The financial Markets are reacting to geopolitical events not to an impending hard landing for the US economy. The events distressing the markets are Japan’s recent interest rate hike, a 35-year reversal of their monetary policy to keep interest near zero. Higher Japanese interest rates increase the value of Yen and cause the unwinding of “Carry Trades”—borrowing Yen at cheap interest rates and investing in higher yielding opportunities in other countries. For ‘carry trade’ borrowers a stronger Yen means it costs more dollars to pay back loans when the Yen appreciates. With US yields also falling and stocks at highs, a rush to payback the carry trades to prevent losses ensued with much of the money leaving US stocks. Estimates are that about 50% of ‘carry trades’ have been unwound so far so the Bank of Japan has said they will only raise again when there is calm in the markets. The other geopolitical event is the escalation of hostilities in the Middle East. Israel assassinated Hamas and Hezbollah leaders inside Tehran & Lebanon heightening tensions with Iran. Investors now fear the war may expand beyond Gaza & Palestine and require greater US involvement (and debt) to support Israel. The takeaway is we expect and are prepared for greater volatility from these geopolitical events over the next several months.

In addition to these uncertainties the election polls now indicate both candidates have a 50/50 chance of winning with neither party getting a sweep of the Presidency and both houses in Congress. Prior to VP Harris becoming the Democratic nominee, Trump was favored to win, and billionaires clamored to fund his winning ticket. Harris by uniting Democrats and selecting Governor Waltz of Minnesota as her VP has now added a margin of additional uncertainty investors must wrestle with until we elect our next President.

The facts are the US economy has been remarkably robust but is now showing signs of slowing with unemployment claims beginning to rise. While Europe, Japan and China are already experiencing significant slowdowns, our Dollar being the Reserve Currency permits us to fund growth though we face challenges ahead. Paramount among these challenges are balancing wages and the cost of living, addressing deficit spending, and blunting the ensuing commercial real estate implosion that threatens the solvency of regional and community banks.

Our expectation is that we’ll see a combination of modest Deflation (lower prices) in housing, commercial real estate, and auto/truck prices with higher unemployment and above-average inflation in 3-4% annual range for a decade or more in healthcare, insurance, and leisure-- travel & eating out at restaurants. Our basis for this expectation is that Fed Chairman Powell is on record saying, “the economy works for no one until price stability is reached.” Yet freezing prices at current levels means the economy still doesn’t work for the majority without wage increases as businesses passalong increased expenses in higher prices resulting in an inflationary spiral. Affordability comes with balancing incomes and the cost of living which in turn happens with abundant job opportunites. The strategic reshoring of manufacturing is part of the solution, but we have experienced a significant shortfall in birthrates for decades now necessitating immigration to meet future workforce needs according to Treasury officials. Bill Dudley, a former NY Federal Reserve Bank CEO and permanent FOMC member, recently explained in an interview that twenty years from now the US would not have enough workers to sustain our economy without today’s immigration. What will be crucial in anchoring affordability is well-compensated labor not cheap labor. Moreover, tariffs are protectionist levies paid by the consumer that permit higher prices to be charged by eliminating competition so innovation & invention should once again be our focus not protectionism.

Economies are multi-faceted behemoths with a lot of moving parts. Our view is that there is a global realignment that must see current importers exporting more and vice versa. While the US and China make this transition the markets will be sensitive to trade flows and if the elections results in a divided Congress again, it is likely by the end of 2025 that income taxes will rise an average of 3-4% while inheritance tax exclusions will fall by 50% ($12 million for couples instead of that amount individually). In other words, doing nothing should decrease the deficit, assuming no new additional spending, and both parties can claim they didn’t raise our taxes. Those living in high state & local tax jurisdictions will once again be able to itemize and deduct those expenses saving more.

Unfortunately, continued division in Congress leaves a void of global leadership and provides gestation time for a multi-polar world order to become established. Already plans are underway to strike a new balance of power limiting US hegemony. With new supply chain routes & international payment systems, the two blocs will have to adjust their foreign policies to avoid war. It is these uncertainties considered together that warrant investment caution, and not panic.
In managing accounts, we always evaluate the health of the market by looking at facts. We use an algorithm employing real time data to evaluate whether we are in an expansionary, uncertain sideways, or contracting economy. We also look at ‘most likely’ geopolitical scenarios and valuations along with these data. Then we work to build-in flexibility to navigate what we expect. Part of that formula is employing hedges and having some dry power to take advantage of opportunities when uncertainty falls. In addition to staying vigilant, we strive to deliver good returns all the time while avoiding big setbacks. It’s a careful process working to own the best companies where the reward-for-risk is favorable while also playing Defense to lessen potential drawdowns.

Once again, we thank you for your confidence & trust. Please feel ask more about our strategy and let us know if your personal or family situation warrants considering a change in how you’re investing particularly if you expect or want to take any sizeable withdrawals so we can make suitable adjustments to provide for them.