Observations by David Robertson, 6/13/25

As we progress into the summer, stocks are snoozing but sirens are blaring elsewhere. Let’s dig in.

As always, if you want to follow up on anything in more detail, just let me know at drobertson@areteam.com.

Market observations

While volatility as measured by the VIX index bumped up on Thursday after the PPI (producer price index) came out and the world anticipates an Israeli attack on Iran, it is still exceptionally low. Indeed, small ranges of activity and low volume have characterized the stock market for several weeks now. As Alyosha ($) commented, “This would be as close to nano-volatility as ever in the history of equity trading since Genesis.” It’s as if the market is waiting to be told what to do.

The one area that has been moving is the US dollar (USD), and it has been moving down. It took a pretty big hit on Wednesday and a bigger one on Thursday. This coincides with the announcement of an agreement on China tariffs — which turned out to be another nothing-burger. It’s probably another case of “Buy the rumor, sell the news”. With stock futures down only modestly on Thursday morning, however, it may also be that USD, rather than the stock market, is increasingly serving as the pressure release valve.

Overnight Thursday, Israeli air strikes on Iran promised to disrupt the calm, at least temporarily. They certainly add an ominous foreboding to a weekend of widespread protests and a military parade.

Politics and public policy I

While the dramatic clash between Elon Musk and President Trump made headlines for only a few days, it did reveal some important insights about the Trump administration. Dani Rodrik wrote this back at the end of February:

What unites these [Republican] groups, at least for the time being, is not Trump’s character or his leadership – both of which leave much to be desired. Rather, it is the belief that their specific agendas will be better served under Trump than under the most likely alternative.

Irrespective of their pet projects, these groups all regarded Kamala Harris (and Joe Biden) as a hindrance, and Trump as a promising ally. Most do not oppose democracy, per se, but they do seem willing to overlook, and hence facilitate, Trump’s authoritarianism so long as their agenda is being served.

With Trump’s elite supporters prioritizing their own narrow agendas over democratic principles, the risk of a slide toward authoritarianism should be obvious. Fortunately, however, the even more likely outcome is that these competing agendas will soon clash, causing the Trump coalition to implode.

Point one is that the very nature of the “Trump coalition” is inherently fragile due to competing agendas. Jonah Goldberg ($) highlights a similar point. According to him, there just isn’t much connective tissue in the Trump administration: “The point I’m getting to is that a coalition built around a personality is destined to crack up far faster than a coalition built around ideas and interests.”

That highlights another aspect of the Trump administration. Given that it is comprised mainly of “narrow,” transactional interests, it is more of a lobby than any kind of body of governance. This explains the tolerance of authoritarianism, but also suggests any hopes of productive, cohesive economic policy are misplaced.

Primarily, however, Rodrik’s characterization points to how enormously important the budget bill is for the Trump administration. By far, the biggest common interest among various Trump factions is lower taxes. Once the budget bill gets passed, regardless of how it turns out, there will be very little remaining common ground among Trump factions. That could get interesting.

Politics and public policy II

In light of the protests in LA and the escalation by the Trump administration, this piece by Jonathan V. Last ($) in the Bulwark is a timely and useful examination of “the nature of protest.” It comes from Peter Coyote:

A protest is an invitation to a better world. It’s a ceremony. No one accepts a ceremonial invitation when they’re being screamed at. More important you have to know who the real audience of the protest is. The audience is NEVER the police, the politicians, the Board of supervisors, the Congress, etc. The audience is always the American people, who are trying to decide who they can trust; who will not embarrass them.

Some practical suggestions include:

Number 1 let women organize the event. They’re more collaborative. They’re more inclusive, and they don’t generally bring the undertones of violence men do. 2 appoint monitors, give them yellow vests and whistles. At the first sign of violence, they blow the whistles and the real protesters sit down. Let the police take out their aggression on the anarchists and the provocateurs trying to discredit the movement. Number 3 dress like you’re going to church. It’s hard to be painted as a hoodlum when you’re dressed in clean presentable clothes …

This all strikes me as both eminently reasonable stuff and also a healthy reminder of what the whole purpose of protest is: “An invitation to a better world.” It’s too easy to get caught up in frustration and negative feelings. The point isn’t to act out; it’s to make things better.

With that in mind, Coyote is absolutely right that the audience of a protest is the American people. They are the ones watching and trying to decide who is making the better case about an issue.

This raises another point: Without organization and leadership, a protest mainly looks like a free-for-all. That doesn’t accomplish anything productive. In order to be effective, protesters must be credible. In order to be credible, they must have discipline. That doesn’t just happen; it requires leadership.

Coyote’s words also provide some helpful direction for those of us in the “audience.” Scenes of violence are disturbing regardless of who is committing them. Perpetrators on both sides seem to be trying to enflame the situation and news and social media amplify and propagate narratives.

Unfortunately, this imposes an emotional tax on everyone. This encourages taking the easy way out in the form of taking sides, tuning out, or freaking out. None of these are very helpful though. Coyote reminds us of why we should endure these challenges.

Finally, what the whole protest situation reveals as much as anything is the dearth of good, effective leadership across the board. There are huge opportunities for those who can lift us above the pettiness in order to realize a better version of ourselves.

Investment landscape I

No one cares about numbers anymore — go figure ($)

https://www.ft.com/content/5d6fa91d-4fa8-40d4-a5dd-42d8ae3e17f9

I sleep knowing every number is grounded in research and an honest desire to enlighten … What a schmuck I am, though. Because who gives a wallaby’s about numbers anymore? Not politicians. Not investors. Not voters. No one, it seems. Numbers have become almost irrelevant. Real ones are ignored; the random embraced.

For example, we learnt on Wednesday that US debt may be $2.4tn higher in a decade thanks to Trump’s new tax bill. Yes, trillion. It would take almost 32,000 years to even count to a trillion. Whatever — yields on US Treasuries actually plunged and besides, how about that Indiana Pacers game?

Since I started my work as an investment analyst focusing on valuation, Stuart Kirk’s comments especially resonate with me. Numbers often tell a story, reveal hidden truths, and inform about risk. That is, unless no one cares.

I started noticing the diminishing importance of numbers after the GFC when solid cash flowing companies went nowhere, but companies with vague but high growth targets rocketed ahead. Things have gotten progressively worse since then.

Kirk explains “our lack of giving a damn” by acknowledging “numbers are only ever indicative” up to the point that “something impacts us directly”. Indeed, public policy, mainly in the form of monetary policy, prevented the effects of the GFC from being felt for a long time.

The same phenomenon applies to macro as well as micro concerns. While US government debt continues to march well into danger territory and non-wartime fiscal deficits break records, most people just don’t feel any negative effects from that, at least not immediately. As a result, they don’t care that those basic financial metrics are way out of line.

For better and worse, the long time lag between public policy cause (fiscal imprudence) and effect (financial crisis) opens itself to various (mis)interpretations. The most common one is the view that risks are overstated because they haven’t happened yet. Another very common one is that numbers just don’t matter because they are fake news.

As Kirk highlights, the risk of such ignorance is that “we only regain our interest in numbers after it’s too late” — which bodes poorly for any kind of soft landing or modest slow down. The upside is that those of us who do deal with numbers can see it coming from a mile away.

Investment landscape II

America’s fiscal policy is going off the rails — and nobody seems to want to fix it ($)

https://www.ft.com/content/812a06b0-2819-4a75-abaf-455722cf63e8

US fiscal policy is running off the rails, and there seems to be little political will in either party to fix it until a major crisis occurs … With US debt already exceeding 120 per cent of GDP, it seems a budget crisis of some sort is more likely than not over the next five years.

Since Bill Clinton last balanced the budget at the end of the 1990s, both Republican and Democratic leaders have tripped over themselves to run ever larger deficits, seemingly without consequence. And if there is a recession, financial crisis or pandemic, voters count on getting the best recovery that money can buy. Who cares about another 20 to 30 per cent of GDP in debt?

Ken Rogoff picks up right where Stuart Kirk left off — nobody cares about unwieldy fiscal deficits because voters to date have counted on getting “the best recovery that money can buy”. Rogoff also notes, however, that things have changed in a way that requires re-evaluation.

Specifically, as global debt levels have risen, so too have long-term real interest rates. In addition, “Other factors — including geopolitical tensions, the fracturing of global trade, rising military expenditures, the prospective power needs of AI and populism — are all important.” The net effect is that financing those large debt levels is now much more expensive than in the years after the GFC.

But wait, there’s more. As Rogoff argues in his book, the imposition of high debt levels will be exacerbated by the fact that “US dollar dominance is now fraying at the edges as China continues decoupling from the dollar, Europe remilitarises and cryptocurrencies take market share in the massive global underground economy.”

Rogoff characterizes two trends coming to a head. Politically, “American voters have become conditioned to never having to deal with sacrifice.” Economically, high debt levels and higher interest rates mean there is precious little room to forestall a fiscal reckoning. This leads to the conclusion:

The US’s high debt and inflexible political equilibrium will be a major amplifier of the next crisis and, in most scenarios, the American economy and the dollar’s global status will be the losers.

Investment landscape III

Given the public policy pattern of “buying recoveries” and the trend of increasing debt and deficits, the investment question is often, “When is this going to matter?”

While it is understandable that investors would want to know this so as to minimize hedging/insurance costs, it’s not a very good question. The reason is because the timing is unknowable for a whole host of reasons.

A better question relies on a different perspective. As I quoted Russell Napier in Observations 5/16/25, public policy isn’t driven so much purely by preference but by the constraints of the economic and political environment: “And one of the mistakes I think we can make as investors is to assume that the politicians are making the decisions rather than being driven to those decisions by circumstances.”

As a result, a better question to ask regarding the investment environment is, “How are macro circumstances increasingly constraining public policy?” Interestingly, this is almost exactly what Marko Papic described at John Mauldin’s Strategic Investment Conference:

“I think what the investors should start doing is not trying to figure out based on his [Trump’s] speeches and his rhetoric what he wants, but rather based on a study of the constraints, what he can get. And what can the U.S. get from his counterparts? Well, not much.”

From this perspective, post-GFC policy was constrained by the political need to avoid recession and massive financial restructuring, and the lack of a mandate for significant fiscal stimulus. That led to extraordinary monetary policy.

Post-Covid policy was constrained by the need to avoid recession and the political pushback on extraordinary monetary policy which had exacerbated inequality and exploded government debt.

Next time around, policy will be constrained by a weak private sector, potential for inflation, and already-high fiscal debt and deficits. In other words, the playbook keeps getting smaller. From here on out, there aren’t good options; there are only choices between bad and worse.

One of the clearest indications of the constraints on public policy is the interest rate on long-term Treasury bonds. Rogoff mentioned this and so did Papic. Last week, I wrote, “James Carville was probably right, the bond market can intimidate anybody. The important takeaway here is the bond market is beginning to intimidate the Trump administration.”

Robert Armstrong ($) picked up on this line of thought in the FT by describing the current policy challenge:

The private sector can’t borrow more and is stuck in permanent recession unless the government, with its r [interest rate] less than g [growth rate], comes in. The government, by running a permanent deficit, can get you out of the liquidity trap — but you need a perfectly engineered government that runs a deficit big enough to avoid the liquidity trap, but not so big that r starts to creep up.

Further, Armstrong highlights that a “perfectly engineered government” effort is no easy task: “As governments walk the razor’s edge that separates an insufficient fiscal impulse from higher inflation and rates, they will frequently slip to one side or the other.”

One implication of these conditions is that there will be volatility in economic results as government struggles to keep policy perfectly calibrated. Relatedly, it becomes clearer why trying to guess timing of any particular economic event is fruitless: It all depends on how conditions evolve and on tactical policy choices.

That said, the general direction of economic growth is fairly easy to see given the increasing constraints on public policy. As Rogoff summarized, “the American economy and the dollar’s global status will be the losers.” While this isn’t great for the US, it is very useful for long-term investors to know.

Investment landscape IV

Trump continues Biden’s activist Treasury issuance ($)

https://www.ft.com/content/106117dc-5294-4cf8-9f47-7fc8d8805dfd

ATI [Activist Treasury Issuance] was a variant of the so-called Operation Twist where, after the financial crisis, the US Federal Reserve pushed rates on longer-term bonds lower by purchasing them and selling shorter-term debt at the same time.

However, despite Miran and Bessent’s roles in Trump’s senior economic team, ATI is not being phased out. It is being continued for now as phasing it out would sharply increase long rates.

Worse, Bessent is flagging the prospect of ATI with a far deeper form of Treasury-led QE. He has stated that, if market conditions were to become disorderly, the Treasury could decide to do more outright buybacks of longer term public debt as a way of preventing long rates from increasing too much.

Ahhh, there’s nothing like being in the driver’s seat to change one’s assessment about the quality of the driving! Yes, Bessent was very critical of Yellen’s use of ATI to try to keep long-term rates down. Now that it is his responsibility, he’s doing the same.

The most plausible explanation as to why Bessent is continuing the same tactic he criticized is that it is the least worst option he has. It’s easy to criticize when you don’t have all the information and/or don’t know the full consequences of other possible actions. As a result, Bessent’s continuation of ATI can fairly be assumed to indicate a severe dearth of demand for long-term Treasuries at current yields.

This inclination is especially important in the context of the upcoming lifting of the debt ceiling. When that happens, Treasury will need to issue large incremental sums of debt to replenish its general account and that huge incremental supply will need to find demand from somewhere at some price. What options does Bessent have?

In brief, none of the options are very good. For the time being, the plan seems to be to “run it hot,” meaning to continue large fiscal stimulus to keep the economy growing at a healthy pace to make interest payments almost look affordable. That may work for a little while, but is not sustainable without considerable economic reform.

Another possibility is to continue ATI. As borrowing needs increase, that increase will be met with disproportionately higher issuance of short-term debt. Since short-term Treasury debt is effectively cash, however, this creates enormous risk for over-stimulating the economy short-term at the expense of longer-term stability. As Roubini puts it:

Measures like ATI lead to looser financial conditions at times when monetary authorities are trying to achieve price stability and avoid the excessive overheating of their economies. This is dangerous stuff, opening the door for a more political business cycle.

A third possibility is to allow/enable a selloff in the stock market. Slowing growth will not only reveal stocks as risky investments but will also increase the relative attractiveness of “safe” Treasuries. Further, slowing growth will provide the impetus for the Trump administration to engage even more forcefully in fiscal stimulus.

That leaves a pretty wild range of possibilities for investors to manage against. All the more reason to think less about timing and more about the ever-shrinking list of public policy options.

Portfolio strategy

At a high level, my portfolio strategy has incorporated the assumption that Covid marked an important turning point by allowing inflation to take hold. I’m not talking about hyperinflation here, but the irritating, constant pressure on the pocketbook kind of inflation.

The implication of a higher steady-state level of inflation was that longer-term interest rates would need to go higher and gold would start rising. The rationale was that public policy would be constrained in addressing the threat of inflation. That has turned out to be the case and as a result, investments in gold and the interest rate hedge have worked out well.

The one larger macro bet that has not worked out as well, at least not yet, is the effective short position in stocks. This worked out extraordinarily well after Russia’s invasion of Ukraine and after “Liberation Day” tariffs were announced. In both cases, however, stocks later recovered their losses.

I thought the emergence of inflation and the risk of all-time high valuations would be the undoing of stocks, but that hasn’t happened yet. Perhaps it shouldn’t be a surprise that the stock market in a highly financialized economy would be protected.

At some point, however, and arguably fairly soon, policymakers are no longer going to have the luxury of being able to support BOTH the stock and the bond market. When that time comes, they will have to choose bonds. And that means money for incremental bond purchases will have to come from stock sales.

That day is coming, but is not here yet. That’s OK. The clock is ticking.

Implications

While the number of good options for public policy are quickly running out, that doesn’t mean there aren’t still opportunities to temporarily juice markets or to create positive narratives. As a result, there will likely remain opportunities for traders to navigate the zigs and zags and it is understandable why risk-seekers might want to engage.

What is less understandable is why investors who are at or near retirement would want to be heavily exposed to increasingly asymmetric risk. Thus far, stock investors have been fortunate to have weathered an environment in which conditions continue to get more difficult. Further, increasingly difficult conditions both constrain the array of public policy options and they render them less effective. The main question now is, “Do you feel lucky?”

Note

Sources marked with ($) are restricted by a paywall or in some other way. Sources not marked are not restricted and therefore widely accessible.

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