Note Précis Feb 21, 2025: Capital Markets, Trade And Own Goals
Note Précis Feb 21, 2025: Capital Markets, Trade And Own Goals - Chockful in tensions with wars, trade and political economies rending potentially from friend and rival alike, the risk is rising of that called an own goal in soccer and hockey parlance. The February 14/16 2025 Munich Security Conference was notable in its breadth of concerns raised. It is appropriate in investments to review balance between momentum versus risk premium cushions being hitherto ignored. We would recall that in 1985, super power rivalry, trade tensions then with Germany and Japan spilt into calls for currency and rate management which was followed by capital market hubris about so called “portfolio insurance” that was anything but.??
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Capital markets have been momentum oriented with dependence on a backstop of globally congruent central bank policy that presently shows bifurcation. Classical creative obfuscation in balancing inflation versus growth parameters was buttressed in Semiannual Congressional testimony over February 14/15 2025 by the Federal? Reserve Chairman. Bellicose trade tariff positioning and many fiscal worldwide uncertainties likely add support for such a shift.
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We expect Fed Funds rates at 4 ? % through 2025 with a potential 25 basis point increase in late 2026 as visibility improves. We see 5% yields as also likely for 10 year Treasury Notes, as risk benchmark. Central banks from Europe to Britain to Canada to Australia have cut rates on domestic weakness, despite common concerns about inflation. Multifactor considerations favor precious metals in strategic asset mix. Monetary and fiscal policy bifurcation could lead to currency stresses even for the G7. In Fixed Income, we prefer positioning on high quality and up to 10 year in maturities.
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We expect the implications for equities worldwide of risk premiums based on 5% 10 year T-Note yields to be to drive down valuation, increase volatility and curb momentum. The reestablishing of risk premiums is precisely to recognize that all is not known in advance. The slicing and dicing of risk may have sartorial elegance but reality is messy for example in the 1985/87 currency/so called insurance debacle and the 2008 credit/subprime international debacle when political economy permutations also loomed large.
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Even were a soft landing to be achieved, we expect volatility as corporate delivery and valuation incorporate higher than present risk premiums. Already in the early 2025 result releases, corporate managements have appeared more circumspect on prospects than have appeared to be capital markets. It is seen from luxury, staples, health and now even basic necessity companies otherwise regarded as better managed; from several automobile companies ranged from the U.S. to Europe to Asia; in banking; and even in momentum favorite information technology.
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With trade and tariff uncertainty globally, we favor sector diversification and quality of operating delivery. Even at low rates and amid momentum fever abating, financial and corporate cash flow management is likely to be critical. It is likely to be a period of strategic heft of defense and infrastructure refurbishment being emphasized by governments and companies. Within sector diversification, we assess energy, industrials and materials to be especially underappreciated.
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