Whiskey-1

Just got back from my 30-year Coast Guard Academy reunion. I always have mixed emotions at these things, but I got to catch up with some people I had not seen in a long, long time. I still say that a service academy in the late ’80s/early ’90s was hell on earth. Psychological trauma that lasts for decades. So, the bonds of friendship are strong and really last. Some of these people look like they can still fit in the uniform. Not me.

Last week I pointed out that stocks are very expensive relative to bonds. Nothing has changed since, except for the fact that Treasury Secretary Bessent hired gold-backed bond enthusiast Judy Shelton and macro strategist David Zervos. I imagine they are hard at work right now trying to figure out a solution to the interest rate problem.

I’m not smart enough to understand the implications, but I imagine it is bullish for both bonds and gold. Top men.

Bazooka Supreme

Did you see that the French bond market fell apart? There is some unrest in France, which is stoking already-existing anti-immigrant sentiment, and now it is pretty much a done deal that Marine Le Pen will be elected the next time around. Maybe good, depending on your point of view, but the National Front are not exactly capitalists, and they do not exactly have fiscal discipline, so the bond market came to the realization that a country with 100% debt-to-GDP might have even more debt and promptly took a dump. 

This bled over into the US bond market as well. It is turning into a global bond conflagration. I don’t know what Bessent & Co. are cooking up, but it is going to take the bazooka of all bazookas to turn this bond market around.

You Get to See Everything

We also had a pretty terrible payroll report last Friday. There wasn’t much of a silver lining at all. That means three out of the last four payroll numbers have been bad. 

If you’ve been faithfully reading this newsletter, you know that the economic data is not great and has been trending lower for a while. Some days, it seems as though I’m the only person who realizes this. It could be a result of AI, but the economy, if you strip out AI and tech, has not been doing well for a while. And to the extent that new jobs are being created, they are in healthcare administration, which are not very productive jobs. It is just layers of bureaucracy to deal with all the regulation. 

So, even though I have been right on the economy and the economic data, I have been wrong on bonds, which is a new one for me. You live long enough, you get to see everything. The Fed used to care about the labor market, you know. Now it has an obsessive fixation on inflation (which is also coming down).

Yahtzee

As for stocks, I want to make a point that I made in The Awesome Portfolio (buy it, gosh dang it): In the construction of the portfolio, I only included US stocks, but I said that it probably made sense to hold some international stocks as well. I did not go into a lot of detail. 

Here is the point: The US market has been so successful, why? Because we have free markets, the rule of law—in other words, the legal framework to allow capitalism to thrive (and a culture of entrepreneurship). The question is: What if that disappears? What if we elect a far-left president? That would probably result in US stocks underperforming the rest of the world by a lot (especially Latin America). If you look around the world, it is not hard to find places with equity markets that haven’t exactly thrived in the last 30 years (like Europe, and Japan up until recently).

A lot of these index fund promoters like to say that stocks are for the long run, but they tend not to be deep thinkers and haven’t put a lot of thought into what might happen if the political climate (or the culture of entrepreneurship) turns sour. It has happened before in history, and those are the periods when you get zero returns for a decade or more. I might feel differently if stocks were cheap here, but they are the most expensive in history. You need to roll a Yahtzee for everything to keep going. Which might happen, because it has happened. I’m certainly not going to bet my life savings on it, but that is what everyone is doing.

I can tell you that the average Boglehead doesn’t do a great deal of thinking about this. I have a very low opinion of the Bogleheads (and Jack Bogle). Also, they wouldn’t let me come on their podcast to talk about the Awesome Portfolio, for obvious reasons, so screw ’em.

That’s enough nonsense for today. Buy the book. Christmas is coming up; you might need some gifts.

Poll

Dumbest Thing I Saw This Week

Okay, one more piece of nonsense…

JPMorgan upgraded Brazilian equities from neutral to overweight following the country’s presidential election first-round results.

This call would’ve been more useful before the election, don’t you think?

Just one reason why you should check out Street Freak. We don’t twiddle thumbs around here.

Jared Dillian, MFA