I sat down to draft this commentary after reading William Blake’s poem “Auguries of Innocence”, while in the background, Robert Zimmerman was singing:
“In these times of compassion when conformity’s in fashion…
Sing ‘Amazing Grace’ all the way to the Swiss bank…”
There are four fundamental developments that are shaping our current trajectory, and which could have global consequences, namely:
- Geopolitically, on the one hand, the Israeli-Palestinian conflict seems to be headed into a period of ceasefire, but the prospects of peace cannot be seen on the horizon yet. On the other hand, the Ukrainian conflict seems to be worsening since the Alaska talks.
- Geoeconomically, the escalation of the trade war between the US and China (especially after Friday’s flare-up regarding rare earths, shipping, export restrictions, and the threat of new tariffs that could reach 130% against Chinese imports in the US), shakes up the markets and reintroduces volatility and uncertainty.
- On the economic front, and as the last part of our commentary a week ago indicated, we may have already reached the point of divergence between growth and employment, so if recession is pronounced mid next year, it could be dated back to late 2025.
- On the valuation front (and as shown below), the concerns about AI’s momentum creating a bubble are rising, and consequently, we might see a correction in the next few days/weeks despite expectations for additional market gains between now and the end of the year.
The message from all four developments described above is the same: Fragility is rising, so anti-fragile portfolios should be built with anchors that protect capital, while earning good yields, and reasonable returns (see below a graph of the S&P 500 vs. gold).
Blake’s 1803 poem the “Auguries of Innocence” starts with the following lines:
“To see a world in a grain of sand
And a heaven in a wild flower,
Hold infinity in the palm of your hand
And eternity in an hour.”
In the background Bob Dylan kept saying:
“They got mystery written all over their forehead…
They don’t believe in mercy…
They exalt you up or bring you down main route
Turn you into anything that they want you to be…”
“Eternity in an hour” or in terms of anchors and performance since the beginning of the century, I prefer to compare the S&P 500 to gold:
Speaking of anchors and Middle East Peace prospects, we are firm believers of what the late Martin Indyk advocated (even just a few months before his death last year), that the only viable road to peace is a two-state solution where blood brothers live next to each other, respecting their mutual rights of autonomy, and of peaceful co-prosperity, while isolating extremism.
On the Ukrainian front, we believe that Putin is facing multiple crises: Growth is dropping significantly, inflation continues to be a major problem, the economy has been inflicted by a major blow with its lack of prospects (due to its war machine conversion), more than one million dead and wounded soldiers, tax revenues are dropping (and hence the recent tax hikes that will hurt the economy further), a rising demographic crisis, cash burning to the tune that he may run out of cash within 16 months, a undercurrent banking crisis that can blow off the whole Russian economy, and the historical reality that any Russian autocrat before him that brought the troops home without achieving his goals was thrown out of power soon thereafter.
Regarding the trade war with China, we believe that it will continue shaking up the markets as it is evolving into a war for critical technologies along with the evolving geopolitical power case (spheres of control/influence, reserve currency). The two are inseparable. A win-win solution is not on the horizon yet, as the US restricted exports on semiconductors, AI chips, and plans for similar controls on critical software, while China’s new export controls on rare earths (which are critical ingredients for defense and tech applications) is undermining the framework for a trade agreement, which was always fragile, and is becoming even more fragile now.
Blake wrote:
“We are led to believe a lie
When we see not thro’ the eye
Which was born in a night to perish in a night,
When the Soul slept in beams of light.”
As for the undercurrent divergence of growth and employment, our take is as follows: Supply-driven recovery, productivity gains, and immigration flows have uplifted growth prospects while inflation remains around 3%. However, rising uncertainties and a significant slowdown in immigration flows are keeping employment growth restrained. We believe that this trend will continue, and by May/June 2026, growth numbers will also slow down.
On the valuation front, our concerns focus on the interplay between a Fed inclined to add fuel to the credit overextension that already finances momentum, leveraged buyouts, and trading, at a time when banks expect the forthcoming deregulation (of rules that were implemented following the 2008 crisis) to unleash more than $2.5 trillion in credit. We don’t doubt that the combination of lower Fed rates and financial deregulation can lead to a market melt-up (and hence further gains in the next few months); however, that could make the eventual adjustment (possibly due to future price pressures) to realistic metrics even more painful.
In the background, Dylan was saying:
“Did he make it to the top, well he probably did and dropped
Struk down by the strength of the will
Ain’t nothing left here partner, just the dust of a plague
That has left this whole town afraid…”
According to Blake, a corrupted view of life that ignores injustices becomes the opium that poisons our trajectories, so as I was digesting Dylan’s words above, I had to go back and re-read Blake’s lines:
“A robin redbreast in a cage
Puts all Heaven in a rage.
A dove house fill’d with doves and pigeons
Shudders Hell thro’ all its regions.
A dog starv’d at his master’s gate
Predicts the ruin of the state.
A horse misus’d upon the road
Calls to Heaven for human blood.”
Only to hear Dylan saying:
“Let the dead bury the dead, your time will come
Feel that hot iron blowin’ as you raise the shade”
