Catching a Hail Mary

It probably doesn’t make sense to stop and rethink our investment strategy on December 31st, simply because the earth goes around the sun every 365 days (and a few a hours), but that’s what we do. We measure returns in calendar years, and, in general investors make big adjustments or revisions at year end. Although 2025 will go through history as a very good year for markets, it is troubling that precious metals are up as much as they are. And it’s also troubling that the US economy, and most of the developed world, is so indebted. Because liquidity has been running wild for a while, expected returns have been compressed, and investors have decided to “fix” that by adding leverage and concentrating on a few names, in one sector, under one narrative. The US economy needs $4-$5 of debt to produce $1 of GDP, which means that, despite what they are telling us, we need inflation. But what if we not only we don’t get inflation, but we fall into a recession or simply a slowdown, because we cannot produce enough debt to fuel GDP? Then the chart below tells us that there needs to be a significant adjustment, because we are at the top of valuations in terms of z-scores in almost EVERY metric. And credit, which is not in the chart, looks very similar. We’re all in, leveraged, concentrated and hoping the “Hail Mary” will be cought.

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