Newsletter

“It was the best of times, it was the worst of times…”

The economy is growing slowly and inflating quickly, which presents significant challenges to the economy, to unprofitable and indebted sectors of the market, and eventually to the government – but not at least until the election.
Heightened uncertainty, rising volatility, and rising indebtedness exert tremendous financial stress on broader portions of the economy. The government won’t let it break until after the election.
Perry Capital has anticipated rising inflation, which is helping corporate profitability, but, to date, has not resulted in higher yields –– although credit spreads are beginning to widen in weaker credits. Expect more.

“It was the best of times, it was the worst of times…” Read More »

“An evil man will burn his own nation to the ground to rule over the ashes.”

Government policy remains stimulative, and aggregate demand is rising. High T-Bill rates with no duration risk remain a gift—no reason to own long-maturity bonds.
The economy is growing slowly and inflating quickly, which presents significant challenges for the government, economy, and markets.
Heightened uncertainty and rising volatility exert tremendous stress on risk assets. Something is going to break.

“An evil man will burn his own nation to the ground to rule over the ashes.” Read More »

“The philosophy of the school room in one generation will be the philosophy of the government in the next.”

Markets continue to reflect extreme volatility as the Fed attempts to grapple with slowing growth, rising inflation, excessive indebtedness, and surging deficit spending.
Economic data last week underscored the dominant and simple truth that, in the aggregate, economic growth is stagnant and inflating- due largely to a rise in aggregate demand initiated by $11t in government stimulus the economy didn’t need.

“The philosophy of the school room in one generation will be the philosophy of the government in the next.” Read More »

“The problem with the world is that fools and fanatics are always so sure of themselves, and wiser people so full of doubts.”

U.S. economic growth is being supported by an extraordinary amount of excessive indebtedness and deficit spending. I have argued that we are witnessing a regime change wherein investors will demand higher yields for investment in government bonds as the mathematical certainty of the inability to ever pay back our debts is becoming so strained that the only way out for the government is to embrace inflation. This is a historic repeating pattern when countries lurch into debt crises of their own making.

“The problem with the world is that fools and fanatics are always so sure of themselves, and wiser people so full of doubts.” Read More »

“War exacerbates risk. Investors should remain defensive. War is also disruptive and inflationary.”

In a slow-growth inflationary environment, much can and will go wrong. This is especially true in the context of rising and volatile geopolitical risk.
Heightened uncertainty and rising volatility exert tremendous stress on governments, economies, and markets. Armed conflict makes it worse. Errors in judgment by countries and misguided decisions on the part of those in power compound mistakes that are extremely dangerous.
War exacerbates risk. Investors should remain defensive. War is also disruptive and inflationary. Prices are rising.
Politicians and business people are playing defense. Investors should, too, as markets are not priced for these rising geopolitical risks.
Perry Capital has anticipated both rising inflation and rising risk and is positioned for more.

“War exacerbates risk. Investors should remain defensive. War is also disruptive and inflationary.” Read More »

“And if the band you’re in starts playing different tunes… I’ll see you on the dark side of the moon.”

Economic data last week surprised on the upside. Manufacturing accelerated, prices accelerated, and job growth accelerated. The unemployment rate fell to 3.8%. The percentage of unemployed job seekers has remained under 4% since January 2021.
Treasury bond yields traded to 4.425%, the highest yield since November 2023. Credit spreads remain very tight. IG spreads are at +89bps and Hy + 303bps.
U.S. equity markets have been on a rampage. Valuations are stretched: P/E multiple is now 21.5 times forward earnings. P/E was 17 at the October low. Earnings growth has been selectively good but is now weakening.
Stocks had their worst week of the year, having traded down from record highs. The Dow (-2.3%) was the worst performer of the major indices for the week, the S&P 500 dropped 1%, and the NASDAQ slipped -0.75%. Growth stocks fared better than value shares. Energy stocks soared (+4%) to record highs and up 16% in 2024. Health Care and Real Estate shares performed the worst. Bitcoin was down on the week, and its correlation to NASDAQ is rising.
The VIX is up 23% on the week, as Oil and Gold surged, and geopolitical tensions are on the rise.

“And if the band you’re in starts playing different tunes… I’ll see you on the dark side of the moon.” Read More »

“There is an inevitable divergence, attributed to the imperfections of the human mind, between the world as it is and the world as men perceive it.”

Stimulus remains ample, and Mr. Powell was more dovish than even the most strident risk asset bulls anticipated. Government activism in the economy and capital market and economy remain and are accelerating.
The performance of the U.S. equity and credit markets is excellent, and they are aggressively testing the Fed, which doesn’t see the threat unless, of course, they see something that we don’t. Three cuts are still expected in 2024. Stocks should remain encouraged but for how long?

“There is an inevitable divergence, attributed to the imperfections of the human mind, between the world as it is and the world as men perceive it.” Read More »

“Perhaps too much of everything is as bad as too little.”

In its quarterly Summary of Economic Projections (SEP), the Fed indicated that they may deliver three interest rate cuts this year as long as — In Powell’s words — “Inflation continues its “bumpy” trend towards the target (2%.)” Bumpy? That sounds generous at best and incredibly disingenuous at worst, especially given that Supercore inflation is rising at 5.8%. Most market participants believe that we’re on track for 3 rate cuts starting in June, thus the continuously impressive risk asset performance.

“Perhaps too much of everything is as bad as too little.” Read More »

“You don’t need a weatherman to know which way the wind blows.”

I have said for almost a year that there will be no Fed cuts in 2024. I stand by that forecast for one simple reason: “Immaculate Disinflation” is over. The U.S. economy is inflating, and it has been for a year. The structural and systemic price increases are not only permanent but accelerating. The twin cancers of elevated and rising inflation have metastasized and imperiled the health of the U.S. economy.

“You don’t need a weatherman to know which way the wind blows.” Read More »

“I thought by now you’d realize, there ain’t no way to hide your lyin’ eyes.”

Stagflation reigns. Slow growth (2.5%) with rising inflation (4%) — driven by the rising cost of labor (+5%) — is the very definition of a stagflating economy. This forecast remains the dominant theme for the economy, markets, and investors. Stagflation has been the Perry International Capital Partners (PICP) forecast for two years, and we continue to be more worried about rising inflation than we are about slower growth.

“I thought by now you’d realize, there ain’t no way to hide your lyin’ eyes.” Read More »

“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of elements or a disease that comes like the plague. Inflation is a policy.”

Last week was another riveting week in U.S. financial markets. The Nasdaq reached new all-time highs, marking the fourth consecutive month of gains for the S&P 500, which has increased in 16 of the past 18 weeks – a 25% rise in four months. During the same period, the Magnificent Seven (Mag7) stocks surged by 40%, Nvidia by 110%, and Bitcoin by 150%, with a notable 21% increase in just the last week. Bitcoin emerged as the standout performer.

“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of elements or a disease that comes like the plague. Inflation is a policy.” Read More »

“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.”

The extreme performance divergence between sectors on the receiving side of the stimulus is stunning. The businesses best positioned to benefit from spending by the upper and upper-middle class are thriving — just look at the share prices of your favorite credit card company; they are at all-time highs. Those most sensitive to interest rates and, thereby, the worst positioned for tight monetary policy are or soon will be flirting with bankruptcy. If you look at commercial real estate owners and their lending banks, you’ll see that their share prices are at all-time lows.

“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.” Read More »

“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.”

The extreme performance divergence between sectors on the receiving side of the stimulus is stunning. The businesses best positioned to benefit from spending by the upper and upper-middle class are thriving — just look at the share prices of your favorite credit card company; they are at all-time highs. Those most sensitive to interest rates and, thereby, the worst positioned for tight monetary policy are or soon will be flirting with bankruptcy. If you look at commercial real estate owners and their lending banks, you’ll see that their share prices are at all-time lows.

“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Read More »

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

Economic data continues to surprise to the upside; the Citi surprise index was up again from last week (44.10 vs 39.0) and the January lows (0). It is above pre-pandemic levels, and the labor market is stronger, too. Unemployment is 3.7%, with claims falling and the number of available jobs rising.

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” Read More »

“The health of nations is more important than the wealth of nations.”

The U.S. Stock market reached an all-time high!
On the week: The Dow rose 1.5%. It is up 2.56% in 2024 to 38,654. The S&P 500 closed- up 1.4%. It is up 3.96% for 2024 to 4,958.The Nasdaq gained 1.7%. to 15,628. It is up 2.56% for 2024 to 15,628.
Last week marked the 4th week in a row of gains for the major benchmarks. Stocks have rallied 13 out of 14 weeks. The only down week was the first week of January. This is a serious Bull-snorting rally.
The catalyst for the gains were Big Cap Tech earnings, stronger employment growth, and rising optimism for growth even with a steady Fed, which left rates unchanged (5.50%) at its first meeting of the year. Traders have already taken the March Rate cut off the table.

“The health of nations is more important than the wealth of nations.” Read More »

“In matters of style, swim with the current; in matters of principle, stand like a rock.”

The Fed will remain very cautious about changing policy any time soon. The economy grew at 3.1% in 2023; it inflated at 4.1%, and wages grew at 5.2%. These are very strong numbers. Economic and market performance does not cry out for stimulus.
The Fed has never cut rates with stocks at record highs when the economy is expanding, and with inflation remaining above target levels. Stimulus seems unnecessary with corporate profit margins at record levels, financial markets extremely liquid, the economy operating at full employment, with personal incomes and wages rising faster than inflation and more quickly than growth.

“In matters of style, swim with the current; in matters of principle, stand like a rock.” Read More »

“The Western world is in danger; it is in danger because those who are supposed to defend the values of the West are co-opted…”

The Western world is in danger, and it is in danger because those who are supposed to defend the values of the West are co-opted by a vision of the world that inexorably leads to socialism and, thereby, to poverty.
Unfortunately, in recent decades, motivated by some well-meaning individuals willing to help others, and others motivated by the wish to belong to a privileged caste, the main leaders of the Western world have abandoned the model of freedom for different versions of what we call collectivism. We are here to tell you that collectivist experiments are never the solution to the problems that afflict the citizens of the world. Rather, they are the root cause.

“The Western world is in danger; it is in danger because those who are supposed to defend the values of the West are co-opted…” Read More »

“Progress is impossible without change, and those who cannot change their minds cannot change anything.”

This past week we saw Q4 earnings reports. Jamie Dimon, the leader of the best-run bank in the world (an obvious bellwether for the economy), professes to be extremely worried about growth, employment, commercial real estate, the lagged effects of Fed tightening policy, deficits, geopolitical risk, and weak political leadership. He thinks the Fed should initiate more Quantitative Easing. I do not.

“Progress is impossible without change, and those who cannot change their minds cannot change anything.” Read More »

Men rise to great fortune “more through fraud than through force.”

Valuations are extreme, liquidity is falling, optimism is at record levels, and speculators are longer than they have been all year. The icing on the cake is that the market thinks there will be 6 Fed rate cuts this year. Policymakers at the Fed, most of whom are non-voters, think there will be 3. I think there will be none. The market is ahead of itself.

Men rise to great fortune “more through fraud than through force.” Read More »

“In this new global environment, policymakers, even those previously in the ‘lower forever’ camp…”

Interest rates drive everything, and they are as volatile and directionally uncertain as they’ve ever been. So are the global macroeconomics driving them. Global fund managers are required to make bets on outcomes for stocks, currencies, and commodities based on the cost of money. If perspectives on rates are so dispersed, how can we judge the value of the things that are driven by them?

“In this new global environment, policymakers, even those previously in the ‘lower forever’ camp…” Read More »

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance…”

Key economic reports in the upcoming week are various and reasonably important, but Friday’s employment report is the only one that really matters. The Fed’s game plan was to raise interest rates enough to reduce the imbalance in the labor market. But the tightening is really quite marginal compared to the continued stimulus, and it is that stimulus that has been supportive of higher equity valuations and growth. I think the stock market sees this. What it fails to see — for now — is that the stimulus is supporting higher prices.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance…” Read More »

“There’s no money. There’s no money.  If we don’t make a fiscal adjustment, we’re headed for hyperinflation…”

Markets need to figure out a normalized level of interest rates appropriate to this volatile new era of De-globalization, rising military engagement, heightened Geopolitical tensions, excessive indebtedness, and the irrational rise in deficit spending.

“There’s no money. There’s no money.  If we don’t make a fiscal adjustment, we’re headed for hyperinflation…” Read More »

“He’s a dictator in the sense that he’s a guy who runs a country that is a communist country…”

The “peak Fed funds narrative” is all the rage. The risk rally off the October 27th lows completely overwhelmed the negative market inputs of persistent inflation, excessive indebtedness, deficit spending, weak political leadership, and increased fiscal and monetary stimulus.

“He’s a dictator in the sense that he’s a guy who runs a country that is a communist country…” Read More »

“Just close the F**king Door” — Federal Reserve Chairman Jerome Powell

“Just close the f**king door!” said Fed Chairman Powell after being interrupted by a protestor as he was delivering his latest Policy speech. That line attracted more attention than his comments which suggested that more hiking may be needed to bring down inflation. Stocks ignored the restrictive bits and determined Powell was cool. The S&P 500 closed at its highest level since September 20th!

“Just close the F**king Door” — Federal Reserve Chairman Jerome Powell Read More »

“In economics, things take longer to happen than you think, then happen faster than you thought they could.”

The stock market had its best week since November 2022 (S&P 500 was up almost 6% and the NASDAQ, almost 7%.) The intense rally occurred for four reasons, in critical orders of importance and timing: 1) Hedge funds covered huge short positions in bonds and stocks, 2) Less long maturity Treasury bond supply, 3) Investors interpreted Mr. Powell’s message as a signal for peak rates, and 4) Slower growth in the labor market.

“In economics, things take longer to happen than you think, then happen faster than you thought they could.” Read More »

“The scientific man does not aim at an immediate result. He does not expect that his advanced ideas will be readily…”

Interest rates have been rising not just because of inflation but because of accelerating credit risk. The U.S. Government has gotten itself into a position where it is forced to borrow in a higher rate environment. This is tremendously problematic because, at some point, rates will rise far enough that investors will be forced to reduce their U.S. equity holdings. The potential destruction of investor wealth may be significant enough to force the Fed to abandon its inflation fight. The Fed will stop its tightening campaign when the stock market tells it to. That moment may even arrive more quickly than we can imagine, but believe me, it’s out there.

“The scientific man does not aim at an immediate result. He does not expect that his advanced ideas will be readily…” Read More »

“If some ‘expert’ were to come up with even the most meager ‘proof’ that…”

Global macro geo-political and economic factors will remain the most significant factors for investors in the days, weeks, and months ahead. A broader and far more destructive armed conflict and escalated military engagement are, by far, the most significant issues confronting investor portfolios.

Wars are inflationary. Now we have two of them. Deglobalization, which is accelerating, will also result in higher prices. Bond investors are increasingly and rightfully vigilant. They demand a higher risk premium for the deteriorating financial state of the U.S. Government.

“If some ‘expert’ were to come up with even the most meager ‘proof’ that…” Read More »

“Some people don’t like change, but you need to embrace change if the alternative is disaster.”

• Investors’ “Flight to Safety” trades dominated market action last week. That trend will continue. The most obvious shift in investor sentiment was the screeching halt to the trend of higher rates in the U.S. Treasury market. 10y Treasury yields reversed their ascent. Rates fell from almost 5% to this morning’s current level of 4.60%. Gold rose 3.5%, and Oil (SPOT WTI) (+3.4%) surged.

“Some people don’t like change, but you need to embrace change if the alternative is disaster.” Read More »

“Our settled aspiration is avoiding the market crevasses. My experience suggests there is almost an inevitability…”

Bond yields are rising because Supply is rising… and Demand is falling. Bond investors demand more of a premium due to a much higher risk in owning U.S. Government debt. Indebtedness, the leverage on it, and deficit spending are overwhelming the capacity of bond portfolio managers to take on additional risk…

“Our settled aspiration is avoiding the market crevasses. My experience suggests there is almost an inevitability…” Read More »

“History repeats itself, but in such cunning disguise that we never detect the resemblance…”

77.25% of the Perry Capital portfolio yields 5.09% with principal guaranteed. I sold my short 25% Treasury
positions and because the Fed is going to raise rates and keep them there for much longer than the market expects. This will exert an enormously negative influence on trillions of outstanding credit market
exposure.

“History repeats itself, but in such cunning disguise that we never detect the resemblance…” Read More »

“Never in the field of human conflict was so much owed by so many…”

75% of the Perry Capital Portfolio remains AAA-rated, very short maturity, and very liquid securities.
I remain underweight in the equity market because the valuation metrics of risk assets are not discounting for
persistent inflation, higher funding rates, and a slowing economy to the degree necessary to be attractive.

“Never in the field of human conflict was so much owed by so many…” Read More »

“We tend to overestimate the effect of a technology in the short run and underestimate…”

75% of the Perry Capital Portfolio remains AAA-rated, very short maturity, and very liquid securities.
I remain underweight in the equity market because the valuation metrics of risk assets are not discounting for
persistent inflation and a slowing economy to the degree necessary to be attractive. I would rather watch from
the sidelines at 5% until the strategic risk/reward is in my favor.

“We tend to overestimate the effect of a technology in the short run and underestimate…” Read More »

“The problem with leverage is that you have to pay it back.”

75% of the Perry Capital Portfolio remains in AAA-rated, very short maturity, and very liquid securities.
I remain underweight the equity market because the valuation metrics of risk assets are not discounting for
persistent inflation and a slowing economy to the degree necessary to be attractive. I would rather watch from
the sidelines at 5% until the strategic risk/reward is in my favor. I must say, though, that the Nasdaq 100 (QQQ)
performance y-t-d is impressive. Perhaps A.I. is a paradigm shift as impactful as the internet.

“The problem with leverage is that you have to pay it back.” Read More »

“If not for you, my sky would fall. Rain would gather, too. Without your love…”

75% of the Perry Capital Portfolio remains in AAA-rated, very short maturity, and very liquid securities.
I remain extremely underweight the equity market because the valuation metrics of risk assets are not
discounting for persistent inflation and a slowing economy to the degree necessary to be attractive.

“If not for you, my sky would fall. Rain would gather, too. Without your love…” Read More »

“What’s the deal with bank runs? I mean, why are they called bank runs?”

I still have small positions in Silver and Bitcoin.
Given recent events, things may get even crazier before they calm down. Monday’s opening and the rest of
next week will be telling. As I cautioned last week, be patient and remain defensive; I suspect that most assets
you might be interested in buying will be available at lower prices.

“What’s the deal with bank runs? I mean, why are they called bank runs?” Read More »

“The whole art of war consists of guessing at what is on the other side…”

I am not fighting the Fed and expect funding rates to rise higher than the markets expect and for them to stay
higher for a longer period than the market expects. I also recognize that liquidity and momentum models may still
encourage large and sophisticated derivative trading which can propel risk assets higher.

“The whole art of war consists of guessing at what is on the other side…” Read More »

“Judging by the price action in markets over the past couple of months…”

50% of the Perry Capital portfolio is in the money market. current yield 4.29%. The T-Bill position
remains at 25% of portfolio assets. 3-month T-Bills now pay 4.63%, 6-month T-Bills pay 4.81%. Long Treasuries
(10% of portfolio) are up 6.7% in 2023 and have returned 12.73% over the last three months.

“Judging by the price action in markets over the past couple of months…” Read More »

“Equity fund managers always tell you what’s going to go right, but what risk managers want to know…

The Perry Capital Portfolio remains unchanged (75% cash.) 50% of the portfolio is in the money market. The
T-Bill position remains at 25% of portfolio assets. Long Treasuries represent 10% of the portfolio. The
S&P 500 is also a 10% position. So far, everything is up. My small Silver and Bitcoin positions have been good
performers for the start of the year. Lower long-term funding rates are the key to the whole puzzle. We’ll
know more about that on February 1st.

“Equity fund managers always tell you what’s going to go right, but what risk managers want to know… Read More »

“The Future has many names. For the weak it is unattainable. For the fearful…”

The Perry Capital Portfolio remains unchanged (75% cash.) The discipline to maintain a cash position
throughout the year was not easy but proved fortuitous. Those who correctly expected a hawkish Fed beat the market in 2022. Those who did not, underperformed. It will be more complicated in 2023.

“The Future has many names. For the weak it is unattainable. For the fearful…” Read More »

“Everything we see hides another thing; we always want to see what is hidden…”

An old axiom in finance posits that averages hide more than they reveal. It’s true and supported by history,
as is the view that consensus forecasts will be wrong. The above quote (“Everything we see hides another
thing; we always want to see what is hidden by what we see.”), from the great Belgian artist Rene Magritte,
captures that axiom. Magritte’s art challenges the observer’s preconditioned perceptions of reality, as do
markets and large swaths of market strategy.

“Everything we see hides another thing; we always want to see what is hidden…” Read More »

“You never know what is enough unless you know what is more than enough.”

I thought very hard about increasing exposure to Long Treasuries and the S&P 500 a month ago; I decided
not to. My decision was based on my forecast—earlier this year—of a 3.5% yield. We spiked from that level
up to 4.33% and then right back down, which I did not expect. Volatility quite elevated. Therefore, my cash
position continues to migrate toward Treasury Bills. Consequently, I must ask… what is wrong with a
guaranteed return of 4% until the dust settles and volatility settles down. Not much, in my opinion!

“You never know what is enough unless you know what is more than enough.” Read More »

“Often the difference between a successful person and a failure is not one…”

The most significant risk facing investors is the Fed’s march towards a restrictive monetary policy.

Indeed, there are others: the invasion of Ukraine, lockdowns in China, the crypto fallout, and even the
nature of free speech in America as encapsulated in the Twitter saga. All make top headlines.

“Often the difference between a successful person and a failure is not one…” Read More »

“What comes next is weak economies and tough policy choices.”

The battle at hand is to reduce inflation. The Fed has been aggressively raising Interest rates while
reducing its balance sheet by $95bn/month, liquidity is being drained from both the financial system and
the economy, and market volatility is rising. The ramifications will be significant. Therefore, I remain
defensive and have maintained the status quo in my portfolio.

“What comes next is weak economies and tough policy choices.” Read More »

“You can reason with a bulldog, astonish a bull, fascinate a boa, frighten a tiger…”

I have an immense appreciation for the great Victor Hugo, who is, I would suggest, perhaps our
finest writer of nautical fiction, among others. I could not help but recall, while witnessing the
margin call on the British pension system, a piece of terrific writing by Master Hugo that describes
the tumult of a loose cannon as a supernatural beast.

“You can reason with a bulldog, astonish a bull, fascinate a boa, frighten a tiger…” Read More »