Random Thoughts for 2025
One has to wonder what multiple equities would trade at if investor psychology radically changed. Since 2008 investors have been conditioned to expect that the Fed and Treasury will rescue markets and the economy should either suffer hardship. Fiscal and Monetary policy since 2008 has been great for stocks, but has destroyed the Dollar’s purchasing power and has greatly weakened the U.S.’ fiscal position. So long as the fiscal side of the house runs $2 Trillion fiscal deficits, expect equities to move higher. The only obstacle to equity appreciation will be long maturity Treasury yields moving higher. A 5%+ yield on the 10YR will slow fiscal spending. The Fed will likely enact a new round of QE to suppress long yields before fiscal spending is curbed. Fiscal overspending needs to be addressed. Entitlement spending needs to end. In the meantime, here’s some commentary on the equity valuation madness that has persisted since Q2 2020:
“AI” companies are overvalued. NVDA, MSFT, META, GOOGL, PLTR, etc., all are overvalued. We are in peak AI bubble territory. Worse than 2021, worse than 1999.
Palantir (PLTR): PLTR is a Services company. I would love to see a breakdown of the “third-party professional services and fees” and “travel costs” that PLTR includes in its G&A line. PLTR likely has buried COGS in G&A so that its P&L looks more like that of a Software company versus a Government Contractor. I called this out on PLTR’s IPO, but the SEC is inept.
Bank of America (BAC): BAC is underperforming (see HERE) and overvalued. BAC is in need of a new CEO. The stock performance spread between BAC and JPM is not nearly wide enough. JP Morgan (JPM) is the best operator of the Big 4 banks.
CRE bailout is coming. I fully expect the Trump administration to bailout the CRE Office sector by subsidizing property owners that wish to replace aged, high vacancy office towers with new properties. I believe all bailouts should be illegal.
QE coming? We last had a QE program (the BTFP), that the Fed ran from March 2023 - March 2024 as it was simultaneously running its muted QT program. I expect we will see a formally announced QE program in 2025 once the 10-year yield hits 5% and stays there for a period.
Residential housing will suffer the longer that long yields remain elevated.
So to will commercial enterprises. See the recent FT article on leveraged loan defaults. The Credit market is not in a strong position and by definition can’t be so long as Federal Debt exceeds U.S. GDP.
Further devaluation of the Dollar. The Fed and Treasury want Core CPI at 3% (the real number is much higher), as 35 Core CPI devalues the $36.2 Trillion of U.S. Debt outstanding. So long as Social Security and Medicare expenses outpace Real GDP growth, the U.S. will always have a debt and deficit problem. This means the Dollar will continue to erode in value versus Gold and other commodities. Inflation is here to stay. Unless someone gets brave and does the right thing which would be to restructure / eliminate Social Security, Medicare and other welfare programs. The Welfare State is killing America. The U.S. is technically insolvent.