JD Straight Up - 15Sep25 - Hurricane Season

Hurricane Season

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 6617 – up 2% from 6460 two weeks ago - all time high - up 32% in five months

VIX at 15 – down 7% from 16 two weeks ago

10yr Treasury yielding 4.06% (down 4% from 4.21% two weeks ago)

Agg (US Aggregate Bond Index) at 100.66 – up 1% from 99.46 two weeks ago

Gold at 3700 per oz (up 6% from 3474 two weeks ago) - all time high - up 42% YTD

Crude Oil (WTI) at 64 per barrel (flat from 64 two weeks ago)

Bitcoin at 115k (up 5% from 109k two weeks ago)

JPM shares at 309 (up 3% from 301 two weeks ago) - all time high - up 50% in five months

Deutsche Bank shares at 37.67 (up 6% from 35.28 two weeks ago) - up 120% YTD

Truist shares at 45.06 (down 4% from 46.82 two weeks ago)

Blackstone shares at 183.77 (up 7% from 171.40 two weeks ago) - up 59% in five months

Magnificent 7 Index at 404 (up 7% from 375 two weeks ago) - up 59% in five months

US unemployment: at 263,000 in latest claims – up 13% from 229,000 two weeks ago - highest in over two years

EUR at 1.18 USD (up 1% from 1.17 two weeks ago)

GBP at 1.36 USD (up 1% from 1.35 two weeks ago)

Macro Environment

US inflation is 2.9% against a 2% target.  Housing, energy, and food are key contributors.  EU inflation is 2.1%.  War continues in Ukraine and Gaza with Israel expanding its actions further in the region.  US continues to negotiate trade agreements with all major counterparties including China.  US administration pushes for central bank easing despite ongoing inflationary pressures.  Political violence persists in US with assassinations and hostile rhetoric.  US equity markets continue to surpass all-time highs.  US unemployment shows signs of increasing.  Annual interest on US debt exceeds $1trn and is 13% higher than aggregate US defense spending.  US national debt exceeds $37trn and US budget deficit is $1.9trn.  $9trn of US debt is held by foreign countries.  Debt to GDP is 123% versus 56% in 2000 and 35% in 1980.

Macro View

A correction in the US equity market is inevitable.  The higher and faster the climb, the more extreme and precipitous the fall.

This climb started gradually with Fed action following the dotcom bust between 2000 and 2002 where Fed Chairman Greenspan warned of irrational exuberance and then went on to oversee an easing that saved the speculators from widespread carnage resulting from the bubble.  There were lamentations for bringing moral hazard following the mid to late 90's S&L crisis and talk of bailouts for bankers and investors.

The early two thousands merely allowed the Fed to test out tools and means for easing.  The real bailouts and application of moral hazard came in 2008 after the fall of Lehman Brothers and the near collapse of the banking system that saw the disappearance of Merrill Lynch, Wachovia and Bear Stearns amongst others, and the conversion of Goldman Sachs and Morgan Stanley into bank holding companies.  Treasury Secretary Paulson worked with the central bank under Ben Bernanke and then Tim Geithner to apply a bazooka in the form of investments and easing.  The Fed never looked back and merely continued to expand its toolset for easing.  It got to invent new means of increasing the money supply during market hiccups in 2012 and 2015, but finally went all-in with the emergence of the pandemic.  This mother of all easings was paired with fiscal stimulus from the government and increasing deregulation and accounts for the change of the slope in the above graph to approach closer and closer to a straight up climb.  Paulson's bazooka was a mere $800bn but was thought to be enormous at the time.  Pandemic stimulus started in the trillions and became so large that there is no definitive total calculated.  It is safe to assume it was in excess of $10trn.  Pumping that much liquidity into the system at any point before was entirely unfathomable.  You might have to go back to the Roman empire and the inflation brought about by lowering silver content in coinage to see anything like it.

Relevance

Now the current US administration takes it for granted that the central bank is there to pump money in rather than to guard against inflation or even its supposed dual mandate of controlling inflation while supporting employment.  The administration is demanding easing.  First in the form of well telegraphed and publicized sizable rate cuts, but further behind the scenes support in loosening regulation, capital requirements, and monetary policy with other tools invented and applied effectively in the last two decades as the Fed grew its balance sheet to nearly $9trn while running up operating losses in the hundreds of billions.  Shockingly, very few economists, financiers and advisors are yelling warnings and trying to reverse what is certain to be a disastrous policy.  A storm is brewing and it remains to be seen whether it can be dissipated to allow for rapid rebuilding once it passes or this is the direct hit, category 5 storm that wipes everything out.

Head Scratchers

1 - How extreme will this correction be?  Are we into Dutch East India Company territory that wrecked England and arguably drove to the decline of the empire?  Mississippi and John Law that tore down France?

Drulard Family Capital Fund

Drulard Family Charitable Fund

www.drulardfund.com

#25- 15Sep25