JD Straight Up - 28Apr25 - Angel's Advocate

Angel's Advocate

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5529 – up 2% from 5405 two weeks ago

VIX at 25 – down 34% from 38 two weeks ago

10yr Treasury yielding 4.27% (down 5% from 4.49% two weeks ago)

Agg (US Aggregate Bond Index) at 98.87 – up 1% from 97.61 two weeks ago

Gold at 3361 per oz (up 4% from 3227 two weeks ago)

Crude Oil (WTI) at 62 per barrel (flat from 62 two weeks ago)

Bitcoin at 95k (up 12% from 85k two weeks ago)

JPM shares at 243 (up 3% from 235 two weeks ago)

Deutsche Bank shares at 25.74 (up 11% from 23.10 two weeks ago)

Truist shares at 38.34 (up 6% from 36.18 two weeks ago)

Blackstone shares at 133.58 (up 2% from 130.47 two weeks ago)

Magnificent 7 Index at 291 (up 7% from 281.20 two weeks ago)

US unemployment: at 222,000 in latest claims – down 1% from 223,000 two weeks ago

EUR at 1.14 USD (flat from 1.14 two weeks ago)

GBP at 1.34 USD (up 2% from 1.32 two weeks ago)

Macro Environment

US and EU inflation persists at 2.4% and 2.5%, respectively, with a 2% target rate.  US GDP growth is running at 2.4% and EU at 1.4%.  War persists in Ukraine and Gaza with slow moving efforts being made to define paths to negotiated ceasefires.  US tariffs and retaliatory tariffs shift unpredictably as posturing and negotiation proceed.  Volatility continues in capital markets.  China declines to engage in US tariff and trade war negotiations.  Port and cargo activity is reported as declining materially in the uncertain environment.  Public companies in transportation, leisure and industrials remove forward guidance and projections.

Macro View

I have been tasked by multiple readers with presenting the bullish case for economic growth and markets.  This suggestion comes from those that believe my comments take a bearish slant despite my insistence that I am not expressing a view but merely reporting statistics and patterns.  The fact patterns in the statistics have been arguably negative in their outlook not because of any perspective of mine, but just because the facts present a wall of worry for anyone interested in macroeconomics and global trade.  Nonetheless, I will use this update to highlight the potential positive outcomes and play 'angel's advocate' to suggest a path towards improved growth and a new wave of flourishing economies and markets.  As with the prior notes, it is not relevant whether I personally believe in any trajectory or outcome, but only whether the statistics are accurate and whether they are portrayed objectively.  So, on to our bull market scenario.  Suspend your fears, concerns, and cynicism and entertain the idea that perhaps this first hundred days of the US administration has a design to it or some intelligence.

Relevance

The US administration with Bessent in the Treasury Secretary seat recognizes that criticality of the size and scale of the US debt and the compounding deficit.  This administration approaches this task as if it were a business in turnaround.  It knows that more revenue is needed, lower expenses are needed, a new capital structure is required, and all of this must happen in the immediate term.  Much like a private equity LBO of a struggling company, the PE firm only intends to control the asset for four years so needs to get to work on it aggressively from the start.  It needs to take actions that employees and other stakeholders will be shocked and appalled by.  It is taking these actions to save the company from bankruptcy and a loss of all capital.  The PE firm wants to take these actions to prove to providers of capital that it deserves a re-rating and less expensive capital and ultimately a higher valuation.  The company is highly levered and needs to bring about the changes to rapidly pay down debt, speed up revenue growth, and change its course.  The US administration is treating the country like a turnaround company.  It is cutting spending, throwing out ineffective management, lowering the cost of capital, and redirecting a leaner and more motivated workforce towards a new set of goals.

Assume this works.  You bring the 10yr Treasury down to 3% when investors believe that it is working.  This allows you to term out some debt and extend duration so you are not entirely reliant on rolling one and two year paper all the time and subject to vigilante pressure.  This is the first part of improving the 'profit' of the country.  Do not waste money on unnecessarily high interest rates.  Second, the right people are not in the right seats in government jobs.  Get the people in there that actually want to work and believe in driving productivity and doing a stellar job for the country.  Get rid of the underperformers, free-riders and ones that game the system.  Cut out the waste.  Third, generate new revenue streams - tariffs.  You have to attack both ends of the P&L - more revenue from existing sources (tax) and from new sources (tariff) while cutting costs (unnecessary staff, handouts, pork barrel).

With a PE turnaround company that is highly levered and at risk of insolvency or illiquidity, it is a terminal risk.  There is no time to be nice and considerate and kind.  The kindest actions are the ones that save the company from failure so it continues to exist and continues to provide value to a multitude of stakeholders.  If you take the view that the US was on a path to disaster, the actions of the first 100 days of the administration are not only correct, but are necessary and perhaps not even extreme enough.  $37trn in debt, $1trn in interest annually, debt to gdp of 133%, 6.4% deficit approaching $2trn annually.

When this works, the deficit gets cut in half by increasing revenue through existing and new sources, cutting spending, and incentivizing growth.  This gives investors sufficient confidence to accept a lower interest rate to fund the country and to be confident in longer term debt so principal repayment is pushed out further and allows cash to fuel more growth in the near term.  Oil is at an historically low $62 per barrel so investment can be made knowing transportation and energy costs are conducive to growth.  The US has a $30trn GDP and workers are earning $16trn.  This is a population of 340m with 113m tax payers.  We are at the start of one of the most important and profound technological and information revolutions in history with the further development, adoption and application of AI.  The increase in productivity through the application of AI will rival every prior period of rapid economic evolution.  Tariffs are not the ultimate cause of volatility.  Tariffs are the trigger for a renegotiation and reset of the global trade and partnership relations between the US and other major countries in the world.  This is the first major reset of US relations since the volatility of the Nixon Shock in 1971 as the convertibility of USD to gold was canceled and the new world monetary system established.  The 1971 change brought about 50 years of progress and growth.  The current revitalization and reset of relations has the capacity to do the same and to energize the next 5 decades while status quo would have led to default.

Head Scratchers

1 - Will it work?  or will the medicine prove too powerful for the patient as it does in so many highly levered LBOs?

The beauty of PE portfolios is that they are portfolios.  Some hit a 10x return, some hit 5x and some fail.  If you only had a single company in the portfolio, would you apply the same playbook?

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#16 - 28Apr25