JD Straight Up - 7Jul25 - Bifurcated Reality

Bifurcated Reality

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 6250 – up 5% from 5973 two weeks ago - all time highs

VIX at 18 – down 14% from 21 two weeks ago - all quiet on the western front...

10yr Treasury yielding 4.37% (up 1% from 4.34% two weeks ago)

Agg (US Aggregate Bond Index) at 98.26 – flat from 98.22 two weeks ago

Gold at 3326 per oz (down 2% from 3387 two weeks ago)

Crude Oil (WTI) at 67 per barrel (down 10% from 74 two weeks ago)

Bitcoin at 108k (up 7% from 101k two weeks ago)

JPM shares at 294 (up 7% from 276 two weeks ago) - all time high

Deutsche Bank shares at 29.01 (up 6% from 27.44 two weeks ago)

Truist shares at 45.49 (up 12% from 40.49 two weeks ago)

Blackstone shares at 153.83 (up 12% from 137.41 two weeks ago)

Magnificent 7 Index at 347 (up 4% from 334 two weeks ago)

US unemployment: at 233,000 in latest claims – down 5% from 245,000 two weeks ago

EUR at 1.17 USD (up 2% from 1.15 two weeks ago)

GBP at 1.36 USD (up 1% from 1.34 two weeks ago)

Macro Environment

Inflation in US continues above 2% target, Fed continues to hold rates steady, 10yr Treasuries remain above 4.3%.  ECB cuts to stimulate growth while EU inflation creeps below 2% target.  US negotiates trade agreements under threat of tariffs with most major trading partners.  Israel continues war against Hamas while Russia persists in Ukraine.  US passes One Big Beautiful Bill Act (OBBBA) with continuation of prior tax cuts, decreases to medicaid, increases in immigration enforcement, and multiple other changes that the CBO estimates will increase the US budget deficit by nearly $3trn.  

Macro View

Unemployment is low.  Inflation is declining.  Asset prices are soaring.  Corporate and consumer confidence is low.  Which one of these is not like the others?  Why is there a continued widespread inability to believe in this economy and its sustainability?  The bifurcated reality is one in which the rich (companies and consumers alike) are seemingly bullish and favorable while the less well-off believe things are continuously and consistently bad and getting worse.  Is it along the prime versus subprime divide or more extreme among the ultra high net worth versus the impoverished?  Commercial property is stalled out, private equity is ailing, wage increases and job changes for wage growth have slowed.  Signs of a slowdown are appearing.  Yet the rich continue to spend while those below on the economic strata continue to rein in expenditures.  Historically, this is a recipe for civil discord and possible economic breakdown.  Currently, equity markets, crypto and other risk assets break through higher and higher levels to reach all-time highs.  Is it sustainable?  Is the AI revolution sufficient energy to feed economies and markets?  Is it investment, speculation, or simply record levels of employment driving record 401k and pension contributions that must find a home regardless of securities prices?  Is there a point where this flow of investible money starts to decline or where faith in the markets erodes sufficiently to redirect it to cash or government instruments?

Note the following charts looking back at the last thirty years (or roughly as long as I have been working and attempting the comprehend economics and markets):

S&P 500 - dips for dotcom bubble 2002, GFC 2008, pandemic 2020

VIX: some correlation with S&P - spikes for GFC 2009, and pandemic 2020

JPM - some volatility in 2020 pandemic and 2022 inflation/rate hikes - overall on a tear for the last decade

10-Year Treasury Yield: historically very cheap money from GFC until pandemic - normalizing now

Relevance

Markets are subject to reflexivity and reversion.  The boom has never continued infinitely in the history of markets.  The current value creation is on a scale not seen in generations.  Mansions in Newport and on Long Island were built with similar money early in the last century and then the cycle caught up with the euphoria and reversion ensued.  It is impossible to know when this cycle turns or how deeply it resets, but the charts show the remarkable decade and a boom that is undeniable.  It was built on the back of historically cheap credit available between 2010 and 2020.  It is unclear if we will have to pay for that provision of credit through an extreme reversion or if it will just digest naturally and facilitate further growth.  It is hard to see the last decade of 'up and to the right' continuing at the same slope for another decade.  Nonetheless there is great pressure on central banks to return to the easy money ways of 2010 to 2020 regardless of impacts on inflation or debt levels.

Head Scratchers

1 - Why are Truist shares up more than 30% in 3 months?  Is this a bet on deregulation and easing of capital requirements?  Its core business has not improved by a third in the course of one quarter.  Is it a general bet on SE US economy and growth prospects?  Or merely a reflexive recovery of overselling in April?  Or more evidence of an irrational market melt-up mentality?

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#20 - 7Jul25