Some General Thoughts
Despite a barrage of noisy headlines and the government shutdown approaching three weeks and counting, asset prices across the board pushed higher last week. The S&P 500 rose +1.7%, Nasdaq Composite +2.1%, Dow +1.56% and the small cap Russell 2000 gained +2.4%. Bonds rallied across the curve as interest rates slipped with the yield on the 10-year T-note breaching the 4.0% level last Thursday, but ended the week right at 4% – a level that is turning into a battleground for the bond bulls and bears to wrestle over. The big winner last week was the precious metals market with gold surging +5.7% on the week (in spite of Friday’s selloff) and silver adding another +6.1% on the week to push its year-to-date gain north of 75% (gold is a not too shabby either with a +58% gain for the year).
Speaking of gold, it is back to its winning ways this morning as it presses up to new all-time highs at $4,360/oz (it just crossed above $4,000 on October 8th). The yellow metal has gained nearly +10% in the past 10 trading days and definitely has the attention of the entire investing universe. Eric Balchunas, Senior ETF Analyst at Bloomberg, posted the below chart on X last week highlighting the performance of gold vs. the S&P 500 over the past two decades. Without question, the fact that a ‘pet rock’ is outperforming equites over a long-term holding period – in an economy broadly engaged in positive economic value-added activities – defies conventional wisdom. However, suppose you take the perspective that in the post-GFC era the U.S. economy is broadly engaged in a debt-fueled financial engineering experiment. In that case, the fact that a ‘pet rock’ is outperforming equities makes a lot more sense.
That being said, and while we remain structural bulls on gold as long as fiscal excess, currency debasement, populism, and debt monetization continue, it must be acknowledged that the price of gold is getting quite stretched at the moment. To be fair, attempting to value gold through various theoretical constructs has always been as much about art as it is science – kind of like religion where one’s perspective, beliefs, and faith have caused strife the world over for centuries. All of that is loquacious way of admitting I don’t know what a fair value for gold is, but I did know that I wanted clients to have a reasonable exposure to it given my interpretation of an investment backdrop that would be conducive for it to deliver alpha in a prudently diversified portfolio. Nevertheless, its price movement over the past couple weeks is more illustrative of a momentum chase than it is a reflection of fundamental factors (central bank purchases, forex rebalancing, currency debasement…). Therefore, we’ve been trimming back our exposure to the core weighting we want to carry in this area as greed and FOMO reach a fever pitch. Yes, we’ll continue to ride the wave on our structural view, but I don’t feel comfortable being as overweight as we were going forward.
A similar case can be made for another area of the market we’ve liked for nearly a decade now, that being uranium miners and the oncoming nuclear renaissance. When we first entered this space back in 2017, we long thought we could achieve 5-10x returns on the capital we allocated here. Well, we’re there, and like gold I still believe there is room to the upside based on our structural views, however the easy money (not saying it was always easy) has been made. I don’t expect the upside from current levels to be as asymmetric. Therefore it’s time to reduce the large overweight position we’ve been carrying as consensus catches on to the story. Like our gold positioning, we’ll retain our core exposure, but be more diligent and aggressive with pairing this area back as it continues to move in our favor. Both capital preservation and capital appreciation require diligence and resolve at all times, and a necessity to never fall in love with your forecasts or portfolio.
Looking at the week ahead, despite the ongoing government shutdown, we will be getting some data this week to gauge the pulse of the U.S. economy. On Friday we’ll get the CPI report for September, but before then we’ll get the Philly Fed services on Tuesday, existing home sales on Thursday, along with the October reading on manufacturing activity from the Kansas City Fed. Beyond that it will be another week chalk full of earnings reports – so far we’ve had 58 S&P 500 companies report with year-over-year earnings growth tracking +8% (consensus is expecting this number to be closer to +11% when all the results are in). On the global trade front, representatives from both the U.S. and China are conducting ongoing discussions in preparation for the anticipated meeting between Trump and Xi in South Korea in two weeks. Odds favor something constructive coming out of this event, with both leaders wanting to be able to return to their countries with good news, but make no mistake – the divorce of these two global powers is ongoing. Treasury Secretary Bessant hit the air waves with a purpose last week, where you can only assume his intent was at projecting strength given some of his statements:
10/13/25: Fox News
Bessant on supply chains, rare earths: going to the equivalent of operation warp speed to tackle processing.
10/15/25: Bloomberg
Bessant: When you face a non-market economy like China, you need industrial policy…
Bessant: Trump needs emergency powers to protect the U.S. economy…The Trump administration will set price floors across a range of industries to combat market manipulation by China.
Bessant: China can’t be trusted with the global supply chain…If China aims to be unreliable, the world must decouple.
A quick thought on the shutdown for a moment, which I’m going to tie into one of the more interesting things I read last week on the U.S. / China trade war. In my mind, the current government shutdown embodies one of the biggest vulnerabilities of the U.S. political process – a focus on short-term political point scoring – which inevitably leads to profligate spending rather than strategic decision making to ensure long-term economic prosperity and debt sustainability. This isn’t a Red or Blue ‘thing’, as both sides of the aisle are guilty of focusing too much on the one-year-forward fiscal impulse in order to posture for the nearest election cycle, while essentially sacrificing long-term security for future generations due to the fact that the U.S. debt trajectory continues on an unsustainable path.
The recently passed OBBBA is just the latest example of a near-dated pro-cyclical tax cut that will deliver a sugar rush to an economy unable to generate enough organic growth without the support of fiscal subsidies. This short-term boost is offset by a back-loaded fiscal tightening well into the next presidential term, where one can only expect the next Administration (Republican or Democrat) will once again kick the can further down the road and push fiscal consolidation beyond even the subsequent election. The longer the fiscal issue festers unaddressed, the more severe the long-term consequences will be as the inevitable sizeable tax increases and/or large spending cuts kill growth, animal spirits and the entrepreneurial essence that is the lifeblood of the U.S. economy.
At a time of dramatic change within societies, politicians across the democratic world are faced with the challenge of short-term political cycles against the need for long-term strategic decision making on a myriad of issues including deregulation, technology, demographics, and fiscal sustainability. Strong leadership is essential to making decisions that will deliver meaningful progress that often outlasts the governments that implement them. I don’t believe we as a country lack the leadership necessary to get us back on a path of sustainability, but I question our collective ability to be willing to make the sacrifices necessary to follow such leaders.
I’ve been spending a lot of time attempting to understand the depth and breadth of this conflict with China, and the more I uncover the more frustrated I become that we’ve allowed ourselves to get into this position. Globalization looks great on paper, and in a lot of ways works for raising the collective wealth of the many to the detriment of the few, but I’m warming to the view that too heavy a focus on ‘corporatism, capitalism, efficiency, wealth, and profits’ has left us vulnerable in more ways than we can measure. I encourage you to have a read of the following Substack post by Australian professor Dr. Warwick Powell on the role and importance of time and, in particular, time compounding, on the U.S.’s attempt to reindustrialize its manufacturing base after nearly three decades of doing the exact opposite. I took the liberty of pulling out some of the key points, but the entire post is worth the time to read: Tick Tock. Time matters and Pax Americana is short on it
This divergence produces what can be called a temporal asymmetry in industrial policy. The United States is engaged in a restorative project - attempting to rebuild capabilities hollowed out by decades of offshoring. China, by contrast, is compounding its advantages through time, scale and spatial diffusion. The result is a dynamic imbalance.
By the time Western reshoring efforts bear fruit, the global industrial terrain will have shifted under their feet, rendering much of that new capacity cost-uncompetitive and strategically less meaningful. Ironically, western reshoring presupposes ongoing access to Chinese supplied capital and intermediate goods and raw materials.
Time, in this context, is not merely a delay; it is a form of resource allocation. Every dollar, engineer and policymaker mobilized to rebuild domestic refining or manufacturing capacity represents an opportunity cost - the redirection of productive energy away from other potential frontiers.
When the United States channels resources into replicating industrial ecosystems that China already perfected years earlier, it effectively replays history at a higher cost. Costs are pushed up in large part because more money gets made not “doing industrialization” than doing it; and as the US financialized over the past few decades, the distributional structure - or system of rewards and incentives - ultimately led to resources finding their way to places a long, long way away from the mundane tasks of extractive industries, chemical processes and factories.
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A battery gigafactory takes two to three years to construct and commission. Refineries for lithium, nickel or cobalt precursors require four to five years, not including lengthy environmental and permitting processes. A new mine - whether in Nevada or Western Australia - can take seven to ten years to move from exploration to commercial output. These timelines are additive, not sequential. Without the mine and the refinery, the gigafactory is an empty shell.
In China, these temporal constraints were largely solved decades ago through industrial clustering. Refineries, component makers and logistics systems were built side by side, under coordinated policy. Western industrial policy, by contrast, must overcome fragmentation - divided jurisdictions, environmental litigation and political turnover. Even when vast subsidies are deployed, such as through the U.S. Inflation Reduction Act, execution lags behind announcement. Factories may emerge, but ecosystems take decades.
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Industrial competition is not fought on a fixed battlefield. Time alters the terrain. The opportunity cost of delayed capacity results in lost production and at the same time, means lost positioning in the moving hierarchy of global competence. Money may buy speed to some extent, but it cannot compress the physics, chemistry and institutional memory of complex production systems. Meanwhile, China continues to deploy time as a strategic asset by extending its industrial logic outward through training, finance and joint ventures.
The call to “localize” supply chains is intuitively appealing. Resilience through proximity delivers a certain sense of comfort. But industrial resilience is not a static condition; it is a function of motion through time. The asymmetry between China’s compounding development and the West’s restorative industrialism ensures that every year of delay widens the structural gap.
Time, in this sense, is not neutral. It is the medium through which advantage accumulates. While the U.S. struggles to rebuild the factories of yesterday, China is building the industrial geography of tomorrow. And by the time America’s vertical integration is complete, the world will already be horizontally integrated through Chinese-supported industrial ecosystems that define the next global cost frontier.
I don’t agree with everything Dr. Powell asserts in this post, but admittedly found myself nodding my head in agreement, and shaking it in frustration through most of it. Yes, the U.S. economy is the largest in the world and yes, the average U.S. household is the wealthiest in the world, but why? Without question, ambition, knowledge, entrepreneurship, opportunity, rule of law, capitalism, property rights…are factors driving such outcomes. But too often we overlook the degree to which the U.S. has leveraged the U.S. dollar and U.S. treasuries as being the world’s reserve currency and world’s reserve asset. Think about the roughly $38 trillion in federal debt outstanding, which was just under $6 trillion at the start of the year 2000. So, over the past 25 years the U.S. has added roughly $32 trillion in debt, of which a valid argument could be made that much of this debt was used on things that were negative value-added (wars, bailouts, and stimulus checks used to buy inexpensive Chinese goods…).
What I’m getting at is that the attempt to onshore and re-industrialize the U.S. is looking less and less like a choice, and more and more like a necessity. However, this transition will take time and will likely require the U.S. printing money to pursue such a policy given how much of our goodwill (U.S. dollar credibility) we’ve squandered over the past two decades. The investment implications are likely to lead to structurally higher inflation and further currency debasement.
Given a big-picture macro set-up like this, many investors would logically conclude that equities, gold, commodities, industrials, and other tangible assets should perform well relative to cash or fixed income. Generally speaking, I agree with such thinking, but I’d be remiss if I didn’t convey how risky such a transition is with U.S. equities trading at their richest valuations in history. According to BofA’s U.S. Equity and Quant Strategy group, “the S&P 500 is statistically expensive on 20 of 20 metrics and has never been more expensive on Market Cap to GDP, Price/Book Value, Price/Operating Cash Flow, and Enterprise Value/Sales.” Oh, I know, valuations are a terrible timing metric and therefore don’t matter (yawn). Not only are U.S. equities historically rich, but they also have never been more concentrated where JPMorgan recently created a basket of 30 AI-connected stocks which collectively account for 43% of the total market cap of the S&P 500. So, while AI very well might end up being the game changer that most adamant optimists espouse, it’s prudent to consider that a lot of this is already priced in – and what happens if it doesn’t live up to the hype? Here are three A.I. headlines from the weekend worth noting:
Alibaba launched Aegaeon, claiming it cuts reliance on Nvidia GPUs by 82%.
Amazon (AWS): Startups are delaying cloud migration to redirect budgets toward AI training and inference.
Microsoft: “Leaders worry meeting OpenAI’s escalating compute demands could lead to overbuilding servers without clear returns.”
These are questions I don’t have answers to, nor do I expect you to. And while I think there is still runway for asset prices to move higher, I remain mindful that the risk/reward across all assets gets less favorable as they do. For now, corporate earnings (which are solid and growing) trumps the weakness we are seeing in areas of the labor market, manufacturing economy, and housing. I suspect lower interest rates and incoming fiscal stimulus will provide a bit of a boost to these areas of the economy in the quarters ahead, which is why I think investors should continue to lean more on the offensive side of portfolio positioning than the defensive side. But do so without taking undo risk. As an investor it’s important not to forget your time frame, where you are in spending lifecycle, and what your needs are relative to your wants. Sure, we all want more money, but you prefer not to learn how much you need after the fact.
The articles and opinions in "Capital Market Musings and Commentary" are for general information only, and not intended to provide specific investment advice. Performance, dividends and other figures have been obtained from sources believed reliable but have not been audited and cannot be guaranteed. Past performance does not ensure future results. Investing inherently contains risk including loss of principle. Advisory services offered through Casilio Leitch Investments, an SEC registered investment advisor.
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