Author: Rebekah Stovall

Keller Quarterly (October 2025)

Posted on by Rebekah Stovall

Letter to Investors | PDF

“The more things change, the more they stay the same.” That old maxim is proving true again as the financial markets are experiencing the curious phenomenon of dual gold rushes. The first is a rush to own the yellow metal itself. The second is a race to make money in artificial intelligence (AI). These two movements dominating the news are not related, in my view, but each reflects important trends that investors need to be aware of.

As to the barbarous relic[1] (gold), deglobalization and US government policies emanating from both parties over the last 10 years are pressuring the dollar down relative to other currencies. In this regard, gold is a currency, one that cannot be manufactured at will by any central bank. And speaking of governments, foreign reserve managers worldwide are diversifying their foreign reserves by rebuilding their gold reserves after spending most of the last 55 years reducing their holdings. They’ve been busy buying gold for at least the last four years, and we expect this to continue. We’ve been arguing for over a decade that deglobalization is dollar-bearish and will worsen inflation. These realizations are finally coming to pass, influencing the gold market. For several years we have allocated to gold in Confluence strategies that involve commodity exposure (Asset Allocation and Global Hard Assets), and we expect to continue holding these positions.

The other gold rush is even more complicated. In modern parlance, the phrase gold rush denotes a race by investors to get rich by investing in new technologies that seem to have “can’t miss” potential. This, of course, is an analogy to the great gold rushes of the 19th century. The two most famous were the 1849 California gold rush and the 1896 Yukon gold rush, but there have been many others in US history, starting with the North Carolina gold rush of 1799. In fact, a new discovery somewhere precipitated another gold rush about every 20 to 30 years. It’s a historical oddity that stock market “gold rushes” occur at about the same frequency. Starting with the railroad boom of the post-Civil War era, we have had similar “gold rushes” for automobiles, radio, aeronautics, semiconductors, personal computers, the internet, and cell phones. Now, it’s AI.

Each one of these technological advancements has eventually proven to be every bit as economically and socially important as early investors thought they’d be. Unfortunately for those gold rush speculators, such booms (bubbles?) suffered from two common faults. First, in their haste to participate in the new technology, investors threw money at the stocks of many companies that eventually failed. It’s a fact that winners in new technological races are greatly outnumbered by the losers. Second, investors have tended to badly overvalue the future worth of these businesses. For example, we saw this on display in the internet bubble of 1999-2000. Not only did many of those dot-coms fail, but the stock prices of the surviving internet and telecom stocks set highs that were not equaled for many years. The NASDAQ Composite Index set a high in 2000 that was not equaled until 2015.

We’re seeing the same thing in the AI race today. Our own Thomas Wash reported in a recent Asset Allocation Bi-Weekly[2] that a study by MIT showed 95% of the companies investing in AI were earning a zero return. OpenAI, the private company that produces ChatGPT, was recently valued by investors at $500 billion, which is over 38 times the revenue they expect this year. Of course, the company is unprofitable in the extreme and does not even expect to be cash flow positive for another four years.

Is anyone making money on AI? Yes, the companies selling the products needed to build out the AI server farms: companies that make semiconductors, servers, cooling systems, data centers, electric generating equipment, etc. In our gold rush analogy, these are the makers of the picks and shovels needed to prospect for gold. Those businesses made a lot of money, at least until the rush ended, even though most of the miners didn’t. The same is true today, and the “picks and shovels” stock prices are also extremely high. Nvidia, the maker of the chips everyone wants for these servers, has a market value of $4.4 trillion (greater than that of the entire German stock market), which is merely 22 times its expected 2025 sales.

We expect that AI will prove to be every bit as economically important as its fans expect, but we caution investors not to over-invest in the sector. Such overly enthusiastic early excursions into economy-changing technologies of the past often ended badly. While we own a few AI-related stocks in our equity portfolios (and within the ETFs in our Asset Allocation portfolios), great businesses that we’ve owned for many years, we have stayed well diversified among many industries. We’re not speculators, but long-term investors. In a time of technological excitement, that’s a distinction that investors need to remember.

These Technology and Communications sectors are now worth 45% to 50% of the major US stock indexes, an amazing figure that, in my opinion, overvalues their economic value over the next years. This rapid run-up in prices has pressured downward the valuations of virtually every other sector of the stock market, leaving the stocks of many excellent businesses anywhere from reasonably valued to downright cheap. These include many outstanding dividend-payers. We cannot predict how long the current AI boom will last (nor how long the more modest valuations of other stocks will remain), but we encourage you to keep focused on your long-term objectives and concentrate, as we do, on quality businesses that will survive the boom-bust cycle.

We appreciate your confidence in us.

Gratefully,

Mark A. Keller, CFA
CEO and Chief Investment Officer

[1] A little over 100 years ago, John Maynard Keynes, the well-known British economist, famously dubbed gold “the barbarous relic.” The moniker stuck.

[2] “The AI Arms Race: Navigating the Divide Between Promise and Profit,” October 6, 2025.

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Asset Allocation Quarterly (Fourth Quarter 2025)

Posted on by Rebekah Stovall

by the Asset Allocation Committee | PDF

  • We expect no recession over our three-year forecast period, with GDP growth near trend, driven increasingly by business investment.
  • Anticipated fed funds rate cuts will stimulate the economy and address weakening labor markets.
  • Inflation is likely to remain around 3%, above the Fed’s long-term target.
  • Passive flows continue to support domestic equities, primarily benefiting large cap stocks, which we add to this quarter.
  • International developed equities are expected to benefit from government fiscal spending, attractive valuations, and a weakening dollar.
  • Gold and Treasury positions remain in the portfolios as a hedge against geopolitical risk.

ECONOMIC VIEWPOINTS

We expect economic growth to remain near its long-term trend, neither booming nor stalling. The underlying drivers of growth, however, are shifting. Business investment has become the engine of expansion, driven by tax-incentivized capital expenditures, resilient corporate balance sheets, and ongoing reshoring and automation efforts. Technology investments have been especially strong as the AI boom continues, providing a steady base for GDP growth. Additionally, both fiscal and monetary policy are expected to bolster the domestic economy over the forecast period. Fiscal policy continues to be supportive through deregulation, tax policies, and industrial initiatives. At the same time, the Federal Reserve has signaled its intention for further easing. Together, these dynamics create a constructive backdrop for continued expansion and renewed business investment.

The Atlanta Fed’s GDPNow model currently estimates real GDP growth at 3.9% for the third quarter, reinforcing the view that the US economy remains resilient. The GDPNow model provides a real-time estimate of quarterly GDP growth, continuously updated as new reports are released. This often provides an early read on the economy.

Overall, consumer data has remained stable, but we are starting to see weakness at the margin, particularly in discretionary spending. Credit card balances are rising while savings rates decline, suggesting that households are maintaining spending through leverage rather than income growth. Projections are for consumer spending to decelerate as income growth and savings buffers weaken. The current savings rate at 4.6% is below the 20-year moving average but above the post-pandemic low. This second chart indicates that an elevated level of credit card holders are making only the minimum payment on their balances, even as the current level is off its recent historic high. If credit stress intensifies, consumer confidence and spending may further deteriorate. Households are clearly facing stress, although it should be noted that most of the concerns reside with the bottom 60% of households in terms of income distribution. Higher income households continue to consume, buoyed by strong asset markets.

Household consumption depends heavily on the strength of the job market. Real wage gains have flattened, and the labor market, though still tight by historical standards, shows signs of stagnation. Many firms are opting to pause hiring, reduce hours, or allow natural attrition, in marked contrast to the labor hoarding of the past several years. Demographic shifts, particularly among foreign-born workers, and waning labor participation rates, especially among the younger cohort, are also weighing on labor supply.

Inflation is likely to settle closer to 3%, reflecting structural pressures of deglobalization, demographic constraints, and sustained fiscal support. The policy mix remains expansionary as fiscal policy continues to bolster business investment, while monetary policy, though restrictive in nominal terms, has turned neutral in real terms as inflation stabilizes. With the Fed on a path of easing and political incentives aligned for continued spending, both pillars of policy are working to uphold nominal growth.

STOCK MARKET OUTLOOK

Against this backdrop, market dynamics are being increasingly shaped by flows rather than fundamentals. The dominance of passive investment vehicles continues to benefit large cap equities and momentum-driven sectors, compressing dispersion and concentrating US market leadership. We expect this dynamic to continue in the short to medium term. Decreased recession risk and the continued capex boost within the technology sector prompted us to shift our growth/value tilt modestly toward growth to capture upside while managing valuation risk. At the same time, we reduced mid-cap exposure in favor of what we view to be more compelling opportunities in large caps. We continue to hold dividend-oriented ETFs across large and mid-cap allocations as dividends tend to provide meaningful support in the higher-volatility environment we expect. Within sector positioning, we maintain exposure to advanced military technologies amid ongoing geopolitical tensions. While we recognize that US small cap stocks should benefit from anticipated lower rates, we remain void this sector as we see more opportunities from the larger capitalization stocks. Small caps are still likely to face greater headwinds from tariff-related pressures, higher financing costs, and limited pricing power that could compress margins.

A combination of policy changes and macroeconomic trends is likely to weaken the US dollar, enhancing the return potential of international assets for US-based investors. We maintain our allocation to foreign developed markets, with selective increases this quarter in certain portfolios. Europe, in particular, is likely to experience growth on the back of increased investment in defense and infrastructure. As such, within international developed equities, we maintain a broad-based index and a Europe-focused allocation. We also maintain our international developed small cap value equity position, which could outperform amid global trade realignment as they’re less exposed to cross-border disruptions and benefit directly from regional fiscal stimulus. With significant exposure to industrials and materials, these holdings are well positioned to benefit from the aforementioned fiscal spending. Strong valuation and profitability characteristics further support the return potential within this segment.

BOND MARKET OUTLOOK

Monetary policy is likely to be accommodative over the coming year. With inflation stabilizing near 3% and growth normalizing, the Federal Reserve has signaled a willingness to ease monetary conditions. A leadership transition expected next spring is likely to reflect a more dovish posture. The next Fed chair is widely anticipated to prioritize employment resilience and debt sustainability over attempting to corral inflation to the Fed’s target level of 2%. Consequently, the new chair will likely advocate for a continued reduction in the fed funds rate following several years of tight monetary policies that elevated real rates. In addition, an end to the Fed’s quantitative tightening program will probably be part of this more dovish stance. As policy recalibrates, we expect a decline in short-term rates and a modest steepening of the yield curve.

Within fixed income, we moved more into the intermediate-maturity section of the curve. Credit markets are currently well supported by ample liquidity, reflecting low default rates, steady growth, and a manageable inflation backdrop. However, credit spreads hold the potential to widen moderately from tight levels due to heavy refinancing needs, though not to distressed levels. With spreads now below their long-term averages and little room for further tightening relative to Treasurys, we expect relatively limited return potential and recommend maintaining an underweight allocation to corporate credit.

We continue to emphasize US Treasurys and seasoned mortgage-backed securities (MBS) for stability and income, while maintaining selective exposure to high-quality speculative-grade bonds. These allocations position portfolios to benefit from the policy pivot toward easier conditions and a more balanced growth-inflation environment.

OTHER MARKETS

We continue to hold gold across all strategies, viewing it as a strategic asset. Central banks remain steady buyers, underscoring gold’s role as both a store of value and an inflation hedge. Ongoing geopolitical tensions and the global shift to diversify away from US dollar dependence are likely to keep demand firm, reinforcing the importance of gold within a diversified, risk-aware allocation. Although gold has proven to be a beneficial holding in the strategies, as it continues to mark historic highs, we are continuing to monitor its ongoing appeal.

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Asset Allocation Fact Sheet

Daily Comment (September 25, 2025)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of a potential change to the Fed’s inflation target. We then provide insights on the latest White House investment initiatives aimed at promoting its policy agenda. Additional topics include the possibility of further tariffs, the US’s financial support for Argentina, and the ongoing efforts to resolve the conflict in Gaza. We also provide a summary of recent global and domestic key economic indicators.

Soft Inflation Target? A growing number of Federal Reserve officials have signaled a willingness to consider an inflation target range, moving away from a rigid inflation target. This perspective has been highlighted in recent speeches by Fed Governors Christopher Waller and Michelle Bowman, alongside Atlanta Fed President Raphael Bostic. These comments emerge as the Fed digests the findings of its latest five-year policy framework review, which was completed in August.

  • Of the three officials who mentioned a possible change, only Raphael Bostic provided a concrete example. During an appearance on the “Macro Musings” podcast, the Atlanta Fed President suggested he could favor an inflation target range of 1.75% to 2.25%. Under such a framework, the Fed would likely raise interest rates if inflation exceeded the upper limit and lower them if it fell below the lower bound.
  • Adopting an inflation target range would represent a significant shift in how most central banks approach their price stability mandate. However, this model has a clear precedent. The Central Bank of Brazil successfully manages inflation with a system that includes a tolerance band of ±1.5 percentage points around its central target, effectively targeting a range from 1.50% to 4.50%.
  • Additionally, the adoption of a rigid 2% inflation target was somewhat arbitrary, as the original proposal was a bit vague. The concept was first introduced by Harvard economist Sumner Slichter in a 1952 Harper’s Weekly article, “How Bad Is Inflation?”, where he explicitly proposed a target of 2 or 3%. This was a significant departure from the prevailing economic view that price stability meant inflation should average zero in the long run.
  • A move to an inflation target range likely signals concern within the Fed that its current communication is ineffective. A defined range would force more pre-emptive and unambiguous rate adjustments ahead of policy meetings. However, this clarity could well have negative implications for bond markets, as a rules-based approach might limit the Fed’s flexibility in responding to unexpected economic shocks.

New Industrial State: The White House is considering acquiring a 10% stake in Lithium Americas as part of a renegotiation of its $2.3 billion loan from the Department of Energy. This potential move underscores a growing trend of direct government involvement in the economy, specifically aimed at ensuring that the US can become more self-sufficient in developing critical technologies and reducing reliance on foreign supply chains, particularly from China.

  • This action is the latest example of growing integration between the public and private sectors. It follows a similar deal with Intel, in which the government also took a 10% share in the company. This emerging practice suggests that the government may be seeking greater control and a direct return on investment for companies receiving significant public funding, especially in sectors deemed critical to national and economic security.
  • Beyond government support, companies receiving public backing are also attracting significant private investment. This was demonstrated on Tuesday, when it was reported that Intel, which had already secured a $2 billion investment from SoftBank, is now in talks with Apple for another cash injection. These discussions are part of Intel’s broader strategy to sell its chips to the iPhone maker, as Apple faces growing pressure to reshore much of its manufacturing capacity to the United States.
  • The evolving relationship between the government and the private sector points toward greater integration. A probable consequence is a competitive advantage for firms with close government affiliations, which may receive preferential treatment in the form of directed contracts. The long-term risk of this arrangement, however, is a potential decline in operational efficiency for these favored companies, as market discipline may be weakened by guaranteed government support.

New Tariffs: The White House has launched an investigation into imports of robotics, industrial machinery, and medical devices under Section 232 of the Trade Expansion Act. The process, which began on September 2, authorizes the president to impose tariffs on goods deemed critical to national security. While potential tariffs on these specific goods have not been discussed, the president has routinely shown a willingness to use this authority (typically imposing tariffs 50% or higher for specific products) to protect strategically important industries.

Weak Lending Standards: Debt investors are concerned about increasingly lax credit standards following the recent failures of two seemingly healthy companies. This apprehension stems from the collapse of subprime lender Tricolor and car parts supplier First Brands Group filing for bankruptcy, both of which had access to favorable financing before their respective downfalls. While this issue is not expected to trigger a financial crisis, it is raising questions about the financial health and stability of other companies in the market.

Argentine Bailout: The US government has moved to support Argentina and prevent a collapse of its currency. Treasury Secretary Scott Bessent has signaled a willingness to purchase Argentine dollar-denominated bonds and could offer standby credit via the Exchange Stabilization Fund. This action underscores the US dollar’s enduring influence globally, even as its reserve currency status faces challenges. While we maintain a bearish outlook on the dollar, we expect its decline to be volatile.

Gaza Peace Plan: The White House has reportedly presented a 21-point plan to Arab and Muslim leaders aimed at ending the war in Gaza and establishing a post-Hamas government. This diplomatic push comes as the US seeks an urgent resolution to the conflict to focus on other pressing global issues. During the discussions, the US reportedly reassured leaders that it would not permit Israel to annex the West Bank. A peaceful resolution to the Middle East conflict would expectedly help stabilize global oil markets

Energy Policy: A survey from the Federal Reserve Bank of Dallas reveals significant concern within the oil industry that current US government policies are negatively impacting profitability. Industry participants cite the administration’s dual pressures of advocating for lower energy prices while supporting tariffs on essential equipment as major factors compressing margins. This weak sentiment suggests that certain sectors may take longer than expected to adapt to the new policy environment.

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Daily Comment (September 22, 2025)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some observations regarding the latest surge in global gold prices. We next review several other international and US developments with the potential to affect the financial markets today, including a potential new wealth tax in France, big anti-corruption protests in the Philippines, and the White House’s new $100,000 application fee for H-1B worker visas.

Global Gold Market: Near gold futures prices as of this writing have jumped approximately 1.4% to a new record high above $3,760 per ounce, apparently reflecting investors’ increasing confidence that the Federal Reserve will cut US interest rates aggressively over the coming year. On that note, traders are looking ahead to scheduled comments later today by Stephen Miran, essentially the White House’s new representative on the Fed’s policymaking committee. Miran will likely continue to press the argument for aggressive rate cuts.

  • Other developments are probably also helping to convince investors that deeper rate cuts are coming and will continue to boost gold prices. For example, the Fed’s preferred gauge of inflation, the PCE price deflator, will be updated for August at the end of the week. If it shows well-behaved inflation, the Fed will be more likely to keep cutting rates.
  • In addition, it appears that global central banks are continuing to buy gold aggressively to diversify their portfolios away from the dollar.
  • Geopolitical tensions, central bank buying, and falling real interest rates have historically been associated with strong gold prices. As just one example of our continued positive outlook on gold, we currently maintain meaningful exposure to the yellow metal in all of Confluence’s Asset Allocation strategies and in our Global Hard Assets portfolio.

US Industrial Policy: Reports late Friday said the White House intervened last week to prevent US Steel from shutting down a major facility in Granite City, Illinois, invoking the controversial “golden share” granted to the federal government to allow Japan’s Nippon Steel to buy the firm. The move will likely fuel further concern about rising government intrusion into private-sector business decisions.

  • If those concerns worsen too much, high-profile firms at risk of intervention could see their stock values decline.
  • More broadly, such activist policy by the government could further undermine global investors’ view of the US investment environment, pushing down the value of the dollar and giving a further boost to foreign stock values.

US Immigration Policy: President Trump on Friday signed an order imposing a $100,000 fee when firms apply for H-1B visas, which are widely used to bring technology workers from China and India to work in the US. Administration officials argued the fee would ensure that firms only bring in exceptionally skilled workers, creating more opportunities for US graduates and raising their pay.

  • For US companies in the technology sector and beyond, a key risk is that the pool of competent US workers may not expand quickly enough to replace the foreign workers, leaving them with insufficient tech talent to innovate, grow, and keep boosting the value of their stock.
  • So far today, the new policy is also weighing on Indian technology service providers, which provide many of the Indian workers who arrive in the US on H-1B visas. For example, Infosys, Wipro, and Tata Consultancy Services have all seen their stock price fall by at least 2.2% so far today.

France: With political polarization continuing to complicate the effort to cut the government’s gaping budget deficit, the center-left Socialist Party is pressing for an annual 2% wealth tax on anyone with a fortune greater than 100 million EUR ($118 million). Importantly, the Socialists are crucial to the survival of Prime Minister Lecornu’s government. If they can use that position to get the proposal passed, it would undermine President Macron’s effort to make France more business friendly and would likely weigh on French equities.

Israel: After the United Kingdom, Portugal, Canada, and Australia recognized Palestine as a state over the weekend, right-wing members of Prime Minister Netanyahu’s government have responded by demanding that Israel immediately annex the West Bank, which Israel has occupied since the 1967 war. Netanyahu is reportedly mulling a range of options, including partial annexation, and may announce his decision in the coming days. Any move to annex even a part of the territory would likely further isolate Israel, weighing on its economy and markets.

Russia-Estonia: Reports late Friday said three Russian MiG-31 fighter jets flew over Estonian territory for 12 minutes before being chased away by Italian F-35 fighters operating in NATO’s “Baltic Sentry” program. The incident marks the third incursion of Russia aerial assets into NATO territory in the last week. That suggests Russia has taken a page from China’s strategy in the Asia-Pacific region, where it gradually increases its “grey zone” activity in territory it covets in order to normalize its presence and potentially mask future aggression.

Philippines: Continuing a recent trend, tens of thousands of protesters marched in locations around the country yesterday to decry public corruption, prompting the government to put the armed forces on alert. The protests stem from news that officials and their cronies siphoned some $2 billion from fake flood-control projects in a province north of Manila. The protests are now morphing into a broader movement against public corruption, which could potentially topple the Marcos government, spark political instability, and weigh on Philippine asset values.

Argentina: The central bank bought more than $1 billion of pesos Wednesday through Friday to keep the currency’s value from falling below the band set by President Milei in April. In addition, Economy Minister Caputo vowed the government would “sell to the very last dollar” to keep the peso within its band. The currency has plunged some 9% over the last two weeks after Milei’s party unexpectedly lost local elections in a landslide, suggesting his libertarian policies may not have staying power. Argentine stock prices have fallen some 30% since early August.

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Asset Allocation Bi-Weekly – Stopping the Bond Vigilante: How Fiscal Dominance Is Reshaping Global Markets (September 22, 2025)

Posted on by Rebekah Stovall

by Thomas Wash | PDF

The bond bull market that began in the early 1980s lasted nearly four decades. Its longevity was largely built on the assumption that governments would always prioritize the health of their bond markets, even if it meant imposing economic pain on their own countries. This thinking fostered the legend of the “bond vigilante” — a mythical force that would supposedly punish irresponsible government spending by selling off bonds, thereby holding policymakers in check.

The bond market’s core assumption — that it would curb government overspending — has been severely tested since the pandemic. The initial, one-time surge in borrowing was necessary to prevent a global economic collapse. However, that precedent has been exploited. Many governments now use debt to finance a variety of pet projects, from infrastructure and green initiatives to energy subsidies and tax cuts. This increase in spending, detached from any corresponding increase in tax revenue or spending cuts, has been the primary driver behind the recent increase in bond yields around the world (see chart below).

A primary focus of attention is the potential for a supply/demand imbalance in the bond market. The concern is that rising bond issuance is occurring simultaneously, with a shift in investor preferences toward short-duration bonds driven by growing anxieties about inflation, economic growth, and central bank policy. As a result of this mismatch, yields on 30-year government bonds globally have risen to their highest level in over 20 years. This rise in sovereign bond yields is largely attributable to growing concerns over US credit quality, triggered by Moody’s Ratings’ decision to downgrade the US credit rating from Aaa to Aa1 on May 16. The agency justified its move by highlighting the US government’s perceived unwillingness to address deteriorating fiscal conditions, specifically citing structurally large annual deficits and escalating debt servicing costs.

These concerns were compounded by a poorly received 20-year Treasury auction on May 21, which served as an immediate test of market confidence. The auction results were weak, and yields rose above 5% for the first time since October 2023. Although not the sole driver, this weak auction amplified selling pressure across the yield curve, with the 30-year yield surpassing 5%.

Concerns about the US government’s credit quality have also raised fears about the creditworthiness of other developed countries. In the same month that the US had its weak bond auction, Japan also experienced poor demand for a 30-year bond offering. Furthermore, yields have risen across Europe and in the United Kingdom, driven by concerns that these countries may struggle to meet their own budget targets.

On the supply side, although interest rates remain elevated, governments are taking proactive measures to mitigate their impact on the broader economy. Notably, the US, Japan, and the UK have begun increasing their issuance of shorter-duration sovereign bonds. This strategy aims to reduce supply pressure on longer-dated bonds, which helps to curb the rise in long-term borrowing costs. Meanwhile, France is in a debt standoff as it looks to address its budget situation through a combination of spending cuts and tax increases.

On the demand side, most central banks are actively adjusting their strategies to ensure liquidity in the bond market. The Federal Reserve, Bank of England, and Bank of Japan have all focused on modifying the pace of their balance sheet reduction to add liquidity back into the system. While the ECB has not formally stated its intention to use its tools to help bring down yields, particularly in France, it has expressed a willingness to do so through its Transmission Protection Instrument in case of a crisis.

While rising government debt remains a problem, it appears that, at least in the short to medium term, governments have the ability to prevent yields from rising to very high levels. The trade-off is that governments worldwide may remain vulnerable to rollover risk when short-term bonds expire. This could force them to take more proactive measures to prevent rates from destabilizing the economy.

We believe the need to mitigate these fiscal risks could pressure governments into a regime of fiscal dominance, where monetary policy is subordinated to keep public debt servicing costs manageable. A key feature of this environment would be central banks tolerating higher inflation, effectively abandoning their strict price stability and leading to structurally elevated price pressures. In such a scenario, a barbell bond strategy — favoring both short-term and long-term bonds while avoiding the middle of the yield curve — could be advantageous in the near to medium term. Furthermore, peripheral European countries that have demonstrated a credible commitment to fiscal sustainability could become particularly attractive investment opportunities for those seeking international exposure.

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Daily Comment (September 19, 2025)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of discrepancies in the weekly jobs data. We then examine the potential implications for US-China relations as the United States signals a desire to re-engage in the Middle East. Additional topics include a new fund for American manufacturing, the possibility of a government shutdown, and Germany’s reluctance to partner with a French defense firm. We also provide a summary of key recent global and domestic economic indicators.

Low Hire, Low Fire? Expectations for Federal Reserve interest rate cuts rose on Thursday due to a data error that cast doubt on the labor market’s health. Although initial jobless claims fell significantly to 231,000, the reported drop in continuing claims to 1.92 million was largely an illusion. It was primarily caused by a major clerical error in North Carolina, which reported a mere 205 claims, a figure drastically lower than the 20,535 reported the previous week.

  • This discrepancy in the data indicates that continuing claims may have actually experienced a slight increase from the previous week, despite the reported decline. This finding suggests that while companies are not yet accelerating layoffs, they are beginning to show hesitation in hiring, a trend that supports the narrative of a cooling labor market. Nevertheless, while continuing claims remain below the 3 million threshold often associated with a recession, the current level is nearing the peak for the expansion.

  • The reporting error in continuing claims occurred shortly after a significant portion of the previous week’s spike in initial claims was attributed to an unemployment insurance fraud scheme in Texas, which is currently under investigation. It is noteworthy that this fraudulent activity did not prompt a downward revision of the prior week’s data; instead, the figure was revised upward from 263,000 to 264,000. This new error, therefore, calls the overall data quality into question.
  • We continue to stress the importance of using multiple data sources to get a comprehensive view of the economy. Since the pandemic, we have seen significant data distortions that have made it difficult to pinpoint our position in the business cycle. We are concerned that the Federal Reserve’s over-reliance on this potentially flawed data may cause it to fall behind the curve. Therefore, we believe that implementing some portfolio protection may be a prudent measure at this time.

Back to Afghanistan? The US has signaled an interest in re-establishing a presence at Afghanistan’s Bagram Air Base, as indicated by a comment made by the president during a visit to the UK. While discussing plans to increase partnership, the president reportedly stated a desire to regain access to the base due to its strategic location. He specifically noted its proximity, describing it as “an hour away from where China makes its nuclear weapons,” suggesting the presence would be a form of deterrence.

  • The US’s desire to position its forces near Chinese nuclear assets, coming just a day before the president’s meeting with his Chinese counterpart, Xi Jinping, suggests the two leaders will discuss more than just trade and technology. The agenda is likely to also include China’s allies, Russia and Iran, given their resistance to US efforts regarding Russia’s invasion of Ukraine and Iran’s nuclear ambitions.
  • While officially maintaining a stance of neutrality, China is deepening its engagement in foreign affairs to align with US rivals. Its strategy involves capitalizing on the international isolation of Russia and Iran through discounted purchases of their energy resources. Furthermore, China is alleged to have supplied limited military assistance to both countries in the form of dual-use technology, enhancing their defensive capabilities.
  • In the days leading up to the meeting with China, the White House has strongly hinted at its willingness to confront China’s foreign policy. The administration has urged allies, specifically the EU, to increase efforts to pressure China and India through sanctions, aiming to break their support for Russia’s invasion. While this strategy has not yet been effective, it demonstrates a clear desire to pressure China into changing course.
  • The talks between US and Chinese leaders will likely set the tone for future relations as they try to navigate their differences. The US request to regain its former Afghan air base is likely a negotiating tactic; however, should the US follow through, it could lead to a significant escalation of tensions. While we do not believe a direct conflict is likely, the risks remain elevated.

American Manufacturing Fund: The White House is exploring how to use funds received from an investment deal that was struck with Japan. The plan is to use these funds for projects designed to support US ambitions in the chip and AI sectors. This strategy includes an expedited review process to allow for the rapid construction of factories and the development of mining operations, and it may also involve extending company leases to allow them to develop on public land.

Supreme Court Battle: The White House has requested that the Supreme Court allow it to fire Federal Reserve Governor Lisa Cook while her legal challenge to her removal is ongoing. The move is a test of the president’s authority to reshape the Federal Reserve, which has reportedly resisted his push to significantly lower interest rates. If the court rules in the White House’s favor, it would set a major precedent that could weigh on the dollar and threaten the central bank’s independence.

US Government Shutdown: Growing concerns of a government shutdown are mounting as both sides remain unable to agree on a budget. Democrats plan to hold out for restored Medicaid funding and ACA subsidies. However, Republicans have started the process of passing continuing resolutions that would fund the government through November 21. This growing partisanship raises the likelihood of a prolonged shutdown, which could temporarily impact markets and the economy until an agreement is reached.

German-French Feud: German officials are looking for alternatives to their French partner, Dassault Aviation SA, for the development of a next-generation fighter jet. This comes as Dassault has reportedly pushed for a controlling role in the program. As a result, the Germans are looking for alternative suppliers from the UK, Sweden, or even Spain. While this decision to find new partners could lead to friction between the two countries, we continue to believe that EU defense companies should benefit from the increased spending.

BOJ Policy Normalization: The Bank of Japan voted to hold rates unchanged but signaled a shift by announcing it is considering offloading a portion of its massive ETF holdings. The central bank currently holds a portfolio valued at approximately ¥70 trillion ($475 billion), with plans to sell at a pace of about ¥620 billion annually. While this will not lead to a quick unwinding of its positions, the move is likely to weigh on domestic equities and push up the value of the yen. The policy shift is another signal that the US dollar may have more room to fall.

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Daily Comment (September 18, 2025)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with thoughts on the Fed’s latest rate decision. We then explore why Nvidia’s investment in Intel may reflect a broader US tech policy. Additional topics include progress in easing US-China trade tensions, a new EU sanctions proposal against Russia, and further evidence of China’s advances in chipmaking. We conclude with a summary of recent global and domestic economic data.

A Fed Divided: The Federal Reserve lowered its benchmark interest rate by 25 basis points, a move that was widely anticipated by markets. While the decision itself garnered broad consensus — with even the two previous dissenters siding with the majority — the future policy path remains uncertain. The sole dissenting vote came from the newest member, Stephen Miran. Furthermore, the updated “dots plot” signaled a more dovish shift, indicating expectations for an additional rate cut. Despite this, the overall trajectory of monetary policy appears far from settled.

  • The Fed’s committee is in a near-perfect stalemate, with a deep divide underscoring the challenge of balancing short-term employment concerns against the long-term goal of controlling inflation. When you exclude the most dovish member’s forecast, likely from Governor Stephen Miran, the committee is split right down the middle: nine members favor, at most, one rate cut this year, while the other nine favor two.
  • Fed communication failed to offer clear guidance on the future policy path. During his press conference, Fed Chair Powell framed the rate cut as a form of risk management. However, this dovish move was contradicted by the Summary of Economic Projections (SEP), which revealed that the Fed had grown more optimistic about economic growth and less confident that inflation would return to its 2% target.
  • There’s growing concern over the Fed’s independence, stemming from Stephen Miran’s role as both a White House Economic Advisor and a newly appointed Fed governor. This conflict became evident in the latest “dots plot.” The projection attributed to Miran was 75 basis points below the next lowest dot, a stark outlier that suggests he’s deeply at odds with his colleagues. This wide gap likely indicates that other Fed officials are pushing back against potential White House influence.
  • Poor communication from the Federal Reserve and concerns about central bank independence fueled significant market volatility on Thursday. This was evident in the dollar’s whipsaw action — initially dropping before rising — and in the S&P 500, which spiked following the announcement only to finish lower on the day. The reaction suggests deep market skepticism about the central bank’s ability to sustain its monetary easing cycle, given the current composition of the committee.
  • The latest dots plot indicates that the FOMC is projecting additional rate cuts of 25 basis points over the last two meetings. The pace of this easing, however, will be highly dependent on incoming data. We believe a sustained cooling of the labor market is a prerequisite for more aggressive rate cuts. Conversely, if inflation remains stubbornly high, the Fed may be forced to postpone any rate cuts. While we do not see it as the most likely outcome, persistent inflationary pressure could even prompt discussions of a potential rate hike.

AI Race: Nvidia has announced plans to invest $5 billion in Intel as the two companies look to co-develop chips for PCs and data centers. The deal would allow Nvidia to purchase Intel shares at a steep discount, giving it a stake in its longtime rival. The move follows major US government funding and investment from SoftBank, highlighting the growing alignment among American tech firms to strengthen domestic capabilities and ensure the US remains competitive in the global AI race.

  • We believe the continued collaboration between US tech firms and the government to expand AI capacity reflects a broader strategy: shifting from offering access to America’s vast consumer market to granting access to its technological ecosystem — a transition we call moving from free trade to free tech.
  • This sentiment was reinforced by White House AI adviser Sriram Krishnan, who noted that the US is using global market share as a benchmark for success. His remarks suggest not only a massive expansion of domestic AI infrastructure, but also an effort to extend US technology abroad, positioning it as the global gold standard.
  • We believe US tech companies collaborating to expand their global footprint could be a key driver of equity market returns in the coming years. However, failure to secure leadership in AI may trigger a significant pullback. As a result, while we remain optimistic on the tech sector, we also see merit in maintaining exposure to value stocks to help balance portfolios.

US-China Trade Talks: China has dropped its antitrust probe into Google’s Android mobile platform, a move seen as a concession to the US as the two nations prepare for trade talks. The investigation was launched in February, the same day the White House imposed new tariffs on Chinese goods. This decision signals Beijing has learned that fostering a friendlier environment for US tech companies can lead to more favorable trade terms. It is a prime example of the growing linkage between global technology policy and trade diplomacy.

AI’s Competition: Earlier this month, two leading American AI models performed at a top-tier level against human competitors at the International Collegiate Programming Contest (ICPC) World Finals, often called the “coding Olympics.” OpenAI claimed its model would have secured first place, while DeepMind’s would have taken second. This breakthrough will likely accelerate the adoption of AI as an assistant or complement to computer programmers.

EU Sanctions: The EU is drafting a new Russia sanctions package for its members, targeting crypto, banking, and energy transactions to pressure an end to the war in Ukraine. This move comes after the US pushed the EU to enact 100% tariffs on India and China for backing Russia. Although the EU has not expressed openness to the tariff idea, it has pursued other restrictions against the Russian allies. Ultimately, while coordinated Western pressure could advance peace talks, it may also encourage Moscow to challenge NATO’s unity.

Farmer Bailout: The White House has announced a new plan to use revenue from tariffs to provide support to US farmers. This comes as the agricultural sector has seen a downturn in sales as a result of trade restrictions. The use of tariff funds for this purpose will likely lead to two key debates: first, the broader economic impact of these tariffs, and second, their long-term viability as a consistent source of government revenue to address fiscal needs, such as debt reduction.

The Chinese Nvidia? In a significant step toward technological self-reliance, Huawei Technologies has launched a new suite of semiconductors, including memory chips and AI accelerators. This announcement comes just one day after China prohibited its domestic companies from buying chips from Nvidia, highlighting a strategic push to control its supply chain. These events mark a major escalation in the US-China tech rivalry as both nations vie for dominance in the critical global semiconductor market.

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Daily Comment (September 17, 2025)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with what to expect from the FOMC meeting and its market implications. We then examine China’s ban on NVIDIA chips and its potential ripple effects across the global tech sector. Further topics include progress in US-UK trade talks, the evolving situation around a potential TikTok sale, and how Chinese trade restrictions are pressuring EU firms and even forcing some to consider shutdowns. We also include a summary of key recent economic data from both global and domestic sources.

Fed Primer: All eyes are on the imminent FOMC meeting minutes as investors seek to gauge the trajectory of interest rates and the Fed’s assessment of the economy. The market has overwhelmingly priced in a 25 basis point cut, with futures implying a 96% probability. However, mounting evidence of a softening labor market, coupled with lingering concerns over the economic outlook, suggests the central bank may ultimately decide on a more assertive path of rate cuts.

  • Federal Reserve officials face a complex economic puzzle. While the labor market is showing clear signs of weakening — with firms slowing hiring due to tariff costs and AI adoption — consumer spending remains remarkably resilient as evidenced by strong retail sales data. This divergence between a softening jobs market and robust consumption is a major challenge for policymakers interpreting the economic environment.
  • The confirmation of Stephen Miran, a White House advisor, to the Federal Reserve Board marks a pivotal shift. It breaks a nearly century-old precedent, making him the first sitting White House official on the board since the 1930s. This move is viewed as a notable assertion of executive influence over monetary policy and is expected to shape the Fed’s future decisions.
  • Analysts will scrutinize the Fed’s “dots plot” for signs of the White House’s influence on interest rate projections. As the newest governor, Stephen Miran is expected to submit the most dovish dot, aligning with the administration’s previous statements. Furthermore, he will likely advocate for a policy focus that extends beyond the dual mandate of maximum employment and price stability, emphasizing a de facto “third mandate” of managing long-term interest rates.
  • We anticipate the Fed meeting will serve as a significant catalyst for markets. In our base case, indications of an aggressive path for rate cuts would be interpreted as a substantial stimulus measure, providing a tailwind for equity assets. A key risk to this view is that the market’s positive reaction may be muted if the cuts are seen as politically influenced.

China Halts Sales: Beijing has ordered its companies to halt purchases of NVIDIA’s AI chips and cancel existing orders, significantly reducing reliance on foreign semiconductor technology. This directive follows recent accusations against the US chipmaker for violating anti-trust laws and comes just a month after regulators flagged its H20 chip as a national security risk. The company’s share fell pre-market following the report.

  • China’s crackdown on NVIDIA chip purchases accelerates its push for semiconductor self-sufficiency, a key front in its rivalry with the US to develop superior AI technology. With domestic technology improving, Beijing is now urging firms to source more AI chips from local suppliers.
  • Huawei is reportedly developing chips that rival those of NVIDIA in performance, signaling a major advancement in China’s semiconductor capabilities. This progress is complemented by breakthroughs in producing domestic chipmaking equipment comparable to that of leading US suppliers.
  • China’s crackdown on US tech is a major market concern, particularly for growth companies in the S&P 500. These firms often rely heavily on foreign revenue, making them vulnerable to such restrictions. The impact is twofold: immediate earnings are threatened, and future growth is jeopardized by the loss of access to the critical Chinese market.
  • While we maintain a positive outlook on the tech sector’s momentum, bolstered by supportive tax incentives for capital expenditure, we do believe a strategic allocation to value stocks offers crucial diversification and resilience during periods of market uncertainty.

US-UK Talks: The US and UK will hold talks to discuss trade and investment, with US companies expected to announce billions in new technology infrastructure investments in the UK. This initiative aims to deepen the bilateral relationship and promote the adoption of US technology. As outlined in our latest geopolitical report, we suspect that the US is moving away from a traditional free trade policy toward a “free technology” policy, using tech access rather than consumer market access to cement alliances and keep partners aligned.

US Investments: The US is in talks to establish a fund, in partnership with investment firm Orion Resource Partners, to finance overseas mining projects. This initiative would target the extraction of critical minerals like copper and rare earths, which are essential for technology manufacturing. The move exemplifies the US government’s growing collaboration with the private sector to play a more active role in the economy.

TikTok Sale: The president signed a new order extending the deadline for Chinese companies to divest from the US, despite signs of progress in negotiations. Under a White House-brokered deal, TikTok would be acquired by a consortium including Oracle Corp., Andreessen Horowitz, and the private equity firm Silver Lake Management LLC. While it remains unclear whether Beijing will approve the deal, early indications suggest that China wants the app to keep its Chinese algorithm.

USMCA Talks: The US is set to hold trade discussions with its North American partners as they prepare for a review of the regional USMCA trade agreement next year. We suspect the conversations will primarily focus on ensuring the countries agree to create a united trade policy, particularly toward China, but possibly regarding other nations as well. Given how much trade is conducted between the three countries, any sign of trouble or disagreement could lead to renewed concerns of trade uncertainty.

China’s EU Crackdown: European firms face potential shutdowns due to a shortage of critical rare earth elements that are essential for production. This crisis follows China’s decision to restrict exports of these vital resources, a move triggered by global trade tensions and US tariffs. Although China and the EU reached an agreement to maintain Europe’s access, numerous member states have complained that significant supply issues persist. We believe this ongoing resource scarcity threatens to negatively impact market sentiment toward the global tech sector.

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