“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
2025 Q3 Newsletter
By Jason Lesh, Managing Principal
It’s been a wild rollercoaster of a year so far. With plenty of ups and downs: never ending risk on, risk off. Markets are booming one minute and burning the next. But underlying all the noise, we do see a couple key themes to be mindful of that are driving our positioning.
Unprecedented AI Capital Spending
Fiscal Profligacy
Persistent Inflation
And while we could editorialize that these are less than ideal macroeconomic trends, our job is to manage your portfolio while maximizing risk adjusted returns. Identify the risks…and the opportunities.
In this quarter’s commentary, Nick touches not just on what we are concerned about, but how we have positioned portfolios to whether the storm while strategically exploiting opportunities we see on the horizon.
I hope this note finds you doing well as we head into the holiday season.
Wishing you all the best,
People are insufficiently skeptical…
The current economic landscape is notably clouded by a number of significant factors, creating a lack of visibility that, in our view, injects uncertainty into asset pricing. Remarkably, this appears to be largely discounted by the market, particularly in segments of large-cap U.S. equities, especially technology/AI stocks. These assets are currently trading at valuations that suggest perfection.
While current fundamentals can offer some justification for these elevated price levels, the critical flaw in the prevailing narrative lies in the presumption that these conditions will persist for a decade or longer. We assign a low probability to such an outcome. Certainly, AI is a game changer over the long-term, but we believe real productivity gains remain elusive and therefore difficult to invest in with any certainty.
The Case for commodities and gold in a Devaluing Dollar Environment
In sharp contrast to the uncertainty pervading equities, gold’s continual march higher is a highly probable, albeit potentially volatile, outcome. We have expressed this thesis through owning the gold mining stocks which are up more than 3X from when we first acquired. We have been harvesting these gains and being patient with redeploying the gains.
Over the long-term each of the factors detailed below have a high likelihood of eliciting a monetary policy response that effectively devalues the U.S. dollar. The antidote to this environment is diversification and a strategic pivot (which we have been advocating for since late 2020) toward a non-traditional portfolio construction which includes commodities, like gold and energy producers. While short-term price fluctuations in commodities are expected, we anticipate its volatility will continue to be rewarded in ways differing from the S&P 500 for example.
Drivers of Market Uncertainty
While each of these themes warrants a full dedicated analysis, we will briefly introduce the core arguments that underpin our current posture:
1. The Unprecedented AI Capital Expenditure Cycle
The Artificial Intelligence capital expenditure cycle is undeniably the singular engine driving massive near-term economic growth. Hundreds of billions of dollars are being deployed annually to construct new data centers and the requisite energy infrastructure. Some analysts estimate this spending could contribute as much as 3% to GDP. With consensus Wall Street GDP estimates hovering slightly above 1%, the inescapable conclusion is that we would currently be in a technical recession without the magnitude of AI spending. This translates to nearly half a trillion dollars per year of spending driven by a select few major companies - an unprecedented concentration of capital deployment.
Historically, major infrastructure buildouts - from 19th-century railroads to the mid-20th-century space race and the late-90s telecom expansion - all pale in comparison to the current AI race. Critically, each of those preceding cycles ultimately culminated in a recession and the destruction of significant capital, despite leading to massive long-term productivity gains that materialized far slower than initial investor expectations.
2. Fiscal Profligacy and Federal Reserve Overreach
The lack of fiscal restraint and the breadth of Federal Reserve overreach have become endemic in Washington. The bipartisan consensus on spending over the last two decades has systematically devalued the dollar against all major real assets - from gold and real estate to the general equity market.
We must consider that the traditional definition of a "recession" may be obsolete. On a real, inflation-adjusted basis, we may already be experiencing rolling recessions and stagflation that do not equally impact all segments of the economy. How can we have a true recession with such massive deficit spending/stimulus? And how do we wean ourselves off of this spending?
Our clients, largely falling into the privileged class, have seen their asset base grow, providing a substantial insulation effect. However, a recent WSJ article highlighting that the top 10% of Americans account for 50% of consumer spending underscores a structural imbalance that feels inherently unsustainable. The resolution of this extreme consumption skew remains unknowable.
3. Persistent Inflationary Pressures
We do not believe we have reached the end of the inflationary cycle. Whether driven by the full impact of global tariffs or a mean-reversion in historically low energy prices, the risk favors higher inflation. Tariffs act as a tax on businesses. While the conventional wisdom is that these costs will be fully passed onto consumers, it is plausible that many businesses, depending on their industry and pricing power, will have to absorb some or all of the cost. This friction fundamentally alters business economics, potentially leading to hesitation in consumer purchasing decisions and/or in major corporate capital investments. This would be a significant concern for broader economic vitality.
Portfolio Construction Considerations
It is important to acknowledge that any sudden shift in market sentiment or a short-term liquidity event could lead to a temporary decline in commodity prices as investors sell off liquid assets to meet capital needs. However, the secular case for commodities as a hedge against the systemic devaluation of the US dollar remains.
We continue to advocate for a diversified and partially defensively positioned portfolio that seeks to preserve capital against macroeconomic instability while strategically exploiting opportunities where assets are priced to reflect realistic, rather than perpetual, growth assumptions. This includes the aforementioned gold and commodity stocks broadly, but also small cap stocks and international stocks as we have detailed previously.
