February 2025 Market Update

America is about fostering freedom, facing challenges, working hard, and maintaining discipline. For the first time since the 1980’s, it appears the American economy has voted for leadership with the fortitude to make tough choices. For far too long, the fruits of the American economy have been sacrificed for short-term political and corporate gain. U.S. home affordability and purchasing power have been forgotten about amid large-scale government spending.

It is common knowledge that America is in a lot of debt and runs a large deficit. The beneficiaries of this debt and deficit spending have really been the government and politicians. It is politically popular to run up the debt and deficit because it typically helps push up the values of stocks and real estate, and since the public generally feels wealthier from this outcome, no boats are rocked, everyone plays along, and politicians get re-elected.

But the time has come for common sense. Basic rules in economics are short-term gain for long-term pain and short-term pain for long-term gain. The American people are fed up with a declining standard of living and have voted for change. The new Department of Government Efficiency is entirely focused on cutting government spending under the helm of Elon Musk. Entrepreneurs, innovators, business leaders, and politicians with economic foresight have recently realized the dire nature of America’s financial problem. Elon Musk, currently the world’s greatest innovator, has been extremely outspoken about the fact that if this debt and deficit problem does not get fixed then all his innovations and aspirations are at risk, because America could fail.

The reason innovators like Elon Musk have woken up is because they realize that if America is forced to refinance its debt at higher interest rates, then long-term average gross domestic product would likely suffer. And because the level of debt and deficit is so high, interest costs could force the government to raise taxes on everyone, which would hurt the economic growth rate and potentially send America into a debt spiral. Whereas the rate of economic growth falls while the level of debt continues rising. If this were to happen, it could serve as a catalyst for a new world where China dictates freedom, instead of America. Innovators do not want this.

For these reasons the government is currently slashing government spending, looking at divesting unused assets, acquiring new assets, unlocking value from its balance sheet, and aiming to drive down the 10-year risk-free rate or 10-year interest rate. The government must make policy decisions that will drive down interest rates so the government can refinance its debt at lower rates. In our view, this is a national security issue and under the current common-sense approach to government the bond market takes significant precedent over the stock market.

Driving down 10-year interest rates requires increasing purchasing power, reducing demand and prices, which could lead to a rise in the unemployment rate, and a decline in real personal income. The job hiring rate is currently at a 10-year low. It typically leads the inflation rate, and it currently indicates that inflation will decline much faster this year than the Fed anticipates.

As 10-year interest rates decline in response to declining demand, mortgage rates will also decline. The extent to which lower mortgage rates spur new home buying could be negatively impacted by employment and hiring rates continuing to drop until interest rates have bottomed. The Treasury would like to see the 10-year risk-free rate drop to 3%.

It is often said that housing is the economy. The housing market is facing pressure from higher interest rates, higher home prices, a declining hiring rate, and a weakening consumer. For the past few years home builders have been dealing with declining margins, which has translated into a slow decline in building permits and units under construction. Since 2023, the anticipation of interest rate cuts from the Fed, which many thought would lead to a decline in mortgage rates, never showed up. Instead, when the Fed cut the federal funds rate by 1%, the 10-year interest rate rose 1%, pushing mortgage rates back up above 7%. The has caused homebuilders to slow or even halt the number of housing units under construction, which is a leading indicator for residential construction employment.

Currently, all eyes are on residential construction employment as a leading indicator of real personal income. Real personal income is tightly correlated to S&P 500 performance. Real personal income growth supports economic spending and corporate earnings. If the Treasury is going to drive the 10-year interest rate down to 3%, declining residential construction employment is likely how they get there.

This is common-sense. For the sake of America, short-term pain for long-term gain, the bond market currently takes precedent over the stock market. The aggregate bond market is near an 18-year low, with 10-year interest rates at 4.25% and real GDP growth of 2.8%. The stock market is near an all-time high, and near the highest valuation of all time. Warren Buffet has been a net seller of equities since the beginning of 2023, and currently sits on the largest percentage of cash in Berkshire Hathaway’s history.

Once again, Warren Buffett and Berkshire Hathaway have a record amount of t-bills and cash while equity fund manager cash levels are at new lows and free cash flow yield is near the lowest level of the past decade. Berkshire Hathaway is set up contrarian to the rest of the market and ready to turn any downturn in the economy into an opportunity for their shareholders.

Our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening added September 2024, Short USDJPY from 153, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2025.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice