July 2025 Market Update

Tomorrow, August 1^st, 2025, the tariffs go back on. Now that the OBBB is law and the Trump administrations agenda is funded, deficit spending can decline and the global playing field can be leveled. This may require some short-term pain.

The government is running a record deficit in peace time to win the global Ai arms race, specifically against China. Deficit spending is funding ai data center projects across the technology sector. This allocation of capital by the government is resulting in an extremely bifurcated economy. There are now two economies to watch, the non-sensitive interest rate economy and the sensitive interest rate economy. The non-sensitive interest rate economy is doing great with record big tech earnings and ai data center buildouts, but the sensitive interest rate economy is breaking down and showing signs of stress in cyclical and defensive companies such as Charter Communications, Dow Chemical, and UPS. A sign of consumer weakness.

The result of the government running a record deficit during peace time to influence economic growth in chosen areas is crowding out of the private sector. This is quickly becoming evident to the public as certain areas of the economy struggle due to the restrictive interest rate policy, while the stock market, which is highly weighed in technology, continues to hit all-time highs. This is also why many working Americans can no longer afford to purchase a home and feel as though they continue to fall behind and may never be able to get ahead.

It is said in America that the housing market is the economy. The housing market is struggling due to high interest rates. Residential construction employment is accelerating its decline along with homebuilders’ gross margins. This is why President Trump wants the Fed to lower interest rates by 3%, from 4.50% down to 1.5%. But with the stock market booming due to record deficit spending boosting the technology sector and the unemployment rate not rising, any cut in interest rates could cause mortgage rates to rise, like they did when the Fed cut 100 basis points ahead of the 2024 election. This could put more pressure on the housing market.

The FOMC committee decided not to lower interest rates at the July meeting this week. Chairman, Jerome Powell cited economic growth and potentially rising prices from the resumption of tariffs as reasons to wait and see. Chair Powell also suggested that the Fed is further away from its inflation target than its employment target and that suggests the Fed is correct in remaining restrictive until conditions change to warrant a shift to neutral.

The key to markets in the coming months may be strongly based on what happens with the growth rate of the deficit. It has become popular to assume the deficit will continue to grow wildly and out of control, but the Trump administration was given a mandate to fix it, and now that the OBBB is law and many policies such an immigration have gone through reform, spending may begin to come down.

For the past handful of years, Americans have been living in an asset price-based economy whereas out of control deficit spending has constantly supported asset prices such as stocks and real estate, because asset prices must constantly move higher to support underlying economic consumption and growth. This is why speculative investments such as bitcoin and fartcoin became so popular and valuable. The market is betting the deficit spending issue never changes and that asset prices keep rising while America's economy gets worse.

We at MacroVex Capital are not betting against America. We believe the deficit continues to naturally rise over time, but the rate of change substantially slows, which leads to a rise in purchasing power in the short term and a better economy over the long term. This transition may hurt speculative investors and valuations. Take a look at the Buffett Indicator below to understand the current level of greed controlling our financial markets.

President Trump calling for a 3%-point drop in interest rates suggests there may be some smoke out there, and where there’s smoke, there’s fire. President Trump knows something about the economy he hopes the Fed gets in front of instead of stays behind, and it may be as simple as a reduction in the deficit is coming.

Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, short to mid-term 1-10 year U.S. treasury bonds and 10-30 year U.S. treasury bonds at positive carry, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening, 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.

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