November 2025 Market Update

In the previous market update we discussed the current low level of bank reserves or liquidity in the financial system, which has so far forced the Federal Reserve to end quantitative tightening and consider re-starting quantitative easing.

The U.S. financial system is currently experiencing a liquidity crisis. Asset prices are likely to face downward pressure until interest rates are cut, and quantitative easing is re-started to increase bank reserves/liquidity in the financial system. This is why with inflation still well above the Feds 2% percent target at 3.1% percent, and the home price-to-income ratio near a record high, the Fed is considering increasing bank reserves/money supply, and risk re-igniting inflation, so banks can continue creating credit to keep asset prices up and prevent a recession.

Consequently, the best efforts by the U.S. Treasury and the Federal Reserve to get ahead of an economic downturn or recession by easing monetary policy early, may actually cause a downturn by re-igniting inflation, raising the cost of living and business operations and lowering overall margins and growth.

The real economy is hurting. The homebuilding market is struggling. Building permits continue to make new lows, pressuring the number of housing units under construction lower. If this continues, construction employment may be the next shoe to drop.

Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off, 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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