The past quarter has flown by fast. Growing up, my stepmother often remarked that time accelerates as you age. At the time, I probably just ignored her warnings and went about my day, but now, I find that no truer words have ever been spoken.
“Las Vegas is the only place I know where money really talks — it says, Goodbye.” Frank Sinatra
I recently had the pleasure of attending an annual family office conference in Sarasota. It was a fantastic gathering where I met other CIOs to discuss investment ideas and market trends. Despite differing perspectives, I left with the same impression as when I arrived: there is a prevalent concern among investors regarding the valuation of public markets—and for good reason.
Looking at the work and data of Nobel Laureate Robert Shiller, we find compelling insights from his CAPE (Cyclically Adjusted Price-to-Earnings) ratio, which has forecasted stock returns over the next decade since 1881. Assuming Shiller’s current math holds true, we might expect a real asset return of only 1.8% annually over the next ten years—a figure that is hardly compelling when compared to historical market returns.
I keep hearing the argument about the record amount of capital in money markets, just waiting for the right moment to “buy the dip.” While it’s true that money market assets are near historic highs, their buying power, especially compared to all domestic public indexes, is below the average of the past twenty years (see next page). Not surprisingly, this ratio reached its peak during the Global Financial Crisis in 2008, indicating the highest level of ‘dry powder’ available at the time.
“Inflation is like toothpaste. Once it’s out, you can hardly get it back in again.” Dr. Karl Otto Pohl
Over the last past months, the Consumer Price Index (CPI) has started to rise again, presenting a bearish outlook for long-duration bonds and valuations overall. The primary driver behind this uptick has been the services sector, which traditionally shows less sensitivity to interest rate changes compared to goods. Alternatively, the services sector tends to be more influenced by wage levels and employment rates, both of which have remained robust—at least for the moment.
In my previous update, I mentioned that the market was anticipating six rate cuts by January 2025. However, as I write this letter, expectations have adjusted significantly downward to fewer than two cuts, with the precise figure being 1.66. If we take the Federal Reserve’s statements regarding their data-dependent approach at face value, it seems unlikely they will cut rates in the near future unless there is material change in the inflation data.
“No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth!” Ronald Reagan
The Gipper was spot-on with his quote. One of the most alarming charts I’ve seen recently is from the Congressional Budget Office, projecting the US national debt to GDP ratio. I remember a time when at least one political party cared about deficits, but it seems the Tea Party movement has long faded. Meanwhile, proponents of Modern Monetary Theory argue that excess government spending or deficits don’t matter, often citing Japan as an example. Well, Japan is looking like it finally crossed the Rubicon. Since 2023, the yen has depreciated over 20% against the dollar, and the decline shows no signs of abating. In my experience, these economic shifts occur just as Hemingway famously described: gradually, then suddenly. Japan looks like they have moved on to the ‘suddenly’ phase, which I hope serves as a wake-up call for our Congress.
“That’s it, man. Game over, man! Game over! What are we gonna do now? What are we gonna do?” Private Hudson in Aliens
Given the current S&P 500 valuation coupled with concerns about persistently high interest rates, adopting a prudent stance is, in my opinion, important. In the near term, we are concerned about the valuations of longer-duration assets, such as bonds and corporate real estate.
We have been strategically “weatherproofing” our ALDS and ALAO portfolios by increasing exposure to investments that will benefit from a higher for longer yield curve environment such as funds with exposure to floating rates. Furthermore, we are allocating resources to market-neutral funds with proven track records of profitability in various market conditions—whether rising, falling, or remaining flat.
The present setup does not necessarily mean that equities cannot go higher; however, the path to achieving these gains becomes more challenging. To echo my earlier reference to Frank Sinatra, the cards are stacked against you.
If anyone wishes to discuss markets at any time, please do not hesitate to reach out. I am always eager to assist.
Best Regards,
Jim Mooney
Partner and Chief Investment Officer
Autumn Lane
DISCLOSURES
This information is provided, on a confidential basis, for informational purposes only and does not constitute an offer or solicitation to buy or sell an interest in Autumn Lane Partners, LP (the “Fund”) or any other security. It is intended solely for the named recipient, who, by accepting it, agrees to keep this information confidential. An investment in the Fund is speculative and involves substantial risks. Additional information regarding the Fund including fees, expenses and risks of investment, is contained in the offering memorandum and related documents and should be carefully reviewed. An offer or solicitation of an investment in the Fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents. Interests in the Fund can only be purchased by investors meeting all the requirements of the Fund. There can be no guarantee that the Fund will achieve its investment objectives. The information contained in this material does not purport to be complete, is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. In preparing this document, Autumn Lane Advisors, LLC has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources.
This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission. Send email requests to info@autumnlanellc.com.