Navigating Through Policy Fog
The end of January 2025 finds the United States with a new president, barely 12 days into the job. While waiting for the Senate to confirm key cabinet members for the new administration, President Trump isn’t wasting any time signing a flurry of executive orders. In U.S. politics, it has become fashionable for presidents to label nearly every issue a ‘crisis,’ which empowers them to use emergency powers and executive orders instead of allowing Congress and the Senate to propose, debate, and compromise on new legislative acts. You may recall recent crises like the War on Terror, the Great Financial Crisis, the H1N1 Influenza Pandemic, the COVID-19 Pandemic, and the Climate Change crisis—all of which granted emergency powers to presidents to act swiftly through executive orders. So, it is no surprise that President Trump’s policy priorities are also labeled ‘crises.’ As a result, we now have the Southern Border crisis, the National Energy crisis, and the ‘everything else’ crisis.
It seems we must get used to living in a perpetual state of crisis, with our elected leaders granting themselves perpetual emergency powers. The issue with this situation is the constant volatility coming out of Washington, D.C., with executive orders being issued without much warning. President Trump’s bold leadership style stands in sharp contrast to that of his predecessor. If you were accustomed to President Biden disappearing from public view for months or avoiding live press conferences for six months—prompting questions about his whereabouts and well-being—then get ready for President Trump’s multiple daily, live, unscripted press conferences. While visibility itself is not an issue, the problem arises when major policy announcements are made during these impromptu press conferences, affecting the economy and financial markets. That’s where volatility stems from.
Furthermore, some of these policy announcements may lead to mutually exclusive outcomes, adding to the confusion of economists and market analysts. For instance, the new administration wants to simultaneously:
Cut taxes (thus reducing government revenues), yet reduce the budget deficit.
Cut government spending (through the Department of Government Efficiency), yet avoid a recession and promote economic growth.
Lower interest rates to boost business and consumer spending, yet tame inflation.
Impose tariffs on imported goods (pushing domestic prices higher), yet tame inflation.
“Drill, baby, drill” to produce more oil and lower oil prices, yet oil exploration companies are unwilling to launch new projects unless oil prices exceed $100 per barrel.
Dissuade BRICS countries from using an alternative reserve currency to the U.S. dollar, yet push for a crypto stockpile in the U.S., which would effectively serve as an alternative to the U.S. dollar.
Avoid future military entanglements, yet keep military action on the table to gain control of the Panama Canal and Greenland.
Despite these contradictory policy goals, financial markets are currently optimistic that the administration’s focus on lower taxes and regulatory burdens, protection from unfair trade practices, and U.S. technological leadership will lead to higher corporate profits and sustained stock prices. As a result, the U.S. stock market remains at extremely high valuation levels. By several metrics, it is overvalued. For instance, the 100-year average ‘Market Capitalization to GDP’ ratio is 95%, whereas the current level is 200%. Similarly, the 100-year average ‘Cyclically Adjusted Trailing Price-to-Earnings Ratio’ is 17.17x, while today it stands at 38x. The market—particularly the technology sector—resembles an overinflated balloon floating in a room full of pins. It’s only a matter of time before the balloon meets one of those pins.
Here’s a brief, though certainly not exhaustive, list of those pins:
Federal Government Debt: The national debt has reached $36 trillion, with interest expense expected to exceed $1 trillion in 2025. This is an enormous burden for a government that collects approximately $4.5 trillion in tax revenues. If the Federal Reserve (Fed) keeps interest rates elevated to fight inflation, we could see a recession, loan defaults, and business bankruptcies—certainly not a favorable environment for the stock market. If the Fed lowers interest rates to avoid this scenario, inflation could surge, eroding the purchasing power of the U.S. dollar. With the Debt-to-GDP ratio currently at 121%, there are no easy solutions.
Debt Refinancing Cycle: The federal government isn’t the only major borrower facing refinancing challenges in 2025. While the government must refinance $7 trillion, U.S. corporations will need to refinance $11 trillion. Additionally, $1.15 trillion in commercial real estate loans are due this year, coinciding with a U.S. office vacancy rate exceeding 20% and significant declines in office building values. These debts are maturing in an environment of significantly higher interest rates compared to their original loan terms. This could become an unbearable burden for some borrowers, potentially leading to massive loan defaults and substantial losses for the banking industry.
Optimistic Corporate Earnings Projections: The 2025 estimated corporate earnings growth rate of 13% may be overly optimistic. Corporate earnings grew around 9% in 2024 when these macroeconomic challenges were less pressing. It’s entirely possible that the earnings of the "Magnificent 7" (Microsoft, Apple, Nvidia, Meta, Amazon, Alphabet, Tesla) will disappoint, as their stock prices are currently priced for perfection.
For instance, this week, the "Magnificent 7" experienced a shock when the Chinese company Deep Seek revealed its artificial intelligence (AI) program, DEEP SEEK R1. The program performs as well as, if not better than, ChatGPT from OpenAI/Microsoft. Moreover, Deep Seek claimed to have developed this powerful AI model in just a few months using lower-power computer chips (A100 Nvidia GPUs), all while spending less than $6 million. Since the Biden administration had imposed export restrictions on high-powered GPUs to China, Deep Seek had to optimize its computing efficiency. Immediately, U.S. AI-related stocks experienced a violent correction. During Monday’s trading session alone:
Nvidia stock dropped 17%, erasing $595 billion in market capitalization.
Data center supplier Vertin fell 30%.
Nuclear power provider Constellation Energy dropped 20.85%.
Vistra declined 28.27%.
OKLO dropped 25.61%.
NuScale Power fell 27.53%.
With Deep Seek’s more efficient AI approach, the demand for computing power and electricity is expected to decline, negatively impacting the outlook for data centers, semiconductor companies, and energy providers.
On Wednesday, Alibaba announced its own AI program, QWEN 2.5 MAX, which reportedly outperforms DEEP SEEK R1, ChatGPT, and LLAMA (Meta’s AI model). Both DEEP SEEK R1 and QWEN 2.5 MAX charge only a fraction of what American companies charge business users for their AI services. Increased competition will make it difficult for U.S. tech giants to generate the monopoly-level profits investors had been anticipating. In fact, investors should reconsider whether it was ever wise—or remains wise—for U.S. tech companies to pour vast amounts of capital into AI development when monetization is now highly uncertain.
At Fierce, we have consistently warned against chasing expensive fads, as they often fade, leaving behind colossal losses. Our disciplined investment approach follows these principles:
We avoid hype. We don’t follow the crowd chasing unicorns.
We identify strong conviction positions in our portfolio and hold them through volatility because they represent tremendous value.
We trade opportunistically, taking advantage of upward price movements but avoiding prolonged exposure to high-risk assets.
We currently prefer Value over Growth stocks, Mid-Cap over Large-Cap stocks, and International over Domestic stocks.
We favor Treasury bonds, anticipating lower yields later this year as economic growth slows, driving bond prices higher.
We maintain liquidity ("dry powder") to deploy during market corrections—these are the best opportunities to acquire assets at fair value.
We understand how difficult it is for investors to control their emotions—whether it’s FOMO (fear of missing out) in bull markets or FOLM (fear of losing money) in downturns. That’s where we come in.
At Fierce, we manage our clients’ portfolios with discipline and prudence, hunting for value in a market filled with overpriced hype. While it sometimes takes longer for value to materialize, history shows that investors burned by speculative bubbles eventually turn to value stocks. Above all, we prioritize risk management—especially during periods of market euphoria. Portfolios must not only grow but also survive downturns to thrive in the next upcycle.
As always, we’re here to answer your questions and guide you on your financial journey.
Stay Fierce!
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