DFCF, LLC
Drulard Family Capital Fund (DFCF, LLC)
Animal Spirits
DFCF, LLC
Drulard Family Capital Fund
Fortnightly Macro View
JD Straight Up:
S&P 500 at 5666 – down 5% from 5951 two weeks ago
VIX at 22 – up 10% from 20 two weeks ago
10yr Treasury yielding 4.29% (up 1% from 4.23% two weeks ago)
Agg (US Aggregate Bond Index) at 98.39 – down 1% from 98.93 two weeks ago
Gold at 2994 per oz (up 3% from 2902 two weeks ago) - all time highs
Crude Oil (WTI) at 68 per barrel (down 3% from 70 two weeks ago)
Bitcoin at 83k (down 8% from 90k two weeks ago)
JPM shares at 233 (down 12% from 264 two weeks ago)
Deutsche Bank shares at 24.05 (up 10% from 21.90 two weeks ago)
Truist shares at 40.71 (down 12% from 46.46 two weeks ago)
Blackstone shares at 143.80 (down 12% from 163.34 two weeks ago)
Magnificent 7 Index at 296 (down 6% from 317 two weeks ago)
US unemployment: at 220,000 in latest claims – down 9% from 242,000 two weeks ago
EUR at 1.09 USD (up 4% from 1.05 two weeks ago)
GBP at 1.30 USD (up 2% from 1.27 two weeks ago)
Macro Environment
Tariffs and trade restrictions are implemented by the US across multiple countries and markets and retaliation commences. US pushes for resolution to war between Russia and Ukraine. A fragile truce is in place in Gaza but hostilities continue. EU and US inflation persists at 2.8%. US Fed balance sheet remains at $6.5trn, down from $7.5trn, but elevated from $4trn pre-pandemic. US budget deficit exceeds $2trn. US annual interest cost exceeds $1trn. US continues to drive cuts in its government spending. US DOGE savings are reported as $200bn.
Macro View
It is hard to see how the US engineers a material decrease in its budget deficit without bringing about a recession. It is equally difficult to see how a US recession would remain isolated and avoid being contagious to its major trading partners throughout the world. Investors sense this fact and are allocating accordingly. Thus far however, the current issue is less with investors and more with speculators. It has become increasingly difficult to separate the two or differentiate among them. Traditionally, investors are aiming for long-term, compounding, risk-adjusted gains in accordance with their financial and life or corporate goals. This is contrary to speculators that are short-term, fluid, and more in line with gambling than saving. So much of the market post-pandemic with the flood of excess money in the system has turned to speculation that it is hard to know which is which. The hot speculator money will be particularly subject to animal spirits. Investors are considered and usually instill research, process, method to their allocation. Speculators might provide a thin veneer of rationale to an allocation, but it is largely momentum and intuition oriented.
Relevance
Near term fluctuations in markets are driven by animal instinct or animal spirits. The core of these instincts can be boiled down to fear and greed. For speculators it might initially be entirely greed as the only fear is the fear of missing out (FOMO). The envy culture drives the speculator market. Eventually markets turn and the fear becomes one of losing what one thinks one has gained. There are well documented psychological phenomena showing that loss aversion bias makes the pain of loss greater than the pleasure of gain. When markets turn and fear of loss takes over, speculators lead the way to the exits. Models and structure are ignored and the animal instincts for self-preservation take over. Keynesian animal spirits are at work right now and have been building through the uncertainty following the November US election. The question is whether it moves past speculators to a reassessment by investors or stays on the speculative fringe.
What is clear so far is that the shine has come off of big tech and big finance as doubt sets in on the impact of tariffs, policy, and growth. Banks and financial institutions trading off by 10-15% in a matter of weeks is indicative of speculative froth burning off, but bank capital structure and willingness to lend is critical to the entire economic system so is worth watching. Big tech trading off is arguably healthy after increasing by 300% in less than two years. The question is whether it is a temporary adjustment to allow earnings to catch up with expectations or it is a return to a more rational slope and trajectory that was in place before the market was flooded with stimulus dollars.
Most important is whether there will be widespread faith that spending cuts, regulatory loosening, and tariff revenue will help improve the US government balance sheet or whether it will implode the global economy and damage all government balance sheets concurrently. Given that non-US governments hold $9trn of the $37trn of US debt, a relatively healthy global economy is imperative to the continued financing of the US.
Head Scratchers
Why is Deutsche Bank up 35% on a rampant rally while US banks are headed in the opposite direction? Solely because of belief in German stimulus under its new administration? Or because of the rally in EUR relative to USD? It has never been a particularly well run bank and it exists in a struggling country in a struggling union. Where is the magic that justifies this run? Or is it merely that it was consistently and egregiously undervalued while all of big finance in the US had its massive rally?
What is keeping the US consumer going? Average family going out for dinner is up to at least $150. Grocery bill is double pre-pandemic. Insurance on everything (home, auto, health...) is up 50% or more from pre-pandemic. Cost of credit to finance all this consumption is up 5x. Loan forgiveness is over. Job hopping to get a material boost has subsided. Job losses are filtering through. Median income is $44k. The equation does not foot.
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#13 - 17Mar25