Juggling Dynamite

Hoisington Management’s 2025 Second Quarter Review and Outlook is available here.

At his June 18 press conference, Federal Reserve Chairman Jerome Powell referred to tariffs as inflationary. Hoisington points out that this is only the first-round effect:

Second, third, and later-round effects also come into play, causing the quantity demanded and price to decrease for the goods subjected to tariffs. When retaliators respond by swiftly raising tariffs, as has been the case historically as well as this year, the micro-demand curves in the country that initiated the tariff increase, referred to as the “instigator country,” shift inward, and the benefit of hiking tariffs is lost. A substantial fall in the quantity demanded for the goods of export industries at home and abroad leads to a contraction in their total revenues. Soon, firms must make the difficult decision of whether to raise prices and lose market share or cut profit margins to maintain their market share. In addition, they will need to reduce their demand for the factors of production (labor, natural resources, and capital). These micro effects quickly domino into the macro-economy.

Less global trade means fewer US dollars being sent into the hands of foreigners who owe trillions in US dollars.

Neither Treasury yields nor risk assets, near cycle highs, are priced for a persistent downturn in economic activity and retreating dollar liquidity.

Hoisington concludes that the Fed will need to ease monetary policy to try to offset the deleterious effects of tariffs and a worsening debt overhang:

While inflation will likely rise over the near term it will be temporary. The far more critical consideration is the coming contraction in global economic activity. This environment is very attractive for long horizon investors in long-term Treasury bonds.

Worth a listen to this one.

Michael Green warns that passive investing has quietly turned markets into a self-reinforcing bubble (Ponzi-like in nature) and reveals why bonds now offer once-in-a-generation returns. Here is a direct video link.

A world focused on selling us investment products and ideas spends little time defining sell or aversion rules. If someone tells you what they own or would buy, ask them when they would sell it. Most haven’t thought that far; they ride price cycles up and down with no plan to protect capital from drawdowns.

Veteran portfolio manager Seth Klarman offers numerous valuable insights in this segment.

Seth Klarman, CEO and portfolio manager of The Baupost Group, is known for his unwavering focus on value. In this conversation with Goldman Sachs President and COO John Waldron, Klarman discusses how his philosophy fits into the current market environment and how his approach to leading Baupost has evolved in his long career as a fund manager. Here is a direct video link.

On a recent visit to our son working in Silicon Valley, he pointed out rows of parked cars on the roadside where people swept up by different speculative waves were now living in their cars because they had taken on a lot of risk and had not managed their finances well.

Valuable money managers don’t blow their clients up, and their long-term worth is not only in what they do, but also in the classic mistakes that they help people to avoid.