Darius recently joined David Lin to discuss the impact of tariffs, the outlook for inflation, the role of gold in our KISS Portfolio Construction Process, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. How Are Tariffs Likely To Impact Asset Markets In 2025?
We believe China is likely to respond to tariffs by significantly devaluing the yuan, which carries profound implications for global asset markets. Historically, when China devalues the yuan, other major economies follow suit with sympathy devaluations to maintain competitiveness. During the 2018-2019 trade war, this dynamic led to broad-based declines in the euro, Japanese yen, British pound, and Swiss franc—on top of the yuan’s depreciation—resulting in a materially stronger U.S. dollar.
If a similar pattern emerges in 2025, we could see a sharp appreciation of the U.S. dollar in the second half of the year, potentially reinforced by a less hawkish Federal Reserve. This would likely lead to higher interest rates, rising bond market volatility, elevated currency market volatility, and a stronger U.S. dollar – all of which are headwinds for global liquidity.
Given the historic scale of global refinancing needs in 2025, we believe any liquidity contraction is likely to trigger a severe market correction – and potentially even a full-scale crash.
2. What Is The Outlook For Inflation?
According to our GRID Model projections for Headline CPI and the econometric study of all the postwar economic cycles in and around recession we conducted, we believe US inflation is unlikely to return durably to trend in the absence of a recession, which implies the highest probability outcome is inflation firming over the medium term against easing base effects.
Leading indicators of inflation also support our hawkish NTM inflation outlook. Core PPI, a reliable leading indicator for inflation in this business cycle, began breaking down approximately 18 months before Core CPI and Core PCE. Core PPI bottomed in December 2023 and has been trending higher since.
Moreover, Core CPI and Core PCE deflator appear to be stabilizing at an above-trend level. These metrics may accelerate in 2025 before resuming the longer-term downtrend, and the key risk is that consensus expects inflation to keep falling, and a rebound in inflation—however modest—could force markets to price out additional Fed rate cuts for 2025 and 2026.
3. Why Did We Replace Core Fixed-Income Exposure with Gold in Our KISS Portfolio?
We incorporate gold into the portfolio to enhance diversification by reducing overall beta and introducing non-correlated asset classes, which helps mitigate drawdowns and volatility while also providing exposure to Fourth Turning monetary policy dynamics. Gold serves as a low-beta asset, with a trailing six-month beta of approximately 0.3 to the S&P 500.
Moreover, the addition of gold to KISS reflects our understanding that if our Investing During A Fourth Turning Regime analysis proves true over the long term and the Fed is forced to accelerate financial repression and monetary debasement, it is highly unlikely that bonds will outperform other assets on a real, risk-adjusted basis.
We expect monetary debasement and financial repression to be tools that the Fed employs to address the challenges of excessive sovereign debt and a robust economy that leaves little incentive for buyers of government bonds, and we believe gold will prove to be a far better hedge against accelerated monetary debasement and financial repression than bonds.
Since our bullish pivot in November 2023, the QQQs have surged 44% and Bitcoin is up +201%.
If you have fallen victim to bear porn and missed part—or all—of this rally, it is time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.
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If you are ready to learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass.
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