U.S. Equities (No Trade): When Prices Run Ahead of the Economy
Why a stretched U.S. equity market can justify sitting out, what expensive hedges cost a portfolio, and which inflation prints decide the next leg.
The Playbook Has Expired
The question arrives in slightly different clothes each time, and the worry underneath never changes. American companies are priced far above what the economy produces, what they sell and what they earn. So what does a sensible person do: cut exposure, pay for protection, or ride it out and pretend the ratio does not exist? The honest answer is boring, and boring answers are hard to sell.
My starting point is that the regime has shifted. The years when cheap money did the heavy lifting for anyone long anything are over, replaced by a choppy middle where growth grinds on slowly and volatility refuses to settle. Sharpe ratios had a glorious run, and a tighter policy stance for longer would take some of that shine off. A market like this can stay afloat without going anywhere useful, and the next real bull leg probably waits for clearer signals on both the fiscal and the monetary side. Until then, agility beats conviction.
The Elephant Hoarding Cash
Berkshire Hathaway is sitting on more cash than at any moment in three decades, and I read that as the loudest comment on valuation anyone has made without opening their mouth. Buffett's preferred gauge, total market capitalisation set against GDP, sits close to the top of its historical range, and the mega-caps carry most of the froth. The mechanism is simple: when prices sprint ahead of real output, the market has borrowed future earnings growth in advance, and a shortfall against those expectations turns into a correction rather than a shrug.
None of that says when. Overvaluation is a condition, and conditions persist for years while the impatient bleed premium waiting for the reckoning. That gap between being right about the level and wrong about the timing is where most hedging budgets go to die.
Hedging as Pricey Mediocrity
For the long-term investor the letter's case is patience: consistent contributions, holding through the noise, and a book spread across equities, tactical income, commodity trend, gold and Bitcoin, with a smart volatility sleeve alongside. Layering expensive protection over a portfolio already diversified strikes me as paying a premium to lock in an average result. The diversification does the defensive work; the hedge mostly adds cost.
For anyone hunting double-digit returns the conclusion is harsher. Celebrity soundbites and the daily chatter of legacy media add nothing to a strategy and plenty to the noise. What remains is a rules-based process fed by hard data and modern tooling, applied without mood. Which brings me to the rule behind this issue: a trade exists only when a setup exists. A fortnight of screens produced nothing worth the risk, so nothing went on. Sitting flat feels like failure to a certain kind of trader; to me it is the cheapest position in the book, and the get-rich-overnight crowd rarely has the patience for it.
Rent, Wages and Beijing's Stimulus
The prints that matter next all sit on the inflation side. Producer prices came in hot and wages are climbing, which sets up the coming CPI release to reignite anxiety even if the headline stays tame. Long-run expectations already sit at multi-year highs, and the sticky components, rent above all, can hold prices up long after the volatile bits calm down. A benign headline with an ugly rent line keeps tighter-for-longer alive, and that scenario is the one that erodes the Sharpe ratios everyone got used to.
The quieter variable is China. Money supply there is expanding, and Beijing's stimulus threatens to flip the country from an exporter of deflation into a driver of global inflation. So the watch list writes itself: CPI components rather than the headline, wage growth, Chinese money aggregates, and any hint of clarity on fiscal direction or on how long tighter stays tighter. Until those resolve, the elephant keeps its cash, and so do I.
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