#184 - Reading Tea Leaves

“If we are intended for great ends, we are called to great hazards.” - St. John Henry Newman, Doctor of the Church

Where are we heading?

I like attempting to read the tea leaves and try to skate where the puck is heading. As best as I can tell, here are the facts on the ground (as of August 10, 2025):

• Stretched market valuations. The S&P 500 forward 12-month P/E is ~22.1, above the 5-yr (19.9) and 10-yr (18.5) averages. Shiller CAPE sits around ~38, well above its long-run mean.

• Policy + rates cross-currents. The Fed has held the policy rate at 4.25%–4.50% through mid-summer even as year-over-year inflation metrics have cooled from 2022 peaks (Core PCE 2.8% YoY in June; headline PCE 2.6%; CPI 2.7%).

• Deficits and debt service. CBO projects debt held by the public rising to ~107% of GDP by 2029; Brookings estimates ~$1T interest cost in 2025 alone—now one of the largest budget items.

• Treasury supply & buyers. Treasury’s latest refunding docs highlight heavy net marketable borrowing for 2H-2025 and active buyback program adjustments; the 10-yr term premium has risen back toward decade-high territory (0.6–0.8%). China’s Treasury holdings fell to $756B in May (lowest since 2009).

• Refi walls. CRE: ~$957B of commercial/multifamily mortgages mature in 2025; CMBS has a $150B+ 2025 wall. Corps: Moody’s pegs $2T+ of U.S. junk-rated debt maturing 2025–2029; IG maturities are also elevated into 2026.

• Ongoing conflicts. Wars in Ukraine and the Middle East continue to inject tail risk and commodity/capex uncertainty. (See DoD/IMF coverage and recent reporting.)

China–Taiwan timeline. The Pentagon’s China reports reaffirm Xi’s 2027 PLA milestone; Adm. Davidson’s “six-year window” warning remains a North Star for risk desks.

Now that we have the facts, where are we heading? My predictions for the next 12–24 months. As they say - always wrong, but never in doubt!

• Budget & reconciliation math. Expect at least one more reconciliation vehicle before the 2026 midterms—and possibly two if leadership splits revenue/spending/debt instructions across separate bills and adopts an FY2026 budget on time. Under the rules, a single budget resolution can generate up to three reconciliation bills (spending, revenues, debt limit), and the timeline contemplates completion by mid-June (rarely on time in practice). Translation: there’s runway, but it’s politically tight. 

  • Political consequence: If the majority overpromises “savings” and under-delivers tangible disinflation/real-income gains, the midterm penalty risk rises materially for House and Senate.

• Long end drives the bus. Even if the Fed trims policy rates in 2026, the long end will be set by deficits, supply, and term premium. With foreign official demand mixed (China trimming, others stable) and issuance heavy, I expect the 10-yr term premium to stay elevated or drift higher, keeping real borrowing costs sticky. That implies higher hurdle rates for CRE, infra, and longer-duration equities.

• Valuation fork in the road. Two-way risk:

  • Soft-landing path: EPS growth (FactSet has ~10–13% 2025–26) slowly “earns into” multiples; drawdowns stay buyable.

  • Re-rating path: A stubborn term premium + tariff pass-through (already showing in PCE/CPI) nudges multiples down 2–4 turns even if EPS holds. Net: I expect a multiple grind lower unless deficits narrow.

• Refi stress rotates.

  • CRE: Office + vintage 2020–22 multifamily feel the brunt; expect more maturity extensions, A/B note splits, rescue capital, and opportunistic loan sales as 2025–27 walls hit. Bank and life-co books bleed slowly; private credit steps in at wider spreads.

  • High yield: Defaults stay contained near term if markets remain open, but 2027–2029 maturities are the real cliff. Watch CCC shelves.

• China–Taiwan risk premium rises into 2027. I’m not calling a date, but increased gray-zone pressure (blockades, exercises, economic coercion) feels likely as Beijing aims to be “ready” by 2027. Markets will periodically price this via semis, shipping, defense, and energy.

• Gold and Bitcoin as institutional hedges.

  • Gold: With ETF inflows at multi-year highs and spot already printing records in 2025, I still see a path to $3,600/oz under: sticky deficits + geopolitics + higher term premium.

  • Bitcoin: Spot ETFs now hold ~1.29M BTC (U.S.), led by BlackRock’s IBIT (~$86B AUM). In a continued “hard-asset” regime, I can see $150-175K by late 2026 on persistent ETF demand and improving liquidity—with 40–60% drawdown risk along the way.

• Rates & the curve. My base case: the Fed stays patient into 2026; the curve bear-steepens on term-premium persistence and heavy coupon supply, then partially bull-flattens if/when fiscal noise ebbs. If deficits widen again (or tariffs lift core goods), the steepener lasts longer.

• Elections & markets. The single biggest swing factor for multiples isn’t who wins, it’s fiscal trajectory post-election: a credible path to narrower deficits (via growth, base-broadening, or spending caps) would compress the term premium and support risk assets; more unfunded ambitions would do the opposite. (See CBO’s debt path and Treasury’s borrowing cadence.)

Bottom line - I believe we are in a fourth turning moment and, while no one knows what the future holds, history tends to rhyme. Hard currency regimes give way to fiat and indebtedness, which then breaks under debt burdens and the cycle begins again under a new hard currency regime. A rising power overtakes a declining power (Spain > Dutch > British Empire > USA > ???) as the reserve currency.

What do you think - where are we heading as a nation, in the markets, politically, culturally? Send me a note with your thoughts!

Buffett indicator flashing red - h/t @geiger_capital

Apollo sees inflation heating up

Leading economic indicators flashing red

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