“In the business world, unfortunately,
the rear-view mirror is always
clearer than the windshield.”
─ Warren Buffett
This past year was a remarkable one for the capital markets and the broader economy. Another year passed without a recession, another year passed with most of the growth being driven by record-breaking levels of deficit spending, and another year passed with inflation remaining above the Federal Reserve’s long-term 2% target. The bond market had another poor year, with the Aggregate Bond Index up just 1.3%, and foreign stock markets* (*MSCI World ex-USA Index) generated modest returns of just 5.3%, while bitcoin, gold, and the S&P 500 Index generated remarkable returns of 121%, 27.5%, and 25%, respectively. The politics of 2024 were no less remarkable, with a presidential candidate swap, a presidential candidate assassination attempt, and presidential candidates exchanging barbs about who really worked at McDonald’s. Quite remarkable, indeed.
Before sharing our predictions for 2025, let’s briefly revisit our 2024 predictions. Overall, we would judge that we were correct on six out of our ten predictions from last year.
Starting with our incorrect predictions, we mistakenly predicted that the Israel-Hamas war would cease by year-end, which it hasn’t, although the eventual outcome seems abundantly clear. We predicted that inflation would reaccelerate, which hasn’t happened yet, even though inflation remained above the Federal Reserve’s 2% target for the entire year. With our expectation that inflation would reaccelerate in 2024, we logically assumed that U.S. stocks would languish, and that value would outperform growth, neither of which happened.
Moving to our accurate predictions from 2024, we correctly predicted that the nuclear energy renaissance would continue. We conducted a deep dive in our Q3 2024 quarterly letter regarding the topic of the nuclear energy renaissance. We forecasted that the gold price would quietly reach a new all-time high. We accurately anticipated that the yield curve would steepen, as long-term interest rates have risen while short-term interest rates have been cut by the Federal Reserve. We said that a new war in the Middle East would take place, which it has, in Lebanon, Syria, and Yemen. Finally, we predicted that housing prices would remain defiantly resilient, and that commercial real estate would remain distressed.
As we have stated in our past annual prediction letters, we write this as a thought exercise, to have some fun in the process, and to engage with our clients in discussing how we are thinking about the future. With that said, we have no crystal ball, we will always make some incorrect predictions, and we view our primary job as finding high quality, undervalued investments, not accurately predicting the future.
Moreover, we keep our client portfolios diversified, invest with a long-term perspective, and do not act reflexively on short-term predictions, which means that we own stocks, even if we expect headwinds for stocks, and we would sell an overvalued energy company, even if we think energy prices will rise. Our best work is done when we find fundamental stock-specific mispricings in the market and act upon them. In such cases, where we have an adequate margin of safety in the share price when we invest, we hope to generate a profit for our clients even when one or more of our predictions do not pan out as expected.
With those caveats out of the way, here are our top ten predictions for 2025:
- Inflation reaccelerates.
This prediction is a repeat of one of our predictions from 2024. While the fundamental factors that should drive inflation have not changed, we were, at the very least, too early with our call last year. We anticipate that U.S. Treasury Secretary nominee Scott Bessent, in order to achieve his “three arrows” policy, will work with the Fed to lower interest rates and weaken the dollar in the first few months of the second Trump Administration. As a reminder, Bessent’s three arrows are to 1) increase GDP growth to 3% annually, 2) cut the budget deficit to 3% of GDP, and 3) raise U.S. oil production by 3 million barrels/day. Our inflation view is only in part predicated on our expectation that he will fall short of hitting all three of these goals. We believe that dollar depreciation, tariffs, and the deportation of millions of low-wage immigrants should also drive a substantial increase in inflation by the end of 2025.
- The Ukraine War finally ends.
We expect President Trump will work out a comprehensive peace and trade agreement with Russian President Vladimir Putin and Chinese Prime Minister Xi Jinping to achieve peace in Ukraine and a reduction of tensions with China. We could see China promising to build more U.S. factories and increase its U.S. imports, while the United States promises to give China a freer hand in terms of its dealings with Taiwan and its naval control in the South Pacific. We would also expect to see the United States loosening some of its semiconductor restrictions on China, while China agrees to let the Chinese Yuan strengthen against the U.S. Dollar.
- The world generates more than 4.0% GDP growth.
Trump pushes for accelerated U.S. economic growth by reducing taxes and regulations across many industries. At the same time, China gradually increases its domestic stimulus to counter its deflationary impulses. With China and the United States both growing at a healthy level, global economic growth accelerates in 2025.
- Yield curve control (“YCC”) begins.
As long-term interest rates climb in tandem with inflation, the Federal Reserve enacts yield curve control and places a cap on the rate of interest of long-term Treasury bonds at 5%. After enacting this change, the U.S. government once again starts issuing 10-year and 30-year Treasury bonds, thus immunizing the long-term cost of debt for the U.S. government for years to come. However, the value of the U.S. dollar declines further in response, exacerbating inflationary pressures.
- Tech stocks underperform.
Despite significant technological achievement, profits from enormous artificial intelligence (“AI”) investments prove elusive, causing investors to start to lose patience and begin to pare back positions. Moreover, speculation recedes from the tech sector and in the market generally, where investment in leveraged long ETF funds exceeded the investment in leveraged short ETF funds by 100:1 on January 1, 2025. Reminiscent of the stock market decline in 2022 in the wake of a highly speculative 2021 a correction in large cap tech stocks and the broader U.S. stock indices transpires.
- Fartcoin crashes.
As speculation recedes from the capital markets, the meme cryptocurrency, Fartcoin (this is actually a real thing), crashes from a $1.45 billion market cap on January 1, 2025 to less than a $100 million market cap by December 31, 2025. With that said, other cryptocurrencies, namely bitcoin and Ethereum, are likely to have a strong 2025, in our view, driven by a weakening dollar, increasingly favorable public policy, possible central bank purchases, and continued record-breaking capital flows into cryptocurrency ETFs.
- Commodities outperform U.S. stocks.
Commodity prices surge as China unveils multiple rounds of economic stimulus. The oil price climbs over $90 per barrel as a result of Chinese stimulus, continued OPEC discipline, muted U.S. supply growth, and heightened sanctions on Iran. As the price of oil rises, the price of many other commodities rise with it, triggering another round of inflation acceleration, making it difficult for President Trump to take credit for a strong economy.
- The Department of Government Efficiency falls short of its $2T annual savings goal.
People who know Elon Musk well like to say, “never bet against Elon Musk.” At the same time, people who understand how the U.S. government works like to say, “never bet on shrinking the government.” While the Trump Administration is likely to cut a lot of regulation, taking $2 trillion of annual non-interest related costs out of the government will end up being an insurmountable task, even for Elon Musk, given that the vast majority of government spending is associated with untouchable entitlements, defense spending, and interest expenses.
- Gold outperforms U.S. stocks by 10%+.
With central banks in many emerging market countries continuing to buy gold as an alternative reserve asset to the U.S. dollar, the gold price continues to rise in 2025, hitting fresh all-time highs. Much like 2024, gold’s price rise in 2025 remains rather quiet, as the Trump Administration successfully distracts U.S. investors with suggestions that bitcoin might be a useful strategic reserve asset.
- Foreign stocks outperform.
With the dollar depreciating in 2025 for reasons already discussed and with stimulus from China, foreign stocks have an excellent year in 2025 and outperform U.S. stocks, which are somewhat hamstrung by overvalued tech stocks that show measurable price declines. The best performing stock market in the world in 2025 is China.
We will be here next year to let you know how these predictions fared. It is important for us to note that one year is not a particularly long investment time horizon. Our investment approach is long-term and is guided by long-term fundamental factors such as:
- U.S. indebtedness across the household, corporate, and government sectors stands at record high levels. Working off this debt will require time, elevated inflation, low real (inflation-adjusted) interest rates, and debt restructurings.
- The global economy remains in the early innings of a secular bull market in commodity prices that began in 2020. In 2024, oil prices declined, but gold prices climbed well above the inflation rate. Commodity bull markets usually last a decade or more and do not end until companies over-invest in future commodity production. If anything, companies today continue to underinvest in future production, opting instead to use their free cash flow to buy back stock or make acquisitions.
- U.S. stocks, and particularly the large-cap growth stocks that dominate the S&P 500 Index, remain expensive relative to history and have room to deflate.
- The dollar remains an expensive currency. Should it depreciate against foreign currencies, as President-elect Trump seems to want to see happen, it means that stock markets outside the United States are likely to outperform U.S. stocks. For this reason, we have been seeking to expand our clients’ asset allocations to foreign stock markets.
While our predictions might change from one year to the next, our investment strategy remains the same. We pay strong attention to value, seeking to purchase investments that we believe are temporarily undervalued by Mr. Market. In addition, we pay strong attention to the fundamental factors of the long-term investing environment, which we tried to describe at the end of this letter, and we invest accordingly. Finally, we take a disciplined and prudent approach toward our client portfolios, seeking to place more emphasis on the return of our clients’ capital than on the return on our clients’ capital.
*****
We appreciate your trust, your willingness to ask us to manage your liquid investments, and your patience. We expect to be working hard in 2025 to continue to earn that trust.
Sincerely,
Pekin Hardy Strauss Wealth Management
This commentary is prepared by Pekin Hardy Strauss, Inc. (dba Pekin Hardy Strauss Wealth Management, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. The information contained herein is neither investment advice nor a legal opinion. The views expressed are those of the authors as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee its accuracy. There are no assurances that any predicted results will actually occur. The S&P 500 Index includes a representative sample of 500 hundred companies in leading industries of the U.S. economy, focusing on the large-cap segment of the market. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries–excluding the United States.
