The Tides of March
The equity markets started off well enough in 2025. However, since the middle of February, stock prices have sunk, with substantial damage done to the share prices of the biggest winners of the last few years.
What’s going on?
The best single word description is “change.” And the term applies to many aspects of the economic, government, and financial ecosystems including the seemingly endless cause-effect connections between the three.
The Generative Artificial Intelligence Industrial Revolution (G.A.I.) is proceeding. However, the implications of the changes this revolution will eventually produce seem less clear. No doubt there will be significant displacements, as costs come down and older technologies become obsolete. In the meantime, massive capital expenditures by hyperscale cloud companies to secure computing power seems like a virtual certainty to accommodate exploding demand.
The Chinese have introduced what is purported to be a much “lower cost” G.A.I. platform called Deep Seek. The claim is Deep Seek will drop costs for organizations hoping to harness the power of G.A.I. What remains exceedingly doubtful is whether a substantial number of free-world entities will ever trust a totalitarian regime with access to all the sensitive data related to G.A.I. queries. People in jurisdictions where basic property rights are respected have simply put, been burned too many times by empty promises from dictatorships. Even if the Deep Seek platform can perform as claimed, which remains in doubt, trust presents a very high hurdle for an entity controlled by the PRC.
In the United States, one startling revelation after another regarding government waste and corruption has jolted the mindsets of hundreds of millions of Americans. With the U.S. National debt rapidly approaching $37 trillion, efforts to reign in reckless and wasteful spending programs now appear to contain, “Damned if we do and Damned if we don’t” implications.
It is important to remember that financial markets involve the decisions of hundreds of millions of emotional human beings. Accordingly, they are reactive, not proactive. For many decades markets have ADAPTED to the inefficient realities of crony capitalism in the U.S. that comes with bloated federal and state governments. This is true despite the long-term destruction on productivity that bloated government budgets create. Sweeping changes in the direction of a more common-sense approach to allocating the massive resources at the disposal of self-serving politicians is a huge red flag, for the status quo. And if there is one thing markets will react to negatively at first, it is a change to the status quo.
An end to substantial portions of behind the scenes wheeling and dealing for trillions of dollars in resources that occur inside the corridors of Washington D.C. among incumbent Senators and House Members is unpredictable. And when things become unpredictable in major segments of the ecosystem, markets shoot first and ask questions later. For now, we are in the middle of the shooting, as assumptions are adjusted.
How long will the destruction last? It is impossible to say for sure. While value is being destroyed due to the end of some previous “assumptions,” terrific opportunities for the next cycle are already beginning to present themselves. Just don’t expect a postcard notifying you in advance of when the “coast” is finally clear and the stock prices of dynamic companies will resume their secular advance.
Those positioned with investments producing more than enough income, plus ample reserves, should prepare to take advantage once market lows appear to have been established via a couple of successful re-tests.
In the meantime, at a minimum, the rest of the spring of 2025 figures to be a test of fortitude. Those who believe that the sweeping changes underway will finally correct horrific excesses produced by fat and bloated governments will see amazing opportunities. And those who long for the status quo will see eminent danger. In the short run, those seeing dangers will be correct. In the intermediate and long run, those seeing massive opportunities will be correct.
Take your choice, but if you are an optimist, don’t expect your timing to be perfect. It won’t be, unless you get lucky. Fortunately, perfect timing is not necessary for success. If you are a long-term pessimist, good luck with that posture, particularly if you also desire excellent results.
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