Hola Libertinus,

The markets are panicked, the bond yield curve is flashing red, and inflation just won’t die.

This week, West takes us through the growing cracks in the market and what rising geopolitical risk means for your money. Meanwhile, Zack breaks down why, no matter how many times government intervention wrecks the economy, people still come crawling back, begging for more.

So grab a drink, settle in, and let’s hedge our bets—maybe the Fed sticks the landing, maybe the Trump bump has more legs, or maybe it’s inflation, recession, a debt crisis, and geopolitical wildfire all at once…

🗞️ DISPATCHES

The Downward Spiral

Despite the title, I'm not here to talk about seminal Nine Inch Nails albums. Instead, I am talking about something much more depressing than heroin-fueled ballads about self destructive tendencies – the economy.

So, why all the negative sentiment in markets lately?

We have issues on both axes of the market conditions chart, as well as rising geopolitical tensions, making markets potentially more volatile than a drug addled rock star. Let's dive in.

Recession/Prosperity Axis

The S&P 500 hit a new all time high on February 19, 2025.

Great right?

Well, its been dipping harder than usual since then, leading some to fear a recession on the horizon.

Gains in stocks, along with Bitcoin, seem to have been driven the past few months by a "Trump bump."

Market participants had a renewed confidence in markets following Trump's election win.

But now that Trump bump is starting to sour as markets react to the volatility that he is introducing via his economic policies.

More importantly, recent economic data suggests that economic activity is cooling.

Combine all of that with interest rates that have remained relatively high, and very high price to earnings ratios in stock indexes, and it seems like investors aren't willing to be as risky with their money as they once were.

What's also alarming is the ISM Purchasing Managers Index (PMI).

The PMI is a survey conducted of purchasing managers in the manufacturing sector that is considered one of the strongest predictors of recession.

There has never been a time in US history where a PMI score of 46 or less has not indicated a recession.

The PMI right now is actually OK, sitting at 50.9 for January 2025.

But back in October 2024, PMI hit 46.7 indicating a very strong likelihood of a recession that didn't manifest.

All of this data leaves me feeling like we are due for a comeuppance, so I'm braced for the worst.

But the plot thickens...

Inflation/Deflation Axis

The Consumer Price Index (CPI) is used to measure inflation and is trending upwards having just hit 3% for January 2025.

Now, 3% isn't the worst, but it is alarming that it is trending upwards while the Fed has interest rates cranked up to 4.25-4.5%.

Basically, the Fed is keeping rates this high in order to get inflation lower, but its going higher anyway.

That puts the Jerome Powell in a tight spot, especially with the aforementioned downturn in stocks we're seeing.

He only has 3 options:

1. Keep rates the same, close his eyes, and hope that it all works out.

2. Raise rates to tamp down inflation, but risk putting the US into a recession while increasing the cost of servicing the national debt.

3. Drop rates to prop up the markets, but risk another bout of high inflation. while disincentivizing the market to buy US debt.

None of these options seem good.

Especially if you buy into Ray Dalio's alarm sounding about an imminent debt crisis if we don't get to a budget deficit of 3% of GDP.

And the cherry on top of this inflation and recession sundae is rising geopolitical turnmoil.

Geopolitics

The geopolitical elephant in the room right now is Trump and Vance's dressing down of Zelensky in their meeting that went south.

But this is just the latest news item in a long string of stories indicating a fundamental change in the US's role in the world.

This article is about markets though, so I want to show you a graph.

This is the most interesting chart I've seen in a while now.

It makes a pretty clear argument for gold as a hedge against political risk.

Remember earlier when I said that stocks hit a new all time high on February 19?

Well one day later gold hit a new all time high as well.

Gold and stocks tend to be relatively uncorrelated, so what gives?

Well, I suspect that while stocks were getting the "Trump bump," gold was getting its own kind of Trump bump.

Trump's presence in the White House is seen as risky by much of the market.

Stocks may not continue to benefit from Trump, but I don't see a dramatic drop in political risk on the horizon, so gold may continue to benefit whereas stocks are starting to flounder.

What are you to do with all of this though?

If you're a "just buy the total US stock market and chill" kind of investor, you may be in for a nasty surprise in the coming months.

With risks on all fronts and rapidly changing market conditions, it is more important than ever to implement solid risk management and a diversified portfolio.

We don't know what's going to happen next with 100% certainty – no one does.

But we do know how to set up a portfolio that is relatively protected against all of the scenarios that could play out.

Get yourself a solid mix of stocks, bonds, cash, and hard assets because we might cycling through inflation, prosperity, deflation, and recession quite rapidly.

Once you're well diversified, one man's downward spiral may being your upward spiral. ~West

Welcome to the Manic, Frothing, No-Brakes, Full-Throttle Economic Revolution!

Don't know if you've been keeping up with the 24/7 news cycle (it's a full-time job), but to paraphrase our old pal Donald Rumsfeld—the ultimate Deep State warmonger... the patron saint of no-bid contracts and failed audits... the man who turned military spending into an ATM for his buds at Lockheed Martin and Raytheon—

Right now, there are a lot of "known unknowns" and undoubtedly a few "unknown unknowns" that'll come back to bite us.

Because the Trump administration is moving fast and breaking things.

And you know what? Credit where credit's due for some unconventional ideas. It's about time someone addressed the colossal elephant in the money-printing room.

Cuts here. Tariffs there. Reciprocal trade wars everywhere.

Plus, we've got forced debt swaps? sovereign wealth funds? And... a Sh*tcoin Reserve?

Oh, and that whole thing with Ukraine.

The market can barely keep up.

But I'd be lying if I didn't say I'm skeptical. Cynical, even.

So let's take a deep breath and have a think on how we got here because the last five years of government hubris were a (commendably) bipartisan effort that started with reckless spending… and ended with inflationary chaos.

Remember Trump's COVID spending bonanza? I sure do.

Stimulus checks, PPP loans, emergency bailouts. It was an absolute effing disaster filled with waste, egregious fraud, and it pumped 25% more dollarbucks into circulation overnight.

And the Fed didn't help. They slashed rates to near-zero to keep the music playing, expanded their balance sheet, and not to beat a dead horse, but who could forget when Yellen—with that perfectly bobbed hair—confidently said inflation would be "transitory?"

Not to be outdone, when Biden came along, he also wanted to fan the flames of the inflationary fire, passing the DEI-riddled $2 trillion American Rescue Plan Act, which ballooned the money supply to 40% above pre-pandemic levels and caused inflation to peak at 9.1% in 2022, the worst in modern history.

Then the Fed decided to "help" again, jacking up interest rates at the fastest pace in decades, throwing the economy into a state of whiplash.

But it was too little, too late. I'm sure I don't need to remind you.

And what what about now?

Well, while the media is hyper-focused on every half-baked idea out of Trump's mouth (Greenland? The 51st State? The Riviera of the Middle East?), the economic warning lights are flashing...

As West points out above, the Atlanta Fed now projects a recession.

The bond market’s inverted yield curve—one of the most reliable predictors of economic downturns—has been screaming “danger” for months.

Stock market valuations are at nosebleed levels, with 89% of fund managers calling U.S. equities overvalued.

And Warren Buffett is Smaugin' it up on a record pile of cash... waiting for the inevitable?

Meanwhile consumer credit card debt has hit an all-time high of $1.21 trillion.

Everyday Americans aren’t even living paycheck to paycheck, they’re drowning under a current of high-interest debt, delinquencies are creeping up, and they’re living with 20% inflation since the start of the pandemic.

And that’s the official figure. If we use ShadowStats’ calculations, it’s double that. Meaning every dollar you’ve earned since 2020 has lost at least a third of its buying power, maybe more.

The economy, we’re told, is "strong." (MSNBC said so!)

And yet, data just came out that the top 10% of earners are keeping the economy afloat, now accounting for HALF of all consumer spending—a record high.

Read that again, because it’s wild.

So yeah, fundamentals don’t just look bad...

They smell bad, they taste bad, they’ve got that sticky, rancid, left-too-long-in-the-sun sheen that's overripe and ready to rupture.

Here’s the real head-scratcher from my perspective...

No matter how many times government intervention wrecks the economy, the people—G*d bless ‘em!—come staggering out of the rubble, half-concussed, pockets emptied, wallets raided, and what do they do?

They turn to the nearest Big Man... the latest Political Messiah, the newest, shiniest central planner with a teleprompter full of lies... and they beg for more.

More control! More spending! More bailouts, buyouts, subsidies, committees, commissions, ‘bold new initiatives!’ ‘sweeping reforms!’

More Big Men in Big Suits making Big Promises with Big Government Money (read: your money).

Oh Fortuna! And so the wheel turns, the cycle repeats.

Left, right, center—it doesn’t seem to matter.

The government just keeps getting bigger. Then the pendulum swings, giving the other team the levers of power to the predictable cries of "fascism."

One party inflates the bubble, the other pops it, the Big Men cash out, and the American voter shambles right back to the table, eyes bloodshot, hands shaking, convinced—this time!—the house won’t win.

We’ve seen the same movie a hundred times, but somehow, people still believe in a different ending. ~Zack

That’s it for this week.

If West is right, we might be heading for a downward spiral—but if you’re risk adjusted correctly, that might just mean an upward trajectory for you. And if Zack’s right, well, it’s the same movie playing on repeat, starring a familiar cast of Big Men promising salvation with one hand, while looting with the other.

Either way, one thing is certain…

The more unpredictable things get, the more important it is to hedge your bets, diversify your risk, and play the game… before you find yourself fat, fleece-thick, silently chewing cud in the great economic pasture, right up until the shears come out… or worse.

Sic semper debitoribus,
~ West & Zack

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