Governments in the developed world continue to rapidly increase their debt levels. They are being led by the U.S., where the recently passed “One Big Beautiful Bill” will accelerate that country’s indebtedness. The United States currently owes US$36 trillion, representing a debt/GDP ratio of 124%. The (non-partisan) Congressional Budget Office projects that the U.S. federal debt will grow to US$52 trillion by 2035, with an ever-increasing debt/GDP ratio. At US$1.1 trillion per year and rising, the interest expense on this debt is second only to expenditures on Social Security, while eclipsing both defense and Medicaid. Investors have already taken note as U.S. Treasury yields have remained persistently high in recent months, despite the U.S. dollar falling in value vis-à-vis European and Asian currencies. Investors are voting with their feet.
Although not as dramatic, public deficits and cumulative debt are climbing faster than GDP throughout the developed world, including Canada, the United Kingdom and Western Europe. Much of this additional spending will be allocated to national defense in an increasingly fractious global environment. As government debt levels grow, financial markets will be tasked to absorb ever increasing amounts of publicly issued bonds. The inherent risk in these bonds will increase in concert with the debt levels themselves. In our view, this will ensure that interest rates will not be returning to the ultra-low levels seen in the decade after the 2008-2009 Financial Crisis. In fact, it is difficult to imagine interest rates declining much from their current levels for the foreseeable future.
Even as risk levels in the debt markets are on the rise, the risk embedded in equity markets has been underestimated. U.S. equity indices are once again hitting all-time highs, although there has been a clear demarcation between perceived winners and losers. The markets have once again gained an appetite for more speculative technology stocks, often driven by excitement for the potential benefits of Artificial Intelligence (AI). On the other hand, many companies that are reliant on imports into the U.S. have underperformed, as have companies providing services and products to scientific and healthcare research.
While the potential for AI may be significant, the economic benefits in the shorter term are not yet evident. Further, the broad equity indices are not discounting the inflationary impact of tariffs. Given Trump’s on-again off-again stance regarding the implementation of tariffs, equity markets have become complacent to the negative impact of rising prices. This underestimation of risk has rewarded high momentum technology-based stocks with significant overvaluations, while leaving many well-managed companies in reliable growth industries trading at a discount. In our view, the notion of risk-adjusted returns in the equity markets are currently misallocated.
Our goal is to provide steady performance with relatively low volatility. To this end, we acknowledge that the era of ultra-low interest rates is over and that some sectors of the equity markets have “stretched” valuations. More than ever, we feel it is vital to understand each company’s fundamental strengths and growth prospects and to invest accordingly. Ultimately, many of the current risks in the financial markets will be realized and some market participants will learn their lesson the hard way. The “value” plays of today will become the safe havens of tomorrow. We will continue to manage your portfolio with a keen eye on risk, and an emphasis on sound fundamental investing.
Second Quarter 2025
Governments in the developed world continue to rapidly increase their debt levels. They are being led by the U.S., where the recently passed “One Big Beautiful Bill” will accelerate that country’s indebtedness. The United States currently owes US$36 trillion, representing a debt/GDP ratio of 124%. The (non-partisan) Congressional Budget Office projects that the U.S. federal debt will grow to US$52 trillion by 2035, with an ever-increasing debt/GDP ratio. At US$1.1 trillion per year and rising, the interest expense on this debt is second only to expenditures on Social Security, while eclipsing both defense and Medicaid. Investors have already taken note as U.S. Treasury yields have remained persistently high in recent months, despite the U.S. dollar falling in value vis-à-vis European and Asian currencies. Investors are voting with their feet.
Although not as dramatic, public deficits and cumulative debt are climbing faster than GDP throughout the developed world, including Canada, the United Kingdom and Western Europe. Much of this additional spending will be allocated to national defense in an increasingly fractious global environment. As government debt levels grow, financial markets will be tasked to absorb ever increasing amounts of publicly issued bonds. The inherent risk in these bonds will increase in concert with the debt levels themselves. In our view, this will ensure that interest rates will not be returning to the ultra-low levels seen in the decade after the 2008-2009 Financial Crisis. In fact, it is difficult to imagine interest rates declining much from their current levels for the foreseeable future.
Even as risk levels in the debt markets are on the rise, the risk embedded in equity markets has been underestimated. U.S. equity indices are once again hitting all-time highs, although there has been a clear demarcation between perceived winners and losers. The markets have once again gained an appetite for more speculative technology stocks, often driven by excitement for the potential benefits of Artificial Intelligence (AI). On the other hand, many companies that are reliant on imports into the U.S. have underperformed, as have companies providing services and products to scientific and healthcare research.
While the potential for AI may be significant, the economic benefits in the shorter term are not yet evident. Further, the broad equity indices are not discounting the inflationary impact of tariffs. Given Trump’s on-again off-again stance regarding the implementation of tariffs, equity markets have become complacent to the negative impact of rising prices. This underestimation of risk has rewarded high momentum technology-based stocks with significant overvaluations, while leaving many well-managed companies in reliable growth industries trading at a discount. In our view, the notion of risk-adjusted returns in the equity markets are currently misallocated.
Our goal is to provide steady performance with relatively low volatility. To this end, we acknowledge that the era of ultra-low interest rates is over and that some sectors of the equity markets have “stretched” valuations. More than ever, we feel it is vital to understand each company’s fundamental strengths and growth prospects and to invest accordingly. Ultimately, many of the current risks in the financial markets will be realized and some market participants will learn their lesson the hard way. The “value” plays of today will become the safe havens of tomorrow. We will continue to manage your portfolio with a keen eye on risk, and an emphasis on sound fundamental investing.