"IN THE MIDST OF CHAOS THERE IS OPPORTUNITY"

Source: Shutterstock.com

    So wrote Sun Tzu the famous Chinese General (born in 544 B.C.). There is plenty of chaos around the world today including the continuing hostilities between Israel and Palestine and Russia's war in Ukraine. Trump has added to the chaos. He has grabbed the President of Venezuela (kidnapped), seized multiple foreign owned oil tankers (piracy on the high seas), dropped bombs on Iran's nuclear development site, Somalia, Nigeria, and Syria (acts of war), threatened Iran's and Columbia's political leaders with military attack for their drug dealing, corruption, and violent suppression of protests ("war mongering"), threatened the chairman of the Federal Reserve Bank with criminal charges for his reluctance to lower interest rates as demanded (intimidation) and threatened to seize Greenland, the protectorate of a NATO ally. His belligerence toward and tariff attacks on Canada push his neighbor to the north into the welcoming arms of China, the US's major antagonist. He proposes price controls of 10% on credit card interest rates evidently unaware that millions of people with low credit scores will have their credit limits reduced, if not their cards cancelled. There is also Russia's suspected damage to North Sea underwater communications and electric cables and Russian and Chinese relentless cyber spying, hacking into and disabling Western government and corporate computer networks.

    In the background, there is the ongoing social, economic and political deterioration of many nations.  By way of example, there is England's evident determination to self-destruct. Over many years it has fostered a nation of welfare dependents hoping to fund that soaring cost by squeezing the remaining juices out of the shrinking population of farmers, workers and businesses who produce the nation's goods and services. The government is pressing hard for more and higher taxes and more economy-strangling regulations. Political leaders have ignored for decades the nation's deteriorating infrastructure (e.g., Thames Water, rail systems, lack of reliable electric generation and distribution) and swelling social problems (vast numbers of immigrants who are overtly hostile to assimilating into the existing population and abiding by local laws and customs). This sorry state of affairs is the result of the Tories' fourteen-year failure to govern with any sense of purpose, followed by the Labor party's ongoing failure to do so. Lipton Matthews laments, 

Britain’s relative decline is no longer a speculative talking point but a measurable trajectory. If current income, productivity, and cost-of-living trends continue, Lithuania is on course to overtake the United Kingdom in average living standards by 2030, with Poland following by roughly 2034. Britain’s tax and regulatory environment increasingly signals hostility to wealth creation. High marginal taxes, unpredictable policy shifts, and moralized rhetoric about “fair shares” have encouraged a steady exodus of mobile high earners. For a country already suffering from weak capital formation, this outflow is economically corrosive. The tax base narrows, public services deteriorate further, and the burden on those who remain intensifies, reinforcing the cycle of decline. England’s predicament, therefore, is not the product of inexorable global forces. It is managed and self-inflicted.

    Richard Huges, the former head of England's Office of Budget Responsibility, whose job was to assess the viability of the government's budget proposals, recalls that Labor's campaign manifesto was to raise and spend £8-9 billion in the final year of this Parliament. However, in their first budget they sought to raise £40 billion in taxes and propose to spend £70 billion. Labor also promised to leave income tax rates, National Insurance and the VAT rates unchanged. They now seek to raise all of them to the disadvantage of employers, employees and the overall economy.  

    Is the answer Nigel Farage's Reform party? We admired his speeches when he was a member of the European Parliament. He excoriated that institution's relentless efforts to diminish the member nations' rights to manage their own affairs. That led him to push successfully for England to leave the EU.  We know too little of Reform's agenda to express an opinion on its merits. Our guess is that he is no Javier Milei, the chainsaw wielding president of Argentina, who has dramatically reduced the size of that government to free up the economy, cut inflation from 211% to 35% in two years, and has encouraged much needed local investments. 

    While England appears to be leading the way to national crisis, France (always in financial stress), Germany (0.2% GDP growth in 2025) and most of Western Europe are following the same trajectory. The Financial Times notes,

Across the EU, 47 per cent of the bloc’s social protection expenditure is spent on old age and survivors’ benefits, ahead of 36.7 per cent spent on sickness and disability and 8.7 per cent on families and children. In Germany, a third of all federal tax revenue will be spent plugging holes in the state pension system this year. In France, the audit office estimated last year that the country’s pension deficit, currently around €1.7bn, could grow to €15bn by 2035 and balloon out to €30bn by 2045 if further reforms are not made.

    Where does this lead? William Strauss and Neil Howe wrote their now-famous book, "The Fourth Turning".  Amazon provides the following description of the book's thesis about great nations' historic cycles.

First comes a High, a period of confident expansion. Next comes an Awakening, a time of spiritual exploration and rebellion. Then comes an Unraveling, in which individualism triumphs over crumbling institutions. Last comes a Crisis, the Fourth Turning - when society passes through a great and perilous gate in history

Steve Blumenthal adds,

The Fourth Turning, as described by historians William Strauss and Neil Howe is the phase in history when long-standing systems finally crack under their own weight. This follows decades of excess, debt, complacency, and institutional drift. It is marked by confrontation, urgency, and uncomfortable change.

Does that describe what is happening in your country? If so, the decay will continue at an accelerating pace. What possible "opportunity" exists in the midst of this chaos? Astute political leaders could make the "root and branch" changes necessary to save their countries from ruin. Does "astute" describe your political leaders? Our guess is they will fail to do anything meaningful fearing being voted out of office, and will instead spend huge sums of newly printed money in an effort to postpone or paper-over the crisis. 

    In the US, the Social Security funding crisis is a good example. This chart, prepared by the Congressional Budget Office, shows the rapidly falling trust fund balances. With regard to the Social Security "trust fund", withholdings from workers' paychecks are deposited into the Treasury's general revenues. The Treasury then issues "intergovernmental notes" to the Social Security fund representing money owed to the fund. However, all money collected by the Treasury (and far more) is spent each year. All that remains are these unfunded "notes" (I.O.U's). Congress is well aware of this growing problem. What is it doing to address the problem? Absolutely nothing. It could raise the retirement age to account for longer lifespans, cut benefits to slow the funding hemorrhage, cease paying benefits to those who have prudently saved for their retirement but it has done none of these things fearing voter wrath. 

   What "opportunity" exists for those who have made themselves aware of the coming crisis and seek to position themselves to survive it? One is to recognize the risk associated with their local currency. It will be relentlessly devalued during the Fourth Turning. One does not want to be left holding any more of it than is necessary to meet short-term needs. The next is to assess the risk of loss in their investment portfolios. High exposure to equities may prove to be their undoing. 

    While bonds often do well during an equity crisis, if your economy is starting to come off its hinges, there will be many corporate bankruptcies (717 in the US during 2025, up 14% from 2024) and consequently many corporate bond defaults. US Treasury debt has an advantage. The government can simply print more money to pay its maturing bills, bonds and notes. That money will quickly lose value, but getting devalued dollars is better than getting none. Many state and local governments are under great financial stress and face mounting debt, deteriorating infrastructure, and surging interest payments. Will the national government bail them out? That too can only be done by printing vast sums of fiat money that will rapidly lose value.

The State of the Markets

    The media is full of articles debating whether stock markets are in a "bubble" and at risk of popping. Those scoffing at the bubble concern argue that earnings are robust, interest rates are being pushed down by the Federal Reserve Bank and other central banks, there is talk of paring back regulations, and in the US, Trump's "Big Beautiful [Tax] Bill" will lower taxes.  They argue that all of this will combine to stimulate the economy and keep stocks at elevated levels. Those worried that markets are overpriced and subject to a serious correction have much to support their argument. We have no powers of clairvoyance. So we look at the data and try to figure out what they are telling us. 

    There are many metrics used by analysts to assess whether a market is "over bought" - meaning at risk of falling in value. A principal one is the "price-to-earnings" ratio. That is simply the current price of an individual stock, or an entire index, divided by its earnings. Over time, the average P/E ratio for the S&P 500 index has been around 17 as shown by the middle horizontal green dotted line in the chart below (that includes data from 1994-2025). It is easy to see that the index's current P/E was at the elevated level of 22 at the end of the year - more than a full "standard deviation" above average. That fact alone determines nothing. The market can become even more "irrationally exuberant" - a term former Fed chair Ben Bernanke used during the "dot-com" melt-up. Investors can hold out hope for yet higher P/E's, or they can take some chips off the table to protect their profits. What one decides to do is usually determined by their tolerance for risk of loss (high or low) and their "fear of missing out" (FOMO) of greater gains. Investors' emotions often dictate their actions rather than an analysis of the data.   

    Robert Shiller, an economist and professor at Yale university, does an analysis of market data that he calls the CAPE (Cyclically Adjusted Price to Earnings) P/E ratio. The chart below goes back to the late nineteenth century - providing a very long historic view. He uses a ten-year rolling average of prices, adjusted for inflation, to compare long-term valuations. His calculations show the current P/E ratio at a very high 40 - a level only once exceeded. Note that past highs were followed by precipitous declines. While past performance is no guarantee of future results, it should not be lightly ignored.

Should Investors Take Some Profits?

    Many people consider Warren Buffett to be the consummate investor. He grew the value of Berkshire Hathaway stock to stupendous levels during his six decades of leadership (he recently retired). His, and his former partner Charley Munger's, long-term mantra was to "Buy when others are fearful and sell when others are greedy." Far easier said than done because one never knows if stocks will go yet lower or higher at any given time. By the time he left Berkshire, he had sold off many of its stock holdings and amassed a cash hoard of over $382 billion. This dated chart shows the rapid rise of those cash holdings.

Source: Financial Times

Buffett was often asked why he was holding so much cash (in US Treasuries). He said that there were not many "good values". That is, he thought the market is overpriced. If you agree with him, you would not be buying into the market at today's high prices. Instead, you might be taking some profits to build up your own cash hoard to buy stocks when they become better values. If you disagree with him you will likely maintain your full equity exposure and hope for the best. (Remember: Hope is not a plan.) 

    Looking at the Magnificent Seven's recent P/E ratios (mid January 2026) there is Meta at 29, Alphabet at 33, Apple at 34, Amazon at 34, Microsoft at 34, Nvidia at 46, and Tesla...... at 309! Not to be outdone, Palantir's ratio is 422. If one must wait 29-46 years for a stock to earn its share price, a lot can and has -gone wrong in that time (as shown in professor Shiller's chart above). 

    While P/Es can continue to rise, history teaches that large corrections are a part of life and investors must be prepared to survive them. If you are in or near retirement, you may never recover from a big loss. The following chart shows the time needed to recover from some past US market set backs. They range from 5 1/2 years to 25 years with even longer times to reach your former purchasing power. Buffett often said that he had two over-riding investment rules. The first was, "Don't lose money" and the second was "See the first rule".  Big market losses can destroy retirement plans.

2025 Market Results

    Looking at 2025 equity index returns, there is an interesting range of outcomes. Here are gains from a selection of markets around the world:

KOSPI (S. Korea)    +75%

IBEX    (Spain)        +49%

       Hang Seng (HK)      +28%      

NIKKEI (Japan)       +26%

DAX (Germany)      +23%

FTSE (England)       +21% 

STOXX (Euro)         +21%

S&P (US)                 +16%

       CAC (France)           +10%        

These reported gains need to be adjusted for inflation to reveal real gains (net of inflation) versus the "nominal" (currency inflated) gains. For example, the US dollar lost 8.5% against a basket of currencies in 2025. So, the S&P's real market gain was 7.5%. All currencies are losing value against historic money - precious and essential metals. Here are their percentage gains during 2025.

Silver         +143%

Platinum    +128%

Palladium   +80%

Gold            +65%

      Copper         +41%       

  Are precious metals subject to a correction? Of course they are. There have been rises in the past followed by corrections. However, long term, we believe that precious metals will continue to rise because no government on earth can resist the temptation to devalue its currency and smart people will seek ways to protect themselves from that devaluation. This chart show the percent rise in the price of gold (blue line) against the percent rise of the S&P (orange line) over the last twenty-five years. Those who have long been ridiculed for being "gold-bugs" are having the last laugh.

    The US government has debt of over $39 trillion. Ray Dalio, founder of the world's biggest hedge fund, believes it is heading into a “debt death spiral” where it must borrow ever more money just to pay interest on its ever rising debt. This creates a vicious cycle that accelerates. He predicts “there won't be a default [because] the central bank will come in and will print the money and buy [Treasury debt] and that's where there's the depreciation of money.” 

    Dalio has repeatedly warned that investors do not have an adequate amount of gold in their portfolios. “When bad times come, gold is a very effective diversifier.” He notes that central banks are acquiring vast amounts of gold to diversify out of the US dollar. He believes it is prudent for individual investors to consider allocating “somewhere between 10% or 15%” of their portfolios to the metal. Is he an outlier with this opinion? JPMorgan's CEO Jamie Dimon has said that gold can rise to $10,000 an ounce due to systemic risks like high inflation, geopolitical uncertainty and falling confidence in fiat currencies. He views gold as a crucial "insurance policy" against economic instability due to its historic role as a safe haven. If you believe that he knows what he is talking about, it is not too late to acquire some.

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Important Message: The foregoing is not a recommendation to you to purchase or sell any security or asset, or to employ any particular investment strategy.  Only you, in consultation with your trusted investment advisor, can select the strategy that meets your unique circumstances, investment objectives and risk tolerance.  © All rights reserved 2025