We always deal with the market so start here. While it usually tracks alongside the economy, they sometimes decorrelate . . . one will get ahead of the other or they’ll go in different directions for a while.

The market does not look great but we’re a long way from awful. Big money has decided that even if stocks start to get too expensive to buy at around 22X dips down to 20X are worth accumulating. This is different from the days when anything above 15-18X looked crazy but this has been going on for a shockingly long time. Remember, the average forward P/E on the S&P 500 across the past decade (2015-now) is now 18X. If this is a bubble, it’s a very slow one. If this is unsustainable, again, it’s taking a shockingly long time to implode.

Anything that takes a shockingly long time to implode may not be “sustainable” in the ultra long term but nothing is. It’s durable enough to sustain itself quarter to quarter and year to year, long enough for our purposes.

Back in 2022 when the Fed took the punchbowl away . . . S&P 500 at 19.7X

Back in 2020 in the midst of the COVID crash . . . S&P 500 bottomed out at 14X. That’s the apocalyptic scenario. Big money looked at the world going into lockdown (and just maybe mass extinction) and said, “you know what? buy the dip.”

So here we are at roughly 20X. As mentioned earlier, this is not great but we know where the modern “awful” is. In the event of absolute extinction-level disaster three things happen:

1. Market multiples drop to 14X
2. The “E” side of the math drops too, maybe 4-5% across the market
3. The Fed capitulates immediately and free money materializes

THE MACRO

Of course government policy can get so bad that it starts racking up unforced errors. This is always the case. A great nation can pick incompetent leadership just like a great enterprise can find itself choking on layers of bureaucratic drag. It’s still a great nation or a great company. It’s great in the face of all the accidents and mistakes life can throw at it.

In other words, bad policy is a problem but it’s not a particularly bad problem. A luxury only a great nation can afford. This might seem crazy but it’s basic realism. You can’t throw away great trade relationships without having built them in the first place. You can’t wreck a good economy without having a good economy in the first place.

And once you build something once, you can build it again better. What a “recession” really does is flush bad investment out of the system to give truly great companies space to thrive. It’s not a pain-free process. Companies die. People need to build new careers they might not have ever expected. Some wealth evaporates.

The next cycle always builds back better because people need stuff and people learn from history. A generation of bankers learned from 2008. Bankers who couldn’t learn from it are no longer with us. It’s been 17-18 years. Even the survivors are closing in on retirement now. But the survivors by definition figured out what not to do. They’ll make mistakes. They just won’t make the same mistakes in the same way.

The Fed learned too. The minute they get anecdotal word of mass layoffs, rates drop hard. The minute they see even a mid-tier bank (not too big to fail) stumble, they take it out. The Fed is always learning but Powell was there watching. He does not want to go there again. He’s proved that he will do whatever it takes to avoid going there again.

Is there a recession coming? There’s always a recession coming. Is there a depression coming, something generation-definingly horrible? Not if the Fed can help it.

Is inflation persistent? In the real world, 2-3% inflation is normal. There are periods of structural disruption where production steps up and prices go down. We like those. But there are also periods of structural stagnation where GDP creeps up and money gets stuck in soft quasi-deflationary spirals. We don’t really like those. We like a world where money is free to get a little hot.

We hate a world where money is hot and the economy is not. It’s miserable. That’s arguably the world we just came out of . . . or if we’re still in that world, the world we’ve been living in for years now.

But the modern Fed does not really care about GDP as a measure of “stagnation,” except in the broader sense that when there’s a lot of economic activity going on, people keep getting paid and can spend that money on stuff. For the Fed, “stag” means persistent elevated unemployment. That’s all they care about.

We have not had anything like persistent elevated unemployment. By all accounts, the job market may not be high quality but hiring managers who sweated blood to fill the payroll are going to fight hard to keep those people. So if “stag” comes, we’ll have to look for it elsewhere.

Maybe stagnation just means not fast enough. At that point the logic starts to resemble someone who overtly or covertly desires a certain outcome and will bend all the definitions to declare victory. That’s fine. But investors have a hard time in a stagflationary world so in that scenario we need to investigate who is trying really hard not to have a good time . . . and why they are doing that.

THE METHOD

But for a moment let’s accept that tariffs will trigger a real inflationary spike similar to the OPEC embargo of the stagflationary 1970s and set off a vicious cycle where people buy less because they aren’t working and they work less because people aren’t buying. Let’s also accept the argument that the entire postwar international system is unraveling through malice and active neglect.

OK. People still have lives to live. They want to protect existing wealth and maybe get wealthier. They want to at least stay where they are in that theoretically more dangerous world. The people we work with want to get ahead. They want to do more than survive. They want to prosper.

There are always places they can go that are relatively better than others. They might not be perfect or great but they will be better than bad. This is why we focus on the market, because the market is what exposes the opportunities to deviate from the status quo that is the economy. Bad economy? Own good stocks tailored for that economy. We can’t control the economy. We can control the stocks we focus on.

So does everyone else. Right now everyone else is sending a signal about where they think the defensive or attractive (depending on your bias) points are. It’s confused because people are confused, but 20X is not exactly an indicator of extreme fear or bearish sentiment. If anything, it’s pretty objectively confident.

We don’t have to trust that signal but then we do have to answer the question where do we go instead. Foreign stocks are great. Yield stocks are probably a better call than Treasury. Growth stocks are the future when the sun shines again. We own them now. We don’t have to buy them at this level. If we sell them at this level, again, we need to answer the question of where we park.

Money markets at 4%? If you’re worried about an inflationary spike, that “safe” bet will be underwater in a year. Large cap at 20X? That’s where we already are. Treasury at 4%? Only if you trust the government. Gold under the bed? That’s retirement. Guns and canned food? That’s also retirement. It means getting out of the newsletter business or at best getting into a very different kind of newsletter business.

And guess what. We all lived through the 1970s. We all lived through 2008. Any landing you walk away from is not the worst landing. Life is risk. We can run from that or lean in and try to squeeze a return out of the experience.