Branzan Advisors Commentary | October, 2024

Markets are said to climb a wall of worry. That certainly seems to be the case in 2024 with multiple wars, ongoing economic uncertainty, interest rate volatility, and a highly-polarized U.S. election.  And that just scratches the surface. Despite all these concerns, almost all asset classes continue to rise with many near all-time highs. We believe many investors are putting too much faith in the Federal Reserve and its ability to achieve a “soft landing” through lowering rates while inflation moderates.

As a result of the rapid increase in interest rates in the last couple years and the ever-increasing U.S. national debt levels (as of this writing, $35.77 Trillion according to www.usdebtclock.org), the U.S. Treasury is now paying more annually to service the U.S. national debt than it spends on the military. The U.S. Treasury has a vested interest in seeing the Fed lower short-term interest rates as that will directly reduce the interest burden the Treasury pays on its debt. If inflation continues to decrease, it makes it easier for the Fed to continue its dovish stance and lower rates again in 2024 and into 2025. If inflation doesn’t cooperate as the Fed hopes, it will be significantly more difficult for the Fed to continue to reduce short-term rates. We aren’t convinced inflation will get back to the Fed’s 2% target anytime soon. If inflation is more entrenched and the Fed cannot lower rates much further, we believe the prices of many interest-rate sensitive asset classes (and most assets are sensitive to interest rates) could decline quickly.

Despite all these concerns, investors seem complacent. Balances in brokerage accounts continue to go up and those people with financial assets are doing well. This in and of itself doesn’t make us nervous, but the fact that all asset classes are going up raises a red flag. Curiously, gold has been one of the best performing assets in 2024 and since January 1,2000. Historically, gold performs well as a safe haven asset during times of turmoil and uncertainty. It also typically exhibits low correlation to other asset classes, including equities. This year has been different. Year to date, gold has increased over 32%. Given our gold holdings in our diversified fund, we aren’t complaining.

Gold demand isn’t just coming from retail investors and from jewelry consumption, but also from central bank purchases. If central banks are diversifying their holdings from U.S. Dollars and U.S. Treasuries into gold, that could spell trouble for foreign U.S. Treasury demand. Waning foreign demand may put pressure on yields as foreign investors demand higher yields on U.S. Treasuries. Another potential fly in the ointment for investors who are relying on interest rates coming down significantly next year.

Before being accused of being a permabear, we do believe this economic uncertainty will bring opportunities. It’s not a question of “if,” but of “when.” After over 22 years in the investment business, we have learned to be patient and wait for the opportunities when the arise. We have no doubt they will and until then, we will continue to invest patiently.

Thank you for your continued support.

Branzan Investment Advisors

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