• S&P 500: -5,09% 
• Nasdaq: -4,89% 
• Stoxx Europe: -8% 
• MSCI All Country World Index (EUR): -5,27% – (the dollar rose by 1.15%, so the index in USD fell by 6.11%).
• Índice global de renta fija (EUR): -0,68% – (the dollar rose by 1.15%, so the index in USD fell by 1.97%).

There is some concern among investors about a potential rebound in inflation and how it may affect upcoming interest rate decisions. Since the beginning of the conflict, the most significant movements in commodities have been:

• Oil: +62%
• Gasoline: +47%
• Diesel: +44%
• Urea: +48%
• Fertilizers: +29%
• Coal: +22%     

This is not a minor move. Energy is a cross-cutting input for the entire economy, so these increases eventually filter through to overall prices.

Following multiple bombings from both sides, the current situation is one of tense calm. Trump has extended the deadline until Tuesday, April 7, for Tehran to reopen the Strait of Hormuz, while the United States, Iran, and regional mediators discuss the terms of a possible 45-day ceasefire that could lead to the end of hostilities.

Although this situation may invite optimism, this weekend President Trump has toughened his tone, threatening to destroy key Iranian infrastructure if no progress is made. For its part, Iran has rejected the ultimatum to reopen the Strait of Hormuz, stating that it will only fully resume operations once war damages are compensated. In short, calm, but very fragile and highly dependent on political decisions that are difficult to anticipate.

Consequences of higher inflation

As we mentioned in the February report, there were already signs that inflation was not fully under control and could rise again, partly due to high global deficits. The increase in gold prices can also be interpreted in this context, either as a reflection of excessive public spending or as a gradual loss of confidence in currencies. The fact is that, at the end of the month, we saw a rise in inflation expectations in the United States, something the market had not priced in for some time.

If we add to this the increase in commodity prices caused by the war, it is reasonable to think that upcoming inflation data releases may surprise to the upside. And, as is often the case, the market does not wait for confirmation—it starts adjusting in advance.

Inflation has negative consequences for both households and companies, as it reduces purchasing power. In addition, it may lead to interest rate hikes, with clear implications:

1. Household: the cost of loans and variable-rate mortgages increases.
2. Companies: financing becomes more expensive and margins are compressed.
3. Government: deficit financing becomes more expensive, although inflation benefits highly indebted governments by reducing the real burden of debt.[1]
4. Investment value: valuations decline.

This last point is especially relevant and often poorly understood.

Valuing a company through discounted cash flow (DCF) consists, in simple terms, of bringing future cash flows to present value plus a terminal value.

This is the formula:

CFi: Cash flow in year “i”. This is what the company generates through its operations.

Vn: Terminal value in year “n”. Based on the company’s long-term growth expectations, this value is calculated. “n” is subjective—it could be year five, for example[2].

K: Discount rate applied to these cash flows.

This discount rate is key in the current environment. It is subjective and depends on factors such as opportunity cost[3], expected growth, or the cost of capital, among others, depending on the perspective of the person performing the valuation.

For example, if the best available investment alternative has an expected return of 10%, or if I require a 10% return for a given investment due to its risk or duration, then k = 10%.

That said, can k change? Of course. It can increase if I perceive more risk in the investment, which reduces valuation (per the formula), as I demand higher returns. It can also change due to interest rate movements. Suppose I require a 10% return and assume a 5% spread over risk-free rates (which are at 5%). If risk-free rates rise to 7%, then k must increase accordingly. Since k is in the denominator, the company’s valuation decreases.

The war has had an immediate impact on markets, with declines in equities, as expected. However, what may be more relevant is the indirect effect via inflation and interest rates, which is more persistent and harder to reverse.

Returning to the DCF formula—and I promise this is the last headache—growth companies, particularly technology firms linked to artificial intelligence, are more affected for two reasons:

1. Their cash flows are further in the future, so a higher k has a greater negative impact on valuation.
2. They trade at demanding multiples, meaning expectations are already very high and therefore more vulnerable to disappointment.

We can see this in the chart: the light blue line (Magnificent 7) falls by 12%, the dark blue line (traditional S&P 500) falls by 4.6%, and the beige line (S&P Equal Weight) rises by 0.19%.

Source: Facset Research Systems Inc.          

This highlights concentration risk. When markets rise, it helps. But when conditions deteriorate, it becomes a vulnerability—especially in uncertain environments.

That said, although it may still be early, corporate earnings have not been significantly affected. The declines are driven more by uncertainty, as shown in the decomposition of the S&P’s performance: dividends contributed +0.28%, earnings +5.18%, and the multiple (P/E) -10.56%, which ultimately dragged the index down.

Source: Facset Research Systems Inc.                

The P/E ratio is equal to price divided by earnings. If price rises while earnings remain constant, the multiple expands, reflecting investor optimism—and vice versa. We do not know what will happen with the war, inflation, or interest rates, but many investors prefer not to wait and sell amid rising uncertainty. Higher uncertainty, lower multiples.

Private credit funds

When asked about the impact of war on financial markets, the immediate reaction is concern, risk, and uncertainty, which naturally leads many investors to sell. Beyond the human tragedy, from a financial perspective, what is more concerning is rising inflation, potential interest rate hikes, and the consequences for leveraged structures that are not immediately visible.

Some worrying news has emerged regarding private credit funds. These funds lend directly to companies and have grown significantly since 2008, partly due to tighter banking regulation. It is a less transparent market, but increasingly relevant.

Many loans are floating rate, meaning companies that borrowed when rates were low are now paying interest rates of 9–10%, leading to refinancing difficulties and rising defaults—although not always officially recognized, as they are often masked through extensions, restructurings, or PIK payments[4].        

In addition, these funds have financed small and mid-sized software companies, a sector now threatened by artificial intelligence, which may deliver similar solutions faster and at lower cost.

This creates a combination of risks: higher financing costs and declining revenues.

It is no coincidence that many investors are requesting redemptions. Some semi-liquid funds are limiting or even suspending withdrawals, while banks tighten financing conditions.

This reveals a key fragility: many funds offer liquidity while investing in illiquid assets. These mismatches only become visible in stressed environments.

This situation somewhat resembles 2008. After years of low interest rates, complex structures with questionable assets were created. When rates rose, the fragility of the system became evident.

Today’s situation is different—less leverage, more capital, simpler structures—but the underlying dynamics are similar. Key risks include opaque valuations, concentration in software/technology, and exposure to semi-liquid vehicles.

This once again reminds us of a very human tendency: repeating mistakes. In times of prosperity, greed blinds us and pushes us to take on more risk. We believe we will know when to exit, that we will stand up just before the music stops. But reality is often different.

The music always stops. The question is whether we are already seated… or still standing when it does.

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[1] If I am lent 100 to repay in one year and inflation over that year has been 10%, I repay the same 100, but it is worth 10% less (a very simple example for training purposes).

[2] The terminal value is calculated as follows: Vn = (CFn / (k − g)), where k is the discount rate and g is the expected perpetual growth rate, which is usually similar to global GDP growth. No company grows above GDP indefinitely.

[3] Opportunity cost can be defined as the expected return of the best available investment alternative.

[4] Payment In Kind (PIK): the company stops paying interest in cash and instead capitalizes it by adding it to the debt. When a company is under financial stress, this provides short-term relief, but it increases overall indebtedness.

Fixed income, meanwhile, is maintaining the momentum we saw last year: short maturities are performing better than long ones. This behavior is significant, as it may be anticipating what is happening, or may happen, in the future.

• S&P 500: +1.37%
• Nasdaq: +1.20%
• Stoxx Europe: +3.18%
• MSCI All Country World Index (EUR): +1.27% (the dollar fell 0.90%, while the index in USD rose 2.83%).
• Global Fixed Income Index (EUR): -0.35% (the dollar fell 0.90%, so the USD index rose 0.11%).

The start of the year didn’t even give us time to settle into our chairs. On January 3, the capture of Nicolás Maduro and his transfer to the United States acted as a real wake-up call for the markets. Beyond the political component, the impact was clearly felt in oil: Brent rose from around $60 per barrel to nearly $70 throughout January, reflecting the increase in geopolitical risk premium in a market already tight in terms of supply.

The so-called “Magnificent 7” rose by only 0.55%, clearly below both the S&P 500 and the Nasdaq. This behavior is relevant because it challenges one of the most repeated narratives of recent years: that a small group of companies can sustain the market indefinitely. January suggests that investors are becoming more selective.

So who has led the gains? To delve a little deeper into the analysis, we take as a reference the US index that groups together the 3,000 companies with the highest market capitalization. The best-performing sectors for the month were energy (+17.63%) and materials (+16.10%), while the last on the list was, surprisingly… TECHNOLOGY!!!, with a drop of -3.87%.

The market is beginning to question the real profitability of the huge investments announced by many companies linked to artificial intelligence. From a prudent perspective, we prefer not to be exposed to this type of gamble. The case of Microsoft was revealing: its share price fell by nearly 10%. The market did not punish the quality of the business, but rather the sharp increase in CAPEX in artificial intelligence. The market is questioning whether it will be profitable.

At the same time, the Bloomberg Commodity Index has risen 8%, while gold has advanced 10% and silver 11%.

Movements in commodities, especially precious metals, are often an early sign of increased uncertainty. When they rise in a coordinated manner, the market is paying a premium for protection… and warning that the year is not going to be exactly boring. The reasons that immediately come to mind are growing tensions between the United States and other countries, Donald Trump’s increasingly harsh foreign policy tone, an energy market that is already tight in terms of supply, and even less common events, such as the renewed geopolitical focus on Greenland. I believe these events may have an influence, but there is a somewhat deeper interpretation that has to do with the US government’s accounts.

As I mentioned earlier, the performance of fixed income provides us with valuable information. Short-term bond yields are falling, largely influenced by central banks’ interest rate management. However, yields on longer maturities, which are more driven by investor supply and demand, remain stable or are even rebounding.

Source: Bloomberg

The brown line represents the yield curve as of December 31, 2024, and the green line represents the yield curve as of February 5, 2026. The red downward arrow indicates the decline in yields on one-year government bonds (-0.67%, from 4.15% to 3.47%). The red circle marks the stability of the 10-year bond, while the upward arrow indicates the increase in the yield on the 30-year bond.

As a result, investors are buying short-term debt and selling very long-term debt. Why[1]? Investors are confident that interest rates will fall in the short term, but are beginning to demand greater compensation for fiscal risk, long-term inflation, and fewer buyers who are insensitive to price.   

If we add the evolution of the US deficit to this analysis, the picture becomes clearer. The graph shows the evolution of the US deficit in the 21st century. The trend is clearly upward and, according to official projections by the Congressional Budget Office (CBO), the deficit in 2026 will reach -6%, above the last recorded figure of -5.36%.

Source: Bloomberg

This implies that public spending structurally exceeds revenue. It should be remembered that during the COVID pandemic, spending increased due to exceptional circumstances, as shown in the graph (dip in 2020). This imbalance must be financed with debt, and this is where a worrying fact arises: US public debt already represents approximately 120% of GDP, meaning that the volume of debt is 1.2 times the country’s production.

The main buyers of US debt have historically been pension funds and insurance companies, both domestic and international, as well as countries such as China and Japan. However, China has reduced its debt purchases and is significantly increasing its gold reserves. This can be interpreted as an attempt to weaken the role of the dollar as the world’s reserve currency and, at the same time, to gradually replace the dollar with gold on its balance sheets.

The big question is: who is replacing these purchases of US debt? The Federal Reserve? For how long? We don’t know. This helps explain why US government bond yields have not fallen and have even risen in the longer maturities: there are fewer and fewer structural buyers, and not just China. What is the result? Just look at these two charts: gold and the dollar against the euro.

Source: Bloomberg

Gold has risen 64%, while the dollar, against a basket of international currencies, has fallen 9%.

And this is not just a problem for the United States. This image shows public spending as a percentage of GDP around the world. Dark brown represents countries with public spending above 40%, lighter brown between 30% and 40%. Most of Europe spends more than 40% and the United States more than 30% and rising. At the beginning of the 20th century, it was between 0% and 10%.

Source: IMF

I have nothing against public spending as long as it makes sense, but these levels imply high taxes and increased debt. Does it make sense? Well, that’s what investors are worried about.  

What does all this smell like? Growing uncertainty about the US public accounts, where debt interest payments already exceed defense spending. As a result, there is a gradual loss of confidence in the dollar.

This brings us back to the world of commodities, and in particular precious metals such as gold and silver. Why are they rising so sharply? For me, there are two fundamental reasons:

• Less supply and the same or growing demand.
  • Since the commodities crisis caused by overcapacity generated as a result of the Chinese supercycle, many of these companies have canceled projects.
  • Environmental regulations that impose many obstacles to production.

Silver, for example, is used in various industries such as electronics, solar energy, automotive, and jewelry, so demand remains strong.

• Protection. We have seen that one of the uncertainties is future inflation.
  • We have already seen that raw materials have begun to rise sharply, and if I had to bet, this will continue in the near future.  
  • The growing deficit is inflationary if there is full employment. The unemployment rate in the United States is 4.4%, which implies full employment.

With regard to gold, there has been a significant increase in purchases by central banks globally. According to a survey by the World Gold Council, 95% of central banks expect to increase their gold reserves over the next twelve months. This trend invites reflection: what are the major institutional players anticipating?

This behavior fits with a macroeconomic scenario such as the one described above. In this context, it is reasonable to consider whether it is advisable to seek protection against inflation. In our opinion, the answer is yes, provided that a prudent and diversified approach is taken.

There are different ways to gain exposure to this type of protection: direct investment in gold, silver, or other commodities, as well as investment in companies linked to these sectors. However, it is important to note that not all of these companies behave in the same way.

For example, gold producers tend to benefit from rises in the price of the metal, as a significant portion of their costs are fixed, which generates an operating leverage effect and increased margins. On the other hand, developers do not yet produce gold, but they have identified deposits and are working to bring them into production; these are companies with greater volatility, but also with high potential for appreciation. Finally, royalty companies provide financing for mining projects in exchange for a contractual right to a portion of the economic value of production, allowing them to operate with very low costs and structurally high margins.

Beyond raw materials, investing in companies with real assets is also an effective tool for protecting against inflation. Keeping capital tied up in an inflationary environment implies a progressive loss of purchasing power, commonly known as the “invisible tax” on savings.

Therefore, investing prudently and in a well-diversified manner is not a matter of opportunity, but of preserving wealth. If the goal is to maintain the same consumption capacity in the future as today, postponing investment has a cost. In this sense, tomorrow may be too late to start investing.

[1] Remember that bond prices move inversely to interest rates.

For this reason, the data you will see below corresponds to the close of the markets on December 24.   

• S&P 500: +1.21%
• Nasdaq: +0.87%
• Stoxx Europe: +2.13%
• MSCI All Country World Index (EUR): +0.18% (the dollar fell 1.57%, while the index in USD rose 1.68%).
• Global fixed income index (EUR): -1.13% (the dollar also fell 1.57%, so the index in USD fell 0.42%).

Overall, it has not been a month of high volatility, but there has been some uncertainty surrounding interest rates and how this situation could affect the field of artificial intelligence. As I mentioned last month, there are reasonable doubts about how to finance the expected heavy investment and how to cope with the increase in energy demand associated with this sector.  

Although market performance over the last month has been relatively stable, this uncertainty has led to episodes of volatility throughout the year, especially in the artificial intelligence sector. This can be clearly seen in the following chart of an ETF (investment vehicle) that groups together US companies linked to this type of business.

At first glance, the annual data is very attractive: so far this year, the ETF has accumulated a return of 32%. However, this final result hides an important reality: during February and March, it suffered a drop of close to 26%.

And here the key question arises: Would we have been able to maintain the investment during that drop without selling?

Source: Bloomberg

If you have carried out your analysis and the conclusion is positive, the reasonable thing to do would be to maintain your investment and even increase it if you are highly confident. But it’s not that simple, is it?

Doubts begin to creep in: was the analysis sufficient, should you have listened to the criticism, is this time different… I don’t know about you, but this happens to me ALL THE TIME.

One of the characteristics that a good manager should have is to have gone through difficult times, as experience helps to better understand how financial markets really work. And you don’t have to be particularly brilliant to understand this; in fact, the opposite example is very illustrative.

The hedge fund Long Term Capital Management, founded in 1994 by John Meriwether (formerly of Salomon Brothers), had such brilliant minds as Myron Scholes and Robert Merton, winners of the 1997 Nobel Prize in Economics. Despite this, the fund ended up going bankrupt after taking on excessive debt, convinced that its strategy could not fail.

It’s not about being very intelligent, but about applying common sense and dedicating a lot of time to studying. It’s true that sometimes the best investments can be boring (personally, they’re the ones I like best), but if we’re convinced of them, we have to persevere even when the going gets tough. I firmly believe that artificial intelligence is here to stay, but it’s not my style to invest in companies with very high multiples, in other words, companies that I consider too expensive.

All this reminds me of a series of charts shared by Jordi García, from Dinero y Bolsa[1], which I found particularly interesting and illustrative. I think they help us to think long term and forget about the “magic” of the short term.

Invest for the long term, for real.

The S&P 500, despite having gone through some of the most difficult times in recent history—the Great Depression, world wars, and major financial bubbles—has generated an annual return of over 9%.

Even if we limit ourselves to the 21st century, the index has achieved an annual return of 8.13%, despite the dot-com bubble, the real estate crisis, and the COVID pandemic.

The investor’s worst enemy is…the investor himself.

Source: JP Morgan

Over the past 20 years, investing in stocks has generated an annual return of 9.5%, while fixed income has offered 4.3%. However, the average investor barely achieved an annual return of 3.6%.

Peter Lynch, manager of the Magellan Fund for 13 years (1977–1990), achieved a compound annual return of 29%. Even so, according to studies by Fidelity, the average investor in the fund earned returns of between 7% and 10%, even below the market.

The reason? Our emotional biases push us to buy and sell at the worst possible time.

Can we predict the future?

We can study and analyze how the economy and financial markets work, and use that to establish benchmarks. But we will NEVER know for sure what will happen in the future.

This somewhat peculiar graph shows precisely how wrong Wall Street economists are when predicting interest rate trends. The dotted lines represent forecasts and the solid line represents reality. Spoiler alert: they don’t get a single one right.

It was said that economists were paid twice: once for making predictions and again for explaining why they had not come true. Mind you, there are excellent economists, but that does not make them fortune tellers.        

The actions and benefits

Long-term stock performance correlates with company profits. Put simply, over time, companies that earn more money tend to be worth more on the stock market.

In the short term, however, market movements respond to other, very different factors: speculation, fads, trends, cash flows, and expectations, all of which are difficult to predict.

This graph clearly shows this difference. Over a one-year horizon, stock market performance depends largely on the expansion of the multiple, i.e., on expectations about the future, which may or may not be fulfilled.

The problem is that these expectations must materialize. If they do not translate into higher sales and real profits, the subsequent adjustment can be catastrophic.

Ten years down the line, however, the determining factor in performance changes completely: what really explains the evolution of stocks is the sales and profits of companies, as it should be.

No, the stock market is not a casino… unless you decide to treat it as such. In that case, I can only wish you luck.

No gain, no pain

To obtain a reasonable return on long-term savings, it is inevitable to live with market volatility. There are no shortcuts. That’s right… sorry…

Source: Shotwell Rutter Baer     

The blue bars on the chart show how the market ended each year. For example, in 1980, the S&P 500 closed the year with a 26% gain. However, the red dot indicates the biggest drop the market suffered during that same year, which was -17%.

Looking back, it all seems simple. But at the time, you have to live through and endure that -17%, without knowing yet that the year will end up being very positive. And this happens practically every year: even in those that end with strong gains, the intermediate declines can be significant.  

The longer the investment period, the greater the probability of obtaining a positive annual return. 

This chart is particularly interesting because it shows something fundamental: market declines are not necessarily a problem if we maintain our investment over the long term.

Source: ScwabCenter

If we invest for just one year, the result can vary greatly. The range of results goes from a gain of +54% to a loss of -43%. In other words, in the short term, practically anything can happen.

However, when we extend the time horizon and maintain the investment for 20 years, the picture changes radically. In that case, the range of results narrows significantly, falling between +17.9% and +3.1% per year.

In other words, time does not eliminate volatility, but it does drastically reduce the probability of negative results. And for an investor with long-term goals, that changes everything.

The conclusion is simple, or at least I think so. Provided that the assets we allocate for investment are not needed today and are intended to cover future needs—such as building a hospital, an educational center, helping those most in need, or supporting our children in the future—it is advisable to keep a few key ideas in mind:

• Always think long term.
• Analyze investments carefully or trust an advisor or manager to do so.
• Assume that there will be volatility in the markets.
• Accept that, at times, there will be pain.

This way, you increase the chances that your assets will grow over time, fulfill the purpose for which they were created, and, at a minimum, beat inflation, which does so much damage to savings.

I wish you all a great 2026, even or precisely, in an environment of market volatility.

And, if you’ll allow me, I’d appreciate a prayer for my family during this journey.

Happy 2026.

For previous Market Reviews, click here.

[1] Dinero y Bolsa — Tu camino hacia la libertad financiera

In the case of fixed income, the increases reflected investor optimism ahead of the upcoming Federal Reserve (Fed) meeting and expectations of a possible rate cut.    

• S&P 500: +3.53%.
• Nasdaq: +5.40%.
• Stoxx Europe: +1.46%.
• All Country World Index EUR: +2.91% (the dollar fell 0.20%, the dollar index rose 3.49%).
• Global fixed income index EUR: +0.27% (the dollar fell 0.20%, the dollar index rose 0.54%).

The market has maintained its upward trend since April’s lows, driven once again by US tech giants. More and more voices are saying that the market is overvalued and even in bubble mode, and that there will soon be a correction that will erode gains. Are they right?

Before answering this question, it is worth reviewing the general reasons behind stock market rises. I humbly offer the following, although others may add more or disagree with these:

1. Positive Economic Situation

Gross Domestic Product (GDP) is the most common benchmark for assessing a country’s economic activity. Personally, I find it unrealistic to try to encapsulate this reality in a single figure, which can also lead to misleading interpretations, but it is the most widely used indicator. GDP is calculated as follows: 

GDP = C + I + G + (X – M)

Where:

C = Consumption

I = Investment in goods and services

G = Government spending

X-M = Exports-Imports (The so-called external sector)

All these variables can rise and fall, but if the net result is positive, it indicates that economic activity is expanding. The variable that carries the most weight in most countries is consumption. For this reason, many economists known as Keynesians propose policies aimed at stimulating consumption, such as making credit cheaper or increasing public spending. 

In times of crisis, when both consumption and investment stagnate, the public sector tends to increase spending (G) to compensate. However, this approach carries an obvious risk: the waste of public money, which, let’s not forget, is our money. An extreme example is provided by the Soviet system implemented in the late 1920s under Stalin’s leadership. This model was guided by planned production targets, not by the actual production needs of the market. If the five-year plan set a target of producing 10 million tons of steel, the factories did so, even if there was no immediate use for so much steel. Success was measured by “fulfilling the plan,” not by the usefulness or profit of the product. One of the consequences of these plans was the environmental disaster caused in the Aral Sea, [1]one of the greatest in contemporary history.  

It is true that I have given an extreme example, but today there is still an incentive or “temptation” on the part of governments to manipulate public spending in order to appear to be in good financial health. That is why I insist: GDP can be misleading if it is not interpreted with caution. 

That said, how is the global economy doing? According to the latest data, global growth stands at around 2.9%, with a more or less stable trend. The United States, with growth of 3.8%, accounts for approximately 35% of the total increase.   

In summary, the economy is growing, albeit in a fragile manner: the momentum comes mainly from consumption, often sustained by credit, which may prove detrimental in the long run, while investment, which is key to future growth, continues to decline. 

2. Corporate Earnings.  

The share price reflects expectations about a company’s future earnings. It is therefore an estimate of the future, which always introduces some uncertainty as to whether those forecasts will be fulfilled or not. Because it is based on projections, the price that investors assign to a company is ultimately subjective, which is why equities tend to be more volatile. 

Currently, there is widespread optimism about the new paradigm of Artificial Intelligence (AI), which is reflected in valuation multiples that, as we have said on previous occasions, are very demanding. AI-related companies continue to post spectacular profits, although the market is already discounting an almost perfect scenario; in other words, growth will have to remain high for quite some time to justify current prices.

But does this mean that if these “AI companies,” represented by the Magnificent 7 (M7), grow, the rest of the market will grow too? 

According to Facset data, the M7s show growth of 14.3%, compared to 3.4% for the rest of the S&P 500. Therefore, a slowdown in the M7s will have a direct impact on the index’s valuation. Today, they continue to lead the rise and pull the rest of the market along with them. 

Does this mean that if we do not invest in the M7, we will miss out on the stock market rally? Not necessarily. This Bloomberg chart compares the performance of the S&P index so far this year (orange) with the same filtered index, which excludes companies whose operations and practices conflict with the Social Doctrine of the Church. The result shows that profitability is not lower. There are still high-quality companies outside these M7 stocks, and at much more reasonable prices. 

Source: Bloomberg.

In conclusion, profits are accompanying the upward trend, although in some cases they are underpinned by considerable optimism, perhaps excessive, on the part of the mega tech companies.

3. Liquidity

According to some studies, in the short term, what drives the market is available liquidity. In periods when central banks have injected liquidity into the system, stock markets have tended to rise, as shown in the graph. The dark blue line represents the money supply (money printing, or the amount of money in circulation) called M2, and the light blue line corresponds to the S&P 500. The correlation between the two is almost perfect. 

Source: Own elaboration, Bloomberg.

This seems like good news, right? In part, yes, but it depends: an injection of liquidity above the real needs of the economy can lead to speculative bubbles and/or inflation. Therefore, in the short term it is very positive, but it is also important to analyze the long-term consequences. 

4. Optimism in the face of interest rate cuts.

This month saw confirmation of the interest rate cut in the United States, a decision eagerly awaited by investors, which has driven the subsequent rise in the stock markets. 

But why is an interest rate cut usually good news for the stock market? There are several reasons, of which I would highlight two in particular: 

• First: Financial assets are valued, in most cases, by discounting future cash flows using a formula that is:    

Oh my goodness, what is that? Don’t worry, I’m not going to go into detail explaining all the elements that appear, but I would like to highlight what is in the denominator: the WACC (Weighted Average Cost of Capital). This is the rate at which cash flows are discounted and is closely correlated with official interest rates. Therefore, if these fall, the WACC is also likely to fall and, as a result, the value of the asset (EV) will increase. 

• Second: Lower interest rates reduce companies’ financial costs, which will have a direct impact on their income statements. 

But beware, not everything has to be positive. Every action has its consequences, and an excessive drop in interest rates can lead to bad investments and future crises.     

It therefore seems that the above factors—economic growth, corporate profits, abundant liquidity, and optimism about rate cuts—are the cause of the rise in the stock markets, but it is very important to analyze each of them, because they could be “the devil dressed as a being of light.” 

Risks and contradictions of lowering interest rates.

1. Does lowering interest rates make sense? When the central bank decides to lower interest rates, it does so to stimulate the economy in times of weakness. However, the current context is as follows:

1. Stocks at record highs.
2. Real estate prices at record highs.
3. Gold at record highs.
4. Money supply at record highs. 
5. Government debt at record highs.
6. Inflation above the central bank’s target.

Given this scenario, it is difficult to understand the need to lower interest rates. Or perhaps there is something we are not seeing?

2. Stagflation

A drop in interest rates accompanied by excessive liquidity injections could lead to stagflation, i.e., economic stagnation with high inflation. This is not a likely scenario, but we must remain alert to any signs in this direction. 

The dark blue line in the graph represents surveys of service companies regarding prices, and the light blue line represents surveys regarding employment. Prices are rising sharply while employment is weakening. 

Is this what the FED is observing? Surely, and its justification for lowering interest rates seems to be the fall in employment, even at the cost of accepting higher inflation…     

Source: Own elaboration, Bloomberg.

But is this really a technical decision by the central bank or interference by the Trump administration, which is interested in keeping rates low to help maintain the country’s deficit? 

Finally, there has been an unusual event in the US administration: a government shutdown, with all the implications that this entails. 

The start of fiscal year 2026 was scheduled for October 1, 2025, and before that date, Congress had to approve the budgets for the various agencies. However, a continuation agreement was not reached in time. 

The main causes of the dispute include:

• The level of federal spending (defense, social programs, etc.). 
• The continuation of certain health subsidies (e.g., tax credits under the Affordable Care Act) and their funding. 
• Disagreements over cuts or termination of foreign aid, as well as possible changes in fiscal policy. 
• Growing political polarization (Republicans vs. Democrats), which makes it difficult to obtain the 60 votes needed in the Senate to pass certain proposals. 

With the deadline passing without consensus, many agencies were left without available funds, which has had significant consequences: 

• An estimated 803,000 federal employees have been temporarily furloughed, in addition to hundreds of thousands more who continue to work without immediate pay. 
• According to analysts, each week of shutdown could cost between $7 billion and $15 billion to the U.S. GDP, depending on the duration and scope of the shutdown. 
• Key economic data, such as the monthly employment report, has been delayed due to the government shutdown. 
• Negotiations between Democrats and Republicans continue, with mutual accusations of unwillingness to compromise. The main point of contention remains the funding of health subsidies and budget cuts demanded by the more conservative Republican wing. 

Jesus said, “The truth will set you free,” and I’m not going to argue with him. In the world we live in, knowing the truth, or at least having an interest in knowing it, is essential for exercising good judgment and freedom. In the world of investing, it’s key, which is why we need to learn or at least put ourselves in the hands of those who know what they’re doing so they can help us. 

If we see investing as a means to get rich quickly, we are more likely to end up getting caught up in some scam, but if we invest so that our assets continue to cover our needs and those of our loved ones, then it is essential to discern what to do with them.   

[1] Mar de Aral: los desastres medioambientales de la Unión Soviética

• S&P 500: +2.03%.
• Nasdaq: +0.92%.
• Stoxx Europe: +0.96%.
• All Country World Index EUR: -0.36% (the dollar fell by 2.38%, the index in dollars rose by 2.52%).
• Global fixed-income index EUR: -0.80% (the dollar fell by 2.38%, the index in dollars rose by 0.35%).

Both equities and fixed income rose in general terms thanks to growing hopes of rate cuts by the Fed in September. On the other hand, a certain caution is perceived because valuations are at highs, above the historical average; structural risks persist such as the uncertainty generated by U.S. tariffs, high public debt, an upward trend in fiscal deficits that is reflected in the rise of the risk premium offered by the longest maturities of government debt, mixed economic data, and very stubborn inflation in returning to central banks’ 2% target.

But well, markets keep going up, don’t they? True, although I think it’s related to what I mentioned in last month’s analysis: the fear of a resurgence in inflation due to various circumstances is leading many investors to replace cash—which is losing value by the day—with assets that can preserve or even increase their value. Among these, gold stands out, as do shares of companies with solid balance sheets and real assets, and even bitcoin.

Historically, the correlation between gold and equities has been slightly negative. That is, when equities fall, gold tends to rise, and vice versa, as can be seen in this chart. This is because, in periods of crisis, investors tend to seek safe-haven assets, with gold being the most traditional and recognized of them.

Source: Bloomberg

However, this year—and especially after the market drop caused by Trump’s tariff announcements—the correlation between gold and equities has been positive. That is, both assets have risen at the same time. In the lower chart, which is the same as the previous one but focused on the current period, the red line marks the low that the market (represented by the orange and yellow lines) set after the tariff announcement. As has happened historically, at the moment of greatest uncertainty gold reacted to the upside. But interestingly, from that red line onward, both gold and equities have risen simultaneously. What happened?

Source: Bloomberg

If we add what is happening with long-term government bonds, we can better understand this situation. As I mentioned before, equities have performed well, driven by optimism about a possible rate cut by the Fed, fueled by weaker-than-expected employment data.

Upside-down world? Is bad data good data? Well, yes, because the weaker the data, the more arguments the Fed has to justify a rate cut at its next meeting in September—and happiness for shorter-term investors.

Do I like it? Not particularly. Although it can stimulate markets in the short term, I believe that in the long term it creates deeper distortions, especially in capital allocation and in the perception of risk.

This chart shows U.S. bond interest rates at different maturities (the famous yield curve). The brown line shows how the curve looked on 07/31/2025 and the green one on 08/31/2025.

Source: Bloomberg

As a consequence of the higher probability of rate cuts, the yields on shorter maturities have fallen. However, longer-term yields, such as 15- and 20-year, have fallen only very slightly or even risen, as is the case with 30-year bonds.

How is it possible that, with a higher likelihood of rate cuts, these yields fall so little or even rise?

The key is that the Fed controls very short-term interest rates, but long-term rates depend on supply and demand in the market—that is, on investor appetite. And what we are seeing is that such an appetite for long-term bonds is not present.

Why? This is one of the big questions. Investors seem to be worried about several factors: the growing trend in the fiscal deficit, the increase in public debt to finance that deficit, the crowding-out effect (which makes access to credit more difficult for the private sector due to higher rates), and the impact all this may have on inflation in the future.

The immediate question would be: isn’t inflation already close to 2%, which is the Fed’s target?

Apparently, yes. It seems to finally be under control. However, besides the fact that it has stayed above 2% since February 2021, the process of a growing fiscal deficit is an important factor that can continue to fuel inflation.

Before sharing my view, it is worth remembering that the official inflation figure is an aggregate average of goods and services that a group of experts considers representative of society. So far, so good. But since it is an average constructed by a group of people, who guarantees that the selected products truly reflect the consumption of the majority?

This table shows a series of common goods and services in the United States that people tend to consume in their day-to-day lives. As can be seen, their prices are well above that “desired” 2%.[1]

Source: BLS

With respect to food, the evolution of food prices has been higher than the overall index.

In the chart, you can see jumps in prices in 2009 and in 2020, coinciding with the crises of those years. What happened?

The Fed, with the goal of supporting the private sector, began to increase the money supply—that is, it printed money to buy assets deteriorated by the crisis and to purchase Treasury debt, thus allowing an increase in social spending.

But of course, printing too much money entails risks, and the most important—and dangerous—of them is inflation.

In the following chart, you can see how, starting in 2020, the money supply (M2) increased very strongly, with the intention of helping families and companies during the COVID-19 pandemic. However, the side effect was a rise in inflation to very high levels.

Source: Bloomberg

Subsequently, the Fed began to lower interest rates, which made it possible to control inflation, at least in the short term. However, if we look at the chart, the money supply—far from decreasing—has taken on new upward momentum.

Once the money supply is increased, reducing it becomes very difficult. It is the “drug” that generates the most addiction among politicians: more spending… and more votes?

We have already mentioned how Trump is pressuring Powell to lower rates, with the aim of reducing the government’s financial cost (that is, the cost of debt) and thus being able to finance the growing fiscal deficit more comfortably. This pressure represents an intrusion into an institution that, in theory, should be independent, namely the central bank. But the truth is that it stopped being so years ago. Today, the Fed is the largest buyer of U.S. debt. And to be able to acquire that debt, it needs to print money, which is a necessary—though not sufficient—condition for generating inflation.

The scheme of what is called deficit monetization is as follows:

• The Treasury spends more than it takes in → issues bonds.
• The central bank buys those bonds (or promises to buy them if necessary) → creates money supply to pay for them.
• More money supply → more bank credit available → higher money supply (greater liquidity in the system) → inflationary pressure.

For me, this is the big problem. The rise in government debt interest rates reflects that investors perceive high uncertainty about the future: slower growth and higher inflation

And this is not happening only in the United States; it is even more serious in other countries, as is the case of France. On Monday the 8th it faces a vote of confidence to obtain parliamentary backing for its fiscal program and to unblock the budget due to having a deficit of 5.8%, far from the 3% required by the EU; debt of 106% of GDP and rising; political uncertainty with an uptick in its risk premium of 0.80%; public spending of 57% of GDP; and weak growth.

With this clarification, the correlated rise of equities, gold and even bitcoin as alternatives to cash makes sense. Gold, by itself, is already a traditional substitute for liquidity: it has proven to maintain its value and to rise in times of uncertainty, because investors sell their banknotes, which are worth less and less, and buy gold, which is worth more and more.

Equities, for their part, represent companies with real assets that, if well managed, not only preserve their value but also increase it over time. That is why it is so important to understand well the businesses one invests in and to know the managers who lead them, to ensure they make the best use of those assets.

Investing, in my humble opinion, has become a search for shelter from political power.

As long as States have the common good as their objective and are governed by the principles of subsidiarity and solidarity, it is legitimate for them to obtain income through taxes to cover those needs. But one may ask: is that common good and those principles so great as to justify a gigantic state, financed through unlimited taxes and debt?

Investment offers us independence and freedom.

For more Market Reviews, click here.

[1] The CPI column indicates annual inflation in the corresponding periods calculated using the CPI index. 

• S&P 500: +4.96%.
• Nasdaq: +6.27%.
• Stoxx Europe: -1.33%.
• All Country World Index EUR: +1.14% (the dollar fell 3%, so in dollar terms the rise is 4.14%).
• Global Fixed Income Index EUR: -1.46% (the dollar fell 3%, so in dollar terms the gain is 1.54%).

So what has happened to cause this distortion?

First of all, from the beginning of the year until the end of May, the S&P had risen by 0.51% and the European index by 8%, therefore, what has happened is that the American and European markets have become more balanced. From the beginning of the year to the end of June, the S&P has risen by 5.50% and the European index by 6.65%, while emerging markets have risen by 15%.[1]

Great, but why?

– United States: Optimism in view of the Trump administration’s negotiations with China regarding rare earths[2], of which Beijing controls 70%, and good inflation data despite the fear of tariffs, which, at least so far, do not seem to have had any effect.      

– Europe: Pessimism ahead of tariff negotiations between the European Union and the United States.

– Emerging markets: A lower dollar benefits them, along with less trade tension with the United States.

It should be added that the best-performing sectors in June were technology and artificial intelligence, with greater weighting in the US and emerging market indices than in the European indices. To comment at a later date on Europe’s capacity for technological innovation.

Therefore, there seems to be a sectoral and geographical rotation from sectors that had performed well, such as energy and financials (with greater weight in European Indexes) to sectors that had performed worse. All this thanks to what is being called in the financial markets, TACO (Trump Always Chickens Out[3]), i.e., he announces with great fanfare the aggressive tariffs and then backs out, out of cowardice? to negotiate? Who knows.

With respect to fixed income, excluding the dollar effect, all segments were up slightly. The downward revision of first quarter GDP and the cooling housing market fueled bets of two rate cuts by the Fed this year. Rates fall, prices rise.

With respect to fixed income, excluding the dollar effect, all segments rose slightly. The downward revision of first quarter GDP and the cooling housing market fueled bets for two rate cuts by the Fed this year. Rates fall, prices rise.         

There are several aspects that are important to highlight from June.

• Why did the market not suffer from the US attack on Iran or the retaliatory missile launch by a US military base in Qatar?

The truth is that the market’s reaction has been surprising. One of the risks perceived in the face of this tension is the rise in oil prices. A sharp rise in oil prices has a significant impact on global inflation. As we can see in this chart of the oil price since the beginning of June, there is a sharp rise on June 19 of 22% even before the US attack on the Iranian nuclear bases. But immediately afterwards, it plummets by almost 15% and stabilizes.

Oil prices fall even with the risk of closing the Strait of Hormuz, which Iran controls and through which 20% of the world’s oil production passes, and which is distributed around the world, as can be seen in this image.

Source: Us Energy Information Administration.

I believe that the reasons why the price of oil has stabilized are i) the low probability of closing the Strait of Hormuz in view of the possible unrest of its “partners” China and Russia, ii) low world demand and iii) accumulation of inventory prior to this crisis.  

All this unlike what happened in the 1973-74 oil crisis, which did provoke a strong crisis. The difference lies mainly in the fact that there are now more energy sources and American energy independence.

• The dollar fell 3% in June.

Could this be the beginning of a change in the world’s reserve currency? I do not think so, maybe later, but it will not be in the short term. There are still a lot of dollar operations and the United States today has the main characteristics to have a strong currency.

Borrowing a list from Macquarie… Victor Shvets, a global currency and its issuer[4]:

It is still the world’s reserve, but with some deterioration provoked again by the politicians of the moment. 

1. It must be convertible and have no capital controls. (The euro and the yen also meet these requirements, but the yuan does not).
2. There should be a current account deficit to deposit sufficient funds in foreign hands. That excludes all but the dollar.
3. It needs a deep and liquid pool of assets; at this time only the United States qualifies.
4. It needs secure, easy-to-use settlement systems; SWIFT is the basis of the dollar’s hegemony, “with no one else even coming close.”
5. It must have strong and reliable internal institutional pillars, with consistent rules-based policies. This is where the US is failing; for all its shortcomings, the EU is more of a rules-based order.
6. It must respect global norms and rules, another area where the United States is weakening.
7. Have stronger than average economic growth: an advantage for the U.S. over the EU and Japan.

Clause 899 of the “One Big Beautiful Bill”, nicknamed “retaliatory tax” (what a name for it) gives the Secretary of the Treasury the right to raise federal taxes (withholding taxes on dividends, interest and other payments) on taxpayers linked to “offending countries” that impose “discriminatory” taxes on the United States. The immediate consequence is a decrease in investment in U.S. assets and, therefore, a fall of the dollar.

This chart shows how the dollar measured against a basket of currencies of the rest of the world has fallen sharply this year.

Was this Trump’s intention to balance the trade deficit? For me it is not the most appropriate, the best thing is to have better quality products and they will be demanded by the rest of the world. I know it is not that simple, but I think that trying to lower the dollar in this way generates internal inflation whose affected are the American citizens themselves.

It has important implications for investment because if you invest in U.S. assets you have two sources of return, that of the asset itself and that of the dollar. For example, if you buy an American company at $100 and the profitability this year is 12%, in principle you will be happy, but as soon as you convert it to euros, the fall of the dollar makes the total profitability -2%, then we are not so happy, are we? Be careful with this.

The volatility of the dollar against the euro is not usually so high, this year it is so because of the uncertainty generated by the Trump administration.

• The inflation forecast as the source of the Fed’s decision whether or not to lower rates.

Donald Trump is pressuring Jerome Powell to lower rates so that the financial cost at the federal level does not skyrocket. As I said before, the financial cost of debt is higher than defense spending. For example, I leave you a message that Trump wrote in his X account to Powell.

This image shows the different interest rates that these countries have. The United States appears in the 35th position. Trump writes in the upper right margin that the United States should be among the first and throughout the image he says textually:

As usual, you are late. “Too late! You have cost America a fortune – and continue to do so – You should lower the rate, and a lot! Hundreds of billions of dollars lost. no inflation!

Regardless of the forms, he justifies his push by the more stable inflation at levels of no concern and how the tariffs have not caused inflation to rise. It is true that the May figure was 2.4% year-on-year vs an expected 2.4% but a slightly more detailed reading as I show in this image from the analysis firm Strategas,[5] the index that captures the most common expenses of a normal person is higher than their wages.

The Fed is not entirely comfortable in lowering interest rates because it does not know what decisions Trump will make on tariffs and how it will impact inflation. Is it prudent? Most likely but time will tell.

The uncertainty that generates the future we cannot control or perhaps it is better that way because it sharpens our wits. This ingenuity together with experience and analysis are necessary to minimize that uncertainty. In addition, the actions of many politicians increase this uncertainty, making forecasting more difficult. Therefore, a good analysis of the assets in which we invest is necessary to avoid the negative effects of unfortunate decisions. As Don Quixote de la Mancha used to say, “The enchanters may take away my fortune, but the effort and courage will be impossible for them.”

[1] MSCI Emerging Markets.

[2] They relate to 17 key metallic chemical elements for the automotive, industrial, defense, petroleum, and healthcare industries.

[3] Coined by journalist Robert Armstrong. In Spanish, “Trump always chickens out”.

[4] John Authers (Bloomberg)

[5] He constructs an index that he calls common man’s inflation, i.e., it takes into account food, energy, housing, clothing, utilities and insurance.

• S&P 500: -1.42%.
• Nasdaq: -2.76%.
• Stoxx Europe: +3.27%.
• All Country World Index EUR: -2.41%.
• Global Fixed Income Index EUR: +1.39%.

U.S. indices are falling and European indices are rising? These investors are crazy. What’s going on? Market volatility has increased due to concerns about inflation, Fed reversal and economic growth risks.

Since September 2024, U.S. inflation has risen from 2.4% to 3% in January 2025, creating uncertainty about the Fed’s path of interest rate policy. Since September 2024, inflation in the United States has risen from 2.4% to 3% in January 2025, creating uncertainty about the Fed’s interest rate policy path. The next data, to be released on March 12, will be crucial in defining market expectations.

In addition, the Trump administration’s recent tariff policy could add inflationary pressures. An increase in tariffs would make imported products more expensive, which in turn, would impact the general price level. If inflation continues to rise, the Fed could halt the cycle of interest rate cuts, a significant blow to investors who were expecting a looser monetary policy.

This scenario revives a concern that no one wants to face: stagflation, an environment characterized by low or no economic growth coupled with high inflation. For central banks, stagflation represents a complex challenge, as raising interest rates to contain inflation further slows growth, while lowering them to stimulate the economy could exacerbate inflationary pressures.

If this scenario were to materialize (although this is not the current situation), it is likely that the Fed would choose to cut interest rates. Why?

1. Structural fiscal deficit in the US.

The Trump administration has pushed through tax cuts without commensurate spending cuts, resulting in a persistent fiscal deficit.

The graph below shows the evolution of federal revenues and expenditures as a percentage of GDP, as well as the fiscal deficit in gray. Although the economy is not yet facing a severe crisis, the deficit remains high. If GDP were to contract due to a recession, the fiscal deficit could increase significantly, making sustainable fiscal policy even more difficult.

Source: CBO and own elaboration.

If interest rates rise, government spending on interest payments will also increase. Currently, interest spending on U.S. debt already exceeds defense spending, making a high interest rate environment a significant problem for public finances. For this reason, the U.S. government is not well served by a high interest rate environment. In this context, it is not surprising that President Trump has openly criticized the chairman of the Federal Reserve, accusing him of failing to adequately manage inflation.

2. Do debt-heavy governments prefer inflation?

You probably already know this, but let’s put the question bluntly: do governments care about inflation? Here’s a hint: politicians like to spend… and spend money that is not theirs. When government spending exceeds its revenues, the most common solution is to resort to debt issuance. But, if a government has a high level of indebtedness, would it benefit from high inflation?

Let’s look at a practical example:

• Let’s imagine that I borrow €20,000 from a friend and commit to pay it back in one year.
• In that year, inflation rises by 10%, which means that the prices of goods have increased in that proportion.
• In real terms, the money has lost value and the same €20,000 can now buy fewer goods.

If with that money I bought an asset that appreciated with inflation (10%), at the end of the year I can sell it for €22,000. When I return the €20,000 to my friend, in terms of purchasing power, I am returning less than what he lent me.

• Who has benefited? Me, because the money I owe has lost value and my asset has increased in price.
• Who has been harmed? My friend, because he gets back the same nominal amount, but with less purchasing power.

The same principle applies to governments: when there is inflation, public debt is reduced in real terms, which eases the financial burden. Therefore, governments with high deficits and large financing needs tend to benefit from inflation. The big question is: if the government benefits, who is the loser? There I leave it, as Juan Ramón Jiménez would say: “No la toques más, que así es la rosa” (Don’t touch it anymore, that’s the way the rose is).

Despite the uncertainty surrounding growth and inflation, European markets have outperformed U.S. markets in recent weeks. In our view, this responds to a process of capital rotation, where investors are reducing their exposure to large growth technology companies in the US and directing their capital towards more defensive and value stocks, a segment in which Europe is better represented.

What factors are behind the decline of U.S. mega-companies?

High valuations

• As we have commented on other occasions, many of these companies are trading at demanding multiples, reflecting optimistic growth scenarios.

Increased risk aversion

• In uncertain environments, investors tend to prioritize prudence, which implies reducing positions in more volatile assets, such as growth stocks.

Inflation and interest rates

• If inflation picks up again, the likelihood of the Fed raising or keeping interest rates at elevated levels is higher.

• A high interest rate environment, without solid growth to justify it, has a negative impact on growth companies.

But then, should we exit the market in fear of lower growth, inflation, etc.? It does not have to, in this chart below you can see how February’s falls are caused by the famous Magnificent 7, but if we exclude these 7 from the index, it even rises by 0.39%. 

Source: Bloomberg

In this context, rather than a market exit signal, what we are seeing is an adjustment in investor preferences, with a shift towards neglected sectors and assets that are attractive in terms of valuation.

There is a universe of opportunities beyond these seven companies, full of equally attractive companies that are, however, being ignored by a large part of the market. This omission is not necessarily due to a lack of managerial ability, but to the influence of a cognitive bias known as “herd bias”.

This phenomenon leads many investors to concentrate their positions in the same companies, not only because of the dominant market trend, but also because of a logic of professional protection: in case these investments turn out to be unfavorable, the responsibility is diluted among the majority, reducing the risk of labor retaliation. Consequently, the search for opportunities outside the market consensus is relegated, despite the potential that these less visible companies can offer.

Past market reviews: click here.

• S&P 500: +5.73%
• Nasdaq: +5.23%
• Stoxx Europe: +0.96%
• All Country World Index EUR: +6.76%
• Global Fixed Income Index EUR: +3.14%

Trump’s election as President of the United States was a major boost for the U.S. stock market, though it didn’t have the same impact on other indices. Could potential new tariffs have something to do with this? Another “Trump effect” was the sharp rise in Bitcoin, which increased by 39% in November and by 123% over the year. Why is this happening? How can a digital asset, something intangible that cannot be touched, rise so dramatically?

For some, Bitcoin is the new money that will replace what we know today. For others, it’s a bubble similar to the tulip mania in the 17th century Netherlands, where a cultivated variety of tulip was sold for 12 acres (about 48,000 square meters) of buildable land. Soon after, a severe crisis hit the country because people had gone into debt to invest in this plant.[1]

To determine whether this is absurd or not, we must first understand what money is, its origin, and evolution. I promise not to bore you.

In the early days of transactions, there was no money; exchanges were conducted through direct trade, known as bartering. Families produced what they needed to survive and, if they had surpluses, exchanged them for other necessities such as food, clothing, or goods. For example, if a farmer had wheat and needed shoes, he would find a shoemaker to trade wheat for shoes. However, this type of exchange was inefficient for several reasons, as Murray Rothbard explains in his book A History of Economic Thought[2]:

• Double coincidence of wants: It’s difficult for two people to coincide in time and in their needs.
• Indivisibility of goods: If I want to exchange a chicken for a cow and the cow is worth more, what do I do? Cut the cow in half?
• Impossibility of storing value: If what I have to exchange is perishable food and it takes too long to trade, it could spoil and lose its value.

God gives man the tools of intelligence and willpower to use nature’s resources to meet his needs. Spontaneously and evolutionarily, man begins to think about how to solve these problems, and thus the idea of money emerges. How? Something was needed that met a series of characteristics to solve the aforementioned problems:

• Divisibility: It must allow transactions of varying values, whether for a cow or a chicken.
• Durability: It should last over time without losing its properties.
• Portability: It must be easy to transport.
• Relative scarcity: If the production of this “money” were discretionary and unlimited, the desire to produce it would also be unlimited, likely resulting in a loss of value. This is important because, to some extent, it happens today.
• Acceptability: It should be a generally accepted good.

This was a significant leap forward in transactions, solving numerous problems and making trade much more efficient, allowing goods to reach more people.

But what could this “something” be that met all these criteria? Various goods were tried, such as wheat, barley, shells, salt (hence the word salary), until the idea of using silver and/or gold emerged, materials that met all these characteristics. Eventually, gold replaced silver because it was deemed more valuable.

Gold became the generally accepted money, leading to indirect exchange. If someone sold a cow and the other party did not have a homogeneous good to trade, they would give gold equivalent to the cow’s value. Since gold was valued by everyone and didn’t lose value—because no one could produce it at will—people kept it until they needed to buy another good (chickens, shoes, wheat, etc.).

If someone had large amounts of gold, it wasn’t easy to transport it without the risk of loss or theft. Thus, entities began to store gold and, in exchange for custody, issued certificates that served as a means of payment, certifying the ownership of gold in the respective entity. Human ingenuity continued and continues to evolve according to needs.

This system worked well, but human creativity applies to both good and bad ends, even with the best intentions. European monarchies financed their expenses, typically wars, through taxes that needed parliamentary approval, which was a limitation. So they sought alternative ways to spend more. How? With gold, they could only spend what they had, but by issuing more certificates than the gold reserves, they could have more money. Would everyone come to withdraw their gold from the bank? It was unlikely, opening an interesting avenue for financing these monarchies (a practice that, to some extent, continues today).

Who was the first? The Bank of England, which was private, “temporarily” suspended convertibility[3] between 1797 and 1821 to finance the Napoleonic wars. Essentially, they could issue money without limit. What was the risk? Issuing more than was needed could lead to inflation, with the circulating money exceeding the existing gold reserves (a scenario that persists to some degree today). Other countries followed, such as France, Germany, and the United States. However, there was still a connection to gold, which imposed certain limits. If a country overspent using this method, others would foresee future problems and stop financing it. Even the general public, and this is important for understanding Bitcoin later, would sell the currency and buy something else to maintain value, like art or property.

Even in ancient times, the gold or silver content of coins was reduced and replaced with cheaper alloys to create more money. However, the end result was price increases, or inflation. Jesuit Juan de Mariana denounced this practice, stating, “Reducing the metal content in coins is an unworthy fraud by an honorable prince, as it robs subjects under the guise of justice.”[4]

In 1913, the Federal Reserve, or FED, was established as the central bank of the United States to serve as a lender of last resort during banking crises. If a bank faced a liquidity crisis, it would turn to the central bank for funding. The FED is a public-private “independent” consortium from the state (I use quotes because no one really believes that). It is the monetary authority of the country, responsible for increasing or decreasing the money supply (printing money or not) as needed.

Until 1933, the gold standard—a monetary system in which currency was directly linked to a fixed amount of gold—was in place. In 1933, Roosevelt suspended gold convertibility due to the Great Depression, even confiscating gold from citizens and prohibiting its possession—in the UNITED STATES! In 1971, Nixon abandoned the gold standard, giving rise to what we now know as fiat money. What is this? It’s money with no intrinsic value (it’s just paper), whose value depends on people’s trust and acceptance as a means of exchange, not backed by any tangible good, similar to Bitcoin.

This sets the stage for printing unlimited money at the discretion of current politicians. The risk? Creating inflation, or in other words, the depreciation of currency.

To give you an idea of the dollar’s depreciation since the end of the gold standard, when unlimited printing became possible, this chart shows its evolution: a 98% loss in value relative to gold. And this is the dollar, the world’s reserve currency.

Source: Bloomberg

The insatiable state spending has led to a 98% loss of purchasing power. At this point, why do we keep money in our accounts if inflation steadily erodes purchasing power? For one fundamental reason: the state requires us to pay taxes in the national currency, making it legal tender.

Do you now understand why Bitcoin has become famous? Bitcoin was born from the desire for a medium that retains its value and, over time, becomes a generally accepted means of payment. It’s structured in a completely decentralized manner, impossible to manipulate (at least so far, despite attempts), thanks to the blockchain infrastructure, where all users validate transactions in some way. Additionally, the supply is limited to 21 million, and if there’s demand, it will retain value. In other words, it has two characteristics many value when considering a means of payment: that it doesn’t lose value when needed and can be exchanged for goods. No one can produce more at will, and the supply is limited.

But will Bitcoin become the generally accepted currency? Honestly, I don’t know. It has just been born; gold took a long time to be recognized as money. Moreover, its future is uncertain for various reasons, which explains its volatility. This may be the biggest hurdle to hoarding bitcoins.

Therefore, this is not an investment recommendation; I simply wanted to provide a personal explanation of why something intangible attracts so much interest (I am referring to Bitcoin and not to other cryptocurrencies with which I am less familiar). I do not think it is comparable to the tulip bubble for the reasons mentioned; I believe it has much more substance, but only time will tell if it truly becomes a generally accepted means of payment.

Alexandre Dumas once said, “Do not value money either more or less than it is worth, because it is a good servant but a bad master.” Money is a means, not an end in itself. It has enabled greater efficiency in commercial exchanges, facilitating access to certain goods for a larger number of people, including essential items. If we treat money as an end, it would be akin to the rich young man who, although he obeyed the commandments, asked Jesus what he needed to do to attain eternal life. Jesus replied that he should sell everything he had and give it to the poor, and the young man left sorrowful because he had great wealth[5].

I have the impression that Bitcoin is currently being purchased as an end in itself, which explains the high speculation. However, we should not view this as irrational. In my opinion, there is a more important underlying reason: the search for an asset that retains its value against inflation. This could be gold, artwork, real estate, and why not, Bitcoin. It is not surprising that in countries with high inflation, such as Nigeria or Argentina, Bitcoin is purchased the most.

[1] La manía del tulipán: el primer crack bursátil

[2] HISTORIA DEL PENSAMIENTO ECONÓMICO – 3ª EDICIÓN (CLÁSICOS DE LA LIBERTAD) : Rothbard, Murray Newton: Amazon.es: Libros

[3] Se puede emitir certificados sin respaldo del oro.

[4] Tratado y discurso sobre la moneda de vellón: Mariana, Juan de

[5] El joven rico (Mc 10,17-30)

The Chinese market rebounded after falling 47% from June’s highs due to problems with the real estate sector and this year has begun to improve its growth, but with doubts because the Chinese government’s debt-based support for this sector has left a leverage of 300% of GDP, a very high level that will take time to decrease to the detriment of growth.

The main reason for the falls in equities and fixed income is disillusionment on the part of investors that a rate cut is becoming less and less likely. Together with comments from members of the FED (US Central Bank) that there is no urgency to lower rates, in January, the market was discounting a 1.70% drop in 2024 and today it is only 0.40% and some are even discounting increases.  

Why are rates rising? Inflation has picked up and it is very difficult for it to return to a level of 2%, which is the central banks’ target. The Fed’s Beige Book, which is something like the minutes of the Fed’s meeting in which the most important points are collected, highlighted an expanding economy with companies that were finding it increasingly difficult to pass on to the end customer the increase in costs and therefore negatively affecting margins. The reading is of a central bank that is not thinking of lowering rates any time soon.

The evolution of prices is captured in an index called CPI which is a benchmark of what the cost of living is at different stages. The risk of this type of index is to believe that a 3% increase in the CPI means that the prices of all goods and services will increase by 3%, a mathematical marvel used by politicians to show their good management. But if this is not the case, who determines that I consume one product more than another or that I have the same habits as the rest of the people? Since ancient times, people have tried to put us all in the same bag in order to “manipulate” us, that is to say, to manage us better. For example, a hauler who has to fill his tank often does not have the same expenses as another person who works at home, but contracts that have some kind of adjustment to inflation (wages, rents, etc.) are made with the same number. It is a reference, but nothing more, i.e., he is a good servant, but a bad boss like money.

On the other hand, if I show you this graph, you will ask me: Who is the “mastermind” that calculates this index?

Cumulative inflation over the last 10 years in the US was 31% but subway prices went up 39% and Mcdonald’s prices went up 100%. Ask someone who has to eat every day at Mcdonald’s and who has had their salary raised year on year since 2014 adjusting for inflation, would they be happy?  I recognize that this is a very simplistic and a bit forced example, but it does not only happen with food but also with other products and services that are more or less common.

In this image, you can see the evolution of prices since 2000 in the United States in several categories.

The price index has risen 74% since 2000, similar to housing and food, but there are essential expenses in families that have risen much more, such as medical services above 100% or university tuition above 150%.

Therefore, if we have idle money and we do not want it to lose value and, very importantly, it is not going to be needed in the short term, the most prudent thing to do, and I mean the most prudent thing to do, is to invest it in tangible goods that we believe will increase in price above inflation levels. For example, if we had $100,000 that we were not going to need in the short term, we could do two things:

1) Leave it under the mattress because I don’t trust the stock market or “speculators”. At the end of the period, we would have the same $100,000 and prices have risen 74%. If in 2000 I could have bought a house for $100,000, in 2024 I could not because it would be worth $174,000. He had lost real money due to the effect of inflation.    

2) Invest it in an index such as the S&P500 (500 most representative companies in the United States) and in the period it would have risen, including dividends, by 440.94%. That is to say, today I would have 540,000 €. Simply by investing in an index that I have been given, I would have covered the purchase of the house, and the rest I would have an equity of (540,000 $ – 174,000 $) 366,000 €.  I could buy two more houses.

This is why it is so important to take inflation into account. One of the alternatives to avoid the effect of inflation is to invest in companies because they produce tangible things, have property, etc. They indirectly protect, but another alternative is to have gold.

Today gold is at a maximum, why?

1) Purchases by central banks as China has been doing lately. A central bank buys gold when what they print is banknotes, how strange, can it be that they do not trust their paper money so much? This happens all over the world, therefore, they give us paper with a man’s face printed on it telling us that it has value, but a value that we have to trust and that they give him so that we can pay taxes with those bills.

I ask myself a question, if I must have liquidity for a long time without investing, which do I prefer to have banknotes or gold? The second point can help us.   

2) Perception of possible inflation spikes in the future. Since I do not want my money to devalue, I prefer to have something that will maintain its value over time, and one alternative is gold. Let’s imagine that we live in the United States and my currency is the dollar, therefore, as the dollar is the world’s reserve currency and I live in a country with legal security, market freedom, and an army that allows us to protect and defend ourselves, the dollar will be a safe asset that will hardly lose value. Well, don’t be so sure, look at this graph. It represents the value of an ounce of gold in dollars from 1920 to 2024.

One ounce of gold was worth $20.58 in 1920. Today it is worth $2,321. The dollar has lost 99% of its value measured in gold. If we had converted our dollars into gold and kept it, we would have no purchasing power.

Let’s take the example of the house. Suppose that in 1920 a house was worth $20,000, so in ounces of gold it was worth approximately 972 ounces of gold. Instead of buying the house, I keep that gold. Along comes 2024 and my grandchildren turn to the gold I had saved for them to buy a house. According to US Inflation Calculator[1] data, $20,000 in 1920 would be $312,332 today, but my grandchildren have 972 ounces that at today’s price (early May 2024) are worth $2,304,000 (972*2,371). If that $20,000 is kept under a mattress, in 2024 we would have $20,000, if we invest it in something that at least hedges me against inflation, I would have $312,332 but if I buy gold and keep it, I would have $2,304,000.   

Curiously, this graph begins when the FED was created. Was the FED created to solve problems in the financial system? Or to subtract income from the population via inflation for its own purposes?

Inflation is an unspoken tax and the battle begins with investing.

You can access the previous month’s market commentary here.

[1] Inflation Calculator | Find US Dollar’s Value From 1913-2024 (usinflationcalculator.com)

– MSCI Emerging Markets +4.8%.

– Stoxx 600 Europe: 1.84%.

– Bloomberg Global Aggregate (global fixed income index): -0,88%

Why is this?

It must be that human beings are naturally optimistic or have a free downside insurance called a central bank. By this, I do not mean that the market should fall, but an economy with a debt growth above economic growth is not healthy and therefore, at least we must be cautious. To give an example, the United States has grown by 53% in the last decade and its debt by 87%.

Equities are no longer focused on whether rates are going to fall or not, at least not in the short term. We believe the fundamental reason is the strength of the economy, especially in the US thanks to the latest manufacturing and services, employment, and consumer surveys. The central bank seems to have been able to contain inflation by raising rates and will therefore lower them sooner or later. In addition, liquidity in the financial system remains abundant and we have already seen that when there are problems, the central bank comes to the rescue.

The downside is what the Anglo-Saxons call “moral hazard” or “moral risk” (it refers to a situation where a person has less incentive to act with caution because he knows that he will be protected from negative consequences, he no longer assumes the full risk of his actions, so he becomes more prone to take risky decisions). In old English, it means, I take more risk than I should because I know that if I am wrong, the central bank will bail me out.

Fixed income fell because of rising yields due to the inflation rally. Historically, fixed income is less volatile than equities and reads between the lines better.

Debt, deficits, and inflation.

A few decades ago, some countries ran deficits and others ran surpluses, the latter financing the former. Who were the former? Developed countries whose currencies were considered strong, including the United States. The United States can get into debt because its currency is a world reserve and therefore will be bought (financed) as long as this strength is maintained. Today, other countries have already entered into a deficit, taking into account the fact that rates are very low, and not only developed countries but also emerging countries.

What is the limit to all this? For countries whose currency is valued worldwide (dollar and euro, for example) the confidence in these countries, the rest, hyperinflation if they continue on this path.

This tool in the hands of politicians is very dangerous because there is a perverse incentive to spend to win the elections and since their position is not perpetual, whoever comes after them will solve the situation. So, is it being squandered? If debt is growing above economic growth, there is reasonable doubt. The problem is that, if the debt is not prepaid with the revenues generated, other alternatives will be sought, raising taxes? As Benjamin Franklin said, “There are only two things certain, death and taxes”.

The problem with excessive public spending (if you can call it that) is that this money competes with the private sector in the purchase of goods and services and therefore either crowds it out (crowding out effect) or pushes prices upwards putting pressure on inflation.

My conclusion would be that inflation is not entirely under control, although it has moderated a lot. I believe that we should not give up the battle and continue to be prudent.

You can access the previous month’s market commentary here.

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