#210: An Amazing Year for Equities

S2N Spotlight

Today’s letter will focus on the S&P 500’s performance last year, and tomorrow I will write about where I think it is heading. Think of today like going for an MRI instead of a standard X-ray.

We start with the headline performance number, where you can see last year in red. 2024 performance relative to 100 years of data was well above average and close to being amongst the best years in history.

On a risk-adjusted basis, last year was a very strong year, well above its average, but giving back some of its outperformance towards the end of the year. It seems Santa isn’t generous every year, or perhaps his reindeer were stuck in traffic with Trump’s negotiating team for Greenland.

The next chart was introduced yesterday as a subtle variation on the Sharpe Ratio, as we only focus on the max drawdown as the risk component. Today we look at 2024 in relation to the previous 25 years.

Finally, we look at a snail trail of 1-year rolling returns versus 1-year volatility for the past 5 years. I have marked last year with red text to make it easier to identify. I have also circled where most of the returns for last year lie, in the upper left quadrant, the best position. This helps highlight the exceptional risk-adjusted return for the S&P 500 last year.

S2N Observations

Let me serve a small aperitif to help digest the heavy stuff to follow.

Thanks to a bull market in financial and housing markets, we have the lowest debt-to-asset ratio in 50 years for US households.

If there is one way to get Trump’s blood pressure raised, it is to talk about the US trade deficit. The biggest culprit is China’s enormous trade surplus. China enjoyed a record export year with only a small increase in imports helping it reach $1 trillion for the first time. As you can see in the second chart, the US is the biggest contributor to the surplus for China.

The world of global macro investing is about to get exponentially more complex as tariffs enable the trade wars to get more explosive. Side note: The new administration has chosen a 42-year-old youngster who did his PhD 10 years ago on the benefits of tariffs to head the Council of Economic Advisors. Does calling Stephen Miran a youngster make me old at 53?

I am not a tariff guy, but if there is one genius component within Trump’s tariff strategy, it is how it provides the US with so much more negotiating power. Trump’s “Art of the Deal” wasn’t a bestseller for nothing.

This week I learned something new. I always thought gold never produced a yield, perhaps one of its few drawbacks. Well, that is not entirely true.

The gold lease rate (GLR) is the compensation the lender of gold receives for entering a Gold lease. Contrary to popular opinion, gold bullion may be lent and borrowed, just like any other asset or currency. Therefore, gold may have a yield and may bear interest. At the end of the lease, the lender is repaid the gold + accrued interest. A gold lease accrues interest monthly. From the perspective of an investor, the total return is a combination of the percentage change (+/-) in the gold price over the term + the interest accrued from the lease.

The current rates for 1-year term = 3.5%, 2-year = 4.0%, and 3-year = 4.5%.

This is a great segue to something related I wanted to share; if you do not know much about DeFi, this might be lost on you, but the universal principle of greed is understood by most. Last night a friend of mine shared a story about the wild west of DeFi yield farming that took my breath away. It is a complex story that I don’t fully understand myself, and I don’t have all the facts. It goes something like this.

A French company well known in blockchain with backing from some major investors launches a stablecoin—Morpho. $1 is meant to be backed with an equivalent asset. It is offering an annual yield of 60% per annum; you would think most people would realise that you only receive that kind of interest if there is a high probability you will never see your money again. Then out of the blue it turns out that the so-called Treasury bill backing the peg is actually a zero-coupon bond that has a 4-year maturity, so there is no way to exit without taking a serious haircut and its actual value is 0.87 cents. So brazen were the promoters that the protocols peg (oracle) was hard coded as 1:1. Once word got out, the protocol was updated with a new oracle valuing the peg at 1 : 0.87 cents, with hundreds of millions of dollars wiped out with the click of a button.

There are many more of these horror stories to come. Scams happen a plenty under the nose of regulators. In the unregulated wild west world of DeFi, scams are more common than my visits to the bathroom at night.