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#228: Napoleon of Protection

#228: Napoleon of Protection

micksonmatch
February 07, 2025

We are experiencing a sharp spike in subscriber growth, so welcome onboard to all our new subscribers. I hope to write some more in-depth welcomes over the coming days to provide some guidelines on what to expect over the next few months; just know that I appreciate every single one of my subscribers. You are family.

“The world is big, but industries are small. After a few years, everyone comes to know the quality of your work. Reputation matters.” James Cleary.

S2N Spotlight

I thought it might be useful to look at some of the main asset classes and their rolling year-on-year performance along with their average return. I believe it gives a good perspective that is not often shown.

We start with the S&P 500. Current year-on-year is 19%, the average annual return is 9.38%.

We now look at the US Treasury Total Return Index (bonds). The current 3.29% is below the mean of 4.52%.

We now look at the US dollar. For all the talk of how strong the US dollar is, which it is at the moment 3.39%, it only has an average return of 0.21% over the last 50 years.

We now look at Gold. It is having a banner year of 39% versus a mean of 5.48%.

I am going to dive a little into golds performance. I have stacked the yearly returns into a histogram for years and performance. I think it is a cool visual, allowing you to see the years that are the star performers or the weak performers and everything inbetween.

I want to close out this spotlight with a look at how the US equity markets have really performed against gold and inflation. As you can see, the S&P 500 in gold-adjusted returns has come nowhere close to its 2000 highs. The S&P 500 inflation adjusted has made new highs but nothing like the unadjusted nominal S&P 500.

S2N Observations

I turn off the minute I hear another story about tarrifs. However, I think this one you might find interesting.

During the Trump campaign, he often quoted William McKinley, who was known as the “Tariff Man” or “Napoleon of Protection” due to his strong support for protective tariffs in American trade policy. I didn’t even know he was the President of the United States from 1897 to 1901. I also didn’t know he was assassinated. Tarrifs sure get people worked up, that is for sure.

This is the interesting part: the McKinley Tariff of 1890 came into being when he was the Chairman of the House Ways and Means Committee. McKinley sponsored this act, which raised average tariff rates to nearly 50% on imported goods. This was one of the highest tariff rates in US history.

Now this is the part Trump doesn’t quote. Back in those days, there was no such thing as income tax, so this was one of the key methods for the government to bring in income. Here is another thing Trump doesn’t quote. Through the success of the tarrifs, the US was “suffering” from the largest government surplus on record. Yes sufferring. There was more money coming into the government’s coffers than they knew what to do with. So in fact, McKinley actually changed his tune while in office and started cutting tariffs as the government was making too much money.

If you look at the Reverse Repo balances, we are close to zero as intended. From highs of $2.4 trillion, we have come down to $79 billion as the excess liquidity from the money markets normalises.

Bank Reserves have not come down and are currently far too stimulatory and therefore potentially inflationary.

I came across a fascinating article saying that there is currently a bit of a crisis with the Bank of England getting gold bullion to its owners who are wanting to move it to the US before tarrifs kick in. There is apparently a 5% discount being applied to gold to get access to it—pronto. By the way, its a complicated process; you cannot just ship bars; you actually have to smelt them into ounces for delivery. Something along those lines.

I quickly whipped up a gold futures term structure to see how the price of gold for future delivery are trading. Quite steeply, as I would have expected.

I have been wondering for some time what the magnificant 7’s performance looks like. It really looks like a two-horse race between Tesla and Nvidia. I added the S&P 500 (SPY) just for comparative purposes.

A very famous reader of this newsletter is bullish the Loonie, thinking it will bounce off this triple bottom. I think there is no chance support will hold.

While writing, I see the new Indian Reserve Bank chief has just cut rates for the first time since 2020. You will see in the screener alerts below that the Indian rupee made a new all-time low yesterday. It has bounced slightly on the news.