MARKET WATCH

Investors are beginning to ask if the market is shifting into a new phase. While American indexes produced superior returns these past few years, they are lagging in 2025. The comparison is especially pronounced when compared to Emerging Markets - but specifically China. Chinese markets, due to a lag from their stringent COVID lockdowns and real estate bubble bursting, have disappointed prior to this year. However, with China’s economy now improving, albeit slowly, investors have taken notice. Should this trend continue, given the size and scope of China’s economy, it could have considerable implications on investment flows moving forward. See below for more on the dynamics at play between China and the U.S.

The other big surprise is gold’s continued strength. Barely two months into the year and the yellow metal has risen over 8%, and Canadian gold stocks have surged 12%! For perspective, each are respectively 48% and 80% higher over the last 12 months. Strong performance to this extent generally concerns me, but given the levels of geopolitical uncertainty, the US dollar potentially weakening, and inflation likely remaining elevated, there are reasons to stay invested. Having said that, as is our practice, we will trim these positions to ensure they don’t become too overweight.

These are interesting times and I believe we are well positioned to navigate whatever waters we face.

As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website.

BOOKS

The General Theory of Portfolio Construction by Charles Gave: One of the best books on investment theory I’ve read. Charles Gave analyses decades of investment returns using two filters (inflation & growth). These are broken into quartiles: Inflationary Boom; Deflationary Boom; Inflationary Bust; Deflationary Bust.

He found that specific investments performed well in some environments and doing in others - leading him to create specific rules of thumb:

• Inflationary Bust: Own cash in the safest currency/sell everything else
• Deflationary Bust: Own government bonds/sell equities, commodities and negative cash flow assets
• Inflationary Boom: Own stores of value (real estate, gold, commodities cyclicals producers)/sell long-term bonds and interest sensitive stocks
• Deflationary Boom: Own innovative companies with pricing power/sell companies without pricing power

We are currently in an inflationary boom, which if trends hold, our commodity investments should do well for years to come.

Showa 1939-1944: A History of Japan by Shigeru Mizuki: The second book in Mizuki’s manga (Japanese graphic novel) classic on the Showa era spanning from 1926 to 1989. This book focuses on the period preceding the second world war to just before its conclusion. Written from the Japanese perspective, I found it refreshing. Much of the WWII history I’ve come across is written from a western perspective, often omitting or glossing over the suffering the Japanese people endured. 

THOUGHTS, REPORTS & SURVEYS

The State of US Exceptionalism

America has led the world in technological development for some time. From Tesla and SpaceX, to Amazon, Nvidia, and the host of companies developing AI - American exceptionalism has been accepted as gospel. Yes, a few companies like TSMC and ASML are on par, but they are in friendly jurisdictions and provide complementary technologies. The result has been colossal profits, attracting trillions in investments, driving U.S stocks ever higher. Despite only having 4% of the world’s population, American stocks comprise 30% of the global total.

However, cracks in the perception of America’s technological invincibility are forming.  

China has made incredible strides the last three decades. Now the world’s largest manufacturer - they represent 30% of the total. They also lead in green technology, 5G development and deployment, automotive exports, robotics production, rare earth mining and refinement, number of engineers graduated, and have a massive $1 trillion trade surplus. Despite these incredible achievements, China was still considered steps behind when it came to future defining technologies like semiconductors and AI. 

That was until a few weeks ago. Widely accepted as impossible, a Chinese company, DeepSeek, released a comparable AI model to the best America had to offer - despite being denied access to cutting edge semiconductors. 

America’s incredible stock market performance has in large part been based on their current and future superiority - especially that of their tech giants. However, if the playing field is flatter than originally thought, investors comparing an expensive American stock market with a cheap Chinese one, would be prudent to reconsider their asset allocation.

To that point, in recent years, Chinese investors are believed to have directed tens, possibly hundreds, of billions into the U.S. stock market. Momentum, however, may be shifting. Though both are in positive territory, China has meaningfully outperformed the U.S. in 2025. Should this continue, especially if American stocks decline, it’s not hard to picture billions being repatriated back to China - let alone global investors sending funds in the same direction.

I’m not predicting the end of American exceptionalism, but this isn’t the 1990’s. America is no longer an unrivaled hegemon. With four times the population, China is a serious challenger, with the means and drive to surpass the U.S. 

And America has serious challenges to address. The globalization which enabled corporate profits to soar, also jettisoned millions of jobs to Chinese and Asia. Income inequality (by some measures) has reached that of the Gilded Age, and the federal government is running a $4 trillion annual deficit. Perhaps most concerning, the United States of America has devolved into a state divided.

The US stock market has underperformed the global index four of the last six decades. I believe 2025-2035 will be another. Underperformance doesn’t necessarily mean negative or poor returns. It does mean other regions (like Asia) will be more profitable. That’s why I’m looking at them so seriously.

Southeast Asia Survey 2024: This survey of ASEAN (association of southeast Asian nations) countries dug into the region’s perspective on global and regional issues.

Their largest concerns regarded unemployment, potential recessions, climate change, and the conflict in the Middle East. Also of interest was their geopolitical take on the region’s power structure. For the first time, if forced to choose between aligning with either China or America, they were virtually undecided. (America was previously the clear-cut choice). However, when it came to trusting a major power, Japan was by far their first choice (58.9% trusted them), the U.S. was a distant second (42.4% trusted them), while China came in fourth behind the EU.

As a caveat, the survey was taken in early 2024 - I suspect this year’s survey will look quite different with President Trump is in the White House. 

Confluence 2025 Geopolitical Outlook: The first section of Confluence’s 2025 outlook, described one of the best histories of America’s financial hegemony I’ve seen. To summarize:

• US hegemony is evolving into a more nationalist form to reduce costs on working class Americans
• Unlike European colonial powers, the US built alliances rather than colonies to project power
• Post-WWII US hegemony underwent several transformations, from Bretton Woods to the dollar/Treasury standard
• Globalization policies after the Cold War increased inequality and debt in the US
• Crises (financial, wars) soured Americans on global leadership
• The US is now moving toward a third iteration of hegemony with:
• Demanding allies shoulder more of the defense burden
• Increasing trade barriers and "gatekeeping" access to US markets
• Expected impacts: higher inflation, narrower profit margins, increased US industrial capacity

Mapping Asia’s Population Change Over Three Decades (1990-2023): The population of Asia has grown dramatically over the last three decades. However, the nations in the north east (China, Japan, Taiwan, South Korea, North Korea), grew at a considerably slower pace. If trends hold, their populations will actually fall in the future.

Notes on China by Dwarkesh Patel: Popular podcaster Dwarkesh Patel went to China for a few weeks and returned with a better understanding of the country. His big surprises were: 

• Everything in China is massive in scale, from cities, to buildings, to Buddhist temples 
• The architecture and urban design, while functional, often lacks aesthetic appeal
• Citizens had varying opinions on the state of China: some saw rising nationalism while others observed apathy
• Many young people felt stressed and overwhelmed by the intense pressure and competitiveness 
• Access to some parts of the internet is restricted and the VPN situation in China is inconvenient for foreigners

THINGS TO PONDER

"In building a meaningful and fulfilling life, it’s usually better to work backwards from a broad vision of your ideal lifestyle than it is to work forward toward a singular grand goal (e.g., a 'dream job' or radical location change) that you hope will make everything better."

- Cal Newport

“An old friend of mine, a journalist, once said that paradise on earth was to work all day alone in anticipation of an evening in interesting company.”​

- Ian McEwan​