Santa Came and Left Early but Optimistic about 2026

To our Clients and Friends -

We thought we would provide a quick update here at year end 2025.

In our last letter of November 22, we wrote:

• Yes, Virginia, we believe a holiday rally is likely but tempered. The early "Christmas in September" stole some thunder, and lingering shutdown effects (plus the risk of another funding fight in January) means we won't see the stronger gains of prior years.

• We expect to see a rotation into undervalued quality names in underinvested sectors (energy, financials, industrials) alongside renewed gains in the AI leaders.

• The Fed is no longer staying "behind the curve" with QT ending soon and rate cuts coming to goose the growing economy, but keep an eye on inflation and employment numbers as government data production returns. The Fed’s “dual mandate” can cut in many different ways.

• We expect decent returns in 2026 but a choppier ride than 2024/2025's melt-up. Look for higher volatility from policy uncertainty, but the business cycle remains intact and in control.

Since then, global risk assets have mostly drifted higher into year‑end, with US, international and especially emerging‑markets equities up modestly over the period, while fixed income has delivered small positive, carry‑driven returns amid tight spreads and stable‑to‑slightly‑lower rate expectations. The Dow and S&P 500 remain near record territory into this final holiday week, with slight pullbacks today, December 29. The tone remains risk‑on but more muted than earlier in the year. Essentially, Santa came early, filled stockings with sweets, and left for good on Christmas morn.

We hope you received all the gifts you hoped for, and a few you didn’t know about!

What has surprised is the stupendous rally in silver which is up roughly 140–150% this year, hitting a record high around 83–84 dollars per ounce before a recent correction. This has made silver and silver‑mining ETFs some of the top‑performing assets globally. The rally has been supported by:

• Falling real rates and multiple Fed cuts, with silver functioning partly as an inflation‑hedge/safe‑haven alongside gold;

• Extremely tight physical balances and inventory drawdowns producing a “silver squeeze.”

  • In response, the CME margin hikes and position‑limit cuts that triggered a sharp pullback from near 84 dollars to the low‑70s, highlighting the risk of forced deleveraging in metals futures.

• Unlike gold, silver is used extensively throughout industry particularly in solar PV, EVs, electronics, data centers and AI hardware drawing supply down meaningfully.

• Worsening supply concerns, China announced formal restrictions on silver exports that begin in 2026. China accounts for an estimated 60–70% of refined silver supply and around two‑thirds of global silver exports, so even a partial restriction is being treated as a de‑facto supply shock by the market.

All this said, can we conclude anything from the silver rally and pullback? We’ve read that this could point to strong 2026 growth in the US and elsewhere–as we and many market participants expect—but it could also point to stockpiling ahead of a widening conflict in Southeast Asia in particular. So, we are watching silver but not buying the shiny metal given its volatility and uncertain path ahead.

Recent Market Challenges for Crypto

The past few months have tested risk assets, with crypto experiencing significant pressure as the most sensitive to liquidity conditions. Temporary drains—stemming from the aggressive Treasury General Account rebuild and the extended government shutdown—created fragility, decoupling prices from broader macro trends. This was exacerbated by the October Crypto Flash Crash, driven by external tariff commentary, resulting in record liquidations and prolonged forced selling.

That said, we believe the bulk of this illiquidity crunch is now in the rearview mirror. As shutdown impacts dissipate and systems normalize, we expect a meaningful "Liquidity Flood" to emerge, providing tailwinds for risk assets overall.

AI Momentum Pause

Much of 2025 saw capital rotate from crypto into AI-driven equities, fueled by rapid advancements in semiconductors and infrastructure. However, recent developments indicate this trade is stalling: AI-related stocks face mounting scrutiny over margin compression, supply chain challenges, and stretched valuations, leading to profit-taking and pauses in major indices (e.g., Nasdaq-100 consolidating near all-time highs with increased volatility). We do not believe this is the end of the AI investment period / buildout, but an opportunity to digest recent gains and reassess.

In contrast, crypto is displaying early signs of stabilization and potential outperformance. Bitcoin is holding around $86,000-$87,000 in an oversold state (extreme fear readings but historical precedents for strong recoveries), while Ethereum trades near $2,950. This aligns with our view of closing "alligator jaws" divergences from global liquidity measures, positioning digital assets to reverse the year's rotation and capture fresh momentum as institutional flows resume and liquidity rebounds.

Private Markets Strength

Private markets have in general seen a modest pickup in activity helped by stronger public markets and better financing conditions, but performance dispersion remains wide and sentiment for 2026 is cautiously optimistic rather than euphoric. Investors are expecting higher deployment and exits across strategies in 2026, but with continued selectivity, slower fundraising than the 2021 peak, and a premium on manager quality and downside protection.

• Late‑stage and venture‑growth deals have been the relative bright spot in 2025, with annualized late‑stage value around $108 billion and venture‑growth value about $150 billion, near decade‑highs; that momentum has continued into Q4 as the IPO window partially re‑opened and secondary markets deepened.

• Global PE deal value reached about $595 billion in Q3, the second‑highest quarterly level in the past decade, and cumulative buyout/VC/growth deal value is expected to hit around $1.4 trillion for the year, the best since 2021. Activity has remained robust into late 2025 as financing costs eased. Deal pace since November 22 has focused on mid‑market and sponsor‑backed M&A, with more willingness to transact but ongoing pressure from older high‑multiple vintages and LP demands for liquidity.

• 2025 has also been a strong year for private credit returns, with middle‑market and direct‑lending strategies delivering high single‑digit to low double‑digit total returns driven by elevated floating‑rate coupons.

• Private real estate performance remains very sector‑ and capital‑structure dependent: logistics, data centers, single‑family rental and some niche residential continue to stabilize or appreciate, while traditional office and weaker retail struggle with vacancies and refinancing risk.

Looking ahead, we are most excited for the expected IPO of SpaceX, which could raise well above $30 billion and value the company around $1.5 trillion, making it the largest IPO in history by proceeds and one of the highest‑valued listings ever. We and many of our client’s have significant allocations to this venture. We also look forward to the public debut of PowerLaw 10, a closed end fund in which many of us are invested which owns ownership stakes in 12 of the fastest growing private companies in the world (including Anduril, SpaceX, Stripe, Databricks and Anthropic). We have several other exciting private deals in the hopper. Indeed, we have so many attractive opportunities that we can’t raise the funds fast enough to take advantage! Suffice it to say, we expect a strong year in the private portfolio.

Optimistic Outlook for 2026

We remain constructive on the year ahead. Major divergences—across Bitcoin/Global M2, equities, small caps, and financial conditions—are set to resolve favorably as liquidity surges, drawing from historical patterns (e.g., 2016-2018). Supporting factors include a weakening US dollar (DXY near 98, down markedly YTD amid relative growth dynamics), prospects for further Fed easing, and coordinated global central bank support. We view current levels as compelling for long-term thematic exposure and continue to monitor these shifts closely.

Please feel free to contact us with any questions or to discuss how these views align with your portfolio objectives. We wish you and your families a wonderful holiday season and a blessed New Year.

Cheers!

Jeff & Biff