To our Clients, Co-Investors & Friends -
With the Dow experiencing its first significant stumble since October this past week, we want to reiterate the importance of maintaining a long-term perspective—zooming out, as we have recently written. Our overarching thesis remains intact: global liquidity is poised to accelerate, and the Federal Reserve ("the Fed") will eventually lower interest rates to facilitate the refinancing of a massive wave of government debt as well re-start a faltering US economy. While recent market noise has introduced volatility, the broader trends continue to support our view of rising asset values over the coming year.
The Fed’s Dilemma and Forward-Looking Signals
The Fed finds itself in a challenging position. With bonds maturing and inflation data from Q4 2024 appearing stronger than anticipated, policymakers are hesitant to cut rates in the near term. This stance bolstered the 10-year Treasury yield and strengthened the $USD, which in turn has tempered inflationary pressures moving forward. However, when we look past backward-looking data to forward-looking indicators, including Truflation, inflation is expected to decelerate driven in part by the Fed’s hawkish stance late last year.
We anticipate this slowdown will manifest in lower CPI prints—particularly in the service sector—over the next few months, accompanied by a softening $USD and, eventually, lower interest rates. These dynamics will amplify global liquidity, a key driver of asset prices. Raoul Pal, CEO of Real Vision, recently expressed this sentiment, noting in a February 13, 2025 discussion that a potential Fed signal for rate cuts could trigger a significant liquidity boost, lifting markets across the board—including crypto. This aligns with our expectation of a market upswing as liquidity conditions improve.
The Business Cycle and ISM: A Positive Turn
Another pillar of our thesis is the improving U.S. business cycle, as measured by the ISM Manufacturing Index. For much of 2024, the ISM languished below 50, signaling contraction. However, it recently crossed above this threshold, hinting at a nascent recovery. Real Vision’s Julien Bittel on February 19, 2025, stated that the ISM often leads Fed action by 6-7 months, with weak data historically paving the way for liquidity surges—potentially in 2025. Indeed, the latest ISM shows Manufacturing PMI for the US rose to 50.9 in January 2025 from a downwardly revised 49.2 in December 2024 and beating forecasts of 49.8.
> The reading pointed to the first expansion in the factory sector after 26 consecutive months of contraction.
This upward trajectory supports our view of a strengthening economic backdrop, which the market has yet to fully price in amid day-to-day noise tied to stale Fed data (not to mention all the political stuff going on.)
Defense Stocks and DOGE: Separating Signal from Noise
Recent sell-offs in defense stocks, spurred by rumors of a 50% cut to the U.S. defense budget, exemplify this noise. Let’s put this in context: even if significant cuts materialize—an unlikely scenario in our view—they would likely stem from efficiency gains identified by DOGE (Department of Government Efficiency) initiatives targeting fraud, waste, and abuse. This wouldn’t necessarily reduce procurement but rather redirect spending to smarter solutions. Companies like Palantir (PLTR), which saw a market overreaction this week, stand to benefit from such shifts, as do private tech-driven firms like Anduril and Astranis—which we hold in Funds II and III with our partners at Friends and Family Capital. The market’s knee-jerk response overlooks this nuance, presenting opportunities for those who zoom out.
Global Liquidity: China and Beyond
On the global front, liquidity is gathering momentum. This week, China’s President Xi Jinping signaled a major policy shift, unleashing the tech sector after years of suppression. As reported widely, Xi’s directive to bolster firms like Alibaba (BABA) reflects a strategic pivot to showcase China’s technological prowess. Combined with a weakening $USD, this is fueling an explosion in China’s M2 money supply and paving the way for rate cuts. Real Vision has emphasized China’s role in global liquidity, noting in an X post on February 13 that its monetization efforts could counterbalance drainage elsewhere. This accords with the views recently shared with us by investment partner Harding Loevner. Layer this atop Europe’s year-long rate reductions, and we have the ingredients for the next market leg-up in International and Emerging Markets equities.
The Bigger Picture
Zooming out, these developments—lower U.S. rates, an improving ISM, and surging global liquidity—haven’t fully hit the markets yet, particularly crypto markets, but we’re close. Real Vision’s data points to Bitcoin’s 86% correlation with liquidity and it’s recovery would be a bellwether for broader asset classes. When the market shifts focus from short-term noise to these fundamentals, we expect a rapid rise across equities, crypto, and beyond. Volatility will persist—higher highs often come with higher lows—but the trajectory remains upward.
There’s much more at play behind the scenes, but this high-level update reflects our current thinking as of February 25, 2025. We’re sticking to our thesis: markets are going higher, propelled by liquidity and an improving business cycle, and it’s likely a good time to by at lower prices ahead of the recovery.
As always, we thank our clients and co-investors for for your continued trust as we navigate these dynamic times.
Warmest regards,
Jeff & Biff
February 25, 2025
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CrossGrain Family Investments
2213 Loreines Landing Court
Henrico, VA 23233
CrossGrain Family Investments, LLC (CrossGrainFI) is a Federally-Registered Investment Adviser. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 804.217.2561 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from CrossGrainFI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on the SEC website, https://adviserinfo.sec.gov. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.