That there is at present an excess of paper in circulation in this country, of which the most unequivocal symptom is the very high price of bullion…that this excess is to be ascribed to the want of sufficient check and control in the issues of paper…
The report of the 1810 House of Commons Select Committee on the High Price of Gold
The commentary on the August stock market bore a resemblance to the ancient Roman god of transitions Janus as The Wall Street Journal, looking back upon the month, headlined “August Market Rally Left Fed Fears in the Dust”. Barrons, choosing to look ahead, cautioned investors “Stocks End August on a Down Note. Why Investors Should Prepare for a September Swoon.” The month certainly offered a reversal of fortunes as health care stocks rallied 5.4% for the month but are barely positive year to date 0.8% while information technology was barely positive for the month returning 0.3% but are +14% for the year. Small cap stocks, having broken more hearts the past several years than a high school prom queen, returned 7.1%, more than triple the S&P 500’s 2%, and the value side of “the 500’s” 3.4% outperforming growth’s 0.8%. Foreign developed markets added 4.5% to their 24.8% year-to-date returns, more than double that of the S&P 500’s 10.8%.
A great mystery in our economic landscape the past five years has been the behavior of U.S. single family home prices. Thirty-year fixed rate mortgage rates have risen from 2.91% to 6.63%. The average monthly mortgage payment to purchase the average priced home has risen from $1408, 19% of the average family income to $2207, 30% of income. All these factors should serve as a harbinger of falling home prices but instead those prices have risen by almost 50%, from $219,782 to $331,515. Stock market investors, fixated on “the Mag 7” stocks and AI, would have made more money the past three years investing in an index of U.S. home construction stocks with that index returning 92.3% versus the Nasdaq 100’s 86.25%.
For decades Cassandra’s, like the boy crying wolf, have been warning about the consequences of too much government debt but the signs of the arrival of our time of reckoning are becoming increasingly apparent. In 2017 U.S. federal expenses were $3.5 trillion and revenue $3.2 trillion. In 2025, eight years later, federal revenue is now $5.1 trillion, an increase of almost 60%, but expenses have doubled to $7.0. Since the 2020 pandemic, for whatever reason, the cost of running our government has shifted upwards to a significantly higher plateau with the resulting consequence that 17.5% of federal revenue is now required to pay the interest on the rising mountain of debt, twice the level of that of the rest of the world. In 2024 the U.S. Treasury issued $29.3 trillion in debt, 94% of which provided the funds to pay off maturing debt and 84% in the form of treasury bills with one year or shorter maturities. Treasury bills are cash equivalents, a significant share of which end up in money market funds. This rising tide of liquidity has supported our rate of economic growth and the stock market, but we are also observing a decline in the value of our money as the rising tide of treasury bill issuance is a form of money printing, quite literally the creation of new money to provide the means of rolling over the inexorably growing mountain of preexisting debt.
Like most experiences of a new world, it takes time for most to recognize the existence of the unfamiliar. From the end of the Global Financial Crisis of 2008 until the pandemic year of 2020 we were inhabitants of an economic and financial environment characterized by very low levels of both inflation and interest rates. Since 2020 we have become migrants to a new world of higher interest rates and inflation. That the U.S. dollar is now being debased as a result of the parlous state of federal finances is likely the most important factor for investors to recognize seeking to make sense of their short to intermediate term futures. This is what explains the otherwise inexplicable behavior of U.S. residential real estate, the average five-year 9.2% annual decline in the index of the returns of long-term U.S. treasury bonds, the 11.5% annual average five year return of gold, the 600% rise in bitcoin and the April 2025 University of Michigan consumer sentiment survey showing the lowest levels of that index since May 1980, a time of 16% fixed thirty year mortgage rates and 14.4% inflation.
50%/50% portfolio investors enjoyed a 2.9% return in August and are now +13.75% year to date. The 50% share in equities returned 2.7% with small cap contributing 4.8% and international 4.1%. Gold continued to shine contributing a stunning 16% and variable rate securities, reflecting declining short-term interest rates buoyed by renewed hopes for fed interest rate cuts, 5.6%. Fixed income returned 1.1% as relatively stable longer-term interest rates allowed for modest amounts of price appreciation to contribute to the returns of their cash flow.
Mark H. Tekamp