Financial Vigilance in a Changing World: Our Commitment to You
Dear Clients:
New Capital Management is required by laws, regulations, contracts, professional certifications, and most of all by our own honor to act as fiduciary advisors and remain vigilant on our clients’ behalf. You pay New Capital not to stick our heads in the sand and deny reality, but instead to pay the closest attention to important financial and economic matters, and also to the political matters that directly impact them.
Beginning on November 6, the day after the election, Jaycee Smalley, our Vice President, and I have been engaged in both ongoing internal meetings and external meetings with our major business partners including Dimensional Fund Advisors, Vanguard, BlackRock, J.P. Morgan, and Fidelity. Through these meetings we have been researching, trading, and taking other actions to craft portfolio responses to the realities we are all witnessing on a daily, even hourly, basis.
Each day we observe the political, geopolitical, and economic earthquakes now taking place and their potential impacts on investment portfolios in general and on individual client circumstances in specific. At the same time, we are being careful not to over-react, and we are monitoring markets multiple times a day in order to observe which government actions or threats move markets, and which do not. In a world that seems to have gone topsy-turvy, we continue to have faith in the ability of financial markets to sort out signals from noise and propaganda from policy.
In our business, we have to try to protect against or respond to unforeseen or sudden events. In my career, I have written to you during financial crises, elections, wars, natural disasters, bear markets, economic disunion (Brexit), a global pandemic, and more. Our firm (and frankly, all advisory firms) now finds itself in the position of having to try and anticipate previously inconceivable hypothetical actions that our government’s Executive might have already planned and may take over the next four years, and then move to protect our clients’ money based on that conjecture. Our clients’ ability to meet expenses for retirement, household, education, healthcare, legacy, charitable, leisure, and other goals and expenses therefore depends to a substantial degree upon our evaluations.
Consider the following relatively small sampling of suddenly consequential financial and economic questions:
Are Treasury bonds, which rely on the U.S. government’s good faith promise to pay, and which financial theory has to date considered to be literally free of risk, still totally safe to own? Might our government conceivably ever declare default on its debts? Might foreign governments and their citizens boycott not just American products but also American debt? For now we conclude that Treasuries might still be completely safe. However, at the end of 2024, we took substantial steps to reduce, though far from eliminate, Treasury holdings in our model portfolios.
Are municipal bonds safe to own if the federal government stops helping pay for infrastructure improvements, leaving cities, counties, and states to come up with all the money themselves or else cancel projects? We don’t know yet, but we aren’t taking any chances: where many advisors load up client taxable non-qualified accounts with municipal bonds, we own them more in moderation in such accounts.
Will the Executive’s dismantling of much of the federal government, which continues to accelerate, have broad economic impacts? Macroeconomic 101 students all learn the following equation: GDP = C + I + G + X, which means Gross Domestic Product is equal to Personal Consumption + Business Investment + Government Expenditures + Balance of Trade. Clearly, this simple equation says that if Government Expenditures fall, all else equal, then Gross Domestic Product, the most important measure of national economic activity, will also fall, which would bring the U.S. economy closer to, not farther away from, recession. Several clients have businesses that rely upon federal grants and contracts, including to local governments, and are facing layoffs. Those who are laid off will have less for personal consumption, and if they cannot quickly find other work, will consume their savings. If too much of this goes on, the entire country could find itself in an economic slowdown.
Will the Administration attempt to take full control of the Federal Reserve, and therefore of the nation’s money supply and short term interest rates? President Trump has already signed an Executive Order headed in that direction.
Will the Administration attempt to take full control of the Securities & Exchange Commission (which has been proposed via Executive Orders), and attempt to make changes, for example: weakening insider trading laws intended to protect the investing public from misuse of non-public material information?
Will Congress permit these and other such actions to happen, even though many of them appear to encroach on the Legislative branch? Currently that appears to be the case.
Will the courts stand in the way? Right now, it appears that judgments will be mixed, permitting some actions while denying or delaying others.
What about tariffs (which are actually the rightful Constitutional domain of Congress, not the President)? Are they really an attempt to negotiate with other nations, an attempt to bolster domestic industries, or an attempt to transition the U.S. from a progressive income tax system (in which wealthier people pay a greater percentage of their income) to a regressive consumption/sales tax system (in which poorer people pay a greater percentage of their income)? Will tariffs drive up inflation?
Despite the lack of clear answers to many of these and so many more questions, I believe our highly diversified, global portfolios are well designed to withstand many challenges - whether actual, threatened, or potential. We are furthermore prepared to act quickly if need be. But nothing can withstand all challenges, there can be no guarantees in the new chaotic geopolitical environment, and we are not miracle workers. Currently, stock and bond markets remain generally stable (although U.S. technology stocks have recently dropped substantially), but that could change at any time.
Over the past few weeks we have been implementing trades in client accounts that our stress testing software estimates, in the face of hypothetical 10% U.S. inflation, could reduce an annual portfolio drawdown in a 60/40 account from -20% to about -13%. We are now modeling changes that could further reduce this drawdown to under 10%. Importantly, we are also seeking to preserve the ability of our portfolios to perform in the event that inflation remains moderate and economies remain robust.
Among the portfolio actions that we have recently taken are:
Slightly reduced U.S. stock market exposure and increased international stocks. Notably, international stock markets in the aggregate have substantially outperformed the U.S. stock market by about 5% since the inauguration and our portfolios have been well positioned to take advantage of this.
Added a small holding in Bitcoin, the most important global digital currency, primarily as an inflation hedge. Bitcoin is highly volatile on a daily basis and we are therefore comfortable only with a small holding in portfolios.
Increased our holdings in inflation-linked fixed income instruments.
Added a small holding in Berkshire Hathaway, as a defensive stock with a large cash holding and a disciplined leader (Warren Buffett).
Maintained the duration of our fixed income portfolio on the short side, as we are concerned right now about lending money to anyone for long periods of time, especially given that there is not much additional yield in that.
Our efforts are greatly aided by critical infrastructure that we built over the past several years, including:
Model portfolios, so that all client accounts get consistent management, broad global diversification, equal priority, and the immediate benefits of our most current thinking.
Exchange Traded Funds (ETF’s), so that client portfolios can be efficiently traded at narrow bid/ask spreads and during market hours, can be held in custody virtually anywhere in the United States and even outside (including in our Swiss bank), and achieve maximum tax efficiency. Crucially, our use of ETF’s provides for excellent liquidity, and we prioritize our strong ability to generate cash for clients when they need it. We believe that liquidity in the period ahead will be beneficial, and we are currently resistant to tying your money up in private or other illiquid instruments.
Focused Investment Partners, so that we invest with and maintain close working relationships with among the biggest and best asset managers, and confer the advantages of their strengths. In the event that insider trading and other anti-corruption laws are weakened, these large business partner entities will be critical to enforcing our legal ownership rights in courts of law and in representing our interests to boards of directors.
Portfolio re-balancing software, so that we are able to quickly, accurately, responsively, and tax efficiently trade the hundreds of accounts under our management.
Portfolio stress testing software, so that we can test hypothetical scenarios (especially, right now, the possibility of higher inflation), model the use of specific securities to reduce stresses, and obtain lower potential drawdowns in overall portfolio values.
Newer services, including multiple U.S. based custodians, international custody in Switzerland, and residency/citizenship by investment.
NCM360, our proprietary client data system, so that we offer comprehensive and secure data storage for clients’ critical data and documents. Very shortly we will introduce (1) a new “personal backup” feature, so that clients can back up their NCM360 data and documents to a local device with the press of a button, and (2) Multi Factor Authentication to make logins even more secure. With the recent and ongoing compromise of U.S. federal data systems by the “Department of Government Efficiency (DOGE)”, we are determined to provide the strongest, most reliable, and trusted data security to our clients.
New Capital is also issuing the first edition of our Financial Survival Guide 2025.
As I have noted numerous times in past letters, countries with stronger democratic governments enjoy higher securities valuations. Companies in more stable democracies generally enjoy higher price to earnings ratios than those in weaker democracies. More stable democracies generally enjoy higher bond prices and credit ratings than weaker democracies. Your overall portfolio value likely depends upon New Capital being able to invest your money primarily (though not exclusively) in democracies.
The vast majority of our investments in stocks and bonds for you are in democracies, and that is not a coincidence. Democracies have shown a persistent ability to innovate; to spread wealth, education, and benefits more equally throughout their populations to better enable civic harmony and cooperation; to form lasting and trusted international alliances; to have reliable legal and regulatory environments that protect shareholders and citizens alike and which reduce organized corruption that re-directs capital from citizens, shareholders, and bondholders. The financial rewards for these features have been enormous, and they should never, ever be put at risk. Hopefully all Americans will fully appreciate what we have.
Should our country and our world continue to sail on into whirlwinds, I will continue to communicate with you in the weeks and months ahead as appropriate and necessary, both in writing and in our webinars. In the meantime, please do not hesitate to reach out to me or anyone on our staff if we can help you. I encourage every single client to think carefully about what they can productively do or say to help us all move beyond this fraught period in our national history, and that begins with finding your best self and your best life. New Capital will always have a critical role to play in that.
Finally, if there is anyone you know who tells you their advisor might have their head in the sand, let them know about us, including forwarding this letter. We are still taking on new clients, but our ark can only hold so many.
Most sincerely,
Leonard M. Golub, CFA
President