This special update was written by our own Gary Richied – his first of what I hope & assume to be many more to come, given how much I truly enjoyed reading it from start to finish. We hope you feel the same.
“Now diving for Grand Lakes University: Thornton Melon. Melon.”
It was, if you can believe it, almost 40 years ago that you could venture to the movie theater and see Rodney Dangerfield play an uber-wealthy, ‘Big and Tall’ clothing magnate who decides to return to college so as to encourage his very much discouraged son to stay. Hilarity ensues as Dangerfield’s character, Thornton Melon, takes in the full college experience. He attends a history class with a madman history professor played by Sam Kinison. He parties with his son, Jason, and his oddball friend with purple hair, played by none other than the future Ironman, that is, Robert Downey Jr. Wild how old trends reemerge. Equally wild was the fact that the movie grossed as well as it did: It was released at the same time as now recognized classics Ferris Bueller's Day Off, Aliens, and Top Gun. The climax of the plot comes when the then middle-aged Melon is called, in a swim meet emergency, to don a swimsuit-onesie and dive for the school. He mounts the high dive. He raises his thumb to judge the wind. He jumps and performs a circus act dive known only as the “triple lindy”. The dive consists of hitting successive diving boards below after mediating twists, turns, and flips. Of course, the hero executes “the lindy” perfectly: He saves the day. The crowd goes wild (Are there big crowds at diving meets?!). Both father and son go off with their respective love interests.
The scene is hysterical because the dive is so ridiculous and improbable. The true outcomes of attempting a dive similar to that in real life range from awkward failure to gruesome death. Pure physics, the limits of human athleticism, trepidation and age were all working against Thornton Melon. In real life, of course, that dive never happens.
Similarly, financial markets don’t tend to respond well to chaotic uncertainty, inverted yield-curves, persistent inflation, an expansive wealth gap and global instability. We might assume financial markets ought not recover from a literal economic shutdown in such a short span of time, and then adding further spectacle to the thought-to-be-impossible: rapidly reach all-time highs.
But, that the market did, from 2020 to 2024, with mega-cap tech stocks leading the major indices to stratospheric heights—albeit with only a brief correction in 2022. Also keep in mind – interest rates went from a decade at near 0% to over 5% during this period to boot.
That is to say that despite all of the chaos, all the economic headwinds and dare I say - in the face of common sense—it felt very much like we had to go back to school.
Now, it is very true that the first quarter of 2025 appears to have brought with it a return to sensibility. As John Maynard Keynes might put it—the exuberant animal spirits have calmed a bit. As a much better economist, Ludwig von Mises would put it—economic laws eventually catch up with you. With a GDP fueled and fostered by runaway fiscal and monetary policy (a metric ton of government expenditure and money printing), you get what Mises referred to as an earthquake economy. The aftermath of a natural disaster brings with it perceived economic activity. Cleanup crews need heavy equipment. Infrastructure must be rebuilt. There’s a perceptible, productive hyperactivity.
However, the important questions remain unanswered without knowledge of other, what we might call, inputs. What are the costs of the work? The abilities of the engineers and crews? And the even bigger ones: How do we assign value to the new structures? Will people elect to still reside here and pay to be here? PerHenry Hazlitt, economics is the science of the seen and the unseen.
Such situations which result from the veritable disasters, both natural and monetary, are fraught with the high likelihood of what the aforementioned Mises called ‘malinvestment’. Consumers and producers alike act on artificial, imagined and ill-informed stimuli. These could be anything from excessively easy-to-obtain credit to excessively wishful thinking. In the post-Covid months, with so many either sitting at or working from home, stock values ascending at ludicrous speed (another 80s movie reference) contributed mightily.
If you would allow me to extend the analogy just a bit further; in the aftermath of 2020, which was an economic dislocation beyond imagination, one can understand why investors and institutions were willing to take on more risk. With dollar abasement and resultant inflation that proved to be way more persistent than “transitory” (Jerome Powell and Janet Yellen’s favorite go-to word from 2020-2023), reasonable metrics of a stock’s worth appeared applicable no longer. The price-to-earnings ratio (P/E or the ratio of a stock’s price to the company’s earnings-per-share) in April 2023 of many of the most popular – and most concentrated – stocks in the major indices ranged anywhere from 50 to over 250. To provide proper context, the average P/E ratio for the S&P 500 over history, is approximately 16. (source: https://www.multpl.com/s-p-500-pe-ratio)
In 2024, the prevailing narrative trotted out by the talking heads on CNBC and Fox Business was that the market along with the Fed had landed “the lindy”—a ‘soft landing’ for the economy; high stock prices; great earnings; moderating inflation. With 2025 now looking like a year of reassessment and correction, are we willing to predict that gold will continue to roll beyond its already historic price? That inflation will abate even in the face of immanent tariffs? Is it time to retreat to Treasury bills and money markets? The answer is likely no, not necessarily. But what we are ready to say is that our traditional stance that economics and valuations do indeed matter indicates that, should we indeed have to “return to school” like Thornton Melon, we would not have to learn from altogether new and foreign textbooks.
Will the recent volatility continue and finally cleanse our financial system and economy of some (or all) of its perceived malinvestment? Time will tell. But if it does, there is a sort of comfort and reassurance to be had that exuberant and irrational gambling with resultant rewards for the “let it ride” crowd of managers and investors alike does not—and cannot—last in perpetuity. In other words, we might take comfort in the fact that free markets are once again – at least for as long as they are allowed – actually operative.
So, we got that going for us…which is nice.
As always, to all of our clients, we can never thank you enough for the trust and confidence you have placed in us.
Sincerely (and on behalf of Gary),
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