In the 1970s, I spent six years at Yale getting a degree in continental European philosophy, with the idea of becoming a college professor. That didn’t turn out well, although I regard this as a lucky escape. I fell into the stock market instead.

I mention this mostly because Yale was a pioneer in private equity in the 1980s and, because I was interested in the excellent economics department that led the charge for Yale, I paid a lot of attention to what the university was doing.

Its general argument was that, like many other private universities, Yale had a very large endowment, the bulk of which it wouldn’t need for many years. So, why pay a price for the liquidity that publicly-traded equities provide, but which Yale didn’t need? Why not, instead, hire its own researchers and take stakes in carefully vetted privately-held companies, where growth would likely be higher and where there were none of the fees charged by public market managers who seldom, if ever, matched their target indices.

Two subsequent developments:

–the success of Yale caught the attention of state-run public employee pension plans, which are by and large defined benefit plans. This means the plan guarantees specified payments to retirees throughout the course of their retirement. This is in contrast to defined contribution plans, which pay out a lump sum on retirement. This is the norm for non-government entities.

A second characteristic of the public plans is that many are substantially underfunded, meaning that under reasonable assumptions about how the funds’ investments will grow, there isn’t enough money in them to meet their promised payouts. The problem gets worse during the periodic downturns in the stock market, when the size of the apparent underfunding (based on market prices for the investments) can get considerably bigger.

If bad comes to horrible, state legislators can always raise taxes to cover any deficit. But no one wants to do that.

Hence the two-pronged appeal of private equity to state-run pension plans: the potential for higher returns and that private investments remove the negative optics of a writedown in the plan’s assets because of cyclical fluctuations in the stock market.

One possible cautionary thought: I’ve read that Trump’s attack on major research universities has prompted Yale to look for possible buyers for some of its private investments. It has apparently found that its value estimates are on the high side. Hard to know whether this is the first round of haggling over price or whether the university has to some degree overvalued its private holdings. My guess, though, is that whatever the Yale situation is, it’s better than that of more recent entrants into the private equity market.

…more in the new year.

As regular readers may know, I started out as an oil analyst shortly after the Iranian revolution and the success of the OPEC cartel in fixing prices sent crude oil soaring. And by “soaring” I mean from around $1 a barrel to producers in 1970 to $35 or so for the easiest to refine grades.

The speculation back then about “peak oil” was about when the demand for oil, driven by world economic and industrial expansion, would finally exceed supply. This, the consensus thinking went, would drive prices to the sky.

The reality was that the new supply brought into production because of higher prices ultimately sent the price into a quarter-century decline, before increasing world demand drove the crude oil price to $100+ per barrel.

This was not the simple interplay between price and production. The world’s big producers break into three camps, with three different price objectives:

–Saudi Arabia, for a long time the dominant OPEC producer, which has decades of reserves that can be brought to market at extremely low cost (a few dollars per barrel). Its pricing strategy has been to keep the crude price low, to discourage the development of substitutes–to minimize the chances of the world shifting away from oil

–the rest of OPEC, which has higher costs ($30?) and shorter-lived deposits. So its strategy has been to seek the highest possible current price

–the US, now the world’s #1 producer, relies on very high cost ($50-ish) and environmentally unfriendly hydraulic fracturing (“fracking”) for the bulk of its output. So it wants the highest possible near-term price.

What it seems to me has changed very recently is that it looks like we’ve finally reached peak oil. But it hasn’t been peak supply. It’s that with more efficient usage and alternative sources of energy, we’ve reached–and maybe already passed the high point–peak demand.

More next year.

I have a high level behavioral rule that I should act to maximize participation in gift-giving holidays. So this is a great time of year for me. I wish the same for you.

I turned on Bloomberg radio in my car on the way into town. The A team wasn’t broadcasting. …instead, the bench, both interviewers and guests. The latter is usually a good thing, since my experience is that publicizing yourself and your firm–although an important task–gradually wears away any edge over the competition that you might have.

Anyway, the interviewee was particularly interesting on current consumer behavior in the US. What I took away is that people are doing what they always do during bad economic times (and “bad” here doesn’t necessarily mean the economy is already contracting, although that’s a real possibility). It may mean instead that if the trend rate of nominal GDP growth, pre-Trump II, was 5%, consisting in 1% productivity growth, +1% growth in the domestic workforce, +1% immigration +2% inflation, it’s now 4.5%.

That doesn’t sound so bad, except that the figure now consists of 1% productivity growth, .5% growth in the workforce, -1% immigration + 4% inflation. So real growth, meaning factoring inflation out, has fallen from +3% to +1%. And that’s making the heroic assumption that the figures the government is releasing haven’t been tinkered with too much. I’m acting on the assumption that the economy is basically flat in real terms, with prices rising much more steeply than we’ve been used to over, say, the past twenty years.

So people are adjusting to harder times. Back to the Bloomberg interview, this means less patronage of bars and restaurants, more eating at home. Less alcohol, too, with trading down and shopping harder for discounts.

I’m beginning to entertain the thought that the real 2026 issue for the domestic economy will be less the tariffs–the harm to the economy likely won’t get worse–but rather Trump’s desire to do things that erode the value of the dollar (whether he understands this is the outcome of his policies or not).

One important idea for me that has worked exceptionally well this year has been looking at the US under the Trump administration as like post-WWII Japan–maintaining a weak currency to foster an export-oriented manufacturing economy, while erecting trade barriers to constrain domestic consumption. My portfolio conclusion from this was to look for companies that have $US costs and foreign currency revenues. This has worked well. The post-inauguration plunge in the dollar on fears that Trump wants a repeat of the devaluation of the 1970s as a way of wriggling out from under the large amount of US sovereign debt has meant a large increase in margins for exporters.

Yes, overall US stock indices have been pretty much the worst in the world–the S&P 500 is +18% in dollars ytd vs. +31% for the rest of the world. But a collection of US-based, S&P- or NASDAQ-listed exporters could easily be +40%.

I’ve also been thinking for some time that US-based global consumer companies with solid brand names (created through years and years of advertising spending) could be acquisition targets for foreign firms who see them as, say, 10%+ cheaper now in euros than a year ago.

However, there’s some pretty ugly stuff in the US right now–ICE terror, the secret prisons, the Navy blowing up boats and killing their crews, the shocking willingness of Congress to permit this to continue… Taking off my hat as a human being and putting on my stock market cap, I have two conclusions from this:

–the more concrete. According to the Economist, American multinationals, experiencing nascent boycotts of their products abroad, are shifting their advertising away from highlighting their US heritage to emphasizing their local roots. My guess is that we’ll begin to see surprisingly large damage to the results of consumer-facing multinationals as 2026 unfolds, especially in the EU. If so, from now on the simple formula of foreign revenues/US costs won’t work particularly well.

–the more conceptual. The US domestic situation is more complex. S&P is projecting 2.0% GDP growth for the US in 2026; the OECD is at +1.7% (according to Gemini). Loss of foreign tourism will clip maybe 0.1% from that. Absent a significant change in the political situation, my guess is that next year we’ll see a continuation of consumer trading down and a broadening to include a larger number of the more affluent. If so, the domestic consumer may not be a great place to be, and certainly not at the high end.

My guess, too, is that if the consensus is wrong about GDP growth, it will end up being too optimistic. Usually, the reverse is true. But I worry that there’s CBS-like institutional pressure not to be too negative in a public forum. If so, this would leave me less enthusiastic overall but in more or less the same place as I was a year ago–with strength being in companies with US costs and a substantial chunk of foreign revenues. I also think it will be much safer to stick to industrial suppliers and global tech companies than to consumer names.

For virtually all professional investors, the books are now effectively closed for 2025. For some time, then, all eyes have been on how to shape a portfolio for 2026. One new, one not-really-new-but clarifying factor:

–Over the weekend, an article by economist Paul Krugman (I’m a big fan) points out that the Trump tariff agenda makes things considerably better for only an infinitesimal fraction of American workers, while making everyone else noticeably worse off. No surprise, then, that the domestic economy remains weak. Given that Congress appears unwilling to act contrary to Trump’s wishes, one’s presumption is that there’s no economic improvement in sight for 2026. That’s my guess, and not really new news, I think.

–on Friday, the FBI released a limited number of heavily redacted Jeffery Epstein documents. I’ve read, and am assuming is correct although I don’t know for sure, redaction applies to anything about Epstein’s sex-trafficking of under-age girls that relates to anyone currently in the Federal government. If so, this seems to defeat the purpose of the law.

That a federal law enforcement agency would simply refuse to obey a law passed by Congress is certainly a shock. The conclusion that any counterintelligence agent. domestic or foreign (ex the FBI, I guess), would likely draw is that the files contain blackmail material regarding prominent government figures, who are acting to prevent their release. The presumption, correct or not, will be that Trump or Supreme Court justices or other powerful figures would be implicated. This will doubtless also bring up again the question of what use may have been made of the top-secret documents hidden at Mar-a-Lago, as well as what prompted the government to look for them in the first place.

It seems to me that all of this raises the risk of creating new plant and equipment in the US. So, not good for the dollar nor for companies whose main attraction is aleady owning tangible assets in the US. Arguably, at some point, foreigners will be willing to buy brand names owned by US-based companies. My own portfolio says I think this is already the case with some out-of-favor valuish US firms. Still, I think the key to success next year will be the same as this–having costs in the US, or at least, in $US, and revenues outside. And, if there were one non-stock-market indicator to watch, I think it’s the strength or weakness of the dollar against the euro and the yen.