President Trump has just signed a bill that allows corporate pension plans to offer private equity products that individuals can purchase in their IRAs and 401ks. This comes at the same time as his attacks on universities appear to be causing them to become sellers of long-held private equity investments. Is there a connection? My guess is no. My surmise is that, if anything, connecting the dots that his stamp of approval on private equity purchases for you and me will reduce some pressure on education institutions would have meant he’d refuse to sign.

Private equity itself is a pretty broad term, though.

In its most basic sense, it means an ownership interest in an entity controlled by holders of common stock —and which is not publicly traded. Yes, being publicly traded makes it easier to raise capital and to compensate employees through stock options. But going public also requires that the company’s financials aren’t terrible, and that the management controls and financial statements meet a relatively high level of sophistication and accuracy. So an early stage company, or one that has steady cash flow but not a lot of near-term earnings growth sizzle, or one that needs money now to expand may find that a private placement of stock today suits its needs better than starting the process of going public, say, next year.

At the same time, it was one of the key insights of the Yale economics department in the 1970s that university endowments like theirs were natural buyers of such private stock sales. That’s because the yearly calls on their accumulated wealth were tiny, so they had no real need for near-term liquidity. This meant they could take a much longer term view in their stock purchases than the typical mutual fund, whose manager might be fired after two bad years. So both the endowment and the company raising money could arrive at a much better deal for each by agreeing to a private transaction with one another.

This worked well for decades, and was widely imitated.

Traditional pension funds, now mostly the province of government entities, have also found that private equity has allure. State-run pension funds for municipal employees (I’m not an expert here, though) are, as far as I can see, seldom fully funded. Imagine a wicked bear market comes along–think, COVID or 2007 financial crisis. Publicly-traded stocks drop through the floor. Bonds don’t do so well, either. So the underfunding that was already there looks a lot worse. Maybe the state has to raise taxes to put more money into the plan to make it solvent again. A political nightmare! But although Mr. Market rules the valuation of the S&P and NASDAQ, one could argue that private equity holdings are relatively undamaged in a situation like this. At the very least, there’s no evidence from public trading that they’ve lost any value–because there’s no public trading. No wonder state pension plans tend to have healthy doses of private equity.

Why, then, introduce private equity to individual IRAs and 401ks?

The obvious answer, I think, is that the traditional markets for private equity are saturated.

An aside: Early in my career, I was at an analyst conference for a big hotel company. The company, which had traditionally focused on big metropolitan hotels, was starting to open smaller hotels in industrial parks, and motels for the first time, too. How so? …the iron rule of marketing, the VP of marketing said: you don’t start selling chocolate ice cream until the market for vanilla is saturated. In other words, the act of selling chocolate itself reveals everything you need to know.

In the private equity case, we’re down to either strawberry or cookies and cream, whichever is #3.

Given what the Ice Cream Rule says the present situation is, I wonder if plan sponsors are going to risk offering private equity alternatives to their pension fund clients.

August is usually a nothing month for the stock market.

Part of this is (ancient) history.

A generation ago, when heavy industry dominated the major market indices, the northern hemisphere summer was vacation time. Europe, which was much more economically important than today, pretty much shut down and headed for the beaches. The US did the same, if less vigorously. With both workers and customers away, this meant August was a time for repair and maintenance and running down inventories, rather than all-out production of new stuff.

The big financial firms shifted into lower gear, as well, with top managements heading for their summer homes on Long Island. Some managers, like me, worked remotely anyway, on the idea that the month was prone to quirky up and down movements. But by and large decision-makers make it clear that they don’t want to be disturbed.

Two things strike me as unusual, though:

–the dollar appears to be stabilizing, and, if anything, rising a bit, and

–the domestic stock market is continuing to chug along, outpacing EAFE for the first time this year. Given that the domestic-economy-oriented Russell 2000 mid-cap index continues to flatline, investors seem to continue to be emphasizing multinationals and avoiding firms with $US revenues.

The ride almost always turns bumpy in mid-September, as mutual funds begin to do their annual tax planning. Given the popularity of ETFs, I wonder if the traditional pattern of selling in late September–early October, followed by a significant rally in the runup to Halloween, will still be evident. Not a today worry, though.

I’m a big fan of economist Paul Krugman. I’d been thinking about this topic for a while but was spurred into typing by his Substack column today.

When I entered the stock market a generation ago, the conventional wisdom (and correctly so) was that the most important leading economic indicator for the US economy was the US stock market.

My personal explanation for why this was so was that, at the first signs the economy was developing a pulse again, the personnel guy would say at lunch something like, “It looks like business is starting to pick up. We’re hiring again, so if you have any friends you’d like to recommend…” So individuals, who in the aggregate have always been more successful investors than professionals, would excuse themselves and call (this is pre-internet) Fidelity.

No longer.

The dynamic still happens. But in today’s world, at best half of the earnings of the S&P 500–and a smaller portion for NASDAQ–come from the domestic economy. And the administration’s negative stance on immigration and education seem to me to guarantee that the shrinkage in the domestic portion of publicly-treaded company earnings will continue to shrink.

In addition, the dollar has been dropping sharply since inauguration day–by almost 12% against the euro, for example. As I see it, this is the first expression by foreign holders of Treasuries of worries that the US will be, essentially, unwilling to pay its government borrowings in full. It’s not simply that the president is the mind behind Trump University and Trump Entertainment Resorts. It’s that the American public elected him and his platform, and that he has the full-throated support of Congress.

As far as the stock market is concerned, the key variable so far has not been the destruction of a big chunk of the national wealth. It’s been the inverse of that–that the large stream of non-US earnings from US-based multinationals has been on sale at a steep discount, thanks to the dollar’s devaluation.

Mr. Krugman’s analysis is that tariffs will clip about 0.4% from US GDP, leaving it above zero, but not by much.

Two things I take from this:

–multinationals will continue to be Wall Street stars. The companies in the worst position will be importers of foreign goods for domestic sale. Here, again, my guess is that the currency devaluation will be a bigger negative than tariffs

–the real daggers to the heart of the US economy will be, in the near term, the ICE attempts to shrink the domestic workforce, and, longer term, the devaluation of scientific research and general education.

So the big picture (concept) is pretty clear–look for US costs and foreign revenues. This leaves valuation, I think, as an increasingly important variable. I find myself looking more and more for value stocks (broken things waiting to be fixed) to counterbalance the growth names I hold.

“Climbing a wall of worries” is the one I’d pick for 2025 to date. Yes, the US stock market has been a severe laggard in global terms, most of the weakness being expressed in a sharp decline in the currency (ytd, EAFE in $US is up more than twice what the S&P is).

The main issue is the most obvious–that “move fast and break things” works best for tech geniuses, not for former reality show stars.

In addition, the strategy of finding weak currency beneficiaries–that is, focusing on exporters + import-competing firms–and on what amount to special situations (HOOD being a prime example), has produced surprisingly good results, year to date.

Where we are now? As one of my years-ago bosses used to say, “trees don’t grow to the sky.” So, IT aside, it’s probably time to lighten up on ytd domestic winners. And at some point, a critical mass of investors inside the US will also begin to realize how large the obstacles to economic growth are that the administration is putting in place. So there’s a non-zero risk that domestic investors will begin to allocate a larger portion of their investment money outside the US.

For me, it’s time to shift toward value-ish names, whose main near-term virtue is that they won’t go down a lot (you can’t fill off the floor (except in the stock market).

The more straightforward point is that the recent jobs report, whose creator Trump just fired, didn’t really show much of anything. That’s because with a domestic workforce of around 50 million workers, +/- even 100,000 jobs is a difference of only 0.2%–which is well within the margin of error for this statistical projection.

The most important thing I see from the report is not the idea that the economy may be slowing (why wouldn’t it be if the tariff rules are constantly changing, so companies can’t really plan?), but the panic that totally benign figures are creating in the Oval Office. That’s the scary part, to me.

How so?

In early 2000, I had owned shares in an IT powerhouse for ten years and was trying to figure out, in the wake of the Internet Bubble collapse, what to do with my large holding. So I went to the company’s annual analyst meeting, where the founder and the newly-minted CEO would be available to answer questions. The founder was asked what I thought was a really stupid question–what he thought was his greatest accomplishment at the company. His answer–“Being able to give jobs to my friends.” Yikes! Then the CEO (in an angry voice) about profit prospects “None of you can imagine how hard it is to get a big company to grow at 5% yearly.”

I left the room and sold my entire holding.

The stock flatlined for well over a decade until, after several years of effort, activist investors ousted the CEO and installed someone who wasn’t the founder’s college friend. The stock is up over 12x in the decade since.

I mention this mostly because my experience has been that this happens a lot. Three friends start a company. Two are geniuses, one gets the coffee–on the days he can find his way to work. Unless coffee guy blows a hole in the bottom of the boat, all get very rich. Coffee guy enters politics and becomes governor of New Jersey or, as a big donor, gets a presidential cabinet post.

Anyway, my point is that I think the Trump cabinet is long on coffee guys and media figures whose main positive attribute is a botoxy physical appearance. It’s short people with actual competence in the areas they’re responsible for. So it’s not that surprising that the administration wouldn’t have anyone who can interpret and explain the BLS numbers.

What’s maybe the most telling thing is the evident panic created in the administration created by BLS figures that don’t have a huge amount of information in them.