Be Cautious My Friends -- My Mid-Term Stock Report.
“When the music stops, in terms of liquidity, things will be complicated,” Prince said. “But as long as the music is playing, you've got to get up and dance.”
-- Chuck Prince, ex Citibank CEO
My wife says I should get a hobby. I told her I have a hobby – investing. She says, no, she means something other than money. I suppose she has a point – but whatever. I thought now might be a good moment to update my investment blogs.
Back in January, I offered my investment predictions for 2026. See https://www.awrcounsel.com/blog/2026/1/14/my-investment-predictions-for-2026 ; https://www.awrcounsel.com/blog/2026/1/7/it-took-only-a-week-for-one-of-my-2026-predictions-to-likely-pan-out-military-contractors-are-likely-heading-into-a-good-year-for-the-war-business. And while not everything has proven out, I am pretty “self-satisfied” by my accuracy. And I think that the things that haven’t played out yet are just early but not wrong. We will see. Of course, the future doesn’t give a darn what I think.
If you read my stuff, you know I have been periodically beating the inflation drum theme for some time. I have been a longtime bond bear. I never thought buying a long-term bond yielding a historic 5,000-year low interest rate made any sense. Refinancing your mortgage made more sense. And that line of thought remains the best strategy. It has proven somewhat prescient. Last week the Producer Price Index (“PPI”) showed gathering steam behind the inflationary push. Wars have a habit of doing that, and this time is unlikely to be different with Trump pushing for lower interest rates before the midterms and the new Federal Reserve Chief likely having a secret deal to hold back rates until after the November mid-term election. We will see what they do, but anything but rate hikes at the next Federal Reserve meeting are the seeds of additional future inflation. I still think natural gas pipelines, land, precious metals, and energy and industrial infrastructure are all decent inflation hedges and will do well in the world that is coming. I got this point of view from a book I read called the Death of Money about the Weimar Republic and the German inflation of post-World War I. If you are a fixed price government service contractor, now would be a good time to start repricing your cost proposals especially for the out years of your contracts.
Besides inflation, the current worry is the end of the world as we know it from AI. I have to admit that the power of AI has surprised me. If you have a medical question, you are more likely to get a detailed helpful answer from AI rather than your harried doctor with 5 minutes to see you. And even the things that I specialize in, the quality of the AI responses is improving. Send your kids to plumbing school, not college, because white-collar work as we know it may be already in the rear-view mirror. I am re-reading a 1955 book by Kurt Vonnegut called Player Piano, which I first read as a teenager. He predicts a future of three classes – the engineers who automate the industrial functions, the managers who oversee the society, and the unemployed masses. There is no lawyer class. The book’s science fiction conjecture turns out to be not so far from the truth. It is that reality which likely partly results in our declining birth rates. Consequently, I don’t see a great future for consumer-oriented businesses. Sadly, the masses are going to be further impoverished.
With respect to government contracting, a subject I have some experience with, it is plainly obvious where the big opportunities will be. We just shot all our high-tech missiles at Iran and worked quickly through our own missile and drone defense systems. We are going to need to spend a lot more to replenish them. And we need to guarantee longer-term production contracts. That means a steady stream of revenue for defense contractors, both established and new. The market has, of course, already taken that into account, but maybe not as fully as it should. Sadly, I am still bullish on the merchants of death.
As for almost everything else in the investment world, I am a bear. There are lots of great tech companies, but they are either fully or overvalued. And the same can be said for most of the rest of the stock market, except you can’t say they are “great businesses.” Most of them are not. That doesn’t leave you many places to hide.
I have been accused of predicting ten out of the last three recessions. While I believe in markets and the wisdom of crowds, I also think markets are prone to excess and delusion. Now is an “almost” everything bubble. The story I tell myself is this -- wake up and smell the coffee. It is likely a greedy, speculative market top. I tell myself, don’t get carried away. Yes, it is hard to time the market, but it is harder to resist the speculative tide. I don’t imagine that I am smart enough to time it and get out at the top or get back in at the bottom. But I gave it some thought and acted to reduce my risk now, particularly in my 401K since there is no tax penalty from selling. Take some off the table. It isn’t all in or all out. I sold in 2026 parts of my investments and booked my winnings. It is about asset allocation at moments of high risk. And consider buying some real tangible stuff in an inflationary world.