Footnotes is a monthly publication which summaries our “First Friday” webinar presentations each month. The goal of the Footnotes publication is to capture our “First Friday” presentation’s most important data points, which will make it easier for The Abernathy Group Family Office members to make intelligent decisions based on facts and data – as opposed to potentially conflicted opinions from the mainstream media.
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As a short reminder to each Family Office member, The Abernathy Group Family Office has now sponsored 20+ “First Friday” webinars. All of them are available on our website and “YouTube” Channel if you would like to go back and see how we have interpreted the economic signals, while doing our best to cancel the noise over the last year plus. Our goal: to help you spend less time making intelligent financial decisions, by focusing on causal, predictive data (signals); and ignoring the clamor of biased, irrelevant data (noise).
Commentary from the April 2025 “First-Friday” meeting:
Today’s Presentation is “Questions and Answers – Today’s Most Important Family Office Questions.”
Good afternoon, everyone. My name is Steven Abernathy, and I, along with my co-host Matthew Daley, will be your host today.
Welcome to the Abernathy Group Family Office’s April 2025 “First Friday” meeting.
In this meeting, we will focus our discussion on six truly important questions that all intelligent investors must answer.
As we have been warning for some time now, 2025 continues to promise significant volatility, eventually culminating in a return to more normal valuations.
However, as we have said numerous times, most public markets are priced for perfection, speculation is abundant, and policy is changing rapidly. This is a recipe for trouble – and is the reason that each of you has such a prominent position in U.S. Treasury securities yielding 4-5%.
Our prepared comments will be recorded today, as other families who cannot attend have asked us for the recording.
Our comments today will be approximately 40 minutes long, leaving us plenty of time to answer questions from everyone on the call.
*If questions arise from the content of today’s presentation, please either send the question along by typing your question into the “Chat” box at the bottom of your screen or write it down and raise your hand at the end of the prepared remarks – by clicking on the icon at the bottom of the screen.
We always intended to make this monthly presentation into a Town Hall-type meeting because we realize our comments may create related and, at times, unrelated questions. The primary intent of this meeting each month is to ensure our questions are answered with sufficient data while avoiding bias.
We want to encourage you to send us your questions, as it is likely that others may have the same or related questions… in short, it makes the discussion more interesting, so please feel free to ask away!
One final NOTE:
Please remember to “Mute” your device’s microphone and stay on “Mute” unless you have a question, as background noise is audible and is distracting.
And by the way, if you haven’t been to our website lately, please consider visiting.
There is a wealth of information; content is added frequently, and some research reports are available, along with summaries of each “First Friday” meeting going back years.
Also, a short self-serving public announcement: We recently started the first 401k plan consulting firm sponsored and funded by a Family Office with the goal of fixing the 401k plans in the U.S.
This firm will fix your 401k plan for free while offering each employee the education they need to make intelligent decisions about their future.
Our goal is to transform the staid and boring 401k plan from a cost center into a benefit that will increase employee retention and help recruit valuable new employees with the ability to retire on time and with the dignity they deserve.
Over 80% of US plans overpay for Plan Administration and force employees to overpay for investment choices. Few corporate plan sponsors actually educate their employees, enabling them to make intelligent decisions about their most important retirement resource.
If you have a few minutes and if you have a retirement plan, give me a call or stop by our website and read one of our recently published research papers. We are happy to let you know how your plan ranks relative to the firms your company competes against.
With that said, let me turn it over to Matt Daley, who will oversee today’s presentation.
Slide 2
Matt: Today, we will discuss several topics using an interview-style approach. First, we will discuss some of the things we think the market may be getting wrong.
The most prevalent topic in the current news cycle is tariffs, but we will also spend a little time on energy demand.
Next, we will present our analyses on the possibility of recession and its potential causes, effects, and level of severity, transitioning that into the Family Office’s stock market outlook for the next 5-10 years.
After that, we will return to a consistent theme we have been touching on for months, the focus of our March webinar: artificial intelligence and the hype around it.
Then we will discuss global diversification. Is the US slated to outperform other markets, or are there markets we should be paying attention to outside our borders?
Lastly, we will tie it together by asking what the next big technological revolution will be after AI. This may have a global slant and broad implications.
Slide 3
Matt: Steven, what is one thing the market is potentially getting wrong right now? What is being said about it, and what is really going on? Are there alternative outcomes not being widely considered?
Steven: Tariffs are largely misunderstood by the investing public. Tariffs are being discussed in almost every sentence related to our U.S. economy. To make matters worse, the “tariffs topic” is being politicized rather than historically researched to understand the “cause and effect” nature of tariffs.
Most investors don’t attempt to research topics that took place before they were involved in the market, and the vast majority of investors have never researched history before they were born. This is a huge problem because not understanding society’s history creates a decision-making framework with little data.
For instance, most investors don’t know that from the late 1800s through the first decade of the 1900s, the U.S. had no income taxes due to the revenue generated from trade tariffs on almost everything coming into the U.S. The trade tariffs paid for our balanced budget without any income taxes.
This is not to say the tariff discussion creates a certain future. Much has changed since 1913, when tariffs enabled the U.S. to run a trade surplus.
However, we can say with a high degree of certainty that the tariffs recently imposed by the current administration are meant to be reciprocal and include an effort to reduce the trade imbalances between the U.S. and all of our trading partners. Why? Trade imbalances distort and decrease our GDP while increasing our U.S. deficit.
Today, there is a lot of political discourse around reciprocity. This conjecture is as politically armed as any I have heard since the Trump/Biden campaign. We would like to avoid this political argument and stick to the facts, so you can make your own decisions about the tariff structure the current administration has imposed.
Firstly, as we discussed in last month’s presentation, the U.S. collects approximately $80 billion in tariffs. It pays well over $600 billion in tariffs despite importing MORE THAN 2 times the amount of goods and services than it exports.
Think about this for a moment. The dominant global power, with the largest market for consumers and consumption, pays almost 8X the amount it collects, despite the fact that we consume almost 3 times more than we export…
If anyone on this call thinks this is fair, understanding that the U.S. has also been responsible for protecting Europe, Mexico, Canada, and more than 20 other countries for the last 75 years, please give me a call so you can explain the math to me.
I am NOT trying to make a political statement – I am trying to make a statement of logic.
The strongest country in the world should have at least an even playing field regarding global tariffs. And game theory, along with historical experiences, would support the reasonable expectation that the strongest country in the world, if protecting scores of weaker countries, should benefit from a tariff surplus.
The strongest country in the world has been the U.S. since WW2, and because we were the strongest and the most profitable, the calculus clearly tells me that the rest of the world has been benefiting significantly from our charity. And, that is all good and well – maybe even fair and just. However, for this oversight and charity, it seems reasonable for the U.S. to at least have an even playing field, described as a reciprocal trading framework.
We certainly admit that there is more at play than we may be embracing; however, tariffs are designed to change economic behavior. We want to remind each investor on this call that humanity is intelligent. When steak is materially more expensive than chicken, we substitute chicken for steak. When foreign-made cars are more expensive than American cars, many Americans will buy American-made cars. When Italian pasta is more expensive than American pasta, we substitute – wait a minute – that is a bad example – no, we absolutely can’t substitute American pasta for Italian pasta… (that would be absurd!)
We believe the current administration knows that a tariff-free world is ideal.
Yet, after more than 75 years of the U.S. a) militarily protecting the world and b) subsidizing other countries’ economies (China was the biggest beneficiary), we find the U.S. paying 15-20 times the tariffs that we collect. This seems unarguably unfair and should change.
There are several ways to change global trade imbalances. You may or may not believe the current administration’s efforts are the best way to do so. The current administration’s strategy is almost certainly going to lead to disruptions, which will almost certainly lead to discomfort in the short term. There is almost always difficulty and pain associated with change.
Tariffs are imposed to change economic imbalances. They are effective over the long term, yet painful over the short term.
The American consumer remains as the strongest and most resilient in the world. Without being political, the current administration is trying to create an even playing field – despite the fact that we are the strongest country in the world, and could demand preferential access to our U.S. consumers.
In summary, as we have been saying since December in each presentation, this administration does not offer uncertainty.
It is certain; they want the world to change. They want an even playing field. Each person on this call may, or may not, agree with the negotiation tactics the current administration is taking to achieve this goal. However, it is certain they are going to pursue the agenda that Trump and his trade advisor Peter Navarro have been touting for more than 30 years at every opportunity. Equal trade first, then free trade.
Matt – If I may, there is one other tremendously misunderstood variable the market is overlooking.
Energy demand – the energy industry is the lifeblood of every economy in the world. If we run out of energy, electricity collapses; almost everything in our world stops.
For our lifestyle, energy is almost as important as oxygen. And for global defense, energy availability will define those able to defend themselves during war and peacetime alike.
This month, we had a Family Office member attend one of the most important annual utility conferences in Dallas. You might think, “Attend a utility conference? I would rather watch paint dry.”
Not so this year! There were many incredibly important takeaways—too many to bother you with. However, one huge variable is being misunderstood by the capital markets, and it is potentially world-changing.
Energy demand has mirrored population growth over the past 50 years, with a 1-2% per year growth rate. This means the utility industry is slow-growing yet consistent. Consequently, it is the type of public security most valued for dividend distributions and safety.
Investors seeking growth avoid the utility sector.
While the utility market is pricing in 2% growth, this year, the insiders – those running the utility companies themselves, uniformly agreed they have demand for nearly 10% growth/yr for as long as they can reliably generate estimates. Keep in mind, this was not just one utility espousing this uptick in demand, but the vast majority of all utilities in the U.S.
What is Driving Demand?
As you might guess, data center growth topped the demand list; yet this surprise demand increase is not only from data centers. Twenty percent of the new demand is coming from increased U.S. manufacturing demand, twenty percent of the increase is coming from EV demand, and the rest is coming from any number of lifestyle demands, as every portion of our existence depends on energy.
This means the utility industry may become valued differently – it could become a growth industry.
Either way, the market is unaware of this, and I urge each of you on this call to consider the first-order effect of increased demand for electricity. I then urge you to consider the second and third order effects of demand growing from less than 2% per year for over the last 50 years to over 10% per year on the natural gas industry, the nuclear power industry, and equally importantly – the infrastructure we call our grid – or the connection and transmission of moving energy from point A to point B.
Regardless of the source supplying the needed energy, the U.S. grid is incapable of handling a 10% increase in demand – infrastructure expertise will likely be in high demand for as far as the eye can see.
Matt – sorry for that long-winded explanation, yet I wanted to make sure we pointed out areas where the market is clearly wrong about its expectations and consequent pricing.
Matt:
First of all, regarding the politicization of these policies, I think it’s important to note that tariffs have historically been a left-leaning idea. Both Nancy Pelosi and Bernie Sanders have advocated for balancing international trade tariff rates in the name of what were formerly traditional Democratic party values of supporting unions and advocating for working-class blue-collar Americans.
To take the other side, I would like to point out one metric to look out for. I saw the economist Thomas Sowell say that after the US increased tariffs in the 1920s, the Fordney-McCumber Tariff Act of 1922, most would say, contributed. The point he made was that uncertainty can cause people to sit on the sidelines. If this is short-term and used as a negotiating tactic to bring better terms for American producers, then it is okay. If the policy framework is done through trial and error, implement one rate and then try something else if it doesn’t work. This uncertainty may encourage some countries, individuals, and investors to pause and hold their money until they feel comfortable with the future outlook. This, of course, could contribute to a possible recession.
Slide 4
Matt – What is the probability of a recession?
What are the drivers? And what could we expect from the markets over the coming years?
The recession probability has increased for certain. However, there is no way to determine how deep or how long this recession will last.
As we have consistently discussed for more than 12 months, the debt load for the U.S., for corporate America, and for the U.S. citizenry will play an important role in the length and depth of the recession to come.
The early indicator to watch is the employment rate. If the unemployment rate moves up, it is a signal to expect a longer recession.
Interest rates and the strength of the dollar will also come into play. If interest rates move lower, this will lessen the recession’s negative impact and may offer us a faster recovery. So keep your eyes first on employment, and second on interest rates. At the same time, keeping your eyes on the bankruptcy rates will be important. We expect bankruptcies to increase, of course, and we expect them to move towards record levels experienced in the past. If we avoid this economic likelihood, our recession will likely be shorter and less damaging.
Is it likely to be as bad as the Great Financial Crisis of 2007-9?
We just don’t know, as many of the first-order effects are still unknown, and of course, the domino chain’s second and third-order effects are completely unknown today.
Matt – did you have any comments to add to this topic?
Just that I think it is important to remember that most often, when a recession comes about due to a pinpointed sharp event, i.e., COVID, it tends to rebound faster. However, if a recession occurs gradually through a slow erosion of value, rampant overspending, structural issues, etc., it will likely lead to a more prolonged period of stagnation, i.e., Japan in the early 1990s.
If we are to enter a recession, we should veer toward the expectation that it will be a longer period before recovery.
Slide 5
Our “Base Case” for the stock market is the same today as it has been since 2023.
The public and private markets remain overvalued. Speculation is rampant. Leverage is at record levels, leaving many investors with fewer alternatives than normal.
We are either going to have a significant correction which will bring our public and private markets to a valuation level which allows investors to expect more normal returns, or we will have a period of 5-10 years where the market narrative continues to vacillate from euphoric to suicidally negative – driving markets higher and lower, confusing the investment world to the point of almost giving up trying to invest in the public and private markets. These 5-10 years will leave the market approximately where it began in 2023.
This is why we have rebalanced everyone’s portfolio to avoid seeking appreciation in an overvalued environment. We are all glad 50-75% of our investment allocation is aimed at high-quality dividend and income generation, which allows us to wait until the markets offer us the ability to invest at levels that allow us to expect a reasonable return relative to the risks taken.
Slide 6
In short, our base case is either a significant correction over the next 5-10 years, which will bring valuations much lower than the average valuation over the last 100 years, offering a buying opportunity that most will NOT want to participate in because the narrative is so scary, or we will tread water, with yearly narratives changing from incredibly bullish to incredibly bearish, leaving the overall market relatively unchanged.
Of course – we do not have a crystal ball – and our insights are based on historical outcomes when markets were similarly valued, as shown in the current slide which documents at least 4 periods over the last 125 years where our capital markets moved both up and down, yet ended with a near 0% return for investors seeking market appreciation – and each of those periods began with an overvalued market coupled with a narrative that convinced the world that there is no limit to growth, risks have evaporated, and conventional investing wisdom is dead.
Matt – do you have any more to add to this topic?
No, I think you covered it nicely and we can move on. So much attention is on Artificial Intelligence, are we overbuilding it and will there be some big losers that look like big winners right now?
Slide 7
The jury is still out on whether Artificial Intelligence is being overbuilt.
The question is not whether it will be helpful in our growth as a society and as a world. The question is not whether we will use the infrastructure needed for inference, which is just saying that similar to the 1990’s few used the internet and didn’t understand why the world was spending the money on the infrastructure – fast forward a short 20 years later, and the internet is so much a part of everyone’s life that if the internet goes down everyone from my firm to my family – comes yelling to me as if they are in a critical accident and need emergency aid.
The more relevant question for all investors is how a return on investment will be delivered. The most complete and truthful answer is that we do not yet know.
So my short answer to your excellent question about overbuilding is “Yes.” We are overbuilding infrastructure today.
The firms that are spending hundreds of billions on infrastructure will likely be sorry at some point over the next 10 years, because there will be a period where they have to prove the value supporting what they have spent, or write it off. However, over the longer term, the extra power demanded, the upgrading of our grid, and the collective intelligence bestowed upon humanity will have incredible returns for lifestyle and progress on topics like decarbonization and disease eradication.
Healthcare may be an incredible beneficiary of the Artificial Intelligence revolution.
Matt – do you want to add to this? No. Well said; lets move on to global diversification.
Slide 8
The main question before us today is not whether we should diversify in a global allocation that includes all countries, despite what we think of them at this moment. The reason is that economies change; countries have new administrations, new ideas, and new resources, and these changes are impossible to predict.
The more relevant question is whether the U.S., with its currently overpriced market, is worth the overvaluation being demanded relative to the seemingly slower growth yet higher dividend-paying non-U.S. countries around the world.
Our position on this is as we have discussed many times:
“The more you know about the future, the less you should diversify.”
“The less you know about the future, the more you should diversify.”
For instance, if you have insider information and are completely sure about the announcement coming in the morning, you should have the vast majority of your assets in the target, which will prosper based on the information.
Although it might land you in jail, this is an easy decision to make, so do not invest based on insider information.
In short, we do not know—nor does anyone else in the world—what will happen globally over the next 10-20 years.
Here is what we know: India looks like China 20 years ago.
India has the largest population on the planet. It is a capitalist country. India is hungry and believes in merit, meaning that if you work hard and make good decisions, you will prosper. The Indian citizenry is motivated by a better lifestyle, well-educated, and smart. However, it has not performed well over the last twenty years. This underperformance has convinced many that India will not perform. As always, there is the usual cast of negatives associated with the investment case against India.
What we believe is unarguable is that everyone should be diversified, because we truly don’t have a crystal ball into the future.
Here is the most important aspect of diversification, and it is a litmus test for determining whether you are truly diversifying or just kidding yourself. When you are adequately diversified, you ALWAYS have one or several asset classes that are underperforming or losing money.
I realize no one wants to lose money as a cost of diversifying, yet diversification means non-correlation—it means zigging when other parts of the market are zagging. However, done correctly, it reduces volatility, and reduced volatility increases returns over time.
As said, the more you know, the less you diversify; the less you know, the more you diversify. The long-term goal is not to lose money, and diversification is a key variable in this goal.
Matt – do you want to add anything to this topic?
Yes, but I don’t want to get into it necessarily because I think we will touch on my main point in our last topic.
I’ll just say that AI may seem revolutionary and it is, but we are just at base level one in a multistep technological revolution that will transform the world in completely unimaginable and many unforeseen ways. What we are seeing now is the absolute most basic building block to what is going to come.
Slide 9
For those of us who relentlessly research this topic, it is very clear that the next disruptive technology to change and improve our lives, companies, and society is the movement of “agents” coming on the scene. What do I mean by agents?
Agents are Artificial Intelligence robots that actually achieve a goal for us. Think of it this way (simplistically): Artificial Intelligence provides the information or the answer to the question. Agents actually carry out the procedure.
In an example we used last month, if you want to schedule a visit to the wine country in Sonoma Valley, California, and you want to visit a certain type of winery or restaurant while staying at a certain hotel chain, an agent can find the locations and make the reservations for you, saving you time and potential frustration.
So, for those of you who are looking for the next layer of hype and gold rush-like narratives, it is likely to be the agentic revolution.
However, for those of you who really want to be on the ground floor of the next earth-shaking revolution—who want to buy NVDA at $1 per share—understanding that there were 50 NVDAs all trying to build the next generation of semiconductors that would change the world, and the vast majority of them lost the battle. The next life-changing technology will be quantum computing.
Is it now? No. Is it 10 years away? We don’t know. Will there be one winner, or lots of winners? Probably several, yet no one knows yet.
What we do know is that quantum computing will have a life-changing effect on the world. For those of you with 10-20 years to wait, it would be wise to start your research.
Matt, I know we are running a bit longer than we thought. However, do you have some comments to add?
Slide 10
In less than one minute, I would like to explain quantum computing at its most basic level so we can all begin to understand its promise.
The fundamental building block of a quantum computer is a qubit. Unlike classical bits that are either 0 or 1, a qubit can be in a superposition, meaning it exists in a probabilistic combination of both 0 and 1 at the same time. Imagine a coin spinning in the air – it’s neither heads nor tails until it lands. Similarly, a qubit holds a range of possibilities until measured.
Without getting too wonky or technical, quantum computing will change every event and activity we engage in. It will offer solutions faster, more accurately, and with fewer hallucinations (incorrectly answered questions) than Artificial Intelligence. Quantum computing will be able to change everything as we know it today. Stay tuned.