Despite the uncertainty we've faced globally, I am cautiously optimistic about the future and see strong evidence supporting our August 2025 white paper, "Are We in That Part of the Cycle?" The United States is divided between two distinct economies: Wall Street and Main Street. I don't see this dual-nature system going away anytime soon. The reality is that the United States is intensifying its strategic competition with China, Russia, and possibly the Middle East over technology, precious metals, and reserve-currency status.

As a result, we've seen hard assets outperform, Mag-7 stocks delivered exceptional returns, consumer spending got crushed, and the government nationalized "bad assets." The current environment reflects a classic deleveraging dynamic: private-sector balance-sheet repair occurring simultaneously with continued monetary accommodation. This tension—contractionary credit conditions offset by expansionary central bank policy—creates the 'muddle through' scenario we've described, though the sustainability of this equilibrium remains uncertain.

The hope is that AI will be a strong enough innovation for new asset classes and development to outperform the paper losses many institutions are carrying. That hope is gradually materializing; however, it remains unclear whether it will prove sufficient in time to support the losses Main Street is facing. Despite labor market and manufacturing data indicating below-average annualized performance, these are the moments in economic history when no one wants to buy.

With the surprisingly low inflation report we saw in December, consistent rate cuts, and a stabilizing international trade policy, now is the time to deploy capital opportunistically. With lenders facing losses and common equity refusing to mark-to-market, there will be more opportunities to acquire great companies at fair prices over the next year.

When we consider the Mag 7 alone, they trade at a Forward P/E of 30-35x. The rest of the S&P is sitting at 15-16x Forward P/E, creating an average S&P Forward P/E of 21-22x. This valuation dispersion historically precedes mean-reversion. Notably, Mag 7 returns are expanding, and the market appears to price the multiple expansion correctly. This doesn't consider private markets or cash equivalents sitting on the sidelines.

Given this optimistic posture, we are not entirely out of the woods, and managing risk is far more critical than upside when it comes to managing a portfolio. An equal-weight portfolio of gold and commodities, volatility-hedged high-growth stocks, and long-duration treasuries will suit most investors in 2026. I'm not calling a top or bottom, I'm simply saying that buying opportunities are increasing.

2025's market activity substantially validated my inflationary deleveraging thesis. Gold's +65% return (the strongest since 1979), consumer discretionary's -12.5% decline, and the Fed's 175bps of cuts while inflation remains elevated at 2.7% confirm the financial repression dynamics we identified. The "two economies" thesis—Wall Street vs. Main Street—is evident in the S&P 500's +12.1% headline return, which masks essentially flat performance when excluding the Magnificent Seven.

Manufacturing remains in contraction (ISM 48.2), housing prices are declining in real terms (-2.4% inflation-adjusted), and unemployment has risen to 4.6%—approaching the Sahm Rule recession threshold. The government's willingness to "eat bad assets" was demonstrated by the nationalization of Intel (a 10% stake) and the 43-day federal shutdown, which paradoxically boosted gold demand. Net interest costs exceeding $1 trillion—now the second-largest federal expenditure—ensure that financial repression remains the primary mechanism of deleveraging.

If the American Dream is "Gone" as many pundits claim, then it has been replaced by a planned economic system. That does not mean socio-economic mobility has been halted; that part of the American Dream still exists. In wartime economies, sectors aligned with government priorities—defense, critical infrastructure, domestic manufacturing—historically outperform.

The policy response to current conditions follows a predictable playbook: governments facing unsustainable debt burdens historically default to financial repression rather than explicit restructuring. Positioning for this outcome—real assets, duration, quality—remains our base case. The conditions that validated our thesis in 2025—financial repression, valuation dispersion, real asset outperformance—show no signs of reversing.

We remain positioned for continued 'muddle through' with asymmetric downside protection: overweight real assets and duration, selective equity exposure with volatility hedges, and sufficient liquidity to capitalize on dislocations. The opportunity set is expanding; we intend to act accordingly.

As always, we are grateful for your continued trust and partnership. Green Mountain Advisers wishes you and your family a happy and healthy New Year!

Data sources: BEA (GDP, trade), Census Bureau (retail, durables, housing), BLS (CPI, employment), Federal Reserve (industrial production, monetary policy), ISM (PMI surveys), S&P Dow Jones (Case-Shiller, sector indices), World Gold Council, JPMorgan, Schwab. Data through December 19, 2025 where available.