Jun 13, 2025, 4:48 PM ETInterview, Fireside Chat

Staying long US assets

Recent PPI and CPI data are described as "benign," with inflation moving toward the Federal Reserve's long-run 2% goal from post-pandemic highs.
Analysts note that tariffs currently in place have not yet eroded hard inflation data or triggered the expected inflationary spike.
The recession narrative is viewed as unlikely, supported by a 4.2% unemployment rate and a positive growth gradient.
Potential "abstention" in consumer behavior due to higher prices is identified as a factor masking inflationary pressures, though the economic elasticity of tariffed goods remains a variable.
Future data releases, particularly following the anticipated budget reconciliation in early July, will be scrutinized to determine if exogenous trade shocks translate into underlying behavioral changes.

Since April 2023, markets have risen approximately 50% despite concurrent banking sector issues and geopolitical instability.
Ashok Varadhan explicitly states that sustaining 25% annual returns over the next two years is not expected.
Current market volatility ("wall of worry") is centered on trade disputes and sovereign deficits, which are perceived by some investors as extreme but likely to gravitate toward a sensible baseline.
Risk premiums are currently embedded in sovereign debt and the US dollar, with the expectation that these premiums will close if adverse trade or deficit scenarios do not materialize.
The market is described as resilient, with many investors remaining on the sidelines waiting for the narrative to clarify before committing capital.

The US dollar is forecast to be "fairly stable," as initial bullish flows from its status as the highest-yielding G7 currency have largely been exhausted.
Policy-driven risks have prompted some investors to immunize against the dollar, leading to a projected shift toward a more balanced global currency approach.
US interest rates are not expected to break the current 10-year Treasury yield threshold of 4.5% to 4.6%.
Current yield curves (Fed funds at 4.375%, 2-year under 4%, 10-year under 4.5%, and long bond near 5%) are deemed entirely consistent with macroeconomic data and debt sustainability.

The US remains the primary investment destination ("the place to be"), driven by the strong incumbency and heavy capital investment of US hyperscalers relative to global competitors.
The recommended portfolio strategy is a 65-70% allocation to US assets, complemented by 30-35% in foreign assets.
Specific asset classes favored include a linear combination of US stocks and bonds, with exposure to a "smattering" of other G7 currencies rather than a sole reliance on the dollar.
While Varadhan acknowledges a personal preference for exotic assets, the current public strategy emphasizes simplicity and tradable instruments for broader client visibility.

Investors are advised to monitor how trade and deficit policies manifest in the underlying economic data over the coming months.
The program notes that if exogenous shocks fail to impact behavioral economics, market risks may subside, though no guarantee is provided that these results will be achieved.
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