CAZ Investments Quarterly Letter 2025 – Quarter 1

An Eerie Calm Following the Storm

This is the letter for the 1^st quarter of 2025, but commentary must be added to reflect the bedlam that markets experienced in April. To recap some of the gyrations that investors had to endure:

• The S&P 500 peaked on February 19^th and dropped more than 21% before the lows were reached on April 9^th. Officially, that means we experienced a bear market, even if it only lasted ~six weeks.
  • Stocks recovered quickly and as of this writing the S&P 500 was only ~4% below the February high.
• Yields on the 10-year U.S. Treasury bond have experienced one of the most volatile periods on record. After yields skyrocketed in late 2024 and early 2025, to 4.79%, concerns about a possible recession drove rates down to 3.86% in early April. Then, as quickly as the world became convinced that a recession was imminent, investors became more convinced that inflation was here to stay. This created the largest three-day spike in 10-year yields that has been seen in more than 40 years, with rates jumping back to 4.52%, and they have remained in that general range through early June.
• The U.S. Dollar has gyrated quite dramatically as well, with unprecedented strength late last year giving way to sharply lower conversion rates, with many currencies appreciating more than 10% versus the dollar in a matter of weeks.
• Most every asset class, sub-asset class, sector, and individual security has experienced a rollercoaster without a seat belt, through one of the most volatile market environments that most investors have been subjected to since the Covid spring of 2020.

At this point, the markets appear to have recovered from the shock and seem to have entered a “wait and see” mode. No one is quite sure what is coming next and so investors seem to be content with current asset levels and are waiting for a catalyst in either direction. Thus the title of this letter that we are currently experiencing “an eerie calm…” Stay tuned, as the volatility one way or the other is likely to return with force in the near future…

During the chaos of April, we did something that we rarely do, twice, within three weeks…We changed the ranking on the CAZ Scale. During the acceleration of the selloff in early April we moved from a 1 on the scale to a 2, letting investors know that the risk/reward for public markets had improved due to the sharp drop in valuations caused by the decline in stock prices. Then, after markets rocketed higher based on news related to the tariffs being postponed, we moved back from a 2 to a 1. This was due to not only the spike in valuations, but also due to the new reality of less predictable earnings. High prices + less confidence in earnings = more risk… That is where we remain in early June, a “1” on the CAZ Scale. We firmly believe that the risk/reward profile of traditional risk assets is not very favorable.

We have received numerous inquiries from investors and the media regarding how they should interpret changes to the scale. Therefore, we believe it is beneficial to provide some historical context. As we have emphasized over the past 24 years, the CAZ Scale is not intended to be a market timing tool. Its purpose is to inform asset allocation decisions by indicating how we are positioning our personal capital within the parameters of our target asset allocation.

For instance, if an institution’s investment policy statement requires stock exposure between 40% and 65%, they must decide where to position themselves within those limits. The CAZ Scale was designed to assist in making that decision. For example, if the CAZ Scale is at a 1, we would suggest the investor maintain minimum exposures, between 40-45% in stocks. A rating of 2 indicates a range of 45-50%, a 3 corresponds to 50-55%, a 4 indicates 55-60%, and a 5 signifies maximum exposure of 60-65%.

This methodology can be applied irrespective of the allocation bands’ width. We know of several large family offices that use our scale within their flexible mandate that ranges between 50% and 150% of stock exposure. Regardless of the bands employed by an investor, adhering to this approach should help them uphold a disciplined rebalancing program. This ensures that decisions are based on fundamentals and valuations rather than being arbitrary.

Still in the Stagflation Camp

With that context on the CAZ Scale, we will move on to the “why” we remain a 1 and believe the risk/reward is not very attractive. Is it possible stocks will rally from here? Absolutely, and we would expect material gyrations both up and down to be the norm, not the exception! However, the world appears to be coalescing around the concept that we have discussed in these letters for the last several years, which is that stagflation is the most likely economic environment. Lest there be any confusion, throughout modern history stagflation has produced the worst return profile for traditional stock and bond investors.

The case for stagflation is becoming easier and easier for investors to believe, as the impact of tariffs, onshoring, etc., can and will likely be inflationary and at the same time create the risk of a recession or a stagnant economy. This results in the Fed remaining “in a box,” with significant challenges that make it very difficult for them to lower interest rates to stimulate the economy out of fear that they will further accelerate inflation. Yes, that creates a circular reference where the Fed will likely stay on the sidelines until one of two things happens, a major recession breaks the back of inflation or massive growth breaks the back of the soft economy… in either situation, it is hard to see how traditional stocks and bonds would perform well. History has borne that out, with every stagflationary environment having delivered a painful experience for investors.

One of the most common things we are asked to do in this letter is to expand on how investors should consider these macro-economic comments and their impact on private market investments. That would take a book to fully expand on the answer, not a letter. The good news is that we did write such a book, The Holy Grail of Investing! That is certainly the place we would recommend people start as it provides good commentary on how different economic environments would be expected to impact the various themes in which we are deploying our personal capital.

From there, we will provide some more targeted commentary. The reality is that stagflation is going to have an impact on every asset class, just like any other economic environment. Some are harmed, some are helped, and the devil is in the details and the specifics. What we can say with confidence is that all four core themes we discussed last quarter are some of the least impacted by stagflation. As a reminder, they are:

The Energy Evolution – We are for all energy and against all poverty and the long-term supply/demand imbalance is extremely lopsided and valuations are as compelling as we have seen them in 40+ years.

The Growth of Private Markets – More and more investors continue to see the benefits from adding private investments to their portfolio. The democratization of alternatives is just getting started, with 401k plans now allowed to own private investments and becoming more commonplace and, just last week, the SEC removed the accredited investor requirement to invest in many assets that were previously unavailable to ~90% plus of the investing public. These businesses we own that manage private investments are driven first and foremost by the growth in assets under management and the tailwinds for asset flows are exceptional.

The Void Left Behind by Regional Banks – With the growth of private markets, there is an opportunity to become the dominant lender to the owners of alternative assets. The resulting holdings are virtually unaffected by the economic environment, and benefit from higher interest rates.

The Changing Consumer – Cord cutting is not going to reverse and the ownership of professional sports teams provides resilient revenues that are less impacted by a soft economy and inflation protection.

We continue to believe that each of these themes provide excellent risk/reward, with little correlation to the public markets. Thus, these are the primary areas where we continue to deploy our personal capital. There are other episodic opportunities that we will take advantage of, such as Disruptive Technology, etc. Speak to our Team to get full details on how you can partner with us in any of these areas.

It is hard to believe that summer is almost upon us and we hope that everyone has some time to rest and recharge between now and Labor Day. What we can say with confidence is that we have some very exciting things planned for the fall and would expect the 4^th quarter to be exceedingly busy. Please let us know if you have any questions or how we can be helpful in any way. All our very best! 

The CAZ Investments Team