December 2025 Update
Greetings,
I hope this note finds you well and enjoying all the blessings of the Christmas season. The Melvilles are well; we continue to navigate our stereotypical three ring circus of raising three incredibly busy boys. We were blessed to find time this year to continue exploring this wonderful world we live in, sharing many travel adventures as a family this fall. Julia and I delight in the unique and different perspective of the boys’ when we are out and about. Their inquisitive nature, love for all critters, and zest for life provide a fresh and beautiful lens to examine the world. I am grateful in these moments for the chance to catch my breath and reflect, not only on family life but on the markets and economy as well.
The global political theatrics continue to command attention, often at the expense of a more meaningful and deeper discussion about the long-term nature and structure of our country and the economic road ahead. While headlines can be exhausting, I believe it is vitally important that we remain grounded in fundamentals – particularly as fiscal policy, monetary policy, and global trade dynamics are beginning to intersect in powerful ways.
Fiscal Reality and the Federal Reserve
There is no doubt that fiscal policy is now exerting tremendous influence over monetary policy. With the passage of the recently enacted “One Big Beautiful Bill,” the Congressional Budget Office estimates that the federal deficit will expand by $3.4 trillion over the next ten years. The pressure on the Federal Reserve to remain accommodative under these conditions is obvious. Lower interest rates reduce the government’s cost of financing the deficit, and that reality is difficult for policymakers to ignore.
Historically, this situation is not without precedent. During World War II, the Federal Reserve entered into an agreement with the U.S. Treasury in 1942 to cap short-term interest rates near zero and limit 10-year Treasury yields to 2.5% – a policy that remained in place until 1951. That framework allowed the United States to inflate its way out of debt by keeping real interest rates artificially low, steadily reducing the debt burden relative to GDP. While the Trump administration has not explicitly stated that this its desired playbook, I believe the President is attempting to revive similar fiscal and monetary policies of the 1940’s to tackle the government overspending.
Trade Policy, U.S. Leverage, and Dollar Dynamics
Trade uncertainty remains elevated relative to history, but it has moderated somewhat as the U.S. continues to dictate both the timing and structure of trade negotiations. While the process can appear disorderly, I believe the United States is demonstrating meaningful bargaining power. One can surmise some of this is the byproduct of American ‘economic exceptionalism’ that we have been discussing the last few years, and some credit is due to the ‘Art of the Deal’ bilateral negotiation strategy with a dizzying array of ‘carrots’ and ‘sticks’ which has led to some favorable results despite the headlines and volatility.
Currency policy has been a recurring feature of these negotiations. In my opinion, the recent weakness in the U.S. dollar is not accidental. While no administration will openly admit to desiring a weaker currency, it makes perfect sense in the context of rebuilding domestic manufacturing and narrowing trade imbalances.
Questions continue to be asked about how long the USD could maintain its reserve currency status, as threats emerge from both within (related to instability and high debt levels/deficit spending of our economy) as well as abroad. Additionally, the steady drumbeat regarding crypto/digital currencies also has investors concerned that they may be missing a future reserve currency in its infancy. Is the dominance of the USD as the worlds ‘reserve currency’ set to end?
While there is some credibility to all these arguments, Mark Twain’s quote of “the reports of my death are greatly exaggerated” could certainly apply to the U.S. dollar. Despite our high levels of debt and political division, the U.S.’s economic transparency, openness, flexibility, and governance suggest that our financial system remains at the center of global commerce. While we have problems like any economy, the potential contenders have even more. As Erasmus said, “in the land of the blind, the one-eyed man is king.”
Markets, Volatility, and the Economic Backdrop
Market volatility has reemerged as a frequent visitor this year, driven in large part by tariff uncertainty, policy risk, and the aftereffects of higher interest rates. Inflation remains my primary concern. While it has retreated from its peak, I believe it will remain structurally elevated for longer than many expect.
The United States faces large structural fiscal challenges in the years ahead, particularly on the spending side. For nearly two decades, historically low interest rates allowed us to avert our eyes from the problem. That luxury no longer exists.
Against this backdrop, I continue to emphasize balance, flexibility, and quality in portfolios. Broadening exposure beyond the most crowded areas of the market, selectively adding income where valuations are compelling, increasing international exposure where appropriate, and thoughtfully incorporating alternative investments for some investors all play a role in navigating this environment.
As always, thank you for your trust and confidence. If you have any questions, or we can be of assistance in any matter, please do not hesitate to reach out. May your holidays be filled with warmth, laughter and joy.
Best personal regards,
Erik M. Melville, CFP®
Senior Vice President/Investments
There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events.
Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing tax information, are not subject to the same regulatory requirements as more traditional investments, and often charge high fees, which may erode performance. An investment is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.
I hope this note finds you well and enjoying all the blessings of the Christmas season. The Melvilles are well; we continue to navigate our stereotypical three ring circus of raising three incredibly busy boys. We were blessed to find time this year to continue exploring this wonderful world we live in, sharing many travel adventures as a family this fall. Julia and I delight in the unique and different perspective of the boys’ when we are out and about. Their inquisitive nature, love for all critters, and zest for life provide a fresh and beautiful lens to examine the world. I am grateful in these moments for the chance to catch my breath and reflect, not only on family life but on the markets and economy as well.
The global political theatrics continue to command attention, often at the expense of a more meaningful and deeper discussion about the long-term nature and structure of our country and the economic road ahead. While headlines can be exhausting, I believe it is vitally important that we remain grounded in fundamentals – particularly as fiscal policy, monetary policy, and global trade dynamics are beginning to intersect in powerful ways.
Fiscal Reality and the Federal Reserve
There is no doubt that fiscal policy is now exerting tremendous influence over monetary policy. With the passage of the recently enacted “One Big Beautiful Bill,” the Congressional Budget Office estimates that the federal deficit will expand by $3.4 trillion over the next ten years. The pressure on the Federal Reserve to remain accommodative under these conditions is obvious. Lower interest rates reduce the government’s cost of financing the deficit, and that reality is difficult for policymakers to ignore.
Historically, this situation is not without precedent. During World War II, the Federal Reserve entered into an agreement with the U.S. Treasury in 1942 to cap short-term interest rates near zero and limit 10-year Treasury yields to 2.5% – a policy that remained in place until 1951. That framework allowed the United States to inflate its way out of debt by keeping real interest rates artificially low, steadily reducing the debt burden relative to GDP. While the Trump administration has not explicitly stated that this its desired playbook, I believe the President is attempting to revive similar fiscal and monetary policies of the 1940’s to tackle the government overspending.
Trade Policy, U.S. Leverage, and Dollar Dynamics
Trade uncertainty remains elevated relative to history, but it has moderated somewhat as the U.S. continues to dictate both the timing and structure of trade negotiations. While the process can appear disorderly, I believe the United States is demonstrating meaningful bargaining power. One can surmise some of this is the byproduct of American ‘economic exceptionalism’ that we have been discussing the last few years, and some credit is due to the ‘Art of the Deal’ bilateral negotiation strategy with a dizzying array of ‘carrots’ and ‘sticks’ which has led to some favorable results despite the headlines and volatility.
Currency policy has been a recurring feature of these negotiations. In my opinion, the recent weakness in the U.S. dollar is not accidental. While no administration will openly admit to desiring a weaker currency, it makes perfect sense in the context of rebuilding domestic manufacturing and narrowing trade imbalances.
Questions continue to be asked about how long the USD could maintain its reserve currency status, as threats emerge from both within (related to instability and high debt levels/deficit spending of our economy) as well as abroad. Additionally, the steady drumbeat regarding crypto/digital currencies also has investors concerned that they may be missing a future reserve currency in its infancy. Is the dominance of the USD as the worlds ‘reserve currency’ set to end?
While there is some credibility to all these arguments, Mark Twain’s quote of “the reports of my death are greatly exaggerated” could certainly apply to the U.S. dollar. Despite our high levels of debt and political division, the U.S.’s economic transparency, openness, flexibility, and governance suggest that our financial system remains at the center of global commerce. While we have problems like any economy, the potential contenders have even more. As Erasmus said, “in the land of the blind, the one-eyed man is king.”
Markets, Volatility, and the Economic Backdrop
Market volatility has reemerged as a frequent visitor this year, driven in large part by tariff uncertainty, policy risk, and the aftereffects of higher interest rates. Inflation remains my primary concern. While it has retreated from its peak, I believe it will remain structurally elevated for longer than many expect.
The United States faces large structural fiscal challenges in the years ahead, particularly on the spending side. For nearly two decades, historically low interest rates allowed us to avert our eyes from the problem. That luxury no longer exists.
Against this backdrop, I continue to emphasize balance, flexibility, and quality in portfolios. Broadening exposure beyond the most crowded areas of the market, selectively adding income where valuations are compelling, increasing international exposure where appropriate, and thoughtfully incorporating alternative investments for some investors all play a role in navigating this environment.
As always, thank you for your trust and confidence. If you have any questions, or we can be of assistance in any matter, please do not hesitate to reach out. May your holidays be filled with warmth, laughter and joy.
Best personal regards,
Erik M. Melville, CFP®
Senior Vice President/Investments
There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events.
Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing tax information, are not subject to the same regulatory requirements as more traditional investments, and often charge high fees, which may erode performance. An investment is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.