The Blue Tower Global Value strategy composite, while achieving a commendable 6.02% net return in the third quarter of 2025 and a 35.31% net return year-to-date, slightly lagged the ACWI during this period, interrupting a four-quarter streak of market outperformance. A significant driver of this quarter's success was the firm's investment in Georgia Capital, which continues to trade below its intrinsic value despite its share price appreciation, making it the largest holding in the strategy. This performance unfolds against a backdrop of evolving global trade dynamics, where a reduced reliance on the US dollar is becoming evident due to sanctions, tariffs, and a substantial federal deficit. The proportion of USD in global reserves has reverted to mid-1990s levels, while gold's role as a reserve asset is expanding, even as the US stock market sustains high valuations.
Western economies, particularly in North America and Europe, grapple with unsustainable deficit spending and an impending pension crisis driven by aging populations. The US debt has escalated to $38 trillion, with a projected deficit of $1.78 trillion for 2025, mirroring similar fiscal challenges in countries like France. This lack of political resolve to address spending or taxation issues provides short-term fiscal stimulus, boosting equity returns and mitigating recession risks. However, this trajectory poses long-term risks, including reduced state capacity, erosion of foreign investor confidence, and increased borrowing costs, as governments potentially resort to monetizing debt through inflation, exacerbated by events like the freezing of Russian central bank reserves. The increasing government borrowing also leads to 'crowding out' in the economy, where higher interest rates divert capital from private investments and diminish future growth prospects, with many developed nations' debt-to-GDP ratios far exceeding sustainable thresholds.
Fiscal Pressures and the Future of the Dollar
Western nations face mounting fiscal challenges, characterized by escalating deficit spending and the looming specter of pension crises, particularly evident in North America and Europe. The United States, with its $38 trillion national debt and an anticipated $1.78 trillion deficit in 2025, exemplifies this trend. Countries like France are also contending with political stalemates over essential reforms, such as raising the retirement age, which are crucial for the solvency of their social security systems. The prevailing political environment in these regions often lacks the will to implement unpopular but necessary measures, such as tax increases or government spending cuts. While this approach might offer a temporary boost to public equities by acting as a fiscal stimulus and staving off immediate recessionary pressures, it sets the stage for significant long-term economic instability. This sustained deficit spending is projected to lead to a decline in essential government services, a loss of confidence among international investors, and higher borrowing costs. The historical precedent of freezing Russian central bank reserves further intensifies foreign investors' apprehension about the stability and reliability of Western government debt. Moreover, the substantial government borrowing contributes to an increase in real interest rates, thereby diverting capital away from private sector investments and ultimately hindering the potential for future economic expansion. Many developed economies, including the UK, France, and Italy, are already operating with debt-to-GDP ratios well beyond the levels typically associated with healthy economic growth.
The current fiscal environment in Western countries, marked by persistent deficit spending, underscores a critical dilemma: short-term economic stimulation versus long-term financial stability. The reluctance of political leaders to undertake necessary but unpopular fiscal adjustments, such as increasing taxes or reducing government expenditures, allows for continued reliance on borrowing. This, in turn, artificially inflates equity returns and momentarily mitigates the risk of recession. However, the long-term ramifications are severe and multifaceted. One significant consequence is the potential for a degradation of state capacity, as critical infrastructure and public services may experience underinvestment due to forced, poorly targeted spending cuts. The growing national debt also erodes the trust of foreign investors, who increasingly fear that Western governments might resort to defaulting on loans or devaluing debt through inflationary measures. This erosion of confidence is accelerated by past geopolitical actions, such as the freezing of Russian central bank assets, which signal a heightened risk for international creditors. Consequently, borrowing costs for these governments are likely to rise, shortening their window to address these fiscal imbalances. Furthermore, the government's substantial demand for capital in debt markets crowds out private investment, making financing more expensive for businesses and households. This phenomenon leads to reduced consumer spending and business expansion, ultimately stifling economic growth. Empirical evidence suggests that debt-to-GDP ratios exceeding 60-100% can significantly impede real economic growth, a threshold that many Western nations, including the U.S. (119%), the UK (101%), France (113%), and Italy (135%), have already surpassed. Germany stands out with a comparatively healthier 64%, while Japan's high debt-to-GDP ratio (237%) is mitigated by domestic ownership of a large portion of its debt. The trajectory of current US deficit spending is therefore setting the stage for elevated real interest rates, a diversion of capital from productive private investments, and a constrained future growth potential.
The Evolving Landscape of Global Currency and Investment
The global financial architecture is undergoing a profound transformation, marked by a deliberate shift away from a singular reliance on the US dollar. This \"de-dollarization\" trend is manifested through various strategies, including the increased settlement of international trade in local currencies, with gold emerging as a critical neutral medium for balancing trade imbalances. Countries like Russia and China are increasingly conducting their commerce in rubles and yuan, while India and Brazil are establishing mechanisms for local-currency settlements in key sectors such as energy and agriculture. These bilateral and regional arrangements aim to reduce exposure to the volatility and geopolitical risks associated with the USD, funneling transactions through participating central banks and localized payment systems. Despite the inherent challenge of persistent trade imbalances between nations, which can lead to currency instability, gold offers a robust solution. By utilizing gold as a reserve asset, countries can periodically reconcile their trade deficits through physical or, increasingly, digital transfers of tokenized gold reserves via international clearing platforms, circumventing the need to accumulate vast reserves of foreign fiat currency. This strategic pivot is reflected in the rising share of gold in emerging market foreign exchange reserves, which has more than doubled over the past decade to 9%, with developed markets holding an even larger share at 20%. The substantial 55% surge in gold prices during 2025 further underscores its growing importance as a tool for de-dollarization and the diversification of trade settlement mechanisms, signalling a shift away from the dollar's traditional dominance.
The global investment landscape is also witnessing significant shifts, particularly concerning the relative valuations of US versus international equities. For over a decade since 2009, the US stock market has substantially outpaced its global counterparts. While US companies have demonstrated marginally superior earnings per share growth, the primary driver of this outperformance has been multiple expansion, meaning US stocks have become disproportionately more expensive relative to their earnings. However, this trend has begun to reverse, with international stocks outperforming the US market by approximately 11% in 2025. Despite this recent underperformance, the US market still exhibits significantly elevated valuations compared to the rest of the world, approaching levels last seen during the dot-com bubble of the 1990s. While some argue that the US market's higher valuation is justified by its concentration of high-growth technology giants, data indicates that this overvaluation persists even when accounting for sectoral differences. For instance, while the MSCI USA IMI Information Technology index had a forward P/E of 30.55 as of September 30, 2025, the MSCI Emerging Markets Information Technology index stood at a more modest 17.57, highlighting a significant valuation gap even within the same sector. This suggests that while there are still ample opportunities within individual US companies, investors in broad US stock indices are unlikely to replicate the substantial gains experienced between 2009 and 2025. Paradoxically, the average financial advisor still allocates a disproportionate 77.5% of their equity portfolios to the US market. Looking ahead, global markets are poised for heightened volatility due to geopolitical, economic, and technological changes, particularly the impactful capital expenditures and valuations driven by AI investments. This environment, while challenging, is expected to create dislocations and opportunities that actively managed strategies can capitalize on. While short-term fluctuations and underperformance against market indices are possible, the overarching objective remains long-term outperformance through strategic investments in high-quality businesses acquired at attractive valuations.