Gyrostat Market Overview

Whilst we make no attempt to "predict" markets, history teaches that extended periods of low volatility often precede sharp drawdowns. Our allocation framework therefore begins with the probability weighted range of macro outcomes, not with a central forecast. On that evidence, current conditions warrant heightened attention to downside protection.

A long sweep of data compiled by Reinhart & Rogoff (2009) documents recurring episodes of stress across seven distinct arenas:

1. Banking
2. Currency
3. Government debt (external, e.g. USDdenominated)
4. Government debt (domestic)
5. Inflation
6. Equity markets
7. Corporate bond markets

Source: Princeton University Press

Government debt (domestic)

The USA debt is at or near historical highs as a percentage of GDP, and is protected to continue to rise with budget deficits forecast by the Congressional Budget Office.

Source: Federal Reserve Bank of St. Louis 

Inflation risk | policy signals versus market pricing

Last week Chair Powell reiterated the US Federal Reserve's data dependency, yet breakeven inflation implies only modest price pressure ahead.

*Nominal minus real yield.

There is, in short, a marked gap between consumers' view of inflation and what the bond market discounts.

Source: Bloomberg, 9May2025

Equitymarket earnings risk

US EPS estimates have not suffered a broad downgrade since mid2022. Precedent suggests that when forward guidance eventually rolls over, revisions can be abrupt and deep. Geopolitical friction and tariff uncertainty only raise the odds.

Source: Macrotrends

Valuations on traditional metrics

Starting multiples remain elevated relative to long run averages (see, e.g., CMG Wealth, On My Radar, January 2025). Finance theory and practical experience both argue for systematic rebalancing after powerful rallies-precisely the backdrop we observe today.

Portfolio construction implications

Family offices are already moving: surveys put their allocation to truly noncorrelated assets north of 25 %. Listed volatility, meanwhile, has cheapened; the VIX closed 18.2 on12 May, up 72 % year-on-year yet still far below crisis highs. Protective structures such as bought puts therefore offer inexpensive portfolio insurance, aligning with Gyrostat's mandate to defend real capital for lower risk investors.

Source: GoogleFinance

Forward actions

1. Rebalance: Harvest gains from equity beta and redeploy into diversifiers.
2. Inflation hedge: Maintain exposure to real return assets; breakevens may underprice risk.
3. Optionality: Accumulate low-cost downside protection while volatility remains benign.

Our objective is unchanged: deliver steady real returns through the cycle by constructing portfolios that are robust to the full spectrum of macro scenarios-rather than betting on a single "most likely" outcome.

This article has been prepared without taking account of the reader's investment objectives, financial situation or needs and is intended solely for Australian residents. Any person reading this document should, before deciding to invest in or continue to hold investments, seek professional advice.