The Dog That Didn't Bark: An Investment Truism

Plus Rating the Private Banks' 2025 Outlooks

Every January, the two private banks I’m a client of, Goldman Sachs and J.P. Morgan, give their annual outlook, the former on a general Zoom and the latter in a private meeting. Most of what they say reflects the Wall Street consensus and, despite my contrarian streak, I usually go with their flow. For the last few years this has been right, as their message to stay in U.S. large cap equities, with a mix of bonds and some alternatives, worked fine.

This year, however, the outlooks felt somehow off, as if both banks were straining to find reasons to stay the course despite alarm bells ringing everywhere. (Indeed, when President Trump opened the NYSE on December 12, he may have literally rung the bell for the market top.) On the Goldman Zoom, their chief strategist Sharmin Mossavar-Rahmani noted the historically high valuation of U.S. equities both in absolute terms and relative to the rest of the world, as well as the risks from wars, both trade and shooting – yet increased the target weighting to the U.S.

Mossavar-Rahmani explained that given U.S. equities’ share of the global market cap, Goldman’s model portfolio had become underweight. She had plenty of justifications for America’s global dominance, which boiled down to this: we and our companies are just better. She addressed the pricey stock market in slides showing that valuations haven’t traditionally been a reliable timing signal for the U.S. market. She also argued that valuations here are structurally higher than they used to be, for valid fundamental reasons.¹

Most important, it seemed, to Mossavar-Rahmani was Goldman’s macro team having set the probability of a U.S. recession this year at only 20%. In most cases, she showed, the stock market goes up during an economic expansion year. Recession wasn’t even listed among the 11 risks to the 2025 outlook.²

JPM’s view was similar, although they advocated shifting some U.S. investment from public markets to private equity. As JPM generates more fees from PE funds than portfolio equity accounts, this is to be expected.³ The outlook at UBS, where I’m not a client, called for continuation of the “Roaring 20’s” and the U.S. bull market, and recommended keeping some international exposure.

Bank of America’s team expected the U.S. to benefit from ongoing productivity gains, and as for Europe BoA’s view was that any rosy developments were already priced in, though there might be opportunities in European small caps. Morgan Stanley was less bullish, though its strategists were inconsistent, with one saying stay long U.S. stocks and another suggesting diversification overseas, but as to Europe only in small caps.

An Investment Truism

There was a particular discordant note in the Goldman presentation that got my attention and called to mind an investment truism, one I made up: Listen For the Dog That Doesn’t Bark.

Sherlock Holmes once solved a mystery by observing that a dog didn’t bark when it should have. Sometimes we learn more from things bankers and brokers don’t say than what they do. Mossavar-Rahmani had a positive argument for every asset class in Goldman’s model portfolio except one, indeed the only one Goldman advised materially reducing: non-U.S. developed market equities. Goldman proposed this reduction despite acknowledging these stocks’ historically very low valuations vs. the U.S., and the existence of great companies in Europe and Japan.

The day after the Goldman Zoom, I told my investment team that if we wanted to make investors laugh, we should propose a fund to invest in Developed Europe stock markets. Usually the “laugh test” is a sign that your thinking is sufficiently contrarian, even if not necessarily wise. We didn’t try, although I did add to an ex-U.S. ETF that my kids own. In this case the laugh test gave an accurate buy signal: since the Goldman Zoom, the Vanguard Europe ETF (VGK) is up 15.6% vs. -1% for the S&P. The Euro has reversed almost its entire loss since Trump was elected promising tariffs that were expected to boost the dollar.⁴

The strategists’ recent pro-U.S. and anti-ROW (rest of world) consensus doesn’t exactly fit the Dog That Doesn’t Bark scenario. A better example was after the 2004 Orange Revolution in Ukraine, when Firebird had a visit from a salesman with a Ukrainian brokerage. This fellow was portly, in a three-piece suit with a watch-chain, if I recall, and my hand smelled of cologne for a full day after shaking his. In orotund tones he recommended that we buy Ukrainian stocks, mostly power utilities, but omitted Ukrnafta, an oil company that was the largest on the exchange.

When I asked why his brokerage didn’t like Ukrnafta, he said it was “too risky.” I suspected based on prior non-barking dog experiences that his firm’s proprietary trading desk and favored Ukrainian clients were accumulating illiquid Ukrnafta, and he didn’t want us to compete. Maybe his clients even wanted to sell us their utility stocks to fund Ukrnafta buys. It turned out, as I’d expected, that every stock he recommended was garbage and Ukrnafta was the only decent one of the lot. We did manage to source Ukrnafta from another, unconflicted broker, and made a profit.

As an aside on Ukraine, if after the war ends President Zelensky or a successor continues the anti-oligarch and pro-rule of law reforms he has been gradually passing, the country could become an excellent investment destination. Unfortunately, in the past Firebird lost most or all our money on anything Ukrainian except Ukrnafta, because of poor governance or outright theft.⁵ And this was not just us: I’ve known Western hedge fund managers who went to Kyiv seeking their fortunes, and while none succeeded, several returned home with a Ukrainian wife who was way out of their league. (You know who you are.)

The Ukrnafta story reminds me of one other investment truism, taught to me as a young manager by Fred Berliner, who set up Moscow’s equivalent of Nasdaq (on a USAID grant) and over five years trained a generation of Russian traders. Fred used to say: “If more than one broker calls you looking for an illiquid stock, you should be buying it, not selling it.”

1. I don’t disagree and in fact for the whole bull market since 2009 have been rejecting any bearish argument based on the Shiller CAPE (Cyclically Adjusted Price-Earnings) Ratio.

2. Recession odds have risen dramatically as President Trump inconsistently pursues tariffs, creating confusion among business leaders, while Elon Musk takes his chainsaw to the Federal workforce. It may be that Trump has decided recession is a price worth paying to try out his agenda and prefers that if one comes it is early in his term, as with Reagan and Clinton. Goldman, for its part, has today (March 10) lowered its U.S. growth forecast for this year, but still sees no recession.

3. They can try with me, but when it comes to investments with both high fees and a lockup period, I have become a macadamia-hard nut to crack.

4. My post from last summer, which argued that our currency will weaken under Trump, has so far been wrong, but I still believe I’ll be proven right. Let’s see: everyone else and the facts disagree, but I’m sticking with the correctness of my view. It seems I could be a professor.

5. We did okay on a Ukrainian chicken producer and badly on an egg producer. I don’t remember which position came first.