Tactical Short 3rd Quarter 2025 Recap

McAlvany Weekly Commentary

Loose Conditions, Excess and Fed Accommodation - October 30, 2025 David: Good afternoon. Thank you for participating in our third quarter 2025 recap conference call for Tactical Short. This is October the 30th, and we're grateful for your joining us. As always, thank you to our valued account holders. We so greatly value our client relationships. The objective of Tactical Short is to provide a professionally managed product that reduces overall risk in a client's total investment portfolio, while also providing downside protection in a global market backdrop with extraordinary uncertainty and extreme risk. I just want to double-check and make sure that everybody has been let into the audience. Ted, can you confirm that? I am going to assume so unless I've heard otherwise. Okay, so beginning: our Tactical Short strategy began and ended the quarter with short exposure targeted at 82%, focused on the challenging backdrop for managing short exposure. A short in the S&P 500 ETF, that is the SPY, remains the default position for high-risk environments. I'll give you an update on performance and then pass the baton to my colleague, Doug Noland, and then we will handle Q&A together at the tail end. So updating performance, Tactical Short accounts after fees returned a negative 6.56% during Q3. The S&P 500 returned a positive 8.11. For the quarter, Tactical Short accounts lost 81% of the inverse of the S&P 500's positive return. As for one-year performance, Tactical Short after fees returned negative 12.54 versus the 17.56 return for the S&P, Tactical Short losing 71.4% of the S&P's positive return. We regularly track Tactical Short performance versus three actively managed short fund competitors. First, the Grizzly Short Fund, which returned a negative 1.24% during Q4. Over the past year, Grizzly's return has been a negative 5.12. Ranger Equity Bear Fund returned a negative 3.13 for the quarter and a negative 5.42 for their one-year return. Federated Prudent Bear returned a negative 6.16 during Q3 and a negative 11.64 for the one year. Tactical Short underperformed the actively managed bear funds for the quarter on average by 305 basis points. Tactical Short underperformed over the past year by an average 515 basis points. Tactical Short has significantly outperformed the bear funds since inception. From the April 7th, 2017 inception through the end of June, Tactical Short outperformed each of the three competitors by an average of 1,654 basis points or 16.54 percentage points. Doug, over to you. Doug: Thanks, David. Hello, and thank you everyone. It was another extremely challenging quarter—the ongoing confluence of speculative markets, highly elevated risk, and worrying developments. With market risk at what I view as extreme levels, I hesitate to reduce exposure. The wide short exposure trading band I've discussed in previous calls was a drag on Q3 relative performance. A pat on the back to the competitor funds, they dodged a powerful short squeeze as the Goldman Sachs Most Short Index posted a 24% gain for the quarter. Tactical Short underperformed for the quarter and over the year, over the past year. Most of the year's underperformance is explained by our competitor funds benefiting from an approximate 400 basis point annual return on proceeds from short sales. Loose conditions, excess, and Fed accommodation. Where do I even begin? We live in such incredible times—we're witness to a steady drumbeat of extraordinary developments—that it's somehow come to almost seem normal. For most, an ever-rising stock market is a normality. This government shutdown is now one of the longest in history, the latest example of the breakdown in functional governing. It is no exaggeration to say deficits are spiraling out of control. More generally, warnings are blaring everywhere within credit markets, the economy, societal well-being, and political and geopolitical stability. Meanwhile, we're witnessing historic manias in AI, crypto, and financial instruments more generally. As I say, things turn crazy at the end of cycles. The intensity of recent folly is consistent with a historic cycle's dramatic concluding act. The big picture is one of an unprecedented three decade-plus credit bubble and monetary disorder dating back to the late '80s decade of greed excess. One of my messages today is that complacency is inherent to late-cycle dynamics. My interest in bubbles dates back to my experience as a treasury analyst at Toyota's US headquarters in 1986, '87. At the time, Toyota Management was concerned that a problematic bubble had taken hold in Japan. Loose monetary policies and an investment-led economic boom were fueling extraordinary asset inflation—most conspicuously in stock market and real estate bubbles. At the time it appeared that the 1987 stock market crash had abruptly brought bubble inflation to a conclusion. While not as dramatic as the 22.6% one-day drop in the Dow, Japan's Nikkei 225 index was down 23% from highs to end 1987 at 20,500. But something extraordinary unfolded that I still find absolutely fascinating. The Nikkei almost doubled in two years to end 1989 at 38,957 while already inflated real estate prices also roughly doubled. That was my first experience with what I would later label terminal phase excess—somewhat along the lines of the great Austrian economist Ludwig von Mises' crack-up boom. The compact explanation? Years of gratifying excess lay the foundation for exuberance, risk-taking, and manic behavior to go off the rails to doom long cycles. The 1989 year-end high in Japan's Nikkei would not be surpassed for over 34 years—a period where deep post-bubble financial and economic structural maladjustment would see Japanese policymakers resort to decades of reckless, ultra loose monetary and fiscal policies. Inflationism's upshot is a Japan today in a more dire predicament than in 1989. After the 1987 stock market crash, there were fears of another U.S. economic depression. Instead, Fed accommodation and loose conditions fueled our own late '80s terminal phase. The bursting of the late '80s bubble would reveal massive fraud and recklessness at the savings and loans. Michael Milken, Drexel Burnham, and junk bond market crimes and shenanigans. Ivan Boesky, LBO madness, and pervasive insider trading; awful loan underwriting, fraud, and deflating real estate bubbles along both coasts. The 18th largest US bank, Bank of New England, imploded in 1991. There were serious concerns for City Corps and other major financial institutions. Having witnessed in the US and Japan parallel cycles of bubble excess, market dislocation, monetary accommodation, late cycle bubble excess, and subsequent painful bubble collapses, it was clear that there were extremely consequential bubble dynamics that I had to understand. I've discussed this previously. The fascination with bubble analysis drove my long and deep dive into understanding America's preeminent bubble experience: the first world war inflation that evolved into historic Roaring Twenties excess, the 1929 market and financial crash, and the Great Depression. In past calls, I've discussed in some detail alarming parallels between that experience and today's multi-decade bubble. In short, one cannot overstate the consequences of the interplay of phenomenal technological advancement and financial innovation and evolutionary changes in monitoring management. For this call, I will offer context for current terminal phase excess and the general disregard for risk in the face of mounting fragilities. Years ago, I read all the contemporaneous accounts of the late '20s period I could find, and the more I studied, the more confounding and fascinating it all became. How could everyone have been blindsided, got so exposed and unprepared in 1929? At some point I stumbled upon writings from a journalist who had interviewed a group of Wall Street traders after the crash. He wanted to understand how they could have failed to recognize the dangers associated with speculative excess, all the margin debt, the leveraged trusts, Wall Street Chicanery, deteriorating economic prospects, and such. I was struck by the commonality of their responses. It was not that they were unaware. Most had recognized the gravity of market excess. Concerns had intensified, especially during 1927 market and economic instability. But these Wall Street traders conveyed something quite profound and especially pertinent for bubble terminal phase analysis. They admitted that you can only worry about such things for so long, explaining that surging stock prices eventually compelled all those operating in the markets to disregard risk. Terminal phase excess is a period of intoxicating wealth accumulation. I'm talking late night whiskey shots rather than evening wineglass tipsiness. Just look at these days at how hefty market returns continue to inflate investment accounts across the population. Just ponder the incredible amounts of money that Wall Street firms made during Q3 and over the past year. Earnings that feed huge compensation for traders, investment bankers, asset managers, structured finance specialists, corporate managers, and executives. There are also the energized commercial bankers and loan officers, along with those working in booming FinTech and crypto, those engaged in private credit and private equity. There are tens of thousands employed across investment management that have never had it so good. The investment arms of insurance companies are printing money, and let us not miss booming professions supporting this great asset inflation, including attorneys, accountants, consultants, and real estate and insurance agents. Millions have watched their net worth inflate tremendously, especially recently. Generations ago, economists referred to this inflationary phenomenon as money illusion.