“The markets are always throwing a party somewhere, but you better know when to leave before the cops show up.” – Jim Rogers
Fall is in the air. The weather is beginning to turn cooler, football season is underway, and optimism abounds on Wall Street. In fact, the S&P 500 has never been higher in its history.
Nevertheless, the Fed delivered its first rate cut of the year in September. Committee members project two more cuts this year, at meetings in October and December. This may seem strange: stocks are hitting new all-time highs, and inflation remains stubbornly above the Fed’s 2% target even before the full impact of tariffs kicks in. But even the composition of the Federal Reserve’s Open Market Committee voting for the cut was odd.
Stephen Miran, who retained his position as a senior advisor to President Trump, was sworn into a vacant seat the day that the FOMC began its deliberations, and another member, Lisa Cook, participated only after a federal appeals court narrowly allowed her to attend amid the White House’s attempt to dismiss her for alleged improprieties. Surprising no one, Miran dissented from the decision to cut by a quarter point, preferring an even larger one.
Despite inflation consistently exceeding its benchmark, the Fed suspects the more critical economic risk today is a softening labor market. Hiring has cooled and the unemployment rate has ticked up. Despite questions surrounding the integrity of the jobs data, the underlying weakening trend was enough to give the Fed cover to cut rates even with upward pressure on inflation from tariffs and immigration restrictions. Chair Powell said at the September press conference, “While the unemployment rate remains low, it has edged up, job gains have slowed, and downside risks to employment have risen.”
The Fed’s pursuit of its mandate is constrained by Washington’s growing reliance on cheap credit. The fiscal deficit has ballooned, and yet there is no political will to cut entitlement or defense spending. Much of the government’s borrowing is short-term, so lower rates help to finance the budget shortfall. As a result, pressure on Fed Chair Powell to lower interest rates has intensified, calling into question the Fed’s independence from political influence. In fact, the interview process for the next Chair – even though Powell’s term extends to May 2026 – has essentially become a contest for who is most supportive of an easy-money policy.
Though it may seem unusual for the White House to so openly criticize the Fed Chair over interest rates, there is historical precedent. President Lyndon B. Johnson famously rebuked Fed Chair William McChesney Martin after his rate hike in December 1965. The President needed lower rates to help fund the Vietnam War and his ambitious domestic agenda. He eventually got his wish with a cut in 1967 (which Martin later publicly regretted). Likewise, President Richard Nixon pressured Fed Chair Arthur Burns to cut rates ahead of the 1972 election; Burns, too, ultimately capitulated to the White House. Many historians point to these premature, politically driven shifts in policy as the gasoline that set the 1970s inflationary fire.
Today, the Fed is back to easing policy while stocks are hitting all-time highs, risking a resurgence in inflation. There are already signs of overheating: the rise of crypto treasury companies (with no business operations other than buying and holding cryptocurrency on their balance sheet), excitement about quantum computing, SPACs peddled by the same promoters as the 2021 boom, record leveraged buyouts, thriving private credit while public credit spreads are near century lows, wild private market valuations and the accompanying hot IPO market, and, of course, the endless appetite for all things Artificial Intelligence (AI).
It all makes contrarian and value-minded investors like us a bit uneasy. We have no doubt that AI will impact our lives in countless ways, most of which we can’t even fathom today. We wonder, though, with the trillions of dollars being committed to AI infrastructure over the next few years, how will these companies ever make an adequate return on that capital spend? It is a spending spree that echoes the 1990s, when networking giants like Cisco, Nortel, and Lucent spent billions to build out the internet backbone, only to see much of that capital later written off. The sobering realization of a potential overbuilding, and the subsequent pullback in AI capital spending, is one of the biggest risks on our radar.
One of Fed Chair Martin’s classic sayings was that the Fed’s job is that of a chaperone who takes away the punch bowl just as the party gets going. Instead, today’s Fed is spiking the punch, and the broader market is partying like there’s no tomorrow. While we are undoubtedly enjoying these good times, we maintain a measured perspective in preparing for what comes next. We’re optimistic that our current holdings will continue to fare well, and they are still reasonably valued. But we remain disciplined in our process and will only deploy capital into new ideas where we believe the risk/reward clearly warrants it.
During the quarter, we initiated a new position in one such company where we see big upside potential: Evolution AB, based in Stockholm. Evolution specializes in live online casino games, offering video streams of classic table games like blackjack and roulette hosted by real dealers. As a gaming supplier, the company sells directly to licensed digital gaming companies (like DraftKings and the parent company of FanDuel, for example), which offer its products to end users in regulated markets worldwide. In exchange, Evolution earns a commission on the casino’s winnings.
The global online casino market has experienced rapid growth and is projected to remain one of the fastest-growing sectors in the gaming industry. But it’s also highly regulated. In response to a formal review by the UK Gambling Commission, Evolution is taking decisive measures to block its games from unlicensed operators and prevent its video feed from being pirated. This has slowed near-term growth and weighed on the shares, providing a compelling opportunity for us.
Evolution has many of the characteristics we look for in an investment: it is highly profitable, debt-free and generates strong cash flow. It is the global leader in an attractive, growing industry and delivers capital returns to shareholders through stock buybacks and an annual dividend (currently 3.9%). The co-founders continue to own 11% of the company. The near-term regulatory challenges have driven the valuation down to levels that we view as highly attractive, and we are excited about the prospects of this new position.
Entering the final stretch of 2025, times are good, one may even say jubilant. How long it lasts and how high it goes is anyone’s guess. We’re happy to remain wallflower investors – sober and thoughtful, never chasing trends but making reasonable, level-headed decisions with a clear margin of safety. As you’ve likely heard us say many times before, our objective is to preserve and grow your wealth, in that order. We’re happy to be your trusty designated driver.
Penn Davis McFarland, Inc.
October 2025
