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Firefly Capital Update - 2025 Q2
2025 Q1 results
April 1st
June 30th
$ change
% change
Firefly Capital
$626,619.29
$625,891.19 *
Firefly Capital (Normalized)
$214.35
$219.16
$4.81
2.24%
S&P500
$5,611.85
$6,204.95
$593.10
10.57%
Difference
-8.33%
Year-over-year results
July 1st, 2024
June 30th, 2025
$ change
% change
Firefly Capital (Normalized)
$182.21
$219.16
$36.94
20.27%
S&P500
$5,475.09
$6,204.95
$729.85
13.33%
Difference
6.94%
There are no rows in this table
* We are currently at $130,071.94 in cash.
This quarter felt as busy as the 405 freeway during rush hour. Honestly, I’m surprised we were up at all. The previous quarter gave us huge gains because one of our largest positions increased by 30%. This quarter, that pretty completely reverted, so the fact that we’re still up (even if not in comparison to the S&P 500) allows me to wipe some anxious sweat from my brow.
I also managed to enter into two of my favorite companies, one at an incredible bargain that I expect to never sell, and another “wonderful company at a fair price.”
We also lost some positions from some of our largest winners, as I believed they were very overpriced. Surprisingly, they have continued to shoot up (so far they have shot up another 20%). It will take some months or years to see if I was incorrect and should have held the positions, but at the moment that means we have more cash to spare for more ideas.
Let’s dive into this quarter
Liberation Day & Trade Wars
. The name given to this administration’s release of tariffs on every country in the world, sparking multiple trade wars and a huge drop in the stock market. Let’s do a quick dive into what Trump was trying to accomplish and why.
Why America's Trade Problem Is Actually a Currency Problem
I want to be upfront - macroeconomics isn't my strongest suit. Like Warren Buffett once admitted, his But sometimes you stumble across connections that make everything click, and I think this trade deficit situation is one of those moments.
Let me walk you through what I've learned about why America keeps buying more than it sells (trade deficit), and why it's harder to fix than it seems.
Why Trade Deficits Actually Matter
Think of trade deficits like this: imagine your family spent $50,000 more than it earned every year. To cover the difference, you'd sell your car, then your furniture, then maybe take out a second mortgage. Eventually, you'd own less of your own house.
That's essentially what America has been doing for decades.
Here's the (scary) math: In 2024, America imported $3.3 trillion worth of goods but only exported $2.1 trillion - . As Warren Buffett warned back in 2003, this means "."
By 2024, that prediction proved conservative. Foreign investors now own over . That's not a typo - $26 trillion.
"We're spending 40% more than we're taking in and this is a chronic problem. So what you're seeing is the debt service payments beginning to squeeze away, not beginning, well into squeezing away. So it's like plaque in the arteries squeezing away buying power. And as you can do the numbers you will see that you can have an economic heart attack as a result of that That we're going to very soon get to the position that you need debt to pay the debt"
The problem isn't that trade is bad. The problem is a persistent imbalance. We're slowly selling off pieces of America to pay for stuff we could make ourselves.
One important factor: trade imbalances only target physical goods, and if you include services (such as those provided by Meta, Amazon Web Services, Google, etc.) there is no deficit.
The Reserve Currency Blessing and Curse
Here's where it gets interesting. Being the world's reserve currency is like having a credit card that everyone desperately wants to accept.
Since 1944, we established the which stated that the US Dollar would be the world’s reserve currency. This means that countries would use the USD to trade with each other. Want to buy oil? Use dollars. Want to save money safely? Buy U.S. Treasury bonds (essentially an IOU from the US Government). This creates massive global demand for dollars.
Why this makes our currency stronger: When everyone wants your money, the price goes up. It's basic supply and demand.
Think of it like concert tickets for a sold-out show - when everyone wants them, the price stays high.
But here's the catch that took me years to understand...
Strong Currency = Expensive Workers, Weak Currency = Cheap Workers
When your currency is strong, your workers become expensive compared to everyone else's.
Let's say an American worker costs $20/hour and a Chinese worker costs $13/hour. The American worker is 54% more expensive.
Now, imagine China deliberately keeps its currency weak (more on why they do this next). Suddenly, that exchange rate changes, and the Chinese worker costs $10/hour, making the American worker 100% more expensive.
As Buffett noted, this isn't about American workers being lazy. It's about math. When your currency is artificially strong, your workers price themselves out of global competition through no fault of their own.
This is why manufacturing jobs moved overseas. It wasn't just about trade deals - it was about currency values making American labor uncompetitive.
Why China Keeps Its Currency Cheap
This is where it gets really clever (and frustrating).
China doesn't accidentally have a weak currency. They work hard to keep it that way. Here's why:
1 - Export advantage: A weak yuan (Chinese currency) makes Chinese goods cheaper for Americans to buy. If China's currency got stronger, its exports would become more expensive, and it'd sell less stuff.
2 - Job creation: China employs hundreds of millions of people in manufacturing. If those jobs disappeared because their currency got too strong, they'd have massive unemployment and social problems.
3 - Economic growth: Exporting goods brings dollars into China, which they can use to build infrastructure and grow their economy.
Here's the circular part: China takes the dollars they earn from selling us stuff and buys U.S. Treasury bonds (essentially lending us money). This gives us cheap money to borrow, which we use to buy more Chinese stuff. It's like your friend lending you money to buy their lemonade.
Both sides benefit in the short term. But America slowly gives up its manufacturing base while China builds theirs.
Trump's Liberation Day Strategy
Back to Liberation Day. Trump's team decided to break the cycle with a coordinated tariff strategy.
The basic idea: Make foreign goods more expensive so American-made products can compete. If Chinese goods cost 25% more due to tariffs, maybe that Ohio factory will become competitive again.
Trump's Liberation Day started off with:
It has since gone all over the place. Chinese tariffs , and then we reached an agreement. . .
The theory: Force other countries to either buy more American goods or watch their exports to America shrink.
The risk: Other countries might retaliate with their own tariffs, making American exports more expensive too. Trade wars can spiral quickly.
It's worth noting that even , said about tariffs:
The Treasury Bond Nuclear Option
Here's the scariest part of this whole situation: other countries could threaten America's reserve currency status by selling their Treasury bonds.
What's happening now: China has been quietly reducing its U.S. Treasury holdings. They owned $1.15 trillion in 2021 but dropped to around $780 billion by late 2024. Japan and other major holders have been selling too.
Why this matters: If major countries coordinated a Treasury sell-off, it could cause a crisis. Bond prices would fall, interest rates would spike, and the dollar might lose its special status as the reserve currency.
have already caused volatility, and as CNBC notes, “America’s policy flip-flops with regards to tariffs has undermined confidence in U.S. assets that has led to a weakening in the U.S. dollar.”
The nuclear scenario: If countries stopped using dollars for trade and stopped buying Treasury bonds, America would lose its ability to print money to solve problems. We'd have to balance our budget immediately, which would mean massive spending cuts or tax increases.
What This Means Going Forward
I don't want to pretend to know how this ends. As Buffett says, "We have long felt that the only value of stock forecasters is to make fortune-tellers look good."
But here's what seems clear:
The current system is unsustainable. America can't keep running trillion-dollar trade deficits forever without consequences.
The solutions are all painful. Whether it's tariffs (which raise prices), currency devaluation (which hurts savers), or spending cuts (which hurt economic growth), there's no free lunch.
The stakes are enormous. Losing reserve currency status would be like a wealthy family suddenly having their credit cards canceled. The lifestyle adjustment would be brutal.
What I find fascinating is that this isn't really about trade policy - it's about currency policy. Until we solve the "strong dollar = uncompetitive workers" equation, we'll keep having these problems.
Maybe Trump's tariff approach works. Maybe we need something like Buffett's Import Certificates. Maybe the dollar naturally weakens over time. Or maybe we're worrying about problems that will solve themselves.
What I do know is that understanding this connection between currency strength and trade deficits has changed how I think about America's economic challenges. It's not that we're bad at making things - it's that our money is too expensive.
Big Beautiful Bill
Well, this happened. On July 4th, Trump signed what he's been calling his "Big Beautiful Bill" - and honestly, the name fits because this thing is massive.
We're talking about an 870-page monster that basically reshuffles the entire federal government's priorities. The Congressional Budget Office ran the numbers and said it'll add $3.3 trillion to our national debt over the next decade. To put that in perspective, that's on top of the $1.8 trillion deficit we already had last year.
What's Actually In This Thing
The tax stuff (good news for your wallet):
Border and immigration (where a lot of the money goes):
Social programs (the cuts):
Energy policy:
The Debt Elephant in the Room
Here's what's keeping the folks at Moody's up at night: we're already paying $882 billion just in interest on our debt - that's more than we spend on defense or Medicare. And now we're adding another $3.3 trillion to the pile.
Moody's is projecting our debt-to-GDP ratio could hit 134% by 2035. For context, that's getting into "yikes" territory that historically hasn't ended well for countries.
The bill passed by razor-thin margins (Senate: 51-50 with VP Vance breaking the tie, House: 218-214). Every single Democrat voted against it, and even a couple Republicans couldn't stomach it.
Why This Matters
This isn't just another spending bill. It's a complete realignment of federal priorities - moving money from social programs and clean energy investments toward tax cuts and border enforcement.
Whether you think that's good or bad probably depends on your politics. But what everyone can agree on is that adding $3.3 trillion to our debt while we're already struggling with interest payments is... let's call it "bold."
As Ray Dalio put it on Fox Business: "We're spending 40% more than we're taking in and this is a chronic problem... it's like plaque in the arteries squeezing away buying power."
The irony? This massive spending increase comes at the same time Trump's trying to fix our trade deficit and strengthen America's finances. It's like trying to get in shape while eating a daily cheesecake.
Time will tell if the tax cuts generate enough economic growth to pay for themselves. History suggests that's... optimistic. But hey, stranger things have happened.
End of an era: Warren Buffett steps down after 60 years
In other news, I took my 4th annual pilgrimage to the this May for his annual meeting, and it was one for the history books. After 60 years of running Berkshire Hathaway he managed a 20% compounded growth rate. That means if you had invested $1,000 back in 1965 it would be worth $104,000,000 today.
20,000 people showed up to the Berkshire Hathaway meeting — record breaking attendance, but no one knew this would be his last meeting as the CEO. He is passing the reigns to Greg Abel, who he has been grooming for the position for decades, and he will remain on the board.
There are many homages out there that can do far better than I can do, and I suggest you search for them. At this point, I consider myself a bit of an amaetur Buffett historian, and while many know he’s “the best investor of all time”, many probably do not know that he has spent decades doing his best to teach his knowledge to anyone who would listen, or that he is one of the largest philanthropists of all time and initiated (with Bill and Melinda Gates) where the world’s wealthiest pledge the majority of their wealth to be given away. He pledged 85%, and has since been joined by 250 other wealthy elites, such as Jeff Bezos, founder of Amazon, and Mark Zuckerberg, founder of Facebook.
In many ways, it’s unsurprising that he decided to step down. His long-time friend and partner passed away the previous year, and at the spry age of 94 and at the 60th celebration felt like a good time.
I’ve spent much of this year digging deeper into his past with a couple of good reads if other are interests:
Happy almost-Summer!
It’s been great investing this last quarter, and as always, please send me any questions or comments you may have.
Cheers,
Kerry
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