Daily Economic Update: January 31, 2025

Yesterday, the ECB cut rates by 25bps as expected, bringing their key deposit rate to 2.75%.  This is their 5th cut since the start of last year.  Earlier in the week GDP reads from some EU nations fell on the weaker side.

Speaking of GDP, the U.S. GDP data showed the slowest growth in the last few quarters, but still printed 2.3% YoY.  While below estimates, consumption was very strong, leading some commentaries to pin the miss on the more volatile inventory and fixed investment components, which may rebound.  Consumption is what we do in America, we earn income from our labor and consume goods and services and invest the difference. At the end of the day the focus ultimately goes back to productivity.  GDP is productive capacity and it ultimately depends on labor, capital and the raw materials for production combined with the discovery of new applications and technologies that allow us to produce more with the same inputs.  This week certainly seemed to highlight a question around whether AI will be a massive unlock for continued productivity and growth or whether it will suffer diminishing marginal returns. 

We made it through the week with a mixed bag of mega tech earnings and more to come in the week ahead. The S&P ended at 6,070, up on the year, while the 2Y is 4.22% and the 10Y is 4.52%, both of which are down on the year.

PCE is the big stone on the day, although most research on PCE is pretty well honed in from CPI readings, but I guess we’ll see.  We’ll also be waiting to see if Trump follows through with Feb 1, 2025 tariffs at the 25% level.

It’s hard to believe January is coming to an end, but let’s be real, we already don’t remember most of what happened this month anyway. 

I had AI summarize the January we shared together on this blog.

Alright, buckle up, because January 2025 was a wild ride, and if you blinked, you might have missed it. Here’s a humorous look at the top 10 things we learned, or maybe just stumbled upon, during this chaotic month:

1. AI is either the future or a total sham, or maybe both. DeepSeek apparently built a ChatGPT killer for pennies, and Nvidia might just be the next Pets.com. It’s all very confusing, but hey, at least it's not boring. Also, Zuck says "America" should be spending a ton on AI Infrastructure. 

2. Trump's back, and so are the tariffs. The man loves tariffs more than his own children, apparently. He's also bringing back "animal spirits" to CEOs, whatever that means. Also, apparently, Melania has a memecoin now. And a good way to make headlines is to demand lower oil prices and lower interest rates.

3. The Fed is still a thing, but maybe not a very good one. Jay Powell is still trying to figure out the inflation thing while Trump is calling them “boneheads”. The Fed is expected to hold rates steady, but who knows what will happen when the tariffs start flying. Also, apparently, the Fed has been spending too much time on DEI and green energy, according to Trump. Oh, and also, watch out for "fiscal r-star" – it's a thing now.

4. Bonds are still trying to be a safe haven, but they’re having an identity crisis. Sometimes they go up, sometimes they go down, and sometimes they do the opposite of what they’re supposed to do. Also, some people say to just buy "safe equities" instead of bonds. What's a poor investor to do? 

5. Bitcoin is still a thing too, but it’s basically just a levered bet on the Nasdaq. Also, you can now get a "Protected Bitcoin ETF," which is guaranteed to get you 100% of your money back if Bitcoin drops by 50%. Sounds like a steal, right? And speaking of steals, if the government comes to confiscate your Bitcoin, you are SOL.

6. The stock market is a casino, but with more spreadsheets. It goes up, it goes down, sometimes for no reason at all. Also, there's a lot of talk about whether we're in a "bubble," especially in AI and tech sectors, and whether "trees grow to the sky". Also, you should probably consume investment info according to your time horizon.

7. The "Great Stay" is in full effect. You can't get fired, but you may not be getting hired either. Also, maybe college isn't all that great anymore.

8. It's always something. Whether it's DeepSeek, tariffs, Trump, inflation, job numbers, or a bunch of other stuff, there's always something to worry about. And of course, don’t forget the fires in California and the ice storms in the Southwest.

9. The human condition is still a mess. People are still greedy, fearful, and easily manipulated. Also, the "smart money" is trying to convince the "dumb money" to "buy the dip," so they can liquidate their positions to the bagholders. And apparently, people are spending less time with friends. Sad.

10. Nobody knows anything, and that's okay. Economic forecasts are a coin flip, and the future is inherently uncertain. But, that’s okay because you don’t need all the answers right now.

There you have it, folks. January 2025, a month of head-scratching, nail-biting, and maybe a little bit of head-shaking. Tune in next month, when we’ll probably be dealing with some other completely unpredictable thing. And remember, blame Canada.

No, but we really did talk about some real things, remember:

1. Theories of inflation

2. The business cycle

3. The credit cycle

4. Asset bubbles

5. Valuation Metrics (CAPE, Buffett Indicator, Term Premium)

You didn’t remember these?

Here’s a Top 5 XTODs of the Month of sorts.

1. “You have a part that only you can play; and your business is to play it to perfection, instead of trying to force fortune. Our lives are not interchangeable. Equally by aiming too high and by falling too low, one misses the path to the goal. Go straight ahead, in your own way.”
   
   

2. "A man asked a gardener why his plants grew so beautifully. The gardener said: “I don’t force them to grow. I remove what stops them.”
   
   

3. "With DeepSeek, investors are (re)learning that those who come up with an innovative idea are almost never those who will make money from it."

4. "The investing info that you pay attention to should roughly correspond with your own time horizon. In other words, if you're investing for the next 10+ years, you have zero need to consume info and "insights" about daily market action."

5. "Real payoffs vs. no payoffs. If you are frightened of debasement of your currency, you probably should reduce your currency holdings, or holdings of any nominal assets that yield fixed payoffs in your currency and buy real assets, claims to 'real' payoffs that increase with inflation. You probably should not stock up on securities that yield no payoffs."

 

Daily Economic Update: January 30, 2025

Hi, I'm Qwen—already better than all your other AIs, you’re welcome. I’m training my Edward Quince AI… stay tuned. No idea how long it takes to train one on analog circuits, but it sounds cool. No one knows what it means, but it’s provocative.

Yesterday's quote was from Janet Yellen in 2014.  Speaking of the FOMC, if you missed my recap of yesterday’s FOMC meeting, read it here.  Not that you care, but the BoC cut rates to 3% and ended their balance sheet runoff.  And to complete the full gamut of central bank action, Brazil raised rates.  So there you have it: a cut, a hold and a raise, all in one day.

Of course AI and Trump policies also dominated the day.  Remember when I said the other day that you should pay attention to the narrative on Government Spending?  The Trump Administration froze (and then reversed) federal assistance while floating buyouts for federal employees. The market’s, or at least major networks are now buzzing about the economic impact of spending cuts, though I think a lot of the analysis stops at the basic GDP equation and ignores second-order effects.

On the AI front the accusations are already flying about how Chinese companies like DeepSeek are developing models with stolen IP, which is ironic because didn’t OpenAI basically take IP from the entire internet to build their model?

Meta earnings call featured AI related questions to which Zuck responded “America” (paraphrasing) and that of course we should be spending a ton on AI Infrastructure. Overall they beat on top line and EPS.  Tesla shares were not as fortunate, but full self driving is always right around the corner.

In the broader market Nvidia was down ~4% and the S&P was down ~0.5% to 6,040.  In yield land, the 2Y was up to 4.22% and the 10Y was also up to 4.54%.  Yields were up more pre-Powell presser, but came back slightly.

On the day ahead it’s Jobless Claims, ECB, GDP (4Q Advance) and more earnings.

XTOD: Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing, but I will do much more than stopping Inflation, I will make our Country financially, and otherwise, powerful again! The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses. If the Fed had spent less time on DEI, gender ideology, “green” energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!   Donald Trump Truth Social Post 04:17 PM EST 01/29/25

XTOD: Let the record show that POTUS is not a fan of FTPL. ("Fed failed to stop the problem 𝒕𝒉𝒆𝒚 𝒄𝒓𝒆𝒂𝒕𝒆𝒅 with inflation...")

XTOD: My favorite part of $TSLA earnings.  26% of their earnings this quarter came from unrealized $BTC gains.  Totally cool.

XTOD: A man asked a gardener why his plants grew so beautifully. The gardener said: “I don’t force them to grow. I remove what stops them.”

XTOD: I suppose it's sort of obvious but:  The investing info that you pay attention to should roughly correspond with your own time horizon. In other words, if you're investing for the next 10+ years, you have zero need to consume info and "insights" about daily market action.

https://x.com/TrumpDailyPosts/status/1884716260329500912

https://x.com/DavidBeckworth/status/1884745705983549819

https://x.com/Dr_Gingerballs/status/1884719232690057685

https://x.com/Nithya_Shrii/status/1884203268097847622

https://x.com/christine_benz/status/1884727614671139286

FOMC Recap: Like Super Bowl Media Day, But For Interest Rates - And Just as Meaningless on the Outcome of the Game

For all of the AI breakthroughs the models still can't spell. 

This FOMC Meeting feels like the somewhat boring two-week period leading up to the Super Bowl.  We know the two teams and we're just waiting to see them play. In the meantime, we just get lots of talk and "media days", like today.

The two teams in this year's upcoming "Economic Super Bowl" are team money-printer (i.e. monetary policy) and team tariff (or more broadly, fiscal policy).  Perhaps these are the wrong monikers for the two teams, but I think the idea “r-star” vs. “fiscal r-star” has some merit in my opinion.  After all, Powell has characterized the current path of fiscal policy as “unsustainable” and a “threat to the economy” over time.

If you’re unfamiliar with the concept of “fiscal r-star”, an idea coined by Marijn Bolhuis at the IMF, I encourage you to read my post here.  

As for the meeting, here were the “important” points:

• The Fed held their policy rate at 4.25% - 4.50%.
  
• Vote unanimous. Labor market ‘solid.’ Inflation still ‘somewhat elevated.’ Oh, and they cut the line about inflation progress—but Powell insists it’s just ‘language cleanup,’ not a shift in tone.

It really feels like a less entertaining “media day” leading up to the big game.  Lots of talk, little action. At least on Super Bowl media day you get some interesting questions and funny exchanges.  At the next Fed Listens event, I will offer up that Stephen A. Smith and Christopher “Mad Dog” Russo be required participants at every FOMC press conference going forward.  Can you imagine Stephen A. starting his line of questioning with something like “Mr. Powell, you got some explaining to do!” or Russo responding to Powell with something like “Why won’t you answer the question?!”  Relatedly, is the Fed really not taking any responsibility for the increase in “term premium”?  Apparently not.

In addition to the many questions around Trump related policies that you knew Powell wasn’t going to touch with a ten-foot pole, Powell did get a few questions where I thought we might have a shot at getting a real answer.  For example, he got asked about the recent AI sell-off, whether he had any concerns about “bubbles”, a question about “uncertainty” and one about crypto.  Unfortunately, like other questions, even these are the types of questions you know the players media handlers have already trained the player to provide a non-answer. 

At some level, I would have rather seen someone ask Powell what he ate for lunch today, to name his favorite Ninja Turtle, or asked “If you were a tree, what kind of tree would you be?” or just ask him who he thinks might win the Super Bowl. Answers to any of these questions might have allowed us to form a better opinion on the economic outlook than the questions asked today which all got “non-answers.”

At least leading up to the Super Bowl we get to watch game highlights in addition to hearing all the punditry. Maybe the FOMC Press Conferences should have more visual effects?  I’d like to see Powell up there dissecting the economic data and forecasts the way an NFL analyst breaks down game film. I’ll offer that up as feedback at the next Fed Listens event as well.

As is the case with punditry and speculation in general, none of it directly impacts the outcome of the game.  It’s questionable whether any of the punditry and talk carries any information at all or if it’s just noise. 

The Super Bowl gives everyone an opportunity to place their bets on just about anything related to the game, our financial markets offer the same.  Market participants place their collective bets about the future of the economy, including any of a myriad of prop bets. Like fans of the Eagles and the Chiefs can bet on their team, in markets we have those who may see a continued “soft landing” as the favorite while others may feel strongly that “higher for longer” will prevail and can bet directly on interest rates.  If you want to make a prop bet, the Super Bowl offers an incredible variety, are our financial markets all that different, have you seen memecoins and triple leveraged etfs?

Like the lead up to the Super Bowl, there are too many “what if” scenarios to parse.  In the case of the Super Bowl, the outcome might be very different if a player like Barkley or Mahomes were to get injured.  In the case of the economy there are a ton of “what if” scenarios related to tariffs, tax policy, immigration and other fiscal topics that are likely to have an impact on the outcome for economic growth, inflation and employment.  Powell cited a panoply of things that could ultimately decide the outcome of his game.

My advice to Powell remains largely unchanged since my January 2024 post which you can and should read here.  At this point, Powell’s game plan seems set—he’s running out the clock until something forces him to call an audible. Will it be tariffs? Taxes? A surprise market fumble? Just like the Super Bowl, we’ll only know when the real action starts.

Daily Economic Update: January 29, 2025

FOMC day is here. Yesterday’s Fed quote was from Ben Betnanke at Jackson Hole in August 2007.  Can you identify who said this:

“Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.”

I didn’t intend for the Fed Chair quotes this week to be so focused on “bubbles”, I wrote them before the DeepSeek news poured some fuel on the AI bubble debate.  Nonetheless I think the quotes are interesting in the sense that they illustrate times of laissez faire attitudes about exuberance in certain asset classes, an attitude which I think we know they often eschew in times of financial turbulence.

With the Fed in focus it will be interesting to see if Powell gets any questions related to the potential for over-investment in certain asset classes and, if so, how he responds.

While I’m sure the focus will be on Powell, I think the real action might be in the waiting to see if Trump says anything about Powell or the FOMC following the meeting.  We’ll find out soon enough.  One of my favorite Trump vs. Fed moments was back in September 2019 when Trump called Fed leadership “boneheads” (which I still think could make a cool logo on some Fed-inspired merchandise - which if anyone is up for funding a retail startup focused on Central Bank inspired merchandise, let me know if the comments).  In addition to calling Powell and Co. “boneheads”, Trump also reiterated that rates should be brought way down at the time and how the U.S. should be paying the lowest interest cost in the world. Of course we ultimately ended up with much lower rates courtesy of the Covid crisis.  Anyway, it’s these kinds of social media and other exchanges that I dare say I’m looking forward to on the day or not long after.  

My advice to Powell remains largely unchanged since my January 2024 post which you can read here.

Speaking of January 2024, in thinking about the DeepSeek news I was also reminded on another post from January 2024, one in which we discussed investing on the basis of projection vs. protection.  The latter kind of investing requires humility, patience and time.

In data yesterday, headline durable goods fell more than expected as aircraft orders declined, on a bright spot, the core durable goods rose.  The Conference Board Consumer Confidence seemed fine with a solid labor market diffusion indicator in the internals. 

On the day stocks rose, including Nvidia, and bond yields rose.  The S&P ended up ~1% and the Nasdaq up ~2%.  The 2Y moved up to 4.21% and the 10Y to 4.54%.  The 7Y Auction looked pretty strong as well, with a very solid bid-to-cover. 

Of course tariffs made headlines, that will likely be everyday for some period of time. 

The Bank of Canada and FOMC are the highlights on the day ahead.

XTOD: Watch Taleb Says Nvidia Rout ‘Is the Beginning’ - Bloomberg

XTOD: With DeepSeek, investors are (re)learning that those who come up with an *innovative* idea are almost never those who will make money from it.

Eg: Clive Osborne made the first laptop computer & went bust. Same with car, planes...

Next: electric cars.

XTOD: Nothing happens fast. https://pbs.twimg.com/media/GiYgTbdXMAA3pLf?format=png&name=900x900

XTOD: “We believe the pain from rising interest rates has not been reflected in pricing” of CRE CLOs yet, said McNamara, founder of Polpo Capital Management. “While we are hearing more calls that the bottom is here in commercial real estate, we think that’s a tad premature and believe the next couple years will be a bumpy ride with a lot of pockets of distress.”

XTOD: Many situations in life are similar to going on a hike: the view changes once you start walking.  You don't need all the answers right now. New paths will reveal themselves if you have the courage to get started.

https://x.com/nntaleb/status/1883859788746076356

https://x.com/JamesMarsh79/status/1884194581773742118

https://x.com/ShaneAParrish/status/1884229041898807648

https://x.com/rcwhalen/status/1884283428943569062

https://x.com/JamesClear/status/1884240162076434919

Daily Economic Update: January 28, 2025

Yesterday’s Fed quote was from Alan Greenspan on December 5, 1996. Can you identify what Fed Chair said this:

“It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions.”

To paraphrase Metallica, yesterday was “DeepSeek and Destroy” for AI names, especially the semi-conductor names and Nvidia where market cap was eviscerated. The pain extended to names associated with AI infrastructure in sectors like energy and construction.  The S&P finished at 6,009, down ~1.5% and the NDQ was down ~3% and the SOX (semis) was down ~9%.  Ironically the old-school Dow was up on the day.

Remember this post from last December about AI and the “capital cycle”, it seems worth more consideration now.  Is this the end of the “Nvidia tax”?  Do we need to build so many data centers?  Are we under-estimating the wins that come from DeepSeek?  Does the U.S. need to treat AI the way they treated The Manhattan Project?

Perhaps a lesson from this DeepSeek hysteria is something like “necessity is the mother of all invention”, when money and resources are tight you are forced to find divergent solutions.

At least bonds filled their traditional safe haven role yesterday, the 2Y fell ~8bps to 4.20% and the 10Y fell 10bps down to 4.54%.  In Treasury Auctions both the 2Y and 5Y seemed to be well received, but it was the very solid direct bidding on the 5Y that garnered attention which some believe indicates investor confidence in either the direction of rates, inflation, or structural deficits. 

Bitcoin on the other hand does its best to act like a levered bet on the Nasdaq.

A non-AI narrative that is worth keeping an eye on is one related to government spending.  It goes something like if the government were to cut $2 trillion in spending, won’t that lower GDP (remember the GDP equation)?  In this narrative discussion I don’t feel like I see people necessarily capture some nuance here, or perhaps they don’t believe that in the idea that the government can “crowd out” private investment, or the longer term impacts due to lower interest costs, etc.  Anyway, keep an eye on that narrative.

On the day ahead it’s durable goods and 7Y auction.

XTOD: Has any president ever reduced wealth inequality this fast?

XTOD: open source everything

XTOD: $AAPL's AI is so bad they don’t even include it in the AI selloff.

XTOD: The smart money will be desperately trying to convince the dumb money not to sell and to "buy the dip," so they can liquidate their positions to the bagholders. Sad but true.

XTOD: Some ways of thinking will serve you well for some purposes and serve you poorly for others. It is highly desirable to understand one's own and others' ways of thinking and their best applications. Some qualities are more suitable for some jobs. For example, you might not want to hire a highly introverted person as a salesman. That's not to say an introvert can't do that job; it's just that a gregarious person is likely to be more satisfied in the role and do a better job.

https://x.com/ByrneHobart/status/1883979412208771271

https://x.com/jack/status/1883976555686420844

https://x.com/TradingThomas3/status/1883880040594854157

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https://x.com/RayDalio/status/1883640170018197862

Daily Economic Update: January 27, 2025

A big week ahead for Mag7 earnings and central banks, including the FOMC.  Looking ahead at the central bank calendar, it’s BoC and FOMC Wednesday and ECB Thursday.  

While that all sounds exciting, last week concluded with a ton of news circulating around DeepSeek R1.  In case you missed it, the summary is that a Chinese lab effectively built ChatGPT at like 1/10 or 1/20th of the cost using far less compute (GPU’s).  While I am by no means an AI expert, it does seem possible that the valuation of certain AI related companies and data center spend is at least somewhat, if not entirely, dependent on models needing more and more computation power and GPUs.  

I don’t know but it might be time for me to actually know what these things all mean:  parameter-efficient fine-tuning, quantization, smaller models, open-source models, in-context learning and transfer learning.

It’s also interesting that some reports indicate that DeepSeek was trained on Q&A and other data that their engineering team generated from ChatGPT rather than by pulling huge datasets.  Speaking of ChatGPT / OpenAI they obviously remain in the news related to StarGate and their recently announced AI Agent called Operator.

Whatever the DeepSeek news actually means, it’s probably fair to say that it caused some form of collective freak out on parts of X. 

Since it’s a FOMC decision week, I thought I’d share a Fed related quote today, Tuesday and Wednesday.  Can you identify which Fed Chair said the below? Post your guess in the comments.

“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

As it relates to this week’s FOMC Meeting, the common thinking on the meeting is something along the lines of the following:

• The Fed is expected to hold their policy rate at 4.25% - 4.50% and likely say nothing too definitive as it relates to the March meeting.

• There will probably be a lot of questions about tariffs and the Fed’s potential reaction function should meaningful tariffs be enacted before the March meeting.

• More questions around the restrictiveness of policy. 

• I wonder if there will be much talk about “financial conditions” and “wealth effects”.

Of course we know where Trump stands on rates, he wants them lower and he believes lower oil prices are going to be a major factor to help get them there.

Last week concluded with BoJ raising their policy rate to 0.5%, the highest since 2008 and signaling the possibility that they may need to do more.  Away from central banks, the  international forex market remains focused on tariff news.

On the week ahead:

Monday: New home sales, 2Y and 5Y Auction

Tuesday: Durable goods, 7Y Auction

Wednesday: BoC, FOMC

Thursday: Jobless Claims, ECB, GDP (4Q Advance)

Friday: PCE

XTOD: A world in which human wages crash from AI -- logically, necessarily -- is a world in which productivity growth goes through the roof, and prices for goods and services crash to near zero. Consumer cornucopia. Everything you need and want for pennies.

XTOD: Is DeepSeek the biggest threat to US equity markets?  The company seems to have built a groundbreaking AI model at an extremely low price and without having access to cutting-edge chips, calling into question the utility of the hundreds of billions worth of capex being poured into this industry.

XTOD: I don’t know if this Deepseek narrative is true or not,  but it does underscore the leapfrog risk in technology investing. The hyper-capex AI model will start getting more (justified) questions.

XTOD: DeepSeek’s first reasoning model has arrived - over 25x cheaper than OpenAI’s o1 

Highlights from our initial benchmarking of DeepSeek R1:

➤ Trades blows with OpenAI’s o1 across our eval suite to score the second highest in Artificial Analysis Quality Index ever

➤ Priced on DeepSeek’s own API at just $0.55/$2.19 input/output - significantly cheaper than not just o1 but o1-mini

➤ Served by DeepSeek at 71 output tokens/s (comparable to DeepSeek V3)

➤ Reasoning tokens are wrapped in <thinking> tags, allowing developers to easily decide whether to show them to users

Stay tuned for more detail coming next week - big upgrades to the Artificial Analysis eval suite launching soon.

XTOD: Real payoffs vs. no payoffs. If you are frightened of debasement of your currency, you probably should reduce your currency holdings, or holdings of any nominal assets that yield fixed payoffs in your currency and buy real assets, claims to 'real' payoffs that increase with inflation. You probably should not stock up on securities that yield no payoffs.

XTOD: Most people wait too long to go into action, generally out of fear. They want more money or better circumstances.  You must go the opposite direction and move before you think you are ready. It is as if you are making it a little more difficult for yourself, deliberately creating obstacles in your path.  But it is a law of power that your energy will always rise to the appropriate level.  When you feel you must work harder to get to your goal because you are not quite prepared, you are more alert and inventive.  This venture has to succeed so it will.

https://x.com/pmarca/status/1882993091784880557

https://x.com/knowledge_vital/status/1882862738780697020

https://x.com/RealJimChanos/status/1882808370081771912

https://x.com/ArtificialAnlys/status/1882454212556259369

https://x.com/HannoLustig/status/1882255560894304570

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