Daily Economic Update: January 13, 2025

Friday’s payrolls report was a major beat on the headline (+256K v. 160K est) and showed a declining unemployment rate (from 4.2% to 4.1%).  You couple that with a UofM survey that showed consumers increasing their inflation expectations and you get a recipe for higher yields.  Yields moved the most in the belly of the curve, but were up across the board. Bank research desk seemingly rushed to change their rate cut forecast, with I believe BofA moving to zero cuts in 2025.  On the other side, some of the Goldman team is now in the camp that the market forward curve is probably too hawkish over the next couple of years: “We have more conviction that market pricing as a statement about the probability-weighted path of the funds rate over the next few years across many possible scenarios is too hawkish.”  

Rising yields weighed on equities as investors decided that higher yields do result in lower present values of future earnings.  Long duration equities were most impacted.   Major indexes declined over 1% on the day Friday and the S&P is at 5,827.

The 2Y starts the week at 4.38% and the 10Y at 4.76%.  On the week ahead bank earnings will be in focus along with inflation data:

Mon: NY Fed consumer inflation expectations

Tue: PPI, Fedspeak

Wed: CPI, Fed Beige Book, Fedspeak

Thur: Retail Sales, Jobless Claims

Fri: Building Permits, Housing Starts, Industrial Production

Moving away from the news of the moment, we’ll start this week with the best I can do to describe the counter to the “trees don’t grow to the sky” narrative, a narrative that in some ways says “this time is different”, arguing that long-term growth investing is a superior strategy in an age where some companies appear to have the potential for sustained, superlinear or exponential growth perspectives that don’t revert to a mean.  Perhaps one thing the meta-narratives have in common is the idea of disruption, but they come at it from different angles. The traditional approach is disruption leads to business cycles and as a result somewhat more of a mean reversion mindset, while the “this time is different” approach is essentially one of just finding those disruptive companies and if you do there is no necessary end to the high-growth trends.

At the heart of the argument seems to be an emphasis of increasing returns to scale, particularly in knowledge based industries with high levels of intangible assets, where success begets more success.  I write this not to imply that investors with this growth oriented mindset believe that trends last forever, rather that they believe there are plenty of opportunities to find companies with sustainable, competitive moats and leaders capable of continued innovation in the face of competition.  They don’t dismiss there are some ultimate limits to market growth and product or service saturation, but would rather likely espouse that the market as a whole has a hard time pricing in the type of exponential growth these types of companies are capable of achieving.  Along those lines, they would likely argue that traditional valuation metrics fail to capture the paradigm shift these companies operate in and their ability to scale often with limited physical assets, resulting in market inefficiencies.

Another approach to investing that runs counter to the “trees don’t grow to the sky” narrative is one that was employed by Nick Sleep and Qais Zakaria when they ran their Nomad Investment Partnership and that tactic was to invest in business models that they describe as “scale economies shared”.  Nick and Zakaria were early and persistent investors in Amazon which they described as a potential “mouse that can turn into an elephant.”  The concept of Scale Economies Shared was central to their philosophy and born from an observation regarding one of Charlie Munger's favorite investments, Costco.  The idea is that there are companies that pass on the cost savings from scale and efficiency improvements to customers in the form of lower prices and as a result these companies continuously gain market share and retain large loyal customer base (a virtuous cycle) that over the long term leads to much larger amounts of free cash flow and much more valuable companies than most investors realize.  They called Amazon “Costco on speed.” Further these types of companies not only grow in good times, but they tend to also perform well in bad times due to their cost advantages.  Inherent in the investment philosophy of Nomad Investment Partners was that there is potential for sustained, long-term growth in exceptional businesses and certain businesses can defy mean-reversion. I should note that Nick and Zakaria were definitely long-term oriented, thinking in terms of decades, not quarters.  They also placed a lot of importance on finding exceptional businesses that were run by exceptional leaders (often founders) as these companies with strong leadership, innovative cultures, and customer centricity would likely be the ones to adapt, evolve, survive and ultimately defy growth expectations.  They have more in common with Buffett than say Cathie Wood in their approach to investing.

I probably didn’t do the discussion of this “meta-view” justice, but I’ll leave you with two ideas, both of which relate to investment time horizons.

“A lot of financial debates are just people with different time horizons talking over each other.” - Morgan Housel

“You can't make a baby in one month by getting nine woman pregnant” - Warren Buffett

No matter where you stand on the meta-investment narrative and your opinion on the application to markets today (including crypto 🙂), the wisdom that you want to leave yourself the room to survive short-term setbacks in order to stick around long-term growth is probably not too controversial.

XTOD: zuck says meta is putting in cubicles. it’s bringing back scotch at lunch and smoking in the office. zuck says the company amex cards work at the strip clubs again. he says it’s back to suit & tie dress code. zuck says they’re reinstalling the asbestos. zuck says no irish allowed

XTOD: "LinkedIn is OnlyFans for middle managers"

XTOD: A friend recently sent me a 2010 article of mine that shows that nearly everything we are discussing today was already an issue 15 years ago when, to most of the world, the Chinese economy seemed in excellent shape and its rapid rise unstoppable. What's interesting to me is that even back in 2010, some of us were saying that "low consumption in China is not a discrete problem that can be resolved with administrative measures". What was required was a transformation of the domestic distribution of income.

XTOD: "We may miss large profits from a major rebound in bond prices. However, our unwillingness to fix a price now for a pound of See's candy to be delivered in [30 years]  makes us equally unwilling to buy bonds which set a price on money now for use [then]." Warren Buffett

XTOD: I've always liked @nntaleb 's terms "extremistan" and "mediocristan" to describe the statistical setting you are looking at.  Natural catastrophes are part of extremistan, where a single loss can be larger than all prior large losses combined.

https://x.com/iroasmas/status/1877928430026608871

https://x.com/BasedBeffJezos/status/1877855472054628362

https://x.com/michaelxpettis/status/1877943509803471266

https://x.com/trengriffin/status/1878194152850292899

https://x.com/mikeandallie/status/1878053972558197238