Daily Economic Update: January 21, 2025

For the rest of the week, I’m going to start my post with a quote from the same book. If you can guess the book without the help of Google or AI, post your reply in the comments.

“Of course after a while, I heard a lot of calamity howling and the old stagers said everybody - except themselves - had gone crazy. But everybody except themselves was making money. I knew, of course, there must be a limit to advances and an end to the crazy buying of A.O.T. - Any Old Thing - and I got bearish.”

With the inauguration in the books and the craziness that is the Trump and Melania memecoins ($Trump and $Melania) on many minds, perhaps it’s only fitting that earnings will be the highlight of the week.  I say fitting because clearly there is a lot of money that has gravitated to ‘investments’ that have no earnings.

At least as it relates to equities, in theory there should be a relationship between GDP and equity returns.  That relationship is one where higher economic growth translates into higher earnings per share (EPS).  There is a model called the Grinold-Kroner model that provides a relationship between nominal GDP to expected equity returns.  Essentially higher growth provides higher earnings growth, higher dividend yields and research also indicates higher P/E ratios, as investors are willing to pay more for each dollar of earnings in a growing economy. Of course the relationship between GDP growth and EPS can be strengthened and weakened by dilution. Another popular model is the “Fed Model”, popularized by Ed Yardeni.  While that model doesn’t explicitly tie valuations to nominal GDP growth it focuses on the inverse of the P/E ratio, or E/P, the earnings yield of the stock market.  The “Fed Model” compares the earnings yield of the stock market to the 10-year yield on government bonds. A positive value indicates the stock market is under-valued, and vice versa. The valuation spread is seen as equivalent to the expected ERP (equity risk premium). If you consider earnings tied to nominal GDP growth, then you can see how stocks can be more attractive to bonds in a situation where earnings are growing and bond yields are stable.  Whether that is the environment we’ll find ourselves in, I have no idea.

I mention all of this because on Friday the IMF upgraded their growth forecast for the U.S. by 0.5% to 2.7%.

We could spend the week talking about equity valuations, shitcoin valuations, speculations and scams, but we’ll start with a topic that continues to get a decent amount of press and that is the stock and bond correlation, which falls under the concept of diversification.  

The basic idea of diversification as a core investment principle is that you can reduce risk by spreading investments across different assets that are not perfectly correlated. Bonds typically provide a way to diversify exposure to stocks because they often move in the opposite direction of stocks, an inverse correlation that is often seen during crises when investors seek “safe havens”.  One of my favorite research articles was a work called "When Diversification Fails” by Sébastien Page and Robert A. Panariello.  The paper highlights that diversification often disappoints when investors need it most, as correlations tend to rise during certain downturns.  While bonds can often be the best diversifier during traditional “flight to safety” crises, there are certain macroeconomic environments where bonds may not live up to their expected role, one of which is when inflation and interest rates drive market volatility.  During periods of high inflation both bond and stock prices may decline simultaneously, think 1970s and 80s and 2022.  Central bank policy can also impact the correlation, think about policies during the GFC, etc.  There was also a period during the Covid crises where investors were forced to sell safe bonds to fund margin calls, leading to losses on bonds and stocks at the same time. The point is that the correlation between stocks and bonds appears not to be static and can be somewhat regime dependent.

Over the last couple of decades there has also been somewhat of an increasing chorus of certain investment minds who believe that investors should largely eschew bonds and focus entirely on equities. A recent paper, "Safe Equities: An Alternative Allocation to Bonds" by Stephen Penman and Julie Zhu argues that a portfolio of carefully selected equities, identified through fundamental analysis as having low risk to future earnings, can offer a viable alternative to bonds for diversifying a portfolio and mitigating downside risk, particularly during equity market drawdowns.  The paper draws on empirical evidence that bonds have failed to provide negative correlation to stocks during periods of drawdown and contend that “safe equities”, those with low downside beta and positive skewness can be a better alternative to bonds as a diversifier.  Interestingly the way the authors believe safe equities should be used is that investors should short safe equities to fund a long position in risky equities, creating a zero-net investment strategy.  Using “safe equities” as the “hedge” results in a lower return when equities rally, as compared to long-only risky equities, but the losses on the short position in “safe equities” will mitigate some of the losses on the “risky equities” in down markets.  It’s a strategy that seems to be predicated on some differences in “beta” of the two equity baskets and a belief that this cost of insurance is better than that of using a traditional 60/40 portfolio.  I’ll have to give it a deeper read and more thought, but I thought it was an interesting concept.

In the week ahead it’s really earnings as the focus with a light week for data.

Thursday will bring jobless claims, Friday will bring S&P manufacturing PMI’s and the final read of the UofM sentiment survey.  We also get the BoJ rate decision, an expected hike. 

Of course Trump’s policies will be front and center….for the next 4 years.

We enter the week with the 10Y at 4.63%, the 2Y at 4.30%, the DXY at 108 and the S&P 500 at 6,022.

XTOD: Southern Taiwan hit by 6.4 magnitude quake, TSMC evacuates some factories http://reut.rs/3PInlpm

XTOD: Senior Trump Advisors have reportedly prepared between 100-200 Executive Orders that President-Elect Donald J. Trump is expected to sign on Monday at the U.S. Capitol immediate following the Inauguration, and then at both Capitol One Area and the White House later in the Afternoon. The Orders are expected to cover many Campaign Promises made by Trump, possibly including:

-Delaying the TikTok Ban for up to 90 Days

-Tariffs of up to 25% on Products coming from Mexico and Canada

-Declaring a National Emergency on the U.S-Mexico Border

-Closing the U.S-Mexico Border

-Directing the U.S. Military to construct additional Infrastructure on the U.S-Mexico Border  

-Designating the Mexican Cartels as Foreign Terrorist Organizations

-Reinstating a Ban on Transgender Military Service

-Rescinding any DEI Policy put in place by the Biden Administration

-Repealing several Policies on Electric Vehicles

-Repealing several Polices related to the Green New Deal 

-Remove certain limits on Offshore Oil Drilling on Federal Land

-Declaring a National Emergency on Energy 

-Orders on the Mass Deportations of Illegal Immigrants

-Ending Birthright Citizenship

-Reestablishing the “Remain in Mexico” Program

-Pardons for Hundreds if not a Thousand of those who participated in the January 6th Protest and Riot

XTOD: From my Surprises for 2025 on @thestreetpro  .... * An extremely leveraged cryptocurrency market represents potential systemic  risks. It is my view that cryptocurrency is "the mother of all bubbles" perpetuated by a  number of factors (including the rejection of fiat money) and developing digital  narratives -- many of which have a weak foundation of logic. The absurd notion that the  limiting of supply of bitcoin is as stupid as it is damning -- as there is no limit to the  supply of other cryptocurrencies. To us, the sheer market size of Bitcoin and other  cryptocurrencies is a manifestation of the risks.   When the cryptocurrency markets implode, which is my baseline expectation, the  contagion effect will likely be pronounced on all of the capital markets.

XTOD: "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."

https://x.com/Reuters/status/1881432800575869203

https://x.com/sentdefender/status/1881138348062040476

https://x.com/DougKass/status/1881137666395164732

https://x.com/TheEudaimonist/status/1881012683824300408

Daily Economic Update: January 20, 2025

Markets closed in observance of MLK Day.  This is apparently only the second time that the Presidential inauguration has coincided with MLK Day (which became a holiday in 1983), the other time being Bill Clinton’s second term inauguration.  Apparently Obama’s second inauguration technically occurred privately on Sunday 1/20/2013, though the public ceremony did take place on MLK day the following day.

Daily Economic Update: January 17, 2025

Does anyone wonder what happened to the drones that people were seeing in NJ? I feel like that fell off the radar.

Yesterday’s retail sales data mostly missed expectations but the core retail sales number (ex. Autos, gas, bldg materials) was 0.7% v. 0.4% est. Jobless claims remain benign, Philly Fed (always volatile) seemed remarkably good. Maybe the cautionary data points as it relates to inflation were that export prices rose again and that Philly Fed prices paid and prices received components were up.  Yields fell and stocks were mostly sideways.  Overall on the week, inflation readings turned out to be a little better than expected and that includes readings from the U.K. and the previously relentless rise in yields decelerated and declined.   

The Bessent hearing didn’t send bond yields higher as some had posited they would.  High- level, he supports the extension of the 2017 tax cuts, favors tariffs, expressed a belief in an independent Fed and maintaining the dollar as a global reserve currency and that fiscal spending is out of control.  In other words he said about everything anyone nominated for Treasury Secretary would likely say.

Waller seemed to state a belief that inflation is likely going to continue to fall and the Fed will make cuts in 2025.  Of course part of Waller's belief is conditioned on inflation coming down which is likely conditioned on fiscal policies, but that was a relatively “dovish” Waller in my view.

Overnight we get a bunch of Chinese data that may or may not reveal more about the doldrums of the Chinese economy.

Going into the day we’ll start with the 2Y is at 4.23%, the 10Y is at 4.62%, both down about 15bps on the week.  The S&P is at 5,937, despite Apple getting smoked on the day.  On the day ahead it’s building permits, housing starts and industrial production.

As we wrap up the week, a week that featured inflation data, it begs the question, what investments are good inflation hedges?   Cumulatively CPI-U is up something like 20% since 2021, how have some investments that are considered “inflation hedges” performed.  The answer isn’t easy but if you look at a price chart for gold-miners GDX they have underperformed both spot gold and inflation.  If you look at a price chart for some apartment REITs they have also underperformed.  Investments in the S&P 500 and in a broad basket of commodities via something like ticker GSG would have looked to have done better. I don’t know what the point of this paragraph is, other than to say there’s a lot of moving pieces in the economy and markets and things that you think should work in certain environments, don’t always.

XTOD: “Senator just to be clear, China will build 100 new coal plants this year. There is no “clean energy” race… there is just an energy race.”

XTOD: China is experiencing a complete financial crash. China’s 10Yr govt bonds yield 1.65%, their ‘policy overnight rate’ sits at 1.5%, their real estate collapse continues (Vanke 2025 bonds collapsing this week), and overnight rate just spiked to 16%. Complete disaster for xi.

XTOD: The point is the US (and other countries) should have much more intelligent (and much less dogmatic) discussions about the impact of global trade, trade imbalances, and savings imbalances on domestic economies, and on the optimal role of manufacturing.

XTOD: Crazy how fast Waller flipped from the voice of reason at the Fed to just another econ slicing the data arbitrarily to pursue his own political agenda (he clearly wants to replace JPOW)

XTOD: Jensen Huang: Excellence is the capacity to take pain

https://x.com/Geiger_Capital/status/1879929226973024400

https://x.com/Jkylebass/status/1879869755240431712

https://x.com/michaelxpettis/status/1879830236944281993

https://x.com/negitrage/status/1879917006197235860

https://x.com/FoundersPodcast/status/1879930342951538735

Daily Economic Update: January 16, 2025

Investors expressed optimism with their trading following yesterday’s inflation report, sending stocks higher and yields lower by double digit basis points across most of the curve.  It was really the core CPI component that showed the most promise, with the MoM measure at 0.2% and the YoY measure at 3.2%, both below estimates. The headline numbers were in-line with estimates at 0.4% and 2.9% for MoM and YoY respectively.  Egg prices, oil prices continue to be volatile components while economists express some optimism over rents and alternative rent measures seem to indicate rents are no longer rising.  All that said, I don’t think it’s lost on anybody that these numbers are still above the Fed’s target and there is a big uncertainty around the impact of Trump policies and more specifically tariffs.

Bank earnings looked pretty solid across the board with some big beats on top line and earnings.  Reports of Israel and Hamas reaching a cease fire also seem optimistic.

The S&P traded up to 5,950, the 2Y yield fell back to 4.30% and the 10Y yield moved down to 4.66%.

On the day ahead it’s Retail Sales and Jobless claims as the highlight in data, but the Bessent hearing might be the real highlight.

The  last couple of weeks have brought the concept of “Term Premium” back on the radar. I was on this topic back in October and generally throughout 2024.  Remember me talking about trading steepeners?   As a reminder, Term Premium is the additional yield that investors require to move out on the yield curve, it’s the compensation for taking on additional interest rate risk. Conceptually, Term Premium, is a departure from a “pure expectations” theory of the yield curve, a theory that posits that yields on longer-dated maturity bonds are simply the average of the expected path of short term rates.  Term Premium would add to that expected path of short term rates and compensate the investor for uncertainty and other factors. Most of the talking of late is about how higher government debt levels can and do put upward pressure on longer-dated yields due to increased supply and investors require extra compensation to absorb that supply,  but of course there are other theories around term premium. A school of thought might say that when the term premium is high-enough it entices investors to move into bonds and perhaps not search for return through other investments.  Of course that rest on a premise that bonds are a substitute for stocks

While the Treasury curve has steepened and shows signs of increasing term premium, it’s kind of crazy that the SOFR swap curve remains super flat.  Negative swap spreads are a post for another day or another career era.

In completely unrelated news, Matt Levine wrote about a CFPB (Consumer Financial Protection Bureau) lawsuit against CapitalOne, which you can read about at a million places, just Google it. Anyway, I only write about it because I vividly remember calling CapitalOne after noticing they hadn't adjusted the rate on the 360 Savings account while simultaneously launching a new account at the higher market interest rate. I remember calling and asking why they couldn't just adjust the rate on my existing account, only to be told I would have to open a new account to get the new rate. Anyway it will be interesting to see how this ultimately shakes out.

XTOD: It’s funny to me that people who had money in the Madoff Ponzi scheme and the FTX fraud had better recovery rates (a -6% loss & an +18 to 43% profit respectively!) than any SPAC investor from 2021, most down by -90 to 100%.  Literal frauds were a better investments than SPACs!

XTOD: Stocks were down on news of a stronger economy  Now they are up on news things might be cooling off  Investing is easy

XTOD: If you are buying fintech “growth” stories, but have to worry about credit losses in a recession ($AFRM, $CVNA, etc.) or catastrophic insurance losses ($LMND), then you aren’t really buying a “growth” stock. You are buying a very pro-cyclical derivative.

XTOD: OUTLOOK-AT-RISK | JAN 2025  Downside risks to real GDP growth remain at historically normal levels, with the estimated conditional distribution of average growth over the next four quarters close to the unconditional distribution.   Charts | Data https://nyfed.org/41kwlUL

XTOD: Everything from a job offer to a marriage proposal is a yes to one thing and a no to hundreds of thousands of other opportunities. It’s easy—the universal default—to get pulled into the quicksand of half-hearted yesses and promiscuous overcommitment, ending up stressed and reactive, wondering where your time has gone.

https://x.com/ecommerceshares/status/1879112543274447055

https://x.com/awealthofcs/status/1879528060401397982

https://x.com/RealJimChanos/status/1879196701539618817

https://x.com/NYFedResearch/status/1879553035321426026

https://x.com/tferriss/status/1879205414480355587

Daily Economic Update: January 15, 2025

CPI Day is here.  Data from options markets suggest that we could experience big moves on the release, but we’ll see.  Recall that the Fed’s preferred inflation measure is PCE.  If you’re interested in how CPI and PCE relate, you’re in luck, the Cleveland Fed has a nice infographic explainer.  A couple of the important points highlighted in that piece are that: (1) since 2000, CPI has on average, been 0.39% higher than PCE, (2) PCE considers rural and urban households whereas CPI is focused on “urban” households, (3) the major differences in methodology are around healthcare and shelter.  PCE places a much higher weight on healthcare and a much lower weight on shelter than CPI.  I don’t know if that helps, but every major bank research desk will take the CPI report and attempt to map it to PCE to derive their forecast.

Yesterday PPI headline for MoM came in at 0.2% vs. 0.4% estimated, Core MoM is 0% also below estimates.  The YoY headline increased to 3.3% from 3.0% in the prior month, but was nonetheless below estimates, the YoY core was 3.5%. A report that seemed to breathe some relief into markets.

The S&P ended up with a slight gain and yields were mixed.  The 2Y is 4.38% and the 10Y is ~4.80%.  

Away from the U.S., Chinese yields remain largely the global outlier when it comes to rising yields, as fear of Chinese deflation continues.  A juxtaposition with other developed economies where yields have been rising, even Japanese long yields are hitting multi-decade highs.

CPI, Beige Book, Fedspeak and the start of bank earnings season are the big rocks for the day. The talk of “gradual tariffs” has been a topic of the last few days and Trump cabinet picks will be a hot topic for the coming days, especially Bessent as Treasury Secretary.

Sticking with the theme of r-star or the neutral rate.  Economist Brad DeLong posted his thoughts on the current macroeconomic environment in this substack post.  Heading into last Friday’s Jobs Report, DeLong was of the opinion the Fed should be “rapidly” cutting rates to 3%.  He spends the balance of the post discussing some dissenting ideas.  Ultimately he concludes his post with the following lamentation:

“The interesting analytic question raised by the most recent jobs report is whether my belief that “neutral” is in fact a 3%/year Federal Funds rate is correct. At the moment I still take refuge in the belief that (a) fiscal stimulative multipliers are somewhat higher than I had thought, and (b) irrational financial exuberance driven by the failure of investors to understand that an extra dollar of NVIDIA profits today is not a signal of rapid future economic growth driven by “AI”, but rather a transfer from tech platform oligopolists to NVIDIA driven by their belief that they have no choice right now but to pay NVIDIA through the nose to build “AI” capabilities to purchase insurance against the disruption of their platforms and the erosion of their platform-oligopoly profits. But that is a point for another day. However, let me set a timer: if what I regard as substantially restrictive interest rates do not bring signs of labor-market slowing, I am definitely going to have to rethink my views about what the American economy’s current neutral rate of interest is.”

XTOD: The book “Inner Excellence” by Jim Murphy that AJ Brown was reading on the sidelines yesterday moved up from 523,497th to 1st on Amazon’s best selling list.

XTOD: OF model Bonnie Blue says she has broken the world record by sleeping with 1,057 men in just 12 hours

XTOD: I don't think the average pension realizes how much long duration corporate paper they should own with yields at 6%...Most have a nominal return target in the range of 7-8%.... I don't know the right weight, but def should be higher than where it is today

XTOD: Investigators from South Korea’s Public Prosecution Office and police officers can now be seen approaching and moving past a third line of impeached President Yoon Seok-Yoel’s security to serve the arrest warrant against him. Two others, including his deputy chief of the presidential security service, are also a slated for arrest.

XTOD: Hard evidence of the Chinese Communist Party running the greatest Digital Trojan Horse EVER. TikTok’s supposed independence is a complete fraud.

XTOD: China said they stopped buying USTs on net in Nov-2013 - which is right when FDI into US equities broke out (blue), followed by QQQ.  Buffett called this "selling the family silver to fund consumption" 2 decades ago, but "USD Milkshake" does roll off the tongue a whole lot nicer.

XTOD: Luke fails to mention that this same thing has happened to Sovereign Bonds all over the world starting in 2014.  It's part of the reason we have seen rates rise, USD rise, US equities rise, and Gold rise...together. 

https://x.com/FieldYates/status/1878942604735193423

https://x.com/FearedBuck/status/1878872079577321935

https://x.com/HayekAndKeynes/status/1879012567047405631

https://x.com/sentdefender/status/1879304022575972666

https://x.com/Jkylebass/status/1879302572097552461

https://x.com/LukeGromen/status/1879197487329939571

https://x.com/SantiagoAuFund/status/1879223984669233645

Daily Economic Update: January 14, 2025

Stocks eked out small gains yesterday. Yields rose slightly with the 2Y at 4.40% and 10Y 4.78%.  If you haven’t checked oil in a bit, it’s hit a 4-month high, some of the recent gains are attributable to further sanctions on Russian oil interest. Away from markets (for now), the impact of the ongoing tragedy that is that of the California wildfires is certainly something that will bear some continued watching.

In economic news, the NY Fed SCE showed: “Median inflation expectations were unchanged at 3.0 percent at the one-year-ahead horizon, increased to 3.0 percent from 2.6 percent at the three-year-ahead horizon, and declined to 2.7 percent from 2.9 percent at the five-year-ahead horizon.”  The survey also showed an increase in inflation uncertainty.  The rise of inflation expectations at the 3 year horizon doesn’t seem like something welcome by the Fed.  U.S. yields continued to climb and tech stocks got little reprieve from some of the recent selling.

While I move away from the discussion on valuations, in the first XTOD there is a link to an article titled 'Mega Cap World Domination' by Ben Carlson, that looks at some of what we’ve been discussing over the last week.  His answer to the current investment debate or what he calls, conundrum, is “I own index funds and I diversify.  Index funds will own the winners without having to pick them in advance. And diversification gives you the optionality to own the winners that often come from unexpected places.”

Today what we’ll touch on will combine two of the other major 2025 themes, one being fiscal policy and the other being “r-Star”.  So it’s fitting to discuss “Fiscal r-star”, an idea coined by Marijn Bolhuis, an economist at the IMF, recently discussed on David Beckworth’s podcast Macro Musings.  I mean who doesn’t need more largely unquantifiable “stars” to try to track?

So what is “fiscal r-star”?  It is the real interest rate that stabilizes a country's debt-to-GDP ratio when output is growing at potential and inflation is at target, given a path of primary deficits or surpluses set by the fiscal authority. This is distinct from the traditional concept of monetary r-star, which is the real interest rate that stabilizes inflation and maximizes sustainable employment.  Fiscal r-star can be thought of as the ceiling for real interest rates. If real interest rates rise above this ceiling, the debt-to-GDP ratio could increase rapidly (does this idea that higher interest rates can increase debt-to-GDP sound familiar to anyone??)

When you consider that the Fed’s liabilities are ultimately backed by the Federal Government and you look at things from a consolidated balance sheet perspective, Bohuis’ work highlights the tensions between fiscal and monetary policy.  If fiscal policy is passive (meaning that fiscal authorities adjust spending and taxes to stabilize debt levels), then fiscal and monetary r-star will be the same. However, if fiscal policy is active and not responding to debt levels, the two can diverge.  Under this framework a situation that could occur is that monetary r-star (the real rate needed to keep inflation in check) can exceed fiscal r-star (a lower rate needed to keep debt-to-gdp in check) which creates a tension that needs to be resolved.

So how might such a tense situation be resolved?  Well, a few ways pop out. One is that the fiscal house gets itself in order by reducing spending, creating growth or otherwise raising revenue.  Other resolutions could be steps taken by the Fed toward keeping rates lower at the expense of allowing higher inflation or other regimes of financial repression.  All said the possibility that the U.S. may currently find itself in a situation where this “tension” exists is potentially concerning.  Bolhuis also mentions that these larger fiscal-monetary gaps can increase the risks of an economic crisis.

Because of the risk that the Central Bank could keep rates low to accommodate fiscal authorities in times of tension, Bolhuis believes it is wise to maintain central bank independence. Perhaps subscribing to my favorite definition of central bank independence helps prevent a fiscal-monetary r-star gap.  That definition is by Peter Stella and reads: “I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.”

All of this still seems to leave open a core dilemma of sorts. The central bank is tasked with maintaining price stability, which typically involves raising interest rates to cool an overheating economy. However, if fiscal policy remains expansionary despite rising interest rates, it can create a vicious cycle. Higher rates increase the cost of government borrowing, leading to larger deficits and potentially even more borrowing, which could further fuel inflation.   This sounds very much like the Fiscal Theory of the Price Level to me.  During Carter’s funeral last week, I mentioned Volcker.  Stories from the Volcker era indicate that politicians took seriously the size and cost of financing budget deficits and clearly Volcker operated independently, essentially urging fiscal authorities to get their act together. 

If I had one takeaway from this work on “fiscal r-star” is that it highlights what appears to be somewhat of an inherent truth that to achieve the “best” macroeconomic outcomes there needs to be some level of coordination between the fiscal and monetary authority in working towards their objectives, or at least some explicit acknowledgment of the trade-offs.   Perhaps this paper highlights something John Cochrane often states (see this post from September) : “almost all current theories mix a fiscal tightening with a rise in interest rates. The rise in interest rates by itself has essentially no power to lower inflation.”  

You should obviously form your opinion on whether the concept of “fiscal r-star” and “fiscal-monetary gap” are valid and useful concepts and from there what implications there might be for investors if you reach an opinion that the U.S. is at risk due to such a fiscal-monetary gap.  Lastly, keep in mind this is different from “fiscal dominance” which is the idea that when government borrowings get so large the central bank is forced to keep rates low to accommodate those deficits and is something of the outcome after the fiscal-monetary gap crosses some tipping point.  

XTOD: What's the more likely scenario? 1. We have an AI bubble that turns into a bust (even if AI tech is huge in the long  run)  or  2. Mega cap world domination rolls on I have some thoughts:  https://awealthofcommonsense.com/2025/01/mega-cap-world-domination/

XTOD: Why it’s still early for crypto: We polled advisors across the country, and only 35% said they are able to buy crypto in client accounts today.  Worth noting: Advisors manage roughly half of all wealth in America.  There’s still a lot of room to run.

XTOD: As long as Marc Andreessen keeps promoting a16z's crypto vaporware, he doesn't belong anywhere near the levers of power. Ditto for crypto grifters like David Sacks and Howard Lutnick.  There's no excusing their behavior.

XTOD: Private equity is “leveraged micro-caps with lockups and high fees” and private credit is “high-interest-rate loans that banks wouldn’t touch.” [Rasmussen] warns advisors not to  let the “smoothed returns and laundered volatility trick you into thinking these aren't high-risk, high-fee assets with a lot of blow-up potential.” https://fa-mag.com/news/2025-may-be-a-whole-new-world-for-alternative-assets-80954.html

XTOD: Stan gave me this advice before my 1st born 15+ yrs ago.Best parenting advice I got.  TIME is all we have. Minimize regrets

XTOD: Habits that have a high rate of return in life:

- sleeping 8+ hours each day

- lifting weights 3x week

- going for a walk each day

- saving at least 10 percent of your income

- reading every day

- drinking more water and less of everything else

- leaving your phone in another room while you work

https://x.com/awealthofcs/status/1878822696618021183

https://x.com/BitwiseInvest/status/1878885763418652976

https://x.com/ParrotCapital/status/1878884743447756960

https://x.com/wolfejosh/status/1878885089784008975

https://x.com/JamesClear/status/1878890125306011971

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