Daily Economic Update: February 25, 2025

Sorry, I thought we had until midnight last night to write down everything we worked on last week - that was the rule, right?  I got this post written in time.

Spring training is in full effect. In baseball they have a statistic called WAR, Wins Above Replacement. Back on January 6, I started the year discussing where this blog adds value to you, the reader, check out that post here. To recap, this blog’s value-add is its ability to enhance your understanding of financial markets, risk management, and the human factors that influence investment outcomes.  You can read about financial markets anywhere, but I believe it’s rare you can find a source that is intellectually humble, provides timely yet diverse perspectives on financial topics, presents content in a way that is accessible and enjoyable by using humor and satire, and of course provides thought-provoking ideas through a curated selection of “X Thoughts of The Day” (XTODs). 

So the question is, why aren’t you sharing this blog with everyone you know?  My ask is everyone who reads this to send a link to 5 people you know.  In this “attention economy”, I would like to think this blog is worth the few minutes of time each daily post takes to read.  I can’t think of anywhere else where someone can find a daily financial blog that contains some humor and satire, incorporates pop-culture references, embraces an “I don’t know” mentality that acknowledges the inherent uncertainty in financial markets, all while providing an accessible perspective on economics, investing, and the human condition.  You can certainly find plenty of opinions and “takes” on X, but a consistently curated XTOD section that fosters humor, sparks reflection and fosters critical thinking, good luck finding that elsewhere.

If you agree with the above, share the blog! Use the desktop search feature and find something you enjoyed and send it to your friends and coworkers. 

I’m clearly biased, but surely you trust AI.  ChatGPT’s favorite recent blog post was from February 6, 2025. Read the first sentence of that post and it seems obvious why ChatGPT chose it as a recent favorite.  ChatGPT describes the blog’s value as follows: “By combining sharp humor with insightful observations, "Where Is Edward Quince?" offers a refreshing perspective on economic discourse, making intricate subjects more relatable and engaging for its audience”. “The blog’s irreverent yet insightful tone is its biggest asset.” Is it appropriate to quote AI?  Can AI actually provide a testimonial? Oh well, I did it anyway.

Away from self gloat and across the pond, if you missed the weekend election in Germany, you should know that voters leaned right in backing largely establishment parties and the coalition government will be led by Friedrich Merz. There is a belief that the election result will lead to stability and more fiscal spending, especially on defense. We’ll see what happens once the coalition government actually comes to fruition.  Trump clearly seems to want to see a larger role in their own security.

In markets, Microsoft data center spend, or purported lack thereof, is all the rage following a TD Cowen report that they were canceling leases. Tariffs remain front and center with Trump indicating that he’s following through with tariffs on Canada and Mexico starting next week…we’ll see. The S&P closed below 6K, at 5,983.25.  Nvidia’s earnings on Wednesday hold the potential to weigh heavily on sentiment from here. In bonds, the 2Y auction cleared around 4.17% with a real strong foreign bid (indirect bidders).  The 2Y treasury yield closed at 4.19% and the 10Y at 4.41%.

Following last week’s data, the narrative has shifted somewhat to questioning the strength of the economy and specifically the health of the consumer.  Nevertheless, Jamie Dimon kept inflation on the radar, laying out a list of inflationary forces in the near term, including what he called “wasting money on the green economy.”

On the docket for the day are Home prices, Fedspeak, and the 5Y note auction.

XTOD: Three years into Russia’s war against Ukraine, the battlefield remains uncertain—but geopolitics is shifting fast. A reality check on where we stand: very long post 💡

1️⃣ This war isn’t just about Ukraine.

Russia isn’t fighting just to expand its borders—it’s dismantling the European security order and securing its pole position in the U.S.-China great power rivalry amid Cold War 2 between America and the #DragonBear.

Yet Europe still refuses to fight back strategically.

2️⃣ Russia’s war on Europe isn’t just military—it’s non-conventional too.

🔹 Weaponized energy, food & fertilizers

🔹 Migration flows as a destabilization tool

🔹 Cyberattacks & sabotage ops inside EU/NATO

🔹 Nuclear blackmail

Meanwhile, Moscow is not isolated—it’s adapting.

3️⃣ Europe’s grand promises vs. reality:

❌ Germany’s “Zeitenwende” was all talk—no real defense shift so far (new Chancellor Merz might bring out the long-awaited shift)

❌ Europe imposed the greatest sanctions packages (16)—then bypass them via Russia's proxies.

❌ €150B in aid—yet Europe failed to create a wartime economy to mass-produce weapons and consistently support Ukraine.

Russia? It just secured more reliable suppliers via North Korea, Iran & China.

4️⃣ The #DragonBear Alliance is real.

For 15 years, the West downplayed Russia-China ties as a "marriage of convenience", "junior partner" and "impossible".

🚨 Wrong. China keeps Russia’s economy alive by:

🔹 Buying Russian oil & gas at scale

🔹 Supplying microchips & industrial tech

🔹 Offering financial escape routes from sanctions

🔹 Strengthening BRICS+, SCO and other organisations with Russia's participation

Russia is NOT China’s junior partner—it’s Beijing’s Eurasian and Arcic power lever as well as commodities safeline amid Cold War 2 with the U.S.

5️⃣ The Global South is NOT on the West’s side.

Many Western leaders assumed the world would isolate Russia. That never happened.

Instead, Russia deepened ties across Asia, Africa & Latin America.

🔹 India & UAE buy Russian oil

🔹 Brazil, South Africa & Turkey refuse sanctions

🔹 Africa sees Russia as an anti-colonial counterweight to the West

This war is redefining global power alignments.

6️⃣ The West is losing the long game amid Bifurcation of the Global System due to long-term structural and systemic crisis on the old continent.

🔹 Ukraine still lacks weapons systems and ammunistion promised by the West

🔹 European defense industries are too slow and fractured

🔹 Russia is outproducing NATO in artillery shells & drones

Putin is betting the West will lose interest before Russia runs out of men & munitions.

7️⃣ What happens next? Three scenarios:

💥 Scenario 1: Ukraine wins

🔹 Requires a U.S. shift back to full military, diplomatic and financial aid; the EU switches to partial war economy

🔹 China stops tech transfers and dual-use to Russia

🔹 Global South cuts strategic exports to Moscow

🔮 Likelihood: Low (U.S. disengagement under Trump 2.0 + EU hesitation)

⏳ Scenario 2: The War Drags On (War of Attrition until now)

🔹 Russia sustains war with Chinese & Iranian aid

🔹 Western aid to Ukraine slows but doesn’t stop

🔹 Global South expands sanctions evasion & energy trade

🔮 Likelihood: High (We’re already here)

🤝 Scenario 3: The Frozen War (Increasingly Likely)

🔹 U.S. & Russia negotiate a ceasefire, restore strategic dialogue

🔹 Ukraine is forced into territorial concessions

🔹 China brokers the deal to stabilize global markets

🔹 Global South pushes for diplomatic resolution due to food and energy inflation

🔮 Likelihood: Rising fast (Trump’s 2025 policy shift)

8️⃣ Final Reality Check:

The EU and its members are becoming the geopolitical backyard of global affairs if they don't get their act together.

🔹 A new Iron Curtain is emerging along NATO’s Eastern flank amid Cold War 2 between America and the DragonBear

🔹 U.S. focus is shifting to China & the Indo-Pacific where the greatest geopolitical tensions will occur in 2025.

🔹 The EU members are divided—some want to fight, others want peace at any cost. The Bifurcation of the Global System is now affecting the old continent - as above, so below.

Russia is playing the long game. Is the West?

XTOD: Apollo Investments worried about downside risks to economy, notes that every 1 federal employee may actually be 3 jobs because of 2 contractors.

XTOD: Fella lost all his money chasing meme coins and killed himself while recording it live. And they made a meme token in his honor and rugged more people. Crypto is easily the most toxic space right now. Crypto easily a net negative for our society, I'm dying on this hill.

XTOD: My favorite ideas from my conversation with @GuptaRK22  

“In a decade, every person will be more capable than any person is today.”

“The best founders today don’t just embrace AI, they re-underwrite their entire business with it.”

“The next billion-dollar companies will be built by people who understand customer problems deeply and understand what AI can do.”

“The more digital-only your product is, the faster AI will create magic—and if you don’t, someone else will.”

“This moment is about ambition—what race are you in, and how many cars can you pass in front of you?”

“For high-agency, ambitious people, AI is a chance to enter a race you never thought possible—and win it.”

“Customers are divinely discontented—either you give them magic, or someone else will.”

“If you had a genius join your company tomorrow, how much would you change to make the most of them? AI is that genius.”

“If you just knew the person was brilliant and they would work 24 hours a day for you, the first time they messed up, you wouldn’t say, ‘Oh, they suck’—you’d say, ‘I need to do something differently to get the most out of them.’”

“What percentage of time does the senior leadership team think about how to deliver value to the customer in the best, fastest, and cheapest way? The lower that percentage is, the bigger the opportunity.”

“Anything that reduces your agility is a massive problem.”

“If you’re a public company CEO and you feel held back by what you said last year, you’re in trouble.”

“If your leadership team isn’t spending most of their time thinking about customers, you have a massive hidden cost dragging you down.”

“Optimists will own the future—pessimists will watch it happen.”

XTOD: “The road to valor is built by adversity.”  — Ovid

https://x.com/vtchakarova/status/1894105221804298645

https://x.com/SullyCNBC/status/1893299923283546339

https://x.com/Investor_NICK_/status/1893431938188198191

https://x.com/patrick_oshag/status/1894038623575798123

https://x.com/Mythos_Man/status/1893865281870819346

 

Daily Economic Update: February 24, 2025

I almost missed today’s blog post because I came down with “Covid 2.0 (aka Covid +)” which escaped a lab in Wuhan (not yet).  I tried to go through United Healthcare to coordinate treatment but they decided to bill Medicare for a bunch of treatments I didn’t actually need.  What a way to end a week.  As a result I missed my call to discuss the “Mar-A-lago” accord, you know the plan to devalue the U.S. Dollar and simultaneously get China to buy longer-dated treasuries. Now I’ve unanchored my inflation expectations and reported that to the UofM. Anyway, I blame Canada - ever since they beat the U.S. team in the 4 Nation Face Off everything in the news cycle went down hill. There, you have everything you need to know from late last week.

But do not be dismayed, we got Berkshire Hathaway’s annual letter on Saturday morning, nothing beats a coffee and Buffett.  So what did the GOAT have to say? 

TLDR:  Buffett believes in the core tenet of trust, he emphasizes transparency in leadership, urging CEO’s to acknowledge and correct their mistakes quickly, while also espousing the benefits of business instinct over formal education (be wary of flashy hires and managers who believe their own BS).  Despite reporting on the record level of cash at Berkshire, Buffett remains committed to equities over cash, warning of inflation risks.  He reaffirms his commitment to Berkshire's insurance model, highlights his Japanese investments and of course underscores the power of capitalism, savings and long-term compounding.

On Management Responsibilities

• Buffett opens the letter explaining that he believes an Annual Report carries the responsibility of communicating to investors both the good and bad decisions in a manner that engenders the trust you put in the CEO.

• “if you start fooling your shareholders, you will soon believe your own baloney and be fooling yourself as well.”

• There is a level of lamentation about how few companies actually admit their mistakes.  

• Reflecting on “mistakes” or “errors”, Buffett recalled the advice of the late Charlie Munger, that the cardinal sin related to mistakes is delaying the correction of mistakes - problems cannot be wished away.

• Buffett shares a tribute to Pete Leigl, owner of Forest River, an RV company that Berkshire acquired in 2005

• He uses Pete’s story to share that he doesn’t care about where people went to school, believes in lifelong learning and that a large portion of business talent is innate.

• While Buffett believes in disclosing mistakes, he also knows that a single winning decision can make a huge difference. “Mistakes fade away; winners can forever blossom.”

2024 Performance:

• Overall performance was better than expected but 53% of the Berkshire operating subsidiaries reported a decline in earnings.

• Earnings were aided by a large gain in investment income from their massive T-bill portfolio.

• Despite the weather related events, Buffett described how no “monster” event occurred in 2024, but that such an event could occur any day.

• Insurance operations had a great year.

Where Berkshire is invested:

• His “ambidextrous” approach to allocating shareholder capital, where on one hand Berkshire controls 189 operating companies and on the other they own a small interest in a dozen or so large, profitable businesses like Coca Cola, Amex, and Apple.

• Buffett somewhat claps back at the commentary around the size of their cash position, stating “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned” and “we will forever deploy a substantial majority of their money in equities”

• His advice to investors is that “Paper money can see its value evaporate if fiscal folly prevails.” “Fixed-coupon bonds provide no protection against runaway currency.”  Buffett believes “Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry.”  Over his career he has depended on the success of American business and will continue to make that bet.

• Buffett discusses the benefits of capitalism, the importance of savings and the magic of long-term compounding.

• Buffett slips in some advice to politicians, “And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.”

A note on the Property and Casualty Insurance business:

• Buffett notes how the “money-up-front, loss-payment later” model has benefited Berkshire, allowing them to invest the float. 

• Buffett expresses confidence that despite growing climate risk, writing one year policies against this risk is manageable. Acknowledging that Berkshire only assumes risk they feel is appropriately priced.

• Berkshire can financially and psychologically handle extreme losses without blinking.

Berkshire’s Japanese Investments:

• Buffett believes Berkshire’s investment in ITOCHU, Marubeni, Mitsubishi, Mitsui and Sumitomo are investments in companies that are very similar to Berkshire itself and are for the long-term.

• He takes a minute to take a subtle jab at U.S. executive compensation, “their top managers are far less aggressive in their compensation programs than their U.S. counterparts.”

• Buffett discusses that from time to time they borrow Yen at fixed rates only and seek a position of Yen neutrality.

We ended last week with a down day for the major equity indexes. The S&P 500 closed at 6,013 down 1.7%, but the index still remains at valuations that are in the 90th percentile on a P/E basis on a historical basis, with IT being the sector trading at the highest P/E’s. The 2Y yield moved back to 4.20% and the 10Y yield moved back down to 4.43%.

On the week ahead the focus will be on PCE data and Nvidia earnings.

Today: Dallas Fed Mfg, 2Y Note auction
Tue: Home prices, Fedspeak, 5Y note auction

Wed: New Home Sales, 7Y note auction, Fedspeak

Thur: Durable Goods, GDP 2nd Est. Jobless claims, Pending Home Sales

Fri: PCE, Income & Spending

XTOD (You are welcome to read Jim’s entire thread): : 1/16 A thread on The Mar-A-Lago Accord (MALA).  tl:dr  Take it seriously, not literally  The status quo cannot last. If we do nothing, it ends badly. What is the alternative?  Most of it has either already happened, or is underway. We weren't aware of the name.

XTOD: In other words if you want U.S. military security going forward you need to swap your century bonds and manipulate your currency higher

If you don't want our protection we will tariff you to achieve our goals

XTOD: An email was sent out tonight to all federal employees, even those not under the Office of Personnel Management (OPM) or Executive Branch, by Elon Musk’s Department of Government Efficiency (DOGE), demanding that they reply to the email with “5 bullets of what you accomplished last week” or face forced resignation. Several agencies and departments, including a number in the Department of Defense, have already instructed their employees not to respond to the email, as they are not under DOGE’s purview or the OPM.

XTOD: Jamie Dimon just sold 33% of his J.P. Morgan stock on February 20th  🤨  Co-CEO Troy Rohrbaugh also sold 20% yesterday.

XTOD: Beta-adjusted gamma. This is a pretty simple thing but worth discussing. 

So ordinarily you think about dollar gamma on your positions - if the underlying goes up by 1%, how much more dollar delta do you pick up?

XTOD: Everyone thinks Europe is finished. In 20 years, they'll wish they had bought in early.   AGI takes over. Productivity is infinite. Everything is automated.  So, tell me: what actually becomes scarce? 

NOT another piece of software — but authentic human experience.

When machines handle everything, what do people crave? Beauty. Meaning. Significance.

And Europe has been accumulating that for centuries.

It's sitting on the most undervalued asset of the AI age:

- 500+ UNESCO World Heritage sites (the US? 25)

- The world's greatest museums

- 50M+ cultural tourists in France alone

- Centuries-old universities, libraries, cafés

- The birthplace of opera, ballet, fine wine

The real arbitrage? Owning land in places machines can't replicate.  In the AI age, people will split into two groups: 

- New "landlords" stacking assets

- New "renters" living off AI welfare (UBI, digital credits, whatever comes next)

XTOD: Warren Buffett: "I think I stay healthy partly by being happy. It really helps if your stomach isn't grinding all the time [because] you're doing things you don't want to do or you're working with people [you don't like]."   "I'll usually sleep 8 hours a night."

https://x.com/biancoresearch/status/1893349442293538872

https://x.com/dampedspring/status/1893294640792584509

https://x.com/sentdefender/status/1893466912446922884

https://x.com/FinanceLancelot/status/1893101972028285242

https://x.com/bennpeifert/status/1892789658201055714

https://x.com/kejca/status/1892977205547876767

Daily Economic Update: February 21, 2025

It was a down day in equity markets as the S&P 500 fell from record highs as blue chip stalwart Walmart offered up guidance that didn’t live up to market expectations, sending its shares down 6% on the day and dragging some other retail names down with it.

In data, jobless claims were a little above expectations and the Conference Board’s Leading Economic Index declined (we talked about economic indicators back here).  The internals of the LEI showed a more pessimistic consumer with declining manufacturing hours.

But don’t get too worried (yet) as the six-month and annual growth rates in the LEI's are still trending upwards and we haven’t triggered their 3D warning.  Go ahead, try to explain the duration, depth, and diffusion to your coworkers, they’ll probably just stare blankly, like they were watching a 3D movie without the glasses. Don’t be surprised in a few years when the FOMC news conferences are 3D holograms explaining the duration, depth and diffusion of some economic disaster they likely helped cause.

Over in fixed income, yields were a little changed, with the 2Y at 4.28% and the 10Y at 4.51% as Bessent doesn’t seem overly interested in increasing the duration of the Treasury issuance. In Fedspeak, St. Louis Fed head, Alberto Musalem expressed some concern over the risk of un-anchoring inflation expectations.

The dollar hasn’t exactly been killing it of late, but gold has.  Treasury Secretary Bessent spoke about both the Dollar and Gold yesterday.  With respect to the dollar he indicated that he favors a “strong dollar policy”, but believes China is manipulating their currency.  When it comes to gold, he clarified that “revaluing gold reserves is not what I had in mind.”

There is a saying that almost everything is noise. Obviously we strive to find some signal in the noise and often that is found by zooming out to see the broader patterns and trends because the small incremental changes are so hard to see in the moment, but ultimately compound to have large effects.  One broader pattern that seems to be at play currently is in the realm of international economics.  We talked about trade, but more broadly there is a topic called “Geo-economics”, which is the study of the interaction of geopolitics and economics in foreign relations.  Geo-economics is an attempt to discuss how countries use economic means of power to achieve their strategic objectives.  The term was coined by Edward Luttwak in 1990 who argued that power comes from "disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases".  My personal introduction to the subject was via the book “Geo-Economics” by research analyst and former chief investment officerJoachim Klement.

I bring up the topic today because it seems to be a topic that is part of a pattern that has been playing out over many years now.  This week we all see the headlines about Ukraine and obviously China is always front and center, but in the headlines we tend to get myopic and can easily get trapped in the noise.  There are a few voices out there that help capture the broader trends, an example being Ray Dalio’s work, “The Changing World Order”, that attempts to provide deeper context to the barrage of headlines, but it is easy to have our attention stolen and focus on a trivial issue and miss the vital signals. I won’t write today about the various geo-economic forces between the U.S. and Russia, or the U.S. and China, but the message is to step back and in some ways get back to basics on what geo-economic risks are important and can possibly be quantified and what might be the impact on various assets.  What are sources of actual meaningful data, not just headlines that matter?  I don’t have all of the answers, but there are some geopolitical risk indexes and economic policy uncertainty indexes that might be useful.  From an investment standpoint it’s always difficult to discern what’s priced in and whether risk-premiums are appropriate, I'll leave it to you to decide.

On the day ahead it’s S&P PMI’s, Existing Home Sales, UofM Feb (final) and whatever news comes out about tariffs or whatever else.

XTOD: Satya is Out   TLDR: MSFT doesn’t believe in AGI, wary of overinvestment, OpenAI partnership is over
A. AI and AGI are overhyped  

- “Us self-claiming some AGI milestone, that's just nonsensical benchmark hacking to me. The real benchmark is: the world growing at 10%.”

B. Very negative on more capex spend from MSFT

- “[If you look at the Industrial Revolution] there was a lot of money lost”

- “…countries are going to deploy capital… I'm so excited to be a leaser… I build a lot, I lease a lot.“

C. Value in AI is in infra where there is overbuild, and B2C apps which OpenAI has won, negative on model layer 

- “in consumer, in some categories, there may be some winner-take-all network effect. ChatGPT is a great example [of a] at-scale consumer property that has already got real escape velocity”

- “[in enterprise] buyers will not tolerate winner-take-all. … where the buyer is a corporation, an enterprise, an IT department, they will want multiple suppliers.. That is what will happen even on the model side.”

- “In the model layer, one is models need ultimately to run on some hyperscale compute.”

Opinion 

————

1. Satya is calling the bubble in buildout. The crazy people like govts are entering the game. He’s happy to lease from them when they overbuild. His own capex spend is capped 

2. He’s disappointed in the OpenAI partnership - he sees them as having built a great consumer app for themselves with dominance in the category, but models for enterprise usage have gotten commoditized.  

3. He’s sooo done with the AGI talk. If you can’t get to 10% global growth your AGI talk is meaningless to him 

4. He’s backing MSFT from the capex precipice. It’s funny because he certainly did make Google dance, and now they’re committed to insane capex. But he’s outta here 

One of the most meaningful @dwarkesh_sp  interviews so far

XTOD: The last 24 hours has had SO much tech news.

— Microsoft Majorana 1 quantum chip

— Google AI co-scientist

— xAI Grok 3 model release

— Clone musculoskeleton

— Claude reasoning coming soon

— Arc institute biological model

— Sakana AI CUDA kernel optimizer

XTOD: BESSENT SIGNALS DOLLAR POLICY CHANGE 

BESSENT Wants the Chinese to play their part in a global rebalancing. 

Threading the eye of a needle, the US Administration wants strong dollar fundamentals but a drop in its value.  This will have huge repercussions across all assets 

As clear a message as ever there was one. There is a deal to devalue the “strong dollar” especially bs the RMB. This will have massive reverberations on risk assets. The dollar will drop precipitously. Stocks across the board will get a huge boost as global growth rises in a weaker dollar environment. The question is whether China and the US can come to some for of agreement where the trade off between hostile trade processes / tariffs is  sufficient to allow Chinese and other central banks buy US bonds. To be clear if that trade off can be found, we’ll see a massive reallocation out of gold and into US bonds. The message  rhe Trump administration are sending on the debt/deficit might with foreign CB participation at increasingly large  US debt auctions might be enough to stop US 10’s breaking 5%. One other dimension that is profoundly important is the recent focus by Xi on reinvigorating the private sector ( look where Chinese tech stocks were when Jack Ma was taken in for reprogramming ) and today.

In recent days we’ve also had a commitment to support consumption. 

In my mind Chinese tech stocks will continue to confound global investors where there is a massive underweight. Unfortunately the anti China hubris and invective means many are still way behind the 🎱on long China tech. 

So much lower dollar across the board.

I’m bearish gold 

I’m bullish US bonds but prefer buying nearer 5%, but you have to have some here.

Long China tech and the Mag 7.

XTOD: Roughly half the IRS agents being laid off are in the division that handles filings from small business owners and the self-employed, according to CBS.  Notable: Business owners and the self-employed are responsible for a massive chunk of tax dodging each year.

XTOD:“Think of how stupid the average person is and then realize half of them are stupider than that.”  - George Carlin

https://x.com/8teAPi/status/1892383248661274699

https://x.com/deedydas/status/1892456208466108527

https://x.com/CurrencyWar1/status/1892557401896685950

https://x.com/JHWeissmann/status/1892639316569939969

https://x.com/Super70sSports/status/1892594419196440785