Jason Rotenberg

Updated deep-dive on US inflation. Wage growth has been somewhat tame, but that is probably a lagging measure of the recent cyclical upswing. Inflation looks more of a problem now late last year. 3% inflation isn’t an emergency, but a monetary diet is long overdue. Policy is too easy, contributing to an acceleration that makes it more likely that inflation stays sticky or rises from here. Core services: Demand has increased, employment has accelerated, and businesses have successfully passed price increases to consumers. The primary disinflationary factor is the surprising upside in AI capabilities, but it is far from clear that significant disinflationary effects are imminent. Core goods: While recent inceases are partly a function of last year’s tariff increases, more importantly, the inflation dynamics of hyper-globalization were, at a minimum, undergoing a reversal. China’s industrial policy push, is if anything likely to consolidate a developed world backlash. These secular forces remain unchanged; in fact, global supply chains have experienced, and continue to experience, another major disruption, further underscoring the need to rethink trade routes and supply chains. This points to an inflationary environment. Housing: It is currently at 3.2%, representing the sole area that has seen some cooling. On the rental side, higher wage growth compared to the COVID period and less negative supply-demand dynamics should support solid increases. We are a bit further along in the rental supply rebalancing. Home prices, though not part of measured inflation, are also buoyed by rising wages, increasing wealth (supporting down payments), and mortgage rates that have remained relatively stable over the past five years. Affordability is a constraint, and home prices may face pressure if rates rise and equity prices fall. But that is not where we are. For now the direction of travel looks to be for stabilization.

A synthesis (my read of macro conditions, market pricing, macro market views), then a lot of charts with hopefully fewer words. Growth is strong (upper end of the COVID expansion) and likely to remain strong. A very strong wealth effect is the main driver, which should continue to push savings rates lower. Rates that have been range-bound for five years are not big drivers. Strong CapEx from the AI build continues to add to growth. Weaker immigration lowers potential growth but not the trajectory of growth versus potential. The energy shock so far is modest (maybe a third as big as the support from rising equity prices). The “K”-shaped economy may have political effects, but a dollar of spending is a dollar of spending, so it doesn’t matter all that much for cyclical macro or what the Fed should do. Unemployment is low and likely headed lower. Mostly a function of the above. The acceleration in growth after the “uncertainty” shock of last year and a fast equity market rebound has led to the pick-up in employment growth in recent months. The swing from strong illegal immigration to a fascist crackdown leading to an exodus means that the supply of workers is flat. So rising demand into weak supply results in falling unemployment. AI adoption, productivity gains, and the likely economic impairment of the bottom third of white-collar workers are slower-moving (i.e., it will likely happen over 0.5–3 years versus 0–3 months). Underlying inflation has stabilized somewhat above target; it is more likely to rise than fall. Inflation has been more subdued than I would have expected. Wage inflation has continued to moderate, but I suspect that cyclical strength will pause or reverse that slowdown as it usually lags growth/employment. AI adoption may lead to some hiring at first (I am certainly getting a lot more out of a small team using those tools, and others will feel the same). Goods inflation is moderate and has the flow-through from tariffs fading but will experience another negative shock from energy and supply disruptions. Chinese exported deflation remains strong. Rent disinflation will reverse due to a lack of supply of apartments. Ultimately, rising incomes and wealth support home prices and rents. Five years of inflation overshoot and new shocks have changed inflation psychology (prices and wages can be adjusted), and I think the risks are still to the upside. A full revisit of inflation dynamics is overdue and is for another day. I may learn that I am missing something on why it has been more subdued than I expected.

The best-in-class, safest, most anti-fragile gold mining names have never been of higher quality. Unlike most of their history, production profiles are very diversified, margins are high, debt is negligible or negative, and no exposure to riskier jurisdictions is needed. You can buy the companies with the strongest management teams and impressive track records. In a few cases, they have had very minor operational hiccups recently, adding to the opportunity. But nothing on the quality side appears broken. They also have solid organic growth prospects and the ability to expand through M&A by rolling up the sector (smaller names are even cheaper). These companies are also at extreme levels of cheapness. When I say cheap, I mean the cheapness at current gold prices - I am not making a gold price forecast or making a case for gold. These stocks are low beta and produce something that isn’t cyclical. They don’t add a lot of risk to most long portfolios.

@abcampbell @DannyDayan5 I've shifted (perhaps a year or three too late) on thinking this AI stuff will actually be macro relevant soon. Like Danny I suspect it may raise employment. 50 years like me hiring analyst to vibe code this. 3 mins for him to do it.

My demand read matches Augur's chart. You had a mini growth scare and the employment data lags a month or two. These moves have reversed. Willingness of consumers to spend is a big deal. If it is nominal or real adds confusion, but who cares. Not strong, but above potential.

Ive run positive beta most of my life. There is a reason risk premiums should be positive. It is also probably reasonable to expect 300-400bp. But conditions matter. And if I think about the next 10 years, I dont think you outperform cash.Downside vol also cheap.

There are SO many smaller cap gold miners that through skill or luck will soon print money due to owning what traditional mining investors would consider shitty mines. These are some combination of small, high cost, low grade, low proven reserves, or in a riskier jurisdictions. Heuristics are usually good. They come from battle scars. The gold rally has made these assets extremely valuable to the smaller companies that own them. You'd have to go back to 1980 to find gold margins like this. These stocks don’t have natural buyers. They are attracting instead curious generalists. Follow my bio to find the full article. $MKO, $MUX, $AIUX, $ARMN, $ITRG. @BrownMarubozu @AkibaLeisman @OriginalBraila @joeriwestland @VukasinPekovic @ttmygh

US Monetary Policy: Betting on Normal; Worried/Hedging against Rogue. The discounting today is more interesting than the macro. The rebound in equities means that recent softness will reverse. Inflation outside of tariffs may normalize as labor markets stay easy. See bio.

Xom puts for me. Mid 20s implied vols a year out. Not that far off highs.

Yeah. The chart below is from the lows, so the "yield on equities" is down again some. Either way pricing in some combination of strong growth/low risk premiums. Not as expensive as 1999 (when bond yields were higher). And not as extreme as Japan in 1989. But expensive.

Just pushed through a mostly macro chart deck with comments. See bio and follow where it takes you.

Enjoying the subscription! Yes, the Fed is too easy. But the bond vigilantes are still no where to be seen, no? Given the terminal rate the BY is fine low. Mkt action is just the economy failing to weaken. My guess is that the Fed will pivot and not ease as much as priced in.