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In this episode of In the Know, you'll hear our reaction to Bill Aman's very interesting tweet. You'll also find out why we're not worried about inflation and what the credit markets are thinking about this AI revolution. Well, greetings everyone. It is employment Friday once again and here we are in the know.
Uh so as usual we'll go through fiscal policy, monetary policy, market indicator, economic indicators and market indicators. Uh but I'm going to start uh a little differently this time. We're going to feature first a tweet by Bill Aman and then a number of slides to explain uh in more detail uh the letter that I wrote within the last 10 days.
really putting into context our outlook for much stronger than expected real GDP growth, much lower than expected inflation, but interest rates moving up influenced much more by real growth than by inflation. Uh in other words, the market is working and uh and uh profitability at probably all-time highs.
We're we're almost there now. uh but we think we will hit all-time highs thanks to the productivity gains we expect out of AI and all of the technologies around which we have centered our research. So let's start with uh the tweet from Bill Aman. I thought it was very interesting and one of the reasons is um when I first started in this business now I was in college and it was the late 70s uh but this argument the one that Bill is putting forth uh was prevalent back then uh and but it was more predicated on just inflation stuck in the double digits and uh and the this idea that interest costs would continue to rise feeding the inflation rate.
So a vicious cycle. Uh we actually think that uh that this time is going to play out very similarly uh to the 80s. And in the 80s what we saw was real growth picking up thanks to productivity, inflation coming down. uh and in one of the reasons inflation was coming down is we were in a little bit of a technology revolution uh really started by the PC and then software.
Uh that did feed some of the disinflationary effects we saw back then. uh today we think the five major innovation P platforms so AI, robotics, energy storage, blockchain technology and multiomic sequencing. Those five major technologically enabled innovation platforms are going to uh are going to drive inflation down to much lower levels uh than most people uh expect.
And in fact, we would not be surprised to see deflation, especially if oil prices crack the way we expect them to. Uh so with that, I'll go into the charts now that uh I featured in my letter uh and explain them perhaps a little bit more. So here's the first one. Now, talk about long term. We're going back to 1790.
Uh and really piecing the the interest rate picture together uh prior to the 1900s uh is quite the task. Uh uh and we worked uh with academic research. Nick Gruce actually did a lot of this work for us in 2019 when we first published a piece uh about uh long-term interest rates and inverted yield curves.
Uh but what I'd like to point out from this chart is we've seen a big spike in interest rates and boy does it feel like a big spike. uh we got down below one I think during COVID and now we're above five on the 10-year Treasury yield. Uh but look at it in the context of history and you'll see that where the the rate is today is really at the midpoint of and and maybe the midpoint of where we were uh on average going back to 1790.
although certainly higher than we were for for um large parts of history here. Um, and the other thing I wanted to point out was really the anomaly in terms of history is not what's going on now. Uh, but what happened in the 70s, 80s, and 90s, uh, and and really up to COVID, uh, the big spike in rates.
And we link that, uh, to a couple of things. Most important, we went off the gold exchange standard in 1971. We closed the gold window. And what had been happening before that was starting with uh the Vietnam War and then the Great Society program. So it's called guns and butter. Government was financing everything and spending uh you know spending was somewhat out of control then.
uh that was all accommodated by monetary policy and that and and which became unhinged around the gold uh closing of the gold window and all hell broke loose and from a monetary point of view we ended up at double-digit inflation and it took us a long time to work out of that. Uh we think we went too far in the other direction.
The market stopped working. the Fed was really feeding the economy, spoon feeding. Uh there was still a lot of fear after 08 09 and uh uh and then again in COVID, but now we think we're back into a situation where the market is working and this Fed I think is going to be very good uh for for for all of us.
Uh so now this is PCE inflation. Um, we're focused on this because Fed Chairman Worsh is focused on headline PCE inflation. So, we got an update. Uh, when we first produced this chart, it was 3.7% with the update and there was a little bit of a downward revision. Uh, we are down to 3.4% on a year-over-year basis.
Um, you can see core is a little bit lower than that. The problem is uh I think Fed Chairman Worsh is fixated on headline or at least he says he is uh and it is a long way from 2%. Uh and so we heard a lot of hawkish top talk meaning the Fed is going to keep tightening. The Fed is going to to keep tightening until this uh this report came out on PCE inflation still very high.
But if we go through and look at a private measure of inflation, which we believe Fed Chairman Worsh is focused on private metrics as well. Uh here you can see uh trueflation. We featured this before. Uh you can see that uh if you look at the headline we it has picked up that's in the purple there to roughly 2.7 with oil prices probably a big part of the recent tick up but look at what's happening to core.
Core is continuing to tick down. Uh and we don't think this is lost on Fed Chairman Walsh. And you can see that uh if you look at pre uh precoid, we're really moving into the averages we saw back then. Uh and here you can see the dollar. This is uh another again long-term chart, not as long as the last one.
Uh but we we like to point out the early 80s here that you see in green with the dollar. Uh back then uh we had excellent uh monetary policy and fiscal policy that was very businessfriendly. Lots of tax cuts uh and uh deregulation as well similar to the environment we're in today. And uh and some may uh argue with that uh but we do think we're in a businessfriendly uh climate here.
And we see that the AI revolution by and large has started from the United States. Uh in fact uh one of the statistics I saw in Bloomberg this month is that if you look at all the data center financing in the world uh 90% of it and this is uh based on fixed income metrics 90% of it is in the United States.
Uh so I I do think what has happened with our uh corporate tax rates the effective tax tax rates now being uh the lowest in the world we think around 8% because of the accelerated uh depreciation uh for new manufacturing facilities and certainly data centers uh qualify for that 100% depreciation uh in the first year of service.
Uh that means that these companies are seeing massive tax refunds that they can redeploy into more investment in the United States. And we're seeing an investment boom. Uh what that meant in the early 80s was that uh the return on invested capital and this is true today in the US was moving up relative to that in the rest of the world.
And what happened was the dollar went up. You can see how dramatically it went up back then. Um well, we're uh coming from a bit of a different level. In the late 70s, the dollar was shellacked by horrible fiscal and monetary policy. Uh and so it was coming from uh a quite a low level and uh and very low expectations.
This time around you can see the dollar uh on this basis. This is the DXY against just six countries. Uh it's closer to the higher end of recent ranges. Uh but we think it is going to continue to move up for the same reason it did in in uh the early 80s. Uh a lot of the narratives out there would suggest that uh the dollar is done and American exceptionalism is done.
Uh we disagree with that. I think uh what the statistic I mentioned about uh data centers uh would speak to that. Uh and we do think the pressure is going to be up again because of foreign direct investment and other kinds of investment moving more towards the US uh because of businessfriendly policies.
Now here's Kelshi uh as you know we're we are partnering with Kelshi. I think I think anyone can partner with Kali and contribute uh ideas to make new markets uh new prediction markets. Um and you'll see here what was very interesting as we uh started this um this market is the the that Khi got this more right uh than I think many people expected.
When we started this, the actual level of the dollar was I think around 98 on the DXY. Uh now it's a little above 100. Uh Kelshi had uh the expectations always above 100 and in fact when they started out you can see here 103 10500. So, so there was something uh in uh the the mind of people who were uh who were placing bets on this market uh that uh the dollar was going to be stronger than when we started and as it turns out that is true.
It did go down and now it's turning around. So we found that kind of fascinating and we will be uh doing more with Kelshi uh in this in terms of economic statistics and other statistics uh in the months ahead. Um here is something fascinating. Uh this is the dollar again. Now the DXY which we just uh showed you uh that is uh how most people think about the dollar the financial markets you know people making judgment calls about the dollar investment decisions about the dollar uh they're fixated on DXY um but this is the real trade weighted dollar it's uh produced by the Fed and it involves 26 different countries and you can see relative to history that the dollar looks like it's not that far from its all-time highs.
You can also see the early 80s here. Um what happened to the dollar on this basis uh but how much higher we are now than even we were back then on the DXY just to revert back to that quickly. You can see that, you know, if if you believed this chart, uh that the dollar is much weaker than it was back then.
According to the Fed's measure, uh that is not true. And the dollar going up, and as I said, we think it will return to all-time highs on this basis. Um the dollar going up is a powerful anti-inflationary force, especially because most commodities are priced in dollars. Uh here's the gold price. So, you can say the dollar is up near all-time highs and and that's good uh because commodities are priced in dollars.
But if you're looking at gold, uh our monetary policy in the last I would say it looks like 15 20 years has been very bad. Uh the dollar has lost a lot of purchasing power relative to gold. Now uh you see in green there we highlight what the dollar did during Vulkar's term and Greenspan's term and we have a suspicion even though they did not say so explicitly that they were managing monetary policy using uh the gold price as one of their prime indicators.
uh and uh when it went down uh it they gave them more room to ease. When it went up uh they were more in a tightening mode. Uh as you can see um the the gold price started going up uh went up to its prior high um under Greenspan and then he left office and you can see since then very bad track record.
Interestingly, uh the do the gold price peaked the day or the day after that uh that President Trump appointed uh Kevin Walsh to be Fed chairman. uh and it has been down since then. And we would not be surprised to see it continue to decline uh as as he gets uh this um this monetary policy under some kind of disciplined control um using price indicators.
Uh here you can see the the oil price and we think that the oil price has levitated over these last 20 25 years. Um partly because of monetary accommodation which is the same reason the gold price went up. Um but if we're right uh the combination of uh disciplined monetary po policy using more of a price rule like the gold price maybe not the gold price but like the gold price uh and the fact that uh innovation technologically enabled innovation is is going to really put a big dent in the global demand for oil 57% % of oil uh consumption is for transportation and we believe transportation is moving away from uh gasoline powered cars and engines elsewhere and diesel-powered uh trucks to electric.
Uh and so we we do believe that uh that the oil demand has been in the process of peaking ever since this uh transition started and it it started in earnest in China uh and Europe. Uh US is uh following. Um but uh we do believe that the oil price could drop into the 30 to $35 range. Uh and the reason we say that is you can see during the various crisis crises it's dropped to that range.
In fact during COVID it dropped well below that range. Um and so now uh this won't be a crisis. It'll be a technological shift that's taking it back down and that certainly will help inflation expectations. Um here's another thing that is going to impact inflation mightily. Uh you can see the two learning curves here.
The one in blue is for genomic sequencing. Uh and just to give you what we've pictured here, it's a it's a it's Wright's law in action. And it says for every cumulative doubling in the number of whole human genome sequence, cost decline by 40%. That's the learning curve for uh uh genomic sequencing.
Uh for AI inference, the learning curve that's in black uh is much more dramatic. It gives you a sense of how much more quickly innovation is happening today for oh and on this basis we're not even using rights law. I'll give you an annual uh number. um the cost of AI inference. So what it costs for chat GBT to answer your questions um and this is at a fixed performance level.
uh the costs dropping 99.99% per year [snorts] uh and uh and and so any any activity that involves AI is going to experience significant cost declines. Now, Jevan's paradox would uh have um have us believe and we do believe that as the prices for AI come down, for AI inference come down, the volume will explode and the revenue growth, think open AI, Anthropic, uh think uh SpaceX AI uh and Muse now um those th the volume growth associated with those kinds of price declines uh is going to be explosive and that's why uh we've seen uh o uh open AAI's uh revenue go from 20 billion that's the annualized revenue run rate at the end of last year to uh 70 billion they just reported uh which uh surpasses the 65 billion reported for July lie for Anthropic.
So I'm sure Anthropic is higher than 65 billion. So they are back neck and neck again probably. Um but despite those price declines and uh that the revenue growth is is exploding, we've never seen anything like this. And that's kind of a microcosm uh that we expect for the economy as a whole. Um we expect that as these price declines seep into the economy more and more deeply and they will uh that uh the volume growth associated with any given activity is going to accelerate uh fairly significantly and that is how we get to uh an outside outsized uh um GDP growth forecast in the years ahead.
Um so and and here's uh in action so to speak how we look at the world. Um we look at the world as you know through a technology lens. Uh and here you can see the 15 technologies involved in those five major innovation platforms. And you can see how they are converging. And you can see how AI in purple is uh is having the biggest impact on the other technologies.
So the cost declines impacting AI will be feeding into these other technologies. And I often say when we first, and I should give Brett Winton, our chief futurist, the the credit for for drawing this, when we first drew this chart, I think there were I don't know if there were any lines between uh the the gold section there, blockchain technology and AI.
But now there are because of Agentic Payments, Agentic Commerce, uh Grockbot, Muse, uh and uh and now bots from uh Open AI. Uh so we're going to uh we believe see a lot of deflationary pressure, but is good deflation uh meaning it causes a boom in growth. Uh, and I'll just round out the the the red there is robotics, the green is uh energy storage, and the blue is multiomic sequencing.
And as you can see, AI is going to have a profound impact on them all and is probably going to speed up uh the innovation in all of these areas relative to what it would have been without AI. Now here is uh global re uh real GDP growth. Uh again thanks to Brett Winton uh in uh in consultation with academic research and academic researchers.
Uh he's come up with this uh with this growth chart or growth timeline going way back to a 100,000 BC. And he's going to go into more detail in this year's big ideas. Um uh and uh you'll see that as we carry out this um this chart to 2036 the growth rates go higher but you can see uh what happened uh from 1500 to600 is you know pretty much we stayed at a 0.6% uh real GDP growth rate as best as academic research can help us understand.
Uh actually I think he might be refining that down to 0.5 and I think that's really good because I think there was a little bit of false precision with that 0.6. uh but you can see what we expect from real GDP growth uh for or what we did expect for the five years ended in 2030 um 7.3% so 7 to 8% and we've been going around with this forecast and of course most people think that's crazy um because we've never lived through a regime change like this we didn't go through the industrial revolution and so we've just been living in this 3% GDP world.
Uh well, this is a technology revolution and we think it's bigger than the industrial revolution. So, you can see going from 0.6 to three, that was a five-fold increase in the growth rate. Uh we actually do believe we're going to overtime see much more than a five-fold uh increase in the growth rate.
It may take a while to get there or maybe it won't. We don't know. This is all happening uh so much more quickly than we expected. But we do believe that uh we'll see, you know, high singledigit real GDP growth. But the other side of that is that we will see much lower than expected inflation, perhaps deflation, uh if these technologies converge the way we think they will.
And you can see there the IMF forecast at 3%. Actually I think the IMF forecast has gone down to two and a half percent or something like that. Uh so effectively the IMF is is saying these technologies are not going to have any impact on real GDP growth. Um we disagree and uh that's what makes markets.
Uh so uh stay tuned for our big ideas. It'll be out in January. uh and this chart will be updated. Now why does that growth rate accelerate? It accelerates because of productivity and you can see in the 80s and 90s uh from a trend sense we had an upward shift in uh in productivity as the PC and software came into being and then the wireless and smartphones and so forth.
uh we think we'll see a replay so that uh productivity growth uh accelerates into the five to six% plus range. Uh that would make sense given uh where we think technology is going. Now this was an interesting again long-term chart. Uh give credit to Nick Gruce who's now director of research for uh consumer AI and fintech.
Um, but here is the yield curve. So, the 10-year Treasury yield uh versus the two-year Treasury yield. Um, and you can see that back in the industrial revolution, uh, we had an inverted yield curve more often than we had a positively sloped yield curve. What that meant was long rates below short rates.
Uh and then we had uh the depression. Um we had the Fed. The Fed was put into existence in 1913. And since then whenever any investor has seen an inverted yield curve um he or she has basically assumed correctly that we were heading into a recession. That was not true. Now you can see there were a lot more recessions uh back then before the Fed uh and that's because we were on the gold standard a price rule and so the adjustment uh the adjustment had to be taken in volume or unit growth uh in order to keep the price rule in effect.
uh and so but you can see that we had inverted yield curves before recessions after recessions uh again more than 60% of the time. Um, interestingly, the last uh inverted yield curve we had and it was quite a lengthy one in the context of uh postworld war II history uh was uh after COVID when the Fed raised interest rates 22 or 24fold within 16 months.
We went into an inverted yield curve and we think we were in a rolling recession. Uh certainly that's what housing, manufacturing, small business, uh lower income consumers, they were all in recession, but the economy never fell into a recession, which is very interesting. And um maybe taking us back to uh the industrial revolution when the yield curve was inverted more than 60% of the time on average by 100 basis points.
So we shall see. Um and then yes uh just to get a little bit at that uh many of you who have been paying attention or tuning into uh in the know that I have been very intrigued by this chart. I know it's kind of geeky but I am a geek when it comes to economic statistics and the yield curve in particular.
I was struck that during COVID or we did not as the Fed and and the government generally, governments around the world both from a fiscal and monetary point of view uh did uh they they put the accelerator to the floor, everyone at the same time. And yet we could not get back to that 200 to 300 basis point of steepness in the yield curve.
And I was thinking, okay, what does that mean? Uh I think what it means and I I and this last turn down from we didn't even get to 150 basis points like we did during COVID as the yield curve was steepening. Um we got to roughly 75 and now we're down into the 40s. Uh what does this mean? I do think it means that uh Treasury yields are stiffing sniffing out some deflationary undercurrens out there.
In other words, that the inflation expectations inside the long-term Treasury, and we'll go into that in a second, but those inflation expectations are pretty tame and maybe getting tamer. Um, now that's not what's quite shown with uh inflation as implied by tips, but uh yet, but we think that's where this is going.
Um, so uh let's let's do just a quick run through some of the charts. I know I've uh used a lot of time with the letter or a summary of the letter. Uh but we'll go through a few charts here. I'll skip through some, but here's the deficit. Uh, we're at mid5%. Uh, Bessant expects 3% by the end of this term, this the the presidential term.
Uh, we think uh he's right and that's because we think nominal GDP growth will be a lot lower than people expect. And this is uh how we started turning things around in the 80s as well under Reagan and then when we got into the 90s um even more so with Clinton. So um uh stay tuned. Uh this is um this is what people fear.
So they're worried. We we see in the headlines we're at $40 trillion dollar of government debt now. This is terrible. It's above our GDP. Um and what we say is we we agree we think there's too much government spending because uh government spending is taxation period either now or in the future or through inflation.
So we agree with that. Uh but we don't think the consequences right now are as dire as many would think. Uh why is that? Well uh if you look at debt to GDP, you're comparing a balance sheet statistic with an income statement statistic. So what people would say a stock versus a flow. Um and uh and and so that's one way to look at it.
Uh but there's another way to look at it uh more like for like debt to equity both of those are balance sheet items and you can see on that basis uh we're near nearer to the low uh in the context of this history uh than we are to a high. In other words, the wealth generation in this economy and the growth uh are are um are taking the edge off of this statistic.
Again, I agree with the sentiment that government spending is too high. And of course, the recent government spending is um in large part about defense spending. So, national security, I am for that. uh but uh I do think government uh spending generally needs to be brought under more control. Um here is uh another again long-term chart.
Um, you know, I think the reason the bond market and equity, everybody's a little confused, uh, is because we went through 40 years when nominal GDP growth decelerated mostly because of inflation and interest rates followed. And now we're on the other side of this. Um, well, I think this is good news.
I know it's not good news for bond holders who don't like seeing um you know their their principal whacked. Uh but uh I I do think it's more uh a testimony of what is going on in terms of accelerating growth and I think uh these few charts will show you. This is the five-year Treasury yield and you can see the real yield.
So broken down between inflation and real, you can see the recent interest rate move is much more a function of real yields than it is a function of inflation. Uh so you can see I find it very interesting. I know fixed income investors uh pay attention to every basis point and uh of course we in the uh in in the equity market probably are just more focused on percentage points so 100 basis points uh but you'd think some days that that as as fixed income investors and reporters are talking about uh inflation implied uh in the bond market that inflation was moving out of control.
Uh we look at this and say, okay, looks like the bond market market expects this five-year inflation rate uh to behave pretty well. Uh sure, it's above 2%. Um but it's kind of been steady state for the last uh for the last few years. Uh we actually think it will break down uh once these um once the impact of technology uh is understood more and more by the markets its impact on on inflation.
Um I'm just going to rip through some of these charts quickly. This is a four-year annualiz four-year uh annualized growth rate in federal outlays and money. And you can see federal outlays are up uh with defense spending a big part of uh the increase recently. Um but monetary policy is not accommodating it.
Uh so the last few years of monetary policy the growth rate of of the M in the low single digits not accommodating this. Um and uh so so so that's that's good news. That means it's not going to be inflationary. And you can see uh you can see what happened in the uh 80s 90s uh that the the money growth rate was much higher and velocity increased which was a big problem.
Uh and here's velocity uh speaking of it um the closest correlation we see velocity has been falling. Another reason um another reason the uh money growth rates uh did not cause inflation is because velocity the rate at which money turns over was falling. The only the only statistic that we see that peaked in the late 90s uh like velocity is the labor participation rate.
Uh and you can see it's been falling recently. It did tick up in today's report. Uh that was good. Uh some of it may be because uh affordability and you know more people coming back into the labor force just to make ends meet. Um if that continues maybe velocity turns around. We don't think it will continue uh because baby boomers are retiring and immigrants have been leaving.
So uh the velocity of money should not uh we think it will flatten out here. It seems to be flattening out uh and will not be turbocharging money growth. Um here you can see money growth at 5 point I believe that's 5.7 uh and many people worried that the inflation rate will follow. Um, understandably, uh, if if velocity weren't flattening out and and rolling over, we'd, uh, we'd probably be wondering this ourselves.
Um, here you can see very importantly, diffusion index. This is what, uh, Fed Chairman Worsh is watching and you can see the diffusion index. Um and this is uh the categories of inflation that are 0.3 or higher. And he didn't like the direction of those. Well, you can see we're seeing now a quick reversal.
The the blue there or purple is the six-month diffusion rate. And we think that is going to build momentum on the downside and pull the annual one down as well. Uh so very important uh uh piece of information. Employment uh today just to run through that quickly much lower than expected employment if you use non-farm payroll.
If you use household employment which is this one it was 400 and something thousand. So again something for everyone. The more important point is on a year-over-year basis this has been pretty flat. It's been pretty volatile month-to-month, but pretty flat. Uh, so that's employment, but labor, the labor force growth has also dropped off.
Uh, as I mentioned earlier, partly boomers, partly uh, immigrants leaving. Um, so, uh, we've got an unemployment rate in the green there, uh, that has been quite well behaved in this rolling recession that we've been in. Uh, and so it's at 4.2. two, but do look at the the the purple line that that's the 16 to 24 year old age cohort.
That is back at 9.9%. So those uh you know uh students leaving college uh having trouble finding jobs. uh go out, start your own company with AI, no employees, solve a problem, keep interviewing, and you'll go to the head of the class, meaning you'll be recruited first. Um, Michig uh sentiment terrible and the conference board joined this.
It had held up much better than expected. So, sentiment is terrible. I think diesel prices 650 and gasoline still a problem. Average hourly earnings a problem surprisingly up only 0.1 uh maybe because of mix shift a lot of technology jobs uh uh tailing off those are high paid jobs so uh this is coming under pressure 3% and we think uh productivity as I showed you on that other chart is going to go well above 3% so we do think we do think there's going to be a labor shortage and that compensation per manh hour average hourly earnings growth rate will uh turn around as the economic momentum becomes clearer.
Um personal saving rate again down very low by historical standards uh and that's because affordability probably people digging into their savings on the high end consumer with the with uh equities near an all-time high maybe uh there's a little bit of a decline in their saving rate as well. We we haven't seen that data yet.
Uh existing home sales still in a recession, just terrible. And uh one of the reasons, of course, is uh mortgage rates have turned up. They're above 7%. Uh so this is a big problem. And uh to move houses well, and this is the new one family houses for sale, inventory inventory is near all-time highs.
These builders are cutting prices to move uh that inventory, but it's still at a high level. Interestingly, there was a little bit of a tick up. This is a three-month moving average basis for existing home price inflation. We thought that those prices would start falling as well if people really wanted to move their houses as uh rates go up.
Still think that could be the case. Here are the rates moving back up. Um not surprisingly uh here's manufacturing it is moved out of recession. So that rolling recession that we saw there it is out uh and one of the reasons is capital spending non-defense capital goods ex uh aircraft uh and as we know defense spending you can add to this the this is booming but I like to remind people that it was kind of capped uh from the tech and telecom bubble and bust on it just stopped.
Again, looking at uh if we were looking at this as a a stock, we'd say the longer the base, the the larger the breakout, and that certainly is happening. And the more sustained, I would say, too. Uh trade balance. Uh we think this is going to continue deteriorating. In this last month, we saw uh our imports up, I believe, 2.8, our exports down 2.2.
too. Uh so we are growing faster than the rest of the world. That's why this will continue to uh deteriorate. President Trump may not like that, but um it's the flip side of it of a trade deficit is a capital surplus. We're getting a lot more foreign investment and foreign direct investment in bricks and mortar um uh than I think many people expected.
Here's domestic profitability. Productivity going up will probably continue to help it. We could go to an all-time high. Uh you can see where that was. Uh I think I can't read the date, but it was a long time ago. Um here you can see we're going into the uh market uh indicators. This is quite interesting to us.
So, you can see uh that the 10-year Treasury yield is is has moved up. Uh and I've given you reasons why. What's very unusual is that that bottom indicator metals to gold has not gone up more than it has. Gold has been falling, so that would put upward pressure on it. Uh but metals relative to gold just hasn't turned.
And I'll tell you, we're seeing so many indicators out of China that are just terrible. I think I might have mentioned uh last time around uh auto auto production in China is somewhere still in the 30 to 35 million uh units per year. Uh but their consumption of autos has dropped from roughly 30 down to I think 19.
change and interestingly our own auto sales uh dropped below 16 million uh in in the latest reading which would have been yes September and I do believe we're seeing the impact of Uber Lift affordability on auto sales uh and so uh I think I think auto sales have peaked secularly just like we think uh oil prices have peaked secularly.
Um and here quickly uh S&P to to oil still still near a high even though oil had gone out to 90 to 100. If we're right on what's going to happen to oil prices, uh the S&P is going to go up dramatically relative to oil. And here's the S&P relative to gold. Again, the reason we feature this is it was a very good indicator in the 60s7s uh uh of the the stock market being in a world of hurt.
Um it started down back then and we went through a a terrible bare market from 1966 effectively uh until 198 um 1982 is when we got back to that 1966 high if you can believe it or not. Um, so we were looking at this indicator fading, fading, and a lot of people focused on government deficits, government debt.
Isn't this terrible? And we're going back into the 70s kind of environment. We are not. We are not uh and happy to see it tick up again. We think this will tick up uh to all-time highs uh as the S&P continues to move up uh with earnings growth uh and gold perhaps moves down. Uh and here very nice very nice turn.
Bitcoin to gold uh Bitcoin going up, gold going down. We've talked about the correlation between Bitcoin and gold. Ironically, Bitcoin's known as digital gold for its store of value characteristics. Uh, but the correlation one to the other over over the the study we did was back to 2019 when institutions were becoming more interested.
The correlation between the two is 0.1. No correlation. Recently, it's been a negative correlation. Uh so we do think the turn is in here for for Bitcoin and uh final market statistics uh you know if you look at uh credit default swap so um insurance policies against uh against bankruptcy and this is bank credit default swaps.
They're very low. there's no systemic risk even though private credit is still uh in uh a difficult moment, shall we say? It's not feeding back into the banking system. You can see here this is these are junk bonds effectively high yield bonds uh relative to the 10-year Treasury. Again, a little bit of an uptick here, but you know, in the context of history, very low.
So, not a worry in the world. though you can see before uh before uh recessions they they typically are low. We don't think we're in a recession at all. We think we came through a rolling recession. Um but so far so good. Uh last chart uh two two last charts here. So this is AI equities in the purple and uh this is Kshi's I think this is Kshi's um bet on will the Republicans uh uh lose control uh or not and uh this would say the higher the black line is the higher the probability Republicans will stay in control.
Um, as you can see, the probability has dropped and many people were making the case that as that happened, um, that a a Democratic or a Democratcontrolled House and Senate would be very bad for AI. And so they were trying to figure out a correlation here. As you can see, these have broken apart. And I think the reason is if the Senate, if the Republicans lost the Senate and uh and the House, uh all that would mean would be gridlock because we have the same president who basically um uh threw out uh President Biden's executive order on AI, which could have become very punishing, and put in and we know this has been the topic of of the week.
Uh, are we going to regulate AI giving the hugging given the hugging face uh incident, the hacks we've heard about recently? And this administration has come down squarely on you self-regulate and oh by the way you uh large language model companies uh are liable if something goes really wrong here. So uh that was interesting.
Uh and there is this worry in terms of the credit default uh swabs, this worry about hyperscalers. And it is interesting, look at the green there, uh to see that those in the context of a short history. Uh you know, they they were cash fortresses for for years and they didn't need to tap the debt markets at all.
Um and yet uh here they are tapping the debt markets and this is quite an unusual moment. So you know their uh credit default swaps uh are deteriorating. Going up means they're deteriorating. Uh and and uh we're seeing the the investment grade tick up that's in black. Uh the high yield the junk bond in purple those are ticking up more.
Um, and I'm sure the Neocloud providers are a big part of the reason for that. Um, as is I I don't know if Oracle was downgraded or I don't know if it was downgraded. It may be featuring in there as well. Uh, so with that, there's a a quick trip through lots of data. Uh, so thank you for joining us and uh I hope you have a lovely weekend.
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