원문 보기
Hello, I'm your host for today and I'll be guiding you through this presentation. First, a very happy new year to all our ARC investors. We're incredibly grateful for your continued support and trust. Today, we're excited to highlight the significant reasons we see for optimism in the current economic landscape as we truly believe we stand at a pivotal moment in economic history.
Despite headline GDP growth, the US economy has experienced a unique rolling recession, effectively forming a coiled spring ready to release. This was largely a result of the aggressive Fed rate hikes, moving from 0.25% 25% to 5.5% by July 2023, which significantly impacted areas like housing, manufacturing, nonAI capital spending, and low to middle inome households.
However, looking ahead, we anticipate a powerful rebound in the coming years. We're seeing a significant contraction in the housing market. Existing home sales have fallen a striking 40% from 5.9 million in January 2021 down to just 3.5 million by October 2023. To put that in perspective, this activity level mirrors the early 1980s despite today's US population being about 35% larger.
It truly indicates a tightly coiled spring. As you can see, the US manufacturing PMI has indicated contraction for roughly three years now. A reading below 50 signals this, clearly reflecting persistent challenges in the sector. This prolonged downturn, in fact, perfectly illustrates what we call the coiled spring effect.
We've observed nonI capital spending return to its mid2022 peak. This recovery follows two decades of post tech bubble stagnation, finally stimulated by the 2021 supply shocks. What's truly compelling is how advanced innovation platforms like AI and robotics could transform this into the start of a historic capital spending cycle.
Importantly, we don't believe an AI bubble is imminent. Consumer sentiment, particularly for low and middle inome earners, has plummeted to levels not seen since the early 1980s, largely driven by ongoing inflation and high rates. What's notable now is that even high income sentiment has begun to decline in recent months.
We view this collective mood as a tightly coiled spring, signaling readiness for a significant market rebound. We believe deregulation and lower taxes are set to reverse the current rolling recession. Deregulation championed by AI and cryptozar David Saxs is already fostering significant innovation.
On the consumer front, tax refunds are projected to boost disposable income growth dramatically from around two. Previously, inflation held stubbornly around 2 to 3% CPI. However, our projections now indicate a significant decline over the next few years, potentially even reaching negative rates. This forecast is underpinned by several key deflationary drivers emerging across various sectors.
Shifting focus to oil prices, we see a clear deflationary trend emerging. West Texas intermediate crude has fallen sharply down roughly 53% from its postcoid peak in March 2022 and about 22% year-over-year. This significant drop in oil prices is a crucial factor driving the expected slowdown in inflation.
Looking at housing prices are now a significant contributor to disinflation. New single family home prices are down about 15% from their peak in late 2022 and existing home price inflation has plummeted, moving from 24% in mid 2021 to just over 1% year-over-year. This clear cooling in the real estate market is actively reducing inflationary pressures.
New single family home inventory is now approaching 500,000 units, a level we haven't seen since before the 2007 financial crisis. To address this, major home builders responded last quarter with significant price cuts, including LAR at 10% and KB Homes at 7%. We anticipate these reductions will impact the consumer price index with a lag over the coming years.
In Q3, non-farm productivity rose 1.9% year-over-year, proving to be a powerful anti-inflationary force. Crucially, even with a 3.2% 2% gain in compensation per manh hour. These productivity gains kept unit labor cost inflation at a low 1.2%. This effectively prevents the kind of 70s style cost push inflation we've seen in the past.
Truflation data confirms inflation is indeed cooling now standing at just 1.7% year-over-year. This figure is nearly a full percentage point lower than the BLS's CPI calculation, offering strong additional evidence of decelerating price increases. We anticipate that technologically enabled disruptive innovation will accelerate non-farm productivity growth to an impressive 4 to 6% year-over-year, effectively lowering unit labor costs.
This surge is fueled by converging innovation platforms such as AI, robotics, and energy storage, which together are set to drive sustainable productivity highs and significant wealth creation. Productivity gains offer a powerful way to rebalance global economic disparities. Companies have the flexibility to channel these gains into various areas, improving margins, boosting R&D, increasing compensation, or even lowering prices for consumers.
This is particularly impactful in China, where higher compensation for productive workers could help shift the economy from its investmentheavy structure towards a more consumption-driven model, directly supporting President Xi's anti-involution goals. For US companies, these gains offer opportunities to boost investment or lower prices, ultimately enhancing their global competitiveness.
Initially, techdriven productivity may temper US employment growth, potentially increasing unemployment above 5%, which we expect will lead to further Fed rate cuts. Post 2026, however, deregulation and fiscal stimuli enhanced by these lower rates are set to accelerate GDP growth significantly. Concurrently, inflation should decelerate, driven by falling oil and home prices, tariffs, and the efficiency gains from technology lowering unit labor costs.
AI costs are collapsing, training expenses are down 75% annually, and inference costs up to 99%. This extreme efficiency is propelling unit growth and underpinning our expectation for 6 to 8% nominal US GDP growth, primarily driven by productivity. This mirrors the deflationary impact of the 1900 1929 tech revolution where innovations like electricity and telefan also led to short-term rates exceeding long-term rates inverting the yield curve.
For 2025, we saw gold appreciate 65% while Bitcoin slipped 6%. However, since October 2022, gold has surged 166% with this growth likely driven by global wealth creation outpacing its 1.8% 8% annual supply. Bitcoin in that same time frame demonstrated an even more substantial 360% surge. The key distinction here is Bitcoin's mathematically fixed and diminishing supply growth, which unlike gold, cannot respond to price signals.
Let's look at gold's market cap to M2 ratio, which is currently at extreme historical levels. It surpasses its 1980 peak and has only been higher during the Great Depression. Historically, long-term declines in this ratio have consistently correlated with strong equity market returns. For instance, following the 1934 and 1980 peaks, the DJIA saw significant multi-deade gains with small cap equities performing even better.
Bitcoin offers significant diversification benefits, showcasing a low correlation with major asset classes since 2020. Notably, its correlation with gold is even lower than the S&P 500's with bonds. This unique attribute positions Bitcoin as an attractive asset for allocators aiming for higher risk adjusted returns.
Despite current narratives pointing to declining US exceptionalism and a projected dollar drop in 2025, our analysis leads to a different conclusion. We project a stronger dollar. We anticipate that evolving fiscal and monetary policy, continued deregulation, and robust US tech innovation will significantly boost US return on invested capital relative to global peers.
We see this dynamic driving the dollar higher, echoing the surge experienced by regonomics in the 1980s. The AI boom is undeniably fueling unprecedented capital spending, surpassing even late9s levels. Data center systems investment, for example, is projected to surge 47% to nearly $500 billion in 2025 and could hit $600 billion by 2026.
This far outpaces the pre-hat GPT trend of 150 to$200 billion annually, naturally raising questions about the ultimate returns on these massive investments. Private AI native companies are currently driving substantial growth in returns. We're seeing consumers adopt AI at an incredible pace, twice the speed of internet adoption in the '90s.
This rapid embrace is translating into massive revenue projections for leaders like OpenAI and Enthropic, who are forecasted to hit $20 billion and $9 billion, respectively, by the end of 2025. Both are reportedly considering IPOs to fund their continued ambitious investment in AI models. OpenAI CEO sees 2026 as the year we bridge the gap between AI's capability and our daily user experience.
Future AI leaders will excel at converting research into intuitive integrated products envisioning solutions like a chat GPT health. While enterprise AI adoption is nent often hindered by bureaucracy and data readiness, organizations must train models on proprietary data and iterate rapidly to stay competitive.
Ultimately, AI will drive instant customer service, accelerate product releases, and foster highly efficient startups. Current equity market valuations are indeed at the high end of historical ranges, a point of concern for many investors. However, historical patterns reveal that significant bull markets have often coincided with periods of multiple compression.
Consider the S&P 500's strong gains in the9s and early 2000s, where prices rose even as PE multiples declined. Our outlook, driven by accelerated productivity growth and decelerating inflation, suggests we could see a similar, potentially even more dramatic dynamic play out this cycle as multiples trend back towards their 35-year average.
Finally, a sincere thank you to all of ARK's investors and supporters. And special gratitude goes out to Dan, Will, Katie, and Keith for their valuable contributions to this new year letter.
Comments 0