Here are some things I think I am thinking about this weekend.
1) There’s Still a Strong Disinflationary Bias at Work.
One of the most important pieces of news this week was the New Tenants Rent Index. The NTRI leads the actual CPI rental data and came in at a the lowest rate of change this cycle at -2.4%. This has been and continues to be the main reason why I am not really worried about inflation flaring up again.Given how big the shelter component of CPI and PCE is you’d need a huge offset in some other component of the data. The most likely culprit would be energy and commodity prices, but we’re not seeing a huge move there. And given how energy friendly Trump was in his first term I find it hard to believe that we’re going to see a huge surge in oil and gasoline prices under his leadership.The thing is, even when this data reverses you’re going to have a huge lag in the way it feeds thru to positive contributions in CPI because the current readings are so low. In the case of the GFC it took 3-4 years for shelter to start contributing to any upside in shelter because the data was so weak. And we’re right at the same levels we saw back then. So, I continue to be skeptical of the theory that inflation is a major upside risk from here.
2) Real Returns vs Nominal Returns.When we hear about stock market returns we pretty much always hear about the nominal return and not the real, inflation adjusted return. In my forthcoming book I analyzed all data in real terms. For example, since 1900 the US stock market has generated 6.65% per year. That might not sound so great compared to the typical 10-12% figure you hear about, but it’s the right way to think about this stuff because your stock returns only give you more purchasing power when they are higher than the rate of inflation.
The interesting thing here is that the difference between 10% and 6.65% is huge. Over the last 125 years a $100 investment in US stocks would have grown to over $12 million in nominal terms. But your actual purchasing power of that $100 only increased to $311,000.Don’t get me wrong. 6.65% is still a phenomenal real return. But you should always be a little skeptical when someone cites nominal stock market returns because that hides the most damaging fee of them all – inflation.
3) Rate of Change of the AI Cycle.It’s incredible how fast the trends in technology are changing these days. Just a few years ago everyone was saying that we all need to learn how to code. Then AI popped up on the scene and now everyone is going to be able to code without learning how to code because the AI will do it for us.But what if the AI’s start cannibalizing one another? Then what? So far US tech firms are in all out spending war to find the ultimate AI. We’re in the phase where Ask Jeeves, Yahoo and AltaVista and a handful of other technologies are trying to become the dominant search engine. And then Google comes out of nowhere and wins the whole thing.Well, something interesting happened this week with the latest release of DeepSeek, a Chinese AI that is open source and reportedly costs about 3% of the what ChatGPT does. What if these US tech firms are all on the verge of spending trillions of dollars only to be lapped by foreign firms that can do the same thing at scale with a fraction of the costs operating in emerging markets. That seems like it has the potential to be a very big deal, especially when you consider that the current economic cycle is being driven largely by AI spending.I have no idea how this all plays out. It’s all moving much faster than I could ever imagine and I am not remotely bearish about technology in the coming decades, but given how fast things are changing I think it’s safe to assume that the road here isn’t going to be without its bumps.More By This Author:The Devolution Of Public US Capital Markets
Three Things I Think – Weekend Reading
Three Things I Think – New Years Edition
