Tariffs Unlikely To Derail Strong Economy—But Market Risk Has Risen | Prometheus Macro’s Aahan Menon
01:14:45 Share

The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

The decline in the equity market is getting steeper and steeper. The peak to drop decline of the S&P is now down just over 10%. So glad to be joined by Ahan Menon of Prometheus Macro. In my view, he's one of the world's best at systematic and quantitative macro. His clients are some of the biggest hedge funds in the world. So I'm really glad he is here. Ahan, welcome to Monetary Matters for the first time. Hey, Jack, great to be on. Congratulations on the new show and the new business.

You guys are crushing it so far. So big, big congratulations. Thank you very much. Ahan, as I said at the beginning, the market is going down and it just seems like it wants to go lower and lower.

How are you thinking about the stock market, about tariffs and about all the other asset classes and how they fit in your quantitative framework? Definitely a lot going on. As of right now, the way we're kind of seeing this is it looks to be a relatively localized positioning kind of an unwind as opposed to something that's very fundamental.

fundamentally oriented or fundamentally driven. So the way we're seeing positioning right now is most of the sell-off is occurring in equities, which is translating into a bid for bonds. But relative to those two things, you actually aren't seeing commodity markets complying. So if you were having a major economic event, you would actually have commodity markets coming down precipitously alongside equities. And to us, that's kind of a sign that

Perhaps there's a little bit more around the new slow and geopolitics than there is around some type of deep-seated economic downturn. So that's the way we're seeing it. These things can move pretty fast.

But at this point in time, it doesn't look like it's something very significant. Not very significant. Okay. And another way to put that, Ahan, is what you write in Prometheus Macro, quote, the speed of this unwind has not been due to macroeconomic factors, but rather a combination of geopolitics and positioning, end quote. I interpret that as tariffs, tariffs, tariffs.

The Secretary, Howard Letnick, going on CNBC and talking about tariffs, Trump tweeting from X or tweeting from Truth Social about tariffs, about how we're going to increase tariffs on Chinese, excuse me, French champagne from 100% to 200% and very high tariffs. And that is what I interpret. So you think that that is not a fundamental macro economic signal for

But let's dig into that because I feel like when you say fundamental macro, what you're picking up, you and your quantitative models are saying, oh, initial claims was weak. PPI was weak. CPI was weak. So that to you would be a macro driver. But if tariffs are coming, wouldn't that cause a decline in real growth that isn't picked up in the hard data? So in other words, what you're saying is that the decline hasn't been picked up in the hard data yet.

but maybe asset stock markets are pricing that in whether or not that it ultimately the slowdown will happen i think i think the way we would frame it is that equity markets are pricing the possibility of that happening and a lot of that also is around

It's kind of around this phenomenon of, you know, talking to clients, the main concern is the positioning of other players in the market unwinding. The amount of volatility we're getting from geopolitics and news flow is extremely high. As a result, well, you know, what we're hearing from clients is that we're basically a lot of caution developing around everyone else's positioning, as opposed to the tariffs are going to turn into a very meaningful economic impact.

With regards to the actual impact of tariffs, we've done some work on this. I think the big thing to kind of focus on is what is the maximum possible impact that we can have from tariffs on the economy? So the way we look at it is that tariffs, unless there's some type of really big reflexive loop,

Tariffs at their onset and even for subsequent months and even possibly years don't necessarily impact nominal GDP, but they can impact the composition of nominal GDP. So the balance between real and inflation. And the concern, I think, for most people is that these tariffs are going to create a negative profit environment or, you know, a drain on consumers in some way, which is going to have a deleterious impact on, you know, activity over time.

an activity as defined in terms of real output. I think that those are the concerns, right? But when we actually go and peel back the data, how does that actually work and how does it flow through the economy? The place where you would see tariffs pop up is in federal custom duties. Federal custom duties are basically the line item where tariff revenues pop up. Today, I believe

So, the tariff revenues and custom duties in general maybe account for about $80 billion of tariffs. Now, I think what you want to try and understand is, one, how do tariffs typically over time impact corporate profitability? So, I'll give you the takeaway. They are so small as a share of total activity that they have no meaningful impact.

Yeah, and that's the visual. So the blue line shows total corporate profits. We've taken the tariff impact on profits. So that's the contribution to profits or rather the detraction from profits. And what you can see is that that red line has virtually no impact.

Now, I think something that's on everyone's minds is that, oh, wait, we've not had any tariffs recently. So of course they have no impact. So what we did as a experiment and a stress test is we actually just scaled up the tariffs by 10x. And even after scaling up tariffs to 10 times their current levels, which are almost impossible, you would have virtually no impact on the profit cycle.

So I think there are a lot of people doing a lot of great work around the impact of tariffs. They're taking into account all kinds of non-linearities and things like that. But as you know, the world I come from is systematic macro. What we're trying to do is we're trying to find consistent, durable, time-tested signals that explain macroeconomic cycles over time.

And when we take a step back and look at what's going to happen over the next year, what's going to happen over the next six months to the economy, which is not always the exact same as the market, we just don't see that as being the meaningful driver. So you don't think tariffs will be that big of a deal. OK. And so I do think that is a fair criticism, though, of the chart of like your chart goes back to the 1960s.

The tariffs on total imports from 1960 until now were well below 10%. For 1960, they were at 8%. Now they're at 2%, 3%. If Trump wants, if he's speaking so kindly about President McKinley...

what were the tariffs right there? 30%. And on total imports, due to be imports on 50%, because some things were exempt. And I don't think that Protomp is going to take tariffs up to 50%. But if it's only a small decline, like, oh, corporate profits are only going to go down by 15%. As you know, Ahan, that's huge. Because the markets are currently pricing earnings to grow at 12%. And if now they

decline or even to grow less. As earnings expectations go down, the stock market should go down too. So I'm not some massive bear thinking that this is going to be the Great Depression at all. But as earnings expectations decline, so should markets. I know actually the official earnings expectations posted by the big banks haven't gone down yet. But if the stock market continues to sell off, I'm quite confident that those earnings expectations will start to go down as well.

Yeah, and that's one of the most reliable relationships in the world, right? Like as equities begin to decline, earnings expectations will decline because a big part of analysts' expectations are actually just guided by what's happening in the markets. But I think that the really important thing to recognize over there is that

If you're trying to take a comprehensive approach to macro, like we're trying to do, what's happening to markets is one dimension of it. What's happening to the economy is another dimension of it. You have to combine both of them to get the whole picture.

And so I think just benchmarking to what's happening to equity prices and extrapolating that to what's going to happen to the economy and extrapolate that further into investment views. Like, I don't think that that's the best way to think about this. I think that you have to take ample amounts of signal from what markets are doing. Absolutely. Like we do that on a daily basis. But I think recognizing what it is is also really important. And I think that what we have today is not a massive economic and so on, but

but rather a pricing in of uncertainty into equity markets coming from a period where we had really, really elevated earnings expectations driving one of the strongest bull markets we've ever experienced. And so, you know, when you put those two things together, you have really exuberant earnings expectations alongside just absolutely killer stocks. The Trump election, which had a further rally after that,

only to be reversed with all of this economic kind of uncertainty around what the policy path is going to be, both on the fiscal and tariff side. You basically have a re-rating of those expectations. So I think it's a market-based thing. You should definitely, I don't think that, you know, in no way, shape or form am I saying be a hero, go long, equity calls, you know, like that's not what it is. But I think reconciling what near-term trend is telling you

with what the macroeconomic fundamentals are telling you is a really important part of piecing together the picture today. So the macro fundamentals are not having you very concerned, but when it looks at stock momentum, so in terms of did stocks go down on Monday? Yes. Did they go down on Tuesday? Yes. Did they go down on Wednesday? Yes. Uh-oh. You write that your momentum reading, a short-term momentum reading on the stock market is currently maximally negative at

negative 100 percent tell us about that and how much does that inform your macro view like you know maybe your max will be bearish on that one tiny little thing but if it's your macro view has you know many many different inputs then you're not that bearish overall exactly and that's what it is right you you definitely have to take some signal from momentum like without a doubt you have to take some signal from momentum but the thing is that momentum by itself is not such a good thing

So what we've actually done to kind of visualize this is we've talked about, if you look back over, let's say the last six months and you take every possible look back definition of momentum. So one day, two day, three day, five day, six day, all the way to 260 trading days. And you combine that into a single estimate. That measure is now maximally negative, which is consistent with the price declines that we're seeing, right? So,

When you look at that, you immediately become a little bared up and that's where everyone is today and rightly so in some way, shape or form. But the question is, can you actually trade that? Is that a valuable insight? And so what we found over time is that that signal by itself is actually a very, very poor indicator of equity market conditions. And what actually ends up determining whether those signals are useful or not is whether the economy goes into a downturn.

So if you look at periods where the equity market begins to fall like it does today, and the economy also begins to show weakness or it is already showing weakness, that's when you have the opportunity to get short stocks. So in the red line over here, you can basically see that if equity market momentum is negative and we were in a business cycle decline, you can get short stocks quite successfully and the P&L profile would be really good if you were short those periods.

But on the flip side, if you actually have equity momentum negative, but at the same time, the economy is still expanding and you're still in a business cycle expansion,

That's actually a buy the dip opportunity. And so if you were short the blue line, which is what we think you would be today, like without a change today, we think that, yes, equity market momentum is negative and you should be pulling back on your exposure because vol has exploded. And that's a whole discussion, like how to manage risk is a whole discussion. But yes,

Right now, if you go max short or you're short in whatever shape or form, we think that you're closer to the blue line than the red line. And for our lovely listeners who are not watching this on YouTube, the blue line has gone up since 1970 and the red line has gone down since 1970. So it's a much more simplified version of saying that is that buying dips works when the economy is expanding.

and shorting dips works when the economy is in a recession or contracting, you think the economy is still expanding, that we're not in a contraction. So you think we're in the blue line. So therefore you think to sell or to short this decline in equities would be a mistake? Yes. Yes, that is true. Now, the way we're also approaching it is that we want to be look, every time you make a trade or you make an investment,

what you're basically doing is you're basically saying, hey, what is my expected return and what is my expected risk? Right. And that recognition is essential. Right. So I think that I think that equities are going to be higher. Right. But at what level of risk?

I think by any measure today, it is clearly that the risks around equities are elevated. Vol is elevated, implied vol is elevated. Every measure of risk, the drawdown is huge. Every measure of risk that you could look at is basically elevated today. So what you want to do is say, do you expect equities to power ahead like they did in 2024?

No, I don't. I don't expect that. I don't think that's a reasonable thing to expect. I think that in any year, it's pretty unreasonable to expect equities to do that. But do we expect them to be positive? Yeah, modestly, we expect them to be more consistent, probably a little bit less than average annualized returns over time. But what we do also see is that vol has come up massively. So like be long, that's the way we're approaching it. Like we think that being long makes sense, but being long and much smaller size than you would have been going into the year.

Like that's the way we think it makes a lot more sense to kind of put together the picture.

And that is what you've got to do is if you're a short-term trader, if you're a long-term investor, which I recommend people do, you don't have to care about this at all. But if you are a short-term trader, you have to, and you should de-risk as volatility increases, because if volatility goes from 10 to 20, your risk has increased by two. So to have the same risk, you've got to have your position sizing. What has volatility on actually done? And here I'm going to nerd out. So for like non-quantitive people, just please, please stay with us. But like

I feel like everyone says the market is super volatile. Yes, it's a 10% peak to trough decline in the S&P, but it's been a thousand little paper cuts, a little 80 basis point decline on Monday, a little 90 basis point decline on Tuesday. There hasn't been one huge flush downwards. I think on Monday, maybe the S&P was down two and a half,

or more than that. But really, you realize volatility if you measure it based off of one day, close to close volatility has not been that high. But I know there are many other ways to measure volatility. And of course, the VIX, which is implied volatility, not realized volatility over the next 30 days,

has gone up, but it hasn't gone up that much because realized volatility close to close hasn't gone up that much. But also there's huge intraday swings. And you know, Ahan, based off, you basically gave me an idea that I have said on the show several times, which is that trend is not going to perform very well. Like Trump tweets something at 9 a.m., at 2 p.m., he totally reverses it. And, you know, the market just has these epic reversals intraday.

And yet the overall trend seems to be down. So how are you thinking about this market in terms of, we already talked about momentum, but in terms of volatility and in terms of trend? So, you know, start at the top. You know, this classification of volatility just depends on like what type of look back you're using. So like, you know, if you use a short, if the shorter, the shorter, the look back to calculate your vol, the higher the reading you're going to get. So if you take the last, you know, 20 trading days, which is like one month, which is basically like the realized version of the VIX, right? VIX is implied.

that number has popped up to 15 from 10. That's a pretty big jump, right? Like that's a pretty big jump by that measure. But if you zoom out a little bit, six months and things like that, yeah, you know, you're in the 10 to 15 range on equity vol. Now there are other measures of risk. Like, well, I promise we're going to stop talking about stat stuff right now, but the other ways to talk about risk, which are things like semi-variance, which is basically downside vol, those measures are even more elevated. Now, I think when you...

What you're basically looking at when you look at vol is like you're looking at the epic amount of uncertainty that that is coming out of this administration. Right. Like you're just entirely unsure. And it's also more complicated by the fact that you have uncertainty around the part of the Fed. So between the Fed and the current administration, you're really, really unsure about what the implied policy path is going to be.

And as a result, investors across the board are just generally much more concerned, much more ready to buy protection, and much more ready to de-risk the equities, which in itself, when investors do that in aggregate, is vol-inducing.

So you're just in an environment where you're going to have more vol until there's a little one of two things is going to happen. People are just going to get used to this, right? Like this is the new normal. Or you basically have a situation where the new slow begins to subside a little bit. We get a little bit more clarity on what's ahead. I expect a little bit more of the latter. Like what seems to make more sense is that from here we start as the economic data continues to come in over the next three months, six months, one year,

In the event that we don't have just tariffs killing the economy or fiscal pullback killing the economy, I think that you're basically going to have a realization across the board where, oh, wait, this is not that bad. And people start adding back exposure over time. Now, it's entirely true the alternative scenario could also happen, where you have a situation where

Equity markets end up declining massively to the extent that they actually have an impact through the wealth effect on consumption and this, that, whatnot. And that creates a downward spiral. Businesses become more underconfident because of the equity market selling off so much. So they stop investing. And that has a whole bunch of effect. That's entirely possible. But I think...

A one month decline does not get you to that point, right? Like that, I think that's the main takeaway, like a one month decline doesn't get you to that point where you can basically have this downward self-reinforcing spiral, because there's a whole real economy that supports spending that is not only contingent upon the equity market. Yes. And it really is in a way pathetic, Alhan. We are, you know, when I read this a few days ago, a 7%

off the highs of the S&P. I was already seeing articles on Bloomberg about how wealthy people are making plans to pull back on their spending. And it's like, I think we should have an economy that people spend money because they earn money from going to work.

And then they spend the money. Okay, they can borrow some money, buy houses. But like people shouldn't, it shouldn't only be rich people spending money because the stock market has gone up so much. But I think once you get to start to, okay, S&P is down 20%. It's continuing to go down a 30% decline. The credit market's starting to blow out.

sales you know sales selling begets selling and you have a volatility spiral then then i think yeah that you really do have a a wealth effect i guess on what do you think of of trump put

If the credit spreads blow out from 300 basis points to 600 basis points, yes, the Federal Reserve will get involved and cut interest rates, in my view. There is a point, whether it's 600 basis points or higher or lower. But what about the Trump put? Wall Street was very confident. Okay, the Treasury Secretary Scott Besant, the Commerce Secretary Howard Lutnick, both come from Wall Street. They're going to be paying attention to Wall Street.

It doesn't seem to me like Trump is perturbed at all, President Trump, about the decline in the stock market. And when Lutnick and Besant are interviewed, they don't seem terribly concerned either, saying volatility is natural, it's part of the business cycle. This is going to be a detox period. I think just the stock market could continue to go down on rumors of tariffs.

And then maybe when the tariffs are announced, they won't be that bad. And then, you know, we get the stock markets begins to boom once again. Like that's what happened in 2018. The stock market did great under Trump 1.0, excluding COVID, of course. But then, you know, it did have some volatility in the Q4 of 2018. So I'm not, you know, a long-term bear by any means. I just, I think this market probably,

is more likely to go lower than higher and i agree with you i just i just don't think there's a lot of short-term upside but of course like i don't want that to dissuade people from being long-term investors in the american stock market which i think is a huge wealth creation vehicle but sorry go ahead yeah i i think i think it's a continuum right like i don't i don't think there's a i don't think it's a it's a binary event that like i don't think it's a there's a binary definition of whether the administration cares about stocks or not like i don't think that that's how it works right like so

Do they care about a 10% drawdown in a month? Probably not. Do they care about a 40% drawdown over the next six months? I have a feeling that's going to, you know, so from a, from a, you know, a more quantitative perspective, like one of the best indicators of whether you're going to get an easing cycle is a vicious drawdown in equity markets. Now,

That drawdown in equity markets needs to be accompanied by economic pain as well, because that impacts employment and whatnot. But one of the best indicators of whether they're actually going to ease policy is whether you have a really significant drawdown in equity markets. So I think that

When push comes to shove, the Fed and fiscal authorities in general, they do have to manage for employment. And if equity prices are down to the extent that they're actually dissuading businesses from investing, which is hurting their profits, which is hurting their hiring plans and such, that is an event that they're going to have to manage. I will say that there is a very, very strong push for fiscal conservatism, much more so in this administration than I think anybody would have expected.

And that definitely is something that is marginally impactful. It does create a Trump put on bonds. I think that the difficulty with that, though, is that the sheer volume of interest payments that we have and the existing amount of...

non-discretionary spending that the government has to do is really hard to cut back on and so yeah like are they going to you know increase discretionary spending in a dramatic way which is more inflationary and going to continue to push yields higher that looks a lot less likely today which definitely puts a little bit more of a cap on yields as compared to previously but at the same time i think that a lot of the dynamics that we're with today have become have

built up over the last two financial crises, like between the COVID crisis and the great financial crisis, to create a situation where government debt is such a large part of the economy, where it's going to be hard to really walk that back very meaningfully. And I think a lot of the news flow around this is also just misleading. The proposed amounts of cuts are usually over a decade or over five years or 10 years or whatever.

That is that is it's marginally impacting the outlook when it comes to bonds as well. But I think that when you really kind of look at it, we do have a little bit more of a situation where the where the Treasury and fiscal authorities are a little bit concerned about the size of the deficit. They want to bring it down. That is modestly, incrementally more supportive of fixed income than previously. Yeah.

So talk to me about the monetary transmission mechanism of the Federal Reserve interest rate policy. You've got some great charts on the private sector interest rate burden, which as the Federal Reserve raises interest rates, that draws money out of corporate profits and the private sector. But then also then the how much the Treasury is paying the private sector in interest because the private sector owns the bonds of the U.S. government, the

the Treasury. So we can flash that chart up and just can you explain why has the Federal Reserve going from 0% to 5.5% and now in the 4%?

Why did that not cause a recession? Yeah, yeah, definitely. I think that's a really big part of what's happened till today. And it's also going to be one of those things that makes monetary policy a lot harder to enact. So how does interest rate policy get into the economy? It gets into the economy, but in two different ways.

it hinders people from borrowing more money and it also over time increases debt on existing it increases interest burdens on existing debt that's being rolled over right and so the as the fed hikes interest rate policy these these interest burdens tend to rise but what you also have which has always existed this is not a new thing this has always existed

is that every treasury asset that's not owned by the Fed and not owned by the foreign sector is owned by private, by the US private sector. And those assets create income. Now, the impact of monetary policy depends on the mix of the private sector, of how much treasury securities they own versus how many private sector securities they own. And so when

policy rates are hiked, the owners of treasuries receive income and that increase in income, the interest income, offsets any of the increase in interest expense. And so as a result, over the last few years, because you just had such an explosion in treasury securities in the private sector, you basically have a situation where the hikes have actually created a net interest

benefit to the private sector. So what we've shown over here is basically how the private policy rates have typically just translated linearly into an increased interest burden for the private sector. But today, you're basically having a situation where policy rates have had almost no effect on

on the net interest burden of the private sector. And in fact, because of the amount of interest income that treasuries are spitting off today into the private sector, they've actually been mildly stimulative.

And so the difficulty in this kind of backdrop is that you basically have a situation where the amount of debt is not likely to decline very meaningfully. And at the same time, you basically have for every unit of debt, you have a modest amount of stimulus going into the economy. And that basically neutralizes the effectiveness of the Fed in very sharply curtailing economic activity.

So high interest rates haven't been that restrictive, but eventually they must become restrictive, right? It depends on two things, right? It depends on the balance of how many treasuries do I own versus what are my liabilities, right? And what is the relative duration of those two things, right? So if I own short-term treasury securities, I roll those securities over relatively quickly, right? If I own bills, they roll over every three months or whatever.

So if the Fed hikes policy rates, that benefit immediately goes to the asset holder. But if I owe a 30-year bond, that was, you know, that was, sorry, I owe a 30-year mortgage, right? Like I have to pay out a 30-year mortgage. I have a 30-year mortgage. The effect of interest rate hikes, it's not going to affect me until I choose to refinance my mortgage, if ever.

And so what it depends on is like, what is the mix of assets and how is that going to flow through to the economy? In today's environment, you basically have a situation where, yeah, you do have some amount of refinancing happening slowly when it comes to the liabilities of the private sector. But the benefit from the short term securities created by the Treasury are so large, it's just like completely offsetting it right now. So the government debt is huge. And as

as a result, interest rate hikes and the higher interest rates are not as contractionary. Obviously, I put a lot of respect into what you say, but you say that actually is net stimulative. I don't know if I'm ready to go that far because that'll just bend my mind too much, but yeah, that's crazy. It's net stimulative on a rate of change basis. Private sector net interest burden is positive. It's not like, "Oh yeah, we're only getting paid." It's just that

So if you think about earlier, when I would raise policy rates 5%, so from 0% to 5%, I raised Fed funds rate, that would result in interest burden going from 0% to 5% for the private sector. Today, what we're seeing is actually the opposite happened in terms of direction. So it's stimulative in terms of direction. That doesn't mean that we're not paying any interest rates at all in the economy. That's not true at all.

Thanks for lining that up. And also, I'm just seeing from Bloomberg today that the S&P 500 is officially in correction over 10%, and it's the seventh fastest going into correction since 1929. So that sounds a little bit ominous. So yeah, just, you know, we're not throwing around, you know, we're not trying to fearmonger, but we're just trying to report accurately that...

people are concerned and that's reflected in the market. Ahaan, we talked about the fundamental macro. What is your fundamental macro view based off of the panoply of data? What are you expecting inflation, GDP spending and real GDP, real growth to be in 2025? How does that compare to other blue chip economic forecasters at the big banks, at the Atlanta Fed and others? Yeah. So I think there's been a lot of consternation, particularly around

atlanta fed popular gdp now cost models so for those that are not super like don't have their nose on the data and aren't looking at atlanta fed all the time atlanta fed is a really popular gdp now cost measure you can just go on their website and they update gdp data based on their gdp estimate based on all the data that's coming in it's a very nice model really convenient

It's quickly become extremely popular. Those readings slipped into deeply negative territory, I would say about a week ago. And that was after the original cracks in the S&P 500 began to show. And people became really concerned that, oh my gosh, did the equity market sniff out the next recession? For technical reasons that aren't super complicated, honestly, those readings are kind of off. Basically, the way Atlanta Fed calculates

the import and export is consistent with anybody responsible that's trying to calculate an import and export data. They take the, so the, so total trade data comes out a little bit late in the month. Prior to total trade data, you get, you get the, the goods trade balance.

Now, the way the BEA accounts for trade data is different from the way the first release is actually reported. And so what is basically accounted for is gold imports, which should technically be in the capital account. They should be in the capital account. They will not actually go into the GDP numbers. But what ended up happening is because of the differences between these two reports, you ended up having the...

the gold imports go into the GDP now cost and gold imports were just up a phenomenal and spectacular amount, which resulted in the GDP now cost coming down. So is that a recession signal? Absolutely not. We on our end, our programmatic estimates are basically just looking through that almost entirely.

So even if you kind of so if you strip out basically the trade components and you focus at you focus only on the real GDP components, domestic real GDP components, you have like two parts of the economy that really, really matter. And does the third. So the two parts are what is happening with domestic investment and then what's happening with domestic consumption. Those are the big pieces. Government spending does matter somewhat, but it's just not as meaningfully impactful to total growth conditions.

Right. And sorry. So GDP is consumption, investment, government spending, and then net exports. So exports minus imports. So the more that the US imports, the greater the negative that draws down GDP. And in January and December, the US imported a ton of stuff because people were front running tariffs. And this can be seen in the data. But in particular, they did a ton of importing of gold from London, from Switzerland. So for example, US gold imports

in like, let's say May 2024, or a normal month during 2024, where like four or $5 billion, they were $30 billion or $34 billion in January. So people were front running tariffs because they thought there'd be a tariff. So it is a kind of mechanical thing. Like I don't think that the real economy will be affected because we are importing so much gold from Britain because metal arbitrageurs are wanting to front run tariffs. Like I don't think it's that bad. So, but for example, this is from the LinkedIn post from the Atlanta Fed now, let me just see if I find it. So

The Atlanta Fed GDP now that looks so bearish last week was negative 2.8% growth for the first quarter. But adjusting for gold, they now have that at 0.4% real growth. But it sounds like your expectations for growth are maybe even higher than that. So I think even we basically had it at like 0.5%. That's basically we had it. We had it about 0.5%.

Now, I think when we zoom in to what we think is going to happen to these GDP numbers over time is one, like you can completely ignore the straight data. Like, don't worry about it. It's not indicative of US conditions. Two, I think when we...

When we try to peer into the future to understand what the likely path is, we basically see two pretty opposing forces operating at the same time, which is that you have just a buoyant consumer. So consumer spending is just

epically strong in the United States. We track 16 subsectors and then within the subsectors, you can basically disaggregate to about 90 subsectors. 100% of those components are expanding over the last year. And so if we were to have a really meaningful downturn in the economy, that would be the first time on record that's ever happened. I know there are a lot of people that are into this whole leading lagging indicator thing and whatnot.

And that, you know, the response I get often is that consumption is like a lagging indicator. But within consumption, you have lots of items that are also considered leading indicators, things like automobiles and whatnot. And all of those items are actually seeing expanding consumption. So that part looks pretty robust. When we go to investment spending in the economy today, you basically have a situation where

Residential spending has begun to deteriorate and inventories have begun to slow down a little bit. Like inventory accumulation has begun to slow down. I think the inventory part you don't really have to worry about because inventories are one of the most reliably mean reverting and cyclical things in the economy. And so basically if you have inventories up today, you're probably going to have inventories actually down tomorrow. So like if they're down today, they're going to be up tomorrow.

And so that is just a function of the fact of the way they're created. And you're basically just going to have like cyclicality in that component. So don't need to worry about that too much. The residential construction component is slightly worrisome. Like that's definitely something you start to see activity fall off the permit starts, completions, sales, all of these things have begun to weaken.

That being said, employment in the sector remains really, really healthy and strong. Now, if I add up what's happening in consumption and I add up what's happening in investment, I think that we're basically seeing a situation where investment is maybe a little bit weaker.

But consumption is really just enough to power the economy along almost entirely. So synthesizing that, like our expectation right now for, so we have these month on month programmatic numbers that are spit out every month for next month's GDP. So our annualized forecast for GDP right now is 2.5, like 2.5%. I personally think that's a little bit rich to like what we might actually get over the course of a year. We just extrapolate the monthly numbers over the next year. But

At the current junction, the strength of the consumer is so immense. And the weakness that I described in residential investment is the only part of the investment complex that's actually meaningfully weak.

If we go to intellectual property investment, it's at all time highs in terms of growth contribution. If we look at information equipment investment, it's expanding. Transportation equipment is expanding. Industrial equipment is expanding. And these are all the major areas of business investment, and they are actually marginally getting better.

So I think this kind of brings up like a little pet peeve of mine with the, I think that there's a massive focus in the macro community on housing, right? Like housing is the business cycle. Like that's, there was a paper written by Ed Lima a few years ago where he basically showed how most of the variation in the business cycle can actually emanate from housing. But that paper was written, I don't want to butcher the date, but- During a housing bubble, 2003. Yeah, yeah.

So it was written in 2003 and the economy has meaningfully changed over that period of time. Right. And so what you've had is just like a

huge proliferation of intellectual property investment over time and information equipment investment. And so those factors, both to equity markets and the economy, matter way more than they ever did in past cycles. So we actually make indexes and indicators and whatnot out of these things. And what we found is that over-benchmarking just to the weakness in housing is

can quantifiably lead to worse investment outcomes in the equity market than using a broad-based understanding of what's happening to the business cycle. And so I know a little bit long-winded, but just getting back to the point, we think that growth is probably going to, like the current trajectory looks really bad. There are some technical issues making that look really bad. We think that it's probably going to bounce and get back to a more stable kind of

expanding area. And I'm looking at a chart of the difference between the Prometheus nowcast and the Prometheus forecast. The Prometheus forecast expects real growth to go up a lot, whereas the blue line, we could put this up shortly, expects it to decline. Can you explain this difference? Yeah, yeah, for sure.

So this is a very simple difference, right? So the forecast is basically taking leading data, some other lagging data and all of that and combining it to say, what is it that we actually expect GDP growth to look like, right? So skipping over the trade and all that stuff, if we look at the business cycle drivers of the economy, reconcile that with what's happening to the labor market, consumer, all of that, that's how we get to our Prometheus forecast. Like that's the actual view.

The now cost, the current trajectory, the blue line that's heading downwards very significantly just extrapolates the most recent trend in the data. And so I think that what this allows, the reason we show this visual is basically most people are just benchmarked to the momentum of what's happening to the most recent data.

And what we're trying to visualize is, OK, like, can we have a view that's different from what just happened to the latest GDP now cost numbers over the last three months or six months? And that's that's the difference. And so how much of that difference is just the gold imports is messing with the data or are there other quirks? A huge part of it, like probably 70, 80 percent of that is just the gold stuff messing up what's happening with the data.

Right. So if people see on Twitter or see elsewhere this chart from the Atlanta Fed showing a huge decline in the economy, that is because of all the gold coming out of Europe, front running tariffs, and it's not economically sensitive. So I'm not saying that real growth won't decline or be bad or every, but that forecast from the Atlanta Fed is having that adjustment. So you got to keep that in mind. Okay.

And so tell us how has consumption been strong? I know the previous data in 2022, 2023, 2024, it was strong, but I wasn't aware that it was getting even stronger. I thought that the rate of growth was going up from, you know, the rate of growth, it was 8%, then 7%, 6%, 5%. And admittedly, maybe inflation was going down by more. So real spending actually went up, the growth rate went up. But

Tell us, you're saying that the breadth continued to go big. And then also, what, if any attention are you paying to the news flow from Walmart, Target are warning and they're leading their economic profit outlook lower. I know, Ahan, over the past three years, there've been tons of scares about the consumer is actually weak based on what Walmart said and 0% of it ended up anywhere. It was all fake. But do you think this kind of time could be different because of tariffs?

Probably not because of tariffs, but I think the main thing is what you described is totally right, that the consumer is...

you have had a declining rate of change of growth of consumer spending. That's true. The dynamic I was describing was the breadth of whether that consumer spending is positive or negative. And so one of the defining characteristics of whether you go into a recession or not is that GDP breadth, which includes consumption, consumption is a subset of that. If you look across all the items that go into GDP, we tally about 75. If you look across all those items, basically what you will start to see is

A bunch of them will start to get more and more negative on a quarter over quarter, six month and year over year basis. And so part of that, it's basically just indicative of like how strong our macro conditions on a broad based on a broad based basis. Right. And what you need is for you to have a recession or a big downturn, you have to have really strong weakness in one area of the economy.

and middling kind of performance in other areas of the economy. So if you look at every past recession, it wasn't that personal consumption expenditures breadth was at zero. That doesn't happen. But what does happen is that interest rates and sensitive items like durable goods consumption and stuff like that, they do come down. So maybe you get 50% breadth or something like that in personal consumption expenditures.

But you have a place like housing that implodes or industrial equipment implodes or transportation implodes or something like that. And the thing that you have to think about when you have to think about a recession is that aggregate activity has to decline, right? And for aggregate activity to decline, something has to be really bad and something has to be like, okay, today you have something, you have a situation where investment is okay. It's being weighed on by one sector.

And consumption is really strong. So if I have a situation where consumption is contributing 2.5% to real GDP growth on a year-over-year basis, to get to a negative one real GDP reading, I have to have a 3.5% negative investment growth. So it's about doing that math and saying, what are the offsetting factors?

And when you look at that, the breadth of consumer spending, like the strength of consumer spending today is like, it's just inconsistent with anything we've seen. We just have to have crazy...

crazy weak, just absolutely ridiculously weak investment numbers with this kind of consumer spending. And, Ahan, so President Trump has announced a lot of investments into the United States from Apple investing $500 billion into the United States. I don't, I mean, that's definitely not going to invest $500 billion this year. I think it will be over a longer period of time. Some of it may be that they repatriate capital. You know, how do you think that will impact the actual on-paper

investment in domestic US GB investment, because right now, like foreigners are selling their stock, and they're pulling money out of the country. But that's not graphics and GDP. But if they put their money back into it through foreign direct investment, or Apple invests, you know, and actually building plants and stuff that will be reflected in positive GDP. So what how will that impact the national accounts going forward?

Yeah, I think on that front, so first off, just like the fiscal stuff, you got to take a massive haircut on anything that's announced in the news flow, right? So I think first off, massive haircut. Second, if we do actually get a massive flow inwards in terms of FDI and whatnot, if it's particularly in the tech sector, that is going to be really, really meaningful and a very, very strong driver of activity. The last time we actually saw

a really, really meaningful change in investment policy based on like based on federal policy was when we actually had the CHIPS Act, right? Like where we basically we encouraged the production and investment in production facilities in the United States. And that led to the single biggest manufacturing, the manufacturing investment boom that we've seen in the construction sector.

And so we're still getting the benefits of that because those projects are still ongoing and they're still actually supporting non-residential investment. So residential investment is pretty weak today, but non-residential investment is just, it's still really, really strong. At one point, non-residential investment spending was up 77% in a year. Sorry, for manufacturing was up 77% in one year. So, I mean, if we ever have anything of that magnitude, it completely changes the game. My expectation is that like,

most of these things are going to be more bluster than actual meaningful change. But if they do, they would definitely meaningfully increase investment in the economy. Now, the place that actually needs it the most, like I've been describing, is the residential investment sector. And I don't think that that's a place where it's really going to go. So if you're watching for weakness in the economy,

that's the place I would be looking the most. That's where the activity is declining. That's where profits are starting to become squeezed. That's where you have the potential for layoffs. And so if there's any piece of the economy where you're looking for like, hey, what leads to the downturn, which allows you to express it well in markets,

It's going to be in the residential investment sector. Okay. You're saying residential investment is already not very strong. So that is the one thing that could get weak. But consumption is very strong. I understand that. But tariffs could knock that down to...

you know, not very strong and then, and then to weak, like if there's a 200% tariff on champagnes, I think, you know, yes, that will stimulate consumption of domestic wine, clean wine in the United States, but there probably will be some snobs who say, I want my champagne from champagne, you know, region of France. And I think consumption will, will go down. So I, you know, I think consumption could, could weaken as well. Maybe. I mean, it, so here's the thing, right? So the nominal spending is unlikely to change, right?

the nominal spending is unlikely to change. It's how much of the stuff that you're going to get is going to change. So why do the tariffs matter and how do they end up really majorly impacting the economy? You end up buying less stuff for the same prices, which ends up actually being a drag on profits, right? Like that's the way it ends up flowing. And so I think the main thing to think about when it comes to those tariffs is like, what is the actual size going to be?

So in the example that I showed, we scaled up the tariff revenues, which are what eat up the corporate profit share by 10 times. And so- In your model, yeah. And so like, yeah, you're talking about a 25% increase. I'm talking about a what? What is that? A thousand percent increase, right? And so even with a thousand percent increase, the drag on profits is just not enough. Now, all of this being said, like Jack, like let's also...

couch all of this, like with where I'm coming from and who I am, right? My job is to find what are the things that are going to work over the next decade for both retail and institutional investors that they can trade on consistently over time. There are plenty of experts who are really, really good at going through every light item of the data and coming up with exactly what the estimates they think.

But what I'm basically capturing is the fact that there is no way for you to validate whether an estimate of tariff impact is going to be good or bad. Like there is no way. You have maybe the onset of tariffs, like big spike in tariffs, maybe three times in U.S. history. So the way we approach it is to say, does this meaningfully change economic dynamics? Like does it meaningfully change economic dynamics? And does it help us understand history better?

And from that perspective, it just doesn't make sense to us because it's not anything repeatable. It's not something that is actually by these measures that we've constructed, like something that is super, it's not super impactful by all historical measures. And so like when we look forward, what we're going to focus on is the things that we think are going to meaningfully impact the cycle. But, you know, there is ample room to be wrong, right?

We had long equity positions going into this month, and we've had to pare them back because the news flow from tariffs has been very dramatically impactful. I continue to think that the actual effect on the economy is not going to be that impactful, which will result in more of mean reversion in equity indices, as opposed to just a breakdown in trend and a bear market.

So it's coming from a programmatic systematic kind of place as opposed to me doing the math on this, you know, like what is a specific tariff and what is the impact of a specific tariff on this and that sector. And so you think that there will be mean reversion, meaning that if for the past two weeks stocks went down, over the past next two weeks, stocks could go up. Tell us about your views on mean reversion and then also how really in fundamental trading and in quantitative macro, there really are only two forces.

trend following and mean reversion and the marriage between those two opposite forces. Yeah, yeah, absolutely. I think that this is one of the things that we spend a lot of time focusing on, right? I think that trend following is for a lot of reasons, mostly because of accessibility, just like super obvious, right? Like markets are going down today. Like I'm going to go short the market. And what...

We find is that approach used to be very, very successful. Like a lot, you know, maybe from let's say the 50s to maybe the 80s.

But as markets have developed and people have traded and alpha has been eroded, you basically had a situation where the edges created by trading such trends has basically disappeared. If markets went down yesterday, there's a higher probability that it'll go up today than there is they'll continue to go down. And so when you're looking at markets today, you're basically looking at a situation where

there isn't like an ensemble of things that's telling you like, "Hey, I should go short." There is one thing very dramatically telling you, you should go short. And that thing is not very, very successful in the modern era. That thing being trend. When we look at mean reversion, alternatively, what we see is that equity markets today have become much more mean reversion mechanisms than they have trend following mechanisms. And as a result,

it allows you to capture moves like this way better, right? So if we're looking at a situation today where the economy, let's say we're six months from now, right? And the economy ended up doing fine. We think there's a much higher probability that equity markets will bounce off the 10% low

then they will continue to break for no reason. And so that's really the way we think about it. You have to have a combination of mean reversion and trend in your approach. You can't do one or the other. Now, if you have a mandate to do one, that's your job. But I think what I've seen become really, really commonplace today is

is to do only one and to do it in one market, right? Like to be a trend follower and just in like ES, right? Like things like that. ES, if you start with S&P 500 or just to be a trend follower in bonds or maybe just to be a trend follower in like two or three assets. That approach is not something that's going to be durable and not something that we think

is really going to make sense in this environment because like there is not much history there to support its durability. And at the same time, like we just don't see the actual reasons that it has to, like the only reason that the trend needs to persist today is that the trend exists.

Barring that, unless you have a very meaningful and well-thought-out view, which there are plenty of intelligent individuals that have opposing views to mine, and that is totally fair game. If you expect the economy to meaningfully deteriorate from here in a way that can actually be seen in actual macro data, payrolls, claims, housing data, all of that stuff. If you have an actual view that, hey, that thing is going to go down, it's a great bet to have the trend following trade on.

But we don't have that expectation. And so we have the other side of it on. Do you think Doge will reduce federal employment by a way that will substantially impact the payrolls? Federal employment declined by 10,000 in the jobs report that was released in early March, about February. But it probably is going to go down way more in the March data that will be released in early April, right? Mm-hmm.

Yeah. I mean, and I think that that's definitely like it's that relative to tariffs, that is a way more meaningful risk. I think that I think that is something to definitely be concerned about to monitor really carefully. I'm not I'm not fully aware of the scale that we're going to actually achieve. I don't think anybody really is, to be honest.

But I think that the impact of downsizing government employment would have a really, really big drag on total non-farm payrolls, which would in turn, those are the types of things that actually create the vulnerability for things like housing that are getting bad to turn you into a recession. So you can easily imagine a situation where we have a ton of government employees laid off. That doesn't result in the recession in itself.

What that does is it brings down growth rates to a point where they start to become vulnerable to a recession. And so I think when I'm thinking about what's happening to government payrolls and such, it's much more about that sort of perspective. Can they marginally decrease us and increase our vulnerabilities to future recession as opposed to they're going to be the cause of recession imminently? And what do you think about bonds and commodities? So bonds, we...

I think I've outlined structurally why we think that the monetary policy transmission of the Fed is limited in terms of being deleterious to activity. The Fed is just not as effective as it used to be in past cycles. That's definitely one part of it. The second part of it is what is activity relative to what the Fed is trying to do? So what...

what are interest rates relative to activity? That's basically what determines how tight or how loose policy is. And so when we look at activity, yeah, activity has begun to slow a little bit. But at the same time, activity is still pretty healthily above net interest burdens today. And so as a result, we don't think that they're super tight.

Now, the thing that we've become like a little bit more concerned about is if you continue to have pockets of the economy way on total activity,

you can start to see an environment where the Fed is actually restrictive. It's not that the tightening has done it, it's the fact that the new investment in the economy is beginning to actually slow down enough to be able to make the Fed restrictive. And so the Fed's policy hikes in themselves, not that big a deal, but now the added effect of having weaker residential investment and whatnot, I think that's the real concern. So

When we look at what the Fed may need to do in the future, we see some possibility that they may need to cut in the future. But when we aggregate all the data, right, like for all of it, which is basically labor data, sales data, inflation data, all of that in a manner that's consistent with what the Fed tracks, like the Fed cares basically about two things. Like they basically care about

The level of employment and the level of inflation, right? And there are a wide variety of gauges that you can use to come up with whether we are consistent with their objectives or not.

When we add up all of those measures, we basically get to a point where the Fed should be at about neutral. There's no need for them to hike and there's no need for them to cut. Right now, there are about 75 basis points priced into the market. I haven't checked today. That may have moved quite dramatically. But as of yesterday, we had about 75 basis points of cuts priced in. Now, I think that we have just...

precipitous amounts of uncertainty and all of this equity market downtrend feeds into bond market Uptrend right and so the way we're looking at bonds is that like bonds are much more tradable today than they are investable because if you if you really want to invest in bonds

What you want is you want a serious and prolonged cutting cycle. What you want is you want a situation where the Fed cuts between four and eight times. Anything other than that is...

is a trade on a growth scare, right? It's like, oh no, like equity markets are going down a lot. Mechanically, that's going to support bonds. But for us to achieve like a bond rally of yesteryear, you need to have a meaningful cutting cycle in excess of what's currently priced. That part we actually don't think is going to happen.

So when it comes to bonds, the way we're looking at it is that bonds are protection for what's happening to equity. So like the way we've been allocating is we've been adding bonds as equities decline, but it's not for the purposes of like expecting a recession. It's like a correlation benefit. Okay. That makes sense. And yeah, I just want to say you're a very quantitative person. So like their macro narratives are extraordinary.

extremely abundant, like the macro narrative that I actually do kind of believe now and with a high enough conviction that I actually share it publicly is like, I think the stock market will go down. And I think that

the Trump tariffs will cause real growth to go down and the Federal Reserve probably will cut. So opposite to your view. And if the Federal Reserve doesn't cut, then the stock market will go down probably more. But I feel like even six months later, Ahan, I'm right about that. I still feel like your quantitative models will have caught up to me really quickly. So I feel like there's a lot of value that the work that you do

is even if you make predictions that are quote unquote wrong, I think being right is kind of cheap in this business. Like it's about making money. And that's why I pay you. Right. And I think it also boils down to, I think a lot of it does also boil down to like what...

What is it that you're trying to do in markets? What are you trying to achieve? And so it may sound like I have a lot of conviction that the economy is this, that, and whatnot. It sounds like, oh yeah, Ahan's a raging bull. He expects the economy to do this. He's long stocks and whatnot. But if you actually look at allocations across various programs, they are conservative and it

it all comes back to that framework of what is your expected return on your investment and what is your expected risk?

I think the expected return on being long equities is positive. And it's probably positive over like a six month period. But there's a considerable amount of vol that you have to take to get there. So what do you do? You have to have a small position, long equities. When it comes to bonds, what do I think? I think that you probably have positive expected returns over a short period of time.

right but possibly less vol in the near term so you can have a little bit of a bigger position relative to what you have in the future i think that when we look back if the six month 12 month views that i have play out well what we'll basically have is a situation where for now we're basically going to have an evil even distribution between stocks and bonds like that's kind of how we're looking at it we're like okay like we think the economy is fine but at the same time like

Markets don't think that at all. Markets don't seem to be thinking that at all. Protect yourself. Have modest diversification in that. So our different implementations of this stuff are drawing down less than equities. So that's the objective. And so now as we kind of come out of that, as I expect, if the economy recovers, start dropping your bonds because you're not going to get... So I agree with you. You could get two cuts. That's what they've guided to. But we already have three priced.

And so they need to do more than is priced for us to get a meaningful rally in bonds. And I think that that's going to be the difficulty over the next year. If the economy is just fine, there's no need to go into a four plus cut. Right. And I think that if tariffs have no economic impact or very, very little economic impact, consider me a bull. I think then you've converted me. I mean, the earnings growth in the S&P 500 from

that the big Magnificent Seven stocks of Tesla has been very high and their multiples are now lower. And so that those stocks might be on sale. So I think we will see. But just like, I mean, Nvidia, it's down a lot and based on current earnings, not forward earnings, but current earnings of like $3.56 a share based off current earnings. So if you just annualize it's what it earned last quarter.

It's got a PE ratio of 32, which it's growing its earnings at 52% and that growth rate will go down. But it seems like the US stock market is not maybe as overvalued. I think the reason it's going down is because of tariffs. And if tariffs are a nothing burger, like you kind of imply, then yeah, stocks are a buy, but it will be volatile.

Yeah. And that's the way I feel it should be played. It depends on who you are as an investor too, right? If you are trading linear products, which are basically like, are you trading futures and are you trading spot equities? It makes sense to do this. If you're trading non-linear products, like you're trading options and whatnot, you have the opportunity to

play for outlier moves much better, right? And so the juiciest bets are going to be like, oh yeah, like super outlier events, right? Like, you know, big equity market drawdown, that's a super outlier event and whatnot. But I think the way to manage risk through this entire thing is like, okay, equity markets and bond markets really seem to think that we're in a bad situation. I should take notice of that, right? But I shouldn't only take notice of that.

And so what I should also do is I should take notice of what all the other macro data are telling me. What does employment data tell me? What does retail sales data tell me? What is industrial production? What is housing data? Like, what is all of this stuff telling me about the economy right now? And if you have some ability, even forecast that data, right? Like there's very limited ability to actually forecast data well, but like,

Within reason, what can you forecast? And when we come up with that picture, we just think that, hey, it probably makes sense to have not too much equity exposure. But we think that expected returns are going to be less than what you've had in the past. But they don't have to be like crash, recession, negative 40%. That's the view.

Yeah, if stocks were up like 30% last year, if they're only up 8% this year, that's still a good healthy return. And you might say, okay, relative to the volatility,

you know, cash performed better or something like that. But, you know, 8%, 12% return. Yeah, that's still good. You can take that and, you know, continue to compound that wealth. What do you think about inflation this year? Do you think inflation is going down? And also, do you think like, do you think real growth, nominal growth is continuing to be very high, but do you think inflation will go down? I think when it comes to inflation, there are basically like,

Let's be clear, like most inflation just stems from the good side. OK, like the good side of the economy dominates most inflation and then it flows through to services over time. Right. So like the major changes in inflation start with goods inflation and then over time, you

slowly the services side catches up. So like if you're trying to estimate what's going to happen to inflation at any given interval, what you basically are looking at is you're looking at four big items to be able to understand what inflation dynamics are. Those four items are food, energy, transport, and housing. And those items basically determine what's going to happen to inflation over time.

When we look at that picture, food and energy are pretty volatile and largely consistent with what happens to commodity prices. So you can put those aside. Your energy component is basically just a nat gas component. That's all it really is. And that passes through relatively quickly as well, which is what is in almost every popular now cost measure. What's the popular one in now cost measure? What?

Every single now cost measure is going to lean very heavily on oil and natural gas numbers to basically come up with what's happening to headline inflation. That's going to be embedded into any major now cost. When it comes to the other components, housing and transport,

Those are a little bit harder, but they are also extremely conditional upon activity. So if housing activity or transportation activity is strong or weak, over time, that nominal spending tends to bubble up into inflation in those sectors. As I've described, there seems to be a significant amount of weakness developing in the residential investment complex.

Now, will that actually translate into deflationary numbers in the housing measures that, you know, the Fed uses and the BEA use and the BLS use? Because of the smoothing process applied, like it's going to be really slow moving. And the activity that we're seeing today is not that weak that it's going to result in, you know, really bad readings for housing.

So what we're going to see in housing inflation is probably just a continual, gradual slowing, which we've been seeing. And keep in mind, everyone's been expecting a slowing in shelter CPI for three years, and it's just been slower than you want it to. And a big part of this is if you go and read the footnotes of how the BA housing measures are constructed,

there are these items in all macro data where there is something called judgmental trend. What judgmental trend is, is basically the analyst who constructs the BA numbers, receives all the raw data,

And he has to construct the measure and he constructs the measure based off whatever trend he look back, he thinks makes sense. So there's no way to mechanically time when the housing number is going to be this or that. Like it's all just guesses. And frankly, if you think about it, like a few years ago or maybe one or two years ago,

You had real-time housing measures or whatever in negative, home price measures in negative. But for some reason, the BA kept printing positive and everyone was like, okay, it's a lag, it's going to pass through. But then the real-time measures began to pop, right? They began to come up a little bit. And as a result, that judgmental trend was probably interpolated to be positive.

And so- But the judgmental trend, they're making it, they're drawing a line through data, but it's real data. They're not making up the data, right? No, they're not making up the data. But what you have to understand is imagine an indicator, like a raw data series for home prices, right? Goes into negative and then pops up to positive. Now I'm sitting over here and I say, "Hey, do I really want to put the negative in there? If I increase the look back, it's going to show the entire trend as positive." And so

So there's no precise way to time exactly when a home price number is going to be anything because there is judgment involved in terms of how they construct the series. So I just want people to understand that. It's really popular to be like, oh, yeah, it's a 12-month lag. It's an 18-month lag. There's no fixed lag. It can be whatever. So what you want to do is you want to track what is happening to the actual home.

like what is happening to the actual sector and try to orient yourself accordingly. So what we think is based on that, that orientations for ourselves, we think that you're probably going to have continued disinflation in the housing sector, the sector where we continue. And I think, I think the first time we talked, I talked about this with you,

And it's a point of pride. Only a nerd would pride themselves on being right about transportation inflation. But yeah, the place where you have the biggest dynamics that are inflationary are the transportation sector. And it's because COVID created a dearth of transportation inventories, automobile and motor vehicle inventories in the US economy. And so that particular component has been really, really resilient over the last few years. And

Now, this is where tariffs become really important. Most automobiles in the United States are imported. Almost all of the consumed automobiles are imported. And so the place where you could see the most inflationary impact of tariffs is going to be in that automobile sector. And so when we put together that picture of food, energy, housing, transport,

We think, yeah, like add up the headline number, probably like headed a little bit lower because housing is a really big weight. But the thing that's going to lead to surprises is probably going to be transport. And then transport, there's a lag. If car prices go up a few years later, car insurance goes up like we saw. Exactly.

with car insurance has just been insane, insane growth of premiums. And that is also something that people actually pay. So they notice it. It's not something that just kind of escapes their notice. Another thing we could go nerdy on is term premia, something that I've seen in my college, but we'll have to do that when you get back on. I'm glad, Ahan, you are relative to, I guess, me and...

Some people in the market, you are, I guess, a little more constructive on the market. You're certainly not a mega bull. You realize the volatility is there, but we've done a few bearish interviews recently. So I'm glad we got you on for balance. If it's not clear to our audience, I've got a lot of respect for what you do. So people can find you on Twitter at Ahan Prometheus and your company Prometheus Macro at Prometheus Macro. A reminder for everyone watching to subscribe to our YouTube channel and to like the video, leave a comment. It really helps.

It helps the algorithm. And of course, we are on Apple Podcasts, Spotify, and wherever else podcasts are found. We'll try and release this interview soon because we know things and markets are moving quickly. I'll be speaking later on to James Aitken, someone I've wanted to interview in a while. So that will likely go

go on live soon. And then of course, next week is the Federal Reserve meeting. So I'll be speaking to Jim Bianco about that. And who knows if the volatility is insane, maybe I'll do a intraday interview with someone in the volatility space because I'm noticing some strange things there. A final, I guess my closing notes is that

I've also been looking into tariffs from like the 1890s because you're so right. We have a sample size of very, very little, like no one has really been alive when tariffs have gone up in the, in the United States. You know, they went up literally during the civil war, you know, Abraham Lincoln was not a free trader at all. And then they stayed high until, um,

I guess like after World War I and then Smoot-Hawley, they went back up. And then after World War II, they went down. And then we've had a free trade era for 70 or 80 years. So no one really knows what's going on. And there are economic models about tariffs are they will raise inflation or they will lower growth. So either way, they will lower real growth, i.e. inflation adjusted growth. But what do we know? What evidence do we have? So that's why I've been trying to go back to the 1890s. And I got to say, I looked at sugar prices.

the sugar tariff in 1897, because there were three tariffs in 1890s, not just one. And the price of sugar, it literally did exactly what the textbooks say it does, of the price goes up and the price goes down in foreign markets because they have the price in the tariff. So

I do think that the mainstream economic view that tariffs will cause economic disruption is probably right, but I'm open to being wrong. All right. That's, I guess, the end of my sermon. Thank you again. And until next time. Take care, Jack. Thanks for having me. Thank you. Just close this door.