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#223: Where is the Growth Coming From?

#223: Where is the Growth Coming From?

micksonmatch
January 31, 2025

“Your best performances will come when you are working in a way that is a full expression of you. The work becomes a natural display of your personality. This is when you not only get better results but also love the activity—because in doing the craft, you feel alive.” James Cleary

This quote really appealed to me, especially right now. It feels like I am drinking life from a fire hose. So looking forward to a quiet weekend of reflection and relaxation.

S2N Spotlight

The Q4 GDP was released yesterday and was pretty much in line with expectations. My favourite series to work with is the latest quarter year-on-year growth from 12 months ago. Call it 2.5%, right on its mean since 1990. Let that sink in for a bit. The economy has grown in real terms, around 2.5% per annum.

It got me thinking. The chart that follows took me way longer than I expected it to. The truth is, I love to learn and build new charts. I wanted to pack into one chart a way to see what I would consider economic sense.

What drives a share price? We know that it is the discounted value of future earnings. Where do businesses get earnings from? They get earnings from economic activity in the economy. The S&P 500 earnings have grown at around 5% per annum over this time. This makes sense; they are the top-performing largest companies on the stock exchange. Here comes the annomaly.

Why is the S&P 500 growing at 12% per annum, or a cumulative 3497% versus earnings growth of 353% and GDP growth of 140% over the same period? The obvious answer is that the S&P 500 is anticipating unprecedented economic and earnings growth over the next few years. I will leave it to you to ask yourself the question whether this is not wishful thinking. Is AI really going to produce the kind of economic productivity that will make companies and economies so much richer?

I would argue the growth has largely come from the fantasy world created by excessive money supply and profligate spending via debt. We humans are easily fooled by headline numbers that make us feel more prosperous than we are. There is a reason gold is at an all-time high, as is Bitcoin, a new asset class that is valued in the trillions.

We live in a world of cause and effect. The challenge is that knowing the cause doesn’t provide you with a timeline of the effect. It provides you with due north coordinates; then it is up to you how you find your way. Happy travelling.

S2N Observations

It is important to mention that Gold made an all-time high. I have included a look at how gold has performed relative to gold miners. Over the last year, the miners have tried to catch up, but it is clear that gold has outperformed the miners by a very healthy margin over the last 20 years, which lines up perfectly with the huge amount of debt and liquidity pumped into the system to provide a risk premium to gold.

The premium I don’t get and stick to with regards to one of my favourite trade ideas is to trade the elimination of the MicroStrategy premium to Bitcoin. I see the ratio trading at 1000 in the not-so-distant future.

The ECB announced a 25-bps rate cut yesterday, taking the interest rate to 2.75% versus the US 4.25-4.5%. This is what a comparative look at the spread between the regions looks like.

I thought it would be appropriate given this interest rate differential to see the EURUSD head downwards on its futures curve. It turns out to be upward sloping. I am not sure why this is the case.

I took a look at the EU yield curve and still cannot answer the upward slope of the EURUSD. This is not nearly as steep as the US curve. I am missing something.

S2N Screener Alerts

Meta made an all-time high (ATH) along with a 9-day up streak for only the 4th time in its history. The hardcore analysts believe it has to do with the fact that Zuckerberg displayed manly characteristics at the inaguaration about 9 days ago .