Hello everyone. It's the Friday of the employment statistics release month again. I'm Ino-san. We'll be looking at fiscal policy, monetary policy, economic indicators, and various reports. This time, I'd like to start from a slightly different place than usual.
First, I'll feature a tweet from Bill Ackman, CEO of hedge fund Pershing Square. After that, I'd like to explain in detail some of the letters I've written over the past ten days or so, using several charts.
We expect real GDP growth to significantly exceed forecasts, while we expect inflation to fall below forecasts. But interest rates will rise. The factor driving that is not inflation but the rise in real growth rates. In other words, the market is functioning properly, and corporate profitability is probably heading toward record levels. We're just one step away. We expect it to reach a new record. The driving force behind that is productivity gains from AI and the various technologies that ARK Invest places at the center of its research. Now, let's start with Bill Ackman's tweet.
This is very interesting. One reason is that I entered this industry when I was still a college student, in the late 1970s. The kind of argument Bill is making now was common back then too. However, at that time, inflation was stuck at double digits and wouldn't come down, and the burden of interest rates kept rising, which in turn pushed inflation higher — a vicious cycle. But we think this time will unfold quite similarly to the 1980s. What happened in the 1980s was an acceleration in real growth rates driven by productivity gains, and a decline in inflation.
One reason inflation fell back then was that we were in the midst of a small technology revolution. It started with the PC, and then software came along. That was somewhat connected to the disinflation of that era. And now we have five major innovation platforms: AI, robotics, energy storage, blockchain technology, and multi-omic sequencing. We believe these five innovation platforms, built on these technologies, will bring inflation down to levels far lower than most people expect.
I wouldn't even be surprised if we ended up in deflation, especially if crude oil prices fall sharply as we expect.
Now let's look at the charts. These are the charts I featured in my letter. I'd like to explain them in a bit more detail. First, this one. This is a really long-term chart going back to 1790. Connecting the movements before the 1900s is actually quite a difficult task. So this time, I also referred to academic research. Nick Gruen did a considerable amount of this work back in 2019, when we first released our report — the report on long-term yields and the inverted yield curve.
But what I'd like you to notice first in this chart is that interest rates have risen significantly. It really does feel like they've gone up a lot. During COVID, I believe they were below 1%. Now the 10-year Treasury yield has exceeded 5%. But take a look from a historical perspective. Historically, today's interest rate levels are actually right around the middle. Looking at the long-term average going back to 1790, it's about that level. Of course, there were periods when they were lower than today, and for quite long stretches at that.
And one more thing I want to say: what's truly abnormal historically is not today. Rather, it's what happened in the 1970s, 80s, and 90s — and in fact, the sharp rise in interest rates that continued until around the time of COVID. That's what's strange. I think there are several reasons for this. The biggest was the United States' departure from the gold standard in 1971 — the so-called closing of the gold window. What happened before that? First, the Vietnam War, and then the Great Society — the so-called 'guns and butter,' both military and welfare. The government funded everything, and spending had become quite unsustainable.
All of that was supported by monetary policy, but around the time the gold window closed, things started to spiral out of control, and it became very difficult. In terms of monetary policy at the time, it eventually led to double-digit inflation, and it took a long time to get out of it. We think it went too far in the opposite direction. The market stopped functioning. The Fed was supplying funds as if spoon-feeding the economy. And after the 2008-09 financial crisis, there was still strong anxiety. The same thing happened during COVID. But now we believe we've finally returned to a state where the market is functioning properly. And we believe the current Fed is a very good Fed for all of us.
Now, this is the PCE inflation rate. We focus on this because Fed Chair Powell places importance on the headline PCE inflation rate. The latest numbers have come out. When I first made this chart, it was 3.7%. In this update, there were some revisions, and it has fallen to 3.4% year-over-year. Core is even lower than that. But the issue is that Fed Chair Powell seems quite focused on the headline inflation rate — at least, that's what he says himself. And 3.4% is still quite far from 2%. That's why we heard quite hawkish statements — that the Fed will continue tightening.
And now the PCE inflation rate has been released. It's still quite high. But looking at private inflation measures, we believe Chair Powell is also paying attention to private indicators.
Now, the private Trueflation inflation rate. I've introduced this before. Looking at the headline inflation rate here, it has risen slightly — the purple line, up to around 2.7%. I think the recent rise is largely due to the impact of crude oil prices. But look at core. Core continues to fall. Chair Powell has certainly noticed this movement too.
And comparing it to before COVID, you can see it's getting quite close to the average level of that time.
This is the dollar. This is also a long-term chart, though not as long as the previous one. What I'd like you to focus on here is the early 1980s — the green portion of the dollar. At that time, there was excellent monetary policy and very pro-business fiscal policy: large-scale tax cuts and deregulation. It's a very similar environment to today. Of course, some people would disagree, but we believe the current United States is a very good environment for corporations. And the AI revolution is essentially starting in the United States.
Actually, looking at figures I saw in Bloomberg this month, if you look at global data center financing, 90% of it — and this is based on bond market data — 90% of the financing is in the United States. So, looking at recent changes in the US corporate tax rate, the effective tax rate is now the lowest in the world — by our calculations, around 8%. There's accelerated depreciation for new manufacturing facilities, and data centers are also eligible. They can depreciate 100% in the first year of operation.
In other words, these companies are generating massive tax savings, and they can channel that money into further investment in the United States. An investment boom is actually happening right now.
What happened in the early 1980s was that the return on capital — this also applies to the US today — was rising compared to other regions of the world. As a result, the dollar rose. Look at how much it rose back then. However, this time the starting point is a bit different. In the late 1970s, terrible fiscal and monetary policy had beaten the dollar down thoroughly. So it started from a relatively low level, and expectations were extremely low. This time, look at this dollar chart. This is the DXY index against six currencies. Looking at the recent range, it's quite high. But we expect it to rise further from here, for the same reasons as the early 1980s.
There's a lot of talk in the market now that the era of the dollar is over, and that American exceptionalism is over too. We don't think so. You can see that even from the data center figures I mentioned earlier. And we expect upward pressure on the dollar again, because foreign direct investment and other investment funds are heading further into the United States — because there are pro-business policies.
Now, this is Kalshi data. As you know, ARK is partnered with Kalshi. I believe anyone can partner with Kalshi to propose ideas for this new market — this new prediction market. And what was very interesting was that when this market started, Kalshi's predictions turned out to be more accurate than most people thought. When this started, the DXY index was around 98. The dollar is now slightly above 100. Kalshi's predictions were consistently above 100. Actually, when it started, looking here, it was around 103 to 105. In other words, the people trading in this market saw something — they expected the dollar to rise. And that's exactly what happened. It fell in the middle, but it's now rising again. I find this quite interesting.
We'll be doing more with Kalshi going forward. We plan to work on various statistics and other indicators over the next few months.
Now, this is also very interesting. It's another dollar chart. I showed you the DXY index earlier, but when people say 'dollar,' they usually look at DXY. In financial markets, everyone assessing dollar movements or making investment decisions about the dollar only looks at DXY. But this is the real effective dollar index based on trade volume. It's calculated by the Fed and covers 26 currencies. Looking at this historically, the dollar is almost at its all-time high. Look at the early 1980s — the dollar's movement at that time as measured by this index. Today, it's at a considerably higher level than back then.
On the other hand, going back to the DXY for a moment — looking at this chart alone, the dollar looks much weaker than it did back then. But according to the Fed's index, that's not the case. And the rise in the dollar — as I said, according to this index, we expect it to return to its all-time high. A strong dollar is a very powerful force for suppressing inflation, especially since most resource commodities are priced in dollars.
This is the gold price. The dollar is near its all-time high, and that's a good thing — as I said, because resource prices are low. But comparing it to gold, US monetary policy over the last 15 to 20 years or so has been quite poor. The dollar has lost significant purchasing power against gold. Shown in green is the dollar's movement during the eras of Chair Volcker and Chair Greenspan. I wonder — although neither of them explicitly said so — whether they used the gold price as one of the key indicators when conducting monetary policy. When the gold price falls, there's more room for monetary easing. Conversely, when the gold price rises, they moved toward tightening.
As you can see, the gold price began to rise, and during Chair Greenspan's era, it reached the previous all-time high. And looking at what happened after Greenspan left office, it's quite bad. Interestingly, the gold price peaked on the day or the day after President Trump nominated Kevin Warsh as Fed Chair. Since then, the gold price has fallen. I wouldn't be surprised if it falls further from here — if Chair Warsh returns monetary policy to a somewhat rules-based state using price indicators.
Now, this is the crude oil price. We believe crude oil prices have stayed high for the past 20 to 25 years. One reason is accommodative monetary policy — the same reason the gold price rose. But if our view is correct, and monetary policy becomes one that places more emphasis on price indicators like the gold price — perhaps not the gold price itself, but similar price indicators — then on top of that, innovation based on technology will significantly reduce global demand for crude oil.
57% of crude oil consumption goes to transportation. And going forward, transportation is shifting from gasoline cars, then from non-car gasoline engines, and from diesel trucks, to electrification. So we believe crude oil demand is peaking out. This transition has been underway since it began, and it accelerated in China and Europe. The United States is following suit.
And we believe crude oil prices could fall to $30 to $35. Why do we think so? Throughout the various crises we've had, prices have actually fallen to those levels. During COVID, they fell well below that. But this time, it won't be because of a crisis — it will be because of technological change that brings prices down that far. If that happens, it would naturally suppress inflation expectations.
And there's one more thing — another factor that has a huge impact on inflation. Here are two learning curves. The blue one is genome sequencing. What this chart shows is Wright's law actually at work. It says that every time the cumulative number of human genomes sequenced doubles, the cost drops by 40%. This is the learning curve for genome sequencing.
On the other hand, for AI inference — the black line — it's even more dramatic. You can really see how fast innovation is progressing. For this one, it's not even Wright's law anymore. I'll show you the annual figures. The AI inference cost — that is, the cost for ChatGPT to answer your questions — assuming performance doesn't improve and stays constant, costs have fallen by 99.99% per year.
So this means massive cost reductions in every activity that uses AI. Applying Jevons' paradox here — and we believe this will happen — as AI prices fall and AI inference costs decline, usage will explode. And revenue will explode too. OpenAI, Anthropic, xAI, and now Meta's Llama as well. These price declines will cause usage to surge explosively.
That's why OpenAI's revenue has grown from $20 billion — that was the annualized revenue as of the end of last year — to the $70 billion announced recently. That exceeds the $65 billion Anthropic announced in July. Of course, Anthropic is probably now above $65 billion too, and the two are likely roughly neck-and-neck again. But even with prices falling this much, revenue is exploding. I've never seen anything like this before. And this is essentially a microcosm — a preview of what we expect to happen across the entire economy.
As these price declines permeate more deeply into the economy, that's exactly what will happen. We expect the growth in volume across all activities to accelerate considerably. That's precisely why we're forecasting that GDP growth will accelerate significantly going forward.
And this is, so to speak, a picture of how we actually see the world. As you know, we view things through the lens of technology. There are 15 technologies here — the technologies that make up the five major innovation platforms. You can see how they're converging with each other. The purple AI has the greatest impact on the other technologies. In other words, the cost declines happening in AI are spreading to other technologies. I often say this, but the person who first created this diagram was ARK's Chief Futurist, Brett Winton — so it's his idea. When I first made this diagram, I'm not even sure there was a line between the gold section — blockchain technology and AI. But now there is a line. There's agentic payments, agentic commerce, and Grok Bot Llama. And now there's OpenAI's bot too.
So we expect considerable deflationary pressure going forward. But this is good deflation — deflation that explosively accelerates growth. To explain the rest: red is robotics, green is energy storage, and blue is multi-omic sequencing. As you can see, AI has a major impact on all of them, and it will accelerate innovation in all of these fields — compared to a world without AI.
Now, this is global real GDP growth. Our Brett Winton also created this growth chart — this growth timeline, so to speak — drawing on academic research and researchers' estimates. It goes back 100,000 years. We plan to explain this in more detail in next year's Big Ideas.
Now, if you extend this chart all the way to 2036, the growth rate rises. On the other hand, looking at 1500 to 1600, real GDP growth stayed at almost 0.6% — as far as we can tell from academic research. Actually, Brett might revise this to 0.5%. That would be better. I think the 0.6% figure was a bit too precise. But looking at how we view real GDP growth — how we forecast it for the five years through 2030 — it's 7.3%. That is, 7.8%. We've been conveying this forecast all along. Of course, most people think it's impossible.
Because we've never experienced such a big change — a regime change. No one alive today has actually experienced the Industrial Revolution. All we know is a world with GDP growth of around 3%. But what's happening now is a technology revolution. And we believe this change is bigger than the Industrial Revolution. Going from 0.6% to 3% means the growth rate increased fivefold. And we believe the growth rate will eventually rise far beyond fivefold.
Of course, it may take time to get there. Or it might happen surprisingly quickly. We just don't know, because everything is progressing much faster than we expected. But we believe real GDP growth will reach the high single digits. And behind that, inflation will fall far below expectations — we might even see deflation — if these technologies converge as we expect.
The IMF's forecast here is 3%. Actually, I think the IMF's forecast has fallen to around 2.5%. Something like that. In other words, the IMF is essentially saying these technologies will have no impact on real GDP growth. We don't think so. Well, there are different views — that's what makes a market. So please look forward to ARK's Big Ideas next year. We'll release it in January, and we'll update this chart too.
So why will the growth rate accelerate? Because productivity will rise. Looking at the 80s and 90s, the trend in productivity growth shifted up a level. It shifted upward because PCs and software appeared, followed by wireless and smartphones. We believe this will happen again — that productivity growth will accelerate to around 5 to 6%.
I think this is entirely possible, given the evolution of technology we're considering. Now, this is also an interesting long-term chart. This was created by our Nick Grous. He currently heads our consumer AI and fintech research.
This is the yield curve spread, the difference between the 10-year Treasury yield and the 2-year Treasury yield.
Looking at the era of the Industrial Revolution, it was more often inverted than not. More often than not, that is.
In other words, long-term rates were lower than short-term rates.
After that, the Great Depression happened, and the Federal Reserve was born. The Fed was established in 1913. And since then, when investors see an inverted yield curve, basically—and it was actually true—investors began to think a recession was coming. But in reality, that wasn't the case.
Of course, back then recessions happened more frequently, before the Fed existed. That was because of the gold standard. In other words, it was a rule that fixed prices. So adjustments had to be made through quantities or real growth, in order to fix prices.
But the inverted yield curve existed both before and after recessions. In fact, it was inverted for more than 60% of the time.
And interestingly, the most recent inversion, which lasted quite a long time, was also quite long by post-World War II standards.
Timing-wise, it was after COVID, when the Fed raised rates 22, 24-fold in just 16 months. That's when the curve inverted, and we believe we entered a rolling recession. At least housing, manufacturing, small businesses, and lower-income consumers—all of these entered a recession. But the economy as a whole did not go into recession. This is very interesting.
Perhaps we're returning to the era of the Industrial Revolution. Back then, the curve was inverted for more than 60% of the time, and by an average of 100 basis points. So let's see what happens this time.
Also, let's look at this point a bit more. If you've been watching our In the Know series, you probably know that I've been fixated on this chart. I know it's a bit niche, but I'm a real geek when it comes to economic statistics. I especially love the yield curve.
During COVID, something surprised me greatly. The Fed, the U.S. government, and governments around the world all floored the accelerator with both fiscal and monetary policy. Everyone at the same time. And yet, the slope of the yield curve did not return to 200 or 300 basis points.
So I wondered, what does this mean? At least, that's what I think. And including the recent decline, it didn't even reach 150 basis points like during COVID, even when the yield curve's slope was steepening. It went to about 75 basis points, and now it's come down to the 40s. What does this mean? I think...
U.S. Treasury yields are reflecting some kind of deflationary pressure. In other words, inflation expectations priced into long-term Treasuries. We'll look at this in detail later, but those inflation expectations have calmed down considerably. And they may be calming down even further.
For now, however, the inflation expectations shown by TIPS, Treasury Inflation-Protected Securities, haven't reflected that yet. But we believe they eventually will.
Now, I'd like to run through several charts from here. We've spent quite a bit of time already, explaining the overview of the letter. From here on, we'll look at several charts. I'll skip through a few. This is the fiscal deficit. It's currently in the mid-5% range. The Secretary of the Treasury says they'll bring it down to 3%. We also believe that will happen before the current administration ends, that is, by the end of the president's term. That's because we think nominal GDP growth will be much lower than most people expect. In the 1980s, they turned the situation around like this as well.
Under the Reagan administration. And in the 1990s, it went even further under the Clinton administration. So let's keep an eye on that. Now, this is what everyone fears. You're all quite worried. In the news, they're saying government debt has reached $40 trillion, and oh no, it's exceeding GDP.
Regarding this, we do think that's true. Government spending is too high. After all, government spending is essentially taxes. The difference is whether you pay now, later, or through inflation. So I agree that the government is spending too much money. But I don't think the current situation is as serious as most people think. Why? Because...
If you look at debt-to-GDP, it's comparing a balance sheet number to an income statement number. In other words, it's the classic stock-versus-flow comparison.
Of course, you can look at it that way. But there's another perspective. For example, debt-to-net-worth. In this case, both are balance sheet items. By this measure, the current level is actually closer to the low end. Historically, it's not high. In other words, the severity this number suggests is significantly mitigated by the wealth and growth the U.S. economy is generating.
To repeat, I also think government spending is too high. And a large part of recent government spending is defense. So, national security. I support that. But overall, government spending needs to be reined in more.
Now, this is another long-term chart. I think the market, the stock market, is a bit confused. The reason is that over the past 40 years, nominal GDP growth has been declining. Mainly because inflation fell, interest rates came down with it. But now we're on the other side of that.
I think this is a good thing. Of course, it's not good for bond investors. They hate seeing bond prices fall sharply like this. But I think this is rather a manifestation of accelerating growth.
You'll understand if you look at the charts that follow. This is the 5-year Treasury yield. It also shows the real yield. If you break it down into the inflation component and the real component, you can see that the recent rise in rates is far more attributable to real yields than to inflation.
I find this very interesting. Bond investors care about things in single basis points, right? Meanwhile, we stock market people tend to look at things in percentages. In other words, in 100-basis-point increments.
But when I listen to bond investors and journalists, it sometimes sounds as if the inflation priced into the bond market is becoming uncontrollable. Yet when we look at this, we think, 'No, the bond market sees inflation over the next five years as settling down considerably.' Yes, it's above 2%, but it's been roughly flat for the past few years. We believe it will decline from here.
That is, if the market comes to better understand the impact of technology on inflation.
Now, let's run through several charts at once. This shows the growth rate of the four-year budget. It includes federal government spending and money. Federal government spending is increasing. Within that, defense accounts for a large part of the increase. But monetary policy isn't supporting it.
Looking at monetary policy in recent years, the growth rate of money is in the low single digits. It's not the kind of growth that would support the increase in government spending. I think this is a good thing. It means it won't lead to inflation.
On the other hand, looking at the 1980s and 1990s, the growth rate of money was consistently high, and the velocity of money also rose. That was a big problem. This is that velocity. Since it just came up, let's take a look. We believe the factor most closely related here is the decline in velocity. The other reason money growth didn't lead to inflation is this velocity—how fast money circulates—it was declining.
Among the indicators we watch, the labor force participation rate has shown a similar trend to velocity, which peaked in the late 1990s. It's been declining recently. In today's employment report, it ticked up a bit. That was good. Part of the reason may be the cost of living. More people may be returning to the labor market to earn a living.
If this continues, the velocity of money might also turn up. But we don't think it will continue. Baby boomers are retiring, and immigration is declining. So we expect the velocity of money to flatten out around here. In fact, it is becoming flat. It won't suddenly accelerate money growth.
This is the money growth rate. I believe it's 5.7%. Many people are worried this means inflation will rise too. I can understand that thinking. If velocity hadn't flattened out and started turning down, we would have been worried about the same thing.
And this is a very important index. The diffusion index. It's an indicator Fed Chair Powell watches closely. This diffusion index. It's the share of inflation components that have risen by more than 0.3%. He didn't like this direction. But look—it's now reversing rapidly. This blue, or rather purple line, is the six-month diffusion rate. From here, we expect downward momentum to strengthen and push down the annual figure as well. I think this is very important information.
Now, today's employment report. We'll go through this quickly. Payrolls came in well below expectations. That's on a non-farm basis. Looking at household employment, it increased by around 400,000. So, as usual, there are various interpretations depending on how you look at it. But the important thing is that on a year-over-year basis, it's roughly flat. Month-to-month fluctuations are quite large, but the trend is flat. This is employment. The growth of the labor force is also slowing.
As I said earlier, part of the reason is baby boomers retiring, and part is declining immigration.
The green line is the unemployment rate. Even in this rolling recession, it has remained quite stable. It's now 4.2%.
But look at the purple line. The 16-to-24 age group. It's back up to 9.9%. In other words, young people who have graduated from college are struggling to find jobs. If that's the case, use AI to start your own company. You don't need any employees. Just solve a problem. At the same time, keep job hunting. That way, you'll be one step ahead of everyone else. I think you'll be the first to get hired.
The University of Michigan consumer sentiment index is terrible. The Conference Board index also deteriorated similarly. It had been holding up better than expected until now, but consumer sentiment is quite weak now. Diesel is $6.5. Gasoline is still a problem. Average hourly earnings are also still a problem. Surprisingly, they rose only 0.1%. The composition of employment has changed, and technology-related employment has declined significantly. Tech jobs pay high wages, so there's downward pressure on average hourly earnings growth. It's 3%.
Meanwhile, productivity, as I showed you in the earlier chart, is well above 3%. So we'll see labor shortages. And compensation per hour worked—that is, average hourly earnings growth—will likely turn up again. Once the momentum of the economy becomes clearer, that will happen.
The personal savings rate. This has also fallen to a historically low level. One reason is the cost of living. People are probably drawing down their savings. Among lower-income households, stock prices are near all-time highs, so the savings rate may have declined a bit there too. We haven't been able to confirm that data yet.
Existing home sales. Still in a recession. Truly terrible. Of course, one reason is that mortgage rates have risen again. They're above 7%. This is a big problem.
As for selling homes, this is new single-family home sales inventory. Inventory is near all-time highs. Homebuilders are cutting prices to reduce inventory. But inventory is still at high levels. Interestingly, it ticked up a bit.
This is the year-over-year rate of increase in existing home prices, on a three-month moving average basis. We had expected home prices to start falling. Even as rates rise, if more people want to sell, prices will fall. We still think that's possible.
Here, rates seem to be rising again. Well, that's to be expected. Manufacturing has come out of the recession. In other words, manufacturing has emerged from the rolling recession we've been seeing. One reason is capital spending. Non-defense capital goods excluding aircraft. And as you know, defense spending can be added to that as well. It's growing enormously. But as I always say, this capital spending barely grew for a long time. Since the collapse of the IT and telecom bubble, it really just stopped.
Think of it like a stock chart: the longer the base, the bigger the breakout. That's exactly what's happening. And I think this move will last even longer.
The trade balance. We expect it to deteriorate further. In the last month alone, U.S. imports rose 2.8%, I believe, and exports fell 2.2%. In other words, the U.S. is growing faster than the rest of the world. So the trade deficit will worsen further. President Trump probably won't like that.
But behind the trade deficit is a capital inflow surplus. Investment into the U.S. from overseas, and foreign direct investment in actual physical assets, is flowing in more than many expected.
This is domestic corporate profitability. Rising productivity will continue to push profitability higher. It could even set a new all-time high. Where was the past peak? It was here. I can't read the date, but it was quite a long time ago.
Now, let's move on to the sector-by-sector discussion.
This is quite interesting. As you can see, the 10-year Treasury yield is rising. The reason is what we've discussed so far.
And what's really strange is this indicator below. The metals-to-gold ratio hasn't risen as much as you'd expect. Gold is falling, so normally there would be upward pressure on this ratio. But metals versus gold hasn't turned up yet.
And when you look at the indicators coming out of China, many of them are truly terrible. I may have mentioned this last time too.
China's auto production is still around 30 to 35 million units annually.
But domestic auto sales in China have fallen from about 30 million units to just over 19 million. And interestingly, U.S. auto sales have also fallen below 16 million. The latest figure, for September, shows that.
And this reflects the impact of Uber and Lyft, as well as the rising cost of living, on auto sales. So we believe auto sales have peaked long-term, just as we believe crude oil prices have peaked long-term.
Now, this is the S&P 500 versus crude oil, in a nutshell. It's still near its highs, despite crude rising to $90 to $100. And if our view is correct, crude will fall, so the S&P versus crude oil would rise significantly.
This is the S&P versus gold. Why bring this up? Because it was an excellent indicator. In the 1960s and 1970s, it signaled that the stock market was entering a dire period. Back then, this ratio started falling, and afterwards there was a terrible bear market. Effectively from 1966 to 1982. It wasn't until 1982 that it returned to the 1966 high. Can you believe that?
So we watched this indicator keep falling. And many people are focused on the fiscal deficit and government debt, saying this is terrible and we'll return to a 1970s-like situation. But that's not the case. We won't go back to the 1970s. And this ratio turning back up is a good move. We expect it to rise all the way to an all-time high.
Because the S&P will continue to rise, corporate earnings will grow, and gold prices may fall.
And this one is very nice. It's reversed cleanly. Bitcoin versus gold. Bitcoin is up and gold is down. We've discussed the correlation between Bitcoin and gold before. Interestingly, Bitcoin is called digital gold. It has the characteristics of a store of value. But looking at the correlation between the two, our analysis goes back to 2019, around when institutional investors started taking an interest in Bitcoin. The correlation coefficient between the two was 0.1. Essentially no correlation. And recently, it's actually become negative. So we believe the trend has changed for Bitcoin here.
Finally, a few market indicators. Looking at CDS, credit default swaps—these are essentially insurance against default, right? This is bank CDS. It's at a very low level. There's no systemic risk. Private credit is still in a somewhat tough situation, but that's not spilling over into the banking system.
Looking at this, this is junk bonds, or high-yield bonds, compared to the 10-year Treasury. This has risen a bit too, but historically it's at a very low level. So we're not worried at all.
As you can see, it's usually low before recessions too. But we don't think we're entering a recession at all. Rather, we believe we've come out of the rolling recession. So far, so good. Now, the last charts—just two more.
The purple line is AI stocks. And this is, I believe, a Kalshi prediction market forecast on whether Republicans will lose control of Congress.
The higher this black line goes, the higher the probability that Republicans will maintain control.
As you can see, the probability is falling. And many people said that as this falls, if Democrats were to control both the House and the Senate, it would be very bad for AI. So we thought there might be a correlation between these two. But as you can see, they're now moving in completely different directions.
The reason is that even if Republicans lost both the House and the Senate, in the end, all that would happen is political gridlock. Because the president wouldn't change.
And President Trump has effectively rescinded President Biden's AI executive order. That was going to be a very strict regulation. And this week, that's been all the talk—whether to regulate AI, in light of the Hugging Face hacking incident and other cases reported recently. The Trump administration's stance is quite clear: regulate yourselves. And by the way, large language model companies should take responsibility if something really big goes wrong. That's their stance.
Well, this is interesting. Another concern is the movement in CDS. Concerns about the hyperscalers. This is interesting. Look at the green line. The history is still short, but for years they held enormous amounts of cash. They had no need to raise funds in the bond market at all.
But now they are raising funds in the bond market. This is a very unusual situation. So their CDS is deteriorating. A rising CDS value means credit risk is worsening.
Investment-grade bonds have also risen a bit—that's the black line. High-yield bonds, the purple line, and junk bonds have risen more. Probably the neocloud providers—that is, AI-focused cloud infrastructure companies—are one of the big reasons.
I'm not sure if Oracle was downgraded. Maybe Oracle is also affecting this move. Anyway, we've looked at a lot of data all at once today. Thank you for watching this month as well. Have a great weekend.
