Thoughts from the Frontline

It’s Labor Day weekend, and my goal with this letter will be to not interrupt your long weekend too much. But there are some things that are happening that are important. My basic thesis for quite some time has been that we are in a Muddle Through Economy, which I’ve always meant that to me the GDP will grow slightly south of 2% over time. For 25 years, that has been the case. Is it time to revisit the Muddle Through world? Let’s look at some of the data and try to get a feel for what the next few months and even quarters looks like.

Last week we looked at the water and the wires. This week we take on the objection that scares people most: that AI, and the data centers that run it, are coming for their jobs. This one is different from the water and power arguments, because it isn't really a factual dispute so much as a forecast, and forecasts about technology and employment have a long, undistinguished history of being wrong in both directions. So, let's separate what people currently believe from what the data currently shows, and then talk about why the jobs argument, even where it has merit, points toward building more data centers rather than fewer.

Artificial intelligence is the topic of the day. It seems everyone has an opinion but not much actual factual knowledge. I’ve been dragging emails and research into my AI folder for a very long time. Today (and next week) I review those emails, as we are going to look at the reasons there is so much opposition to AI data centers. Some of it is because of the hype that the AI hyperscalers offer in their fantastic views of the future. They breathlessly tell us how much AI is going to be doing for us and to us. They see a future where AI and robots do everything. (I’m looking at you, Sam Altman, Peter Diamandis and Elon Musk.) “We are moving to a post-work future.” They see the world evolving into some Star Trek-like world of abundance, where whatever work we do is because we want to do it.

Elvis Presley’s rendition of Suspicious Minds topped the record charts in 1969. The lyrics portray a romance that couldn’t work, but was also impossible to escape. That’s also a good way to describe our relationship with government debt. We know it can’t last, but we can’t walk out. We love government spending and its benefits (like Medicare, Social Security, and unemployment insurance) too much.

I’ve been thinking a lot about my own portfolio construction for the past five years. It was admittedly complex. It was a combination of various alternative funds and private placements, with a few stocks thrown in. Not something that I think anybody should try to duplicate.

This week’s vote from the Federal Reserve FOMC committee is going to have implications for quite some time. I think most of the pundits who are writing about this have their analysis wrong. This was not just a vote to not raise rates. I think there was a lot more going on behind the scenes.

I talk about the Federal Reserve often in these letters, and for good reasons. Fed policy has enormous influence on the economy. Yet the Fed has far more power in some areas than others. It has deep, almost dictatorial control over short-term interest rates and overnight bank liquidity and much less power over long-term yields. Yes, the Fed has somepower over mortgages and Treasury bonds, but it’s not as simple as taking a vote. The actual mechanism for the Fed to influence mortgage and long-term rates is very complicated and often counterintuitive.

Last week I noted the problems of sitting down with a blank screen and trying to figure out what to write. This week I have the opposite problem: I have well over 20 important research notes from various authorities about inflation, Federal Reserve policy, and interest rates. The challenge will be to summarize the most important points.

Next month I will begin my 27th year of writing this letter. The way I write, how I come up with topics, when I write have all changed over time. But one thing is consistent: when I sit down to write there is a blank screen. Some weeks topics are obvious. Some weeks I scramble as the fear of a blank screen forces me to just start writing. On a few occasions those are my better pieces. Often, well, let’s just say that those letters will make the top of the list.

This letter is going to be a little different, and much shorter. But on July 4 I hope it makes you feel good!

When we talk about inflation, the conversation usually centers on periods (like now) when inflation is especially high. Those are certainly problematic. But we can overlook a possibly bigger problem: other than a few short breaks, you and I have never seen a time when inflation wasn’t rising. Inflation isn’t some problem that pops up occasionally. Inflation has become normal – so normal we let it accumulate for years without complaint.

The Social Security Administration recently gave us their annual report with a few blockbuster footnotes. We all know that Social Security as it is currently constructed will run out of money in the early 2030s. Social Security's cost has exceeded its non-interest income since 2010. Since then, payments have been made out of the so-called trust fund. Except the trust fund does not hold cash. The money was borrowed by the rest of the federal government to cover other spending, and the government now owes it back.