Here’s a preview of what we’ll cover this week: 

• Macro: Trump on Tariffs, The Thump on put, Consumer Spending Resilience, Job finding rate drops sharply

• Markets: PHARMA & Healthcare, AI Dependency Dilemma

• AI: Open AI, AI Diagnosis Revolution

• Digital Assets: Lessons in Exit Timing

Broadcast

Ram dives deep into the week’s market highlights:

• FOMC Reaction

• Growth vs. Value and the 10-Year

• Animal Spirits On the Wane?

 Catch the insights and strategies that matter most this week.

Macro

Last week, we wrote we expect a hawkish cut. Boy, did the Fed deliver.

Markets puked on Wednesday and Thursday, and we had a relief rally on Friday.

The hard part about markets is holding multipe conflicting ideas in your mind at the same time.

You need your mental model of the world, and then you need the Consensus mental.

When you find something that is not aligned you have a ‘variant perception’. That creates an opportunity — if you are Non-Consensus and Correct.

However, suppose you are incorrect. One advantage of a Non-Consensus approach is that the consequences for being incorrect are lower… because the ‘price’ of that view is cheaper than the ‘price’ of being correct.

A good example of that is Nike or Starbucks stocks. These are names that are in deep bear markets and loved by Bill Ackman for reasons we fail to understand.

(Both are expensive, and rely on the China consumer for marginal growth, and have competition.)

If you own a Consensus idea and are incorrect, you will pay dearly as the herd re-prices your idea.

Back to the Fed.

My read on the Fed ‘hawkish cut’ is that it is short-term scary - Powell and the FOMC’s dot plot indicate that inflation is sticky.

That wasn’t part of the outlook.

But, this is long-term bullish.

The Fed is saying in may take 1 to 2 years for inflation to get to normal levels.

And they aren’t going to pull the punch bowl during that period. That’s bullish.

The Fed is acknowledging they are willing to tolerate an inflation level above 2% for a protracted period of time. (God bless all the debt and Treasury holders out there, the real value of your asset is set to decline further.)

2025 Sell Side Analysts

Here are sell-side estimates of where the S&P lands.

Invariably, Mr. Market doesn’t do what the average analyst expects.

I expect we’ll be on the higher side, after a bumpy Q1.

If you want to determine the direction of the S&P, you can focus on determining the direction of Mag 7.

And most of them are positioned for strong earnings growth. 

The big risk to next year is if we a sticky inflation print in the second half. So far we’re still OK.

Disinflationary trends are in place.

Another datapoint.

Bubbles tend to have some trigger event. What’s the trigger event here outside of an inflation surprise? Or aliens landing in New Jersey, I guess? (Ha)

TRUMP ON TARIFFS

Howard Lutnick is leading Trade Policy and tarrif strategy for trump.

Lutnick said ‘Reciprocity’ is the new principle behind tariffs rather than ‘revenue’.

I have been a vocal critic of Trump’s love affair with tariffs. But, it seems like he’s adjusting in ways that are very good: (i) focusing on reciprocity, and (ii) puting Lutnick in charge rather than tariff hawks floating in the admin.

And reciprocity makes sense!

1. Why does France and the European commission have a 10% tariff on US auto exports?

Fix that. Let GM and Tesla compete in Europe 

Make it easier for American banks to compete. It’s very hard for American banks to compete in the Eurozone.

JP Morgan only entered the UK market a couple of years ago… meanwhile, Barclays has been in the US for how long?  Is that fair?

Ironically, Trump is flipping ‘fair trade’ on its head.

2. Why are American tech firms routinely fined and shackled ad nauseum by the European Commission?

Stop that. 

3. Why is Europe free-riding on American pharma R&D, and then resorting to cheap generics?

Pay for it. 

4. Why are American farmers denied access to EU markets b/c of GMO labels? 

Let consumers choose. 

Tariffs used as a stick to change behavior makes sense. 

Re-focusing policy on opening markets rather than increasing cost of goods sold for domestic firms is the right posture. 

Trump is setting up a highly consequential second term…

Overweight: United States

WSJ Excerpt:

Trump doubled down on his use of tariffs on imports from around the world after he is sworn in as president. “They tax us, we tax them,” Trump said about the use of tariffs.

Howard Lutnick, Trump’s pick for commerce secretary, who is expected to take a leading role on the trade front, noted the administration will embrace reciprocal trade policies. 

“Reciprocity is something that is going to be a key topic for us. How you treat us is how you should expect to be treated,” Lutnick said when asked during the news conference if there is a trade deal to be made with China. 

Though Trump didn’t detail his tariff plans at the press conference, the president-elect has already threatened to impose stiff tariffs on China, Canada, Mexico and other countries.

Mag 7 Embraces Trump

Expect less anti-trust pressure on Mag 7.

You can see that showing up in the results already.

Here’s an image showing our recent Mag 7 rotation call. 

We still believe Mag 7 is well positioned - especially: Nvidia, Meta, Google, and Amazon.

THE TRUMP PUT

Forget the Fed put. 

You’re going to hear the term ‘Trump Put’ in the years ahead. 

Trump has explicitly identified his stock performance with stock market performance. 

(That’s a good thing. Corporate profits, job and income growth, and household wealth are all linked to equities.)

Trump made this connection immediately after the election and his NYSE appearance. 

Datapoints:

1. The Continuing Resolution bill broke down this week at Trump’s request - shaking markets. 

Trump is pressing for a new one immediately. 

He is sensitive to the stock market. 

2. When BTC fell last week, Don Jr stepped in with positive comments to lift the asset. 

He will do that again and again is my guess. 

The Trump family is long digital assets. 

They are issuing tokens on Ethereum. 

I’m pretty sure the new SEC Chair will male peace with that. 

3. Trump chose not to replace Powell. 

He selected Scott Bessent… more I study I believe may be the best Treasury Secretary in decades. (Better than Rubin even.)

All of this means — there will be limits on uncontrolled tariffs and policies that impede growth or engender inflation. 

2025 will be a good year for Mr. Market.

Consumer Spending Resilience

Retail sales +0.7% m/m

Online sales +1.8% m/m, +7.9% y/y

Autos +2.8% m/m, +2% y/y

Consumer spending is strong. And e-commerce growth (E.g., Amazon) is still happening.

Great charts and analysis from Yardeni showing retail sales.

We expect Abercrombie & Fitch (Ticker: ANF) will out-perform many retailers this year due to the componding effect, and success in international markets.

We’re wrong if people favor other brands or if the consumer is weaker than we think.

JOB FINDING RATE DROPS SHARPLY

Interesting chart from Goldman showing a  sharp drop in the job finding rate among Foreign Born workers. 

Every consumer and small biz confidence measure I look at is up since Trump election since then but this one

Labor market wants clarity on ICE policy

If this continues it could setup wage pressure sometime in ‘25

Personally I believe the mass deportation talk is overblown.

ICE will triage, that’s what Trump indicated recently and he is open to stapling Visas to qualified graduates.

Markets

Healthcare

Pharma generics company $TEVA up 18% on Thursday

We wrote about this idea 10 days ago here.

I would be a buyer of Monday morning weakness if we see it across the market.

AI Dependency Dilemma

AI

Open AI 

In April of this year, Nvidia’s CEO Jensen suggested AGI could be 5 years away.

OpenAI released model o3. It’s open to limited testing. It will cost $1,000 per task.

The model is solving problems in mathematics, and crushing the Math Olympiads competition.

Solving math problems at this levels require novel insight. These math problems aren’t turn the crank analytical exercises such as taking the derivative of a sin function. You can load up a table of all possible derivatives and mechanically solve that problem.

These math problems require insight. That’s a marker of intelligence.

It’s an exciting breakthru. 

Would I pay $1,000 for a super brain to run certain tasks. Yes. I would pay $1,000 for a weekly decision where the AI’s sole problem each week is portfolio positioning. That means identifying what changes to make, on the margin, to positions and factors industry weights and market exposure based on all the information we have.

We spend out 2.5 hours each morning reviewing the flood of incoming data. We have good framework for this. But, having an AGI would undoubtedly be better.

The average human has 8 slots for short-term working memory. Some humans can remember a 16 digit credit card number on sight. Those latter humans have an edge in portfolio positioning because you need to hold multiple distinct contradictory ideas in your mind at the same time and then identify what is relevant.

AI has no problem with that kind of task. And AI, in the right environment, can summon history on the fly to arrive at a better decision.

For example, we noticed Friday morning markets were gapping down on the news that the US Government might shutdown.

We researched with AI that last time this happened alongside a hawkish Fed. That was December 2018.

Markets bottomed on X-Mas eve and rallied strongly. Budget wasn’t passed for a month later.

Asking that question, getting that answer, and synthesizing that information allowed to make a better decision than otherwise.

An AI won’t have any problem with this.

At the same time, however, there are challenges and limits to AI impact.

o3 is great and all. 

But there are challenges. 

GPT 5 is delayed. 

It’s clear cashflow generators can fund these investments - and have the data - and will dominate over time. 

The WSJ notes that o1-preview is far superior to doctors on reasoning tasks and it's not even close, according to OpenAI's latest paper.

AI Diagnosis Revolution

Here’s a nice tweet analyzing OpenAI’s o1-preview model:

o1-preview is far superior to doctors on reasoning tasks and it's not even close, according to OpenAI's latest paper.

AI does ~80% vs ~30% on the 143 hard NEJM CPC diagnoses.

It's dangerous now to trust your doctor and NOT consult an AI model.

Here are some actual tasks:

Here's an example case looking at phosphate wasting and elevated FGF23, then proceeded to imaging to localize a potential tumor.

o1-preview suggested testing plan takes a broader, more methodical approach, systematically ruling out other causes of hypophosphatemia.

I have all the respect in the world for doctors, but in many cases their job is basic reasoning over a tremendously large domain-specific knowledge base.

Fortunately, this is exactly what LLMs are really good for.

This means more high quality healthcare for everyone.

h/t Deedy

Digital Assets

This exit timing on Digital Assets was pretty pretty good this Tuesday

I remember thinking ‘If the Fed says something silly tomorrow, I’d regret not sharing this post now and no one will believe me.

A lesson I learned from an earlier Millennium trader and HF manager (Neal Berger):

It’s not wrong to miss the first 30% of a move or even the last 30% of a move. 

In fact, in my view, it’s less risky. 

On this specifically, I thought the move was not yet done,  but the risk reward was not justified. 

I wasn’t trying to optimize the exit. 

The mindset of willing to leave upside on the table paradoxically helps you avoid downside I’ve found and can deliver optimal exits.

What’s competing for Digital Assets right now? Quantum computing stocks.

Momentum assets like Digital Assets compete for attention. There’s a new kid in town - these quantum computing startups.

We believe the vast majority of these quantum bets are a headfake. They don’t make money. They don’t have the capital to fund research.

And Google is not only way ahead…Google can plow more into research without issuing dilutive financing to finance growth.

These quantum computing firms are science projects like biotech trading in the public markets.

Look at their revenue vs their marketcap and you’ll see they are priced more expensive than stocks in the 2021 era.

Back to digital assets.

I’m feeling a bit indecisive here. There was a nice liquidation wick on Thursday. That’s a good entry point.

However, the expectations are that Trump will deliver Valhalla.

And there’s some truth to that longer-term. But, Trump will need the help of Congress.

I had lunch with two insiders in the crypto space. One spent a bunch of time in DC recently.

He shared an observation that many politicians are hooked to the crypto political fundraising drip (Fair Shake PAC).

And that is in their interest to delay and milk this PAC for years to come.

Crypto is the new farming lobby. He doesn’t expect stablecoin regulation in 2025.

The bull case is we will get a very good SEC Chair in Paul Atkins - and that will enable an IPO market to open up, and new protocol framework, and an investor disclosure framework.

My bias is to wait for rock-solid entries such as these liquidation wicks. Wait for fat pitches.

Especially as I see animal spirits as a theme cooling off as we get into the New Year.

Insight of the Week

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