The Lopsided Expansion | Aahan Menon on Why Long-Term Forecasts Don’t Make Money, And The Growing Divergence Between AI CapEx And Labor Market
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Podcast Summary
This episode features Aahan Menon, founder of Prometheus Macro, who explains a significant shift in his positioning from "max bullish" to neutral or even short on equities and commodities. (01:31) Menon reveals concerning economic divergences: while GDP appears strong due to AI capital expenditure and concentrated consumption, underlying labor markets are weakening substantially. (03:17) He challenges conventional macro beliefs by presenting data showing that long-term forecasting and tracking "rates of change" generates negligible or negative alpha, emphasizing that professional money management value lies in managing the path to forecasts rather than just making predictions. (14:08)
- Main theme: The unsustainability of current economic growth driven by AI CapEx versus weakening labor fundamentals, and why traditional macro forecasting approaches fail to generate meaningful returns
Speakers
Aahan Menon
Founder of Prometheus Macro and a trusted "quant's quant" for sophisticated hedge funds around the world. Menon works with some of the biggest and most sophisticated institutional clients globally, providing systematic macro strategies that trade 49 different global markets across equities, bonds, and commodities. His institutional multi-strategy program has achieved exceptional risk-adjusted returns with minimal drawdowns.
Jack Farley
Host of Monetary Matters podcast, conducting in-depth interviews with leading macro strategists and financial professionals. Farley provides a platform for sophisticated macro discussions and has developed partnerships with top research providers in the institutional space.
Key Takeaways
Economic Circularity Problem Makes AI CapEx Unsustainable
The economy operates as a circular flow where AI capital expenditure must eventually transition into consumer spending to be sustainable. (06:10) However, weakening labor markets mean people lack the wages necessary to drive consumption growth. Menon explains that while AI CapEx initially funded by excess cash is now transitioning to debt financing, creating real constraints on its continuation. This creates a fundamental mismatch where investment growth cannot sustainably occur without corresponding employment and wage growth to support the circular economic flow.
Perfect Long-Term Forecasting Provides Minimal Trading Alpha
Even with perfect knowledge of asset prices one year forward, investors would not significantly outperform buy-and-hold strategies due to path dependency. (16:24) Menon's research shows that managing daily, weekly, and monthly volatility matters more than long-term directional accuracy. Professional money managers succeed by adjusting positions relative to expected paths rather than making long-term calls and holding them. The key insight is that you must successfully navigate short-term price action to reach any long-term forecast.
Rate of Change Analysis Is Overrated and Ineffective
Despite popular belief that "macro is all about rate of change," Menon's analysis reveals this approach has minimal predictive value for asset prices. (27:29) His backtesting shows that perfect prediction of GDP growth rate changes yields extremely poor Sharpe ratios compared to buy-and-hold strategies. What matters for asset prices is beating growth expectations that are already priced into markets, not simply predicting whether growth rates will accelerate or decelerate from current levels.
High-Frequency Economic Nowcasting Generates More Alpha Than Forecasting
Superior returns come from understanding current economic conditions with extreme granularity rather than making long-term predictions. (34:10) Menon emphasizes finding periods where current economic reality isn't properly reflected in market pricing due to positioning dislocations or volatility events. The Liberation Day example illustrates how having an accurate read on immediate economic strength while markets panicked created profitable opportunities for those positioned correctly.
Systematic Diversification Across Independent Signals Creates Sustainable Edge
Professional alpha generation requires building multiple independent strategies across different asset classes rather than relying on single macro views. (41:11) Menon's approach involves systematizing unique drivers for each market - from energy term structure dynamics to equity mean reversion characteristics to bond market differentials. When aggregated, these independent signals create comprehensive macro views with higher information value and better risk-adjusted returns than traditional growth/inflation-based macro strategies.
Statistics & Facts
- Menon's institutional multi-strategy program trades 49 different global markets across stocks, bonds, and commodities, with 2024 performance showing approximately 1.6 Sharpe ratio. (53:13)
- The top 25% of income households contribute approximately 70% of total consumption spending in the current economic environment. (04:04)
- Almost all current earnings growth at the S&P 500 level is concentrated in tech and tech-adjacent companies, with earnings expectations growing at 10-12% almost entirely from this sector. (67:11)
