Why Bonds Still Suck | Aahan Menon of Prometheus Macro on Immigration’s Impact on Lower Job Numbers, Technology CapEx, Business Expansion, Manufacturing Green Shoots, and More
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Monetary Matters, host Jack Farley sits down with Ahan Menon, founder and CEO of Prometheus Macro, for a deep dive into the current state of the global economy. (01:14) Menon characterizes the current business cycle as an expansion, powered primarily by technology spending and intellectual property investment rather than traditional manufacturing cycles. Despite weak labor market readings and concerns about tariffs, (02:31) he argues that the economy remains in a stable expansion phase, supported by resilient consumer spending and robust business investment, particularly in AI-related capital expenditure.
- Main Theme: The economy is in a business cycle expansion driven by technology investment and consumer resilience, despite labor market challenges stemming from immigration policy changes rather than traditional cyclical weakness.
Speakers
Jack Farley
Host of Monetary Matters, Jack Farley brings deep financial markets expertise to his podcast, regularly interviewing top macro analysts and portfolio managers. His show focuses on delivering actionable insights for sophisticated investors navigating complex market environments.
Ahan Menon
Founder and CEO of Prometheus Macro, Ahan Menon is described as "a true quants quant" who serves some of the biggest and most sophisticated hedge funds and investors in the world. His quantitative approach to macroeconomic analysis has made him a sought-after voice for institutional clients seeking systematic investment strategies across global markets.
Key Takeaways
The Business Cycle Has Fundamentally Shifted from Manufacturing to Technology
Menon explains that the traditional business cycle dominated by manufacturing and industrial activity has evolved significantly. (02:23) Over the past 60-80 years, intellectual property and information investment have become central to how businesses invest, creating much more stable investment patterns. This technology-driven spending, both in investment and consumption, now serves as the primary support for the current business cycle expansion, making it less volatile than historical manufacturing-dominated cycles.
Labor Market Weakness is Policy-Induced, Not Cyclical
Despite concerning employment data showing only 19,000 jobs created in May and 14,000 in June, (26:18) Menon argues this weakness stems from slowing immigration rather than traditional business cycle contraction. He breaks down employment growth into three mathematical components: population growth, participation growth, and changes in unemployment rates. The current weakness comes from reduced foreign worker inflows due to policy changes, not from companies laying off workers due to compressed profits - the typical recession pattern.
Tariffs Won't Significantly Impact the Economy
Through multi-step analysis, Menon's team treated tariffs as an inflation shock and found the impact would be well-distributed between imports and exports. (13:16) More importantly, the confidence effects that initially spooked businesses reversed within 2-3 months, with business fixed investment actually turning upward rather than contracting. The direct impact on corporate profits from tariffs was found to be "minuscule over time," making tariffs unlikely to trigger meaningful economic weakness.
AI Capital Expenditure is Driving Disproportionate Economic Growth
While intellectual property investment appears modest at under 50 basis points of GDP in real terms, (06:38) Menon clarifies this represents about 30% of total GDP growth when you consider the headline growth rate of 1.4%. This sector is expanding at an extremely rapid rate and contributing to growth in a way that's "totally disproportionate to its size," consistent with the massive AI-related capital expenditure numbers being reported by major technology companies.
US Assets Are Expensive But Supported by Earnings Growth
Both US stocks and bonds are significantly overvalued compared to global alternatives, with European bonds offering 50-100 basis points better value on an FX-hedged basis. (47:43) However, US equities remain attractive because they're backed by actual earnings growth of around 8-10% year-over-year. The key insight is that while bonds offer fixed returns making them purely a valuation play, equities have the earnings growth to potentially justify their premium valuations, though diversification across global markets remains prudent.
Statistics & Facts
- Consumer spending breadth shows about 90-95% of sectors expanding, which is "entirely inconsistent with any type of material slowing" according to Menon. (11:23) This compares to typical weak economies where 40% contract and 60% expand.
- Foreign-born workers have accounted for a very large percentage of both population growth and employment rate growth from 2023 to now, but both metrics are now contracting due to policy changes. (23:43)
- Current S&P 500 earnings expectations are up about 8% year-over-year, with realized numbers around 10%, significantly beating initial expectations of around 5%. (50:23)
