There are more than 5000 data centers in the US. In Germany there are 521 and in China 449, see chart below.
More Data Centers in the US
Still No Signs of a Recession
Jobless claims declined this week, the Atlanta Fed GDP for Q3 currently stands at 2.9%, and the Dallas Fed weekly GDP indicator is currently 2.2%.
The bottom line is that there are still no signs of a US recession, and the US economy is doing just fine with steady growth in daily and weekly data for restaurant bookings, air travel, hotel bookings, credit card data, bank lending, Broadway show attendance, box office grosses, and weekly data for bankruptcy filings trending lower, see our chart book with indicators updated as of August 10.
In short, Fed pricing is wrong, and the market is making the same mistake it made at the beginning of the year.
Portfolio Allocation Views: The Search for Risk Premia
With rates still expected to stay “higher for longer,” risk premia in public equities and public fixed income is narrow. In our view, private markets can offer options, especially in private equity secondaries, large corporate direct lending, asset-backed finance, and other areas.
Key Takeaways
- Even if the Fed embarks on an easing cycle in September—as we now expect—we believe that average interest rates will remain relatively “higher for longer.” If so, we believe that portfolio allocations today should be designed with the expectation of sustained elevated rates in mind. But where can investors find risk premia?
- High levels of concentration and still lofty valuations (despite recent sell-offs) have combined to narrow the risk premium in public equities. Meanwhile, in public fixed income, still tight spreads have made it difficult to find attractive yields at, in our view, reasonable risk levels.
- We believe that private markets can offer an alternative to muted risk premia in public markets.
- Although higher rates pose some challenges to traditional “growth” buyout private equity (especially those not focused on purchase price and, therefore, more dependent on multiple expansion to meet potential return targets), we see attractive risk-adjusted returns in the secondaries markets.
- On private credit, we believe that an expanding and increasingly diverse addressable market can be a source of attractive risk premia, with opportunities in large corporate direct lending, asset-backed finance, and other areas.
- We believe replacing a portion of public equity and fixed-income allocations with private assets has the potential to add sources of attractive risk premia today, diversify portfolios, and enhance risk-adjusted returns over time.
The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.
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Rising Share of Fixed-Rate Mortgages
The rise in the share of fixed-rate mortgages over the past four decades is the reason why the transmission mechanism of monetary policy is weaker today, see chart below.
When interest rates go up, it has a milder impact on the economy as mortgages are locked-in at lower interest rates. But this effect is symmetric. When the Fed starts cutting interest rates in September, lowering interest rates will not trigger a strong boost to housing demand because 95% of mortgage holders are already in mortgages with low interest rates. In addition, a record-high 40% of homeowners don’t have a mortgage, which also contributes to making monetary policy less potent.
The bottom line is that the high share of fixed-rate mortgages makes monetary policy less effective both when the Fed raises interest rates and when the Fed lowers interest rates.
Rising Labor Supply Because of Immigration
The uptrend in immigration continues with a near record-high level of immigrant visas issued every month, see chart below. Examples of immigrant visas include employer-based visas and family-sponsored visas (such as spouses of US citizens). Maybe the reason why the unemployment rate is rising is because the government is gradually working through a Covid-related backlog of visa applications, which increases the labor supply.
Job Cuts Very Low
The source of the rise in the unemployment rate is not job cuts but a rise in labor supply because of rising immigration. That is the reason why the Sahm rule doesn’t work. The Sahm rule was designed for a decline in labor demand, not a rise in immigration.
For more insights, a replay of my Tuesday webcast on the current market volatility and its implications for the Fed, the economy, and the markets is available here.
Default Rates Declining
The soft employment report for July is in sharp contrast to the steady decline in default rates seen in recent months, see chart below.
If the economy were crashing, default rates would be spiking higher, and that is not what the data shows.
Also, join us today for a live discussion hosted by yours truly on what the current market volatility might mean for the Fed, the economy, and the markets. We start at 8:00 am EDT. Register now.
A US Industrial Renaissance Has Started
The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered a new industrial renaissance in AI and energy. Also, US manufacturing capacity is now growing after having declined for many decades, see chart below.
Labor Market Constantly Changing
Research by David Autor from MIT shows that 60% of today’s workers are employed in occupations that didn’t exist in 1940, see chart below.
This is important when discussing what impact AI may have on the labor market.
Slowing, but Still a Soft Landing
The soft July employment report is inconsistent with the hard data for economic activity, see charts below and our chart book. There are no signs of a slowdown in restaurant bookings, TSA air travel data, tax withholdings, retail sales, hotel demand, bank lending, Broadway show attendance, and weekly box office grosses. Combined with GDP in the second quarter coming in at 2.8%, the bottom line is that the current state of the economy can be described as slowing, but still a soft landing.
