UBS' Jason Draho - Another Roaring '20s for the US? | #538

Episode Summary

Executive Summary: Jason Drejo argues the U.S. is entering a possible “Roaring 20s” regime driven by strong household balance sheets, fiscal stimulus, business formation, AI-led capex, and a likely return to higher nominal GDP growth. He sees inflation easing gradually without recession, the Fed cutting cautiously, equities supported but not cheap, and diversification shifting toward commodities, gold, high-quality bonds, and real assets.

Main Topics: Why the U.S. economy has surprised to the upside: Drejo says investors misread pandemic distortions as deterioration, over-relied on pre-pandemic indicators, and underestimated household balance-sheet strength after massive fiscal transfers. The 'Roaring 20s' / 1990s analogy: He frames the current era as potentially similar to the mid-1990s: strong growth, disinflation, rising productivity, and a technology-driven investment boom rather than stagflation. Mega trends: capex, AI, energy transition, security, deglobalization: He views AI and capital deepening as the most convincing positive-supply forces, while energy transition and deglobalization are more ambiguous or less productivity-enhancing. Inflation and Fed policy: He expects inflation to trend lower but unevenly, with the Fed likely delivering gradual cuts rather than forcing a recession; policy is viewed as risk-management and supportive of a hotter economy. Asset allocation implications: Drejo is constructive on equities and high-quality bonds in the near term, but says the long-run regime is less favorable for the traditional 60/40 stock-bond mix and more supportive of commodities, gold, and real assets. Valuations, speculation, and market structure: He thinks equities can still deliver solid high-single-digit returns, but today’s starting valuations limit upside versus the 1990s; unlike the late-90s bubble, IPO and M&A froth remain muted. What could happen in 2025 and beyond: Near-term 2024 outcomes are relatively bounded, but the bigger debate is what policy and growth look like in 2025, which could reopen a wide range of economic and market scenarios.

Key Arguments: Pandemic-era data distorted traditional recession signals; normalization in goods/services was mistaken for deterioration. Households exited COVID with unusually strong balance sheets because government transfers effectively injected trillions into the private sector. Low mortgage rates plus higher cash yields created a favorable household arbitrage that strengthened consumption. The U.S. may have shifted out of the 2010s secular-stagnation regime into a more investment-led economy. Business formation rose structurally after 2020, signaling stronger dynamism and risk-taking. A Roaring 20s scenario requires a positive supply shock; AI and capex are the best candidates because labor shortages force firms to substitute capital for labor. Nominal GDP growth around 5% to 6% would be consistent with a strong U.S. economy and help stabilize fiscal dynamics. Inflation should drift lower, but the path will be bumpy due to lagged effects like auto insurance and shelter. The Fed is likely to favor gradual cuts and avoid recession, echoing a mid-1990s-style soft landing. The traditional bond/equity negative correlation may be less reliable in a world where inflation matters more, making commodities and other hedges more valuable. Equities still look attractive, but with elevated starting valuations, returns are more likely high-single-digit than 1990s-style extraordinary gains. Gold’s strength may reflect a structural shift toward higher nominal growth/inflation and central-bank buying rather than pure speculation. Deglobalization is overstated; the more realistic trend is regionalization and supply-chain reallocation rather than a true reversal of globalization.

Data Points: Cropland lost to urbanization: 4.8 acres per minute - Used in the farmland ad to highlight scarcity of productive land. Farmland platform minimum investment: $15,000 - AcreTrader’s minimum for passive farmland access. Assets overseen by Jason Drejo: Over $1 trillion - He oversees strategic and tactical asset allocation recommendations at UBS Global Wealth Management. Consensus recession timing in 2023: By the middle of the year - Drejo says the market expected recession early in 2023, especially after SVB failed. Federal government transfer to private sector: About $4 trillion - His estimate of pandemic fiscal support that strengthened household balance sheets. Mortgages locked in by households: Sub-4% - He cites low fixed mortgage rates as a key reason consumers remained resilient. Cash yields mentioned: 5.5% - Households could earn high cash returns while holding low-rate long-term debt. New business formation trend: Around 450,000 per month - Post-2020 monthly new-firm formation, roughly steady for 3.5 years. Pre-pandemic new business formation: Around 300,000 per month - Baseline before the pandemic, indicating a step-up of roughly 50%. Meta/Alphabet/Microsoft AI capex: $140 billion this year - Example of AI-related capital spending supporting the capex-boom thesis. AI capex growth rate: 48% increase vs. last year - Year-over-year growth in the major platforms’ spending plans. Nominal GDP growth in 2020: Over 10% - Used to illustrate post-pandemic economic overheating. Nominal GDP growth in 2022: Over 9% - Supports the view that nominal growth has been running above 2010s norms. Nominal GDP growth last year: A little over 6% - Referenced as evidence of a stronger growth regime. Expected nominal GDP growth this year: 5% to 6% range - His base case for a Roaring 20s-like economy. 2010s average nominal GDP growth: Just over 4% - Contrasted with the stronger 2020s/1990s-style nominal growth regime. 1990s average nominal GDP growth: 5.85% - Benchmark for his Roaring 20s analogy. 2000s nominal GDP growth: About 5.3% - Another comparison point for a higher-nominal-growth environment. Stock market forward P/E: About 21x - Current valuation level limiting upside versus the mid-1990s. Fed cuts expected: 2 cuts starting in September - UBS house view on the likely policy path. Federal deficit: Over 6% of GDP - Supports the argument that nominal growth needs to stay elevated. Auto insurance inflation: 22% - Example of a lingering, idiosyncratic inflation surge in Q1. Treasury yield peak used for duration trade: 10-year at 5% - Presented as an asymmetric opportunity to extend duration. Mid-90s Fed tightening: 300 basis points in 12 months - Historical precedent for a soft-landing disinflation cycle. Mid-90s rate cuts: 3 cuts of 25 basis points - Part of the Fed playbook Drejo thinks could rhyme with today. Gold’s implied fair value under old rate relation: $1,600-$1,700 - He says the old 10-year real rate relationship would suggest a much lower gold price than current levels. IPO boom in 1999: ~70% average first-day return - Illustrates the degree of late-cycle speculative excess that is absent today. IPO boom in 2000: ~50% average first-day return - Additional evidence of prior bubble conditions. Tactical risk budget: 10 percentage points deviation vs benchmark - He describes how his team manages active risk around long-term allocations.

Pivotal Quotes: "people were misinterpreting normalization for deterioration" — Jason Drejo: Explains why 2023 recession fears were driven by distorted pandemic-era data. "the federal government wrote about a $4 trillion check to the private sector" — Jason Drejo: Describes the fiscal boost that left households in unusually strong financial condition. "productivity is the cure-all for all economic ills" — Jason Drejo: Summarizes why AI and capex-led productivity gains are central to his bullish macro thesis.

Implications: If Drejo is right, investors should expect stronger nominal growth, persistent but manageable inflation, and a less reliable 60/40 bond hedge. Portfolios may need more exposure to equities, commodities, gold, real assets, and selective duration.