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

Episode Summary

Executive Summary: Ahan Menon argues the U.S. economy remains in a business-cycle expansion driven by resilient consumer spending, AI/tech capex, and improving manufacturing, while tariff shocks largely faded. The main near-term risk is labor-market weakness tied to slowing immigration rather than recessionary demand collapse. His portfolio view: stay long equities selectively, avoid U.S. Treasuries, favor some global bonds, and remain constructive on industrial commodities and gold.

Main Topics: Business-cycle assessment: expansion continues (Priority: 5/5): Menon says the economy is still expanding because consumption and business investment remain positive and financial conditions are not tight enough to trigger contraction. AI/technology capex as a growth engine (Priority: 5/5): He argues that a concentrated wave of tech and AI-related investment is disproportionately supporting GDP and profits despite the sector’s relatively small share of employment. Tariffs: initial shock, then fading effects (Priority: 4/5): The discussion revisits why tariffs were expected to be manageable: small trade exposure, temporary confidence effects, and limited pass-through to profits or fixed investment. Labor market weakness driven by immigration slowdown (Priority: 5/5): Menon sees weak payrolls and softer labor growth as a supply-side issue linked to reduced immigration, not a classic demand-led recession. Manufacturing recovery and industrial commodities (Priority: 4/5): Manufacturing had been weak for years, but improved sales, right-sizing, and better order data suggest a possible turn that could help industrial commodities. Asset allocation: expensive U.S. assets, unattractive Treasuries (Priority: 5/5): He prefers equities over bonds, is cautious on U.S. stocks due to valuation, and views U.S. Treasuries as richly priced versus global alternatives. Gold and global diversification (Priority: 4/5): Gold remains supported by ETF flows and diversification demand, while global equities/bonds offer better relative value and diversification than a U.S.-only portfolio.

Key Arguments: The economy remains in an expansion because consumer spending is resilient, business investment is rising modestly, and financial conditions are not sufficiently negative to force a downturn. The business cycle has shifted from manufacturing-led to tech/IP-led dynamics, making AI and information-processing investment a much larger driver of growth and profits than its employment share suggests. Tariffs were unlikely to cause a deep slowdown because imports are a small share of GDP, the confidence shock faded, and business fixed investment recovered quickly. Labor-market weakness is best explained by slower immigration rather than falling demand; that means weaker job growth without necessarily implying a recession. Payroll prints below replacement levels are concerning, but Menon expects labor growth to trend lower rather than collapse, given still-solid business activity. Manufacturing may be bottoming after a multi-year recession-like stretch, helped by right-sizing, steadier sales, and better orders/PMIs. U.S. Treasuries look unattractive because markets keep pricing in too many cuts relative to the still-resilient growth backdrop; the curve remains rich versus global peers. U.S. equities are expensive, but strong earnings growth and the ongoing expansion argue against being aggressively short; the better stance is modestly long but not overexposed. Global bonds, especially in Europe, can offer better yield-curve value than U.S. bonds once FX is hedged, even if the FX carry is a separate trade. Gold is supported by ETF inflows and central-bank demand, while industrial commodities should benefit if manufacturing continues recovering.

Data Points: U.S. business cycle: Expansion - Menon’s one-word characterization of the current cycle. Consumption growth: ~1.8% annualized - Headline growth rate cited for consumer spending after smoothing tariff distortions. 90% of PCE sectors: Expanding - Breadth measure used to argue consumer spending is not recessionary. Labor market benchmark revision: Up by more than 1 million, possibly 2 million - January population benchmark revision to household survey employment data. May payroll gain: 19,000 - Weak nonfarm payroll reading discussed as below replacement level. June payroll gain: 14,000 - Another weak nonfarm payroll reading cited as recession-like. AI/tech capex contribution: ~40 bps - Contribution to GDP growth from AI/information-processing-related spending. Real GDP trend: ~1.5% - Menon’s estimate of current trend growth, used to frame AI capex’s importance. U.S. market pricing: 4-5 cuts over the next 18 months - Fed funds futures pricing that Menon считает excessive relative to growth conditions. SP 500 earnings expectations: ~8% YoY - Current expected earnings growth, with realized growth around 10%. Realized SP 500 earnings growth: ~10% YoY - Actual reported growth referenced as above expectations. U.S. vs Europe bond richness: ~50-100 bps - Approximate yield-curve richness of U.S. bonds relative to European counterparts. Fixed-income volatility: 4%-8% - Typical volatility range cited for bond assets, used to explain FX-hedging importance. Global equities exposure: ~200% at peak - Multi-strategy program’s gross exposure during strong synchronized global beta. Coverage universe: 39 assets across 9 strategies - Prometheus Macro’s expanded multi-asset framework. Manufacturing sector share: 15%-20% of the economy - Used to note manufacturing’s importance despite prior weakness.

Pivotal Quotes: "In one word, an expansion." — Ahan Menon: His direct assessment of the current U.S. business cycle. "What we think that weakness in the labor market is coming from slowing immigration." — Ahan Menon: Core explanation for weak jobs data and labor-market softness. "Bonds are the worst." — Ahan Menon: His blunt view on U.S. Treasuries given rich pricing and limited recession risk.

Implications: Listeners should expect slower but positive growth, not a classic recession. The biggest risks are labor-supply drag and rich bond pricing, while selective equities, industrial commodities, gold, and some global bonds appear better positioned.