The Variant Perception Podcast

Where are we now? VP's 2025 Top 10 Surprises

Inspired by Byron Wien, we listed VP's 10 surprises as part of our 2025 Themes. We followed his definition of a “surprise” as an event that the average investor would assign less than a 33% probability, but which we believed were “Probable,” having a 50%+ likelihood.The below AI summary provides the key takeaways that can be read in less than 5 minutes.AI Summary - Evaluating VP's 10 surprises for 2025#1 – Trump's tariff and migrant policies are not as inflationary as feared [00:01:05]Contrary to early concerns, tariffs and immigration restrictions have not forced the Fed into hiking. Inflation has risen, but not in a way that demands aggressive tightening. Instead, sticky inflation limits the Fed's ability to cut. Labor market impacts from immigration limits and deportations are still playing out, especially in construction and agriculture.#2 – US growth neither collapses nor surges, supported by consumption [00:04:10]Growth has been stable, but risks are rising. The fiscal impulse has plateaued, and manufacturing capex has weakened. Services have held up, but forward-looking indicators show rising downside risks to activity. Consumption remains resilient, though softening—so far, no cliff.#3 – Powell does nothing after Jan 2025; no cuts, no hikes [00:11:58]Initially seen as a hold scenario, Powell now has scope to cut if growth slows. The market is pricing in about three cuts, but this probably reflects a weighted probability of 1-2 cuts (without recession) or more than 4 cuts (with recession). Rate hikes are almost unthinkable due to political and fiscal constraints; even in a sharp rebound scenario, yield curve control would likely emerge instead.#4 – U.S. 10y yields never break 5% thanks to “Bessent put” and foreign buyers [00:16:46]Despite market volatility and bear steepening, 10-year Treasury yields have held below the key 5% level. The administration appears committed to ensuring yields don't breach this level. Policy intervention - either direct or via tools like SLR reform - is expected to keep long-end rates contained. This is a high-conviction view for us, given the importance of the bond market.#5 – US small caps continue to underperform [00:21:34]Despite optimism post-election, small caps have lagged due to poor index quality, interest rate sensitivity, and weak fundamentals. The index remains vulnerable to high funding costs and lacks appeal outside of single stocks related to reshoring or possibly regional banks. Tactical rallies may occur, but the broader underperformance trend remains intact.#6 – Trump and Xi make a deal [00:25:30]While rhetoric escalated sharply, both sides have signaled openness to talks. A shallow, symbolic deal is likely—low-quality but headline-friendly. Structural tensions remain, but neither side wants to escalate beyond manageable limits. Economic pain on both sides will push toward de-escalation later in the year. We believe peak escalation has passed, and the two parties will gradually move toward some form of a agreement.#7 – Euro breaks parity as Germany “brakes” its economy [00:34:32]This was a clear miss for us. German politics unexpectedly unified in response to Trump's early policies and managed to pass a massive fiscal expansion (~€1 trillion), loosening the debt brake. Liberation Day also unleashed a repatriation wave that weakened the dollar and boosted the euro. While economic fundamentals remain shaky, capital flows have overridden them. The euro might give back some of its gain on a tactical basis, but flows are a structural tailwind from here.#8 – OPEC Loses More Members as Oil Falls [00:43:49]The oil price has fallen since the start of the year, with Kazakhstan exceeding quotas and OPEC adjusting “voluntary” cuts. While no formal exits have occurred, cohesion in the cartel is weakening. The oil story is both supply- and demand-driven, with supply rising and growth headwinds reinforcing downside for demand. We still prefer energy equities over crude itself. So far, the surprise remains valid, with more to play out.#9 – Gold fails to make new highs, underperforms 60-40 [00:41:43]Liberation Day triggered a shift in global reserve preferences, with gold benefiting from reduced trust in Treasuries. Emerging market central banks, esp. those wary of sanctions, may now see gold as their primary neutral reserve asset. Gold is now seen as a structural allocation, and we think tactical sell-offs are opportunities to add exposure.#10 – Capital Cycle: buy China tech, luxury goods as contrarian play [00:46:26]The call began well with a rally in Q1, but Liberation Day and the intensification of trade tensions prompted a reassessment. Chinese equities now face structural headwinds, especially for international investors. Luxury goods remain appealing long-term due to their IP and Lindy effect characteristics, but timing is poor amid global growth concerns and geopolitical risk. Both themes remain valid from a capital cycle view, but we are shifting our attention towards LatAm and US single stocks that may benefit from reshoring and other key themes that have emerged since Liberation Day. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit blog.variantperception.com

Making CapEx Great Again

This post is an excerpt from a video originally shared with VP clients on November 7, 2024. Link to original video here. To gain access to more of our research, contact us here.Speakers: Tian Yang (CEO & Head of Research) and Jonathan Petersen (Chief Markets Economist)Trump's decisive victory (foreseen by the “Keys to the White House”) reinforces structural trends: The Republican sweep should boost nearshoring, domestic CapEx, and FDI inflows into the U.S., accelerating ongoing megatrends such as reshoring, manufacturing, and supply chain restructuring.Don't expect dramatic change in Fed's policy or surge in UST yields: Powell's future remains uncertain, but the Fed is likely to proceed with rate cuts for the rest of 2024, before pausing and becoming data dependent as inflation stabilizes. Bond yields may rise further in the near term, but fears of a "Liz Truss moment" in the US bond market seem overblown.Strong dollar with regional divergences: The dollar is expected to stay strong, but Asian currencies may have limited downside due to already weak levels, while structural euro weakness could persist for years to restore competitiveness. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit blog.variantperception.com

Big Government, Big Business, Big Labor

This post is an excerpt from a video originally shared with VP clients on October 11, 2024. Link to original video here. To gain access to more of our research, contact us here.* Speakers: Tian Yang (CEO & Head of Research) and Scott Freeman (Director of Asset Allocation)* The likely holding pattern until the US election makes it a good time to revisit our key structural (2-3y+) themes and their investment implications.* Fiscal deficits and greater government involvement will be a feature, not a bug, in the coming decades as moral obligations (e.g. social security, national security) have locked us into heavy future spending.* Industrial policies are mostly motivated by geopolitics and strategic competition. We are in a world that prioritizes security over efficiency. As geopolitical tensions rise, governments will continue to provide a relatively price-intensive source of demand for companies that offer the materials, tools, and infrastructure needed to support escalating geopolitical competition.* US housing has seen an extended period of underbuilding, creating a structural supply-demand mismatch specifically in entry-level single-family housing in the US.* Investment implications: long real assets, gold, energy, TIPS, US homebuilders. Avoid US nominal bonds.  This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit blog.variantperception.com

The How, What, and Why of VP's Asset Allocation Engine

This video was originally shared with VP clients on September 23, 2024. Link to original video here. To gain access to more of our research, contact us here.Speakers: Tian Yang (CEO & Head of Research) and Scott Freeman (Director of Asset Allocation)There are 2 key decisions to get right for asset allocation:* How much to allocate to risk assets (stock vs. bond vs. cash allocation).* How to gain exposure to outperforming sectors while avoiding underperforming ones.We address these two problems in a repeatable way, using the best frameworks we have developed over the 15 year history of Variant Perception.* Our leading indicators help us understand the business cycle.* Our capital cycle models help us understand long-term profitability trends across industries.* Our crowding indicators help us understand market positioning and herding behavior.These 3 key models can be synthesized into modular and customizable portfolios that:* Maximize upside capture & minimize downside capture vs. standard benchmarks.* Do NOT take undue risk with leverage or hero calls.* Have reasonable trading turnover. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit blog.variantperception.com

3 Key Frameworks - VP August 2024 Asset Allocation Call

This post is an excerpt from our August 28, 2024 market discussion video to VP clients. The full length, original video can be viewed here.* We discuss our recent thematic report: Asset Allocation Using LEIs, Capital Cycle and Crowding.* The VP Asset Allocation Engine uses a) LEIs to quantify the current macro outlook and make high level asset allocation decisions between equities and bonds, and b) capital cycle and crowding models to make more granular selection decisions across sectors within the equity allocation.* Our asset allocation process has been designed to be modular, so that the macro regime decision can be viewed separately from the equity sector allocation decision. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit blog.variantperception.com