JD Straight Up - 16Feb26 - Lies, Damn Lies, and Statistics

Lies, Damn Lies, and Statistics

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 6836 – down 2% from 6972 two weeks ago

VIX at 21 – up 24% from 17 two weeks ago

10yr Treasury yielding 4.06% (down 4% from 4.23% two weeks ago)

Agg (US Aggregate Bond Index) at 100.99 – up 1% from 99.68 two weeks ago

Gold at 4923 per oz (up 4% from 4726 two weeks ago)

Silver at 75.55 per ounce (down 4% from 78.79 two weeks ago)

Crude Oil (WTI) at 63 per barrel (up 1% from 62 two weeks ago)

Bitcoin at 69k (down 11% from 79k two weeks ago) - down 40% from 115k in Oct

JPM shares at 303 (down 1% from 306 two weeks ago)

Deutsche Bank shares at 35.28 (down 11% from 39.62 two weeks ago)

Truist shares at 51.90 (down 1% from 52.43 two weeks ago)

Blackstone shares at 129.86 (down 8% from 141.51 two weeks ago) - down 30% from 184 in Sept

Magnificent 7 Index at 393 (down 8% from 426 two weeks ago)

US unemployment: at 227,000 in latest claims – up 9% from 209,000 two weeks ago

EUR at 1.19 USD (up 1% from 1.18 two weeks ago) - USD declined 16% vs EUR in LTM

GBP at 1.37 USD (flat from 1.36 two weeks ago)

Macro Environment

US inflation reportedly declined to 2.4% driven by decreases in cost of shelter, food, and gas while US unemployment declined to 4.3%.  EU inflation is expected to achieve its 2% target while unemployment continues at 6%.  War persists in Ukraine.  Ceasefire continues in Gaza.  US threatens Iran and positions aircraft carriers in the Arabian Sea.  Markets respond to the potential of transformational disruption in software and other service businesses by AI.

Macro View

For decades global investors smirked when reading the print for Chinese economic statistics.  There was a belief that in a managed economy the statistics were also managed akin to GE in its golden era under Welch when it regularly beat analyst estimates regardless of how ambitious the consensus estimates were.  It came to be understood and then relied on that magic could be applied to ensure the right outcome.  Some revenue would be pushed to the right quarter, some write-offs would be sized and timed optimally, and statistics could be manufactured the same way equipment or buildings could.  Many investors took solace in this consistent outperformance.  Then again, many Madoff investors did for a while too.  Eventually, investors discredited the numbers and failed to believe.  The lack of belief negatively impacted the cost of capital in both cases.

Relevance

There is an undercurrent in the market following the prolonged US government shutdown, a period of a lack of statistics, and the implementation of new leadership that the economic statistics coming out of the US are less than credible.  There has always been a jockeying for definitions on employment, inflation, productivity and other key statistics that drive interest rates.  Some of this adjustment is required as economies evolve from agriculture to manufacturing to service and move to digital.  Some of it is arguably a better reflection of current and future direction of travel for the economy.  Regardless, there is the potential to distort.  The statistics specified in the Macro Environment section above are chosen specifically for their impact on rates and their potential to impact asset prices.  If the inputs to the statistics change or there is an ability to smooth them like China or GE, do the models that incorporate them need to change also?  The ever important risk-free rate is inevitably impacted and hence a critical input to most models.

Head Scratchers

1 - Which businesses will actually be endangered, damaged or destroyed by AI versus those that will be saved, improved, and transformed?  Is it possible to tell yet in this shoot first and ask questions later environment?  I can create digital products with Claude Opus 4.6 with minimal coding experience and without a team of developers behind me.  Does this endanger all existing digital products?  Or does it allow products that already have a brand, revenue stream, and client base to respond more rapidly to client needs and aspirations in order to build or deepen a moat to keep me out?

2 - Is there really a risk-free rate?  Is it oxymoronic or perhaps just moronic to apply that term to the US Treasury?

Drulard Family Capital Fund

Drulard Family Charitable Fund

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#36 - 16Feb26