Jacob Miller reflects on the macro forces that will drive divergence in 2026
Nick Gerace:
Jake, anytime you want to take a look forward in terms of developing firm outlook and prognosticating on the future, I think it's really healthy to take a look in the rear view, revisit some of the outlook from last year, some of the themes that we thought would prevail in 2025. Just take a sanity check on the way things played out, reassess what we thought would happen. I mean, Jake, you primarily wrote about four different themes or trends that we expected to see play out in '25. I'll start with exit environment. We thought capital markets would reasonably open up each start to see more distributions from PE and venture-backed companies, whether it be through IPO or other means. What have we seen play out there? I think high level, we've seen some more liquidity but fits and spurts, so I'll turn it to you just curious what we saw and how you grade our assessment that capital markets would open up a little bit.
Jacob Miller:
Yeah, I would give it a B minus if we're grading, but it's because we got a little bit too good of a grade in another section. And so one of the other big forces we were talking about was trade and tariffs. We were talking about this before liberation day and massive bilateral tariffs were announced. That shocked the market obviously fell pretty significantly. Bond yields adjusted. There's been recovery since then, but really shuttered doors for about a quarter as people tried to integrate what that level of tariffs and the international response would mean for capital markets. There have been a few notable IPOs of the year. We got Chime, which is down Circle, which I believe is down. We can edit that later if it's not. There was core Weave which had a big pop but has come under some pressure more recently and Figma, which similarly had a lot of pent-up demand but has kind of erased those gains and obviously, there've been ones outside of large venture IPOs, but not I think the year that people were expecting this to become. In terms of high profile, many and well performing IPOs, the mergers and acquisition market has heated up a bit less pressure from the FTC as well as relatively supportive conditions in the back half of the year have led to some higher profile acquisitions. In fact the largest private equity acquisition of all time with games. So yeah, about a B where because of the tariff response, a lot of plans got readjusted, but some green shoots in the back half of the year, particularly in the acquisition space.
Nick Gerace:
EA is a name close to my heart as I am probably the best Madden player in the private markets RA ecosystem. Moving on to the next topic within the 2025 outlook is just disruptions to supply chains. Onshoring impact of the idea when we wrote about it, of tariffs coming in 25, Jake, something tells me you'll probably grade yourself better than a B minus on this one, but where did we see this play out? Any surprises or did tariff and trade policy fall in line with expectations here?
Jacob Miller:
I'd say, yeah, we got a grade on this, but maybe it wasn't the hardest assignment. He sort of said what he was going to do and did it just maybe a bit more aggressively and a little less thoughtfully than might've been anticipated with the original Liberation Day announcements. A few things that have materialized as part of that that are interesting. One, I think equity markets have proven more resilient to that than expected. There are moving pieces to that of we are still not fully through inventory buildup in advance of tariffs, and so you don't totally know the impact until you've run out of the inventory stocked up at lower prices and that hasn't quite flowed all the way through the consumer yet. So to date, less pain felt than anticipated, but likely more to come there though of course many bilateral agreements have eased from the liberation days highs.
The second is I think what is now more of a self-sustaining flywheel around domestic build out of manufacturing capacity, especially in chips and that being seen as sort of a national security issue as well as a industry we want actively on shore now the methods by which you arrive there could probably be a bit more scalpel than the hammer that they were, but you're seeing pretty self-sustaining investment in chip production capacity and a bunch of associated industries to go with that. You need logistics for that. You need a lot of construction, you need a lot of energy and so a lot of building in core infrastructure, manufacturing and high tech and energy to support that as a result of the trade war and also just a national agenda to reshore a lot of that capacity.
Nick Gerace:
Great. Super helpful. I want to just keep us moving here. I think another thing that we wrote about heading into 25, we'll talk more about in this session here in terms of 26, but you wrote about the big impact of boring AI and just want to talk about where we're starting to see a year later the implementation of the technology to help make what we would call more boring businesses, more efficient. How have we seen that play out? Are we starting to see productivity gains within ai?
Jacob Miller:
So the short answer is yes, but the more complete answer is you wouldn't really expect to see the lion's share of that for quite some time. So we wrote about the AI cycle and general investment cycles and there's two ways to think about this. Where is money going right now being invested to lead to these gains and how is that having early success? And then how long do you expect it to actually penetrate a full industry? And so from an investment perspective, we are already seeing companies that are employing agents to do middle and back office processing for credit unions to work through hospital billing claims and other insurance claims. A lot of these really deep vertical processes in legacy industries, but those are early adopters of that technology. And so if you look industry-wide, that productivity gain is probably not going to be massive, but if you look at specific players adopting it more quickly, they are able to cut costs pretty significantly upwards of 70% because these waves take years to play out.
Our core thesis around AI haven't changed that much in 12 month period. I think that makes sense. This is not a one and done thing similar to IT adoption in the eighties and nineties and cloud adoption in 2010s. It's a process that takes time, not just takes time to implement, but takes time to convince and takes time for penetration to really flow across the entire economy. The other piece of this is thinking about the impact of that spending and CapEx has on the overall economy. We'll talk more about that later, but we are starting to see two things. One individual examples of how AI is driving company level performance, and two, how spending on AI is driving growth.
Nick Gerace:
Great. Just one more thing to cover as it relates to the look in the rear view. Jake wrote about an expectation around tightening spreads in private credit for 2025. Now that we're at year end have had some time for that to play out. How do you think about that market? What have we seen this year that's been notable and how do you assess where our view was last year relative to how we saw the environment play out?
Jacob Miller:
Yeah, so I'd give us a minus B plus here. Some of the regulatory relief for banks and lifting and Basel three requirements took I think longer than expected and is expected for next year now. And so you face less competition from banks coming in than anticipated though that is coming pretty quickly here. There have been a few cracks. There have been some big stories about fraudulent assets, backing loans, some larger scale defaults that hasn't pushed spreads materially up on the private side, which is I say a little surprising and I think there might be more pain in store there if defaults continue to rise into the late cycle. I think spreads not rising relative to the tariff pressure and increase in defaults is pretty telling just so much capital chasing this space, only so many loans that can be written and it's a space we continue to be relatively enamored by the large loan market.
Nick Gerace:
Looking forward, Jake, you and the team have developed a view on the macro backdrop here and maybe before we dive into some of the more specific nuances of the way we view the world, maybe just at a 30,000 foot view, you talk a little bit about entering a high pressure system, set the stage for where we stand today and the dominant factors at play before we get into how we think things will play out in the next year.
Jacob Miller:
We said last year the 2025 was going to be an interesting year. Interesting is not usually an investor's best friends and I think unfortunately that turned out to be the case. We had some pretty wild swings ending well as of November 25th in a relatively fine space across markets, but a lot of heartburn along the way. That general template seems set to repeat here. And so what I mean in the high pressure system is you have macro mattering more than average and you're in normal mid cycle growth. Plenty of capacity left rates with room to rise, not seeing defaults. Macro can go on the back burner. You can be much more thematic in your investing around terms of cycles or what could potentially be terms of cycles. Macro starts matter a lot more. Large top-down forces can end up having an outsize impact on the economy versus sort of a bottom up view. I think that trend is continuing, but not all forces point the same direction, which is what leads to the high pressure.
And so you have a lot of corporate CapEx and R&D coming online, trillion dollars plus by the end of the next decade and a lot of that being borrowed and spent today to build that manufacturing capacity to build that AI data centers energy. You have fiscal stimulus in the form of tax cuts and spending programs. It's also very growthy and you don't usually see fiscal spending like this when growth is relatively high and unemployment is relatively low. You have deregulation in the pipe which should continue to expand available credit and potentially lower spreads and boost borrowing and spending. But you do have this tariff hangover coming with inventories being drawn down and potential inflationary pressure and just kind of spending constraints hitting the consumer today you got a very negative report on consumer expectations and so how these things net and also given the political pressure, will the Fed be able to ease soon enough and in a large enough way if necessary given the inflation pressure and the general sense that we're sort of at 2% is the lower limit, not the upper limit now leaves us in a precarious situation. The growth side could win, but it could win in a way that causes inflation and potentially a positive nominal growth low to negative real growth picture.
On the other hand, the Fed could not ease the money from banks, could not materialize and defaults could pick up and that could kick into consumer confidence, decrease spending and not be able to overcome the increase in fiscal and business fixed expenditure. And so we are trying to position ourselves for a wide range of outcomes here and also acknowledging that those forces are likely to pick winners and losers sort of inherently fiscal spending doesn't flow everywhere in the economy it's spent in the programs that are selected to be spent on corporate CapEx is not across the board. We're talking largely about energy and technology right now and industries that they will pay to complete that CapEx. And so it's pretty important to go a level down and look at those idiosyncratic factors and the deals, companies and mechanics that we're seeing with our finger on the pulse of the market and how that is evolving quite rapidly.
Nick Gerace:
Awesome. Maybe now we can just spend some time diving into some of the more specific themes. You've kind of hit on a lot of this stuff at a high level, but obviously the AI CapEx cycle fueling so much of the growth today we're projecting US AI and semiconductor total CapEx will reach 120, 140 billion in 2026 alone. What is this kind of fuel to the existing economic fire provide? What are the risks but also what are the key things to be aware of as you create a macro outlook and a view on the economy from here?
Jacob Miller:
Corporate CapEx doesn't tend to be a huge portion of GDP overall, but it's highly growthy. You're talking about companies borrowing, you're creating money out of thin air to build productive capacity to build space, to build factories and power plants that you have to hire people to build those. You then have to hire other people to run them. And so it's very pro-growth behavior versus consumer spending is certainly good for growth, but it has less of a multiplier effect. There's a ton of the announced plans, they go out a decade, but again over a trillion dollars, our best read is over the next 12 months that could be a 55 basis point change in GDP, which again for business, fixed investment is a very large change and could offset a lot of the pain from rising tariffs at the macro level. And that's the important part of some people will earn those incomes, those people will feel richer, they'll spend more, not everyone will, but everyone will feel the costs of rising goods, prices rising import prices. And so how those two pieces net of how good are things for the people who experienced the boom versus what is that blanket depressing factor of rising prices will matter a lot for what happens in the year ahead.
Nick Gerace:
Alright, Jake, one of the things you wrote about heading into next year is just the impact of fiscal policy and the element of building in a floor to the economy through fiscal policy, but then also the implications of how such policy can put a bit of a ceiling on economic growth and overall health here. I mean, curious to hear your thoughts and let you describe what you're seeing there.
Jacob Miller:
Yeah, so one of the unique things we're seeing going into 2026 is a lot of announced plans for increased fiscal spending. This is in defense sector, this is in basic infrastructure revitalization, a lot in energy expansion and grid. And what's unique about this is we often get these sort of large programs in times of economic crisis as a way for the government to stimulate growth when the private sector is not doing so itself. We aren't seeing those cracks in the private sector yet. There's been a little bit of shakiness in the jobs reports, but consumer spending is still robust, growth is still positive, and so it's quite rare to get this sort of fiscal impulse when the baseline conditions are already relatively tight. And so what does this mean for a floor? Well, you have a non-price sensitive actor coming in and saying, Hey, I'm going to spend a bunch of money. That means there's probably only so far things can drop. You're sort of preemptively hitting the gas before you necessarily need to stimulate growth. That could however, create some second order consequences since that's what we mean by the ceiling.
And so to think about those, one is capacity. Anything about capacity for production and capacity and labor unemployment's already relatively low, a little bit of wonkiness in the data because of the shutdown, but call it mid fours, not really elevated versus any natural rate of unemployment. And so if you have a government actor coming in and hiring a bunch of people, that might make it harder for the private sector to hire, which would be a dampener on growth if you need to expand your workforce. At the same time, a lot of the raw inputs and capacity production side that you'll need to revitalize grid to build out energy, the concrete, the steel, the copper, you're now creating more scarcity for those resources.
So again, competition with the private sector that might set a ceiling on how much certain areas can grow given capacity constraints on those input factors, which are heightened even further by increased tariff duties. The other important piece here is the impact that it puts on the long end of the bond curve. And so over this year we've seen a large reduction on the short end. The fed has cut several times, there's expectations for a couple more cuts, but we haven't seen any movement on the long end. The curve has gotten much steeper. And some of that could be interpreted as the bond vigilante is saying, Hey, you are cutting taxes at the same time as you're increasing spending, something's got to give here leading to higher yields. And now a lot of real economic factors link to that long end. When people go and get a 30 year mortgage, one of the things that that's going to be indexed to is what you could get from the government lending for 30 years. And so keeping that long and higher for longer can also be another form of sealing on growth as it might depress long-term borrowing from the private sector as well.
Nick Gerace:
Jake, just talking more about tariffs, we obviously covered this when looking back at how we thought 25 played out, but looking ahead to 2026, where do you see the continued impact of trade policy coming in? Impacts to GDP obviously impacts to costs of goods. Talk a little bit about kind of go forward perspective on that.
Jacob Miller:
Yeah, look, we've experienced one of the largest tariff shocks in economic data history, similar things back in the Great Depression in 1930s, but the largest spike since 1970. And one of the surprises was how well the economy absorbed that punch looking forward, there will be some moderation. We're already seeing certain bilateral deals being struck, but it's important to note even when those deals are being formed, it's not a reduction to pre liberation day levels. It is lower than the starting point but higher than the norm. And we're still working through some inventories in the private sector, but those price increases are being felt by the consumer. That is another dampening factor on consumption. We might measure GDP increasing because just from an equation perspective, imports are a negative number, but that's consumers buying stuff. And so it might see GDP up by consumers say, I bought less.
This will disproportionately hit certain sectors. There are certain raw inputs we really need from Canada Lumber say, or certain high technology inputs from Taiwan that we're trying to rebuild that capacity here we are all seeing this show up in prices that will hit consumer spending and budgeting. And the biggest questions for the year ahead is how good of deals can certain partners strike with the United States and how much relief does that provide? And so what we saw in 2025 was just how big the shock would be. Well, we predicted a large shock. I think we were all surprised by just how large it was and just how universal it was. Every country, essentially 2026, we'll be measuring that moderation where our deal struck. What does that mean for which goods somewhat normalize in terms of price pressure and which they much more expensive than they have been in the last decade.
Nick Gerace:
So Jake, we've talked about tariffs, trade policy, we've talked about fiscal policy, government spending. One of the themes from this administration has been the concept of deregulation with the impacts that that can have on supply chains and hopefully impact bleeding through on prices. Where do you see that playing out in the new year from a deregulatory administration and regime?
Jacob Miller:
A lot of the growth of what now is the large private credit sector. It started with post-crisis regulation changes in what banks couldn't do in particular certain Basel three legislation. Much of that is being rolled back and we're getting financial sector regulatory relief in 2026. This should reopen a lot of markets that banks have not been able to lend in as well as lighten some of the capital ratio limits that they have to hit. We're already starting to see this show up and so based on the most recent surveys of tightening versus loosening of standards from major banks, we're already moving into loosening territory from tightening. And this regulatory impulse should only amplify that. When you get banks easing standards, you get more credit creation pretty simply, especially when you have a fed cutting rates that lowers the floor for a bank's effective net interest margin.
And so they need to write more loans at higher yields. So this again, is a pretty pro-growth move late in the cycle where we could get a whole new block of potential lenders for the same sorts of borrowers that private credit has been focused on and likely spur another leg of commercial industrial borrowing, which also is in line with the demand we're seeing on the AI and chip and energy CapEx side. So more borrowing, more spending, but the introduction of a new lender with a lot of firepower could mean that yields either don't rise from that demand or could even fall based on the supply side dynamics there.