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Investment Strategy

“Work the Problem”

February 13, 2025

By Joe Zidle

In the 1995 movie Apollo 13, NASA Flight Director Gene Kranz tells his team: “Work the problem.”

Instead of fixating on what should have been—a routine moon mission—they focused on the reality. A landing was off the table due to damage caused by a ruptured oxygen tank. They couldn’t change the circumstances, but they could adapt and find a way to get their astronauts home safely, which they did (with some “artistic liberties” in the movie.) The phrase has since become a problem-solving mantra: Systematically break down the problem rather than get stuck on assumptions, distractions, or even asking the wrong questions.

Investors need to take the same approach and adapt to a new reality. The old investment playbook relied on ultra-low yields, traditional public 60/40 portfolios, and central banks stepping in as backstops. We’re now in a world where real rates are meaningfully positive, inflation is slower to recede, and economic resilience is keeping policy tighter for longer.

The US Economy Is On Solid Footing

The Q4 2024 GDP report showed robust consumption growth at the strongest pace since early 2023 (+4.2% quarter-over-quarter, annualized).[ 1 ]

Add to that strong household and corporate balance sheets, full employment, and easing credit conditions, and you have an economy that remains in solid shape.

While initial jobless claims remain low, the ratio of job openings to unemployed persons has declined, along with the quits rate – signaling a cooling, yet balanced labor market where finding a job has become more challenging. Within Blackstone’s private equity portfolio, we are also seeing a normalization of the labor market, with only 40% of US company CEOs reporting hiring challenges, the lowest percentage of the post-Covid era, down significantly from the 76% peak.

Improving this stable picture is an increase in liquidity with more lending from private credit pools and banks, and money supply growth turning positive, rising nearly 5% year over year (see Figure 1).[ 2 ] With this backdrop, policymakers hit pause on further rate cuts, and now, with stronger economic data, market expectations have shifted from four cuts in 2025 to one.[ 3 ]

Figure 1: M2 Money Supply Growth
(% YoY)

The Connection - Winter 2025

Source: Macrobond and Federal Reserve, as of 12/31/2024. M2 money supply includes M1 (currency, demand deposits, and liquid savings deposits) plus certificates of deposits and money market funds. Grey bars represent NBER defined recessions.

A Closer Look at Inflation and Interest Rates

The path of disinflation is slowing; however, our analysis indicates that government data continues to overstate shelter inflation, a significant component of CPI, comprising around one-third of the overall index and more than 40% of core CPI.

The latest CPI report had shelter increasing by 4.4% year over year.[ 4 ] However, after reconstructing the Bureau of Labor Statistics’ (BLS) methodology and incorporating real-time rent data from Blackstone’s multifamily and single-family rental portfolios alongside industry figures, we find that shelter inflation is running around 2% year-over-year. Adjusting these inputs suggest inflation is much closer to the Fed’s target.

Looking ahead, favorable year-over-year comparisons could further support this trend. Figure 2 below illustrates if monthly CPI growth flattens to zero, the year-over-year inflation rate would still decline due to tougher base effects. All else being equal, shelter costs are coming down, while other components have been heating up.

Figure 2: CPI Projections Assuming Zero Growth in Underlying Components

The Connection - Winter 2025

Source: Bureau of Labor Statistics, as of 1/31/2025. Data after January 2025 are projections assuming zero growth in the underlying CPI components listed in the chart.

The Fed indicated in January its current policy is “meaningfully restrictive.” But the real takeaway is how well the economy is performing in this environment.

Historically, strong productivity growth (think the late-1990s tech boom) coincided with rising rates, yet economic expansion continued. That raises two key questions: How much lower do rates need to go and at what point does the 10-year Treasury yield start to hinder growth? Recent years have shown that both the economy and financial markets can thrive even with higher rates.

This shift in economic conditions underscores what I see as a broader transition—from the “vicious cycle” of the 2010s, characterized by higher unemployment and sluggish productivity, to a more “virtuous cycle” in the first half of the 2020s marked by tight labor markets, rising wages, and strong investment (see Figure 3). For investors, this change isn’t just an economic backdrop, it’s a call to rethink portfolio strategies.

Figure 3: From a Vicious to Virtuous Cycle
Vicious 2010s

JZ - The Connection - Winter 2025 - charts


Virtuous 2020s

JZ - The Connection - Winter 2025 - charts

Note: The above information is provided for illustrative purposes only and should not be considered research or investment advice. Represents the author’s view of the current market environment as of the date appearing in this material only. There can be no assurance that these opinions will come to pass.

Asset Allocation in a Virtuous Cycle

So how do you allocate capital given that rates are, on average, higher than the previous cycle?

Understand the problem, and then work the problem.

Traditional public-only portfolios have long benefited from a reliably negative correlation between bonds and equities. However, this relationship has become unreliable, as seen in 2022 when both asset classes declined sharply, and in several subsequent periods. Since the first quarter of 2022, stocks and bonds have only exhibited a negative correlation 25% of the time (see Figure 4).

Figure 4: Total Return for US Stocks and Bonds
(% QoQ)

The Connection - Winter 2025

Source: Bloomberg, as of 12/31/2024. Equities reflect total quarterly returns for the S&P 500 Index. Bonds reflect total quarterly returns for the Bloomberg US Treasury Index. Red boxes represent quarters of negative correlation.

Given these conditions, we believe that private markets provide a more reliable avenue for investors to improve diversification and can enhance returns through:

  • Private equity which has historically outperformed public market equities over the long run and currently offers more attractive valuations.
  • Private real estate and infrastructure provide potential inflation protection and long-term compounding—crucial for portfolios across cycles.
  • Private credit addresses risk and return challenges in public markets by offering high recurring cash flows, with most loans adjusting with short-term interest rates. While most asset classes suffered in 2022 as the US 10-year Treasury climbed over 200bps, private credit generated strong outperformance and diversification (see Figure 5).

    Figure 5: Private Credit Excess Returns Over Various Asset Classes in 2022

    The Connection - Winter 2025

    Source: Bloomberg, as of 12/31/2022. Corporate bonds represented by the Bloomberg US Corporate Bond Index and Treasuries represented by the Bloomberg US Treasury Index. Excess return calculated over the period of 12/31/2021 to 12/31/2022 using quarterly returns.

    In our Guest Column, Michael Zawadzki, Global Chief Investment Officer for Blackstone Credit & Insurance (BXCI), further outlines the attractive backdrop for private credit performance and the many ways to capitalize on the rapidly growing opportunity set across private credit strategies.

    Read the Guest Column

    Back to The Connection

    Read the Guest Column

    Important Disclosures

    This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. This commentary discusses broad market, industry or sector trends, or other general economic, market or political conditions and has not been provided in a fiduciary capacity under ERISA and should not be construed as research, investment advice, or any investment recommendation. Past performance does not predict future returns.

    The views expressed in this commentary are the personal views of the authors and do not necessarily reflect the views of Blackstone. The views expressed reflect the current views of the authors as of the date hereof, and neither the authors nor Blackstone undertake any responsibility to advise you of any changes in the views expressed herein.

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    Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. All information in this commentary is believed to be reliable as of the date on which this commentary was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy or completeness of the information contained herein.