***** denotes well-worth reading in full at source (even if excerpted extensively here)
Economic Fare:
If you’ve been following oil prices since the Iran war started you’ve probably been surprised at how low prices have often been. I certainly was, at first.
The issue is fairly simple: most governments are worried about the price of oil, and not the supply of oil. So they’ve taken various measures to keep prices low. Some of those have been manipulative financial and some of them have been massive releases of oil from reserves.
IEA chief Fatih Birol told Bloomberg that a historic 400-million-barrel emergency release, equal to roughly 2.5 million barrels a day, helped push oil prices down by $20.
The price of oil, though, isn’t really the issue. One part of it is refinery capacity. A fair bit went off line in the Middle East, but ironically, even more in Russia. Why is Russia systematically destroying ever gas station in Ukraine? It’s retaliation for constant hits on Russian refineries.
Marathon Petroleum’s own management flagged on the Q1 earnings call that roughly 6 million barrels per day of global refining capacity is offline, about 6% of the world total. Ukraine’s drone campaign against Russian refineries is the largest single piece, but Middle Eastern facilities inside the Persian Gulf export corridor, and Chinese refiners voluntarily throttling to preserve inventory, add to the shortfall.
As a result Russia is no longer exporting diesel. And even though oil prices are low, gasoline prices are not as low as one would expect, because short refinery capacity means this:
Amusingly the Europeans and Americans have been encouraging Ukraine to hit refineries.
Now you may think “but America is an excess oil producer.”
Yeah, but it doesn’t matter. What matters is refineries and the type of crude oil involved. We aren’t just talking about gasoline, diesel, jet fuel and bunker fuel (ships), we’re talking about fertilizers, sulfuric acid (used for amazing amounts of processes) and so on. This cascades out into medicine (your aspirin for example), packaging, semiconductor production (hey, even higher prices) and whatnot.
But with rare exceptions (hello, China, again) most governments have not managed the actual supply situation.
In a rational economy prices and supply of crucial goods would be managed. For example farmers would get fertilizer and diesel at subsidized prices. Truckers shipping important goods would get subsidized diesel. Drug manufacturers would get guarnteed supplies (though not subsidized in most cases, they make tons of profits, just force them not raise prices.)
Rational governments would say “OK, what parts of the economy are actual important (food, medicine, transport)?” and act to protect those parts of the economy, and would ration and subsidize those goods.
Instead our elites manipulate the price numbers and make the actual physical situation worse as they do so, by not allowing high prices to lower use and by not allocating key parts of the economy what they need at reasonable prices. Oh, and by releasing absurd amounts from the reserve to manipulate prices rather than using the reserve for actual necessities. They’re so used to an economy where just manipulating prices seems like all you need to do because there’s a global market with surplus. They don’t know how to handle an economy with actual, genuine shortages.
Anyway, as best I can tell if the Strait stays closed we are now weeks to about two months away from actual physical shortages in the first world. (They’ve already hit in the developing world.)
Then the fall harvest comes in and we get terrible numbers from that, and food prices surge.
This is the stupidest war of my entire lifetime and I’m old enough that this includes Vietnam, which was stupid beyond belief, but not one-tenth as moronic as the Iran war. A war of complete choice which the US has lost, won’t admit it has lost and is in danger of running the world into a decade long depression.
If it stops now or soon, it will suck, but we’ll get thru. But if Trump dismantles Iranian infrastructure like he’s threatened (by no means sure, this is Trump, but also not impossible, this is Trump) the Iranians have said they will respond by dismantling Gulf infrastructure: that means refineries that will take years and years to rebuild. Oil fields. Facilities producing helium. A decade of not enough fertilizer. .............
The Fed's one rate can fight inflation or protect the AI boom carrying the economy, but not both
Strip artificial-intelligence spending out of the American economy and the growth that remains is close to nothing. By several economists’ estimates, data-center and AI-related capital investment accounted for roughly three-quarters of US GDP growth in the first half of 2026. Take that spending away, and the largest economy on Earth is expanding at something near half a percent. That is the fact that should frame everything you read this morning about the Consumer Price Index ........................
Last November, before the job was his, he argued in print that artificial intelligence would be “a significant disinflationary force,” that it would “make almost everything cost less,” and that the Fed should therefore cut rates to help households and small businesses. It was an elegant thesis. It offered a way to have cheap money and falling prices at the same time, the productivity boom paying for the party.
Seven months later, the thesis is running in reverse. The AI buildout is not making things cheaper yet. It is bidding up electricity, straining the power grid, pulling in construction and chips, and adding to the very inflation Warsh expected it to cure. The productivity payoff he is counting on lies somewhere in the future. The costs of building toward it are landing now.
So the chair who staked his framework on cutting rates finds himself unable to. ...............
China Fare:
"A key reason for weak expectations about the future is a lack of confidence, with claims such as 'there are structural problems' [...] exerting considerable influence on people." — Lin Yifu
Market Fare:
Just 27.6% Of Stocks Outperform The Market While 60% Destroy Shareholder Wealth, New Study Finds
From 1926 through 2025, just 27.6% of stocks beat the broader market. Nearly 60% actually destroyed shareholder wealth, and the median stock delivered a lifetime return of -6.9%. Yet despite those sobering odds, U.S. stocks collectively created roughly $91 trillion in wealth over the last century, with just 46 companies responsible for half of it. .........
Bubble Fare:
From 1926 through 2025, just 27.6% of stocks beat the broader market. Nearly 60% actually destroyed shareholder wealth, and the median stock delivered a lifetime return of -6.9%. Yet despite those sobering odds, U.S. stocks collectively created roughly $91 trillion in wealth over the last century, with just 46 companies responsible for half of it. .........
Bubble Fare:
The sky-high valuations of space and AI firms today are similar to that of internet ventures before 2000. Herd instinct is leading promoters and investors, not financial and technological reality
................... Take SpaceX, an unwieldy conglomeration of Starlink satellite operations, a space launch business, a controversial social media service, a struggling AI venture as well as plans for orbital data centres, a moon base and an inter-planetary colonisation programme. The satellite broadband and X platforms use established technologies, but the launch business’s cost advantage relies on reusable rockets that remain a work in progress. Orbiting data centres and interplanetary colonies are technically unproven. The SpaceX prospectus provided unhelpful techno-babble—extending “the light of consciousness to the stars” and harnessing the sun “to power a truth-seeking AI”.
During booms, investors aggressively finance prospects with limited understanding and less due diligence, feeding herd-like tactics and poor business models that amplify risks and speculative excess. While some lessons have been learnt, others are recurring.
part one of two, probably
TLDR: The value of corporate equity relative to GDP is at a historical high. But this does not necessarily mean there’s a bubble: profits and shareholder payouts are also very high relative to historical values.
............................................................... How should we think about this?
Logically, the value of corporate equity relative to GDP must reflect a combination of four factors: value added in the corporate sector as a share of GDP; corporate profits as a share of their value added; payouts to shareholders as a percentage of profits; and the value placed by markets on each dollar of payouts.
In other words, if corporate stock is worth more relative to GDP, that can be either because more of GDP is now happening in the corporate sector; or because more of the income from that activity is going to profits; or because more of those profits are being paid out to shareholders (rather than retained in the firm); or because financial markets place a greater value on each dollar of payment. Or of course some combination of those.
We can write this as an accounting identity:
equity/GDP = value added/GDP * profits/value added * payouts/profits * equity/payouts
................................................................ All of these series (except the last one) are combined in the next figure, which is really the whole point of this post. If you take one thing from one I’ve written here, this picture is it.
Equity value relative to GDP and its components, 1947-2026:
For this figure, I’ve converted the values to logs. This has the big advantage of converting the multiplicative relationship to an additive one, so that we can visually see the contribution made by each of them. But it can make interpreting the figure a bit tricky. Here, zero is the average value over the full period; positive one is a value about 2.7 times greater than the average, while negative one is a value about one-third of the average. The black line similarly describes the deviation of the equity-GDP ratio from its full-period average; the heights of the bars correspond to the contribution each term makes to that deviation. ....................
The big takeaway from this decomposition is that we should be cautious about assuming the stock market is overvalued — that we’re in a bubble, that this is another bout of irrational exuberance — simply because equity prices are high relative to the historical norm. Shareholders have it better than the historical norm, too. Corporations are more profitable. And more of those profits are flowing out to them. A bit of exuberance might be rational, under the circumstances.
On the other hand: If we focus on just the past 20 years, as in the figure below, the picture looks a bit different. ....
Yes, both profits and payouts are high relative to their long-run averages; but those shifts mostly came earlier, while the big rise in equity prices is more recent. Apart from the relatively brief collapse in profits during the Great Recession, almost all the variation in equity prices over the past two decades comes from the valuation term, rather than changes in the underlying payments to shareholders.
............................... This Alphaville piece goes further, saying that “supernormal profits are unsustainable, because they always are.” I don’t know about that. I don’t know if there’s any reason to think the profit share is stationary, to use the statistics jargon — apart from a dip in 2008-2009, profits as a share of value added have been greater than their long-run average in every year of this century, and seem to be getting farther from it. Capital really has won some lasting victories in the class war.
That is one natural way to look at profits — as a distributional variable. But there’s another way of looking at them, from the demand side.
We know, as readers of Keynes, that an increase in investment automatically creates an equal quantity of additional saving. If, furthermore, there’s little or no incremental saving out of wage income (a reasonable assumption, in my opinion) and if the fiscal balance and trade balance don’t change significantly (perhaps less reasonable, but we’ll go with it) then this additional saving must take the form of an increase in profits. This relationship is often known as the Kalecki-Levy profits identity, and is one bit of heterodox economics that has established a foothold in finance and the business press. The same identity says that an increase in the fiscal deficit or trade surplus should similarly lead to an equal increase in aggregate profits.
Exploring the math of this and the extent to which it is a reasonable first approximation of real-world dynamics would be an interesting exercise for another post. But it raises another point which I think is very relevant for thinking about the current situation: Even if the AI companies themselves are not particularly (or at all) profitable, AI-related investment spending is probably an important factor in raising aggregate profits. Just like the California gold rush generated plenty of profits for somebody, even if the vast majority of prospectors themselves went broke. ...............
********** Awaiting the Crash?
What is a bubble? It is a collective belief. What is a crash? It is the collapse of that belief. AI has given rise to two bubbles. There is a stock market bubble – the two highest-profile players, OpenAI and Anthropic, are expected to launch IPOs heralding astronomical market capitalizations of around $1 trillion each. But this is underwritten by a credit bubble, which is of even greater concern. Stock market crashes are often more spectacular than destructive – causing losses in asset value – whereas credit bubbles, when they burst, trigger a cascade of defaults throughout the financial system.
Two bubbles, generated by a collective belief powerful enough to sustain a mobilization of capital unprecedented in the history of capitalism. Let us grant that US capitalists know a thing or two about spinning a story – that is, generating a belief. This time, they have spared no effort, treating us to the most grandiose visions. But these have taken an unusual and paradoxical form: convincing humanity of the terrible, near-existential risks of the product they are selling. .............
......... Until now, it was sufficient to cast a spell, and what a spell it cast: since 2020, the ‘Big Five’ – Microsoft, Google, Oracle, Meta and Amazon – have poured $1.9 trillion into the cauldron. Now, however, it needs to deliver a return – if not soon, which isn’t on the cards, then eventually, and on a scale commensurate with the investment. Those expressing scepticism about this were initially dismissed as grumblers, killjoys incapable of experiencing the thrill of the miraculous, of envisioning the great civilizational breakthrough of our time. How long can the collective belief in AI withstand evidence to the contrary? The answer: a long time, but not forever – especially when warning signs begin to multiply, as they are now. We may well be witnessing the start of the erosion of that belief; once a critical threshold is crossed, a financial correction will ensue as brutal as the preceding frenzy was manic.
Can the revenue forecasts possibly justify the capital expenditure? Everyone’s fate hinges on this: .......................................
The unveiling of DeepSeek was hailed as a ‘thunderclap’ – yet the fact that lightning had struck was immediately forgotten. Everyone reverted to the prevailing article of faith: the supremacy of US-made AI. This state of denial could not last long; after an initial spike followed by a lull (the period of denial), the weekly demand for Chinese tokens soon surged from 5 to 20 trillion in a single month, leaving US models, at 5 trillion, in the dust. The rock-bottom token pricing ought to shake the faithful out of their complacency, for what is at stake is nothing less than the potential collapse of a $5 trillion business model. .......................
We are entering hazardous territory. And we know what contribution to expect from the key players: nothing. OpenAI and Anthropic, haemorrhaging money, have yet to generate a single kopeck of profit. As for the hyperscalers, they aren’t in great shape either. The Financial Times estimates – ‘under the most generous assumptions’ – that, with the exception of Amazon, all hyperscalers will see negative returns on investment for the 2025–30 period. Oracle’s figure is a staggering -35%. Indeed, to sustain the financial pace, hyperscalers are now resorting to unexpected measures – including halting share buybacks, on which they previously lavished colossal sums to appease shareholders – and are beginning to pile up debt. ............
Goldman Sachs raves about the diverse segments and asset classes ready to commit under the bold banner of ‘alternative investments’. Everyone and their dog is involved: private credit, private equity, infrastructure and real estate funds (real estate is key, given the massive footprints required for data centres). The boundaries between these alternatives are increasingly blurred, as are the lines separating them from players in the regulated financial system. Banks provide leverage to these entities; pension funds and insurers invest a portion of retirement savings in them, while some insurers even lend to them – it’s a free-for-all. Every corner of the financial world, whether shadowy or transparent, is thus implicated in AI financing, setting the stage for disaster.
If the edifice crumbles, the effects will indeed be catastrophic. And how could they not? The business model equation is fundamentally untenable: all the investment is based on the most far-fetched assumptions about demand. The financial world is slowly beginning to realize this, as illustrated by a few cautious abstentions by the banks and conversely, the headlong rush into shady territory where neoliberal finance displays no shortage of enthusiasm or imagination. The deal proposed to Anthropic by two private credit funds, Apollo and Blackstone, to hide its debt will be remembered as a classic of the genre. ..................
What could possibly go wrong? Entering this territory is the surest sign that a ‘credit cycle’ is veering off the rails. The resort to schemes as baroque as those chips-backed loans – and Big Sky is far from an isolated case – indicates that there is too much to hide. ..............
Then there is what is unfolding in the equity markets. There is growing concern over the debt used to finance stock purchases readily extended by the brokers through whom investors place their trades. So-called ‘margin debt’ is anything but marginal: it has now reached an all-time high of $1.4 trillion. What happens if equity markets reverse course? Investors will face the infamous margin calls – a broker’s request that a client post additional collateral to secure a loan when the assets backing that loan are losing value. We should here revise our opening proposition: stock market bubbles are not especially dangerous so long as they remain disconnected from the credit system. They become dangerous when they create the potential for defaults and frantic scrambles for liquidity. ...........
Vid Fare:
(not just) for the ESG crowd:
Why the United States Keeps Choking on Canadian Smoke
More than 800 wildfires are burning across Canada, sending toxic plumes of wildfire smoke into the Great Lakes, Midwest and Northeast. As of 6 pm Eastern, New York, Chicago, Detroit, and Minneapolis are 4 of the top 5 major cities with the worst air quality in the world.
You've probably heard a lot of reasons why this is happening on social media, most of which aren't true. Here are the real reasons. ...........
Sci Fare:
War Fare:
........... "The Strait of Hormuz is our territory, and we will not allow a rogue and child-killing army from the other side of the world to continue its illegal interference in it," the statement said.
............ "The Army of the Islamic Republic of Iran, while condemning the repetition of the American enemy's attacks on certain military centers, non-military infrastructure, and the people, and the flagrant violation of the fundamental principles of the United Nations Charter, emphasizes that it will not hesitate for a moment to defend the sovereignty, territorial integrity, and independence of Iran and our dear compatriots against any enemy aggression," the Public Relations Office declared. ................
Geopolitical Fare:
The creeping nazification of particularly Europe but also United States and other Western proxies cannot be ignored anymore. But we cannot ignore either the roots of Nazism espoused today in the West.
Other Fare:
A patent pool and licensing architecture would enable more widespread use of key minerals than would decades of mining and refining investment alone.
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