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Friday, May 29, 2026

2026-05-31

***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic Fare:


.... The more I thought about it, the more I realized that the modern macro world is becoming less about access to information and more about the ability to interpret complexity, connect systems together, and identify structural shifts before they become visible in traditional data.

......... That observation matters because it reveals something important about the phase we are entering globally: the problem facing investors, policymakers, and even societies is no longer the lack of information, but rather the inability to distinguish signal from noise in a world saturated with endless data, headlines, commentary, opinions, and short-term reactions.

........ The rapid evolution of AI and public-data infrastructure is also progressively democratizing access to macroeconomic information. Large institutions, banks, hedge funds, sovereign investors, and increasingly even smaller independent research platforms now possess the technological ability to recreate significant portions of traditional macroeconomic databases internally through public APIs, automated pipelines, AI-assisted systems, and open-source data infrastructure. In such an environment, the future value of macro research will increasingly depend not on access to raw information itself, but on the ability to interpret structural change, connect systems together, identify second-order effects, and recognize regime shifts before they become consensus. ...........






 



Real Household Disposable Income (2017 $bn):




  • Global oil inventories and floating storage have acted as temporary shock absorbers against the Hormuz disruption.
  • OPEC spare capacity has stabilized markets, but it cannot fully replace lost Persian Gulf exports indefinitely.
  • Prolonged disruption could eventually exhaust market buffers and trigger a much sharper oil price surge.
I think most energy analysts would have been shocked to learn that roughly three months into a total closure of the Strait of Hormuz, oil would be trading at just over $100 a barrel. I certainly expected prices to be significantly higher by now. The physical math seems indisputable: take that much supply off the market, and prices should respond quickly and decisively. .........



China has pulled off probably the biggest surprise of the Iran war — and it's confounding commodity analysts.

Why it matters: Since the start of the conflict, China has sharply cut the amount of oil it imports — and that has kept a lid on global oil prices.

The big picture: "If Chinese imports had stayed at prewar levels, oil prices would almost certainly be significantly higher today," says Salih Yilmaz, a senior oil analyst at Bloomberg Intelligence.

The country "has probably been one of the single biggest reasons oil prices didn't spike much higher during the Hormuz disruption." ...........

Between the lines: China has been operating for a while like a doomsday prepper, to borrow an analogy from Soumaya Keynes and Chad Bown's new book, "How to Win a Trade War." ...........



........ Building on UBS analyst Arend Kapteyn's note from Friday titled "When The Oil Buffers Run Out," Brookings' Robin Brooks and Ben Harris outline in a note that oil markets could face a massive price shock by mid-July as temporary supply buffers run dry.

There appears to be consensus building among Wall Street analysts at Goldman, JPMorgan, UBS, and many other desks that if the Hormuz chokepoint is not reopened in the near term, an energy cliff may materialize in early summer. .........



......................... But if Chevron was pessimistic, the company's biggest domestic competitor, Exxon, was downright apocalyptic. Speaking at the same Bernstein conference, Exxon SVP Neil Chapman had some truly horrifying remarks, certainly not something that Donald Trump would like to hear. We present them below.
Commercial inventories of crude oil, of liquids, think petroleum, gasoline, diesel, jet fuel, they've all run down. And running down those inventories has mitigated or offset, supplemented by the release of strategic petroleum reserves, which most of the Western countries have done. All of that has mitigated the impact. You can model this. We've modeled it. I think a lot of people in the industry have modeled it.
Nothing new here: we've discussed all this in the previous three months. But it is what he said next that was a moment of shocking insight into just how bad things are about to get: 
We're approaching unheard of inventory levels. I mean, really, really low levels. You can debate whether that's going to hit those really low levels in two weeks or three weeks. Once you get to that point, then you'll see price shoot up. A model would say dated Brent will shoot up. Once you get to that really low inventory level, up to $150, $160.

The models would tell you that. And then what happens is when the price gets to a certain level, demand destruction brings it back into balance. Prices go so high, it becomes unaffordable. And that's what happens. And so we're at that level right now.



Market Fare:

McCullough: #Quad2 Flows = ATHs

Key takeaways
  • Markets do not revert to some neat textbook “balance.” They compound through fractal flows, positioning, leverage, and machine-driven signals that keep forcing the next move.
  • The real portfolio killer is bad assumptions. Gaussian math, valuation comfort, and old-school narratives do not protect you when #Quad2 flows go exponential and crowded shorts get ripped.
  • The playbook is not to argue bubble or no bubble. Respect the timestamps, book some gains in winners like DRAM and QTUM, rotate into higher-quality flow beneficiaries like NVDA, and keep following the signal.
........ What is their definition of "balance" exactly? Is it some optimal "valuation" that makes sense to a Business School student still studying frameworks that Ben Graham himself said stopped working decades ago?

Brennan puts the autopsy on Gaussian math cleanly in The Fractals Of Finance: "For more than a century, finance placed its faith in the mathematics of certainty. It offered more than a method. It offered reassurance."

Markets aren't orderly. They're fractal. The bell curve never saw a Quad coming. The Machine doesn't need reassurance. It needs signal that perpetuates The Flows. The signal says #Quad2 went exponential.

............. Are they “bubbles”? I don’t know. But it would be cool if they were… because bubbles keep going up.

............ NVDA is almost 9% of the index. Do the math on The Flows going into that stock during #Quad2 in June. The Machine already has.

If reading ROC numbers from Hedgeye and Tier1 Alpha every morning isn't their thing, that's fine. They’re not paying for this anyway. The most important reader of these Quad & Flow numbers isn't human.

It's AI's evolving Machine. It doesn't need reassurance. It doesn't have feelings about “being like” Buffett or Ben Graham. It reads the signal, processes the fractal, and moves. Every. Single. Day.

That's not a threat to your process. It's the point of ours. ...........




History Says To

The chart I run every single week
(Momentum) - Top panel: RSI and its bullish regimes (green).
(Trend) Middle: SPY with the sustained uptrends labeled.
(Breadth) Bottom: the share of S&P 500 members trading above their own 200-day.
I post a version of this every week, and it's not decoration.
It sets my posture for the whole week.
Three questions:
  1. Is RSI in a bullish regime (holding above 50)?
  2. Is price above the 200 day moving average?
  3. Are more than half the S&P's members above their own 200-day?
When it's yes, yes, yes, you're in a bull market and you position with optimism.


......... Simply above the 200-day versus below it. 

......................... Here's the part nobody wants to hear, myself included.
  • Doubt your doubts. Make your list of problems - it's good to have one. But hold it loosely. The data that looks bearish is the same data that can flip bullish. That's the wall of worry.
  • Innocent until proven guilty. The market gets the benefit of the doubt until price says otherwise. Once it's below the 200-day, fine go ahead and start believing the bad news. Until then, you're optimistic.
  • The market is smarter than you and me. It solves the problems you can see and the ones you don't even know about yet.
None of this is voodoo, and it's not dogma.
It's robust data that backs one simple idea: doubt your doubts in a Bull Market.






AI Validation Fuels A Ninth Weekly Advance

The headline tape made fresh history. The S&P 500 closed Friday at 7,580.06, finishing up 1.43% on the week and posting its ninth consecutive weekly gain. That’s the longest weekly winning streak since 2024, and only the 5th time since 1965 that has occurred. While markets previously saw weakness following such streaks, the 24- and 52-week outcomes were primarily positive, except in 1989 ............


(Or: The Risks in Your Private Equity Portfolio)

.......... It is not good news, then, that over the past 10 years, private equity has focused on taking companies private that are both more levered and less profitable than similarly-sized businesses (which we have already established are junky to begin with), all while paying a higher price for them than their size-peers. These companies bank on the same set of factors—that interest rates will remain sufficiently low and the economy sufficiently robust—for them to be able to generate enough cash flow to pay down their debts. Different types of shocks—an economic slowdown, a further pickup in real interest rates if inflation proves sticky, a widening of credit spreads if private credit continues to sour—can all be enough to meaningfully hamper the profitability of these businesses, and to do so in a correlated manner.



Head of Multi-Asset Macro Investing Michael Contopoulos explains why, with credit spreads at historic tights and rates moving higher, investors should focus on resilient yield, as there is limited room for price appreciation.
Key takeaways:
  • Liquidity, not credit quality, is likely to be the primary risk in corporate markets, particularly as stress emerges in private credit and investors are forced to sell what they can, not what the want.
  • Spikes in rate and equity volatility should further erode carry, creating asymmetric downside risk.
  • In our view, the current environment argues for patience, flexibility, and an emphasis on resilient yield over stretched credit.

One sector is flashing the most extreme oversold reading in its history. We're paying attention

Summary: The Nasdaq has posted eight consecutive weekly gains — a historically rare signal that has preceded positive three-month returns in the large majority of prior instances. Defensive sub-industry relative performance has reinforced that reading. Both data points argue for remaining long the trend.

Against that, three developments warrant attention: our Trifecta Lens Score deteriorated last week; fund manager sentiment surveys show signs of euphoria; and BofA’s Bull-Bear Indicator triggered a sell signal. We are not calling a top. But the distribution of outcomes has widened. The appropriate response is to trail stops, size down on risk and tactically ride the momentum.



The Core Observations
  1. Roughly one-fifth of the S&P 500 today sits directly in semiconductor names, and by our classification around 60% of the index is invested in companies whose valuation is primarily driven by the AI narrative. Diversification has quietly left the broadest US benchmark.
  2. At the same time, the relative performance of Quality stocks versus the S&P 500 stands at its lowest level since 1999, and the Momentum factor trades five standard deviations above its long-term trend. Quality has never been offered more cheaply against the broad market.
  3. Our view: Quality today is primarily an allocation question, not a crash hedge — the missing diversification pillar against a concentrated index, at historically most attractive relative valuation.


Bubble Fare:


................................... The report compared the current environment to previous periods of speculative excess, but stopped short of calling for an immediate market collapse. Instead, Hartnett suggested investors remain “long and paranoid,” balancing strong momentum against growing risks from inflation, interest rates and crowded positioning.



With valuations at the most extreme point in U.S. stock market history, pressed to fresh extremes by a wildly narrow advance in “AI adjacent” stocks, it’s tempting to warn investors that bubbles typically end badly – that even the final doubling, and tripling, and quadrupling, and quintupling of the Nasdaq 100 during the late-1990’s tech bubble was wiped away in the collapse that followed. Instead, let’s talk about the hippo. .................

As historically-informed investors, we have to observe that current conditions are no less extreme than at the 1929 and 2000 bubble peaks. Even so, we needn’t rely on any pointed forecast or scenario about what might happen next. We can take good care of the future simply by taking good care of the present moment, again and again, as conditions change.

In order for valuations to reach the most extreme level in the history of the U.S. financial markets, it must be true, by definition, that valuations have plowed through every lesser extreme, time and time again, without consequence. Unfortunately, the deferral of consequences is often confused with the absence of consequences. As investors, we should be capable of seeing both the possible continuation of the bubble, and also the possible collapse of the bubble. Knowing that both are possible, and refraining from being locked into any forecast or scenario, we see better what to do and what not to do. ..............

The U.S. equity market has again pushed to the most extreme valuations in history, on the measures we find best correlated with actual subsequent market returns across a century of market cycles. The chart below shows our most reliable gauge of market valuations in data since 1928: the ratio of nonfinancial market capitalization to gross value-added (MarketCap/GVA). Gross value-added is the sum of corporate revenues generated incrementally at each stage of production, so MarketCap/GVA might be reasonably be viewed as an economy-wide, apples-to-apples price/revenue multiple for U.S. nonfinancial corporations.


........... The S&P 500 Information Technology Index presently trades at a price/earnings multiple of 45, on earnings that benefit from a record operating profit margin of 30%, well over three times the historical norm in prior market cycles. This is equivalent to saying that at historically normal profit margins in the information technology sector, the price/earnings multiple would be well over 135. One can take the present multiple of 45 at face-value only if one relies on the continuation of record profit margins forever. Meanwhile, the price/revenue multiple stands above 11.6. 

........ Observing the frantic “swarm-like” buildout of AI capacity, investors are paying valuations that essentially assume that this frenzy of spending, revenues, and profits will be sustained, year-after-year, forever. Indeed, at a P/E of 45 one has to assume that it will grow at a considerable rate from here. Nothing in our investment discipline requires us to rule this out, but it’s worth observing that across history, extreme speculation of this sort has ultimately been punished rather violently. 

Of course, taking current record revenues and profit margins at face-value does “improve” earnings-based valuation multiples, but it’s important to remember that a valuation ratio is nothing but shorthand for a proper discounted cash flow analysis. A valuation multiple implicitly assumes that the denominator is proportional and representative of long-term (decades and decades and decades) future cash flows. If profit margins are elevated, but may only be elevated for 5 or 10 years, taking the price/earnings multiple at face value will give you a strikingly optimistic view of where valuations stand.

Here is what that face-value P/E multiple looks like here, based on analyst estimates of year-ahead S&P 500 forward operating earnings. Since “forward operating earnings” were only invented by Wall Street in the 1980’s, and popularized in the 1990’s, the chart also shows our estimate of what the forward P/E would have looked like across history, had this measure been available.


....... One of the striking aspects of a speculative bubble is how many investment professionals who ought to know better somehow forget what they know. We saw this during the tech bubble and the mortgage bubble – how the lure of seemingly easy money and sure-fire returns encouraged countless portfolio managers to drift into top-heavy overweighting in technology stocks or financial stocks. Meanwhile, fixed income investors, hedge funds, and institutions across the entire banking system were lured into mortgage-backed securities that seemed to promise that 2 plus 2 could somehow equal 5.

Ten companies now comprise 40% of the S&P 500 Index. ............

When I left teaching finance and economics at the University of Michigan and the Michigan Business School more than 25 years ago, I resolved to continue teaching through my writing. I’ve always considered these market comments as a way to share perspectives and investment research freely, and I rarely discuss the Hussman Funds directly. We don’t “market” the Funds because I prefer investors to find us through an understanding of our discipline rather than through advertisements. Given current market extremes, however, I think it’s worthwhile to discuss the Funds specifically, both to illustrate how alternative investments actually function in a portfolio, and because I believe the increasing concentration of investor portfolios in a single industry makes this a critical moment to think carefully about portfolio construction.

.... Faced with the most extreme valuations in U.S. stock market history, now may be a particularly useful time for investors to consider the potential for alternative assets to improve the expected return/risk profile of their portfolios.

The essential feature of a useful alternative asset isn’t that it’s unusual or exotic, but that its returns aren’t tightly linked to the risks that already dominate the portfolio. The value of an alternative asset comes from the way it interacts with the other assets in the portfolio. The lower the correlation, particularly if the asset tends to hold value or advance when the rest of the portfolio is under pressure, the more the asset can improve the expected return/risk profile of the portfolio – even if the “standalone” return on that asset may be low.

A useful diversifying asset can improve the profile of return/risk either by raising expected return for a given level of portfolio risk, or by reducing portfolio risk for a given level of expected return. It is both naïve and incredibly dangerous to construct a portfolio simply by cobbling a group of assets together based on their standalone returns, particularly if those returns are backward-looking ...........

........... Across history, whether we look back to 2000, 1940 or even 1928, we find these “roses in the garbage” exist. They’ve existed all along. It’s just that prior bubbles devolved quickly enough that it was enough to take our ball and go home as soon as market internals deteriorated – indeed, it was enough to leave the party as soon as we observed sufficiently “overvalued, overbought, overbullish” conditions.

The thing that’s been “different” about this bubble has been the unprecedented amplification of speculation, first by monetary policy, then fiscal policy, and finally by novel technology that may – or may not – have reached the point of systemically destabilizing overinvestment. From the standpoint of our own discipline, we’ve had to extend our strategic flexibility to every sort of condition.

See, even in the most speculative markets, constructive opportunities exist – not because of what’s happening in the economy, in monetary policy, or in market valuations. They exist because of what’s happening in the heads of investors, and we can quantify that through measures like investor sentiment, market volatility, credit spreads, and certain components that “feed into” our key gauge of market internals – even when broad internals themselves are unfavorable. These periods often take the form of brief, explosive advances after a bout of market weakness. The question of whether a market pullback follows through to further downside, or whether it leads to a “fast, furious clearing rally”, has everything to do with what’s happening in the heads of investors. That’s essentially what we’re quantifying.



Vid Fare:




A.I. Fare:


......... The second sentence— “Tokens got burned for millions of dollars without any real significant ROI to show for it” – might well turn out to be the epitaph for an era.





.............. The West is building vast numbers of data centers, far more than the Chinese, because nothing is optimized for efficiency. Our models use far more electricity, far more GPUs, and far more water. Additionally the Chinese are working hard on real-world AI uses: robotic AI, in other words, so that their AI can be used for actual production, and pushing on humanoid robots so they can take care of their old people, do household work and so on: Chinese AI is optimized to do shit work so you can read and write and paint, while Western AI is optimized to do creative work so you can shovel manure, do your own laundry and clean toilets. 

............. I’m shaking my head as I write this. This is the greatest mis-allocation of resources I’ve seen in my entire life. It makes the housing bubble (out of which we at least got some homes) look brilliant and wise. ........



...


Quotes of the Week:

Wintersberger: But if one looks at the price action, one can clearly see that markets reacted positively to the news again. At this point, it seems that financial markets have moved on and assume that the Iran war is basically over. Everyone seems to expect a deal is in the pipeline, and setbacks are treated simply as a delay to a deal. Whether that turns out to be right needs to be seen.




Charts:
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(not just) for the ESG crowd:


Sci Fare:



Optimized programs with heavy weights are the gold standard for trained athletes. How much do they matter when starting fresh?

Strength and mobility are foundational for maintaining independence and the ability to navigate the world comfortably. And maintaining muscle mass as we age—combating age-related sarcopenia (muscle loss)—provides amino acid reserves and metabolic protection during inevitable periods of illness or stress. Despite this, uptake of resistance training—our best tool for building strength, mass, and mobility—remains low. A large percentage of our society remains in the “untrained” category, often for decades or even their entire lives. 

Most popular training advice emphasizes optimization: how do you maximize muscle and strength? Programming for those kinds of goals entails lifting heavy loads, training near muscular failure, and doing so for long sessions, many times per week. While effective, these approaches impose meaningful costs in time, effort, and perceived risk, creating a barrier to entry for many people.

Here we encounter a mismatch: what is optimal isn’t necessarily what is sustainable for everyone, especially those new to weight training. For athletes and fitness enthusiasts with the right time, motivation, and interest, optimization is often the right goal. But for most people first starting a training program, the more relevant question is not how to maximize strength or hypertrophy—it’s how to obtain the majority of health benefits with the lowest possible cost in time and complexity.

A recent meta-analysis addresses that question directly.1 In untrained individuals, resistance training performed with only moderate loads, multiple sets, and just two sessions per week was shown to capture most of the strength benefit, produce near-maximal hypertrophy (muscle growth), and deliver the full improvement in mobility seen with more demanding protocols.

This study does not change what is optimal. But it does help define what is sufficient to obtain meaningful benefits when starting resistance training.  ..........



U.S. B.S.:








War Fare:




Since February 28, we have experienced the geopolitical equivalent of a roller-coaster ride on magic mushrooms. We hurtled from Operation Epic Fury to Operation Economic Fury to Project Freedom to no fury at all, and not much freedom of navigation either. We sped from the impending obliteration of Iranian civilization to “a Memorandum of Understanding pertaining to PEACE . . . largely negotiated, subject to finalization.” If you have not experienced the psychological equivalent of whiplash in the last 12 weeks, you have not been paying attention. How many nearly-peace nearly-deals have we nearly had? Four? Five?


.................. Iran won the war. They want a peace deal that reflects that. They aren’t willing to give in peace what the US can’t win by arms.



My best guess is that the Trump administration has successfully fooled markets once again into thinking that there is to be an imminent agreement between Iran and the US. Trump will do and say anything that tempers oil markets (and make him, his family and co-conspirators even richer). The probability of a real peace settlement is remote. Why? Iran has the advantage right now and would be foolish to give it up in negotiation with a demonstrably undependable, bad-faith and fanatically Zionist interlocutor.....................

Iran is rightly insisting on retention of its recently-established control over the Strait of Hormuz because this is a major source of leverage over the political West, and a source of revenue which, for the immediate future, can help compensate it for the massive damage that the West inflicted upon it, while it waits upon a time when the West will be forced to lift all sanctions on Iran, release $26 billion dollars of frozen Iranian assets, and pay reparations, and this time is not as far away as many people suppose. ................


Israel imported military-related goods from six European countries despite arms restrictions.




Geopolitical Fare:



Other Fare:


It's Not Okay To Join The Military

Polly on Twitter asks, “Is there a pejorative term for military like what pig is for cops?”

Dear Polly,

No, but there should be. We need to start stigmatizing that shit.

It is not okay to be a stormtrooper for the western empire. It is not honorable. It is not worthy of respect. If you are a westerner who is considering joining the military, you should choose a different career path instead.

Don’t thank soldiers for their “service”. Don’t play along with the lie that your nation’s soldiers fight for your rights or your freedom. It only encourages more people to join the military when you do that. It’s irresponsible and unethical.

If you live in the west and you join the military, at no point will you ever be acting in defense of your country; you will be murdering people who are trying to defend their country.  ............

......... The crimes of the empire will continue until people stop facilitating those crimes. Anyone who volunteers to help the empire inflict murder and devastation on targeted populations should be regarded as the lowest of the low.



Pics of the Week:



Posted by at No comments:

Sunday, May 24, 2026

2026-05-24

 ***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic Fare:


Drawing down crude inventories at a record pace, with SPR releases doing the heavy lifting to cushion the Gulf supply shock, only delays the move higher in crude oil prices. Once those buffers are depleted, oil risks being violently repriced higher.

That is why the Trump administration's race to secure a peace deal with Iran and reopen the Hormuz chokepoint has taken on new urgency in recent weeks. The longer the critical waterway remains disrupted, the greater the risk that the oil shock will escalate from a market event to a financial crisis, with higher crude prices feeding directly into inflation, consumer stress, and broader recession risk.

The message from the SPR crude data this week, the largest ever draw, is very clear: The Trump administration is buying time to get a deal done with Tehran. If Hormuz does not reopen soon, the market will eventually force demand destruction through much higher prices. ......

...... Earlier, Rapidan Energy Group analysts warned that a prolonged closure of the Hormuz chokepoint risks pushing the economy into a downturn on a scale approaching that of the 2008 Great Recession.





............ A delayed opening of the Hormuz chokepoint would increase the third-quarter oil supply deficit to 6 million barrels per day as inventories fall toward dangerously low levels, the analysts warned.

Even an early-August restart would not bring immediate relief, as inventories would continue to slide into early fall while Gulf production and shipments normalize.

JPMorgan analysts recently warned that the world is spiraling toward a catastrophic cliff-edge shortage of crude oil if the maritime chokepoint is blocked through June ............

*** Major Markets Letter #24: Yield curves in Stagflation








... This is certainly impressive, although the impact on GDP may be less than what the above figure suggests due to the associated rise in imported silicon chips — buying foreign equipment to invest locally improves the capital stock, but does not represent a rise in domestic production. (The exporting country is producing the goods.) This relates to one of the perennial online economics debates: do imports subtract from GDP? In addition to the statement “imports subtract from GDP” being mathematically correct, the cancellation of domestic spending does matter: there is a financial cost associated with buying foreign goods, and that financial cost can displace spending that would have been made on domestic production. .........



Market Fare:

MS Weekly Warm-up: Thoughts from the Road (via the Bond Beat)

................. Last Wednesday, We Published Our Mid-Year Outlook...We raised our next twelve month (mid 2027) S&P 500 price target to 8,300 driven by strong earnings—16% annualized EPS growth through our forecast horizon (2x the long-term median). Under the surface, we prefer Industrials, the hyperscalers, Financials, and Discretionary Goods.

.......... We’re took our forward 12-month (mid-2027) price target up to 8300. That’s 20.5x forward EPS of $404. Our year-end 2026 price target moved up from 7800 to 8000. The main messages here are:

This is an earnings story, not a multiple expansion one.

This outlook builds on three themes we have emphasized since last year: running the economy/earnings cycle hot, public to private rebalancing, and a broadening of earnings and performance.

The fear of AI is leading many companies to “run it lean” in an economy that is also running hot. This has only boosted the operating leverage and margins further and one reason we raised our EPS forecasts last week.

In our baseline, we have 2026 EPS of $339 (23% growth), 2027 EPS of $380 (12% growth), and 2028 EPS of $429 (13% growth). The drivers of our resilient earnings forecast are: positive operating leverage and margin expansion aided by AI adoption, stabilizing pricing power in goods oriented end markets and a capex cycle that continues to show momentum…........

Our Midyear Strategy Outlook published last week highlights the fundamental momentum in the global economy as a driver of markets, with the energy shock as a key downside risk. The disruption has lasted almost three months, but drawdowns in inventories and redirection of trade have kept macro implications muted to date. If oil prices rise significantly from current levels or the disruption continues for another quarter, the macro narrative will shift. Our Outlook frames alternative scenarios along these lines. For now, we focus on positive structural drivers — AI-driven capex, wealth-driven consumption, and a return to full employment — that should support a recovery in growth next year… ............

…The duration of the oil shock is as critical for growth, inflation, and monetary policy as the price of energy. If the conflict escalates and oil prices surge through $150 and stay above $125 for several quarters, the outlook turns recessionary. A milder adverse scenario has a persistent oil price premium that reflects widespread but non-crippling shortages, prompting central banks to lean more aggressively against inflation. Both scenarios are negative, but the differences are significant.

But we also see substantial upside risks. Especially in the US, aggregate demand has proved resilient and could easily surprise us to the upside for a prolonged period. Strong wealth effects boost US consumption and AI-driven capex appears unrelenting. Taken together, the US growth impulse could build on itself and because consumption and investment goods have a huge import component, the rest of the world would benefit. ...........




Various metrics suggest that the Canadian banks could be overvalued



.......... Startups with no revenue, no profits, and occasionally no actual product are raising millions or billions because their founders can say the words “large language model”. Public company CEOs now jam “AI” into earnings calls with the same shamelessness that “trendy” gastropubs have when being the 4th “new” place on the block to not just offer a good ole’ fashioned cheeseburger, but the breathtaking innovation of a truffle aioli smashburger.

........... Berkshire has spent decades avoiding one of the central mistakes in modern investing: confusing a compelling narrative with a compelling investment. A transformative future does not automatically justify any price.

............ There is also a lesson about temperament. Successful investing is often less about predicting the future perfectly and more about avoiding emotional decision-making when sentiment becomes extreme.





................. So, I think two things can be true here:

This market is not a “bubble” because it has real fundamental drivers underlying it.
This market is riskier in certain elements because the expectations embedded in certain sectors are very high which reduces margin for error and creates potentially higher sequence risk. ..............

There has been renewed chatter in recent weeks that we’re headed back to the 70s (again). People love this chart from Larry Summers showing the 2014 starting point compared to the 70s. As if there’s some sort of necessary temporal relationship between the two time periods because…because!


Are we going to get another big surge in inflation? We’re seeing a surge! It’s surged from 2.4% to 3.8% in just 5 months. That’s a pretty sizable jump. The problem is, it’s mostly cost push inflation driven by the war in Iran. Consumers will eat the price hike until they can’t. But here’s the thing – in order to get a 1970s style inflation you need a much larger boom in oil and commodities. And I mean MUCH larger. You see, in the 70s that second big jump in prices coincided with a 150% surge in oil prices after the first big surge. So, if we’re expecting inflation to go to 14% year over year (or anything remotely close to that) then you need a record breaking surge in oil prices and broader commodities on top of what we’ve already had. The equivalent sort of price action is a move to something well above $300 oil. But that brings in another problem – the US economy isn’t nearly as oil dependent as it was in the 1970s. So it would take a much broader and much larger commodity rally to cause this. And it would need to be supported by some sort of underlying stimulus from global governments. None of which is completely out of the realm of possibility, but I struggle to see what will cause that 



Just when investors thought it was safe to go back into the bond market, the Iran War and resulting inflationary concerns reversed the January-February decline in rates (rally in bond prices) and then some.

Expectations for Fed cuts have quickly turned into fears of Fed hikes given the inflationary backdrop, while the correlation between bonds and stocks, which had been reverting to negative territory over the past two years, has snapped back to being unhelpfully positive ............



Bubble Fare:

Rising prices are draining the liquidity from financial markets, including bonds. The AI stock bubble is ripe for bursting


***** Last call
on the most valuable company in the world

Sit. Sit down. No, here, I saved you the stool. You want one of these? Course you do. Two more of whatever this is, thanks.

Right. So you’re buying Nvidia.

Don’t. Don’t do the face. Everybody does the face. I’ve been doing this twenty years and the face never changes, it’s the same face the guy made in ‘99, the same face the guy made in ‘07, this sort of but the numbers are good face, and you know what, you’re right. The numbers are good. The numbers are spectacular. That’s the whole problem and nobody will sit still long enough to let me explain it to them. You’ll sit, though. You bought me a drink. That’s the deal now, you’re stuck.

Wednesday. You watch Wednesday? The earnings?

Course you didn’t, you were busy buying the thing. Let me tell you about Wednesday. Street wants seventy-nine, they print eighty-one and a half. Street wants a buck seventy-eight, they do a buck eighty-seven. They guide up. They hand everybody a dividend twenty-five hundred percent fatter, which, between us, between you and me and this glass, is a penny turning into a quarter on a two-hundred-dollar stock, so it’s a yield of bugger all, but the room cheered, they actually cheered, twenty-five times more of basically nothing and grown adults stood up and clapped. Revenue up tenfold in three years. Best quarter the most valuable company in the history of money has ever turned in. Flawless. Spotless. Not a hair out of place.

And the stock went down.

Yeah. Down. I had it on the screen behind the bar, I made Tony put it on, and I watched it go red and I thought, Tony, your telly’s broken. It wasn’t broken. Fourth time now. Fourth perfect quarter in a row and the thing just... sags. And everybody’s got the line ready, profit-taking, it’s priced in, and here’s the thing about that line, my friend, that line is true so many times that the one time it’s a lie you’ve already stopped checking. The guy who says priced in is right and right and right and right and then the building’s on fire behind him and he’s still saying it.

Because that’s how it goes. That’s the part you’ll learn the expensive way if you don’t let me buy you the cheap version right now. The top doesn’t ring a bell. There’s no guy with a bell. I keep waiting for the guy with the bell, twenty years, never shows. It looks like exactly this. Perfect everything, and the price just won’t go. You feed the machine the single best meal of its entire life and somehow the whole table walks out poorer. Something changed underneath. And nobody, nobody, sends the memo.

Even the bean-counters clocked it. Read the boring stuff, nobody reads the boring stuff. Every quarter lately the thing barely twitches on the day and then bleeds out over the week, every quarter a triumph, and they gave it a little name so they wouldn’t have to think about it. A trap. A nice trap, a cheerful trap. Which is bean-counter for the good news quit working and we’re all very politely not mentioning it over dinner.

Hey. Hey. You still with me. Good. Drink up, I’m only getting started, and there’s three things wrong here, not one. Three. One screams, one’s in the walls, and one’s been down the cellar this whole time just... eating. Quietly. We’ll get there. ................................



A.I. Fare:




..................... The scale of today’s AI buildout has historical precedent. For instance, the railroad expansion of the mid-1800s involved more extreme infrastructure investment, with railway Capex estimated to have consumed as much as 10-20% of GDP at its peak. A more recent and appropriate comparison is the telecom buildout of the late 1990s, when Capex peaked at roughly 1.0-1.2% of US GDP. Today’s AI infrastructure spending by just the four companies has recently surpassed that telecom figure.

But unlike the debt-fueled telecom boom, today’s AI spending has thus far been funded almost entirely by the cash and cash flows of extremely profitable corporations. While the composition of funding is shifting from cash and free cash flow to debt, the companies noted above have debt-to-equity ratios well below the S&P 500 average and significantly lower than during the telecom buildout. Moreover, earnings from other highly profitable business lines will continue to provide them with substantial cash for investment.

............ While still early in the AI revolution, the economic data points to genuine economic momentum. Whether AI productivity benefits can become more broadly based across the economy is the question that Part Two of this article addresses.



AI is, as it stands, not economically viable for anybody involved other than the construction firms, NVIDIA, and the surrounding hardware companies benefitting from the irrational exuberance of a data center buildout that doesn’t appear to be happening at the speed we believed. 

Every AI startup loses millions or billions of dollars a year, and nobody appears to have worked out a way to stop hemorrhaging cash. Hyperscalers have invested over $800 billion in the last three years, with plans to add another $700 billion or so in 2026 and another $1 trillion in 2027, meaning that they need to make at least three trillion dollars in AI specific revenue just to break even, and $6 trillion or more for AI to be anything other than a wash. I went into detail about this (albeit at a lower, pre-2026/2027 capex number) in a premium piece last year.  ................


Strong opposition kicks in when data center demand surpasses 5% of a country's power supply.


Why politicians are squandering the anti-AI backlash





Vid Fare:
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(not just) for the ESG crowd:

The floating ice shelf of world’s widest glacier – Thwaites glacier in Antarctica – is detaching, with worrying implications for global sea-level rise





The inaugural Transition Away from Fossil Fuels (TAFF) Conference took place in Colombia at the end of April. It's almost universally reckoned to have been “a measured success”.

We have to hope so given that the whole current climate governance system driven by the United Nations Framework Convention on Climate Change (UNFCCC) and underpinned by scientific advice from the Intergovernmental Panel on Climate Change (IPCC) has comprehensively failed the whole of humankind for the last 25 years. ........



Sci Fare:


Our inner narrator makes it all up



U.S. B.S.:

.......... Beyond all that, MTG has repeatedly shown that she will risk her own political career in order to condemn destructive war policies, whether they’re carried out by the other party or by her own. She did so by not only opposing and denouncing Trump’s financing and arming of Israel, but also the panoply of D.C. bipartisan war policies. MTG thus denounced Trump’s bombing of Yemen (after he spent 2024 criticizing Biden for bombing Yemen), his bombing of Iran last year with Israel, and Trump’s new war with Iran.

AOC, by rather stark contrast, is a partisan hack, nothing more than a glorified Nancy Pelosi Jr. She will criticize the policies of a Democratic president only in the most muted and deferential tones.

............ None of this should be remotely surprising to anyone who has paid attention to mainstream, DNC-loyal liberal politics. Caring about outcomes is very low on their list of priorities, if it appears on it at all. ...............





Travel by Canadians to the US is down almost 50% from last year’s already drastically reduced levels. Part of this is a quiet Canadian protest against US imperialist foreign policy — Trump’s arrogant assumption that Canadians wouldn’t find the idea of being a US state repulsive, his threats of annexation, his endless tariff wars against former US allies, and the US Uniparty’s financial, political, and military support for Israel’s genocides and the Empire’s brutal, illegal, endless wars, while so many Americans are suffering poverty, precarity, joblessness, and illness that the government refuses to pay a penny to relieve.

But the larger part of our reticence to travel to the US, I think, is fear. It is increasingly obvious that the collapse of the ‘rule of law’ in the US, and the declaration by government officials that they are ‘above the law’, and that their ICE and other paramilitary forces are exempt from prosecution for their terrorism and excesses, means that it is absolutely dangerous for non-citizens to venture across the border. ........

And anyone following the political events there knows that even if the Tweedledee Democrats replace the Tweedledum Republicans in the next elections, the policies and situation there aren’t going to significantly change. The US Empire has entered a death spiral, and it’s only going to get worse. .......



War Fare:

A memorandum of understanding for the MoU of the deal

That is the most consequential string of weasel words I’ve seen since “weapons of mass destruction - related programme activities”.

Largely. Negotiated. Subject to. Finalization.

That’s not a deal. That’s not even a ceasefire!

............... The neocons are already losing their minds on X. Pompeo, Levin, Graham, the whole fingerprints-up-their-asses crowd - furious. Which, for what it’s worth, is the one legible signal in all of this that something real might be happening. ...............

..





Geopolitical Fare:




Every society is three meals from chaos
-Vladimir Lenin
On May 4th I wrote that a year of hunger and famine is baked in for most of the world.

This was based on the effects of Six Week War and the continued blockade of the Strait of Hormuz. But, in addition, we have the strongest El Nino is a hundred and fifty years incoming ............



Other Fare:

Everybody knows about the decline in birthrates. Fewer people understand why—or just how significantly it could transform society in the next few decades.


How a generation's time preference was sabotaged

......................... There was a famous Stanford experiment called the Marshmallow Test which measured time preference in young children. A child would be left in a room with a single marshmallow on the table. They were of course free to eat the marshmallow, the experimenter would tell them, but if they didn’t, then later on they would get a second marshmallow. Children with high time preference – meaning that they strongly prefer the immediate reward to the hypothetical future reward – would cram the marshmallow into their candy-holes without a second thought. Children with low time preference – meaning that they value the future at a similar or even higher level to the present – would patiently wait, and be rewarded with a second marshmallow. These children were then followed, and it was demonstrated that the children with low time preference demonstrated better life outcomes: they maintained higher grades, were less likely to fall into debt, were less likely to develop drug addictions, were less likely to get pregnant before marriage, were less likely to get fat, and so on. All of which makes sense. The capacity to endure present pain – by studying, dieting, working out, what have you – in order to obtain a better future outcome is obviously going to be linked to better outcomes.

How would a smart kid react if the experimenter failed the marshmallow test?

For instance, say the experimenter simply lied. There was no second marshmallow; the child waited for nothing. Or, even worse, the first marshmallow was snatched away, and replaced with two marshmallows, each one half the size of the original? Or a third the size? Here are your two marshmallows, sucker, joke’s on you. What would the results be if, after this experience, the children were tested a second time? I don’t know if such an experiment has ever been conducted, but the outcome is not hard to guess. Every single one of the children, whether they’d passed the marshmallow test the first time or not, would scarf down the marshmallow the moment it was in front of them.

The capacity for low time preference may be largely innate, but whether it expresses or not is entirely a function of social trust. In order to defer gratification for a greater future reward, one must believe that there is a reasonably high chance of that reward manifesting. The less likely the future reward becomes, the more steeply a rational actor will discount the future.

........................ I’d like to believe that this is all temporary, that things can be turned around, but if you tell me this hope is nothing more than cope it is very difficult for me to argue otherwise. Maybe things will finally improve and maybe they won’t; the point is that, for the young who have only ever known civilizational rot, it is entirely rational for them to lay down and let it rot.

Generation X and the millennials both tried to do everything right, according to what the boomers told them was the path forward: save money, study hard, get a ‘job’. At every stage we got rugpulled. Most of us have nothing to show for any of that.

Zoomers looked at what happened to Gen-X and the millennials and said, quite rationally, fuck that.

.................. Zoomers have no faith that the future will be better and every reason to believe that it will be much worse, and so they have every reason to prize the small, present pleasure over some future prize that experience has taught them lives only in their broken dreams. What’s the point in saving for a house if you’ll never even be able to afford a hovel in an abandoned toxic-waste dump small town where the major local industries revolve around the fentanyl trade? You might as well just splurge on that $28 lunch, which you can enjoy now, and which you won’t be able to enjoy in a few years, when you’re making the same amount of money, but that lunch costs $48, is prepared with worse ingredients, is provided in smaller portions



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