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Sunday, January 18, 2026

2026-01-18

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


Economic and Market Fare:

The last time we saw this degree of collective exuberance was in late 2007, and we all remember how that turned out

..............  The very absence of recession forecasts is itself a leading indicator of complacency.

The equity strategy community has somehow managed to outdo even the economists in their collective exuberance. Every single major sell-side strategist has a bullish year-end target for the S&P 500. Every single one. The average target implies double-digit upside from current levels. The range of estimates, which normally spans several hundred points, has compressed to the narrowest band I can recall.

This is what happens when career risk trumps intellectual honesty. ............

Now, to be clear. I am not predicting an imminent crash. But it’s always about respecting the probabilities and the entire range of possible outcomes, and respecting John Keynes’ simple adage that markets can remain irrational far longer than most skeptics can remain solvent.

I have been humbled far too many times in my professional career not to understand that basic concept .............

The margin of safety has evaporated. Valuations, by almost any reasonable metric — price-to-earnings, price-to-sales, price-to-book, market-cap-to-GDP (the Buffett ratio), the Shiller CAPE — are in the top decile of historical readings.

That doesn’t mean markets can’t go higher; it means that the starting point matters for long-term return potential, and the current starting point is a poor one. There are a whole lot of things that need to go right. And when your upside scenario requires perfection, you’re no longer investing; you’re speculating.

History may not repeat, but it does rhyme, and the current verse sounds awfully familiar. The sequence is almost always the same: a period of strong returns breeds complacency, complacency breeds excessive risk-taking, excessive risk-taking compresses risk premiums to unsustainable levels, and eventually — always eventually — something triggers a repricing. ...........



In 2025, we worried that the trade war and immigration restrictions would lead to stagflation.
With those headwinds fading, the list of tailwinds keeps growing, and we are starting to worry about overheating in 2026.
The bottom line is that there are significant upside catalysts to growth and inflation over the coming quarters.
US economic outlook: 10 tailwinds in 2026
  1. Trade war uncertainty fading
  2. Strong AI and data center spending
  3. High AI stock prices boosting wealth effects for consumers
  4. Dollar depreciation
  5. Falling oil prices
  6. The Soccer World Cup
  7. One Big Beautiful Bill eliminates federal income tax on overtime pay and tips
  8. One Big Beautiful Bill increases the child tax credit to $2,200 dollars per child
  9. One Big Beautiful Bill extends 100% expensing for equipment and factories to encourage capex and hiring
  10. Tax refunds for households will be larger because the total tax liability for 2026 is lower


The US labor market has evolved in an unusual way over the past several years. A “no hire, no fire” dynamic has prevailed for the better part of two years, leading to a slow rise in the unemployment rate without the recessionary sting of mass layoffs. .......................

To conclude 2025, the cyclical portion of the labor market remains weak, with most of the downward pressure coming from the manufacturing sector.

The major question for the economy in 2026 is whether the monetary easing we’ve seen so far is enough to arrest the labor market declines in these cyclical sectors before they accumulate to several hundred thousand and cause downstream stress in the less cyclical and larger areas of the economy.

The increase in the unemployment rate over the last few years has fallen primarily on the youth, with more than a 3-percentage point increase from early 2023. This fits perfectly with the “no hire, no fire” labor market. ..............



One of the joys about writing about bond markets is that I always get questions in real life about whatever crisis du jour is being spread about bond markets. The thing to keep in mind: if you are a developed country with a freely-floating currency that you control, it takes a concentrated dose of stupidity to create crisis in your government bond market. Unfortunately, concentrated doses of stupidity are in great supply in the 2020s.

However, if we avoid stupidity, do we need to worry about debt levels? The answer is: one needs to worry about inflation created by fiscal and other policies (looking at you, tariff policy), but the debt-to-GDP ratio will take care of itself.

Let us take a look at the American debt-to-GDP ratio in the figure above. The latest figure (from the second quarter of last year) is at around 118%. For some reason, people get into a panic about a debt-to-GDP ratio of 100%, but that is a superstition and/or relying on a bogus study (see the appendix). ...............



A.I. Fare:

AI layoffs are looking more and more like corporate fiction that’s masking a darker reality, Oxford Economics suggests

Despite breathless headlines warning of a robot takeover in the workforce, a new research briefing from Oxford Economics casts doubt on the narrative that artificial intelligence is currently causing mass unemployment. According to the firm’s analysis, “firms don’t appear to be replacing workers with AI on a significant scale,” suggesting instead that companies may be using the technology as a cover for routine headcount reductions.


Marcus: How generative AI is destroying society
An astonishingly lucid new paper that should be read by all

Two Boston University law professors, Woodrow Hartzog and Jessica Silbey, just posted preprint of a new paper that blew me away, called How AI Destroys Institutions. I urge you to read—and reflect—on it, ASAP. ........


Big Tech sways too many economic development officials, and local residents are fed up.



Quotes of the Week:

...... This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation. .......



Charts:
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(not just) for the ESG crowd:


Yves here. It is depressing but climate engineering, aka geo-engineering, is inevitable. Our putative betters are not just not doing remotely enough to try to slow the pace of global warming but are going pedal to the metal in making matters worse with their AI fevered dreams and related energy-hogging data center buildouts. Even with them using electricity, the demands are so high that it seems heroically optimistic to posit that all can or will come from solar or nuclear. ...............




Ocean Iron Fertilization — what's right about this solution is also what's wrong

......... The climate crisis, now nascent, concerns us all, even those who feel its effects but deny its cause. No one wants their home to be uninsurable; no one wants to watch their coastal town eaten by ocean erosion or murdered by storms. New York is a coastal town, as are Miami, L.A., Mobile and a great many more. That’s a lot of property owners who could lose everything.

But where’s the solution that’s acceptable to the billionaire class, the only people with power?

MIT-trained physicist Peter Fiekowsky thinks he has one, Ocean Iron Fertilization (OIF), and it sounds pretty promising. It’s a “hacking the planet” idea, which I’m generally against, but unlike most geo-engineering proposals, this appears to be low risk with potentially high reward. It’s also fast.



Welcome to the twilight of the Industrial Age. Growth is ending. That was the blunt thesis of a recent essay, and the signals are already here—deindustrialization, grid stress, financial instability, and rising geopolitical conflict.

The Honest Sorcerer’s argument is simple: growth depends on ever-faster drawdown of energy and materials as population and complexity increase. If extraction slows, growth slows. Growth becomes stagnation, then decline.

Vaclav Smil adds the physical reality beneath the abstractions. Modern civilization rests on four industrial pillars: cement, steel, plastics, and ammonia. Cement is the platform for cities and infrastructure. Steel is the universal structural and machine metal. Plastics are the lightweight, versatile base material embedded in packaging, electronics, and healthcare. Ammonia, through the Haber-Bosch process, is the foundation of nitrogen fertilizer and therefore modern food production. If one pillar weakens, the system strains. If several weaken at once, strain becomes systemic risk.

Those pillars are hitting limits .............

............. Rana Faroohar argues we’re in a new Great Game: the U.S. and China competing for resources, territory, and influence without open war. The flash points are places like Venezuela, Ukraine, Greenland, and the Arctic, along with the routes that move energy, goods, data, and weapons. It’s a scramble for minerals and fossil fuels, but also for ports, seabed claims, undersea cables, and logistics corridors.

How should we understand that in the context of the twilight of the Industrial Age: a world running into energy and material limits?

I see a long chain of events pointing to the breakdown of the old world order that include the Vietnam War, the oil shocks of the 1970s, and the end of Bretton Woods. The shift to a fiat, debt-based monetary system and globalization created the illusion that stability and growth had returned. The collapse of the Soviet Union seemed to confirm the triumph of Western economic ideology. Peak oil and the Global Financial Crisis were treated as setbacks that shale, central banking, and expanding debt could paper over. .............



Sci Fare:




U.S. B.S.:




There’s only so much grist one can get from pointing out over and over again that Tulsi Gabbard has systematically flouted the deeply-held convictions she once claimed to hold. After a while, it starts to get redundant, and a bit too formulaic to even be worth harping on anymore. Yes, we’re aware that she previously made opposition to “regime change” and its offshoots the centerpiece of her presidential campaign, Congressional tenure, and entire existence as a nationally-prominent political figure. We know she used to vehemently denounce the concept of US intervention in Venezuela, Iran, and so forth, but now she’s participating in (and openly supporting) exactly those policies. Still, though: shrieking “hypocrisy” ad nauseam will eventually have diminishing returns. You can fish out all the speeches and tweets you want from several years ago, demonstrating that a particular politician had once purported to believe something diametrically opposite to what they’re doing today. But people already expect inconsistency, or even outright “hypocrisy,” from political figures. By incessantly highlighting examples of this, there’s a sense in which you’re telling people something they’ve already been conditioned to know. Which can get a bit dull. Furthermore, the notion that any politician will maintain perfect consistency across time is often derided as not just unrealistic, but undesirable, since politicians are expected to adapt to changing circumstances, absorb new information, and adjust accordingly. To exhibit “flexibility” in this regard can even be lauded as a virtue. Only a hardened zealot would insist on stubbornly clinging to their erstwhile beliefs for all eternity. Or so the argument might go. In any event, dwelling on a politician’s myriad hypocrisies, no matter how incontrovertible the evidence for them might be, can come across like beating a stale drum. ............

............................................................. As you might have gathered from following the news lately, Trump’s regime change initiatives in Venezuela and Iran are moving ahead with little constraint. Except this time, Tulsi Gabbard is magically in favor of them. She’ll even fudge intelligence to justify Trump’s quest to bomb Iran, as she infamously did during the June 2025 war — “phase two” of which appears like it could be coming imminently. And if the pattern holds, she’ll be on call to dutifully provide whatever assistance might be required. By any reasonable metric, that June 2025 episode was a “crossing the rubicon” moment for Tulsi Gabbard — proving beyond any lingering doubt that she’d abandoned all remnants of her prior, putative self. Because if she’ll happily volunteer to have her own “Colin Powell moment,” what wouldn’t she do?  ..........................



Geopolitical Fare:

Canada has cut a trade deal with China. This is what I have been suggesting for ages, and it’s finally happening. (Not, of course, because Carney reads me, but because it’s the obvious play and of all Western leaders he’s been the most resistant to Trump’s threats and blackmail.) 

............. This will break the ice for many nations. As I have argued for ages, even before Trump came to office, everyone needs to cut a deal with China because it’s the rising power. It’s already the most powerful nation in the world in many ways, and it will be in all ways that matter in less than ten years. Perhaps five.

.............. But it’s also that you can make a deal with the Chinese. They keep their deals unless you cross very clear red lines like supporting Taiwanese independence. Even before Trump the US did not keep its deals. As a Canadian I’m aware that America just ignored trade rulings against it in favor of Canada even twenty years ago. America is simply untrustworthy, they don’t really believe they have to obey even rules they themselves have agreed to. Trump is “ignore inconvenient rules on steroids” but pretending he hasn’t just ramped up an already existing American characteristic would be delusional. ..............









....... Today pro-government marches are held in all major cities of Iran. They are much bigger than anything the opposition could ever assemble. The Iranian system has again demonstrated that it is astonishingly stable. Not one official has changed side.



.................................. In the circles I move in you often hear people talk about how the US empire is on its way out and getting weaker and weaker, but I dunno man. It sure has racked up a lot of wins lately. Maybe they’re just grabbing up as much global power as quickly as they can before things heat up with China, but whatever the reason, they’re certainly not acting like they’ve lost the ability to dominate world affairs right now.

Whether they have or not, the work remains the same: wake the public up to the unacceptable nature of the empire, and to the truth that a better world is possible. .....



The electricity and heat supply in Ukraine has stopped in large parts of the country. Kiev had already been on scheduled blackouts where groups of consumers received for example four hours of electricity to then be cutoff for eight hours. That scheduling has ended. The blackout has become permanent.

Over several weeks Russian attacks had isolated the electricity supply in Kiev from other parts of the country. It then attacked generating stations within the city. There is now less than 10% of electricity supply available than the city would normally use. Public lighting has been shut down as much as possible. Factories have closed down. Schools and Universities are on prolonged holidays. Many shops have closed as running their private generators is costing more money than they can make while open. ....................

For three years Russia had mostly refrained from attacking Ukrainian infrastructure. Electricity and heat supply operated at peace time levels. Only during the last year did attacks increase. In March 2025  President Trump announced a 30 day infrastructure ceasefire. Russia committed to it. Ukraine didn’t.

In November 2015 Ukraine blew up transmission pylons that supplied Crimea. 75% of its populations were left without electricity. A brewery in Lviv celebrated that by creating a dark beer named ‘Crimea by night’.

In 1999 NATO bombed Serbia to further split up Yugoslavia. NATO bombing started on March 23 1999. It took out some 80% of Serbia’s electricity and water supply. ...............



Students of propaganda learned a great deal about the evolution of their subject matter from the multi-decade Western regime-change operation in Syria, especially as this played out from 2011 onwards.

Perhaps the fundamental lesson is that subtle propaganda is not so much about the message or, perhaps, is about the message only at the end of a much longer process. Rather, the main deal is about purposefully shaping “reality,” and perceptions of reality, or even creating a new reality, or simulacrum thereof. This is intended to impact interpretations of “evidence” by selected audiences by means of representations fed to mainstream media that are pre-primed (through corporate ownership, transactional deals with power, preferred ways of doing journalism, recruitment and training) to align with how the interests of the main centers of power would like events to be interpreted (despite various obfuscations, distractions and narrow windows of permitted “controversy” and and “disagreement” that serve to disguise the fundamental alignment). This does not mean that these strategies are always successful.



....................... The US power alliance is unquestionably the most destructive and abusive entity in our world, and it also happens to be the power structure under which I live. This gives me a special responsibility to oppose its abuses.

The only reason everything I just said isn’t completely obvious to everyone is because we live in a mind-controlled dystopia where people are aggressively propagandized from birth into believing our rulers are more or less the Good Guys and the nations they target are more or less the Bad Guys. 

..................... Regime change the United States. Not its fake official elected government: its real government. The oligarchs and government agencies which actually run the thing. Replace its empire managers and empire management institutions with real democracy which gives the American people real authority over the actions of their own government, rather than the fake decoy elections they have now.

Regime change the United States, and regime change all its imperial member states. Australia. The UK. Israel. Canada. The EU. The entire imperial core.



Other Fare:


.............. Now, in a blunt way, we call that point in life retirement, but because people who are in the pre-retirement era are very likely to be amongst the highest earners in society, and therefore those about whom these claims are being made , we are misinterpreting the situation. People, in fact, don’t want to retire at a blunt point of time.

As people now are getting into their fifties and maybe a bit beyond, because people do work well into their sixties, they find they’ve reached a point where their housing is secure, their pensions have become credible, and their basic material needs are met largely because the children have left home if they ever had them. At that point in time, they suddenly realise that there are things more valuable than money, and that is the phenomenon that we are observing.

People realise that money can accumulate without limit, but time cannot, and health,   relationships, meaning, and care, all require an alternative investment, particularly if retirement is going to be long and meaningful, because there is plenty of evidence that those who work flat out to retirement day and then stop and do nothing thereafter have quite short lives as a result; the shock is too great to manage.

So rational people are beginning to manage what is scarce, and this has literally nothing to do with tax. Choosing fewer hours of work as you get older is not irrational. It’s logical. ............


........................................ But Alexander succeeds in reconciling all this with Adams’ achievements: it’s all just consequences from the starting axiom that the world is ruled by morons, and that he, Scott Adams, is the only one clever enough to see through it all.

Is my epistemology any different? Do I not also look out on the world, and see idiots and con-men and pointy-haired bosses in every direction? Well, not everywhere. At any rate, I see far fewer of them in the hard sciences.

This seems like a good time to say something that’s been a subtext of Shtetl-Optimized for 20 years, but that Scott Alexander has inspired me to make text.

My whole worldview starts from the observation that science works. Not perfectly, of course—working in academic science for nearly 30 years, I’ve had a close-up view of the flaws—but the motor runs. On a planet full of pointy-haired bosses and imposters and frauds, science nevertheless took us in a few centuries from wretchedness and superstition to walking on the moon and knowing the age of the universe and the code of life.

This is the point where people always say: that’s all well and good, but you can’t derive ought from is, and science, for all its undoubted successes, tells us nothing about what to value or how to live our lives.



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