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Sunday, February 22, 2026

2026-02-22

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


Economic Fare:

Uneven growth puts the outlook on a fragile footing.





Something is goosing corporate profits, and identifying the culprit could tell investors a lot about just how sustainable the growth will prove to be.





Not all economic indicators are created equal. Here are the best (and worst) for recession forecasting.

.................. A good leading indicator needs to do two primary things:
  1. Decline early
  2. Decline deeply
An indicator that declines early but only has a very shallow contraction will never provide enough confidence or a clear enough signal for action. An indicator that declines deeply but late is not useful for any predictive analysis. An indicator like this may be useful as a confirmation tool, but not as a leading signal.

The chart below plots 15 major components of GDP across these two dimensions, using data from all recessions between 1955 and 2019.




Market Fare:


For most of the time since the pandemic, large-cap stocks have outperformed their smaller counterparts in the US stock market. That is, the LargeCap S&P 500 index has outperformed the MidCap S&P 400 and SmallCap S&P 600, collectively the “SMidCaps.” That started to change late last year as investors increasingly concluded that the former’s earnings outlook had become riskier and its valuations stretched. The SMidCaps’ earnings, which had been flat since late 2022, began moving higher late last year, with valuations that were relatively low. Thus began the Great Valuation Rotation of the Roaring 2020s.

Early last year, global investors also began rotating away from the US toward other markets. They did so because the US had outperformed the rest of the world since 2010, raising its market-capitalization share of the MSCI to a record 65% last year. So it was time to rebalance into stock markets with lower valuation multiples. This global rebalancing is likely to continue this year…

…At the start of the year, we assigned a 20% subjective probability to a meltup/meltdown scenario. That’s relatively low. We are even more comfortable with it now that the likelihood of an AI-related stock market bubble is much less likely. The S&P 500 Information Technology sector’s forward P/E is back down to 23.7 from over 30.0 late last year (chart). A repeat of the 1999/2000 Tech Wreck is clearly much less likely than widely feared last year…..



At this late stage of the earnings season, the (blended) revenue growth rate for the S&P 500 for Q4 is 9.0%. If 9.0% is the actual growth rate for the quarter, it will mark the highest revenue growth rate reported by the index since Q3 2022 (11.0%). At the sector level, ten of the eleven sectors are reporting year-over-year revenue growth. Three of these ten sectors are reporting double-digit revenue growth: Information Technology, Communication Services, and Health Care.

However, the Q4 revenue growth rate for the S&P 500 has been increasing over a longer timeframe. On September 30, the estimated revenue growth rate for Q4 was 6.5%. On December 31, the estimated revenue growth rate for Q4 was 7.8%. Today, the (blended) revenue growth rate is 9.0%. ..........



Bubble Fare:


In seventh grade science class, we studied how things are classified – the systems used to organize various kinds of rocks, elements, species, different types of clouds. I’ve always liked the name “cumulonimbus” – the sort of big billowy heap of a cloud that has a dark grey underside – full of water, not yet transformed into rainfall. If you see those clouds and suddenly feel a cool breeze, that’s often the storm’s “gust front” racing ahead of the rain – and a good time to head for cover.

You wouldn’t look at the rainfall and think it has come from nowhere. Looking at the cloud, you know the rainfall was already there – just waiting for enough conditions to show itself. As warm, humid air rides up over the wedge of cooler air, the cloud builds – water vapor beading into droplets, gathering weight until they finally let go as rain.

We call rainfall a “conditioned” phenomenon because it depends on many other factors. When causes and conditions are sufficient, the rainfall manifests. When causes and conditions are no longer sufficient, the rainfall ceases to manifest.

We should be careful, when talking about rainfall, to consider the causes and conditions that produce rain. We might say the average amount of rainfall is this, or the average frequency is that, but if we don’t change our estimate even when there’s a cumulonimbus cloud over our head and a cool breeze in our hair, we may get soaked.

Likewise, suppose we look at historical stock market returns over any particular horizon, whether daily, weekly, or annual – regardless of valuations, market behavior, investor sentiment, monetary policy and other factors. We can collect all of those returns in a heap called an “unconditional” probability distribution. Historically, average annual market returns on the order of 10%, more or less, have been most common, so the heap is highest at that point, with progressively smaller “tails” for returns that are wildly positive or wildly negative. The overall profile looks roughly like a “bell curve.”

We might say the average market return is this, or the average frequency of a crash is that, but if we don’t change our estimate even when valuations are at the highest levels in history and market internals are ragged and divergent, we may get soaked.

It would be incorrect to say that the market plunges of 2000-2002 and 2007-2009 came from nowhere. Looking at a bubble, you know the crash is already there – just waiting for enough conditions to show itself.

Whatever market conditions may be, it can help to look at the probability distribution of returns, “conditional” on some important factor, or a combination of them. We can then ask questions like “What’s the profile of likely market returns and risk, given this or that set of conditions?” That’s what we call the “conditional” probability distribution. In nearly every case, the distribution includes both positive and negative outcomes. The average outcome may be higher or lower than the “unconditional” average, but even then, we typically can’t rule out outcomes on the opposite side. The best we can do is talk about the likely distribution of returns, rather than specific “point forecasts.” To interpret a distribution as a forecast is far too demanding about what’s possible.

That’s part of the reason we talk about the “return/risk profile” of the market, rather than relying on forecasts or scenarios. Nearly every market condition we identify is characterized by a distribution that includes both positive and negative returns, often quite large ones in both directions. To imagine that a probability distribution is a “forecast” is to be caught in a concept of reality. A classification or label – overvalued, undervalued, constructive, defensive – is only a tool that describes a distribution. It’s not something to take literally as a forecast.

The bell curves below show fitted probability distributions of actual weekly S&P 500 total returns since 1940. They’re not quite “lognormal” curves. The full distribution of S&P 500 returns has a slightly narrower peak, a bit of skew, and fatter tails than a classical bell curve. I’ve also included two “conditional” probability distributions – not because they’re great models, but simply to partition market conditions by a crude version of “valuation and market action” using commonly available indicators.

The blue curve is the “unconditional” probability distribution of weekly S&P 500 total returns. In contrast, the green and red curves are “conditional” – based on the “yield” implied by Shiller cyclically-adjusted P/E (CAPE) relative to 10-year bond yields, and the percentage of U.S. stocks “participating” in a market advance, as measured by their position relative to their own 200-day average. Geek’s note: each curve is defined by its own data subset, so the area under each is 1.0.

Notice that the conditional distributions include both positive and negative returns. For the red distribution, the average S&P 500 weekly total return is slightly positive, but lags T-bill returns by about 2% annually (that is, annualizing the cumulative S&P 500 returns that comprise the red distribution). In contrast, the average weekly return in the green distribution exceeds T-bill returns by close to 12% annually. The red distribution is the widest (has the highest “standard deviation”), while the green distribution is the narrowest. That means that unfavorable market conditions generally involve much greater volatility than favorable market conditions. Observe in particular how fat the tail of the red distribution is on the right side. When people say how much investors would lose by “missing the 10 best” days or weeks of market returns, keep in mind that these “rewarding” instances generally occur during periods when the market is crashing. ..........

The chart below shows the conditional distributions that we estimate based on our actual classification of market return/risk profiles – reflecting our adaptations in recent years – particularly in 2021 and 2024. I’ve condensed them into just two groups – bearish/hard-negative (which includes neutral positions) and leverage/constructive. There are more subtle variations in practice, but two “conditional distributions” are enough to illustrate the key idea.

While the overall profile of these distributions is similar to the previous ones that use crude gauges to classify market conditions, the average returns are profoundly different. In the red distribution, average S&P 500 total returns are negative, and lag T-bills by about -22% annualized. In the green distribution, average total returns exceed T-bills by about 28% annualized. There’s no assurance that future returns will be similar, but we see the same overall profile in subsets of the data across history, from the recent bubble all the way back to the Great Depression ...................

Every market return/risk profile we define maps into a probability distribution that includes both positive and negative outcomes. The average returns may be extremely different, but any individual outcome is largely unpredictable. It’s only by aligning our outlook with prevailing market conditions – again, and again, and again – that we have an expectation that our returns will capture some of those differences as investment returns.

Record extremes
Presently, the U.S. equity market stands at 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: 
 
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Our outlook will continue to change as measurable, observable market conditions change. In our view, the best way to take good care of the future is to take good care of the present moment – again, and again, and again. No forecasts or scenarios are required. 

Mathematics as a tool, versus mathematics as a dogma
I ran across an article in recent weeks proposing that nearly all mathematics in the field of investment is “sham” and “almost 100% phony.” I typically don’t cite writers if I’m not complimenting or drawing on their work, but my impression is that the phrase “almost 100%” may be the best example of sham mathematics in that particular article.

Now, yes, if one’s use of mathematics in finance assumes that stock prices follow Brownian motion (a pure “random walk”), that price distributions are best characterized as perfect (lognormal) “bell curves” without skew (lopsided shape) or kurtosis (fat tails), or that the correlations across assets will be reliably well-behaved even in a crisis – leading you to lever your portfolio up 40-to-1 (which is what blew up Long-Term Capital Management), or to slice up mortgage risk into securities that you imagine will be well behaved when it all hits the fan (which is what blew up Lehman and many banks during the GFC), then yes, your application of mathematics may be a reckless sham.

But it’s not math that’s the problem. Math just allows one to approach problems in ways that require structured, deliberate, systematic thinking – to understand how variables interact, and how this changes when that changes. Mathematics is merely well-structured thought. It’s the assumptions one uses when doing the math that may or may not be garbage.

For example, if you take seriously the idea that securities are claims to a stream of future cash flows that will be delivered to investors over time, you can productively use math to figure out how to price a bond, how to calculate the yield-to-maturity given the price, and how changes in growth rates and risk-premiums affect stock prices. You can examine prevailing valuations and ask what assumptions about future cash flows are needed for an investment at those valuations to actually produce an adequate long-term return. All of that is just arithmetic.

You can go further, for example, and accurately price more complicated securities like options, allowing you to study the implications of various investment strategies. All of that is a useful application of mathematics – provided you don’t take probability distributions (“bell curves”) literally, and you instead realize that the main thing any good option model does is to allow you to add up various option payoffs times their respective probabilities. You don’t have to use a lognormal distribution at all. As long as the probabilities add up to 1 and the expected value of the distribution rules out arbitrage, you can use whatever distribution you like – you just have to use a more creative integration method.

The fact that actual financial markets don’t obey simplifying assumptions like perfect bell curves doesn’t make “almost 100%” of financial mathematics a sham, unless your understanding of mathematics is that objects like probability distributions, correlations, covariance matrices, stock betas, expected returns, or other parameters are literal, fixed, and “unconditional” regardless of valuations, and regardless of whether investors are optimistic or risk-averse. The “sham” emerges if we stumble into dogma – if we assume that prices are produced by a random number generator rather than the expectations, hopes, and fears in the heads of investors. The use of mathematics doesn’t force anyone to make such dogmatic assumptions – the math is just a tool for systematic thinking.

The making of a permabear
Last month, Jeremy Grantham generously sent me a copy of his new book, The Making of a Permabear – The Perils of Long-term Investing in a Short-term World. The title alone – disarm your critics by owning their label – felt very B-Rabbit in the rap battle at the end of Eminem’s 8 Mile.

Jeremy’s book, which I greatly enjoyed and recommend, is partly an autobiography; partly a history-rich journey that combines investment wisdom with lessons in entrepreneurship; partly a deeply principled examination of our relationship with the environment that humanity relies on for its existence; and from cover to cover, an example of what it looks like to live an interesting, constantly curious life that has purpose beyond oneself.

For veterans of market cycles from the Nifty Fifty, the late-1970’s “death of equities”, the deep undervaluation of the early 1980’s (when my own career began), the 1987 crash, the dot-com bubble, the tech collapse, the global financial crisis, and on into the current bubble, Jeremy’s book provides a fascinating look at what was going on in his head while whatever-it-was happened to be going on in your own head.
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Charts:
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(not just) for the ESG crowd:

The world is not quitting coal

So, this is what’s actually going to determine the future of our planet. Over here in the blue square you can see the total number of new coal plants in MW that came online in 2025 around the world:

What do we see? The highest number since 2015. These numbers come from the global energy monitor, where you can easily verify them yourself. Now let’s contrast these numbers with the coal plants retired in 2025:
...
The retired coal capacity in 2025 is nowhere near the new coal capacity that came online. How are coal emissions supposed to peak, when so much new capacity comes online? If you build a coal plant then it’s going to be used. Demand for electricity will simply increase to meet the supply. The United States is trying to save coal, although it can’t compete there with natural gas, but China, India and Indonesia also seem to have no intent to quit using coal anytime soon. As long as the world keeps bringing more coal plants online, we can forget about carbon emissions peaking anytime soon.


  • The geothermal revolution includes both shallow geoexchange systems, such as The Riverie high-rise which uses boreholes for heating and cooling, and deeper, more technologically advanced "enhanced geothermal" techniques.
  • Enhanced geothermal aims to make this alternative energy source viable anywhere by borrowing advanced drilling technologies from fields like hydraulic fracturing and nuclear fusion to access the Earth's core heat.



Sci Fare:

The big bang wasn’t the start of everything, but it has been impossible to see what came before. Now a new kind of cosmology is lifting the veil on the beginning of time



U.S. B.S.:

That’s what happened, right?

Article I, Section 8 of the Constitution gives Congress the power to "lay and collect Taxes, Duties, Imposts and Excises." Tariffs are duties. Yesterday the Supreme Court had a case in front of it about a president who imposed tariffs unilaterally on the entire global economy without a single vote from Congress. Six justices looked at that and concluded he filled out the wrong form. The ruling said one statute, IEEPA, does not contain the word "tariff" and therefore cannot authorize one.(1) It said nothing about whether the president overstepped the constitutional boundary between the branches. Trump imposed tariffs in his first term under Section 232 and Section 301. Biden kept them and raised some of them. No court touched any of it for years. The only time the Supreme Court intervened on tariffs was yesterday, and all it said was that the newest batch cited the wrong law.

….. The media frames the 6-3 vote as evidence of cracks forming between conservative justices. Look at what the split actually is. Three conservatives said IEEPA authorizes tariffs. Three said it does not because the statute does not use the word. Nobody on either side said the president lacks the authority to impose tariffs. The disagreement is over which form to fill out.

But the Court did not even strike down all the tariffs. It struck down roughly half. Everything imposed under Section 232 and Section 301 never went before the Court at all. Fifty percent on steel. Fifty percent on aluminum. Twenty-five percent on every imported car. Fifty percent on copper. All still in effect. The effective tariff rate dropped from 16.9% to roughly 9.1%, and 9.1% is still the highest since 1946. The Tax Foundation estimates the surviving tariffs alone will cost American households $400 a year and raise $635 billion over the next decade. Not one headline I have found leads with the fact that half the tariffs survived untouched. .…. 

Hasen drew the bottom line: "Just because the Court takes two or three cases to reach its highly ideological decision doesn't make it any less ideological or any more comporting with principles of judicial minimalism or respect for precedent."

The Court is not functioning as a neutral interpreter of the Constitution. It is functioning as one party's legal infrastructure. And the founders had a name for what to do about that. ..............



The depth of the Supreme Court’s corruption has forced us to find new language to describe its actions. Today’s decision, undoing Trump’s massive array of tariffs that upended the global financial system, is a case in point.

We say the Court “struck down” these tariffs. But that wording is inadequate and misleading. These tariffs were always transparently illegal. Saying the actions were “struck down” suggests at least a notional logic which the Court disagreed with, or perhaps one form of standing practice and constitutional understanding away from which the Court decided to chart another course. Neither is remotely the case. There’s no ambiguity in the law in question. Trump assumed a unilateral power to “find” a national emergency and then used this (transparently fraudulent) national emergency to exercise powers the law in question doesn’t even delegate….

This is a case where the legal merits of the President’s action were just too transparently bogus even for this Court to manage and — critically — his actions and the theories undergirding his claims to the power were, for the Corrupt majority, inconvenient. The architect of the current Court — the Federalist Society’s Leonard Leo — was behind the litigation that undid the tariffs. That tells you all you need to know. In this case Trump’s claim to power was neither in the interests of the Republican Party — the Court’s chief jurisprudential interest — nor any of their anti-constitutional doctrines. So of course they tossed it out. This may sound ungenerous. It’s simple reality. ...........



........... This is the way it works. Whenever something evil is done by the powerful to the weak, they look to see if there were consequences. If not, they expand, moving inwards. Yemen is a place no one cares about in the West: there wasn’t a lot of coverage. Palestine got tons of coverage and even law cases, but in the end no one powerful suffered, and the genocide was and is pushed thru. Opponents lost their jobs, went to prison and were deported or lost their banking access (Albanese, for example.)

Since those responsible for the genocide got away with it twice, they’re now doing it a third time.

Everything the powerful do to someone else is something they are willing to do to you if they think it’s in their interest................

Every time the elites of any country get away with abusing regular people, whether foreign or domestic, the line moves on what is acceptable. ..............




Like the Iraq War, the planned war with Iran is built on false premises. Unlike the Iraq War, there hasn’t even been a real public debate.


Eight months after Trump insisted that Operation Midnight Hammer "totally obliterated" Iran's nuclear program, he has deployed the largest military presence in the Middle East since the Iraq War.

............................................ In fact, Trump’s own 2025 national security strategy released in December explicitly states that the U.S. is not going to attempt to stop repression in other countries or lecture them about the need for democratic and human rights reforms, but instead will deal with such countries as they are (that policy was designed to justify Trump’s close relationship with Saudi, Emirati, Qatari, Egyptian and Jordanian tyrants but the principle applies to Iran as well, which is at most as repressive and in fact mildly less so than those close U.S. allies). ...

The willingness of the U.S. to embrace and even support the world’s most savage regimes has, in fact, been the staple of U.S. foreign policy since at least the end of World War II; Trump, I guess to his credit, is the first to candidly admit and describe that reality. .........


The Trump administration talks the language of diplomacy while posturing for a war on Iran which, if implemented, will be the end of the American democratic experiment.

........... At some point the global analytical community is going to have to come to grips with the harsh reality that, from the US perspective, diplomacy is not an option. The policy of the US when it comes to Iran is not how to find a diplomatic path toward a compromise solution which allows Iran to enrich uranium as is its right under Article 4 of the nuclear nonproliferation treaty, but rather regime change in Tehran.

Which means the United States is on a collision course for war with Iran that will happen sooner rather than later. ..................

A war on Iran will result in a disaster for all parties involved. There is no guarantee of success on the part of the United States and Israel, or failure on the part of Iran. There is a huge risk that this war will result in massive disruption of critical energy production capability in one of the most critical energy production regions in the world, triggering a massive energy security crisis that could collapse regional and global economies.

So, the key question is why Donald Trump, a man who ran on a platform of peace, willing to risk losing his political base on the eve of critical mid-term elections by betting on the successful execution of a short war with Iran that achieves the regime change outcome desired?

The simple answer is because he simply has no choice. The combination of domestic political backlash to Trump’s deployment of an army of federal agents into the streets of American cities and the ongoing political fallout from the release of the Epstein files has severely diminished Trump’s ability to guarantee that the Republican Party would retain control of both houses of Congress this coming November. The loss of the House of Representatives would signal the end of the legislative viability of Trump’s remaining years in office as Trump would be facing repeated motions for his impeachment form office.

The only hope Trump has to offset the ICE/Epstein political disasters is to deliver an unprecedented military victory over Iran, something no American President since Jimmy Carter has been able to deliver. .............



The US has amassed the largest military force in the Middle East since the invasion of Iraq almost 23 years ago and is poised once again to commit mass murder and gleefully perpetrate an astonishing amount of war crimes.

Yesterday a huge number of planes, from fighter jets to air-to-air refuelling tankers to command and control planes, left the US en route to the Middle East. The planes had stop-overs on US military bases in England and Germany, because no imperial war crime is ever complete without the involvement of Europe. 

A US attack on Iran, a flagrant violation of international law, if such a thing is even worth mentioning any more, appears imminent.

Why? For Israel, for oil, for power projection, for Trump’s legacy. Because the logic of the military-industrial complex demands that $1 trillion dollars a year and an astonishing array of killing machinery doesn’t just sit idle.

Because this is what empires do.

Because the US is violence. ............

...................... The US is a rogue state operating in plain site and a huge amount of effort goes into obscuring that fact. Because if people understood the US as a rogue state, they might question if its constant violence is not the violence of a peacekeeper or a freedom fighter, but the violence of a rogue.

They might question who, in fact, the bad guys are.................



Geopolitical Fare:

How elites in Beijing view the collapse of American hegemony

A professor at Fudan University and a former interpreter at the foreign ministry, Zhang is the author of a bestselling trilogy on what he describes as China’s “civilizational state” – a model of governance, rooted in indigenous ethical systems developed over centuries, that he presents as a coherent alternative to liberal democracy.

Zhang’s arguments have found a particularly receptive audience in Beijing: he is close to the Chinese Communist Party, and an amplifier of the ideas and views circulating among the Chinese elite. Pankaj Mishra spoke to Zhang about how the Chinese political and intellectual elite sees the collapse of American authority and the crumbling liberal international order.

............. Indeed, the Chinese are watching all this drama closely and with fascination. I think many people feel Carney was a bit more courageous than his European counterparts in calling this so-called rules-based international order a kind of disguise that allows the West to benefit – the US more, Canada maybe less. Now Donald Trump has said: we don’t need this disguise. We can approach everything based on the darkest aspects of realpolitik.

People [in China] see very clearly that these are naked acts of imperialism, hegemonism and colonialism. We have a holistic perception of all this: the crisis in in Greenland, the genocide in Gaza, the low-intensity civil war in Minneapolis and elsewhere in the US. All these are, in fact, interrelated, and it reflects deep structural problems in the Western political system.

In 2006, I wrote a small piece for The New York Times, saying that the Chinese model will be far more attractive than the American model in the Global South. Because in our model, we focus on people-centred development. The US, on the other hand, orients its political structure to favour the super-rich, and to sustain that today, they’re going back to the roots of capitalism: exploitation and territory grabs. In 2018, I gave a talk at Harvard in which I said that China’s leadership was looking to the 2050s while Trump was looking to the 1950s. Now he’s looking to the 1850s, which is clear in the US security strategy report issued at the end of last year. I remember Jeffrey Sachs saying that it is not so much anti-Russia or anti-China, it’s anti-everyone – except, perhaps, Israel. .........







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