***** 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
Market Fare:
................. 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.
Zitron: AI Is Too Expensive
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
The compounding effects of upstream delays
Charts:
1:
(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. ...............
BREAKING: Iran says contrary to what the US claims, the now fully leaked "Memorandum of Understanding" contains no Iranian commitments to hand over nuclear stockpiles, remove equipment, shut down nuclear facilities, or even commit to not build a nuclear bomb. Instead, all nuclear…
— The Hormuz Letter (@HormuzLetter) May 24, 2026
..
Iran says the United States has advised it to ignore President Trump’s public statements, claiming they are made primarily for domestic media purposes and should not be taken as official policy positions.
— Iranian Force (@MrImranPk) May 24, 2026
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.
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