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Sunday, July 5, 2026

2026-07-05

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


Economic Fare:


Stable Backdrop for Assets Despite Risks to U.S. Economic Resilience
The U.S. economy is reaching the halfway point of 2026 with its resilience intact. We see real gross domestic product (GDP) growth holding around 2 percent, underpinned by robust artificial intelligence (AI) capital expenditures and near-term fiscal tailwinds. Consumer spending faces some headwinds from cooling incomes and still elevated gasoline prices, but the labor market has improved and wealth effects continue to support upper income cohorts. Inflation has been hot, though we expect cooler readings later in the year will allow the Fed to remain on hold as the passthrough of tariffs and energy prices to consumer prices fades.

Against this constructive baseline, we see notable risks. First, the FOMC has indicated a willingness to hike rates should inflationary pressure fail to abate later this year, which is a risk if accelerating AI-driven demand drives further price increases or the recently announced agreement to open the Strait of Hormuz falters. Second, while the economy has shown remarkable resilience in recent years, any disruption to the AI investment thesis could present a downside risk, in particular to consumer spending which has been supported by accumulated wealth.

Although the range of potential outcomes is relatively wide, in our baseline outlook, the backdrop for U.S. fixed income is stable. Absent a shock to growth or inflation expectations, we expect 10-year Treasury yields to continue trading in a range, offering a combination of attractive income and diversification. Strong earnings growth is supporting corporate fundamentals, which helps contain spread widening from rising AI-related issuance. Still, with spreads generally tight, we are looking to less crowded sectors and relying on rigorous credit selection to guard against downside risk….........




...................................... Investment bubbles sow the seeds of their own destruction if they attract more capital than they can productively use, and starve other areas that need it. That point might be approaching. Arthur Budaghyan of BCA Research argues that capital expenditures are overshooting. In the US, he points out, capex on everything other than tech is actually falling: 


That might suggest that the AI boom is leading to malinvestment. Budaghyan compares tech capex’s share of overall gross domestic product with previous extreme doses of speculation. Famous housing bubbles burst when residential investment reached 7% of GDP in the US, 9% in Japan, and 8% in Spain. In all cases, these numbers halved swiftly once the bubble burst. US tech-related capital expenditures peaked at 5% of GDP in nominal terms in 2000 and are now slightly higher. In real terms, this number is now above 7%

............ None of this proves that the market will sell off forthwith. But it does look as though AI is beginning to suck in capital that others cannot spare. Budaghyan’s argument that the current trends only have a matter of months to go looks reasonable. 


Apollo: Fixed Income Replacement for Corporate Pensions

Corporate pensions are fully funded again for the first time in almost two decades, see chart below.

With rates still high, plans can lock in attractive yields now by replacing return-seeking assets with liability-matched fixed income and guard against the risk that falling rates during the next downturn reinflate their liabilities and erase the surplus.



There was a suggestion today suggesting that President Trump will formally “withdraw” from the Canada/Mexico/United States free trade pact (CUSMA/USMCA) tomorrow (Happy Canada Day!). However, unless he radically breaks the rules (always possible), this is just moving the situation towards annual reviews with a potential dissolution in 10 years.

This was already expected to happen, as this gives more negotiating space for the Americans to try to aggressively ram terms down the Canadian negotiation teams’ throats. That said, the Canadian Federal Government is not exactly in a mood for giving ground to the Americans, and the economic outlook for the Americans going into midterm elections is hardly great, and a renewed trade war might not be welcome outside of the White House.

It is possible that the Canadians could offer some concessions, but considering that Canadians are boycotting American goods, it is not clear how much concessions allowing greater access to Canadian consumers matters. The main industry at stake is automotive, with the American major manufacturers having sprawling supply chains that criss-cross the borders. However, those manufacturers are looking more and more to be dinosaurs that missed the boat on electric vehicles, which reduces the salience of the industry on a forward-looking basis.
It is unclear to me how much more damage Trump can inflict on the Canadian economy.  The Supreme Court limited his ability to impose tariffs via social media post, so a sudden stop to trade appears less likely. The trade talks will be a source of negative headlines, but the global economic outlook is more important at this time.



AFed chair who refuses to show his work is taxing the economy with avoidable risk. By shredding forward guidance, Warsh isn’t restoring discipline – he’s deepening uncertainty.A communications strategy of not communicating definitely helps him balance Trump’s demands with Wall Street’s hopes, but it is not good monetary policy. Markets can try to deal with hawks and they can try to deal with doves. But how can they deal with and price in a Chair who will not say what game he is playing? ...............

................ My interpretation of what is going on is rather cynical: it is that Kevin Warsh has told an awful lot of lies to get to his position. Donald Trump and the Trumpists think that he is a convinced interest rate dove, and that the only reason right now he is not pushing for rapid interest rate decreases is that he wants to nudge the committee rather than begin his term with a confrontation. The financial market community thinks that he pulled the wool over Donald Trump’s eyes by pretending to be an interest rate dove. Well, actually, he is a normal central banker. Those two sets of beliefs are inconsistent. Anything Kevin Warsh says is likely to disrupt at least one of them, and that could cause him trouble.

Hence he is going to make it a matter of principle to shut up. The longer he can preserve ambiguity, the better for him personally in his place at the top of this particular greasy pole. ..............



................................................ If the Iran War taught us anything about oil markets, it was that almost everyone was surprised by two things.

First, oil prices did not spike nearly as much as many expected. Second, instead of losing something close to 20 million barrels per day from a closure of the Strait of Hormuz, the world lost roughly 4 million barrels per day. The first surprise suggests that markets were already beginning to anticipate the second.

I do not mean that markets have a brain, or that they somehow knew the outcome in advance. Markets are not conscious. But they are complex adaptive systems. They self-organize around new information, constraints, incentives, expectations, and probability. While people were arguing about whether oil would go to $150 or $200, the oil system was already adapting. .....................


Big Tech AI capex crosses cash flow this quarter. From here, the build is borrowed.

The prospectus landed on the desks of institutional bond buyers on a Monday morning in February. It was several hundred pages, it carried the Alphabet Inc. name, and it meant investment-grade paper backed by the largest advertising business on the planet. Twenty billion dollars in seven tranches, with maturities spanning decades and a century bond that would not come due until 2126.

By Friday, the total had climbed to thirty-two billion dollars across dollar, sterling, and Swiss franc denominations. It was the largest corporate debt raise of 2026 to that point. It had a single purpose: data centres.

Alphabet had just told the market it would spend between $175 billion and $185 billion in capital expenditures this year, and operating cash flow, formidable as it was, could not cover the full cost. Morgan Stanley projected global AI-related bond issuance would approach $570 billion in 2026, nearly double the prior year. The era in which hyperscalers funded their infrastructure from earnings had ended. The era in which they funded it from capital markets had begun.

That transition is the threshold this article is about. When Google, Amazon, Microsoft, and Meta collectively guide to $725 billion in capital expenditure for a single fiscal year, up 77 percent from the roughly $410 billion they spent in 2025, the number stops being a corporate planning metric and becomes a macroeconomic variable. The combined spending of four companies exceeds the GDP of all but roughly twenty countries, larger than the entire economic output of Sweden, Poland, or Belgium. Bridgewater Associates estimates that AI-related capital expenditure will contribute 140 basis points to US GDP growth in 2026, accounting for half of the country’s projected 2.8 percent real growth.

The Federal Reserve cannot model the path of inflation without accounting for what these four companies decide to build. .................

And then there is the physical ceiling. Nearly half of all US data centres planned for 2026 have been cancelled or delayed, with only about 5 gigawatts under active construction out of 12 gigawatts announced. The bottleneck is not chips. It is transformers. ...........

Twenty-five percent probability belongs to the world where the build slows not because the financial thesis fails but because the supply chain cannot deliver. If you are pricing AI infrastructure equities and watching the next two quarters, the tell is not the earnings call. The tell is the transformer order book. A hyperscaler that guides capex lower in Q3 or Q4 and cites infrastructure delivery timelines rather than demand optimisation is confirming this scenario.

The financial threshold is equally precise. Epoch AI calculates that aggregate hyperscaler operating cash flow is growing at roughly 23 percent per year while cash capex is growing at roughly 70 percent per year. Those two lines cross in Q3 2026, the quarter that has just begun, when aggregate free cash flow reaches zero. Oracle has already crossed. Amazon is crossing now. Alphabet’s crossover arrives around Q1 2027, Meta around Q3 2027, Microsoft not until Q3 2028.

The sequence matters. By the time the last company crosses, the first will have been borrowing for two years. ............................

The Repricing -- 10%

This is the tail risk and it belongs to a single trigger. One hyperscaler, most likely the one with the weakest AI revenue narrative relative to its capex commitment, cuts guidance by 20 percent or more in a single quarter. The market reads the cut not as company-specific but as the first crack in the consensus, and the AI infrastructure trade, which has added roughly $3 trillion in market capitalisation since early 2023, begins to unwind in days rather than weeks. If you are running a tech-heavy portfolio, this is the scenario you cannot afford to ignore even at low probability. The drawdown speed would exceed any rebalancing window.



China Fare:


America has no peer competitor in artificial intelligence outside of China. Several years ago, when the trajectory of AI model development was uncertain enough to allow middle powers like the United Kingdom and France to nurse hopes of remaining competitive, this may have sounded like an overconfident pronouncement. Today, it is well-earned conventional wisdom. Competing at the frontier of AI requires coordinating talent, data, energy, and compute infrastructure at unprecedented scales—scales that only the United States and China are realistically capable of delivering on, although each in their own distinctive ways. Understanding China’s approach to developing and diffusing AI is thus of existential importance to understanding America’s relative position in the world to come.

America has been surprised by China’s AI prowess before. In January 2025, the release of DeepSeek was widely described as a Sputnik moment by policymakers and business commentators. While DeepSeek’s technical advances were overstated, the media’s reaction revealed the extent to which many in the United States had become complacent about China’s lag in AI capabilities.1 Against available evidence, too many American observers believed that China was incapable of discovering AI breakthroughs on its own, whether because of constraints on their access to advanced semiconductors, or the persistent myth that Chinese companies can only copy but not innovate. Even now, many still seem to believe that Chinese AI models will remain behind American models in perpetuity, offering lesser capabilities but at a fraction of the price. Yet offering a good enough product at ultra-low prices and thereby cornering the market on less exquisite technologies and manufacturing inputs is exactly how China became a peer competitor to the United States in the first place. In AI, we are thus primed to be surprised once again. ...............



....................................................................... He gives five reasons for this, in China's specific context.

First, at the risk of stating the obvious, China has "a huge population." As he explains, today "only slightly more than 20 countries around the world, with a combined population of about one billion, have achieved modernization." Consequently, this means that China, when attempting to achieve modernization for more than 1.4 billion people, is by definition operating without a roadmap: modernizing more people than every currently developed country combined. You can't just scale up someone else's model for that.

Second, he stresses that one of the key objectives of China's modernization, as opposed to "Western modernization," is "common prosperity." In his words: "the biggest problems with Western modernization are that it is capital-centered rather than people-centered and that it seeks to maximize capital gains rather than serve the interests of the people."

To him, this isn't just a moral failing but also a structural one. He explains that modernizing without common prosperity "create[s] a huge gap between the rich and the poor and [leads] to severe polarization," which he says is the reason why "some developing countries [that] have approached the developed country threshold" ultimately "[fell] into the middle-income trap and became mired in prolonged stagnation." ........

Fourth, and this has always been a very important theme for Xi, ever since his days as a local official, he emphasizes that Chinese modernization cannot come at the expense of "harmony between humanity and nature" and must give "priority to resource conservation and environmental protection, and letting nature restore itself." As he explains, this isn't only an ideological commitment, but also a practical matter, China having especially constrained natural resources per capita.

Last but not least, the fifth point that Xi advances as a core differentiation is that Chinese modernization will be achieved through peaceful development, not through the "bloody crimes such as war, slavery, colonization and plunder" that, as he puts it, characterized Western modernization and which China itself "suffered" from. China, he says, will "never oppress other nations or loot the wealth and resources of other countries in any form" but will instead "always uphold peace, development, cooperation, and shared benefit."

The jury is, of course, still out on whether China will manage to live up to this promise but there is, sadly, no jury needed for the Western side of the comparison: That verdict came in a long time ago. As the famous quote from Samuel Huntington's The Clash of Civilizations goes: "The West won the world not by the superiority of its ideas or values or religion … but rather by its superiority in applying organized violence. Westerners often forget this fact; non-Westerners never do." ..........................


A policy reading of the 2026–2030 blueprint for a "new-type energy system," released June 26

On June 26, China released the Plan for Building a New-Type Energy System during the 15th Five-Year Plan Period. As a major sector-specific deployment within the national 15th Five-Year Plan framework on the energy front, it sets the direction for energy development from 2026 to 2030, making it essential reading for anyone hoping to understand China’s energy strategy. ...........

In the 14th Five-Year Plan for a Modern Energy System, there were no binding indicators governing new energy development; and in the 14th Five-Year Plan for Renewable Energy Development, there were only five anticipatory (non-binding) indicators concerning the development and utilization of renewable energy—namely, the total renewable electricity consumption responsibility weighting, the non-hydro renewable electricity consumption responsibility weighting, renewable power generation, total renewable energy utilization, and non-electric renewable energy utilization. The 15th Five-Year Plan for Building a New-Type Energy System, by contrast, adds three binding indicators: comprehensive energy production capacity, raising the share of non-fossil energy in total consumption to 25% by 2030, and reducing carbon emissions per unit of power generation by more than 10%. ...................





Market Fare:

Is this finally the rotation we have been waiting for? The last 2 weeks of 'duration ping pong' have been exhausting. 

First, a quick retrospective.

I don’t think that the 🐿️ is alone in feeling relieved that Q2 had ended. A sea of green for most risk assets - many of which we had trimmed ahead of and after the onset of the Iran war - interspersed with deep red patches in the places where we had remained overweight (especially energy).

By contrast, Q1 was certainly this rodent’s favorite type of equity market. January through March saw the dividend yield, low volatility and value factors dominate the US equity leaderboard. From April onwards, unless you were ‘max long’ high beta and momentum stocks, you were struggling. ...........



Last week saw renewed skepticism in the AI narrative, this week there is growing skepticism to the semiconductor narrative. A multitude of reasons from leveraged single-stock ETFs to a too hawkish Fed were apparent in explaining renewed Tech weakness. Indeed, despite Micron’s post earnings rally, which has now fully faded, much of the broader tech sector did not bounce back as might have been expected.

In a note laying out the biggest pain trades in the market currently, titled appropriately "The Biggest Pain Trades" (available to pro subscribers) HSBC's multi-asset strategist Duncan Toms writes that he is wary of how narratives can drive near-term market moves even if fundamentals do not justify changing tack. For example, last year’s AI bubble narrative saw US semiconductors fall c.15%. But as AI bottlenecks become more evident than bubbles, we saw a much more aggressive rally.

According to the self-admittedly bullish strategist, for HSBC to be more concerned right now, we’d need to see overly bullish sentiment and positioning. But by the bank's measures this is firmly neutral. More dovish US rate expectations could be another catalyst for equity strength – and last week’s data prompted a tentative step in that direction. Elsewhere, oil is no longer a key driver  of many financial markets.

As we enter into the second half of the year a lot of views for H2 have become widely held. So to address the key pressure points, Duncan and his team highlight and outline key pain trades that could potentially catch the consensus off-guard. These pain trades are:
  1. The AI trade continues unabated
  2. Europe outperforms,
  3. an explosive USD rally,
  4. US Treasury curve steepening,
  5. EM yields decline
  6. a derailing of the Russell 2000 rally.
The AI trade continues to face scrutiny and comparisons to the tech bubble of the late 1990s/early 2000s. The bubble narrative was rife in Q4 2025, but this broadly gave way to clear bottlenecks as agentic AI has led to even higher data center and chip demand (although today's META news clearly dented that belief). Yet, HSBC laments,the bearish narratives keep coming. 

So what if, instead, the AI trade just continues and valuations actually begin rising strongly again? Forward PE ratios currently suggest no sign of exuberance (Chart 1). For example, Nvidia at just under 20x is currently sitting at a 10-year low in its 12m forward PE ratio. That’s some contrast vs the equivalent metric for Monster Beverage at a 10-year high at just under 40x 12m forward PE (of course, forward PEs are cheap simply because consensus is projecting hockeystick earnings... and consensus has never been wrong before).


Firmly set in its bullish ways, HSBC thinks even a mere re-rating back towards middle-ranging valuations in the context of their own history will be enough to see the AI trade continue strongly. Here even HSBC admits that an alternative pushback is that future earnings expectations have become too positive and the reality check will then come. Yet the main problem with that is that many of these stocks have seen realized earnings growth over the last year outstrip stock price performance (to which one can answer that this is the result of frontloaded earnings through excess pricing and tokenmaxxing, both of which are no longer relevant thanks to a flood of extremely capable and cheap Chinese open-sources models). 

So, all of Meta, Amazon, Microsoft, Nvidia, Broadcom, and Micron have seen trailing PE ratios fall too in the last 12m. The same can’t be said of many other parts of the markets.

Here, HSBC proposes an even more aggressive bullish scenario, namely the possibility that earnings growth estimates haven’t yet caught up with strong earnings momentum. For many names at the forefront of the AI story in the US, expectations for full year 2026 earnings growth is flat or lower than the year-on-year earnings growth seen in the 12 months to Q2 2025. This is despite a pickup in earnings revisions ratio for these names in recent months. As such, while the narrative on AI continues to search for cracks, the pain trade could be continued strength and upside surprises on AI in H2.


The garbage rally roils quantitative investment strategies


And a lot of hedge funds are probably hating it




Quoting the front page of the monthly market update written by Joachim Klement and Francisca Reis, of [UK investment bank] Panmure Liberum …

“In 1929, the cyclically-adjusted P/E-ratio (CAPE) of the S&P 500 reached 32.6x according to Prof. Robert Shiller’s data. This was 1.8 standard deviations above trend at the time. In 2000, the CAPE reached 44.2x, or 3.3 standard deviations above trend – a clear sign of a bubble. However, … , earnings in both instances were within normal range, less than one standard deviation above trend. 

Today, the CAPE is at 41.0x, or 2.9 standard deviations above trend. Once again, we are clearly in bubble territory for stock market valuations. However, unlike in previous bubbles, we are having extremely high CAPE at a time when earnings themselves are 1.8 standard deviations above trend. In other words, we are in a valuation bubble at a time when earnings are in a bubble themselves. 

If we correct for the earnings bubble, the current CAPE would be 67.6x or 4.6 standard deviations above trend, a bubble that surpasses anything ever seen in US history by an extreme margin. If valuations followed a normal distribution (which they don’t, so don’t take this literally), this would happen in 0.00019% of months or once every 43,432 years.”

Bubble anyone?

Or, as they say, cash is king.

Railroads?

Internet?

Surely not the DotCom bubble?

Perhaps even, for the more historically minded, tulips?

Mania obsession is sweeping the commentariat.  We are on the road to something or other.  It’s just that we have no idea what, where, or when.

I am sure our economists will be able to answer all those questions with both precision and alacrity.  After all, the market is all-knowing, information freely and perfectly available, and the arc towards equilibrium so smooth and unrelenting that all will be revealed shortly.  There is nothing to say about apparently aberrant behavior.  Why?  Because the market always speaks the truth.

Or maybe not.

The drumbeat of articles and op-eds warning us about the apparent insanity of the speculative mania unfolding before our incredulous eyes has both picked up in intensity and had practically no impact on that speculation.   Yet.  The folk who call themselves experts and advisors on how to make money and how to allocate wealth are starting to raise the alarm.  Even the technocrats are stirring from their peer-reviewed siloes.   We can expect an avalanche of analysis after the crash, but solid forecasts are hard to find.  All that pervasive uncertainty so carefully cleared away from orthodoxy devalues the resultant theories and renders them after-fact rather than prescient.

So is this 1873 or is it 1929?

Either way the mania is epically manic.  We are living through a conjunction of convulsions.  One is the short term mania of a financial system unmoored from reality and unanchored from regulatory restraint.  The other, which is far more disruptive, is the end game of neoliberal and neoclassical orthodoxy being played out  .............................

............... I had half expected that economics would, itself, be refurbished in the aftermath of the Great Recession of 2007/2008.  Of course it wasn’t.  It is far too path dependent and unable to move towards recognition of its faults.  Reputations matter enormously and mere facts cannot be allowed to get in the way of maintaining status within the guild.  So here we are a few years later, gripped in a speculative mania that has all the makings of a spectacular wealth destroying moment, and we can get no guidance from economics because its orthodoxy excludes the possibility that markets can be really, truly, stupid.  Or that manias can overwhelm analysis.  Or that the urge to protect wealth, so often cited as the bedrock of sanity and self-interest, can sink without trace when the fear of missing out reaches fever pitch. Or that the power and influence of a few well-connected players can completely divert attention away from the well-being of the majority.  ...........................

An awful lot of destruction seems to be looming on the horizon. ..........

Are we de-funding the future in order to fund a mania?

Is the present crowding out the future? ......


Leveraged funds and margin debt have grown to unprecedented levels this year

Investors have never been more eager to ratchet up their stock returns through margin loans and funds that amplify gains and losses. It may be a sign of trouble.  

U.S. margin debt, or what investors borrow from their brokerages to buy securities, rose 54% to a record $1.4 trillion in May from a year earlier, according to Finra data. Meanwhile, high-risk leveraged exchange-traded funds that produce double or triple the daily move of underlying stocks are growing rapidly, as is trading in options tied to them. ...........



It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Mark Twain, American writer (1835–1910)

In Part 1, we read the tape: a textbook three-stage parabola, semiconductors at 22% of the S&P 500, record inflows, a five-sigma momentum stretch. The chart says late-stage.

But a stretched chart, on its own, is not a sell. Great trends get stretched and stay stretched for years. The chart only becomes dangerous when something else is true at the same time — when the story underneath the price is quietly weaker than the price assumes.

So this piece does what we always do at arvy: we turn the chart face-down and interrogate the «Good Story». We are quality investors first. Before we trust a parabola or fear it, we want to know two things — whether the earnings are real, and, more importantly, whose earnings are real. Because the most important discovery we have made about this sector is that «semiconductors» is not one trade. It is three different businesses wearing one ticker-cloud, and our own screening pulls them apart with uncomfortable clarity.

But first, the foundation. Are these earnings real at all? .......

.............. Here is the trap that catches even good quality investors — we have watched it happen, and it cost a lot of careful managers dearly in 2022.

Nvidia was an unquestionably great company in 2018. It was an unquestionably great company in 2021. And the stock fell over 50% in the first case and roughly 66% in the second — not because the business was bad, but because it is cyclical, and the market eventually remembers that. (Tellingly, it then recovered to new highs within about eighteen months each time — which is precisely the double-edged lesson we return to in Part 3: the cyclical crashes were also the buying opportunities.) ...............

And this is precisely the evidence for our thesis, not against it. A cyclical business throwing off margins this far above its own history — margins so extreme they are visibly destroying the economics of its largest, most powerful customers — is not a business that has discovered a durable secular moat. It is a business at the violent top of its cycle. The squeeze is the symptom. When a sixty-year-old commodity industry suddenly has the most powerful company in consumer tech over a barrel, the right question is not «how much higher can the memory makers go» — it is «how much longer can a margin this abnormal possibly last». Peak power over your customers is what the top of the cycle feels like from the inside. .............



Crypto Fare:

Every post-ETF Bitcoin correction has stopped at the same volatility boundary. This one just did.

................. And what it measured last week was a correction that had arrived at the boundary.

The thesis is specific and falsifiable: Bitcoin’s decline from its spring high near $77,600 to its low near $59,300 on June 25 represents a drawdown of approximately 23.5 percent, which lands at 1.8 standard deviations of the asset’s trailing 90-day realized volatility. This is not a coincidence. It is the signature of ETF-era selling mechanics, where the dominant sellers are not retail panic or organic liquidation but pension funds, endowments, and wealth management platforms rebalancing portfolios against allocation bands that trigger automatically when Bitcoin’s weighting drifts beyond a predefined ceiling.

That selling is finite by construction. When the rebalancing is complete, the selling stops. It does not taper. It stops. .......................

The distinction between volatility compression and price stagnation is the distinction between a coiled spring and a dead battery. A dead battery does nothing because it has nothing to give. A coiled spring does nothing because it is waiting.

The Bollinger Band width at its current level has, in every prior instance in Bitcoin’s post-ETF history, resolved with a move of at least 40 percent within 100 days, according to historical analysis published by CryptoDailyUK in May 2026. The direction of that move is not predetermined. But the magnitude is historically consistent. ................

If you hold Bitcoin and you are watching the volatility compression, the most likely path forward is the one the compression signature has delivered every time before. The spring uncoils. The Bollinger Bands expand. The move begins. At roughly 45 percent probability, the mechanical selling has exhausted itself, the macro does not worsen materially over the next 60 days, and the combination of long-term holder accumulation, options repositioning into July and September, and the removal of the quarterly options overhang produces a recovery toward the $72,000 to $78,000 range by early September. The 200-week moving average near $62,457 holds as the structural floor it has been in every prior cycle. You do not need a catalyst. You need the absence of a new seller. The compliance cliff means the old sellers are finished.

The path that demands your patience, at 30 percent, is the one where the compression resolves sideways rather than upward. ..............

The scenario that should concern you, at 25 percent, is the one where the macro breaks the pattern. The Fed hikes in October. ...............



A.I. Fare:


.......... On Sunday, the Bank of International Settlements (BIS) put out its annual report and said, well, a bunch of things that I’ve been saying:
In the near term, the ongoing AI investment boom raises questions about the sustainability of the current economic expansion. The five largest hyperscalers are set to spend over a trillion US dollars on AI-related capital expenditure from 2025 through 2026. These commitments are outpacing earnings and the free cash flow of these firms, leading some to issue debt to raise additional financing.
As edifying as it is to see the bank for central banks say exactly what I’ve been saying for the last few years, this part is the one that both rocks as far as being right goes and sucks for the world at large:
Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions…should hyperscalers slow or halt the aggressive pace of capex deployment, many borrowers across the supply chain could struggle to replace lost revenue and service their debt.
No shit. In April of last year, I wrote a piece called “AI is a systemic risk to the tech industry,” where I outlined how the failure of one model lab, OpenAI, would have seismic effects down its supply chain, delivering body blow after body blow to NVIDIA, Oracle, Microsoft, and the various Neoclouds that serve its compute, the most notable of which being CoreWeave.  ...................



....... As Slok shows in the chart below, so far there are no signs of profit margins rising outside the tech sector. He notes that "this is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb."

........... This, according to Slok, creates a dangerous divergence between aggressive, front-loaded valuations today and a much slower cash flow reality, since equity markets priced for instant earnings growth will face a painful repricing if the productivity hockey-stick takes five years rather than five months.

....... Slok's bottom line is that a mismatch between current earnings expectations and the actual time firms need to generate ROI on AI investments could have significant implications for many AI company valuations today.


Abstract
The history of technological advancement is often invoked as a reason for optimism about the future of artificial intelligence. AI supporters infer from history that regulating AI would be counterproductive, because new technologies are typically beneficial to society overall. Those who think AI is unlikely to have much real-world impact also invoke technological history, pointing to prior inventions that failed to live up to their initial hype. Yet the lessons of technological history are not as clear as many believe. This Essay examines several historical episodes where elites made grave errors involving new technologies and threats, sometimes due to excessive optimism and sometimes due to excessive skepticism. History reveals that novel technologies can exceed expectations, have harmful effects on society, cause serious environmental harms, and even risk global catastrophe. Policymakers and regulators should find little basis for complacency about AI in technological history.



............................ The development of neural networks, or synthetic brains, comes with new implications. AI created via linear programming uses a rules-based system, in which humans must manually alter code to improve performance. By contrast, neural networks are “grown” to learn patterns.

Due to the sheer size and complexity of neural networks, AI designers themselves admit they do not understand the models they’ve created. Because neural networks comprise millions of nodes, the combinatorial possibilities are, in the words of Eliezer Yudkowsky, “inscrutable.” This is known as the interpretability problem, and it has led experts to call neural networks a “black box.”

Yudkowsky has worked in the field of AI safety for decades. He founded the Machine Intelligence Research Institute (MIRI) in 2000 and recently co-authored (with MIRI President Nate Soares) the New York Times bestseller If Anyone Builds It, Everyone Dies. Their warning concerns Artificial General Intelligence (AGI), the not-yet-achieved AI that would match humans in all cognitive domains. Unlike LLMs, an AGI would have very broad capabilities. The frontier AI companies (OpenAI, Anthropic, Google DeepMind, and XAI) are racing toward AGI as the holy grail.

........................................ If these scenarios seem like science fiction, consider that Geoffrey Hinton gives a 10–50 percent chance that AI would result in extinction (“X risk”). Yoshua Bengio, the most cited AI researcher and most cited living scientist, gives an X risk of 20 percent. Yudkowski and Yampolskiy give an X risk of over 95 percent, while Dario Amodei, CEO of Anthropic, gives an X risk of 10–25 percent.

Some researchers, such as Yann LeCun (previous chief researcher at Meta), give a near-zero probability of a catastrophic outcome. However, Roman Yampolskiy challenges such confidence. “If you have a solution (to alignment), you can make billions of dollars….not a single AI lab in the world has one. They don’t have a paper published on how to do it. Not a patent, not a rigorous blog post. The best they say is, ‘When we build it, we’ll figure it out.’”

AI risk represents the apex of growth mania, where a few tech elites gamble with humanity’s future. They take these risks without our consent and without our interests in mind. As Anthropic’s Jack Clark opined recently, “…the AI industry has a gas pedal, but it doesn’t have a brake pedal.”

Just like the economy it feeds.


We are producing more than ever and understanding less of all of it. The mechanism has a name.

.......................... Institutions are beginning to sense the corruption without being able to name it. Gartner predicted that by the end of 2026, half of all organisations globally would require AI-free skills assessments. The prediction is a policy admission that the signal has been corrupted. When every employee produces competent work with AI assistance, competence ceases to distinguish between people who understand what they produce and people who merely recognise quality when a machine produces it. The organisation can no longer tell what it actually knows. 

..................... And the question nobody can yet answer, not the governance frameworks, not the workplace analytics, not the AI indices, is whether productivity purchased at the cost of comprehension is a bargain we can afford, or a debt we are running up against a future that will, as futures always do, eventually present the bill.



Investing Fare:

Part 3 of 3 · The finale.

........... Stop Predicting. Start Following Rules.

Here is the liberating truth that took me years and real money to internalize.

You do not need to know whether this tops in 2026 or melts up into 2028.

The investor who survives the end of a great trend is not the one who calls the peak — nobody calls the peak. It is the one who decided, in advance and in cold blood, exactly what they would do in each scenario, and then did it, mechanically, while everyone around them was paralysed by the same unanswerable question.

links to:
Buying stocks is easy. But when should you sell?

28 March to 28 June 2026 | Scenarica's first self-assessment

In our manifesto, published on 24 April, we described a discipline. Not a prediction method, not a forecasting model, but a discipline: the practice of holding multiple futures in mind at once, assigning each a probability, watching those probabilities move as new evidence arrives, and never committing to a single outcome until the evidence forces the commitment. We called this the defining characteristic of the reader Scenarica was built for. We named the failure it guards against: the compression error, the human mind’s tendency to collapse a complex situation with five plausible outcomes into a single narrative and discard the other four. Scenarica, we said, exists for the reader who refuses to compress. ..........

But the finding that sits at the centre of this report is not about accuracy. It is about a structural habit. In 297 scenario annexes, Scenarica priced the most likely outcome above 50 per cent exactly five times. Five out of 297. A publication that asks readers to think in probabilities, that built its manifesto around the discipline of holding multiple futures, turns out to price almost everything in the same narrow band: 35 to 49 per cent. Every vertical. Every topic. Every level of uncertainty. The same band. That is not calibration. It is a comfort zone. What follows is the evidence. ...........

The first article Scenarica ever published, on 24 March, examined the oil price implications of Iran’s refusal to negotiate over the Strait of Hormuz. Four scenarios. “Escalation Premium Regime” was priced highest at 36 per cent. “De-escalation,” in which diplomacy succeeds and the Strait reopens, received 12 per cent.

Three months later, Brent crude sits at $72, down from $103. The Strait is reopening. In late May, the United States and Iran began converging on terms. By mid-June, the outlines of a 60-day memorandum of understanding were public. Iran would begin to end its near-total closure of the Strait. The US would lift its blockade of Iranian ports. Shipping transits accelerated. Oil dropped over 20 per cent from its 2026 peak. The scenario priced lowest is the one that materialised.

.............. Three patterns sit inside 1,214 probability calls, and together they describe a publication that identifies the right possibilities and then flinches from pricing them with conviction.

The first is conservatism. ......

The second is what this report calls drift-as-base-case bias.  .........

The third is the structural underpricing of dramatic outcomes. ......



Vid Fare:

Sees similarities with the 1998 mid-year swoon

Darius Dale notes that the risk of a 1998-style correction in the next quarter or two is "high".

If you remember, that's when the Russian debt default plunged the S&P by -15% between July and October, and Long Term Capital Management imploded.

This is notable because Darius has been a consistent bull since stocks bottomed out in late 2022.

It's not all gloom, though. If the market indeed corrects, he then expects a dovish Fed response to send stocks higher in 2027.


Quotes of the Week:

What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower.
William J. O’Neil, investor and author (1933–2023)



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(not just) for the ESG crowd:


............. Then I read that at the recent Group of 7 summit in Évians-les–Bains, with seven environment ministers in attendance, all discussion of the climate change crisis was deliberately kept off the agenda to avoid dissension — specifically to make sure the American delegation did not get up and walk out. 

Where is the seriousness in high places? 

Then I read that a conference intended to discuss extreme heat, part of the June 20–28 London Climate Action Week, was cancelled because the building where it was to be held was too hot. Yes indeedy. Just the thing. 

These Climate Action Weeks, convened here and there on different continents, are a curious thing. Business execs, NGOs, policy wonks — all sorts of people attend. But “C.A.W.s” are decentralized by design. No one with power — no resolute president or cabinet minister ready to pass laws, to declare a new national or international direction — seems ever to go. .....................


When conflict of interests meets reality

Stories we tell ourselves
According to the newly released report, total energy supply in 2025 increased by 1.7% over the previous year, with solar power accounting for the vast majority of this growth. Despite solar’s rapidly increasing share of world energy—now at 8.7%—all other forms of energy use continued to expand in absolute terms, including fossil fuels. Coal, oil and gas use have all increased throughout 2025, and still accounted for 86% of all energy supplied to the economy. Contrary to the stories we tell ourselves the energy transition still hasn’t started yet: wind and solar are still mere additions to an ever growing pile of carbon based fuels. ................

................................................ So, despite the fact that oil production and consumption have climbed to new record highs in 2025 (surpassing the previous record set in 2018)4 one cannot ignore the dark clouds gathering on the horizon. Even if traffic eventually normalizes through Hormuz, and Latin America, Libya and some other nations keep pumping more oil than they ever did, the rising energy cost of drilling and delivering more oil, together with natural decline throughout the rest of the world will eventually tip global crude oil (and then natural gas) output into a long enduring decline. Not just the conventional part (as it happened in 2004) and not just in one country (the US in 1970)5—but on a global scale. I wonder whether that will be the year, when this series of the most widely respected publication in the field of energy economics, the Statistical Review of World Energy, finally comes to an end.



....................... It took a while for me to realize that in our society, as in all others, there are taboos that most people obey blindly and thoughts that most people won’t let themselves think.

Just now, one of the things hobbled most severely by these taboos is clear thinking about the future. Part of the problem is that faith in progress has long been the de facto established religion of our society. ..............................

...................................................... Nor do alternative energy resources offer a way out, for a simple but crucial reason: all of them, without exception, are built, transported, installed, maintained, dismantled, and disposed of using fossil fuels. You can’t build a wind turbine using nothing but energy from wind turbines. Some calculations, in fact, indicate that the amount of oil, coal, and natural gas needed by a wind turbine from the beginning to the end of its life cycle embody more energy than the wind turbine itself will produce during its working life. In a very real sense, then a wind turbine is simply a roundabout way of burning fossil fuels. This explains why wind turbines can’t pay for themselves without huge government subsidies—and it also explains why CO2 levels in the atmosphere have kept climbing steadily, even as wind turbines sprouted like weeds across the industrial world.

This is the real meaning of peak oil: a long era of downward pressure on lifestyles and economic activity around the world, with no prospect of an end in sight. There will still be liquid fuels to burn a century from now, but by then the engines that burn them and the lifestyles that depend on them will be prohibitively expensive for all but the rich. Economies will downscale and localize for the simple reason that transport costs will put any other option out of reach—the much-ballyhooed global economy of the recent past is already coming apart for this reason among others—and political power will also relocalize as the capacity to enforce government edicts over continental areas becomes increasingly fragile.

A word or two probably needs to be said about the role of high technology in all this. Right now vast amounts of money are being poured into the quest for artificial general intelligence (AGI)—a machine that can outthink humans. Read the output of the Silicon Valley moguls pushing this and it becomes instantly clear that this is a desperate Hail Mary maneuver, an attempt to find some way out from between the jaws of our predicament. The moguls in question have at their beck and call all the human intelligence they can hire, and that isn’t enough to find a way out of the trap we’ve made for ourselves. Trying to come up with something that can discover things humans can’t is the only option they can think of. 

From one perspective, this is a textbook example of hubris, that quality best described as the overweening pride of the doomed. From another, it’s a measure of just how desperate the best informed members of our society think our situation really is. ..........................



................... Google’s power consumption rose by 7 TWh between 2023 and 2024. That was bad. But it rose by a whopping 12 TWh between 2024 and 2025, almost double last year’s increase. Google’s power consumption isn’t just growing – the rate at which it is growing is growing. 

.................. If “AI infrastructure buildout is currently accelerating faster than the grid is decarbonising” then Google shouldn’t be building AI infrastructure. If they are breaching the boundaries of safe operation on a planet that can only take so much, they should stop and consider whether all of this is worth it.

Think about what Google’s AI services have done for you. Does it seem worth it? Are you getting a deadly heatwave’s worth of use, out of PDF summaries and AI overviews? ..............



......................... Humans tend to stick their heads in the sand, until eventually they all panic simultaneously.

Well, climate I’m telling you, is not going to be any different. The American oil companies were all warned about this problem, in the 1950’s. By the late 1970’s, they had an accurate picture of what was going to happen. If at any point they chose to warn us, we would have had plenty of time, to figure out an alternative way to live without using any more fossil fuels. They did not warn us, Hansen warned us, in 1988.

If we had taken Hansen’s warning seriously, we would still have had some time to figure out a way to stop using fossil fuels. Hansen’s warning was not taken very seriously. In fact, when Hansen warns us we need to reduce carbon dioxide back below 350 parts per million to stabilize the climate, nobody really listens to him unfortunately. Hansen did not plan for climate change to become a kind of grand existential conflict for humanity. Hansen had hoped we would implement a carbon tax and start building nuclear reactors.

That did not happen. We’re happily continuing the march towards oblivion. So, what you can reasonably expect to happen at some point, is a climate event that is so massive, that we can not choose to ignore it. We will get an event that is so massive, that we end up getting the kind of mass panic we had in March 2020, when we suddenly had tens of thousands of police on the streets of Paris, announcing to people that they had to stay inside.

What would that look like? Well, for that, we have to talk about wet bulb temperatures. ..................

Heat stress conditions beyond the limit of human survivability are already a regular thing now on Earth. And due to arctic amplification, the fact that we actually see more rapid global warming in parts of the world that lie further north, there is not really any major part of the world anymore where we are safe from these heat waves.

Now combine this realization, with another problem we face: The heat dome. Because we have changed our climate, the weather has started behaving differently. It’s not just a fact that the Earth in general has warmed, but heat waves now behave differently. We now increasingly get heat domes, which are large parts of the world where the heat is simply trapped and the weather becomes stationary. .....................

So, please allow me, based on what we’ve learned, to offer you a prediction:

At some point, something big is going to happen. Something so horrifying, that many people will not be able to mentally cope with it. And people are going to freak out. They’re going to freak out, like you’ve never seen before. All these realizations people have been suppressing for years, are going to be released in a tidal wave of emotions, all at once. And governments are going to find themselves panicking too, like they did in March 2020.

As I have explained before, the electric grid in Europe is just not equipped to have us all use air conditioning. Only 20% of Europeans have air conditioning. This does not stop people right now however, from buying air conditioning. If everyone used air conditioning, our evening demand peak would be 50% higher than it is right now, enough to crash the grid. Also, please keep in mind, that our cities suffer a massive heat island effect. Cities can be up to ten degree Celsius hotter than the neighboring countryside. ..................

A kind of climate 9/11, if you will. I honestly don’t expect it will take more than a decade, before we have a climate 9/11. ..............

Psychologists won’t be able to cope with the demand from people having mental breakdowns. The reason it will be such complete insanity is because people already know all of this, but they still suppress it. But at some point, everyone will almost simultaneously become unable to suppress it. What you are living in now, is the quiet before the storm.

And then within a few days, you find yourself waking up in a whole new world. A world where you have to request permission if you want to travel somewhere by airplane. A world where the tires of your SUV are slashed at night  ................

So, what I’m telling you, is to collapse now and avoid the rush. Move to live closer to your family and friends now ................

So what I’m asking you, is to just prepare for it. Make the changes that are going to be necessary to your life now, rather than being part of the big crowd of people who will try to exit the theater all at once when someone yells fire. Help make this a somewhat orderly and dignified transition.



Sci Fare:




U.S. B.S.:

Several people have been arrested and cited after President Donald Trump, without evidence, blamed vandals for destroying the pool.



War Fare:







Zeteo’s weekly round-up of the stories you may have missed out of occupied Gaza and the West Bank, as Israel continues its genocidal war and apartheid policies.




Hannah Arendt warned in 1948 that a Jewish state built without Jewish-Arab agreement would live by permanent war, fear and exclusion – a warning that now reads less like idealism than realism.



Other Fare:


This issue may not matter to most, but I believe in the humane treatment of farm animals, since I am not enlightened enough to be a Jain. And there are so few wins these days for laws and regulations that inconvenience capitalists that we should celebrate victories when they do come. ...............

The law — which is similar to California’s Proposition 12 law — requires that hogs, calves and chickens that are on confined farms or sold in the state are raised with adequate room to turn around, lie down and extend their limbs. .................


Are you smarter than a 4th grader?



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