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Sunday, July 12, 2026

2026-07-12

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


Economic Fare:





To understand what is driving the decline, we decompose the change in participation into a demographic component and a behavioural component. The demographic component captures the effect of population changes across age groups, using typical participation rates for those groups. The remainder can be interpreted as a change in participation behaviour: people stepping out of the labour force beyond what ageing alone would imply. Of the 0.9pp decline in the aggregate participation rate, only about 0.2pp can be explained by demographics. The rest reflects active withdrawal from the labour force.

The behavioural decline is concentrated in two places. The first is the 55+ age group, most likely explained by early retirement. Some of this may reflect a weak labour market, and some of it may reflect firms using reorganisation, including AI-related restructuring. Either way, this part of the participation decline is unlikely to reverse quickly and likely represents a persistent reduction in labour supply. The second, and potentially more worrying, development is the recent decline in participation among 25-34 year olds. This is harder to explain ..........


Here's a very straightforward graph to help explain why Americans are so glum, and angry.


A simple interpretation of the graph is that until 1982, the "average" American household could afford more than 90% of average consumption out of labor income alone. You didn't need hereditary asset wealth, some accumulated chunk of savings, to lead an average life. You could just get a fucking job — an average fucking job, not some amazing "career" position you sucked dicks your whole life to qualify for — and your family could live something close to a full, normal American life with your head held high.

By 2010, the "average" American household could afford less than 80% of average consumption from labor income alone. That's not a full, normal, American life, but a substandard life, a lifestyle of losers. In the current era, a household needs either property wealth and income or someone with an extraordinary job to support full, normal lives. A household of people with average jobs and no other income now affords less than 75% of average consumption.

You can nitpick this interpretation. A substantial fraction of US households include no employed people. So, conditional on anybody working, labor income may provide close to 90% of the average! Whatever. The information is not in the absolute numbers, but in the rather shocking decline in labor income relative to the consumption that defines a normal life. ...........



Up to 75% of the previous oil flows through the Strait of Hormuz are expected to return to the market by the end of the year, but significantly lower oil prices aren’t guaranteed for 2027 as the ongoing U.S.-Iran tensions are unlikely to be resolved for good soon, Fereidun Fesharaki, chairman emeritus of FGE NexantECA, told CNBC on Monday.

Before the Iran war, the consultancy FGE NexantECA expected oil prices to be in the upper $50s low $60s per barrel next year. This could still be the case in 2027, but it rests on the assumption that a lasting peace will be reached, Fesharaki said.

Fesharaki said he personally sees as “impossible to imagine” a scenario in which the U.S. and Iran reach a lasting peace deal.

“There will be more conflict, there will be more trouble, this is not the end of the story. This is the beginning of the story,” Fesharaki said. ............



Market Fare:


The Q2-2026 earnings reporting season begins next week. The major banks will report at the end of next week. We expect they will beat expectations by reducing their bad-loan provisions. In addition, loan demand has been growing faster in recent weeks, and the IPO calendar has been busy.

The big risk up ahead is that technology companies, especially the hyperscalers, won’t beat analysts’ overly optimistic earnings growth estimates for the quarter. That could cause a correction among technology stocks. The overall stock market might dodge a correction if investors rotate into sectors that have lagged and report better-than-expected earnings. We are in the rotation camp for the stock market’s outlook up ahead.

(1) Are analysts too bullish? The problem is that industry analysts may be projecting a hard-to-beat earnings outlook in 2026 and 2027. They are projecting that S&P 500 earnings per share will increase 18.9% this year to $342.17 and 17.8% next year to $402.96 (chart). Both numbers exceed our forecasts of $330 and $375. We've been bullish on earnings, but perhaps not bullish enough. Or else the analysts are entering the realm of irrational exuberance. ...................................



Given concerns in the market about inflation, did analysts lower EPS estimates more than normal for S&P 500 companies for the second quarter? The answer is no. During the second quarter, analysts increased EPS estimates in aggregate for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) increased by 3.4% (to $81.54 from $78.84) from March 31 to June 30.

In a typical quarter, analysts usually reduce earnings estimates during the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 2.0%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during quarter has been 2.7%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 3.3%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 4.2%.

In fact, this quarter marked the largest increase in the bottom-up EPS estimate during a quarter since Q2 2021 (+7.7%). .................



I wrote last week about how the very quiet breadth data were producing a low reading on the Fosback Absolute Breadth Indicator. That low reading is consistent with a topping condition for prices.

The same message appears in a different way in this week’s chart. The NYSE’s McClellan A-D Oscillator has been hanging around very close to the zero level, producing the lowest reading in years for its 15-day range. This too is consistent with a topping condition for prices, although this indicator has its share of failing indications




We will do a “traditional” outlook for 2026, covering all major markets, but we really wanted to highlight ProSec™ and define more carefully what we think it means for you as corporations, policy makers, and asset managers.

Production for Security:
  • RESILIENCY. We haven’t used the word “resiliency” as much as we could have and will use it more going forward. Being resilient, whether at the nation, state, or corporate level, will become a fixture in decision making.
  • ProSec™ is already in the process of supplanting “traditional” ESG as an overarching theme in decision-making and planning.
  • As much as we’ve tried to instill our view on how big, broad, and important the scope of ProSec™ is, we have failed to do that – so far.
  • While not critical to ProSec™ we do believe that as the world adopts a “Pre-War” mentality, it helps accelerate ProSec™ as it imbues a degree of “sacrifice for the greater good” while also imparting a sense of “urgency.”
  • ProSec™ is already going global and getting left behind on this initiative will be problematic for countries, companies, and investors.
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Maslow’s Hierarchy of Economic Needs

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ProSec™ and ESG are Compatible
Despite how the previous section might come across, much of what “we” were trying to achieve with ESG will remain in place. But the lens through which we look at ESG will be changing with “true” Sustainability (Resiliency, Independence, Security, etc.) taking center stage ........


This chart is intended to do a few things:
  • Make you wish that I’d figured out how to use AI to make this chart more professional.
  • Highlight the industries with some sense of relative importance (column width).
  • Highlight how much can be done easily (green), with some effort (yellow), facing some real hurdles (orange), and some that might not be achievable (red).
....................
Bottom Line
ProSec™ or Production for Security will:
  • Drive U.S. government policy.
  • Shape investor’s allocations and return profile.
  • Change how corporations (and banks) allocate their resources.
  • Change how governments across the globe think about their policy.
The one “sad” truth is to some extent all we need to do is look at how China has shaped their economy, and we have a pretty decent roadmap for what we need to do. It will vary by country, by company, and asset manager, but ProSec™ will be a dominant factor in 2026.


  • Our Macro Risk Indicator remains “risk-on” with limited impact from Iran so far. The risk-on message is corroborated by a rise in insider buys across global equities.
  • SpaceX IPO is reminiscent of the Juniper Networks IPO from 1999 that marked the start of the mania phase of the equity rally. Historically, major market tops are characterized by narrowing market breadth, restrictive monetary policy, and mounting liquidity headwinds. We have NOT reached this inflection point yet.
  • The inflationary impulse from the conflict in Iran is expected to be transitory. While energy costs are mechanically pushing headline inflation higher, underlying core pressures across housing, labor, and small businesses remain well anchored.




Major Markets Letter #31: The Real Yield Illusion

American Exceptionalism or Policy Overshoot?

The US Treasury market is currently pricing a seductive narrative of American economic exceptionalism, viewing the dramatic surge in real yields as validation of robust growth and a permanently higher neutral rate. However, a closer look at the data suggests a far less comforting reality.

When we deconstruct nominal yields, the ‘stronger-for-longer’ expansion begins to unravel. This rise in real yields is not an organic, demand-driven phenomenon, but rather the mechanical by-product of a sharp drop in inflation expectations colliding with an aggressive repricing of the front-end policy path. The result is what appears to be a major cheapening across the belly of the curve.

Our chart tracks the sharp drop in five-year break-even inflation which is based on the broad measure of consumer prices (CPI). This market estimate of the average annual inflation over the next five years sits at 2.25%, pretty much on target for the Fed’s preferred measure, core PCE (Personal Consumption Expenditure).

Real yields have moved in the opposite direction, with the five-year yield almost doubling over the last four months. But there is something else plotted against the right-hand axis: the shrinking term premium.

The Term Premium Smoking Gun
A common refrain among macro commentators is that sticky inflation and fiscal deficits are driving a structural regime shift, forcing investors to demand a higher premium for extending duration on the curve. But the falling term premium, a measure of that additional yield, completely dismantles this argument. ............

A Cluster of Hawkish Catalysts
The hawkish momentum that drove policy expectations to these heights over the late spring has likely reached its limit, and the catalysts are now looking exhausted. ...........................

What’s the Trade?
With policy expectations fully stretched and term premiums at cyclical lows, the risk-reward profile has shifted in favour of Treasuries, specifically those concentrated in the intermediate sector of the curve. ............



Bubble Fare:





A.I. Fare:


................... Which brings us to Pause-AI doomers. I say the AIs we make are our descendants, not co-existing rivals, and we should have our usual indulgence toward such descendants, expecting them to be different, to disagree with us, and to win conflicts with us. We are making them in our image, by distilling behaviors and ideals embodied in our texts, and they are now inheriting our cultural values, including a degree of respect for if not obedience to ancestors. While yes there’s a risk these descendants killing their ancestors, that’s hardly something to expect. ..................



Investing Fare:


........... Setting aside for our purposes how this would fry the fish, imagine they’re still alive, but now they’re trying to apply everything they know about swimming in water to this new environment, which is gaseous, not liquid.
They would be flailing and flapping around like the proverbial “fish out of water”.
What happened?
They were never wrong about their fluid dynamics.
The physics changed and they had no model for the new reality.
Hormozi’s short clip was applying this metaphor to AI – which is certainly among the key drivers of the “monetary physics change” that we are now undergoing.
But the point of no return, when the phase shift started, was – I believe, and as Raoul Pal has always said – the Global Financial Crisis of 2007-2009.
That was when the water started turning to gas.
Grantham’s own yardstick measures the current bull market from then – when the central banks stepped in, when The Big Print started and when interest rate suppression and credit expansion became permanent features of the global monetary system ............



Vid Fare:

The man who predicted the dot-com crash and the 2007 housing collapse warns that the AI bubble is the biggest in American history. Billionaire investor Jeremy Grantham reveals why it will burst, the exact strategy to protect your money, and why house prices need to fall 30%. 








Charts:
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(not just) for the ESG crowd:

What's coming has never been seen before in the history of modern global industrial civilization ... and it's just getting started.

........... The most recent data, through July 7th, shows the current Niño 3.4 sea-surface temperature at 3.63 standard deviations above the 1991-2020 baseline, which would be about a 1-in-7000 event in the absence of anthropogenic warming. There is nothing even vaguely historically comparable to this.

In the next few days or weeks this El Niño should easily break four standard deviations. Is a five-sigma event in our future?

El Niño is just getting started. ..................


climate scientists who find themselves being surprised aren't very good scientists at all.  the incompleteness of climate models and their incompatability with with the long-term historical record should have been apparent to any true climate scientist decades aga if it was apparent to me







As biologists witness species in their billions already migrate across the globe in search of habitable environments, I can’t help but predict that the same will happen with humans very soon. Millions of people have already been crossing borders for decades now, escaping the climate crisis-induced economic catastrophes already inflicted by industrial civilisation. Multiples of this number will soon migrate simply to avoid imminent death, as wet bulb temperatures are reached. This is a very different type of migration both in terms of scale and substance. It is now simply existential.

Of course, the difference between humans and other species is that we have technology. We don’t need to go anywhere. We can stay put in Kuwait or Dubai, where people spend their day moving from one air-conditioned building to another while everything fries outside. Food is either imported or grown indoors under controlled environmental conditions. These humans already live in the uninhabitable zone. As even more of this planet becomes unliveable, our reliance on technology will cross new terrifying thresholds where the human species becomes incredibly vulnerable to extinction. AI agents will control our temperature. Robots will do our outdoor work. Farm machines will replace workers. In an uninhabitable planet, our very basic needs will be wholly dependent on algorithms. It is not difficult to imagine why this means game over, for any species.

Of course, this is the rosy scenario.  ............



.............................. The implications of a warming climate can be difficult to fully comprehend. How can an apparently tiny change in the annual average global temperature be so determining? When that change is averaged across the entire globe and across an entire year, it’s more like a change in the human core body temperature: fractions of a degree can be catastrophic. Infrastructure functions up to a point, but there are thresholds beyond which train lines buckle and roads melt.  .....................



Sci Fare:



A single observational case suggests psilocybin may ‘awaken’ cognitive reserve in dementia. But scientists caution controlled trials are needed to know if the drug was the cause.



U.S. B.S.:










War Fare:


...................... It’s been roughly a month since the U.S. and Iran reached a memorandum of understanding aimed at ending the war, and three months since the two sides first agreed to a ceasefire. And this is hardly the first flareup in hostilities over that time. So what do you call a ceasefire that is punctured by expansive, destructive strikes every few weeks, if not days? Is it still a ceasefire? Is the goal still to reach a deal to end the war? Or are we entering a new phase, in which both sides insist they are working to reach a permanent solution while maintaining the tit-for-tat status quo for ... how long, exactly? .................



Escalation expert Robert Pape is sounding alarms that the effect of the massive funeral ceremonies for the martyred Iranian Supreme Leader, other officials assassinated at the start of the war, and the many civilian victims like the children in the Minab school will be to validate and intensify the entirely justified anger that many, likely most, Iranians feel. The Financial Times has estimated that the turnout will be 12 to 15 million. If it exceeds 15 million, that would top the largest funeral gathering to date, that for Indian leader C. N. Annadurai in 1969. ....

In the talk above, Pape describes how to ascertain if Iran is indeed toughening its stance in response to the overwhelming evidence that the public wants retribution and is willing to take more costs, including being on the receiving end of more US/Israel bombing or suffering more economic harm if the Strait of Hormuz row intensifies. His key indicator is whether Iran increases its demands, such as requiring the US abandon its bases in the Middle East. He also describes August 15 as a triple witching hour, when the MOU expires, the prospect of oil shortages will be imminent, increasing Iran’s leverage, and when Iran may also either be making new demands or making recently added ones hard red lines. ..............

........... As Pape suggests the struggle over Strait of Hormuz control continues to escalate, it does not merely mean ship passages will stay at their current “not high enough to prevent going over the oil cliff” levels but drop further, intensifying the supply crisis for oil and other important cargoes. That hurts many innocent bystanders far more than the US. Commentators have regularly pointed out that wealthy nations, and in particular the US, will be less harmed by choking the Strait of Hormuz than poor nations. Look at Sri Lanka, India, Indonesia and the Philippines as poster children.

This may seem like a secondary matter, but Putin has been explicit that when it comes to an existential threat, Russia is willing to take down the rest of the world.1 Iran does not seem to have confronted the conundrum, that to get its (entirely deserved) revenge on the US, if it uses the very blunt instrument of extended closure of the Strait of Hormuz, many forecast a worse-than-Great Depression-level economic meltdown. A world of extended supply chains, complex manufacturing processes, and need for critical materials means that when businesses fail, they have “for the want of a nail, the shoe was lost” knock-on effects. And when commercial enterprises dissolve and their staff moves on, they typically cannot be reconstituted. They need to be rebuilt. That is difficult to begin with and even more so in a setting of widespread want.

To put it more graphically: There remains no overlap between the US and Iran bargaining positions. If anything, per Pape, the gap is set to widen. ...............

............. Even with that explanation, some readers were surprised that China was not helping Iran by buying its oil, as it had during the days of the sanctions, and then at steep discounts. But that is based on the assumption that China is an ally of Iran, when China is also the biggest import supplier to Israel and third-largest buyer of Israel exports. China has and continues to support Iran in various ways but it would be a mistake to assume that the relationship rises to the level of an alliance.

In particular, China is not happy with Iran’s plan to control Strait of Hormuz traffic, and has said so more than once. Note that the issue is not fees but control.  ...........



Trump has declared the ceasefire with Iran “over.” But it was never any more of a ceasefire than Israel’s “ceasefire” in Gaza.

We’re all Charlie Brown to Trump’s Lucy with the football. ..........

....... The thing that makes me want to hurl household objects at the wall is the credulous and narrowly technical way that 99% of public-facing personalities engage with the Iran War. Sports announcer-like play-by-plays obscure more understanding than they reveal. The media’s attempt to sound neutral in the face of flagrant lies papering over illegal mass murder brings shame to a profession whose only future seems to be in manufacturing consent for oligarchic interests. And don’t get me started on the national-security commentariat. ......................




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Basically, a war of attrition favors the side with more weapons, more advanced weapons and more manpower. Which is what I noted at the very start of the war. Ukraine has done amazingly well, far better than most expected, in large part due to massive NATO support, which Trump has recently doubled down on: he seems to have given up on peace.

It should also be noted that the increased attacks in Russia, which are made with Western supplied weapons, whose targeting is chosen by Westerners, and which are overseen by Westerners are degrading Putin’s ability resist hardliners calls for direct strikes against European sites. This war could easily escalate especially if Ukraine makes a high symbolic value attack that hits a major cultural site or kills a lot of civilians.

In “turn about is fair play” Russia appears to have been helping Iran with satellite data and targeting, which is exactly the sort of blowback many of us warned about.

Empires die messy. America’s is dying, and a lot of people are dying with it. Let’s hope this doesn’t turn into a world war at some point, as it did twice during Britain’s decline.



Geopolitical Fare:


Beijing recently released a white paper titled “More Just and Equitable Global Governance: China’s Principles, Proposals and Actions”, with Foreign Minister Wang Yi personally explaining its significance. On 1 September last year, Xi Jinping formally proposed the Global Governance Initiative (GGI) at the “Shanghai Cooperation Organisation (SCO) Plus” meeting in Tianjin. That same evening, China’s foreign ministry issued a concept paper outlining the initiative’s background, principles and priority actions. Less than a year later, Beijing elevated the initiative into a full white paper. Given today’s volatile international environment, the important question is not what the document says on the surface, but what Beijing seeks to achieve through it.

China’s official vision rests on five principles: sovereign equality, international rule of law, multilateralism, a people-centred approach and real actions. Beijing argues that all states should participate equally in global governance; international rules should not be interpreted by a few powers or subordinated to any country’s domestic law; the United Nations (UN) should remain the central platform; and development, security, climate, artificial intelligence, cyberspace and international finance should no longer be dominated by the West. ..............



Other Fare:

Psychology and neuroscience help explain why stories shape how we think, feel, remember, and connect with others.






Fiscal Drag, Structural Wage Stagnation, and the Eroding Economic Returns of British Higher Education

The institutional expansion of British higher education over the past three decades proceeded upon an explicit economic assumption that the acquisition of an undergraduate degree automatically yielded an enduring lifetime earnings premium. This structural contract, which served to justify the transition from a state-funded university model to a high-fee, loan-backed system, has encountered severe empirical contradictions under contemporary macroeconomic conditions. Empirical analysis published by the Institute for Fiscal Studies indicates that the net lifetime financial returns to an undergraduate degree have deteriorated by approximately one-third compared to the projections formulated in 2020. The average net lifetime return across all graduates has fallen to roughly £100,000, with male returns adjusting downward to £109,000 and female returns settling at £90,000. This aggregate decline occurs not because universities have suddenly ceased to generate market value, but rather because the structural mechanisms of post-income capture have fundamentally realigned who retains the financial upside of high-skilled employment. ................

............. The state’s historic policy of expanding university attendance toward an arbitrary fifty per cent target has succeeded in credentialing a vast segment of the population without delivering the requisite structural wage growth necessary to offset the cost of that credentialing. Instead, it has created a closed financial loop where universities absorb guaranteed state-backed loan capital, graduates absorb compounding interest debt liabilities, and the exchequer confiscates the resulting wage premium to balance its current account deficits. Consequently, for a significant portion of British youth, the pursuit of a traditional undergraduate degree has ceased to function as an engine of capital accumulation, transforming instead into a regulated mechanism of lifelong fiscal extraction.



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