Given my trip to Japan and time with family for my co-host, it had been a month since we got together for the CFA Chicago ‘Macro Matters’ podcast. As a result, we thought it would make sense to take a look at all of the major asset classes to get a sense of what was happening. Each one has had quite the month even though I know most of the headlines go to the moves in the stock market.

As we ended the podcast, I asked the question, “is there a common thread driving all of them?”

You can listen to the podcast on any podcast app or get it here: Macro Matters

Bonds

As I have discussed before, there may be a ‘line in the sand’ for the Treasury market. The US needs to fund $39 trillion of debt this year and the typical buyers are either more hostile to the idea (China) or less able to find the money (Japan) or not interested in the yields (Boomers). I have thought this line in the sand is around 4.5% in the 10-year yield, which is where yields were when the President and his Administration came into office in early 2025.

That seemed to work for all of 2025 and even into early 2026. However, since the start of the conflict in the Middle East, you can see, almost to the day, an abrupt turn. Every Treasury yield - 2-years out to 30-years - has moved higher since the beginning of March. The 2-year is 75 bps higher, 10-yr 55 bps higher and 30-yr 35 bps higher. These are big moves over the 3-month horizon.

Flashing back to the start of the year (it seems so far away), we may recall that the market was pricing in more than 2 rate cuts (56 bps) by the end of the year. They were expected to start at the June FOMC, when the presumed new Fed Chair Kevin Warsh would take over and bring his dovishness to the FOMC. Remember?

By early May, with the conflict in the Middle East now two months old, the market had given up on rate cuts. In fact, there were really no expectations of any moves for the next 18 months. The Fed was expected to be on hold for an extended period of time.

Move to today and the Fed Funds futures & options market is now pricing in a full rate hike (25 bps) by the end of the year and 1.5 rate hikes over the next 12 months. This 75 bps+ of expected rate change increase (from over 50 bps of hikes to more than 25 bps of hikes) explains the entire move in the 2-year yield, which in turn is driving the rest of the curve. What is driving this move in the rates?

Commodities

You would have to be living under a rock to not know about the conflict in the Middle East. The knee-jerk is that oil prices are affected; however, it is really a variety of commodities, many of which use petroleum as an input. In addition, transportation costs take all other commodities and products higher. The move from the end of February to mid-May was about 20% in the broader commodity market. It has turned in the last month, but still is 10% higher from the start of the conflict.

Oil is the thing that most focus on because it impacts their day to day more directly. The chart above shows the front month crude oil futures price as compared to the front month gasoline price. Not surprisingly there is a direct connection. Gas prices in the US have moved from $2 a gallon to a high of $3.50 a gallon and have since corrected to about $3 a gallon. Is this impacting consumer behavior? Most governments fear this.

The supply disruption is real. The oil market, based on EIA data, has moved from extremely over-supplied at the end of 2025, which was weighing on prices, to meaningfully undersupplied. This is the 10 million barrels shortfall through the Strait of Hormuz you hear about. Most in the energy market are quite surprised oil prices (and by extension gasoline prices) are not much higher than they are currently.

Perhaps the reason they are not higher is that governments, worried about the impact on the consumer, are taking actions. In the US, the Strategic Petroleum Reserve has been drawn down from 415mm barrels to 349 mm barrels. We should not be surprised. The Biden Administration drew down the SPR from 600mm barrels to 347 mm barrels before the 2022 mid-term elections. While many were cynical about this, it worked. The Dems did well in the mid-term. Do you think the Trump Administration isn’t aware? The question becomes: how much can they draw down? Also, is this only temporary until the Middle East is solved and oil starts flowing? Can the Iran problem be solved? All of this impacts oil, gas and consumer expectations.

Gold

Having spent my early, formative years in FX and precious metals, I am well aware of the connection between gold and real rates. In fact, there was a clear negative relationship between real rates and the price of gold. I show this in the chart above where I invert real rates and compare to gold. The connection: higher real rates mean higher carrying costs which means lower gold prices and vice versa. However, at the far right of the chart, you can see Covid changed that relationship.

Since Covid, the relationship has completely broken down. Instead, the market has not been worried about carrying costs but more worried about the debasement of the Dollar because of overly aggressive fiscal spending and the lack of restraint from the FOMC. In fact, most might tell you the Fed has been complicit in helping government monetize this debt that was taken on.

However, there are a couple of things going on. The new Fed Chair may not be as dovish as first thought. He has brought in a couple of advisors who are seen as being hawkish. In addition, the commentary on Warsh of late has focused more on his desire to reduce the Fed balance sheet and less on rates. This, along with the data, is likely leading to the repricing of Fed Funds futures. In addition, the fiscal stimulus has fallen considerably. Is the gold market re-thinking the debasement trade and starting to focus on real rates and carrying costs again?

Stocks

Over the past month, the commentary has been about the continuation of the move in semiconductor stocks, which went on a historic 100% move from the end of March until early June. I have to think any equity portfolio manager is either happy or sad based entirely on their exposure to semis. However, in aggregate, over the past month, the market is down about 1%. In addition, over this period, the broader move in sectors has a lot less to do about tech and AI. Leading the pack are health care, energy and financials. Bringing up the rear are consumer discretionary and communication services. What is this saying about the market’s view of the economy.

I turned to Yahoo Scout embedded in Alphaspace on Yahoo Finance. I asked the question about this sector performance and inquired how each of these sectors does when the market is having a growth scare or an inflation scare to gather a sense of where the market is concerned. You can see in the table above what Scout says about this sector performance but then I asked for the summary and this is how AI sees this sector performance:

The Macro Quadrant This Maps To

Using the framework from your earlier session:

This is the Stagflation quadrant, leaning toward its growth-scare boundary.

• Not pure Reflation (which would have Discretionary and Tech holding up better)

• Not pure Recession/Deflation (Energy would be the worst performer, not a leader)

• Not Goldilocks (obvious)

• Stagflation or late-cycle growth scare fits best: inflation pressures perceived as sticky (Energy, Financials holding), while growth expectations are being marked down (Discretionary, Comm Services sold off, Healthcare bid)

The market is essentially saying: “We don’t think inflation is going away, but we’re also starting to doubt growth can hold up against it.” That is a particularly uncomfortable combination for equity investors because it limits the Fed’s ability to ride to the rescue — cutting rates risks re-accelerating inflation, but holding rates risks choking growth further.

I would concur that a market led by Health care and Energy, with Consumer names lagging, is a market that is worried about Stagflation. This is what I talk about and teach in my Applied Portfolio Management class.

A market focused on Stagflation will be intensely focused on earnings growth for sure. I have shown in the past that this has been a critical driver of stock prices. The assumption was that multiples, having already corrected, would stay relatively flat. The incremental focus on inflation, however, potentially puts more pressure on multiples. If we use a basic Fed model approach - comparing the earnings yield on stocks to the 10-year Treasury yield, we see that stocks are still very overvalued. They can get more so, as they did in the late 90s. However, the equity risk premium has tended to average 3-4% over the last 30 years. If the multiple begins to move back toward that, driven by a move above 4.5% in the 10-year yield, and stocks could start to suffer. 4.7% 10-year + 2% equity risk premium implies a multiple of 15x vs. the current 22x. If that adjustment happened over the next 6 months, even if we got the expected earnings of about $375, the SPX would be 5625 vs. today’s level. Inflation and yields will play a big part in the equity market.

Crypto

Another beneficiary of the debasement trade was crypto - Bitcoin and Ethereum. The rally in these two markets led to the creation of the Digital Asset Treasury companies. The unwind of the debasement trade is now putting pressure on the DATS (Strategy led by Michael Saylor and BitMine Immersion Technologies led by Tom Lee) which creates a negative feedback loop. Crypto winter looks set to continue with the market no longer focused on Dollar debasement. While I still believe there are medium and long-term drivers such as stablecoins and asset tokenization, I am not naive enough to think this negative sentiment can’t continue as faster money is flushed out of the ETFs. Fed dovishness around Covid drove crypto higher in 2021. Fed rate hikes in 2022 coincided with a crypto winter. Fed dovishness again in 2024/25 drove crypto higher. Rate hikes and Fed hawkishness are clearly not helping crypto.

Inflation

Every market, therefore, seems to hinge on inflation and the Fed’s reaction to it. I have shown before my simple CPI forecast measure, which looks at M2 growth, inflation expectations, commodity price changes and PPI. While it disconnected in 2024/early 25, it has been pointing to higher inflation and we are seeing that.

It doesn’t matter what I think, what does the Fed think? Jay Powell introduced the idea of a ‘Supercore’ which is core, ex-housing, services inflation. He was trying to capture the critical driver of inflation from a consumer perspective. This Supercore has been stickier than headline CPI, but now both are again moving higher. I overlay this versus the terminal Fed Funds interest rate. Not surprisingly, it follows both with a lag. All are pointing higher right now.

Not everyone is a hawk on inflation and Fed Funds, however. Nancy Lazar at PiperSandler is an economist that many hold in high esteem. She thinks inflation continues to move lower as she lays out in her note today. While I agree with Nancy on growth (we are both more bullish than consensus), I do not agree with her on inflation. She sees the economy in positive growth and declining inflation, the sweet spot for stocks. I see strong growth but higher inflation, a mid-cycle market. The market is worried about late-cycle stagflation. There is a trade out there for someone.

Kevin Warsh in now the new Fed Chair and has his first meeting next week. Inflation and growth are clearly going to be the focus, as they always are. The market will be intently focused not on what the FOMC will do (there is no move expected), but more importantly on the commentary toward how the FOMC now sees the jobs and inflation backdrop. Concern on inflation will be negative for rates, stocks, gold and crypto. Concern on growth could be negative for stocks and commodities but positive for rates and may give a relief to gold and crypto. Are Kevin Warsh and the Fed now the common thread that is weaving through the markets? I think so.

Stay Vigilant

I was on a golf trip last weekend (yes, I do play a lot of golf) and my playing partner said to me as we walked off the range, “Our caddie looks like Peter Brady.”

Sure enough, he did. It made me think of how many “Brady Bunch” references of some shape or form Gen Xers make, sometimes without even thinking about it. My wife and I have done such a good job of that, even our daughters will sometimes joke “It’s not all about you, Jan!”, even though neither of them is named Jan. Or the reference to “pork chops and applesauce” every time one of us sees pork chops on a menu.

After my partner made that reference, I had “The Brady Bunch” theme song stuck in my head all day long. Perhaps that was a gamesmanship technique.

“Here's the story of a lovely lady
Who was bringing up three very lovely girls.
All of them had hair of gold, like their mother,
The youngest one in curls.

Here's the story, of a man named Brady,
Who was busy with three boys of his own,
They were four men, living all together,
Yet they were all alone.

Till the one day when the lady met this fellow
And they knew it was much more than a hunch,
That this group must somehow form a family.
That's the way we all became the Brady Bunch.

The Brady Bunch,
The Brady Bunch,
That's the way we became the Brady Bunch.”

source: https://www.lyricsondemand.com/tvthemes/thebradybunchlyrics.html

I still had that song stuck in my head as I was thinking about what to write this week. Right now, there are two competing stories, or narratives. There is the bullish story based on economic growth, earnings growth and climbing the wall of worry. There is also the bearish story about AI-fueled parabolic moves, overvaluation, high inflation and high rates that will eventually kill this market.

I have tried to present both sides of the argument in previous posts (see “On the One Hand …”) as well as ask you your opinion of the economy and market (see “What do you think?”). With that song still stuck in my head, I am going to tell my story.

Here’s the story, of a lovely economy…

As I tell students in my Applied Portfolio Management class, sometimes we over think things. When it is all said and done, earnings drive stocks and the economy drives earnings. That is why we need to try to anticipate when the economy will do, as this gives us the idea of earnings and that is all we need. Sure, markets get overvalued and undervalued at times, as investors react (and overreact) to both good and bad news. There is greed and fear, euphoria and panic. If we step back and focus on the economy, we will be fine over the long-run. That is why the first part of my 3-part framework focuses on the economic trend and the drivers of it.

You can see above a comparison of GDP and SPX earnings per share. It is not a perfect fit, but it is pretty solid and a good validation of starting the process with a view of the economy. Now, we need to find leading, and anticipatory, data that tells us what will happen to GDP.

…which had three very important data points

I wrote on LinkedIn this week about my favorite indicator of the economy, and therefore markets - the ISM:

Chart of the Day - ISM

Yesterday we got the Institute of Supply Management (ISM) data. Y'all know this is my favorite data from a market perspective because it is a leading indicator, has a long time series, and does a good job of predicting 10y yields as well as earnings estimate revisions

It was also better than expected

This is important because in the last couple months, it had been giving a signal that it was flat-lining in the low 50s after a nice move to start the year. This was in contrast to the S&P PMI (good data but very short time series) and the regional Fed surveys. Yesterday it caught up

It is also important that the ratio of new orders to inventories, which leads the leading indicator, also moved back higher. After a big move higher, it had cooled off the last few months which suggested some potential issues from supply chain disruptions. However, the data yesterday pointed higher again

While many are focused a good amount on the things that are wrong in the economy and the markets, this data tells us what is going right

A measure above 50 (it was better than expected at 54) and rising points to positive equity returns going forward

This data is showing the lagged impacts of fiscal and monetary stimulus. Other than the Covid-response improvement of 2021, this is the best data since early 2019. I think that is important to understand

Supply managers are telling you the economy looks pretty solid and improving. They are showing us this in increasing new orders vis a vis inventory levels. We should take note of this

Another data point that came out last week was the Market News International Chicago PMI. I like this data not because I live near Chicago. I like it because the Chicago economy is pretty central to the US economy and always has been. It does not have the thematic trends of the coasts - Wall Street, Silicon Valley or Hollywood. What it does have is airports, railroads, highways, agriculture, distribution centers, and data centers. When activity is happening in the US, it is usually flowing through Chicago in some way, shape or form We see in the chart that the MNI Chicago PMI leads GDP. Last week it broke out higher to the best level since late in 2021. If any data point shows the positive impacts of fiscal and monetary stimulus, of both the AI buildout but also re-shoring activity, it is this Chicago PMI. It is signaling good times ahead.

Finally, financial conditions need to be a core focus in the fundamental approach. I wrote about this on LinkedIn as well:

Chart of the Day - financial conditions

Per the Chicago Fed description: "The National Financial Conditions Index (NFCI) is constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1973. Positive values of the NFCI indicate financial conditions that are tighter than on average, while negative values indicate financial conditions that are looser than on average."

Thus, as you can see this century, financial conditions have generally been quite easy. In fact, this century, the average of this financial conditions index is about -0.33 or 1/3 of a standard deviation easy. Right now, we are a little more than -0.5 or 1/2 of a standard deviation easy

In fact, the only times this century we went above the mean of 0 were the tech bubble, the Great Financial Crisis and Covid. Even after the tightening cycle in 2022 we didn't get there

I think it is safe to say, then, that policy and conditions have generally been pretty easy. In fact, even when they get less easy, not even tight, the market starts to panic. This is useful to keep in mind when people begin to complain, as they surely will, that new Fed Chair Warsh will be too easy. It is safe to say every Fed Chair has been easy and most on the FOMC are likely so as well

This is important because when conditions are easy, activity happens. Loans are made for data centers. Houses get built even if they are expensive. Stocks go to all-time highs

This is not because people are wildly optimistic. This is because money is abundant and readily available. CEOs, consumers and investors are conditioned to want to grow, to take risk, to make money. When are not conditioned to hide under our desks. When the money is there to do it, we will

This doesn't mean you have to take risk, but it does mean you have to understand why other people are willing to take risks.

You might think of the negatives of middle east wars, AI bubbles, affordability, or fiscal negligence from politicians. However, when you look at things through the lens of how the economy appears simply in terms of financial conditions, things look fine

They look better than fine. They look 0.5 standard deviations fine. Not quite 2021 fine but apparently headed in that direction. Just keep that in mind

Here’s the story, of the lovely technicals …

In my career, I usually run into people that are fundamental analysts or technical traders. Rarely do they pay much attention to the other, unless it suits their needs i.e. a fundamental bear looks for bearish charts etc. This is confirmation bias. In my career, I have tried to use each, objectively. I am both a proud Chartered Financial Analyst and a Chartered Market Technician. The second part of my process is focusing on the technical or behavioral picture. This is more than just drawing lines on charts or reading the tea leaves as some say derogatorily. To lead off, I think it is important to again, step back, and look at the long run trend of the market. This is the SPX with 1, 3 and 5 year moving averages. This is a good proxy for the 401k or IRA portfolios of both Boomers headed into retirement and Millennials just getting into the throes of investing. For all of the criticism of ‘buy the f***ing dip’ mentality, objectively, this chart tells you to do so. Only during Covid was the 5-year moving average breached, briefly. During the Fed hiking period, the 3-year was. During the tariff tantrum or Iran War conflict, the 1-year was barely touched. A long-term holder is not feeling at risk really at any time in the last 15 years. In a day and age where passive and systematic flows dominate the day to day, if these holders are never nervous, don’t expect the trend to change. Capital flows to where it is treated the best, and the SPX is treating it pretty well. However, I know everyone wants to time the market, so let’s look at some shorter-term technicals too.

… which were busy with three graphs of their own …

The daily chart of the SPX is showing signs of being overbought. That said, this is not a huge sell signal. It is a consolidation signal. The ichimoku cloud has turned higher. The MACD is pointing higher. The trend looks higher in the short-term, once the market can work off the high RSI either by correcting 5% or going sideways for a time. That will not get much money to flow out of the market.

My favorite short-term trading signal is the moving average of the Put-Call ratio. Most don’t look to the options market for good signals, but it is ripe with them. Understand that portfolio managers will not buy insurance against drawdowns (puts) until they get very nervous. Why? It is a drag on returns. On the upside, PM’s may choose to overwrite for some yield (sell calls) or even leverage their bets (buy calls). Either way, when they are bearish, we see put activity move higher. When they are neutral to bullish, we see call activity go higher. Thus, if I inverted the Put-Call ratio for the market (and use a 1 month moving average to take out day to day noise), it does a pretty good job of telling me where the SPX is likely to go in the next month because the PM’s are telling me what they think via their options trading. The light blue line is this Put-Call. It is pointing to higher returns in the next month.

Finally, we don’t want to be too equity market centric. I like to look at the commodities markets as well and the best measure of the risk-on/risk-off tell in the commodity markets is the ratio of copper to gold. Just ask Bill Gross and Jeffrey Gundlach. They look(ed) at it when managing the biggest bond funds in the world. Copper is the commodity most levered to economic activity. It is in plumbing and housing. It is in the electrification of the economy and now data centers. Last Fall and into early this year, this ratio was telling us to be cautious. The market struggled over this period of time. Over the last 2+ months, this ratio is telling us the economy is doing very well, and it is time to get long risk. Sometimes the best signals for one market can come from a completely different market.

Till the one day when that Substack put them together …

I have been a beta user of the new and improved Yahoo Finance. Older investors will recall that Yahoo Finance was X.com before X. It was the one place people went in the late 90s/early 00s. Now, it is the place to go when you want to get away from the noise and negativity of X. Even better, they have upgraded Yahoo Finance (which many go to for data at least) with a new product called AlphaSpace. It is a completely customizable look across any markets you want to. Even better, it has AI embedded in it where you can ask questions of it and it will build the view you need to analyze that. For example, I went to Yahoo Scout embedded in AlphaSpace and told it about my three-part framework of fundamentals, behaviorals and catalysts. I asked it to analyze all of the market information and build the views I need. The screen capture above is the analysis from Yahoo Scout of what the three-part framework is telling the AI. it also built the relevant charts and datasets I need to monitor. Pretty cool stuff.

… and paired them up with some catalysts …

I wanted to do it on my own, though. Back to ISM and why I like it. The chart above is of ISM compared to the positive earnings surprises of the SPX over the last 26 years. You can see that ISM and positive surprises are well-correlated. An improving economy leads to better earnings and vice versa. This is why I like the ISM so much. Imagine if you could anticipate the ISM, with a ratio like New Orders to Inventories? Then you might be able to anticipate the direction of earnings surprises. Wouldn’t that be useful? With a forecast of higher ISM ahead, we should expect more positive earnings surprises ahead too.

But why wait for that. What has been happening with earnings surprises lately? For this, I went back to AlphaSpace and asked Yahoo Scout. Above is what it told me. Yes, still a lot of AI. However, these are not fly-by-night names. These are the longest-tenured names in tech. Even more validation is that Berkshire deployed money into AI (Google). Not only that, but it just announced a deal to buy a homebuilder. Do you think Berkshire is bearish anymore if it is buying AI and homebuilding?

One negative story hanging on the market is labor. While it is a lagging indicator, the ‘no hire, no fire’ or ‘AI will eat all of the jobs’ thematic has been pervasive. This week we got Job Opening and Labor Turnover Survey (JOLTS). Within this data, if we look at the ratio of layoffs to quits, it does a good job of anticipating the direction of the unemployment rate. It makes sense. If there are a growing number of layoffs relative to employees quitting for better jobs, we should expect the unemployment rate to head higher. If instead, employees are quitting, this is a sign that the job market is stronger and the unemployment rate will improve. While the current rate at 4.3% is much higher than the insanely low 2% from 2021, it is objectively still one of the best rates of the last 25 years. Also, based on the JOLTS data from this week, it is likely heading lower, as layoffs fell relative to quit rates. This probably surprises a LOT of people, but I have been saying for some time that I was just not seeing the weak labor market when talking to my students. I guess they had a good read on it.

Finally, affordability is still a huge issue. I said early in the year that I thought it would be a major theme because it was in the 2024 election and is expected to be in the 2026 election. A war in the Middle East driving up gas prices will not help. We can see from the University of Michigan survey from early this year, spiking gas prices have consumers very worried about inflation 1-year forward. Gas prices are the one price that every consumer knows, which is why it is a good indicator of consumer sentiment. Recently, these prices have from $3.75 to $3.12. Still a long way to go to get back to $2, and we likely won’t get there any time soon, but relief at the pump will get consumers feeling a bit better.

… then that group had somehow formed a family …

Looking at my three-part framework, this is what I see:

Fundamentals: financial conditions are quite easy which is driving and economy that is strong and improving (ISM and Chicago PMI), which will lead earnings growth going forward

Behaviorals: the trend of the market is strong and continuing; we are overbought near-term but that can be worked off going sideways; both the options market and the commodity markets are telling us that we are still in a risk-on mode

Catalysts: positive earnings revisions, more earnings surprises from the big names and better economic data are all good news; falling gas prices will improve consumer sentiment that is still worried about affordability

… and became my market hunch. My Market Hunch, my market hunch

In agreement with the Yahoo Scout AI read, the near-term outlook for risk and for markets is positive. Sure, there can and may well be some problems down the road. Will they be big enough to spook passive holders out of positions? Unlikely at this point. Though, keep an eye on the bond market and the bond vigilantes as they will likely be the next big problem risk will need to contend with.

That is my market hunch.

Stay Vigilant

P.S. I notice in my audience description, the only state where I have no subscriber is Wyoming and the only South American country with none is Bolivia. So, if you know anyone in Wyoming or Bolivia (I guess if you know cowboys of any kind), please share this with them in the hopes of getting subscribers there

Over the past several months, I’ve spent a great deal of time traveling — meeting people from different countries, cultures, and religious traditions. I’ve shared meals with Christians, Buddhists, Hindus, Muslims, Jews, and people with no formal faith at all. We spoke about family, work, suffering, purpose, discipline, fear, and hope.

Despite obvious differences in language, customs, and beliefs, I was struck by something deeper: The values that sustain meaningful lives are remarkably similar everywhere.

Humility. Discipline. Compassion. Self-control. Curiosity. Service to others. The ability to endure hardship without becoming bitter. The willingness to keep learning.

And the more conversations I had, the more I realized something else - those same principles form the foundation of successful trading and investing.

After more than 30 years in the markets, across asset classes, cycles, booms, panics, bubbles, and crises, I’ve come to believe that markets are ultimately a mirror of human nature. Prices move not just because of earnings reports or economic data, but because of greed, fear, ego, hope, envy, impatience, and regret.

That’s why mastering markets first requires mastering yourself.

The ancient sages never traded leveraged ETFs or watched central bank press conferences. Technical analysis that started with Japanese rice traders in the 1600s didn’t understand all of the indicators we have now. However, all understood human behavior deeply. And human behavior hasn’t changed very much.

The Common Ground of the major religions and cultures

One of the most fascinating discoveries from my travels was how often the world’s major religious and philosophical traditions converge on the same truths. So much of what we see in social media emphasizes how different we all are. If you aren’t IN my echo chamber you are AGAINST my echo chamber. That is so far from the truth. When I dig deeper into the ethos, the moral code, that we all share, at some basic level (deep down for some of us), there is a LOT we have in common.

Humility

Christianity teaches meekness and warns against pride.
Buddhism emphasizes dissolving the ego and seeing clearly.
Hinduism speaks of surrendering attachment and acting without arrogance.
Confucianism praises modesty and lifelong learning.

Markets teach this lesson brutally. Every single day.

No matter how intelligent, experienced, or successful you are, the market will eventually humble you. Overconfidence is one of the fastest paths to destruction in trading. This is one of the most basic tenets I hope to pass on to my Derivatives and Trading Academy. Respect the market.

Humility is not weakness. It is survival.

Compassion and the Golden Rule

Nearly every tradition teaches some version of treating others as you would want to be treated:

Jesus Christ tells us to “Love your neighbor as yourself.”

In Buddhism, there is a focus on compassion and loving-kindness.

Those who are Hindu know about ahimsa (non-violence) and selfless service. Gandhi exhibited this clearly.

Confucian humaneness and reciprocity are core to the belief system which drives social stability.

In a world increasingly driven by outrage and tribalism, this common ground matters.

And yes, it matters in markets too.

The best traders I’ve known are often generous with younger traders, respectful of opposing viewpoints, and capable of disagreeing without hostility. Confidence does not require contempt.

Learning Through Adversity

Every meaningful tradition recognizes suffering as part of growth.

Losses, setbacks, mistakes, humiliation, failure — these are not interruptions to life. They are part of life.

Trading reinforces this lesson every day.

You will be wrong. Repeatedly.

The question is not whether you experience losses. The question is whether you learn from them or let them poison your judgment.

Resentment and self-pity are expensive emotions.

Reflection and adaptation are profitable ones.

Self-Discipline and Emotional Control

The traditions differ in theology, but many converge on the importance of inner mastery:

• Control impulses.

• Avoid excess.

• Develop patience.

• Pursue wisdom over immediate gratification.

This is almost identical to what successful trading demands.

Most catastrophic losses do not come from lack of intelligence. They come from lack of discipline.

Greed. Revenge trading. Panic. Ego. Impulsiveness.

The enemy is rarely the market itself.

The enemy is usually the trader in the mirror.

How These Principles Shaped My Trading Rules

Over the years, many of you have asked about the core principles behind Stay Vigilant. Looking back, I realize these rules are not just market rules. They are human rules.

Rule #1: Stay humble

The market owes you nothing.

Humility keeps you adaptable. It keeps you listening. It prevents small mistakes from becoming catastrophic ones.

The moment you believe you’ve “figured out” the market is usually the moment danger begins.

Rule #2: Learn from your losses

Every loss contains information.

The key is to analyze mistakes honestly — without denial, ego, or emotional attachment.

The best traders are not the ones who never lose. They are the ones who evolve.

Rule #3: Keep your powder dry

This applies financially and emotionally.

Maintaining reserves — cash, patience, emotional energy — allows you to act rationally when opportunity appears.

People who exhaust themselves emotionally or financially lose the ability to think clearly under pressure.

Rule #4: Maintain intellectual curiosity

The world changes constantly.

The best investors remain students forever. Traveling recently reminded me how dangerous intellectual isolation can become. Spending time with people who see the world differently sharpens your thinking. It challenges assumptions. It forces humility.

That applies to markets too.

Rule #5 and #6: Stay unbiased and understand both sides

Every trade has another side. What are the people on the other side of your trade thinking?

If you cannot articulate the strongest argument against your position, you probably do not understand your position well enough.

Good traders seek truth, not validation. As Ned Davis talked about in his book of the same name, it isn’t about being right, it’s about making money. That means avoid confirmation bias. That means cognitive dissonance is your enemy.

That requires intellectual honesty.

Rule #7: Value being out of consensus

Independent thinking creates opportunity.

But there is an important distinction: Being contrarian for the sake of being contrarian is ego. The bearish argument always sounds more compelling. I know, I have been a bear quite a few times. However, sometimes, the consensus is right.

Being independently thoughtful because evidence and process lead you there is discipline. Respect the process. However, respect price action too. I learned this in early 2023 when the fundamentals were bearish but the technicals were bullish. Right now, it may be the opposite.

The crowd is sometimes right. Sometimes terribly wrong.

Wisdom is knowing the difference.

Rule #8: Help others

This may be the most important rule of all.

Across cultures and religions, I found the same recurring insight: a meaningful life ultimately points outward, not inward.

Service matters, mentorship matters, community matters. Sharing with your peers makes you better, not weaker. It is the Socratic Process. Debate with others. If you win, you may be onto something. If you lose, maybe it is better to re-assess than put on bad positions.

At some point, success without contribution begins to feel hollow. Been there, done that. I have never been happier than when I am talking about markets with my students. Macro Idea Dinners were great, but the egos in the room were tough to swallow, even with a nice Cabernet Sauvignon. Helping others is what we are all called to do, and it feels awesome to do. Especially when they appreciate it.

Some of the most fulfilled people I met during my travels were not necessarily the wealthiest. They were the people deeply connected to purpose, family, faith, and service to others.

Markets can become all-consuming if we let them. P&L can become a false scoreboard for self-worth.

Helping others restores perspective.

Trading and investing are not merely financial exercises. They are key to finding financial freedom. Financial freedom isn’t a number. It is a mindset. It is being able to live without worrying.

However, they are also daily psychological and moral tests.

They expose impatience, arrogance, fear, envy, impulsiveness, and insecurity. But they also create opportunities to cultivate discipline, resilience, humility, wisdom, and generosity.

The more I traveled, the more convinced I became that these virtues are not accidental cultural preferences. They are enduring truths about what allows human beings to flourish — whether in markets or in life.

Technology changes, asset classes change, narratives change. In the 90’s, it was all about the big mutual funds. In the 00’s, it was all about the hedge funds. In the 10’s it was all about ETF’s. Now it is all about private markets. Despite all of this change, there is something that stays the same.

Human nature. Thus, you need a process that is disciplined but adaptable.

And perhaps that is why wisdom written thousands of years ago still applies so directly to modern markets.

Stay humble.
Stay curious.
Stay disciplined.
Stay Vigilant.

This weekend, Christians celebrate Pentecost which means 50th and commemorates the descent of the Holy Spirit and the birth of the Christian church. At the same time this occurred in Jesus’ time, it was Pentecost for the Jews also called Shavuot. Shavuot is celebrated 50 days after Passover and commemorates the harvest season. Today, I went to Fushimi Inari-taisha, the famous Japanese Shinto shrine that has thousands of torii gates that is dedicated to Inari, the Shinto god of rice and agriculture. Suffice to say, harvesting is on the mind!

Harvesting evokes that cycle we consistently go through in life in all facets - planting, growing and harvesting. This could be business opportunities or relationships. It may relate to our work or our family and friends. We are always either planting or growing or harvesting.

Financial markets also like to think of harvesting. In my derivatives class, we talk about risk-premia harvesting, the idea that there is a premium to taking risk embedded in the markets, and if you know what you are doing, you can harvest it and earn some money. It isn’t easy, as there is no such thing as a free lunch. However, for those with the right training and risk appetite, it can be done successfully. Much like farming or gardening. Casual gardeners may not get much yield. However, with a little training and hard work, the harvest can be bountiful.

As I tour through Japan, I am thinking about harvesting of a different opportunity. Is there a market discount in Japan vs. the rest of the world that perhaps should not exist? I was thinking so before I arrived here. The more time I spend and more discussions I have, the more I think that long risk in Japan could be harvesting an opportunity.

Here me out.

Fundamental

The first and most important step is to assess the fundamentals in Japan. The story that many think of is the 3 decades of economic stagnation the country suffered following its bubble in 1989. As we toured the Imperial Palace this week, I mentioned to my family that at one point at the peak of the bubble, this 1-mile diameter area was once worth more than the entire state of California. It is truly amazing the magnitude of the bubble Japan was in. It was the largest stock market in the world by a long shot. While there was no depression, there was a long, drawn-out stagnation that allowed for the correction. It was exacerbated by a declining population, such that even as per capita GDP began to recover, overall GDP could not grow because of the demographic headwind.

The fortunes of the economy may be changing, however. After importing the inflation no other country wanted post Covid, consumer habits appear to be changing. Wages are slower to catch up but wages and prices are following. As a result, the economy has been surprising on the upside for well over a year at this point.

As the economy goes, so go earnings. That was certainly the case this past quarter. With the economy surprising at the fastest pace in a decade, earnings and sales growth were off the charts. With the quarter basically complete, earnings growth is 45% which is truly remarkable. This is a huge positive surprise over expectations. You can see from the lower left this rate of growth far exceeds anything in the last 5 quarters. There were sectors with massive year over year growth. So go earnings, so go stocks.

As a result, the Nikkei is starting to close its valuation gap to the US. On an EV/EBITDA basis, the Nikkei now trades at about a 2 turns discount but only last year this was a 4-5 turns discount. You may notice that Europe still trades at quite a discount to both markets right now, but given it has all of the negative catalyst of higher energy prices and none of the positive catalysts of AI, it is a tougher call to make. Yes, the Nikkei has closed a lot of the gap, however, does this just indicate more positive investor sentiment? I think so.

From a fundamental standpoint, Japan looks pretty attractive with a rapidly growing economy, earnings growth off the charts, and a tightening but still discounted valuation.

Behavioral

Of course, the fundamentals are only one leg of the stool. The next leg is what I refer to as the behavioral leg. I measure this by looking at the technical charts and investor positioning. From a weekly chart perspective, we can assess the longer-term trend. It is clear that over the last few years, Japan is in a strong uptrend. Even during pullbacks such as the August 2024 Yen de-risking event of the April 2025 Liberation Day in the US, the TOPIX held the weekly cloud level. After the pullback last spring, it has moved quite a bit higher and recent weakness/consolidation has worked off overbought conditions. The MACD looks like it is set to cross over and move higher again in a sign the bull trend may re-assert itself.

Zooming into the daily charts, the market initially looked like it might break down at the outbreak of the Middle East conflict. However, the lagging span never breached the ichimoku cloud and now price is testing the highs again. Given it is not overbought, a break to new highs would be very bullish indeed.

Are investors positioned for this move? It looks like they are getting that way. This summary from FactSet lays out that stock market turnover is more than double what it was last year. In the past 3 years, volumes have tripled. The old technical axiom is that price follows volume. Volume is exploding, coinciding with the rally. This is a very positive sign.

• Nikkei discussed stock market turnover, noting activity in TSE Prime Market surged this month to an average daily total of JPY10.2T ($64B), more than double a year earlier. 14-May alone saw JPY12.376T, a record high including its time as the former TSE First Section era. Over the past three years, Prime Market volumes have grown about three-fold, outpacing a doubling in Nikkei and Topix. Main factor has been foreign investors for which April TSE flow data showed Prime Market gross turnover of JPY254T when combining purchases with sales, also doubling on the year. Individuals‘ activity also expanded more than two-fold over the year to JPY103T, owing to active day trading and NISA inflows. Shares ranked by daily turnover over May-1 to 21 showed AI-tech plays exclusively made up the top ten. Kioxia (285A.JP) has been a highlight this week after market cap has surged to become the fourth-largest stock behind SoftBank (9984.JP). This milestone was achieved Thursday through turnover exceeding a staggering JPY3T, up 135x on the year, and alone accounted for 30% of total Prime Market volumes. Some thoughts that domestic investors are reluctant to buy these names amid overbought concerns, though foreigners attracted by the NAND market tightness story. Next ten names saw some diversification -- MUFJ (8306.JP) was the lone bank, Mitsubishi Heavy (7011.JP) represented the defense theme, Sony (6758.JP) and Nintendo (~7974.JP) for entertainment and Fast Retailing (9983.JP) for consumption/apparel.

• The behavioral assessment is equally as positive as the fundamental segment.

Catalyst

Finally, what are the catalysts? As I travel around Japan this week, it is clear there are tourists here from all over the world - India, China, Australia, US, and just about every country in Europe. Perhaps the weak Yen is attracting them. It is probably something else as well as tourism has been trending higher for the last 12 years. In 2025, tourism was over 40 million visitors. In a country of 127 million, having a third the size come and visit leaves a meaningful impact. There are fleets of Toyota vans to shuttle tourists around. There are certified tour guides showing all the sights. There are police set up to direct traffic. For a country that has historically been quite xenophobic, there is a clear embrace for these tourists as it is bringing economic well-being for quite a few people. Based on my experience this week in conversations with people at the various sites, this year is off to as good a start as 2025, if not better.

• Tourism is nice but that can’t be the entire economy. What other trends are there? For so many other markets, there has to be an AI trade. It is starting to sound like there may be one. One thing we have discussed this week is that Japan is excellent at taking a trend or a ‘thing’ from elsewhere in the world and taking it to an entirely different level. This may be food from around the world, or this could be electronics, autos and manufacturing. The latest thing is robotics and automation. We shouldn’t be surprised. With a declining population, Japan will rely on robotics and automation more than other countries. Tokyo 2020 Olympics were meant to be the coming out party for this in Japan, but they were postponed and that never really happened. It looks like investors in AI are starting to recognize the importance of Japanese robotics and automation and how this will play out with the AI trade, in this case the ‘physical AI’ trade. This summary comes from FactSet again:

• Japan markets higher: Equities closed sharply higher Friday near intraday highs with Nikkei up 2.68% to a new record and Topix up 1.00%, leaving weekly gains of 3.14% and 0.74% respectively. Main TSE tiers finished with Prime Market up 1.00% on the day, Standard up 1.34% and Growth up 3.66%. Broader growth index logged less than half the increase though still rose sharply and outperformed value. Blue chips were on par with small caps. Intraday Nikkei VIX drifted higher over the session though remained in the low 30s. Sectors were mixed. Strength was led by a sharp rally in nonferrous metals, followed by info & communication, glass & ceramics and electric appliances. Retail, transportation equipment and banks underperformed. Main laggards were insurance, real estate and agriculture. Utilities, construction and pharmas also declined.

• Ongoing hopes for a US-Iran peace deal was cited as the main support factor, with latest reports indicating some good progress has been made albeit key sticking points remain on uranium enrichment and control over the Strait of Hormuz. Technically, further easing in crude oil prices and US yields provided substantive grounds for optimism. This in turn further enhanced the resurgence in AI optimism. SoftBank (9984.JP) staged another double-digit rally after hitting limit-up yesterday. Tailwinds from a similar surge in Arm (ARM) came on the heels of yesterday’s news that OpenAI was preparing an IPO. Kawasaki Heavy (7012.JP) rallied on the back of a report that it will partner with Nvidia (NVDA) to integrate AI into robotics. This adds to reports of non-tech companies taking up AI initiatives, offering conduit for AI optimism to broaden into other industries. Indeed, a recent discussion noted value plays are seeing such companies as attractive. So-called ‘physical AI’ has started to gain attention as the most promising channel. Kioxia (285A.JP) saw its market cap grow further after having ascended to the fourth-largest stock behind SoftBank.

Positive fundamentals, positive behaviorals, and catalysts to unlock this opportunity. This sounds like an ideal time for investors to ‘harvest’ this opportunity in Japan.

Final thoughts

One last place we visited this week was Hokyo-in Temple in Kyoto. The first lesson as we walked around this Zen Buddhist temple was humility. The Buddhist monks maintain the centuries old temple by doing the most basic of tasks - raking leaves, pulling weeds in the garden etc. The idea is that one has to lose their pride and find things bigger than them in order to become a better monk.

The second lesson is forgiveness. This temple contains the graves, side-by-side of military foes Ashikaga Yoshiakira and Kusunoki Masatsura from the 14th century. One of these was a shogun and the other a supporter of the emperor. They were brutal foes that fought to the death. They also followed the same monk. The monk told them they needed to be buried together in a spirit of forgiveness so that this anger would not be passed on to other generations.

Regardless of your faith, regardless of what you do in life, humility and forgiveness are things I think we can all agree on. At least, we all SHOULD agree about them. While this was the lesson at a Zen Buddhist temple, it is certainly one that my Christian faith is always trying to teach as well.

Stay Vigilant, my friends.

President Harry Truman once famously quipped: “Can’t somebody bring me a one-handed economist?”

He was frustrated with the classic economist who would give Presidents or others a scenario that could play out, but then hedge that by saying - one the other hand …

Lawyers, strategists, really any experts are known for giving you the two sides to every story. While thorough in the analysis, it can be frustrating for those that just want to know what an ‘expert’ think is going to happen.

It is not uncommon to see this way of thinking in the markets, but over the last several years, it seems to me that people have become more polarized and dig into their views more and don’t think about what else could happen. These leads to confirmation bias where people only look for the data that confirms their view and ignore the rest. This is perhaps more of a problem than getting both sides of the story.

In the spirit of Socrates and the Socratic debate method, I want to present both sides of a few topics that are driving the debate in markets now and let you decide for yourself which one makes the most sense. I will also give my view of which way I think it falls as well.

Let’s begin

Earnings

On the one hand:

Bulls will point out that earnings growth this past quarter was not just good, it was historically good. There aren’t too many quarters that put up 25% earnings growth and see the breadth of earnings pretty much across the board:

Even if you say that the bar was pretty low because last year was the tariff-impacts et cetera, thus growth far surpassed that. 84% of companies beat expectations, higher than the 75% that typically do, and the earnings surprise came in at 17% overall and was better than expected in every sector (even the -3% in the healthcare sector was better than expected). Across the board, it isn’t even debatable, earnings growth was good.

On the other hand:

Yes, earnings growth was good, but how sustainable is it? How do we anticipate future earnings growth or have a sense of how good it is? We look at free cash flow. Eric Johnston from Cantor had a presentation this week in which he talked about the sustainability of earnings. He is an equity bull even but sees problems down the road. One chart that stood out the most was the free cash flow minus net income which this quarter was $1 trillion difference.

One company’s capex spend is another company’s earnings as we are seeing right now. However, those hyperscalers spending $700bb this year and $1 trillion next year on capex are going to need to pay for it somehow. They have all burned through their high free cash flow and are now turning to the bond market to finance. If these companies don’t turn their capex spend into revenues and earnings by the end of the year, the bond market may not be willing to fund the capex spend next year, which is built into the future earnings growth forecasts of a lot of companies in many sectors. Rapidly falling free cash flow is a sign that this level of earnings growth is not sustainable.

Conclusion:

The free cash flow argument is compelling. If we look at the FCF yield of the SPX, it has dropped below the long-term average of about 4.5%. It can stay there for several years but the times in the past when it has - 90s tech bubble, Great Financial Crisis, and Covid for a brief time - all ended in tears.

This is definitely a yellow flag warning for investors. It is not an imminent concern that will stall the market; however, I do think by the end of 2026, investors will need to see revenue and earnings growth from the companies making the spend. Bond investors will balk if there is no cash flow to support debt issuance. Equity investors will anticipate they are about to be diluted by equity follow-on offerings. This is a risk, but one I think will be more important in Q4 of this year.

Market valuation

On the one hand:

The sell-off in Q1 of this year was all about a contraction of the multiple in the market. Exiting last year near the highest P/E levels of 27x forward earnings, the multiple correct to 20x before bouncing slightly to 22x. That said, the average of the last 5 years is about 21x so after the correction, the market is more fairly valued:

While many like to look at the Cyclically-adjusted P/E and still see overvaluation, looking at the S&P P/E through time lacks intellectual rigor. Why do I say that? Because the companies that are the largest in the S&P now, are different than 10 years ago, 20 years ago etc. The business models are different. The sectors are different. Would you pay the same multiple for an asset-light tech stock as you would for an energy company or a bank? Of course not. No one would. Well then, why would we pay the same multiple for an index that was dominated by energy and banks 20 years ago than we would for one dominated by tech now? We wouldn’t. Relative to its own recent history, the market is fairly valued now.

On the other hand:

Another way to think about the multiple you pay is by inverting it and looking at the forward earnings yield. We can then compare this to bond yields to get a sense of what investors should pay. After all, we know there should be an equity risk premium, since equity investors are taking more risk and are lower down in the capital stack. They are the first to be wiped out if there are any problems. When we compare the S&P forward earnings yield to the US 10-year Treasury yield, we see they are both 4.5%. Thus, there is no equity risk premium being priced into the market now:

The thing is, this condition, which has been in place since 2023, can last for a very long time. The forward earnings yield and the 10-year Treasury were the same level from 1993-1996 at which time Alan Greenspan gave his famous ‘irrational exuberance’ speech. Then, the market took off even more and the forward yield traded at a discount until 2001 when it finally moved back above. As the studies show, valuation is not statistically significant when it comes to short-run market (or stock) performance but is the significant for long-run returns. A pricey market doesn’t mean stocks go lower tomorrow, but it is likely to mean forward returns over the next 5 and 10 years will struggle vs. history

Conclusion:

Bond yields matter. They are the foundation for all of the equity valuation models that we have. Right now, the bond vigilantes are sending a loud signal to governments around the world that there is too much spending going on and they shouldn’t expect the bond market to underwrite it:

Yields in Japan are at 30-year highs, in the UK at 20-year highs. Both governments want to increase fiscal spending to offset inflation, largely in commodity prices. Germany is spending more on the military and yields there are the highest since the Great Financial Crisis. Here in the US, we talked about the ‘line in the sand’ that Treasury Secretary Bessent has on 10-year yields at 4.5%. When yields get there, he tries to do something to rein them in. We are at that line in the sand; can he do anything with global yields moving higher? This is something for equity investors to pay close attention to because it will be a weight on equity multiples. This does not mean stocks have to go lower, but it means earnings growth will need to drive the market from here because we are unlikely to get multiple expansion.

Consumer strength

On the one hand:

Nancy Lazar from PiperSandler had a piece this week in which she discussed that consumers are starting to feel much better. These charts come from that piece and reference surveys done by the NY Fed:

As you see, consumers expect to be spending more over the next year and are not concerned about missing any debt payments. Banks are reporting stronger loan demand and the consumers are saying their financial situation is trending better. All of this feeds into her model that shows real consumer spending ticking up to 3%. Nancy is pointing out the consumer is starting to feel like it is in pretty good shape.

On the other hand:

Not everyone is so sanguine about the US consumer. When the bears point out the consumer weakness, I often hear the Bank of America consumer survey cited as the rationale for why they think the US consumer is struggling. This is from the May 2026 “Consumer Checkpoint” put out by the bank:

Spending is focused on the need to have and not the nice to have. The rate of growth is slowing. Where we see spending it is in higher income households with lower and middle-income households ‘easing back on discretionary spending’. This is the rationale for the “K-shaped economy” argument that you know I don’t agree with. Why? Spending is always heavier amongst the wealthier. Lower-income households will always skew more toward the need to have segment and be able to save less. Even there, however, the tax refunds have provided a buffer as BofA says.

Conclusion:

I think Nancy makes a better argument than the consumer bears. In fact, reading the BofA survey, it doesn’t even sound that bearish to me even though equity and economy bears always cite it. Ultimately, if people have jobs, they will be fine and continue spending. Right now, the labor market looks to be in good shape, with jobless claims near the lowest levels of the last 5 years:

Despite the headlines of mass layoffs at big firms, the overall labor market is doing well. Sure, it is healthcare, education and construction showing health, while tech is struggling, but there are always areas of relative strength and weakness. This may be having an impact on people in their decision-making, though. I have spoken to a half-a-dozen high schoolers this year who are deciding to go into ‘the trades’ instead of going to college - HVAC, electrician, airline mechanics and pilots. Why? Because they hear of how well these folks are doing while their college friends bemoan the weak job market (depends on the degree because I have seen my students do well). The unemployment rate is one of the lowest we have seen even if it is higher than a few years ago. The job market is fine, so I expect the consumer to be fine.

Overall:

I recognize the risk to earnings. I don’t think we see it hurt until Q4 of this year, but I do think it is a possibility of causing some equity market weakness, it is just a question of where that weakness comes from, and I think it is from higher levels than now. It will have to be this earnings growth that will drive the market higher because multiples will struggle to expand and are more likely to contract if bond yields continue to move higher. If the risk-free rate goes higher, everything priced off of it must also struggle. However, the consumer appears to be in solid and improving shape, so I think it is likely we do see earnings growth, at least for the next couple of quarters.

That is my read on the situation. That is my one-hand. What is your other hand?

Stay Vigilant

I’d like to start off by wishing a Happy Mother’s Day to all who celebrate. Moms are the best people around and I think we can all agree that we wouldn’t be where we are today without our moms.

Speaking of where we are today, there seems to be a lot of debate these days about where we are and where we are going. On the one hand, we have the camp suggests that massively higher input costs as the results of tariffs, retaliation to tariffs and the supply disruptions from the Iran War are going to lead to prices being so high that growth will get squelched. On the other hand, we have a crowd that suggests that fiscal and monetary stimulus, combined with a positive productivity shock from the move toward AI, is going to lead to growth without inflation i.e. Goldilocks.

Of course, asset class and sector performance will vary markedly whether we are in Stagflation or Goldilocks. I have been debating with many the last few weeks about which of these scenarios is more likely to play out. We like to share the data that we think proves our point. Each time I do this, I think of what The Riddler used to say to Batman, “Riddle me this, Batman”.

So, Riddle me this …

FUNDAMENTAL

Let’s start the riddle by considering the fundamental data that we are seeing. When it comes to fundamental data on the economy, the one data point I focus on the most is the ISM. In addition, I focus on the new orders component as well since it tends to lead ISM, which itself is a leading indicator. This month, ISM is again above 50 indicating that the economy is expanding. Last month, new orders had pulled back after a huge jump the month before, but this month, they ticked back higher. For those that watch and care about the ISM and its components, the economy is giving the all clear.

Speaking of new orders, there was a ton of orders info out this past week. Factory orders, durable goods orders and capital goods orders. I wrote about this on LinkedIn this week:

The economic data has been quite good. Look at the data today. It is Factory Orders, Durable Goods Orders (ex transports) and Capital Goods Orders (es transports). We are at the highest levels we have seen in years. We are ell above the lows of last summer and are accelerating

I particularly note the Capital Goods orders skyrocketing to the highest in 5 years. They are a subset of Durable Goods. These are durable items used by companies to produce other goods/services (e.g., machinery, industrial equipment, computers, vehicles for business use). They are not final consumer products but tools for production

They are a direct indication of the strength in demand of data centers, manufacturing and the infrastructure to build it. That is why for every computer programmer that is laid off, we see a construction job takes it place. Yes, those are not the same people, but it is why overall jobs are stable

Orders lead profits. Profits lead employment. Don't get stressed about the AI eating jobs narrative. For one, it isn't entirely true. For another, once these strong orders numbers flow through to profits, people will get hired

The surveys from the regional Federal Reserve branches corroborate this strength as they continue to point to more economic strength as well:

I know we got non-farm payrolls this week. However, we all know it is useless because it will be revised over and over and over. A better measure of the economy is jobless claims. Looking at this data, in spite of all of the negativity about AI eating jobs, jobless claims are at one of the lowest levels of the last 30 years. Is the economy struggling? Not based on this.

Why might the economy be doing well? Perhaps it is because financial conditions are so easy. Whether we look at credit spreads, Chicago Fed National Financial Conditions or the Bloomberg financial conditions index, we are at some of the easiest financial conditions in the past couple of years. On the Bloomberg measure, we are at some of the easiest in the last 10 years.

Another driver of the strength in the economy right now is from the fiscal and monetary stimulus. This comes from Nancy Lazar at PiperSandler. Fiscal and monetary stimulus are leading us in the early stages of a classic business cycle:

All in all, the fundamental data in the economy look robust. How robust? So much so that we should not be surprised the market is going to new all-time highs. In fact, if it wasn’t for the Iran War, we might even be a lot higher just based on the fundamental data right now.

BEHAVIORAL

We know there is a behavioral component to the market. We can’t ignore that. One of the bigger concerns is the magnitude and pace of the recent rally. Clearly, on a daily chart, the market is overbought. This does not mean it has to move lower, but it would suggest consolidation could be likely too.

Stepping back to a weekly chart and the picture is quite compelling. Even on the sell-off in March, we pulled back to the ichimoku cloud and held. Now the MACD is turning higher and we are not overbought. This is a very strong looking chart:

On a shorter-term basis, I focus on the put-call ratio because changes in this ratio indicate short-term rends. When there is more put demand, the market is weak, and when put demand falls sharply relative to calls, the market is strong. This indicator is giving us a strong market signal right now.

Economic surveys are also giving a positive sign. The NFIB small business survey is moving higher. Because businesses are doing well, they are looking to hire more employees as well.

It isn’t just small businesses either. The Business Roundtable shows the CEO economic outlook. It has turned higher and is back to one of the higher levels of the last few years. Thanks to Nancy and team from Piper for these charts:

While the daily technical chart is overbought, that is really the only behavioral component of the market that is giving any sort of negative signal. Everything else is giving a strong positive signal.

CATALYST

We are approaching the end of the earnings season. This season has been one of the best, if not the best, in the last few years. There is no doubt that earnings are telling us the economy and stocks are about to head even higher still:

A big negative is oil. Many macro funds tell us to fear $250 per barrel oil. The current and coming supply shock is meant to tell us the world is going to end as we know it. The worst-case scenario is the closure of the Strait of Hormuz. However, as a simple person, I know that I do not know what the spot commodity experts know. That is why I focus on the futures curve. If we are screwed longer term, why are futures for December of this year about $20 lower, not higher, than they are now? I see no $250 price anywhere on the curve. The futures market tells us the oil market will find a workaround. I will assume the futures market is correct until proven otherwise.

Consumers care less about oil prices and more about gasoline prices as they need to drive to work everyday. Gasoline prices are set to end this year back below $2.50 a gallon. Again, not as good as 6 months ago, but not bad at all.

Finally, if we aggregate and look at the economic surprise index, we can see that economic data has been better than expected across the board. The economic data, much like the earnings data, is not only good, but better than expected.

The catalysts are telling us things are not only good, but improving. I know this is hard to believe for a lot of people caught up in the headlines of the war. However, I would tell you that what we are seeing is a classic business cycle driven by monetary and fiscal stimulus. Is the war good? No, not at all. However, it is hitting an economy that is cooking with gas as they say. In 2007, bad news hit an economy that was weakening. In 2020, bad news hit an economy that was weakening. In 2026, bad news is hitting an economy that is accelerating.

Across the board, on a fundamental, behavioral and catalyst basis, the news is good. The economy is strong and accelerating. This is leading to better earnings. This means companies will continue to invest. It means companies will hire. It means consumers are doing fine.

With all of that info, Riddle Me This, Batman. Where is the stock market headed over the coming months?

In my Derivatives & Trading Academy class, I try to develop critical thinking skills. After all, while we think of finance as a science with a basis in mathematics, there is rarely a ‘right answer’ when we apply it. There is a right answer given a set of assumptions, but if our assumptions are incorrect, the answer is wrong.

We see this every day in financial markets. People changing their assumptions given new information coming into the market. Prices move because the inputs to the model are changing, whether this is for qualitative, discretionary and active investors, point-and-click traders, or the most sophisticated quantitative finance firms.

So, I showed my students a series of charts in class and asked them “What do you think?” No right answer. Only a right answer based on how you interpret the charts. Based on your assumptions. After all, there are buyers and sellers in the market every day. We all can see the same info. People simply prioritize different info different or look at the same chart and come to a different conclusion.

I want to do that with all of you. Here we go:

S&P 500 futures, daily chart - strong rally the last month, but maybe a little overbought:

Same futures, weekly chart - does this change or reinforce your view?

S&P 500 earnings - everyone focused on tweets about Iran, but there is another movie playing out - objectively strong, maybe ridiculously so (lower left), the only two sectors where the price may not like the story (lower right) are Communications and Consumer Discretionary

Communications is META and the stock plummeted despite good numbers because it is upping the ante on the capex spend, even though many don’t think much of their AI models

Consumer Discretionary is largely Amazon - good numbers, big investment in Anthropic which is Claude Code and Co-Work, all the rage right now. However, is there anyone left that doesn’t own in?

Technology - it’s all AI all the time and this is a massive trend for sure. Leading to a bull market not just in tech but in the energy, materials and industrials building the data centers. However, right now, it depends on if you are long the Gemini ecosystem or the Open AI ecosystem:

Gemini

Open AI

Finally, investors and traders do not seem particularly nervous about all of the events of the world. Implied volatility - what traders think will happen the next month - is trading below realized volatility - what has actually happened the last month. Does this present a risk, or an opportunity

With all of that information at your disposal, what would you do?

No, I am not suggesting this is something that President Trump told the leader of CentCom regarding the current crisis in the Middle East.

I am trying to make heads or tails of everything we have seen in the markets the past month, and there has been quite a bit. Some of it is obvious, and some not so obvious.

Mechanical

First things first, I want to talk about what I think put in the lows of the market, and it had little to do with any ceasefire talk in my humble opinion. I think it was purely a mechanical aspect of the market. I know many people think the market is rigged against everyone, as trust has been lost in all of our institutions, so why not capital markets. However, I don’t think the market is rigged, I think you may not understand that there are many mechanical - in timing, in structure and in rationale - events in the market that largely never make it to the mainstream. That happened on March 30.

I discussed it on the last Macro Matters podcast that I shared, though I know many of the great subscribers of this blog have less time for my pods. I know that because I look at the stats. I shared it because we hit on some important topics that we need to know.

The gist of it is this. JP Morgan runs a series of hedged equity products. The assets under management are well over $20 billion. As part of these products, the firm executes an option hedge (a put spread collar for those who care to know) on a quarterly basis. On March 31, when the firm closed its March hedge and entered a new June hedge, it bought a 6175-5200 put spread and funded it by selling a 6875 call. The effect of closing the old spread and entering a new spread meant dealers had billions of dollars of futures to buy. The market has been illiquid because long only firms are fully hedged and doing very little while hedge funds had very small positions given the high volatility. The futures buying had an outsized impact given the illiquidity.

It also meant dealers got very long implied volatility, particularly as futures moved higher. Dealers therefore moved down the level of implied volatility. The thing is, volatility is an input into asset allocation for both pension funds that use risk parity and volatility control (if leveraged) as well as hedge funds that are allocated Value at Risk if part of a multi-strategy fund. Falling implied volatility meant more equities to buy by these groups.

Then, the short-term technical picture changed which mean commodity trading advisors who use short, medium and long-term technical models for their decision-making, jumped in to buy. In addition, long only funds unwound their hedges, putting more upward pressure on markets and downward pressure on vols. We moved quickly up to the long call strike from the hedge which put further pressure on volatility and created a virtuous cycle.

We can see this in charts of vol control, implied vs. realized volatility, put-call ratios and the price action of the market around these levels. After a month, though, the market has digested all of this flow at this point, though you want to bear the strikes in mind because if we are near any of those levels on June 30, the impacts could be similar.

For more on this, revisit my podcast or read the piece I wrote for the CME Group in my bi-weekly Excell with Options report:

The link to the podcast: Is the market macro?

The link to Excell with Options: EWO

Technical

The technical picture has changed in the past week or so. We went from an oversold market with an improving technical picture to one that is overbought and looking weaker.

The e-mini S&P looks overbought in the short-term and pointing to about 5% downside:

The Nasdaq futures look even more overbought and pointing to a 10% correction possibly:

The advance-decline line is also suggesting some near term caution:

The Smart money index is telling you the faster hedge fund money is fading this move, though in fairness, they have underperformed the ‘dumb’ money:

Pension funds haven’t fully caught up yet:

Fundamental

Of course, we need to focus on the fundamental story in the market outside of the conflict in the Middle East. We are in the first couple weeks of earnings and with about 25% of the companies reporting, the sales and earnings surprises are very strong. If we look at the lower left, we can see the level of earnings surprises are the best in 8 quarters. Many may suggest that this quarter’s earnings don’t matter because the war started only in the last month of the quarter. That is fair. However, that would also be factored into the stock price move on the back of earnings. In the lower right, we see that with the exception of the Communications sector, the stock price reaction to the news has been positive, suggesting that the commentary from management is also better than expected:

From an absolute growth level, this looks like a massive productivity boom is r. Sales growth is almost double digits and earnings growth is 25%. In addition, outside of the Consumer sector, growth is extremely good. This is all good news:

From an economic growth standpoint, the data has been coming in better than expected all year long. The 3-month moving average of surprise is also trending higher. The economy appears quite strong.

Anecdotally, once again, I was at a golf tournament in Joliet, IL this weekend. This is the ultimate of blue-collar places in America (look it up). I played golf with plenty of people the media tells us are negatively impacted in this K-shaped economy. The reality is that is just not happening. Is everyone ecstatic? Not at all. Are people doing just fine? Yes they are. This does not mean that the GOP will win the mid-terms. There is a lot of wood to chop there. It does mean that people are not yet feeling pain such that they are changing any behavior.

Geopolitical

I have written a bit about this lately and I think it is worth highlighting as this war is likely with us for the foreseeable future.

H.R. McMaster, in the “Goodfellows” below paraphrases Churchill in regard to the Suez crisis, which many are comparing this to for the US. He said essentially, “I would not dare, but if I did, I would not dare stop.”

I still think the potential catalyst for a change is the May 14-15 meeting between Trump and Xi. China is supporting Iran. This war is really between the US and China as I wrote last week. If this is going to stop in the near term, it has little to do with what happens in the negotiations in Islamabad, and entirely what Trump and Xi decide.

For more on geopolitics, go here:

and here:

I also think this “Goodfellows” podcast with an Iranian expert is worth a listen:

Who's Actually Running Iran - Goodfellows

Conclusion

The mechanical part of the rally is now over. That drove us from the lows to new all-time highs. There is little ammunition left from that.

The technical picture looks challenged in the short-term. It does not mean we have to go lower. We could work off an overbought situation by consolidating and going sideways for a few weeks.

The fundamental picture looks quite strong. Earnings are very good on both an absolute and relative basis. If it wasn’t for the war, we would be in a raging bull market.

The geopolitical picture is still quite murky. I do not expect any changes in the coming weeks with the May 14-15 Trump-Xi meeting as the next catalyst. If that gets delayed, I think it is a negative story. If they have that meeting, I think it is a good sign.

Neutral, negative, positive, neutral. Hard to have a strong view here. I would not sell anything. If I were long, I might add hedges ahead of the May catalyst. For now, I expect some sideways to slightly lower price action for the coming couple of weeks.

What do you think?

You have Trump Derangement Syndrome. We all do in some form. What used to be a very divided political phrase is now the reality for most people.

Why do I say this? Because of the chart above which shows the President’s approval rating at the lows of the second term.

He already had a large percentage of the population against him because they didn’t vote for him. Then came tariffs last year which turned off CEOs as well as farmers who were hurt by the trade wars, tariffs and disrupted supply chains. Finally came the confrontation with the Pope and his image of himself as Jesus (eventually deleted) which upset a large part of his core constituency.

As a result, the President has few fans left for his social media tirades and adventures in the Middle East. It seems at this point, most people have some form of Trump Derangement Syndrome.

What if the President is actually embarking on a plan that makes a lot of sense? What if the plan is smart but since we only find out about it from him, we don’t like it? What if there is a reshaping of the global order occurring that will change the course of the next several decades, but we are not paying attention because we get too caught up in the headline ping pong?

That is what I want to explore today, not because I think it is the case, but because as investors, we need to put biases to the side and focus not on what we want to happen or think should happen, but on what is actually happening and what that means.

I recently watched to a YouTube video that laid out the hypothesis for what we are witnessing. I want to explore the main points. We can then pass our own judgement of how much if it we believe, but more importantly, what that would mean for investing.

Hypothesis

1. 1. We are witnessing a changing world order. Gone is the post-World War II Washington Consensus and US hegemony. In is a new order with new organizations and new allies.

2. 2. Western hemisphere security

3. 3. US energy dominance

4. 4. Strong military which includes space dominance

5. 5. US manufacturing renaissance as well as AI/tech superiority aimed at declawing China and reducing its influence in this new world order

   6. Maintaining US debt levels

Let’s look to see if there is evidence that this is playing out and surmise what that could mean.

Changing world order

If we think of the post-WWII world order and the US hegemony in the world, we have to start with the organizations that were the channel for US influence - United Nations, World Bank, IMF and NATO. This world order is not changing because of Trump, Biden or Trump again. This world order is changing because China decided it wanted a much bigger voice at the table. This is the ‘Thucydides Trap’ - the high risk of conflict when a rising power threatens to displace an established hegemon, historically making war likely but not inevitable. It was detailed by Harvard professor Graham Allison in his book “Destined for War” which came out in 2017. China has pushed this, the US is only responding.

Start with the UN. This is an organization that has been the source of criticism and frustration, not just in the current Administration, but going back much further. The veto power of the P5 - US, UK, France, Russia and China - means that almost any resolution at the Security Council level is blocked by someone, whether that is the Russia/Ukraine war, the series on conflicts in the Middle East including the current one, or the genocide in many places in Africa. As a result, we have seen several other organizations arise to step into the void. China put for the BRICS+ - Brazil, Russia, India, China and South Africa - in an attempt to gain more influence. The US countered with the Quad (US, India, Japan, Australia) or AUKUS (Australia, UK, US).

The one thing we can see is that India, with its massive population, is playing both sides right now. It has the strongest demographics in the world in terms of a young, growing and educated workforce. It is in a place where both sides are vying for its friendship, and in optimizing its situation, it is playing all sides against the middle, as any country would do in the same situation.

We can also consider the IMF/World Bank. These were multinational organizations, where the US provided most of the capital and had most of the influence of who got bailed out and at what terms they did. China decided it wanted to change that influence with the “Belt and Road Initiative”, which began in 2013 and continues to this day. Countries had a choice on where they could turn, and in many parts of Asia and Africa, they turned to China. This reduced the US influence in those parts of the world.

As a result of all of this, the US is trying to identify who are its friends and who isn’t. Who it still may have influence over and who it doesn’t. The entire topic of Greenland is a test of who supports the US and who doesn’t. Many in Europe voted on that. NATO is another test and the countries that would not let the US fly over or leave from their countries recently are another test. The US is, in real-time, determining who is on board with it. The ultimate test perhaps? The Board of Peace. Who is aligned with the US?

This is important for us as investors. Why? Expect the US to move away from funding/supporting anything to do with the countries that aren’t stepping up their allegiance and expect more favorable terms in those that do. You own a multi-national that does its business in the EU? Not so good. If it does its business in Eastern Europe or the Middle East? Much better for you.

We may think this is just something that Trump is doing, but I think if we step back, we can see that China decided long ago it wanted more influence and is taking it. The ball is in the US court to react to this. Biden did nothing and the US lost influence. Trump is doing something and gaining it in some places. That is fact, not a political comment. We can all wail and gnash our teeth and hope for a return to the post-WWII world order, but it isn’t going to happen, so it is time to move on but importantly to know what it means for the portfolio.

Western hemisphere security

The “Donroe Doctrine” is a play on the Monroe Doctrine that political scientists have studied for the last 100 years. The term arose in late 2025 when the Administration put out its National Security Strategy. The 2025 National Security Strategy (NSS), which sounds impressive and intimidating, is meant to lay out the framework through which we can interpret the ‘how and why’ the Administration takes certain actions. It is widely viewed by analysts and critics as a significant departure from the post-Cold War consensus. This should be surprising if we consider point one above. It is widely considered an “America First” document.

American First should not be a surprise to anyone. Remember that phrase from the first Trump term? At the time, few took it seriously, and in fact many late-night shows in Europe had some fun making fun of it:

America First - who is second?

Venezuela, Greenland, Cuba

Fast forward to today, and America First is no longer the stuff of late-night jokes. Now people are using it to try and understand how and when it may make actions. Why? Because the reaction function we have had in place for 80 years is changing. Again, not because the US wanted it to change (arguably it worked out okay for the US) but because China wanted it to change. It is the Thucydides Trap playing out.

The most prominent element of the 2025 NSS is the aggressive reassertion of United States dominance in the Western Hemisphere.

• Sphere of Influence: The strategy formally adopts a “Trump Corollary” to the Monroe Doctrine, asserting that the Americas are an exclusive U.S. sphere of influence.

• Exclusion of Rivals: A primary stated goal is the systemic removal of Chinese and Russian influence from the region, viewing their economic and security ties with Latin American nations as a direct threat to U.S. national security.

• Operation Absolute Resolve: The military intervention and capture of Nicolás Maduro in January 2026 is widely cited as the “proof of concept” for this pillar of the NSS—demonstrating that the U.S. will use unilateral, kinetic force to remove regimes it deems hostile or illicit.

I would layer into this, things that have not happened … yet. I say yet because we can’t really rule anything out at this point. Could there be meaningful change in Cuba? I think that is very likely. Russia has long had an influence in Cuba going back to the Cold War and the Cuban Missile Crisis. The US has decided it will no longer allow that so it is only a matter of how this will play out.

Could there be some change in Greenland? I think that is less likely (arguably, the US already has a pretty good deal there) but I would not rule anything out. Greenland is important for global trade, energy security, hemispheric influence and the dominance of the military. We have not heard the last of the Greenland story.

The NSS shifts from a value-based foreign policy to one focused on securing material and strategic assets. It shifts from multi-lateral organizations to bi-lateral trade deals. It goes from soft power to hard power. It is less diplomatic and more in your face. This change in strategy may reflect the urgent nature of the shifting world order.

US energy dominance

“Drill baby drill”. When Trump first uttered this phrase, the market reacted by dropping oil prices and dumping energy shares.

However, “drill, baby, drill” takes on new significance in the current context. With spot oil prices near $100-, and 12-month futures above $70, energy companies are no longer getting crushed by fears of over-supply. Instead, US energy dominance is both insulating the US economy from the spike in prices caused by the closure of the Strait of Hormuz, but also allowing US companies to take market share potentially from Russian or Iranian players.

China has rare earths and won’t sell them to the US. That’s okay, the energy you used to get from Iran is no longer allowed to leave, and the oil you used to get from Venezuela is now in US control. The negotiation now is a bit more balanced. I am not saying China doesn’t still hold a very good hand, but the deck is a little more balanced.

The US is pursuing AI dominance, needed for the 21st century and for both military and economic control. If we know one thing about AI, it is that it is an energy hog. Largely nat gas. Enter US energy dominance. Look at the range of announcements on tie-ups:

Nuclear -

Microsoft & Constellation Energy, Amazon & Talen Energy, Meta & Oklo, Google & Kairos Power

Geothermal -

Google and Ormat Technologies, Google and Fervo Energy

Nat Gas -

Amazon & Energy 1 & Chevron

All of the above -

Google & Meta & Next Era Energy - nuclear, renewables & nat gas energy

Expect more and more announcements. The tech firms quickly realized that the key constraint is not compute power or software engineers, but the access to cheap and reliable fuel to power these. The US has access to cheap and reliable power, primarily nat gas, but across the board. This alone helps the US in the AI race. Denying China access to cheap energy (heavily discounted sanctioned oil) hurts China. That is why China has been rapidly expanding ALL forms of energy, because it realizes how important this is.

Many countries will rush to build up the ‘all of the above’ access to energy because they have now witnessed not once (Covid), not twice (Suez Canal blockage by Ever Given in 2021), not three times (Russia/Ukraine War) but now four times (Iran War). The US and its energy dominance gives it a competitive advantage that it can use for its own companies, but also use for its allies. See above on the US determining who its friends are and are not.

Strong military

The only way this works is with a strong military. Not a strong military that is used as the world’s policeman, protecting global trade for allies and the US consumer. A strong military that can tactically project influence where necessary - in Venezuela, in Iran, in Africa. Where else could it be projected?

This goes back to Trump’s first term and NATO. Recall then that the criticism was of NATO countries not spending the required 2% of GDP on defense? Trump basically said that the US would pull out of NATO if they did not? Fast forward to today. Look at what countries are doing:

Many are still doing the bare minimum. Many of the NATO allies have rejected Trump, first on Greenland, but then, and more importantly, on the Iran War. Expect the US to refocus a lot of its defense spending away from NATO initiatives and back to US initiatives. Some countries can see this more clearly and are stepping up more aggressively. Some are still calling bluffs. I think NATO is more at risk than many may think.

In addition, Ukraine and now Iran have demonstrated the changing nature of war. This doesn’t mean that either is winning. I think it is fair to say that both are feeling a fair bit of pain from the traditional military. However, they are both also to stay around a lot longer, and project far more power, because of new technology like drones and AI.

I strongly consider you to listen to this “All-In” podcast with Palantir and Anduril on the subject:

All-In pod

Layer in that the military dominance is moving to space as well. Is the US moon launch about some nostalgic push to frontiers beyond? Unlikely. Is the moon launch a race to space to keep up or surpass China and others? More likely.

For the US to maintain its place in the new world order, it needs a strong military. That that means going forward may mean different players are important. Past alliances like NATO may be changing, which means every country will need to start considering increasing defense spending. This is meaningful repercussions.

Manufacturing renaissance/tech superiority

How does the US attempt to counteract China in this new world order? How does it de-claw’ China? After all, in the Thucydides Trap, those are the two rivals.

How does the US get AI superiority? How can it achieve military dominance? How can it reduce reliance on Chinese exports?

This is where the tariff strategy comes in. The US knows it can’t be reliant on China anymore. We saw this during Covid initially. The subsequent supply chain shock was painful for the economy.

We have seen it the threats from China to withhold rare earths and the other items that it has a monopoly on.

The US can’t come out and simply say ‘buy less’ or ‘buy American’. On the former, US consumers like to spend. Generationally, maybe Millennials and Gen Z are more minimalist than Boomers, but US consumers spend.

On the latter, we tried that in the 1970s and 1980s and it didn’t work. The quality was worse and the price was higher.

So, you have to slow consumption. How do you do that? You raise the cost. You put on tariffs. You don’t market it by saying ‘we are going to raises prices so you buy less’. You market it as ‘these countries are screwing us so we are fighting back.’ However, the outcome is the same. Less stuff being bought:

We aren’t talking a recession, because nominal spending is higher. However, fewer things being bought means less money recycled abroad.

What is the next step? Getting more US manufacturing

No one has done more work, or better work, on the US Manufacturing Renaissance than Nancy Lazar at PiperSandler. I recall doing a podcast series back in 2022 about Peak Globalization and she was the one who started off the series

You can find that series here for Peak Globalization

This is something that had been happening a decade ago, as the cost to manufacture in Asia was moving higher. The corporate focus on ESG accelerated it because of the concern over worker safety or the environmental footprint. Covid and the Ever Given Suez blockage really ramped it out. Tariffs and both trade as well as kinetic wars only continues. The good news - it is happening

You see the President constantly push toward this. It is all about national security and moving away from China. It is not just a narrative, it is reality.

Lastly, it is also about AI. The US knows it is in an existential race in AI. Whether that means AGI or agentic AI is likely yet to be determined. However, one can see that there are going to be two competing camps when it comes to AI - China and the US. Thus, it was important for the US to name David Sacks as the first US AI and crypto czar. The US is forming a cohesive strategy across both of these fronts, and they are tied together more than you think.

US debt levels

Post the Great Financial Crisis, two academics - Rogoff and Reinhart - did a study that talked about the level of debt on a sovereign balance sheet that ultimately leads to a crisis. Why? We just had a sovereign crisis, but also because debt levels in the West were exploding. They determined that crises happened with debt above 100% to GDP.

The Modern Monetary Theorists came out and said that was non-sense. If you can print in your own currency, it doesn’t matter, until of course you have extremely high inflation. That is the market telling you that there is too much debt. Then came 2022, with extremely high inflation. Doh!

Crypto enthusiasts will tell you that all of this debt is leading to debasing of the Dollar, and one needs to be long. That sounded good in 2024-25, and maybe not so much now.

I think the important thing to consider - debt levels are NOT going lower. Whether we think there is too much debt or not, it doesn’t really matter. Look at the above. Does anything above sound like austerity? Not at all. The US is NOT going to lower its debt. So, what does that mean?

First of all, it means it has to fund it. That has historically meant Japan and China. We can assume China will no longer fund it. Will Japan? So far perhaps. No one else is stepping up. So how can we fund it?

Enter stablecoins. I have been arguing this for a while on Stay Vigilant. Then, I saw this headline:

Stablecoins Moved More Money Than the US Financial System’s Backbone

• Stablecoin monthly volume hit $7.2 trillion in February, exceeding ACH’s $6.8 trillion.

• Total stablecoin transaction volume topped $28 trillion in Q1 2026, a new record.

• Cross-border payments and B2B settlements are accelerating stablecoin demand beyond crypto.

This is mega important. It used to be the US SWIFT network and ACH transactions for global trade. This is how the US flexed its muscles and sanctioned players like Russa, Iran and Venezuela. Then they found ways around it. Layer in the US needs a steady buyer of its debt. Enter stablecoins, which need to hold US Treasury bills as collateral. It also allows the US to see how and where money is flowing.

Sure, this is short-end debt. It would need to term some debt out. Have you noticed that since Yellen, the US is already funding itself largely inside of 2 years? We have already moved there. This just cements the transition.

Where has usage of US stablecoins gone up the most? South America (Venezuela), Africa and the Middle East. You want to be a friend and ally of the US? Time to use a stablecoin linked to the US Dollar and Treasury.

Debt is not going down. The nature of issuance is changing, though.

Conclusion

Is this all plausible? If so, what does this mean?

The Iran War - why now? For one, the US wants to diminish Chinese influence. As it tries to do so, China pushes back via trade and exports it controls (on rare earths etc.). The US has no cards to play in this game, so what does it do? Well, now that it has de facto control of Venezuelan oil (see below for more), moving on Iran with the risk of the closure of the Strait of Hormuz, hurts the US less than China, which is the largest destination for Iranian oil. Not only is it not as worried about the closure of the Strait of Hormuz, but it also actually decides to blockade ships coming in and leaving itself because these are all Chinese vessels. Ahead of a meeting on May 14-15 between Xi and Trump, the Administration is showing that it has cards to play as well.

The US military helping to secure energy dominance not only helps in bi-lateral discussions with its biggest rival, but it also helps the US in the race of US manufacturing and AI dominance.

A Thucydides Trap leading to a war between rivals - US and China - may not be a kinetic war but a war about manufacturing, AI, trade, alliances, and influence.

This all sounds like a lot more spending. This all sounds like a lot more debt. This all sounds like a lot more inflation.

Perhaps this is all just crazy talk. Perhaps you strongly disagree and think it is all rubbish. I know my post “4d chess, utter chaos or something in between” met some very visceral negative reactions.

However, I ask you “what if'“? What if this is what we are witnessing play out? What if only half of this is true? What are the ramifications?

Most importantly, how is your portfolio prepared for it?

The mechanical/technical led catalyst that caused the bottom in the market has been followed by better macroeconomic data. What happens if we now get better earnings in stocks where the multiples have fallen?

The ‘macro’ traders out there are intensely focused on the Strait of Hormuz and disruption to oil supply. However, in other areas, the market is telling us we are past the worst of this conflict in the Middle East.

Have a listen. Let me know your thoughts.

Most importantly … stay vigilant to both the risks as well as the opportunities.

This weekend I had occasion to catch up with three friends over golf. That is, watching golf but also playing golf. As golfers know, this past weekend was The Masters, frankly the highlight of every golf season even though it is early in the season. It is, in my opinion, the best of the Majors. It is also the one that I think most players want to win (though any major would do). Most importantly, for those in the north, it is the official start to the golf season.

For us northerners, the November - April period is golf trip season, since even if we get a warm day here or there, the greens have snow covers on, so it isn’t real golf. For The Masters this year, we took a trip to Charlotte, NC, where a college friend is now living, to play 72 holes of golf. It was also time for 72 holes of Masters golf not too far away in August, GA. All in all, playing and watching golf in amazing weather with good friends is a special treat.

Since these friends are all working in various Wall Street jobs, the discussion on the golf course will always turn to some aspect of what we are seeing in the markets. This time, more intentionally so since I wanted to get their take on a few things that I am watching, to garner a perspective different than my own.

The Economy

The first topic was the economy. As you know, my take is that the economy is stronger than many on Wall Street are saying right now. I have been to Florida, New York, South Carolina, California, Oregon, Wisconsin, Missouri, Michigan and Illinois all in 2026. Big cities and small towns. Top of the K and bottom of the K. Everywhere I go I see people spending money. I see people traveling, with kids. I see people at restaurants. I see people at sporting events and concerts. The narrative is loud and clear that presumably half the country isn’t doing well, though there is little evidence of that.

I asked each of the three. They see it the same way. They have traveled to many other places and get the same vibe. As we went out to dinner in Charlotte, it was packed. This wasn’t just the top of the K. Sure, we saw Maserati’s driving in some places. We also saw a suburban mall with restaurants, bars and a concert going on that was full of F-150s. Young and old alike. People spending money.

The chart above is retail sales. February was the strongest month since last summer. Pretty much across the board in terms of categories. Consumers are getting big tax refunds and are spending despite higher gasoline prices. When people are befuddled about the strength in the market, in spite of a war in the Middle East, perhaps they are overlooking the underlying strength to the economy, which should drive earnings, and therefore stock prices. Don’t sleep on a good economy.

Affordability issues

I will fall short of calling it an affordability crisis. However, affordability is still an issue for consumer. It isn’t so much of an issue that it is a crisis otherwise they would not be spending as they are (see above). However, it is still a cause for concern, and one that will be a central topic for the mid-term elections. This is a theme that I mentioned at the start of the year as being central for the markets this year.

A topic for us and the markets was the historically low University of Michigan consumer sentiment number. It recently came in at a 74-year low. Think about what we have gone through in the last 74 years: Presidential assassination, Presidential resignation, Viet Nam war, OPEC oil embargo, 9/11, Great Financial Crisis. However, in spite of all of those epic events, all negative, now is the time consumers are the most negative in history?

Sure, things are clearly more partisan now than they have been. I have showed how the UofM number, when split between Democrats and Republicans, shows a different answer. Democrats are clearly so negative they can’t think straight. Yet, that is not really the full story here.

UofM has always been more levered to inflation than other measures of the economy. Look at the chart above. I have highlighted periods when CPI was above or below trend. You can clearly see when CPI is below the long run trend, UofM sentiment is at the highs. When it is above the long run trend, UofM is at the lows. Since Covid, CPI has exploded well above trend so much as to call the trend into question. We should not be surprised to see the UofM tank coincident with the rise in CPI.

The President has an affordability issue. I don’t think he is unaware. I also don’t think he doesn’t care. Not just Congress, which ONLY cares about elections, but also his Cabinet, which see themselves as successors, are about this issue. It is the top issue for voters. This is why I think the war will be over before long. I think by July 4, when people get together with friends and family and talk about life, a few months before the election, I think the Administration will want to see some change in trends. Perhaps it cannot change the trend, but I think the desire is there. Affordability is still the top issue. Go and poll 10 of your friends and family. I would guess it will show up more than anything regardless of the demographic.

Private Credit

Because of the war in the Middle East, the market has stopped myopically focusing on private credit issues, which first rose to the fore late last summer. It was definitely top of mind for our group. One gent is involved in institutional private credit allocations. Another has invested in private credit individually. The third competes with private credit as a banker. For me, since private credit has hired more of our students the last 5 years than an industry, it is a huge topic for the students.

The chart above shows the Van Eck Business Development ETF. It is the proxy for weakness in private markets. It is still near the lows of the last 3 years. The sentiment is very negative.

In speaking with these gents, that are experts in assessing this, I feel like this is more of an issue for the largest players and not as much a systemic risk for the economy. The largest players had so much capital flood in, they had to put it to work. The underwriting was likely more lax than it was at the middle market players. It was definitely more lax than at a bank. In addition, it got over-allocated to software, not just SaaS but software in other industries as well. These annual recurring revenue (ARR) businesses, cash-flowing businesses that private equity loves because it can lever it up, were perfect for the LBO model. That is, until AI came in to potentially disrupt the industry, in something few saw coming to this extent or this quickly.

Again, the middle market players - focused on HVAC, doctors’ offices, landscaping, industrial businesses - have not seen the exits they want but are not facing the existential crisis.

Layer into this that the large PE firms opted for continuation vehicles with daily liquidity to retail clients, and you have the setting for a run on the bank. Investors have an incentive to put in redemptions, because when only 5% can come out at a time, you want to be as high in the queue as you can be. Bad underwriting because of too much capital, centered in an industry facing existential crisis, packed into vehicles that can’t handle the liquidity. A perfect storm for the large PE and private credit firms.

However, not systemic. The middle market firms we see are all still firing on all cylinders. The hiring I see is as strong as ever. The allocation opportunities are still robust. There have been no losses to individuals. Private markets are an issue, and probably need to chop through some wood over the next few years, but are not something that will drag the economy down like a Financial Crisis.

Conclusion

The conclusion is more a non-negative than a positive. It is more the absence of darkness than the presence of light. No one thinks everything is perfect. No one is talking like we are in the middle of the best bull market of all time.

However, everyone thinks things are fine. Maybe a little better than fine. Everyone is gainfully employed. Everyone’s kids and spouses of kids are gainfully employed. Are there issues? Are people frustrated with the President? Is affordability, on everything from houses to plane tickets, a talking point? Absolutely. Though, not issues that we can’t get past.

Most importantly, we concluded that we need to again play 72 holes over 3 days, in 80-degree weather, and then watch The Masters. Can’t beat that.

On Friday, the tickers stopped, the exchanges were quiet, and the frantic pulse of the macro environment had slowed for the Easter holiday weekend.

Usually, my goal is to help you navigate the complexities of interest rates, debt cycles, and equity valuations. But as we enter this weekend, I want to break character. We spend so much of our lives trying to optimize our portfolios, yet we often neglect the one asset that determines our ultimate trajectory: our soul.

The Infinite Gap: Why “More” is Never Enough

In the world of finance, we are trained to seek growth. We assume that if we hit a certain net worth or achieve a specific level of influence, we will finally reach a state of equilibrium—or what we might call “happiness.”

The great philosopher Thomas Aquinas identified this fallacy centuries ago. He argued that humans instinctively seek happiness in four things: Money, Power, Fame, and Pleasure. I can tell you from personal experience of 35 years on Wall Street that I have tried to find happiness in bigger bonuses, faster promotions, renown among peers and endless nights at fancy restaurants and night clubs. I found the opposite. The higher up I went, the more I felt lacking.

In my career, I saw other people chase these daily as well. Some still are. As a professor, I hear some students tell me their goal is to get a job that pays a lot of money. But Aquinas’s insight was profound: because these things are finite and fleeting, they can never satisfy a hunger that is infinite. We were made by God, for God, and attempting to fill that void with market gains is like trying to fill the ocean with a teaspoon. As Augustine of Hippo wrote in his book Confessions: “Our hearts are restless until they rest in You, O Lord.” While he is now a saint and a doctor of the church, he didn’t start out that way. He chased the same things Aquinas told us we all chase. Every saint has a past, and every sinner has a future.

Pascal’s Wager: The Ultimate Risk Management

In trading, we manage risk. We look at the “downside” versus the “upside.” Blaise Pascal, a brilliant mathematician and philosopher, applied this logic to faith in what is now known as Pascal’s Wager.

Pascal suggested that if you bet on God’s existence and you are right, your gain is infinite (eternal life). If you are wrong, your loss is minimal. However, if you bet against God and you are right, your gain is minimal; however, if He exists, your loss is infinite. From a pure risk-reward standpoint, the most “rational” move a person can make is to live as if God exists and seek Him.

I recall a colleague speaking to another colleague who had some atheist views. He simply said, “you are a bad risk manager.” In our portfolios, we are always trying to find convexity. Asymmetric reward to risk. Bigger gains for smaller risk. As Nassim Taleb says, we want to be anti-fragile. If we apply that to our lives, the convex position to take, the long optionality, is to believe in God. Not believing in God is akin to selling options and not taking in much premium to do so. Thus, it is being a bad risk manager.

Examining the Data: Evidence for the Resurrection

I know many of you are data-driven. You want evidence before you buy into a thesis. Every week I try to bring you data and charts to prove a point. Why would this week be any different?

Faith isn’t a blind leap into the dark; it’s a step into the light based on historical and philosophical footprints. As Bishop Robert Barron says, faith is suprarational, not infrarational. It is not based on irrational credulity or superstition but rather a response to God who engages the mind and critical facilities.

That is, faith doesn’t happen before science or before facts. It happens after we have exhausted all possible facts. His example: you are meeting someone new, so you Google them or look them up on LinkedIn to get some facts about them. You get to know them a bit. Then you meet them. Maybe you have a relationship for years and get to know them better over several drinks of coffee or something stronger. At some point, someone might say “did you hear what so and so did”? You don’t know for a fact what they did. You don’t know what is in their heart. However, you have a lot of data because you have known them for years but at this point, you have to rely on faith or what you believe they did.

That said, you may be looking for a “due diligence” report on the claims of Easter, I highly recommend these resources:

• Bishop Robert Barron – “Evidence of the Resurrection” A clear, powerful walk-through of why the resurrection stands at the center of everything Christianity claims. It isn’t just a nice story; it’s the pivot point of history. Watch here

• Lee Strobel – “4 Proofs of the Resurrection” The former atheist legal journalist lays out the historical evidence like a courtroom case. Short, compelling, and evidence-based for the skeptics among us. Watch here

• Dr. Jeremiah Johnston – “The Shroud of Turin” A leading New Testament scholar and apologist explains why the Shroud of Turin - studied by hundreds of scientists from all disciplines for over 100 years, is the best evidence we have that Jesus was real, He died for us and He rose from the dead, which changes everything. Watch here

The Bottom Line

You remember those ING commercials from several years ago that asked “What is your number”? The idea was: people have a number in mind at which point they will retire. Do they? If your happiness is tied to your portfolio value, you will never get to the right number. If you have success, you will want a bigger number, a bigger 2nd house. If your number falls short, you won’t retire, you will keep trying. Markets will fluctuate. Currencies will devalue. Empires will rise and fall. If your identity is tied to the markets, you will eventually be crushed by its volatility.

This Easter, whatever your portfolio looks like—whether you’re up big, down big, or sitting in cash—remember that your ultimate security isn’t in any asset class. It’s in the empty tomb

Easter reminds us of a reality that is fixed and unchanging: Jesus is risen. He has conquered death, offering us a peace that the world—and the markets—simply cannot give.

This weekend, I hope you turn off the monitors, put down the charts, and look toward the Savior. He is the only investment that yields an eternal return.

Stay Vigilant—and stay anchored in the One who conquered death. The only data point that matters is an empty tomb.

Happy Easter.

Earlier this week, I wrote about the vastly divided opinions on which side is winning the War in Iran. Whether you primarily get your information from traditional media or social media, you will see people share videos of events in the Middle East to support said view. However, are any of these videos actually real?

There have been several articles pointing out that AI fakes and deep fakes are being aggressively used to spread propaganda in this war, with cyberwar being a major theater of the war. This a but a smattering of the stories about it:

AI images being used as propaganda - The Hill

Cascade of AI images - NYT

AI generated images surge - BBC

I thought the topic was covered very well by Michael Every from Rabobank, who was a special guest on MacroVoices podcast this week. He said essentially you cannot trust a single thing you read, see or hear. This even goes for the ‘official’ news coming from Trump’s Truth Social account. Why? Because you don’t know if there is intentional disinformation as part of a tactical strategy or not. Maybe it is true, maybe it isn’t, how do you know?

This is all part of the Fog of War.

What are we to do as investors? Largely what you are seeing from many participants - as little as possible. Institutional investors do not appear to have changed many of their individual positions, instead opting for very liquid futures, etf’s and option hedges to dampen portfolio volatility. Active traders are keeping positions smaller, trading less, and opting for defined risk/reward option plays to express views.

As I think of how this environment could shift, I come down to two scenarios that could play out in the War and in the economy: either a quick resolution or a long, drawn-out affair. Let’s consider each.

Scenario 1: Long drawn-out affair

The logic here is that Isreal sees Iran as an existential threat and this as a once-in-a-lifetime opportunity, so it is not going to relent. Iran’s regime is fanatical and will not stop nor step down because it also sees this as an existential threat. Finally, the US has waited for almost 50 years to avenge the 1979 hostage crisis and 1983 Beirut bombings among many other threats Iran has posed over this time. If that is all true, no one has an incentive to end the war.

This may be where many US consumers are coming out as well. We see this in plunging consumer confidence surveys, particularly the high frequency Piper Sandler survey which puts consumer confidence at lows seen last year on Liberation Day and with the government shutdown:

Perhaps not surprisingly, there is a considerable difference between the views of Republicans and Democrats. The University of Michigan has showed this divergence for the past 15 months since Trump assumed office. However, if you look at the far right, both Republicans and Democrats lowered their expectations in the last survey.

A lot of this likely has to do with the move in gasoline prices. This price is the one price that just about everyone in the country knows with a nickel. Since the start of the war, gasoline prices have almost double from 5-year lows to some of the highest we have seen in some time. The red line is the average over the last 5 years. We are well above that level:

While the Administration probably was hoping that low gasoline prices would help the approval ratings, the reality is voters are seeing the intrusive government as a reason to disapprove of Trump. While he has been below 50% since inauguration, you see a step lower on the tariff news last Spring, the government shutdown last Fall, and the War this year. Gasoline prices only augment that move to the lows in approval ratings that Trump has ever had:

Looking at a summary of the recent surveys and trying to see if there is support anywhere, about the only place you can see robust support is among Republicans who are 65 or over. For anyone who was of age in 1979, Iran has been the enemy and the chance to eliminate the mortal enemy is an opportunity you cannot pass up. Younger voters who do not know or do not care about this are not supportive of the War. Democrats don’t support anything Trump does so this is not too surprising:

However, if you were to ask politicians off the record, you have to think they would be in favor of setting Iran back. MSNBC’s Joe Scarborough, no fan of Trump himself, seemed to suggest this and pushed Sen. Chuck Schumer on this very topic:

So, while not popular, there may be support among the political class which could be reason enough that this War continues. If it does continue, what are investors to do?

Implied volatility, as measured by the VIX, has already surged, so the cost of insurance has gone up. It can certainly go higher particularly if a long war takes the economy into a recession, as many are starting to believe. It is too late, however, to find cheap insurance for a portoflio:

In addition, the implied volatility skew, which measures the relative price of downside put options vs. upside call options, or the relative demand and supply of insurance. The cost for downside options is relatively about as high as anything we have seen in the last 20 years outside of Covid.

One way to take advantage of this relative pricing is to consider a put butterfly. A strategy I prefer is to not use symmetric strikes as is typical in a butterfly, but to bring the lowest strike a little closer. This raises the price a bit, but allows for there to be gains if the market blows through the low end. With Fibonacci support to the SPX in the 5900-6000 range, I like the 6400-6000-5800 put butterfly expiring in June. This would provide a nice amount of downside P&L protection for a relatively low cost:

If options aren’t your thing, then it may be time to rotate in healthcare stocks. This sector has been weak this year, lagging the index, as there are fears of the government hurting profitability as politicians go after healthcare costs in an attempt to improve affordability. However, if the war is drawn out, and prices aren’t coming lower anyway, politicians may not have the votes to do much on healthcare. If this risk is gone, the sector traditionally acts as a defensive sector and would do relatively better if there is a risk of stagflation or even recession.

Scenario 2: Quick resolution from here

Why would the war end quickly? The argument here is that either Trump backs down because he sees his approval ratings, the stock market or gasoline prices and chickens out, or that the Marines come in and both clear the Strait of Hormuz and seize Kharg Island. In the last 5 years, whether it was Covid and the abrupt fiscal & monetary response or Liberation Day and backing down quickly. In each case (circled below), the stock market was back to the highs within 6 months:

Could that happen even with higher gasoline prices? Well, the underlying economy was looking quite strong before this all started. A major offset for higher gasoline prices is larger tax refunds. It would take gasoline prices to be elevated for a year to offset all of the benefit to consumers from taxes:

It is not just the consumer, though. As Nancy Lazar at Piper points out, while acknowledging the negative from the War, there are three very positive catalysts rom the fiscal, monetary and productivity levers:

In fact, she points out the positive drivers for companies add up to 1.4% of GDP. If the War is in the rearview mirror in the next couple of weeks, and focus turns to the positive drivers of the economy, the market may get back to the highs much sooner than anyone thinks because of these tailwinds:

The data is bearing that out. In regional Fed surveys this past week, we saw company capex plans spiking higher. The picture below is from NY Fed, but we got the same data from Philly Fed and Richmond Fed:

We saw before that implied volatility is quite high, so we do not want to simply buy options. One of my favorite ways to lever a long position is to use ratio call spreads. Layering a 1 by 2 call spread on top of a long portfolio position leverages moves to the upside. Is it optimal as a stand alone trade? Possibly. Here I look at a zero-cost 1 by 2 call spread expiring in June using 6500 and 6750 calls. The upside breakeven is 7000 which is essentially the highs we would get back to. Will we set new highs in the next 2+ months? Even if you are bullish, it might be hard to see that.

There is no easy answer right now. We are in the midst of a war. The Fog of War means none of us have any idea what is happening, who is winning or when this could end. My sense is you have to ask whether this ends quickly or takes longer. I think in either scenario, finding defined risk positions to express views may be your best bet.

Would love to hear your thoughts on which scenario is more likely:

Stay Vigilant

I prompted and probed and dug into the hypotheses of whether we are seeing 4D chess or utter chaos since these seem to be the two most vocal camps of people I speak with. Typically, the truth is somewhere in-between.

This is what we came up with, which is heavy on AI but aggressively steered/prompted/challenged as well. Let me know your thoughts. Feel free to challenge any and all of it. Let us humans decide what we think actually might happen.

Stay Vigilant

A Game-Theoretic View of Energy, China, and the Multipolar Transition

The world feels like it’s oscillating between improvisational chaos and shadowy grand strategy. U.S.–Israeli strikes on Iran, retaliatory disruptions in the Strait of Hormuz, Venezuela sanctions relief, and renewed U.S.–China supply‑chain friction—taken together, it looks like geopolitical whiplash.

But the apparent disorder is misleading. What we’re actually watching is a strategic competition unfolding under new rules. Not a flawless master plan, not random crisis management—something in between. A world shifting from public‑goods stability to chokepoint leverage, where states impose costs, hedge vulnerabilities, and adapt in real time.

This is the game-theoretic lens that makes sense of 2026: a transition from cooperative equilibrium to a non‑cooperative, constraint‑bounded struggle for relative advantage.

I. The New Rules: From Public Goods to Chokepoint Power

For decades, the U.S.-led order treated open sea lanes, energy flows, and dollar liquidity as global public goods. That system is eroding. China’s state-capitalist model, Belt and Road infrastructure, and BRICS financial experiments have created partial alternatives—not replacements, but enough to weaken the old equilibrium.

The result is a world where:

• Energy chokepoints matter more than global supply chains

• Critical minerals matter more than trade volumes

• Financial plumbing matters more than headline diplomacy

In game-theory terms, we’ve shifted from a repeated cooperative game with high mutual gains to a non-cooperative game where players optimize for leverage under uncertainty.

Selective disruption—once “irrational”—is now a rational cost-imposing move if your own exposure is lower.

II. What the Evidence Actually Shows

1. Energy Asymmetries Are Real

• The Strait of Hormuz still carries ~20 million b/d—20–25% of global seaborne oil.

• ~80% of that flows to Asia, not the U.S.

• The U.S. is producing 13.6 million b/d and is a net exporter of petroleum products.

Price spikes hurt China, Japan, Korea, and India far more than they hurt the U.S.

2. U.S. Policy Is Dual-Track: Coercion + Stabilization

Recent moves—burden-sharing pressure, Venezuela sanctions relief, naval escorts—are not chaos. They’re cost imposition paired with market stabilization. Classic repeated-game signaling: punish adversaries without letting volatility spiral.

3. China Is Exposed—but Buffered

• Historically 35–45% of China’s crude imports transited Hormuz.

• Diversification (Russia pipelines, overland routes) has reduced seaborne reliance.

• Hormuz-linked oil now represents ~6–7% of total Chinese energy consumption.

China’s strategy is resilience, not escalation: diversify supply, deepen Russia ties, and calibrate rare-earth controls as bargaining tools.

4. Rare Earths and Tech Controls Are Reciprocal

China’s tightening of rare-earth and dual-use tech controls in 2025 was a direct tit-for-tat response to U.S. restrictions. Partial pauses followed when negotiations reopened.

This is not passivity—it’s strategic reciprocity.

5. What We Don’t Have Evidence For

There is no indication of:

• A coordinated U.S. campaign to “starve China of oil”

• Energy policy designed to win the AI race

• A premeditated U.S. blockade strategy

The Hormuz disruptions stem from the Iran conflict, not a secret containment plan.

III. The Missing Piece: Europe and Asia in the Pain-Distribution Game

The U.S. and China are the primary players, but the allies are the swing states of the system. Their vulnerabilities—and their responses—shape the equilibrium.

Europe: High Exposure, Low Leverage

Europe is the most structurally exposed actor in the game.

• It imports over 90% of its oil.

• It remains dependent on Middle Eastern flows despite diversification away from Russia.

• LNG dependence ties it to U.S. pricing and U.S. political cycles.

• Industrial competitiveness is eroding under high energy costs.

Europe’s strategic moves:

• Hedging through green industrial policy (Net-Zero Industry Act)

• Quietly lobbying Washington for stability over coercion

• Deepening Middle East diplomacy to reduce volatility

• Increasing security contributions to NATO to retain U.S. goodwill

Europe’s dilemma: It needs U.S. security but suffers from U.S. coercive energy strategy.

Japan and South Korea: High Stakes, Limited Options

Japan and Korea are even more exposed than Europe:

• Both import over 90% of their energy.

• Both rely heavily on Middle Eastern crude.

• Both depend on U.S. security guarantees.

Their moves:

• Accelerating LNG contracts and nuclear restarts

• Deepening trilateral security cooperation with the U.S.

• Quietly urging Washington to avoid prolonged Hormuz instability

• Expanding strategic reserves to buffer shocks

Their dilemma: They cannot afford a U.S.–China rupture, but they cannot afford to oppose Washington either.

India: The Opportunistic Hedger

India is the most agile actor:

• It benefits from discounted Russian crude.

• It is less exposed to Hormuz than Japan/Korea.

• It plays both sides in tech, energy, and security.

India’s strategy: Maximize optionality, minimize entanglement, extract concessions from both sides.

IV. The Pain-Distribution Game: A Simple Payoff Matrix

Below is a stylized representation of the strategic interaction between the U.S. and China in the energy/tech chokepoint domain.

Players

• U.S.: maximize leverage, minimize fiscal strain, maintain alliance cohesion

• China: maximize resilience, minimize vulnerability, preserve growth

Strategies

• U.S.:

  • Coerce (energy pressure, tech restrictions)

  • Stabilize (market smoothing, diplomatic de-escalation)

• China:

  • Diversify (Russia, storage, overland routes)

  • Retaliate (rare earths, tech controls)

Payoff Matrix (Qualitative)

Current equilibrium: U.S. coercion + China diversification

A non-cooperative but stable equilibrium where both sides avoid catastrophic escalation while jockeying for relative advantage.

V. The Hidden Constraint: U.S. Debt and the Stablecoin Offset

U.S. federal debt held by the public is now over 125% of GDP—a level historically associated with reduced fiscal flexibility. Aggressive coercion risks undermining foreign demand for Treasuries, raising borrowing costs and shrinking strategic room.

But stablecoins introduce a new dynamic:

• Market cap: $300–320B (early 2026)

• T-bill holdings: ~$122B

• Projected market cap by 2028: $2T

• Implied T-bill demand: up to $1T

Stablecoins extend dollar usage into emerging markets and crypto rails, creating structural, retail-driven Treasury demand that is less politically coordinated than central banks.

They don’t eliminate the fiscal constraint—but they buffer it, allowing the U.S. to apply pressure without destabilizing the financial architecture that underwrites its power.

VI. Scenarios: The Next 12–24 Months

1. Western Hemisphere Consolidation

The U.S. builds a near-shore energy buffer—Venezuela, Mexico, Brazil—reducing exposure to Middle Eastern volatility.

2. Arctic and Critical Mineral Preemption

Accelerated U.S. and allied moves to secure Arctic routes and mineral deposits as ice recedes.

3. Alliance Pressure and Conditional Guarantees

The U.S. links trade access and security guarantees more explicitly to burden-sharing.

4. Managed Decoupling

Tech and financial separation continues, but both sides avoid a clean break.

5. China’s Counters

More Russian energy, calibrated rare-earth controls, and heightened Taiwan signaling if vulnerability thresholds rise.

6. Russia as Swing Beneficiary

Higher prices and Chinese dependence strengthen Moscow without requiring new offensives.

VII. Final Assessment

We are not watching 4D chess. We are not watching chaos. We are watching adaptive coercive geopolitics in a world whose rules have already changed.

• The U.S. leverages structural advantages—energy independence, geography, dollar dominance.

• China is vulnerable but far from helpless—diversification and reciprocal tools give it meaningful buffers.

• Europe and Asia are the pressure points—caught between U.S. coercion and Chinese resilience.

• Stablecoins add a new layer of financial resilience that subtly expands U.S. strategic bandwidth.

This is the chokepoint world: a system where control of nodes matters more than global openness, and where the winners are those who manage transition costs, maintain alliances, and stabilize the financial rails beneath the competition.

Volatility is the new normal. Understanding the game—and its constraints—is the only durable advantage.

The Hormuz Panic: Scarcity vs. Sequestration

The “Doomsday” narrative has returned to the energy markets. With the Strait of Hormuz facing unprecedented friction, the headlines are screaming about a permanent $200 oil floor and a global systemic collapse.

However, if you look past the noise and into the futures curve, the market isn’t pricing an apocalypse. It is pricing a violent, but finite, liquidity event. Here is why the structural reality of 2026 differs from the 1970s.

1. The Diversification Buffer

While the Middle East remains the heart of global energy, the “OPEC dominance” of the past has been diluted by the rise of the Americas. The system is more resilient than the headlines suggest.

Iran is pumping oil pretty aggressively and you know it is getting through the Straits of Hormuz. This is making its way to China and India. This chart from Bloomberg shows Iranian output at a 46 year high:

Iran didn’t buckle even when it’s exports theoretically collapsed. The reality is likely that they found their way to the global energy market under a different banner. Right now, its exports are still near a peak.

The point being, the biggest markets for crude through the Middle East are still getting product. Other markets are getting product diverted from other places. While students of the markets and politics have been trained on the worst-case scenario being the closure of the Straits of Hormuz, we are witnessing it, and we realize how resilient the oil market really is.

2. The Logistics of Bypass: Pipelines over Prowess

The Strait of Hormuz sees 20 mb/d of transit. A total blockage is the “Tail Risk,” but the “Base Case” is successful rerouting. We are seeing a massive shift from maritime transit to terrestrial bypass:

• Saudi East-West Pipeline: Running at high utilization. Capacity is $\sim$7 mb/d; current flows are nearing 6 mb/d.

• UAE Habshan-Fujairah: Bypassing the Strait entirely to the Gulf of Oman, capable of moving 1.5–2 mb/d.

• Net Impact: When accounting for these bypasses and existing global inventories (SPR releases and commercial stocks), a 20 mb/d “shutdown” effectively nets out to a 5–8 mb/d physical deficit. This is severe, but it is manageable through demand destruction and spare capacity.

We talked about this last week. These pipelines were built to hedge against the risk of the closure of the Straits of Hormuz. Diverting in this way adds cost to the system, but it does not mean the system must collapse.

3. Reading the Curve: Backwardation vs. Contango

The most honest indicator of reality is the Forward Curve. Currently, Brent is trading in a window of $110–$115, but the structure is in steep backwardation.

• The Message: The market is screaming for barrels now (high spot price), but it expects the market to be oversupplied or “normalized” in 12–18 months (lower long-term price).

• The Contrast: In a “Permanent Scarcity” regime, the entire curve shifts upward (Parallel Shift). Instead, we see a “Front-End Spike.” This tells us that participants view this as a logistical bottleneck, not a terminal depletion of global reserves.

Again - bad and short-term painful, but not long-term systemic collapse.

4. The “Crack Spread” Divergence

Refining margins (cracks) are where the real pain lives. While crude is expensive, Diesel and Jet Fuel are trading at astronomical premiums ($60+/bbl).

This indicates that the crisis isn’t just about “getting oil out,” it’s about the quality of oil. The world is losing “Medium/Heavy Sour” barrels from the Gulf, which are harder to replace with “Light Sweet” U.S. shale. This “Quality Gap” is what will drive inflationary pressure in the transport sector even if the crude price stabilizes.

It was already getting more expensive to travel. It is going to get even more so. It is also getting more expensive to ship just about everything. This has the risk to add about 1% to the US CPI which means the dreams of Fed cutting this year are gone. However, it doesn’t mean we are back to where we were in 2021-2022. Affordability will continue to remain an issue. We said it was one of the major themes of the year and this is not going to help the matter.

The Bottom Line

The gap between the Narrative (Apocalypse) and Pricing (Temporary Shock) is your opportunity.

1. Avoid the “All-In” Long: The steep backwardation means you have to be careful where you are expressing your energy longs

2. Trade the Vol, Not the Bias: Expect 60%+ implied volatility to persist. This means it still may be better to trade this event and not invest in this event until there is more clarity on de-escalation.

3. Watch the Bypasses: If Saudi East-West pipeline throughput drops or is sabotaged, the “Temporary” thesis dies.

The system is bruised, but it isn’t broken. Trade the reality of the curve, not the fear of the feed. This is still about whether the threat is contained or escalates.

According to Treasury Secretary Bessent, per NBC, 50 or 100 days of elevated gasoline prices are worth it to eliminate the Iran risk permanently from energy markets. For 50 years there has been some amount of a geopolitical risk premium in the markets because of Iran. Could that be gone at some point? Many say know, the regime is still in charge and is formidable. Others say the regime is on its last days. We shall see which side is correct.

Much like we are no longer in a unipolar geopolitical world, we are no longer in a unipolar energy world. The two go hand-in-hand. The pressure that the US is putting on Iran has a lot to do with the pressure the US wants to put on China. The threats to take out Kharg Island are aimed more at China than Iran in my opinion. This is where 90% of Iranian oil flows. Sure, it can divert to other areas, but it would be costly. The US and China are in an AI arms race right now. AI is an energy hog. The US is threatening to take out the supply of energy to China the same way China has threatened to take out the rare earths supply. There is a natural deal to be had but given the March 31-April 2 meeting between Trump and Xi has been delayed, we are not yet at the point of a deal. I still think there will be a US-China solution to end these events in the Middle East.

Per the Oxford Review: Confirmation bias refers to the tendency of individuals to seek, interpret, and remember information in a way that confirms their pre-existing beliefs or values. This bias leads people to focus on evidence that supports their views while dismissing or undervaluing information that contradicts them. As a result, confirmation bias can create a distorted understanding of reality, reinforce stereotypes and hinder effective communication in diverse settings.

In both my Applied Portfolio Management and Financial Management Capstone classes in the last week or so, I have discussed the cognitive errors and behavioral biases that we face as investors. One of the most common biases we face is confirmation bias. In fact, the algos on social media feed into this and give us more and more of the same information. That is why we get lured down rabbit holes and stuck in an echo chamber unless we actively try to fight through it.

The ‘war’ between US/Israel and Iran, now two weeks old, is the least popular war, at the start, in history. This came out in a NY Times poll:

In the US, the left will be against it simply because Trump is doing it. He could save a puppy, and they would be against it. However, even within the MAGA crowd, many are against it. Many voted for Trump to keep us from going into forever wars or for putting their kids’ lives at risk. “Boots on the ground” hits differently in the heartland and the southern states than it does on the coasts, where there are more commentators and less parents of soldiers.

Europeans are largely against the war because they are more affected by higher commodity prices and because Trump never bothered to try and build a coalition. Both their wallet and their ego are taking a hit, so don’t expect support there.

Countries in Asia are not in favor because they are bearing the brunt of the higher cost. 80-90% of the oil and chemicals coming through the Straits of Hormuz goes to Asia, with China, India, Japan and South Korea most directly impacted. They have also seen the biggest negative impact on their stock portfolios, so have felt the negative impacts more than the typical US investor.

It doesn’t help when the bearish narrative of the war proceedings on X.com and other places comes from a variety of sources, but the bullish narrative comes largely from Trump on Truth Social with some Pete Hegseth thrown in.

The Wall Street narrative on this war revolve around the risk that the disruption of the Straits of Hormuz, for oil, petrochemicals, fertilizers and metals, is going to cause a global recession. This is because once refineries and industrial capacity shut down from lack of inputs, it takes weeks to re-start. The disruption of trade flows and supply chains takes month to normalize. Inflation from higher input costs leads to demand destruction. I think this narrative is well-captured by Jeff Currie who spoke on Bloomberg this week:

Jeff Currie on oil

Another important Wall Street voice sounding the alarm is Michael Hartnett who I have referenced countless times. The work he does, particularly around the Global Fund Manager survey, is best-in-class. He aggregates the opinions of trillions of AUM from across the world in every asset class. It is as good a look at the consensus as you will find. A popular chart from his deck this week suggested that markets are very close to the 2008 analog:

In spite of 2008 level concern among investors, based on what we hear from the commodity markets and see in the sector rotation, he goes on to say that we have not even come close to getting to a good entry point because people are still too optimistic:

In fact, his widely followed Bull & Bear Indicator is giving a SELL signal:

But, what if?

It is very easy, and frankly often prudent, to follow the best minds on Wall Street on these subjects. It is very difficult to find or even start a conversation that the war might actually be going just fine, as I tried to do this week. It is very easy for people to consistently point out all of the negative information that is out there.

It’s makes me think of the interview I did with Rick Bensignor last year. In that he said, “we have to always ask, ‘who’s taking the other side of the trade?’”

As I am trying to have the conversations about what is or could go right, and largely get dismissed in most circles, I wonder aloud to myself if there isn’t too much confirmation bias occurring. Ironically this is happening at the same exact time I am teaching about confirmation bias in markets in my classes. How can we avoid that? We can try to actively seek out information that might support the other side of the trade, the bullish view.

First, while the BAML Bull & Bear Indicator is well-done and well-followed, it is not the only measure of sentiment in the markets. There is also the CNN Fear & Greed Index, which is constructed with different information, using more market metrics than the flow and positioning data Hartnett uses. Interestingly, it comes up with exactly the opposite view, that the markets are not extremely bullish, but that there is extreme fear in the markets right now:

Perhaps this extreme fear emanates from the hedge fund crowd, because a story this week pointed out how the biggest and the best hedge funds are getting taken to the woodshed this year. Crazy moves in precious metals, massive sector rotation, private credit losses in software, growth vs. value having 3 s.d. moves, and $115 per barrel of oil create an environment that leveraged money doesn’t always get right:

It is not just the three mentioned above. Other stories suggest firms like ExodusPoint, Coatue, Marshall Wace, Citadel and Rokos are also off to horrible starts. When these pod shops lose money, they shut down the losing pods and reduce risk across the other pods too. It becomes a systemic de-risking event. This leads to less liquidity and potentially gapping moves in parts of the market.

The de-risking happens quickly and then the pods sit and watch the rest of the month. If you lost two months in a row, you might sit and watch longer. With 90% of flow in a market on a given day done by passive strategies, the loss of these active traders can really slow activity. In fact, when we look at the realized volatility in the SPX right now, you would have no idea that there is a war going on that has closed the Straits of Hormuz, with $100 oil and fears of a global recession. Volatility in the markets is actually lower than normal. What does this mean for market-makers? As we talk about in my derivatives class, it means their gamma is not carrying well. Said another way, their gamma scalping is not covering their theta. Said another way, they are losing money being long options:

If market-makers are losing money by being long options, they aren’t going to stay long options for very long. Look at the VIX curve right now (white) vs. a month ago. Even a month ago the VIX was elevated because of the private credit concerns. It is up even more. This VIX suggests 1-month at-the-money options cost 23% in volatility terms even though we are seeing more like 13.5% in actual movement. That spread of almost 10 vols is about 4-5 times the normal spread of implied to realized. That is not sustainable. Either traders need to see more volatility, or they are going to start selling options.

Now consider another potential source of option selling - hedgers. The moving average of the put-call ratio helps us identify how the relative demand for downside insurance vs. upside opportunity is trending. I have inverted it here to show that it is good at identifying the turning points in the market, good or bad. When there is more demand for insurance, more put buying, it weighs on the market. Similarly, when insurance costs have been a drag on returns and portfolio managers determine it is no longer worth it, they sell the insurance, dealers buy futures to hedge their long puts, and markets move higher. Something to consider.

Volatility also matters for the volatility targeting crowd. Depending on who you ask, they either use implied or realized as the input for the decision of how much allocation to each asset class. In recent posts I suggested higher implied volatility could be a catalyst to the selling of volatility targeting funds. If they are tracking realized volatility, they aren’t selling at all. In reality, they aren’t selling at all. This crowd was a big reason for the selling a year ago. It has not happened yet. Will it?

Then look at the positioning in the futures market. Dealers and Asset managers are offsetting each other. The place to really watch is the Leveraged money community (green line). Collectively across all US futures markets, this crowd is near the most bearish they ever get in the futures market. This must largely be Commodity Trading Advisors (CTA’s) at this point given the hedge fund de-risking we see. There are reports from GS that CTA’s might be big sellers this week as longer-term models turn more bearish. We shall see. They are already pretty short.

What’s the catalyst for any good news? What could go right? Perhaps it is the notion that the worst-case scenario of 20 mm barrels of oil shut inside the Straits of Hormuz indefinitely is not really playing out. For one, the average flow through the Strait in 2025 was 15mm bpd. Jeff Currie called it 18mm bpd in the video above. Many suggest it is 20mm.Let’s call it 15mm bpd which was the average.

This is something I was discussing with others this week as there were stories of Chines-flagged carriers getting through the Straits. Now there is discussion that Chinese and Indian carriers will get through. As Zerohedge points out, that is 7mm of the 15mm barrels a day that Iran might let through, one because they need the money and two, because China is its only ally. We know Saudi Arabia is already getting 2mm bpd on the pipeline and says this can go to 7mm bpd. If that is true, have we really lost that much from the Straits of Hormuz?

Back to Zerohedge (apologies, I know many aren’t fans, but in fairness, it is the one place putting out the other side). Treasury Secretary Bessent said that, temporarily, the US will allow sanctioned oil to be sold in order to promote stability in the price of oil. This is potentially a big deal:

How big a deal? The Wall Street Journal says there are 124mm bpd of Russian oil floating at sea. The Strait has been shut for 10 days? We have lost about 150mm barrels? Well, we just found 124mm of them…

Another thing that has happened that many diminish is the release of the strategic petroleum reserve of the G7 countries. They have about 1.2 billion barrels and are releasing 400 million of these barrels or about a third. They can’t do this forever, but now is the time when it should be released (Biden released after the Russia-Ukraine War). People like Currie say that this is really only about 2mm bpd. Let’s take it at face value. That is still 2mm that helps close the gap.

This is a clear and possible catalyst. The release of oil that stabilizes the oil market. This matters more than you think. Since the war, oil and the SPX are trading in lockstep. It is one trade. If oil goes down, SPX goes up and vice versa. Right now, the price of oil is ALL that matters:

Now, back to that BAML vs. CNN sentiment indicator. One says everyone is bullish, the other says everyone is panicked. How do we break the tie. I have long felt that Bitcoin is the market’s best risk sentiment measure.

Bitcoin lost its risk-on flavor well before the NDX this time. In fact, because of the leveraged positions of goofballs like Michael Saylor, Bitcoin has been pummeled even harder than NDX. However, in the last week, Bitcoin has started to trade better. Is that telling us something?

Who is buying Bitcoin? Well, maybe the devastating crash in the Kospi only stopped people out of their stocks but did not crush their spirit to take risk. This story suggests that Korean punters have just moved their positions over to Bitcoin.

I am not here to say any of the above well happen. I am here to ask the question, “who is taking the other side of the trade?” We all have learned sine the 1979 Iranian hostage crisis that shutting the Straits of Hormuz is very bad. Now it is shut. For the Gen X and Boomer crowd, we have had it ingrained that this is the worst of all worlds. It is not surprising that we are acting like it is. However, not everything is acting like it is. What if it isn’t? What if we have too much confirmation bias and aren’t looking for what could not be so bad this time? What if we fail to see what could actually be good?

Stay Vigilant

With everything going on in the past week, I have been reading a ton of perspectives and listening to many webinars. I thought this point, raised by Tony P. of Goldman in his note to clients, was maybe the most humble but also the most important:

Very, very few people really know anything.

I couldn’t have said it better myself. Right now there are a lot of “experts”. Even worse, if you spend all day on X.com trying to sort through things, you are being hit with 3x the amount of propaganda as usual. You have likely the China/Russia bloc saying how Iran is winning the war and the US is running out of ammo, and the MAGA crowd saying that this will be over in days. How do we know what to do?

For me, I try to keep it simple. What is the simplest thing to think? Oil prices are higher. Oil prices are likely to stay a bit higher than normal for now. You want to be long the oil winners (energy stocks, petro currencies) and be short or sell the oil losers (Asia, cyclicals).

This is difficult because the oil losers had been ripping higher. However, as John Maynard Keynes says, “when the facts change, I change my mind. What do you do, sir?”

Oil prices have an impact on more than just the oil importers. There is a link between oil prices and the multiples we pay on stocks through the inflation channel. The current move higher in medium term (3-month futures) suggests the SPX forward P/E is heading lower:

In addition, for those that follow commodities, you know that futures that go into backwardation predict higher futures prices. This is the 2-month vs. 9-month curve vs. futures prices. Higher oil prices are predicted.

Layer in the problems we already had in the credit market, which also predicts forward P/E through the liquidity and investor sentiment channel, and forward P/E looks set to fall to the 19.5-20x area pretty soon.

If we put 19.5-20x on the expected eps the next 12 months of 316, we get an SPX of 6150-6300. Now, what if earnings come down to only 290-300, still growth just not the 14% growth as expected? We are quickly into the 5900-6000 area.

What is the catalyst? Volatility itself. As I discussed with students this week, risk parity strategies use volatility targeting. This is the way they measure how much leverage to take and therefore how much to own of each asset class. When implied volatility rises, the amount risk parity invests in equities comes down mechanically. What causes volatility to go higher? Tighter liquidity as seen in credit spreads. This is the same measure of credit spreads vs. implied volatility, pointing to higher vols:

This is the measure of implied volatility (inverted) overlaid with the equity exposure of risk parity, which has yet to fall very much. This is very real (hundreds of billions) of selling pressure.

Technically, the SPX looks like it is breaking through the ichimoku cloud. With this selling pressure, the lagging span will fall. The target range on the Fibonacci retracement of the move from the April low to the October high is 5900-6200, the same area we can get to by looking at P/E and eps.

This suggests to me that risk management needs to take precedence to being the hero.

As Tony P said, no one knows very much about what will happen. I am not trying to predict what will happen. I am just trying to look at the ramifications of what has already happened.

K.I.S.S.

Stay Vigilant

I know all of the discussion this weekend and coming week will be about the attack on Iran, the retaliation by Iran throughout the region, the possibility of closing the Strait of Hormuz and the supply response by OPEC+. I have little to add to this discourse as I am not a geopolitical expert. I would encourage you to see the opinions of experts and try, as hard as it is, to get a balanced view. Scrolling through the media and social media this weekend of US accounts and news agencies yielded the typical response of either “Trump is a war-mongering dictator covering up the Epstein files with wars” or “Trump is a hero, stopping another evil empire and saving the world”. I am confident the truth is somewhere in between.

One thing I was thinking, however. In this new multi-polar world, China has gone around trying to bring people onto their team (BRICS etc.). Now, the two regimes arguably closest to China have seen their leaders taken out in pretty impressive fashion with amazing intelligence and sophisticated weaponry. If I were another China ally, I might be placing a call to the US to say, ‘let’s talk’. An unintended (more likely intended) consequence of this action.

I wanted to write this week about how a few of the ideas are going now that we are two months into the year. Portfolio attribution and a rigorous tracking of ideas, what worked and what didn’t, is an important part of portfolio management. We need to look at the ideas that went our way (mea victoria) and determine if it was for the reasons we envisioned and if the implementation was optimal or not. We also need to look at the ones that haven’t gone our way (mea culpa) and figure out what went wrong.

For some reason, when I think about things that go right or things that go wrong, my head goes back to a commercial that was common and popular when I grew up. It was by a company called Peter Paul who made two candy bars - Almond Joy and Mounds. It was clever that they used a single commercial to advertise both. It said, “sometimes you feel like a nut, sometimes you don’t”. Don’t believe me? Here is one of the commercials:

Mea victoria (sometimes you feel like a nut)

2026 has been a challenging year in the US financial markets. In speaking with many alternatives managers, they are either struggling as the market casts aside previous themes that these managers were still invested in, or they are happy because there has been a powerful move into new themes. I personally think that the price action has been pretty positive in the overall market given the powerful rotation we have seen this year. A 20%+ underperformance of tech vs. the top sectors yet the index is essentially flat? A 15% outperformance of value vs. growth on a sector neutral basis, potentially carrying out quant funds and yet the index is flat? New tariffs and other geopolitical events and yet the index is still flat? We will see how the market opens tonight and trades this weekend but I’d say so far, so good.

One thing I had harped on in the Fall of 2024, only to be stopped out on in early 2025, but then got back involved with last Fall, is small caps. Small cap underperformance vs. their large cap peers had been amazing in both duration and magnitude. Small cap underperformance reflected the weak underlying US economy last year that the SPX didn’t acknowledge because it was led by a handful of names. However, as we moved into Q4, it was clear that there were several catalysts for small caps: lagged effect of rate cuts + new rate cuts, tax incentives for capex, large tax refunds for consumers, signs of a growing domestic economy. As a result, small caps (as measured by the S&P 600 here) are outperforming the S&P 500 by 7% and the NDX by 10% this year:

If the National Federation of Independent Businesses Optimism Survey is any guide, there is still more room to go on this relative performance:

Another thing that is making me feel a little ‘nutty’ this year is the performance of Emerging Markets in absolute and relative space. The MSCI Emerging Market Index is up 14% this year, again leading the S&P 500 which is basically flat but also the MSCI World Index, which is up 3%:

I could lay out for you the myriad of reasons why there is still relative upside in these names, but UBS highlighted them very well in a report this week, so it is easier and clearer to share that with you:

Mea culpa (sometimes you don’t)

However, it hasn’t been all rainbows and unicorns this year either. Every portfolio will have winners and losers, and the biggest loser for me this year is China. I had written a Substack entirely about China last Fall and at this point, I have quite a bit of egg on my face. I just hope it is not a century egg that I remember from Lunar New Year celebrations. The thought process was that in the new multi-polar world and AI arms race, China would be stimulating as much as US, Germany, Japan et al. However, the 1-year moving average which held during the Liberation Day sell-off last Spring, has just given way. If you are still long, it is time to get to the sidelines in my opinion.

The Chinese tech sector has been an even worse performer. This should have been stopped out in early February if you were long. In fact, Chinese tech proved to be an early warning sign for the disaster we are seeing in US tech. Tech of any kind is not a favorable holding right now. There will be opportunities, but now is not the time to be a hero.

Things to watch (besides the commercial)

Again, the caveat I had above. The Iran-Israel-US-GCC conflict throws a spanner in the works here. It confuses some of the underlying trends to global growth that we see. When I was looking at charts on Friday, this one stood out to me, though. It shows the ratio of ISM manufacturing to services, which is noisy but also more indicative of the business cycle because manufacturing is more sensitive to the cycle. We have seen the cyclical vs. defensive sectors already respond to the better economic cycle news we are getting. We are only now seeing the Emerging Markets vs. SPX and the Russell 2000 vs. SPX respond. While the outperformance has been strong this year, there is still a LOT more to go. We will get new ISM and PMI data this week, so keep your eyes out for it:

Back to UBS, which downgraded US equities last week. Having worked at UBS for years, I know the power of its reach. In the US? not so much. In Europe and Asia, particularly in the high net worth and wealth management channel? Top tier if not the top. Thus, global strategists making moves like this will trigger changes in flows:

Per Citi, the flows are already favoring assets outside the US:

One last thing on Iran. I thought Bloomberg Economics laid out the scenarios pretty nicely:

The same article did a nice job of quantifying the Iranian risk premium:

OPEC+ has already responded that it will increase supply. This basically means Saudi Arabia will increase supply and it is not surprising because MBS was likely consulted at some level before the attacks to ensure this type of response:

As I am long energy stocks, I feel they are either a good hedge if oil prices go up so much that growth is choked off, bringing risk to my small cap and EM positions. Ideally, we thread the needle, and oil is firm but not too high.

For now, though, I can say that I feel like a nut.

Stay Vigilant

This weekend was a chance to get away for a quick golf weekend in Florida. It was great to catch up with friend of the show Jerry McNulty while we navigated our way around some of the gold courses on the Gulf side of Florida.

When I travel, I like to observe what activity is like - in the airport, at the restaurants, on the golf course, just around town. This was my instant observation from Friday morning at O’Hare Airport, the busiest in the US:

Chart of the Day - travel

Today is a day to leave the missus behind and see what sort of golf game I still have

Early on a Friday, I am always interested in how O'Hare 'feels' versus the last few times

More vacationers - Boomers as well as young families - and less business travel for sure

Otherwise, I'd say solid but not spectacular

So I looked it up as I wait to board and that is how the TSA screenings look too - solid not spectacular

In my classes this week, the student teams building models for growth and inflation found the same for growth outlooks this year - solid but not spectacular

Lots of things pointing the same way, all with implications for investing

Now I just have to figure out that golf swing

In fact, on the way home I noticed it was even busier, in both Tampa and Chicago. Lots of Boomers on golf trips, families with school-age kids (seemed a little early for Spring Break), and groups of millennials that all seemed to be on some sort of weekend away.

That said, among the many people I spoke with at all of these events - my kids compare me to the guys on the Progressive commercials - I found that while people were out and about, when you dug in even a little bit, they were quick to complain about something, typically in relation to the government, taxes, prices, Epstein files etc. People were enjoying the sun and fun on the one hand, but pretty downbeat on the other. Not so downbeat they weren’t spending, but sentiment was more negative than positive. This surprised me because if I was that downbeat, I am not sure I would get on a plane, as it isn’t as if plane tickets aren’t really expensive right now.

I decided to plot those TSA numbers vs. consumer sentiment, and we see a clear break after about Q1 of 2025. People seem to be acting as if things are okay, but when asked in surveys, they are downright miserable.

One thing Jerry and I discussed was oil and the performance of energy stocks. There are some that think that oil has some geopolitical risk premium from Iran priced into it. Perhaps that is true, but I think the price of oil is acting pretty well given the news and reality. This chart shows the supply/demand imbalance in white. The world has been over-supplied since the middle of last year. I say over-supplied because you can see the separate global supply and demand numbers and they are both near 10-year highs. Again, if people are so downbeat, why are they consuming oil at a 10-year peak? If we weren’t so over-supplied to the tune of 3.7mm barrels a day, where would oil be? Typically, when we break outside the 1.5mm bbls band one way or the other, prices respond. Can we continue to try and hold prices down like this?

In the face of that, oil prices look good on the chart. They have broken out and are trending higher. This is not the price action of a spike from Iran and trying to hold onto that gain. It is a steady progression higher with a new trend developing.

Which is why oil stocks look so good on a relative basis. This is one sector that Jerry and I both agreed on. As money rotates out of expensive tech, given some uncertainty, energy looks appealing. There are a number of possible catalysts. You pick up a yield to hold it. In the ETF alone you get 2.7% and in majors like Chevron, the dividend is over 3.8%. Add on some incremental yield from buy-writing the names and you get paid a fair bit to hold onto them. The multiples have expanded from the depth of the Biden/ESG hate-selling lows in 2022, but they are far from onerous. Might be worth a look.

Finally, one of the podcasts I listened to on the flight was the MacroVoices podcast with Michael Every from Rabo Bank. He also did an excellent pod with Grant Williams recently. He has some very unique and interesting views of the changing geopolitical landscape, which certainly impacts oil, and this podcast tied it into how stablecoins will be used as a tool of economic statecraft. In light of the post last week about Ethereum, I thought you might like it: MacroVoices - stablecoin

Going to keep it short this week as travel weekends get me behind on some work.

I just want to leave with a quick poll on what you think about the consumer right now. Thanks for taking the time to answer:

In the past 6 weeks since 2026 started, there has been an enormous rotation of money, across asset classes, between countries and within indices. Just in the past 2 weeks, the carnage wreaked on multiple sectors where fears of AI disruption are hitting close to home range from SaaS to BDC’s to freight & logistics. No one is spared and it is reminiscent, but hyper-speed, of when Amazon was rumored to be looking into a sector. The fact is, most of these rumored disruptions are quite true. I need only to have conversations with families I know where both a parent has just been laid off because of AI and the kid can’t get the job out of college because of AI. A quick look at the sector performance this year shows that any industry that supports the construction or powering of AI is doing well, while those that will be disrupted are devastated. Plus/minus 20% moves across sectors in 6 weeks is a rare event and one where people feel the “baby may be thrown out with the bathwater”.

We see a similar wild swatch of performance even within the commodity markets. Double digit gains and losses are just as common here. As you know, I feel there will be a commodity super cycle, and still do, but right now, where you have your bets really matters. Hard to believe silver, which was a high-flier only a month ago, is now just middle of the pack.

Set-up

Other asset classes are seeing this price action too. One where I think there is a big misunderstanding is crypto. Most that I speak to, regardless of their age or experience, lump Bitcoin and Ethereum into the same bucket. They are ‘crypto’, ‘risk assets’ or even ‘Ponzi schemes’ depending on whom you speak with. I think they are quite different as a matter of fact, and I think this could be creating a great opportunity. While Bitcoin is now seeing the tail wag the dog, as the leverage financial engineering (to put it nicely) done by Strategy Inc and Saylor is now leading to speculation they will have to sell, creating even more downward pressure. While Bitmine Immersion and Tom Lee are equally as cringy, the company is not in the same negative levered position. It is underwater on its Ether buys for sure, even more so, but not in a position where it will have to sell.

Even more importantly, the differences between Bitcoin and Ethereum are quite stark. Bitcoin is a ‘store of value’ or not, depending on your perspective; however, that is the use case. With a finite supply, it is meant to maintain its value while fiat currency and other things decay around it. I think of it as a collectible, like baseball cards and artwork, where there is a limited supply and when there is a lot of demand, value goes up, but when there is selling pressure, there is no one on the other side to absorb.

Ethereum, on the other hand, is a technology layer. Some will make the case it is ‘digital money’ or a ‘store of value’ but that is not its core reason. It is a layer of secure technology upon which decentralized applications (dapps) are built. As usage increases, fees are paid. These fees result in supply being burned. Those that hold ETH can stake their holdings (as BMNR does) to earn yield. This yield is paid in ETH, and can range from 2% to 5%. When there is a lot of activity, fees are higher than issuance, and net issuance is deflationary, which puts upward pressure on price. When there is less activity, but ETH is still staked, supply can grow and this is inflationary, putting downward pressure. This, the network benefits from more usage. As a result, catalysts that promote more usage are good for ETH and those that don’t are bad. Look at the last 12 months. Back in July 2025, the GENIUS Act was signed into law, legalizing stablecoins, and the House passed the CLARITY Act, making regulation for all usage much cleaner. ETH responded to this promise of more usage by rallying from 3000 to 5000. In January of this year, the Senate pushed off discussion on CLARITY, and industry players backed off, and now ETH has fallen from 3000 to under 2000. Usage matters because it is a techology, not a store of value.

Background

To understand this and more, I would point you to an excellent primer on the Ethereum network from which explains all of this:

Ethereum primer

Now, back to the trends we have seen in ETH the last several months.

The current net issuance for Ethereum (ETH) refers to the daily/ongoing net change in total supply: new ETH issued (primarily via staking rewards to validators in Proof-of-Stake) minus ETH burned (via EIP-1559 base fee burns from transactions).

As of mid-February 2026, Ethereum’s supply dynamics show modest positive net issuance (inflationary), with low network fees leading to burns below issuance levels. Key sources like ultrasound.money and related reports indicate:

• Recent 7-day period (as per latest available snapshots): +18,856 ETH net supply increase

• This reflects ongoing low activity/burns post-upgrades (from proof of work to proof of stake)

• Annual supply growth is around +0.5% to +0.8% in recent low-fee regimes (e.g., ~0.81%/year in some projections), or modestly positive like +0.35% inflation noted in late 2024/early trends continuing.

• Current total circulating supply is approximately 120.69 million ETH

Over the past two months (roughly December 2025 to mid-February 2026):

• Net issuance has been positive (supply increasing), continuing a trend from mid-2025 where Ethereum shifted inflationary after earlier deflationary periods post-Merge and Dencun.

• Low transaction fees/gas (which fluctuate with activity) result in minimal burns, while staking issuance continues steadily (~0.5-1% annual gross issuance depending on staked amount, currently high staking ~28-30% of supply).

• Overall, the supply has grown modestly over recent months, remaining below pre-Merge peaks in some views but trending up slowly.

That said, there is still a positive yield to staking ETH. In fact, this is part of the problem, because holders (like the aforementioned BMNR) can earn by holding and staking, which creates net issuance. On the plus side, while Bitcoin has no cash flow upon which to value it, ETH does have a yield one can use to value it.

As of mid-February 2026 (around February 14-15, based on latest data):

• The network base/reference staking yield is approximately 2.79% to 2.81% APY.

• This is the base network rate before any provider fees. Those that don’t have the 32 ETH to stake, can do so via a pool in places like COIN. If so, they are likely to get a lower yield, as much as 100 bps lower.

Over the last 12 months (roughly February 2025 to February 2026), the range of the yield:

• Has shown a downward trend overall, driven by rising staking participation (from ~25-28% ratio in early/mid-2025 to over 30% now, with total staked climbing to 36-37M ETH).

• Approximate range: ~2.8% to ~4-5% (or slightly wider in some benchmarks).

  • Lows: Around 2.8% (current levels in low-fee, high-staking environments; e.g., Compass STYETH index at ~2.81% recently, with annualized return showing declines).

  • Highs: Up to 3.5-4.2% or higher earlier in the period (e.g., reports from 2025/early 2026 cite 3.5-4.2% ranges; some provider/average figures hit 4-5%+ with MEV when participation was lower or activity higher).

  • Trends: Yields have generally declined as more ETH gets staked (dilution effect), with modest volatility.

Yields fluctuate daily with network activity (higher fees/MEV boost yields temporarily) and staking ratio (currently high at ~30-30.6%, suppressing yields).

The larger point is twofold: those that hold are not just counting on higher prices as they can earn a yield, but the yield will move lower as net issuance grows. The net issuance is more a function of lack of activity. With more activity, more ETH is burned, leading to deflation in supply, and higher prices, which potentially leads to people not staking but selling. So, the supply/demand can be both a virtuous circle on the way up and a vicious cycle on the way down. Right now, we are in the vicious cycle portion.

Catalyst

So, what changes this? The CLARITY Act is likely the biggest catalyst on the horizon. Right now, prediction markets give it slightly more than 50-50 chance of passage. My variant view is that the odds are in fact higher. President Trump needs some wins, to improve his polling, and this is one place he can get them:

What does the passage of the CLARITY Act mean? For me, it unlocks the potential of three mega-trends that all support Ethereum mainnet or layer 2 applications built on top of it: 1. stablecoins 2. asset tokenization 3. prediction markets.

Don’t take my word for it. I asked the various LLMs the aggregated view of whether the passage of CLARITY would help these trends and this is the answer that I got:

1. Stablecoins: Strong “Yes” (with a yield caveat)

• Why it spurs usage: The Act explicitly treats “permitted payment stablecoins” as a distinct category outside pure securities/commodities rules. It allows banks and broker-dealers to custody, trade, and broker them, and enables clearer integration into traditional finance (e.g., corporate treasuries, cross-border payments, collateral). This removes the “regulation-by-enforcement” overhang that has kept big players sidelined.

• Growth drivers: Combined with the already-passed GENIUS Act (stablecoin issuance framework), it unlocks institutional capital. Analysts project trillions in sidelined money flowing in via stablecoins as the “fastest on-ramp.” Real-world use cases (payments, DeFi collateral, tokenized asset backing) would explode.

• The sticking point: The biggest delay right now is the fight over yields/rewards. Banks (and some credit unions) are pushing hard to ban interest-like payments on stablecoins to protect deposits. Crypto groups want allowances for activity-based rewards (e.g., for payments, staking, wallet use). Current drafts lean toward restrictions (no yield just for holding), which could blunt DeFi innovation. If resolved favorably (even partially), stablecoin supply and transaction volume could surge 2-3x in the following year.

Net: Clarity alone is bullish. Passage = more USDC/USDT-like issuance, more on-chain volume.

2. Asset Tokenization (RWAs): Very Strong “Yes”

• Direct boost: The Act defines “digital commodities” and “investment contract assets,” creating a clear path for tokenized real-world assets (securities, funds, real estate, royalties) to move from experimental to mainstream.

• Institutional tailwinds: Banks can custody tokenized assets, secondary trading gets lighter rules once decentralized, and there’s a safe harbor for mature blockchains (like Ethereum). SEC guidance already says “tokenization changes the plumbing, not the policy” — CLARITY gives the green light for scale.

• Expected impact: Experts (Grayscale, Skadden, K&L Gates) call this one of the biggest 2026 catalysts. Tokenized RWAs could grow from ~$10-20B today to hundreds of billions, with Ethereum (and its L2s) capturing the lion’s share due to existing infrastructure.

This is the area with the broadest consensus as a “game-changer” for on-chain finance.

3. Prediction Markets: Solid “Yes”

• Why it helps: Prediction markets (Polymarket, etc.) are treated as derivatives/event contracts — squarely in CFTC territory under CLARITY’s framework. The bill’s progress has already coincided with CFTC Chairman signals for new, supportive rules (withdrawing old bans on political/sports contracts).

• Growth potential: Legitimacy attracts regulated capital, liquidity, and users. These markets are high-frequency and event-driven — perfect for crypto-native apps. Passage would reduce legal gray areas that currently cap institutional involvement.

For prediction markets in particular, the bears might say that layer 2 dominates the volumes more than the Ethereum mainnet. What this means is that for example, Polygon, and application built on top of Ethereum, will aggregate a lot of volume to make things faster, and then do fewer transactions on the mainnet Ethereum. It still goes there for security purposes, but it is a bundled transaction and not every transaction. On the negative side, this reduces activity. On the plus side, it drives fees lower which will increase activity ultimately. I look at it like the commissions charged on stocks. As commissions fall, more volume trades. Yes, in the short-run it is negative as rates fall; ultimately, volume increases from usage in ways we aren’t even imagining right now will dominate.

Again, don’t take my word for it. I asked AI to aggregate views on this:

• L2s win on volume: ~95%+ of Ethereum activity is already on L2s. These use cases (especially stablecoins and prediction markets) are fee-sensitive and high-throughput → they thrive on cheap L2 execution. Expect explosive growth in daily tx, TVL, and user activity.

• Mainnet still gets paid (and burns more): L2s post data/proofs back to L1 → increased blob usage, higher base fees during peaks, more ETH burned via EIP-1559. High-value RWAs and large stablecoin settlements often hit L1 directly. Net: more security value, higher staking rewards over time, and potential return to deflationary periods during demand spikes.

• Overall Ethereum flywheel: More usage = more economic activity secured by ETH → stronger network effects. Even “L2-first” growth accrues to the base layer.

Bottom line: CLARITY is the regulatory unlock the ecosystem has been waiting for. It doesn’t solve every problem (yield fight is real), but the directional impact is strongly positive for adoption, on-chain activity, and — yes — Ethereum’s economic model (L1 + L2).

If it passes by spring/summer (current market odds ~55-62% for 2026, with White House pressure), we could see a meaningful step-change in real usage, not just speculation.

Implementation

Does that mean you should just go out and buy ETH? For one, I never give financial advice. Do your own research. This is for educational purposes only. For another, I think if you are pre-disposed to get long, there may be better ways.

Implied volatility for ETH, which spiked on the big fall from mid January and the VaR shock that hit all markets, has subsided, and is now back in in the middle of the range we have seen the past two years, neither too high or too low:

However, what stands out is the nervousness about the downside. The skew, measured here by a 25-delta risk reversal, tells us how much higher implied volatility is for downside puts vs. upside calls. It is currently 8 vol points which is one of the highest levels we have seen. This is where I think the market is giving you the opportunity to implement long ideas more intelligently.

The screen below is for the options on the April ETH futures on CME. We can see the high skew for the lower strikes. As I write this, ETH futures are looking down 100 ticks from the Friday close, so things may be even more attractive when markets open up post holidays. That said, with current pricing, I see where we could sell the 1950-1750 put spread to buy the 2175 call. This is a defined-risk trade where the most you can lose is the distance between the strikes if futures close below 1750 (200 points). The most you can gain is unlimited above 2175. Recall that futures closed at 2062 on Friday and were 2175 on February 4.

In conclusion

I know many will have their favorite ideas of what has been sold to brazenly. However, I think ETH stands out. It is not at risk from AI. In fact, the two can work quite harmoniously. Read what Vitalik Buterin, founder of ETH, just said. This comes from Bankless:

“This week, Vitalik published an updated framework for how Ethereum and AI intersect, which reads like a direct response to the safety vacuum. He, and I as well, believe that Ethereum can provide structural, bottom-up safeguards built on the same “don’t trust, verify” principles that brought many of us into crypto.

Two pillars stand out:

· Building tooling to make more trustless and private interactions with AI possible. With cryptography, we can build safe execution environments, client-side verification of outputs, and behavior verification for agents operating on your device. This is the foundation that makes hosting locally more trustworthy and reliable. Whether the models run locally are open or closed source, these guardrails will prove necessary to ensure AI remains constrained to whatever zone and level of access we provide it.

· Ethereum as an economic action network for agents. Vitalik envisions Ethereum as the layer that lets agents interact economically, moving capital, hiring other agents, posting security deposits, without routing through a corporate intermediary. But for me, the real value is access control. Loading an agent’s wallet with $50 is fundamentally different from giving it $50 worth of access to your bank account. One is siloed, permissioned, and bounded. The other opens a door that can’t fully be closed. Ethereum’s wallet architecture lets you definitively control what an agent can access and how much capital it works with, reducing the trust required to let agents take economic action on your behalf.”

Can you think of anything that has sold off more than 50% from the high, that is not actually disrupted by AI, has a definable (and tradable) catalyst potentially in the next several months, and where you can put on a spread with defined risk and unlimited reward? All of this because people think ETH is just like Bitcoin, not really understanding the mega-trend potential of stablecoins, asset tokenization and prediction markets?

As I said, just hear me out

Stay Vigilant