A Few Things, and Your Weekly Macro Wrap

For our lead-in to this week's macro note I'd like to share a few key highlights from our internal market log... These essentially reflect our take on the current and go-forward global investment setup.

We've had, and will continue to have, multiple discussions internally about the potential market impact of the inevitable come-down off of the extraordinary spending commitment to AI infrastructure... While there's little if any sign of a letup over the near-term, we view this as a some-day -- in the not too-distant future -- not-small market event.

Our timeline falls on the shorter end of the 1-3 year range BCA expresses in comments below:

The Elephant In the Room

Kevin Warsh just completed his highly-anticipated Jackson Hole speech, and, to no surprise, there was no mention of the elephant in the room -- which would be the treasury's financing burden going forward... 

I.e., given the enormity of the debt coming due over the next couple of years, as well as the massive current budget deficit, there's no understating the need to issue new treasury debt at rates that simply can't be allowed to rise measurably on the front-end -- despite Warsh's tough-sounding (on inflation) speech this morning.

The great irony here is that, forgive me, inflation is precisely the answer to remedying the debt problem, as it's measured -- a % of GDP.

I.e., there's no paying down the debt, that's a fantasy they're no longer willing to even insult our intelligence with... Ah, but if "we" grow the economy faster than "we" grow the debt -- a la mid-40s to early-50s, we can wake up somewhere in the future with something less than 100+% debt-to-gdp.

Curb Your Enthusiasm

If you're pumped by Nvidia's earnings report last evening and by this morning's bounce in the tech sector, allow the following to curb your enthusiasm:

That's our live US sector watchlist. Unless you're loaded up with only tech and miners, you're not feeling it this morning.

This is what you call poor breadth... The Dow, for example, is up over a hundred points as I type, yet only 5 of its 30 members are in the green... The SP500 is up 0.6%, while 60+% of its constituents are in the red.

We'll explore what's occurring under the surface in this weekend's macro wrap.

"Insanity"

Here's popular macro-thinker Kevin Muir on current and go-forward conditions, and recent (increased treasury buybacks) events.

"It is insanity to think the US economy can run at a nominal GDP of 6.5% with AI borrowing and spending exploding at the largest pace since the railroad boom, while the US government runs petal to the metal fiscal policy -- all the while geopolitical developments force other nations to also run expansionary fiscal policies -- yet not expect bond yields to rise.  Increasing liquidity support buybacks does little to change this dynamic.  

The bond market has rightfully concluded that this will not be enough.  And not only that, the gold, fx, and crypto markets have correctly sniffed out that attempts to keep bond yields down could well be inflationary.  You can't have a booming global economy and lower interest rates.  And if you try too hard it risks letting inflation run away to the upside.  The era of ultra-low bond yields is over.  

Markets and governments need to accept this new reality and adjust accordingly."

In a nutshell, and as I keep expressing, the go-forward/structural macro setup is vastly different than what you and I have grown accustomed to over the past several decades... I've articulated herein the nature of two broad regimes that course throughout history, each possessing notably different inflation dynamics, and, therefore, inspiring policy decisions that would've been -- in the opposing regime -- entirely unintuitive, often to the extreme.

And, make no mistake, each demanding a notably different investment approach as well... Something I fear is, alas, presently lost on too many investors, and advisors alike.

I have much to add to this top, but this'll suffice for the moment... I feel a video coming on 😎.

In the meantime, here's today's macro and market rundown*:

No, The US Is Not Bailing Out Japan -- And Your Weekly Macro Rundown

The past few weeks have been very interesting! And oh how recent events have been the best sort of fodder for click-baiting doomsayers.

A conversation I had the other day inspires me to revisit the recent interplay between US Treasury's Scott Bessent and the Japanese Ministry of Finance.

An acquaintance of mine had bought into the notion that the US is bailing out Japan... A notion that I'm certain he gathered via YouTube, Tick Tock, Twitter, Facebook even, or perhaps any combination of these and untold other such platforms.

Suffice to say that my attempt to disabuse him of what I presumed to be his social-media-induced-outrage was not nearly as exhaustive as what I'm about to write... For him I simply expressed that the treasury's intervention had zero to do with bailing out Japan, and everything to do with containing the long-end of the US treasury yield curve.

But, since you are particularly special to me, you get the following:

Ghosts of 2022

As I've stated aplenty herein in writing and in the videos of late, we remain constructive on equities, but with a relatively short window of confidence -- that being into late this year/early next... The ultimate headwind that we've assigned high odds of developing is precisely the one that is troubling markets as I type this morning.

In a nutshell, our view in January was that when we add up record tax refunds, a recession-level budget deficit (huge net govt spending), a new Fed chair who's appointment would come with some serious strings attached, and whatever else an administration heading toward a mid-term election can conjure up to make voters happy -- well, sure, that "should" be a recipe for higher equity prices in 2026.

On Fed Incentives, And Your Complete (and Important) Weekly Macro Rundown

According to macro analyst, liquidity expert and research provider Michael Howell in this week's Macrovoices podcast, the odds of the fed hiking interest rates relatively soon are exceedingly high... As you'll see in the following, I don't entirely sympathize.

He cites the predictive ability of 2-year treasury yields: 

"It's correct 85% of the time."

And on that I concur, as this is an indicator we have tracked very closely for years.

Here's our chart (orange line = 2yr yield, white line = fed funds rate)... Note how the current setup -- historically-speaking -- virtually assures a coming fed hike: