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:
8/28/2026:
In case that reads fuzzy, here's that third 3-5 year AI scenario:
Scenario: Moderate Macro-Level Productivity Gains
Description: "Middle-ground" capability outcome for AI. AI adoption is high but impact is lower than optimists expect.
Odds of Occurrence: 80%
Comments: "AI Winter" likely to begin at some point over the next one to three years. Implies disappointing and subpar performance for many AI-related companies as valuation excesses are worked off, but not necessarily permanent losses.
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The second paragraph in the following quote echoes yesterday's note titled The Elephant in the Room: emphasis mine
8/27/2026
Our thesis in a nutshell (2nd paragraph) by BCA’s EM strategist Arthur Budaghyan:
“If, over the coming years, the US government’s effective nominal borrowing costs average 4% and nominal GDP grows at 4% a year, the required primary fiscal deficit to stabilize the public debt-to-GDP ratio would be 0%. This would require a large fiscal tightening of 3.5% of GDP.
In sum, there is no politically viable fiscal tightening that any US administration can implement in the coming years to achieve such a reduction. Thus, the only realistic path to stabilizing public debt is to boost growth and bring real interest rates down to very low levels. This will entail both financial repression and currency devaluation.”
------------------------------------------------------------
This one is a highlight from my entry on Capital Group's emerging markets go-forward view -- one we're sympathetic to:
8/23/2026
“Bottom line
EM investing has entered a dynamic new phase that still appears to be in its early stages. The push-pull dynamic of previous cycles is still apparent. But this new third wave appears to be unfolding on a more structurally resilient foundation, with a move to higher value industries and more structural compounders in the mix, potentially indicating less susceptibility to cycles. The leadership of Asian semiconductor companies makes EM foundational to the AI revolution as well as the technology sector in general.
Additionally, historic amounts of global capex are fueling opportunities beyond technology and AI in cyclical compounders and commodity cyclicals, while domestic defensives are operating with improved technology capabilities. These dynamics suggest that this cycle is broader, more resilient and fundamentally different from previous ones.
For investors, these changes may have important implications both for the allocation to emerging markets relative to developed markets and for the optimal balance between passive and active EM exposure..."
-----------------------------------------------------
And, lastly, these two from MRB... The first expressing the concerning reality that the US economy captures 25% of global GDP while at the same time captures 65% of global stock market capitalization and almost 60% of foreign exchange reserves... I.e., there's a whole lot of potential pent up selling in US markets that could occur if/when global investors feel inspired: emphasis mine
8/4/2026
The following, from MRB, highlights a real risk (via FDI imbalance) to US markets in a multi-polar world:
“The financial and capital account inflows to the U.S. have resulted in a massive stock of global wealth placed into U.S. assets over the past few decades (chart 17). The U.S. economy is about 25% of global GDP yet has captured nearly 65% of global equity market capitalization and nearly 60% of foreign exchange reserves. The risk for investors is that it appears that the U.S. administration still does not appreciate that wealth could flee much faster than any rebuilding of U.S. manufacturing capacity...”
"The investment implications are more complex, but a continuation of the Global LeaderShift theme should cause an erosion in the value of the U.S. dollar and relative value of U.S. equities (or DM equities more generally). It is likely that a greater financial wealth transfer would have occurred over the past two decades had there been a credible alternative to the dollar as a reserve currency or favorable alternative to listing public global companies on U.S. exchanges. China’s closed capital account and managed exchanged rate, along with unpredictable intervention in listed shares, has prevented the country from competing in this element of global leadership. Despite these challenges, China and other EM countries should provide opportunities for outsized financial asset returns in the decade ahead."
8/4/2026
MRB on the dollar, supports our structural weak-dollar thesis:
“...the leading U.S. economy currently has a significantly overvalued exchange rate based on most measures. The U.S. dollar is currently about 15% above MRB’s PPP “fair value” estimate (chart 12). IMF measures also point to an extremely overvalued U.S. dollar.
Similarly, the U.S. dollar is about 15% above its historical average on a real trade-weighted basis (chart 13). Note that secular U.S. dollar bear markets tend to persist until the currency undershoots its long-term trend by a similar magnitude, suggesting that the dollar could depreciate by 25-30% over a multi-year horizon, which would dramatically alter the perceived global leadership of the U.S. economy.”
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Like I said Wednesday, the future demands
Here's how the PWA Index faired last week, followed by your weekend macro wrap*:
The Speech, and the Two Things It Did Not Mention*
Week of August 24, 2026
Last week we wrote about the Treasury's attempt to lower long-term interest rates, and about the market's decision, within forty-eight hours, to overrule it. This week the Federal Reserve's new Chairman gave his first major address, and the question we said mattered going in was whether he would say anything about long-term rates.
He did not. Not once.
We want to spend most of this note on what he did say, because it was more consequential than the coverage suggested, and because it changed several prices that affect you directly.
8/28/2026:
In case that reads fuzzy, here's that third 3-5 year AI scenario:
Scenario: Moderate Macro-Level Productivity Gains
Description: "Middle-ground" capability outcome for AI. AI adoption is high but impact is lower than optimists expect.
Odds of Occurrence: 80%
Comments: "AI Winter" likely to begin at some point over the next one to three years. Implies disappointing and subpar performance for many AI-related companies as valuation excesses are worked off, but not necessarily permanent losses.
-----------------------------------------------------
The second paragraph in the following quote echoes yesterday's note titled The Elephant in the Room: emphasis mine
8/27/2026
Our thesis in a nutshell (2nd paragraph) by BCA’s EM strategist Arthur Budaghyan:
“If, over the coming years, the US government’s effective nominal borrowing costs average 4% and nominal GDP grows at 4% a year, the required primary fiscal deficit to stabilize the public debt-to-GDP ratio would be 0%. This would require a large fiscal tightening of 3.5% of GDP.
In sum, there is no politically viable fiscal tightening that any US administration can implement in the coming years to achieve such a reduction. Thus, the only realistic path to stabilizing public debt is to boost growth and bring real interest rates down to very low levels. This will entail both financial repression and currency devaluation.”
------------------------------------------------------------
This one is a highlight from my entry on Capital Group's emerging markets go-forward view -- one we're sympathetic to:
8/23/2026
“Bottom line
EM investing has entered a dynamic new phase that still appears to be in its early stages. The push-pull dynamic of previous cycles is still apparent. But this new third wave appears to be unfolding on a more structurally resilient foundation, with a move to higher value industries and more structural compounders in the mix, potentially indicating less susceptibility to cycles. The leadership of Asian semiconductor companies makes EM foundational to the AI revolution as well as the technology sector in general.
Additionally, historic amounts of global capex are fueling opportunities beyond technology and AI in cyclical compounders and commodity cyclicals, while domestic defensives are operating with improved technology capabilities. These dynamics suggest that this cycle is broader, more resilient and fundamentally different from previous ones.
For investors, these changes may have important implications both for the allocation to emerging markets relative to developed markets and for the optimal balance between passive and active EM exposure..."
-----------------------------------------------------
And, lastly, these two from MRB... The first expressing the concerning reality that the US economy captures 25% of global GDP while at the same time captures 65% of global stock market capitalization and almost 60% of foreign exchange reserves... I.e., there's a whole lot of potential pent up selling in US markets that could occur if/when global investors feel inspired: emphasis mine
8/4/2026
The following, from MRB, highlights a real risk (via FDI imbalance) to US markets in a multi-polar world:
“The financial and capital account inflows to the U.S. have resulted in a massive stock of global wealth placed into U.S. assets over the past few decades (chart 17). The U.S. economy is about 25% of global GDP yet has captured nearly 65% of global equity market capitalization and nearly 60% of foreign exchange reserves. The risk for investors is that it appears that the U.S. administration still does not appreciate that wealth could flee much faster than any rebuilding of U.S. manufacturing capacity...”
"The investment implications are more complex, but a continuation of the Global LeaderShift theme should cause an erosion in the value of the U.S. dollar and relative value of U.S. equities (or DM equities more generally). It is likely that a greater financial wealth transfer would have occurred over the past two decades had there been a credible alternative to the dollar as a reserve currency or favorable alternative to listing public global companies on U.S. exchanges. China’s closed capital account and managed exchanged rate, along with unpredictable intervention in listed shares, has prevented the country from competing in this element of global leadership. Despite these challenges, China and other EM countries should provide opportunities for outsized financial asset returns in the decade ahead."
8/4/2026
MRB on the dollar, supports our structural weak-dollar thesis:
“...the leading U.S. economy currently has a significantly overvalued exchange rate based on most measures. The U.S. dollar is currently about 15% above MRB’s PPP “fair value” estimate (chart 12). IMF measures also point to an extremely overvalued U.S. dollar.
Similarly, the U.S. dollar is about 15% above its historical average on a real trade-weighted basis (chart 13). Note that secular U.S. dollar bear markets tend to persist until the currency undershoots its long-term trend by a similar magnitude, suggesting that the dollar could depreciate by 25-30% over a multi-year horizon, which would dramatically alter the perceived global leadership of the U.S. economy.”
--------------------------------------------------------
Like I said Wednesday, the future demands
"a notably different investment approach as well... Something I fear is, alas, presently lost on too many investors, and advisors alike."
Week of August 24, 2026
Last week we wrote about the Treasury's attempt to lower long-term interest rates, and about the market's decision, within forty-eight hours, to overrule it. This week the Federal Reserve's new Chairman gave his first major address, and the question we said mattered going in was whether he would say anything about long-term rates.
He did not. Not once.
We want to spend most of this note on what he did say, because it was more consequential than the coverage suggested, and because it changed several prices that affect you directly.
What the Chairman actually said
Three things are worth understanding, and none of them are the headline.
First, he told the market to stop watching him so closely. Central bankers have spent fifteen years telling investors what they intend to do at future meetings — a practice called forward guidance. The Chairman said this practice has overstayed its welcome, that it can create ambiguity in the name of clarity, and that he will not be publishing a formula describing how he will react to future data. His closing line was that he is committed to a discipline, not to a decision.
He also explained why, and the reasoning is not the self-serving kind. He argued that when investors rely mainly on the central bank's guidance, and the central bank in turn reads the prices those investors set, everyone ends up staring into a hall of mirrors and nobody is looking at the economy. And he pointed out who pays for that: not investors, but households, who bear the cost of inflation that runs too high or a job market that turns without warning.
Second, he said inflation is not improving underneath the surface. He put the Fed's preferred measure at 3.7% over the past year, and 4.1% over the past six months — meaning the recent pace is faster than the annual figure, which is the opposite of progress. He then did something unusual and useful: he broke the inflation index into its 199 individual components and counted how many were rising faster than 3%. Over the past year, 54%. In the two decades before the pandemic, 32%. Better than the 77% at the 2022 peak, but a long way from normal.
He also accepted responsibility on behalf of his institution for what he called sixty-five months of sustained, elevated inflation. That is not a small thing for a central banker to say out loud.
Third — and this is what moved markets — he said financial conditions do not look restrictive to him. Corporate borrowing costs are near the low end of their historical range. Company profits are up more than 20% over the past year. Business investment is growing at its fastest rate since 2021. He said he would be hard pressed to describe conditions as restrictive, and that if the Fed cannot be confident inflation is moving to target quickly enough, it has more work to do.
Investors heard that as a warning. The probability of an interest rate increase at the Fed's September meeting, as priced in futures markets, went from roughly one in three to a coin flip in a single morning.
Three things are worth understanding, and none of them are the headline.
First, he told the market to stop watching him so closely. Central bankers have spent fifteen years telling investors what they intend to do at future meetings — a practice called forward guidance. The Chairman said this practice has overstayed its welcome, that it can create ambiguity in the name of clarity, and that he will not be publishing a formula describing how he will react to future data. His closing line was that he is committed to a discipline, not to a decision.
He also explained why, and the reasoning is not the self-serving kind. He argued that when investors rely mainly on the central bank's guidance, and the central bank in turn reads the prices those investors set, everyone ends up staring into a hall of mirrors and nobody is looking at the economy. And he pointed out who pays for that: not investors, but households, who bear the cost of inflation that runs too high or a job market that turns without warning.
Second, he said inflation is not improving underneath the surface. He put the Fed's preferred measure at 3.7% over the past year, and 4.1% over the past six months — meaning the recent pace is faster than the annual figure, which is the opposite of progress. He then did something unusual and useful: he broke the inflation index into its 199 individual components and counted how many were rising faster than 3%. Over the past year, 54%. In the two decades before the pandemic, 32%. Better than the 77% at the 2022 peak, but a long way from normal.
He also accepted responsibility on behalf of his institution for what he called sixty-five months of sustained, elevated inflation. That is not a small thing for a central banker to say out loud.
Third — and this is what moved markets — he said financial conditions do not look restrictive to him. Corporate borrowing costs are near the low end of their historical range. Company profits are up more than 20% over the past year. Business investment is growing at its fastest rate since 2021. He said he would be hard pressed to describe conditions as restrictive, and that if the Fed cannot be confident inflation is moving to target quickly enough, it has more work to do.
Investors heard that as a warning. The probability of an interest rate increase at the Fed's September meeting, as priced in futures markets, went from roughly one in three to a coin flip in a single morning.
The part we found most interesting
Here is where it gets subtle, and where we think most of the commentary missed something.
Interest rates rose across the board on Friday. But they did not rise evenly, and the unevenness is the message.
The two-year Treasury yield — the maturity most sensitive to what the Fed does at its next few meetings — rose about eleven hundredths of a percentage point in a single session. The ten-year rose about four. The thirty-year rose one or two.
Think about what that combination means. Investors raised the odds of a September rate increase by more than twenty percentage points, and the interest rate that matters most for mortgages and long-term corporate borrowing barely moved. If the market believed higher rates were coming and staying, the long end would have moved with the short end. It did not.
The market appears to be pricing an increase it expects to happen and does not expect to last long. Raise rates now, it will work, and you will not need to keep them there.
We want to be careful with that reading rather than lean on it. It is an inference from the shape of a single day's move, not a statement anyone made, and one session is a thin foundation. Over the full week the thirty-year yield did finish modestly lower — but most of that decline came Monday through Thursday on weak economic data, not from anything the Chairman said.
We would also note an asymmetry, and we hold it as a caution rather than a forecast. Markets are pricing both that the Fed will fight inflation and that the fight will be brief and successful. Those are two separate bets, and only the first one is under the Fed's control.
The two things the speech did not address
The government's borrowing costs. The Chairman spoke for roughly forty minutes about inflation, employment, artificial intelligence and the practice of central bank communication. He did not mention the federal debt, the government's financing needs, or the long-term interest rates the Treasury tried to lower two weeks ago. In our view that silence is itself information, and it is consistent with what we described last week: the problem of long-term rates is not one the central bank currently regards as its problem.
The credit that is not there. In arguing that conditions are not restrictive, the Chairman cited growth in business lending by banks. Our own tracking of that series shows bank lending to businesses has stopped growing and is now shrinking. To be fair to him, he was describing the calendar year, and for most of it he is right. But the direction has turned recently, and it has turned in the weeks that will decide the September meeting. We think that is worth watching, because a business investment boom funded entirely by company cash flow and capital markets, with the banking system stepping back, is a more fragile arrangement than the headline numbers imply.
The American consumer: no improvement
Every household reading this week pointed the same direction.
Consumer spending, adjusted for inflation, did not grow at all in July. Spending on services rose; spending on goods fell by nearly $50 billion. Household income did rise, and the savings rate improved slightly — families took the raise and saved it rather than spending it.
New home sales fell 10.5% to their lowest level since January. Inside a separate consumer survey, the share of Americans planning to buy a home in the next six months dropped from 6.5% to 5.2% — the steepest one-month decline in more than five years. Mortgage applications fell for a second consecutive week.
Consumer confidence fell to a seven-month low. The component measuring how people feel about the present actually improved; the component measuring how they feel about the next six months fell sharply. That split — the present holding up, the future darkening — has now appeared in four separate reports this month.
And on Friday, the Labor Department published its annual reconciliation of the monthly jobs numbers against actual payroll tax records. It found that the economy had 79,000 fewer jobs in March than previously reported, with private-sector employment overstated by 178,000. Forecasters had expected the revision to go the other way. The largest single downward adjustment, by a wide margin, was in retail: 155,000 fewer jobs than reported.
The weakness in household spending we have described for two months is now visible in the employment data for the industry that sells to those households.
The business economy: the first real cracks, and why we are not yet acting on them
For a month we have described an economy split in two — households under pressure, businesses accelerating. This week the business side produced its first genuine counter-evidence.
A widely followed measure of business activity in the Chicago region collapsed by more than ten points into outright contraction, its first such reading in four months, when forecasters had expected a small increase. A regional Federal Reserve survey in Richmond came in below expectations. And orders for the equipment businesses buy to expand — the cleanest available measure of the investment boom — grew just 0.2% when 0.9% was expected, with orders for computers and electronics actually falling.
We are recording these and not yet acting on them, for a specific reason.
Against that evidence, a Kansas City Federal Reserve survey held steady with new orders jumping sharply. The Baltic Dry Index, which measures the cost of shipping raw materials by sea, rose 12% in the same week — that is not a survey of opinion, it is a price someone actually paid to move physical goods. The largest company in the artificial intelligence supply chain reported strong results and forecast continued demand into next year. And the Atlanta Fed's real-time estimate of third-quarter growth went up.
Two more definitive measures — a Dallas Fed survey on Monday and the national manufacturing index on Tuesday — will settle this within days. We would rather wait forty-eight hours than change our reading of the economy on a single volatile regional survey and reverse it next week. We have watched several indicators this summer flip and flip back within seven days, and we have learned to be slower.
Energy: the most important development for our positioning
On Monday the administration announced the sanctions program it had been trailing for a week — the largest economic measures of the conflict, explicitly extending to countries that continue trading with Tehran.
Oil fell 2.5% on the announcement and kept falling. Crude finished the week down roughly 5%, the first weekly decline in three.
We think that is the most important thing that happened this week for how your portfolio is positioned, and we want to be direct about why.
For two weeks, oil rose on the anticipation of these measures. They arrived and the market sold them. Investors appear to have concluded that economic sanctions and physical supply disruption are different things, and that this conflict has become the former. At the same time, one major investment bank now estimates that oil exports from the Persian Gulf have recovered to roughly two-thirds of their pre-conflict volume, up from less than a quarter at the low point in March. Iran and Oman reached a framework agreement on managing the strait, though Tehran was careful to say this does not mean reopening.
We have said all year that we would weight observed shipping volumes over diplomatic announcements. We are obliged to apply that standard when it points against our own positioning, and this week it did. Our working expectation had been that shipping through the strait would recover toward half of pre-war levels by the end of this year. On the newer estimate, that recovery may have already happened, four months early.
We are not yet certain, and we want to be honest about why. The estimate above measures exports from the Persian Gulf as a whole; the official U.S. government figure measures traffic through the strait itself, and the two numbers are far apart — as recently as the prior weekend, fewer than twenty vessels made the transit, which is nothing like normal traffic. We are working to reconcile them before we change anything.
But the direction is not in doubt, and energy has been among our most rewarding positions this year. If the reconciliation confirms the more optimistic estimate, that position, and several others connected to it, will need reconsidering together.
Where our internal conditions gauge stands
Our internal conditions gauge rose for the first time in three weeks, to a level exceeded in only seven of the past two hundred eighteen weeks.
We want to explain that reading rather than celebrate it, because on its face it does not match the week we have just described.
The gauge tracks sixty-seven separate readings and moves in fixed increments as individual readings change category. This week's rise represents a net change in one of those sixty-seven. More importantly, most of this week's discouraging news arrived in readings that were already at their most negative setting — housing, mortgage applications, consumer sentiment, employment — where no further change was possible. And several of the week's largest events, including the jobs revision and the Chairman's speech, are not scored readings at all.
Meanwhile, the readings that did improve were largely the resolution of tests we had written down weeks ago: an agricultural measure finally cleared a threshold we had specified, an inflation-market indicator failed to extend a move we said it needed to repeat, and oil fell.
There is an irony in this that we would rather point out ourselves than have you notice. Part of the reason the gauge rose is that oil fell — and falling oil is precisely what most threatens one of our largest positions. The gauge and the portfolio moved in opposite directions this week, and both were reading the same facts correctly. That is a useful reminder that a broad measure of economic conditions is not a measure of how a particular portfolio is doing, and we do not manage the portfolio to the gauge.
The level remains historically high. The change is not a statement about the week.
How we are positioned
Confirmed. Our precious metals holdings did something this week that we regard as important, even though the price fell. Gold rose to a three-month high midweek and then dropped sharply within minutes of the Chairman's speech. It ignored the largest sanctions announcement of the conflict entirely.
Last week we wrote that we own these holdings as a hedge against the long-run consequences of government borrowing and monetary policy, not as a bet on geopolitical conflict, and that the market had treated them exactly that way. This week supplied the mirror image: abundant conflict news that gold ignored, and one central bank speech that moved it 2.5% in an afternoon. The position is behaving as we have described it, in both directions, on consecutive weeks. We would rather have that confirmation at the cost of a down week than the reverse.
Under review. Energy, for the reasons above.
Under review. Consumer-facing holdings, for a second week. The retail employment revision removed the last reason to treat this as provisional.
Unchanged. Our industrial, infrastructure and technology-investment holdings sit in front of data that got mixed this week rather than bad. We are watching Monday and Tuesday.
We have deliberately built the portfolio to hold positions that do not move together, and this week illustrated the cost side of that design rather than the benefit: energy and precious metals, which have carried the portfolio through the summer, both had difficult weeks, while technology and financials helped. That is the arrangement working as intended, not against you.
What we are watching
A regional business survey Monday and the national manufacturing index Tuesday will settle the question of whether the business economy is genuinely cracking or whether one volatile survey misfired.
The August employment report arrives Friday, September 4. It remains the single most informative item on our calendar, and it now arrives with a downward revision to the prior year underneath it.
On September 9, the Treasury's expanded bond-buying operations finally begin. Whether long-term rates take that offer, in a period when investors expect the Fed to be raising short-term rates, will tell us a great deal about whether the problem in the long-term bond market is the supply of government debt or confidence in the inflation outlook. Those two explanations point to very different futures, and we have positions that depend on the answer.
And on September 16, August retail sales and the Federal Reserve's rate decision land on the same morning.
This commentary is provided for informational and educational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security, sector, or investment strategy. The views expressed reflect the opinions of Private Wealth Advisors as of the date written and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as personalized investment, tax, or legal advice.
*The section titled "The Speech and the Two Things It Did Not Mention" was drafted with the assistance of artificial intelligence tools under the direction and editorial review of Marty Mazorra, Chief Investment Officer of Private Wealth Advisors. All analysis, conclusions, and final content are his own.
Your blog is timely. I've spent much of my day reading about currency debasement and scaring myself half to death, but not quite to the point of holding physical gold. These are times where many of us are thinking about how/when to best lock in the gains we've seen thanks to the AI boon/boom. The impact of taxes, even at long-term capital gains rates is untenable, but I may just have to bite the bullet sooner rather than later.
ReplyDeleteMarty, thanks for all you do to help people navigate both the good and bad times. Sometimes people can be their own worst enemies in financial situations and it's good to know there are people like you to help.
❤️
ReplyDelete