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Last week at this time, investors and the world were wondering if an attack on Iran would spiral into a broader war. Since then, oil prices plunged nearly 20% (shown below), and the focus shifted to TALO. The White House criticized Canada for having the audacity to do to the US what China did—retaliate where it hurts. China restricted rare earth exports, while Canada imposed digital taxes. Same idea.
Given that Iran is now in the rearview mirror, where does that leave us? A few thoughts on markets below.
Before I jump in, however, two podcasts. First, I spoke last week with Democratic Congressman Jim Himes, who accurately predicted the policy with Iran and also shared his thoughts with what is going on in DC more broadly. Among other interesting points: Congress won’t constrain spending until a crisis emerges. This suggests ever-larger deficits until long-end bond yields spike. Other countries are balancing their budgets; the US, not so much.
Second, a past guest, Dr. Alexander Vanyukov, was labeled a “foreign agent” by Russia last week. You can hear our 2021 conversation here. Alexander is a friend and a remarkable person—the type a government should treasure. You can hear why in this podcast. During COVID, his hospital was on the front lines, and among other innovative solutions, he called for volunteers in a notoriously cynical society and recruited soccer hooligans to care for grandmothers. I’m not making this up. That Russia is punishing someone like him shows how far the government has veered off course, alienating talent, as it has for generations. Russia is dangerous, and the US will likely abandon Ukraine to Russia’s grip as fall approaches and US funding dries up. While it won’t happen this fall, if Russia isn’t contained, other countries will end up in Ukraine’s situation. We all know the story; Alexander’s conversation puts a human face on it.
Regarding the markets, three big themes stand out: AI, slowing growth, and tariffs.
This week, AI went haywire; the NASDAQ surged nearly 4% and is now up 4.5% for the year. But this had little to do with AI. Instead, it was driven by a) the realization that Iran was foreign policy Kabuki and b) expectations the Fed is about to cut interest rates. But why “b”? Not because the Fed said so. The Fed chief stated the opposite in two days of testimony, emphasizing they are in no hurry to cut rates. Yet, the market anticipates rate cuts and priced in another 25 basis points of cuts just as tariffs are set to kick in and drive up prices. As a result, rate expectations shifted significantly, the yield curve steepened, and stocks soared. We now have a sense of what will happen when rates are cut, though I suspect that won’t happen for a while. The line below shows the change in discounting.
Growth is slowing, slowly and at various paces in different countries. If you look at where unemployment is above average and yet bond markets are discounting relative strength, some of the smaller countries on the periphery stand out, like New Zealand and Sweden. That said, our perception is that growth is gradually slowing everywhere. Most governments are reducing spending, private sector borrowing is lackluster, and unemployment is rising, so incomes are falling. In short, where is the fuel for a boom, outside of AI?
Tariffs are coming. We just don’t know how much or when, and everyone is confused. If I were the Fed, I’d stick to my guns and hold off on rate changes until inflation and employment data clarify the situation. If I were in the White House, I’d delay the tariffs because signing these deals is clearly tough. If I were Canada or China, I’d do exactly what they are doing. How many times has the US Commerce Secretary said a flurry of deals was just around the corner? The net effect of the uncertainty is loose monetary policy globally (as growth slows), and the net effect of technology is deflation, so the rally in assets (stocks and bonds) might just be getting started. However, the focus could shift to Asia, which a) has strong technology, b) has lagged the equity rally, and c) is increasingly focused on shareholder returns.
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