Eye On The Market

Many client questions I received last week in California were laden with a sense of foreboding: third rail questions about the US Federal debt as ten year yields blow through the Bessent Maginot line, the elevated share of US market returns and growth attributable to AI, the sustainability of US equity markets close to all-time highs, Anthropic’s dire warnings about open weight models and cyber risks, rising stress in private credit and European deindustrialization.

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Over the last year, the Eye on the Market included views on sectors, rates and currencies. For this back-to-school piece, I prepared a rear window post-mortem on each.

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The Year of the Trojan Fire Horse: China’s imbalanced economy and unrelenting mercantilism

While there’s plenty of evidence to support Stephen Roach’s thesis of unsustainable imbalances in China’s economy, China is living up to anthropomorphic characteristics of this year’s zodiac, the Fire Horse, in at least one regard: bold moves, self-reliance, speed, action and innovation in the energy transition.

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I mean pretty as an adverb, as in pretty cautious on cyber risks, open and closed weight challenges to the frontier labs seeking to go public and some market technicals related to AI.

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Semiquincententacles: The US grip on markets on the 250th anniversary of the Declaration of Independence

Behold the Aquilaceph, half-bald eagle and half-octopus. On the semiquincentennial 250th anniversary of the US Declaration of Independence, this imaginary beast is a metaphor for the continued US grip on financial markets. In this special issue we look at the details: US reserve currency status, capital flows, the much anticipated but still unprofitable “Sell America” trade, US corporate profitability and productivity in the age of AI, investing in Security & Resilience, equity market concentration, energy independence and the revival of the US IPO market. The biggest medium-term concerns for investors in US assets, other than the sustainability of the US Federal debt and cyclical inflationary pressures: the increased unpredictability in the rule of law, and government defunding of science and sidelining of scientific expertise.

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The new Fed chair Kevin Warsh, like Kevin McCallister in Home Alone, faces a lonely vigil: survive until the adults get home again. The latest on inflation, rising Treasury yields, shrinking equity risk premia and pressure from the White House. Also: investing in China’s home-grown AI ecosystem, and the predation in prediction markets.

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Abandon Ship! Topics: midterm elections, Spring thaw in US economic data, Strait of Hormuz oil rationing timeline, AI and data center update, Gulf State pipe dream, Congressional redistricting and Mythos update

Summary: Despite improving US leading indicators and economic/stock market resilience, GOP House members are abandoning ship at a record pace. The midterm challenges for the GOP include declining blue-collar employment, soaring ACA premiums, a surge in commodity prices, rising inflation expectations and some unorthodox choices at the Department of Justice.

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Salem’s Lot: an update on the Gulf War. Topics include international commodity price pass-throughs to the US, the limits of energy independence, Gulf temperatures and their relevance to US military options, the proposed Iranian toll on the Strait of Hormuz, the cost per payload of asymmetric warfare and our commodity price tracker. Also: the history of Presidential firings of senior US military officers, and a US fossil fuel reliance fever dream.

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Fighting Words. This year we look at energy arguments, battles and debates: the impact of data centers on power prices, the cost of solar plus storage as baseload power, the “primary energy fallacy” that ignores waste heat, the true cost of small modular reactors, Germany’s decision to shut down nuclear, China’s dominance of renewable supply chains, solid oxide fuel cells as turbine alternatives, the materiality of demand response, staffing cuts at the EIA, the hype around geothermal and geologic hydrogen, the misplaced fascination with small country energy transitions, satellite vs factor-based oil & gas basin methane emissions, the mostly profitless EV industry, xAI mobile gas plant permits, negligible progress on carbon capture and renewable fuels, and the unfavorable economics of charging my Jeep Wrangler hybrid.

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New York City now has one of the tightest housing markets since 1960.

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In this year’s EOTM Outlook by Michael Cembalest, we focus on four risks: US power generation constraints, China on its own, Taiwan and hyperscaler profits.

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On the surface not much has changed since our last review two years ago.

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While the prior decade was defined by disruption in content distribution, the next decade will be defined by disruption in content creation, augmented by generative AI. This month’s Eye on the Market looks at the rapidly shifting fortunes in legacy cable/broadcast shares vs streaming, the rise of social media as a platform for consuming all forms of content, rising acceptance of user-generated content and the increasing democratization of text-to-video tools used to create it, the value of the legacy content moat in film/tv libraries and the best movies of the 21st century (as ranked by me).

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Mad Libs. This piece is not about how mad liberals are at the administration, although the latest polling data indicates that it could be. Instead, it’s a fill-in-the-blank exercise regarding the impact of tariffs and immigration policy on growth, the impact of Chinese critical mineral export restrictions, Oracle’s debt levels and borrowing capacity, central bank gold reserves and the gender balance of psychiatric medication.

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In this piece, we look at the AI and data center takeover, and the OpenAI-Oracle deal; the US government equity investment in Intel, the origins of TSMC and how many countries support national champions via industrial policy; efforts in China to reduce excess capacity and consequences for equity investors; crime and municipal solvency in Chicago and Illinois; how tight net new equity supply has been supporting US equity markets since 2011; and pictures from Chilliwack, Canada.

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Assessing US earnings and economic trends during one of the broadest policy shifts since FDR; partisan redistricting, the Supreme Court, the Census and the balance in the US House of Representatives.

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Every summer, I answer questions from the Eye on the Market client mailbag.

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Take a look back at 30 standout insights which are just as relevant for the future as they were for the past.

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Throughout history, non-FDIC insured short-term dollar denominated debt redeemable at par on demand has been prone to runs, whether in money market funds, repos or uninsured deposits. Why would lightly regulated stablecoins be any different?

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A brief note on the debt and deficit impacts of the House budget reconciliation bill, Henery Hawk and Foghorn Leghorn.

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