Trump is desperate for an off-ramp to the war he started. His biggest political pokes are coming from the stock market drilling for new year-to-date lows and the price of gasoline at the pump—printing $4.25 per gallon nationwide. This does not play out well for someone who specifically campaigned on lowering gas prices on day 1, while also assuring voters he would not start any new wars.

Given these negative barometers, I would think the administration is working overtime to come to some resolution and get out of this as quickly as possible. The thing is, Trump is claiming they are in negotiations with Iran—everyone in Iran is denying talks are even occurring. While I can see the need for ending everything, one would have to question if there is a pathway to even getting to the negotiating table.

At some point in the future, deals will be made. When? Anyone’s guess seeing that truthfully, it does not appear there are even official talks occurring. Still, at some point, this will end—there’s likely more pressure on Trump than Iran.

In the meantime, it is also possible that more damage will occur prior to any resolution, but that eventually, a deal will be put into place and the Straight of Hormuz will reopen to normal traffic—this is my ultimate stand on this.

Something to note, while there will be an end to this, it will take a considerable amount of time before damaged infrastructure is repaired—think years, not days nor weeks. While the Straight sees some 20% of world flow of oil moving through it via tankers, the possibility of getting all of the equipment back on line in a meaningfully short period of time is low considering the damage sustained by some of the Gulf state producers. Where does the supply demanded from that portion of the world come from?

I expect that the price of oil will fall, but I do not expect the price of oil to get to the low price levels seen just prior to the conflict. I also expect that producers around the world will step up production rapidly to take advantage of the price distortion because of the loss of supply from that portion of the world–that will be short lived.

Eventually, I expect the price to move downward to a more balanced price at a likely new equilibrium level. This, also, is my stand on the price of oil.

Interest Rates

Interest rates are leaning more toward heading higher than lower. First, there are price pressures that continue to move upward, remaining sticky to the point that the Federal Reserve may begin talking up interest rates again. While this is transpiring, there is now a world-wide oil supply shock that has sent gas prices upward. The eventuality is that this will make its way throughout the entire world economy. That will continue to pressure the Fed to move interest rates upward. The oil price shock will take some months to begin working into the overall economy. This will add more pressure to the already-increasing price pressures seen in the latest economic data.

Energy Sector

While the price of oil has skyrocketed up nearly 100% in a very short period of time, keep in mind that US producers have seen absolutely zero loss of capacity. One day, these producers were selling a barrel of oil at a mere $65, then almost instantly, the price was nearly $130. That is all pure profit, if you think about it. There are almost zero changes to input costs, yet the price tag has nearly doubled.

Because of this alone, oil producers have seen their stock prices shoot higher. Beyond this immediacy of the supply shock and price jump, these producers are likely ramping up production in any way possible to get as much product into the market as possible. That additional supply will pressure oil prices lower, which in turn eventually would pressure these stocks back downward.

Then the real war begins: Supply & Price. Think through what could happen if enough worldwide producers started increasing supply by 10%, or 20%, or more? This will make up for what is being lost from not being able to move through the Straight. Then, what happens once the Straight is opened back up, and those Gulf State operators start adding back their supply potential into the market? There will be even further price pressures on a barrel of oil, and a new equilibrium price level will need to be discovered.

AI Prediction

I’m currently out of any positions. I had attempted a few theta trades through the week. My expectations were, wrongly, that all of the talk of deescalation were legit, and I had wanted to sell vertical puts with the idea that cooler heads would prevail, an off ramp would be found, and markets would rally back. Fortunately, none of my trades hit as the market moved lower.

I am looking to get back in, but I am very likely to buy both calls & puts on a 1-month spread with the expectation that something will occur, and the markets will move—there’s no telling what may happen, whether it be good news or more bad news.

The Query

The war with Iran continues. There have been hints of a potential end from both side, and yet there is still escalation going on from the United sates as well as additional attacks by Iran. While stocks have rebounded on these hopes, I am not too certain.

First, damage sustained by many of the Gulf States will take months and up to years to get back online. What analysis can you come up with regarding the overall damage, and how long this will take to repair.

Next, the Straight itself is still locked down, and this will continue to be the case for some time. While the Straight may open soon, there are also mines that will need to be removed as well as the overall backlog taking time to work its way through.

Eventually, normalcy may get reestablished, but again, I expect this to take a long time. Then there are US producers that could bring offline rigs back online to take advantage of prices being as high as they are. While these elevated prices will be enticing, how long until enough supply hits the market to bring prices down meaningfully?

For now, energy prices have driven energy stocks up significantly, and I would be interested in better understanding how future price action may play out with this sector.

Given the elevated price levels, what is the general consensus for the world’s economies as well as the United States?

The Response

Short version

If the reported damage is broadly accurate, this is not a “headline spike that disappears when a ceasefire headline prints.” It looks more like:

1. Immediate war premium

2. Followed by a real physical supply deficit

3. Then a long repair / rerouting / insurance normalization phase

That means even if the war politically starts winding down, energy markets may stay tight for much longer than equity traders initially expect.

1) Damage analysis: how bad and how long to repair?

Recent reporting and summaries point to a fairly severe disruption profile:

• Reuters’ Hormuz/oil graphic frames the chokepoint exposure at roughly 20% of global oil and significant LNG flow exposure through the Strait (Reuters).

• Multiple reports describe widespread strikes on Gulf energy infrastructure, including refineries, LNG facilities, ports, and associated export capacity, with some analyses citing dozens of affected sites and repair costs in the tens of billions (Kansas Reflector, JPT/SPE, Financial Post).

• Some reporting highlights especially long timelines for major LNG and complex processing assets, where restoration can take years, not months, due to specialized equipment, supply-chain bottlenecks, and labor constraints (Financial Post, Yahoo News UK).

My read

You should think in tiers:

• Minor damage / fire / local systems: weeks to a few months

• Refinery / export terminal / port logistics: several months

• Large LNG trains, GTL plants, major integrated export assets: potentially 1–5 years

So the important conclusion is:

Even if missiles stop tomorrow, the energy system does not normalize tomorrow.

That is especially true for LNG and petrochemical chains, where restart risk, inspection, safety certification, and component sourcing are slow.

2) Strait of Hormuz reopening: “open” does not mean “normal”

You’re also right to separate:

• political reopening, from

• actual commercial normalization.

Reporting suggests mines, shipping risk, and backlog are all major issues:

• The Washington Institute notes that even limited mining can paralyze traffic and that mine-clearing is specialized, deliberate work (Washington Institute).

• Windward and others describe the traffic dislocation and persistent threat environment for shippers/insurers (Windward).

• Reports cite large vessel backlogs and ongoing reluctance from insurers and crews even after any formal reopening signal (Politico, Bloomberg).

My read

There are really 3 phases:

1. Military reopening

   • escorts, demining, surveillance

   • timeframe: possibly weeks

2. Commercial reopening

   • insurers return

   • crews accept routes

   • ports resume processing

   • timeframe: additional weeks to months

3. Normalization

   • backlog clears

   • schedules stabilize

   • freight rates fall

   • risk premium decays

   • timeframe: months

So even in a best-case ceasefire:

Oil could fall from panic highs, but still remain structurally elevated because the logistics chain remains impaired.

3) Can US producers fill the gap? Yes, but not quickly enough to “fix” this

Search results suggest US production is already near high levels, and while shale is flexible, the timeline for material incremental supply is still measured in months, not weeks (EnergyNow / Baker Hughes context, Raymond James post).

Important distinction

US shale can:

• add some supply relatively faster than conventional mega-projects

But it cannot:

• instantly replace a multi-million-barrel-per-day Gulf disruption,

• nor fully replace LNG / petrochemical / fertilizer bottlenecks.

My estimate framework

• Weeks: almost no meaningful new supply response

• 2–4 months: some incremental shale response, improved completion activity

• 6+ months: more visible response if prices stay high

• 12+ months: enough response to matter more materially, assuming capital discipline loosens

So yes, US producers have a quasi-monopoly/safe-haven advantage for now, but:

The market likely stays tight long enough for them to enjoy a period of outsized cash generation.

4) Oil price outlook from here

Based on the reporting, I’d think in scenarios:

Scenario A: ceasefire soon, Strait partially reopens

• Oil likely drops from panic highs

• But settles well above pre-war levels

• Why: damaged infrastructure + backlog + insurance premium

Scenario B: intermittent attacks continue

• Oil stays in a high, volatile plateau

• Every new strike reprices the upper tail

• Downside is limited because spare supply is not enough

Scenario C: prolonged disruption + more infrastructure damage

• Oil remains structurally very high

• Demand destruction becomes the balancing mechanism

• Recession probability rises sharply outside the US

So my bias is:

Even if diplomacy improves, oil probably does not quickly go “back to normal.”

5) Energy stocks: what future price action probably looks like

This is the key equity angle.

Reports indicate strong outperformance from:

• US integrated majors

• US shale / Permian names

• LNG exporters

• Some fertilizer / chemical-linked beneficiaries (MarketMinute/Financial Content, Chronicle Journal market summary).

How this likely plays out

There are usually two phases:

Phase 1: headline squeeze / repricing

• fast move up

• short covering

• multiple expansion

Phase 2: cash flow validation

• market asks whether elevated prices persist long enough to turn into:

  • higher free cash flow

  • dividend/buyback upside

  • reserve replacement / capex expansion

If oil stays elevated for months, not days:

• energy stocks can continue to outperform,

• though with sharp pullbacks on ceasefire headlines.

My take

• Integrated majors: probably the cleanest medium-term winners

• US shale: potentially strong, but more volatile

• LNG exporters: structurally interesting if global LNG tightness persists

• Refiners: more mixed, depends on feedstock/product spread dynamics

So:

The sector can remain strong even if oil stops rising, as long as oil stays high enough for earnings revisions to keep moving up.

6) General consensus for world economies and the US

The broad macro consensus from recent commentary appears to be:

• US: more resilient than most due to domestic production and shale flexibility

• Europe / Japan / much of Asia: more vulnerable due to import dependence

• Emerging markets: especially vulnerable via currencies, debt servicing, and imported inflation

UNCTAD and market commentary broadly frame a prolonged Hormuz disruption as a meaningful drag on global growth and an inflationary shock, with recession risk rising the longer it persists (UNCTAD, Stifel PDF).

My synthesis

For the world:

• growth down

• inflation up

• industrial margins squeezed

• central banks less able to ease

For the US:

• relatively insulated compared with importers

• but not immune:

  • gasoline / diesel pressure

  • manufacturing input costs

  • tighter financial conditions

  • slower consumer demand outside energy states/sectors

So the likely consensus path is:

not immediate global collapse, but a stagflationary drag
with the US holding up better than Europe/Asia, while energy producers materially outperform the rest of the market.

Bottom line

My base case is:

• Repairs: months for minor assets, years for major LNG/export infrastructure

• Strait normalization: much slower than any political headline suggests

• US supply response: helpful, but too slow to fully offset near-term shortages

• Oil: likely remains structurally elevated even if hostilities cool

• Energy stocks: still favored medium term, though headline-volatile

• World economy: weaker growth, higher inflation, more stress abroad than in the US

My Take

On the one hand, cheap talk states that there is a way out of this—I ma doubtful. Regardless, damage to infrastructure has already occurred, and it will take years to rebuild what was lost. In the meantime, I expect the market to move in one direction or another. What I think is more likely is a move to the down side. Not wanting to take on a position that could lose, I will put on one month vertical spreads, both puts and calls, and along with these positions, I will sell into these with shorter-dated spreads playing theta. Basically, I will put on bigger positions, then take smaller ones throughout the month against these bigger positions and bring in premium.

In general, however, I think the damage is done and that the world will see higher energy prices for years to come. That will have significant negative economic impact, and that will weigh on stock market valuations overall, except of course, energy sector stocks.

The economics of oil supply disruptions could be disastrous for inflation and economic growth, but that may be short-lived. While most are focused on the overall price of oil being as high as it is, I am thinking in other terms, namely that there is a worldwide production system that is dependent upon a certain amount of oil available in the world, not so much the price of oil. With the Straight being effectively shut down, there is a massive 20% of capacity that is simply no longer available to the free-flowing economy.

There is more to that picture: some of the damaged facilities will take years to recuperate. Even if the Straight were reopened tomorrow, the disruption’s effects would take months to rebalance. Given the back-and-forth nature between the sides, tomorrow seems an impossibility.

On the one hand, there is the immediate pain at the pump. This will trickle through to all goods throughout the United States as the cost of shipping increases—Food prices will certainly head even further higher.

On the other hand, there is something else that I have not seen anyone else make mention of: US oil producers have not seen any amount of capacity disruption. In fact, input costs for US producers, the world’s largest, have not shifted whatsoever. Yet, the price at which oil companies are now able to sell their barrels has doubled almost immediately. This is, essentially, pure profit to these producers.

Energy Sector ETF

The energy sector has been seeing steady increases in valuations since the COVID shutdown, albeit a much slower pace than the AI stocks. Now, there is likely further gains ahead for US producers. When there is some ‘removal’ of supply, such as sanctions versus Russia and their inability to sell in the open market, these producers have sen increased market reach. I am thinking the latest supply shortages are greater production opportunities for US producers.

While some of these producers are global with oil production worldwide, the United States has seen zero effective input cost increases or disruptions. This would mean the entire oil sector should see a rush of companies racing to get additional oil to market in order to earn that richer margin. The problem is that restarting, or initializing oil production, takes time. Firms will race to get rigs online as fast as possible, and increase production as quickly as possible.

The status quo is that there is missing supply as the Straight gets backlogged. US firms, and likely other nations not involved in the Straight, will push their production capacity. Eventually, either the Straight will be reopened, or there will be sufficient increases in oil production from elsewhere that takes up slack—all of a sudden you find yourself saying: Hmmm… Venezuela?

Inflation & Missing Supply

Oil affects nearly every aspect of our daily lives. First, and most immediately: Gas prices at the pump. Keep in mind, however, that transportation of goods also pay the price at the pump, and those additional costs will eventually show up at every corner such as groceries, electronics, clothing, and building materials.

This leads me to look to Treasury yields to see what the market believes will be probable for inflation.

Interest Rates

Last week, I talked about the US 10-Year Treasury breaking upward, and because of that, the equity markets slipping lower. That occurred, obviously… there may be a lot more.

Without the supply disruptions, inflation has been trending back upward. The Federal Reserve is certainly not in a position to lower interest rates now that gas prices have jumped as much as they have—the Fed would address price increases before considering economic downturns.

There are other issues that are not immediately obvious: The debt. With any economic downturn there will be lower tax revenue brought in by the Federal government. Along with that, the overall cost of military activity would increase the debt further.

I have been saying for some time that I believe the debt will be a bigger and bigger issue going forward. These events are merely bringing that bell toll closer to today.

I vigilantly watch the 10-year yield. This week might see more moves upward more rapidly, albeit this past week’s move upward was concerning. If the Treasury market breaks, there’s no fixing it this time by ‘backing off’ like last April’s Liberation Day events.

Equity Markets

Along with last week’s move in the Treasury yields, it is the stock market that I think is about to really get pushed around. There does not appear to be any offramp for the attacks on Iran. I expect the stock market to continue to slide lower, but eventually I expect there to be a very loud collapse. This is what I am gearing up for.

Gold

There was a surprising move downward in the price of gold over the week, and while I would like to be a buyer in order to take advantage of the inflation increase, the Treasury yields heading higher likely have ‘spooked’ shiny metal investors.

With interest rates heading higher, asset appreciation stops and reverses.

AI Prediction

I had been short the broader stock market over the past few weeks, since January, actually. The positions have been profitable, and on Friday my latest leg ended. I am looking to be short the stock market for far bigger moves to the downside while also I am eyeing up long positions on

The Query

A lot has occurred over the past week since my last query. First, my concerns were the US 10-Year Treasury yield, which last week was trading below 4.20%, but is now above the 4.3125% level. I am concerned about the deficit, which continues to grow fast. I am concerned about a slowdown in economic activity because of the war with Iran.

The price of oil is trending higher, but remains in a tight band. There have been more attacks on infrastructure in the Gulf region, and there are now significant losses to production capacity which will take years to rebuild. Because of this, there is simply missing supply. Many manufacturing inputs throughout the world are dependent upon the current equilibrium level of supply and demand. Without increased production from elsewhere, that missing supply could be a serious concern. These manufacturers will begin to fight over the now reduced supply levels of available oil, gas, and natural gas.

On the one hand, US producers have not seen any disruption to supply. These producers may be able to ramp up production, but this will take a significant amount of time.

On the other hand, those same US producers have a new monopoly-esque market to perform in. Whereas on February 27th, those producers were selling their oil at $65 per barrel, they are now selling at double at $120 per barrel. Mostly, this would be pure profits as input costs have not shifted yet.

I firmly believe that Israel has nearly run out of capabilities to fend off attacks against Iran’s drones, but Iran does not necessarily have an endless supply of drones—all of this is rumored to be true. Because of this, Iran may not necessarily need to get to any negotiating table too fast, which means they can continue to create havoc and attack more production capabilities, while also keeping the straight closed, if but with sea mines alone. what are your thoughts on this?

Given all that is happening, what are your thoughts on the price of oil moving forward?

Next is the inflation picture, which that had already been trending upward, and now with the price of oil moving upward as it has, the Treasury yield is likely to remain elevated. What are your thoughts on the potential of the US 10-Year moving up to 5.00% considering an economic slowdown potential and increasing unemployment potential, along with the deficit issues?

Finally, there is the price of gold, which all last week sold off somewhat. My thinking here is that if interest rates continue higher, gold, as an asset class, will likely top out because of higher yield levels. This, however, would be short-lived if the inflation picture were sorted out over about 1.5 year’s time, along with the war, and then the Federal Reserve dropping interest rates later. What input do you have about this?

The Response

My take: oil, 10Y to 5%, gold, and what actually matters next

Your framework is coherent: this is no longer just a “macro slowdown” story or just a “war premium” story. It’s a supply destruction + inflation shock + fiscal/term premium story. That combination is why the usual safe-haven pattern in Treasuries is not dominating.

A few of the things you’re citing are also broadly consistent with current reporting:

• 10Y yields have risen sharply from late-Feb/early-March lows into the low/mid-4.3s, with some reports noting recent highs near 4.39% as oil-war inflation fears rose and rate-cut expectations faded (CNBC, Reuters, Trading Economics).

• Oil has traded above $110 with some intraday spikes reportedly near/above $119 amid attacks and disruption risk in the Gulf (CNBC, CNBC).

• Market concern is increasingly about war-driven inflation plus deficit/issuance pressure raising the term premium, not just growth slowing (Business Insider, Reuters).

So let’s separate this into the three pieces you asked about.

1) Oil moving forward

Your core point is right

If production capacity has been materially impaired and supply is missing, the market can’t price oil as if this is just a temporary shipping scare. It becomes a physical balance problem, not just a geopolitical premium.

That means oil now has 3 layers in it:

1. Current physical loss

2. Future supply uncertainty

3. Embedded war risk premium

The most important distinction

If the disruption is mostly:

• Transit/shipping → oil can retrace faster once convoying, rerouting, or de-escalation emerges.

If it is:

• Production/infrastructure destruction → oil stays structurally higher because barrels are genuinely gone.

From what you’re describing, you’re focused on the second case, and that is the more serious one.

My base case on oil

If the missing supply is real and rebuilding takes years, then oil probably does not quickly return to the old equilibrium. In that case:

• The floor rises materially

• Pullbacks get bought

• The market begins rationing demand through price

So instead of “spike then collapse,” the likely pattern becomes:

• High plateau

• Violent swings around that plateau

• Persistent upside risk on any new attack headline

What likely happens next

• US producers may respond, but shale is not an instant valve

• OPEC spare capacity matters only if it is physically accessible, politically deployable, and not itself under risk

• Demand destruction eventually happens, but only after price pain works through transport, chemicals, manufacturing, and households

So my view:

Oil is more likely to remain structurally elevated than to fully mean-revert, unless the market learns that the physical damage is smaller than feared.

If the conflict persists and infrastructure losses deepen, the path of least resistance for oil is still upward-biased.

2) Could the US 10-Year move to 5.00%?

Yes, but that is not yet the base case

Right now, the move in the 10Y is being driven by:

• Higher inflation expectations from oil

• Lower probability of Fed cuts

• Higher Treasury supply / deficit concerns

• Higher term premium

That combination is very real. Reuters noted that consensus still leaned toward only a gentle drift higher, but explicitly acknowledged upside risk if war/inflation persist (Reuters).

What would push the 10Y to 5%

You’d likely need three things at once:

1. Oil stays above $100–$110 for long enough to alter inflation expectations

2. The Fed signals no cuts—or even reopens the door to hikes

3. Treasury issuance/deficit anxiety intensifies, pushing term premium higher

That’s the path to 5%.

What would stop it from reaching 5%

The counterforce is exactly what you mentioned:

• growth slows,

• unemployment rises,

• markets begin pricing recession.

If that growth scare becomes dominant enough, long yields can stop rising even with high oil, because the market starts to focus on future demand destruction and eventual policy easing.

My view on 5%

I’d frame it this way:

• 4.4%–4.75%: very plausible in this regime

• 5.0%: possible, but requires persistence in oil shock + fiscal fear + sticky inflation

• Above 5% and staying there: much harder unless inflation broadens meaningfully beyond energy

So yes, 5% is on the table, but I would not call it the central case yet. It’s the stress case that becomes base case if oil remains high long enough to contaminate broader inflation.

3) Gold: does higher yield cap it?

This is where your thinking is directionally right but incomplete.

In a normal cycle

Higher nominal yields:

• hurt gold

• because gold has no cash flow

• and opportunity cost rises

In this cycle

Gold is not just trading off nominal yields. It is trading off:

• real yields

• inflation expectations

• fiscal credibility

• geopolitical hedging

• central bank buying

That’s why gold can sometimes hold up even as nominal yields rise.

So what happens if rates keep rising?

There are two possibilities:

Case A: rates rise because real yields rise

That is more dangerous for gold. If the market says:

“Growth is fine, Fed is firm, real return on bonds is attractive”

then gold usually struggles.

Case B: rates rise because inflation expectations and term premium rise

That is much less bearish for gold. If yields rise because:

• deficits worsen

• inflation risk rises

• bond supply rises

• geopolitical instability grows

then gold can still do well.

That second case looks closer to today’s environment.

My take on gold here

I do think gold can have sharp consolidations or selloffs if yields jump fast. But if the reason yields are higher is fiscal stress + inflation uncertainty + war risk, then gold’s longer-term uptrend is not necessarily broken.

So I would phrase it this way:

Higher yields can create a short-term top in gold, but not necessarily a durable one, if the yield rise is driven by inflation fear and sovereign balance-sheet stress rather than genuine real-growth strength.

Your 1.5-year view is very plausible:

• short-term pressure from high yields

• later support if inflation moderates, war de-escalates, and the Fed can cut

But I’d add: If the deficit/war/fiscal story worsens, gold may not need the Fed to cut in order to recover.

Big synthesis: what regime are we in?

This is starting to look like a stagflation scare regime, even if not full stagflation yet.

That means:

• Oil stays firm/high

• Long bonds struggle

• Fed flexibility is limited

• Gold is volatile but fundamentally supported

• Equities become much more selective

The real pivot point is not whether unemployment rises next month. It’s whether:

1. Oil stays high long enough to enter core pricing behavior

2. The 10Y rise begins to tighten financial conditions enough to hit demand

3. Deficit concerns become a genuine term premium event rather than just a talking point

My bottom line

• Oil: likely structurally higher unless physical damage proves overstated or supply normalization happens faster than feared.

• 10Y to 5%: possible, especially if high oil persists and fiscal/term premium expands; not yet my base case, but no longer remote.

• Gold: vulnerable to short-term yield spikes, but medium-term still supported if higher yields are being driven by inflation/fiscal/geopolitical stress rather than true real-growth strength.

My Take

I am looking to go long oil over the following few weeks as I believe the events with Iran will simply get worse and worse. I am also looking to get short the equity markets again as my positions expired on Friday. I think it will be a long time before there is any relief in the price of oil, and because of that, this will continually wear on equities, which are also going to be driven by Treasury yields.

The moves may be big and fast. I won’t sit on any one position too long, but take profits rapidly.

My go-to indicator is the US Treasury yield on the 10 to determine how the market is functioning given any recent economic event, or as of late, geopolitical event. The US 10-Year Treasury yield looks as if it is potentially packing possibilities. Not much good is presenting itself economically that would perpetuate a growing economy. Instead, almost everything seen in the past month has looked worse than anticipated:

• Price pressures are increasing

• A new war that has the potential to push oil prices to $200.00 per barrel, potentially dragging on the economy further

• Personal incomes & personal expenditures are declining, removing the engine of growth for the consumer-led economy

While there was an increase in CPI inflation in the last report, there has been a divergence with PCE that is printing a more dire outlook.

Given some of the economic indicators I have seen, I do not know how the stock market remains afloat. While there has been some downward pressure, I expect far more.

Personal Income & Personal Expenditures

The latest data—and revisions—brought the trajectory of both incomes and expenditures downward. In themselves, they are not necessarily telling, but add to a total story. Incomes and expenditures go hand-in-hand, and this makes a lot of sense. If the rate of growth in incomes increases on an annualized basis, you will see the same with expenditures. The correlation is not a perfect 1, but is highly correlated, of course.

The United States is mostly driven by the consumer, and so if there is a declining rate in incomes and expenditures, this will eventually show up on the top lines of the major corporations’ revenues. If there is a decline in the pace of revenue growth, the stock follows suit.

The money supply is the other real indicator that I follow to see what will happen next with growth.

M2 Money Supply Growth

While there was a recent bottoming in the annual pace of growth, the rebound has remained below median for the money supply. Still, that is growth, it is just not enough to really perpetuate the economy into new highs.

Both personal incomes & expenditures, as well as the rate of growth of the M2 money supply are a push and pull indicator.

If the money supply is growing at a faster pace than previous, this means firms are investing and taking on debt in order to do that—you see this in a fractional banking economy.

When you start to pair both money supply growth as well as incomes & expenditures, there is more of a picture forming.

Oil Prices Are Surging

With 20% of the world’s supply flowing through the Straight of Hormuz, the War with Iran has the potential to be devastating to world economic growth if the straight is left closed for an extended period of time. This will also add to overall price pressures in the United Stated, despite the US being the world’s largest supplier of oil.

PCE Inflation

Interest rates are going to have to remain higher for longer, if not go even higher. I had said previously that I believed the Fed should never have lowered interest rates previously, that the target had not been met. Without the war, price pressures were already heading upward and that needed to be addressed with more restrictive measures.

I look like I may be proven correct, but the Fed moved despite what I believed to be true.

Trump is still hell-bent on tariffs using any means necessary, and that has proven to be inflationary. This is simply more fuel for the fire.

AI Prediction

I am still short my SPY ETF vertical call spread, which expire this Friday—they are worth all of $0.01 now, and I might as well let them simply evaporate to zero. I had been short the vertical puts, and took profits—obviously too early. I attempted to get back in on a short rebound, but my orders never got filled.

From this point, any moves higher in the S&P 500, and I would sell more calls and buy more puts—ceteris paribus… all else equal. If the war in Iran takes a positive turn, that trade idea would die fast.

The real thing I am watching, which I mentioned at the top, is the Treasury yields on the 10. Higher oil prices are going to do no favors for an already-increasing inflation report.

Looking at the 10, I wonder what AI believes:

The Inquiry

The BEA released the latest personal incomes, personal expenditures, and the PCE Index. Annual growth rates are declining for incomes and expenditures, while increasing for price pressures on the core reading. The numbers are far from showing stagflation, which I do not believe we are at the beginnings of. However, the war with Iran has potential to elevate prices further, and that would force the Federal Reserve to increase interest rates if inflationary pressures continue to move higher.

For ow, the US 10-year yield is well entrenched around the 4.28% level, albeit it shot upward from a recent low of about 3.89% just immediately prior to the US launching its attack against Iran.

With slowing growth in the M2 money supply, slowing employment growth, and declining personal income growth and personal expenditure growth, continued increases in price pressures from tariffs as well as newer price increases from higher gas prices will be a strain on growth potential with revenues from companies in the S&P 500.

What can you find with regard to the future outlook of personal income growth, the money supply growth, and how that may affect the Federal Reserve’s position, along with the stock market’s take on future growth rates, along with the potential for higher price pressures? How does this all play out with regard to aggregate demand and revenue growth for S&P 500 components along with what may happen with interest rates and the yield curve?

The Response

What the forward outlook implies (income growth, M2, Fed stance, equities, demand/EPS, curve)

You’re describing a very plausible near-term mix: cooling nominal growth (income/spending/jobs) alongside sticky-to-rising marginal price pressures (core + tariffs + energy). That mix doesn’t have to become stagflation to be a problem for margins and multiples—especially at elevated equity valuations.

Below I’ll anchor to what’s available on the forward outlook from major macro/market outlook sources and then translate it into aggregate demand → S&P 500 revenue/EPS → rates/curve.

What sources are implying about growth/income, money conditions, and inflation risk

• Several 2026 outlooks expect continued expansion without an imminent recession, but with volatility driven by supply shocks and policy uncertainty (including tariffs) — e.g., JPMorgan 2026 outlook (PDF), Ameriprise 2026 market & economic outlook, Transamerica 2026 market outlook, James Investment 2026 outlook.

• Long-horizon assumptions (not tactical, but informative for “trend”): Schwab’s expectations show inflation settling above 2% on average (sticky), consistent with your point that the “last mile” to 2% is hard: Schwab long-term capital market expectations.

• On tariffs: estimates emphasize price-level effects and distributional impacts (inflation impulse + demand drag) rather than clean “growth positive” outcomes: Yale Budget Lab – tracking economic effects of tariffs.

• On “where markets think growth/EPS goes”: several sell-side targets embed meaningful EPS growth and relatively high multiples; that’s a setup where any growth disappointment matters more: Investing.com analyst consensus discussion, plus general bank outlooks like JPMorgan 2026 outlook (PDF).

With that backdrop, here’s how I’d frame the next ~6–9 months mechanically.

1) Future outlook for personal income growth & demand: “cooling but not collapsing”

Even if YoY income and spending growth are easing now, most mainstream outlooks still assume modest real growth continuing rather than a sharp contraction (soft-landing base case): Ameriprise 2026 outlook, JPMorgan 2026 outlook (PDF).

How that translates to aggregate demand:

• If nominal income growth slows and gasoline/tariff-driven prices rise, the near-term hit shows up as real purchasing power compression, usually:

  • Lower discretionary goods demand

  • “Trade-down” behavior

  • A shift toward essentials/services

• That tends to keep top-line revenue growing nominally (prices help) while unit volumes soften.

So your intuition is right: you can get revenue resilience with margin pressure.

2) Money supply growth outlook: positive but not “reflationary turbo”

I’m going to avoid claiming a specific forecast number for M2 from these sources because most “outlook” reports don’t forecast M2 directly in a consistent way. Practically, what matters for markets is whether money/credit conditions are:

• Re-accelerating (risk-on, easier)

• Flat (range-bound)

• Tightening (risk-off)

Given the broader outlooks expecting continued expansion and some easing (not tightening), the implied baseline is: no major credit contraction, but also not a return to 2020-style liquidity.

In your framework: M2 slowing + jobs slowing argues for disinflationary growth, but tariffs + energy reintroduce cost-push inflation.

That is a tricky combo for the Fed.

3) How this affects the Fed: the “cuts are conditional” regime

Multiple outlooks point to the Fed being able to ease somewhat in 2026, but with inflation risks limiting the pace: JPMorgan on Fed rate cuts, iShares Fed outlook / rate forecast framing.

Your setup (slower growth + higher headline/cost pressures) pushes the Fed toward:

• Less urgency to cut if core is sticky/rising

• Willingness to look through energy spikes if they believe they’re temporary

• But if tariffs/energy feed into services inflation/wages or inflation expectations, they can’t ignore it

So the Fed’s reaction function becomes:

“We can’t cut unless growth weakens enough to dominate the inflation impulse.”

That’s why you can have contained 10Y yields even as risk assets wobble: markets price growth risk while the Fed stays cautious.

4) S&P 500 aggregate demand & revenue growth: nominal ok, real/margins at risk

A useful way to think about S&P revenues is:

• Nominal demand drives reported sales

• Real demand drives volumes and operating leverage

• Input costs (labor + energy + tariffs) drive margins

If tariffs/energy lift prices while incomes/spending growth cool:

• S&P top-line can look “fine” (inflation helps revenues),

• but:

  • consumer-facing margins get squeezed (cannot pass through fully),

  • industrials face input costs,

  • and the “multiple” (P/E) can compress if rates stay high.

These outlooks commonly still embed decent EPS growth (often double-digit), which increases the market’s sensitivity to any earnings revision cycle: Investing.com consensus discussion, JPMorgan 2026 outlook (PDF).

Implication: the market can tolerate “some” cost-push inflation only if:

• pricing power holds, and/or

• productivity offsets costs

That’s where AI/productivity narratives matter to index-level margins.

5) Rates and the yield curve: competing forces → likely more steepening, but with volatility

Several outlooks expect continued curve normalization/steepening as short rates drift down more than long rates, while deficits/inflation risk keep the long end from collapsing: Transamerica 2026 outlook, James Investment 2026 outlook.

Given your facts:

• If energy/tariffs lift near-term inflation prints, long-end yields can remain sticky (term premium).

• If growth slows (income/spend/jobs cooling), the front end can price eventual easing, steepening the curve.

So the near-term likely set is:

• Range-bound but volatile 10Y

• Curve steepening bias (cuts priced in later; long end anchored by term premium)

6) How this “plays out” (probability-weighted scenarios)

Here’s a clean 3-scenario map for the next ~6 months:

Scenario A (Base): Soft landing + cost-push bumps

• Income/spend growth slows but stays positive

• Core inflation sticky; headline jumps on energy

• Fed pauses; cuts delayed

• Equities: choppy, selective; earnings revisions modestly down

• Curve: mild steepening

Scenario B: Growth scare dominates

• Consumers retrench; earnings revisions fall

• Fed becomes more dovish despite tariffs/energy

• Equities: drawdown, then recovery on “Fed put”

• Yields: down; curve steepens more

Scenario C: Inflation re-accelerates meaningfully

• Tariffs/energy feed into broader core/wages

• Fed signals tighter-for-longer (or hikes)

• Equities: multiple compression; leadership narrows

• Yields: up at the long end; curve can re-flatten

Tariffs are a key swing factor here, and Yale Budget Lab’s work is directly relevant because it highlights the price-level impulse as a central channel: Yale Budget Lab – tariffs.

My Take

I simply do not see any pathway forward for a rally in the stock market, assuming continued fighting with Iran. Even without the war, inflationary pressures are mounting, which I have been saying would occur for about 18 months now. While I have been playing a lot of theta trades, I am gearing up for a bigger move to the downside with the stock market as the economy slides nearer to a zero-growth landscape.

It is Sunday evening for me, and I am looking at the market opens getting ready for the week ahead. The responses to the latest conflict in the Middle East are jaw-dropping when you look at some of the charts (See below). Oil prices have shot up at to levels that are double from December’s lows—nearing COVID-supply shock levels—while the stock market is down some 2.25% in overnight trade.

This may shift back quickly.

It is not all bad. Some market metrics are actually moving positive for the US, which I will point out below.

The moves from oil are really driving everything. Next, will be higher prices at the pump, and the outrage from Trump’s remaining base will be swift and loud. Eventually, Trump will have to shift, as he always does. While there may not necessarily be a reason for the stock market to rally to new highs, some rebound is likely. Also, the price of oil will have to come back downward.

In the meantime, showing that some aspects of the market have not panicked yet, the US dollar index is rallying and Treasury yields, a.k.a., credit, have not shown signs of panic… yet.

Oil - West Texas Intermediate

This is where the real shock lay: The price of oil is up 100% since November lows, and this has occurred in short order. With 20% of the world’s oil production passing through the Straights of Hormuz, shutting that down has devastating consequences.

This is a bargaining chip for Iran at the very least. In the meantime, Trump will not be able to sustain the outcry this is creating. Trump campaigned on two promises:

• No Wars

• Lower gas prices

He has handily broken both of these promises. Fracturing portions of his base are bleeding out of their eyeballs, and no amount of political posturing will be able to cover this up.

US Treasury Yields

In the meantime, here is one of the things I always check, that being yields for credit. While there has been some movement, this is more likely attributed to economic data from last week more so than Middle East tensions.

We also have crucial economic data coming this week with CPI, which on the heels of last week’s PPI, I could expect increases for consumer prices. Prices at the pump will hit consumers in a couple of months, but passthrough and trickle-through price pressures will take additional time. If we see increases in price pressures from this week’s report, this will add to increases in yields. Given the steep loss of jobs seen last week, this creates a duality of inflation and low employment, and that will put the Fed in a bind. Here’s the important note on that: The Fed will pressure interest rates higher to combat price pressures first, then shift to creating policy that could promote job growth. In that scenario, the stock market does not perform well.

US Dollar Index

The dollar is moving up. Mostly, this is likely safe-haven moves out of riskier investments. At the same time, as the 10-year Treasury trickles higher, this attracts investors out of those riskier investments into more predictable markets.

AI Prediction

There is a lot of potential in what comes next. Framing the appropriate questions gets interesting. Pulling together all of the potential economic inputs makes this a fun exercise, to say the least.

The Query

Activity in the Middle East is getting more serious. Iran is fighting back as best they can, and they have been disrupting many everyday lives in neighboring countries. Iran has also shut down the Straight of Hormuz. This has some 20% of the world’s oil supply moving through it, and the price of oil at this moment is sitting over $100.00 for WTI, which is double where it was in late December. The price of gasoline at the pump is shooting up rapidly because of the supply shock. Meanwhile, the stock market is starting to sell off in early trade as the short-term increase in the price of oil will have economic repercussions for world economies. However, the US 10-Year Treasury yield has remained contained and the US dollar index has seen increases—both promising events that show there is not real panic in the financial system.

Let’s talk about the TACO Trade where Trump always chickens out. With all of the previous moves where Trump has tried to act tough, there have been many ways upon which he’s had to reverse course because the reaction was opposite–and potentially seriously damaging. Lay out at least 5 scenarios where Trump has chickened out, how the markets have reversed course, then lay out what would likely occur with the price of oil because of Trump having to back down in response to the shutdown of the Straight. Also, what are some scenarios for the Treasury yields in the near future along with what may occur if Trump does reverse in some way for the stock market.

The Response

can’t verify the specific claims in your setup (e.g., “Iran has shut down the Strait of Hormuz,” WTI “over $100,” or what’s happening in “early trade”) without checking live sources. Also, I should be careful with the “TACO trade / Trump always chickens out” framing: I can discuss policy reversal patterns and market reactions, but I’m not going to assert intent or psychology as fact.

If you want, I can pull the latest headlines/market prints via web search after this; for now I’ll answer in scenario form (which is what you’re really asking for).

1) First: if Hormuz is disrupted, the macro transmission is very mechanical

A Hormuz shutdown / severe disruption is an oil supply shock. The chain is:

1. Oil up → gasoline/diesel up quickly

2. Inflation expectations up (near-term)

3. Real disposable income down (consumer hit)

4. Corporate margins squeezed (unless you’re energy)

5. Risk assets down, especially high duration/growth

6. Policy reaction function becomes messy: central banks dislike cutting into an inflation spike

But you’re also correctly observing something important: if 10Y yields stay contained and DXY rises, it often means:

• Flight to quality (Treasuries)

• Global risk-off bid for USD liquidity

• Not necessarily “panic,” but definitely “stress bid” behavior

2) “TACO trade” mechanics (policy shock → market tantrum → walk-back → reversal)

Whether it’s Trump or any administration, the market pattern that creates a “TACO” narrative usually looks like:

1. High-impact policy threat (tariffs/sanctions/export controls/pressure campaign)

2. Markets reprice growth + inflation + margins

3. Financial conditions tighten (equities down, credit spreads widen, volatility up)

4. Political/economic constraints appear (industry lobbying, court blocks, legislative pushback, allies’ retaliation, poll shock, supply chain impact)

5. Policy is delayed, watered down, given exemptions, or reframed

6. Markets mean-revert (most violently in what sold off most)

That’s the trade.

3) At least 5 “chickened out” scenario archetypes (how markets reverse)

You asked for “at least 5 scenarios where Trump has chickened out.” I’m going to interpret this as five repeatable types of reversals markets often see during Trump-era style brinkmanship, because listing “at least 5 specific historical instances” needs sourcing and exact dates/market moves (which we can do with web search if you want).

Scenario A: Tariff escalation → exemptions / delays

• Shock: threaten broad tariffs.

• Market reaction: cyclicals and semis down, importers/retail down; inflation breakevens pop; vol up.

• Walk-back: exemptions, phased schedule, “talks going well.”

• Reversal: risk-on bounce; hardest-hit sectors snap back; USD can soften if global growth fears ease.

Scenario B: “Firing / attacking Fed” rhetoric → softening

• Shock: rhetoric implying pressure on Fed independence.

• Market reaction: long-end yields rise on credibility risk; USD can wobble; gold up.

• Walk-back: “I have no intention…”, or re-focus elsewhere.

• Reversal: yields retrace; equities stabilize; gold cools.

Scenario C: Debt ceiling / shutdown brinkmanship → last-minute deal

• Shock: US governance risk.

• Market reaction: front-end funding stress; bills dislocate; risk assets down.

• Walk-back: deal/extension.

• Reversal: funding normalizes; equities rebound; vol collapses.

Scenario D: Geopolitical “maximum pressure” → negotiated off-ramp

• Shock: threat of escalation.

• Market reaction: oil up; defense up; airlines/transports down; broad market weak.

• Walk-back: ceasefire talks / humanitarian corridor / partial de-escalation.

• Reversal: oil down quickly; equities rebound, especially consumer + transports.

Scenario E: Aggressive trade/tech restrictions → licensing regime

• Shock: sweeping bans.

• Market reaction: targeted sectors gap down (chips, industrial automation, cloud).

• Walk-back: licensing, carve-outs for allies, delayed enforcement.

• Reversal: the sector rebounds; leadership resumes if earnings intact.

If you want specific Trump examples with dates (and “market reversed course” receipts), tell me which domain you mean—tariffs, Fed, shutdown/debt ceiling, immigration, Iran/NK, etc.—and I’ll pull a sourced timeline.

4) Now apply that to your Hormuz setup: “Trump backs down” → oil path scenarios

With a chokepoint disruption, oil can move fast on headline risk and then retrace just as fast when probability of sustained outage drops.

Oil path scenario 1: Rapid de-escalation / partial reopening

• Catalyst: negotiated corridor, naval escort, limited reopening.

• Oil: spikes fade; WTI could retrace a large portion in days/weeks because risk premium collapses.

• Gasoline: remains elevated briefly (refiner lag + inventory) then eases.

Oil path scenario 2: “Face-saving” standoff + intermittent disruptions

• Catalyst: no full reopening, but flows resume intermittently.

• Oil: stays high but choppy; risk premium persists.

• Gasoline: stays sticky-high longer; consumer sentiment hit.

Oil path scenario 3: Sustained closure / broad regional escalation

• Catalyst: attacks on infrastructure/shipping persist.

• Oil: remains structurally >$100 with upside tails.

• Macro: recession probability rises materially; central banks trapped.

Your “TACO” angle most naturally corresponds to Scenario 1: the market forces the off-ramp because the economic damage is immediate and politically toxic (gasoline is the most visible inflation).

5) Treasury yield scenarios near-term (given oil shock + risk-off)

Treasuries respond to two forces that pull opposite directions:

• Inflation shock (oil up) → yields up

• Growth shock / risk-off → yields down (flight to safety)

So you can get “contained 10Y” exactly as you described.

Yield scenario A: Risk-off dominates (most common in acute shocks)

• 10Y: down or flat (contained)

• Curve: bull steepener or bull flattener depending on Fed expectations

• Interpretation: recession-risk channel stronger than inflation channel

Yield scenario B: Inflation credibility dominates

• 10Y: up meaningfully; real yields up; breakevens up

• Interpretation: market fears policy behind the curve / unanchored expectations

• Risk: worse for equities (especially AI/growth)

Yield scenario C: Policy “dovish put” emerges (Fed looks through oil)

• 10Y: down; front-end prices cuts; long-end anchored

• Equities: can rally if oil premium fades too

6) Stock market if Trump reverses (in the presence of an oil spike)

If the administration “backs down” in a way that increases probability of reopening Hormuz / reducing disruption:

Likely equity sequence

1. Energy stocks: may give back some spike gains if oil falls quickly.

2. Broad market: relief rally (SPY up).

3. Most sensitive winners:

• Transports, airlines, consumer discretionary

• Small caps (if recession fears fade)

• High-duration tech (if yields stay contained)

What does not happen automatically

A “policy walk-back” does not instantly restore confidence if:

• Physical supply is still constrained

• Insurance/shipping rates remain elevated

• Inventories draw down

• Retaliation risks persist

So the rally depends on whether it’s a real de-escalation or just rhetoric.

7) One important caution on the premise

A true, sustained Strait of Hormuz shutdown is an extreme event; if you want this analysis to be anchored to reality, I can quickly check:

• Whether there is an actual closure/disruption being reported

• Current WTI print

• DXY and 10Y moves

If you confirm you want that, I’ll run a web search using exactly your phrasing (Hormuz shut down, WTI over 100, etc.) and then refine the scenarios with real-time context.

My Take

I got out of one leg of my trade last week feeling that I did well with what occurred in the market. I was long put spreads, and took profits that were nearly 2x my costs. I am still short the call spreads, but they have dwindled in value significantly—I am going to sit on them and allow for more decay, albeit there is not much value remaining.

Mostly, I don’t see a significant move downward in equities. I do not believe that Trump can afford to continue with the fight, and at some point the administration is simply going to declare a victory of sorts, then move onward.

I also don’t see any real rationale for a significant rally upward in stocks. Given that, I am playing Theta with options, and I am likely going to continue with that as I don’t see meaningful moves.

That being said, I am trying to short oil. At the very least, neighboring countries will be able to negotiate oil passing through. In fact, it is very possible that these neighboring countries throw out US troops in favor of defending themselves, which could be a win for all. Regardless, the world will not tolerate these high oil prices for too long.

Nvidia reported earnings Wednesday night after the bell. The company reported larger than expected revenue and profits beating across the board. Where it missed was easing concerns for investors. The next trading day saw NVDA stock sell off 5%.

The chart above shows where the “AI Trade” has moved, and where it is at the moment. In 2023, OpenAI announced its conversational search engine. Because Nvidia’s chips power the lion’s share of the AI foundation, during the following two years, NVDA stock moved from ~$40 in 2023 to over $200 in 2025.

Now, however, the concerns are growing that the OpenAI deal Nvidia is putting together have stalled, AI stocks are overpriced, software companies may see their hegemony be eliminated by AI’s possibilities, circular investments are unstable for the entire industry, and just maybe AI could actually be bearish for the economy.

While my main focus is on economic data and how that will show a roadmap to where the stock market moves next, the AI trade may be more important than where the economy may be moving.

Looking at the NVDA chart above, one can see that the stock has stalled lately. I want to point, however, that just maybe it is time for NVDA stock to move lower, and with that, likely we see the entire bull market correct.

NVDA Valuation

What is NVDA stock worth? Starting with back-of-the-napkin mathematics, Nvidia should return some $8.29 for investors during the coming year. What should investors pay to ‘earn’ those forward earnings? According to Y-Charts, the market is paying ~23.80 for forward earnings across the board for the S&P 500. If this were a solid gauge, NVDA stock would be trading at $197.30.

A look at the valuations for NVDA moving beyond this year’s forward P/E ratio start to make Nvidia stock look frothy, and with that the broader AI Trade.

Consider using a Discounted Cash Flow (DCF) statement to value NVDA stock—A DCF would calculate the price of what an investor should pay for NVDA stock ownership based upon an approximate 10 year calculation. A DCF would take the total amount Nvidia would earn in revenue and profits, and discount that amount for an investor to today’s price based upon other investment opportunities.

If you looked at ownership in Nvidia from a longer-term perspective, NVDA stock might be a better buy at $100.00. The problem is that while Nvidia continues to increase revenue and profits at a sizable rate, expectations are that this rate declines significantly to more natural levels in about 2 - 3 years after companies reach scale.

This is concerning in that NVDA stock has been the real heartbeat of the AI Trade. If Nvidia stock were to fall, consider all of the others that might follow suit.

Circular Investing

There are concerns about circular investing that are warranted, such as large AI companies investing in smaller startups, then those startups turn around and use the very same funds to purchase cloud services from the bigger, partner companies. What happens if these smaller startups never progress to larger scale, and are forced to turn back to these larger investors for even more funds? That systemic risk could perpetuate.

Beyond that, even the bigger firms have yet to materially grow their top line revenue despite hundreds of billions being spent on the infrastructure. Potentially, sizable and sustainable profits from the massive investments may not materialize. More likely, profits will show up, however they will take a much longer period of time to materialize.

Could AI Be Economically Bearish?

Everyone has seen the potential headlines that AI will, not if, come for their job. I am dubious on this as I believe that AI will augment jobs, but not necessarily replace them en masse. In my own research, I am gearing up to do more with AI, but I cannot foresee a potential situation where mass layoffs occur. Instead, I see more depth and focus, and higher productivity, but that employment gains will materialize in the long run. Still, there will be shifts from the start, and already headlines have been printed indicating this.

What about Iran?

I do not see the war with Iran turning into a major regional outbreak, and even if it did, Iran simply does not possess the resources nor the allies to last long. Oil will not be permitted to stop flowing through the Straights of Hormuz, that is one absolute that the world would not be able to tolerate. Mostly, I believe this will be contained.

AI Prediction

I placed a trade in January that the stock market would not move too much, but if it did, down would be the most likely direction. I did well through the trade, but the market really did not move anywhere, actually.

Now, I am considering placing the same trade this week now that Nvidia has reported, and earnings season is generally over. My belief is that the economy will continue to expand at a slower and slower pace, and that employment will moderate. More, I believe the AI Trade will take a hit and these stocks will start to sell off quickly.

Given the latest news and Nvidia’s earnings, let’s see what AI thinks of the AI Trade potential.

The Query

I want to focus more on the AI trade. Last week, Nvidia released its earnings. NVDA stock performed poorly the next day and thereafter, but has since leveled out. Given the circular investments of the main AI players, the investments of larger companies into smaller startups, only to have those smaller companies pay for services to the larger investors, and overall potential bearishness of AI for the economy as individuals are likely to be laid off, how does all of this play out? What do you predict with AI companies and their revenues, how employment may eventually be affected by AI, and the stock market given these likely scenarios?

The Response

Good — now we’re getting into the structural plumbing of the AI trade rather than just price action.

You’re pointing to three real concerns:

1. NVDA earnings reaction despite strong numbers

2. Circular capex / revenue recycling within AI ecosystem

3. Long-term labor displacement risk

Let’s unpack them in layers: short-term market mechanics, medium-term revenue durability, and long-term economic impact.

1️⃣ Why Nvidia Can Beat and Still Sell Off

This is classic late-cycle leadership behavior.

When a stock:

• Has become the primary macro expression

• Is heavily owned

• Is priced for acceleration, not growth

Then:

“Strong” is not enough. It must be “stronger than trajectory.”

What likely happened:

• Revenue beat ✅

• Guidance strong ✅

• But incremental acceleration slowed ❌

• Or margin trajectory plateaued ❌

That’s not bearish structurally. It’s multiple compression without narrative break.

Leveling out afterward tells you:

• No institutional exit stampede

• No earnings credibility break

• Just position recalibration

That’s consolidation behavior, not topping behavior.

2️⃣ The Circular Investment Problem (This Is Real)

You described it correctly:

• Hyperscalers invest in AI startups

• Startups spend capital on hyperscaler cloud

• Chip vendors sell to hyperscalers

• Hyperscalers resell AI tools

• Equity ownership overlaps across ecosystem

It creates:

• Revenue amplification through ecosystem recycling.

The risk is not fraud. The risk is demand circularity.

The key question: Is AI spend being funded by: A) End-user monetization
B) Or venture capital / balance sheet subsidies?

Right now it’s a mix.

But here’s the important macro distinction:

If hyperscaler AI capex is funded from:

• Operating cash flow

• Not debt issuance

• Not speculative leverage

Then the system is self-financing.

And that appears to still be the case.

The real danger would be:

• Startups collapsing

• Hyperscalers cutting capex sharply

• Enterprise clients delaying AI integration

We are not seeing that yet.

3️⃣ Revenue Outlook for AI Companies (Next 6–12 Months)

I’ll divide this into tiers:

Infrastructure Tier (NVDA, chips, networking)

Near-term:

• Growth moderates

• Still elevated vs history

• Margins remain strong

Revenue likely:

• Still positive

• But decelerating from peak growth rates

Market reaction:

• More sensitive to guidance

• Less tolerant of misses

Hyperscalers

AI is:

• Increasing capex

• Increasing revenue

• Compressing free cash flow temporarily

But monetization is improving.

Revenue impact:

• Slower, more stable growth

• AI embedded into enterprise SaaS pricing

Less explosive, more durable.

Application / AI-native Companies

This is where risk lives.

Many:

• Trade on TAM narratives

• Not profit durability

Expect:

• Dispersion

• Some collapse

• Some consolidation

• A few durable winners

Just like 1999–2002 — but without the leverage bubble.

4️⃣ Employment — The Big Question

Right now: AI is augmentative, not displacing.

Historically: Technology affects employment in three waves:

1. Productivity boost without layoffs

2. Hiring slowdown

3. Gradual role elimination

We are still in wave 1.

If displacement comes, it likely shows up as:

• Lower hiring velocity

• Not mass layoffs

Which means:

• Payroll growth slows

• Wage pressure softens

• Corporate margins improve

That is ironically: Bullish for equities initially.

Only later does:

• Consumption weaken

• Political pressure rise

• Regulation increase

That’s multi-year, not 2–5 months.

5️⃣ Is AI Bearish for the Economy?

Short-term: No
Medium-term: Neutral to mildly positive
Long-term: Depends on distribution effects

Why?

Because productivity shocks:

• Lower unit labor costs

• Support margins

• Support GDP

But: If labor displacement outpaces wage growth, you get demand weakness.

We are not there.

6️⃣ Stock Market Implications

Here’s the most important distinction:

The market doesn’t care if AI replaces jobs. It cares if:

• Earnings grow

• Liquidity holds

• Discount rates stabilize

Right now:

• Earnings still growing

• M2 positive

• Inflation drifting lower

• Fed on hold

That’s not bearish for equities.

7️⃣ Where AI Stocks Likely Go (2–5 Months)

Base Case:

• Volatile consolidation

• No collapse

• Rotation periods

• Leadership narrowing

Bull Case:

• Inflation continues drifting lower

• Real yields ease

• NVDA and peers reaccelerate

Bear Case:

• Capex guidance cuts

• AI monetization stalls

• Real yields spike

Probability-weighted: Consolidation with upward bias.

8️⃣ The Bigger Structural Question

Is this 1999?

No.

Because:

• No systemic leverage explosion

• Cash-rich megacaps

• Real revenue growth

• No widespread retail mania comparable to dot-com

But we are in: Late-cycle multiple sensitivity.

Which means:

• High-quality AI leaders survive

• Marginal players get repriced

Final Synthesis

Over next 2–5 months:

AI revenues:

• Continue growing

• Decelerating but strong

• Infrastructure solid, apps selective

Employment:

• Hiring slows before layoffs rise

• Wage growth cools gradually

Market:

• Broader index stable

• AI volatile but not structurally broken

The AI trade is transitioning from:

“Narrative expansion” to “Earnings validation phase”

That phase is choppier, but not necessarily bearish.

My Take

On Friday, after the Nvidia release calmed down, I went ‘short’ the S&P 500 via selling out-of-the-money vertical call spreads, then buying out-of-the-money puts. The world woke up to a different world on Saturday as the United States launched a war against Iran. Market sold off somewhat Monday, but then fell sharply on Tuesday. I bought back my vertical call puts as they were in-the-money and took profits on those—it was a gift I could not pass up so rapidly. I tried to get out of the calls, but the spread never hit my offer. As this market continues to trickle back upward, I will repurchase the puts again. Mostly, the stock market has not moved from its original position, and everything appears to be stuck at eh same levels. I do not see any real reasons for their to be any rallies as of right now. Inflation prices heated up with PPI on Friday, and this will continue to keep a lid on the Fed moves. With potential shipping disruptions through the Straights, and other disruptions within the region, I just don’t see rallies happening.

With that, AI said some things about NVDA that while there are concerns, mostly the stock is consolidating. The report was astounding, and yet NVDA fell 5% the next day—how much more would it take? On some level, I can see the market getting weary on the AI trade for now, but not exiting for any real reason.

These are the reasons I will remain short in some capacity or another. If I can get back into my long vertical puts, and then we see moves lower, I will either take profits again, or simply sell overnight positions versus the longer-dated long position to continue to bring in premium.

Eventually, however, it is possible that the market, which is near all-time highs, just might capitulate to AI angst and the new war. If I can get back into the long vertical puts, and they go back into the money, I will take those profits and likely step back to reassess what may be next with the AI trade and geopolitics.

Over the past couple of weeks, doubts have been seeping back into the AI story. Some stocks are seen by the market as being vulnerable due to replicability by AI. Some software company stocks have taken large hits to their valuations from wavering expectations.

The carnage is not just software: Real estate REITs have taken a hit as work-from-home is even more likely. While there are many individual sectors that are softening from selling in AI, taking a look at the broader picture is a great place to start.

The AIQ ETF is a great overall ETF to see what is happening with AI. As the chart above shows, there are concerns, and a modest top is in place.

My take on this has been consistent: AI will have winners and losers, and we are now at that point where simply having the AI label in a company’s business model no longer is enough to push the stock higher. Most believe that there is a bubble percolating in the industry. Maybe. Some companies are actually printing results and their respective valuations are not necessarily frothy.

There is also the proverbial K-shaped economy: there is AI expanding, and the more traditional economy remaining stagnant. Interestingly, directions may shift and flip.

Economic Data

Over the past week, economic data hit for both employment and inflation. My focus is usually key economic data, but the AI story has been the story, so coupling them is where I have been putting my positions.

The Employment Situation

Employment printed 130K for the month. There were downward revisions to past data that ultimately showed the US created a mere 180K jobs in all of 2025. Meanwhile, the unemployment rate dropped somewhat. This gives the Federal Reserve barely any incentive to push rates lower as there is some growth in jobs. As for 2025, mostly the cumulative lack of job growth was driven by large chunks of federal government employees quitting.

I still do not see a printable recession given where the economy is at this point. If there is still employment growth through 2026—my expectation—there is not a real compelling story from the employment side of things that would get the Fed to move lower—employment is only one half of the equation.

Inflation

Inflation has been falling, as the latest CPI data shows (above). I typically focus on the annual rate of change with the Core PCE—so does the Fed. They move similarly, but it is not a pure 1:1 relationship. Still, the print could give the Fed some hope for achieving its 2.00% target rate goal.

Money Supply & Inflation—Don’t Expect A Fed Cut

Beyond inflation, when it comes to economic data, I gravitate to the M2 Money Supply growth rate along with the Personal Income growth rate—due this week. If the money supply is growing, this shows that firms are taking on risk and expanding, as well as consumers spending.

The Money supply is seeing an accelerating pickup in pace again (See Above). Inflation follows suit. So, while the tariffs have burdened the economy, there is still resilience. We are now awaiting the Supreme Court’s ruling on the constitutionality of the tariffs. I fully expect the tariffs to be struck down as being an unconstitutional overreach by the executive. Imagine what will happen with the economy if the ball and chain are removed from the ankle!

If the money supply continues to expand as it is doing, and the tariffs are struck down, price pressures will certainly follow suit on an upward growing pace. The Federal Reserve will be in no position to lower interest rates with that kind of scenario.

This, ultimately, will also push the ‘other’ economy into an expansionary mode. AI has been the real support for the economy over the past couple of years. If the consumer is unshackled, then the consumer can do what it does best: Get the cash registers ringing again.

If that were to occur, the Fed would be in no position to lower rates, nor would they need to be because the economy would be expanding.

AI Prediction

For the past month, I held a position where I sold an out-of-the-money vertical call spread for $0.45 while buying an out-of-the-money vertical put spread for $0.28. They expired on Friday. The trade was profitable, but not wildly. First the calls expired worthless, so I collected the entire $0.45 of that side. On the puts, they expired almost dead on at the money, and I closed that side at $0.32. Meanwhile, I had sold a few positions either 0DTE or overnight against the puts to bring in additional funds while keeping risk contained. In total, I earned nearly $1.00 for the month on that trade. There was a bit of size, so that was nice to start the year. I push my size somewhat because I am comfortable doing so. With that big push, this could have been a 1% return for the month.

When I inquired about the trade with AI, the system felt I had “won the trade” and the responses were always that there was a fear of seeing profits evaporate. Meh… I don’t mind risk.

The truth is, no matter what, being correct about the market is the only real path for profits. This requires taking a position in the market, and choosing a side.

My thoughts are that the stock market may come down somewhat, if but briefly. I don’t necessarily believe the selling we’ve seen the past couple of days is enough. AI does not appear to have a point of view on this either, and hedges its responses.

The Query

M2 money supply has increased to 1.09% year-over-year growth while employment numbers have come in showing gains of 130K for the latest month, albeit this is off a year where the federal government shuttered many jobs and all of 2025 printed 180K in total new non-farm payroll gains.

Simultaneously, the CPI data is showing a slow move lower in the year-over-year growth rate in the Core CPI at 2.50%, this is down from 2.65% the month before.

The 1.09% increase the M2 money supply from the previous prints of 1.05% shows that there is growth in the economy, and this will likely push employment gains along with price pressures.

From that, I do not expect the Federal Reserve to have a great deal of room to lower interest rates if the economy continues to print jobs and the rate of growth in inflation continues to move toward the 2.00% target rate, but at a modest decline. If the money supply continues to increase, this shows there will be lagging data that will show employment increasing again, and also the correlation between the growth of money, personal incomes & expenditures add to price pressures.

First, what is your long-term take on this over the next six months with the possibility of increasing employment and inflation?

Next, there are AI stocks. Many stocks have sold off lately in response to AI potential displacement, of which there is no real concrete evidence that AI has really disrupted many jobs at all.

What are your thoughts on the leading AI stocks going into the next 2-5 month period of time considering the concerns of total investments by companies, concerns from stock market participants, and overall valuations on these AI stocks?

Also, balance the two areas in your response with ideas on the broader economy and what could happen in the stock market in the medium-term versus AI stocks and what may occur with these stocks during this same period.

The Response

You’re layering this correctly — liquidity → labor → inflation → Fed constraint → equity leadership rotation. Let’s treat this as a regime forecast rather than a single-variable call.

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Part 1: Six-Month Macro Outlook

(M2 1.09% YoY | Core CPI 2.50% drifting lower | 130K jobs | 2025 weak aggregate payroll year)

First: Important nuance on M2

1.09% YoY is positive, but historically:

• Below 3–4% → neutral liquidity

• 5–8% → expansionary

• 10%+ → inflationary impulse

So right now we’re in:

“Stabilized liquidity,” not accelerating liquidity.

That matters. M2 rising from 1.05% to 1.09% is incremental, not regime-shifting.

---

Where this likely goes over 6 months

1. Employment

130K is:

• Below long-term expansion average

• Above recession threshold (~0–50K)

• Consistent with soft landing

2025 total payroll growth of 180K for the entire year tells us something important:

The labor market already cooled.

Unless M2 materially re-accelerates (toward 3–4%+), you’re unlikely to see employment reheat sharply. Money supply leads labor, but with:

• 6–12 month lag

• And amplitude dampened when credit standards are tight

So I do not expect a reacceleration in hiring. I expect:

• 75–150K monthly prints

• Gradual upward drift in unemployment

• No collapse

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2. Inflation

Core CPI drifting from 2.65 → 2.50% is meaningful.

If:

• Wage growth moderates

• Shelter lags continue rolling over

• Goods stay flat

Then inflation likely oscillates 2.2–2.7% over next 6 months.

That is:

Too high for aggressive cuts
Too low for hikes

Which traps the Fed in: “Restrictive but patient.”

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3. Fed Constraint

You’re right: The Fed has limited room to cut unless growth rolls over.

But they don’t need to cut for equities to rise.

Historically:

• Flat rates + positive earnings = bullish

• Rate cuts + falling earnings = not bullish

We are closer to the first setup.

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Macro Summary (Next 6 Months)

Most probable path:

• Mild USD softness

• Inflation drifting toward 2.3–2.6%

• Payrolls steady but unspectacular

• Fed on hold

• Equity volatility suppressed

This is not an overheating scenario. It’s a late-cycle glide path.

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Part 2: AI Stocks (2–5 Month Horizon)

Now we zoom in.

Important distinction:

There are two AI trades:

1. Infrastructure (chips, hyperscalers, hardware)

2. Application layer (software, services, automation)

Right now the concern is:

• “Overinvestment”

• Capex saturation

• AI replacing jobs

• Valuation stretch

But here’s the reality:

AI has not materially displaced jobs.

Productivity improvements show up first in:

• Margin expansion

• Capex intensity

• Revenue per employee

Labor displacement comes later — if at all.

So job fears are mostly narrative-driven at this stage.

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What actually drives AI stocks over next 2–5 months?

Three variables:

1. Capex guidance

If hyperscalers:

• Maintain or increase capex → infrastructure stocks rebound.

• Signal moderation → multiple compression continues.

2. Earnings revisions

If earnings estimates hold → dips get bought. If revisions turn negative → correction deepens.

3. Liquidity + rates

AI stocks are long-duration equities. They care more about:

• Real yields

• Discount rates Than about CPI drifting 0.15%.

Right now real yields are not spiking. That’s key.

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My Tactical View on AI Stocks (2–5 Months)

Base case:

• Volatility

• Rotational pullbacks

• No structural unwind

Why?

Because we are not in:

• Tightening liquidity

• Spiking real yields

• Credit stress

We are in:

• Slower but positive liquidity

• Stable inflation

• Flat rates

That supports multiple stabilization.

However:

If macro drifts softer:

• Broader market may outperform AI

• Defensive rotation

• Equal-weight outperformance

If macro stays stable:

• AI leadership resumes after consolidation

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Now Balance the Two: Broader Market vs AI

Broader Market (SPY-type exposure)

Pros:

• Earnings breadth improving

• USD softness supports multinationals

• Rate stability

• Lower valuation risk than AI leaders

Risk:

• Multiple already elevated

• Earnings growth must continue

Likely outcome:

Grinding advance, modest volatility, shallow pullbacks.

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AI Leaders

Pros:

• Structural productivity story intact

• Capex cycle not done

• Margins supported

Risks:

• Valuation compression

• Crowded positioning

• Earnings disappointment punished harshly

Likely outcome:

More volatile than SPY
Higher upside beta
Higher downside beta

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What Could Change the Script?

Bearish Catalyst

• M2 stalls or turns negative again

• Core CPI re-accelerates above 3%

• Real yields spike

• Capex guidance cut sharply

Bullish Catalyst

• Core CPI breaks toward 2.2%

• Productivity prints strong

• AI revenue shows monetization acceleration

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Final Synthesis

Over next 6 months:

Macro likely:

• Stable but cooling

• Inflation drifting lower

• Fed paused

• No shock

That environment favors:

• Broader index stability

• Rotational leadership

• AI consolidation rather than collapse

AI stocks may underperform in short bursts, but unless liquidity tightens materially, this is not the end of the cycle.

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If you’d like, next we can:

• Model a downside case (SPY -8%) and see how AI behaves

• Or build a probability-weighted scenario tree for next 6 months

• Or dig into whether we’re in 1999, 2018, or 2021 analog territory

Your framework thinking is very coherent — you’re asking regime questions, not headline questions.

My Take

While I would not mind being short right now with the disappointment coming from the Fed not lowering interest rates and AI stocks likely to wobble further, the K-Shaped economy also may flip somewhat if economic growth continues to generate momentum. This week, I have sold some vertical puts while the market has remained tightly moving sideways, but I wonder on a strong burst higher in market activity very soon?

The Dow pushed through the 50,000 level last week, and this week is continuing. There are a few things to point out about this, though. First, since 2020, the Dow average is up impressively 100%. During this same time, however, the Nasdaq average has gained double that at 200% increase. On the one hand, the Dow posting through the 50,000 is a milestone, but it is almost inevitable as the US economy continues to expand. On the other hand, the Dow is actually a laggard in this position, and there were obvious other opportunities—at this point, the Dow may only be catching up.

There is another issue that may be something to consider, and that is the debasement trade: Are governments giving up on their debt piles and going to simply debase their currencies and economies? From this, with a move in inflation, are there actual gains in the stock market, or is this just inflation?

Beyond that, where are we with the economy? This week will see two key indicators in jobs data and inflation numbers. There is a strong correlation between key economic indicators, and I see the potential for continued high price pressures along with additional job gains. This may be disruptive with the hopes of stock market participants, but with a strong economy, that would boost legacy style stocks, which is where I am leaning toward.

How is the economy?

There is a continuous feeling of unease with the economy… and, it is showing up everywhere except the data. Consumer sentiment is sitting near its all-time low. The jobs data continues to show increases in new jobs created, but not at any pace worthy of note; jobs are not being created or destroyed at a pace that is out of norms.

The money supply, however, is starting to see a tick back up, as the chart above shows. For me, I see this as a push & pull: If firms are taking on new loans at an increasing rate, this would create more jobs, which would create more expenditures in the economy… which would give firms more confidence to take on more risk and add to employment.

While the numbers are improving, the pace is below far below what could be termed blistering.

This adds to inflation, and very likely this week’s report will show increases in price pressures because of increasing demand.

I see continued economic increases, ceteris paribus—all else remaining constant.

Debasement

There are a lot of fears of the dollar being debased as government debt-loads become so large that they are a burden beyond means. The dollar collapsing is one thing being pointed to as proof this is happening in the FX world.

I don’t agree with this… for now.

The value of the dollar is a reflection of the valuation of its counterpart currencies. The yen has been sliding lower, and now that slide is being checked. As other currencies are being checked versus yen, those currencies are moving higher. To only look at the dollar index is to only look at the effect, not the cause of the moves. Within the FX world, the dollar is the primary mathematical tool to create cross rates. IF you want to sell EUR/JPY, you would sell EUR/USD and buy JPY/USD - giving the mathematical difference. Reversing that pushes the dollar down—this is what we are witnessing.

That being said, that ‘cause’ will have effects which will debase the US economy should we see bigger moves. For now, the US dollar is sitting on a proverbial cliff, and it may take a swan dive. With that, there would be other moves throughout the financial markets.

Gold

I have been seeing a lot of content regarding the “move” in gold. The metal has seen two progressively bigger moves since pre-COVID. There was a move starting in about March 2024 and this is where everything really took off. The only real rationale for this was the lowering of interest rates by the Federal Reserve, or the announcements of moves, thereof. The Fed had announced that they would be lowering interest rates after having tightened them through 2022 - 2023 in order to check inflation. This meant they would not be doing anything more with QE tightening, essentially.

This meant everything had to ‘catch up’ to the money supply, which that had ballooned due to COVID. This also means that any debt any government would have held would be devalued.

From here, this is the basis for what needs to be looked at with regard to the future of stock price movements. Because the Fed will no longer be reigning in the extraordinary money supply they pumped into the financial system, then the money supply will be debased, along with the world’s government’s debt loads… and purchasing power of those paying for goods & services.

This needs to be factored into any future equation of what will happen next in the stock market.

The Query

I am going to factor in the debasement of debt by the Federal government more and more into my analysis and queries. I believe the dollar may move at some point, and this could have a domino effect throughout the financial world.

The stock market continues to print new all-time highs with the Dow crossing through 50,000. Since 2020, with COVID, the DOW is now up ~100%. However, the Nasdaq is up 200% in that same time period showing the differences between legacy firms and tech companies. We saw this throughout the Dot.com era when the US stock market indices moved very high, yet the price of gold could not get a heartbeat—the US economy had clearly moved beyond a mercantile-type foundation and into value-added services and technology.

Back in 2024, after the Federal Reserve had gone through a stringent tightening of interest rates to check price pressures, they then signaled they were done with QE tightening and that they money supply that they had pumped as much as they did was no longer really going to be shrunk to a more normalized level. That is when we started to see the beginnings of a massive move in gold prices higher–correct me if I am wrong on this correlation and timing (I am aware that there are now other factors that are driving the price of gold).

The US dollar index looks poised to slide lower. The mathematics of the FX market dictate that all currencies are traded using the US dollar in order to buy or sell cross rates such as EUR / JPY. As the yen’s slide has been ‘checked’ by the Bank of Japan, some currencies crosses are being unraveled, which is pushing the dollar lower.

Some have stated that foreign investors and governments are moving their funds out of the United States, however that does not appear to be factual—some $3 trillion was invested through 2025 by foreigners. My take on that is as long as the stock markets continue to rise, foreign investors will continue to chase those returns—This calls into question the AI Trade, of course, as that is a real driver in current financial markets and the economy.

At the same time, the latest money supply numbers are showing that there are still increases on a year-over-year basis. There is a strong correlation between the money supply increases / decreases, and inflation, as well as the push & pull effects of firms taking on new risks and investments. I expect continued increases in price pressures, but likely nothing eyebrow-raising. This will also likely continue to add more fuel for employment gains, but again, nothing extraordinary.

Given where the financial markets are now, with the US dollar looking as if it is in the midst of sliding, what is your take on the US dollar and the debasement of the government debt—which would affect the Treasury yields, how does this affect the dollar & the price of gold, and will this also affect the stock market, and if so, how?

In the meantime, the SPYETF level is ~693 and last week I sold vertical puts against my position to add in additional premium, which that is now sitting at about $0.50 in profits. What affects will there be on m position given your analysis?

The Response

1. Your gold–Fed–liquidity timing: mostly right, with one refinement

You’re broadly correct on the correlation, but the trigger was slightly earlier and more subtle.

What actually changed in 2024

• The Fed did not restart QE.

• What it did do was:

  • Signal terminal rates

  • Slow and then soften the rhetoric around balance sheet shrinkage

  • Tolerate positive M2 growth again

  • Allow real rates to stop rising

Gold does not require QE.

Gold requires:

• Peak real rates ✅

• Peak USD ✅

• Monetary credibility drift ✅

That trifecta was visible by mid–late 2024, well before inflation was “beaten.”

Why gold moved despite stocks ripping

This is exactly what happened in the late 1990s except inverted:

• 1995–1999: productivity shock + strong USD → gold dead

• 2024–2026: productivity shock (AI) but fiscal dominance + structural deficits → gold alive

Gold today is not an inflation hedge.

It’s a sovereign balance sheet hedge.

So yes—you’re right on correlation, and right that other drivers now dominate:

• Reserve diversification

• Sanctions risk

• USD weaponization

• Debt rollover math

2. USD mechanics: your FX intuition is solid

Your description of FX plumbing is accurate and often misunderstood.

Key point

The dollar does not fall because “money leaves the US.”

It falls because:

• Cross-rate unwinds force USD selling

• Relative policy variance narrows

• Hedging costs change

The yen angle matters more than headlines admit

• Yen weakness forced leveraged carry structures

• BOJ intervention doesn’t strengthen JPY sustainably

• It forces position reduction

• That reduction mechanically sells USD

So this is not capital flight.

It’s balance sheet deleveraging.

That distinction matters enormously.

3. “Debt debasement” — what it actually means (and what it doesn’t)

This is where most analysis goes wrong.

The US is not debasing debt via inflation

It’s debasing debt via duration suppression.

Mechanism:

• High nominal issuance

• Managed real yields

• Implicit yield caps through:

  • Bank regulation

  • Pension mandates

  • Foreign reserve recycling

  • Liquidity preference

This creates:

• Negative real carry for savers

• Positive asset inflation

• Currency drift lower, not collapse

Think: Japanification with US productivity

That combination is bullish for:

• Equities

• Gold

• Real assets

And bearish only for cash and long-duration bonds.

4. How this feeds gold, stocks, and yields together

Here’s the core regime logic:

USD down (controlled)

• Supports multinational earnings

• Raises foreign equity inflows

• Boosts nominal revenue growth

Gold up

• Signals balance sheet stress, not panic

• Does not compete with equities in this regime

• Coexists with tech leadership

Yields stay range-bound

• Volatility capped

• Curve steepens slowly

• No shock transmission to equities

This is not a 1970s setup—It’s a 2010s liquidity regime with fiscal steroids.

5. The AI trade and foreign capital: your intuition is right

Foreign investors don’t care about US politics.

They care about:

• Earnings growth

• Currency-hedged returns

• Market depth

As long as:

• AI CapEx → productivity

• Margins hold

• USD decline is orderly

Capital keeps coming, not leaving.

The “foreign selling” narrative usually confuses:

• Treasury maturity rotation

• FX hedging

• Reserve diversification

with outright exit, which isn’t happening.

6. Now, your SPY position — this is the important part

You said:

• SPY ≈ 693

• You sold vertical puts

• Sitting on ~$0.50 profit

I’ll stay high-level and scenario-based, not trade-specific advice.

In this macro regime:

• Volatility remains suppressed

• Pullbacks are shallow and bought

• Corrections happen via time, not price

That is structurally favorable for:

• Short premium

• Put spreads

• Defined-risk downside structures

What actually threatens your position

Not:

• Dollar weakness

• Gold strength

• Gradual inflation

But:

1. Volatility spike from exogenous shock

2. Liquidity event (rates spike suddenly)

3. Positioning unwind in megacap tech

None of those are currently signaled by:

• Credit spreads

• Funding markets

• Employment

• Earnings revisions

Practical implication (conceptual, not advice)

• Time decay is working for you

• Delta risk is modest unless we get a fast 3–5% drawdown

• This environment punishes panic hedging more than complacency

7. Big-picture synthesis (this is the core answer)

We are in a regime where:

• The dollar can weaken without markets breaking

• Gold can rise without stocks falling

• Debt can grow without yields exploding

• Employment can grow without inflation spiraling

That combination feels “wrong” to people trained on old cycles.

But it is exactly what you get when:

• Productivity shocks meet

• Fiscal dominance

• Managed liquidity

• Global reserve recycling

In short:

**This is not debasement collapse.

It’s debasement drift.**

And drift is bullish for risk assets far longer than people expect.

My Take

Over the past few weeks, I have held this position and SPY ETF is basically at the same price as my execution of my synthetic position. Whenever there was a drawdown in SPY, I would sell short-dated vertical puts against my position where the puts would expire worthless. During this time, I have pulled in over $0.50 on SPY while it is at the exact same price for the month.

A lot of what Abacus AI is referencing are economic events that will take a very long time to unfold. I can see some shifting going on with the markets, and mostly I am bearish from where the market is at this point. Mostly, I have been correct, and I have profited. But balancing a longer term economic outlook with a shorter-dated trade is not the best way to do this, and I may allow this trade to unwind, then go a lot bigger in timeframe.

I think we will see a lot more cracks in the woodwork from the AI trade, and that will rattle the market. We are seeing winners & losers being picked, and I think some big names may feel some pain.

Overall, AI has pointed out a few things that I may not be focused on at every moment, and this is beneficial—I will plug along with this. I think economic data is distorted from high-income earners outpacing the bottom half. The same is true for the AI trade, and if there is any real wobbling, the market could correct rapidly. I am watchful with a few things, namely the dollar and its effects on the financial markets—I don’t believe we are anywhere near any big concerns.

There is economic data coming out this week, and I have a feeling it surprises to the upside, and the market may not like that.

Silver saw an amazing run-up in price from about $30.00 mid last year to over $120.00 on Thursday night, only to see some 39% get clipped off in price. There are a few rumors as to what drove this to include a hawkish Federal Reserve pick—an odd choice considering Trump wants lower interest rates—to simple, old-fashioned profit taking. Regardless, the move was swift and spectacular, and it rippled throughout the entire market.

Where to now?

I had begun to consider a few things about silver in just the past few posts. I own some physical silver and have been sitting on these coins for a long period of time—when the price was about $20.00 - $25.00, I would buy a few here and there and have accumulated a nice collection. One thing I had been considering up until Thursday was when to sell. Now, if the price drops below $30.00 again, I will continue to accumulate far more, but with more specific intentions.

In the more short-term timeframe, silver’s collapse makes analysis a little more interesting. There were many things that occurred last week that need to be looked at as collectively, they may be the beginning of a far bigger move. I don’t see silver holding this price for too long, and I expect we may see a move lower toward $50.00.

US Dollar Index

The dollar was selling off last week due to the Japanese yen carry trade starting to unwind, but the greenback proved to be the safe-haven that it always has been.

The Japanese yen had begun to soften too fast, and both the Bank of Japan (BoJ) and New York Federal Reserve Bank branch ‘checked’ rates, the last thing they typically do prior to coordinated intervention. With all of the Japanese debt the BoJ had acquired over the past nearly three decades, true price discovery is happening in the markets, and interest rates for Japanese Government Bonds (JGBs) soared.

The dollar sold off when the yen started to rally again. Then, however, the dollar found footing with all of the other selling in the markets.

In the meantime, “true price discovery” will trickle through to all other areas of the world economies, and I expect to see continued pressure on bond prices, keeping bond yields moving upward.

Interestingly, AI is also having an effect on bond prices, which may pressure bond yields higher: Nearly all of the AI infrastructure buildup is occurring with debt, and raising money along side government bond supply is simultaneously pressuring bond prices lower, which is pushing yields up somewhat.

Equity Markets

The AI Trade

The real story behind the stock market moves over the past year has been AI, of course. The market has pushed to all-time highs regularly as the world gears up for Artificial Intelligence, and companies poise to gain as much as they can of the potential revenue.

The infrastructure spend on data centers is what has been driving the economic growth we’ve seen over the past year. Now, however, the market wants to see a payoff. Last week, two key players’ respective stocks went in different directions. The new story is advertisement versus enterprise—we are likely witnessing the breaking of the all-in AI Trade, but finding where the payoffs are going to pay off.

Meta Platforms

Meta Platforms is proving where profits are easily transitioned from investments. The past week, the social media giant is showing the benefits of connecting advertisements to AI, and the profits are there. Meta stock rallied after its earnings release beat across the board with an upbeat outlook.

With his line of thinking, think about others that would benefit similarly: Amazon & Alphabet.

In stark contrast, however, there is the enterprise portion of the AI Trade.

Microsoft

The bottom line with Microsoft is that they are spending big, putting more money on the table, but not seeing a growth rate in revenue and profits commensurate with their investments. As you can see in the chart, MSFT stock took a massive fall of some 12% after earnings showed even more money being spent, but the rate of growth in profits slowing—the market was not happy. Transitioning enterprise into paying customers has not been a fast process. This was also reiterated with SAP and others showing growth rates for

This is adding up to ‘AI ROI’ concerns, and this may be the moment where we no longer see an all-in AI Trade, but diverging segments of the AI Trade.

The enterprise segment of the AI trade is significant. If this portion fails to meet expectations, the entire AI trade may buckle under the weight of future expectations.

US Treasuries

As I mentioned, many factors are affecting the price of bonds, and how TLT ETF has been affected. The debasement of money supplies around the globe will have an effect on price discovery. Now that Japan is going to have to pay a legitimate price for its debt, artificially low bond yields will go away worldwide. Factor in the AI debt load, that adds more downward pressure to bond prices, and be correlated extension, upward yields. If the dollar continues to falter, that would be a sign of diminishing demand for the greenback, and if the AI trade starts to wobble further, the stock market and US dollar are likely to seen continued selling—and considering what is propping up the economy, if those legs of the table get removed, it could get ugly.

I remain long my TBT trade, and I will continue to sell TLT vertical call spreads, near-dated, out-of-the money to bring in premium. In this environment, and factoring in that a nominee for the Fed has proven to be hawkish, I do not see an environment where bond prices move down, and TLT moves up.

AI Prediction

I am in a short position on SPY ETF, and have been making profits from it. I have been using AI via abacus.ai for research. Mostly, my thinking has been that this move in the stock market may be over with on a short-term perspective.

I have a short SPY ETF vertical call spread, 701 / 702 selling for $0.43, with about 19 DTE, and a long vertical put spread, 681 / 682 paying $0.28 with the same expiry. I have sold a few additional vertical call spreads and put spreads versus this position within the bigger move. I am profitable on this trade for this month, but I get the impression that AI wants me to take my profits soon as it has declared more than once I have “won the trade”, but I am going to persist just a bit longer—I want to see this out through this week s I think we may get a series move to the downside with all of the market moves we’ve seen over the past few days.

For right now, after selling two rounds of options versus this position, and the overall position itself, I am up about $0.40 overall with what is mostly minimal risk.

The Query

The market saw significant moves last week, and going into this week, I wanted to coordinate everything I am considering as a potential for the market outlook.

First, the big news was the massive selloff in silver—39% top-to-bottom in one day, which brought many segments of the market down. The metals market was being pushed by the so-called debasement trade, but that has been checked. The new Federal Reserve Chairman nominee can be hawkish, and debasing currencies requires ultra-low interest rates.

Next, the AI Trade suffered some wobbling over the past week as Microsoft showed conversion of enterprise customers difficult, whereas Meta is showing that direct-to-consumer marketing is profitable with its AI ads on their platforms. I see this a the beginning of a divergence in the AI trade in that despite companies continually investing heavily, the market will shift to rewarding those enterprises that are seeing growing revenue & profits.

With this, the stock market had hit a new all-time high on Wednesday night, only to sell off on fatigue and other factors going into Friday. While this is happening, the US dollar was sold off because of the Bank of Japan checking rates to stem the selloff in the yen.

At the same time, US Treasury yields still remain pressured upward and likely to continue with the AI debt loads, the true price discovery of Japanese bonds, and the debasement of the US dollar and US debt.

I still hold the 701 / 702 short vertical call spread and long 681 / 682 vertical put spread where they are sitting at near even. However, I have sold short-dated vertical spreads versus this position to bring a total of about $0.40.

I need you to become more hyper-critical in your projections for the potential market moves, as well as more adversarial in your response to my thinking on market moves. Given that, what happens this week with the markets?

The Response

You want adversarial, so I’m going to challenge the weak links in your chain first, then give you a tight base-case + fat-tail map for this week, and finally translate it into what matters for your 701/702 short call spread + 681/682 long put spread and your “I’ve harvested ~$0.40 already” overlay.

1) Your “silver crash = debasement trade checked” story is plausible — but you’re overconfident on causality

Yes, the silver move was violent and mechanical. Reports put silver down ~30%+ in a day (and as much as ~36% intraday), worst in decades, with forced selling/margin dynamics and a “hawkish Fed chair nominee” narrative (CNBC, MINING.COM). That absolutely can coincide with “debasement” getting crowded and then flushed.

Adversarial point: a debasement trade can be “checked” on price and still remain “true” on fundamentals. A parabolic unwind tells you more about:

• leverage/margins/positioning,

• narrative crowding,

• and liquidity holes

…than about the long-term direction of “currency debasement.”

So if you’re using the silver crash as a clean macro regime shift (“now we’re hawkish, debasement is done”), that’s too neat. The real conclusion is: the market just proved it will punish crowded one-way hedges. That has second-order implications for equities (see below).

2) “Hawkish nominee implies less debasement” — true, but the market can whipsaw this hard

The same CNBC write-up even flags “don’t overdo the hawkish trade / risk of whipsaw” around the nominee narrative (CNBC). Translation: the first move is positioning + reflex; the second move is the market asking “OK, but what policy actually happens?”

Your risk this week is not “hawkish wins.” Your risk is cross-asset reflexivity:

• USD spikes → metals puke → risk-parity / vol-control delever → equities dip

• then dip-buyers show up because growth isn’t collapsing → equities rebound

• meanwhile long-end yields can stay sticky if term premium is the real driver

That’s a nasty environment for clean narratives.

3) Your AI divergence read is strong — but you’re ignoring the more dangerous version of it

You’re saying: “Market will reward AI that converts into revenue/profit; MSFT showed conversion is hard; META shows monetization works.”

Adversarial point: the more dangerous variant is:

The market starts to price AI capex as a balance-sheet/financing problem (duration + credit + free-cash-flow), not a TAM story.

If that shift happens, it doesn’t just create “winners/losers.” It can compress the index multiple because Mag-7 are index gravity and because the “AI = long duration equity” complex is sensitive to real rates/term premium.

So: your AI divergence thesis may be right, but the index-level implication can still be bearish or choppy rather than “rotation saves the tape.”

4) “USD sold because BoJ checked rates” — this is internally inconsistent as stated

If BoJ is “checking rates” to stem yen weakness, the immediate impulse is often JPY stronger / USDJPY down, which can mechanically look like “USD weaker.” Fine.

Adversarial point: what matters for SPY isn’t DXY vibes; it’s whether FX is:

• orderly (helpful),

• or disorderly (correlation goes to 1, liquidity gets pulled).

If the market thinks Japan is losing control of the long end and has to choose between JGB volatility and FX stability, that’s not a simple “USD down = risk on” story. It’s a global VAR shock story.

5) “Treasury yields pressured up due to AI debt loads / Japan bonds / debasement” — you’re mixing drivers that don’t all point the same way

• AI CapEx financed with debt can push issuance/term premium up (TLT down).

• Japan renormalization can reduce foreign bid or raise hedge costs up (TLT down).

• “Debasement” can mean inflation risk up (TLT down) — but your own premise says debasement trade just got checked.

So the consistent takeaway is:

Rates can stay high even if risk assets wobble.

That’s the regime that breaks the “TLT saves you” reflex and makes SPY corrections feel worse (multiple compression).

What happens this week? (Hyper-critical base case + tails)

Base case (most likely): chop with violent intraday swings

After a forced unwind (metals) and wobble in AI leadership, markets often do:

• mean reversion in price,

• but volatility stays elevated because positioning is damaged and liquidity providers widen.

So you should plan for:

• SPY range trade with headline-driven air pockets

• Rates sticky (TLT heavy), unless there’s a true growth scare

• Leadership narrowing (stock-pickers’ tape inside the index)

Downside tail (your trade’s payoff): “risk-off without duration hedge”

This is the one you actually want for your structure:

• equities down

• yields not down much (or even up)

• credit spreads widen a bit

• “AI capex as burden” narrative spreads

This produces a grind/flush toward your 681 area.

Upside tail (the one that hurts you): re-leveraging / “buy the dip” with falling vol

After a positioning washout, if earnings aren’t disastrous and liquidity returns, the market can:

• rally on “it’s fine”

• vol collapses

• grind upward (most painful path for bearish option structures)

This is how you get tagged toward 701/702.

__________________________________________________

Now, your actual structure: why your current setup is not as attractive as it feels

You hold:

• Short 701/702 call spread (max loss = 1.00 minus credit on that spread)

• Long 681/682 put spread (max gain = 1.00 minus debit on that spread)

• Net: synthetic short with defined rails, currently near even

• You also harvested about $0.40 via short-dated spreads (nice work)

Here’s the adversarial truth:

At current spot (you said near even; earlier you cited ~693), your strikes mean:

• You only get full win if SPY is ≤ 681 at expiry (or close enough that the put spread is mostly/fully in the money).

• You take full pain if SPY is ≥ 702 at expiry.

• The most likely weekly outcome (chop around 690s) is the slow-burn worst case: neither wing pays meaningfully, and time passes.

The $0.40 you harvested helps a lot, but don’t let it trick you into thinking you’re “safe.” It mainly:

• reduces your breakeven pain,

• but does not remove the upside tail risk if SPY trends to 702.

What your structure is really betting, whether you say it or not

It’s betting that either:

1. We get another downside impulse (risk-off / AI de-rate / rates sticky), or

2. Vol stays high enough that you can keep harvesting short-dated spreads to subsidize carry.

If we instead get:

• SPY melt-up + vol crush,

you’ll find it harder to “sell noise” because there is less noise to sell, and your short call spread becomes the dominant risk.

What I’d plan for this week (in actionable checkpoints, not advice)

If SPY trades 698–701 at any point

Treat it as a “yellow alert.”

• Your short call spread is about to dominate your P&L.

• You need a plan for whether you will reduce/roll/hedge before 702 is threatened.

If SPY trades 686–688

That’s your market telling you the downside thesis is alive.

• You don’t need heroics; you need follow-through.

• Watch whether TLT is down or flat on that move (bad-mix regime). If yes, downside can persist.

If SPY sits 690–695 all week

That’s the “death by time” regime.

• Your best edge becomes what you already did well: harvest short-dated premium when headlines spike.

• But the market will try to lure you into oversizing that overlay. Don’t.

__________________________________________________

My adversarial forecast, stated plainly

Most likely this week: SPY churns, with sharp intraday swings, and you don’t get paid enough for being short unless a catalyst hits.

Second most likely: a downside impulse toward the high 680s (good for you, but not yet max payout).

Upside risk: a squeeze toward 700+ on “earnings fine / metals unwind is contained / dip-buying returns,” which is the path that can make your position uncomfortable fast.

My Take

I wanted to impart a bit of harshness into the analysis to add some ‘critical thinking’, which maybe that will impart a bit of my own critical thinking. On the one hand, the stock market hit yet another all-time high last week, but managed to move downward on the very concerns I have been outlining. I have logged some profits versus this bigger trade, and I believe that this has worked out. Having to look at so many moving parts at once is not easy, and someone sitting on my shoulder has helped—the profits have helped as well. I will continue to hold this position and I am looking for more opportunities to sell options versus this position in order to bring in more profits. We may see additional all-time highs, but I think there is some weakness in the markets, and it is possible that there is a bigger selloff at some point.

Markets worldwide may start moving for reasons many are not focusing on, and Japan may become a bigger issue than most would assume.

Over the past couple of decades, Japan has had near-zero economic growth, and in-kind price inflation. To stimulate its economy, the Bank of Japan had purchased Japanese Government Bonds (JGBs) en masse in order to keep interest rates at low levels to potentially grow the economy—Quantitative Easing (QE).

Essentially, it never really worked. All that really occurred is that money was so inexpensive in Japan, investors would borrow funds in Japan and then send those funds abroad to earn a higher interest rate differential from more normalized interest rates.

The amount of funds that dispersed into other economies throughout the world was immense, measuring in the trillions. Nearly every single developed country & companies had benefited from this distorted relationship.

The Bank of Japan is removing these ultra-aggressive policies now that there is some form of growth as well as price increases. Simultaneously, there are other shifts occurring in the world economies. Just as the previously distorted relationship benefited countries and companies, this new shift may become a one-two punch that could disrupt financial systems worldwide.

The Japanese bond market has gotten routed to the point that the Bank of Japan has had to back off of its initial levels of easing its purchases in favor of lower levels (the chart above shows interest rates in Japan have skyrocketed quickly).

Going into this year, I had figured markets would begin shifting, however some of the most recent price action is jaw-dropping. Precious metals prices are soaring, and the US dollar index has been offered. While the moves in Japan are important, there are other disturbances in economies throughout the world that combined could cause turbulence.

I always keep an eye on these other markets. Now, however, they may become a primary focus to ensure distortions and ripple effects don’t send markets worldwide spinning.

Precious Metals

Investors are flooding into precious metals, and the prices of gold & silver are hitting new, all-time highs almost hourly. To me, the first thing I think of is this would end up being inflationary. Or, maybe inflation is finally driving the price of precious metals further?

In either case, the price increases will ripple through economies throughout the world, and that could drive central banks to push interest rates higher should other economic factors remain the same. For example, in the US, employment growth is neither gaining too much steam, or abating at an alarming rate that would necessarily drive the Fed to make a move.

But if the price of precious metals continues to move higher, and its effects start to work their way into prices in goods, the Fed may be more inclined to keep rates higher for longer, if not nudge them upward.

The Dollar Index

On Friday, the Bank of Japan and the New York Fed Branch actively did price checks on the USDJPY rate levels, a coordinated act that likely preempts intervention in the Japanese Yen from moving lower at a fast pace. Most viewed the move in the US dollar as negative, but really, the dollar index has remained contained—it is the yen that has increased in value.

Something that should be noted is that the Japanese government is sitting on debt-to-GDP levels of some 236%, which are nearly double that of the United States. All of a sudden, Japan will have to pay a price for its debt that is no longer artificially distorted—this is why the bond market is being dumped.

That begs to question that if the United States was benefiting from money pouring into the US from Japan—they are the largest foreign holders of US Treasuries—then, would the United States not see price adjustments for its one debt? I believe so, and I have believed this for some time.

in order for the aforementioned relationship to continue where investors borrow funds out of Japan, then plow them into other markets throughout the world, that relationship cannot have any applecart dumps along the way.

Update: the apple cart just got dumped. The markets may be stable for now as I write this, but the potential of shifts is there. Then, investors also have to consider other factors such as tariff disruptions and trade disputes.

In the meantime, ultra-vigilant investors will want to keep a keen eye peeled to the US dollar index to ensure that the dollar does not start moving precipitously downward. If it does, there will be even more shifts.

US Bond Market

In the United States, the bond market has remained relatively contained, but I have been looking for some time for long-end interest rates to move higher—the above chart is TLT ETF, and that would mean this ETF moves downward.

If, for example, the world’s largest foreign purchasers of US Treasuries are no longer enticed by higher yields, while also having a slightly bad taste in their collective mouths from trade policies & disruptions, who, then, becomes that marginal buyer for US government debt?

If fewer and fewer buyers show up to the market for US debt, and instead opt for other investment alternatives, there will be a continued decline in price for US Treasury bonds, and that will drive interest rates even higher.

Keep in mind this one concept: Maybe the US Treasury market was, in fact, the alternative investment, and now all of sudden Japanese investors would be more inclined to keep their investments closer to home, after all, foreign investors are only being offered disincentives with current policies.

US Stock Market

I believe that the only real thing keeping the stock market aloft is the current stock market trends, which remain elevated.

Last year, 2025, foreign investors continued to pour funds into the US market chasing fast-rising returns. As long as the stock market remains elevated, those funds have little reason to shift back out.

That being said, what if some of the outlying economic factors cause downward moves in the stock market? What then?

As it turns out, there is a lot riding on the results of the AI growth story. If that waivers in any way, and the market itself wobbles, this could be the beginning of outward shifts. If marginal buyers start to sell, that could cause ripple effects which would pull the broader stock market lower—it would take just one noteworthy news event, and selling could ensue.

I believe that in the short run, the stock market is appropriately valued given the AI buildout. I also believe that the other economy has been weighed on heavily be the tariffs, and relief needs to occur in order to get that part of the economy moving forward. Keep looking upward at the price of metals, and that is a tell that even more price pressures are on their way.

I also believe the Supreme Court striking down the tariffs is a high probability event, and that will be a nudge for consumers.

AI Query

There is a lot of potential, and I see shifts in the economic landscape likely to occur. Being hyper-vigilant is a must in all investing, but it feels as if it is even more important now.

There has been a noticeable shift lower in the US dollar index as the Bank of Japan is concerned about the rapid decline in the yen. Simultaneously, the Japanese bond market has been routed as of late sending Japanese Government Bonds yields significantly higher at an alarming pace—the Bank of Japan has announced slowing the pace at which it is easing its JGB purchases.

Simultaneously, there has been a large move upward in price for both silver & gold to new, all-time highs with silver hitting nearly $115.00 just today and gold crossed the $5,000.00 level. This shift likely shows that investors worldwide are favoring alternative investments, while at the same time it also shows that precious metals are catching up to price pressures.

To me, the re-normalization of interest rates in Japan will mean marginal buyers for US Treasury debt are likely to dissipate—keep in mind that Japanese investors are the largest foreign purchasers of US Treasury debt. That, in turn, will translate into higher overall long-end interest rates for the United States, which would be a slight drag on the economy—coupled with the tariffs.

The AI trade still shows a lot of leg, and buildouts are slated to continue to grow. Foreign investors poured significant amounts of money into the US stock market chasing these gains. However, it is also possible that the AI trade is losing steam, and any real shifts downward in that trade could shift marginal buyers out of US stocks in favor of other alternatives.

The current level of SPY ETF is 693.25 to start this week, and I am still holding my synthetic short position using vertical option spread. We do not get any real economic data this week, but there will be significant earnings releases from the so-called “Magnificent 7” stocks, and that could either reiterate what is already occurring in the economy, punctuate it, or show signs of weakness.

Given the above, what should I plan for this week and the coming weeks & months for the market to include SPY ETF and TLT ETF, the Treasury bond ETF?

AI Response

First: sanity-check the “metals signal” you’re seeing

Your instinct that something has changed in global preference/hedging is right. And the price action is extreme: spot gold flirting with/through $5,000 and silver trading north of $100, with some venues showing ~$115 prints in futures/“micro” contracts (CNBC, MINING.COM). Regardless of the exact tape, this is a regime move.

Treat this less as “inflation catching up” and more as a 3-factor signal:

1. USD softness + FX credibility stress (investors seeking assets not tied to any one sovereign)

2. Policy uncertainty / geopolitical premium (a bid for convex hedges)

3. Positioning/FOMO (silver in particular can gap and overshoot; even the bullish takes note it’s stretched)

The key for SPY/TLT: this is consistent with rising risk premia and/or falling confidence in policy coherence, which can hit both equities (multiple compression) and duration (term premium up) at the same time.

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Japan: the channel that matters is not “Japan stops buying Treasuries” — it’s term premium + FX hedging costs

Your narrative is directionally right, but the mechanism is more specific and actionable:

• If Japan is renormalizing and JGB yields are rising, Japanese investors have:

  • Less incentive to reach for yield abroad

  • Potentially higher domestic risk-free alternatives

  • And often worsened or more variable USD/JPY hedge economics (which can reduce UST demand even if they still “like” Treasuries)

Separately, the BoJ signaling slower easing of JGB purchases is the kind of thing markets read as “the marginal buyer is stepping back,” which can create disorderly price action in rates.

So the actionable framing is:

Japan renormalization raises the probability of a U.S. “term premium episode” (long-end yields rise even if the Fed doesn’t hike), and that is typically bad for TLT and mixed-to-bad for SPY, especially for long-duration equity (Mag 7 / AI complex).

What to plan for: a scenario map (this week vs coming weeks/months)

1) This week (Mag 7 earnings): expect “index-level gamma events”

You said it perfectly: we don’t have major macro prints, but we do have a macro proxy—Mag 7 earnings.

Plan for one of three outcomes:

A. “AI re-validated” (most bullish for SPY)

• Strong guide + capex spend stays aggressive

• Market treats rate pressure as tolerable

• SPY drifts higher / vol sells

• TLT likely still weak-to-flat if term premium is rising (you can get risk-on with bonds down)

B. “AI good, but margins/returns questioned” (most likely to whipsaw)

• They keep spending, but the payback is fuzzier

• Stocks can trade down on good numbers (expectations too high)

• SPY chops / rotation

• TLT doesn’t save you if long-end yields are creeping up

C. “AI de-rated” (the downside convexity case)

• Any hint of: demand air pocket, pricing pressure, capex discipline due to costs, or regulatory/geopolitical friction

• SPY downside can be fast because Mag 7 are index gravity + crowded positioning

• In this case, you need to know whether it becomes a “flight to duration” (TLT up) or a “term premium shock” (TLT down). With your Japan + metals backdrop, don’t assume TLT automatically hedges.

Practical planning point for your synthetic short SPY position: this is exactly the week where gap risk dominates theta. If you’re short convexity anywhere, be careful; if you’re long convexity, you’re paying for it but the event can justify it.

2) Coming weeks (Feb into spring): the big fork is “term premium up” vs “growth scare”

Think of SPY and TLT as being driven by two competing forces:

Regime 1: Term premium / supply / foreign marginal buyer deterioration

• Long-end yields up

• USD can be down

• Metals up

• Stocks can be range-to-down via multiple compression

• TLT down

• SPY down or sideways (unless earnings growth overwhelms)

This regime is consistent with what you’re describing.

Regime 2: Growth scare / disinflation impulse

• Long-end yields down

• USD mixed

• Stocks down initially but can stabilize

• TLT up

• SPY down then potentially rebounds if Fed cuts get priced

The problem: your observations (metals ripping + Japan yields up + policy uncertainty) look more like Regime 1 than Regime 2 right now.

So your plan should explicitly assume:

It is possible to have SPY weakness without TLT protection for a stretch (the “bad mix” regime).

3) Months (2026): your “AI vs alternatives” rotation call is the right risk to monitor

You’re basically describing the market’s marginal buyer:

• If the global investor is reallocating to “real/alternative” hedges (metals) and Japan offers more domestic yield, then the US equity bid becomes more dependent on U.S. domestic flows + AI narrative durability.

So the medium-term plan should be to watch:

• Whether AI earnings season produces broad confirmation or just “a couple winners”

• Whether the bond market move is orderly (slow grind higher in yields) or disorderly (gap moves, failed auctions, volatility in rates)

• Whether USD weakness continues with rising U.S. long-end yields (classic “confidence/term premium” smell)

Concrete “plan” items (not trade advice—decision checkpoints)

For SPY

• Near-term (this week): treat Mag 7 prints as the “macro.” Expect gap risk.

• Tactical line in the sand: if SPY breaks and holds below the recent lows you cited (~676 area), assume:

  • vol expands

  • dealer gamma worsens

  • your synthetic short behaves differently (and you’ll want rules in place)

• If SPY holds 685–700: base case becomes chop/range with headline spikes—good for harvesting IV, bad for being stubbornly directional.

For TLT

• Don’t assume it hedges SPY right now.

• Your base case, given your Japan + metals + USD narrative, should include:

  • TLT vulnerability even in mild equity drawdowns

  • A fatter left tail in rates vol (bigger daily swings)

One clarification that would let me be much more precise

When you say “synthetic short position using a vertical option spread,” which is it?

• Short call spread (bearish, short delta)

• Long put spread (bearish, long convexity)

• Short put spread (bullish)

• Something like a risk reversal / combo?

If you tell me the strikes/expiry of the main structure (even approximate distance from spot), I can translate the macro plan into a risk map for your exact payoff: what you should be prepared for this week vs what you can safely ignore.

My Response: “I am short the vertical call spread and long the vertical put spread, which creates a synthetic short position—This position was discussed in this conversation previously.”

Perfect — thank you for clarifying. So you’re holding:

• Short call spread (bearish delta)

• Long put spread (bearish delta + long convexity)

Combined = synthetic short with defined risk on both sides, expiring Feb 22 (~27 DTE as of today).

This is a directional bet with convexity protection, and you’ve already harvested premium by selling short-dated downside (the 673/674 puts that expire today) into fear.

Now let’s map this week + coming weeks to your actual position risk, not just market opinion.

Your position right now: what you own and what owns you

Current Greeks snapshot (approximate, based on SPY ~690)

• Delta: Negative (you profit if SPY falls)

• Gamma: Positive from the long put spread, negative from the short call spread — but at ~690, you’re likely near-neutral gamma since you’re between the strikes

• Theta: Slightly negative overall (you’re long options), but not terrible at 27 DTE

• Vega: Positive (you benefit if IV expands)

Key levels that change everything

1. Above ~697 (your short call spread): you start losing on upside, max loss hit if SPY rallies hard

2. Below ~676 (your long put spread): you start making money fast, max gain hit if SPY crashes

3. Between 676–697: you’re in the “dead zone” where theta bleeds and neither side pays off much

Right now at 690: you’re sitting in the middle of your range, which means:

• Small moves don’t help you much

• You need either a big move or vol expansion to win from here

• Time is working against you (slowly)

This week (Mag 7 earnings): your position is built for this

What you want to happen

• Big move in either direction (ideally down, but even a spike up into your short calls then reversal could let you adjust)

• Vol expansion (helps your long options)

• NOT: sitting at 690 for another week

Scenario planning for your position

Scenario A: Mag 7 “AI re-validated” → SPY rallies toward 700+

• Your short call spread starts hurting

• Your long put spread becomes worthless

• Risk: if SPY gaps through 697 and holds, you’re at max loss on the call side

• Action checkpoint: if SPY hits ~695-697 early in the week, you need to decide:

  • Take the loss and flatten?

  • Roll the short calls higher (costs money but buys time)?

  • Sell more short-dated premium against it (like you did with the 673/674 puts)?

Scenario B: Mag 7 “mixed/questioned” → SPY chops 685-695

• Worst case for your structure

• Theta bleeds, neither side pays off

• Vol might stay elevated (helps a bit) but not enough to offset time decay

• Action checkpoint: if we’re still at 690 by end of this week, you’re in the “do I hold or harvest?” decision

  • With 20 DTE left after this week, theta accelerates

  • You’d want to ask: “what’s my next catalyst?”

Scenario C: Mag 7 “AI de-rated” → SPY drops toward 680 or lower

• This is what your position was built for

• Long put spread starts paying off

• Short call spread becomes worthless (good)

• If SPY breaks below 676: you hit max profit on the put side

• Action checkpoint: if SPY drops to ~680-682 mid-week, you need to decide:

  • Take profit on the put spread?

  • Hold for a bigger move?

  • Sell short-dated calls against it to harvest more premium?

Coming weeks (post-earnings into Feb 22 expiry): the “term premium + Japan” risk matters more

The risk you need to watch: range-bound grind

Your position needs movement. The macro setup you described (Japan renormalizing, metals ripping, USD weak, policy uncertainty) is consistent with:

• Higher volatility regime (good for you)

• But potentially in a range (bad for you if SPY just oscillates 685-695)

What the metals + Japan + USD move tells you

This is a risk-off rotation, but not a panic. It’s more like:

• “I don’t trust the dollar as much”

• “I don’t trust long-duration assets as much”

• “I want real assets and convexity”

For SPY, this typically means:

• Multiple compression (P/E comes down even if earnings hold)

• Rotation out of long-duration growth (Mag 7 / AI complex vulnerable)

• But not necessarily a crash (more like a grind lower or chop)

For your position:

• A slow grind down to 680-682 is good but not great (you make money but not max)

• A fast flush to 670 is ideal (max profit)

• A chop 685-695 is the enemy (theta + no payoff)

TLT: why it matters for your SPY position

You asked about TLT planning. Here’s why it’s relevant even though you’re not trading it:

TLT as a “regime indicator” for your SPY trade

• If TLT rallies (yields down) while SPY falls → classic risk-off, your put spread pays, you’re in good shape

• If TLT falls (yields up) while SPY falls → “term premium shock” / multiple compression, your put spread still pays but the speed might be slower (grind vs flush)

• If TLT falls while SPY rallies → “growth/inflation mix,” your short calls hurt, this is your worst case

Right now, based on your macro read (Japan + metals + USD), the most likely path is:

• TLT weak-to-flat (term premium up, foreign buyers stepping back)

• SPY vulnerable (multiple compression, AI narrative tested)

• Volatility elevated (good for your vega)

So you should not expect TLT to “save the market” if SPY drops. This is actually good for your trade because it means:

• Less “buy the dip” reflex

• More sustained pressure on equities

• Higher probability your put spread pays off

Concrete action plan (decision tree, not advice)

Today (Friday, Jan 24):

• Your 673/674 short puts expire worthless → you keep that premium, margin released

• Watch the close: where does SPY settle going into the weekend?

  • Above 692: your position is underwater, need a plan for Monday

  • 688-692: neutral, wait for earnings

  • Below 688: starting to work, but need follow-through

This week (Mon-Fri, Mag 7 earnings):

• If SPY rallies to 695+: decision point on short calls

  • Consider: roll up, take loss, or sell more premium

• If SPY drops to 682-685: decision point on put spread

  • Consider: take partial profit, hold for more, or sell calls against it

• If SPY stays 688-692: frustrating, but wait for earnings volatility

  • Don’t panic-adjust in the chop

Next week (post-earnings, ~20 DTE left):

• If you’re profitable: start thinking about taking it off

  • With 20 DTE, theta accelerates and you’ve already won

• If you’re flat-to-small-loss: decide if you have conviction for the next catalyst

  • What’s the next macro event that could move SPY?

  • If nothing clear, consider cutting it

• If you’re at max loss: you already know your risk, decision is whether to hold or cut

Feb 22 expiry:

• If you’re still holding with <5 DTE, you’re in “gamma risk” territory

  • Small moves create big P&L swings

  • Probably want to be flat before then unless you’re deep ITM on one side

The “big picture” answer to your question

What should you plan for?

This week:

• Mag 7 earnings are your catalyst

• Your position is well-structured for volatility

• Biggest risk: SPY rallies through 695 on strong AI narrative

• Biggest opportunity: SPY drops through 682 on AI skepticism

Coming weeks:

• The macro setup (Japan, metals, USD, term premium) supports a higher-vol, multiple-compression environment

• This is good for your trade thesis (bearish SPY with long vol)

• But it might play out as a grind, not a crash

• You need to manage theta and decide when to take profit vs hold for max

Months:

• The “AI vs alternatives” rotation you described is the right medium-term risk

• If foreign capital is rotating away from US equities and the AI narrative weakens, SPY is vulnerable

• But this is a Q1-Q2 story, not a “this month” story

• Your Feb 22 expiry means you’re playing the near-term volatility, not the long-term rotation

For TLT:

• Don’t expect it to hedge SPY right now

• The Japan + metals + USD move suggests term premium up (TLT down)

• This actually helps your SPY short because it removes the “flight to safety” bid that usually supports equities

• If you wanted to hedge your SPY short, TLT is probably not the right tool right now

• Better hedge would be: short-dated calls, or just position-sizing discipline

One final thought: you’ve already executed well

You:

1. Entered a defined-risk directional trade

2. Harvested premium by selling into fear (673/674 puts)

3. Are now sitting in a macro environment that supports your thesis

The hardest part now is not over-managing it. You have a plan (synthetic short, defined risk, expiry in 27 days). Let the position work, but have clear levels where you act:

• Above 695: re-evaluate short calls

• Below 682: consider taking profit on puts

• Still at 690 in a week: decide if you have conviction for the next catalyst

My Take & Positions

I will add in a new possibility that I had last week, such that if there is a dip in the market, I can sell additional short-dated vertical puts to bring in premium. Outside of that, this is a well-created plan for the week.

Over the weekend, the Truther-In-Chief exchanged salvos about his desire to acquire Greenland for the United States. After being told emphatically no, a potentially new trade war has begun. The markets, ending near all-time highs last week, have been rattled lower.

A few things to bring in context:

• It is earnings season, but that may be ignored

• Employment is slowing, but inflation is still sticky

• The economy has been grinding to a lower growth pace, and it may shrink more—however, not a recession

Considering the economic backdrop, launching a new trade war with Europe has destabilizing potential.

I wanted to break down my AI predictions and the my SPY ETF trade I have on with the new economic landscape. I will feed the new geopolitical backdrop into the AI query, then see what could be next for the markets.

Economic Data

The economic data has been consistent for several months now in that we continue to see lowering employment growth—employment gains have slowed to levels not seen since the COVID shutdowns. Businesses are wary of pushing into new ventures, which along with consumer demand, this has softened the growth rate in the money supply keeping it at below-median levels.

There is a massive caveat to the above, however, in that the AI infrastructure buildup continues to dominate any real growth we have been seeing. Effectively, the amount of funds being poured into AI data centers and the software systems to power AI services may be the only increasing growth the economy has.

Along with money growth, which is both cause and effect within the economy, personal income growth, and its correlated personal consumption growth, have both slowed to below-median levels.

The consumer-led economy is not being fed any kind of increasing catalyst. The effects of this will be slowing revenue growth rates with lower profit levels. Without these ever-increasing levels, stocks will adjust to lower projection levels.

Then we turn to the interest rate outlook to see what may be possible.

Inflation remains somewhat sticky. The immediate tariff tax increases are working their way into price pressures. This should be temporary as tariffs are more likely than not deflationary over the long run. Getting there requires many individuals to lose their purchasing power for goods, which would in turn drive economic growth lower. Tariffs are a tax. These taxes are taking a chunk out of discretionary purchasing power—incomes are finite. Prices eventually will fall, but at the cost of aggregate demand.

Bond Yields

The latest news rattled the bond markets. Many suggest that the simplest way to deal with Trump’s takeover demands of Greenland is to put the United States in its financial place by merely threatening to dump Treasury debt. This would push interest rates up significantly, and rapidly—maybe that is what is playing out in the markets.

It may be that liquidity in the debt markets dried up somewhat, and bond prices dropped, which pushed the US 10-Year Treasury yield up somewhat 15 basis I points since last week. If needed, the Fed could step in and provide liquidity to ensure orderly market conditions—which is inflationary as that is akin to QE if that keeps going on for too long.

This may be a bit of fuel to a potential bonfire that is just round the corner: The Supreme Court is deciding on the constitutionality of tariffs. If they strike down the tariffs as overreach, that would be tax revenue that would disappear immediately. That would leave a hole in the budget and add an additional 20% of debt onto an ever-increasing deficit—which will add even more to the ever-increasing debt.

Note: Given the potential tariff ruling, I had tried to get into a short TLT position last week, but missed that move. Now, the bond market has moved from other, outside reasons.

Over the past two years, after the big move higher in bond yields from the COVID-driven, near 0% interest rates environment, TLT ETF has gone flatline. I have been sitting on a long TBT ETF—the inverse Treasury ETF—for several months now. During this, I have been selling TLT calls almost like clockwork, which I have covered in my previous posts. While that has not made me a kagillionare, I have consistently brought in premium.

I fully expect a longer-term gravitation of interest rates to higher levels. The debt is getting to levels that it will consume more and more of the budget. If the Supreme Court rules against the tariffs, it will only add more supply of debt, and that will allow price to fall further. While I missed last week’s potential entry for new positions, I am going to figure out a way to get in—notwithstanding my inverse position I am already in.

But there’s more… and it is not just the United States: Interest Rates in Japan are starting to soar at a pace that is eye-popping, and the ripple effects throughout the world will be seismic.

Watch Japan

Above is the yield on the 10-year, Japanese government bond—since 2020, it has gone from zero to 2.37% in a rapid pace.

This will be something that is ever-consuming, and it will drive interest rates and currencies around the world. Japan has been seeing massive deflation and effectively near-zero economic growth. To stem this, the Bank of Japan (BoJ) has, for years, acquired Japanese Government Bonds in order to cap interest rates to potentially stimulate economic growth. The BoJ has slowed purchases significantly, and this is driving up Japanese interest rates.

During all of these years, Japanese investors have sent their investments abroad to gain interest income that could not be earned at home because of their own country’s near-zero rates.

Japanese interest rates were not permitted to hit a free-market equilibrium price, but instead, were manipulated. That is reversing. Funds that were sent abroad may start to move back to Japan because of higher interest rate differentials. These moves will push the Japanese yen higher versus all other counterparts with the US dollar being the main player in this.

This will be something that happens slowly at first, then all at once.

AI Projections

Here are the main points I am asking of Abacus AI in my ongoing chat in this thread:

• Employment numbers continue to increase, albeit at a much lower pace. At the same time, inflation numbers remain higher than desired, but likely will move lower over time as economic output slows;

• The Bank of Japan has all but halted its purchases of its government bonds. The yield on the 10-year has been rising sharply in response to the drop in demand from the BoJ, as well as increases in inflation in Japan;

• Over the weekend, President Trump threatened a new trade war with Europe over his desire to obtain Greenland for the United States, from which Norway has stated emphatically no. The stock market today fell and ended down 2.00% for the day while the US 10-Year Treasury yield increased despite selling in the stock market selling off, lacking the proverbial flight-to-quality moves typical in a stock market selloff.

Given the three main points above, I do not see aggregate demand increasing at any pace that would bolster employment growth. Simultaneously, I do not see the Federal Reserve necessarily lowering interest rates in response to slower employment growth as inflation still remains slightly elevated. My thinking is that there will be a long, slow move out of US Treasuries as the Japanese government bond yields continue to rise rapidly. Any investors that bought US Treasuries may start repatriating funds out of the United States and back into Japan, which could very well trigger selling in the FX markets. This will ultimately drive long-term interest rates higher in the United States, and throughout the world; likely at a slow, grinding pace.

My current stock trade was to sell short a SPY ETF 1-month 702 / 703 vertical call spread for $0.43 while simultaneously buying an in-kind long 1-month 681 / 682 vertical put spread for $0.28. Both legs of the spread had been out-of-the-money since the beginning of the trade, but now the puts are in-the-money with three weeks to go.

Overall, what are your thoughts on the economy given the economic inputs above, and how would this play out in the stock market?

Here is the response:

1) Framing what you’re describing: this is a rates/term-premium shock, not a classic “growth scare”

The key observation you made—stocks down hard while the US 10Y yield rises—is the tell. That pattern usually means the market is repricing one (or more) of:

• term premium (less willingness to hold long-duration paper at any given yield),

• inflation risk premium (policy/trade shocks that could be inflationary),

• fiscal/supply absorption (who is the marginal buyer of duration?),

• or global relative-yield dynamics (capital reallocation, hedging costs, basis effects).

That’s different from a typical recessionary equity selloff where Treasuries rally.

Your “three inputs” actually line up coherently under a single umbrella:

A) US: slow job growth + still-elevated inflation → Fed stuck

You’re basically describing a mild stagflationary policy box:

• Employment is still growing but slower (so demand isn’t exploding).

• Inflation is still above target (so Fed can’t cut aggressively).

• That combination tends to keep front-end rates “sticky” and makes the market more sensitive to any force that pushes long-end yields higher.

B) Japan: BOJ steps back → JGB yields rise → global duration reprices

The “Japan is exporting higher yields” channel is real, especially via global term premium and carry/funding dynamics.

• BOJ balance sheet is shrinking and it’s stepping away from the JGB market; reporting shows QT and rising JGB yields (10Y ~2%+; long end higher) (Wolf Street).

• Rising Japanese yields have been widely framed as a global spillover risk (Reuters).

• Market snapshots show Japan’s 10Y yield around 2.34% as of today (Jan 20, 2026), up sharply vs a year ago (Trading Economics).

You’re also right to focus on repatriation as a plausible medium-term headwind for USTs: as domestic yields rise, the hurdle rate for Japanese investors to hold foreign bonds rises (especially once you include FX-hedge costs). It doesn’t need to be “everyone sells everything”—even a marginal shift matters at the long end.

C) Geopolitics/trade threats: inflation tail risk + risk premium up

Even if growth is slowing, tariff/trade-war talk tends to be interpreted as:

• inflationary (import prices, supply chain friction),

• growth-negative (demand hit, uncertainty),

• and risk-premium widening (earnings multiple compression).

That’s exactly the kind of shock that can produce “stocks down + yields up.”

CNBC also explicitly tied the global bond sell-off to tariff threats and geopolitics (CNBC).

__________________________________________________

2) Your macro conclusion is directionally right, with one nuance

You wrote:

“I do not see aggregate demand increasing at any pace that would bolster employment growth… I do not see the Fed necessarily lowering rates… long, slow move out of US Treasuries…”

That’s a coherent base case: slow growth + sticky inflation + rising term premium.

The nuance: demand can be “meh” and yet rates can still rise if the driver is term premium / marginal buyer withdrawal rather than expected growth. That’s exactly the environment where equities struggle: not because earnings collapse tomorrow, but because the discount rate is drifting up.

So the equity regime becomes:

• Earnings don’t implode, but

• multiples compress or at least stop expanding,

• making the market rangebound-to-down with periodic sharp drawdowns.

That aligns very well with what you’re positioned for.

__________________________________________________

3) How this tends to “play out” in stocks (mechanically)

A) Higher long rates → duration equity gets hit first

If the 10Y rises on term premium (not “good growth”), the market usually:

• de-rates high-multiple growth and long-duration cash flows,

• punishes crowded/expensive leadership,

• while defensives may hold up “less badly” (but can still fall in a liquidation).

B) Inflation + trade uncertainty → margins become the key

In a slowing-demand world, companies can’t easily pass through costs.

So you get a market that worries about:

• margin compression

• not just revenue growth.

C) Correlations can flip the wrong way for “balanced” portfolios

If both stocks and bonds sell off together (your observation), diversified portfolios don’t damp vol. That tends to:

• push up VaR limits / de-risking,

• create “air pockets,”

• and keep realized volatility elevated.

__________________________________________________

4) Your SPY structure in this regime

You’re short the 702/703 call vertical and long the 681/682 put vertical; now the put spread is ITM with ~3 weeks left.

Given today’s tape (“stocks down, yields up”), your structure is well matched because:

• Your short call spread benefits from:

  • reduced odds of an upside melt-up while yields are rising,

  • time decay working in your favor.

• Your long put spread benefits from:

  • downside continuation,

  • and (often) volatility bid during risk-off.

The one thing to be aware of now that your put spread is ITM:

A 681/682 put vertical has max value = $1.00 at expiry if SPY is below 681.

So the put spread’s remaining upside is capped and becomes more about:

• “how close are we to max value?” and

• “do I want to keep exposure to a rebound?”

In other words, once it’s solidly ITM, it behaves less like convex protection and more like a nearly-realized payout that can be given back if SPY mean-reverts.

__________________________________________________

5) The most likely “market path” given your inputs

Base case (most consistent with your thesis):

Grinding higher yields + choppy/down equity drift

• Not a crash, but repeated selloffs and weak rebounds.

• “Bad breadth” markets: index held up by a few names until it can’t.

Risk case against your short call:

A sudden pivot in narrative to “Fed will cut anyway / growth fine / inflation falling fast”

• That’s typically triggered by a very friendly inflation print and/or dovish Fed communication.

• Would push SPY back toward the call strikes faster than slow macro logic would suggest.

Tail case in your favor:

A “global duration tantrum” where term premium rises faster than earnings can justify

• This is where you can see multiple compression accelerate.

__________________________________________________

6) What to watch next week to validate/kill the thesis

1. US CPI / inflation data (you already flagged this):

• hot → supports your view (rates up + equities pressured)

• cool → weakens your view (rates down + equities bounce risk)

2. JPY + hedging costs (the repatriation channel shows up here before it shows up in TIC flows)

3. Auction demand / bid-to-cover in USTs (proxy for marginal buyer stress)

4. Credit spreads: if HY starts widening meaningfully, equity downside can accelerate.

__________________________________________________

Bottom line

You’re describing a plausible 2026 setup where:

• the labor market isn’t collapsing (so no emergency Fed cuts),

• inflation isn’t fully defeated (so no easy easing),

• and global duration is repriced (Japan/BoJ + geopolitics/trade risk).

That combination tends to produce equities that struggle to make sustained upside progress and are vulnerable to multiple compression—which is broadly supportive of your current SPY structure.

My Take

This is a ton to chew on, and I will systematically work through all of this. So far, Abacus AI has been spot on, and I am profitable—likely not for the reasons I initiated the trade, but profits are profits. AI believes I am in the correct position, and my profits will rise further. However, and in line with my own thinking, we are likely to see a bounce in the market, so I am going to step into the market and sell short-dated vertical puts out of the money to bring in a few more pennies—this will be a small, protective trade within the bigger moves.

Last week we received employment numbers, which came in a bit on the soft side. There were gains in employment, but they were less than anticipated. In fact, the year 2025 was the worst year for job growth since the pandemic.

While job growth is poor, there was not much there for the Federal Reserve to bite into to lower interest rates faster. In the future, expectations are for one decrease in interest rates in 2026, and maybe there is enough room for two cuts. The latest jobs data does not push that needle too much further, however.

This week, inflation hits with CPI on Tuesday and then PPI on Wednesday. While job growth has slowed, inflation has not necessarily painted a picture that shows positive moves toward the all-too-critical 2.00% annual growth rate.

The chart above shows how strongly correlated the year-over-year growth rates are for the money supply and inflation—effectively, they move in tandem. Inflation is a purely monetary phenomenon. If the money supply growth rate is increasing rapidly, there is more money to purchase goods and services, which drives up prices, ceteris paribus.

I asked AI to analyze the latest employment numbers, as well to look into my position to see what it believes (last week’s post). AI feels that employment will not push the needle for the Fed, that the wait-and-see approach to employment is still warranted. In the meantime, the real “fork in the road”, as AI put it, will be inflation.

Both releases are hitting this week for CPI and PPI, which are solid indicators for the PCE at the end of the month. Notably, data is missing because of the government shutdown, so the actual inflation data may feel a bit askew. For that, looking to the money supply data is the best way to determine the overall trajectory for inflation, given the chart above.

The Odd Thing About Tariffs & Deflation

Price pressures have been falling—even the money supply growth rate is falling, as can be seen above. While there has been a drop, the latest numbers are printing about 2.65%—still above the 2.00% level.

There is an odd outcome from tariffs that is not immediately obvious: Tariffs can be deflationary. Tariffs are a tax. Anything that will be consumed is now being taxed at a much higher rate. This diminishes the purchasing power of the consumer because incomes are finite and have not increased measurably over the past year, certainly not relative to price increases, where the word “affordability” is now a key driver for the Trump administration.

Tariffs actually create deflation. Since less is being consumed, prices begin to drop. The catch is: Employment begins to drop. We are seeing employment dropping, and from that, revenues and profits for companies will fall short. So, on the one hand, while more is being spent on taxation, prices will eventually drop and employment will continue.

My expectations for this week’s inflation data is that we see more of the same, that inflation is moving toward the coveted 2.00% level, but the pace may be slow. I do not believe we see anything that would necessarily push the needle for the Federal Reserve on inflation, much the same as employment.

My Current Position

My current position is a pseudo-short position on SPY ETF. I am short a 1-month vertical call spread versus long a 1-month vertical put spread. I sold the call spread for $0.43 points, and bought the put spread for $0.28; I have a $0.15 credit. Both of the positions are about $10 out-of-the-money giving me some cushion.

If the market moves mostly sideways, or goes up slightly, then expires, I earn the $0.15 at expiration—if I keep the position that long. If the market moves down, the calls will decrease in value, while the puts increase in value, and I will exit the trade. The downside is a sustained move upward.

According to AI, this is a patient trade, and the rewards are for sitting and waiting this out. AI believes the overall trade will work because it does not see sustained moves higher. I agree, and that is why I put the position on.

However, I want to know more about AI and stocks involved in that genre.

The AI Trade

What happens next in the stock market may be determined by what happens with the AI trade. Above is AIQ ETF, which is the go-to AI trade ETF as it encompasses the most predominant AI stocks. Since 2023, AIQ has been on a tear, and is up near its all-time highs reflecting how some of the individual stocks are trading in the sector.

But what happens next?

This is the big question everyone is focusing on, inducing myself. There is a tremendous amount of spend going on within the industry, and this has driven all of these stocks to their current all-time high levels. However, the market is starting to wonder what the payoff will be, and when it will materialize.

Take the leader: Nvidia. They are backlogged. NVDA stock is appropriately priced given the 12-month forward P/E ratio. But if you look beyond that, Nvidia stock may be overpriced as the rate of growth is expected to taper beyond 2027-2029. Then there is the poaching that is starting to happen with some companies opting for Alphabet’s TPUs versus Nvidia’s GPUs, and that poaching will drive more increases for GOOG stock at the expense of NVDA stock.

Then you have companies like Oracle where the market is wondering if the company can recoup their investments, and the latest stock moves have shown the concerns of investors.

My take on this is that we may see a pullback on AI stocks because of the lack of profits and the over-valuation on some of these stocks—I will be asking this of AI in next week’s post.

A Potential Bond Position

The final thing to consider in this is the tariffs themselves, and the Supreme Court’s pending decision. Expectations are that the SCOTUS will strike down the tariffs as unconstitutional. What happens then?

Interest rates are likely to move higher because of this, and because of other effects from that.

First, the consumer would be relieved of its tax on consumption. That would reinvigorate that segment of the economy, which actually would relieve the Fed of the pressure campaign to lower interest rates. Employment would likely restart, and toward H2 2026, employment gains are likely to materialize in the data.

But how does the government pay for the hole in the budget that the tariffs were designed to fill?

The current budget deficit is expected to hit ~$1.825 trillion. The lack of the tariffs should have a hole of about $400 billion, pushing the deficit to ~$2.25T, a 10% increase higher than expected. Investors will be able to demand more interest for their investment from the United States, and absent any real concrete moves from the Federal Reserve, this would drive the 10-year yield up to about 4.50%-4.75%. From there, it could be all downhill. As the debt increases, the amount being paid continually consumes the budget itself.

I am awaiting the Supreme Court decision as we all are. I am going to start moving back into TLT ETF on the short side (I am still long my TBT ETF, the Treasury inverse ETF). I am not anticipating a big move down in TLT ETF, but instead. continuous pressure that would keep a lid on any moves up.

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It was another banner year for the stock market with some 38 new all-time highs printed for the S&P 500. Despite these milestones, a lot of investors are exhibiting doubt.

The economy ‘feels’ like it is slowing, and there have certainly been declines in employment. Affordability is at the core of a lot of concern, and consumer confidence is near all-time lows. Despite that segment of the economy, the ‘other’ portion of the economy, the AI economy, is booming. Yet, investors are fretful over a potential bubble. Valuations are high, but it is the lack of profits from all of the AI-driven investments that is most worrying. Valuations are pegged to ever-increasing expenditures, revenues, and profits. Those increases are looking like they may be out of reach, and some stocks have sold from this.

This begs to question what will happen next for the stock market in 2026.

Let’s Ask AI

With the new year, I am incorporating more AI into my analysis. AI is a tool that I believe will assist me in analyzing the entire economy while also broadening search results to information outside of my normal sphere of influence.

I use quantitative analysis to evaluate individual companies and the overall economy. What I plan on doing is also taking the results of the data, incorporate all economic data to query AI as to what it believes will happen next. This is a top-down approach using a broader macro-economic analysis.

Next, I will systematically work through all 500 of the S&P 500 stocks, building a Discounted Cash Flow Statement (DCF), then query AI on each individual company and have AI use that input within the bigger, broader scope of analysis—2 per day, 5x per week, 50 weeks = 500 stocks. This is more bottom-up, if you will.

Combining the two methods will likely yield more nuanced results.

Let’s see what AI has to say.

Follow Along

I am using abacus.ai, a super-assistant. Abacus.ai allows a user to access nearly all of the major AI LLMs. With abacus.ai, you can get Chat GPT 5.2, Claude 3.0, Gemini 3.0 Pro, Grok 4.1, Deepseek, image generators, video generators, and many, many more, all for just one low price of $10.00 / month … my referral link is below:

Get abacus.ai

My Broader Economic & Investing Thesis

My economic theory is that the rate of growth on the money supply is one of the key beginning points of economic activity. If firms are expanding into new business ventures, and these firms are taking on debt to finance these ventures, in an economy based on fractional banking, the pace of growth of the money supply will increase. This also means that hiring will expand, and new hires will increase the aggregate demand of the economy, thereby pushing revenues for companies, and inducing firms to expand further—a feedback mechanism.

If you want to know what is going to happen within an economy, watch the money supply growth rate, personal income & personal expenditures growth rate, and median earnings growth rate of the S&P 500. These all work hand-in-hand, and if you watch all three, you will have a solid understanding of how the economy will perform in the coming months.

Don’t stop there, however, compare everything to anything. One data set does not tell you much without comparing it to other data sets.

What is happening now?

There are key bullet points that are the basis of where the economy is right now:

• The economy has been grinding lower and AI feels this will continue.

• AI has been the biggest stock market driver of late—what does AI believe will happen next?

• The tariffs are a key factor in the economy and will continue to be so.

Within my input query to AI, I will encompass a lot of these as the focus.

Using AI - Goals & Limitations

The goals are to get a sense of what will happen with the stock market because of what is happening in the economy. Next, I also want to add in queries about short and medium-term price movements with the S&P 500 via SPY ETF.

AI has limitations, however: You basically have to back it into a corner so that it stays within a set framework. I want to see what AI has to say, but I also want to extrapolate each bullet point and get as much information from AI as I can.

This is the first simple query, and from here I will continually add into this query on a continuous basis:

My Query

I am an economist, and I use econometrics to analyze data that will give clues as to what will happen next in the stock market. There is a strong correlation between the rate of growth of the money supply versus the rate of growth of personal incomes and personal expenditures. Since the U.S. economy is primarily driven by consumer spending, analyzing the rate of growth of these data points will show some correlated moves in corporate revenues and profits, which would translate into stock market movements. There is also a strong correlation between personal incomes and personal expenditures, and the median earnings growth rate of the S&P 500 stocks since the U.S. economy is mostly driven by consumers and services. Can you describe the current growth rates of these components and how this might affect the stock market?

AI Output

AI did not hold back—this will be a massive rabbit hole. It will take me days, weeks, if not the entire year to fully understand what all of the key points are from the query output, and what to expect next.

That being said, here are the key bullet points that I will be continually researching over the following days & weeks:

Here’s a concise, data‑driven view of where those components stand (using the latest 2025 data available as of Jan 2026) and what they imply for equities, framed in the way you’re thinking about macro–earnings–equity linkages.

1. Money supply growth vs. income and spending

M2 money supply (YoY)

• Level: M2 around $22.3T in Nov 2025, up slightly from Oct [FRED M2].

• YoY growth: ~4.3% in Nov 2025, down a bit from ~4.6% in Oct; broadly running in a 4.0–4.6% YoY band through 2025, up from ~3.5% in late 2024 [YCharts M2 YoY].

• Qualitative takeaway:

• After the post‑COVID contraction/flatlining, money growth is now moderate and positive, but nowhere near the double‑digit surges of 2020–21.

• It’s consistent with a “normal-ish” expansion, not an outright liquidity boom and not a sharp monetary squeeze either.

Personal income growth

• Latest comprehensive BEA snapshot: Sept 2025

• Personal income: +0.4% MoM (SAAR) [BEA, Personal Income & Outlays, Sept 2025].

• Real disposable personal income: +0.1% MoM.

• Wages/salaries YoY: roughly around +5% YoY (various series; BEA + wage trackers like TradingEconomics).

• Savings rate: ~4.7% [BEA].

This puts nominal personal income growth a bit above nominal GDP growth, and real disposable incomes still grinding higher, but modestly.

Personal Consumption Expenditures (PCE)

• Sept 2025:

• Nominal PCE: +0.3% MoM; services drove the increase [FRED PCE, BEA Sept 2025].

• Real PCE: 0.0% MoM – flat in real terms for that month.

• PCE price index: +0.3% MoM, +2.8% YoY; core PCE also +2.8% YoY [BEA].

• Over Q3 2025, PCE prices were rising at about a 2.8% annualized pace [BEA GDP Q3 2025].

Macro alignment with your framework

• Money supply growth (~4% YoY) is roughly in the same ballpark as nominal consumption and income growth (call it mid‑single‑digit, combining modest real growth with ~3% inflation).

• There isn’t a major divergence where money is contracting sharply while incomes and spending still rise, or vice versa; that argues for continuity rather than a regime break, at least near‑term.

2. Income–expenditure dynamics and corporate revenues

From a consumption‑driven GDP perspective:

• Incomes > spending at the margin in Sept 2025:

  • Nominal income +0.4% vs. spending +0.3% MoM.

  • Real incomes slightly positive, real spending flat.

• Savings rate stabilizing around mid‑4% — low by historical standards, but not collapsing.

Implications for corporate top‑line:

• With:

  • nominal incomes growing ~5% ish YoY,

  • inflation ~2.5–3% (PCE),

  • real spending trending slightly positive but choppy,

• You’d expect nominal revenue growth for broad consumer‑facing corporates in the mid‑single digits, absent large share shifts or price/mix effects.

• Services spending is doing more of the work than goods, which favors service‑heavy sectors (travel, leisure, some financials, software/IT services) more than traditional goods producers.

In your econometric language, the current configuration looks like:

• Money growth: moderate, positive, not explosive.

• Personal income: somewhat faster than real consumption (small decompression of balance sheets / slight rise in saving).

• PCE: still expanding nominally, flat to slightly positive in real terms.

That tends to be supportive but not booming for forward revenue growth.

3. Earnings growth: S&P 500 vs. “median” stock

Data availability is better for aggregate EPS than true median growth:

• S&P 500 aggregate EPS growth (consensus):

  • CY 2025: ~10–12% expected EPS growth (FactSet has ~12.1%) [FactSet Earnings Insight].

  • CY 2026: ~14–15% EPS growth outlook [FactSet, Investing.com summary].

• These aggregates are heavily skewed by mega‑cap tech / “Mag 7”, with expected high‑teens to >20% EPS growth for that cohort.

If you’re looking for something closer to a median growth rate:

• Various breakdowns of “S&P 493” (S&P 500 ex‑Mag 7) show expected growth in the high single to low double digits (roughly ~9–12.5% in 2025/26), more in line with what you’d predict from mid‑single-digit nominal demand plus some margin normalization and buybacks.

• In other words:

  • Index‑level EPS ≈ 10–15% (cap‑weighted, skewed by mega‑caps).

  • Distribution center/median likely closer to high‑single/low‑double digits, consistent with your income–expenditure–earnings correlation story.

4. How this configuration might affect the stock market

Putting your macro–earnings link into an equity narrative:

a) Directional bias: modestly positive fundamental backdrop

• Money growth is not restrictive:

  • YoY M2 > 0 and comfortably positive.

  • This reduces odds of a deep liquidity‑driven demand downturn in the near term.

• Income and consumption are growing slowly but positively in real terms:

  • That supports continued revenue growth, especially in services.

  • Consensus EPS projections of 10–15%:

  • If your models show similar growth from personal incomes/expenditures, the macro–earnings alignment is relatively tight.

• Net effect: baseline case is continued, moderate earnings expansion rather than an imminent earnings recession. That’s usually supportive of equities, particularly if the Fed is perceived as at or past peak tightness.

b) Valuation vs. growth: key tension

• With mid‑single‑digit nominal macro growth but double‑digit EPS expectations, you’re implicitly relying on:

  • margin stability or expansion,

  • buybacks and financial engineering,

  • sector‑specific growth (AI, tech, communication services) well above the macro trend.

• For the broad market, this means:

  • If your econometric models on income + consumption start pointing to slower nominal demand than currently priced into 2025–26 EPS, there is downside risk to earnings expectations and thus to index levels.

  • If they confirm or exceed current consensus growth, current valuations could be “justified but rich” rather than fundamentally stretched.

c) Sector implications, given the current mix

Given that:

• Services spending is driving PCE gains, and

• Real goods spending is flattish

You’d expect:

• Relatively stronger tailwinds for:

  • Service‑oriented sectors (consumer services, travel/leisure, health care services, IT/services).

  • Firms with pricing power and exposure to nominal growth rather than volume alone.

• Weaker tailwinds or more cyclicality for:

  • Goods‑focused cyclicals tied to durable goods, housing‑related spending, and discretionary big‑ticket items, especially if real spending on goods does not re‑accelerate.

d) Money–income wedge: what to watch going forward

Given your focus on the relative growth of money vs. incomes vs. expenditures:

• If M2 growth accelerates faster than income and PCE growth:

  • Historically associated with periods of multiple expansion, credit easing, and potential speculative behavior.

  • Would be a signal for a more pro‑risk stance if inflation expectations remain anchored.

• If M2 growth slows while income and PCE keep rising:

  • That usually presages tighter financial conditions and can lead your models to flag a future deceleration in corporate revenues and profits.

  • In that scenario, it would be a warning for multiple compression or an earnings disappointment down the line.

Right now, we’re in a middle regime: moderate, roughly aligned growth in money, incomes, and spending, with earnings expectations running somewhat ahead of macro aggregates due to sector mix and margins.

5. How you might incorporate this into your econometric work

Since you’re already working with these correlations, a few practical ideas:

Use:

• YoY real PCE and real disposable income,

• M2 YoY,

• and some measure of consumer credit growth

as predictors in a panel or distributed‑lag model for S&P sector revenues.

Compare:

• model‑implied median EPS growth vs.

• current bottom‑up median/“S&P 493” growth expectations

to identify where the Street is optimistic or pessimistic relative to the macro.

If you’d like, tell me which exact series (FRED/BEA tickers) and frequency you prefer (monthly vs. quarterly), and I can help you sketch a specific empirical specification (e.g., ADL/VAR) to tie M2, PI, PCE into sectoral earnings or S&P median EPS growth.

My Take

The was a lot—AI did not hold back.

I will be reading this, and rereading this, and rereading it over a very long period of time. Mostly, I completely understand all of this, but linking everything will be the challenge, along with breaking down and linking everything to all that was stated here.

Mostly, the read I get is that the economy is slowly grinding lower, but AI does not necessarily see a recession at this point. The tariffs have had an effect on consumption, and this is going to lower economic output, which will translate to lower revenue growth and profits for companies.

Then there is AI, which that portion of the economy is still driving the stock market. I will touch on AI soon as that is a whole different topic for discussion.

We are starting to see economic data trickle back in after the shutdown. The economic picture remains consistent. The tariffs are having the effect of restricting economic activity. This is reducing both economic output and having a downward push on employment. Although I see cracks appearing because of the tariffs, I also see these cracks being short-lived.

That being said, I fully expect the tariffs to be struck down. The Supreme Court is considering this right now, and they appeared dubious of the constitutionality of a president imposing widespread tariffs unilaterally. This is especially true given that the law in question never even mentioned the word tariffs. Further, all taxation is constitutionally supposed to originate in the House of Representatives—there is no delegation-clause.

Read: I fully believe the tariffs will be struck down and am gearing up for this to occur. Once that happens, then it is a matter of what economic foundation we are standing on, and what a post-tariff economy could look like.

Our economy is primarily a consumer-driven economy. Because of this, I always look at the money supply first, then move to both personal income and personal consumption, as well as consumer sentiment. Understanding where the consumer is right now will give clues as to what is possible for the post-tariff economy.

Mostly, I see an economy that has seen its potential slightly handicapped, and once the tariffs are removed, there will be a large amount of investment and expenditures in the future. That’s the good news, of course.

I also see increased inflation along with this economic growth. While some inflation is an essential part of any economy, there may be heightened price pressures. The tariffs will immediately reduce prices for direct-to-consumer goods from overseas producers. Those price declines will happen immediately. Eventually, however, I see costs going right back upward because of the removal of the tariffs—there will be a massive hole in the budget without the tariffs, and long-ned interest rates are already moving higher.

Personal Incomes & Personal Expenditures

The first chart above is the rate of growth of the money supply. In a fractional-banking economic structure, money is the driver of all things. If you want to know what will happen in an economy, or the respective stock market, looking at the economic growth rate is the first place.

The money supply has grown, but at a pace that is just below median. That feels like what is occurring with the economy, that we are seeing inflation (see below), and that economic growth doesn’t necessarily feel like it is moving at a pace it could.

When you consider the fractional-banking aspects of our economy, the pace of growth of the money supply tells us how much in terms of loans are being made, which expands the money supply. For example, if businesses believe there is a continued possibility of profitability, and if they also believed that taking on new loans would not only be paid for, but be a profitable venture, business in a purely competitive landscape will expand to grab further market share. That expansion means building new infrastructure for the respective business, and the pace of this shows up in the money supply.

The money supply itself has grown to 1.42%, down slightly from the most recent peak of 1.70%. For reference, the median growth rate is just over 2.00%. That means not only has the money supply growth rate failed to achieve a median level, it has hit its most recent peak and started to fall further. But there are two things that will flip this:

• Current interest rate decreases via the Federal Reserve’s recent move; and,

• The removal of the tariffs.

Equally, when business expand, they typically hire. In an economy that is more than 70% consumer driven, the tariffs are reducing the consumer’s capability of full expenditures of their disposable income because the tariffs are taxing a chunk of that capacity.

Just after I look at the money supply growth rate, I also look to the growth rate of personal incomes and then personal expenditures, which the chart above shows a strong correlation.

Incomes drive consumption. If there is a growing pace of income, driven by more and more individuals being hired as well as currently employed individuals seeing pay increases, that pace then drives consumption.

While not a perfect science—economics never is—the correlation is very strong. Just as the money supply is showing, both incomes and consumption have expanded, but fallen short of median growth rates.

With the Federal Reserve having just dropped interest rates, this will help consumers with expenses as rates paid to credit cards as well as loans for housing and vehicles will move lower. In aggregate, this helps.

But it will be the tariffs that have the biggest effect on reducing price pressures, which will help drive consumer expenditures. Right now, the tariff tax is reducing finite incomes from their full consumption capability. Take the tax away, and there is more available disposable income. Decrease the interest rate being charged for financing, even more potential is unleashed for the consumer, which will drive expenditures, which will drive businesses to take on additional future expansionary possibilities.

Once the tariffs are gone, the consumer side of this economy will expand rapidly. I am positioning myself for this. But, there will be consequences.

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Inflation

The above chart compares the money supply growth rate with the inflation rate. I say this often: Inflation is a purely monetary phenomenon. If the pace of the money supply expands or contracts, inflationary pressures do the same in a highly-correlated relationship.

The Fed has just reduced its target rate for overnight lending, and banks will follow suit for their lending products. The reduction of the overnight rate is correlated to the increase in the money supply because the cost of borrowing money is less expensive, and therefore there will be higher demand—all else equals.

But it is the tariff tax that will be the ultimate consumer-reliever that I believe will have the bigger effect on the consumer economy.

That drive from consumer expenditures is both a push and pull on price pressures. The money supply will expand because of the reduction of interest rates via the Fed’s moves. But the increased demand from consumers will mean consumers will have a greater amount of their disposable income for purchasing products that had previously seen price hikes because of the tariffs. That, too, will drive price pressures up.

While the tariffs being removed will reduce their import costs, demand will push these prices right back upward.

Prices on goods directly imported will drop immediately at the register. But intermediate goods imported, which then work into a broader price for a finished good—think each individual part to a car—will take time to push the price down on vehicle purchases.

It may be highly likely that the Federal Reserve reverses its position shortly after the tariffs are removed because of price pressures moving right back up. There will be turbulence in pricing over any period of time until new equilibrium pricing levels are discovered from secondary inflation.

Sentiment versus Expenditures

Another key chart I follow is consumer sentiment versus consumer expenditures, which looking at the chart above shows that consumer sentiment is just above the all-time low from the COVID shutdowns. Consumers are beholden to their overall confidence level in the future when they consider long-term, bigger purchases such as a vehicle.

The two factors that are driving such low sentiment:

• Government shutdown

• Tariffs and overall affordability

The government shutdown has ended… for now—the current resolution is set to expire on January 31st, which the Republicans have promised Democrats they would address healthcare related tax credit extensions for the next resolution. I have almost zero faith in Republicans keeping that promise… let’s see. Given that, it is not too far out of the realm of possibilities that the Republicans allow the government to shut back down when the Dems don’t submit. Then again, Republicans are feeling the pain in what will be an election year where there are record numbers of individuals not re-upping for reelection… let’s see.

The other factor that had driven confidence to near all-time lows is affordability, and consumers have placed the blame squarely on the tariffs which has driven prices upward. If the Supreme Court does, in fact, strike down the tariffs, then there is a significant chance that there will be a newfound boost in confidence for consumers, which that will drive expenditures… which that will drive business who have been wary of taking on new investment projects because of uncertainty of the future.

I see consumer sentiment moving back up rapidly in a post-tariff economic landscape.

Interest Rates

But… hold up a sec: longterm interest rates have steadily climbed back upward. The Federal Reserve has just lowered interest rates (yesterday, in fact) and long term interest rates such as the 10-year, 20-year, and 30-year Treasury yields have all move back upward despite the lowering of interest rates.

What gives?

The tariffs were a tax transference from higher taxation rates of upper-income earners down to all consumers via a consumption tax, which disproportionately favors the wealthier versus the lower income brackets. If you take away the tariffs, there will be a very large hole in the budget creating a larger deficit.

Investors are loath to lend money to the government without due compensation; they are demanding higher interest for the money lent to the government. The markets are considered the world’s greatest discounter of information, and they always get ahead of the reality of the landscape. Investors believe the tariffs will go in the dust bin, and so will the government’s finances.

Higher interest rates will be the norm with a large deficit. But, so will inflationary pressures both because of the removal of the tariffs and the effects of the removal of the tariffs.

My Take

I see consumer stocks moving back upward. Above, XPL ETF is the consumer staples sector of the S&P 500, which as you can see, has been flat for the year. Keep in mind, the tech sector, specifically the AI-driven stocks, have pushed the S&P 500 up to all-time highs for the past two years continuously. This has left the economy “feeling” like it is K-shaped in the sense that the AI boom has generated a massive surge in infrastructure buildup as well as minting millionaires in their 401(k)s. But the consumer economy has felt like it was left at the train station.

There’s likely a second train coming, and that one will pick up the consumer sector of the economy. However, ticket prices are likely to have “additional fees” in the sense that there is going to be higher inflation because of higher interest rates, which could wear on employment.

I am still holding onto my long TBT ETF position, and have done so for several months after exiting my long TLT ETF position in April when it spiked higher. What I have been doing in the meantime is selling options against TLT ETF, typically call vertical spreads, and bringing in option premium. While my positions and profits aren’t going to fall short of my buying me a mega-mansion, the strategy has brought in consistent profits over the course of this trade. It was not exciting trading, of course, but profits don’t have to be.

I see the government’s finances looking bleak because of the tariffs being struck down. Because of that, I see continued longterm interest rates at higher levels, higher than they currently are. I also see my TBT position moving to larger level of profitability.

While there are possibilities for consumer stocks to move higher, this will happen with increased inflation because of the tariffs being struck down, and the budget deficit this will create; it is a double-edged sword.

The AI Boom still has a lot of legs left in it, but some companies will fare better, and others will poach current success. Coupling that with increasing consumer expenditures, and the other portion of the so-called K-shaped economy will pick up steam.

On November 30, 2022, OpenAI released a statement that they were launching a new Large Language Model (LLM) that was described as “a model called ChatGPT which interacts in a conversational way”. This ushered in Artificial Intelligence, a.k.a., AI.

Three years later, a lot has changed, and likely the world will never be the same.

There has been an arms race by different enterprises to build out their own versions of an LLM as well as the necessary data centers to house these services.

Building these data centers requires one key component: GPU processors. From that, there is one clear winner to date in the AI arms race: Nvidia.

Nvidia designs the most-used GPUs for AI—the manufacturing is outsourced to TSMC or Samsung Electronics. Because of the high demand for these chips, revenue, price, and profits for Nvidia have increased massively in the past three years.

Nvidia’s stock has increased some 1,400% in the past three years—A $10,000.00 investment in NVDA stock on Day 1 would now be worth ~$125K, an approximate 12x in three years.

Nvidia, for its own, continues to maintain that demand for its products are strong and growing with revenue increases hitting 60% in the latest quarter released just two weeks ago.

But cracks are starting to form—investors are getting anxious that there may be a bubble. These cracks may not be in the bigger picture of the AI trade itself, per se, as much as any one individual company over another.

Just last week, Meta Platforms announced they intend to acquire some of Alphabet’s—parent company of Google—TPUs to use in their data centers. This is a seismic shift, and while the buildup for AI data centers is still on, Nvidia’s hegemony of GPUs may have just been tarnished.

The important thing about the shift in Meta to Google’s TPUs is that this shows there are alternatives to Nvidia’s chips that are slightly less costly up front, and because of a higher efficiency, less costly to companies over the longer term.

I still maintain that the AI trade has a long way to go and that the build up will still occur. For now, companies will continue to build their data centers, and then provide their respective services. But the fact that there is an alternative to Nvidia’s chips means that there may be less demand for Nvidia products. That could be the start of a domino tipping.

NVDA stock is priced for continued gains in revenue and profits. What happens if the revenue growth rate wavers? What happens if overall demand starts to level out, or worse, go down?

Other companies would obviously be in the race to grab market share. AMD has its own GPUs and may be putting together more efficient processors. Any unexpected announcement from AMD in this arena could be a shattering shift for NVDA stock.

Then there is the rented data center business: Is it possible that by building massive data centers, some companies that are using Nvidia GPUs could build the services to compete with Nvidia?

While my focus is more on macroeconomic activity and how that translates into moves in the broader stock market, the AI trade has outpaced the general economy. The government shutdown had completely stopped the flow of economic data, that flow is restarting. Notwithstanding that position, the AI buildup is easily a massive shift in the economy and its effects need to be focused.

AI Is Not The Economy

It is important to note a few things here:

• AI is not the economy

• There are not many spillovers from the AI buildup that have driven the broader economy

AI is not the economy. The US economy is over 70% driven by consumers. Those consumers are feeling strains from tariffs and confidence is near all-time lows.

Consumers themselves account for the lion’s share of growth in a normalized economy. If the rate of growth in personal incomes increases or decreases, you can expect an in-kind shift in expenditures. This, then, drives business expansion or contraction. You can see this in both personal incomes & personal expenditures, as well as in the M2 Money supply.

Within a fractional banking system, if businesses are taking on a growing or shrinking rate of loans, this expands or contracts the money supply.

The M2 money rate has topped out somewhat.

But you also have to take into consideration that business expansion will generate its own economic activity. However, this is more of a non-linear reaction, and this is shown with the massive buildup of AI infrastructure, and the lack of in-kind economic expansion.

What we are seeing is that the tariffs are draining the consumer’s capabilities while at the same time, massive buildup of AI data centers have not spilled over to overall economic activity.

All of that may shift quickly as the US Supreme Court is likely to strike down the tariffs as an unconstitutional move by the executive branch.

Imagine what kind of economic activity will occur once the consumer is unburdened by the tariffs?

SPY Versus NVDA

Above is the chart on SPY ETF, the broader S&P 500 ETF, versus NVDA stock since November 30th, 2022. While the S&P has had remarkable gains during this time, these gains are dwarfed by NVDA stock’s 1,400% gain.

Nvidia states that demand still exists for its GPU chips. The company is backlogged with orders. But investors are getting nervous.

Why the inventory buildup?

In its latest financial statements, Nvidia has seen a buildup in its inventory. This begs to question: If the company is backlogged, why is there a buildup in inventor?

Why the Receivables Lag?

Another key factor in the financials that I saw was a lag in accounts receivables, which in itself, is not necessarily a noteworthy element. This could be transitory, and nothing more. Still, this begs to question which companies are lagging. Certainly, the Metas & Microsofts of the acquisition world would not need to float a CapEx purchase. And considering the massive size of these companies, and their overwhelming size of their purchases, what are the companies that are dragging down this metric?

For me, I am sticking with Nvidia’s own guidance that they see continued, and long-term demand for its chips… for now.

The Problem With Nvidia Being So Big

The math is tricky. NVDA stock represents about 7%-8% of the S&P 500 on a weighted index—that will change by the minute as the price of NVDA fluctuates.

While there is some consternation with the potential of an AI bubble, NVDA’s valuation still remains within reach of the overall stock market. Forward P/E ratio for the broader stock market are 22.5x, whereas the forward P/E for NVDA is 28.5x.

My take on this overall is that if Nvidia starts to lose business, it is not because the AI buildup is slowing as much as it that the companies demanding its chips are shifting to alternatives. AMD may very well grab a chunk of this shift, and Alphabet is already taking some of this.

Regardless of which company finds itself the new AI chip maker du jour, the demand will persist… for now—I want to see about profits! Nvidia is certainly there, but the services revenue stream needs to start growing in order to continually push demand.

Google: Move Over Nvidia

Thanksgiving week saw the announcement from Meta Platforms that they were purchasing TPUs from Google parent Alphabet for its AI data center. While Meta has already amassed a large quantity of GPUs for its data center, the shift to purchasing some TPUs can be a bit of an earthquake.

As I mentioned previously, TPUs are more efficient and have lower up-front costs. But they are less well-rounded. From all of the articles that I have read, a good balance is likely to be a focused objective for all involved.

For its own, OpenAI is hastily worried about its product offerings. Google’s Gemini 3 performs better. But there is more to this story: With Google’s data centers, it now controls the entire ‘stack’ with the hardware & software. And, their products are better than the first to arrive: OpenAI.

The services end of all of this is where I have said the real money is. Companies are hastily building up their respective data centers and working to improve the products. Nvidia is needed up front to build these data centers. I do not see NVDA stock as a bubble, as so many have feared. Instead, I see it as a company that is offering the necessary foundation to get these data centers up and running, but the eventuality is that the companies will have what they need, and the growth rate will dissipate.

With Google getting a bigger slice of the data center buildup, this will push GOOG stock further as its own revenue increases from other companies purchasing its TPUs. With its Gemini being a better product than OpenAI, Google stands to gain a lot more over the longer term.

Then there is the fact that Alphabet offers far more than just search. Google has a massive foundation of offerings that search will augment. Search, to me, is a feature, not a business. Google understood this decades ago and built an entire empire starting with search. I am looking to OpenAI scrambling for its life over the longer term. Google will catch and retain all that overflow business.

Microsoft: The Biggest Nvidia Customer

Who is the biggest customer for Nvidia products… which in turn means which company is in the forefront of offering AI products? Microsoft. The behemoth is slated to be building up some $250B for data centers and cloud potential. As the ‘customer’ of AI buildup, the actual profits have yet to really materialize. This is where I ponder what happens next with AI.

First, research is showing us that users are not using AI for productivity gains, but pondering esoteric questions in life. There has only been about an 8% conversion rate for users to pay for premium search. That makes me question the buildup and its potential payoff.

The sums in total are astronomical with how much is being spent on AI data centers. Paying for the data centers, the up-front build, then the ongoing costs for a mass amount of electricity needs for all of the searches goes on top of that. But if each user is not paying for premium pricing for their searches, what pays for the costs?

Microsoft, just as Alphabet & Meta Platforms, have additional offerings that can buffer the overall costs of any one individual search. Microsoft is enterprise, and has a better ability to provide enterprise-focused product offerings that would draw in revenue.

Already, Azure is seeing revenue gains—however, there is a downgrade just this week. There has not been enough conversion of users to premium pricing usage; everything is essentially being given away for free.

Meta

Meta Platforms stock has surged with the AI boom, as shown above. Meta’s growth is far more than Microsoft and Google, which I am hesitant to see how that is. On the one hand, it is the ecosystem that could drive continued profits for Meta over the hardware buildup pace. But is Meta Platforms better positioned than Microsoft & Google?

Meta is far more consumer-based than Microsoft. While Meta has seen solid gains for its AI-related ad revenue, those gains are starting to shrink in their growth rate.

Then you have to account for the overall AI-arms race investments, and the profits are not justifying the costs. There are well-founded concerns that Meta’s buildout is too much, and that the costs will overwhelm profits from taking on substantial debt.

Energy Consumption is Driving Costs

The next big factor of the AI buildup is the energy consumption these companies will need. I am fairly balanced when it comes to breaking down all 11 sectors of the S&P 500. The energy sector is of big interest me because of the shifts we will be seeing. The AI data centers are going to be massive consumers of energy.

Expectations are that over the next 5 years, the AI data centers energy demand will double. This will represent a total of 12% of all US energy demand. But that demand shift will necessitate increased investment in energy. That 12% is in addition to what already exists.

Energy expansion capabilities in the United States are projected to grow some 75GW-125GW in the following 5 years, with an additional 125GW slated by 2035 on top of these initial projects.

After these two layers are added to the overall grid, AI data centers are expected to be demanding 30%-40% of all energy in the United States.

You can be assured that I will be following these projects heavily over the following decade as these investments represent opportunities for financial gains.

My Take

Nvidia itself may be in some form of trouble as its stock price is valued at a level where there is continued increases in revenue and profits. Nvidia designed the necessary hardware to sell its chips with TSMC and Samsung producing the chips. But now other options are available and end-users are starting to expand their

Then we begin to play the what-if game: What if AMD were to announce something this week that would be less costly for data center builders both up front and long term? NVDA could crack hard. But another may take its place. And while there is likely to be a shift going back and forth, based on overall demand, NVDA valuation remains within a reasonable reach of normalized valuations.

The overall buildup is what I am focused on at this stage, and that appears to be on its continued path. Energy consumption is something that I will b e focusing on as well, and that could be a potential boon for investors.

Wednesday after the bell, the much-awaited Nvidia financial release hit the wires. NVDA stock shot up like a freshly-lit rocket, flaring up the hopes of the AI-trade die-hards that there is still plenty of juice left to squeeze.

Prior to the release, there had been ongoing concerns that the AI trade was turning into a bubble, and the earlier an exit, the more the greediest could keep. Those fears of a potential bubble starting to pop were swiftly, and deftly tossed aside: Nvidia’s financials, and their future expectations are showing continued increases.

Nvidia reported higher-than-expected revenue and earnings, and future revenue growth will continue its frothiness. Then, CEO Huang set the tone that he does not see a bubble, but something entirely different.

Notwithstanding this information, the next day, while initially the market held up, there was an eventual sell-off in one of the biggest stock market intra-day turnarounds in a decade—what started as a 2.50% increase on the day for the S&P 500, ended down -2.50% for the day—a full 5.00% swing.

What happened?

With a newly printed revenue beat, then future earnings that are sure to continue to increase further, why would the stock move lower?

Something that may be missing within is other information that affected the stock market last week. The other bit of information is the economy and potential of interest rate moves in the upcoming December Federal Reserve meeting.

But first, what is NVDA stock worth today considering future revenue and earnings?

Nvidia Valuation

How much is NVDA stock worth? The stock has been on a tear since the AI revolution really kicked off in 2023. Nvidia is leading the charge as they are the main producers of the workhorse AI chips that power data centers.

The chart above shows the extraordinary move NVDA stock has done since 2023. In January of 2023, NVDA stock was just below $20.00. The most recent all-time high pushed above $200.00—a 10x move in two years’ time.

Some say the party is overdone. Fine. But ask yourself what is a proper valuation for the world’s most valuable company?

Plainly, future EPS for NVDA shares are set at $6.02. This is the current expectation of future earnings—it may very well move higher. What would you pay for that $6.02 EPS?

The comparative investment grade

All investments start with a comparison of the US 10-year Treasury yield which is currently just above the 4.06%. If you give the United States money to pay for its debt, the US will give you about 4.06% per year over the next 10 years, which at a $100.00 lent is $4.06 every year for the following 10 years. This is considered the best investment grade there is, and this is what I use to compare all investments versus.

Given that, the ‘forward’ price of the 4.06% is 24.63x.

The future earnings on NVDA over the next four quarters is $6.02. NVDA stock is currently trading at $180.00. This is a forward P/E ratio of 29.09x. This is just slightly above the investment grade of the US 10-year Treasury.

An investment in NVDA yields a higher return than the US 10-year note. But there are more variables at play, and that always needs to be taken into consideration. One of those variables is that the AU trade may in fact be a bubble that could burst. The other variable is that Nvidia could see even higher increases in revenue and EPS returns—an investor needs to balance these concerns.

A Bottom-Up Look

My thinking has been consistent with where Nvidia and the AI trade are right now in that this is not a bubble looking at only NVDA. The demand is there, and it continues to be off the chart.

At a 29.9x future earnings, NVDA is still within a reasonable valuation. With increasing revenue, the price should shift accordingly.

Notwithstanding this, there are other variables to consider.

The Other AI Trade

The biggest of the other AI trade stocks above are Microsoft, Amazon, Meta, & Google. Each of these are investing heavily in AI data centers with Microsoft leading the spend.

But these companies may be the real root of the AI bubble selloff scare. Are these individual companies earning a requisite return on their respective investments?

Looking from a bottom up angle, there are continued increases in earnings from these companies, but it may not be enough to sustain their individual stock valuations. This may be a better way to look to see if there is a potential bubble burst—I will do an individual company analysis on these players to break down where they are.

My Take

The numbers we keep seeing are eye-popping with how much is still left to spend on the AI infrastructure buildup. CEO Jensen Huang had addressed the so-called ‘bubble’ issues and made it clear that Nvidia is seeing something completely different. Nvidia is backlogged. Demand for its chips is still very robust and will continue to be for some time.

There are concerns of the turnover rate on chips, however. The average of how long these chips lasts is ~2 years’ time (between 1-3 years). Companies building up their data centers will need to swap out initially acquired chips for newer, better chips in about 2 years’ time.

There are no hard data points to reference regarding to how much capacity is currently being used. It is believed that 50% is about the current rate. This means that while demand for AI chips is still high, the rollover rate may not be as high as thought.

This may be why some bigger players are selling out NVDA positions, and in the case of Michael Burry of Big Short fame, taking a short position on the company (I think he is early and wrong).

Several of the bigger companies above are missing their returns, and their respective stocks have sold.

The Other Economy

While NVDA stock, et. al, have outpaced the broader stock market because of the AI buildup, Artificial Intelligence is not the entire economy. The consumer still drives some 70% of the US economy. That has been hobbled by tariffs. Fortunately, the tariffs will more likely than not be struck down by the United States Supreme Court. That would mean the ‘other’ economy could reignite itself.

This, too, could very well prop the economy up further moving forward.

I am looking for continued growth in the AI trade, albeit there may be some concerns along the way. Also, and equally important are tariffs that likely will be struck down, and then the other portion of the economy can begin to expand further. I still see more upside in this economy.

We are living with diverging economies, and we are about to get more information over week. The stock market is regularly hitting new all-time highs. However, this is driven entirely by AI investment and returns. What about the ‘real’ economy?

This begs to question what the real economy even is? The US economy is primarily a consumer-driven economy—a little over 70%. If consumers are increasing or decreasing their expenditures at a growing or declining rate, the economy will expand or contract at a correlated rate. Because the consumer represents such a big portion of the overall economy, their collective ‘health’ is important.

Understanding this is the main focus of my analysis and something I am always tuned into. The consumer has been weighed down heavily from tariffs, and this is affecting consumer stocks.

If you look at the chart above, it is XLP ETF, the consumer staples sector of the stock market. Since the beginning of the year, there has been very little gains or losses in XLP ETF, whereas in stark contrast, SPY ETF, the overall broader stock market ETF with all 11 sectors.

Consumer expenditures have been significantly impacted by the imposed tariffs. Tariffs are a tax, which the government has been happily collecting. But consumer incomes are finite. Because of the tariffs, there will be tradeoffs. Consumers will have to give up something in order to buy another as the government collects a bigger cut of the purchase price of any item—have you been to a grocery store lately?

The end result is that consumer spending is still occurring, just at a lower level than it could be because of the tariff tax.

This week, we get earnings releases from Nvidia, which is the big headline for the stock market. I think the numbers will be in line with expectations so I am not too focused on NVDA right now.

Beyond this, I am looking to the broader market to see what will happen with the economy and the current effects the tariffs have had on economic activity.

Along with NVDA stock earnings, we also get Home Depot (HD), Lowes (LOWE) Walmart (WMT) and Target (TGT), all of which have underperformed the overall stock market. That’s not surprising at all.

What I want to know first is how poorly these companies have performed as a result of the tariffs.

However, I am also willing to look past each companies current disposition because although consumer sentiment is in the gutter, the government shutdown has been resolved (for now), and more likely than not, the tariffs will be removed via the Supreme Court.

SPY ETF: 2025-Present

Looking at any one chart does not do much good unless you compare it to another. Above, SPY ETF and XLP ETF are shown since the beginning of the year. SPY is up about 13.5% year-to-date. XLP ETF has barely budged.

That being said, SPY took a solid hit in April, whereas XLP barely budged.

However, for even broader comparison, take a look at Nvidia stock (NVDA) versus SPY ETF which shows how closely correlated SPY is to NVDA, and that NVDA is up some 22% for the year. This has been the main driver of the overall stock market.

And yet, the consumer is some 70% of the economy!

Consumer Confidence versus Personal Expenditures

Confidence and expenditures go hand-in-hand. The chart above shows the latest University of Michigan Consumer Sentiment Index versus Personal Expenditures. The latest UofM number is at its 2nd-worst reading of all time.

That reading has been driven by the government shutdown and tariffs. The shutdown has ended—for now (the current appropriations bill only goes until January 31st of 2026)

As for the tariffs, I have maintained that they are unconstitutional and be struck down since the day they were imposed. So far, two courts have ruled that way. The Supreme Court recently took arguments and as far as any witness can conclude, the court appeared very dubious of the government’s assertions. I believe that the tariffs will be struck down, and because of that, there will be an overall reversal in the consumer’s disposition.

This would also drive consumer stocks.

Money Supply versus Stock Market

Consumer confidence and consumer incomes are some of the most important data points that I follow to determine what will happen next with the stock market. The other thing is the money supply.

All of this goes hand-in-hand.

Our economy lives in a fractional banking world. If more and more money is being created, this trickles through the economy. As more and more firms take on investment opportunities by borrowing money, expanding the money supply, that money leads to individuals getting hired. New hires gain income, which then creates expenditures within the economy.

All of that money, and the rate of it increasing, drives new revenue for firms, which then expands through to the stock market driving stock prices.

I expect that the more broad stock market will see increased opportunities as the tariffs are shot down.

My Take: Watch for Tariff Relief

The shutdown has weighed on consumer confidence along with the tariffs. The shutdown is now over, and that will help in confidence.

Tariffs are a tax, and they have impacted consumers significantly. But the tariffs are likely to be shot down soon. This, more than anything will relieve the consumer’s disposition.

Given that, I can see a lot of upside possibilities with XLP ETF. Some firms could see increased revenues because the consumer won’t be taxed on individual consumption. Since incomes are finite, and the government won’t be collecting a sales tax on purchases, more income will be allocated back to normalized expenditures.

In fact, this could push some stocks far higher.

We will get more news on the consumer and how each company sees what will happen next this week with individual earnings releases. As I mentioned, I am looking beyond these numbers because to me it is only a matter of when the tariffs are removed, not if.

There is a caveat, of course: What if Nvidia has a bad day this week?

The University of Michigan Consumer Sentiment Index was released Friday, and the number was basically in the gutter. When you think about it, why wouldn’t it be? The tariffs, which have pushed consumer prices upwards are impacting families across the board; especially at the grocery store. Then there is the government shutdown, which is now the longest ever. This has impacted services, especially the government SNAP program; again, food.

Will a deal happen? Absolutely! The Senate just passed something that is headed to the House.

Then, there are the tariffs, which Justices appeared highly dubious of their constitutionality in last week’s hearing. More likely than not, the tariffs go away (I would expect results will be released within 2-6 months—the timing is difficult to decide as factors of how divided the court is, or who does the writing, are the real factors in how long it takes to get a decision).

Looking beyond these major factors are the best thing to do at this point. It is this, that I have been focusing on over the past few months. The tariffs will go away. Then, there will be a massive hole in the budget. The Federal Reserve will dilute that debt, and that means an infinite amount of inflation is coming. Prices of all assets will move higher and higher to include, stocks, gold, crypto, housing, and many other classes.

Keep an eye on the bond yields as that is what will be next to make its move.

If The Tariffs Are Shot Down

The tariffs are unconstitutional. They’ve been declared so by multiple courts, and it does not take a rocket science degree to think this through. When the question of the constitutionality of the tariffs hit the Supreme Court, the Justices were highly doubtful.

Think through the process of the tariffs being struck down from this point. First, consumers will get a break for everything they buy, especially food products. This will reaccelerate economic activity. This will help draw in business expansion with hiring all over again. The unemployment rate remains low at what economists currently think is ~4.5%—there’s no data! This is still considered full employment. If the consumer begins spending again at a growing rate on more and more products, this will push economic activity rapidly upward.

Keep in mind something I have said over and over again: Personal Incomes are a finite number. The tariffs are a tax. This taxation is a direct tax on consumption. This removes potential economic activity if the government taxes consumers; via their respective finite personal incomes. If the government shaves down that income level, there is less to spend in the consumer-driven economy. While it is true that the taxed income would be spent within the economy, it is done so at a less efficient rate.

Given all of this, with the tariffs more likely than not going away, the debt will need to be considered.

The US debt burden is widening, and removing a key taxation method is only going to make that far worse.

Debt-To-GDP Percentage Will Surge

I fully expect this chart above to expand further upward once the tariffs are struck down. There will be a penalty for that in the form of higher interest rates for US Treasuries.

The Federal reserve will need to '“deflate” that debt, and by deflate, what I am really saying is there will be more and more inflation coming. With all of this debt, the money supply will expand—along with renewed economic activity.

What The Yield Curve Is Telling Us

The Federal Reserve has signaled that they are not necessarily going to lower rates at the December meeting. The yield curve is starting to move higher on the long end; this has started to move quickly over the following few days.

The Fed typically targets the short end of the curve, and although the shorter end has responded to the latest interest rate cut by the Fed, the long end is moving up.

The taxes being collected by the government from the tariffs will vanish. Those tax dollars were a key aspect of paying for the Big Beautiful Bill. Where will the funds to pay for the bill come from without the tariffs?

The Money Supply Will Expand

All of the debt that is being printed by the Federal government will require money. Funds from around the world will be brought in to pay for the debt. But US citizens, ultimately, are going to have to pay for that debt via taxes. In order to blunt that, the money supply will be expanded. By doing that, deflating the value of the debt, inflation will happen. All asset prices will increase in value. Prices across the board will move even higher. This is not necessarily a short-term effect as much as it is a longer-term move.

The AI Trade is Still Trading

The news on the Senate bill passage pushed the markets back up. This is one of the hurdles being cleared that really did not seem to bother the stock market much. I expect that this trend will continue as the world gears up for the AI economy.
While this is overall positive for the economy, the prices being paid by consumers is stretching them thin.

Consumer Staples Sector—the only sector in the negative

A good indicator as to how far the consumer is stretched, the only sector of the 11 sectors that is in the negative for the year is the consumer staples sector. Consumers have been stretched beyond reason, and the stocks within the consumer sector have not performed nearly as well as the AI-loaded stock—if only Coca Cola and Procter & Gamble can figure out how to produce AI versions of their products.

The reality is that AI is good for investment within the economy. But our economy is not AI, and is not functioning properly—it will likely get worse.

I will break down the consumer staples sector next week to show how detached this sector is becoming.

The S&P 500 has surged to yet another all-time high the past week. It is important to note that the S&P 500 is not the economy, but a barometer of the stocks traded on the stock exchange.

Some stocks are driving the stock market more than others—the infamous Magnificent 7?

And, as the AI trade continues to expand, this is driving many stocks further higher.

But what about the economy itself? Many say the economy feels like it is about to collapse on itself. And yet, the stock market keeps making new highs.

Without government data, relying upon creative strategies gives us a clue as to where the economy is, and where it could be going.

One of the first questions is if the stock market is over priced.

The Forward P/E

The forward P/E ratio is high at 23.45 from a normalized level, but is not near any levels that previously indicated a coming recession. This could be some of the Magnificent 7 showing up in the numbers to keep the P/E ratio in overall perspective.

While the Magnificent 7 and the AI trade continue to surge higher, other aspects of the economy are showing weakening signs. Consumers themselves, are not confident in where the economy is.

But it is the money supply that is showing signs that the growth rate is slowing, and this is one of the first stops that I always check when trying to determine what will happen next with the economy.

The Money Supply - Rate of Growth

My analysis always begins with the money supply and the consumer. These two aspects go hand in hand with each other. In fractional banking, if the money supply is growing, firms are taking on loans to expand their business. Those loans create money within the economy, expanding the money supply. The rate of growth, the year-over-year change, is where to see at what rate loans are being made, expanding or contracting the money supply. With an expanding M2, firms will take on new employees, which drives consumer incomes and consumption.

We are not getting consumer income nor expenditure data from the government because of the shutdown. Therefore, another place to look is consumer confidence.

Consumer Confidence is Falling

While consumers may be getting hired at a pace because of businesses expanding their operations, the other place to look is consumer confidence. If consumers are feeling less favorable about their future, or the overall economy, this also drives consumer expenditures. In an economy that is over 70% consumption by the consumer, with falling confidence, consumers are more likely to entrench and diminish spending.

Confidence is an indicator that is heavily tied to consumption. Many things are weighing on the consumer right now to include tariffs and the shutdown. Non-essential Federal workers have been furloughed as well as SNAP benefits being suspended, and this is playing out in the news every day.

If confidence continues at this lower level, this weight will begin showing up in economic data—when it starts being released again.

With lower consumption rates, this would translate into lower revenue growth levels for companies. On the one hand, many companies have continued to invest and expand with their AI investments. On the other hand, those companies that are not involved in the AI trade are seeing slowing in revenue growth and have begun laying off employees.

All of this will start to show up in the consumer economy, and credit cards are a solid barometer that show what is happening with consumers.

Credit Card Companies

The three major credit cards; Visa, Mastercard, and American Express, all released their earnings this past week, and all three had solid releases with increasing revenue and profits. Yet, the direction of each stock has gone differently that expected.

American Express

American Express saw solid growth this quarter with increases in revenue and profits. Amex had a lot of solid things to say about growth and international growth, and this is why AXP stock has surged as much as it did.

Given the situation of the shutdown and consumer sentiment here in the US, Amex differs in where they think the consumer will be over the following year. Amex believes that the consumer will keep on rolling forward, but the typical Amex card holder may not be affected by the shutdown nor tariffs as much.

AXP stock is trading currently at $361.00. With a projected EPS of $17.44, and an average of 23.44 on the forward P/E, this puts AXP stock above $400.00. If American Express customers pull through, and international carries the company, there’s a 10% gain to that could be coming for AXP stock.

However, I wonder if the company will actually hit their numbers. If the shutdown continues, as I expect it will, this will have negative impacts on the economy. Plus, the Federal Reserve may not lower interest rates too much more over the coming months. It may be that the forward P/E ratio moves lower, and that could cap AXP stock.

Mastercard

Just like Amex, Mastercard saw solid revenue growth and earnings growth. And, just like Amex, Mastercard sees continued increases through this year.

But looking at MA stock moves over the past few days, it does not look like the stock market believes Mastercard.

The projected EPS for Mastercard in 2026 is $19.12. With an average forward P/E of 23.44, this would put MA stock at $450.00—it is currently trading at $510.00. This may be why MA stock has started to slide lately.

Although there has been solid double-digit growth in revenue, the stock market is adjusting its expectations with MA stock, and this will mean the stock should slide further.

Factoring in the consumer’s sentiment and a money supply that is not increasing its growth rate, this may explain what is happening with the stock.

Visa

Just as the other two companies, Visa has seen strong growth in revenue and profits. However, just like Mastercard, the revenue growth and subsequent profits are falling short.

Visa is expected to haul in $12.79 through 2026. But the economy could falter with the consumer tightening its grip on their wallets. The same factors that are affecting the economy, will play out to affect Visa as well. With the average forward P/E ratio of 23.44, that would put V stock at $300.00—it is currently trading at $335.00. Visa could see a drop of about 10% given the law of averages.

But I suspect that the economy will falter over the coming year. Because of that, I also expect that companies like Visa are likely to miss because of the decline in economic activity. I believe Visa will slide below the $300.00 level through 2026.

My Take

In lieu of economic data coming out of the government, private-sector economic indicators are proving to be important. A lot can be discerned from these data points. But it is also the information from the credit card companies that are important.

Collectively, the consumer sentiment index as well as the money supply tell us where the consumer is, and the numbers look like they could show a lot of future negativity.

The overall feeling of the consumer would drive expenditures, which would drive firms hiring firing employees in response to shifts in the broader economy. We can see through the University of Michigan Consumer Sentiment index that the numbers are near all-time lows. Expenditures are likely to follow. This will show us what will happen next with the money supply.

Credit card companies also tell us a story that they believe the consumer will continue forward, albeit at a slower pace. This is why the respective credit card company stocks have slid the past week.

But the AI trade is still what is driving the stock market, and this is overshadowing other aspects of the stock market.

It is the Chipotle factor that really tells the story, however. Yes, consumers are being stretched. Those at the very lowest on the economic ladder are feeling the price increases from the tariffs the most, and they are spending less - Next week’s post will be on retailers to include Chipotle, Starbucks, McDonalds, Target, Walmart, & Costco. These companies will give investors a solid look at what the stock market could do, notwithstanding the AI surge.

Mostly, I think we are seeing a tale of two economies where the consumer on the lower end of the economic ladder is stretched too thin. While AI investment is driving a lot of what we see in the stock market, the portion of the consumer may start to weigh on the stock market more broadly.

I continue to look for the stock market to move higher because of the AI trade, but eventually the shutdown and its effects on the economy will begin to weigh on the stock market—traders cannot live on AI alone. Further, the stock market has taken off again because of sentiment that the Federal Reserve will pursue more accommodative policies. However, that is not as likely, and the stock market could retreat because of the most recent comments.

I will break down more of the consumer-related stocks next week.

With this earnings season just starting, bank stocks have been reporting better-than-expected results. Revenue and profits are improving, and Net Interest Margins (NIM) are widening suggesting a strong finish for the year.

However, there are concerns with the overall health of the economy and the banking sector. There have been two strong warnings so far in the past two weeks; there could be more profits ahead, but the possibility of a bank meltdown is also on the horizon.

Bad loans may hit banks soon, and this could cause a selloff in bank stocks. While many banks have been getting ready for these potential loan losses, if the economy were to falter significantly, the planning could be for nothing. Still, there is a lot of hope the economy does not slip into recession, and with that, bank stocks could maintain higher valuations.

That’s a lot of talking with two hands.

Winners & Losers

Within the KBE ETF, the bank stocks ETF, which holds some of the bigger-name banks, the results show strong earnings and revenue growth. Of the top 15 stocks within the ETF, 13 have reported so far, with only one missing EPS expectations and two misses on revenue:

• EBT Stock: Eastern Bankshares

  • EPS Expected/Reported - $0.398 / $0.35

  • Revenue Expected/Reported - $245.93M / $241M

• FBK Stock: FB Financial

  • EPS Expected/Reported - $0.96 / $1.07

  • Revenue Expected/Reported - $167.75M / $173.8M

• PFSI Stock: PennyMac financial

  • EPS Expected/Reported - $2.70 / $3.37

  • Revenue Expected/Reported - $591.24M / $632.9M

• JPM Stock: JP Morgan

  • EPS Expected/Reported - $4.846 / $5.07

  • Revenue Expected/Reported - $45.47B / $46.43

• NTRS Stock: Northern Trust

  • EPS Expected/Reported - $2.259 / $2.29

  • Revenue Expected/Reported - $2.03B / $2.03B

• BK Stock: Bank of New York Mellon

  • EPS Expected/Reported - $1.764 / $1.88

  • Revenue Expected/Reported - $4.97B / $5.07B

• CFG Stock: Citizens Financial Group

  • EPS Expected/Reported - $1.028 / $1.05

  • Revenue Expected/Reported - $2.1B / $2.12B

• C Stock: Citigroup

  • EPS Expected/Reported - $1.729 / $1.86

  • Revenue Expected/Reported - $21.09B / $222.09B

• BAC Stock: Bank of America

  • EPS Expected/Reported - $0.952 / $1.06

  • Revenue Expected/Reported - $27.52 / $28.09

• TFC Stock: Truist Financial

  • EPS Expected/Reported - $0.992 / $1.04

  • Revenue Expected/Reported - $5.19B / $5.24B

• BOKF Stock: BOK Financial

  • EPS Expected/Reported - $2.171 / $2.22

  • Revenue Expected/Reported - $540.38M / $542.08M

• WFC Stock: Wells Fargo

  • EPS Expected/Reported - $1.547 / $1.66

  • Revenue Expected/Reported - $21.15B / $21.44B

• CADE Stock: Cadence Financial

  • EPS Expected/Reported - $0.703 / $0.67

  • Revenue Expected/Reported - $523.34M / $517.24M

I broke out the most recent earnings reports for the top 15 stocks that trade within the biggest bank ETF (2 have yet to report, they are not listed here just yet). So far, one miss on EPS and two misses on revenue. Otherwise, the numbers have been impressive, and likely to continue.

That being said, bank stocks have seen a jolt higher, but overall the banking ETF is down. Revenues and profits are one thing, but it is the debt tsunami that we’ve been hearing about for so long that is showing up on balance sheets.

To start, understanding the revenue and profits is key with banks.

Net Interest Margins (NIM)

Understanding bank stocks is slightly different than other, more traditional stocks. While banks have many sources of income, such as fees, one of the best ways to understand the profitability of a bank is to know their Net Interest Margin.

Net interest Margin is the difference between the growth rate of revenue less the growth rate of non-operating costs. If revenue is growing fast, but non-operating costs are growing at a slower pace, this suggests a bank is ‘efficient’ at deploying its capital. If a bank can acquire funds for savings from depositors, then lend out these funds at a higher rate, this is a way to bring in revenue. If that bank also keeps non-traditional costs low, such as technology investments, compensation, and other non-interest expenses, then a bank is being efficient.

So far, banks have been able to mostly increase their revenues with higher loans while keeping their payouts lower - the mathematical sum that gives us NIM. I expect that this will actually widen to some degree given the Federal Reserve’s position, and the overall economic outlook.

The Yield Curve

The yield curve is a great place to start when you want to know how well banks may be doing versus previous periods. In this chart above, I have pulled out the yield curve from January 1st versus the present.

The spread from the 1-month then to now is down some 34 basis points. In contrast, the longer-dated spread is down only 20 basis points. What that tells us is that on shorter-term deposits, banks would be paying less in interest on a relative basis. However, banks are lending out at a higher basis level. This differentiation leads to lower costs versus higher revenues.

The yield curve will be crucial in determining what is next for banks. If the yield curve remains relatively lower - or falling more - on the short end, but the long end remains higher, banks will perform well… all else equals.

The Fed’s Next Moves

The Federal Reserve is likely to lower interest rates at its next meeting. Inflation numbers, the ones we are getting, are showing increasing price pressures, but not at a blistering pace relative to what one would expect with the tariffs.

However, employment is slipping. The wear and tear of tariffs is slow… for now. Over the longer period of time, this will not be the case. Prices will continue higher as pass-through inflation kicks in, which will erode the consumer’s ability to keep up, leading to slower revenues for firms.

The Federal Reserve will have to weigh both the employment situation as well as price pressures, which are pulling in different directions. I do not believe that the Fed is a given that interest rates will continue lower and lower.

What’s The Big Deal?

You can see the big drop in ZION stock above. This came from a major write-off that Zions Bancorp announced along with its earnings. The real estate industry for office properties is taxed and has been so for some time. Due to COVID, offices have vacated. Those rents are no longer paying for the mortgages of these office buildings, and because of that, mortgage defaults on offices are increasing.

Zions Bancorp just wrote off a $50M loan. This is what is spooking the market at this point. There will be far more coming. But that massive wave has time, and because of that, banks are setting aside funds, readjusting their portfolios, and taking advantage of the time variable allotted them.

Zions has served as a reminder of what is potentially going to show up.

My Take

Some bank stocks have done very well, and have soared from their most recent reports. JPM Stock, JP Morgan, has continued up through the past few years. The bigger banks have performed overall well, and look to continue to do so. If the spread differential widens further, this will enable the bigger banks to take advantage of friendlier terms.

The Federal Reserve will more likely than not lower interest rates in the coming meeting. However, moving forward, it is far trickier to tell without adequate economic data.

Eventually, price pressures and lower revenue growth for firms will weigh on the economy, and that may start to show up during the first part of the coming year… if we get data. While the Fed can alleviate some of the pain being caused by the tariffs, there are limitations to how much they can do.

For now, the stock market continues its upward, unabated push driven by the AI trade, which has seen a renewed resurgence. We do not have key economic data, and this is hampering any real analysis.

That being said, M2 Money Supply report comes out in just a few hours. This, ultimately, is the best gauge of future economic activity. In the meantime, I am going to be focusing more and more on individual sectors, breaking down the bigger stocks in order to get a feel for what the economy is doing, and by extension, the stock market.

Healthcare stocks actually shot up higher overall when the government shut down. While both parties are very willing to stand their ground, healthcare stocks stand a good chance of winning in the longterm if the Republicans get their way. The sticking point in the shutdown is Democrats wanting COVID-derived cuts and credits to be extended for healthcare. Republicans want firms to be more free to charge whatever they deem fair for their products.

Both parties are willing to go as far as it takes to win; the government shutdown shows that.

In the meantime, what long-term potential is there for healthcare stocks?

What is driving the move?

The tax credits embedded within the current law for of the Affordable Care Act, a.k.a., Obamacare, are set to expire on December 31st of this year. These benefits were added during the COVID crisis. Democrats want the credits to be extended permanently; Republicans are set to allow them to expire. This is the main driver of the standoff with the two parties and the subsequent shutdown.

Because of potential expiration of the tax credits, firms in the healthcare industry could allow premiums charged to go higher. Already, individuals who use the ACA Marketplace are seeing notices that their premiums are going higher.

Ultimately, higher premiums would mean more revenue for firms in the healthcare industry across the board. This is the reason healthcare stocks have shot upward; in summary, Republicans are willing to do whatever it takes to ensure they win this fight, including the shutdown of the government over this one, highly-contentious issue.

My honest take on this? First, I don’t think the shutdown has anything to do with healthcare and Congress passing legislation to fund the government, but instead, shutting down the Congress has everything to do to not release a certain set of files… More on that below.

Stocks To Watch

First, it is not simply healthcare premiums, but also all healthcare services. If premiums go higher, other products and services would be able to go higher. Companies that provide healthcare related products could charge insurers higher prices.

Notwithstanding this, I wonder on what is available for upside on healthcare stocks, so I broke down the entire sector.

Here are a few standouts.

Eli Lilly

Ely Lilly (LLY) stands out as the stock that is leading the sector. The forward P/E is somewhat below the overall average. With earnings coming due at the end of this month (October 30), and the prospect of higher medical costs paid by consumers without government restrictions, the possibility of increased future earnings could drive ELY stock further:

Halfway through the reporting year, Lilly is on target to earn a 36.1% revenue increase. This has driven LLY stock higher throughout this year, but the stock has stalled lately.

• Q3 2025: $6.15

• Q4 2025: $6.92

• Q1 2026: $6.72

• Q2 2026: $7.70

The total of this is $27.49. With a forward P.E of 30, this should put LLY stock at $824.70. With the government shutdown, there will be market volatility, and LLY could move back lower. That would be a buying opportunity if Lilly were to see increased revenues. With the Fed lowering interest rates, that will expand the money supply somewhat, and this could drive the P/E ratio higher.

LLY stock ran rich previously. With the current forward P/E ratio sitting at a mere, 30, relatively, this could push LLY stock up further.

Thermo Fisher Scientific

Along with LLY, Thermo Fisher Scientific (TMO) has seen a rich move upward over time, and lately, with the shutdown and Republicans standing firm, TMO has shot back up to the higher range.

Growth in revenue is slower than Eli Lilly. However, and as the move in TMO stock shows, expectations are that there will be increased moves up.

Along with revenue growth, EPS growth has slowed, but is turning back upward. Thermo Fisher is expected to earn $23.44 in EPS over the next four quarters.

Price to earnings remains consistent for TMO stock, and with a P/E ratio of 31, this would put TMO stock up around $726.64, which is an increase of nearly 50% from its current levels.

Boston Scientific

Like the other two stocks I’ve mentioned, Boston Scientific (BSX) has moved solidly. There could be more potential, especially with future revenue gains.

As with the other two companies within the healthcare sector I am highlighting, Boston Scientific is seeing an increase in revenue over the next two years.

Like the other two companies, increasing revenues will translate into increasing EPS, all else equal. However, what would you pay for about $3.20 in future EPS? At 30x the earnings, likely a solid price would be about $96.75. BSX stock just cleared $100.00 as of today.

So, the question becomes: will future revenue and earnings be more than the $3.20? Probably, but understanding how any one particular company’s revenue moves relative to what pricing changes will appear in the future is unknown right now. However, I believe it would likely push the EPS higher, and therefore push the stock up.

But the margins are thin.

My take

I don’t, for a second, believe the shutdown is 100% related to a sticking point in the funding of the government.

First, I see an executive that wants to dismantle the government as much as he can. By eliminating as much as possible, he can then dictate what he wants without the nagging speed bumps.

Second, I also believe that many federal employees will simply quit. The shutdown, for Trump, is a way to get rid of as many individuals as possible without really lifting a finger.

Third, if the government is shut down, then the House of Representatives has no reason to be in session, and therefore there is no mechanism for a certain set of files to be released.

Given this, expect a very long, and protracted shutdown. Expect that there will be negative consequences. This could offer opportunities to buy these stocks on a dip should the stock market itself sell off.

I will be looking at more and more sectors in lieu of economic data, and the overall effects of the government shutdown on teh economy.