Hey Erik! Regarding the consumer, what are your thoughts on oil at 150 to 200 dollars? Looks like the energy shock is just beginning… disposable income will be squeezed hard especially at lower part of K economy. Consumer sentiment at extreme lows. On top of that employees not feeling brave to ask for salary raises on back of A.I. threat to employment. I can’t see a rebound on consumer cyclicals any time soon… could it be that loans are high because people are squeezed? Need to pay attention to NPLs..
a generalised sell off that pulls everything down could happen unless we have even more support from gov… I think only banks, energy, and tech (software and hardware) do well. And perhaps orthogonal healthcare as a separate theme.
Some people a drawing parallels to 2007 2008 increase in oil prices before the GFC. Also the mad valuation of SpaceX open Ai and Anthropic hitting the market this year. It appears a great transfer of wealth from Nasdaq investor to Elon on the first part. How is it that Nasdaq passive investors are forced to buy spacex at 100 times sales… it’s insane.
And Hormuz… how will Trump climb down?
market is complacent. Sorry for the rant! Any thoughts on where you see the pessimistic bear side is wrong would be much appreciated
You are going to hate this answer, but it's what I have come to learn is true. There is no answer to all these problems other than more money. So the market will just keep going up. I used to be the same way. I would have 20 problems that needed to be solved, but earnings would keep growing and the market would go up and I would miss it and it would frustrate me. But it all changed for me in Zimbabwe. That's when I realised markets go up more when things are bad. And that actually the crash is not being long risk assets. Read 'Bad is Good' or '7 Things I learned in Zimbabwe' or 'Stupidly Bullish'. It's my journey to realising the problems never get fixed and the market goes up anyways.
Every time I hear someone prognosticating about the macro or geopolitics or black swan events or the big short or inflation I immediately think 1) that’s someone who has never been directly accountable for managing other people’s money or 2) that is someone who is not good at managing money. Nobody knows anything. Bravely into the storm.
My observation is that someone always knows something. That is the only possible explanation for why security prices move first and then you find out why. Now, it is completely true that who knows what is never the same. But the idea that nobody knows anything is completely contradicted on a regular basis by changes in security prices before the underlying reason becomes known.
I understand. I do. More important is to have confidence you know something before everyone else does. Among investors there is such an understandable desire to see the future even though they would never cop to it. Investing successfully over many years is not easy. Many flock to people who made one great call or Ray Dalio types. I spent the early part of my career devouring Wall Street research and today there are five to ten people I read consistently. Substack is a godsend when you find people like Eric. My only advice is gravitate to folks with a track record of success with a bullish bias because equity markets rise 70% of the time. Tepper, Klarman, Drukenmiller, etc…watch them. I highly recommend Jim Paulsen.
How do reconcilliate 'Nobody knows anything.' with 'I understand. I do. More important is to have confidence you know something before everyone else does.'?
Possible, depending on circumstances, just very, very unlikely. At, 6% plus the stock starts puking. At 7% the economy is so on its back that inflation is in free fall.
When you compare the tariff shock to an EM-style FX devaluation, do you view tariffs as creating a genuinely new inflation impulse, or more as accelerating/revealing an inflationary backdrop that already existed due to monetary expansion and persistent fiscal deficits?
Trying to separate the cyclical tariff effect from the longer-duration currency debasement effect in your framework.
"At this point, some unpleasant arithmetic that we need to face up to is that the FOMC has been unable to achieve our stated inflation target for more than five years. In 2021, when inflation took off, we made the judgement that this inflation would be transitory based on logic and effectively considering Bayesian updating in our inflation forecast.6 This may help explain the FOMC's caution in tightening monetary policy after the pandemic. I believe the Committee was heavily influenced by the low inflation data we observed over the previous decade, which suggested that inflation would fall back to 2 percent or below. I would characterize this as saying we may have been too Bayesian in forecasting inflation: Inflation had been low in the recent past and so our probability estimate was for it to remain low despite the high readings we got in the early part of 2021.
Even so, by adopting an aggressive series of rate hikes in 2022, the FOMC did succeed in dramatically reducing inflation and did so without causing a recession. We were within a quarter percentage point of our inflation goal in April 2025, before tariffs moved inflation in the other direction. But the truth that we must own is that inflation has been above 2 percent for a long time, and that fact raises the risk that the recent escalation of inflation that we are experiencing ends up unanchoring expectations of future inflation. While I am not predicting this and I don't believe it is likely, it is a risk I cannot dismiss and one that I must consider in weighing policy decisions."
"With regard to this last statement, there is a theoretical puzzle that I have been thinking about. If people know that each shock in a sequence of price shocks is transitory, then why might they expect average inflation to increase in the future when observing this sequence of shocks? Let me give a simple example. If you flipped a coin and won a dollar each time it came up heads and lost a dollar every time it came up tails, your expected winnings from the next flip of the coin would be zero. This would still be true even if the last three coin flips came up heads. But when forming this expectation, it is assumed that the flips are independent and uncorrelated. And we all make this assumption when calculating this expectation. Expectations formed this way are based on classical probability theory—in this case, people are assumed to know the data generating process.
But what if they don't understand it? Then they must make a judgment on a probability that may only be based on limited information. This is where Bayesian updating comes into play. In a nutshell, Bayesian updating adjusts the perceived probability of an event happening based on the history of past shocks. To illustrate how this works, if someone saw three heads come up in a row, they might infer that the coin flips are not independent and are, in fact, positively correlated. The source of the positive correlation is unclear, but it is what they believe. So, based on observing three heads in a row, you would put more than a 50 percent probability weight on a coin turning up heads on the next flip and your expected winnings would go up, not stay at zero.
This Bayesian view may apply to inflation expectations as well. If people do not know the true inflation generating process and see a sequence of positive price shocks, they may infer that the next price shock is more likely to be positive than negative. This view can lead them to raise their inflation expectations even though they may also believe the recent shocks are transitory. A large body of research shows that Bayesian selection sometimes helps explain human behavior, and it may be relevant in judging the chances of a move upward in inflation expectations."
It's tough. Everything can always potentially be a 1-off. COVID, Tariffs, Energy, but they keep coming. These effects are all intermingled (government debt spending, bank lending, economy running hot, tariffs, energy). I have a hard time explaining (to myself) why we are getting inflation now, and didn't during the Zero interest rate era, but I think it's a mix of things. End of globalisation, banks lending again, and governments spending more. The one effect the US has not had is FX devaluation.
I could be wrong. But we have lots of data that shows debt & obligations rising.
The official US gross federal debt is ~$39T right now (per Treasury data as of May 2026). Debt held by the public is ~$31T, or about 100% of GDP (~$32T nominal).
The ~$117T figure (375% of GDP) refers to a broader measure: explicit debt plus the present value of unfunded liabilities in Social Security, Medicare, etc. (Treasury/CBO estimates put social insurance shortfalls alone at ~$88T recently, with longer-term gaps pushing totals near $120T). These are real fiscal obligations, not "fake," but they are future commitments rather than current borrowings. Governments often understate the full picture this way.
That's true ... although Japan is benefitting from allocation from foreigners, stronger corporate balance sheets and much lower valuations. But yes, bottom line is that you need cashflows in the dcf to grow faster to withstand the higher rates.
Inflation has a similar impact btw - basically markets derate against sustained inflation because after a while most companies cannot pass on their rising costs.
Have a look at Turkey or any other emerging market for that
It’s a great question. The standard answer is as rates go up the P/E of the market goes down. But no one asks what happens to the ‘E’in the P/E. What I often noticed in African markets is the E goes higher. It was almost like the cost of high interest rates was getting passed on to the price of everything. So yes, the valuation multiple of the market was falling, but the market (index level) was still going up. That’s why i’m cautious about the standard reaction that the market will go down if rates go up.
Even during the period from the mid 60's to the early 80's there were multi-month to multi-year trading opportunities in bonds. If the yield on the 10 year reaches 6% then it would be a buy.
Hey Erik! Regarding the consumer, what are your thoughts on oil at 150 to 200 dollars? Looks like the energy shock is just beginning… disposable income will be squeezed hard especially at lower part of K economy. Consumer sentiment at extreme lows. On top of that employees not feeling brave to ask for salary raises on back of A.I. threat to employment. I can’t see a rebound on consumer cyclicals any time soon… could it be that loans are high because people are squeezed? Need to pay attention to NPLs..
a generalised sell off that pulls everything down could happen unless we have even more support from gov… I think only banks, energy, and tech (software and hardware) do well. And perhaps orthogonal healthcare as a separate theme.
Some people a drawing parallels to 2007 2008 increase in oil prices before the GFC. Also the mad valuation of SpaceX open Ai and Anthropic hitting the market this year. It appears a great transfer of wealth from Nasdaq investor to Elon on the first part. How is it that Nasdaq passive investors are forced to buy spacex at 100 times sales… it’s insane.
And Hormuz… how will Trump climb down?
market is complacent. Sorry for the rant! Any thoughts on where you see the pessimistic bear side is wrong would be much appreciated
You are going to hate this answer, but it's what I have come to learn is true. There is no answer to all these problems other than more money. So the market will just keep going up. I used to be the same way. I would have 20 problems that needed to be solved, but earnings would keep growing and the market would go up and I would miss it and it would frustrate me. But it all changed for me in Zimbabwe. That's when I realised markets go up more when things are bad. And that actually the crash is not being long risk assets. Read 'Bad is Good' or '7 Things I learned in Zimbabwe' or 'Stupidly Bullish'. It's my journey to realising the problems never get fixed and the market goes up anyways.
I don’t hate the answer at all, I very much appreciate it 🙌 thanks
C O N S E R V A T I V E !
We’re looking at 7.5 - 8%. Then settling back to 5-6%.
Oh sheesh... wow. Let me think about that... 7%-8% would be a shocker.
Ridiculous
Agreed. Which is why it’s always a surprise.
The future sometimes does not look like the immediate past.
Time will tell.
Every time I hear someone prognosticating about the macro or geopolitics or black swan events or the big short or inflation I immediately think 1) that’s someone who has never been directly accountable for managing other people’s money or 2) that is someone who is not good at managing money. Nobody knows anything. Bravely into the storm.
I like V3!
My observation is that someone always knows something. That is the only possible explanation for why security prices move first and then you find out why. Now, it is completely true that who knows what is never the same. But the idea that nobody knows anything is completely contradicted on a regular basis by changes in security prices before the underlying reason becomes known.
I understand. I do. More important is to have confidence you know something before everyone else does. Among investors there is such an understandable desire to see the future even though they would never cop to it. Investing successfully over many years is not easy. Many flock to people who made one great call or Ray Dalio types. I spent the early part of my career devouring Wall Street research and today there are five to ten people I read consistently. Substack is a godsend when you find people like Eric. My only advice is gravitate to folks with a track record of success with a bullish bias because equity markets rise 70% of the time. Tepper, Klarman, Drukenmiller, etc…watch them. I highly recommend Jim Paulsen.
My I ask you, who all are five to ten people you read consistently?
How do reconcilliate 'Nobody knows anything.' with 'I understand. I do. More important is to have confidence you know something before everyone else does.'?
Possible, depending on circumstances, just very, very unlikely. At, 6% plus the stock starts puking. At 7% the economy is so on its back that inflation is in free fall.
Very much appreciated this read.
When you compare the tariff shock to an EM-style FX devaluation, do you view tariffs as creating a genuinely new inflation impulse, or more as accelerating/revealing an inflationary backdrop that already existed due to monetary expansion and persistent fiscal deficits?
Trying to separate the cyclical tariff effect from the longer-duration currency debasement effect in your framework.
"At this point, some unpleasant arithmetic that we need to face up to is that the FOMC has been unable to achieve our stated inflation target for more than five years. In 2021, when inflation took off, we made the judgement that this inflation would be transitory based on logic and effectively considering Bayesian updating in our inflation forecast.6 This may help explain the FOMC's caution in tightening monetary policy after the pandemic. I believe the Committee was heavily influenced by the low inflation data we observed over the previous decade, which suggested that inflation would fall back to 2 percent or below. I would characterize this as saying we may have been too Bayesian in forecasting inflation: Inflation had been low in the recent past and so our probability estimate was for it to remain low despite the high readings we got in the early part of 2021.
Even so, by adopting an aggressive series of rate hikes in 2022, the FOMC did succeed in dramatically reducing inflation and did so without causing a recession. We were within a quarter percentage point of our inflation goal in April 2025, before tariffs moved inflation in the other direction. But the truth that we must own is that inflation has been above 2 percent for a long time, and that fact raises the risk that the recent escalation of inflation that we are experiencing ends up unanchoring expectations of future inflation. While I am not predicting this and I don't believe it is likely, it is a risk I cannot dismiss and one that I must consider in weighing policy decisions."
BTW, the Fed is also thinking about these continual 'one-off shocks' and how they might be changing inflation expectations even if they are 'one-off'. https://www.federalreserve.gov/newsevents/speech/waller20260522a.htm
"With regard to this last statement, there is a theoretical puzzle that I have been thinking about. If people know that each shock in a sequence of price shocks is transitory, then why might they expect average inflation to increase in the future when observing this sequence of shocks? Let me give a simple example. If you flipped a coin and won a dollar each time it came up heads and lost a dollar every time it came up tails, your expected winnings from the next flip of the coin would be zero. This would still be true even if the last three coin flips came up heads. But when forming this expectation, it is assumed that the flips are independent and uncorrelated. And we all make this assumption when calculating this expectation. Expectations formed this way are based on classical probability theory—in this case, people are assumed to know the data generating process.
But what if they don't understand it? Then they must make a judgment on a probability that may only be based on limited information. This is where Bayesian updating comes into play. In a nutshell, Bayesian updating adjusts the perceived probability of an event happening based on the history of past shocks. To illustrate how this works, if someone saw three heads come up in a row, they might infer that the coin flips are not independent and are, in fact, positively correlated. The source of the positive correlation is unclear, but it is what they believe. So, based on observing three heads in a row, you would put more than a 50 percent probability weight on a coin turning up heads on the next flip and your expected winnings would go up, not stay at zero.
This Bayesian view may apply to inflation expectations as well. If people do not know the true inflation generating process and see a sequence of positive price shocks, they may infer that the next price shock is more likely to be positive than negative. This view can lead them to raise their inflation expectations even though they may also believe the recent shocks are transitory. A large body of research shows that Bayesian selection sometimes helps explain human behavior, and it may be relevant in judging the chances of a move upward in inflation expectations."
It's tough. Everything can always potentially be a 1-off. COVID, Tariffs, Energy, but they keep coming. These effects are all intermingled (government debt spending, bank lending, economy running hot, tariffs, energy). I have a hard time explaining (to myself) why we are getting inflation now, and didn't during the Zero interest rate era, but I think it's a mix of things. End of globalisation, banks lending again, and governments spending more. The one effect the US has not had is FX devaluation.
I could be wrong. But we have lots of data that shows debt & obligations rising.
The official US gross federal debt is ~$39T right now (per Treasury data as of May 2026). Debt held by the public is ~$31T, or about 100% of GDP (~$32T nominal).
The ~$117T figure (375% of GDP) refers to a broader measure: explicit debt plus the present value of unfunded liabilities in Social Security, Medicare, etc. (Treasury/CBO estimates put social insurance shortfalls alone at ~$88T recently, with longer-term gaps pushing totals near $120T). These are real fiscal obligations, not "fake," but they are future commitments rather than current borrowings. Governments often understate the full picture this way.
Government debt is the one which has been growing strongly since the GFC while debt growth for consumers and corporates was quite moderate.
Naive question: does the fair value of the stock market change if rates are higher?
Japan is a current example of a market which is going up even though interest rates are rising as well.
That's true ... although Japan is benefitting from allocation from foreigners, stronger corporate balance sheets and much lower valuations. But yes, bottom line is that you need cashflows in the dcf to grow faster to withstand the higher rates.
Inflation has a similar impact btw - basically markets derate against sustained inflation because after a while most companies cannot pass on their rising costs.
Have a look at Turkey or any other emerging market for that
It’s a great question. The standard answer is as rates go up the P/E of the market goes down. But no one asks what happens to the ‘E’in the P/E. What I often noticed in African markets is the E goes higher. It was almost like the cost of high interest rates was getting passed on to the price of everything. So yes, the valuation multiple of the market was falling, but the market (index level) was still going up. That’s why i’m cautious about the standard reaction that the market will go down if rates go up.
Yes…as close as you get to a law of physics in finance…rated up asset prices down
Even during the period from the mid 60's to the early 80's there were multi-month to multi-year trading opportunities in bonds. If the yield on the 10 year reaches 6% then it would be a buy.
Yes, especially if Apple bonds are 7%.