An old “Helicopter Ben” crack was always good for a chuckle: “Chairman Bernanke is only human. He puts his pants on one leg at a time, just like everyone else. And then he prints money.” The former Fed Chairman is clearly one highly intelligent individual (scored 1590 out of 1600 on his SAT!). His foolhardy inflationist policy prescriptions stemmed from his deeply flawed analytical framework.
I haven’t stumbled across Kevin Warsh’s SAT scores, but his Stanford undergrad and Harvard Law School pedigree suggest well-functioning gray matter. But what about the soundness of his analytical framework? During his earlier stint as Fed governor, I was impressed with Warsh’s more traditional central banking reasoning in the face of Bernanke inflationist ideology. And especially after the past 15 years working closely with Stanley Drukenmiller, I hold elevated expectations for the soundness of Warsh’s analytical framework – if not his capacity to translate it into sound monetary management.
The Fed Chair delivered an impressive presentation at Jackson Hole. He continues to talk a good game, and his focus on traditional central bank principles is commendable.
“Hawkish Kevin Warsh Hints Fed Will Raise Rates if Inflation Does Not Fall Soon.” “Warsh Jackson Hole Speech Most Hawkish Since 2009 as Yields Jump.” “Kevin Warsh: the Hawk at Jackson Hole.” “Wall Street Piles On Rate-Hike Bets as Warsh Renews Hawking Tone.” “Warsh Succeeds at Jackson Hole – Convincingly Hawkish.” “Bond Traders Buy Warsh’s Tough Talk on Inflation, for Now.” “Fed Chair Warsh Leans Hawkish in Jackson Hole Speech – Markets Approve.”
The “Markets Approve” headline ran after the initial bullish market reaction. The S&P500 (SPY) advanced 0.5% on Warsh, with the Nasdaq100 (QQQ) notching a solid (0.4%) gain. The Broker/Dealer Index rose almost a full percent, with the Banks 0.8% higher. The VIX (equities volatility) Index dipped to 14.13, the low back to December.
Investment-grade CDS slipped to 50 bps, near the low back to February. High-yield CDS declined to 298.5, within a couple bps of the low back to early February. EM CDS traded near lows since early March. In short, most financial conditions indicators signaled “all’s clear” for unrelenting loose “money” and Credit. High yield spreads-to-Treasuries narrowed nine bps this week to a near three-month low of 2.60 percentage points – to within 10 bps of the low back to June 2007.
Bond market reaction was similarly fascinating. Consistent with hawkish messaging, two-year yields popped a quick eight bps to 4.31%. The yield curve flattened notably, with 30-year yields declining four bps to 5.15% (10-yr yield down 2bps).
The rates market went from pricing 35% probability of a rate increase at the September 16th meeting to 60%, with odds for a hike by October 28th jumping to 92% (from 62%).
It was a “beautiful” market reaction - initially. Warsh successfully brandished his inflation-fighting credentials, while offering some needed clarity on his thinking and approach. That said, no one believes the Warsh Fed would dare resort to “slamming on the brakes.” The market is now pricing two 25 bps increases by next March – with short rates forecast back above 4%.
Rates were at 5.25% to 5.50% as recently as September 2024, a level at the time not generally restrictive for financial conditions. At this point, it’s perfectly rational for a highly speculative equities market to dismiss a couple small rate increases over the next seven months. The AI arms race Bubble couldn’t be less concerned by the prospect of a 4% Fed funds rate. That’s a problem.
After trading down to 4.65% on a hawkish Warsh, 10-year Treasury yields (as they’ve tended to do) reversed higher. Yields traded up to 4.73% - within six bps of the closing high back to October 2023 – before ending the week at 4.72%. Reading the table, the bond market senses it’s the sucker. The Fed has adopted a tightening bias, but with no intention of actually tightening financial conditions. Understandably, the prospect of financing Trillions of Treasuries and AI-related debt, as the Fed tightens up monetary policy, can seem daunting in a rising global yield environment.
I’d feel more comfortable had the President posted on Truth Social his disapproval of Warsh’s hawkish speech. After the July 29th FOMC meeting and press conference, Trump weighed in: “He’s a brilliant guy. I know he’d love to see lower interest rates, but he’s got a board, and it’s a political board, and they want to keep rates up. But we fight through rates.”
I’m imagining the Treasury Secretary in a tension-filled Oval Office. “Mr. President, you are doing such an incredible job with the ballroom. Pure genius, sir. And don’t worry about Kevin. He’s fully on board. He just has to play the game of talking a little tough so he won’t actually have to raise rates. The Dow (DIA) was basically unchanged today – just off all-time highs. We’re good on this, and you know I’m locked and loaded in the event that markets start to waver.”
Warsh from Jackson Hole: “To get policy right, we also need to get the relationship right between financial markets and the central bank. The Fed needs clear market signals, as unfiltered as possible… from market internals… the level and change in asset prices across sectors… the prices and trading volumes of Treasury securities… the foreign exchange value of the dollar… the cost and availability of credit… and the price of a broad set of commodities. These and other indicators should inform the Fed’s near-term outlook on economic activity and inflation throughout the business cycle. They should also reveal the state of broader financial conditions… and the risks and uncertainties in the financial cycle. At the same time, market participants themselves should be tracking real information across the economy. They should draw their own conclusions; form their own expectations of output, employment, and inflation; and stay sharply attuned to risks.”
I applaud the Chair’s framework – including his emphasis on the “cost and availability of Credit” and “the state of broader financial conditions…” But after QE1, QE2, open-ended QE, “whatever it takes,” the pandemic free-for-all, and decades of recurring Fed and Washington liquidity backstops - markets staying “sharply attuned to risks” is pure fantasy.
Additional appreciative applause for Warsh’s seven stated principles (my abbreviations):
1) “In other words, we must interrogate reality to make sure we are not setting forward-looking policy based on stale or inaccurate data. Nor should we rely on isolated data points. Trends matter most.”
2) “The Federal Reserve’s actions are intended to ensure that the aggregate demand side of the economy is broadly consistent with aggregate supply.”
3) “The Fed’s price-stability objective of 2%, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target… Price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed’s job to deliver stable prices.”
4) “The Fed also bears responsibility for maximum employment.”
5) “Short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”
6) “Money matters. It’s not fashionable these days, but my view is that money has something important to do with monetary policy. We should pay attention to money created by the central bank and money that comes from the banking and financial systems. It’s true that financial innovations and other factors alter the mechanics that link the monetary base, the velocity of money, and the broader economy. But that is scarcely a reason to ignore the ultimate effects of money on financial conditions and prices.”
7) “A quieter Fed, more purposeful in its communications, is better able to meet its objectives. And we can be held accountable for delivering on our remit—the only true test of our credibility. To borrow a line from General Chuck Yeager, ‘At the moment of truth, there are either reasons or results.’”
As much as I appreciate #5 (and a good Chuck Yeager quote), principle Number Six finds a special place in my analytical heart. Has Kevin Warsh just opened the door for contemporary monetary analysis? Such essential subject matter for sound analytical and policy frameworks has somehow been MIA throughout this multi-decade Bubble period.
“Money” has been an ongoing Warsh interest. He footnoted principle Number Six with his 2022 paper published by the American Enterprise Institute (a chapter in American Renewal, a book edited by Paul Ryan and Angela Rachidi): “Money Matters: The U.S. Dollar, Cryptocurrency, and the National Interest.”
Warsh: “Most money used by the public sits in digital form in accounts at commercial banks. The safety of this so-called commercial bank money is predicated on deposit insurance, capital requirements, and the quality of supervisory and regulatory oversight. Its value is also a function of the commercial banks’ access to central bank liquidity. When commercial bank money has a call on the central bank of the strongest sovereign in the world, it’s deemed safe and sound. The nexus between the commercial bank and the central bank is where the alchemy happens.”
“As Ravi Menon, the highly capable head of Singapore’s central bank, stated: ‘The credibility of money is underpinned by this two-tier monetary structure where commercial banks create money and central banks preserve its value.’”
This is exciting. And, holy cow, what a can of worms our new Fed Chair has just opened! And we can go back to the mid-60’s Milton Friedman and (John) Gurley & (Edward) Shaw debates. Friedman, the devout monetarist, exhorted the Fed to manage the money supply to control inflation. Seems simple enough. But when asked to define “money”, he struggled and defaulted to a narrow monetary aggregate. Critics argued that if you can’t define it, how are you supposed to manage it? Gurley & Shaw focused soundly on broad money-like financial instruments and financial intermediation more generally. Their superior analytical framework notwithstanding, they lost the debate.
I commend Warsh for reintroducing “money” in Fed policy analysis. But his comment from 2022 – “Most money used by the public sits in digital form in accounts at commercial banks” – is even more archaic these days. Total money market fund assets have inflated 10% over the past year to $7.935 TN, with historic inflation of $3.35 TN, or 73%, since October 2022. Surely Warsh appreciates that current monetary inflation is dominated by booming Wall Street - “repo,” money funds, hedge fund leveraging, derivatives, “basis trades,” “carry trades,” and securities finance more generally. “The nexus between” Wall Street “and the central bank is where the alchemy happens.”
Money Matters, financial conditions, Wall Street finance, Credit Bubbles, assets inflation and speculative leverage. Let this critical - and long overdue - debate begin! I don’t want to get too carried away, but injecting “money” into the Fed’s analytical framework kind of turns contemporary central banking orthodoxy on its head.
As a regular listener, I’ll give a shout out to Tracy Alloway and Joe Weisenthal’s “Odd Lots” Bloomberg podcast. In Thursday’s episode, they interviewed the host of the Jackson Hole Economics Symposium, Kansas City Fed President Jeffrey Schmid.
I’ll highlight a particular question asked by Tracy Alloway, one I encourage journalists to replicate for all Fed officials, certainly including at Chair Warsh’s post-meeting press conferences.
“When you look at financial conditions now, do you think that something fundamental has changed in the U.S. economy, such that perhaps we’re more accommodative than we would have been otherwise?”
Jeffrey Schmid’s “we’re at a fairly accommodative place for rates right now” was a reasonable response that missed the essence of such a critical issue.
All one needs to do is examine current financial conditions indicators (loose across the board) in the context of today’s long list of extraordinary risks - and it’s clear that there have been both fundamental and monumental changes. The explosion of unfettered non-bank Credit creation fundamentally boosted Credit Availability and growth. The explosion of Wall Street finance (i.e., money funds, repo, hedge funds, derivatives, etc.) fundamentally amplified marketplace liquidity, asset inflation and speculative excess (while providing Washington a blank checkbook). Resulting market, financial and economic instability then fostered ever-greater Fed, Washington and global market and liquidity backstops/bailouts – fundamentally distorting risk perceptions and market function.
The Treasury market had no qualms, so long as bond price inflation (lower yields) remained the epicenter of contemporary monetary inflation. But liberated inflationary effects now dominate in an epic stock market Bubble; with elevated consumer and producer prices; and for a historic AI arms race, to note the most obvious. Today, ongoing loose conditions pose major bond market risks (i.e., inflation, issuance, deleveraging…). Our Fed Chair Friday outshone even our Treasury Secretary when it comes to sparking fascinating discussion.
August 25 – Financial Times (Robin Wigglesworth): “Stanley Druckenmiller is not only a bona fide Wall Street legend, the hedge fund manager is also a longtime mentor of both US Treasury secretary Scott Bessent and Fed chair Kevin Warsh. Bessent himself told the FT last year that ‘in macro, there’s Stan and then everybody else’. Which is why this must be exceptionally embarrassing for the protégé: [Drukenmiller]: ‘The Treasury Department announced on Aug. 19 that it would double the size of its long-dated bond buybacks, from $2 billion to at least $4 billion per operation, aimed at the 10- to 30-year sector and running from Sept. 9 through Nov. 4. The announcement came after the 30-year yield touched a 19-year high. Yields fell within minutes. By the next afternoon they had round-tripped to levels above where they started. The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management — and a mistake far larger than $4 billion suggests… The bond market wasn’t being a vigilante, as some would argue. It was being a pushover that had finally begun to clear its throat, and Treasury moved to quiet even that… Every basis point of artificial yield suppression is a subsidy to procrastination. Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else’s problem. If Congress and the administration are unlikely to touch entitlements even with the market’s signal, they are certain not to touch them without one. Whatever this operation saves in basis points, it will cost multiples in delay.’”
For the Week:
The S&P500 increased 0.5% (up 12.7% y-t-d), and the Dow added 0.5% (up 11.4%). The Utilities rose 1.3% (up 22.3%). The Banks increased 0.7% (up 14.0%), and the Broker/Dealers gained 1.3% (up 22.3%). The Transports dipped 0.9% (up 23.2%). The S&P 400 Midcaps (MDY) declined 1.3% (up 14.4%), and the small cap Russell 2000 (IWM) fell 1.5% (up 19.8%). The Nasdaq100 added 0.4% (up 16.6%). The Semiconductors retreated 2.3% (up 61.9%). The Biotechs fell 1.4% (up 30.0%). With bullion down $148, the HUI gold index dropped 2.8% (up 19.7%).
Three-month Treasury bill rates ended the week at 3.7181%. Two-year government yields jumped 11 bps to 4.34% (up 87bps y-t-d). Five-year T-note yields gained five bps to 4.48% (up 75bps). Ten-year Treasury yields slipped two bps to 4.72% (up 55bps). Long bond yields declined six bps to 5.21% (up 37bps). Benchmark Fannie Mae (FNMA) MBS yields were unchanged at 5.72% (up 68bps).
Italian 10-year yields added two bps to 4.10% (up 55bps y-t-d). Greek 10-year yields slipped a basis point to 3.95% (up 51bps). Spain's 10-year yields increased two bps to 3.73% (up 44bps). German bund yields added two bps to 3.28% (up 42bps). French yields dipped a basis point to 4.13% (up 56bps). The French to German 10-year bond spread narrowed about three to 85 bps. U.K. 10-year gilt yields were unchanged at 5.06% (up 58bps). U.K.’s FTSE equities index was little changed (up 8.9% y-t-d).
Japan’s Nikkei 225 Equities Index added 0.6% (up 31.9% y-t-d). Japan’s 10-year “JGB” yields rose four bps to 2.93% (up 87bps y-t-d). France’s CAC40 declined 1.0% (up 3.1%). The German DAX equities index recovered 1.7% (up 8.5%). Spain’s IBEX 35 equities index increased 0.4% (up 15.8%). Italy’s FTSE MIB index was little changed (up 17.1%). EM equities were mixed. Brazil’s Bovespa index jumped 2.7% (up 9.0%), while Mexico’s Bolsa index slipped 0.4% (up 1.7%). South Korea’s Kospi fell 1.8% (up 61.1%). India’s Sensex equities index dipped 0.4% (down 9.3%). China’s Shanghai Exchange Index rallied 1.2% (down 0.4%). Turkey’s Borsa Istanbul National 100 index increased 0.9% (up 30.0%).
Federal Reserve Credit declined $11.1 billion last week to $6.695 TN, with a 37-week expansion of $204 billion. Fed Credit was down $2.195 TN from the June 22, 2022, peak. Since the September 11, 2019 restart of QE, Fed Credit has expanded $2.968 TN, or 80%. Fed Credit inflated $3.884 TN, or 138%, since November 7, 2012 (720 weeks). Elsewhere, NY Fed holdings for foreign owners of Treasury, Agency Debt recovered $7.1 billion last week to $2.878 TN - just off the low back to August 2010. “Custody holdings” were down $288 billion y-o-y, or 9.1%.
Total money market fund assets (MMFA) added $6.1 billion last week at $7.935 TN. MMFA were up $728 billion, or 10.1%, y-o-y - having ballooned a historic $3.350 TN, or 73%, since October 26, 2022.
Total Commercial Paper increased $6.1 billion to a 13-month high of $1.447 TN. CP increased $42 billion, or 3.0%, y-o-y.
Freddie Mac (FMCC) 30-year fixed mortgage rates added a basis point to 6.66% (up 10bps y-o-y). Fifteen-year rates added three bps to 5.98% (up 29bps). Bankrate’s survey of jumbo mortgage borrowing costs had the 30-year fixed rate unchanged at 6.76% (up 8bps).
Currency Watch:
For the week, the U.S. Dollar Index rallied 0.9% to 99.702 (up 1.4% y-t-d). On the upside, the South Korean won increased 0.8%. On the downside, the Swedish krona declined 1.4%, the New Zealand dollar 1.1%, the Brazilian real 1.1%, the Canadian dollar 1.0%, the Swiss franc 1.0%, the South African rand 1.0%, the Norwegian krone 0.8%, the euro 0.8%, the British pound 0.8%, the Japanese yen 0.7%, the Mexican peso 0.7%, the Singapore dollar 0.4%, and the Australian dollar 0.1%. China's (onshore) renminbi slipped 0.13% versus the dollar (up 3.83% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index slipped 0.2% (up 27.8% y-t-d). Spot Gold declined 3.2% to $4,455 (up 3.1%). Silver dropped 3.8% to $66.3815 (down 7.4%). WTI Crude retreated $3.66, or 4.2%, to $83.40 (up 45%). Gasoline jumped 4.2% (up 104%), and Natural Gas rose 4.1% to $2.888 (down 22%). Copper slipped 0.4% (up 17%). Wheat surged another 12.5% (up 51%), and Corn jumped 5.8% (up 16%). Bitcoin (BTC.X) declined $850, or 1.1%, to $77,450 (down 11.6%).
Market Instability Watch:
August 24 – Bloomberg (Cameron Fozi): “Interest-rate strategists at Goldman Sachs (GS)…, Wells Fargo (WFC)... and other Wall Street firms said the US Treasury Department’s bond buybacks will do little to reverse the jump in long-term yields… ‘The US Treasury’s decision to increase long-end buybacks does not address what we see as the main sources of recent long-end volatility,’ strategists at Goldman Sachs, including George Cole and William Marshall, wrote… ‘We think the buybacks themselves are unlikely to meaningfully reset rate levels even if scaled up.’”
August 28 – Wall Street Journal (Megumi Fujikawa): “Japan spent $98.7 billion to prop up the yen in the past month in a joint action with the U.S., a record intervention that has had a modest impact so far. The yen has given up many of its initial gains, highlighting the limitations of government efforts to move prices in financial markets. The U.S. has also tried to stem a rise in bond yields, again with limited success.”
August 27 – Reuters (Leika Kihara): “Japan’s latest effort to prop up the yen revives memories of the Asian financial crisis, with the operation bearing little resemblance to traditional coordinated interventions, former top currency diplomat Naoyuki Shinohara said… In announcing this month that Washington had joined Tokyo’s efforts to arrest yen declines, U.S. Treasury Secretary Scott Bessent encouraged Japan to use dollar swap lines rather than sell U.S. Treasuries to finance future intervention. The situation brought back memories of the Asian financial crisis in the late 1990s, when access to dollar liquidity became a critical issue across the region, Shinohara said. Back then, the United States, Japan and the International Monetary Fund (IMF) provided Thailand with dollar funding to bolster its foreign reserves.”
August 24 – Bloomberg (Davide Barbuscia): “Bond traders have ramped up measures of credit risk associated with Broadcom Inc. (AVGO) as it backstops mega financing packages for the buildout of artificial intelligence. The yields on Broadcom's 5.15% bonds that mature in 2031 rose about 14 bps so far in August. The price of its five-year credit default swaps, meanwhile, climbed 28 bps over the same period — a larger amount than both Oracle Corp. (ORCL) and SpaceX. Broadcom is in talks to raise more than $60 billion in debt for an AI chip financing deal that is expected to benefit Anthropic PBC and other companies.”
August 27 – Politico (Marion Solletty): “France’s Economy Minister Roland Lescure said… a ‘stable public deficit’ was the goal for next year’s budget. The government was initially aiming to bring France’s 2027 deficit below 5% of GDP, the current estimate for this year… But grim economic forecasts and a fractured parliament are making its deficit reduction trajectory more and more elusive, including a government commitment to bring back the deficit under 3% by 2029 to abide by EU rules.”
August 24 – Reuters (Maria Martinez): “The recent surge in bond yields is a result of United States President ‘Donald Trump’s war in Iran’, German Finance Minister Lars Klingbeil said… ‘The rise in interest rates in recent days and weeks is the result of global uncertainty triggered by Donald Trump’s war in Iran,’ he said speaking alongside the finance ministers of other German-speaking countries.”
U.S. Credit Trouble Watch:
August 24 – New York Times (Rob Copeland and Matthew Goldstein): “The investment office of an insurance company used to be one of the more boring departments in finance, focused on putting customers’ premiums into ho-hum assets like bonds. But over the past two decades, this onetime backwater has become an engine of enormous wealth, as private equity firms have acquired insurers en masse and redirected those premiums into their own risky investments. Now, the wisdom of that approach is in the spotlight as one of its biggest stars, Mark Walter, faces a financial reckoning during a federal investigation into whether some of his companies improperly characterized tens of billions of dollars in assets. Mr. Walter, 66, might be Exhibit A in the how-to manual for transforming insurance money into private fortune, steering a modest asset manager, Guggenheim, to acquire a string of insurers in the years after the 2008 financial crisis. He then oversaw the sale of many of those insurers to his personal investment firm.”
August 21 – Financial Times (Lee Harris, Eric Platt, James Fontanella-Khan, Antoine Gara and Sujeet Indap): “Mark Walter… built an investment giant over long years by pioneering a shift by insurance companies in need of higher returns into private investments. It is a trade that helped win $367bn of assets under management for Walter’s Guggenheim Partners and made the billionaire a titan in the world of sport… But the empire… is unravelling. Federal prosecutors are investigating his business practices in a probe that has revealed how two insurance companies he controlled provided more than $20bn in previously undisclosed financing for dealmaking by other parts of his business empire… ‘What makes Mark Walter unique is that he failed to disclose a tremendous amount of affiliated transactions, which have the potential to loot the insurer, for the benefit of his other companies,’ says Andrew Granato, a University of Texas law professor. ‘But other private capital firms are engaged in essentially the same business model.’”
August 26 – Wall Street Journal (Matt Wirz and Heather Gillers): “Turmoil in Mark Walter’s financial empire is spreading, shaking Wall Street’s confidence in one of its most lucrative trades. A federal investigation of how Walter used life insurers he owned to finance his other businesses has drawn greater scrutiny to the now-common practice among fund managers of snapping up insurance companies so they can invest the insurers’ huge troves of policyholder money... ‘In one sense, [Walter] is an isolated case but in another it brings attention to how insurance companies have been investing much more in private securities,’ said Peter Troisi, an analyst at Barclays (BCS). ‘The question is: ‘Is this a sign of there being too much risk and will there be fallout from that?’”
August 23 – Financial Times (Patrick Jenkins): “Billionaire Mark Walter’s brief ownership stints at the Los Angeles Lakers basketball team… and Chelsea Football Club… are unlikely to be mourned. But the flak he got from sports fans is nothing compared with the fallout that may be looming in financial markets. The deals appear to be linked to a dash for cash related to scrutiny of previously hidden ‘affiliated investments’ between different parts of Walter’s business empire. This, though, may prove more than a one-off event in the wider market. Walter was a pioneer in the now fashionable practice of combining private credit asset managers with life insurers. Some regulators rightly seem nervous about sector-wide problems.”
August 24 – Financial Times (Sujeet Indap): “A US bankruptcy court ordered First Brands Group into liquidation, rejecting a complex restructuring plan to pursue claims over $25bn paid out by the company in the years before its surprise 2025 bankruptcy.”
Global Credit Bubble and Boom Watch:
August 27 – Financial Times (Ramsay Hodgson): “Global issuance of zero-interest convertible bonds is on track for a record year, as AI companies attract eager investors willing to forgo coupon payments in exchange for exposure to the fast-growing sector. Companies have issued $72bn of zero-coupon convertibles so far this year, according to… Dealogic, putting issuance on course to overtake the previous record of $73bn set for the whole of 2025.”
Leveraged Speculation Watch:
August 23 – Bloomberg (Vinicius Andrade and Srinivasan Sivabalan): “Cathy Hepworth, who heads $1.5 trillion asset manager PGIM’s emerging-markets debt team, doesn’t hesitate when asked about her highest-conviction theme across the developing world: ‘Carry, carry, carry.’ She’s referring to a popular but often risky trade in which investors borrow cheaply in currencies like the US dollar, Japanese yen, or euro, and put the money to work in higher-yielding currencies like the Turkish lira, where interest payments on bonds or money-market funds can be as much as 40% or higher. Carry trades funded by the US dollar are on their longest winning run since 2008, yielding positive returns for a seventh successive quarter. ‘It’s a carry world,’ said Hepworth, who joined PGIM in 1989 and helped establish its emerging-markets debt management effort in 1995. ‘There’s a ton of money looking for yield.’”
August 27 – Bloomberg (Katherine Doherty): “Citadel Securities rode the wave of volatility that took hold across markets in the second quarter to post a record $7.3 billion of trading revenue for the period. That was more than triple the level from the same period a year earlier… Net income also climbed, increasing more than 250% to $3.3 billion… Founded by billionaire Ken Griffin, Citadel Securities rose to prominence in the era of meme stocks and is today responsible for handling more than a third of all US retail stock trades. It’s ramping up its presence across fixed income beyond interest-rate swaps and Treasuries to serve institutional investors in corporate debt trading, starting with investment-grade bonds.”
Iran War Watch:
August 25 – Axios (Zachary Basu): “President Trump’s economic D-Day’ for Iran came and went Monday with little of the shock or awe it promised, amounting instead to yet another extended ultimatum. Operation Economic Outcast will unfold not like the Allied invasion of Normandy, but as a sweeping, slow-burn sanctions campaign that could eventually lock Iran's foreign enablers out of the U.S. financial system. Treasury Secretary Scott Bessent kicked off the operation by blacklisting more than 60 Iran-linked targets and widening the reach of secondary sanctions. ‘Every country has a defined timeline to shut down activities we have identified,’ he said. Bessent declined to name specific countries or deadlines, saying the administration preferred ‘quiet diplomacy’ before resorting to ‘the hammer of U.S. Treasury actions.’ ‘Why would I want to blow up the global financial system?’ he told reporters when pressed on the gradual rollout, saying countries deserve a chance to change their behavior.”
August 23 – New York Times (Erika Solomon): “President Trump has warned that ‘Economic D-Day’ is coming for Iran. This weekend, Tehran promised to fight back, threatening any nation that helps the United States. Iran’s new security chief, Mohsen Rezaei, on Saturday vowed to strike the interests of oil-rich neighbors if they joined U.S. efforts to further isolate Iran, whose economy is already in free fall. He warned that Tehran would seek to prevent ‘even a single drop of oil’ from leaving the region. ‘Any country that becomes a partner in creating economic restrictions against us will be regarded by us as an enemy,’ he said…”
August 24 – Financial Times (Alice Hancock, Malcolm Moore and Najmeh Bozorgmehr): “Iran has threatened dozens of ships with fines or confiscation in an escalation of its efforts to assert control over the Strait of Hormuz after the US said it would unleash an ‘economic D-Day’ against Tehran. The Persian Gulf Strait Authority, set up by Iran, said on X that 46 ships had violated ‘Iranian protocols’ for transiting the waterway. It added the vessels… would ‘face restrictions on future passages, including fines, detention or confiscation’.”
August 27 – Reuters (Samia Nakhoul): “The Iran war has reached its endgame: a costly stalemate. Six months after U.S. and Israeli forces attacked Iran, killing its supreme leader and maiming his son and successor, opens new tab, the Iranian government is under economic siege, but it still holds power and believes it has time on its side. A threat by U.S. President Donald Trump to impose crippling new sanctions on Iran faces a fundamental problem: Tehran is betting he will not take the final step to break the stalemate - aggressively enforcing secondary sanctions on the countries keeping its economy afloat, foremost among them China and India.”
August 26 – Bloomberg (Ellen Milligan and Alberto Nardelli): “US allies are privately warning that the Strait of Hormuz is still likely mined, casting doubt on President Donald Trump’s claim that the US Navy has completely removed and detonated explosives laid by Iran. The US is likely to have made some progress in removing mines in international waters, according to the people… But they believe that demining efforts haven’t cleared all of the estimated 80 to 150 mines laid by Iran.”
August 26 – Bloomberg (Arsalan Shahla and Patrick Sykes): “Iran said it reached a revenue-sharing agreement with Oman on the Strait of Hormuz, as the two sides push for a wider deal on the management of the crucial waterway. ‘Agreements have been reached regarding each country’s share of the strait's waters as well as Iran and Oman's share of its revenues,’ the Islamic Revolutionary Guard Corps said…”
Iran War Ramifications Watch:
August 27 – Associated Press (Emma Burrows and Ben Finley): “The U.S. military is experiencing a ‘beyond critical’ shortage of advanced missile interceptors in Europe largely driven by President Donald Trump’s war with Iran, a U.S. defense official in Europe and a NATO official told The Associated Press, raising concerns about vulnerabilities in NATO countries to a potential Russian attack. The U.S. defense official said the most concerning shortfall involves Patriot missile interceptors, which can shoot down Russia’s high-speed ballistic missiles.”
August 22 – Financial Times (Jacob Judah): “For almost four decades, the American presence in the Middle East has been anchored by a chain of sprawling bases stretching across the Gulf. But in six months of war, Iran has cast their future into doubt. Tehran, which battered the US facilities with short-range missiles and drones, quickly exposed how vulnerable the vast installations had become when positioned so close to Iran’s shores. The Islamic republic forced Washington to move soldiers and aircraft beyond its reach to Israel, Jordan and further afield. Washington has had access to bases in every major Gulf state for more than three decades. It will now need to decide whether to spend billions of dollars rebuilding the facilities or rethink its military footprint in the Middle East for a new era.”
August 24 – Wall Street Journal (Georgi Kantchev, Rebecca Feng and Summer Said): “The Trump administration says large volumes of oil are slipping through the Strait of Hormuz. The trackers whose job it is to count the world’s oil shipments see much less. Energy Secretary Chris Wright said last week the U.S. military had helped ship over 15 million barrels of crude and oil products out of the waterway last Tuesday. He put the average oil exports through the strait over a seven-day period at more than 8 million barrels a day. Earlier this month, Wright said the seven-day average stood at around 9 million barrels a day. The count from commercial ship trackers tells a different story, with estimates ranging from roughly 2 million to 6 million barrels a day.”
Trump Administration Watch:
August 25 – New York Times (Peter Baker): “This is a summer movie that’s been seen before: President Trump makes demands. When the other side does not give him what he wants, he escalates with bombastic threats of crippling punishment. The other side surrenders. Except that Mark Carney… evidently has not read the script. His refusal to buckle in the face of Mr. Trump’s trade ultimatum even at the cost of retaliatory tariffs has flipped the narrative of the president’s second term. Instead of giving in, Mr. Carney is testing whether defiance is a viable strategy against Mr. Trump. The age of capitulation that defined Mr. Trump’s return to office may be starting to fade. World leaders and domestic institutions are, in some cases at least, showing less willingness to submit to Mr. Trump’s will. European leaders have refused to join his war with Iran. Prime Minister Benjamin Netanyahu of Israel flatly rejected his Gaza plan. Gulf Arab states forced him to abandon plans to charge a shipping toll in the Strait of Hormuz. Universities and law firms are rebuffing his directives rather than signing on the bottom line. Bond markets are rebelling against his fiscal policies.”
August 24 – Wall Street Journal (Damian Paletta): “The war of words between the White House and Canada is growing in bombast and bravado, with provocateurs on all sides looking to deliver the latest zinger. Tariffs are escalating. The trade war is getting messier. And it’s becoming more and more personal. On Sunday, Transportation Secretary Sean Duffy said of Canada ‘to think that they’re gonna go to war with Donald Trump and actually win that war with the U.S., I think it’s foolish on their part.’ On Monday, White House adviser Peter Navarro jumped into the fight… ‘I want to speak directly now to the Canada people, you have a leader now in [Mark] Carney who politically gets stronger by talking tough against Donald John Trump… Carney is taking you, Canada, down a very dangerous road’… Ontario Premier Doug Ford, took a far less measured tone than Carney... Ford, the political leader of Canada’s most populous province, referred to himself as a ‘big dude,’ and said of Trump, ‘I have a lot of real estate on my ass, so he has a lot of room to kiss my ass.’ The remark clearly drew Trump’s attention… Trump attacked Ford and accused him of ‘bluster.’ ‘Someone should get these clowns to ‘fall in line’ or, the consequences for Canada will be far WORSE!’ Trump wrote.”
August 24 – Bloomberg (Jeff Mason and Josh Wingrove): “President Donald Trump, who has argued that the US does not need Canada, lamented Monday that his northern neighbor did have something he wants: aluminum. ‘This country desperately needs aluminum,’ Trump said... ‘Selfishly, we need aluminum in this country. We don’t have it. We get it all from Canada for the most part, and we need it badly.’”
August 23 – Wall Street Journal (Editorial Board): “President Trump took exception last year when we called his tariffs against Canada and Mexico the dumbest trade war in history. It got dumber this weekend as Mr. Trump escalated with another round of border taxes on Canadian imports, a mere 10 weeks before midterm elections. Mr. Trump issued his latest tariff threat against Canada last month under Section 338 of the 1930 Tariff Act. The law lets the President impose tariffs up to 50% on countries that discriminate against ‘commerce of the United States, directly or indirectly’ in relation to foreign countries. No previous President has used this power.”
August 27 – Bloomberg (Jonathan Levin): “Putting it mildly, Treasury Secretary Scott Bessent has had a disappointing month. First, his dubious use of public funds to support Japan’s yen was called in question. Then he embarked on a futile attempt to manipulate the bond market, which led legendary hedge fund manager Stanley Druckenmiller to publicly upbraid his former mentee for the amateurish gambit. Finally, after promising to unleash ‘the greatest coordinated economic isolation in the history of the world’ on Iran, Bessent’s big reveal proved underwhelming, leaving far more questions than answers.”
August 24 – CNBC (Steve Liesman): “The Treasury could use its near $1 trillion General Account to help fund its recently announced plans to increase purchases of government bonds, according to two senior Treasury officials. Using the TGA would provide the Treasury with considerable firepower to influence long-term bond yields.”
August 23 – Bloomberg (Greg Ritchie and Michael MacKenzie): “Treasury Secretary Scott Bessent came to office blasting his predecessor for trying to re-engineer the world’s largest bond market. This week he took a stab at it himself. By buying back a swath of long-term US debt, which will require selling more short-dated securities, Bessent said… he’ll be doing ‘what I would call a Treasury twist.’ It was a nod to the Federal Reserve's famous 1960s plan to rejigger Treasury yields. Right now, Bessent said, those yields are out of whack with ‘equilibrium’ levels.”
August 24 – Bloomberg (Erik Wasson, Steven T. Dennis, Caitlin Reilly and Yash Roy): “Treasury Secretary Scott Bessent’s promised deficit reduction plan due in the coming days will plow headlong into a stark reality: there is no sign the Republican-controlled Congress is going to make any net budget cuts this year. ‘I don’t see anything on deficits because of the politics,’ Republican Senator Thom Tillis of North Carolina told reporters… It’s not ‘a popular winning issue in the election, even though it’s the right thing to do,’ he added.”
August 24 – Wall Street Journal (Alexander Ward, Lara Seligman and Alex Leary): “Days before going to war with Iran in February, President Trump summoned his intelligence chief to the Oval Office to ask whether a full-on assault was a good idea. Iran was at its weakest point in decades, senior aides and Israeli Prime Minister Benjamin Netanyahu told him, providing Trump the rare opportunity to dismantle Iran’s nuclear program and bolster his legacy as a peacemaker. The question was whether a large-scale attack would work and possibly topple the regime. Then-Director of National Intelligence Tulsi Gabbard outlined assessments from America’s intelligence apparatus… She told Trump that killing Iran’s supreme leader would likely usher in a more hard-line regime open to acquiring nuclear weapons. Tehran would rush to close the Strait of Hormuz, destabilizing the global energy market. And it would strike U.S. forces and partners in the Middle East, prompting questions about American resolve and reliability with allies. The notes of caution echoed warnings Trump was receiving from all corners.”
August 27 – Bloomberg (Jennifer A. Dlouhy): “President Donald Trump announced he was moving to rename Lake Ontario as Lake America, escalating his clash with Canada after trade negotiations between the two nations collapsed. Trump… signed a directive changing the name of the lake… The president previewed the move in a social media post earlier this week. ‘Canada has been ripping us off for a long time on trade,’ Trump told reporters… ‘They want to be treated like they’re a state, and so we just can’t do that anymore.’”
August 27 – Bloomberg (Fabiola Zerpa and Mie Dahl): “The US is in talks with Venezuela to take a large stake in its oil fields, a dramatic move by the Trump administration to extend its influence on the post-Maduro government and the nation's vast energy reserves. Negotiators from both countries are discussing the plan… Some of them said a possible arrangement that has been discussed is a 100-year-lease on several oilfields.”
August 27 – Financial Times (Akila Quinio): “US banking regulators are narrowing their enforcement and supervision standards to put greater emphasis on material financial risk. The Office for the Comptroller of the Currency and the Federal Deposit Insurance Corporation will announce a new set of rules… centered on ‘refocusing supervision on what matters most — material financial risk’, an agency official has said. The overhaul is part of a wider deregulatory push under the Trump administration that has also led regulators to scrap “reputational risk” from their supervisory framework in order to prevent what they view as unfair ‘debanking.’”
August 23 – Bloomberg (Paige Smith, Emily Flitter, and Weihua Li): “Donald Trump’s family is on the verge of having its very own bank. The president’s relatives and their business associates have won preliminary approval to start one, riding a wave that doesn’t come around often: It’s now easier than at any time in almost 20 years to get a national bank charter, thanks to the Trump administration’s deregulation push. In the first 19 months of the president’s second term, the Office of the Comptroller of the Currency approved 22 bank charter applications, more than the number it gave out during the five previous years combined…, with many of the new wave going to fintech and digital-asset firms. That volume has been rare in the years since the 2008 financial crisis, when charter applications plummeted and bank regulators tightened their scrutiny.”
August 24 – Associated Press (Matthew Lee): “The Trump administration is preparing to revoke the business and tourism visas of up to 200,000 foreigners who have applied for or are currently seeking asylum status in the United States. If it happens, the move would be the largest single mass revocation of visas in U.S. history and would likely face legal challenges. Unless challenged or revised, the State Department is expected to announce in the coming weeks the revocation of so-called B1 and B2 visas issued between 2016 and 2026 whose holders have sought asylum or are now seeking asylum…”
Trade War Watch:
August 24 – Wall Street Journal (Gavin Bade, Amanda Coletta and Paul Vieira): “President Trump said the U.S. would impose 50% tariffs on automobiles and parts from Canada starting in January, the latest escalation in a tit-for-tat trade conflict that erupted over the weekend. ‘On January First, 2027, Tariffs on all Cars, Trucks, both large and small, Automotive Parts, and Steel, will be increased to 50%,’ Trump said… U.S. tariffs on Canadian automobiles now stand at 25%, with discounts for the U.S. content in cars, while steel tariffs are at 50%. The threat came after Canadian Prime Minister Mark Carney said his government would respond to a separate set of Trump’s tariffs with levies on U.S. products.”
August 26 – Reuters (Bo Erickson and David Shepardson): “U.S. President Donald Trump said… it was ‘time to teach Canada you can’t do this anymore,’ just days after trade talks between the neighboring countries broke down. ‘I had a deal, that was a pretty good deal, you know, quite good,’ Trump told Glenn Beck… ‘They don’t have anything that we have to have, okay, we can get by. I mean, there are a couple of things that would make it a little inconvenient, but we can get them elsewhere. And it’s time to teach Canada you can’t do this anymore.’”
August 22 – New York Times (Ilya Gridneff, Steff Chávez and James Politi): “Canada was ‘at war’ over trade with the US after President Donald Trump ‘miscalculated’ by escalating his tariff attack, Prime Minister Mark Carney said. Carney delivered a defiant address to the nation on Saturday after suspending trade talks with the US overnight, saying the Trump administration had demanded a ‘bad deal’. The collapse of talks ushers in a new wave of tariffs on $20bn-worth of Canadian exports on top of existing levies on steel, aluminium, lumber and vehicles. ‘You’re at war when you’re attacked, and we got attacked,’ Carney told reporters… Trump underestimated Canada’s resolve to stomach economic hardship in a ‘miscalculation’ that escalated the trade war, he said. ‘We cannot accept what they’ve offered and we will not give what they’ve asked,’ he added. Carney said last-minute changes proposed by the US were unacceptable.”
August 24 – Associated Press (Rob Gillies): “Canada will announce retaliatory tariffs against the United States on Tuesday after relations deteriorated sharply Monday, with President Donald Trump telling Canadian leaders to ‘fall in line’ or face consequences ‘far WORSE’ than existing tariffs and Prime Minister Mark Carney accusing Washington of trying to subordinate Canada. Trump also threatened new 50% tariffs on Canadian vehicles, auto parts and steel, while Carney said U.S. trade demands showed Washington wanted to ‘destroy our major industries,’ including autos, steel and aluminum.”
August 26 – Wall Street Journal (Gavin Bade and Amanda Coletta): “The U.S. and Canadian governments, along with businesses in both countries, are bracing for a prolonged trade dispute that could last until after the midterm elections, according to people familiar… Washington and Ottawa are locked in a tariff tit-for-tat after last-minute talks broke down over the weekend. The Trump administration on Saturday imposed 50% tariffs on $20 billion of Canadian goods, leading Prime Minister Mark Carney to retaliate with similar tariffs on a range of U.S. goods, effective Sept. 8.”
August 23 – Bloomberg (Josh Wingrove): “Prime Minister Mark Carney’s government sees little chance of resuming talks with President Donald Trump before the midterm elections after trade talks collapsed, according to people familiar… The Canadian leader, who said he will prepare a domestic aid package to help businesses hurt by US tariffs, is designing those measures to ride out the balance of Trump’s term if necessary, added the people…”
August 27 – Reuters (David Shepardson and David Lawder): “Canada cannot accept a trade deal with the U.S. unless it ensures the survival of a robust Canadian auto assembly and parts industry, Canada’s ambassador to Washington said…, giving no indication when talks may resume. ‘We need to have those capabilities in Canada. We need to have those jobs in Canada. It makes up a huge part of our industrial complex, both in Ontario and Quebec,’ Ambassador Mark Wiseman told Reuters… ‘From the Canadian perspective, the preservation of a robust assembly and parts industry in Canada is critical.’”
August 27 – Bloomberg (Brendan Murray): “The Trump administration’s top trade negotiator suggested the US ought to consider banning some Canadian goods, injecting another threat into a trade dispute between Washington and Ottawa. ‘Canada has banned the sale of liquor and spirits. We haven’t banned anything from Canada. You know, they’ve capped the type of autos we can bring in, they’ve banned certain goods and services from procurement in the provinces,’ US Trade Representative Jamieson Greer said… ‘Again, we’ve never done these bans, it’s quite extreme. But maybe we need to,’ he said…”
August 27 – CNBC (Sawdah Bhaimiya): “U.S. President Donald Trump’s administration is reportedly considering new tariffs on semiconductors used in the U.S., as tech giants race to beat China in the artificial intelligence infrastructure build-out. The duties will be imposed on an expanded range of tech products made alongside chips, including laptops, data center servers and gaming hardware, eight people familiar with the matter told Politico…”
August 24 – Bloomberg (Lucille Liu and Jenny Leonard): “The US is set to impose a 7.5% tariff on Chinese goods over allegations of excess manufacturing capacity before a planned summit between Xi Jinping and Donald Trump next month, according to people familiar... The move would restore Trump’s second-term duties on China to around 20%, a level Beijing has previously said is consistent with its trade truce with Washington. Those come on top of other levies imposed during Trump's first term and extended during the Biden administration.”
U.S./Russia/China/Europe/Iran Watch:
August 26 – Wall Street Journal (Lara Seligman, Alexander Ward, and Josh Dawsey): “The surprise visit by the director of the Central Intelligence Agency to Moscow this week was to deliver a warning to Russia not to attack NATO countries… The trip was spy-agency chief John Ratcliffe’s first publicly known visit to the Russian capital. It followed new U.S. intelligence assessments… that Russian President Vladimir Putin could try to test the resolve of the North Atlantic Treaty Organization with a limited assault on an allied country in the next few years. U.S. officials are concerned that Putin, squeezed in Ukraine and under pressure at home, could launch an assault ranging from a cyberattack to a small-scale land incursion, likely on a Baltic nation...”
August 25 – Financial Times (Joe Leahy): “Beijing has warned the US that it will retaliate if Chinese companies are included in any significant expansion of the Trump administration’s new secondary sanctions relating to Iran. The measures unveiled on Monday by US Treasury secretary Scott Bessent targeted companies based in Hong Kong and mainland China but stopped short of listing large Chinese financial institutions. Any serious increase in US sanctions on China, which buys 90% of Iran’s oil, would risk exploding the relationship only a month before presidents Donald Trump and Xi Jinping are scheduled to meet in Washington… ‘China will take all necessary measures to firmly safeguard its rights and interests,’ a Chinese foreign ministry spokesperson said… ‘China has made clear on many occasions its firm opposition to illicit unilateral sanctions that have no basis in international law or the authorisation of the UN Security Council… The pressing task is to facilitate de-escalation of the situation and return to dialogue and negotiation as soon as possible,’ they added.”
August 25 – Associated Press (Didi Tang and Farnoush Amiri): “The ‘economic onslaught’ that Treasury Secretary Scott Bessent has declared on Iran’s financial connections around the world may have one major caveat: China. Beijing is Iran’s biggest trading partner and its leading oil buyer. While the U.S. is trying to isolate the Islamic Republic from its remaining economic partners, President Donald Trump also is preparing to host Chinese leader Xi Jinping next month to maintain a fragile trade truce. Absent from Bessent’s remarks this week were specifics about how the Trump administration would target China, casting doubts on how effective the new campaign would be…”
August 25 – Bloomberg: “Xi Jinping’s government is sending a message of defiance to Donald Trump over China’s economic ties with Iran. Hours after the US sanctioned dozens of Chinese entities and threatened to target an unspecified ‘major financial institution’ for its dealings with Tehran, Beijing responded by saying its relationship with Iran ‘should not be disrupted or undermined.’ China will take ‘all necessary measures’ to safeguard its interests, Foreign Ministry spokesperson Lin Jian warned. The response underscores the risk of another clash between the superpowers as Trump promotes an economic onslaught against Iran in a bid to pressure the Islamic Republic into a deal.”
New World Order Watch:
August 23 – Reuters (John Geddie, Yukiko Toyoda, Ben Blanchard and Aftab Ahmed): “Donald Trump’s olive branch to North Korea’s Kim Jong Un at the expense of a long-standing ally comes at a pivotal moment for U.S. security ties in Asia, as partners from Japan to India reassess how much they can rely on Washington. The U.S. president’s abrupt decision to cut back military drills with South Korea last week, which he described as hostile to Pyongyang, has reinforced fears that Trump’s unpredictability could strain alliances that have long maintained peace in the region, government officials and security experts said… ‘The decision will certainly fuel growing doubts in the region about U.S. security commitments,’ said Jeremy Chan, a senior analyst with political risk consultancy Eurasia Group and former U.S. diplomat in Japan and China.”
Ukraine War Watch:
August 26 – Wall Street Journal (Marcus Walker): “A Russian barrage of missiles and drones hit a children’s hospital, a school, apartments and warehouses around Kyiv last week, killing at least 16 people. Ukraine, lacking Patriot interceptors, didn’t shoot down any of Russia’s ballistic missiles. Ukraine’s response this week included a drone strike that caused a massive fire at one of Russia’s largest oil refineries… The air war between Russia and Ukraine has entered a new phase. With expanded aerial arsenals and inadequate air defenses, both sides are bludgeoning each other in a bare-knuckle fight that is causing a widening swath of destruction and a rising civilian toll.”
August 26 – Bloomberg: “Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end, according to three people close to the Kremlin. For now, Russia is weighing an intensification of powerful conventional ballistic missile attacks on Kyiv, including the center of the capital, and infrastructure targets in other Ukrainian cities, the people said… Negotiation frameworks have effectively collapsed, leaving the two warring sides back at square one, the people said.”
August 26 – Bloomberg (Pyotr Kozlov): “The world’s top container shipper MSC Mediterranean Shipping Co. has suspended new bookings to and from Russia’s Novorossiysk port with immediate effect after one of its vessels was attacked by a drone. The decision follows a recent strike on the MSC ULSAN III while it was en route to Novorossiysk…”
AI Bubble/Arms Race Watch:
August 25 – Wall Street Journal (Asa Fitch): “Nvidia (NVDA)’s current financial position looks rock solid to say the least. But the financial engineering it is using to keep revenue growing introduces risks that could eventually cause real pain. Nearly four years into an artificial intelligence boom that has brought Nvidia hundreds of billions of dollars in profit, the company is increasingly tapping its financial strength to keep customers buying its chips. Those chips have become the ubiquitous computational workhorses of the AI boom, a status quo Nvidia has an interest in maintaining. Nvidia recently provided backstops that could put it on the hook for some $230 billion in lease obligations and residual-value deals, including a $105 billion backstop for an OpenAI lease in Ohio and potentially up to $125 billion in ‘residual-value support’ for financing deals with Wall Street heavyweights. That support would likely entail Nvidia’s assuring that the value of assets backing loans won’t fall below a predetermined level. Nvidia also recently signed deals with two young cloud-computing companies in Australia where it acts as a customer of last resort if they can’t find others to rent their computing power to.”
August 27 – Bloomberg (Jan-Patrick Barnert): “The price of AI is collapsing, while the cost of building it is not. Equity investors have spent the summer trying to work out who gets caught in between. Consider the past 10 days: A free model called Ox Alpha appeared online, performing near the frontier of what AI can do, and nobody will even say who built it. OpenAI cut prices on its flagship model for the third time in about a month. Meanwhile, the token-price gauge this column flagged as a warning signal back in July has kept sliding since. Intelligence, as a product, is deflating in real time.”
August 23 – Financial Times (George Hammond): “Anthropic’s US customers are using cheaper alternatives to its most powerful AI tool, raising questions about the group’s high-spending business model ahead of what is expected to be the biggest initial public offering of all time. Spending on Fable 5, Anthropic’s largest and priciest model, has plateaued at only about 11% of overall outlay on the company’s tools… This breaks a pattern of corporate users defaulting to the most powerful models. Analysts and investors in Anthropic said the change was primarily driven by Fable’s high price and the fact that older models are capable of handling the bulk of business demands.”
August 26 – Bloomberg (Michael Hytha and Dani Burger): “Growing political opposition to data centers is slowing the industry’s growth and increasingly forcing developers and their funders to consider community concerns. ‘Community backlash is very real,’ said McKinsey & Co. partner Maria Goodpaster. ‘It will definitely slow down the pace because some investments have already been made and now we’re seeing players pivot from those and abandoning some sites in some cases.’ Goodpaster… said available power and water supplies are now part of the business case for projects and are shaping capital allocation and site selection.”
August 23 – New York Times (Shane Goldmacher): “The fight over data centers is suddenly at the epicenter of the midterm elections. One new ad in Texas begins with someone typing into a chatbot, ‘Why is my electric bill going up?’ Another in Ohio blames one of the state’s Republican senators for a proliferation of data centers, calling them ‘a total scam.’ And in top House battlegrounds in Michigan, Wisconsin and Pennsylvania, the Democratic challengers are all running ads against the server warehouses powering the artificial intelligence boom.”
August 26 – Bloomberg (Ruth Liao): “As many as half of the proposed data centers in the US are at risk of delays or cancellations because of growing political backlash and the complexities of building physical assets, according to investment firm Kimmeridge Energy Management Co. ‘The sort of Silicon Valley model is running into a real-world infrastructure constraint,’ Ben Dell, managing partner and co-founder of Kimmeridge, said…”
August 27 – Axios (Madison Mills): “Meta (META)’s landmark social media settlement marks the latest milestone in a decade-long unwinding of Big Tech’s once-unfettered freedom to operate. The AI industry is watching closely. Its historic expansion, already fraught with job risks and public anxiety, depends on building thousands of power-hungry data centers in communities where opposition is rising fast. ‘The last time we’ve seen the public this angry about an industry was during the financial crisis,’ Nidhi Hegde, executive director of the American Economic Liberties Project, told Axios.”
August 24 – Bloomberg (Dina Bass and Ian King): “Amazon.com Inc.’s Andy Jassy has begun making an audacious boast during conference calls this year. Though his company remains a top Nvidia Corp. customer, it’s also one of the world’s largest makers of data center chips in its own right. If Amazon’s semiconductor operation were a standalone business, it would generate annual revenue of more than $25 billion… And the sales are growing by a percentage in the triple digits. ‘We’re quite excited about what’s happening in our chips business,’ Jassy said. The swagger underscores how much the semiconductor landscape is changing — and how fast. Though Nvidia remains the dominant maker of data center processors, particularly ones that help train artificial intelligence models, it’s facing increasing competition from all sides, including its biggest customers.”
Bubble Watch:
August 26 – Bloomberg (Jeffrey Sparshott): “A nearly 10% increase in US corporate profits propelled a measure of profit margins to the widest on record in the second quarter, reflecting a strong earnings season helped along by price hikes and resilient consumers. A measure of after-tax profits as a share of gross value added — a proxy for margins — climbed to 19.4% from 18.2%... That was the highest in data back to the 1940s.”
August 26 – CNBC (Jonathan Vanian): “Meta and a coalition of state attorneys general have settled a major federal case centering on allegations that the social media giant misrepresented the extent of child mental health harms caused by apps like Facebook and Instagram. The settlement was revealed in a court filing… that details several requirements Meta must make to its apps as part of a proposed ‘consent judgement’… As part of the settlement, Meta agreed to pay $16.7 billion. The state of California could receive $1.5 billion to $2.1 billion as part of the settlement…”
August 22 – New York Times (Sophia June): “Rising housing costs and high mortgage rates are making buying a house increasingly less likely to be part of Gen Z’s ticket to building generational wealth. According to a Pew Research Center survey…, 89% of adults under 40 say it is harder for young adults today to buy a home than it was for their parents’ generation. The survey also showed that young adults are less likely than older ones to say buying a home is a ‘very good’ investment. Instead, they see saving for retirement, trading on apps and contributing to high-yield savings accounts as their best ways to build wealth.”
August 25 – Financial Times (Sun Yu): “US private equity funds that invest in fast-growing companies without taking a controlling stake raised a record amount of capital in the first half of this year, in a sign of their strong recovery from a 2023 fundraising slump. Growth funds attracted $33.2bn in the first six months of this year, the highest first-half total on record and a 36% jump from a year earlier, according to… Preqin. Fundraising across other private equity strategies grew 20% over the same period.”
Inflation Watch:
August 26 – CNBC (Jeff Cox): “Prices consumers pay for a variety of goods and services rose slightly in July, according to the Federal Reserve’s main inflation gauge. The personal consumption expenditures price index… increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 3.7%... Both were 0.1 percentage point above the… consensus. But stripping out volatile food and energy costs, core PCE posted respective gains of 0.2% and 3.3%...”
August 26 – New York Times (Aruni Soni): “The average price of diesel in the United States was $5.62 a gallon…, 53% higher than a year earlier… Because fuel supplies were disrupted after the United States and Israel went to war with Iran, diesel prices are now hovering close to a record high and could drive up prices of many other goods and services. Diesel powers a vast chunk of America's economy. It fuels equipment on farms…, as well as trains, trucks and other heavy machinery. As prices climb, businesses often have to pass on that higher cost to their customers.”
August 24 – Axios (Matt Phillips): “A long-predicted energy shock is finally showing up in sky-high prices for diesel fuel. Diesel fuel is a key input for virtually anything grown or transported throughout the U.S., making it a potentially inflationary force. It means the market’s relief over crude oil’s relatively muted reaction to the Iran war could be misplaced. ‘The market is out to lunch, looking at crude oil prices,’ Jeff Currie, a former commodities analyst with Goldman Sachs and Carlyle (CG), tells Axios. ‘Look at diesel prices.’ Futures prices for diesel have soared to roughly $100 above those of crude oil, the divergence between prices for the two products reflecting a dearth of diesel refinery capacity worldwide.”
August 26 – Bloomberg (Hallie Gu and Eleanor Thornber): “Wheat hit a fresh three-year high in Chicago, as concerns grow that the war between Russia and Ukraine could escalate and further disrupt supplies from one of the world’s most important breadbaskets. The conflict has damaged ports and grain terminals, significantly curbing shipments from a top exporting region.”
August 23 – New York Times (Somini Sengupta): “Instant noodles. Hot chapatis. Sliced bread. Wheat is at the heart of the modern diet, and this year, it is facing an accumulation of modern dangers. The breadbaskets of the world are getting pummeled by drone strikes and devilish weather, nudging prices higher amid already soaring food costs in the wake of the Iran war. Heat and drought have diminished harvests in some of the biggest wheat-producing countries, including the United States, which is expected to have its worst wheat harvest in a half-century... Poor countries that agreed to buy American wheat under the threat of Trump tariffs could be stuck paying abnormally high prices. The Black Sea, a crucial passage for the global wheat trade, is an active theater of the Russia-Ukraine war, while the Houthi militia’s attacks on shipping in the Red Sea have already forced grain shipments to take a longer, more expensive route around South Africa.”
August 26 – Financial Times (Editorial Board): “It has been a turbulent year for the global food industry. Disruption to shipping in the Strait of Hormuz has led to a surge in the price of fertiliser, fuel and cooking oil. The Ukraine war has continued to hit grain exports through the Black Sea, and droughts and wildfires, linked to global warming, have scorched crops from Australia to Europe. Now an intensifying El Niño… is set to compound strains on food production and trade. The phenomenon… can last for up to 18 months.”
August 26 – Reuters (Stella Qiu): “Australian consumer prices rose more than expected in July as fuel costs jumped…, while core inflation also exceeded forecasts and added to the risk of another hike in interest rates… Data… showed its monthly consumer price index (CPI) rose 1.0% in July from June, exceeding forecasts of a 0.8% rise, as fuel prices jumped 7.5% after falling for three months. The annual pace slowed to 3.5% from 3.8%...”
Federal Reserve Watch:
August 27 – CNBC (Jeff Cox): “Kansas City Federal Reserve President Jeffrey Schmid said Thursday that inflation is still too high, though he stopped short of calling for an interest rate hike… Schmid said… inflation has proven resilient.’ It’s still stubborn and it’s still sticky, and ... we’ve got to continue to find ways to break through,’ he said… ‘We’re going to have our work cut out for us as we move into the [Federal Open Market Committee] cycle.’”
August 23 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Minneapolis President Neel Kashkari played down concerns over rising US Treasury yields, saying markets are functioning well and the recent surge is unlikely to affect monetary policy deliberations. ‘There's every indication that the US Treasury market is functioning as it should, that trades are taking place, that there's liquidity in the market, and so that enables us to focus on the federal funds rate as our primary policy tool to get inflation back down,’ Kashkari said…”
August 25 – Reuters (Howard Schneider): “The U.S. Federal Reserve will need to raise interest rates soon unless coming data show a continued decline in inflation that remains too high and which has become a ‘pervasive’ concern for businesses and households, Boston Fed President Susan Collins said…”
August 27 – Axios (Neil Irwin): “Lawyers for Federal Reserve governor Lisa Cook have submitted their case for why she cannot legally be fired, as President Trump seeks new avenues for dismissing the Biden appointee for cause. After the Supreme Court ruled against Trump’s attempt to fire Cook last year over allegations that she claimed two different properties as her primary residence in mortgage documents, the White House has sought to introduce a more formal process in pursuit of the same goal… Three weeks ago, the White House asked for her response to the substance of those allegations… Cook’s lawyers argue that ‘there is no legitimate basis for’ removing Cook from the Fed board, where her term extends to Jan. 31, 2038, and that the purported errors were ‘an entirely inadvertent oversight.’ They say that she was fully transparent with her lender and note media reports that Trump himself and five members of his cabinet have also had dubious claims of primary residency on a property in the past.”
U.S. Economic Bubble Watch:
August 27 – Bloomberg (Mark Niquette): “The US merchandise-trade deficit widened in July to the largest since early last year on a multi-decade surge in inbound shipments of capital equipment. The shortfall in goods trade grew 17.2% from the prior month to $118.8 billion, the largest since March 2025… The gap was wider than all estimates… Merchandise imports climbed 3.7%. The advance was fueled by the largest increase in capital goods… since 1993. US exports of goods fell 2.9%.”
August 27 – Associated Press (Paul Wiseman): “The number of people filing for U.S. unemployment benefits fell last week, remaining at historic lows as layoffs are rare and most Americans enjoy job security. Jobless claims slipped to 203,000 last week from a revised 207,000 the week before… For the past year, claims have mostly been at a historically low range of around 200,000 to 230,000 a week.”
August 26 – Wall Street Journal (Dean Seal): “Demand for U.S. durable goods jumped more than expected in July… Total orders for durable goods—which comprise goods meant to last three years or more—increased in July by 1.1% to $339.3 billion, compared with a 0.5% increase in June.”
August 26 – Associated Press (Paul Wiseman): “The U.S. economy grew at a sluggish 1.5% pace from April through June. But consumer spending stayed strong. Growth in gross domestic product… decelerated from a 2.1% pace from January through March… The second-quarter growth number was unchanged from the department’s first estimate. Still, consumer spending — which accounts for about 70% of U.S. economic activity — increased at a healthy 3.4% annual clip, up from 0.5% in the January-March period. The reason for the lackluster growth was imports.”
August 26 – CNBC (Diana Olick): “Mortgage interest rates moved even higher last week, causing demand for loans to weaken yet again… Applications to refinance a home loan, which are most sensitive to weekly rate moves, fell 2% for the week. They were 17% lower than the same week one year ago… Applications for a home mortgage fell 0.3% for the week and were 5% lower than the same week a year ago.”
August 25 – Wall Street Journal (Jessica Coacci): “U.S. home price growth rose in June as home-price trends differed throughout regions and inflation cooled. The S&P Cotality Case-Shiller National Home Price Index… rose 1.5% in the 12 months through June… ‘Homeowners and renters alike breathed a sigh of relief in June as inflation cooled to 3.5%,’ said Rebecca Kaufman, associate director of commodities at S&P... Chicago reported the highest annual gain among the 20 cities with a 6.9% increase in June, followed by New York and Cleveland with annual increases of 4.8% and 4.1%... Seattle posted the lowest return in June, falling 2%.”
August 24 – Financial Times (Brij Khurana): “Perhaps there is no better example of the K-shaped nature of the US economy than the fact that employee compensation has fallen to 50% of GDP, its lowest level since 1947, while household net worth is close to an all-time high of 546% relative to GDP. This dichotomy helps explain the resurgence of socialism among younger Americans. Gen Z depends disproportionately on wages, whose purchasing power has been eroded by inflation, while baby boomers hold much of the country’s accumulated wealth.”
China Watch:
August 23 – Reuters (Clare Jim, Liangping Gao, Ziyi Tang, Ellen Zhang and Kevin Yao): “The one-time billionaire who came to personify the boom and bust of China's property market was sentenced to life in prison last week by a Chinese court. But the collapse of the sector, entering its sixth year, remains a drag on the world’s second-biggest economy… Many angry homeowners and creditors — in comments that went initially uncensored on Chinese social media — asked why Hui Ka Yan, once Asia’s richest person and the founder of China Evergrande (EGRNF), was not given the death penalty… Six years after China’s financial regulators cracked down on the heavily leveraged property sector, the pain continues. Millions of partially built properties sit derelict across China, a recovery in new-home prices in the biggest cities, like Beijing and Shanghai, has stalled, land sales continue to plunge and declines are accelerating in property sales and construction.”
August 26 – CNBC (Anniek Bao): “China’s industrial profits growth in July slowed to its weakest pace this year, expanding 11.2% from a year earlier, as soft demand and a broader slowdown in the economy weighed on manufacturers. For the first seven months of this year, profits climbed 17.6% from a year earlier…”
Central Banker Watch:
August 26 – Financial Times (Daniel Tudor): “The Bank of Korea has raised its benchmark interest rate by 0.25 percentage points to 3%, as an AI-driven semiconductor boom drives growth and heightens inflationary pressures. The move… was the second in as many months…”
Europe/UK Watch:
August 27 – Bloomberg (Simon White): “High indebtedness has prompted a call for France to cancel part of its public liabilities. Ideas spread, so expect similarly unorthodox demands elsewhere as governments grapple with high debt, while political disruptors air increasingly unconventional policies. All those roads, however, lead to more inflation and the debauchment of financial assets. The greatest hits of the GFC keep getting played. The latest is the call from the left-leaning French populist politician, Jean-Luc Mélenchon, to cancel 18% of the country’s public debt; in his words, ‘to just take the bonds, and burn them.’”
August 27 – Bloomberg (Mark Schroers, Sabrina Nelson Garcinuño, and William Horobin): “Spanish inflation surged to more than double the European Central Bank’s 2% target while France’s reading exceeded expectations, strengthening the case for an increase in interest rates next month. Prices in Spain… jumped 4.5% from a year ago in August. That’s the fastest since 2023… French inflation accelerated to 2.7%, the highest since May. The region’s second-largest economy also saw a steep downward revision in growth for the first half of 2026.”
Japan Watch:
August 25 – Reuters (Makiko Yamazaki): “Japan’s finance ministry expects debt-servicing costs to rise 17% to a record 36.64 trillion yen ($230bn) in the next fiscal year, adding to pressure on the country’s already tattered finances... The increase reflects plans to set the assumed interest rate for calculating debt servicing costs at a 29-year high of 3.8% in its budget request for next fiscal year. The total value of budget requests from government ministries and agencies for fiscal 2027 is expected to exceed 130 trillion yen for the first time, up sharply from about 122 trillion yen in the current fiscal year…”
August 25 – Reuters (Leika Kihara): “A key gauge of Japan’s service-sector inflation rose 3.6% in July from a year earlier…, reinforcing the central bank’s view that a tight labour market is pushing firms to pass rising costs on to consumers. The increase in the services producer price index, which tracks the prices companies charge each other for services, followed a revised 3.4% gain in June…”
August 27 – Reuters (Leika Kihara): “Annual core inflation in Tokyo accelerated in August for the third straight month…, a sign of broadening price pressures that bolsters the case for an interest rate hike as soon as next month. Core consumer prices in Tokyo rose 1.8% in August from a year earlier…”
August 27 – Reuters (Leika Kihara): “Bank of Japan Deputy Governor Ryozo Himino on Thursday stressed the need for timely interest rate hikes with a focus on the risk of an inflation overshoot, reinforcing dominant market expectations for a near-term increase in borrowing costs.”
EM Watch:
August 24 – Wall Street Journal (Jiyoung Sohn, Sooyoung Rhee and Jack Pitcher): “South Korea had the world’s hottest stock market for most of the past year, powered by the artificial intelligence boom. Then it crashed. Yoon Jae-Yi, a 30-year-old English teacher, lost $19,000. She has since cut her living expenses… South Korea, which introduced Squid Game and K-Pop, now hosts the world’s craziest stock market… The benchmark Kospi index more than tripled in value, driven by faith in the AI boom. Two South Korean companies, memory-chip makers Samsung Electronics (SSNLF) and SK Hynix (HXSCF), soared to trillion-dollar valuations and became the twin forces pushing record market gains. Then the Kospi plummeted around 40% over six weeks in June and July, burning hundreds of thousands of investors—a sober warning to those betting big on the AI industry.”
August 25 – Bloomberg (Maria Elena Vizcaino, Scott Squires, and Kelsey Butler): “Long the poster child of fiscal probity in emerging markets, Mexico was, at its peak, an A-rated borrower in the bond market just a few years ago. Today, the country finds itself teetering on the cusp of junk status and paying interest rates that are higher than those offered by tiny neighbors with lower credit ratings, like Guatemala and Panama. There are any number of reasons for the decline — from soaring government spending to feeble economic growth — but, lately, one issue keeps coming up again and again: the financial losses piling up at the state oil giant, Petroleos Mexicanos, and the way the government keeps pumping cash into the company to keep it afloat.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 25 – Wall Street Journal (Joe Stonor): “Extreme heat and droughts suffered by Europe over the last two months are severely damaging harvests and will likely result in crop failures, the European Commission’s crop monitoring survey said. Long-lasting dry and hot weather has ‘substantially worsened summer crop prospects across western and most of central Europe,’ said researchers behind Europe’s MARS Bulletin. France, southern Germany and northern and central Italy are among the regions significantly impacted.”
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