macroeconomics

03/10/2026 by Naomi

Many people treat uncertainty as something they should eliminate before they can get on with things. In investing, that instinct can cause significant damage. Ironically, investing works because markets are unpredictable.

If markets were predictable, just about every asset would carry the same return, the risk-free rate, and nothing more. Stocks pay more than bonds over time precisely because nobody can promise you they will, not even the government or the fund manager who has been beating the market for a decade. If that risk disappears, so does the reward.

David Booth, who worked for 45 years building Dimensional Fund Advisors around this idea, puts it this way: uncertainty is not something to eliminate from your investing life. It’s something to manage.

So much of investing anxiety comes from treating an unpredictable process as if it should behave predictably. You didn’t know twenty years ago where you would be today, and you will not know twenty years from now either. That doesn’t stop you from planning a life, and it shouldn’t stop you from planning a portfolio.

Even Professional Investors Struggle to Beat the Market

The people who are paid the most to beat the market typically don’t, especially once you account for fees. With fees in the picture, the average professional manager underperforms a simple, low-cost index over long stretches of time.

This is no knock on their intelligence, work ethic, or skill. It’s simply a function of how markets work. Prices move because sophisticated buyers and sellers are constantly competing to find mispricings, and that competition is what makes mispricings rare and short-lived.

So their effort is worthless? No, not necessarily.

It’s that the kind of effort that works, including deep research, broad diversification, and patient structuring, looks nothing like the kind of effort that gets attention: bold calls, hot picks, and timed exits. The boring version wins more frequently, over more decades, for more individuals. It just doesn’t make for a good headline, which is part of why so few people ever hear about it.

Learn to Separate Useful Investment Information From Market Noise

There’s more financial data available to the average person today than any professional had access to a generation ago. Phones deliver a constant stream of prices, forecasts, and hot takes before breakfast. In many ways, it’s an unhealthy overload of information for many people. It’s simply too much, and almost none of it is meaningful information that informs any kind of decision.

A piece of information is meaningful if it should change what you do with your portfolio. A change in your income, your family situation, your time horizon, your tolerance for risk, these are meaningful. An opinion about next quarter's inflation number or a prediction about where interest rates go from here, these are almost always just interesting. They make for a good conversation, but they rarely make good reasons to touch your portfolio.

The discipline worth building into your approach is not about reading less or tuning out day-to-day price moves. It is about asking, every time something crosses your desk, whether it actually changes what you should do. If the answer is no, file it under interesting and move along. Most things belong there, and learning to sort them quickly is a valuable skill.

Plan, Don't Predict

A phrase that captures this philosophy is “Plan, don't predict.” It sounds simple because it is, but simple is not the same as easy, as the great Charlie Munger said repeatedly of his own investing strategy that made him one of the wealthiest people in the world.

Predicting is seductive, and it offers the feeling of control. Planning offers something less exciting and more durable, a process you can trust even when you have no clue what happens next. A prediction is a bet on a single outcome. A plan is a structure made to survive a wide range of outcomes, including the ones you can't see coming.

Flexibility Matters in a Long-Term Investment Strategy

Flexibility has economic value when it comes to investing. Rigid plans break when circumstances change. Plans made with some give in them, room to update assumptions as new evidence arrives without abandoning the underlying approach, tend to hold up better over long periods.

So being willing to challenge your own conclusions, even ones that have served you well for years, is not a weakness in a strategy. It’s what keeps a strategy alive long enough to matter as conditions change around it… because they inevitably will.

Long-Term Investors Have Reason to Be Optimistic

Optimism in investing does not mean assuming everything will work out. It means looking at the long history of markets and recognizing that economies have repeatedly recovered from recessions, wars, financial crises, and other major disruptions.

That history does not tell investors what will happen next, but it does offer a useful perspective. Markets will go through difficult periods, and some of them will be severe. Yet over long stretches of time, businesses adapt, economies recover, and growth eventually resumes.

The practical lesson is to focus on the things you can control. That includes how much risk you take, how diversified you are, how long you stay invested, and whether your portfolio is built to withstand difficult periods. Build a plan that does not need every outcome to go your way.

DISCLAIMER: This article is based on a conversation from Top Traders Unplugged and reflects themes, ideas, and perspectives discussed during the episode. The views expressed are those of the guest and participants in the conversation and should not be interpreted as investment advice or as the official views of Top Traders Unplugged.

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26/09/2026 by Naomi

So many portfolios are built for the economy that just happened. For most of the 2010s, that meant an economy short on demand, and many of the rules of portfolio construction that emerged during that decade followed from that single fact.

A decade later, the fact has changed. And many of the rules built on top of it need to change too.

The Decade That Made Diversification Easy

Picture the 2010s as a world defined by a shortage of demand. Growth was scarce, so central banks did what central banks do when growth is scarce: they pinned interest rates near zero and pushed investors toward riskier assets in search of return.

That policy response had a chain of effects. It suppressed volatility across markets, and it made weak growth rather than inflation the primary concern for investors and policymakers alike. Because almost everyone shared that same worry, stocks and bonds tended to move in opposite directions. Anything that damaged growth expectations also gave central banks reason to lower rates, pushing bond prices higher just as equities were coming under pressure.

That made diversification feel almost effortless. Own stocks for growth, own bonds for protection, and let the correlation between them do much of the work. But that negative correlation was never a permanent law of markets. It was the product of a particular economic regime. And regimes change.

When the Economy Ran Out of Slack

The change started during the pandemic and never really stopped. Supply chains investors had assumed were resilient turned out to be fragile the moment a global shock tested them. The war in Ukraine delivered a second lesson, this time about energy. And now the AI buildout is delivering a third, showing up in bottlenecks around leading-edge chips, power generation, and the sheer amount of capital required to keep the buildout going.

This is a shift from a demand-constrained world toward a supply-constrained one. A shortage of demand can often be addressed with policy. Central banks can cut rates, governments can spend more money, and policymakers can make risk-taking more attractive. A shortage of supply is different. Interest-rate cuts do not manufacture advanced chips. They do not build power plants, expand electricity grids, or suddenly create more energy capacity. Those physical constraints take time to resolve.

That changes the inflation picture. It changes the role of interest rates. And ultimately, it changes what investors should expect the different parts of a portfolio to do.

What is the Role of Bonds Now?

In a demand-driven world, bonds performed two jobs at once. They generated returns through duration, as falling interest rates lifted the value of long-dated bonds. And they diversified equity risk because weaker growth usually meant lower rates, allowing bond prices to rise when stocks were struggling.

In a more supply-constrained world, where inflation and scarcity matter alongside growth, that second function becomes much less dependable. The answer is not to abandon bonds. It is to give them a different job description.

Rather than relying as heavily on duration and the assumption that bonds will rally whenever equities fall, the more durable case for fixed income increasingly rests on income itself: a diversified mix of government bonds and public and private credit, spread across corporate debt, emerging market credit and other sources of cash flow.

Income is a different kind of ballast. It can still suffer when credit conditions deteriorate, but it does not require stocks and bonds to maintain the same negative correlation that made the traditional portfolio work so well during the previous regime.

That leaves a bigger question. If bonds are no longer providing the diversification they once did, where should investors look for it instead?

Where to Find Diversification Today

One answer is market-neutral hedge fund strategies, designed to generate returns without depending heavily on whether markets themselves rise or fall. Another, which should surprise no regular reader of this blog, is Trend Following. The interesting thing is that they approach the same diversification problem from almost opposite directions.

Market-neutral strategies try to remove broad market direction, offsetting long and short exposures in an attempt to isolate something closer to pure alpha. Trend Following embraces market direction, but without needing to know in advance what that direction will be. It can go long or short across equities, bonds, currencies and commodities as sustained trends emerge. That distinction becomes particularly valuable when the source of portfolio stress is no longer predictable.

The next major shock might come through equities. But it might just as easily emerge through inflation, interest rates, currencies, commodities, or some combination of them. Trend Following does not require investors to know where the shock will appear, and crucially, it does not require stocks and bonds to behave according to a familiar correlation pattern. It requires something different: markets that move far enough and persistently enough for those moves to become opportunities.

Market-neutral strategies bring a different set of lessons. The 2007 quant crisis was a reminder that calling something market-neutral does not make it risk-neutral. Strategies that appeared independent could still share hidden factor exposures, crowded positions and common sources of leverage. When those positions were unwound together, correlations appeared precisely when investors least wanted them.

The lesson was not to abandon systematic investing. It was to become much more deliberate about what risks were actually being neutralized and to isolate return streams that were genuinely different rather than merely labelled differently.

Neither market-neutral investing nor Trend Following is a permanent hedge. Market-neutral strategies can struggle when supposedly independent positions suddenly become correlated. Trend Following can struggle when markets repeatedly reverse direction or fail to establish meaningful trends. But that is also the point.

True diversification does not come from finding one strategy that protects against everything. It comes from combining return streams that succeed and fail for different reasons. A strong multi-strategy allocation therefore becomes less about finding the perfect hedge and more about making sure the portfolio is never built around a single point of failure.

The AI Valuation Question

No conversation about the current market gets far without addressing AI valuations, and the usual bubble debate misses a detail worth thinking about.

Many of the companies sitting at the center of the AI buildout, particularly suppliers of memory chips and other critical inputs, are generating extraordinary profits. Yet several trade at less than ten times forward earnings, a number BlackRock's Mike Pyle has highlighted as evidence that the market is not treating this the way it treated technology stocks in the late 1990s.

A classic bubble tends to combine extraordinary expectations with extraordinary valuations. Here, at least in parts of the AI supply chain, extraordinary profits are being awarded surprisingly ordinary multiples. The market may be telling us something.

Those profits are coming from bottlenecks rather than necessarily from permanent competitive advantages, and bottlenecks do not last forever. Economics has a simple way of describing this. In the short run, factors of production are fixed. That scarcity is precisely what creates bottlenecks and the outsized profits that come with them. In the long run, factors of production become more flexible. New suppliers enter, existing companies expand capacity and the scarcity that created those profits begins to fade.

Seen that way, a low multiple can simply be the market's way of saying today's earnings are unusually high, not permanently so. That is very different from the late 1990s, when investors often paid enormous multiples for profits that had not yet arrived.

Building Around a Different Center of Gravity

None of this means abandoning growth exposure. Growth still belongs at the core of a well-constructed portfolio. What changes is everything built around it.

Bonds move from being primarily a duration hedge toward being more of an income engine. Diversification moves from something bonds once provided almost automatically to something investors have to seek out deliberately, through strategies such as market-neutral investing and Trend Following that depend on fundamentally different sources of return.

Instead of starting with fixed allocations to stocks, bonds and alternatives, the more useful question becomes what jobs the portfolio actually needs performed. It needs growth, it needs income, and it needs diversification that does not depend on the growth and income pieces behaving exactly as they did during the last economic regime.

That is essentially the logic behind what some large asset managers call a total portfolio approach. Rather than organizing the portfolio around asset-class labels, it organizes it around the underlying drivers of risk and return.

Seen through that lens, equities might provide exposure to growth and themes such as AI and scarcity. Fixed income can provide contractual income. Market-neutral strategies can seek returns independent of broad market direction. Trend Following can provide exposure to sustained price movements wherever they emerge.

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19/09/2026 by Naomi

Just about every generation of investors inherits a set of assumptions that feel permanent until they stop being true. For the last few decades, the working assumption was that the world was becoming one connected market, that costs should be minimized wherever they could be, and that inflation was a problem the developed world had mostly solved. That world is fading, and something different, something more competitive, is replacing it.

It’s worth remembering that regimes like this rarely “declare” themselves while they’re happening. The evolving from one economic order to another tends to look, in the moment, like a string of unrelated news stories, a tariff here, a subsidy there, a foreign policy speech that seems mostly symbolic. Only in hindsight do these things line up into a pattern, and by the time the pattern is obvious to everyone, much of the repricing it causes has transpired.

AI, Defense, and Energy Are Driving the New Global Rivalry

The rivalry driving global markets centers on three priorities: artificial intelligence, defense, and energy. AI matters for both economic advantage and military capability, which is why it draws so much capital and attention. Defense matters because the world feels more uncertain than it has in decades, and uncertainty tends to make governments spend rather than save. Energy matters because leadership in either AI or defense is impossible without abundant, cheap power to run it all.

Nearly everything else tends to follow from these three priorities, including regions not directly part of the main rivalry, which are increasingly adopting similar agendas of their own.

Once you see markets through this lens, a lot of seemingly unrelated headlines, chip export controls, defense budgets, grid capacity debates, start to look like different expressions of the same underlying competition.

Bringing Supply Chains Home Comes With a Higher Price Tag

This rivalry is changing how goods get made and where.

For years, the dominant corporate strategy was to manufacture wherever it was cheapest, regardless of geography, under the broader banner of globalization and multilateral trade. Now, with supply chains treated as a strategic vulnerability rather than merely a cost line, companies and countries are reshoring production closer to home, or at least closer to trusted allies.

That change is not free, of course. Manufacturing domestically, or near-shoring to politically aligned countries, usually costs more than sourcing from wherever labor and materials happen to be cheapest. That extra cost shows up eventually as inflation, which is part of why persistent inflation looks less like a temporary post-pandemic anomaly and more like a structural feature of this new era.

Governments Are Putting Money Behind Strategic Industries

Alongside reshoring sits a second trend worth naming clearly: economic nationalism, governments taking direct financial stakes in strategic companies and industries. This used to look like a playbook practiced by a handful of countries, and it increasingly describes some of the world's largest economies as well.

Rare earths, semiconductors, and space infrastructure are treated less like ordinary industries now and more like assets of national importance, worth subsidizing directly rather than leaving entirely to private capital.

For investors, this matters because it changes the incentive structure underneath entire sectors. Industries aligned with national priority, AI infrastructure, defense manufacturing, energy capacity, are increasingly backed by government money in addition to private capital.

That backing doesn’t eliminate risk, but it does change its shape, and ignoring it means missing where a meaningful share of future growth is likely to be directed.

Higher Nominal Growth Could Favor Stocks and Real Assets Over Bonds

Put these pieces together, reshoring, economic nationalism, and rivalry over three enormously capital intensive priorities, and a plausible case emerges for higher nominal growth than the last decade delivered. That sounds appealing in the abstract until you look closely at who benefits.

Higher nominal growth tends to be good for equities, good for real assets, and good for private equity, because rising prices and rising output both flow through to nominal revenues and asset values.

It tends to be considerably less kind to bonds, whose fixed payments become worth less in real terms as growth and inflation both run hotter. That asymmetry makes strategic asset allocation itself worth revisiting, rather than assuming the mix that worked over the last cycle of low growth and low inflation will keep working in this one.

Fiscal Caution Can Become a Disadvantage When Rivals Are Spending Aggressively

Regions that cling to heavy regulation and high taxes occupy an uncomfortable spot in this story.

Regulation and taxation make it harder to compete for the capital and talent now flowing toward AI, defense, and energy. Fiscal responsibility, admirable on its own terms, becomes a competitive disadvantage when rivals are both willing to run up debt to subsidize the industries of the future.

Modest moves toward greater defense and infrastructure spending are a meaningful start in some of these regions, but effects like this rarely show up quickly in growth numbers. A more durable response is not simply spending more, but leaning harder into higher value added, highly specialized industries where an edge can be maintained without matching the sheer scale of larger rivals dollar for dollar.

Sovereign Debt Could Become the Biggest Risk Beneath This New Era

Underneath all of this is a risk that gets less daily attention than AI headlines but arguably matters more: sovereign debt. In 2022, a sudden spike in government bond yields in one developed economy came close to breaking its pension system within days, a preview of how quickly market trust in government debt can crack. That kind of stress can resurface wherever debt has grown large enough, and when it does, it tends to pull money out of equity markets and into debt markets at precisely the moment most portfolios are least prepared for that.

This is a key part of the story that rarely gets the same attention as AI capital expenditure or chip export controls, largely because it moves slowly right up until it does not. Debt markets can look calm and unremarkable for years, absorbing steadily rising issuance without much drama, and then reprice suddenly once investors collectively decide the math no longer works.

There’s a pattern worth noticing across these risks, from reshoring costs to sovereign debt stress. Each one builds gradually, easy to dismiss because nothing dramatic happens for a long stretch of time, and then the adjustment happens all at once. That pattern shows up throughout financial history, which is part of why patience and positioning tend to matter more than timing.

Portfolios Designed for the Last Economic Era May Need to Be Reconsidered

None of this requires a precise prediction about exactly when or where the next shock lands, which is fortunate, since precise predictions in this domain have a poor track record. It requires something more useful, an honest look at where the underlying incentives are pointing, which industries and countries have already committed capital to a particular direction, and where a portfolio might be out of step with a world that no longer resembles the one it was originally built for.

The investors who navigate a genuine regime change well are rarely the ones who guess the headlines correctly. They are usually the ones who understand the underlying forces early enough to position for them patiently, and stay with that positioning long enough for it to matter.

That patience is harder to practice than it sounds, because regime change rarely proceeds in a straight line. There will be stretches where the old order seems to be reasserting itself, where bonds rally, where the case for reshoring looks overstated, where fiscal caution appears vindicated rather than costly.

Those stretches are part of how regime change unfolds, not evidence that the underlying change has reversed. Mistaking a pause for a reversal is one of the more common and more expensive errors an investor can make during a genuine transition, and it tends to happen precisely when the new regime is consolidating rather than retreating.

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12/09/2026 by Naomi

A forest that hasn't burned in decades looks perfectly safe. The trees are tall, the canopy is thick, and nothing has gone wrong in years. But foresters know something many investors don't: The longer a forest goes without a fire, the more fuel piles up on the ground between the trees. Dry branches, dead leaves, and thick brush accumulate season after season, mostly unnoticed by anyone walking through.

The forest becomes more flammable over time, not safer. When the spark finally comes, it can do far more damage not because the spark itself is bigger, but because there is so much more waiting to burn.

Calm Is Not the Same as Safe

Markets work the same way. Many investors, and most of the tools made to help them, treat calm as a stand-in for safe. When prices stop moving much, measured volatility falls, and low volatility reads as low risk. The standard models respond accordingly. Position sizes that scale with volatility grow larger when markets settle down. Risk budgets loosen, and leverage creeps higher because the math says there is room for it. None of this looks reckless; it looks disciplined, and it looks like risk management working exactly as it was designed to.

The problem is that a calm market is less a market at rest than one where opposing forces happen to be canceling each other out for a while. Buyers and sellers, trend followers and value investors, momentum and mean reversion, all pulling in different directions with just enough balance that price barely moves. That balance can hold for a long stretch. It can also break in an afternoon.

Physicists have a name for this kind of system: self-organized criticality. It appears in forest fires, in avalanches, in a pile of sand that grows one grain at a time until a single additional grain triggers a collapse. The system doesn't need a large shock to produce a large outcome. It only needs enough hidden fragility built up over time, plus one ordinary event to reveal it.

The Japanese government bond market offered a clean, if painful, example of this in 2018. Trailing volatility had fallen to a fraction of one percent, low enough that standard risk models effectively authorized leverage much higher than normal. A routine move of about six tenths of one percent then arrived and wiped out significant capital for anyone leaning on that leverage. The move itself was unremarkable by historical standards, but the position sizing built around the illusion of calm was not.

This is one part that trips people up. It feels backward to say that danger builds during the good times and gets released during the bad ones, since the bad times are what everyone remembers as risky. But the damage in a crisis is usually just the bill coming due for leverage and complacency that accumulated during the calm stretch beforehand.

Nobody gets hurt by volatility itself. People get hurt by the position they were carrying when volatility finally showed up. There's a second mistake hiding beneath the first one, and it has to do with how returns compound.

The Order of Returns Matters More Than the Average

Many of the statistics used to evaluate an investment like average return, standard deviation, even the Sharpe ratio, share one property in common: none of them care about order. Run a set of monthly returns forward, or shuffle them into a different sequence, and every one of those numbers comes out exactly the same.

Wealth doesn't work that way, of course, since wealth compounds: it multiplies one period's ending balance into the next period's starting point, which means the order those returns arrive in matters enormously, even when the average never changes at all. Take forty years of real investment returns and reshuffle the sequence in which the good years and bad years occurred. The average stays fixed, so does the volatility. The ending wealth, though, can swing by tens of percentage points, sometimes the difference between a rough stretch and running out of capital entirely, purely as a function of when the losing years happened to fall.

This is why a fifty percent loss requires a hundred percent gain just to get back to even, not fifty. It’s why two portfolios with identical statistics on paper can produce wildly different outcomes for the people who held them, depending on the path each one took to get there. A system is non-ergodic when the sequence of events changes the outcome, rather than averaging itself out over time. Financial markets are about as non-ergodic as it gets, and almost none of the standard tools used to measure investment risk were made with that fact in mind.

What ‘Optimal’ Can Cost You

There’s a well-known case study in what happens when this gets ignored. In the late 1990s, a hedge fund staffed with some of the most decorated minds in finance, including two Nobel laureates, created a strategy that looked close to optimal by every conventional measure. It performed brilliantly for years, compounding well while the assumptions behind its models held.

Then a string of ordinary-looking events lined up in a way the models hadn't priced, and the same leverage that had made the good years so good turned a bad stretch into a wipeout within weeks. The fund didn't fail because its edge disappeared. It failed because the bets were sized as if the future were knowable enough to trade at the edge of what the math allowed, leaving no room to be wrong.

That’s a trap inside any strategy made around an optimal position size. Betting exactly at the mathematically ideal level, the kind a formula like the Kelly criterion would recommend, maximizes long-run growth only if the estimate feeding the formula is correct.

But markets rarely hand out estimates that clean. Betting a little below that ideal level costs some potential growth in exchange for room to be wrong, and that trade tends to win almost every time reality intrudes on the model.

What Risk Truly Is, and What This All Means for How You Invest

Put the two ideas together and a clearer picture of risk starts to form, one that has very little to do with volatility.

Risk is not about the size of the daily wiggle in a portfolio; rather, risk is the chance that a bad sequence of events forces you out of the game before compounding has had time to work in your favor. That calls for a different set of habits than watching a volatility number.

It means treating a long stretch of calm as a reason to check your assumptions rather than relax them. It means sizing positions so that no single bad sequence can end the game, rather than sizing them to whatever a backward-looking measure of recent volatility happens to allow. It means remembering that the goal was never to avoid every loss; it was to survive the big losses that happen on the way to compounding the wins.

None of this requires predicting the future, which is fortunate, since nobody can. It requires building a portfolio that can absorb whatever sequence the future decides to deliver, calm stretches included, especially the ones that have gone on a little too long.

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05/09/2026 by Naomi

Every investment decision is a bet on a person who hasn't yet met the specific bad year that's coming. You can model the market. You can’t model who someone becomes when things stop going their way, and that gap is where manager selection tends to go wrong.

A CIO can run Monte Carlo simulations across a thousand economic scenarios. They can split a portfolio into a growth bucket and a diversifying bucket, each with its own job to do. They can review every manager fee line by line and present it to committee, so the cost of doing business is never a mystery. None of that is the hard part.

Paul Chai, CIO of the Kansas State University Foundation, worked for nearly a decade running a family office's fund of hedge funds portfolio through the 2008 crisis and its long aftermath. Somewhere in that stretch he arrived at a rule no spreadsheet gave him, realizing the biggest driver of investment success is the person executing the strategy, not the strategy itself.

Every Allocator Is a Prediction Machine, and Certainty Never Comes

Allocators have been characterized as prediction machines. You are trying to forecast whether a manager will still be good in five years, in a market nobody has seen yet, using information that’s always inherently going to be incomplete. Wait for full certainty, and the opportunity is gone. Move on 60 percent confidence, and you are exposed. So the more useful question becomes a narrower one: What predicts whether a person keeps performing after the track record runs out?

Grit Is Passion Plus Perseverance, and Neither One Works Alone

One answer is grit, and it breaks into two components worth weighing separately. Grit is passion plus perseverance. You need something you love, and you need the willingness to keep working at it once it stops being fun. Neither one alone is enough.

Passion without perseverance quits at the first bad year. Perseverance without passion is just stubbornness dressed up as commitment, and it tends to curdle the moment the work stops paying off emotionally as well as financially.

There Are Two Kinds of Passion. Only One Survives a Bad Year

The harder split lives inside the passion half, as research distinguishes two types. Harmonious passion is oriented a bit more outward. It serves a purpose bigger than the person holding it: a curiosity about getting something right, independent of what it earns them. Obsessive passion is oriented inward, and it serves the person's need to arrive somewhere, whatever the cost.

Both can produce spectacular short-term results, which is what makes the distinction so hard to see from the outside. A manager running on obsessive passion can put up numbers equally as good as one running on harmonious passion, for a while. The difference shows up later, sometimes much later, but it almost always comes.

When a bad quarter hits, people running on obsessive passion tend to fray under pressure. They get brittle, defensive, quick to blame the market instead of examine the decision. People running on harmonious passion tend to hold their shape, because the goal was never really about them in the first place.

How a Manager Talks About a Bad Quarter Tells You A Lot

The test, then, is not the pitch deck. It is how a manager behaves once the market turns against them. Do they own a bad quarter, or explain it away? What did they change afterward, and why? A track record only tells you what happened. It takes a conversation, repeated over time, to find out why.

That question gets harder, not easier, as a track record grows. For emerging managers without ten years of returns to model, grit is close to the whole underwriting; there is no spreadsheet substitute for it. For established managers, the question shifts. Is the fire that built the record still burning, or did it go out somewhere around the third fund close, replaced by the comfort of assets under management that renew themselves regardless of conviction?

Everyone doing this work is running their own pattern recognition, shaped by their own path, whether they notice it or not. That is worth sitting with, because it cuts in both directions at once. A pattern that helps you recognize real grit in one manager can just as easily lead you to mistake a familiar story for a good one in another.

A key move is not pretending the bias away. It’s naming it precisely enough to build around it, and then deliberately surrounding yourself with people who see the world differently enough to catch what you would miss on your own.

The People Around You Should Have the Power to Overrule You

That instinct extends past manager selection into how a team gets run.

It’s one thing to say you want dissent. It is another to give it teeth. If even one member of an investment team has a strong, well-reasoned objection to a deal, the rule that matters is whether the person in charge will stand down, not only listen politely and proceed anyway.

The same standard should apply to how leaders talk about their own mistakes. Sugarcoating an error and asking managers to be transparent about theirs is a contradiction most allocators never notice they are living inside.

Clarity Beats Completeness When You're Explaining Uncertainty to Someone Else

This same discipline shows up, less obviously, in how an investment office communicates upward. The instinct of anyone trained to be rigorous is to be maximally transparent: hand a board or a committee every piece of underlying data and let them draw their own conclusions. It feels like the more sincere approach, and in some ways it is.

But board members without an investment background don’t necessarily feel informed by that level of detail. They can feel shut out by it, and grow quieter in meetings rather than more engaged.

One solution is spending the time to understand where each person in the room is coming from, and prioritizing clarity of direction over completeness of data. The goal shifts from proving the work has been done to making sure everyone at the table feels like they belong there.

Be Curious, Not Judgmental, Especially When You Don't Have to Rush

One piece of advice ties the framework together: be curious, not judgmental. It maps onto Daniel Kahneman's distinction between fast thinking and slow thinking, the instinct to pattern-match a manager or a market in seconds, against the discipline to sit with uncertainty a little longer before deciding what it means.

An institution that never retires does not need to rush. Unlike a fund with a defined life span or an investor with a retirement date, an endowment has the rare luxury of thinking slowly, and that luxury is easy to waste by importing urgency the mandate never required.

None of this shows up on a term sheet. A manager's Sharpe ratio, correlation profile, and fee structure will always be visible in the data room. Whether their passion is serving them or serving something bigger than them usually is not.

That’s what every allocator has to go find for themselves, one conversation and one difficult market at a time, because it’s the part that decides what happens after the good years end.

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29/08/2026 by Naomi

Tyler Goodspeed studied four centuries of economic data and found almost none of the reasons we usually blame for recessions hold true.

There’s a version of Peter Pan and a version of Dorian Gray, and Tyler Goodspeed thinks many people have the wrong one in their head when they think about the economy.

Dorian Gray stays young on the outside while his portrait, hidden in the attic, absorbs every sin. Eventually the picture is so rotten that only destruction can restore him. That is how most people think about economic expansions. Growth looks fine on the surface, but debt piles up, asset prices get stretched, and imbalances accumulate somewhere out of view. Eventually the bill comes due. The recession is the reckoning.

Peter Pan never grows old. He does not die of age. He dies, if he dies at all, because he loses a fight with Captain Hook. That’s the alternative view, and it’s the one Goodspeed, a former chair of the Council of Economic Advisers and now chief economist at ExxonMobil, tested against the historical record for years.

The chronology goes back to 1700, and covers 132 recessions

He extended the standard US recession chronology back to 1700, added the United Kingdom as a second data series, and ended up with 132 recessions spanning more than three centuries. The finding that could unsettle anyone who talks confidently about business cycles: economic expansions have never died of old age, in either country, before or after 1945.

According to his research, an expansion in its tenth year is no more likely to end than one in its first. Recessions, on the other hand, do die of old age. The single best predictor of whether a recession ends next quarter is how long it has already lasted.

Height and speed predict nothing about the recession that follows

If expansions aged like Dorian Gray's portrait, there would be information in their height and speed. A faster, higher, longer boom would predict a deeper, faster bust.

Goodspeed tested that directly, using everything from GDP growth to skyscraper records, and found nothing, no informational content at all. Expansions that run hot for a long time are no more fragile than ones that amble along. What Goodspeed calls the pluck model fits the data far better than the oscillation model many people have in their heads.

The economy doesn’t swing above and below some rubber band, snapping back after every stretch. It grows along a fairly steady trend and occasionally gets plucked downward by a shock, then recovers. Newton's third law applies to expansions, an equal and opposite reaction to every deviation, but recessions are chronic violators of that law. There’s no clean symmetry between how hard you fell and how hard you bounce back.

From oil to coal, it's always a shock to something you can't replace

If imbalances are not the culprit, what is? Goodspeed keeps landing on the same answer: shocks to essential, hard-to-substitute goods.

Oil is the modern example, a contributor to nine of the last dozen or so US recessions since 1945. Before oil, it was coal strikes. Before coal, adverse harvests functioning as energy shocks, since feed grain powered the draft animals that moved goods, and a bad peat harvest in the UK could knock out both home heating and industrial power.

The common denominator is a sector that touches everything else in the economy and that nobody can easily do without on a twelve-month horizon. That thought has an uncomfortable present-day application: Rare earth export restrictions from China, currently deferred but not resolved, fit the same pattern as a 1970s oil embargo or a nineteenth-century cotton shock. Small in isolation, large in what it touches.

The story of 2008 starts with $2,000 in extra energy costs, not reckless banks

The 2008 story gets a similar demolition. The popular narrative has villains and heroes, reckless banks and firefighting regulators, and Goodspeed does not dispute that the financial system was fragile. But he points out something that rarely makes it into the retelling: the highest price for a barrel of oil and a gallon of gas in US history, adjusted for the era, was not 1973 or 1990. It was the summer of 2008.

Energy costs the average American household roughly two thousand dollars more per year than they had two years earlier, hitting people who mostly had no savings to absorb it. By that summer, five percent of homeowners were seriously delinquent on their mortgages, months before Lehman collapsed. The banking crisis was real. It was also, in his telling, downstream of an energy shock that gets almost no credit in the story people tell themselves.

Britain developed branch banking in 1826, and it's been less recession-prone ever since

Why does the UK have such a different recession history from the US, despite similarly deep financial and trade ties?

Two prosaic reasons, according to Goodspeed. Britain developed a nationwide branch banking system in 1826, so weakness in one region could be absorbed by strength elsewhere, the way a diversified portfolio absorbs a bad position. The US banned interstate branch banking until the 1980s, leaving thousands of small, undiversified banks that amplified every local shock instead of cushioning it.

Second, Britain ran on coal rather than oil for most of the twentieth century and went from 1926 to 1972 without a single national coal strike, so it largely sat out the oil-driven US recessions of the 1950s through the 1970s. Diversification, not virtue, explains the gap.

The one exception: post-2008 bank rules became financial repression

There’s an exception: After 2008, both the US and UK tightened bank capital and liquidity rules, effectively pushing banks to hold more government debt and lend less to the private sector. In the UK, where businesses relied far more heavily on bank credit than their American counterparts, that regulatory shift produced a rate-of-growth problem, not just a one-time drop. Growth never returned to its pre-2008 trend.

In Goodspeed's phrase, it looked uncomfortably like financial repression. The lesson he draws is not that regulation was wrong but that policy fixes carry trade-offs, and the trade-off here fell hardest on the country most dependent on the thing being restricted.

A Soviet economist summed lottery numbers, and it looked like a business cycle

Perhaps a useful idea in the whole project comes from an unlikely source: a Soviet economist named Eugen Slutsky, who in the 1920s took a stack of old lottery ticket numbers, summed them, and found the resulting series looked almost like a business cycle.

Random noise, added up, can produce something that looks deliberate and cyclical even when nothing underneath it is cyclical at all. Goodspeed's conclusion runs the same direction: Recessions behave less like a morality play and more like a negative lottery. Enough shocks have to land at once, and of different kinds, for the economy to tip over. Most years, most of the dice come up fine.

None of this argues for complacency. Relief for the households and workers who bear the brunt of a downturn still matters, regardless of whether the downturn was earned or just unlucky.

But it does argue for humility about the confident, moralized story that usually gets told after the fact. If expansions do not die of old age and recessions are not penance for excess, then the honest response to a strong economy is not to brace for a reckoning. It is to keep the trend as strong as possible and try not to make the next bad shock, whenever it lands, worse than it must be.

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22/08/2026 by Naomi

When the Strait of Hormuz closed, Adam Rozencwajg’s team built a detailed model of the global oil supply chain. It tracked production, storage, vessel movements, transit times, and the flow of oil through the strait to downstream markets.

After all that complexity, the model produced a simple result: remove a billion barrels upstream and the market eventually ends up with a billion fewer barrels downstream. The exact timing may be uncertain, but the missing supply cannot simply disappear.

The world’s most important oil transit chokepoint had been partly closed for around 100 days, preventing an estimated one to one-and-a-half billion barrels from reaching the market. But still, prices have largely returned to where they started.

Adam explains that the market has not yet absorbed the full impact. Oil takes time to move from the wellhead through ships, storage tanks, refineries, and distribution. Investors may be interpreting the delay as evidence that the disruption was not severe when its effects are still moving through the system.

Why Oil Shortages Take Months to Appear in the Data

A disruption does not appear in inventory data immediately. Once a barrel is produced, it still has to reach a vessel, travel for several weeks, enter storage, pass through a refinery and move into distribution. The full process can take 60 to 90 days. This means the numbers investors see today may reflect conditions from two months earlier.

Another reason is that the data itself arrives slowly. The United States publishes weekly inventory figures, although even those are affected by the physical delay. Most other countries report monthly through the IEA, with an additional reporting lag. This is why inventories barely moved during the first six to eight weeks after the strait closed. The missing oil had not yet worked its way through the system.

The effects are now becoming more visible. US inventories are falling sharply, and the available international data suggests that inventories are also declining elsewhere. The Strategic Petroleum Reserve has dropped to its lowest level since the 1980s, and nobody knows exactly how much more can be safely withdrawn from the underground salt caverns where it is stored.

Adam believes the same delay will now work in reverse. If the strait reopens and more vessels begin moving through it, inventories may continue falling because the market is still absorbing the earlier loss of supply. That could create a confusing period in which the headlines suggest conditions are returning to normal while stockpiles continue to decline.

The Global Oil Cushion Is Much Smaller Than It Looks

The world is estimated to hold between 7 and 8 billion barrels of oil in storage. At first glance, that appears to provide a large cushion against a supply disruption. Adam’s argument, however, is that much of this oil is required to keep the system operating and cannot simply be released when needed. It is closer to working capital than emergency savings.

Around 2 billion barrels is pipeline fill, the oil that must remain inside pipelines at all times. Draining it would require taking the pipeline out of service. Another 1.7 billion barrels is continually moving across the world by ship. Reducing that amount would mean cutting seaborne trade, which would make shortages worse rather than provide relief.

There is also oil that cannot normally be withdrawn from storage tanks. The outlet is positioned above the bottom of the tank so that sediment does not enter the pipes, leaving roughly the bottom 10 percent inaccessible.

Once these operational barrels are excluded, Adam estimates that the system’s usable minimum is closer to 1 billion barrels.

If global inventory draws eventually approach 1 billion barrels, as his estimates suggest, the market could come dangerously close to those limits. The world may appear to have an 8 billion-barrel cushion, but the amount it can actually draw on is far smaller.

Did Oil Demand Collapse, or Did the Data Become Misleading?

China created another complication in the oil data. Petroleum demand is not measured directly. It is usually estimated partly from refinery activity, because refinery runs are easier to track than the final consumption of gasoline, diesel and jet fuel.

When the Strait of Hormuz closed, China stopped exporting refined products and reduced the role of its refineries in supplying the global market. Standard demand models interpreted the lower refinery runs as a decline of 5 to 6 million barrels a day, similar to the collapse seen during COVID.

Adam questions whether that reflects genuine demand destruction. Airports remain crowded, flights are full, and vehicle use has not collapsed. In his view, consumers did not suddenly stop using fuel. Instead, Chinese refiners stepped back from the export market, forcing the rest of the world to draw more heavily on existing refined-product inventories.

Why China chose to idle export capacity is less certain. Adam suggests it may have been a strategic test: a way of showing how China could protect its domestic market if access to imported oil were disrupted, while leaving the rest of the world to deal with the resulting shortages.

Why Bearish Oil Prices May Be Giving Investors the Wrong Signal

Bearish positioning may help explain why the oil price has remained weak despite increasingly tight fundamentals. Investors entered the conflict broadly pessimistic, and the initial rally appears to have been driven largely by short covering. Once that pressure faded, selling resumed, supported by the belief that the oil market remains in a structural surplus.

But last year’s relatively stable inventories did not show the kind of build that a large surplus should have produced. Demand may therefore have been stronger, and the market more balanced, than the prevailing narrative suggested. With inventories now already low and continuing to fall, that distinction matters.

The bearish price creates an uncomfortable question: can the physical fundamentals really be this tight while the market trades as though supply is abundant? One explanation is that some unseen source of supply or genuine demand destruction is balancing the system. The other possibility, and the one Adam believes the market is overlooking, is that price may simply be wrong for now.

The absence of a visible shortage today may not mean the supply shock has disappeared. It may simply mean that its full impact has not yet reached the reported numbers.

There is still a clear test for this view. The effects have taken longer to appear than expected, and if the next three or four months pass without a meaningful impact on inventories or the wider energy market, the thesis will need to be reconsidered.

Until then, the disagreement remains unresolved. The price looks bearish, but the physical evidence continues to point in the opposite direction.

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15/08/2026 by Naomi

In the early 1960s, the Federal Reserve noticed something it could not explain. Foreigners were earning deposits in American banks, but they were not converting them into gold from Fort Knox as economists expected. Instead, they were using those deposits in a completely different way. The Fed sent researchers to London to find out what was happening.

They discovered that foreign banks and businesses were trading claims on American deposits and using them as cash. Soon, banks in London went a step further. They began creating new dollar-denominated loans and deposits on their own balance sheets. In effect, they were creating dollars outside the United States and beyond the direct control of the Fed or the Treasury.

That offshore market became known as the eurodollar system. Today, it contains roughly $14 trillion, compared with around $19 trillion in domestic US dollars. It plays a central role in financing global trade and continues to grow, including in China, even as headlines suggest the world is turning away from America.

The contrast between what countries say about the dollar and how they actually use it is crucial. Brendan Greeley, a former Financial Times economics editor and author of “The Almighty Dollar” argues that the dollar is not a referendum on the United States. People may be frustrated with America and still rely on its currency. The important question is why.

The Dollar Existed Long Before the United States

Let's start with an uncomfortable fact from the dollar's own biography: it is older than the United States. The currency adopted by America’s founders was based on the Spanish piece of eight, a widely used silver coin struck from metal mined in Mexico and Bolivia. Its name can be traced back to Joachimsthal, a silver-mining valley in Bohemia. Joachimsthaler became thaler, then daalder, and eventually dollar. The term was already familiar in England and even appeared in Shakespeare’s plays long before the United States existed.

A new country might have been expected to create an entirely new currency. Instead, the United States joined an existing global monetary system because the dollar was already widely accepted and useful. Foreign silver coins remained legal tender in America until the 1850s.

Even powerful rulers could not simply impose their preferred form of money on global markets. Charles V, the Holy Roman Emperor, had to mint his silver in a form that merchants in Antwerp already recognized and trusted. In practice, he had to copy the established international coin rather than create a new standard of his own.

This challenges the simple idea that money becomes valuable because a government declares it to be money. Greeley argues that governments do not create monetary dominance by decree alone. A currency becomes dominant because people find it useful, reliable, and easy to exchange, regardless of how they feel about the country behind it.

The Three Pillars Supporting Dollar Dominance

If the dollar’s dominance were based only on habit, it would be easier to replace. Greeley argues that the system rests on three deeper foundations that make the use of dollars a practical choice.

The first is deposit insurance. After the Great Depression, the United States created a national system to protect bank deposits. Nearly a century later, the dollar still benefits from a vast pool of safe, regulated and federally insured deposits. The Eurozone has no equivalent system covering all member states; each country remains responsible for its own banks.

The second is the Federal Reserve’s network of swap lines. During a crisis, the Fed can lend dollars to foreign central banks, which then provide them to commercial banks in their own countries. These facilities helped stabilise the global financial system in 2008 and again in 2020, before shrinking once the pressure eased.

Historically, access to Fed swap lines has depended mainly on whether a country had a credible and responsible central bank, not whether its government supported Washington’s policies. China also offers yuan swap lines, but not on the same scale, and they may come with more conditions.

The third pillar is the quality of American financial institutions. US bank regulation is imperfect, but it generally works. More importantly, New York’s capital markets can turn a wide range of investments and projects into dollar-denominated assets.

Greeley refers to an old joke that Rome disappeared but left behind the Church, while the British Empire disappeared but left behind the Bank of England. His extension is that even if America changed dramatically, the world might still be left with New York’s capital markets.

None of these pillars depends on other countries admiring America. Greeley remembers how warmly Americans were received when he lived in rural Germany in the 1990s. That feeling has faded across much of Europe, but the global dollar system continues to grow. Its strength comes from the institutions supporting it, not from affection for the United States.

The Real Threats to Dollar Dominance

None of this makes the dollar invulnerable. It simply means the biggest risks are not necessarily where most commentary looks for them. If dollar dominance rests on deposit insurance, swap lines and institutional quality, those are the foundations worth watching.

Stablecoins could test the first pillar. They function like dollar deposits but do not come with the same insurance. Greeley expects that a major failure could eventually lead to tighter regulation, with stablecoin issuers brought into the existing system and required to provide stronger protection for users.

The second risk is the politicisation of swap lines. The US Treasury has signalled a willingness to use its own swap arrangements to encourage policies that favour Washington. Kevin Warsh has also suggested that the Fed’s international operations should be more closely coordinated with the executive branch.

Fed swap lines have historically been used to support the global dollar system during crises, without requiring countries to align politically with the United States. If that changed, governments might eventually have to choose between financial support from Washington and support from Beijing. Currency fragmentation could begin quietly, through new conditions attached to emergency dollar access.

The third risk is a gradual decline in institutional quality. This is harder to track because it cannot be measured as clearly as deposit insurance or swap-line access. Regulation, legal reliability and the strength of capital markets can weaken slowly, without a single event marking the change.

When assessing predictions about the dollar, the important question is what evidence they rely on. Arguments based mainly on how the world feels about America have repeatedly failed because the dollar system was never built on popularity. Arguments focused on the institutions and financial infrastructure supporting it deserve more attention.

The dollar has survived the empire that first produced it, the disappearance of the silver that once gave it value, and the end of its convertibility into gold. It endured because people continued to find it useful. That usefulness is less visible than political sentiment, but it is also more durable and slower to change.

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08/08/2026 by Naomi

In October 2021, Pippa Malmgren launched her Substack by arguing that the world was already in World War III. At the time, many readers dismissed the idea. Over four years later, that language has become far more common.

Malmgren, a former White House adviser whose father worked on the Cuban Missile Crisis and advised several US presidents, describes this as a “latency problem.” By the time the wider consensus catches up with what she saw earlier, she has already moved on to the next development. Today, while others are only beginning to recognise the scale of the conflict, she believes the superpowers may already be moving toward a resolution, what she calls the “hug.”

Why should investors pay attention? Geopolitical thinking is heavily weighted toward escalation, fragmentation and war. Most people consider the downside in detail, while giving far less attention to the possibility of accommodation or peace. That imbalance in the scenario tree is worth examining.

“It's Either the End of the World or it's a Hug”

Pippa’s argument begins with the reality of nuclear deterrence. A direct military confrontation between nuclear superpowers would be catastrophic, and every major leader understands that. Drawing on Herman Kahn’s work on escalation, she argues that once nuclear weapons are used, events become difficult, if not impossible, to control. That risk creates a powerful incentive to avoid direct conflict.

In her view, this leaves the superpowers with two possible outcomes: destruction or accommodation. History offers examples of leaders choosing the latter. Nixon met Brezhnev when many believed such a meeting was impossible. Reagan and Gorbachev later did the same. In both cases, hostile superpowers eventually found a way to negotiate.

Pippa says her father, who worked on the Cuban Missile Crisis, taught her that when leaders come close to a nuclear exchange, they become acutely aware of the human consequences. Nobody wants to make the final decision that could end millions of lives. That does not mean the path toward an agreement will be smooth. It may remain tense, unpredictable and dangerous, but she believes the pressure created by nuclear weapons ultimately pushes leaders toward diplomacy.

How Today’s Conflicts Could Be Creating the Conditions for a Deal

Pippa believes markets make a mistake by treating Ukraine, Taiwan and Venezuela as separate conflicts. In her view, they are connected parts of a broader strategy aimed at producing peace in Ukraine, an accommodation over Taiwan and, eventually, a wider agreement between the United States and China.

She points to both public developments and quieter diplomatic signals. One example is the alignment she sees between the United States and China on preventing nuclear escalation in Ukraine and keeping global oil markets functioning. She also highlights developments around Kinmen, a Taiwanese-controlled island close to the Chinese mainland, where the movement of people and changes in cross-strait relations may suggest that discussions are taking place behind the scenes.

For Pippa, ending a conflict also requires offering each side a more attractive future. Russia could be brought back into the global economy after a peace agreement. China could gain greater access to US markets and move beyond an economic model based mainly on low-cost exports, building global brands in the way Germany and Japan did after the Second World War.

Many people will disagree with this interpretation. But her broader point is that lasting peace is rarely achieved through pressure alone. It usually requires giving each side a reason to believe that cooperation offers a better future than continued conflict.

Why Investors Should Prepare for Peace or Escalation

There's a lot to learn from this debate on whether peace or escalation is imminent. But perhaps the most useful lesson for investors is about preparation.

Markets reward participants not for knowing exactly what will happen, but for considering a wider range of possible outcomes. At the moment, geopolitical analysis is heavily weighted toward escalation. These risks are heavily discussed, modelled, and hedged. The possibility of resolution receives far less attention.

History shows why this matters. Previous periods of superpower tension eventually gave way to negotiated settlements that many people had considered impossible. For example, the relative peace that followed the end of the Cold War lasted so long that it started to feel normal, even though it was the result of difficult and sustained diplomacy.

You do not have to believe another “superpower hug” is coming to ask whether your portfolio assumptions are prepared for one. The downside scenario already has countless analysts studying it. The upside has far fewer. It's crucial to examine both.

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01/08/2026 by Naomi

The 30 years of stable inflation and falling interest rates that made central banks look heroic were mostly a demographic accident.

The tailwinds behind that stability are reversing on roughly the same timeline. The choices central banks face in the next decade are ones they have not had to make in a generation, and the implications run well beyond the next FOMC meeting. In this article, we’ll explain exactly why.

The real reasons for stable inflation and falling interest rates

Three forces compounded between roughly 1990 and 2020. Baby boomers entered their peak working years. Women joined the workforce at much higher rates than in any prior generation, particularly in healthcare and education where their participation now exceeds that of men. China integrated into the global trading system, bringing not just low-cost manufacturing labor but skilled workers across nearly every level of the value chain.

Taken together, those forces added something close to 1.5 billion workers to the labor supply. Goods inflation fell sharply because Chinese manufacturing flooded the world with cheap inputs. Real interest rates fell, because investment opportunities in the West shrank relative to global savings. Governments could finance large deficits cheaply. Central banks looked like they had things under control because the forces doing the work were structural rather than monetary.

What is changing now?

Birth rates have fallen below replacement in most of the world, including India at the national level and across most Chinese provinces. Hungary, China, and several other countries have tried direct subsidies for childbearing without producing a meaningful response. The cost of raising children, the role of female labor force participation, and broader cultural shifts all point in the same direction. It’s difficult to foresee that pattern reversing anytime soon.

China's labor supply is now shrinking, and Chinese cities have started competing for migrant workers rather than absorbing them passively. Whether China has reached the Lewis turning point is debated, but the fact that the debate is playing out tells you about how mature the migration cycle has become. The post-pandemic surge in immigration into advanced economies generated a political backlash that has narrowed the space for immigration in the US, UK, and several other countries on a more or less permanent basis.

Government dissaving will outweigh higher household savings as societies age

The standard counterargument to demographics-driven higher rates is that people will save more if they expect to live longer, which should push real rates back down. That logic has merit at the household level, but it misses the role of government, and the omission turns out to be decisive.

As populations age, healthcare costs, pension obligations, and disability spending all rise sharply. Healthcare costs in particular grow faster than GDP, because medical technology compounds.

So, we end up with large structural increases in government dissaving. Almost any reasonable arithmetic puts the government dissaving above the increase in household savings, with the net effect being upward pressure on real rates rather than downward.

Housing demand persists even as population growth slows

A second under-appreciated channel runs through housing. The older a population becomes, the less housing fungibility there is between generations. Elderly homeowners are increasingly unwilling to move, and the homes they occupy do not pass smoothly to younger families. New family formation therefore requires new housing construction, which keeps real estate demand elevated even as overall population growth slows.

Rural depopulation in Italy, Japan, China, and parts of the United States compounds the effect. Population concentrates in cities where healthcare access and economic opportunity are stronger, which raises urban housing demand sharply. Make no mistake, the aggregate effect on real interest rates is upward, not downward.

Hyperscaler CapEx plus the fiscal bill add $1.3 trillion to capital demand in 2026

Hyperscaler CapEx will run roughly $700 billion this year, most of it funded from corporate cash rather than borrowing. The distinction matters.

Roughly $700 billion of cash that used to sit in money market funds, supplying cheap short-term liquidity, is being redirected into physical assets. That alone tightens the supply of loanable funds. The One Big Beautiful Bill adds an estimated $600 billion to the US deficit in the same year. Together that produces roughly $1.3 trillion of new demand for capital, with no corresponding increase in supply. The arithmetic mechanically pushes real rates higher.

There are non-financial channels as well. AI infrastructure requires very large amounts of electricity, and the social and political opposition to new data centers in places like Ireland and parts of the US suggests the supply response will be slower than markets currently price.

The two Phillips curves explain why past and future inflation have different drivers

The Phillips curve as typically taught conflates two different relationships. Goods inflation since the 1990s has been determined mainly by Chinese manufacturing and commodity prices, neither of which respond meaningfully to domestic interest rates. Services inflation responds to domestic labor markets in the textbook way.

The disinflation of the last 30 years was almost entirely goods-driven. Most central banks did very little real work, because cheap Chinese exports were doing the heavy lifting. The inflation of the next decade is more likely to be services-driven, because tighter labor markets and higher fiscal spending feed directly into services prices, and services are 70 to 80 percent of most advanced economies. Cutting rates can stimulate services demand. Raising rates can slow services demand, but only at a fiscal cost that is much higher than it used to be.

AI may reduce inequality by removing barriers to high-paid service jobs

The popular framing of AI assumes it will increase inequality by displacing workers and concentrating returns to capital.

A more careful reading might suggest the opposite is plausible. If AI removes the barriers to high-paid service jobs in fields like law and accounting, more workers can compete for those jobs. Aggregate income may compress in the middle and upper-middle rather than spread further apart. Of course, time will tell.

Lower inequality has a counterintuitive implication for interest rates. Recent work by Mian, Straub, and Sufi has argued that higher inequality pushes real rates down, because the rich save more and those savings flow into financial markets.

If AI compresses inequality even modestly, real rates rise rather than fall. That cuts against the standard market intuition that AI is universally deflationary.

The choice central banks have not had to make in a generation is coming back

Paul Volcker raised rates aggressively in the 1970s without destabilizing the fiscal situation, because federal debt-to-GDP was low. At today's debt levels above 100 percent in most advanced economies, the same response generates an interest expense problem that has to be inflated away later. Central banks face a choice between fighting inflation and supporting fiscal stability.

The market reactions to the Truss budget in the UK, French fiscal stress, and Japanese yen weakness suggest that bond vigilantes are starting to treat advanced economies the way they used to treat emerging markets. Brazil is the cleanest example of where this can go. Its nominal fiscal deficit is 8 to 9 percent of GDP. The primary deficit is under 0.5 percent. The rest is interest expense, and the central bank cannot cut rates without re-igniting inflation. Advanced economies at high debt ratios face a structurally similar trap.

One broad view of the central banking outlook is that the next decade will not look akin to the last 30 years, because the demographic forces doing the work have run their course. The next chapter requires central banks to make choices they have not had to make in a generation, and the decisions will shape the relationship between governments and central banks well beyond the next rate cut.

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25/07/2026 by Naomi

Many discussions of trade imbalances focus on what the deficit countries are doing wrong. The framing usually puts the blame on borrowers in the deficit countries for spending beyond their means and saving too little. There’s a more useful frame that reorganizes the entire analysis: Trade imbalances are income imbalances. When you accept that observation, almost everything that has happened in global macro over the last 25 years starts to look a bit different.

The frame is not new, as it runs through Keynes, Joan Robinson, Michal Kalecki, and Ragnar Nurkse. Mainstream economics drifted away from it during the 1970s and 1980s, in part because price-effect models are easier to teach than income-effect ones.

The current generation of policymakers and investors is rediscovering the income view through experience.

Germany's 2003 labor reforms caused Spain's property bubble

One clean historical example sits inside the Eurozone.

When the euro launched in 2000, the so-called peripheral countries of Spain, Italy, Portugal, Ireland, and Greece ran small surpluses or small deficits. None had serious debt problems or asset bubbles. Then, around 2003 and 2004, all of them at the same time began to borrow heavily, ran current account deficits, and developed property bubbles.

The shared timing was no coincidence.

Germany implemented the Hartz labor reforms in the same window. Wages stopped growing in line with productivity, and corporate profits surged. German aggregate savings rose sharply, even though German household savings actually fell. The increase in saving showed up on corporate balance sheets rather than in household budgets.

That capital had to be deployed somewhere. The euro made it easy to recycle German savings into peripheral economies through bank lending. Spanish banks lowered lending standards, and Irish banks did the same.

By the mid-2000s, credit was so easy that getting one credit card meant nothing because everyone had 12. The countries that received those flows did not lose their financial discipline at random. They received German savings through a channel that mathematically required an offsetting current account deficit, and the property bubble was the form that adjustment took.

Lower wages improve competitiveness without improving productivity

Wage suppression works as a competitiveness tool rather than a productivity tool.

Lower wages let a country win export share, but they do not improve actual productivity. After the Hartz reforms, German productivity growth slowed while German competitiveness rose, because lower wages widened the gap between price and cost. The policy literature usually blurs these two outcomes, which makes the political conversation about labor reform harder than it should be.

The Polish economist Michal Kalecki described what happens when this logic spreads: A single firm can raise its profits by cutting wages. If every firm cuts wages, total demand falls, and profits fall with it. The same applies to countries: a single country can run a surplus by suppressing domestic wages. If every country tries the same thing, global demand contracts and the surpluses become harder to sustain.

China's growth model is locked into excess manufacturing

China's rise as a manufacturing power has run on the same mechanism that drove German exports. Wages as a share of GDP fell to among the lowest levels recorded for any meaningful economy. Chinese unit labor costs became the lowest of any major exporter. The trade surplus that followed was not an accident.

The problem with this model, which the economist Albert Hirschman pointed out decades ago, is that successful growth models build political and economic institutions that depend on them. Switching to a new model requires dismantling those institutions, which always involves accepting slower growth in the interim.

Japan tried in the 1980s and 1990s. The household consumption share of GDP took 17 years to rise by 10 percentage points. During the same period, Japan's share of global manufacturing fell by more than half.

China is roughly where Japan was in 1986. The Maekawa Commission Report could be rewritten today for Beijing with minor edits. Chinese officials understand that the consumption share has to rise. Doing it would require accepting a sharp loss of manufacturing share, slower growth, and political stress. Most economies in this position have chosen to delay the adjustment and let debt absorb the gap. Chinese debt-to-GDP is officially around 315 percent, growing at 10 to 12 percentage points per year, and accelerating rather than slowing.

The US trade deficit is caused by foreign capital inflows

The American conversation about trade usually treats the deficit as a consequence of US savings habits. The causality runs the other way.

The United States has the deepest, most liquid capital markets in the world, with stronger investor protections than most jurisdictions. When surplus countries need to invest their dollars, the Anglophone economies of the US, Canada, and the UK absorb 70 to 80 percent of those flows.

Those inflows force an offsetting current account deficit. US domestic saving then adjusts through some combination of rising unemployment, rising household debt, or a wider fiscal deficit. All three are versions of negative saving.

The income distribution within the US, with inequality at historic highs, would normally produce a high savings rate because the rich save more than the poor. The US does not have high savings because foreign inflows push the adjustment in the other direction.

The dollar's reserve currency role therefore works as an exorbitant privilege for Wall Street and the foreign affairs establishment, and as an exorbitant burden for American manufacturers and middle-class savers. The internal political fight over the dollar's role reflects which part of the economy you sit in.

Europe's hardest test arrives when the US fixes its own deficit

The US, the UK, and Canada together account for roughly 70 percent of global trade deficits. Most surpluses still come from China and a small group of other manufacturing economies.

The Chinese surplus with the US has fallen, but the Chinese surplus with the rest of the world, including Europe, has risen. The US deficit with China has fallen, but the US deficit with the rest of the world has risen by more. Nothing fundamental has yet rebalanced.

If the US succeeds in reindustrializing and reducing its deficit, those surpluses have to land somewhere. A very likely destination is Europe, which then faces a choice between absorbing the surplus and accepting further de-industrialization, or intervening in its external account through tariffs, capital controls, or other tools.

Whether Europe is politically unified enough to take the second path is unclear. The Draghi report acknowledges the need to act, but the institutional capacity to do so is harder to assemble.

Keynes' Bretton Woods proposal would have prevented this

Keynes' original Bretton Woods plan included a mechanism that penalized persistent trade surpluses until they were drawn down to zero.

The US rejected it at the time, because the US was the world's largest surplus economy and did not want to be penalized for its own success. The system built instead allows imbalances to persist for very long stretches before they correct, and the corrections are usually painful.

A growing list of mainstream institutions, including the IMF, the OECD, and the Bank of England, has begun to acknowledge that persistent imbalances are a problem. The intellectual ground for revisiting Bretton Woods is being slowly rebuilt. Whether it gets revisited in time for the next adjustment is the open question.

The macro question is who pays the cost of the next adjustment

Every major imbalance episode in modern history has ended in difficult adjustment. The interesting variation is who absorbs the cost.

In the 1920s US/Europe imbalances and the 1980s Japan/US imbalances, the surplus countries paid most of the price. In the 1970s Latin American crisis, the 1990s Asian crisis, and the 2000s Eurozone crisis, the deficit countries paid most of the price.

Historical patterns suggest that when the deficit countries are large and powerful, they can force the adjustment onto the surplus countries. When the deficit countries are small or weak, the surplus countries push the cost onto them.

This setup features the US, the UK, and Canada as the dominant deficit economies, all relatively large and powerful, and China as the dominant surplus economy, which is arithmetic suggesting that the surplus countries will absorb most of the next adjustment. China's manufacturing share will probably fall in line with what Japan experienced after 1990, possibly faster.

The macro outlook describes how the costs of an inevitable adjustment will be allocated, rather than predicting who comes out ahead. Watching the policy responses in Beijing, Berlin, and Washington over the next several years will likely reveal more than watching the next inflation print.

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18/07/2026 by Naomi

Five forces are converging on the central bank, and each one limits the response to the others.

US markets are now large enough relative to the economy that a 20% drawdown would meaningfully cut consumption, because roughly 50% of US consumption comes from the top 10% of households. The national debt interacts badly with any sustained rise in rates.

Structural inflation has been elevated for six years, driven by populist and protectionist forces rather than monetary ones. Populism itself keeps rising as inequality widens. And the confrontation with China adds supply-chain and commodity risks that further push prices up.

Any one of these pressures is manageable with the tools the Fed has. All five together produce a setup in which every available response makes another problem worse.

Why rate cuts no longer reach the people pressing for them

By design, a rate cut is a supply-side tool. It lowers the cost of borrowing for firms, wealthier households, and asset holders. The bottom 50% of Americans are not major borrowers and do not directly benefit from a cut. They benefit indirectly through whatever job creation a stronger investment cycle produces.

The current labor market complicates that logic. Real wages are falling and multigenerational households are at an all-time high. Underemployment among recent college graduates is around 50%. The political pressure on the Fed is coming from a group that rate cuts cannot directly help, and the gap is what makes a traditional response politically costly even when it might be economically defensible.

The transmission mechanism the Fed has historically relied on was also broken after COVID, when stimulus went directly to households rather than through the banking system. Money handed to people moves with a velocity close to one. That’s why inflation appeared the way it did in 2021 and 2022, and why the Fed's traditional tools, which work through banks, have less grip on the situation than the textbooks assume.

What the Hank Paulson Bloomberg appearance was about

A few weeks ago, Hank Paulson, Former United States Secretary of the Treasury, appeared on Bloomberg and argued, with directness, that the United States faces a coming Treasury crisis and needs to backstop the long end of the curve. He made the case multiple times. That kind of message, from someone of his stature, almost certainly didn’t come without coordination with current Treasury leadership.

The implication is that the work of stabilizing markets is likely to shift toward Treasury action rather than Fed action. A Treasury buyback at the long end of the curve is one available tool. A sovereign wealth fund that directly purchases US equity is another. A coordinated absorption of fiscal function by the Fed, formal or informal, is a third. All three are starting to be discussed publicly after years of being unspeakable.

Why a sovereign wealth fund solves several problems at once

One framework worth considering is that the United States is moving toward a partial sovereign wealth fund model that buys US equities directly, funded with new debt and existing federal assets, including Fannie Mae and Freddie Mac. However unusual that sounds, the logic potentially addresses several problems at once.

It absorbs Treasury issuance demand by giving the government an additional balance sheet to use. It supports the equity market, which, through the wealth effect, supports consumption. It provides a vehicle for industrial policy, including infrastructure and competition with China, and it offers a partial response to populism, because the equity purchases could be distributed to households as a form of universal basic income funded in shares rather than in cash. The shares can be sold or held, and the household balance sheet improves either way.

Japan has done something close to this for years through Bank of Japan equity purchases. The US has not, and the constitutional architecture isn’t designed for it. The argument is that the pressure to do something like this is becoming hard to resist regardless of the original design intent.

Is the Fed's mandate changing?

The Fed's stated mandate is to balance inflation and employment. The unstated mandate over the next two years is increasingly going to be debt management and market stabilization. That change doesn’t need to be announced to be real. It can be revealed in what the Fed does, in what the Treasury does in coordination with the Fed, and in what does not get pushed back on by either institution.

Kevin Warsh's character and history suggest he will resist a return to zero interest rates and a relaunch of QE. He stepped down from the Fed in 2011 in protest of QE and described it as Robin Hood for the rich. The harder question is what he does when forced. The historical pattern is that Fed chairs who walk in with strong views about discipline often end up implementing the opposite policy under pressure, because the pressure is structural and the tools to resist it shrink as the crisis arrives.

Why crisis may be the necessary mechanism

There’s an uncomfortable observation worth considering.

The Fed was created in part to smooth the business cycle. Smoothing the cycle has worked for decades, but it has also disrupted a mechanism the Republic depended on. Crisis is what produces the political unanimity to pass real structural changes, to reform institutions, and to renew the contract between citizens and government. A century of smoothing has prevented that periodic refresh from happening.

If the coming chapter requires the Fed to absorb a much larger role, or the Treasury to act in ways that look more like an emerging-market central bank than a G7 one, the political reaction will be significant. That reaction is probably what eventually produces the structural reform the system has been postponing for a generation.

Why investors should focus less on rates and more on liquidity

A takeaway consistent with what has been happening for several years: The most important decisions in US monetary policy aren’t happening at the rate decision. They’re happening in the balance sheet, in the contract language between Fed and Treasury, and in the slow public preparation for a chapter that does not look like anything the modern US has run before.

The portfolio implication could go like this: Stay long the assets the policy response will support. Hold real downside protection, because transitions in this kind of system tend to come fast, and hold inflation-sensitive assets, because the political response to the position the Fed is in will almost certainly be to inflate around the problem rather than let it correct.

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macroeconomics

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The US trade deficit is caused by foreign capital inflows

Europe's hardest test arrives when the US fixes its own deficit

Keynes' Bretton Woods proposal would have prevented this

The macro question is who pays the cost of the next adjustment

Why rate cuts no longer reach the people pressing for them

What the Hank Paulson Bloomberg appearance was about

Why a sovereign wealth fund solves several problems at once

Is the Fed's mandate changing?

Why crisis may be the necessary mechanism

Why investors should focus less on rates and more on liquidity