Notes from the Road

Not investment advice.

I am traveling and keeping an eye on things. Here is what I see.

1. The most likely scenario is that AI works and we are in a productivity boom. Nvidia just reminded us of that. That is generally bullish for stocks, and can be supportive for bonds as well, because productivity lifts profits and should lower costs over time. That is the medium-term secular picture.

2. Many thoughtful investors are concerned about AI. Predictions on X and other forums of an imminent crash are frequent. Analysts are eager to point out the similarities to past capex cycles, booms and busts. Valuations, by some metrics, are high. That said, the equity risk premium has been low for a long time and, if anything, is rising now. The “fuel” for the boom is the profits of the companies that benefit most from it, and those profits still look sustainable. Amazon, for example, benefits enormously by using AI and robotics to make its operations more productive, and it spends heavily on Nvidia chips; Nvidia in turn spends on foundry capacity in Taiwan and memory from South Korea. The cycle has momentum until the productivity gains stop or valuations go haywire. Neither is true now.

3. It has been hard for this medium-term picture to play out because of how erratic U.S. policy is. That includes tariffs, insider dealing, fiscal stimulus, attacks on the Fed, and last week’s oddities: the Treasury intervening in a way that looks aimed at squeezing shorts in U.S. bonds, and a baffling assault on one of America’s most reliable allies, Canada. Each of these actions is like a storm on a lake. It creates waves and disrupts the dominant current, but after the disruption the bigger force reasserts itself.

4. For bond markets, that primary force is the difficulty of absorbing a large and growing U.S. budget deficit plus heavy corporate issuance. A Democratic win in the fall would not change this trajectory. No one is running on fiscal austerity. Real yields in the 1970–1990 period were much higher than they have been from 2000 to now.

5. Fed chief Warsh’s speech today didn’t change the story. He said he’d hike if inflation accelerates. The question is whether that happens. I do not see a runaway inflation problem in the United States. Headline inflation jumped with the Middle East shock and has come off that peak, but core inflation is gradually grinding lower. As the fiscal impulse fades, growth has been uneven and competition for capital can still drive real yields up. If inflation accelerates, then the game changes.

6. Geopolitically, the United States looks weaker. That is one reason Canada answered Trump so forcefully. Once the U.S. is no longer recognized as a force to impose order, the world becomes more unpredictable.

7. We are in a low-grade world war. It has many protagonists, including Russia, North Korea, China, the Houthis, Hezbollah, Hamas, the United States, Europe/NATO, Israel, and Ukraine. It is fought with soldiers, drones, cyber operations, sanctions, trade and propaganda. The next front could be the Baltics, particularly Latvia. One region acutely disadvantaged by this is Europe, which now has to fund and build a modern military and an energy system independent of, and protected from, both Russia and Iran, and militarily divorced as much as possible from the U.S. It is conceivable that Europe could be pressured on two fronts at once: Russia in the Baltics and Iranian strikes on U.S. assets in places such as Bulgaria.

8. Oil is moving more again through the Strait of Hormuz, but energy shortages are increasingly visible. Fuel shortages inside Russia are obvious, with long lines for gasoline in major cities. Diesel prices in Europe and gasoline and diesel in the United States are elevated. The situation in Iran is intricate and delicate. The Iranians are moving toward some sort of temporary arrangement to open the Strait more fully, but their primary goals remain irreconcilable with those of the United States. It is likely they want to embarrass and hurt Trump ahead of the midterms, so I expect repeated flare-ups in which oil prices jump and then, probably, settle back down. The broader message will still be clear: the world can no longer rely on the Middle East for secure energy the way it once did.

To me this points to a portfolio that is long stocks, gold, and oil, and short bonds. Getting the relative weights right matters a lot.

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