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“What’s working for investors? Noth­ing. It’s really one of the worst set-ups you can think of.”

— Raphaël Thuin, Head of Capital Markets Strategies at Tikehau Capital

This, regrettably, is going to be the starkest commentary in a good while.

I say that because anywhere you look now, the picture is bleak, and I’m trying desperately to figure out how everything is going to play out, but this is a fog I have not seen since the Great Financial Crisis, though that episode had an ending which was Congress finally passing TARP and ringfencing the banking system. Figuring out how or when this war ends that has held the global economy hostage is something completely different because, let’s face it, we are not dealing with rational actors. Not only is Tehran not interested in ending this war, but now the Houthis have joined. Oil is flirting with $100 per barrel, inflation expectations are starting to climb, and bond markets are factoring in a rising fiscal risk premium.

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“Available indicators suggest that economic activity has been expanding at a solid pace […] consumer spending has been resilient…”

— Jay Powell, January 28^th

Well, if the Fed Chairman can be accused of anything, it is focusing on averages and aggregates instead of on the change that is happening at the margin, which is what matters most. Nary a word any time about how the economic spoils are being distributed and the impact this will have on inflation when all is said and done.

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• GDP growth has been skewed by AI data center spending, import declines, and the drawdown in the personal savings rate from the equity wealth effect (the largest factor)

• Broader measures of income or growth are stagnating

• The AI effect is coming from productivity, but that’s primarily manifesting as

  lower demand for labor — a disinflationary effect

• All of this means we’ve entered a dangerous and volatile phase for equities. Best to limit your exposure to high beta names, avoid concentration, and look at hedging strategies to limit downside risks

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• While the new U.S. tariffs receive all the attention as the source of Canada’s economic woes, the real problems are more long-term and structural

• Canada’s decision to keep corporate tax rates the same after the 2017 Trump tax cuts has put its business sector at a competitive disadvantage

• Ireland represents a powerful case study of a comparatively smaller economy using lower tax rates to spur productivity growth

• When combined with spending restraint, a pro-growth tax

  reform is fiscally realistic and would increase Canada’s long-term growth rate

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• Falling labor demand, not just falling labor supply, is a key factor keeping job growth low — a view we hold in sharp contrast to some Fed hawks

• The pool of available unemployed or job-seeking workers has grown by +8.1% in the last year, and represents a large share of potential workers (well-above the pre-pandemic level)

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• Japan’s new Prime Minister, Sanae Takaichi, is likely to restart much of the old Shinzo Abe reform agenda, which will be bullish for Japanese equities

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• Markets are pricing in unsustainably high levels of future EPS growth, with the equity market running on extremely bullish sentiment

• Leverage and concentration are classic bubble indicators that are blinking red

• Households are highly exposed to the equity market, especially the baby boomer generation

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But I am still a bit mesmerized by what the Fed staffers had to say in this latest set of FOMC minutes:

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— White House Press Secretary Karoline Leavitt, July 3^rd, 2025

“In my opinion, today’s Jobs Numbers were RIGGED in order to make the Republicans, and ME, look bad.”

— President Donald Trump, August 1^st, 2025

What a difference a month makes. Strong leaders share the credit and accept the blame. Weak leaders take all the credit and lay the blame on others.

Talk about a classic case of shooting the messenger. If you don’t trust the nonfarm payroll data, then just go to the companion Household Survey, which showed a huge -260k jobs decline in July and is down -402k since the end of the first quarter (in the aftermath of all the tariff-related uncertainty, if you are seeking out a culprit). And with no revisions to blame, either. What a sham. We are on a slippery slope, folks.

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The recent passage of the Big, Beautiful Bill will cause a massive increase in debt at exactly the worst time. With massive demographic change looming, the U.S. faces a serious debt problem, and yet the fiscal hawks in Congress are nowhere to be found. We explain the investment implications of a major debt increase combined with long-term demographic change.

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When we isolate what is happening in the Treasury market yield “meltup” from the nearby lows, we can see that both real interest rates (growth induced) and TIPS breakeven levels (inflation expectations proxy) remain rangebound. That is not the story. The story is in the term premium, which reflects the inherent policy risks and uncertainty embedded in nominal bond yields. The market interest rate that is not explained by the economy, inflation, or the Fed — the sort of things that are only explained by other factors. At first, the surge in yields reflected all the uncertainty surrounding trade and tariff policy, but that took a bit of a respite in mid-to-late April when the President offered olive branches with respect to the reprieves on the reciprocal tariff file. What then replaced that uncertainty was the fiscal risk premium embedded in the Treasury market as investors sense that the White House and Congress are bent on taking what already was an unsustainable budget path into a completely different orbit. A worry that, in my opinion, is way overblown.

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When President Donald Trump states that the trade plan is “our declaration of economic independence,” what he is, in effect, saying is that he wants America to be “independent” - or “liberated” - from bilateral deficits with all countries running such gaps against the U.S.

As a result, just about any country in the world that runs trade surpluses with the United States just faced a brutal and unanticipated assault in terms of magnitude — 57 in total (with a range of 1% to 40% of penalties layered on top of the 10% baseline move.

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— Steve Cohen, Point72 Asset Management founder, Friday, February 21^st.

Finally, beyond Warren Buffett, we have someone else with heft who seems to have a modicum of judgment and rationality. The thing is, bear markets last a year — not significant corrections which tend to last weeks or months.

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This is history in the making because there is little doubt in my mind that we are now on the precipice of a global trade war. While it is true that the U.S. only ships 1% of its GDP to Canada while Canada sends over 20% of its economy south of the border, this does not mean that the U.S. economy will not be adversely affected, especially in the goods sector. Donald Trump seems to think that external producers will eat all of the tariffs and that revenues from the trade action will help pay for his bold domestic fiscal initiatives, but that is just an assumption. He has another assumption which he stated verbally on Friday, which is that insofar as American consumers bear the brunt of any pain, they will be forgiving, and the pain will be short-lived. Assumptions all around.

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It’s time to revive the thesis more vociferously.

Warren Buffett has built up a 30% cash hoard for a reason.

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At the near-5% cycle high for the 10-year T-note yield in October 2023, the markets and Fed were in sync for -50 basis points in rate cuts in 2024. The December dot plot was raised to -75 basis points of rate cuts for 2024, but the market went ahead and priced in -165 basis points of cuts and at that point the 10-year T-note yield plunged to 3.8%. When the Fed kyboshed that expectation in the opening months of 2024, when it stuck to its guns at three rate cuts worth -75 basis points for 2024, the bond market repriced to a 4.75% yield peak at the April highs because the futures market had gone from pricing in -165 basis points of 2024 rate cuts to just under -50 basis points! When push came to shove, the Fed eased -100 basis points, not the -50 that was priced in at the October 2023 yield peak, but also not the -165 basis points that was being discounted at the 3.8% yield trough in December 2023.

We are replaying the same story now for 2025. At the September 2024 yield low at 3.65%, we had nine cuts totaling -220 basis points of cuts being priced in to 2025. But the dot plots were for only 4 cuts and that is when the current problems for the Treasury market began. The Fed cut -100 basis points but stuck with its prior guidance. It goes to show how words matter more than deeds. That was the moment that the bond rally got snuffed out. Then the Fed went to two cuts for the 2025 dot plots at the December 18^th FOMC meeting from four, and at that point the markets were still discounting nearly four cuts with the 10-year T-note yield sitting at 4.4% heading into that FOMC meeting. But now the market is pricing in just -40 basis points of rate cuts for 2025 even though the Fed is currently at -50 basis points which is how we get to over 4.6% on the T-note yield.

I keep hearing about the “bond vigilantes” but in reality, there is no such thing as a “bond vigilante.” It’s about the Fed reaction function and there is no other variable as important as this in any bond yield model.

Now as for inflation, I am stunned that the bond market has had such difficulty since that +0.1% print we got on the core PCE deflator for November — that number came out on December 20^th and the 10-year T-note yield is up +10 basis points since that report. It can’t be caused by the stock market because from the nearby post-election peaks, the Dow Transports are down nearly -10%, the Russell 2000 is down -7%, and the S&P 500 equal weighted index is down -6%. And it’s not the data, which have been mixed at best — I realize the macro bulls went wild on Friday with the better-than-expected ISM manufacturing PMI print. Never mind that the grand total of 39% of industry members posted any growth at all to close out the year! The share of businesses in this survey saying they have growth has not crossed above 50% since August 2022. That’s a fact. The long-run average is 60%, and we are south of 40%.

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