"Think Like An Investor" is chapter 1 of a 5-part series examining the narratives around "investing for the long run."

There is a chart that lands in your feed every few months. It plots a single dollar dropped into the stock market a century ago, which has grown into a small fortune. The caption never changes. Just buy and hold. Time in the market beats timing the market. It looks airtight, and honestly, most of it is true.

However, there is a catch: nobody prints underneath it. That chart was built for an investor who does not exist. If you want to actually build wealth instead of just admiring the math on someone else's timeline, you have to learn to think like an investor first, and almost nobody explains what that means before they hand you the chart and wish you luck.

This is the starting point, and it’s not with a stock tip, not with a hot sector, not with the app that promises commission-free riches. Let’s start with the one mental shift that separates the people who keep their money from the people who donate it to the market in waves. It costs nothing, takes about 10 minutes to understand, and will save you from most of the expensive mistakes waiting for you.

The "Stocks For The Long Run" Promise Has A Catch

Let me be fair to the promise, because it is not a lie. Over the last 126 years, U.S. stocks have gone up and to the right. Anyone who tells you the market does not reward patient owners of good businesses is selling you something worse. The long-run story is real, and I am not here to talk you out of owning stocks.

But look closer at what that beautiful chart quietly assumes about you. It assumes that you:

• Have 126 years to invest
• Never sell and never panic, and
• Never need the money at an inconvenient moment.
• It also assumes you happened to start buying at a reasonable price rather than an expensive one.

Four assumptions, and each one of them is wrong for a real human being with a job, a mortgage, a couple of kids, and a retirement date that does not move.

Strip those assumptions away, and the airtight chart springs a leak. Not because the market failed anyone, but because the market on the poster and the market you actually live through are two very different animals. One is a smooth exponential curve. The other is the thing that gave your parents gray hair in 2008.

The Catch: You Don't Get The 126-Year Average

Here is the reality nobody puts in the brochure. You are not investing for 126 years. Most people do not start saving seriously until their mid-thirties, and they need the money by their sixties. That is one market cycle. Two if you are lucky and disciplined. So the average return of the last century is a fine piece of trivia, but it is not the return you get to spend.

Here is that same dollar and that same century from the top of this article, with one thing added back in. The cost.

Notice how much of it is red in the chart above. Since 1871, U.S. stocks have spent roughly three of every four months below a prior peak. Three of every four. The green climb is real, but you spend most of your investing life inside the red, grinding back toward a high-water mark you already touched once before and lost.

Andrew Lo, the MIT economist, put it better than I can.

"A river with an average depth of five feet can still drown a six-foot hiker who cannot swim. The average is comforting. The average is also irrelevant if you go under in the deep part."

Markets have plenty of deep parts, and they do not schedule them around your retirement party.

This is a point I keep coming back to, most recently in a piece called "My Favorite Chart Doesn't Tell You 3 Things." Markets grow your money over time. They do not compound it.

Those sound identical, and they are not. Compounding assumes one thing above all else, and that is you never take a large loss along the way. Read that twice, because it is the whole ballgame. Compound returns assume no principal loss, EVER, and the market has never once signed that contract.

Notice the enormous gap between “what is promised” and “reality.” That gap is what the marketing pitch leaves out. The media quotes that you will average 8-10% over time, which is measured before inflation. They then show you this smooth growth line that no market has ever walked.

As shown, what you actually keep after going through the drawdowns, instead of skipping over them, is a fraction of the projection. This isn’t because anyone lied to you, but an average is a promise the future never agreed to.

Look at what the chart calls the lost decade. An investor who put money in around the 2000 peak did not get back to even, in real terms, until roughly 2013. That is 13 years of biology, of aging, of a retirement date getting closer, spent recovering ground you had already covered.

Getting back to even is not growth. It is the absence of loss that is wearing a costume. If you were 45 years old in 2000 and did everything the poster told you to do, the math did not work out the way it promised.

Learn To Think Like An Investor, Not A Speculator

So if the long-run chart is a trap for real people, what is the fix? It starts with a distinction almost nobody teaches on day one, and it is the single most useful idea in this entire series. There is a difference between an investor and a speculator, and knowing which one you are at any given moment is worth more than any tip your brother-in-law will ever give you at Thanksgiving.

Here is the specific difference.

• An investor buys a stake in a real business at a sensible price, cares about what that business is actually worth, and manages the risk of being wrong.
• A speculator buys a ticker symbol because he believes he can sell it to someone else at a higher price later. That is the whole difference. One is buying value. The other is renting price and praying the music keeps playing.

Now, I am not throwing rocks at speculators. Speculating is not a sin, and plenty of smart people do it on purpose, with money they can afford to lose, fully aware of the game they are playing. That is fine. The danger is not speculation, but rather telling yourself you are a long-term investor when you are actually speculating. This is because you expect the safety of the first but take the risk of the second. That is the trap.

In the 2020s, speculation lives more than ever, and you’ve seen it. From the latest meme stocks your co-worker tripled his money on, to the crypto coin your nephew swears is different this time, or the latest 0DTE options trade. That is speculation wearing an investor’s coat.

A good example is the Betterment 2026 survey of 1,000 retail investors, and the answers from Gen Z are revealing.

• A full 52% of the youngest investors said they took money they had originally set aside for investing and moved it straight into sports betting over the previous 12 months.

That alone is a story, but the next number is the one that matters.

• Fully 26% of Gen Z now describe sports betting as a deliberate part of their "long-term financial strategy."

Read that again and realize that a quarter of young investors have taken an activity built on point spreads and parlays and filed it in the same drawer as the retirement account. That is pure speculation, not even remotely disguised as investing.

In the chart above, notice how fast that number falls as you move up the age brackets. That should not be surprising, as both Gen X and Boomers have already survived two bear market cycles. The less market history you have lived through, the easier it becomes to mistake speculation for an investment.

However, here is the part that the headline skipped. That same research found 80% of the Gen Z crowd reaching for these bets said they are doing it because they feel financially behind, and see gambling as a faster road to their goals than the slow way.

That is the most critical point, as they are not speculating for fun with money they can afford to lose. They are speculating out of fear, with money they cannot afford to lose, and calling it a plan. That is the exact trap Graham and Dodd drew 90 years ago, playing out in real time on a phone.

Does the math rescue them? No. A five-year study from UC San Diego tracked more than 700,000 online gamblers and found that 96% of them LOST money over the period. So a quarter of a generation is quietly building part of its financial future on the one activity where the operator has already told you, in writing, exactly how the story ends.

Bob Farrell, who watched markets for half a century at Merrill Lynch, wrote it into his rules decades ago.

“The public buys the most at the top and the least at the bottom.“

When speculators dress up as investors, that is how that rule keeps coming true, cycle after cycle, generation after generation.

The Margin Of Safety

This is not some idea I cooked up on a slow afternoon. The greatest investors who ever lived spent their careers drawing this exact line, and they put it in writing. Benjamin Graham and David Dodd defined it in 1934 in Security Analysis, and the definition has never needed updating.

"A real investment, after honest analysis, promises the safety of your principal and a satisfactory return. Anything that cannot clear that bar is speculation."

Phillip Carret, writing four years earlier in The Art of Speculation, drew the same line from the other side.

"The investor cares about the economics of the business. The speculator cares only about the price."

When the whole crowd pays any price at all because "this time is different," they are leaning on what gets politely called the greater fool theory. The belief that it does not matter what you overpay, because a bigger fool will always turn up to take it off your hands for more. It works right up until the day it doesn't, and whoever is holding when the fools run out eats the entire loss.

I pulled together how the legends thought about this in Speculator Or Investor: 10 Rules From Legendary Investors, and the striking part is how they all land in the same place.

Jeremy Grantham warns that you get punished, not paid, for buying expensive risk. James Montier says valuation is to markets what gravity is to everything else. Different words, one message. What you pay decides what you get, and gravity always collects.

So how does an investor avoid falling into the speculation trap? Graham answered it in three words that Warren Buffett still calls a cornerstone. Margin of safety. You buy a dollar of value for fifty cents, so that even when you are wrong, and sooner or later you will be, there is a cushion between the price you paid and the damage you can survive.

And here is the discipline almost nobody has the stomach for. When nothing is trading at a sensible price, the correct move is to do nothing. Jesse Felder put it perfectly. The hardest thing in this business is to sit on your hands, because inaction feels passive and every instinct screams at you to be DOING something.

But when no opportunity clears the bar, patience is not laziness. It is the most proactive decision you can make. I wrote about this at length recently in "Value, Margin Of Safety, And The Art Of Doing Nothing." Cash is a position. Waiting is a strategy. Overpaying because you got bored, or because your neighbor is bragging at the barbecue, is exactly how speculators get made.

The Two Questions That Decide Everything

Great, you have made it this far, and once you accept that you get one cycle and that your job is to invest rather than speculate, almost every decision collapses down to two questions. Get these right, and you can ignore the vast majority of the noise. Get them wrong, and no amount of clever stock picking will save you.

The first question is simple. What price are you paying? Valuations at the moment you start matter enormously, because what you pay for a future stream of earnings sets the return you can reasonably expect to earn from it. Pay a high price, and you are pre-committing to a low future return. This is not my opinion. It is arithmetic, and the historical record is about as one-sided as anything you will ever see in markets.

Look closely at the chart above and notice that the cloud of dots slopes down and to the right, and it is not subtle. When stocks were expensive, the next decade took its pound of flesh. The gold line marks where we stand today, with CAPE near 40. Every prior time valuations lived up in that neighborhood, the following ten years delivered a NEGATIVE real return on average. Not a crash necessarily. Just a long, quiet decade of your money running to stand still.

The second question is the one everybody skips, but it is the most critical. How much time do you actually have? This is where the "should I just go all in on stocks" debate usually falls apart.

I wrote a whole piece asking whether Millennials should put 100% into stocks, and the honest answer is that it depends entirely on your answer here. A 25-year-old with four decades ahead and a steady paycheck can absorb a brutal bear market and even use it. A 58-year-old with five years left before retirement cannot. Same market, completely different math, because time is the one asset you cannot buy back once it is spent.

Bob Farrell's first rule ties the two questions together.

"Markets return to the mean over time. Prices that stretch far above fair value do not stay there forever, and the further they stretch, the harder they snap back when it comes."

In other words, the price you pay is not just a number at the register; it is a promise. That promise is how much pain you will feel, and how many of your finite years you will burn, when the mean reversion eventually comes.

But Doesn't Buy And Hold Actually Work?

This is the one question that you need to reconcile, and it depends on you personally. For a specific type of investor, buy-and-hold is an excellent strategy and should be recognized as such. But notice what is most important,

• IF you have a thirty-plus-year horizon,
• And IF you start at reasonable valuations,
• IF you keep your costs near zero,
• IF you automate your contributions,
• And IF you never once flinch during a crash

Then a simple, low-cost index fund held for decades will beat the majority of professionals and virtually all tinkerers. Jack Bogle was right about fees. He was right that most people's own behavior is the single biggest drag on their returns. Buy and hold, done with discipline, removes the two things that quietly wreck most portfolios: high costs and human emotion.

However, repeated studies show the problem with assuming that describes you. That paragraph is one long chain of "ifs," and most real investors snap at least one link. Look at what the starting date alone does to the exact same strategy.

Think about that for a moment. That is the same fund, the same patience, and the same "just hold on." One investor got rich. The other spent the better part of a decade underwater, and neither of them did a single thing differently. The only variable was the admission price on the day they walked in.

The strategy did not fail the 2000 investor. The strategy is fine. The flaw is assuming you are the flawless, infinitely patient, perfectly timed investor the strategy quietly requires, and that you will not be the one who happened to start at the wrong table.

How To Start Investing With The Right Mindset

With this all in mind, where does a beginner actually start? Not with a stock screener, and not with the app that turns your savings into a video game. You start by getting a few things straight before a single dollar goes to work. Here is the order that matters.

Let me just state that I realize that none of that is exciting. It will not make you rich by Friday, and it will never trend on social media. But it is how people who keep their money actually think, and it is the difference between compounding for decades and starting over every time the market has a bad year.

End Of Chapter 1

The "long run" is not a myth. It is just not yours. You get one cycle, a finite stack of years, and a brain wired to do the wrong thing at the worst possible moment. Learning to think like an investor rather than a speculator is not a personality quirk or a matter of taste. It is the entire game, and the good news is that it is a skill you can actually build, starting today, with the two questions and the five steps above.

That brings us to the next problem. Even once you know all of this, two forces spend every single day trying to drag you back into speculating. One lives inside one's own head, while the other scrolls past on your screen dressed up as breaking news. In the next article, we take on both, starting with the enemy you cannot fire, mute, or unfollow. Yourself.

If reading this raised a question about how your own money is actually positioned, whether you are truly investing or quietly speculating, that is the conversation worth having before the next bear market forces it on you. At RIA Advisors, our process starts with your complete financial picture, not just your brokerage balance. Schedule a complimentary consultation, and let's talk about what the data means for you.

Sources & Notes

1. Real total return and CAPE valuation data: Robert Shiller, Yale University. econ.yale.edu/~shiller/data.htm. All three charts are built directly from this data series through July 2026.
2. Lance Roberts, "My Favorite Chart Doesn't Tell You 3 Things," RIA Advisors. realinvestmentadvice.com
3. Lance Roberts, "Millennials, Should You Put 100% Into Stocks?" RIA Advisors. realinvestmentadvice.com
4. Lance Roberts, "Money: The 10 Immutable Laws Of Building Wealth," RIA Advisors. realinvestmentadvice.com
5. Andrew W. Lo, "Adaptive Markets: Financial Evolution at the Speed of Thought," Princeton University Press.
6. Bob Farrell, "10 Market Rules to Remember," Merrill Lynch.
7. Lance Roberts, "Speculator Or Investor: 10 Rules From Legendary Investors," RIA Advisors. realinvestmentadvice.com
8. Lance Roberts, "Value, Margin Of Safety, & The Art Of Doing Nothing," RIA Advisors, 2026.
9. Benjamin Graham & David Dodd, "Security Analysis" (1934); Philip Carret, "The Art of Speculation" (1930); Seth Klarman, "Margin of Safety" (1991).

The post Think Like An Investor, Not A Speculator (Chapter 1 of 5) appeared first on RIA.

Friday's weak retail sales report did more damage to the hawkish case. Sales fell 0.6% in July against expectations for a 0.1% gain. The control group, the piece that feeds directly into GDP, dropped 0.4%. That was its first decline this year. The print landed a week after payrolls fell 23,000 and two days after PPI came in flat.

The bulls will point to Prime Day. Amazon moved the event to June this year, so nonstore sales fell 2.2% in July after a 7.7% June surge. Hot weather and the end of the World Cup pulled traffic too. Strip out the calendar quirk, and spending was probably close to flat.

But the weak retail sales headline is not where the real signal is. As we show below, on a rolling quarterly basis, both total sales and the control group have given back the entire spring acceleration. Total momentum peaked near 3.6% in April and now sits near 0.35%. The control group peaked at 2.4% and has fallen to roughly 0.5%. One month can be explained away. A four-month round trip cannot.

That matters for a Fed with three members who dissented in July because they wanted to hike. Their case rested on an economy running hot enough for firms to keep pushing prices through. Weak retail sales undercut that logic directly. Consumers who stop showing up do not validate price increases. Headline inflation is still 3.3%, but prices fell in June and were flat in July. The hawks are running out of evidence.

The bond market agreed. The curve steepened Friday after Thursday's sloppy 30-year auction, yet yields finished the week lower. The front end is pricing in a lower risk of a hike, while the long end still worries about supply.

What To Watch Today

Earnings

Economy

Market Trading Update

day line it has not closed beneath since April. That is a healthy, intact uptrend, and it deserves respect. The problem is not direction. It is the distance from the longer-term trend.

At Friday's close, the index sat roughly 10% above its 200-day moving average. That is one of the widest gaps of this entire cycle, and it sits about 3.7% above the 50-day line, too. Add our Money Flow and Breadth Indicator at 75%, with 72% of members above their own 200-day average. This market has done a lot of work in a short window. Friday's quiet fade from record highs is the kind of small caution flag that shows up when a tape gets this extended.

Look at the ceiling first. Price is pressed right against its own record highs, with Thursday's 7,801 close and 7,817 intraday high just overhead. Above that sits the round 8,000 mark, which also happens to be Goldman's year-end target. Round numbers act like magnets until they act like ceilings, so that's where sellers tend to dig in. The floor sits much further away. First support is the 20-day line near 7,585, then the 50-day line near 7,510, both comfortably below Friday's close. The takeaway is the asymmetry. There's little cushion above, and plenty of open air below, down to those averages.

Neither support level is very far away, and a pullback to either would be routine housekeeping within an uptrend, not a break of it. The number that matters for risk is lower down. That gap from here to the rising 200-day line near 7,076 is roughly 10%, and that mean-reversion "air pocket" is the risk. The trend remains up, but momentum is overbought; therefore, entries here offer poor near-term reward relative to risk.

The Week Ahead

The earnings calendar shifts from technology to the consumer this week. Home Depot reports Tuesday, followed by Target, Lowe's, and TJX on Wednesday, and Walmart on Thursday. That lineup arrives days after retail sales fell 0.6% in July, the weakest reading in more than a year. Guidance will matter more than the quarter itself. If Walmart and Target flag trade-down behavior or thinner back-to-school baskets, the consumer story gets much harder to dismiss as a one-month blip.

The FOMC minutes on Wednesday afternoon are the main event on the economic calendar. Three members voted to hike in July, and the minutes should show how close the rest of the Committee sat to joining them. Keep in mind that the meeting predates last week's inflation data. CPI rose only 0.1% and PPI came in flat, so a hawkish tone in the minutes may already be stale. Traders will still hunt for the conditions the dissenters laid out, because those are the tests September's decision turns on.

The rest of the calendar leans toward housing and manufacturing. Empire State manufacturing and NAHB builder sentiment open the week Monday. Housing starts, building permits, and industrial production follow on Tuesday. Builder confidence sits at 34, deep in contraction territory, and mortgage rates near 6.8% keep doing damage. Thursday brings jobless claims and the Philadelphia Fed survey, which spiked to 41.4 last month and should give most of that back. Flash PMIs close the week on Friday.

Yen Intervention Narrative: What's True and Not

Here is a narrative that needs the most attention. The “doomers” claim that the Treasury Secretary, Scott Bessent, is quietly opening “swap lines” to stop Japan from dumping its Treasuries in a “fire sale” that sends U.S. yields screaming higher.

The motive is real, and with the 10-year yield near 4.6%, no one at the Treasury wants the largest foreign holder of American debt selling into a soft market. But that is also the Treasury’s job as the governor of the world’s reserve currency. Both the Federal Reserve and the Treasury provide liquidity when needed to maintain financial stability. Currently, the tool Bessent is using is an expanded FIMA facility that targets that fear directly. However, these are not “swap lines,” and the difference is important to understand.

READ MORE…

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Weak Retail Sales Take Rate Hikes Off The Table appeared first on RIA.

🔎 At a Glance

• Record Highs: Should You Chase The Rally?
• Market Brief & Technical Review
• From Lance's Desk: Yen Intervention Narrative: What's True And Not - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Record Highs And A Friday Wobble

This past week, stocks pushed to a fresh record, then gave a little back on Friday as inflation came in softer-than-expected. Both CPI and PPI prints cooled the case for a September rate hike, and Friday's weak retail sales report and a softer read on consumer sentiment nudged the index down about 0.2% into the close.

The numbers, however, were good. The S&P 500 added 0.4%, its third straight weekly gain. It finished at 7,785.76, roughly 13% higher year over year. The Nasdaq eked out a 0.1% gain to 26,729.16, with Communication Services and Technology leading again, powered by AI and memory names. The Dow was the laggard, off 0.6% on the week to 53,732.41, and the small-cap Russell 2000 finished roughly flat near 3,055. Energy was the soft spot at the sector level even as crude firmed, and the run to record highs was, once again, a tech-driven affair.

Under the tape, the bond market did the talking. The 10-year Treasury yield ticked up to 4.69% as oil prices rose, but the soft data pulled the "Fed on hold" story forward, pushing the 2-year toward 4.13%. Volatility stayed asleep, with the VIX pinned near 14.6. That is a market priced for calm heading into a data-heavy and seasonally rough stretch. It is exactly the tension we take up in this week's main story.

📈Technical Backdrop - Pinned and Stretched

There is nothing bearish about the tape, and the overall trend could not be much cleaner. The S&P 500 sits above every major moving average and above a rising 200-day line it has not closed beneath since April. That is a healthy, intact uptrend, and it deserves respect. The problem is not the direction, but the distance from the longer-term trend, which is more concerning. As is always the case, deviations above the long-term trend eventually "revert to the mean." We see it almost every year.

At Friday's close, the index sat roughly 10% above its 200-day moving average. That is one of the widest gaps of this entire cycle, and it sits about 3.7% above the 50-day line, too. Add our Money Flow and Breadth Indicator at 80%, with 72% of members above their own 200-day average. This market has done a lot of work in a short window. Friday's quiet fade from record highs is the kind of small caution flag that shows up when a tape gets this extended.

Look at the ceiling first. Price is pressed right against its own record highs, with Thursday's 7,801 close and 7,817 intraday high just overhead. Above that sits the round 8,000 mark, which also happens to be Goldman's year-end target. Round numbers act like magnets until they act like ceilings, so that's where sellers tend to dig in. The floor sits much further away. First support is the 20-day line near 7,585, then the 50-day line near 7,510, both comfortably below Friday's close. The takeaway is the asymmetry. There's little cushion above, and plenty of open air below, down to those averages.

Neither support level is very far away, and a pullback to either would be routine housekeeping within an uptrend, not a break of it. The number that matters for risk is lower down. As noted, the gap from here to the rising 200-day line near 7,076 is roughly 10%, and that mean-reversion "air pocket" is the risk. The trend remains up, but momentum is overbought; therefore, entries here offer poor near-term reward relative to risk.

🔑 Key Catalysts Next Week

Next week hands us the two things this tape cares about most. We get a fresh read on the consumer and the Fed. After Friday's soft retail sales print, the retail bellwethers offer a real-time answer to the same question. The FOMC minutes hit on Wednesday, and Jackson Hole starts Friday, pushing the rate-path debate back to center stage. All of it lands right before the September 16 meeting.

This week, we also get numbers from key retailers to gauge consumers' actual health. Are high oil prices finally creating some demand destruction in the economy? Or is slower job growth showing up in consumer spending that suggests the economy is slowing more than expected?

The through-line is simple. Say the retailers echo Friday's soft sales, and the minutes show a Fed leaning toward patience. Then the "Fed on hold" story we lean on gets firmer footing. If a hawkish surprise turns up at Jackson Hole, the calm priced into that 14-handle VIX gets tested in a hurry. Either way, the playbook holds, and this is a week to hold quality, keep the cash buffer, and let the tape come to us.

Need Help With Your Investing Strategy?

Are you looking for comprehensive financial, insurance, and estate planning services? Need a risk-managed portfolio management strategy to grow and protect your savings? Whatever your needs are, we are here to help.

💰 Record Highs: Should You Chase The Rally

Last week in the Bull Bear Report, I flagged that our Money Flow and Breadth Indicator had pushed into extreme overbought territory. This week, it pushed even further.

"As of August 14, 2026, with the S&P 500 at 7,785.76, the Money Flow Breadth Ratio (MFBR) stands at 80% and rising, versus 75% the prior week - a 15 percentage-point increase over the trailing four weeks. This places the indicator in extreme overbought territory (75% or higher). The raw breadth signal still reads BUY, but the MFBR is a contrarian indicator at extremes: readings this stretched have historically been followed by below-average forward returns, so the model treats this as a caution flag rather than a green light to add risk."

Regardless, the market shrugged, as it tends to do when momentum runs this hot. The S&P 500 is back near record highs, just under 7,800, and suddenly everyone wants back in the pool. So, here is the honest question before us this week:

"Should you keep chasing record highs here, or is the smarter move to participate while quietly managing the risk building underneath it?"

The Inflation Data Just Made The Bulls' Job Easier

Before we answer that larger question, let’s touch on what changed this week. Both inflation reports came in soft. July CPI rose just 0.1% on the month and 3.4% over the year, with core at 0.2% and 2.5%. The reports were all in line with forecasts, and the shelter reading did most of the lifting, a slow-moving piece that the Fed will likely fade. The next morning, PPI landed flat at 0.0% versus a 0.2% gain expected, and the annual rate cooled to 4.7% from 5.5%. Final demand goods prices actually fell 0.7%. The tariff "passthrough" the hawks keep warning about simply hasn't shown up in the pipeline yet, a point I walked through in Friday's commentary.

That data is important, as the upcoming FOMC meeting in September won't be about rate cuts but rather about a small minority of "hawks" rescinding their previous dissenting opinions. Coming into the week, futures had the September meeting near a coin flip. After the CPI print, the odds of the Fed holding rates jumped to roughly 64%, and the soft PPI only reinforced that move. A hike on September 16 is now the least likely outcome, particularly following very weak employment and retail sales reports.

For stock buyers, a Fed parked on hold removes the one macro tail risk that could have knocked a richly priced tape off course, a surprise hike into record highs. Notably, the recent data isn't the same as "all clear," and inflation is still running north of 3% keeps the Fed on hold for now. However, the near-term policy threat is smaller, and that is precisely the backdrop that emboldens buyers.

Speaking of that, let's talk about who has been buying this market lately.

The Buyer List Behind Record Highs Keeps Growing

Give the bulls their due, because the setup is real. Scott Rubner at Citadel Securities laid out his "buyer checklist" this week, and it keeps getting longer.

Earnings are carrying the load, with Q2 profits for the index growing roughly 33%, one of the steepest revision paths in a quarter century. Furthermore, the forward multiple has actually fallen to about 20x earnings from 23 last October.

In other words, earnings are doing the heavy lifting, not "easy money" multiple expansion. Passive demand never blinked either. Households pushed a record 350 billion dollars into ETFs in July alone, part of 1.6 trillion in year-to-date inflows.

More than a trillion dollars of buyback authorizations reopen this month, and nearly 70% of them sit outside Technology.

When several sources of demand strengthen simultaneously, and selling pressure fades, the path of least resistance is higher. Breadth has healed, volatility has fallen, and the same rule-based strategies that were dumping stocks in the spring can start buying them back. Such is the mechanical reality of this tape right now.

That is the bull case, and it is a compelling one. However, a market where the buyer list is this crowded, moves this fast, and is on the heels of a 26th record high for the year, is also a market where the easy part of the move is behind us. In other words, it is now the marginal new buyer who is "paying up" for exposure near the highs.

Retail Is Back, And Buying What Already Burned It

As noted above, retail investors returned as net buyers across Citadel's platform with a vengeance, reversing the selling seen at the end of June. However, while participation is back, conviction seems to be lacking. The same traders buying cash equities are still paying up for downside protection. Put buying sits near its highest reading since the March lows, and "what" they are buying is notable. Over the last two weeks, retail's most-bought names were semiconductors and memory, the exact "story" trades that got cut hard in the summer washout.

We wrote about one flavor of this on Monday in Leveraged ETFs: Math Often Trumps Hype, where a widely shared post pitched a 2x-leveraged SK Hynix fund as "magnified exposure" to a doubling of the stock. The math does not work that way in option-backed ETFs. Daily resets and volatility decay mean a leveraged fund can end a year in the red even when the underlying stock doubles. Buying the same crowded names that already burned you, and doing it with leverage, is not a strategy. It is a "this time is different" bet.

The question, naturally, is if the flows are this strong, why fight them? I am not saying fight them. I am saying do not confuse a strong tape with a safe entry point.

Stretched Breadth: A Reason To Chase Record Highs?

As discussed in yesterday's Daily Market Commentary, market breadth is very healthy. As noted above, more than 72% of the S&P 500 now trades above its 200-day moving average, the broadest participation since December 2024, up from a washed-out 41% this spring, and cross-stock correlation sits near record lows.

Historically, when more than 50% of stocks are trading above their 200-day moving averages, it indicates a long-term uptrend. As StockCharts has noted for years, readings north of 70% are technically overbought, yet in a real uptrend, overbought stays overbought. Over the next 6-12 months, broad market participation like this has been a tailwind more often than not. Citadel’s own point reinforces this:

“Breadth is rising while cross-stock correlation sits near record lows, indicating a wide market, not a narrow pocket of leadership.”

From a contrarian view, this is also where the risk resides. Elevated breadth by itself has NOT reliably preceded corrections. What precedes them is a divergence, the index pushing to new highs while fewer stocks tag along. We don’t have that today, as breadth is rising into the highs rather than fading beneath them.

Here is what you should take away from this data. The biggest forward returns show up after washed-out lows near 20%, not after the crowd is already all-in near 70%. In other words, breadth predicts risk better than it predicts return. While over the next 3, 6, and 12 months the odds tilt toward higher returns, the next month is the stretch when an overbought tape can correct without changing the larger trend.

That is exactly why this past Monday, we took profits in winners like MSFT across the Equity 60/40 Portfolio and the Dividend Growth Model, and rebalanced the AI, Crypto, and Infrastructure thematic sleeves back toward target weights

The "Supply Of Stock" Nobody Is Talking About

With the market now back to more overbought conditions, what could cause the next correction? Is there a "supply of stock" waiting above current levels, where "trapped longs" who bought the previous semiconductor highs and rode them down into the lows will look to sell the instant they get back to breakeven? The honest answer is: yes, but less than a classic top. In a classical textbook distribution-topping process, the index pushes to record highs while fewer and fewer stocks tag along. That "divergence" is what marks the overhead supply. Currently, we do not see that in the data, particularly with breadth rising into the highs, not fading beneath them.

When overall market participation is high, and prices reach record highs, most of the buyers who were underwater relative to the old highs are getting whole and holding, not dumping. That is the difference between a market building a base of support and one quietly distributing stock to the next greater fool. Do not confuse less supply with no risk, though. Such is where the calendar comes in.

As shown in the chart above, September is typically the weakest month of the year for stocks. Over the last decade, the S&P 500 has averaged a loss in September and finished higher only half the time, the worst reading of any month on the calendar. Now layer the events on top. A September 16 FOMC meeting with a fresh dot plot, a midterm election on November 3 that reliably injects volatility, and a VIX pinned near 14.6 after spiking toward the low 30s in the March selloff. The VIX seasonal pattern points in the same direction. Volatility tends to trough right about now and grind higher into the fall, and it does so more dependably in a midterm year.

A compressed VIX is not a signal to sell. It is a signal that protection is cheap, right before the calendar turns hostile.

What Should Investors Do Now

So what do you actually do with all of this? For now, continue to participate while managing your risk. Those two actions are not in conflict and do coexist successfully. The trend is up, breadth is broad, and the flows are real, so this is not the moment to run to cash. It is the moment to stop chasing record highs and start rebalancing.

Consider the setup on both sides. Goldman just raised its year-end target for the S&P 500 to 8,000, roughly 3% above current levels. However, here is the "risk" for your portfolio: while there is 3% to gain, the market sits roughly 10% above its 200-day moving average, one of the widest stretches of this entire cycle. Pay attention to the math: for every new dollar you invest, you risk $3.33 in losses.

When the upside is a coin-flip 3%, and the downside air pocket is roughly three times larger, committing fresh capital in size into record highs right here is the textbook definition of poor risk-reward. That skew doesn't argue for selling, but does argue for how you participate, which is why the following tactics make sense.

Does that mean sell everything and hide? No. It means take the gifts the market is handing you now, while it is still handing them out. Such is the discipline that separates managing risk from trying to time the top.

Manage risk into the strength, not after it breaks. I hope this helps.

🖊️ From Lance’s Desk

This week's #MacroView blog explores why Japan didn’t just spark a currency crisis, but reminded everyone that the Fed has quietly backstopped the dollar for 60 years. The Yen intervention is not new, and while the “end of fiat, buy gold” crowd is right about the destination, they are wrong about the departure time.

Also Posted This Week:

• Lacy Hunt Turns Bearish Bonds: Studying His Reversal - RIA - by Michael Lebowitz
• Earnings Drive Both Bull & Bear Markets - RIA - by Lance Roberts

📹 Watch & Listen

Markets remain near record highs, but after a powerful run since April, the S&P 500 is trading more than two standard deviations above trend and has stalled in a tight range. At the same time, retail investors are aggressively buying dips and returning to many of the stocks and sectors that previously burned them. That enthusiasm can keep markets elevated, but stretched conditions warrant caution.

Subscribe To Our YouTube Channel To Get Notified Of All Our Videos

📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market action this week continued to vindicate the bulls, with the market hitting all-time highs. As we have noted previously, the out-of-favor Mag 7 stocks led the charge, but now most every sector and market is very overbought with bonds extremely oversold. Such is usually a good setup for a short-term reversal.

📐 Technical Composite: 85.03 - Bullish Overbought

The technical condition eased slightly this past week but The market remains overbought, and sentiment remains bullish for now.

🤑 Fear/Greed Index: 86.63 – Extreme Greed

The recent push in the market brought investor positioning and sentiment along with it. From a "how are investors positioned" perspective, investors remain very bullish on the market and show no real signs of concern. However, these levels are historically present near short-term market peaks and consolidations.

🔁 Relative Factor Performance

We noted last week that "Magacaps continued to outperform this past week, along with Gold Miners, and Growth stocks are now overbought." That remains the case this week, and with the market very bullish, we could see a rotation back to defensive positioning heading into September/October.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of August 14, 2026, with the S&P 500 at 7,785.76, the Money Flow Breadth Ratio (MFBR) stands at 80% and rising, versus 75% the prior week - a 15 percentage-point increase over the trailing four weeks. This places the indicator in extreme overbought territory (75% or higher). The raw breadth signal still reads BUY, but the MFBR is a contrarian indicator at extremes: readings this stretched have historically been followed by below-average forward returns, so the model treats this as a caution flag rather than a green light to add risk.

The model currently recommends reducing equity exposure, with a target equity weight of 50%. The trim is driven by the contrarian grid rather than by weak breadth - the model takes profits into strength when participation reaches extremes.

Breadth this stretched is a profit-taking signal, not a chase signal. The model's message is to sell into strength, move down to the target weight, and reassess next week."

📊 Sector Model & Risk Ranges

This past week, the surge in the markets to new highs also pushed quite a few, previously lagging areas, of the market above historical risk tolerances. These extremes are often a good signal to take profits and rebalance, and such is the case now with markets overbought, stretched and excessively bullish.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Record Highs: Should You Chase The Rally? appeared first on RIA.

Japan didn't just spark a currency crisis; it reminded everyone that the Fed has quietly backstopped the dollar for 60 years. The Yen intervention is not new, and while the "end of fiat, buy gold" crowd is right about the destination, they are wrong about the departure time.

Every time somebody touches the plumbing of the financial system, the same story writes itself on social media before the ink is dry. This month, it was the yen intervention, and over the last couple of weeks, the timeline settled on three conclusions:

1. The yen intervention was the "end game" for Japan,
2. Bessent is quietly bailing out the U.S. bond market, and
3. The whole affair proved "fiat money" is dying, so you had better own gold.

While it is a very compelling story, most of it is wrong. More importantly, the only part that's right won't help your portfolio this quarter.

So let's do the work the timeline skips, starting with separating what actually happened from what the narrative needs you to believe. Then we'll ask the only question that pays: should any of it change how you're positioned this morning?

What Actually Happened In The Yen Intervention

Start with the facts, because the framing is where the damage gets done. This was the first joint U.S.-Japan currency operation since 2011. The yen had slid to about 164 per dollar, its weakest in 40 years, and the entire point of the exercise was to push it back up, not down. Japan did the majority of the heavy lifting, with Tokyo spending roughly ¥8.45 trillion, call it $53 to $59 billion, in one session, with the full week closer to $75 billion. Conversely, the U.S. share was small, maybe $5 to $10 billion, and there is one detail almost nobody mentioned: the Treasury bought yen with euros, not dollars, so it never had to touch the Treasury market to do it.

Read that again, because the entire "Fed is intervening" headline is wrong twice over. The Fed didn't set monetary policy here, nor did it spend a dime of its own money either. The New York Fed served as the Treasury's operating desk, which is its ordinary role whenever the U.S. engages in the currency market. Furthermore, the direction ran opposite to the "scare story," as no one was "dumping dollars." This was a country buying its own currency off the floor, and doing it with euros.

A weak currency is a relative price, whereas a sovereign default is a failure to pay. The yen intervention is firmly the first thing, not the second. Hold onto that, because almost every piece of the doom narrative depends on blurring the two.

Narrative One: "This Is The End Of Japan"

The strongest version of the doom case comes from people worth reading, so let me give it room before I take it apart. Daniel Lacalle put it about as sharply as anyone.

"Japan is not going bankrupt in strict terms; it is demolishing its currency, which is equivalent to an implicit default."

With its public debt near 250% of GDP, it is clear that these evolutions can last for far longer than anyone could imagine. Lacy Hunt has made the patient version of this for years. Past a certain point, a debt load stops stimulating growth and starts strangling it. Japan crossed that line a long time ago, but they haven't gone bankrupt yet.

Such is the trouble with the word "default." A default is a failure to pay a creditor.

• Japan borrows in a currency it prints.
• It owes that debt mostly to its own citizens,
• Runs a current-account surplus, and
• Holds the largest net creditor position on the planet.

You can't force a missed payment on debt denominated in money you print yourself, which is exactly why a country like Japan quietly devalues and inflates its obligations away instead of formally defaulting the way an emerging market saddled with foreign-currency debt eventually must. The issue is NOT whether the yen is weak, as it plainly is, but whether "weak" means "insolvent," and it doesn't.

"But Lance, they're openly wrecking their own currency to pay the bills, and you're telling me that's fine?"

No, and I never said it was. A 40-year low is a real stress signal and a genuine policy failure. Japanese savers pay for it in imported inflation every day, and that is a serious problem. It's just a different problem than the cascading sovereign default the "end game" crowd is selling. Conflating the two is how a slow story gets sold as an imminent collapse.

Narrative Two: "Bessent Is Bailing Out The Bond Market"

Here is a narrative that needs the most attention. The "doomers" claim that the Treasury Secretary, Scott Bessent, is quietly opening "swap lines" to stop Japan from dumping its Treasuries in a "fire sale" that sends U.S. yields screaming higher.

The motive is real, and with the 10-year yield near 4.6%, no one at the Treasury wants the largest foreign holder of American debt selling into a soft market. But that is also the Treasury's job as the governor of the world's reserve currency. Both the Federal Reserve and the Treasury provide liquidity when needed to maintain financial stability. Currently, the tool Bessent is using is an expanded FIMA facility that targets that fear directly. However, these are not "swap lines," and the difference is important to understand.

The whole point of the FIMA facility is to provide liquidity to prevent a fire sale that would hurt all parties even more. Think about a pawnshop, where Japan walks in holding an asset it already owns, its Treasuries. It posts them as collateral and walks out with the dollars it needs. It never sells the family silver spoons into a falling market.

However, a "swap line" is uncollateralized lending between central banks. FIMA is a fully collateralized repo, priced above market, so it stays a backstop, capped at $60 billion per counterparty, with any increase requiring an FOMC vote. Ben Emons called it "a bit Kabuki," and he's right. Japan already parks around $350 billion in the Fed's foreign repo pool. This is plumbing, not a rescue.

Lastly, these backstops are not new, which is where the "secret bailout" framing comes apart. The Fed has run a dollar-swap network for more than 60 years. It started in 1962 to help defend the Bretton Woods system. The logic never changes, and all revolves around maintaining financial stability.

When a global panic hits, banks and firms outside the U.S. still owe dollars. If they can't borrow them, they raise them the hard way, by selling what they own. For foreign institutions, that would mean Treasuries. Therefore, a scramble for dollars would become a dumping of Treasuries, which would spike American yields and freeze the world's most important market. The whole mess then feeds the very crisis everyone was trying to escape.

Cullen Roche has hammered this for years.

"The dollar isn't just America's currency; it is the plumbing of the global system, so a dollar shortage abroad becomes an American problem, too."

FIMA was built for exactly this problem. Read that bolded sentence again. What's happening with the yen isn't a new lever getting yanked for the first time. It's the same 60-year-old playbook, pointed at Japan. The concern worth holding isn't a Tokyo fire sale. The plumbing exists to prevent one. It's the precedent, the slow blurring of the line between the Treasury's job and the Fed's. I'll come back to it.

Narrative Three: "Fiat Is Dying, So Own Gold"

Then comes the punchline every version of this story drives toward. Paper money is being debased; gold is the only "real money," so sell your stocks and bonds and buy the metal. You'll see the charts. The S&P "priced in gold," or the dollar "priced in gold." They point to these charts and proclaim, "Look what happens once you measure things in something a government can't print." It is a neat story. (Read More: Sound Money: Be Careful What You Wish For.)

I'll handle this one carefully, because I own gold in client portfolios and the long-run case is legitimate.

A chart of any asset priced in gold tells you only one thing, and that is how gold did against that asset, over whatever window somebody picked. That's it. You could price stocks in houses, or houses in gold, or the S&P in a barrel of oil. Each is an equally valid ratio, but none of them is "the truth." When a chart shows stocks priced in gold and murmurs "see the problem," it has already assumed the thing it pretends to prove: that gold, not the dollar, is the right ruler for money.

"But Lance, gold doesn't lie. It's real money, and everything else is confetti."

I hear that one a lot, and there's a kernel of truth in it. Still, two things get buried every time. First, gold is not a fixed yardstick. It fell about 70% from its 1980 peak to its 2000 low. So when the ratio drops, you can't tell whether stocks got worse or gold just got better. Second, and this matters most, those charts use price alone. Gold pays you nothing, whereas a stock pays dividends, a bond pays coupons, and a house pays rent. Strip the dividends out of the S&P, and of course, it looks sickly next to a metal in a bull market. Put them back, and the "collapse" shrinks fast.

So, yes, I agree with one premise. You should own gold as insurance against inflation, sized as a hedge and never as a religion. Don't let a rigged denominator argue you out of the assets that actually compound.

Where The Bears Are Right

The bears are not wrong about everything. There are three places where the bears are simply right, and we must acknowledge those points to navigate whatever the future holds more successfully.

• The debt math is real, and it's getting worse, in Japan and increasingly so in the U.S.
• Secondly, when the Treasury leans on the Fed's balance sheet to conduct monetary policy, the wall between fiscal and monetary authority grows thinner. Robin Brooks is right that intervention "treats the symptom, not the disease." It can manufacture "the illusion that nothing's wrong" while a real problem compounds beneath the surface.
• Lastly, the secular case for gold rests on exactly these dynamics, chronic deficits, and financial repression. That case doesn't vanish because this month's panic was overblown.

So, what is the concern, or risk, that actually keeps me up at night? It isn't a Tokyo fire sale next Tuesday, but rather the slow, almost boring normalization of central banks backstopping government funding, one facility at a time, until the day the market stops believing the backstop was ever meant to be temporary. That day is a genuine threat, but it is also years from the headline that ran this week, and that distance is what matters most.

What The Yen Intervention Means For Investors

Read that last sentence again, because it focuses on the one word the doom narrative never says out loud: timing. Almost every bearish quote in this piece is defensible over five to ten years.

• The debt arithmetic,
• The debasement,
• The creeping fiscal dominance,
• The long-run bid under gold.

None of it is fantasy; it is all a very slow grinding transition that will take decades to play out.

The mistake was never being bearish, but collapsing a decade-long thesis into a next-quarter trade is. Any serious analyst will stand on the other side of the timing. BCA Research argues the yen's slide:

"It reflects the Bank of Japan's inflationary monetary policy rather than concerns about Japan's public finances."

They point to wage growth above 5% for three years and credit growth at a 30-year high. Their conclusion is most crucial to the debate.

"The yen is deeply undervalued and a buy, not a short.

Currently, it seems just about everyone is short the yen, which is a prime setup for a reversal.

So, does any of this put money in your pocket in the near term? Modestly, yes. When Japan funds yen buying through FIMA repo, the Fed's balance sheet expands for the life of the loan. That's net new dollar "liquidity" in the system, collateralized and temporary, but real while it's out there. The bigger effect runs through volatility, and the real danger from a disorderly yen was a rerun of the August 2024 "carry trade" unwind, when the whole world tried to de-risk in a week. Draw a line under the yen, and that tail risk comes off the table for now. A stabilized, still-cheap yen just reloads the carry, and carry-on is "risk-on" for stocks and credit.

So what do you do with all of it?

• Stay invested with the trend while the tape and the liquidity backdrop support it.
• Treat these events as warnings on the horizon, not triggers for today.
• Own your gold and your hedges the way you'd own an umbrella, bought while the sky is still clear, because you never get to buy one once the storm is overhead.

The things that will matter most someday rarely demand that you act this morning. Position for the decade, but trade the tape you actually have. I hope this helps.

Sources & Notes

1. Fortune, "Bessent joins Japan to help reverse months of yen losses," Aug 2026.
2. Al Jazeera, "Japan and US confirm rare joint intervention to prop up yen," Aug 3 2026.
3. OMFIF, "Japan's yen intervention and the US's unusual support," Aug 2026.
4. CNBC, "How Bessent is pushing Warsh's Fed to expand the FIMA backstop," Aug 3 2026.
5. Federal Reserve, FIMA Repo Facility, policy tools; and "Central bank liquidity swaps," Board of Governors.
6. Congressional Research Service, "Federal Reserve: Dollar Swap Lines," IF11498.
7. Bordo, Humpage & Schwartz, "The Evolution of the Federal Reserve Swap Lines since 1962," NBER WP 20755.
8. Ben Emons, "FIMA Kabuki," FedWatch Advisors Notes, Aug 2026.
9. Investing.com, "Why did the Japanese yen collapse in 2026?" (BCA Research view).
10. Fortune, "The yen is quietly crashing... 'doomed to fail'" (Robin Brooks), Jul 2026.
11. ZeroHedge, "Japan's Keynesian Mirage" (Daniel Lacalle).
12. Data note (replication, per house standard): the "growth of $100" total-return series was rebuilt from Robert Shiller's monthly S&P 500 dataset using the monthly-average price method, with dividends reinvested. Endpoints were cross-checked against known annual returns (2008, 2013, 2022); individual calendar-year returns can run 2 to 5 points off exact month-end figures, so the chart is used for the long-run comparison, not precise annual quotes. Gold is the LBMA annual price. Series runs through year-end 2022.

The post Yen Intervention Narrative: What’s True And Not appeared first on RIA.

According to an article published Wednesday in The Wall Street Journal, more than 40 S&P 500 companies have reported roughly $9.6 billion in tariff refunds. Apple leads at nearly $2.2 billion. Nike follows at $986 million, FedEx at about $800 million, Amazon at $640 million, and GM at $500 million.

The timing is awkward. In July, the New York Fed published More Tariff Pass-Through Is in the Pipeline. Its May survey of firms that paid tariffs found that 47% of service firms and 44% of manufacturers still plan to raise prices further. About a third of those service firms and closer to 40% of the manufacturers intend to move within six months. Wednesday's CPI backed them up. As we show below, core goods rose 0.2% in July after three flat-to-negative months, with motor vehicle parts up 0.6%.

Here is where tariff refunds counter the Fed narrative. That pipeline assumes firms still need to recover the cost increases they absorbed. A tariff refund does exactly that. Thus, businesses holding the cash have less reason to execute previously planned increases. Several are already spending it on price. Amazon CFO Brian Olsavsky told analysts in July that the company will "utilize refunds to continue to invest in low prices for customers." Costco intends to pass refunds along "in some form." FedEx starts cutting checks to shippers this month.

We are not calling for disinflation. Section 232 and 301 duties remain in force, and the Treasury intends to backfill under Section 122. Generously, tariff refunds are worth a tenth of a point on headline CPI. But they are still a reason to think the Fed's pipeline drains slower than its survey implies.

What To Watch Today

Earnings

• No notable earnings reports today.

Economy

Market Trading Update

Yesterday, we walked through Citadel's read on the market's internals and why July's “reset” changed the tape more than the headline index let on. Today, let's put a hard number on the market breadth question and ask what a 70%-plus reading really means for the next few months.

Here's the number. As of August 7, more than 72% of S&P 500 members traded above their 200-day moving average, the broadest participation since December 2024. That's a long climb from the roughly 41% washout this spring. The average stock is healing even as the S&P 500 sits at 7,748.50 after Wednesday's close, less than 1% below its record high.

Does that mean the rally has room, or is it a warning? Both camps have a case, and the honest answer is that trajectory matters more than the level.

Start with the bullish read, because the base rates back it. When breadth thrusts higher near a record high, as it has since spring, SentimenTrader finds that the S&P 500 has been positive roughly 90% of the time over the following two months.

Anything above 50% of stocks trading above their 200-day moving average indicates a long-term uptrend regime. And as StockCharts has noted for years, readings north of 70% are technically overbought, yet in a real uptrend, overbought stays overbought. Over six to twelve months, broad participation like this has been a tailwind far more often than a headwind. Citadel's own point reinforces this: breadth is rising while cross-stock correlation sits near record lows, indicating a wide market, not a narrow pocket of leadership.

Now the contrarian side, because that's where the risk hides. Elevated breadth by itself has NOT reliably preceded corrections. What precedes them is a divergence, the index pushing to new highs while fewer stocks tag along. We don't have that today, as breadth is rising into the highs rather than fading beneath them.

The sharper caveat is subtler: the biggest forward returns show up after washed-out lows near 20%, not after the crowd is already all-in near 70%. Put simply, breadth predicts risk better than it predicts return. So by horizon, the odds tilt higher over three, six, and twelve months, while the next month is the stretch where an overbought tape can chop or shed a few percent without changing the larger trend.

That's the read for the models. In our Equity Models, we're used the broadening to rebalance, not to chase, trimming the most stretched winners back to target weight, lifting quality, and keeping the cash buffer intact. Manage risk into the strength, not after it breaks.

The Consumer Balance Sheet Is Not Cracking

On Tuesday the New York Fed released its Quarterly Report on Household Debt and Credit for the second quarter. Total household debt fell $13 billion to $18.771 trillion, a rare quarterly decline, led by a $74 billion drop in mortgage balances. Debt now equals 79.4% of disposable income. That is the lowest reading since 2003 outside the stimulus quarters. It ran above 110% before the 2008 crisis.

Delinquencies improved as well. The share of balances flowing into serious delinquency fell to 2.57% from 2.91% a year ago. Student loans did most of that work, dropping from 12.88% to 7.83% as the 2025 forbearance-exit distortion washes out of the data. Fresh delinquencies, 30 to 119 days past due, sit at 1.7% of balances. That is close to pre-pandemic lows. Foreclosures totaled 55,160, below where they ran in 2019.

Joelle Scally of the New York Fed put it simply: "Delinquency rates across most products have held steady over the past two years."

As we show below, mortgage delinquency transitions climbed to 1.52% from 1.29%. Every other category held flat or improved. Credit cards still sit near 7% and autos at 3%, high in absolute terms but no longer deteriorating.

All of this refutes the consumer-is-cracking narrative. Households carry less debt relative to income than at any point in the past twenty years. Housing is the exception, which makes it the category to watch through the fall.

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Tariff Refunds Soften The Fed’s Passthrough Warning appeared first on RIA.

Nvidia announced an agreement with Wall Street heavies, Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR. The six Wall Street firms will arrange more than $500 billion in third-party capital for AI infrastructure. The firms will create funding vehicles that allow investors to invest money directly in AI data centers in exchange for a share of the income those data centers generate. From Nvidia’s perspective, the agreement is very beneficial with little risk. The Wall Street-led financing arrangements provide the big hyperscalers with capital to build data centers at a time when their financial obligations and balance sheets are being more closely scrutinized. The data centers in turn run on Nvidia GPU chips.

Despite the seemingly good news, Nvidia shares fell. The reason is that the press release also mentioned that Nvidia is weighing a $250 billion guarantee on OpenAI's data-center lease payments and $350 billion in GPU purchase financing. That follows a $500 billion AI buildout tied to SK Group. Some critics argue these deals blur the line between chipmaker and lender and further highlight circular financing concerns, where Nvidia is essentially providing its customers with funds to buy Nvidia chips.

The $500 billion structure involving the six Wall Street firms may ease those fears, since it entails outside capital, not Nvidia's balance sheet, absorbing the risk. Bear in mind that as financing for AI data centers grows rapidly, it increases one risk for many investors, which Axios summarized well: "if one major company runs into trouble, it could have a ripple effect through the AI ecosystem."  As we wrote recently in Carnage in Hyperscaler Credit Part One and  Hidden Debt Part Two, Oracle is the “one major company” to keep an eye on if this is a concern of yours.

What To Watch Today

Earnings

Economy

Market Trading Update

Over the past week, we’ve argued that new highs tend to beget new highs, and that the right response to a record close is discipline, not panic. Today, the better question isn’t whether to chase the tape. It’s who’s actually buying, because the return of retail buying and corporate buybacks is what keeps dragging prices back to the highs.

The S&P 500 has climbed back to within a fraction of a percent of its August 7 record close of 7,757.64, roughly 3% above its 50-day average and about 10% above its rising 200-day line. The 14-day RSI is in the mid-60s, firm but not yet overbought.

So where’s the bid coming from? Scott Rubner at Citadel Securities laid it out this week, and his checklist is the most constructive I’ve seen from him in months. Retail returned to net buying last week, reversing the late-June flush. The corporate buyback window is reopening with more than a trillion dollars of authorizations, a record for this point on the calendar, and nearly 70% of that sits outside Technology. Passive demand never left, with roughly $1.6 trillion into funds this year and July the single biggest month on record. Even breadth is healing, with more than 70% of the index back above its 200-day average, the best reading since December 2024.

Notice in the scorecard below how many cohorts lean the same way at once. That’s the whole point to pay attention to. No single buyer sets the price, but when several sources of demand strengthen while selling pressure fades, the flow math tilts higher. Rubner’s own data shows retail is still paying up for downside puts even while it buys. In other words, while participation is back, conviction isn’t, at least not fully.

A crowded bid is a near-term tailwind, NOT a foundation, and flow analysis is never complete because, for every buyer, there’s a seller. Seasonal patterns get harder as positioning fills. Therefore, as noted on Monday, we’re using the strength rather than surrendering to it.

In our equity models, we’re staying long the trend while treating this bid as a chance to do the unglamorous work: trim the biggest winners back to target weight, lift quality, and hold a cash buffer for the eventual pullback. If you’re putting new money to work, do it on weakness toward the 50-day near 7,500, not on strength into round numbers. Let the buyers carry the tape. Just don’t mistake a strong bid for a margin of safety.

CPI Update

Wednesday's July CPI report gave Warsh ammunition to restrain the Fed's hawkish members. Headline CPI rose 0.1% month over month, in line with the Wall Street consensus. The core CPI rose 0.2%, also matching expectations. On a yearly basis, headline CPI held at 3.4%, unchanged from June's revised reading. Core CPI, which strips out food and energy, fell to 2.5% from 2.6%, the lowest reading since March 2021.

The details reinforce the headline numbers. Energy fell 1.5% in July, with gasoline dropping 2.9%, continuing the decline that began as the Iran conflict's oil premium unwound. Core goods inflation, the tariff-sensitive category we've watched closely, increased by just 0.2% following two monthly declines. Shelter, the category that has proven to be sticky at higher-than-market prices, has recently started to catch up to reality. It rose only 0.1% on the month, though it still accounted for roughly two-thirds of July's modest monthly gain given its outsized weight in the index.

Per CME FedWatch, Wall Street is giving a 50- 50 chance of a hike for the September meeting. In our opinion, that positioning is difficult to square with an economy that just posted a negative July payroll print and a second month in a row of benign inflation. While we are not there yet, continued good news on the inflation front may soon have the market asking whether a softening labor market justifies a cut instead.

Lacy Hunt Turns Bearish on Bonds

Economist Lacy Hunt has been a bond bull longer than most money managers have been in the business. Recently, he made a surprising U-turn on his bullish stance. The following paragraph opens his Second Quarter Review and Outlook.

The structural backdrop for U.S. inflation increasingly suggests that the long-run equilibrium range is migrating from roughly1.5–3.5% toward 3.5–4.5%, with a significant risk of episodes of inflation above 5%. An important core reason is the steady erosion of the disinflationary architecture that dominated the 1990–2020 period, even as various cyclical pressures also play a role.

For nearly four decades, Lacy Hunt has been pounding the table for lower yields. As chief economist of Hoisington Investment Management, Hunt bought long-term bonds, betting that globalization and excessive debt impede economic growth, keeping a lid on inflation and interest rates. Despite the extraordinary monetary efforts to stem the 2008 financial crisis, the decade of extremely loose monetary policy following the crisis and even through the pandemic-related surge in the money supply and high inflation, Hunt held his deflationist line.

So, when Lacy Hunt and his partner Van Hoisington posted their Second Quarter Review and Outlook titled “Capital Scarcity and the End of Globalization’s Disinflationary Era,” heads turned. Backing their words with action, Hoisington Investment Management, managed by Hunt and Hoisington, sharply reduced their clients’ bond duration and put the proceeds in Treasury bills.

That reversal of such long-held opinions deserves serious attention. We provide a summary of their new views and some counterpoints to help you assess their new stance.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Wall Street To Support Data Center Growth appeared first on RIA.

Economist Lacy Hunt has been a bond bull longer than most money managers have been in the business. Recently, he made a surprising U-turn on his bullish stance. The following paragraph opens his Second Quarter Review and Outlook.

The structural backdrop for U.S. inflation increasingly suggests that the long-run equilibrium range is migrating from roughly1.5–3.5% toward 3.5–4.5%, with a significant risk of episodes of inflation above 5%. An important core reason is the steady erosion of the disinflationary architecture that dominated the 1990–2020 period, even as various cyclical pressures also play a role.

For nearly four decades, Lacy Hunt has been pounding the table for lower yields. As chief economist of Hoisington Investment Management, Hunt bought long-term bonds, betting that globalization and excessive debt impede economic growth, keeping a lid on inflation and interest rates. Despite the extraordinary monetary efforts to stem the 2008 financial crisis, the decade of extremely loose monetary policy following the crisis and even through the pandemic-related surge in the money supply and high inflation, Hunt held his deflationist line.

So, when Lacy Hunt and his partner Van Hoisington posted their Second Quarter Review and Outlook titled "Capital Scarcity and the End of Globalization's Disinflationary Era," heads turned. Backing their words with action, Hoisington Investment Management, managed by Hunt and Hoisington, sharply reduced their clients’ bond duration and put the proceeds in Treasury bills.

That reversal of such long-held opinions deserves serious attention. We provide a summary of their new views and some counterpoints to help you assess their new stance.

Our objective in this article is not to support Lacy Hunt or rebut his work, but to present his case and accompanying data to help you better assess his warning.

A Broken Production Function

Lacy Hunt's basic bond bullish thesis for the last thirty-plus years rested on the core economic framework that economic output is a function of labor, capital, technology, and resources. Thus, anticipating changes to those four factors is paramount to forecasting output and inflation.

Hunt argues that the collapse of the Iron Curtain and China's entry into global trade, along with economic globalization involving many other countries, introduced “One of the largest positive supply shocks in modern economic history.”

Hundreds of millions of low-cost workers entered the global economy, with manufacturing concentrating in the regions that could do so most cost efficiently. Simply, those countries that could produce at the cheapest costs did so to the benefit of the global economy. From the US perspective, outsourcing production resulted in cheaper goods.

Moreover, with enhanced global trade, global capital flows increased, and resources became more abundant. Further, because of the dollar’s reserve status, steadily increasing global trade boosted demand for US dollars and dollar investments like US Treasury debt.

Deflationary Debt

Hunt claims that the macroeconomic environment of the last 30 to 40 years helped explain why increasing debt levels were disinflationary. Per Hunt:

Diverted income away from consumption, restraining aggregate demand growth, while expanding global productive capacity absorbed liquidity and credit expansion without generating broad pricing pressure.

Further to his case, monetary velocity fell. Velocity calculates how often a dollar circulates through the economy. Inflation is a function of the supply of money and, often overlooked, the velocity of money. For the better part of the last 40 years, velocity declined as money was increasingly parked in financial assets rather than investments in plant and equipment or consumption. Corporate executives increasingly favored financial engineering, like stock buybacks, over capital investments. This inflated financial asset prices while doing little for the economy's underlying productive capacity.

Hunt’s Shift

Hunt’s new stance appears to be predominantly based on three factors.

First, in his opinion, globalization is reversing. Tariffs, reshoring and friendshoring, alongside security-related trade protectionism, replace the "lowest-cost producer" model with a more expensive "secure and resilient producer" model.

Second, labor supply growth is slowing. The combination of lower birth rates, an aging population, and reduced immigration is decreasing the supply of labor, thus raising wage costs. Furthermore, with deglobalization, less outsourcing forces corporations to use more expensive labor domestically.

Third is capital scarcity. AI data centers, electrical grid modernization, and semiconductor fabs are all vying for the same scarce pool of capital, commodities, and skilled labor. At the same time, government deficits require significant capital, and it comes at a time when the national savings rate is near historic lows.  

Hunt’s Argument Versus Data

While Hunt makes a very convincing argument, we must analyze recent and historical data to see if the trends he envisions are starting to play out.

Inflation Expectations

The market isn't buying into Hunt’s inflation forecast.  As we share below, the 5-, 10-, and 30-year breakeven inflation rates, as determined by TIPS and nominal Treasury securities, are at the same level they have been for the last four years and not that different from the post-financial crisis era. For context, Hunt is forecasting a 3.5-4.5% equilibrium range, and "episodes above 5%" which he flags as a real risk.

While expected long-term inflation hasn’t budged, long-term real yields have risen appreciably as shown below.

Given that Treasury yields are a function of expected inflation, current inflation, and the term premium, the graphs suggest that the term premium is largely to blame for higher interest rates. Investors are demanding higher yields as they are likely worried about the government's growing borrowing needs alongside the massive capital being allocated to AI. This feeds into Hunt’s scarcity-of-capital argument, which we discuss next.

Capital Scarcity- Savings Rate

The United States appears to be entering a period in which the demand for capital is rising far faster than the domestic supply of saving.

Debt must be financed by domestic saving, foreign capital, or government intervention like quantitative easing (QE). A low domestic savings rate, shown below, means a greater reliance on the other funding sources. Hunt warns that expanding the money supply via increasing the Fed balance sheet (QE) can help the scarcity problem, but it can also drive inflation higher.

The U.S. has operated with a low net national saving rate for most of the last twenty-five years. This shortfall of an important funding source for US Treasury debt has in part been financed by foreign capital requiring dollar assets and QE at times. Despite the recent bout of higher inflation, poor bond returns, large fiscal deficits, and recent policy actions like tariffs, the international inflow of capital to the US Treasury has continued to grow, offsetting the low saving rate.

Whether we can continue to depend on foreign investors depends heavily on the dollar's reserve-currency status, a variable Hunt's letter doesn't directly address.

We view the military actions in Venezuela and Iran, as well as some recent trade deals, as viable attempts to strengthen the dollar’s reserve currency status, thus bolstering foreign demand for US debt.

Furthermore, forcing crypto stablecoins to hold US Treasury securities as collateral should provide a multi-trillion-dollar source of new funding for the Treasury.

QE

Hunt mentions QE as another possible source of future deficit funding. He views this as inflationary. To wit, he provides recent evidence:

Substantial liquidity injections occurred from mid-December 2025 through June 2026. In this period, the Federal Reserve purchased approximately $290 billion of Treasury securities, igniting a surge in bank deposits and loans. ODL rose at a torrid 8.9% annualized rate in this year's first six months—more than 1.6 times faster than its ten-year compounded growth rate… This Fed-driven liquidity event, along with the recovery in velocity, may explain a sharp February reacceleration in inflation prior to the latest geopolitical energy shock.

Hunt assumes that a recent seven-month bout of QE was inflationary. It may have been, but the graph below shows a weak but negative historical correlation between QE and inflation.

Hunt does concede that QE may not be an inflationary concern. He credits Fed Chair Kevin Warsh's balance-sheet restraint as "an important monetary offset to fiscal expansion."

Warsh, a Fed governor from 2006 to 2011, was arguably the Fed’s most consistent skeptic of asset purchases, and after his term ended, he became one of the most vocal outside critics. Warsh as the Fed chair, on its face, is a bet against the QE playbook Hunt says just reignited inflation. Hunt's 3.5 - 4.5% inflation range may hold water if fiscal and market pressures overwhelm Warsh's instincts.

Global Trade

President Trump has imposed tariffs and other protectionist measures on many imported products. He has also incentivized domestic companies to shift production back home. While the actions may appear to have an anti-globalization impact, the data so far tell a different story.

Global trade, exports plus imports relative to world GDP, climbed to an estimated 68.5% in 2025, the highest level in 46 years, per the World Bank. Moreover, despite Trump’s trade policies, 2025’s 68.5% was a big jump from 56.7% in 2024. If tariffs and reshoring were meaningfully unwinding globalization, that ratio would be flat or falling. Similarly, the US trade deficit is bouncing around the same levels as it was under President Biden and worse than any reading before 2020.

AI And Productivity

Moving on to AI and productivity, Hunt rightly blames the capital intensity of building data centers and the resulting upgrades to the electrical grid for making capital scarcer and pushing interest rates higher. However, he gives little weight to the possibility that AI-driven productivity gains show up sooner rather than later and act as a disinflationary force, much as prior technology waves eventually did.

In our opinion, it is unknown when the productivity benefits of AI, including lower inflation, will ease the capital scarcity argument. History shows that the benefits could accrue rapidly or they could take time.

Summary

None of the recent evidence we share indicates Lacy Hunt will be wrong. He is forecasting a regime change to the macroeconomic environment that recent data trends haven’t picked up on. 

Hunt also acknowledges his forecast is not necessarily that of higher interest rates. He writes:   

The result is not a simple forecast of continuously rising interest rates, but rather a more volatile interest-rate regime.

He notes that a recession, a favorable supply shock, or successful balance-sheet restraint under Chairman Warsh could still deliver lower inflation and falling rates. His Treasury Bill purchases appear to be not just a bet on higher inflation and a sustained high term premium, but equally a desire to avoid volatility in the long end of the curve.

While we have the utmost respect for Lacy Hunt, we must remember that he is making a forecast, an educated guess. His warnings may prove correct. But he is forecasting a big change in the way the global economy operates and its impact on capital flows. Further, he is making assumptions about one of the greatest technological innovations that is just in its infancy.

Might the Covid echo be coming to an end and the historical disinflationary trends of the last forty years be reasserting themselves, or are we in the early innings of the macroeconomic regime change Hunt is calling for?

The post Lacy Hunt Turns Bearish Bonds: Studying His Reversal appeared first on RIA.

Greg Abel just completed his first full quarter as the CEO of Berkshire Hathaway, taking the throne from Warren Buffett. In his first earnings announcement, Abel sent strong signals of a strategic pivot. Most important of these, Berkshire repurchased $4.5 billion of its own stock in the second quarter, its largest quarterly buyback since a similar amount in 2023, and a sharp jump from $200 million in the first quarter. The quarter also saw Berkshire's first net equity purchases in 14 consecutive quarters; $39.4 billion was deployed in the first half alone.

In our opinion, the buybacks, not the net purchases of equity holdings, are the most revealing signal, because Buffett spent decades preaching when repurchases are and are not justified. As we wrote in Buffett On Buybacks:

When a company overpays for repurchases, the continuing shareholders lose... gains from value-accretive repurchases benefit all owners."

In 2016, Buffett stated:

If you're repurchasing shares above a rationally calculated intrinsic value, you are harming shareholders, just as if you issue shares beneath that figure, you are harming shareholders."

The recent repurchases should provide shareholders with confidence that some of the best corporate capital allocators see their stock trading at a discount to its intrinsic value. In other words, Abel buying back stock aggressively is him effectively telling the market Berkshire shares are cheap relative to what the business is actually worth.

This year, Berkshire shares have underperformed the S&P 500 despite Abel’s repurchases. Either Abel is wrong about the discount, or the market hasn't caught up yet.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed why we rebalanced portfolios on Monday. However, we didn't aggressively reduce risk because the bullish backdrop remains intact.

"S&P 500 8k here we come." That was Goldman partner John Flood's answer last week when clients kept asking whether the market could keep "digesting" a record wave of new stock. The S&P 500 sits near 7,753 this morning, a hair below Friday's record close of 7,757, and roughly 3% under the number everyone suddenly wants to talk about. After thirty years of watching Wall Street bolt round numbers onto bull markets, my first instinct with a call like this is skepticism. But here's the uncomfortable part for the bears: the math behind an 8,000 target isn't "crazy." It's the second half of the story that should worry you.

Flood's argument rests on plumbing, not vibes. Yes, 2026 will be a record year for equity issuance in dollar terms. Goldman pegs corporate supply at near $700 billion, with about $225 billion in IPOs and $450 billion in everything else. Against that sits an estimated $1.4 trillion of gross buybacks, with authorizations already at a record $989 billion year to date and S&P 500 repurchases growing 11% in the second quarter. Do that arithmetic and demand laps supply by roughly $700 billion, even if you assume every unlocked post-IPO share gets sold the day it frees up. Goldman calls the issuance a "manageable headwind," not a "gale." On the numbers, that reading is fair. When corporate America is the largest and most price-insensitive buyer in the market, the question of "who's going to buy all this paper" mostly answers itself.

Now the part Flood's note glides past. "Why not just chase it?" Because price isn't the only variable that matters. Start with valuation. The Shiller CAPE sits near 42, the second-highest reading in roughly 150 years, beaten only by the 2000 peak. You're being asked to pay a "this time is different" multiple for that final 3%.

Then look at who is doing the buying. Issuance is freakishly concentrated, with the three largest deals accounting for nearly half of it, AI names at 40% of follow-on volume, and tech, media, and telecom running near 30%. The same hyperscalers propping up the buyback line are the ones shifting cash flow toward capex, with consensus already seeing it topping $1 trillion a year and running past 100% of operating cash flow through 2027. Nvidia just raised half a trillion dollars privately to build more of it. So the "demand" pillar is quietly financed by rising leverage in a handful of names, and such is the tell that a supply-demand model built on buybacks can miss: the buyer and the borrower are wearing the same face.

So is an 8,000 target crazy? No. It's a coin-flip 3% hop this tape could clear in a month, and round numbers act like magnets right up until they act like ceilings. That's exactly why we won't treat it as a "green light." In our equity models we're holding target weight, we trimmed the most extended winners back toward their allocations, and keeping a little dry powder rather than reaching for the last leg.

The bottom line is simple. You can respect the bid and still refuse to pay any price for it. Manage risk at the line, keep your quality high, and let the melt-up come to you instead of running out to meet it.

AI For The People: Zuckerberg Lays Out Meta's Vision

Mark Zuckerberg, CEO of Meta, published a lengthy AI vision statement this week, "The Path to a Positive AI Future," and its central argument is different from how the large frontier labs like Anthropic and OpenAI describe their mission. Rather than building AI primarily for corporations and governments, Zuckerberg argues Meta's goal is delivering "personal superintelligence" to individuals, "putting power in people's hands" rather than allowing it to be concentrated inside a handful of institutions. He writes:

Most other labs are focused on building AI for companies, governments, or other institutions.... so if those labs lead, then the balance of power will favor larger institutions over individuals.

Meta's philosophy rests on three pillars, which he states plainly in the letter:

• Individual empowerment as "the source of prosperity"
• Invention as "the primary purpose of superintelligence," not automation
• Balance of power favoring people as "the foundation of safety"

His vision presents concrete benefits to individuals. To wit, every person gets "an exceptionally capable personal agent" that works "24/7 on your behalf" across relationships, health, career, and finances, with "strong privacy and security options" modeled on Meta's WhatsApp encryption. Per Zuckerberg, "even Meta cannot see or grant access to your information." He promises free AI access to "billions of people." He envisions that for more complicated uses, paid compute will be priced through "a dynamic auction mechanism that will guarantee everyone gets the lowest price possible."

Essentially, Meta is positioning itself as consumer-first, opposing the large labs that sell primarily to corporate and government contracts. While Zuckerberg paints Meta as the sole lab working for individuals, Google's Gemini is a mass-market consumer product. Demis Hassabis, the CEO and co-founder of Google DeepMind, which oversees Gemini, claims their products benefit "people everywhere."

Zuckerberg's Case Against Centralization

In his letter, Zuckerberg makes a contrarian economic claim. He argues broad AI access could produce "even job growth" rather than net job loss, provided the technology empowers individuals faster than it automates their work. He states,

There is no rule that AI must increase automation faster than it increases individuals' capabilities

To wit, he anticipates "personal biologists," "world builders," and "one-person product studios" running companies "at significant scale" with the help of personal agents.

In addition to his economic comments, he also presents philosophical arguments. Zuckerberg rejects the idea that a single, tightly controlled AI system can be made benevolent for everyone. He argues that any centralized system "would have to prioritize some values over others."

His centralized proposal may look like the following example:

• One person with a superintelligent lawyer creates an unfair advantage
• If everyone has a superintelligent lawyer, justice is restored "more fairly and efficiently"
• The same logic applies to cybersecurity and business competition

To this end, Meta pledges to resume open-source model releases and to give its independent board authority to approve model release safety criteria, an explicit governance check on any single decision-maker, including Zuckerberg himself. He ends his missive as follows:

If these values lead the way, then I am optimistic that the coming decades will be some of the most amazing in history. The arc of human civilization has bent towards putting more power in people’s hands to live and shape the world in the ways we believe are best. Superintelligence holds the promise of giving everyone that power, and building a positive future for everyone.

– Mark

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Abel Takes Charge at Berkshire Hathaway appeared first on RIA.

The Tweet on the right below irresponsibly suggests that if SK Hynix shares double, as Cantor Fitzgerald's $300 target implies, a 2x leveraged fund like SKHA offers "magnified exposure" to that outcome. Assuming the stock doubles, the leveraged trade ETF sounds like easy money. However, even if Cantor is right and the stock doubles, the math behind leveraged ETFs does not guarantee the holder will earn 200%. In fact, it doesn't even guarantee positive returns.

2x Leveraged ETFs deliver twice the daily return of the underlying stock, not twice the annual return. Over time, the daily resets compound and produce a different result than a simple doubling. Consider a stock that goes up on day one and down on day two to end up flat. A 2x leveraged fund moves twice as much every day, so its bigger up days and bigger down days don't cancel out evenly. In this case, the leveraged ETF ends up losing a little money even though the stock went nowhere. Essentially, volatility chips away at the value of leveraged funds. The graphic on the left shows how extreme volatility over the course of a year creates a massive return differential between the underlying stock and the leveraged ETF. In this example, the stock doubles over the course of the year, but the 2x leveraged fund ends down 11.1%.

The more a stock chops sideways versus trending, the worse the outcome for a leveraged ETF holder. Given that SK Hynix has already logged multiple double-digit single-day price swings this year, that volatility tax we describe is not hypothetical.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we reviewed the market's technical backdrop heading into this week, along with market performance statistics following a consolidation breakout. However, in Saturday's #BullBearReport, I discussed that the Moneyflow and Breadth Indicator had triggered a warning. To wit:

“As of August 7, 2026, with the S&P 500 at 7,757.64, the Money Flow Breadth Ratio (MFBR) stands at 75% and rising, versus 70% the prior week – a 10 percentage-point increase over the trailing four weeks. This places the indicator in extreme overbought territory (75% or higher). The raw breadth signal still reads BUY, but the MFBR is a contrarian indicator at extremes: readings this stretched have historically been followed by below-average forward returns, so the model treats this as a caution flag rather than a green light to add risk.

The model currently recommends reducing equity exposure to a target weight of 50%. Against your current equity weight of 63%, that implies reducing equity exposure by roughly 13 percentage points. The trim is driven by the contrarian grid rather than by weak breadth – the model takes profits into strength when participation reaches extremes.

Breadth this stretched is a profit-taking signal, not a chase signal. The model’s message is to sell into strength, move down to the target weight, and reassess next week.”

On Monday, we followed those instructions across both the Equity 60/40 Portfolio and the Dividend Growth Model. We took profits in some of the recent winners, like MSFT, and swapped out or added to positions that have seen decent corrections. We also rebalanced several of the Thematic Models (AI, Future Growth Focused, Crypto, Dividend, and Infrastructure). You can see all the specific trades made in the Portfolio/Model/Transaction tab for each portfolio.

While the MFBR indicator is triggering a warning, it does not mean that you should immediately reduce overall equity exposure to the market. When the indicator reverses, that will be the signal to reduce exposure more aggressively and raise cash accordingly.

The S&P 500 Is The "Sector" Of Choice

This week's rotation analysis presented a rarity in the absolute and relative scores of the S&P 500 sectors. As we circle, Financial stocks are the only sector with an absolute score higher than the S&P 500, and Technology stocks are the only sector with a positive relative score.

Essentially, the SimpleVisor analysis means the S&P 500 itself is the strongest "sector" in the set. Such a setup usually shows up in a couple of related ways:

• Leadership is extremely narrow. In this case, a handful of mega-cap names and some other technology stocks are carrying the index's return, while the other nine or ten sectors can't keep pace on a relative basis.

• Breadth is deteriorating. Similar to the prior bullet point, this would entail that few large stocks are leading the market. However, if we look at the dispersion of the absolute and relative scores, there is not much of a difference between the out- and underperformers; thus, breadth is fine despite the absolute and relative scores.

The decent breadth, along with new record highs, suggests the market is not necessarily about to fall, but that the rally has less structural support underneath it than the index level alone would suggest. It also likely means that rotation opportunities are scarce, so the S&P 500 is the easiest and least risky way to play the market on a relative basis until a sector or sectors start to outperform or underperform.

Earnings Drive Both Bull & Bear Markets

A stock is a claim on future cash flows, and its price is that claim divided by a discount rate. So there are exactly two ways to knock the market down hard. Either the expected cash flows fall, or the discount rate rises. That’s the whole list. Capex, deficits, and oil only matter to the extent they eventually show up inside one of those two variables, and most of the time they don’t show up in either with enough force to matter.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Leveraged ETFs: Math Often Trumps Hype appeared first on RIA.

"Earnings drive market outcomes. In 151 years, every single 20% market decline was accompanied by a double-digit earnings decline, with zero exceptions."

Every few months, a new reason to sell arrives. Capital spending is too high. The deficit is unsustainable. Oil just broke out. The conclusion attached to each is always the same: investors are about to lose half their money. I've watched that warning recycle for three decades, and it's a smoke detector that goes off every time somebody makes toast. What actually matters is far less exciting. Earnings drive market corrections, and the historical record on that is close to airtight.

A probability tree from BCA Research has been circulating that makes the point simply. It shows the S&P 500 rising 84% of the time overall, and only 64% of the time in years when earnings fall. The framing is right. The specific numbers, when I rebuilt them from scratch, turned out to be a good deal more interesting than the chart suggested.

The Bear Case That Keeps Not Working

Start with why the popular scare stories fail as timing tools. Capital spending, government deficits, and energy prices are all real economic variables. None of them repriced the market on their own. If earnings drive market corrections, then every one of these stories has to travel through profits before it can do any damage, and most of them never complete the trip.

The reason is mechanical. A stock is a claim on future cash flows, and its price is that claim divided by a discount rate. So there are exactly two ways to knock the market down hard. Either the expected cash flows fall or the discount rate rises. That's the whole list. Capex, deficits, and oil only matter to the extent they eventually show up inside one of those two variables, and most of the time they don't show up in either with enough force to matter.

Consider what that means in practice. Hyperscaler capital spending can run at what looks like a reckless pace for years without producing a bear market, because the spending itself is a transfer from cash flow to depreciation schedules rather than a destruction of earning power, and the market will happily fund that trade for as long as revenue keeps validating it. The spending isn't the risk. The risk is that the moment revenue stops validating it, it becomes an earnings problem wearing a capex costume. I made a version of this argument in AI Capex Depreciation Risk Is The Catch To Record Earnings, where the concern isn't the capex line but the impact deferred costs have on reported profits later.

Deficits work the same way, of course. They can widen for a decade, and the only reliable transmission into equity prices runs through interest rates, which is the discount-rate channel rather than the earnings channel. Oil, in contrast, is the most direct of the three, because energy is an input cost that compresses margins. Even there, the market doesn't fall when oil rises. It falls when the margin compression shows up in guidance.

How Earnings Drive Market Corrections Over 151 Years

Rather than take anyone's chart on faith, I rebuilt the analysis from Robert Shiller's monthly S&P 500 dataset, which carries index price, dividends, and trailing reported earnings per share back to the nineteenth century. That yields 151 complete calendar years, from 1872 through 2022, where both an annual total return and a year-over-year change in reported earnings can be computed. Reported earnings, not operating earnings, and certainly not forward estimates. Actual bottom-line profits.

Here's what the conditional probabilities look like.

Two things stand out. The unconditional hit rate is 74%, not 84%. That figure cross-checks cleanly against Aswath Damodaran's independent dataset at NYU Stern, which records 71 positive years out of 97 from 1928 through 2024, or roughly 73%.¹ The 84% figure only appears if you start the sample in the mid-1980s, which conveniently excludes the Depression, the 1970s, and both world wars.

The second finding is the one that should give a strategist pause. In years when earnings fell, the market still rose 66% of the time, which is close to BCA's 64%. But in years when earnings rose, the market rose only 79% of the time, not 92%. Widen the sample and the gap between the two branches collapses from 28 percentage points to 13. Over the 1928 to 2022 subsample it shrinks to roughly three points.

So does that kill the thesis? No. It relocates it.

Earnings Drive Market Corrections By Severity, Not Direction

Up or down is the wrong question. A tree that sorts years into two buckets throws away the only variable an investor actually cares about, because a year finishing 2% lower lands in the same box as a year finishing 38% lower, which is how you end up holding a chart that looks decisive while telling you nothing whatsoever about risk. Sort the same 151 years by the magnitude of the earnings change instead. The relationship of the binary version buried comes into focus immediately.

Read the middle column first. When reported earnings fell by less than 10%, not a single one of those 25 years saw a decline worse than 10%. Zero. The worst outcome in that entire bucket was a year that finished down 9.4%. A mild earnings dip is a nothing-burger for the index, which is exactly why the market shrugs off the soft patches that dominate financial television.

Now read the left edge. When earnings fell by more than 25%, half of those years saw declines of more than 10%, and a quarter saw declines of more than 20%. The average outcome in that bucket is negative. That's the only bucket in the entire 151-year record where the average annual return is below zero.

Ultimately, that is the sentence to carry out of this article. Earnings drive market corrections through severity, not through direction. Whether the market finishes a given year up or down is close to a coin weighted by sentiment, liquidity, and valuation. Whether the market takes a 20% beating is an earnings question, and the historical record answers it without a single exception.

Every Major Decline, And The Earnings Behind It

In fact, only eight calendar years in the entire sample have a total return worse than-20%. That's a small enough list to examine one at a time, which is the appropriate level of humility when you're drawing conclusions from tail events.

Look at the last column. Every one of the eight is accompanied by a double-digit earnings decline. Three of them, 1937, 1974, and 2002, had earnings still growing in the year the market fell apart, which is why a naive year-by-year test would file them as counterexamples and move straight on. They aren't. The 1937 crash preceded a 43.4% earnings collapse in 1938. Same pattern in 1974, which preceded a 10.5% drop the year after. And 2002 had the sequence reversed, arriving after the 50.6% collapse of 2001 and the valuation reset that followed.

"In each apparent exception, the market didn't ignore earnings. It got there first."

That is the mechanism, stated properly. As a result, the market prices expected earnings, so it turns before reported earnings turn. Which means anyone waiting for the profit decline to appear in the data before reducing risk is reading a rear-view mirror and calling it a windshield.

The Strongest Objection, And What It Costs The Thesis

There is a real argument on the other side that we should examine.

"But Lance, 2022 was a 25% bear market, and earnings never fell. That was rates, full stop."

It's the best objection available, and it's half right. On forward operating estimates, 2022 is a clean multiple-compression event. Estimates actually rose through much of the decline, and the forward multiple did nearly all of the work as it compressed from the low twenties into the mid-teens. No earnings recession required.

Here's the wrinkle. On trailing reported earnings, the measure this entire study is built on, 2022 shows a 12.7% decline. Both statements are true at once, and the gap between them is the point. Operating earnings exclude what companies would rather you ignore. GAAP earnings don't. When those two series diverge sharply, you're looking at a quality-of-earnings problem, and I've written about that divergence in Shiller's CAPE: Is It Really Just B.S. more than once.

Still, the objection lands a genuine hit, and I'd rather concede it than dress it up. Rates are an independent channel. A discount-rate shock can produce a serious decline on its own, and 1937, 1974, and 2002 all carried heavy multiple-compression components alongside their earnings problems. So the honest formulation isn't that earnings are the only thing that matters. It's that earnings are the variable that separates a routine 10% air pocket from a portfolio-altering event, while rates determine how much valuation cushion you have when the earnings news arrives. Watch both. Weight earnings more heavily.

What about the other direction?

There's a mirror-image error that costs investors more money than the one this article is mostly about. Earnings collapsed by more than 25% in 12 separate years, and in half of those years the market went UP. For example:

• 1921: earnings fell 63.8%, yet the market still returned 14.1%.
• 1938: down 43.4% on earnings, up 19.8% on price. In In
• 2020, earnings were off 32.5%, and the index was up 18.2%.

Why? Because by the time the earnings collapse is measurable, the market has moved on to pricing the recovery. Markets bottom before earnings bottom, without exception in the record above. Selling into a confirmed earnings recession is frequently the worst available trade.

Watch The Estimates, Not The Reports

If earnings drive market corrections and the market front-runs reported earnings, then the practical question becomes which earnings number carries information. The answer isn't the one company's report. It's the one analysts are revising.

That would be more comforting if analysts were good at it. They aren't. A McKinsey study spanning 25 years found Wall Street pegging earnings growth at 10% to 12% annually, while actual growth came in at around 6%, roughly the economy's nominal growth rate, which is why forecasts drift so reliably above outcomes.²

Every year, since 1994, when operating earnings became the convention, initial quarterly forecasts have been skewed optimistically by something close to 30%. I've covered the machinery behind that bias in Earnings Season and The Truth About Wall Street Analysis, and the arithmetic of overpaying for those estimates in Estimates By Analysts Have Gone Parabolic.

Of course, the bias doesn't make estimates useless. It makes the level useless and the direction valuable. Nobody should care that the consensus is too high, because the consensus is always too high. What matters is the second derivative, meaning the rate and breadth at which estimates are being cut. As Bob Farrell's Rule #9 puts it, when all the experts and forecasts agree, something else is going to happen. The tell isn't the agreement. It's the moment the agreement starts quietly dissolving, which typically shows up first in the number of companies being revised down rather than in the index-level figure.

In addition, the breadth of revisions matters more than the magnitude, and index-level estimates hide it. When a handful of very large companies carry the aggregate, the index number can climb while the median company deteriorates. That's the setup I flagged in Earnings Estimate Revisions Are Very Optimistic, and it's the single most common way a deteriorating profit cycle stays invisible for a couple of quarters longer than it should.

Investor Tactics When Earnings Drive Market Corrections

None of this matters without a process. Howard Marks has made the point for years that you can't predict, but you can prepare, and preparation here means deciding well in advance which signals change your positioning and by exactly how much, so that the decision isn't being made while you're staring at red numbers and feeling something about them.

Warning Signals Worth Monitoring

Credit markets whisper what equities later shout. Bondholders get paid to worry about whether a company survives at all, so they reprice deteriorating fundamentals well ahead of equity holders, who spend their days pricing growth and tend to read the balance sheet last. Gilchrist and Zakrajšek demonstrated this formally in their NBER work, building a credit spread measure that predicted declines in economic activity and equity prices considerably better than standard default-risk indicators.³ I've walked through the practical version in Credit Spreads: The Market's Early Warning Indicators.

A caution on all of it. Earnings drive market corrections, but these are monitoring tools, not triggers. Spreads spent long stretches at complacent levels while equities compounded, and investors who de-risked the moment spreads looked tight gave up substantial returns for the privilege of being early. The rate of change matters more than the level; confirmation across several signals matters more than any single one; and the correct response to a deteriorating dashboard is usually a smaller position rather than no position.

Frequently Asked Questions

Do earnings declines always cause market corrections?

No, and that's the most misunderstood part. Across 151 years, the market rose in 66% of the years when reported earnings fell. Small earnings declines are routine, and the index absorbs them easily. The data show that large earnings declines are a precondition for large market declines.

If earnings drive bear markets, how large does an earnings decline have to be to matter?

From the data, an earnings decline of roughly 10% appears to be the threshold. When reported earnings fell less than 10%, no year in the sample produced a decline worse than 10%. Once earnings fell more than 25%, half of those years produced a double-digit decline, and a quarter exceeded 20%.

Why did the market fall in 2022 if earnings didn't decline?

It depends on which earnings series you use. For example, forward operating estimates rose, making 2022 look like a pure valuation reset driven by rates. Trailing reported GAAP earnings fell 12.7%. The divergence between operating and reported earnings is itself the story.

Should I sell when earnings start falling?

Usually, the opposite is true if the decline is already visible in reported data. Indeed, markets bottom before earnings bottom. In 1921, 1938, and 2020, earnings fell more than 25% while the market delivered double-digit gains. The useful signal is estimated revisions and credit spreads, both of which move earlier.

Are capital spending and deficits irrelevant to market risk?

Not irrelevant, but indirect. However, they affect equity prices only by working through expected cash flows or through the discount rate. Watching them without considering earnings and rates means watching the symptom rather than the disease.

What This Means Going Forward

Earnings drive market corrections. That's the finding, and the next serious decline won't arrive with a headline about capital spending or the deficit but will begin exactly where all eight of the others began, in the profit cycle, surfacing in credit spreads and revision breadth well before it reaches any earnings report you can actually read. The investors who get hurt won't be the ones who missed the story. They'll be the ones watching a different story entirely, waiting on confirmation that always arrives late.

Notes and Sources

1. Aswath Damodaran, Historical Returns on Stocks, Bonds, and Bills, NYU Stern. Reports 71 positive years of 97 from 1928 through 2024, best year 1954 at +52.56%, worst 1931 at -43.84%.
2. McKinsey & Company research on analyst forecast accuracy, covering approximately 25 years of consensus estimates versus realized S&P 500 earnings growth.
3. Simon Gilchrist and Egon Zakrajšek, Credit Spreads and Business Cycle Fluctuations, NBER Working Paper 17021.
4. ICE BofA US High Yield Index Option-Adjusted Spread, FRED series BAMLH0A0HYM2, Federal Reserve Bank of St. Louis. Note that FRED restricts the ICE BofA series to a rolling window, so longer histories require the index provider directly.
5. Primary dataset: Robert J. Shiller, monthly S&P 500 price, dividend, and trailing reported earnings series. 151 complete calendar years, 1872 through 2022. All conditional probabilities, severity buckets, and adjacent-year earnings figures were calculated by RIA Advisors.
6. Probability tree framing adapted from a chart published by BCA Research, sourced from FactSet and BCA calculations. Figures in this article are independently recalculated and differ from those in the chart.

The post Earnings Drive Both Bull & Bear Markets appeared first on RIA.

The Friday BLS employment report showed the economy lost 23k jobs. Along with last Wednesday's ADP report (+44k), the two reports suggest the spring pickup in job growth is stalling. Adding to the bad news, the BLS revised May and June jobs down by a combined 103k jobs. The labor market has now averaged a mere 20k net job growth per month over the last three months.

Despite the drop in payrolls, the BLS unemployment rate ticked down to 4.1% from 4.2%. While the decline is good, the reason it fell isn't. Labor force participation fell to 61.4%, its lowest level in more than five years, meaning the rate declined because people left the workforce, not because hiring picked up.

The rate hike debate just took a serious hit. Markets had been pricing 80%+ odds of a September hike after Warsh's hawkish tone and the prolonged oil-driven inflation scare. Friday's negative BLS payroll print with the downward revisions makes that case far harder to sustain. Citigroup economists have been arguing the Fed's equation would shift once the unemployment rate began rising meaningfully. The most recent BLS report, even with the rate technically falling on a participation quirk, is the kind of data that may reopen the door for market participants to think about rate cuts rather than hikes.

What To Watch This Week

Earnings

Economy

Market Trading Update

The S&P 500 finished at 7,757.64, up 3.6% on the week and at a record close. The index sits 3.5% above its 50-day moving average near 7,488 and 10.0% above a rising 200-day average near 7,045. RSI(14) closed at 66.0, which is firm but still shy of the 70 overbought threshold. MACD remains above its signal line with the histogram widening to +3.3.

What happened here matters more than the level, and I want to reiterate an analysis from this past week because of its importance.

From early June, the market did not fall, but went sideways. This is crucial to understand because an overbought tape corrects one of two ways. It can either drop in price or work off the excess over time. This current cycle chose time. Eight weeks of chop reset momentum without breaking the trend. Tuesday’s record close at 7,736.52 confirmed buyers had finally absorbed the overhead supply. Friday extended it on the jobs print, and volume confirmed the move rather than contradicting it. That is what separates a real breakout from a squeeze.

So the obvious question is whether you chase a market at record highs. History argues against the fear. Going back a decade, we count eleven prior cases where the S&P broke to a new high after at least two months without one.

The downside is what surprises people. The worst 12-month outcome in that group was a 2.8% dip, compared with a 21% drawdown for the worst year following a random day since 2016. Carson Group’s work dates back to 1957, and it lands in the same place: stocks are higher a year after a new high roughly 71% of the time. New highs beget new highs FAR more often than they ring the bell at the top.

None of that even remotely suggests abandoning discipline. We are extended, and the markets are not cheap. The index runs 10% above its 200-day average into a historically soft August-to-October window, and breadth is thinning again. In our equity models, we are staying long the trend and holding cash for the pullback that eventually arrives. If you are trying to add money into the markets, do that on weakness toward the 50-day, not on strength into round numbers.

The level that matters is 7,736.52. That was Tuesday’s breakout close, and a decisive move back below it would turn this from a confirmed breakout into a fail

The Week Ahead

With the weak BLS report dampening the odds of a September rate hike, traders will be looking at this week's CPI and PPI reports for more evidence as to what the Fed may do. The CPI and PPI headline rates are both expected to show a small 0.1% gain. Those follow -0.4% and -0.3% respectively last month. Assuming the data come in at or below estimates, the Fed's case for hiking rates will be greatly diminished.

Retail Sales on Friday will be interesting as wage growth continues to decline, as shown below. Last month's retail sales were relatively weak compared to the prior four months. Based in part on weak wage growth in the BLS report, estimates are for a small 0.1% increase. This too would support the case to avoid a rate hike.

Sound Money: Be Careful What You Wish For

A return to sound money has become the rallying cry for a growing crowd of investors, politicians, and commentators who are, understandably, fed up. Fed up with deficits that never shrink, with a national debt north of $39 trillion, with a dollar that buys a little less every year. The pitch is elegant. Back the dollar with gold again, and you force Washington to live within its means. I get the appeal. I’ve spent years in these pages warning about the debt and deficit trajectory myself. But there’s a problem with the prescription, and it’s a big one.

The problem is NOT the diagnosis, which is largely correct. The problem is the medicine: applied to a $30 trillion economy wired the way ours is, it would likely trigger the very collapse it claims to prevent. Let me walk through why.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post BLS And ADP Reports Take Rate Hike Off The Table appeared first on RIA.

🔎 At a Glance

• AI Narrative Risk: The Hyperscaler Story Changes Again
• Market Brief & Technical Review
• From Lance's Desk: Sound Money: Be Careful What You Wish For - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Weak Jobs Data Fuels Rally

The week the labor market cracked was the week stocks had their best run since April. Friday’s close of 7,757.64 on the S&P 500 set a record, up 3.6% over five sessions. The Nasdaq Composite gained 5.2% to 26,690.62, and the Dow added roughly 3% to 54,036.93. Small caps kept pace, with the Russell 2000 proxy up 3.6%. That is two straight weekly gains, and it is the first close above 7,700 in the index’s history, and it arrived in the very week that delivered the worst payroll print in years, which is the kind of contradiction that usually resolves badly for whoever assumes it simply continues.

In July, the economy shed 23,000 jobs against expectations of a gain of nearly 83,000. The unemployment rate then fell to 4.1% rather than holding at 4.2%. Don't overlook those two numbers; read them together, and you get the real story. Unemployment did not drop because hiring improved. It dropped because the labor force shrank again. Participation slipped to 61.4%, down 0.7 percentage points this year, as roughly 1.4 million people simply left.

Interestingly, the markets did not care about the mechanism, but rather about the fact that a September rate hike was taken off the table. That matters more than it sounds. The Fed held on July 29 by a 9-3 vote, with Hammack, Kashkari, and Logan all dissenting in favor of an increase. It was the most divided decision since 2016. On Thursday, a rebound in crude prompted desks to openly debate an autumn move; however, by Friday morning, that debate was over. Futures still carry a hike in 2026, though not before December.

Leadership was narrow and violent, with Technology gaining 7.2%. Semiconductors did even better, with the iShares and VanEck chip funds up 7.6% and 7.8%, a full reversal of the memory-led damage from the prior month. Energy fell 3.4% as crude dropped nearly 9% on renewed Iran diplomacy. Utilities lost 1.7%. Gold was the quiet standout at 7.3%, running on the same rate-cut arithmetic that lifted equities. The dollar slipped, and volatility collapsed.

One caution worth carrying into the week. The cap-weighted index beat its equal-weighted twin by about 115 basis points, so the same handful of names is doing the lifting again. Watch the macro thread: the softening labor market is bullish only as long as inflation cooperates, and Wednesday’s CPI is the first real test of whether that condition still holds.

📈Technical Backdrop - Breakout Confirmed, Momentum Extended

The S&P 500 finished at 7,757.64, up 3.6% on the week and at a record close. The index sits 3.5% above its 50-day moving average near 7,488 and 10.0% above a rising 200-day average near 7,045. RSI(14) closed at 66.0, which is firm but still shy of the 70 overbought threshold. MACD remains above its signal line with the histogram widening to +3.3.

What happened here matters more than the level, and I want to reiterate an analysis from this past week because of its importance.

From early June, the market did not fall, but went sideways. This is crucial to understand because an overbought tape corrects one of two ways. It can either drop in price or work off the excess over time. This current cycle chose time. Eight weeks of chop reset momentum without breaking the trend. Tuesday’s record close at 7,736.52 confirmed buyers had finally absorbed the overhead supply. Friday extended it on the jobs print, and volume confirmed the move rather than contradicting it. That is what separates a real breakout from a squeeze.

So the obvious question is whether you chase a market at record highs. History argues against the fear. Going back a decade, we count eleven prior cases where the S&P broke to a new high after at least two months without one.

The downside is what surprises people. The worst 12-month outcome in that group was a 2.8% dip, compared with a 21% drawdown for the worst year following a random day since 2016. Carson Group’s work dates back to 1957, and it lands in the same place: stocks are higher a year after a new high roughly 71% of the time. New highs beget new highs FAR more often than they ring the bell at the top.

None of that even remotely suggests abandoning discipline. We are extended, and the markets are not cheap. The index runs 10% above its 200-day average into a historically soft August-to-October window, and breadth is thinning again. In our equity models, we are staying long the trend and holding cash for the pullback that eventually arrives. If you are trying to add money into the markets, do that on weakness toward the 50-day, not on strength into round numbers.

The level that matters is 7,736.52. That was Tuesday’s breakout close, and a decisive move back below it would turn this from a confirmed breakout into a failed one, which is the single scenario that would change how we are positioned. Ride the trend. Keep your stops honest.

🔑 Key Catalysts Next Week

Two questions dominate the week, and the second only matters because of the first. July CPI lands on Wednesday, and it arrives amid a visibly deteriorating labor market. That combination is the whole ballgame for the markets. If the print is cool, the Fed sits still and validates the rally that Friday’s payroll miss set off. A hot one revives the three dissenters who wanted a July hike and forces the market to price in stagflation rather than a soft landing.

However, it isn't the headline print that matters; it's the core reading. Headline CPI will move with energy, and crude just fell nearly 9%. That flatters the print for reasons unrelated to underlying price pressure. Shelter and services are where the signal lives, and the signal is in the core reading.

PPI follows on Thursday, and retail sales on Friday. They answer whether consumers are still spending as employment shrinks. Again, instead of the headline numbers, watch the control group, which feeds into GDP. Weekly claims on Thursday now carry more weight than usual. A second soft labor reading inside the same week would harden the case that July was a trend rather than a stumble.

Two other threads remain unresolved, with the Strait of Hormuz still at issue. Thursday night brought reports of explosions tied to Iranian interceptions. The oil move that helped equities this week can reverse on one headline. The FOMC minutes land the following Wednesday, and after a 9-3 split, they will be read closely for how close the hawks came to winning.

Earnings thin out to the AI supply chain. Cisco reports after the close midweek, the tape’s bellwether for AI networking, where we will be watching for margin compression rather than demand. Applied Materials reports on Thursday after the close and is the more consequential print because it is where hyperscaler capital spending ultimately lands. The China revenue mix is the cleanest read available on export-control drag. CoreWeave reports early in the week, and after a 40% drawdown, it is the sharpest live test of whether the neocloud backlog actually converts.

Need Help With Your Investing Strategy?

Are you looking for comprehensive financial, insurance, and estate planning services? Need a risk-managed portfolio management strategy to grow and protect your savings? Whatever your needs are, we are here to help.

💰 AI Narrative Risk: The Cost Of Trading The Story

Two weeks ago, in The AI Capex Bill Comes Due, we closed the week at 7,411.98 with an AI capex scare and an oil shock against us. Last week, we asked whether the momentum crash was over. On Tuesday, the S&P 500 closed at 7,736.52, its first finish above 7,700. This morning, July payrolls printed at -23,000, against expectations of +83,000. Almost nothing about the underlying businesses changed across those sessions. However, the AI narrative story changed twice. That gap is the subject of this piece because "AI narrative risk" has cost investors more this year than being wrong about AI ever did.

Let's dig into it.

Four Obituaries And Not One Funeral

First, let's start with the overall pattern, because it is the most useful thing here. Over the last roughly eighteen months, the market has written the AI narrative's trade obituary four separate times. Each obituary was intelligent and written by serious people who argued with one another with real evidence, from a widely cited MIT study to a $1.1 billion options position. Each one produced a violent repricing inside the AI complex that never became a market event.

Look at the pattern rather than any single row. Each time, the claim changes, whether it was the models are too cheap to justify the chips, to an enterprise that would never pay, to fake accounting, to stretched balance sheets. However, the shape never changes. Something inside the complex gets destroyed, and the index goes on to make new highs.

Retail Bought The Story And Sold The Stocks

Here is what turns this from an intellectual exercise into a P&L problem. Scott Rubner’s team at Citadel Securities tracks retail order flow, and their July data is the cleanest illustration of narrative risk I have seen this cycle.

Read those rows together. Separately, they look like a sentimental story, and together they describe the single most expensive mistake available to an investor this year, which is being right about a theme and wrong about which part of it you own. Through May and June, retail aggressively accumulated semiconductor and memory names on the narrative that the infrastructure layer captured the value. In the final week of July, they sold those same names at more than five times the previous record. Days later, the hyperscalers rose between 4.6% and 6%, and the index closed at a record.

They were not wrong about AI, but they were wrong about WHERE twice, and the second mistake landed at the point of maximum discouragement. That is what a narrative does to a portfolio. It tells you what to own without telling you what you are paid to own it.

This past week supplied the epilogue. SanDisk and Western Digital both reported beat-and-raise quarters on Wednesday night. Then on Thursday, SanDisk fell more than 6%, and Western Digital dropped 13%. Coming in, the two were up roughly 469% and 201% on the year. AppLovin lost nearly 20% on mixed results. The point here is that when a stock falls on a beat, the price is carrying the story, not the numbers.

What Was Knowable All Along

The frustrating part is that the July bear case was checkable while it was being made. The claim was that spending had decoupled from demand. So do the arithmetic. Microsoft’s commercial remaining performance obligation reached $678 billion. Alphabet’s cloud backlog reached $514 billion. Amazon’s reached $496 billion. That is $1.688 trillion of contracted revenue against roughly $725 billion of 2026 capital spending across the four largest hyperscalers.

The contracted book is 2.3 times the spending it must justify, and the duration is short. Microsoft disclosed a weighted average duration of 2.3 years, with the slice converting inside twelve months growing 37% year over year. Alphabet expects to recognize just over half of its backlog within 24 months. None of this required a forecast, just a reading of the disclosures instead of the headlines.

Andy Jassy told analysts that “the demand we already have for 2028 is striking.” The return question was equally testable. Here is the point. In theory, if AI workloads carried structurally worse economics, a rising AI mix would compress cloud margins. In reality, it did the opposite.

Where The Profit Actually Lands

So, here is where this whole AI narrative matters. The question we need to be asking, and understanding, is where the profit in an AI dollar actually ends up.

Pay very close attention to the chart above. Currently, the hyperscalers keep 29.7 cents of every dollar spent on AI. Conversely, the entire chip and equipment complex retains 26.1 cents in combined revenue, while the neoclouds retain only 0.3 cents.

That split has been roughly stable through all four narrative cycles, which is precisely what makes it useful. Through Tuesday, Micron was up nearly 700% over twelve months while Meta was down 25% and Microsoft 6%. Think about that, for the last eighteen months, the market bid up the 26 cents and discounted the 30 cents.

The Next Narrative Is Already Forming

Before you run out and do anything, let's analyze both sides of the debate. Everything above supports a conclusion that is rapidly becoming the new consensus; however, the “AI capex ROI is proven, own the hyperscalers” is also a narrative. If you look at our core portfolio, you will see that it also reflects the narrative we think is correct. At least for now. However, it is also the fifth story in eighteen months, and the previous four all felt obvious on the day they peaked. So we are watching this very closely.

While we are cautious, we are aware that the setup has genuinely improved. Citadel’s read is that:

• Positioning has normalized,
• Fundamentals matter again,
• Leverage has unwound, and
• Funding spreads are near 50 basis points over SOFR, down from a peak of 138 basis points.

We agree with that analysis, particularly, Information Technology now trades near 20x forward earnings, close to the first percentile of its one-year range and below its 23x ten-year average.

"July did not change the structural bull market. It reset it." - Scott Rubner, Citadel Securities Global Market Intelligence, Aug 3, 2026

Again, we agree with the mechanics, but we should add the following part. The same $1.5 trillion in semiconductor market value that came out can go back in, and 411 companies have now reported, with 87% beating, up from 82% a year ago. If semis re-accelerate, then “hyperscalers over chips” becomes the crowded trade, and the next reset takes whoever arrives late.

Bob Farrell’s Rule #9 exists for exactly this moment. When all the experts and forecasts agree, something else will happen.

What Should Investors Do Now

So what do you do with this? The answer is not to guess which story wins next. Everyone who tried that got whipsawed at least once, and the ones who used leverage are gone. Michael Lebowitz made the credit version of this point last week. Strip out Oracle, and the other four hyperscalers’ spreads have sat at or below the AA index since the start of 2025. The “carnage” applied one company’s story to four balance sheets that never shared it.

Three risks deserve naming.

• Memory costs are still climbing, which is what moved Amazon’s capex guide from roughly $200 billion to $220 billion. That pressure eventually reaches margins.
• Regulation is second, and underpriced. New York State has already imposed a moratorium on data-center construction, enough for Baird to cut Caterpillar to Hold in late July. Land and power were supposed to be the flexible part of the plan.
• The third is the labor market. A negative payroll print, with unemployment falling to 4.1%, signals a shrinking workforce, not a hiring boom, and ADP reported only 44,000 private jobs on Wednesday.

Cheaper money helps long-duration assets. However, a workforce that stops growing eventually reaches enterprise software budgets, and that is where much of the $1.688 trillion backlog is paid. Jamie Dimon warned on Wednesday that “margin debt is the highest it has ever been,” much of it carried under other names. FactSet shows incremental debt rising from 9% of capex in fiscal 2024 to 32% over the trailing year.

As portfolio managers, our job is to manage the risk of being wrong, and as such, our confidence is calibrated rather than absolute. Over the next 12-months, I think the profit-share argument wins. However, over 12 weeks, anything can happen, given that August through October is the weakest seasonal stretch of the year, breadth is thin, and this complex has repriced violently four times with no warning.

For now, we own the part of the chain where the cash lands, sized so no single story can hurt us. It is crucial to remember that narratives are free to change, and they change often. Your portfolio, however, is not.

🖊️ From Lance’s Desk

This week's #MacroView blog explores that while everyone wants the discipline of gold, almost no one has done the math on what getting it would actually cost.

Also Posted This Week:

• Hidden Debt: Is Our Hyperscaler Thesis Wrong - Part 2 - RIA - by Michael Lebowitz
• Bonds In Your Portfolio: Why Ditching Them Is The Wrong Move - RIA - by Lance Roberts

📹 Watch & Listen

The S&P 500 has broken out to fresh all-time highs after months of consolidation, triggering a new momentum buy signal. But after one of the strongest five-day rallies since April 2025, should investors keep buying or start taking profits?

Subscribe To Our YouTube Channel To Get Notified Of All Our Videos

📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market action this week vindicated the bulls, with the market hitting all-time highs. As we have noted previously, the out-of-favor Mag 7 stocks led the charge with momentum stocks lagging, and Energy faded as new hopes of an Iran resolution emerged. The market is now up over 13% YTD, with Technology up more than 30%

📐 Technical Composite: 86.38 - Bullish Overbought

The technical condition ticked up this past week as the Megacaps put in a strong run at the end of the week. The market is now overbought, and sentiment remains bullish for now.

🤑 Fear/Greed Index: 83.21 – Extreme Greed

Earnings reports from large-cap stocks pushed the market higher, bringing investor positioning and sentiment along with it. From a "how are investors positioned" perspective, investors remain very bullish on the market and show no real signs of concern.

🔁 Relative Factor Performance

We noted three weeks ago that "compression of factors has been evident...that clustering will shake itself out sooner than later, and the opportunity will be in which factors start to take the lead." That happened at the end of this past week with some of the Megacap names leading the charge. Magacaps continued to outperform this past week, along with Gold Miners, and Growth stocks are now overbought. With the market very bullish, we could see a rotation back to defensive positioning heading into September.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

NEW! MFBR Index: The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of August 7, 2026, with the S&P 500 at 7,757.64, the Money Flow Breadth Ratio (MFBR) stands at 75% and rising, versus 70% the prior week - a 10 percentage-point increase over the trailing four weeks. This places the indicator in extreme overbought territory (75% or higher). The raw breadth signal still reads BUY, but the MFBR is a contrarian indicator at extremes: readings this stretched have historically been followed by below-average forward returns, so the model treats this as a caution flag rather than a green light to add risk.

The model currently recommends reducing equity exposure to a target weight of 50%. Against your current equity weight of 63%, that implies reducing equity exposure by roughly 13 percentage points. The trim is driven by the contrarian grid rather than by weak breadth - the model takes profits into strength when participation reaches extremes.

Breadth this stretched is a profit-taking signal, not a chase signal. The model's message is to sell into strength, move down to the target weight, and reassess next week."

📊 Sector Model & Risk Ranges

This past week, the surge in Megacap and Technology related names, as well as Basic Materials, Gold, and Goldminers, back to very overbought and extended conditions. Take profits and rebalance risk particularly given the status of the MFBR indicator above.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post AI Narrative Risk: The Hyperscaler Story Changes Again. appeared first on RIA.

A return to sound money has become the rallying cry for a growing crowd of investors, politicians, and commentators who are, understandably, fed up. Fed up with deficits that never shrink, with a national debt north of $39 trillion, with a dollar that buys a little less every year. The pitch is elegant. Back the dollar with gold again, and you force Washington to live within its means. I get the appeal. I've spent years in these pages warning about the debt and deficit trajectory myself. But there's a problem with the prescription, and it's a big one.

The problem is NOT the diagnosis, which is largely correct. The problem is the medicine: applied to a $30 trillion economy wired the way ours is, it would likely trigger the very collapse it claims to prevent. Let me walk through why.

What "Sound Money" Really Means

"Sound money," in its purest form, is money whose supply a government cannot expand at will. Under a gold standard, every dollar is a claim on a fixed weight of gold. You can't print gold. So the government can't monetize its deficits, and the money supply grows only as fast as miners pull metal out of the ground, historically around 1.5% a year.

That constraint is the whole point. As Michael Bordo of the NBER puts it, the gold standard worked by "regulating the quantity and growth rate of a country's money supply." Spend more than you tax, and gold flows out, forcing austerity. There's no hiding the bill in a slow inflation tax that voters barely notice for years.

The intellectual heart of the argument is about trust. Fiat money asks you to trust that the people who benefit from printing will restrain themselves. History says they mostly don't. Ludwig von Mises and Friedrich Hayek built careers on this insight, and today's Bitcoin advocates have inherited it wholesale. The dollar has lost the better part of its value since the Federal Reserve was created in 1913. Savers, retirees, and anyone on a fixed income paid that tax quietly for over a century. When a gold bug calls fiat a slow-motion confiscation of purchasing power, they aren't wrong, and that steady erosion of savings is very real.

The erosion shows up most clearly after 1971, the year we cut the last tie to gold. A dollar back then buys roughly 12 cents' worth of goods today. We've dug into this before in our work on what dollar debasement really is and isn't. That slope is the gold camp's whole case in one line.

The Gold Standard's Real Record

Here's where the story gets complicated for the gold advocates. The classical gold standard, running roughly from 1870 to 1914, is remembered as an age of stability. It wasn't. It delivered stable prices over decades while inflicting violent year-to-year instability.

The numbers are unambiguous. Economists Bordo, Dittmar, and Gavin measured short-run price uncertainty under the gold standard against the modern fiat era. Under gold, the average short-run forecast error was 3.59%. Under the 1968 to 2001 fiat regime, it was 1.78%, roughly half. Their conclusion: "the gold standard actually produced less short-run price stability than did the fiat regime." Long-run stability bought at the cost of worse short-run swings is the trade you're actually making.

The instability wasn't just in prices. The gold-standard decades gave us the Panic of 1873, the Panic of 1893, and the Panic of 1907. In 1893 alone, roughly 500 banks failed. When a crisis hit, the gold standard tied policymakers' hands. There was no lender of last resort because stopping a run meant creating money that wasn't backed by gold.

Then there's deflation, the gold standard's quiet companion. British wholesale prices fell about 42% between 1873 and 1896. Falling prices sound great until you owe money. As Irving Fisher explained in 1933, deflation raises the real burden of every nominal debt, so debtors cut spending, and output falls. American farmers lived this. Their mortgages stayed fixed while crop prices collapsed. That's what William Jennings Bryan's "Cross of Gold" speech was about in 1896, a debtor revolt against hard money.

Look at the last two rows. Every gold-standard government that faced the discipline actually biting chose to break the link rather than take the pain. In other words, that tells you how durable any new gold standard would be.

Sound Money In A Modern Economy: Be Careful What You Wish For

Now for the arithmetic that ends most of these debates. The United States holds about 261.5 million ounces of gold, roughly 8,133 tonnes, the largest official hoard on earth. Gold trades near $4,120 an ounce as of July 11, 2026. That values the entire U.S. gold stock at around $1.1 trillion.

Our M2 money supply is about $23 trillion. Let's do the math. Therefore, to back it with the gold we own, you'd have to reprice gold at roughly $88,000 per ounce, more than 20 times today's price. Additionally, you could back only the narrow monetary base, and you still need gold near $22,000. However, if you back the entire federal debt, you're looking at $150,000 an ounce. There is no gentle way to get there.

That repricing would be the largest one-time wealth transfer in modern history, and much of it would flow to America's rivals. Russia and China have accumulated gold for years as a hedge against the dollar. A twenty-fold revaluation hands them the windfall.

Consider what a hard dollar does to trade. If the U.S. pegged to gold while the world stayed fiat, capital would flood into the hardest currency on earth, and the dollar would surge. A soaring dollar makes U.S. exports expensive and imports cheap, which widens the trade deficit rather than closing it. When Churchill put Britain back on the gold standard at an overvalued rate in 1925, British exports became uncompetitive, unemployment rose, and the pain helped trigger the 1926 general strike. Keynes wrote a whole pamphlet about the damage.

A purist will object that a true gold standard corrects itself. Gold drains out, prices fall, and exports get cheap again. That's true on paper. In practice, it runs through wage cuts, layoffs, and years of deflation, and only if every major economy plays by the same rules. Go hard while the rest of the world stays on fiat, and the capital just keeps coming.

How Money Actually Works Now

This is the part the sound-money pitch skips, and it matters most. Modern growth doesn't come from factories and workers alone. It comes from credit, and that credit system sits on an expanding pile of government debt.

U.S. Treasuries are the collateral that underpins nearly everything. They're the safe asset in repo, the ballast in money market funds, the foundation of the global dollar system. Yale's Gary Gorton has shown that the economy runs on a stable and growing supply of these "information-insensitive" safe assets. His research found the safe-asset share of total U.S. assets has held near 33% every year since 1952. That's structural demand, not an accident.

And that demand doesn't stop at our borders. The dollar is the world's money, as the chart below lays out. Cap the supply of dollars and Treasuries, and you don't just squeeze the U.S. economy. You starve the whole system of the collateral it runs on.

Here's the second-order effect nobody mentions. Gorton's work shows that when the supply of public safe assets runs short, the private sector manufactures substitutes, and those substitutes are fragile. The AAA-rated mortgage securities that blew up in 2008 were exactly that, private-label "safe" assets created to fill a Treasury shortage. As Gorton puts it, "the likelihood of a financial crisis is increasing in the ratio of private safe assets to public safe assets." Cap Treasury issuance under a gold standard, and you don't get discipline. You get a scramble for collateral and a deleveraging spiral.

The Money-Printing Fear Meets The Data

The sharpest sound-money fear is that fiat means endless printing and eventual hyperinflation. The reality is more boring. Money gets lent into existence, tracking the economy. Our M2 money supply sits near $23 trillion against a $30.8 trillion economy, so M2 runs about three-quarters of GDP. That ratio spiked during COVID and has been FALLING ever since. As we showed in "Why the Money-Supply-Growth Thesis has a Fatal Flaw" and the "Gold Bugs' Faulty Thesis on M2 and Inflation", money supply grows with the economy over time.

That doesn't let Washington off the hook. It now takes more than a dollar of new debt to buy a dollar of GDP, a point we detailed in our work on the debt and deficit problem. Strip that borrowed money out, and the picture turns brutal. Real growth net of debt ran solidly positive for decades, then collapsed into deeply negative territory. That's what the word deflation hides, because it sounds mild, like prices drifting lower, when the reality is that cutting off the debt doesn't just soften the economy, it shrinks it. You don't get deflation. You get a depression.

The Great Depression is the clearest evidence we have. Barry Eichengreen's landmark study "Golden Fetters" established the pattern that's now the mainstream consensus. The countries that abandoned gold earliest recovered fastest. Britain left in September 1931. The United States left in 1933. The "Gold Bloc" nations that clung on, led by France, stayed mired in deflation for years. Gold didn't cushion the Depression. It transmitted and deepened it.

France proves the mechanism. Douglas Irwin's research shows that France increased its share of world gold reserves from 7% to 27% between 1927 and 1932, then sterilized the inflows so it never expanded its money supply. That "gold hoarding created an artificial shortage of reserves and put other countries under enormous deflationary pressure." Irwin's counterfactual is stunning. World prices should have risen about 15% over that stretch. Instead, they fell 42%. Hard money didn't prevent the catastrophe; it was what manufactured it.

Why does no government run a gold standard today? The honest answer is revealed preference. Every country that ever had one abandoned it in a crisis and never went back voluntarily.

This isn't a conspiracy of central bankers who love to print. It's a near-universal judgment that a government facing a war, a bank run, or a pandemic cannot afford to have its hands tied to a mining constraint. The 2008 and 2020 rescues would have been flatly impossible under gold. Here, the reverse holds. When every government on earth quietly makes the same choice, it's worth asking what they see that the pamphlets miss.

Where Sound Money Advocates Have A Point

I don't want to strawman this. The gold camp is right about more than they're given credit for, and the strongest version of their case deserves a real answer.

They're right that fiat has enabled debasement. They're right that discretionary central banking has fueled boom-bust cycles, the dot-com bubble and the housing bubble being exhibits A and B. And the most serious academic version of their argument, made by economists George Selgin and Lawrence White, is that the gold standard's historical failures were caused mostly by central banks and bad regulation, not by gold itself. A gold standard paired with competitive free banking, they argue, could have supplied money far more elastically. That's a legitimate position, not a gold-bug tweet.

But here's the honest reframe that both sides usually miss. The real debate was never gold versus fiat. It's rules versus discretion. Gold is just one rule, and a rigid, deflation-prone one. There are better-designed rules on the menu. Milton Friedman proposed a fixed money-growth rule. John Taylor gave us the Taylor rule. Scott Sumner and the market monetarists argue for targeting nominal GDP. Each strips out central-bank whim without chaining the economy to the output of a gold mine.

One caution on the way there. Be skeptical of the claim that "real" inflation is secretly running 7% or more. That figure usually traces to ShadowStats, which isn't credible. It applies a fixed fudge factor rather than recomputing anything. The serious critique runs the other way. Back in 1996, the Boskin Commission found the CPI overstated inflation. The defensible point isn't a hidden inflation cover-up. It's that official indices miss asset-price inflation in homes and stocks, which is real and does widen the gap between the haves and have-nots.

No commodity is big enough because a reserve currency must be elastic. It has to expand and contract with a $100 trillion economy and backstop crises. Any commodity anchor sacrifices that. The gold bugs chase discipline. What they need is a rule.

The Smarter Bull Case: Remonetization, Not A Standard

The strongest version of the gold argument has quietly dropped the peg. It doesn't ask for a gold standard at all. It argues for "remonetization," a slow, evolutionary process in which gold regains monetary relevance as the neutral reserve and settlement asset, pushed along by fiscal strain, sanctions risk, and eroding trust.

That's a more serious thesis, and parts of it are simply true. Since the 2022 freeze of Russia's reserves, gold's appeal as the one reserve asset with no issuer and no counterparty risk is real. The dollar's share of global reserves has drifted from about 71% in 1999 to roughly 57%, while gold's share has climbed. At the margin, gold is remonetizing, and pretending otherwise would be dishonest.

Here's the flaw that runs through the whole case. Almost every argument in it proves that gold could go UP, not that gold becomes money. Rising reserve demand, a thin market meeting large flows, central banks diversifying, those are price arguments wearing a monetary-regime costume. A higher gold price and a gold-anchored system are different claims, and the case quietly swaps one for the other.

You see the sleight most clearly in the "shadow gold price" this camp loves to cite. Fully back the money supply with existing gold, and you get numbers from $20,000 to a quarter-million an ounce, depending on which measure of money you choose. We ran that same arithmetic earlier and landed in the same place. But that price only exists if someone actually imposes the backing, the very gold standard this camp swears will never come. You can't disown the peg and then bank the price target that only a peg produces. Pick one.

The clever workarounds don't escape it either. Revaluing gold on the books to "recapitalize" the state is an accounting entry, and the moment you spend it, you're monetizing an asset, which is money printing by another name.

Gold-backed bonds relocate the credibility problem rather than solve it, since a gold-indexed debt explodes in real terms if gold soars. Tokenized gold hands back the counterparty risk that bullion was supposed to remove. And the sweeping claim that fiat is a 54-year anomaly against 5,000 years of history skips an awkward fact: the real coordinated gold standard ran barely from 1870 to 1914, shorter than the fiat era it is meant to indict.

What A Gold Standard Would Do To Your Portfolio

Suppose Washington actually tried to return to a "sound money" regime. What happens to your money? The transition, not the steady state, is where the damage lives.

Gold is the obvious winner on paper, since the exercise revalues it many times over. Everything else gets harder because:

• A deflationary deleveraging would hammer equities and corporate credit as the debt superstructure shrinks to fit the metal.
• The surging dollar would punish U.S. multinationals and anything tied to exports.
• Long-dated Treasuries would benefit from deflation in yield terms, which is the debt-deflation dynamic Lacy Hunt has argued for years, but only if the government's solvency held through the transition, and that's a large "if" when you've just capped its ability to fund itself.

Here's the twist most gold bugs miss. That paper win assumes you can calmly hold the metal, and in a real dollar shortage, you can't. When everyone scrambles for dollars at once, gold is what gets sold to raise them, because it yields nothing and trades in a deep, liquid market. We saw a preview during the Iran shock: as oil spiked and emerging-market currencies buckled, central banks turned net sellers of gold, and Turkey swapped bullion for dollars to defend the lira. What people reach for in that moment is the dollar and short Treasuries, not the metal that supposedly protects them.

So what do you actually do with this? You don't position for a "sound money" gold standard that isn't coming. You position for the real trend. The debasement the gold camp warns about is a genuine long-run risk, which is why a sensible allocation carries some exposure to:

• Real assets and gold as insurance
• Favors quality balance sheets that survive a credit squeeze, and
• Respects duration as a hedge against deflation.

I'm reasonably confident in that framework over a full cycle. I'm far less confident about the timing of any given year, and I'd rather own the insurance before the fire than chase it during one.

The bottom line is this. The sound-money camp has diagnosed a real disease. Yes, the dollar does lose value. Deficits are real, and I'll keep saying so. But the gold standard is a nineteenth-century cure that has repeatedly failed at exactly the moments when a modern economy needs flexibility most. The discipline they want doesn't live in a metal bar. It lives in the political will to pursue responsible policy, and if we had that will, we wouldn't need gold to enforce it.

That's the harder conversation. It's also the only one that leads anywhere.

Sources

1. Bordo, Dittmar & Gavin, "Gold, Fiat Money, and Price Stability," NBER Working Paper 10171 (2003). nber.org/papers/w10171
2. Bordo, "Gold Standard," Concise Encyclopedia of Economics (Econlib). econlib.org/library/Enc/GoldStandard.html
3. Eichengreen, "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," NBER / Oxford University Press (1992).
4. Irwin, "Did France Cause the Great Depression?" NBER Working Paper 16350 (2010). nber.org/papers/w16350
5. Gorton & Ordonez, "The Supply and Demand for Safe Assets," NBER Working Paper 18732 (2013). nber.org/papers/w18732
6. Gorton, Lewellen & Metrick, "The Safe-Asset Share," NBER Working Paper 17777 (2012). nber.org/papers/w17777
7. Federal Reserve History, "Roosevelt's Gold Program" and "Nixon Ends Convertibility of U.S. Dollars to Gold." federalreservehistory.org
8. U.S. Treasury Fiscal Data, "Status Report of U.S. Government Gold Reserve." fiscaldata.treasury.gov
9. Federal Reserve H.6 Money Stock Measures; U.S. Bureau of Economic Analysis (nominal GDP); U.S. Treasury "Debt to the Penny."
10. U.S. Bureau of Labor Statistics, Consumer Price Index (CPI-U). bls.gov/cpi
11. World Gold Council, "How Much Gold Has Been Mined?" gold.org/goldhub/data/how-much-gold
12. White, "A Gold Standard with Free Banking Would Have Restrained the Boom and Bust" (SSRN); Selgin, "The Theory of Free Banking."
13. Boskin Commission, "Toward a More Accurate Measure of the Cost of Living" (1996). ssa.gov/history/reports/boskinrpt.html

The post Sound Money: Be Careful What You Wish For appeared first on RIA.

AMD and SanDisk (SNDK) delivered earnings beats this week, yet both stocks fell. AMD posted record revenue up 50% year over year, with data center revenue more than doubling. Its CEO Lisa Su said she expects "Data Center sales to accelerate in the second half of 2026." Guidance for the current quarter came in near Wall Street estimates, but it fell short of "whisper" expectations. Despite the seemingly good earnings, AMD shares initially fell by more than 8% and remain down by a similar amount a few days later.

SanDisk's earnings report was similar. Its EPS beat consensus by more than 12%, revenue grew by a whopping 372% year over year, and gross margins held at 78%. Shares still fell roughly 10%, because guidance for the coming quarter was slightly below the more bullish estimates.

The thread across AMD, SNDK, and other AI-related stocks is that investors are expecting absolute perfection not only in what happened but in guidance for what will happen. The market reactions to AMD and SNDK allow us to start focusing on Nvidia's earnings report, due August 26. If AMD's data center revenue can more than double and still disappoint, and if SanDisk's margins can hold at 78% and still disappoint, Nvidia's bar is set equally high. Nvidia guided Q2 fiscal 2027 revenue to approximately $91 billion, which would mark another 11.5% sequential increase and roughly 80% annual growth. We think NVDA investors will heavily rely on guidance including:

• Commentary on the Blackwell to its next-generation (Vera Rubin) ramp and any supply constraints that could lessen deliveries
• Forward capex commentary from its hyperscaler customers
• Revenue and Gross margin guidance

Nvidia will again test market sentiment. Can they exceed the incredible investors' demands and see a 10-15% surge, as MSFT and AMZN did, or will they struggle like AMD and SNDK?

What To Watch Today

Earnings

Economy

Fed Speakers

Richmond Fed President Tom Barkin speaks at 10:00 a.m. ET, ninety minutes after the payroll print. The Fed is not in its pre-meeting blackout period, with the next FOMC meeting scheduled for September 15 and 16.

Market Trading Update

Yesterday, we walked through the base rates behind the breakout to record highs, and why new highs tend to beget more of them. Today I want to flip the lens and ask what the options market is charging to insure that breakout. Implied volatility says remarkably little, and that gap is worth your attention.

The VIX closed Wednesday at 15.81. On July 29, it printed 20.66. That is a 23% collapse in five sessions, which fits the story of a tape that just absorbed two months of overhead supply, and had the largest 5-day advance since April 2025.

Here is the problem. Realized volatility went the other way.

Notice what happened underneath. While implied volatility dropped nearly five points, actual movement in the S&P 500 accelerated. Twenty-day realized volatility bottomed at 9.46 on July 28 and has since climbed to 14.34. In other words, on a ten-day window, realized volatility now sits at 17.77, which is almost two full points ABOVE the VIX.

So what? Well, it matters more than just looking at the index level in isolation. According to the CBOE's own educational material, the normal state of affairs is that expected volatility priced into S&P options tends to run at a premium to the volatility that actually shows up later. That premium is the compensation for underwriting somebody else's risk.

The problem is that it has now disappeared.

So why is index volatility this cheap? Dispersion. We flagged the mechanism back in July, when Goldman Sachs's volatility desk noted that one-month implied correlation had fallen to roughly its lowest level in twenty years. When individual names move hard in opposite directions, they cancel each other out at the index level. The surface looks calm while the water underneath is churning. Bob Farrell's ninth rule is the relevant one when everybody agrees the ride will stay smooth.

None of this is a sell signal, and I am not calling a top. The market trend remains intact, and as we noted yesterday morning, risk management is key for now. Make no mistake, while the recent action is bullish, the setup deserves respect. The index finished Wednesday roughly 9.7% above its rising 200-day moving average, and July's employment report lands this morning at 8:30 a.m. Eastern. Furthermore, we are just starting the weakest stretch of the calendar.

For now, we are maintaining our holdings and will likely rebalance our portfolios soon. What is different this week is the cost of protection. Remember, even if you are very bullish on the market, an umbrella is only useful if you carry it before the rain starts.

Amazon Crosses $3 Trillion, Bezos Sells $4 Billion

Amazon crossed $3 trillion in market capitalization Monday, becoming just the fifth company in history to reach that milestone. The move occurred after a strong earnings beat sent the stock up roughly 20% over two trading sessions. As the stock was crossing the $3 trillion milestone, Jeff Bezos filed to sell 15 million shares worth a little more than $4 billion. Shares fell slightly on the news of his sale. CNBC pundit Jim Cramer called Bezos' timing "a buzzkill."

The optics are worse than it appears. His stock sale falls under a SEC Rule 10b5-1 trading plan Bezos adopted in 2025, well before Amazon's stock crossed the $3 trillion threshold. Many executives use such prearranged, scheduled selling to avoid the appearance of market timing. Bezos' sale follows a prior sale of roughly $5.7 billion sold between late June and late July, bringing his recent total to about $10 billion. Measured against Amazon's 10.78 billion shares outstanding, the sales are a rounding error, and Bezos remains the company's largest individual shareholder by a wide margin.

Founders and senior executives at Nvidia, Meta, and Alphabet have also filed large share sales in recent months as AI-driven valuations reached new highs. The sales likely reflect routine diversification, but we must keep in mind executives know a lot more than we do about their companies and the industry. Could they be making a statement that valuations are too high?

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post AMD and SanDisk Set A High Bar For Nvidia appeared first on RIA.

Software stocks have taken a beating this year on fears that AI will erode pricing power across the industry. While the fear may be genuine for some companies, Palantir posted earnings that told a vastly different story. To wit, its CEO Alex Karp described Q2 earnings as "otherworldly." Palantir shares surged by nearly 30%, its largest single-day move in over a year. Its revenue jumped 93% year over year, led by U.S. commercial revenue growing 149%. Net income of $1.06 billion tripled the $327 million they earned last year. Guidance was equally encouraging as the company raised full-year revenue guidance, implying 82% annual growth, up from 71% just one quarter ago. As we share below, Palantir shares are still down 8% year to date even with Tuesday's price surge, although it has gained nearly 800% over the last three years.

During the Palantir earnings conference call, Karp called out fears that "the artificial intelligence software trade is running out of steam." His rebuttal is a direct dig at the market’s bear case for software stocks. If frontier AI labs like OpenAI and Anthropic and free open-weight Chinese models keep closing the capability gap, why would enterprises keep paying for the software layer in between? Karp's answer:

Demand for AI sovereignty has now been unleashed; enterprises want to run AI on their own terms rather than routing sensitive data through outside model providers. Further, "their competitive advantage should never become the training data for future models.

His points boil down to the security of internal knowledge for AI users. To wit, every prompt a company sends to an outside lab risks teaching that lab's model something a competitor could benefit from. Palantir’s earnings, guidance and market reaction alone don't settle the debate about the value of software in the AI world. But this large earnings beat by Palantir, with such negative sentiment for the industry, may get some bearish investors to rethink their thesis.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we covered the hyperscaler catch-up trade that pushed the S&P 500 back to new record territory. On Wednesday, the index confirmed the breakout on a momentum buy signal. The S&P broke out of a two-month consolidation, closed Tuesday at a record 7,736, and the MACD crossed back above its signal line.

Here's what matters about that combination. Since early June, the market has not fallen. It went sideways. As I've noted before, an overbought tape corrects one of two ways. It can drop in price, or it can work off the excess over time. This one chose time. Eight weeks of chop reset momentum without breaking the trend, and the push to new highs tells you buyers have finally absorbed the overhead supply.

So the question I keep getting is the obvious one. Do you chase a market at record highs, or is the easy money already behind us?

History argues against the fear. Going back through the last decade, I count eleven prior cases where the S&P broke to a new high after at least two months without one. The forward returns didn't just hold up, they beat the average day at every horizon. A month later, the index was up about 1.9% on average and green in nine of eleven cases. Three months out, up 4.5% and higher in ten of those eleven. Six months, up better than 7%. A year later, north of 16%.

The downside is what surprises many investors. The worst twelve-month outcome in that group was a 2.8% dip. Compare that to a random day since 2016, where the worst year ahead was a brutal 21% drawdown. The bottom line is that breakouts to new highs, after a long consolidation, didn't mark tops, but rather a continuation, with far less tail risk than the tape carries on an average day.

This isn't a small-sample quirk, either. Carson Group's work dates back to 1957 and lands in the same place. Stocks are higher a year after a new high roughly 71% of the time, and when the market climbs out of a long stretch without records, it is up 12 months later in 12 of 13 cases. New highs beget new highs FAR more often than they ring the bell at the top.

None of this is a license to abandon discipline. The index now sits about 10% above its rising 200-day average with RSI in the mid-60s, so we're extended, not cheap, heading into a historically soft August-to-October window. In the Equity models, we're staying long with the trend, but we will trim stretched winners back toward target weight soon, and we still sit on ample cash for the pullback that eventually comes. Ride the breakout, but keep your stops honest.

Manufacturing Rebounds

The ISM Manufacturing PMI jumped to 55.6 in July, up 2.3 points from June, making it the highest reading in four years. It easily beat the 53.9 consensus estimate. The details are equally optimistic.  Four of the five subindexes accelerated, led by Production, which surged 6.3 points to 58.5, its strongest reading since late 2021, and Order Backlogs, which climbed to 55, up 4.5 points. Most notable, the Employment Index jumped to 52.8 from June's 49.7, the first reading in expansionary territory in nearly three years. Sixty percent of those surveyed reported their companies are actively hiring. Fifteen of 18 manufacturing industries grew in July, with only Chemical Products contracting. Not only was the data good, but so was the breadth.  

As encouraging as the ISM manufacturing report is, some context is warranted. Manufacturing accounts for only about 10% of GDP, while services play a significantly larger role at 70%.  Unfortunately, the services sector data has not been nearly as robust. June's ISM Services PMI was 54%, down from 54.5% in May, and its Employment Index, while back in expansion at 51.2%, only recently emerged from four straight months of contraction. Manufacturing's rebound is genuinely encouraging, but a sector one-seventh the size of services cannot carry the labor market on its own; Friday's jobs report will tell us which story is closer to the truth.

Hidden Debt: Is Our Hyperscaler Thesis Wrong? Part 2

CDS spreads and bond yield spreads are the market’s real-time judgment on default probabilities. The market’s assessment is based on all available information. This includes SEC-required financial statements, which include data like on-balance-sheet debt, cash flow, and leverage ratios. However, bond investors are not stupid, so they seek out any other data, including off-balance-sheet obligations, that may affect a company’s credit standing.

Thus, the market’s verdict on a company’s credit as shown by CDS and bond yield spreads incorporates the off-balance-sheet obligation concerns that Nikkei raises in its article.

The reason Oracle’s spreads are widening rapidly while Microsoft’s, Amazon’s, Alphabet’s, and Meta’s are relatively calm is that Oracle’s reported balance sheet is extremely stretched. Their off-balance-sheet obligations complete the story we told in Part One.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Palantir Earnings Provide Hope For The Software Sector appeared first on RIA.

Having just published Carnage In Hyperscaler Credit, a reader pointed us to an article from Nikkei Asia titled "Five US Tech Giants’ Hidden Debt Soars To $1.65tn On Opaque AI Funding.” He asked if the article and its claims that off-balance-sheet obligations at Alphabet, Microsoft, Amazon, Meta, and Oracle have grown roughly eightfold in four years to an estimated $1.65 trillion change our opinion from what we just wrote.

To recap, in Part One, we opened with a chart showing hyperscaler credit default swap spreads jumping, or as some claim “exploding,” from 115 to 162 basis points. While the graph is eliciting fear in some investors, we concluded the brewing credit concerns are overwhelmingly an Oracle story. Oracle's five-year CDS spread has jumped from below 50 basis points to roughly 200, its debt-to-equity ratio sits near 4x, and its bonds are trading like junk bonds despite an investment-grade rating.

By contrast, Microsoft, Amazon, Alphabet, and Meta have debt-to-equity ratios between 0.18x and 0.51x, credit ratings firmly in the AA to AAA tier, and credit spreads that have remained relatively flat and at levels at or below the broader AA-rated bond index. Our conclusion was that the graph overstates the risk embedded with four of the five hyperscalers.

Nikkei Asia’s reporting of hyperscalers’ hidden debt doesn't change our conclusion, but it does complicate it as we will explain.

Hidden Debt Structures

Nikkei's analysis traces the $1.65 trillion in off-balance sheet obligations to three main mechanisms: long-term data center lease commitments, GPU supply contracts structured as take-or-pay obligations, and joint venture or special-purpose-vehicle financing arrangements.

• Long-term data center lease commitments: A hyperscaler leases a data center that was built to their specifications rather than buying and financing it directly on their balance sheet. Because the commitment is an operating lease, the payment obligation is reported in the footnotes of the financial statement rather than as a line item on its balance sheet.  
• GPU supply contracts structured as take-or-pay obligations: A hyperscaler commits to pay for a set volume of GPU chips, whether it uses them or not. It's a binding future cash obligation, but it isn't a loan, so it doesn't show up as debt on the balance sheet.
• Joint venture or special-purpose-vehicle financing arrangements: Unlike a straight lease, where the hyperscaler is solely a tenant, here the hyperscaler helps create a special-purpose financing vehicle (SPV), often with a private credit or private equity partner. The SPV borrows money and builds the data center, and the hyperscaler signs a long-term contract to use it. The debt sits on the SPV’s books, not the hyperscaler's, so it doesn't negatively impact the company's leverage ratios. However, the hyperscaler's payments are binding, and the relationship is more involved than a simple rent payment like in the first bullet point.

Hidden Hyperscaler Debt

The distribution of hidden off-balance sheet debt for the five hyperscaler companies is uneven. The following data is pulled from their respective SEC filings. The $1.65 trillion figure for off-balance-sheet obligations that Nikkei reports is nearly identical to what we found in their SEC filings as follows:

Meta

Meta’s off-balance-sheet obligations are estimated at roughly $420 billion, nearly three times its approximately $140 billion in disclosed on-balance-sheet debt.

Oracle

Oracle's hidden debt is reported at roughly $273.3 billion. This reinforces our original thesis on Oracle. The off-balance-sheet debt stacked on top of the roughly $130 billion in on-balance-sheet debt makes Oracle’s debt problem even more concerning and helps us appreciate why the bond market trades its debt at yields similar to junk-rated bonds.

Alphabet

Alphabet has a very low debt-to-equity ratio of 0.18. However, its most recent 10-Q discloses $75.6 billion in leases not yet commenced and $332.4 billion in purchase and other contractual commitments, a total of roughly $408 billion, including roughly $30 billion in equity-derivative structures.

Microsoft

Microsoft's recent SEC filings disclose $196.6 billion in leases not yet commenced, primarily for data centers, plus a separate contractual-obligations table showing roughly $32 billion of construction commitments and $110 billion of purchase commitments. Combined, Microsoft's total comes to approximately $338.7 billion. Microsoft is one of only two companies rated AAA.

Amazon

Amazon has $106.35 billion in leases not yet commenced and $103.77 billion in unconditional purchase obligations, adding up to roughly $210 billion, the smallest of the five hyperscalers in absolute terms.

The graphic below shows the composition of the $1.65 trillion in off-balance-sheet obligations for the five big hyperscalers.

On and Off- Balance Sheet Financial Ratios

To help us do a complete analysis of the five companies' on- and off-balance-sheet obligations, we present the graph below.

In Part One, we showed that Oracle bonds were trading on par with junk-rated debt. The graph above, showing it has an on- and off-balance-sheet debt-to-equity ratio over 10x, justifies the bond market’s assessment of Oracle’s credit situation.  Not nearly to the same degree as Oracle, but Meta’s debt-to-equity ratio increases substantially from .36 to 2.08 when we include hidden debt. The ratio for the other three, Alphabet, Microsoft, and Amazon, hover around 1.00. For reference, consider that the average debt-to-equity ratio for the S&P 500 has recently ranged between 0.75 and 0.95. However, that is not a fair comparison as the S&P 500 average does not include off-balance-sheet obligations.

Why Off-Balance-Sheet Obligations Don’t Change Our Verdict

CDS spreads and bond yield spreads are the market's real-time judgment on default probabilities. The market’s assessment is based on all available information. This includes SEC-required financial statements, which include data like on-balance-sheet debt, cash flow, and leverage ratios. However, bond investors are not stupid, so they seek out any other data, including off-balance-sheet obligations, that may affect a company’s credit standing.

Thus, the market’s verdict on a company's credit as shown by CDS and bond yield spreads incorporates the off-balance-sheet obligation concerns that Nikkei raises in its article.

The reason Oracle's spreads are widening rapidly while Microsoft's, Amazon's, Alphabet's, and Meta's are relatively calm is that Oracle's reported balance sheet is extremely stretched. Their off-balance-sheet obligations complete the story we told in Part One.

What to watch

Three things would tell us whether off-balance-sheet debt at Meta, Microsoft, Amazon and Alphabet are becoming a bigger problem for them and the broader financial markets.  

• Whether rating agencies begin incorporating off-balance-sheet AI commitments into their leverage calculations. So far, Moody's and S&P have continued to rate hyperscalers on the strength of their reported balance sheets. If that changes, credit spreads could widen on concerns of ratings downgrades.
• Whether these lease and supply obligations start showing up as impairments or restructuring charges. A take-or-pay GPU contract becomes a problem if the compute capacity it locked in goes underused. That may raise the specter that they overinvested in compute capacity, and AI-related revenue may not be ample to fulfill its debt obligations.  
• Whether more hyperscalers follow Alphabet's Blackstone model.  Alphabet’s joint venture with private capital moves risk off the balance sheet, but it doesn't make the risk disappear; it relocates it to private credit investors, who are already facing scrutiny over AI-linked exposure.

Summary

Part one's conclusion largely stands. Today's “exploding” CDS spreads and bond yields are pricing an Oracle problem, not a problem with the other four hyperscalers. But Nikkei's reporting is a useful warning that a growing share of the AI buildout is being financed through structures that don't show up in traditional debt ratios.

It's worth reminding you that bond yields price in default odds and not necessarily profit growth as the stock market does. Thus, hyperscaler investments may prove to be poor, which would weigh on their stock prices. But for bondholders, the analysis is whether they have ample cash flow from all revenue sources to pay their obligations.

Again, our thesis remains largely unchanged. Accordingly, we think it's appropriate to end Part Two as we did Part One:

The question investors should be asking isn't whether Oracle is an outlier. It clearly is. The question is whether Oracle is a preview of what happens to credit markets more broadly if AI capital spending keeps outrunning AI revenue.

The post Hidden Debt: Is Our Hyperscaler Thesis Wrong – Part 2 appeared first on RIA.

According to A Statistical Revamp Is About To Lower Inflation by The Wall Street Journal, the Bureau of Economic Analysis (BEA) is reformulating its Core PCE calculation. The markets seem to focus on CPI as its inflation gauge, while the Fed often touts PCE as its key inflation indicator.

Economists expect the BEA's changes will lower the Core PCE by roughly two-tenths of a percentage point when the changes take effect with the August data reported in September. The changes target three PCE sub-categories:

• Software: the BEA currently borrows a BLS index that includes items like flash drives, whose prices are currently surging due to AI demand. In their logic, this distorts the reading with hardware costs that are unrelated to actual software inflation. The fix blends in videogame and web-hosting data. Per UBS economist Alan Detmeister, the change will lower PCE by about a tenth of a point.
• Investment management: the BEA is changing how it treats investment advisory fees. Currently, most investment managers charge a percentage of a client’s assets. Thus, when the stock market rises, advisory fees follow. Former Fed governor Stephen Miran has argued that rising fees on a bigger asset base reflect more service volume, not a higher price for the service. Per Alan Detmeister, this change could also reduce PCE by another one to two-tenths.
• Legal services: the BEA will now use data from the BLS PPI report instead of the BLS CPI report. This change will increase PCE inflation but not by enough to offset the other two.

The timing of the BEA action will draw scrutiny given that some pundits think the Fed should hike rates. Moreover, we suspect the media will ask if politics played a role in the reformulation. According to the Wall Street Journal, the changes won’t impact Warsh’s perception of inflation.

A few tenths of a percentage point won’t alter the big picture. Inflation has run well above the Fed’s 2% target for more than five years. The new Fed chairman, Kevin Warsh, has said he isn’t interested in splitting hairs, adding that he prefers to focus on how the inflation rate looks “to the left of the decimal point."

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we laid out the overview for SpaceX's earnings report. Today, I want to touch on something noted by JPM's Mark Schilsky, who argues the market is becoming increasingly convinced that hyperscaler AI capex is generating returns well in excess of its cost. This is a stark difference from the "AI Capex Is The Hyperscalers Waterloo" narrative.

The S&P 500 closed Monday at 7,600.50, up 1.48% and above 7,600 for the first time. The Dow set a record at 53,178.41. By Tuesday morning, the index printed a fresh all-time intraday high, its first since June 2. Now look at what carried it. Microsoft added 4.90%, Amazon 4.64%, and pushed through a $3 trillion market cap, Meta 6%, and Alphabet 4.9%. Nvidia managed 2.9%. The hyperscalers led. The chips followed.

That composition matters more than the index level, because this isn’t a new AI melt-up. It’s a catch-up trade. Over the past twelve months, three of the four hyperscalers trailed the chip complex badly, and two of them fell outright.

Meta is down 25.1% over the year, and Microsoft is down 6.1%, while Micron is up roughly 700%. For a year, the market paid a premium for the picks and shovels and charged the hyperscalers a discount for the privilege of buying them. Second-quarter results broke that. Not the capex guides, which went UP again at all four. The margins did it. AWS's operating margin expanded 520 basis points, excluding a one-off item, to roughly 39%. Google Cloud went from 20.7% to 35.6%.

Here is the part most coverage skips. Notice in the chart below where the profit in each AI dollar actually settles.

Hyperscalers keep 29.7 cents of every dollar spent on AI, more than the entire chip and equipment complex, which together keep 26.1 cents. Neoclouds keep three-tenths of a cent, which explains most of what CoreWeave’s chart has been saying. Bob Farrell’s Rule #9 fits the moment. When every desk agreed the spending was value-destructive, something else happened.

I’m treating this as a rotation to respect, not a green light. We continue to favor hyperscaler exposure over semiconductor exposure here, funded by trimming the most stretched memory and chip positions rather than by spending the cash buffer. Keep that buffer. August through October is historically the weakest three-month stretch of the year. Breadth is still thin, and one Hormuz headline reprices oil inside an hour. Add to the group collecting the profit, trim the group collecting the multiple, and manage risk at the line rather than after it breaks.

Two Bitcoin Woes: One Real, One Overblown

A firmware flaw in Coinkite's Coldcard hardware wallet (self-custody) has resulted in over $100 million in bitcoin being stolen from 5,200 addresses during the last few days. Coinkite has supposedly fixed the problem, but users who generated seeds under the vulnerable firmware remain exposed and must migrate to new wallets. This is an engineering failure worth taking seriously if you own a Coldcard, but it is a one-off vendor bug, and importantly, not a threat to bitcoin or to hardware wallets generally. That said, as we share in our Tweet of the Day, self-custody of bitcoin is proving more risky than holding it with traditional centralized custodians.

Strategy's latest move is the more structurally important story for bitcoin holders to consider. The company just sold 1,638 bitcoin, raising $104.7 million, its third sale in recent months. The action reduces its holdings to 842,138 coins, leaving it still the largest corporate bitcoin holder. Michael Saylor moved quickly to separate himself and his prior statements about never selling bitcoin from Strategy's decision:

When I say 'never sell your Bitcoin,' I speak as one saver to another. I have never sold mine. Not one satoshi. Strategy is a public company, not my wallet.

The latest bitcoin sale was used to help pay a $400.7 million preferred dividend. While selling to fund its leverage is not an indicator that Saylor or Strategy are having doubts about bitcoin's worth, it is the third consecutive break from Saylor's promise, one that helped build a hefty premium for Strategy a few years ago. The premium, as shown below, peaked in 2024 at 3.4x. It has since fallen steadily, now sitting well below 1.0x.

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post The BEA Is Reformulating Its Key Inflation Gauge appeared first on RIA.

The US Treasury bought Japanese yen last Friday and again Monday morning in its first coordinated intervention in the currency since 2011, following Japan's earthquake and tsunami. It is only the third such move since 1998. Treasury Secretary Scott Bessent confirmed the action: "Friday's coordinated foreign exchange actions countered disorderly yen movements," and pledged, "we will not hesitate to participate in further joint intervention." While the trades are small, the message is clear. The US and Japan will no longer tolerate further depreciation of the yen versus the dollar.

Before the intervention, the yen was trading at 40-year lows versus the dollar. In our opinion, Bessent isn't overly concerned about Japan's currency; it's likely rising yields in the US Treasury bond market driving his actions. Japan holds $1.15 trillion in Treasuries, making it the largest foreign holder on earth. Historically, when Japan defends its currency, it must sell its Treasuries to raise dollars to purchase yen, resulting in higher US yields. That helps explain one factor driving yields higher recently.

To help Japan accomplish these interventions, Bessent is pushing a little-known Fed tool, the FIMA (Foreign and International Monetary Authority) repo facility. The program allows nations to borrow dollars against their Treasury holdings instead of selling them.

We wrote a few articles and commentaries about the yen carry trade's importance to global liquidity and saw how yen intervention can greatly impact markets in August 2024. With this intervention, Bessent is trying to manage that risk preemptively and prevent one of the largest buyers and holders of Treasury debt from becoming a forced seller.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the market's technical backdrop, given last week's decline and the rally back above the 50-DMA. Today I want to stay on the AI trade but narrow it to the one name reporting Tuesday night, because the SpaceX lockup expiration turns this into the most lopsided setup on the board.

Let's anchor it in the actual tape. SPCX traded at $111.80 late Monday morning after printing a fresh all-time low of $104.83. That's 50.5% below its June 16 intraday high of $225.64 and about 17% under the $135 IPO price. Here's what most of the coverage misses. There is no 50-day moving average on this chart, and no 200-day either. The stock is 35 sessions old. Anyone showing you a long-term trend line on SPCX drew it from imagination.

So use what exists. The 14-day RSI sits at 35.9, soft but NOT washed out, and the price is 11.5% below its 20-day average of $126.38. The figure that matters more is the volume-weighted average price since the IPO, $158.46. On average, every share traded in this stock was bought 29% above today's quote. That is an enormous cohort of underwater holders stacked above the market.

Now the bar on Tuesday has to clear. Consensus expects roughly $6.8 billion in revenue, up from $4.7 billion in the first quarter, and a loss of nearly a quarter per share, with estimates ranging from negative $1.26 to positive $0.33. That spread tells you nobody has the cost base pinned down.

The segment split is the whole argument. Starlink connectivity is modeled at a 35.9% operating margin and carries the firm, while Space and the xAI-built AI division both lose money. Capex, meanwhile, is projected to climb from $48.7 billion this year toward $118 billion by 2028, and debt from $41.7 billion to $218 billion.

Then Thursday shows up. Roughly 911.5 million shares unlock on August 6, worth about $102 billion and more than the entire existing float. Michael laid out the valuation problem in Can SpaceX Fire On All Cylinders? near 100 times sales. The multiple has compressed since. The supply picture has not.

So is the decline an entry point? Not yet. The 50% drawdown in seven weeks suggests the supply of shares for sale remains high, and there are no technical signs of a bottom yet. We aren't underwriting a position in the Equity Aggressive Growth Model until this stock has a trend line to manage risk against and the August 6 supply has cleared. Let the float double, let the sellers finish, then price it. You forfeit the first bounce, but you also avoid catching a $102 billion distribution with your face.

Value Continues To Beat Growth

Value is overbought, and growth is oversold. The graphic below from the new "coming soon SimpleVisor.ai" shows that every value and small-cap factor is overbought, while every growth factor is oversold. The second graphic declutters the top graph to paint the same picture. Amazon and Microsoft, which both jumped by about 15% on earnings last week, shrank the wider divergence between growth and value. While the rotation has certainly benefited value and small cap stocks, the relationships are not stretched to the point that we should expect it to flip soon. Simply, this trend may continue to favor value over growth before a rotation toward large-cap growth and technology occurs.

Bonds In Your Portfolio: Why Ditching Them Is The Wrong Move

Lately, it seems like you can’t open a financial publication without stumbling across another article declaring the 60/40 portfolio dead. The pitch is everywhere: bonds are broken, the old rules no longer apply, and investors should modernize by swapping the bonds in their portfolio for Bitcoin, gold, or whatever alternative the asset management industry is currently selling.

Last October, CNBC ran a story on the rise of the “60/20/20” portfolio. The pitch was simple. A positive stock bond correlation has broken diversification, so investors should take half of the bond allocation and move it into gold and Bitcoin. Several strategists lined up to endorse it.

Well, now that 9 months are in the rearview mirror, we can price in just how valuable that advice was.

From the October 17 close through Friday, Bitcoin fell almost 41%. Gold slipped about 4%. The S&P 500, the very asset those investors were told to diversify away from, gained more than 12% over the same stretch, which means the hedge fell hard while the risk it was bought to offset went straight up. So the two “replacements” didn’t hedge anything. They just lost money.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Bessent Is Buying Yen In Support Of US Bonds? appeared first on RIA.

Leopold Aschenbrenner's Situational Awareness Fund turned $225 million into as much as $45 billion. Not bad for a 24-year-old with little experience. In June alone, his fund was up 439% year-to-date. Despite the rapid wild success, last Thursday the fund was forced to sell all of its public investments to satisfy margin calls. Furthermore, they are trying to sell remaining stakes in private holdings like Anthropic to raise cash. Some pundits estimate the fund fell by 90% or more as a result of excessive leverage primarily employed in the once-hot semiconductor and hardware stocks. Some of the large declines of his favored holdings are shown below, courtesy of Bloomberg. Bear in mind that a 40% decline in a stock with as much as four times leverage wipes out your entire equity and then some.

This event teaches investors two very important lessons.

First, leverage can greatly enhance your returns, but it can just as easily bankrupt you.

Second, investors must understand the difference between an investment and a bet. Aschenbrenner transformed an investment thesis that rested on outsized profits for AI infrastructure companies over many years into a short-term bet. His bet was not based on future revenue and profits but on the daily whims and sentiment of fickle momentum traders. He made fortunes when his holdings doubled and tripled, but like all parabolic price trends, they ran out of steam. His leverage, which produced amazing returns, ultimately sunk him and his investors.

What To Watch This Week

Earnings

Economy

Market Trading Update

The S&P 500 ETF (SPY) closed Friday at 747.03, up 0.72% on the session and 1.1% on the week. The number that matters is 744.99. That is the 50-day moving average, and Friday finished 0.27% above it after three sessions below. The index reclaimed its first line of defense on the last day of the month.

Reclaimed is not confirmed. Momentum snapped back hard, but the trend signals have not flipped. RSI(14) closed at 53.0, up from 38.7 on Wednesday, which is neutral rather than strong. Williams %R(14) sits at −32.3 after printing −98.6 on Wednesday, among the deepest oversold readings of the year. MACD remains below its signal line and below zero, at −0.80 against −0.02, though the histogram improved from −1.52 to −0.78. That describes a bounce inside a damaged trend.

Volume supports the move without validating it. Friday traded 60.8 million shares, 1.27 times the 20-day average, and the session ranged from 737.68 down low to 748.89 high before closing near the top of it. Buyers showed up on the dip. Twenty-day realized volatility is 12.4% annualized, still low, meaning the tape is pricing very little risk into a 19-year high in long rates.

However, as we have noted previously, we are paying attention to market breadth. The market-cap-weighted index beat the equal-weighted index this week, 1.1% vs. 0.7%, reversing the prior month’s pattern. Semiconductors fell 4.2% while the index rose. Micron lost 5.9%, and SanDisk lost 5.1% on Friday alone, while the S&P gained 0.7%. Leadership is still contracting, not broadening.

From a trading perspective, the 50-DMA at 744.99 is the pivot, and it sits 0.27% under Friday’s close. While the market reclaimed that previously broken support, it needs to maintain that recovery this week. If you added any positions on Thursday or Friday, you can set a stop just below the closing price. A close below opens the July 29 low at 729.10, and under that, the 200-DMA at 700.39 is 6.2% lower. To the upside, the June 2 record close of 759.57 is only 1.7% away, and I would trim into it rather than chase through it. A marginal new high on contracting leadership is a distribution setup, not a breakout.

Watch 744.99 at Monday’s open. Holding it keeps this bounce alive into the record high. Losing it tells you that Thursday and Friday were the rally to sell.

The Week Ahead

As we share below, the earnings calendar will start to lighten up after a busy few weeks. AMD will provide another angle on data center growth. Additionally, they may also provide some guidance that will be helpful for estimating NVDA's earnings later in the month.

The economic calendar this week is primarily focused on employment data. JOLTS on Tuesday, ADP on Wednesday, and the BLS report on Friday will be important indicators for the Fed. If the number of new jobs remains below 100k, the Fed has a key factor that, at a minimum, will cause them to pause before potentially raising rates in September. Also of note, PCE prices last Thursday showed the Fed's preferred inflation gauge fell by 0.1%, and the core PCE rose by 0.1%. Like CPI, the data is good, but it's only one month. The Fed will want more evidence to believe the worst of the recent inflation spurt is behind us. Furthermore, oil prices have since risen, thus the August inflation data may not be as friendly. The Fed will have two months of inflation and employment data to help them make its policy decision in September.

AI Bear Case: What Skeptics Get Right And Wrong

Here’s the problem with the way the AI bear case is usually discussed. The skeptics blur three separate claims into a single mood.

• The earnings are fake.
• The demand is manufactured.
• The spending will never earn a return.

Each one points to something real, but each one also gets stretched beyond what the evidence supports. Most notably, that often occurs in the same breath.

I’ve spent the better part of a year on this question. Last summer, I argued that the deficit narrative would find its cure in AI infrastructure. Then, last month, I stress-tested that thesis against Goldman’s research and conceded where my original multiplier math was too generous. So I’m not defending a permabull position here. I’m doing what my clients would want me to do: steelman the bear, then check the receipts. Let’s take the three in the order the skeptics usually make them.

READ MORE...

Tweet of the Day

New UPDATED Trading Rules With Desktop Printout

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Leverage Turned A Winning Thesis Into A Stupid Bet appeared first on RIA.

Lately, it seems like you can't open a financial publication without stumbling across another article declaring the 60/40 portfolio dead. The pitch is everywhere: bonds are broken, the old rules no longer apply, and investors should modernize by swapping the bonds in their portfolio for Bitcoin, gold, or whatever alternative the asset management industry is currently selling.

Last October, CNBC ran a story on the rise of the “60/20/20” portfolio. The pitch was simple. A positive stock bond correlation has broken diversification, so investors should take half of the bond allocation and move it into gold and Bitcoin. Several strategists lined up to endorse it.

Well, now that 9 months are in the rearview mirror, we can price in just how valuable that advice was.

From the October 17 close through Friday, Bitcoin fell almost 41%. Gold slipped about 4%. The S&P 500, the very asset those investors were told to diversify away from, gained more than 12% over the same stretch, which means the hedge fell hard while the risk it was bought to offset went straight up. So the two “replacements” didn't hedge anything. They just lost money.

The Argument Being Sold, And What It Costs

The case against bonds runs in four steps.

• Stocks and bonds now move together.
• That means bonds have stopped diversifying.
• Something has to fill the gap they left.
• And here, conveniently, is the product being sold to fill it.

Does that sound familiar? It should. The first step is always true; the rest just doesn't follow.

BlackRock's research notes that since 2020, bond returns have been negative in 17 of the 19 months when equities fell 2% or more, most recently in March 2026.¹ That figure is accurate. What I will point out is that the very same firm published a separate piece in late 2025 arguing that falling inflation volatility had pushed the stock-bond correlation back toward slightly negative, which is close to the opposite conclusion, drawn from the same data, within the same twelve months.²

Bob Farrell's Rule #9 covers this ground. When all the experts and forecasts agree, something else will happen. The “60/40 is dead” thesis is now close to unanimous across the sell side, and, for Wall Street, that narrative always arrives conveniently attached to a product they want to sell you. That combination is worth a second look before you act on it.

Correlation Tells You The Direction. Beta Tells You The Size.

In April, AQR's Cliff Asness, Dan Villalon, and Antti Ilmanen published a note whose title does most of the work. A positive stock bond correlation, they argue, is a terrible reason to add more equity risk to a portfolio.³

Notice what they did NOT say. They didn't say hold your bonds no matter what; rather, their claim is narrower and more useful than that: If a positive correlation has you questioning the allocation, then apply a high diversification bar to whatever you buy next.

Here's why the distinction matters so much. Correlation tells you whether two assets move in the same direction; however, it says nothing about magnitude. Beta tells you the magnitude, and it has a plain reading. An equity beta of 0.19 means each dollar you hold carries about nineteen cents of stock market exposure.

Now look at the five years ending February 28, 2026. Bonds carried a 0.53 correlation to the S&P 500 and a 0.19 equity beta. Bitcoin carried a correlation of 0.53. Identical. Its equity beta was 2.09.

Same correlation, ten times the equity risk per dollar. The gap comes entirely from volatility. Bitcoin ran at 60.4% annualized volatility over the period, compared with 5.6% for Treasuries, so an identical directional relationship translates into a wildly different amount of risk for every dollar an investor actually commits to the position.

"Every dollar you move from Treasuries to Bitcoin delivers roughly ten times as much equity risk. That's not diversification. That's doubling down and calling it modern portfolio construction." - RIA Advisors

What Each Bond Replacement Actually Delivered

Take a close look at the table below, which shows the relationship between various asset classes, often touted as a replacement for bonds, and the market itself.

Private credit has a 0.70 equity beta, more than 3x that of bonds. AQR reaches that figure using publicly traded business development companies as a mark-to-market proxy. That sidesteps the “volatility-laundered” reporting that makes the asset class look calmer than it is. The stress is surfacing anyway. Fitch's US private credit default rate hit a record 6.0% for the twelve months through April 2026, up from 5.7% a month earlier, and Fitch's June update had it still pinned at that record. ⁴

Buffer funds show a correlation of 0.98 and a beta of 0.63. They are equity products with options attached. AQR's work finds that they deliver less return than an equivalent-risk mix of stocks and cash, which rather defeats the purpose.

Bitcoin returned 25.5% annually over the period. That looks compelling until you adjust for the beta. Alpha came in at-1.3% with a t-statistic of -0.1, which, in plain English, means zero. In other words, you got paid for taking equity risk, but not for anything else, which is why Bitcoin doesn't belong in the bond bucket.

A Necessary Word About Gold

Gold is not in AQR's table. But it needs to be discussed because gold is often touted as a bond replacement. If inflation is the worry, that argues for inflation-sensitive assets rather than more equity; you are simply calling it a hedge to justify a poor rationale. I have no objection to a modest gold position, but gold pays you nothing and promises no return of principal.

Does gold belong in a portfolio? Yes, and that is an easy argument to make. However, gold belongs on the equity side of the ledger as a volatility damper, not in the bond slot.

Here's the part almost nobody quotes from that paper. AQR names two things that cleared their bar.

• Equity market-neutral strategies had a beta of 0.02, an alpha of 3.6%, and a t-statistic of 3.6.
• Trend following had a negative 0.22 beta and a 7.8% alpha.

Whether you want either one is a separate discussion for another day. The point is that genuine diversifiers exist, and none of the three assets marketed as a bond replacement qualifies as one.

The Strongest Case Against Me

As a portfolio manager, I run all types of portfolios from 100% equity to fully diversified to stock/bond allocations. The reason is that every client has different needs, goals, and, most critically, psychology, so matching the right portfolio to our clients is critical.

With that said, look again at the bond column in the table above. Over the five years ending February 2026, Treasuries returned an average of just 0.1% per year, with an alpha of negative 5.4% relative to equities and a t-statistic of negative 2.5. That is the only statistically significant negative alpha in the table. Worse than private credit. Worse than Bitcoin.

“But Lance, that's a brutal five years for the very thing you're defending.” 

You are absolutely correct. It has been, and anyone who tells you 2022 was a rounding error was not holding bonds in their portfolio at the time.

Morningstar's 150-year stress test makes a similar point from a different angle. Across the crashes during that period, a 60/40 portfolio suffered roughly 45% less pain than all equity in aggregate. However, there was just one singular exception - the 2020s. The 2020s produced the only crash in 150 years in which the 60/40 decline was both deeper and longer than all equity, and the mix didn't reclaim its prior high until June 2025.⁵

Then there is the tape in front of us. The 30-year Treasury closed the week above 5.2%, its highest since 2007. The 10-year traded at 4.73% on Friday, the highest in more than a year. An energy shock is running through the inflation data, and investors are openly questioning the Fed's resolve on inflation.⁶ AQR flagged this exact risk in a footnote, allowing that an oil shock and challenges to Fed independence could keep the stock bond correlation positive for longer than their base case. We should all take that seriously.

Here is the reality. Will bonds protect you from an inflation shock? No. Inflation damages stocks and bonds together, because neither asset likes it. That has always been true, it is well documented, and it is not a new discovery that invalidates fixed income.

What bonds protect you against is a growth shock. Those are a different animal, and the next recession will be one.

Why Own Bonds In Your Portfolio

Let's take a look at the fastest growth shock in modern history. Between February 19 and March 23, 2020, the S&P 500 fell 34.1%. Long Treasuries gained 14.1%.⁷ That happened not because of a favorable correlation coefficient, but because frightened capital in a genuine panic needs somewhere to go, and it goes to the deepest and most liquid market on earth.

The recovery math is what investors consistently underestimate. A portfolio down 24.7% needs a 33% gain to get back to even. However, a 52.6% decline requires a 111% recovery to return to the previous level. Bonds not only reduce losses but also shorten the climb back, and that difference compounds over the years of a retirement timeline.

Here is another crucial point for owning bonds in your portfolio, particularly if nearing retirement. Income is better today than at any point in two decades. The 10-year yields 4.68%, more than three times what it paid at the end of 2021. That is contractual cash flow rather than hoped-for appreciation, which means you aren't forced to sell equities into weakness to fund a withdrawal.

Lastly, there is the behavioral issue, which actually determines outcomes. DALBAR's 2026 study found that the average fixed-income investor earned 2.41% in 2025, while the Bloomberg Aggregate returned 7.30%, a gap of 4.89 percentage points. Investors pulled a record 2.30% of assets out in a single month, July 2025.8 Read that again. The asset class returned more than 7%, while the people who owned it captured a third of the return. They sold into the drawdown and bought back after the recovery, which is the same behavior that the stock-bond correlation debate is now encouraging on a much larger scale.

“Bonds and Bitcoin carried the identical correlation to stocks. One gave you nineteen cents of equity risk per dollar. The other gave you two dollars and nine cents. That isn't diversification, that is doubling down with better marketing.”- RIA Advisors

Why This Is A Poor Moment To Add Equity Risk

The Shiller CAPE closed in July at 41.4. Only one month in more than 140 years of recorded data carried a higher reading, and that was December 1999 at 44.2, which is another way of saying we sit within three points of the most expensive month in market history.⁹ The long-run median is near 16. We trade at better than two and a half times it.

Furthermore, market concentration compounds the issue. BlackRock's work puts the top 10 S&P 500 names at roughly 37% of total market capitalization, up from 29% in 2020 and 19% in 2010. The “diversified” index fund most investors think they own is a concentrated wager on a dozen companies.

A high CAPE is not a timing tool. Markets stay expensive for longer than reasonable analysis suggests, and I have watched that frustrate very good analysts for three decades. But valuation sets the price of your upside. When equities are already priced for close-to-perfect outcomes, further multiple expansion has a low ceiling, while a re-rating toward the historical mean has a long floor.

AQR's other finding lands squarely here. In 49 of the last 50 years, when the S&P 500 lost money, so did a standard 60/40 portfolio. Equity risk has always dominated portfolio outcomes. Correlation between stocks and bonds is a second-order variable by comparison. So the answer to a portfolio already saturated with equity risk cannot be to add more of it under a different label.

What This Means For Your Portfolio

For our clients, we will keep and manage the duration risk of the bond allocation. Not because bonds are exciting, and not because the past five years treated them kindly. We will keep them because they remain the cheapest insurance against the one scenario that does the most damage to a retirement plan: a deep equity drawdown that arrives early in the withdrawal phase.

If you own bonds in your portfolio, they should be sized to your circumstances rather than to a number somebody printed in 1952. Forty percent is not a law of nature. Your income needs, your time horizon, and your honest tolerance for watching a statement fall determine that figure.

Understand the limitation clearly. Duration protects you in a growth shock and hurts you in an inflation shock. If inflation is the risk that keeps you awake, the answer is inflation-sensitive assets and a shorter duration, not a 2.09 beta. I would rather own the honest hedge than the exciting one.

The positive stock bond correlation is real. It was also the norm more often than not between 1900 and 2000, which makes the current regime a return to form rather than a structural break. A positive stock bond correlation signals that inflation uncertainty currently outweighs growth uncertainty. That balance will shift again.

When it does, the investors who traded their duration for a 2.09 beta will discover what they actually bought.

Sources and Notes

1. BlackRock, “Rebuilding 60/40 portfolios with alternatives.” blackrock.com/us/financial-professionals/insights/60-40-portfolios-alternatives
2. BlackRock, “Bonds Starting to Offer More Diversification,” November 2025. blackrock.com/us/financial-professionals/insights/bonds-offer-more-diversification
3. Asness, Villalon and Ilmanen, “A Positive Stock-Bond Correlation Is a Terrible Reason to Add More Equity Risk to Your Portfolio,” AQR Capital Management, April 8, 2026. All correlation, beta, return, volatility, alpha and t-statistic figures in the table are measured over the five years ending February 28, 2026.
4. Fitch Ratings via CNBC, “Private credit defaults hit record high as interest rates soar,” May 21, 2026, and Fitch's June 15, 2026 update.
5. Morningstar, “150 Years of Stock and Bond Market Crashes: How the 60/40 Portfolio Held Up.” The 45% figure is Morningstar's aggregate measure across crashes, and the 2020s are their stated exception.
6. US Department of the Treasury daily yield curve, July 30, 2026, cross-checked against Friday's close as reported by CNBC and Yahoo Finance, July 31, 2026.
7. Calculated by RIA Advisors from daily closes, February 19 to March 23, 2020. Long Treasuries proxied by TLT, price return. Note that a figure of roughly 18% circulates for this window and does not replicate on this basis.
8. DALBAR, 2026 Quantitative Analysis of Investor Behavior, released April 17, 2026.
9. Robert Shiller's monthly CAPE series, July 2026 reading, cross-checked against YCharts and Multpl.

The post Bonds In Your Portfolio: Why Ditching Them Is The Wrong Move appeared first on RIA.