🔎 At a Glance

• September Market Weakness: The Setup Has Teeth
• Market Brief & Technical Review
• From Lance's Desk: AI Bears: Right About The Excess, May Be Wrong On The Trade - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - A Bond Scare

This was a decently boring week that ended just about where it began. The S&P 500 closed Friday at 7,718.60, up a rounding-error 0.1% for the week; however, that flat headline hid a decently bumpy five sessions. Stocks dipped early as oil spiked on fresh Middle East hostilities, recovered midweek when Fed Governor Chris Waller struck a dovish note, and yields eased, then handed it all back Friday when the August jobs report landed hot.

Strong payrolls should be good news, but not this cycle. The economy added 162,000 jobs in August, exceeding expectations of nearly 53,000, and the unemployment rate held at 4.1%. With Chair Kevin Warsh's Fed focused on taming inflation rather than cushioning the labor market, a strong number is the hawkish outcome, so traders promptly lifted the odds of a September rate HIKE to roughly 52%. "Good news is bad news" is back, and the tape traded like it. The split within the Fed only sharpened tensions, with Warsh pledging to tame inflation while Waller signaled he could hold rates if prices continue to cool.

The weekly market sector performance reflected the current market crosscurrents. The Nasdaq Composite finished at 26,506.99 and the Dow at 53,414.25, with the Dow off 0.2% on the week and the Russell 2000 essentially flat. Under the surface, this was a rotation week rather than a "broadening" one. Energy jumped 2.2% as crude surged more than 9% on Strait of Hormuz supply fears, and technology added 0.9%, but seven of the eleven sectors finished red, led lower by consumer discretionary at -1.9%.

However, it was interest rates that did the real work this past week. The 10-year Treasury yield pushed back to about 4.79%, near a three-year high, while the 30-year held above 5.2% and long bonds fell on the week. Gold also slipped as the dollar softened, and high-yield credit leaked lower.

Overall, it was the quiet kind of risk-off that rarely shows up in the index itself. As I flagged in Wednesday's Daily Market Commentary, the buyers who carried August are stepping back, and this week the tape proved it by stitching a flat index together from a shrinking handful of leaders while most of the market bled beneath.

Heading into next week, the focus will shift to next week's CPI and PPI reports. Those prints will decide whether Friday's hot jobs number really supports a Fed rate hike, or if those numbers just fade with the inflation data, because it, not the labor print, will set the Fed's hand into the September 16 meeting.

📈Technical Backdrop - Momentum Rolls Over, What Next?

So, what does that mean for investors heading into a holiday-shortened trading week? As noted above, Friday's close of 7,718.60 leaves the S&P 500 roughly 1% below its record of 7,796 and still comfortably inside its bullish uptrend. The market consolidation this past week certainly weighs on investor sentiment, but the index remains 1.8% above its rising 50-day moving average at 7,585 and 8.2% above its 200-day at 7,137. What does that mean? Well, on the surface, nothing is broken, but underneath, the momentum picture is turning. Furthermore, the risk/reward isn't compelling.

From a purely technical perspective, let’s start with the primary oscillators. The 14-day RSI reads 55.7, squarely neutral, but that reading has cooled from the high-50s. However, that leaves the index with no oversold cushion. With that said, there is downside risk into next week.

Furthermore, the bigger tell is the MACD, which rolled over and crossed below its signal line this week, the first real momentum warning the daily chart has flashed since the summer advance began. Neither signal is a sell trigger on its own. However, together they say the easy upside is likely behind us for now.

Lastly, overall market breadth tells the same story, but with a bit louder voice. Seven of eleven sectors fell in the last week, while the index finished flat. Discretionary, industrials, and materials led the retreat while a narrow band of energy and megacap technology held the line. In other words, while the market headline suggested everything was fine, the average stock did worse. That is the "musical chairs" tape we will dig into in detail in this week's main story. Leadership is rotating rather than broadening, and that is exactly the kind of internal deterioration that tends to precede a real pullback.

Heading into next week, the support and resistance levels are evident. The first resistance is the record at 7,796, about 1% away. Just above that are the round numbers at 7,900 and 8,000. (Those are our year-end targets that sit just above previous all-time highs.) Conversely, support starts at the 50-day near 7,585. That level also marks the breakout that a failed retest would expose. Just below that level is the 7,300 zone, then the 200-day at 7,137, the same downside band the seasonal math points toward.

With that setup going into next week, we will want to continue playing defense rather than offense. Secondly, investors should consider increasing cash buffers keep stops under the 50-day. Lastly, use any push toward the record market levels to trim rather than chase.

To be fair to the bullish camp, a decisive close back above 7,796 would neutralize the momentum warning and reopen those round-number targets. There are several risks ahead, from the mid-term election cycle to the loss of corporate buybacks, so this is a two-sided setup rather than a directional call. However, pay close attention to the 7,585 next week. If the market can hold that level, the uptrend will remain intact. If it fails, the seasonal downside risk increases.

🔑 Key Catalysts Next Week

Next week is a holiday-shortened trading week with one question that will dominate it.

“Does inflation confirm the hike that Friday's jobs report just put back on the table?”

With the market closed on Monday for Labor Day, that stacks the two prints that will matter the most at the very end. PPI lands Thursday morning and CPI follows Friday, both at 8:30 AM ET, and both feed straight into the September 16 FOMC decision.

This week is where the Fed debate will get settled. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, framed it well after the jobs report. The upside payroll surprise certainly heightened rate-hike concerns, but the outcome will hinge on next week's inflation numbers. If CPI and PPI come in cooler than feared, the Fed can discount the hot labor market signal. However, if both prints come in hotter than expected, a September hike moves from a coin flip to the base case.

As far as the rest of the week goes, the slate is fairly thin. Tuesday brings NFIB small business optimism and consumer credit. Then on Thursday, we will see jobless claims, existing home sales, and wholesale inventories. As noted, PPI also drops on Thursday, with Friday’s CPI report coming alongside the preliminary Michigan sentiment read. The Fed itself goes quiet, with the pre-meeting blackout that began September 5 keeping every official off the tape through the decision.

Overall, the earnings calendar remains very light, with the vast majority of earnings already behind us. However, of note, Oracle reports on Thursday after the close and will be scrutinized for AI cloud demand and hyperscaler capex. Its numbers and backlog commentary will swing semiconductors and the broader AI complex more than any single macro release.

Adobe follows the same afternoon. Crude is the other wildcard, with a 9% weekly surge on Middle East supply fears keeping energy and inflation risk alive. Thin post-holiday liquidity can exaggerate the reaction to both inflation prints, so expect sharper intraday swings than the calendar alone would suggest.

Friday's CPI is THE report for the week, and everything else is pretty much a sideshow until that number crosses.

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💰 September Market Weakness: The Setup Has Teeth

Earlier this week, in our Daily Market Commentary, I flagged that the market was testing support after three straight down days, starting in September, with the calendar. That was just the warm-up, as the real story lies in a note from Scott Rubner at Citadel Securities, whose read on September market weakness is among the best that I have read. Rubner’s case is not that the bull market has ended. It is that the near-term math just changed, and hardly anyone is positioned for the shift.

Why September Market Weakness Is A Record, Not A Fluke

September has a losing record that is worth paying attention to. Since 1928, September is the only month in the year that closes lower more often than higher. Over the past century, the average return is a loss of roughly -1.1%, and in midterm election years like this one, it slips to roughly -1.5%. Furthermore, the back half of the month is the weakest two-week stretch of the calendar year.

As CNBC noted in its writeup of Rubner's work, this is not a "quirky stat" from a cherry-picked window, it is close to a century of data pointing the same direction, and the average intra-month selloff of -4.7% (nearer -6.2% in midterm years) is the kind of air pocket that turns a quiet drift into a real drawdown before most investors update their models. Such is the reputation September has earned honestly.

The Buyers Who Carried August Are Leaving The Table

Here is what makes this year different. Every cohort that pushed the S&P 500 to records in August is stepping back at the same time. The earnings tailwind that carried the tape is largely behind us. Retail buyers, who returned in force through the summer, tend to fade in September, and Citadel's own data show their buying on down days has run near half its normal pace since 2019. (Chart courtesy of Citadel Securities)

As we have discussed previously, the corporate bid, which has been a net buyer of equities since 2000, turns negative. Companies authorized more than $1.1 trillion in buybacks through August, but that buyer goes quiet as blackouts accelerate around September 12, right before third-quarter reporting. (Chart courtesy of Citadel Securities)

The systematic crowd, the CTAs and volatility-control funds that reloaded off the July lows, have already spent most of their capacity. (Chart courtesy of Citadel Securities)

When you add up the cohorts, the demand side is quietly EMPTYING.

So, here is the most common criticism hitting my inbox this past week: “Yes, but that seasonality is just a statistic.” That is a fair statement, and it is indeed an average of returns. However, a statistic is exactly what it is. A statistic with five structural tailwinds draining out behind it, though, stops being a coin flip and starts being a setup

Protection Has Rarely Been This Cheap Into The Noise

Now, the part that should get your attention. Volatility collapsed in late August. The VIX fell to around 14, its lowest reading of the year, and S&P skew sank to the first percentile of its range, which is a technical way of saying downside insurance was the cheapest it had been all year. The one-month, 25-delta put changed hands near its most affordable level since December 2024.

As we headed into the month, a garden-variety three-day decline popped the VIX back toward 16 in just a handful of sessions. The size of that move, given the very mild decline, tells you how little cushion was priced in. Cheap protection is landing just as the macro calendar turns increasingly noisy, with the jobs report yesterday, then CPI, and an FOMC decision all stacked into the next two weeks. When protection is this cheap and buyers are this tired, the cost of being caught without a hedge climbs quickly. As Howard Marks likes to remind investors, you cannot predict, but you can prepare, and September has consistently been a month to prepare for.

To wit: cheap insurance is a gift the market rarely leaves on the table for long, and it never rings a bell on the morning it decides to take the gift back.

The Options Market Is Carrying A Record Into Expiry

The last piece of the September puzzle is purely mechanical. On the third Friday of the month, the September options expiry will occur. That event is currently on track to set a record. Roughly $9.6 trillion is set to roll off through September 18. Then about $6.2 trillion of that is concentrated to expire on the 18th alone. That single day would clear the June triple-witch near $7.7 trillion, which was itself a record. Add quarter-end pension rebalancing, with funding ratios near 112% and plans de-risking out of stocks and into bonds, and the plumbing itself leans against equities into month-end.

Notably, none of this guarantees a market selloff. However, it does stack the odds against overly aggressive investors. Currently, every major desk from JPMorgan to BofA has turned cautious. However, CNBC's own investment committee is refusing to sell a single share into the weakness. That crowd can be right about the direction and still be wrong, or early, on the timing. Such is the nature of a market that loves to punish the obvious trade.

A Second Desk Lands On The Same Downside

While Scott Rubner reads the market through flows, BTIG's Jonathan Krinsky reads it through the tape. Interestingly, he lands in nearly the same place as Rubner. Krinsky’s framing is that the post-summer rally has been a game of "musical chairs" rather than a true "broadening." Money rotated out of Technology and AI into Consumer Cyclicals and Large Cap Value. At the same time, the index sits roughly where it did on June 2. Breadth has quietly rolled over. The share of Russell 3000 names above their 50-day average is the lowest since early April. Furthermore, the one-month correlations just jumped to their highest level since June. That is a classic tell that names begin to fall together.

The other half of the concern is investor complacency. The five-day put/call ratio sits near 0.82. That is one of the lowest readings in years. Notably, the tape has not printed a single 80% NYSE downside-volume day in almost a year. That long stretch falls against a historical average of 21.

Lastly, Krinsky's base case is a failed retest of the 7,600 breakout, followed by a slide toward 7,200-7,300. Such a pullback would encompass 7% to 8% off the highs. While not a meaningful decline, given the market's low volatility and high investor complacency, it will “feel” much worse. That lower zone sits right on Rubner's midterm seasonal math and the rising 200-day average near 7,127.

Think about it this way. When both a flow desk and a technical desk reach the same number from opposite directions, you should at least respect it. Crucially, none of that means that it will happen with absolute certainty, nor does it pinpoint the day. But it is certainly a risk worth appreciating.

What Should Investors Do Now

So, what does this all mean for investors? Most importantly, this is a tactical market reset, not a call to abandon equities and go hide in cash. Scott Rubner himself framed the September weakness as a “better entry point ahead of a more constructive mid-October.”

He is correct. Once mid-October arrives, the options expiry will have cleared, the FOMC will have met, and corporate buybacks will have resumed. Notably, the market will be focusing on Q3 corporate earnings reports. which typically support markets heading into November.  

Therefore, the investor playbook is to use market strength to rebalance portfolio risk rather than chase it.

The moves worth making now are the unglamorous ones. Start by taking profits and banking gains where a position has run well past its intended weight. Raise a little cash so a pullback becomes an opportunity rather than a scramble. Then add downside protection while it is still on sale. Why? Because the whole point of Rubner's note is that the insurance is cheap today and may not be next week. Such is the value of preparing before the crowd decides it has to.

September rarely hands out cheap insurance and a clear warning at the same time. When it does, the disciplined move is to take both.

🖊️ From Lance’s Desk

This week's #MacroView blog explores that while the AI bears focus on concentration and circular financing, the last tech overbuild was financed with debt, and this one is being paid for in cash.

Also Posted This Week:

• Market Valuation: Expensive CAPE Or Cheap PEG? - RIA - by Michael Lebowitz
• Loss: Why Crashes, Timing & Valuations Matter (Chapter 3 of 5) - RIA - by Lance Roberts

📹 Watch & Listen

Markets remain trapped in a frustrating sideways consolidation as money rapidly rotates between Technology, Healthcare, Momentum, and Value. Momentum stocks remain under pressure, while large-cap Value and Quality are holding up better.

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📊 Market Statistics & Analysis

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

💸 Market & Sector X-Ray: Market Gains Ground

The market struggled a bit this past week and ended roughly where it began. Technology gained ground, but Energy eased a bit with the decline in oil prices. Overall, the market remains well deviated above longer-term moving averages but has reversed some of its previous overbought conditions. International and Emerging Markets are the most overbought, and Staples, Discretionary, and Real Estate are the most oversold.

📐 Technical Composite: 73.33 - Overbought Reversing

The technical condition eased mildly this past week as the market stalled. However, overall, the market remains technically overbought, and sentiment remains bullish for now with no significant technical breaks. Indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 68.07 – Investors Reduce Bullishness

Even though the market posted a positive return last week, the underlying allocation and sentiment to the market reversed somewhat. There was a sharp drop in the Commitment of Traders equity allocations, and sentiment declined over the last two weeks. While not a significant warning yet, as we enter September, the reversal in positioning is worth watching.

🔁 Relative Factor Performance

Market action remains fairly concentrated, however, low beta value, high dividend yield, and midcap value and growth, are lagging while more speculative areas of the market like disruptive technology, S&P and Megacap growth, and emerging markets are decently overbought. Such suggests near-term caution, see MFBR below, and rebalance risk accordingly.

📊 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 September 4, 2026, with the S&P 500 at 7,718.60, the Money Flow Breadth Ratio (MFBR) stands at 75%, down from a peak of 80% set 3 weeks ago and flat versus 75% the prior week. The trailing four-week change is still 0 percentage points, but the near-term trend has rolled over. This places the indicator in extreme overbought territory (75% or higher). The raw breadth signal still reads BUY, but that is the momentum read, and at these levels the MFBR works as a contrarian indicator. The setup that matters is the one now in place: a stretched reading that has stopped rising and turned down from its peak. Historically that combination has led to below-average - and in the 75%-plus zone outright negative - short-term forward returns, so the model reads this as a risk-off signal rather than a green light to add risk.

The 25-year backtest is why the grid trims here rather than adds: the 75%-plus zone has averaged -0.8% over the following 4 weeks and -0.8% over 13 weeks. Direction reinforces it - in the 70%-plus band the 26-week win rate is 72.2% once the gauge is falling versus 76.5% while it is still rising. The same logic runs in reverse at the lows, where sub-30% washouts have carried the strongest forward returns in the study.

Breadth that is this stretched and has already turned lower 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. A move back above the 80% peak would reset the momentum read; further deterioration would confirm the risk-off turn."

📊 Sector Model & Risk Ranges

Three weeks ago we noted that several sectors of the market were hitting extremes which typically denotes a good opportunity to reduce risk and rebalance holdings. That has been good advice as the market continues to consolidate within a small trading range. The model reset itself on the beginning of the month, and we need a full week of trading data for analysis, and risk assessment.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post September Market Weakness: The Setup Has Teeth appeared first on RIA.

CoreWeave, which rents GPU computing capacity to AI labs and hyperscalers, sits at the heart of a circular financing story that worries some investors. CoreWeave's total debt sits at $35 billion as of June 30, up sharply from $21 billion at year-end 2025. Further, interest expense hit $640 million last quarter, accounting for more than 25% of its revenue. Against that debt load sits a revenue backlog of approximately $100 billion, consisting mostly of take-or-pay contracts (buyer must pay whether they use the service) with Meta, OpenAI, Microsoft, and Anthropic. On paper, that is roughly threefold debt coverage. Yet CoreWeave's 5-year bonds yield nearly 13%.

Bond markets aren’t doubting the authenticity of the backlog contracts. Three narrower concerns likely explain the high yield.

• Concentration risk. Per Fitch, 65% of Q1 revenue came from just two customers, and one of them, Anthropic, is not rated.
• Timing mismatch. Bond interest is due now while backlog revenue only becomes cash when data center capacity comes online over several years.
• Capex is immense. Its capex-to-operating-income ratio runs near 35-to-1, meaning CoreWeave must borrow about $35 billion every year to keep building capacity to fulfill its revenue backlog.  

The revenue backlog helps secure financing for already built data centers, but not for new ones. This leaves us with an important question: Will Nvidia, AI labs, and the hyperscalers continue to help finance the data center buildout needed for CoreWeave to recognize the $100 billion in commitments, or will CoreWeave be left to the whims of the bond market? The answer could greatly impact investor sentiment for the AI industry.

What To Watch Today

Earnings

Economy

Market Trading Update

On Wednesday, we flagged compressed volatility as a spring wound tight. Then yesterday, we discussed what tends to perform best in September. Today, let's look at what correlations and market breadth say underneath the index, because they tell a very different story than the headline level.

Let's start with the actual tape. The S&P 500 closed Wednesday at 7,668, just 0.7% above where it closed on June 2 at 7,612. Three months, no progress. Yet the equal-weight S&P is up 4.1% over that same stretch. That isn't broadening. That's money sloshing out of Tech and AI into cyclicals and value while the index stands still. BTIG's Jonathan Krinsky calls it a game of "musical chairs," and the breadth data backs him up. The percent of Russell 3000 names above their 50-day average has fallen to 42%, the lowest since early April, and the percent above the 200-day average peaked in mid-August and has started rolling over.

Here's where it gets interesting. One-month implied correlation just hit its highest reading since late June. Rotation and rising correlation are opposites. When money rotates, correlation falls, because something works while something else doesn't. When correlation rises, the chairs stop getting handed off, and everything falls together. The absolute level near 13 is still low, so this is early, NOT late. But Bob Farrell's Rule #7 covers the ground: markets are strongest when broad and weakest when narrow.

The cyclical side is already cracking. Industrials (XLI) closed Wednesday at $172.78, about 4.8% below the 50-day average and only 1.3% above the 200-day. Transports (IYT) dropped 4.5% in five sessions. The names that grabbed the chairs in July are handing them back.

What's missing is the flush. NYSE downside volume has run near 63%-65%, nowhere near the 80% day that marks real capitulation, and we haven't seen one since last October. The average year delivers 21. There has never been a year with fewer than five. The 5-day put/call average sits at 0.82, one of the lowest readings in years. Complacency is still the crowded trade.

So the roadmap is clean. 7,600 is the breakout line, less than 1% under Wednesday's close, with the 50-day at 7,570 right behind it. Lose both, and the next real support is the 200-day at 7,127. Notice that Krinsky's 7,200 to 7,300 downside target, roughly 7% off the August 13 record close near 7,799, lands within about 1% of that trend line. The bear case and the moving average are the same number.

Keep doing the risk management work while the tape is still orderly. Raise quality, hold the cash buffer, and manage risk at 7,600 instead of after it breaks.

Today's Job Report Could Decide The Rate Hike Debate

Today's August employment report could be the linchpin deciding whether the Fed hikes rates at its September 16 meeting. After Warsh's hawkish Jackson Hole remarks, it's quite possible that a strong jobs report could push Warsh to support a hike. At the same time, another weak report and the possibility of another benign CPI report next Friday could even flip the narrative toward rate cuts.

As a backdrop for today's BLS report, July payrolls fell 23,000, with May and June revised down by a combined 103,000. The unemployment rate fell to 4.1%, its lowest in two years, but for the wrong reasons: labor force participation shrank by 264,000 and household employment fell by 87,000. Outside of COVID, the participation rate (61.4%) is the lowest since the mid-1970s. A benchmark revision on August 28 reduced total payrolls by another 79,000 through March. Over the last five years, the economy has created 201k jobs per month on average. Over the last six months, that has slowed considerably to 44k.

The Wall Street consensus expects a rebound to roughly 55,000 jobs, with unemployment holding at 4.1%. The range of plausible outcomes remains wide and, further confusing, we have seen large revisions over the past few months erase what was initially a good reading.

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The post Is CoreWeave At The Mercy Of The Bond Market? appeared first on RIA.

While the AI bears focus on concentration and circular financing, the last tech overbuild was financed with debt, and this one is being paid for in cash.

Before I discuss why I disagree with the "AI bears," I want to state that I respect their opinions, have evaluated their concerns, and have simply derived a different set of conclusions. That is an important statement, because this particular group of "AI bears" includes some of the sharpest risk minds in the business, and they have been early to almost every warning that later mattered.

When people this good line up on one side of a trade, you go back and check your own work. That's what I did, and this article is where I landed. As always, the reason I publish these articles is for accountability later, for you and our clients.

While this group of AI bears may indeed be right about the excess, they could still be potentially wrong about the trade. I care about the latter, and those are two different claims that the market keeps confusing.

The Bear Case Deserves A Hearing

Let's start with the person I admire the most in the AI bear camp: Fred Hickey. Fred has run The High-Tech Strategist since 1987 and has made the cleanest version of the argument. He compares today's datacenter mania to the fiber-optic overbuild that cracked in 2000, only far larger. To wit: he has called it a "more dire situation than the great fiber-optic capacity overbuilds." 

He is not alone in this view, and that really is the point to address. Michael Burry has been circling the same plumbing, watching Nvidia's credit-default swaps widen as the chipmaker turns into banker, landlord, and equity partner to its own customers.

But the AI bear roster doesn't stop there. The Bank for International Settlements flagged roughly $1.65 trillion in off-balance-sheet obligations held by the largest hyperscalers, exceeding the amounts they carry on their books. Then Sequoia's David Cahn put the annual gap between AI infrastructure spending and ecosystem revenue at nearly $600 billion. Furthermore, Allianz measured the capex-to-revenue divergence at about 46%, well past the 32% that marked the 2001 telecom bust. Then, lastly, in August, an MIT study suggested that most corporate AI pilots had produced no measurable revenue at all.

That is a very serious AI bear group making a very serious case, and you should only ignore it at your peril. When a strategist who has correctly traded five separate Nvidia collapses of 55% or more says a sixth is coming, and a Bank of America survey shows 54% of professional managers are now calling AI a "bubble," you need to factor that into your thinking. As investors, we must work out precisely which parts are right and which parts are borrowed pattern-matching from a different era.

So, let's start with where the AI bears are right.

Where The Bears Are Right

Yes, valuations are stretched, and by the measure that matters most for fragility, concentration is worse now than it was in 2000.

Notice how far the line has traveled in the chart above. The ten largest stocks now make up roughly 43% of the S&P 500, a record, and past the 27% peak the index touched at the height of the dot-com boom. By that single measure, the market is more top-heavy today than at any point in modern history. The equal-weight index has already begun to diverge from the headline benchmark, which is exactly the kind of internal crack that tends to show up before the megacaps wobble. Such is the setup the AI bears keep pointing toward, and on that point, they are correct.

Secondly, the circular-financing argument is real, too. When Nvidia takes an equity stake in a company that then commits to buying Nvidia chips, part of what gets reported as "demand" is the seller funding its own sales. Such is a genuine distortion of the signal, and it deserves the scrutiny that it has been getting. Add the depreciation math, where trailing capex of roughly $434 billion dwarfs the $149 billion of depreciation currently running through income statements, and you get a bill that arrives in 2027 through 2029, whether the revenue does or not. The AI bears did not invent any of this; they just read the corporate filings.

Where The Analogy Breaks

So, with all that stated, it seems to be obvious that you should just get out of the AI trade now before the next "Dot.com" crash occurs. Here's the problem with that comparison. The comparison to the fiber-optic "boom and crash" is that it turns on the one variable that actually determined the outcome in 2000, and that variable does not read the same today: who is writing the checks.

Leading up to the 2000 overbuild, the financing came from companies that had no business borrowing what they borrowed. WorldCom, Global Crossing, and the upstart carriers that were stringing fiber on debt, and the vendor loans that Lucent and Nortel handed customers who could not pay them back. When revenue failed to arrive on schedule, those balance sheets could not cover the shortfall, and the structure collapsed into bankruptcy court.

Today's buildout is a different animal on this exact axis. Roughly two-thirds of the 2026 capex is funded directly from the operating cash flow and equity of Microsoft, Alphabet, Amazon, and Meta, four of the most profitable enterprises ever assembled. The existing borrowing is investment-grade and still a minority of spending. The balance sheets carrying this cycle are not WorldCom's, and that difference is close to the whole ballgame.

Revenue Is Real

Second, "no revenue" is not the same thing as revenue that simply hasn't caught up to the spending yet. Inference now clears roughly 70% gross margins. Microsoft's AI business is past a $37 billion run rate, Amazon's AI revenue is growing in the triple digits, and Anthropic went from about $9 billion to a reported $47 billion run rate in a single year.

More notably, even Nvidia, the bears' favorite “whipping boy,” has seen forward earnings climb so rapidly that its multiple has actually compressed as fundamentals caught up to what was believed to be overly exuberant expectations. That is the mirror image of Cisco in 2000, which peaked at nearly 30 times sales on earnings that then evaporated. The revenue trailing capex is a timing issue, not the zero-payback story the headlines imply.

Third, the AI bears predict a glut, yet the binding constraint right now is the opposite of a glut. Microsoft is sitting on something like $80 billion of Azure orders it cannot fill for lack of electricity, with GPUs idle in inventory waiting on power.

Today, more than 60% of the data center capacity planned for 2027 is not yet under construction. If or when datacenter demand is rationed by the power grid rather than by customers walking away, you do not have a capacity glut; you have a shortage. However, a fair objection at this point, and it is the strongest one the bears have: build two or three years' worth of power and transmission, and today's shortage becomes tomorrow's oversupply. That is true concern, and it is the timeline risk worth watching closely, but it is also a 2028 question, not a 2026 one.

What The AI Bears Debate Means For Investors

Let me be clear. The AI bears have a real case, but no timing. This is the same problem we noted in "Debt Trap: A Crisis Without A Calendar." I am definitely not arguing that investors should be buying the AI complex with both hands and closing their eyes. The question is NOT whether there is excess, because there plainly is. The real question is what a disciplined investor does with a genuine, extreme, but cash-funded overbuild.

Start with position sizing, because it is the one tactic that survives contact with a drawdown. NVIDIA has fallen by 55% or more on five separate occasions since 2000, and it has recovered to new highs after each. Investors who were sized to hold through the pain benefited tremendously. They did even better if they managed their exposure risk during those drawdowns.  Own your AI exposure at a weight where a 50 percent drawdown is uncomfortable rather than fatal. Sizing comes first.

Secondly, the rules are simple.

• Favor the self-funders over the borrowers, and
• Spread your exposure across the layers of the trade, the chips and the clouds, and the power underneath them, rather than staking the whole thesis on a single chip name.
• Always insist that the price you pay is backed by existing earnings and not by a total addressable market slide.
• Lastly, keep some dry powder (ie, cash), because the volatility in this complex is a feature rather than a defect, and a real correction turns into a gift the moment you have cash and a shopping list ready.

Where you take the risk matters as much as how much you take. Not all AI exposure carries the same danger, and the map below is how I would sort it.

The 5-Signals

The self-funders and the power bottleneck are part of this trade that looks least like 2000. Conversely, the levered edges are the part that looks most like it. That levered part is where a revenue disappointment does the real damage, and those are the first positions to shed when the story starts to wobble. The profitable compounders funding their own buildout sit in a different bucket, and selling them because a bear called a top is how investors miss years of compounding while waiting on a crash that shows up late, or never.

Which raises the harder question. How do you know when the story is actually wobbling?

This is crucial, and the trap that most investors fall into. You do not need to call the top. What you need is a short list of signals that fire before the top is obvious to everyone, and the discipline to act on the list rather than argue with it.

Which brings me to the question I get most often: "Why not skip the stock-picking and just own the index?"

Here is my opinion. The index has quietly become the "bet." With the ten largest names accounting for nearly 43% of the S&P 500, buying the market today is a concentrated wager on those same few companies, made passively, without anyone ever deciding it was a good idea. Owning the index is not a way to sidestep the AI trade, because it is the AI trade, whether you meant it that way or not.

Bob Farrell's Rule #9 is always worth repeating here:

"When all the experts and forecasts agree, something else usually happens."

Conclusion

With more than half of managers now calling AI a "bubble" and "long the Magnificent 7" ranked the most crowded trade on the Street for nearly two years, the consensus has already tilted bearish. That does not make the AI bear case wrong, but it does suggest the obvious crash may refuse to arrive on the obvious schedule.

One of my favorite quotes from Howard Marks is that, "being too far ahead of your time is indistinguishable from being wrong." When it comes to investing, timing is critical. Most importantly, notice that Hickey himself holds his AI-bear book at roughly 1% of his portfolio in puts, suggesting he treats it as a hedge rather than a conviction short. That is the posture worth borrowing. Own the compounders, hedge the tail, and let the revenue prove or disprove itself on the tape.

The AI bears will eventually be right about a drawdown, because everyone is eventually right about a drawdown. Whether they are right about the trade depends on a question their favorite analogy cannot answer:

"What happens when the richest companies on earth overbuild with their own money rather than borrowed money?"

Such is the question actually on the table, and that is the question you must answer before you sell.

Sources & Notes

1. Fred Hickey commentary: CNBC (Feb 2026); The Market Ear via Benzinga (five NVDA collapses, sixth expected); Kitco News (Jul 2026).
2. Circular financing and off-balance-sheet obligations: Bloomberg; 24/7 Wall St. citing the Bank for International Settlements 2026 Annual Report and Nikkei (~$1.65T off-balance-sheet).
3. Capex-to-revenue gap: Sequoia Capital (David Cahn, ~$600B); Allianz Research (46% divergence vs 32% in the 2001 telecom cycle).
4. Funding mix and depreciation: FactSet (incremental debt ~32% of capex, LTM mid-2026); SiliconAnalysts / SEC filings (trailing capex ~$434B vs ~$149B depreciation).
5. Inference margins and AI revenue: SemiAnalysis via Forbes (~70% inference gross margins); company disclosures (Azure AI >$37B run rate, Anthropic ~$9B to ~$47B).
6. Concentration and valuation: RBC Wealth Management, Guinness Global Investors, InvestmentNews (top 10 near 43%); Deutsche Bank / Goldman Sachs; price-to-sales vs Cisco 2000 (KuCoin summary of DB/GS data); Northwestern Mutual (NVDA forward earnings and multiple compression).
7. Power constraint and 2027 capacity: Introl (~$80B Azure backlog on power limits); Bloomberg / industry estimates (60%+ of 2027 capacity not yet under construction).
8. Positioning: Bank of America Global Fund Manager Survey (54% call AI a bubble; "long Mag 7" most crowded trade).
9. All market and financial figures are drawn from the sources above, are current to mid-to-late 2026, and are approximate. This article is for informational purposes only and is not investment advice.

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For those worried about the impact of deficits and inflation on US bond yields, it's worth taking a trip around the world to get a better picture. Global bond yields for many of the world's ten largest economies are behaving similarly. Across the Globe, the US, Germany, Japan, France, Italy, and Brazil- seven of the ten largest economies- saw both benchmark government bond yields and inflation rates rise simultaneously.  

The 10-year Treasury yield has climbed roughly 52 basis points over the past year to 4.42%, while inflation has run near 3.5%, up from 2.9%. UK gilts moved even further, up 68 basis points to 4.68%, with inflation holding near 3.8%. Japan's yields remain relatively low, but the jump in yields stands out most starkly in percentage terms, more than doubling from roughly 1.05% to 1.85%.  

India is the clear outlier, the one major global economy where both bond yields and inflation eased. Indian yields have fallen by roughly 35 basis points as inflation cooled from around 5% to 4%. Russian yields have fallen slightly but remain well above all the other countries listed.

Debt loads and deficits add another layer of complexity to the global rising-yield story. Japan's debt exceeds 237% of GDP, and every additional basis-point increase in yields raises that country's financing costs, as it does in the US and other countries. The table below shares global deficit and inflation data, as well as yield changes, to show that what is happening in the US bond markets is generally occurring around the world's most developed economies.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we covered the market testing support as September seasonality, buyback blackouts, and quarter-end repositioning lined up against it. Today, I want to go one level deeper, into why this September downside window carries more teeth than the calendar alone suggests. Scott Rubner at Citadel Securities laid out the case this week, and it is worth your attention.

His point is not that the bull market is over. It is the setup that carried August that is fading cohort by cohort. Retail stays a buyer but historically slows more in September than in any other month. The corporate bid, worth more than $1.1 trillion in fresh buyback authorizations, starts going dark around September 12 as blackouts return ahead of Q3 reporting.

And the systematic crowd, the CTAs and vol-control funds that reloaded off the July lows, has already spent most of its dry powder. When I run the cohorts, the pool of natural buyers is simply smaller than it was a month ago.

Here is what makes it dangerous: protection is dirt cheap right into the noisiest part of the calendar. The VIX sits near 16, up from the 14.4 close on August 28 that Rubner flags as the second-lowest since December, and puts skew ranks in the first percentile. A garden-variety three-day dip already popped volatility two full points. That tells you how little cushion was priced in.

Anchor it in the tape. The S&P 500 trades near 7,670 as I write, up about half a percent on Wednesday and snapping a three-day skid, yet it sits only 1.4% above its 50-day average near 7,570, and the 14-day RSI reads 52. Neutral. NOWHERE near oversold.

Now the history. Since 1928, September is the only month that closes lower more often than higher, down 1.1% on average and 1.5% in midterm-election years, with the back half the weakest two-week stretch of the year.

Do the math on Rubner's numbers. His average September selloff of 4.7% carries the index to roughly 7,310, right through the 50-day. The 6.2% midterm version lands near 7,200, on top of the rising 200-day at 7,127. Neither breaks the bull. Both punish anyone who bought the last leg unhedged.

The market is short-term oversold, so use bounces to rebalance risk and raise cash levels as needed. This is a tactical reset, not a bearish turn. Capital preservation buys the option to be aggressive later. September rarely hands that option out for free.

PwC Data Center Estimates Ignore An Important Caveat

Per PwC, global data center spending is set to reach $31.6 trillion through 2050. Even more optimistically, they note that if AI adoption accelerates beyond their base scenario, spending could rise as high as $50 trillion. That works out to about $1.3 to $2.0 trillion a year. For context, estimates for 2027 AI-related capex sit between $1.2 and $1.3 trillion. While the $31.6 trillion in spending is large in aggregate, it basically assumes today's massive spending will continue for nearly 25 years. Their forecast is possible, but we think it's worth asking whether today's data center infrastructure will be relevant in five years, let alone 25 years. The answer may not affect total spending, but it could strongly influence how that spending is allocated.

Obsolescence risk is the danger that a data center's physical infrastructure becomes technologically outdated or economically unviable. In this case, smaller, more efficient data centers will likely replace the current ones. This is already occurring. For instance, rack densities have jumped from 8-15 kilowatts historically to 50-100 kilowatts or more for AI workloads, and infrastructure built even five years ago is often no longer fit for high-density AI clusters.

Hyperscalers face a risk of obsolescence, called "obsolescence debt." Debt may remain outstanding to fund a data center that no longer fits their needs. In such a case, a football-field-sized data center built today for today's chip generation may require an expensive retrofit or replacement.

None of this means the $32 trillion figure is a poor estimate, but it likely understates how much of that money will be spent tearing out and rebuilding infrastructure that's already obsolete, rather than adding new capacity.

Market Valuation: Expensive CAPE Or Cheap PEG?

The S&P 500’s Shiller CAPE ratio just hit 41. Since 1881, the market valuation has been more expensive under CAPE only once. That was during the final months of the dot-com bubble. At the same time the CAPE is ringing warning bells, the PEG ratio, which measures price relative to expected earnings growth, is at its lowest level in at least three decades, possibly its cheapest reading ever.

One market valuation says run for cover while another says bargain. Both market valuation tools use data from the same 500 S&P companies but interpret the market completely differently.

Confusing, yes, but the disagreement between the two charts comes down to one question: Is the past a better predictor of the future than the wisdom of Wall Street?

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The S&P 500's Shiller CAPE ratio just hit 41. Since 1881, the market valuation has been more expensive under CAPE only once. That was during the final months of the dot-com bubble. At the same time the CAPE is ringing warning bells, the PEG ratio, which measures price relative to expected earnings growth, is at its lowest level in at least three decades, possibly its cheapest reading ever.

One market valuation says run for cover while another says bargain. Both market valuation tools use data from the same 500 S&P companies but interpret the market completely differently.

Confusing, yes, but the disagreement between the two charts comes down to one question: Is the past a better predictor of the future than the wisdom of Wall Street?

To answer our question, we'll first summarize what each ratio measures, then dig into expected growth versus historical growth, the culprit behind the big difference in the two graphs.  

CAPE Isn’t Perfect

The P/E ratio is one of the most quoted market valuation gauges for stocks and stock indexes. While valuable, it rests on one bold and often wrong assumption: future earnings will match past earnings. In other words, it doesn’t capture how earnings may change.

For the CAPE valuation, the assumption is similar, but instead of using the most recent one year of earnings to assess value, it uses ten years of earnings. This better smooths earnings, reducing the impact of short periods of economic volatility.  But it has the same vulnerability, assuming the future will be just like the past.

P/E tends to be most useful for comparing companies with similar earnings growth, but it is less useful when analyzing high-growth companies or those with the potential to change their growth trajectory.

Despite its flaws, the CAPE valuation strongly correlates with future market returns, as shown in the graph below comparing CAPE valuations and forward ten-year S&P 500 returns. While the CAPE provides a good indicator of expected returns over the full next ten years, it doesn’t provide a roadmap for the monthly and annual returns that make up the period.

The PEG Ratio

The PEG ratio builds on the P/E ratio framework but uses future earnings growth estimates instead of prior realized earnings. Because it uses estimates, it can change rapidly.  

The PEG ratio calculation is the forward P/E divided by the expected 3–5-year earnings growth.

To better appreciate today’s PEG ratio, we break down the numerator, forward P/E, and the denominator, G (3-5-year growth estimates).

Forward P/E

The numerator in the PEG ratio is the forward P/E. Instead of using the trailing twelve months of earnings as in the traditional P/E ratio, the forward P/E uses earnings estimates for the coming twelve months. Thus, its value depends heavily on how well Wall Street can predict earnings for the coming 12 months.  

We can analyze the effectiveness of one-year earnings forecasts in a couple of different ways.

First, we can compare the trailing 12-month P/E to the forward P/E and imply expected earnings for the next year. We can then compare the implied earnings with actual earnings. Using this method, the top two charts below show that Wall Street almost always overestimates earnings and by a wide margin at times.

The second way to grade Wall Street's forecasting ability is to compare final one-year forecasts with those made at the start of the period. The graph below reinforces the graphs above: Wall Street tends to overestimate earnings.  EPS estimates were reduced in nine of the ten years spanning 2016 through 2025.  However, the trend has changed with 2026 and 2027 estimates trending higher than original forecasts.

G: 3- 5 Year Expected Earnings Growth

Forecasting earnings for just 12 months forward is extremely difficult for Wall Street professionals. Accordingly, forecasting three- to five-years of earnings growth (G in the PEG ratio) is much trickier and more error-prone.

(Note: for this article, we use four-year expected earnings growth to balance out the three-to-five-year range of estimates.)

To assess the effectiveness of longer term forecasts, we can use historical PEG and forward P/E ratios to back out an implied four-year growth rate. As we did with one-year estimates, we then compare that to the actual four-year growth that ensued.

The graph below shows there is very little correlation between four-year earnings growth estimates and actual growth. As we saw with one-year estimates, the market overestimated earnings far more often than it underestimated them.

Deciphering Today's PEG Ratio

The graph below shows the market PEG valuation and its two components- forward P/E and 3-5 year earnings estimates.

The middle graph shows the forward P/E (the numerator) is stretched, indicating a relatively expensive valuation. Despite the forward P/E, the PEG ratio in the top graph is cheap because the longer-term earnings growth estimate shown in the bottom graph is at its highest level since at least 1995. The takeaway is that the PEG ratio is cheap entirely because of strong earnings-growth forecasts.

The G Is Concentrated

The hardest part of analyzing the “G” in the PEG ratio is the abnormal divergence in recent earnings trends and earnings expectations between a few large tech companies and the large majority of other S&P 500 companies.

Second-quarter earnings results exemplify this problem. In a mid-July summary of the quarter, with roughly a third of the stocks in the index still to report, FactSet reported the Magnificent 7 was growing earnings 31.1% year over year versus a blended rate near 25% for the index. Only a few weeks later, on August 7, the quarter's growth rate more than doubled to 50.4%.

Most of that acceleration traced back to two companies. Alphabet and Amazon, both large earnings contributors, reported significant non-operating gains. Alphabet reported a $98 billion mark-up in its equity portfolio primarily due to SpaceX, and Amazon added a $53 billion gain largely from Anthropic. Strip out those gains, and FactSet's blended growth rate for the S&P 500 falls from 50.4% to 32.0%. Two companies, out of five hundred, are worth eighteen full percentage points of index earnings growth.

This leads to a big question. Can ten or so large-cap technology companies carry earnings growth for a 500-company index? Hyperscalers are on pace to spend roughly $700 billion on AI infrastructure in 2026 and are projected to top $1 trillion in 2027. That spending shows up today as reported capex and, eventually, as revenue for a small number of companies selling the chips, the cloud capacity, and the construction and power systems supporting it. It does not contribute much to the earnings growth for the other companies in the index.

Is The Market Rich Or Cheap?

Think of this market valuation conundrum between PEG and CAPE like your favorite sports team that's been mediocre for a decade. Ten years of results argue that your expectations for next season should be minimal.  But during the offseason, the team signed a few all-stars, and a reasonable fan would bump up their expectations regardless of the last ten years.

The historical losing record is real, and so is the upgraded roster. The substantial growth estimates are making a big bet that the new players will significantly help the team. The question investors need to ask is whether they will help generate more wins than the market expects.

So, how should investors think about today’s stock market valuations? The answer likely sits between rich and cheap. If earnings keep growing rapidly alongside AI spending, the market, in aggregate, may be fairly priced despite CAPE's warning. But a recession, or a slowdown in planned AI spending, is a real risk to that outcome.

That said, while the optimism embedded in the PEG ratio carries downside risks, we must also consider that AI's productivity gains will eventually spread to other S&P 500 companies. The open questions are when, how much, and most importantly for pricing today's market, how that eventual payoff compares to what's already priced in.

Summary

CAPE uses historical realized data to value stocks.  You can debate whether the past decade is a fair guide for valuing stocks, but you can't debate whether the earnings in CAPE's denominator are real; they are.

PEG asks you to rely on one-year and three-to-five-year earnings estimates.  This leaves the obvious question of how much current forecasts deserve to be trusted. The historical answer, as we showed, is not very much.

Nine of the last ten annual EPS estimates were revised lower before they were finished. Thirty years' worth of four-year growth estimates show no statistical relationship to the growth that followed.

However, today's outlook is trickier than in the past, as the expected growth making today's PEG ratio look so cheap is disproportionately concentrated in a small handful of companies. That earnings growth concentration hinges on AI, a powerful innovation that could be an economic game changer.

PEG says market valuations are cheap while CAPE says they are expensive. CAPE is a report card on what already happened. PEG is a bet on what happens next. Keep that distinction in mind, and the two market valuation charts stop contradicting each other.

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After 15 years of guiding Apple to become the largest US company by market cap, Tim Cook stepped down as Apple's CEO effective September 1. In his place, John Ternus, the company's hardware engineering chief since 2021, will become Apple's eighth CEO. The move was announced in April, but with the CEO turnover in September, Apple gave itself a long runway to better manage the transition. Ternus starts about two weeks before Apple's mid-September iPhone launch, in which they will introduce the first foldable iPhone.

Interestingly, Apple didn't pick a services leader, a software executive, or an AI specialist as its next CEO. Ternus is an engineer who has overseen the development of the iPhone, iPad, AirPods, Mac computers, and the Apple Watch. With Ternus, Apple appears to be focusing on hardware innovation, while most of its fellow mega-cap technology companies are chasing AI-related products. Some analysts consider Apple's AI position a vulnerability. The long-delayed Siri overhaul, expected this fall, is reportedly built in part on licensed Google's Gemini technology, and Apple Intelligence (AI) has drawn criticism. Picking Ternus, a hardware engineer to be the CEO, may be recognition that Apple's edge lies in building the best devices for running AI rather than building the models. For more perspective, we discussed the path Apple may be taking on AI in The Apple AI Strategy: Discipline Over Hype.

Tim Cook leaves a formidable record, a market cap that grew 24x to above $4 trillion, and services revenue that crossed $100 billion annually. Ternus inherits headwinds including weak revenue and earnings growth, tariff exposure, memory-driven cost pressures that forced price increases, and clear signs that Apple lags in its AI offerings.

The Ternus bet is that Apple's next chapter is in physical devices, not a model-building arms race.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we walked through September’s seasonal record and a market gone strangely quiet heading into it. Today, the sequel that matters for risk: September sector seasonality, and where the ballast sits when volatility wakes up.

Start with the calm itself. The VIX printed 14.13 on Friday, its lowest of 2026. Even after ticking back near 15 by midday Tuesday, it sits well below its usual level for early September. The S&P 500 hovers around 7,685, a whisper below its record. Ninety-one sessions have passed without a 2% down day. That’s not stability. That’s a spring wound tight.

Notice in the chart above how volatility behaves on the calendar. The median VIX since 1990 climbs from the mid-16s in late August toward 18 by mid-September and 19 by early October. We’re walking into that window priced for the opposite. Bob Farrell’s Rule #9 still applies: when everyone agrees on something, something else usually happens. Right now everyone agrees the tape is bulletproof.

Here’s the part most seasonality talk skips. September is the worst month for the index, but it isn’t uniformly red beneath the surface. Since 1999, Utilities is the one sector that’s closed September GREEN, averaging close to a 1% gain while the S&P lost 0.6%. Consumer Staples and Health Care rank next. They don’t turn positive; they just bleed less. That’s ballast, not a bunker.

The cross-asset read rhymes. Gold sits in its own seasonal window into early October, with GLD near $407, and low-volatility funds tend to earn their keep right when the tape turns jumpy. To wit: the one classic hedge I’d be careful leaning on this year is long-duration Treasuries. With the 10-year back at 4.76% and a Fed under Warsh openly weighing a September hike, bonds aren’t the reliable shock absorber they were in calmer cycles.

There’s a second reason to shade defensive. Nvidia and Micron alone drive roughly a third of this year’s earnings growth. The top ten names explain two-thirds of it. Trimming the crowded winners toward target and rotating a slice into Utilities, Staples, and low-vol does double duty. It hedges the season and thins the concentration.

We suggest that the next move is to trim the most stretched tech back to weight, lift defensive and low-vol exposure, and let cash ride. None of these forecasts that September breaks. It’s ballast bought while it’s still cheap. Buy the umbrella while the sky’s blue. It costs a lot more once the rain starts, if they’ll sell you one at all.

Liquidity Always Has A Price

It's worth comparing sports betting to Wall Street because both operate on the same underlying profit motives: the house extracts a liquidity fee regardless of outcome. FOr investors, knowing the cost of liquidity is imperative, whether it’s disclosed or hidden.

To help explain this concept, let's start with a hypothetical sports bet in which the odds are even for two teams playing each other. Our first bet is to wager $100 on both teams playing using a traditional sportsbook like a casino or online betting site like DraftKings. In this case, the cost of liquidity is implied in the odds. Assuming the odds are -110 for both teams, the bet on the team that lost will lose the $100. The winning bet only collects $90.91 (Profit = $100 × (100 ÷ 110) = $100 × 0.9091 = $90.91). The net cost for both trades is $9.91, or 4.95%.

Now we do the same bet on a prediction market like Kalshi, buying $100 of each team's contract at an even 50 cents each. Kalshi, instead of posting odds, charges a "taker fee", which works out to about $8 on the same $200. The liquidity costs for our bets ranges from 4.00% to 4.95%.

Wall Street runs similarly. Some costs are disclosed, like mutual fund and ETF expense ratios or commissions. This is like Kalshi's fee. Other costs hide inside the price. These include the bid-ask spread and payment for order flow arrangements. These often-small costs add up.

Every financial market, regulated or not, embeds a fee for the dealer providing liquidity by taking the other side of your trade. The question worth asking of any exchange, broker, or sportsbook is whether the cost is disclosed or built into the price. We bring this to your attention because we were just quoted a 2% bid-offer spread to sell a small, illiquid municipal bond. We bet the investor didn’t account for the cost when they bought it.  

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Because Warsh doesn't believe in forward guidance, Friday's Jackson Hole speech may be the last window investors get into his thinking before the September 16 FOMC meeting. Accordingly, it's worth spending more time on his speech to see if Wall Streets verdict agrees with our hawkish take in Monday's Commentary- Warsh Makes A Hawkish Pivot.

It appears our hawkish interpretation of the speech is largely unanimous among Wall Street Analysts. Deutsche Bank called the speech a little surprising and said it "lean[ed] in a decidedly hawkish direction." Nomura agreed, noting "the sensitivity to near-term inflation data is high" and that Warsh was "implying policy may need to react if disinflation is not occurring with speed." Wells Fargo's Gary Schlossberg was very direct in his interpretation. To wit,

He's telling the market, do not expect cuts any time until we have this thing (inflation) completely under control and do prepare yourself for hikes.

A point we raised was whether the motivation behind his hawkish turn was truly inflation concerns or supporting the bond market. Tiger Brokers' James Ooi framed Warsh's emphasis on inflation as a credibility move:

Reinforce the Fed's independence and credibility, reassuring markets that monetary policy will not bend to fiscal pressures

EY-Parthenon's Gregory Daco read it similarly as an overdue inflation-credibility repair.

Both thoughts directly answer our question about the motive being "supporting the bond market." CNBC went further politically, noting the speech "puts Warsh more clearly at odds with Trump's demand for lower rates."

The market's verdict matches our yield curve flattening observation. Cyrus Amini of Hyphen Wealth Management confirmed "the short end of the yield curve rose while the long end moved down," calling it "consistent with a Fed hike." Please see our Tweet of the Day sharing another aspect of the hawkish turn.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we noted the market sitting within a stone's throw of its record while momentum quietly rolled over. Warsh Makes A Hawkish Pivot. Today, I want to put a price on the market complacency heading into September, because the options tape is trading as if drawdowns had been repealed.

Start with what portfolio insurance currently costs. The VIX closed Friday at 14.43, while the S&P 500's own 21-day realized volatility was 10.5%. Four points of premium are very thin, and Goldman's derivatives desk sharpens the point with Brian Garrett putting numbers on it. Roughly a third of the S&P carries three-month implied vol in the sub-5th percentile of a six-month lookback. Worse, forward implied pricing is under-realized for the first time in four years. A negative volatility premium isn't a forecast. It's the market telling you nobody wants the hedge.

The single-stock tape agrees. Cboe's equity put/call ratio printed 0.39 on August 27 and 0.62 on Friday, with the total ratio's nine-day average near the 13th percentile of its range. Everybody is buying calls. Nobody wants to buy puts.

The pushback can almost write itself, with Garrett's own work showing AAII bears above 40 alongside a VIX under 20 has been a bullish setup. It has averaged 1.1% over the following month and 2.9% over three, with roughly a 75% hit rate. Cheap volatility is not a sell signal, and I'm not treating it as one.

The calendar is less accommodating. Since 1928, the S&P 500 has averaged a 1.17% loss in September, per Bank of America. That's the only month with a losing long-run record, and it finishes higher just 44% of the time. The last nine Septembers averaged a 1.7% decline.

Just for reference, the index closed Friday at 7,710, about 2% above its 50-day moving average, which is running at 7,556 and 8.4% above the 200-day at 7,114. A garden-variety reversion to the 50-day is a 2% event. A trip to the 200-day costs 8% and still leaves the bull trend intact. Neither one breaks anything, but, critically, they tend to arrive quickly, particularly in a market where investors carry almost no protection.

We don't recommend selling into this market, at least not yet. Keep risk controls on, a larger-than-normal cash buffer, and no new exposure until the tape shows clearer intent.

What we ARE doing is taking Garrett's conclusion literally. When implied trades under realized, hedges are marked down, and the cheapest week to buy insurance is the week nobody wants it. Rebalance winners back to target, lift portfolio quality, and put the protection on now rather than after the market makes you want it. Such is the nature of complacency. It never feels like a risk until the bill arrives.

Growth Leads The Pack

Breadth remains decent, with the relative scores and the range of scores not too far apart. That said, we are seeing signs that more speculative, growth-fueled stocks are gaining favor. For instance, ARKK, Cathie Wood's Innovation ETF, tends to own high-beta stocks that offer the potential for substantial growth as well as high valuations has the second-highest relative score.

Smaller-cap, mid-cap, and value stocks are generally lagging the market, with relative scores below zero. However, most of their absolute scores are above zero, telling us they are likely in upward trends; thus, they are rising with the market but not keeping up.

As shown in the second graphic, the sector map shows a little more divergence in scores. Energy, Technology, and Healthcare are leading the market. This points to higher oil prices and a renewed focus on growth and higher beta stocks. Recent news from Merck and Moderna on customized cancer treatments pushed the entire healthcare sector higher. Transportation stocks, utilities, real estate, and industrials are weaker. General weakness in real estate and utilities is likely due to higher yields. However, weakness in industrials and transportation stocks signals concerns about rising economic pressures.

Loss: Why Crashes, Timing and Valuations Matter- Part 3 of 5

The first two articles in this series were about behavior. How to think like an investor instead of a speculator, and how to keep your own wiring and your own training from robbing you. This one is about arithmetic. Cold, unemotional, undefeated arithmetic. Underneath every good decision and every bad one sits a layer of math that does not care how you feel, and Wall Street would very much prefer you never do it in your head.

There are three numbers that decide most of your investing life. What a loss actually costs you to recover. What the price you pay today does to your future returns. And what happens when a bad stretch arrives at the wrong moment in your life? Let’s do the math Wall Street skips, one number at a time.

The Math Of Loss

At some point, you have probably seen a version of the reassuring chart below of a century of market history in which bull markets tower over bear markets, crashes look like tiny notches on a soaring line, and the caption tells you to relax and stay fully invested because it all works out. It is undoubtedly one of the most popular charts in finance, and it sells an illusion of safety.

Before you believe the sales pitch that goes along with it, you should ask yourself two simple questions. If staying fully invested through everything is so obviously correct, why does no legendary investor actually do it?

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Traditionally, the annual Jackson Hole Symposium is where the Fed Chair signals which economic forces are shaping the Fed's thinking for the coming year. With a few members pushing for rate hikes and inflation making others anxious, the market is taking his speech as more of an indication of what the Fed may or may not do at the next few FOMC meetings, and less about its 2027 outlook. Focused on the here and now, Warsh was blunt in his assessment of inflation. He signaled the Fed may not be done fighting inflation, saying financial conditions didn't look restrictive enough to him and that recent benign inflation readings hadn't convinced him the trend was improving meaningfully. Per Warsh's speech:

And while this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.

Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job . . . our mandate . . . and our charge to keep.

Warsh backed up inflation concerns with hard data. For instance, PCE inflation sits at 3.7% year over year, with core measures also elevated. He disaggregated all 199 components of the PCE basket and found 54% of goods and services rose above 3% over the past year, down from post-pandemic highs near 77%, but still well above the 32% average of the two decades before the pandemic.

Did Warsh present a more hawkish view to support the bond market, or does he genuinely see inflation this way? We ask this because at the last FOMC meeting he was more optimistic on recent inflation trends. Whatever the motivation, longer bond yields fell on the remarks while shorter yields rose, flattening the yield curve. That is what a credible inflation-fighting message would be expected to do: reassure long-duration holders while raising the odds the Fed holds or hikes at the next meeting rather than cuts. As we show below, within an hour of the speech, the odds of a hike at the September 16th meeting rose from 35% to 57%.

What To Watch Today

Earnings

• No notable earnings releases today

Economy

Market Trading Update

As noted above, the market remains within a stone’s throw of previous highs, but underlying momentum quietly rolls over. The S&P 500 finished the week at 7,711.76, about 1.1% below the record close of 7,796 set on August 13. The index sits 2.0% above its rising 50-DMA near 7,556 and a healthy 8.4% above its 200-DMA near 7,114, and the golden cross remains firmly intact. When looking solely at the trend, the reamins a bull market. However, a look at the underlying momentum shows the cracks are appearing.

Specifically, the 14-day RSI closed at 56.6, down from 58.6 a week ago and well off the overbought readings that accompanied the mid-August record. That reading suggests a more neutral condition, not stretched, and it leaves room in either direction. More telling is the MACD, where the signal line has rolled over; the MACD line at 41 is now sitting below its 51 signal, with a negative histogram. Furthermore, the histogram is narrowing rather than widening, so this is a loss of upside thrust, not the start of a breakdown. Price at the highs on fading momentum is how most short pauses begin, and occasionally how larger ones do.

Overall, participation is the most important tell. As we detailed in Breadth Is Lacking: Is The Rally Sustainable?, a rally led by a shrinking group of names is weaker. This week proved it again. The equal-weight index fell while the cap-weight rose, and small caps dropped 1.4%. When the generals advance without the troops, the advance is on borrowed time.

Heading into next week, this is how we would suggest approaching the market. The record close at 7,796, and the round 7,800 level, are the resistance barriers. If the markets can muster a decisive close above the levels, on strong breadth, that would reopen 7,900 and then 8,000.

Absent that, we will continue to treat rallies into 7,800 as a place to trim winners back to target weight, not to add.

On the downside, the first support is the recent swing low near 7,643, then the 50-DMA at 7,556. Any break of the 50-DMA is the level that begins to turn the recent pause into something worth hedging with index puts or a raised cash buffer. Our money-flow model already trimmed equity exposure toward target weight at the August highs, and we see no reason to reverse that currently.

The base message is to continue keeping risk controls in place, a larger-than-normal cash buffer, and swap risk for safety until the market declares where it is headed next.

The Week Ahead

After Jackson Hole and with little earnings news, markets will likely be quiet in the run-up to Labor Day weekend. That said, Friday's August employment data will be closely watched. Currently, the street expects the Friday BLS employment report to show payrolls rose by 45k with a 0.1% uptick in the unemployment rate to 4.2%.

The graph below shows that payroll growth has largely stalled out since December 2024. Over that period, payrolls have grown by less than 28k per month on average, with most gains coming in March through May of 2026. Some of that growth is likely related to the World Cup. Thus, in addition to the weakness we saw in July's data (-23k) as those workers were let go, we may see more in this week's report.

Since December, the labor force has grown by 2.4 million people, and the number of jobs has grown by 540k or about a fifth of the labor force growth. Over the same period, unemployment remained steady at 4.1%. The curious difference is due to the participation rate, which has fallen by 1.1% to 62.4%. For more on the participation rate and why it may not be as concerning as it seems, check out our Commentary from August 26, 2026. The following paragraph is from the Commentary:

The St. Louis Fed recently broke down what’s driving the decline, and the answer is not necessarily that unemployed workers have stopped looking for jobs.  A “statistical population-control revision” the BLS made in January accounts for 43% of the decline. Another sizeable chunk is due to our aging population; older workers are participating less, as more baby boomers retire. This accounts for another 41% of the decline. The remaining piece is the concern. There has been a sharp drop in the number of prime-age workers 25 to 54.

Democratic Socialism: A Beautiful Cake With A Bitter Aftertaste

On January 1st, a self-described democratic socialist was sworn in as mayor of the largest city in America. Weeks before that, socialist candidates swept a wave of primaries, sending the largest bloc of socialist legislators in New York history to Albany and two more to Congress. Then billionaire governor JB Pritzker went on CNN, was asked whether the socialist wins were a good thing, and answered that they are “the recipe for winning in 2026 and beyond.” Make no mistake, democratic socialism is no longer a fringe idea in America. It’s a live political program with real momentum. The only question that matters is what it delivers after you buy it.

I have been managing money for a very long time through many market cycles, from manias to crashes. Over that time, I have learned to separate what a policy promises from what it produces. So let’s do that honestly here, starting with a concession most defenders of markets won’t make: Capitalism has flaws.

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"Math of Loss" is chapter 3 of a 5-part series examining the narratives around "investing for the long run."

Chapter 1: Think Like An Investor

Chapter 2: Investor Psychology

The first two articles in this series were about behavior. How to think like an investor instead of a speculator, and how to keep your own wiring and your own training from robbing you. This one is about arithmetic. Cold, unemotional, undefeated arithmetic. Underneath every good decision and every bad one sits a layer of math that does not care how you feel, and Wall Street would very much prefer you never do it in your head.

There are three numbers that decide most of your investing life. What a loss actually costs you to recover. What the price you pay today does to your future returns. And what happens when a bad stretch arrives at the wrong moment in your life? Let's do the math Wall Street skips, one number at a time.

The Math Of Loss

At some point, you have probably seen a version of the reassuring chart below of a century of market history in which bull markets tower over bear markets, crashes look like tiny notches on a soaring line, and the caption tells you to relax and stay fully invested because it all works out. It is undoubtedly one of the most popular charts in finance, and it sells an illusion of safety.

Before you believe the sales pitch that goes along with it, you should ask yourself two simple questions. If staying fully invested through everything is so obviously correct, why does no legendary investor actually do it? Every single great investor of time, from Buffett to Paul Tudor Jones, preaches some version of the same rule. That rule is “buy low, sell high, protect your capital.” Why? Because they know something the comforting chart leaves out.

What “if” the chart and the pitch leave out one of the most misunderstood facts in investing? Percentage gains and losses are not mirror images of each other. If a portfolio declines by 10%, it will need about 11% to get back to breakeven. While that may seem tolerable, the math turns vicious quickly after that. As shown, a 20% loss needs a 25% rebound, but a 50% decline requires a 100% increase to recover. Think about that carefully, you need the market to double, just to get back to where you started. Recovering losses is not the same as growing your wealth.

The trick of the chart is how percentages hide the real damage. For example, imagine an index that climbs from 1,000 to 8,000. That is a 700% gain, and you are feeling pretty brilliant. Here is where the percentages begin to trick you. If we assume a 50% correction, your 700% gain doesn’t become a 650% gain, the way subtraction in your head suggests. In reality, it subtracts 4,000 points and drops you back to 4,000, which is only a 300% gain. Half your points, and more than half your profit, gone in one move.

That is why a decline late in a long bull market is never just a blip. As discussed in Bear Market Losses, A Dangerous Illusion, the headlines speak in percentages because it makes the damage sound survivable. The chart below remakes the percentage chart above into actual point losses. Historically, bear markets tend to reverse a majority of the prior move. This is what Buffett and Tudor understand about protecting your investment capital.

There is more to this story, and it gets worse. Equal-sized gains and losses do not cancel out. Start with $100,000, gain 10% to $110,000, then lose 10%, and you are not back to even. You are at $99,000. Do that over and over, and the erosion has a name. "Volatility drag." It is the reason a wild ride to the same average return leaves you poorer than a smooth one. Volatility works against you silently, year after year.

Which brings us to the single most important distinction in this entire series. The difference between the AVERAGE return and the ACTUAL return. A single 10% loss, after three years of 10% gains, cuts your compound growth rate roughly in half. To get back to the average you were promised, you now need a 30% gain. The average on the brochure and the actual money in your account are two very different things. And, most importantly, that gap between them is exactly where losses do their damage. It is the same lesson we started this whole series with. You do not get to spend the average.

And the deepest cost of a big loss is not even the money. It is time. When you take a severe drawdown, you do not just have to earn the money back. You have to earn it back before your goals arrive, and the market sets that schedule, not you. Here is how long the worst declines actually took to recover in real, inflation-adjusted terms, with dividends reinvested.

Sure, you can always earn more money. However, the one commodity you can not “buy” more of is “time.” That is the real math of loss, and it is why this instinct matters so much. Remember loss aversion from the last article, the wiring that makes a loss hurt twice as much as a gain feels good? That is the exact instinct that freezes you into holding a small, survivable loss until it becomes a catastrophic one. Benjamin Graham said it best decades ago.

"The investor's chief problem, and even his worst enemy, is likely to be himself."

Valuations Are Destiny

So the first job is avoiding the big loss. The second number tells you when the risk of one is highest, and it is the most reliable guide we have. Not a chart pattern, not a headline, but valuation. The price you pay for the market today sets a ceiling on what you can reasonably expect it to return over the next decade.

Let me be precise about what valuations do and do not do, because this is where most people get it wrong in both directions. Valuations are a terrible market-timing tool. They tell you almost nothing about where prices go over the next twelve months, and anyone using them to call next quarter is going to look foolish. But over a decade, they are about the closest thing this business has to gravity. High valuations do not mean every year ahead will be bad. They mean the total return across the whole decade is likely to be low. Those are very different claims, and holding both in your head at once is the mark of an investor who actually understands the tool.

One of the most widely quoted valuation measures is Dr. Robert Shiller's CAPE ratio. CAPE is the ratio of the "cyclically adjusted price-to-earnings." The ratio smooths earnings over a 10-year period, so a single boom-or-bust does not distort the picture. Here is where it sits today against 155 years of history.

Now, you could argue the CAPE is just one measure, and you would be right. So consider that it has plenty of company. Price-to-sales ratio sits near record highs. Market capitalization relative to the size of the economy, the ratio Warren Buffett once called the best single gauge of valuation, tells the same story. So do the earnings yield and corporate return on equity. I have run through all of them in Lower Forward Returns Are A High Probability Event, and the punchline never changes. No matter which measure you pick, the message is identical. From here, expect less. That is what makes the signal robust. It is not one indicator flashing. It is all of them, at once.

And the historical record behind that signal is about as one-sided as anything in markets. Sort every month in history by its starting CAPE, then measure what the market actually delivered over the following decade.

Read the far-right bar carefully, because that is where we live now. Every prior time valuations reached today's neighborhood, the following decade delivered a NEGATIVE real return on average. The logic is not complicated. If you overpay today for a future stream of earnings, your future return has to be low. You have simply pulled tomorrow's gains forward into today's price and left the next decade with the bill.

It also explains a startling fact from market history. Across the last 150 years, only a handful of long secular bull markets produced essentially all of the market's gains. Buy and hold during any of the long stretches in between, and the result was deeply disappointing. When you start matters, and you almost always start from wherever valuations happen to be. This is Bob Farrell's first rule in action. Markets return to the mean, and the further they stretch above it, the more the next decade tends to give back. This time is rarely different.

"Valuation tells you almost nothing about next year and almost everything about the next decade. Pay a high price, and you have pre-committed to a low return." - Real Investment Advice

The Retirement Reckoning

Let’s tie all this together, as this is where the first two numbers collide, and where the math gets personal. Everything above is manageable while you are still working and adding money. A bad decade early in your career is almost a gift, because you are buying cheap the whole way down. But flip the situation. Once you retire and start withdrawing money, the order in which your returns arrive can matter more than the average return itself. Financial planners call it sequence-of-returns risk, and it is the quiet killer of retirements.

The idea behind the “sequence of return” risk is both simple and brutal. In retirement, you start withdrawing income, so a large decline early in your retirement cycle can cause permanent damage. This is because every withdrawal during a downturn forces you to sell shares at depressed prices to cover your living expenses.

Think about it this way. If we assume a $1,000,000 portfolio, with the 4% taken as a fixed dollar amount ($3,333/month, the classic 4%-rule convention) and the market declines by 10%, your portfolio ends down about 13.78%, not 10%.

Go back to the “math” above. That 13.78% loss, assuming the ongoing 4% withdrawal, now requires an 21.14%. recovery. See the problem with the simple math? Even when the market fully recovers, your portfolio does not.

Repeated studies of retirees who withdraw around 4% per year find that a 30% to 40% loss in the first few years sharply increases the odds of running out of money, even if the long-run average return is perfectly fine. The order is the whole game. Watch what that looks like.

That is the same strategy, same withdrawal, and the same discipline. One retiree ends up with three million dollars, and the other nearly runs out, and neither of them did a single thing differently. The 2000 retiree simply had the misfortune of retiring into high valuations right before a lost decade, drawing income while the portfolio was underwater. That is sequence risk, and here is the part that should get your attention. The 2000 retiree started at a CAPE of 44. Today we sit near 40.

That does not mean anyone retiring now is doomed. It means the margin for error is thin, and the standard advice to simply buy, hold, and withdraw a fixed percentage was built on a much cheaper market than the one in front of us. If you are within a few years of retirement, this is the number that matters most, and it is the one that almost never makes it into the glossy brochure.

What The Math Tells You To Do

Okay, it’s time to tie this all together, and there are three numbers and one conclusion.

• Losses are asymmetric, so avoiding a big one is worth more than catching a big rally.
• Valuations set the odds, and today they are stacked toward lean returns.
• And timing, especially near retirement, can overwhelm everything else.

Put together, they do not say sell everything and hide in a bunker. They say to manage risk deliberately. Here is the framework I come back to, drawn from years of writing on portfolio risk management.

The Bottom Line

None of this math is complicated. That is what makes it so striking that so few people ever do it. A loss needs an outsized gain to recover. A high price today means a low return tomorrow. And a bad decade at the wrong moment can undo a lifetime of saving. The market has been teaching these three lessons for 155 years, in the same numbers, over and over, and they have never once gone out of style. Savvy investors stop thinking in percentages and days, and start thinking in dollars, years, and goals.

The math is pretty simple, and its message is clear:

• Avoid big losses
• Respect valuations, and
• Mind your timing.

If that is the case, then why does so much of the industry insist on the opposite? Why are we told to always stay fully invested, that you cannot beat the index, that the great investors are impossible to imitate, and that costs are the only thing that matters? In the next article, we take on the myths themselves, the comfortable stories the industry tells to keep you passive, and we run each one through the same unforgiving math we just used here.

Sources & Notes

1. Real total return, CAPE valuation, and inflation data: Robert Shiller, Yale University. econ.yale.edu/~shiller/data.htm. All four charts are built directly from this series, data through July 2026.
2. Lance Roberts, "Bear Market Losses, A Dangerous Illusion," RIA Advisors. realinvestmentadvice.com
3. Lance Roberts, "Lower Forward Returns Are A High Probability Event," RIA Advisors. realinvestmentadvice.com
4. Lance Roberts, "The Best Measure Of Future Stock Market Returns," RIA Advisors. realinvestmentadvice.com
5. Lance Roberts, "Portfolio Risk Management: Accepting The Hard Truth," RIA Advisors. realinvestmentadvice.com
6. The math of loss is arithmetic: the gain required to recover a loss of x% equals x / (100 - x). Drawdown and recovery figures are real (inflation-adjusted) total return, dividends reinvested. Forward-return-by-valuation figures group every month since 1881 by starting CAPE and measuring the subsequent 10-year annualized real total return. Retirement illustration: $1,000,000 initial balance, $40,000 first-year withdrawal, grown with inflation, invested at the market's real total return from each start date.
7. Benjamin Graham, "The Intelligent Investor." Bob Farrell, "10 Market Rules to Remember," Merrill Lynch.

The post Loss: Why Crashes, Timing & Valuations Matter (Chapter 3 of 5) appeared first on RIA.

🔎 At a Glance

• Druckenmiller Warning: The Bond Market Already Priced It
• Market Brief & Technical Review
• From Lance's Desk: Democratic Socialism: A Beautiful Cake With A Bitter Aftertaste - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - A Bond Scare

If you look at the market headline, the bulls won this week. However, the internals told a different story with the S&P 500 closing Friday at 7,711.76, up 0.5% on the week, while the Nasdaq Composite added 0.9% to 26,402.42. Yet under that placid surface, the average stock lost ground. The equal-weight S&P slipped 0.4% while the cap-weighted index rose, and the Russell 2000 fell roughly 1.4%. Notably, only three of the eleven sectors finished green.

Nvidia did the heavy lifting. Its blowout Wednesday-night report and a forecast for 70% fiscal-2028 revenue growth sent the stock up nearly 9% Thursday and dragged the index to a fresh record before Friday's fade. The entire tape is now leaning on the AI complex, and the AI complex is now leaning on one earnings call at a time. Communication services, technology, and financials were the only sectors to advance. Health care, industrials, and energy led the laggards.

However, the real story was in Wyoming as Fed Chair Kevin Warsh gave his first Jackson Hole address and refused to blink. He said this summer's better inflation prints do not tell him underlying trends have "meaningfully improved," and he committed, in his words, to a discipline rather than a decision. In other words, his rock-solid commitment to “no forward guidance” remained intact and provided no cover for a market pricing in cuts.

Beneath the equity calm, the bond market is anything but. The long end refuses to come down with the 30-year sitting near 5.2%, not far from a 19-year high. This is even after Treasury doubled its long-dated buyback lots to $4 billion to steady the tape, which starts September 4th. As we discuss more below, Stanley Druckenmiller used the pages of the Wall Street Journal this week to call that intervention "price management" and to remind Washington that the long bond is the only fiscal disciplinarian we have left.

Cross-asset performance told the same cautious tale. On Friday, gold fell 2.9% o roughly $4,530 after its strongest month in decades, WTI held near $83, and bitcoin slipped toward $77,700 as its mid-month squeeze unwound. This is a story about uncertainty over whether the Fed can successfully transmit its interest-rate signal back to the bond markets.

As I flagged two weeks ago in Record Highs: Should You Chase The Rally?, our money-flow breadth model had already pushed into extreme overbought territory and was signaling profit-taking, not chasing. Nothing this week changed that message. Watch participation, not the index, as we head into next week's jobs data.

📈Technical Backdrop - Momentum Rolls Over, What Next?

As noted above, the market remains within a stone’s throw of previous highs, but underlying momentum quietly rolls over. The S&P 500 finished the week at 7,711.76, about 1.1% below the record close of 7,796 set on August 13. The index sits 2.0% above its rising 50-DMA near 7,556 and a healthy 8.4% above its 200-DMA near 7,114, and the golden cross remains firmly intact. When looking solely at the trend, it remains a bull market. However, a look at the underlying momentum shows the cracks are appearing.

Specifically, the 14-day RSI closed at 56.6, down from 58.6 a week ago and well off the overbought readings that accompanied the mid-August record. That reading suggests a more neutral condition, not stretched, and it leaves room in either direction. More telling is the MACD, where the signal line has rolled over; the MACD line at 41 is now sitting below its 51 signal, with a negative histogram. Furthermore, the histogram is narrowing rather than widening, so this is a loss of upside thrust, not the start of a breakdown. Price at the highs on fading momentum is how most short pauses begin, and occasionally how larger ones do.

Overall, participation is the most important tell. As we detailed in Breadth Is Lacking: Is The Rally Sustainable?, a rally led by a shrinking group of names is weaker. This week proved it again. The equal-weight index fell while the cap-weight rose, and small caps dropped 1.4%. When the generals advance without the troops, the advance is on borrowed time.

Heading into next week, this is how we would suggest approaching the market. The record close at 7,796, and the round 7,800 level, are the resistance barriers. If the markets can muster a decisive close above the levels, on strong breadth, that would reopen 7,900 and then 8,000.

Absent that, we will continue to treat rallies into 7,800 as a place to trim winners back to target weight, not to add.

On the downside, the first support is the recent swing low near 7,643, then the 50-DMA at 7,556. Any break of the 50-DMA is the level that begins to turn the recent pause into something worth hedging with index puts or a raised cash buffer. Our money-flow model already trimmed equity exposure toward target weight at the August highs, and we see no reason to reverse that currently.

The base message is to continue keeping risk controls in place, a larger-than-normal cash buffer, and swap risk for safety until the market declares where it is headed next.

🔑 Key Catalysts Next Week

As noted above, this whole week came down to Kevin Warsh’s Jackson Hole speech in which he focused solely on the data. This coming week, the labor market will answer pretty much everything all at once. The August employment report lands on Friday at 8:30 a.m. ET, and it is the week's fulcrum. After the Fed chair refused to pre-commit to a September cut, a soft payrolls number would hand the doves their ammunition, while a firm print alongside sticky prices would validate the hold and keep pressure on the long end of the curve.

However, it isn’t just Friday that will move the markets. Tuesday brings JOLTS job openings and the ISM Manufacturing index, with a much greater focus on the prices-paid component after it last printed above 70.

Then, on Wednesday, the ADP private payrolls report, which has been running soft, will give us some insight into Friday’s BLS employment report. Thursday brings the ISM Services, weekly jobless claims, the trade balance, and productivity revisions into a single session as September gets underway.

The Fed itself goes dark. The pre-FOMC blackout begins ahead of the September 16 decision, so Warsh's Jackson Hole remarks are the central bank's last word until the meeting. That leaves the data to do all the talking.

On the corporate side, one report towers over the rest. Broadcom reports fiscal Q3 after the close midweek, with consensus near $3.24 in EPS and management already guiding to roughly $29.4 billion in revenue, driven by AI strength. Broadcom is the cleanest read we get on whether hyperscaler AI capex is still accelerating, and given how much of this tape rests on that one question, it matters far more than its market cap suggests.

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💰 Druckenmiller Warning: The Bond Market Already Priced It

Recently, Stanley Druckenmiller wrote an opinion piece for the Wall Street Journal. The “Druckenmiller warning” hit on August 24, and within a day, the financial press turned it into a soap opera. Some of the headlines were “Mentor scolds protégé,” and “Billionaire slams the Treasury Secretary.” Then, the revelation that he wrote it with the help of AI somehow became its own headline.

However, while the media was busy making headlines, the argument was lost. Stanley Druckenmiller did not forecast a debt crisis, nor pitch a trade. What he said was something difficult to fit in a headline, and it was something the bond market has already said for him.

What Actually Happened On August 19

On August 19th, the Treasury said it would double the size of its long-dated buyback operations to at least $4 billion. That operation will run from September 9 through November 4 (it hasn't started yet) and is aimed at the long end of the curve. The timing of the announcement was the tell, and the heart of the Druckenmiller warning, as the move came right after yields hit their highest level in about 19 years. Yields dropped on the news, but by the next trading day, the bond rally was reversed. The long bond has hovered in the 5.2% range since then.

Treasury Secretary Scott Bessent then told CNBC the operations could run bigger than $4 billion. Days later, senior officials floated the idea of using the department's nearly $950 billion cash account to help fund the purchases. What is crucial to understand is that these actions are a very different conversation from "liquidity support."

You do not need to support a market you yourself describe as having strong, consistent sponsorship, and that strong sponsorship is the definition of a healthy market. However, the Treasury intervened anyway right after yields peaked, which is why the market read it as "price management" and shrugged.

What The Druckenmiller Warning Actually Says

I posted the link to Druckenmiller’s warning above, and encourage you to read the piece closely. When you do, you will realize that the popular summary falls apart.

Most notably, the article was not a claim that yields are about to spiral. What Druckenmiller suggests is that a 30-year bond at 5.5% is an "invoice," not a “crisis,” nor was it a claim that the "bond vigilantes" have finally arrived. He actually described the opposite: a market he called "a pushover that had finally begun to clear its throat,” and the bond market has been too calm, rather than too violent.

However, Druckenmiller’s real target is structural. To wit: the long bond, in his framing, is "the only fiscal disciplinarian the U.S. has left." He states that if you suppress that signal, you subsidize the one thing Washington does reliably well: “delay.”

While many currently point fingers at the Republicans, particularly as we approach the mid-term elections, the reality is that neither party has the will to touch entitlements with the market applying pressure. But more importantly, without that pressure, neither party has shown the will to touch them either. Such is why entitlements are called the “third rail of politics,” because if you touch them, your political career is toast.

There's a second layer that most of the media coverage skipped. Historically, yield management has always started as a technical operation. However, as with most things in Government, it tends to end as a more permanent policy commitment. From 1942 to 1951, the Fed capped long Treasury yields to finance the war. Naturally, that cap outlived the war by years before the Treasury-Fed Accord finally killed it. The wall between managing the debt and managing bond prices was built on purpose. Unfortunately, that “wall” gets blurred by this intervention.

The last time this happened, it looked like this.

The gap at the center of the Druckenmiller warning is the space between what he wrote and how it's being read. That gap is wide enough to matter. The table lays it out.

The Strongest Case Against The Druckenmiller Warning

To be fair, the bond bears have a valid point. Someone will wave the whole thing off as $4 billion against a market north of $30 trillion, a rounding error. So, what is all the fuss about? They are correct about the arithmetic. Four billion dollars cannot set the long end, and the recent round-trip in yields proves it. However, that also exposes the risk in the argument. You can't call an operation both impotent and dangerous in the same breath without saying which one it is.

(The chart below shows the history and magnitude of previous buybacks. This is not unprecedented by any measure.)

There is a much better version of the pushback, and it comes from people like Jon Hilsenrath. He noted that a move in long yields isn't purely fiscal information but also reflects dealer balance sheets, hedging flows, and the financing of levered positions. The March 2020 and 2022 gilt crises both showed that liquidity can seize up even when the fundamentals look fine. Furthermore, Bessent's stated case is that the Treasury sees something about market functioning that outsiders don't. That probably isn't as crazy as it sounds on its face.

So where does that leave the Druckenmiller warning? In our opinion, it is much stronger than its critics allow, for one reason. The danger was never the four billion dollars. The mistake is the precedent: the signal that the Treasury will now step in to defend a price. Once the market believes that, every selloff becomes a test of official resolve, and the tests only get bigger. This is the very definition of “moral hazard” that we discussed previously. More notably, the bond market has already ruled on this point.

Bessent's actions run counter to Kevin Warsh's recent mandate to remove the "Fed Signal" from the market. For investors, this means we will need to watch the next moves from both Bessent and Warsh.

What The Druckenmiller Warning Means For Bond Investors

The future is currently uncertain. What will happen with oil prices, tariffs, and political policy? The mid-term elections are coming quickly, and there are signs of both economic weaknesses and strengths. The Fed is signaling it is backing away from market support, but the Treasury says it is still there. It's all confusing, but for investors managing their own portfolio, it suggests several changes to both strategy and holdings.

1. Do not buy the long bond for the buyback bid. A $4 billion operation is a backstop, not a floor under prices. Supply at the long end is getting heavier as deficits run near 6% of GDP. Furthermore, corporate issuance is competing for the same buyers. The 20- to 30-year part of the curve is now a political football. Political footballs trade with extra volatility.
2. Own the belly of the curve, the 5- to 10-year part. That is where you capture most of the yield with far less duration risk. You also reduce exposure risk to whatever "policy commitment" the long end gets dragged into. At a 10-year near 4.7%, the coupon does real work as you are paid to wait. Just take that interest rate “carry” where the duration risk is SMALL.
3. Lastly, it could pay to keep some inflation protection in the mix. If the Treasury escalates its interventions and funds long-bond purchases with bills or its cash account, that's a quiet form of easing. However, that is occurring while inflation still runs above the Fed’s 2% target. In that environment, TIPS will earn their place in portfolios. But the risk is that you cap your returns if the term premium keeps grinding higher on increasing supply.

Here is an example of the 40% allocation in a 60/40 equity/bond portfolio.

So, here is the question worth asking.

“If there's no crisis, why not just own the long bond and clip the coupon?”

The answer is the escalation path, so you will want to watch the Treasury General Account. If Treasury actually deploys the $950 billion to defend a yield level, Druckenmiller's "technical tool becomes policy commitment" line stops being theory, and the trade shifts toward steeper curves, more inflation protection, and shorter nominal duration.

The one thing that would push me to extend into the long end with conviction is the opposite of intervention. A credible plan on the deficit would do more for the long bond than any buyback. This is the real point of the "Druckenmiller Warning," and it's mine too. I've argued before that the debt problem is a crisis without a calendar. However, that is what the waiting looks like.

🖊️ From Lance’s Desk

This week's #MacroView blog explores the differences between Democratic Socialism and Capitalism. While capitalism has its flaws, before abandoning it for socialism, understand what you are voting for.

Also Posted This Week:

• Productivity On Gilligan's Island: Episode 2 - RIA - by Michael Lebowitz
• Investor Psychology Is Sabotaging Your Returns (Chapter 2 of 5) - RIA - by Lance Roberts

📹 Watch & Listen

The NASDAQ is showing signs of technical improvement after five straight down days and a significant mean-reversion move. The 20-DMA has moved back above the 50-DMA, a rising trend line is developing, and improving momentum could put recent highs back in play.

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 struggled a bit this past week but eeked out a small gain. Technology gained ground with Nvidia's earnings, but Energy eased a bit with the decline in oil prices. Overall, the market remains well deviated above longer-term moving averages but has reversed some of its previous overbought conditions. Communications is the most overbought sector, and Industrials, Utilities, Small and Mid-cap stocks are the most oversold.

📐 Technical Composite: 74.31 - Overbought Reversing

The technical condition pushed higher this past week with the markets small gain. However, overall, the market remains technically overbought, and sentiment remains bullish for now with no significant technical breaks. Indicator does suggest more struggles for the market next next.

🤑 Fear/Greed Index: 68.07 – Investors Reduce Bullishness

Even though the market posted a positive return last week, the underlying allocation and sentiment to the market reversed somewhat. There was a sharp drop in the Commitment of Traders equity allocations, and sentiment declined over the last two weeks. While not a significant warning yet, as we enter September, the reversal in positioning is worth watching.

🔁 Relative Factor Performance

About 12-weeks ago we noted that Goldminers were the most oversold factor on the list which suggested that a rotation was likely. That rotation has now occurred and Goldminers are extremely overbought. Take profits and rebalance your positioning. Disruptive Tech, US Qualrity, Large Cap Value, and Equal Weight are also very overbought suggesting we could see a bit more of correction in the market over the next few weeks and see a rotation towards lower beta and technically beaten up sectors.

📊 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 28, 2026, with the S&P 500 at 7,711.76, the Money Flow Breadth Ratio (MFBR) stands at 75% and declining, versus 75% the prior week - a 5 percentage-point decrease over the last two 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's 25-year backtest is the reason for the trim: MFBR readings above 70% have been followed by below-average forward returns, so the grid reduces exposure at these levels rather than adding to it. 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

Two weeks ago we noted that several sectors of the market were hitting extremes which typically denotes a good opportunity to reduce risk and rebalance holdings. As of this week, the overall market, Energy, Communications, Materials, Technology, Healthcare, Emerging Markets, Gold and Gold Miners are all outside normal return ranges on a monthly basis. Continue to rebalance risk as we move into the seasonal weak month of September.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Druckenmiller Warning: The Bond Market Already Priced It appeared first on RIA.

Nvidia reported record fiscal second-quarter results Wednesday with revenue more than doubling year over year to $96 billion. After initially falling on the news, the stock rose over 8% overnight. During the earnings call with analysts, CFO Colette Kress guided Nvidia's fiscal 2028 revenue to roughly 70% growth. The forecast implies nearly $700 billion in annual revenue, more than 10% higher than most analysts expected. CEO Jensen Huang one-upped her, alluding that demand is much greater than what they can supply.

Even though our demand is much greater than 70%, our supply allows us to confidently deliver 70%... We've got a huge year coming up next year, and it's going to be pretty extraordinary.

The commitments from hyperscalers driving Nvidia's revenue outlook are impressive. Kress said the top five hyperscalers are expected to increase capital spending from $800 billion this year to $1.3 trillion in 2027, and commitments for Nvidia chips more than doubled sequentially, from $119 billion to $279 billion.

Gross margins held at 75% for a second straight quarter, though Kress warns they will compress to 71-72% by Q4, partly due to memory scarcity driven by the massive AI buildout. Also of note and as we discuss in more detail in a section below, its accounts receivable rose by 127%. Nvidia spent $26 billion on buybacks and dividends this past quarter, showing the company is returning capital even as it commits hundreds of billions in funding agreements with customers to promote future demand.

What To Watch Today

Earnings

Economy

Market Trading Update

In yesterday’s commentary, we laid out the earnings preview for NVDA. Today, we are going to discuss the results and why NVDA not only remains an important barometer of the AI space, but also an important data point for the market in general.

As Michael notes above, the print was spectacular, and the stock traded near $224 in Thursday’s pre-market, up about 7%. So the “beat and raise” coverage wrote itself, and the Nvidia "buy, sell, hold" question looked settled before the market even opened. However, it wasn’t and isn't, and the number that matters never appeared on the income statement. It was in the cash flow statement.

Give the quarter its due first. Revenue beat consensus by nearly $4 billion, Data Center grew 117%, and gross margin came in at 75.0%, up 2.6 points from the July quarter a year ago. Jensen Huang said, “Compute is revenue” on the release. On these numbers, he’s earned the line.

There were two details worth paying attention to. The first was that gross margin was guided DOWN to 74.0% next quarter, which is small but the wrong direction for a company that the market prices on scarcity. Secondly, GAAP earnings of $2.46 also exceeded the adjusted $2.22 because a $7.8 billion mark-to-market gain on equity stakes was recognized in the income statement. Anyone anchoring to the GAAP figure is counting a “one-time” windfall as operating performance, which is why we focus on operating income, which strips out those one-time gains.

As for the reported $12.9 billion for Hugging Face, read the price two ways. When compared against the roughly $150 million in revenue, Nvidia paid 86 times sales. However, against Nvidia’s balance sheet, it was twelve days of revenue. Strategically loud, financially trivial, and the “vertical integration” framing reads as defense. Nvidia’s largest customers are designing their own processors, and owning the place developers download models from is how you keep them on CUDA.

Here’s the chart of the day. Revenue grew 106%. Net income grew 126%. Operating cash flow grew 57%.

That gap is what the “quality of earnings” question actually means. Nvidia turned $59.7 billion of reported profit into $24.1 billion of operating cash, roughly forty cents on the dollar, against fifty-eight cents a year ago. Free cash flow totaled $21.4 billion, while the company returned $25.8 billion to shareholders through buybacks and dividends. For one quarter, Nvidia returned more cash than the business generated and covered the shortfall from the balance sheet. It’s the same species of choice we looked at on the policy side on Wednesday.

The Nvidia Buy Sell Hold Verdict

So, mostly good news, and some things to watch, which brings us to the "Buy, Sell, or Hold" question. We say "Hold" for now. The valuation is the weakest part of the bear case, not the strongest. Nvidia trades at 18.4x forward earnings, while the S&P 500 trades at 20.0. The largest weight in the index, the stock every strategist points at when they call this market expensive, is cheaper than the market it dominates.

It earned a 103% return on invested capital over the past year against a cost of capital nobody sensibly models above the low teens. Broadcom, a genuinely excellent business, returns 24%.

So we are not selling 18x earnings on a business compounding at triple digits. I’m not adding either, because you don’t pay up into a margin guide that just ticked lower and a cash conversion rate that halved in four quarters. Both facts arrived in the same press release, and the market spent Thursday morning pricing only the revenue line.

Will "hold" always be the right answer? No. If the fundamentals begin to weaken, we will reevaluate our thesis quickly and take action.

Currently, we hold Nvidia at 4% of our 60/40 portfolio, and most investors read that the wrong way. The arithmetic is dull. Nvidia is 7.50% of the S&P 500, so an index-neutral position inside a 60% equity sleeve works out to 4.50% of total assets, which makes our 4% a half-point underweight rather than the “concentrated” bet it gets called. At that weight, a 30% drawdown costs the portfolio 1.2 points, and a 50% drawdown costs 2.0 points. Neither ends a retirement plan.

So keep it at the target weight and let it work. Trim back to 4% whatever the next rally pushes past 5%, because that’s rebalancing, not forecasting.

Nvidia Accounts Receivable Double

As we opened this Commentary, Nvidia reported another quarter of stunning revenue growth. However, buried in the earnings report is a potential risk that gets far less attention than the headline growth numbers. Three customers accounted for roughly 44% of first-half revenue combined, and in the prior quarter, three customers represented 64% of accounts receivable. Nvidia does not name the customers in its filings.

Our best guess is that they are the largest hyperscalers. CFO Colette Kress has said cloud service providers represent roughly half of data center revenue. Thus, with Microsoft Azure, Amazon Web Services, and Google Cloud commanding the largest share of that market, Microsoft, Amazon, and Alphabet, alongside Meta and OpenAI, are the most likely candidates.

Microsoft, Amazon, Alphabet, and Meta are among the most well-capitalized companies, are highly rated by bond rating agencies, have tens of billions in quarterly free cash flow, and balance sheets built to absorb far more spending than they're currently committing. That concentration of risk is not concerning in our opinion.

OpenAI is the exception. It's privately held, unprofitable, and increasingly diversifying its own compute away from Nvidia toward Cerebras and other architectures. They are expected to announce an IPO this year or early next year, which would better finance the company and improve the risk on Nvidia's books. However, its shift in ordering away from Nvidia may be more concerning. The section below shares more about Cerebras and the differences between their chips and Nvidia's.

Who Is Cerebras?

Compared to Nvidia, Cerebras Systems takes the opposite approach to AI chips. Rather than manufacturing individual GPUs and networking thousands of them together, Cerebras builds a Wafer-Scale Engine, a single chip that uses an entire silicon wafer, roughly the size of a dinner plate. For context, Nvidia's largest GPU is closer to the size of a credit card.

Cerebras eliminates a major source of latency. In a normal GPU cluster, data travels between separate chips through cables and networking protocols, adding latency. Cerebras keeps everything on one piece of silicon to avoid the latency.

Building a chip that large was considered impossible to mass produce because one defect can ruin the entire chip. Cerebras solved this problem with hundreds of thousands of small, redundant cores, so a single defect disables only one tiny core rather than the whole chip.

To some degree, Cerebras is becoming a credible alternative for AI inference. If other large hyperscalers and AI labs like OpenAI shift to wafer-scale inference, Nvidia's revenue growth may fall short of expectations. However, Cerebras is too small to replace Nvidia at scale; its entire revenue base is a fraction of what Nvidia earns in a single quarter, and it can't manufacture wafer-scale systems at anywhere near the volume hyperscalers demand today. Its wafers also excel at a narrower niche, inference and memory-bandwidth-heavy workloads, rather than serving as a general-purpose substitute for the training work that drives most AI spending.

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Democratic Socialism promises affordability and fairness. The bill, from Caracas to Copenhagen, is something else entirely.

On January 1st, a self-described democratic socialist was sworn in as mayor of the largest city in America. Weeks before that, socialist candidates swept a wave of primaries, sending the largest bloc of socialist legislators in New York history to Albany and two more to Congress. Then a billionaire governor, JB Pritzker, went on CNN, was asked whether the socialist wins were a good thing, and answered that they are “the recipe for winning in 2026 and beyond.” Make no mistake, democratic socialism is no longer a fringe idea in America. It's a live political program with real momentum. The only question that matters is what it delivers after you buy it.

I have been managing money for a very long time through many market cycles, from manias to crashes. Over that time, I have learned to separate what a policy promises from what it produces. So let's do that honestly here, starting with a concession most defenders of markets won't make: Capitalism has flaws.

Capitalism Has Flaws

Capitalism is not perfect, and pretending otherwise is how you lose the argument before it starts. The system distributes rewards unevenly, routinely runs in boom-and-bust cycles, and has produced a K-shaped economy where asset owners pulled away from wage earners after 2008 and again after 2020. Housing, healthcare, and childcare have all outrun paychecks, and younger workers look at home prices and tuition bills and conclude the game is rigged.

I get it, and most importantly, I agree.

However, here's the part that should bother free-market defenders most. A lot of that anger is aimed at something real. As I've written before, the serial bailouts since 2008 have socialized losses for the powerful while everyone else has absorbed the cost. That's not capitalism working. That's capitalism being corrupted. So when a 28-year-old votes for Zohran Mamdani, the grievance underneath the vote is not stupid. It's the diagnosis of the cure that fails, and it fails badly.

Let's dig into something equally important.

Democratic Socialism Is Not Social Democracy

The biggest source of confusion in this whole debate is the word itself. People use “socialism” to describe two systems that could not be more different, and the sloppiness is doing real work.

Socialism, in the textbook sense, means the state or “the community” owns the means of production. The government runs the factories, the banks, and the farms. Central planners, not markets, set prices. Social democracy is a completely different animal. It keeps private ownership, market prices, and free trade fully intact, then layers a large, tax-funded welfare state on top. One replaces the market. The other feeds off it.

Why does the distinction matter so much? Because the countries that collapsed were the first kind. And the countries American progressives actually point to, Denmark and Sweden, are the second kind, which is "Social Democracy." They aren't socialist at all. We'll get to why that gap sinks the whole pitch. First, the table.

The Purest Version: Collapse, Then A New Elite

Start at the far end of the spectrum, because that's where the theory gets its cleanest test. Venezuela was the richest country in Latin America, sitting atop the world's largest oil reserves. Then Hugo Chavez and Nicolas Maduro nationalized hundreds of companies, imposed price controls, and expropriated private land in the name of the people.

The result was the deepest peacetime economic collapse in modern history outside of war. Output per person fell by roughly three-quarters. Food production dropped 75%. Inflation crossed a million percent. Nearly eight million people walked out of the country on foot.

One point critics will reach for is U.S. sanctions. That is true, but those sanctions arrived later and only deepened the existing wound. But the collapse was well underway before the 2017 sanctions, and other oil states rode out the same 2014 price crash with their economies intact. The wound was self-inflicted. During the boom years, many Western admirers held up Venezuela as proof that socialism works. It wasn't.

Now, the part that the brochure never mentions, and what you have to be very careful of when voting for it. Socialism promises to abolish the elite. In reality, it only installs a new and more deeply entrenched one.

The Soviet Union had its nomenklatura, the party class with private stores and country dachas. North Korea is on its third generation of hereditary Kim rule, a monarchy with a red flag. China favors its “princelings,” the descendants of the original revolutionaries. Venezuela produced the boliburguesia, the connected insiders who grew rich while the country starved. So, the reality is that SOMEONE will always end up on top, it just won't be you or the average worker.

Look at who leads the movement here at home. The new face is Mamdani, son of a Columbia University professor and a globally acclaimed filmmaker. The loudest establishment cheerleader is Pritzker, heir to the Hyatt fortune, worth close to $4 billion, assuring everyone that taxing the rich is only fair. These are not people who have missed a meal. That's the pattern across a century of these movements, and it's no accident. The bigger the state you build to deliver “equality,” the bigger the prize for whoever captures it.

Markets, Not Manifestos, End Poverty

Run the film in reverse, and the lesson is just as sharp. Under Mao's fully planned economy, the Great Leap Forward produced the deadliest famine in human history, killing somewhere between 10 and 40 million people. Then Deng Xiaoping said four words that changed the world: “Poverty is not socialism.” He handed farmers their own plots, opened special economic zones, and let prices and trade do their work.

The result is the single largest reduction in human poverty ever recorded.

China's extreme poverty rate fell from roughly 88% in 1981 to under 4% by 2016. Around 800 million people climbed out of destitution, accounting for about three-quarters of all global poverty reduction over that period. India tells the same story after it dismantled its socialist “License Raj” in 1991 and let markets breathe.

Here's the point, and it's the one that should stop a thoughtful young voter cold. China is not free. It's an authoritarian state. Yet the moment it let private ownership and market prices operate, outcomes improved faster than any welfare program in history could dream of. That's how much power sits in the market mechanism, and it's exactly the machinery socialism proposes to switch off. We've laid out the deeper data on this in Capitalism: The Road To Wealth And Happiness.

“But Scandinavia Works”

This is the strongest argument the other side has for democratic socialism, so let's take it seriously. The Nordic countries have universal healthcare, cheap college, low poverty, and citizens who report being among the happiest on earth. Bernie Sanders has spent a decade telling Americans to look to Denmark and Sweden. If that's democratic socialism, why not copy it?

Because it isn't socialism. Not remotely. Denmark's own prime minister traveled to Harvard to correct the record, telling Americans plainly, “Denmark is far from a socialist planned economy. Denmark is a market economy.” The Nordics rank among the freest economies in the world. On the Fraser Institute's index, Denmark sits at #10, ahead of most of Europe. They have flexible labor markets, no legislated national minimum wage, strong property rights, aggressive free trade, corporate taxes lower than ours, and, in Sweden's case, a nationwide school voucher system American progressives would call heresy.

When you compare Venezuela to Denmark, the word “socialism” gets stretched across right next to each other, and the argument ends itself.

Denmark also got rich first, back when it was a low-tax economy, and then reformed hard back toward markets in the 1990s after the welfare state had stalled its growth in the 1970s and 80s. And here's the detail the pitch always leaves out. They pay for it by taxing the middle class, not just billionaires.

Think a 25% national sales tax and income tax rates that bite ordinary workers, not a magic levy that falls only on the yacht crowd. The Nordic model is capitalism with a big, broadly financed welfare state. Copy the capitalism if you like. The part U.S. socialists want to skip, the broad taxes and the market discipline, is the part that makes the whole thing stand up.

The Bill Comes Home: Taxes, Wealth, And Free Money

The American program for democratic socialism rests on two pillars: much higher taxes and some form of guaranteed income. Both have a track record, and neither is kind.

Start with “tax the rich,” which assumes the rich aren't already carrying the load. They are. The top 1% of earners pay 38% of all federal income taxes while earning about 21% of the income. The top 10% pay more than 70%, and the top half pays 97% of the entire federal income tax take. The bottom half pays a little over 3%. We run the most progressive income tax in the developed world.

Now to the fairness point people raise, and it's a fair one. Lower earners still pay payroll taxes. True. But once you count what comes back, the picture flips. The Congressional Budget Office finds that after transfers, Medicaid, food assistance, and refundable credits, the lowest fifth of households carries a net federal tax rate of roughly 0.5%.

In 2020, it went negative, meaning they received more than they paid. Over half of all means-tested transfers flow to the bottom fifth, three-quarters to the bottom two-fifths, while the top fifth pays more than two-thirds of all federal taxes. The reality is that the productive top is already funding the safety net. There's no vast, untapped vein of “the rich” sitting there to bankroll a far larger state.

So how do the countries that actually run these programs pay for them? Not the way the slogans suggest. The math of democratic socialism forces the burden down onto the middle. Here is what the American tax base looks like today, next to what it would have to become if we adopted the Nordic model these candidates hold up as the goal.

Read that table again, because it's the whole argument in one frame. In America, the top rate hits at roughly 9x the average wage. In Denmark, it is about 1.3x the average wage. The barista and the surgeon land in nearly the same bracket, and a 25% sales tax greets both of them at the register on almost everything they buy. That is not a tax on the rich. It's a tax on working and middle-class life, and it has to be, because as the Tax Foundation flatly concludes, mirroring the Scandinavian model would raise taxes in the U.S. “especially on the middle class.”

What about a wealth tax, then? Europe already ran that experiment. In 1990, a dozen countries levied one. Today, four do. France lost an estimated 12,000 millionaires in a single year and raised less than 0.2% of GDP before scrapping its version. Capital and the people who own it don't sit still and wait to be taxed. They move.

And the second pillar, universal basic income? A recent review of 122 guaranteed-income pilots found that the larger, more credible studies showed employment falling rather than rising. The deeper flaw is one of economic gravity. Production has to come before consumption. Send out checks without new output, and prices simply rise to swallow them, exactly what 2021 showed. We covered this at length in UBI: Tried, Tested, and Failed As Expected and in A Robot Economy. All of it lands on a country already carrying $39 trillion in debt, north of 120% of GDP, spending more than a trillion a year just on interest. There is no fiscal room for this. None.

Every Flaw, Made Worse

Here's where it comes together. Go back to capitalism's real flaws, the ones I named up top, and watch what social democracy actually does to each one.

Worried about inequality? Socialism produces the most extreme concentrations of power and wealth on record, and it hands them to a political class you can't vote out and can't compete with. Money inequality is at least contestable. Power inequality is not. On top of that, funding the program with a printing press delivers inflation, which is the single most regressive tax there is. It robs the poor first. The cure deepens the disease.

Angry about cronyism and bailouts for the connected? Then the last thing you want is a bigger state. Every dollar of economic activity you route through government becomes another dollar the well-connected fight to capture. The bigger the prize, the harder they fight, and they always win. You don't end cronyism by enlarging the thing cronies feed on. You starve it.

Furious about the cost of housing, healthcare, and childcare? Those are already the three most government-distorted markets in America. Rent control shrinks the housing supply. Subsidies poured in without new supply getting absorbed into higher prices, which is why childcare grew less affordable even as the subsidies grew. More of the same intervention makes the scarcity WORSE, not better. And stagnant wages? Wages rise on productivity, productivity rises on investment, and investment flees higher taxes and capital controls. Ask the thousands who left France or the millions who left Venezuela.

So yes, capitalism is flawed, but democratic socialism only makes it worse. But the honest fix is to remove the distortions, end the bailouts, stop debasing the money, break the regulatory capture, and clear the way for supply. That's the argument I've made for years in pieces like our work on productivity and jobs. The fix is more competition and sounder money. It is not a system that takes every flaw you're angry about and pours gasoline on it. As Howard Marks likes to say about cycles, the seeds of the next problem are planted in the solution to the last one. Social democracy is that seed.

What It Means For Your Money

So, what does this have to do with money and your portfolio? A durable shift of democratic socialism toward higher taxes on capital, wealth levies, and deficit-financed transfers changes the terrain on which investors stand. It raises the odds of higher structural inflation, pressures the currency, and invites the kind of capital flight that has followed these policies wherever they've been tried.

The practical takeaways are straightforward. Own productive assets, the businesses and hard assets that hold value when money is being debased. Watch policy risk at the state and municipal level, where these ideas arrive first and where capital and residents vote with their feet. And keep the long view. The market engine that compounds wealth over decades is precisely what's on the ballot. Protecting your exposure to it is not a political act. It's a risk-management one.

The appeal of democratic socialism is real because the pain it speaks to is real. I won't pretend otherwise. But intentions are not outcomes, and history has handed us the outcomes in ink, from Caracas to the old Soviet bloc to the Nordic countries that quietly kept their capitalism. The promise is a beautiful cake. The aftertaste is shortages, capital flight, inflation, and a new elite standing where the old one used to be.

Capitalism's flaws are worth fixing, and we should fix them. Replacing the system that produced the highest living standards in human history, in order to cure its imperfections, is how you end up with the imperfections and none of the living standards. That's the trade on the table. Look closely before you take it.

Sources

1. Gallup, “Image of Capitalism Slips to 54% in U.S.” (survey conducted Aug. 2025). news.gallup.com/poll/694835/image-capitalism-slips.aspx
2. Tax Foundation, “Who Pays Federal Income Taxes? IRS Federal Income Tax Data” (tax year 2023). taxfoundation.org
3. Congressional Budget Office, “The Distribution of Household Income, 2019.” cbo.gov/publication/58781
4. World Bank / CEPR (M. Ravallion), China poverty reduction, PovcalNet ($1.90/day, 2011 PPP). worldbank.org; cepr.org
5. Economics Observatory, “Why did Venezuela's economy collapse?”; Council on Foreign Relations, “Venezuela: The Rise and Fall of a Petrostate.”
6. The Local (Denmark), “Danish PM in US: Denmark is not socialist” (Harvard, Nov. 2015); Heritage Foundation, “Economic Freedom Underpins Nordic Prosperity.”
7. Fraser Institute, “Economic Freedom of the World” annual report.
8. OECD, “The Role and Design of Net Wealth Taxes in the OECD” (2018); Tax Foundation, “The High Cost of Wealth Taxes.”
9. K. Corinth and H. Mayhew (AEI), review of 122 guaranteed-income pilots, 2017–2025.
10. U.S. Treasury, Fiscal Data, “Debt to the Penny” (~$39.2T, June 2026).
11. CNN, “The Source” interview with Gov. JB Pritzker (June 30, 2026), as reported.

The post Democratic Socialism: A Beautiful Cake With A Bitter Aftertaste appeared first on RIA.

Bitcoin peaked a year ago, hitting an all-time high of $126,210 in October 2025, and has since fallen more than 50%, bottoming near $58,000 two months ago. The tide may be turning; over the last week, Bitcoin rose by over 20%, marking its sharpest bounce during this year-long drawdown. The question is whether that marks the start of a leg higher or it's a dead cat bounce within a bear market.

The optimistic bullish case rests on deleveraging and the Treasury's actions to manage yields. Many crypto pundits believe that leverage used by Bitcoin investors last summer was massive. While it pushed Bitcoin's price up substantially, it also left the price vulnerable to deleveraging. These pundits believe leverage has since normalized, which might ease pressure on Bitcoin. Second, the recent Treasury buyback announcements lead some to question the dollar and US Treasury bonds as safe havens. Thus, alternative currencies like gold and Bitcoin may be gaining value for some.

The bear case is more mechanical. Bitcoin's four-year halving cycle (mining rewards are cut in half every four years) has historically driven boom-bust cycles, including drawdowns ranging from 75% to over 90% leading into significant rallies.

One strong week doesn't undo a year-long drawdown, and Bitcoin's history is full of head-fake rallies. But assuming it follows the four-year cycle pattern of the past, Bitcoin might be starting to rise into the April 2028 projected halving with a peak projected in early 2029.

What To Watch Today

Earnings

Economy

Fed Speakers

The Jackson Hole Economic Symposium opens today (Aug. 27–29). No marquee address on the tape yet: Chair Kevin Warsh delivers his first Jackson Hole keynote as Fed Chair tomorrow, Friday, Aug. 28, around 10:00 a.m. ET. The Fed is not in its pre-FOMC blackout (next meeting Sept. 16).

Market Trading Update

Yesterday, Michael Lebowitz used the Gilligan’s Island framework to explain why productivity, not spending, ultimately drives growth and returns (read it here). Today I want to shift from that long-run engine to the near-term calendar, because September is upon us and midterm election seasonality has a story worth hearing.

Start with the tape. The S&P 500 closed Tuesday at 7,677.28, roughly 1.8% below the August 13 record high of 7,816.70. Momentum has cooled off an overbought push, and the VIX still sits near 15.8. The index is up about 13% on the year. In other words, the wobble so far is mild. The real question is what the calendar says happens next.

September has a history of earning its reputation of being a month to avoid. Since 1950, it’s been the worst month for stocks, and the only one with a reliably negative average return, roughly -0.7%. It finishes higher just 44% of the time (LPL, Investing.com). Layer on the four-year cycle, and it sharpens. As the chart below shows, the midterm year is the weakest seat in the cycle, up around 4.5% on average and positive in barely half the cases. The pre-election year that follows has been the strongest by a wide margin, up roughly 16%.

Here’s the part that matters for how you potentially manage portfolio risk. The midterm cycle period has been the most reliable "buy-the-fear" window of the entire cycle. As investors approach the actual election, market returns are muted, and drawdowns tend to be deeper. Fidelity pegs the average midterm drawdown near 19%, and this year’s worst pullback was only 9%, back in March. Bottoms cluster in the August-to-October window, with October the dominant low. That is when the tape actually turns.

The scoreboard below is close to perfect. The S&P has been higher one year after every midterm since 1950, up around 15% on average. It has been positive 95% of the time since 1938.

So far, the current setup doesn’t match the classic script precisely. The market is moving down heading into September; true, but it remains within a stone’s throw of records, with rich valuations, heavy AI concentration, and a 30-year yield near 5.3%. Averages describe nineteen cycles, not this one. The base rate rewards buying the dip, NOT chasing the high. As Howard Marks likes to say, you can’t predict, but you can prepare.

So that’s what we’re doing. In the latest Bull Bear Report, our money-flow breadth model hit an extreme overbought level, so we trimmed the most stretched positions back toward target weight and lifted the cash buffer. We’re not selling the bull. We’re keeping dry powder for the weakness in September and October that the calendar is flagging. We also remain ready to add to a pullback rather than reach for strength here.

PCE Prices Confirm The Cooling Trend

Yesterday's PCE report largely confirmed the disinflation story. Headline PCE prices rose 0.2% in July, putting the annual rate at 3.7%, just 0.1 percentage point above consensus, and core PCE rose 0.2% as well, holding at 3.3% annually, in line with expectations. Both readings align with the cooling CPI and PPI trends we have seen over the last two months.

One detail in the PCE report is worth highlighting. Slightly over half of that 0.2% core increase came from a single line item, portfolio management fees, not from broader goods or services inflation. Portfolio management fees are directly correlated with rising stock prices, not any real change in the service provided. The BEA has acknowledged this measurement quirk and plans to fix it in a methodology overhaul at the end of September.

PCE personal income rose 0.4%, and spending rose 0.2%, both slightly above forecasts. Bear in mind that with 0.2% inflation, PCE spending is flat in real terms.

The more interesting question is what this data does to the September hike debate. Several FOMC members have supported a hike this year, but that case has rested heavily on inflation running hot enough to require it. With CPI, PPI, and now PCE all cooling and July's payroll report showing an outright decline, the inflation half of that argument is getting harder to sustain while the employment market is starting to make a case for a rate cut.

Productivity On Gilligan's Island: Episode 2

Over 7 years ago, we wrote a piece using the 1960s TV sitcom Gilligan’s Island to provide a simple example of why productivity is the most important driver of economic growth. In this article, we present the next episode of Gilligan’s Island, describing what happens after the benefits of innovation no longer drive economic growth.

Right now, the US and global economies are in a period of transition between two innovation eras: the IT boom’s productivity tailwind is largely spent, and AI’s potential is budding. Nobody knows when, or how large, the AI payoff will ultimately be.

While no one has the answers as to what AI has in store for the economy, we can help you appreciate why productivity and innovation are vital for economic growth and ultimately investment returns.

READ MORE...

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Famed investor Stanley Druckenmiller published a Wall Street Journal opinion piece (Let The Bond Market Speak) on Monday, in which he warns Treasury Secretary Bessent about long-dated bond buybacks. His core thesis seems to rest on the paradox between Warsh's strong belief in the information value of free markets and the Treasury's actions to intervene in the bond market. Warsh has noted on a few occasions that market prices send valuable economic messages. To wit, he has limited guidance to better hear the market's voice. Yet, the bond market is voicing fiscal concern, and the Treasury Department, likely in discussion with Warsh, is trying to suppress the market's opinion.

Druckenmiller argues the Treasury move is all about defending a price the bond market wants to reject.

I have spent five decades trading on a simple premise: Markets aggregate information no committee possesses, and prices are how that information reaches decision makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left.

Druckenmiller's primary concern is that yield suppression reduces the pressure that forces fiscal discipline on our leaders. He claims that "every basis point of artificial yield suppression is a subsidy to procrastination." Moreover, suppressed rates:

sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else's problem.

Another key point Druckenmiller raises is that intervention becomes self-reinforcing and markets will test Bessent's resolve, forcing the Treasury to intervene in ever-growing amounts. Monday's introduction of using the TGA for purchases supports his view.

His prescription: Use buybacks for "their stated purpose, small, scheduled, off-the-run liquidity operations announced at quarterly refundings, never off-cycle responses to yield levels," and "term out the debt honestly and pay the price the market sets.

The only durable fix, he argues, is addressing the primary deficit directly, instead of the market that reflects it.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we walked through how the Treasury's cash rebuild could turn a modest buyback into a genuine market mover. Today, the Nvidia earnings preview, because the largest company in the index reports after the close, and the options market is pricing the quietest print in years.

Using Monday's close, Nvidia sat at $208.48, right on its 50-day moving average of $207.65 after giving back 7.4% over the past week. The stock still holds 6.7% above its rising 200-day average near $195.34, but it's 11.6% below the May 14 record close of $235.74. The 14-day RSI is 45. The MACD rolled under its signal line last week. Momentum has cooled, not collapsed.

Here's where it gets interesting. Options are pricing a move of roughly 5.6% in either direction, per ORATS data cited by Reuters. That's the smallest expected swing ahead of any Nvidia report in at least three years. During the prior 12 quarters, the average was 7.6%. However, don't mistake a 5.6% swing, which will equate to roughly $260 billion in market value. To put that into perspective, that is equivalent to the market capitalization of more than 90% of the companies in the index individually.

"Nvidia has not been moving the way it used to on earnings." - Chris Murphy at Susquehanna

The record agrees. The stock fell the day after four straight reports by 0.8%, 3.1%, 5.5%, and 1.8% respectively. That averages 2.8%, or half of what's priced.

Here are the expectations for this evening. Consensus is looking for roughly $91.9 billion in revenue, up 97% from $46.74 billion a year ago, with earnings near $2.08 per share, up from $1.05. They are maintaining gross margins at 73.5%, and operating income is expected to be close to $60 billion, up from $28.44 billion last year. Net income runs around $51 billion versus $26.42 billion. The bar is set decently high.

Those numbers are not the real risk. The risk is in the October guidance. The street wants $104 billion, so anything softer and the multiple has to do the work by itself. Therefore, we need to pay close attention to three things.

1. Does gross margin hold that 73.5% line?
2. Does China stay at zero inside the guide?
3. And how does management frame Vera Rubin's timing relative to the $166 billion that the four largest cloud buyers spent last quarter?

Notice, too, that the beat is shrinking, and revenue upside relative to guidance has compressed from 22.8% in fiscal 2024 to 4.6% last quarter. In other words, a beat is expected, but a BIG beat is not.

The downside of that implied band sits near $197, just above the 200-day line. Trade the levels after the report, not the headline in the first ten minutes.

The BLS Participation Rate Tumbles: What It Means

July's unemployment rate fell to 4.1%, which, on the surface, seems like good news.  Unfortunately, the rate fell because 264,000 people left the labor force, not because more people found jobs. In fact, household employment declined by 87,000. The labor force participation rate, as shown below, now sits at 61.4%, down 0.8% from 62.2% a year ago and is the lowest reading outside the pandemic since 1976.

The St. Louis Fed recently broke down what's driving the decline, and the answer is not necessarily that unemployed workers have stopped looking for jobs.  A “statistical population-control revision” the BLS made in January accounts for 43% of the decline. Another sizeable chunk is due to our aging population; older workers are participating less, as more baby boomers retire. This accounts for another 41% of the decline. The remaining piece is the concern. There has been a sharp drop in the number of prime-age workers 25 to 54.

So what would unemployment actually look like if participation had been steady? Using the civilian population base of roughly 270 million, if participation had held at January's 62.1% rather than sliding to 61.4%, the labor force would be about 1.9 million people larger. Assuming those additional people remained unemployed rather than found work, the unemployment rate would be closer to 5.2%, more than a full point above 4.1%. If we strip out the roughly 84% the Fed attributes to statistical and demographic factors, the resulting rate would likely sit only a tenth or two above the current 4.1%, not especially concerning on its own.

The gap between 4.1% and 5.2%, then, is mostly demographics, not as much a wave of discouraged workers as the number alludes to.

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Over 7 years ago, we wrote a piece using the 1960s TV sitcom Gilligan's Island to provide a simple example of why productivity is the most important driver of economic growth. In this article, we present the next episode of Gilligan’s Island, describing what happens after the benefits of innovation no longer drive economic growth.

Right now, the US and global economies are in a period of transition between two innovation eras: the IT boom's productivity tailwind is largely spent, and AI's potential is budding. Nobody knows when, or how large, the AI payoff will ultimately be.

While no one has the answers as to what AI has in store for the economy, we can help you appreciate why productivity and innovation are vital for economic growth and ultimately investment returns.

Review Of Gilligan’s Island Episode 1- Innovation Takes Root

On our fictitious island and plot, seven castaways produced only one product: coconuts. They harvested coconuts to sell to other islands and to obtain needed goods.

Without innovation, the castaways had only a few ways to increase coconut production and grow their economy; however, each had limitations. 

• They could work more hours, but daylight and physical stamina capped their efforts.
• They could invite new castaways to the island. While more people may increase production, the output per person wouldn’t change. Thus, it wouldn’t be a genuine increase in prosperity.
• Thurston Howell III can borrow money from a neighboring island so they could consume more goods, but that debt must be repaid with interest, essentially forgoing tomorrow's consumption to fund today's.

The Professor’s Innovations

The true, lasting way to grow an economy comes only from innovation that boosts productivity.  For example, the Professor recommends redirecting some of their coconut revenue from frivolous consumption to buy ladders. By doing so, the castaways can get up and down the trees more quickly than by climbing and pick more coconuts per hour. He also recommends investing in genetically modified trees that yield five times as many coconuts per tree. The simple ladders and the highly scientific genetically modified trees represent productivity growth. Both innovations allow the castaways to produce more coconuts without working more hours, adding more people, or taking on debt.

Economic growth, whether on Gilligan's Island or in the real world, is a direct function of productivity, which measures the leverage an economy can generate from its two primary inputs: labor and capital. Without productivity, an economy relies solely on two inputs, both of which are limited.

Gilligan’s Island Episode 2 -Innovation Exhaustion

Our next episode of Gilligan's Island economic story occurs after the benefits of the ladders and modified trees are fully realized. Once every tree on the island has been upgraded and every castaway has a ladder, economic growth flattens again. The Professor's breakthrough did not ensure permanent growth; it was a limited burst in growth and a one-time leap in the island’s coconut output. The graph below shows a hypothetical plot of the island’s GDP.

Just as labor and capital run into physical limits, productivity runs into innovation limits. An economy that has already captured its easy productivity gains finds each additional percentage point of growth harder and costlier to generate than the last. This is precisely the wall the U.S. economy has been running into for roughly fifty years.

Measuring Productivity

Before proceeding, it is important to define Total Factor Productivity (TFP), a popular measure that economists use to quantify productivity. TFP is the share of labor productivity growth that cannot be explained by changes in labor quality or capital deepening. It serves as a broad measure of overall economic efficiency, technological innovation, and how effectively inputs are converted into output.

Think of TFP as the extra economic growth that comes from using inputs more cleverly, whether through better technology, smarter organization, or more efficient processes. In the Gilligan's Island example, it's the ladders and the genetically modified trees. Adding more castaways, working longer hours, and borrowing money would not have increased TFP, even if they did increase economic output.

TFP: The Golden Age

The graph below charts the ten-year annualized TFP growth using San Francisco Fed data starting in 1948. We smoothed the data over ten-year periods to reduce the noise from irregular COVID-related activity and other economic shocks.

In 2013, Robert Shackleton from the Congressional Budget Office (CBO) wrote a white paper entitled Total Factor Productivity Growth In Historical Perspective. The paper helps explain the “Golden Age” and “IT” productivity booms and the periods of slower TFP growth that followed.  The rise and fall of productivity mirror Gilligan’s Island: a tale of technological breakthrough followed by exhaustion.

To help appreciate the concept of boom and bust in productivity growth, we summarize the period his paper calls the postwar "Golden Age," which ran from 1948 to 1973. He notes:

Critically, the paper argues this wasn't a new burst of invention. Rather, the golden age may be more accurately interpreted as the full final exploitation of an earlier burst of innovations through electrification, suburbanization, completion and increasing exploitation of the highway system, and production of consumer appliances.

In other words, the Golden Age was the payoff phase of innovations invented decades earlier, not a fresh Professor moment of its own. Those “earlier bursts of innovations” trace back to what the paper calls the "big wave" of the 1920s and 1930s, which he attributes:

Primarily to four clusters of critical innovations—electricity generation, internal-combustion engines, chemicals, and telecommunications—with nearly all of the important innovations in those clusters already in place well before World War II.

Further, the government's post-WWII buildout of the interstate highway system and suburban infrastructure, alongside a surge in both corporate R&D (Bell Labs, DuPont, GE) and federal research spending, and you have the primary forces behind the Golden Age

The Golden Age ended precisely because those sources of economic leverage ran their course:

By about 1970, however, the bulk of the gains in TFP associated with the innovations of earlier periods had been exploited.

The IT Boom

Another Professor moment arrived in the mid-1990s. This was the productivity boom driven by personal computers and the internet. Information technology delivered the kind of broad, economy-wide leverage that the factors noted above delivered in the post-WWII Golden Age.

But the productivity growth rebound proved temporary, exactly as the castaways on Gilligan's Island found out. The IT boom's ladders had been distributed. The genetically modified trees of the internet age had already been planted. Growth flattened, and we await to see if AI is the next great innovation.

Where We Stand Today

The most current productivity reading suggests that despite the promising AI innovation wave, we have yet to see tangible productivity benefits. The San Francisco Fed's measure of productivity- utilization-adjusted total factor productivity- grew by just 0.07% over the four quarters ending in the first quarter of 2026. Such is not far from zero and well below the post-Golden Age era.

Kansas City Fed researchers separately found that the recent productivity pickup visible in some official data is "not yet broad-based," with a small set of industries accounting for most of the gains.

AI: The Next Rung On The Innovation Ladder?

AI appears to be the leading candidate for the next innovation that can boost productivity growth. As we discussed during the Golden Age, it took a few decades for the productivity benefits of remarkable innovations to fully impact the economy.

So far, the evidence of productivity gains from AI is a puzzle. San Francisco Fed researchers Aakash Kalyani and Huiyu Li used nearly 500,000 corporate earnings call transcripts spanning 5,198 public firms to measure how executives talk about AI and productivity. They found that firms with positive AI sentiment on their calls have "substantially higher investment growth" than other public companies, concentrated overwhelmingly among the largest technology firms building AI infrastructure.

Kalyani offers proper framing that separates this research from popular AI hype. To wit, “we trust what people do, not what they say," noting that the correlation between AI-positive language and actual capital spending is real, even though the resulting productivity has not yet shown up.

The National Bureau of Economic Research (NBER) surveyed corporate executives across the US, UK, Germany, and Australia. It found that more than 80% of firms report no measurable impact from AI on either employment or productivity over the past three years, even though roughly 70% of firms are actively using it.

However, the “same executives predict sizable effects over the next 3 years, predicting that AI will boost productivity at their firms by an average of 1.4%, raise output 0.8%, and cut employment 0.7%.”  

Other Opinions

Fed Chair Kevin Warsh often discusses the coming productivity boom from AI, but he is uncertain when it might occur. To wit, on the longer-run productivity payoff, he pointed to the possibility of "material improvement in productivity, which should have a material improvement ultimately in wages and the strength of the economy," making the economy "richer" and "more productive." However, he hedged his optimism with doubts on the timing, as follows:

The long term can be quite far out, and we've got to monitor things month by month, quarter by quarter, as we get there.

Fortune magazine reminds us that AI benefits can be limited due to the entire economic chain.  They write:

However fast AI accelerates research or drafting or analysis, two people still need to schedule and show up to a meeting, and that step moves at exactly the same speed it did four years ago.

The ladders may work brilliantly for picking coconuts faster, but if the castaways can't ship more coconuts to neighboring islands, the benefits of the ladders are limited.

The graph below shows no material benefits from AI in economic output or TFP data.

Summary

No one knows the extent to which AI will boost productivity and its impact on the economy. Just as hard to forecast, there is no good forecast of the timing of such an impact. History's two prior productivity step-changes, the Golden Age and IT Boom, both took years to show up convincingly in the aggregate data after the underlying technology was genuinely transformative.

The Gilligan's Island framework is a useful discipline because it strips away the jargon and complex formulas economists use and the hype investment pundits frequently spew. An economy does not grow permanently faster simply because companies are spending heavily, any more than the island's economy would have grown permanently faster simply because the castaways worked longer hours or had more children. The spending must ultimately convert into more output per unit of labor and capital. On that specific test, the evidence for AI is unsettled, but the potential is real.

The post Productivity On Gilligan’s Island: Episode 2 appeared first on RIA.

The Treasury General Account (TGA) is Treasury's cash balance held at the Federal Reserve. Its balance is the net of cash inflows like tax receipts and outflows to pay the government's bills. On Monday, we learned that Treasury Secretary Scott Bessent may fund the expanded Treasury bond buyback program by tapping the TGA.

Currently, as the graph below shows, the TGA balance is just shy of $1 trillion. The balance has crossed $800 billion several times since 2020, but every prior instance had a trigger.

The 2020 spike to $1.8 trillion was pandemic emergency funding, a one-time buildup that unwound over the following year. The other elevated readings and sharp declines in 2021, 2022, and 2024 were all debt ceiling related. Upcoming debt ceiling risks pushed the Treasury to build TGA balances. Once Congress acted, the Treasury rapidly spent down the balances.

Today's high balance breaks that pattern. No debt ceiling crisis preceded this buildup. And the large cash cushion may be drawn down by buying back debt, not by spending it into the economy.

The distinction matters because the funding source for buybacks changes what the intervention actually does. For instance, issuing bills to fund buybacks is a wash for market liquidity. But drawing down the TGA injects cash directly into the banking system. While it's not QE, because cash, not reserves, is injected into the banking system, it does provide banks with a new source of money to lend.

What To Watch Today

Earnings

Economy

Fed Speakers

Richmond Fed President Tom Barkin speaks at 8:00 a.m. and 4:00 p.m. ET. The Fed is not in blackout; the week builds to Chair Warsh’s Jackson Hole keynote Friday at 10:00 a.m. ET.

Market Trading Update

Yesterday, we asked whether Kevin Warsh would talk down the hawks at Jackson Hole. Today I want to turn to the trade that has been front-running that answer. Gold is overbought and crowded again, and this setup rhymes with January in a way worth respecting. As I write on Monday, GLD trades near $428.74, up about 1.3% on the session, with spot gold back above $4,650 an ounce for the first time since mid-May. The move is real, but the question is what is fueling its last leg.

Here is what the tape shows. The 14-day RSI on GLD sits at 82.7, above 80 for a third straight session. That reading is rare, and it tends to show up late in a move, not early. The fund trades 11.7% above its 50-day average near $384 and about 3.6% above its rising 200-day average near $414. Notice in the chart below that the price has already round-tripped once this year. Gold blew off to a record $495.90 close on January 29, surrendered 26% into a $364.96 low by mid-July, then ripped 17.5% off that bottom. It is up more than 15% in August alone, and it still sits roughly 13.5% below the January high.

Positioning tells the same story, only louder. Over the past three weeks, speculators bought a record $22.2 billion in gold futures, the largest notional jump in more than a decade, split between $13.6 billion in fresh longs and $8.6 billion in short covering. Goldman’s desk data puts net length at the 93rd percentile on a two-year lookback.

The CTAs that were short in early August have flipped hard to long, open interest is climbing with price, and options skew has swung from paying for downside protection to chasing upside calls. The chase is not stopping at gold, either. Bitcoin is up 23% this month on the very same trade.

None of this breaks the long-term case, with the Treasury doubling its bond buybacks, a softer dollar, and steady central-bank demand are real tailwinds. Furthermore, parabolic moves run further than you think, but they do eventually end. Positioning is stretched, BUT the easy money in this leg is behind us, and Friday’s Warsh keynote is a live trigger for a hawkish jolt that could stall the momentum fast.

So we are managing it, not marrying it. In our All-Weather allocation models, we previously added to exposure, but we are approaching the time to trim tactical gold positions back toward target weights. Tighten trailing stops beneath the rising 50-day, and hold the strategic core that has earned its keep all year. When RSI is 82, positioning sits at the 93rd percentile, and the crowd already agrees, you get paid to take chips off the table, not to add them. We can always buy the pullback. Trade accordingly.

Gold Miners Are Overbought Or Are They?

The first table below from the "coming soon" new version of SimpleVisor shows the gold miner ETF GDX has beaten the S&P 500 by 33% over the last 20 trading days. The second graphic shows it is the most overbought factor, both relatively and absolutely. While the rotation and performance signals may suggest gold miners are extended, we must remember that the relative rotation analysis compares GDX's price to the S&P 500, which isn't an apples-to-apples comparison. A better way to assess if gold miner stocks are overbought or fair is to compare them to the price of gold.

The new version of SimpleVisor will let users create a custom list of stocks and ETFs to analyze together. To highlight this new feature, we did a simple analysis of Gold (GLD) and gold miners (GDX). The two securities are well correlated, as you would expect, but we want to know whether one is outperforming or underperforming the other enough to provide some clues.

The third graphic shows GDX is more overbought than GLD. Both are compared to the S&P 500, but the analysis by default shows how they compare versus each other. While GDX is overbought, the gap between the two scores is not enough to warrant a trade between gold and gold miners. A wider gap may have been a clue to buy one and sell the other.

Investor Psychology Is Sabotaging Your Returns (Part 2)

You are human, and humans are built to do exactly the wrong thing at exactly the wrong moment – it is investor psychology

Being human is not a character flaw; it is just our genetic wiring. The same instincts that kept our ancestors alive, like running from danger, following the herd, and vividly remembering the last scary thing, are catastrophic when applied to a brokerage account. Notably, there is a second enemy that is subtler than the first. It is the set of reflexes, our investor psychology, that the market itself has trained into you, year after year, until you mistake them for wisdom. One enemy is how you are built. The second is how you have been trained.

This article is about both. Let’s start with the one in the mirror.

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Kevin Warsh delivers his first Jackson Hole speech as Fed Chair on Friday, August 28, at the Kansas City Fed's annual symposium in Wyoming. The meeting occurs less than three weeks before the September 16 FOMC decision. While the official topic is financial innovation in payments, Wall Street will primarily want to see whether Warsh tries to talk the hawks out of their tightening bias.

The backdrop Warsh faces is difficult. The 30-year UST yield is at its highest level since 2007. June and July CPI cooled significantly, with core inflation down to 2.5%, the lowest since 2021. Growth is slowing, the labor market just posted a negative payroll print, and Walmart's signaled consumers are pulling back. Yet several FOMC members continue pushing for a hike, and futures markets oscillate between 35% and 65% odds of a September hike.

If we look at how Warsh has handled public speeches thus far, the expectation may be that he will say as little as possible. He has stopped giving forward guidance at almost every opportunity. Further, he reduced the size of the FOMC statement and has tended to be elusive during his FOMC press conferences.

Recently he said higher bond market yields are doing their job for them. Since then, yields have risen further, CPI weakened, and economic growth slowed. Might Warsh's speech stick to his free-market principles? Reveal little, keep Fed Funds where they are, and let the bond market do its job?

What To Watch Today

Earnings

Economy

Market Trading Update

As noted above, while the overall market was only down mildly this past week, the momentum trade remained under pressure. Despite all the seemingly brutal headlines this past week, the S&P 500 is only down ~1.6% from the record close of 7,796 it set on August 13. However, it still sits about 1.9% above a rising 50-day moving average and a comfortable 8.3% above the 200-day, so nothing about the trend structure is technically broken.

Underneath, though, the momentum picture has quietly deteriorated. The MACD rolled over this week and crossed below its signal line, the first bearish crossover since the spring, with the histogram sliding to negative 9 index points. That is the kind of shift that tends to show up before price, not after it.

The 14-day RSI has cooled to 54, squarely neutral and well off the overbought readings that came with the August run to new highs. In plain terms, the buyers are getting tired even though the tape has not cracked. Volatility stayed notably calm through the decline, with the VIX easing on the week rather than spiking, which suggests the selling has been an orderly rotation rather than panic. This is worth noting because the market "calm" tends to last right up until it does not. September tends to be the weakest trading month of the year.

So, as we head into next week, here are the important levels to watch.

The first resistance level is the 7,700 shelf, then the 7,796 record. Goldman Sachs currently has 8,000 as its year-end target for the market, which doesn't leave much headroom. On the downside, the 50-DMA near 7,534 is the line that counts. It has held every pullback since April, and a decisive close beneath it would be the first genuine technical warning that the character of this market has changed. Below there, 7,400 is the next shelf, and the 200-DMA at 7,091 is the level that defines the bull market itself. That is a 3-to-1 risk/reward outlook, which should be considered relative to your equity exposure levels.

For positioning, this is a moment for discipline, not heroics. With momentum rolling over into a wall of event risk, we continue to recommend trimming the most extended mega-cap technology winners back toward model weight and letting cash build rather than chasing the tape up here. The place to add is the 50-DMA, not the highs, and a close below 7,534 is the trigger to get more defensive.

The single line to watch is the 50-day at 7,534. Hold it, and this is a routine pullback inside an uptrend. Lose it on a closing basis, especially on a hot inflation print or a soft Nvidia guide, and the momentum divergence flashing right now becomes a great deal more than a footnote.

The Week Ahead

As we led, Warsh's opening speech at Jackson Hole will be closely watched for clues on whether the Fed hikes in a few weeks. Further, the PCE Price Index on Wednesday will help us gauge their stance. The headline number is expected to rise by 0.2% with core PCE rising by 0.1%. Those estimates would keep inflation benign for a second month in a row, making it easier for those not wanting to hike rates to hold their ground.

Nvidia reports Q2 fiscal 2027 earnings Wednesday, August 26, after the close. The company guided revenue to approximately $91 billion, plus or minus 2%, marking another large jump from Q1's $81.6 billion, up 20% from the prior quarter and 85% year over year. Investors will key on forward guidance, data center revenue, and any commentary on the Blackwell ramp. Full-year FY2027 consensus sits at $391.3 billion in revenue and $9.34 in EPS, leaving little room for a guidance disappointment.

Normal Interest Rates: What The Debt Panic Gets Wrong

Let’s start with Adam’s analogy, which is vivid and understandable, and why it had traction. Depth equals pressure; pressure equals stress; and somewhere down there, the hull of the ship fails. The symbolism is good; a submarine has a fixed “crush depth” set by the laws of physics. However, an economy doesn’t. What matters isn’t how deep yields go, but whether the borrower’s income is compounding faster than the interest clock is ticking. Moreover, we must know how much of the existing debt has actually repriced.

Here’s the problem with that argument in its popular form. It treats a 5% long bond as the oddity. Yet a 5% long bond is NOT the anomaly. What was odd was the fifteen years of zero-rate policy and four rounds of quantitative easing that taught a whole generation of investors that money was “free.” We’ve written about this before, and the data on rising interest rates has consistently refused to cooperate with the crash thesis.

So the first job is to define what “normal” actually means. If normal interest rates are the 5% kind, then the last decade and a half was the anomaly, and the current tape is a return to form. If free money is the baseline, everything looks like a crisis. One of those framings has 60 years of data behind it.

Rates aren’t the disease. They’re the thermometer.

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"Investor Psychology" is chapter 2 of a 5-part series examining the narratives around "investing for the long run."

Chapter 1: Think Like An Investor

In the first part of this series, I promised that the next enemy we would face is the one you cannot fire, mute, or unfollow, because it is "You." You can learn every valuation metric ever invented, memorize the two questions that decide everything, and still hand most of your returns back to the market for one simple reason. You are human, and humans are built to do exactly the wrong thing at exactly the wrong moment - it is investor psychology

Being human is not a character flaw; it is just our genetic wiring. The same instincts that kept our ancestors alive, like running from danger, following the herd, and vividly remembering the last scary thing, are catastrophic when applied to a brokerage account. Notably, there is a second enemy that is subtler than the first. It is the set of reflexes, our investor psychology, that the market itself has trained into you, year after year, until you mistake them for wisdom. One enemy is how you are built. The second is how you have been trained.

This article is about both. Let's start with the one in the mirror.

You Are Your Own Worst Enemy

Here is one of the most uncomfortable facts in all of investing. The average investor does not just underperform some fancy benchmark. The average investor underperforms the very funds they themselves own. The fund increases by a certain amount, but the person holding it somehow captures less of the increase. Every year...like clockwork.

Morningstar measures this every year in a study called "Mind the Gap." In the most recent edition (2025), covering the ten years through the end of 2024, the average dollar invested in U.S. funds earned about 7.0% a year, while the funds themselves returned 8.2%. That is a gap of roughly 1.2 percentage points per year, and Morningstar has found it to be stubbornly persistent across every ten-year window it measures. The money did not vanish into fees, but rather due to investor psychology. Buying after things had already run up, selling after they had already fallen, and doing it over and over.

Examine closely what that "small" gap does over a lifetime. A 1.2% shortfall sounds like a rounding error, but stretch it over 30 years, and it quietly consumes about $300,000 from a $100,000 starting stake. Put that into some context, that is not just a rounding error; it is the cost of a house.

Let’s be fair, though, as researchers argue about how much of this gap is pure bad timing versus the simple mechanics of when people happen to have money to invest. That debate is real, and the whole 1.2% isn’t due to just self-sabotage. But the direction is not in question, and neither is the cause you can actually control. When you trade on emotion, you will lose, and the more you trade, the more you will lose. Morningstar found exactly that truth:

“The investors who touched their portfolios the least kept the most.”

The Cycle That Traps You Every Time

So, if that is the case, then why do smart, capable people buy high and sell low with such reliability? The reasoning is basic because it feels right at that particular moment. Every market cycle runs on the same emotional script, and that script is engineered to separate you from your money at both ends.

Read that chart slowly, because you have lived it. Near the top, after a long climb, you feel terrific. The gains look easy, everyone at the barbecue is a genius, and that feeling has a name on this chart. Euphoria. And it sits directly above the words "point of maximum financial risk." At the bottom, after everything has fallen apart, you feel sick, and you swear you will never touch a stock again. That is despondency, and it sits directly above "point of maximum opportunity." Your investor psychology is just unhelpful here...it is pointed exactly backward.

Bob Farrell, who watched Wall Street for half a century, wrote it into his rules decades ago.

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

This is not because people are stupid, but because the top feels safe and the bottom feels terrifying. Howard Marks makes the same point about investor psychology from the other direction.

"The most dangerous thing in markets is the widespread belief that there is no danger. When nobody is afraid, everyone has already bought, and there is no one left to push prices higher."

The Four Biases That Do The Damage

Investor psychology is powered by a handful of specific mental shortcuts. Psychologists have cataloged dozens, but four do most of the financial damage. You do not need a degree to recognize them, since you have likely already experienced every single one.

Naming a trap is the first step to seeing it coming, so let's take each one in turn. These are not abstractions. Each has a specific moment where it reaches into your account and takes something.

Loss aversion is the heavyweight in investor psychology, so we will start there. Daniel Kahneman won a Nobel Prize partly for showing that the pain of losing a dollar runs about twice as deep as the pleasure of making one. Two to one. That single asymmetry explains most of the bad sell decisions you have ever made, and it is why a position that is down 40% becomes impossible to sell, because booking the loss hurts more than the paper loss you have quietly tolerated for months.

This is the moment you freeze, hesitate to act, and begin to hope something will bail you out. However, the hole only gets deeper. The fix to this emotional cycle is almost mechanical. Start by deciding your exit before you ever buy. Setting the level before you buy is when that choice is still cheap and unemotional. Make the selling a rule you follow rather than a wound you have to accept. In the next article, we will discuss the brutal arithmetic behind this error, because every loss you refuse to cut early is the most expensive habit in investing.

Recency bias is the quiet bias that sneaks up on us. It is probably also the most common of the four. Recency bias is just your brain assuming that whatever happened in the recent past will keep happening indefinitely in the future. After an investment rises significantly, it feels safe, obvious, and almost inevitable that it will continue to rise. That is exactly when the money pours in. The same occurs after a brutal decline; stocks feel radioactive, so that is exactly when people swear them off for good.

Recency bias is insidious because it leads you to repeatedly buy the recent past at a premium and sell it at a discount. You are always a step behind the turn. The fix is to zoom out to longer time frames in your analysis. A three-year hot streak looks very different against 20-years of history, and the best antidote is to anchor on the starting valuation rather than recent performance. Cheap and hated has paid far better than expensive and loved, in every decade we can measure.

Confirmation bias is the one that feels like research but is a quiet killer. Once you own something, or badly want to, you go hunting for reasons that your thesis is correct. Quietly, and unwittingly, your mind begins to discard everything that disagrees with your view. You read the bullish analysis and mute the bearish. You create a social media “echo chamber” by following only those who support your views and blocking everyone else.

The trap is that this feels responsible the entire time. You are doing your homework, informing yourself, and building the case for your investment. However, what you are really doing is just collecting applause. The fix is uncomfortable on purpose. Go find the smartest person who thinks you are wrong and take their argument seriously. If you cannot make their case better than they can, you do not understand your own position yet. This is also why turning down the volume matters so much. An echo chamber does not inform you. It just makes you louder.

Herding is the oldest instinct of all, and probably the most expensive. Throughout human history, there has always been real safety in numbers, particularly when a predator is chasing you. However, when it comes to investing, there is no safety when “the herd” is chasing an overpriced asset. Of course, when everyone is piling in, it feels prudent to pile in too. Conversely, when everyone is running, it feels insane to stand still.

Bob Farrell wrote the punchline decades ago.

"The crowd is most wrong at the extremes."

It is crucial to remember that at the moment when buying feels most comfortable, because everyone agrees and the trend has been up forever, it has historically been the moment when the risk is highest. So treat your own comfort as a warning light. When a decision feels easy, obvious, and universally shared, that is precisely when it has earned a second, harder look.

You Have Been Trained Like Pavlov's Dog

Investor psychology is not just about your wiring; that is only half the problem. The other half is your training. More than a century ago, Ivan Pavlov noticed that if he rang a bell every time he fed his dogs, the dogs eventually began to salivate at the sound of the bell alone. No food required. Pair a neutral signal with a reward often enough, and the response becomes automatic. The thinking drops out. Only the reflex remains.

Markets do the exact same thing to you. For years now, every meaningful dip has eventually been bought, and every scare has eventually been rescued, whether by policymakers, by momentum, or just by the passage of time. Pair "the market fell" with "and then it came roaring back" enough times, and you stop analyzing. You just react and buy the dip. Chase the rally, assume the rescue is coming, because it always has, wash, rinse, and repeat. Economists have a blunter word for the belief that someone will always rescue you. Moral hazard.

Noun – ECONOMICS: The lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.

Here is the trap inside the training. The reflex feels like wisdom, because it keeps getting rewarded. Every time buying the dip works, you become more certain it always will, and a little more willing to take on risk to do it. That is not analysis. That is a salivating dog, and the cruel part is that the conditioning is strongest right when it is most dangerous, at the top of the cycle, after a long run of rewards, when everyone has been trained to believe the bell will ring forever. The reflex works right up until the dip that does not return, and that unfortunate outcome eventually comes.

The Awards You'll Never Win

If you have gotten this far, congratulations. At this point, you should realize that your wiring and training, when combined, create a very specific catalog of self-sabotage. The market does not hand out trophies, but if it did, these are the ones people chase hardest without realizing the cost. Here are a few awards you will never actually want on your shelf.

Examine those traits closely, and every one of these trophies is really the same mistake in a different costume. Loyalty to a position instead of loyalty to a process. The investor who cannot sell a loser is ruled by loss aversion. The one taking maximum risk has confused volatility with opportunity, when, as Jeremy Grantham puts it:

"You get rewarded for buying cheap, not for taking risk, and if you buy something only because it is risky, you get punished for it. "

The one who is a long-term investor only while underwater is rationalizing, not investing. Time spent nursing a broken position is time and money you never get back.

If you are still having difficulty tying this all together, a healthier way to picture it is to think about tending a garden. which is how I framed it before in our gardening guide to better returns. A good gardener does not fall in love with a dying plant. They weed what is failing, prune what has grown too large, and give room to what is healthy. A portfolio is no different. Selling a loser is not an admission of defeat. It is maintenance. And there is no ribbon for letting the weeds take over because you could not bear to pull one.

How To Beat Both Enemies

Here is the problem with investor psychology. You cannot rewire your instincts, and you cannot untrain years of conditioning by willpower. So you do the only thing that actually works. You build a process that does not care how you feel or what your reflexes are screaming. Here is where to start.

Realize that the market does not take your money. You are giving it away, in small emotional installments. Those payments happen every time you buy a top out of greed or sell a bottom out of fear, usually with a headline egging you on. The single most valuable skill in investing is not the analysis that you do. It has always been the discipline to sit still when every instinct and every screen is screaming at you to move.

However, discipline needs something to stand on. In the next installment, we will get to the hard numbers that make all of this concrete. Most notably, the brutal math of losses and why a 50% decline needs a 100% gain just to break even. Why the price you pay today all but sets your return for the next decade. And why, if you are anywhere near retirement, does the order in which those returns arrive matter even more than the average? It is the math Wall Street would rather you skip. We are not going to skip it.

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. Investor return gap: Morningstar, "Mind the Gap 2025" (data through Dec. 31, 2024). Average investor return 7.0% vs. 8.2% fund total return over the trailing decade. morningstar.com
2. Bob Farrell, "10 Market Rules to Remember," Merrill Lynch.
3. Howard Marks, "The Most Important Thing," and Oaktree memos on risk and cycles.
4. Daniel Kahneman, "Thinking, Fast and Slow," on loss aversion and prospect theory.
5. Lance Roberts, "Narratives Change, Markets Don't," RIA Advisors.
6. Treasury yield data: U.S. Federal Reserve via Massive Market Data. Ten-year yield 4.56% as of July 8, 2026.

The post Investor Psychology Is Sabotaging Your Returns (Chapter 2 of 5) appeared first on RIA.

🔎 At a Glance

• The Basis Trade: Is The Bond Market Signal Distorted?
• Market Brief & Technical Review
• From Lance's Desk: Normal Interest Rates: What The Debt Panic Gets Wrong - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - A Bond Scare

The week belonged to the bond market. Long-dated Treasury yields spiked to levels not seen in decades, with the 30-year touching a 19-year high above 5.30% mid-week and the 10-year closing Friday at 4.738%, near a 20-month high. Those seem to be really scary numbers, but as discussed on Friday, this is just a return to normalcy after 15 years of abnormally low rates.

Nonetheless, the move forced the Treasury's hand. On Wednesday, Secretary Bessent doubled the size of the government's long-bond buybacks to calm the selling. As I flagged a few weeks ago in Are US Treasuries Still A Safe Asset?, the risk in this cycle has migrated out of stocks and into the plumbing of the bond market. This week made that migration impossible to ignore. (We will discuss another risk momentarily).

The reaction told the story. Money did not flee to cash; it fled to hard assets, and the scoreboard was lopsided: bitcoin ripped roughly 23% higher in its best week since 2023 to close in on $79,000, gold added 5.5%, finally reclaiming $4,500, and oil gained more than 6% as the Iran stalemate kept a supply premium in the price.

Equities were the mirror image. The S&P 500 slipped 1.33% on the week to 7,674, the Nasdaq 100 dropped 2.41%, and the Russell 2000 lost 1.63%, while the Dow held up better at down 0.80%. Here is the tell that matters. The equal-weight S&P fell just 0.45%, far less than the cap-weighted index, leaving the damage concentrated in the previous momentum names rather than the average stock. A rising discount rate hits the longest-duration assets first, and right now, that is big tech.

Sector leadership confirmed the rotation. Health care led, up 4.4%, with energy up 2.9% on the oil bid and materials up 1.9%. The laggards were exactly what a rate spike punishes: technology fell 3.5%, rate-sensitive utilities dropped 3.4%, and industrials lost 3.3%.

The thread to follow into next week is to watch the long end of the Treasury curve. As long as the 30-year keeps pressing against multi-decade highs, the pressure on mega-cap equity multiples and the bid under gold and bitcoin both stay in force. The bond market is running this tape now, and what happens next determines a lot.

📈Technical Backdrop - Momentum Rolls Over, What Next?

As noted above, while the overall market was only down mildly this past week, the momentum trade remained under pressure. Despite all the seemingly brutal headlines this past week, the S&P 500 is only down ~1.6% from the record close of 7,796 it set on August 13. However, it still sits about 1.9% above a rising 50-day moving average and a comfortable 8.3% above the 200-day, so nothing about the trend structure is technically broken.

Underneath, though, the momentum picture has quietly deteriorated. The MACD rolled over this week and crossed below its signal line, the first bearish crossover since the spring, with the histogram sliding to negative 9 index points. That is the kind of shift that tends to show up before price, not after it.

The 14-day RSI has cooled to 54, squarely neutral and well off the overbought readings that came with the August run to new highs. In plain terms, the buyers are getting tired even though the tape has not cracked. Volatility stayed notably calm through the decline, with the VIX easing on the week rather than spiking, which suggests the selling has been an orderly rotation rather than panic. This is worth noting because the market "calm" tends to last right up until it does not. September tends to be the weakest trading month of the year.

So, as we head into next week, here are the important levels to watch.

The first resistance level is the 7,700 shelf, then the 7,796 record. Goldman Sachs currently has 8,000 as its year-end target for the market, which doesn't leave much headroom. On the downside, the 50-DMA near 7,534 is the line that counts. It has held every pullback since April, and a decisive close beneath it would be the first genuine technical warning that the character of this market has changed. Below there, 7,400 is the next shelf, and the 200-DMA at 7,091 is the level that defines the bull market itself. That is a 3-to-1 risk/reward outlook, which should be considered relative to your equity exposure levels.

For positioning, this is a moment for discipline, not heroics. With momentum rolling over into a wall of event risk, we continue to recommend trimming the most extended mega-cap technology winners back toward model weight and letting cash build rather than chasing the tape up here. The place to add is the 50-DMA, not the highs, and a close below 7,534 is the trigger to get more defensive.

The single line to watch is the 50-day at 7,534. Hold it, and this is a routine pullback inside an uptrend. Lose it on a closing basis, especially on a hot inflation print or a soft Nvidia guide, and the momentum divergence flashing right now becomes a great deal more than a footnote.

🔑 Key Catalysts Next Week

After a week driven by the bond market, next week hands the tape three separate stress tests, all stacked on top of one another. Wednesday morning, we get the July PCE report, the Fed's preferred inflation gauge, alongside the second estimate of Q2 GDP and July durable goods orders. Then, after the close that same day, Nvidia reports earnings.

Next Wednesday will tell us whether inflation is reaccelerating and whether the AI capital-spending engine is still running. Full stop.

The inflation print carries the most macro weight. After this week's yield spike, a hot PCE number would pour fuel on the fire and validate the bond market's fear that the Fed is stuck, while a soft print would hand the bulls some relief and take pressure off the long end. Given how the 30-year behaved this week, the risk is asymmetric to the upside on inflation.

Nvidia is the other side of the barbell. Wall Street consensus is looking for roughly $2.07 in earnings on about $92 billion in revenue, a 67% jump from a year ago. With the entire AI trade leaning on this single report, the guidance matters more than the print itself. A strong number could reignite the mega-cap leadership that just took a beating, while a cautious one landing on top of a hot PCE would be a real problem.

Then there is the Fed. On Thursday, new Chair Kevin Warsh delivers his first Jackson Hole keynote since taking over in May. Coming just days after the Treasury had to step into the bond market, whatever he says about the balance sheet, the Fed's backstop, and the path for rates will be parsed to death. This is the highest-stakes Jackson Hole in years.

The marquee earnings all land on Wednesday after the close.

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💰 The Basis Trade: Is The Bond Market Signal Distorted?

The 30-year Treasury just touched 5.34% this week. We have not seen a yield that high in 19 years, and the 10-year sits near 4.64%. The easy read is that the bond market is screaming about deficits, inflation, and a wall of new supply. I don't disagree, as most of that read is right. As I noted recently in "Are US Treasuries Still A Safe Asset?", a repricing is not a default. But the Federal Reserve just published research that complicates the story. The culprit is something you may not have heard of, with a dull name: the basis trade.

What The Basis Trade Actually Is

The “basis trade” is simple to describe, but very dangerous to scale. Here is how it works.

1. A hedge fund buys a cash Treasury and, at the same moment, sells a Treasury futures contract against it.
2. Those two prices converge by the delivery date. The fund pockets the gap between them, the "basis," almost regardless of where yields go.
3. The basis trade on a single treasury bond is a rounding error.
4. The hedge fund then pledges the bond in the repo market. Borrows against it at a near-zero haircut, and puts the proceeds right back into the same trade.
5. Wash, rinse, and repeat.

While the spread is so thin it barely registers, repeatedly borrowing against the position makes that number large. Then, once every large fund runs the same trade, that number becomes large enough to move the entire bond market. In other words, when $10 million of capital can carry a $100 million position, that is 10x leverage at work.

The Fed now pegs the basis trade at roughly $830 billion. That is about double its pre-2020 peak, and that financing sits inside a $3 trillion pile of repo borrowing. Such is the nature of any carry trade. It looks riskless right up until something breaks.

The New Owner Of The Bond Market

Step back, and the basis trade is one piece of a much larger shift. Hedge funds have doubled their total Treasury footprint since 2023. Their long book now accounts for 8.5% of the Treasury's outstanding, up from 4.5% at the start of 2023, more than the entire US mutual fund industry holds and more than the whole banking system.

Read that again. Fifty funds, most of them financed overnight in a market that can seize up without much warning, now stand exactly where foreign central banks, pension funds, and insurers, the patient money that almost never had to sell, used to stand.

The chart below shows where that $2.4 trillion long book resides. The basis trade dominates at 35%, with swap spread arbitrage and curve trades filling most of the rest. Genuine buy-and-hold money is a rounding error at 3%. This is not the price-insensitive ownership the Treasury market was built on. As I wrote in February in "Is China Really Dumping US Treasuries?," the foreign official bid has faded over the past decade, so something had to fill the hole. Leverage did.

How The Basis Trade Bends The Signal

Here is why any of this touches the number on your screen. A long Treasury yield is really two things added together:

1. The market's expected path for short rates, which carries its read on inflation, growth, and the Fed, and
2. The "term premium" is the extra compensation investors want for locking up money for a decade.

Split the 10-year into those pieces with the New York Fed's model, and something jumps out. The expected-path component is tracking the Fed's own projections closely. The part doing the moving is the term premium, and it's exactly where the basis trade lives.

The issue at hand is that when hedge funds crowd in, they become net buyers of cash Treasuries. That short-term, manufactured demand pushes the term premium down. In other words, hedge funds may be suppressing the term premium, keeping yields lower than fundamentals alone would imply.

However, this is where the obvious question exists.

“If the trade pushes yields down, why are they going up?”

Because the basis trade is just one force among several, and right now, rising oil prices due to the Iran crisis and the AI borrowing boom are the stronger ones. That does not make the basis trade harmless, but it does make it a coiled spring under a market already strained.

The Fed made the link itself in its June minutes, noting that the shift toward "price-sensitive private investors" could affect the "term premium component of yields." When your biggest marginal buyer is a leveraged fund that must sell the moment its financing tightens, the message inside the yield stops being a clean read on the economy. The signal is not clean.

What Happens When The Basis Trade Reverses

Here is the part that should keep you up at night. Every one of these trades assumes it can be closed calmly; however, that is always the case, and history says otherwise. The danger is not the trade, it is the exit. When a strategy is built to shrug off interest-rate direction, that trade can suddenly be forced to reverse, causing rates to move faster and further than any economic news would.

Just like all leveraged bets, when an event causes a reversal, it can trigger a chain reaction.

• The unexpected, exogenous shock causes a spike in volatility.
• Margin and repo haircuts jump, and
• The fund has to sell Treasuries into a market where everyone else is selling too.
• Prices fall, yields spike, and the spike triggers the next margin call.

As is always the case, that is the cruel arithmetic of leverage. The same borrowing that magnifies the gain magnifies the forced sale.

If you look at the chart above, you will notice that we have already watched this movie twice. The first time was in March 2020, when funds dumped roughly $180 billion in Treasuries in a matter of days, and yields spiked as the economy imploded. That is the opposite of what a "safe haven" is supposed to do. Only the Fed's interventions, which drove its balance sheet toward $9 trillion, stopped the bleeding.

Then, in April 2025, the "Liberation Day" tariff shock hit the swap spread trade, causing an unwind of about $60 billion before markets steadied.

However, there is another side to this self-correcting event that matters as much as the initial cascade event.  

The forced selling leaves the cash bond cheap, its yield artificially high, and that gap is extremely appealing to cash-rich buyers. A real-money buyer or a fresh arbitrageur steps in to lock the fatter yield, and their buying drags it back down, which is why the spike is usually temporary. Most of these basis-trade wobbles never make headline news, just the event that caused them.

Your next question is a good one.

“Why were March 2020 and April 2025 the exceptions?”

The reason those two periods were exceptions was that those reversals depended on three things holding at the worst possible moment:

• A dealer with a balance sheet to finance the bond,
• Cheap repo to fund a fresh trade, and
• Unlevered real money is buying, not selling.

In a genuine dash for cash, all three of those factors arrive at once. That was March 2020 exactly, when mutual funds dumped another $270 billion right alongside the hedge funds, so the natural stabilizer just became an additional seller. When the three hold, the reversal is a blip. When they jam, yields overshoot, and the only buyer left with the size to stop it is the Fed. The chart below traces the full sequence: the doom loop on the left and the buyer who ends it on the right.

This time, the fuses are not hypothetical. Japan, the largest foreign holder at $1.2 trillion, is defending a yen at 40-year lows. Such is why Washington decided to join Tokyo's yen intervention in July to mitigate the risk of an isolated event from spreading.

Secondly, the "Iran stalemate" has pushed yields to multi-decade highs and continues to impact the real economy through an oil shock. Furthermore, the plumbing is already creaking: the Fed's repo backstops saw their first real use over the winter; the Fed quietly stopped shrinking its balance sheet and restarted buying bills; and just this week, the Treasury doubled its long-bond buybacks to fight the sell-off. When the government is already reaching for the fire hose, there is smoke in the building.

Which brings us to the real question.

“If the basis trade blows up, will the Fed step in?”

Almost certainly, in the end. The Treasury market is the one market monetary policy cannot function without, and the tools are already built: a standing repo facility for domestic funding stress, the FIMA facility for foreign central banks like Japan, and, at the extreme, the same unlimited buying that stopped the last two episodes. To wit, the Fed's own economist has already put the risk on the record.

"The combination of large scale, high concentration, and elevated leverage creates the potential for systemic stress if multiple strategies face simultaneous pressure or if severe shocks affect the largest participants." - Federal Reserve, Decomposing Hedge Funds' U.S. Treasury Exposures, June 2026

However, the fireman is different now, and that matters more than the market likely wants to admit. Kevin Warsh took over in May after years of arguing that the crisis backstop gets reached for far too freely. He wants a smaller balance sheet, and he blames the old regime's bond buying for enabling government overspending.

Warsh is also rewriting how the Fed and Treasury work together. On top of that, add the moral-hazard problem that policymakers now openly discuss: a guaranteed rescue just invites investors to lever up more, and you get a Fed likely to let the basis trade take real losses before it acts.

Such is the new reality. The "Fed put" on the bond market is not gone. It just has a higher strike and a slower trigger than under Powell, which means the overshoot before your rate reversal arrives is likely bigger, not smaller.

What Should Investors Do Now

So where does that leave you? Not in a bunker, but not asleep either. The current setup is going to reward investors who can read who read the tape correctly, not those who react to every headline.

None of this argues for panic, but just for reasonable respect for the risks. As Lacy Hunt has been warning, and as we covered in Lacy Hunt Turns Bearish Bonds, the old rules for owning duration are shifting under our feet. The basis trade is one more reason the bond market is no longer the quiet corner of the portfolio. Do NOT mistake a leverage-driven spike for an economic message, or an economic message for a leverage-driven spike. Trade accordingly.

🖊️ 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:

• Three Percent Real TIPS Yields: Boring But Valuable - RIA - by Michael Lebowitz
• Think Like An Investor, Not A Speculator (Chapter 1 of 5) - RIA - by Lance Roberts

📹 Watch & Listen

Treasury debt buybacks helped push bond yields lower and stocks higher, but the market’s technical setup still warrants caution. The 10-Year Treasury yield remains on a sell signal, while the S&P 500 is nearing a momentum sell signal with downside risk toward its 50-day moving average. Meanwhile, volatility remains extremely compressed, investor complacency is elevated, and cheap portfolio hedges could become increasingly valuable.

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📊 Market Statistics & Analysis

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

💸 Market & Sector X-Ray: Market Gains Ground

The market struggled a bit this past week Energy took the lead with rising oil prices. Overall, the market remains well deviated above longer-term moving averages but has reversed some of its previous overbought conditions. Staples, Energy, Materials, International and Discretionary are overbought, while Utilities, Technology, and Industrials are oversold.

📐 Technical Composite: 71.81 - Overbought Reversing

The technical condition eased slightly again this past week but the market remains overbought, and sentiment remains bullish for now with no significant technical breaks. Indicator does suggest more struggles for the market next next.

🤑 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

About 12-weeks ago we noted that Goldminers were the most oversold factor on the list which suggested that a rotation was likely. That rotation has now occurred and Goldminers are extremely overbought. Take profits and rebalance your positioning. Disruptive Tech, US Qualrity, Large Cap Value, and Equal Weight are also very overbought suggesting we could see a bit more of correction in the market over the next few weeks and see a rotation towards lower beta and technically beaten up sectors.

📊 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 21, 2026, with the S&P 500 at 7,674.37, the Money Flow Breadth Ratio (MFBR) stands at 75% and reversing, versus 80% the prior week - still 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's 25-year backtest is the reason for the trim: MFBR readings above 70% have been followed by below-average forward returns, so the grid reduces exposure at these levels rather than adding to it.

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

Last week we noted that "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." That turned out to be good advice given the turmoil this past week. Gold and Goldminers are once again grossly extended so taking profits is recommended along with Energy exposures as well.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post The Basis Trade: Is The Bond Market Signal Distorted? appeared first on RIA.

Starting December 6, 2026, Nasdaq will offer a trading session starting at 9 p.m. to 4 a.m. ET. The new hours, in addition to the standard 9:30 a.m. to 4:00 p.m. ET and current pre- and post-market trading sessions, would extend the exchange's trading to nearly 23 hours a day, five days a week, from Sunday evening through Friday evening. Doing so would not only allow Nasdaq to capture higher domestic volumes and increase its revenue, but also provide value for international investors and better rival 24/7 crypto trading.

During the tech melt-up of the dotcom boom in 1999, Nasdaq proposed keeping its exchange open for 24 hours. The market crashed, and it wasn’t enacted. Below we share a few concerns worth considering regarding Nasdaq's longer sessions.

• Poor liquidity in off-peak hours will result in wider bid-offer spreads and more volatility
• Wells Fargo analysts reportedly called the proposal "the worst thing in the world," arguing it would push equity trading further toward feeling like a casino rather than a market for long-term capital allocation
• Running compliance, risk management, and trading desks across a near-continuous 23-hour cycle, with just a one-hour maintenance window, is a real staffing and operational burden for brokerages, exchanges, and the firms that support them.
• Questions remain about whether information processors, like those disseminating price data, and clearing firms can fully support the Nasdaq proposal.

Whether 2026 rhymes with 1999 and the proposal is quashed remains to be seen. Either way, Nasdaq and Wall Street have a lot to consider before moving ahead with the proposal.

What To Watch Today

Earnings

Economy

Market Trading Update

A couple of sessions ago, we marked the August 21 gamma cliff on the calendar in The Gamma Cliff: August 21st, Mark The Date. That mechanical OPEX setup arrives today with a real fundamental company attached to it. Walmart's earnings landed before the bell yesterday, and the tape's reaction to a genuinely good quarter is supporting the recent softness in the economy.

Overall, the headline was a beat. Adjusted earnings came in at $0.81 against the $0.73 the Street expected, on revenue of $187.94 billion. eCommerce grew 23% globally, U.S. comparable sales rose 2.6%, and management raised the full-year outlook. On paper, that's a clean print. However, the stock fell sharply.

There were a couple of reasons why the beat didn't hold. First, a large chunk of the upside came from tariff refunds booked in the quarter, and CFO John David Rainey told investors to read Q2 and Q3 together because the company is plowing those refunds back into price. Secondly, the forward math shows it. Q3 operating income is guided to grow just 2% to 4%, and Q3 adjusted EPS of $0.62 to $0.64 sits essentially flat against the $0.62 Walmart earned a year ago. The beat was real, but the soft guidance suggests the consumer is weakening, as we have noted previously.

Add to the fact that at 40 times forward earnings, WMT is trading at a premium. Yes,.WMT is a superb operator, but you were paying a growth multiple for low-single-digit sales growth. Howard Marks has made the point for decades. There's no asset so good that it can't be priced badly. The price gap sliced through previous support in a single session and extended the decline from the May 19 record of $135.16 to roughly 23%.

This brings us to Costco (COST), which is the same trade, but one notch more expensive. Cost trades at roughly 43x forward earnings, with a PEG north of 4, against roughly 26x for the staples group. If the best-run retailer in the world can shed 9% on a beat-and-raise, Costco is at risk if it misses.

So, what are we doing with our WMT position now? It is not a sell, but we aren't adding to it yet either. The franchise, the advertising business, and the membership engines are real, and full-year guidance has increased. Once WMT finds a bottom and we see buyers return, we will rebalance the position back to the target weight.

BuyBacks Are Not Yield Curve Control Or Operation Twist

Yesterday's announced increase in the Treasury's buyback program, as we detailed HERE, drew comparisons to two more famous bond market interventions: the Fed's 2011-2012 Operation Twist and yield curve control (YCC). Both comparisons are inaccurate.

Yield curve control occurs when a central bank explicitly targets an interest rate level and buys whatever quantity of bonds it takes to maintain that level. YCC is QE, but unlike more traditional QE, where the central bank targets a quantity of bonds without a rate target, under YCC the central bank intentionally buys enough bonds to reach a specific interest rate target. The Fed used YCC during and after WWII (1942 to 1947) to cap long-term rates at 2.50%. More recently, Japan pinned its 10-year yield to near zero from 2016 to 2024.

Treasury's buyback program shares none of that architecture. There's no announced yield target and no open-ended commitment, just a cap: $4 billion per operation. Importantly, the Treasury will issue debt to buy back debt; thus, it is not adding to the money supply or reserves on bank balance sheets that could increase the money supply. YCC is a central bank tool, and this is a Treasury Department one.

The Operation Twist comparison is not much better. Under Operation Twist, the Fed sold short-term securities and bought long-term ones simultaneously to reshape the yield curve. Treasury's buybacks aren't immediately offset by a matching short-end sale. In fact, the Treasury could issue "on-the-run" 10- and 30-year notes and bonds to buy cheaper bonds that lie between the two maturities. For instance, as we show below, the yield on the 20-year bond is about 25 basis points too cheap to the yield curve. The Treasury could issue 10- and 30-year bonds to buy back 20-year bonds and save 25bps.

We have no doubts that the Treasury is increasing buybacks in part to cap the recent increase in yields. However, comparing this Treasury debt management operation to Fed operations is a big error.

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The post Nasdaq Is About To Make Wall Street Sleepy appeared first on RIA.