[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Based on their extreme valuations, AI-focussed equities are in a bubble and have been for a considerable time, but what about the investments in AI infrastructure such as datacentres, semiconductors, servers and the associated power supplies? Does the rapid rate of investing in AI-related hardware, software and buildings constitute a bubble?

We suspect that it does, but at this time there is no way of knowing. Investment that turns out to be malinvestment always is based on forecasts of future demand that prove to be far too optimistic, but not all optimistic forecasts of future demand turn out to be wrong.

One sign that the investment underway in AI-related hardware and software constitutes a bubble is the creative ways that are being used to fund it. For example, the following meme reflects how three of the most important companies in the AI world recently funded each other. NVIDIA invested US$100B in OpenAI, which used the money to buy server capacity from Oracle, which used the money to purchase chips from NVIDIA. This circular transaction boosted the equity valuations and the revenues of all three companies involved.

Our 1-2-year bullish outlooks for some industrial commodities, including natural gas, uranium, copper and tin, are linked in part to the AI buildout. Therefore, could the bursting of the AI bubble cut-short the cyclical commodity bull market?

We don’t think so, for six reasons.

First, even if the stock prices of AI-focussed companies were to crash soon, the investment in the associated AI infrastructure probably would add significantly to commodity demand for at least another two years. This is based on the datacentres already under construction and planned to commence construction in the near future.

Second, there are other important potential drivers of increased commercial demand for commodities, chief among them being the rebuilding of Ukraine, the rebuilding of Gaza and the construction of the massive Yarlung Tsangpo Hydroelectric Project in China.

Third, restrictions on international trade are likely to put upward pressure on commodity prices in some parts of the world, including the US, by making the international trading of commodities less efficient. For example, whereas previously it would have made sense to import a commodity rather than produce it locally, due to tariffs it could make more sense to produce locally. However, it generally takes several years to build a new mine and the mine-building process itself consumes large quantities of commodities.

Fourth, the combination of a weaker US$ and increased government spending around the world will both support the commercial demand for commodities and boost the speculative demand for commodities as an inflation hedge.

Fifth, even though investment in ‘renewable’ energy such as solar and wind is now being de-emphasised or actively discouraged by the US government, there continues to be massive investment in these forms of energy around the world and especially in China. This will boost the commercial demand for industrial metals.

Sixth, the gold bull market of the past few years projects a commodity bull market over the next few years (commodity bull markets are just gold bull markets that have broadened).

In our opinion, the rise in the prices of some commodities over the past six months is just a taste of what’s to come.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

Indicators of sentiment suggest that the US economy is weak, while macroeconomic indicators such as GDP suggest that the US economy is doing fine. This difference between what most people perceive and the performances of economic aggregates such as GDP has been apparent for years, and can be explained as follows.

First, the reality is that people who are asset rich and/or cash rich have done extremely well over the past few years and continue to do so due to higher interest income and equity prices. They have increased their spending accordingly, boosting measures such as GDP in the process.

Second, there has been an investment boom associated with AI that has led to massive capital spending on datacentres. Everything that goes into building these new datacentres has added to GDP while doing very little, to date, to improve the lives or the job prospects of the vast majority of people. In fact, the datacentres are increasing the cost of energy and therefore the cost of living for the average person.

Third, the government has spent rapidly over the past few years and continues to do so, ensuring that there is plenty of ‘fiscal stimulus’ to boost the economic aggregates.

A result is that numbers such as economy-wide consumer spending look good, while for most consumers it feels like the economy is in recession or heading that way. The economy-wide numbers matter for the financial markets and for our analyses, but it’s important to understand why the perceptions of most people don’t align with these aggregates.

Overall, the economic indicators to which we pay attention point to an economy that is far from strong but at the same time is not yet weak enough to be put into the recession category. For example, the ISM New Orders Index (NOI) continues to be low enough to generate a recession warning signal without doing what it usually does after a recession gets underway in earnest: plunge below 40. This means that the NOI has been generating a recession warning for three years now without the overall economy entering official recession territory, which is something that has never happened before.

As we’ve noted many times in the past, something that should happen before a recession gets underway in earnest is a sufficient general widening of credit spreads to push the High Yield Index Option Adjusted Spread (HYIOAS) above its 65-week MA (the blue line on the following chart). HYIOAS generates the occasional false recession warning, which is what happened during the first quarter of this year, but in the past it has never failed to signal an actual recession. In other words, it generates the occasional false positive but no false negatives.

HYIOAS’s current message is that the US economy is not in recession.

The US economy therefore does not appear to be in recession right now, although it would not take much in the way of additional weakness to tip the scales decisively in that direction. This risk is a reason to hold a larger cash reserve than usual, but it is not a reason to avoid investments/speculations in commodities and commodity-related equities. As we’ve noted in the past, commodities and the associated equities performed very well during the bulk of the 1973-1974 inflationary recession (probably the best historical analogue) and also performed well during the first six months of the 2007-2009 deflationary recession.

[This blog post is an excerpt from a commentary posted at www.speculative-investor.com last week]

The senior US stock indices have trended upward with only minor pullbacks since April, leaving them very overbought by most measures and at their highest valuations in history. Furthermore, the Russell2000 Small-Cap Index is testing long-term resistance. At the same time, the economy is weakening under the weight of tariffs, regime uncertainty and many years of malinvestment, pointing to either slower earnings growth ahead or earnings contractions if the long-delayed recession finally arrives. Consequently, the current market situation seems precarious.

It is precarious, which is why our own accounts are now about 50% in cash. This is up from 30% in April-2025 and is the highest cash percentage we have had in many years. However, over the past 18 months we have steered clear of bearish speculations in our own accounts and with regard to TSI recommendations/positions (we have not added a stock-market-focussed put option to the TSI List since March-2024).

As an aside, we came close to adding an IWM (Russell2000 ETF) put option to the TSI List in July of this year, but for the option to be added the IWM price had to test resistance at US$230 before reversing downward. It ended up reversing downward from significantly below this resistance and then rebounded off support, prompting us to write (in the 11th August Weekly Update): “…note that a rise by IWM to resistance at $230 now would constitute an upside breakout and would NOT create a buying opportunity for IWM puts.” A week later we went on to explain: “…the small-cap-focussed Russell2000 ETF (IWM) finally attacked resistance at US$230 last week. The resistance has held for now, but the fact that IWM pulled back to support before attacking resistance makes it more likely that the resistance will be breached.” The resistance eventually was breached and a rise to the next important resistance at US$245 soon followed.

Our interest in equity-index-related bearish speculations diminished greatly after we fully understood the reality that with passive investing strategies having come to dominate the market, the traditional mix of equity market fundamentals such as corporate earnings and valuation had all but ceased to matter. In fact, valuation now works in the opposite way, in that the greater the relative overvaluation of a particular stock the larger the proportion of ‘passive’ money that will be allocated to the stock, driving its valuation even higher.

The situation is precarious, because at some point the system that is putting a relentless bid under the market and especially under the stocks with relatively large market capitalisations will go into reverse. At that point and with valuations in the stratosphere, there will be no value-oriented investors to ‘buy the dip’ and most people will be surprised at how far and how fast the market falls.

The system won’t go into reverse because valuations have become too high, because, as explained above, high valuations are not an impediment to demand if most of the demand is ‘passive’. It will go into reverse because the net flow of money into passive funds stops or simply becomes insufficient. This could happen due to the “boomer” generation withdrawing money from their retirement accounts or it could be the result of much higher unemployment (a recession).

Unfortunately, there is no way of predicting when the major reversal point will arrive. At this time we suspect that the overall bullish trend will continue until the end of this year (with a significant intervening correction), but it could continue for much longer than that. In the meantime, we plan to continue doing what we have been doing, which is 1) adjust our overall cash percentage based on short-term risk considerations and 2) find ways to profit on the long side that don’t involve turning a blind eye to the values of underlying businesses. Fortunately, there have been excellent opportunities in the commodity realm over the past 12 months and we expect that there will be many additional opportunities in this realm over the next couple of years.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Since 1970, which roughly was when the current monetary system involving no official link to gold was born, the USD/CHF exchange rate (the US$ relative to the Swiss franc) has experienced a repeating pattern of 8-10 years down followed by 6-8 years up. We rarely discuss this cycle at TSI, because it only becomes relevant when the window for a cyclical turning point is entered, which only happens every 6-10 years. We are discussing it today because a turning-point window has been entered.

The cyclical pattern outlined above began with an 8-year downward trend in the US$ (relative to the Swiss franc) during 1970-1978. This decline was followed by an upward trend that culminated in 1985 and then a 10-year decline to a major bottom in 1995. The following weekly chart picks up the story in 1991, which means that it captures the final few years of the 1985-1995 cyclical decline and everything thereafter.

The chart shows that the most recent cyclical decline kicked off at the start of 2017, so it is not a coincidence that the last time we discussed this long-term cycle at TSI was in 2017. An 8-10-year decline from the 2017 high would result in the next major low for the USD being set during 2025-2027. Hence our comment above that a turning-point window has been entered.

It’s worth pointing out that knowledge of the above-described cycle generally isn’t useful for practical trading purposes, because the countertrend moves during both cyclical uptrends and cyclical downtrends can be substantial. However, it is useful to know that previous cyclical downward trends, which culminated in 1978, 1995 and 2011, had large declines during their final 12 months. If this aspect of the long-term pattern repeats, then a large decline in the USD still lies ahead.

So, where does this leave us?

Our view at the start of this year was that the USD was about to embark of a 1-2-year decline to complete a cyclical downward trend. We subsequently refined this view and over the past several months have written that we expected a cycle low to be set late this year at not far below the early-July low. While we continue to expect that this year’s low will be not far below the early-July low, we no longer expect this year’s low to be the ultimate cycle low. Here are the three reasons in order of ascending importance:

1) As mentioned above, previous long-term declines in the USD have involved large declines during their final 12 months. Unless the USD loses about 10% of its value against the CHF within the next three months, the decline during the 12 months leading up to this year’s low will be minor in comparison.

2) Major USD lows have occurred at 16-17-year intervals (Q3-1978, Q2-1995, Q3-2011). The same interval projects 2027-2028 for the next major low.

3) Total US equity market capitalisation as a percentage of global equity market capitalisation reached a peak of almost 70% early this year. Refer to the following chart for the details. There is evidence in capital flow data and in the following chart that a reversal has occurred. Furthermore, the trade-related policies of the Trump Administration will tend to reduce capital in-flows at the same time as they restrict goods in-flows to the US, and US equity valuations are extremely high in both absolute and relative terms. A result is likely to be a multi-year period of weakness in US equities relative to global equities, which, in turn, would mean a multi-year period during which our US$ True Fundamentals Model (UTFM) spends most of its time in bearish or neutral territory.

Chart source: Lord Abbett

Further to the above, we expect that the USD will make an intermediate-term low before the end of this year, but the overall cyclical decline is now expected to extend into 2027. A cycle low in 2027 still would be within the window projected by the 6-8 years up followed by 8-10 years down repeating pattern. It also would mesh with the 16-17-year cycle of major USD lows and our expectations regarding currency market fundamentals.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

The Trump-Putin summit in Alaska ended with no peace deal, which was not a surprise*. However, we suspect that an agreement to end the fighting will happen within the next few months, because there are strong incentives for all parties to bring the destruction to an end. For Putin and Russia’s political elite, the incentives are economic and are becoming stronger as time goes on.

In our 29th January 2025 commentary we discussed the effects of Russia’s invasion of Ukraine on the Russian economy. Here’s how we described the situation:

“Due to the government’s control of the commercial banking system, there won’t be a [financial/debt] crisis. However, the cumulative costs of waging the war in Ukraine will lead to long-term weakness. In effect, a lot of resources are being drawn from the broad economy and then destroyed as part of the war effort, reducing the total amount of wealth.

The war-related wastage of resources (destruction of wealth) is not evident in the financial statements of the Russian government due to the ‘sleight of hand’ that has been used to keep a large part of the war financing off the government’s books. The sleight-of-hand involves directing the commercial banks to provide whatever financing is required by the manufacturers of armaments…[which] has led to a massive expansion of corporate credit in Russia.

A consequence is that although the government’s balance sheet still looks healthy, the effects of the war-related spending are evident in the inflation rate. The official inflation rate is around 9%, but the fact that the central bank considers a short-term interest rate target of 21% to be appropriate suggests that the actual inflation rate is 15%-20% or higher.

The government’s control of the banking system will prevent a crisis, but Putin certainly has strong economic incentives to bring the war in Ukraine to an end.”

Since then, the war has continued to grind on, with Russia’s invading forces making slow but steady progress. The cost has been high (it has been estimated by the Carnegie Endowment for International Peace that the war will cost the Kremlin about US$170B this year), and making matters worse for the Russian government is that its oil-related tax revenue dropped by about one-third from July of last year to July of this year. This is not because sanctions are working, but because the oil price is now about 25% lower in US$ terms while the Russian Ruble has gained about 10% against the US$.

The following chart shows that the Ruble has strengthened significantly against the US$ since the start of this year (the line on this chart declines when the Ruble strengthens) and is now roughly where it was in early-2022, immediately prior to the start of the war with Ukraine.

As a result of the on-going wealth destruction, the adverse effects of the war on Russia’s economy are becoming increasingly apparent. This is why we say that Putin has an incentive to strike a peace deal that is becoming stronger with the passage of time. In short, the longer the war drags on, the worse will be the outcome for Russia’s economy. However, a peace deal will require the acknowledgement, on the part of NATO/Ukraine, that Ukraine will never be part of NATO and that about 20% of Ukraine is now Russian territory.

*It also wasn’t a surprise that Trump portrayed the meeting as a significant step towards peace. Further to a comment we made a week ago, this could enable him to back away from his “secondary sanctions” threat and substantially reduce tariffs on India.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

Temporarily at least, we have some semblance of clarity on the international trade front, with a trade deal covering most imports being announced at the start of this week between the US government and the EU. Like the earlier one between the governments of the US and Japan, this deal involves huge and fictitious dollar amounts of promised investments and spending. In this case, the fictitious amounts are US$750B of EU purchases of US energy over three years and US$600B of EU investment in the US.

The investment/spending amounts that have been linked to the deals are made-up numbers that bear no resemblance to reality, because:

1) The parties making the agreements are not the ones that would be doing the investing/spending. For example, the EU is not a legal entity that invests in the US or purchases energy from the US.

2) In order for an investment to be made in the US, an investor would have to believe that the investment will achieve an adequate return. Therefore, the amount that will be invested will be determined as it always has been determined: by the forecast return on the investment, taking risk into account.

3) The only way that the EU could greatly increase the amount of energy it buys from the US would be to change energy trade routes. To be more specific, a lot of the energy (oil, LNG and coal) that is being shipped from the US to destinations other than the EU would have to be re-routed to the EU, and a substantial portion of the EU’s current energy imports would have to be re-routed to other countries. This would result in substantial extra costs being incurred for the benefit of no one other than the energy shipping industry. Perhaps that is why the stock price of Flex LNG (FLNG) was very strong during the first two days of this week and has broken out to the upside.

As an aside, it generally is the case that when one country or region takes actions that hampers trade, trade doesn’t stop; it moves. This concept was highlighted in the UPS earnings call on Tuesday of this week. In this call UPS first noted that during May-June there was a 34.8% drop in the average daily volume in the company’s China-US trade lane, and then noted: “…in the second quarter, we saw volume in our China-to-the-rest-of-the-world trade lanes increase by 22.4%, and we nearly doubled our capacity between India and Europe to meet the growing export demand on that trade lane.”

4) In the way it handled the attempts by Nippon Steel to buy US Steel, the US government has demonstrated that it does not want additional foreign investment in the US.

The reality is that although the recent trade deals have included huge numbers that supposedly reflect additional foreign investment in the US, these deals will not result in any investments that would not have occurred anyway. The touted numbers are solely for public relations purposes.

The recent deals have added some clarity, but the overall level of trade-related uncertainty remains high.

One reason is that there is a 12th August deadline for the US and China governments to do one of the following: a) come to a new agreement on trade terms involving tariff rates and export restrictions, b) extend the terms of a temporary arrangement that was agreed in mid-May, or c) return to the ridiculous tariff rates and restrictions that applied prior to the mid-May agreement. A 90-day extension of the current terms is widely expected.

Another reason for a continuing high level of trade-related uncertainty is that Trump has shortened the time for Russia to strike a peace deal with Ukraine or face secondary sanctions (these would be sanctions on countries that import Russian products). The new deadline mentioned earlier this week is about 10 days from now. This will be interesting, because a) there won’t be a peace deal prior to this deadline, b) China is the main importer of Russian products and c) India gets about 45% of its oil from Russia. The US can’t punish China for importing Russian products, because via its control of REE supply China’s government has the ultimate weapon in the trade war. However, the US could punish India with secondary tariffs, but what would this achieve?

The fact is that all the oil currently produced in the world gets bought by someone, so the only way that India could stop consuming Russian oil would be to take oil that currently is being consumed elsewhere, causing a supply shortage elsewhere that would have to be filled with…Russian oil. There simply is no way to prevent the global consumption of Russian oil and any attempts to do so would have minimal effects on Russia but could cause major problems in other countries/regions.

[This blog post is a slightly modified excerpt (including updated charts) from a commentary published during the week before last at www.speculative-investor.com]

US President Trump threatened on 14th July that if a Russia-Ukraine peace agreement didn’t happen within 50 days, then very high secondary tariffs would be imposed on Russia’s trading partners. As explained below, this is an empty threat.

China is Russia’s most important trading partner, so this is a threat to again impose extremely high tariffs on US imports from China. Now, the probability of a Russia-Ukraine peace agreement within the next 50 days is low and the probability that China will stop trading with Russia in response to this threat is zero, so the likely outcome 50 days from now is that Trump will be forced to either carry out his threat or back down. If he doesn’t back down and makes good on his threat, we know what will happen because we watched the same scenario play out within the past few months.

The unilateral imposition of higher tariffs on Chinese imports to the US would cause China’s government to stop exporting Rare Earth Elements (REEs) and other critical metals to the US. Within a couple of months this would bring the US auto industry as well as US-based production of batteries, turbines, a lot of military equipment and anything that uses an electric motor to a virtual standstill, prompting the US government to strike a deal that substantially reduced the tariffs.

It turns out that the ultimate weapon in the ‘trade war’ is the Chinese government’s control of global REE supply, because the economic impact of stopping exports of these minerals is low for China and extremely high for the US and many other developed nations. This was proved over the past few months and will be proved again if the US government imposes hefty additional tariffs on China after 50 days.

Moreover, due to growing demand associated with high-tech applications, the extent to which REEs are critical will increase as time goes by. This is why we have had a strong focus on REEs over the past five years and why we expect REE mines and processing facilities outside China to become far more valuable over the years ahead.

One of the unintended consequences of Trump’s trade war has been to highlight the risk presented by the Chinese government’s influence on REE supply. This prompted the stock market to start pricing-in the increasingly urgent need to diversify in this area, which has involved some rapid valuation changes. For example, the stock prices of Energy Fuels (UUUU) and Neo Performance Materials (NEO.TO), two of the TSI stock selections that provide exposure to REEs, have more than doubled from their lows of the past four months.

A chart of UUUU is included below. The recent frenetic price action suggests that we are nearing the end of the first leg of a cyclical bull market.

However, there haven’t yet been large increases in the prices of the underlying commodities.

Regarding the prices of the underlying commodities, the following chart shows the performance of Neodymium (Nd), one of the most widely used REEs. The chart reveals that although there has been a steady upward trend in the Nd price since March of 2024, the price remains very low relative to where it traded during the bulk of 2021-2023. Nd is a “light” REE and is not one of the REEs over which China’s government has a stranglehold on supply (heavy REEs such as Dysprosium (Dy) and Terbium (Tb) are more vulnerable to Chinese export restrictions), but as far as we can tell its price performance is representative.

The risk that the stock market has gone part of the way towards discounting is that REE prices are about to accelerate upward as the users of these metals around the world scramble to secure supply. In other words, the risk is that for REE prices we are at the equivalent of mid-2020.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

To our surprise, the US economy has not entered a recession over the past two years. This is not because a recession has been avoided altogether but because the current economic cycle has been elongated.

We use the commodity/gold ratio (the Spot Commodity Index (GNX) or the CRB Index (CRB) divided by the US$ gold price) to define booms and busts, with booms being multi-year periods during which the ratio trends upward and busts being multi-year periods during which the ratio trends downward. The vertical lines drawn on the following GNX/gold chart mark the trend changes (shifts from boom to bust or vice versa) that have occurred since 2000.

It’s not essential that the bust phase of the cycle contains a recession, but it’s rare for a bust to end until a recession has occurred. Usually, the sequence is:

1) The commodity/gold ratio begins trending downward, marking the start of the economic bust phase.

2) The economic weakness eventually becomes sufficiently pervasive and severe to qualify as a recession.

3) Near the end of the recession the commodity/gold ratio reverses upward, thus signalling the start of a boom.

It is not unusual for the stock market to continue trending upward after the bust begins, but in the past the stock market always has peaked prior to a recession getting underway. For example, an economic bust began in October-2018 but the SPX continued to make new highs until early-2020. For another example, during the first half of the 1970s the stock market continued to trend upward for about three years after the start of a bust.

By the way, due to the change in the structure of the US stock market it’s possible that the next cyclical peak in the SPX will occur AFTER the start of a recession. This is because, thanks to the domination of passive investing, the stock market no longer forecasts cyclical trends in corporate earnings, interest rates or economic growth; it simply responds to passive money flows.

In the current cycle the commodity/gold ratio has been trending downward since the first half of 2022, meaning that the US economy now has been in the bust phase of the cycle for about three years without entering recession. This is unprecedented within the context of the past 30 years, but it is comparable to what happened during the 1970s.

A much longer-term view of the commodity/gold ratio is provided by the monthly chart displayed below. This chart uses the CRB prior to 1993 and the GNX thereafter.

There were two long bust phases during the 1970s, the first starting in Q1-1970 and the second starting in Q3-1976. The time from the start of the first bust to the start of a recession (November-1973) was about 3.5 years, and the time from the start of the second bust to the start of a recession (January-1980) also was about 3.5 years. Late this year will be about 3.5 years from the start of the current bust.

Consequently, although the current economic cycle has been elongated to an unusual extent relative to the cycles of the past few decades, it currently is in line with the cycles of the previous period during which inflation generally was viewed as the major economic issue.

[This blog most is a slightly modified excerpt from a commentary published at www.speculative-investor.com about three weeks ago]

We consistently have been predicting lower price inflation for almost three years now, but we also have been predicting that the downward inflation trend would be followed by another major inflation wave. It’s likely that the next major inflation wave will begin this year and continue for at least two years. It’s also likely that it will be driven more by government actions than by the creation of new money (monetary inflation). We’ll now explain why.

Despite the famous Milton Friedman comment to the contrary, price inflation (a rise in the cost of living for the average person) is not always a monetary phenomenon. It also can be a government phenomenon. The reason, in a nutshell, is that government interventionism and deficit-spending can distort the economy in a way that reduces productivity, leading to lower production and therefore to higher prices even in the absence of monetary inflation. In very simple terms, government actions can result in the same amount of money chasing less goods and services, causing prices to be higher on average.

Going deeper and focussing on the US, by its deeds and words it is reasonable to conclude that the US government will be 1) increasing its already-massive deficits over the years ahead, 2) driving up the costs of manufacturing in the US through tariffs on imported materials, and 3) using tariffs as a negotiating tool, thus ensuring that many business leaders remain uncertain about the costs that they will face in the future. There also is a risk that the US government will take actions that discourage foreign investment in the US.

An effect of the above-mentioned government actions will be reduced investment in productive enterprises. We note, for instance, that unless the additional debt issued by the government to finance its increased deficit spending is monetised by the Fed, it will crowd out investment in private businesses (the productive part of the economy). Furthermore, as well as driving up manufacturing costs, tariffs imposed on commodity imports probably will lead to shortages of some important commodities. While this could prompt efforts to increase local supply, due to the time, energy and materials it takes to bring new mines into production this additional building activity would, for at least a few years, have the effect of applying additional upward pressure to commodity prices and popular measures of inflation.

With the government putting upward pressure on many prices by making the economy less efficient, the Fed will not be able to justify the sort of monetary interventions it conducted during 1998-2021. The following chart shows that during this earlier period the year-over-year growth rate of the Core PCE (the Fed’s favourite inflation gauge) never went above 2.7% and spent most of its time in the 1%-2% range, effectively giving the Fed cover to ‘print’ as much new money as it deemed necessary to support the stock market and stimulate economic activity. That cover will not exist over the years ahead.

In addition, with it being obvious to almost everyone that the Fed contributed in a big way to the inflation problem of 2021-2023, from now on the Fed will tread far more carefully with regard to inflationary measures.

Consequently, we expect that for at least the next couple of years the Fed will be unwilling to mitigate the crowding-out effect of the government’s expanding indebtedness.

On a related matter, periodically in the past there would be a ‘deflation scare’ — a set of circumstances during which the Fed and other central banks effectively had carte blanche to ramp up the supply of money. Due to government-created shortages and price distortions, it’s unlikely that there will be a deflation scare within the next few years.

Summing up, the world has changed. For more than two decades every economic downturn or financial crisis was met with a new round of aggressive money creation, each of which set in motion a boom that ended in the bursting of an investment bubble, a deflation scare and another round of aggressive money creation. That won’t happen in the future, because government actions will maintain sufficient upward pressure on the prices of commodities, goods and services to limit the central bank’s ability to inflate the money supply.

[This blog post is an excerpt from a commentary published about two weeks ago at www.speculative-investor.com]

In the latest Weekly Update we wrote that government actions would maintain sufficient upward pressure on the prices of commodities, goods and services to limit the central bank’s ability to inflate the money supply. What we meant is that for the foreseeable future there would not be the “deflation scares” that periodically led to large-scale money creation (QE) by the central bank during 2008-2021. However, we expect that the money supply will continue to grow.

In the US, prior to 2008 there was plenty of monetary inflation but no QE programs. Prior to 2008 the monetary inflation was driven by the commercial banks, which create new money (bank deposits) when they make loans and purchase securities.

The following monthly chart shows the year-over-year growth rate of US True Money Supply (TMS), with a vertical red line drawn to mark the start of the Fed’s first QE program in September-2008. Clearly, there were many waves of monetary inflation prior to the introduction of QE, all of which were due to deposit creation by commercial banks. We expect that there will be waves of monetary inflation in the future, again due to deposit creation by commercial banks. Commercial banks have the legal ability to create money out of nothing, so naturally that’s what they will do in the future just like they did in the past.

A problem will arise when the economy becomes very weak and commercial banks stop expanding credit due to a contraction in the pool of qualified private borrowers. We suspect that this problem will be mitigated by incentivising or forcing the commercial banks to purchase more government debt, which they would do by creating new money that the government would inject into the economy via its spending. What we don’t expect is large-scale asset monetisation (QE) by the Fed in response to future economic weakness, because “price inflation” statistics won’t provide the necessary cover.

Anyway, the point we wanted to make is that there probably will be ‘ample’ monetary inflation in the future, it’s just that the money creation won’t be driven directly by the Fed. Due to the popular inflation indices spending most of their time well above the Fed’s target, monetary inflation will become the purview of the commercial banks — just like it was prior to 2008.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

In last week’s Interim Update we noted the speculation in uranium-related equities and listed seven reasons to expect a sufficient increase in the demand for uranium over the years ahead to cause the price of this commodity to move much higher. We then concluded: “Due to [these reasons] and that it would take several years to develop new sources of uranium supply, we don’t think it is unreasonable to expect the uranium price to double or even triple within the next three years. However, there’s a limit to how much higher the prices of uranium equities will be able to move without the support of an upward-trending uranium price. At the moment, what’s needed is a move above the May-2025 high (near US$73) to underpin the speculation.” Well, thanks to a 9% surge in the uranium price on Monday 16th June, the move above the May-2025 high has happened. Refer to the following daily chart for the details.

The uranium price is determined by the supply of and the demand for the physical commodity, so daily price moves such as the one that occurred on Monday of this week are rare. Monday’s unusual price increase was the result of this news:

The Sprott Physical Uranium Trust (U.U.TO), a daily chart of which is displayed below, announced on Monday 16th June that it is raising US$200M (initially the amount was $100M, but the financing was upsized to $200M due to strong investor demand) by issuing new trust units. Also, it announced that the “net proceeds per Unit to be received by the Trust will be not less than 100% of the most recently calculated net asset value of the Trust per Unit prior to the determination of the pricing of the Offering.”

This news was bullish for the uranium price, because the proceeds of the offering will be used to purchase physical uranium, thus reducing the supply of uranium available to meet the requirements of the nuclear power industry.

U.U is in a unique position in that the more new units it issues the higher its own net asset value (NAV) is likely to become, given that the money it raises is used to take uranium out of the market. However, it only makes sense for the Fund to issue new units when its market value is close to or above its NAV. At one point in early-April it was trading at a discount to NAV of around 20%, but the subsequent elimination of this discount opened the door to the current offering.

What happened on Monday of this week possibly will occur again and again, because every time U.U’s market price rises to its NAV or above it will make sense for the Fund to issue more units to buy more uranium, thus driving its own NAV upward.

[This blog post is an excerpt from a commentary posted last week at www.speculative-investor.com]

After a market has been trending strongly for a few months or longer, a piece of extremely bullish news (in the case of an upward trend) or bearish news (in the case of a downward trend) can be the catalyst that sets in motion a multi-day or multi-week blow-off move that at least temporarily marks the end of the trend. This appears to have been the case during April-2025 with the upward trend of the gold/SPX ratio (the US$ gold price relative to the S&P500 Index) and the corresponding downward trend of the SPX/gold ratio.

We remarked in the 21st April Weekly Update that the SPX’s sell-off in gold terms was much more severe than its sell-off in nominal currency terms, paving the way for the SPX to rebound in terms of gold as well as in nominal dollar terms over the ensuing weeks. It turned out that extremes for the SPX/gold ratio and the gold/SPX ratio were set on 21st April.

With reference to the following daily chart of the gold/SPX ratio, the news that appears to have set in motion a 2-3-week upside blow-off was Trump’s press conference regarding “reciprocal tariffs” after the close of trading on 2nd April. At this press conference Trump held up the now-infamous board showing the tariff rates that would be imposed on imports from every country. It quickly became apparent that these rates were based on a nonsensical formula and a nonsensical premise (the notion that if the US has a trade deficit with a country, then the US is being ‘ripped off’ by that country). This shattered any illusions that the Trump Administration was proceeding in a well-thought-out manner, prompting a panic out of US assets and a surge in the demand for gold.

As a result of the panic precipitated by the “reciprocal tariffs” announcement, the gold price gained about 20% relative to the SPX in only 12 trading days. Although this price move could be viewed as reasonable given what was happening in the world, it was so dramatic in one direction that it set the stage for a significant move in the opposite direction.

We expect that the gold/SPX ratio eventually will move a long way above its 21st April high, but this high probably will hold for at least 3 months and could hold for up to 6 months.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

We wrote in the latest Weekly Update that the Moody’s downgrade of US sovereign debt probably wouldn’t have any effect beyond a knee-jerk reaction, because the downgrade wasn’t significant new information. Prompted by the big deal that was made in the press over this virtual non-event, we thought that it was worth outlining what does and does not matter for the long end of the US Treasury market. We’ll start by listing some of the things that do NOT matter.

First, the so-called “debt wall” does not matter. When you look at a chart showing the amount of US government debt that will have to be refinanced every month or every quarter for the next several years, there always will appear to be a ‘wall’ of debt that has to be refinanced over the coming 12 months. This simply is a function of the fact that 25%-35% of the total debt constitutes T-Bills (debt securities that mature within a year). It is not significantly different today than it was at any time over the past 10 years and it most likely won’t be significantly different at any time over the next few years. On a related matter, almost everyone with a substantial T-Bills holding automatically rolls the position when the old bills mature, so it’s not like the US government constantly is having to find new buyers for its debt.

Second, the Fed staying tighter for longer does not matter, or at least is not bearish, for the long end of the Treasury market, because the Fed staying tighter for longer reduces both the actual and the perceived risk of “inflation”. In fact, at a time when inflation fears are elevated due to what has happened in recent years, it could be more of a plus than a minus.

Third, large-scale selling of Treasury securities by foreign governments is not a serious threat. Foreign governments (via their central banks) buy and sell US government debt securities primarily to manipulate the exchange rates of their own currencies. This involves selling US treasuries when the US$ is strong, with the aim of propping-up the local currency, and buying US treasuries when the US$ is weak, with the aim of preventing the local currency from becoming excessively strong. We see no reason to expect that the trade war initiated by the US will change this method of managing FX reserves.

We’ll now mention some of the things that do matter, that is, some of the legitimate concerns if you happen to own long-dated treasuries.

The main concern is the fiscal deficit. This is not only because a large fiscal deficit results in a large increase in the supply of new government debt securities, but also because a large fiscal deficit generally will lead to higher “inflation” by diverting savings from the relatively efficient private sector to the relatively wasteful public sector. The worst-case scenario is a fiscal deficit that is both large and increasing as a percentage of the economy.

With reference to the following chart, if we ignore the Covid-related extremes of 2020-2021 we can see that the US federal deficit is large and steadily increasing as a percentage of nominal GDP (the downward trend on the chart reflects a rising deficit/GDP ratio). Moreover, the budget bill that currently is making its way through the US parliament would all but guarantee the continuation of the adverse trend, because this bill front-loads tax cuts and back-loads spending cuts. This is a good reason to expect lower T-Bond prices and higher T-Bond yields over the years ahead.

Another valid concern is the inflationary effects of tariffs. The tariffs that Trump seems determined to impose could lead to an upward ‘blip’ in the popular measures of inflation within the next several months, but the more important longer-term effect is that they will reduce the dollar’s purchasing power by making the economy less efficient. This is a secondary reason to expect higher bond yields over the years ahead.

A third valid concern doesn’t apply right now, but it’s likely that when coincident and lagging economic data clearly signal “recession” the Fed will again take actions designed to rapidly boost the money supply. There’s a high probability that this will happen at a time when the government’s deficit is growing rapidly due to the combination of declining tax revenue and rising costs associated with government support and stimulus programs, leading to an inflation surge.

Summing up, some of the reasons to be bearish on the T-Bond that often get mentioned are not valid, but there are some very good reasons to be bearish, at least beyond the short-term. In particular, currently there appears to be no political will to end the deficit spending or even to cap the deficit’s growth rate, which means that any limits will have to be imposed by the bond market. This would be done via higher bond yields.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

The US CPI numbers reported on Tuesday 13th May extended the downward trend that began in mid-2022. As illustrated by the following chart, the year-over-year growth rate of the US CPI has just made a new cycle low. The Core CPI’s growth rate is significantly higher and was reported to be unchanged at 2.8%, but its annualised growth rate over the past three months is only 2.1%. Therefore, the Core CPI also is moving in the right direction. However, the implications and the outlook are not clear.

The last time the CPI’s growth rate was as low as it was in April of this year was February-2021, at which time the Fed was inflating the money supply aggressively via its QE program and maintaining a target interest rate of around zero. Now, the Fed is still draining money via QT and expects to keep its targeted interest rate at 4.25%-4.50% in the short-term. Why?

The principal problem is that the Fed has no way of knowing what its monetary policy should be, because the correct interest rates and monetary conditions are those that would exist in the absence of the Fed. The Fed is the equivalent of a giant spanner that has been thrown permanently into the monetary works. The best that anyone reasonably can hope for is that the damage it does is counteracted partly by private industry.

A secondary issue is that having exacerbated the inflation problem by being so blatantly late in stopping its monetary easing and starting its monetary tightening during 2020-2022, the Fed is now being overly cautious with regard to any actions that would ease monetary conditions.

A related secondary issue is that the constantly shifting tariff situation is causing uncertainty at the Fed just like it is causing uncertainty everywhere else. The news that the US and China governments have agreed to slash tariffs by 115% — from 145% to 30% in the case of the US and from 125% to 10% in the case of China — is positive, but at this stage the reduced rates are for 90 days only and still leave the average tariff rate for US imports at around 18%, which is the highest since 1934.

The tariffs will be more negative for economic growth than positive for inflation, but they could cause an upward ‘blip’ in the official inflation numbers over the next few months if the economy doesn’t tank in the meantime. The decisionmakers at the Fed are concerned about this possibility and therefore are reticent at the moment to make any moves in the easing direction.

Due to the uncertainty regarding the effects of tariffs, it’s possible that the US economy will have to become very obviously weak before the Fed makes its next decisive move to loosen monetary conditions. If so, this will magnify the severity of the recession that probably has started or will start soon, although the Fed’s slowness to loosen won’t be the primary cause of the recession. The recession will be the result of several years of malinvestment, with a final push coming from the “policy uncertainty” of the past few months.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

We expect that a 1-2 year or perhaps even longer upward trend in commodity prices will begin this year. Although we will refer to this upward trend as a bull market, strictly speaking it shouldn’t be labelled as such. This is because there actually is no such thing as a commodity bull market, meaning a bull market in a broad index of commodities such as the GSCI Spot Commodity Index (GNX) or the CRB Index. There are only gold bull markets that eventually expand to encompass most commodities. In other words, what we are anticipating is an expansion of the gold bull market to encompass most other commodities.

Gold bull markets begin and are sustained by monetary and governance factors. In short, there is a decline in confidence in the official money and/or the banking system and/or the government that causes an increase in the demand for gold, meaning an increase in the desire to hold gold bullion. These bull markets have nothing to do with gold supply, since for all intents and purposes the supply of gold is constant over a normal investment timeframe*.

Eventually, the issues that have been discounted by the gold market lead to higher prices for many other commodities, but, for all commodities other than gold and to a lesser extent silver, supply can be a major price driver. In fact, the non-monetary commodities that have the most severe supply restrictions tend to be the ones that rise in price the most after monetary/governance factors set in motion a broad upward trend.

Every cycle is different in some way and this time around one of the major differences has been the extent to which price trends have been elongated by the concerted attempts, during 2023-2024, to counteract the Fed’s monetary tightening by pre-emptive recession-like deficit spending on the part of the US government and actions by both the Fed and the Treasury that sustained ‘liquidity’ in the financial markets. These actions postponed the start of a US recession by 1-2 years and also, we think, substantially widened the gap between the start of a gold bull market and the start of a broad upward trend in commodity prices (a gold bull market began in Q4-2022 and a general commodity bull market is yet to begin).

Just as the performance of the gold price telegraphed weakness in the US dollar, it is telegraphing a large, broad upward trend in commodity prices. Furthermore, the upward price trend will be exacerbated by artificial shortages caused by Trump’s trade war. Like the Covid lockdowns, the tariffs and the uncertainty regarding future tariffs have disrupted and will continue to disrupt supply chains.

We expect that a broad upward trend in commodity prices will begin after it becomes sufficiently clear that the US economy is in recession to prompt monetary and fiscal measures designed to stimulate economic activity. This is likely to happen before the end of this year and could happen as soon as the next three months.

*Almost all the gold that has ever been mined remains available to satisfy demand today, with the global mining industry adding only about 1% to this existing stockpile every year.

[This blog post is an excerpt from a recent commentary posted at www.speculative-investor.com]

Due to everything we are seeing and expecting, including the performance of the gold price and shortages that potentially will stem from Trump’s trade war, we think there’s a very real possibility that an equity bear market could unfold in parallel with a commodity bull market. If so, it would be very different from anything that happened over the past three decades, a period during which the commodity markets generally weakened when the stock market was very weak, but very similar to what happened during the 1970s. As illustrated by the following monthly chart, a broad basket of commodity prices rose substantially during the equity bear market of 1973-1974.

By the way, the chart also shows the remarkable stability of commodity prices when the US$ was linked officially to gold.

We hasten to point out that right now there is only tentative evidence in the price action to support the above-mentioned scenario. In particular, the first of the following charts shows that equity prices (represented by the SPX and shown in green) and commodity prices (represented by the GNX and shown in black) plunged together in early April and have since rebounded together — price action that does NOT support the idea that commodity prices will be able to trend upward while equity prices trend downward. However, the second chart shows that commodity prices have been strengthening relative to equity prices since early-December of last year.

What we could see over the coming quarters is more of what happened since early-December of last year, with commodity prices generally strengthening relative to equity prices but getting hit during the brief periods when equity prices fall rapidly and there is a rush for liquidity.

[This blog post is a modified excerpt (for example, it contains updated charts) from a recent commentary published at www.speculative-investor.com]

Think back to how bullish almost everyone was about the US dollar’s prospects at the start of this year. Also recall that our view at the time was that the Dollar Index (DX) was set to make a very important peak in January-2025, after which it would trend downward for at least a year. Actually, our view going into this year was that the DX had commenced a cyclical decline in September-2022 and would resume its cyclical decline in January-2025. The fact that it recently made a new cycle low confirms that the DX has, indeed, been in a cyclical bear market since September of 2022 and that the strong rally from the September-2024 low was nothing more than a countertrend move. So, what now?

Before attempting to answer the above question, we present herewith a daily chart and a weekly chart of the DX. The daily chart shows the virtual crash of the past two weeks, while the weekly chart shows that the DX has broken below its July-2023 low and is at its lowest level since April of 2022. Both charts show that the DX is extremely oversold.

Due in part to the performance of the US$ gold price, we doubt that the DX’s cyclical decline is complete. This is because on an intermediate-term basis the gold market does not react to trends in the US dollar’s exchange rate, it projects them. For example, gold’s strength last year projected future US$ weakness against other currencies. The fact that the US$ gold price has just made a new all-time high projects future weakness in the DX.

The way that the DX’s true fundamentals are expected to evolve over the months ahead (they are expected to remain bearish) and the paths taken by the DX following comparable highs in September-2022 and January-2017 also point to additional downside.

However, thanks to the recent collapse it’s likely that the bulk of the decline is in the past.

We have had and continue to have the mid-90s in mind as a target for the DX’s ultimate cycle low. This target may have seemed unreasonably bearish a few months ago, but it is only a few points below the current level. At the same time, a countertrend rebound could result in the DX returning to the 104-105 range.

Further to the above, we are now short-term and intermediate-term neutral on the DX. The ultimate cycle low probably won’t be set until the final few months of this year, but the rebound potential is now at least as large as the remaining downside potential.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com on 6th April 2024]

The effects on the financial markets of Trump’s 2nd April announcement were similar to, albeit not quite as extreme as, the effects of the COVID lockdowns in March of 2020. Like the COVID lockdowns, what was announced on 2nd April constituted a massive government intervention that will disrupt global commerce and that to some extent came as a shock. Markets obviously were expecting widespread tariffs to be announced, but it is clear by the reaction that many market participants were surprised by the magnitude of the tariffs and/or the arbitrary way in which the tariff rates were determined.

Due to the adverse consequences for global economic growth, commodity prices plunged along with equity prices over the final two trading days of last week. For some industrial commodities the current price levels are not surprising to us in that we expected to see new cycle lows, but what we expected to unfold over the next few months occurred over the space of just two days.

For example, we expected that the rebound in the oil price from its early-March low would be followed by a decline to new cycle (multi-year) lows within the next few months, but the following weekly chart shows that last week the oil price plunged from a 1-month high to its lowest level in almost four years. In oil’s case, the negative reaction to the growth shock that potentially will stem from the tariffs was exacerbated by an OPEC announcement that the first three months of its planned production increases will be lumped together, meaning that OPEC oil production will increase by 411K barrels/day rather than the expected 135K barrels/day next month.

The oil price probably hasn’t bottomed, but by plunging to a new cycle low last week it has done as much as we thought it would do prior to the start of a cyclical upward trend.

For another example, a week ago we wrote that we perceived a lot of downside risk in the copper price, but we didn’t expect the downside risk to materialise immediately. Instead, the copper price fell 14% last week and removed any doubt that a multi-month price top was set via the spike up to US$5.40 during the preceding week.

The commodity and equity markets reversed course following their lockdown-related crashes in March-April of 2020 due to 1) the extent to which they were stretched to the downside and 2) the upward price pressure exerted by unprecedented monetary intervention. Based on Powell’s words late last week, the Fed is not close to doing anything supportive on the monetary front. Therefore, currently there is no reason to expect anything more bullish than a countertrend rebound.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

We are revisiting a long-term cycle that we began tracking several years ago. This cycle, which is illustrated by the vertical red lines drawn on the weekly chart displayed below, has been elongated for the same reasons as other cycles/trends over the past couple of years. Before we get to the current situation, a recap is in order.

Over the past two decades, gold mining stocks as represented by GDX have set major peaks relative to general mining stocks as represented by XME approximately every four years, that is, the GDX/XME ratio has tended to make a multi-year peak approximately every four years. Furthermore, the major peaks in the GDX/XME ratio have coincided with major peaks in the gold/GYX ratio (the US$ gold price relative to the Industrial Metals Index), which, in turn, have coincided with the crescendo of an economic or debt crisis. To be specific, the Q1-2009 peak was linked to the Global Financial Crisis, the Q1-2012 peak was linked to the euro-zone sovereign debt crisis, the Q1-2016 peak was linked to the shale oil bust in the US and the general bust in industrial commodity-related investment, and the April-2020 peak was linked to the COVID lockdowns.

The continuation of the 4-year cycle would have led to major peaks in the GDX/XME ratio and the gold/GYX ratio last year. However, this didn’t happen. There was a substantial rise in the gold/GYX ratio, but the GDX/XME ratio did little more than ‘chop around’ near its cycle low.

This prompted us to conclude, in the 23rd September 2024 Weekly Update:

“Either the GDX/XME ratio is going to peak at a much lower level during the current cycle than it ever has in the past, or the current cycle has been elongated and is still a long way from its completion.

The latter possibility is the more plausible. The main reason is that the GDX/XME ratio is driven by the gold/GYX ratio, and as noted above past peaks in the gold/GYX ratio have coincided with the crescendo of an economic crisis or a debt crisis.

Mainly because of aggressive government deficit spending designed to postpone a recession, but also because of Fed/Treasury actions that have boosted financial market liquidity in the face of tightening monetary conditions, there has been nothing resembling an economic/debt crisis during the current cycle to date. The crisis has, we think, been shifted from 2024 to 2025 or perhaps even later. Consequently, the cycle top in the GDX/XME ratio that was ‘due’ to occur this year probably won’t occur any sooner than H2-2025.

An implication of the above is that it will make sense to favour gold mining stocks over other mining stocks for at least another 12 months.”

Turning to the current situation, since late last year there has been a significant increase in the GDX/XME ratio (shown in the top section of the following chart), while the gold/GYX ratio (shown in the bottom section of the following chart) has continued its strong upward trend. GDX/XME is now at its highest level since mid-2021.

Despite its meaningful increase over the past three months, the chart suggests that there is plenty of scope for additional relative strength by the gold sector. We are referring to the fact that over the past two decades the GDX/XME ratio has never made a cycle peak below 1.2, which is more than 50% above the current level.

We expect that both the GDX/XME ratio and the gold/GYX ratio will make their cycle peaks this year, but those peaks probably aren’t in place and in the case of GDX/XME the peak could be a long way above today’s level.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

We generally don’t engage in unprovable/unfalsifiable conspiracy-linked speculation to explain market performance or government policy, but today we are making an exception because we are struggling to come up with a more straightforward explanation for Trump’s recent actions.

Tariffs would be negative for the US economy even if they were not large in percentage terms and were introduced in a measured way, but the haphazard way in which large tariffs have been imposed and changed over the past two months greatly magnifies the economic damage that will be done. Furthermore, another intervention under consideration could be even more damaging than the tariffs that have been threatened/implemented to date. We are referring to the port fee plan discussed in an article posted at lloydslist.com on 11th March. Here is an excerpt:

“The US Trade Representative announced on February 21 that it plans to levy exorbitant port fees — in some cases over a million dollars — for every US port call by Chinese transport operators, Chinese-built ships, all operators that have any ships on order at Chinese yards, and according to one interpretation of the proposal (based on a presidential draft order obtained by Lloyd’s List), all operators with any Chinese-built ships in their fleets.

The USTR plan would also mandate that a portion of US exports be carried on US-flagged and, eventually, US-built vessels.

Respondents had until Monday to submit comments to the USTR if they wanted to testify at the hearing on the proposal on March 24. They responded in droves, overwhelmingly negatively, with several predicting a disaster for importers, exporters and the US economy in general if the USTR did not kill the port fee plan.

Some executives also bluntly asserted that if the plan was approved as written, their companies would go out of business or leave the US.”

If the port fee plan is implemented it will inflict a devastating blow on the US economy, with no potential upside in either the short-term or the long-term. Why, then, is it even being considered?

The port fee plan and the reckless way in which tariffs are being imposed/threatened only make sense if the Trump Administration is trying to ensure that the US economy goes into recession soon. If this is the plan then there is already evidence of success, in that the High Yield Index Option Adjusted Spread (HYIOAS), an indicator of US credit spreads, generated a recession warning signal last week. The signal is the weekly close above the 65-week MA (the blue line on the following chart).

Why on earth would the Trump team want a recession to happen ASAP?

One reason is that a recession this year could be blamed on Biden. In a way this would be appropriate, because the US economy probably would have gone into recession 12-18 months ago if not for the Biden Administration’s use of aggressive deficit-spending and other tools (mainly, issuing a higher percentage of short-term debt as mentioned below) to delay the inevitable until after the November-2024 elections.

Another reason is that a recession would create a financial/economic backdrop in which there was much greater demand for Treasury securities, enabling the US Treasury to ‘term out’ the government’s debt at lower interest rates. By way of further explanation, during 2023-2024 the US Treasury under Janet Yellen substantially increased the use of short-term debt to finance the government’s deficit and in doing so reduced the average term of the total debt. The new Treasury Secretary (Scott Bessent) must now return the average term of the debt to where it should be, which only could be done by increasing the issuance of long-term debt relative to the issuance of short-term debt. This would put upward pressure on long-term interest rates, but if there were a recession then this pressure probably would be more than offset by an increase in the demand for the relative safety provided by long-dated Treasury securities.

A third reason is that if a recession occurs this year, then the economy probably will look fine by the time the mid-term elections roll around in late-2026.

There’s now a high probability that if a US recession is not already underway then it will begin within the next three months. Therefore, if this is happening according to a plan to get the inevitable recession out of the way in 2025, then the first part of the plan is coming together.