Belief is a funny thing.

I frequently debate my agnostic roommate about what it means to believe in something. He often tells me that, if it were up to him, he would be a Christian, but he can’t force himself to believe. And perhaps that is the strange thing about belief: we don’t always choose it. We simply do.

Much of modern life rests on this kind of collective belief. Most Americans and foreigners don’t believe in the United States because they have personally studied every statistic on our military strength, economic resilience, or commitment to the rule of law. They believe because, over generations, those institutions have given them reason to trust that America will remain America.

The Treasury market is built on a similar kind of trust. Investors buy U.S. government debt not merely because of a list of facts about America’s economy, but because they believe the institutions behind that debt will remain credible, predictable, and ultimately reliable. But belief, like any faith, can be broken. And right now, that belief is being tested. The problem facing the Treasury market is not simply that America has too much debt. It is that the price of borrowing has changed, while America’s willingness to borrow has not.

Three major forces are coming together to create enormous pressure in U.S. Treasuries: inflation, artificial intelligence investment, and a federal budget that increasingly defies arithmetic. If these problems are not dealt with, the result will eventually be some combination of default, debasement, or a painful rise in interest rates. All of these outcomes would be damaging, and our government must restore the faith that is eroding in front of our very eyes.

Let’s start with the first major threat to the Treasury market right now: inflation.

The Federal Reserve of the United States operates under a dual mandate of “full employment and price stability.” It defines price stability as an average of 2% inflation over the long run in the PCE price index. However, since 2021, inflation has not averaged 2%. With tariffs, fiscal stimulus in the form of tax cuts, and most recently a war in the Middle East affecting oil prices, inflation does not seem to be returning quietly to its old trend.

The war in Iran has not been nearly as disastrous for oil prices as many initially suspected. The reason why is mostly due to China, but that requires an entire blog post of explanation. Even with a more muted rise in oil prices, though, the impact on energy prices has been meaningful, and that has contributed to elevated inflation. The war does not seem to be ending soon. The risk that consumers begin to expect higher inflation, combined with continued elevated fuel prices, has caused investors to demand more compensation for holding Treasuries.

This gets to an important concept in the bond market: the real interest rate.

If inflation expectations rise, investors need a higher nominal yield just to maintain the same real return. A Treasury yielding 5% when investors expect 2% inflation is a very different investment from a Treasury yielding 5% when investors expect 4% inflation. But inflation expectations are not the only thing that matters. Treasury yields can broadly be thought of as reflecting the expected real interest rate, expected inflation, and the term premium, which is the additional compensation investors demand for holding longer-dated bonds and taking on more uncertainty.

That uncertainty has become particularly important in the current environment. The United States has a new Fed Chair who has suggested making substantial changes to how the Federal Reserve approaches inflation and monetary policy. The possibility of new inflation metrics or a change in the Fed’s approach to the 2% target has created another source of uncertainty for bond investors. If investors believe monetary policy will become less predictable, they will demand more compensation for lending money to the government for ten, twenty, or thirty years.

Without stability in price expectations and monetary policy, investors will seek to protect themselves with higher yields. The inflation story in the United States therefore remains unresolved. The Federal Reserve can raise interest rates to slow demand, but it cannot produce more oil, reopen the Strait of Hormuz, or permanently bring gasoline prices back down to $3. Monetary policy has limits, and those limits become increasingly important when inflation is being driven by forces outside the Fed’s control.

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But inflation is only one part of the story. The second major threat to the Treasury market is paradoxically what is powering the growth of the United States economy: artificial intelligence.

For the past few years, one of the major drivers of growth in this country has been spending on AI infrastructure. Much of this spending has come from the balance sheets of hyperscalers like Google, Meta, Amazon, Microsoft, and others. However, as the amount being spent on compute continues to rise, these companies are increasingly turning toward debt financing to fund their infrastructure buildouts. Projections put total AI capital expenditures from 2024 to 2029 at roughly $11 trillion, with approximately $6 trillion coming from cash and $5 trillion from debt financing.

The United States capital markets are the largest, most liquid, and most complex in the world. But AI is also creating one of the largest investment regimes in modern history. Data centers, semiconductors, electricity generation, transmission infrastructure, and networking equipment all require enormous amounts of upfront capital.

If demand for money rises dramatically while the supply of savings does not increase by the same amount, the price of capital should rise. That price is the interest rate.

This is where AI and the Treasury market begin to intersect. The U.S. government is already demanding enormous amounts of capital to finance its deficit. Now some of the world’s largest companies are demanding enormous amounts of capital to build the infrastructure required for AI. These forces do not exist independently. For the hyperscalers, the additional cost of borrowing may not matter very much. If the returns on AI investment are as large as many expect, paying an additional few basis points to finance another data center may be a trivial price to pay.

The same cannot be said for the United States government, which brings us to the last and largest threat to the Treasury market.

Recently, the United States hit $40 trillion in total debt. We are running a deficit of around $1.9 trillion, or roughly 6% of GDP. That would be an enormous deficit under almost any circumstances, but it is particularly striking when the economy is growing and unemployment is relatively low. And this is not simply a problem for today. There is a looming hole in the federal budget coming from Social Security and Medicare as people live longer, collect more benefits, and the working-age population that pays into those programs grows more slowly as the baby boomer generation retires and immigration falls. At the same time, the United States is spending more on national defense. With the growing conflict in the Middle East, the Pentagon recently requested the largest budget in its history at a staggering $1.5 trillion. So we are on a course to spend more and more. This does not even take into account the additional programs that politicians on both sides of the aisle want to enact.

Now let’s look at the other side of the ledger: tax revenue.

The United States currently collects around $4.5 trillion in federal taxes. Neither party appears particularly interested in significantly raising taxes on middle-income and lower-income Americans, while Democrats have increasingly favored higher taxes on wealthy Americans if they return to power. Higher taxes on wealthy Americans could raise meaningful revenue, but even the most rosy estimates of the most aggressive proposals would barely put a dent in a deficit approaching $2 trillion.

So what’s the point? Why is spending all this money and having higher interest rates so bad? Is it just that country boys from Georgia named Nigel get annoyed when their leaders don’t know arithmetic?

This part of the story rarely gets explained well.

Most Americans understand that spending uncontrollably is reckless. What is less well understood is what happens when the cost of borrowing rises. From 2009 to 2021, we lived in a world of extraordinarily low interest rates. The United States could borrow enormous amounts of money and pay very little for the privilege. In that environment, the opportunity cost of government spending was unusually low. That is why the arguments of deficit hawks often fell flat. If the government could borrow at almost zero, why worry about another trillion dollars of debt?

Unfortunately, that world is gone. It died when inflation exploded in 2021.

The United States has not yet fully adjusted to the reality that debt now costs money. And that changes everything. As interest rates rise and old debt gets refinanced at higher rates, an increasingly large share of the federal budget goes toward servicing the debt rather than providing new services to Americans. Right now 15 cents of every dollar you pay in taxes goes toward interest payments on the debt. If rates just go up one percent, that adds another $300 billion every year in debt service payments.

That is a painful scenario, but unfortunately not even the worst outcome possible.

Imagine a government where an enormous share of every dollar collected from taxpayers goes toward paying interest on money that has already been spent. That is money that cannot be used to build roads, improve schools, fund defense, or invest in the next generation of Americans. This is where higher interest rates become much more than a problem for bond traders. They become a problem for the entire country.

The danger is not that America suddenly becomes a failed state or a banana republic. We still have the largest economy, one of the world’s strongest militaries, and the deepest and most liquid capital markets in existence. The danger is that an increasing share of America’s resources gets consumed servicing yesterday’s spending.

This is why the end of the zero-interest-rate era matters so much. The United States can no longer assume that it can borrow indefinitely without consequences. Every additional dollar of debt now carries a real cost. And that cost becomes especially painful when three forces are pushing in the same direction. Inflation threatens to keep nominal yields elevated. AI investment is creating an enormous new demand for capital. And the federal government continues to run deficits that require ever more Treasury issuance.

That brings us back to belief.

Treasury securities are ultimately promises. The United States promises to repay investors, but investors are also making a bet about the future of the country. They are betting that America’s economy will continue to grow, that its institutions will remain credible, and that its government will eventually make the difficult decisions necessary to keep its finances sustainable. That faith is not unlimited. The only way we can get out of this crisis is through some combination of tax increases, spending cuts, and, most importantly, economic growth. It has been done before. Bill Clinton and the fiscal surpluses of the 1990s provide one example of what can happen when economic growth and fiscal discipline come together.

But we must have the courage to make difficult decisions before the market forces us to make them. We have spent 250 years getting people to believe in a country that was, and still is, an experiment in multiracial democracy. That belief is America’s greatest asset.

Let’s not lose the faith now.

Every year in elementary and middle school, we had a Veterans Day parade. The entire school would assemble in the gymnasium, and if you brought a relative who served, you would get a special breakfast with them before the service began. The parade was a production; we would spend weeks beforehand learning the songs for each branch of the military (I can still recite the Marines hymn from memory). This was a normal, almost expected part of Southern life: you must call every adult ma’am and sir, and you must always thank a veteran for their service. The mantra “freedom is not free” was something I heard almost every day.

Don’t get me wrong, I didn’t grow up thinking America was perfect by any stretch of imagination. My parents taught me about enslavement and I knew racism was still a problem. We marched on MLK Day and were active in trying to better our community, going to homeless shelters and volunteering with our church. But even with the social and economic problems that were apparent to me, I grew up with a sense that this was the greatest country on Earth and I should feel grateful to be here. I felt proud of my identity as an African American. My ancestors were strong, resilient people who had made genuine progress in this country, and I was lucky enough to be reaping the spoils of their toil.

As I left the South and got older, I noticed my generation didn’t seem as patriotic as the town I grew up in. They didn’t feel the pride of being an American. They didn’t believe America was the greatest country on Earth, something my school had taught as matter-of-factly as the sky being blue. Greater and greater cynicism with politics curdled into disillusionment with being an American altogether. So in the wake of our 250th anniversary, having grown up with that pride and watched it thin out in the people around me, I keep coming back to the same question: What does it mean to be an American?

Fundamentally, to be American is to believe in progress. Not in the political sense, but the belief that things will improve. That is why Black Americans were historically among the most patriotic: they had seen firsthand America’s capacity to remake itself. They knew better than anyone how far the country had fallen short, and yet many chose faith over cynicism because they had also seen what that faith could produce. But today, it seems like Americans across the board have lost confidence that this country can get better. That the arc, however long, still bends somewhere meaningful. But we have been here before. The moment in history most prescient to our current predicament is the Civil War, that rupture in which faith in government and in each other collapsed so completely that it produced not just political disagreement but genuine war. We know how that story ends: a nation finally reckoning with the sin of slavery, imperfect by any measure, but undeniably better than before. The question worth asking on our 250th anniversary is how we survived it. How, in that moment of disunity and disdain for those who disagreed, did Americans find their way back to each other? The answer, I’d argue, is that they reinvested. Literally.

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The Civil War was the most expensive war the United States had ever fought up until that point in history. The war cost the Union alone $3.4 billion in 1865 dollars and the totality of GDP in 1865 was $10 billion. So, we are talking about a conflict that was roughly a ⅓ of GDP, an amount equivalent to a $10 trillion conflict today. To fund this, the United States needed to be creative, and that they did: we see in this period of time the creation of an unprecedented personal income tax, rise in tariffs, the creation of the greenback which eventually became the dollar, and the reinvention of the banking system. However, the innovation that really funded the war belongs to a banker by the name of Jay Cooke and the Treasury Secretary Salmon P. Chase. Chase’s idea was that the United States was not going to be able to raise enough money through the traditional channels to fund the war, it was just too expensive and vast. He thought the only way to raise the money was through the people, through a popular bond issuance: have regular people, not wealthy individuals and big banks on Wall Street, invest their hard-earned money into US debt and buy bonds to fund the war effort. This effort of a large scale bond issuance across a continent of regular people had never been done before and was going to take a financial wizard with the means and grit to do it. Enter Jay Cooke. Cooke was a financier who became the sole banker for the United States and built up a group of agents to go all around the country to every small town and big city all the way from Boston to California selling Union bonds. They even sold these bonds in the Confederacy. Cooke ended up selling about $1.4 billion worth of bonds to the people, helping the Union fund the effort and eventually defeat the South. The financial ingenuity of Cooke and the creativity in times of desperation by Chase are quite admirable and should be lauded, but what’s important for us is how the American people responded to the call for service, sacrifice, and aid. Many forget, but Lincoln won with just 39% of the vote in 1860, and a lot of Americans had mixed feelings about the war and sending their sons off, many of whom died. There were riots and revolts by frustrated northerners, and polarization expanded. But when their country needed them, Americans stepped up and pitched in. And those bonds that they bought gave them an even more apparent stake in the country, the value of which they could track every day. Eventually, Lincoln won reelection in 1864 in a landslide because his opponent wanted to sue for peace and the people had bought into this American project too much to just give in. At the root of that was a belief in progress.

After the war, Black Americans did something more striking than survival. They ran for office, built schools, established banks, and threw themselves into Reconstruction with an energy that can only be described as belief made visible. These were people who had every reason to write America off, who had suffered its worst contradictions firsthand, and yet they chose to double down on a country that had not yet fully invested in them.

Then, Reconstruction ended, and what followed was a systematic effort to reverse every inch of that progress, or as Dr. Cornel West calls it, the rise of Jim and Jane Crow. And yet Black Americans still did not abandon their faith. They built HBCUs, Black Wall Streets, mutual aid societies, entire economies within the economy, because they refused to let their belief in progress be extinguished by those determined to prevent it. When John Lewis marched across the Edmund Pettus Bridge, it was not an act of rage. It was the same act as buying a Jay Cooke bond: an ordinary person putting something real and irreplaceable on the line for an outcome that was far from certain, because refusing to engage, withdrawing, leaving the field to those who would make it worse, was not something they were willing to live with.

Which brings us to today. I won’t pretend things are good. The political environment is poisonous, institutional trust is at historic lows, and the sense that the game is rigged, for reasons economic, racial, or otherwise, is not paranoia. Young people in particular have inherited an economy where the traditional markers of American progress feel increasingly out of reach: homeownership, stable employment, retirement security. The optimism my elementary school teachers spoke of with such conviction has come to feel, to many of my peers, like a story told to children that doesn’t survive contact with adulthood.

But we have been in darker rooms than this one and found the door. The men who bought Jay Cooke’s bonds did so in the middle of a war that was tearing the country in half, with no guarantee of which side would win. The Black Americans who marched in Selma did so knowing they would be met with clubs and tear gas, with no certainty that the law would change. The faith that animated both of those moments was not the easy kind. It was not the faith of people who had been given every reason to believe. It was the faith of people who chose to believe anyway, because the alternative, disengagement, cynicism, withdrawal from the national project altogether, meant ceding the country to those who would make it worse.

That is the choice in front of us now. Not between a perfect America and a flawed one. That choice has never existed. The choice is between engagement and capitulation, between the hard work of reinvestment and the easier comfort of disillusionment. Two hundred and fifty years in, this country remains unfinished. It has always been unfinished. The question every generation has to answer is whether they are willing to keep building. The Civil War generation answered yes. The Civil Rights generation answered yes. What we owe them, more than any parade or pledge or firework, is the same answer. We are at a crossroads in this nation’s history, and the only way to keep this 250-year experiment going is if this generation reinvests, not with capital, but with attention, trust, and belief in what is not yet seen. This is a generation that reengages and rebuilds the civic trust that made this country the greatest on Earth. That is what it means to be an American: to believe in progress, and choose engagement over capitulation, even when the path forward isn’t visible.

With the first full week of 2026 behind us, it is safe to say that this year will be nothing less than action-packed. As the year unfolds, there are three major forces that I think will drive underlying economic growth and markets: tax cuts/tariffs, Fed independence, and geopolitical stability. In 2026, there will be major tax cuts from the Big Beautiful Bill and a potential repeal of the Trump tariffs, the Fed will likely succumb to the will of the executive, and geopolitics will be dominated by large powers trying to establish regional hegemony. Overall, this will provide a short-term boost for asset prices but will likely bring longer-term issues.

Let’s start with the tax and tariff landscape. President Trump’s signature achievements in 2025 were the One Big Beautiful Bill Act (OBBBA) and the tariffs he implemented through executive authority. The OBBBA contained a massive $4.5 trillion tax cut, which will be very stimulative to the economy in the short run, at least. The bill was structured so that many of the headline-grabbing tax cuts (no tax on tips, no tax on overtime, etc.) for working people occur immediately with Americans receiving their tax refunds in April of this year. These provisions will amount to between a $300 and $1,000 increase in refund amounts. This should have a similar directional though smaller magnitude impact to COVID-era stimulus checks, where working people (who tend to spend a higher proportion of their income rather than save) will increase aggregate demand, thereby boosting growth.

The other major tax cuts in the OBBBA were making permanent the cut to the top tax bracket, along with permanent 100% bonus depreciation and immediate R&D expensing. These provisions should increase investment and subsequently boost growth. The OBBBA also came with major cuts to the social safety net, namely Medicaid and food assistance. However, the way the bill was structured means that the bulk of these cuts do not come into effect until 2028, so the decline in aggregate demand from reduced income in low-income households will not be felt in 2026. All this is to say that for 2026, the OBBBA will provide a tailwind to growth and likely to asset prices as well.

Now moving on to Trump’s second major accomplishment of 2025: tariffs. Many people chastise politicians for being flip-floppy or changing their beliefs to align with whatever is popular at the time. On tariffs, however, no one can accuse President Trump of this. He has been remarkably consistent on the issue, going all the way back to the 1980s, when he would remark on how much the US should tariff Japan. In his first presidency, Trump’s tariffs were significant but largely limited to certain products and mostly focused on China. During the 2024 campaign, Trump 2.0 signaled a different approach, going so far as to say that tariff is “the most beautiful word” in the English dictionary.

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Even with this heavy foreshadowing, the Liberation Day announcement seemed to catch everyone off guard, as it imposed tariffs on nearly every country, with rates on China exceeding 100% at certain points. The market reaction was swift and painful: a roughly 20% decline in equity markets and major turbulence in the bond market. This was enough for Trump to announce a pause in the tariffs and roll out his “90 deals in 90 days” initiative, which I have written about previously. While many tariff-targeted countries have not reached formal deals, several major countries and blocs have de-escalated and entered a holding pattern as negotiations proceed.

The tariffs have not yet had a large impact on real economic outcomes, mainly because many actors are still waiting on the courts to determine whether they will actually remain in place. There was significant jolting early on as tariffs were repeatedly turned on and off, and now the Supreme Court is set to rule on what may be the most consequential case of Trump’s presidency so far. If the Court rules against the administration, the White House will be severely constrained in how quickly they can impose tariffs on other countries, and there will be serious questions around reimbursement for affected firms and nations. Alternatively, if the Court rules in the administration’s favor, markets, businesses, and governments will be forced to accept that these tariffs are here to stay.

Either ruling would provide clarity and allow economic agents to act accordingly, rather than remaining stuck in the stagnant posture that currently exists. In one scenario, globalization continues; in the other, reshoring accelerates. A ruling against the administration would likely provide a tailwind for growth and downward pressure on inflation, while a ruling in its favor would likely lead to a spike in inflation (whether it’s a one time price increase or permanent remains to be seen) and at least a short-term headwind to output.

Next is the Federal Reserve. Traditionally the home of PhD technocrats, the institution has become a political punching bag in recent years. Though Trump originally appointed Jerome Powell, he has become increasingly unhappy with Powell’s direction on interest rates and would like rates to be much lower. It is expected that when Powell’s term is up, Trump will appoint someone who shares his views on rates. Markets do not appear to be taking Trump fully at his word and are not pricing in the magnitude of rate cuts for which he has been calling. Short of a Senate rejection of the nominee or Trump appointing another Chair who refuses to follow his wishes, which seems particularly unlikely given his experience with Powell, he will likely get his way.

With inflation still above the Fed’s 2% target and early cracks appearing in the labor market, the central bank finds itself in a difficult position. Its mandate is full employment and stable prices (2% inflation), but at the moment it may be forced to prioritize one over the other. Historically, central banks have chosen to fight inflation, as stable prices and anchored inflation expectations are prerequisites for sustainable growth and full employment. The Trump administration, however, appears to believe that inflation at this level is not sticky and will cool on its own without maintaining restrictive rates.

It is therefore highly likely that Trump will secure his preferred nominee as the next Fed chair and, by extension, interest rates closer to his preference. The only real question is whether his gamble on inflation stickiness proves correct. If he is right, economic growth will surge as tax refunds, corporate tax cuts, and lower interest rates push the economy into full gear while inflation drifts back toward 2%. If he is wrong, growth will still accelerate, but inflation will rise alongside it. Either way, the Federal Reserve’s posture in 2026 will play a central role in shaping output, asset prices, and inflation dynamics.

Finally, there is geopolitics. Last year, the dominant geopolitical force was the sweeping tariff regime. This year, the theme appears to be a renewed commitment to the Monroe Doctrine, or what some within the administration have dubbed the “Donroe Doctrine.” Historically, President Monroe established the Monroe Doctrine to deter European powers from recolonizing newly independent nations in the Western Hemisphere, asserting U.S. dominance in the region while pledging non-interference in European affairs.

The current administration has revived this doctrine with a Trump-era corollary, outlined in its national security strategy. This corollary focuses less on external powers encroaching on the Americas and more on ensuring that countries within the U.S. sphere of influence act in alignment with American interests. This approach moved from memo to action with recent operations in Venezuela, where the administration determined that Venezuelan actions ran counter to U.S. interests and intervened to change that posture.

Whether this strategy succeeds in the long run remains to be seen, but it is likely to generate disruption in the short term. There has been discussion of similar interventions in places like Cuba, Colombia, and even Greenland. Thus far, market reactions (both domestically and internationally) have been relatively muted, and political fallout appears limited, if not mildly positive, for the administration. This response may embolden further action.

This incursion seems to have had limited effects on equities but more pronounced impacts on local commodities, as seen in Venezuela’s influence on oil markets. Incursions may also accelerate risk-on investments toward hard assets like gold, which is already coming off a record year. This assumes these actions do not escalate into broader conflicts or prolonged entanglements, which history suggests is a common outcome for the United States.

The three forces most likely to drive real economic growth and markets this year are taxes and tariffs, the Federal Reserve, and the shifting geopolitical order. Across all three, the Trump administration is pursuing a more expansionary stance that should support stronger nominal growth in the near term. Tax refunds and corporate tax cuts will lift demand and investment, interest rates are likely to move lower under a more accommodating Federal Reserve, and a shifting geopolitical order will be a tailwind for Gold.

Markets appear comfortable with this backdrop and have not yet pushed back against the risks embedded in these policies. This calm reflects the confidence that inflation will continue to cool, that tariffs will either be rolled back or absorbed without major disruption, and that geopolitical actions will remain contained. If those assumptions hold, markets and underlying economic growth should remain strong through 2026.

Before 2021, most Americans rarely thought about inflation. The metric that tracks the rate of change in prices had been anemic since the 2008 financial crisis. There had been no real spikes in inflation since the 1980s, when Volcker famously defeated inflation by tanking the US economy with aggressive rate hikes. Then came COVID, along with supply chain disruptions and massive amounts of stimulus: four trillion dollars in fiscal spending from Congress and another five trillion from the Federal Reserve. When inflation started to rise, the Fed insisted it was transitory and would fade on its own. That was not true. Inflation took off, and we saw the fastest and most aggressive tightening cycle since that Volcker episode.

However, this Fed did what Volcker could only have dreamed of: beat back inflation without inducing a recession. That is the story the Fed likes to tell, framing unemployment as the new concern while suggesting inflation is largely behind us. But inflation has not returned to the 2 percent goal. It remains stuck near 3 percent. And as the Fed often reminds the public, long-run price stability is essential for sustainable economic growth and low unemployment. Given the Fed’s recent dovish pivot, ballooning deficits, and the end of Quantitative Tightening, I believe inflation is poised for an unwelcome comeback. And as all Star Wars fans know, sequels are almost always worse than the originals.

Start with the dovish pivot. A policymaker is considered a dove when they prioritize employment over inflation. The Fed’s current mindset is captured well in a recent speech by New York Fed President John Williams: “Looking ahead, it is imperative to restore inflation to our 2 percent longer-run goal on a sustained basis. It is equally important to do so without creating undue risks to our maximum employment goal. I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.”

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The Fed remains committed to its dual mandate, at least in rhetoric. In practice, that commitment is becoming harder to see. It is well understood that moving inflation from 7 percent to 3 percent is far easier than pushing it from 3 percent to 2 percent. The last mile is always the toughest and, arguably, the one that matters most for credibility. Prioritizing employment in a softening labor market makes sense politically, but it carries risks. If the Fed keeps cutting rates until policy is no longer restrictive, inflation will likely stay entrenched around 3 percent and could even reaccelerate.

The second concern is the explosion in deficits. Right now, the United States is running a deficit above 6 percent of GDP, the highest level outside wartime or recession. This is unsustainable.. And although Trump’s One Big Beautiful Bill (OBBB) cut over a trillion dollars in spending, the tax cuts in the same bill outweighed those reductions by a wide margin. Supporters argue that tariff revenue from the Liberation Day rates and later trade deals will offset some of the cost. But Trump has since said he wants to send stimulus checks to Americans using that revenue, and Josh Hawley introduced legislation to make that official. That is simply pumping cash into the economy, with effects similar to the COVID-era stimulus checks: higher inflation. The bottom line is that both political parties overspend, and no one wants to take the political hit required to address it.

Lastly, the Federal Reserve is set to end its Quantitative Tightening program on December 1. QT began after the 2021 inflation spike to drain liquidity and push long-term rates higher. It works by reducing the Fed’s holdings of long-term Treasuries, increasing the supply of bonds in the market and lifting yields. So far, the Fed has shrunk its balance sheet by roughly 2.3 trillion dollars. Ending QT will allow more liquidity back into the financial system and bring long-term rates down. That will be stimulative in the short run because lower borrowing costs spur more business and consumer lending. It matters because mortgages, auto loans, and many credit products depend on long-term rates, not the short-term policy rate.

Taken together, the dovish pivot, swelling deficits, and the end of QT point toward an era of persistently high inflation. In the near term, that means higher nominal GDP growth, lower unemployment, and strong stock returns. But as investors and consumers adjust their expectations and accept that inflation is not returning to 2 percent, the longer-term consequences will be painful. Long-term interest rates will rise because lenders will demand compensation for lost purchasing power. And a larger share of the federal budget will be swallowed by interest payments rather than education, defense, healthcare, and other core priorities. This doomsday scenario has played out before in other countries, and even the hint of it forced the United Kingdom into submission in 2022. We are unlikely to face a true crisis, but the median scenario of higher inflation paired with higher interest rates is bad for most consumers and investors. It is something we should try to avoid.

I’m not sure if it is abnormal to have a favorite metal, but if you asked me what mine is it’d be an easy answer: Gold. And if you had been holding a meaningful amount this past year, you have likely had a very good one. In 2025, Gold has been completely parabolic, up over 50 percent compared to the S&P’s 16 percent. Over the past five years, Gold has gained 117 percent, but most of that rise has come in this single extraordinary year. The question is why. What has pushed a commodity that pays no interest and produces nothing to outperform almost every other asset? The answer lies in four words: tariffs, the dollar, geopolitics, and rates.

Gold is seen as a safe asset to own when the financial world feels fragile. Investors buy it because it is scarce, simple, and will always have some value. When confidence in paper currencies declines, gold becomes the fallback. The first major driver of this year’s surge has been a loss of faith in the dollar. In April 2025, President Trump launched his “Liberation Day” tariffs that reshaped the global trade order. For decades, the United States has been the world’s consumer, buying goods from abroad. That system worked because when an American bought an iPhone or a toy from China, the dollars spent flowed into China, and those dollars had to go somewhere. For years, they went right back into U.S. financial markets through purchases of Treasuries, equities, and other assets. This pattern of reinvestment, which existed with nearly every country we traded with, propped up the dollar and made the U.S. financial system the envy of the world.

When Trump announced he wanted to upend that structure, it unsettled global investors. If foreign economies no longer recycled their dollars into U.S. assets, the foundation of dollar dominance could weaken. That loss of faith showed up quickly in markets. Stocks dropped, Treasury yields spiked, and the dollar fell. Although most trade deals were resolved in the months after April, with the notable exceptions of China and India, the damage to sentiment had already been done. Equity markets recovered as investors rotated back into AI-driven growth stories, but the dollar never fully bounced back. The rise of gold has been, in part, a direct reflection of that sustained weakness.

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Even after trade tensions cooled, global risks remained high. The ceasefire in Gaza has provided some relief, but it is extremely fragile, with both sides accusing the other of violations and the potential for renewed conflict always present. The war in Russia continues with no clear end, and tensions between the United States and China remain elevated. In that environment, investors have sought safety. Traditionally, that flight to safety would have meant buying dollars. But because of the new trade doctrine and questions around U.S. policy consistency, much of that capital has flowed into gold instead.

Trump has noticed this shift and tried to counter it. He has threatened tariffs of up to 100 percent on countries that attempt to replace the dollar as the global reserve currency. But confidence cannot be forced through threats. The realignment of foreign investors’ views toward the dollar and the renewed appeal of gold are structural changes, not temporary reactions. Investors are likely unwilling to rely solely on the dollar in the way they once did.

Monetary policy has added another layer to this story. Gold usually struggles in periods of high interest rates because it offers no yield. But as global growth has slowed and inflation has moderated, central banks have shifted into rate-cutting cycles. Europe is stagnating, and in the United States inflation has cooled enough for policymakers to ease. Lower rates reduce the opportunity cost of holding gold, making it more attractive to investors seeking stability. With rates down and growth uncertain, holding gold feels less like a sacrifice and more like a necessity.

There are still risks in the gold rally, and cracks are beginning to show. Anytime a market experiences a sustained parabolic rise, not all of it is driven by fundamentals. Some of it is speculation and leverage, and the recent pullback may be an early sign that momentum is fading. Over the past week, gold has fallen about 5 percent from its peak on October 20th following an uptick in inflation and an imminent trade deal with China. There is short-term fear that the Fed will be less aggressive with rate cuts if inflation continues to rise, and that lower geopolitical risk could lessen the need for a flight to safety. Many of the investors who bought on speculation rather than fundamentals are now being burned. However, for Trump to have agreed to a deal with China, it would need to reduce the trade deficit, reinforcing the long-term decline of the dollar-based financial system and the gradual shift toward gold. In the short to medium term, prices may fluctuate, but if these broader trends persist, gold will continue to rise.

If the global trend of declining confidence in the dollar continues, and if political and economic uncertainty remain elevated, gold will stay in demand. It is not a bet on growth or innovation. It is a bet on doubt. Gold does not require faith in any government or institution to hold value. That, in times like these, is exactly what investors are paying for.

Back on April 2nd, President Donald J. Trump declared a new era of “reciprocal tariffs,” announcing sweeping trade measures meant to liberate the U.S. from what he called decades of economic exploitation by both allies and adversaries. Tariffs were slapped across the board—20% on the European Union, 24% on Japan, 34% on China. The list kept growing, and the pressure on China intensified in the days that followed, culminating in a tit-for-tat tariff spiral that pushed the rate all the way up to 145%. 

Markets, fearing a stagflationary shock and an escalating trade war with China, saw massive sell-offs in stocks, bonds, and the dollar. It all came to a head when, reportedly, Treasury Secretary Bessent and Commerce Secretary Lutnick held an emergency meeting as Treasury yields were kissing 5% and fears of Treasury auctions failing due to weak demand spread. The U.S. Treasury has not had a failed auction in modern history—and even getting close is enough to set off alarm bells across the financial system. A failed auction means the government can’t raise the money it needs to fund essentials like healthcare, defense, education, and Social Security. It would also force the U.S. to offer much higher interest rates to attract buyers, sending borrowing costs soaring—not just for the government, but for mortgages, credit cards, and business loans.

Sensing the danger, Trump announced a 90-day pause and promised “90 deals in 90 days.” Markets rallied, with the S&P not far from record highs. His strategic ambiguity allowed everyone to read what they wanted into the moment: trade doves saw a pivot toward moderation, while trade hawks saw a classic Trump move—pressure, pause, then deal. So far, only one deal has been signed—with the United Kingdom—and the clock is ticking, with the original Liberation Day tariffs set to snap back on July 9th.

Strategic ambiguity has been a friend of the Trump Administrations in their tariff war, however if they do not eventually show substance the financial markets will punish. Ambiguity only works for so long, but even in the short term there are still consequences. For example we have already seen a 10% decline in the dollar versus the Euro since his presidency began. Businesses want certainty above all else and if Trump makes the US a constantly uncertain place with ever changing tariff policy the economic effects will be catastrophic.

It's safe to say that 89 deals will likely not come about in the next 20 days. As I see it there are two ways that the tariff war will unfold after July 9th: Trump will extend the pause or he will not. 

Extending the pause maintains the status quo of strategic uncertainty, which markets will likely reward in the short term. Stocks will likely trade up on the belief that Trump won’t actually follow through on the most painful tariffs—investors will interpret the delay as a sign that he prefers headlines over hardline economic action. For now, Wall Street can keep playing the optimism game, pricing in the assumption that threats are just posturing and that cooler heads will prevail.

But underneath the rally, something deeper starts to break. Business leaders don’t think in 90-day windows—they plan across quarters, years, and decades. And if they come to believe that U.S. trade policy is volatile, politically driven, and subject to last-minute reversals, they’ll start pulling back. Investment slows not because tariffs are high, but because nobody knows if they will be. Companies can price in bad news; what they can’t price in is chaos. Why build a new plant, open a new line of exports, or source new materials when the rules of the game might change with a single tweet or press conference?

That’s where the real economic cost starts to accumulate. Delayed investment today means weaker productivity tomorrow. Add to that the rising cost of hedging against policy risk—through legal fees, complex supply chain shifts, or even lobbying efforts—and you start to see how uncertainty acts as a hidden tax on growth. Even if the tariffs never fully materialize, the uncertainty alone becomes economically destructive.

Extending the pause may buy time—but it doesn’t solve the problem. It turns the U.S. into a policy question mark. And while markets may cheer that ambiguity in the short run, the real economy doesn’t. Business leaders want to know where things are headed. Without that clarity, growth flatlines—and in the long run markets will follow suit.

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On the contrary, letting the tariffs snap back into place shows that Trump is willing to stick to his word—but it would almost certainly come at a major economic cost. We already saw the reaction on the first Liberation Day: massive sell-offs in stocks, bonds, and the dollar as markets priced in the reality of higher prices, slower growth, and the risk of global retaliation. Reinstating those tariffs now, especially at such high rates, would likely trigger another wave of market panic.

Here’s why: at their core, tariffs are taxes on imports. Raising them suddenly and across multiple trading partners jolts the entire supply chain—costs rise, margins get squeezed, and companies are forced to either eat the difference or pass it on to consumers. That’s a recipe for inflation at a time when the economy is already fragile. But unlike supply-driven inflation caused by external shocks, this is self-imposed. It's inflation born not of scarcity, but of policy. At the same time, growth would slow sharply. Businesses facing both rising costs and reduced certainty would likely cut back hiring and investment, pushing the U.S. closer to a stagflation scenario.

As that risk materializes, global capital would likely begin to shift away from dollar-denominated assets. Why hold U.S. Treasuries if inflation is rising, policy is unpredictable, and the trade deficit is ballooning again? Foreign buyers—already cautious after Treasury auctions nearly failed during the last round of tariff escalation—could start demanding higher yields to compensate for the chaos. That means borrowing costs rise across the board, from mortgages to corporate bonds. The Fed would be caught in a vise: pressured to raise rates to fight inflation, but also staring down a potential recession. It’s the worst of both worlds.

And beyond markets, the geopolitical consequences would be severe. Trade partners wouldn’t just absorb the tariffs—they’d retaliate. Tit-for-tat tariffs would spring back up. China, the EU, Japan, and others would likely target politically sensitive sectors of the U.S. economy—agriculture, autos, tech—creating pressure on domestic firms and further fueling the inflationary spiral.

This time, though, the backlash might be more coordinated. Allies tolerated Trump’s first trade war as an aberration. A second round, with even higher stakes, might convince the world that this is no longer a phase—it’s a permanent shift. That opens the door for other economic blocs to step in and write the new rules of trade without the U.S. at the center.

In short: letting the tariffs snap back might earn Trump credibility with protectionist voters, but it would cost the U.S. dearly in financial stability, economic growth, and global leadership. The pain would be swift and far-reaching—and the markets, as they did on the first Liberation Day, would make that crystal clear.

Trump wasn’t wrong to argue that U.S. trade deals should be fairer or that we need to strengthen American competitiveness abroad. That’s a legitimate goal—and one many across the political spectrum agree with. The problem is the execution. Setting a 90-day clock for 90 trade deals was always ambitious, and now, with just weeks left and only one deal signed, it’s clear that timeline was unrealistic.

If I were a betting man, I’d say the pause will likely get extended. But once you show the world that deadlines are flexible, they stop meaning anything. The moment you extend once, it becomes easier to extend again—and suddenly the entire negotiation process starts to drag. Foreign governments may decide to wait things out, either for a different U.S. president or for the courts to step in and rein in executive tariff authority. The urgency disappears. The leverage weakens. And with each extension, the deeper problem grows: strategic ambiguity morphs into strategic paralysis. The uncertainty that markets and businesses had been willing to tolerate in the short term begins to feel structural. Investment decisions stall, long-term planning erodes, and America starts to look like a country without a clear economic direction.

That’s the real risk: not just tariffs or inflation or sell-offs—but the slow erosion of credibility. You can’t strike tough deals if no one believes your threats. You can’t build competitiveness on strategic ambiguity alone. So as July 9th approaches, what’s at stake isn’t just whether tariffs come back—it’s whether the U.S. can lead with both strength and clarity. Right now, the world is still waiting for an answer.

The largest market in the entire world, by trading volume, is the market for foreign exchange (FX). It has roughly $7.5 trillion traded daily. To put that in perspective, if you combined the GDP of Canada, Mexico, and Brazil, it would still be less than the amount traded in one day on the FX market. This market is made up of every country's currency, and the value of that currency fluctuates, as with any market, due to supply and demand. As people demand more of a currency, the value of the dollar, euro, yuan, etc. appreciates. Conversely, as people enter the market selling dollars or euros, the value of that currency falls. For most currencies in developed countries, the price action on their currency only fluctuates within a certain band. If their currency is not reliably a certain value, it makes it difficult to do business on an international scale. For example, if you invest $1000 in the United Kingdom and earn an additional $1000 (so you now have $2000 in British currency), but the pound then falls by 50% before you convert it back to U.S. dollars, you effectively end up with just $1000—no real profit—because of the exchange rate loss. Due to this phenomena, developed countries try to protect against large swings in their currency.

Recently, however, the South Korean Won has seen a significant amount of price movement, with the value of the Won falling 11% this year—its worst year since the 2008 financial crisis—and falling 5% in the month of December alone. Why is that? What could spark such a movement in the currency of a country that well established on the world stage? As I see it, there are three main factors influencing South Korea’s currency woes: Political Turmoil, President-Elect Trump’s Tariffs, and Low Relative Interest Rates.

Let’s start off with a review of the political turmoil. In early December, the President of South Korea, Yoon Suk Yeol, declared martial law in the country, a move not seen since the 1980’s. This drastic action was reversed only 6 hours after it was implemented, after outrage by many citizens and the South Korean parliament. The vote in parliament to overturn the martial law was 190-0, with 18 members of the President's own party voting to overturn the edict. The implementation of martial law in South Korea was particularly traumatizing given the history of this tactic being used for brutal crackdowns on the citizenry and free speech. Shortly after the vote to restore regular order, President Toon Suk Yeol was impeached and removed from office. Nevertheless, even though regular law was restored, consumer sentiment, which serves as a proxy for consumption spending, was severely hampered. Additionally, business sentiment also saw drastic declines in the most recent surveys by the Bank of Korea. If business sentiment is low, that means less investment into the economy, which is needed in every economy but particularly important in South Korea. Even after all of that the drama unfortunately wasn’t over, on December 27th the interim President Han Duk-soo was impeached, causing further turmoil in the South Korean political system and prompting the finance minister, Choi Sang-mok to become acting President. All of this turmoil has caused the government to focus less on governing and promoting the economy and more on politics. Investors, seeing this uncertainty and growing risk in the South Korean economy, saw greater returns and stability in other countries, so they sold their Korean Won on the market for foreign exchange and bought other currencies, pushing down the value of the Won.

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The second factor impacting South Korea’s currency is the new Trump administration. As I mentioned in my November video, President-Elect Trump has promised repeatedly to place tariffs on nations that he thinks have a trade advantage with the United States, even if they are an ally. Recently, Trump announced 25% across-the-board tariffs for Mexico and Canada, which showed how serious he is on this issue. With exports making up 44% of South Korea's GDP, and the United States being the country’s second biggest trading partner (16% of total trade), South Korea cannot afford to lose out on the American market. One of the largest trade items between the United States and South Korea is automobiles. While their automakers did avoid the tariffs implemented in the first Trump administration, due to the political turmoil outlined above, , they have not been able to organize a lobbying effort to stay clear of the impending tariffs. The placement of tariffs on automobiles shipped to the US would cripple a vital industry for South Korea, and this concern is furthering growth worries and causing investors to flee the South Korean Won. Additionally, in a world of tariffs, the only way for South Korean automobiles to stay competitive would be with an intentionally weak currency. With a weak Won, Americans would find South Korean automobiles cheap, even with a tariff placed on top. Investors could be anticipating this policy move and fleeing the currency before the intentional weakening takes place. Whether investors believe the Won will weaken due to deliberate government policy or tariff-induced economic weakness, the result is the same: selling the Won on the FX market, driving down its value.

The final major driver affecting South Korea’s currency is the most straightforward: interest rate differential. South Korea’s central bank authority, The Bank of Korea, recently lowered its base rate by 25bp to the current rate of 3%. In the United States, our central bank authority, The Federal Reserve, has set interest rates at 4.5% after also lowering by 25bp. Investors place their money in currencies where they can earn the most return. Right now, holding cash in the South Korean Won earns investors 3%, whereas holding cash in U.S. Dollars earns investors 4.5%, which is substantially more. Additionally, even if we look beyond just cash, the risk-bearing investments like equities have performed far better in the United States than in South Korea. The YTD return on the S&P 500 will be about 25%, whereas the South Korean equivalent, KOSPI, is down about 10%. That represents a 35% differential between the two exchanges. Investors, seeing this differential, have decided to exit South Korean markets, causing them to sell their Won on the market for foreign exchange in return for other currencies like Dollars.

These three factors have combined to cause the overwhelming decline in the Won seen in markets this past year. The question is, what’s the point? Why does a weak South Korean Won matter?

A weaker South Korean Won is extremely consequential not only for citizens of South Korea but also for the global economy, given that South Korea is the 13th largest economy worldwide. For South Korean citizens, a weak Won means costlier goods and diminished purchasing power. Consequently, essential items such as food and energy may become less affordable for the average household, potentially driving inflation higher. On the global stage, a weaker Won signals lower demand for imports. Those who typically export goods to South Korea will likely see a decline in sales, as the currency no longer goes as far, and given South Korea's considerable economic influence, a downturn in its import appetite is hardly something to dismiss.

Ultimately, whether the Won will regain its strength or continue its downward trend depends on how swiftly the political situation stabilizes, how trade policies shift under the Trump administration, and how competitive South Korea’s interest rates and equities become compared to other global markets. In the immediate future, investors will be closely watching the new administration’s policy stances, any attempts at trade agreements, and the Bank of South Korea’s willingness to adjust monetary policy in response to global pressures. If South Korea can reassure both its citizens and international investors of its political stability, find a diplomatic path through potential tariffs, and establish more enticing returns on capital, the Won may stage a comeback. If these headwinds continue unresolved, however, the currency’s decline will not only affect South Korean wallets, but will also reverberate throughout the interconnected global economy.

The United Kingdom was the first national government to issue bonds, doing so in 1694 through its establishment of the Bank of England. Established by royal decree under King William and Queen Mary, “The Bank,” as it was then known, raised funds for the war against France. Over 300 years later, government bonds have become one of the primary ways—second only to taxation—that sovereign states fund their operations. A government bond is essentially an IOU from the state, repaying the original loaned amount plus interest. Initially, these bonds are sold by the government to a select group of buyers (individuals or institutions) and are later traded on a competitive secondary market. In this market, bond prices and yields (interest rates) have an inverse relationship: lower-priced bonds offer higher yields and are generally considered riskier, while higher-priced bonds offer lower yields and are deemed safer. 

Historically, bonds were backed by physical assets, usually gold. However, since the U.S. exited the Gold Standard in the 1970s, American bonds have been backed solely by the “full faith and credit” of the U.S. government. That unlinking of the dollar to gold removed the limits of U.S. borrowing. Since the beginning of the 21st century, due to wars and recessions, the U.S. has consistently spent more than it collects in taxes, increasing its reliance on borrowing. Although concerns about the consequences of this spending may sound repetitive, today we face the potential for significant financial strain if policies remain unchanged. With historically high non-recessionary/non-war deficit levels, normalized interest rates, and an aging baby boomer population, the U.S. debt and deficit challenge may soon become unmanageable unless proactive measures are taken.

High deficits are not new to the United States; since 2002, the country has run a budget deficit. That initial deficit was fueled by the Bush tax cuts and military engagements in Iraq and Afghanistan. The deficit remained relatively small until 2008 when it surged due to the financial crisis. Since then, the U.S. has consistently run significant deficits. What's changed now compared to the previous era is the Federal Reserve's shift in interest rate policy. 

In response to the 2008 financial crisis, the Fed set interest rates at extremely low levels. When growth rates exceed interest rates, debt levels stabilize. This environment of near-zero rates made it relatively easy for the U.S. to maintain debt sustainability. Throughout the 2010s the US economy grew at anemic levels—only around 2% each year. This was manageable with interest rates maintained at basically zero. However, this is no longer the reality in which our government is operating: post-COVID inflation has driven neutral interest rates higher, requiring stronger economic growth to sustain current debt levels.

Meeting this need for higher growth while maintaining current deficit levels would be challenging enough. However, candidates from both major parties have proposed agendas that would significantly increase the deficit: one candidate pledges deep tax cuts, while the other proposes substantial increases in welfare spending. These moves will likely cause U.S. bond buyers to demand a higher risk premium due to the increased risk, leading to higher interest rates. Rising interest rates are already impacting the budget, with interest payments now the second-largest line item on the U.S. federal budget—greater than spending on national defense, education, and healthcare, it is surpassed only by Social Security. If current trends persist without policy changes, interest payments could become the largest budget item by 2051. Furthermore, the aging population and restrictive immigration policies are limiting potential GDP growth, as fewer working-age people can contribute to economic productivity. The aging population is also driving deficits higher as more citizens become eligible for Social Security benefits. While the direct effects of the deficit are significant, the broader economic consequences of an unsustainable deficit are potentially even more severe.

Because so many other interest rates—such as those for mortgages, credit cards, and auto loans—are benchmarked off U.S. Treasury rates, the ripple effect would be felt across the economy. Higher rates would disincentivize borrowing for business investment and consumer spending, two essential drivers of economic growth. This decrease in borrowing could lead to a slowdown in growth or even a recession. Today, U.S. Treasuries are seen as safe-haven assets during economic downturns. If this perception changes and confidence is lost, investors may withdraw from Treasuries in times of economic panic, exacerbating the instability. During a recession, the Federal Reserve typically cuts interest rates to boost demand and revitalize the economy. However, in this scenario, such a move would be difficult, because the Fed would need to act drastically, likely deepening the panic from investors and reinforcing a cycle of lack of confidence leading to higher rates to more economic weakness and then back to lack of confidence. 

While I hope that this scenario will prove to be an overreaction and that the current situation is merely another “boy who cried wolf” moment, the trajectory is concerning. Both major parties advocate either tax cuts or expanded welfare without providing concrete plans to fund these measures, making some version of a confidence doom loop appear more and more likely. The difference between this time and the pre-COVID era is the mismatch between growth rates and interest rates. The question is how do we solve this problem and prevent this catastrophe from occurring?

There are as I see it three ways to stave off economic catastrophe from overleveraging: taxing more, cutting spending, or growing at a faster clip. It is irresponsible to overly rely on any one of these so a coherent plan would combine all three parts. If a candidate were to try and make up the deficit only through heavy-handed new taxes it would stifle economic growth and make it even harder for growth to outpace interest rates. Similarly, cuts to spending would have to be so severe that it would cause growth to fall below interest rate levels. Lastly, focusing only on growth is impossible as the level of growth required to get rid of the deficit is wildly above the potential of the US economy. The combination of these three in order to escape bulging deficits has proven effective; for evidence, we only need to cast our mind back to the presidency of Bill Clinton. In 1993 Clinton's economic stimulus package cut spending, raised taxes, and invested in high-growth areas of the economy, and it was only through this balanced approach that the US government was able to balance the budget and even run a surplus for multiple years.         

The deficit problem is daunting; we’re facing the highest non-war, non-recession deficit in U.S. history with interest rates exceeding growth rates. Both presidential candidates are projecting plans that would add to the deficit. While the solution is seemingly straightforward—cut spending, raise taxes, and invest in high-growth sectors—political pressures remain a significant obstacle. What gives me hope though is that like most challenges facing the U.S., we have the capacity to implement solutions—we just need the courage and competence to do so.

Historians estimate that Gold has been used as currency since 600 BCE. Throughout history, this metal has shaped migration, money, and civilization writ large. This shiny yellow material made Mansa Musa, the king of Mali, the richest man in the entire world. The story of Gold in many respects is the story of humanity. Over 2000 years after 600 BCE it is still seen as a store of wealth. The United States up until quite recently used Gold to legitimize the value of our own currency, the dollar. However, in the 1970s Richard Nixon removed our country from the Gold Standard. Today Gold is traded as a commodity on markets across the world. While many factors impact the price of Gold the main drivers are interest rates and a hedge against risk. Over the past 2 years, gold has been on a remarkable surge growing by more than 50% in value. The inflationary pressures around the globe have driven gold's rise over the past two years, but because of falling interest rates and rising geopolitical risk, this rise in Gold prices will only continue.

Why do humans value Gold in the first place? This answer to this is more complicated than the question may imply, so to keep from impeding philosophy humans find value in Gold because it is rare and because it just has been seen as valuable for more than 2 millennia. Today because Gold has the legitimacy of over 2000 years investors see it as a hedge against risk. The thinking goes, everyone agrees Gold is valuable so even if all else fails in the financial system Gold will still be an agreed-upon source of value. This is why Gold strengthens in times of economic uncertainty, recessions, and inflation. Over the past three years, the world has been in an inflationary cycle not seen in this century. The United States saw inflation peak at 9.1% in 2022. Inflation is quite literally the diminishing value of a currency, so when investors see currencies depreciating they generally allocate more money into Gold as a hedge against falling currency values. This inflationary cycle proved persistent and has dominated economic moves for the past few years. Thus the rise in Gold has been remarkable as currencies around the world have lost a lot of their value. 

Aside from just a check against inflation, Gold is also a hedge against geopolitical risk. The logic for this is similar to that of a hedge against financial risk, if there is a geopolitical crisis that impacts the world markets or causes major disruptions, people will rush to hold assets that are perceived as “safe”. This causes the price of Gold to surge when there is geopolitical instability because investors rush to Gold as a hedge against systemic risk. Over the past two years, major wars have plagued the world— and caused hyperventilating amongst the investing class. As investors saw risks to the global system rising they increasingly hedged with Gold. Subsequently the news of conflicts around the world worsening over the past two years have sent Gold prices soaring.  

The third major driver of Gold is interest rates. The logic goes that holding gold gives you new interest payments whereas holding any other currency you can receive interest payments on that country's bond payments. Thus when interest rates are high that is seen as an inhibitor to Gold prices as there is a higher opportunity cost to holding Gold. However, as laid out earlier, the price of Gold has been climbing despite the headwinds of high interest rates due to high inflation and rising geopolitical risk. With the Federal Reserve cutting interest rates by a substantial 50 basis points at their latest meeting while also guiding to more cuts over next year, the opportunity cost of holding Gold is set to fall drastically. Additionally, these lower interest rates push investors into risk-based assets (i.e. gold, stocks, real estate, etc.) as they try to make up the yield lost from high interest rates. 

These factors explain why Gold has risen in the past but do not give much explanation as to why it will continue to soar. The main reasons why Gold will continue to soar are widening conflicts in the Middle East and Ukraine, combined with a global rate-cutting cycle yet to be fully realized.  The recent increasing intensities in the conflicts in Ukraine and Gaza have only made investors more fearful of wider conflicts and they continue to rush to gold as a hedge. Unfortunately, with no end to these conflicts in sight the risks of their escalation remain entrenched, so investors will seek to hold more and more gold to de-risk their portfolios. The second concurring factor is the global rate-cutting cycle. We have already seen the United States start to cut interest rates which has boosted Gold prices, but as The Bank of England gears up to cut rates alongside the European Central Bank the opportunity cost of holding Gold will fall in comparison to all currencies. The coalescence of these two factors will be extremely positive and lead to growth in Gold prices similar to what we’ve seen over the previous two years. 

Gold has been a fixture of human life for the past two millennia, and if current trends are any indication it will be for the next two. The past two years have seen massive growth in Gold due to high inflation, even in the face of unprecedentedly high interest rates in the United States and around the world. As high interest rate headwinds fade away and low rate tailwinds reappear the bull case for Gold is stronger than ever. The Geopolitical crises and lack of opportunity cost for holding Gold make it more attractive than ever as an asset. Investors will reallocate their portfolios to have greater protection against rising risks in the Middle East and the globe. This shiny metal that has made fortunes of kings, will continue to hold its value as more and more seek to hold it.             

In the fall of 2000 then President Bill Clinton made the monumental move of removing tariffs and bringing China into the WTO. This was the culmination of years of foreign policy, starting all the way back with Nixon's famous detente and Kissinger's secret visit to the People’s Republic. That acceptance into the WTO set China off on one of the fastest economic rises in world history. From 2000 to 2019 China’s Gross Domestic Product (GDP) grew at about 8% per year. Even when the Western world was reeling from the Great Financial Crisis China continued to blossom growing at almost 4x the rate of the United States. This growth was mainly fueled by investment spending as China embarked on massive and truly remarkable infrastructure projects. The projects made China’s cities the marvel of the 21st century: from its marvelous high-speed rail to its beautiful skyscrapers, China seemed unstoppable. However, today the China Story has seemed to hit an inflection point. The economic growth that at one point seemed unstoppable looks remarkably fragile today. 

So, what happened? The Chinese economic problem is one of an economy at the crossroads of its identity: will it continue to try and grow by infrastructure or will it shift to a growth model fueled by consumption spending? Gone are the days when China could build its way to growth. If China wants to realize its potential, they need to strengthen their consumer and increase consumption spending. 

China’s effort to build its way to growth also brought with it over-construction. Over the past twenty years, glittering megacities have gone up around the country. However, there was just one problem—no one was living in them. Despite this reality, housing prices soared, seen as a “for sure” investment. Since most Chinese citizens don’t invest in capital markets, the middle class saw the housing market as the most effective way to build wealth. Many families borrowed a lot of money to buy overpriced homes that often weren’t even finished with the hope that they would quickly appreciate. However, starting in 2021 home values began to collapse with the default of major developer, Evergrande Group. This collapse stoked fears of what economists call a “balance sheet recession”. Balance Sheet Recessions are when high levels of debt cause consumers to focus on paying down debt instead of spending or investing. The failures of Evergrande and similar developers show that this building your way to growth method is untenable for China now, however, the consequences of collapsing net worths and higher debts are straining would-be spenders. Balance sheet recessions, if not fixed swiftly, lead to long intractable periods of anemic growth, for evidence one only needs to look across the East China Sea to Japan.

Asset price bubble collapsing and turning into a balance sheet recession is not a new phenomenon. Up until the 1990’s the Japanese economy had been on a run similar to the one China has experienced in the 21st Century. Rapidly industrializing in a very short span Japan catapulted itself to the second largest economy in the world by the 1980s, leading many to even fear they’d overtake the United States. Then it all came crashing down. Japan also had an overpriced real estate market, and they too had an excessive amount of borrowing from consumers. What followed was a retraction by Japanese consumers that not only led to a short-term balance sheet recession but also a long-term corrosive bout of deflation and anemic growth. It wasn’t until just last year that Japan finally saw some inflation and lukewarm growth, though economic problems still persist. 

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So what is the solution? How can the Chinese economy avoid the mistakes of Japan and get back on track? In order to get their economy roaring again China must transition to a more consumption-based economy. Recall what the equation for GDP is: GDP = Consumption + Investment + Government Spending + Net Exports. As I said earlier, China has relied heavily on investment spending to fuel their growth. In order for them to boost consumption they must raise the wages of their citizens and shift their economy to a fundamentally new phase. The transition of China’s economy from agricultural to industrial in the 21st century helped raise Chinese wages as workers sought much higher incomes in factories than on farms. This industrialization of China brought almost 800 million people out of extreme poverty. Now it is time for the Chinese economy to transition from industrial-driven to more service-driven. This transition is the only way China can raise the incomes of citizens and allow them to spend more. In the short term, China should stimulate its economy and boost spending through direct transfers, similar to what the United States did with stimulus checks in the Covid era. Long term, they need to try and lower the savings rate and invest in education and industries that provide high wages to citizens. In the United States, an economy where consumers spend a lot, the savings rate is 4%, while in China the savings rate is 44%. This rate needs to decline if China wants to grow through consumption. 

This model of an industrial giant shifting to a more consumption-based economy is a story we’ve seen before. After World War Two the United States was an industrial giant unmatched in its productive capacity. However, as the world became more competitive, and industry shifted overseas we lost some of that dominance. The 1970’s saw the American economic engine starting to sputter and it seemed that maybe the American miracle was just that, a miracle. Instead of capitulating to these forces, our economy adapted and showed its resilience by transitioning to a consumption-based growth model with a tremendous rise in service jobs. This enabled the United States to continue to be the strongest, largest, and most prosperous economy in the world. Today consumption spending makes up almost 70% of the total United States Gross Domestic Product.  

Mark Twain famously wrote that history does not repeat, but it often rhymes. It would be intellectually lazy to say that The China story will perfectly mirror Japan’s or The United States’. The reality though, is that China is at an inflection point. The model that sent their economy on the historic run over the past 20 years is just not viable anymore. China’s economy has made remarkable progress in the 21st Century, however, reaching the next stage of growth will require another great transformation. The solution, while difficult to implement, is ultimately simple. China must transition to an economy that is centered around high-paying service jobs and consumption-based growth. They can choose the path of investing in their citizens, increasing wages, and boosting consumer spending, or continuing down paths of trying to build their way to growth. The future is still uncertain and how it will all unfold is a mystery, but there is one thing I am certain about: The China Story will go down in history. 

In a recent paper, notable economists Stephen Miran of The Manhattan Institute and Nouriel Roubini of NYU  accused the United States Treasury Department of tampering with the Macroeconomy. Miran and Roubini coined the term Activist Treasury Intervention, or ATI, to describe irregular issuances by the Treasury. More specifically, Miran and Roubini accused the Treasury of using bond issuances to boost the US economy in an election year for political gain. The Treasury has traditionally been viewed as an honest broker and market maker, so this accusation is particularly scathing because it cuts deep at the department's credibility. While there is evidence that the Treasury’s irregular issuance patterns have boosted the economy, there is no evidence that this issuance schedule or boosting of the economy was politically motivated. The real culprit for the irregular issuance is not the Treasury but the US Congress with its out-of-control deficits and fiscal irresponsibility.  

What is ATI? In their paper, Miran and Roubini define ATI as “aggressive changes to the relative levels of long- and short-term security auction sizes”. Miran and Roubini argue that the Treasury under ATI has created their own version of Quantitative Easing (QE). They say that recently the Treasury has made a large shift in the amount of short-term bonds they issue. The Treasury Borrowing Advisory Committee, or TBAC, the guidelines for bonds, advises that short-term “bill” issuance should make up 15 to 20 percent of total issuances. This amount has been above 20 percent since September 2023 (See Figure below). Miran and Roubini argue that issuing a disproportionate amount of short-term bonds restricts the supply of longer-term bonds, specifically the 10-year Treasury note. This supply restriction creates upward pressure on the price of bonds thus pushing down the yields for long-term bonds. This creates stimulative effects in the broader economy because the 10-year Treasury rate serves as a base interest rate in the macroeconomy. Thus, if the 10 years is lower, people will borrow more and generate more economic activity. In their models, Miran and Roubini find ATI has pushed the 10-year yield down by 25 bps and is equivalent to 100 bps of cuts by the Federal Reserve.  

Why would the Treasury ever issue debt this way if it caused distortions in the market? These over-issuance of short-term bills are mainly used in times of crisis/recession. In times like that the Government usually tries to fund stimulus to help the economy from over contracting. Due to the security of United States debt, short-term bonds are seen as cashlike because they bear little to no interest rate risk and will be repaid quickly. Therefore in a recession, the issuance of short-term debt is an easy way for the government to fund large stimulus in a way that markets will not balk at. This has the side effect of keeping long-term yields low but it is just that, a side effect not a goal. 

Why, then, was the Treasury issuing so much short-term debt outside of a recession? October 2023 was well removed from the COVID-19 Recession of 2020, and there seemed to be no imminent financial crisis at the time. The answer lies in the Treasury's depleted savings account.  Due to political shenanigans around the debt ceiling, the Treasury's rainy day fund, used when they can't issue debt quickly enough, was extremely low. To combat this, the Treasury issued hundreds of billions in short-term debt to help fill this rainy day fund. This funding was collected in addition to their financing of the deficit. All of this borrowing on the short end of the yield curve led to the distortions that Miran and Roubini wrote about in their paper. Markets saw this borrowing on the short end of the curve, entered into a bond price rally pushing down yields (see figure below), and fueled an equity market takeoff (See Figure Below). The lower interest also coincided with a blowout GDP growth report of 3.4% in the fourth quarter of 2023. 

However, there is little evidence that this borrowing was done with the intent of “propping up” the economy in an election year as the authors of this paper and other political pundits have claimed. As I said in the opening paragraph, the blame rests squarely on Congress. The budget deficit we are running now stands at a historic $2 trillion. More frightening than the nominal deficit is the deficit as a percentage of total GDP. The current deficit as a percent of GDP is 6.3%, this is much higher than the pre-pandemic levels which was about 4% in 2019. Prolonged high levels of deficits in strong economic periods are prone to create distortions in an economy and in a debt market. An even one percent shift in the tenor of issuances, which is what the Treasury’s ATI accounted for, can cause massive disruptions in interest rates. This is the main culprit that pundits, economists, and financial experts should be examining are the political actors, not the Treasury Department. As deficits remain unnecessarily elevated the Treasury Department will continue to be put in situations where they will do what is best to preserve debt market functionality and preserve their ability to make payments on the outlays set by Congress. To do this they will have to at times deviate from the guidelines set by TBAC, even for an extended period. This is only avoidable if Congress uses its constitutional power of the purse and regains control of government spending. 

The Treasury Department brokers the largest and most liquid capital market in the world. Their role is not to decide how their borrowed money is spent, but to facilitate the borrowing for said spending. They also are committed to financing spending at the lowest cost possible to the taxpayer. Miran and Roubini’s claims cut so deep because they essentially argue that the Treasury is no longer acting in the best interest of the taxpayer but in the best interest of the chief executive's political ambitions. Miran and Roubini are right that the Treasury’s irregular issuance has been beneficial to macroeconomic conditions, however, the notion that this was politically motivated is categorically untrue. To preserve long-term market functionality, the Treasury sometimes must deviate from its guidelines. The reason why this deviation was an extended duration is only due to the sheer magnitude of borrowing the Treasury is responsible for. As I said earlier, the Treasury is not in charge of spending but instead how to finance said spending. Miran and Roubini were right, fiscal irresponsibility is rampant, but to solve this problem we need to first fix the Washington building on Capitol Hill, not Pennsylvania Avenue.    

On November 30th, 2022, the world permanently changed. Though generative artificial intelligence (AI)—artificial intelligence capable of generating text, images, and videos, from its training on vast amounts of data—in its modern form has been around since 2017, ChatGPT’s release marked the first time the general public got to interact with generative AI. ChatGPT quickly became the fastest platform to reach 100 million users. Cheating on papers in school went rampant, and before long, the talk of the news media was dystopian AI futures. While it is true that AI is the most powerful tool humans have ever created, right now, it seems it is just that: a tool. This tool has the potential to completely reconstruct society, but its impacts seem to be more augmentative than substitutive. In order to form an AI future that is in the best interest of humanity, we must create a new SEC regulatory body that promotes safety, transparency, and guides AI innovation into alignment with human values. 

AI is not a passing fad. Paul Krugman infamously wrote about the Internet in 1999 that “The growth of the Internet will slow drastically...By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.” While Krugman’s assertion was proven laughably wrong, there are some today that make less drastic versions of this statement on AI. The difference between AI and virtually every other invention in human history is the exponential characteristic it has. To quote Larry Summers, “AI unlike other inventions in society is compounding, the invention of the wheel did not beget another good wheel, however, the invention of AI begets other good AI which makes its development exponential.” Beyond just warring thought leaders, there have been studies that project the base case and the potential tail-end cases on AI’s economic impact. McKinsey projected that AI could add $2.6 to $4.1 trillion in GDP, and they went on to write that, “This estimate would roughly double if we include the impact of embedding generative AI into software that is currently used for other tasks beyond those use cases.” All throughout the economy we see money pouring into AI and AI-adjacent fields. For example, NVIDIA, the maker of the GPU chips that are so crucial to AI right now, is the most valuable company in the world. All of the indicators show that  AI will not be like Pets.com or other overhyped trends we saw in the Internet bubble that eventually went completely bust. 

Most in the general public and academia agree that AI is not simply a passing fad. However, there is a furious debate over what form the AI future will take. After talking to a number of AI experts from Harvard, I describe the main fault lines in this debate as those who see AI as augmenting humanity versus those who see AI as replacing humanity. Now one of these camps offers a significantly more rosy outlook for humanity than the other, and that tempts many to disregard the other as nihilistic. This reaction is often seen in the face of many existential threats; climate change is the most recognized example of this phenomenon. However, this knee-jerk response must be avoided, and both sides of this debate must be thoroughly examined. It is true AI will replace jobs.  You need to look no further than simple data entry positions and even possibly some lower-level coding positions as well. These jobs are already starting to be eliminated, and as businesses find better ways to integrate AI into their workflow, similar positions like paralegals will likely be eliminated in the next 5 to 10 years. These examples are likely exceptions rather than the rule. Conversations with experts and several research reports suggest that, at least in the medium term, AI will primarily augment rather than replace jobs. The AI phenomenon in the workplace was best described to me by one of the experts I talked to: “When students are introduced to the calculator in the fifth grade, they are able to focus on algebra instead of arithmetic. AI looks like it will do something similar - eliminate menial redundant tasks and allow humans to do more big-picture thinking.” The introduction of Excel ruined bookkeepers but allowed accountants to be more productive than ever. There is an active debate among experts on whether the dynamism and creativity of the human brain can be replicated by AI as it advances over time. While there is no surefire answer, it seems that for the short to medium term, AI will be an augmentor, not a replacer. 

Even if AI does not replace us all in the workforce, there are still real threats that it brings that we need to address. Currently, the United States has no federal regulations on the usage of AI. In October of 2022, the Biden White House released a blueprint for an AI Bill of Rights that many who favor AI regulation saw as a good first step. However, the nature of democracy and government is slow and deliberate while the motto of Silicon Valley is to “move fast and break things.” This should worry the average citizen because AI will significantly upend society, thus necessitating strong efforts to align its impact with human interests. To quote Summers again, “God knows we cannot leave wars to generals and by that same logic we cannot leave AI to developers.” While I believe that the innovators in this space care about safety, we should find it deeply troubling that many privacy and safety decisions are left to the whims of CEOs serving their shareholders rather than the government officials elected to serve the people. The government must regulate AI, but it cannot be a regulatory regime aimed at slowing innovation. For better or worse, the genie is out of the bottle. AI is here to stay, and it will only get more powerful and prominent in the future. If society wants to avoid an AI crisis, there must be a sea change in the regulatory environment that governs AI.  

What would this regulation even look like? In 1934, responding to the greatest economic crash in American history, President Franklin Delano Roosevelt created the Securities and Exchange Commission, better known as the SEC. Though the Federal Trade Commission had been around since 1914, the vast growing field of finance and investing proved the need for an agency dedicated just to securities. Its mission was to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The creation of the SEC allowed average Americans and global citizens to trust a rapidly expanding portion of our economy that few understood. In addition, it also steered that fast-growing sector into alignment with the broader public's values – less fraud and reckless speculation. Smart people learn from their mistakes in the present, wise people learn from the mistakes of the past. Let us be wise and not wait for there to be a catastrophic crash before we decide we need a regulatory agency for AI. In order for our society to become integrated with AI, we need an agency that pushes for safety and transparency to align AI with humanity. There will be those who argue that overbearing regulation will dampen innovation and growth, and to those I only point to current US markets which are the most valuable, liquid, and sound in the entire world. This is all because of the trust the general public and investors have in those markets due to the regulations and transparency that bind those markets. The agency I call for will not stifle growth; it will instead act like the SEC in encouraging growth, just in a way that also promotes human flourishing. In order for AI and humanity to succeed together, AI must be safe and it must be trusted. Just as the SEC brought trust and stability to financial markets, a dedicated AI regulatory agency can bring trust and stability to AI, ensuring alignment with human values and fostering growth without compromising safety.

Mark Twain famously wrote, “History Doesn't Repeat Itself, but It Often Rhymes.” AI, like many other technological revolutions, has brought about seemingly equal amounts of excitement and fear. The main difference between this revolution and those in the past is the speed at which this one will come about. The exponential factor of AI means that humanity will likely experience more change in the next 30 years than experienced in the past 300 years. That change will not lead to the replacement of man. To the contrary, it will likely elevate man to an unimaginable level. Already, we are seeing remarkable advances in the drug-making process, improved efficiency in coding, and a revolutionary impact in the classroom. Humanity controls the fate of AI more than AI controls humanity’s fate. However, if we decide to let AI run amok with no restraints, the likelihood of misalignment and terrible outcomes for society rises considerably, and unfortunately, that seems like the path that we are currently traveling. This is the threat of AI—humanity should not worry about what AI will do to us but rather what we will do to AI. These types of problems, ones where humans are their own biggest obstacle, are the simplest in the hypothetical, yet most difficult to face in the practical. Unless there is a coalescence around adoption, regulation, and innovation, the future is much more uncertain and more prone to AI misalignment.  The good news is, that every AI problem we face, we have the ability to solve. 

Recently, there has been a lot of chatter in the news media regarding the past few CPI reports. They have renewed fears that the United States is in an inflationary environment that will remain elevated. However, these fears are unwarranted because inflation is on a solid glide path to reach the 2% target set by the Fed.

It's important to remember that inflation is the rate of increase in prices, not the price level, which refers to how much things cost. Think of the price level as f(x) and inflation as the derivative. Many prognosticators are often confused about why consumer sentiment is so low even though inflation has fallen considerably since its peak in 2021. This is because, while the rate at which prices are increasing has slowed, the overall price level remains high for many Americans.

Where is this inflation coming from? Recently, the prices of used cars, gas, and food have steadied as supply constraints have eased. However, most of the inflation is now coming from housing and services, with shelter accounting for more than two-thirds of the increase in inflation in the past month's core CPI print. This trend indicates that, as housing prices go, so does overall inflation. The good news for those hoping for disinflation is that housing inflation will ease over time as the supply of houses ramps up. In 2021 the story on inflation was used cars and other goods, now as supply has ramped up significantly those goods are seeing negative price increases, they are not just seeing a slowdown in the price increase but a decline in prices. Well, why hasn’t housing seen a leveling off or decline in price increases? That's because the length that it takes for new homes to be built and get on the market en masse is much longer than the same process for cars, timber, or many other goods that pushed inflation up initially.  The rate of increase in housing prices will decline gradually as the year goes on putting downward pressure on inflation. With this downturn in home prices will come a downward push in inflation overall.

When you look at the most recent CPI inflation reading from April, core CPI with housing removed is at an annualized basis of 2.1 (I use 12 months because that is the data point that has the least amount of variance and thus less subject to“noise” in the data).

In the most recent PCE inflation report, which came out May 31st, my case for housing having an outsized impact was only bolstered. In this chart you not only see that on a 12-month basis, housing has an outsized impact causing PCE ex-housing to be at 2.2%, but in the PCE measure due to asset prices rising portfolio fees have accounted for 1/6th of the inflation increases. Reference the market-based core for an adjustment of asset prices/stock market. 

With services, however, the story is more mixed. Most of the inflation that has come in services has been due to an increase in wages. With goods we know that prices will level as supply increases, however it's harder to create more supply in the labor market. However, there is evidence that this is exactly what's happening. Last year the United States saw the highest levels of immigration in years. The rate of increase in border crossings has slowed down from its record-breaking pace last year, however, the level is still elevated historically speaking. The increase in immigration will help the services side of inflation cool off. 

What happens next, if we see a persistent decline in inflation towards 2% how much will the Fed cut interest rates, and by how much will they cut? Pre-pandemic this rate was pretty much near zero and while I along with many others believe the neutral rate has risen, the Fed has telegraphed that the terminal rate for Fed Funds is likely around 2.5%. 

What does this mean for the broader real economy and the broader financial economy? For the real economy, it looks like a mixed bag but overall pretty positive. Although inflation and high interest rates remain a headwind the consumer still looks very strong and is set to continue. While there is some weakness in consumers on the lower end of the earnings spectrum, real wages are growing and consumers at the middle and upper parts of the spectrum are as robust as ever. 

For the broader financial economy things look very positive given this inflation and interest rate outlook. Larry Summers calls soft landings like second marriages because they are both “triumphs of hope over experience”. A soft landing is when inflation diminishes but the output does not, this interplay of variables is extremely supportive and stimulative for financial markets. While there isn’t much experience of this we don’t need to look further than 2023 when these two factors happen concurrently. This synchronization of events was a boon for the financial markets with interest rates falling like a rock and the stock market going on a massive run. Larry Summers has even gone back to revise his statement now saying “Soft landings are a triumph of hope over experience, but sometimes hope does triumph”

Although inflation remains a concern, the trajectory is decidedly downward, guided by easing pressures in key sectors such as housing and services. The data from recent CPI and PCE reports support this optimistic outlook, showing significant progress towards the Fed's 2% target. This outlook is further boosted when removing the outsized impact of housing.  The eventual increase in housing supply and the impact of higher immigration on wages are likely to put even more downward pressure on service and shelter inflation.

Looking ahead, the Federal Reserve's anticipated interest rate adjustments will play a crucial role in shaping the economic landscape. A reduction in rates could foster a more favorable environment for consumers and provide a supportive backdrop for stocks. We may indeed achieve another "Goldilocks" scenario in the latter half of this year, where inflation declines while stocks, real wages, and other asset prices boom, even as consumer sentiment remains negative due to an overall high price level.. 

Though many Americans, especially those on the lower-income side are still struggling, the outcome I laid out above is positive and worth optimism. While inflation has not been vanquished completely, it is on its last leg, bringing hope that this national chapter is coming to a close.

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