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On Oil, Financials & Quantum IPOs
Oil industry assets are being destroyed left and right in Russia and the Middle East, the casualties of two ongoing wars. As a result, the world is using more oil than it’s producing, and the Strategic Petroleum Reserve has been depleted to levels nearing the minimum needed for its pumps to work. Jackie examines associated ramifications, ironies, and the pipeline projects being undertaken as an alternative to shipping oil. … Also: Banks, brokers, and asset managers have been reporting stellar second quarters. … And: A look at the leap in quantum-computing-related IPOs—and US government initiatives to accelerate development of quantum technologies.
Too Much Complacency?
Our Roaring 2020s thesis holds that the demand side of real GDP remains supported by resilient consumer spending and robust business investment. On the supply side, tech-led productivity is boosting real GDP, while keeping a lid on inflation. Now that the economy has proven its mettle over the first seven years of the decade, it should continue to do so over the remaining three years of the Roaring 2020s. While our Roaring 2020s thesis has been a contrarian view for much of this decade, it is increasingly accepted. We are in good company. Both US Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh are vocal proponents of the productivity-led economy story. Investors have been increasingly betting on it, as evidenced by record-high stock prices and stable bond yields. We are comfortable with the financial markets embracing the Roaring 2020s narrative. However, as optimism becomes consensus, rising complacency can leave markets vulnerable if overlooked risks become more visible. One example of such complacency may be in the crude oil market. Despite renewed attacks on shipping by Iran and the resumption of the shooting war between the US and Iran, the price of a barrel of Brent crude remains relatively subdued at around $85 currently (chart). Alternative routes for exporting oil that avoid the Strait of Hormuz have helped keep prices relatively contained. So has weak Chinese demand. However, the oil market may be underestimating the risk of a prolonged war, especially if it continues into the winter months with depleted oil inventories. This week's batch of cooler-than-expected PPI and CPI inflation numbers for June certainly calmed concerns on that front. As a result, the likelihood of an imminent Fed rate hike has become less likely, with the federal funds rate futures market now moving toward one rather than two such moves over the next 12 months (chart). The recent increase in the 10-year US Treasury yield was attributable to the 10-year TIPS yield, signaling better productivity-led growth. The spread between the two narrowed, suggesting a moderation in inflation expectations (chart). (1) Sentiment. Signs of complacency are not limited to financial markets. Sentiment indicators tell a similar story, with Polymarket.com showing only a 10% probability of a US recession this year (chart). Our favorite Bull/Bear Ratio rose to 3.12 last week, well above its historical average, suggesting that investor optimism has become increasingly widespread and may be approaching excessively bullish territory in the near term (chart). Furthermore, June's BofA Global Fund Manager Survey shows investors increasingly anticipate a Roaring 2020s outcome, with an AI-driven productivity growth boom and no Fed tightening. A record percentage of respondents expect a "no landing" global economy, and their cash levels are extremely low. All that triggered BofA's contrarian sell signal, The buying of US equities by foreign investors tended to be a contrarian indicator in the past. They loaded up on US stocks near the tail end of the previous three bull markets (chart). Be warned: Over the past 12 months, they purchased a record-busting $903.8 billion! (2) Inflation. Yesterday's CPI report gave investors some reasons to be complacent about inflation. So did today's PPI report. The PPI total final demand fell by 0.3% m/m in June, driven mostly by a 6.4% decline in energy (chart). Excluding food and energy, it rose just 0.2%. On the other hand, the core PPI final demand for personal consumption rose 4.8% y/y in June, its highest since late 2022 (chart). The June PPI report confirms that price pressures remain in the pipeline. Core PCED excluding shelter rose to 3.5% y/y in May. Both suggest that the subdued 2.1% y/y increase in June's core CPI excluding shelter might be misleading. To be or not to be complacent? Here is something else to worry about: The New York Fed's Global Supply Chain Pressure Index continues to exhibit a tight correlation with CPI goods inflation (chart). With supply-chain pressures remaining elevated in June, goods inflation is likely to remain firm in the near term. (3) Employment. We've been expecting the labor market to improve after it was depressed by severe winter weather in January and February. Sure enough, ADP weekly payroll gains turned higher in March and April (chart). They remained solid in May but have trended lower since then through June. Then again, we called the bottom in employment-related stocks, which are still rebounding (chart). (4) China. Looking overseas, China's real GDP rose 4.3% y/y during Q2-2026, the slowest growth rate since the lockdown-impacted final quarter of 2022. That happened despite another record high in China's exports during June (chart). The export boom reflects China's growing economic imbalance. Industrial production continues to outpace retail sales by a wide margin, forcing producers to rely increasingly on export markets to absorb excess capacity (chart). As a result, Chinese goods continue to flood global markets, fueling trade tensions and concerns that China is exporting deflation.
On AI’s Revenues, Gold’s Outlook & Blockbuster Earnings
Can investors really expect that today’s ravenous demand for AI will keep growing at the clip providers expect over the coming years? AI bears say no, but Ed and Melissa disagree. Her back-of-the-napkin reality check found that Anthropic’s firm’s $150 billion 2030 revenue forecast looks doable. … Also: Ed and William discuss the outlook for gold in the wake of its price drop. If support holds at $4,000 an ounce, they could see a rebound to $5,000 by year-end without any weakness in the dollar. … And: Joe’s data show that analysts’ earnings estimates for S&P 500 companies have shot up over the course of last quarter, which is highly unusual.
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