The monthly jobs report from the Bureau of Labor Statistics will come out in two weeks from today. Do you want to hazard a guess as to the number of nonfarm payroll (NFP) gains reported for the month of April? Good luck with that – see below.

In the past fifteen months we have had nine months of payroll gains and six months of payroll losses, according to the BLS data. And this chart doesn’t reflect an even more bizarre facet of the BLS report, in which initial estimates are subject to sweeping revisions. Case in point: the initial report for February 2026 had nonfarm payrolls declining by 92,000. A few weeks later, that number was revised to payroll losses totaling 133,000. Who knows what that March NFP figure of 178,000 gains will look like when the BLS gives us a revision in its next release on May 8?

Below the Headlines

All the payrolls volatility notwithstanding, the headline numbers themselves are not flashing five-alarm warnings. The unemployment rate, which has bounced around between 4.0 and 4.5 percent since the beginning of last year, is nowhere close to the levels normally associated with economic downturns (though that can change quickly when exogenous factors impact prior assumptions about growth trends). At least one industry sector – healthcare – is a reliable enough job creation machine to offset steadier losses in other sectors like manufacturing and transportation services.

Below the headlines, though, there are plenty of indications that things are moving in the wrong direction. Fed chair Jay Powell is of the opinion that net job creation is effectively zero, which does not look too different from that chart above showing nearly offsetting NFP gains and losses from month to month. The situation for entry level jobs is even worse. The unemployment rate for recent college graduates (age 22-27) is around 5.6 percent, higher than the overall figure of 4.3 percent and well above the 3.1 percent level for all college graduates. Anecdotal evidence from young job seekers paints a hellish picture of thousands of resumes and cover letter sent into the void of employment search platforms, never to be heard from again. Graduate degrees in areas once thought to be sure-fire recipes for successful careers are not the golden ticket that was supposed to be worth that $100,000-plus investment in one’s education.

The Specter of AI

Looming over all the present uncertainty in the labor market is the specter of artificial intelligence. Don’t take it from us – listen to what the experts in the field themselves have to say. Dario Amodei, the CEO of Anthropic, opined recently that roughly 50 percent of entry-level white collar jobs are at risk of disappearing within a one to five year time frame, potentially creating an unemployment spike as high as 20 percent. The most exposed industries, according to Amodei, are those very ones that attract the brightest and most ambitious cohort of young people – finance, consulting, law and tech.

OpenAI, Anthropic’s peer and rival in the AI space, projects that 18 percent of all jobs will soon be automated with AI capabilities. A recent CNBC study found that AI-related layoffs totaled 55,000 in 2025. Every day we see evidence of major layoffs at tech firms – this week it was Meta (10 percent reduction to “offset” spend on AI) and Microsoft (voluntary redundancy of 7 percent) in the headlines.

Of course, for every AI Cassandra warning of the crisis ahead there is a Pollyanna pointing to the long history of doomsaying at the dawn of new technologies that proves overblown. This time, though, there may be more reason to pay attention to the Cassandras than to blithely assume that new doors will open for each one shut by the incursion of AI. The technology is growing and spreading and becoming more sophisticated at a mind-blowing rate. Not just here at home, either. China’s DeepSeek platform, which caused a major freak-out in the AI space early last year when it debuted, appears to be closing in on the capabilities of the leading US models. So there is a geopolitical element overlaid on what could be one of the biggest macroeconomic shake-ups ever experienced in our country. Regulators, policymakers and business leaders need to be ready to take up the challenge. As do the rest of us.

On Wednesday this week the S&P 500 stock index closed above 7,000 for the first time ever, and thus gave traders the thrill of two big things on the same day: a nice round number (oh, how we love crossing the round number thresholds), and a record close to boot! So the stock market has clawed back all its losses since the onset of the Middle East war, and then some. Is this the dawn of another one of those magic carpet rides the market takes us on from time to time, or is there potentially cause for a pause?

Neither we nor anyone else can answer that last question with any certainty, of course. But take note of the following: Wednesday was also the day when a company called Allbirds, which makes a line of footwear seemingly popular with the inhabitants of Silicon Valley, for reasons not entirely clear to us, announced out of nowhere that it was pivoting (a timeless expression of Valleyspeak) to become an AI compute infrastructure company. Yep, from shoes to AI compute in one easy press release. Shares in the company rose 580 percent after the announcement (no, that is not a typo). Make of that what you will. When these types of things happen, the image that comes to our mind is that grinning visage of the 1970s, Alfred E. Neuman, on the cover of Mad Magazine with the iconic tag line “what, me worry?” Indeed.

Meanwhile in the Actual World

Do you know what prices have not gone back to their prewar levels? Oil prices, that’s what, and they seem to have settled into a range around $95, plus or minus $5 or so, per barrel of Brent crude oil.

The question of when oil prices will come off their elevated levels probably will have a lot to do with whether the stock market continues on its merry way upwards or starts to cool off. Earlier this week the IMF came out with a fairly downbeat assessment of the war’s potential impact on global economic growth, painting several scenarios of increasing harm depending on how long energy prices remain stuck at current levels (or higher). In the best case, which assumes that the current various ceasefires hold and activity in the Strait of Hormuz returns to something resembling normality by early summer, global growth will fall to 3.1 percent from 3.4 percent last year – a gradually slowing trend. If energy disruptions last through the end of the year, though, the situation gets a lot more dire and the possibility of a global recession goes up, according to the agency’s analysis presented as its annual spring meetings in Washington got underway.

The stock market seems to have digested the best case scenario with no qualms. But looking ahead to those crucial summer months, oil traders are proceeding with more caution. According to current Brent crude futures prices posted by CME Group (the Chicago Mercantile Exchange), August 2026 futures are fetching around $88 per barrel, and that only drops to $82 per barrel for the December 2026 contract. Those prewar prices, fluctuating between $60 and $70 per barrel during the first two months of this year, seem a long way from being seen again.

Complacency versus Caution

Whether the market is being too complacent at present is something we only will learn over the next couple months as more data come in, particularly about jobs and inflation, both of which have been trending in the wrong direction since well before the war began at the end of February. On the caution side of the equation, we are likely to see an abundance of it from the Fed until they have a better understanding of how much the inflationary impact of the war will be structural as opposed to transitory (and don’t expect any of the governors or regional bank heads to actually say the word transitory, regardless). The labor market is similarly perplexing, with Fed chair Powell having noted on a number of occasions recently that, in his view, there is roughly zero net job creation growth happening now. It might be just as perplexing to the number crunchers at the Bureau of Labor Statistics itself, given the massive revisions that seem to be coming out every month in regard to the previously published estimates of nonfarm payroll growth.

On the other hand, there has been quite a bit of upbeat commentary from bank executives this week as the major US financial institutions report Q1 financial results and offer their views on the rest of the year. Consumer spending is ticking along and, despite high levels of consumer debt, defaults and delinquencies are more or less in line with expectations. As long as consumers keep spending and AI companies keep throwing money at their infrastructure build-out, overall growth should remain positive.

Which brings us back to that earlier sidebar about Allbirds. Watch this space, because a shoe company becoming an AI infrastructure player seems to be on par with that old parlor trick of 26-odd years ago – slapping a “dot-com” at the end of your company name and watching the share price rocket into the stratosphere. We’ve seen this rodeo before.

Patience and discipline. This is the mantra we have been encouraging our clients to embrace from day one. The past several weeks has constituted one of those times when following that mantra is exceptionally important. It is also exceptionally hard, because it requires control over our very powerful lizard brain impulses of fear and greed.

An Anthology of Disruption

Because it is hard to practice the art of patience and discipline when markets go pear-shaped, we pay very close attention to the facts around disruptive events. Specifically, we have documented every drawdown in the S&P 500 of five percent or more going all the way back to January of 1929. That’s 96 years’ worth of data. We are interested, not only in the magnitude of the drawdown, but what happens afterwards. One of the most common features of the post-trough recovery period is one or more days of very large gains shortly after the low point. This past week serves as a useful example of this tendency, which we show in the chart below.

The S&P 500 reached its last record high on January 27. From there it declined by 9.1 percent to reach a low – thus far – on March 30. As you can see in the chart, much of the market’s recovery – a total of 7.6 percent from the March 30 low to the April 9 close – happened on two big up days: a gain of 2.9 percent on March 31 and one of 2.5 percent on April 8. Anyone who got out of the market sometime between January 27 and March 30 (probably closer to the latter, given how much of the drawdown has been driven by concerns over the war in the Middle East) and is still out has missed out on those up days. In the long run they matter – a lot.

Lessons from Liberation Day

Here is another specific example of why these up days matter so much. A year ago we experienced that stomach-churning event known as “Liberation Day,” when that preposterous chart showing how much the penguins on McDonald Island were going to have to pay the US government sent the market into a tailspin. That happened on April 2, 2025. Lizard brains went right to work, cranking up the fear factor and bailing out of the market. A week later, on April 9, Trump backed away from the tariffs and the S&P 500 jumped by 9.5 percent. In one day.

Here’s what that means for the longer term. The S&P 500 gained 37.4 percent from the post-Liberation Day low (on April 8) to the end of 2025. Now, let’s assume that Investor X got totally out of the market sometime between April 2 and April 8, and waited for a month before deciding that it was safe to come back in (say, for argument’s sake, on May 2). That investor’s gain from May 2 to December 31 would have bene just 20.4 percent. Not bad, of course, but still well below the 37.4 percent enjoyed by Investor Y, whose mastery of the patience and discipline mantra kept things on even keel during the chaos.

Ignorance Can Be Bliss

Of course, nobody has any idea ahead of time when these trough and recovery events are going to happen. That’s why we keep records of them – so that we can understand patterns and at least have a probabilistic argument to make for why it is better to stay invested through the rough patches. Every time the market falls by five percent or more, followed by a recovery of at least five percent, we record the drawdown-recovery as a discrete event. There have been 315 such “events” since the beginning of 1929. Over that same period there have been just 15 bear markets, defined by a structural downturn with a peak-trough decline of 20 percent or more. That is a perspective worth keeping in mind.

And even with the bear markets, staying disciplined is the better strategy. The second-worst market of this 96 year span occurred within the living memory of most of us – the global financial crisis of 2008 when the S&P 500 tumbled 56.8 percent from peak to trough. The recovery wasn’t pretty, but it happened. And within the first month after the March 6, 2009 trough, the S&P 500 registered one-day gains of two percent or more on seven occasions. Investors who got out during the mayhem paid the price for missing out on those up days.

Generally speaking, we are not fans of ignorance. But in the absence of a crystal ball to tell us when the market’s twists and turns are going to happen, it might not be the worst idea in the world to ignore the urge to time portfolio decisions around the imagined effects of market disruptions.

March was not a great month in most asset classes. The S&P 500 lost a bit more than five percent from the month’s opening bell to its closing coda a couple days ago. Many other equity benchmarks took it on the chin even harder. Bond yields rose, and oil prices rose by a whole lot more. But for all the short-term pain, at least investors in these highly liquid markets had ready access to their capital if need be. Not so for the multitudes, retail and institutional alike, who over the past several years heard the siren song of private credit funds and opened their wallets to the purveyors – private closed-end funds and business development companies – of these dulcet tunes.

Owl Trouble

You can check out any time you want, but you can never leave. That line from the Eagle’s iconic hit “Hotel California” may be on auto-repeat in the heads of investors in one of the funds at the top of the private credit world. The figurative front desk at Blue Owl Capital has been full of folks trying to check out of their investment and leave — $5.4 billion in redemption requests in the first quarter of this year. For one of the firm’s two flagship funds, the Blue Owl Technology Income Fund, the amount of money seeking to get out ran to more than 40 percent of the fund’s total asset value. In response, Blue Owl slapped a cap of five percent (of total asset value) on withdrawals, so for most of those check out requests, the exit doors are shut and sealed. Most of Blue Owl’s peers in the elite tranche of private credit funds, including Apollo Global, KKR and Ares Management, have instituted similar measures to limit redemption outflows.

A $22 Trillion Walled Garden

The private credit market, with around $2 trillion in total assets, is part of the $22 trillion colossus that is the market for private capital, which includes as well the sprawling complex of private equity that has insinuated itself into every highway and byway of the global economy. This market has come a long way from 1982, when a consortium of investors led by former Treasury Secretary William Simon purchased the Gibson Greeting Cards company for the modest sum of $81 million and thus launched the leveraged buyout craze immortalized a few years later by Bryan Burrough and John Helyar in their classic “Barbarians at the Gate.” Private equity concerns today invest in all manner of businesses from consumer retail to hospital chains, technology infrastructure and software. Much of the funding – and this has been axiomatic to the business model since those early days in the go-go 1980s – takes the form of debt, and much of that debt is financed from sources outside the traditional banking industry. Enter the likes of Blue Owl and its cohort of private credit funds.

One of the key drivers for the recent surge in redemption requests from private credit funds has been the equity market shakeout in software companies. As noted above, software has been one of the big areas of focus for private credit, and vehicles like the aforementioned Blue Owl Technology Income Fund feature prominently in providing debt capital to the sector. The woes of publicly-traded software-as-a-service companies, some of which have seen their market value tumble by more than 40 percent in the recent sector-wide drawdown, has hit private companies (and their capital providers) in this space hard.

But even before the recent software crisis – which in time may turn out to be an overblown reaction to some of the latest developments in AI tools for enterprises – conditions in private capital were turning sour. The industry went through a massive boom in the early 2020s, with a tidal wave of new money chasing productive investments and driving up valuation multiples. During this time, the marketing arms of private capital enterprises reached out beyond their traditional base of sophisticated institutional investors and tapped into retail – individuals who might have a very poor understanding of the risks associated with the potential returns in these funds, with $25,000 or $50,000 to jump into the game. These are the folks – your nice lawyer neighbor with a couple kids in college and tuition bills to pay – who are now stuck inside the walled garden while the private credit funds try to ride out the storm.

Could the troubles in private credit be another canary in the coal mine like the subprime housing market was in the months before the 2008 global financial crisis? There is some commentary out there making this case. We think the conditions are quite different. Although financial leverage is at play in both cases, and most major financial institutions have some exposure, the structure of the private capital market appears to us to be more robust than the fragile web of interdependencies that made up the derivatives products like collateralized debt obligations and credit default swaps that all unraveled when the 2008 crisis hit. That being said, though, we have enough other concerns at present, including a geopolitical mess and the looming threat of stagflation, not to be complacent about the potential threats coming from the troubles in private credit.

How bad could it get? That is the question on the minds of many investors as the war in the Middle East slogs on with no apparent clarity about, well, anything. Let’s do a quick check-in to see where we are as of this somewhat rainy Friday morning in the Washington, DC environs where we ply our trade.

When In Doubt, Equivocate

The S&P 500 stock index has lost around 7.2 percent of its value from its last record high, on January 27, to its close on Thursday. That is considerable, but the index has yet to cross either of Wall Street’s technical drawdown lines – a correction, which happens when the peak-trough reversal hits 10 percent, or a bear market, when the damage reaches 20 percent.

The relatively measured pace of this drawdown suggests that a multitude of scenarios are at play, with rosier projections imagining a near-term cessation of hostilities and eventual resumption of something approximating normal energy flows from the region to export markets, and less optimistic takes assuming that the absence of an obvious exit ramp today raises the probability of a structural quagmire. What this implies is that, within the current picture of a mid-high single digit percentage decline in stock prices, you have assumptions ranging from $200 oil  to $60 oil by the time summer rolls around, with all the attendant secondary and tertiary effects in the broader economy.

About that Broader Economy

Let’s step back for a minute from the war and think about that broader economy as it exists today. We have finished tabulating corporate sales and earnings results from the fourth quarter of last year, and it was in fact a pretty good quarter. S&P 500 earnings per share grew 13.4 percent over the quarter, a much better result than the 7.1 percent consensus projection economists were making as the fourth quarter got underway. Earnings season for the first quarter of this year will kick off in a couple weeks, and here too the outlook is fairly cheery, with the EPS growth consensus currently priced in at 13.0 percent – again, this is a higher projection than earlier estimates. In other words, even with the near-certain prospect of higher inflation looming – the Organization for Economic Cooperation and Development came out this week with an estimate of US inflation rising to 4.2 percent – the consensus among economists who follow these things is that companies will continue to enjoy double-digit profits growth.

Of course, just as the price trend in the S&P 500 reflects those myriad prognostications by the Pollyannas and the Cassandras of the market forecasting world, so to do assumptions about the health of corporate earnings depend in no small part on how things fare in the Gulf. Here is one example: helium. You may have had no personal exposure to this element other than shoving a handful of helium-filled balloons into your car on the day of your three year old daughter’s birthday party. But helium is a critical input for the advanced memory and training chips employed by artificial intelligence models. The vast majority of these chips are manufactured in either South Korea or Taiwan. A large portion of the helium they need for the manufacturing process comes from – you guessed it – the Gulf region and has to pass through – you guessed it again — the Strait of Hormuz. Inventories are running low, and there have been some rumors circulating this week that Taiwan’s helium supplies were down to just a couple weeks or so.

Given that spending on AI infrastructure was plausibly the largest single driver of US growth in 2025, it obviously should be of no small concern to contemplate the possibility of significant ruptures in the supply chain that feeds AI spend (it also serves as a useful reminder that, for all the talk of a rapidly deglobalizing world, these supply chains are still very much interconnected across multiple regions and nations). This is just one example of what we mean by secondary or tertiary economic effects. A full suite of scenarios is currently at play. With time, though, the practical range of outcomes is going to winnow down, either to the upside or the downside. The decision makers responsible for whatever happens next do not have unlimited time on their side.

This is not stagflation! Or so Jay Powell insisted, during the Wednesday press conference this week following the Federal Open Market Committee meeting that, as widely expected, kept US policy rates on hold at present levels. Stagflation was a thing we had to deal with, very harshly, in 1979, when turmoil in Iran was just one of many factors fanning the flames of consumer inflation. Paul Volcker’s Fed had to raise the Fed funds rate, ultimately to as high as 20 percent, to corral inflation and reinvigorate the economy’s potential to grow. Anything less than the experience of 1979-80, in the world according to Jay Powell, does not merit the term “stagflation.”

Wrong Direction

We’re not in 1979, that much is true. But we do have the two components of that word – the “stag” and the “flation,” if you will, both moving in the wrong direction. On Wednesday we got a report showing wholesale prices in February moving considerably higher than economists had been expecting – and that report reflected activity before hostilities in the Middle East broke out at the end of last month. Inflation is moving higher while the jobs market is weakening (and Powell and his Fed colleagues believe that actual conditions in the labor market are worse than the already-bad numbers in the jobs reports).

So how is all this affecting conditions in the bond market? The chart below shows the one-year trend for Treasury yields at the two and thirty year maturities, along with oil prices, noting the before-and-after conditions around the Middle East war.

Since the attacks began on February 28, the 2-year Treasury yield (the blue line on the chart) has jumped from around 3.4 to 3.8 percent, a percentage move of around 12 percent. The 30-year yield (green line on the chart) has moved from around 4.63 to as much as 4.91 at the same time, a more modest but still solid percentage gain of about 5.8 percent. Remember that bond yields move inversely to prices, i.e. higher yields mean falling prices. At first glance this might seem counterintuitive. In a risk-off market environment, like the present, Treasuries are supposed to be the refuge, the safe haven where capital flows in search of security. The problem, of course, is that this is a risk-off environment in which at least several among all the possible outcomes have inflation settling in for a more structurally elevated duration, thus making present nominal yields look relatively unattractive.

Strains on the Upside

The problem with writing these commentaries in the middle of a very fluid and rapidly changing environment is that events can move faster than the hand can type (yes, we do our pieces the old-fashioned way, without the divine intervention of ChatGPT). As of mid-morning Friday, yields at both the short and long ends of the curve are pushing higher without much apparent hedging sentiment to pull them back. The 30-year is at 4.94 as this sentence is being typed, already some six or seven basis points up from where it started the day. Although, as the above chart will show, the 30-year yield has been well above this level on a handful of occasions in the past year, so we would still characterize the market as bent but not broken, with at least some safe haven muscle memory to offset the inflationary push.

The short end of the curve is relatively easy to explain: taking their cues from the Fed and from what they see around them, bond investors are backing off from the previous assumption of one or more rate cuts this year (even though the median expectation from the Fed itself, in the Summary Economic Projections released on Wednesday, still calls for one rate cut in 2026). Market yields are adjusting accordingly.

At the long end, where rates are influenced by a wider variety of variables than just monetary policy decisions, the capitulation could start in earnest if the 30-year moves significantly north of five percent. That would, in our opinion, be a high-probability outcome if the consensus around the war converges on the assumption of no end in sight for the disruption to energy markets. This week’s bombing of critical energy infrastructure sites in the region has pushed sentiment towards that position. It’s still far short of a universal consensus, but it is also making the best-case scenario of a quick and relatively painless end much less likely.

On Wednesday this week the Bureau of Labor Statistics released the Consumer Price Index report for February. Economists had been expecting to see a year-on-year increase of around 2.4 percent in the headline inflation number, with an attendant gain of 2.5 percent in core CPI, excluding the volatile categories of energy and food. That is more or less what happened. But it happened last month; in other words, before a series of air strikes by the US and Israel had the effect of shutting down the passage of shipping traffic through the Strait of Hormuz.

As a refresher from last week’s commentary: approximately 20 percent of the world’s oil exports pass through the Strait of Hormuz, a sea lane with a span of roughly 35 miles bounded on three sides by Iran and one side by Oman. How much longer will this critical bottleneck remain shut? Given the volatile state of play in this unfolding crisis, who knows? Maybe tensions will be resolved by the time you are reading this piece on Friday afternoon. Maybe it will be out of service for weeks or even months to come. In a column this week on Substack the economist Paul Krugman noted that the “hit to oil prices will if anything be bigger than earlier crises” (Krugman’s own words) if the Strait were to remain closed on an ongoing basis. With that in mind, it is worth spending some time looking at what those previous crises meant in terms of inflation – both the core number which is the main object of focus for the Fed, and the headline number which actually takes into account the money you and I spend every week on groceries and gas. Forget that February CPI report, and prepare for something different in March and April.

Not Just a Headline Story

In the chart below, we show the trend for both headline and core CPI since January 1970.

We focus on four key events over this span of 56 years: the Yom Kippur War of 1973 that led to the first round of OPEC oil price shocks, then the Iranian Revolution at the end of the 1970s that sent prices soaring again, then the Chinese supercycle of explosive growth in the first decade of the twenty-first century, and finally the inflationary spike that came on the heels of the Covid pandemic.

In the two oil shock-related events of the 1970s we see an instructive message about the relationship between headline and core inflation. Again – this distinction is important because the Fed focuses most closely on core inflation for its monetary policy deliberations, due to its purportedly lower volatility. Most of the time that is a valid assumption. But consider the trend during those two bursts of inflation in 1973 and 1979. Headline inflation (the green line) started surging first, but core inflation (blue line) was fast on its heels. If an oil price spike is short-term in nature, then its knock-on effect into other goods and services will be relatively mild. But if it is structural – and the OPEC and Iranian events were both structural – then the inflationary effects will be far more pronounced across far more economic sectors.

We can contrast what happened in the 1970s with the China supercycle of the 2000s. You can see here that headline inflation went up by a lot while core inflation was actually pretty stable. Remember $5 dollar gas in 2005? That was the supercycle. In fact, the inflation-adjusted price of a barrel of crude oil in this period was higher than it was in either of those 1970s-era crises. But the main cause of high oil prices in the 2000s was China’s voracious demand for any and all forms of energy inputs. Those inputs powered the manufacturing plants churning out loads of goods that made their way back to the US and other developed economies as consumer products sold at low, low costs. So higher energy prices didn’t bleed into the rest of the economy in the same way.

The inflation resulting from the Covid pandemic was a more complex mix of factors. The massive amount of fiscal and monetary stimulus enacted by the US government and the Fed, respectively, created an environment of high consumer demand. Meanwhile, the breakdown of global supply chains resulted in a supply crunch. This combination had an effect on just about everything. And right in the middle of all this, in 2022, Russia’s invasion of Ukraine sent energy prices skyrocketing, though those came down fairly quickly from their highs as it became evident that sanctions on Russian oil were not having much of a restrictive effect on total global exports.

Dire Straits

And that brings us to the present. Unfortunately, the inflation that threatens to make itself known in the next few CPI reports has the potential to look more like the oil-related crises of the 1970s, and less like either the China supercycle or the Covid pandemic. There is still time for the worst-case scenario not to play out, and the most effective way for that to happen would be enough of a cessation of hostilities, or a ceasefire or whatever else you want to call it, to allow the Strait of Hormuz to reopen safely for shipping traffic. Even if that were to happen this week – even if the Strait is already open by the time you are reading this – at least some of the inflationary cat will already be out of the bag. The longer the present state of play continues, though, the harder it will be to manage the spillover effects into the larger consumer economy.

Exactly one week ago, the Bureau of Labor Statistics published its January report for wholesale prices, showing a 3.6 percent year-on-year rise in the Producer Price Index, much larger than economists had expected. Today, the same Bureau of Labor Statistics issued its monthly jobs report noting, rather coyly, that nonfarm payrolls had “edged down” by 92,000 in February. Now, perhaps whoever edits the BLS report wanted to soften the delivery of bad news for whatever delicate sensibilities might be perusing the jobs numbers, but a decline of 92,000, when economists had been expecting a gain of 60,000, is not “edging down” as much as it is a whopping clunker of a payroll figure.

Shutdown in the Strait

These two BLS reports bookended the other major news of the week, the attack on Iran by the US and Israel that has led to widespread disruption throughout the Middle East, including a near-total shutdown of shipping through the Strait of Hormuz, the narrow body of water between the Persian Gulf and the Gulf of Oman through which one-fifth of the world’s oil exports pass through. Much of that oil is bound for nations in the Asia Pacific Region. Local stock indexes in that region were quick to reflect the potential shock to the system. The Kospi index in South Korea, which had set a year-to-date high just last week, plunged by around 20 percent over the first three days of this week before stabilizing a bit by week’s end.

The immediate reaction of most world markets was somewhat less dramatic than the Kospi crash. Even oil prices rose more modestly on Monday and Tuesday than many observers had been predicting after the first US and Israeli air strikes on Saturday. But as questions grew in number over the week, without much in the way of coherent answers from those directing the operations, the “resilience” theme pronounced by many financial media sources gave way to mounting concerns that the disruptions could persist for some time to come. Stock markets are down. Brent crude oil, a benchmark standard, is currently around 30 percent higher than where it was before the war.

Shades of 1979?

Nominal bond yields are also higher, reflecting the inflationary concerns attending the rise in oil prices. As we noted above, inflation was already pointing higher before the air strikes began. And with today’s jobs report adding another data point to the case for a slowing economy, the specter of stagflation – slow or negative growth and high inflation – is making itself felt. Stagflation, rising bond yields, turmoil in Iran…this sounds an awful lot like 1979. That period of disruption led to a draconian monetary tightening program by the Fed and the then-deepest economic decline since the Great Depression. It would take three years before the economy returned to sustainable growth in the early 1980s.

It was in that year as well, 1979, that the troubles in Iran led to the establishment of a brutal theocratic regime that has terrorized its own people and the world at large ever since. Now there is at least a chance, a best-case scenario, that the Middle East war that started last Saturday will lead to a definitive end to this regime and its nefarious influence on proxies throughout the region. Much will have to go right for this to happen, a combination of smart planning and luck. We are not overly optimistic, but we will remain ever hopeful. A strong and democratic Iran would be a genuine asset – for Middle East stability, for the interests of the international community, and most of all for the Iranian people, who deserve the chance for a brighter future.

When Commodore Matthew Perry sailed into what is now Tokyo Bay in July 1853, the Industrial Revolution had already been galvanizing Western economies for a half century. Japan, by contrast, was an isolated feudal backwater, intentionally cut off from the rest of the world since the beginning of the Tokugawa Shogunate in 1603. Faced with the obvious technical superiority of the West as they stared down the cannon barrels of Perry’s Black Ships, Japan’s leaders realized that nothing short of a far-reaching transformation away from the ossified practices of the ruling samurai class was going to be required. Via the Meiji Restoration that began in 1868, they succeeded. By the end of the nineteenth century, Japan was a modernized industrial power carving out its own empire to compete with those of its Western peers. In 1905 it defeated one of those peers, the czarist empire of Russia, in the Russo-Japanese War and thus firmly established itself as a player in the great-power politics of the age.

The Takaichi Trade

The point of that little history lesson is that one should never count out Japan and its ability to reinvent itself. For the past thirty-odd years it has been easy to dismiss Japan as a once-strong economy whose time has come and gone. The Nikkei 225 stock index failed to regain its 1989 high point until 2024, 35 years later. Demography, deflation and debt summed up an economy listlessly drifting its way into senescence, stubbornly clinging to a shopworn model while the rest of the world raced ahead with successive generations of game-changing technologies.

But recently, the country seems to have shaken off the malaise of these so-called lost decades. That long-suffering Nikkei 225 index has gone from also-ran to world-beating over the past twelve months.

A good portion of this outperformance can be attributed to the emergence of a new political star. Sanae Takaichi is a rarity in the world of Japanese politics in two ways: first, she is a woman, the first of her gender to attain the office of prime minister; and, second, that she is wildly popular. Her initial victory last October sent the Nikkei surging, even as the Liberal Democratic Party (LDP) that she heads struggled to piece together a coalition government. It surged again earlier this month when a snap election audaciously called by Takaichi resulted in an LDP victory of historic proportions and a clear green light for the new government to move ahead with its mandate for sweeping economic reform.

The Takaichi Trap

That mandate, though, is not without some potential headwinds. The Takaichi government seeks to implement a major stimulus program to reinvigorate industry, catalyze consumer spending (for example, by eliminating a consumption tax on food products) and establish a stronger geopolitical presence in the region. This last item, which implies a big investment in Japan’s defense industry, has already created some waves after Takaichi made some supportive remarks in favor of Taiwan, remarks that provoked pointed criticism from China. As for the stimulus measures, they are going to have to contend with the Bank of Japan’s attempts to normalize monetary policy and keep a lid on inflation, which has made a somewhat surprising return in the past couple of years. Japanese bond yields have experienced some wobbles of late, as investors try to figure out how the BoJ and the Takaichi government are going to harmonize their respective agendas.

Remembering Shimonoseki

It is, of course, possible that the best laid plans of the Takaichi government will fail in its attempts to re-establish Japan as a highly productive and energetic economy with world-class products and services. But, as we noted above, it is never wise to count the country out. Reaching even farther back into the annals of history, in the late thirteenth century Japan was besieged by the superpower of the day, the Mongol empire of Kublai Khan. After a first encounter in which the Mongols gained some territory but then backed off to regroup, the Japanese built fortified protections strong enough to withstand future assaults. Attack again the Mongol fleet did, but it failed to penetrate the fortifications, and while the fleet was stranded in the straits of Shimonoseki trying to advance, it was destroyed by a great typhoon – the “divine wind” the Japanese translation of which is “kamikaze.” The Mongols never attacked again.

Japan is a highly conservative society with a pronounced resistance to change. But when it puts its mind to it, the country has shown in the past that it is capable of remarkable change in a very short period of time. As nations around the world grope for position in the changing global order, it may be time to give Japan another, closer look.

The rotation out of US equities is into its second year and going strong. The rest of the world may be having its share of problems, but underperforming stocks is not one of them. Here is a brief snapshot of how things are going in other parts of the globe, relative to the flattish ways of the S&P 500 thus far.

This got us to thinking about the last time non-US equities gripped the imagination and enthusiasm of the investing crowd. Let’s take a little trip back to the quaint world of this century’s first decade.

Swan Song for the Global Age

In hindsight, we know that it was the last gasp of the Global Age – the final five years of the quarter century in which the neoliberal trinity of open borders, light-touch regulation and unconstrained capital reigned as the unapologetic Zeitgeist. But for those of us living in those years, sandwiched in between the dot-com crash and the global financial crisis, 2003 to 2007 was just another chapter in the “end of history,” briefly interrupted from late-1990s good vibes by said bursting of the tech bubble, but with the Clinton-era directive to not stop thinking about tomorrow still circulating endlessly in our limbic regions.

The US dollar, which had risen steadily during the world’s love affair with everything dot-com, held its own during the 2001 recession, but started to falter the following year, setting the stage for what would become the great non-US equity rally of the mid-aughts.

What caused the decline of the dollar and the related move out of dollar-denominated assets? Several variables were probably at play, including the simple fact that the late-90s tech boom was almost entirely a US affair, so a “sell America” impulse was natural when that play fell out of favor. But there was more to it than that. The outperformance by international equities of almost every stripe over their US counterparts was solid, structural and sustained over this entire five-year period.

This was the period when China’s fast-growing economy blasted into its supercycle phase. Observers suddenly realized that all those jobs which had left the US due to offshoring in the 1980s and 1990s were not reappearing all over the world as hubs in an increasingly complex global supply chain. The word of the day was “decoupling,” as in the growing independence of these emerging regional clusters without the need for depending on capricious portfolio investment from Western capitals. The non-US world, and especially the emerging parts of that world, were destined to grow faster than the established West. Faster growth would mean more prosperity and, sooner or later, companies that would be every bit as good as, if not better than, their Western counterparts.

Decoupling Arrives, Twenty Years Later

Things didn’t work out that way, as we now know. The global financial crisis knocked all stock markets for a nasty loop, and the Great Recession set in. The Eurozone nearly fell apart in the early 2010s. China’s supercycle ran out of steam in the middle of that decade, prompting a major devaluation of its currency and a collapse in Chinese equities. Meanwhile central banks, led by the US Fed, took over the job of rebuilding the economy by providing ultra-cheap money. That easy money, in turn, catalyzed animal spirits in Silicon Valley to invest in audacious tech projects, some of which became extremely successful. US assets were back in favor, led by the tech giants and some of the smaller pilot fish that swam along in their wake.

Finally, though, the decoupling moment that had been imagined back in the mid-2000s arrived, last year. The old Washington Consensus of a global village unified under the neoliberal banner of free trade, judiciously overseen by the US, is gone. China is ascendant, Europe is regrouping into a post-Pax Americana order, and even Japan is showing some moxie again as the country rallies to its new and extremely popular prime minister. What all of this is going to look like five years from now is anybody’s guess. But the composition of global asset markets is likely, we think, to be quite a bit more diversified than it is today.