Nobody understands quantum mechanics. akarisakura-official.com That’s according to the late Richard Feynman, and as one of the greatest physicists of the twentieth century, he was in a good position to opine on the subject. As mind-bendingly counterintuitive as the subject is, though, it is showing up in all kinds of technological spaces these days. Including the stock market. volkovlaw.com The chart below shows the two-year performance of three companies engaged in various approaches to the challenge of developing a quantum computer: IonQ, Rigetti Computing and D-Wave Quantum. That blue dotted line plodding along below these three companies is the S&P 500. p3m.pnk.ac.id

The Qubit of It All

The above chart reflects not just the eye-popping returns for these companies, but also the considerable risks involved for something that…well, doesn’t quite exist yet in a fully functional form. If you bought into Rigetti Computing two years ago, you would be up more than two thousand percent cumulatively. If your cost basis was October 2025, on the other hand, you would be down by minus 54 percent as of today’s prices —  good for tax loss harvesting against all your AI winners, maybe, but not much else.

So where exactly are we in this brave new world of computers powered by qubits? Unlike the ordinary bits that make up the building blocks of classical computers, each of which can take a value of either zero or one at a discrete point in time, qubits can exist in a so-called superposition of all states between those numbers at the same time. That should give quantum computers vastly superior performance over their classical peers in the run-time needed to solve extremely complex problems.

But getting these qubits to behave properly is a daunting challenge. A qubit works – for the purpose of quantum computing – when it is in that superposition state, but it only remains that way for a tiny fraction of a second. Adding more qubits to a system creates interference as individual qubits pop in and out of their fragile superposition states, creating an unwieldly amount of cross-talking noise. That makes it hard to scale up to a size commensurate with what would be considered a fully operational quantum machine. There is considerable debate among experts in the field as to when this scalability will be achievable – from a couple years from now to a quarter century or more away. That’s a pretty wide time gap.

All Roads Lead to Somewhere

Which of the various technologies being tried out today will get to that big milestone of an industrial-size quantum computer with acceptable levels of interference? Are we going with superconducting circuits, or trapped ions, topological qubits or other modalities that so easily roll off the tongue? Right now – as the above chart suggests – investors are casting their nets wide rather than going all-in on any one thing that may wind up a dead end. The parallels with artificial intelligence can be seen here, where a thousand flowers bloomed and faded in the world before ChatGPT (and arguably, that debate is not finalized either, as the race for less costly and energy-intensive systems with fewer hallucinations continues in AI land).

Steady progress is being made, though, and along with the potential benefits from quantum computing in areas such as drug discovery, there are plenty of threats. One of the first practical uses identified for a machine running on qubits was cryptography, or the ability to crack the most complex of security codes. That presents an obvious challenge to the integrity of cybersecurity systems. In today’s Financial Times, an article titled “Crypto industry braces for quantum threat” described how a post-quantum world could pose a lethal threat to the security of the code powering the blockchain, upon which the cryptocurrency bitcoin rests. As if we didn’t already have enough to worry about with AI hacking superpowers like Anthropic’s Mythos out there lurking around. Whether it’s two years or two decades, we need to be plugged into what is going on in the trippy quantum world, ready to take advantage of the opportunities and to take defensive actions against the threats.

May the odds be ever in your favor. That was the cynical sentiment expressed to those unfortunate souls selected for participation in the “Hunger Games,” the much-read and much-seen saga by author Suzanne Collins. With a 95.83 percent chance of death in that contest (23 out of 24), the odds were most definitely not in one’s favor. Now, Kevin Warsh did not come into his new post as chairman of the Federal Reserve through any “reaping,” as per the protocols of the Panem games in the fictitious series. This is, arguably, his dream job. Unfortunately for him, though, the state of the global economy today means that the odds are in his favor about as much as for some hapless tribune from District Eleven or wherever.

No Room for Rate Cuts

Warsh takes the baton from outgoing Fed chair Powell today (Powell will be staying on for the foreseeable future as a regular Board governor). This morning, bond yields jumped for a variety of reasons mostly linked to the persistence of high energy prices, with resulting upward pressure on consumer and producer prices, and the apparent lack of any kind of definitive action coming out of this week’s summit meeting between the US and China. The 30-year bond yield is at its highest level in recent history.

Bond market investors have taken stock of the inflation situation and concluded that there will be no interest rate cuts in 2026, with doubts even as to their likelihood in the first half of 2027. Core inflation, as shown in the chart above, remains well above the Fed’s target rate of two percent, a level last seen in 2021. Core inflation excludes the volatile categories of food and energy, thus not directly reflecting the spike in fuel prices since the beginning of March. But those higher energy costs eventually work their way into the broader economy, as seen in the chart above (the green line). Conditions are even worse at the wholesale level. The headline Producer Price Index (PPI) for April, as reported on Wednesday this week, came in at 6.0 percent year-on-year while the core PPI jumped to 5.2 percent. With the Fed’s mandate to maintain stable prices front and center, this is no environment for a rate cut.

Unfortunately for Mr. Warsh, he comes into the job with at least one extremely powerful individual expecting him to do just that. Trump is not exactly known for a keen appreciation for the judicious use of monetary policy to address the economic realities of a given place and time. In about one month’s time, on June 17, Warsh will be captaining his first Federal Open Market Committee meeting, marking the Fed’s first call on interest rates under his leadership. Now there is, of course, a non-zero possibility that conditions will change so much between now and then that a rate cut could be up for discussion. We would put the odds of that somewhere below the odds of emerging as the victor in the Hunger Games, but one never knows for sure.

Catching Fire

Kevin Warsh has a deep knowledge and sound understanding of how the economy works in all its component parts. At least based on much of his past record, he is instinctively a hawk when it comes to the task of managing inflation. More than his technical skills, though, he is going to need to draw on all his skills in the art of diplomacy to thread his way through the political expectations of the White House and the sober, technocratic analysis of his eleven fellow voting members on the FOMC. The traditional role of the Fed chair, when it comes to the FOMC, is to steer the members to a unified consensus on what action to take. His predecessors, for the most part, succeeded in that role (post-Arthur Burns, anyway).

On June 17 we will get to see whether Warsh has the diplomatic chops to produce a harmonious decision on policy without unleashing a firestorm of social media invective from down the street. Perhaps he should take some pointers from Katniss Everdeen, heroine of the Hunger Games who exuded diplomatic charm along with streetfighting smarts as she clawed her way through the tribulations of fending off her potential killers, those both in the arena with her and in the backstabbing halls of power in the Capitol. Good luck Mr. Warsh. Through your efforts and skills, we hope that the odds actually will be in your favor, sooner rather than later.

Ten years ago, in 2016, it was Great Britain that fired the opening salvo in what would come to be recorded as a very disruptive year in global politics. sonae.projects.coppertable.co.za ipatineteelectrico.com The decision to leave the European Union took place that summer as British citizens stuck it to the man – if only by a couple percentage points – and buckled in for whatever might or might not happen next. YOLO, as the kids were still saying back then. A few months later, Americans likewise flipped off the Establishment as they handed Donald Trump a presidential victory over Hillary Clinton, the living and breathing paragon of the establishment if ever there was one. soragroup.vnDead and Buried

Here we go again. Election results for English council seats and the parliaments of Scotland and Wales are still being tallied, but enough of the vote has been counted so far to say that the results are a flat-out disaster for the two parties – Labor and the Conservatives (Tories) – that have dominated UK politics for the entirety of the postwar system. To the right of the Conservatives stands the Reform Party, an ethno-populist movement that is swallowing up the lion’s share of the votes being hemorrhaged by Labor and the Tories. As of this writing, with 63 of 136 councils determined, Reform has seen a net gain of 515 council seats while Labor is facing a net loss of 288 and the Conservatives a net loss of 204.

The Green Party, a left-leaning progressive movement, is also adding seats. Its leader, Zack Polanski, pronounced the two-party system “dead and buried” after the Greens won a crucial mayoral contest in Hackney, a borough in Inner London. The Greens are also expected to pick up their first constituency seats in Scotland, where the make-up of parliament is at stake with the overall winner expected to be the Scottish National Party, again displacing Labor. Similarly in Wales, the 30 year rule of Labor is set to end with just 10 or so of the 60 parliamentary seats with the national (Welsh) Plaid Cymru Party and Reform picking up much of the rest.

Relics of a Bygone Order

We decided to spend some time talking about the UK elections this week because we see this as part and parcel of the same phenomenon we were talking about last week, namely, the widespread and deep-seated disillusion being felt in so many households in so many parts of the world. Last week, you will recall, we highlighted the dismal numbers reflected in the University of Michigan household sentiment report – the lowest in 66 years’ worth of data. Well, we got the latest Michigan survey numbers this morning and they are even worse than the previous ones, for a second straight month of record lows. Dissatisfaction with the direction of consumer prices, anxiety about their future prospects and lack of trust in the country’s institutions are all in the mix. These are the same sentiments being reflected across the pond today as voters turn their back on the once-reliable two party system of an age gone by.

Here in the US we don’t have a parliamentary system, so voters aren’t able to throw their support into other parties that would have a reasonable chance to prevail in elections. In the UK, as in much of Europe, these other parties have long played a role as coalition partners when neither major party manages to win outright. But recent polls show a large and growing dissatisfaction by Americans with both of our major parties. Around 45 percent of all US voters now identify as independent, according to Gallup News. That’s the highest percentage since Gallup started gathering this data in 1988.

Defenders of this bygone relic of a system may look around them and wonder why anyone should care. Hey, we just got another respectable jobs report this morning from the BLS, with nonfarm payroll gains of 114,000 and a still-modest 4.3 percent unemployment rate. The economy is growing, companies are making scads of money and the stock market seems happy to clamber up whatever wall of worry is put in front of it. All true. But the economy still depends on people, and it depends on a stable political framework in which these people can operate. That framework increasingly appears to be under threat. Policymakers would do well to pay attention to what is happening in Hackey, and Edinburgh, and Cardiff, and figure out how to solve some of the things that are manifestly on the minds of the citizens they serve.

In the wonderful world of economic analysis we have hard data and soft data. These two things have been at odds with each other for some time, keeping those who try to supply insights and explanations about the data, ourselves included, asking why. We will try to come up with some answers as we delve into this topic today.

Let’s establish some basic definitions. By hard data we mean the numbers associated with macroeconomic performance metrics, the big three of which are arguably growth (GDP), prices for goods and services (inflation), and the availability of jobs (payrolls and the unemployment rate). Soft data, on the other hand, refers to surveys of sentiment and expectations among identifiable cohorts in the economy such as households, small businesses or multinational executives.

You could say that it’s a question of what they feel (soft data) versus what they do (hard data). Let’s look at one recent data point that has raised some eyebrows among those who follow these things. Here is the University of Michigan consumer sentiment index, with data gathered from households across the country going all the way back to 1960.

The Vibecession in Living Color

The most recent reading for the Michigan sentiment index, reflecting surveys conducted in March, has household vibes at their lowest level ever. Ever, as in lower than the 2020 pandemic. Lower than the great financial crisis of 2008. Lower than the stagflation of 1979 that led to 20 percent interest on car loans. You get the picture – lowest level in the past 66 years. When you hear financial pundit types talking about the so-called vibecession, this is what they are talking about. Now, to be clear, not every sentiment survey is quite as down-in-the-mouth as the Michigan one. According to the Conference Board’s Consumer Confidence Index, sentiment is currently about as bad as it was during the 2020 pandemic, but better than the dark days of 2008. That still gives one pause, though, given the general absence of a pandemic today.

Meanwhile in Hard Data Land

So, far though, the negative vibes are not showing up all that much in the macro hard data reports. Yesterday we got the first quarter GDP numbers, showing growth at a modest but still positive two percent (annualized) for the quarter. Consumer spending, which makes up close to 70 percent of total GDP, grew at 1.6 percent, a bit better than expected. Last week’s retail sales numbers for March also beat expectations, with headline sales up a healthy 1.7 percent. As far as jobs and inflation are concerned, they are not great and are moving in the wrong direction (unemployment and inflation both trending higher, which makes the Fed’s job in managing monetary policy very complicated). But a 3.3 percent consumer price index (CPI) and 4.3 percent unemployment rate are far, far from the most dire figures in either category. Worthy of a vibe-cooling, maybe, but not a vibecession.

There may be a simple explanation, though. Poring through levels of detail in consumer activity provides ample evidence of what economists are calling the K-shaped economy, with the bulk of spending being done by the wealthiest segment of society. To be specific: at present, according to many sources, about half of all consumer spending is coming from the top ten percent of consumers by income level.

Now, presumably when representatives of that top ten percent show up in the soft data consumer surveys, they are likely to be pretty happy with the state of things (at least as pertaining to their own material well-being). But the other 90 percent of households also feature in the surveys, and that’s where the hard-soft gap is likely to be situated. Simply put, their dissatisfaction as reflected in the Michigan survey and its ilk is more than compensated for in the hard numbers by the fact that the bulk of consumer spending is coming from elsewhere. To use a stock market analogy, you could say that the market capitalization of that top ten percent income bracket runs to half of the total market.

There may be more to it than this, and we will leave aside for now the thornier question of how sustainable this K-shaped arrangement is. But in trying to figure out what exactly is going on in this strange moment in which we are living, one has to pay attention to the hard and soft data alike.

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. thrive.systemadik.com 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. paracent.com iplax.inOwl 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. suministroshidraulicos.net duasrikandinusantara.com Anything less than the experience of 1979-80, in the world according to Jay Powell, does not merit the term “stagflation.”

akarisakura-official.comWrong 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.