Daily Commentary

MarketMinder’s View: As highlighted here: “US inflation jumped to an annual 3.8 per cent in April, while average hourly earnings increased 3.6 per cent over the year, meaning prices were rising faster than earnings for the first time in two years.” This phenomenon is also occurring in the UK and eurozone, sparking concerns “that households will rein in spending, worsening the hit from the war to economic growth and forcing companies to cut jobs as demand slows.” But that isn’t all: “The other possibility is that workers will succeed in bidding up wages, fuelling persistent inflation even once energy prices fall.” History, though, shows investors can put both these fears to bed. Regarding the first, most consumer spending goes to essential goods and services, while energy makes up too small a portion of the total to prompt major cutbacks elsewhere. You do get some substitution, but it tends to be modest, mitigated by changes in driving behavior and in a handful of discretionary categories, which markets are aware of and have likely priced in. Overall spending is generally pretty stable even in recessions. As for the second, workers typically bid up wages to stay on top of living costs—otherwise they seek employment elsewhere, as Nobel economist Milton Friedman taught decades ago, debunking the wage-price spiral theory of inflation in the process. Wages always follow inflation. They never lead it, for this reason. And since wages are an aftereffect of inflation, they don’t drive it, which conveniently resolves the second issue, too. As Friedman also taught, inflation is caused by too much money chasing too few goods and services. With developed market money supply growth currently running at prepandemic rates—when inflation wasn’t a problem—it isn’t about to runaway today (one-off energy spikes notwithstanding, as attendant cutbacks elsewhere depress prices in those areas).

MarketMinder’s View: Although a US-Iran deal could unlock the Strait of Hormuz and “return large amounts of [oil] barrels to the market,” our interest here is the longer-term focus, which markets care more about. The article notes that “There are already efforts to at least somewhat ease the strait's importance by building pipelines to bypass it. The United Arab Emirates said in mid-May that it's speeding construction of a major pipeline that will double its export capacity through the port of Fujairah.” Meanwhile, regarding US oil production: “Higher prices are likely to encourage producers to boost their output as they see opportunities from a market that went from soft to tight. Before the war, the U.S. Energy Information Administration projected domestic production dipping from 13.6 million barrels per day this year to 13.3 million barrels per day in 2027. Its latest outlook, in mid-May, now sees production rising to 14.1 million next year. Publicly listed U.S. shale producers have increased 2026 capital spending plans by $490 million compared to pre-war guidance, the energy research and consulting firm Enverus tells the FT.” So regardless of how peace negotiations go, the titular emerging “new oil order” looks more stable than the one it is replacing—a better outcome than many feared just a few months ago. For more, please see Fisher Investments founder and Executive Chairman Ken Fisher’s recent column, “How to Think About the Iran War—and What It Means for Oil and Stocks.”

MarketMinder’s View: There is a whole lot of political bias in this piece, so we remind you MarketMinder doesn’t play favorites in politics and assesses matters solely for their potential market effects. When you strip it down to its core argument and ditch the politics, what you find is the well-chewed-over theses that America is overindebted (with a side dish of the well-digested AI bubble fear), arguing centrally that America’s political “instability” means we won’t rein in the deficit and rising debt, setting up a financial crisis. “The largest risk, at this moment, revolves around the federal government’s accumulation of debt, now in excess of 120% of the nation’s gross domestic product, a near unprecedented level. It is likely to keep on growing at a fast clip given massive built in budget deficits for the next decade.” With all due respect, fear of US debt is age-old and there is nothing particularly special about today. That figure, the debt-to-GDP ratio, is literally the only evidentiary point offered. So let us consider it. The figure presented is gross debt-to-GDP, which includes Treasurys the government owns itself. That is an accounting entry, and things that are both assets and liabilities cancel. Per Treasury and US Bureau of Economic Analysis data, net debt to GDP finished Q1 at 98.7% of GDP. It is estimated to have crossed 100% recently. Beyond that, as we have written, this comparison is faulty, comparing the accumulated national debt (which almost never falls) to the annual flow of economic activity. Uncle Sam also doesn’t pay debt interest with GDP. It uses tax revenue. If you compare debt interest to tax revenue, the ratio is at the high end of the historical range—but it sits right around where it was in the late 1980s and early 1990s. Another fun fact? China isn’t “the major player on the other side of the US’s fiscal imbalances,” whatever the heck that is supposed to mean. It has pared down its debt holdings for years with little fallout, and even the most generous estimate of its total holdings are around one-thirtieth of net debt (source: US Treasury). Look, we get it. If there was a debt crisis, banks would likely be hit because they own a lot of Treasurys. But as even this article admits, there is next to no real sign that is happening now and little sign it is very close.