Markets Weekly May 30, 2026

hello my friends today is may 30th and this is markets weekly all right so last week was a super boring week in the markets the stock market basically went up every single day doing what it's supposed to do and you have that familiar spot up volup activity showing that people are basically mobbing the market with calls this is something that we saw during the dot-com boom as well and it can go on for months but i believe inevitably and no one knows the time of the date the correction will come like a thief in the night and we'll suddenly implode and even that after that it can still continue to go up we'll find out on the geopolitical front it seemed like we're having some kind of breakthrough last weekend where the president moved away from kinetic action and toward some kind of peace agreement some kind of ceasefire memorandum of understanding but on friday after a two-hour cabinet meeting the president walked out without signing anything so we're basically right back to where we've been the past few weeks.

no one knows what's going on the straight upon moves is still closed and we still draw down on global oil stocks that puts a timer as to how long this couldn't go because once stocks are to reach some kind of minimal low level we'll see the price of oil began to spike maybe uncontrollably so today let's talk about two things first off let's talk about the data we got last week and secondly i'll talk about why i bought a lot of bonds last week and how some ways to think about a 30-year yield at five percent all right starting with the data so last week we had the second look at first quarter gdp print and it was kind of disappointing so the first look was two percent now it's looking like it was 1.6 now fourth quarter last year it was a disappointing print and that was due to the government shutdown usually what you would expect is after the government reopens we have a give back where the following quarter has a much better than expected gdp print and 1.6 percent doesn't look that way in addition to that of course you had all this ai build out that should have been goosing the print.

now one possibility could be that's because our working force population is not growing uh we have to adjust our expectations as to what a gdp print is and with fewer people joining the labor force or fewer slower population growth um maybe we should expect just uh a good gdp print to be lower than it is in the past you can see something similar happening in canada where they had two consecutive negative gdp prints a technical recession but that is in large part due to big changes in their immigration policy where they used to import millions of people a year now they're not doing that anymore if you look at the core a core measure of gdp here in the u.s though so final cell sales to private domestic consumers it's still pretty solid so it doesn't seem like the gdp print is anything to worry about.

now something people have been worrying about though is the very notable drop in the personal savings rate savings is basically just you have your income and how what fraction event do you save now you can see that the saving rate has been trending down notably low there's a couple stories that could explain this one of course is the tremendous tremendous wealth effect let's say that you're making a hundred thousand dollars a year but your nvita stock went up say millions then of course you'll be comfortable spending much more than you usually are would simply because you have a lot more wealth so you sell your nvidia stock and you consume that instead of just financing your purchases out of your income so that could naturally lead to a lower savings rate for those who benefited from the wealth boom on the lower part of the k.

you can also have a story where because there's a sudden rise in gas prices in order to maintain the same standard of living you're going to have to spend more money on gas and that naturally means that you're going to save less money so that is also something that lends to a lower savings rate if you look at this credit card data from the wall street journal you can see that across income cohorts there does seem to be an increase in a financial stress even among those who are well off because it could be just a spending problem and so forth so it does seem like it could be a combination of both high wealth and also higher inflation in these essential things like energy that could be pushing down the savings rate.

the last data point that i thought was meaningful was of course the all-important pce pce of course is the is the fed's preferred measure of inflation so pc right now is basically four percent as a reminder the fed targets four percent up sorry two percent headline pc and four percent is double that and if you look at the trend over the past few months it's been taking higher and higher now fed speak over the past week has shown that there is a broader audience of fed officials who are open to having a more hawkish stance so that doesn't mean that they're openly advocating for rate hikes but it does mean that they are comfortable holding rates where they are for an extended period of time remember before the iran war the market was solidly pricing in a rate cut cycle at the moment the right market is pricing in one hike next year that has moderated a bit due to the decline in oil prices the trajectory of monetary policy is going to be continued to be heavily reliant upon developments in the middle east and maybe the equity market as well if we do have a significant decline in equity prices the market would price in rate cuts.

all right the second thing i want to talk about is the third year bond yields now if you look at this chart you can see that globally the 30-year bond yields have been going higher in the us in the uk in germany and so forth and that's after basically a multi multi-decade bull market where yields just seem like they continue to decline so in thinking about this um i guess let's talk about how some conventional frameworks to think about 30-year yields now typically when we think about yields we think about yields first and foremost as the expected path of monetary policy now that works really well for most of the curve but it works less well for the 30-year bond simply because no one has any idea what the trajectory of monetary policy would be over 30 years for let's say within 10 years you had liquid silver futures so you can easily trade that to have it until to have an idea of what market participants are thinking but beyond that it becomes basically a lot more guesswork and not really not really um well traded.

so supply and demand becomes a much bigger factor in determining longer term assets like um like the third year bond so on the supply side it's it's very clear but because the u.s fiscal deficit is six percent of gdp and maybe uh will be that way for the foreseeable future you're going to have an ongoing supply of 30-year bonds now the tragedy tries to minimize its impact uh on the long end by shifting issuance mostly towards the belly of the curve where there's a lot of appetite but at the end of the day it continues to issue more and more third-year bonds as time goes on now just simple adjustments in supply can have pretty big impacts on the long bond you saw in japan for example when their 40-year was getting a bit out of control the ministry of finance talked about reducing issuance and that had a very immediate and very strong impact on lowering longer dated yields.

on the demand side though you can also see that there's going to be less demand for long dated treasuries going to the future so one way to think about long dated treasuries is simply as an interest rate management tool so if you are a pension fund or life insurance fund you have a lot of liabilities that are far into the future so let's say that you have you have to pay life insurance and someone's going to live 20 or 30 years so that's a long dated liability in order to hedge that though one of the things that makes sense to you is to have a long dated asset and naturally that's a 30-year treasury right so you buy 30-year treasuries to hedge your elongated uh liabilities now one thing that's happening demographically is that the global population is both aging and shrinking so you have this very large boomer cohort but they're already advanced in age they're not going to live another 20 or 30 years right and the cohort beneath them is smaller right smaller so if you have a smaller cohort say in their 20s or 30s than compared to in the past then that means that these insurance companies these uh pension funds they're not going to have as much longer dated liabilities they need to hedge with longer dated assets and that suggests lower demand for long dated assets like the third year treasury and so you can have this easy mismatch between supply and demand that can push yields higher.

now to be clear the entire curve shifted higher so the trajectory of monetary policy is having an impact as well now another thing to think about 30 year olds is of course through the lens of inflation right growth and inflation so before we get to what the trajectory of growth and inflation will be in the future it's it's helpful to think about where we have been how do we get here right so how do we get this huge huge rally in the bond market where we have this secular decline in interest rates now one very clear candidate of course. is the china shock so if you see from this chart here you can see that since china joined the wto basically hundreds of millions of people join the labor force and with hundreds of millions of people joining labor force that increases the supply of labor and in china they have a very strong industrial policy to be able to try to manufacture more stuff so the supply of goods increased massively as china joined the wto and that was a huge tailwind to getting inflation under control increased supply of goods meant goods deflation and over the past few decades a big driver of low inflation has been consistent goods deflation and even today the dominance of chinese manufacturing actually continues to increase and china has steadily moved up the value ladder where now they're producing things like electric cars cutting edge batteries and of course hypersonic missiles.

so that looks like something that will continue when it looks like their manufacturing technique has improved such that you even have these what they call lights out factories where it's totally automated such that there are no humans so that you don't even need to have the lights on and if you look at this chart of growth in trade with china you can see that over the past few decades this has actually led to very strong dominance in global trade and that dominance i would say is a form of geopolitical power so although the u.s dominates in their financial system and stuff like that at the end of the day what people consume are goods and services and you know being able to get that medication or being able to get those rare earths is going to be a lot more important to people than i think just numbers in their computer screen so anyway that was a big trend in causing disinflation um another popular trend of course is uh what you see here from um professor goodart and uh his co-author someone whose name i have trouble pronouncing also have this very good book noting that the increase in supply and labor by women joining the labor force also had a really big disinflationary impulse again more labor more people are joining the workforce more supply of goods and services that obviously has a disinflationary impact.

now looking forward though how do we think about the future trajectory of inflation now that obviously is is very very difficult now on the one hand professor goodhart again tells you in a very compelling way that aging demographics is inflationary now there was some debate among economists about this mostly because some people misunderstood the difference between the real and the financial the thinking is that their thinking was that aging populations would actually be deflationary pointing to japan which had an old population consistent deflation because when you are an aging population you don't consume as much and also you save more right so but that misunderstands that when you save you save in financial assets bank deposits and you need to convert those to actually real goods and services right because that's what you consume if you are saving in bags of rice then yes higher savings would imply deflation later on because well you're just going to consume the bags of rice that you saved but what you actually save is just numbers in a computer screen and you have to go out and buy rice and other services and in the future as that demand is persistent you continue to have demand from your savings but there are a few people working because people mostly people are more people are retired that creates a mismatch between demand and supply of goods and services and pushes up inflation that was good arts theory.

and as we look at japan today i think it's accepted wisdom that that is actually the correct interpretation with even governor waydo having a very memorable graph i think last year at jackson hole showing that um the lack of labor in japan labor supply in japan is pushing up wages and is going to be a secular inflationary force so looking at demographics it's obviously an inflationary trend looking at that alone looking at the fiscal deficit obviously an inflationary trend again you continue to have um constant spending some could even say some kind of sovereign debt crises although as we all know that's nothing the printer can't fix could have side effects on inflation but you wouldn't get that looking at yields you get that with inflation so looking at these secular trends how do you think about inflation.

going forward into the future it's actually really hard to say and um something that I don't actually try to guess what I do think though would happen is that you can also think about the 30-year bond as basically a trading instrument as to the stance of monetary policy now when you look at the dot-com boom it was actually really difficult shorting the dot-com boom uh because you would short it and it would go down and then it would go right back up and sometimes you the booms could be violent so even if you were um even if you had plenty of margin you could still be just pushed out even though the broader trend was still lower.

but what was very reliable at that time was um bonds so as the equity market declined the fed became concerned because of course you know financial conditions tightening and whatnot and that did eventually lead into a recession as so much paper wealth evaporated so you had steady string of rate cuts and that basically meant that if you were holding fixed income even a third-year bond which is you know far in the future and has big supply and demand impacts um you also benefit a lot from that and so that actually turned out to be a much safer play on the dot-com bubble busting so at five percent third-year yield you'd be collecting five percent and should the bubble burst and you have just a rate cutting cycle it doesn't mean that we're going down to zero it could just mean a few cuts say to below neutral which commonly people think of as below three percent you would have significant capital appreciation on something that is of such long duration.

now none of this is trading or investment advice but that's just kind of how i think about uh the 30-year bond again there are many lenses to think about this but this is just one of them in this aspect when you're just thinking of it as a trading instrument you don't really have to think about the future of growth and inflation blah blah blah no one knows for for for all we know we could have massive deflation from the ai revolution which is also a potential scenario but since no one knows it's probably more useful to just look at this as a as a way in light of your liabilities and maybe as a trading instrument all right so that's all i prepared for today thanks so much for tuning in next week it looks like um more of the same we'll find out talk to you guys next week.