During the 1990s, the 10-year Treasury rate averaged 6.6%. During the 1980s, it averaged 10.6%. Those were both prosperous decades with strong growth and improving living standards.

What’s different now, however, is the US government runs massive annual deficits topping $2 trillion, with a national debt of more than $40 trillion. That means small changes in interest rates can have large effects on the US government’s finances. At some point, it could become difficult to manage, with the government’s interest costs skyrocketing and little money left for anything else.

“A renewed focus on deficits is warranted given the rise in rates,” Bank of America economists wrote in a Sept. 4 research note. “The fiscal challenge is increasingly about interest expense, which now exceeds spending on both defense and Medicare and is still rising. The biggest long-run risk is a feedback loop in which higher rates raise deficits, larger deficits increase Treasury supply, and higher term premiums push borrowing costs even higher.”

[The Weekly WTF: Interest rates befuddle business genius]

Two charts convey the problem. The first shows the annual interest payments on outstanding federal debt. The figure crept upward from $331 billion in 2001 to $521 billion in 2020. But then interest payments mushroomed, rising to almost $1.2 trillion in 2025. The Congressional Budget Office estimates interest payments will hit around $1.3 trillion in 2026.

Read more

But if your goal is to build wealth—regardless of the form—there’s powerful evidence that stocks are the way to go. Financial assets are far more liquid than real estate. You can buy small amounts without saving up for a five-figure down payment. You don’t need to take out a loan to buy stocks (and you shouldn’t!)

But most of all, the return on stocks during the last 35 years has obliterated the return on real estate.

In 1990, Americans held more than three times as much wealth in real estate than in stocks. The old adage was true: For most families, their home was their biggest asset.

The amount of financial wealth almost caught up during the dot-com boom of the 1990s. But the dot-com bust corrected that. A long rally in stocks began in 2009, at the nadir of the Great Recession, and stock wealth surpassed real-estate wealth for the first time in 2021. Today, Americans hold $55.1 trillion in stocks, compared with $48.7 trillion worth of homes and other properties, according to Federal Reserve data.

[What the bond market wants you to know]

An important statistical note: That stock-market wealth doesn’t include retirement plans such as IRAs and 401(k) plans or stocks held by traditional pension plans. It’s just the amount people hold in individual shares, mutual funds and exchange-traded funds at brokerage firms. Adding stocks held in retirement plans pushes the amount of financial wealth substantially higher.

The case for stocks is even more stark when looking at appreciation. Since 1990, the median sales price of a home in the United States has risen from $123,900 to $410,700, according to Census Dept. data. That’s a nifty 231% gain.

But stocks have vastly outperformed that. The S&P 500 stock index has risen from 334 at the beginning of 1990 to 7,600 in 2026. That’s a 2,178% gain since the beginning of 1990, or 9.4 times the return on real estate. And that does not include reinvested dividends.

Read more

The second is a recent Foreign Policy article by Stephen Walt that ponders “why the United States keeps losing wars.” We don’t lose every war. But we seem to be losing President Trump’s war against Iran. The Iraq incursion that began in 2003 certainly wasn’t a win. And the Afghanistan war that began in 2001 ended ignominiously in 2021, with the Taliban regaining control of the country. The connective thread is that these are wars of choice for America, but they are wars of survival for perceived foes we try to impose our will on. They have more at stake than we do and therefore the will to tough it out longer. Meanwhile, we squander blood and treasure.

If America is facing a comeuppance, we probably deserve it. As a nation, we’ve been fiscally irresponsible for 25 years, spending money we didn’t have and racking up $40 trillion in debt. Trump didn’t cause every current problem, but his petulance toward friends and foes alike is fitting. We’re a spoiled rich kid who’s grown up to be entitled and bossy.

Most of this doesn’t matter to ordinary Americans right now. Investors are fixated on a restless bond market that seems to be signaling that America’s debt binge is entering the danger zone. But if you need a loan for a house or a car, you can easily get it, at interest rates that are still lower than historical averages.

[The Weekly WTF: Operation Economic Nothingburger]

Unemployment is low. Whatever is going on in the bond market, it isn’t causing mass layoffs. And rising interest rates don’t seem to bother the stock market, which is close to record highs. Most Americans don’t live off investment gains, but many have 401(k) retirement plans that have gotten a lot cushier during the last three years.

So the public carps about the elevated cost of gasoline and hamburger. The bond market isn’t their problem. But it might be their problem the next time there’s a recession. And there will be another recession.

Read more

Sorkin frames his book as a warning for those who forget the past, or fail to ever study it. He chides those who believe “this time is different.” His point is that greed is irrepressible, universal, and timeless, and will always find a way to bilk the system and endanger it.

It’s an apt moment to ponder greed, financial manias, and human folly. The stock market has been on a tear for nearly three years, enriching millions lucky enough to own stocks. President Trump wields a deregulatory axe, slashing rules meant to protect consumers and keep businesses honest.

[What the bond market wants you to know]

Trump also sets a personal example of rapacious greed by operating a pay-to-play presidency in which patronizing his businesses helps the rich and powerful get favorable treatment. His family’s crypto firm ran a de-facto pump-and-dump scheme to capitalize on the impression that Trump, as president, would send crypto to the moon. Gullible buyers lost billions. He now plans to open a bank that will allow institutions to pay hefty fees as tribute to the king.

Sorkin wants his readers to feel a sense of alarm at the way modern markets operate. Yet revisiting the stock-market crash of 1929 made me appreciate everything we’ve done to improve the financial system and prevent disaster. In the aftermath of the crash, reforms addressed many abuses that were legal in the 1920s but no longer are. Nearly 100 years later, the record of those reforms is remarkably solid. In a way, it’s amazing what we get away with today, because the system protects us against our own profligacy.

Sorkin’s book is a reminder that the most astonishing thing about the 1920s is what was legal. Shrewd investors routinely formed pools and trusts explicitly to manipulate stock prices. They’d quietly buy certain stocks in coordinated fashion, driving the price up. Then a leak would appear in the press, touting the hot stock, as if it could only go up. Ordinary Joes would start buying, sending the price even higher. Then the smart money would sell, locking in profits, which would tank the stock and leave the little guy with losses. Again: That was legal.

[The Weekly WTF: $40 trillion in the hole]

Insider trading was also legal. Investment banks sold stocks to politicians and favored customers at below-market prices, generating instant profits. Stock speculation was all the rage and banks encouraged their customers to get in on it. Just about anybody could start a local bank, with few regulations meant to assure solvency.

It’s still hard to say definitively what caused the 1929 market crash, or the depression that followed. But financial markets in the 1920s were a carnival of deception and fraud. Some sort of comedown was inevitable. The failure of 9,000 banks during the next five years amplified the pain, and foolish policies such as the Smoot-Hawley Tariff Act of 1930 made a bad situation worse.

What does this tell us about today? It’s self-evident that many reforms of the 1930s reined in fraud and shored up the banking system. Insider trading and stock manipulation are now illegal. Federal agencies now regulate and insure banks, oversee stock trading, and prosecute offenders. Abuses still happen—and will always happen—but there’s a general sense of confidence that rules and laws govern US financial markets and keep the banking system stable.

[A Subaru capitalist takes on the “Subaru Socialists”]

We tested all this during the market crash in 2008, when the failure of Lehman Brothers triggered a run on institutional banks. That was driven by widespread speculation in the housing market, similar to the stock speculation of the 1920s. Fraudsters exploited loopholes and fools took the bait they dangled, on a massive scale. It took aggressive federal intervention, including unprecedented action by the Federal Reserve, to stabilize the system. A nasty recession ensued, but safeguards built during the prior 80 years prevented a depression and saved humanity from its own gaping flaws.

We put new protections in place after the 2008 crash to prevent those particular problems from recurring. So are we perfectly safe now? Of course not. But the next war never looks quite like the last one, and our ability to screw up evolves just as technological progress evolves.

The problem we have today is that we take our safeguards for granted, which you might characterize as excessive moral hazard. There’s so much safety in the system that it enables dumb decisions. It’s one reason the US national debt has ballooned to $40 trillion and is certainly going higher.

The Fed and the Treasury could probably manipulate inflation or interest rates, or both, as a way of reducing the size of the debt relative to the economy. That kind of federal power was unimaginable in 1929. The markets know it, one reason investors have been willing to lend the US government so much money in the first place.

[Trump’s biggest grift yet]

The Fed has kept long-term interest rates artificially low since 2009, a form of monetary stimulus known as part of the “Fed put.” It’s a powerful pushback against market discipline that keeps rates lower, stock prices higher, and the economy rosier than if the Fed stayed on the sidelines. The Fed has tried to unwind this unusual form of stimulus, but at a snail’s pace that has basically left an emergency measure intact nearly 20 years after the emergency.

Maybe we can do this forever, with no downside. But we might just be delaying the point at which we need to address fundamental problems, such as the national debt. And the ability to delay means the problem will be far worse once we address it than if market forces compelled us to deal with it earlier.

Other safeguards make the economy stable enough to withstand Trump’s ridiculous tariffs and his foolish protectionism, which raise costs on everybody and reduce growth. One of the most prominent lessons of the Great Depression was the disastrous effect tariffs can have when overused. Trump is blundering into the same trap, and getting away with it, because of rigorous efforts to stupid-proof the economy under many of his predecessors.

[The myth of the prosperous worker]

Trump is also trying to manipulate the Fed into goosing the economy even more, as if there will never be a price to pay, at least not under his watch. The Treasury Dept. recently got into the act, announcing plans to manipulate the bond market to bring long-term rates down. There’s even a proposal to reduce the reporting requirement for public companies from quarterly to semi-annual. There’s no obvious problem with quarterly reporting, except that it’s more of a bother for companies than doing it less frequently.

Our system is showing it can withstand boneheaded mistakes, one at a time. But there could be a breaking point at which the combined weight of needless, man-made strains causes fractures. We’re stress-testing the safeguards built during the last century.

This time is different, but with the same overconfidence and self-interest that have always tripped us up.

Enjoy a cartoon.

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Jim writes frequently about the Federal Reserve, which is in a state of flux under new Chair Kevin Warsh, who took over the central bank in May. Warsh has appointed five task forces to review the way the Fed does business and suggest reforms. One issue under review is whether the central bank should continue to offer “forward guidance” that lays out its future plans on the direction of interest rates and other matters.

Warsh has argued for doing away with forward guidance. Jim generally agrees. Others think the Fed should continue telegraphing its moves, to prevent misunderstandings. This will be a topic of much debate in coming weeks and months as the Fed makes some crucial decisions about the path of inflation and interest rates. The task forces are due to report back at the end of the year, and changes could follow in 2027.

[What the bond market wants you to know]

Here’s a short discussion with Jim on forward guidance. Takeaways follow. My full chat with Jim at Camp Kotok, including some additional discussion about the Fed and the broader economy, is at the end.

• The Fed wasn’t always so chatty about what it might do in the future. Famed Fed Chair Alan Greenspan, who ran the Fed from 1987 to 2006, was notoriously opaque in his public statements, to avoid having any effect at all on markets. That was the custom at the Fed for most of its history.

• The Great Recession changed things. The Fed started to become more transparent during the Great Recession in 2008 and 2009, under Chair Ben Bernanke. The Fed enacted massive amounts of complex monetary stimulus during that crisis, to prevent a recession from becoming a depression. Much of it happened with little public awareness. Bernanke argued that the public should have a better idea of what the Fed is doing when it’s pulling multiple levers. He still insists that providing a public roadmap of the Fed’s likely actions can have a powerful impact that helps stabilize markets in a crisis.

[The Weekly WTF: $40 billion in the hole]

• The press conference era dawned in 2011. The Fed, under Bernanke, began to hold press conferences four times a year, after four of its eight regular policymaking meetings. Until then, the Fed chair mainly communicated to the public through Congressional testimony and infrequent media appearances. In 2019, under Chair Jerome Powell, the Fed started holding press conferences after each of its eight regular annual meetings.

• The “dot plot” arrived in 2012. This is a graphical representation of where 19 top Fed officials think interest rates will go during the next few years. It has become an integral part of the Fed’s forward guidance.

• The Fed now bombards investors with information. Every press conference these days generates forensic analysis of the dot plot and the exact phrasing the Fed chair uses to describe the economy and the Fed’s outlook. Traders use AI to identify the slightest change in the outlook or the verbiage and spot trading opportunities. Markets sometimes surge or plunge the second the Fed chair says something unexpected.

[A Subaru capitalist takes on the “Subaru Socialists”]

• One problem with forward guidance is that it boxes the Fed in. When the Fed provides guidance, “the market takes it as a promise,” Jim says. Then, if the situation changes and the bank changes tack, “the Fed is kind of stuck.” Investors may trust the Fed less, and the Fed, in turn, may be reluctant to make changes it hasn’t telegraphed. That can distort decision-making both at the Fed and in the markets.

• Markets will adapt. What will markets do if there’s less Fed guidance? “The market’s made up of very competent people,” Jim says. “Let them figure it out on their own.”

Here’s my full interview with Jim:

The global bond market encompasses $160 trillion in debt that investors trade every day. The bond market is a better indicator of economic trends than the stock market, which is subject to bubbles and abrupt selloffs. And the bond market is beginning to signal that governments and corporations are issuing too much debt, at a time when inflations risks are uncomfortably high.

A brief bit of history provides helpful context. The Federal Reserve intervened in bond markets during the Great Recession in 2008, buying several trillion dollars’ worth of bonds in order to force long-term interest rates down. It worked, and probably prevented a nasty recession from being worse. The Fed did something similar during the Covid pandemic in 2020. That drove rates on loans such as mortgages to all-time lows.

Read more

When Trump took office in 2025, his Treasury Secretary, Scott Bessent, laid out a “3-3-3 plan” for rejuvenating the economy. The three threes stood for:

• Pushing real GDP growth to 3%

• Cutting the annual federal deficit to 3% of GDP

• Pumping an additional 3 million barrels of oil per day

Those were stretch goals nobody expected Trump and Bessent to hit any time soon. But progress toward those goals would be an accomplishment in itself. Stronger growth would make more Americans better off and bring in more tax revenue to help lower the annual deficits in the federal budget. More oil production would mean lower energy prices and a stronger hand for the United States in global energy markets.

[Check out our archive of cartoons, courtsey of CartoonStock]

A year and a half into Trump’s term, those targets seem further out of reach than ever. And Trump’s own policies are partly to blame. Let’s take them one at a time.

GDP growth. During Joe Biden’s last year in office, 2024, real GDP growth adjusted for inflation was 2.4%. GDP growth fell to 2% in 2025 and the latest data shows the economy growing at just 1.5% on an annualized basis. Growth has gotten weaker under Trump, not stronger.

Deficits. Bad news here, too. In Biden’s last year, the annual deficit was 6.2% of GDP. That dropped to 5.8% of GDP in Trump’s first year, but the Congressional Budget Office estimates it will be back to 6.2% in 2026. CBO expects that number to drift higher, indefinitely.

Read more

Bank of America got some attention recently with research suggesting the gap between economy’s upper K—the shareholder class— and the lower K—working-class Americans—is narrowing. BofA cites credit card data showing that spending during the last few months has been rising faster among lower-income Americans than among higher-income shoppers. Larger refunds from last year’s tax-cut law might be one reason. People who change jobs are also getting bigger pay raises than they typically do.

The bank calls this “the great convergence,” a theme the media, always looking for a fresh storyline, is dutifully picking up. Axios, for instance, recently announced the “closing” of the K-shaped gap. Treasury Secretary Scott Bessent, eager for any good news that might offset the dreary and never-ending Iran war, went a step further, declaring that the K-shaped economy is “over.”

Sorry. Not buying it.

Read more

The national debt will hit $40 trillion sometime in September, and many economists think it is finally starting to force interest rates higher. That would be one of the first manifestations of a debt crisis. Here’s the video with Jim’s take. Bullet points follow.

Slowly, then suddenly. Jim describes the US debt situation by paraphrasing Hemingway: “How does one go bankrupt? Slowly, then suddenly. We are in the slowly camp.”

Why slow? Markets are absorbing all the debt the Treasury issues these days without much trouble. That’s happening as artificial-intelligence “hyperscalers” are also issuing tons of debt to help finance the AI buildout. That debt competes with government securities for buyers. “The bond market is more concerned about borrowing from hyperscalers,” Jim said during a separate panel at the Kotok event. That hyperscaler borrowing will total at least $1.2 trillion during the next couple of years.

[The gigantic national debt is starting to matter]

What could speed up a debt crisis? “It could be the next recession,” Jim said during the panel. “The bond market might say, fine, you need to do more borrowing, you’re going to have to do it at sky-high interest rates.” The government typically borrows more during recessions to enact fiscal stimulus as a means of combating the downturn. But if that triggers substantially higher rates on business and consumer loans, it could make a recession worse.

The Liz Truss moment. There’s a template for upshifting from a slow to a sudden crisis: The 2022 UK bond crisis. In September of that year, Prime Minister Liz Truss’s government announced a set of tax cuts that would have pushed government debt substantially higher. Long-term interest rates spiked to unacceptable levels, forcing Truss to abandon the plan. It was a fiasco and Truss resigned after just 49 days in the job, the shortest tenure of any British PM.

What other major event happened in the UK around that time? Jim quizzed me. I didn’t know the answer. Watch the video to see if you can get it right.

Here’s my full interview with Jim:

But maybe it’s not that surprising. When the July report hit I was at Camp Kotok in eastern Maine, an annual gathering of financiers, economists and other interesting people. One of the regular attendees is Jim Bianco, president of Bianco Research in Chicago. Jim is a keen market observer and he spent some time talking with me on camera about the jobs report and a few other trendy topics in finance.

Jim explained how the labor market is changing, and how we need to change our own expectations as a result. The upshot is that job growth is probably slowing permanently—and it may not be as bad as it sounds. Jim’s remarks on the job market follow, with some bullet points below. You can see my full interview with Jim at the bottom.

Population growth is the underlying issue. The US birth rate has been slowing for years. We’ve maintained population growth through immigration—until Trump put a stop to that. Lower population growth means we can keep the unemployment rate low with fewer jobs. That’s what seems to be happening.

[David Kotok vents: “The lousy, stinking politicians”]

Lower for longer. Until recently, economists thought we needed about 100,000 new jobs per month to keep the unemployment rate steady. But now, it might take 35,000 jobs or fewer. We’ve been meeting that lower target on average, even with the loss of jobs in July.

The July job losses kinda make sense. “If you look at why it went down, there was 50,000 jobs subtracted from government and from leisure and hospitality,” Jim explains. “That is, restated: Summer school ended, and a bunch of teachers stopped working, and the World Cup ended, and a bunch of hospitality workers, their jobs ended.”

There were positive signs, too. The construction, manufacturing, and tech sectors added jobs in July. Part of that is the artificial-intelligence buildout, including data-center construction. “Remember we were all going to lose our jobs to AI,” Jim says. “That actually had very good gains for the month.”

Unemployment went down. It dropped from 4.2% to 4.1%, the lowest level in 14 months. The U-rate measures unemployed workers as a portion of the labor force, and with the labor force contracting, the U-rate can go down even if there’s a loss of jobs. Jim thinks that’s more or less okay. “If we weren’t producing enough jobs, the unemployment rate would be going up,” he says.

Feel better? 🤔

Here’s my full interview with Jim, conducted August 9 on the deck at Leen’s Lodge, on the shores of West Grand Lake.

If you don’t know David, the video will give you a sense of the passion and humor that make him a people magnet. If you do know David, you’ve probably heard all this before, but you’ll enjoy hearing it again, anyway. 😊

Hummingbird alert: Just before I started recording, Scott Weeks, proprietor of Leen’s Lodge, where the event takes place every year, cleaned and refilled two hummingbird feeders at the railing of the deck at the back of the lodge. Several hummingbirds showed up right away. You’ll see them flitting in the background starting around the 2:20 mark. As I was filming, I wasn’t sure the hummingbirds would appear in the video, so I cut away for a moment to see if I could capture them more clearly. But they show up just fine, buzzing and darting right behind David as he talks. Maine is pretty cool.

Here’s the video, which I conducted on August 9. A few bullet points follow.

Washington stinks. There seems to be near-consensus on that among Camp Kotok attendees. “These are money people, they’re in the investment class,” David says. “They are harsh on the budgetary, fiscal policy to the point where three-quarters of the people now are talking about how the creditworthiness of the United States is deteriorating because of policy. And the finger-pointing at the lousy, stinking politicians is repeated and repeated by Democrats, Republicans, Independents.”

Hegseth is awful. I already wrote about the disdain for Defense Secretary Pete Hegseth. David piled on. “Hegseth is like the plague,” he says.

The biggest AI concern. At the financial level, the unanswered question is where the return on a gigantic amount of investment will come from. “Nobody can answer the financial question,” David says. “Where do you get the revenue for a long stream to amortize trillions of capital investment? That stumped the group on AI.”

[Notes from Camp Kotok: 10 ways to exploit AI]

Trump’s deportations are business-negative. “We have the shock of losing a million originally legal working people who now are not here,” David says. “What happens to those jobs? This has an impact on both business and finance. That’s a subject we may discuss next year.”

“He’s a farce,” I said. “Is there some way to withhold this money until there’s somebody better in the job?”

“Hegseth is one of the least effective secretaries of defense I’ve seen,” defense analyst Byron Callan of Capital Alpha Partners, one of the panelists, concurred. “His interactions with Congress tend to be toxic. His inability or unwillingness to communicate information to Congress is a detriment to getting things done.”

As Callan was answering, another Camp Kotok attendee texted to say thanks for asking the question the way I did. Then after the panel, David Kotok, patron saint of Camp Kotok, reminded me of a survey of camp attendees, asking their views of certain Trump Cabinet members.

[Notes from Camp Kotok: 10 ways to exploit AI]

The question listed five Cabinet secretaries with three possible answers. Should the Cabinet official should stay or be replaced? “Not sure” was also a choice.

Here are the stay/replace results (with “not sure” omitted):

Pete Hegseth:

Stay: 3

Replace: 26

Health Secretary Robert F. Kennedy, Jr.:

Stay: 6

Replace: 23

Commerce Secretary Howard Lutnick:

Stay: 5

Replace: 26

Treasury Secretary Scott Bessent:

Stay: 21

Replace: 10

Secretary of State Marco Rubio:

Stay: 24

Replace: 7

Since these shareholder-class people sound so anti-Trump, they must be bleeding heart lefties, right?

I asked David to clarify. “Does this group lean left?” he said. “Decidedly not. Politically, this group is center right. This is not an AOC crowd. It’s a fiscally conservative group and only three people would have Hegseth stay.”

[Notes from Camp Kotok: Why the AI boom is just getting started]

Jim Bianco of Bianco Research, another panelist leading the national security discussion, told me afterward that Deputy Defense Secretary Stephen Feinberg would probably be a much better steward of a trillion-dollar budget and the careful decision-making needed to transform the US military for the drone era. As the former CEO of private-equity firm Cerberus, Feinberg is deeply experienced at running large organizations. “Plus he’s a billionaire,” Bianco pointed out. “Trump obviously loves billionaires.”

But Hegseth and Feinberg seem to be feuding. Recent reporting suggests Hegseth blames his deputy for a shortage of missiles and other weapons that has become an embarrassment for the Trump administration. “Hegseth is a political animal,” Callan told me. “He’d probably win a scorpion shootout with Feinberg. And losing Feinberg would be very detrimental.”

So instead of better management of the Pentagon’s massive budget, it’s possible Hegseth may vanquish the one competent person at the top of his organization and become even more unfettered. 😠

After the national-security panel ended, we all started chatting and a couple of other attendees argued that Hegseth might be bad, but at least one other Trump Cabinet official was worse: RFK Jr. We debated which job entailed greater responsibility—overseeing defense or health policy—and whether a worst-Trumper rating should be weighted to account for the gravity of the job.

Then we debated whether we should expand the Trump worst list to incompetents who have already left, such as Intelligence Director Tulsi Gabbard, former Attorney General Pam Bondi, and of course, ICE Barbie, Homeland Secretary Kristi Noem.

Conclusion: There are too many stinkers in the Trump cabinet, past, present and undoubtedly future, to single out just one as the worst.

Enjoy a cartoon.

You can order this cartoon👆 and play cartoon-themed puzzles and word games at CartoonStock.com.

Prior to the gathering, Eric Hale of Trader Oasis organized an informal survey on AI, including one open-ended question about innovative ways people use AI. Eric condensed the attendees’ responses into a top 10 list, focused on how AI can improve workflows. I particularly like numbers 4, 5, and 10. Here’s the list:

1. Help AI get to know you. Keep a file of information about yourself and what you want from AI. Run it through the agent at the start of each session. Much better than starting from zero each time.

[Eric Hale shares some AI insights👇. Short and worth your time.]

2. Make it interview you. Tell the agent to ask you questions about what you’re looking for, until you feel it has gathered enough information.

3. Confirm your request. Before submitting a query, ask the AI to restate what it thinks you’re asking for. This can clear up misunderstandings and save wasted time.

[The AI boom is just beginning]

4. Tell the AI it can disagree with you. That’s a great way to stress-test your ideas. And much better than the pointless flattery AI often delivers.

5. Red-team your thesis. Related to No. 4. If you’re submitting some kind of analysis, ask it to identify holes in your logic and make a counterargument. If you seek criticism in the privacy of your AI, it might prevent some surprises when you go public.

6. Wall the garden. You don’t always have to let AI draw information from everything on the Internet, which can produce messy results. Sometimes you might want to limit the results to sources you’ve vetted or volumes you know you can trust.

7. Triage the reading pile. If your inbox features dozens of reports every week (or day), ask AI to read them first and guide you to what might be most interesting. One differentiator might be: Tell me what is actionable.

8. Ask again, in a different way. If you get a weak answer to a query, ask again using different language. If you get wildly different answers, you might have found a weakness in the reasoning. Triple check the info or keep it out of your final work.

9. Create a morning brief. Establish a daily task such as, “tell me what happened in overnight markets.” Refine the task with details and limitations until you get the info you need.

10. Take AI on the road. While driving, ask the mobile AI agent on your phone to tell you about the town you’re passing through, nearby landmarks, or anything else that might make your trip more interesting.

BONUS

11. Know your agent. Free versions of AI agents are more likely than paid versions to use the information you provide to train other AIs, which means your information is more likely to get around. Be careful with personal info and know what the AI might do with it.

Enjoy a cartoon.

You can order this cartoon👆 and play cartoon-themed puzzles and word games at CartoonStock.com.

This is an informal gathering where discussion is off-the-record unless stipulated otherwise. I’m able to share observations.

Artificial intelligence is a main topic of conversation. We’re discussing the obvious questions: Is the remarkable AI-driven stock-market rally sustainable? What could slow it down? Where are we in the AI buildout? What could go wrong?

There seems to be a broad view that this revolution is just getting started. One person who likens it to a baseball game says we’re at the singing of the national anthem—not even in the first inning yet. Another points out that the global semiconductor industry is still relatively small, valued at less than $1 trillion. The global new vehicle market, as a comparison, is about $2.5 trillion, and the auto industry as a whole is a $4.5 trillion market if you include parts and service.

[Check out The Weekly Matterboard, where we rate the importance of the latest news]

Somebody pointed out that former Federal Reserve Chair Alan Greenspan uttered his famous remark about “irrational exuberance” in 1996. He was talking about a stock market that seemed overinflated. During the next three-and-a-half years, the S&P 500 rose another 105%. Don’t take that literally to mean we’re at the “irrational exuberance” moment of the AI boom and we’ve got another three years to party. It’s just context.

Nobody knows if the hyperscalers such as Amazon, Microsoft and Alphabet, which are spending hundreds of billions of dollars to build AI data centers and all other types of infrastructure, are going to recoup their investments. It could be years before clues emerge.

Is there an analog to the dot-com boom, which became the dot-com bust in 2000 and took 49% off the S&P 500 during a 31-month period? One difference is that many of the companies spending billions today are hugely profitable, rather than speculative startups. But the manic data-center buildout could be similar to the massive overbuild of fiber-optic networks in the late 1990s.

[See why the gigantic national debt is finally starting to matter]

At some point, data-center construction will slow, which will be a headwind for physical-infrastructure stocks such as Caterpillar, which has soared 102% during the last year. The construction aspect of AI probably will turn out to be cyclical, with slower periods when the buildout takes a breather. People refer to this as a possible “tools downturn.”

It’s an open question whether we’ll end up with a glut of data centers, with some going unused. The demand for computing power, or “compute,” in AI-speak, is so strong that there’s no sign of overcapacity, for now.

What will happen is new data centers with leading-edge chips will continually replace older data centers with lagging-edge chips. That doesn’t mean older data centers will become obsolete. There’s a lot of demand for lagging-edge chips that can handle routine tasks, or tasks that will become routine. Old chips don’t become obsolete just because new chips are better. There’s still important work they can do.

The chip industry is beginning to focus a lot more on cooling and energy efficiency, to address the problem of all the power needed to run data centers and the water needed to cool them. This brings us to Elon Musk’s bold idea to run data centers in space, where they could be powered by the sun and cooled by frigid ambient temperatures.

There is profound skepticism toward this idea. Like, it’s a non-starter. One expert says it would be easier to operate data centers at the bottom of the ocean. There are a lot of technical barriers to running data centers in space, such as radiation that could fry chips unless they’re hardened and latency lags that could make the centers unreliable.

It seems far more plausible that technological advances and possibly game-changing breakthroughs will improve the efficiency of terrestrial data centers, leaving space to the satellites. The big companies powering the AI boom have thought about all this and developed elaborate long-term strategies that are unfolding gradually. Don’t underestimate them.

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Economists have been warning for years about a debt crisis caused by too much federal borrowing. It’s finally arriving.

But it’s not a rapid cataclysm, as some may have expected. Instead, the debt crisis is unfolding slowly and almost deliberately, in plain view for everybody to see.

The first manifestation of the debt crisis is rising interest rates. There are two types of interest rates. The Federal Reserve sets very short-term interest rates, which mostly affect banks. The last time the Fed changed those rates was last December, when it lowered them slightly. That’s not where the debt crisis is showing up.

Long-term rates on mortgages, car loans, and most other consumer and business loans are set by the market. And those rates have been rising since March. That’s the warning sign.

Rates are not in a danger zone. If they were, stocks would be falling and economic worries spreading. But economists think they’re higher than they would be if the US government weren’t borrowing roughly $2 trillion every year.

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“The government is running these large deficits, and debt is so high that investors are demanding higher interest rates,” Natasha Sarin, president of Yale University’s Budget Lab, said recently. “That trickles down to the rest of the economy.”

The debt crisis is generating some weird developments. The Treasury Dept. recently helped Japan stabilize its currency, the yen, which has been falling in value against other currencies. The Treasury got involved because one way Japan could have stabilized the yen would have involved selling large amounts of Treasury securities. More supply hitting the market would have forced interest rates up.

Treasury—led by former currency trader Scott Bessent—helped Japan accomplish the maneuver using euros rather than dollars, which prevented a rise in US rates. The unusual move worked, for now. But it was an extraordinary intervention revealing deep concern in the Trump administration about rising rates and their effect on the economy.

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As everybody knows, the national debt is humongous, and due to hit $40 trillion near the end of September. Federal debt now competes for investor money with hundreds of billions of dollars worth of corporate bonds being issued by tech firms to finance the artificial-intelligence buildout. There’s always a mix of government and corporate debt in the market, but investors don’t automatically scoop up infinite amounts of it. If there’s more supply of debt than there is demand, rates have to rise to juice the return to investors and persuade them to buy.

Another complicating factor is the Iran war, because soaring energy prices have reignited inflation. When investors think future inflation is likely to be higher, they demand higher rates to lock in their money with bonds, to compensate for the eroding value of money.

So several factors are forcing rates up, not just runaway government borrowing. But rates might not be rising if there weren’t so much government debt.

Treasury has been subtly managing the problem for at least three years. Since 2023, Treasury has been issuing more short-term debt than usual to meet the government’s borrowing needs. Short-term debt is less likely than 10- and 30-year bonds to push up the interest rates consumers and businesses pay.

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In 2024, when Bessent was an advisor to presidential candidate Donald Trump, he criticized the Biden Treasury Dept. for relying too heavily on short-term debt. But Treasury has continued the practice under Trump and Bessent. Excessive short-term funding becomes risky if short-term rates suddenly rise, because the debt rolls over quickly and the government has to pay more to borrow, on short notice.

While Bessent is busy swatting rates down, nobody in Washington is dealing with the core problem, which is too much government borrowing. Everybody is responsible for the $40 trillion debt. Republicans have cut taxes without cutting spending to match. Democrats have raised social spending without raising taxes to match. Wars added several trillion dollars to the tally. Voters getting more than they’re paying for punish any elected official who dares propose benefit cuts or tax hikes.

America doesn’t need to pay off its entire $40 trillion debt. What it does need to do is reduce annual borrowing enough to stabilize the debt relative to the size of the economy. That is going to require a painful combination of benefit cuts and tax hikes, and it will entail brutal political combat.

Yet it’s doable. Budget analyst Jessica Riedl of the Tax Policy Center has drawn up a plan with “something for everyone to hate,” because it would require sacrifices by liberals and conservatives and everybody in between. There are many other such plans. Where there’s brainpower, however, there’s no political will.

So we will continue to bear the cost of too much debt. First it will be marginally higher interest rates that punish borrowers. At some point, higher rates will ding stocks, slow the economy, and maybe cause a recession. The process has begun, and it’s now up to us to decide how long to watch the water rise before we start bailing.

Is that a good thing? Probably not. Huge swings in stock prices are a mark of volatility, and certain corners of the stock market are pretty manic right now, as investors try to identify the winners and losers of the artificial-intelligence revolution.

[Pop quiz: What the biggest one-day loss of market value? Answer at the bottom.]

That narrative keeps changing, with some stocks and sectors going in and out of favor. Microsoft is a good case study in investor fickleness.

Read more

But a lot is happening with interest rates, and they affect stock values and borrowing costs for ordinary Americans. Bullet points below. Here’s the CNN clip:

• The Fed controls short-term rates that mostly affect banks. That’s important, but the Fed does not directly control long-term rates on mortgages, car loans, and most other consumer and business loans. Those have been gradually rising since the start of the Iran war in February, because the energy crisis has pushed inflation higher. When investors think future inflation will be higher, they demand higher rates of return on bonds for committing their money. That has pushed mortgage rates, for instance, from just below 6% in February to about 6.6% now. Most other borrowing rates have risen by a similar amount.

• The Fed is struggling like all the rest of us to figure out what’s going on with inflation. That’s because nobody knows when the Iran war will wind down. By the time the Fed meets again in September, oil prices could be near $70 per barrel, if a ceasefire actually holds, or as high as $110 if the war continues.

• There are other inflationary pressures, but they’re hard to suss out when a huge anomaly like a war is clouding the picture. Some electronics components, for instance, have been soaring in price, because the AI buildout has juiced demand and created shortages. But if oil prices drop, that might not be enough to warrant rate hikes.

• Stocks sank after the Fed meeting, as interest rates rose even further. The market seems to think the Fed might sit on its hands too long and let inflation get too high. But that could be a one-day knee-jerk reaction. Markets sometimes reverse themselves when big moves seem out-of-sync with actual developments. The Fed didn’t surprise anybody by keeping rates steady. So dip-buyers might decide the market reaction was overblown, creating a buying opportunity.

• Prediction markets put the odds of a small rate hike at about 55% when the Fed meets in September. Until then, earnings, war developments, and other things will drive the market.

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The very unpopular Iran war is one reason Trump’s ratings stink. But even before the war, the US economy was underperforming in ways that matter to millions of Americans.

Our Better-Off Index tracks four aspects of the economy, comparing current conditions with levels of one year ago. Including all four metrics—job and income growth, home affordability, and stock values—the Better-Off Index sits at 105.6 in July. That means a 5.6% improvement during the last 12 months. (Here’s our methodology.)

But stripping out stocks leaves the Better-Off Index at just 100.47. That means there’s been almost no improvement in job growth, income growth or home affordability. Those matter more than stock values to working-class Americans who earn most of their income from a job, rather than from investments.

This pattern has been in place for most of Trump’s second term, and it illustrates the so-called K-shaped economy. People lucky enough to own stocks, a home, and other assets are generally on the upper slant of the K, and doing very well. Their spending is keeping the economy afloat.

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People who don’t benefit from the ownership economy are generally on the lower slant of the K. Those are the folks driving confidence surveys down to recessionary levels—and taking their ire out on Trump.

Looking at each of the four metrics isolates where the problems are. Total employment has risen just 0.3% during the last year. The unemployment rate is fairly low, at 4.2%, but Trump’s tariffs, the Iran war, and the artificial-intelligence buildout have made businesses cautious about hiring.

The biggest problem is real income, adjusted for inflation. When Trump took office in January 2025, workers were regaining ground lost to inflation during the Biden years. But the energy crisis spurred by the Iran war erased that progress.

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Real income growth turned negative in April, which means inflation was rising by more than incomes. Inflation has dropped back a bit, but during the last year, real incomes have inched up by just 0.3%, with the median family barely keeping up with inflation.

Home affordability has also worsened during the last few months. In February, before Trump launched the Iran war, mortgage rates were around 6%. They’ve since risen to about 6.6%, because an inflation surge usually pushes long-term rates higher. That raises a monthly mortgage payment by about $125 per month, or $1,500 per year.

The stock market, represented by the S&P 500 index, is up 21% during the last year, from the end of June 2026 through June 2026. Stocks have been on a tear since the end of 2023, driven mainly by the artificial-intelligence buildout.

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Around 60% of Americans own stocks, so the rally has benefitted a lot of people. But most Americans hold stocks in retirement accounts that don’t help with real-time bills. And a record number of Americans are tapping retirement accounts to help cover everyday expenses, according to investing giant Vanguard.

When Trump ran for a second term in 2024, he promised lower prices and a booming economy. He hasn’t delivered either. Voters, as a result, seem even more disappointed with Trump than they were with Biden.

What’s the problem?

Five discrete forces are dragging down stocks. They might prove fleeting, or they might stick around for a while. For now, the mood is gloomy. The S&P 500 index was down slightly for the week, and it has fallen 2.5% since June 1.

Here’s what’s weighing on markets.

Read more

You can be excused for missing the news, because President Trump himself buried it. Congress passed the Road To Housing Act on June 23—but Trump never signed it. Trump held out in protest because Congress won’t pass the SAVE America Act, the election bill that would make it harder to vote. Trump called the housing bill a “big yawn,” as if it was too inconsequential for him to bother signing.

But Trump didn’t veto the bill either, and it became law on July 11 without his signature. And housing experts think Trump is completely wrong. Instead of a big yawn, the Road To Housing Act is “the most significant housing legislation in a generation,” according to the Terner Center for Housing Innovation at UC Berkeley.

Anybody trying to buy a home knows that in much of the country, lack of supply has jacked up prices. Home affordability is close to the worst levels since 2005, when the housing bubble temporarily inflated home values.

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Affordability is a combination of price levels, income levels, and mortgage rates. Economists consider homes “affordable” if the cost of a mortgage is no more than 30% of income. At the national level, it currently takes 43% of median income to cover the mortgage on a median-priced house. That’s a painful stretch for many.

The home market is now bifurcated between those who bought before the 2020 Covid pandemic and those who bought after, or are trying to. Families who bought before were able to refinance mortgages at record low mortgage rates in 2020 or 2021. That was a gift to homeowners from the Federal Reserve, which slashed rates as a form of monetary stimulus.

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Rates jumped back up starting in 2022, and they’re now nearly 4 points higher than the record lows of 2021. Owners who locked in lower rates are reluctant to sell, since they permanently lowered their housing costs. Strong demand and a shortage of homes hitting the market have pushed prices about 27% higher than they were at the start of 2020. Many would-be buyers are simply locked out.

Rentals are expensive, too, with rental affordability close to the worst levels in data going back to 2001. The index in the chart below measures median income relative to median rent, assuming rent is 30% of income. A higher number means the typical renter has more income relative to the cost of rent, and vice versa.

The biggest problem in the US housing market is that there’s not enough housing, especially new construction for lower-income workers. Local zoning restrictions make it hard to build in many areas. Builders make more money on expensive homes and are disincentivized to build cheaper units. Trump’s tariffs have raised the cost of building materials, and his immigration crackdown has hollowed out construction crews in some parts of the country.

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The Road to Housing law doesn’t contain any silver bullets, but it does include numerous measures meant to address these problems one-by-one over time.

It eases the requirements for manufactured housing and modular homes, for instance, which should make it easier and cheaper to build some of the most inexpensive structures available. New federal grants will create incentives for municipalities to ease zoning restrictions. Environmental rules will loosen, cutting some red tape for builders.

One provision that got some attention is a new limit on the institutional purchases of homes by investors who rent them out for a profit. That was a politically popular provision because it’s easy to blame fat-cat investors for gobbling up real-estate, cornering the market, and raising rents. In reality, institutional buyers don’t distort pricing all that much, and the new restriction might have a modest impact at best in areas where there’s a relatively large portion of investor-owned homes, such as Phoenix and Dallas.

The bipartisan nature of the law stands out in a political environment characterized by what seems like never-ending warfare between Republicans and Democrats. Key sponsors included progressive Democratic Sen. Elizabeth Warren of Massachusetts and Republican Sen. Tim Scott, a Trump ally. Democrats had to swallow the easing of environmental regulations, anathema to many environmentalists in their ranks. Republicans agreed to new funding for low-income housing even though the White House lobbied to get that removed.

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The law relies on the executive branch to implement many provisions, so foot-dragging by the Trump administration could neuter the law. The Urban Institute points out that at least three dozen new programs will have to be run by the Dept. of Housing and Urban Development, which endured deep staff cuts last year as part of Trump’s “DOGE” ransacking of the federal bureaucracy. “Massive staffing cuts have already limited the agency’s functions, and the bill contains no additional money for staffing and operations,” the institute says in an analysis of the law.

Trump’s lack of enthusiasm obviously suggests that his priorities are elsewhere. Trump calls the affordability crisis a “hoax” and pursues policies that push prices up, not down. He’s busy raising tariffs anew, with a fresh round of import taxes that will replace the emergency tariffs the Supreme Court killed earlier this year. The Iran war has sent gasoline prices back above $4 per gallon and pushed many other prices higher.

All this is happening with the midterm elections less than four months away, and Trump’s fellow Republicans fearing a wipeout. Any other president would be taking credit for trying to get housing costs down. If the legislation ever works, maybe he’ll become a believer.

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