Any investor with a knowledge of history recognizes that our current situation of “global crises” is relatively mild. Apart from theoretical potential existential threats (global warming, nuclear war) conditions are pretty calm despite a few localized problems that affect supply chains and impact inflation.
Let’s avoid “recency bias” but also realize that the equilibrium has shifted, perhaps medium to long-term. Of course, the METAR is a short-term forecast.
How to Invest When the Global Crises Never Stop
In a world of wars, trade wars and crop failures, bond yields need to be higher than they were because they offer so much less protection than they used to
By James Mackintosh, The Wall Street Journal, July 11, 2026
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The basic problem is the return of superpower conflict and the withdrawal of the U.S. as the world’s policeman, exacerbated by more frequent extreme weather events due to global warming. Combine that with toxic dog-eat-dog politics threatening trade, and investors and policymakers are bracing for bigger and more frequent shocks to the economy…
In the old investment paradigm, government bonds acted as shock absorbers, with prices rising and yields falling when the economy takes a hit.
But in a world where the shocks cause inflation, bond prices fall and yields rise when bad stuff happens. That is particularly true when government debt levels are so high…
At the moment I like government bonds as protection against a major fall in stocks if traders turn sour on artificial intelligence. A big drop would be a much more traditional type of shock, slowing the economy, slowing inflation and making the solid yield of Treasurys look attractive.
But in a world of wars, trade wars and crop failures, bond yields need to be higher than they were because they offer so much less protection than they used to. [end quote]
The chart shows that between 2000 and 2020, the S&P 500 had a strong correlation with bond yields. Since bond prices fall when bond yields rise, this is the same as saying that bond prices rose when the SPX fell and vice versa. This tended to stabilize the swings in a mixed portfolio.
Inflation was low between 2000-2020. After 2008, the Federal Reserve actively suppressed Treasury yields by buying Treasuries. At the same time, countries with large trade surpluses with the U.S. (China, Japan) were buying Treasuries with dollars to suppress their own currencies. That price-insensitive buying suppressed Treasury interest rates.
Inflation began to spike in 2021 due to supply chain problems caused by the Covid pandemic. The Fed raised the fed funds rate and raised the fed funds rate to push inflation down toward their goal of an inflation rate of 2%. But inflation is largely driven by fiscal (Congressional) spending which puts money directly into consumer pockets. The Covid emergency is long over but the federal deficit is far higher than it was pre-Covid and much larger than it was during previous economic expansion periods.
Bond investors are taking inflation into account when accepting bond yields. The 30 year Treasury auction had a yield over 5% for the first time in decades though the secondary market has had yields over 5% several times in 2025 - 2026. The question is whether the 30-year yield will break through the resistance level of 5.1% due to rising forecast federal deficits and the reduction of Treasury purchases by countries that used to invest their trade surpluses in Treasuries.
The crucial 10 year Treasury yield has been trending higher in 2026 but the 30 year has risen faster, steepening the yield curve. This isn’t only inflation worries. The 10 year and 30 year TIPS yields both are in rising trends. The 30-year TIPS yield is 2.86%, the highest it has been since this was first issued in 2010. This duration premium shows that bond investors see extraordinary risk within the next 30 years even though they still think that inflation will return to 2.2% within the next 5 years.
The Cleveland Fed’s Inflation Nowcast shows the sudden decline in oil prices due to the (defunct?) agreement with Iran to open the Strait of Hormuz to oil shipments dramatically reduced the 3Q26 CPI forecast.
Junk bond spreads over Treasuries are also rising. This puts pressure on weaker companies, especially zombies whose cash flow doesn’t cover the interest payments on their existing lower-interest debt so they must continually roll over maturing debt and even borrow more to stay in business.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows very loose financial conditions which are getting looser. Markets are calmer, and funding is flowing smoothly with lower perceived risk.
Turning from bonds to stocks…
The SPX and NAZ have paused in their upward trends for the past few weeks though the DJIA continues to rise. The AI hyperscalers who have forecast spending gigantic amounts on data centers in 2026 and beyond are turning to borrowed money and stock issuance since even those with massive profits from their current business can’t cover their projected bills.
About 40% of the SPX value consists of these overvalued giants. This is a historic bubble. When interest rates rise the borrowing to scale up AI becomes more burdensome. Stock issuance dilutes existing shareholders.
Buy and hold investors are holding tickets to a roller coaster near the top of its tallest hill.
The trade is turning to risk on since the SPX and junk bonds are rising while Treasury prices are falling. (Treasury yields are rising.) The Fear & Greed Index is neutral. VIX is low.
USD has bounced off the top of its channel. Gold, silver and natgas are falling. Oil is bouncing around in its elevated channel. Bitcoin is bouncing along the floor.
The METAR for next week is sunny. The reciprocating war in Iran is heating up but the market has ignored it so far.
Wendy
