Higher Rates and Inflation Until Something Cracks
Here is my base case, stated plainly so I can be held to it later.
Inflation is not finished. Iran is keeping a bid under energy, and energy leaks into everything — freight, food, utilities, the price of running a factory. On top of that, the fiscal side keeps creating money. The deficit runs without any serious attempt to close it, and now there is a proposal to hand every American $5,000 — roughly $1.6 trillion, every dollar of it borrowed. It is hard to call that anything but reckless. You do not mail a check to every household in an economy that still has an inflation problem, and you certainly do not borrow $1.6 trillion to do it. That is demand poured straight onto the fire, and the bill lands on the same bond market that already has to absorb everything else.
Meanwhile the Fed is going the other way. Warsh has been about as clear as a Chair gets that he intends to hold the line. So you get a tug of war: Treasury and Congress pushing money into the system, the central bank trying to pull it back out.
I don't think that resolves cleanly. I think rates creep higher. Not a spike — a grind, quarter by quarter, driven by the two borrowers I keep coming back to: AI capex that has moved onto the bond market, and a government that will not stop issuing. Both are price-insensitive in the near term. Both crowd out everyone else.
And that is how this ends. Rates climb until something in the economy cracks — housing, commercial real estate, small business, the leveraged borrower who has been rolling debt and praying for relief. Not the AI names. They can pay these rates and will keep spending straight through a downturn, because for them falling behind is the more expensive outcome. It is the rest of the economy that breaks first.
So the positioning follows directly. Stay long the AI names; that is the part of the economy that compounds through the downturn rather than in spite of it. And keep a large cash position — not as a forecast, but as an option. If the crack comes and good names get beaten up alongside the bad ones, I want to be buying rather than watching. The cash does cost me something every month it sits there, but that is the price of being able to act.