Closing Thoughts for the Week

We’re undoubtedly in the AI euphoria stage of the market. Everybody’s bullish and seemingly not at all concerned that cyclicals are lagging, small-caps are lagging and bitcoin is still way down. Even lumber prices are back in contango and heading higher again. I can’t envision a scenario where the government will default on its debt, which means this will be largely forgotten before too long. The fascinating thing about this is that investors never appeared very worried that there was a real risk of default.

The financial markets are starting to react to the latest daily updates and developments on the debt ceiling. The government won’t allow a default to actually happen, but it’s how we get there and the actual resolution that will mean the most to the markets. The one other big takeaway from the week has to be the apparent division within the FOMC about where to take policy from here.

I’m sensing a complacency in the markets right now that I don’t believe is healthy. Overall, I think the risk-off case is still building. Long bonds have struggled to generate gains thanks to persistent inflation, but a lot of other signals are all flashing warning signs. The debt ceiling could be the event that blows things up in the financial markets. Congress is unlikely to act until something breaks and that could happen in the next week or two.