In late February, the US 10-year Treasury yield was trending lower, dipping below 4.0% on the final trading day of the month. The macro outlook at the time suggested the benchmark yield would dip even lower in the coming weeks, a view supported by the downside trending behavior that month. But on Feb. 28, the bombs started falling on Iran, an event that reversed the 10-year yield’s slide—a turnaround that has strengthened in July.

The collapse of the US-Iran peace agreement and renewed military strikes in the Gulf region have revived the bond market’s focus on inflation risk. The US military on Tuesday conducted an 11th straight day of attacks on Iran. Secretary of State Marco Rubio on Wednesday said the US was open to diplomacy, but that the attacks would continue if Iran continued its efforts to control shipping through the Strait of Hormuz, the critical chokepoint for Middle East energy exports. Meanwhile, President Trump this week said he is willing to escalate US military action by again bombing Iran’s nuclear facilities, or what’s left of them after previous attacks.

Earlier this week, the risk of a wider war that further restricts oil shipments came into focus after the Houthis in Yemen threatened to blockade ships moving from Saudi Arabia through the Bab al-Mandab Strait at the southern end of the Red Sea. At stake is roughly 4% of the world’s oil shipments, according to Kpler, a consultancy.

The oil market is taking the hint and repricing crude higher again. The US benchmark rose above $87 a barrel in trading yesterday, the highest in more than a month.

The bond market is processing the news and testing the upper level of the trading range for yields since the war started. The 10-year yield rose to 4.63% yesterday, just below the war’s peak set in May.

The revival of energy costs is again pointing to higher inflation risks at the headline level. Although the Federal Reserve may be inclined to look through a new spike in a general increase in pricing pressure to the extent it’s driven by energy costs, there’s a growing concern that core inflation, which ignores food and energy costs, will stay elevated or rise further. Core inflation tends to be more influential for monetary policy decisions because this measure generally offers a steadier read on the underlying price pressures that matter most for setting interest rates.

Expectations for higher core prices cooled after the June update on prices reported softer inflation pressure, but the optimism has faded as the latest phase of the war has continued. The Fed funds futures market is still expecting no change to rates at next week’s policy meeting (July 29), but at least one rate hike is now priced in for the rest of the year.

The policy-sensitive 2-year yield’s hawkish pivot is especially pronounced these days. In yesterday’s trading, this yield rose to 4.28%, just a few basis points below the peak since the war began—set a few days earlier at roughly 4.30%. Notably, this yield is well above the Fed funds 3.50%-3.75% target range—a clear sign that the market expects rate hikes.

Inflation and Treasury yields remain closely tied to Middle East instability. Finding an off-ramp presents a strategic dilemma for the US. A de-escalation is vital to ease energy-driven inflation and calm nervous financial markets, yet accepting anything less than explicit capitulation from Iran risks looking weak on the international stage. With missile exchanges continuing alongside mixed diplomatic signals, any proposed “deal” risks being framed as a retreat—leaving the administration trapped between market-damaging inflation and political face-saving.

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Navigating health insurance for the first time often requires managing your own finances and decoding terms like deductibles, copays, and network restrictions. If you’ve aged out of your parents’ plan or started a new job, you might wonder where to begin. Working with a licensed health insurance agent simplifies the process and helps you find […]

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Thinking about money is the last thing you want to do after a loved one dies, but you need to make a decision regarding their final disposition. For centuries, burial was the most common choice, but in recent years cremation has become quite popular. It’s easier and less expensive than a traditional burial that often […]

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When you first launch a business, you feel invincible and almost superhuman. The energy is high, and if you’re like most new business owners, you start out absolutely certain you can do everything in-house. From advertising and accounting to copywriting and SEO, if you can’t do it yourself, you can find competent employees who are […]

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The momentum risk factor has been leading the field in recent history, but there are signs that a rotation may be underway, based on a set of ETFs through yesterday’s close (July 20).

As a new phase of the Iran conflict heats up—reigniting concerns about macro effects—there are hints that the leadership profile in the factor space is shifting. The analysis is speculative at this point, but the differences in how various segments of the current stock‑market pullback are performing suggest that capital flows in equity allocations may be shifting.

Let’s start with an update of factor performances since the conflict with Iran began on Feb. 28. Results highlight the momentum factor’s ongoing leadership via the iShares MTUM Momentum ETF (MTUM), which is up nearly 20% over that span—a clear outlier that’s well ahead of the rest of the field, including the stock market benchmark (SPY).

Month‑to‑date results, however, highlight a reversal of fortunes for several of the leading factor funds. Notably, the leading factors in the chart above—momentum (MTUM) and high beta (SPHB), the second‑best performer since Feb. 28—have fallen the hardest this month. Meanwhile, small‑cap (IJR) and micro‑cap (IWC) shares have posted relatively modest losses.

Reviewing the price charts also highlights a divergence in the recent correction and the trend profiles. Consider the recent price action for small‑cap stocks (IJR), which have posted only mild downturns.

Compare that with the considerably deeper slide for momentum stocks (MTUM).

These differences could be noise, of course, and so it remains unclear whether the long dominance of momentum via large caps, as reflected in the MTUM portfolio, has run out of road or is simply on the back foot temporarily. But after a long run of relatively weak small‑cap results, the recent strength for these shares raises the possibility that a leadership rotation may be developing.

For some analysts, the writing is already on the wall. Vanguard is currently forecasting that small caps will outperform large caps over the decade ahead.

Royce Investments’ co‑CIO, Francis Gannon, told CNBC on Monday that an earnings rebound for small caps is a key factor shaping expectations. The negative earnings run for small caps “just turned positive at the end of last year. The [earnings] outlook [for small caps] is pretty positive, and we think it’s actually going to continue to be in line—perhaps even potentially better than large‑cap earnings—by the end of this year into 2027. If earnings lead the market, as I believe they do, I think you’re going to be in a sweet spot here for small caps for a period of time.”

Forecasts should be viewed cautiously, especially in the small‑cap space, which has suffered numerous false dawns in recent years. But monitoring price trends is a way to trust but verify. If the relative‑strength profile holds up, the bullish earnings outlook will continue to resonate—a combination that could keep the small‑cap engine humming.

With the Iran war escalating, the conflict is again getting harder to ignore, which strengthens the case for maintaining a globally diversified portfolio. The reasoning isn’t based on assuming that a broad approach to asset allocation will outperform other strategies or deliver superior risk management. Although one or both outcomes are possible, the stronger case for leaning into global diversification is that it rests on the idea that markets can, and often will, deliver surprising results.

Consider asset-class performances since the bombing of Iran began on Feb. 28. My initial assumptions after learning of the attack turned out to be quite different from how markets reacted through Friday’s close (July 17), based on a set of ETFs. U.S. stocks (VTI) and real estate investment trusts (VNQ) have rallied, outperforming the rest of the field. Bonds — including the U.S. investment‑grade benchmark (BND) — have lost ground. Foreign real estate shares (VNQI) have been hammered, posting the steepest losses among the major asset classes.

To say that I didn’t expect these results is an understatement. Perhaps I’m in a minority of clueless market observers, but I suspect there are many more card‑carrying members of this club than it appears.

The question is how to read the latest headlines in terms of adjusting asset allocation. Is the case for hedging with a particular tilt timely? The news flow certainly inspires acting to some degree.

The U.S. and Iran traded fresh strikes on Monday — American attacks on Iranian sites followed by Iranian hits on Bahrain and Kuwait — underscoring how the collapse of last month’s interim deal has pushed both sides step by step toward a wider war and stalled shipping through the Strait of Hormuz.

Energy prices are rising again, and the specter of elevated inflation and potential Federal Reserve rate hikes is once more a risk factor on the march. Although there are reports that the U.S. and Iran are willing to restart peace talks, there’s also growing concern that the conflict will intensify before a new phase of relative calm returns.

“This is the wake‑up moment for both sides,” said Ellie Geranmayeh, an authority on Iran at the European Council on Foreign Relations. “They either take the diplomatic off‑ramp now or risk allowing the war to spiral beyond managed escalation.”

Attempting to predict how the war evolves at this point — and how asset classes will react over the coming weeks and months — is difficult bordering on impossible. That, at least, is my main takeaway as I review performances to date since the start of the conflict.

Consider, for instance, the chart below, which shows that small‑cap stocks (IJR) have outperformed during the war. Meanwhile, cash (SHV) is ahead of bonds (BND), while a relatively middling but respectable rally has been logged by a 60% stocks/40% bonds portfolio strategy (AOR).

For investors who, on Feb. 28, expected these results, congratulations — you’re a member of what is probably an elite club of seers. But even if you anticipated how the past five months have unfolded, you still have your work cut out for you for the remainder of the year.

Granted, for analysts with sophisticated models that have proven to be resilient during various macro shocks and periods of elevated geopolitical risk, there could be a case for relatively aggressive portfolio tilts via focused hedging actions. But there’s also a case for considering forecast‑free asset allocation that limits tilting and takes a broader perspective.

The market isn’t perfectly efficient, nor is passive asset allocation a shortcut to investment success. But it’s a good place to start when refining a portfolio to match the specifics of investors’ assumptions and financial objectives.

Predicting how markets will fare in the short term remains as challenging as ever, but history provides valuable lessons. Perhaps the most important is that a passive asset‑allocation strategy will likely continue to deliver average to above‑average results through time, especially after adjusting for trading costs, taxes, and other frictions. That’s one of the few forecasts likely to stand tall once we review the results after the Iran conflict truly ends at some unknown point in the future.

● Speed: How It Explains the World
Vaclav Smil
Review via The Wall Street Journal
We are often told that the speed of innovation today is faster than ever before and accelerating exponentially. But as we prod and marvel at our smartphones or develop parasocial relationships with our chatbots, it’s useful to remember that a few decades spanning the turn of the 20th century saw the invention of lightbulbs, the electric automobile, home refrigeration and powered flight. How fast are we really going now by comparison? And is faster necessarily better?
That is the question posed in “Speed,” a marvelously encyclopedic book by Vaclav Smil, an environmental scientist and professor emeritus at the University of Manitoba.

● Cheating: The Human Project and its Betrayal
Fred Harrison
Summary via publiher (Shepheard-Walwyn)
Five thousand years ago, humanity made a huge mistake. The income generated from shared land, known as economic rent, was taken by chiefs and priests instead of being used for everyone’s benefit. Every unfair tax, every preventable death from poverty, and every financial crash since can be traced back to this original betrayal. Drawing on evolutionary science and years of accurate economic predictions, including the 2008 financial crisis, Fred Harrison reveals the “culture of cheating” built into the foundations of modern society. He explains how mainstream economics deliberately removed the idea of rent and how governments choose to tax wages instead of land, harming prosperity and shortening lives. With five major crises: political gridlock, environmental collapse, mass migration, authoritarianism, and uncontrolled artificial intelligence, set to clash around 2028, Harrison makes an evidence-based case for tax reform: replacing taxes on labour with Annual Ground Rents and sharing rents between nations to resolve conflicts from Gaza to the global climate crisis.

● Stop Making Stupid Investments: 7 Rules to Avoid the Hype and Build Real Wealth
David Leiter
Summary via publisher (Wiley)
In Stop Making Stupid Investments: 7 Rules to Avoid the Hype and Build Real Wealth, experienced real estate and finance leader David Leiter delivers a practical, common-sense strategy guide for building wealth through intelligent investing. Leiter explains the 7 rules that helped guide him as he built a large and resilient portfolio over 30 years. He demystifies complicated financial concepts and explores powerful investing techniques in a straightforward way without the usual jargon.

● No Experience Necessary: Why Betting on Yourself in Your Twenties Is the Best Decision You’ll Ever Make
Ronnen Harary
Q&A with author via Brands Untapped
Q: What prompted you to write it?
A: The book was a bit of a give-back for me. I’m an entrepreneur at heart, I’ve put a lot of toys out into the world, and this is kind of like my solo record. I was thinking back to my 20s, remembering how special that decade was and all the things that are accrued to you in your 20s that you don’t necessarily have in your 30s and 40s… I felt that this was my opportunity to contribute something to the dialogue and discussion around the power of youth and the power of your 20s. It was really a thesis that I wanted to get out, and I used my story as the mechanism to do that.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Economic activity is on track to expand close to the pace reported in the first quarter, based on the latest Q2 nowcasts compiled by The Capital Spectator. The median estimate suggests growth will ease slightly from Q1.

Output is pegged to increase at a 1.8% real annualized rate for the April‑through‑June quarter. This median nowcast marks a modest downshift from the 2.1% increase in Q1. The Bureau of Economic Analysis is scheduled to release Q2 data on July 30.

Recent nowcast updates show Q2 growth running slightly below Q1’s pace, although today’s estimate improved a bit from the previous report’s 1.5% advance. on July 7.

Yesterday’s release of the Federal Reserve’s Beige Book aligns with today’s modest nowcast estimate for the second quarter. “Economic activity increased at a slight to moderate pace in eleven of twelve Federal Reserve Districts in late May and June, while one District reported no change,” the report noted. “The pace of growth was quite close to that of last period, when activity expanded in ten Districts, was flat in one, and down in one.”

The Beige Book also reported that “Employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change.”

A separate government release yesterday indicates labor‑market stability persisted last week as jobless claims edged lower. Initial unemployment filings fell 8,000 to 208,000 for the week ending July 11, the lowest since April and near recent cyclical lows.

Retail sales rose again in June, though at a slower pace than expected. The 0.2% monthly gain is the softest increase since January’s essentially flat reading.

“Despite challenges, consumers are still spending and the labor market shows no signs of cracking,” Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, wrote in a research note yesterday. “This type of data won’t move the Fed’s needle either way, but it underscores the ongoing resilience of the US economy.”

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Federal Reserve officials are talking tough on inflation, but the outlook for monetary policy is still cloudy amid murky geopolitical and economic conditions.

The possibility of a hawkish pivot came into focus this week after comments from three of the central bank’s policymakers. Governor Christopher Waller set the tone on Monday, noting that raising interest rates may be necessary in the “near term” if inflation continues running well above the 2% target. “Sternly staring at inflation until it melts before our withering gaze is not an option,” he told the New York Association for Business Economics.

On Wednesday, the government published data that highlighted cooler inflation figures for June, which ease the pressure for rate hikes, at least on the margin for the immediate future. The year-on-year change in the headline measure of the consumer price index (CPI) moderated for the first time since January. Core CPI, which strips out food and energy and is said to be a more robust measure of the pricing trend, also fell back.

Shortly after the CPI report was released yesterday, Fed Chair Warsh told the House Financial Services Committee that he and his colleagues “have no tolerance for persistently elevated inflation.”

Later on Wednesday, Fed Governor Lisa Cook said, “I see it as prudent to give a bit more time to observe how inflation unfolds from here.” Speaking at the Exchequer Club of Washington, D.C., she added: “Going forward, though, I believe the risks continue to be strongly weighted toward higher inflation for at least two reasons.”

One reason is related to the rapid rise in the AI-driven building of data centers, she noted. The second is “the recent big supply shocks—tariffs and the Middle East conflict—that risk leading to persistently higher inflation.”

Despite the hawkish comments this week, yesterday’s CPI data strengthened the market’s view that the Fed would leave its target rate unchanged at the next FOMC meeting on July 29. The Fed funds futures market is currently estimating a 90% probability of standing pat later this month. The outlook for a rate change at the September meeting, by contrast, is roughly a coin toss estimate.

The return of military strikes by the U.S. and Iran in the Gulf region in recent days raises uncertainty about the disinflationary pulse that emerged in the June CPI report. Absent the war, core inflation’s trend would likely ease in the months ahead, based on a model updated each month in The US Inflation Trend Chartbook, which is part of the research service for subscribers to The U.S. Business Cycle Risk Report, an affiliate publication of The Capital Spectator. In line with recent updates, the model’s current estimate shows the one-year change for core CPI easing in the near term, based on the point forecasts. Keep in mind, however, that the model is purely econometric and doesn’t factor in geopolitical risk.

The question is whether the softer inflation in June is outdated now that military actions in the Middle East have resumed, curtailing energy exports through the Strait of Hormuz again and driving up oil prices. Because of the renewed fighting, tanker traffic through Hormuz fell late last week, abruptly halting a brief recovery that followed the fragile ceasefire between the U.S. and Iran — an agreement that has collapsed this week.

The U.S. benchmark for crude oil (WTI) has rebounded in recent days to just under $80 a barrel, but remains far below the levels reached earlier in the war. For the moment, the inflation impulse from energy remains relatively moderate.

The clock is ticking, warns Fatih Birol, executive director of the International Energy Agency (IEA). He predicts the global economy faces economic impacts within weeks as Middle East tensions re-escalate and tanker traffic through the Strait of Hormuz halts.

“If the Strait of Hormuz remains closed, we may again have some difficulty for global economies, including those in the region, developing nations, and Asia,” Birol explained in an interview with Bloomberg yesterday. “It is not months, it is weeks,” before major economic challenges return, he advised.

A new round of an energy shock could slow economic activity, and in turn translate into a disinflatinonary pulse, eventually. In the near term, however, pricing pressure would probably rebound if the Middle East crisis continues to deepen.

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In crypto trading, speed is often seen as the main advantage. A user opens an exchange, chooses a trading pair, and executes the order within seconds. For everyday transactions, this works well. But when trade sizes become larger, execution is no longer just about speed. It becomes about price certainty, liquidity, privacy, and settlement control. […]

Global hiring used to create mostly logistical headaches. A company opened a new office, hired local accountants, added another payroll vendor, and hoped the reporting would line up properly by quarter’s end. That approach becomes harder to sustain once employees, contractors, tax authorities, and finance teams all operate across different countries simultaneously. Buyers comparing the […]

The market premium for the U.S. 10‑year Treasury yield dipped in June after rising for three months, based on a fair‑value estimate calculated by The Capital Spectator. The decline coincided with last month’s expectations that the war‑driven rise in inflation expectations had peaked. But the resumption of hostilities in the Gulf in recent days has raised questions about whether recent optimism on the inflation outlook is premature.

Military strikes by the U.S. and Iran in the Gulf region have intensified in recent days. The U.S. hit Iran early Wednesday, launching heavier airstrikes and reimposing a naval blockade after Tehran attacked ships in the Strait of Hormuz, a key chokepoint for oil exports. As the two sides traded overnight strikes for a fourth straight night—amid President Trump’s threat of a ground invasion and infrastructure attacks—fears of a full‑scale war escalated on Wednesday.

The threat of renewed fighting may keep oil prices rising, which could slow or reverse the easing inflation trend reported for June, based on the Consumer Price Index (CPI). After running hotter for months, the 1‑year change in headline and core CPI cooled last month for the first time since January. But the revival of a disinflationary impulse may fade or even reverse if the Middle East crisis intensifies.

The 10‑year yield continues to trend higher, albeit in fits and starts. In yesterday’s trading, the benchmark rate closed slightly lower, at 4.59%, close to its recent peak near 4.70%.

The market premium for the 10‑year yield slipped to 38 basis points in June, marking the first month‑to‑month decline since February, according to The Capital Spectator’s average estimate for three models. Note that the softer spread was due to a drop in the monthly 10-year yield, in contrast to the model’s fair-value estimate, which continued to rise.

The current premium remains modest by historical standards and implies that the 10‑year note is offering a relatively attractive yield.

One caveat to consider: the model doesn’t factor in geopolitical risk. The renewed hostilities in the Gulf underscore why the recent easing in the market premium may prove fleeting. With the U.S.–Iran conflict again disrupting energy markets and reviving fears of a broader regional war, the inflation outlook is suddenly more fragile than it appeared just weeks ago. Oil remains the key transmission channel, and any sustained rise in crude prices threatens to re‑accelerate inflation expectations, push Treasury yields higher, and widen the market premium anew.

In short, the geopolitical shock has reintroduced a level of uncertainty that markets had begun to discount, leaving investors to reassess whether June’s disinflationary signals were a pause rather than a pivot.

The US expansion just marked its six‑year anniversary, and the odds still lean toward growth holding up in the near term. Yet the backdrop is anything but serene. Geopolitical flashpoints, economic crosscurrents, and a thicket of slow‑burn risks continue to accumulate beneath the surface.

So how is the economy actually performing?

One useful lens is the “big four” indicators of the business cycle—payrolls, consumer spending, personal income, and industrial production—and how their current trajectories stack up against the historical record since 1970. Together, they offer an insightful read on whether the expansion’s momentum is fading, firming, or simply treading water.

Let’s start with the labor market: the recovery in payrolls since the brief but dramatically sharp pandemic recession ended in April 2020 has been an upside outlier by historical standards. A key driver for the rebound is the snapback from unprecedented speed and depth of the loss when the economy effectively shut down during the early phase of the Covid‑19 shock. But as the chart highlights, the growth rate has slowed as the expansion ages. That’s unsurprising at this late stage of the recovery. After 75 months of expansion, the pace is naturally settling into a more mature phase of the cycle, which suggests that the labor market’s contribution to economic growth will continue to ease.

Consumer spending’s trend is stronger, which is somewhat surprising for several reasons. The macro shocks over the past couple of years—tariffs and Middle East conflict—looked like textbook threats to personal consumption expenditures. But supported by a resilient labor market, the appetite to consume has remained robust, despite one measure of consumer sentiment reflecting some of the weakest polling on record in recent months.

The solid growth trend in consumer spending is all the more striking when viewed alongside the relatively weak recovery in personal income since the pandemic ended. Income surged early in the pandemic thanks to the government’s Covid‑related stimulus, but the path since then has been one of the weakest—and at times the weakest—runs during economic expansions in half a century.

Finally, industrial output has been strikingly lackluster over the past several years. There are hints that activity in this sector is strengthening lately, but the flatlining that has prevailed for much of the time since the recovery began in early 2020 suggests a cautious outlook for industrial activity is still warranted.

The takeaway: the expansion is heavily reliant on consumer spending. That’s hardly surprising. The modern US economy has long run on the capacity of households to open their wallets. But hints that labor‑market growth has slowed while support from personal income and industrial activity remains weak suggest a degree of vulnerability for the economic outlook.

To be clear, a deeper analysis of current conditions points to low recession risk in the near term, based on this week’s edition of The US Business Cycle Risk Report. But with the Middle East crisis flaring again and oil prices rebounding, the economy’s heavy dependence on household demand makes the expansion look more fragile than the headline data suggests.

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The Middle East conflict is a fire that seems to die down, only to flare up from embers that continue to burn. Those embers burned brighter over the weekend as the ongoing cycle of attacks between the US and Iran continued. The military strikes of the past week have had little effect on markets to date, but it’s an open question how a low‑grade war will affect investor sentiment if the fighting drags on for weeks or months.

Reviewing the major asset classes since the first US strikes on Iran on Feb. 28 reminds us that the risk appetite was dented but not broken, based on a set of ETFs through Friday’s close. US equities have led the winners by a wide margin: the Vanguard Total Stock Market ETF (VTI) is up nearly 11% since the start of hostilities.

Note, too, that a globally diversified portfolio has also rallied during this period, advancing more than 6%, based on the Global Market Index (GMI), an unmanaged benchmark (maintained by The Capital Spectator) that holds all the major asset classes (except cash) in market‑value weights via ETFs.

Yet a fundamental question is coming into focus as the conflict drags on and the US confronts the possibility that military force, at least in its current form, may not achieve the administration’s aim of reopening the Strait of Hormuz and restoring pre‑war flow of energy exports.

Senior Iranian officials escalated their threats in recent hours as the latest U.S.–Iran exchange of strikes continued into Monday. Neither side appears to be backing away from a cycle of attacks that is unraveling the cease-fire signed last month.

The main question for markets is bound up with the outlook for inflation. Although oil prices have dropped sharply over the past month — briefly returning to pre‑war levels in early July — crude has rebounded in recent days, albeit moderately relative to the spike in March and April. Even if energy prices remain relatively stable in the near term, it’s unclear whether the recent surge of energy‑driven inflation is bleeding into the wider economy, which would likely require a response from the Federal Reserve. In that scenario, a series of rate hikes may be near, creating stronger headwinds for financial markets.

The prevailing narrative to date is that the Iran conflict lifted headline inflation via energy prices, but that this shift was temporary. This account is under renewed threat as it becomes clear that the US has few options for restraining Iran from attacking shipping in the Gulf. Short of a full‑scale invasion — an unlikely scenario — it’s possible, if not likely, that gray‑zone conditions in the Gulf, somewhere between war and peace, will persist. In turn, these conditions could support an ongoing inflationary pulse that triggers a reaction from the Fed.

The week ahead will be an important test of how markets price in the risk that hotter inflation may linger longer than recently expected. The US 2‑year Treasury yield is on the front line of digesting investor sentiment around inflation risk. An upside breakout above the recent peak of roughly 4.25% would be a worrisome sign for markets generally.

The United States has backed itself into a corner with Iran, trapped in a retaliatory cycle that leaves little leverage to defuse the crisis or accelerate a quick reopening of the Strait of Hormuz. If the waterway stays constrained for longer than expected, the resulting pressure on energy markets could keep inflation elevated well past policymakers’ comfort zone — and it’s increasingly unclear how markets will react to this emerging risk.

● The Asset Class: How Private Equity Turned Capitalism Against Itself
Hettie O’Brien
Review via The Guardian
Private equity partnerships are groups of individual and institutional investors with deep pockets. O’Brien traces their rise following the era of deregulation inaugurated by Reagan and Thatcher, and details how Blackstone, the Qatar Investment Authority, Macquarie, KKR and others have bought undervalued assets using borrowed money to minimise their exposure to risk. What happens next is that costs, wages and investment in the future are frequently cut to the bone in the cause of exceptionally high returns.

● Investing in America: The Rise Of A 250-Year Bull Market
Meb Faber
Review & interview with author via ETF Trends
The book was born out of frustration with a generation that learned investing through meme stocks and zero-day options rather than structural ownership. Faber’s remedy is long-term compounding, illustrated by the idea that $1 invested in 1800 would be worth $200 million today. He cited Charlie Munger’s principle: “The first rule of compounding is don’t interrupt it unnecessarily.”
Faber also frames America’s origins as a venture capital story, noting that the Virginia Company and the Plymouth Colony’s Mayflower voyage were financed as joint-stock ventures by profit-seeking investors. Today, roughly 55% of American households own stock, and despite representing only 5% of the world’s population, the U.S. commands two-thirds of global stock market capitalization.

● The Next China Is Still China: An Insider’s Playbook for Winning in the New Era
Joe Ngai and Nick Leung
Review via Fortune
When Joe Ngai, McKinsey’s Greater China chair, first began to test-drive his point that “the next China is still China” on social media, the world’s second-largest economy was in a post-COVID slump. Sluggish consumption and a property market crash were still dragging down the country’s economy, while foreign companies were rethinking their investment in China as both a consumer market and a manufacturing hub—and asking where the “next China” might be.
“You heard all these things. We’re trying to diversify away from China. We’re trying to de-risk from China,” Ngai tells Fortune in McKinsey’s Hong Kong office. “You can’t find another China. There’s no other China out there now.”
Ngai’s observation is now a book, The Next China is Still China: An Insider’s Playbook for Winning in the New Era, coauthored with Nick Leung, director of the McKinsey Global Institute and Ngai’s predecessor as Greater China chair.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

War‑related inflation risk appeared to be easing when the US and Iran signed a ceasefire three weeks ago, but new military strikes in the Gulf region this week from both sides highlights and strengthens the uncertainty around the outlook. Markets aren’t yet fully persuaded that inflation will continue to rise, but events over the last several days have increased doubt about when pricing pressure will ease.

Oil prices rose earlier in the week on news that military action had resumed in the Gulf region, and Treasury yields moved higher as well. Markets were calmer on Thursday, however, with both oil and yields pulling back. Even so, it’s clear that expectations for the Iran crisis to keep fading as a geopolitical risk factor for markets and the global economy were premature.

There’s still a case for expecting inflation to ease in the months ahead, but the path may take longer than markets were anticipating before this week’s resumption of military strikes. The Cleveland Fed’s inflation nowcasts, published just before the latest round of hostilities, anticipated that pricing pressure would start easing in the upcoming June Consumer Price Index report and continue dipping in July. But the prospect of a long, uneven path to peace in the Middle East has dented the optimistic view.

One of the proprietary models The Capital Spectator monitors for tracking inflation has been showing a transition into a high‑inflation regime lately, based on data through May. The shift was notable since it wasn’t accompanied by a slowdown in economic pulse.

The task for the immediate future is monitoring if the recent move of the pricing trend, albeit modestly so, into the high inflation/high growth endures. It’s possible that the latest military strikes in the Gulf region will be one-off events that don’t derail efforts to normalize Middle East energy exports, in which case inflationary pressure will ease.

Yet this week’s events also remind that the pre-war calm is still nowhere on the near-term horizon. The potential for a long, protracted period of conditions that remain in a gray area between war and peace prevail.

The question is how markets price in a brittle equilibrium for the US-Iran conflict. Similarly, the Federal Reserve will struggle to make reasoned, timely decisions for monetary policy.

The latest release of Fed minutes, for the June 16-17 policy meeting, highlight that the central bank’s interest-rate setting committee remains split on the inflation outlook. This week’s events in the Middle East will likely strengthen the policy debate well into the future.

The minutes outlined two key scenarios: if inflation stays high and broadens, most Fed officials are ready to raise rates; if inflation steadily falls, most prefer to hold rates steady or eventually cut them.

“I do think [the minutes] showed that richness of these scenarios,” New York Fed President John Williams said on Thursday. “There are certain parts of the inflation outlook that are probably maybe a little bit more benign, say on the tariffs, maybe on the energy prices, depending how that plays out. But there are other scenarios where inflation is more persistent and stays higher, which would … call for tighter monetary policy. I think that’s the right way to think about it.”

Fed funds futures continue to price in moderately high odds for keeping the target rate unchanged at the next FOMC meeting on July 29, followed by modest shift in favor of a rate hike in September.

The wild card, of course, is still Iran, and will likely remain so for weeks if not months, or even longer. With no obvious path out of this box in the near term, markets will struggle to find a degree of comfort with elevated Middle East uncertainty that persists.

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The Iran war has scrambled the old map of safety, leaving bond investors rethinking which havens still deserve the name. It’s debatable whether the period since the attacks began on Feb. 28 has forged a new normal, but a review of performance across major fixed‑income sectors certainly raises questions about how to manage expectations.

Perhaps the most surprising trend since the conflict began: bank loans have outperformed the rest of the field by a wide margin, based on a set of ETFs through yesterday’s close (July 8). The Invesco Senior Loan ETF (BKLN) continues to lead, rallying more than 3% since Feb. 28 — roughly double the gain of the next‑best performers.

Meanwhile, most Treasuries and the investment‑grade benchmark — Vanguard Total Bond Market (BND) — remain underwater since the war began. The biggest loss: long Treasuries (TLT), down more than 5%.

One explanation is that the war has lifted inflation and fueled expectations that the Federal Reserve will soon be forced to react by raising interest rates. Add in growing concerns about the still‑unaddressed rise in federal debt, and incentives are in place to think differently about safe havens.

Bank‑loan securities surged because the war in Iran flipped the usual risk playbook. Investors rushed to floating‑rate, senior‑secured credit, which suddenly looked safer than the long‑duration assets that typically anchor defensive portfolios.

BKLN holds floating‑rate, senior‑secured junk loans. The ETF’s strength in recent months suggests investors are eager to chase higher yields while sidestepping interest‑rate risk. They’re willing to take on a bit more credit risk to lock in coupon income and seek protection from future rate hikes.

On that basis, it’s no surprise that the second‑best performance during the war is essentially a tie between a dedicated floating‑rate note ETF (FLRN) and a short‑maturity junk‑bond fund (SJNK).

This isn’t a free lunch, however. Investors should be aware of three pressure points for BKLN and other funds favoring floating‑rate loans issued by relatively highly leveraged borrowers: shrinking income if the Fed cuts rates, leveraged borrowers vulnerable to tightening credit, and an underlying loan market prone to sudden liquidity freezes.

The crowd’s preferences remain clear, and BKLN’s strength is conspicuous relative to the investment‑grade benchmark (BND) since the war started.

To the extent that the Middle East conflict has persuaded investors to favor BKLN and similar portfolios, this week’s news flow suggests geopolitical risk will remain elevated. Renewed military strikes in the Middle East have jolted markets by reviving fears that the region’s fragile calm is slipping back into open conflict.

If war and geopolitical uncertainty have been bullish factors for BKLN and its counterparts in recent months, the near‑term outlook still looks supportive for this slice of the fixed-income market.

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The U.S.–Iran ceasefire was looking strained before it appeared to break after both sides traded military strikes yesterday. President Trump said on Wednesday that he believes the ceasefire and interim agreement to end the war are “over.” He added that while U.S. negotiators can continue talking with Iran, he personally considers the effort “a waste of time.”

The path ahead for the Middle East crisis remains uncertain, and monitoring key indicators that serve as proxies for market sentiment has returned to the fore. Hanging in the balance as the conflict twists and turns anew: inflation risk, economic activity, monetary policy, and the risk appetite across financial markets.

The price of crude oil remains on the front line of real‑time reaction, and so it’s not surprising that the weeks‑long slide sharply reversed this week. As the trading week began, the war premium had fully unwound, and WTI (the U.S. benchmark) briefly traded under $70 a barrel. The rebound to above $74 on Tuesday keeps prices at the low end of the range that has prevailed since the first attacks on Feb. 28. If oil continues to climb, many of the recent assumptions about a disinflationary pivot will come under renewed scrutiny.

A similar reversal has unfolded in the U.S. 10‑year Treasury yield, which jumped to 4.56% on Tuesday. That’s a sign of renewed anxiety tied to the latest round of conflict in the Gulf and the potential for a renewed inflation pulse.

The stock market remains relatively calm as the S&P 500 Index continues to trade in a range, but the stoic sentiment will be tested as the murky conditions of the Middle East play out in the days and weeks ahead.

The moderate rebound in confidence that the Federal Reserve might be able to delay or sidestep rate hikes is under renewed pressure. Although markets are still pricing in moderately high odds for no change in monetary policy at the next FOMC meeting on July 29, the probability of a rate hike in September is estimated at roughly 66%, based on Fed funds futures.

The danger here is what appears to be Iran’s emerging game plan: holding out for increased leverage ahead of the November U.S. midterm elections rather than pursuing a deal with the Trump administration. By driving up oil prices and Treasury yields, the regional conflict threatens to force a more hawkish Federal Reserve stance, leaving the U.S. economy exposed to the long‑term consequences of Mideast instability.

Given the mercurial decision‑making on both sides, the outlook remains highly fluid. Once again, watching how oil prices and Treasury yields reprice the latest spike in geopolitical risk is essential for monitoring the crisis.

As Yogi Berra famously said, “It ain’t over till it’s over,” and it definitely ain’t over.