This Market Is Directionless (And That Should Scare You)

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25:03We're back with Profity Markets. Final prediction here. I thought that non-U.S. equities would continue to outperform. So far, that has been true. The MSCI World Index is up 13%. So international stocks are outperforming. But as Michael Semblis pointed out in his recent research note, the reason that international stocks are outperforming is basically because of three stocks, TSMC, Samsung, SK Hynix, all chip stocks. So that's another story of the chips are the ones that are pulling up the rest of it. And if those didn't exist, you would not see that level of outperformance. So correct, but not necessarily for the right reasons there.

25:49Robert Armstrong:Yeah, but they all count in investing, you know? Right is right and wrong is wrong. So good for you. I think you accounted yourself pretty well there. I think I did, not bad. Now I'm going to go to a couple of yours. Oh God, I'm like dreading even hearing what these are. Don't worry, you're good. You're good. You only got one wrong. Okay, good. you said we are in an ai bubble but it won't pop this year so far that's been true but i'm feeling a little queasy about the second half we will see god you said u.s stocks will not underperform non-us stocks so far that has not been true but it's that special phenomenon yeah yeah yeah exactly Exactly.

26:36You said the Fed funds rate will not end the year below 3%. So far, that is definitely true. And you also said, and this is probably your biggest win, that the biggest risk in 2026 will be inflation. And so far, that has been very true and more true than a lot of people would have predicted because it has risen kind of spectacularly after Iran. Now there's a question of, will this last? Will it continue? But so far, that's very true. And it's especially reflected in the interest rate conversation, which, of course, has been the biggest shift. Everyone thought interest rates were coming down into 2026.

27:16Now everyone believes they're either going to stay where they are or they might go up because of inflation.

27:22Robert Armstrong:Energy inflation is a special case. And it's, of course, a price people pay. You can't just put it aside. It affects the economy. If energy inflation is high, that eats into real incomes and drags on growth. But in terms of things like rate policy, sustained inflation, et cetera, et cetera, it's core inflation. that we're worried about taking energy out. And that thing will not go away, right? It's sort of like some, you have a hopeful month, you have a bad month, but it just, service and inflation in particular, we're above target and we're not moving in the right direction. We're moving sideways at best, maybe worse than sideways, depending on which month you're talking about.

28:08So this gets us to some of the recent data we've seen. Obviously, CPI hit 4.2 % in May. the PCE, which is the Fed's preferred inflation measure, just bolstered the point. It just came in at 4.1%. And then I think what's really, I mean, a big question has been, say inflation goes up or that it sticks around. And that was your prediction, and it appears to be playing out. What does that mean for people? Why does that affect, I mean, we know what it means for consumers. We know that it means that your life is more expensive, especially if it outpaces wage growth, which it is right now. But the question that investors are asking is, what does this mean for stocks?

28:54Is this a bad thing for stocks? And I'd be curious to hear your views on, because this was one of your predictions, is one of the biggest risks to the markets, not to just American people, but to investors, is inflation. And we're all seeing that kind of play out. So how do you view it at this point?

29:12Robert Armstrong:huge amount of different stuff to unpack, but let's just start with the history. The history is that of the last, going back 25 years, whatever it is, when you have a rate hiking cycle, which if you have inflation, you will eventually get a rate hiking cycle. The Fed, you know, probably is not going to put up with this forever. That has coincided or correlated with ugly market corrections. If you look at the last three or four corrections in the last three or four rate hiking cycles, they do, I'm not saying anything about, I'm being very careful not to talk about causation here, just talking about correlation.

29:55Robert Armstrong:That's an important point to make. You know, the last big correction we had was a trickier case though, right? Because it was the COVID correction and we'd been, the rates had been coming up and then COVID hit and there was a collapse. So there's a question, would that rate hiking have sunk the market anyway, virus or no virus? Open question. But if you just look at a chart of the federal funds rate superimposed on the S &P 500, you start to worry about this stuff, whatever the correlation is, right? So big question, The massive question is, here we are bumbling along above target, above the 2 % target of the Fed, but not, you know, it's like on a good month, you strip out energy and you're like, you do trim mean or whatever statistical package you want.

30:46Robert Armstrong:and you get kind of inflation is like 2.7 and in a bad month, it's like 3.5. And we're kind of going along sideways in this clearly above target by call it roughly on average, a percentage point. Right. And, you know, the markets can probably live like that. You know what I mean? The difference between two and three, you know, there's these discussions like when the Fed says two is the target. Do they mean two is the first number of the target? Or do they mean two with 2.0? Anyway, the question is, if it goes up again, I think that's a disaster. I think markets can live with core inflation that's a percentage point above target.

31:33Robert Armstrong:It has been living with it. it's not ideal or whatever. But if it gets loose from there, I just can't see how, given what we know about the historical relationship, given the instability that brings, I just can't see how markets can stay at this high level if inflation is above target and rising again. And I don't know. If I could predict inflation, I wouldn't be sitting here talking at you, that's for sure. But like that's, but like, so it's bad. If it stays the level of bad, it is now okay. We can live with that. If it gets to another level of bad, I'm scared. And I think this ultimately does, this is where Iran comes back into the mix because yes, we can strip out energy as much as we'd like, but supposedly the strait is open.

32:26The question of how long it will remain open, I think is an open question because I think we're dealing with a president who is irrational and has a tendency to exaggerate to the point of basically nearly lying, especially when it comes to how done his deals actually are. We have the fact that this isn't really a deal. It's a pause that they violated within like a day. And so how strong And then there's also Israel, which is another giant question mark, was not involved in this deal. And if Israel strikes Lebanon or continues to strike Lebanon, then does that mean that America violated the deal?

33:12Does that mean that Iran will then get angry again and say, no, we're going to use our leverage, which we just realized in the past year, which is that we can either close the strait or just charge everyone who comes through it, which they could easily do, which would also increase. oil prices. And all of those questions go back to your big point, which is that could increase inflation. And if it does, it could mean that inflation remains above 4%. And if that happens, interest rate hikes, which, as you say, are kind of go hand in hand with bear market.

33:44Robert Armstrong:I think the reason the market was so confident all along that there would be some kind of resolution in the strait was recognition that, look, both sides needed the hot war to turn into a cold war for a while. And so, you know, I think the market is probably right that the central hypothesis is that an uneasy peace continues for a while. I might, if I was Iran, I might want, I don't know. What do I know about Iran? But, you know, I might want the uneasy piece to last until there's a different president, maybe. And the president might want the uneasy piece to last until there's another president, by the way.

34:32Robert Armstrong:So, like, I agree with you. It seems like a fake piece. But for the market's purposes, fake piece might be enough. Right? Do you know what I mean? We're refilling oil inventories, whatever. But I agree with you. It's unstable and it's a question mark. And I would say your point is generalizable that, you know, if you start saying, well, if you don't count this shock, oh, we had the COVID shock, we have the oil shock, we have the AI shock, we have this shock. Well, we seem to live in an age of shocks. And, you know, they seem to be, you know, supply shocks of one sort or another, sometimes demand shocks, and they keep happening.

35:08Robert Armstrong:And of course, if you specify at the outset that you're not counting every unexpected thing that happens into the economy, into your inflation calculation, you're probably going to end up with a view that inflation is pretty low. But shocks happen, right? So anyway, I think inflation followed by higher interest rates is the big risk. but I'm not predicting it, but it's the easiest way to see things coming off the rails. And to your point, I mean, just looking at the price of Brent crude right now, it's down to around$74 a barrel. It's higher than it was before the war, but barely higher. It's basically where it was.

35:56And yet we are living in a time where, to your point, the uncertainty around that straight is inarguably higher. There is certainly higher confusion, higher uncertainty, which could lead to a problem. But what we're counting on is the optimism of traders to keep that price low. And that's how they feel. And it actually works in preventing inflation from getting worse. Yeah.

36:26Robert Armstrong:I think we did learn some things during the crisis about the flexibility of the world energy system. And those things are mostly encouraging. You know, I mean, it would have looked a lot different if the strained state closed for another couple of months and we really hit the end of oil inventories. But we were able to burn inventories, supply chains moved around, there was some demand destruction. So, you know, you have to say that the world energy economy performed pretty well under strain. And so I think that's a little good news coming out of a rather dreary period in our history. I'm going to move us on to our thoughts on what might happen in the second half, and it's certainly related.

37:12I have a list here of the biggest question marks for H2 2026. And the first one on my list is what we're talking about. It's Iran, specifically when and how the Iran conflict will be resolved, or if it won't. When we look at the probabilities on Kalshi, the chances of a, quote, real deal are very low. It's 23 % happening before September, 46 % happening before 2027. So that's people betting on, will we come to an actual resolution where we sign and the war is over. But that might be a different question from will the strait remain open?

37:58Robert Armstrong:I mean, my prediction on this is, you know, I wouldn't bet my house on it, but we're going to keep faking it, right? We fumble through, we kick the ball in the high grass, we grope our way along. It's never resolved, but it doesn't heat up again. That would be my guess. but it's no better than a guess. I don't want to even call that a prediction. Yeah, I think that's right. I also have here, will inflation get worse? And this is, of course, related. I refuse to predict. You make a prediction and I'm going to watch. I'm not going to predict. Well, I kind of will predict. My prediction at the beginning of the year was that inflation would hit 4.5%.

38:43Or not beginning of the year. It was just as we were getting started with Iran. My view is that this was going to last a lot longer. I thought it would hit 4.5 % by the year end. We're at 4.2%. I think I hold to that prediction. But I mean, you know, I was listening to Mark Zandi, who we have on the show. I think you've appeared on the show with him. And he believes that we're close to a top with inflation, that it probably won't get worse. I don't buy that personally, but that is kind of the big question. It sounds like you believe that it might get a little bit worse as well.

39:22Robert Armstrong:I'll tell you one thing. If you're planning on buying a MacBook, you're going to get more than 4 % inflation. Yeah, exactly. I mean, we got that news from Apple today, and I'm going to now say something that is an idea that I'm outright stealing. And let me credit the person I stole it from was a guy who had a cup of coffee this morning, former Reuters journalist called Rob Cox. And he pointed out that it's not just, you know, Apple comes out and says, You know, the memory chips are very expensive. We have to increase the prices on the phones and the laptops and the tablets and so forth. Fine.

39:53Robert Armstrong:The price of Apple goods are a very important price in our economy, right? That is a very salient price in people's minds is, you know, we all, a lot of us use iPhones. A lot of us have iPads. A lot of us are Mac people. And that is there, that like, that's a price that everybody can see and knows going up. So I wonder if that is like a signaling one. It's not just computers when Apple does it. Because Apple's Apple. You know what I'm saying? Anyway, I'm just throwing that idea out there because I thought it was a good idea from Rob and I wanted to repeat it. I think it's important and also important in the context of how the American public views AI, specifically how much they dislike it.

40:37Because what we know and what Tim Cook has said outright is the reason that we're increasing the price of our computers and our phones and our chips, or excuse me, our Mac minis, is because the price of memory chips has exploded to a degree that I've never seen before. And the reason that's happened is because everyone's trying to build a data center. And so that is another link.

40:58Robert Armstrong:Every word of that is true, by the way. All of it's true. And if you don't like AI, this is another reason to not like AI even more, because the reason your iPhone, if you wanted to upgrade, has gotten more expensive is literally because of AI. It's because of data centers. So the machines that are coming to get you fired and make electricity more expensive are also making your iPhone more expensive. Now, I wonder why people wouldn't like that technology. What a mystery. What poor misinformed people. That's exactly right. The you're fired machine that makes everything expensive.

41:39Robert Armstrong:that's exactly right. I don't know if any of that's true, but that's the perception very clearly, you know, we know that it's true in terms of making things more expensive. That much has been proved. We'll see about the you're fired thing. Exactly. So on that, by the way, and we can get to AI in a moment, but that could be a huge obstacle in AI's way. In fact, it seems it already is, but I'm just going to keep moving through my list of question marks. I think that this is the biggest question mark, and no one is able to agree on this, is what will happen to interest rates.

42:15We've seen different predictions made by different banks. JP Morgan Global Research said that they believe that the Fed will hold rates for the rest of the year. Goldman Sachs also said they're not expecting any cuts they think that they will hold, or they don't think it'll rise either. um bank of america said they expect three interest rate increases this year so there's dispersion in

42:41Robert Armstrong:the predictions that's what makes our job fun right we're not not everybody is on the same seeing the same stuff here and part of that is simply because got a new guy in charge of the fed and we don't know we don't really know who he is and we're gonna find out over the next few months I'd be interested to hear your views on this. Like, I think that is a big piece of what's going to happen to interest rates, which, as we said, as you pointed out, that basically could determine what happens to the stock market in the second half of the year. If history is any guide, it will be. I mean, I think Kevin Warsh, who's the new head of the, okay, how I describe him, and I don't mean this to be as critical as it sounds, but I call him the dog who caught the car.

43:28Robert Armstrong:And what I mean by that is he's literally spent most of the last 15 years criticizing the Federal Reserve. He was on the Federal Reserve back in the financial crisis. He parted ways with the Federal Reserve, partly because of disagreements about balance sheet policy or whatever, back in like 2010-11 or something like that. He left the Fed. And since then, he's been suing a fair percentage of his time giving speeches about how the Fed is screwing everything up. And now it's like, oh, thanks a lot, wise guy. Here's the keys. You know what I mean? So as a journalist, I'm very sympathetic to people who sit outside of the game criticizing the players.

44:10Robert Armstrong:That is basically my job. So I don't want to criticize such people out of court. But this is a case where he's going from thinking he knows the right way to do it from the outside to being on the inside and being under all the pressures that go with actually running the thing. Point number two is, of course, there is a question about whether he will be bullied by Trump. As I've been saying all along, I think I've said it on the show here before. I don't think that's an issue. Two reasons. One, Donald Trump tried to bully Jerome Powell. And it really, really didn't work. You know what I mean? It was a complete failure, right?

44:50Robert Armstrong:His bullying efforts probably made things worse from his point of view, right? So that didn't work. And two, the chairman of the Federal Reserve is not going to be, it doesn't matter whether the president likes them or not. What matters to someone who has that job is who am I in the eyes of history? And if you are the chair of the Federal Reserve under whom inflation got out of control, your grandchildren will be hearing jokes about what a crap Fed chair you are. You will be remembering this is Arthur Burns is the Fed chair who famously let inflation get out of control in the 70s. You don't want to be that guy.

45:31Robert Armstrong:So I think he's going to have his eye on the ball in terms of inflation. Does that mean he manages it perfectly or anything like that? I don't know. But I don't think the president is going to intimidate this guy into doing anything. We'll be right back. And by the way, Scott is going live with his predictions. Media check-in tomorrow, June 30th at 3 p.m. Become a Prof G Plus subscriber on Substack to tune in. If you want to do that, visit profgmedia.com slash subscribe.

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49:07We're back with Profty Markets. So if you're watching on YouTube, Robert was just kicked out of his office at the FT. I guess they don't respect you enough over there. So that's why he's got a bit different background. But I was asking you, Rob, about Kevin Walsh's anti-fetishness and also the fact that he has signaled that he does not want the Federal Reserve to be communicating as much to the public about what they're actually doing, which has been a large point of controversy. I personally can't figure out why any of that actually matters on the big decision, which is basically interest rates.

49:45Robert Armstrong:Possibly interest rates in the balance sheet. Call it those two together. Yeah. What are your views on his, I guess, anti-Fed philosophy? The communications thing is a bit weird. And let me give you first the case against his approach. His thing is, we don't want to give the markets guidance on what we're going to do. We want to say what we have done, but we don't want to talk about the future. We're going to take what they call forward guidance out of the statement, which is the kind of slightly coded language in the press release that comes with every interest rate decision that sort of gives you a way to predict which way they're leaning the next time.

50:29Robert Armstrong:He doesn't want to explain what they call the Fed's reaction function, which is he doesn't want people to have the thought if the employment report does this, the Fed will do that. You know what I mean? He wants you to know less about what we're doing. And he said this thing in his first press conference about this, which was complete nonsense and not true, which is he said, we want to know what's going on by looking at the market. And we can't do that if the market is filtering all the incoming information through their idea of what we're going to do. So it's this idea that the signals the Fed is getting about the economy will be distorted by the fact that we give forward guidance.

51:17Robert Armstrong:To me, this makes no sense whatsoever, because you can be damn sure the markets are, no matter what the Fed does, how the markets respond to the economy is going to be conditioned by who they think the Fed is and what they think the Fed's going to do. It's always going to be a muddled signal. So I think that is just a silly story that he's telling to justify himself. This is what I think is really going on. He is a person who thinks the market counts on the Fed as a backstop, and he wants less of that to be happening. He wants the market to be more volatile and more scared because he thinks the market is too dependent on the Fed put and Fed put like stuff.

52:02Robert Armstrong:If we get in trouble, if we leverage ourself too far, If we whatever, the Fed will always bail us out. And he wants to take that anesthetic out of the system. And I think the communications policy is part of that. Like you guys figure it out for yourselves. And if you find that scary, if you find it scary to operate without us telling you what we're going to do, good. I want you more scared. That's how I like it. You know, that would be my interpretation of that. And we will see how that goes. so uh there is a kind of there are no atheists in foxholes aspect to all this like it's all very well and good to say you want more volatility in the markets until the shit really starts to fly and then we'll see how you feel about volatility in other words when there's a crisis and institutions are falling over and they're begging for lines of credit from the fed what's the Fed going to do?

53:02Robert Armstrong:When you start shrinking the balance sheet, which is something that he wants to do, you know, he's very keen on shrinking the balance sheet more, and there's a crisis in the money markets, how much of a tough guy are you going to be then? You know what I mean? So you don't really find out what kind of Fed chair you have and what kind of Fed boards you have until they're in a difficult situation. And then you take the measure of what they're prepared to do and not do. Which is all makes it scarier for Wall Street in the scenario where there is some sort of shock or crisis or extreme bear market.

53:42Because what we had in previous crashes was what was, of course, the Greenspan put, Alan Greenspan, who recently died, who this was kind of his doing, is this idea that the Federal Reserve can come in and prop up asset prices such that prices don't go down. And it became a theme. We saw it from Ben Bernanke. We saw it from Jerome Powell. And to your point, if you've got this guy coming in saying, we're not doing that anymore. So if you guys want to go have your AI bubble and things crash, I'm not saving you.

54:15Robert Armstrong:Now, he's not saying this explicitly, but I think this is the subtext. That's my interpretation of the subtext of what he's saying. New sheriff in town, we want to let markets be markets. Yes, which is a really interesting interpretation, which brings us to the next big question mark on my list here, which is, will the bubble burst if we believe that there is a bubble? And it does seem this was a conversation that was being had in the fall of last year, and there were a lot of question marks around this. our view was that a bubble was growing, but it wasn't about to burst. And it wasn't quite like what we saw in the dot-com era because you didn't see these prices.

54:59But I have a new view, which is that actually prices are like what we saw in the dot-com bubble. And that is we can look at the Shiller PE ratio, which is the cyclically adjusted price earnings of the S &P. It's currently at 41. And during the height of the dot-com bubble, it was 44. So it's in that territory. And the historical average is 17.4. Granted, it's been a lot higher in the last several decades because stocks have just gotten more expensive. But the reality is, this is the second most expensive stock market of all time, is now. The only time it was more expensive was right before it crashed from 99 into 2000.

55:43So this is now a real question to contend with. What do you think?

55:47Robert Armstrong:As I'm sure I've said on the show before, because I repeat it whenever I get a chance just to humiliate myself, the thing I have done that has cost me the most money, you know, with my personal investments and my savings is try to get out of the way of bubbles, right? Trying to anticipate a bubble can turn into an extremely expensive hobby because you miss out on a lot of gains. And so I would never, if the price momentum was still headed up and to the right, I would say, Ed, you're crazy. There's no point predicting a bubble this year. It's not happening soon. what makes me slightly nervous is the determined sideways movement of markets over the last six weeks or so that the market tries to rally, uh, and it kind of can't.

56:41Robert Armstrong:And, uh, that now that means we're between trends. We're not in an uptrend and we're not in a downtrend. And, uh, let me give you a metaphor for this that actually has a nice resonance with a standard market. metaphor. When I was a young and very stupid man, I went to the running of the bulls in Pamplona, which is a kind of classic thing for a dumb young American to do. That is stupid. I love it, but I love it, yeah. It's first thing in the morning, and you're like, you know, had an hour of sleep, and they're about to release these bulls into this narrow road, and you run along with them, and you're starting to have second thoughts.

57:20Robert Armstrong:And I remember asking the Spaniard I was with for advice, and he said, don't worry, this is all very safe as long as the bull is just running down the road. A bull that's going one direction, you can just run along next to it and you're fine. If one of those things falls over, get out of the way as fast as you can because you don't know what direction it's going to go when it gets up, right? As long as the bull is pointed one direction, you are good, right? But literally, because one of them will wipe out going around the corner and it could start coming back the other direction. And it's the same thing with markets.

57:58Robert Armstrong:A market with no trend is a bit unsettling, right? And I feel like right now we're in a market with no trend. You know, look, it's not going to change my approach. You know, I have a fixed allocation, I stick to it. You know, I'm only in ETFs, I'm diversified, et cetera. But as an observer of the market, a trendless market is a scary thing. And there's a good example of this just today. So we discussed how the markets were very nervous heading into the Micron earnings. Micron earnings finally land and they're terrific. Micron is up, I don't know, 15 % or something as we speak. I don't know. The NASDAQ today, still down.

58:41Robert Armstrong:So we got the good piece of news that everybody was looking for. It was better news than even everybody expected. That stock, I'll just look at it now, is up 17%. NASDAQ is down slightly. what's a man got to do to get this market up? So that makes me think we don't have a trend and it could go either way. I think it's a really important point, yeah. You know what I mean? And this is a mathematical point, by the way, made about all markets everywhere by the famous Benoit Mandelbrot. And if I can recommend any book about markets to your readers, it's The Misbehavior of Markets. And his point is this is the pattern of markets.

59:26Robert Armstrong:They have a trend. They have momentum. They don't move randomly. If they're going up, they're more likely to keep going up. If they're down, they're more likely to keep going down. And then the trend breaks, and there is a moment of chaos until the new trend forms. And that's true at the micro level, like on a given day, a given trading session. It's true over 10 years. It's kind of the fractal pattern of markets. and we're at one of those intermediate periods right now, I would argue. It's a really, really good point. And it reminds me of something that Barry Ritholtz said when we had him on the pod a couple of weeks ago, where I laid out to him my views on this feels like it's, we actually are in dot-com territory at this point.

1:00:08And he said, sure, but SpaceX just went public and it absolutely exploded. And as long as people start off feeling good and things are going up, to your point about the trend, then, you know, you can keep predicting the bubble as much as you want, but prices are going to keep going up and you're going to lose out on all of that. All you're doing is getting poorer. But what have we seen in the past week, two weeks, SpaceX came crashing back down. And if we're thinking that the, I mean, at this point, I think we can all agree that asset prices are very pricey right now. um i i don't i don't think that's up for debate i mean you look at every sector you look at tech you look at energy industrials materials consumer everything is expensive everything is trading on a multiple basis a lot higher than than they historically did yes earnings are growing but those multiples are growing too and so if we're waiting we're waiting on something to break the momentum.

1:01:15And it does seem that we're in that moment where the momentum is wavering.

1:01:19Robert Armstrong:And the momentum can resume. You know, if you told me Micron is going to crush earnings and the market's going to take off flying again on Thursday morning, I would have believed you. But that's not what's happened here this morning. You know what I mean? So it could go either way. I am, you know, it is reassuring that the U.S. economy is OK, U.S. consumers OK, and that profits are good. That is a more helpful background than you would otherwise have. Although there also seems to be a little bit of wavering on the consumer front. We did just see the revision for the consumer spending in the first quarter.

1:01:51Robert Armstrong:Consumption's a little softer. Yeah, yeah. And if that continues again, I think this goes back to Iran. I mean, then that's the real question for corporate earnings. And it does remind me of 2022 where you had stocks were expensive. Just going back to the Shiller PE, it hit 40 in January of 2022. Then you did see a drop-off in consumer spending, and it was really triggered by the inflation shock that we felt coming out of COVID. And the Fed finally started putting the hammer down on rates. It was like for the 70-30 portfolio, was the worst year anybody alive can still remember, basically, is because your bonds, because it was inflationary, your bonds were no good.

1:02:42Robert Armstrong:And the stock market was going down, so you lost coming and going. It was a terrible year. You know, like, if you said, you know, the market is going to lose a third of its value, you know, I mean, it wasn't a third, but 2022, we survived, you know, and we could survive another crash here. I mean, this is maybe a question for another hour, but there's kind of crashes and crashes. You know, if the market goes down a third, let's just say from where it is now, which would bring it back into its normal valuation range historically or whatever, as long as there's not awful second order effects, that's kind of fine.

1:03:20Robert Armstrong:It happens once in a while. A lot of those are paper profits. You know, some hedge funds will go out of business, but like that's a totally survivable event. You know, the question is, is it a third in the style of 2008, where there are massive second-order consequences that affect the real economy. In that case, there was massive second-order consequences because the locus was the housing market, which is the main asset of every American family. For a young investor, and i think you probably you're a young man yourself you probably have listeners who are your age the market falls by a third as long as you have a little bit of savings and cash you should be getting up and cheering exactly right you know that would be awesome right you know what i mean so you know as long as long as you're not 100 in stocks anyway or you can access a little money to start some savings at the end of the crash it would be a great thing right so that that's that's something to keep in mind old people like me have to worry we need the money now yes yeah that's right but but for you it's different i think this is a really important point and i i think that ultimately and this is where i'm beginning to land on this i think what we'll see i think we will see a correction i think it is as close to imminent as you can get, I think it will look a lot more like 2022 than it'll look like 2000.

1:04:53Because to your point, I think that...

1:04:56Robert Armstrong:Knocking on wood. But I think that a lot of, I mean, it's a lot less, I mean, it's hard to argue that this bubble isn't systemic. It is systemic. But at the very least, it's far less debt financed, at least the AI build-out, which has been highly dependent on... equity. Even though they are issuing debt now, it's still mostly an equity story. Yes. And these big tech companies have the cash to pay for this stuff. They're starting to issue debt financing, and it's starting to look a little weird. But if you literally just look at their net debt, specifically, you know, Meta, Google, Amazon, you know, those really big players, They have cash and they can do this.

1:05:45They can take these risks, which makes me think that we'll see a correction more similar to 2022, which doesn't collapse the whole thing. I think it results in a year that's kind of shitty, meh for investors. That would be my prediction going into the second half.

1:05:59Robert Armstrong:No, I'll join you in that prediction, and I certainly hope it's true. I think the argument you've made for it is very good. The only caveat to this is you mentioned that this is not as leveraged a financial bubble as the bubbles we saw in 2008 or possibly 2001. Now, the thing about leverage is you don't really know where it is until asset prices start to fall. And then you have these awful experiences like, who lent what to, what are you talking about? So it was like in 2008, you were like, European banks have a lot of leveraged finance in American houses? I remember finding that. I was like, what is happening right now?

1:06:41Robert Armstrong:You know what I mean? German banks, you know? And so it's like, let's just hope there is not secret leveraged love affairs going on in financial markets that we don't know about. And, you know, every once in a while I write a column about how leveraged is the financial system. And every expert you talk to, they tell you the same thing. You can get a sense of it, but you can never know quite the extent of it. So this is the ultimate example of Warren Buffett's, you know, you see who's swimming naked when the tide goes out. To the extent that you can even know, given what you just said, how leveraged would you say we are?

1:07:22My understanding is that on the AI side, for the ones that matter, not so leveraged. But maybe that's not including a lot of other stuff.

1:07:32Robert Armstrong:So there's a famous data series you can look at from FINRA, which is the industry's kind of self-regulatory body, which is the amount of debt in securities, margin debt in securities accounts. And that line is up and to the right hard, right? Right. So there is a lot of leverage speculation in markets. I think you can find similar proxies for the leverage being provided by trade trading desks to hedge funds and so forth. So I think there is quite a bit of that. It's not good. You know, I was looking the other day at leveraged ETFs. There's a couple of these. They're not huge. You know, we're talking in the tens and twenties and thirties and forties of billions, but like your, your NASDAQ 3X leveraged ETF has grown its ATM.

1:08:20Robert Armstrong:So I think we can conclude that there's appetite for speculative leverage out there. And you know, in a crisis, what that, what's happens with that? Is it the valence reverses and it goes backwards and that's going to happen. So maybe I'll, I'll need to rethink that one. Yeah. Well, I don't know. I think, I think you're right within the circle of the AI part. But the question is people outside of that circle speculating on what happens in that circle. Are they using borrowed money to do so? Yeah. The answer to that question is yes. And I wonder the next question becomes which one matters more or do they both matter equally?

1:09:00Robert Armstrong:Yeah. Yeah. I mean, like I said, it wouldn't be finance if you could predict these things in advance. It's a dynamic system and it's really tough. My final question on my list of question marks, and then we'll wrap it up, is what will happen at the midterms? It seems like Democrats are going to win, but who the fuck knows? Yeah, not me. Not me. And will the market care? I'm not even sure it's a market event. Right. Do you know what I mean? Here's what I would say about the political side of things. And I was talking to this, a very senior editor at the FT about this, that the, I don't know if this is even the right word, like the amplitude of political madness seems to be going down.

1:09:47Robert Armstrong:So like a year and a half ago, we were like arguing about global trade rules and, you know, tariffing our allies. Six months after that, there was like masked government thugs arresting Americans and non-Americans alike in the streets. That was crazy. I forgot about it. And now what we're doing is arguing about the reflecting pool. and like so as a direction of change i kind of like this you know what i mean like i i think this is actually it's funny but it's actually quite a serious point like yeah let's freak out about the swimming pool great stick to that love it it is very interesting but part of me feels worse about that because i'm almost like are we just sort of are we gotten bored about the fact that we've launched a war in the middle east again from the guy who said that we wouldn't launch any wars.

1:10:42I mean, I wonder if that's almost worse. I mean, by the way, it's not like the tariff thing is no longer a debate. That's still playing out in the global stage.

1:10:52Robert Armstrong:Yes. But it died down. You know what I mean? Whatever happens in the midterm, Trump is a lame duck. So all of that stuff is kind of happening. And maybe what we're seeing is you're quite right to mention the war in this context. You know, that's that, that, that is true. But like I said, maybe things are calming down a little bit. It's, you know, if there's anything I hate to predict, it's the interplay between politics and markets, you know, because you have to be smart about both and nobody is.

1:11:26Well, I will just, to your point on, will it even affect markets? I think my view is it, It won't. And for one crucial reason, which is that the midterms are about what happens in Congress. And what we've learned about this new Trump presidency is that he doesn't give a shit about Congress. And he'll basically just do whatever he wants. And here is our very interesting data to just support this point. Trump has issued more than twice as many executive orders in this term than Congress has passed bills. And that never happens. You look at the Biden presidency. It was flipped. He passed four times fewer executive orders than Congress passed bills.

1:12:06In Trump, one, also four times fewer. Obama, five times fewer. Bush, six times fewer. Suddenly, it's reversed. Trump is just spraying executive orders. Doesn't matter what Congress does. He's still going to do whatever he wants to do.

1:12:20Robert Armstrong:Now, I would guess that the next presidential election might be very consequential for markets because based on what we saw in my home state, it could be a race between extremes. You know, the recent congressional races here in New York. You know, if that's a race between the Trumpian right and the AOC left, markets are going to have no choice but to care because it's going to be wild, right? But that's, thank goodness, a few years away. So that's probably more important than midterms, but it's farther in the future. Well, at the very least, midterms might be sort of the canary in the coal mine on what the direction will actually be.

1:12:58Well, that's my list, Rob. We've covered a lot of ground.

1:13:02Robert Armstrong:Yeah, I think it's a good list. And I agree with your predictions. I think a significant correction, whether it's this year or in the next couple of years, is perfectly likely for the reasons you laid out. I think it is perfectly reasonable to think it won't be catastrophic for the reasons that you laid out. And here's hoping that we're all okay on the other side. Let's take a look at the week ahead here. We will see earnings from Nike. We'll also see consumer confidence and the employment report for June. Rob, this is usually where I ask Scott for a prediction, but we've made a lot of predictions.

1:13:42Robert Armstrong:Yeah, I'm exhausted. But I guess let's just get your final reflections on first half of 2026. I mean, you've been writing about the markets for a long time. You're one of the most respected voices and commentators in this space. I mean, how is it shaped up for you? What are your final takeaways? For me, the most important thing is the transformation of a huge trend, which was the Mag7 trend into something different. And that could switch back, right? It could be we're looking at a six-month aberration and we're going to get back. But we knew what third of the market was kind of in the driving seat.

1:14:20Robert Armstrong:What eight or ten companies were in the driving seat of markets and finance generally. We're in this interregnum period now where we don't know who's driving the bus. And so it's exciting because like, oh, you know, we could talk in a month and the story could be very different. So where the first six months have left us is like wondering. It's a terrible cliche for a journalist to say it, but we're standing at the crossroads here. It's a fun moment to be observing what's happening. Robert Armstrong is the US financial commentator for the Financial Times. Rob, I missed you. It was great. This is fun.

1:14:58Robert Armstrong:Well, let's do it again. Let's do it again in six months. We can be wrong in our predictions again. Exactly.

1:15:06This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Chalon, Isabella Kinsel, Kristen O'Donoghue, and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director. and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and tune in tomorrow for a fresh take on the markets.

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