Amidst all this uncertainty ...

AI infrastructure demand has in no sense abated. Oracle’s earnings release showed vast interest in enterprise AI; company chairman Larry Ellison noted one customer simply asked for all available global capacity. The company expects to spend $25 billion on data centers in the upcoming year. Elsewhere in the digital economy, Google reports AI token usage is up by a factor of 50 y/y (not 50%, 50x!), and stablecoins are at a $33 trillion rate of annual transactions. So far, the Middle East crisis has not prompted a flight to safety, with Treasurys, the dollar and defensive equities all quiet. As of Wednesday June 18, markets were pricing a 76% likelihood of US military involvement against Iran by August. How to position for this? Israel has been involved in 11 military conflicts of significance since 1967. Aside from the 1973 Yom Kippur War, none of these events had a long-term effect on the price of oil. Regime changes in oil-producing countries, however, do tend to cause oil price increases—30% on average going back to 1979. Here in the US, the hard data lately has not shown a booming economy; inflation has been restrained as well. This suggests that any inflationary force from tariffs and the budget bill could be offset by weaker data. Earnings growth—expected at 5.7% for Q2—remains above levels that would indicate a recession. Operating margins have been stabilizing of late, a condition that tends to indicate a late-cycle steady state for the S&P 500. The market looks solid right now, with the S&P 500 in a position to retest its all-time highs this summer. The rebound from those February highs is largely over, raising the prospect that the dispersion of returns will increase amid new market leadership. Volatility has dropped sharply, and internal correlations have fallen as well. Instead of the single overwhelming theme of tariffs, we are likely to see multiple themes emerge, and market breadth may improve.

About one-fifth of the global oil trade flows through the Strait of Hormuz, so the hostilities with Iran present a major risk for investors. The US, though, imports just a small amount of this oil; more than two-thirds goes to China, India, Japan, and South Korea. If Iran shut the Strait of Hormuz, oil prices would likely soar. It’s hard to imagine Iran being able to keep the Strait closed for long, though, as the US and its allies would surely inflict heavy losses on their navy. Iran itself makes up about 12% of OPEC’s oil output and 4% of global oil output. Interestingly, energy stocks are basically flat on the year, even with two of the world’s largest producers—Russia (#3) and Iran (#7)—engaged in wars. The market has digested a lot of geopolitical shocks in recent years, but these are hard to trade. On average, the S&P 500 drops 6% in the three weeks just after a geopolitical event but then fully recovers over the following three weeks. So far at least, oil is well above recent levels but in-line with longer-term levels. Also, equities have mostly held steady. Deutsche reckons that the market is pricing in a 50% reduction in Iranian oil exports. As of the time of this writing, both the Israelis’ and the Iranians’ attacks on energy infrastructure seem focused on creating localized disruptions. However, either side could adopt a more intense posture. What if the Iran conflict connects to that in Ukraine, via the countries’ superpower sponsors? Trend Macro speculates that Trump and Putin may be carving up the map, with the US giving Russia a freer hand in Ukraine in return for Russia standing aside with regard to Iran. In Trend’s stark words, “If this is a swap of Ukraine for Iran, it could stabilize the Middle East potentially forever.” Hmm.

Aside from the potential for an oil shock, inflation looks to be under control. Meanwhile, personal savings rates are high and, absent worsening unemployment, the consumer’s recent weakness could simply reflect the effort earlier this year to front-run the tariffs. Furthermore, the consumer has tailwinds ahead, via the wealth effect and stimulus from the “big, beautiful bill.” As a percentage of income, consumer spending on energy has been at very low levels, suggesting a buffer against the effects of an oil price spike—particularly since the US is now a net exporter of oil. Also, a study this month from the Harvard pricing lab found that tariff announcements are followed by quick, relatively small price increases. Trump’s tariffs spurred price growth on imports of about 3% since early March, despite much larger headline figures such as 125% on China and the 10% baseline tariff. Similar behavior was seen in the last major round of tariffs, in 2018-19. If tariffs don’t fully flow through to consumers, maybe the Fed can ease off the brakes. The first quarter US Financial Accounts data show households deleveraging, with very little credit deployed to fund personal consumption. But, truly, there are two Americas at present, with the top half benefiting from the wealth effect and AI-related productivity gains. In the words of 22V Research, “the broader macro conversation is shifting—toward fiscal dominance, wealth inequality, and structural labor dislocations that are reshaping investor expectations.” It’s been my privilege to have a front-row seat to that show. After my presentation in Austin this week, an advisor approached me. He’d seen me speak 20 years ago, and “I’ve been reading your weekly ever since, so I was excited to see you on today’s agenda.” Then he asked if he could give me a hug. He has no idea how much that means to me right now …

Positives

• The consumer is holding up, so far Control group retail sales, which strips out more volatile components, rose 0.4% in May, a touch above the 0.3% consensus. On a trend basis for the control group, nominal retail sales are running 4-5.5%. In contrast, headline retail sales disappointed, falling 0.9% m/m vs expectations of a 0.6% decrease. The weakness was concentrated in volatile categories: motor vehicles (-3.5% m/m, likely due to tariff front-running in April), building materials (-2.7%), and gasoline (-2.0%). Otherwise, core sales showed signs of a rebound. Finally, the only service category, restaurants, saw sales dip 0.9% m/m, though this may reflect seasonal noise.
• Remarkable resilience, still The FOMC policy statement had very few changes, as Powell reiterated an uncertain outlook but still-solid economy and labor market. He also left open rate cut possibilities this year. As the Fed has lowered the fed funds rate to 4.3% and maintained that level over the first half of 2025, headline PCE inflation has fallen to 2.1%—one tenth above the Fed’s target—and the unemployment rate has converged to 4.2%—consistent with the median value of the longer-run unemployment rate in the Fed’s Summary of Economic Projections. For 22V Research, the economy appears to have settled into a steady state with the current setting of monetary policy one that is “so smooth it looks like the simulation of a model economy.” You would be hard pressed to identify the historic shocks from the Fed’s aggressive tightening cycle in 2022, a banking crisis in early 2023, and a record spike in tariff rates in 2025. 22V also notes that a large share of the easing of financial conditions is due to the US dollar weakening. The more the US dollar contributes to the easing of financial conditions, the higher the bar for the Fed to ease rates.
• Steady, for now Industrial production declined 0.2% m/m in May, slightly below consensus expectations (0.0% m/m). The weakness was driven by a 2.9% plunge in utility production, while manufacturing and mining production both rose modestly. Vehicle sales assemblies jumped to 11.2 million units; and business equipment production posted a robust gain, though consumer goods production fell. The operating rate fell to 77.4% in May, which is below a critical inflation hurdle rate. Further, import prices were flat in May, versus consensus expectations of a 0.2% decline, mainly due to a sharp fall in petroleum prices. Non-petroleum prices, however, were up 0.3% m/m. Note that these import prices do not factor in tariffs, meaning that any increase in tariffs will raise the actual cost of imported goods beyond the current figures. Headline import prices increased by only 0.2% y/y in May.

Negatives

• Home builders are in a really bad mood The June National Association of Home Builders Housing Market Index sank to 32 in June versus expectations for a two-point improvement, the lowest since its 2022 cycle low. At 35, the sub-index measuring present sales has not been this weak since 2012! Buyer traffic fell for the fourth time in the last five months while future sales declined for the fifth time in the last six months—both to their lowest since November 2023. The drop in home-builder sentiment implies weakness ahead for residential investment and new home sales.
• Can you blame them? Housing starts dropped a sharp 9.8% m/m in May to an annual rate of 1.256 million units, well below forecasts (1.350 million units), amid wet weather. Single​-​family unit starts increased slightly to 0.924 million (+0.4% m/m), while multifamily units dropped sharply to 0.332 million (-29.7% m/m). 22V Research notes that multifamily contributes very little to GDP growth. And ISI asserts that with housing starts greater than 1.200 million, the US economy is unlikely to slip into a recession. Permit issuance, historically a stronger indicator of overall housing demand, declined 2.0% m/m in May to 1.393 million, well below the 1.422 million expected by consensus. The most forward-looking part of the report, single-family permits, fell 25K to 898K, marking the third consecutive month of decline.
• Regional manufacturing reports coming in The New York Fed's June Empire State manufacturing index fell 6.8 points to –16.0 from -9.2, much weaker than expected, bringing the ISM-adjusted version down to a contractionary 48.6%. New orders, shipments and unfilled orders components plunged. This survey was taken before the Israel-Iran escalation, so the headwind of potentially higher energy costs isn’t included. Interestingly, expectations jumped back above 0%, to a pre-Liberation Day level, suggesting manufacturers see the tariff tumult as only a brief disruption. Over in Pennsylvania, the headline Philly Fed manufacturing index was disappointingly flat at -4.0%, but its internals were better. And ISM-adjusted, it climbed back over 50%, to 51.4%. Simply averaging that with the weak Empire reading gives us a very early national ISM June bogie of 50.0%, vs. May’s 48.5%.

What Else  

The “Pentagon Pizza Index” started as a Soviet spy trick and has now accurately predicted 21 crises since the 1990s, according to The Economic Times. It links spikes in pizza orders near the Pentagon with looming global crises. Analysts now use open-source tools like Google Maps to monitor pizzeria traffic in the vicinity of US defense hubs. On June 12 and 13, users on X reported a sudden surge in pizza deliveries near the Pentagon, sparking “Pentagon Pizza” speculation that the US may be quietly signaling government urgency behind closed doors.

This bromance was doomed from the start In his book, “The Hypomanic Edge: The Link Between (A Little) Craziness and (A Lot of) Success in America,” author James Gartner found that the most successful people display classic characteristics of hypomania, a mild mania. Among the symptoms: One who is prone to making enemies and feels he is persecuted by those who do not accept his vision and mission. When someone has these characteristics, the person often does not handle opposing views well. This results in the risk of escalating arguments. Sound familiar?

Although Trump is from Queens, so … According to the author, hypomanic traits are common among entrepreneurs, CEOs, politicians, and hedge fund managers. And the reason for this, he theorizes, has to do with immigration: 1) immigrants are the biggest risk takers and 2) the three nations with the highest rate of hypomania—the US, Canada, and Australia—have the highest share of immigrants. As for our college graduates, over 50% of US unicorns have been co-founded by international students.