In my view, a broadly diversified 60/20/20 model continues to make sense. The chess pieces are always moving, and currently it’s Bitcoin and commodities in the lead, followed by the Mag 7 which has perked up in recent weeks. At the bottom are (what else?) long yields.

Will 5.0% be the ceiling for the nominal Treasury yield? Maybe not, but for bond investors the risk-reward math has gotten considerably better. The 5% yield provides such a good cushion that if the 10-year yield were to fall 100 bps, an investor would make 11.9%, while only losing 1.9% if the yield were to rise to 6%.

Below is a longer view of real yields vs real potential GDP growth and R-Star. For the ever-rising debt burden to remain sustainable, it’s essential that economic growth remains above the country’s funding rate. Based on the CBO’s real potential growth rate of 2.5% (and falling below 2% in the coming years), that is no longer the case. Hopefully, the CBO projections are too low given the AI boom that is currently underway. If not, we run the risk that the rising cost of capital will choke off the economy’s formidable growth. Note below that the last few times that the real yield spiked to or above the real potential growth rate were 2007, 2000, and 1994. Those were either rate shocks or growth shocks.

As for the Fed, it raised rates last week as expected, and the market wants several more hikes. The SOFR curve is considerably more hawkish than the Fed’s own dot plot, which as usual is all over the place. The biggest development as far as I am concerned is that the 10-year real yield has now risen to above the economy’s real potential growth rate.

Anthropic: our AI will literally kill you Meta: awe look at how cute the lil guy is, did you know he can talk with a cowboy accent? Have a rootin’ tootin’ day I think I know who is going to win

And below is a nifty heatmap of the weekly progression by quarter. Aside from 2021, which was the recovery form COVID), only 2018 shows a similar momentum. That was a mid-cycle boost from the TCJA. Ironically, 2018 was a down year as falling multiples more than offset booming earnings. It’s a reminder that prices do follow earnings, but rarely at the same time.

How booming are #earnings#? Very. The incoming waves of quarterly estimates are still rising, which is the opposite of what normally happens as we approach a new quarter. For Q3 earnings, which will be reported in a month, the expected growth rate is holding in at 24% (same as last quarter).

As disturbing as the near-perfect price analog is between the semis today and the internet stocks 26 years ago (see below), the critical difference is that earnings were non-existent in 1999 and 2000 while they are booming today. So, at forward P/E of 20x, there is no valuation bubble as far as I can see. If the AI theme unravels at some point, my guess is that it will be because investors are choking on the firehose of capital raises as opposed to being deceived by earnings that don’t materialize.