Running On Empty, Running Blind - HyperNormal Situation Report May 15th

Friday, May the 15th. But this week I want to talk about the market that has decided to look through everything. The closed strait, the record inflation prints, the gilt crisis, the geopolitical theater dressed up as diplomacy. Through all of it, equities are at or near all-time highs.

These are the themes this week that point toward the same question. The question is, how long can you keep running on empty? The global equity market paradox, oil inventory maths, inflation is no longer just about energy. Kevin Walsh's impossible new job, and the UK, where the bond market is now the government, and the G2 summit that resolved nothing.

I'm Jeremy McHugh, and this is In the Company of Mavericks, a podcast where we help serious active investors navigate market volatility, protect capital, and uncover new ways to confidently grow wealth in these radically uncertain times. However, what you're about to hear is not any kind of advice, but just for your information and hopefully your entertainment. I'm not your advisor. You should take responsibility for the decisions you take about your wealth.

Brought to you by Progressive Equity. Let's start with the thing that makes the least sense, the equity market paradox, and therefore probably it tells us the most about what might or might not be going on. The S&P 500 is at or near an all-time high, so too the NASDAQ and the Philadelphia Semiconductor Index. This happens against a backdrop of oil at a hundred and seven dollars.

The hottest PPI print in three years, a UK political crisis that beats any Netflix political drama for being too unbelievable to be true, a US-China summit that resolves precisely nothing about the thing that really matters, and a new Fed chair who scraped through confirmation by the narrowest of margins we know that for the last year, the market's dominant trade had a name. It was the taco trade. Trump always chickens out. Buy the dip.

Laughs at the geopolitics. Ride the AI CapEx wave. It has worked embarrassingly well. Every political escalation has been right to fade.

But this week, another Tex-Mex favorite has circulated, the nacho. Not any chance Hormuz opens. This is the view that the strait stays shut until the accumulated economic pain becomes overwhelming. And by that time, the damage will already be done.

Michael Green told Macro Voices this week that the equity bid is unthinking. It is mindless, it is passive, but it is relentless. That's not a compliment, but a warning. When the bid is structural rather than rational, the correction when it comes doesn't send out the conventional warning signs.

In Green's view, it will be caused by rising unemployment, which will trigger lower four oh one K flows into the triple Qs. But by the same token, a few juiced up mega IPOs, SpaceX, Anthropic, OpenAI, might just preempt whatever it is the labor market has in store. There is no denying that US earnings have been extraordinary. S&P five hundred companies are not beating expectations, they are annihilating them.

The AI CapEx wave is real. Jensen Huang is now apparently indispensable to American diplomacy, which tells you something about where the money is. But Michael Berry thinks the NASDAQ hundred is heading for a dramatic reversal, and Morgan Stanley's Global Investment Committee reminded us this week that inflation hasn't ceased to matter. But no one cares until everyone does, of course.

The second theme is about oil inventory. Here's the story that the equity market is choosing, not the price. The IEA reported this week that global oil stockpiles fell by two hundred and fifty million barrels in March and April. Gone in two months.

The thirty-two nation IEA has deployed a hundred and sixty-four million barrels of strategic reserves and now expects to release another two hundred and ten million through July. JP Morgan published a note this week titled The Illusion of Plenty. It puts OECD stocks at operational stress levels by early next month and at operational floor levels by September. Capital Economics says oil at a hundred and thirty to a hundred and forty dollars a barrel is the base case if Hormuz stays shut.

Saudi Aramco CEO warned that refined product stockpiles could reach critically low levels ahead of the summer driving season. US diesel stocks are likely to fall below a hundred million barrels, the lowest since two thousand and three, by the end of this month. And here's the part people keep skipping over. Even if the strait opens tomorrow, supply cannot recover quickly.

Mine clearance, infrastructure repair, vessel redeployment, the IEA estimates a minimum of two to three months. The market is pricing a reopening that hasn't happened and a recovery that can't happen fast enough even when it does. The human cost of all this arrived in a place nobody was watching Cuba ran out of fuel, oil and diesel. Havana neighborhoods erupted.

Pots were banging, garbage was burning. The energy minister said, and I quote directly, "We have absolutely no fuel oil. We have absolutely no diesel." No political theater here, no spin, just the truth.

This is the Hormuz crisis distilled on a human scale. The energy market canary, it turns out, was in Havana, but it is now dead at the bottom of its cage. This takes us to theme three. Inflation is no longer just about energy US CPI this week came in at three point eight percent year on year, the hottest since May twenty twenty-three.

Energy was up seventeen point nine percent. Tomatoes fifteen point one percent. That's in a month. Real average hourly earnings slipped into negative territory in the US for the first time since April twenty twenty-three.

All rather suboptimal for an administration that ran on fixing the cost of living. But it's the PPI number that should concentrate minds, six percent up year on year, the highest since December twenty twenty-two. Core at five point two percent. Truck freight costs at eight point one percent, the biggest jump since two thousand and nine, and services inflation up one point two percent in a single month.

The last number is the one that matters. The inflation story is no longer purely about energy feeding through at the pump. The second-round effects, the ones that embed in wages, freight, services, and expectations are now arriving. The Bank of England's Megan Green put it plainly this week, "Inflation risks are entirely on the upside," she says, and she knows that even the MPC can't print oil.

The US inflation data, CPI on Tuesday, PPI on Wednesday, did what a month of geopolitical noise hasn't managed, force the bond market to reassess the yield basis. Global bond yields are now at one-year highs. Japan's ten-year yield rose further after its biggest producer price surprise since twenty fourteen. Australian yields resumed their advance.

TD Securities said an extended and persistently high oil price could be a nail in the coffin for bonds. I want to tell you about a specialist financial training business called Finance Talking. I know the team there well. Finance Talking's experienced trainers provide education around capital markets and the basics of business finance and communications.

They offer virtual and in-person training, as well as a range of low-cost e-learning courses for independent learners. Finance Talking already trains people for companies such as Rio Tinto, HSBC, Unilever, and Shell. So maybe they should be training you or your team too. You'll find a link in the episode notes.

If you contact them, tell them that Jeremy sent you. Now back to the episode. Into all of this walks a new Federal Reserve chairman. Kevin Warsh was confirmed on Wednesday fifty-four to forty-five, the narrowest Senate margin since approval became required in nineteen seventy-seven.

For context, Powell got eighty-four, Yellen fifty-six. So Warsh scraped through by the finest of margins. He spent years warning about inflation, then spent the last few months arguing that AI-driven productivity gains would allow the Fed to cut rates without stoking inflation. That argument has had a rough week.

On his first full day as chair-elect, PPI printed at six percent. CME FedWatch now prices in a thirty percent odds of a rate hike by the year-end. The easing bias he inherited looks like history, unless he has a large hat and an even larger white rabbit to pull out of it. Welcome to the job, Kevin.

He presides over his first FOMC meeting on June the 16th. It is shaping up to be the most consequential meeting probably since Paul Volcker's cigar-chewing frame entered the room on August the 14th, 1979. The outcome of that one, you'll recall, was not that pretty for the following few years. Whether Warsh enters the room and turns the music down or keeps the dancing going is the single biggest macro question facing investors probably for decades.

And now we come to the UK, where the bond market seems to beat the government. If you want to understand what happens when fiscal credibility breaks down, watch the UK. It is a live demonstration. Labour lost nearly one thousand five hundred council seats last Thursday.

Reform took fourteen hundred and fifty-one of them. Angela Rayner went full Brutus on X. Gordon Brown turned up, and when he's the answer, you know that someone must be asking the wrong question. Starmer gave a speech, pivoted towards EU, and survived the week's opening.

But then on Thursday, Wes Streeting walked into Downing Street, triggering a Labour leadership contest. Ninety-four MPs have publicly called for Starmer to go. And then, crucially, Andy Burnham said he had booked his return ticket to Parliament. Burnham is the only senior UK politician with a net positive approval rating and a clear preference among Labour members.

However, although Starmer indicated he wouldn't block his rival's return, there is a small matter of Nigel Farage with a very large crypto finance kitchen sink about to be thrown at the Lancashire Borough of Makerfield. The pound fell one percent on Thursday, its worst single-day slide since February. It extended losses on Friday, heading for its worst week since November 2024. The thirty-year gilt sits near five point seven percent, well above every developed world peer in terms of long-term financing cost.

Bloomberg Economics estimates that the May yield move alone adds two billion pounds to the debt interest bill to be paid by the UK by decade end. Traders went underweight UK bonds. The best case for gilts is Starmer stays. Second best is Streeting wins quickly.

Worst case is Burnham. The markets are now pricing that worst-case scenario. Burnham has previously said the UK shouldn't be in hock to the bond markets. Gilt investors don't forget statements like that.

It's a rather delicious irony that they remain Keir Starmer's only convincing vocal supporters right now, and that's just because the alternatives are, on their terms, far worse. As Kemi Badenoch put it, Starmer is in government, but not in power. The ultimate power, it turns out, resides with the bond market. Sorry, Andy, but ultimately it always did.

UK GDP for March did surprise to the upside, plus point three percent against a consensus expecting minus point two. Gilt traders ignored it entirely and reached for the short pound playbook. When even good news is bad news, you know exactly where the real confidence level sits. And so to theme six, the summit that resolved nothing.

The Trump-Xi summit in Beijing was the week's most cinematic event and its least consequential in terms of outcomes. YMCA played at the state banquet. Xi and Trump strolled through rose gardens. Trump admired the roses.

Xi promised to send seeds. Trump called Xi a great leader and floated that this may be the biggest summit ever. Jensen Huang, not on the original Air Force One guest list, boarded in Alaska, then reported that meetings went well. Boeing was promised two hundred jets.

The markets expected closer to five hundred. Boeing fell four percent. The gap between the theater and the substance is becoming a little too obvious for comfort. While Trump and Xi left the party, each with a balloon, as is the traditional way, it is hard to conclude that China's balloon wasn't the larger one.

Then Xi reminded everyone what the summit was actually about. Taiwan is the most important issue in US-China relations, he said. Mishandling it could lead to conflict and an extremely dangerous situation. Independence, he said, is fundamentally incompatible with peace.

Trump was asked by a reporter in the Temple of Heaven whether they'd discussed this matter, and he didn't answer. The fourteen billion dollar arms package for the Taipei government remains unsigned on his desk back in the Oval Office. On Iran, Beijing's biggest foreign ministry overnight described the war as a conflict which should never have happened. That's diplomatic code for distancing without delivering pressure on Tehran.

China will say it must remain neutral and will not lean on Iran, unless, of course, there are major concessions elsewhere, such as Taiwan, and then ways maybe could be found, just perhaps. The Economics Intelligence Unit's Jim Lee said the outcome was strategically reassuring but underwhelming in substance. Gerard Baker in The Times captured the structural shift underneath all this, saying, "This is the first time in nearly a century an American president met another power's leader on equal terms.

Trump came seeking help, not making demands. The H-200 reversal of Biden-era controls, the soft language on Taiwan, the implicit acceptance of Chinese leverage via rare earths and Iranian oil are all signals that in the grand arc of history, the unipolar moment was fleeting." So what's the bottom line? The inflationary story has moved beyond energy into services, freight.

The second round effects are now landing. The UK is in active political crisis with the bond market delivering daily verdicts, and the worst case candidate for gilt investors is now the market's expected outcome. The oil inventory maths is running out of runway, the stress levels coming in weeks, systems strained by September, and the summit didn't deliver on Iran. The strait is being normalized under Iranian control.

It is not being reopened. Equities are at records. The bond market is screaming. Currency pairs are jumping like meme stocks on speed.

Oil is more volatile than Bitcoin. Something is going to break. The question is what and when, and whether Kevin Walsh has any idea what he's walking into on June the 16th. Jackson Browne told us in 1977, "I'm running on empty, and I'm running blind."

It's not the only echo in my head from that decade. Have a good weekend. Buckle up, stay liquid, and stay solvent. If you're still listening, you might like what I post on Substack, where I write hypernormal times, all one word, and post other content for subscribers.

I dive a bit deeper into the financial world we inhabit and attempt some joined up thinking about how we investors might gain fresh insights into what it all means. Please check it out and subscribe. It only takes a few seconds. Thanks for listening, and hope to see you over there soon.

Brought to you by Progressive Equity.