Three Key Thoughts:

1.     Bond Debacle
2.     AI and Iran Still Dominate
3.     Back to the Late 1960s?

Bond Debacle
This past quarter was bad for investors in long term bonds. Yields on US Treasury bonds rose nearly 20% with the ten-year bond yield rising from 4.47% to 5.25% and the thirty-year bond yield going from 4.71% to 5.57%. In the bond world, when yields rise, prices fall. A series of factors came together to cause this sudden adjustment. Pessimism about the prospect for peace with Iran kept oil prices high. Ukrainian strikes on Russian diesel refineries put pressure on global supplies, driving prices up sharply. Because diesel is largely an “intermediate” fuel – largely used commercially for transportation, farming and other industries – a rise in price likely contributes to inflation months in the future.

The Federal government also added some fuel to the bond fire. First, there was a great deal of publicity around the fact that the aggregate Federal debt hit $40 trillion and counting, raising concerns about whether investors will demand higher yields to fund ever higher levels of debt. Second, the Treasury Secretary launched an ill-conceived debt buyback program which he quickly withdrew as it had the effect of withdrawing, rather than adding, confidence in the Treasury debt market. Finally, the Federal Reserve raised short term interest rates by 25 basis points. This was expected and welcomed as it gave investors some confidence that the Fed will be vigilant on inflation.

It may well be that we are returning to a more normal interest rate environment and that the time of very low rates from 2010 to 2025 was an aberration. Whether that is true or not, bond yields now provide a very good return relative to expected inflation and also offer a competitive alternative to stocks.

Iran and AI Dominate
Since the end of February, two themes have dominated the financial markets: (1) the status of hostilities with Iran and, most importantly, the Strait of Hormuz and (2) the peril and promise of Artificial Intelligence (AI).

When the war with Iran started, it was expected that the intense military operation would last only a matter of weeks. While that turned out to be true, getting to an actual peace deal has proven impossible, in no small part because there is no agreement within Iran about what should be agreed to. For now, the Revolutionary Guard, with the help of the Houthis, continues to try to disrupt shipping in the region, while the US military has gotten better at figuring out how to move ships through. This cat and mouse game shows no sign of ending. And President Trump seems to be biding his time until after the mid-term elections, even while popular support wanes.

Speaking of waning popular support, the latest thing for municipalities to do is to put a moratorium or ban on new data centers. Enormous increases in computing power will be needed as AI tools are rolled out across the economy. Of course, these centers can pose some difficult environmental issues but there are many companies working on inventive ways to solve these problems. And, for every city that shuns data centers, there will be another that will welcome the jobs and investment that go into them.

Back to the Late 1960s?
We have been thinking about the state of our society for some time and wondering how we might resolve some of the challenges and divisiveness we face. Thinking back to the last time we recalled such restlessness, it struck us that that there many parallels between the late 1960s and today. We asked Google Gemini to give us a comparison and it gave us six major parallels: (1) political polarization and institutional distrust; (2) social unrest, protests and campus activism; (3) media transformation; (4) economic pressures and inflation anxiety; (5) foreign policy entanglements and great power tension; and (6) new technological and scientific frontiers. We had thought of five of these without Gemini’s help, but it was good to get a more complete list!

We bring this up now because we believe it is worthwhile to begin thinking about how each of these challenges played out and what allowed us to move beyond them. We will have much more to say about this in future writings. Meanwhile, share with us your favorite protest song from that era!

Investment Implications
You don’t have to stretch on quality to find good yields on fixed income investments. Earnings continue to be exceptionally strong within and outside of technology so stocks may not be as expensive as they might otherwise seem. We continue to favor a broadly diversified portfolio with US and international stocks, fixed income and well-chosen alternative investments.