Dear Reader,
This is Dylan Jovine with Behind the Markets.
Happy Monday. Today is Monday, May 18th.
I spent the weekend talking with friends about what happened last week.
The CPI numbers. The China trip. The warning President Xi gave Trump.
And the PPI number — wholesale inflation — which jumped to 6% last week.
The biggest increase since 2022.
The Risk Level Has Gone Up
I don't want to be Chicken Little.
I'm not saying the sky is falling.
But we bet on statistics here.
We look at patterns and we bet on probabilities.
And the probability of a sell-off — or something worse — has gone up.
Full stop.
Why the PPI Number Matters
Producers buy things to make things.
When the price of what they buy goes up, they pass that cost along to retailers.
Retailers pass it to consumers.
We saw the proof of that immediately.
The Treasury Department, in anticipation of higher prices, just issued $25 billion in new 30-year bonds at 5.046%.
That is the highest level since 2007.
Think about that.
We haven't seen 30-year rates this high since before the financial crisis.
And for those of you who have read Midnight in America — this is one of the big five cracks I warned about.
Higher interest rates raise our cost of borrowing, which makes it increasingly difficult to manage the debt load we're already carrying.
How This Affects the Bull Market
Here is the chain reaction I'm watching.
Higher rates mean consumers spend less.
It costs more to buy a car, more to buy a house, credit card rates go up.
Gas prices are already draining wallets at the pump every single week.
When consumers spend less, they buy less.
When they buy less, the Mag 7 makes less money — from advertising, from commerce, from cloud services.
When the Mag 7 makes less money, they stop spending a trillion dollars a year on the AI buildout.
When the AI buildout stops, the bull market is over.
That is the chain.
It's not here yet.
But the links are starting to form.
Before last week, I'd have put the probability of a serious sell-off or recession at around 25%.
I'd put it at 30% to 35% now.
A Lesson from the 1970s
I've been thinking about something I read about inflation in the seventies.
What struck me then and strikes me now is that they just couldn't seem to get it under control.
Inflation would spike to 9% or 10%, come back down a little, then spike again.
The reason is almost tragically human.
When inflation is that painful, the government does what governments do — it spends to alleviate the pain.
Fiscal stimulus.
It helps in the short term.
But it causes more inflation in the long term.
So you get stuck in a negative reinforcing cycle.
It took Volcker and Reagan finally deciding to raise rates high enough to break inflation's back — and accepting all the short-term pain that came with it.
Nobody wanted to do it until the situation was truly unbearable.
That is a feature of being human.
We don't graduate above it.
We repeat it.
What We Are Doing
Risks have gone up.
The Midnight in America scenarios I wrote about a couple of years ago are dancing before our eyes — they come closer, they pull back, they come closer again.
Those who take the time to prepare their portfolios will find themselves much more protected in the coming crash.
That’s why soon you can expect us to close out some positions, sell some things, and take some profits off the table.
We stay sharp.
We stay patient.
Anyway, that's all I have for you today.
Have a wonderful day.
I will see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine