The Podcast of the Lotus Eaters - May 19, 2026


PREVIEW： Brokenomics ｜ Market Update May 2026


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20 minutes

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3,039

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64

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Transcript

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00:00:00.000 Hello and welcome to Brokernomics.
00:00:25.320 Now, there has been grumbling, grumbling in the comments that I have strayed too long from, you know, the boring business of, you know, markets and investing and economics and all that sort of stuff.
00:00:38.560 So here I am returning with a bit of an update on the market, what's going on.
00:00:43.700 And we can talk about all those lovely things that we like to talk about here on Brokonomics, such as, you know, the liquidity and PMIs and et cetera and so forth, and see if we can make an assessment of what's actually sort of going on at the moment.
00:00:53.820 now just to recap some of the core let's do it as a kind of a bit of a recap of the core arguments
00:01:01.180 and and that is that the investment markets are not just you know doing the old-fashioned
00:01:07.100 discounting earnings or um looking at confidence it's as much as well it i mean it is still those
00:01:14.020 things but it's also about the uh the water level that floats all boats it's about liquidity so
00:01:21.180 So what is happening there and what is happening to the debt machine, which is, well, first of all,
00:01:27.440 is keeping the various sovereigns funded, which the sovereigns like very much, the governments of
00:01:34.220 the world like. But also by necessarily doing that, they're creating an environment in which
00:01:40.720 asset prices can't really help but rise. So some specifics on that. The Fed ended SOMA,
00:01:48.440 which, if I remember correctly, is System Open Market Account, something like that.
00:01:54.740 Basically, they ended the running off of QE that they had previously done.
00:02:02.200 So I think that ended late last year from memory.
00:02:06.120 So the balance sheet reduction in the US has ended.
00:02:11.780 That's not the case in the UK, and we come to the UK later as well.
00:02:14.960 So global liquidity for that and other factors that we talk about is rising again, right?
00:02:21.280 And that's good for assets, especially assets that can't just be printed.
00:02:28.120 So physical stuff, land, manufacturing, gold, Bitcoin, none of that can be printed.
00:02:35.700 Energy is something that we're going to want to talk about.
00:02:38.080 The issue is, however, if the dollar is falling, which it is, and equities are rising, which they are, and gold's rising, and Bitcoin's rising, well, it's rising a bit anyway, and bond volatility is yet falling and yields are looking managed, well, that does sort of smell like a liquidity injection.
00:03:01.060 there's a bit of market management going on here so you know liquidity is is not just stimulus
00:03:07.640 anymore it's it's effectively you know as as is the brokernomics frame the system can't tolerate
00:03:13.320 honest pricing and thus all boats are being floated i guess essentially is is the core of it
00:03:19.900 so as we've said many times before let's let's just think about the debt for a minute
00:03:23.900 government debt is a financial product that has to be sold continuously and it needs to be rolled
00:03:32.120 over continuously uh and it needs to be priced continuously and it needs to be absorbed by
00:03:37.800 someone now the main driver we might as well just talk mainly about the us i mean i will come back
00:03:43.160 to the uk um which is as good a proxy for any european or anglo country that isn't the us but
00:03:50.180 Of course, special rules apply to the US.
00:03:52.280 Debt in the US, we're looking at just shy of $39 trillion at this point.
00:04:00.760 Yeah.
00:04:02.200 Right, and that's up, was it 2.7?
00:04:05.240 So that was up almost $3 trillion year on year.
00:04:09.140 And that's mental.
00:04:10.800 They're adding more per year than the UK has in total.
00:04:14.520 So public debt, the amount of debt held by the public,
00:04:18.760 I mean, that is 31 trillion, I believe.
00:04:22.800 So, I mean, that's a bit less, but it's still an enormous amount.
00:04:28.320 I mean, that alone is 100% of GDP.
00:04:32.560 I think bond payments or interest payments in the US
00:04:37.060 are probably going to surpass a trillion fairly soon.
00:04:41.020 I mean, in the last fiscal year, they spent $630 billion, $40 billion on just servicing the debt.
00:04:54.320 You know, this is not a treasury that is just borrowing.
00:04:58.740 It is running the largest rolling refinance operation in human history.
00:05:06.380 The product is sovereign debt.
00:05:08.080 and the key question is who's actually going to buy this stuff and at what yield
00:05:13.660 uh we we can't ever forget the the boulder that the u the enormous boulder that the u.s economy
00:05:24.120 is having to try and push uphill and you really don't want to stumble when you're pushing an
00:05:29.840 enormous boulder uphill we talked about qe we should probably come back to that you know qe
00:05:37.560 being, you know, you buy a quantity of your own bonds back at market price. And the big
00:05:48.880 risk we've talked about a whole bunch of times is what if something like the US gets pushed 0.95
00:05:53.620 into yield curve control, which the Japanese have been stuck in for decades, where you
00:05:58.040 effectively buy an unlimited quantity of bonds, but you do it at a specific price. So it's 0.54
00:06:06.060 like the evil twin version of qe as if qe wasn't bad enough by itself now the whole thing that
00:06:13.320 well not just the us but every sort of treasury market that at the moment is is doing is is trying
00:06:20.020 to pretend that look it's not qe which was a term they invented in the first place to disguise the
00:06:26.380 fact that it's just bloody money printing now now they're calling it reserve management purchases
00:06:30.500 right but the practical point is this the the the the treasury um it it it it stopped shrinking
00:06:39.760 the amount of bonds on its own balance sheet that it previously bought and in fact it's buying them
00:06:45.780 back right so apparently the fed is looking to buy something like 40 billion treasury bills
00:06:56.680 um now that i suppose is you know not a huge amount at the moment but it is happening
00:07:05.740 i mean it's not it's not you know like 2020 or 2021 levels but it is happening it is going in
00:07:14.200 that direction it's just a question of of how fast it goes in that direction now we should be
00:07:19.240 to look at this right and think okay well look liquidity is being supported therefore risk
00:07:26.160 assets should like it. On the other hand, we should also acknowledge that this is thinly
00:07:33.740 disguised bond market support. So, once you're in the situation where markets are effectively
00:07:42.840 requiring state balance sheet management, so you've already moved away from honest pricing.
00:07:49.200 so you know the the less interesting argument for me is whether they call it qi or not you know the
00:07:57.500 argument is whether the state is again using its balance sheet to make government debt financeable
00:08:02.640 and we kind of arrived in the point where you know the bond markets are act acting as a
00:08:09.160 democratic constraint because the democratic systems that are supposed to do this are not
00:08:14.520 doing it. If the voters refuse austerity, living within their means, and politicians
00:08:23.980 refuse to cut, and bureaucracies right across the Western world refuse to reform, and central
00:08:32.380 banks refuse to take the consequences of a failed auction, the only constraint that
00:08:40.980 I can see left is bond markets, which is a bit worrying. Last line of defense. Maybe it will
00:08:49.020 hold. And US debt held by just the public, right? That's crossed 100% of GDP by itself.
00:08:56.920 30-year US treasuries are priced over 5%. And the short end, actually, is where the action is,
00:09:06.180 right? So, I mean, in the first four months of 2026 alone, the US issued nine trillion
00:09:19.180 worth of debt. Just think about that. Nine trillion in debt. Now, some of that is new
00:09:28.240 issuances and a lot of it is rolling overall debt. But the point is, is that the interest
00:09:35.700 expense is is large enough to behave like a structural budget category all on its own
00:09:42.300 now maybe you could discount me wittering on about this and you can say well look dan you'd be you've
00:09:48.340 been warning about this kind of stuff on your show for however long you've been doing your show was
00:09:53.220 it three or four years now could be something like that and actually you could you could discount me
00:09:57.440 further and say look you well i've been worrying about this stuff for you know a couple of decades
00:10:01.160 at this point and and so far you know the the whole system hasn't messily imploded if you ignore
00:10:08.540 2008 but i mean what happened in 2008 well the banking system couldn't absorb the level of debt
00:10:14.140 anymore so it got kicked upstairs to the sovereign um to the national governments and
00:10:19.900 where does it go next next time the 2008 situation comes around where does it go
00:10:28.680 well there isn't anywhere for it to go so i can't help wondering if we're driving a
00:10:35.560 a heavily laden truck um rapidly towards the end of the pier well anyway i mean they're gonna have
00:10:42.800 to print money aren't they i mean essentially is what i'm coming to and in the meantime the the
00:10:48.380 only the only brakes on this truck that we've got is that the bond market will say no after every
00:10:55.640 elected institution every bureaucracy and every voter has already said yes so there is there is
00:11:02.380 some breaks on the truck but i'm worried i i will give you that doesn't mean that equities and risk
00:11:11.760 assets won't do tremendously well in the meantime and there's probably going to be a lot of
00:11:16.680 distribution and i want to be on the right side of that distribution which is to say
00:11:19.960 money is going to be cycled around um you probably want to be standing where it's going to um come
00:11:27.840 raining down um which spoiler alert is not going to be for people earning a wage gold let's talk
00:11:34.120 about gold people like it when i talk about gold gold is i mean recently been trading in the you
00:11:39.520 know four and a half thousand to four thousand seven hundred dollars per ounce range i mean
00:11:45.640 that's worth noting silver as well a lot of analysts which i respect are saying that you
00:11:51.820 kind of want to have i mean a lot of the analysts i follow are more institutional rather than retail
00:11:57.000 but you know they're saying have very short-term uh treasury bills like t-bills so that you've got
00:12:03.620 liquidity for opportunity or cash i suppose would be the retail version of that have you know gold
00:12:09.080 um as a as a hedge against sort of currency collapse bitcoin also works i'd probably prefer
00:12:15.540 bitcoin but i know that's a bit less institutional but then a lot of other analysts are saying well
00:12:20.020 look this setup and i and i probably lean towards this more myself with my own investing
00:12:24.380 is this setup is so supportive for risk assets uh because they're going to print money but they
00:12:31.400 can't print factories or investments that offer a lot of growth um against a destabilizing money
00:12:39.580 situation i can see why gold is doing well because it's what people buy when they suspect that the
00:12:45.520 bond market is being saved by effectively sacrificing the currency energy is a theme
00:12:51.540 i've talked about on previous updates we should probably come back to i mean you know my core
00:12:58.140 position on this which is energy is where you know these financial notions these abstractions
00:13:04.700 meet the physical world and yeah governments and banks and the bond market they can smooth out
00:13:10.540 between them spreadsheets and to an extent you can manage you know barrels of oil being shipped
00:13:17.000 around and ship insurance but you can't you can't wish into existence those latter things and you
00:13:24.360 certainly can't do it for grid connection or energy supplies now i had a quick look this morning
00:13:29.760 yeah this this goes out later uh because of it the editors like to you know do their stuff but
00:13:35.300 um when i had a look this morning brent was at 107 wti was about 103 and straits of hormuz uh which
00:13:45.020 i cover quite a lot and i'd like to cover more but you guys grumble when i cover the same topic
00:13:49.220 too much even though the the the the iran war is probably the most significant and interesting
00:13:54.860 geopolitical event of my adult life but whatever you you you you want me to uh you want me to
00:14:00.700 return to the knitting so fine but Straits of Hormuz I mean I mean just quickly comment on that
00:14:06.100 the number of ships going through it on a daily basis is somewhere between zero and 30
00:14:10.360 and before it got closed it was like 140 a day I mean Straits of Hormuz is not just a story about
00:14:18.800 oil it is the physical world reminding financial markets that supply chains are not something that
00:14:27.240 could be neatly managed in their spreadsheets. I mean, the fascinating question to me is why
00:14:30.960 it hasn't blown up more so far? Perhaps because some of these management tricks that we've
00:14:35.240 been talking about here. Inflation. Let's talk about inflation. I mean, it's not just
00:14:40.080 governments would like you to believe it's just some number that gets published.
00:14:44.740 There's real signal in that, that nominal claims on real resources are outrunning the system's
00:14:52.260 capacity to supply those resources at the current price mind you i have to acknowledge
00:14:59.120 actually let's talk about pmis i have to acknowledge pmis are good right so uh um for
00:15:06.980 those of you who might be joining and not having watched the whole series so far uh that that is a
00:15:11.400 purchasing managers index apparently in big businesses they have things called purchasing
00:15:16.220 managers and the they are either buying stuff uh meaning that the company that they work for
00:15:21.800 is going to be doing stuff, or they're not.
00:15:24.780 And they survey these people, and if the index is above 50,
00:15:29.200 that means that the economy, the real economy, is expanding
00:15:33.440 and on the verge of doing more stuff than it had previously been doing.
00:15:38.720 So when you see it above 50, that is good.
00:15:41.380 Even a bit above 50 is good.
00:15:44.020 And it's currently, the US Purchasing Managers Index
00:15:48.960 is currently sitting a shade below 53.
00:15:51.800 when I last checked. So that is good. The international one is sitting above 53,
00:15:59.900 like 53.5, something like that. So that is good. I will also note that the ISM manufacturing
00:16:09.180 price index hit 84 so look manufacturing is steady but the input costs are rising
00:16:20.520 so the pmi numbers tell us the activity is expanding very good but the cost
00:16:28.460 to do that expansion is starting to get a bit ugly so um i mean still good
00:16:37.740 but i i'm i'm looking at this market and thinking you know it would be nice if it was much cleaner
00:16:45.640 across the board it's it's it's not things are heading how i expected them to be
00:16:52.940 when i was talking more about this stuff about a year ago but events have transpired to make it
00:16:59.960 still happen but messier uglier straights of all moves uh being a big factor in all of that
00:17:10.560 another thing we can talk about which is actually really interesting uh and i'm looking at quite a
00:17:16.120 lot is the um the ai expansion now i know some of you are skeptical on this but clearly businesses
00:17:24.460 are running headlong into ai uh businesses are finding they couldn't extract vast amounts of
00:17:32.160 cost by putting in ai um entry-level job positions are no doubt being impacted some larger teams are
00:17:42.000 being um cold use cases are coming out i mean the thing that i personally like about it the most
00:17:48.120 as of the time of recording is is we're all wondering if elliot page is going to be um the
00:17:54.560 new achilles in that christopher nolan's is it elliot it is elliot page that's i'm not dead
00:18:00.900 naming am i because i'm not allowed to do that on youtube but anyway um you know the the the girl
00:18:06.400 that you that is now boy the thing i like about ai is there is people are remaking classic films
00:18:12.640 like terminator and fight club and putting elliot page in it and it's very funny but it's but ai is
00:18:17.720 not just about amusing me it is also having a real impact on the economy and the bigwigs seem
00:18:24.460 to think that it is something that is worth a pretty vast amount of investment because look
00:18:31.720 none of it's magic it requires power transformers and it requires grid connections and it cooling
00:18:39.680 and bloody gas turbines and nuclear and substations
00:18:44.620 and copper and land and construction and permitting, right?
00:18:49.960 The last one being a key factor, the permission to build
00:18:52.980 is the thing that everybody's talking about in that space, right?
00:18:57.700 So it's hard not to look at that and think,
00:19:01.780 okay well we are in what i would have expected to see the year 18 months ago as kind of entering
00:19:11.560 the sweet spot now for investments you know i mean the compute rollout
00:19:16.580 is kind of the binding constraint on this it is it's like not it's it's the semiconductor
00:19:24.860 the data rollout is
00:19:27.680 I mean it's not just following it
00:19:30.320 it's not just following the cycle
00:19:31.760 it appears that it could be leading it now
00:19:34.020 and I mean I'll explain what I mean
00:19:38.160 if you look at the big hyperscalers right
00:19:40.420 the well the Amazon and Microsoft
00:19:43.960 and Google and Meta 1.00
00:19:44.860 and all of those sort of chaps
00:19:45.900 they're spending like 600 billion this year 1.00
00:19:50.360 possibly 700 billion this year
00:19:52.580 right and that is up
00:19:55.740 a third on the previous year if you enjoyed that content and of course you did because you are a
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