How Tehran’s Negotiating Timeline, Fertilizer Inflation, Rising Rates, and a Stock Market at Historic Valuation Extremes Could Combine to Reshape U.S. Politics and Markets

Thoughts on the Market by Andy Krieger, June 1, 2026

As the Iran War continues to unfold as an epic failure, I want to lay out a scenario that I hope does not play out.  Just as I laid out the scenario nearly a year ago of a desperate Iran closing the Strait of Hormuz and forecasted in some detail what the ramifications of this closure would be, my new scenario is actually more frightening. No matter what happens with the negotiations between Iran and the U.S. over the coming weeks and months, I am afraid that many of the developments discussed in this report are still likely to occur. We can look at this report as a roadmap of a worst-case scenario, but the best case is not likely to be so terrific.  I apologize in advance for the length of this report, but I believe that it is essential reading in order to make sense of the many disparate forces now at work in the global macro economy. 

Suffice it to say that Kevin Warsh has been handed a very complicated and very messy macroeconomic scenario to manage.  For the sake of all of us, I sincerely wish him the very best of luck and hope that he can find the inspiration to navigate this astonishingly complex situation wisely.

FOREWORD

The Bubble Context: What History Teaches Us About Where We Stand

Before examining the specific mechanisms by which Iran’s negotiating strategy interacts with U.S. economic vulnerabilities, it is essential to establish the baseline condition of the market into which these shocks are arriving. The analysis that follows draws on the June 2026 market commentary of John P. Hussman, Ph.D., President of Hussman Investment Trust, together with data from multiple independent valuation frameworks spanning 145 years of U.S. market history. Their convergent message provides the essential foundation for understanding why the current moment is so consequential.

I.  A Bubble Without Historical Precedent

The starting point for any honest macro scenario analysis must be the valuation environment. Dr. Hussman’s June 2026 commentary is unambiguous on this point:

This is not a market that is somewhat richly valued or trading at a modest premium to historical norms. Hussman’s most reliable gauge — the ratio of nonfinancial market capitalization to gross value-added (‘MarketCap/GVA’) — has pushed to the highest reading in its history since 1928. The current conditions, in his assessment, are "no less extreme than at the 1929 and 2000 bubble peaks."

II.  The Anatomy of the Current Extreme: Six Independent Valuation Gauges

What makes the current moment so historically significant is that the valuation extreme is not a quirk of one particular metric. It appears across every major valuation framework developed over the past century, using entirely different methodologies and data sources. When six independent gauges all flash the same warning simultaneously, the probability that any single one is being distorted by structural change diminishes sharply.

1.  Shiller CAPE Ratio: Second Highest in 145 Years of Data

The Cyclically Adjusted Price-Earnings ratio, developed by Nobel laureate Robert Shiller, smooths out the volatility of single-year earnings by dividing the current price by the average of the past 10 years of inflation-adjusted earnings. This eliminates the distortion caused by cyclically elevated or depressed profit margins in any given year, providing a genuinely long-run valuation perspective.

The current CAPE stands at approximately 41.6x — more than twice its long-run average of 17.3x since 1881, and the second highest reading in over 145 years of data. The only period with a higher CAPE was December 1999, at 44.19x, just before the dot-com collapse that saw the S&P 500 lose nearly half its value. Critically, the current CAPE of 41.6x sits above the 1929 pre-crash level of ~32x and far above the 2007 pre-financial-crisis peak near 27x.

The CAPE’s implied forward 10-year real return at current levels is estimated at approximately 0 – 1% per year, which is essentially flat – in real terms – for a decade. When compared to a 10-year Treasury now yielding nearly 5%, the case for holding equities over bonds at current valuations has rarely been weaker in the entire data series.

2.  The Buffett Indicator: Near All-Time Record at 230–238%

Warren Buffett described the ratio of total market capitalization to GDP as "probably the best single measure of where valuations stand at any given moment" in a 2001 Fortune Magazine interview. The ratio compares the aggregate forward-looking expectations of the stock market against the current productive output of the entire economy. Ratio = Total Market Cap / GDP.  The Indicator uses Wilshire 5000 for total market cap and GDP data from the Bureau of Economic Analysis. 

The Buffett Indicator currently stands at approximately 238% of GDP -- the highest reading in the history of the data series. This compares to a long-run historical mean near 86%, making the current reading approximately 2.4 standard deviations above trend. For context: the indicator hit 146% at the dot-com peak in 2000, 109% before the 2008 financial crisis, and then retreated to around 60% at the post-crisis lows in 2009. It was at 152% in 2020, right before the COVID Crash.  The current reading of 238%+ is in a category of its own.

3.  Price-to-Sales: At a Record High, The Metric Hardest to Manipulate

Unlike earnings-based metrics, which are subject to accounting choices, share buybacks, non-GAAP adjustments, and margin cyclicality, the price-to-sales ratio is the most manipulation-resistant valuation measure. Revenue is harder to inflate than earnings. A company cannot buy back its way to higher sales.

The S&P 500 price-to-sales ratio currently stands at approximately 3.7x, a record high in the history of the data series and more than double its median of approximately 1.6x. This reading is 2.1 standard deviations above historical norms. To return to the median, market prices would need to fall by roughly 55% with revenues held constant – or revenues would need to grow by more than 100% at flat prices. Given that the macro scenario in this report involves margin compression rather than expansion, this metric argues powerfully against the “high valuations are justified by superior earnings quality” narrative.

4.  Price-to-Book: Near Record Highs at 6.0x

The price-to-book ratio compares market value to the underlying net asset value of the index constituents. The S&P 500 currently trades at approximately 6.0x book value, which is near a historical record and more than twice the long-run median of approximately 2.9x. Even allowing for the structural shift toward asset-light technology business models (which legitimately command higher P/B ratios), the current level implies that investors are paying $6 for every $1 of hard net asset value — a premium that depends entirely on the sustainability of current earnings power.

5.  Dividend Yield: At a Record Low of 1.03%

The dividend yield on the S&P 500 is currently at 1.03% -- a record low in the entire history of data stretching back to 1871. The long-run median is 2.87%; the average since 1960 is approximately 3.0%. The current yield is 64% below the historical median.

This metric matters for two reasons. First, it independently confirms the overvaluation signal. A low yield is the mirror image of a high P/E: you are paying so much for each dollar of earnings that the dividend return per dollar invested collapses. Second, in an environment where the 10-year Treasury now yields 4.5% and the 30-year Treasury yields nearly 5%,  investors in equities are receiving a dividend yield of just over 1% in exchange for accepting equity risk. That is the most unfavorable risk-reward trade-off for equity ownership relative to government bonds in the modern era.

6.  The Convergence: What It Means When All Gauges Agree

The critical point is that these measures are not all derived from the same data. The Shiller CAPE uses 10-year average inflation-adjusted earnings. The Buffett Indicator uses aggregate market cap versus economy-wide GDP. Price-to-sales uses revenue. Price-to-book uses net assets. Dividend yield uses cash distributions. Hussman’s MarketCap/GVA uses gross value-added across the production chain. Each was developed independently, by different researchers, to capture different aspects of value.

They all say the same thing at the same time. The probability that all six are simultaneously generating false signals due to structural change – the “it’s different this time” argument – is low. The more parsimonious explanation, and the one supported by 145 years of data, is that the market is priced at a level that implies future long-run returns well below historical averages, and that a significant mean reversion event remains a real possibility.

III.  The “New Era” Doctrine: A Pattern Repeated

One of the most valuable aspects of Hussman’s framework is his identification of the rhetorical pattern that accompanies every bubble. He quotes his own April 7, 2000 commentary, which is indistinguishable from the arguments being made today:

Substitute “AI” for “internet” and “cloud,” and the 2026 version of this argument is identical. The technology changes. The valuation logic that great companies deserve unlimited multiples does not. Shiller himself, after noting that a CAPE above 40 has only been recorded twice in 145 years, has cautioned that elevated readings have historically been a poor reason to assume the rules have changed.  It is true that the AI and AI-related companies are generating significant revenues and earnings – as opposed to the early Dot-Com companies – but are things really that different in terms of all valuations and sensible assumptions?

IV.  The Collapse Mechanism: No Mass Selling Required

Perhaps the most important analytical insight in Hussman’s framework concerns how bubbles actually collapse:

This mechanism matters enormously for this report. The Iran delay strategy does not need to cause mass selling. It needs only to shift expectations – about earnings growth, about the cost of capital, about the Fed’s willingness to accommodate. When those expectations shift, the repricing is immediate and violent, because the market is priced for a specific rosy future that has been called into question. (**Please note that the Hussman’s calculation is simple to verify – 14.67 billion shares x $.07 = $1,026,900,000.00.)

V.  The Magnitude of the Potential Correction

Hussman is direct: a 70% broad market loss and 65–83% Nasdaq loss from recent highs to the ultimate bottom would, in his assessment, be entirely consistent with valuations returning to or below historical norms. These are grounded in the same valuation arithmetic that correctly characterized the 1929 and 2000 peaks.

The Shiller CAPE independently corroborates the magnitude: to return to its long-run mean of 17.3x from the current 41.6x -- with revenues and earnings held constant -- would require a decline of approximately 58%. To return to the Buffett Indicator’s historical mean from 230%+ would require a similar magnitude of adjustment. The fact that every independent metric points to a correction in the 50–70% range is not coincidence. It is the arithmetic of reversion to the mean.

The specific triggering catalyst need not be Iran. But the macro scenario described in this report – rising rates, entrenched food inflation, a belated Fed hike cycle, and margin compression – provides exactly the kind of expectation-realignment mechanism that Hussman describes as sufficient to initiate a collapse.

Executive Summary

The United States entered the Iran conflict with an economy already under stress from accumulated tariff shocks and elevated post-pandemic inflation, and an equity market at  or near the most extreme valuations in U.S. financial history across every major valuation framework. The onset of hostilities and the resulting closure of the Strait of Hormuz has injected a new and particularly insidious form of inflationary pressure: one that travels slowly through the agricultural supply chain, arrives at consumer grocery bills many months after the original shock, and almost never reverses once embedded in food prices.  This does not minimize the painful and horrific shock and pain of sharply higher gas and diesel prices.  It is simply an additional source of extreme pain that is coming, and Iran is well aware of the pain they have already inflicted on us and continue to inflict on us. .

This report examines the scenario in which Iran’s leadership concludes -- rationally -- that dragging out negotiations until the 2026 midterm elections represents the highest-value strategic outcome. We assess the chain of consequences across the fertilizer-to-food pipeline, the repricing of long-duration bonds, a politically constrained Federal Reserve, a historically overvalued equity market, the compounding cost of financing $39+ trillion in federal debt, and the downstream effects on housing, wages, and consumer confidence.

1.1  Why Delay Is Iran’s Dominant Strategy

Iran’s leadership is applying a rational cost-benefit calculus to its negotiating posture, and that calculus overwhelmingly favors delay. The Strait of Hormuz--  through which approximately one-third of all global seaborne fertilizer trade passes -- is Iran’s primary lever. Every week the Strait remains disrupted, consequences accumulate:

•       Urea prices compound. Already up 54% in a single month (February to March 2026) and 50% year-on-year by late April. Each additional month tightens the forward supply curve for the 2027 crop cycle.

•       American farmers lock in 2027 input costs at peak prices. Forward purchasing of fertilizer for next year’s planting begins in summer and fall. Every week of delay is a week closer to irreversible cost lock-in.

•       Food inflation builds in the pipeline. The consumer price impact of today’s fertilizer spike will be most acutely felt at the grocery store in 2027 -- during and after the midterm political cycle.

•       Political pressure on the White House intensifies. A sitting president facing rising gas prices, grocery inflation, and a population furious with overall rising inflation enters the midterm campaign season from a position of structural weakness.

The World Bank projects the overall fertilizer price index to rise more than 30% in 2026, with risks tilted to the upside. Average urea prices could exceed the $700/ton record set in 2022 – retail urea was already trading at $858–866/ton in late April. Farm-level cost increases of more than $20 per acre in central Illinois have been documented for April 2026 alone. 

2.2  The Transmission Lag — Why the Worst Is Ahead

•       Stage 1: Farm input cost (0–3 months): Fertilizer prices spike. The 2026 crop cycle was largely pre-purchased; the 2027 cycle is being priced now at peak levels. Fertilizer represents 36% of corn operating costs and 35% of wheat costs.

•       Stage 2: Commodity price (3–9 months): Higher input costs reduce farmer margins and alter planting decisions. Commodity prices for corn and wheat begin to reflect forward supply uncertainty.

•       Stage 3: Wholesale food price (6–15 months): Higher commodity prices flow into wholesale grain, feed, and processed food prices. Livestock producers face higher feed costs that transmit into meat, dairy, and egg prices.

•       Stage 4: Retail grocery price (12–24 months): The final consumer-facing increase arrives. The 2026 fertilizer shock will be most acutely felt at the grocery store in 2027.

2.3  The Ratchet Effect: Food Prices That Do Not Come Down

Food prices exhibit a "ratchet" dynamic: they rise quickly in response to input cost shocks but decline very slowly, if at all, even when those input costs subsequently fall. As one agricultural economist observed: "Very rarely do food prices fall, and when they do it is very short-lived, which is why these disruptions are so concerning." Once food inflation is embedded in consumer expectations and wage bargaining, it cannot be wished away by a Fed that declines to raise rates.

3.1  The Long End Has Already Delivered Its Verdict

The bond market does not wait for the Federal Reserve. Since the onset of the Iran conflict, the 10-year Treasury yield has risen by more than 14%, a move that reflects the bond market’s independent assessment that inflation risks have materially increased and that the Fed’s response will lag. This is tightening without control: without the Fed’s ability to calibrate the pace or signal forward guidance.

The context makes this especially dangerous: in an environment where the S&P 500 dividend yield is just 1.03% and the equity risk premium has essentially vanished, a 10-year Treasury at 4.5% and a 30-year Treasury at 5% represents direct competition for capital that the equity market has not had to contend with in over a decade. The "TINA" trade (There Is No Alternative to equities) has not merely weakened, it has reversed. Bonds now offer five times the income of equities with a fraction of the risk.

3.2  The Compounding Cost of Financing America’s Debt

• Pre-War Baseline (3.93%): On a $31 trillion public debt balance, the baseline interest cost would be $1.218 trillion annually.
• Current Reality (4.50%): At today's 4.5% yield environment, the annualized interest burden jumps to $1.395 trillion. This reflects a direct increase of $177 billion in annual servicing expenses from pre-war baseline rates.
• Hypothetical Escalation (5.00%): If market pressures drive borrowing rates up to 5.0%, the annual interest servicing bill expands to $1.550 trillion. This represents an additional $155 billion increase over current levels.

These numbers get much worse over time given the $1.9 trillion in new public debt that is being added each year.  (Moving from $31 trillion today to $48.1 trillion by year 10.)  The compounding cost of elevated interest rates becomes progressively more severe.  The debt service costs are already greater than our entire defense budget, and the numbers just get worse and worse.

3.3  The Housing Market: Where Rate Pain Is Most Directly Felt

•       Transaction volume has collapsed. Existing homeowners with 3% mortgages are locked in, unwilling to trade up into a 6.5%+ rate environment. Inventory remains suppressed, supporting nominal prices but destroying housing mobility.

•       New construction is deterred. Builders face higher financing costs on construction loans and reduced demand from buyers who cannot qualify at current rates.

•       Rental inflation is sustained. With purchase unaffordable for a growing cohort, rental demand remains strong, keeping rent inflation elevated and directly feeding into CPI services components.

4.1  The New Chair Inherits an Impossible Hand

Kevin Warsh was confirmed as Federal Reserve Chair on May 13, 2026, by a 54-45 vote – the most divisive confirmation in Fed history – and sworn in on May 22. His first FOMC meeting is June 16-17, 2026. He inherits an economy with inflation at its highest level in nearly three years, a deeply divided FOMC, and a president who has loudly demanded rate cuts. The structural contradiction is acute: the White House’s political interest demands lower rates; the inflation data demands the opposite.  The Fed has already missed its inflation target for six years running, so sharply rising inflation, with the threat of even worse to come, is a terrifying prospect for the central bank.

4.2  The Danger of Ignoring Headline Inflation

•       Expectation formation happens in headline, not core. Workers do not read core PCE reports before entering wage negotiations. They observe gas prices and grocery bills. When headline inflation is high, wage demands rise -- and once wage growth accelerates above productivity, it becomes embedded in core services inflation with a 6–12-month lag.

•       Food and energy are not mean-reverting in this cycle. With fertilizer prices locking in 2027 agricultural costs at multi-year highs and the ratchet effect preventing reversals, food inflation is not noise -- it is signal.

•       The political economy creates a dangerous asymmetry. A Fed chair installed by a president who demanded rate cuts faces immense pressure to hold. If that pressure causes the Fed to lag, the eventual tightening required will be far more severe than early action. The Volcker episode of 1979–1982 remains the canonical example: unemployment above 10%, a deep recession, and bond yields that reached 15.84%.

5.1  The Valuation Landscape

As established in the Foreword, the U.S. equity market enters this macro shock at historically unprecedented valuations across every major framework: a Shiller CAPE of 41.6x (second highest in 145 years), a Buffett Indicator at 230–238% (near all-time record), price-to-sales at an all-time record, and a dividend yield at an all-time low. The implied total discount rate applied to equities is approximately 9–9.5% and is built on assumptions that are now simultaneously under assault.

In simple language, this table outlines a severe equity market stress-test scenario where a macro-driven "double hit" of rising discount rates and shrinking corporate earnings triggers a 30% to 40% correction in the broader stock market index.

1. The Cost of Equity Shock (The Discount Rate)

• Risk-Free Surge: The 10-year risk-free rate moves from the current 4.5% baseline up to a restrictive 5.2%–5.7% (+70 to 120 bps).
• Risk Premium Mean Reversion: The current Equity Risk Premium (ERP) sits at a thin 4.23%, indicating high investor complacency. The model forces this back to its historical mean of 5.5% (+127 bps).
• Total Drag: Together, these factors force the required Cost of Equity up by 150–200 basis points to an elevated 10.7%–11.2%, dramatically lowering the present value of future corporate cash flows.

2. Severe Multiple Compression

• The Baseline: The market is priced aggressively at 22x forward Earnings Per Share (EPS).
• The De-rating: Under the higher stress-test discount rates, the market refuse to pay premium valuations.
• The Impact: The forward P/E compresses by 20% to 30%, dropping down to a historically defensive 15x to 17x P/E.

3. The Earnings Growth Reversal

• Optimistic Baseline: The market currently prices in robust corporate health with 8% to 10% EPS growth.
• Margin Squeeze: High input costs (e.g., energy, wages, or borrowing costs) crush profit margins.
• The Impact: Growth completely evaporates, reversing into an earnings recession of flat to down 5% to 10%.

Summary: The "Double Hit" Mechanism

Stock market corrections usually happen because either multiples shrink (valuation de-rating) or earnings drop (fundamental deterioration). This combined scenario simulates a worst-case cyclical downturn where both happen simultaneously, compounding a standard pullback into a highly painful 30% to 40% bear market.  This is not, however, the most bearish scenario that the current indicators warn us might be coming. 

5.2  The Double Compression Risk

Numerator (earnings) falls as rising fertilizer, energy, and wage costs compress corporate profit margins. S&P 500 net margins at 11.5%+ are historically anomalous and have been sustained by pricing power, share buybacks, and below-trend input costs. None of those conditions hold in the current environment. The IT sector’s 30% operating margins -- which Hussman notes imply a P/E of 135x at historical norms -- are the most exposed.

Denominator (discount rate) rises as the 10-year Treasury yield continues to climb, the equity risk premium reverts toward historical norms, and the Fed is ultimately forced to hike. When both move against equities simultaneously, the repricing is multiplicative, not additive. This is the double compression that no current consensus earnings model has yet reflected.

6.1  The Wage-Price Spiral Mechanism

The conditions for a wage-price spiral are not fully present today, but they are assembling. Food and energy inflation are viscerally visible to workers. The labor market remains relatively tight. Real purchasing power is falling. Government contracts, union agreements, and corporate compensation reviews on annual cycles will price in the full impact of 2025–26 headline inflation during the 2026–27 cycle. Once wage growth in the labor-intensive services sector exceeds 4 - 5%, it becomes very difficult to slow without a material increase in unemployment.

6.2  Services Inflation: The Stickiest Component

The Fed’s focus on core services ex-housing (“supercore” inflation) is analytically sound. This component is the most wage-sensitive and the most durable. It does not respond quickly to supply chain normalization or commodity price easing. Once elevated, it tends to persist for years rather than quarters. By the time supercore inflation is unambiguously elevated, the window for a soft landing will likely have closed.

Tail Risks That Could Accelerate the Timeline

•       Escalation in the Strait of Hormuz: A direct naval confrontation would immediately reprice energy and fertilizer markets sharply higher, compressing the agricultural lag timeline.

•       Dollar weakness: If foreign holders of U.S. Treasuries reduce exposure in response to fiscal deterioration and Fed credibility concerns, a falling dollar amplifies import inflation.

•       Credit event in leveraged sectors: Higher rates for longer create stress in private credit, commercial real estate, and leveraged buyout portfolios financed at floating rates.

•       Additional supply shock: A severe hurricane season, Midwest drought, or further deterioration in Black Sea grain shipping would compound the food inflation shock. 

8.1  The Structural Thesis

The Iran delay strategy, if executed with discipline, represents a masterclass in asymmetric geopolitical leverage. Tehran does not need to defeat the United States militarily, economically, or diplomatically. It needs only to sustain disruption long enough for the self-reinforcing economic dynamics described in this report to do the political damage independently.

The fertilizer shock is the most underestimated component. Unlike energy prices, the fertilizer-to-food pipeline is slow, distributed, and structurally irreversible once locked in. The American voter who has never heard of urea or anhydrous ammonia will nonetheless feel the consequence of today’s Strait of Hormuz disruption at the grocery store in 2027, long after the immediate crisis has faded from headlines.

8.2  The Market Is Not Priced for This Scenario

Six independent valuation frameworks — the Shiller CAPE at 41.6x, the Buffett Indicator at 230–238%, Hussman’s MarketCap/GVA at a 98-year high, price-to-sales at a record high, price-to-book near a record, and the dividend yield at a record low — all confirm that the equity market enters this period at historically unprecedented valuations. The market is priced for perpetual margin expansion, indefinite AI-driven growth, and a benign rate environment. Every one of those assumptions is directly threatened by the dynamics described in this report.

8.3  The Fed Dilemma Has No Good Resolution

The Federal Reserve is being placed in an impossible position by design. Holding rates accommodates White House preferences but allows inflation to become entrenched and requires a more severe eventual response. Hiking rates fights inflation but triggers the very market and economic pain that damages the incumbent party. There is no path that avoids significant disruption, but instead. only choices about timing and distribution of that disruption.

9.1  $30 Trillion Borrowed Since 2008: Mortgaging the Future to Fund the Present

When the Great Financial Crisis hit in 2008, total U.S. federal debt stood at approximately $10 trillion. As of mid-2026, total federal debt has surpassed $36–37 trillion, which means the United States has borrowed and spent approximately $26–27 trillion in the roughly 18 years since the crisis. Including the debt accumulated during the COVID-19 pandemic and subsequent stimulus programs, the number is closer to $30 trillion in net new borrowing if one counts from the pre-crisis debt level of approximately $6–7 trillion in publicly-held debt. Whichever starting point one uses, the scale is historically staggering.

This borrowing was not without consequence in the real economy -- it funded two economic recoveries, a pandemic rescue, and sustained the world’s largest military. But it also directly inflated asset prices to the levels described in the Foreword. The Federal Reserve’s bond-buying programs (quantitative easing) and near-zero interest rate policies, made possible partly by the government’s need to finance deficit spending cheaply, suppressed the risk-free rate for over a decade. That suppression is the single most important factor behind the current equity bubble: when the discount rate is held artificially near zero, the present value of future earnings becomes almost infinite, and any multiple can be justified.

The critical question I want to raise is: what would markets look like today without this intervention? The honest answer is that without $30 trillion in deficit spending and the monetary accommodation that financed it, U.S. GDP growth would have been materially slower, corporate earnings would have been lower, and -- most importantly -- the discount rate would never have been suppressed to near zero. The Shiller CAPE would almost certainly be trading between 20–25x rather than 41.6x. The Buffett Indicator would be closer to 120–150% rather than 230–238%. The stock market, in rough terms, would be worth perhaps 40–60% less than it is today, but on a sounder structural foundation.

9.2  Deficits That Only Appear During Wars and Crises -- In a Period of Neither

The FY 2024 and FY 2025 deficits of approximately $1.8–1.9 trillion -- representing 5.8–6.4% of GDP -- were, in the words of the U.S. Treasury’s own analysis, "greater than at any time in U.S. history outside of a war, recession, or national emergency." The CBO confirmed this: since the Great Depression, deficits have exceeded 6% of GDP only during and shortly after World War II, the 2007–2009 financial crisis, and the COVID-20 pandemic.

The United States is currently running wartime/crisis-scale deficits during peacetime -- or what was peacetime before the Iran conflict. The 50-year historical average deficit is approximately 3.7% of GDP. Today’s 5.8–6.4% is roughly 1.5 to 1.7 times that average, sustained not by a temporary crisis but by structural spending commitments (Social Security, Medicare, defense, and interest) that cannot easily be reversed. Interest payments alone reached $970 billion in FY 2025 — surpassing defense spending and representing the third-largest federal expenditure. And that was before the Iran conflict pushed long rates materially higher.

The NBER projects net interest payments will rise from 3.2% of GDP in 2025 to 6.3% of GDP by 2054 under current law, far exceeding the previous historical peak of 3.2% reached in 1991. Interest on the debt, not defense or social programs, is projected to be the fastest-growing component of federal spending for the next three decades. Every 100 basis points of rate increase accelerates this trajectory by approximately $350 billion per year. The Iran conflict, if it sustains elevated rates through 2026 and forces a Fed hike cycle, is not merely a short-term economic disruption, it is a permanent upward shift in the U.S. federal interest burden.

9.3  What Happens When Investors Lose Confidence in U.S. Creditworthiness?

This is the question that bond market participants are beginning to price, and that equity markets have not yet confronted. The U.S. has benefited for decades from the "exorbitant privilege" of issuing the world’s reserve currency: the ability to borrow essentially unlimited amounts at favorable rates because global demand for dollar-denominated assets is structurally high. That privilege is not permanent, and it is not cost-free. It depends on a credibility compact: the world believes the U.S. will honor its obligations, manage its finances responsibly, and maintain the rule of law and institutional integrity that makes dollar assets attractive.

Several of those pillars are under stress simultaneously:

•       Debt-to-GDP at 100%+ and rising. Debt held by the public reached approximately 99.8% of GDP in FY 2025 — twice the 50-year historical average of ~51%. The CBO projects this rising toward 120% by 2036 and potentially 199% by 2054 under current policy. These are not sustainable trajectories without a fundamental reset.  (This does not include the irrevocable intra-governmental obligations like Social Security, which are roughly $8 trillion.)

•       Political dysfunction around debt management. The repeated debt ceiling crises, the use of emergency supplemental spending to circumvent budget caps, and the passage of legislation that raised the debt ceiling by $5 trillion while simultaneously cutting revenues have eroded the credibility of U.S. fiscal discipline internationally.

•       The Fed’s independence under political pressure. A Fed chair confirmed in the most divisive vote in the institution’s history, under a president who has publicly demanded rate cuts, raises legitimate questions internationally about whether the Fed can credibly tighten when inflation requires it. If the Fed fails to hike when inflation is running at 3-year highs, foreign holders of Treasuries, who own approximately $10 trillion of U.S. debt face a real return calculation that may not favor continued accumulation. In fact, they might opt for liquidation!

•       The geopolitical fragmentation of reserve currency demand. The dollar’s share of global reserves has been declining for a decade. The BRICS economies are actively constructing non-dollar settlement mechanisms. A scenario in which even a modest shift in reserve allocation reduces foreign demand for Treasuries – 10–15% of the $10 trillion foreign-held book – would represent a supply-demand shock in the Treasury market of $1-1.5 trillion.

9.4  The $3.5 Trillion Private Credit Market: A Shadow Banking Fault Line

The current figure is somewhat is quite extraordinary, and it is growing rapidly. The global private credit market stands at approximately $3.5 trillion in AUM as of end-2025, up from $2 trillion in 2020, and is projected to reach $5 trillion by 2029 according to multiple industry estimates including Morgan Stanley and the Alternative Credit Council. It is the fastest-growing segment of the global financial system and, critically, the least transparent and most illiquid.

Private credit largely grew to fill the lending void left by banks after the GFC, as Basel III capital rules made leveraged lending less attractive for regulated institutions. Apollo, Ares, Blackstone, Carlyle, KKR, and other alternative asset managers stepped in, offering direct loans to middle-market and large corporate borrowers at floating rates. That floating rate structure is the time bomb embedded in the current environment:

•       Floating rate exposure to rising benchmark rates. The vast majority of private credit loans are tied to SOFR or similar benchmarks. When the Fed is forced to hike -- as the base scenario in Section VII describes -- borrower interest costs rise automatically and immediately. A company that was comfortably servicing 10% all-in interest costs at SOFR+5% sees its cost jump to 13%+ if the Fed hikes 300bps. Borrowers with thin operating margins do not survive that transition.

•       Mark-to-model pricing conceals stress. Unlike public credit, private loans are not marked to market daily. They are marked by the lender using proprietary models, typically quarterly. This means that stress in private credit portfolios is invisible until it becomes undeniable, a feature that provides false confidence during the buildup and brutal shock during the recognition event.

•       Illiquidity at precisely the wrong moment. Private credit funds typically have 3 - 7-year lockup periods. Investors who need liquidity in a stress scenario cannot sell. This means the feedback loop that in public markets produces price discovery and position-clearing in real time instead produces hidden losses that accumulate until they surface as defaults, fund suspensions, or forced asset sales.

•       Concentration in leveraged buyouts. A significant portion of private credit is financing private equity LBO transactions, acquisitions made at elevated valuation multiples, financed with significant leverage, typically in a low-rate environment. Many of these transactions were originated at 2021–2022 valuations with 2021–2022 interest rate assumptions. They are now being serviced in a world of 7–10% cost of debt. The maturity wall for this vintage is arriving in 2025–2027. 

The FSB published a report on private credit vulnerabilities in May 2026 noting that key credit metrics in private credit portfolios indicate that stress remains comparatively elevated following the 2022 rate rises, and that the private credit CLO market -- at $155 billion outstanding as of October 2025 -- includes a higher proportion of CCC-rated loans and weaker recovery rates than traditional CLOs. A forced Fed hike cycle in late 2026 would represent the first major stress test for private credit at scale. The lack of transparency, the illiquidity, and the floating rate structure make it potentially the most systemically dangerous component of the current financial architecture, precisely because it sits outside the regulatory perimeter and has no established crisis management framework.

9.5  The Wealth Concentration Trap: When the Top 10% Stop Spending

The top 10% of the U.S. income distribution accounted for 49.2% of all consumer spending in Q2 2025, which is the highest level since data began being compiled in 1989, according to Moody’s Analytics. This figure has risen relentlessly from 36% three decades ago, and the gap accelerated in the 2020s as asset price inflation enriched the wealthy far faster than wage growth benefited the middle and working classes.

This concentration creates a specific and severe vulnerability in the current scenario:

Mark Zandi of Moody’s Analytics framed the risk precisely: "The economy is being powered in big part by the spending of the extraordinarily well-to-do, who are cheered by the surging value of their stock portfolios. If the richly (over)valued stock market were to stumble, for whatever reason, and the well-to-do see more red on their stock tickers than green, they will quickly turn more cautious in their spending, posing a serious threat to the already fragile economy."

Now run the numbers on a 30–40% market correction:

•       $44 trillion in household equity wealth held by the top 10%. A 30% correction destroys approximately $13.2 trillion in paper wealth held almost entirely by this group. 

•       The historical marginal propensity to consume from wealth for high-net-worth households is estimated at approximately 3–4 cents per dollar. A $13.2 trillion wealth loss implies a reduction in annual consumer spending of approximately $395–530 billion, representing roughly 1.5–2.0% of U.S. GDP removed from the economy. Imagine what would happen if we experience a 50% - 70% correction in equities!!

•       The bottom 80% are already stretched, with real spending barely outpacing inflation since 2020. They have no capacity to offset a withdrawal by the top end. GDP would contract.

•       A GDP contraction triggers the automatic stabilizer loop: tax revenues fall, unemployment insurance costs rise, the deficit widens, the debt-to-GDP ratio surges, and the bond market demands a higher sovereign risk premium — raising rates further and depressing asset prices further.

9.6  The Complete Amplification Chain: How It All Connects

These three structural amplifiers – the $39 trillion debt burden, the $3.5 trillion private credit fault line, and the wealth concentration trap – are not independent risks. They are a connected chain of amplifiers, each one accelerating the next when the triggering conditions are met:

Each step in this chain is individually plausible. The convergence of all nine -- which is the scenario this report describes -- constitutes what risk managers call a "correlated tail event": a scenario where risks that appear independent are revealed to be deeply connected, where diversification fails precisely when it is most needed, and where the tools that would normally interrupt the chain (Fed credibility, fiscal space, market liquidity) are themselves among the casualties. The fact that we enter this period with six valuation gauges at or near historical records, $28 trillion in accumulated debt, a $3.5 trillion illiquid private credit market never tested in a true rate stress scenario, and half of all consumer spending concentrated in households whose wealth is entirely exposed to equity markets means that the amplitude of a downturn, if it materializes, could be historically severe.

As always, I want to wish you all the very best of luck with your trading.  The markets are particularly complicated now, but my team and I hope that we can help you navigate these tricky times. 

Andy Krieger

This report is prepared for discussion purposes only and does not constitute investment advice. Hussman quotations are drawn from the June 2026 Hussman Market Comment, “Record Extremes, Alternative Investments, and the Hippo,” published by Hussman Strategic Advisors. Valuation data sourced from GuruFocus, multpl.com.

Imre's Report:

My Framework

I treat markets as auctions, not prediction machines.

Most sessions on a day-to-day basis are balanced.

Edges form at the extremes of value.

I trade acceptance and rejection at those edges.

If value migrates, I align with it.

If it fails, I trade the rotation.

I am not in the business of forecasting.

I am in the business of validating participation.

_________________________________________________________

S&P 500 E-Mini Futures (ES):

Sunday evening's gap up set the tone immediately. The market moved straight into the first target zone of 7533 to 7542 — and then did something important. It didn't just pass through — it built value there.

That's acceptance. The market telling you it's comfortable at higher prices.

Eventually a breakout followed and the second target zone of 7575 to 7585 was reached. That zone is now minor support.

The more significant reference heading into next week is the value area built mid-week, which forms the major support zone spanning 7518 to 7549. Buyers need to defend this zone to keep the upside targets in play.

The first upside target comes in at 7629 to 7639. Further targets will be identified as the market continues into new high ground.

Lose the major support zone and the downside target comes in at 7423 to 7458.

The market is accepting higher prices. Until it stops doing that, the trend doesn't change. 

Gold Futures (GC):

The key control zone did exactly what it was supposed to. It contained the week's opening gap and sellers took over from there — driving price all the way down to the long-cited downside target of 4411.

That level has been in play for weeks. When it finally got tested, the market's reaction said everything.

The response was powerful — price reversed sharply and ripped back through the top of the control zone before the week closed within it.

That's a significant development. 4411 proved itself as a genuine floor.

Heading into next week, the zones are unchanged. Build acceptance above the 4536 to 4586 control zone and the upside target of 4722 to 4785 comes into play.

Fail to hold the control zone and 4411 comes back into focus for another test.

The market just showed you what it thinks of 4411. Pay attention to that.

Crude Oil Futures (CL):

The control zone held as resistance. The week opened with a sharp gap down, pulled back to test the $94 to $97 zone, and sellers defended it. Price dropped swiftly — straight into the cited downside target of $86 to $88.

That zone is now support heading into this week.

If buyers can hold $86 to $88, the first objective is a re-test of the $94 to $97 control zone. Reclaim that and the upside targets open up — $102.52, then $104.85 to $107.30, then $110 to $112.

Lose $86 to $88 and $80 becomes the next downside target.

Buyers need to make a stand here. $86 to $88 is the line.