Trading Points: Winners & Losers in an Inflated World
October 7, 2026 | How long will the wave of energy inflation coming towards the industrial nations last? Will this unanticipated surge inflation event cause consumers, companies and even nations to default? Below we ponder some asset allocation themes for subscribers to the Premium Service of The Institutional Risk Analyst as we prepare for our quarterly call on Thursday after the market close. Our latest discussion with Adam Taggart is below:
We think that the inflation caused by the Iran war authored in early 2026 by President Donald Trump and Israeli leader Benjamin Netanyahu is going to create a significant and long-lasting period of inflation. The dislocation in relative terms in a highly-interconnected industrial society is comparable to some of the largest economic shocks in history going back to the Middle ages.
In our upcoming book, entitled "Gold: The One Measure," we describe the vast inflation that occurred in Europe when the silver, gold and other treasure began to flow to the shores of Britain, Spain and France all the way to the markets of Asia:
"The massive influx of precious metals from the New World —primarily silver, along with some gold— significantly contributed to a historic era of inflation in Europe. In Europe during the 1500s and early 1600s, commodity prices rose roughly four to six times over a span of just 150 years. But currency debasement by the warring kingdoms of Europe were also responsible for a great deal of the inflation."
Inflation: Winners & Losers
The new investment theme that most analysts have identified is inflation, but the financial community has still not come to a full realization just how bad the direct and indirect effects of inflation will be on public and private enterprises, and particularly consumers. This inflation wave comes at the end of half a century of steadily falling nominal interest rates, a trend that is now at an end. Note the sharp uptick in credit spreads for high-yield borrowers shown below.
Businesses and sovereign borrowers that have become accustomed to ultra-low interest rates since 2008 are in for a particularly nasty shock. As we noted last week, the Fed's interest rate cuts in 2024 and 2025 gave President Trump and the markets all that they asked for and more. But now, the impact of rising junk spreads as shown above in particular suggests that marginal borrowers are losing access to the capital markets. Spencer Jakab at the Wall Street Journal summed it up nicely:
“Banks’ profitability measures, such as return on tangible common equity, are at their highest in years for some large institutions. But rising consumer stress, problems bubbling up in private credit and a record borrowing binge by AI companies are all concerns.”
The chip maker NVIDIA Corporation (NVDA) now has a market capitalization of $5.5 trillion, but this number says more about the plunging value of the dollar in real terms than it says about the inherent value of NVDA. One of the things we have worried about since 2008 and particularly since COVID is that players in the world of finance are in a big hurry and this tendency to move quickly often generates absurd investment predictions and outright fraud.
We see the tendency to cut corners in the growing mess in private equity and credit, where financial sponsors have defrauded investors and broken laws in order to earn the big money. We particularly see this in events such as the bankruptcy of 777 Partners and the insurance fraud allegations against Guggenheim Partners CEO Mark Walter. But nowhere is the tendency to cut corners and call black white more pronounced than in the investment bubble around artificial intelligence or AI.
The Bank for International Settlements (BIS) just published a research paper on AI entitled "Circular relationships among AI firms." The summary of the paper states:
"Between 2021 and 2025, 28.7% of artificial intelligence (AI) firms’ investment deals (by deal value) involved a target company that was also an AI firm, while 55.2% of incoming investments in AI firms came from other AI firms. Of all the AI-to-AI investment deals between 2021 and 2025, 16.1% (by deal count) and 46.4% (by deal value) also involved commercial supply chain relationships between the investor and target firms. Circular investment relationships reflect key economic features such as the need to secure critical inputs and the presence of information asymmetries, yet they entail macroeconomic risks and increase opacity."
Author Jim Rickards warns that an artificial intelligence bubble is deflating and predicts an 80% stock market crash driven by an impending AI industry meltdown. Ray Dalio, the founder of Bridgewater Associates, told Bloomberg Television that the increasing borrowing by A.I. companies could further tighten other types of credit, and that even some tech giants are starting to hit debt limits.
Our collaborator Mickey Maini, in an interview with Gulf Business, explains why the compute of AI will outlast some of the balance sheets financing it and why machine-speed markets have quietly removed the time that economies assume they have to self-correct.
What we can say about the credit stress from AI and private related debt is that it is causing significant increase in HY credit spreads. Other sectors like mortgage finance and even banking are seeing higher credit expenses. Investment grade spreads are also skewing to the upside, a troubling sign. Even some of the more reckless speculators in AI such as Masayoshi Son of Softbank have literally run out of cash to support the bubble.
Trading Points
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