The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

The same as last month, after breaking to new highs in August, the S&P500 has stalled, and prices have been going sideways since. Overall investor positioning is dangerously bullish and greedy, with near-record levels of margin debt and extreme valuations.

The past month featured three articles about the looming stock market top, the 1920s electrification mania, and a new portfolio strategy that is better than buy-and-hold investing. Check them out if you haven’t already!

The Gray Area portfolio is up 6.73% year to date with lower risk than the S&P 500 (Sharpe 1.51 vs 0.85, Sortino 1.83 vs 1.20, max drawdown 4.41% vs 6.5%, and 76% positive vs 52%).

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan.

Every month, we look at the updated technical analysis and risk management of each position. We track each position’s returns and the macro justification (or link to detailed research articles about them). We show real diversification strategies based on likely macroeconomic outcomes, summarize the portfolio weights and changes, and discuss possible new entrants to the portfolio and when/how to enter.

I will continue to provide a preview of two interesting positions within the portfolio.

Natural Gas Companies (FCG) - 5.8% → 5.1%

We bought into energy before the Iran conflict began, showing the power of technical analysis and understanding macroeconomic conditions. Be careful with any short-term energy trading, as oil seems heavily manipulated. Energy looks like a good buy overall, with or without the Middle East conflict as a catalyst.

Last month, FCG rejected the $32 level and made a retracement to support. It has since turned up and is testing the highs once again. The uptrend after a long multi-year consolidation from 2022-2026 is still intact. The target level for the immediate move is $35-38. I’ll rebalance back to a 5% allocation right here since we rejected hard off of the $32 level in September.

I can’t ignore the possibility of a larger correction into the green box ($15-19), which would likely coincide with a strong recession and a great buying opportunity. This portfolio position is up 32.3% total, with the target zone being an ideal price for rebalancing.

Uranium Miners (URNM) - 1.9%

The idea behind uranium is that it will be an important part of our energy future, and real assets should offer true diversification from both the S&P 500 and bonds. Over the year, we strategically reduced the position and booked gains.

URNM went down exactly to $41 and bounced. Now we see whether momentum (red moving average) keeps the price going down for more lows, or if structure builds to the upside. I would want to see green resistance levels break, and any move higher to hold support retracements for entries. Our position is up 10.7% despite the recent selling pressure due to our profit-taking.

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Math Of A Loss

The standard investment advice is a buy-and-hold approach. Never selling and riding out all downtrends is marketed as the optimal investment strategy. A recent piece by Lance Roberts explains the argument against this well, and for a few reasons. Losses are not symmetrical, volatility drag reduces actual returns, and time is not on your side. A 50% drawdown needs a 100% gain just to get back to even, and a single bad year drags down the compound annual growth rate (CAGR) precipitously. Volatility drag suggests that repeated up 10% and down 10% loses money over time. After large corrections like the 1929 and 2000 peaks, it took investors roughly 15-25 years to recover.

This is especially important for those nearing retirement, when heavy losses can destroy retirement plans and that wealth cannot be recouped with 10+ years of income. Younger people have that luxury, but it does not mean it is good for them either. For a 30-year-old with $50k invested, a $25k haircut is a missing $1.1 million in retirement (10% compounded over 40 years).

With valuations such that expected 10-year returns are muted or even negative, it is especially prudent to monitor risk. The average market compound annual growth rate (CAGR) since 1972 is 11.2%. The market doesn’t typically return 11%, though, as it encompasses the inflationary 1970s, the 1987 crash, the 2000 tech bubble, and the 2008 financial crisis. The market is actually extremely volatile, but we have been in a period of calm and a strong bull market since 2009.

If there were a way to avoid these losses and keep your capital, wouldn’t it be too good to be true? Ideally, that’s what The Gray Area Model Portfolio is doing, and is so far. I’m human, though, and could technically make a mistake. What if there were a rules-based trustless system that allowed you to avoid the major losses and stripped out human error and emotion?

Diversification

Money managers often use a 60/40 stocks/bonds approach. This is supposed to be all the diversification you need. The volatility, drawdown, and risk-adjusted return are better, so it is serving the correct purpose. Unfortunately, the CAGR is much worse, going down to 9.4% from 11%. That’s $2.8mil vs $1.2mil since 1973, markedly worse.

If you could ride out the downturns, just holding all stocks is better over the long run. The problem remains that you don’t want to lose 50% of your money right before retirement, or in general.

The Rule

I use technical analysis quite a bit, and the simplest tool is the moving average, which is merely the average price of the last number of weeks. Moving averages often act as support and resistance levels for price and can be a barometer of things like momentum and trends. The 12-month simple moving average (SMA) is also the 52-week SMA and 250-day SMA. This is a slow and lagging indicator that can be used to avoid major drawdowns.

The strategy is this: when price is above the 12m SMA, be in the stock market. When price is below the 12mo SMA, hold money market/short term t-bills instead.

This extremely simple strategy can avoid most of the losses associated with bear markets. You won’t pick the top or buy the lows, but that’s not the point, and is very difficult anyway. Backtesting this strategy to 1972 shows a nearly identical CAGR of 11%. The volatility goes from 15.6%→11.4%, max drawdown from 50.1%→23%, and improves the risk-adjusted return (sharpe/sortino).

Apply the same rule to the 60/40 portfolio, and you get the same CAGR as the static 60/40 backtest, but with even better risk-adjusted returns, volatility, and max drawdown. Now that we have established the risks of major losses in a portfolio, the importance of diversification, and the power of an extremely simple technical analysis approach to investing, the fun can begin.

At The Gray Area, we believe the future macroeconomic environment is likely different from the one we are in now, meaning the assets that do well may not do as well. Stocks and bonds alone don’t provide adequate diversification depending on what period we are in. 2022 and the 1970s are prime examples. To find out the methods of TRUE diversification and risk management while still beating the market, check out the Model Portfolio (click here).

The Simple Strategy

The point of this exercise is to make things incredibly simple. This new portfolio will be a small addition to the monthly Model Portfolio updates. Instead of ~10 positions actively managed, it has only 3 and is rules-based, using the extremely simple rule I established above. While you can get most of the way there with the simple S&P 500 strategy I outlined above, paid members will get access to the simple 3-asset strategy here, tracked monthly, that beats the market significantly with better risk-adjusted returns and lower drawdowns over the backtest.

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The Story

The Roaring Twenties were truly roaring, with the Dow Jones Industrial Average (DJI) returning 500% (25% compounded annual growth rate/CAGR) in just 8 years, from August 1921 to August 1929. Bubbles tend to have this “blow-off top” behavior that still somehow leaves investors greedy after all of those gains. The dot-com bubble grew 225% over 6 years (22% CAGR), and the current AI bubble grew 114% over the last 4 years (21% CAGR).

Bubbles always contain a story, and in the 1920s it was electricity. By the 1929 market crash, about 70% of American manufacturing relied on electricity, up from roughly 30 percent in 1914. The darlings of the time weren’t tech companies like today, but utilities that distributed that power helped fuel the late-1920s stock market boom. Last month I wrote about the British railway mania in Gone Pear Shaped, where the technology worked, but the investment didn’t. The electrification story had the same shape and feel as the railroads in the US and Britain.

With the invention of the light bulb, transformers, and transmission technology at the end of the 19th century, companies soon began devising ways to expand their reach. Power stations and transmission networks took off in the 1920s, especially as serving household demand became more feasible. Over the decade, electricity demand doubled, proving this was a technological revolution, not merely a psychological mania (like the 1630s Tulip Mania).

The Speculation

We know that electricity changed the world and kept growing, but we also know the decade ended with a 90% drop in the stock market. The financing mechanism is where the groundwork was laid.

Companies could obfuscate revenues across state lines to hide from regulation using holding companies. Holding companies would issue shares to purchase a utility company, and then another holding company would issue shares to buy the holding company with ownership of the utility. This pyramid structure caused many layers of separation and leverage between the final company and the operating business.

In the case that each layer funds itself with 40% equity and buys with 50% margin, the fourth holding company would get wiped out by a mere 1.3% decline in the underlying asset. At the peak, utility stocks traded at three times book value, meaning endless new capital and lack of regulation were required for things to continue.

Buyers showed up for years, with utility stocks making up 18% of the stock market, and rising twice as much as the rest of the market in 1929. Fraudsters (legal at the time) like Samuel Insull, through pyramiding and accounting tactics, were able to inflate reported operating income by at least 150 times.

A similar mania in the banking sector was happening simultaneously, driven by the expansion of bank branches not previously allowed and a subsequent acquisition frenzy. This fueled speculation in bank stocks as well as utilities.

The Bust

One thing you realize studying bubbles is that the crash doesn’t happen until there is a reason companies can no longer refinance their debt needs. There are many potential causes to blame for the bust, such as overbuilding of electrical capacity and a regulatory response. Companies like Insull’s needed new loans to cover costs and add new holding companies. Once financing becomes more difficult, with higher collateral commitments or higher debt servicing costs that can no longer be repaid, things get ugly. Add on top a selloff in the underlying asset, reducing collateral values. A spiral of harder-to-obtain commitments and lower asset values meant highly leveraged players got wiped out rather quickly.

In three months, the DJIA was down 48%. By the time the correction settled, the market was down 90%, with many investors wiped out with leverage. Regulation came in 1935, and the number of holding companies fell from 216 in 1938 to 18 in 1958. What boosted earnings and investor speculation on the way up also accelerated it on the way down.

Conclusion

Electricity demand kept growing, and the story about the electricity revolution was real, but that didn’t stop the leverage from being wiped out. The signs were there: opaque financing schemes, extreme market concentration, and inflation of earnings through financing schemes and accounting gimmicks. All of these are also present today with the AI bubble.

The AI theme now represents 49% of the stock market, surpassing every bubble since the 1870s railroads. The realization that, like all capital cycles, compute is outpacing demand is starting to kick in. Earnings of AI companies are overstated. On top of that, investor margin is at record levels.

Hyperscaler cash flow is now inadequate to fund AI investments, and they are turning to bond issuance. The massive supply of investment-grade debt has to compete with longer-term government bonds for capital. Along with investor concerns (risk premia), this is the reason interest rates are going higher, not inflation. This is proven empirically by the bond market’s inflation forecast (breakeven inflation rate remaining stable).

Off-balance-sheet vehicles, lease commitments, GPU asset-collateralized loans, circular financing, and equity financing all blur the financing risk. This risk is starting to appear, as Oracle’s credit default swaps (default insurance) are exploding, CoreWeave's bonds are now trading at 15%, and Anthropic’s latest financing is up from 7% four months ago to 10%, in junk bond territory. Yields are determined by supply and demand, which shows that investor demand for these investments is waning and a higher return is demanded for the risk.

Where this financing becomes problematic is the refinancing. When a company fails to cover the collateral requirements to obtain a loan or when the financing terms cause the company to fail to meet future debt obligations is when the crash will happen. When investors get spooked, the loss of asset value will ripple through the leverage and accelerate the downfall.

There is a real AI technology with a surge in investment to follow, just like the electrification and railroad booms. That doesn’t mean that the investments can’t get wiped out like it was in 1929. We are at the phase where the investments are taking place, but are getting more expensive. Soon these expenses will take enough of a toll for someone to crack.

Please don’t sleepwalk into a market disaster and forget about market risk at the exact worst time. Upgrade to see The Gray Area Model Portfolio to learn how to manage these exact risks. We cover exactly where I think the market is headed in the short and long term, key risk management parameters, position entry conditions, REAL diversification principles, and more. We are beating the market nominally with way less risk, so check it out by clicking here.

Until next time,

-Grayson

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The stock market is among the most expensive in history along many valuation metrics. That doesn’t help with timing a major top, but gives the conditions necessary for one. The traditional buy-and-hold stock market strategies have worked since 2008, but recency bias has blinded people to the wealth destruction that 50%+ drawdowns cause to a portfolio and the immense difficulty of regaining it. It is therefore of utmost importance to know when to reduce risk in this environment. Using technical analysis, credit/bond market analysis, macroeconomic analysis, and sector analysis, we can have a better idea than almost everyone.

Techincal Analysis

As I discussed in Thin Ice, the market often warns you before major tops. Momentum indicators like the relative strength index (RSI) and moving average convergence/divergence (MACD) can give insight into a market running out of steam. The McClellan Oscillator is a breadth indicator, showing how many stocks are positive and contributing to the move. Finally, the Gray Area Liquidity Conditions (TGALC) shows a proprietary measure of market liquidity (i.e central bank liquidity, bond market volatility, dollar strength, overnight financing, etc.). Deteriorating liquidity conditions often precede market weakness. If the market is going up and these indicators are going down, it precedes major tops and is referred to as negative divergence. Divergence in TGALC has preceded the 2025, 2022, 2020, 2015, and 2008 tops.

There is negative divergence on every one of these indicators on the weekly timeframe right now. Momentum, breadth, and liquidity are decreasing as the price moves higher. This is a major sign of underlying market technical weakness. Since it is the weekly timeframe, the market can go higher still in the immediate and short term, but this happens before major tops like 2022, 2020, 2008, and 2000.

Bond Market

Anyone can look at a chart and say it is going to go down, but the underlying health of credit and the economy is the true story. If things are really going to hit the fan, watch credit conditions.

Credit spreads show the yield for certain bond grades relative to safe Treasuries of the same duration. When spreads are low, it means the market doesn’t see much risk of default. When spreads are high, it means the market doesn’t want the riskier bonds and demands a much higher premium for the risk. While they won’t say it on the news, bond investors often can see the credit risk before it happens.

Risky junk bond spreads have risen rapidly over the last few weeks and are at levels last seen in 2022. Junk spreads rose to this level before the 2008 Financial Crisis (GFC), before blowing out even further. Spreads on higher quality bonds (BB+) are also showing a small increase, but still insignificant in the grand scheme. Lower quality spreads rise quicker and earlier than higher-grade bonds during stress and are starting to move.

The yield curve is an important economic indicator that compares long- and short-duration bonds. Short rates are dictated by T-bill supply, money-market, and reverse repo market demand. Long rates are more economically tied to liquidity and debt refinancing (GDP+inflation+risk premia). When the yield curve un-inverts back to a 1.3% difference, we are in a recession historically. The 10y-3mo curve has an 8/8 recession prediction track record back to 1968.

The current un-inversion is at 1.09%, nearing 1.3%, but has been driven by long yields rising faster than short yields. If that case remains, it is healthier and the soft landing case is more likely. Many times in the past, there is a yield spike before yields top, and falling yields and recession inevitably follow. I will be watching for long yields to top out and go lower, along with the continuation of a rate-cutting regime. Historically, yields top first, followed by stocks, and then commodities.

Economy

AI capex is quite literally holding together the entire economy at this point. One of the main players involved in the buildout and circular financing schemes is Oracle. Credit default swaps (CDS) can be thought of as insurance against a company default. Oracle CDS spreads have widened more than in the 2008 GFC. Even the hyperscalers, which are the best and most profitable companies in the world, have seen a sharp increase in their CDS since a year ago.

We must talk about the fundamentals of the companies powering the AI mania. From Anthropic's leaked IPO prospectus (reported by major outlets but should still be taken with a grain of salt), the company reported a 2025 loss of about $42 billion. This is misleading, as $34 billion was a non-cash charge tied to investor funding, so the number that matters is the ~$8 billion operating loss on $4.6 billion of revenue. Revenue is growing fast this year, but we have to wait to see the verified operating income for 2026.

The company has committed $518 billion to compute over about 10 years, a fixed obligation of roughly $52 billion a year against revenue that does not match that yet, and a cash reserve of only ~$20 billion. ~25% of revenue comes from two customers, showing extreme dependency risk. Finally, falling token costs mean usage must grow faster than prices drop merely to maintain revenue. A very large chunk of revenue comes from sales by Google, who are a competitor given their own models, which gives further reason to worry about the financial picture.

Back to the broader economy, leading indicators show where the cyclical economy is headed before it actually shows up in the GDP or unemployment data. Private residential fixed investment (PRFI) is new residential construction and improvements. This indicator, among others like deterioration in full-time employment, shows the cyclical weakness of the economy and its employment engine before the stock market tops and recession appears.

Sector Analysis

Next, pick your favorite basket of consumer discretionary stocks, and they’ve likely performed horribly as of late. I’ve chosen Home Depot, FedEx, Lennar, and Toyota to get a mix of home improvement, shipping, residential equipment, and automobiles (you can also just use the equal-weight XLY ETF). When there is economic pressure, consumers and businesses slow spending on non-essential purchases, which shows up in these companies.

These companies typically massively underperform before a recession. This basket is currently down 43% relative to the general stock market, the most ever. Similar price action can be noted with the financial sector (XLF/SPX) and transportation sector (DJT/DJI). The 2000 recession wasn’t as bad for consumer spending because it was primarily a repricing of corporate risk and valuation. Ironically, now we have both a technology bubble and consumer weakness.

Consumer staples (XLP) are the right stocks in a recession because their earnings are less affected by consumer saving, credit stress, and bubble contagion. People still need food, medication, and consumables regardless of their economic environment. They do not have the same predictive ability, but tend to outperform during and prior to a recession. Right now, the market is giving a massive discount to consumer staple stocks relative to the general market.

We have the technical, credit, and economic warning signs of a major top in the stock market. Credit stress is rising, the cyclical economy is slowing, the AI theme is showing cracks, and the technical analysis looks ugly. How will you prepare?

A buy-and-hold strategy doesn’t work when it wipes out half of your wealth and derails your wealth-building journey. Try real diversification instead of rotating into other stocks that will also lose half of their value. The Gray Area Model Portfolio shows you how to diversify for multiple scenarios, weighted for the most likely economic outcomes. It also teaches technical analysis for knowing when to buy and sell from positions, position sizing, and risk management on current positions. Upgrading your subscription with the button below is quite cheap for the performance and value of the content.

-Grayson

Like to see these asymmetric opportunities synthesized into a real model portfolio that beats the S&P 500 and avoids major downside risks?

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

After breaking to new highs in August, the S&P500 has stalled, and prices have been going sideways since. Overall investor positioning is dangerously bullish and greedy, with near-record levels of margin debt and extreme valuations.

The past month featured four articles about bonds, the digitization of money, the British railway mania, and housing.

The Gray Area portfolio is up 5.42% year to date with lower risk than the S&P 500 (Sharpe 1.49 vs 0.94, Sortino 1.85 vs 1.29, max drawdown 4.41% vs 6.5%, and 75% positive vs 55%).

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and avoid getting destroyed in a bear market, please consider joining with a premium subscription.

I will continue to provide a preview of two interesting positions within the portfolio.

Natural Gas Companies (FCG) - 5.8%

We bought into energy before the Iran conflict began, showing the power of technical analysis and understanding macroeconomic conditions. Be careful with any short-term energy trading, as oil seems heavily manipulated. Energy looks like a good buy overall, with or without the Middle East conflict as a catalyst.

FCG has rejected the $32 support, which was the local high from March. It is now in a short-term support zone. In the long term, FCG is now in an uptrend after a long multi-year consolidation process since 2022. The target level is $36-40. I can’t ignore the possibility of a larger correction into the green box ($15-19), which would likely coincide with a strong recession. This portfolio position is up 20.8% total, with target zone 1 an ideal price for rebalancing.

Uranium Miners (URNM) - 2.2%

The idea behind uranium is that it will be an important aspect of our energy future, and real assets should offer true diversification from both the S&P500 and bonds. Over the course of the year, we strategically reduced the position and booked gains.

In the last update, URNM broke out of the downward trend channel I said to watch for a buildout of upward structure. That was dependent on holding $50.56 and also the July low, but they were both broken. As I suspected, this was a fakeout to the upside, and we are continuing the C of (IV), which has a target of $41.

I’ll reiterate that we will get a better entry with a change in trend or lower prices. If price makes a move up and then holds support, it is a good sign and time to add to our position. Otherwise, the grey support box at $34-41 will provide an even better entry. Our position is up 12,77% despite the recent selling pressure due to our profit-taking.

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Homes are often the most expensive and, by extension, most important purchase of people’s lives. Over the last 50 years, they’ve largely been viewed as an investment class, in addition to a means of shelter. A steady bond bull market (lower interest rates) has helped to encourage further credit expansion in the asset.

The biggest affordability issue is expensive housing prices. Since the turn of the century, prices have gone from $163k to $410k. Prices of new houses sold have actually moderated since July of 2022. At the same time, existing home sales have decreased significantly.

This is due to rising mortgage rates, which have caused the cost of an already expensive house to explode even higher. Many people argue that the 1980s high mortgage rates made today’s housing affordability look like nothing. They fail to take into account that housing prices weren’t as high. A composite of prices and interest rates clearly shows that total home cost has never been more extreme.

This has caused a complete freeze in housing transactions. People with 3% mortgage rates would be out of their minds to give it up for a 7% one and pay double their current costs for the same house. New entrants into the housing market are trapped in an affordability crisis. The monthly supply of new houses is at 8.5 months, which is at levels only reached in the early 1970s, early 1980s, 1990, and 2008. Over 8.3 months’ supply has historically always been followed by a recession.

To truly tell whether housing is expensive historically, we can compare it to the median income. The chart looks even more extreme when taking interest rates into account (for the 80s interest rate people). Today, new housing prices are 4.7 times the median income. Existing homes are even worse than the chart below suggests (~5-6x) since stubborn homeowners are less willing to cut prices than new home builders who are in the business of doing what it takes to sell homes. Housing is more expensive than ever in history compared to what really matters: incomes.

A simple Google search suggests that “housing becomes more expensive relative to incomes over time because the physical supply of buildable land and new construction fails to keep pace with growing population demand and economic productivity.” Looking forward, this is a questionable premise. Fertility rates are below replacement levels, demographics are of an aging population, and markets look to be at extreme overvaluations.

Not only are there fewer total 30-34 year-olds due to aging demographics, but there are fewer married couples (the cohort buying houses). In 1994, 75% of 34-year-olds had been married, but in a few years’ time married by 34 will be a minority group. The ability for immigration to solve these issues is questionable and hotly debated.

This whole article has shown how expensive housing is compared to history and implied that it will be difficult to continue on that trajectory. What if there were a metric where housing looked cheaper than any other time in history? A house today is 100oz of gold, cheaper than the previous low in 1981. This ratio has typically been 200-700oz. Mean reversion would suggest ~200oz for a house, which would coincide with a 1980s post-stress economic recovery that lasts two decades.

Given my research, this seems unlikely, and if gold stayed flat would require home prices to further double from here. Conversely, gold would have to drop by 50% for housing prices to stay where they are. This also seems unlikely with the bullishness of gold and monetary debasement themes. Maybe there are no more recessions, we enter another 80s bull market, and there’s a mix of housing appreciation and gold depreciation to mean-revert this ratio?

Housing/gold has dropped hard three times: the 1970s, 2000s, and now. All three coincided with massive gold bull markets. This ratio is likely more about gold than it is about housing. This implies that the mean reversion occurs when the gold bull run is over. At these extreme levels, it might already be.

Using technical analysis, it looks like this ratio could use another low. If the long term is making a huge abc correction, with the c-wave being a 5-wave decline, 58-71 is the target range. This coincides with the fundamental case better as well. The economy is not ending a lost decade in stocks with heavy inflation and is ready for a new bull market. It looks more like the complete opposite.

I propose a scenario where gold may do well and create another high before it begins its bear market, while housing prices struggle as affordability is not solved. If a recession is triggered, housing will also likely struggle equally or more than gold, furthering the deterioration of the ratio.

Then we are very likely to have mean reversion at some point soon. Gold speculation subsides, the price stagnates, or a new bear market begins. Housing and other real assets may begin another bull market.

Even without a natural bull market, financial repression and excessive money printing could cause a bid for real assets, which drives the ratio compared to gold higher. The gold bull run in the 1970s did not stop copper prices from outperforming. Gold is expensive relative to housing and copper, which has been much higher in the 1870s, 1920s, and 1970s. We are at post-fourth-turning (1870s, 1930s) levels in the copper/gold ratio when no fourth turning has occurred yet. I suspect there could be some wild swings in copper/gold and housing/gold this decade.

The housing/gold ratio implies a Goldilocks economy is more likely based on historical ratio mean reversion. However, housing is more expensive relative to incomes than ever before, with bleak demographics a headwind. If it doesn’t look like housing will be surging any time soon, something else must be going on.

I argue the ratio has more room to the downside before the regime switches. As long as gold remains elevated, so will the ratio since gold volatility is higher than housing. My work also suggests a looming recession, which would put downward pressure on housing and gold.

Only after the recession is it likely that housing and real assets truly outperform gold long term, even if debasement sends gold higher as well. To be on the right side of these outcomes and not be caught off guard by the chaotic fourth turning environment we are in, subscribe for access to the Gray Area Model Portfolio to learn how to actually diversify, navigate bubbles/bear markets, and deliver superior risk-adjusted returns.

-Grayson

Like to see these asymmetric opportunities synthesized into a real model portfolio that beats the S&P 500 and avoids major downside risks?

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The Story

Behind every good bubble/mania is a story that captivates investors and fuels greed so strongly that it becomes the dominant narrative. From mainstream media to uninformed family members, the story becomes an unescapable zeitgeist. The first question becomes whether it was grounded in technological revolution or it was an old-fashioned psychological mania (1630s Tulip Mania).

I’ve written in some detail about the US railway mania in the 1870s, which makes the topic of this piece even funnier, because it already happened in Britain 30 years earlier.

In 1830, the Liverpool & Manchester Railway opened as the first passenger line built specifically for steam locomotives. Despite the showcase resulting in the first passenger railway casualty, it worked properly and was profitable almost immediately. The story was formed, and it was a real technology with real profitability.

A weak economy followed the Panic of 1837 in Britain. As a result, interest rates were low, and capital financing was cheap for early railroad companies, boosting profitability. As people saw the success, railway securities on the London exchange roughly tripled between 1843 and 1845. Speculation in railroad stocks followed alongside the number of new entrants into the market.

The Speculation

Even if the story is correct, investments can still go horribly wrong. In this case, railroads were a key economic revolution. It created jobs, increased productivity, and reshaped national transportation.

On top of cheap financing costs, speculation fueled 10% deposits for investments. It was customary at the time for infrastructure investments to call upon investors at each stage of construction rather than all up front. This expanded the investor base dramatically. Common folk were able to join in on the party instead of merely the upper class, even if they weren’t thinking about the total cost of their commitment.

Laws at the time allowed fast-tracked company formation and the ability to raise money without any previous infrastructure. Newly started companies also ran aggressive marketing campaigns in newspapers, sometimes with grandiose claims and often suspicious accounting methods. The first modern audit was not performed until 1949, after the mania fell apart. In 1845, over 1,200 railway schemes sought Parliamentary authorization. Many competed for the same routes or were outright shells with no serious intention of laying track.

Like any good mania, it had its fraudsters. George Hudson became known as The Railway King. Long before Ponzi made his rounds around North America, Hudson used dividends paid out of capital rather than earnings to manufacture the appearance of profitability and attract new investors. Companies like Hudson’s were fraudulent and eventually succumbed to burdensome debt refinancing.

The Bust

The story of the railroads doesn’t mean it is going to end in chaos, but the speculation does. While some companies had solid moats and profitability, the companies that took too much leverage, laid duplicate tracks, or raised money without physical infrastructure under the mania were malinvestments. Any real economic weakness would show where the cracks were.

Real economic headwinds did soon follow. Crop failures increased imports and prices for consumers, while gold left the country. Interest rates increased, enticing capital to bonds over railroad equities on the margin. On the consumer side, calls for the next round of financing (the rest of the promised 10% deposited) were a heavy burden. On the commercial side, railway-linked non-bank lenders, corn-trade speculators, a famine-driven gold drain, and higher interest rates caused deteriorating liquidity conditions.

As debt refinancing burdens rose, many companies could no longer hold out. The speculative credit had run its course. By 1850, railway share prices lost roughly two-thirds of their value from the peak in 1844.

Conclusion

The British railroad mania and the story told were real and transformative. It laid the tracks that would power transportation of passengers and freight for decades to come. That didn’t stop the industry from losing 67% and hundreds of companies from being wiped out. The lesson is recognizing if the story has transcended into unsustainable mania and how to avoid losing money.

This is similar to the current AI bubble. It has a grounding in a transformative new technology with a story sparking a wave of new investment. The investment is in the process of becoming too speculative and burdensome, just like the British railroads.

The AI investment is already running at extreme levels of the entire economy (1.4% of GDP, 3.1% by 2027). These are bubble territory despite not being rookie numbers compared to the 7% of the British railway mania.

We can also compare the new investment share of economic growth rather than compared to the size of the entire existing economy. Railway investment consumed roughly half of all investment happening in Britain at the mania’s peak. Those are rookie numbers compared to today, where AI investment is the only thing holding up the economy. 74% of Q1 2026 GDP growth was attributed to AI investments.

The British bubble walked into deteriorating credit and economic conditions as the catalyst for the collapse. Deteriorating consumer health, rising interest rates and thus refinancing costs, tighter credit conditions, and increased debt are all similar to today’s AI mania.

History doesn’t repeat, but it often rhymes. Are you willing to learn from them and not let your capital become the collateral damage that loses 67% or more? Subscribe to the Model Portfolio to learn how. Until next week,

-Grayson

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I like the idea of Bitcoin and have spoken positively about it. A digital, decentralized, trustless, and immutable ledger of transactions where the government cannot steal or confiscate your money is right up my alley. While the fundamental and technical arguments for Bitcoin’s utility and reliability are strong, the more I research the whole picture, the more suspicious I get. Unfortunately, I now believe it is merely a tool to be used to support the US financial hegemony and traditional financial system. The real clues arise when we look beyond Bitcoin itself, into what’s happening with real money (gold) and a not-so-little company called Tether.

To set the stage, the reserve currency status is often called the exorbitant privilege. It wouldn’t be called this unless it was, in fact, a good thing for whoever has it. US leaders have sent mixed signals about the privilege, but you can call their bluff on the negatives very quickly. Economic power is on a similar level to military power, and the US dollar financial system and reserve-currency structure are paramount. The US has done and will do anything in its power to hold onto power and control over the world. Military interventions, trade deals, foreign sanctions, and asset confiscation have all been used and likely will again.

Here I set the axiom that the US global hegemony is dependent on its vast economic influence, and that its leaders, regardless of political affiliation, will defend at any cost. We can look at the world through this lens. To put it succinctly, what if the assets most associated with escaping the dollar system (Bitcoin/Tether) are, like the petrodollar regime, its latest pawns?

Gold

Gold is easy to understand. It is a reserve asset because it is scarce and maintains value over many decades. It failed as money in a globalizing and faster-moving economy, but is still held in higher proportions as reserves by nations that are the most powerful. There is a reason Nixon took away gold convertibility in 1971, because if not, the US might actually have to send away all of the gold holdings. If gold didn’t matter, there wouldn’t be a need to hold onto it. Today, central banks around the world are hoarding gold. They are buying at twice the rate of the previous decade and scooping up a third of freshly mined supply. With the acceleration following the confiscation of Russian reserves in 2022, the primary mechanism is presumably to diversify their own reserve assets away from trust-requiring assets like Treasury bonds.

There is a war of influence going on already between the US and “the countries the US doesn’t like,” such as China and Russia. China is clearly taking the approach to consolidate as many real assets as possible, whether that’s physical gold in central bank vaults or spurring Chinese investment in mining, infrastructure, and manufacturing. Lately, China has taken some unusual steps in the domestic market, including halting paper gold trading. To understand why they would do this, you need to understand why and how the US has been manipulating gold for over a hundred years.

It is in the US’s best interest to manipulate gold because it helps maintain the credibility of the fiat dollar system. With gold spiraling higher, the fiscal irresponsibility would be obvious, likely causing higher interest rates and less demand for government debt. The tremendous financial engineering infrastructure of “paper gold” allows 100:1 to 300:1 paper claims to physical gold. Not everyone is going to demand a costly delivery process of tons of gold each month, so a synthetic supply of paper claims is totally feasible and suppresses the price of gold.

China is not interested in this. First, it wants to devalue the yuan against gold while maintaining capital controls to solve its domestic debt burden, which is a real economic issue. Second, the obvious one is to reduce dependency on US Treasuries, which can be confiscated if the US doesn’t agree with you. Third, these governments have been hoarding gold at suppressed prices, so a sudden revaluation would create a windfall of profits for the nations quietly hoarding.

What does this epic nationwide gold battle have to do with a little crypto company? Bear with me; I will connect the dots.

Tether

Tether is a stablecoin, which means it is a cryptocurrency tied to the value of the real US dollar instead of flailing around violently like Bitcoin, Ethereum, or Dogecoin. While this removes the speculative nature and other draws of regular cryptocurrencies, it makes for a more legitimate asset for tokenization. If real-world items are going to be tokenized, it will be with a currency that matches real-world money.

To do this, when Tether receives a real dollar, it issues a dollar-equivalent unit, UST. Right now, UST is primarily used to purchase other cryptocurrencies on exchanges. Tether takes the real dollars and buys US Treasury bills as collateral.

The company has settled for fraud with the New York Attorney General, and it is unclear the extent of the fraud and whether it is still ongoing. I’m by no means the first to point out how sketchy Tether is (Doomberg 1,2,3,4, Parallel Mike, and Leah). They have done a much better job detailing the MANY issues of Tether than I could in this single section of this article, so I recommend those for further reading if you are interested.

Tether buys Treasuries which pay a yield, and the company actually profits off of the arbitrage of people depositing a real dollar for a UST. This raises the simplest and most obvious red flag. Why would the government allow a random fraudulent private company to so easily arbitrage its own bonds?

If Tether were merely a small unregulated offshore company, it may not matter, but it’s growing. The stablecoin market is projected to reach $2 trillion by 2028, each dollar of which requires Treasury bill backing. Tether uses profits to buy speculative investments in gold, robotics, data centers, media, neurotech, Bitcoin, gold royalties, and Argentinian agriculture. It has become one of the largest holders of gold in the world. Not to mention the deep connection to the files; if you know, you know.

Then, there are the connections to government, where you would expect the government to be anti-crypto and anti-Tether. Last year, the Genius Act was passed, creating a framework for stablecoins, specifically requiring them to be backed by US dollars or Treasuries. A White House official who helped draft the law then became the CEO of Tether US a month later. Further, Secretary of Commerce Howard Lutnick’s firm, Cantor Fitzgerald, is Tether’s custodian of US Treasuries.

The line between private financial innovation and state monetary policy has dissolved. Tether should’ve been a snuffed-out fraudulent offshore entity drawing capital away from the US government through demand for Tether and Bitcoin. Instead, the government is intertwined with it and is legislating with it to ensure that all that capital is still demand for US government debt.

Bitcoin

First, Bitcoin should be an independent asset not dependent on anything else in theory. Bitcoin is priced in Tether (UST), not USD, meaning that if Tether is severely fraudulent, it could have deleterious impacts on the price of Bitcoin if it is found to be manipulated higher through excess supply of UST. The main argument from me is not that. It is that Bitcoin appears to be a Trojan Horse; a jester disguised as the knight in shining armor.

The US government would, in theory, want to ban an asset designed to circumvent government control, yet it owns a sizeable amount with the Strategic Bitcoin Reserve. MicroStrategy is now a de facto Bitcoin treasury company, and CEO Michael Saylor has done great marketing, drawing in capital and demand for the asset. Their behavior is suspicious, issuing aggressive amounts of debt and diluting shares to purchase Bitcoin. BlackRock and other major financial institutions have been granted the ability to issue ETFs. These are the primary draw of capital into markets today, and IBIT and others have seen extreme demand for their products, drawing in billions of capital.

The National Security Agency created some of the basic cryptography innovations, while Coinbase, Tether, and the early days of Bitcoin have close ties with the files, increasing the likelihood of coordination. These aren’t proof but merely something worth keeping in mind. Whether Bitcoin is or is not what the stout supporters suggest is irrelevant; you have to look at incentives and actions. The government shouldn’t be supportive of it, and it is being happily used to keep capital within the Western financial system.

The Gold Scheme

Tether is already a large global holder of gold, with reportedly around 150 tonnes and growing, stored in Swiss vaults. If the US wanted to continue manipulating the gold price, it could sell gold to Tether while being the custodian. The Treasury books cash received, Tether books gold held, and both sides get what they want on paper. If Tether’s usefulness runs out or times change, they can merely confiscate the gold already in their own vault. There's a precedent for this kind of paper reshuffling. FDR confiscated gold at $20.67/oz in 1933, repriced it to $35, and booked the difference as a windfall that capitalized the Exchange Stabilization Fund (ESF), which still exists.

The ESF, notably, can deal in gold without congressional approval, at the Treasury Secretary’s discretion. That’s the legal plumbing that would make a quiet tether/gold arrangement possible. The 2025 Gold Reserve Transparency Act calls for a full accounting of all gold in which the US government has a direct or indirect interest, including gold held by third parties such as the ESF or foreign central banks. If the government is using Tether as a gold manipulation tool, this Act should uncover it. If it comes back clean, we can restore some hope in corruption and confidence in the gold price. On the contrary, if this legislation gets swept under the rug, it could be suggestive that they want this relationship hidden.

The US could also be accumulating foreign gold through Tether in Swiss vaults to hedge against their plan failing and to stealthily accumulate gold. This way, it doesn’t appear that the US has lost faith in its own currency and can hedge China’s gold rebalancing tactics, which will only increase. Tether has already undergone a trial run of a gold-backed currency, the XAUT token. Should gold reemerge in importance, there is already a mechanism to keep capital in a digital gold coin in the US financial system, rather than China’s version.

The Dollar Scheme

While the gold scheme is speculative with some evidence, the dollar scheme is based on actions. The purpose is to issue stablecoins to keep capital in the US dollar system. Tether can maintain credibility by holding safe assets like Treasuries and also hoarding gold like a central bank.

As monetary digitalization proliferates the world, countries will find easier access to US dollars. Despite Bitcoin's long-run price appreciation, foreigners will much rather save in stablecoins than their local hyperinflating currencies. The demand for stablecoins and Crypto broadly will, through Tether, be a mechanism for continued US Treasury demand, required by law.

The manipulation of Bitcoin through leveraged UST collateral, MicroStrategy marketing, and BlackRock institutional trust to entice investor capital into Bitcoin. Legislation like the Clarity Act passing someday may increase the legitimacy and capture of the industry. By legitimizing Bitcoin, all capital flows into Bitcoin are not capital flows into gold, and thus are maintained in the US financial system.

Tether’s intimate connection with the US government and elites allows the unlikely rise to make more sense. It’s not about financial innovation, but stagnation. I want to love Bitcoin, but whether Bitcoin and Tether genuinely started as a fair and noble creation or an elites/government ploy is irrelevant; it is now clear it will be used by the US to defend its economic power, to manipulate capital flows and gold.

This does not mean avoiding the assets entirely, but knowing where to be and when is critical. History is full of examples with changing monetary regimes. I’ve written about the past two in Tumultuous Times Pt 1 and Pt 2. Now more than ever, it is vital to understand which assets to own, when, and with risk tolerances. To learn how to manage risk and the changing monetary regime, consider upgrading for access to the Gray Area Model Portfolio.

-Grayson

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The stock market is expensive, no matter which way you look at it. From cyclically adjusted price-to-earnings (CAPE P/E) to the S&P 500 market cap to GDP (Buffett indicator), the market is at extremes. The CAPE ratio shows us price to the past 10 years of earnings, to smooth out noise and volatility. The downsides to this approach are that the data is backward-looking and new behaviors can cause long-lasting changes to earnings like stock buybacks, new paradigms, or accounting changes. Nonetheless, in conjunction with other methods shows the long history of valuations in the S&P 500.

Going all the way back to 1877, extremes in the CAPE ratio follow a rough 30-year cycle for both peaks and troughs and consistently precede reversals to the other extreme. For a variety of factors, there is a rising trendline in valuations over time. Not every reversal is to the channel extreme, and some are only moderate extremes, like the 2008 financial crisis or late 1960s bubble top. While we are near the highest levels ever recorded (1929 and 2000), there technically is more room to run if we are going to hit the upper trend line. This is the bull case for a few more years of AI Mania.

Some suggest that since forward-looking P/Es are really low, AI is not a bubble and valuations are overstated. I take the complete other side. Earnings are the actual bubble, as I’ve argued in Written Off. If true, the CAPE ratio understates the extremity of valuations. Regardless of this stance, the long-term CAPE P/E is historically expensive, which tends to produce a forward 10-year annual return below average.

Taking the CAPE and flipping it gives what’s called the earnings yield of the S&P 500. This is thought of as what percentage return the market earnings represent on your purchase price. This is the same chart as the one above, just flipped. You can also see the extreme readings today, in 2000, and 1929.

If stocks are probabilistically worse over the next 10 years, are there alternatives? The main alternative is bonds, and for much of history, bonds were the dominant investment class over equities. Today, that is an unthinkable world, but not so fast. If we are thinking about valuations and their probabilistic relationship to future 10-year returns, we can directly compare that to a bond of the same duration.

Everyone knows that stocks typically outperform bonds; this is because of the excess risk you take. This is measured with the equity risk premia. Adjusting the US 10-year Treasury bond for inflation, you can compare the real bond yield to the S&P 500 earnings yield. If the excess risk you take is zero, it doesn’t make sense to own stocks. In other words, you are not being compensated by stocks for the excess risk over owning bonds. This is the exact scenario we are in now. Excess yield from stocks is negative, like it was before the dot-com bubble, meaning you are paying a premium to own stocks over bonds in the current environment.

You may say, so what? The forward earnings of these companies are amazing, meaning the economy is growing and doing great. As long as this is the case, stocks are fine. Are they?

Nominal GDP (nGDP) represents economic growth (GDP) + inflation. The 10-year treasury roughly represents nominal GDP in the long run. First, with nGDP decreasing, this is a sign that the economy is slowing and potentially on its way to recession.

Second, after the pandemic was the “run it hot” economy, with nGDP higher than bond yields. In this environment, debt-financed economic activity pays for itself easily. Oftentimes debt/GDP ratios go down, and debt service is not burdensome. Over the long run, this would be great for governments with large debt burdens, and relates to financial repression.

On the other hand, nGDP less than bond yields is the opposite. Interest costs compound faster than the revenue base servicing them, so debt/GDP rises. This makes it difficult for anything that depends on outgrowing its financing cost, like government deficits, corporate leverage, and typical growth investments.

This is the environment we are entering. Run it hot (nGDP>bond yields) was good for our tech-dominated markets, made financing easy even with elevated rates post 2022, and supported asset prices and economic growth. Entering an environment with increasing headwinds (nGDP<bond yields) makes debt more difficult to justify and service, and makes growth investments look less attractive.

A subtle nuance in this relationship is that nGDP lags forward-looking yields. Yields are a real-time, forward-looking summation of all market participants. GDP and CPI data from the government are inaccurate and lagging. This is why you don’t look at GDP to see if a recession is coming, but at the credit markets. Before a recession, bond yields will fall in the quarter or two before the recession as expectations of lower growth and inflation are apparent to investors but have not been borne out in the GDP data. Before 2000 and 2008, you had a brief upward relief in this data set before things hit the fan, as the bond market saw the recession coming even though a rising line in this graph looks good.

From a technical perspective, bonds were in a multi-decade bubble that popped in 2020. The chart below is TLT, which shows the price, which is inverse of the bond yield (if bond yields we’ve been discussing go lower, bond prices and your investment go up). Since then, we have seen an impulsive move lower (circle 1-5) followed by a corrective sideways move within the wedge. Corrections are typically a 3-wave (abc) countertrend move. My primary path is a (C) of b move higher into the 100-110 area, which would correspond with a recession.

That thesis is corroborated by the elevated asset prices, underloved bond market, and yield relationship between the two. The thesis is also being stressed right now with an apparent breakdown from the triangle in TLT. We wait and see if the breakdown on TLT (breakout higher in yields) is persistent or a trap.

In addition to nominal bonds, inflation-protected bonds (TIPS) are an asset I’ve written about as similarly attractive. In a world where inflation and government financial repression are a longer-term issue, TIPS are great safe protection. Yields on TIPS are similarly attractive to nominal bonds but carry liquidation risk during a credit event, unlike nominal bonds, which stand to benefit from that scenario.

Conclusion

Everyone is concerned about bonds right now because inflation and growth expectations are strong. People think that the debt and money printing are causing bond investors and foreign nations to not want US Treasuries to the same extent. A contrarian investor would look at the seeming breakout in bond yields, extreme sentiment, and extreme short interest and view this as a good time to buy. The fears of money printing and inflation may be true over the long run, but a credit issue and recession can meaningfully disrupt those plans.

In general, earnings yields to bond yields are telling a story that stocks are not paying you as much as the safety of government treasury bonds. Further, the growth narratives of the economy are going in the wrong direction, now providing headwinds to the hyper-growth story relative to financing costs. Boring old bonds might just be the best place to be. Until next week,

-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

After the market’s meteoric rise over April and May, it is in a sideways corrective process for most of June and July. In the first few days of August, the S&P500 has broken out to new highs. Since then, the market has gone sideways once again.

The past month featured three articles about the forming record El Niño, Midterm election years, and data center electricity use.

Overall investor positioning is dangerously bullish and greedy, with near record levels of margin debt and extreme valuations. Midterm election years tend to be weaker into elections, which may be reason to be cautious this coming two months.

The Gray Area portfolio is up a healthy 7.68% year to date with lower risk than the S&P 500 (Sharp 1.78 vs 1.01, Sortino 2.23 vs 1.36, max drawdown 4.41% vs 6.5%, and 79% positive vs 58%). The portfolio also has higher nominal returns since inception.

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and know how not to get destroyed in a bear market, please consider joining with a premium subscription.

I will continue to provide a preview of two interesting positions within the portfolio.

Natural Gas Companies (FCG) - 6%

We bought into energy before the Iran conflict began, showing the power of technical analysis and understanding macroeconomic conditions. Be careful with any short-term energy trading, as oil seems heavily manipulated. Energy looks like a good buy overall, with or without the Middle East conflict as a catalyst.

Last month, we noted its support level at $26; FCG has now had two positive months in a row, up 18% off the July 1st low. This portfolio position is up 28.2% total, with target zone 1 an ideal price for rebalancing. FCG looks to be in an uptrend after a long multi-year consolidation process since 2022. The target level is $36-40. I can’t ignore the possibility of a larger correction into the green box ($15-19), which would likely coincide with a strong recession. Nonetheless, my long-term outlook is bullish.

Uranium Miners (URNM) - 2.5%

The idea behind uranium is that it will be an important aspect of our energy future, and real assets should offer true diversification from both the S&P500 and bonds. Over the course of the year, we strategically reduced the position and booked gains.

Here’s where things get really interesting. Last update, Uranium was in a solid downtrend. The recent move in metals appears like a breakout to the upside out of the downtrend with positive divergence in momentum. For this immediately bullish green scenario to play out, URNM must hold $47, and ideally $50.56.

I said we will get a better entry with a change in trend or lower prices. If we hold that support and turn up, it is a good sign and time to add. Otherwise, the grey support box at $34-41 will provide an even better entry. Our position is up 19.3% despite the recent selling pressure.

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In episode 342 on why price controls don’t work, I introduce you to the data center. The AI mania has caused the largest companies to spend all their money on building data centers to support new compute efforts. Data centers consume a lot of electricity, so the grid is once again an exciting thing to talk about.

The PJM interconnection, serving the mid-Atlantic region, is the largest regional grid operator. The regional power operator has found itself with an interconnection queue of over 8 years. This means that new power generation wants to come online, but is having difficulty.

While the issue here is a backlog, the real issue is the price clearing mechanism. Each year, they hold an auction for utilities to bring power online. Operators like to keep a 20% reserve in case of issues in certain areas, but the latest auction hit the price cap and had a record low reserve. Estimates for the clearing price were much higher than the price cap, meaning there wasn’t enough incentive for new power generation to come online.

The tremendous demand for AI data centers is running into an antiquated power generation system that is not being responsive. The argument is that higher clearing prices result in unwanted price increases to consumers, but the result is an increasingly stressed grid and a non-market dynamic.

Goldman Sachs estimates that US data center power demand is forecast to more than double from 31GW in 2025 to 66GW in 2027. This is largely a regional phenomenon and helps us figure out that most of the commercial electricity demand growth is from new data center activity. Data centers fall under the commercial electricity basket and show tremendous growth post-pandemic, compared to growth rates seen prior. With the data center buildout accelerating,

So what can stop the fear that data centers will suck up all the electricity and increase costs on consumers? There are three: incorrect estimates, efficiency gains, and the inevitability of markets to persist despite government intervention

Estimates

EIA’s own 2001 Annual Energy Outlook projected 2020 electricity demand roughly 25-30% above what actually materialized that year. Forecasts today likely discount macro environments, forecast linearly, and become excited by a hot new technology. RMI’s research suggests that utilities have also over-forecasted peak demand for over a decade. If a utility overcommits capacity, waste is shed at additional cost to consumers. If a utility under-commits capacity, there are blackouts and major grid distress.

Today, the interconnection queue and data center load figures are more like wish lists than actual commitments. LBNL shows the queues are enormous, but the historical completion rate for queued projects is low. Many entries are speculative, duplicated across multiple utility territories by the same developer shopping for the best site, or filed to reserve a place in line before a project is fully financed. This phantom load is a real problem that makes predictions and estimates difficult for all parties, not to mention the significant number of data center projects experiencing delays. These could include political backlash/moratoriums, supply constraints, or permitting issues.

Efficiency Gains

It’s easy to assume that as NVIDIA chips continue getting better and more efficient, as cooling systems innovate, and AI models improve software efficiency, that power demands may not be as high as expectations suggest because the per-unit efficiency rises. This is a trap, and a phenomenon called Jevons Paradox arises.

Jevons observed that more efficient coal engines in 19th-century Britain increased total coal consumption, not lowered it. Efficiency lowered the effective cost of the service, bringing in users faster than the per-unit savings. This paradox argues against my point initially, because as AI and the infrastructure improve, it will get cheaper, bringing in more use cases, and keeping the energy demand.

What I think people miss is that efficiency will not be a demand shift, but a geography shift. As AI becomes cheaper from efficiency gains across the technology space, more users will have access. Specifically, they will have access on local devices, whether that be small devices or smaller community data centers. Instead of decreasing the overall electricity demand, it changes where that demand comes from. Instead of a large queue on PJM, the load will be more distributed around the country, similar to how electric vehicles are broadening their footprint from a few cities to nationwide.

Shifting Bottlenecks

The last point has been made well by Doomberg and SemiAnalysis. Bottlenecks are only bottlenecks until someone finds a solution. Is a crackhead going to call it quits when drugs become illegal? To be clear, I’m not saying AI companies are crackheads or doing anything illegal per se, but that they are going to desperately look for alternatives.

If PJM has an eight-year backlog of the power generation needed, you go to another provider. If that provider/state bans data center construction, you build your own. This is called behind-the-meter solutions (power generation and storage systems located on the customer’s side of the utility meter). Not without its own backlash, companies are now constructing their own power generation plants for their data center projects.

Natural gas in the Permian Basin has become the hotspot. Natural gas is a growing byproduct of oil production in the US's largest oil region. Since it is a gas, it requires specific complex infrastructure to transport to other areas, let alone leave export terminals. With prices often in the negatives in some oilfields, it is the perfect place to take advantage of cheap energy.

Texas has put temporary freezes on data center connections, but has not banned them. New regulations on interconnections in Texas have actually incentivised behind-the-meter even more. Finally, the avoidance of many federal regulations in Texas has been another driver of this approach. Ultimately, the data centers will go to where they can begin as quickly and cheaply as possible. The market will find a way, regardless of things like price controls in PJM. The crackhead will get his crack.

Conclusion

Bottlenecks are like whack-a-mole; eventually you either win or become overwhelmed. Data center projects are playing whack-a-mole with grid operators and state governments to get the quickest and cheapest electricity.

While interconnection queues are a huge issue now, as efficiency gains from hardware and software revolutionize AI, electricity demanded from AI will geographically expand over time, reducing localized power burdens. This is just like the technology improvements of the computer/internet revolution or even the geographic proliferation of electric vehicles from select cities to the whole nation.

On top of all that, estimates of demand tend to be overestimates. On one side you have analysts and companies bought into the AI mania and excitement, and on the other, utilities overestimating so they aren’t the ones in the news and in the courtroom when there is a grid blackout.

All of this to say that I’m not as worried about data centers sucking up all of the electricity and making your bills go up as I would be about the government artificially creating energy shortages or debasing your hard-earned savings with inflation and taxation. This whole article is important, but doesn’t even scratch the surface of the largest reason data centers likely don’t suck up as much electricity as the mainstream suggests, and that is the capital/debt cycle.

-Grayson

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Sometimes in the media you hear things like, “September is seasonally bad,” or “sell in May, go away.” Another one is that mid-term election years tend to be choppy and poor for returns. We have already had a volatile year, with a 9.5% correction in February/March, followed by one of the most aggressive 20% rallies in history, followed by another 5% correction, and now back to highs. It has been volatile, but largely positive so far in 2026, up ~12%.

Is that early-year correction all she wrote, or is there room for weakness before mid-terms in November?

Midterm Election Years

Mid-term election years are actually worse than normal years going back to 1930. Midterm years averaged +3.2% (median +0.6%) vs. +9.5% (median +12.4%) for regular years. On top of that, midterm years averaged max drawdowns of -21.1% (median -20.3%) vs. -15.8% (median -12.2%) for regular years. Bigger corrections and worse full-year performance.

Only 54% of the time the full year finished positive, compared to 70% for other years. Outside the great depression and WWII, these have been buy-the-dip moments. For all the years, it shows attractive average next 6-month returns of 11.4%.

As far as when the drawdowns take place, October alone accounts for 9 of 24 (37.5%), the same as the first 7 months of the year combined. The tail end of the year (Aug–Dec window) captures 15 of 24 troughs (62.5%), while the entire first seven months of the year (Jan–Jul) account for only 9 of 24 (37.5%). Statistically, the late-year correction clustering is even more significant than the return differences between midterm and non-midterm election years. There has never been a mild correction in Q1, so 2026 would be historic without another >9.5% correction later this year.

Federal Reserve

To add a further wrinkle to the mix, we had a new Federal Reserve chairman, which can bring uncertainty to the monetary environment. Looking at the last 12 chair switches, returns tend to be slightly worse, but it is not significant. Perhaps it’s not the person, but the policy that makes the bigger difference.

Layering in which interest rate regime coincided with the midterm year may give clues to whether it will be a particularly bad year or not. From this analysis, an active Fed tends to be worse than a stagnant Fed in terms of full-year returns. Post-rate-cut plateaus showed milder max drawdowns. There isn’t much difference between any regime in the 6-month post-election returns.

Typically, the worst scenario is a rate-cutting regime, which we are currently in by my definition. While the sample sizes are small, our current year would be a strikingly positive anomaly based on these historical conditions if things stay positive.

Other Methods

Perhaps economic conditions of the time may influence what type of midterm correction there is. Checking both whether there was a recession the prior year or how much GDP growth there was proved completely insignificant.

Perhaps the government makeup influences returns. Political party did not influence returns, but whether Congress was unified or divided did. Divided government years had a meaningfully higher positive-year rate (66.7% vs. 46.7%), a stronger average full-year return (5.1% vs. 2.2%), and nearly double the post-election bounce (+16.4% vs. +8.4%). Max drawdown had no difference, and only the post-election bounce was close to statistical significance. Gridlock may in fact be good for markets, at least for midterm years. Today we have a unified Congress, which points to slightly worse outcomes based on history.

Momentum and volatility don’t seem to matter much either. If the prior year was very positive (15+%), mildly positive (0-15%), or negative, there wasn’t a significant difference. The same happened when I ran whether the prior year had a larger or smaller drawdown. There wasn’t any predictability from the prior year.

Since most of the time corrections happen in the latter half of the midterm year, what if there is a correction in the first quarter? First, we have to separate whether there is a bull market or not, since bear markets would skew the data fast. We’ll define that as 20% off the previous low. The median Q1 correction splits the series at 9%. Non-bull market years are worse from a max drawdown and post-election return perspective, but neutral for full-year returns. Bull markets with mild or no Q1 correction have the best outcome for each category. Including >9% correction years, it becomes the category with the worst yearly return.

You might retort that, of course, the year is weaker if it starts with a >9% correction, but in only 2 out of 10 bull market cases was the Q1 correction the largest of the year. October had the most full-year troughs (6 of 10). Only 1982 and 1994 had the Q1 low double as the year's real low. Typically, the Q1 correction is not the largest of the year. Even when you further select for years where the market swiftly reclaimed highs like 2026, the results don’t change. It would be against historical precedent for today’s market to continue without another correction.

Quick Points:

• No midterm year in 96 years has combined a shallow drawdown (<10%) and an early trough.

• Historically, the real low tends to be larger and show up later in August through October, even with stronger Q1 corrections.

• 2026 is also a Fed-transition midterm year which has historically run cooler and had larger maximum drawdowns than we’ve observed so far.

• Political party doesn’t matter, but divided Congress tends to have worse outcomes (gridlock=better).

• Previous year momentum/volitility/GDP are not significant.

• Valuation extremes bode worse and had larger drawdowns than average (1966, 1970, 1998, 2022). They were also stronger than average in the 6 months post-election.

• Midterm years were reliably positive in the 6 months after election across the series other than the Great Depression and WWII.

Conclusion

Some of these are supportive of the market, and some of them aren’t. 2026 doesn’t have to follow history, but it doesn’t hurt to keep our eye on it. History suggests that another larger correction is likely before November to fit the traditional mold. Regardless, we are not in a historically bad environment, so the odds of a good post-election rebound are good based on this analysis.

Not once did a bear market begin in the midterm election year, but a few times it followed it. The 6 months post-midterm were strong throughout the sample (outside GD and WWII), but peaks were found in the market 3 times in the year after. 1987 flash crash, the 2007 peak, and the 2019 peak were all found in the following year.

Could this mean we get a second correction into midterms, a solid rally higher, before finding a major top in 2027? It’s too early to tell for sure, and we will find out together. To help learn how to navigate this with a portfolio, please consider upgrading to find access to The Gray Area model portfolio. We discuss real-time risk management, position sizing, technical indicators, what to keep an eye on in the markets, and an example of a better total and risk-adjusted return than just buy-and-hold S&P 500.

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El Niño

For climate scientists, an El Niño occurs when the sea surface temperature anomaly off the Pacific coast of South America reaches +1.0C. The terms strong and super are used when this anomaly reaches 1.5C and 2.0C.

The top two El Niño events in recorded history are 1877 and 2015, reaching ~2.75C. Currently, the latest August estimates predict a maximum anomaly of ~3.5-4.0C by December. We are essentially already at a super El Niño months earlier than normal. The median forecast is for the strongest on record by late 2026.

In 2015, El Niño brought droughts and floods to certain regions, crop shortages, and food insecurity. Overall, the impact was minimal to moderate. 1877 saw the opposite impact, with an estimated 50 million deaths worldwide. Now it is extremely important to determine whether this event will be insignificant or cause another global calamity.

Typical impacts for strong El Niños include temperature, precipitation, and storms. It tends to be drier in India, Indonesia, northeast Brazil, Australia, and South Africa. It tends to be wetter in Brazil and western South America. The US typically sees a wetter southwest and southeast with a drier northeast and northern Rockies into Canada.

Global mean temperatures should react in 2027 to the large reservoir of ocean heat transferred to the atmosphere. This burst in mean global temperature is a predictable phenomenon based on the solar cycle impact on ENSO climate patterns, not climate change. There is some debate about whether the ENSO events are exacerbated by climate change, but that is not a topic I will cover.

Finally, cyclones and hurricanes react to the ENSO environment. El Niños typically bring weaker Atlantic hurricane seasons and stronger Pacific typhoon seasons. That does not negate the possibility for one of those less frequent storms to be extreme and cause damage.

These are investable themes I’ve discussed in the past in my Not So Bright and Fields of Neglect series. To learn how these may fit into a portfolio, consider upgrading your subscription to access the model portfolio.

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1877

The 1877 super El Niño caused abnormal weather patterns which led to a progression of drought, crop failures, and famine. Horrific geopolitical and colonization issues contributed to and worsened the negative impacts. 50 million famine-related deaths resulted.

Singh et al. also proposed mechanisms of the 1877 event, which suggest that while the Pacific anomalies are the dominant factor, the correct timing of specific anomalies in the Indian Ocean and Atlantic Ocean determine whether we get an extreme 1877 event or a mild 1998/2015 type event.

The paper suggests that risks escalate if the Indian Ocean anomaly peaks in the fall after the Indian monsoon season and the Atlantic anomaly peaks in the spring during Brazil planting season instead of summer.

Other factors like pressure and wind determine whether the temperature anomalies are actually impacting the weather patterns. The multivariable index below shows that we are in fact experiencing strong El Niño already. Another factor that made 1877 worse was the 7 years of La Niña preceding it. Today, we have a somewhat similar dynamic, with most of the last 10 years spent in La Niña.

Today

While it may get more clicks, I am not going to sit here and tell you that global famine with millions of deaths is on its way, nor would I ever like to see that happen. Although we would be unwise not to heed the warnings of history. 2026-2027 is shaping up to be the most extreme El Niño event in recorded history. Whether that leads to global food shortages or mild agricultural stress is multi-faceted.

In short, we are first watching the development of drought in India/Indonesia and an Indian Ocean sea surface temperature anomaly peaking later in the fall/winter. We are then watching the rise of the Atlantic sea surface temperature anomaly to peak during Brazil’s wet season in spring of 2027 instead of later in the summer.

Other than climate, the human element is not to be understated. While food insecurity is typically an issue in a super El Niño event, policy errors and geopolitical issues can turn them into deadly famines. Forced exports from India by Britain and dwindling reserves from conflicts in China turned moderate issues into catastrophes on the scale of WWII or the influenza outbreak back in 1877.

Today, transportation capabilities and agricultural yields are orders of magnitude better, which should help us avoid another global calamity. This El Niño occurred amidst a Fourth Turning by my definition and obviously was an event that made this era exceptionally worse, but did not cause it. Just like today, El Niño won’t cause the Fourth Turning, but if geopolitical impacts are not resolved, agricultural and food issues could escalate worse than expected.

We are unfortunately seeing tensions in the Middle East as well as in Ukraine continue longer than originally predicted. If these continue to disrupt energy, fertilizer, food, and other commodity supplies, things could be worse than they need to be. Things are ‘generally good’ right now. Past fourth turnings were very Tumultuous Times, which means that things could get worse today if the cyclical generational theory holds as I expect.

Agricultural commodities and energy are two sectors that could see outsized returns. Not only do these sectors benefit from El Niño-related stress, but they have seen historically low investor attention. Commodities are low percentages of the major stock indexes and have poor returns comparatively, which suggests mean reversion would be severe. Finally, governments are printing money hand over fist, and it will only get worse with deteriorating economic conditions. Real assets provide true diversification against the debasement of your money.

-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

After the market’s meteoric rise over April and May, it is in a sideways corrective process for most of June and July. In the first few days of August, the S&P500 has broken out to new highs.

Overall investor positioning is dangerously bullish and greedy, with near record levels of margin debt and extreme valuations. The Gray Area portfolio outperformed the struggling market in the first quarter and is up a healthy 4.28% year to date with lower risk (Sharp 1.55 vs 0.87, Sortino 1.93 vs 1.19, and max drawdown 4.41% vs 6.5%).

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and know how not to get destroyed in a bear market, please consider joining with a premium subscription.

I will continue to provide a preview of two interesting positions within the portfolio.

Natural Gas Companies (FCG) - 5.7%

We bought into energy before the Iran conflict began, showing the power of technical analysis and understanding macroeconomic conditions. Careful with any short-term trading of energy, as it seems to be heavily manipulated. Energy looks like a good buy here in general.

FCG rallied modestly in July, but hasn’t decisively decided which direction it wants to trend next. This portfolio position is up 17.5% total. It has held support at $26.5 and could continue the bullish pattern from here. Breaking 26 could mean a larger correction to $15 could be taking place, which would be an even better long-term buying opportunity.

Uranium Miners (URNM) - 2.4%

Our reduction in uranium miners last month proved wise, as the trend channel down is still intact, moving averages are acting as resistance, and momentum is down. I expect better buying opportunities with lower price targets being hit or a change in trend.

The idea behind uranium is that it will be an important aspect of our energy future, and real assets should offer true diversification from both the S&P500 and bonds. Our position is up 16.1% despite the recent selling pressure.

For the full portfolio breakdown and analysis, please upgrade your subscription.

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Intro

A fourth turning is a period of chaos/transformation within the Strauss-Howe generational theory, which I neatly introduce in Your Turn. We are in a fourth turning now, which typically lasts ~20 years and is characterized by some of the most famous and transformative historical events (revolutions, wars, economic crisis, civil crisis). Our last fourth turning was the Great Depression/World War II time frame (GD/WWII), which I discuss in detail in Tumultuous Times. In it, I discuss the groundbreaking policies, rising populism, and, most importantly, asset performance over the period.

The gravity of ignorance heading into this period cannot be overstated. The Silent Generation is reaching the end of their lives, so most of us have not experienced this before. The markets have no lived experience investing in these times and are not tuned to these risks. Only by studying history can we truly prepare for what is to come. Investing has been easy, but all monetary and governance rules are thrown out the window during chaotic times. To find and study the fourth turning before the GD/WWII, we roll the clock back to the Civil War period.

Civil War

Most regard Abraham Lincoln as one of the best presidents in history, and are taught that the Civil War was taking it to the greedy Southerners unwilling to relinquish slavery. While there were greedy Southerners, Lincoln’s motives were unfortunately far from those of a moral savior.

I encourage you to read my full piece on the Civil War, as this is a mere summary. In short, the Northern elites knew the dire economic consequences of Southern secession. Heavy tariffs subsidized northern industry at the expense of the agricultural South, and the Civil War was pushed by Lincoln to protect the Union and this favorable scheme. Lincoln originally had no intention of ending slavery, and the Reconstruction era was proof that the slaves were a mere tool, rather than the prime directive.

Please read the full piece for my full argument, and why I believe the fourth turning didn’t end in 1865 with the war, but in 1879 when the new monetary and institutional order was finally settled.

Civil Policies

Political policies have huge implications for how to invest since some have to do with civil liberties, and others directly influence the monetary and fiscal regime. A good example that I discussed in Part 1 was when FDR signed Executive Order 6102 confiscating gold reserves from US citizens at a discounted value with the threat of prison or extreme fines. Not only does this violate simple property rights, but it also stole the primary method of saving for American citizens. Imagine the government shut off bank accounts, the primary method of savings today (happened already on a smaller scale in Canada in 2022).

The Emergency Banking Act of 1933, to bail out banks without requiring gold reserves, was not possible without the confiscation of gold first. Back to the Civil War, the Legal Tender Act of 1862 was passed so that a paper fiat currency could be created. Just like FDR, the monetary anchor was abandoned in the crisis period so that the government could print greenbacks to fund the war effort.

These periods tend to result in government overreach and an increasingly interventionist federal government. I discussed the Agricultural Adjustment Act of 1933; the Reconstruction period altered the constitutional framework of the United States forever. While the GD/WWII period was an attack on personal and corporate sovereignty by the federal state, the Civil War was an attack on state sovereignty by the federal state, with the Reconstruction legislation crossing the Rubicon for legislation granting federal intervention power into state affairs.

Lincoln also suspended habeas corpus in 1862 to suppress opposition without due process and protection from the Constitution, which was then legally ratified as a federal power in the Habeas Corpus Suspension Act of 1863. This gave the federal government immense power to ignore First Amendment rights and increase power over states.

Economic Policies

National Banking Acts created the first federally chartered banking system. Each bank with a charter was required to hold U.S. Treasury bonds. This, along with the issuance of new currency, was a move to fund the war through devaluation efforts. Jay Cooke, a politically connected banker, worked with the Treasury to issue bonds to fund the war. Instead of merely working with smaller banks, he marketed directly to citizens around the nation, a novel concept. This was a tactic similarly used in WWII with war bond propaganda.

Both permanently tied the banking system's health to government debt and government backstops in ways that didn't exist before the crisis. Both instituted financial repression as a tactic deemed necessary under the emergencies of the time.

As I argued in The Civil War, the fourth turning didn’t end at the war’s conclusion, but as the monetary order was finally reshaped in the decade that followed. All of that financial repression actually benefits debtors as the value of debts is inflated away by new money being worth less than old money. Back then, there were still strong political movements that supported hard money (gold/silver), but truthfully, it was the banks that wanted to return to hard money. At this time, large banks wanted to preserve their standing, especially over the smaller banks. The best way to do this was to return to the gold standard. They achieved this politically with the Coinage Act of 1873, which made a gold standard by default.

It took a long time for the banking cabal to get so corrupt that they could just get instant liquidity from the Federal Reserve (next fourth turning). In this period, the resumption of the gold standard actually drastically strengthened the dollar and was the opposite of the wild money printing. While I am a supporter of having a currency tied to real fiscal constraint, it clearly is discarded during fourth turnings. Further, these wild swings ended up strengthening big banks at the expense of smaller banks working with silver, and more importantly, severely impaired low/middle class workers who had debts. All of a sudden, their debts had to be repaid in dollars worth more than before, destroying the financial well-being of many with outstanding debts. Wealth was transferred from debtors to creditors, the opposite of the GD/WWII era where financial repression continued throughout the fourth turning.

A defining feature of the pre and post Civil War era was the financial bubbles in railroads and western land expansion. The North’s financial health was not in the best shape heading into the Civil War, following the Panic of 1857, which contributed to some of the more radical monetary/fiscal policies. This didn’t stop railroads from bubbling again afterwards, leading to yet another Panic in 1873. This one wiped out Cooke, one of the key players in cahoots with the new federally involved banking industry. He and many others in the revolutionary railroad industry were destroyed. It was known as the great depression until the next fourth turning, and what is now known as the great depression of the 1930s.

Asset Performance

Asset performance is the meat on the bones. History is important because during fourth turnings, it rhymes in eerie ways and gives clues about what radical political moves get made that most people won’t see coming. These are always born out in prices of assets, especially those that hold value like commodities.

During the mid to late 1800s, there wasn’t a broad, liquid, and diversified stock market like there was by the 1920s. During this period, wealth was tied up in government bonds, railroad bonds, bank deposits (cash), and precious metals.

Equities were almost all in the booming railroad sector, and most in railroad bonds. Equities crashed in two waves over this period. First in 1857, then after a recovery and continuation of the epic railroad bubble, a crash in 1873. Historians estimate a ~50% corporate default rate during the period, the highest ever, along with equities crashing ~70%. This false rebound behavior is a common phenomenon seen between 1929 and 1937, but also in recent memory between 2000 and 2008. In technical analysis, this is the corrective b-wave before the c-wave in a simple abc correction.

Most people held wealth in land, physical coins, and bank deposits in urban areas. Things were wild as there was no deposit insurance and the Federal Reserve. In panics, banks went under, bank notes/deposits went unpaid, and bank runs were common. Land was only a good investment if unleveraged, as debtors were crushed after the Civil War with the resumption of the gold standard. Luckily, they wouldn’t get their gold stolen like their grandchildren in the 1930s, so what hard currency they did have would hold up reasonably well.

Agricultural commodities served well in inflation-adjusted terms initially. This was short-lived as wheat and cotton in the South were subject to heavy wartime blockades. Deflation then gripped the industry after the war ended as well. Livestock, iron, coal, timber, and soon-to-be oil were other commodities that were highly volatile at the time.

Precious metals were abandoned during the crisis. Luckily, they weren’t confiscated this time, so if you had any wealth, you were protected from the wartime financial repression. After the resumption began, the value of gold relative to the dollar actually went back down, but it remained a fundamental asset as the currency and what backed bank balance sheets. Gold mining stocks did not exist yet, but gold remained the most important commodity during and after this period.

While railroad bonds were the worst investment, government bonds were the best. First, the bonds issued at the time were purchased with greenbacks, but paid interest tied to gold, meaning interest payments were very attractive. Then, by the time that many bonds had matured, resumption meant that the underlying currency of the bond was appreciating since you bought it. Third, after the war ended, bond yields tracked lower as inflation/growth slowed, giving capital appreciation on bond prices. Fourth, the Panic of 1873 meant a flight to safety into government bonds from other assets, giving more price appreciation.

Implications

The wealth transfer was different in the 1870s and 1930s. The Civil War gold standard resumption left anyone with leveraged real estate or debt destroyed. Conversely, the GD/WWII era yield curve control/financial repression hurt creditors and helped devalue government debts. Today, our banks intertwined with the government don’t have any incentive to support creditors explicitly since the Federal Reserve exists to bail them out if liquidity dries up and the gold standard no longer exists. Financial repression is the likely path today, meaning real assets and devaluing debts are good investments.

Gold is an escape valve. Coins and physical currency did not devalue as much as greenbacks in the Civil War, and gold mining stocks served you well during the GD/WWII since gold was confiscated. Today, gold will help hedge monetary inflation once governments begin massive liquidity creation again.

Equity bubbles do not last in fourth turnings. Railroads during the 1870s and equities in the 1920s were massive bubbles leading to the two biggest collapses in American financial history. This means that today is on the same scale as railroads and 1929 rather than the dot-com, nifty-fifty, or 2008 real estate.

Bonds were the protection in the panics. The Civil War period was uniquely positive for government bonds through the fourth turning. Bonds appreciated during the crash phase in the GD/WWII period, but were subsequently horrible during the financial repression period. Today is likely to be closer to the latter. There are no hard money politicians or incentives left, only continued monetary irresponsibility. Bonds can hedge crash risk, but are most likely a terrible long-term investment.

The importance of being smart and nimble during a fourth turning is clear. The government and big banks will change the rules. In the Civil War, debtors do really well initially, then policy shifts and creditors end up the real winners. Severe inflation preceded severe deflation. Mega bubbles in equities were a defining characteristic alongside a massive debt crash and economic depression.

Both Fourth Turnings prove the government will suspend, redefine, or seize control of money and property under crisis pressure, but the wealth transfer differed. The lessons aren’t always to own gold, or always own bonds, but to identify the direction the wealth is heading. It is more important than ever to have financial understanding, critical thinking, and the ability to be nimble with your assets.

If this is something you might need examples of, consider upgrading to see the Gray Area Model Portfolio. Instead of throwing all our money in the S&P 500, a bubble ready to be destroyed like equities in 1873 and 1929, we have real diversification to the fourth turning risks. In addition, we show superior risk-adjusted returns and how to do risk management and technical analysis.

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Until next week,

-Grayson

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Would you rather own the best stocks in the world or commodities? The answer is likely, and rightfully, an enthusiastic vote for stocks. Stocks generate earnings and grow capital over time. Commodities are merely dug up and consumed year after year, are volatile, and often perform negatively for multiple decades at a time. This axiom of investing is severely challenged during lost decades in the stock market. The 1930s, 1970s, and 2000s were lost decades which saw negative real returns for stocks. Where were the real returns over these time frames? You guessed it, commodities.

The ratio of stocks to commodities shown below captures the relative performance. It will suffice for showing this ratio, but SPGSCI is not a perfect basket of commodities, with a composition of 51% energy, 17% agriculture, 12% industrial metals, 11% livestock, and 8% precious metals. The stock-to-commodity ratio is currently higher than it was at the dot-com bubble peak. You can also clearly see the extreme underperformance from 2000 to 2010.

Stocks

How do we know if we should be thinking about a lost decade for stocks and should be switching to commodities? The first thing to do is to get a general sense of stock market valuation, as the late 1960s and late 1990s were characterized by stock market bubbles. This is the first clue that forward returns for stocks would not live up to expectations. Today, we are undoubtedly in an AI bubble. Today is worse than people realize because the bubble isn’t directly in the investor valuations, but in earnings. This makes the forward price-to-earnings valuation metrics look totally normal and trick investors into thinking everything is fine.

We can also look at economic data to suggest whether we are going to get strong growth going forward. The economy is not rolling over, but for multiple reasons, as I’ve written, the economy is in a dangerous, pre-recessionary environment. Some of these data points include liquidity, full-time employment, yield curves, net savings, and leading economic indicators.

I’ve been warning, to mixed success, about this relationship for two years. In The Bear And Some Rocks, I identified this exact trend and outlined oil, sugar, copper, and gold. Since then, oil is flat, sugar down 25%, copper up 40%, and gold up 73%. The S&P 500 is up 49% in just over two years since then, meaning the lost decade has not started. This is not unexpected, though, as I ended the piece,

The blow-off top ended up the path we are on, with back-to-back >20% return years for the S&P500 and momentum still on its side. Today is even more extreme than the dot-com bubble from a relative price chart, some valuation extremes, and index weightings. It seems normal that technology takes up more market cap in the S&P 500, but this hasn’t always been the case. The divergence was extreme in the dot-com bubble, reverted, and now has grown to more extreme deviations. Energy and materials make up a meager 5%, while tech makes up 33% (semiconductors 18%).

Enough about stocks; we also have to have an idea of whether commodities will be a good replacement for stocks if they underperform once this bubble rolls over.

Real Assets

The capital cycle causes booms/busts in major bubbles like railroads, internet, shale gas boom, and soon to be AI. Bubbles burst when the oversupply is so large it causes a glut, which naturally brings prices down.

Commodities are the most sensitive sector to capital cycles. This means that underinvestment in the sector causes supply shortages, which eventually cause shortages and wild swings higher in prices. Oil is a key example. While oil can be brought online quickly in some regions, it does typically take significant investment to obtain future oil.

The rig count divided by oil production shows us that we are at low levels of oil investment relative to the amount of oil being produced. While this can be partially attributed to efficiency improvements, it shows that oil producers are not choosing to invest in new infrastructure and are merely tapping existing wells to produce oil. To get the full picture on oil, you have to read Oh Barnacles! This low investment was also seen before oil destroyed stocks in the 2000s.

Mining companies have much longer capital cycles than oil. Instead of 3-10 years, mining stocks are 10-20 years. This means that over/under supply can get much worse before the response to the problem is realized. Uranium sits at the intersection of energy and mining markets. Uranium must be mined with long capital cycles and is currently at a deficit to nuclear reactor production requirements. Add on future clean energy demands, the renaissance of nuclear energy popularity, and Kazatomprom struggling with production, you have a recipe for uranium deficit.

Industrial metals like copper also sit at the far end of the spectrum with long capital cycles. There is a decade or more lead time for a new copper mine to come online. S&P Global has projected that copper supply is soon to be in a deficit to demand. Goehring & Rozencwajg suggest that this is not the case since China has pulled forward a lot of copper demand, leaving the future situation not as bad as projected. I’ll add on a projection that the data center buildout will not continue as aggressively as currently projected. Further, Copper is known as Dr. Copper and is tied to the growth of the economy. If these contrarian views materialize, copper will not do quite as well.

Agriculture has very short capital cycles, as immediate next-year production responses are normally possible. Capital cycles are not the dominant driver of agricultural price volatility. Supply issues are more commonly brought on by geopolitical and weather-related supply shocks in export-heavy countries.

Russian wheat production or Middle East fertilizer have the potential for geopolitical impacts. The looming strong El Niño could affect crop supplies in areas like South and Southeast Asia, Australia, and South America.

Gold miners have felt the love from higher gold prices, but still sit at a mere <1% of the stock market. They are the highest-margin sector right now and are at record undervaluation compared to the S&P 500 from a free cash flow yield perspective.

Conclusion

Not all commodities are equal. Wheat and copper have very different lead times for new production. They have also performed very differently over the past two years. While precious and industrial metals have stormed higher with exceptional returns, energy and agriculture are still completely hated sectors.

A record global oil disruption yet to be resolved has barely moved the oil price for a month. Agricultural commodities face potential impacts from geopolitical tensions and climatological impacts. These commodity sectors have still not moved in the same way as their metal counterparts, providing notable opportunity.

This is not to say commodities as a whole will not outperform in a lost decade scenario. We know that excessive money printing and devaluation of assets in real terms also helps scarce assets like commodities in addition to their underinvestment.

Instead of being collateral damage in a stock repricing, why not capture real returns in commodities when the AI bubble pops? Consider learning how I structure a portfolio to mitigate these risks while still outperforming the general market by upgrading your subscription to access the model portfolio.

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-Grayson

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What if I told you that predicting the future was possible? Maybe not who will win the World Series, or what Nvidia’s stock price will be 1 year from now, but how generational moods change politics, economics, and institutions. This is the idea behind the Strauss-Howe generational theory, which I’ve discussed in Your Turn.

The framework suggests that high times and chaos times are cyclical and predictable. The fourth turning is where major crises and changes happen. Institutions are inadequate and destroyed, and new ones take their place. We are in a fourth turning now, according to the authors, precipitated by the 2008 financial crisis. Since we are in the “chaos” times, it is useful to understand the previous cycles and how we might protect ourselves from the negative events they were wrought with.

I’ve discussed the recent fourth turning during the great depression/WWII. The period of unraveling and the causes of the Great Depression are debated historically, as I discuss in my piece, Great Depression. Then, I discussed what happened politically and economically in the fourth turning and how to protect your wealth in such a time in Tumultuous Times. These are useful connections that are worth reading for their prescience today, but not necessary for understanding this piece about the Civil War period.

Prewar

The American Civil War period is canonized in textbooks by a heroic Abraham Lincoln taking it to greedy Southern elites unwilling to relinquish slavery. The truth is, unfortunately, far from this. Emancipation was used as a political tool rather than the primary moral grounds for the Civil War. Lincoln’s original inaugural address in 1861 expresses this as such. He vows not to interfere with the institution of slavery, but has every intention to uphold the economic arrangements of the time.

These economic arrangements were the real powder keg for the Civil War, not slavery (perhaps already approaching economic inadequacy). The prewar period was essentially one big wealth transfer system that was reaching a breaking point. The primary economic engine was the agricultural industry of the South. The mechanism at the time was tariffs, which were paid by the South and generated revenue for the Union in the North, only further exacerbated by the aggressive increase in the Morrill Tariff Act of 1861. Revenue generated in the South was used to subsidize railroads, big banks (like Jay Cooke, who helped finance the war effort), and the northern industrial economy.

The political elites knew the economic consequences of secession; without upholding tariffs in the South, Northern imports would also reroute into Southern ports, destroying the Northern economy. In the July 4th message to Congress, Lincoln admitted that the resupply to Fort Sumter was an intentional provocation for the South to fire the first shots and give a pretext for war.

Reconstruction

The strongest evidence of war motives wasn’t even Lincoln’s quotes, but the Reconstruction following the war. Reconstruction turned out to be a massive failure, as troops remained across the South to enforce policies. With a contentious election, the Compromise of 1877 was passed, which gave Rutherford Hayes the presidency in exchange for withdrawing federal troops from the South.

Reconstruction attempted to give freed men land, access to capital, and political power. Unfortunately, land was often reconquered by the prewar elite slaveowner class. The Freedman’s Savings Bank was looted by the Cooke family, the same financial elites that dominated before the war and funded it. Political and labor improvements were also not achieved in the new Jim Crow era.

The economic extraction mechanism was solidified by force, and the freedmen were abandoned after the war. The freedmen were useful as a political tool during and disposable once the fiscal architecture was secured.

A first turning starts when new civics emerge, and people rally behind new institutions. This was hardly the case, as the corrupt institutions were merely upheld by the Civil War and Reconstruction. Strauss and Howe officially acknowledge that the Civil War period was weird, and the fourth turning was much shorter than the typical generational cycle. I argue a different case.

Banking

Alongside the failed reconstruction, the underlying economic and institutional questions that produced the crisis were still unresolved following the crisis. Long before the war, the Second National Bank was dissolved by Andrew Jackson. While this could be considered a free market miracle by government standards, the void it left was no better. Rogue regional banks were left decentralized and unregulated to use fractional reserves to their advantage, with no standardized collateral. This increased credit and speculation contributed to bubbles in Western land expansion and railroads.

The banking system had doubled in size, and railroads were heavily subsidized (powered by the agricultural revenue engine of the South). This inevitably came to a halt in 1857 when the credit bubbles collapsed. Telegraph technology allowed this to be the first nationally transmitted financial crisis. Bank failures, bankruptcies, and railroad stock crashes ensued.

The financial system wasn’t necessarily in a robust position heading into the Civil War. Jay Cooke, a politically connected banker, worked with the Treasury to issue bonds to fund the war. Instead of merely working with smaller banks, he marketed directly to citizens around the nation, a novel concept. Then, he lobbied and helped design the National Banking Acts, which forced banks to hold federal bonds to issue their own bank notes. This centralized control of the banking industry and connected federal debt issuance with private credit expansion more than ever.

Simultaneously, the government undertook the most extreme fiat currency experiment, with the issuance of greenbacks as legal tender. Combined with the suspension of gold convertibility, this naturally led to immense inflation and debt devaluation, all to fund the war effort.

Fourth Turning Continues

Once the war financing ended, the infiltration of bankers and the federal government did not subside (unsurprisingly). Cooke and Company turned to the railroads again, issuing loans to railroad companies alongside heavy government subsidies. At the same time, the government had to use productive capital to pay war debts. This became problematic as the bank’s ability to lend was based on treasury bond collateral, which was decreasing, let alone increasing at the rate required for the railroad speculation.

The chickens came home to roost as fears of overcapacity, cost overruns, and the Crédit Mobilier corruption scandal depressed Northern Pacific bond prices in 1873. Cooke and many others went bankrupt. The government-subsidized credit expansion led to absurd levels of malinvestment, which then led to one of the worst economic depressions in American history, the Panic of 1873. The depression that followed lasted roughly six years, had record unemployment, and was known as the Great Depression until the 1930s.

The depression was also hampered by the Coinage Act of 1873. This launched a de facto gold standard by cutting the role of new silver as a legal tender. Ironically praised by sound money folks and big bankers alike, it reduced the ability of inflationary monetary policies. For the surviving big banks, the strengthening dollar without government issuance of greenbacks and new silver meant that value was transferred from the debtor to the creditors. A farmer who takes on debt in an inflationary regime pays back the loan with worthless dollars. Now, the farmer all of a sudden has to pay back debts in dollars worth much more. This brought even more financial hardship to debtors around the country and contributed to a rising populist movement for more inflationary policies later in the late 1800s.

The bankruptcy of Jay Cooke was the symbolic destruction of the war’s financial apparatus, but the Compromise of 1877 and resumption of gold convertibility in 1879 were the institutional capitulations that allowed the new era to be ushered in.

The war ended secession as a live option in 1865, but the actual subordination of state power to federal power was a legislative and judicial project that continued for decades. The 13th, 14th, and 15th amendments fundamentally altered the power balance between federal and states, leading to multitudes of future legal battles like Munn v. Illinois in 1877, serving as an inflection point for future Supreme Court cases.

The genuine resolution came by 1877–1879. The political compromise ended the military occupation and restored domestic governance to the South. The monetary resumption of the gold standard settled the currency question. The new constitutional grounds were set by the new amendments. The railroad collapse cleared the speculative excess and left a real infrastructure. These were the terms on which the postwar order was actually accepted, and they are less flattering to the moral narrative of the war than the mainstream version.

The time that followed was known as the Gilded Age, sharing more qualities with the “high” period in the generational theory framework. Real wages increased, economic growth was strong, many legendary companies were created, and innovations were made.

Conclusion

Instead of a short fourth turning and a strange first turning, I propose an alternative where the Civil War wasn’t the end of the fourth turning, and instead the 1st turning was shortened. A “high” doesn’t contain a failed reconstruction, the railroad bubble, the Panic of 1873, or the Great Depression of the 1870s. This sounds more like a 4th turning. To me, it appears that the political and economic institutions that were fought so desperately for during the Civil War and after were finally destroyed and rebuilt by 1979, not 1965. This is when the new civic compact started, and the next cycle began. This takes a more monetary view on things rather than the social moods that Strauss and Howe view as foundational, but it fits better in my eyes.

Unfortunately, the Civil War was about the political class trying to uphold their political and economic interests by force, rather than a moral imperative to free the slaves, as proven in hindsight by Lincoln’s prerogatives and the Reconstruction failure. The end of the Civil War did not usher in the next phase, but merely secured the same system. It wasn’t until the collapse of that monetary system and eventual political compromise that the next cycle with new institutions could be ushered in.

We should take from these analyses of the fourth turnings that the existing order will fight tooth and nail to protect its political and economic interests, whether a Civil War or a world war.

This typically involves rapid monetary change and government intervention. Debasement of the currency and the withdrawal of gold convertibility are recurring themes with massive economic impacts.

It also means institutions change. Perhaps not for the better in the long run, but at least providing some stability. Political agreements between the two parties were found, the banking industry found a new footing intertwined with the federal government, and newly freed men were left to find a new path on their own. Until next time,

-Grayson

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The stock market is in a bubble. From the Price/Earnings (P/E) ratio to the Buffett Indicator, valuations are at extremes. The stock market and economy are being driven by the AI boom. This boom is being driven by a narrow subset of the economy: hyperscaler capital expenditures (capex). This accounted for 96% of GDP growth in 2025; otherwise, growth would be 0.1% (a Harvard professor said it, not me). These high-margin, cash-flowing companies have decided to make considerable investments in building out data centers to supply AI models and cloud services. This number is already over $700 billion for 2026.

This capital expenditure comes from somewhere. Since these companies are successful and generate huge cash flows, they can funnel that directly into investments. Hyperscaler free cash flow was astronomic, but is now turning negative. If investments are productive and AI can be profitable, this will be worth it; otherwise, it could be a huge malinvestment. This is the million-dollar question investors are wrestling with.

For the past few years, companies have been issuing record share repurchases, or stock buybacks, instead of paying dividends or investing in new investments. Instead of boosting stock prices, companies actually investing in the economy and their businesses should be a good thing, right? Hopefully, and in theory, yes, it will drive future revenues. The AI narrative is a strong one, and this capex shows something real for investors to point to as a reason to pay higher valuations for these large US growth companies. However, it’s not the price (P) in the P/E ratio we should be concerned about; it’s the earnings (E).

Paper Profits

The stock market is historically a good investment because companies make earnings over time and grow. Earnings and earnings estimates for the hyperscaler companies are astronomical, with the rosiest expectations you could imagine from analysts. Unfortunately, there are a lot of accounting gimmicks going on.

If you invest in a factory, inputs, and labor and get out more in revenue, that's profit. Alphabet’s Q1 net income jumped 81% to $62.6 billion. 46% of that was merely marking up the value of its stake in Anthropic, one of the top AI companies. This is an unrealized, non-cash accounting gain sitting in the “other income” category. Amazon added a $16.8 billion gain in the same way. These paper profits accounted for a whopping 12% of the entire S&P 500’s earnings according to Mike Green.

This is perfectly legal and makes sense, but adds a layer of fragility if OpenAI and Anthropic’s valuations don’t continue to race higher forever. Google invests in an AI company, AI company valuation goes up, Google books additional earnings from AI company valuation. Google didn’t actually realize any earnings. When the Mag7 is 40% of the index, these things actually matter. As it accelerates earnings on the way up, it’s the opposite on the way down.

Capital F-light

One of the reasons tech companies are so richly valued is that they are capital-light and generate huge margins. An airline company is the example of the opposite; maintaining hangars, airplanes, maintenance equipment, and buying jet fuel is a lot of work. The hyperscaler companies had rapid scalability in software, ad platforms, etc with very little infrastructure. These companies are now investing large amounts into capex to provide compute and essentially become commodity companies. Build data center to sell compute = build oil rig to sell oil.

This capital requires capital… duh. Not only are they using cash flows to fund new investments, but they are also using debt. Oracle is the clearest example of this, projected to run out of cash by November if they don’t raise more capital. For the first time in years, following year after year of stock purchases, companies are selling stock as well. Google launched an $85 billion equity offering, one of the first mega-caps to sell stock in a while.

My long-time readers know I am privy to the passive investment phenomenon. Google, Meta, along with IPOs of SpaceX, Anthropic, and OpenAI, means there will be more supply for these money flows to soak up than there has been in a long time.

Circularity

One of the most touted AI bear arguments is the circular financing. Also common for Cisco during the dot-com boom, Nvidia invests in a company on the assumption it will then buy the chips from Nvidia. Nvidia has used stock to invest in Coreweave, just so they can buy GPUs from Nvidia. When Nvidia, OpenAI, and Oracle all pass $100 billion back and forth, it only works if OpenAI becomes profitable.

Mike Green estimates Nvidia’s earnings are overstated by about 300%. If true and earnings per share (EPS) is a quarter of reported EPS ($6.56 TTM becomes roughly $1.64), at $195 and a P/E of 30, it implies price should be $49, or -75%. When the bubble pops, people won’t be willing to pay as high a multiple either, so if the P/E drops to 15x, that leaves price at $25 or -87%. Crazy? Cisco was the Nvidia of the internet and fell 90%.

Everything is fine and dandy as long as someone is giving OpenAI and Anthropic money to buy things. As soon as Nvidia, the hyperscalers, and other private equity stop, they will have to use their own money, if they have some by then. In the meantime, this is boosting Nvidia earnings and making everything look better than fine, even encouraging more investment.

Depreciation

The One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property, like GPUs, servers, cooling, and electrical systems. This lets hyperscalers deduct the full cost of AI infrastructure in year one for tax purposes, rather than spreading it over five or six years. This tax deferral lets companies pay tax later instead of now, leaving more cash on the balance sheet the year the investments are made.

On top of this potentially spurring further investment and tax deferral, there are debates on how much GPUs actually depreciate given the technological advancement. Will GPUs in data centers be obsolete in 4-6 years or shorter? This not only has tax implications, but real implications for investment. Costs rise for companies having to constantly fund new capex to stay afloat. Here brings us to the airline company vs software company again. Are the hyperscalers going to have to keep maintaining and buying new infrastructure like Delta?

Regardless, the government has lowered the tax cost of data center investments where the useful life is contested, all while circular financing and private investments are boosting earnings.

Obsolescence

Investors are paying premiums on these companies like they know the forward returns will be there to match. We can also speculate on a future where things are not as they seem today. No one knew where the dot-com boom was headed even though we knew it would change the world. We shouldn’t be so naive today. If we’re so optimistic about these companies, why not be optimistic about the technology itself?

Just this year, Chinese models have reduced costs by over 90%. This has led many companies to move compute to these cheaper open source models. Further, if efficiency gains and hardware technology keep improving, we could do a lot with less. It is not infeasible to imagine a world where we don’t actually need data centers. On-device or decentralized architecture using a fraction of today’s compute could leave this a huge malinvestment in hindsight. What if the question isn’t how long the infrastructure will last, but if it is even the right infrastructure in the first place?

I may sound like a doomer, but I am actually more optimistic on AI than most investors. This is speculation, but I think we see energy and hardware efficient models that can be used for the majority of users on smaller devices as hardware and models improve. Like railroads and fiber, this leaves tremendous compute capacity being built out with a much smaller market than originally forecasted.

Conclusion

The hyperscalers are spending more money than they are making in revenue. Whether that investment turns into revenue is the million-dollar question. The capex-to-revenue growth rate is 46% and higher than the dot-com peak. At the same time, the enterprise valuation is higher than that period as well. These are extremes on every metric.

If it looks like a duck and quacks like a duck, it’s a duck. There is no doubt we are in an AI bubble, but the bubble is even bigger than people realize because the earnings are a bubble too. This causes the P/E ratio to look smaller and more attractive as you’re dividing by a bigger number.

Earnings ended up cut ~30% in the 2000 dot-com bust, and ~50% during the 2008 financial crisis. Assuming earnings were merely 10% lower in reality, the P/E ratio goes from 41 to 46, surpassing the dot-com peak of 44. If earnings were 30 or 50% lower in reality, the P/E would be 60 or 83. These three scenarios where earnings are lower imply 40%, 53%, and 86% drawdowns to return to the long-run average P/E of ~28.

AI will change the world like the internet, perhaps even more so, but that does not mean earnings and valuation bubbles don’t go through mean reversion. If OpenAI and Anthropic are both profitable, hooray, but Netscape and AOL paid the price for their success in time. Even Cisco, Sun Microsystems, and Yahoo all were crushed when the bubble popped. Cisco generated massive free cash flow each year through the dot-com period, but it didn’t stop its stock price from falling 90%. New paradigms don’t go predictable ways, as I said. The hype landscape (Netscape, AOL, Sun Microsystems, Yahoo) gave way to the real winners that ate the leftover scraps (Google, Microsoft, Verizon, eBay).

Eventually, people realize they don’t need as many railroad tracks, internet servers, and eventually AI compute. Nvidia will still be a cash flow monster, but bubbles always pop. It took 21 years for Cisco to recover its high, and I suspect a similar fate for Nvidia.

The AI bubble is built on misleading earnings, driven by hype around transformative private companies with questionable futures. These misleading earnings are priced for perfection, at the highest valuations only seen in the 1929 bubble and the 2000 dot-com bubble.

Expect the unexpected. AI will transform in ways the world is not looking at right now. Most importantly, don’t bet your wealth on a market that destroyed investors in 1929 and 2000. We are in that same market now. If you want to keep growing wealth and not be collateral damage, subscribe to see the model portfolio and learn how to make it through the AI bubble and 4th turning.

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-Grayson

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Peace to the Middle East, well, kind of. The US and Iran have signed a memorandum of understanding, but there have already been more strikes since. This article is not about politics, but energy. The disruption to the oil market from the prolonged closure of the Strait of Hormuz was not only significant in raising gasoline prices, but was the largest unplanned outage in history. Not only was it the largest disruption in terms of barrels per day, but also the largest in terms of cumulative barrels and percent of total global oil supplies. The 1979 Iranian revolution was the last time this happened, with prices going from $15 to $40/barrel.

If this was the biggest oil event in history, dwarfing measly events like the 2022 Russia war, why have prices not exceeded the 2022 levels? In fact, oil prices are already back down to pre-war levels. The peace deal helps a lot, but doesn’t magically make everything go back to the way it was before. The market is acting like everything is fine. Is it, or could we have ourselves a discount on an attractive investment opportunity?

Fundamentals

First, there are several concerns with the Straight of Hormuz. Even with the peace deal, some unknowns remain, such as whether it even holds. Strategic reserves and commercial inventories have been drawn down to record low levels. Not only does this leave nations less resilient, but it also raises questions about when these stop being drawn down and when they will be refilled.

Refineries are slow to ramp up/down production as well as switch to different types of oil. It may take some time to resume normalcy for refineries that were shuttered or switched crude sources. When wells get shut in and stop producing, it takes time to resume well pressure and resume full production capacity. This is the case for Iran and some other nations in the area. In some cases, wells never return to their pre-shuttered capabilities.

On top of these issues, shipping confidence, crew confidence, shipping insurance rates, and even barnacles will play a key role in resuming normal oil flows throughout the region.

With concern over the fate of oil in the Middle East, US oil is as important as ever. The US is the largest oil producer in the world, but that doesn’t mean that everything is back to normal after the reopening of the Strait of Hormuz.

Despite projections for more drilling, US production looks to have peaked in 2025, on top of struggling to resume following the COVID disruption. The Permian basin region in Texas was pretty much the only region showing incremental production growth, and it has also shown signs of peaking out. This is not doom and gloom or a peak oil prediction, which never works, but shows that things are slowing and not as easy as they were.

US producers still lack confidence to drill new wells after record-low oil prices during COVID. Rig counts show the willingness to invest in new drilling operations. They usually lag oil prices by 10-12 weeks. Following COVID, rig counts did not increase as aggressively as in the past, showing hesitation. Now, after the Iran conflict, oil prices went to $110/barrel, but rig counts have barely moved up. With prices back down near pre-war levels, this may lead to further hesitation.

Rig count is merely the first step in the oil production journey. The rig needs to then drill the well and complete it before oil is produced.

Considering rig counts lagged prices, the oil production growth in the past few years came from drilled but uncompleted wells. Instead of investing in new rigs and drilling new wells, they simply completed existing wells (DUCs). 78% of 2025 production came from wells that were already drilled. By late 2022, the buildup of DUCs was nearly exhausted. It is now harder for incremental oil production growth without significant investment, which we know companies are hesitant to do.

US production growth, while stalling, is also explained by efficiency gains. Fewer rigs and wells are producing more oil. While this sounds like a miracle, the truth is less rosy. As I discussed in No Love, companies are drilling further horizontally to get more out of each well. The headline is greater productivity per well, but the truth is lower productivity per lateral foot. On top of this, as the age of wells increases over time in the Permian, the share of gas extracted instead of oil increases, which is less valuable than the denser oil.

On the flip side, people point to potentially reduced oil demand as the reason for the drop. Oil demand tends to have greater impacts than supply unless supply is extreme. Demand for oil globally continues to increase and is revised higher each year. The other counterargument is that oil liquids have replaced some demand for crude oil. These liquids are not swappable one for one around the world, but switching certainly can happen at refineries if need be. Other than oil being manipulated or investor optimism, this is the real fundamental argument for lower oil prices.

All this to say the fundamental position of US production has not improved and is less responsive than it was. On top of that, reserves have been drawn down, and the foreign oil disruption has longer-lasting ramifications than people seem to realize.

Techincals

It’s hard to believe today, but oil used to be the top sector in the stock market not that long ago. Exxon was the largest US company from 2005 to 2011. It also held the crown from 1988 to 1994. An interesting cycle emerges, with alternating periods of energy vs tech dominance.

In 2011, energy was 11% of the S&P 500, and today it is a mere 3%. NVIDIA alone is over 7%, meaning one company is valued greater than the entire sector that fuels it all. The AI bubble will inevitably fall victim to its own malinvestment. The question is whether this value is vaporized or flows to other areas of the market. Historically, this has been the energy sector, which coincidentally is one of the most unloved sectors today. Priced in oil, the S&P 500 is very expensive.

Levels near the upper trendline have only been observed a few times (1929, 1968, 1999, 2020, 2026). Comparing returns from these levels, you are way better off owning oil than stocks over a 1, 5, and 10-year period. Once again, we find ourselves talking about the three lost decades for stocks. While so far the 2020 extreme is bucking the trend, we might not have seen the peak just yet.

Pricing stocks in oil might seem funky, but we can also present oil’s relationship to gold. Among the commodity space, oil is historically cheap relative to gold. When the gold/oil ratio hits the upper trendline, this has also historically been a favorable time to invest in oil instead of gold. 2026 was another strike of this trendline. 1, 5, and 10-year returns for oil are historically favorable from these levels and most often outperform both stocks and gold.

The stocks in the energy space benefit from higher energy prices and increased flows into the energy sector. Already, tech companies (XLK) are spending capex like industrial companies but are priced as mega growth companies. At the same time, energy companies (XLE) are printing cash, may print more cash in the future in an oil bull market, and are not priced like it. The free cash flow yield for XLE is ~12%, while only ~4% for technology.

Conclusion

Oil companies are terrified to make investments in new oil production. You can’t blame them, given the downward price volatility from COVID and the Iran war peace deal. These and geopolitical actions have left the US in a more dangerous spot to truly respond to production in any meaningful way.

Based on nearly every metric, the stock market is in a bubble, led by the AI and technology sector. The energy sector has been extremely unloved. Typically, the energy and tech sectors rotate dominance, and we are at an extreme level now. It may take time, but I expect things to shift the other way. Buy oil and sell tech is the least sexy article in June 2026, but it is one that people may need to hear.

To learn how to participate in the market returns, truly diversify from various macro outcomes, and not get destroyed if the AI bubble pops, subscribe and get access to the Model Portfolio, which synthesizes all of these themes together.

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-Grayson

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The model portfolio was made public in July 2025. It has 5 main components: stocks, bonds, cash, real assets, and alternative assets. Last month’s performance has been:

After the market’s meteoric rise over the last two months, it is in a corrective process. We got a 20% advance, followed by a 5% pullback. As you’re reading this, the market is trying to decide whether to go back to the highs or continue the correction.

Even if the market isn’t racing the way it was, the overall positioning is dangerously bullish, with near record levels of margin debt. The Gray Area portfolio outperformed the struggling market in the first quarter and is up a healthy 4.46% year to date with lower risk.

This model portfolio is reasonably priced for paid members, with free subscribers still receiving three themed research articles each month. Consider upgrading to get up-to-date portfolio changes, allocation decisions, technical analysis, and synthesis of all the research pieces into an actionable plan. To beat the market, reduce risk, and know how to not get destroyed in a bear market, please consider joining with a premium subscription.

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I will continue to provide a preview of two of the positions in the portfolio.

Natural Gas Companies (FCG) - 5.4%

Natural gas and oil have been in a corrective posture and sold off further in June. We added energy exposure before the Iran conflict began on technical and fundamental grounds.

This portfolio position is up 12.23% total, despite the recent selling pressure. As long as FCG holds its low at $26, we could see an 18-30% move to new local highs. An alternative count that is more immediately bearish would be a pullback to ~$15. Both scenarios are quite bullish long-term technically and fundamentally. The short term is more difficult to predict, with oil news headlines unpredictable.

Uranium Miners (URNM) - 4.5% → 2%

The idea behind uranium is that it will be an important aspect of our energy future, and real assets should offer true diversification from both stocks and bonds. Our position is up 20.03% despite the recent selling pressure.

Uranium prices have been moving similarly to precious metals. Managing risk in positions is crucial. In April, we reduced in anticipation of further correction, which was prudent in hindsight. Now, price has built a corrective channel with moving average and momentum not giving any signals to disrespect the trend yet. We identified a potential ABC down to 34-41 for a while, and it looks ever more likely that may be the outcome.

While a good long-term hold, there may be better places to buy. We are reducing the position size from 4.5% to 2%.

For the full portfolio breakdown and analysis, please upgrade your subscription.

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