Vapor Capers

The Credit Strategist - October 2025

There’s a saying that “There are decades where nothing happens; and there are weeks where decades happen.” Every week during the Trump presidency feels like a decade as President Trump gives new meaning to the concept of the “energetic executive.” It is increasingly difficult to keep pace with events which is why I publish almost daily Notes on Substack that I strongly urge readers to check out (they are available to paid and free subscribers). To help separate the signal from the noise, below are the key market-moving factors I am focusing on as we approach year-end.

· Tariffs are a sales tax paid by producers or consumers; either way, they raise prices, increase inflation, and slow economic growth. The economy has yet to feel the full impact of tariffs but soon will and the impact will be negative.

· While employment numbers have weakened significantly since May, the causes are complex and still subject to question. Likely culprits are tariffs and strict immigration enforcement that reduces the pool of available workers. If the latter turns out to be a significant factor, then the poor jobs reports may be sending a misleading signal of economic weakness that could lead the Federal Reserve to lower rates too far or too quickly.

· The Federal Reserve is lowering interest rates with financial asset prices at record highs (and signs of excesses in financial markets), inflation still above target (it is flattered by comparison with Biden-era highs), and employment possibly stronger than reported due to structural changes in labor markets not reflected in government figures. Lower rates will reduce the cost of funding the federal deficit (assuming the government keeps borrowing short term) but will almost certainly fuel financial market excesses. But lowering short-term rates may lead to higher long-term rates (10+ years), resulting in higher mortgage and other financing rates for businesses as concerns about debt and deficits increase (as they should).

· Federal Reserve independence is at risk as is that of the Department of Justice. And the two are interrelated and damaging to markets. Politicians should respect, not threaten, the independence of these institutions. Not only America but the world looks to the Fed to act independently to protect global financial stability. It also looks to the American judiciary system as a neutral arbiter of justice (though it falls short of that standard). Politicians are foolish to interfere in monetary or judicial policy. They get blamed for enough problems without taking responsibility for setting interest rates or targeting political opponents for prosecution. By doing so, they are bound to commit economic and political malpractice. While other factors are at work, it is no accident that the US dollar is falling while the credibility of two of America’s most important institutions is questioned.

· Stocks are in a bubble. By every reasonable (or unreasonable) measure, even adjusted for inflation (see more on this below), stocks are significantly overvalued. The bubble could continue for a while for reasons outlined below; as the great Richard Russell (author of The Dow Theory Letter) taught us, bull markets are designed to pull in as many investors as possible before ending. That is what is happening now.

· Corporate credit is also in a bubble that could last a while. Not only are spreads (the risk premium) at near record lows, but covenant protections and liquidity are much worse than in earlier periods when spreads were tighter such as 2007. Further, borrower-on-creditor and creditor-on-creditor violence makes owning corporate debt a miserable experience and further lowers risk-adjusted returns.

· The artificial intelligence (AI) arms race is showing signs of a mania. Projections of future adoption and spending are highly unlikely to be realized in time frames required to produce reasonable returns on capital over the next decade. A hard look at payment commitments made by companies like OpenAI and CRWV (see more on CRWV below) are implausible at best. Longer term, nobody knows what will happen and anybody who claims they do is full of you-know-what. But applying common sense is always a good rule-of-thumb when evaluating future promises by technologists.

· All of these factors are interacting to create an incredibly challenging investment environment that looks much easier than it really is. Those who ignore the lessons of past bubbles or who think this time is different are exhibiting hubris that is rarely rewarded.