Notes on the Week Ahead

The era of low growth, low inflation and super-low interest rates that followed the Great Financial Crisis was christened by Mohamed El-Erian as “The New Normal”. While this episode largely came to an end with the post-pandemic growth and inflation surge, real interest rates had generally remained below the levels that prevailed in the decades before the financial crisis until recently. However, a steady bond market selloff in 2026, which accelerated over the summer, has now pushed real long-term Treasury yields to their highest levels since 2010.

In a generally upbeat Jackson Hole speech on Friday, Fed Chairman Kevin Warsh asserted that “labor markets are consistent with full employment”. Given that the current unemployment rate, at 4.1%, is the lowest it’s been in 18 months and is also lower than it has been 88% of the time over the past 50 years, it is hard to argue with the Chairman’s assessment.

Money was tight in our early married years. We bought a house we couldn’t afford, purchased a car we couldn’t afford and had all the expenses attendant on the raising of two young boys. However, as we wandered the local mall gazing at all the other things we couldn’t afford, we were always willing to stop into Godiva to get chocolate squares. Godiva was, of course, more expensive than Hershey bars. But no one was going to go broke buying chocolate squares – it just wasn’t a big enough item to feature in our budgetary woes.

The summer of 2026 has been dominated by the AI boom. Some fear that AI is advancing too quickly for thoughtful regulation. Others worry that end-user revenues will lag too far behind massive capital spending and fast-growing debt. From an economic perspective, AI is pure momentum, generating huge profit gains, adding to investment spending, boosting upper-income consumer spending via a wealth effect and coinciding with very solid gains in productivity.

No one liked the defendant. That much was clear. But when the jury retired to consider their verdict, they hardly knew where to start. The case was so confusing and the judge’s instructions hardly seemed adequate. “Perhaps”, suggested the foreman, “we should start with a list of questions…”