Trump Talks Up Iran Blockade as Israel-Lebanon Truce Extended

(…) “I have all the time in the World, but Iran doesn’t — The clock is ticking!” Trump said in a Truth Social post

Trump’s allies say the blockade will force Iran to start shutting down crude production — its main source of foreign-exchange earnings — within about two weeks. JPMorgan Chase & Co. analysts have said it may take closer to a month for the US to achieve that goal.

The US naval operation has caused many Iran-linked vessels to turn around rather than go through the Hormuz strait. Still, at least some are making the crossing, according to ship-tracking firms, potentially giving Iran the ability to withstand the restrictions for longer. (…)

That’s increasing concerns that fuel prices will rise even further and lead to a global economic slowdown. (…)

“The US naval blockade of Iran looks less airtight than Washington claims,” Bloomberg Economics analysts Becca Wasser, Chris Kennedy and Dina Esfandiary said in a note. “That risks blunting its impact as a tool of economic pressure and undermining its core objective: forcing Tehran to concede control of the Strait of Hormuz and return to the negotiating table.” (…)

From Windward:

Maritime dynamics across the Strait of Hormuz and surrounding corridors continue to shift from constrained activity toward selective escalation, with enforcement, evasion, and direct engagement shaping vessel behavior.

Iranian crude exports from Kharg Island declined sharply during the week of April 13–19, with total volumes estimated at approximately 3 million barrels, significantly below the year-over-year weekly average of around 8 million barrels. Satellite imagery confirms a mid-week pause in loading activity, followed by a limited resumption, indicating disruption to primary export operations.

At the same time, activity is redistributing rather than stopping. Large tanker clusters have formed east of Hormuz near Chabahar, while congestion and dark activity remain elevated near Bandar Abbas. These patterns point to adaptation under pressure rather than a breakdown in flows.

The operating environment is defined by instability and adaptation, where enforcement continues to expand, evasion strategies evolve, and maritime flows persist under increasingly constrained and volatile conditions.

Trump does not have “all the time in the world”. The longer Hormuz is constrained, the more the world economy is impacted, not only by higher prices of just about everything, but increasingly by actual shortages of energy and other critical commodities that will eventually lead to production curtailments.

So far, the reverse may be happening, risking a manufacturing boom-bust scenario.

Flash PMI signals muted rebound in output from initial war impact as output prices rise at sharpest rate since mid-2022

Business activity growth rebounded in April having broadly stalled in March. The headline flash S&P Global US PMI Composite Output Index rose from a two-and-a-half year low of 50.3 to a three-month high of 52.0 in April. The improved reading signaled faster economic growth at the start of the second quarter, albeit running well below levels typically seen last year.

 

Service sector activity remained especially subdued. Although recovering slightly from March’s dip, the rate of expansion was the second weakest in the past year due to a further cooling of demand growth. New business placed at service providers rose only marginally and at the slowest rate seen over the past two years, led by an ongoing decline in exports.

Lost sales were commonly linked by survey contributors to the uncertainty and disruption caused by the war in the Middle East alongside other government policies and affordability issues.

In contrast, the manufacturing sector saw output rise at the sharpest rate for four years, fueled by the largest influx of new orders since May 2022. However, both output and new orders growth were over supply availability and price hikes due to the ongoing war. The rise in orders was driven by domestic demand, as export sales of goods fell at an increased rate.

War-related issues led to increasingly widespread supply problems, adding to existing challenges related to tariffs. Factories reported the greatest lengthening of supplier delivery times since August 2022, extending a trend that now stretches to eight months. In addition to shipping-related disruptions due to the war, shortages were also linked to the additional purchasing of safety stocks. Purchasing activity rose at the second fastest rate seen for nearly four years, surpassed only by the jump in buying activity seen shortly after last spring’s tariff announcements.

Average prices charged for goods and services rose in April at the fastest rate since July 2022 amid increases in input prices and supply scarcities. While manufacturers reported an especially steep jump in goods prices, with the rate of inflation at a ten-month high, service sector selling price inflation also accelerated to reach a 45-month high.

Input price inflation meanwhile hit an 11-month high in April and was the second-highest in over three years. Manufacturing input costs increased especially sharply, with inflation a ten-month high and the second-fastest increase since July 2022. The rise in services costs was the largest since December and among the sharpest in the past three years. Alongside higher energy prices, companies reported increased charges for broad swathe of commodities and inputs. Rising staffing costs were also reported.

Employment rose only marginally in April after falling slightly in March. The overall flat picture represents the worst back-to-­back months for employment since late 2024. Manufacturing headcounts fell for the first time in nine months and only a marginal return to jobs growth was reported in the service sector. While some of the weak employment picture reflected resignations and persistent labor supply shortages, companies also reported concerns over the need to reduce staffing costs in the face of the uncertain demand environment and high input prices.

Companies’ expectations for output in the year ahead improved in April but remained historically low. Concerns focused on the war’s impact on prices and supply availability, exacerbating existing worries over the cost of living and government policies. Sentiment remained especially low in the service sector, albeit ticking up since March. Manufacturers were their most optimistic since February 2025, and thereby confidence was amongst the highest seen since the pandemic. This was largely reflective of the recent upturn in orders, additional investment in marketing and hopes of tariff-led reshoring.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The April PMI is broadly consistent with the economy struggling to manage annualized growth in excess of 1%, with the vast service sector acting as the principal drag. Orders for services ranging from travel and tourism to financial products barely rose as the war caused hesitancy for spending among both household and business customers, with surging prices and the prospect of higher borrowing costs acting as a further deterrent.

“There was better news from manufacturing, but here an expansion of output and orders could be partly traced to the building of safety stocks, with survey respondents reporting “panic” and “emergency” buying ahead of price hikes and supply shortages in echoes of the problems seen during the pandemic. Not surprisingly, prices are already spiking higher in this environment, and not just for energy but for a wide variety of goods and services.The overall inflation picture is now the most worrying for almost four years.

“Balancing the risks of inflation lifting sharply higher against the underlying weakness of economic growth presents policymakers at the Fed with a growing dilemma.However, it will likely be increasingly hard to make a case for rate cuts if inflation follows the path signalled by the PMI while the economy continues to eke out only modest growth.”

 

The WSJ which rarely reports on flash PMIs added that war effects are global:

Factories in the U.S. and parts of Asia and Europe have reported a pickup in activity as they rushed to meet orders placed by customers anxious to avoid price hikes and shortages should the conflict in the Middle East prove long-lasting, according to business surveys released Thursday. (…)

Surveys of purchasing managers compiled by S&P Global during the early weeks of April showed some businesses are trying to get ahead of anticipated shortages by stockpiling goods, leading to a pickup in factory output in a number of large economies including the U.S., France, Japan, India and the U.K.

The rush to complete orders and build stocks echoes moves in early 2025 to get ahead of anticipated hikes in U.S. tariffs. As in that case, the boost is likely to prove short-lived, with output falling back sharply as stocks are drawn down later in the year. (…)

In Japan, manufacturers signaled the steepest rise in output for over 12 years in April. French manufacturing also recorded a surprise revival, with output rising at the fastest pace in 50 months, according to the surveys.

In the eurozone as a whole, manufacturing activity hit an eight-month high. The U.K. also saw a boost. (…)

Across the eurozone as a whole, the composite Purchasing Managers Index fell to 48.6 from 50.7, reaching its lowest level in 17 months. A reading below 50.0 points to a decline in activity.

“The hit from the Iran conflict may turn out to be larger than we had been anticipating,” said Andrew Kenningham, chief European economist at Capital Economics.

The surveys also recorded a surge in the costs faced by businesses as a result of the conflict, and evidence those businesses were charging their own customers more, a development that will concern central banks.

In the U.S., prices charged rose at the fastest pace in 11 months, while in Japan, prices rose at the fastest pace since the series began in 2007. Across the eurozone, prices rose at the fastest pace in more than three years.

Time is on neither side, quite the opposite.

The US president’s public messaging, according to the officials, is key to the impasse. There’s been little progress in the past day, according to a European diplomat in touch with Iranian negotiators. (…)

Iran’s President Masoud Pezeshkian on Wednesday said Iran welcomes talks with the US, but that the “blockade and threats are main obstacles to genuine negotiations.”

Some of Trump’s advisers want to milk the blockade longer, arguing that Iran is just weeks away from shut-ins because of its inability to export oil at normal volumes, said the US officials. That could inflict significant economic damage and lead to bigger concessions. For them, the president’s social media posts are serving the purpose of running out the clock.

Trump suggested Thursday that he agreed with that approach and he’s under no pressure to make a deal.

“You know who’s under time pressure? They are, because if they don’t get their oil moving, their whole oil infrastructure is going to explode,” Trump told reporters in the Oval Office. “You know what that means — because they have no place to store it, and because they have no place to store it, if they have to stop it.”

Another camp of Trump allies has argued that the time to seek the off-ramp is now and that Trump risks deeper financial wounds at home — with repercussions for November’s mid-term elections — if the Hormuz disruption persists much longer, said the same American officials. For this group, the president’s rhetoric could unravel progress made by US and Iranian negotiators toward an agreement that would limit the Islamic Republic’s nuclear program and reopen the critical shipping route in return for sanctions relief.

While the president has said he’s in no rush and that the blockade is squeezing Iran’s economy by preventing it from exporting oil, he is under mounting pressure to bring down US fuel prices. They’ve surged because of Iran’s effective closure of the Strait of Hormuz, turning Americans against the conflict and leading to concern about a global economic slowdown.

The Iranians, said the Arab official, want an accord that resolves a host of long-standing issues such as the sanctions against the Islamic Republic and its nuclear and missile programs.

Tehran also wants guarantees it won’t be attacked again and some formal control over shipping traffic through Hormuz. The US and Israel have signaled they won’t accept those demands.

Still, it’s possible that Washington and Tehran agree to an interim deal that reopens the strait and ends the US blockade, while leaving most of the other sticking points to future negotiations. Some Gulf Arab and European leaders believe talks on the wider points would take at least six months to be agreed, Bloomberg reported last week.

“Trump’s style of messaging has undermined his own position of wanting diplomacy to work,” said Alex Vatanka, a senior fellow specializing in Iran at the Middle East Institute. “In the case of this Iranian regime, effective means quiet, silent, not loud, not in the media, not attacking Iranian leaders in social media posts.” (Bloomberg)

Why If the War Doesn’t End Soon, Everyone Will Pay Like the Ernest Hemingway quote, the energy crisis triggered by the US-Israel conflict with Iran will get worse gradually, then suddenly.

The Oil Futures Market Is Lying to Us

Roughly 15 million barrels a day of oil supply, 15% of global demand, are bottled up in the Strait of Hormuz. You can also think about that number as the total amount of oil that’s been drawn from global stockpiles to bridge the disruption: Roughly 500 million barrels so far, estimates Goldman Sachs Group Inc. At the current pace, that could hit a billion barrels by June, maybe even Memorial Day.

As Bob McNally, who heads consultancy Rapidan Energy Group, said this week at a conference hosted by Columbia University’s Center on Global Energy Policy, these missing barrels are like a vacuum; a giant deficit that will move through the global oil system for some time, even if a peace deal opens the Strait. (…)

Prices for 2027 are up 17% compared with 43% for front-month contracts. On that, Kaes Van’t Hof, chief executive of Diamondback Energy Inc., one of the larger shale operators, said from the same stage as McNally: “The back end of the curve is lying to us.” (…)

The roughly 500 million barrels drawn over the past two months are equivalent to about 6% of global observed inventories (these are estimates since not all oil stocks are reported). To put that in perspective, consider the history of movements in OECD inventories, the most transparent subset of global stocks, where 6% would already represent the sharpest two-month decline in data going back to 1988. By June, we could be looking at more like a 10-12% drop in global inventories, way beyond the scope of prior declines. (…)

In the most optimistic scenario, where Hormuz opens immediately, it would still take months to first clear the backlog of blocked tankers, then clear local oil in storage and finally bring shut-in wells back into production — all while clearing mines laid by Iran, something that could take months to do. While the pace of inventory draws would ease, they would still be running down the tanks. (…)

US oil executives canvassed by the Federal Reserve Bank of Dallas in an unusual interim survey released Thursday concur. Four-fifths of them don’t expect traffic through the Strait to resume normal levels before August; 40% think it will be November or later. In addition, a majority implicitly concur with Van’t Hof’s comment about the lack of an adequate price signal to boost output, expecting relatively little growth in US oil production this year and next.

The bigger the vacuum becomes, the longer it will take to refill those inventories whenever whatever passes for normality finally arrives. Oil prices along the curve would need to rise accordingly to encourage excess production — or, conversely, achieve the same outcome by destroying demand. (…)

Looking back to a different kind of disruption, the outbreak of Covid-19, ClearView Energy Partners notes how the oil market still hadn’t internalized that looming catastrophe as late as February 2020, weeks before the Nymex price went negative as demand cratered. Realization didn’t so much dawn as go supernova. Almost exactly six years on from that day, the gap between physical flows and financial markets looks as wide as the Strait is narrow, and widens by the day.

The same Dallas Fed survey quotes an oilfield services executive saying: “The long-term consequences of this war were not fully considered. The disruption this will cause to energy markets and other macroeconomic measures will be significant. The unpredictable nature of the current administration makes business modeling near impossible.”

Scott Bessent at a Senate hearing Wednesday:

“Many of our Gulf allies have requested swap lines. Swap lines, whether it’s from the Federal Reserve or the Treasury, are to maintain order in the dollar-funding markets and to prevent the sale of the U.S. assets in a disorderly way.”

Axios explains:

The requests are a way for them to prepare for the possibility of a cash crunch, says Vishal Khanduja, head of broad markets fixed income at Morgan Stanley. Better to ask now before things actually get dire.

These asks could’ve been kept confidential, but they’re public because it sends a signal to the market, assuring investors that these countries are shoring up their reserves, he says.

The swap lines could backstop Gulf states’ ability to keep investing in the U.S., Evercore analysts wrote Thursday.

“In political terms, perhaps most importantly, swaps could at the margin at least reinforce the ability of the Gulf states to deliver on giant U.S. investment commitments which the White House has frequently touted.”

And the requests are a way for Gulf states to signal unhappiness with the war.

“This is to send a message to the administration that the Emirates is unhappy that they’re being asked to absorb significant economic costs as a byproduct of the administration’s decisions,” Brad Setser, a senior fellow at the Council on Foreign Relations, tells Axios. “And they feel like they haven’t been adequately consulted or compensated.”

Dollars may get swapped, but there’s a lot more getting exchanged.

Oracle’s Deluge of AI Debt Pushes Wall Street to the Limit The AI boom has hit a funding snag, compounding power constraints and growing public backlash against data centers

Oracle’s $300 billion megadeal with OpenAI is testing the limits of Wall Street’s appetite for debt tied to America’s data-center boom.

Banks including JPMorgan Chase struggled for months to spread the risk of billions of dollars in loans they made to build data centers leased to Oracle in Texas and Wisconsin, people familiar with the matter said. Many financial institutions that would ordinarily buy those loans face restrictions on how much exposure they can have to a single counterparty, and the sheer size of these debt packages pushed them to the limit with Oracle. As a result, bank balance sheets got clogged, constraining the financing prospects of future projects tied to Oracle and OpenAI.

For example, lenders balked at financing the expansion of a data-center complex in Abilene, Texas, if Oracle were the tenant, according to people familiar with the matter. That led the developer, Crusoe, to lease it to Microsoft instead.

The challenges surrounding Oracle highlight a risk for the multitrillion-dollar data center boom, where limited access to capital compounds obstacles caused by a strained electric grid and a growing public backlash.

Any slowdown in data center construction and completion would stymie a build-out that artificial-intelligence players desperately need. Some top AI companies appear to be hitting the limit of what they can offer users as demand for computing firepower, which is provided by data centers, exceeds supply. (…)

Oracle still has additional cash funding needs of $100 billion or more for 2027 and the first half of 2028, according to Morgan Stanley credit analysts. “We’ve pondered how [Oracle’s] considerable funding needs over the next three years may test the depths of different fixed-income markets,” the analysts wrote in February. (…)

OpenAI is counting on Oracle to deliver the capacity it needs to scale ChatGPT’s growth ahead of a hoped-for public listing.

Silicon Valley needs access to debt to meet its goals for AI-related spending. Big tech companies are expected to generate enough cash to cover only about half of the $3 trillion they are projected to spend on AI through 2028, according to analysts at Morgan Stanley. The rest has to come from banks, corporate bonds, private credit and other forms of financing. (…)

Oracle, though, is in a comparatively weaker financial position than big tech rivals. It has a lower investment-grade credit rating, more debt and is burning cash. Much of its future revenue is tied to a money-losing startup that is facing growing competitive pressure. (…)

To manage risk, banks and institutional investors typically have rules capping their exposure to a single counterparty or tenant. Those concentration limits emerged as an obstacle when a group of banks were syndicating some of the loans in late 2025 and early 2026, the people said. (…)

SURVEYS SAY

Disapproval of Congress Ties Record High at 86% Republicans’ approval has plummeted since spring 2025

Americans’ approval of Congress has fallen to 10%, barely above its all-time low of 9%, while disapproval has climbed to 86%, tying the record high for the institution. Three of the five peaks in disapproval since 1974 coincided with a government shutdown or the threat of one.

Republicans have driven most of the recent decline, with a sharp drop in their latest approval rating of Congress after surging to 63% in March 2025. By contrast, Democrats have consistently rated the current Congress poorly, and independents’ views have been relatively stable at a low level.

Data: Institute of Politics at Harvard Kennedy School. Chart: Danielle Alberti/Axios

• 48% of Americans say Trump is suffering modest or significant cognitive decline

38% of Americans approve of Donald Trump’s job handling in the most recent Economist / YouGov Poll, and 56% disapprove, for a net job approval of -18.

Asked to choose which words describe Trump from a list of 13, Americans are most likely to pick dangerous (52%), corrupt (47%), or bold (45%), and least likely to pick honest (22%), steady (16%), or inspiring (16%).

22% of Americans say Trump’s negotiating skill is excellent, while 16% say it’s good, 10% fair, and 43% poor.

35% say Trump is suffering significant cognitive decline, while 13% say he’s suffering modest cognitive decline and 32% say he isn’t suffering cognitive decline.

Only 24% of Americans strongly or somewhat approve of Trump’s signature being added to all U.S. paper currency, while 59% disapprove. Almost all Democrats (4% approve and 92% disapprove) and most Independents (13% vs. 65%) disapprove of putting Trump’s signature on currency. A majority of Republicans approves of this (55% vs. 20%), including approval from most MAGA Republicans (63% vs. 12%) but division among non-MAGA Republicans (35% vs. 40%).

US Retail Sales Surge by Most in a Year as Spending Extends Beyond Gas

The value of overall retail purchases increased 1.7% following a revised 0.7% gain in February, according to a Commerce Department report published Tuesday. The data are not adjusted for inflation.

While the March increase was led by a record jump in spending on gas, nearly every category in the report — from furniture to electronics to general merchandise — posted increases.

That strength likely reflects larger-than-usual tax refunds flowing into households’ bank accounts in recent weeks. As a result, forecasters may boost estimates for first-quarter gross domestic product, which the Bureau of Economic Analysis will publish on April 30. (…)

Excluding gas stations, sales rose a firm 0.6%. Motor vehicle sales were up 0.5%. Receipts at restaurants and bars, the only service-sector category in the report, advanced 0.1%.

High-frequency card data have been mixed in recent weeks. Reports from PNC Financial Services Group Inc. and the Bank of America Institute pointed to strength in spending in discretionary categories such as travel and electronics, while Visa’s Spending Momentum Index suggested that — excluding gas — spending across discretionary, non-discretionary and restaurant categories declined.

The retail sales report showed so-called control-group sales — which feed into the government’s calculation of GDP — were up 0.7%, the most since August. The measure excludes food services, auto dealers, building materials stores and gasoline stations.

Americans are … Americans. We will get more data on income and spending Friday next week but March retail sales, with upward revisions in both January and February, tell us that Americans are still very much able and willing to spend.

Goldman Sachs estimates that real core retail sales rose at a 1.9% three-month annualized rate through March.

War-related inflation has yet to fully find its way into wallets but tax refunds are spent merrily.

The consumer is still spending, and this is partially due to larger tax refunds offsetting the initial hit from higher gasoline prices. Right now refunds are up over $40 billion versus last year, which is a 17% increase over the prior year. And the total number of refunds sent is up 3 million MORE versus the same time last year. So it would be hard to ignore this reality, especially as it relates to the state of spending today. (Wells Fargo)

Super Core retail sales are up 4.8% YoY in March:

(RBA Advisors)

The half-full glass view:

• My Tuesday post (Resilient!) warned about the sharp slowdown in real disposable income amid rising inflationary pressures from the war in Iran.
• But the retail sales data show that Americans, in aggregate, are not bothered much by the jump in gas prices.
• Ed Yardeni’s smart chart below, plotting the savings rate against wealth/disposable income, says that a savings rate below 4.0% should not be discounted given accumulating wealth.

• Continued strong consumer spending coupled with “solid” government expenditures would keep the economy humming through 2026 and possibly into 2027. The White House recently asked for a 42% increase in the Department of War’s budget for 2027.

The half-empty glass view:

• Assuming the above well stimulated economy, the resulting demand pull could fuel inflation higher and for longer than currently forecast by most economists and strategists, forcing the FOMC to raise interest rates. This could in turn boost the government’s interest payments, further aggravating the budget deficit.
• This “growthflation” scenario could spook leveraged investors in historically overvalued equities, potentially creating a negative wealth effect while lower-K Americans would still be in “coping mode”.

On April 15, a confident Ed Yardeni posted The Champagne Glass Is More Than Half Full:

Happy days are here again! (…)

The private credit bubble may be losing some air, but it isn’t bursting, while banks are still lending. Real GDP slowed during Q4-2025 and Q1-2026, but some of that was related to bad weather.

(…) it feels like the Roaring 2020s are back, given the strong V-shaped recovery in stock prices since March 30.

So what could possibly go wrong? Obviously, the war could flare up again. Oil exports might remain blockaded in the Arabian Gulf, causing oil prices to rise again. Let’s search for additional possible troubles in the economic reports of the past couple of days:

The Fed’s Beige Book was released today, covering data collected on or before April 6. The main message is that risks are skewed toward the inflation side of the Fed’s dual mandate:

• Labor markets held steady, with employment flat to slightly up in most districts (…). Wages remained modest to moderate across all districts, with no acceleration or deceleration reported.
• The most consequential shift from the March Beige Book is the energy price shock now hitting the economy. (…) The short-term inflation picture has clearly worsened. The Beige Book is broadly consistent with our view. The economy remains in good shape, but inflation risks have intensified.
• Major US banks kicked off the Q1 earnings season this week. Their CEOs’ commentary was uniformly upbeat about the US economy in Q1.
• The March NFIB survey of small business owners suggests that job openings may be bottoming. Hiring intentions have moderated to their long-run average. These readings are consistent with our view that the labor market remains in good shape, with supply and demand roughly in balance.
• The resilience of consumer spending is fully consistent with our upbeat economic outlook. Thanks to the 2025 One Big Beautiful Bill Act, the 2026 tax filing season is delivering a timely boost to consumers’ purchasing power.

I have great respect for Ed, a rare one-handed economist and strategist, but my current reading of Andrew Ross Sorkin’s great book “1929” is keeping me worried amid still expensive equity markets:

Yale professor Irving Fisher, described by the Los Angeles Times as “one of the nation’s leading economists and students of the market,” had become an intellectual celebrity of sorts for his groundbreaking work on monetary theory.

But what people loved most about Fisher was his unwavering, plainspoken optimism. He was not some mealymouthed academic muttering about storm clouds. He was a man who understood the times and spoke with a sense of confidence.

“Stock prices are not too high and Wall Street will not experience anything in the nature of a crash,” stated Fisher on September 5 [1929].

“We are living in an age of increasing prosperity and consequent increasing earning power of corporations and individuals. This is due in large measure to mass production and inventions such as the world never before has witnessed. The rapidity with which worthwhile inventions are brought out is the result of the tremendous research laboratories of our great industrial concerns.”

During other speeches in October, Fisher expressed confidence that productivity would help the  economy:

“Stock prices have reached what looks like a permanently high plateau…I do not feel there will be soon, if ever be, a 50 or 60 point break from present levels, such as [bears] have predicted. I expect to see the stock market a good deal higher within a few months.”

A few days later, Fisher expanded on that belief. “Even in the present high markets, the price of stocks have not yet caught up with their real values,” nor had the market “yet reflected the beneficent effects of Prohibition, which had made American workers more productive and dependable,” (…)

On October 15:

Hoover’s secretary of commerce, Robert P. Lamont also remained resolutely positive. “Industrial and commercial activity during the first nine months of 1929 continued on the same high level which has characterized American business during the past five years,” he said in a statement.

“The output of pig iron and steel ingots, usually regarded as an accurate reflector of industrial conditions, was more than 17 percent greater than in the corresponding period of the preceding year…Automobile production, often used as a measure of consumer purchasing power, was greater than any other similar period. Industrial employment was larger than in the same period of last year, while industrial payroll totals showed considerable expansion.”

In every measure the economy was showing remarkable stability, asserted Secretary Lamont. Like Fisher, he expressed no doubts about the state of America’s financial health. (…)

America’s future, Lamont continued, “appears brilliant…we have the greatest and soundest prosperity, and the best material resources…our great domestic market, our efficiency and our capital supplies make our securities the most desirable in the world.”

Inflation was not a problem in the roaring 1920s. Economists were rather worried about deflation risks.

Banking authorities were concerned by rampant speculation. From the Federal Reserve History:

The Roaring Twenties roared loudest and longest on the New York Stock Exchange. Share prices rose to unprecedented heights. The Dow Jones Industrial Average increased six-fold from sixty-three in August 1921 to 381 in September 1929. (…)

The financial boom occurred during an era of optimism. Families prospered. Automobiles, telephones, and other new technologies proliferated. Ordinary men and women invested growing sums in stocks and bonds.

A new industry of brokerage houses, investment trusts, and margin accounts enabled ordinary people to purchase corporate equities with borrowed funds. Purchasers put down a fraction of the price, typically 10 percent, and borrowed the rest. The stocks that they bought served as collateral for the loan. Borrowed money poured into equity markets, and stock prices soared. (…)

The governors of many Federal Reserve Banks and a majority of the Federal Reserve Board believed stock-market speculation diverted resources from productive uses, like commerce and industry. The Board asserted that the “Federal Reserve Act does not … contemplate the use of the resources of the Federal Reserve Banks for the creation or extension of speculative credit”. (…)

The Federal Reserve decided to act. The question was how. The Federal Reserve Board and the leaders of the reserve banks debated this question. To rein in the tide of call loans, which fueled the financial euphoria, the Board favored a policy of direct action. The Board asked reserve banks to deny requests for credit from member banks that loaned funds to stock speculators. The Board also warned the public of the dangers of speculation.

The governor of the Federal Reserve Bank of New York, George Harrison, favored a different approach. He wanted to raise the discount lending rate. This action would directly increase the rate that banks paid to borrow funds from the Federal Reserve and indirectly raise rates paid by all borrowers, including firms and consumers. In 1929, New York repeatedly requested to raise its discount rate; the Board denied several of the requests.

In August the Board finally acquiesced to New York’s plan of action, and New York’s discount rate reached 6 percent.

The Federal Reserve’s rate increase had unintended consequences. Because of the international gold standard, the Fed’s actions forced foreign central banks to raise their own interest rates. Tight-money policies tipped economies around the world into recession. International commerce contracted, and the international economy slowed.

The financial boom, however, continued. The Federal Reserve watched anxiously. Commercial banks continued to loan money to speculators, and other lenders invested increasing sums in loans to brokers. In September 1929, stock prices gyrated, with sudden declines and rapid recoveries. Some financial leaders continued to encourage investors to purchase equities, including Charles E. Mitchell, the president of the National City Bank (now Citibank) and a director of the Federal Reserve Bank of New York.  In October, Mitchell and a coalition of bankers attempted to restore confidence by publicly purchasing blocks of shares at high prices. The effort failed. Investors began selling madly. Share prices plummeted. (…)

While New York’s actions protected commercial banks, the stock-market crash still harmed commerce and manufacturing. The crash frightened investors and consumers. Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills. Fear and uncertainty reduced purchases of big ticket items, like automobiles, that people bought with credit. Firms—like Ford Motors—saw demand decline, so they slowed production and furloughed workers. Unemployment rose, and the contraction that had begun in the summer of 1929 deepened. (…)

Today, worries are about inflation, although speculation is very much present.

(AdvisorPerspectives)

This next chart plots the Federal Reserve Margin Loans data which shows lower total margin debt because “it does not fully capture margin-like lending from large bank holding companies to entities like hedge funds.”

The chart, going back to 1965, allows to also plot margin debt against disposable income.

Note the explosion of margin debt (through Q4’25) since the pandemic (FINRA +65%, Fed: +100%). While margin debt is tiny vs income, it’s up 50% since the pandemic and is now in line with the 1999-2008 period of speculative excesses that eventually led to sharp deleveraging (selling) when equity markets turned.

Not a timing tool, but a measure of speculative behavior, warning of the risk if and when fear comes back.

Speculation nowadays is not only seen in margin loan numbers. Here’s a non-exhaustive list of recent “investment tools” offered by your friendly broker:

• Zero-Day Options Tools.
• Leveraged ETFs to potentially gain 2x or 3x exposure to equity markets.
• Single-Stock Leveraged ETFs allowing retail traders to gain 2x or 3x exposure to specific high-momentum companies.
• Event Trading tools to amplify bets on specific binary events, such as earnings reports or Fed interest rate decisions, or just about anything.

During his confirmation hearing last week, Kevin Warsh explicitly criticized QE as a policy that fuels asset price inflation and benefits wealthy asset holders while distorting market signals.

He advocated for a “radical” reduction of the Fed’s $6.7 trillion balance sheet, stating that the central bank’s massive footprint in the bond market distorts financial conditions and creates “market noise” that confuses investors.

He said that the Fed’s communications encourage market participants to over-rely on central bank promises rather than real economic data.

In effect, he wants a radical reduction in liquidity and the elimination of the “Fed put”, both encouraging speculative behavior. FOMC meetings will get lively.