One of the more vexing issues is the current outlook for oil. Broadly, we think it is reasonable to expect oil prices to rise over the long term, although in the short term they may fall given the actions of the US and China in helping to stabilise the market.
But oil inventories are falling, and at some point we arrive at a position which sees a severe shortage of oil. That is expected to be around July/August. From there we will most likely see demand destruction, in which case oil prices may not rise since demand falls to meet supply. This would also give rise to recession, as demand for many products falls and unemployment starts rising.
Then what? We think governments act, and the model is COVID. People will be given one-off payments to keep markets stable, and while avoiding a recession, there comes a time when we have to deal with the considerable debt burden, mainly in mortgages.
Stock markets too will be impacted as earnings projections will have to be reassessed.
Recreated from J.P. Morgan Commodities Research (Kpler, IEA, EIA, PAJ, JODI, OilChem, Bloomberg). 2026 observable inventories tracking below every year since 2017, with JPM estimates pointing to a severe drawdown into July.
It is exceedingly difficult to keep up with the geopolitics of the Iran-US conflict. On Friday morning Australian time, Trump announced yet again that a deal with Iran was imminent, and within a short space of time both Israel and Iran said no such deal existed. Markets, of course, responded by sending oil prices lower.
The volatility makes it difficult for investors to determine what is really going on in the conflict, with both sides playing to their domestic audiences while also trying to convince other countries that "they" are winning.
The volatility is growing large, and with the CAPE at 42 and the IPOs of SpaceX, OpenAI and Anthropic, we can expect more volatility for the foreseeable future. We suspect things will settle down, but the question is when. And that is something we cannot answer with any degree of confidence. So it is a waiting game while keeping close watch on the markets and our portfolios.
No surprise as the budget appears to have caused people to check their position. Australia will do well to avoid a recession. Consumer sentiment has collapsed to 81 on the Westpac-Melbourne Institute index, with the 3-month average rolling over hard from the brief recovery above 95 late last year. We are back at levels last seen in the depths of the 2022-23 inflation squeeze.
(Neutral = 100)
Applications, 3 Weeks
Remember a few weeks ago when the US-Iran conflict started, Albo was on TV calming fears regarding potential shortages. Since then he has not provided any updates as the fears subsided. On Wednesday he hinted that things will get worse rather than better. Not exactly a good sign for the future. We can most likely expect the ASX to be impacted.
"We're very worried both about the human impact of course that comes with war, but also the economic impact, that is having a massive impact on the global economy, will get worse rather than better."
And the property story has turned. It appears the government's plan of reducing property speculation is working. The government's proposed reforms to negative gearing and capital gains tax have triggered a 20 per cent fall in Westpac's housing investor loan applications over the past three weeks, with the head of consumer banking Carolyn McCann warning there is widespread community concern about the changes. The banks will see decreased demand for loans, and this will result in falling property prices. The narrative has changed.
If you are thinking through what this means for your own position, our two recent property pieces cover the full picture:
Read on TMM →
Read on TMM →
The ASX has been choppy, whipsawed by the same oil headlines moving global markets. The S&P 500 Shiller CAPE sits at ~42, holding near the second-highest level in 140 years of market data, with only the December 1999 peak of 44.2 above it. Against that backdrop, the IPOs of SpaceX, OpenAI and Anthropic are preparing to add an unprecedented supply of new paper to the market.
As you know, we often discuss the "time" aspects of investing. The reason why is because you need to always place yourself and your emotions in the appropriate timeframe. If you are following the AI sector, you are gaining many lessons on how markets work over time to deceive investors who have not learnt from previous bubbles. There will be more bubbles in the future, and learning from this one will stand you in good stead for the next one.
We have said before that one of the major issues surrounding AI is the economics. Every product looks good when it is subsidised. The economics change once customers are required to pay the full cost that makes the product profitable. And to make it profitable, OpenAI and Anthropic have a herculean task in front of them.
AI cannot, under any circumstances, slow down. In a year, Anthropic and OpenAI's businesses have to be roughly twice the size they are today, then double again basically every year until 2029 or 2030. In that period they must also raise hundreds of billions of dollars or turn deeply unprofitable businesses into profitable ones while doubling revenues. Alternatively, both must severely reduce costs, except if they do that, they won't need all that compute capacity, which deprives Oracle, Google, Microsoft, SpaceX, Cerebras, CoreWeave, TeraWulf, Cipher, and Hut8 of the $1.1 trillion in remaining performance obligations.
The sector continues to see price volatility thanks to China's influence and control of the supply chain. This is why the US and others want to create their own secure supply chain. China's rare earth export controls, imposed on April 4, 2025 in retaliation for Trump's tariff increases, are driving prices sharply higher.
Never has one country controlled the supply chain of a necessity in such a comprehensive way. The export licensing requirements cover seven rare earth elements. The flow-through to western defence, EV, and chip supply chains is only beginning to be priced.
Here is what happens when large-cap stocks start going to markets for capital to build infrastructure. This is tied to the IPOs. Google just raised $84.7 billion in equity, its first issuance in 20 years. History has something to say about what happens to forward returns when cash-rich giants start selling stock to fund capex super-cycles.
| Episode | 1M | 3M | 6M | 12M | 24M |
|---|---|---|---|---|---|
| 1929 Utilities | +5.7% | -1.7% | -23.8% | -26.1% | -49.7% |
| 1972 Nifty Fifty | +0.8% | -4.3% | -10.8% | -19.3% | -42.9% |
| 2000 Telecom | +1.3% | +1.4% | +1.8% | -17.8% | -20.0% |
| 2008 Energy | -6.3% | -9.3% | -34.6% | -31.0% | -19.2% |
| 2014 Shale/MLP | +1.3% | +2.4% | +5.5% | +7.8% | +7.0% |
| Median | +1.3% | -1.7% | -10.8% | -19.3% | -20.0% |
| Worst | -6.3% | -9.3% | -34.6% | -31.0% | -49.7% |
Recreated from Macro Ops / Robert Shiller monthly S&P 500 data and SEC filings (Alphabet FWP/8-K, June 2026). Five episodes of external-equity-financed capex peaks. The signal skews sharply negative at 6-24 months. 2014 is the clear positive outlier.
The pattern across a century is hard to ignore. Utility holding companies in 1929. The Nifty Fifty capital raising peak in 1972. The telecom fiber super-cycle in 2000. Energy in 2008. When the biggest companies in the market stop funding growth from cash flow and start selling stock to build infrastructure, the median 12-month forward return has been -19.3%. Add the SpaceX, OpenAI and Anthropic IPOs into the same window and the supply of paper hitting the market is unprecedented.
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