Economy đź“Ť

📽️ Videos

Large Cap Stocks and Market Concentration

|

In recent years, value stock investors have been quick to point out the risks of index funds that use market-cap weighting (like those tracking the S&P 500) allocate money based on company size. While large caps (especially mega-cap tech) dominant market performance, smaller companies have historically provided higher long-term returns to compensate investors for taking on higher volatility and risk—a concept known in finance as the size premium.

When a few massive tech giants outperform the rest of the market, as is case currently, they consume a massive percentage of the index. In these times, a so-called “diversified” fund becomes heavily reliant on just a handful of stocks. With the current market, SP 500 based indexes mean 30%+ of your money is in just 10 companies. This means the fund will swing wildly based on the performance of a few mega-cap stocks. 

Alternatives to indexing based on S&P 500

  • Equal-Weight Funds: Invest in versions of the index where every company gets the same exact dollar allocation. This heavily biases you towards small caps.
  • Factor Investing: Allocate a portion of your money to value or small-cap funds to balance the mega-cap growth exposure. This gives you some additional small caps without over weighting to small caps.
  • International Diversification: Add foreign stock indexes, which typically have less mega-cap tech concentration. 

But are large cap stocks dominating the S&P 500 index necessarily a bad thing?

  • Large-Caps (e.g., S&P 500): These are mature, stable businesses with global operations and massive balance sheets. They excel during economic slowdowns, periods of high interest rates, or when specific sectors like mega-cap technology experience exponential, monopolistic growth.
  • Mid-Caps (e.g., S&P MidCap 400): Often called the “sweet spot” of investing, mid-caps offer a blend of financial stability and room to grow. Historically, they have frequently outperformed both large and small caps over rolling 20-year periods by avoiding the bureaucracy of giant corporations and the high failure rates of tiny ones.
  • Small-Caps (e.g., Russell 2000): These are younger, nimble companies with high growth potential. They are highly sensitive to the domestic economy and tend to massively outperform during the early stages of an economic recovery or bull market, fueled by low interest rates and easier access to capital.
FactorLarge-CapsMid-CapsSmall-Caps
Long-Term Growth PotentialModerateHighVery High
Volatility & Risk ProfileLowestModerateHighest
Economic SensitivityGlobal trendsBalancedHighly sensitive to domestic economy
Historical “Size Premium” WinnerUnderperforms over multi-decade cyclesStructurally strong risk-adjusted returnsOutperforms over long historical cycles

Small caps are not necessarily better …

  1. The “Size Premium” Volatility: While small caps can generate higher geometric returns over 30+ years, they can go through brutal decade-long stretches of underperformance where large caps dominate completely.
  2. Interest Rate Sensitivity: Small and mid-cap companies typically rely more on floating-rate debt. When central banks raise interest rates, their borrowing costs skyrocket, allowing cash-rich large caps to easily outperform them.
  3. Survivorship Bias: Small-cap indexes suffer from higher churn. When a small company becomes wildly successful, it graduates out of the small-cap index and moves into mid or large-cap territory, leaving the small-cap index to continually cycle through unproven businesses.
Map: Green Mnt NF Forest Road 74 Camping
Map: Headwaters Of White River

You Might Be Fueling Inflation Just By Reading This Story

|

You Might Be Fueling Inflation Just By Reading This Story

Economists at Oxford Economics in an analysis released Wednesday said the Iran war is pushing prices for energy and other things more than it otherwise would if people weren't paying so much attention to it. The analysis shows how inflation can be a psychological phenomenon as well as a physical one—notable at a time when real-world factors including tariffs and the closure of the Strait of Hormuz?are also stoking inflation.

Treasury Bonds Surge – What it means for the economy

|

The 30-year U.S. Treasury bond rate has surged to 5.12%, marking its highest level since June 2007. This milestone represents a dramatic shift in global financial conditions, driven by a combination of persistent domestic inflation, escalating geopolitical tensions, and shifting expectations for Federal Reserve policy.

Why 30-Year Treasury Rates Are at a 20-Year High

Long-term government bond yields move inversely to bond prices. Investors are selling off long-term U.S. debt—forcing yields upward—due to four primary catalysts:

  1. Resurgent and Sticky Inflation: U.S. Consumer Price Index (CPI) inflation recently accelerated to 3.8%, driven heavily by an energy price shock stemming from the U.S.-Iran war. Concurrently, wholesale prices (PPI) jumped to 6% annually, signaling deep-seated inflationary pressures.
  2. Hawkish Fed Pivot Under New Leadership: Newly confirmed Federal Reserve Chair Kevin Warsh is navigating an increasingly complicated inflation picture. Because inflation is ticking higher, the market has rapidly priced out expected interest rate cuts for 2026. Investors are instead bracing for rates to stay “higher for longer,” with growing expectations of a potential rate hike.
  3. Massive Treasury Supply and Deficits: The U.S. government continues to run large structural deficits, requiring the Treasury to auction off vast volumes of new long-dated bonds.
  4. Waning Foreign Demand: Japan, the largest foreign creditor to the U.S., is facing its own domestic inflation shock (producer prices surged to 4.9%), driving Japanese government bond yields to multi-decade highs. As a result, domestic Japanese institutions are keeping capital at home rather than purchasing U.S. Treasuries, reducing the global pool of buyers and forcing the U.S. to offer higher yields to attract lenders.

What This Means for the Economy

Because U.S. Treasury bonds represent the ultimate “risk-free” floor for lending, an increase in their yields ripples across the entire financial system: 

  • Tighter Financial Conditions: Higher long-term yields increase the cost of capital for corporations. Companies face steeper bills to issue debt, which compresses profit margins and slows down business expansion and hiring.
  • Stock Market Volatility: High-yielding, guaranteed government bonds create a steep opportunity cost for investors. Capital is being pulled out of riskier assets, causing major stock indices like the S&P 500 to fall as investors favor the guaranteed 5%+ returns of government debt.
  • Surging Government Debt Costs: As the yields on newly issued 30-year bonds cross the 5% threshold, the U.S. government must allocate an increasingly massive share of federal revenue simply to pay interest on the national debt, threatening to crowd out other public spending. 

The Impact on Borrowers

For everyday consumers, higher Treasury yields translate directly to more expensive debt, reducing consumer purchasing power. 

Potential Homeowners

  • Locking in Higher Mortgage Rates: The 30-year fixed mortgage rate is structurally tied to long-term government bond yields. With Treasury yields breaking past 5.1%, average 30-year fixed mortgage rates have quickly marched upward to 6.41%.
  • Severe Affordability Compression: A buyer purchasing a $400,000 home with a 20% down payment ($320,000 loan amount) at today’s 6.41% rate faces a monthly principal-and-interest payment of roughly $2,003. For perspective, when mortgage rates hovered near 3% a few years ago, that same monthly payment was approximately $1,349—a difference of over $650 per month for the exact same house. 

Car Buyers

  • Stricter Lending Standards: Auto lenders routinely price their loans based on commercial benchmark rates, which scale alongside Treasuries. As banks experience higher funding pressures, they pass these costs onto consumers.
  • Elevated Auto Loan Rates: Borrowers looking to finance a new or used vehicle will face significantly higher Annual Percentage Rates (APRs). Even consumers with excellent credit scores are seeing auto loan rates cross into the 7% to 9% range, while subprime borrowers face double-digit interest rates.
  • Increased Total Cost of Ownership: Financing a standard $35,000 vehicle over 60 months at an 8% APR adds over $7,600 in lifetime interest payments alone, forcing consumers to settle for cheaper vehicles or absorb much higher monthly financial stress.
Map: Shindagin Hollow State Forest Ortho
Map: Severence Hill Trail
Map: Deer River State Forest

The Collusion of Nixon’s Politics and Monetary Policy

|

With this week’s appointment of Kevin Warsh to Federal Reserve Chair by President Trump, it seems fitting to look back at another President who was not afraid to put his thumb on the scales of monetary policy. While 2026 is not 1970, we can learn a lot from studying the history books. Arthur Burns’ chairmanship of the Federal Reserve from 1970–1978 remains a definitive cautionary tale of how political encroachment can compromise central bank independence. Driven by fear of political defeat, President Richard Nixon utilized personal ties and systemic leverage to force the Federal Reserve into an expansionary stance. The result was short-term political triumph for Nixon, but long-term economic disaster for the United States, cementing the era of “stagflation”.

Richard Nixon’s obsession with economic metrics stemmed from the 1960 presidential election. He blamed his narrow loss against John F. Kennedy on the Federal Reserve’s refusal to ease monetary policy during a pre-election recession. To secure control over monetary policy, Nixon appointed his long-time economic adviser and personal friend, Arthur Burns, as Federal Reserve Chairman in early 1970. While Burns was an accomplished economist, his personal loyalty to Nixon fatally compromised his institutional neutrality. Archival evidence from the Nixon White House Tapes reveals an aggressive campaign of intimidation. Nixon routinely brought Burns into the Oval Office, demanding faster expansion of the money supply. When Burns hesitated, the administration planted false stories in the press and threatened to expand the Federal Reserve Board to dilute his voting power. Burns ultimately capitulated, shifting the central bank to a highly expansionary stance throughout late 1971 and 1972.

Burns’s capitulation was not entirely forced; it was also enabled by flawed economic theories. Burns held a non-monetary view of inflation. He argued that rising prices were driven by the monopoly power of labor unions and corporations rather than excessive money printing. Because Burns believed monetary policy was powerless against structural inflation, he endorsed Nixon’s August 1971 “Nixon Shock”. This policy temporarily froze wages and prices and broke the dollar’s link to gold. With artificial price ceilings masking underlying inflation, Burns felt justified expanding the money supply to achieve full employment.

The short-term political calculation achieved exactly what Nixon wanted. The economy boomed just in time for the 1972 election, allowing Nixon to win a historic landslide. However, the bill arrived immediately afterward. When the unsustainable wage and price controls were lifted in 1973, the suppressed inflationary forces burst into the open. This internal monetary imbalance was further aggravated by the 1973 OPEC oil embargo, pushing the U.S. economy into double-digit inflation and a deep recession by 1974.  By continuously blaming “special factors” like crop failures and energy prices rather than his own monetary expansion, Burns allowed inflation expectations to become deeply entrenched in American society.

The Nixon-Burns era proved that central banks cannot effectively combat inflation if they are micromanaged for short-term electoral gains. Subsequent research confirms that political pressure shocks increase long-term inflation without providing any lasting benefit to real economic growth. This historic failure permanently altered the architecture of global central banking. It underscored the absolute necessity of institutional independence—a principle later utilized by Paul Volcker to finally break the back of the inflation that Burns and Nixon unleashed.

Map: Hinckley State Forest
Map: Long Lake