Consumer sentiment not supporting market sentiment

 

University of Michigan Consumer Sentiment is now at the lowest level in 40 years. I could go back further. It is the lowest level ever recorded, as listed in the FRED database. Worse than the Volcker recession and the double-digit recession. Sentiment has fallen since the pandemic. The consumer confidence survey data, which goes back even further to 1959, shows the same pattern. There is a confidence problem in the US. 

The Conference Board numbers are better, yet the overall direction is the same. So, even if you choose the best survey, there is still a problem. This will carry over to economic behavior, yet it is not clear when or how, but the general trend is negative. Who or what is going to provide a jolt to sentiment? It does not seem to be on the horizon, and because of that, it is hard to see strong economic growth over the next year.

Yen intervention will not change fundamentals

 

The coordinated Yen intervention continues as we see the currency has continued to improve. Short-term intervention can reduce volatility, but this is not a volatility problem. This is a policy problem, and nothing has changed in policy. The Bank of Japan has moved its target rate to 1% and has provided forward guidance that it expects rates will continue to move higher. If this is the policy, then the yen carry trade will be reversed, and there will be further upward pressure on US Treasury rates.

The expectation is that short-term intervention will stop the yen slide and reduce pressure on global rates, but that is not how markets work in the longer run. There is no change in BOJ policy, no change in Fed policy, and no change in global imbalances. Hence, the markets will readjust their positions and currency rates will have to adjust. The process can be slowed but not reversed. 

What makes me worry about the markets - August 2026

 

The markets are connected, and the message is not good:

1. The Korean tech bubble is bursting, and some return to normality; however, it is not done yet. US retail investors are net sellers. We just saw a US fund blow-up with Situational Awareness. It is a one-off, but investors need to realize that investor euphoria led to the excessive money flows.  

2. Coordinated intervention in the yen market to stop a massive currency slide. Japan rates moving higher, so global fixed income is being reset. 

3. Long-term Treasuries at levels not seen since 2007. Real rates continue to move higher. Housing market declines will continue given high mortgage rates. Cost of borrowing for all AI projects is going higher. 

4. Consumer sentiment continues to move lower. 

5. Continued war in Ukraine and the Middle East, which impacts the oil market. Oil inventories are reaching low levels. 

What can LLMs do and more importantly, not do?

 

A very interesting position paper worth a read for any follower of AI: “LLMs Can't Jump: Why the Abductive Leap is the Final Frontier of AI Discovery.” The thought is simple. AI may be good at some forms of inference, like deduction and induction, but it is not able to do the third type: abduction. “While AI can compress data (Induction) and prove theorems (Deduction), it cannot yet recreate the intuitive leap Albert Einstein took to formulate the axioms of General Relativity—a process rooted in embodied physical simulation rather than symbolic manipulation.”

The Three Pillars of Inference

The paper adopts the framework of Charles Sanders Peirce to categorize AI’s missing link:

• Deduction (Rule + Case → Result): Applying a known law to a specific situation. (AI status: SOTA - Achieved)
• Induction (Case + Result → Rule): Spotting patterns in data to find a general rule. (AI status: SOTA - Achieved)
• Abduction (Rule + Result → Case/New Rule): Inventing a hypothesis to explain a surprising or singular phenomenon. (AI status: The Missing Jump)

There is still room for importing thinking by analysts. The market has to understand which skills are important for analysts and what can be done by quants.