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Over the past six months, the S&P 500 has staged an incredible rally—one that was very much in line with what my models had projected earlier this year. Back at the start of 2025, following the tariff tantrum and the heavy selloff, we flagged the market’s move as a clear mispricing. Flows were simply too strong to justify the decline, and sure enough, the rebound has been powerful.

But as we head into October, the winds that fueled this rally are beginning to shift. What were tailwinds over the summer are now turning into headwinds. The key message I want to make clear is this: I believe we’re at an inflection point, and volatility is likely to spike in the near term. The rally looks exhausted, and a breather—possibly a sharp one—is overdue.

The First Domino: Treasury Flows and the Tax Drain

The most important factor right now comes down to fiscal flows. The daily Treasury statement is, in many ways, the first mover of macroeconomic outcomes.

Each September, we see a major corporate tax drain. This year, starting around September 11th, roughly $120 billion was pulled out of the private sector over a two-week period. On its own, that may not change the long-term trajectory of the economy—but in the short run, it significantly pressures the balance sheet capacity of the financial sector.

As Bitcoin continues to carve out a larger and larger share of the global financial system, the question of what truly drives its price has never been more important. For years, commentators have pointed to “Fed liquidity” as the main force behind Bitcoin’s price action. But as I argue in my latest video, this explanation doesn’t hold up under scrutiny. Instead, the evidence strongly suggests that fiscal flows—not monetary liquidity—are the true driver of Bitcoin’s long-term price trajectory.

Why “Fed Liquidity” Falls Short

In the post-COVID era, analysts have been quick to tie Bitcoin’s movements to changes in so-called Fed liquidity. Whether through quantitative easing (QE), reverse repos, the Treasury General Account (TGA), or reserve balances, the idea was that when the Fed injected liquidity, Bitcoin’s price would rise.

But there’s a fundamental flaw in this argument: Fed liquidity only swaps assets, it doesn’t add new ones. QE and related tools merely change the composition of private sector balance sheets; they don’t create new net financial assets. That means there’s no direct channel for these measures to bid up Bitcoin—or any other financial asset—in a sustainable way.

On Friday, the jobs data hit—and it wasn’t good. Non-farm payrolls came in at just 22,000, far below the already low expectation of 75,000, and well short of the 53,000 that would have at least met consensus. By any measure, that’s a weak print.

It raises a big question: are we looking at the beginning of a major slowdown, or is something else going on beneath the surface?

In this post, I want to break down how to interpret this report, why it might not mean what the “perma-bears” think it does, and how it fits into the broader macroeconomic picture.

Framing the Question: Major Slowdown or Temporary Pause?

Whenever I see a headline-grabbing data point like this, I try to step back and ask a few simple questions:

1. What are the main drivers of the economy right now?
2. What should we expect to see if the bearish case is real?
3. What doesn’t line up with that story?

With jobs data, the natural concern is that weak hiring means the cycle is rolling over. But to confirm that, we need to see reinforcing signals in credit, fiscal policy, inflation, and layoffs. Without those, a bad number might just be noise—or the result of something temporary.

Markets have had a rough ride lately. Just last Wednesday, we hit fresh all-time highs, only to see a sharp selloff in the days since. As of writing this, the S&P 500 has dropped around 4.5% in just five trading days. So, what’s going on? What’s driving this pullback?

If you follow financial media, you’ll hear a common explanation: the bond market. Specifically, falling bond yields have been blamed for the market's weakness. But does that explanation really hold up? Let’s break it down and take a closer look at the broader macroeconomic forces at play.

The Bond Market’s Message—Should We Be Concerned?

A traditional macroeconomic interpretation of falling bond yields suggests that investors are flocking to safety due to concerns about future economic growth. If the market truly feared a slowdown, we’d expect capital to shift into bonds, pushing prices up and yields down. This logic, at least in theory, makes sense.

Donald Trump’s top economic advisor, Kevin Hassett, recently outlined the administration’s economic vision, and after digging into the details, one thing stands out: it looks eerily similar to what Europe did following the Great Financial Crisis (GFC). If Trump gets his way, the U.S. economy could end up looking a lot like Europe’s—stagnant growth, higher unemployment, and structurally weaker economic conditions. Let’s break it down.

The Core Strategy: Fighting Inflation by Shrinking the Economy

Hassett laid out two main pillars of Trump’s economic plan:

1. Increase Labor Supply – This means pushing those receiving government assistance into the workforce, which effectively increases unemployment before they find jobs.
2. Lower Aggregate Demand – Achieved through government spending cuts, meaning less money flowing through the economy.

Theoretically, this will bring down inflation. But at what cost? If history is any guide, slashing government spending and pushing more people into the labor market without increasing demand leads to stagnation—a scenario Europe found itself in after the GFC.

The discussion around tariffs often gets caught up in political rhetoric, but if we take a step back and analyze the mechanics from a macroeconomic perspective, there are two key points that often get overlooked. Understanding these nuances requires thinking through the lens of post-Keynesian, Modern Monetary Theory (MMT)-influenced macroeconomics—an approach that sheds light on how tariffs impact financial flows, growth, and inflation.

The Recent Tariff Announcement and Market Reaction

Last Friday, Trump announced the implementation of tariffs on Canada, Mexico, and China—25% on Mexico, 25% on Canada, and 10% on China. The announcement created immediate market turmoil over the weekend, leading to significant drops in futures markets when they opened on Sunday night. However, by mid-afternoon on Monday, Trump had paused tariffs on Canada and Mexico after discussions with both nations, leading to a near-full recovery in the markets.

Despite the volatility, the S&P 500 remains only 2% off its all-time highs. This resilience underscores an important point: while tariff-induced uncertainty can cause short-term disruptions, the long-term macroeconomic impact is what really matters. That’s why it’s crucial to break down what tariffs actually do in an economy and how they might affect growth and inflation.

The Trump 2.0 era has officially begun, and it’s off to a fast-paced start. In just a few days, we’ve seen sweeping changes, executive orders, and policy shifts that are already making waves. While political discussions abound, my focus here is on what really matters to traders and investors: the markets. Specifically, how will this new administration’s fiscal priorities impact market movements in the months and years ahead?

Setting the Stage: A Bull Market in Transition

As we stand today, markets are on the edge of all-time highs. This follows nearly two years of a relentless bull market that has pushed asset prices steadily higher. The key question is whether this momentum will continue in the Trump 2.0 environment, or whether we’re about to see a shift.

To answer that, we need to focus on the primary driver of markets over the past several years: fiscal flows. The fundamental idea here, rooted in Modern Monetary Theory (MMT), is that government spending adds financial assets to the private sector. Those assets, whether saved or spent, ultimately funnel into financial markets, driving asset prices higher.

In short, fiscal flows are the lifeblood of the markets. When government spending accelerates, markets tend to follow suit. Conversely, when spending slows, so do markets.

Treasury yields have been climbing steadily, particularly on the long end of the curve, sparking renewed chatter from macro bears who see this as the harbinger of an impending crisis. If you’ve followed my content for a while, you won’t be surprised when I say: this isn’t the disaster they’re hoping for. Let’s break down why yields are rising, debunk some common macro bear arguments, and explore the dynamics behind this shift.

Why Are Yields Rising?

At its core, rising yields boil down to one thing: investor expectations. Specifically, expectations for future growth and inflation are now higher than they were just months ago. As markets anticipate stronger economic performance, this is being priced into the long end of the yield curve.

But there’s more to it than just investor sentiment. Understanding this phenomenon requires addressing two pervasive myths propagated by those forecasting doom: the “debt crisis” narrative and the “lack of demand for treasuries” argument.

Debunking the Debt Crisis Myth

One popular theory among macro bears is that the U.S. is on the brink of a debt crisis, fueled by the notion that our national debt is unsustainable. This view ignores some fundamental principles of monetary and fiscal policy in the United States.

As the release of the United States’ fourth-quarter GDP figures draws near, it has become increasingly evident that forecasting the rate of change for this metric remains a significant challenge. Current projections even within the Federal Reserve’s own models show considerable divergence. For instance, the Atlanta Fed’s GDPNow model currently predicts growth at 3.3%, whereas the New York Fed’s equivalent model estimates a much lower rate of 1.8%.

CPI for October came in at 2.6% today, inline with forecasts but persistent inflation remains a key narrative as we finish out the year. Today's 2.6% print aligns closely with projections from our DeepMMT 2 model (more to come on DeepMMT 2 soon) and we anticipate elevated CPI readings through November and December, with modest reductions expected to emerge in early 2025.

The Fed’s recent rate cut on November 7 has been incorporated into the model. After a two-day meeting, the Federal Open Market Committee noted that “economic activity has continued to expand at a solid pace.” The committee lowered the target rate range to 4.50% to 4.75%, as anticipated, with a unanimous decision.

Expectations of another 25-basis-point rate cut on December 18 have also been factored into our model. These projections, derived from the 30-Day Fed Funds futures, currently reflect a 63% probability of a target range of 4.24% to 4.50% for the upcoming decision.