Inflationary Boom Collides With Global Oil Shock

Key Points

• We are in the midst of an inflationary boom, driving stock prices and home prices to record highs.
• But that is about to collide with a global oil shock of unprecedented proportions.

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The inflationary boom is driven by:

Tax cuts from Trump’s “Big Beautiful Bill.”

Fed rate cuts. The Fed has two mandates: first, to maintain price stability by keeping inflation in check; second, to keep the economy at full employment. The Unemployment Rate (blue) was already low, below 5.0%, and Core PCE Inflation (red), the Fed’s favored inflation measure, was above its 2.0% target, which did not justify rate cuts.

Quantitative easing (QE). The Fed has expanded its balance sheet since December 2025, adding $193 billion of liquidity to financial markets.

The declining Chicago Fed National Financial Conditions Index reflects the impact of easing monetary policy over the past three years.

Fiscal stimulus. The budget deficit is set to exceed 6% of GDP in 2026. Congress was never going to contain fiscal spending heading into an election year, with the midterms in November. The Supreme Court overturned Trump’s tariffs, but they would not have made a meaningful difference to the deficit.

AI spending boom. Capital spending by major technology companies has contributed more than 90% of GDP growth.

War stimulus. On top of that, we have military spending on the war with Iran, which costs more than $1 billion per day.

Past Inflationary Booms

This is the fourth inflationary boom since the 1960s:

The first inflationary boom saw a massive spike in consumer prices, with CPI reaching nearly 15.0% in 1980.

The second boom was during the Dotcom era of the late 1990s. Robert Shiller’s CAPE ratio — which compares the S&P 500 to the past 10 years of inflation-adjusted earnings — reached record highs during the Dotcom bubble.

The third inflationary boom manifested in the real estate and banking sectors, leading to the 2008 banking crisis. The Chart below shows elevated growth in real estate prices and a massive surge in the NYSE Financial Composite Index before a dramatic collapse.

The fourth wave is evident in the AI sector and private credit. The Nasdaq QQQ ETF has more than doubled in the past three years.

Robert Shiller’s CAPE Ratio (shown earlier) has exceeded 40 for the first time since the Dotcom bubble.

The nebulous private credit sector is another threat. Linkages through credit lines from the banking sector, and private credit acquisitions of insurance companies, which are then stuffed with assets of dubious quality, would spread any financial shock across the entire financial sector.

Another bubble of epic proportions is emerging in government debt, which threatens to exceed its 1946 high of 106 percent of GDP, after WWII.

What triggers the end of the current boom is still to be determined.

Global Oil Shock

The most likely trigger is the supply shock from a global oil shortage.

HFI Research highlights the shortfall in global crude exports:

Global crude exports are lower by ~6 million b/d in May vs last year.

That’s with the US averaging 5.6 million b/d this month, or +2.1 million b/d year-on-year.

What most people may not realize is that the current export trend in the US is completely unsustainable. This week’s EIA oil storage report saw the largest crude oil inventory draw in history ….slightly lower than what we had projected. By July, US commercial crude storage will hit an operational minimum, and the market is already starting to price out US crude exports.

The EIA chart below depicts the record decline in US crude inventories, including the Strategic Petroleum Reserve (SPR).

Conclusion

The US economy is particularly vulnerable at present.

The economy is expanding, fueled by fiscal and monetary stimulus, but is almost totally reliant on AI capital spending to maintain GDP growth. That same stimulus has increased inflationary pressures, further exacerbated by rising oil prices emanating from the war with Iran. Depleting global oil reserves and continued curtailment of shipping through the Strait of Hormuz will likely drive crude oil prices even higher.

Increased fiscal stimulus by highly indebted Japan, in response to the crude oil supply shock, has heightened bond market concerns about a sovereign debt crisis and is driving up long-term yields.

Rising long-term interest rates add further pressure on an already fragile financial system. A highly leveraged private credit sector and corporate borrowers face debt roll-overs at much higher rates.

Rising interest rates also increase pressure on the fiscal budget. CBO projections assume 10-year Treasury yields of 4.2% and a Fed funds rate of 3.4%. Every 1-basis-point increase adds $3.9 billion in interest expense to the budget deficit. 50 basis points (0.5%) would add $195 billion — close to the $200 billion DoD budget funding request for the Iran war.

Inflationary pressures have created an increasingly fragile economy. That is now colliding with rising pressure on crude oil prices as the shortfall in global shipments depletes reserves. The longer the conflict continues, the greater the pressure on crude oil prices, inflation, and long-term interest rates. Solvency pressures will increase. A crisis in one sector risks a domino effect on other vulnerable areas.

We maintain our defensive stance, overweight in Gold, defensive stocks, and short-term financial instruments.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• CBO: The Budget and Economic Outlook, 2026 to 2036
• HFI Research: Oil Storage Math – There’s No Hiding Now
• Marcus Nunes: The Blind Men and the Elephant
• Gita Gopinath: Keynote Address at the Atlanta Fed
• Thomas Hoenig: The Inevitable Decline of the Dollar | Former Fed Governor Tom Hoenig