Truth or Consequences

morning musings 6.26.26

phil dauber

Jun 26, 2026

∙ Paid

The Crack in the Foundation

TL;DR:

The AI hardware trade just showed its first real demand destruction signal. Apple is hiking prices 15-25% on a memory shortage Tim Cook calls a “100-year flood.”
Tech funds saw $9.3B in outflows one week after $19.2B in inflows.
Only 12 stocks in the S&P 500 are at 52-week highs while the index itself sits at highs.
The market is renting this rally, not owning it. Warsh’s Fed, with PCE running 4.1% and rate cuts pushed to June 2027, is the gravitational force that makes every crack in the narrative widen faster.

Reality is a funny thing; you can avoid it, hide it, dispute it, deny it, but facts are facts. Eventually, its acceptance becomes inevitable. We are, I believe, in the midst of such a bubbling to the surface on multiple fronts right now.

Capitalism in the United States is not working for everyone; wealth is accumulating in a very narrow cohort, while the vast majority lag. Government is increasingly seen as out of touch or failing to address the needs of the electorate. Corruption, always a fact, has reached new heights and can no longer be ignored as a necessary evil; it is now often the dominant motive for policies and actions. The result? The surge in extremist candidates on both sides, promising to be change agents or advocating radical change. Note the growing number of socialist-friendly candidates winning Democratic primaries and the more radical right-wing politicians gaining support on the Republican side.
Some bridges are, in fact, too far; there is growing institutional pushback against the policies of the current Administration, as self-enrichment and personal agendas dominate the policy steps. More extreme bills flounder; the courts are increasingly enforcing the guardrails. Green shoots, perhaps, but a welcome development.
Two contrary facts cannot co-exist indefinitely. I am thinking here of Israel, where the internal contradictions, demographics, democracy, cultural schisms, and geopolitical necessities are increasingly at odds. Add to that the rising and profoundly disturbing geopolitical isolation of the country and the more and more blatant anti-semitism being expressed around the world. Israel’s influence and impact far exceed its size. Watch that space for major changes with unclear ramifications.
AI is coming. Tech will continue to be an ever bigger deal. But the FOMO and blind investment in the space qua space is overdone and starting to show ‘cracks in the foundation’. Exits are always more narrow than entries; think funnel-shaped. There is more room in this selloff.
Officials can say the Strait is open and that prices will plummet. Chyrons can scream ‘mission accomplished’ and tell people there is naught to see. But reality can be pesky. The potential for negative (read: higher) pricing is much higher than the market is factoring in; supply chains do not repair or resume overnight. Pay attention to the hard facts, not the political theater.

KOSPI triggered its second circuit breaker this week. Second. Let that register. Monday the index touched a record above 9,000. Tuesday it fell 10%. By Thursday it clawed back. Friday it dropped another 5.8%. Samsung and SK Hynix, the companies that literally supply the memory chips powering every AI data center on earth, each fell 8%+ intraday before partially recovering. (BBG)
And here is the part nobody wants to say out loud: the catalyst wasn’t some black swan. It was Apple raising Mac prices 20% because memory chips cost too much. That’s it. The AI supply chain is now so tight that the cost side is destroying demand on the device side, and the market just figured out in real time that this is a problem.

MY READ

I think the AI trade is fracturing at its most critical joint, and the flow data confirms it. Tech funds saw a record $9.3 billion in outflows in the week to June 24. One week earlier? A record $19.2 billion inflow. (BofA) That is not rotation. That is panic in both directions, and it tells you the marginal buyer has zero conviction. Only about 12 stocks in the S&P 500 are at 52-week highs, while the index itself is at highs. I have seen breadth this narrow a handful of times, mostly late 1990s. The crowd is long on AI hardware on a capex durability thesis, while the first real demand destruction signal just arrived from Cupertino. The question is no longer whether AI capex continues. It’s whether the economics work on the other side. Two prominent Chinese hedge fund managers called it a ‘super bubble’ this week. (BBG) I’m not there yet, but the speed of the KOSPI round-trip and the flow reversal suggest the market is closer to that view than the index level implies.

WHAT MATTERS TODAY

FED AND INFLATION

PCE came in at 4.1% headline, 3.4% core. Three-year highs on both. But the monthly print at 0.4% kissed just below the 0.5% consensus, and that sliver of daylight was enough for bonds to rally and for 2-year yields to slip 4 bps to 4.10%. (BBG)
Do not confuse relief with progress. Economists in the latest Bloomberg survey have pushed the first expected rate cut to June 2027. June. 2027. Half the FOMC is reportedly projecting hikes this year. Goldman’s Kaplan said the Fed may need to hike as soon as September. Warsh’s framework review, covering communications, the balance sheet, data sources, and the inflation target itself, is the dominant macro variable and nobody is pricing the tail outcomes correctly. (BBG)
The dollar is wrapping up one of its best months in a year. JPMorgan, BofA, and Goldman have all turned structurally bullish on the greenback. When three banks that disagree on everything agree on USD direction, pay attention. (BBG)

HORMUZ

A container ship was hit by an unidentified projectile in the strait Thursday. Traffic continued in both directions, but the incident is a reminder that ‘ceasefire’ and ‘normalization’ are not synonyms.
Iran is pushing to charge transit fees it estimates at $40 billion annually. Rubio called the tolls unacceptable Friday.
Saudi restarted crude loadings at Ras Tanura after a four-month halt, which is the real logistical milestone.
Brent is below $73 and heading for a third straight weekly decline. (BBG) (WSJ)

The market is pricing Hormuz as resolved. The shipping data says otherwise. As I said above: pay attention to the hard facts, not the political theater.

FLOWS AND POSITIONING

Record tech outflows ($9.3B) following record inflows ($19.2B). US equities posted their first weekly outflow since March at $8.5B, following a record $119.2B inflow the prior week. (BofA) Bond funds absorbed $16.6B. Money markets shed $25.5B.
Foreign investors sold 5 trillion won ($3.2B) of KOSPI shares Friday alone. (BBG)
Fund holdings in mainland China are near a five-year high per HSBC, with GEM funds rotating into internet and banking names. That positioning divergence (out of AI hardware, into China value) is worth monitoring closely. (HSBC)

Look, Samsung drops its capex bomb Monday. SK Hynix prices its Nasdaq listing July 10. Nike reports next week, which is the first real read on consumer demand destruction from energy costs. And Warsh’s Fed is sitting on a 4.1% PCE print with half the committee wanting to hike.

Reality is bubbling to the surface. Question is whether you’re positioned for it.