Somewhere between the headlines and the airstrikes, the truth slips through the cracks. The script is messy, the stakes are high, and the plot twists just keep coming.
The war/no war charade plays out like a rigged stage play, where missiles fly mid-peace talks and no one’s truly held accountable. Amid frustration, we stay locked on what matters: the economic fallout for small businesses and factors.
The system hums along. And the rest of us? We’re left to figure out how to keep moving forward with our eyes wide open.
In this edition of our newsletter, we unpack our economy’s acceleration further into the unknown and lend an ear to some of the key voices raising alarm bells.
Deficits, Deregulation, and a Debt-Driven Economy
The U.S. economy is walking a fiscal tightrope. In May alone, the Treasury posted a $316 billion deficit, the third-largest on record.
For the first 8 months of FY2025, the total budget gap has already hit $1.37 trillion, with the 12-month shortfall now at $2 trillion, or 6.7% of GDP. Projections show that number ballooning to 9% of GDP by 2034. These levels are typically seen only during war or extreme crisis.
Despite a 270% surge in tariff revenue, spending keeps outpacing income. Policymakers aren’t pumping the brakes. In fact, they’re flooring it. The playbook now is to “run it hot”: use banking deregulation and balance sheet expansion to push nominal GDP growth faster than debt.
Behind the scenes, banks are quietly gearing up. Deposits are rising, balance sheets are expanding at a 15% annualized rate, and regulators are eyeing changes to the enhanced Supplementary Leverage Ratio (eSLR) to make it easier for banks to buy Treasuries and lend more freely.
If this policy shift materializes, it could kick start a new wave of credit creation just as the real economy shows signs of cooling. However, the backdrop is shaky.
Housing starts just missed big, and nearly 700,000 layoffs have been announced in the first half of 2025, an 80% jump from last year. The Fed and Treasury are betting that deregulation and deficit spending can keep the game going. But if the engine stalls, there’s not much cushion left.
You Can’t Repeal Gravity
In his latest memo, Howard Marks dives into what happens when governments try to override market forces. He also covers how those efforts often end in exactly the kind of pain they were meant to prevent.
Rent control. Fire insurance in California. Blanket tariffs. Marks makes the case that while these interventions aim to protect constituents, they distort incentives, limit mobility, and reduce investment. When regulators cap fire insurance premiums but won’t let companies price based on future risk, insurers exit the market.
The result? After devastating wildfires, most affected homes were uninsured. It’s not just economic theory, it’s real-world damage.
Then there’s the fiscal piece. Marks doesn’t hold back on Washington’s spending habits or the political paralysis around Social Security. He warns that ignoring deficits and demographics will eventually force a reckoning.
Free markets aren’t flawless. Trying to out-legislate the laws of economics is like ignoring gravity because you don’t like the fall.
Cracks Beneath the Rally
Markets are climbing, rate cut bets are creeping in, and under the surface, the foundation is cracking.
David Rosenberg flags falling consumer confidence, widening retail weakness, and long-term headwinds like declining birth rates and housing unaffordability. He sees a Treasury market waiting for a catalyst. Once the Fed pivots, long bonds could rally hard.
At the same time, Danielle DiMartino Booth calls out the Fed for ignoring mounting economic strain. Layoffs are up, regional employment indices are plunging, and over 6 million student loan borrowers are already 90+ days delinquent with millions more set to default in July.
Both warn the risks go beyond markets. Households (especially Boomers) are dangerously overexposed to equities, with no real rebalancing in sight. Defaults on credit cards, auto loans, and small business debt are rising fast. Inflation is cooling, but Powell keeps relying on backward-looking data.
Their bottom line? If the Fed doesn’t shift focus soon, the next downturn could spark a consumer-driven crunch that hits deeper than portfolios…and harder than expected.
Between Reckoning and Resolve
Of course, this isn’t the end of the story. We’re very much still traveling that same grueling Road of Trials. The stretch where distractions multiply, institutions wobble, and clarity becomes a survival tool.
What we’re seeing isn’t a fluke. It’s the friction of a system trying to outrun gravity. The Fed is betting on soft landings, Congress is punting on hard truths, and the average household is carrying more risk than ever. There’s still time to course-correct. But if the current playbook holds, we may be heading for a reckoning that no rate cut (or regulation tweak) can avoid.
We swallow down the reality that Elon’s not coming to flip the table. The deficit won’t fix itself and the market won’t wait. But that’s where the real work begins: staying alert, staying honest, and doing what the system hopes you won’t: see it clearly and act anyway.
Let the jokers play their games. We’ve got a journey to finish and our own call to answer.
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