Two viewpoints. The WSJ Editorial Board is all principled (and a naval blockade expert) while the FT is more practical.

Trump Blockades the Blockaders in Iran The regime made its nuclear intentions clear in 21-hour negotiations.

(…) Iran’s failure to come to terms was predictable. Tehran took Mr. Trump’s eagerness for a cease-fire as a sign of desperation and confirmation that its energy strategy is a winner. The regime won’t even open the Strait amid the cease-fire, so there was little reason to think its leaders would abandon their decadeslong nuclear objectives and ideological core.

As Vice President JD Vance explained after marathon talks failed, “We need to see an affirmative commitment that they will not seek a nuclear weapon and they will not seek the tools that would enable them to quickly achieve a nuclear weapon.” The latter half is the key. No matter what Iran’s regime says, the only reason it needs domestic uranium enrichment capability is to pursue a bomb.

Mr. Trump summed up the talks on Sunday. “There is only one thing that matters,” he wrote on Truth Social. “IRAN IS UNWILLING TO GIVE UP ITS NUCLEAR AMBITIONS!”

The regime says the U.S. is asking too much, but Mr. Trump is right to stick to his terms on dismantling Iran’s nuclear program. (…)

We raised the blockade option in Saturday’s paper, and it makes sense as long as Mr. Trump is willing to accept the energy-market pain. (…)

Mr. Trump says the Navy will even seize tankers that have paid a toll to make it out of the Gulf, another blow to China if the U.S. can execute it. With the help of allies, the President added, the Navy will also de-mine the Strait—important preparation for the ultimate goal of reopening Hormuz to all. Iran’s regime will have to take that threat more seriously. (…)

Over weeks and months a blockade would strangle the regime’s revenue, but the President may want results at the negotiating table sooner. (…)

Oil exports are a better target than Mr. Trump’s misguided threats last week to destroy Iranian “civilization” or all of its power plants.

As the President said in his first term, the U.S. shouldn’t start a war it doesn’t intend to win. His challenge now is to prove to Iran’s regime he meant what he said.

The risks of Donald Trump’s Strait of Hormuz blockade plan

(…) On its surface, the naval embargo is intended to shrink Iran’s capacity to fund its defence by limiting the revenue it generates from oil exports. But such an operation risks further destabilising global energy markets and triggering a new surge in oil prices.

It also jeopardises a fragile two-week ceasefire agreed by the US and Iran last Tuesday. “Closing the strait entirely will spike oil prices even more than they did before, and put more pressure on the US from the international community,” said Jennifer Kavanagh, director of military analysis at Defense Priorities, a Washington think-tank. “It definitely shows how frustrated and at the end of his options the president feels,” she added.

Trump’s order of an embargo on the strait reflects his hope that he can apply to Iran the model of his intervention in Venezuela, when the US seized then-president Nicolás Maduro in a military operation after a naval blockade of the Latin American nation. (…)

After devising the blockade with Trump and his team, Vance is hopeful that Iran will be more willing to accept a deal meeting US demands, the US official said.

But the Islamic regime has repeatedly shown it is not willing to capitulate to pressure. It believes it has the upper hand in the conflict, with the strait its main point of leverage.

Iran’s foreign minister Abbas Araghchi blamed the Trump administration for the lack of progress at the talks in Islamabad, which were the highest-level negotiations between the US and Iran since the 1979 Islamic Revolution. “In intensive talks at highest level in 47 years, Iran engaged with U.S in good faith to end war,” Araghchi, who was part of the Iranian delegation, said on X.

“But when just inches away from “Islamabad MoU”, we encountered maximalism, shifting goalposts, and blockade. Zero lessons earned.” (…)

“The ‘Open for All or Closed to All’ policy could rally the world as it reflects a commitment to keeping an international waterway open to nearly everyone’s benefit. It would not increase the damage and destruction of the war,” added Richard Haass, another former US diplomat, writing in his Substack.

But others were sceptical, such as Vali Nasr, a former US official and a professor at Johns Hopkins University. He said Trump’s threat to blockade the strait would not concern the Islamic republic in the short term, with Tehran calculating that a closure puts more pressure on the global economy than on Iran.

“This is fine by the Iranians, it prolongs the chokehold on the global economy,” he said. “And the Iranians could shut down [the] Bab el-Mandeb [a chokepoint off the coast of Yemen] and then the US will have to deal with that.” (…)

Esfandyar Batmanghelidj, chief executive of the UK-based Bourse & Bazaar Foundation think-tank, said Iran had already blockaded itself with limited access to oil revenues. “A US blockade might squeeze Iranian oil out of the market, but the impact on the state budget will be secondary and will anyway pale in comparison to the costs that Iran was willing to sustain from air strikes. If this is a tactic to add pressure on Iran, it is an odd one,” Batmanghelidj said.

The US Central Command said in a statement that the blockade would be “enforced impartially against vessels of all nations entering or departing Iranian ports and coastal areas, including all Iranian ports on the Arabian Gulf and Gulf of Oman”.

Analysts have repeatedly cautioned against making comparisons to Maduro’s regime in Venezuela, pointing out that the Islamic republic has over nearly half a century established an entrenched bureaucracy and spent decades preparing for the type of asymmetrical warfare it is fighting, led by the ideologically motivated Revolutionary Guards. 

Whereas in Venezuela, Trump was able to find a compliant successor to Maduro in Delcy Rodríguez, the new president, the remaining regime leaders in Iran after the killing of Ayatollah Ali Khamenei — who was replaced as supreme leader by his son Mojtaba — and other senior figures have not been willing to cave in to US demands.

Trump’s naval blockade represents an abrupt shift from Washington’s strategy of allowing Iran to continue exporting oil as it has sought to calm energy markets. It has also tried to compensate for the production losses its Gulf neighbours have suffered as a result of the strait’s closure and Iranian attacks on their oil and gas facilities.

The strait is important for Iran’s exports and imports. But it has alternatives to bring in food imports and other goods, as it shares borders with 15 countries, including land routes to Iraq and Turkey in the west, Central Asian states and Russia in the north, and Afghanistan and Pakistan in the east.

Kavanagh said that a US naval blockade of the Strait of Hormuz would also pose some operational challenges and dilemmas that did not exist during the action against energy shipments to and from Venezuela.

“Let’s say that it’s a Gulf state or a French ship that’s going through and they did pay the toll,” she said. “What’s the US going to do? Seize an allied tanker? And let’s then, say that it’s a Chinese ship that paid the toll. Are we going to seize a Chinese tanker? And what are the Chinese going to do?”

• “Experts say it’s unlikely the US military will fire missiles or other weapons at vessels, given the risk of an environmental disaster. The most likely option is the US navy will try to force them to change course through threats – and if that doesn’t work, they will launch armed boarding parties to take physical control of the ships, experts say.” (The Guardian)

Boarding a Chinese ship?

The Guardian sums up the “negotiations”:

The talks in Islamabad didn’t fail accidentally; the US and Iran were talking past each other. Washington’s position is that Iran must abandon its capacity to develop a nuclear weapon, while Tehran insists it is not seeking one and has the right to a civilian nuclear programme. The US vice-president’s “final and best offer” would have required Iran to give up that capacity altogether – terms that looked less like the basis of a negotiation than an attempt to impose the conditions of victory.

Washington also wanted free passage through the strait of Hormuz, a vital global energy artery. Tehran, instead, sought control of the strait through transit fees as well as having sanctions lifted, assets unfrozen and reparations paid, alongside a wider regional ceasefire. Given the gap, the positions were never likely to be reconciled in a single round of negotiations. The result was talks without trust – and a war without resolution. (…)

The irony is that Mr Trump is negotiating over a nuclear programme that was once contained by a deal he ripped up, while trying to reopen a strait closed by an illegal war he chose to start. (…)

The ceasefire runs out in little over a week. The talks are not over, but there’s a stalemate. However, the logic of escalation is taking hold. Iran is unlikely to back down – opting instead to test US resolve at sea. A full-scale ground offensive may be constrained for now by the Gulf’s summer heat, but the conflict risks shifting into more dangerous forms – naval confrontation, airstrikes and proxy warfare – with no way out. There will be no winners in such a scenario, only losers.

Also:

Vance spoke to Donald Trump at least a dozen times during the talks, and even once to Israel’s Benjamin Netanyahu, a conversation Araghchi was quick to claim led to a hardening of the US position. But it was probably unrealistic to expect issues that took up two years of negotiations in Vienna between 2013 and 2015 over the nuclear deal to be resolved in one marathon session.

Robert Malley, a veteran of nuclear talks with Iran under Joe Biden, noted pithily: “Twenty-one hours was 20 hours too many if the goal was to reiterate a demand Iran had already rejected. It was many hours too few if the goal was to negotiate.”

Another US state department veteran, Aaron David Miller, noted if the administration believed that after only 21 hours of negotiations Iran would give up enrichment – which is what Vance implied – it totally misread the moment and the Iranian delegation.

In that context, it was unfortunate that Vance spoke of coming to Islamabad to see “if we could get to a situation where the Iranians were willing to accept our terms”. The former Iranian foreign minister Javad Zarif, a brave advocate of talks with the US even in wartime, was not the only Iranian to claim this sentence revealed an unchanging US take-it-or-leave-it arrogance. “No negotiations at least with Iran will succeed based on our/your terms,” he said. “The US must learn: you cannot dictate terms to Iran. It’s not too late to learn. Yet.”

Iran War Hits US Economy With More Inflation, Record-Low Sentiment

The war in Iran has fueled the biggest jump in US inflation in nearly four years and sent consumer sentiment tumbling to a record low. Economists say that’s just the beginning. (…)

A record surge in gasoline prices has been accompanied by higher fertilizer and diesel costs, which are seen rippling through to airfares as well as food and transportation costs.

“You are going to see those surcharges start to appear in bills, and people pay attention to those,” said Olu Sonola, head of US economics at Fitch Ratings. “It’s not only airfares, it’s not only luxury travel or this or that. It’s about the things that you buy on a day-to-day basis really moving higher.” (…)

Oil prices, which account for about half of how much motorists pay at the pump, fell sharply on the news of the ceasefire. But even if hostilities subside, gasoline and diesel prices are likely to remain above their pre-war levels through the end of the year, said Isabelle Gilks, head of short term refining and oil products research at Wood Mackenzie.

That would put gasoline prices around $3.65 a gallon by Memorial Day and moving into the mid-$3 range over the summer when Americans tend to hit the road more often, according to Patrick De Haan, head of petroleum analysis at GasBuddy. But in the event that the conflict heats up again, a national average of over $5 a gallon is possible, he said.

Beyond the energy shock, a disruption in the supply of fertilizer is expected to eventually lead to higher grocery bills, while rising transportation costs could impact all kinds of consumer goods.

“The damage has already been done,” said Gregory Daco, chief economist at EY-Parthenon. “We’ve already seen a significant rise in energy prices, in commodities prices, and those will make their way onto consumers and businesses around the world.”

The erosion in purchasing power is coming at a fragile time for consumers. Real disposable incomes fell in February, and Americans saved less of their paychecks. Inflation-adjusted consumer spending barely rose, following months of lackluster demand. (…)

Let’s put numbers to those words from the personal income and spending and CPI data we got on Friday:

• Nominal personal income declined 0.1% MoM in February. It’s up 3.2% annualized in the last 2 and 3 months.
• But excluding government transfers, labor and investment income declined 0.5% MoM in February and are only up 0.7% and 0.3% a.r. in the last 2 and 3 months respectively.
• Headline PCE inflation rose 0.4% in February (before the Iran war), +4.1% a.r. in the last 3 months.
• Real disposable income, including transfers, declined 0.45%, the thrid decline in the last 5 months. It’s up 2.2% a.r. in the last 2 months but only 0.9% in the last 3 months.
• On a YoY basis, real expenditures are up 2.5% over a weak 2025 February print. Growth should slow closer to growth in real income which was 1.1% for disposable income and 0.5% excluding transfer payments.

• Bank of America card data for March showed seasonally-adjusted spending per household up 0.9% MoM, but only 0.1% excluding gasoline spending.
• Goldman Sachs estimates that headline PCE inflation will be up 0.60% in March, +3.40% YoY.
• Aggregate payrolls (black below) were up 3.9% YoY in March, only 0.6% in real terms after inflation of 3.3% (CPI).

In all, the American consumer is dealing with low employment growth, slowing wages and rising inflation, right when its savings rate, at 4.0%, is historically very low and credit card delinquencies are rising.

• The Fed in a difficult spot even before the Iran conflict (NBF)

(…) sluggish hiring is indeed weighing on the growth of real disposable income excluding government transfers – one of the “big four” indicators used by the NBER to date business cycles – but other factors are also at play. Chief among them is accelerating inflation.

To be sure, this morning’s data also showed that price pressures had already intensified significantly even before the conflict in the Middle East began. Although the year-on-year figures did not look too bad, this was largely due to a positive base effect.

A closer look at the report revealed a much more concerning situation. Both the headline and core indices rose 0.4% in February, and these figures followed strong prints in December and January. The result is that, over the past three months, the core PCE index has risen by as much as 4.4% on an annualized basis, something that has not been seen since 1991, except for the post-pandemic period.

A 6.5% surge in the price of core goods, attributable in part to tariffs and in part to supply chain issues related to microprocessors, has driven the increase over that period. And while core goods prices have increased by a more modest 2.3% over the past 12 months, this is still significantly higher than in the previous three cycles, when achieving the Fed’s inflation target often depended on deflation in that segment.

Truly, the numbers released this morning show that the central bank was already facing a difficult situation, marked by slowing growth and rising inflation, even before the conflict in the Middle East began… and things may not have improved much since then.

This when the federal government’s debt and deficit provide little helping room if needed…

The economists in the recent WSJ survey (April 3-6, with the ceasefire on April 7) put the probability of a recession in the next 12 months at 33%, up from 27% in January. GDP growth is now seen at 2.2% vs 2.0% with inflation at 3.2% vs 2.6% (core 2.9% vs 2.6%).

Asked how high crude oil would need to rise to push the probability of a recession above 50%, economists gave responses ranging from $95 to $225 a barrel, with an average $146. Their estimates for how long prices would have to stay elevated to cause a recession vary from four to 55 weeks, with an average duration of 12 weeks.

However,

The question isn’t whether prices for fuel, fertilizer, shipping & insurance will rise amidst the disruptions of the Iran War.

It’s how much and for how long.

The biggest oil supply disruption in history + massive spending needed for repairs & rearmament + greater government borrowing to replenish & expand strategic reserves + higher future risk premiums is not a deflationary recipe nor likely to prove transitory.

However the Iran War ends, it has already changed the world. Every government now faces the same calculation: spend heavily on resilience — energy, infrastructure, defense industrial base — or accept dependence on rivals. Most will spend. Expect higher debt, harder borders, and a louder nationalism in every capital. (Bruce Mehlman)

There is indeed a bit of a relationship between oil and inflation. Some, me included, even say Trump has been lucky that oil prices dropped 40% during his first year, thanks to the Saudis. Also lucky for the AI boom.

And, in case you missed it last week:

The US Data Center Boom Is Hitting a Transformer Crunch More than half the US data centers planned for this year are expected to be delayed.

Approximately 12 gigawatts of data center capacity is expected to come online in the U.S. in 2026, according to data by market intelligence firm Sightline Climate cited by Bloomberg. Yet only about one-third of that capacity is currently under active construction because of various constraints.

• “The only sure thing about luck is that it will change.” (Wilson Mizner)
• “When ill luck begins, it does not come in sprinkles but in showers.” (Mark Twain)

AI Is Using So Much Energy That Computing Firepower Is Running Out AI companies are rationing offerings and products, rankling users—a warning sign for a boom that depends on rapid adoption

(…) Over the past few months, demand has exploded for “agentic” AI, autonomous tools that use the technology to independently perform tasks, from writing software code to scheduling house tours for real-estate brokers. Companies have been scrambling to secure the availability of computing capacity needed to serve a growing base of customers who are also significantly increasing their AI use.

“Everyone’s talking about oil, but I think what the world is mainly short of is tokens,” said Ben Pouladian, an engineer and tech investor based in Los Angeles. A token is a unit of measurement in AI to track how much computing resources are being used for a task. (…)

Demand is growing far faster than companies are able to access resources and build out infrastructure. Historically, price increases have been among the only ways to address a supply crunch, but such a move could be perilous for frontier AI companies, who are in a ferocious competition to gain users. (…)

Token use in OpenAI’s API—a platform where mostly enterprise users access its software—rose from six billion a minute in October to 15 billion a minute in late March.

“I do spend a lot of time trying to find any last-minute compute available,” Sarah Friar, OpenAI’s chief financial officer, said in a recent public video interview with an investor. “We’re making some very tough trades at the moment on things we’re not pursuing because we don’t have enough compute.”

Toward the end of last year, CoreWeave, one of the largest publicly traded AI cloud companies, raised prices by more than 20% and started asking smaller customers to sign contracts committing them to use the company’s services for at least three years, up from one year before. (…)

Spot-market prices to access Nvidia’s GPUs, or graphics processing units, in data-center clouds have risen sharply in recent months across the company’s entire product line, according to Ornn, a New York-based data provider that publishes market data and structures financial products around GPU pricing.

Renting one of Nvidia’s most-advanced Blackwell generation of chips for one hour costs $4.08, up 48% from the $2.75 it cost two months ago, according to the Ornn Compute Price Index.

“There’s a massive capacity crunch that’s unlike anything I’ve seen in the more than five years I’ve been running this business,” said J.J. Kardwell, chief executive of Vultr, a cloud infrastructure company. “The question is, why don’t we just deploy more gear? The lead times are too long. Data center build times are long, the power that’s available through 2026 is already all spoken for.” (…)

The frequent outages at Anthropic are happening as the AI lab is experiencing explosive growth. At the end of 2025, the company hit $9 billion in annual run rate, which means the company was on track to make that amount of revenue in the next 12 months. By February, that figure ballooned to $14 billion. Two months later, it doubled to $30 billion. (…)

Also in China, but not because of shortages:

Zhipu Hikes Prices Again as China AI Monetization Wave Quickens

The Beijing-headquartered company released its latest open source model GLM-5.1 this week. It set prices for cloud-based usage — for instance, input tokens — between 8% and 17% higher roughly than for its older GLM-5 Turbo, according to official pricing on OpenRouter. That’s at least the second time the company, which debuted in Hong Kong in January, has raised prices for users in 2026.

Zhipu joins rivals from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. in jacking up charges, responding to surging demand for OpenClaw-like agentic services as well as pressure from investors to begin delivering on profits.

The increase followed a 30% price hike of its coding plan in February. (…)

Meanwhile, in the K economy:

• Pawn Shop Loans Spike as High Gas Prices Weigh on Americans

(…) “We’re making a lot more loans,” said Tim Cassidy, the fourth generation in his family to run Cassidy’s Jewelry & Loan in Stockton, California. “They have to have that gas, they have to get to work.” (…)

Cassidy’s family-run shop has been around since about the time Ford launched its Model T, and the 82-year-old Cassidy has seen again and again that costlier gas is bad for US consumers and good for his industry. “A lot of people live very close to the edge,” he said.

“Expensive watches are coming in a little bit more frequently,” said Abigail Mielcarek, co-founder of Abby’s Pawn and Coin in Santa Rosa, California. “Some of the people who have more money are also feeling what’s going on.” (…)

Some of her customers are starting to ask for more time to repay loans, while some longtime clients have begun to default. Other pawnbrokers said people are starting to sell more valuables to shops outright, probably concerned that they wouldn’t be able to pay off loans. (…)

So far, most of the pawnshop owners interviewed said they haven’t yet seen significant increases in defaults, which may be because tax refunds have been coming in. But Janelle Morehart-Leevey, co-owner of Ponders Pawnbrokers in Lakewood, Washington, said she’s noticed clients walking back in with the same items they hocked just a few weeks earlier to secure a new loan. (…)

McNamara, the analyst, said that before the Iran war, he and others were expecting tax refunds this year would really help lower-income Americans make ends meet. “That’s not been the case,” he said. “You have gas prices that are just slapping people across the face.”

At the other end of the K, unfazed by rising costs:

“Thousands” [of private jets] are arriving for the annual golf major, “making it one of the most important events of the year” for the industry, CNBC reports.

Industry leader NetJets expected 775+ flights to and from Augusta, up as much as 40% from a year ago.

Flexjet projected up to 400 flights: “Demand is off the charts,” Flexjet Mike Silvestro told CNBC. “The Masters is like nothing else.”

That would represent a 35% to 40% increase from 2025 which saw a record 3.9 million departures last year, +34% vs pre-Covid numbers.

In response to the deluge, Augusta airport hiked its “special event fee” by 25%. (Axios)

While the wealthy part of the K keeps the economy afloat, the poorer part makes everybody depressed like never before:

Is the NY Fed’s household sample very different than Michigan’s? Are inflation expectations anchored or not?

The bond market’s inflation fears are hitting a 20-year ceiling:

In the real world:

Construction Business Taking a Hit From Iran Conflict Rising prices for fuel and materials like aluminum push up costs months after they showed signs of stabilizing. ‘This war just trashed that.’

Rising fuel prices after more than a month of hostilities have increased the cost to ship construction materials for building apartments, office towers, retail centers and other commercial properties. Higher prices for oil and natural gas have also made building materials made with those fuels, such as plastic pipes and asphalt, more expensive.

The price of aluminum, which is used for window framing, roofing and cladding, is rising, too.

Many construction firms have to absorb the higher costs for now, rather than passing them onto developers and property owners, said Ken Simonson, chief economist for the Associated General Contractors of America, a construction trade group.

But if costs continue higher for much longer, future construction projects are at risk of delays or even cancellations because they would no longer pencil out.

“Looking forward, we’re going to see even more caution on the part of owners about going ahead with projects,” Simonson said. (…)

U.S. commercial building activity was already cooling this year, despite more stable prices. The lone bright spot in the construction industry has been data centers. Construction of these properties is so far undeterred by those higher costs because of still unmet demand from hyperscalers.

Data center construction spending was up 31% in January compared with the same month a year prior, while all other nonresidential spending fell 5% during the same period, according to U.S. Census Bureau data.

The construction industry is contending with a host of other issues beyond the conflict in Iran. Interest rates remain elevated and reduced immigration has made for an especially shallow labor pool. Construction hiring in February, when the Strait of Hormuz was still open, fell to the slowest rate on record, according to the Associated Builders and Contractors.  (…)

Since the start of the war, the price of PVC used for piping has risen more than 50%, said Rob Cantando, director of national strategic supply chain at Skanska USA Building.

Aluminum prices jumped after Iran’s bombings of smelters in Abu Dhabi and Bahrain. At one Skanska project, shippers for roofing materials are charging a fuel surcharge of $600 per truck, Cantando said.

Construction workers have their own woes. Holland said his laborers in Texas often live far away from job sites and are getting walloped at the gas pump. His company is considering providing workers with a fuel stipend if prices remain high, he said. (…)

The Q1 earnings season officially starts this week. The actual earnings will matter much less than management comments and guidance. There will be a lot of “on the one hand…”.

Canada: Labour market stuck in low gear in March amid elevated uncertainty

The March employment data came in line with consensus expectations for both employment and the unemployment rate, confirming that the recent weakness in the Canadian labour market was not a statistical anomaly.

Indeed, while a gain of 14K jobs would normally be welcomed, especially amid the ongoing population decline, it follows a substantial cumulative loss of 107K over the previous two months.

Notably, all of the new jobs in March were in part-time positions, while full-time employment remained essentially flat after falling by 108K in February. Meanwhile, demand in the private sector remained subdued, with an increase of just 15K following a decline of 125K in the first two months of the year.

Overall, this morning’s report confirms that the economic situation remains fragile in the currently highly uncertain economic climate, given trade tensions with the United States and, now, the geopolitical situation in the Middle East—which, if it becomes deadlocked, could plunge the global economy into a downturn.

The latter will put upward pressure on inflation in the coming months, particularly through higher oil prices, but in our view, the Bank of Canada would be advised to exercise patience before raising interest rates. In this uncertain environment, monetary policy does not appear particularly stimulative, as reflected in weak housing activity, moderate credit growth, and the expected mortgage repayment shock in 2026.

What’s more, inflation was moving in the right direction before the oil shock (link), and we are not currently concerned about the acceleration in average hourly wages observed over the past two months (wages of permanent employees have risen 5.1% year-on-year in March and 4.2% in February).

Indeed, Statistics Canada has noted that, when controlling for composition effects, hourly wages of all employees rose by only 3.6%, the same level as in recent months. The headline wage uptick could therefore be temporary, given that, in our view, the labour market remains in a state of excess supply.

China open to Taiwanese TV and imports after opposition visit

China has said it will promote cross-strait flights, allow in Taiwanese TV dramas and facilitate sales of agricultural goods, after a rare meeting between Xi Jinping and the leader of Taiwan’s opposition.

China’s Xinhua news agency said on Sunday that — as part of a 10-point plan for closer ties — Beijing would push for the resumption of more direct cross-strait flights and take steps to facilitate agriculture and fishery imports.

Cheng Li-wun, head of Taiwan’s KMT party, met the Chinese president on Friday, the first such visit for a decade, billing the trip as a “historic journey for peace”. (…)

The opposition KMT has long pushed for closer ties with China, though Cheng’s meeting with Xi last week — at which he told her reunification was a “historical inevitability” — was the first of its kind since 2016. (…)

“It will be viewed with scepticism by some Taiwanese people, as they view these measures as an attempt to exacerbate Taiwan’s domestic division,” he added.

The 10-point plan also pledged to explore a “regular communication mechanism” between the Chinese Communist Party and the KMT, as well as youth exchanges between the two parties.

In their meeting, Xi warned over any move towards independence, which he described as “the chief culprit destroying peace in the Taiwan Strait”. (…)

China lures home its top AI talent from Silicon Valley Engineers and scientists return for better pay and quality of life as US grows more hostile

(…) This is not just a trickle of nostalgia — it is a calculated realignment. Macro and micro factors in China are creating a magnetic pull that is becoming more difficult to resist.

On a macro level, the opportunity set in China is undergoing a transformation. While Silicon Valley debates the ethical dilemmas of AI applications, China is deploying AI across all sectors of its economy.

Its supply chain advantage is no longer just about assembling iPhones for Apple, but producing world-leading electric vehicles and robotic hardware, and creating vast amounts of quality data from its hyperconnected society.

From autonomous taxis in Beijing to AI-powered trading in Shanghai, AI implementation has soared. For a computer scientist, this represents a real-world laboratory where algorithms make large-scale impact almost instantaneously. While such implementations also happen in the US, regulations and security concerns are slowing their adoption.

“If you are in anything related to hardware, especially robotics, you have to be literally in Shenzhen,” says Steve Hsu, a professor of computational mathematics at Michigan State University who recently visited the city, which has at least 100 humanoid robotics companies. “If not, a piece breaks and you have to send it to Shenzhen and the turnaround is just too much.”

This macro opportunity is supported by more attractive micro conditions. Pay for top-tier AI researchers in China has surpassed Silicon Valley standards when adjusted for tax and cost of living, according to the headhunters.

They add that the purchasing power of a junior or mid-level researcher’s salary in a Chinese tech hub affords a lifestyle — including property, domestic help and access to world-class amenities — that feels out of reach for even well-paid engineers in the San Francisco Bay Area.

Efficient infrastructure, low crime rates and a sense of cultural fluency also create a gravitational pull that grows with age and family considerations. (…)

However, the most decisive factor may be the “push” from the US. Rising geopolitical tensions and a more restrictive immigration regime have made shifting from student visa to green card an uncertain odyssey.

For the Chinese engineers who make up a significant portion of Silicon Valley’s AI labs and tech industry, it is clear the US no longer welcomes them. Hsu, who gave lectures last month at China’s elite Tsinghua University, says:

“You can also see an increasing amount of China’s brightest kids choosing to stay home, instead of pursuing [a] PhD in the US,” adding “it absolutely has something to do with the US immigration policies, in addition to just significantly more opportunities in China these days”.

Lu Zhang, founding partner at Fusion Fund based in Silicon Valley, says it is too early to suggest the Valley is losing out to its Chinese competitors. The US, and specifically the Bay Area, still possesses the strongest ecosystem for technological incubation and development.

“The circulation of capital is the most efficient. Entrepreneurs get to validate their ideas quickly, and work with an extensive network of top-tier peers and mentors. You can’t find this anywhere else in the world,” says Zhang.

The recent poaching of Alibaba’s AI engineers by Meta is a testament to how the magnetic pull works both ways. For every researcher who returns to China, another may be lured to the Valley.

A career officer at Tsinghua University, who declined to be named, says about 20 per cent of its engineering graduates still apply for PhDs in the US, down from about 50 per cent before Covid-19.

What does the return of the engineers signify? It shows the maturing of China’s tech sector. It no longer merely consumes US innovation; it creates it.

For the returnees, their decision is not about rejecting Silicon Valley, but about embracing a new frontier. They are betting that the future of AI will be written not just in the code that runs on servers in California, but in the data generated by billions of devices, factories and cities across China.

This migration is, at its core, a normalisation of the global tech order. Talent will flow to where the greatest opportunities and stability are perceived.

For decades, that was a one-way street to the west. Now, with China accelerating tech development and the US tightening its borders, the traffic is beginning to flow both ways.

The winners in the global AI race will be those who understand that in the war for talent.

If you missed some of my write-ups after a December 2025 tech trip in China:

• Bots On The Ground (Robotics)

• Who got a plan?

Don’t say you were not warned!

From The Wall Street Journal last week:

The day after President Trump announced a sudden pause of strikes against Iran last month, the White House warned staff against improperly leveraging their positions to place well-timed bets in futures markets.

The warning came in a staff-wide email from the White House Management Office on March 24, according to people familiar with the matter. The day before, Trump had announced the pause via Truth Social. About 15 minutes before the sudden shift in policy, a mysterious flurry of activity kicked off in the futures markets.

More than $760 million worth of oil futures contracts changed hands in less than two minutes, according to Dow Jones Market Data. More recently, three accounts on Polymarket earned more than $600,000 by correctly betting on the timing of this week’s Iranian cease-fire. . .

The White House confirmed the authenticity of the warning, with Trump spokesman Davis Ingle telling The Wall Street Journal that “the only special interest that will ever guide President Trump is the best interest of the American people.”

Last Friday, perhaps worried that some might forget:

Trump Promises Mass Pardons to Staff Before Leaving Office

“I’ll pardon everyone who has come within 200 feet of the Oval,” Trump said in a recent meeting to laughs, according to people with knowledge of the comments. That radius appears to be expanding as the president repeats the line. (…)

This term, Trump has wielded clemency far differently than any other president, dispensing some 1,600 grants to date. Many have gone to allies and donors, or those who had hired them, coming after a social pull-aside or a round of golf. Some have received bipartisan criticism, including one to a crypto billionaire whose company boosted Trump’s own digital-currency company, and another to a former Honduran president convicted of conspiring with cartels to ship cocaine to the U.S. (…)

Some 1,500 of Trump’s second-term pardons are for defendants charged in connection with Jan. 6. (…)

The president has repeatedly raised the specter of pardons with White House aides and other administration officials, particularly when staff have suggested they could face prosecution or congressional investigations over decisions, people familiar with the comments said. (…)

Yesterday, after criticizing the Pope:

Donald Trump posted an apparently AI-generated image of himself on social media in which he appeared as Jesus.

BTW: Hungary’s Orbán Ousted in Landslide Election Defeat

The results end the 16-year rule of a leader who had become a standard-bearer for populist right-wing leaders globally. (…)

(…) Trump endorsed him and sent Vice President JD Vance to Budapest to campaign alongside him last week. Orbán was often a voice of dissent within the EU and opposed Europe’s support for Ukraine in the war in Ukraine.

“This is not just a repudiation of Russian influence but it’s also a repudiation of Trump,” said Ian Bremmer, an American political scientist and president of the Eurasia Group, a geopolitical risk firm.

CONSUMER WATCH

From Bank of America Institute:

Seasonally-adjusted spending per household rose 0.9% month-over-month, after the 1.0% MoM jump in February. Excluding higher gasoline spending, the MoM rise in total spending was a more modest 0.1%. (…)

Higher-income households’ after-tax wage and salary growth rose sharply in March, to 5.6% YoY – the fastest YoY growth since August 2021 – up from 4.2% in February, according to Bank of America deposit data. And while there was a rebound in middle- and lower-income households’ after-tax wage growth in March, it was smaller, to 2.0% and 1.0% YoY, respectively.

As a result, the divergence with higher-income households widened to the largest gap we’ve seen since our data series began in 2015

(…) the gains among higher-income households are likely, in part, the result of bigger bonuses.

The rapid rise in gasoline prices in March – from just below $3 a gallon nationally to around $4 by the end of the month was reflected in a spending increase at the pump. According to Bank of America card data, gasoline spending per household surged 16.5% MoM in March. Interestingly, we also saw a rise in gasoline transactions despite higher prices – in our view likely as drivers tried to get ahead of price rises by filling up early.

While the duration of the conflict is highly uncertain – as is the impact on oil prices – if higher gas prices are sustained for a prolonged period all households will be impacted, but lower-income families are most exposed. Household monthly gasoline spending for this cohort was equivalent to around 8-10% of their total card spending throughout most of the past eight years, roughly twice that of those with higher incomes. (…)

One relief for households navigating higher gasoline prices is coming from higher tax refunds and lower tax payments. BofA Global Research notes that the lower payments – resulting from the One Big Beautiful Bill Act (OBBBA) – may benefit higher-income households more than anyone else. And Bank of America deposit data confirms that these households are also seeing a bigger increase in tax refunds as well. (…)

Lower-income households, in particular, are using their tax refunds to cut debt by increasing their credit card payments. Thus, this tax season has allowed some of them to meaningfully repair their household balance sheets. Additionally, our data shows another potential use for tax refund increases: the extra cash could help buffer the increases in gasoline spending for at least five months.

• Almost Half of American Households Have No Retirement Savings

How Transitory Is The Inflation Problem Ahead?

(…) Last year, the Fed tolerated the lack of progress toward its 2% target because the inflationary impact of tariffs was widely expected to be transitory. Moderating services inflation was cited as evidence that underlying inflationary pressures were easing.

Fast forward to February 2026, and the assumption about tariffs has yet to be vindicated. Durable goods inflation surged 1.1% m/m in February–the strongest monthly reading since January 2022. It is up from -3.1% y/y in May 2025 to 2.8% currently.

The March FOMC meeting Minutes confirmed that policymakers still expected the inflationary impact of tariffs to fade over the course of this year. According to the Minutes, “participants generally expected that the effects of tariffs on core goods prices would diminish this year.”

Fed officials seem to have the same transitory assessment of the latest energy price shock, which is very similar to the one during 2022.

Back then, inflation began rising in 2021 due to pandemic-related supply chain disruptions. The energy price shock exacerbated inflation and forced the Fed to raise interest rates more aggressively after it realized the inflation problem was more persistent than expected.

This time, the energy shock is hitting while inflation has remained stuck around 3.0% due to tariffs, which are having a more persistent inflationary impact than Fed officials might have expected.

The risk is that the shock will boost inflation more broadly in the coming months. Consider the following:

(1) In 2022, a surge in jet fuel prices translated directly into a spike in the CPI for airline fares. It is doing that again.

(2) A surge in WTI crude oil prices translated into a spike in the CPI for transportation services back in 2022. It is doing that again.

(3) The bottom line is that there is a risk that inflation will turn out to be more persistent than widely expected, including by Fed officials, once again. If so, then beware of an adverse reaction from the Bond Vigilantes once they wake up from their siesta.

We are still using a 4.25%-4.75% range for the 10-year Treasury yield this year. We are at the bottom of that range now, but thinking that the next move might be to the top end.

FYI via Goldman Sachs:

The core PCE price index rose 0.37% in February, and the YoY rate edged down to 2.97%.

Core goods prices rose 0.84% (the fastest pace since January 2022), likely reflecting continued tariff passthrough and a 6.5% month-over-month increase in software prices, the second-largest since 1980 (after a 7.0% increase in December 2025).

Core services prices rose 0.22%.

Headline PCE rose 0.38% in February, reflecting a 0.45% increase in food and energy prices.

Personal income declined 0.1% (nominal) in February, against expectations for an increase. Personal spending rose 0.5% in February, and January spending growth was revised down 0.1pp to 0.3%.

The saving rate declined to 4.0%, roughly in line with its 2025Q4 level.

 

China Ends Over Three Years of Factory Deflation After Oil Shock

Producer prices rose 0.5% in March from a year earlier after a drop of 0.9% in the previous month, according to data released by the National Bureau of Statistics on Friday. The median estimate of economists surveyed by Bloomberg was 0.4%.

But consumer inflation cooled more than expected to 1%, down from 1.3% in February, as a seasonal boost from holiday spending petered out. The core consumer price index, which excludes volatile items such as food and energy, slipped to 1.1%. (…)

But a continued fall in the price of consumer goods at the factory gate suggests broader spending by households remains weak. (…)

What’s Going on in Private Credit?

From a new, and lengthy (and somewhat self-serving), Howard Marks’ memo:

(…) Direct Lending and Software

In recent years, sponsors have increasingly turned to direct lending as an alternative to broadly syndicated loans, as the former allowed them to get the capital they needed from a few big lenders, freeing them from protracted road shows, widely distributed financial disclosure, and having to deal with a large number of counterparties if trouble necessitated renegotiation. Direct lenders have also shown a willingness to support higher debt levels, enabling sponsors to achieve leverage beyond what the syndicated loan market might accommodate. They’ve also been willing to lend more to companies that are not yet profitable in the form of “AAR loans” based on annual recurring revenue.

The attractiveness to sponsors of loans versus bonds and private versus public brought the representation of software debt in the U.S. sub-investment grade credit markets to roughly the following proportions:

High yield bonds 4-5%

Broadly syndicated loans 10-15%

Direct lending 20-30%

In addition, thanks to the same factors, the percentage of software debt that is to companies that were the subject of leveraged buyouts (meaning they’re more highly levered) is higher in the broadly syndicated loan market than in the high yield bond market, and higher still in the direct lending market.

As a result of all the above, a significant portion of direct loans were made to software companies, which were often acquired at high EBITDA multiples of ~20x and with high leverage ratios. Now, suddenly, software company debt is in the news.

Over the last year or two, artificial intelligence has significantly reduced the need for humans to write code (that is, program computers or write software), largely relegating coders to instructing AI models what to do. The market for software company stocks and debt didn’t react much in 2024-25. Then, in November 2025, Anthropic released a powerful new model for coding, followed in late January by the release of 11 “plug-ins” to automate tasks in a number of fields. It seems a cognitive tipping point was reached in the first days of February. Investors finally took notice of the negatives that had accumulated, and the private credit market has faced scrutiny and volatility ever since:

• Worry about software debt made investors in semi-liquid public vehicles put in for redemptions.

• Limits on redemptions caused investors to question the safety of their investments.

• The process through which some investors got out at the stated net asset value might have caused those remaining to question whether the NAVs people exited at were overstated and if so what the impact might be on them.

• When funds limited redemptions, investors might reasonably have concluded that they should put more shares in for withdrawal next time.

The redemption limits built into the direct lending funds appear to have worked as designed so far, allowing managers to avoid fire-sale liquidations. But it would be understandable if investors reacted negatively to being told they can’t get their money out when they want.

The rest of the memo is interesting for financial history buffs and for understanding the Brookfield/Oaktree investment approach.

Almost Daily Grant’s yesterday piece is much more revealing of what’s going on in Private Credit:

The hour is getting late for scores of speculative-grade software firms, with upwards of $330 billion in high-yield, leveraged loan and business development obligations tied to the sector set to mature over the next three years, per Bloomberg-compiled data.

With artificial intelligence presenting an existential threat to industry business models, aggressive capital structures leave little room for error. “Software borrowers from private credit funds are more highly leveraged and more dependent on future growth expectations than borrowers in other industries, making them more sensitive to adverse shocks,” analysts at MSCI warned. 

Software accounted for well over 40% of all private equity deals across the venture, growth and buyout categories since 2020, Bloomberg finds, with the sharp post-Covid rise in borrowing costs further complicating refinancing efforts.

“The credit dates for a third of these loans are still 2021, meaning the issuer has not demonstrated capital market access in many years,” analysts at Citi find. “The average price of the 2021 vintage/2028 maturity is 83.4 [cents on the dollar], signaling significant stress.”

The suddenly stricken software sector adds another headache for the private equity-cum-credit complex.  Ebitda growth among closely held firms tracked by Lincoln International registered at 4.7% as of Dec. 31, decelerating from 6.5% and 5.2% expansions in the second and third quarters, respectively.

Meanwhile, covenant amendments jumped by 13% on a sequential basis during the final three months of 2025 while 11% of private loans utilized some form of payment in kind – servicing obligations with fresh debt rather than cash – last year, up from 7% in 2021.  The share of “bad PIK,” or loans that did not originally feature that option and were then amended to do so, reached 6.4%, up 2.5% four years earlier.

“We have seen a steady slowing of EBITDA growth during 2025 and companies not being able to organically deleverage,” Ron Kahn, managing director and global co-head of Lincoln’s valuations and opinions group, told industry publication Private Equity Professional in February.

“Many of these deals likely mature in the next two years and we estimate that around 30 to 40% of the deals maturing in the next two years have already extended their maturity once, meaning that lenders either need to provide an incremental extension or potentially explore a restructuring if these deals cannot otherwise be refinanced.”

A Cease-Fire for Now in Iran, but a Blow to American Credibility Critics wonder if this is America’s “Suez moment,” when a leading power signals the start of its international decline.

(…) The Suez analogy works, Mr. Wertheim said, in that the war in Iran demonstrated “in a single incident the danger of American misgovernance and poor judgment.” (…)

The war itself and its uncertain outcome, he said, “just accelerates an existing worry shared by countries around the world about what America’s declining quality of governance means for what they can expect from the United States.”

America’s allies may be unhappy, perplexed and even angry about Trump administration policies, but many of them, especially those in the Persian Gulf and Asia suffering the impact of energy shortages and restrictions, have few other options for security partners.

But the war and cease-fire deal have diminished American influence and will affect how the allies of the United States view its reliability, said Charles A. Kupchan, a political scientist and director of European studies at the Council on Foreign Relations.

The war against Iran was not begun in consultation with allies. And it came after a series of events that have confounded them. Mr. Trump’s tariff wars were an unpleasant shock, but his threat to take Greenland by force if necessary from Denmark, a European and NATO ally, is seen as an inflection point about American predation, unreliability and contempt for traditional friends.

“The Iran war and its economic impact are piling on and reinforce this sense that the U.S. right now has become unpredictable and undependable,” Mr. Kupchan said.

International relations and alliances work on trust. But as Francis Fukuyama of Stanford University wrote on Tuesday, “There has never been a time when the United States was more distrusted, by both traditional friends and by rivals, as at the present.”

A successful dealmaker, he said, needs to generate a minimal amount of trust that he will uphold his end of the bargain. “But reciprocity is a virtue that Trump has never understood or practiced,” he said. (…)

“By engaging in a war of choice in a critical region for global trade and utterly ignoring the probable consequences for the economies of its closest allies, the Trump administration has destroyed the legitimacy of American power,” asserted Anatol Lieven of the Quincy Institute for Responsible Statecraft.

The impact of a diminished United States is strongest in Europe, which has relied on NATO and the American security guarantee implicit in membership, including the U.S. nuclear umbrella. But Europeans drew a distinction between faith in America and faith in Mr. Trump. The former remains because it is vital for European security.

Still, Mr. Trump’s policies are inevitably producing a response that will outlast him. The rest of the world is trying to organize itself and derisk from an America that treats its allies as enemies and its traditional enemies, like Russia and China, as friends. (…)

In the long run, China looks to be the bigger winner.

“While we look crazed and talk about bombing a country back to the stone age, China looks like a peacemaker and agent of stability,” he said. All the while, Beijing got a chance to watch how the U.S. Navy operates.

“China is looking on with a great deal of glee, and when Trump goes there” for a summit meeting now scheduled for mid-May, “he will be much diminished.”

China, which gets so much of its oil through the Strait of Hormuz, pushed Iran to agree to the cease-fire, and it is expected to participate in keeping the strait open and guaranteeing safe passage for others.

Much depends on how the war ends, cautioned Mr. Kupchan of the Council on Foreign Relations.

If the cease-fire leads to a deal that imposes significant constraints on Iran’s nuclear program and its ability to cause trouble, he said, that would be much better in the longer run than a frozen conflict or one that “just burns on month after month,” with all the accompanying impact on the energy market and American allies.

That Easter morning tweet certainly did not help Trump’s standing:

Open the Fuckin’ Strait, you crazy bastards, or you’ll be living in Hell – JUST WATCH! Praise be to Allah. President DONALD J. TRUMP.”

Talk about “Epic Fury!”.