Blain’s Morning Porridge October 7^th 2026 – Stocks and Bonds believe in different realities.

“In stocks there are hopes and dreams. In bonds there is brutal truth.”

The equity rally to yet new all-time-highs feels unconvincing. Expectations of inflationary pressures easing and a return to upside growth are not shared by bond markets which are concerned at signals of higher borrowing costs as governments fail to rein in fiscal programmes. A fall in oil prices will help but won’t solve anything.

LINK TO PODCAST

Key Takeaways:

• Booming US Stocks reflect optimism about corporate earnings and lower interest rates. Bond markets are far more concerned with longer-term inflation risks, and the sustainability of national debt piles.
• The current rally is very focused on the AI narrative – making it highly vulnerable if doubts on competition and future revenue streams start to mount.
• The larger macro risks from growth, oil and inflation in a changing geopolitical environment are more likely to keep rates elevated for longer than the stock markets anticipate.
• Higher government funding costs and weak public finances are a recipe for unhappy electorates, adding to instability at a time when conflict risks and media manipulation are feeding fear.
• France is a good example of how political incompetency and diminished debt sustainability result in conflict. In contrast, the UK is sticking to tight debt rules, is trying to manage spending, while benefitting from a stronger underlying debt structure.
• Blain’s Virtuous Sovereign Trinity of Stable Currency, Sustainable Bond Market, and Political Competency is a simple framework to measure which nations can withstand a debt storm.
• The US midterms next month may prove a critical moment – triggering further political conflict and exposing the flaws in the current administration.
• The WSJ’s hatchet job on Scotty Bessent this morning is shocking and provides good reasons to be concerned. A US debt crisis would carry substantial contagion risks.

There is something very contradictory about current markets. It’s a six-impossible things before breakfast kind of market.

• On one hand… US stock markets have hit yet another record high, fuelled by expectations a superb US Company earnings season over the next month will fire up stocks, and by the unstoppable US tech boom! Rising interest rates have done nothing to slow the pace and scale of the AI infrastructure build out. There are concerns that the current upside sentiment is too narrowly focused on the mega tech sector, but that’s because its such an “irrefutable upside story” … (how many times have we heard that before in market history?) There are also rising expectations oil prices are about to fall (as more ships slip through the Straits of Hormuz), thus inflation will start to ease by early next year, reversing fears of sustained series of Fed Hikes.
• On the other hand… I commented yesterday on how sentiment is slipping on the Street (the financial part of the economy, where sentiment tends to front run what the actual commercial world of business is thinking) as deal making slows as investors turn increasingly defensive. Part of that hesitancy is related to how the current smorgasbord of politics, bond markets, conflict and geopolitical risks play out. There is also the growing realisation that AI is proving a very competitive market where sky-high valuations are based on revenues that show little sign of materialising at the pace or scale of what will be needed to justify the current pricing… Again, we’ve been here multiple times before – when expectations get ahead of reality, its prices that correct!

Predicting the future is never easy… but it is great fun. It’s never been more complex to figure out what comes next. Not only do we have all the usual factors such as economic innovation, tech adoption, interest rates and inflation to consider in our market predictions, but now, in a period of rising geopolitical challenge, we have the added spice of populist politics, hegemonic trade shifts and conflict risks to consider (including kinetic and psi-ops designed to destabilise society!)

And on top of all that is the uncertainty of just what the bond market is signalling. Yesterday a small drop in US Treasury yields (on the back of the oil moves) was enough to swing the mood positive across stocks – convincing many buyers their fears of Treasuries being dragged down by a global bond sell-off were overblown. Maybe… but probably not.

Thus far we have not seen a bond crisis. All the noise about rising rates and the prospects of global bond mayhem have been fervid speculation – thus far. The rise in interest rates merely reflects normalisation from the abnormally low levels we saw through the repressive interest rates of the QE era, when inflation was kept in check as China exported “deflation” around the globe as the manufacturer of everything. There is evidence to suggest that higher “real” interest rates are good for economies – because pricing money too cheap simply fuels foolish speculation rather than effective investment. And we know that ultra-low rates from 2009-2022 did not fuel investment growth, but massive inflation in financial assets instead!

As rates normalise in a period of increased risk, there is a rising probability the market will fret and wobble. As interest rates rise and borrowing costs start to bite on government spending… that’s when the market starts to creak and groan… that’s the point when fears start to turn into the reality of a chaotic bear market event.

In France it feels the crisis is upon us. France is revolting. The French government seems incapable of controlling its debt. It shows how a weak Government that has lost control of the spending narrative becomes a crisis. Every group across the nation is demanding spending rises – and lower pension ages! The French left-wing (with schoolkids on the front lines) has initiated mass demonstrations, seeking to increase their credibility with soft-conservative voters as the only alternative to a future Le Pen hard-right presidency by demonstrating they can cause mayhem for the current government. It’s oh so French – and it demonstrates the unsustainability of France’s bond markets. Because of monetary union, it’s a crisis that will have consequences across the Eurozone.

Perversely… the UK is doing it right. The current government may be doing all the wrong things (according to the Torygraph) in terms of delaying defence spending (I agree), not slashing welfare (modifying the triple lock on pensions addresses the largest welfare cost), threatening tax hikes (sadly necessary), inflicting higher costs on business (to be discussed), chasing off billionaires (are they not the ones betraying their country?)… the list of Labour mistakes is literally endless. (I heartily recommend the Torygraph. It is the first thing I read every morning, to get the sordid details of every mistake the Govt is making from the perspective of the politicians who so conclusively lost the last election…)

The one thing Labour are doing “right” is the one thing that matters at this point in the political/economic cycle – they are sticking to the spending rules and trying to control debt. There is an awareness in Whitehall that the UK might find itself sitting in the eye of a global debt hurricane. If/when the global bond selloff comes, the UK is better prepared than most nations with a smaller portion of the national debt to refinance each year, and a record of strict adherence to the rules (which admittedly they pretty much make up.)

What might trigger such a debt mega storm?

It’s all about inflation and the price of money. Now we face a very different financial world. China no longer exports deflation – its competing as the premier force across the globe and ending the “exorbitant dollar privilege” that supported the dollar and US treasury market. Global trade is changing and that includes the primary global commodity, energy. As the dollar’s influence wanes, it’s a reason markets are increasingly focused on other stores of stable value – primarily gold. Safe and proven. Bitcoin? PJ Barnum time.

There is a chance this fundamental shift and turnover in the global economy happens without triggering inflation and rising interest rates, but that seems unlikely. Democracy is struggling under assault from populist politics which promise much but will deliver little. It’s a wonderful opportunity for the Authoritarian states to socially engineer instability to further distort to foundations of successful capital economies: Stable Currencies, Sustainable Bond Markets and Political Competency. Which are, of course, the three legs of The Virtuous Sovereign Trinity!

Expect the bond markets to signal more volatile rates depending on how stable governments are, and how convincing their efforts to stabilise borrowing and focus spending are. Populist governments will trigger higher rates – and all the likely carnage that will go with that.

An important crunch point will be the US Midterms, where the risks of political instability can’t be ignored if it ends up a contested election in the courts further polarising the US electorate. How controllable US spending looks to be in its wake will be critical – including the damage an unresolved Govt shutdown may trigger. (My fear is 2-years of bitter US gridlock spells much deeper crisis ahead of the US 2028 Presidential election.)

As a final point today… consider the political competency of the USA. I could repeat all the many wonderful things Donald J Trump has done for the economy (US readers – dripping sarcasm alert), but no. Let me simply refer you to this article in the Wall Street Journal this morning: Inside Bessent’s Treasury: Tension, Turnover and Unmet Economic Goals.

Bessent was supposed to be “the adult in the room”. Instead, he’s at the centre of the Drama Triangle in the administration, caught between sycophantically maintaining his position in Trump’s court by  battering down any and all opposition, while trying to run the markets – which is laughing at him after his “I am the house” comments. As a Treasury Secretary, he’s the USA’s go to finance guy – and that requires credibility… which he’s progressively blown. (It also spells division in the Trump House: rumour this morning is Secretary Lutnick may be the source behind much of the story.)

Out of time, and back to the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Meanwhile, don’t forget about my new book: The Battle for Hamble

You can read a review on the Society of Professional Economist’s website here.