Supply shock, inflation risks, and AI valuation concerns (with Dani Burger)

Eric van Nostrand argues the Iran conflict represents a major supply shock, not a demand shock, and markets are underestimating the inflation risk. With inventories drawn down, any further disruption will have a bigger impact. He sees bond markets pricing in persistent inflation, but equities are too optimistic. The Fed's toolkit is limited for supply shocks, and monetary policy will explain less of market variance. AI valuations are based on speculation, making them vulnerable to bad news.

explicit

implicit

RUT

explicit

Metals

USD

Lazard 8.5
Investment Bank $259.70B
Eric van Nostrand 8.5

Supply shock, inflation risks, and AI valuation concerns (with Dani Burger)

ndx

Van Nostrand states equities are 'looking through some of the inflationary risks at their peril' and that AI valuations are based on speculation, making them vulnerable to bad news. This implies a cautious downward view.

wti

Every incremental piece of bad news in the gulf will have a bigger downside impact on those prices [retail gasoline].

yields

Bond markets are actually a little closer to the mark in terms of the historically high levels of long-term interest rates... reflecting some expectation of more geopolitical disruption and persistently higher inflation globally.

1 calls

-19

consistently off direction or weak follow-through

6/5/2026 1:18:56 AM	medium term up	21 days later	-3.91%	-3.91%

Has something changed in the way you look at big tech players, given the Mag Seven correction?

Dani Burger
Eric van Nostrand

Last week was the first real pause in AI enthusiasm. The market reckoned with a memory bottleneck and headlines about big AI spenders shifting to cheaper models. This gave a pause to the narrative.

We'll see more of this over the year.
Is financing for AI companies going to come under stress, given IPOs like SK Hynix, SpaceX bonds trading at a discount, and OpenAI delaying its IPO?

Dani Burger
Eric van Nostrand

Markets are reckoning with a new kind of uncertainty about supply, not aggregate demand. The productivity shock from AI is uncertain, and valuations are based on speculation, making them vulnerable to bad news.

The pricing of future AI profits is based more on intuition than historical data, leading to more uncertainty.
Has headline risk around Iran lost its punch, given oil is at $70 a barrel?

Dani Burger
Eric van Nostrand

Markets are underestimating the supply shock. Inventories have been drawn down to keep retail prices from skyrocketing. With less cushion, any incremental bad news will have a bigger downside impact on prices.

The price of crude oil in the Gulf is not the same as retail gasoline in Ohio.
What is the timeline for paper markets to reflect physical markets if shipping resumes slowly?

Dani Burger
Eric van Nostrand

Near term, narratives around inventory-constrained producers will dominate. If another pause in peacemaking occurs, it will be worse than the last round because there are no inventories to cushion the blow.
What are you expecting from Fed Chair Kevin Warsh's speech?

Dani Burger
Eric van Nostrand

Markets should expect fewer rate hikes than a few weeks ago, but we are not out of the woods on inflation. The conversation will veer towards tighter rates to combat an inflationary problem we are not through yet.

The Fed will talk about looking through this as a supply shock, but there is too much optimism that we are out of the woods on inflation.
Is this a bond market story, or are equities also a problem?

Dani Burger
Eric van Nostrand

Bond markets are closer to the mark, reflecting geopolitical disruption and persistently higher inflation. Equities, due to AI optimism, are looking through inflationary risks at their peril.
Is there a risk the market over-interprets what Kevin Warsh says, given the new world of supply shocks?

Dani Burger
Eric van Nostrand

The Fed's mission is demand management. The big themes are about supply shocks, which the Fed doesn't have the toolkit to engage with. Monetary policy will explain less of the variance in market outcomes than in the past.

Chairman Warsh knows this and has made it clear in his public remarks.
As hyperscalers turn to bond markets, does that present an issue for cross-asset portfolios, making corporate bond markets more tech-concentrated?

Dani Burger
Eric van Nostrand

It reflects the changing nature of financing, but debt financing is healthy. The negative signal is the existential question about whether expensive American frontier models will be the main suppliers of reasoning as a commodity when China can put out cheap open-source models.

When trading at 100x sales, there is a lot of daylight between optimism and that multiple, leading to downside risk.

SignalTube

markets at a glance