Sand in the Hourglass – December 5, 2025
In markets and the economy, the marquee title fight is always between inflation and deflation. Right now, we’ve got powerful fighters on both sides looking to face off. Essentially, we’ve got 6-foot 5-inch 300-pound heavyweights in each corner set to duke it out over the next several weeks, months, and years.
In the inflationary corner, Bloomberg’s Simon White pointed out this week that inflows to all U.S. listed commodity exchange traded funds (ETFs) are rising at the fastest pace since COVID. Further, they are rising to new absolute highs for the post-great financial crisis (GFC) era. Importantly, in the other two instances when commodity ETF inflows spiked since the GFC, so, too, did inflation—on a three- to six-month lag (in both 2010–2011 and 2021–2022). In HAI‘s view, surging inflows to commodity ETFs could certainly be a powerful signal that we are on the doorstep of a third such—perhaps even more dramatic—inflationary outbreak in 2026.
Supporting the inflationary signals, we know that the Trump administration wants to reshore and revitalize the U.S. manufacturing base, which is inflationary. To do that, they need to weaken the dollar, which is also inflationary. Broadly, the U.S. needs to inflate away the net present value of its massive debt obligations.
Now, ETF investors aren’t alone in scrambling into commodities. Sovereign nations are, as well. In fact, sovereigns are busy aggressively issuing debt to buy critical minerals.
According to a late November Reuters article, “The U.S. Export-Import Bank (EXIM) will invest $100 billion to secure U.S. and allied supply chains for critical minerals, nuclear energy and liquefied natural gas, the organization’s chair John Jovanovic told the Financial Times in an interview published on Sunday.”
Jovanovic said “We can’t do anything else that we’re trying to do without these underlying critical raw material supply chains being secure, stable and functioning.”
This week, a Bloomberg article titled, “US Plans More Stakes in Minerals Companies, Trump Official Says” underscores the ongoing U.S. focus on industrial policy and securing critical commodities (inflationary).
And the U.S. isn’t alone. According to the FT in late November, “EU plans minerals stockpile center to stop US snapping up supplies.” As the FT put it, “The EU plans to create a central body to co-ordinate the purchasing and stockpiling of critical minerals to stop the US buying up global supplies from ‘under our noses’, the bloc’s industry chief has said.”
And according to a November mining.com article titled, “Britain unveils critical minerals strategy to cut reliance on foreign supply,” Britain’s strategy seeks to ensure no more than 60% of the UK’s supply of any one critical mineral comes from a single country by 2035.
In short, the interest in real hard asset commodities is now very apparent among both investors and sovereign nations alike. And that interest is in both outright demand and investment demand for protection against expected inflation.
In HAI‘s view, given the slow breakdown of the petrodollar system (the very system that supported virtually unlimited U.S. debt growth), the need for the U.S. to now suppress bond yields and inflate away the debt burden, and the imperative to weaken the dollar and reshore and revitalize the U.S. industrial base, expectations for a bout of intense secular inflation appear very well founded.
But we’ve got another heavyweight in the deflationary corner—in the form of multi-pronged, growing, global funding stress now coming to a head.
In the middle of November, a Financial Times article reported that the “NY Fed convened a meeting with Wall Street firms over strains in U.S. money markets.” The U.S. dollar is the world’s number one funding currency, and, in short, unsustainable U.S. government deficits and the resulting massive funding needs are creating structural U.S. dollar funding stress that is a rising deflationary force.
In addition, the Wall Street Journal reported on December 1st, “Japanese bond yields hit fresh multiyear high.” The Japanese yen is the world’s number two funding currency, and rising yields on Japanese government bonds (JGBs) also indicate increasingly acute global funding stress from the East.
Then we also have the growing funding needs of the artificial intelligence (AI) arms race that is increasingly reliant upon debt financing. On November 25th, the Financial Times reported that AI wunderkind “OpenAI needs to raise at least $207bn by 2030 so it can continue to lose money, HSBC estimates.” The story highlights the stark reality that what started as a cash flow-funded AI race has since descended into a debt-fueled binge.
Regarding that binge, Trump’s AI and crypto czar David Sacks just acknowledged that a slowdown of AI mania isn’t an option. As Sacks put it, “AI-related investment accounts for half of GDP growth. A reversal would risk recession. We can’t afford to go backwards.”
With the trillions in funding needed by the U.S. government, JGB yields rising sharply and threatening to unwind the carry trade in the world’s number two funding currency, and what Morgan Stanley estimates to be the need for $2.9 trillion in funding for AI-related data centers through 2028, the growing global funding stress is real. It will likely crowd out other real economic growth and threaten the positive stock market wealth effect.
That, dear reader, would imply a very nasty deflationary date with crashing economies and cratering markets the likes of which most market participants can’t imagine—unless policy makers supply liquidity in full force, support the bond market in bulk, keep bond yields in check (some form of yield curve control), and sacrifice both the value of the currency and the Fed’s inflation mandate.
In HAI‘s view, over the next few years, the direction of travel (likely inflationary) seems clear. However, the question remains: how many potholes of deflation that trigger desperate inflationary policy responses will there be in that road?
In HAI‘s view, the deflation threat stemming from multi-pronged sources of funding stress have now become a significantly elevated risk. Perhaps we will soon find out (starting at next week’s Federal Reserve FOMC meeting) whether policymakers will opt for truly aggressive preventive policy alchemy or instead wait to respond in force only after crisis has begun.
With time running out on a policymaker decision to either print and dramatically inflate preventively or to suffer a deflationary crunch before reacting, the dynamic is reminiscent of Churchill’s famous quote; “The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.”
HAI suspects that the sand in the hourglass marking the era of complacency is very nearly gone. A decision will likely soon be made to unabashedly inflate or otherwise dangerously flirt with deflation risks. Either way, at present, overweight positions in both gold and cash seem the best positioning bets until further clarity is offered on the intentions of policymakers.
Weekly performance: The S&P 500 was up 0.31%. Gold was off 0.50%, silver gained 3.31%, platinum was lower by 1.61%, and palladium was up 1.52%. The HUI gold miners index was off 2.02%. The IFRA iShares US Infrastructure ETF lost 1.42%. Energy commodities were volatile and higher on the week. WTI crude oil was up 2.72%, while natural gas surged 12.03%. The CRB Commodity Index was up 1.49%. Copper was up 3.63%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.64%. The Vanguard Utilities ETF was down 4.41%. The dollar index was off 0.48% to close the week at 98.98. The yield on the 10-yr U.S. Treasury was up 12 bps to close the week at 4.14%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
