The CAPE that Cried Wolf
Dino Palazzo (Board of Governors of the Federal Reserve System)
May 2026

The Capital Spectator’s Takeaway
The paper reports that traditional CAPE ratio’s false warnings of market overvaluation since the 1990s are an accounting illusion caused by mandatory R&D expensing and volatile special-item write-downs. By stripping out these regulatory distortions, CAPE-H eliminates the apparent structural break and restores CAPE’s ability to accurately predict long-term price appreciation and excess stock market returns.

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The war with Iran is bad news for the global economy, but it’s lifting the fortunes of most energy stocks, led by oil refiners, according to a set of ETFs. The world has had a painful reminder that fossil fuels from the Middle East can’t be ignored. At the same time, some corners of energy have taken a hit — the nuclear power industry is the major downside outlier since the conflict began on Feb. 28.

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In late February, the US 10-year Treasury yield was trending lower, dipping below 4.0% on the final trading day of the month. The macro outlook at the time suggested the benchmark yield would dip even lower in the coming weeks, a view supported by the downside trending behavior that month. But on Feb. 28, the bombs started falling on Iran, an event that reversed the 10-year yield’s slide—a turnaround that has strengthened in July.

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The momentum risk factor has been leading the field in recent history, but there are signs that a rotation may be underway, based on a set of ETFs through yesterday’s close (July 20).

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With the Iran war escalating, the conflict is again getting harder to ignore, which strengthens the case for maintaining a globally diversified portfolio. The reasoning isn’t based on assuming that a broad approach to asset allocation will outperform other strategies or deliver superior risk management. Although one or both outcomes are possible, the stronger case for leaning into global diversification is that it rests on the idea that markets can, and often will, deliver surprising results.

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● Speed: How It Explains the World
Vaclav Smil
Review via The Wall Street Journal
We are often told that the speed of innovation today is faster than ever before and accelerating exponentially. But as we prod and marvel at our smartphones or develop parasocial relationships with our chatbots, it’s useful to remember that a few decades spanning the turn of the 20th century saw the invention of lightbulbs, the electric automobile, home refrigeration and powered flight. How fast are we really going now by comparison? And is faster necessarily better?
That is the question posed in “Speed,” a marvelously encyclopedic book by Vaclav Smil, an environmental scientist and professor emeritus at the University of Manitoba.

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Economic activity is on track to expand close to the pace reported in the first quarter, based on the latest Q2 nowcasts compiled by The Capital Spectator. The median estimate suggests growth will ease slightly from Q1.

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Federal Reserve officials are talking tough on inflation, but the outlook for monetary policy is still cloudy amid murky geopolitical and economic conditions.

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The market premium for the U.S. 10‑year Treasury yield dipped in June after rising for three months, based on a fair‑value estimate calculated by The Capital Spectator. The decline coincided with last month’s expectations that the war‑driven rise in inflation expectations had peaked. But the resumption of hostilities in the Gulf in recent days has raised questions about whether recent optimism on the inflation outlook is premature.

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The US expansion just marked its six‑year anniversary, and the odds still lean toward growth holding up in the near term. Yet the backdrop is anything but serene. Geopolitical flashpoints, economic crosscurrents, and a thicket of slow‑burn risks continue to accumulate beneath the surface.

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