Before we get to why this is happening to all of them at once, let's stop for a moment on a basic question — who sets this interest rate in the first place? The intuitive answer is "the central bank," and it's true only for the short rate, the one decided in those famous meetings, the one that moves your checking account and your short-term loans. But a government that needs money for ten or thirty years doesn't walk over to the central bank — it issues a bond (that is, a written promise to pay the money back on a set date, with interest known in advance) and sells it in the market, to whoever is willing to buy. The rate it will pay is set right there, by the buyers, and nobody imposes it from above. When the buyers are calm they settle for little, and when they're worried they demand more before they'll agree to lend at all. The mechanics of the rate (or the yield, from the investor's side) run through the bond's price: when there are fewer buyers, the bond's market price falls, and whoever buys it cheap receives the same future payments on a smaller outlay — meaning the yield (the effective rate for whoever steps in now and holds on) goes up. The central bank sets the price of money for one night (that is, for loans that open and close within a day); the price of money for thirty years is set by the market.

So why everywhere, and why all at once? Because the world's lenders are, at the end of the day, one crowd. Take Japan as the example, because it's the heart of this week's story. For thirty years Japan was the world's great lender: interest rates at home were zero, so Japanese pension funds and insurance companies — managing trillions of dollars — went looking for yield abroad, and bought other governments' bonds, in the US and in Europe. Now, with home paying 4.18% for thirty years for the first time, those institutions have no reason to cross the ocean. The money is going home. On the other side of that same move, in London, Frankfurt and New York, a big veteran buyer (the Japanese) has suddenly gone missing — and a shortage of buyers, as we saw a moment ago, means rates that rise. That's how a record in Japan rolls into a record in Britain, which rolls into a record in Germany. The world economy is a set of connected vessels, and money moving in Tokyo moves the price for everyone.

That leaves the question of what spooked the lenders this particular week, and the answer is three things arriving together. The first is energy: the renewed flare-up between the US and Iran over the weekend sent oil prices jumping, and a thirty-year lender fears one thing above all — inflation, which gnaws away at the value of every future payment he is owed. The second is supply: all of these governments keep showing up at the market with more and more new debt, right when the buyers are hesitating. In Britain they calculated this week that every quarter-point rise in rates adds about £2.5 billion a year to the government's interest bill, and in Japan the new prime minister arrives with big spending plans — in a country whose debt is already twice the total output of its economy. The third is the central banks themselves: Fed Chair Kevin Warsh doubled down this week on his pledge to tame inflation, and the market now prices roughly 70% odds of a rate hike — a hike, not a cut — at the meeting in the middle of this month. Put the three together, and the world's lender (that is, the bond buyer) hears one simple message: your future payments are worth less, and the line of borrowers at the door keeps getting longer. So he demands more interest, from everyone. And by my simple explanation from before — more interest means a lower price at the entrance, that is, falling bond prices, and short-term losses for everyone who was already holding them.

In the headline I wrote "almost the whole world." That "almost" is, believe it or not, Israel. While the world breaks records, the Israeli government's 10-year bond trades at only about 4%, less than what the US government pays for the same term. As I've written in earlier letters, the market has priced Israel as a less risky borrower than the US for more than a year now, and the reasons have only strengthened since: annual inflation around 2% (that is, right inside the target), a central bank in the middle of a rate-cutting cycle, and a strong shekel. But no confusion here: economists in Israel will tell you that the single biggest driver of Israel's long-term rates is the direction of yields in the rest of the world, above all the US and Europe. When the whole world makes money more expensive, the Israeli exception isn't immune — it just gets a discount, and that discount may turn out to be temporary. Meaning — this gap cannot keep widening forever. At some point it will start to close, from one of two directions or from both at once: either yields around the world stop rising (and start falling), or Israel's yield climbs toward the rest of the world, or a bit of both.

And wait — what about Friday's jobs report?

On Friday the US Bureau of Labor Statistics published the August jobs report, and it was the kind of surprise we'd forgotten existed: 162,000 new jobs, when economists expected only about 55,000 — the strongest month in five months. The unemployment rate held at 4.1%. If you've been reading me for a few months, you'll remember that in Letter #20 I explained that the first release of this report is really a draft — it's built from a sample of businesses, not a count, and gets revised twice — and that back then the revisions leaned systematically downward. This time? The revisions went up: June and July together were revised 55,000 jobs higher. The mechanism hasn't changed, and the first print is still a draft — but the direction flipped this time, which is exactly why you read the trend and not a single number. One layer under the headline, a familiar story continues: the information sector — software, computing, media — lost another 23,000 jobs, while restaurants and local-government education led the hiring. That split, between a shrinking knowledge economy and service industries that keep recruiting, is a process I wrote about half a year ago, and it keeps grinding on quietly, report after report. Why does any of this belong in a letter about interest rates? Because a stronger-than-expected job market is precisely the reason the Fed is in no hurry to cut — and may even hike — and the market indeed raised its bets on a hike the moment the report landed. Friday's jobs report didn't cool the trend — it simply poured another drop of oil on the fire.

What this means for your pocket

If you have money sitting on the side, then on the face of it, the opportunity I described two weeks ago has only improved: more than 5% a year, guaranteed for thirty years, from what is still considered the safest borrower in the world. A British or Japanese saver is being offered the highest rate an entire generation there has ever seen. But — and it's a big but — what looks like an opportunity today can look, a few months from now, like a trap for the suckers who walked in too early.

If you hold stocks, the mechanism I explained two weeks ago is still at work, and in the unpleasant direction: when the safe alternative rises, companies' future profits are worth less at today's price. Same company, same profit forecast — lower price. That pressure doesn't go away as long as yields stay up, and it is exactly why markets have been jumpy these past few weeks. As long as bonds don't let up on their march toward higher yields, the stock market won't be able to lift its head.

So what do I think about all this? I have to tell you — I don't have an unequivocal answer. The trends and forces at work here are not pulling against each other. And they are strong. Meaning, whatever pushed yields up hasn't gone away, and I don't see how it goes away anytime soon (except for the war with Iran, which can swing either way on any given day). The world's debt is still heavy, the deficits (above all in the US) are enormous, the Japanese are still wrestling with structural problems and debt far above their output — and all that before the new technology companies come to market to finance themselves and join the sellers' side. Tempting as it is to buy now and lock in 5-plus percent for decades to come, my gut feeling is that it's better to wait outside a little longer, because what started as rain can accidentally turn into a flood. Let's hope not, and either way —

We shall see.

To answer that, you have to look at what it costs to make a loaf of bread, and then at what it costs to buy one. The wheat sitting inside a loaf is worth about fifteen cents. We all know that is a very long way from the price we pay at the register. Which means almost everything you pay for in that final price is milling, baking, wrapping, trucking, the shelf the loaf sat on, the wages of whoever stocked it, the electricity in the oven, and everyone's margin along the way. A 12% increase applied to fifteen cents, then pushed through a great many other costs, stops being tangible long before it reaches you. We have seen this before: in 2022, after the invasion of Ukraine, the price of wheat roughly doubled, and the price of bread in Europe rose by a few percent.

So who does pay, and in cash? It cannot be that everywhere in the world this increase is simply absorbed as if it never happened. This is where we step into the geopolitics of economics. It is worth remembering that not every economy in the world is developed, liberal and running on a free market. In fact most of the world — in population terms, obviously, not in output terms — still lives in economies of a different kind. So here is one economy that feels the rise directly in the pocket, and immediately:

Egypt is the largest wheat importer in the world, and it — meaning the state itself, not factories, not businesses and not citizens — buys a large share of the imported wheat in order to run a subsidized bread program that feeds some seventy million people. A loaf sold at a price the state sets is not a product with a whole industrial chain behind it. The entire increase lands in one place, on the budget that funds it. So if the Black Sea closure continues, Egypt will have no choice — and back in 2024 it was already forced to raise the price of bread, for the first time since 1989.

If we widen the wheat story into a slightly more general picture, commodity prices — particularly the global ones, the ones that travel around the planet to be turned into products somewhere else — are a variable whose behavior can be extreme, while its effect on the end consumer, and on local economies, changes from commodity to commodity and from country to country, sometimes in ways you would not expect.

Take fuel on one side. Between the oil well and your car there is a relatively short production and distribution chain — someone refines it, someone hauls it, someone sells it — and so roughly half of what you pay at the pump is the cost of the crude oil itself. That is why when oil moves, the price at the pump moves within days, and we all feel it almost immediately. There is no chain there long enough to swallow anything. (The part that does stay still is the tax, a fixed amount per gallon that does not move with the market — so when oil gets more expensive, the tax actually softens the percentage. But perhaps another time.) Fuel is close to the only commodity where it is genuinely worth watching the raw material price in the news, because the change really will reach you, and it will reach you fast.

And on the other side of the arena, coffee. The U.S. Department of Agriculture measured this over years and reached a result: a 10% rise in the world price of coffee beans moves the bag of coffee on the supermarket shelf by about 3% — meaning 30% of the increase rolls into the final price. That bag also carries the cost of roasting, packaging, marketing and shelf space, but the beans are still a serious share of it. Now take those same beans and put them into a cup at a café, and there they all but disappear — because what you are buying there is mostly rent on a corner, the person behind the counter, milk, a cup and a dishwasher. When café prices rose this year, the beans added about a percent to that, and all the rest was wages, rent and equipment. The same commodity, two products, two different behaviors.

Want another interesting example? Meet our friend cocoa, which over the last two years travelled from around $2,500 a ton — the level the entire chocolate industry was built around — to close to $13,000. The average American chocolate bar rose as a result from $2.43 to $3.45. In percentage terms that is very incomplete pass-through relative to what happened to cocoa (the bar jumped about 40%, while cocoa rose 420%), but in pocket terms it is the only item on this list that people genuinely felt. The reason is simple: there are far fewer people standing in the way of a chocolate bar than of a loaf of bread, and cocoa is a large share of it.

To cope with that insane rise in the raw material, manufacturers shrank the bars and replaced some of the cocoa with other ingredients — meaning you paid the same, or in fact quite a lot more, and got less. A necessary trick, and one that shows how much manipulation a product can go through as a result of dramatic swings in raw material prices. And on the other side, once cocoa had made almost the whole journey back down, the price of chocolate in the supermarket did not come down with it right away, simply because the expensive raw material stays inside production for months more — in the factory and in the finished goods. Once again it was demonstrated that swings in raw material prices do not roll through to the end consumer, quickly or at all. Meaning us.

So the next time a headline tells you some commodity has spiked, the size of the jump is probably the less interesting part. What matters more is the question of how many hands stand between the raw material and the hand of yours that pays, and which of them has already locked a price in advance — meaning it settled today the price of what will only reach it half a year from now. The two answers together will tell you whether this touches you at all, and when.

Israel sits in a strange position, and it is worth saying plainly for American readers too. Most of the wheat arriving at Israeli bakeries comes from Russia, while the basic loaf — a relatively plain, common type of bread — sits under price control and is updated by a monthly calculation in a government ministry rather than by the market. On price, in other words, the Israeli reader is insulated even more than the American one. But a price control does not make the cost disappear, it only moves it: somebody still pays the gap between what the grain cost and what the shelf charges, and when a government is holding the shelf price down, that somebody is the public purse. Much like Egypt, only at a lower volume. Two letters ago I wrote about the American debt and argued that debt is always solvable, and that someone always pays for it — in taxes or in inflation. Here is that same mechanism, in a size you can hold in your hand. If you missed it, I would jump to it here.

Israel's real risk in this story is not the price at all. It is supply. A country that imports nearly all of its wheat, most of it from a single source now sitting inside a war, does not need to worry about a more expensive loaf. It needs to worry about whether it can produce that loaf steadily and in sufficient quantity for the whole of demand. Otherwise it, and its citizens, are in an entirely different kind of event — at least where bread is concerned.

See you in next week's letter, or during the week — if I can't help myself until then...

Think about that again, because at first glance it doesn't really add up. A government that issues bonds is a borrower. A government that buys its own bonds back off the market is a borrower chasing down his lenders to pay off the loan early (and in our case, right when his debt is at a peak and he needs the money most). Why would anyone do that at the exact moment the interest he's paying is at a nineteen-year high? The answer, as always, starts in the most boring place to look — the bond market.

The day before the Treasury's announcement, on August 18, the yield on the 30-year US government bond touched 5.33%, the highest it has been since 2007. That yield is simply the interest the US government pays to borrow money for thirty years (on a newly issued bond), and nobody sets it from above — not even the American central bank. It gets set in the market, and the ones who actually set it are the buyers. When they're calm they'll settle for less, and when they're worried they demand more before they'll agree to lend at all. Since late June the buyers of long debt — meaning the 30-year bonds — simply stopped showing up in the numbers the market was used to, and the price the government has to offer to tempt them back climbed, and then climbed some more.

This is where the Treasury steps in, announcing that starting September 9 it is doubling the size of its purchases in the 30-year bond, from $2 billion a batch to at least $4 billion, and Treasury Secretary Scott Bessent added the next day in an interview that it could run higher than that. The market reacted immediately, and the 30-year yield fell that day by almost a tenth of a percent, to 5.196%. The way a yield comes down on a bond that already trades in the market is through the bond's price: when there are more buyers than sellers the price goes up, and the yield on it goes down. Meaning, that day there were far more buyers than sellers. And then, inside of a single day, that drop was wiped out. Why? Because somebody asked the obvious question — where is the money for these purchases coming from — and the answer is that the government is issuing short-term debt (that is, going out to sell new bonds and stepping right back onto the sellers' side of the bond market) in order to buy back long-term debt.

Those of you with a mortgage already know this maneuver up close, even if nobody ever gave it a name. You have a thirty-year fixed portion, it's expensive, and you shift part of it into an adjustable-rate portion tied to the short rate — meaning a rate that resets quickly — which today, as it happens, is cheaper. The monthly payment really does come down, and that's not imagination and it's not an accounting trick. But the debt itself hasn't shrunk by a single dollar, and the risk hasn't gone anywhere; it has only moved from today to the day the short rate resets. The US government is doing exactly this, only on a scale of trillions, and if I may point it out — Bessent himself, the honorable Secretary of the Treasury, went after his predecessor pretty hard for this very maneuver, two years ago.

Now, let's climb up a floor and look at this from above, at the long-term process that's unfolding here. The average interest rate the US government pays across all of its debt stands today at just 3.39%. Not 5.3%, because most of the existing debt was raised in years when money cost almost nothing (in 2021 that average was around 1.5%). But debt, unlike a building, doesn't stay standing where you left it. About a third of the US debt comes due and gets rolled over (meaning a new bond is issued that has to find buyers in the market, against the one that just matured) within roughly a year, and every cheap bond — issued back when rates were lower — that reaches the end of its life gets replaced by a more expensive one. The implication is simple and unpleasant: even if rates froze today exactly where they stand, the US interest bill would keep climbing for years, purely from the swap. That's the slow runner in this story, and he never gets tired.

Against that slow runner, what exactly is supposed to run faster? This is where artificial intelligence comes in, along with quantum computing and the rest of advanced technology. In the first quarter of 2026, investment in artificial intelligence — data centers, hardware and software — accounted for about 74% of all the growth in the US economy. Meaning, without that investment, the largest economy in the world barely grew at all that quarter. The story the market tells itself is that this enormous investment turns into efficiency, that companies produce more with fewer people, and that profits grow faster than the interest on the country's debt.

To my mind, that can absolutely happen. But it's worth remembering that as long as we're talking about investment in the future, that money is still sitting on the spending side of the equation, and (almost) not on the earning side. Every new technology in history has moved the same way: first you pay and pour money in, then it works, and the efficiency — and the big profits — show up only after that. And more than that: the spending is certain, the profits afterward are still in doubt.

What does that do to your stocks?

On the face of it there's no connection between the interest a government pays on its loans and what a share in a software company is worth. In practice, they're very much connected. The value of a stock is, in the end, the profits the company will produce in the future, translated into today's money — or in plain language, into the price you're paying for a share you're buying right now. A dollar of profit arriving ten years from now is worth less than a dollar in your hand today, and exactly how much less depends entirely on the safe alternative available to you. If you can get 4% risk-free on a long government bond, that's one thing. If the safe alternative has jumped to 5.3%, those same future profits you're counting on from the stock are already worth less against the stock's current price — because you're "giving up" a bigger pile of interest you would have earned had you not bought the share — and from there: same company, same profit forecast, lower price today. Meaning, a falling stock market.

Now, all the new guys (new to me, mind you), meaning anyone who's been trading since 2010, will tell me right away — so what. The market falls, stocks get cheaper, we buy, the market comes back. And they're right, that really is what happened every time, and fast. In March 2020 the index fell 33.9% in 33 days and was back at its previous peak within five months. In 2022 it fell 25.4% over nine months and was back at the peak within about two years (roughly — it depends which index you're looking at). Both times the pain was short and temporary, and if it taught the new investors anything, it only hardened their faith that every dip is a buying opportunity. But I, old-timer that I am (and reasonably well-read, too), remember the index buyers of the year 2000 perfectly well — the ones who sat thirteen years in the stocks they bought just to get back to what they paid for them. I've also studied the earlier history of these markets, and of other markets while I was at it (Japan, anyone?), and I know and I remember that sometimes the market does not come back so fast. And there are always reasons.

Before anyone here decides I'm a pessimist, it's important to me to say that there's a scenario that ends well, and it's a long way from fantasy. If the efficiency genuinely arrives, the economy grows, the government's tax revenue grows with it, and the debt shrinks relative to the size of the economy without anyone actually paying it down. This has happened before, and not that long ago by the way (in historical terms): after the Second World War the US carried debt worth 106% of its economy, and by 1974 it was already down to 23%.

Granted, in that case it wasn't growth alone that solved the problem, but also heavier taxation, and inflation that ate away at the debt (we'll get into that one in a separate letter sometime). But the bottom line is that government debt is a solvable problem. It's simply solvable over time rather than in one blow, and someone always pays the price. With taxes, it's whoever pays them. With inflation, it's anyone holding an asset that isn't indexed to it. But here's the important part: a shrinking debt lets the government pay less and less interest on its bonds, and lets the stock market go on realizing the upside it's capable of.

What this means for your pocket

If you have cash on the side, you're being handed an investment opportunity you haven't seen in nearly two decades: a 30-year US government bond paying 5.3% with no default risk. For years the line that "there is no alternative to stocks" was simply true, because rates were near zero and there was nowhere else to go. It isn't true anymore, and that is exactly why some of the money sitting in stocks today may want to leave, why new money may not come in at all, and why money that was supposed to finance growing companies can end up sitting in institutional pockets with nobody lending it out.

And if you stayed in stocks and passed on a guaranteed 5.3% a year for the next thirty years, what you're meant to take away from all this is that you are, in fact, betting that long-term growth in the stock market — through rising profits at the companies inside the indices — will turn out strong enough both to justify the earnings multiples you're paying today (I wrote a letter on exactly this about Nvidia, and I recommend jumping over to it here) and to pass enough tax from those companies to the government to bring the debt down. Quite a bet. And everyone buying stocks is buying that bet.

So who wins?

What would I do? If I'm being honest, to my mind what's happening in our lifetime is a revolution that isn't "once in a generation" or "once in a century," but something closer to once in the history of humanity. And personally, I wouldn't want to sit on the sidelines with a guaranteed rate and bet against that revolution. At the end of next week, on August 27, the Jackson Hole symposium opens and Fed Chair Kevin Warsh gives his first address there in the role, and that's where we'll start getting a hint of where interest rates are taking this whole story.

We shall see.

I want to stop on that number, because it measures something quite different from what most of us think it measures. And this is not an Israeli curiosity. The same mechanism is running right now in the American new-home market and in the American car market, which is where this letter will end up.

Before we go on, it's worth knowing which number we're talking about, because the CBS publishes two and they don't say the same thing. The housing price index is built from real transactions reported to the Tax Authority, and it is quality-adjusted: the bureau takes the price written in the contract and strips out the differences between the homes that happened to sell — locality, the socio-economic level of the area, number of rooms, floor area, and the age of the home, which in practice is the difference between a new home and a resale. Without that adjustment, a month in which more large homes or more new homes happened to sell would look like a month in which prices went up, even if no price moved at all. It's a good method, and it's the standard one around the world.

Alongside it the CBS also publishes a table of average prices by home size and city, and that one is a plain average with no quality adjustment at all. That table showed a national average of 2.43 million shekels in the second quarter, a rise of 7.9% over the year. Same bureau, same day, and one number says minus 1.5% while the other says plus 7.9%. The entire gap sits in the method and not in the market, and someone reading a headline usually has no idea which of the two it used. When someone tells you what happened to home prices, the first question isn't "by how much" but "according to which number."

The quality-adjusted index is the better of the two, and it still has one blind spot, which is what this whole letter is about. It reads the price written in the contract, so it works beautifully on one condition — that the price in the contract is actually the price that was paid. For the past two years, that has not been the case.

The discount that comes in through the back door

Research by the head of financial analysis at Reichman University, published in TheMarker in April, measured what the financing incentives that developers hand buyers are actually worth. The result: the average incentive is equivalent to a discount of 12.7% off the price of the home, which on a 3 million shekel apartment comes to roughly 380,000 shekels. According to the same research, 38.7% of new-home purchases in the preceding year included an incentive of this kind, so this is no longer the edge case of one developer stuck with a project. It is how a large part of the market works. How does it happen in practice? We'll get to that, and the most common route by far is a mechanism called 20/80.

Now watch what happens. The developer gives the buyer a discount worth 380,000 shekels, and the buyer receives every shekel of it, but the contract filed with the Tax Authority shows the full price — because the discount wasn't given on the price, it was given in the payment terms. The bureau sees the full price. The index sees the full price. And when enough deals like that pile on top of one another, you get exactly what we saw on Friday: the index reports that prices have steadied, while the price people are actually paying keeps falling. There's a fingerprint of this inside the data itself. In that same release, new-home prices fell 2.0% over the year against 1.5% for the market as a whole. The segment where the incentives are concentrated is the one falling faster, and that's before you deduct the incentive from the price.

Which means the floor everyone reported is, at least in part, not something happening in the market but something happening in the measurement. In the last letter we talked about how the first release of an economic number is really a draft, and how it gets revised afterwards. This is a different animal entirely: this number will not be revised in two months, because as far as it is concerned nothing about it is wrong. It is simply measuring one thing while all of us read it as another.

How a 20/80 deal actually works

Let's take the instrument apart, because without it there's no seeing where the discount comes from. In an ordinary purchase from a developer you pay according to the pace of construction — ten percent now, another twenty when the frame goes up, and so on until you get the keys. That means you take out a mortgage early and pay interest on it through the entire construction period, three to four years in which you are paying for a home you don't live in yet, while you go on paying rent on the place where you do live.

In a 20/80 deal you pay 20% at signing, and that's it. The remaining 80% comes due only on the day you get the keys, and in the meantime the developer is the one carrying the cost of financing the project. In real money that is a discount worth hundreds of thousands: all the interest you didn't pay for three years, plus the double housing cost you were spared. The developer calls it a financing incentive, the Tax Authority sees a contract for the full amount, and those are simply two descriptions of the very same thing.

Why would he do that, instead of just cutting the price?

The answer is less sinister than it sounds. A developer who cuts his price list by 10% isn't cutting the price of one apartment, he is repricing the entire project: the units already sold suddenly look like a bad deal and the people who bought two months ago pick up the phone, the bank financing the project looks at the collateral it took and finds it worth less, and the inventory still sitting on his balance sheet, the inventory he borrowed against, is worth less too. A single price cut hits all of those at once, and in a market where cash flow is already stretched, that is precisely the move that can break the camel's back — in this case, the developer's financial back.

A discount routed through the payment terms, by contrast, hands the buyer exactly the same money and touches none of them. From the developer's side it's a perfectly sensible business decision, and I'm not sure I would decide differently in his place. The side effect is that the official number, the one all of us look at to understand what's happening in the market, stops describing reality.

And before you decide this is someone else's problem

American builders do the same thing, and they barely bother to hide it. The National Association of Home Builders reported in March that 64% of builders were offering sales incentives — mortgage rate buydowns, closing-cost credits, upgrade allowances. The most common of them is the rate buydown, where the builder pays the lender up front so your mortgage rate starts lower than the market rate.

The logic is identical to the Israeli one, and American analysts say it out loud: the builder keeps the sticker price high in order to protect the value of the inventory he hasn't sold yet, and hands you the discount somewhere the price sheet doesn't record. You get a real benefit worth tens of thousands of dollars, the recorded sale price stays where it was, and every index built on recorded sale prices reports a market that is holding firm.

Where else we've seen this movie

If you've ever walked onto a car lot, this will sound familiar, because carmakers have been doing it for decades. A carmaker almost never cuts the sticker price, for exactly the same reason — a cut like that wipes value off every car sitting on every lot and infuriates everyone who bought last month — and instead it offers zero-percent financing. This August, Volkswagen, Ford, Dodge and Jeep are all offering 0% for up to 72 months, at a time when an ordinary car loan runs around 7%. On a $40,000 car that financing is worth about $4,000. A real discount, in cash, that appears nowhere on the sticker.

Take the arithmetic of an American car buyer over the past decade, because it shows where this mechanism leads in the end. The average transaction price of a new car went from roughly $35,000 to almost $49,000, close to 40% in ten years, and wages did not rise at that pace. Had loan terms stayed where they were, the monthly payment would have jumped by the same proportion and a great many people would simply have left the market. What happened instead is that the loan got stretched: nearly a quarter of new-car buyers in the second quarter signed for 84 months or more, which is seven years, on a car. The average monthly payment did reach a record $777, but that is far less than it would have been without the stretch. The price didn't come down, the ability to pay it didn't go up, and the gap was closed with time.

What's in your pocket

If you're buying new construction. The incentive is worth real money, and on average it's worth a great deal of it. But two buyers who signed at exactly the same price, one with an incentive and one without, did not make remotely the same deal — and nobody looking at the two contracts could tell them apart. The price on its own has stopped telling you much of anything, and the question "what does it cost" now has to include "and when do I pay."

If you own a home and you're watching the index. The index tracks contract prices, not what your home would fetch today. In a market where discounts are leaking into the payment terms, that reading leans high, so the home you carry in your head at a certain value is probably worth somewhat less. The gap does no harm to anyone as long as nobody touches it, and it closes the moment you actually try to sell.

If your mortgage rate was bought down for you. This one has a date on it, and it's worth knowing. In the common structure, your rate is two points below the note rate in year one, one point below in year two, and from year three you pay the full rate. The payment you budgeted around is not the payment you will be making in three years, and the home securing it may be worth less than the price on the contract. In Israel the same clock runs on the 20/80 deals: the 80% comes due at delivery, three to four years after signing, which means deals signed in 2023 and 2024 are landing now and over the next two years.

What's already happening on the ground

Israel's chief economist at the Ministry of Finance published a figure this week that illustrates that last point precisely: 1,821 purchases of new homes were cancelled, a jump of 41% against the January review. It's worth being accurate about how this works, because in Israel there is no real clause in the contract letting a buyer walk away. In practice, though, developers let most buyers out quietly, because they don't want lawsuits, buyer associations and noise in the press. So someone who put down 20% and discovers the financing doesn't work finds that the door out is a good deal wider than the contract says.

At the same time, sales were reported this month to have jumped 50% in June, and that number is also correct. It is measured against June 2025, a month of military operations when the market was almost entirely frozen, so nearly anything that came after it looks like a surge. In the free market, excluding subsidized housing, 7,550 deals were done in June — against June 2024, that is zero change.

Sitting above both of those is the inventory: 84,280 new homes waiting for a buyer at the end of June, roughly 26 months of supply. And that number, large as it is, still understates things — the bureau drops a home from the count 15 months after its construction is finished, even if it was never sold. It wasn't sold, nobody moved in, it simply stopped being counted. Industry estimates put the real inventory above 90,000 homes, and that is an estimate rather than an official figure, but the direction is clear enough. As long as that cushion is lying there, any recovery in demand gets absorbed into it long before it reaches prices.

Which brings us to two scenarios

This balloon — a price list that won't move, discounts hidden in the payment terms, buyers stretched across seven years of payments, and more than two years of unsold inventory — is not going to stay inflated forever. At some point people stop playing by these rules, either because the money runs out or because the patience does. The only question is how the air comes out.

The first scenario is 2008. The air comes out with a bang, and it can start from either end. At one end a large developer falls, and the banks discover the collateral they took is worth less than they booked. At the other end — and this is in fact what happened in 2008 — a financial institution is the one that falls first, a bank or a finance company, and then the whole market stops lending to developers at once, banks start pulling deposits from one another, and a credit squeeze forms across the system. From there it rolls to exactly the same place: projects freeze mid-construction, subcontractors and suppliers go down after them, and people lose their jobs. The damage doesn't stay in the sector either, it reaches the stock market, interest rates, and the pockets of people who never bought a home from a developer and never planned to.

The second scenario is a long, slow leak. The air comes out over years, the price list stays where it is while the real price keeps quietly sliding. Developers turn into companies whose only function is servicing debt rather than building, buyers keep waiting on the sidelines because nothing gives them a reason to hurry, and transactions stay at low levels year after year. No drama, no headlines, not one single day you can point at and say "it happened here" — but no market either.

What I think will happen, and why

Before I answer, it's worth looking at one number from the American car market, because it settles the argument almost on its own. The 60-day delinquency rate on car loans to borrowers with weak credit stands today at 6.9%, the worst reading since 1994, and higher than the roughly 5% peak recorded at the height of the 2008 crisis itself. An entire market, built end to end on stretched financing terms, is today in deeper distress than it was in 2008 — and there has been no bang. No collapse, no contagion, no wave of unemployment. It is simply bleeding slowly, and has been for years, and most people have no idea it's happening.

From that you can draw the rule, and it isn't the intuitive one: the size of the balloon doesn't determine the shape of the pop. What determines it is who holds the risk, and whether they are forced to sell. In 2008 four conditions held at once, and that is what made it a bang. The risk was packaged and sold onward until nobody knew who was holding it; whoever was holding it was leveraged, meaning working mostly with borrowed money, and funded itself with short-term loans that constantly had to be renewed, so it had to sell at precisely the moment of the fall; the accounting rules forced it to recognize the loss immediately; and millions of households were the borrowers, and they went down almost simultaneously.

In the Israeli housing market, three of those four conditions simply don't hold. First, there is no securitization here — that's the trick where a bank takes thousands of mortgages, packages them into a bond and sells it to investors, passing the risk along. In America in 2007 that was an enormous machine, and it is exactly why, when the thing blew up, nobody knew who was holding the toxic package and nobody was willing to lend to anybody. In Israel the securitization bill has been crawling through the Knesset for some two decades and has passed a first reading, but there is no market operating at any real scale, and this credit sits on the balance sheets of the five large banking groups, around 39% of all business credit in the economy. That sounds more frightening. In practice it is more reassuring, because everyone knows precisely who is holding it, and he is supervised.

Second, those banks are under no pressure. They are among the most profitable in the world, and a bank earning like that absorbs credit losses out of current earnings rather than out of capital, which means it isn't forced to sell anything on a Tuesday morning in order to survive. There's also a difference in the timing of supervision that is easy to miss: in 2007 the American regulator arrived after the fall, whereas here the Bank of Israel has already required the banks to set aside additional capital against leveraged land financing, and capped subsidized balloon loans at 10% of the mortgages taken out each month. You can argue about whether it's enough, but it happened before the event rather than after it.

Third, there is no daily pricing here, and that point sounds technical and changes everything. A security traded on an exchange gets a new price every morning, and that price is what forces somebody to act — a fund that has to meet a capital ratio sells at the market price, whatever it happens to be. A finished apartment standing empty at a developer doesn't get a new price every morning; it simply stands there, and that standing shows up in no report as a loss. That is precisely why the adjustment in this market happens through quantity rather than through price, and it explains how a nearly frozen market and a nearly flat price index can coexist in the same month without contradicting each other.

The one condition that does hold is that the bonds of the real estate companies trade on the exchange, get priced daily, and sit inside the pension savings of a great many of you. That is the only fast channel there is here, and two real pressures are building beside it. The Bank of Israel reports that in 44% of the banking system's exposure to projects, the pace of construction is running ahead of the pace of sales, meaning they are building faster than they are selling and financing the gap with debt that only grows. And the 20/80 deals, as we said, carry a built-in expiry date that is starting to land right now.

So in my estimation, this will be a long, slow leak and not a bang. The risk here is visible, concentrated in supervised and profitable institutions, and nobody is forced to sell. And I want to say this plainly, because I'm not sure it counts as good news: a bang at least clears the market and brings prices back to where people can buy, whereas a long leak stretches that out over a decade and leaves an entire generation standing on the sidelines, waiting. Japan did exactly this for twenty years, and nobody there remembers one dramatic day.

What could turn it into a bang is one specific combination, and it's worth keeping an eye on: a large developer financed with traded bonds stops meeting its debt payments, at precisely the time when the banks are already required to hold extra capital against the sector and are therefore less willing to extend credit. That is what turns visible risk into a forced sale, and a forced sale is the difference between a leak and a bang. In the meantime, the next time you see a headline saying home prices have stopped falling, it's worth remembering that the index that measured it never saw the discount in the first place — which makes it the last one that will tell you when this is actually over.

We shall see.

See you in next week's letter, or during the week — if I can't help myself until then...

The July report itself, published the same day, strengthened the direction even further. The U.S. economy didn't add jobs in July at all, it lost 23,000. Economists had expected a gain of roughly 83,000, so the gap between what was expected and what happened is about a hundred thousand jobs in a single month. It's the first monthly decline in some time, and it comes after an average of 34,000 new jobs a month over the preceding 12 months. A good part of it came from the public sector, which shed 53,000 jobs in July. The official unemployment rate, despite all of this, actually fell from 4.2% to 4.1%. We already took that strange mechanism apart here in Letter #16: the number goes down even when people give up and stop looking for work, because the moment they stop looking they are erased from the count. The participation rate, the share of adults who are either working or looking for work, fell this month to 61.4%, the lowest in more than five years. The same story exactly, only deeper.

So why does it actually work this way, with revisions running backwards every time? Well, the U.S. jobs report isn't counted, it's sampled. Every month the Bureau contacts about 120,000 businesses and government offices and asks how many people they employed that month. Some answer on time, some answer late, and some don't answer at all. The report comes out on a date fixed in advance, whether the answers arrived or not, so the first release rests only on those who managed to reply. Over the next two months the answers keep trickling in, the sample fills out, and the number is updated twice before it's locked. Every employment number you see in a headline on publication day is an early estimate: the best one available at that moment, but not final, and everyone in the field knows it.

The process will be familiar to you from somewhere else entirely. On election night, the networks call states hours before the counting is anywhere close to done, working off partial returns and exit polls, and every so often a call has to be walked back as the mail ballots and the late precincts come in. The official canvass takes days, sometimes weeks, and only when each state certifies do we know what actually happened. Nobody feels cheated when the numbers move overnight, because everyone understands that what they watched at 11 p.m. was an estimate. The jobs report works exactly the same way, except that nobody goes back on air to tell the viewers the number they were shown two months ago was 66,000 too high.

There's another layer here, and it explains why the revisions of recent months keep running in the same direction. A business that is growing and hiring is usually an organized business, with somebody to fill in the survey on time. A business that is shrinking, laying people off or closing is exactly the one that doesn't rush to fill in forms, and if it has closed it never will. So when the economy loses speed, the answers that arrive late are the bad ones, and the first release runs systematically too optimistic. This is not malice and not manipulation, it's a property of the method. But its meaning is uncomfortable: exactly at turning points, when it matters most to know where the economy is heading, the first number is the least reliable one you'll get.

This is where it stops being a statistical curiosity and becomes money. Nine days before this report came out, on July 29, the rate-setting committee of the Federal Reserve, the central bank of the U.S., left interest rates at 3.5% to 3.75%. The vote was nine to three, and the three dissenters didn't want to cut rates, they wanted to raise them. The official statement said economic activity is expanding at a solid pace. Nine days later it emerged that this solid pace had been measured on a May and a June that were, together, 103,000 jobs smaller than what the committee was shown when it voted. I'm not claiming they would have decided differently. I am saying the people holding the interest rate all of us pay decided on the basis of numbers that changed nine days later, and that explains a good deal of the market's nervousness around every release.

The market's reaction was immediate and strong. The index of the 500 largest U.S. companies rose about 3.6% over the week and closed Friday at an all-time high, the technology-heavy Nasdaq rose about 5%, and it was the best week in the U.S. markets since April. In Letter #16 we explained why the market rises precisely on bad news, and the principle hasn't changed: in the short term the market doesn't react to the economy itself, it reacts to what it believes the Fed will do because of the economy. What did change is the direction. Back then investors priced in a rate cut moving closer; this time they priced in a rate hike moving further away. The market still assumes there will be a hike this year, only now it has been pushed out to December. Alongside that, the yield on the 10-year U.S. government bond, the annual interest the government pays whoever lends it money for ten years, fell to 4.64%. That's part of the same story.

One number in the report was clean of all these revisions, and in my view it's the most troubling of them: wages. Average hourly earnings in the U.S. private sector rose by just 2 cents in July, to $37.62, and their annual rate of increase, meaning how much wages rose over the past 12 months, fell to 3.2%. That's the lowest since May 2021. An employer who struggles to fill positions raises pay; an employer who knows someone will replace tomorrow whoever quits today does not. Wage growth losing momentum is usually the most honest evidence there is about the state of the labor market, not least because there's nothing in it to revise two months later.

What does this mean for your pocket?

The first lesson is a reading habit, and it's worth real money. The next time you see a headline with an economic number in it, ask first whether it's a first release or a figure that has already been revised. A first release is a good estimate, not a fact, and anyone moving money on the difference between 57,000 and 83,000 is moving it on noise. You can simply wait for the corrected version, and at the very least know that it's on the way.

The second point concerns Israelis no less than Americans. Most Israelis hold a substantial slice of the U.S. market without ever having bought a single American stock, through their pension fund, their study fund, or a fund that tracks the index of the 500 largest U.S. companies. This week, in which that index closed at a record, went into your savings as well, and not because the American economy got stronger this week, but because the fear of a rate hike was pushed off by a few months. That's a difference worth remembering on the day this assumption flips, because then it will work in precisely the opposite direction.

Anyone waiting for a rate cut in the U.S., whether because of a dollar loan or because of a portfolio, would do well to stay clear-eyed. The labor market there really is weakening, but Kevin Warsh, the Fed chair, said explicitly that his priority is bringing inflation down to target rather than supporting employment, and we wrote about that in both Letter #16 and Letter #17. To understand where rates are heading, you have to see that two forces are pulling them in exactly opposite directions. On one side there's a weakening labor market: fewer people working, pay rising more slowly, and anyone worried about their job spending less. That's a force pushing the Fed to cut rates, so money gets cheap and people and companies go back to spending. On the other side there's inflation still above target: prices in the shops are still climbing too fast, and that's a force pushing him in exactly the opposite direction, to keep rates high and maybe even raise them, so people buy less and prices settle down. The Fed can't satisfy both forces at once, and it has to choose which one worries it more. Warsh has already told us plainly what his answer is, so as long as prices don't cool, he probably won't be in a hurry to change anything, and a market that is mainly pricing the odds of a hike treats no change at all as good news.

Before we part, a word about a stock we left open here two weeks ago. In Letter #18 we took apart the collapse of IBM, which lost a quarter of its value in a single trading day. Since then the stock has been crawling back up: from its post-earnings low of about $211 it reached about $237 at Friday's close, roughly 12% higher in three weeks. In my view, that drop was an overreaction. The market today is nervous, and it doesn't really know how to price the question of how much artificial intelligence will eat into a company's profitability five years from now, so when bad news arrives it would rather sell now and think later. That is exactly the mechanism we took apart in Letter #19: uncertainty about future profits pulls down the multiple the market is willing to pay and widens the swings in the short term. So nothing dramatic was needed for the stock to start coming back, no new announcement and no good quarter. All that was needed was for the nervousness to ease a little, and the stock began crawling its way back up. Let's keep proportion: on the eve of the collapse it traded around $290, so even after this crawl it is still about 18% lower. The next report, in October, will tell us whether the crawl is justified.

We shall see.

See you in next week's letter, or during the week — if I can't help myself until then...

This week's letter is a bit more theoretical, and a bit "deeper" relative to everyday concepts, but I'm here to stop and explain the terms so that we're all aligned as we move further into the piece.

So let's start with a short explanation of the term multiples. If I own a business that earns $10 every month, and someone is willing to buy the business from me for $100, he is effectively paying today at a price of 10 years of profitability ($10 of profit a year, times 10 years forward, equals $100). This buyer expects that after holding the business for 10 years, he'll have made his investment back, and from there on it's all profit. That expectation rests on the assumption that this business will know how to preserve its profitability over many years.

In the same way, let's talk now about a case where the buyer is willing to pay $500 for my business. That is, 50 years of profit. Is he really building a business plan that lets him start earning 50 years from now? Probably not. What this buyer is actually saying (through the price he's willing to pay) is that he believes that after the purchase, he'll manage to bring the business to far higher profitability, and let's set aside for a moment the ways of doing that. So he is in fact looking not at the current profitability of the business ($10), but, for example, at profitability of $50 a year — after the moves he expects to pull off. And here we're back at a multiple of 10 ($50 of expected annual profit, times 10 years).

What am I really saying? That there are 2 types of multiple deals. The first type buys an existing state of affairs, meaning it assumes stable profitability over the years, and is therefore willing to price at relatively low multiples (around 10), and the second type sees growth and is willing to pay a "future multiple" for it, meaning to buy today at a much higher multiple that is expected to come down as the company grows, bringing it to a more reasonable multiple relative to the price that was paid.

The truth is there's one more type, a third one, and that's the multiple of a shrinking company — deals that assume profitability will decline over the years, and there the logic obviously works exactly in reverse: the multiple paid will be very low (single digit, sometimes even close to 1), out of an understanding that the profitability won't survive over time and so the buyer needs to earn the purchase price back as close as possible to the deal itself. But we'll talk about that less today, because the market by its nature houses fewer companies like that (they usually disappear from it over time).

How does the multiples discussion connect to AI? Glad you asked. Through the uncertainty component. The greater my certainty, as a buyer, about the future profitability of companies, the more I can "afford" to pay a higher multiple. Meaning, to build on future profits. In the opposite direction, if I'm not sure that what worked today will also work tomorrow, I'll be willing to pay a lower multiple, because I'm not "locked in" on how much this company will keep growing and generating profits for me.

If I look today at the reaction of entire sectors — mainly technology and software, but not only — that's exactly what I see. Companies that keep making money and sometimes even grow aggressively are falling tens of percent in their share price. Monday.com is an excellent example. Its stock lost a little more than half its value in the first half of 2026, while revenue in the first quarter grew 24% against the same quarter a year earlier, and its operating profit doubled. At the end of July it announced an efficiency plan and a cut of about 20% of its workforce, the stock fell another 8% that day, and in that very same announcement the company reaffirmed growth guidance of 19% to 20% for the full year. Nothing in the business itself broke. What broke is investors' willingness to pay for its future. This is essentially investors' way of saying: we have no idea whether this business won't be replaced by AI, we have no confidence in its level of profitability, and therefore we won't be willing to pay high earnings multiples, even though the profitability is already here, and it has grown (past tense) quarter after quarter until now.

In my estimation, a few years out from today, there won't be a business field that AI doesn't work its way into and change, and so the multiples event is in fact a market-wide event, not something unique to technology stocks. What we've seen there in recent months is likely to seep across the whole market. And this thing has very far-reaching implications:

The market is priced by investors through a number of parameters, and the central, longest-term one is the earnings multiple. Many times, when investment managers debate whether the market is cheap or expensive, you'll hear the line: "the long-term multiple of the S&P is 19, similar to the current market, and therefore stocks aren't expensive." When the current multiple rises significantly above the long-term multiple, that's a strong signal to investors to reduce exposure, and vice versa. I don't know many investment managers who would add to a market with an average multiple of 30, and I also don't know managers who wouldn't buy deep into a market at a multiple of 10.

That figure, in my view, is going to lose its credibility, and in fact the market's representative multiple, according to my thesis, is going to come down, for the reasons I listed earlier. If that's the case, an (average) stock at a multiple of 20 may trade in the future at a multiple of 12. So first of all, that pulls the ground out from under the benchmark for what a stock is worth — are stocks cheap or expensive? — but more than that, a stock that traded at a multiple of 20 and moves to trading at a multiple of 12 is in fact worth 40% less in price! Going back to that same example, of the business earning $10 a year, if instead of a multiple of 20 (that is, $200), investors are willing to pay a multiple of 12 only (that is, $120 in value terms), we're talking about a stock that falls from $200 to $120.

Which brings me to the second point I wanted to talk about — standard deviation. In the market, we use this term for the short-term movement of a stock. In simple language, how "hard" it rises or falls in a given period. Standard deviation is measured against the average move, meaning: if on an average day a stock (say Apple) moves 1% (up or down), then a move of 8% in a day is a standard deviation very far from the average. If the stock moves 8% on an average day, then a move like that is normal for it (which of course doesn't exist in this market).

My thesis says that investors are trying as hard as they can, and not necessarily successfully, to carry out the "multiple adjustment" as fast as possible, and therefore — given a piece of information released to the market (hello there, IBM stock) they simply "cut" the stock, sometimes over-aggressively, so as not to be stuck holding a stock that's about to go through a multiple adjustment (meaning, that its earnings multiple will come down as a result of uncertainty about future profits). We saw (and I wrote a letter about it) IBM falling 25% in a day, not because of bad reports (it kept making money and even grew its profits), but simply because of a fear about a change in the structure of its future sales, driven by customers shifting money to other spending, the kind suited to the AI world.

In that very drop, investors effectively "corrected" IBM's multiple from 22 to 16, and turned it into a "cheaper" stock, on the claim that you can build less on future profitability, and in such a case, as I explained, the multiple contracts. That strong drop was what we call in the market a high standard deviation. I've seen this phenomenon in recent weeks at Apple, Amazon, Nvidia and other stocks as well — not necessarily always downward, because the market is also trying to guess the "winners" and rewards them with pinpoint aggressiveness too, but in general, as long as this situation continues, in the short term I expect these swings to continue and even intensify, and in the long term — as astonishing as it sounds — the market may fall by significant percentages, if a multiple adjustment does indeed take place.

What can, or needs to, happen for the market not to fall despite the "multiple adjustment"? If on average a traded company grows its profits significantly, then the multiple adjustment gets offset, and the stock doesn't necessarily fall, or may even rise. An example — my business, the famous one from the start of the piece, earns $10 a year and trades at a multiple of 20 — that is, it costs $200. The multiple adjustment (say 40% down) brings it to a multiple of 12 and a value of $120. But if I manage, using AI, to double the annual profit and bring it to $20, then at a multiple of 12 it will already be worth $240. Meaning, despite the drop in the multiple, the stock rises from $200 to $240 (a gain of 20%), because of the improvement in profitability.

And if you ask me — investors in the market are building on exactly that today. Otherwise, they're facing significant losses as future multiples contract.

The truth is I have plenty more thoughts and extensions to this thesis, and I'll be glad to share them in future letters. Stay tuned, we'll get there yet.

We shall see.

See you in next week's letter, or during the week — if I can't hold myself back until then...

Naturally I was on alert, and I went looking for the data in real time. I started at the beginning — what are we even talking about? The company announced a significant drop in sales (of a particular product). Okay, got it. What's the effect on the company's profit? In terms of earnings per share (that is, how much the company earned, divided by the number of its outstanding shares) they announced they'd earn $2.93 per share in the second quarter. The number on its own is meaningless, unless you compare it to the company's profit in the equivalent quarter (in this case, the second quarter of 2025). And how much did the company earn then? $3 per share. In other words, roughly the same.

It's important to understand — that same profitability justified a share price that had traded, right up to that day, at about $300 a share. So for that you lose $80 a share?

Moving on. Maybe the company announced it won't earn more in the future. I checked that too. The company said it expects growth of 5% for the year ahead (updated to 4-5% when the official reports came out). Well, do you drop 25% instantly over that? That's not it either. The angle is apparently a different one, and it's also broader than the company itself. Keep in mind that ever since AI models entered the workforce en masse, investors are extra-sensitive, afraid that every company is at risk of extinction, that every product will be replaced by internal code written at minimal cost. That's probably the story here, and IBM "took a bullet," as they say on the street, for a fear about a great many old-economy (supposedly) technology companies. Let's get into what IBM's CEO said in the press release:

Large deals simply didn't close in the final weeks of the quarter, because customers took the money earmarked for software and consulting and redirected it to hardware — servers, storage and memory — to grab AI infrastructure before prices rise. Stop and think about it for a second: that same AI wave everyone is excited about, the one that's supposed to be IBM's big promise, is exactly what swallowed its money right now. The wave that is the future is also the problem of the present. This is no longer one company's excuse, it's a macro signal: in the short term, the rush to AI hardware is draining budgets out of the rest of the technology world.

Underneath all of this sits the real question, and we already got close to it in the Nvidia letter (#15): is IBM a growth stock or a value stock? The difference is simple. A growth stock is a company whose business grows fast on its own, and that is what justifies paying a high price for it. A value stock is a stable, profitable company that hands its profit to shareholders but doesn't really grow. IBM sells the market a growth-stock story, "a software and AI company." But look at the number: its software grew 5% in the quarter, which sounds nice, until you discover that almost all of that growth came from a company IBM bought recently for about $11 billion. Strip out the acquisition and look only at the existing business, and software growth was close to zero. That's the difference between organic growth and bought growth: organic growth is when the business you already own gets bigger; bought growth is when you buy another business and glue its revenue onto yours. On the table the revenue looks identical, but the two are not the same thing. One says the engine is strong, the other says you bought a new engine.

Alongside this, and this is where much of the dream lives, IBM keeps investing in quantum computing — a new kind of computer that promises to solve problems no ordinary computer can (we covered this in Letter #11). Just this week, on July 23, it announced the purchase of a quantum research lab called HRL from Boeing and General Motors. It sounds big, and in the narrative it really is. But in actual money it's almost nothing: all of IBM's quantum orders from 2017 through 2024 add up to roughly $1 billion, against revenue of more than $60 billion a year. Anyone buying IBM for the quantum is buying a lottery ticket, not a cash flow. Quantum is a nice option for the next decade, not an engine that pays this year.

So let's lay it out. Here is the picture in the most honest form I can give it: first the pros, then the cons, then one opinion of mine in a single sentence.

IBM's advantages, by the facts

1. A real cash machine. IBM generated about $2.5 billion of "free cash flow" this quarter — the money left in hand after the company paid for everything it needs to operate and develop. That's spare cash, and it's what makes the dividend possible.

2. A steady dividend. The company kept its dividend — the slice of profit returned to shareholders in cash every quarter — even in a bad quarter. A company that keeps paying its shareholders signals confidence in its cash flow.

3. A predictable revenue base. About 80% of IBM's software revenue is "recurring," meaning it comes from contracts and subscriptions that renew on their own. That's revenue that doesn't vanish from one quarter to the next, and it's what keeps the company steady even in a bad week.

4. The AI demand is real. About half of the new deals signed this quarter included an AI component, and the order book in that area is large and still growing. The demand exists, even if the quarter itself was weak.

5. The stumble looks like timing. According to management, roughly a third of the large deals that slipped had already closed in the first weeks of the current quarter. If that holds, the money didn't run away, it was just late.

The disadvantages, in the same spirit

1. Almost all the growth is bought. As we saw, nearly all the software growth came from an acquisition, not from the existing business. A company that has to buy its growth isn't really a growth company.

2. Guidance was cut. IBM itself lowered expectations from "above 5%" to 4-5%, a sign that management too sees the road ahead as less good than it had promised.

3. The growth engine depends on acquisitions. To grow above the market, IBM has to buy one company after another, and that costs money and piles on debt — about $62 billion as of today.

4. Quantum doesn't pay this year. The investment is enormous in the headlines but tiny in actual money; anyone buying for the quantum is paying for a dream, not a near-term profit. This isn't really a disadvantage, it's simply about setting expectations to reality.

5. Management's credibility cracked. A sudden profit warning, after years of promises that IBM is already "a software and AI company," damages trust, and trust is hard to win back.

And EcoMan's opinion, in one sentence: IBM today is a stable value company with a nice dividend dressed up as a growth stock, and whoever buys it for the cash and the dividend may well be satisfied. The quantum is a tremendous value option for the coming years, and at the company's new price, you get it practically for free. And remember — growth achieved through acquisitions is still growth. In the end, money is money, and if IBM knows how to earn it through growth by acquisition, something that sits in its strategic plans going forward, that's good for shareholders.

What does this mean for you? Most of you hold IBM without knowing it. It sits in the Dow index and in the index of the 500 largest U.S. companies, so any fund that tracks those indexes holds a slice of it, and so does your portfolio. Anyone looking for the old world of technology, with an option on the new world of AI and quantum, can find an interesting opportunity here — not a startup, definitely a strategy challenge, but an attractive valuation in the middle of all the current AI frenzy.

The question that will follow this stock from here is whether the deals that slipped really do come back next quarter, as management promises, or whether they're simply gone. The next report, in October, will give the answer. If the deals return, the "stumble" turns out to be timing. If they don't, we'll find the problem ran deeper.

We shall see.

See you in next week's letter, or during the week — if I can't hold myself back until then...

On Tuesday the U.S. released its Consumer Price Index — the gauge that measures how fast prices are rising in the stores — and it came in better than feared: annual inflation, meaning the rise in prices over the past 12 months, cooled from 4.2% to 3.5%. And yet, the market still bets that the U.S. central bank's next move will actually be to raise rates further, perhaps as soon as September. That very same week, the Bank of Israel did the exact opposite, cutting its rate to the lowest level since 2022.

How can the same tool — the interest rate — be pushed in opposite directions in two economies, in the very same week? To answer, let's stop for a moment on what an interest rate actually does.

A central bank essentially has one main lever. When the economy runs too hot and prices climb fast, it raises the rate: loans get more expensive, people and companies borrow and spend less, and the pressure on prices cools. When the economy loses speed and weakens, it does the reverse — cutting the rate so money is cheap, to encourage people to buy and companies to invest. In that sense, an interest rate is like medical treatment: the exact same medicine cabinet, but what you prescribe depends entirely on the diagnosis. A patient with a high fever needs something to cool them down; a healthy, calm patient can actually go out and exercise. Our two countries are those two patients.

The U.S. is the patient whose fever won't quite break. True, June was a cooler month, mostly because energy prices tumbled, but inflation there has run above the 2%-a-year target for five straight years now. Part of the current rise comes from tariffs — taxes the U.S. placed on imported goods, which ultimately make them more expensive for the consumer — and part comes from service prices that, once they went up, are in no hurry to come back down, and keep creeping quietly higher. Above all sits a clear stance: the new Fed chair, Kevin Warsh, said plainly that his priority is bringing inflation down to target, even at the cost of a weakening job market. We talked about that in the previous letter. So the American finger stays close to the "raise" button.

Israel is the other patient, the one who feels fine. Inflation here stands at just 1.6% over the past 12 months, the lowest in five years, sitting comfortably inside the target of one to three percent a year. Prices of fresh fruit and vegetables fell, so did clothing, and even transportation. With prices this calm, the Bank of Israel can afford to cut rates to support growth, instead of fighting a rise in prices it doesn't have. There's another quiet reason we've met before: the strong shekel itself helps. A strong shekel makes everything Israel imports cheaper, which pushes inflation down, and that is exactly what gives the Bank of Israel the room to cut.

So this week we got two friendly economies, the same year, opposite prescriptions — simply because they are sick with opposite illnesses. That gap touches directly on the thing many of us watch: the dollar-shekel rate. When dollars pay more interest than shekels, the world's big money prefers to sit in dollars, and that supports the dollar against the shekel, at least in the short term. Indeed, the shekel, after touching a 33-year high against the dollar, has already weakened against it by about 3%.

What does it mean for your pocket?

For anyone in Israel holding a mortgage tied to the rate, the Bank of Israel's cut is real, tangible good news. The monthly payment gets a little lighter, and that's real money staying in the account at the end of the month. For anyone keeping their money in a shekel deposit, the trend runs the other way: the relatively generous interest you got on that deposit last year is shrinking, and this environment gently pushes some of that money to look for other places to go.

And here comes the eternal question, the one we get asked every time the rate moves: so maybe now, when the gap leans toward the dollar, is finally the time to buy dollars? We wrote a whole letter about this once, and the answer today hasn't changed. The long-term forces that strengthen the shekel — demographics, gas, and high-tech — didn't budge this week, not even a little. A rate gap is a temporary crosswind, not a change in the story. The right question to ask is always the same one: did the story change, or did only the number move? And this point touches even those who have never bought a single American stock, because most Israelis hold a sizable slice of the U.S. market through their pension fund, their study fund, or a fund that tracks the 500 largest U.S. companies. A U.S. central bank leaning to raise rates is a headwind for American stocks, so the decision made in Washington quietly moves Israeli savings too.

Before we part, we can't ignore one event from this week, simply because it is too big. Shares of IBM, one of the oldest technology companies in the world, dropped 25% in a single day. It was the worst day in the stock's history — worse even than the famous crash of 1987 — and in one day about $67 billion was wiped off it. What happened there? The company pre-announced a weak quarter, explaining that its customers had shifted their budgets: instead of buying software and services, they rushed to buy hardware, servers and memory, to build AI data centers. A few large deals simply slipped. And here hides the $67 billion question: is this a temporary shift of budget that will find its way back, or a real crack at the heart of the company's story? IBM's full report comes out on the 22nd, and next week we'll sit down and take it apart, slowly and calmly: an opportunity, or a chance to run. We've got something to come back for.

We shall see.

See you in next week's letter — or sometime during the week, if I can't hold myself back until then...

So here's the contradiction you can't ignore: hiring was weak, the trend is cooling, and yet unemployment actually fell. How do those two things live in the same breath? The answer starts in a place most people have never stopped to think about, in the simple question of what the unemployment number even measures.

Picture a long line outside the unemployment office. In the city there are three kinds of people: those who already have a job, those standing in line looking for work, and those who gave up, stepped out of line, and went home. The official unemployment number, the one you hear on the news, looks only at the line. It takes the people in line without a job and divides them by everyone still "in the game," meaning the employed and the line-standers together. Here's the trick: whoever got up and went home simply vanishes from the math. They aren't counted as unemployed, because "unemployed" is defined as someone actively looking for work. The moment they stop looking, they disappear from the equation as if they were never there.

Now watch what that does. If one day a hundred people give up and leave the line, the line gets shorter. A shorter line looks like good news, as if the problem shrank. But not one of those hundred found a job. They just went home. The unemployment number dropped, not because things improved, but because people quit.

That is exactly what happened in June. The US labor market didn't grow, it shrank by 720,000 people. Almost three-quarters of a million left the workforce, meaning they stopped working and stopped looking for work all at once. The figure that captures this is called the labor force participation rate, and it's simply the share of adults who are working or looking for work. This month it fell to 61.5%, the lowest since March 2021. That's the real reason unemployment "fell": not because the line moved forward, but because a big part of it got up and left.

We can now return to another number, one I mentioned once before in Letter #08. Besides the official unemployment rate, there is a broader measure of unemployment, known in the jargon as U-6. If the official rate counts only those who have no job and are actively looking, U-6 tries to capture the people who fall between the chairs too: those working part-time only because they couldn't find full-time work, and those who have already given up the search but would gladly work if there were a job. It's a number that tries to show how many people are truly unsettled in the labor market, not just the official, narrow edge of it. This time even U-6 fell, to 7.9%. So maybe everything's fine after all? Not at all. Both numbers, the official one and the broad one, share the exact same blind spot: they only see who's still inside the labor market, working or at least looking. Whoever got up, gave up, and went home isn't counted by either. The only gauge that managed to capture what really happened this week is the participation rate, that same share of adults working or looking, and it sank to its lowest level in more than four years. It says exactly what the other two missed: people didn't find jobs, they simply stopped looking.

After a report that weak, weak on almost every measure, logic says the stock market should fall. In reality the exact opposite happened: the Dow and the Nasdaq, the two main US stock indices, actually rose that same day. It sounds illogical, until you understand what investors are really looking at. They weren't reacting to the state of the workers, they were reacting to what this report does to the Federal Reserve.

The Federal Reserve, or "the Fed" for short, is the central bank of the United States, the body that sets interest rates in the economy. That's the same rate that affects almost everything, from your monthly mortgage payment to whether investing in stocks is worthwhile. The Fed has one main tool: when the economy is running too hot and prices start climbing too fast, it raises rates to cool it down; when the economy weakens and loses speed, it lowers rates to encourage it. Now we can connect the dots. A weak jobs report is a sign the economy is cooling, and a cooling economy takes the pressure off the Fed to raise rates, and may even push it to cut them sooner than planned. But why does all of this move stocks in particular? For a few reasons that add up. First, when rates fall, loans get cheaper, and companies can raise money on the cheap, expand, and earn more. Second, the safe alternative to stocks, like a bank deposit or a government bond, becomes less rewarding when rates are low, so some of the big money flows out of the safe channels and into the stock market, lifting it. So in the investor's eyes, a bad jobs report is actually good news: it brings closer the rate cut the market has been longing for.

This is exactly the principle that repeats in the market again and again: in the short term, the market doesn't react to the economy itself, it reacts to what it thinks the Fed will do because of the economy. Those are two completely different things, and whoever confuses them will be surprised every time by why the market rises on a day of bad news, and falls on a day that looks good on its face.

What does this mean for your pocket?

So what does all of this mean for your pocket? First, and it doesn't matter whether you're reading this from New York or Tel Aviv, the first lesson is to read an economic headline carefully. The next time you hear "unemployment fell," don't stop at the headline. Ask why it fell, because as we saw, the very same number can be published both when things are genuinely improving and when people simply give up and stop looking, two completely opposite situations. Whoever reads only the headline may get exactly the reverse of reality, and feel secure precisely when caution is called for.

And this point touches Israelis too, not only Americans, and far more people than it seems. Even an Israeli who has never bought a single American stock usually holds a sizable slice of the US market, through a pension fund, an advanced-study fund, or a fund tracking the index of the 500 largest US companies. What happens to US interest rates ends up moving Israeli savings too, and the shekel-dollar exchange rate as well. This week you saw that mechanism live: a bad economic report lifted the market, not because the economy is strong but because investors priced in lower rates ahead. The one mistake really worth avoiding is to get confused and think stocks rose because the economy is healthy. They rose thanks to the Fed, not thanks to the job market, and that's a difference that can cost money for anyone who misses it and bets on the economy instead of on the rate.

One component remains that will decide where all of this goes, and it sits with the man running the Fed. The US central bank has, in effect, two goals that pull in opposite directions: on one hand to keep inflation low and stable, meaning prices that don't climb too fast, and on the other hand to keep employment high, meaning people working. In normal times you can balance the two, but sometimes they collide, and that's exactly the situation now. The new Fed chair, Kevin Warsh, said plainly this week that his priority is bringing inflation down to the 2% target he's aiming for, and not employment. The implication is troubling: as long as inflation is high, Warsh can afford to ignore a job market that's quietly weakening, and not rush to cut rates to help it. So the next important number to wait for isn't another jobs report, it's the consumer price index, the measure that tracks the pace of price rises in the stores. If it comes down, the Fed's hand is freed and it can finally start paying attention to the widening cracks in the labor market. If it stays high, Warsh will keep looking in just one direction, and the job market will have to fend for itself.

We shall see.

See you in next week's letter, or sometime during the week, if I can't hold back until then...

And the whole story starts right there, in that little bit of confusion. Because "an expensive company" and "an expensive stock" are not the same thing, and most people have never stopped to think about the difference. This week we're going to stop on it, because once you understand it, you can look at any stock in the world and decide for yourself whether it's expensive or cheap. Not by feel. With a tool.

First, what is "market value," or market cap? It's simply the size of the company — what the whole thing is worth if you bought all of it. Nvidia is enormous, the most valuable on earth, and deservedly so: it sells the chips that the entire artificial intelligence revolution runs on. If you remember the letter about the AI gold rush (Letter #07), we talked there about the people who sold the picks and shovels to the gold diggers instead of digging themselves. Well, Nvidia is the biggest seller of picks and shovels the world has ever seen.

But here's the first thing you have to absorb: the size of the company tells you nothing about whether the stock is expensive. Those are two completely separate questions. And to answer the second one, professionals have one simple tool they look at before anything else. It's called the price-to-earnings ratio.

Let's explain it without a single piece of jargon. Imagine you're buying a hot dog stand. The stand makes 100,000 dollars a year, clean. The owner wants 3,000,000 dollars for it. How many years of profit are you paying to buy it? Thirty. You're putting thirty years of profit on the table up front. That's the price-to-earnings ratio — how many years of current profit you pay for the business. This stand trades at a multiple of 30.

Now imagine that further down the street there's a second stand, nearly identical, that also makes 100,000 a year. But they're only asking 1,000,000 dollars for it. Ten years of profit. The second stand is far cheaper, right? Same profit, a third of the price. And that's exactly the point: both stands have a "for sale" sign, but one is three times as expensive as the other — not by the sticker price, but by what you actually get for your money. The sticker alone tells you nothing. What tells you something is the ratio between the price and the profit.

Back to Nvidia. Its current multiple is about 30, exactly like the expensive hot dog stand. Thirty years of profit. At first glance, expensive. So what am I talking about when I call it cheap?

This is where the most important distinction in this letter comes in, and it's the difference between the current multiple and the forward multiple. The multiple of 30 is calculated on Nvidia's profit over the past year. But Nvidia is not standing still. Its profit is growing at a pace that's hard to grasp: its revenue jumped about 65 percent this year, and in the last quarter alone sales rose roughly 85 percent compared with a year earlier. When profit grows that fast, next year's profit is expected to be far bigger than last year's. And when you divide the same price by the bigger, forward-looking profit, the multiple drops. Nvidia's forward multiple is about 20.

Go back for a second to that expensive hot dog stand, the one at a multiple of 30. Suppose you discover that its profit doubles every year, because a new tech campus just opened next door and the lines keep getting longer. In two years it'll already be making several hundred thousand a year, and the price they asked, three million, suddenly doesn't look like thirty years of profit but more like four or five. The "expensive" stand turned out to be a pretty good deal, not bad at all. That's exactly what the forward multiple is trying to capture: not how much you earned yesterday, but how much you're about to earn.

And now for the last piece of the puzzle, without which you can't tell whether any number is expensive or cheap: comparison to similar companies — what's called the industry, or the sector. Is a multiple of 20 expensive or cheap? There's no answer to that in a vacuum. You need something to hold it against. So here it is: the rest of the world's chipmakers trade at a median forward multiple of about 38. Nvidia, at 20, trades roughly 40 percent below its own sector. And even within the club of tech giants, the "Magnificent Seven" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla), it's one of the cheapest there is.

And here the paradox finally resolves. Nvidia is both the most expensive company in the world — by size — and one of the cheapest stocks in the market — by its forward multiple against its sector. Both facts are true at the same time, because they aren't measuring the same thing at all. One measures how big the company is. The other measures how much you pay for every dollar of profit it will produce.

But I wouldn't be EcoMan if I stopped here and let you feel clever. Because there's a catch, and it matters. The low forward multiple is not a gift and not a free lunch — it's a bet the market has already made, the bet that Nvidia's profit really will explode upward the way everyone expects. Notice what happened here: the risk didn't disappear, it just moved. It shifted from the price to the profit. You're no longer at risk of having paid an inflated price; you're at risk that the future profit won't show up.

Let's be precise for a second, because this is where it's easy to get confused. Nvidia's current multiple, 30, isn't really a cheap multiple, even if it's below its sector. What's actually cheap is the forward multiple, 20. But notice what that 20 is: it rests on profit that hasn't happened yet, profit Nvidia is expected to produce but hasn't produced. In other words, the buyer is getting a cheap multiple — but cheap on the forecast. And that's exactly the trick: it's a cheap that comes with an asterisk. It's cheap on condition — on the condition that Nvidia really does keep growing the way everyone expects. If the growth shows up, it'll turn out you paid a little for a lot. If it doesn't, that pretty 20 evaporates, and the price you're paying today will suddenly look very expensive.

What does this mean for your pocket?

If you own a fund that tracks an index — one that follows the S&P 500 (the 500 largest companies in America) or the Nasdaq — you already hold a nice slice of Nvidia without ever buying it directly. It's the single heaviest weight in those indexes. What moves in it, moves in your portfolio, whether you noticed or not.

If you've ever looked at a stock's price and said "too expensive," or "cheap, it's only a few dollars" — it's worth knowing that this simply tells you nothing. The price alone won't tell you whether the stock is expensive or cheap. A stock at 1,000 dollars can be cheap, and a stock at five dollars can be very expensive. What decides is the multiple, not the number on the screen.

If you're comparing two stocks to decide between them — don't compare prices, compare multiples. Preferably the forward one, and preferably against that company's own sector, not the whole market. Apple to apple, not apple to watermelon.

And if you hear on the news that "the stock is historically expensive" or "it's a bubble" — ask immediately: expensive against what? Against yesterday's profit or tomorrow's? Against which companies? Most of the time you'll find that the dramatic headline melts away the moment you put those three questions to it.

So here's the tool, in short, for every time someone tells you a stock is expensive or cheap: first, the multiple, not the price. Second, the forward one, not just the current one. Third, against its sector, not in thin air. Three questions, and you already know more than most of the people talking about the market over dinner.

The real question with Nvidia, then, was never whether the stock is expensive. It's whether the growth will hold. The next quarter, which Nvidia expects to bring in about $91 billion in revenue, will tell us whether the market was right to price the growth in advance. If the numbers arrive, the "most expensive in the world" will keep looking cheap. And if they don't, we'll find out how fast "cheap" turns back into "expensive." That's exactly what we'll be watching.

We shall see.

See you in next week's letter, or sometime during the week, if I can't hold out until then...

Let’s start with what happened. For four weeks running, money has been flowing out of the big Bitcoin funds, the ones that let an ordinary person hold Bitcoin through a regular brokerage account, exactly the way they’d buy a stock. More than five billion dollars was pulled from them this month, the heaviest run of withdrawals in over a year. In the middle of all this came a small report that made a lot of noise: Michael Saylor, the man who built a company worth billions on a single principle, you buy Bitcoin and you never sell, ever, sold. Not much, 32 coins, a negligible drop against everything his company holds. His first sale since 2022.

Here I want to stop, because it’s easy to misread this. Saylor’s sale is not a prophecy. It heralds no end, and he didn’t “see something” that you can’t. It’s simply one more brick coming loose from a wall that’s been built stone by stone for years. The only difference is that when this particular brick slips, because it’s Saylor’s, you hear it louder. The wall started losing bricks long before the high priest himself removed one.

To understand why this wall was shaky from day one, you have to go back to the most basic question, the one everyone skipped on the way up: what is Bitcoin, really. Here I have to say something not everyone will want to hear, that it was never an investment but a bet, and that’s the single most important distinction I’ll make here today.

An investment, in the end, produces something. An apartment produces rent. A company produces profit. A deposit in the bank produces interest. You can sit down, do the math, and estimate what the asset is worth by what it generates, year after year, even if no one wants to buy it from you tomorrow morning. That’s what makes it an investment: there’s an engine in there working for you even while you sleep.

Bitcoin produces nothing. No rent, no profit, no interest. It sits in a digital wallet, and that’s it. The only way you’ll make money from it is if someone else, later, agrees to pay more for it than you did. That is not the definition of an investment. It’s the precise definition of a bet, a wager on who comes after you in line. You’re not holding an asset, you’re holding a guess about the next person.

I don’t want you to get me wrong: I take risks myself, and not small ones. More than once I’ve invested in a company that is really just a dream, a company without enough traditional financial data to justify it, with slim odds of success. But even then, behind the investment there’s always a rationale and a story in which someone is trying to create value, a product, a service, a business that might one day turn a profit. That’s still an investment, even a daring one. Bitcoin isn’t that case. It creates no value, and to be honest it mostly destroys it: every dollar of profit someone takes out of it comes straight from the pocket of whoever buys in after them, and along the way vast amounts of electricity get burned on nothing. That’s exactly where the trouble begins, when something that produces no value dresses up as an investment, and millions of people forget what they’re actually holding in their hands.

Now comes the part I think history will remember longest. Every bubble we’ve known before this one had a human ceiling: it stayed locked inside the room where it was born. The famous tulip mania in Holland reached the handful of people who could trade tulips at all. The internet bubble of the late 1990s reached whoever had a trading account and a financial paper in the morning. Some of them were enormous, far bigger in dollars than Bitcoin is today, but they were bounded, sealed inside their own group.

Bitcoin is different, and social media is the reason. For the first time in history, the speculative mania didn’t stay in the room. It went straight onto everyone’s phone. About one in five American adults now holds some crypto, and more than half a billion people around the world. It arrived wrapped in something no earlier bubble ever had: community, identity, belonging. You didn’t just buy a coin, you became “a Bitcoiner.” You joined something bigger than yourself. This club had one rule, the very principle we started with: never sell. Selling wasn’t a financial decision, it was a fast way to find yourself outside the community. This no longer sounds like a market. It sounds like a cult.

So I’d argue this isn’t the biggest bubble in history if you count it in dollars. It’s something far more interesting: it’s the most widely spread one the world has ever seen. It sits in more ordinary people’s pockets, in more countries, than any mania that came before it.

And here is the strange result. A bubble held by a handful of big players bursts in a single day: everyone runs for the same door at once, and that’s it, it’s over. But a bubble held by millions of believers, each one raised to think that selling means exile from the community, doesn’t burst. It leaks. Slowly. Month after month a little more air escapes, while most of the room keeps insisting nothing has happened. Even now, as the money drains out of the funds, the incorrigible believers keep buying and holding the floor up a little longer. That’s not a sign of strength. It’s exactly why this balloon takes so long to empty: there’s always one more believer ready to catch the next brick before it falls.

So what does this mean for your pocket?

If you hold crypto, understand what you’re holding. I’m not telling you to sell it today; I’m not in the business of telling people what to do with their money. But “never sell” is not a strategy, it’s an ideology, and ideologies are built to keep you sitting in your chair while someone else decides when to get up and leave. You’re allowed to take a profit. You’re allowed to walk out of the casino while you’re ahead. The trap was never the bet itself, it’s the belief that tells you the exit is reserved for the outcasts.

If you’re tempted by the next hot thing, and there will always be a next hot thing, carry one simple question with you, the same one we asked here: what does this thing produce? If the honest answer is “nothing, but someone will pay more for it later,” that’s perfectly fine. Just know that you’ve placed a bet, and treat it like a bet: with money you can afford to lose, not with your pension fund.

Back in Letter #13 we talked about being “rich on paper,” wealth that exists only as long as the last price holds. Bitcoin is the purest version of that idea ever built. With a company, at least there’s a business under the paper. Here, the paper is all there is.

The air will keep leaking out slowly, and I’m not sitting here predicting for you when, or whether at all, the balloon finally goes. I’m not a prophet yet. What I do know is that a new mania will always come along, with a new certainty and a new community that will swear that this time it’s real. The only question worth asking is whether, by then, we’ll finally learn to tell a bet from an investment.

We shall see.

See you in next week’s letter, or sometime during the week, if I can’t help myself until then...

On Friday, June 12, SpaceX went public. “Went public” simply means that a company that until now was private — owned by a founder and a small, closed group of investors — sells small pieces of itself (shares) for the first time to anyone who wants to buy them on the stock market. From that moment on, anyone can own a tiny piece of the company. And for those who don’t fully know it — SpaceX is Elon Musk’s company, the one that led the revolution in space. They built the first rockets that launch, land back on their own legs, and launch again — which made the cost of flying to space drop dramatically. They run Starlink, a network of thousands of satellites that delivers internet from space to every corner of the world, including places a cable never reached. And on the horizon, Musk’s stated goal: to make humanity a species that lives on more than one planet — meaning, to reach Mars. Whatever you think of the man himself, this company does things that a decade ago would have sounded like science fiction.

So how much is it worth? Friday’s IPO was the largest in history. The stock was priced at $135, and on its very first trading day it jumped about 19% and closed near $161. In a single day, the value of the entire company climbed past $2 trillion — in Amazon’s league, one of the most valuable companies in the world. To give you a sense of it: a company that builds rockets is worth today, on paper, almost as much as the giant store we all buy everything from. Right there, among the analysts, some raised an eyebrow and asked whether the company is really worth that sum. We’ll come back to that question in a moment, because it’s exactly the heart of what I want to tell you.

The First Trillionaire in History — Two Small Words

Because the real headline on Friday wasn’t the IPO itself. It was this: Elon Musk became the first person in history worth a trillion dollars. The first trillionaire. And here, friends, I want us to stop on two small words that almost every article quietly slipped into the middle of the sentence: “on paper.” In my view, those are two of the most important — and most ignored — words in the entire world of money.

Musk holds a little more than 40% of SpaceX. When the whole company is worth over $2 trillion, his slice is worth hundreds of billions — and together with his shares in Tesla and his other businesses, that’s what pushed him past the trillion. But what does it actually mean that “he’s worth” a trillion dollars? It doesn’t mean he has a trillion dollars in the bank. It doesn’t mean he can go out tomorrow and buy a small country. It means something far more fragile, and the easiest way to explain it is with the building across the street.

The Building Across the Street

Picture a building with a hundred identical condos. One neighbor sells his condo for $1 million — a record price for the building. What happens now? All the other owners look at each other and say: “Wait, so my condo is worth a million too.” On paper, the whole building is now worth $100 million. Everyone got richer, without doing a thing, and without a single dollar changing hands.

But now picture all hundred owners deciding to sell in the same week. Suddenly the simple truth comes out: there aren’t a hundred buyers willing to pay a million. There are maybe two or three. To sell all the condos you’d have to drop the price, and drop it again, until enough buyers show up. The million dollars was real for one condo, one buyer, one moment. It was never real for the whole building at once.

That is exactly what “rich on paper” means. Musk’s worth is calculated in the simplest way there is: the number of shares he holds, times the price of the last share that traded on the market. And that price was set by a small number of shares that changed hands in that one moment. The instant Musk tries to sell his slice — 40% of the company — he himself becomes the hundred owners all running to sell at once. There aren’t enough buyers in the world to take that much off his hands at the current price. The more he sells, the lower the price drops. The wealth he is “worth” on paper would evaporate in the very act of trying to turn it into cash.

And there’s a second layer here that deepens the paradox. The market prices SpaceX so high partly because of Musk himself — because he’s the one leading it, and because control stays in his hands. If tomorrow he started selling his shares to “cash out” the wealth, he wouldn’t just be flooding the market with stock. He’d be signaling to every investor that the man they bought the dream for is starting to walk away from it. In other words, one of the things holding up that high valuation is precisely the fact that he isn’t selling. The moment he tries to turn the paper into money, he breaks the very thing that created the value in the first place.

So yes, Musk is the first trillionaire in history. But that trillion isn’t a pile of cash in a vault. It’s a number that exists only as long as nobody touches it. It’s the same gap we came back to here not long ago, in the letter about the Friday selloff: there’s a huge distance between the value of a company and the price someone is willing to pay for it at a given moment. Musk’s worth isn’t money he has in hand. It’s the price someone paid for a tiny piece of what he has, multiplied by a lot.

What This Means for Your Pocket

You’re probably not about to take a company public this week, but this mechanism touches you far more than it seems.

If you own a home: you’re living right inside the example. When you hear that “your home went up $50,000 this year” — that’s true on paper, based on another house that sold on your street. It becomes real money only on the day you sell, and only if a buyer actually pays that price. Until then, it’s a nice number, not a balance in your bank account.

If you hold stocks, a mutual fund, or an ETF (a basket of many stocks you can buy as a single share): the value you see on the screen is always “on paper.” It’s completely real when it comes to amounts you can sell easily, whenever you want. It becomes less real precisely on a day of falling markets, when everyone wants to sell at once and there aren’t enough buyers — exactly like the building where all the owners run for the exit at the same moment.

If you just read the news: the next time you hear that “X got $50 billion richer today” or that “someone lost $30 billion” — take it with a grain of salt. In most cases nobody actually made or lost a single dollar. What moved is the price of the last share that traded, multiplied by the amount they hold. It’s not money that changed hands. It’s a number that changed on a screen.

And for all of us: Musk’s story is the extreme, glittering version of something that’s true for every one of us. Most of us are “worth” more on paper than we have in hand — in our home, our savings, our investment portfolio. That’s not bad, and it’s certainly not a fraud. It’s just important to understand that wealth on paper and wealth in hand are two different things, and that the distance between them reveals itself precisely the moment you try to cross it.

SpaceX has only just opened for trading, and this stock will move a lot — up and down — in the coming months. We’ll see whether the market really keeps believing those two trillion dollars are real, or whether they too, in the end, were on paper.

We shall see.

See you in next week’s letter, or sometime during the week — if I can’t hold myself back until then...

On Friday, June 5, the Nasdaq — the American index that tracks the largest technology companies — fell 4.2%. Its worst day in over a year. The S&P 500 (the index of the 500 biggest American companies) dropped 2.6%, its sharpest single day since October. If you hold stocks, American technology in particular, Friday hurt.

Now here’s the part that should make you stop. The two events that “caused” the fall were both good news.

A few days earlier, Broadcom — one of the most important chip companies in the world — reported a record quarter. Its artificial-intelligence chip business more than doubled in a single year. Excellent by almost any measure. Then, on Friday morning, the U.S. jobs report landed: 172,000 new jobs in May, more than double what economists had expected. A strong, healthy labor market.

A record earnings report. A strong economy. And the market fell anyway, hard. How does that work?

Let me explain — because once you understand the mechanism, you’ll never read a market-crash headline the same way again.

Great Wasn’t Good Enough

Start with Broadcom. The quarter was excellent. So why did the stock fall sharply?

Because the market doesn’t pay for what a company did. It pays for what it expected the company to do. (We covered this in Letter #09, with the defense stocks — “buy the rumor, sell the news.”) Investors had been leaning forward in their seats, waiting for the CEO to promise that future sales would climb even faster than he’d already said. He didn’t. He delivered a great year — just not the spectacular one the crowd had already convinced itself was coming.

So a company that did almost everything right got punished. Not because it failed, but because “excellent” landed a step short of “miraculous.” When a stock is priced for a miracle, merely great is a letdown. This is the same AI gold rush we dug into in Letter #07 — the chip-makers selling shovels while everyone digs. The shovels are still flying off the shelves. The crowd had simply convinced itself they’d fly even faster.

When Good News Is Bad News

Now the jobs report. 172,000 new jobs, more than double the forecast, is a strong number. Normally, a strong economy is good for stocks. So why did it push them down?

Because for months, one of the things keeping the market calm was the hope that the Federal Reserve (the U.S. central bank) was about to start cutting interest rates. A jobs report this strong tells the Fed the economy doesn’t need the help — so there’s no reason to rush. The hope of a near-term rate cut, which a lot of investors had been quietly leaning on, slipped away. You could see it instantly in the bond market, where the interest the U.S. government pays to borrow money jumped — the market’s way of saying out loud, “no cut is coming.”

Take away that hope, on a day when the market was already hunting for a reason, and you have the second spark.

But Here’s the Real Story

Everything I just described is true. But it is not really why the market fell so hard in a single day. Those were the triggers. They were not the cause.

Here is the cause. The Nasdaq, and the chip stocks inside it especially, had been on a historic run. The main index of semiconductor stocks was up about 65% since the start of the year. Sixty-five percent — in five months. After a climb like that, a pullback isn’t a surprise. It’s overdue. The market was a rubber band stretched as far as it would go.

When a market is wound that tight, it doesn’t need a strong reason to snap back. It just needs a trigger — any trigger — that gives everyone permission to do what a lot of them were already itching to do: take their profits and step aside. Broadcom being “merely excellent,” and the jobs report quietly removing the hope of a rate cut, were never powerful enough on their own to do this much damage. They were the excuse, not the reason. The crowd was already inching toward the exit. Someone just had to say the word.

And this is where the part most people never talk about comes in.

Why Everyone Sells at the Exact Same Second

Picture a crowded theater. Someone smells smoke. If people filed out one at a time, calmly, no one would get hurt. But that is not what happens. The instant a few people bolt for the door, everyone bolts — and the door, built for a steady flow, can’t handle a stampede.

Now replace the people with computers.

Today, most of the trading on the U.S. stock market — roughly two-thirds of it — is done not by people, but by automated programs. And a large share of those programs are built to follow one simple instruction: the moment prices start falling, sell, and keep selling for as long as they keep falling. These programs don’t read earnings reports. They have no view on Broadcom. They don’t even care why the price is dropping. They follow the direction of the price, and nothing else.

So here is what happens. The triggers hit. A few large players start selling. Prices tick down. The automated programs see the move and sell too — which pushes prices lower — which trips the next wave of programs into selling — and on it goes, each wave feeding the next. In my view, this is the single most important change in how markets work that most investors still haven’t absorbed: the reason a market can fall this far in hours instead of weeks is that the machines all run for the same door at the same second, because they are all obeying the same rule.

The trigger was the size of a person. The stampede was the size of a machine.

The Clue Hiding in Plain Sight

Want proof this was profit-taking, and not the economy breaking? Look at the other index.

While the Nasdaq fell 4.2%, the Dow Jones — which holds far fewer high-flying tech names and many more “old economy” companies — fell only 1.3%. If investors genuinely believed something was breaking, everything would have dropped hard together. It didn’t. The money didn’t flee the market. It rotated — out of the most stretched, most expensive technology and chip stocks, and into the companies that hadn’t run up nearly as much. That is not fear about the economy. That is a crowd quietly cashing in its biggest winners and moving the chips to a calmer table.

So — Healthy Pause, or the Start of Something Worse?

I’ll give you my answer plainly, because you deserve one: this was a healthy pause, not the beginning of a collapse.

Here’s why I’m comfortable saying it. Nothing about the real economy, or the real companies, got worse on Friday. Broadcom’s business didn’t shrink — it grew. The jobs report was strong, not weak. The thing that fell wasn’t the worth of these companies; it was the price a very excited crowd had been willing to pay for them. A market that drops because the economy is breaking looks like everything falling together. A market that drops because one over-loved corner simply got too expensive looks exactly like Friday: the stretched part snaps back, and the rest barely flinches. This was the second kind.

That doesn’t mean the ride is over. A stretched rubber band can snap back a long way before it settles, and the machines can keep the selling going for a while no matter what the companies are actually worth. But a pause that lets an overheated market catch its breath is a healthy thing, not a frightening one.

What This Means for Your Pocket

If you hold a pension fund or a savings plan: you almost certainly own a slice of these American tech and chip companies, even if you’ve never bought a single share yourself. Friday touched your savings, quietly. This is not a reason to do anything — it’s a reason to understand that “the market” inside your pension is, to a real degree, a bet on a handful of technology giants.

If you hold technology or chip stocks directly: ask the question we always come back to — did the story change, or just the price? On Friday, only the price changed. The businesses behind these stocks are doing exactly what they were doing on Thursday. That is a very different thing from a company in trouble.

If you’ve been waiting to buy: a pullback after a run this big is exactly the kind of moment that tempts people in. It may well be an opportunity. But check each company on its own, don’t guess — a stretched market can fall further before it steadies, and no one rings a bell at the bottom.

And for all of us: Friday was a reminder that the size of a market move and the size of its real cause are often completely unrelated. The market didn’t fall because the world changed. It fell because a very stretched market found an excuse, and a market run mostly by machines turned that small excuse into a stampede. Understand that, and the next frightening headline will read very differently to you than it does to everyone else.

We shall see.

See you in next week’s letter, or during the week — if I can’t help myself until then...

Let’s pause for a moment to understand — what is a quantum computer, exactly?

Imagine you need to find the shortest route between a hundred cities. A regular computer will check one route, then another, then another — one after the next, until it gets to an answer. It’s very fast, but it still works in sequence. A quantum computer checks all the possible routes simultaneously. All of them, in parallel, in one instant.

How is that possible? Because instead of a classical computer working with switches that are either on or off — ones and zeros — a quantum computer works with units that can be both at the same time. Like a coin spinning in the air: before it lands, it’s neither heads nor tails. It’s both. Only when you look at it does it decide. In this kind of physics, computing power doesn’t grow by addition — it grows by multiplication. Every computing unit you add multiplies what’s already there, rather than simply adding to it.

Why hasn’t this reached us until now?

Because the hardest thing is to keep that “spinning in the air” state — the condition in which the computer hasn’t chosen yet. Every small vibration, every bit of heat, every external interference — forces it to choose too early, and in doing so it loses its power. The developers called this “noise,” and twenty years of research focused on one question: how do you protect the computer from the noise around it? In the past two years, the solutions have started to work.

Three applications for the near future, once this becomes commercial:

The first is drug development. Every drug is essentially a molecule that needs to enter the body and do one specific thing without disrupting ten others. Designing such a molecule requires a precise understanding of chemistry — exactly the kind of computation a quantum computer excels at. A drug that takes ten years to develop today — with quantum computing, some of those years (or all of them) could be saved. The person who cures a particular cancer won’t necessarily be the smartest doctor. They’ll be whoever had the right computer.

The second is any problem with a huge number of options where you need to find the best one. Managing a global supply chain, building an investment portfolio that balances hundreds of variables, scheduling thousands of deliveries — all of these are problems a quantum computer solves in a fraction of the time a regular computer takes. We’re not talking about improvements of a few percent. We’re talking about improvements of orders of magnitude.

The third — and the biggest in the long run — is the combination with artificial intelligence. The AI everyone is talking about today runs on chips that consume electricity in quantities we’ve mentioned here more than once. Quantum computing, when it connects with AI, will allow models to process problems that are currently impossible in any reasonable timeframe. The combination of the computational power of the quantum architecture, together with the infinite data accessible to artificial intelligence, is going to change the entire order of things. Nothing less. In my view, if we traveled fifty years forward in time, we wouldn’t recognize the world we’d arrived in. (Maybe I’m exaggerating — but you understand what I mean.)

Back to reality. People have money and want to invest it, not just sound more interesting at dinner parties. Two ways to be part of this story:

The first way — pure-play stocks, meaning companies whose entire business is quantum computing. Here’s where it gets interesting: each of these companies is working on a completely different technological approach from the others. Take IonQ and Quantinuum, which are building on “ion traps” — capturing individual atoms in an electric field and working on them. Other companies, like Rigetti and D-Wave, are working on entirely different approaches. Another company, PsiQuantum — still private — is building on photons, meaning particles of light. The French company PASQAL is building on neutral atoms controlled by lasers. And Microsoft is pursuing an approach that no one else quite replicates — one that, if it works, could leave all the others behind. Nobody knows which format will win. It’s exactly like the early nineties, when it wasn’t clear whether the internet would travel through telephone cables, through TV cables, or through something else entirely. At a stage like this, building a small portfolio divided between several companies is probably a smarter strategy than betting on a single winner. Not all of them will succeed — but whoever holds all of them will hold the winner too.

And there’s another layer worth knowing about: some of the most interesting companies in the space are still private — they’ve already raised tens and hundreds of millions of dollars and aren’t yet publicly listed (meaning you can’t buy their shares on the stock exchange). The successful ones will want to reach the public markets one day, and we can expect to see more IPOs in the coming years. That matters, because the biggest winners in the space may not be public yet today — just as Google wasn’t public when Netscape (who?) was already trading on Wall Street. Google came to its IPO in 2004, years after the internet had already “worked,” by which point it was already a giant — and since then the stock has risen thousands of percent. Even those who bought after the IPO, when the company was already worth billions, still made a lot of money.

The second way — mixed-exposure stocks, meaning tech giants for whom quantum computing is part of their research, not the whole business. In this space, IBM has been investing in the field for the most years and with the most consistent approach — and the U.S. government just rewarded that with a commitment of $1 billion in funding for this area alone. Google itself holds one of the most advanced labs in the world. And Microsoft isn’t standing still — it’s presenting a completely different approach to building the computer that, if proven, could be a major leap forward. When you buy these stocks, quantum comes as a kind of option: the existing business holds you in place, and the revolution — if and when it arrives — arrives as a bonus.

We’re in 1999 for quantum computing. The technology is real. The big victories are still ahead of us. Whoever invested in Google in 2004, three years after the internet bubble burst and the dust had settled — made a lot of money. This story doesn’t begin and end with the question “will quantum succeed?” It begins with the question “when” — and with the question that follows from it: how much of your portfolio are you willing to put into a project that belongs to the next decade, not the next year.

See you in next week’s letter, or during the week — if I can’t help myself until then...

Less than a week has passed since I wrote here that Israel is growing faster than any G7 country. This week, the Central Bureau of Statistics published the growth figures for the first quarter of 2026. GDP — meaning the total of everything the country produced and sold in the quarter — contracted by 3.3%. Not growth. Contraction. So what happened? Was it all an exaggeration? No. And now let’s explain why.

What Happened in the First Quarter

At the end of February 2026, the military conflict between Israel and Iran broke out. We’re not talking about a matter of days — we’re talking about weeks of ballistic missile fire, school closures, massive reserve mobilization, and the immediate collapse of tourism. The result: private consumption — meaning how much Israelis spent on shopping, restaurants, and services — fell 4.7%. Exports dropped 3.7%. And even government spending fell 4.8%. Three growth engines stopped at once, for more than a month. On paper — it looks bad. In the headlines — it sounds catastrophic.

But there is one number the media barely reported on: investment in fixed assets — construction, equipment, technology — rose 12.6%. The technology sector didn’t stop. The energy sector kept investing. Whoever planned to build — built. Whoever planned to develop — developed. Israel’s internal economic engine didn’t turn off — it simply worked behind the scenes, while the part visible to the eye was in shock. And one more thing that didn’t make the headlines: analysts had forecast a 4% decline. Israel surprised to the upside even with its 3.3%.

One Bad Quarter Doesn’t Break a Good Story

Think of a store that grows every year. One day, the road leading to it is closed for repairs. For a full month, no customers come through. Revenue collapses. Did the store go bankrupt? No. Are its products any worse? No. Did the customers disappear? No. They simply didn’t come — because the road was closed. The right question is: when the road reopens, will they come back?

For Israel, the closed road was the war. The Bank of Israel’s answer — which knows the numbers better than anyone — is still the same: if the ceasefire holds, the economy will grow 3.8% for the full year. And if the peace talks conclude successfully, the Governor said it’s possible to reach 5.5%.

The story of the first quarter is really a demonstration of the difference between the temporary and the permanent. If a long-running process is stopped by a one-time event — however powerful and however significant — that carries no negative long-term consequences, then you can and should ignore it and stay committed to the long-term trend. In fact, these one-off events are precisely the ones that serious investors use to profit over the long run.

On that note, I have a good example — for those of you whose memory isn’t betraying them, and who also sin by investing in the stock market: you may recall that last April, Trump announced a sweeping tariff policy against countries around the world, a move that led many economists and investors to fear it would upend the global order and damage their securities holdings. Anyone who had accumulated enough mileage (or kilometrage, depending on your side of the Atlantic) in understanding Trump’s methods knew to assume this was more declaration than implementable policy — a kind of diplomatic opening position for a dialogue whose results would be very minor, if any at all. And therefore, within the sharp market drops that followed the announcement, that person could have bought stocks cheaply — sometimes even very cheaply.

And Then, on Friday — Trump Surprised (Again?)

The announcement of an imminent deal with Iran is not yet official. Trump likes to get ahead of himself and announce things early (as noted). But when you try to understand what’s behind it — we’re talking about an agreement that would end the military conflict between the U.S. and Iran and return the Strait of Hormuz to full operation. Hormuz — already mentioned in Letters #01 and #09 — is the narrow chokepoint through which nearly a third of global oil and gas trade passes. When it’s restricted, energy prices rise. And high oil prices mean: inflation in the U.S., expensive fuel, expensive plane tickets, and pressure on every monthly household expense.

And now — connect the two threads.

The war with Iran is what hurt Israel in the first quarter — and also what’s keeping inflation high in the U.S. The same war, two victims on two sides of the ocean. And the same agreement — if signed — will release both: Israel returns to full growth, and the U.S. gets relief on energy prices and room to cut interest rates.

What This Means for Your Pocket

If you’re Israeli and were alarmed by the 3.3% figure: stop. The number explains what happened — not what will happen. The reason for the bad quarter is clear, contained, and not structural. The Bank of Israel did not change its annual forecast. And if the ceasefire holds — Israel enters 2027 with strong momentum. If you’re holding Israeli stocks: ask the same question from recent weeks — has the story changed? In my view — not yet. But make sure you’re looking at the full picture, not just the quarterly one.

If you’re American, living with inflation, and waiting for the Fed (the U.S. central bank) to cut rates: the Hormuz deal — if signed — is the best economic news that could reach you this year. Cheaper energy will bring inflation down, and the Fed will finally get the breathing room it’s been waiting for.

And for all of us: this week was another reminder that one number never tells the whole story. Israel minus 3.3% — published everywhere. Israel with 12.6% growth in investment in the same quarter — almost no coverage. It’s always like that. The headline is easy to write. The context takes two or three more sentences. And we’re here for the context.

We shall see.

See you in next week’s letter, or during the week — if I can’t help myself until then...

If you had to guess which economic variable is affecting both the Israeli pocket and the American pocket the most this year — what would you say? Interest rates? Inflation? The exchange rate?

The answer: Hormuz.

The Strait of Hormuz — the narrow chokepoint through which nearly a third of global oil trade passes, already mentioned in Letter #01 — is back in the headlines. Oil prices have surged, with Brent crossing the $105-per-barrel threshold. And from one narrow stretch of water, two economies received completely opposite results. Let’s break it down.

Israel: The Economy That’s Beating the Ones It Was Supposed to Lose To

The International Monetary Fund (IMF) — the body that is (theoretically) responsible for the health of every country’s economy — published a forecast in recent months that made people rub their eyes: Israel is expected to grow between 3.8% and 4.4% in 2026. The OECD, which tracks developed economies, went even further and called 4.9%.

For comparison: the U.S. is expected to grow 2.3%. Europe — 1.3%. The G7 average, meaning the seven largest economies in the world — is below 2%.

Israel, effectively at war for nearly three years, is on track to grow faster than all of them.

And that’s not all. The TA-35 — the Israeli stock index tracking the 35 largest companies on the exchange — is up roughly 20% since the start of 2026, after rising 51.6% through all of 2025. Anyone who invested in the Israeli stock market two years ago and held on tight played it well — and played it big. The Shekel, as we’ve written here more than once, kept strengthening — about 7% against the Dollar since the start of the year.

What explains all this? A few things working at the same time.

The first is debt. Israel’s debt-to-GDP ratio — meaning how much Israel owes relative to the size of its economy — stands at around 70%. The G7 average is 123%. When an economy starts from a less debt-burdened position, it has more room to breathe, invest, and grow. Israel isn’t perfect on this front — the budget deficit has grown during the war — but relative to the rest of the world, it’s still in a reasonable position.

The second is exports. Israeli arms exports broke a record in 2024, for the fourth consecutive year. Natural gas keeps flowing and keeps bringing in foreign currency. High-tech never stopped. These are export engines that bring Dollars into the country — and Dollars coming in strengthen the Shekel. This trend continued through 2025 and into early 2026.

The third is what didn’t happen. The Israeli consumer didn’t collapse. The real estate market didn’t crash. The banks didn’t face a crisis. And the Bank of Israel now has flexibility — if and when the fighting eases, the growth forecast could jump to 5.5%, according to the Governor himself. The market is already beginning to price that in.

The U.S.: Inflation That Won’t Let Go

Now for the other side of the story.

The U.S. Consumer Price Index for April 2026 came in at 3.8% on an annual basis — up from 3.3% the month before. That’s not a decline. That’s an increase. And anyone who remembers the yoga teacher and the lawyer from Letter #02 — sticky inflation is back in the headlines.

What’s driving it? Energy. Energy prices rose 17.9% year over year. Gasoline — 28.4%. All of this comes directly from the spike in oil prices we just mentioned. In other words, the regional tensions — the very thing that’s partly driving Israel’s growth — are also what’s making every American’s commute, plane ticket, and grocery run more expensive.

And what about interest rates? The Federal Reserve (the U.S. central bank) held rates at 4.5%, and the market now puts more than a 59% probability on zero rate cuts happening in 2026. Bank of America is talking about two small cuts — in 2027. Not this year.

This is what you’d call neither here nor there. Stuck. The Fed wants to cut rates to give the economy room to breathe — but it can’t, because inflation at 3.8% won’t allow it. And part of that 3.8% inflation comes from oil prices that rose due to geopolitical tensions the Fed has absolutely no control over.

What This Means for Your Pocket

If you’re an Israeli holding savings in Shekels — we’ve already written it here: the Shekel trend keeps working in your favor. The Israeli economy doesn’t move based on headlines — it moves based on what’s laid out here. And until these numbers change, the investment direction is clear.

If you’re holding savings in Dollars — ask yourself again, not because the Dollar is collapsing, but because the ratio is slowly moving in one direction. The question “is now a good time to buy Dollars?” will keep getting the same answer from me. (And if you don’t remember what that answer is — go back to the previous letters.)

If you’re American or affected by U.S. inflation — your real disposable income is shrinking. Not dramatically, but gas, flights, and grocery bills are all going up. And the interest rate you’re paying on loans and mortgages is not coming down anytime soon. But you don’t need me to tell you that, so let’s move on. That’s the situation, and that’s just what it is.

And if you’re holding American stocks — high inflation generally weighs on earnings multiples (meaning, on the willingness to pay a premium for every dollar of profit a company generates). This absolutely does not mean you should sell your stocks — if you’ve read my previous letters, you know my positive long-term view on large-cap stocks and tech in particular. It simply means the environment is less comfortable than it was when three rate cuts were expected this year, and that may affect the strength of their performance.

Two economies. One war. Opposite results. And no, that’s not a coincidence.

We shall see.

See you in next week’s letter, or during the week — if I can’t help myself until then...

I wrote about it two months ago (Letter #03), and said it plainly: the March report was interesting mainly to historians. It reflected a one-time event — the in-and-out movement of federal workers (that is, people employed by the U.S. government) who had been on strike — and didn’t really tell us much about what was actually happening in the American labor market. I said the April report would be far more interesting.

Well — the April report is here. And it is indeed interesting. Just not necessarily in the way you might have expected.

The good news — which is less good than it looks — is that the U.S. added 177,000 new jobs in April, against economists’ forecasts of only 133,000, and the official unemployment rate held steady at 4.3%. On the surface, the labor market looks strong. But let’s go deeper, because one number should stop you in your tracks: 8.2%.

That’s not the unemployment rate you hear on the news. That’s what the BLS (Bureau of Labor Statistics) calls “U6” — the broad measure of unemployment. I’ll elaborate in a moment. The rate shown to the public (4.3%) counts only those who are out of work and actively looking for a job. U6 is the deeper number. It also includes people working part-time because they couldn’t find full-time work, and people who gave up searching entirely and therefore dropped out of the statistics. Add all of those up — and you get 8.2%, an increase of 0.2% from last month. Doesn’t sound quite so low anymore, does it?

Now for the second problem — the bigger one, in my view, looking forward. Old economy sectors are hiring. Knowledge industries are cutting.

When you break down those 177,000 new jobs by sector, an uncomfortable picture emerges.

Who added jobs? Healthcare and social services — 37,000. Leisure and hospitality. Transportation. In other words, physical, hands-on service sectors, with wages significantly below the national average.

Who lost jobs? The information sector — that is, tech companies, digital media, software — minus 13,000 jobs. Manufacturing — minus 2,000. (And the federal government continues to shrink, though that’s less relevant to the point.)

In my view, this is not a coincidence, and it’s not statistical noise. This is a trend. And what worries me is not the decline itself, but what it signals over time.

We are in the middle of a technological revolution. Everyone talks about it. But what gets less attention is this specific effect on the labor market: the AI revolution is not just eliminating programmers’ jobs — it’s eliminating middle-tier jobs. Analysts, content editors, project managers, operations staff. Exactly the jobs that served as the bridge between the old economy and the new one — the entry point into a kind of salary that allows a comfortable life.

What’s beginning to take shape: fewer knowledge workers, earning higher wages (because the ones who remain are worth more), and more service workers, earning lower wages. This gap — economic polarization — is one of the most dangerous forces for social and economic stability over time. An economy with a thin middle class produces weakening private consumption. Politics become more extreme. We’ve seen this play out over recent decades — this is not a theory.

What does this mean for your pocket? If you’re in the knowledge industry — invest in learning tools that increase your output, and don’t wait for someone to tell you your role is at risk. If you’re an employee at a tech company — pay attention to the signals of hiring versus layoffs around you. If you hold tech stocks — you can no longer treat these holdings as a single “sector” in your portfolio. Some companies will collapse loudly, others will break forward through the efficiency gains. In investor language: volatility is increasing, and will continue to do so.

When Israel Became Less Risky Than the U.S.

Look at the table I shared above. Let’s break it down.

The table shows the yields on 10-year government bonds (meaning, the annual interest rate a government pays to whoever lends it money for ten years) — for five countries. You can see the current figure, what it was at the start of the year, and what it was a full year (12 months) back, for an investor who bought the bond at that time.

Our starting point: 12 months ago. Israel was paying 4.34% interest — the U.S. was paying 4.16%. The meaning: global investors demanded a premium (extra interest) to lend to Israel, because of the risk. War, uncertainty, complex budget management. Entirely reasonable.

Now jump to April 2026. Israel: 3.98%. The U.S.: 4.39%. Israel is below the U.S. In other words, the market is willing to accept less interest from Israel than from America. That’s the complete opposite of where things stood a year ago.

What happened? Two processes moved in opposite directions.

Israel: the Shekel strengthened (as we discussed at length in Letter #05), the economy proved its resilience during wartime, natural gas provides steady income, and the end of the war reduced the risk premium — that is, the “extra” that investors demand because of uncertainty. When risk goes down, the interest rate the government has to pay goes down with it.

The U.S.: moving in the opposite direction. Inflation is still “sticky” (if you’ve forgotten — back to the yoga teacher and the lawyer from Letter #02), the Federal Reserve isn’t cutting rates, the government deficit is growing, and now the information sector is showing cracks as well (in terms of both profitability and employment at software companies). The big investors are pricing forward, and what they see — isn’t reassuring.

The broader global picture reveals that more than this being a U.S. story, it’s actually an Israel-versus-the-rest-of-the-world story. Israel is trending in the opposite direction from every other Western economy. Whoever wants to analyze this properly needs to focus on what’s happening in Israel — less on why the U.S. has to pay more interest, simply because they all have to pay more interest (except Israel).

What does this mean for your pocket? If you’re an Israeli holding savings in Shekels — you got good news. Israel is currently a less risky destination in the world’s eyes than it was a year ago, and that puts money in your pocket — whether through lower interest rates on loans and mortgages, or through a strengthening Shekel (which prices your trips abroad and dollar-denominated purchases — cheaper). If you hold Israeli government bonds you bought a year ago at a higher yield — well played, because in a falling-rate environment, whoever bought earlier will continue to enjoy the interest rate that existed on the day they bought the bond, for the full life of the investment.

So what’s worth doing going forward? Honestly, I’m a believer in most cases in one sentence: the trend is your friend. If the data justifies the trend — stay in. Exactly like the Shekel-Dollar rate — as I’ve written here before, the Shekel will continue to strengthen against the Dollar, and I will continue to answer for free (unfortunately) the question: is now a good time to buy Dollars, when the rate is low?

See you in next week’s letter, or during the week — if I can’t help myself until then...

The Federal Reserve held its interest rate meeting, announced it was keeping rates exactly where they’ve been (3.5% to 3.75%), and Jerome Powell stepped up to the podium for what he announced would be his final press conference as chairman of the most powerful central bank in the world. He’s done on May 15. Kevin Warsh takes the wheel.

Most headlines celebrated the stability. “Fed holds rates — markets rally.” The S&P 500 — an index that tracks the 500 largest companies in America, and that most people use as a shorthand for “how is the stock market doing overall” — closed Friday at a fresh all-time high of 7,230. Apple beat earnings. Good vibes. Good week.

Well, forgive me. Let’s look at what’s actually happening here.

The Numbers Underneath the Headlines

Every month, economists put together something called a PCE index. Think of it as a national receipt — a tally of what American households actually spent their money on, and how much more expensive everything got compared to last year. This is the number the Fed watches most closely when it decides whether to raise or lower interest rates. This week, that national receipt showed prices up 4.5% from a year ago.

For context: the Fed’s stated goal is to keep that number at 2%. They are more than double that.

There’s also a version of this measurement that deliberately removes food and energy prices — because those tend to jump around due to weather events and geopolitical conflicts, and don’t always reflect what’s really happening in the broader economy. That version came in at 4.3%. Still more than double the target.

And GDP — the total value of everything the country produces and sells in a year — came in at 2% for the first quarter. Which sounds okay, until you do a bit of math. In dollar terms, the economy is growing at 5–6%. But most of that growth is just inflation: the same things, costing more. In real terms — meaning actual goods produced, actual services delivered, actual wealth created — it’s barely 2%. The difference between those two numbers isn’t growth. It’s just things costing more.

So the Fed is sitting on rates that, by their own measurement, should probably be higher. But they’re not raising them. And they’re certainly not cutting them. They’re frozen.

The Most Interesting Thing About Wednesday’s Vote

Here’s the part I want you to pay attention to, because the financial media mostly glossed over it.

The Federal Open Market Committee — the group of 12 economists and governors who actually vote on what happens to interest rates — split 8 to 4 on Wednesday. Four of them dissented, meaning they voted against the majority’s decision to hold. That’s the most divided this committee has been since October 1992.

Four people sitting in that room looked at the same data and said: this isn’t right.

I don’t know exactly what each of the four wanted. Some probably wanted to cut (optimists who think inflation will solve itself). Some probably wanted to raise (hawks who think 4.5% is already a fire, not a spark). But the fact that this vote was so fractured tells you something important: even the people running the monetary system don’t agree on what’s happening or what to do about it.

When the people in charge are this divided, uncertainty is the real product being manufactured. And markets hate uncertainty — until they don’t, which is when they should.

Now Let’s Talk About Why Stocks Are Up

This is the part that trips most people up, and understandably so. If inflation is high, if growth is slow, if the Fed is frozen and internally divided — why is the stock market at an all-time high?

The short answer is: because inflation is good for some companies’ numbers, even when it’s bad for everyone’s wallets.

Here’s how it works. A company sells you something for $100 this year. Next year, because of inflation, that same thing costs $110. The company’s revenue went up 10%. Their profit margin — the gap between what something costs them to make and what they charge you for it — may have held or even widened, because they raised prices faster than their own costs went up. On paper, the company looks like it’s growing. Investors get excited. Its stock price rises.

But you, the customer, spent $10 more on the same thing. The actual amount of stuff your money can buy went down. You didn’t get poorer in dollar terms. You got poorer in real terms.

So when Wall Street analysts describe this moment as “companies benefiting from strong pricing power,” what they’re saying in plain language is: companies are successfully passing their higher costs onto you, and investors are rewarding them for it.

Your portfolio went up. Your grocery bill went up too. One of those numbers feels like a win. The other one quietly takes it back.

Enter Kevin Warsh

On May 15, Jerome Powell hands the keys to Kevin Warsh. Warsh is a smart man — a former Fed governor, a Morgan Stanley alumnus, someone who has been in the room before. But he’s walking into a scenario that has no clean exit.

To me, the situation looks something like this. Imagine you’ve been driving a car for a long time, and the engine temperature gauge has been creeping up — slowly, steadily, but you kept driving because you were almost there. Then you pull over, hand the keys to someone else, and say: “Your turn.”

The new driver has three options. He can keep going and hope the engine holds (hold rates, let inflation run). He can pull over now and pop the hood (raise rates, slow the economy, risk a recession). Or he can try to find a third way — some clever combination of signals and rhetoric that convinces markets he’s in control without actually doing anything painful.

History doesn’t love the third option. But it remains the most politically attractive one.

Personally, I think Warsh will try to establish credibility quickly — probably with language that sounds tougher on inflation than Powell’s. Whether that translates into actual rate decisions, we’ll see in June.

What This Means for Your Pocket

Let’s get practical, because that’s the whole point.

If you have a mortgage or a loan whose monthly payment goes up or down based on current interest rates: don’t expect relief anytime soon. The Fed is not cutting. The market is pricing in maybe one quarter-percent rate cut by the end of the year — and that’s in the optimistic scenario. Your monthly payment is your monthly payment for a while.

If you have a savings account that pays you more than a regular bank account — the kind that tracks current interest rates and currently pays somewhere around 4–5% a year: actually, this is one of the few places where a frozen Fed works in your favor. Rates staying high means your cash keeps earning. Don’t rush to move it somewhere riskier just because the markets are up.

If you have stocks, index funds, or pension savings: the portfolio looks good on paper. But the question worth asking is whether those gains are real or just inflation in disguise. If inflation is running at 4.5% and your portfolio grew 7%, your real gain was closer to 2.5%. Still positive — but not as exciting as the headline suggests.

And if you’re thinking about a big spending decision — a new car, a renovation, a major purchase — I’d wait and watch Warsh’s first few months before assuming prices are coming down anytime soon.

Fast forward several decades, and I must say that when I look back at all the real estate deals, I have encountered (mostly other people’s, and a tiny bit of my own), I couldn’t agree more with that assessment. True, there are types of real estate that will adhere more to this statement, and types of transaction motivations that will align better with this logic, but by and large—as long as the goal of purchasing real estate is to make money over time, there is no parameter more important than location to influence that variable.

There is a reason why real estate that is distant (even slightly) from centers of employment, housing, tourism, or academia will be significantly cheaper than an identical real estate unit in the “center of the action.” And this reason is not going to change anytime soon: human nature. Humans are social animals, gathering and needing interpersonal connections and mutual support. Physical proximity to shared hubs is a value reflected in real estate prices. And of course, until further notice, humans get around on their own two feet. And after hundreds of meters, or yards, this walking becomes a chore rather than something trivial, and this chore also has a price (in time, cost, logistics, and planning).

Thus, real estate factors two additional parameters into its price, beyond the structure itself: the ability to meet other people with a common denominator similar to yours, and the lack of need for any transportation from place to place. This premium—this price addition—is the gap you will find between an apartment on La Rambla in Barcelona and an apartment only 7 minutes’ walk away.

Another thing I learned is that even two different streets, in the exact same area (meaning, without these proximity gaps), can produce a justified price gap between them. You know it, you go just around the corner, but it’s a completely different neighborhood, with problematic neighbors or crumbling infrastructure. Often, investors are tempted and buy that proximity, betting that the problematic street will “catch” the good data of the more expensive streets on the other side. It’s a bit like buying startup shares – it can profit, but statistically, it is unlikely to happen. And if it doesn’t happen, the price gap will continue to widen, and not only will the investor not profit from the closing gap, they will lose out relatively on the price appreciation of any other deal they could have made during that time.

When can such a deal be interesting? Again, like a startup: if you have additional information beyond the market. For example, there is an urban renewal plan for the problematic street that will improve its bad elements and allow it to be branded closer to the successful area on the other side. If you have information about such a plan, or better yet—the ability to influence it—just like in a startup where you understand better than others how and why it will break through and conquer market share, and maybe even assist it in doing so—then the price you pay is cheap relative to the potential, because you know how to price it better than others. And that is a successful deal, not just in real estate, but in general.

I want to comment on the calculation of property yield, which is done by both residential and commercial real estate investors of all kinds. Property yield is a simple calculation of how much you receive in annual rent (net, after expenses), divided by how much it cost. If I received a net annual income of $50,000 on an investment of $1,000,000, I have a yield of $50,000 divided by $1,000,000, which is 5%. This yield should be like an investment in a bond with equivalent risk. For example, a residential apartment in a good neighborhood with high demand and strong infrastructure will be like an investment in a bond of a stable government, or a very large and strong company. An office with a bad tenant in a remote commercial center should produce the yield of a low-rated bond, or one with no rating at all, of a company whose future is unclear.

This calculation, even though it is clear and immediate for professional investors, can be very misleading and dangerous for the small investor. I suggest not relying on it, certainly not exclusively, in considerations for choosing a property. The reason is that you don’t really have a clue. If you paid too much for the property, paradoxically, it would lower the yield on it (because you will receive the same rent, but you will calculate it based on a higher cost. Mathematically, it will simply give a lower yield in terms of yield). So not only did you buy at a premium, but you also now mistakenly think that the property you bought is safer because the yield on it is relatively low.

Another example of distortion is on the income side—you bought an office with an excellent tenant who signed a contract with the previous landlord at a market price that is too high relative to the current market (maybe they made a mistake and understood it in hindsight, maybe overall market prices dropped, maybe the condition of the office was better), and upon renewal, you won’t be able to get the same price. Now the yield formula changes completely, and not in your favor.

There are properties that trade in a certain yield environment (i.e., next to other properties) but offer a specifically higher yield. For example, in a neighborhood where real estate assets of a certain type are sold for $1M and rented for $50k a year, there will be a property offered for sale for $850k. That is the market’s way of telling you—higher yield, meaning a riskier property. Find that risk. But maybe, after searching well and understanding the risk, you will decide that it might pay off for you, and you will buy the property even though its yield signaled you to be careful.

Should you buy real estate for investment, or not?

Over the years I have learned to understand that, in the end, the best reason—and sometimes the only one—to allocate resources to purchasing real estate for investment is healthy leverage. What is meant by healthy leverage? Let’s start with leverage. Leverage is the ability to receive a loan from someone else to invest it and enjoy the profits yourself. If you invest in a brokerage account in the US, you can get leverage on every dollar you invest in the broker itself, to purchase stock in an amount that exceeds your own funds. This, of course, creates a greater opportunity to profit, along with a greater risk of losing the money you invested. Leveraging to invest in stocks is a move that doesn’t suit most investors, for two reasons. The first is that the average investor might be tempted by risky stocks, or by unwise allocation of funds (I bought a “meme stock” with everything because it went up hard). In such a case, leverage can wipe out equity very quickly during the strong declines that will come. The second reason is that sometimes we need the money—or part of it—at a surprising time, and that is precisely when the big losses can come, and “lock in” the loss. We won’t be able to get more leverage later to try to turn the wheel.

Healthy leverage, in my view, is investing someone else’s money in a less volatile, income-generating investment that is harder to sell (and therefore “fixed” in our minds as a long-term investment), where a small profit becomes a large profit over time, at low risk. We all know this real estate exercise, it is called “mortgage,” and it rewards people well who persist in purchasing real estate for investment with other people’s money.

True, real estate value can also drop, and the property may stand empty without rental income, and those are risks that need to be priced, and that is what brings me back to the beginning—location, location, location. Investing in a property in an excellent location will allow us to avoid the lack of a tenant for a long time—there will always be demand for rent, even if at a lower rent. Better a little less than absolute zero. In addition, central real estate has the property of losing less value in bad times and recovering first to good times.

In addition—and this in my eyes is the key to investing in leveraged real estate, and what differentiates the people who somehow just get rich from real estate from those who sometimes don’t have this “luck”—the best option is not to build (only or at all) on current income as a mortgage repayment, but to finance it from the current income. True, it’s not always simple, but anyone who uses all the rent to pay back the mortgage can find that in the case of a breakdown, they fall into debt (or a loan to pay the mortgage, which will always be at a higher interest rate than the mortgage itself, or a refinancing of a mortgage with higher debt), and over time may lose money as a result of huge interest expenses, or from being forced to sell the property at a loss.

The biggest success stories I have seen were of those who were smart enough to pay back loans from other income (say, a salary) and accumulate assets that over time “break free” from the mortgage. If there are such assets, new mortgages can be taken out and more assets bought, and so on—and this, friends, is what makes real estate investment worthwhile. The thing is, this move requires planning ahead, having less in present time (to cover the debt repayment), and a lot of patience. And those are much rarer ingredients for the average investor.

And a short reference to stock markets, which continued to rise this week too. Why? The short answer—because. The not-much-longer answer—I have already explained in previous reviews that the long-term trend of the markets is upward. This trend relies on strong economic foundations, and any disruption along the way is just a stop for a rest. As long as nothing “disturbs” the market, it will go on upwards.

See you in next week’s letter, or during the week—if I can’t help myself until then...

I have been making a living from economic consulting for four decades, and to be honest, this is the easiest question to answer. I always say “no,” and I am usually right. For 25 years, the Shekel has been trending stronger against the Dollar, even if it “pauses to refresh” from time to time. For all those who asked me when the rate was 4.4 Shekels to the Dollar if it was time to buy, I said no—and they returned and asked again at 4.0 (what, it’s so low now?). Some continued to ask at 3.9, and 3.6, and then—at 3.3—it was “impossible,” and here we are, under 3 Shekels to the Dollar.

And my answer today remains the same. No.

Everyone is trying to find a bottom, or some minimal threshold below which “the Dollar (against the Shekel) cannot possibly continue to fall.” A number below which the end will come: the Bank of Israel will intervene, the government, Trump, someone. But the truth is, there is no such number. At least not in the current system of rules in Israel.

A bit of history—there really was such a number once. A moving number. It was called the “Diagonal Band,” or by its nickname, “The Band.” It was a mechanism for pegging the Shekel to a basket of major world currencies, led by the US Dollar. The idea behind the Band was that the Shekel could not weaken too much or strengthen too much, in order to maintain economic and market stability. It was born after Israel suffered a very difficult economic decade, starting with the 1973 Yom Kippur War and ending with hyperinflation in the 1980s.

As part of the realization that Israel could not continue to fix its currency rate against foreign currencies—which created an official exchange rate and a “black market” for currency conversion based on market forces—it decided to create room for maneuvering. On one hand, it would leave the state in control, and on the other, it would allow for real foreign currency trading and bring the Israeli economy closer to Western standards.

This Band was born in 1989 and lived, with certain changes, until 2005, when it breathed its last. After years of the Shekel trading close to its lower limit—meaning it maintained its strength against all currencies it was traded against, without being able to realize its potential for appreciation because every time it touched the lower limit, the Bank of Israel had to intervene and weaken it to keep it within the band.

Ah, how fun it was back then. As a young trader (relatively speaking), that Band provided me with a good living in those years. Every time the Shekel approached the lower limit, I could bet on its weakening, because the Bank of Israel—by law—was behind me, and had to sell Shekels to bring the rate up a bit. In any case, what was, was—but that was when I realized the power of a currency, or rather, the power of a free market. If there is no central bank in the way, the currency will reflect the economy. And sometimes even if there is a central bank in the middle, it is not enough. Ask the British what George Soros did to them in 1992. But that is a different story.

In any case, since 2005, the movement of the Shekel against other currencies has been completely free, and therefore, the Israeli economy determines the direction and rates over time—simply because it is the only variable that affects the Shekel. After all, nowhere else in the world does two terminal traders meet and do business in Shekels. To put it simply—if the Israeli economy is more successful, relatively, than the global economy, or more accurately—if it advances and develops at a faster pace than the rest of the world—then its currency will also strengthen relatively against other currencies, compared to its starting point in 2005.

And that is exactly what is happening.

Let’s go back to 2002. A global high-tech crisis, a security crisis in Israel, high unemployment, high interest rates, the Shekel worth 5 Shekels to the Dollar (the highest official rate ever was 4.994. During that day, the Shekel even traded for a moment above 5 Shekels to the Dollar). In fact, from that moment on, a trend of Shekel strengthening began, reaching a rate of 3 Shekels to the Dollar. Or in plain language—Shekel holders are “buying” the world cheaper. For a product that costs 100 Dollars in the US, they only need 300 Shekels, compared to the 500 Shekels they needed 25 years ago.

How can that be? Has the Israeli economy really succeeded that much? Yes.

As usual, simple explanations without blowing your mind with exhausting numbers:

Demographics—perhaps the strongest explanation, and with the most long-term impact. While almost the entire West is shrinking—meaning more people are dying than being born—in Israel, the situation is the opposite. The economic mathematics are simple: fewer citizens also mean less production, less consumption, less exports—less of everything. And if you are a country with less, your currency is also worth less. Israel consistently increases the gap compared to the West (and the truth is, also compared to most of the East) in birth rates, and its population has almost doubled in the last 30 years. And according to the data, this situation is not going to change tomorrow morning.

Gas and Oil—Israel has entered a field in recent decades that was foreign to it since its establishment, and today it is a tiny energy powerhouse—providing for itself and selling gas and oil to its neighbors. These funds, which literally come out of the ground, out of thin air, enter the country as Dollars and a large portion of them is converted into Shekels and invested in various investments. In other words—the land creates excess demand for Shekels, beyond the production of the local economy. Anyone who wants to check will find a certain correlation between the entry of these funds and the strengthening of the Shekel in the last decade.

High-Tech—here there are three parts. The first part is the knowledge industry. Israel has trained professionals over the years who have excelled in technological developments and thus has effectively sold technological knowledge to the world, which brought Dollars into the country—which must be converted to pay salaries in Shekels, and it has also, of course, sold products based on that knowledge. The second part is that this knowledge also attracted foreign companies (led by Intel about 30 years ago, and many good companies since) to establish development centers in Israel, which in turn attract huge budgets from these companies, entering Israel and strengthening the Shekel. And the third part is, of course, the stocks of those Israeli companies that are being created, when smart venture capital seeks to invest in them. These funds also mostly enter Israel, are converted into Shekels, and from there to the pockets of the shareholders who created them. Of course, these companies produce more knowledge, and this knowledge in turn produces additional new companies. In short, this is growing over the years and strengthening the currency significantly.

Local Economy—Israel, which was established in 1948 as a country with a socialist economy, moved over the years toward the economic right, toward the free and entrepreneurial market. This movement allowed for the exploitation of the economic growth potential of the growing population (demographics, remember?). In simple language—more production, more consumption, higher wages, improvement in quality of life, sustainable economic growth over time. All the ingredients that strengthen a local currency, even without the advantages of the previous items.

What do we have? An economic system that uses its most prominent relative advantage—when you are small relative to the total pie, it is much easier to take bites that don’t really affect its size but make you very full. Or simply—Israel has managed to find a way to export knowledge, resources, and stocks, and consistently attract foreign currency that buys all this good stuff. Mostly through the Dollar.

And where have we arrived—to the eternal question I am asked every week—so tell me, is now a good time to buy Dollars?

You already understand why I answer “no” every time?

So actually? What is the bottom? Where is all this going?

The answer is—I don’t know, and to the same place, as long as the conditions remain.

Meaning—if Israel doesn’t re-legislate the Band, or any other technical solution to control the exchange rate, and as long as Israel continues to export to the world the knowledge, resources, and investments it wants, and as long as the possibility of managing a free economy is preserved in Israel, and as long as the Bank of Israel continues to behave as an independent body that makes decisions based on professional parameters—then most likely interest rates will remain low, growth will remain high, production and exports will grow with the growing population, and if all this happens—do not look for a bottom for the Dollar against the Shekel, because there won’t be one.

And if the State of Israel decides to change the rules? To stop free currency trading, to carry out a government takeover of the Bank of Israel, to raise taxes on foreign investments, or anything else extreme? What will happen then?

And to that I say—friends, this is the risk in the equation. Whoever lives in Shekels lives with the risk. And until now, it has succeeded quite well...

I absolutely remember the promise from last week to review the subject of real estate, and its turn will indeed come—in next week’s review. See you there, or during the week—if I can’t help myself until then...