Hello everyone. Before we get into the numbers — one question.
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...