Energy Shock: Stagflation Is Here — The Fed Between a Rock and a Hard Place

McDonald describes the current macro environment as "real stagflation."

Iran's strikes on infrastructure in Bahrain, Dubai, and the UAE have affected the entire energy supply chain — from fertilizers and distillates to aviation kerosene. McDonald believes: even if tensions in the Middle East calm down, the viscosity effect on prices will last "at least 5-6 months." The reason: increasing insurance costs take time to "dissipate," and business return to the region is also slow; regional logistics are broken.

Rising energy prices reduce GDP by about 1%. Meanwhile, a wave of layoffs in the AI sector is accelerating — McDonald notes: after a 45% reduction in staff at Square (Jack Dorsey), shares rose 30%, and many companies are repeating this pattern. The population suffers from a "hidden energy tax," economic activity declines, and the recession risk grows.

This puts the Fed between a rock and a hard place: sticky inflation hampers rate cuts, but a downturn requires easing. McDonald believes: in the near future, the short end of the curve will be "pinned," yields will flatten and even invert, rather than be sharply steep as the market expected.

Last week, this already materialized — several funds betting on a steepening curve "blew up" on Wednesday and Thursday. McDonald: "These are real losses; several funds just collapsed."

His advice: buy 2- or 3-year US Treasury bonds at around 4% yield. The logic: over the holding period — 3%-4% annual risk-free return, and if a recession worsens and the Fed sharply cuts rates, bond prices will soar — the total return could reach 8%.