Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Author: Sean Paul Kelley Page 1 of 13

'89-'93 BA History, Houston
'95-'07 Morgan Stanley, Associate Vice President
'99-'02 MS International Relations and Economic Development, Saint Mary's University
'07-'13 International Software Sales Manager, Singapore
'13-'16 MA, History, Thesis on Ancient Silk Road City of Merv, UTSA
Kelley lives in San Antonio, Texas.

BLS Alters How It Counts Core PCE Inflation – Guess What Changed?

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On July 23, 2026

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~by Sean Paul Kelley

From the Seoul Economic Daily:

The overhaul is expected to partly resolve an unusual gap between PCE and the more widely known Consumer Price Index (CPI). The annual core CPI rate in June was 2.6%, while core PCE was estimated at 3.3%. Typically CPI runs slightly above PCE, but recently the two reversed because of software and investment advisory figures. Both items are expected to show smaller increases after the overhaul.

Why the change? Well, “chipflation” was bleeding into software.

The SED continues:

For the software price measurement being revised, the BEA uses the BLS computing cost index. But that figure includes items such as USB flash drives. Their prices have surged amid a spike in demand for artificial intelligence (AI). The result was a distortion in which rising hardware prices were reflected in the software index.

For some reason game consoles are included in the software measurement. As I argued on July 14, these numbers are fraudulent. And this story is pretty solid evidence of that reality.

Everyone Misses Second Largest Drive Of Core Inflation—Memory Chips

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On July 14, 2026

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~by Sean Paul Kelley

Just about everyone has missed the second largest driver of core inflation (after petroleum) the Fed must reckon with. The insanely high prices and going higher of memory, you know, RAM, DRAM, SDRAM and the like. We’ll call it ‘chipflation.’

Chris Barber, CEO of a Baltimore based firm that helps small companies with IT says:

“RAM chips that sold for $100 six months ago are an “insane” $300 now, so customers may be better off just buying a new computer. “Parts themselves are just completely out of control,” Barber says. “This is the worst increase I’ve ever seen.”

That kind of price rise all but guarantees inflation, even using Fed based hedonics (don’t ask).

And Bloomberg says:

“Software and computer accessories, which usually trend cheaper as technology improves, were up a record 14.5% in May from a year earlier while the cost of electronic components for producers soared 27%. The memory squeeze will add 0.4 percentage point to headline inflation before it eases.”

I think Bloomberg understates how much pressure “chipflation” is going to increase Core PCE inflation.

Take Apple’s recent price hikes. They are 100% due to the increase in the price of memory.

Does the Fed really have a grip? Because “chipflation” will certainly increase in weight in meaesures like Core PCE inflation:

“Technology hardware (such as laptops, phones, and peripherals) historically acted as a deflationary force. Skyrocketing memory costs have reversed this trend. Analysts at Wolfe Research estimate that rising memory and storage costs alone can add noticeable basis points to Core PCE inflation.”

Why has “chipflation” flown so far under the radar at this point? One word: hedonics.

I’ll let Reuters explain: 

“Historically, hedonic models accounted for inflation by concluding that if a computer costs the same but processes data twice as fast, the consumer receives an implicit price decrease. Under chipflation, downstream hardware companies (like PC, smartphone, and appliance makers) are choosing to raise prices for devices that offer similar or identical capabilities to previous generations in order to protect margins. This severely slows down the historical trend of increasing “utility per dollar.”

And now this essential model to keepin inflation low is more and more useless. So, the Fed now has to deal with a private credit crisis—deflationary, an energy shock—inflationary and now this inflationary clusterfuck.

Talk about a trifecta!

No Eyesight, No Blogging

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On June 11, 2026

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~by Sean Paul Kelley

My Dr. gave me the wrong blood presure meds. One type blocks a hormone, another type halts it creation. I need the meds that block the hormone, not halt it. Without it my eyes turn into a mess. It is a very rare side-effect.

I woke up Saturday morning and could not focus my eyes on a damn thing—I could not count my fingers, had I not known they were there, of course.

It was quite worrying. So, I called Docs message service. She called back with instructions: stop taking the meds. Come see me Monday. Had to weight wait a minute for an opthmalology appt. which was early today. Great news: all will be back to normal in a few more days.

And my blood pressure is fine.

Can I just add how unsettling it is when the world is one giant blur of color? Not being able to focus sucks.

Closer to the End of Credit Cycle Phase Two

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On May 29, 2026

8 Comments

~by Sean Paul Kelley

For the first time in this Credit Cycle more money is leaving private credit than is going in.

In Q1 2026, $7 billion left non-publicly traded BDCs (business development companies, ie. private credit shops) while they only raised about $5 billion. Total redemption requests from investors to private credit shops topped $15 billion.

Okay class, a little math. If $7 billion was cashed out, only $5 billion was raised then $8 billion of redemption demands were denied investors. That means investors were denied 53% of their redemption requests. (One might call that a run on the bank.)

Systemic Deterioration

We’re talking about the entire private credit industry, here. Not just a bad loan or failing borrower. It’s becoming systemic.

“If there were no war,” as Herr Tarman at Deutschbank said, “in the Persian Gulf this would be dominating the news cycle.”

What makes this very, very bad is when more money leaves the private credit system, sales are forced.

These are not voluntary sales or trades. They are forced, essentially they are margin calls, except, as Bloomberg pointed out, some sales sell for .98¢ on the $1, others sell for .90¢, but one forced sale went real bad for the private credit firm. They got .65¢ on the $1.

That’s a 35% loss. I can recover from a 15% loss but losing 35%? Nope. That’s a busted investment I’m never getting my principal back on. This activity has a name, one rarely uttered on Wall Street, as it is the market equivalent of screaming, “Voldemort,” on the floor of the NYSE.

This is what we in the business call “Accelerating Downside Price Discovery.” (Honestly, last time this happened was in 2008 and I got giddy. I love seeing fools lose boatloads of money. The schadenfreude works like an aphrodisiac on me!)

Accelerating downside price discovery creates a vicious downward cycle in credit markets and later in equity markets. Assets devalue. Private credit shops announce bankruptcy. Lots of people lose jobs.

Then equities decline, soon the investment (Morgan Stanley and Goldman Sachs) and commercial (JPM Morgan Chase, BoA and Wells Fargo) banks crater. In February 2009 I bought an enormous amount of Bank of America at $6 a share. A month later it was trading at $3.50-ish. I was biting my fingernails for sure. But, ten years later I sold it for almost $30 a share. But for ten years the stock traded sideways. So did the equity markets. The Fed’s QE–quantitative easing–made money virtually free and no one paid a price for the sub-prime fiasco.

This time will be different. No one understands what private credit does, except buy up empty houses and make the housing crisis worse.

Petroleum And Economywide Demand Destruction

Another consequence: This credit cycle is ending and oil futures are flashing a clear deflationary spiral. This is why I keep pointing out the long end of the WTI Oil futures price contracts going out a year. Here is why oil matters:

In Mid-August US petroleum reserves (non SPR) will fall to 390 million barrels. Today that number is 440mln barrels.

For refineries, pipelines, storage tanks, and terminals to function the system needs a minimum of 380mln barrels in reserve. If reserves fall below that level getting petrol from point A to B is like pushing a string, instead of pumping a viscous liquid.

Let’s do some simple math. We export 5mln barrels a week, plus or minus a million. The US uses 120million barrels a week. Subtract our exports over the next ten weeks. That’s 5×10=50 mln barrels pulled out of the reserve. Subtract 50 mln barrels from present reservers (non SPR) gets us within the margin of error at 390mln barrels. At this rate US petroleum and gasoline reserves will be at crisis levels in mid-August. 

And herein lies the big rub, the dilemma of dilemmas, caught between Scylla and Charybdis: how can the Fed backstop a credit crisis with easy credit (because only easy credit solves a credit crisis) when its fighting phantom inflation with high rates, ie. tight credit? It cannot do both. Picture clearing up now?

I’ve been explaining the imminent unraveling of this credit crisis here at Ian’s for at least two months now. Today we’re closer to the end of Phase Two of the Credit Cycle now than we are to its start. When Phase Two unravels fully, that’s when the AI bubble goes pop.

When will that be?

Sooner than we want, but not as quickly as we fear.

“Cowboy up,” folks, as we say down here in Texas, “you’re going to need a raincoat.”

In Defence of Le Mot Juste

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On May 28, 2026

15 Comments

~by Sean Paul Kelley

My mother and I got into it yesterday about writing.

Now, I adore my mother: she’s fantastic; most of the time.

Yesterday, however, she took issue with my word usage.

Preface: Mom is Catholic. Went to Catholic high school and university. She knows her St. Thomas Aquinas, Grotius, Pascal, and a good smattering of just war theory. She’s good coming heavy with the ethics when I screw up, Buddhist or not. When she aims, she doesn’t miss.

12 lbs of joy and discovery

So in an email yesterday we were discussing Catholic and Buddhist ethics. Mom wanted to know specifically how Buddhists view the Three Soures of Catholic Morality. I resisted a flashback to Sister Agnes and the 12 inch wood ruler with which she routinely slapped my hand. Transgression, unknown. She was a sadist but I learned my Latin declensions perfectly, especially for pain: dolor, masculine, Third declension”

Dolor, doloris, dolori, dolorem, dolore, dolor

But I digress. . .

“In Catholicism,” my Mom wrote, “for an action to be morally good the object, the intent and the circumstance must all be morally sound or the action is corrupted.”

“Interesting that there are three sources in Catholicism, because in Buddhism ethics are rooted in the Noble Eightfold Path through three main components: right speech, right action, right livelihood,” I replied. “However, to achieve merit and harmony in Buddhism one is not required to act in a supererogatory manner, whereas some Catholic actions imply it.”

She laid into me in the next email. “See, you’re grandstanding–she meant grandiloquent, a vice I am very guilty of–with your words again,” she said. “What does that even mean? It sounds like something out of the Kama Sutra!”

“First, the Kama Sutra is Hindu. Second, what did I say?” I replied.

“You’re a word snob. Supererogatory is what you wrote. What does that even mean?”

“Mom, it’s actually a Catholic concept,” I replied. “It’s something that is morally good, but not required to be done; it is to go above and beyond what is morally or ethically required.”

“Why didn’t you just say that?” She said.

“Why use eleven words when one gets the job done?”

And then I mouthed off to her, like a dumb-ass.

“How hard is it to use a dictionary app on your iPhone?”

“If you weren’t an adult I’d beat you, right now.”

“I know, Mom, but still. I’m a logophile, a verbivore. I can’t help myself.”

“You’re insufferable.”

“I love you too.”

Gustave Flaubert believed in the perfect word in the perfect place.

So do I.

The Haters Guide To Post-Modernism

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On May 15, 2026

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To be read while listening to the Beastie Boys, Sabotage, at full tilt. Speakers, not earbuds you nit-wit.

In the beginning, circa 1989-93ish, post-modernism was out of step with mainstream academia. Derrida was a curiosity. Baudrillard was simply too dense to understand. (Confession: Baudrillard’s book, “The Gulf War Did Not Take Place,” is actually damned profound and prescient once you get past the kind of syntax that would make Yoda blush.) And Foucault, poor Michel (already dead by the time I attended university) was still dismissed as a fad—although of all the post-moderns Foucault’s work has aged the best and is worthy of respect. His discourses on the body, knowledge and the aggrandizement of power over all three by public institutions presaged neoliberalism. Credit where credit is due.

Sed tamen aberro . . .

Regardless, to the overworked and underpaid graduate students the post-moderns had the frisson of transgression. And nothing attracts the mediocre like a charlatan wrapped in the mantle of authenticity.

Eventually, those grad students became instructors, adjuncts and associate professors all over the country. Chipping away at the old ways by introducing Lyotard’s “incredulity towards meta-narratives” and Roland Barthes declaration that “the author was dead” both invalidating authorial intent and empowering the reader’s (usually baseless) interpretation, Derrida’s rejection of common sense and objective interpretations (known as ‘Deconstruction’) was the perfect mortar for the worst possible innovation.

It was probably Foucault, as his education included a substantial grounding in the history of science, who connected the dots leading from Heisenberg’s Uncertainty Principle, aka the observer effect, and grafted the concept onto his own thinking on the fluid and relative nature between institutions and power.

Then, in 1975 he took LSD. The experience changed everything according to Foucault. He completely revamped his work on human sexuality and its was here that sex took on the aspect of a social construct, to be negotiated. Sex was no longer an issue of pleasure, but of truth. (And thus our sexual identity politics were born.) Foucault’s popular discourse took on a life of its own, especially after his premature death in 1984.

The post-moderns soon expropriated wholesale the ‘observer effect.’ Unfortunately they abandoned rigorous analysis at the same time and like the good mediocre minds they were, adopted a pose I call, “la pose de Sarte.”*

With a highly dubious interpretation of science in one hand and quasi-erotic mojo in another students flocked to their lectures in droves. The ladies showed up for you. The men showed up for the ladies. And everyone ate up the half-baked but dangerously sexy contrarian theories on race, gender, and the negotiation of sexual identity.

Sometime between 2002 and 2014 when I returned to academia the entire coterie of post-moderns had infected all the humanities. And the observer effect acted like leprosy rotting the academy from every which way at once.

But the classes were full. Administrators took note. Professors got grants.

“Whoa, this grift is working?” They thought.

“Nicely done, Waldo.”

Now they’re wearing Zegna shoes and hand-woven black woolen Irish turtlenecks. Undergrad coeds hop in and out of their beds like Mae West on meth.

Soon they get published in peer reviewed journals by overworked and underpaid peers who just don’t give two fucks because university administrators have proliferated while tenured jobs have declined in nominal and real terms.

Big time college sports gobble up what is left of the academic budget, so universities start hiring half-assed adjunct professors and pay them slave wages.

And still, the post-moderns strike le pose, claiming their bullshit truth is equally as true as 2+2=4, when in actuality said theory is the the square root of wildebeest horns multiplied by baboon asses, divided by the Pyramid of Giza plus the Sphinx.

Making any sense yet?

It should not. It should boggle the mind, as not one iota of the post-moderns nonsense theorizing is scientifically provable or falsifiable. It’s bunkum. A weak attempt to prove there is no such thing as objective reality to anyone but the observer.

While working on my second masters I signed up for a seminar on the history of human sexuality. This was 2015 and we deconstructed the biological focus of traditional theories of sexuality. Now there was a masterclass of freeway rubbernecking idiocy. After that nonesense, we discussed Foucault, Jameson and finally Deluze, who more than any other post-modern flagrantly conflated science and mathematics to justify nothingness and subjectivity’s role on the observer’s effect, especially on sexual identity.

Give you one guess what conclusion we arrived at: sex is a social construct.

To be fair, gender is a social construct. The Thai’s have three genders, masculine, feminine and khathoey, or ‘Lady Boy.’ Kathoey are fully integrated and accepted into mainstream Thai, Cambodian and Laotian society. But sex, sex is not a construct.

I can prove the objective reality of sex’s falsifiability as a social construct.

Question: can you have an orgasm? Answer: yes. Then you are male or female.

Answer: no. Well, I respect your commitment, snip-snip, but you are neither male nor female.

Why would the professor care about any of this? He has tenure and his agenda. Besides, he’s getting laid more than Hank Moody in Californication.

Meanwhile the students grow stupider yet simultaneously more arrogant as they adopt le pose.

A vicious cycles ensues and we now find ourselves in the present moment, slaves to time’s relentless arrow.

But as the close neared its end it was time to put up or shut up. Yes, I know how to be a good suck up of a student and get high marks!

So, I wrote my research paper on the Alexandrian Greek poet Constantine Cavafy and his catamite. I got an ‘A’ but the course, well, to be generous, it was a shit show of moral degeneracy and complete intellectual absurdity.

I’d have been better off in Amsterdam’s Red Light District. At least I’d have had more fun.

————————

*Sarte: French existentialist philosopher of high regard and mortal enemy of Foucault.

The Oreshnik

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On May 13, 2026

14 Comments

~by Sean Paul Kelley

I’ve spoken to a handful of nuclear weapons and arms control analysts/experts and all pretty much agree that the Oreshnik, while a terrifying weapon, is actually a very positive development in regards to making nuclear weapons obsolete. Here’s why: prior to the successful deployment of the Oreshnik, there were only two weapon systems capable of bunker busting crucial enemy C3 nodes: thermobaric weapons, like the US MOAB fuel-air explosive bombs and the Russian Tosochka-2 and Tos-3 Drakon missiles. These weapons are useful for eliminating hardened C3 bunkers/nodes just behind the front lines but aren’t capable of striking hardened intermediate range targets. The only weapon capable of eliminating hardened C3 bunkers deep behind the lines are intermediate range city-busting nukes. Think a nuke that can take out Cheyenne Mt. or its Russian equivalent, or perhaps the NATO C3 bunker in Brussels.

Enter the Oreshnik.

The Oreshnik rarely carries an explosive load. It derives its destructive power from kinetics; physics; sir Isaac Newton’s laws at work. The Oreshnik moves so fast when it releases its MIRVed warheads that it is enveloped in plasma from friction with the air molecules.

Its warheads separate and move at such a stupendous speed that when they fall out of the sky it resembles a lighting strike. When they strike their target the speed and force is so immense they penetrate up to 150 meters. They leave no impact crater, but the reactive metal they are made of—a Russian state secret to be sure—for all intents and purposes becomes lava, shattering the bedrock, steel, liquifying concrete and discharges a shockwave that eviscerates everything within 300 meters or more.

After this cataclysmic ruination a molten material bubbles up through the point of entry, like a volcano bleeding liquids that were once solid. Such a scene was attested by onlookers in the Ukraine after a 2025 Oreshnik strike on a covert-NATO-Ukraine C3 bunker near Lviv.

It is the Oreshnik’s ability to accurately strike an intermediate range target—accurate to within 5 meters, +/- a small margin of error Mea culpa. The missile is accurate to within 100 meters. I regret the error.—that obviates the needs for city-busting nukes.

Why destroy an entire city to wreck a single C3 bunker when you can preserve the lives and assets of an entire city whilst destroying the C3 bunker with ease?

That’s not to say the Oreshnik is ushering in some new golden age of nuclear arms reduction.

That’s absurd.

But, it does eliminate a great deal of past risk.

And that’s not a bad thing, if you ask me.

America Exports Record 6.4 Million Barrels of Crude

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On May 5, 2026

8 Comments

Today’s headline news chronicles our triumphant, record-breaking petroleum exports: 6.4 million barrels a day. The highest weekly figure ever recorded. On the surface, it appears America may just make up in exports what the closure of the Straits of Hormuz prevents.

On the surface.

The reality of our domestic petroleum situation is more dire. The same week America exported record amounts of crude it quietly drew down its strategic reserve to the tune of 7.1 million barrels a day same week ending April 24. This represents the largest drawdown since 2022.

Let’s do some simmple arithmetic: drawdown strategic reserves by 7.1 mln and export 6.4 mln. Subtract and you get a net loss of 700,000 barrels a week. That’s the burn rate of crude oil. Not slack. Vanishing.

Adding insult to injury, Morgan Stanley reports that gasoline inventories are at their lowest level since well, ever. Yes, ever. By August gasoline reserves will freefall to 198 million barrels. 

In reality, America is facing an unsustainable crude oil burn rate coupled with a completely unsustainable draw down in gasoline reserves. These drawdowns are occurring in the face of perilously high petroleum prices, including gasoline.

But domestic petroleum production, and refining capacity will make up the difference!

What part of unsustainable did you not understand?

For example, the oil refinery on Corpus Christi Bay here in South Texas is effectively off-line because it has no water source. Lake Corpus Christi is dry. No water, no refinery, no gasoline.

To make matters worse, domestic crude production is trending flat to down, even as WTI spot prices are in the $102 range.

Permian Basin rig counts, a leading indicator of what future crude production will look like, are down 15.33% YoY. Oklahoma rig counts are down from 55 last April to 43 today. That’s a -21% decline YoY. New Mexico dropped 3 rigs and Wyoming dumped 1. What about Eagle Ford shale oil you ask? At $102 a barrel shale has to be profitable. True, but there hasn’t been a drilling permit issued in the Eagle Ford basin in three years. None have been filed with the state since the crisis with Iran began. There’s a reason for this. WTI spot prices are $102 a barrel, as I previously noted. Those are spot prices for oil deliverable right this minute. If you go 12 months out on the contract curve to May 2027, the price of WTI Falls to $73 a barrel. At that price shale oil isn’t in the sweet spot. 

Moreover, what the prices in May 2027 are telling policy makers, factory owners, grocery store managers, freight shippers and the like in bright red flashing lights are that a deflationary spiral is a very real possibility.

Here’s where the rubber hits the road: the petroleum and gasoline burn rate will force the Fed’s hand and compel a rate increase to prevent a massive inflationary spike.

But what is the Fed to do six months to a year from now when the looming credit crisis, and housing collapse reach critical mass and unravel, popping the AI bubble the blowoff?

We’re literally exporting our seed corn.

You can’t reap what you don’t sow.

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