It’s been a rough stretch for markets.
Over the past several weeks, we’ve seen a sharp uptick in volatility and consistent selling pressure across equities. The S&P 500 is down meaningfully from its recent highs, the Nasdaq has slipped into correction territory, and investor sentiment has clearly shifted.
Naturally, the big question on everyone’s mind is:
Are we on the verge of a major bear market—or is this just a temporary pullback?
In this post, I want to walk through how I’m thinking about the current environment, with a particular focus on one key variable driving concern right now: oil and how I'm analyzing things through an MMT lens.
The Source of Market Anxiety
There are several forces converging at once:
- Geopolitical instability (particularly in the Middle East)
- Rising oil prices
- Weakness in private credit and private equity
- Broader macro uncertainty
All of this feeds into volatility. And volatility, in turn, gets priced into markets.
But volatility alone doesn’t necessarily mean we’re headed for a full-blown recession or a prolonged bear market. To answer that, we need to dig deeper into the mechanics—specifically through an MMT (Modern Monetary Theory) lens.
Why Oil Matters So Much
Oil has surged roughly 50% in just a few weeks, briefly touching around $120 per barrel before settling closer to ~$100.
That’s a big move—and it matters because:
- Oil is a foundational input cost across the entire economy
- Higher energy costs ripple through supply chains
- This pushes up inflation and compresses margins
The conventional view is straightforward:
Higher oil → higher inflation → weaker growth
And broadly speaking, that’s correct.
But the key question is: how much is too much?
The MMT Perspective: What Actually Breaks the System
From an MMT standpoint, the business cycle hinges on one critical dynamic:
The private sector wants to save—and it can only net save if another sector (primarily the government) runs deficits.
Government deficit spending injects net financial assets into the private sector. That supports income, savings, and ultimately economic stability.
However, things become fragile when:
- Government deficits slow (or shrink in real terms), and
- Inflation erodes the real value of those financial assets
When that happens, the private sector is forced to rely more heavily on credit expansion (leverage) to sustain growth.
That’s where instability begins.
The Role of Inflation (and Why Oil Drives It)
Here’s the crucial link:
- Oil → Inflation
- Inflation → Reduces real value of deficit spending
- Reduced real deficits → Less support for private sector savings
If inflation rises faster than government spending can offset it, the system starts to strain.
This is exactly what we saw in 2022:
- Oil spiked dramatically
- Inflation surged
- Fiscal dynamics tightened in real terms
- Markets sold off hard
Where Is the Breaking Point Today?
Using current estimates:
- A doubling of oil prices typically adds about ~2% to CPI
- We’ve already seen about a 1% inflation bump from recent oil moves
Right now:
- CPI is ~2.5%
- Forecasts are around ~3.5%
At these levels, things are slowing—but not breaking.
The Critical Threshold
Based on the modeling:
- The system starts to become unstable around ~6–6.5% inflation
- That’s the point where real deficit support turns negative
- And where recession risk meaningfully increases
To get there from here would likely require:
- Oil above ~$200 per barrel
- Or a similarly large inflationary shock
We are not close to that right now.
So… Are We Heading Into a Bear Market?
My answer: not yet.
What we’re seeing today looks far more like:
A market that was already stretched—and is now reacting to uncertainty.
In fact, I’d argue:
- The current selloff was already “baked in” based on weak underlying flows
- Markets were overvalued relative to fiscal support going back to late last year
- Geopolitical stress is acting as a catalyst, not the root cause
A Counterintuitive Point on Oil
Interestingly, higher oil prices aren’t purely negative for the U.S.:
- The U.S. is a net energy exporter
- Higher prices can boost domestic income and profits
So unless oil triggers runaway inflation, it doesn’t necessarily derail the broader market trajectory.
What to Expect Going Forward
Could things get worse in the short term?
Absolutely.
- Another 10% drawdown is entirely possible
- Volatility could remain elevated
- Headlines may continue to drive sharp swings
But unless we see a true inflation breakout toward 6%+, the conditions for a deep, prolonged bear market are not yet in place.
The Bigger Picture: Opportunity Ahead
If anything, this environment is setting up what could become:
A very attractive buying opportunity later this year
Why?
Because once:
- Volatility stabilizes
- Flows improve
- And fiscal dynamics reassert themselves
…the market will have a much stronger foundation to move higher again.
Final Thoughts
To summarize:
- Oil is rising—but not yet at dangerous levels
- Inflation is increasing—but not at system-breaking levels
- The selloff is real—but largely expected based on prior conditions
This looks less like the start of a structural collapse—and more like a necessary reset within an ongoing cycle.
As always, the key is to stay focused on flows, not headlines.
If you’d like to hear the full breakdown and walk through the charts and models in detail, you can watch the full video below.