America’s advantages in semiconductors, data centers and money make for a durable lead in the race to replicate human intelligence. In China, meanwhile, the strategy has focused on spreading artificial intelligence as fast as possible with free tools that can be adapted for specific tasks. But a third, far more important race is underway among governments, companies and individuals struggling to integrate these magic new algorithms into what they already do.

If you are an investor worried about Nvidia’s valuations and Oracle’s balance sheet, it’s time to look at who is putting these new tools to best use. As every rider knows, it’s not just about the best water or the nearest water. The horses need to drink it.

The largest U.S. firms racing to build artificial general intelligence understand that adoption is crucial, which may be why they have distributed so much of their tools at little or no cost on our laptops and mobile devices. But untold billions in their capital expenditure budgets confirm the priority: roll out bigger, more sophisticated frontier models, expecting profits to follow.

Even amid mounting worries over AI models that take on a life of their own and growing resistance to data centers that drive up utility prices, President Donald Trump insists America can’t afford to slow down. “AI is probably the biggest thing anybody’s ever seen,” he reiterated last month. “And whoever wins that race is probably going to win. Period.”

While China has hardly given up on frontier models, its AI strategy stresses the importance of diffusion through the adoption of open-weight models that can be downloaded at little or no cost and tailored to a user’s need. The idea is to drive AI adoption into every corner of the Chinese economy and spread these models globally, even if giving away inexpensive software may be hard to sustain indefinitely.

Uncharacteristically for a centralized communist government, many Chinese models are open-weight and free, meaning users can download them and tailor them to their own purposes. “We often say in China, ‘A single string cannot make music, and a single tree does not make a forest,’” President Xi Jinping told a recent AI conference in Shanghai. “AI development should not be a solo performance by a single country, but a symphony of international cooperation.”

These two races get first-rate examination in a new collection of essays, The Geopolitics of AI: Power, Conflict and the Future of Global Order, edited by Hal Brands of Johns Hopkins School of Advanced International Studies. Beyond exploring efforts to build the best model and drive the widest distribution, contributors also analyze the broader economic and political implications of this approaching technological tsunami. This is not a race among AI developers, they point out, but a much more complicated race among potential AI users.

Since no other country can credibly beat the U.S. or China in the races they have chosen, governments need to be more creative in reinforcing their comparative advantages. Singapore has decided to accelerate AI adoption across its public services to mitigate its resource limitations and bolster its role in regional innovation. Across the globe, the United Arab Emirates has positioned itself as one of the world’s most friendly regulatory regimes for launching an AI startup or building a data center.

Corporate efforts to integrate the benefits of AI are easy to spot, but harder to evaluate. Companies talk about AI and potential cost savings in their quarterly calls, but the evidence in profits is sparse. Investors need to look deeper to understand if these firms have a thoughtful vision for AI tools that will help deliver a better product or service. Every CEO should be able to answer why their company’s AI strategy will outperform the competition.

Finally, the rest of us face the challenge of integrating Claude and ChatGPT into our lives beyond summarizing our inbox and generating amusing memes. Does it make us better job candidates? Does it actually free up time in household routines? Could it, by chance, help us become more thoughtful and engaged citizens?

What becomes clear is that the real winners won’t be the country with the best model or the most downloads. The true beneficiaries will be the governments, companies and individuals that focus on this third race to integrate AI most effectively to improve what they already do.

Leading Thoughts doesn’t give investment advice, because long experience confirms that investors need suggestions tailored to their own goals and time horizons. Instead, we try to point out the most important geopolitical forces that are almost certainly coursing through your portfolio as you focus on margins, financing costs and valuations. You need to decide what to buy and sell.

If you are lucky enough to be heading to a beach or mountain top between now and Labor Day, enjoy that Tom Clancy or Danielle Steel you have been saving. But bookmark this for when you are back at your post, and review how your holdings may fare through these five global dramas as they play out.

China’s Trade Surplus: While hardly a new story, this remains the most important risk to the world economy. With an overbuilt industrial sector and weak domestic demand, the Chinese trade surplus hit a staggering $1.2 trillion last year, surging at nearly three times the growth in global goods trade. Mike Froman, the indefatigable president of the Council on Foreign Relations, makes a fresh case that these global imbalances may be approaching a breaking point. A collapse in China’s economic model will do far more damage to the global economy than any pause in hyperscaler investments.

America’s Elections: Even if November voting proceeds without major disruption, there will certainly be fraud accusations from losers. The Justice Department investigations and internet conspiracies that follow will further corrode trust in what is likely to be a very close presidential result in 2028. Take a look at this troubling Pew Research survey conducted last month, which shows that Republicans and Democrats are now equally unconvinced of the fairness and accuracy of the midterm vote. Imagine chaotic and uncertain results that leave Congressional control in doubt. The dollar will surely slide, Treasury yields will rise, and it’s hard to see a lot of stock market optimism. The risks look even higher when presidential votes are counted in 2028.

The World’s Falling Population: “As of 2026, humanity is likely below replacement fertility. That has never happened before, not in wars or pandemics.” That’s the chilling start to a fascinating study published last week by Jesús Fernández-Villaverde and Patrick Norrick. While declining population growth has been clear in rich countries, it’s now falling in poor countries and much faster than previous forecasts. These authors suggest different forces afoot in different countries, but they fall back on the simplest fact that three children are much more expensive than none at all. They don’t venture any forecasts, but these trends will have profound consequences on almost any investment case that extends out a decade.

The AI Race That Counts: Large U.S. firms are racing to build the best models in their quest for artificial general intelligence, and Sebastian Mallaby’s excellent primer traces their struggle to balance innovation and safety. Meanwhile, China has leaned into AI diffusion by pushing the adoption of open-weight models that can be downloaded at little or no cost and tailored to a user’s need. But the rest of us are in a third race to make best use of these magical new tools. For investors, this means asking every CEO exactly what they are doing to integrate AI tools in their business model and why they will be more successful than their competition.

Continuing Climate Risks: Donald Trump has made it unfashionable to worry about changing weather patterns, but no sensible investor can ignore Europe’s devastating summer fires. Even before the record July inferno west of Madrid, a team of Bruegel scholars assembled a frightening report about the mounting economic costs from storms, floods and fires. You can ignore climate change if it helps you sleep better at night, but you can’t ignore the additional financial burdens for companies and governments if you consider yourself a thoughtful investor.

Of course, there are plenty of other geopolitical landmines you need to track. Will the Strait of Hormuz stay mostly closed and will it drive another spike in energy prices? Will Ukraine’s attacks on Russian refineries trigger escalation from Moscow? Will the new Fed chair’s strategy for managing monetary policy be better or worse? Then you need to catch up on the Ebola spreading outbreak, a lurking attack on Cuba, renegade Large Language models and more.

But put these five at the top of your list. They may quickly overwhelm any lingering vacation memories, but they are crucial to planning your fall strategy.

The intrepid Research Secretariat here at Leading Thoughts is on summer break, leaving me free to rant factlessly about the pernicious turn in U.S. economic policy. But as I am taking on Donald Trump’s completely unsubstantiated premise that “The Whole World Has Been Laughing At America,” evidence for my view is not especially important.

The president argues they aren’t laughing anymore after his dizzying 18 months in office, but the wrenching pivot in America’s economic policy is important for anyone with money at risk here. The more Trump repeats his claim that other countries have taken advantage of America’s good nature for decades, the more it drags the mainstream policy debate towards more sanctions, more tariffs and more investment restrictions.

Treasury Secretary Scott Bessent continues to build out an economic strategy that calls out this unfairness as a direct threat to national security. U.S. Trade Representative Jamieson Greer tells the New York Times he’s just getting started on refashioning America’s trade policy.

Since we aren’t checking this essay for facts, let’s at least acknowledge that it raises eyebrows from Brussels to Beijing that the country with 5% of the world’s population should enjoy 25% of global GDP and more than half of the stock market capitalization.

Just who is taking advantage of whom?

But let’s turn to some of the ways we are being mocked, in the administration’s logic.

The loudest laughs, we are told, are coming from China, which has stolen jobs and cheated on trade. Conceding that many manufacturing jobs have been lost over the last three decades, it’s still important to point out (once again) that many – if not most – were lost to automation and robots. Again, we’re not providing evidence, but you could look at similar trends in almost every other developed country in the world.

If some of them were robbed, however, no serious analyst can overlook the net benefits of expanding trade with China: cheaper consumer goods, lower input costs and a freeing up of some workers for better jobs. Yes, the rich got richer, but the poor got richer, too. And yes, the rich got even richer than that, but that was a failure of tax policy, not trade negotiations.

For all the undeniable suffering that plagues former industrial hubs, Americans have seen real wages rise since China joined the World Trade Organization in 2001. With our fact-checkers away, the St. Louis Fed offers this, and the OECD offers this.

Europeans are also laughing, we are told, because they suckered us into spending all that money to defend them since the end of World War II. This was apparently pure charity, since we would have been perfectly fine with Soviet bases in Germany and French communists in power. Since the Cold War, I could be wrong, but I don’t remember many voices in Washington arguing that we should shut down NATO. Our team will double-check when they get back.

Trump surely deserves half the credit for triggering more European spending on defense, but Vladimir Putin gets the other half, and surely no one is laughing in Kyiv. Moreover, Trump’s persistent musings about the viability of NATO’s collective defense clause are every bit as self-defeating as standing in front of your bank with a sign announcing it’s on the verge of collapse.

Most ridiculous of all were last week’s Oval Office claims about the hordes of “birth tourists,” who apparently chuckle softly as they conceal pregnancies when they show up for their visa interviews. These are the tired, the poor and the huddled masses yearning to give birth in an American hospital. The motive, says Trump’s entirely mirthless advisor Stephen Miller, is to secure welfare benefits and the right to vote for their babies! (I am not making this up.)

The dearth of facts to support this policy is so dearthy that estimates of the problem range from a quarter to a half a percent of all U.S. births. But Trump’s own Solicitor General admitted to Supreme Court Chief Justice John Roberts that “no one knows for sure,” which may be why the laughter is so faint. The Court ruled against that argument, but the administration is trying yet again.

Of course, none of this is funny, because it has dragged the debate over economic policy from thinking about how to drive strong, balanced and sustainable growth into a self-defeating scramble to reinforce American security. Free trade turns to protectionism that undercuts American competitiveness. Alliances crumble and drive up the costs of defense for everyone. And anyone with a sense of history knows that dog whistles about unwanted immigrants never end well.

For investors, this means an America that is less innovative, more suspicious and hunting for scapegoats, instead of building the future. If this all sounds extreme and nutty, think of any number of recent White House announcements that would have been considered extreme and nutty.

What’s more worrying is that the debates have not shifted based on facts, but on the imagined sounds of laughter.

HIMARË, ALBANIA — The southern coast of this tiny European country offers glorious sun, crystal waters and vivid lessons in the corrosive consequences of massive military budgets and economic isolation.

Albania’s communists built one of the world’s most extreme models of militarization and self-reliance, and the damage is still evident 35 years after they lost power. Donald Trump’s vision of America is not remotely comparable to the dictatorship Enver Hoxha built here from the end of World War II until he died in 1985. But Washington’s current trajectory of mushrooming military budgets and turning away from key trading partners will just as surely undercut America’s investment appeal.

The lesson is not that America is becoming Albania. It is that persistent fiscal strain, weaker alliances and politicized trade policy can slowly erode the institutional advantages that have long justified a premium for U.S. assets.

Hoxha (pronounced ho-ja) began building a communist state when the war ended, brutally eliminating domestic rivals and progressively cutting ties with key international sponsors. First, he broke with Yugoslavia over worries it would absorb his country. Then, he ended relations with the Soviet Union when it turned its back on Stalin’s crimes. Finally, he deemed China to have abandoned Communism when it opened diplomatic relations with the United States.

As he turned against the world, Hoxha spent ever more of his country’s limited resources on defending against attacks that never came. Most prominent in this effort are the 175,000 concrete bunkers that honeycomb the landscape. (That’s 5.7 bunkers per square kilometer.) By some estimates, the annual cost from 1967 to 1986 exceeded 2 percent of the country’s annual output, which was on top of a defense budget of more than 5 percent of GDP.

Today, these empty concrete shells on the coast loom above sunbathers and sailboats; others have been transformed into cafés and works of art. But Hoxha’s choice to combine extreme militarization with deepening economic isolation helped leave Albanians among Europe’s poorest people when Communism collapsed.

What followed included civil war, disastrous pyramid schemes and rampant government corruption. Tourism and remittances have managed to drag the country into the position of Europe’s ninth poorest. A recent surge in international investment has delivered better growth, but the country’s weak institutions mean much of the money is channeled into sweetheart real estate deals with local oligarchs and politicians.

Albanians have been staunchly pro-American since Woodrow Wilson defended its statehood after World War I and Washington defended Kosovo’s Albanians against Serbian attacks in 1999. It is one of the few European countries to have erected a statue to George W. Bush following his visit in 2007. That alignment helped secure the country’s NATO membership two years later.

But weak institutions and turbulent politics continue to hobble progress. In recent weeks, another surge of anti-government protests has centered on a controversial luxury resort project involving Trump’s son-in-law, Jared Kushner. Longtime Prime Minister Edi Rama quietly stripped protection for a nature reserve that has been home to migratory birds to allow construction to proceed. The movement has been dubbed the Flamingo Revolution, and street protesters have once again called for new elections.

Rama’s government has also been hoping to host the next NATO summit, but Albania’s weak economy and institutions leave it struggling to meet Trump’s demands for more defense spending. Ironically, perhaps, a legacy of excessive spending and isolation has left it short of much more reasonable defense targets today. Meanwhile, European leaders are reluctant to suffer another tongue-lashing from the American president, whether in Tirana or any other NATO capital.

This brings us to Trump’s America, which has targeted a $1.5 trillion defense budget next year and continues to provoke trade wars with longtime allies. Few expect Congress to approve the president’s 50 percent spending increase request, but even half that would represent a significant boost for a country running a deficit near 6 percent of GDP. Meanwhile, the administration has plowed ahead on alternative plans to replace tariffs the Supreme Court ruled illegal.

There is no magic level for either defense spending or trade integration. For investors, the question is whether new spending improves security and whether trade measures strengthen or weaken the network that supports U.S. growth. A sound national security strategy depends far more on robust alliances and thoughtful procurement plans than on another billion dollars of expenditure. Tariffs can make sense as temporary bargaining chips to advance freer trade, but they remain a poor way to raise money or attract durable investment.

The Trump administration will point to the latest economic data as evidence that its security and trade policies are working, but the extremes of militarism and isolation that Communist Albania explored should at least raise doubts about the risks of going too far. Spending money on defense that adds to America’s debts doesn’t necessarily make the country more secure. Forcing trade partners into self-serving agreements undermines the benefits of any network of allies and partners.

The gorgeous Ionian coast is well worth the trip, whether you are looking for sunshine, great food or the warmest hospitality Americans can expect in Europe these days. But its history of isolation and militarism plagues its current prospects and serves as a vivid reminder of the corrosive costs of a bunker mentality.

Over a delightful dinner in Florence last month, I joined a few top European economists and political scientists in searching for the right word to describe the current transatlantic turmoil. Some favored “breach” or “rupture.” Recalling past alliance crises, I suggested something milder, like “renegotiation.” But between last week’s tumultuous NATO Summit headlines and the magical final stages of the World Cup, the current geopolitical moment is perhaps best captured by the internet meme that casts us as a great extended family cursed by the squabbles of the older generation.

For all the emotional, historical and commercial reasons that Europeans and Americans should cooperate ever more closely, their leaders are caught in increasingly bitter recriminations. In any family feud, the children suffer most. When alliances unravel, investors are the first victims.

As European leaders regroup in Paris this week to rally support for Ukraine and watch the Bastille Day parade, the conversation may be more relaxed without the grumbling insults from an unpredictable U.S. president. They already have the makings of a plan to build up their defenses against the military threat from Moscow. But they are only just beginning to develop a strategy to defend against Washington’s much more assertive economic agenda.

Instead of drones, tanks and missiles, the transatlantic conflict will play out through sanctions, tariffs and export controls. Thankfully, the collateral damage won’t be people and their homes, but rather investment returns and corporate profits that are caught in the middle.

Europeans rightly blame Trump for the current crisis in the relationship, but America’s strategic priorities have been shifting since the end of the Cold War. The pivot to Asia began under Barack Obama, and Europe has never been deeply concerned about the rise of the Chinese military. Trump’s weird admiration for Vladimir Putin is not widely shared in the U.S., but his successors will be pleased with anything that hands off primary responsibility for containing Russia to Europeans.

In the Middle East, few Europeans want Iran to have a nuclear weapon, but they are distraught at the mess America’s attack has left behind and will expect future U.S. presidents to clean it up. And, of course, they are wary of Trump’s intervention in Venezuela, nervous about his plans for Cuba and understandably furious at the persistent talk of taking Greenland.

But most of these differences will continue to play out across the Atlantic long after Trump.

Following the Supreme Court’s invalidation of tariffs under emergency powers, the administration has rebuilt tariff walls through more traditional legal authorities. Future presidents of either party will look weak if they don’t at least threaten tariffs in the face of EU competition decisions that penalize U.S. multinationals. They will face harsh domestic backlash if they do nothing to respond to Europe’s digital taxes or its Carbon Border Adjustment Mechanism.

Whatever new normal takes shape in the Gulf, Americans and Europeans will adjust their sanctions against Iran at different speeds. There will be differences over Russia and Cuba, too, and all of them risk triggering economic salvos from Washington. Recall 2014, when the U.S. fined BNP Paribas $8.9 billion for violating sanctions on Iran, Sudan and Cuba.

Then there’s the economic nuclear option. No, the American government won’t dump European debt, because it doesn’t have any. But there are high-tech export controls that could hurt European security. And any administration can always block sharing the latest models from ChatGPT or Anthropic.

Europe’s leverage to respond looks pitiful, but rising anger and populism across the continent will force some kind of resistance. Selling U.S. Treasury holdings would be self-defeating, but there may be rising calls to boycott U.S. goods. Europe could threaten to withhold exports of its advanced technologies such as the microchip lithography of the Dutch company ASML. Europe’s nuclear option is its Anti-Coercion Instrument, which would permit broad tariffs on U.S. exports, restrict U.S. firms’ access to public procurement and curb service market access.

Much of this is admittedly conjecture, but escalating economic conflict between the U.S. and Europe is far more likely than any live skirmish over the control of Nuuk. Most Americans don’t appreciate the depth of European anger over recent developments, which only increases the risks of damaging escalation.

Caught in the middle will be the companies that must pay the tariffs, navigate the potential sanctions and brace for large fines. The prospects of flagging investment and lost jobs may help avoid the most extreme scenarios, but the next chapter looks set to get much messier.

When American soccer fans cross the Atlantic for the next 2030 World Cup in Spain, Portugal and Morocco, “breach” and “rupture” may seem mild to describe a relationship that has descended into open economic warfare.

In no particular order:

1. Apollo 11 and Artemis II

2. University of Kansas Marching Band

3. General Electric, Coca-Cola, Microsoft, Google, and even SpaceX

4. D-Day

5. Johnny Carson, Richard Pryor, Victor Borge, Tina Fey and Stephen Colbert

6. Fathers and their daughters

7. The telephone, the Internet and the iPhone

8. PEPFAR

9. Sweet Caroline

10. The International Institute of New England (and all immigrant and refugee resettlement organizations)

11. Barack Obama

12. COVID-19 vaccines

13. Battle Hymn of the Republic

14. Thanksgiving

15. Civil Rights Act of 1964

16. World Cup euphoria

17. The Grand Canyon

18. CNN

19. U.S. Special Forces

20. The Pulitzer Prize

21. First generation college students

22. The Peace Corps

23. Charitable giving

24. Checks and balances

25. The Fourth of July

But then there’s:

1. Denying entry to a Somali World Cup referee

2. Appalachian poverty

3. Drug commercials

4. Mass incarceration

5. Tariffs

6. Deportations

7. Fox News

8. Joseph McCarthy, Father Charles Coughlin, George Wallace, Tucker Carlson and Stephen Miller

9. The Jones Act

10. COVID mask wars

11. Christian nationalism

12. Ranch dressing

13. Rising gun ownership

14. Declining test scores

15. Rising greenhouse gas emissions

16. Declining reputation abroad

17. Meme coins

18. X

19. Tuskegee syphilis study

20. My Lai

21. Donald Trump

22. Congressional stock trading

23. Fentanyl

24. Local news deserts

25. Gerrymandering

Add yours in the comments below.

In February 1918, the German army was heading for Russia’s imperial capital of Petrograd, and Vladimir Lenin stood ready to accept a harsh peace deal so he could focus on securing his Bolshevik Revolution. Others argued for fighting on, hoping Germany’s working classes were on the verge of rising up to topple their capitalist rulers. Leon Trotsky, who was leading negotiations, chose a stunning third formulation of “neither war nor peace,” walking out of the talks and declaring that Soviet Russia considered the war over.

Any investors who were excited last week at the prospect of a Gulf peace deal that would allow oil to flow again may hear echoes of Trotsky’s slogan in the exchanges between Iran and Washington over the weekend. And they may need to get used to it.

Iranians apparently attacked a departing Singaporean ship last week because they were hugging the coast of Oman rather than using the channels that Tehran had designated for safe passage. On Saturday, a Panamanian tanker was hit. It’s increasingly clear, however, that words like “Iranians” in this context should be in quotation marks because there are evidently competing factions interpreting what “Tehran” has actually agreed in the cease-fire deal.

The Trump administration retaliated with attacks against several military targets and a menacing social media post. Iran fired missiles at Kuwait and Bahrain. It would be deeply alarming if it didn’t have the feel of two exhausted boxers who just want the whole thing to end, even as hawks from their corners encourage one last blow for the history books.

Shipping traffic appeared ready to return to normal last week, with dozens of eager ship captains hoping to head home. The Memorandum of Understanding that President Donald Trump signed with so much fanfare at Versailles triggered a plan by the UN’s International Maritime Organization (IMO) to orchestrate safe passage for the 500-600 stranded ships. The plan, apparently agreed with both Iran and Oman, was to direct traffic along both the Iranian and Omani coasts to avoid sea mines lurking in the middle.

By last Wednesday, as many as 70 vessels cleared the Strait, apparently mostly Iranian ships free to deliver oil now that U.S. sanctions have been lifted. This was still not the normal pre-war daily level of 110 to 160 ships, but it was a good day when as many as 10 vessels snuck through when the missiles were flying.

By Thursday, however, traffic had all but stopped again, but global oil markets were mostly calm. More likely than not, there will be another pause in hostilities over the next week or two, and the trapped vessels will rush to take advantage of another window to escape. Iran is clearly eager to regain its lost oil revenues. Trump shows little appetite to restart an unpopular war before the midterms, and it’s difficult to see what more bombing might achieve even after the vote.

The real measure of the current fragile peace is not in the exodus of ships. The real test is the number of captains brave enough to enter the Gulf. What was striking last week were reports of at least 10 ships headed westward into the Gulf. Four were reportedly LNG tankers en route to Qatar.

But steady inflows will be slow to return. Many shipping companies have redirected their vessels to make deliveries in the Gulf of Mexico or elsewhere. And it will take generous insurance coverage and brave ship crews for the new normal to take shape.

Meanwhile, it seems sensible for investors to brace for an extended period of something that is not quite war and not quite peace. And both sides will be angling to tell a story for their citizens--and the history books--that their side prevailed.

Some historians will point out that Trotsky’s bluster didn’t last long. German troops continued their advance, and Russia was forced to sign an even worse deal. Today’s diplomats might conclude that in this case, Iran has the upper hand with its control of the Strait, and Trump will be forced to accept ever less favorable Iranian interpretations of the ceasefire, including shipping tolls and continuing nuclear enrichment of some sort.

Other historians will note that within months of Lenin’s humiliating concessions, there was an actual uprising in Germany that toppled the Kaiser and brought a new republic to power. Humiliating German concessions were extracted and sealed at another signing ceremony in Versailles.

All students of history will remember that deal didn’t really settle anything either.

As investors in artificial intelligence wonder how much higher their riches might soar, the questions multiply faster than the answers. They need to understand the rapid evolution of large language models, the spiraling capital commitments on data centers, the reliability of chip supplies and the spiking cost of talent. They need to assess how much value their magical algorithms actually deliver, how much the competition may charge and how long the race for primacy will continue.

But the most difficult forecast to incorporate in their investment plans has nothing to do with their suppliers or their customers. It’s their governments that are still trying to figure out how to encourage innovation while bracing for the Pandora’s Box of woes that AI risks unleashing on the world.

It’s easy to dismiss the fecklessness of the G-7 leaders last week as they took advice from leading AI titans in a session entitled “Ensuring the safe, rapid and effective deployment of artificial intelligence.” Seated around the triumvirate of AI’s top executives from Google, OpenAI and Anthropic, they talked through the need for a dash of coordination, a spot of regulation, but stopped short of anything that might interrupt the current race for AI primacy.

No sensible investor in artificial intelligence, however, can avoid the fact that regulation is coming. Nor can they avoid the uncomfortable fact that not a single leader really knows what they should regulate or how.

But put yourself in the shoes of any one of those G-7 leaders, consider the multitude of unmeasurable trade-offs before you and then ask yourself a few questions.

Will AI boost my popularity? This is the first simple test for any policy, whether you lead a democracy or a dictatorship, but the answer is complicated. No leader wants their country to miss out on the “next industrial revolution,” with its potential to speed discoveries, boost efficiency and turbo-charge growth. And yet, every politician has to consider the rising anxiety around AI over what it means for privacy, safety and electricity prices.

Rich countries record mounting fears around the potential consequences of AI deployments at every turn, while the developing world seems to welcome the prospect of tools that will help make up for their skills shortage. In the United States, half said they were “more concerned than excited” about AI in a Pew Research poll. In Nigeria, it was 24%.

Will AI speed growth? The answer should be a resounding “yes” for a technology that demonstrates magical abilities to gather information and draw conclusions on a scale and speed far exceeding human brains. AI tools should make everyone more productive, which should make everyone richer. As with any innovation, however, the unanswered question is: what new jobs will be created to replace those that disappear?

What is especially worrying about AI, however, is the speed with which it spreads its magic. For now, the main obstacles to its adoption are the human limitations in understanding how AI can be incorporated into existing organizations or activities. But the prospect of mass unemployment looms large. And what will happen to government finances if millions of jobless workers suddenly need retraining and social benefits?

Will AI boost security? The answers here are the most confusing. The Pentagon has gone all-in on AI tools, including in the Iran War, with the promise that it can identify threats and organize responses far faster than the best field commanders. And yet some of these same tools also boost the advantage of far weaker opponents, as Iran itself deployed AI to spread disinformation and rally global opinion against Washington.

Beyond war, large language models capable of hacking secure systems or circumventing built-in guardrails jolted the U.S. government into imposing restrictions. And this triggers further puzzles for countries that must protect their economic or military security when crucial AI tools come almost exclusively from the U.S. and China.

The political leaders gathered last week in France put a brave face on the challenge before them of managing the introduction of this transformative technology. President Emmanuel Macron, their host, made soothing statements about the need for a scheme to share models among trusted partners, but there were few clear ideas about how.

And this is where AI investors are left after they make all their heroic decisions about likely costs and potential revenues. They must think through what potential government policies, restrictions or intergovernmental agreements will shape how these products are deployed. Analysts will have to guess how much these rules may shrink the margins of their investments, and then assess if a competitor might be hurt more or less.

Anyone worried about whether AI stocks deserve current valuations or whether a market bubble is about to burst will focus on market technicals and current sentiment. The best investors will concentrate on the far more consequential dynamics ahead as governments wade into the complex tangle of questions around whether the rapid spread of AI tools increases their nation’s security, their economy’s growth and their own political prospects.

Investors get their first glimpse this week of America after Donald Trump as a new Fed chair kicks off his first meeting of a term that extends to 2030. Kevin Warsh is America’s latest Rorschach test on just how much the country has changed under its historically disruptive president.

Some will see continuity: a mainstream financier who will refresh the Fed’s creaky institutions, curb its sprawling balance sheet and keep a sharp eye on inflation. Some will see permanent damage to a central pillar of the global economy: a docile, “sock puppet” who abandoned his principles to curry favor with a president obsessed with cutting rates. Warsh may not be on Trump’s speed dial, but just how much will he monitor those Truth Social posts?

It’s one of the first real measures of just how much Trump will leave a lasting mark beyond a new White House ballroom and a shattered relationship with erstwhile European allies.

Just how much Trump reflects deeper political changes underway in America and how much he has single-handedly refashioned the country’s economic model will keep analysts busy for years. For now, if you are investing in America, what you really want to know is how much is lasting and how much will fade away when he leaves office. (And, yes, he will leave office in just … 950 days from today.)

The trick, peering into the future amid the tumultuous present, is to filter out the president’s vindictive personality and chaotic decision-making from the institutional and policy changes that may last. For now, Fed independence looks undamaged from Trump’s assault. But there may well be more economic policy continuity than change under successors of either party.

Fiscal Policy: Republicans and Democrats shut down the government in each of Trump’s two terms over the budget. But their differences were over small discretionary pots of money, with no serious attempt to stabilize America’s worrying debt trajectory. It’s hard to see how a Republican successor can justify more tax cuts, but there will be more spending under either party. A market crisis may force a change. The election outcome won’t.

Industrial Policy: With Trump having bulldozed the free-market wing of his own party, there are few voices in Washington to ask where the government should draw the line on subsidies for “strategic” industries and equity stakes in “vital” manufacturers. Americans have chosen to give up some efficiency and growth in favor of something that sounds like it’s reinforcing national security.

Trade: Beneath the name-calling and “Liberation Day” chaos, Trump’s tariffs reflect the same choice. Any successor will likely be less quixotic with trade demands, but tariffs are now a mainstream geopolitical tool that both parties will feel free to deploy. Indeed, a president will seem weak to relinquish them despite the costs they impose on American consumers or the protectionist rot they allow to build up. Even the most free-trading successor won’t revoke them without trying to extract concessions from battered trading partners.

Immigration: Here, Trump’s longstanding anti-foreign views seem aligned with the moment, especially following the pandemic-era border chaos. The Biden Administration finally managed to stem the flows before it left office, reflecting consensus across the political spectrum on the need for tighter border controls. No successor seems likely to pursue Trump’s cruel and unpopular deportations, but none seems likely to open the doors to more immigration visibly. I wish I were wrong, but “More Immigrants” has rarely been a winning bumper sticker.

Regulation: Here, the next election may make a meaningful difference. A Democrat in the White House seems sure to reverse Trump’s reversal of climate policy, even if the party’s hostility to hydrocarbons may diminish. Many Republicans don’t like to talk about climate change, but they do support limits on air pollution. A Republican may be more tolerant of renewable solutions, but the age of the internal combustion engine will win an extension. Banks will need to hold more capital under Democrats. Artificial intelligence and crypto will get tighter supervision.

Foreign Policy: Trump’s premise is that, for decades, the world has taken advantage of America’s protection, and it’s time for other countries to settle the bill. Most potential successors--other than Vice President J.D. Vance--will try to mend the scarred relations with allies, but none will argue they should spend less. The current stabilization of relations with China may last for now unless Beijing moves on Taiwan. Ukraine may get more U.S. support since Trump’s overtures to Vladimir Putin have failed. Meanwhile, any successor will be scrambling for years to restore stability in the Middle East.

So, take heart as you listen to Warsh this week. At least this key pillar of the U.S. economy looks resilient to Trump’s assault. But the central thrust of Trump’s economic policy whirlwind looks far more lasting than his presidency.

On a rainy New England morning several decades ago, my graduation speaker was the hero-astronaut Senator John Glenn of Ohio. The web archives suggest he assailed President Ronald Reagan’s diminishing support for university research and national laboratories, although I can’t really remember. But this confirms advice from some former speechwriter colleagues that I should focus today on celebrating your achievement, delivering one big idea and ending with hope.

So first, congratulations, graduates! This is not a day for political wrangling or social mudslinging. This is a day for you to thank the family, teachers and mentors who supported, encouraged, inspired and perhaps even sometimes threatened you to get you through. Even in a time when so much information is available to so many people, our world remains desperately short of educated people. So, we’re really glad you’ve arrived.

Second, I confess that I drew up a long list of “big ideas” to share with you today. But I have discarded most of them.

I won’t tell you to follow your passions. Passions are great for those who have them, but paralyzing for those of us who don’t. Concentrate on the things you like to do and the things you are good at doing, and see where it leads you.

Also, I won’t tell you to dream big. Of course, the world needs some dreamers, but it needs the rest of us too. We are the ones who may latch on to visions of peace, justice or scientific progress. But we may spend most of our time doing so as good teachers and managers, devoted mothers and fathers, caring friends and neighbors.

Finally, I won’t tell you that it’s your turn, that my generation did its best and feels bad for the mess we are leaving behind. In fact, my generation helped end the Cold War, lift millions out of poverty and deliver magic new cancer treatments. We also ran up huge debts, accelerated climate change and can barely stand to be in the same room together. Odds are your generation will have great success with some of the problems, but pass on different challenges to those who come after. That seems to be the pattern.

My big idea today is this:

Ask questions. And listen to the answers.

Ask and listen. It’s harder than you think.

My first job after that rainy graduation was as a news reporter in St. Petersburg, Florida. It’s a job full of questions, and journalism professors always teach that every good article should answer “the 5Ws and an H.” Whether it’s a traffic accident or a sheriff’s office scandal, find out Who? What? When? Where? Why? and How?

But that’s the easy part. What I learned there and in my later posts as an economic advisor to the post-Soviet Russian government, as an investor in companies around the world, and as an official in the Obama Administration was the importance of listening to the answers.

Does the person I have asked understand my question? Do they know what they are talking about? Are they trying to hide something embarrassing about their company? Do they have a political agenda to bolster their side in the next election? These are not always easy to detect. But if you listen carefully, you will learn to judge the confidence in their voice or the way they squirm when you ask for specifics.

What is much harder, however, and what is much more important, is listening when they tell you something you don’t want to hear. Maybe it undermines the premise of the article your editor assigned. Maybe it flags an investment risk you should have seen. Maybe it’s a part of what motivates your political foes that suddenly seems more reasonable than you expected.

Your future roles as a plumber or parent or doctor or neighbor or flight attendant or waiter or sibling or lawyer or friend will all require you to ask good questions so you can do better work and build stronger relationships. But even more important is listening carefully to the answers, understanding who is speaking and judging the answers as honestly as possible.

You always have the right to reject answers you don’t like, but make sure you understand why you are rejecting them. Some will call it empathy. Some will call this simply kindness. I just think that the world could use a lot more listening.

And that, I hope, tackles my third task, which is to send you off with hope. Because listening doesn’t require a distant scientific discovery, a huge new spending program, or even victory in the next election. It’s something that you can do for yourselves, that you can model for others and that you can pass on when one of you is standing up here when the generation that follows yours comes to collect their degrees.

Again, congratulations!

In the last week alone, we’ve had Russians warning U.S. diplomats to leave Kyiv as they prepare to retaliate for Ukrainian attacks on their oil infrastructure. The European Commission has been sharpening new tools to punish China for its rising trade surplus. And, of course, whiplash from negotiations between Washington and Tehran that have yet to free more than a tenth of the world’s oil supply.

Are greedy investors ignoring the rising geopolitical risks as they pump U.S. stocks to fresh heights?

No.

And yes.

With the S&P 500 trading at more than 20 times forward earnings, investors leave little room for disappointment amid headlines that have been nothing but disappointing. Rising bond yields may hint at mounting worries about inflation and America’s finances, but investors still seem ready to absorb the largest Initial Public Offering in history, even if it remains years away from turning a profit.

But if it’s easy to dismiss current stock levels as extraordinary popular delusions and the madness of crowds, there are good reasons why the market is trading rich and may trade even richer from here.

First, there could be a tiny bit of media hype in describing just how bad everything is. Alarming headlines and gloomy analyses are the fuel of news cycles and desperate Substack scribes. A widely cited geopolitical risk index looks high, but remains well below its level after the September 11 attacks, let alone last century’s world wars.

Second, regardless of what textbooks teach about market prices reflecting expectations about all future returns, investors tend to focus on next year’s earnings. The shifting tectonic plates that drive geopolitical realignment rarely move fast enough to affect next year’s earnings. As long as any showdown over Taiwan looks unlikely for the next couple of years, Taiwan Semiconductor Manufacturing Company, the world’s largest foundry with a 70% market share, should easily trade at 26 times next year’s earnings.

Third, the whole point of a globalized economy is that it offers alternatives when crises strike. When tariffs make Chinese suppliers too expensive, then “new” counterparts in Southeast Asia pick up the business. When the United States rips up trade agreements with its best trading partners, then the United Kingdom and Europe accelerate trade negotiations with India or key Latin American economies. Even the loss of a major source of the world’s oil and natural gas triggers a natural scramble to find alternative supplies in Canada, Brazil and the United States.

Fourth, U.S. growth clocked in at a respectable 2% during the first quarter, and unemployment remains at historically low levels. Consumer sentiment is terrible, but shoppers are still spending money at a good clip. The housing market has ground to a halt with rising mortgage rates, but incomes are rising in real terms, too. Income inequality and rising prices look more like political problems than economic ones.

Fifth, if you stop reading the political headlines, you will realize these are magical times of scientific and commercial innovation. For all the angst around artificial intelligence, consumers and businesses have entered a new era of astonishingly inexpensive analytical and processing horsepower. Blockchain technologies will transform finance. Genetic editing will extend lives. That SpaceX IPO may never turn a profit, but it seems sure to transform what’s possible in orbit and beyond.

But if there are plenty of explanations for the soaring market, there’s still plenty to give pause.

Government spending in developed countries has underpinned global economic performance for at least two decades. Public debts and central bank balance sheets have ballooned through the Global Financial Crisis and the pandemic lockdown. The demands ahead include everything from fatter defense budgets and old-age benefits to climate mitigation costs and infrastructure investment.

These debts are mostly manageable at current interest rates and growth forecasts. But Kevin Warsh may face raising the Fed Funds rate before he can consider cutting it. Gulf War inflation may be a one-off, but broader price pressures have been hard to wring out.

Meanwhile, looming midterm elections don’t seem likely to bring many balanced budget types into the next Congress. Last year’s Moody’s downgrade of the U.S. credit rating specifically cited America’s rising interest rate payments as a share of its budget.

If trade wars with China and actual wars in Europe and the Middle East haven’t dimmed market optimism, it’s hard to see what geopolitical crisis investors might fear. But maybe it’s the slow-burning political gridlock in the United States and many other developed countries that has politicians unable to balance budgets, tame inflation and stabilize their debts.

LONDON – Consider the geopolitical challenges of today’s European leader. A Middle East war you believe to be a mistake is sending another energy shock through your economy. A flood of subsidized manufactured goods from China continues to undermine what’s left of your industrial base. And any future national security plans are caught between a menacing Vladimir Putin and a mercurial Donald Trump.

Then, if you are UK Prime Minister Keir Starmer, the floor beneath your feet collapses. If you invest in gilts or sterling, so does your portfolio.

Just two years ago, Starmer’s Labour Party secured a commanding majority of 412 seats of a 650 total in Parliament, returning to power after 14 tumultuous years of Conservative rule. True, it won with only a third of the votes, and Starmer’s personal approval ratings were lukewarm. Still, there were hopes he might at least restore stability after four prime ministers since the country’s 2016 vote to leave the European Union.

But that was then. The prime minister’s popularity has now collapsed, with 69% of the electorate viewing him unfavorably. Labour polls fourth behind the Greens, Conservatives and new insurgent populist party, Reform UK, which leads with 26% support if elections were held today. It’s all anyone in London talked about last week.

At home, Starmer is universally blamed for indecisive leadership, a listless economy and an Epstein-related scandal. All this overshadows his solid efforts abroad to navigate the current geopolitical hazards.

He entered office with a plan to ‘reset’ ties with the EU. His early attempts to win over Donald Trump with personal flattery and a second State Visit to the UK helped secure a better trade deal than the European Union managed to land. Last May, as Trump tried to pressure Ukraine into a tenuous ceasefire with Russia, Starmer traveled with France’s Emmanuel Macron and Germany’s Friedrich Merz to Kyiv to bolster President Volodymyr Zelensky. A visit to China in January secured modest agreements in the wake of a tempestuous year of U.S.-China trade war.

These were hardly Churchillian triumphs, but they revealed the plausible strategy of a “middle power,” as Canada’s Mark Carney calls the countries with enough influence to model good behavior, but not enough to deter rule-breaking by Washington or Beijing. These are the countries that should at least try collectively to build common practices and defend core values even as the world’s strongest powers roll back progress toward more order.

But Starmer does not have Carney’s luck, rhetorical skills or splashy Instagram account. For now, with a comfortable 58% approval rating and an economy growing near 1% despite damaging U.S. tariffs, Carney can afford to stake out positions to guide Canada through treacherous geopolitical shoals without getting drawn into petty domestic politics. For now.

In France, Macron has seen his own political support collapse, undermining his attempts to give voice to Europe’s global interests. As Germany teeters on a third consecutive year of recession, Merz never had a chance to rise above his fractious governing coalition.

Both leaders face worrying challenges from domestic blends of nationalism and populism. The French Rassemblement Nationale holds a commanding lead in the polls in Macron’s final year of power, pushing for an aggressive crackdown on immigration and reclaiming control from Brussels. Germany’s Alternativ für Deutschland promises deportations and warmer relations with Russia.

Similar angry promises echo across Europe even as mainstream leaders struggle to reinforce what is essentially the world’s largest association of middle powers. They have tried to argue that Europe can only grow through deeper economic and financial integration and closer security coordination. Still, it’s always easier to draw attention to failures at home.

Back in Britain, Farage argues correctly that traditional British parties have lost touch with working men and women, but incorrectly that the path ahead requires insulation from immigrants and retrenchment from Europe. Despite polling suggesting widespread regret over leaving the EU, he remains a stalwart defender of Brexit.

Labour’s collapse is much more the fault of failed domestic leadership than any agenda abroad. Starmer now faces several potential leadership challenges, most prominently from Manchester Mayor Andy Burnham, although he must first win a by-election next month to enter parliament.

Few expect the beleaguered prime minister to last through the summer, but whoever prevails will be left to navigate Britain’s geopolitical perils astride the same fractured political foundations. The trick for any politician is to convince voters that global agendas deliver concrete benefits. The trick for any investor is to see where international agendas are cracking from below.

Former U.S. House Speaker Tip O’Neill was right, of course, that all politics are local, but Starmer is neither the first nor the last to learn that all geopolitics are, too.

As the readouts and analyses roll in from last week’s Beijing summit, investors may feel confused. If the relationship between the United States and China is unraveling, why did Donald Trump and Xi Jinping go out of their way to be so nice with each other? And can these two men alone keep the world’s most powerful countries from open conflict?

The answer to the first question is that each leader now knows exactly how to hurt the other’s economy the most, and neither wants to provoke a fight. China can cut off Western supplies of critical minerals, and America can cut off China’s access to advanced chips.

The second question is harder to answer, but we will know in 129 days before the next scheduled summit in Washington. If little substance gets done at summits, they set powerful deadlines for officials on both sides as they struggle to find common ground amid powerful centrifugal forces driving their countries apart. Xi is currently due to be wheels down on September 24.

In some sense, it would have been hard for much to come from this summit. Most of last year, the two sides attempted to pressure each other through tariffs, sanctions and export controls. By October, Trump and Xi met in South Korea and set the stage for a tenuous one-year truce that would restore the flow of critical minerals and semiconductors, while bringing tariffs down from nose-bleed levels.

Given the warmth of their exchanges, an observer might be forgiven for thinking that economic cooperation was heading back on track. But Trump told reporters that tariffs never came up in their conversations.

The president and his team reported Chinese commitments to buy more American airliners, beef and soybeans. They described plans to establish a Board of Trade and a Board of Investment that would jointly talk through problems in the economic relationship. Trump said Xi was deeply impressed to meet the corporate CEOs who had hitched a ride on Air Force One.

But even these green shoots in the frozen relationship will be difficult to build on for two countries that are still fundamentally trying to rely less on each other. Republicans and Democrats alike wish that America didn’t depend so heavily on Chinese critical minerals, pharmaceuticals or electronics. And they rightly denounce the country’s surplus of manufactured goods. Meanwhile, Chinese officials are focused on Xi’s vision of “dual-circulation,” which makes his domestic economy less reliant on foreign inputs even as it continues to ship goods abroad.

Then there are all the emotional issues that would ruin all that summit goodwill if both countries really said what they thought about each other. Americans still view China as a troubling dictatorship that is building up its military at breathtaking speed to reclaim Taiwan and dominate Asia. Chinese see an America in steep decline, plagued by intermittent financial crises, rising civil violence and a decaying educational system.

It’s little wonder that neither leader is entirely convincing, as he describes a great relationship capable of addressing the world’s pressing problems. Still, there will be concrete areas ahead to measure if anything has really been achieved.

• The simplest measure will be in any orders for U.S. goods that do materialize over the summer. Chinese officials have yet to confirm their intentions, but large purchases of goods they need anyway would be the easiest way for Xi to signal his hope for a better relationship.

• Progress on opening the Strait of Hormuz seems beyond the power of either president to deliver. Still, as the stand-off between Washington and Tehran continues, it will be a measure of progress if U.S. and Chinese officials can head off an escalation of sanctions on Chinese firms and banks doing business with Iran.

• For all the talk about the artificial intelligence race between the two countries, they share an interest in reinforcing the safety of these tools and ensuring that malign actors don’t misuse them. Even a channel to discuss principles would mark progress.

• As much as Trump tries to ignore Taiwan, it was prominent in Xi’s talking points. Awkwardly, the American president is due to approve a $14 billion Taiwanese arms purchase soon, but could try to delay the decision until after the Xi visit.

• Any dialogue on trade or investment will have to address a renewal of the truce on tariffs and export controls. If the two sides can’t even agree on this bare minimum by the time Xi lands in Washington, the relationship will clearly be in unraveling mode.

The U.S. commentariat seemed relieved that an improvisational president like Trump delivered the diplomatic equivalent of the Hippocratic oath “to do no harm” to a fraught bilateral relationship. But the summer will go a long way to determining if investors can expect any lasting calm between the world’s largest economies. The two teams have 129 days to show progress.

Then they have the chance to be even more ambitious as they prepare for two more Trump-Xi meetings before the end of the year!

In November 1941, with German forces some 50 miles from Moscow, Stalin ordered a showy parade through Red Square to commemorate the Bolshevik Revolution. Some troops were marched directly from the front to participate, while diplomats and foreign journalists were invited to bear witness to a country whose spirits could not be broken.

Some 31 years ago, my wife and I attended huge celebrations marking the 50^th anniversary of Victory Day, which were more directed at confused citizens emerging from a shattered Soviet Union. The parade recalled the immense sacrifice of 27 million Soviet dead but also raised hopes of a new era of opening and reintegration with wartime allies. A giant Red Square poster showed a Russian soldier with his arm around a Western ally under the slogan: “Glory to the Peoples who Defeated Fascism!” British, American and French flags waved above them.

This weekend, Vladimir Putin’s Russia staged an understated, hurried march past Lenin’s Tomb with a message that was less defiant or triumphant. At just 45 minutes, it was half the length of last year’s parade, and the only visible military hardware was projected on giant video screens.

Ten weeks into the Iran War, the conventional wisdom argues that Putin’s Russia is an unintended winner, benefiting from sky-high oil prices, lax sanctions enforcement and a distracted America. (I may even have suggested as much in an argument I have now reconsidered.) Ironically, however, the oil spike has only exposed the weakness of the Russian economic engine. The Gulf turmoil has turned into an unexpected boon for Ukrainian diplomacy. And the war’s geopolitical shifts will only drive Putin into even deeper dependence on China’s President Xi Jinping.

Closing the Strait of Hormuz was, to be clear, a pleasant surprise for Russia’s finance ministry, which had ordered huge cuts in non-military spending for 2026. But Russia books an estimated $1.6 billion per month for every $10 increase in oil prices. Then there are taxes on higher natural gas, fertilizer and all the country’s other commodity exports. The problem is that Moscow’s budget masters understand all too well that these windfalls do nothing to change the fact that Russia’s near-term growth depends overwhelmingly on war spending.

In fact, last week, Russia’s Economic Development Ministry reported the first quarterly contraction in three years, as household income growth slowed dramatically. After two years of an economy supercharged by defense spending, consumer demand is running out of steam. Putin likes to brag about unemployment at 2.2%, but that’s mainly due to a severe labor shortage from so many men fighting and dying in Ukraine. While inflation near 6% is lower than last year’s, interest rates remain a whopping 14.5%.

The last few months, meanwhile, have been good for Ukrainian diplomats and soldiers. Zelensky concluded security agreements with Saudi Arabia, Qatar and the United Arab Emirates. They get crucial air defense technology and training now that their neighborhood has turned dangerous; Ukraine gets a fresh set of deep-pocketed backers beyond the United States and Europe.

On the battlefield, Russia’s spring offensive has yielded virtually no territorial gains, while it has been losing more troops in battle than it has been able to recruit during the first quarter. This may force Putin to consider expanding unpopular conscription even as his own popularity has dropped to a four-year low.

Finally, the prospect of a much longer war and a flagging economy only drives Russia into a deeper long-term dependency on China. In the short term, China has already boosted its purchases of Russian oil, gas and coal, and its latest five-year plan calls for progress on a new gas pipeline from Russia. But Beijing drove a hard bargain over the terms of its Power of Siberia 1 pipeline, and it surely recognizes just how desperate Russia may be to move ahead with a second project now that it has lost its Western markets.

And while Russia angles to offer Iran arms and intelligence support in its fight against America, Tehran will always prioritize its relationship with Beijing. China not only bought 80-90% of Iran’s oil exports but also kept the Iranian economy afloat through industrial imports and structural investments amid rigid Western sanctions.

A three-day ceasefire between Ukraine and Russia, announced on Friday by President Donald Trump, had already collapsed by Sunday as both sides accused the other of violating its terms. While Ukrainians have grown accustomed to Russia’s attacks over four years of fighting, Ukraine’s attacks on Russian territory have increasingly rattled Russia’s leaders.

Zelensky had issued a cheeky decree ordering Ukrainian forces to withhold any attacks on Saturday’s Victory Day Parade “on humanitarian grounds.” He then listed the precise geographic coordinates of Red Square.

In a revealing riposte, Russian officials denounced it as “a silly joke.”

“Of course it hurts,” says the actor Peter O’Toole in the title role as Lawrence of Arabia as his fingers squeeze the flame from a match. “The trick … is not minding that it hurts.” Both Washington and Tehran are doing their rhetorical best to feign indifference to the pain from a naval blockade that has trapped a third of Iran’s budget revenues and a fifth of the world’s oil.

In Barron’s on Friday, I outlined how irrational stubbornness on both sides could push the global economy to the verge of recession with cascading disasters in certain countries and sectors. But record-setting stock prices suggest that markets believe this will soon force one side or the other to back down before calamity strikes. And the overwhelming evidence so far is that the Iranian regime either won’t – or can’t -- give in.

No, this argument doesn’t involve lumping Persians and Arabs into a big Middle Eastern pot of stoicism, fanaticism and zealotry. Rather, it refutes accusations from Defense Secretary Pete Hegseth last week that Congressional Democrats “and some Republicans” are going soft after just two months of war.

That’s more than enough time to reach a few solid conclusions.

First, for all the signs in the last year of rising opposition to the Iranian regime and for all the hopes that the U.S.-Israeli attack might trigger a popular rebellion, the current regime looks like it remains in full control. Some spark could still ignite a revolutionary flame, but that domestic chaos would likely keep the Straits shut even longer.

Second, bureaucracies are highly resilient to bombs. You can kill most of a country’s top leadership, but the regime will remain largely unchanged. In fact, the regime is probably more entrenched in its hostility to the United States and less able to make decisions of any kind. The only way the United States has ever changed another government for the better has been to send its army to install, train and supervise friendlier officials. This was done in Germany and Japan with great success; in Iraq, with mixed results. Not even the most hawkish hawks think occupation is a good idea.

Third, governments survive disastrous economies, especially when they can blame outsiders for their failures. Think of Castro’s Cuba, Kim’s North Korea and Putin’s Russia. Iran’s inflation may surpass current 50% levels, and its GDP may contract more than the 6% the International Monetary Fund projects this year. But after eight years of tightening sanctions and four decades of U.S. hostility, the government has proven deeply resistant to domestic economic chaos.

Fourth, Iran’s government has now shown itself highly resistant to military pain, too. Bombing its nuclear facilities did little to change its bargaining position. If striking more than 17,000 targets in March and April didn’t change the regime’s calculus, it’s hard to imagine how much more devastation and death might be required.

Fifth, while Operation Epic Fury has imposed enormous costs on the Iranian government and devastated its armed forces, it hasn’t eradicated its enriched uranium at the heart of its nuclear program. Intelligence estimates suggest half its ballistic missiles and associated launchers remain intact. And it has done little so far to noticeably tilt the balance of forces toward Israel as it struggles to eradicate Hamas and Hezbollah.

If the hardest thing for an investor is to sell a favorite stock that has gone wrong, the hardest thing for a political leader is to give up on a fight that isn’t going well. The more Trump’s backers argue that Iran is on the verge of breaking, the more they sound like a beleaguered portfolio manager hoping that next year’s earnings will improve.

But there’s a fine line between persistence and stubbornness. Sooner or later, every investor learns to ignore sunk costs and focus on the relative merits of adjusting strategies. This need not mean giving up on containing Iran’s aspirations for nuclear weapons or ending its support for regional proxies. But it does mean opening the Straits as quickly as possible before the blockade causes lasting damage to the global economy, America’s fraying alliances, and Republican prospects in the fall elections.

Trump may even be right when he insists that Iran is suffering more from this conflict than America, where growth is a steady 2%, and inflation has edged above 3%. But that’s different from understanding which side can better withstand the current pain, just as that pain is about to ramp up sharply for the U.S. and its main trading partners in Europe and Asia.

Right now, simply put, Iran minds less.

As you track the expert commentary on the Iran War, you will notice a pattern. Whether they come from military, academic or investment backgrounds, everyone agrees that the Iranian government is terrible, that the U.S. military has performed brilliantly and that nuclear proliferation presents a risk to the volatile politics of the Middle East.

But there is a yawning divide between those who back negotiations and incentives for good behavior and those who prefer the attack. Basically, carrots or sticks. Soaring financial markets seem to believe that President Donald Trump’s on-again, off-again talks with Iran will somehow reopen the Straits of Hormuz soon. But that won’t happen unless the president overcomes his aversion to a negotiated settlement that looks like the Iran deal he himself renounced.

“Team Carrot,” of which I am a proud member, starts with the premise that knowledge is hard to control. Once a country learns how to make a bomb, it can never unlearn it, which means depending on its goodwill, its values or, failing those, a balance of incentives that encourage better behavior.

Thus, Japan, Germany and many other countries could make their own nuclear weapons, but have decided that their security would not improve. They may look at Russia and the United States, for example, and see how little vast nuclear arsenals have helped in securing friendly governments in either Ukraine or Cuba. They may see greater advantage in reliance on conventional forces and strong alliances to protect themselves.

After years of punishing economic sanctions on Iran, this was essentially the premise behind the 2015 Joint Comprehensive Plan of Action. (That’s pronounced “jik-POE-ah” if you work at the Pentagon or just “JCPOA” to the rest of us.) Under President Barack Obama, the United States, together with the United Kingdom, France, Germany, Russia and China, negotiated a framework that would reduce Iran’s uranium stockpile by 98% and establish continuous inspection of its enrichment facilities.

“By binding Iran to an inspection regime for at least 15 years as crippling economic sanctions were released,” argues Team Carrot, “the government would have come to see that it could better secure its country and grow its economy by renouncing any plans for nuclear weapons. Its young and educated population would have pressed for change. If nothing else, Iran would not have amassed the uranium stockpile it has today.”

“Team Stick” scoffs at this logic as soft-headed, left-wing tripe. “Hope is not a strategy,” they say. “These mullahs can’t be trusted. Have you seen how many of their own people they detain and kill? Don’t you understand the regional threat they pose through their proxies? When the JCPOA expired, they would have raced to build a bomb with that money we released.”

Team Carrot explains that Trump’s decision to pull out of the JCPOA in 2018 is what triggered Iran’s current rush to build a stockpile of enriched uranium. It argues that the diplomatic path would have been far preferable to the current state of affairs. Having been attacked by the United States and Israel twice during negotiations, Iranians might naturally conclude that nuclear weapons are the only way they can secure their borders.

“Ah,” says Team Stick, “that’s the same muddled logic that got us here today. Look at how we have taken out their air force and their navy and decimated their defense infrastructure. Force, it adds, is the only thing they understand!”

But listen closely to what they say next.

“Of course, bombing alone won’t change the government,” the Stickers admit, relying on centuries of war history that demonstrate pretty conclusively that it takes ground troops to topple an existing regime and install a replacement. They go on to concede that there’s no way even the U.S. military can occupy a country the size and sophistication of Iran. “But we would hope,” they say, “that maybe this will be the time that the Iranian people rise up to form a better government!”

Then, realizing they used the word “hope,” which is off-brand for these serious, hard-headed and meticulous realists, they add something curious: “Of course, every conflict has to end with some sort of negotiation.” Some will then point out that President Trump is a master negotiator. Others will then say that we have the upper hand in these talks as Iran doesn’t want -- and can’t withstand – a return to “kinetic” operations.

Surely, not even the evil Iranian regime wants a reprise of U.S. attacks, but it’s not clear that they can’t withstand them. Moreover, having discovered how to block 20% of the world’s oil and natural gas inside the Gulf, it’s not obvious who has the upper hand. Soaring gasoline prices, a looming China summit and mid-term campaigning raise the stakes for Trump to reach a quick resolution. Not only are Iran’s leaders defending their homeland, but they also believe they have God on their side.

Investors still seem sanguine that Gulf energy supplies will be back on the market soon, but they should examine the trap Trump and Team Stick have walked into. Once the president concedes the Iranian regime isn’t going anywhere, he must consider what carrots to offer. Reports suggest the deal in the works may allow Iran to enrich uranium and regain access to its frozen assets eventually.

Markets should be very clear that if a deal is going to be difficult for the Iranians to accept, it may be even more difficult for Trump to accept. And it may not come as quickly as they expect.

Investors looked eager last week to believe that a deal between Washington and Tehran was imminent and that disruptions to the global economy could be quickly repaired. With reports that negotiations might allow Iran to enrich uranium after 20 years, there seemed to be ample room to reach a compromise. But if the U.S. entered this conflict with overwhelming advantages in money and firepower, Iran has demonstrated that it still has more patience and endurance.

The current standoff isn’t ending as quickly as either side hopes, which means markets may be headed for a brutal shock. It’s not that Iran wouldn’t welcome an agreement to end the fighting soon, but its leaders seem to understand that time is on their side, and they can afford to spend weeks or months hammering out details in their own favor.

Consider the uncomfortable calendar ahead for Donald Trump as he reiterates his belief that the conflict is nearly over:

May 12: Next U.S. Consumer Price Index released, recording the April price spikes for oil, gas and fertilizer.

May 14-15: Rescheduled Beijing Summit with Xi Jinping, who will be expecting that any American leader desperate for a trade deal will make concessions on tech exports or Taiwan’s security.

May: Europe faces jet fuel shortages and flight cancellations. Key Asian oil reserves run out. Food price shocks cascade through developing countries.

May 25-29: Members of Congress, breaking for Memorial Day, will be bracing for an earful from voters about the war.

June 15-17: G-7 Summit in Evian-les-Bains, France, at which European and Japanese leaders will have their own pointed questions for Trump – unless he cancels his trip.

Now consider the calendar ahead for Iran’s leaders:

Late May: Eid-e-Ghorban, the national holiday that commemorates sacrifice and charity.

June 3: Eid-e-Ghadir, a major Shia celebration of the appointment of Imam Ali as successor to the Prophet Mohamed.

June 4: Commemoration of the death of Ayatollah Khomeini.

June 5: Anniversary of the 1963 uprising crushed by the Shah.

Any negotiations of this complexity take on their own dynamic, but a glance ahead shows the uncomfortable dates on Trump’s schedule if this war continues much longer. Iran’s leaders are surely eager to extend the current ceasefire. Still, they are less likely to make significant concessions as they mark important political and religious events that unite their people and shore up their power.

Over the weekend, six airports reopened to domestic flights, which had been closed since the first U.S. and Israeli attacks on February 28. Even if this conflict ends soon, the IMF expects Iran’s economy to shrink more than 6% this year, amid even more severe shortages of food, fuel and medicines.

But for all the decades of economic hardship, Iran’s leaders can credibly claim that this latest blow was beyond their control. Besides, they take their mandate from God, which means they rarely feel compelled to yield to pressure from at home or abroad. Just three months after the regime put down massive domestic protests and survived a decapitating U.S. attack, it shows few signs of releasing its grip. That could change quickly, but for now it seems intransigent.

Iranian leaders know their country’s situation is much worse than America’s, but they also know that closing the Strait inflicts far more incremental pain on Trump and the global economy. It’s one thing for financial markets to price in the current interruption in flows; it’s entirely different in late May, when national reserves are drained, oil wells are shut in, or refineries shut down.

This means Iranian negotiators can press for a shorter period before enrichment resumes, faster access to their frozen assets and less humiliating inspections of their nuclear facilities.

Markets have rallied on Trump’s repeated assertions that a deal is near, and as investors reckon that Trump understands the looming damage ahead if this conflict drags on. But the risks are evident in the chaotic announcements that the Strait was closed, reopened and then closed again. Ending this war is not entirely in the president’s hands.

Even when a deal is announced and all trapped ships are freed, the moment of truth for the global economy will only come when the first shipowners feel brave enough to send their vessels into the Gulf. Given how quickly Trump changes his mind, this may take time. Given how tenuous governance in Tehran remains, it may take even longer.

The irony is that both sides desperately want shipping flows to resume, but they will likely continue threatening to close the Strait even after any agreement is reached. Investors shouldn’t hold their breath waiting for a return to normal shipping commerce anytime soon.

Despite many years spent studying global history and international relations theory, the two most influential people in my understanding of world events remain Neil Armstrong and William Shatner. While I know full well that countries always find reasons to fight over land, resources or their own visions of security, I still operate under the happy assumption that Earthlings must inevitably join forces to colonize the Moon and stand up to the Klingon menace.

Okay, I haven’t actually been holding my breath for the conversion of all swords into plowshares, but I wasn’t expecting that space exploration would aggravate earthbound conflicts as it has. And optimist that I remain, I still wonder if a few well-designed voyages into the stars might at least help smooth things over back here at sea level.

Sadly, the breathtaking pictures from last week's Artemis II mission landed amid the rest of the headlines from Iran, Lebanon and Ukraine, confirming just how little progress there has been since Apollo 11 and the original Star Trek television series. Maybe six decades just isn’t very much in the scope of human history, and we all need to be more patient. But maybe the most important benefit of these stunning pictures of our tiny, fragile planet is the stark reminder that we had better start getting our act together.

If you were lucky enough to watch it live, you remember the tingle in your spine when Armstrong read a plaque left on the Moon that declared his mission had “come in peace for all mankind.” Just a month earlier, Captain James T. Kirk completed 79 episodes in command of the U.S.S. Enterprise and a bridge crew that was Russian, Japanese, African American (female!) and Vulcan.

For a brief moment, space really did seem to hold the promise of encouraging global cooperation despite the parlous state of the Earth. At the height of the Cold War, the United States and the Soviet Union backed the 1967 Outer Space Treaty, which prohibits nuclear weapons in space and precludes any country from claiming sovereignty beyond the heavens. As détente bloomed in 1975, an American astronaut and a Soviet cosmonaut shook hands through the hatch of their docked Apollo and Soyuz spacecrafts.

The International Space Station, launched in 1998, brought together the United States, Russia, Canada, Japan and Europe and has survived the geopolitical transformation below including the rise of China, September 11, the Global Financial Crisis, and wars in Kosovo, Afghanistan, Iraq, Georgia, the Middle East and more. Even as relations between Washington and Moscow plumb new depths, Americans and Russians continue to conduct research today, and the joint space station crew chatted amiably last week with the Artemis astronauts as they returned to Earth.

The station itself is scheduled to return to Earth by 2030, having more than doubled its original 15-year lifespan. But what lies beyond that looks more like a mad scramble for profit and prestige than any cooperative effort to explore the universe or ward off extraterrestrial threats.

Actually, it’s looking like two mad scrambles.

NASA’s exploration plans will increasingly rely on commercial launch services. The next Artemis missions seem designed to get an American back on the Moon by 2028 before the current Chinese schedule to land in 2030. Then, launch a new race for Mars.

The U.S. has rallied a loose coalition of more than 60 states that have agreed to cooperate under the “Artemis Accords.” In addition to traditional European, Canadian and Japanese participation, this now includes ambitious space programs like those of India and the United Arab Emirates.

Meanwhile, Russia’s space program, strained by sanctions and war, may lean more toward supporting China’s mission. Even Iran, which had planned to launch its first satellite network last month before the U.S.-Israeli attacks, had been cooperating with both Moscow and Beijing.

China and Russia have denounced America’s space agenda as a blatant colonization to secure valuable mining rights in space in violation of the 1967 treaty. But it’s now clear that any pure aspirations to explore space on behalf of humanity are part of a larger mix of motives that includes a lust for geopolitical prestige, a drive for military advantage and a hunt for profit.

Perhaps it’s just a win that we’ve managed to get Germany and France on the same space mission after centuries of war. Possibly, we should just be grateful that Russians and Chinese working together in space can overcome enmities that date back to the 1689 Treaty of Nerchinsk.

But maybe, just maybe, these missions will remind everyone of the long game. Yes, we should insist on moving everyone towards greater freedom and democracy, but we’d better land on a formula pretty soon so we can move on to other priorities.

This may sound hopelessly idealistic to foreign policy realists, who rightly warn of increasingly powerful tyrannies. But consider this an appeal to begin thinking about interplanetary realism. It may be many decades--or centuries--before we need to unite as a single planet to face an extraterrestrial threat as nasty as the Klingons. But on our current trajectory, we’re not going to make it.

If you live anywhere near the recent violence and destruction in the Middle East, all you want to know is when it will end. If you have money at risk in global markets, your more selfish question is how soon oil markets can expect relief.

President Donald Trump promised last week that the U.S. would accomplish all its military objectives “very shortly,” but investors don’t seem convinced his list includes safe and unrestricted passage through the Strait of Hormuz. Futures markets suggest oil will only fall below $100 a barrel by Memorial Day and not below $70 until next year. Trump’s expletive-laden threats yesterday seem unlikely to calm anyone’s nerves.

In fact, even this seems optimistic when you consider the odds for the most probable paths ahead. Consider these alternatives -- and assign your own probabilities.

1. Iran concedes: With the country unable to defend itself from U.S. and Israeli attacks, even an unchanged regime of committed hardliners could seek relief. Current leaders might be worried about their own personal survival, too. With their nuclear program largely destroyed, abandoning it for now isn’t much of a concession. A humiliating surrender might trigger a domestic outcry, but the ayatollahs would face few distractions to tightening their grip on power. (Odds: 10%)

2. U.S. concedes: Trump’s goals have remained fluid enough for him to define his own victory, and the military successes have already been impressive. Still, any scenario in which Iran threatens or collects a toll on shipping through the Strait has to be considered a loss for Washington. But Trump may decide he can’t withstand gasoline prices near $5-a-gallon as summer approaches, and Iran’s Gulf neighbors may decide that paying for safe shipping may now be more reliable than counting on American protection. (Odds: 10%)

3. U.S. Navy to the Rescue: The Pentagon has been running Hormuz scenarios for years. It knows how to sweep away Iranian mines and protect ships. But in the Drone Era, even U.S. Navy protection may not be enough to bring soaring insurance costs back to normal levels for ships carrying cargoes worth as much as $200 million. It also requires an indefinite deployment of U.S. military assets to the region, even if Europeans follow through on their offers to help. (Odds 15%)

4. Send the Marines! Or other U.S. Special Forces. There are plans to seize or dilute enriched uranium in Natanz or Isfahan. This is, after all, the most frequently stated reason for the attack. There are other ideas to take Karg Island, Iran’s primary oil storage and transshipment facilities. But this presumes that cutting off Iran’s oil exports could be traded for reopening the Strait. Would Iran be more or less likely to strike a deal? What would be the potential losses to U.S. forces, and how long would they stay? (Odds 15%)

5. Indefinite War: Does the current standoff continue for months? Or years? U.S. and Israeli bombing may slow down as the number of useful military targets dwindles, but there’s no obvious point at which Iran gives up. Over the weekend, Trump continued his threats to bomb power facilities and civilian infrastructure, but presumably his team has advised him that this would be a war crime. This puts Washington in the painfully familiar position of having started a conflict with no clear path to ending it. Oil prices spike to $200 over the summer and only start to fall again when the global economy tilts into recession. (Odds: 15%)

6. Escalation: Even with its diminished capacity, China and Russia continue to offer support. Iran might decide there is additional leverage in expanded attacks on Israel or Gulf states that host U.S. bases. The Gulf states themselves may feel compelled to enter the fighting. Or the fighting could expand into cyber attacks or terrorist attacks that reach European or U.S. civilians. (Odds: 10%)

7. Negotiated compromise: And then, of course, there’s a path to settlement as both Trump and Khamenei the Younger realize they have steered their countries into dead ends. It won’t be easy for either of them, but they may find a way to structure a deal through intermediaries that allows them to save some face. Essentially, Washington agrees to stop the attacks and lift sanctions, and Tehran reopens the Strait and makes verifiable commitments to restrict its nuclear program. Both sides agree to some sort of non-aggression pact. (Odds: 25%)

Iran’s former foreign minister has just urged his government to pursue negotiations along these lines. Yes, it also sounds a lot like the deal President Barack Obama struck with Iran in 2015, and the agreement Trump himself was ready to accept just before launching his own attacks with Israel last year and last month. But there’s really no way this ends without something that looks like this.

The only problem is that no compromise will come “shortly,” in the president’s words. That bodes ill for the current oil futures curve and current global growth forecasts.