August turned out to be an interesting month. Bessent took on the “debasement trade” and won. Warsh did his best to help out over the Jackson Hole weekend, after which markets decided he was actually a “hawk”, and not a “dove”. The AI trade lost all momentum after the Nvidia result, leaving traders to play individual stocks, producing large moves, up and down, sometimes on the same day. As for the TACO trade, nothing really happened. The spat with Canada hardly caused a ripple. And everyone now seems bored by endless “war of words” with Iran.

So, what the hell is Wall Street, the app-jockeys, and institutional investors going to do? Sit tight until the next FOMC on 15-16 September? Wait until Q3 earnings are out in late October, or until Nvidia reports on 19 November? What about the mid-terms on 3 November? Are they at all relevant, given Trump with veto anything a Democrat-controlled Congress sends to him to sign?

Well, I do not know any more than anyone else. But what I do know, is that markets get bored with just hanging on and waiting for something new to trade around. Wall Street, in particular, gets protective about year-end bonuses as the year winds down. And boy, the pay packets will be gargantuan in the “boomer” year that 2026 so far has been.

The Debasement Trade

Economists have been warning about the US debt situation for as long as I can remember. But the dollar still survives, and the US Treasury market did not have as bad a month in August as the headlines suggested.

Many of the naysayers are right, despite being the home of AI, the inevitable secular decline of the United States is well underway, no matter what happens after Donald Trump. But empires do not collapse because of theories. They collapse when the money runs out. And the US still has a lot of financial firepower.

As argued in “Armageddon Beckons: Keep on Rowing”, Bessent and Warsh are a formidable team. They will whatever it takes to defend the dollar and the Treasury market.

Gold and Bitcoin were the principle beneficiaries of the “debasement trade” in July and August. But the buyers of Gold ETF’s mostly came from North America, in contrast to earlier in the year, when the major buyers were from Asia.

The surge in Bitcoin was almost vertical, after being stuck in the low sixty-thousands for months. Speculation as to how this materialised is a mystery. But the loss of momentum in the past week is not suggestive of the type of surge experienced after the first few ETF’s were launched.

The AI Trade

To state the obvious, the growth in profits of the tech companies at the centre and the edges of the AI trade are extraordinary. So, is it not puzzling that the record results seen in Q2 2026 has seen the NASDAQ move sideways since May?

Every trade reaches a point of exhaustion. And the very large movements in individual “hot stocks” suggest the AI trade is now more about trading individual stocks than the market overall.

But the more important point, is one that I have made in a number of previous articles. And, coincidently, mentioned by Kevin Warsh at Jackson Hole. Namely, the importance of “the second derivative”. Mathematics does not have an opinion. But it does govern the universe. When the rate of change in the rate of change of profits is increasing equity prices go up a long way and rapidly. But the second derivative stalls, or goes negative, stock prices stop rising, and begin to decline.

The Nvidia Q2 profit call produced extraordinary moves, first sharply declining on the actual result, before surging higher on the future guidance. The reality was sold. The future promise was bought. As of the close on 31 August, the stock closed around 9 percent lower than its all-time high after the Q1 earnings call.

Bigger picture, the critical role of “Take or Pay” contracts with data centre operators, has come under much more scrutiny, with some commentators suggesting that they are akin to the “teaser loans”, which played such a material role in the collapse of the US mortgage market in 2007-2008. These loans offered heavily discounted rates for two to three years, for borrowers that simply did not have the income to pay market rates. The assumption was that when the “teaser” period ended, the price of the house purchased would have risen enough, to re-finance. Unfortunately, house prices went down.

Given the uncertainties about future AI revenues, the potential for defaults on “Take or Pay” contracts is significant. In reality, such contracts are a deferred loan, on an unknown future cash flow.

If the AI frenzy loses momentum, as it seems to be doing, a bright light might be shone on the circular financing arrangements, which are often raised, but not forensically examined.

The TACO Trade

Offering early access to Truth Social Posts rightly led to uproar. It might prove to be the death knell of the TACO Trade. Markets seem to be taking must less notice of anything Trump says. His behaviour is becoming even more erratic, even though that might seem an impossibility.

He has no coherent strategy on his re-kindled trade war, and no idea whatsoever to do about Iran, other than repeating the same lines we have heard time and time again.

“When You Don’t Know, Take Profits”

This is an old saying, but one that should always be remembered.

Whatever happens in the weeks and months ahead, market dynamics have changed. As argued in “The End of the Beginning”, the long-wave credit cycle has been ebbing for some time. No one can predict the moment when it all goes wrong.

Absent some unforeseen positive event or development, navigating markets over remainder of 2026, will be like crossing a minefield.

Good luck.

Wall Street hates Kevin Warsh. Imagine how much revenue is lost when traders have no reason to buy or sell before and after Fed meetings. Worse still, what happens to risk taking if he takes away the Street’s “safety blanket,” known currently as the “ample liquidity” regime. And how the hell are markets ever going to absorb the $7 trillion of securities sitting on the Fed’s balance sheet?

In contrast, the Street loves Scott Bessent. He supports all things crypto-related, while fearlessly defending the dollar. Last week, he saved the Treasury market, just as he did the week before. Who knows, he might be forced to come to the rescue again this week.

Amid all the jeers and the cheers, hardly anyone seems to understand that Warsh and Bessent are two like-minded souls, rowing the same boat in stormy seas, trying to avoid financial market Armageddon.

Yet, the economic commentariat, especially those that belong to the “Cult of Fixing Everything,” think that Kevie and Scottie are worshippers of the devil, namely George Soros, who decades ago proved all their silly theories were wrong. They claim that Warsh is a puppet of Trump, simply because he talks to him regularly. And have begun to suggest that he is doing whatever Bessent asks him to do, undermining Fed independence. And most alarmingly of all, that Warsh’s Task Forces are full of heretical unbelievers, that have long pointed out the fallacies of their religion.

Though now forgotten, in the spring of 2025, Bessent penned an article in the journal, International Economy, for which Warsh could easily have been a co-author. This passage from the article says it all:

“The Fed must change course. Its standard policy toolkit has become too complex to manage, with uncertain theoretical underpinnings and problematic economic consequences…the Fed extended its liquidity tools into uncharted territory, repurposing asset purchase programs as instruments of stimulative monetary policy, designed to stimulate the economy through various channels, none of which are well understood.”

While the life-long academic, Ben Bernanke, was still trying to digest the lessons of Walter Bagehot’s 1873 magnum opus, now known simply as “Lombard Street”, in order to understand what was happening in 2007-2008, Warsh was solving the problem, given his Wall Street experience. As I have said in other articles, Warsh and Bessent are the best qualified Fed Chair and Treasury Secretary since Paul Volcker and Hank Paulson.

So, ignore all the headlines and criticisms, and ask yourself the simple question, what would you do if you were in their shoes?

Though Ray Dalio has been on the wires predicting “Armageddon” in the US Treasury market, he has not exactly offered any practical solutions, other than suggesting we should all buy gold and Bitcoin.

Nor has anyone from the “Cult of Fixing Everything,” the members of which just keep banging on about the massive US budget deficit, the unsustainable accumulation of debt, and the potential loss of reserve currency status. Not to mention the need for higher rates to bring down inflation. Telling us what we already know, while recommending a strategy that will only make things worse, and has so far failed to work, says it all about the arrogance and ignorance of the economics profession.

With around 80 percent of global leverage collateralised by US Treasury securities, any calamitous decline in the market value of that collateral will lead to deleveraging on a scale never before experienced. The massive corporate bond issuance to fund AI, especially from the Big Tech, has largely been swallowed up by insurance companies, that already have exposures to private debt, which the BIS and other central banks keep on expressing concerns about systemic risk.

The vast majority of professional equity investors live in a fantasy world of balance sheets, income and expenditure accounts, earnings calls, and the perpetual “spin” from CEOs and CFOs. They might sometimes worry about debt and interest payments. But rarely do they ever think about who the future buyers and sellers of a stock might be, entrapped as they are in traditional concepts of value, an “invisible hand” of other investors that will one day recognise what they know, at some indeterminable future date. Rates and yields are simply discount rates for future cash flows, not critical for collateral values, or triggers for selling by leveraged holders.

So, what does all this mean?

Selling US Treasuries is no longer just a “trade.” It is an existential risk for global financial markets. Expanding swap lines for the Bank of Japan, without asking the Fed, and doubling up on Treasury buybacks to shorten the duration of outstanding debt, is not about manipulating markets, or doing Trump’s bidding. It is two men, staring into an abyss, doing what they can, while saying nothing.

Those obsessed with inflation, demanding higher rates, simply do not understand. Nor do those demanding lower rates, whether to avoid defaults in private debt, or to make all those AI valuations look more reasonable.

No one on Wall Street really wants to talk about the deteriorating situation in the Gulf, let alone the escalation of the conflict between Ukraine and Russia, which is now causing major shipping disruption in the Black Sea. Aside from the fact there is a lot of money being made on TACO-like punting on oil futures contracts, economists keep telling everybody that the rise in oil prices is less material than in the past. Comparisons with the 1970’s are everywhere to be found. That the actions of OPEC were about price hikes, not supply shortages, has been conveniently overlooked, especially in the US.

Oil production facilities are being severely damaged and will take years to repair. China’s reserves are dwindling badly, and supplies of propane, butane, sulphur, and naphtha, essential to the production of petrochemical and plastics, are also being critically affected.

And, of course, El Nino is just a fantasy, even though wildfires are on the brink of engulfing Reno. It is just the climate change “commies” that think there will be any impact on food prices, or that the declining flow of water in Colorado River might become a problem. No one has even mentioned that the impact of the most severe El Nino on record, has yet to hit the southern hemisphere.

In short, the months ahead are going to see increasing price pressures, not just at the local gas or petrol station, but in the prices of countless essential inputs and finished goods come under pressure.

Now, the less capable, self-delusional central banks, might be tempted to raise rates, imprisoned as they are by their wrong theories and unreliable models. But I doubt the Fed will join them.

Warsh and Bessent will keep on rowing the boat, controversially and quietly.

We should all wish them luck.

Here we are, less than two weeks from the end of a remarkable summer.

What a trip it has been!

Unbelievable profit numbers. Massive equity wipe-outs followed by surging rallies, leading to a new all-time high for the S&P 500, despite the highest 30-year Treasury yields since 2007.

All this happened despite the on-and-off again ceasefire in the Gulf, and disruptions to traffic in the Black Sea, as the Ukraine war escalated. El Nino driven wildfires across the Northern Hemisphere, with record temperatures in Europe, threatening all sorts of crops. Not to mention election campaigns getting underway just about everywhere.

Just goes to show that geo-politics doesn’t matter after all, as Wall Street keeps on telling us, day after day. Funny thing is, this is always true, until it isn’t.

What does matter to Wall Street are the numbers. There was a time when 5 percent plus long bond yields would scupper long-duration equities. You know, the ones where profits might take years and years to arrive, like Amazon and Netflix. But no more, AI is different. Anthropic’s Q2 run rate suggests a P/E of just under 400x, roughly around Telsa’s peak valuation. Its 2028 projection, however, suggests something around 25x. Of course, this is all just speculative until the IPO, but poor old Sammy at OpenAI, might be a bit worried.

Numbers can be a funny thing. The bigger the profit, the harder it is to grow. Large levels make large percentage increases less likely, and large decreases more likely. In the bond game, they call this “convexity”.

Now whether the surge in profits shown in this chart from early 2024 onwards, had anything to do with King Donald’s ascension, is hard to say. But after the infamous Liberation Day, they certainly took off. Q2 2026 was a “ripper” quarter. Now, you might think that this cannot be repeated. But the historic stats suggest otherwise.

This infographic is worthy of examination in detail. But the key point is that 50% plus quarterly profit growth can in fact continue for a while, but not, forever.

The 2009 earnings recovery was from the biggest global financial crisis since the Great Depression. And though the COVID plunge was simply a “short sharp shock”, rather than “long-wave cycle”, the the initial meltdown was truly alarming. Obviously, lockdowns and the fear of infection made it hard for any business to make much money.

At the risk of committing a cardinal investing sin, I dare to say that this time IS different. The probability that the past two quarters in S&P 500 profit growth will be repeated is not high. Maybe there might be one more. Perhaps two. But to be confident requires more detailed analysis, on a stock-by-stock basis.

Coming back to convexity point, the rate of growth in the rate of profit growth cannot increase forever. The second derivative always matters in financial markets, especially to professionals, hedge funds, and option traders. Though hedge funds reportedly sold a significant proportion of there leveraged equity exposures in the July scare, the volume of hedge fund equity leverage was at unprecedented levels at the time, as shown is this chart from the Office of Financial Research .

As everyone should now realise, the old Markowitz-world of 60/40 portfolios, implicitly assumed that there was a negative correlation between equity and bond returns, in order to provide the perfect balance between risk and return.

But facts often get in the way of theories. Like the S&P 500 infographic, the one below is worthy of closer inspection and contemplation.

From the all-time high in yields in 1981 until early 2022, the correlation was predominantly positive, with the odd period here and there crossing over the zero line into negative territory. For almost four decades, US 30-year yields trended downwards. And there were many periods where they materially outperformed equities. In one year, 1994, where they were both strongly negative.

Reviewing the S&P 500 profit chart, and the equity and bond infographics, poses a question which Wall Street, and the financial media, dare not ask. Can the recent trends continue?

Why do they not ask? Because the answer could be terrifying. Bringing to an end what has been a “golden era” for every major player on the Street. Bonuses gone. Along with countless numbers of jobs.

Obviously, the question is how long, and how far, could equity returns and bond yields diverge? And what event, or series of events, will trigger a reversal?

The answer is a familiar and very simple one - “its the economy, stupid”.

Globally speaking, China is weakening, so is Europe, and with no resolution to the escalating conflict in the Gulf, oil prices will continue to rise. Not the front month and back month futures being punted by traders, but the spot prices being paid, the crack spreads, and the feed through to fertilisers and the by-products of the refining process that are critical to a vast array of products, which most people have no idea are linked to oil.

As for the United States, Wall Street tells us repeatedly that it is chugging along, still strong and resilient. But these two charts speak for themselves. Quarterly GDP growth has been trending since the end of 2023, after the recovery from the rates hikes and inflation of 2022. Non-farm payrolls, paint an even gloomier story, which the large decline in the labour force participation rate offsets in the unemployment rate.

So, do you really think that the remarkable summer of 2026 will continue into autumn and winter?

Or is it just another oscillation of the “long-wave cycle” discussed in the my earlier article, “The End of the Beginning”?

I suspect you already know what I think.

Stay wary and focussed.

And, as always, good luck.

Last week has been heralded as the best week for tech and semiconductor indices since 2020.

Whether this was due to the news of the “noble and selfless” rescue of Situational Awareness by Ken Griffin’s Citadel, or the “buying opportunity” provided by the liquidation of an estimated 30 per cent of retail leveraged equity ETF’s, was seemingly irrelevant. All that mattered was that the S&P 500 made a new all-time high. And that Amazon and Microsoft surged, along with SpaceX, despite more post-IPO issuance. The hiccup in the AI trade was over. It was time to get back on board.

US employment numbers added to the renewed optimism. Even though they were much weaker than forecast by the all-knowing Wall Street commentariat, and that there were significant downward revisions to previous months, it was claimed that the US economy remained strong, with no hint of recession. After all, the unemployment rate fell by a truly significant 0.1 per cent. More importantly, the “strong” yet well below forecast numbers, confirmed that the Fed was not going to tighten. Optimists argued that Warsh might even deliver the rate cut he supposedly promised King Donald.

But perhaps the best news of all was for Wall Street, not Main Street. NASDAQ announced it was soon going to be open for trading 23 hours day, on the basis that a lot of retail traders preferred to manage their portfolios after they had finished their day jobs, if they had one. Or prefer to trade rather than play video games, or scroll social media. Within hours, other exchanges, even in stuffy old London, saw the benefits to their customers of extended trading. Doing more to help customers was a noble act, like the Citadel rescue, and in no way just a means of sustaining once unthinkable profit growth, from the gifts that keep on giving, the AI frenzy and the TACO trade.

It was also a good week for oil. Trump was not going to obliterate Iran after all, because “key discussions” were ongoing. It certainly had nothing to do with the Pentagon demanding that US defence suppliers seriously accelerate their production of missiles and interceptors. Trump declared that it was “fake news” and that the US “had plenty” of both.

Unfortunately, over the weekend, Iran denied any such discussions, suggesting that only the deal with Oman for opening the Strait of Hormuz, was close to being agreed. In response, Trump claimed he was going to take a “low-key” approach, confident that Iran was collapsing economically, with inflation running at 77 per cent. He stopped short of suggesting there would be a “popular uprising”, just in case the idea caught on in the United States, when his new Attorney General starts prosecuting anyone he does not like.

The more I reflected on all this insanity, the more it made think that far too many market participants could be suffering from am unrecognised cognitive condition, best described as “situational un-awareness.”

How far and wide is this affliction? That is hard to say, but it has certainly reared its ugly head, time and time again.

JT Barnum famously claimed that a “sucker is born every minute” which is yet to be empirically proven, but not an unreasonable hypothesis.

Maynard Keynes persuasively argued that those that delude themselves that a sober assessment of investment fundamentals is the key to success, should instead focus their energies on guessing what others will guess what the majority will guess is the consensus assessment of value.

Or to draw on the game, which many contend I invented all those centuries ago in New Orleans, if you do not know who the “fish” is at the poker table, then it is you.

“Situational un-awareness” is caused by inexperience, overconfidence, or a combination of both. It is something which a significant proportion of retail day-traders, especially so-called “digital natives,” possess in abundance. But the same applies to a generation of market professionals, with no experience of the scale of the upheaval that the world is experiencing, not just in geo-politics, but the fundamental technological rewiring of economies, not to mention heatwaves and other climate related events.

Leopold Aschenbrenner was no doubt brilliant. Just like Robert Merton, Myron Scholes, and John Meriwether and the host of experienced bond traders that founded or worked at Long Term Capital Management (LTCM). The collapse of LTCM was not just the result of astonishing leverage. The killer blow was that other market participants figured out what they were doing and engineered a “squeeze,” just like “Roaring Kitty” did to the hedge funds that shorted Game Stop.

In a “Nightmare on Coin Street” I highlighted the risks of the Bitcoin “whales” eating the “minnows.” Not because of the arguments made by the self-righteous and deluded members of the economics profession, but because of the structural imbalance in the market. It is impossible to know how much insider cooperation led to the halving (pardon the pun) of Bitcoin from its all-time high. But there is no doubt that the coin market fanatics and ETF investors were the major losers. The various coin exchanges are now struggling to make money. And whether Michael Saylor is a fantasist or a charlatan, his Strategy Inc, the largest corporate holder, could soon disappear into the ether (oops another pun).

The “whales” and the “minnows” are now at war in equity markets, and not just in the US. South Korea is another example of what happens when equity markets become little more than casinos. Where certain market participants could be engaged in collusion, or the use of inside information, and all those other things that were once policed in the United States, until King Donald usurped the throne.

So, what should the greedy and the gullible be aware of, rather than simply swallowing the self-serving narratives of Wall Street, or acting on questionable interpretations of questionable economic data?

Well, the short answer is, AI, oil and its refined products, and inflation and interest rates.

On AI, the simple fact is that no one really knows where it will take the world. But just like the railways in later half of the nineteenth century, there are an awful lot of companies laying out parallel “rails” which ultimately take customers to the same destination, with different degrees of speed and comfort. What if the inventive names, speeds and capabilities, might simply end up being little more than a choice between MacDonalds and Burger King, the same junk in different wrapping.

According to Stanford’s AI index, in addition to the familiar household names, there could 30-60 other providers not far behind, hundreds of smaller specialised providers, and thousands to tens of thousands of companies building products on top of AI foundation models. No one should forget that while the capex spend might be real, the competition is intense, indeed frantic, and the future revenues are distant and merely guesswork.

The recent episode of “doubt” in the AI trade could simply prove to be a bout of deleveraging. But the patience of investors might have over future revenues is the great unknown. Episodes like those experienced recently, highlight the growing doubt.

There is a parallel with the emphasis coin markets have been placing on the importance of Congress passing of the CLARITY Act, but which has so far failed to eventuate. And could potentially be buried forever depending on the outcome of the Mid-terms. Could faith in the AI trade also be destroyed by a single event, perhaps the implosion of OpenAI, run by a fantasist and a charlatan, just a bit younger than Michael Saylor?

When it comes to the escalation of conflict in the Middle East, the degree of “situational un-awareness” is truly frightening. Experts contend that the Gulf States have had their evolution into luxury safe-havens and tourist destinations put back decades. The war in Ukraine is also spreading, with increasing conflict in the Black Sea. Oil facilities are being attacked on all fronts, from Russia to the Red Sea. Traffic through the Strait of Hormuz is running at 10-15 ships a day, over a hundred less a day than before the conflict.

The market obsession with the daily fluctuations of oil futures prices is oblivious to spot price, which has fallen, but is still well above the futures price. The backwardation of the futures curve into 2027 and beyond seems incongruous to those aware of the structural damage already inflicted, let alone from a continuation of the conflict. “Crack” spreads, especially on diesel, remain elevated and have declined much less than spot oil has done relative to the futures price.

The deeply ingrained group think over inflation and monetary policy considers such prices pressures a solvable problem. But the very the idea that tweaking rates up and down a few basis points can somehow deliver some made-up target for rate of inflation, not only defies the abundant evidence of the failure of such policies, but the secular trends of the near monopolisation of industries, rising global temperatures and the future scarcities of food and water. Add a sustained rise in the price of oil and its distillates and by-products, and inflation is not going down, even if economies weaken.

As argued in “How to Play the Ball,” Kevin Warsh is most qualified Fed Chair since Paul Volcker. It might turn out that Volcker’s solution to inflation - a multi-percentage increase in rates without warning - might one day be required. Funding AI will get even more expensive.

In short, there have been countless episodes of “situational un-awareness” in markets over the centuries. But something tells me that the awakening which lies ahead for those with the cognitive disorder is going to be a seismic event.

Good luck.

Outrageous. How could another Fed meeting go by without Warsh giving any hint of where rates might be going? And how dare Bessent step in to upset the applecart of all those carry trades in Yen? What is wrong with these guys? Who’s side are they on?

Trump has been a godsend to Wall Street, with all those TACO trade opportunities. But without any official commentary or projections on the future of rates and currencies, how will Wall Street firms, hedge funds, and retail day-traders be able to confidently leverage?

Not every Wall Street firm is as market savvy, or as well-informed, as Citadel Securities, that last week liquidated the leveraged positions of Situational Awareness LLC, and then bought them back for their own book, after the prices had plunged. The average Wall Street player might need all the “forward guidance” and economic projections the Fed provides in order to make a buck. Doing your own analysis of data is expensive, even in world of AI.

Putting the sarcasm to rest, the simple truth is that the Wall Street commentariat has always detested change. Why? Because change creates uncertainty and uncertainty always increases the risk of loss. Learning anew is an expensive business in financial markets, whether or not, in the end, you are a winner or a loser.

It is worth recalling what happened when Bitcoin and other cryptocurrencies captured the collective imagination of investors. The great and good of Wall Street, and just about every economist, ridiculed the idea. It was not “real money” they said. Unlike gold and other precious metals it had no intrinsic value. Yet, before too long, Wall Street found ways to make money out of crypto, and now there are countless ETF’s, and RWA tokens, traded twenty-four seven, every single day.

When Warsh said that Wall Street needed to “play the ball, not the referee” the newswires were full of scorn and ridicule, and endless speculation:

• Why did the FOMC not tighten, like so many well-connected firms like Citadel, boldly declared it would?

• Was Warsh Trump’s “puppet” after all?

• Was all that talk about different measures of inflation to the Private Consumption Deflator (PCE) just a smokescreen?

• Would there be the usual “dot plot” and Summary Economic Projections (SEP) after the September FOMC, with Warsh just abstaining.

• Or would both be canned?

• Could the deafening silence on everything expect the decision, or non-decision been maintained until the Task Forces report in January?

Following the outrage and disdain over the FOMC press conference, Bessent surprisingly announced that he had asked the Fed to increase Japan’s FIMA Repo Facility limit, questions were raised about whether the FOMC had formerly approved to do so. Though FIMA has become an important tool for maintaining global financial stability, such currency market interventions are usually discussed privately, and rarely made public. When Japan confirmed that it had accessed FIMA, and would use the facility again going forward, speculation grew that that Bessent made the request to avoid Japan selling US Treasuries to fund its purchases of the Yen.

Oddly, no one suggested that the recent sharp fall in the Yen was being driven by another surge in Yen-funded carry trades, increasing the degree of leverage in US assets markets. Something which the BIS has expressed concerns over for some time. A sudden unwind in Yen carry trades could lead to a material tightening in global liquidity, adding to current BIS concerns about the systemic risk in AI circular funding arrangements, and the exposure to private credit in the global industry.

Unlike many of their predecessors, Bessent and Warsh, have a deep understanding of financial markets, especially the role and dangers of leverage. It is not possible that they are not mere obedient servants to King Donald, but simply have similar views and objectives?

Bessent learned his trade under the legendary George Soros, a long-time critic of orthodox thinking, not just in financial markets, but its complex interactions with economies. His book on “reflexivity” was met with nothing but ridicule from what I call the “Cult of Fixing Everything”, otherwise known as the proponents of the Neo-Classical Keynesian Synthesis, often shortened to NKS.

Warsh played a critical role at the Fed during the global financial crisis of 2007-2009. Then Fed Chair, Ben Bernanke was a lifelong academic and self-proclaimed expert of the Great Depression. A number of my previous articles have already touched upon the very different perspective which Warsh brings to global thinking on the conduct of monetary policy, best summarised as “talk less, do more”. His disdain for the continued use of QE, as reflected in the size of the Federal Reserve balance sheet, is well known. What has not widely been recognised, is that there was not one single member of the NKS, appointed to the Warsh’s Task Forces.

In my view, Warsh and Bessent are truly looking to change the way in which the “game” in financial markets is played. Their personal connections to Trump do not mean that they are simply his puppets. Of course, they do not challenge the President in public. But they are unquestionably more qualified for their roles than anyone else in, or appointed by, the Administration.

Though different men, both are at least as knowledgeable and astute as Hank Paulson and Paul Volcker. Not academics testing their theories in reality, like Greenspan, Ben Bernanke or Janet Yellen, or a highly principled lawyer with a background in investment banking and private equity, like Jay Powell.

After nearly three hundred years of watching one financial era after another abruptly turn into something very different, I boldly and confidently declare that the current generation of market participants are grossly underestimating the capabilities and determination of the men in charge of the financial foundations of the United States.

The era of near-zero rates and unprecedented asset purchases by central banks lasted fourteen years, from 2008 until 2022. Many still contend that it saved the world economy from a devastating recession, if not a repeat of the Great Depression. But others argue it brought about the end of capitalism. Capitalism, as Austrian economist Joseph Schumpeter said in the 1950’s, is about “creative destruction”. Yet the NKS school of economic thought told politicians that the the right mix of policies could ensure perpetual prosperity.

What actually happened was the zombification of economies, with easy money keeping failing businesses afloat. For competitive companies, the sheer ease of making money led to what has been termed “corporate feudalism”, layers of management with meaningless titles, supported by workers that were increasingly displaced by new technologies. Yet, despite the promises of those technologies, productivity mysteriously stopped growing. Big companies swallowed up small companies, to avoid competition, just as medieval kings sought to conquer their neighbours.

Wealth and inequality materially widened, rivalling continent Europe of a decade or so before what was once called the Great War. Before long, those “left behind” became angry, seeking a better deal, by voting for unscrupulous charlatans dressed up as statesmen. Societies became divided between them and us. When enemies could not be found, they were manufactured.

The point of all this, is that the past cannot be repeated in the future. The world in which the majority of investors, economists, and media commentators learned their trade, is over.

So, coming back in August 2026, how is the “ball” to be played, is this new game?

First, keep an eye to the future. As argued in “The End of the Beginning”, a “long-wave” credit cycle is slowly unravelling. Inflation is unlikely to be tamed, no matter what central banks might do, without a global recession, or worse. The consequences of the war with Iran will linger for years, however it might end. China has many issues in Western eyes, but geo-politically it holds all the cards. Unlike the United States, the CCP looks decades ahead, towards an inevitable destiny of both economic and military dominance. The debate over who wins the AI war, misses the point that China simply needs to compete, not dominate, given it vast advantages in infrastructure, education and critical resources, especially rare earths.

Second, let go of the past. The conduct of monetary policy is going to change. Central banks do not have the ability to control inflation. The very notion is simply an NKS fantasy, sold to naive and uninformed politicians. As argued in previous articles, Warsh has a vision of a less transparent, less activist approach, that is also more potent. And which, by design, will lead to less leverage, simply because uncertainty discourages recklessness. Enemy number one of central banks will be the bloated sheets, which created, along with near-zero rates, the biggest asset price bubble in history, which was further inflated by treating the “short, sharp shock” of COVID like it was a “long-wave” credit cycle.

The scale of liquidity injection, illustrated in the charts below for the Fed and ECB, would have once been viewed as central bank insanity.

That such insanity has been normalised, will no doubt baffle future economic historians. It arguably turned capitalism into financialism. Where trading in financial claims supplanted trading in goods and services as the engine of economic growth.

Third, ignore the financial market luddites. Not those that reasonably question the future economic value of the AI revolution, but those that keep insisting the same investing rules of decades past will apply. That geo-politics does not matter. That diversification is the solution to everything. That valuations, volatilities and interest rates mean-revert to some prior historical average, rather than evolve from the obsessions and fads of the times.

Finally, and perhaps most importantly of all, never forget that flows determine asset prices, not theories. The saving flows from the baby boomers has been the engine of asset price growth since the 1990’s. The astonishing rise in collateral values has supported the equally astonishing rise in debt. Saving flows will still incrementally provide a secular bid. But when the “long-wave” credit cycle reaches its nadir, collateral values will be crushed, and debt defaults will be everywhere to be seen. More “cockroaches” perhaps than in other “long-wave” credit cycle in recorded history.

As always. Good luck.

The ship is sinking. The passengers are looking for a lifeboat. But which one has the fewer holes?

Peace in the Middle East? Fed intervention? Some yet unforeseen source of surging profits?

The missiles and drones are again silently waiting. But far too much damage has already been done. And any peace will be provisional. Though rumoured for some time, Russia is helping its ally. Perhaps China might also be a playing yet unseen role.

Warsh impressed the great and good of central banking in Europe, but his American colleagues keep on playing the same old tune, making speeches, hinting at “forward guidance.” Maybe he will take a stronger hand at this week’s FOMC meeting, given the power of his Congressional appearances.

CEO’s and CFO’s might be rewriting their scripts after last week’s Alphabet experience, or perhaps even changing the numbers.

Without a peace deal, Fed action, or some as yet unidentified “new story” to provide support to equity markets, the greedy and the gullible might simply need to put on a lifejacket, to avoid drowning, while hoping for a rescue. In other words, staying afloat, by taking some profits.

The potential problem with this strategy is the gigantic shiver of sharks gathering in the East. America has become China’s “bait ball.” In the tradition of Sun Tzu’s “Art of War,” Xi’s is letting Trump make one imbecilic mistake after another. His simple one-liner to all those fawning American billionaires - that the “Strait must be opened” - has somehow been forgotten in the translation. The missile count has clearly swung in China’s advantage.

“Moonshot” was a more apt name for upending American AI dominance than “Deep Seek.” More consistent with a “Sputnik Moment.”

Championing free trade and the rule of diplomacy, amid the insanity and lies of the Trump Administration, is turning the once hesitant and cautious engagement of the West, into a choice of the lesser evil. Unpredictable and fascist America. Or cooperative and communist China.

Meanwhile, back in the USA, the hollowed-out military and intelligence agencies now speak only “Trump,” who keeps telling us Iran is “toast,” while resurrecting his trade war by different means. The President-in-Waiting has gone icily silent, no doubt hoping the mid-terms are cancelled due to the home-grown communist menace, so he and the congressional allies he has been courting go all-in on the 25th Amendment. His recent book about his journey to become a Christian, brings backs memories of Obama’s “Audacity of Hope.” And unlike Trump’s “The Art of the Deal,” Vance actually has the ability to write it himself.

Wall Street keeps telling us, none of this really matters. It is all just politics. And more to the point, geo-politics. America is an island, self-sufficient in everything that matters. The Street has never had it so good.

The CME has boldly just announced it will be offering single-stock futures contracts on fifty of most popular names with retail investors. Stick that up your leveraged ETFs, BlackRock and Vanguard.

One quarter of negative cash-flow does not make Alphabet a losing bet, despite how dramatic this chart looks. But it might be some time before the next stock buyback.

The Magnificent Seven are also not yet dead, with a total return of minus 4 percent so far in 2026, compared 14 per cent over the past year, and a 300 percent return on investment from the low in early 2022. Surely something similar can be repeated.

As for the banks, the total return this year has been almost 15 per cent, and 33 per cent over the past year. A truly astonishing result, thanks to the TACO man, Reddit, You Tube, and all those other social media guru’s.

As mentioned last week in “The End of the Beginning”, the current low level of individual stock correlations is unquestionably the result of the huge volumes of individual stock trades, rather than trading in indices. Hence the CME’s announcement mentioned earlier

Despite all the dire headlines last week, the huge “ocean liner” of a bull market has simply taken on a little bit of water. The hole in the hull is not that big. It will need to get much bigger before the ship’s final plunge to the bottom of the ocean. Some technical analysts are suggesting that the major indices are displaying a “rounded top,” an early signal of bad things to come. Others are looking at the trendline support levels. From the 2021 lows in the S&P 500 until now, the ship could sink to the low five thousand level, a 30-40 percent plunge from where it is now, depending on the analyst and the methodologies used.

What could negate this tragic loss of paper wealth?

Well, the most obvious thing would be a sudden surge in profits from AI. But is that reality feasible for entire sector, given the intensity of competition. Is it not simply too early for earnings to come close to fulfilling the promise inherent in current valuations. As I have argued many times over, the AI revolution will unquestionably change the world. But there will be a mere handful of winners, and hundreds, perhaps thousands, of losers.

So, if the ship sinks, the lifeboats prove inadequate, and the sharks eat the “bait ball” of those floating in their life jackets, how might events unfold?

Well, as discussed in the “Beware the Trump Put,” direct intervention in US equity markets is a higher probability than many might think. It is already happening on a small scale, and Trump could easily do “whatever it takes,” to support the market. It is not as if there are no precedents. China, Japan, and other countries have intervened in equity markets, just as they have done in bond and currency markets.

Warsh wants to fundamentally change the Fed, but in a market crisis, the Fed will still intervene. It is the permanence of liquidity support, and the bailing out of the insolvent, not just the illiquid, where his actions might differ to his predecessors. But such an approach is about the aftermath, not the sinking itself.

The Fed has expanded currency swap limits with the major central banks to avoid the dollar shortages from unwind the of dollar carry trades that led to the severity of 2007-2009 global financial crisis. The current weakness of the Yen is the most visible sign that carry trades still play a major role in global leverage. A yen rally could be the first sign of panic. But so could a surge in the dollar.

Slashing the Fed funds rate, as happened in 2020, cannot therefore be ruled out. It would be a boon for the US Treasury market.

But with inflation still above target in most countries, and the increasing acknowledgement that the zero-rate era simply encouraged an unwelcome degree of risk taking, worsened inequality, leading to both political and societal division, I suspect there will be much greater institutional reluctance. Assuming, of course, that the United States still resembles a democracy, rather than a dictatorship.

Good luck.

Every bull market comes to an end, even though the vast majority of market participants inevitably believe that it will go on forever.

But contrary to what you might think, bull markets do not suddenly collapse due to deteriorating stock fundamentals, economic news, or even interest rate hikes. Such things might trigger the initial selling. But crashes are all about the scope and size of leverage.

To paraphrase Charlie Munger, show me the leverage and I will show you the outcome.

Last week, I likened the prevailing market environment to three “cats” sitting inside Schrödinger’s Box, in which the Strait of Hormuz was both “open” and “closed,” Kevin Warsh was both a “dove” and a “hawk,” and Wall Street was both “bullish” and “bearish.”

My conclusion was that each cat was in fact “dead,” and hence nothing but bad news for the greedy and the gullible. To my mind, events in the week just ended opened Schrödinger’s Box for all to see.

Whatever might happen in Iran and the Gulf this week, Hormuz is closed for the foreseeable future. The once threatened destruction of Iranian critical infrastructure has happened, and Iran has retaliated, attacking US bases and infrastructure in the Gulf states, including de-salination plants. Under the rules of war which emerged from the Nuremburg prosecutions, both sides have committed war crimes. But the idea that war can be conducted within a set of pre-determined rules has long been a collective delusion.

Warsh’s five-hour testimony to the House and Senate was a masterclass in handling Congress. Direct answers, with a focus on principles, and the acknowledgment of uncertainties. No jargon, no long economic diatribes, and no hints on future rate moves. Democrat accusations relating to his relationship with Trump were met with a steely firmness.

More importantly, Wall Street was given a very clear message, which will serve to undermine the astonishing growth in profits over the past year and half. The Warsh Fed will not underwrite risk-taking in financial markets. A statement reinforced by Warsh’s remark that sustained low rates and QE has led to excessive market leverage and growing wealth inequality.

When it comes to the bulls and the bears, the word “casino” appeared in more articles in the mainstream financial media over the past week, than at any time that I can remember.

SpaceX’s surge to almost double its issue price followed by the massive fall below $135, the wild swings in the Korean market, and Sy Hynix’s stunning rise and fall after its Nasdaq’s ADR listing, was unquestionably casino-like. Stock moves which stayed under the radar, such as a 25 per cent plunge in IBM after weaker software and consulting revenues, Accenture’s 18 percent fall on softer guidance, despite an earnings beat, and the general weakness across the health care sector on modest growth expectations, also highlights an exceptionally low investor tolerance for disappointment.

What was once dubbed a “healthy” bout of stock rotation has now led to near record low stock correlation, as can be seen in the chart below.

Bigger picture, key indices have already lost upward momentum. If more modest growth in earnings and cautious guidance becomes the norm, stock correlations will undoubtedly rise, perhaps even to levels seen when in the wake aggressive tightening monetary policy in 2022. In fact, reports suggest that traders and hedge funds are beginning to build long positions in volatility convergence.

If the end of the bull market has in fact begun, it is time to focus on how it will play out. In “Think Before Buying the Dip” I stressed the difference between “short sharp shocks” and “long wave cycles” in equity markets. Both might look and feel like market “crashes.” But the critical difference is duration and recovery.

“Short sharp shocks” are frequently the result of some trading-related event, like portfolio insurance in 1987, then the biggest one-day fall since Black Monday in October 1929. Other short-lived crises, such as the Russian debt default in 1997, the not unrelated collapse of Long-Term Capital Management the same year, and the Asian Currency crisis in 1998 were the result of leverage unwinds.

The most recent “short sharp shock” was COVID sell-off in March 2020. “Liberation Day” was another example, but shorter and far less material. Other instances of weakness since then have been little more than minor dips, many simply TACO Trade opportunities, where micro-scale deleveraging has played a role.

“Long-wave cycles” reflect the secular flow and ebb of credit, sometimes over decades. After the initial shock, what follows is rolling deleveraging of one market after another. Such deleveraging has played a critical role in every major financial crisis in recorded history.

In 1907, margin lending by brokers was a minor source of leverage, with limits of around three times. But the systemic failure of banks in the US, due to weak balance sheets, hidden by all forms of accounting skullduggery, was catastrophic. Like all such calamitous events, it led to increased regulation, most notably the establishment of the Federal Reserve in 1914.

In 1929, the frenzy in stock markets was similar to what we are now observing. Atlantic ocean liners had dedicated telegraph operators will lines to Wall Street brokers, as did luxury hotels. Newsboys and shoe shine vendors bet on the market, alongside the mega rich.

The trigger for crisis was the initial failure of a small number of large banks and brokerages, some of which offered margin loans with up to ten times leverage. Yet, the bulls remained committed. Little more than three weeks after Black Monday and Tuesday, the Dow staged a 25 percent recovery, leading President Hoover to prematurely declare that America was back “in fine shape”.

Unfortunately, over the course of 1930 and 1931 countless numbers of other banks, small and large, also failed, leading to the Great Depression. When the Dow finally bottomed in July 1932, it had fallen 89 per cent from its then all-time high. One the eve of World War II, most people in America still felt that the country was in the Depression, with unemployment of 13 percent.

As for the Global Financial Crisis of 2007-2009, unscrupulous mortgage brokers on high commissions obtained home loans for those with little income and, in some cases, no job. The pitch was “buy now and refinance later,” when the long-term trend of ever-rising home values and rising home equity would enable them to get a better deal. Along with less speculative loans, so-called NINJA loans were sold to Wall Street to be packaged up into CDOs, and CDOs², so that mortgage investors could also reap the returns from home price appreciation.

Not only did this assumption prove to be wrong, but conventional risk modelling massively underestimated the embedded leverage in instruments themselves. These instruments were leveraged even further when purchased by mortgage-focussed hedge funds, most notably by the first casualty of the crisis, Bear Sterns.

Today, disentangling leverage, whether visible or hidden, is a daunting task, even for central banks. Hedge funds, the long-standing leverage players, had stable degrees of leverage from 2013 to 2020, despite steadily rising equity markets. Perhaps the memories of the GFC were still fresh. But something happened from the end of 2024 to the end of March 2026. Equity leverage increased from $750 billion to $175 trillion, as shown in the chart below. Credit leverage has barely risen for more than a decade, while macro strategy leverage has risen by a modest $300 billion.

Though private credit markets are far from being a new asset class, as much of the retail marketing suggests, all major central banks are now concerned about the actual rather than assessed credit quality of private loans, and the potential systemic risk posed by the major global buyers of private debt, insurance companies.

Also often overlooked is the fact that banking sector plays a pivotal role in both private equity and debt markets. Lending by US banks to private market firms is now their biggest exposure to NBFI’s. Lending to Special Purpose Vehicles (SPVs), CLO’s and ABS has also increased materially, perhaps reflecting the capital needs of AI, especially from Big Tech, were there is a reluctance to take balance sheet risk. In recognition of this, all the major US lenders recently publicly disclosed their exposures to private markets, perhaps to reassure their shareholders and markets.

Added to all this, in what seems to be a very short period of time, ETF providers have rushed to offer all shapes and forms of leveraged ETF’s, which now seem to be playing a major role in the short-term volatility, not just of major equity indices, but increasingly individual AI related stocks. Most notably SpaceX, where there were a number of offerings, both long and short, established before the IPO, leveraged at 2-3 times. Similar offerings have appeared on the recently listed ADR of Korean firm, SK Hynix, whose massive moves brought the average trading day experience in Korea to the United States.

So, what happens next? How will the end unfold now that it has begun?

Well, that depends on what actions are taken by central banks, and perhaps more importantly, the Trump Administration.

Offering early access to his Truth Social posts for a monthly fee, makes a mockery of his feeble defence over his 25,000 trades in 2025. And it makes singling out one individual in the White House for trading on his pre-recorded speeches, look even more farcical and self-serving.

As I argued in “Beware the Trump Put,” King Donald might simply use taxpayers’ money, or US issuance of US Treasury debt, to prop up the stock market, which as everyone knows, is his sole yardstick for the health of the US economy. Whether this would work, could depend on whether ICE agents challenge and threaten every “un-American” looking voter in the key states. Foreign flows into US equities have surged in recent years on the back of the AI boom. Political chaos could easily result in a flight of capital, given all the other negatives already in play.

As for the Fed under Warsh, in my view, he will follow the long-proven approach of supporting the “illiquid”, while allowing the “insolvent” to go under. He has made it very clear that Fed support for financial markets will be temporary, not institutionalised, as it was under Bernanke and those that followed him.

But whatever happens in markets, or whatever the Fed or Administration actions are taken, the layers and layers of leverage will no doubt take a long to unravel.

In the wake of the initial meltdown, whenever that might be, the complexities and interdependencies of global leverage will slowly unwind. Add to this the diminished flow of global savings as the Baby Boomers shuffle off this mortal coil, and the the world could well be subject to something that has never before happened.

A relentless and slow grind down, where selling rallies becomes a successful strategy, rather than buying the dip.

Good luck.

Is the Strait of Hormuz open or closed? Is Kevin Warsh a “Hawk” or a “Dove”? Is Wall Street bullish or bearish? Yes, is the unequivocal answer.

Until Schrödinger's box is opened, the fate of the cat inside cannot be known. The same applies to these current conundrums.

Traffic has been flowing through the Strait of Hormuz, as evident from the IMF data in the chart below. And the tracked transits shown understate the actual traffic as many ships switch-off their transponders. But the simple fact is that transits are dramatically lower than before the Iran war began.

Kevin Warsh is doing his first semi-annual address to Congress this week. After his recalcitrant approach to the press at the ECB Forum conference in Sintra a fortnight ago, those looking for clues about the future of Fed policy could be sadly disappointed. There was general agreement between the systemically important central banks attending on downplaying or avoiding “forward guidance”, under the theme of “Back to Basics”.

Back home last week he announced his appointments to the five Fed Review Task Forces, namely Fed communications, balance sheet policy, data gathering, productivity and jobs, and most importantly, the inflation targeting framework. To suggest that the mix of academics and former practitioners have very differing philosophies and perspectives on the respective topics would be an understatement.

As for equity markets, the SpaceX and Sy Hynix’s listings served to highlight the evolving nature of retail investor behaviour, largely driven by the creation of more single stock ETFs, especially those offering leverage. Retail equity trading volumes in broad indexes and single stocks are now on par, as shown in the chart below.

In terms of leverage ETF’s, this chart requires no explanation.

Perhaps all the activity and increased daily volatility of ETF’s traders also reflect the mass exit from Bitcoin.

There has also been much talk about sector and stock rotation, not just from hyperscalers to chip makers, but a modest move back into SaaS stocks after their pummeling. Some contend investors are recycling profits on past one-way bets, most notably Nvidia, which is now down 10 percent from its all time high. With so little free float, the 35 percent plunge in SpaceX from its frenzied high is hardly a surprise, while speculation that Musk’s next move will be a SpaceX purchase of Tesla sustain its eye-watering PE ratio of 335.

But whatever is behind recent equity market dynamics, there is much more of a sense of increasing doubt about past strategies, of looking for something different, to keep the trading treadmill spinning, rather than irrepressible optimism.

Which of these three Schrödinger cats are dead and which are alive? That no doubt depends on individual perspectives. In my quest to save the greedy and the gullible, here are my thoughts.

Hormuz

Any Wall Street guru will tell you that geo-politics does not matter. Everyone has a table with dozens of events, showing how far market prices moved, before the prevailing trends re-asserted themselves. So, it is no surprise that the war with Iran has served only to provide more and more TACO trades. Printed numbers hardly show anything to be worried about, especially with regard to the robust economy of the United States. It is as if - as so many have been taught - that once an event happens it is in the price.

Every global agency has expressed concern about the Strait of Hormuz. Not because it is in the headlines. But that conflict Iran has been a modelled global risk event for decades.

Recently, the Bank for International Settlements (BIS), warned that the supply disruption to oil markets dwarfed the embargoes of the 1970’s. The mitigating factors were less oil-dependency, the use of strategic reserves and the emerging glut of oil before the conflict started. That said, it warned that reserves are now depleted, and that any further disruption could have severe consequences.

The damage done to refinery and storage facilities, not just in the Gulf, but also in Russia due to Ukrainian attacks, could take years to repair.

Though largely ignored, or misunderstood, by the media, spot oil prices paid by refiners reached all-time highs $40-60 per higher than one-month WTI and Brent futures. In turn, this has led to much higher and stickier prices for petrol and diesel. So-called “crack spreads” posted record highs in May, as shown in the chart below.

Every week without a proper ceasefire will exacerbate the impact of pre-ceasefire disruption. Insurance costs are already adding millions in costs to shipping in the Gulf, and these will not fall based simply on Presidential statements, or even another ceasefire agreement.

With current price pressure across the full spectrum of refined oil products, and by-products of the refining process, yet to fully felt, there is little chance of moderating inflation. Indeed, the opposite is the case. The rose-tinted glasses of Wall Street commentators have rested on hope, not unbiased analysis, due the ever-growing fear of retribution from King Donald.

Warsh, the Fed and the Economy

As for Warsh and the Fed, the pantomime of “will he or won’t he” deliver Trump’s desire for lower rates, will not be answered anytime soon, absent a much weaker economy.

Wall Street has persistent played-up the economy ever since the election. Every data release is judged on which side of the market forecasts it falls. Mass AI-related lay-offs are good, because the AI trade is going to boost productivity. The announced scale of AI investment is seen as economic strength, blissfully ignoring the bottlenecks, let alone the validity of predictions of unprecedented future profits. That the K-shaped economy is key to economic robustness, rarely gets a mention. Like a lot of AI funding, the link between the US economy and equity markets is circular, as shown in the chart below.

Conventional economic thinking assumes that markets reflect the economy. This has never been the reality. But rarely has the equity market been so pivotal for aggregate spending.

Bulls and Bears

Funny things are happening in the AI world.

It all began back in April, when Microsoft restructured its arrangements with OpenAI. Though the corporate spin on both sides was unquestionably positive, in marital terms it seemed like a trial separation. Sam wanted more independence. Satya was tired of paying the bills.

Then, after SpaceX jumped the gun on listing, and underwriters started planning to buy private islands with their fees from what they expected to be the three biggest IPO’s in history, Sam pulled the plug. According to inside information, namely ChatGPT, the reason was “primarily about valuation and market timing, not about OpenAI's underlying business”. Whether it also was about the now-public Apple lawsuit, my inside source was silent. Just like his good friend Elon, Sam has never made anything up, or failed to deliver on a promise, otherwise his disciples would have abandoned him long ago, given OpenAI is burning cash at an unprecedented rate.

But some experts see a more fundamental issue with the AI boom.

For some time, announcing big capex numbers saw share prices surge. It confirmed that AI was real. Such sums could not logically be spent by such all-knowing corporate deities if the revenues were not guaranteed. Yet most of the capital was through structured SPV’s, with only small exposures the balance sheet. A rather sensible approach given the uncertainties of the payoffs.

Before long, public funding took over from private funding. Bond issuance by the global giants made records. But with yields higher and spreads a little less attractive, surging share prices made equity issuance a no-brainer. One big player after another jumped on board.

Future capital raisings, in whatever form, might require more confidence in future revenues. Meta was initially punished for reducing capex. Perhaps Mark was just ahead of the game.

The BIS, given its responsibility for the stability of the global payments system, did some analysis for its 2026 Annual Economic Report. It compared the AI capital cycle, with a number of others throughout history. The three-panel chart from the report is shown below:

Looking at the first panel of the chart, hyperscalers will spend, on average, nearly half their revenues in 2026. Some of course, generate huge cash flows and are among the most profitable companies in history. Others are significantly loss-making and hence spending multiples of their revenues. The second panel is a modelling result that is interesting but contestable. The third panel is also modelling, comparing past economically transformative technologies, where the opportunity is obvious and durable, but nonetheless follows a cycle.

In terms of competitive pressures, the railway boom is perhaps the most relevant. In the US, competing companies constructed parallel tracks to the same destination, just as AI models often take users to the same place, with differing degrees of service quality. Most of the tracks are still there, and many might have generated the revenues once imagined, but the overall majority failed more than a century ago.

While the size of capex has in recent times has arguably become more a negative than a positive, the other challenge is deciding whether the AI cat is alive or dead is the basic mathematics of investing.

But when it comes to funding capex in order to grow revenues, too much debt funding introduces what fixed income and option traders call negative convexity. Debt payments are not optional. If the projected revenues from capex disappoint, or fail to materialise, borrowing more becomes more expensive. If the company’s share price also declines, a vicious cycle develops. When companies cannot borrow more, shareholders become the last resort. After that is a takeover or liquidation.

The AI revolutionary start-ups do not yet to make any money. But their focus on a single product should logically give them an advantage. Depending on the metric chosen ChatGPT is dominant player, though it is losing market share to Gemini and Claude. For what it is worth, surveys of user perceptions rank Claude by far the better product, as shown in the chart below.

That said, going back a few decades, similar surveys said the same thing about Betamax. If you have never heard of it, the inferior technology, now also obsolete, was VHS.

In current financial terms, Anthropic is in better shape than OpenAI, whose multiple capital raisings are unprecedented for a loss-making company. Each funding round has been more expensive than the last. The rate of revenue growth has begun to decline. Future funding might be harder to obtain. That could be a more believable explanation for the IPO delay than offered by inside source, ChatGPT.

Pulling all this together, it is not surprising that the bulls are becoming less bullish, and the bears becoming more bearish. You might argue that equity markets are off their highs but hardly looking soft. Fair enough. But it is important to remember that the global pensions industry continues to grow. Institutional managers are now little more than a passive heard, too fearful to deviate from what everyone else if doing. It is the leverage players that decide that the equity cat is in fact dead, not alive.

Opening the Box

Markets have been steadfast during the Iran war. Short-term TACO trades have been the name of the game. Some might suggest even the President himself. But even if peace breaks out tomorrow inflation is not going to soften. If anything it will rise.

Warsh will not be the white knight on horseback cutting rates for all those suffering from the price of debt. Most notably perhaps, all those private borrowers from the final year or so of the “free money” era, that have kept on kicking the can of default down the road, in hope of much cheaper re-financing.

Show-me-the-money will soon become the rule rather than the exception in all those profit announcements, perhaps even the Q2 ones, kicking off in the weeks ahead.

So, all of the cats in the box are actually dead. Entangled to each other. Half a millennia before the quantum world was discovered, Da Vinci said the that “everything is connected to everything else”. And so it will be.

Good luck.

The Boss summoned me this week. Not Bruce Springsteen. But God. She was far from pleased.

For two-hundred and fifty years she has tolerated the melting pot of religious contradictions and unrelenting sinfulness, which we call the United States of America.

But now it seems she has had enough.

Once she expected the devout European flocks fleeing to America to enlighten the native peoples, not seek to annihilate them. Her tolerance for commercialisation of religion by charlatans, psychopaths and more recently television evangelists, not to mention the hate and blame preachers of all denominations, is also rapidly running out.

She hinted in our conversation that something like the divine vision she gave to Martin Luther, to encourage his crusade against the centuries of selling of indulgences to the wealthy by the Catholic Church, might be in order.

This added to my concern. The Reformation ultimately led to the Thirty Years War, one of the deadliest in human history, where starving parents were forced to eat their children.

Brought up a Calvinist, I am very well-versed in the “fire and brimstone” teachings of John Knox, who’s fearful looking statue still dominates the courtyard of the University of Edinburgh. Obviously, I was not born when Sodom and Gomorrah earned God’s divine wrath. But I do fear the Boss might have something similar in mind for the United States of America.

We all know that God works in mysterious ways. Maybe an earthquake in California, will finally see it sink into the Pacific Ocean? Or perhaps a coordinated nuclear attack by China and Russia? Or, that Elon Musk is in fact an alien, not just a South African? Or, more likely, a failed IPO by OpenAI triggers a global meltdown in financial markets, on a scale not yet experienced?

Before offering my perhaps too late advice on saving the United States from divine obliteration, I should make a few things clear.

First, the only reason I am in purgatory, rather than hell, is that I died a pauper, confessed my sins, and promised to save the greedy and the gullible, with my hard-earned wisdom. God takes the story of the rich man, the camel, and the eye of the needle, very seriously.

Second, she realises that poor old Donald is not very bright, and that while he might not be the most corrupt President in US history, he has made very little effort to hide his corruption from the public. As for his fitness and competence for the job, well, he has none. Trump has always had a puppet master. His first was Roy Cohn, who prosecuted the Rosenberg’s, and was the brains behind Senator McCarthy’s Communist witch hunt. As President, it has been Stephen Miller, who many contend is a far-right, anti-immigration, white supremacist. If Trump is the performing monkey Miller is the organ grinder. Not exactly one of God’s children.

Third, the United States has lost the trust and respect of world. More importantly, it has yet again inflamed the heinous millennia and a half of conflict between the Abrahamic religions. God does not like to see her children killing each other.

So, there are much more important things to do, than to express outrage over the UFC 250 promotion on the Lincoln Monument, the arrest of those alleged terrorists responsible for viciously vandalising the Reflecting Pool, and Trump’s warning of a Communist revolution in America, on the morning of the 250th Anniversary of the Declaration of Independence, a muddled concoction of a document, written by wealthy slave owners.

It is time, my dear American friends, to face some facts, and actually do something to prevent the divine retribution that might lie ahead.

Fact one is that America has never been a true democracy. It has always been a kleptocracy. The “checks and balances” were never really about the people. They were designed to prevent a dictatorship. The cumbersome wording of the false-God that is the Declaration of Independence was all about the oppression of hereditary monarchy, not the virtues of democracy.

Fact two is that recent Supreme Court decisions serve only to support the Unitary Executive Theory. Or in simple terms, the election of a King. Trump has even asserted that the judgement on Fed Governor Cook provides a template to fire Fed Governors in the future, despite the Fed being singled out as the single truly independent agency of the United States.

Fact three is that politics in United States has always been corrupt. Donald’s 21,000 trades in 2025, his crypto profits, and his Middle East envoys looking for real estate development opportunities rather than peace, might be more overt than the self-enrichment activities of some of his predecessors, but not unprecedented. With the advent of PACs, and more recently SuperPACs, election funding has not only skyrocketed but become more opaque. Political donations on the scale seen in the US, dwarf every other country. Longstanding members of the Senate and the House are widely recognised to be “owned” by the corporations that donate to them, especially on the Committees where huge sums are approved and handed out.

So, what should you do? Well, in short, vote.

Now you might find registering difficult. You might think your vote does not matter. You might be worried in Blue States that masked ICE agents could shoot you for parking your truck in the wrong place.

Those that already vote should reach out to those that do not. Material change in American politics will come only from the disenfranchised, which is typically one-third of those eligible to vote. Every study of voting demographics suggest that the profile of the “average” non-voter is:

· under 35 years old

· without a four-year college degree

· earning below the national median income

· renting rather than owning a home

· having moved within the past few years

· only weakly interested in politics

· believing government is unresponsive.

· and less connected to civic organizations or community groups

The Democrats are just as captive to self-interested donors as the Republicans. No major party acts in the interests of the “people,” just the people that have bought them. Washington is a swamp of self-interested predators.

The so-called “Democratic Socialists” that keep ousting incumbents in mid-term Primaries might be on to something. Politicians like Zohran Mandani might not be the answer in most states, but ordinary people talking to other ordinary people is a formula which has worked for many years.

Cutting the slick bullshit from politics and focusing on the needs and aspirations of ordinary people is the essence of democracy.

It is about time, my American friends, that you gave it a try.

Good luck.

The wild gyrations in equity markets, especially in individual stocks, and the on-again off-again ceasefire with Iran, consumed the attention of financial media last week.

But whether by accident or design, something profoundly important happened in Congress. The Federal Reserve was banned from issuing tokenised dollars until the end of 2030, by a single un-related clause in a bipartisan housing Bill. With the passage of the Anti-CBDC Surveillance State Act still being debated, the Administration had a significant victory in its campaign for privately issued dollars. Otherwise known as US stablecoins.

Obviously, King Donald and the family are proud issuers and owners of crypto, even if their Bitcoin holdings are down around 40 percent from the purchases made public at around $103,000.

Scott Bessent and Kevin Warsh are also both supporters of privately issued dollars, perhaps for different reasons. Bessent perhaps sees increased demand for Treasury securities given the scale of issuance and unrelenting rise in government debt, even before the huge costs of the war with Iran. Warsh reasons are not yet clear, other than that privately issued dollars are consistent with his negative view on the Fed providing “ample” reserves and running a persistently bloated balance sheet, thanks to the breathtaking scale of QE.

After three centuries of observing the endless confusion over money and what it is, and what its role should be, it is obvious to me that is money is debt and debt is money. An asset to some, a liability to others, and a means of transacting for both. It is the oil in the machine, which enables intangible things to be assigned a value, no matter how fleeting, in the twenty-four seven casino markets of today.

The crypto revolution has become a financial media behemoth, which began with the simple idea that printing money is not a good thing.

So, whoever, or whatever, is the eponymous Satoshi Nakamoto, the idea for Bitcoin was an act of genius, and in many aspects, a middle-finger to modern delusions about the nature of money. Though ridiculed by a clueless generation of economists, indoctrinated in the belief that they alone could end the gyrations of capitalist economy, Bitcoin and the crypto phenomenon have survived the test of time.

As the inventor of fiat money, and the father of modern central banking, I can assure you that currency debasement destroys empires and civilisations. Bitcoin will always have some role to play. However, significant challenges are emerging.

The dramatic decline from the all-time high of c.$126,000 to c.$59,000, reduces the rewards to mining, at a time where AI is already putting upwards pressure on electricity prices. Some miners might shut up shop, others might add more selling pressure. Those that first bought Bitcoin through ETF’s are facing book losses. Many have already sold their holdings. Strategy Inc, the largest holder, always had the look and feel of a Ponzi Scheme, and at current prices might struggle to meet its obligations to equity and debt holders. Perhaps, more importantly, the rush by Wall Street to issue leveraged ETFs, and all manner of complex derivatives, has rendered traditional holders to be little more than “bobbing corks” in an ocean of frenzied greed.

Stablecoins are different in many ways but will always remain a part of the crypto ecosystem. A significant degree of the current demand for stablecoins reflects their role as a low-risk on-chain holding account for crypto trading. A parking vehicle for crypto-native investors. Current stablecoins are less than 10 per cent of the cryptocurrency market while Bitcoin is a bit over 50 per cent. Relative to US banking system assets they around 1 percent and 5 percent respectively, and half that proportion, when compared with US fixed income markets.

While the US banking system is archaic and expensive, and the global SWIFT, Visa and Mastercard payment systems long outdated, it is difficult to see how the Administration’s relentless promotion of tokenised private money solves the problem.

A financial system split between tokenised private dollars, and un-tokenised public dollars, cannot simply be about “privacy” or the deeply ingrained mistrust of government in American culture.

Stablecoins already trade at differential prices. It is unclear how a surge in new providers will serve to eliminate such differences. Intense competition could lead to different “bells and whistles” being attached, replicating the archaic and inefficient existing payments system. Tokenised dollars, with the potential to trade at differing prices, simply creates a tokenised alternative to the Fed, where the profits go to private enterprise, and the only limit on issuance is the amount of available Treasury securities.

To my mind, it serves only to repeat the mistakes of the past. And, as the BIS has argued repeatedly, US dollar stablecoins cannot become part of a future tokenised global payment system.

The argument that US dollar privately issued stablecoins will extend the influence of the dollar, and expand global demand for dollars, is based on the inconvenience and bureaucracy of opening a US bank account, compared with the “any time” access, speed of settlement, and security. But all of these advantages could equally apply to a Fed-issued US dollar CBDC.

Given Trump’s penchant for pardoning those convicted of financial crime, his lawsuits against banks refusing to do business with “colourful entrepreneurs” and scrapping of prosecutions for those suspected of unlawful practices, his opening of the door for more US dollar stablecoins should raise concerns about the potential for wrongdoing.

“Hucksterism” is deeply ingrained in American culture. From PT Barnum’s famous quote “a sucker is born every minute” to the loud and relentless “hard sell” of just about everything, the absence of modesty explains why United States dominance in advertising, the entertainment industry, and more recently in social media, and especially the “influencer” phenomenon. But “hype” and “falsehoods” should have no place in financial markets, where millions of lives and livelihoods are at risk. Such has been the principle behind decades of regulation.

When it comes to trust in the dollar, warnings about ballooning deficits and debt have been voiced for decades. But never before has there been a global loss of trust in American institutions and American politics than in the past year and half.

The United States has always been over-banked, regionally focussed, and prone to all forms of skullduggery, from creative accounting to outright fraud. Between 1792 and 1907 there were ten banking crises, with five devastating ones between 1873 and 1907. The latter one being the proverbial last straw for the American public, leading to the establishment of Federal Reserve in 1914.

Since then, there have been only three - the Great Depression, the Savings and Loan Crisis in the late 1980’s and early 1990’s, and the Global Financial Crisis of 2007-2009. Mini crises have been more frequent, and financial stability maintained by coordinated efforts through the major central banks, insulating other countries from bouts of deleveraging in US markets. But this was supported by increasing banking regulation and liquidity support mechanisms, that can only be conducted by central banks, acting together.

Trump’s infatuation with all thing’s crypto goes beyond the money he made from his family meme coin. By endorsing crypto and allowing the proliferation of ever-more complex forms of leveraged ETFs, perpetual futures, and all things that make a lot of money for Wall Street, he will leave a legacy for which will never be forgotten.

As argued in “Tokenisation: The End of Dollar,” China is leading the world in the tokenisation of not just currencies, but all assets. The push for privately issued money is more about supporting the archaic payments system from which America has benefited most and therefore has most to lose. That this had to be legislated through indirect means in a Housing Act, speaks volumes about the integrity of the Administration and Congress more generally.

Trump has lost the war with Iran. The TACO trade has made record profits for Wall Street, and who knows who else, while creating unprecedented swings in asset prices.

Wasting time and energy on a corner of the crypto market, for a handful of supporters looking to make easy money, could end up being his greatest mistake. And could well ensure that a totalitarian regime, with superiority in everything from education to infrastructure ends up dominating the democratic world.

The Trump “puppet”, that allegedly promised the President lower rates, managed to make a debut performance at the FOMC that will never be forgotten. The Statement itself was a mere 132 words, a length not seen since the Greenspan era, and 213 words shorter than Jay Powell’s departing effort.

But his point blank refusal to add his “dot” to the infamous “dot plot”, and the appointment of a task forces to review the ample reserves policy and the Fed’s bloated balance sheet by year-end, was reinforced by the simple one-liner, “inflation has been above target for five years”.

In the corporate world, only Elon Musk could get away with a promise so persistently broken. But Musk answers only to himself, not the American people.

As the inventor of fiat money and the father of central banking, I am an unabashed Warsh fan. On my quest to save the greedy and gullible, the old-fashioned thinking which Warsh seems to be bringing to an FOMC filled with “Cult of Fixing Everything” economists, is not just what the Fed needs, but what all central banks should be doing.

When it comes to policy failures, this graphic says it all. Though the operational aspects of the Fed, ECB and BoE differ, all failed to get inflation up during the “free money” era, did not see it coming in 2021-22, calling it ‘transitory’, and have so far failed to get it down to target in the middle of 2026. With the fragile status of the MoU on Iran, there is no reason to expect some miraculous decline in inflation any time soon.

In an earlier article, “Where the Buck Stops”, I argued that the irritating nonsense being peddled, that Warsh was going to be a “dove”, ignored the simple fact that he had always been a “hawk”. And given his experience on Wall Street, and the pivotal role he played during the GFC, he was far more qualified for the top job than any of his predecessors, from Greenspan to Powell.

In fact, his thinking harks back to the almost nineteen year reign of William McChesney Martin, and his famous one-liners about the role of monetary policy. Namely, “to take the punchbowl away before the party gets going” and “to lean against the wind, whichever direction it is blowing”. He confessed to a friend towards the end of his term, that a new generation of American economists had far too much faith in their theories and the econometric models, and could beguile politicians with promises that monetary policy could deliver perpetual prosperity.

McChesney Martin’s prediction came true around the turn of the century, with the best example being Gordon Brown, who, in 2007 repeated a claim that he had made many times before, “we will not return to boom and bust”. Not quite on par with Irving Fisher’s declaration that “stock valuations had reached higher plateau” a few day before the 1929 crash, but nonetheless close.

The famous “Fed Put” began as the “Greenspan Put” but took an entirely new dimension under Ben Bernanke. Bernanke was dubbed “Helicopter Ben” after a 2002 speech he gave shortly after becoming a Federal Reserve Governor, where he stated "The U.S. government has a technology, called a printing press... that allows it to produce as many U.S. dollars as it wishes at essentially no cost”. Although the image of a helicopter dropping money was a thought experiment used by Milton Friedman, to warn of the inflation risk of money printing, Bernanke turned it on its head, arguing that it meant that the deflation experienced during the Great Depression would never happen again, at least on his watch as Fed Chair.

Though there are differences in how central banks implement monetary policy, the framework for making decisions is almost universally focussed on targeting inflation. Yet, since Nixon ended the Bretton Woods fixed exchange rate system in 1971, there have been no less than five implementation regimes, from reserves targets to various forms of money supply targets, and even exchange rate targets. The objective of these frameworks has always been to provide a so-called “nominal anchor” for prices. A substitute for the long-standing link to gold which had provided financial stability for the majority of the past three centuries.

The new generation of economists, which so disturbed McChesney Martin, were obsessed with the idea that perfect markets, set free by Adam Smith’s “invisible hand”, was not just a theory, but a religious mythology. And, it is not an exaggeration to suggest that many of the pioneers of such thinking, were indeed deeply religious. That such beliefs lacked any empirical support, after four centuries of capitalism, with booms, busts, deep depressions and myriad financial crises, was irrelevant. These men knew they were right.

Why such attitudes linger, given the events of the past twenty years, is difficult to explain. The “group think” surrounding monetary policy remains entrenched, despite the collective failure to get inflation “up” to target for a decade or so, and “down” to target since 2021.

Even now, economist, financial markets and media commentators do not really seem to appreciate that Warsh’s tenure at the Fed could be game-changing. His key objectives are truly radical:

1. Talk Less: Formal forward guidance on the direction of policy is both an attempt to shape market expectations and to manipulate market yield curves. The concept is an offshoot of the theory of rational expectations. In other words, if you tell market participants what you are going to do, they will simply do it for you. But even if we were all stupid enough to believe what we are told, the forward guidance needs to be followed through. That this rarely happens, completely undermines its objective. For almost a decade after the GFC, central bankers articulated numerous triggers for “normalising” interest rates. But material action was ever taken. Even when inflation re-emerged, central banks clung to the fantasy that it was “transitory”. Again and again, the “talk” was not followed by action.

2. Debate More: Publishing central bank minutes, and producing long and repetitive statements, leads to stifled debate, defending of past views, and who knows whatever other ego-driven behaviours. It is rumoured that some FOMC members bring along prepared briefs, for fear of being misquoted. Anything as consequential as central bank decisions, not only deserves, but demands an open mind.

3. Reserves and the Balance Sheet: “Ample” reserves, QE and QT are instruments specifically designed to support the operation of financial markets, to ensure there are no liquidity crises, no serious bouts of deleveraging. By doing so, the Fed is effectively writing a “blank cheque”, which serves only to underwrite more risk taking. It is indiscriminate insurance against failure, which is in fundamental conflict with the role for which central banking was invented. Namely, to protect the general public from the greed and recklessness of unwise borrowing and lending.

Though it is never been hinted at by Warsh himself, his key objectives lead to one simple and obvious conclusion. Monetary policy, especially rate increases or decreases, are much more potent when nobody is expecting them. And the less frequent and larger such rate adjustments are, all the better. Aside from being a more effective inflation management tool, uncertainty over monetary policy discourages excessive risk taking, and excessive leverage.

So, to conclude, as I argued in “Wall Street, the War, and Warsh”, the new Chair of the Federal Reserve is on the side of Main Street, not Wall Street. The only uncertainty is how long it will take him to turn the Fed Governors and District Presidents around to his way of thinking. Who can possibly know? But his first meeting has sent the strongest possible that change is inevitable.

As always, good luck.

Historic is an over-used word. But something tells me that Friday 12 June 2026 might prove to be one of those days where the world changes. Not for a few months, decades or years, but forever.

Just as it did when torrential rain led to Napoleon’s defeat at Waterloo. Or when Archduke Ferdinand’s driver took a wrong turn in Sarajevo. The Bomb was dropped on Hiroshima. And Tim Berners-Lee and CERN to gifted the World Wide Web to us all.

Why could this day be so monumental? Two things happened. Each of them unrelated.

Trump’s declaration of victory on the basis of yet unpublished agreement with Iran was an unprecedented embarrassment for America, no matter which way you cut it. A TACO of monumental proportions which never be forgotten. After saying a week or so ago that did not care about the impact of the war on the average American, the only logical conclusion for this capitulation was the plunge in the stock market, and perhaps crypto markets as well. As we all know, Wall Street has always been more important to Trump than Main Street.

After Xi firmly told Trump that the Strait had to be reopened, while Netanyahu insisted on finishing the job, Trump was caught between conflicting objectives. Continuing to do the bidding of a significant source of election funding and electoral support, or jeapordise the bull market in equities and trade opportunities for American companies in the world’s second largest economy. The leader of State of Israel’s only remaining ally, chose China and financial markets, over its long-standing support for American Zionists. The damage inflicted on America’s allies in the Middle East will never be forgotten. Neither the Arab states, nor Israel, will fully trust the United States ever again.

As for Musk and SpaceX, the words contained in the offering documents paint of vision of a "total addressable market of $28 trillion, of which the future vision for xAI division represents around 90 percent. What few have failed to realise, however, with the exception of Warren Buffet, is that the key to this vision is not the colonisation of Mars, but data centres in space, where solar power is free, and cooling unnecessary. Whichever current and future AI providers survive the intensely competitive environment they find themselves in, might end up being SpaceX customers, leaving ugly worthless monoliths scarring the planet.

So, what does all this mean for the greedy and the gullible.

The potential for any deal with Iran to break down is high. Insisting that the agreement should be publicly signed in Switzerland on 19 June, speaks loudly of the lack of trust in the Trump Administration. Releasing sanctioned funds, or making any other form of payment to Iran, will be extremely controversial in the United States, especially among old school Neo-conservatives.

Trump’s declaration that the Strait is now open, is not only false, but will hinder future negotiations, and likely prompt a show of strength by Iran. Global stocks of oil and related by-products are extremely low. Insurers will need to be confident that the deal will be maintained before traffic resumes to anything like per-War levels. Oil does not flow because King Donald commands it.

But the bigger issue to which markets seem oblivious, is that critical oil infrastructure has been destroyed, or severely disabled. A return to pre-War production and supply will take many months, potentially years. Inflationary pressures in the pipeline will not suddenly cease. They are more likely to increase. Future prices are just that. Spot oil had consistently trade well future deliveries.

And then, there is the Israeli wild card. Netanyahu has not been pardoned on his ongoing corruption charges as Trump requested. With the election looming, and his popularity is falling, he could be defeated by a more aggressive and extremist coalition. If Israel decides to “go it alone” on Iran and Lebanon, chaos could erupt in the Gulf yet again. The widely held consensus on the future of the Gulf States is that the decades long process of promoting the Gulf as safe haven for business and luxury travel has been materially harmed. Winning back the confidence of the businesses and peoples of the West will take time, years not months.

The bottom line is all of this, is that a yet unpublished agreement, is not the end of the Iran saga. There is a lot of water to yet flow under the bridge.

When it comes to SpaceX and the other mega-IPO’s, even the most faithful of “true believers” are going to face an avalanche of supply. With so much optimism and euphoria, valuations for companies with more concentrated revenue streams than SpaceX will likely be priced to perfection. In a market as competitive as AI, the chances of a reality check are high. Arguably, inevitable.

In contrast, the debate over SpaceX and the weight being placed on xAI to justify the market price is less of a concern. Grok does not have to be one of the “winning” AI bots. Just as SpaceX developed the technology of rocket reuse, it undoubtedly has a head start on the construction and operation of data centres in space. With opposition to data centre construction and operation growing rapidly in many countries, a modern “Luddite” movement will unquestionably gather momentum. Moving compute capacity into orbit is a game-changing risk for earth-bound AI companies.

The greatest risk to investors in SpaceX is, obviously, Elon Musk. His almost total control over the company will expose investors to his ego, his politics, and his erraticism. He is no doubt a visionary, but he has repeatedly missed on his timing, from full self-driving, to Robotaxis, humanoid robots, and most notably, the colonisation of Mars.

In the short term, passive demand for SpaceX will be largely immaterial. MSCI index investors will be the main source. As for sellers, even those investors that are locked in for six months, are unlikely to sell, given most insiders in such situations raise cash by borrowing against the collateral of shares held. But over time supply will steadily increase. The decision to apply standard rules for index inclusion by S&P takes away mainstream passive buying for at least a year, and more likely longer. With limited float, the price of SpaceX could prove extremely volatile, especially to any new information or developments.

The extent to which the SpaceX IPO is good or bad news for the OpenAI and Anthropic listings in the months ahead is difficult to assess. Will being first soak up a significant proportion of investor capital? Will questions be asked about the earth-based expenditure on compute? It is impossible to say. Market conditions at the end of the year could be very different to now.

The Iran agreement and SpaceX IPO might result in a bounce back in the US and global equity markets. At the time of writing, futures prices are almost back to their recent highs. Bond yields globally had fallen modestly. With the Fed meeting ending on Wednesday, attention might shift the new chair, Kevin Warsh. Expectations of a Fed hike might dissipate, but there is little probability of a rate cut anytime soon.

As I argued in “Think Before Buying the Dip”, every recent precipitous decline in equity markets since 2008-2009 has been a “short sharp shock”. A market deleveraging event, where short-term excess was met with concerted central bank intervention. That is, the so-called Fed Put. Warsh will not allow the Fed Put to be exercised, absent a calamity.

For as long as rates and bond yields remain at the current levels, the “long wave” credit cycle remains intact. The extreme demand for capital in the form of debt is ongoing, not just in private markets, but public markets as well. Each lending sector is exhibiting ever-increasing complexity in the slicing and dicing of risk. With companies now raising equity capital on an astonishing scale, new sources of supply will be required.

For the bull market to continue, new money is needed. With global financial market leverage already at extremes, and little prospect of a material fall in funding costs, other investments will need to be sold. That could be already be playing out in coin markets. Perhaps it will lead to even more stock rotation than evident in recent weeks. Whatever happens, however, the mega AI IPOs will further reduce market diversification, increase day-to-day volatility, and increase the risk of material losses of capital.

Before long, the world might end up “betting it all” on just a handful of numbers on the equity market roulette wheel.

Good luck.

Last Friday could prove to be the proverbial “canary in the coalmine” for what has been a remarkable bull market in just about every risky asset, but particularly equities, and the relative “newcomers” Bitcoin, and other cryptocurrencies.

Announcements of a large equity raise by Alphabet, and a mooted one by Meta, coincided with lacklustre forward guidance from AI chip giant Broadcom, sending its shares down 20 percent, prompting sharp declines in a host of semiconductor and other tech stocks. Some claim this selling was to “make room” for the “once-in-a-lifetime” opportunities of the SpaceX and OpenAI IPO’s, not to mention Anthropic. But the fact that these companies will not be added to the S&P 500 until they actually show a profit, might also have contributed to change in sentiment.

Strategy Inc’s first-ever sale of Bitcoin, not only broke a solemn promise by Michael Saylor, but accelerated a sharp decline triggered by unprecedented retail selling of Bitcoin ETF’s.

Adding fuel to the fire, was an above-forecast 180,000 increase in non-farm payrolls. That this number was artificially boosted by a surge in temporary hiring in the hospitality industry ahead of the World Cup, did not seem to matter. Treasury markets priced out hopes of rate cut and began to price in a rate hike before the year is out.

One of the many myths of Wall Street is that no one can predict a crisis in markets. And that you can go broke, or miss out on untold riches, by even trying. But there are always signs.

Last October, in my article, “The “Canaries” of Wall Street”, I argued that they were a peculiar branch of the species, that see no evil, hear no evil, and speak no evil, for fear of unleashing evil upon each other. But I also pointed that some of these “Wall Street Canaries” are known to wear “gas masks”. They drop hints, express the odd concern, while quietly seeking ways to protect themselves from the potential carnage. Continuing the analogy, those wearing gas masks are now looking rather clever, and those that are not are “twittering” rather loudly.

Back then, no one really expected war in Iran. The “canaries” to watch were the retail investors, or day-punters, fed ever-bullish scenarios by You Tube, Reddit and Tik Tok; the crypto “minnows” being eaten by the whales; and the credit cycle, in particular the private debt industry, kicking the proverbial can the road with PIK and other LME’s , in hope of a return to much lower rates, not to mention the “push into retail” to help out all those mum’s and dad’s missing out on such “low risk” lending. The final, and potentially most consequential one, was the the US Treasury market.

Well, almost nine months later, equity markets are much higher and crypto currencies much lower. And mum’s and dad’s want their money back from all those BDC’s.

The crypto downtrend accelerated in November last, and again in February and March this year. After a strong bounce, the current plunge is being driven by those that fuelled the ETF-led surge that took BTC to its all-time high of $128,000. Avoiding losses being the key motivation.

In private debt, after a brief period of self-interested generosity, redemption caps are being enforced, even when applications are averaging two to three times the fund limits. Although no major “cockroaches” have since emerged, Bessent has commissioned an enquiry into the systemic risk in private debt joining other countries. The most recent concern is about the letter-only ratings of the insurance companies owned by the major private markets firms are really of the credit quality assumed. Default rates have recently hit 6 percent, which most experts consider to be over-optimistic, given the extent of LME’s, and still high interest rates, which seem most unlikely to be headed downwards absent a material recession. Higher funding rate and higher inflation could be the death knell of an industry that was once heralded to become ten times larger.

As for the Treasury market, concerns have so far turned out to be unwarranted, although the benchmark 30-year is above 5 percent. Yet, critical things, like the CLARITY Act, and the related legislative ban on the Federal Reserve ever issuing a digital dollar, are still being bounced around in Congressional Committees. As argued in “Tokenisation: The End of Dollar”, Trump’s promotion of US dollar stablecoins, is at odds with China’s focus, supported by the BIS, of sovereign CBDC’s. Privately issued US dollar tokens, lacking direct access to central bank dollars, are subject to falling prices of US Treasury securities, not mention operational or governance issues, with private stablecoin providers.

But the “canary” that did not exist last year, namely Iran, could prove to be the most consequential of all. Why markets seem to be discounting the probability of a prolonged impasse over the Strait of Hormuz, which threatens not just sustained high oil prices and potentially global stagflation, is a conundrum wrapped in an enigma.

Putting aside the concerns over AI capex, the physical and political bottlenecks to data centre expansion, and the likelihood that the intense competition will result in a handful of “winners” and a multitude of “losers”, the downstream impact on all tech industries could profound, and long-lasting.

Qatar is a major supplier of helium, a critical gas used in semiconductor manufacturing, scientific instruments, and aerospace applications. Petrochemical feedstocks used in semiconductor packaging, photoresists, solvents, and specialty materials will not only be more expensive but also subject to shortages in supply. Manufacturers of hardware across a wide range of electronic components could also be affected.

While the depletion of global oil inventories is modest to date, the rate of depletion is unprecedented. Another issue is that inventories are not distributed evenly, so some countries could face more shortages and higher end-product prices than others. With most accessible commercial stocks and strategic reserves being used first, the IEA to recently warned that inventories could reach critically low levels before peak summer demand, if the disruption to traffic in the Strait of Hormuz continues.

Then, of course, is the bigger risk to all markets. Global recession. Or worse, entrenched global stagflation. The oil crises of the 1970’s were all about prices, not prices and supply shortages. More importantly, the growth of the petrochemical industry, and the much wider usage of oil refining by-products, particularly in the tech industry, means that Iran crisis could have much pervasive impact on the world economy.

So, all of the “Wall Street Canaries” are now “twittering” very loudly. But the biggest “canary” of all is Iran and the Strait of Hormuz. While the Iran war will go down in history as the United States greatest ever geo-political failure, not to mention a military embarrassment beyond anything that has come before, it could be remembered most, for triggering the greatest financial market crisis in history.

Good luck.

The world has truly gone mad.

Agreements without agreement. Ceasefires where firing does not cease. Losers proclaim victory. Winners smugly smile. Allies are accused of “performative outrage”. Enemies are rewarded with “constructive strategic stability”.

While thousands are killed, and millions are displaced, in the land of the Crusades, the Emperor entertains the masses with blood sports on the White House lawn and the Lincoln Memorial, soon to be followed by a headline performance to celebrate 250 years of “American Exceptionalism”. A heady mix of innovation and wealth accumulation, endless self-promotion, and layer upon layer of self-righteous bullshit.

Meanwhile, hunger has become serious risk in many countries, due to the shrinking supplies and much higher prices of diesel and fertiliser. Even the invincible tech industry could soon feel the pinch of all those obscure yet critical petrochemical essentials, that no one seems to want to talk about, especially the Emperor and his fawning attendants. Perhaps the outbreaks of Ebola and Hantavirus might soon fade in headlines, replaced by all those childhood diseases once eradicated, now re-emerging, thanks to US Secretary of Health, the psychopathic snake-wrestler, that denies science, and loves being worshipped by the manosphere.

But do not worry too much. All is well in the world of finance. You know, the unstoppable engine of ever-increasing wealth, no matter what might happen in the real world. Your ETF provider is getting ready to help you share in the greatest IPO’s in the history of humanity, guaranteed to make their founders rich beyond their already profane aspirations.

The AI juggernaut has moved on from the AI providers to the AI suppliers, just as every Wall Street pundit predicted. Those heavy “uneconomic” users of the providers tools will soon see their $20-30 monthly fees go to $2000-3000. It will no doubt be worth much more.

Jobs will of course be lost. But this will simply elevate humanity into a species of what Ricardo called “rentiers”, those that do nothing than simply watch their wealth accumulate as the prices of their investments go up, and up, and up. What the indomitable Nicholas Nassim Talib calls a “flaneur”.

So, the mad world of today, will soon make sense again. The Demi-gods of AI, living in their Bond Villain Bunker’s populated with robotic henchmen, will ensure that the “flaneurs” prosper, playing the role of customer, investor, and rentier. A self-sustaining circular society, with no need for dated things like government, the “rule-of-law”, or anything non-flaneur like, such as working, or thinking, or contributing to the common good. A civilisation proudly claiming in one deafening voice that they “are all individuals”.

On the other hand, perhaps humanity will end-up like Orwell’s Winston Smith. A happy cog in the wheel that worships Big Brother after a life-changing visit to Room 101. Or maybe some might rebel, turning their back on the AI world of perpetual bliss, and seek to be like Huxley’s "John the Savage, and live in a world of love, family, spirituality, individuality, and freedom, at the cost of aging, poverty and ultimately death.

Enough of the sarcasm. Time for some facts.

Whatever happens next in this world gone mad, you can be sure that Wall Street will find a way to take a cut. But do not expect anyone on the Street to undermine the narratives. Speak no evil is the golden rule.

TACO and AI are the gifts that keep on giving. Not to mention the on-again off-again deal with Iran.

Citadel’s record trading revenue in Q1 followed similar announcements by the mainstream banks, as did BlackRock’s near 50 percent year-on-year earnings result. Even Jamie Dimon has gone quiet on the “cockroach” front, despite the ongoing issues with BDC’s, and private credit more generally, including rumours of some large BDC’s being downgraded to junk.

So what are the speed bumps lying in wait for all this enthusiasm?

Well, first and foremost, is the Strait of Hormuz. Despite all the misinformation, around 20-30 ships do seem to be transiting through the Strait most days. But this is still 100 ships fewer than pre-War levels. One-off deals, alternate sources of supply (i.e. Russia), and other measures are mitigating the impact on both spot prices and futures markets. The impact on fertilisers, petrochemicals, and the by-products of the refining processes like sulphur to paraffin wax, are also being felt. This differs from country to country, but the direction is clear - higher prices and reduced supply.

Leaks from within the Trump Administration are multiplying day-by-day. A recent PBS Frontline podcast highlighted how the key players warned Trump that the war would be a mistake. But it alleges that Netanyahu flattered Trump with tales of his future place in history. Other leaks suggest that his Middle East envoys are more interested is re-construction development deals, than successful negotiations, and are suggesting Iran’s demand for war reparations to be in the form of a US Investment Fund. All should recall Trump’s enthusiasm over Gaza as site for a luxury resort, and his deals with the Gulf States. Most recently reflected in his enthusiasm for “one big happy family” in the Middle East, suggesting the Gulf states should sign the Abraham Accords. Maybe Lebanon, especially Beirut, will be reborn as the jewel of the Levant after the Israel takes over.

If a deal does emerge in the weeks ahead, Trump will need to yield on his, and no doubt Israel’s, red lines. Both China and Russia are rumoured to be assisting Tehran on many fronts, which should not in any way be surprising, given Iran’s role in the new BRICs.

Aside from Iran, the AI Phenomenon continues to expand its boundaries. But the simple fact remains that the vast expenditures on data centres, equipment, chips will at some point run into roadblocks, from electricity and water supply, to NIMBYism. Speed of construction and access to power and water cannot proceed at the same speed as AI output, or demand. The Big Three IPO’s could also be a critical test. Musk is relying on fantastical visions and one highly profitable business, and has already cut the estimated value of SpaceX by $200 million. Who knows what Altman, the other fantasist, will claim, relative to the more grounded team at Anthropic. And then there is the AI wild card, China. Another DeepSeek moment could be in the offing.

Another inconvenient stumbling block is the US economy. The Street is still telling us that the US is stronger than expected. But that does not mean it is actually strong.

Every measure of consumer confidence is looking dire compared with levels of consumer spending, which is being supported by the top 10% of earners accounting for almost 50% of the total.

When it comes to jobs, recent numbers have beaten economists forecasts, but do not suggest a robust labour market. This week’s number is projected to be around 90,000. Not so long ago, this would have been regarded as weakness.

Given just about every major economy in the world is softening, and that Canada, still the US’s major trading partner recently dipped into recession, projections of a resilient economy relies on AI spend, which, as already noted, is soon going to run into a number of significant real world barriers.

In earlier articles, I have often referred to economic historian Niall Ferguson’s five stages of financial bubbles. For some time I have argued markets were in the second phase, namely “euphoria.” But the widespread absence of doubt, and the size and speed of price appreciation in a world gone mad, tells me that markets are in “mania” stage , which is followed by “distress” and then “revulsion”. Terms which do not need any explanation.

Good luck.

Time for some good news. Just like Iran, the US dollar is not about to burn in the fires of hell. But also like Iran, its fate remains uncertain.

All the endless chatter about ever-rising US deficits and debt, inflation and stagflation, the politicisation of the Fed, or anything else that the so-called “bond vigilantes” obsess about, is irrelevant.

The end of dollar will be all about one thing. And one thing only. A loss of trust.

Money is only money if there is widespread collective agreement that it is an acceptable medium of exchange and a store of value. A greenback made of linen costs a few cents to make. But if enough people decide the denomination of the banknote is worth less, or nothing at all, it ceases to be money. Inevitably, as history attests, something else will take its place.

When the mysterious (or mythical) Satoshi Nakamoto created Bitcoin, the key selling point was that there would never be more than 21 million coins mined. Given the unprecedented degree of electronic money printing during the Global Financial Crisis, and the persistence of QE long after it was necessary, no one should be surprised BTC hit a peak of $128,000, and that it still sits around $77,000. A return of around twenty-five million percent since its launch in 2009.

Boring things like gold, which you can weigh and touch, is around $4,500. In 1971, before Nixon suspended the dollar convertibility into gold, it was fixed at $35 dollars per ounce, a return of around thirteen thousand percent, or 130 times more.

Despite these simple facts, does anyone really spend much time thinking about the debasement of the dollar? Are these extraordinary returns on investment, simple due to a scarcity premium? Or are they indicative of a loss of faith in the in dollar and the United States, as the centre of the financial world?

Bitcoin’s surge began during the pandemic when interest rates were slashed and QE yet again kicked into gear. Gold ended the doldrums it had been in for many years in early 2025.

Is there some common cause? Could it possibly have anything to do with the election of the 45th and 47th President of the United States? Is there a collective lack of trust in Donald J Trump?

Of course, these are rhetorical questions. His second term record speaks for itself. Pardoning insurrectionists and those convicted of financial crimes. Starting a trade war on a false premise; threatening to invade sovereign nations; kidnapping heads of state; covering up a global pedophilia network for the rich and famous, while claiming he was not involved, despite the abundance of evidence to contrary; the brazen launch of a Trump family meme coin, which has lost of ninety per cent of its value; and his use of taxpayers money to build monuments to himself, while he has taken away the medical insurance of millions of Americans.

Thankfully, Trump cannot be re-elected. Something which he has now admitted, perhaps because of his alleged failing health.

But the big question is whether the risks to a loss of faith in the dollar will diminish when he is gone? Has too much trust in the United States already been lost? Will the Democrats be able to shake off the yoke of appealing only to the educated elite? Is there anyone in the party that will be able to connect with the ordinary American? Will Vance or Rubio follow the MAGA agenda, without the blatant toxicity? I wish I knew.

While America has been belligerently flexing its muscles, every major economy has been doing bilateral trade deals. Bypassing America, or ignoring it altogether, is the diplomacy of the times.

Canada’s Mark Carney led the way with his landmark speech, “Living Within the Lie” which did not at any point mention the President by name. He has since strengthened current agreements with the Trans Pacific Partnership, which Trump has shunned, and the CETA agreement with the EU.

The EU has just completed a trade deal with Mexico on the heels of the historic finalisation of the Mercosur Agreement, twenty-five years in the making.

The UK has also recently signed a comprehensive trade deal with the Gulf Cooperation Council, eliminating tariffs on 93 percent of the UK’s exports to what has become a major buyer of UK luxury goods and especially financial and digital services.

The so-called Western Hemisphere which the “Donroe Doctrine” seeks to dominate, is simply ignoring the empty threats, idiotic ramblings, and infantilism. No one is confronting Trump, they are simply ignoring his tantrums. Xi’s patronising treatment of the President, not to mention the billionaires that accompanied him, was perhaps the most pivotal moment of all.

Putting all this to one side, the killer blow to the US dollar, might not be about politics, trade, or any of the other economic concerns mentioned earlier. The Administration’s embrace of all things crypto, particularly stablecoins and the CLARITY Act, driven by a combination of unbridled greed and the deep distrust of government in general by its wealthy proponents, could end up on the wrong side of the inevitable tokenisation of currencies and assets across the globe.

At the moment, the Act still has a few hurdles to overcome, with different versions emanating from the various Senate Committees. It still requires to be passed by the Senate and the consolidated version re-approved by the House. With several sitting Republican Senators losing their primaries, the final approval could be held over to early 2027.

A related Act, called the Anti-CBDC Surveillance State Act, is still awaiting approval by the Senate. This seeks to amend the Federal Reserve Act to prohibit the issue of a US dollar Central Bank Digital Currency (hence the acronym CBDC). In the interim, the President has signed an Executive Order banning any government entity from researching the viability or infrastructure needed for the creation of a CBDC.

Why is this so important? Well, because the tokenisation of currencies, indeed all financial assets, and no doubt real assets like houses, is inevitable. Given the technology already exists, and continues to rapidly advance, why would anyone not welcome the instantaneous settlement of global transactions with hard-coded descriptions of the currency or asset’s features, and the absolute security of ownership.

Just as the United States took charge of the Bretton Woods conference in 1944, establishing the dollar as the world’s reserve currency, China has led the way for CBDC’s since 2014. Pilot programs began in the major cities of China in 2019-2020, and in January 2022 China released an e-CNY wallet app for iPhone and Android. Latest data indicate that three and half billion transactions have been completed, with a value of around $2.4 trillion, from 230 million personal wallets.

Intertwined with the establishment of the new BRICs - which most notably includes the UAE, Iran, Egypt, Indonesia and Saudi Arabia - China is no longer just focussed on replacing the US dollar within SWIFT. It is constructing an entirely separate infrastructure, in conjunction with the Bank For International Settlements (BIS) Project m-Bridge. Project m-Bridge also involves the Hong Kong Monetary Authority, and the central banks of Saudi Arabia, the UAE, and Thailand. The infrastructure enables instant peer-to-peer, programable cross-border transactions, without passing through any US entity, making it resistant to any US sanctions imposed on any country or individual. In simple terms, it neuters the ability of the United States to use money and finance as a geo-political weapon.

Most developed countries are also working on the viability of CBDC’s, especially those where peer-to-peer transactions are already instantaneous, with in-built security features to verify new counterparties and authorise transactions.

Needless to say, the losers from tokenisation are the major custodians and credit and debit issuers, most of which are US companies. The payment system in the United States is archaic and expensive. Around 5% of transactions are still via paper cheques. International transactions take days. A handful of apps are available with free transfers between account holders but any transactions outside the App network attract fees of 1.5 to 2.5 percent. In terms of efficiency and cost, the United ranks last in the developed world.

Already well behind in the adoption of tokenisation, perhaps because the undoubted losers are politically influential, the Administration prefers a private enterprise solution, seeking to expand the availability of private stablecoins, which at the moment tend be parking vehicles for crypto trading, or very large peer-to-peer transactions.

Whether the entities currently offering stablecoins, and the new entities likely to enter the market when and if the CLARITY Act becomes law, will be willing or technologically able to process transactions as rapidly and as cheaply as a global CBDC system remains to be seen. Some might be well-managed and trustworthy; some might be run by rogues.

But as the old saying goes, the current state of the US payments system, not to mention SWIFT, are not the ideal place to start on a technological journey. Just like the global embarrassment of the railways and airports of the United States, no politician seems able to recognise the problem, let alone find a solution. Let the market decide, is the golden rule.

So, fear not the demise of the dollar due to all the economic arguments.

While the US might end up the dominant player in AI, it will never give up on the fragmented, inefficient and costly, payments system, absent some political miracle, and more political courage than has been seen since LBJ drove through the Civil Rights Act.

Culturally, distrust of government in America is ever-present, whether governments do smart things or dumb things. While some have come close, there has never been an Administration as arrogant and stupid as this one.

With two and a half years to go, I wish you all good luck.

Last October, I argued in my article “The Art of the Deal vs The Art of War” that Trump was destined to lose the trade war with China. After last week, anyone that doubts that China is winning on all fronts, needs to think again.

The corporate oligarchs of America have done well from their relentless fawning over King Donald. But when Trump invited them on his state visit to China, they seized the opportunity to worship someone much more important to their businesses, Xi Jinping.

Of course, only time will tell whether this unprecedented opportunity will make them richer or poorer. With Boeing shares “plummeting” 4 percent due to a Chinese order for a piddling 200 planes, and no firm commitments for purchases of Nvidia’s H200 chips, it not clear that anything material was achieved. Tim Cook’s attendance made sense. But what Elon was hoping to gain remains a mystery. Perhaps he hoped to offer a mega bulk discount on all those unsold Tesla’s.

King Donald clearly enjoyed being warmly patronised by a ruler with genuinely unlimited power, like his “good friends” Vladimir Putin and Kim Jong Un. No doubt Xi coupled simple words of praise with vagueness and ambiguity when it came to anything that really mattered. Unlike poor old King Charles, a monarch with no power, whose speech to Congress about “checks and balances”, contained far too many big words, and nuances of “proper” English, for Donald to realise he was being pointedly critical.

No two men could be less alike. Xi’s ever-present “Mona Lisa” smile, said it all.

Xi is a “princeling” of the Communist Regime. His father was one of the leaders of the revolution, not an immigrant making billions by building slums in Queens and Brooklyn. His path to power did not involve being mentored by that appalling example of humanity, Roy Cohn, hosting a reality TV show, making rambling speeches, and pursuing ever-more grandiose opportunities for self-promotion.

After Xi’s father was expelled from the party by Mao Zedong in 1966, his 15-year old son was banished to a rural village, condemned to living in a cave, as a peasant agricultural worker. Somehow managing to join the Party in 1974, he studied chemistry through a scheme designed to provide opportunities for the rural poor. Before long he proved his mettle as a leader and administrator, becoming the Governor of Fujian. From there, he seized every opportunity to root out the endemic corruption in China’s coastal provinces, focusing on economic development and infrastructure planning, which proved pivotal in creation of the what are now the most modern cities in the world.

For many years, Xi lived a mere two hundred kilometres across the strait from Taiwan. So, it should be no surprise that the one unequivocal message from last week’s Summit, was that China will tolerate no interference whatsoever when it comes to the losing side in the 1949 Revolution. Taiwan “belongs” to China.

President Lai Ching-te’s comments on Sunday reminded King Donald of the United States’ long-standing commitments to the island, saying Taiwan would “not be sacrificed or traded”. Words that might fall on deaf ears, if there are lucrative deals to be done.

On Iran, Xi’s message was more subtle. The Strait of Hormuz must be opened, with no hints of what that might actually mean. It reminded of me a Godfather movie, where Michael Corleone quietly uttered “you will disappoint me” before he “gave the order”.

As should be obvious by now, the only winner from the Iran War is Benjamin Netanyahu and the State of Israel. Not surprisingly, US media reports on the actions of the State of Israel in Lebanon, Gaza, the West Bank, and East Jerusalem are less graphic and appalling than the videos being broadcast by foreign new agencies across the world. At some point, the United States needs to realise that a nation of ten million people should not dictate US foreign policy, let alone lead America, and Americans, into an unwinnable war, that could devastate the world economy and financial markets, and turn former allies into enemies. On day one of the war, Marco Rubio told the truth, when he said “Israel was going to attack. We had to join them".

While the war is clearly unpopular with the American public, it is surrounded by an air of unreality. It is not a Hollywood movie where plucky American do-gooders will prevail in the end. Iran is not anything like Iraq. No amount of suffering felt by the Iranian people is going to dislodge such an oppressive regime, especially when it continues to be given various forms of support from Russia and China. Iran is a geographical fortress, strengthened by 47 years of paranoia, militarisation and iron-willed oppression of dissent. A regime willing to kill its own people, does not care about the damage being done to the world economy.

While King Donald and his entourage of billionaires were in China, Iran has been deciding which ships are allowed passage through the Strait of Hormuz, and the procedures and tolls to be followed and paid. With so many lies being told by the Administration, the actual state of play is impossible to assess. Is the blockade really working? Are the Gulf states exerting pressure to find a resolution?

With US equity indices falling on Friday for range of supposed reasons - including hedge fund profit taking and gamma hedging of options and a 10 basis points “meltdown” in Treasury yields - early reports strongly suggest that retail buying continued in reasonable volume. The “Battle of Wall Street”, the topic of last week’s article, is ongoing.

As for what lies ahead, Trump made more threats against Iran on Sunday, which was more than a little surprising, given what happened in markets. Maybe he will say something more reassuring before the opening bell on Monday.

Looking ahead to this week, will Nvidia’s profit result re-start the rally in equity markets? Will the bond sell-off continue? Will Warsh’s confirmation and Miran’s resignation lead to greater focus on the next FOMC meeting on 16-17 June? What about the Department of Justice’s announced investigation of BlackRock and its “marks” on private debt?

Well, your guess is as good as mine.

Bigger picture, nothing happened last week to bolster market equity market optimism. Even Bitcoin broke back down through $80,000, allegedly due to institutional selling of Spot ETF’s. Global growth is materially slowing. Somehow the US seems somewhat immune, at least in aggregate. But AI capital spend and consumer demand from the ten-percent of American’s flush with cash might not last forever. As the dire list of indicators below suggest, the average American is worried and suffering.

But maybe none of these things are going eat away at the feverish optimism “digital native” generation.

Perhaps the battle of the AI IPO’s, where proper numbers will need to be disclosed, will be time of reckoning. My money would be on Anthropic more than OpenAI, given the latter is run by a fantasist and a liar, according to the testimonies of those that know him well, in the very entertaining legal proceedings that Musk hopes to win. Might Q2 earnings be subject to more scrutiny, given Big Tech has materially eroded it free cash flow. Maybe price pressures from oil, and supply problems with the myriad by-products of refining, from fertilisers to sulphuric acid, begin to register as a “problem” in the United States, as they are in many other countries already.

Or could there be a proper “meltdown” in the US Treasury market, not a mere ten basis points, but something more serious, where the market ceases to function, as in did briefly in 2022. When the collateral for more than 80 per cent of global market leverage plummets in value, bad things happen.

The “wild card” could even come from China. Given the material depletion of the US’s military hardware, independent defence analysts have concluded that the United States could not engage in a conflict with a “peer power”.

If this is genuinely the case, China probably knows it has an advantage. A blockade of Taiwan could be the beginning. TSMC produces 25 per cent of the world’s semi-conductors and more than 90 per cent of cutting edge chips. Some production has been shifted to Arizona, but mostly for basic chips. If US-China relationship sours, now could be a perfect time for China to seek re-unification. For the two China’s to become one.

Unthinkable you might say.

Well, after three centuries of watching humanity engage in collective stupidity, again and again, nothing should be ruled out when the geo-political world order implodes.

As always, I wish you luck.

Money flows, not theories, determine asset prices. Full stop.

Throughout the long history of financial markets, the “battle” between buyers and sellers has always been one of differing perceptions and motivations. Like two tribes going to war, there is always a winner and a loser to every trade, even if they do not know it at the time.

Markets today are no different.

That said, the growing democratisation of markets, and the unprecedented ease of access, has meant that perceptions and motivations are more varied, with generational philosophies and life experience also playing critical roles.

For decades the “battle” was fought between competing professional investors, as the custodians of other people’s money. But a recent study by Boston Consulting Group estimates that a retail investors accounted for 61 percent of AUM growth across all asset classes from 2020 to 2025, almost three times more than pension funds. And a not insignificant proportion of these flows has found their way into products with embedded leverage. Once an anathema to the pension industry, and still tolerated only in small doses.

Many professional investors are worried about the implications of the collapse of the post-war global order, resurgent inflation, and burgeoning debt, both public and private. Other less so. But they still speak the same language, and focus on similar things. Generationally speaking, the majority of these are a mix of Gen X and early Gen Y, with a few aging baby boomers thrown in.

But retail investors speak a range of languages and rarely diversify their investments to the extent that professionals do. Being a professional is subject to constraints, some might say, “group think”. The demographics of retail investors is difficult to assess. But there is evidence to suggest that the proportion of Gen Y and Gen Z is significant.

Often termed “digital natives”, a recent World Economic Forum Investor Survey found that 30 percent of Gen Z began investing in early adulthood, compared with 6 percent of the Baby Boomers. Perhaps, not coincidentally, this cohort entered early adulthood around 2020. Other surveys suggests that Gen Y and Gen X lean towards self-employment, reflecting the ease with which a laptop and an internet connection can create businesses with little capital outlay. Without access to employer pensions, it make sense to self-invest. The issue is on what basis do they make their decisions.

Often keen followers of FinFluencers, they appear to pay little regard to any of the things that professional investors focus on, trade much more frequently, typically as a reaction to the flow of news, or the latest ideas running “hot” on social media.

In the unprecedented market environment of today, who will win? Nervous, worried professionals? Or relaxed and confident amateurs? Are equity markets really just going to rise for the foreseeable future, or will the longest and and strongest bull markets in history finally implode?

Well, you already know what I think. But let’s put where we are today in a broader historical context.

In financial markets, “stories” have always been more important than accounting metrics, measures of comparative value, or anything else for that matter. Partly because no one can predict the future and history only rhymes but never repeats.

For centuries, wealth was inherited and built upon. Insider knowledge and collusion were the keys to success. But from the mid-twentieth century onwards pensions schemes were established in most countries. Then, in the mid-1980’s, something unprecedented happen. The common people, not just those with inherited wealth, purchased assets on an unprecedented scale. The baby boomers entered their high savings years and the asset management industry exploded.

Before long, a new generation of professional investors began to embrace a range of new theories of asset pricing and portfolio construction. A “scientific approach”, not simply relying on experience and instinct, became essential to be taken seriously. It did not matter that the theories of Sharp, Markowitz, Fama, Black Scholes and Merton, were little more than pseudo-science, based on assumptions which bore no resemblance to reality. It was a much better “story”. The now ubiquitous 60/40 portfolio was born.

But innovation quickly turned into convergence. For institutional investors, “fiddling at the edges” became the norm. Client risk and career risk argued strongly against doing anything too bold.

As time passed, returns to active management slowly and surely evaporated. Markowitz inspired indexing offered much better value for money and soon became the “optimal strategy” for an increasing number of both generations of investors.

Pension and mutual funds still grew. But the ETF industry was the knockout winner, especially in the retail space. Indeed, with the current expansion into tokenised assets, traditional mutual funds, and perhaps organised exchanges, could in the not-too-distant future become an anachronism.

But the ease of access and lower costs of investing and trading was accompanied by a revolution in information provision and delivery to retail investors.

You Tube, Redditt, Tik Tok and other social media platforms are populated by FinFluencers, which walk a fine line between “views” and “advice”. Despite more scrutiny from the SEC and FINRA in the wake of the “Roaring Kitty” Game Stop investigation in 2021, the legal situation remains muddled. Needless to say, this is not a legislative priority of the Trump Administration.

Perhaps merely a coincidence, perhaps not, the rise of the stay-at-home day trader also coincided with the COVID pandemic. The initial shock to markets, despite aggressive rate cuts and liquidity measures, saw a calamitous decline in equity markets, which has since proved to be an unparalleled buying opportunity. It was also a time when the acceptance of Bitcoin and other crypto currencies began to gather momentum.

Apart from the profits made by this new generation of investors, the “digital natives, having grown up in a world of social media, became eager users of a mushrooming array of trading apps. Soon came the emergence of FinFluencers, who spoke their language. Social media algorithms reinforced their investing beliefs to generate more trading activity. The standards of analysis required by professional investors, with fiduciary duty to their clients, was chalk and cheese to “I like the stock”.

As evidenced with the debacle that is the Iran War, “buying the dip” remains deeply entrenched. Traditional financial news companies, well aware that positive news attracts more customers than negative news, seem to have gone along for the ride. You need to dig deep to find articles of meaningful depth, or contrarian perspectives. The first headline every morning seems to begin with “market makes new highs”, as if that is not supposed to happen. Many investors behave like Pavlov’s dogs, salivating every time the opening bell is rung on the NYSE.

Perhaps even more concerning is the tendency news providers and social media to judge every piece of economic data by whether it is better or worse than market forecasts. It is as if such forecasts are cast in stone, scientifically estimated, rather than just guesses, with the consistency of a broken clock.

The charts below provide classic examples of questionable media interpretations of economic data.

2025 was one of the weakest years for US employment growth this decade. And, as in the past, the numbers published for 2026 to date could be substantially revised in the months to come. Yet the payroll number released last week was heralded as being indicative of a “strong” economy. An assertion which could prove more than a little unjustified, when mapped against a longer-term history.

Though the Q1 reporting season for the S&P 500 saw 85% of companies better analysts expectations, the headline on this historical comparison by Bloomberg might be accurate but could also be interpreted very differently. It could be compared with past periods that proceeded major corrections. Perhaps Q1 was a the “blow-off top”, the final surge, given AI capital spending has reduced the once huge positive cash flow of Big Tech to next to nothing.

Of course, there is no doubt that the US economy is more insulated from the oil crisis than many other countries, especially on the sub-continent, and in Asia. And increased military spending will be required to replenish the 50-60 per cent depletion of a range of missiles and THAD’s deployed or destroyed in Operation Epic Fury.

Yet US consumer confidence continues to make news lows. The K-shaped nature of the US economy makes it vulnerable to asset price declines. Though the line of causation from economy to markets has always run in both directions, the equity market “tail” could soon wag the economy “dog”.

More importantly, as I have argued now for some time, the “long-wave” credit cycle is unquestionably down.

Even Scott Bessent is now looking into the risks in private credit for the insurance industry. Powell has clearly articulated his commitment to stay on as a Fed Governor. Warsh has very different views on monetary policy than any of his predecessors. While the suspension of QT, instigated by the Fed late last year, allegedly for “liquidity management purposes”, remains in place, Warsh will be arguing for its continuance, perhaps acceleration. The prospect of a rate cut, or cuts, looks increasingly unlikely.

So, who will win the generational “battle” between the professionals and the amateurs?

I do not know. But there are several things to consider.

The US equity market could continue to remain resilient to the crisis in the Strait, given AI story and military spending. But the rest of the world could begin to feel its effects very soon, even if the conflict is resolved in the weeks ahead.

Also on the positive side, the digital native generation are sitting on substantial profits and could continue to “buy-the-dip”, despite the warnings of seasoned professional investors, and long-dead charlatans like me, trying but failing to help the greedy and the gullible see the risks.

On the negative side, perhaps one or more of the corporate deities worshipped by the digital natives will destroy their trust. Or there could be some technological breakthrough, that scuppers the data centre boom. That professional investors will regain some courage, and overcome their reluctance to materially reduce market risk, sadly seems the less likely outcome.

Should the digital natives materially change their collective minds and sell, buyers will be scarce, potentially leading to a calamity that will shape investing attitudes for a generation, just like 1929. As always, when the “long-wave ”credit cycle turns, only the very few win.

Good luck.

Events last week in the United States resembled an incomprehensible plot of a Eugene Ionesco, or Samuel Beckett, play. In short, it was theatre of the absurd.

King Donald’s flood of foolish falsehoods about an Iran deal were soon overshadowed by the Secretary of War’s belligerent responses to pertinent questions from the Senate and House Armed Services Committees. But as entertaining as Donald and Pete were, Elon Musk really stole the show, when Sam Altman’s lawyer forced him to admit that he “did not read the small print” when he invested his money in OpenAI. Sadly, there was no footage of Robert Kennedy’s reaction to Trump overriding his choice for Surgeon General, on the basis that it would be preferable to appoint someone with a medical degree to such an important position.

Unfortunately, of course, none of this, is theatre. It is Trump’s America. But whatever happens over the remainder of his term, those hoping for from some dramatic U-turn in the global and domestic policies of United States of America are likely to be disappointed.

Having observed the emergence of the nation and the trends in its politics over the past three hundred years, I think what we are seeing is a return to “normalcy”.

Not in the sense that President Warren Harding popularised the term after the First World War. But more of a reversion to the America of the 19th and early 20th centuries.

Back then, what was often called the “robber barons” of industry (and later the media) “owned” politicians of the major parties. The Federal government also financially sponsored “colourful” adventurers to undertake territorial expansion into the vast wilderness to the north and the west, at the expense of the lives of the native population. It also fought wars with Britain, France, Spain and Mexico, as well purchasing Louisiana from the Emperor Napoleon. Waves of European immigration led to often deep religious, cultural, and racial divisions, just as immigration does today. Then, of course, there was the issue of slavery, which almost destroyed the Union, and lingers in North-South attitudes to this very day. Perhaps the only difference is that the lynching’s of those with opposing creeds and beliefs come in the more humane form of the lawsuit, although perhaps Mike Pence had a lucky escape.

In 1939, when Germany invaded Poland, America was still suffering from the Great Depression, triggered by the excesses of Wall Street and the collapse of the banking system in the early to mid 1930’s. Unemployment had returned to 19 percent from a low of 13 percent a year or so before. After the war, the United States became a beacon of democracy and freedom, a marvel of technological advancement, home to the entertainment industry, glitzy advertising and rampart consumerism. Teenagers of the fifties were immortalised in literature.

Spared from the destruction and deprivations of war on its soil, together with financial rewards of Roosevelt’s Lend-Lease program which supported the war effort of it European allies, the United States rapidly became the most prosperous nation on earth. It had won the war in every possible sense. Other combatants struggled for years with re-construction and many faced continued rationing of food and other scarcities.

Trump’s re-election put the final nail in the coffin of the post-war global order that had already begun to show signs of fragility. Yet, some still hope that his current unpopularity will lead to a successful comeback for the Democrats, and a renewal of American sponsored global cooperation. But the recent Supreme Court ruling which upended the pioneering Voting Rights Act of 1965 has significantly tilted the scales of State re-districting towards the Republicans. Even if the Congress swings back to the Democrats, at least in the House, Trump will no doubt veto every legislative action. Should he fall ill, or fail one of those cognitive tests he keeps getting remarkably high scores on, the Vice President will continue with most of his policies.

With a more “balanced” personal style, James David Vance could well be elected in November 2028. His views on democracy are well known. He lectured European leaders about democracy at the Munich Security Conference in February 2025, in reference to the refusal of the German coalition parties to form an alliance with the AfD, which many regard as Nazi’s. After the conference, the British press labelled him “the most dangerous man alive”. His recent passionate endorsement of Viktor Orban did not persuade he Hungarian people to re-elect him. Orban lost in a landslide. But no one was left in any doubt of the type of president Vance would make.

So, what does this all mean, for markets, and the greedy and the gullible.

First, ignore the “theatre of the absurd”.

Second, the only potential “winner” in the Iran War is the State of Israel. A nation of 10 million people surrounded by the rich countries of the Gulf, and the historic bastions of Islam, most notably Turkey, Syria, Jordan and Egypt.

Third, however and whenever the Iran conflict ends, and the Strait of Hormuz re-opens, material damage has already been done to the world economy. Hard though it seems difficult for Trump to comprehend, it is not just about oil, but the full range of petrochemicals, fertiliser, and side products of refining the various grades of crude, many of which are critical for chip production and other high tech processes.

During the trade war and the current conflict, Trump has allowed China to re-invent itself as a champion of the rule of law. His recent school-boy boast about the US being a “pirate” on high seas, played directly into China’s hands. As discussed, in my earlier article, The Myth of Exceptionalism, China benefits from political stability, world leading infrastructure, vastly superior basic education, and a long-held unifying belief in the superiority of its ancient culture.

Canada and many other countries are doing bi-lateral trade deals with China while Trump announces new US trade policies at night on Truth Social. Trump and his advisers seem to be deluding themselves that the closure of the Strait will “weaken” China. That might be the case in the short term, but the Chinese regime is not obsessed with the economy, or its financial markets. It cannot be overthrown and has always played the long-game in geo-politics. It does not seek to score points in opinion polls, or use the 24 hour media cycle to spread puerile propaganda.

Fourth, the AI “bubble” is being met with increasing doubts and about the scale of capital expenditures relative to the potential payoffs. Even the major firms could soon be faced with negative cash-flow, despite recent debt raisings. Sam Altman has the eyes of fantasist, never answers a direct question, and keeps reneging on promises. He looks to have had a victory over Elon, or perhaps the whole thing was staged. While irrelevant for public markets, OpenAI is a poster child of the so-called FinFluencers, and any major hiccup with the intended IPO could be a catalyst for doubt across the AI multiverse.

After last weeks Tesla Q1 earnings call, many analysts suggested the numbers and assertions led to doubts about the company’s future prospects. Elon worshippers nevertheless warmly welcomed the usual range of grandiose promises, despite the fact that such promises have consistently failed to come to fruition. Nevertheless, the share price surged 4 percent.

Finally, the long-hoped-for cut in US interest rates looks less and less likely, even though some might argue the impact of the Strait is a “transitory” issue. There is no guarantee that Warsh will opt for a cut at his first meeting, assuming he will be confirmed. Today, the Reserve Bank of Australia reversed yet another prior rate cut, due to concern about inflation. Higher-for-longer rates will serve only to reinforce the “long-wave” credit cycle long underway, as discussed in “Think Before Buying the Dip”.

US equity markets have yet again bounced strongly from the initial plunge when the Iran War began. The percentage of analyst “beats” in the Q1 reporting season point to still strong earnings. And the US is one of few countries that are self-sufficient in oil, if not all of it by-products, including fertiliser. US economic data has also been better on average than expected, even if it has not signaled economic strength.

More importantly, retail flows remain strong and are estimated to constitute around 25 percent of daily trading volumes. Flows into passive funds from institutional investors and 401k plans in US further support continued strength in the major US indices, dominated as they are by Big Tech.

But it is wise to remember that orderly markets do not imply robustness. And when the newswires are overflowing with nonsensical and absurd statements contrary to the facts, market fragility will increase.

Be mindful that a lot of positive news is already priced in. And that America is not “winning” anything. Also do not forget that the tech giants are competing intensely and cannot all win. Some, indeed many, will lose.

Just like America, and just about every country other than the State of Israel, is losing every day the traffic through the Strait of Hormuz remains but a trickle.

Two important things happened last week. The war with Iran reached a stalemate and the Justice Department’s apparent backdown on the prosecution of Jay Powell could lead to Kevin Warsh’s Senate confirmation as Fed Chair.

Why are these important?

Well, both could shift the focus from Wall Street to Main Street. From the financial fantasy world of ever-rising paper profits to the coal-face reality of the buying and selling of goods and services, that are produced and consumed. You know, that thing called the “economy”. And not just the allegedly invincible US economy. But the entire world.

As argued in last week’s article, From TACO to TUFF, markets have treated the Iran war very differently from Trump’s trade war. Perhaps because one was considered a permanent change, and the other simply a fleeting annoyance, that would soon end.

For anyone with experience of geo-politics and diplomacy, it was not a surprise that Iran was not interested in meeting with two failed property developers, whose role in the Middle East to date has been raising funds from the Gulf States for real estate opportunities. Israel’s continuing military actions in Lebanon were also not exactly conducive to any form of peace talks.

So, traffic through the Strait of Hormuz is still at little more than a trickle.

Even if there is an agreement to open the Strait in the next few months, before too long the economic and social impact of the war is going to be felt much more widely, including in the United States itself.

Of course, no government can ever openly warn of sustained high energy prices or astute shortages of fuels, even though this is already happening in India, as well as some countries in Africa and South East Asia. Even developed countries like Australia and New Zealand could soon suffer material economic impacts. The uber-rich countries of the Gulf are estimated to already be facing double-digit declines in GDP.

Wall Street has always thrived on self-delusion. It is a well-established rule to ignore anything that might suggest tough times lie ahead for corporate America. Indeed, a potential self-fulfilling prophecy. So it no surprise that the narratives and the headlines scream out “new record highs”, as if that isn’t something that is supposed to happen in the fullness of time.

Making sure that the greedy and gullible keep on buying and selling, no matter what is unfolding, has always been the path to riches for the Wall Street elites. And the road to ruin for those that listen to the comforting rationalisations that Wall Street peddles. If you doubt this assertion, I suggest you read Andrew Ross Sorkin’s latest book, simply titled “1929”. Over five hundred pages chronicling the lies, market manipulation, and skullduggery of bankers and brokers.

In the Q1 reporting season on Wall Street, any form of negativity seems to have been steamrollered by the percentage of the Wall Street “beats”. That the Iran war might impact future profits was hardly given a mention. After all, Trump has declared victory time and time again, and keeps on assuring the world that a favourable deal will be done.

Even Musk’s fantastical massaging of Tesla’s poor results was given a positive spin, resulting in 4 percent jump in the share price. In the reporting season so far, no CEO or CFO has dared to suggest that the multi-faceted disruption in oil and petrochemical supplies, and the various by-products such as helium, will have any meaningful impact on profits, unless they were oil companies. Though it should be obvious, the potential effects on the chip production, or anything else that might be relevant to the tech industry was duly overlooked. This might change when Nvidia reports. But I would not bet on it.

Optimism has also re-merged in crypto markets in recent weeks, despite the legislative delays to the CLARITY Act. Even BTC seems likely to break $80,000 in coming days. Some contend Iran has been buying significant amounts but whether this is fact or fantasy we will never know. At the other end of the crypto spectrum, King Donald held his second annual black tie event at Mar-a-Lago for those canny investors in $TRUMP, even though it is trading at 90 percent below its peak. Maybe those invited are the ones that sold early on.

Common sense suggests that whether the impact on global inflation turns out to be “transitory” or not, no central bank is going to be rushing to cut interest rates, absent economic calamity. Higher for longer rates will serve only to amplify the impact of the unwinding of the “long cycle” of credit growth, discussed in my earlier article “Think Before Buying the Dip”. An absence of “cockroaches” in recent weeks, has fostered the emergence of more positive narratives on private credit, especially with regard to systemic risk. But such is the nature of the “long cycle”. More optimistic views have however been countered by the unprecedented public disclosure of the major banks’ loans to private debt funds, and their reduction in exposure limits and other terms and conditions.

Talking about banks and credit brings us to second important thing that happened last week. Kevin Warsh’s Senate testimony. He denied being Trump’s “puppet”, or even having a conversation with the President on rate cuts. But he did clearly argue for fundamental change. Wall Street has had mixed views on Warsh. But most market participants still cling to the hope that he will somehow deliver King Donald’s long-desired rate cuts.

As I argued in my earlier article “Where the Buck Stops”, Warsh has radically different view on the the role of the Fed, and central banking more generally, than any modern Fed Chair. To the many critics of the Greenspan/ Bernanke era, including me, Warsh is a breath of fresh air.

In short, Warsh sees moral hazard in the current framework of monetary policy, in the sense that the market should price risk, not the central bank. QE should only be an emergency measure, not a permanent feature of the Fed’s engagement with the financial sector. He also believes the Fed should not try to massage market expectations and that the Fed Governors and Regional Fed Presidents should talk to markets much less, if at all, and privately debate policy options much more. Though not widely appreciated, the public release of Fed Minutes has created an sub-industry on Wall Street, and replaced Board debates with individually prepared statements. Such things as the infamous “dot-plot” should simply end. All this does is add uncertainty. No “dot-plot” that I can recall has even proven accurate.

Warsh could encounter much opposition to his views on the role of the Fed but other FOMC members could secretly support many of his views. Though an anathema to Wall Street, they would provide much greater stability for those on Main Street. Less noise. More stability and predictability in a what is a critical business cost.

The media and the average investor focusses primarily on equity markets. But the volume of trading in equities is dwarfed by the volumes in currency and bond markets. In a such a globally integrated financial system, a less “active” Fed would soon re-shape monetary policy frameworks in other countries, not to mention materially diminish broker profits.

Today, there is much talk about the K-shaped recovery from COVID. But the global increase in inequality in income and wealth began long before the pandemic. And it is fair to say that it has also led to a polarisation in politics. Trump and MAGA clearly focussed on polices that would appeal to the so-called “left behind”. Globally, inequality in all it forms gave birth to “populist” movements. That the populist policies followed have done little to address the grievances of the ‘“left behind” is increasing being recognised. The most notable recent example being Orban’s crushing defeat in Hungary. The landslide victory of Labour in Britain being another.

Some central bankers contend that inflation leads to inequality, hurting the less well off much more. And vehemently deny that the current modus operandi for monetary policy added to the problem. But when inflation was virtually non-existent, those with the most collateral benefited much much more that those of limited means.

History teaches that growing inequality is the essence of the capitalist economy. But the so-called social contract that was born of two devasting world wars led to what was once dubbed the “era of the common man”. The post-war period saw surging standards of living for all, given the scale of human sacrifice and suffering. It was an era where the health of Main Street was critically important. Wall Street was a facilitator where past excesses were curtailed by regulation.

When the “long cycle” of credit creation finally unravels, the financial excesses of recent decades, especially the astonishing growth in and unfettered access to leverage, will implode.

As I have argued previously, the war with Iran could well be the catalyst, depending on how long the Strait of Hormuz is effectively closed.

What a week. What a weekend. The Iran war was over. Now it is back on. US equity market made new highs, rendering the warnings of those with decades of investing experience, or centuries in my case, totally dumfounded.

Who knows what might happen this week?

With an estimated 25 percent of daily trading volume in markets coming from retail investors, perhaps none of the old rules apply. Maybe too many institutional investors are sidelined, hamstrung by the all the Markowitz “optimal portfolio” nonsense, not to mention the career risk of doing anything different to the crowd. Perhaps the hedge fund industry has also moved on from taking big directional bets.

Or maybe it is just collective insanity, like when poor Dutch men and women sold everything to buy Tulips, and investors in my Mississippi company bought shares in a swamp. When a failing footwear company changes its name from Allbirds to NewBirdAI and is rewarded by a 600 percent rise in it share price in a single day, based only the intent to buy GPU’s, it does make me wonder.

What also puzzles me, is that with markets having figured out some time ago that Trump “always chickens out”, why so has much credence has been placed on anything he says about the war on Iran. In my previous article, “Iran: A Game of Liar’s Poker”, I highlighted the unprecedented scale of Trump’s politically motivated culling of the Joint Chiefs, the CIA, and the diplomatic service, which cannot be a positive when initiating yet another foreign war.

Markets cottoned on to the TACO trade many months ago. Backing away from statements and policies that upset financial markets are not exactly unusual. Companies do it all the time. But when the President of the United States utters one foolish falsehood after another, in a war where thousands of innocent people have been killed or wounded, and essential infrastructure of allies damaged or destroyed, not to mention the heightened risks to the world economy, how could any statement that Trump makes be given credence.

In contrast to the TACO trade, where every utterance he made was discounted, the TUFF trade (i.e. Trump Utters Foolish Falsehoods) has been met with unquestioning belief, at least in the United States. When he says that Iran will be bombed back into the Stone Age, markets tumble. When he says the US has achieved “all of its objectives” and the war will soon be over, markets stage a frenzied rally.

Some are suggesting it is time for Congress to invoke the 25th Amendment, as if Trump is no longer just being Trump. But if a nation elects a grandiose narcissist as its leader, what do you expect? Sober reflection and cautious analysis? It is not as if such individuals have never before led nations.

Wars do not end, because some political leader says it is over. They either end in the total collapse of one side, or a negotiated settlement. A US and Israeli “total victory” over Iran, is an even more delusional ambition than the various attempts by Russia and the US to defeat the Taliban. The great northern plain in Europe has seen many wars over the centuries, largely because the geography is amenable to putting “boots on the ground”. In case you have forgotten even those wars can drag on for many years. The current conflict in Ukraine has gone on for more than four years, or twelve years if you take account of the annexation of the Crimea. But as Colin Powell warned George W Bush when some suggested the US should invade Iran, given the (pyrrhic) victory in Iraq, “we we do deserts, we don’t do mountains”.

War is not a TV reality show. It has consequences way beyond the killing and destruction. It destroys trust between nations. King Donald and his fawning cabinet of financiers, Fox News presenters, hack lawyers and social media personalities are simply amateurs in the diplomatic game, let alone fighting a war. Drawing up a list of targets to conquer, like Canada, Greenland, Cuba, to name but a few countries, is not about Making America Great Again, it is megalomania.

So, what does all this mean for the greedy and gullible in financial markets?

Well, a case can be made that the US is less exposed to higher oil prices than other countries and that its defence industries have hit the proverbial jackpot, given the material depletion of existing missile stocks and THAAD’s. Then, of course, the AI frenzy continues, despite the concerns raised by Anthropic’s Mythos model, and continuing advancement in quantum computing.

But aside from these potential positives for markets, Iran could prove to be the final nail in the coffin of the post-war global order. In geo-politics, trust once lost takes decades to regain. Even with a quick resolution of the war, which seems unlikely, material damage will be done. Higher crude prices affect many industries, reflecting the complexity of the role of oil by-products. Industrial chemicals, plastics, fertilisers, and helium, critical for the semi-conductor industry, are but a few examples.

Of course, the analysis of fundamentals has long been out of fashion. Counter-narratives will no doubt emerge which will downplay the impact of the Iran war on the world economy, as has happened with the existential risks posed by climate change.

As I have frequently argued, flows determine asset prices, rather than facts or theories. So, with this in mind, it is perhaps worthwhile reflecting on George Soros’s theory of reflexivity, long ridiculed by the Cult of Efficiency and the Cult of Fixing Everything (also known as the economics profession).

Soros argued that market participants are not just observers of the forces which drive market prices but are able to create their own reality. Circular feedback loops lead to collective perceptions unsupportable by the facts which take on a life of their own.

The Allbirds corporate metamorphosis mentioned above, and the GameStop story, immortalised in the movie “Dumb Money”, not to mention myriad similar episodes across a broad spectrum of equity markets, provide classic examples of the theory of reflexivity in action. Throw in the rapid growth in passive ETF’s, algorithmic trading, increasing use of leveraged derivatives, the role of social media, and the explosion in trading apps and the associated research that accompanies them, a case could be made that any form of traditional analysis of markets has become an exercise in pointlessness.

As argued in “Think Before Buying the Dip”, we are nearing the end of a “long cycle” that was born in the era of “free money” This is evidenced by the stresses in credit markets, including the emergence of “cockroaches”, and the “gating” and enforcement of withdrawal limits with respect to private credit funds. That the major US banks have recently tightened lending conditions to private market firms, and published their respective exposures, serves only to confirm that the “long cycle” is ebbing. These “long cycle” forces have not suddenly dissipated, despite the stunning recovery in markets in recent weeks. They have simply taken a back seat to the saturation media coverage of the conflict in Iran.

Whatever unfolds in the weeks or months ahead, their are two certainties. Inflation is going to be structurally higher for some considerable period of time. Persistent hopes for lower US rates are likely to be dashed, unless Trump takes some unanticipated direct intervention in his battle with Jay Powell. The same applies globally, given the mandates to which central banks are subject. Those praying for lower rates do not oddly wish for the global recession, the only possible basis for global monetary easing.

The key to success in the current market environment is, as Maynard Keynes pointed out ninety years ago, to guess which way the herd will turn next. Focusing on valuations, historical comparisons, or doggedly clinging to the idea that asset prices should reflect economic fundamentals, like economic growth and inflation, has become a foolhardy activity.

Whether the herd is focusing solely on Iran, or eagerly anticipating the AI reporting season, or simply ignoring geo-politics, the long cycle will in time rear its ugly head.

The challenge is to figure out when.

Good luck.