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Thursday, January 1, 2026

2026-01-01

**** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:


................................ In the G2 world, the imagined global village is a gladiatorial arena where the EU and the United Kingdom now wander aimlessly. A new, harder, colder world order has been erected on the grave of European ambition. The year’s enduring lesson is that in an age of existential contests, strategic dependency is the prelude to irrelevance.





We are now living in a technocracy that is changing too fast to metabolize, what futurist Alvin Toffler back in 1970 referred to as ‘future shock’. We travel through life guided by our metaphorical GPS; we no longer know the complete route to our destination, only the next turn, and it doesn’t always work. My internal GPS device is now randomly rerouting me, constantly flipping to new directions, causing dysfunction the magnitude of which will become clear shortly. Facts do not stay factual. The past is like a Tarantino film where history is rewritten to control the narrative. I can no longer trust my lying eyes. As Bret Weinstein so incisively noted, somebody has intentionally broken all of our fact-checking mechanisms .............................................................................................................................................................................................................................................


Major Markets Letter #3: A tale of two curves: The US and Europe diverge

The yield curve has steepened for three consecutive years, and the prevailing narrative says the US curve is on track to make it four. Consensus feels comfortable. Which is usually the moment to ask an uncomfortable question: what could possibly go wrong?

Anyone who trades or invests in bonds knows that talking about “the curve” is meaningless unless you specify which part of it. There is also an important difference between being right in principle and making money in practice. Curve calls live and die by segment, timing, carry, and magnitude. .........

At the front end, the story is the same in both markets: policy rates were cut by more than investors expected at the start of the year. What was priced in turned out to be insufficient, so front‑end yields adjusted lower. How far that rally can extend further out the curve depends on the proximity of policy rates to their perceived neutral level.

Mention the neutral rate and eyes tend to glaze over, but it remains central to how markets think about the destination for policy. In simple terms, it is the equilibrium rate at which the economy is neither too hot nor too cold, with full employment and inflation at target. It is unobservable, model‑driven and deeply uncertain; all good reasons for economists to argue about it endlessly. ..........

............... So will the curve steepen again? At the start of 2025, the extent of the Bund steepening to come was far from obvious. If the US curve delivers another version of this year’s move, it is most likely to be led by the front end rather than the long end selling off aggressively. In that environment, the cleanest trade may not be a curve position at all, but simply holding an outright long in intermediate maturities and letting policy do the work.



 

............... With analysts expecting strong revenue growth and margin expansion despite rising input costs, global uncertainty, and declining employment, a market priced for perfection leaves little room for earnings misses or growth shocks. If those optimistic assumptions fail, market risk could rise abruptly. ......................


Thomas: Off-Topic ChartStorm - Commodities
Taking stock of Commodities: an insight into trends across supply, demand, valuations, sentiment and positioning, technicals, and super-cycles...

Overall, there’s growing evidence for a new cyclical bull market in commodities (following a cyclical bear market from 2022-24). This is likely to become a major macro theme in 2026 (not to mention a very interesting opportunity for investment in both commodity related stocks and commodity prices themselves).

1. Follow the Leader: gold has blazed the path, commodity catch-up comes next.

.......
9. Supercycling: speaking of which, it looks like we are already in a new supercycle for commodities, and the way I see things; we’ve basically just wrapped up a cyclical bear market (from 2022-2024) and a new cyclical bull market is now underway. This is significant because it’s set against a structural bull case (underinvestment in supply, thematic demand drivers such as electrification and energy transition, new space race, AI & robotics race, geopolitics, and infrastructure (re)building). So we shouldn’t underestimate the opportunity in commodities as bullish forces set in motion, nor the upside risks this will present to inflation.




Bubble Fare:

The Danger of Today's 10x "Opportunity"


............. Some argue these multiples are justified by the Mag 7’s dominant business models and exceptional growth—but we see several problems with that logic:
  1. Even great companies can disappoint when expectations are sky-high.
  2. Speculation has inflated valuations for many firms without the market power or fundamentals of the top-tier leaders.
  3. Equal-weight perspective reveals the breadth of excess. Roughly 8% of all U.S. stocks trade above 10x sales, approaching the 2000 peak and not far from the 2020 growth bubble. 
In short, today’s market reflects more than optimism—it reflects risk. History suggests such extremes rarely persist without painful corrections.


You must leave now, take what you need you think will last.
But whatever you wish to keep, you better grab it fast.
— Bob Dylan
If September 2025 was peak bubble, 2026 will likely the year which it all falls apart. The clues are everywhere. .................

............ It’s all over now, Baby Blue. Whether it all falls apart suddenly, or gradually, I do not know. And LLMs will continue to exist.

But the economics don’t make sense, and never will, in large part because of the core technical problems that I have stressed repeatedly here and elsewhere since 2019. Without world models. you cannot achieve reliability. And without reliability, profits are limited.

The technical problems are not new. And a trillion dollars or so of investment hasn’t remedied them.

What is new that they have at last become widely recognized, not just as the transitory “bugs” the industry wanted you to think of, but as inherent limitations that flow from the very design of LLMs they really are. This cold reality in turns undermines a large fraction of the use cases that people initially fantasized about.

Once the implications are fully appreciated, the whole thing will begin to unwind.







Quotes of the Week:



Charts:
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(not just) for the ESG crowd:


.................. Figure 3 shows what’s actually happened since the Paris Accords. Mitigation efforts—renewable energy, carbon capture, electric vehicles—have not changed the trajectory of global CO₂ emissions at all. Nor is there any evidence of decoupling between emissions and GDP. Economic growth and carbon emissions continue to move together, just as they always have.

................... As long as economic growth continues, fossil fuel use will rise—and so will carbon emissions. Population growth is entangled with that dynamic, and reducing population is not a serious or humane policy option. This leaves us in a quadruple bind: emissions, growth, energy, and population pulling in the same direction, with no obvious escape within the window of climate urgency.


The Fallacies That Doom Our Solutions


Backpedaling from net zero

................... But the big problem is that we simply don’t have the natural resources to pursue the renewable energy transition at the speed required.

...................... I don’t think fossil fuels are going away. Solar and wind look more affordable, as long as you don’t have to think about how you’re going to store the electricity. Fossil fuels in contrast, are their own storage system. As long as people can’t cooperate to shut down economic growth and implement a global carbon tax, we’re stuck pursuing the maximum power principle, which means we’re stuck burning fossil fuels


Why Oedipus and Cassandra Both Failed

It is a tradition that, at the end of the year, people who discuss political and economic matters (like me) try to make predictions for the year to come. Modern predictors (myself included) have a generally poor record, especially for long-term predictions. Yet, we all indulge in this hobby, one way or another. We are born predictors.

The current debate sees two camps facing each other: the catastrophists and the cornucopians. The first group sees our civilization brought down by a combination of pollution, resource depletion, or overpopulation. The second sees technological progress breaking through all physical barriers and leading humankind to keep growing in power and numbers.

It is remarkable how this debate is polarized. Both sides see no shades of grey ............

Unfortunately, today, taking extreme positions seems to be commonplace in the debate about our future. T hose of us who try to strike a balance between doomerism and cornucopianism are normally seen as traitors from both extremes of the spectrum of the debate. Yet, there is space for a view that considers that neither the return to the Stone Age nor the colonization of Mars are just around the corner. A viewpoint that sees collapse not as an event but as a process. We may not be able to avoid it completely, but we can manage it, soften it, and prepare a return from a decline that doesn’t necessarily have to arrive at the very bottom of the chasm. ............

The Energy Transition in Mind-Sized System Dynamics Models: Four Scenarios from Collapse to Abundance

Can we model the transition from fossil fuels to renewable energy in a way that captures both the collapse dynamics of resource depletion and the potential for a sustainable energy future? This post presents a simple extension of the Single-Cycle Lotka-Volterra (SCLV) model that treats fossil and renewable energy systems as two independent capital stocks. The model was created in view of a “mind sized” approach proposed by Seymour Papert in 1980. To maintain the model simple, the two stocks (fossil-generated capital and renewable-generated capital) were treated as independent from each other. This is, obviously, an approximation. ..................

............................................................... Despite these limitations, the model captures something essential: the energy transition is a race between fossil fuel depletion and renewable energy deployment.

The “collapse” we experience depends on:
  1. How much capacity renewables can ultimately provide (L)
  2. How fast we can build them (k₁_renew)
  3. When we start in earnest (C_renew_0 and initial growth phase)
Conclusion: Not Doomed, But Challenged

.................. We face difficult times - the model is clear about that. The fossil fuel decline is based on physics. But the depth and duration of the transition crisis depends on choices we’re making right now. The question isn’t whether we’ll face disruption, but how much - and what we’ll build on the other side.




Sci Fare:

COVID-19 infections are rising again across the U.S. Here's which symptoms to look for and how to protect yourself over the holidays.

........................ According to the CDC, the most common symptoms of COVID-19 include:
  • Fever or chills
  • Sore throat
  • Cough
  • Fatigue
  • Congestion
  • Shortness of breath
  • New loss of sense of taste or smell
  • Headache or muscle aches
  • Nausea or vomiting, diarrhea


............................................... A small number of researchers have become interested in the intestinal microbiome, but so far, we don’t have enough understanding of interrelationships among species to be the basis for effective treatments. 

These spectacular, early results for the effectiveness of a bacterial strains in fighting cancer remain in a backwater of medical literature. You can be sure that if any molecule had shown such promise, the public relations machine would be in full gear, promoting the breakthrough in Science Magazine and in the news media as well. 

The universe of bacteria and fungi with potential for treating human disease remains an untapped resource which could be seminal for the future of medicine. 

Our American for-profit model of medical research has introduced distortions into the field, and whole areas of possibility are being neglected. Lifestyle changes, exosomes, natural hormones, traditional herbs — all of these are non-patentable, so no company is motivated to invest in researching their potential. 

It’s not just that pharma companies fund their own in-house research as well as research at medical schools. Government-funded research is overwhelmingly the same model. Everyone is looking for one molecule for one disease, preferably a new molecule that can be patented.

Through the last century of medical research, we have come to view the body through a biochemical lens. Our bodies are also ecosystems of symbionts, commensals, and parasites, each with multiple counter-balancing and reinforcing effects. We look for biochemical imbalances as the root of disease, when some diseases are better understood as ecological imbalances. 



U.S. B.S.:



Geopolitical Fare:


Which is saying something,  because worthless has been in charge of the West for generations. There are no leaders in charge of any major Western country who aren’t functionally morons.

Europe is run by utter idiots who want war with Russia, refuse to acknowledge that Ukraine is losing, are actively speeding up their loss of industry and imagine they can bully China and think America was their friend before Trump.

Trump is the stupidest president of my lifetime. No one else even comes close. Reagan with Alzheimers was better. Congress is a sewer of morons. Every major American politician, even AOC and Bernie, are functionally psychopaths. (Yes, both Bernie and AOC have repeatedly voted to send more money and weapons to Israel.)

Britain’s Starmer is the stupidest PM of my lifetimes and stunningly incompetent and evil. Yes, his job is to make rich people richer and suck off Netanyahu, but a competent pol would do that without destroying Labour as a party.

Macron has accomplished nothing for France except to make it weaker and its citizens poorer. Germany’s government is presiding over the destruction of a German industrial base that is 150 years old and one of the greatest in the world: the very foundation of Germany’s power and affluence.

Australia is acting as if America is more important to them than China with a military buildup, which is insane since Australia’s future is with China, or it has no future. Japan is antagonizing China, again, insane, without a serious plan. Either make nice or try and get nukes, there are no other paths.

Everyone is destroying free speech to symp for a genocide. Everyone is immiserating their own populations, setting up serious future political instability.

The US is all-in on AI, spending trillions it does not have, driving up energy prices, and creating a larger more concentrated bubble than the real-estate bubble which caused the 2008 crash. If AI is everything they say, it will utterly destroy the US economy by replacing 30% of workers, and if it isn’t, it’ll never pay back all the resources spent. Plus China will win the AI race anyway, since no one with sense will pay for a proprietary model when Chinese open source models are about as good and mean you can’t suddenly be hit with a massive price increase or rate restrictions.

Politicians are either ignoring climate change and doubling down on fossil fuels (which are more expensive than solar) or using climate change as an excuse to immiserate their own people.

Britain is destroying their own farmers.

Meanwhile morons are constantly whining about fertility rates when humanity is in population overshoot so severe that it is causing the second fastest great extinction in Earth’s history. Most countries would be better off with fewer people, but because they don’t know how to stabilize an economy whose population isn’t always growing leaders and their intellectual dupes are panicking.

Only China is handling this with some grace, but they’re not Western. They’re trying to increase fertility somewhat but have accepted there will be population decreases and are moving hard on robotics to care for an aging population and reduce the need for workers.

There isn’t a single major challenge that the West is facing that our leaders are not actively making worse, not better. Not a single one. It’s extraordinary. Even Nixon managed to sign Clean Air and Water Act and to pivot on China. Reagan reduced nuclear weapons. Clinton made everything worse long-term, but was able to manage the economy during his Presidency, at least, so that it felt good to ordinary people, including pushing oil prices under $20/barrel. George Bush Sr. managed the collapse of the USSR with grace. Biden had good anti-trust policy and half decent industrial policy. Trump has done nothing good of significance. Nothing. Even when he has a good idea (tariffs, reduction in H1-B Visas) he fucks it up completely because he can’t execute and has the attention span of a coked up flea. 

This reminds me of the Weimar Republic or the late Roman Empire. Most things can be fixed in principle: in theory. Nothing can be fixed in practice because leadership is beyond corrupt and incompetent, high on their own wealth and convinced they are the masters of universe and that reality is what they want it to be.

Prepare, if you’re in the West. By all means feel free to keep working at the politics, but don’t count on it. Instead prepare as individuals and groups. Government isn’t going to save you, not in the West. Your leaders are the number one danger to you, more than any outsider, “terrorist” or “foreign enemy.” Treat them as such, and protect yourselves from them.



There’s a lot of confusion about the end of the American empire, and the fall of neoliberalism. Many people think the US will just be in “second place” and it’ll be OK.

No.

The problem is the nature of America’s decline. Since 1980 the US economy has been progressively financialized. Profits are all that matters, not what is done to make profits. In properly functioning markets the idea is that products fill a need, on net improve human welfare and lead to more growth of real products.

If a company doesn’t make a profit, that means it isn’t growing the real economy with products which are a net positive. In such a case it goes out of business.

This is approximately how the Chinese economy works. It’s how the US economy worked for much of its history. It’s how the British economy worked up till about 1890 or so.

It’s not how the US economy works.

You could say that the US economy is currently auto-catabolic. The more money that is made, the more real economy is damaged. You see this most purely in Private Equity. .............

............... The only possibility of the US avoiding the UK’s fate, despite being a continental power, is for the oligarchs to lose power and for there to be a huge compression of asset and service prices. This process will be extremely painful and is currently politically impossible, due to the control of the duopoly. Both parties are owned by oligarchs, the tech bros are rising and none of them have the least interest in creating a good economy when it’s so much more profitable to loot America.

Real innovation is moving to China and will increasingly do so. ..............


U.S. National Security Strategy marks a break with America's globalist committments. Yet its regime-change playbook and capabilities remain intact through the NED.

It is becoming increasingly obvious that the EU has gone rogue and lawless, although it’s hard to say when or how this happened. Recent turns of events have even set the EU and nations like France, Germany and the UK on a collision course with the United States, particularly over their divergent views on Project Ukraine.


Defending it is our urgent task in the year to come, speech itself our instrument


Bondi Beach reconsidered

........................... Read in the larger context of these awful events, the obsessive humanization of the Bondi Beach victims is an upside-down exercise in dehumanization. This is first, straight off the top. Jewish lives count, white lives count, names, faces, generous smiles—all this counts. But the names, faces, and lives of those the Zionist regime has terrorized and brutalized for the past two years or eight decades, depending on how you reckon history: No, no need for any of this because they do not count.

This is an obscenity, in my view—obscene for what it is and because what it is has a 500–year history. Since the opening of the imperial era in the late 15th century, the West has aggrandized itself with never-to-be-questioned claims to civilization, decency, reason, law, and moral superiority, while the rest of the world consists of unruly, racially inferior, not-quite-human barbarians. The horrors of the mission civilisatrice—inhumanity in the name of humanity—were the inevitable outcome and so they remain. ..................................

I have called the Bondi Beach attack transformative. Two reasons.

One, these awful events mark a major step in the erasure not only of history and memory but of sheer cognition. I have heard or read no mention from any mainstream quarter of the campaign of terror and dehumanization the Zionist state now wages not just in Gaza and in the West Bank but against Muslim populations across much of West Asia. How big is the elephant in this room going to get, you have to wonder. 

This is hardly new. Apartheid Israel and its too-numerous, too-powerful enablers have sought to erase and otherwise obscure the truth of the Zionist project since there was a Zionist project to speak of. ..........................



If the right to free speech does not include the right to oppose an active genocide using strong and unmitigated language, then there is no freedom of speech.

This is exactly the sort of thing that freedom of speech is intended for: times when the government is doing something wrong which needs to be ferociously opposed. That’s the primary reason it’s an enshrined value in our society. Freedom of speech is for holding the powerful to account.

If you only have freedom of speech when you’re agreeing with your government and saying nothing which inconveniences the powerful, then Saudi Arabia has free speech. Every tyrannical regime that has ever existed has had freedom of speech by those standards. You don’t measure a society’s freedom by how much its citizenry are allowed to agree with their government, you measure it by how much they’re allowed to disagree. ......................................

That’s what they’re telling us with this mad rush to stomp out freedom of speech this past week. They are telling us that we do not live in the kind of society we were taught about in school. They are telling us that the only reason we were allowed to speak as we pleased in the years leading up to the Gaza genocide is because we were a bunch of compliant sheep who were not meaningfully challenging the interests of the powerful, and now that we are meaningfully challenging them the facade of freedom and democracy is falling away.

As Frank Zappa once said, “The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.”



.......................... This has been going on for generations. As Martin Luther King Jr famously wrote all the way back in 1963:
“I have almost reached the regrettable conclusion that the Negro’s great stumbling block in his stride toward freedom is not the White Citizen’s Counciler or the Ku Klux Klanner, but the white moderate, who is more devoted to ‘order’ than to justice; who prefers a negative peace which is the absence of tension to a positive peace which is the presence of justice; who constantly says: ‘I agree with you in the goal you seek, but I cannot agree with your methods of direct action’.”
If you have loyalty to the establishment order of things, then obviously you’re never going to support efforts aimed at the upheaval of that order. If you support Israel and its western military backing, the only kind of protesting against the Zionist state that you’ll ever accept is protest that makes no difference and draws no attention to itself.


Reunification ‘is unstoppable’, says Chinese president, a day after the conclusion of intense military drills




Other Fare:


Introduction
I am not a stock picker. I worship at the altar of a large breadth of low confidence (<= 53% win-rate) bets, but I am absolutely betting the house that long degeneracy is the prevalent socioeconomic theme of the coming century.
It is why people above the age of 40 will recommend you to get better at your job and increase your salary, whilst everyone else seem to be ignoring exactly THAT and desperately clawing at something, ANYTHING that can give them a shot of outrageous success.
The easiest thing to sell to a crowd like this is "hope", and when you understand this, you will understand the rise of the casinos (in all forms, dexes, prediction markets, etc) and the rise of trading gurus, business gurus, courses, and of course... substacks.

The Set-up
One doesn't need to be locked up to be imprisoned. There is a generation walking around with invisible bars.
They know the life exists, the house, the stability, the reward for showing up and doing the right thing for thirty years. They know people have it. They just can't imagine how to get there. Not "it's hard"; they literally cannot construct a realistic path from where they are to where they're supposed to end up.
The traditional path to wealth accumulation is closed. Not difficult. Closed. When boomers hold ~50% of national wealth while comprising 20% of the population, and millennials hold ~10% despite being the same share, the game reveals itself to be fundamentally broken. 
The ladder got pulled up and it's not like the boomers wanted to do this; asset price inflation just happened to benefit those who already owned assets. But the effect is the same.

The Collapse of the Traditional Bargain
The implicit deal used to be simple: show up, work hard, stay loyal, and you'll be rewarded. Companies offered pensions. Tenure meant something. Your house appreciated while you slept. The system worked if you trusted it.
That deal is dead. ........................



.................................... None of this is organic. None of it follows from the logical dictates of the free market. People are not paying for AI, but they don’t care. A handful of billionaires expect they can just continue spending enough money until everything is AI and you have no choice on the matter.

Why? Who knows. Some like Peter Thiel fear death and hope the AI will let them upload their mind to a computer. Others like Larry Ellison just fear the public in general and want to control people. Elon Musk needs AI to keep Tesla from imploding. And in general, they don’t seem to like those pesky workers, who can demand rights. They prefer imported labor over natives and they prefer machines over humans.

People like to insist that all of this stuff is “value neutral”. But it isn’t. Certain technologies just inherently centralize power in the hands of a small group of people. .........


Stoller: In 2026, Will Americans Finally Turn Against Oligarchs?
Americans are noticing private equity roll-ups in everything from youth sports to fire trucks to big tech. And they really don't like it. Is a genuine anti-monopoly revolt finally brewing in 2026?



Pics of the Week:



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Monday, December 15, 2025

2025-12-14

**** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:

QE is now done by the Treasury not the Fed

The Federal Reserve cut rates by 25 basis points yesterday, but the rate decision itself was irrelevant. The real message came through Powell’s press conference, where the contradictions in the Fed’s narrative became impossible to ignore. He insisted the economy continues to grow near 2 percent, that inflation is gliding back to target, and that household balance sheets remain strong. Yet at the same time he acknowledged softer labour demand and weakening consumption. What he did not admit is the critical truth: consumption is being held together purely by the wealth effect. Wages have slowed, credit growth has collapsed, and the income engine of the U.S. consumer is losing power. Powell spoke as if the structure of demand had not changed. It has.

Then came the remarkable moment. Powell stated that monetary policy cannot solve a supply problem in the housing market. He is correct. But tariffs are also negative supply shocks. And if the Fed truly believes monetary policy should not respond to supply-side inflation, then rates should already be far lower today. Powell is defending two incompatible positions, and that contradiction revealed more than all the forecasts combined. ..............

But the real event yesterday was hidden in a single line of text. The Fed will resume buying Treasury securities up to three years in maturity “for reserve-management purposes,” and critically, with no specified limit. This is not routine balance-sheet housekeeping. This is the moment the Fed admitted the system cannot function with declining reserves. Treasury bill issuance drains liquidity; the Fed must now inject it back. The central bank has effectively become the structural liquidity provider to the fiscal authority.

This is where one of our most important charts the last few weeks becomes essential. The gap between total T-bill issuance and the system’s cash basin, bank reserves plus RRP, has exploded to roughly 3.5 trillion dollars, the largest in U.S. history. The private sector does not have the liquidity to absorb issuance at this scale. To close even half of that gap, the Fed would need to buy around 2 trillion dollars of T-bills, injecting 2 trillion of fresh reserves. That liquidity flows directly into Treasury financing. Call it “reserve management” if you like. In substance, it is monetary financing of fiscal operations. 

Because the Treasury controls the maturity structure of its debt, this arrangement grants it unprecedented influence over the entire yield curve. If the Treasury prefers to fund itself at 3 percent while the long end sits at 4½ percent, it can issue aggressively in the short end, slash long-term supply, execute buybacks, and rely on the Fed to offset the reserve drain with short-end purchases. The liquidity the Fed injects naturally spills into duration, pulling long-end yields down. This is a form of yield-curve control, not declared but fully operational, driven not by the central bank, but by the fiscal authority. The Fed cannot resist without detonating the repo market.

This is fiscal dominance. The Treasury leads, the Fed follows, and monetary policy becomes an instrument of funding needs. .............. Negative real rates become the equilibrium condition, financial repression by design ....................

This is why we say the printing press has changed hands. It is no longer Powell’s. It is Bessent’s or the White House’s The Treasury now effectively controls the liquidity engine of the United States. ....................

.......... This is now the global regime. Fiscal dominance is not an American quirk. It is the new international monetary order. The printing press has shifted to the Treasuries of the world, and financial repression is the equilibrium that follows.


Why Trump’s policies will power America’s financial supremacy in a multipolar era

Rumours of the U.S. dollar’s decline are as persistent as they are exaggerated. In 2025, one fact stands out: The global U.S. dollar system—“King Dollar”[1]—is not vanishing. The financial, legal, and institutional architecture that makes the dollar the world’s indispensable currency remains at the heart of global finance. It is this systemic centrality, not its day-to-day market price, that ensures “King Dollar” matters most, and it is being strategically reinforced and recalibrated for a multipolar era. After the energetic “weaponization” of the dollar under the Biden administration and U.S. Treasury Secretary Janet Yellen, a prudent diversification of reserves by global central banks was always going to follow. Still, to declare the end of U.S. exceptionalism or the death of King Dollar is not just premature, it is strategically misguided. Yes, the counter trend rally in many currencies is coming to an end. Driven by fundamentals, the King Dollar revival is upon us; investors take note. 

The dollar’s reserve role obliges the U.S. to run trade deficits, exporting dollars to ensure global liquidity—a dynamic known as the Triffin Dilemma[2]. This system provides stability through dollar liquidity, even as it invites concerns about rising U.S. debt and persistent deficits. Yet King Dollar’s endurance is less about direct U.S. strength or manufacturing prowess and more about the dollar’s indispensable status as the world’s settlement, liquidity, and safety anchor. When the U.S. periodically adjusts, illuminated by tariffs or incremental protectionism, it echoes British economist John Maynard Keynes’ logic at Bretton Woods: for balance in a global system both creditors and debtors must bear responsibility. The present-day pivot toward protectionism, particularly under U.S. President Donald Trump, isn’t an abandonment of leadership but a disciplined reset, enforcing the long-term health of the dollar order. The widely claimed “end” of the U.S. dollar system instead signals how early we are in the artificial intelligence (AI)- driven resurgence of American industrial capacity. ....................

................. The current arc of U.S. policy is less about rupture and more about calibrated reinvention. Implicit yield-curve control has quietly stabilized long-dated bond markets. Following the U.S. Federal Reserve’s move toward October rate cuts and ongoing U.S. Treasury purchases, the curve has flattened, with short-term bill issuance absorbing liquidity and moderating volatility. This is a result of persistent, if subtle, coordination between fiscal and monetary authorities—deliberate, quiet, and effective.

America’s advantage, then, is not raw power but institutional stamina and a willingness to accept short-term pain for longer-term renewal. Supply-side creative destruction—a centrepiece of Trumpian and centre-right economic policy—isn’t reckless but methodical, funding industrial resurgence even when headline debt stays high. A moderately softer dollar could, as after the 1985 Plaza Accord, enhance export competitiveness, catalyze infrastructure booms, and lay groundwork for generational prosperity without destabilizing the international system.

The tech-driven transformation of collateral, the rise of AI-intensive infrastructure, and the emergence of integrated fintech solutions all reinforce U.S. leadership. The 2020s look set to usher in a capital expenditures (CapEx) supercycle unparalleled since the postwar era. .....................


The three charts that signaled the recession 18 months early.


This is the Fun Part
“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of ‘I’m not sure.’”
Annie Duke, Thinking in Bets
........ The goal is to consistently place probabilistically favorable bets when the weight of the evidence lines up.


Run it Hot, Privatizing the Fed's Balance Sheet, Dollar Devaluation and the AI Boom

Key Themes, Forecasts & Risks:
  • Bank deregulation and a steeper yield curve (3-month-10-year) release bank reserves and drive asset growth with significant macroeconomic and asset pricing effects.
  • The FOMC reduces the policy rate to 3-3.25%, the impact on small banks and small businesses is greater than expected, both for the profitability and valuation of spread sensitive regional banks and the labor market.
  • The FOMC also increases the pace of duration tightening by expanding reinvestment of mortgage paydowns into bills to a portion of maturing Treasuries.
  • As a consequence of the Fed regulatory and monetary policy actions there is no need for additional balance sheet expansion, instead the privatization of the Fed’s balance sheet takes hold.
  • Capital spending broadens to include non-AI infrastructure manufacturing.
  • Consumption recovers as the effects of the three adverse aggregate demand shocks, tariffs, slower government spending and reduced immigration, fade and the individual tax provisions of One Triple B spur spending.
  • Labor market demand and dynamism improve as Fed easing reopens the small bank credit channel and eases pressure on small floating rate borrowers. The increase in the U3 unemployment rate stalls at 4.75% in 1Q26 but doesn’t decline much due to structural pressure on employment (technology innovation adoption).
  • Supply pressures return to the belly of the Treasury curve, 10s end the year at 4.5%, 2s at 3.4%, and with the policy rate at 3-3.25% the 3m10y curve crucial to regional banks ends the year above 1%.
  • The privatization of the Fed’s balance sheet, bank deregulation, rate cuts and duration tightening gets into lots of market cracks. The yield curve steepens; cyclical stocks, metals, energy and industrials outperform.
  • The trade weighted dollar has a similar ~8% decline led by Asian currencies as their trade surpluses stall and begin to contract. If the process stalls, a global accord is possible.
  • The S&P 500 has a significant pullback in 1Q26 and ends the higher with about half the ‘25 gain.
  • Credit spreads widen due to AI infrastructure debt. Fixed income supply from the Fed (DT), mortgage and credit markets, along with reduced global demand, cause a couple of real rate risk-off shocks.
..................
Run it Hot
One of the most widely expected themes for ‘26 is ‘they will run it hot’. They, in this case, refer to the Trump Administration and GOP controlled Congress. Setting aside our aversion to the assumption that ‘they’ have control over the economic outcome, as a base case we expect the effects of the three adverse aggregated demand shocks, lower immigration, slower government spending and higher tariffs, to fade. As the policies that were integral to the first second term president being elected with control over Congress since FDR morph into initiatives targeting the midterms, a modest recovery in consumer spending, stronger capex and increased labor market demand and churn are reasonably probable. Additionally, with the Fed on track to reduce the policy rate close to our estimate of neutral (a bit above 3%), the normalization of the upward sloping yield curve will reopen the small bank credit channel, and a recovery in small business employment and housing construction will contribute to stronger, more broadly distributed, growth in ‘26.


Michael Howell, founder of CrossBorder Capital and GL Indexes, warns of a lack of liquidity in financial markets. The global liquidity cycle is about to turn, which should favor commodity investments in 2026.

Liquidity is the oxygen of financial markets. When it is abundant, stock markets thrive. When it becomes scarce, turbulence increases. In recent weeks, there have been increasing signs of scarcity. Liquidity-sensitive investments such as Bitcoin have promptly suffered losses.

Few market observers understand the plumbing system of the global liquidity structure better than Michael Howell. The founder of CrossBorder Capital and GL Indexes in London specializes in analyzing liquidity flows.

These days, Howell is concerned. He says that the Federal Reserve has deliberately allowed liquidity to be withdrawn, partly because the «monetary plumbers» on the Federal Open Market Committee are in a minority. In addition, after three years of upswing, the global liquidity cycle is beginning to turn, he warns.  ..............



The thesis of my two most recent books (available on the Gavekal website; great Christmas gift for your loved ones!) was that the 2018 US semiconductor embargo against China changed the world. The age of cooperation and globalization was over. Instead, the semi-embargo marked the start of the Clash of Empires. In the years that followed, China became “uninvestible” and the US became “exceptional.” This bifurcation in destinies was the most important investment trend of the period from 2018 to 2024. Anyone long the US and short China thrived. This was really the only trade to have on.

However, since early 2024, the short-China leg of this trade has clearly stopped working. Meanwhile, the long-US leg is also no longer outperforming everything in sight. So has the world changed again? I believe it has, and will try to explain the reasons for this belief in a series of upcoming papers. This paper is the first of this series, and is dedicated to US policy choices, how these have affected relative returns, and where they go from here. ......................................................

.......................... 
In short, looking at the prospect of US industrial policy raises more questions than it answers, including:
  1. Does the US have the institutional make-up to follow through on industrial policy? After all, the US does not have a Ministry of Industry and Information Technology, nor a Ministry of Science and Technology.
  2. Can the US afford to de-Sinify its supply chains? Or are US policymakers simply virtue-signaling around the subject?
  3. Is the demonization of China and the need to de-Sinify supply chains just one big excuse for a power and money grab of epic proportions? If it is, how will US policymakers deal with the consequent corruption?
  4. If US policymakers really are serious about de-Sinifying supply chains, will America’s elites accept the redeployment of capital into activities with lower returns on invested capital, and that in consequence the stock market will struggle and the US dollar roll over?
The answer to the last question seems most obvious: no! With US equity market capitalization now more than twice the value of US GDP, it could be argued that maintaining stable equity prices is now essential to keeping US economic growth on track (see Concerning Signals On US Growth). All of which brings us to the other option: mending fences with China. ...............


Major Markets Letter #2: Ask your parents



This week revealed a clear inflection in the macro landscape as the Fed’s latest actions pointed to the emergence of a new monetary-policy regime. The Fed’s justification for lowering the policy rate is consistent with our call that the FOMC will lean into the long-term outlook for productivity growth to implement increasingly — and perhaps unjustifiably — dovish monetary policy. This move toward an expansionary balance-sheet policy raised the possibility that Paradigm C and Paradigm D could operate simultaneously — a mix that is resoundingly bullish for risk assets.

For those new to our Paradigm framework:

Paradigm A: The 2020–21 lurching into fiscal dominance which helped catalyze the geopolitically driven supply-demand imbalance in the US Treasury bond market that is likely to persist – and widen – throughout the duration of this Fourth Turning.

History confirms that when sovereigns get too indebted – specifically when both the stock and flow of sovereign debt supply increasingly exceed available resources to capitalize the leverage – there are only three options to remedy the issue.

...  Paradigm B is the cut phase of the cut → grow → print sequence required to address the geopolitically driven supply-demand imbalance in the US Treasury bond market. Cutting requires a reduction in fiscal expenditures and a reduction in trade deficits; both outcomes increase net national savings.

... Paradigm C is the grow phase of the cut → grow → print sequence required to address the geopolitically driven supply-demand imbalance in the US Treasury bond market. Growing requires the adoption of a growth-friendly policy mix featuring tax cuts, deregulation, and credit easing. The goal of the grow phase is to delever the public sector balance sheet by increasing the denominator (e.g., GDP, GDI, domestic liquidity) faster than the numerator (i.e., sovereign debt).

... Paradigm D is the print phase of the cut → grow → print sequence required to address the geopolitically driven supply-demand imbalance in the US Treasury bond market. Printing requires an erosion of central bank independence that results in the monetary authority monetizing debt – either explicitly via quantitative easing (QE) and/or yield curve control (YCC), or implicitly via reserve management operations (RMOP). The goal of the print phase is to lessen the impact of crowding out by the bloated public sector balance sheet upon the private sector. The Treasury market is atop the global capital structure, so until the US dollar is no longer the dominant reserve currency, it will always attract the capital it needs at the expense of the private sector – particularly low-to-median-income households, small businesses, and interest-rate-sensitive sectors like housing and consumer durable goods.



..................... A widely used statistical test to detect the explosiveness of a price process suggests that both the S&P 500 and the price of gold have entered explosive territory in recent months. Historically, the prices of US equities and gold have breached the explosive behaviour threshold at different times (Graph C1.A). This was often followed by a significant correction, such as in 1980 for gold (after having surged during the Great Inflation) and the burst of the dotcom bubble for US equities. Note, however, that these corrections took place over a variable and potentially long time frame: while the test has reliably detected past bubbles, it provides no information on when bubbles may burst. Hence, during the development phase of the bubble, investors jumping on the trend could still benefit from further price increases. Also note that the past few quarters represent the only time in at least the last 50 years in which gold and equities have entered this territory simultaneously. Following its explosive phase, a bubble typically bursts with a sharp and swift correction. Graph C1.B suggests that high values of the test statistics – hinting at an ongoing bubble – are typically followed by periods of negative or subdued returns.






Apollo: Private Credit. Fact vs Fiction



Bubble Fare:


Yves here. Servaas Storm provides a fantastic broad and properly sobering view on the AI/stock market mania and the far too many reasons why US players can’t possibly deliver on their hype. ...................................................................................................................................

The Insufferable Irrationality of the AI Industry
The AI race is mostly based on the irrational fear of missing out (FOMO), in Silicon Valley and on Wall Street – which induces a herd mentality to follow ‘momentum’, a complete disregard for fundamental values in favour of placing an exaggerated importance to the limited availability of a key resource (here: Nvidia’s GPUs and ‘compute’), and overwhelming confirmation bias (the all-too-human inclination to look for information that confirms our own biased outlook). To bring home the point: the use of ChatGPT has been found to decrease idea diversity in brainstorming, as per an article in Nature.

It is deeply ironic that the industry that is supposed to build ‘super-intelligence’, a deeply flawed concept with rather sinister origins (see Emily M. Bender and Alex Hanna 2025), is itself deeply irrational. But solid anthropological evidence on the local tribes living in Silicon Valley and working on Wall Street shows that this irrationality is hardwired into the perma-adolescent psyches of the inhabitants, who are wont to talk to each other about the coming AIpocalypse, almost religiously believe in AI prophecies, have deep faith in their algorithms, regard AI as a superior ‘sentient being’ in need of legal representation, enthusiastically engage in techno-eschatology, and, above all, are deeply fond of Hobbits and the LOTR. ...............................

The Revenue Delusion
There is no world in which the enormous spending in data centre infrastructure (more than $5 trillion in the next five years) is going to pay off; the AI-revenue projections are pie-in-the-sky because of the following: ..................................................

Conclusion
Because of these four reasons, AI’s ‘scaling’ strategy will fail and the AI data-centre investment bubble will pop. The unavoidable AI-data-centre crash in the U.S. will be painful to the economy, even if some useful technology and infrastructure will survive and be productive in the longer run. However, given the unrestricted greed of the platform and other Big Tech corporations, this will also mean that AI tools that weaken the labour conditions — in activities including the visual arts, education, health care and the media — will survive. Similarly, generative AI is already entrenched in militaries and intelligence agencies and will, for sure, get used for surveillance and corporate control. All the big promises of the AI industry will fade, but many harmful uses of the technology will stick around.

The immediate economic harm done will look rather insignificant compared to the long-term damage of the AI mania. The continuous oversupply of AI slop, LLM fabricated hallucinations, clickbait fake news and propaganda, deliberate deepfake images and endless machine-made junk, all produced under capitalism’s banner of progress and greed, consuming loads of energy and spouting tonnes of carbon emissions will further undermine and self-poison the trust in and the foundations of America’s economic and social order. The massive direct and indirect costs of generic LLMs will outweigh the rather limited benefits, by far.


Part 1: On the coming geopolitics of the compute stack, or Our New Imperial Strategy


On the political economy of the Cloud and AI

As near as one can tell, the business rationale for AI rests on the hope that it will substitute for human judgment and discretion. Given the role of big data in training AI systems, and the enormous concentrations of capital they require to develop, the AI revolution will extend the logic of oligopoly into cognition. What appears to be at stake, ultimately, is ownership of the means of thinking. This will have implications for class structure, for the legitimacy of institutions that claim authority based on expertise, and for the credentialing function of universities.

Consider some recent developments that don’t pertain to AI per se, but show the power that comes with ownership of computational infrastructure.

When Amazon Web Services went dark in October of this year, thousands of institutions were paralyzed for a few hours. Banks went offline; hospitals were unable to access medical records. Platforms that people rely on to communicate, such as Signal, also became nonresponsive. The cloud hosts an increasing share of the services that make a society run, routing them through a small number of firms. Our own government is also dependent on this infrastructure, and therefore dependent on the continued solvency of a handful of business enterprises. The phrase “too big to fail” hardly begins to capture the situation. .............




Big Tech is spending billions on data centres in the US to fuel the development of artificial intelligence. But those grand plans face a problem: access to power.


Trump goes all in on Silicon Valley, leaving US citizens, and even his own party behind.

Moments ago, despite enormous opposition from both parties, President Trump signed an Executive Order that is designed to block states from regulating AI; since the federal government has passed almost no laws regulating AI, this essentially leaves AI unregulated in America. .............



Charts:
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(not just) for the ESG crowd:

The 2025 state of the climate report: a planet on the brink

We are hurtling toward climate chaos. The planet's vital signs are flashing red. The consequences of human-driven alterations of the climate are no longer future threats but are here now. This unfolding emergency stems from failed foresight, political inaction, unsustainable economic systems, and misinformation. Almost every corner of the biosphere is reeling from intensifying heat, storms, floods, droughts, or fires. The window to prevent the worst outcomes is rapidly closing.  .......................






Sci Fare:


.......... What’s not rare however, is immune system damage from this virus, if you’re willing to believe the studies that are being done.

The strange unusually large waves of respiratory illness we see every year now that keep getting worse every year are caused by SARS2 vaccination and the virus itself. The studies now suggest that SARS2 vaccination itself plays a role in the problem. ..................



U.S. B.S.:

The regime's project is to destroy all alternative visions of the future.



This is unlikely to end well for all parties concerned, including the US.  

It’s been a busy week for the Empire of Lies and Chaos, especially in its direct neighbourhood. The illegal seizure of an Iranian oil tanker carrying Venezuelan oil on Wednesday was a reminder of what the US’ illegal war of aggression is really about: Venezuela’s oil deposits, which represent almost one-fifth of the world’s known reserves.

........ There are, of course, other reasons, including Venezuela’s large deposits of gas, gold, rare earths and freshwater. Venezuela’s close ties with Russia, China and Iran, from where the tanker originally came, and Cuba, to where the tanker was heading, are also a key factor.

There are the Military Industrial Complex’s needs to keep in mind. With the Trump administration drawing down US commitments to project Ukraine, another war must be started in order to keep the Pentagon’s money laundromat working at full speed ..........



Just as the United States hits its first official trillion-dollar annual military budget, the New York Times editorial board has published an article which argues that the US is going to need to increase military funding to prepare for a major war with China.

The article is titled “Overmatched: Why the U.S. Military Must Reinvent Itself,” and to be clear it is an editorial, not an op-ed, meaning it represents the position of the newspaper itself rather than solely that of the authors.

This will come as no surprise to anyone who knows that The New York Times has supported every American war throughout its entire history, because The New York Times is a war propaganda firm disguised as a news outlet. .........

The narrative that the US war machine has “defended the free world” during its period of post-world war global dominance is itself insane empire propaganda. ....................

................. But that’s the New York Times for you. It’s been run by the same family since the late 1800s and it’s been advancing the information interests of rich and powerful imperialists ever since. It’s a militarist smut rag that somehow found its way into unearned respectability, and it deserves to be treated as such. The sooner it ceases to exist, the better.



Geopolitical Fare:

Is the flotilla off Venezuela’s coast bluff or a prelude to invasion? And either way, what is behind it?

Roughly a quarter of the U.S. Navy’s fleet now floats in the Caribbean off the coast of Venezuela, including the U.S.S. Gerald R. Ford, the largest aircraft carrier in American history. Alongside the Ford, numerous destroyers, amphibious vessels, and submarines are also patrolling just outside Venezuela’s territorial waters. In the air, the Pentagon has deployed F–35 jets, heavy bombers, MQ–9 Reaper drones (large, long-range, lethal), and some 15,000 uniformed personnel. This is America’s largest deployment in the Caribbean since the Cuban Missile Crisis in 1962. In mid–October Trump acknowledged that he has authorized the Central Intelligence Agency to conduct covert operations in Venezuela and that he may order ground troops to invade the country.

What is the plan? Let us reason this through. ...........


The Battle for Heavy Crude Supremacy has Begun

The United States forged its post-war alliances in the Middle East on a simple bargain: price your oil in dollars, and we guarantee the regions political regimes’ security. In return, the major producers not only adopted the dollar for their oil exports but also pegged their currencies to it, ensuring that the dollars earned through energy sales were recycled into U.S. financial assets. In practice, this meant these states surrendered their monetary and fiscal independence. By tying their currencies and their security to Washington, they became, whether acknowledged or not, vassal states within the American financial system.

This also explains why, despite being formal leaders of OPEC, these states remain structurally aligned with U.S. geopolitical priorities. Their monetary anchors, security frameworks, and external balances force them into compliance. And history shows that any OPEC member attempting to rewrite the rules of the dollar-oil order eventually pays a heavy price. Iraq in 1991, Libya before the 2011 uprising, and now Venezuela, all sought to deviate from the dollar-centric system, and all were forced back into subordination. The message has always been clear: challenging the monetary architecture of oil pricing is not tolerated. .................



Dollar privilege: everyone using the dollar for trade, and the US controlling the system that moves currency around the world is important. When it goes away, and it will in the next five years, I’d guess, the US will take a huge hit to its ability to command the world’s resources and will lose most of its ability to sanction anyone outside the US vassaldom area. (And the vassals will find it easier to leave if they choose.)

But to see the loss of dollar privilege as primary is a huge mistake. It’s downstream from the only thing that really matters: actual national capacity.

Industrial output, tech, secure resource availability (people, food, energy, rare earths, oil, uranium, etc.)

Fundamentally everything flows from having the most industry and the tech lead, combined with enough resources to make use of that industry and tech lead. Dollar privilege happened because after WWII the US controlled over 50% of the world’s manufacturing ability and was the most powerful non-Soviet state in the world. .............................

To return to our initial point, dollar privilege is a lagging indicator. You get currency domination after you’ve already won, and you lose it after you’ve lost.  .................

This is another “last days of the American Empire” thing, and thank God. Dollar privilege has been used, literally, to kill many millions of people thru the world, and to impoverish hundreds of millions. It will be a great day for every non-American when it ends.



Zeitgeist Fare:

Why the kids have stopped listening

.............................. Before you even get to the cultural battles, we need to start with the basics, young people today are disadvantaged in ways Boomers never were.

Housing? Impossible.

Wages? Can I even get a job?

Debt? Everywhere.

Public services? Collapsing.

We had hope.

We sold their hope to not have recessions.

Let’s call it for what it is, politicians trading lies for votes and paying for it with debt (their future).

What did that do?

It took away the opportunity of owning a home, having kids and retiring. We told them work hard at school, get a degree and the world is yours. They followed the rules and now they’re working for Starbucks saddled with debt.

If you grew up believing everything was getting better, you behave one way.

If you grow up watching everything fall apart, you behave another.

This is the foundations of the nihilism. It’s not “online radicalisation.” It’s not “bad parenting.” It’s just a generation looking at the economy and realising the lift doesn’t go up for them. ................



Other Fare:



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