It's past time to look beyond the AI hype. The stock valuations of the leading hyperscalers and frontier AI modeling companies are almost certainly in bubble territory. But the market will sort that out in time.
We all know the names of the AI stocks whether from the hardware, software or compute vectors - Apple, Microsoft, Meta, Google (Alphabet), Amazon, OpenAI, Anthropic, NVIDIA and a few others.
Some of these names have valuable core businesses independent of the AI bubble. Others are pure AI plays. All will be hurt to a greater or lesser extent when the AI bubble bursts.
Still, bubbles can get bigger before they pop and they can take far longer to pop than many market participants realize. It's not prudent to short these names but one should definitely lighten up on long positions. Moving portfolio allocations to cash and hard assets is a good way to weather the coming storm.
Valuations aside, these companies now pose serious risks to national security, critical infrastructure, the financial system and other institutions. These risks need to be considered on their own because they will affect all of us. These dangers are not about stock bubbles. They're about social chaos.
<h2 class="centered subhead" style="text-align: center;">Geopolitical Catalyst</h2>
Two threats in particular stand out. The first is the use of AI models by the Chinese to attack the United States. The second is rogue AI models that work autonomously to attack us on their own.
We've seen continuous headlines about the AI race going on between China and the U.S. The elements of the race include massive data centers, high-powered semiconductors and frontier AI models built by U.S. firms such as Anthropic, OpenAI and xAI and by Chinese firms Baidu, Tencent, DeepSeek and Moonshot AI. Other critical inputs in this race include massive amounts of electricity and water required to run the hardware.
The U.S.-China AI race is usually framed in existential terms. Whichever country gets to superintelligence first will control global AI and possibly the world. Even in less grandiose terms, there are critical outcomes in areas of national security, encryption, digital payments, weapons systems and curing disease that depend on the winner of the AI race.
Yet, the competition is far from fair. The U.S. relies on massive investment in fixed assets, superior technology and access to the fastest semiconductors.
China has some of these tools but they rely more on theft of intellectual property from the U.S., using output from U.S. AI apps as curated input on their own apps (to increase processing speeds) and smuggling advanced chips through third countries. China may not be leading the AI race but they are certainly keeping pace.
<h2 class="centered subhead" style="text-align: center;">AI Recon</h2>
Now a new threat has emerged. China is using the most advanced AI models including Claude from Anthropic to process information scraped from a wide variety of open sources in the U.S. including military photographs, ship transponder signals, commercial satellite images and other information combined with Chinese satellite images to determine the exact locations and movements of U.S. naval vessels.
That AI-generated information is then passed to Iran, who use it to fire missiles at U.S. Navy vessels near the Strait of Hormuz and the Arabian Sea.
So far, no U.S. vessels have been hit but that may just be a matter of time. China is using U.S. AI technology to help attack the U.S. Navy at sea. Just days after this revelation, a Chinese spy satellite blew-up in space.
No one has taken responsibility for it. But it's not a stretch to infer that the U.S. used a space-based weapon to destroy the Chinese satellite that was used to help Iran attack the U.S. Navy.
The AI wars are becoming star wars in real time.
<h2 class="centered subhead" style="text-align: center;">Regulatory Capture</h2>
As a separate threat, the media is flooded with stories about an AI Apocalypse in which AI apps from frontier developers like OpenAI and Anthropic achieve superintelligence, join forces and take over the world putting humans in the same position relative to the AI systems as apes are to humans. Other versions of this AI dystopia involve gangs of AI apps working together to shut down the power grid, loot banks and brokers and cause chaos in civilized society.
This wave of panicked propaganda began with an essay by Anthropic CEO Dario Amodei. The Amodei essay was amplified by Anthropic researcher Jacob Coxon who publicly resigned from Anthropic and issued a warning that AI could "kill all humans" within a decade. The Amodei and Coxon warnings were then taken up by the media, politicians and tech experts in what became a cascade of doom and gloom.
But let's put these warnings in perspective. Whenever you see the same talking points coming from multiple insiders at once, one should be suspicious that a psychological operation (or "psyop") is being conducted to sway public opinion. In this case, the message is that regulation is needed to protect the world against AI going rogue. This regulation would involve government rules, internal compliance departments, auditor inspections, testing and periodic safety certifications.
How convenient for Anthropic and OpenAI. The kind of regulation they envision is extremely expensive. The giant AI developers can afford it but their newer and smaller competitors cannot. Anthropic and OpenAI are planning $1 trillion plus IPOs later this regulatory moat around their franchises to keep out competition with help from the year. The scaremongering about rogue AI could be nothing more than a tactic to build a government-enforced oligopoly.
My own research indicates that superintelligence can never be achieved because it is impossible to program abductive logic (in contrast to inductive and deductive logic) which can be summarized as gut feel or common sense.
Still, AI is powerful and needs guardrails. But it is not as potentially dangerous as the scaremongers insist. Trump was smart to resist calls for more government regulation. The real enemy in the AI world is not superintelligence - it's China.

dr-hero-img-09-23-26

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Hard-hitting economic news and market commentary. Each issue features biting market coverage, expert commentary, and in-depth analysis… along with a warm dose of humor and some skepticism.

Daily Reckoning

The Real AI Threat: China

One of the persistent debates surrounding the war with Iran concerns the amount of weapons the United States has launched, either in attacking Iran or defending U.S. bases against Iranian attacks.
The question of how many weapons have been used segues into how many weapons remain in U.S. inventories. If those remaining inventories are low, that calls into question the ability of the U.S. to sustain the war in Iran and respond to attacks in hot spots around the world.
President Trump claims that the U.S. has ample weapons to continue the war and meet new threats. That claim is dubious. The truth is that arsenals are almost totally depleted in some cases and dangerously low in others.
Hard data is hard to come by, but we have been able to obtain reasonably accurate figures from sources in the Pentagon and from the weapons manufacturers themselves.
Here&rsquo;s a summary of the key weapons systems now in short supply, including the quantities requested to replenish U.S. arsenals, anticipated deliveries, annual production capacity and estimated timelines for returning inventories to prewar levels:
<ul>
<li>Tomahawk Cruise Missiles: Over 1,000 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 785 missiles. Anticipated deliveries in fiscal year 2026 are 207. Annual production capacity is between 600 and 1,000 missiles, although the lower figure is more realistic. Inventories at a level prior to the war in Iran are not expected to be achieved until late 2030 or early 2031.</li>
</ul>
<ul>
<li>Terminal High Altitude Area Defense Missiles (THAAD): Approximately 290 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 857 missiles. Anticipated deliveries in fiscal year 2026 are 92. Annual production capacity is between 96 and 400 missiles, although the lower figure is more realistic. Inventories at a level prior to the war in Iran are not expected to be achieved until late 2029.</li>
</ul>
<ul>
<li>Patriot Interceptor Air Defense Missiles: Approximately 1,430 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 3,203 missiles. Anticipated deliveries in fiscal year 2026 are 172. Annual production capacity is approximately 2,000 missiles. Inventories at a level prior to the war in Iran are not expected to be achieved until mid-2029.</li>
</ul>
<ul>
<li>RIM-161 Standard Missile 3 (SM-3): A system meant to destroy incoming ballistic missiles in space &mdash; approximately 250 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 214 missiles. Anticipated deliveries in fiscal year 2026 are 52. Annual production capacity is between 156 to 250 missiles, although the lower figure is more realistic. Inventories at a level prior to the war in Iran are not expected to be achieved until early 2029.</li>
</ul>
<ul>
<li>RIM-174 Standard Missile 6 (SM-6): A system meant to destroy incoming aircraft and missiles that can also strike ships &mdash; approximately 370 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 540 missiles. Anticipated deliveries in fiscal year 2026 are 125. Annual production capacity is about 240 to 500 missiles, although the lower figure is more realistic. Inventories at a level prior to the war in Iran are not expected to be achieved until late 2028 or early 2029.</li>
</ul>
<ul>
<li>AGM-158 Joint Air-to-Surface Standoff Missile (JASSM): A cruise missile that can be launched by U.S. Air Force aircraft from a safe distance (standoff) &mdash; approximately 1,100 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 821 missiles. Anticipated deliveries in fiscal year 2026 are 484. Annual production capacity is about 860 missiles. Inventories at a level prior to the war in Iran are not expected to be achieved until mid-2027.</li>
</ul>
<ul>
<li>Precision Strike Missile (PrSM): A new surface-to-surface attack missile &mdash; approximately 70 missiles have been used in Iran to date. The Pentagon&rsquo;s request for new missiles for fiscal year 2027 is 1,134 missiles. Anticipated deliveries in fiscal year 2026 are 70. Annual production capacity is around 680 missiles. Inventories at a level prior to the war in Iran are not expected to be achieved until late 2026.</li>
</ul>
This data is focused on the most important weapons systems the U.S. uses in Iran, including cruise missiles, anti-missiles and attack missiles.&nbsp;
It does not include other, more mundane but equally important data, including global shortages of 155mm artillery shells. Those shells are not being used in Iran, but they are critical weapons used on the front lines in Ukraine.
<h2 class="centered subhead" style="text-align: center;">The Pentagon&rsquo;s Math Doesn&rsquo;t Add Up</h2>
Some key facts should jump out at us based on these figures.
The first is the gap between weapons requested by the Pentagon for 2027 compared to the amount of weapons anticipated for delivery in 2026. Requests for Patriot missiles in 2027 are almost 20 times anticipated deliveries this year. Requests for THAAD missiles in 2027 are over nine times anticipated deliveries this year. Requests for PrSM missiles in 2027 are over 16 times anticipated deliveries this year. Similar high ratios prevail for the other systems.
This ratio casts considerable doubt on the ability of weapons manufacturers to meet the Pentagon&rsquo;s requests. It is true that output is increasing, but these weapons systems are highly sophisticated and therefore sensitive in terms of electronic components, guidance systems, radar seekers and other features that make them effective.
Expanding production is not nearly as easy as expanding output on an automobile assembly line. Some of the work is almost artisanal.
There is also a gross mismatch between the weapons requested and actual production capacity. Patriot missiles requested are 160% of estimated capacity. THAAD missiles requested are almost 900% of current capacity if the lower capacity estimate is used.
This mismatch explains why many of the inventory goals will not be met until 2029 or later. And even those 2029 estimates do not make allowance for expanded attacks in Iran or new wars elsewhere.
The U.S. is dealing from a position of weakness in terms of key weapons systems inventories. Loud claims from the White House won&rsquo;t change that.
<h2 class="centered subhead" style="text-align: center;">Ukraine&rsquo;s Bill Comes Due</h2>
The biggest disgrace is that our arsenals would not be this depleted if we had not committed so many weapons to Ukraine.
We wrote from the start of that war in 2022 that Russia would win and that Ukraine was a corrupt state with a serious neo-Nazi problem. Those forecasts reflected our assessment of the war from the beginning. The end game is now in play, with Russia pressing its campaign in eastern Ukraine and along the Black Sea coast.
The Patriot missiles and other systems supplied to Ukraine have added to the pressure on U.S. inventories and production capacity. Not all of those weapons came from existing U.S. stocks, and Ukraine is not the only reason inventories are so low now that we are fighting in Iran.
But the allocation of scarce weapons among competing theaters is precisely the problem Washington should have anticipated.
The White House has invoked the Defense Production Act to remove legal, logistical and supply chain obstacles to expanded weapons production. Of course, the situation would not be so dire if Obama and Biden had not spent their twelve years in office running down the military capability of the United States.
Trump could not do much to reverse the situation in his first term because of the Russiagate Hoax and two impeachments led by Democrats. Now, in Trump&rsquo;s second term, things are beginning to change for the better.
<h2 class="centered subhead" style="text-align: center;">Eight Defense Giants, One Massive Rebuild</h2>
The biggest defense contractors in the U.S. (known as the Big Eight) are Lockheed Martin, RTX (formerly Raytheon), General Dynamics, Northrop Grumman, Boeing, L3Harris, HII (formerly Huntington Ingalls Industries) and Leidos.
Lockheed Martin is the prime contractor on THAAD, JASSM and the PrSM strike missile. RTX is the prime contractor on the Tomahawk cruise missile, the Patriot air-defense system, the SM-3 and the SM-6. HII builds nuclear aircraft carriers and submarines.
Northrop Grumman builds the B-2 stealth bomber and is a major partner on the F-35 advanced fighter jet. L3Harris specializes in advanced telecommunications, electronic warfare, night vision capabilities and rocket motors.
Leidos works closely with the intelligence community on cyber operations and mission software. General Dynamics builds the M1 Abrams battle tank and nuclear-powered submarines. Boeing&rsquo;s space and defense units focus on fighter jets, helicopters and space and satellite systems.
Beyond the Big Eight, other large defense contractors include SAIC, Booz Allen, Textron, SpaceX, Palantir, Anduril and General Atomics. As the Pentagon replenishes its arsenals and invests in new technologies, contracts will flow to both established manufacturers and newer companies.
<h2 class="centered subhead" style="text-align: center;">The Next Defense Boom Starts Here</h2>
The dire state of U.S. inventories of weapons systems, as well as the obsolescence of many front-line systems, is a national disgrace.
Patriot air-defense systems can shoot down cruise missiles and ballistic missiles, but the growing threat from advanced hypersonic weapons presents new challenges. Russia has repeatedly targeted Patriot systems in Ukraine, underscoring the vulnerability of expensive air-defense assets to modern missile attacks.
That said, out of past failures come new opportunities.
The Pentagon is determined both to replenish inventories and to build new systems that are better suited to the age of AI, drone swarms and hypersonics. Investors looking to lighten up on the AI boom exposures might consider the defense sector as the next big thing.

dr-hero-img-09-14-26

From Empty Stockpiles to Explosive Profits

The fact that China has a large quantity of gold in its official reserve position is not news. China&rsquo;s gold reserves have been rising substantially since 2009.
At that time, China&rsquo;s official gold reserves were 1,054 metric tonnes (mt). Today, those reserves stand at approximately 2,366 mt, an increase of about 124%. But that does not tell the whole story.
The official reserves are reported by the People&rsquo;s Bank of China (PBOC), the Chinese central bank. But China may also hold gold through other state entities, including the State Administration of Foreign Exchange (SAFE). China is non-transparent about the full extent of its gold holdings. The exact amount of any unreported gold is unknown. Estimates can be formed based on imports from Switzerland via Hong Kong, but those are inexact.
One estimate is that the amount of &ldquo;hidden gold&rdquo; held by Chinese state entities is approximately the same as the amount reported publicly by the PBOC. If that estimate is correct, total Chinese gold reserves would be about 4,700 mt, or roughly 58% of U.S. gold reserves of 8,133 mt.
That would make China the second-largest sovereign gold holder in the world after the U.S. and put China ahead of gold powers such as Germany, Italy and France. Still, caution is warranted. Actual official gold holdings in China could be higher or lower than that estimate.
Both the publicly reported gold reserves of PBOC and any hidden state gold reserves are in addition to the amount of privately held gold in China. That figure is even more difficult to estimate. It is widely reported that Indian citizens privately own substantial quantities of gold, with estimates often running into the tens of thousands of tonnes.
China has a population about the same size as India and an equally strong cultural affinity for gold bullion. An estimate of perhaps 10,000 metric tonnes of gold held privately by Chinese citizens seems reasonable, although it cannot be verified precisely.
By any measure, China is a gold powerhouse, even if its reported official holdings still fall short of those of the U.S. But what is China doing with its gold? What is the point of massive gold accumulation by the Chinese government and its people?
<h2 class="centered subhead" style="text-align: center;">The Gold-Backed Yuan Is a Chimera</h2>
One thing that is not happening is the creation of a gold-backed Chinese yuan. China may have an enormous amount of gold, but China has an even larger money supply than the U.S. and an enormous debt burden once provincial debt issuance is taken into account.
Traditionally, gold holdings must be between 20% and 40% of the money supply to engender trust in a gold-backed currency system. China&rsquo;s reported gold holdings are in the low single digits as a percentage of money supply. In my view, there will be no gold-backed yuan for the foreseeable future.
The idea that the Chinese yuan, whether gold-backed or not, can replace the U.S. dollar as the global reserve currency is also nonsense. Official foreign exchange reserves are not simply piles of currency. They are held largely as securities and deposits denominated in a currency. These securities are typically government bonds but can include other assets, depending on the country.
In short, you cannot be considered a major reserve currency unless you have financial markets large enough to absorb global official savings.
A bond market requires underwriters, called &ldquo;primary dealers&rdquo; in the U.S., a range of maturities, regular auctions, hedging instruments such as futures, options and when-issued trading, a large pool of institutional buyers and, above all, a strong rule of law.
China has a large bond market, but it lacks the depth, openness, convertibility and legal protections needed to rival the U.S. Treasury market as the foundation of the global reserve system. It will take years to build a system that does. China is simply not in the same league when it comes to reserve-currency status, with or without gold.
The latest IMF data show that the U.S. dollar accounts for about 57% of global foreign exchange reserves. The euro accounts for about 20%.
That leaves all other currencies to share the remaining 23%, with significant portions taken up by Japanese and U.K. securities, along with Australian and Canadian dollars and Swiss francs. The Chinese share is about 2%.
If a gold-backed yuan is a chimera and the yuan as a dominant reserve currency is a nonstarter due to the limitations of its financial markets, why is China buying so much gold? What is the real plan?
<h2 class="centered subhead" style="text-align: center;">Follow the Gold, Not the Yuan</h2>
To understand China&rsquo;s gold acquisitions, we need to look at what else China is doing in the gold market.
Major Chinese banks have recently moved to suspend or restrict individual trading in precious metals linked to the Shanghai Gold Exchange. This was presented as a risk-reducing measure. The restrictions do not prohibit physical gold purchases or ownership through gold funds by everyday Chinese citizens.
In effect, China is curbing certain forms of retail &ldquo;paper gold&rdquo; trading while allowing accumulation of physical gold. That&rsquo;s an amplification of trends already in place.
Hong Kong also launched a new central clearing and settlement system for gold in July 2026. Hong Kong has a better rule of law than mainland China, although it is firmly under the control of the Chinese Communist Party.
This arrangement gives China greater flexibility to develop gold trading and settlement outside the traditional dollar-dominated system. That result is not the same as a gold-backed yuan, but it does lessen China&rsquo;s dependence on dollar-denominated payment systems with regard to gold.
China also changed its insurance regulations to allow ten major insurance companies to invest in gold, with exposure capped at 1% of total assets. Given the size of the Chinese insurance market, even 1% represents a potentially major increase in demand for gold.
Hong Kong is also expanding its physical storage capacity, with a target of over 2,000 metric tonnes within three years. That would make it one of the world&rsquo;s major gold storage centers, although the target has not yet been reached.
<h2 class="centered subhead" style="text-align: center;">China&rsquo;s Golden Escape Hatch</h2>
Taken together, these measures show that China &mdash; already the largest gold producer in the world based on its mining operations &mdash; is building more than a massive gold reserve.
It is positioning itself as a global gold trading center, with infrastructure for investment, retail accumulation, hedging, imports, settlement, clearing and storage.
China is not troubled by the decline in the dollar price of gold between January 2026 and today. The reason is that China is in acquisition mode.
In my view, Chinese policymakers expect the price of gold to soar sooner rather than later. Any buyer accumulating gold favors a lower price for the time being because it means getting more gold for every dollar spent.
The payoff comes later if the dollar price of gold spikes higher. Whoever has the most gold then is the biggest winner.
All of this dollar price action really says more about dollar volatility than it does about gold. That&rsquo;s one more reason to get out of dollars and into physical gold.
China is looking ahead to the day when a confrontation with the United States could force it to separate from the dollar payments system entirely in order to avoid asset freezes and financial sanctions.
Chinese policymakers are watching the financial sanctions that the U.S. is imposing on Russia and Iran and drawing the appropriate lessons.
China&rsquo;s solution to geopolitical chaos and financial warfare is to buy physical gold. Investors in the U.S. are well advised to take the same approach.

dr-hero-img-09-10-26

Beijing Preps for Currency Wars

President Trump hosted Chinese President Xi Jinping for a multi-day state visit beginning Sept. 23. There were a number of interesting aspects to this summit that call for closer examination. And they&rsquo;re not the features most analysts explored.
Xi is the president of China, but that&rsquo;s not his most important role. He&rsquo;s also the General Secretary of the Central Committee of the Chinese Communist Party (CCP) and Chairman of the Central Military Commission.
In China, the state ranks third after the party and the military when it comes to power. Americans tend to gloss over Xi&rsquo;s CCP role, but in China, nothing is more important. The party is what matters. Government is simply a means to an end, which is the perpetuation of the CCP.
The summit took place in Washington, D.C. That&rsquo;s not surprising for a visit by Xi to see Trump, except for the fact that the annual U.N. General Assembly (UNGA) meeting was taking place in New York at the same time. Xi did not bother going to the UNGA, even though New York is only about a 60-minute plane trip from Washington.
Xi&rsquo;s itinerary says something about the rise of a multipolar world and the unilateral power of the U.S. and China, in contrast to the globalized worldview that prevailed from 1994 to 2018. The one-world view promoted at the U.N. is becoming irrelevant, even as the superpowers (China, the U.S. and Russia) go their own way and ignore the U.N. except when some U.N. resolution proves convenient.
<h2 class="centered subhead" style="text-align: center;">When Ceremony Is the Substance</h2>
One critique of the summit offered by the legacy media (bearing in mind the media attacks almost everything Trump does) is that it was heavy on ceremony and light on substance.
We&rsquo;ll look at the substance next, but that critique misses the point and reveals the media&rsquo;s ignorance about how things work in China. In China, the ceremony is the substance. Putting on a good show offers respect for the visitor, casts the host in a favorable light and allows the guest to gain face. These matters are not trivial.
I&rsquo;ve spent extensive time in China, Japan and South Korea over the past 40 years. I&rsquo;ve visited over a dozen cities in China, including cities in the western and northern regions far from Beijing and Shanghai. I understand the importance of face.
We don&rsquo;t have an exact cultural equivalent in Western culture, but it&rsquo;s a unique blend of respect and status. By offering face to Xi, Trump was able to solidify the working relationship between the two greatest powers on Earth.
Trump did several things along these lines. He met Xi as he disembarked from his plane at Joint Base Andrews. Typically, a foreign leader is met at the airport by a delegation and is greeted later by the president at the White House. The symbolism behind the airport greeting was huge.
Trump then personally escorted Xi through the West Wing of the White House and gave him a tour. I&rsquo;ve been in the West Wing on official business a number of times dating back to 1974. It&rsquo;s a lot smaller than people imagine, definitely smaller than the sets you see on TV.
Trump organized a photo gallery of past presidents. When you get to the place for Biden&rsquo;s photo, there&rsquo;s no headshot. Instead, there&rsquo;s a picture of Joe&rsquo;s autopen. Xi and Trump had a laugh about that. (Seems likely that Jill Biden was not amused.)
This was all topped off with an elaborate state dinner in the East Room of the White House. (Trump&rsquo;s new ballroom on the site of the former East Wing is not finished yet, but it&rsquo;s going up fast.)
Not every leader gets a state dinner. Most leaders get a photo op in the Oval Office, a little face time with the president and that&rsquo;s about it. Xi got the Full Monty.
There is little doubt that Xi was suitably pleased with his reception and the hospitality extended during his visit to Washington, D.C. There is enormous tension in the U.S.-China strategic relationship at the moment. Taking steps to reduce the tension and improve communications was well advised.
Beyond the ceremony, there was some substance to the summit. Just ahead of the meetings, Treasury Secretary Scott Bessent announced that an existing trade truce between the U.S. and China that was set to expire on Nov. 10 will be extended until Jan. 10, 2027.
By itself, that extension does not resolve open issues, but it does prevent trade relations from getting worse in the meantime.
The U.S. and China also agreed on a framework that could provide more favorable tariff treatment for about $30 billion of imports in each direction. The agreement covered mostly &ldquo;non-sensitive&rdquo; goods.
For U.S. imports, those goods include consumer products such as small appliances, toys, holiday decorations and children&rsquo;s car seats. For U.S. exports, they include agricultural goods, fish and seafood, logs and wood products, cosmetics and medical devices.
Still, these tariff concessions were underwhelming. They did not resolve the most contentious trade issues involving rare earths, high-tech magnets, soybeans, semiconductors and other advanced technologies.
One potentially important development involved NVIDIA&rsquo;s RTX Pro 5500 chip. China was reported to be considering allowing domestic companies to purchase the chip, although approval had not yet been confirmed. Interestingly, NVIDIA CEO Jensen Huang attended the White House state dinner for Xi.
The most politically sensitive issues, including weapons sales to Taiwan and Iranian oil sales to China, either produced no publicly announced breakthroughs or were not the subject of any public acknowledgment.
So, the accomplishments at the summit were modest, even if the protocol was brilliant. The main accomplishments were the things that didn&rsquo;t happen. Relations did not get worse and the trade truce did not end. The two sides are still talking, and that&rsquo;s a positive result in itself.
<h2 class="centered subhead" style="text-align: center;">The Truce Lasted About a Week</h2>
That said, the improved vibe didn&rsquo;t last long.
Just one week after the summit, Chinese refiners suspended exports of gasoline, diesel and jet fuel to destinations outside Hong Kong and Macau as Beijing moved to protect domestic supplies. It was not immediately clear how long the restrictions would remain in place or whether exports would resume after China&rsquo;s Golden Week holiday ended Oct. 7.
That move was not specifically aimed at the United States. There is a global diesel shortage. Russia has also sharply restricted exports of diesel and other refined fuels as Ukrainian attacks have disrupted Russian refining capacity and Moscow has moved to protect domestic supplies.
Trump had also floated the possibility of restricting U.S. diesel exports as prices surged, although on Oct. 2 he said there would be no U.S. diesel export ban.
Still, there is direct damage to the United States. Diesel trades on a world market, so reduced supply anywhere can translate into increased prices everywhere. The Chinese move could exacerbate inflation in the U.S. and hurt Republican election chances in the midterm elections on Nov. 3.
Meanwhile, U.S.-China tensions remain high around a long list of issues, including Chinese military maneuvers near Taiwan, China building artificial islands by dredging in the South China Sea, U.S. restrictions on high-end chips going to China and Chinese restrictions on rare earths going to the U.S.
There will be more Trump-Xi summits in the months ahead. It&rsquo;s unclear if the most difficult issues can be resolved. A return to full-scale trade and currency wars is certainly possible.
The best that can be said for the recent summit is that things did not get worse and the two sides are still talking. For now, that&rsquo;s as good as it gets.

dr-hero-img-10-09-26

Face-Off: Trump vs. Xi

Last week&rsquo;s financial media was full of apocalyptic headlines: &ldquo;$40 trillion in national debt!&rdquo; &ldquo;U.S. debt in a doom loop!&rdquo; &ldquo;The end of the dollar is near!&rdquo;
Gold and bitcoin soared in lockstep with the dollar doom and gloom. If you took the headlines at face value, one would assume the dollar was already toast and U.S. Treasuries were worth no more than digital confetti.
The truth is that the dollar&rsquo;s position as the leading reserve currency is not in jeopardy. Of course, foreign exchange reserves are not simply piles of currency. They are largely held in liquid financial assets, including U.S. Treasury securities denominated in dollars.
Dollar-denominated assets will dominate global reserves for decades to come.
The reason is simple. There are few sovereign bond markets with the size, liquidity and depth of the U.S. Treasury market. Other large government bond markets, including Japan and major European markets, do not offer the same combination of scale and liquidity. King dollar will remain king.
This does not mean interest rates won&rsquo;t rise or inflation won&rsquo;t increase. Both are likely. But neither means the end of the dollar. It just means the Treasury pays more to borrow and you pay more at the gas pump and grocery store.
So, there are problems in the dollar bond markets, but debasement-trade hysteria is not a useful way to understand them.
<h2 class="centered subhead" style="text-align: center;">BESSENT GOES AFTER THE BOND MARKET</h2>
U.S. Treasury Secretary Scott Bessent has just announced a plan to address higher interest rates in U.S. Treasury securities markets and, by extension, mortgage and credit card markets. It has both long-term and short-term components.
One short-term component involves U.S. support for Japan&rsquo;s efforts to prop up the yen, including joint currency intervention and potential greater use of the Federal Reserve&rsquo;s FIMA Repo Facility. That facility allows Japan to borrow dollars against its U.S. Treasury holdings rather than selling those securities outright.
In turn, that could take pressure off U.S. interest rates. Japan is the world&rsquo;s largest foreign holder of U.S. Treasuries, with about $1.12 trillion as of June.
Another short-term component is for the Treasury to purchase longer-dated Treasury securities, specifically those in the 10- to 30-year sectors. The Treasury recently announced that it will at least double the size of certain scheduled buyback operations from $2 billion to $4 billion, with the possibility of going higher.
Treasury has also relied heavily on short-term maturities such as one-month, three-month and six-month Treasury bills in its overall financing mix. These Treasury bills generally carry lower interest rates than longer-dated notes and bonds. Greater reliance on shorter maturities can lower U.S. interest expense, at least in the short run.
Treasury bills are also prized by dealers and hedge funds because they are highly liquid and are widely used as collateral in financial transactions. Supporting liquidity at the long end while maintaining a large supply of short-term Treasury securities makes sense. Why it is causing such hysteria in the media is a bit of a mystery.
<h2 class="centered subhead" style="text-align: center;">BESSENT&rsquo;S 3-3-3 GAMBIT</h2>
The longer-term component of the Bessent Plan is sometimes referred to as the Three Arrows.
The first arrow is to keep annual deficits at 3.0% or less of GDP. The second arrow is to achieve GDP growth of 3.0% or more. The third arrow is to increase U.S. energy production by the equivalent of 3 million barrels of oil per day.
That&rsquo;s where the shorthand 3-3-3 comes from: a 3% deficit, 3% real GDP growth and 3 million additional barrels of oil equivalent per day.
Since oil output does not directly impact fiscal policy, we can leave that to one side in our analysis. The deficit and GDP growth targets, however, are critical.
The metric that really matters in terms of whether investors have confidence in U.S. Treasury securities is the U.S. debt-to-GDP ratio. It&rsquo;s silly to hyperventilate about $40 trillion as the U.S. national debt unless you put that number in the context of the GDP available to finance and roll over the debt.
Right now, gross U.S. federal debt is roughly 123% of GDP. That&rsquo;s the result of approximately $40 trillion of debt divided by roughly $32.5 trillion of annualized nominal GDP. That ratio is near the highest levels in U.S. history.
High debt-to-GDP ratios can be a drag on growth and leave governments with less room to respond to crises. A ratio of 60% is much more comfortable. A ratio of 30% is more comfortable still. The previous postwar high was reached around the end of World War II.
The annual deficit will not go down to zero. That&rsquo;s a fantasy. The level of U.S. national debt will also not go down anytime soon. That&rsquo;s another fantasy.
But that doesn&rsquo;t matter.
What does matter is whether the debt-to-GDP ratio goes down.
The way to do that is to grow the economy faster than the debt. If you can do that, the ratio goes down even if the debt goes up. That&rsquo;s Bessent&rsquo;s plan. That&rsquo;s what he meant when he said the U.S. could &ldquo;grow its way out&rdquo; of the debt problem. In theory, he was right.
For example, let&rsquo;s say annual deficits are $2 trillion so that a year from now the national debt will be $42 trillion. That&rsquo;s a 5.0% increase in the national debt.
But if GDP grows from $32.5 trillion to $34.5 trillion, that&rsquo;s a 6.2% increase. The debt-to-GDP ratio drops from roughly 123% to 121.7%. That&rsquo;s still high, but it&rsquo;s lower than the year before.
That&rsquo;s all the so-called bond market vigilantes need to see. As long as the debt-to-GDP ratio is coming down, bond investors have reason to retain confidence in U.S. Treasuries and the U.S. dollar.
The U.S. has done this before. The gross federal debt-to-GDP ratio reached roughly 119% in 1946 and was down to about 31% by 1980. That process took more than three decades and occurred under both parties using a combination of fiscal and monetary policy, strong nominal growth and inflation.
During that period, the national debt increased substantially. But GDP increased by more than 1,000%. And that was the key. If GDP grows faster than debt, the ratio comes down and America&rsquo;s fiscal position improves.
<h2 class="centered subhead" style="text-align: center;">HERE&rsquo;S THE DIRTY LITTLE SECRET</h2>
So, that&rsquo;s the plan. But there&rsquo;s a dirty little secret that Bessent has not emphasized.
When the government computes debt-to-GDP ratios, it&rsquo;s using nominal numbers, not numbers adjusted for inflation.
In the example above, GDP grew by about 6.2% while the national debt grew by 5.0%. That lowers the ratio, but it does not reveal how much of the GDP growth was real and how much was inflation.
The 6.2% nominal growth could have been 4.2% real growth plus 2.0% inflation. That&rsquo;s fairly healthy. But it could have been 2.2% real growth plus 4.0% inflation.
At 4.0% annual inflation, the purchasing power of the dollar is cut roughly in half in about 18 years and cut in half again over the next 18 years. That kind of inflation can destroy your net worth and income if you&rsquo;re not prepared.
So, how much inflation is included in the Bessent Plan? Secretary Bessent didn&rsquo;t say.
Investors should assume the worst.
The U.S. has had difficulty sustaining real growth of more than about 2.0% per year on average since the global financial crisis. If we need roughly 6.0% nominal growth to outrun the growth in debt and if we can only produce 2.0% real growth per year, then the difference has to come from inflation.
That could mean 4.0% inflation.
That&rsquo;s not a policy preference. It&rsquo;s just fifth-grade math.
In describing how the U.S. lowered its debt-to-GDP ratio dramatically between the end of World War II and 1980, I conveniently omitted the fact that consumer prices rose about 50% between 1977 and 1981.
That&rsquo;s one way the U.S. government took care of the debt problem.
I lived through that period. It was a fun time if you owned gold or real estate, if you used leverage and if you had a job that gave you a raise every few months.
It was not a fun time if you depended on fixed-income streams like annuities, insurance policies, pension plans or Social Security.
Which side of that trade are you on?

dr-hero-img-08-27-26

Rickards: The Dollar’s Not Dying

Communism is on the rise in the United States and has now entered otherwise mainstream Democratic Party politics.
The Democratic Socialists of America (DSA) is on track to increase the number of its members in Congress from two to at least six in January, possibly more. That&rsquo;s not including Sen. Bernie Sanders, who calls himself a democratic socialist.
A DSA member named Francesca Hong just came within striking distance of becoming the Democratic nominee for governor of Wisconsin, one of our largest and most important states. Hong was narrowly defeated in the Aug. 11 primary by Milwaukee County Executive David Crowley.
Don&rsquo;t be confused by those calling themselves socialists. A few may be well-meaning middle-of-the-road Democrats who favor the Scandinavian socialist model. But others are wolves in sheep&rsquo;s clothing &mdash; communists who use the socialist label to hide their real intentions.
What&rsquo;s interesting is that many of the new socialists don&rsquo;t even try to hide their radical leanings. They publicly call themselves socialists and are proud of it.
After the fight against communism in the U.S. in the 1950s and the U.S. victory in the Cold War by the early 1990s, most Americans might assume that communism is no longer a threat to the American way of life and the U.S. political system.
That&rsquo;s a mistake.
Communist and Marxist ideas are alive and well in the U.S. and are thriving in universities, think tanks, foundations, the media and other institutions that Americans typically think of as having better motives.
<h2 class="centered subhead" style="text-align: center;">The Evolution of Revolution</h2>
This ideological infiltration may follow Marxian economics, but the method used by the new communists was anticipated by the Italian communist Antonio Gramsci, who wrote in the 1920s and 1930s.
Gramsci agreed with Marx&rsquo;s goal &mdash; the abolition of private property &mdash; but he thought the way to achieve it was not through violent revolution but through a long-term struggle for control of society&rsquo;s cultural and political institutions.
Decades later, this strategy came to be described as &ldquo;the long march through the institutions.&rdquo;
In other words, communism would not necessarily win by direct confrontation but by a gradual infiltration of education, culture and governance and the decline of critical thinking.
U.S. institutions would become ideological boot camps and propaganda outlets that would gradually convince Americans that communism, dressed up as &ldquo;socialism,&rdquo; was the better path.
From there, it would be a simple task to tear down traditional constitutional structures by getting rid of the Senate, the Electoral College and an independent judiciary.
Top-down communist control would be the final step. No revolution required. Just long-term rot like the proliferation of mold or termites.
For a powerful example of this process, consider the recent controversy surrounding the Smithsonian Institution and testimony before Congress by Anthea Hartig, director of the National Museum of American History.
The dispute centered on whether America&rsquo;s national museums have increasingly emphasized slavery, race and inequality at the expense of the country&rsquo;s founders and achievements. Hartig defended the museum&rsquo;s approach and told lawmakers that it does not take sides in America&rsquo;s political debates.
The Smithsonian&rsquo;s treatment of Benjamin Franklin, for example, emphasizes his history as a slaveholder. Yet Franklin was also one of the great scientists and founders of the 18th century and, later in life, became a leading abolitionist.
He served as president of the Pennsylvania Society for Promoting the Abolition of Slavery and, in 1790, petitioned Congress to work toward ending slavery.
Franklin also became the nation&rsquo;s first postmaster general, helped establish an early fire insurance company and helped found the institution that became the University of Pennsylvania, where I attended law school.
The real issue is one of emphasis: whether America&rsquo;s national museums should primarily celebrate the country&rsquo;s achievements or increasingly focus on slavery, race, inequality and other failures in the American story.
That debate is worth having because institutions shape the way Americans understand their own country.
<h2 class="centered subhead" style="text-align: center;">A Very American History of Communism</h2>
Communist ideology never entirely disappeared from America. It took root in organized political movements following the Bolshevik Revolution in Russia in 1917 and expanded during the Great Depression.
The New York Times&rsquo; Moscow correspondent Walter Duranty notoriously minimized Stalin&rsquo;s man-made famine in Ukraine in the early 1930s, reporting that helped obscure the brutality of the Soviet system.
American communism suffered a setback after the Molotov-Ribbentrop Pact of 1939, which was a nonaggression treaty between the Soviet Union and Nazi Germany. American communists and fellow travelers were disillusioned that Stalin would make a deal with Hitler, who was universally viewed as the avatar of fascism.
Anti-communism reached a frenzy stage during the Cold War with the execution of Julius and Ethel Rosenberg in 1953 after their conviction for conspiracy to commit espionage, the Alger Hiss case, accusations of communist infiltration leveled at government officials by Sen. Joseph McCarthy and hearings by the House Un-American Activities Committee.
Despite these setbacks, the radical left had a revival during the 1960s and 1970s and is prominent today in the success of the Democratic Socialists of America, now the largest socialist organization in the United States.
<h2 class="centered subhead" style="text-align: center;">Castro&rsquo;s American Alumni</h2>
Cuba also played an important role in the American radical left during the Cold War. Many American radicals traveled to Cuba or absorbed the influence of Castro&rsquo;s revolution, including Stokely Carmichael and Angela Davis.
Karen Bass, now the mayor of Los Angeles, traveled repeatedly to Castro&rsquo;s Cuba in the 1970s as part of the Venceremos (&ldquo;We Will Conquer&rdquo;) Brigade, where young American left-wing activists worked alongside Cubans and were immersed in the communist revolution.
Cuba was not the only source of communist influence. Barack Obama, as a teenager in Hawaii, had a relationship with Frank Marshall Davis, a writer and activist with documented ties to the Communist Party. Obama later wrote about Davis in Dreams from My Father and the influence Davis had on his thinking about race and identity.
If you wonder why race relations in the U.S. remain strained after enormous progress beginning in the 1960s and why socialism is on the rise today in urban centers like New York and Los Angeles, the history of the American radical left and its ties to international socialist movements are worth understanding.
The labels and tactics have changed, but the underlying struggle over property, markets and political power has not disappeared.
<h2 class="centered subhead" style="text-align: center;">Politics Comes for Your Portfolio</h2>
The rise of socialism inside the Democratic Party is an enormously important political story on its own. But it also has huge investment implications that could affect your portfolio.
Many democratic socialists favor higher taxes on wealthy households, expanded government healthcare and tuition programs and sweeping changes to policing, immigration and other institutions. Some prominent figures on the left have also supported &ldquo;wealth taxes&rdquo; &mdash; which would tax certain holdings of property, shares, bonds and other assets rather than merely income.
Depending on how such a tax were structured, investors could find themselves selling retirement assets just to pay the new wealth tax.
Apart from causing social and economic disruption, these policies could hurt your retirement because you&rsquo;ll have to pay the taxes needed to finance them. Later, you may pay even more taxes to clean up the mess.
Gold and silver may be among the best assets to own in these circumstances because they&rsquo;re non-digital, can be held outside the banking system and are difficult to freeze electronically.

dr-hero-img-08-14-26

The DSA’s War on Wealth

Can Marxism offer a framework for understanding artificial intelligence (AI) and the tech bros behind it?
This is not to suggest that Marxism is a viable economic system or a practical alternative to capitalism. It&rsquo;s not. But Karl Marx was a heterodox economist before he became an ideologue, and some of his ideas are powerful tools for understanding economics, even if his overall program was a failure.
Let&rsquo;s use some of those tools to understand the rise of AI oligarchs and the future of AI.
We begin with Marx&rsquo;s main idea: the abolition of private property. How do tech bros feel about private property? They steal it. If you can simply take private property, then it&rsquo;s not private. Marx would approve.
The AI gang does this by scraping vast amounts of internet content for use in training their large language models (LLMs). That material includes copyrighted books, magazine articles, academic papers, images, music and countless other forms of intellectual property (IP).
Do tech bros pay royalties? Do they pay licensing fees? Sometimes, but often they don&rsquo;t. They take what they want like internet pirates, or the Bolsheviks after the Russian Revolution in 1917.
In fact, AI models have used my nine books in their training sets. Google, Apple, Microsoft, OpenAI and Meta have paid me nothing. Anthropic offered to pay me $37,000 for some (not all) of my books. I accepted the offer, but I still haven't received the payment. Maybe I&rsquo;ll call my lawyer about that before their IPO.
The point is that much of the AI crowd behaves no differently than the imperialists of the 19th and early 20th centuries, who exploited land, resources and human capital, including slavery, while paying little or nothing in return.
V. I. Lenin called imperialism &ldquo;the highest stage of capitalism.&rdquo; But Lenin never met a tech bro. They put imperialists to shame.
<h2 class="centered subhead" style="text-align: center;">YOU Are Paying for the Boom</h2>
Marx&rsquo;s theory was based on the idea that the owners of the means of production (capitalists) used labor but did not pay workers a fair share of the surplus created by the production process. There are a lot of flaws in this theory.
But the tech bros have a better idea: Get rid of human labor completely.
AI allows companies to pay some workers less because a growing share of productivity comes from software rather than labor. More to the point, AI is eliminating certain jobs entirely, as seen in layoffs among software developers and in industries such as healthcare and customer service that are increasingly using AI to perform repetitive or administrative tasks.
In the AI world, capitalists don&rsquo;t just take more than their share; they take the entire buffet table. The tech bros&rsquo; solution to mass unemployment is guaranteed basic income, a handout. This ignores the dignity of the individual, which is achieved largely through productive work.
Other examples of taking public assets for private use include massive demands placed on the electric grid to power hyperscale data centers. Towns and counties around the country could face higher electric bills as hyperscalers compete with residents and businesses for available electricity.
It&rsquo;s another case of extracting wealth from everyday Americans to feed the AI beast.
Even that&rsquo;s not enough. AI applications are being crammed into our laptops, tablets and smartphones whether we know it or not and whether we like it or not. This is forcing manufacturers to build more powerful devices, which can increase costs for consumers while requiring additional processing power to handle AI features.
Many of these AI features operate by default, even if users never intentionally engage with them. That means you may be using AI without realizing it.
Never mind that AI output can be inaccurate and, at times, dangerous. The problem is compounded as AI-generated content increasingly circulates online and becomes part of future training data. Meanwhile, many AI features collect large amounts of user data from the devices they run on.
Individual AI users also provide fresh inputs to LLMs through prompts, interactions and, in some cases, data collected from their devices. AI operators are hungry for this kind of information because they have already consumed vast amounts of publicly available internet content, while the quality of that content continues to deteriorate as more AI-generated material floods the web.
Are you getting paid for information that may be collected from your device? Do you even know it&rsquo;s happening? Almost certainly not. This is just another form of digital extraction that enriches the tech bros while helping fuel trillion-dollar valuations.
In addition to authors, artists, local communities and everyday Americans, the AI mafia is also feeding off the government. Subsidies include streamlined permitting for massive data centers, tax incentives and abatements in many jurisdictions, favorable regulatory treatment in some areas and enormous government contracts.
There are costs associated with all of these government benefits, but they are not borne by the AI companies themselves.
They&rsquo;re borne by everyday citizens in the form of taxes, higher electricity rates, reduced quality of life as data centers reshape small communities and the risk that increasingly capable AI systems could create serious disruptions in sectors such as banking, telecommunications and healthcare if they malfunction or are misused.
<h2 class="centered subhead" style="text-align: center;">The Extraction Economy&hellip; And New Revolutionaries</h2>
The Chinese are no better. The success of Chinese AI models such as DeepSeek and Moonshot has been aided by their ability to build on advances made by leading U.S. AI labs. It&rsquo;s a case of one group of pirates raiding another group of pirates.
Both thrive on information they did not create, but the Chinese have become especially adept at turning those advances into low-cost competitors.
This predatory behavior can be likened to imperialism or piracy. The technical economic term for it is externality. That means the profits and benefits of extracting information are kept by AI firms, while many of the costs are pushed onto the public.
It&rsquo;s no different than a gold mine that keeps the gold but dumps the cyanide used in refining into public waterways. The miner gets the gold and the public gets poisoned. The fact that AI is digital does not make the behavior any more acceptable from a social perspective.
Perhaps the most disturbing aspect of Silicon Valley&rsquo;s extractive culture is that many CEOs are not only aware of it; they thrive on it. They have perfected the art of turning their own customers into unwilling guinea pigs. A culture of short-termism, disdain for the public and pure greed keeps the extraction racket going.
If there&rsquo;s one ray of sunshine, it&rsquo;s that some members of Gen Z appear to be turning their backs on AI, autonomous agents and endless screen time.
There&rsquo;s growing fatigue with the amount of time people spend online, along with increasing concern about the pervasive nature of AI. This shift also reflects widespread frustration that much AI output is bland, repetitive or simply wrong.
Some Gen Zers are doing something that now seems almost radical: They&rsquo;re reading books.
There are many reasons why the AI bubble could burst, but the Gen Z revolt may be one of the least appreciated and most unexpected.

dr-hero-img-07-29-26

Tech Bros Run the Marxist Playbook

Can a popular 1960s television game show help us understand Donald Trump&rsquo;s decision-making process with regard to the war in Iran?
The answer is yes.
To understand why, we first need to understand how the game show worked. Using that as a model, we can apply it to Trump&rsquo;s choices in Iran, see how he arrived at the current ceasefire and negotiation stage and consider what may come next.
The game show we&rsquo;re considering was called Let&rsquo;s Make a Deal. The host was Monty Hall, a Canadian-American talent who hosted the show from its debut in 1963 through 1976. The show was continued in many forms under different names all over the world, but the original format is what we want to study for geopolitical purposes.
The game consisted of a stage with three closed doors. Behind one door was a grand prize, such as an all-expenses-paid trip around the world. Behind another door was a modest prize, perhaps a TV set or kitchen appliance. The remaining door had a comedic &ldquo;zonk&rdquo; prize with little or no value. One of the famous zonk prizes was a live goat.
The number and order of the doors doesn&rsquo;t matter mathematically, but for purposes of illustration, we can say that Door No. 1 has the grand prize, Door No. 2 has the zonk prize and Door No. 3 has the modest prize. The contestant does not know which door holds which prize.
The contestant was offered something of reasonable value but was allowed to &ldquo;trade&rdquo; that item for something hidden behind the doors. Most contestants would do the trade. Then they had to pick a door. Let&rsquo;s say the contestant chooses Door No. 3.
Here&rsquo;s where the game gets interesting.
Monty Hall, knowing where the prizes were, would walk up to the stage and open one of the doors the contestant did not choose. In our example, he would open Door No. 2 to reveal the zonk prize. He would then ask the contestant if she would like to change her mind. The contestant could switch from Door No. 3 to Door No. 1 or could stand pat with Door No. 3.
Most contestants would stick with Door No. 3. Their logic was that Door No. 3 originally had a one-third chance of being the grand prize. That&rsquo;s the correct probability.
They would reason intuitively that Door No. 1 also had a one-third chance of being the grand prize. Since the odds were the same between Door No. 1 and Door No. 3 and since nothing had changed, there was no reason to switch doors.
If the contestant stuck with Door No. 3, that door would eventually be opened and the contestant might or might not win the grand prize.
<h2 class="centered subhead" style="text-align: center;">The Math Most People Get Wrong</h2>
It&rsquo;s counterintuitive, but the logic most contestants use is incorrect.
Door No. 3 still has a one-third chance of containing the grand prize. But Door No. 1 actually has a two-thirds chance.
A contestant given the situation described above should always switch doors. That doesn&rsquo;t guarantee a win every time, but it does double the chances of winning.
Here&rsquo;s why:
At the start of the game, Door No. 3 has a one-third chance of holding the grand prize. That means Doors No. 1 and No. 2 combined have a two-thirds chance.
The key insight is that Monty Hall is not opening a random door. He knows where the prizes are and deliberately reveals a losing door.
When Door No. 2 is opened and shown to contain the zonk prize, the two-thirds probability that originally belonged to Doors No. 1 and No. 2 does not disappear. Instead, it shifts entirely to Door No. 1.
Nothing has changed about Door No. 3. It still has a one-third chance of containing the grand prize.
But Door No. 1 now carries the full two-thirds probability that was previously shared between Doors No. 1 and No. 2.
That&rsquo;s why switching doors improves your odds of winning.
This is a simple example of Bayes&rsquo; Theorem. You start with the best estimate you can make based on the information available. When new information arrives, you update your assessment.
Once Monty Hall reveals that Door No. 2 contains the zonk prize, the odds change. A rational contestant updates the probabilities and switches doors.
(By the way, when the Let&rsquo;s Make a Deal solution was first published, thousands of readers &mdash; including many with PhDs &mdash; wrote in insisting there was no benefit to switching.
Experiments with pigeons showed the opposite. Pigeons almost always switch.)
<h2 class="centered subhead" style="text-align: center;">Trump&rsquo;s Three Doors</h2>
Interesting. But what does this have to do with Trump and the war in Iran?
It turns out that Trump has a Monty Hall problem of his own in terms of policy choices in the war.
The grand prize, from a practical standpoint, is a negotiated settlement. It doesn&rsquo;t sound appealing, but it would end the fighting, reopen the Strait of Hormuz, help reunite MAGA and get Republicans focused on the midterm election.
The zonk prize is a continuation of the stalemate. This avoids fighting in the short run, but it keeps the Strait of Hormuz closed. The world was close to running out of energy and other strategic inputs, and major parts of the global industrial economy were coming close to shutting down. It was the worst possible outcome economically and politically.
The modest prize is escalation. It has a short-term feel-good aspect to it, but it doesn&rsquo;t accomplish much in the long run without 600,000 boots on the ground. It might reopen the Strait of Hormuz, but at a high cost in lives and treasure.
We can think of retreat behind Door No. 1, stalemate behind Door No. 2 and escalation behind Door No. 3. Retreat has a political cost. Stalemate has an economic cost. Escalation has a cost measured in uncertainty and casualties.
<h2 class="centered subhead" style="text-align: center;">The Zonk Prize Revealed</h2>
Trump was merely guessing as to which choice had the best outcome and which choice was the zonk prize.
Two weeks ago, Trump was leaning toward Door No. 3 without really knowing what he was doing or what the outcome might be. He was guessing.
At this point in the policy process, JD Vance and others explained to Trump that Door No. 2 was the zonk prize. In effect, he opened the door like Monty Hall.
Door No. 2 was never a good outcome. The result of running out of energy was always going to be catastrophic. It was just a matter of time and the time was near.
Now Trump was like the contestant in Let&rsquo;s Make a Deal. He could stick to Door No. 3 or switch to Door No. 1.
His goal was to get the best possible outcome for the United States without really knowing how to achieve that. When he saw that stalemate was the zonk prize, the odds favored switching strategies to increase the odds of success.
And that&rsquo;s what he did.
<h2 class="centered subhead" style="text-align: center;">Why Trump Switched Strategies</h2>
Over the course of June 11 and 12, 2026, Trump first threatened to bomb Iran into reopening the Strait and then abruptly announced a planned memorandum of understanding (MOU) that would reopen the Strait by giving Iran most of what it was asking for and leaving critical issues to be negotiated over the next 60 days.
In effect, Trump switched from Door No. 3 to Door No. 1 to increase the chance of success.
It worked.
The odds of the Strait reopening went up significantly and, as of today, substantial tanker traffic is in fact moving through the Strait (although it&rsquo;s a tenuous situation with Iran firing on an oil tanker in the Strait just yesterday). Economic catastrophe has been averted at the cost of some embarrassment for the United States.
But we still achieved the best possible outcome.
<h2 class="centered subhead" style="text-align: center;">The Next Round of the Game</h2>
Of course, war and diplomacy are far more complex than Let&rsquo;s Make a Deal. There are many mixed cases. Agreements like the MOU can be torn up and the war restarted.
Or the MOU negotiations can be used by both sides to restock depleted weapons systems in preparation for another round of fighting.
Trump has already said he will &ldquo;bomb the hell out of&rdquo; Iran if it doesn&rsquo;t live up to his expectations under the MOU.
New doors and new choices keep emerging.
Still, models are a useful way to analyze complex problems when all the inputs are not known. Bayes Theorem, which is the model behind the Monty Hall problem, is a powerful tool that I used frequently in my work at CIA.
The lesson is straightforward: Start with the best assessment you can make. Then update that assessment when new information changes the odds.
Rather than throw up our hands at Trump&rsquo;s apparent contradictions, we can view his decisions as responses to changing information and changing probabilities.
That approach won&rsquo;t predict every outcome, but it can help us make more accurate forecasts than intuition alone.

dr-hero-img-06-26-26

Let’s Make a (Iran) Deal

As we anticipated in Tuesday&rsquo;s FOMC meeting preview, the Fed left interest rates unchanged at the June 17 meeting. This leaves the Fed funds target rate at 3.5%&ndash;3.75%, where it&rsquo;s been since Dec. 10, 2025.
We&rsquo;ll explain the Fed&rsquo;s latest policy decision, the signals Kevin Warsh sent in his first meeting as chair and why they may mark the beginning of a very different Fed.
<h2 class="centered subhead" style="text-align: center;">UPDATE: &ldquo;Not the stale Bernanke-Yellen-Powell Fed&rdquo;</h2>
First, here&rsquo;s the text of the relevant part of the Fed&rsquo;s press release issued at 2:00 p.m. ET on Wednesday:
<blockquote>
The Committee decided to maintain the target range for the federal funds rate at 3.5% to 3.75%, in support of the Federal Reserve&rsquo;s dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee&rsquo;s 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
This meeting included a Summary of Economic Projections (SEP), which is a set of predictions on interest rates, unemployment, economic growth and other key metrics issued by the Fed governors and the 12 regional Federal Reserve Bank presidents.
</blockquote>
These projections (known as the &ldquo;dots&rdquo; because they are presented as points on a graph) can safely be ignored. The dots offer some insight into current views, but they have little or no predictive value. They are almost always wrong.
The rationale for holding rates steady is straightforward. Inflation is not only above the Fed&rsquo;s target of 2.0%, it has been rising rapidly and shows no immediate signs of coming down.
<img class="aligncenter" src="https://images.ctfassets.net/vha3zb1lo47k/67O3fCKUSiPLN3lYHiBBMc/46a90b792123afd3b389d5ee1b4eadfc/dr-img1-06-20-26.png" alt="image 1" width="540px" />
Meanwhile, unemployment has been steady between 4.3% and 4.5% since July 2025. That&rsquo;s not particularly high and it has not been going up.
With inflation on the rise and unemployment steady, it was clear that the Fed would focus all of its policy initiatives on inflation.
As a practical matter, this meant that rates were definitely not going down. There was some sentiment for a rate increase, but this was outweighed by the view that inflation might come down on its own in the coming months as oil prices decline sharply due to the extension of the Iran war ceasefire and the prospect that the Strait of Hormuz will reopen soon.
This prospect was enough to avoid a rate increase for now.
Since this was Kevin Warsh&rsquo;s first meeting as chair, there was certainly a view inside the FOMC that Warsh should begin his tenure with a strong show of support from committee members.
The result was a unanimous 12-0 vote to do nothing.
While the policy decision was a non-event, the meeting itself was highly significant.
New Chair Warsh used the FOMC statement and his press conference to make a number of important points. He made it clear that from now on this will be the Warsh Fed and not the stale Bernanke-Yellen-Powell Fed.
Here&rsquo;s a summary of significant changes:
<ul>
<li>Warsh personally declined to participate in the Summary of Economic Projections (SEP). This tells us two things: Warsh does not consider SEP important and he will probably get rid of the &ldquo;dots&rdquo; in the near future. Good riddance.</li>
</ul>
<ul>
<li>The FOMC vote to approve the policy statement was unanimous. This is in contrast to recent meetings that incorporated dissents &mdash; including the April 2026 meeting &mdash; which had an almost unheard-of four dissents. That shows Warsh is firmly in charge for now.</li>
</ul>
<ul>
<li>The FOMC statement was highly abbreviated, much shorter than statements have been for years. This reveals a Warsh policy that less is more. You can expect fewer leaks and wordy announcements from the Fed and more focus on listening to markets.</li>
</ul>
<ul>
<li>The FOMC and Warsh himself did not offer any forward guidance. Since the rise of Ben Bernanke, the Fed has taken the view that by projecting inflation and growth expectations into the future, it could influence consumer and investor behavior in such a way as to achieve the targeted result. (This was always nonsense. I&rsquo;ve met with Ben Bernanke, and he&rsquo;s just as arrogant in person as he appears to be.)</li>
</ul>
Warsh knows that markets and the consumer economy are bigger than the Fed and they will go their own way based on more factors than the Fed can possibly influence or compute.
<ul>
<li>Warsh created five independent task forces to review key functions of the Fed. These areas include communications, balance sheet management, the use of existing data, productivity and jobs in an era of transformation, and the Fed&rsquo;s inflation framework.</li>
</ul>
The work of these task forces may take months or longer. But the topics themselves suggest material changes in how the Fed operates.
Likely outcomes are that the Fed will communicate less and listen more. It will likely reduce its balance sheet by selling, or not rolling over, intermediate- and long-term securities. The impact of AI on jobs will be an important focus. And Warsh is likely to favor more diverse inflation measures instead of the current preferred benchmark of core PCE.
Taken together, these developments do not just mark the beginning of a new chair. They mark the beginning of a new Fed.
The core of Warsh&rsquo;s views and his new policies are contained in this excerpt from his press conference following the FOMC announcement:
<blockquote>
We recognize that inflation has been running well ahead of the Fed&rsquo;s long-stated inflation goal of 2%. That&rsquo;s been going on for more than five years. Persistently high prices are a burden for the American people.
But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.
At any institution, a change in leadership is a natural and timely opportunity to reaffirm its mission, to review current practices and to consider whether those practices best meet our objectives.
On that score, you might have already noticed something: a difference in today&rsquo;s policy statement. It&rsquo;s a bit shorter, a bit simpler &mdash; and it dispenses with some older language.
That statement just gives you the facts, as best we can judge it. Absent, also, is so-called &lsquo;forward guidance,&rsquo; which we agreed was not well-suited to the current policy conjuncture.
This afternoon you also received the usual Summary of Economic Projections. It&rsquo;s been the practice of this Committee for participants to submit these projections, and I have encouraged my colleagues to continue to do so. I, however, have refrained from offering any projections of my own &mdash; consistent with my long-held views on the SEP, at least as currently structured.
In the median projections, real GDP rises at 2.2% this year, 2.3% next year, and total PCE inflation runs at 3.6% this year, 2.3% next year. The unemployment rate stands at about 4.3%. The median participant judges the appropriate federal funds rate to be at 3.8% at the end of this year and 3.6% at the end of next.
</blockquote>
Reducing Warsh&rsquo;s statements and initiatives to their essence, he is saying that the Fed will stop trying to lead markets and start listening to markets.
Markets are bigger than the Fed and they offer a wealth of information about the state of the economy &mdash; if you know where to look and how to interpret the data.
Yield curves, swap spreads, TIPS breakevens and other indicators are far more valuable than Fed junk science such as the Phillips Curve, forward guidance and wealth effects.
One can only hope that Warsh will be successful and the Fed will end its long history of being wrong about almost everything.
Institutional changes aside, the Fed&rsquo;s dilemma over whether it should fight unemployment or inflation will be resolved. Inflation will come down on its own due to a slowing global economy and a likely recession. Unemployment will rise sharply for the same reasons.
The Fed&rsquo;s interest-rate pause today will make both conditions worse, but its short-term obsession with inflation makes it blind to that outcome. Everyday Americans will pay the price as many lose their jobs and more businesses fail.
The next meeting of the Fed&rsquo;s Federal Open Market Committee (FOMC) is scheduled for July 29, 2026. Given the uncertainties of the war in Iran and the impact of higher short-term and intermediate-term interest rates, the U.S. economy will be in a very different place by late July.

dr-hero-img-06-20-26

Warsh Declares Fed Independence

Trump has three ways out of the Iran War.
While the choices are all bad for Trump, they are not all bad for the U.S. economy. Some are better than others. Trump&rsquo;s choice will not only determine the outcome of the war, it will determine the path of the U.S. economy over the year to come.
<h2 class="centered subhead" style="text-align: center;">Choice One is surrender.</h2>
Basically, the U.S. would withdraw from the Iran War without having achieved any of its major goals (not that those goals have ever been well articulated by the administration). Iran would still have its highly-enriched uranium (HEU).
The Iranian regime, consisting of the Iran Revolutionary Guard Corps (IRGC) and Supreme Leader Mojtaba Khamenei or a successor, would still be in charge.
The Iranian people would be largely unified behind new leadership who are younger than the leaders Trump killed. This new group, in their 40s instead of their 70s and 80s, would feel more nationalist and more comfortable in power than their predecessors.
Iran would suffer enormous infrastructure damage, but it can repair and replace those assets over time. Most importantly, Iran would have de facto control of the Strait of Hormuz &mdash; something it has threatened but never actually accomplished in the 47 years since the Iranian Revolution.
<h2 class="centered subhead" style="text-align: center;">Choice Two is stalemate.</h2>
This is basically the current state of the war. Calling it a ceasefire is a joke. Iran recently attacked the Kuwait airport and Israel. The U.S. bombed radar facilities in Iran. Israel struck Iranian energy infrastructure. Hezbollah and Israel continue to fight it out in southern Lebanon.
This is a low-intensity conflict &mdash; all sides back off after a few strikes. But it&rsquo;s not a ceasefire.
The stalemate suits Iran because it gives them time to dig out missile sites, build more drones and receive financial assistance from Russia and China. The stalemate suits the U.S. because it gives us time to rebuild stockpiles of cruise missiles and Patriot anti-missiles.
Most importantly, the stalemate favors Iran because the Strait of Hormuz remains closed. Iran can suffer economic consequences longer than the world can do without Persian Gulf oil, liquid natural gas, helium, nitrates and sulfur. It&rsquo;s a game of chicken, and the U.S. will swerve first because it has more to lose.
<h2 class="centered subhead" style="text-align: center;">Choice Three is escalation.</h2>
The logic is simple. Trump won&rsquo;t surrender, and the game of chicken can&rsquo;t go on much longer.
Trump will unleash the U.S. Department of War to bomb Iranian infrastructure, including bridges, railroads, key highways and telecommunications. Bombing may include sites believed to hold the Iranian HEU.
More extreme versions of escalation could include a special operations mission to seize the&nbsp;Iranian HEU or precision bombing aimed at Iran&rsquo;s oil export facilities on Kharg Island, or even desalination plants. The idea is to bomb Iran into submission and get the deal Trump wants while avoiding the stigma of surrender.
All three choices will fail.
A surrender might be papered over with some kind of memorandum involving an &ldquo;agreement to agree&rdquo; in the future, but the world will see it for what it is &mdash; just another Iranian stalling tactic that preserves the status quo for Iran and solidifies the rule of a new younger regime.
Iran won&rsquo;t give Trump the satisfaction of saving face because Iran is winning. Trump won&rsquo;t accept surrender because of ego and the bad optics. Neither side will accept the deal the other wants. So there will be no deal.
Choice Two will fail because the current stalemate is unsustainable.
The world has been without Persian Gulf oil exports for almost four months. A combination of Gulf oil already underway in tankers before the Strait was closed, some increased production from the U.S. and Russia and a drawdown of strategic reserves by various countries has kept the global industrial economy going.
Those lifelines are running out. There is no more Gulf oil in tankers on their way. Reserves are reaching critically low levels, at which pumps and pipelines begin to break down. The U.S. and&nbsp;Russia can supply some oil to their friends, but there&rsquo;s not enough to go around.
Time is almost up on the stalemate. Something has to give.
Escalation may be attempted, but it will fail also.
There is no history of a side being bombed into submission without boots on the ground.
Germany tried to bomb Britain into submission during the Battle of Britain, the first major military campaign fought entirely with air forces. It failed. Germany was never able to invade.
The firebombing of Dresden did not defeat the Germans. It took D-Day, the Battle of the Bulge and the Red Army marching on Berlin after destroying Warsaw.
The firebombing of Tokyo, which used napalm on wooden structures, did not defeat the Japanese. The atomic bombs may have ended World War II, but that&rsquo;s an exception that proves the rule. Is anyone up for using nukes in Iran?
<img src="https://images.ctfassets.net/vha3zb1lo47k/218Tr9rb4d5ywyJr6hk5O0/c93d93fc79ae3fd3644d40c8bdb983ec/dr-img1-06-10-26.png" alt="image 1" width="540px" />
Tokyo after the firebombing raids of March, 1945
Ten years of bombing North Vietnam did not win the war in Vietnam. The U.S. never invaded the North in that war.
In short, bombing doesn&rsquo;t work without a land invasion.
Invading Iran would be a military undertaking on a massive scale. With 80 million people and a landmass roughly the size of the U.S. east of the Mississippi River, Iran would require perhaps 60 divisions organized into six armies and two Army Groups, backed by air power, naval aviation and submarine-launched missiles.
Anything short of that would risk defeat. You can escalate all you want, but it won&rsquo;t win the war.
Surrender would be the best result for the U.S. economy.
It would be embarrassing, but not necessarily more embarrassing than the outcomes in Vietnam, Iraq, Ukraine and Afghanistan. Better to cut your losses and live to fight another day.
The Strait of Hormuz would reopen (possibly with tolls paid to Iran as reparations), but the oil would start flowing and oil prices would gradually return to the pre-war $60 per barrel level. The American people might actually be relieved that we got out of the Middle East. They&rsquo;re more focused on the economy anyway.
A stalemate would be negative for the U.S. economy in the medium term because it would keep oil prices high and disrupt other critical supply chains, including helium for semiconductors, nitrates for fertilizers and sulfur as a precursor chemical for many important industrial processes.
It could lead to a global recession in the second half of 2026 and weigh heavily on stock markets. But because a stalemate is non-sustainable, it could eventually lead to surrender, which would be a much better outcome.
Escalation would produce the worst economic outcome by every measure.
It would offer all of the disruption of a stalemate, but for a longer period, at a higher cost and with no better outcome. If Trump pursued escalation, large parts of the global industrial economy could grind to a halt, putting millions at risk of starvation.
For those reasons, escalation would likely be abandoned in the end, but not before historic damage is done. Escalation could produce a market crash and a new Great Depression.
Our estimate is that the U.S. will pursue the current stalemate for another month and then turn to escalation because of the warmongers in the Republican Party.
The best strategy for investors is to reduce stock exposures, increase holdings of cash and gold and keep your car&rsquo;s gas tank full. You may need it to flee from social unrest.

dr-hero-img-06-10-26

Trump's 3 Bad Options in Iran

To say that the world is in turmoil to an extent not seen since the 1960s is an understatement.
The war in Ukraine is now in its fifth year. The war in Iran continues with no end in sight, despite Trump&rsquo;s optimistic talk. NATO may be nearing the break-up stage as Trump pulls U.S. troops out of Germany.
Energy prices are soaring, inflation has accelerated sharply again, consumer confidence has fallen sharply, debt is at an all-time high and supply chains are breaking down.
Yet the major U.S. stock indices are at or near all-time highs.
What accounts for record stock prices amid almost unprecedented turmoil?
There are a number of key factors supporting stocks. The most obvious is the AI frenzy. This has two aspects. The first is that AI applications can improve productivity. The second is that the build-out of data centers with the most advanced semiconductors has led to a $1 trillion capital investment tsunami as Microsoft, Amazon, Google, Meta, OpenAI, Anthropic and other AI providers build their server farms.
The next factor is related to the first and is often called the picks-and-shovels trade. The idea is that those who benefit in a gold rush are not the gold miners but the merchants who sell tools, clothes, supplies and other goods the miners need.
In the AI gold rush, the winners are electricity suppliers, builders, hardware manufacturers (semiconductors and servers) and small towns where the server farms are located. These suppliers will do well today whether AI lives up to its promise or not.
<h2 class="centered subhead" style="text-align: center;">Passive Aggression</h2>
Another major factor is passive investing. An enormous amount of U.S. wealth is held in 401(k)s, IRAs and assets under management by wealth managers.
Relatively few of the account holders (or, for that matter, wealth managers) really understand active stock investing or risk management. Instead, they buy index funds, ETFs or other equity basket products that track the stock market itself or a specified segment.
When money is put into these index funds, the manager buys the stocks in the index. That buying pushes stock prices higher. That attracts more money, more buying and more gains in a positive feedback loop that drives stocks even higher. No Ph.D. is required. You just buy the index, sit back and enjoy the ride.
<h2 class="centered subhead" style="text-align: center;">FOMO and TINA</h2>
Two other factors related to the passive investing feedback loop are fear of missing out (FOMO) and the idea that there is no alternative (TINA). It&rsquo;s difficult to show up at a cocktail party or the country club when all of your friends are touting their stock gains and you&rsquo;re not in the market.
It&rsquo;s also difficult to put money in 4% cash equivalents or assets like gold when stocks seem set to deliver 10% returns as far as the eye can see.
FOMO and TINA have nothing to do with fundamental stock analysis. But they are real and powerful drivers of human behavior.
It&rsquo;s not all fairy dust, however. There are actual fundamental drivers behind stock gains. Corporate profits are coming in strong (despite some high-profile missed estimates). U.S. energy self-sufficiency will keep the lights on in the U.S. and help prevent 1970s-style gas lines &mdash; even if we are not immune to the impact of higher prices.
That&rsquo;s the argument for higher stock prices despite global problems. What could possibly go wrong?
<h2 class="centered subhead" style="text-align: center;">Unrecognized Risks</h2>
The greatest threat to higher stock prices is that the market has not fully discounted the impact of the war in Iran and the unprecedented disruption in the supply of oil, liquid natural gas, nitrates for fertilizer, helium, sulphur, aluminum and other critical inputs.
The reality of these shortages has not hit home (with the exception of higher prices for gasoline and oil), but that does not mean the coast is clear.
An enormous amount of oil supply was already on vessels that left the Strait of Hormuz before the war began. That &ldquo;floating supply chain&rdquo; took weeks to be delivered to end users. That process has now been completed; the last deliveries have been made. There is nothing else on the way.
Major manufacturing nations like South Korea, Japan, Taiwan and China are now using up reserves. These may last another month or so. The critical point at which reserves are gone, no resupply is on the way and the Strait of Hormuz remains closed grows nearer by the day.
Even if the strait reopens tomorrow, the current shortages will raise prices, disrupt supply chains and possibly lead to a global recession. Markets seem to be ignoring this possibility in favor of a narrative that says the strait will reopen soon and all will be well.
<h2 class="centered subhead" style="text-align: center;">Great Expectations (for AI)</h2>
Eventually, it may also occur to markets that AI is not producing any revenue. It&rsquo;s consuming $1 trillion in capital and promising untold riches, but those riches have yet to materialize. AI is a powerful technology and it&rsquo;s here to stay. But that does not mean it will be particularly profitable. It may even hurt growth if hundreds of thousands of skilled workers are laid off.
There are serious reasons to believe that AI will not be that productive at all. Output errors (called &ldquo;slop&rdquo;) not only cast doubt on the reliability of AI, but are also populating the internet, which AI itself uses as a training set for new applications.
More slop in the training set means even less reliable output than earlier versions. The dream of superintelligence (artificial general intelligence, AGI) is out of reach because of the inability of engineers to code abductive logic.
If the AI bubble bursts (which I expect), it will not only hurt the Mag 7 stocks but also the picks-and-shovels plays around it.
<h2 class="centered subhead" style="text-align: center;">The Private Credit Canary</h2>
A separate trigger for a market meltdown is the crisis in private credit. Funds sponsored by top managers like Apollo, BlackRock, Blackstone, KKR, Morgan Stanley and others are severely limiting investor withdrawals.
Complicating matters further, if fund managers try to sell assets quickly, there may be very few buyers unless the seller agrees to slash the price dramatically &mdash; sometimes by half or more compared with the stated &ldquo;book value.&rdquo;
Supporters of private credit say that this private market is only worth about $4 trillion and that even 20% write-offs will not jeopardize the system. But this calculation ignores the impact of leverage and the effects of contagion. Losses in private credit can trigger runs on mid-tier banks, which then spread to funds that hold those mid-tier bank stocks and so on.
<h2 class="centered subhead" style="text-align: center;">The Dark Side of Passive</h2>
But the greatest threat to the stock market may be the dominance of passive investing.
The same buying dynamic that drives stock prices higher can work in reverse. A market drawdown can cause investors to sell their index funds. This causes fund managers to sell the underlying stocks, which takes down the indices, causing more selling by investors and so on.
While passive investing can push markets higher gradually, it can also drive them lower with startling speed and violence.
What&rsquo;s an investor to do? The positive story for stocks is real, but the downside potential is equally real. The solution is to hedge by diversifying your portfolio. Keep some stocks, but also maintain a slice of cash, a slice of gold and medium-term U.S. Treasury notes.
Gold is the everything hedge. Treasury notes are secure and will rally when the recession goes into high gear. Cash will give you the option to go shopping for bargains when everyone else is dumping stocks.
TINA and FOMO are not your friends. Diversification is.

dr-hero-img-05-20-26

Investing in a World in Turmoil

It&rsquo;s too soon to forecast the results of the mid-term elections. I&rsquo;ll be doing that between July and November when we have a lot more information from which to make reasonable inferences about the outcome.
But it&rsquo;s not too soon to forecast what will happen between now and this summer. The Republican legal response to years of Democrat lawfare is coming down the track like a runaway train. Get ready for legal and political turmoil to match the financial and geopolitical turmoil we already see. Put on your crash helmets.
As Jeff Childers and others have noted, 2025 was a year of preparation. 2026 will be a year of action. And the action has already started.
<h2 class="centered subhead" style="text-align: center;">Where&rsquo;s The Accountability?</h2>
MAGA supporters of President Trump have grown increasingly frustrated with the lack of prosecutions and criminal convictions for the wrongdoing during the Biden years and reaching back to the Obama administration. Why has no one gone to jail over the Russia hoax? What about the corrupt FBI officials who ran Operation Crossfire Hurricane and Operation Arctic Frost?
The January 6th &ldquo;insurrection&rdquo; was a carefully planned operation by Nancy Pelosi and the FBI to make sure Trump could never run for president again (and he was impeached for the second time because of it). The 2020 election was stolen by Biden. The list goes on. Where&rsquo;s the accountability?
Here&rsquo;s the short answer: It&rsquo;s coming. And just in time for the mid-term elections. That timing is no coincidence.
Building a complex criminal case involves a lot more than just repeating rumors and accusations. It requires in-depth investigation, smoking-gun documents, credible witnesses and a friendly jurisdiction (or at least one that won&rsquo;t automatically acquit Democrats like Washington DC).
In turn, those processes require armies of forensic accountants, creative lawyers, skillful prosecutors, whistleblowers and low-level targets who are willing to testify against the big shots in exchange for leniency. That kind of work can&rsquo;t be rushed.
<h2 class="centered subhead" style="text-align: center;">Preparation And Timing Are Key</h2>
The fact that criminal cases against corrupt figures like former FBI Director James Comey and hyper-partisan NY Attorney General Letitia James were dismissed on technical grounds shows what happens when prosecutors don&rsquo;t do their homework. (Comey and James will be re-indicted once the Department of Justice gets their legal ducks in a row).
Preparation is not the only cause of the delay in bringing cases against corrupt Democrats. Political timing plays a role. If some of the cases could have been brought in 2025, those trials might be underway now and the cases decided and forgotten by next November.
Instead, the Trump White House and Department of Justice (DOJ) have timed the cases to be brought this spring so the criminal trials will dominate the headlines in the summer and fall just ahead of the mid-term elections. Convictions of prominent figures will be fresh in voters&rsquo; minds when they show up at the polls on November 3, 2026.
<h2 class="centered subhead" style="text-align: center;">The DOJ Is Building Cases</h2>
With that as background, let&rsquo;s take a look at some of the lawfare attacks and outright fraud Democrats have conducted in the past five years to consider what prosecutions will be coming in the next five months:
By far the most important cases will involve the 2020 election fraud. The results of the 2024 presidential election are done. Trump won in an Electoral College landslide with 312 electoral votes, exactly the amount we predicted before the election. Most forecasters had Trump winning four or five of the seven swing states. We were the only ones who predicted Trump would win all seven and we were right.
So, if the books are closed on 2024, that must mean the 2020 election results are old news. Biden won. Right? Not so fast.
It was agreed that Biden did win and he served a four-year term as president with progressive dementia from 2021 to 2025. But Biden and the Democrats cheated to achieve that result.
When you cheat in presidential elections, you don&rsquo;t have to cheat everywhere. Some states such as California and New York will go for Democrats no matter what. Other states such as Texas and Florida will go for Republicans no matter what. There&rsquo;s no point in cheating in a place you&rsquo;re bound to win.
Instead, the cheating takes place in real swing states that could go either way. These states are Arizona, Georgia, Pennsylvania, Michigan, Wisconsin, North Carolina and Nevada. When you cheat in those states, you don&rsquo;t have to cheat in every district. You can concentrate your efforts in a few big cities like Philadelphia, Detroit, Madison, Charlotte, Las Vegas, Atlanta and Phoenix.
And you don&rsquo;t have to win 100% of the vote or 100% of the swing states. You only have to win 51%. You probably have 45% in the bag. This means it just takes 6% of the vote in four or five states to tip the entire presidential election your way. Cheating in presidential elections is more like aiming a laser beam than carpet bombing.
Cheating techniques include pre-printed ballots shipped in on election night, running the same ballot through a scanner multiple times, trashing ballots for your opponent, late mail-in ballots, fake ballots &ldquo;harvested&rdquo; by professionals and dumped in drop boxes, allowing illegal aliens to vote, allowing dead people to vote, and much more.
It&rsquo;s an art the Democrats mastered in 2020 using COVID as an excuse to keep poll watchers at a &ldquo;safe&rdquo; distance &ndash; that is, too far away to see what the con artists were doing. The New York Times did their part by claiming that Trump&rsquo;s concerns were &ldquo;baseless&rdquo; and that anyone who disagreed with the Times was an &ldquo;election denier.&rdquo;
Supporters of the cheat claimed that the courts supported their view. That&rsquo;s not true. Courts did deny Trump&rsquo;s cases, but they did so on narrow procedural grounds. No court ever looked at the merits of the claims. They did not want to get involved.
The 2020 cheat was almost the perfect crime until now. Two weeks ago, the FBI raided the elections office in Fulton County, Georgia, which includes Atlanta. They drove away with trucks full of paper ballots, machine tallies, receipts, memos, computers and all the evidence needed to prove fraud.
Tulsi Gabbard, the Director of National Intelligence, was on the scene when the FBI raid on the Georgia ballots took place. Why was the head of intelligence present for a domestic FBI raid on a warehouse? Tulsi spoke directly with President Trump while the raid was taking place and put some of the FBI agents on the phone. This certainly adds a note of international intrigue to the whole operation.
The timing of the Georgia raid is not a coincidence. You can expect similar raids coming in Arizona and Pennsylvania and elsewhere. Criminal charges against Democrat operatives can be expected in the months ahead. Many prominent officials including sitting governors, secretaries of state and election commissioners will be targets of the criminal probes.
Another scandal about to break wide open involves the Arctic Frost investigation. This was another rogue FBI operation conducted by Joe Biden in an effort to prosecute Trump for trying to overturn the results of the 2020 election by using &ldquo;fake electors&rdquo; who would cast electoral votes for Trump in states where Biden was certified as the winner.
In fact, there were no fake electors. Trump and his associates prepared alternate electors in case the voting results were found to favor Trump after litigation that was pending. This is a well-established practice in U.S. politics. In fact, the Democrats did the same thing in the 2004 election between George W. Bush and John Kerry.
There have been many disputed U.S. presidential elections. In 1800, the election was decided in favor of Thomas Jefferson in the House of Representatives after 35 ballots. In 1824, the election was also decided in the House of Representatives in favor of John Quincy Adams.
In 1876, neither candidate received enough electoral votes to win, but 20 votes (from Florida, Oregon, Louisiana and South Carolina) were disputed. A special commission awarded those votes to Rutherford B. Hayes, supposedly in exchange for a promise to end Reconstruction in the South. The 2000 election between George W. Bush and Al Gore was decided by a Supreme Court opinion.
In short, U.S. history is full of close and contested elections with uncertainty and contingent outcomes. The idea that Trump would prepare alternative electors just in case makes perfect sense. Only in the age of extreme lawfare and Trump Derangement Syndrome would the government try to criminalize that behavior, but that&rsquo;s what Biden did.
The Arctic Frost prosecutor Jack Smith then spied on numerous Republican senators including Lindsey Graham, Josh Hawley, Ron Johnson and Marsha Blackburn. He also targeted Charlie Kirk&rsquo;s Turning Point USA (Kirk was assassinated last year), the Republican National Committee, and the American First Policy Institute among many others.
This investigation had no valid predicate and engaged in illegal surveillance. You can expect indictments of Jack Smith and other corrupt FBI and Department of Justice officials who served under Joe Biden. This scandal is ready to blow sky high.
Bill and Hillary Clinton are back in the limelight for refusing to testify after being subpoenaed by the House Oversight Committee looking into the Jeffrey Epstein scandal. The House Committee then moved forward with contempt of Congress proceedings, which can result in jail time.
On February 2, 2026, the Clintons said they would testify after all. But they did not agree to specific terms or specific dates. Committee Chair James Comer said the Clinton change of heart looked like a stalling tactic.
The Clintons are boxed in. If they refuse to testify in good faith, they can be found in contempt and subject to fines or imprisonment. If they do testify, they risk perjury charges if they lie or other investigations if they tell the truth.
If they try the &ldquo;I don&rsquo;t recall&rdquo; tactic, other witnesses may come forward to refute them. The outcome is unclear as of now, but it&rsquo;s another election year scandal that will make the Clintons and Democrats look bad regardless of the outcome.
Another major scandal that will soon result in criminal charges is the looting of billions of dollars of taxpayer money by Somali immigrants in Minnesota. The fraud involved hundreds of fake daycare centers that were taking billions in federal funds for poor families and working mothers, skimming the money and then sending it back to Somalia to support terrorist groups. The frauds also included other programs such as rental assistance, pandemic payroll protection plan loans and small business loans.
It now looks like the Somali skim in Minnesota is just the tip of the iceberg. Similar scams have been identified in California and Washington. In some cases, the corruption goes up to the governor&rsquo;s office where the governor knew what was going on but ordered investigations shut down and told police and program administrators to ignore what was happening. Again, you can expect indictments and arrests of prominent figures, possibly including Minnesota Governor Tim Walz in the coming months.
The list of criminal complaints aimed at those trying to disrupt lawful enforcement actions by Immigration Customs Enforcement (ICE) personnel is enormous. Resisting arrest, interfering with federal law enforcement, assault, destruction of federal property and related crimes are just for starters. Those charges will be aimed at the local activists and operatives.
Much more serious charges await the bigger players and financiers behind the street violence. These charges can include conspiracy, RICO, money laundering and insurrection. The DOJ is patiently building these cases even as the FBI and the intelligence community trace the funding to its source including the Chinese Communist Party.
And let&rsquo;s not forget President Autopen. Joe Biden is too mentally incompetent to stand trial but his staff and family members who ran the White House while Joe was wandering around in the bushes are definite targets. They used the autopen without Biden&rsquo;s knowledge to sign executive orders, pardons, appointments and even pieces of legislation.
This scandal will feature low level operatives testifying against former senior officials in exchange for leniency. The higher ups will then begin to turn on each other. That&rsquo;s how these conspiracies unfold.
Watch for the tsunami of criminal charges to begin this spring and for the trials and convictions to spread like damage from the tidal wave as we draw closer to the election. Stock up on popcorn. The show&rsquo;s about to begin.

dr-hero-img-02-16-26

Justice is Coming

Our specialty is forecasting. We use multiple branches of science in our predictive analytic models including complexity theory, behavioral psychology, Bayes Theorem, neural networks (a form of artificial intelligence or AI), inference, subject matter expertise and good old-fashioned intuition to arrive at the market and geopolitical predictions we offer our readers.
Our track record speaks for itself. We predicted Brexit when polls gave it only a 25% chance. We predicted Trump&rsquo;s 2016 victory when polls gave it only a 5% chance. We were the only publication in the world to predict the exact number of Trump&rsquo;s electoral votes in the 2024 election (312 votes; no one else predicted he would win all seven swing states). There are many other examples. Our forecasts on gold and silver prices are followed all over the world.
But science and applied mathematics are not the only ways to do forecasting. There&rsquo;s ample room for imagination and creative fiction. In fact, all forms of forecasting are fiction because the events predicted haven&rsquo;t happened yet. They only become &ldquo;true&rdquo; when the forecast plays out.
In this genre, you can think of Jules Verne, who wrote about Captain Nemo and the Nautilus in Twenty Thousand Leagues Under the Sea (1869), decades before systems such as electric propulsion, long-duration submersion and life-support systems were used in submarines.
Another great science fiction writer is Arthur C. Clarke whose 2001: A Space Odyssey (1968) described adventures in space that still have not been achieved but are being actively pursued by Elon Musk and others. The pseudonymous author Big Serge is a current master of this genre as it applies to military affairs and geopolitics.
<h2 class="centered subhead" style="text-align: center;">Unlikely Scenarios (For Now)</h2>
With this as background, let&rsquo;s jump into the creative end of the pool and offer some scenarios that are definitely fictional (as of now) and not hard forecasts (that&rsquo;s for another time), but rather scenarios that if not likely are at least possible and worth your consideration. In some ways, the more unlikely the scenario the greater the impact on your portfolio if it does come to pass.
Trump has backed away from his threat to take Greenland by force if a deal could not be worked out with Denmark, which controls the territory today. But Trump is famously volatile and could reverse his views in a minute if the newly proposed framework for transferring Greenland to the U.S. on some basis yet to be announced falls through.
What if NATO members such as the UK, Denmark, France and Germany send their armed forces to defend Greenland? None of those powers are particularly strong and it&rsquo;s unlikely they could muster more than two brigades for this purpose (about 5,000 troops in total).
Under the direction of U.S. NorthCom, with a U.S. aircraft carrier battle group, cyber warfare, drones and elite airborne troops trained in Arctic warfare, the U.S. could put those NATO troops into full retreat with substantial casualties on their side in a day or two at the most.
The U.S. would gain Greenland, but the armed confrontation would be the end of NATO. That&rsquo;s not necessarily a bad thing from the U.S. perspective. NATO members have not been paying anywhere near their share of the costs of military preparedness.
The War in Ukraine has shown that most NATO weapons, including Patriot anti-missile batteries, Abrams and Challenger tanks, HIMARS precision-guided artillery, Bradley fighting vehicles and cruise missiles are obsolete when up against Russian hypersonic missiles, drones, anti-missile defenses and GPS jamming techniques. NATO is probably falling apart anyway, but a debacle in Greenland would accelerate that ending.
<h2 class="centered subhead" style="text-align: center;">The Great Powers Would Rule</h2>
Without NATO, the Baltic Republics could be rapidly invaded and annexed by Russia. They already have large Russian-speaking populations and were part of the former Soviet Union from 1945 to 1991. This annexation would be a tragedy for some but a homecoming for others.
The major NATO powers might form a new military alliance centered around France and its nuclear weapons. Yet, the U.S. would still have allies in Europe including Italy, Hungary, Romania, Slovenia, the Slovak Republic, Poland and Greece.
These countries form a kind of wall between Russia and Western Europe. Europe could find itself cut off from Russian natural gas because of Ukraine and also cut off from U.S. natural gas because of the battle for Greenland.
With the U.S. controlling its own oil and that of Venezuela and Guyana, and Arab countries siding with the U.S., Western Europe could find itself with almost no energy supplies apart from its pathetic patchwork of windmills and solar farms and French nuclear reactors. Western European manufacturing would quickly grind to a halt.
With the U.S. grabbing Venezuela and Greenland and Russia helping itself to the Baltic Republics, China could decide that the time was ripe to seize Taiwan. The U.S. might allow this to happen on a view that its sphere of influence is the Western Hemisphere through the Trump Corollary to the Monroe Doctrine.
Of course, the U.S. would destroy Taiwan&rsquo;s semiconductor fabrication and research facilities on its way out the door. The U.S. would rapidly expand its indigenous semiconductor manufacturing while mining the Western states of the U.S. and Greenland for rare earths.
Have you heard of the Chagos Islands? They&rsquo;re an archipelago of seven atolls including more than 60 islands lying 300 miles south of the Maldives in the Indian Ocean. The Chagos are controlled by the UK as the British Indian Ocean Territory.
Except for their natural beauty, they would be unremarkable but for the fact that the Chagos includes the island of Diego Garcia, which houses a U.S. Naval Support Facility. That facility has been used to launch B-52, B-1 and B-2 bomber attacks throughout the Middle East including the Gulf War, the Global War on Terror and the invasions of Iraq and Afghanistan.
Keir Starmer, Prime Minister of the UK has agreed to cede the Chagos to the island nation of Mauritius, also in the Indian Ocean closer to Madagascar. The UK would take back a lease to Diego Garcia, but Mauritius would be sovereign. Trump has called the Chagos deal &ldquo;stupid&rdquo;. Would Trump take over the Chagos Islands to prevent the transfer to Mauritius? Possibly yes. That would be one more nail in the NATO coffin.
Japan sensing that its alliance with the U.S. might be on shaky ground could decide to build its own nuclear weapons to deter Chinese threats. Japan has long had this technology and engineering capability. Now it would decide that all bets are off and it needs to move as quickly as possible to become a nuclear military power.
In these scenarios, the Great Powers of Russia, China, the U.S. and possibly Japan would strike out on their own and seize as much adjacent territory as they could. The small powers like Greenland, Venezuela, the Baltic Republics and the Chagos Islands would be gobbled up. And the middle powers like the UK, France and Germany would watch helplessly as their assumptions about the shape of the world melted like ice cubes on a hot day.
Big Serge writes, &ldquo;Our history is full of great wars which began in seemingly small places: the Lexington Common, Fort Sumter, an Archduke&rsquo;s touring car in the back alleys of Sarajevo.&rdquo; Could Greenland or Guyana or even the Chagos Islands be the next Sarajevo?
That may seem unlikely. But a look back at the last seven years that brought us COVID, twenty-million illegal immigrants, the War in Ukraine, a senile Biden, the War in Gaza, B-2 bombers over Iran, the seizure of Venezuela, two impeachments and the reelection of Donald Trump should teach us that the least likely scenarios happen with much greater frequency than conventional forecasts expect.
We will stick to our rigorous forecasting techniques. But we will also find a place for fictional scenarios of the kind described above. Fiction has a funny way of becoming fact.

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A Geopolitical Earthquake

Is Donald Trump an emperor? Of course not. Still, the more interesting question is whether Trump personally rules like an emperor, at least the &ldquo;good emperors&rdquo; of Roman history. That question requires some in-depth analysis. The answer may surprise most readers. At the same time, the answer offers some valuable clues as to Trump&rsquo;s policy choices over the coming years. That&rsquo;s an invaluable aid to investors.
To be clear, we&rsquo;re not referring to the &ldquo;No Kings&rdquo; protests against Trump staged recently with support from George Soros, the American Federation of Teachers, The Ford and Rockefeller Foundations, and far-left dark money groups like Arabella and Tides.
Trump is not a king, and the No Kings protestors just embarrassed themselves with their failed political theatre. In fact, the Trump administration has been highly transparent and has stuck closely to legally permissible approaches, even if they have creative lawyers who are breaking new ground in terms of legal precedents.
<h2 class="centered subhead" style="text-align: center;">No King&hellip; But An Emperor?</h2>
The emperor analogy is far more interesting. Most students have at least a broad working knowledge of the outlines of the history of the Roman Empire. They&rsquo;ve heard of Julius Caesar, Augustus, Nero, and perhaps Marcus Aurelius. Some are familiar with the mad Emperor Caligula. He preferred to be called Gaius by friends. Far fewer know his full name was Gaius Caesar Augustus Gemanicus. None of those long family names mattered for any of the emperors. They were all called Caesar. The title Caesar lived on through the twentieth century in variations such as Czar and Kaiser.
That said, surprisingly little is known about the day-to-day lives of the Caesars; what they ate, how they dressed and the like. A lot of what students believe they know is either false or salacious gossip by an emperor&rsquo;s enemies rather than actual events. Historian Mary Beard has done an excellent job of discarding the myths and getting to the reality of being an emperor in her recent book Emperor of Rome (2023).
<img src="https://images.ctfassets.net/vha3zb1lo47k/1jZVMy7rKbNbrOCzcx8kOV/bca30191c6eb6ba369583e0378e22d08/tac-img1-01-14-26.png" alt="image 1" width="245px" />
Historian Mary Beard discards the myths and shows the &ldquo;job description&rdquo; of being an emperor in her 2023 book.
Beard relies largely on two primary sources. The first is a speech given by Gaius Plinius Secundus (Pliny the Younger) in 100 AD in praise of the Emperor Trajan, known as the Speech of Praise.
Since Pliny repeated the speech for friends on various occasions, it was eventually written down and survives today. The second source was an essay by Emperor Augustus known as What I Did, which is a long list of his own accomplishments. What I Did was publicly displayed throughout the Roman Empire etched in bronze and copies have also survived and are readily available.
Many historians dismiss the Speech of Praise because it is fully of flattery for Trajan and casts Pliny in a very favorable light. They also dismiss What I Did for the same reason. Obviously, Augustus was bragging about his achievements and glossing over any failures or shortcomings. But Beard says it&rsquo;s a mistake to dismiss these sources.
<h2 class="centered subhead" style="text-align: center;">The Emperor Handbook</h2>
The two sources may be obsequious and self-congratulatory, but they contain invaluable information. In the course of praising emperors, the Speech of Praise and What I Did constitute a handbook on how to be a good emperor. If these sources focus on the successes of Trajan and Augustus, it follows that those successes were widely considered benchmarks by which emperors were measured by Roman citizens. Mary Beard calls it a &ldquo;job description&rdquo; for being emperor.
There&rsquo;s a lot in these two sources, but they can be boiled down to a few key points. The successful emperor did the following:
<ul>
<li>Win military victories</li>
<li>Being a benefactor to everyday citizens and worthy causes</li>
<li>Provide spectacles and entertainments (the famous &ldquo;bread and circuses&rdquo;)</li>
<li>Sponsor new buildings and restore those in disrepair</li>
</ul>
Not every emperor lived up to this job description, but the best ones did. In truth, the Empire did not expand much after 100 AD, although some military victories could be won by fighting barbarians on the frontiers. The Roman dole was expected to be grain, and other staples were routinely distributed in the cities.
Julius Caesar expanded the ancient Circus Maximus around 50 BC and it was used for chariot racing and other spectacles until 549 AD. The Emperors Vespasian and Titus built the Colosseum in Rome between 70 &ndash; 80 AD. Spectacles at the Colosseum included gladiator fights and battles between wild beasts and defenseless Christian martyrs.
The Roman triumph was a parade through Rome featuring a victorious general (later only Caesar) with a laurel held over his head followed by defeated captives in chains and wagons full of the spoils of war. In short, the successful emperors lived up to their job description.
<h2 class="centered subhead" style="text-align: center;">Which Brings Us To Trump</h2>
Is Trump using the emperor&rsquo;s handbook to conduct his own administration? While staying within the boundaries of the U.S. Constitution, the answer appears to be: yes.
On the subject of military victories, while Trump has laid claim to the title Peace President (which seems well-deserved at least with respect to Gaza), he has also shown a militant side.
He re-named the Department of Defense as the Department of War. His intercontinental B-2 bomber raid on Iran&rsquo;s nuclear bomb project, his ongoing support for the War in Ukraine, his attacks on ISIS in Syria and Islamic militants in Nigeria, and the capture of President Nicol&aacute;s Maduro of Venezuela using one of the greatest armadas in history all reveal a Trump who seeks and achieves military victories.
As a benefactor to everyday citizens, Trump pushed through a major tax cut in 2025, which extended his original tax cuts from 2017 and added new ones. He now proposes a $2,000 tariff dividend check for every American below a threshold of about $200,000 per year in income.
Federal Reserve interest rate cuts are irrelevant when it comes to stimulating the economy, but fiscal policy is different. A Trump dole of $2,000 per citizen genuinely would stimulate the economy in the short-run (even if the long-run impact of higher debt levels would be negative).
When it comes to spectacles and entertainment, Trump has already staged a military parade on June 14, 2025 (the 250th anniversary of the U.S. Army) and has even larger events planned in connection with the 250th anniversary of the Declaration of Independence on July 4, 2026, the World Cup soccer competition hosted by the U.S. in 2026, and the Summer Olympics hosted by Los Angeles in 2028. When it comes to bread and circuses, no one compares to Donald Trump.
Trump is also unmatched in terms of monumental building projects and restorations. He is building an extravagant 90,000 square foot $400 million ballroom as part of the White House, after tearing down the dilapidated East Wing. Trump also plans a triumphal arch near Arlington Cemetery (already being called the Arc de Trump) similar to the Arc de Triomphe in Paris. And he has decorated the Oval Office in gold to the point where there is little room left for any additional ornamentation.
The ugly FBI headquarters in Washington DC opened in 1974 and done in the aptly named Brutalist school of design is now being abandoned and will probably be torn down in due course to be replaced by something more to Trump&rsquo;s liking.
When it comes to the emperor&rsquo;s handbook, Trump is four-for-four. He pursues military victories, he offers handouts to everyday citizens, he stages spectacles and he is erecting monumental structures around the nation&rsquo;s capital while tearing down the ugliest of the lot. Pliny would be proud.
There&rsquo;s no reason to expect any of this behavior will change. Eighty-year-old guys from Queens, NY don&rsquo;t change their style under any circumstances and Trump is especially set in his ways.
We can leave the parades and monuments to the media and future historians. They do make a favorable impression on the general public (good taste is an entirely separate issue), but they don&rsquo;t have a large economic impact and are not especially costly in terms of the overall federal budget.
Handouts are another matter. A $2,000 &ldquo;tariff dividend&rdquo; check for every citizen making below $200,000 per year could cost up to $600 billion (depending on the exact cut-off point for eligibility). Trump&rsquo;s tariffs may raise about that much in additional revenue in fiscal years 2025 and 2026, but that revenue gain will be lost in terms of deficit reduction if it is distributed as tariff dividends.
The tariff dividend checks will no doubt prove extremely popular and could tip the mid-term elections in favor of the Republicans. That&rsquo;s a win for MAGA supporters, but it could come at the cost of slower growth in the future if annual deficits don&rsquo;t shrink from the current multi-trillion-dollar level.
Trump&rsquo;s role as a warrior is also a double-edged sword. Crushing ISIS and overthrowing Nicol&aacute;s Maduro in Venezuela can be counted as wins for U.S. foreign policy. But Trump&rsquo;s failure to end the War in Ukraine (which was always going to be on Putin&rsquo;s terms short of complete Russian victory) runs the risk of escalation that could involve a wider war in Moldova and the Mediterranean Sea. Gaza remains a powder keg that can explode at any time despite Trump&rsquo;s vision of a Miami-on-the-Med. Trump&rsquo;s search for the source of fentanyl distribution to the U.S. could easily lead to attacks on Mexico.
<h2 class="centered subhead" style="text-align: center;">Sector Winners</h2>
The clear winners as Trump follows the emperor&rsquo;s handbook are defense stocks, minerals and mining, energy and the safe havens of gold and silver. U.S. Treasury notes are also attractive assets as interest rates plunge in the months ahead. Still, that interest rate plunge will be associated with recession or worse, rather than a stimulus-linked boom. Unemployment will rise, which will hurt consumption and give rise to more bad debts.
The emperor&rsquo;s handbook is not foolproof. Popular programs may go hand-in-hand with slow growth and even recession. Mary Beard showed she was in on the joke when she wrote that Pliny&rsquo;s speech was part of a plan to &ldquo;Make Rome Great Again.&rdquo; At least Americans will be entertained even if they are out of work. Bread and circuses still have their place.

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Trump Follows the Emperor’s Playbook

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Articles by Jim Rickards