For reference, see the 2022 pieces “The Perse-istant Empire” part 1 and part 2; as well as “Iran news - the Eurasian connection - Return of an empire?“, 2023 “Israel - Iran Update“ and 2024 “The Coming War With Iran“.

Make no mistake, this is part of what will be categorized by historians as WW3, a topic I discussed here.

And a war that will coalesce with the Ukrainian front by involving Turkey, potentially with Erdogan pushed out of the way if he resists.

Now let’s dwell on the specifics of two topics:

• Prediction for the upcoming long war with Iran.

• The direct investing consequences of the closing of the Strait of Hormuz and destruction of the Middle East hydrocarbon facilities.

Iran At War

The War So Far

Iran has surprised most observers by performing as I predicted years ago.

The country had 2 decades to prepare exactly for THIS war, focused on negating the two superpowers of the USA and Israel: air power and soft power / infiltration / subversion.

For the rest of the article, I will refer to it mostly as Isramerica, as it is clear to anyone honestly looking at it that the two nations are now entirely merged in their objective and leadership.

The first part about air power is now obvious. If you put your air defense and missiles + drone stockpiles in bunkers under 100+ meters of rock, you can handle a lot of bombing with little military effect.

You can even poke out the launcher, fire, and go back to safety.

Hence why Isramerica is already bombing softer targets, hoping to break the 90-million people nation resolve: schools, hospitals, oil storage around Tehran, high-ranking officials’ homes, etc.

The second part about infiltration was seemingly Iran’s greatest weakness, and the pager episode in Lebanon, or deep infiltration in the previous episode of that war, had made me wonder if Iran would collapse suddenly from infiltration inside the state capacity and an intelligence failure.

However, a few poorly timed actions depleted this weapon, likely to never be seen again in signficant importance in this conflict:

• Repeated assassination of diplomats and leaders for months and years, again and again, showing the pointlessness of negotiations and the risks of any security vulnerability.

• The reinforcement of hardliners’ positions by assassinating Khomeini (who was opposed to nuclear weapons), backing out of military crippling deals (JCPOA), and relentless hostility. Any leader advocating for compromise was sidelined by the pointlessness of this position.

• A tentative color revolution WEEKS AHEAD of the bombing, a truly puzzling timing choice, with too little popular support, too late into the Gaza genocide, that allowed the Iranian internal security to identify and remove most infiltrators, including many clandestine suicide drone factories.

  • This also used Starlink, which Russia has learned to locate and turn into a target-rich beacon, a tech I am sure Iran benefited from.

After these first weeks, any destabilization will fail, because the Iranian people are understandably outraged at the targeting of schools and hospitals, or poisoning of millions of civilians with toxic oil fumes blotting Tehran’s skies.

So even the people who disliked the mullahs intensely will not betray their country and look to become the next ISIS-led Syria instead.

Iran might not be able to bomb NY or submarines in repair in Virginia, but it can force the US out of Iran’s vicinity, although at a steep price for itself.

Iran’s win conditions is to win locally, while the US can lose by just failing to project power close to Iran and in the Hormuz Strait.

As such, this leaves Iran with the strategic initiative.

Let’s resume the situation briefly:

• The Strait of Hormuz is closed for everyone BUT Iranian oil, which has to be paid for in Yuan, a big win against the petrodollar (protection versus boost in dollar demand).

• $5,000-$10,000 drones are being intercepted by $1M missiles produced AT BEST in the 200-300 units PER YEAR. Probably that many are used PER WEEK.

• The US still does not have air dominance over Iran, and that’s without Russia replenishing the country’s air defense yet. Or China.

• Almost none of the underground bases East of Iran, nor its most advanced missiles, have yet been used, nor any of its thousands of suicide speed boats and underwater drones.

• Every US military base is a target; many have already been turned to rubble.

• As US air bases are getting hammered, long-range strikes with Stratotankers following the bombers for refueling mid-air are needed, with one Stratotanker downed over Iraq, another hit, and 5 destroyed on the tarmac (although the US has 300-400 of these).

• The Gulf states’ reputation as a fun and rich luxury destination, or a safe financial and airport hub, is forever destroyed.

• Many oil facilities in the Gulf have been bombed, with severe damages and the rest at the mercy of Iran, which, for now, has chosen restraint as IT can still export oil, so is happy to see production stay intact for everyone.

• 15-20 million barrels per day are missing in global markets, with oil & gas fields closing, guaranteeing massive economic pain for months if not years, even with no further damage.

• Israel is getting hammered, and the Iron Dome is gone, even if the damages are hard to evaluate due to heavy censorship.

Many expect Trump to “TACO” (Trump Always Chickens Out) out of complacency and a misreading of the situation.

This will not happen because Iran might not have started the war, but has stated its own war goals very clearly:

• full compensation for all damages.

• + removal of all US bases from the region.

As a “fun” alternative, short of full compensation, Iran has stated it will actively look to inflict as much damage as it received as “compensation”.

A situation that memes resume far better than a longer discussion:

The reason for this relatively maximalist position is that Iran already tried appeasement after the 12-day war: mostly fake mutual strikes for everyone to save face, a pretense of a deal, and continuous negotiations.

The negotiations ended with the religiously-motivated martyrdom of a 90+ year old Khamenei in a sneak surprise attack WHILE NEGOCIATING (a tactic now used TWICE), a man sick with prostate cancer and likely to die soon, and seemingly welcoming his death to galvanize the country against its enemies.

But many of his relatives were also killed (including a toddler), so the newly elected leader, a new Khamenei (one of old Khamenei’s sons and an Iraq war veteran), will likely not be very peace inclined and want vengence for his family, at the very least until true deterrence and impossibility for the US to launch a similar strike ever again.

Iran’s Winning

Because of the hapless execution of the military action, ignoring the actual generals or admirals who saw it coming for the likes of Jared Kushner + the rather flawless assessment of the military possibilities by the Iranian military, the trajectory is clear.

Isramerica’s interceptors are depleted and cannot be restocked in significant numbers due to production constraints.

The only alternative is a land war, but so far, the Israeli invasion of Lebanon is already stalling, and attacking 90 million people in a mountainous desert region is a logistical nightmare, especially when the only supply line runs through vulnerable waters or hostile & full of Shia militias Iraq.

The border with Turkey is just not long enough, and Kurds are unwilling to help after being betrayed merely a few weeks ago, and left to the mercy of ISIS in Syria.

As a reminder, Iran is HUGE on top of a very hostile terrain. It will make the flat, hard soils of Iraq, perfect for the overweight Abrams tanks, look like a promenade in the park.

We are also talking of an old and capable civilization that has domestic production of advanced gas turbines, a domestic independent automotive industry, its own medical equipment manufacturing, the most advanced space program of the Middle East, massive mineral resources, a fully domestic military industrial complex, etc.

All this despite (or maybe thanks to?) decades of sanctions that crippled the country’s economy.

So primitive and divided Afghanistan will also be a walk in the park for any invader compared to Iran.

There is a reason Iran has only ever been conquered by a one-of-a-kind general, namely Alexander the Great, or ultra-mobile, brutal, & hardened forces (Caliphate Arabs, Mongols).

Actually, considering the historical precedent, the defeat of an invading force in Iran is the norm, not the exception. Not the Roman Empire, nor the Byzantine Empire, nor Russia have ever managed.

Only periods of extremely poor leadership (Darius III) or uniquely skilled nomadic armies have broken this rule.

In that respect, Iran is very much like Russia. A force you might defeat abroad with relative ease, with poor soft power and power projection abilities, but almost unbeatable at home.

And this is BEFORE Iran receives any help from Russia, which now manufactures at least 5,000 upgraded Shahed drones (“Geran”) PER MONTH.

What happens if Iran receives 1,000 of these per month? That’s a lot of Dubai luxury hotels, Saudi military bases and Israeli critical infrastructure to hit every month…

Surely, Russia will see to it that Iran “have a right to defend itself from illegal aggression” as an ironic payback to NATO after 5 years of SMO in Ukraine.

Or what happens if China decides to further help with parts, machine tools, chemicals, and electronics in a repeat of the US support of the UK in WW2? I doubt Iran will struggle to source rare earths, tungsten, or advanced parts, which is more than the US military industrial complex can say…

At this point, the USA has 2 options:

1. Admit defeat and find an acceptable deal, likely retreating out of the Middle East, which would be the best outcome for America as a nation and the American people.

2. Double down and plan a land invasion, with no Hormuz Strait opening before AT LEAST 2 years, in the unlikely case of a US victory (likely involving nuclear bombs).

This would be the options for the USA, with one vastly superior albeit unpleasant.

But Isramerica has no choice but to fight, as Israel cannot survive a dominant Iran that subdues the Gulf states and kicks America out.

So the fight will go to its military conclusion, escalating MUCH FURTHER than 99% of analysts realize. If the Saudi and Emirati oil fields are not burning in 6-12 months, I will be genuinely pleasantly surprised.

(note: before I managed to finish writing this, it seems that it already started…)

Investing Takeways

The Macro Context: 1970s Redux On Steroids

The obvious investing takeaway is that we will all be reliving the 1970s, with less hippies or classic rock and more stagflation, stagnant or declining stock markets, and brutal energy shocks.

In this environment, the only things that worked were, in order of profits: gold & silver, oil stocks, commodities, real assets like land, forest, and, to some extent, real estate (although not commercial).

Frankly, just moving into these for the next 10 years is probably the best strategy, and not much would need to be said from there.

HOWEVER, the endpoint of the 1970s 2.0 will be different. At the time, the West and the US were thriving, an engineer-rich society with low debt levels.

France built so many nuclear power plants that it made its today 70% of electricity from nuclear power from this era.

The US embraced new technology, boosted domestic oil output, and overall rebounded. It was also the most powerful military on Earth, very far from a nation struggling to subdue Iran, even if it did fail in Vietnam.

By the way, the USA never controlled more than half of Vietnam, and needed 500,000 troops to do so… Let’s just compare both countries’ maps:

The 1970s stagflation was stopped by MASSIVE interest rate hikes that stabilized the currency and established the petrodollar as an alternative to gold.

The US's main rival was a decaying, increasingly dysfunctional communist regime unable to feed its own people.

Today Western nations are divided by immigration and politics, all above 100% of debt-to-GDP ratio, and with barely any industrial output left, they are not the same.

It is simply impossible to pull a Volker and raise the interest rates to kill inflation to reboot the system. High debt levels cannot authorize it. So the endgame is necessarily some form of currency destruction, which makes gold or productive land (farmland, forest) even more attractive.

Oil, But From Where?

Of course, if we lose 20 mmpd of oil, and 20-30% of LNG production suddenly, oil & gas producers should do well.

However, I am skeptical of any US oil companies. Trump will simply not let domestic prices run wild, and his blatant disrepect to US allies will not encourage him to provide them the energy they need at the expanse of what’s left of his political capital. Instead, pillaging the collapsing industries and human capital of Europe, Japan, and Taiwan will be “good deal” for America.

This leaves us with South America, but probably not Colombia, which might be caught in imagined or real “war on cartels” spreading from Venezuela and Mexico.

Probably the best option is the somewhat dull but still remarkably cheap Petrobras. Expect plenty of windfall taxes and forced low local fuel prices, but any export will be fully priced and EXTREMELY profitable which will compensate.

And this is a company that booked a lot of ultra-deep drilling when it was abundant and cheap, so it will be able to grow production throughout the years-long coming energy crisis.

Transocean, now merging with Valaris, might also see its time to shine, although I have had no time yet to check how many of Valaris jack-up are stuck in the Persian Gulf, a quick AI search telling me “too many”.

Chemicals

Any country short on feedstock (gas, naphta, etc.) will have to curtail production of key chemicals.

The chemical products most affected will be the energy intensive, relatively cheap products straight from hydrocarbons: PVC, pipes, paint, roofing material, solvants, plastic for packaging or isolation, etc.

On the flip side, petrochemical plants WITH feedstock will be able to make crazy margins in what is normally a boring low margin cyclical sector. The sector was close to a bottom, so valuations are rather still cheap, even after the recent pre-war rebound.

So we are looking at big opportunities for companies making chemicals from coal or locally cheap gas.

Companies I have seen discussed on this topic, but did not research yet are Sasol, Braskem, and LyondellBasell.

Fertilizers, Food

Another category is nitrogen fertilizers, as they are essentially transformed natural gas. You can technically do it with other energy sources, but with ALL energy going crazy, shortages are coming.

And already, China is blocking ALL export of fertilizers (and refined fuel products), with Russia reducing exports as well.

Here too it is tricky, as US nitrogen producers should be great (cheap shale gas), but will likely be hammered by Trump. This would exclude obvious play like Nutrien.

Yara International in Norway is maybe an option?

Another is Adecoagro, with a very surprising and to my opinion very shady 70% ownership by stablecoin provider Tether, worth its own dedicated article whenever possible.

In any case, food prices will go up, and only producers that are somehow secure in their nitrogen input will do well. Grass fed cattle can be a great deal here.

Metals

Industrial metals might suffer from contracting demand and high energy costs, but here too it will depend.

African producers will get wrecked by shortage of sulfuric acid, especially to mine copper and gold, before even factoring in food riots and general instability from food prices.

Gold and silver producers will do well if they can maintain production (again, massive sulfur shortage), as the incoming crazy money printing will definitely keep up with energy price, even without counting the already massive 100% profit of AISC costs at current gold prices.

Short?

Helium shortage is an interesting case, as most of global production came from Qatar. This is an essential product for MRI, niche applications, and more importantly semiconductor production.

China has in advance redirected 50% of its helium supply so that it comes from Russia.

However, Taiwan and therefore TSMC seems to be in a VERY bad spot, squeezed by low energy supply, potentially less stable grid (very damaging to semiconductor foundries) and no helium.

So far, TSMC seems the most obvious short to me, as well as any luxury gas guzzling toys like RVs or cruise ships.

I can say that the first two weeks of 2026 certainly vindicated this view.

You can add Venezuela to the list of those “not authorized to sell oil to China”. Whether the US manages to produce anything more, or Venezuela turns into another Libya is an open question for now.

Then there is the Greenland plotline, which is a total deception. Truth is, the USA can already keep all Russian or Chinese influence out of Greenland at will, as well as build all the military equipment it needs.

But what this does is that either Greenland ends up American or not, it gives a good excuse for the breakup of NATO, or the US withdrawing from it.

Once this is done, an active war between Russia and Europe does not directly involve the USA, limiting the risk of nuclear escalation. This matches what I predicted in September.

And military spending is exploding ahead of the real fireworks.

But this article will not further elaborate on this topic, because the die is already cast on this subject as far as I am concerned.

It also means that I have been a little paralyzed in terms of decision-making and how to iterate from here.

I finally decided to reorient a course of action and this publication toward a more macro focus, as this will likely be a decade of macro-driven events, together with some ery narrow stock picking.

I have also suspended all my subscriptions and will switch to a fully free model, hopefully helping increase reach.

This will also assume that my readers are somewhat locked in the West, personally and financially, and will sooner or later lose access to some or most international markets.

If not, I would recommend putting some of your money in overseas accounts in places like Singapore or Hong Kong, or even Panaman or Dubai.

But if you are stuck with me in the West (for personal or professional reasons), let’s work through it.

The Big Picture

So the fact is that we are heading for a big industrial military conflict, one that we will likely lose. This simple fact orients a lot of investment decisions.

The first one is a list of what CANNOT be invested in, which unfortunately covers a lot of what would otherwise make sense for a defensive investment portfolio.

In addition to this list is driven by two phenomena: either these companies’ assets will be a prime military target, or they will be strategically important enough to warrant state control, price control, suspended dividend nationalization, etc.

This is already happening to the US defense industry, more sectors to come: “MILITARY EQUIPMENT IS NOT BEING MADE FAST ENOUGH!”

It should also be noted that the current political trends make nationalization and Mussolini-style policies a lot more likely than Roosvelt-type military industrial policies.

Even if you keep the ownership of these assets, good luck keeping any of the profit if you are not VERY politically connected, see Trump’s post above for confirmation of this trend.

The provisional list, certainly to be extended over time, includes:

• European Infrastructures / Utilities: just look at the Ukrainian power grid.

• US and Western chemical companies, whose products are just too critical to military production to not be either nationalized, bombed, or sabotaged.

• Miners of strategic and precious metals and other resources.

• Weapons manufacturers (that was the play 3 years ago, only adjacents to the topic can benefit, see below).

• Key strategic supply chain: semiconductors, aerospace parts, drone manufacturers, explosive production, etc.

This leaves a select few options, which correlate highly with who made bank during WW2. It will be a mix of niche sectors, surprising winners, and overseas neutral parties happy to sell to the belligerents at a hefty profit.

For this article, I will give an overview and name-drop what seem superficially potential good picks. In the upcoming months, I will go through individual companies and elaborate further.

Another structural trend will be currency debasement. When a country goes to war, fiscal responsibility, independence of the central bank, and other such luxuries go out of the window.

And there might be signs, like trying to indict the Federal Reserve leader for rising rates, which is likely the first time in a decade the Fed did the right move…

Lost wars break currencies of the losing countries and sometimes even the winning one as well, as it happened to the Deutschmark , Franc, and Pound in WW1, to the Deutschmark again in WW2, and it will do it to the Euro, Yen, and USD in WW3.

So hard assets and no leverage are to be preferred: commodities, real estate, land, forest, metal, productive machines with low operating costs / low fixed costs.

Another structural trend is that the best protection and investment will grow progressively more illiquid.

If you were an investor in Imperial Japan or 1944 Germany, your priority as the conflict progress is not immediate cash return or liquidity, but capital preservation while everyone else around you lost their shirt.

THEN, you can buy discounted assets on the penny the moment gunfire stops.

Beneficial Sectors

Food & Farming

The first group that benefited, which I know from the direct testimony of my grandparents in France during 1939-1945, was farmers.

When price controls and black markets thrive, while currency devalues, the urban population gets broke buying potatoes t o add to their rationing.

However, this is not a solid option as a direct investment, as any such profit could never be legally recognized in a balance sheet and reach shareholders of agri companies.

Still, farmland, whose leasing price to farmers will be boosted by the black market profits, might directly benefit.

Farmland REITs are an easy way to get in, but I suspect anyone with institutional money would be better off looking at private investment in a land trust, directly buying large lots, etc.

Expect extreme illiquidity of the asset, but strong cashflows.

Overseas farming corporations, like CRESUD (ADR ticker is CRESY), or BrasilAgro (AGRO3.SA) could also benefit (the stocks yield a >5% and 3.7% f dividend yield respectively, for that matter).

This is because we can expect massive stockpiling ahead of time from countries like China and India, but also because if Ukraine and Russian grain & oil harvests or exports are disrupted (de facto cutting production), places like Egypt and Jordan will be desperate for alternative supply.

Large farming oversea corporation will likely also be a key supplier to soldiers themselves.

Oil

Since WW1, wars run on energy, be it coal or oil. One day, it might be lithium and hydrogen, but electrification has yet to seriously hit military equipment.

So stable, safe, not-exploding-in-a-conflict-zone source of oils will be extra valuable.

This might however be the swan song of the oil sector, as serious dent in demand will come from electrification, as solid-state batteries and sodium are now clearly a mature enough technology to several impact demand from transportation, not just from cars, but trucks as well.

So this is a trade, but not a sector to stay for the long run. Weak prices in the run up to the conflict and low economic activity in the real good sector also make it something to time precisely.

For several years, I advocated for South American oil for this very reason. However, the erratic last few days in Venezuela can make for some adjustments. How destabilizing or gushing oil the country will be could determine a lot of the future of the oil market and the attractiveness of the neighboring producers.

Here too, a detailed analysis of individual companies will be needed to correctly assess the situation.

Temporarily, I would focus on Petrobras, as Brazil is a country largely stable, further from Venezuela than Colombia, but less of a basket case than Argentina. However, I think there might be better plays on the continent as well … to be investigated.

Uranium

Uranium is the commodity that boomed and that I completely missed out on (seemingly) misplaced skepticism. Of course, as ALL commodities are booming, and I did well on others, I can hardly feel sorry about it.

Still, as a disclaimer, keep in mind that this is maybe not the sector where my track record is something I can brag about.

I always felt that the narrative of an uranium shortage, thanks to build up of new power plants and SMRs, was overblown, as they will take another 5-10 years before even starting to consume uranium.

However, if Russian supply, together with Kazakh supply, disappear overnight, markets are undersupplied to feed the CURRENT fleet of nuclear reactors. Combined with the desperate need for more power for data centers and restarted heavy industry, and you get a bid for yellow cake at almost any price from nuclear utilities as long as they keep the lights on.

The obvious company here is Cameco, not any junior, as the uranium need is NOW, not in 5 years when maybe a mine opens. However, a stock chart that looks like that and a P/E of 127 makes me think this has already mostly run its course.

Trading it is maybe possible, as a start of the war with Russia and interruption of supply could send it further in the stratosphere, out of pure reflectivity.

But it is likely to fall quickly after, as “buy the rumor, sell the news” might apply here, with news of an uranium embargo being the crash and not the last boost to the stock.

But of course, if the US start to guarantee a minimum price…

US Utilities & Chemicals

As I said, European chemical and utilities companies are off limits, with maybe some exceptions to be discussed another time (e.g., nuclear utilities in central & West Europe).

US utilities might be in a different position, as it would be extraordinarily difficult for Russia or China to inflict significant damage to the US power grid or water stations, while flying a few thousand Geran drones per month in Europe will be trivial.

As the USA will mostly be officially fighting only Iran, this will also be less likely to happen.

However, some level of sabotage & such shenanigans are to be expected. So overall, I would focus on the companies with the larger asset bases, and the less likely to go boom.

Less dependence on natural gas as a cheap feedstock, which will be required by other industries to forge steel and produce explosives, will be best.

If the power price goes up a lot, a bunch of dams and solar farms will do fine. But if sabotage becomes a thing, a company producing ammonia or TNT may not be so safe.

So the best would be utilities with a strong presence in nuclear, hydro, and solar, and chemical companies with low dependency on natural gas.

(Monitoring the risks of incoming price control will the highest priority for that investment idea)

Military Services Providers

As I said, directly investing in weapons manufacturers is a trade that is 4-years too late, just a glance at some chart is a good indication, together with Trump's ban on dividends and share repurchases.

Anybody who has followed my recommendation in buying Leonardo, GD, and HII the past 1-2 years in that field must have done well (although I missed Rheinmetall), but it is time to not overstay our welcome.

However, another category could be the military service providers. I am not talking of the provider of parts and directly linked to the supply chain of the main defense contractors, as these will be squeezed out of profit as well.

But companies that can provide satellite telecommunications, cyberdefense, transport, logistics, etc, WHILE not being defense-centric, therefore not worth coercing in giving up on profit, could be a major beneficiary.

Think of it as in WW2, avoiding military shipyards, but profiting from juicy military contracts to sell canned soup for the troops, fabric & ropes for parachutes, or building radio transistors.

Potentially, this sector is the deepest, most diverse pool of war-proof investments.

Precious Metals

Lastly, especially with the craziness regarding silver price the past few weeks, I could hardly not mention the timeless protection against manmade chaos: gold & silver.

In a time of weaponization of the USD, unlimited military budget, and resource shortage, going out of fiat makes a lot of sense.

Silver

Regarding silver, it is a speculative but potentially highly lucrative trade to be done here.

The key is that silver is structurally in shortage, and being consumed by industries like electronics and solar panels, leading to much less silver to go around than gold.

This is a commodity that has a recorded tendency for speculative moves and vertical rise and fall.

It should also be noted that only physical silver should be considered, as the whole point is the potential explosion of the paper silver market, now that China is actively repricing the physical silver according to PHYSICAL supply, and not financial speculation.

Same physical that the US Mint repriced over the weekend from <$100 to $169.

The key ratios to follow for me, and deciding when to sell your silver, are:

• The silver-to-gold ratio, which will signal it is time to move from silver to gold

  • Anything below 25 is a warning sign, and 1:15 is likely when you should sell urgently. The ratio could briefly brush the 1:5 or even 1:3 (it happened briefly historically), but we would be in extremely overpriced territory then.

• The Silver to Dow ratio, which always craters in periods of silver overvaluation or crashes when stocks are reaching a bottom: 1929 Great Depression onset, 1980 Hunt Brothers price manipulation, or 2011-end of commodity boom.

  • It has certainly started to fall, but we are far from 2011 levels, despite much more dramatic silver shortages. I think going from the current 670 to 200-150 levels would make sense if the current speculative pattern holds.

    • Falling to the 50-25 level of the Hunt Brothers era is possible, but it will require serious commitment from Chinese buyers.

(On a side note, did you know that the final blow to China’s economy in the 1930s was delivered by the US Silver Purchase Act of 1934, throwing China into the Great Depression.

I will elaborate later, but it would be very much in the CCP style to pick silver for this exact reason in order to wreck US financial institutions and the USD a century later.

Gold

Gold in your hands is basically cash out of reach of central banks.

In this sense, it is not so much an investment as it is “dry powder” waiting for a better opportunity.

After a period of analysis paralysis, I am starting to see patterns emerge that make some sectors still investable.

However, it is entirely possible that gold, anyway, ends up performing as well or better, without the headache. There have been entire decades where this was true, like the 1970s, or for localized regions, the losing countries in WW2.

The key will be to convert gold into productive assets in due time, probably right after guns stop shooting, or even a year or two after, with the subsequent crash in economic activity when the war economy stops and a recession ensues, crashing profits and valuation multiples further.

Conclusion

We are going to face a very narrow and progressively shrinking investment landscape in the next few years, as we are sliding at an accelerating pace into a global war, and lileky not winning it.

This is not to say that NOTHING is investible, just that an extreme level of caution is required, as well as a clear head.

Flexibility and the ability to navigate the changing circumstances and change our minds or admit mistakes will be required.

Lastly, a hold onto our own greed is also required. This is the type of era where some fortunes are made, but many more are lost.

A Great Reset of sorts, if you wish.

In that game, staying head above water is winning, as most will be drowning…

On one hand, it clearly did not bring enough money to be worth the effort.

Thanks to the generous help of one of my readers, this is no longer fully true. I also feel I owe to my readers to keep going anyway.

On the other hand, the growing likelihood of a global conflict acts as a sort of event horizon for any prediction. And a paralytic for the analyst. This has only gotten so much worse in the past few months.

So my thought process was rather muddled and I had not much of value to say until I clear my mind.

So this article will do a quick recap of the world’s situation, the likely outcome of a now likely massive war between Europe and Russia, and between the USA and Iran; and then what can be done for managing our portfolio accordingly (in a subsequent part-2 follow-up).

Ukraine-Russia-Europe-USA-Israel-Iran

In the past 6 months, we have seen the Trump administration playing a seemingly schizophrenic diplomacy, claiming to have stopped 6 wars, while actually bombing Iran, massing troops around Venezuela, and escalating the conflict in Ukraine.

This is, of course, disingenuous and obviously not a proper description of what is happening.

What IS happening is that the short bombing between Israel and Iran, and the repeated failure to crush Yemen with air bombing, has spooked the Pentagon analysts.

(In this section, I will consider the USA and Israel as the same entity, as it became really hard to determine where one starts and the other stops from a security point of view).

Contrary to the ridiculous claim by the military industrial complex, missile shields are not very efficient. They are also ridiculously expensive, allowing even a much smaller economy like Iran to inflict disproportionate costs on its enemy.

They still believe they could handle it, but only with a very strong concentration of force, meaning that Ukraine needs to be left out to hang and dry from US support.

Except that the entire credibility of NATO would collapse with Ukraine.

So a decision has been taken to perform this little theatrical dance we have seen in Alaska, where the US/Trump pretend to want peace, will later claim the Europeans and Ukrainians are too unreasonable, and let them fight Russia essentially alone, except with maybe some supply of limited US and Korean weapons.

Now that European Western leaders are pushing for NATO troops BEFORE a ceasefire or peace treaty, the escalation to a full-blown conflict is almost guaranteed.

Meanwhile, the US’ missile production can be focused on helping Israel survive, and ideally gives it the strategic depth in need for long-term stability by conquering the “Great Israel”, incorporating part of Jordan, part of Syria, part of Egypt, all of Lebanon, and expelling/killing all Palestinians.

Paradoxically, the mounting antisemitism resulting from mass killings in Gaza, and likely soon, the West Bank, will help boost the number of Jewish immigrants to Israel to colonize all these new territories.

Europe Vs Russia

As Ukraine is getting very close to being a spent force, with likely north of 1 million casualties (killed and maimed) and a mounting problem of mass desertions (with report of 60% of forced mobilized never reaching the frontlines), new troops need to be thrown into the meat grinder.

UK-France-Germany, the small satellites like Sweden-Denmark-Netherlands-Austria-Czechia, and the reluctants getting dragged into it like Spain-Portugal-Italy-Greece, will provide the bulk of the equipment. They have limited manufacturing capabilities, but all combined will provide a relatively impressive air force and navy and a half decent land army.

This will be enough to blockade Russia’s oil exports physically, the only economic sanction that can really hurt, and relatively easy to do as most of it passes by a few chokepoints in the Baltic and Black Seas.

(The Arctic searoad is still very much a gas road, and not able to be used for most of the country’s oil exports, so are the East-bound gas pipelines)

NATO troops in Ukraine to ensure the fight is done to the last Ukrainian, and the economic strangling of oil exports seems to have already been decided.

The way that attacking the nuclear site of Iran was a sure way to end up in war soon after; this move will ensure the Europe-Russia war.

However, this war will be short on men willing to fight, with Poland, the Baltics, and Finland making a poor substitute to Ukraine’s resilience and fanaticism.

Caucasus-Turkey

This is where the other and forgotten important Eurasian member of NATO will be useful.

Turkey is an 85 million people country. When combined with Poland’s 40 million, this makes it a good option to have abundant manpower to throw at a tiring Russian army, a 145 million people country.

Why would Turkey do it?

Because it is already being baited into this position and is too ambitious for its own good.

Azerbaijan is today mostly a Turkish vassal state, that has been quickly becoming a problem for both Russia and Iran, its much larger neighbors. It has also repeatedly invaded its neighbor, Armenia, and recently performed an interesting diplomatic theatre of its own:

Trump clinches Armenia-Azerbaijan deal — along with some personal branding and more Nobel Peace Price talk

Armenia gave up its land, allowing Azerbaijan to connect to Turkey, cut Armenia from Iran, and then LEASE said corridor to the USA, right on the Iranian border.

Be assured that US and Turkish “peacekeeping troops” will be in position soon.

Importantly, most of the deep strikes by Israel in Iran were performed by using Azerbaijani airspace, and the death of the Iranian president in 2024 happened when coming back from Azerbaijan.

By giving Turkey the access to the Caspian Sea it craves, and relative independence in oil supply, with the dream of influence over all the Turkic-heritage nations north of Iran to replicate the way north of Syria got given to it last year, this is the price to get Turkey in line with the West’s plans.

Of course the end game would be a collapse of Iran, and a management of Al-Queada / ISIS by Turkey like in Syria, with all over central Asia this time, created problems over thousands of kilometers of border for both Russia and China.

Ideally, these would also support Uyghur insurgents in West China, creating further “low-cost” destabilization.

It would cut the Silk Road passage where a lot of Central Asian and Russian gas and oil, as well as food supply, enter China.

It is also where the railroad connecting China to Iran passes, that finally opened just a few weeks before Israel attacked Iran.

Let’s not forget that all the human right NGOs regarding Uyghurs are headquartered in Washington DC…

If, after all that, Erdogan tries again to play all sides and double-crosses the US, a coup or softer “replacement” will likely be pushed at an accelerated pace.

So getting Turkey in line with a war with Russia & Iran is also a way to clear the way to many strategic objective:

• Greater Israel expansion

• Neo-Ottomans ambitions in the Caucasus and Central Asia.

• US target of overextending Russia on its softer South underbelly, from the Caucasus to the absurdly large and hard to control Russian-Kazakh border (7,598.6-kilometre / 4,721.6 miles).

Turkey is a major conventional military power, the exact type of capacity missing in Western Europe.

The UK can barely marshal FORTY tanks in functioning order, and 30 artillery pieces. This would barely cover 20km of the Ukrainian frontline.

Turkey, by comparison, has a stockpile of almost 3,000 tanks and 3,500 artillery pieces. Older models yes, but still a lot of metal to send against Iran and Russia.

Turkey's numbers can be added to Poland’s 1,100 tanks and 750 artillery pieces.

Altogether, the air and space assets of the West, and the infantry, tanks, and artillery of Poland+Turkey represent a rather serious threat to Russia, almost as serious as the Soviet stockpile in Ukraine was.

Except this will come at the end of a gruesome 3-year war, and in the context of economic sanctions that will actually hurt this time (oil blockade).

It should be noted that in that scenario, it is only the minor nuclear powers of France and the UK that are directly involved. This essentially allows the US and Russia to go to war with each other, but lowers the risk of the war seeing ICBMs and megaton-bombs involved.

Most likely, the Baltic States will not be defended at all (too poor logistics), except around Kaliningrad. Most of the fighting will be in Ukraine, Romania, the Suwalki Gap, and the Black Sea/Turkey/The Caucasus.

The $1M question is if Russia will use nuclear tactical weapons on Turkey and/or European bases of non nuclear state (Rammstein? Poland’s Redzikowo?) and military factories.

Israel-Iran Round 2

Meanwhile, Israel is in a death spiral due to a strategic trap of its own making. It cannot stop the ongoing bombing of the civilian infrastructures leading to the ethnic cleansing in Gaza (through mass death from starvation or deportation), and will need to move on to do the same to the West Bank as soon as it’s done.

It also needs to annex Lebanon and South Syria QUICKLY before the area can rebuild a capacity to resist the IDF post-Bashar Al Assad.

So Israel equally needs to destabilize Iran enough to do all this unimpeded. The assassination of the Yemeni prime minister and most of its cabinet is another step in that direction.

All these very far reaching objectives need to be done quickly enough before the American military and economic decline preclude it from making it possible (although the date by when to make it work was likely 15 years ago).

China’s Role

While the question of Taiwan annexation/reunification are looming over the region, it is likely that this can be achieved peacefully simply by defeating the Western Alliance elsewhere.

Especially as Taiwanese people have in the past year realized that they are not too keen on becoming a new Ukraine and are reclaiming their Chinese identity.

Although this might be a more likely scenario for the Phillipines, a much more docile and easy to control colony it seems.

Overall, short of a catastrophic miscalculation or further provocation in East Asia, China’s role in the coming conflict will likely be similar to that of the USA in WW2:

• Use the ongoing wars to build up for many years its industrial base and convert it to wartime production quietly and peacefully.

• Provide equipment and funds to one side of the belligerent, while extorting ludicrous future commercial advantages and debt repayments from them, making it “good business”.

• Eventually step in at the last stage of the war to harvest resources and vassals at a low cost.

  • Most likely, China would focus on getting large access to the Arab states oil, leaving Iraq, Lebanon & Syria to Iran, and the only somewhat hostile move on Russia would be a greater control over Central Asian countries.

Of course, this is doable because China today mirrors the USA’s industrial might in 1939. It produces:

• More than half of the world’s steel, aluminum, chemicals, etc.

• Dominates the supply chain of (green) energy, which can be crucial for stabilizing grids and provide more energy.

  • This is also true for energy infrastructure, like special steel for transformers, turbines components, etc.

• Controls 90-95% of the supply of batteries, drones, rare earth and other military critical elements for this era of military tech.

• Has a massive, stable and secure supply of cheap domestic energy, through coal, nuclear solar; + Russian gas imports.

  • In 1939, the USA produced 57% of the WORLD’s oil production, and the USSR 11%.

  • Massive amount of electrified vehicles also limit the impact of an embargo of oil imports passing the Malacca Strait.

Who Wins

The irony is that after a few months trying to understand how it unfolded, the answer to the end of this conflict is that the details do not matter.

The economics of this conflict that will likely be remembered as WW3 are so unbalanced that it is almost comical, in a dark way.

The Side With Influence

On one side, the West, is today specialized in targeted covert operations (spying, pager attacks, influence, coups, surgical strikes) with boutique armament costing 20x the market price than in other countries, for barely better capacities (or even worse when looking at the F35).

The West can deplete the stockpile of weapons left by the Soviets out of Russia (done) and the equipment accumulated by Poland and Turkey over decades, but it cannot make more new weapons in any significant number.

In large part, this is because the industrial base has either been moved abroad or let to rot in the past 40 years.

Only South Korea, and to a lesser extent Japan have such industrial capacities left with low-cost production, but they are just not big enough.

These covert methods can secure remarkable wins, like the collapse of Syria, the pager attack on Hezbollah, or the infiltration of Iranian air defense.

But these operations take years to build, are one-shot-use, and will wither away in a context of tighter internal security and purge of liberal elements.

They are high-efficiency one time gambles, that when they fail, cannot be replaced, and show diminishing returns the more you use them.

The Side With More Stuff

The other side (Russia + Iran, with China as an arsenal/factory/R&D center) has the world’s largest reserves of oil, gas, metals, as well as massive food surplus.

Any technological gap (advanced chips and drone components for example) can and will be supplied by China.

Who has the most energy, metal, people, and heavy industries wins industrial wars, irrespective of strategy, tactics, and starting position.

We are already seeing that, with Russia’s 143 million people producing more artillery shells in 3 months than the whole of the almost 1 billion people of NATO + Japan & Korea. And for 1/10th of the price per unit!

Ukrainians are now saying that for every 1 drone they send, Russia has 10.

Similarly, Iran produces way more cheap missiles (not even counting even cheaper drones) than the entire USA can produce interceptor missiles costing $1M a piece.

Contrary to the skulduggery of spy stuff, influence, and outright coups, industrial military capacity displays increasing returns over time during wars.

Industrial powers ramp up their production over time, even when they are losing, with for example Nazi Germany peaking in tank production in 1944, while the Wermach was deep into a losing retreat.

But, But…

I know that the idea of a generalized conflict involving 2 main fronts, one with Europe vs Russia, and one with USA vs Iran is rather cataclysmic, and our initial instinct is to reject the idea.

This would mean such a large zone of conflict, to a scale almost no one alive have ever seen.

The first objection is often that nuclear powers cannot fight each other directly. First, this is not really true.

What is true is that nuclear powers SHOULD not do it. If one side is arrogant, desperate, or unhinged enough to do it, who knows…

The refutation is also that this risk is likely not happening in this scenario:

Not The Same Caliber

With the shape the conflict is taking, the nuclear superpower of Russia will only fight the barely qualifying nuclear powers of France and the UK.

Not that their 300+ bombs they have combined would not be devasting potentially. But they might be extremely reluctant to risk using them against a country with the potential for total anhillation in response.

Especially as the rate of actual hits versus interception is unclear. And that many of the UK & France bombs are relatively speaking rather small, at the edge of tactical nuclear capacity, with only a handful or “true” strategic megaton scale bombs.

Meanwhile, Russia could employ tactical nuclear weapons against non-nuclear Poland or Turkey, or even Germany, while still counting on its (bigger bombs) strategic arsenal to limit retaliations.

Similar Imbalance On the Second Front

The same situation is shaping to be true in the Middle East. While Iran could theoretically devastate Israel and US bases, even with just conventional weapons, so would Israel do to Iran with undeclared arsenal of 200-300 small nukes.

In that scenario, the USA could officially not even be involved, and limiting itself to “condemning the nuclear holocaust of the Jewish state by the Axis of Evil” and conducting only limited strikes in response.

The war that is shaping in the Middle East might be partially nuclear, but we are far from the Hollywood scenario of a free for all nuclear fire between Russia and the USA.

Think of it again as the “proxi war to end all proxi wars”.

Nukes blasting barely 5km radius, with limited to no nuclear fallout (high-yield bombs) would not be much different from large scale firebombing of cities, like it was done on Dresden or Tokyo in WW2.

But Why?!

Another objection, is why would Western leaders really be ready to risk so much for the sake of Ukraine or Israel.

The answer is that it is not about these locations, although in the case of Israel, it seems that it has a very strong hold over Western decisions makers, which might or might not be reflected in the sudden non-existence of the Epstein files…

The answer is that a war abroad is a perfect option to crush dissent at home and kick the can down the road.

The UK is seeing anti-immigration and race-driven riots every other month lately.

The USA political situation is unstable to say the least.

France has had THREE prime ministers in less than one year.

Germany is regularly considering banning one of the largest and most quickly growing party in the country.

Romania literally canceled elections and made sure the “elected” new president will built NATO’s largest air base in the country.

Meanbwhile, the economic situation is rather… interesting

It is VERY common over history for failing regimes to engage into one last gamble on their way out. Especially when the troubles are not just economic but a legitimacy crisis, with an ossified elite unwilling to accept any reform.

Wars allow for martial laws and arresting any dissenter as a “traitor to the nation” or “Russian agent”.

Wars allow for economic “boom” driven by seizing of the population’s savings, and growing industrial spending.

Wars give the elites a great opportunity to pillage the state coffer one last time, with juicy contracts to distribute to all politicians and large corporations.

Wars also give a lot more power over your vassals, hence why the US overlord is fine with it.

Wars make previously unthinkable policies easy to pass, like cutting welfare, forced mobilization, nationalization industries, capital control, increased taxes, financial repression, etc…

Wars distract from domestic issues and give a common foreign enemy, a monster at the door:

You might say that Europe does not have the demographic for a massive industrial war. But that’s fine in the perspective of the EU rulers, there is a virtually infinite supply of immigrants to bring in after.

And there is also the fact that the USA will not relinquish its #1 spot to China without a fight. Removing the weaker parts of the Eurasian Tripod (Iran and Russia) from the equation is a must if you want China to bend the knee.

Is It Certain?

Of course, the answer, is no, not really. Such predictions are hard to make, and impossible to be certain of.

But the probability has slowly crept up from a low 5-10% three years ago to a higher than 50% in the past few months.

Now that the stage is set for Europeans and Ukraine to be “unreasonable” and “secretly plot against the marvelous peace plans from Trump”, the USA can disengage while pretending to have done all it could, and focus on the Middle East.

It was always going to be when Ukraine is on the verge of defeat that the risks were going to grow the highest.

The West still believes that Russia is “a fuel station with nuclear weapons”, and that the only reason for the Ukrainian defeat is the absence of the awesome, Top Gun-esque air forces of NATO.

So the risk of a massive miscalaution are just mounting, simply because either they go the economic total war road, which will trigger a Russian attack beyond Ukraine, or put NATO troops in Ukraine, which will trigger a Russian attack beyond Ukraine.

And at the end of the day, are we really supposed to believe the EU leaders are competent and able of self-reflection, or will they instead always double down on bad decisions…

They even know when it will happen, how convenient… We better listen…

It is rather rare in this publication that I claiming “this time is different”, it is actually a first, I think.

So let’s first study the facts and then study the consequences.

No One Is Backing Down

The first part to understand is that, contrary to Trump’s early claims, almost no one is giving him what he wants in the trade negotiations. And this is mostly due to stunning incompetence from his own administration.

The first sign of trouble were when the Japanese delegation admitted its dewilderment that, as far as they could tell, the US administration could not tell them what they wanted from them.

Which led to not-so-constructive results…

Meanwhile, the entire ASEAN (700 million people), by far the most economically dynamic region in the world, rolled a red carpet for Xi visit, including countries previously leaning the way of the US like Vietnam.

Even the EU seems to be growing a spine, although this is likely more out of a dislike for Trump than a true anti-American stance or intent of true independence.

Meanwhile, Trump has to dig in too, as he whipped in a frenzy his political base that is apparently now convinced, together with Trump, that the entire world has conspired to give their resources and labor to the US for dollars freshly printed at zero costs, and that it is somehow their fault, nefarious, and not what the USA requested from its vassals for decades.

However, the Art of the Deal is quickly turning into the Art of Dizzying Confusion. What is the position of the US at this point?

It can get even a little comical at times, even if in a tragecomedic way:

How you tariff a movie or what is considered a foreign movie is another interesting question I never considered I would ever ask.

In the background, the war with Iran in preparation also sort of implies that anyone trading with China will be sanctioned into oblivion by the USA. (China buys 90% of Iran’s oil)

US-China Trade

While Trump decided, likely unwisely, to take on the rest of the world at the same time, the core issue is the US-China rivalry.

If the problem is the trade deficit, what is China supposed to buy from the USA? After all, the very same administration considering trade deficit as a quasi casus belli is also very busy sanctioning high-value imports to China.

Or is the point of the trade war to get fairer and lower tariffs? Apparently not either.

More fundamental is the idea that China's rise is only a favor the USA granted, and it is now taking it away.

Even if that was true (it is not), this is likely waaay too late for that type of strategy.

In any case, physical trade data indicate that Trump is getting what he wants, with an above-COVID level of collapse in trade.

The change is now going toward the -60% as far as I understand this quickly changing situation.

However, companies make it clear to their customers why their orders are costing 3x the previous prices is going to be a target of the White House:

Amazon quickly backed down from making the tariffs visible and understandable for the public…

No Chinese Imports Consequences

When everything is made in China, what happens when nothing comes from China?

Logically, empty shelves will result if nothing is done. After a few weeks of hesitation, Walmart apparently caved in and gave up on trying to get its supplier to pay for the tariffs.

Somehow, this is something the United States Secretary of the Treasury ASSUMED would not be a problem, because US businesses are famously running with high inventory, and not prone to failure, just-in-time, Wall Street-driven management methods…

Speaking of governmental competence and preparation… Never believe it until they deny it is still a solid analysis framework about government.

For many small and mid-size businesses, this is almost a death sentence.

As it takes ~30 days for containers to go from China to LA. 45 to Houston by sea, 45 to Chicago by train. 55 to New York by sea, we are not seeing the effect YET, but very soon.

Overall, it is unlikely that the optics of Soviet-style empty shelves can be accepted, nor will US retailers take the chance.

They will have to pass on the new prices and scramble for alternative suppliers (themselves more expensive and submitted to their own 10-50% tariffs).

Not Just Trinkets

I think an absolutely fundamental error is that many, especially in the more sheltered halls of power, think that China is only producing.

But for example, the 8th largest category of exports by China is electrical transformers, a grid essential element with an order book saturated globally until 2030. And that’s before crashes like the Iberian Peninsula grid collapse of last week push further investments into the European and US grid.

In ~3-6 months we are going to start having shortages of transformers, pumps, air conditioners, and other complex goods which are made (or their critical components) in China. These products, which cannot be efficiently sourced elsewhere in this timeframe, are necessary for electricity, clean water, and a pleasant life.

Why do I say that the rich and powerful don’t get it? Well, here is how Trump sees the supply risk straight from the horse’s mouth:

Of course, this will not be the great thinker pushing for trade wars that will go to work in the factory and have 10x less goods for their children…

Killing Manufacturing?

A much more serious risk is to destroy US manufacturing instead of saving it. This is because after 5 decades of globalization, virtually all Western factories have a lot of inputs coming from oversea for their “made in USA” products.

More critically, almost every machine tool requires parts from China, especially the one crucial for maintenance and wearing off.

And let’s not talk about rare earths vital for magnets, batteries, electronics, radars, laser, screens, and any advanced tech, that are now embargoed from being re-exported to the USA.

I insist, it is not just sales to the US that is forbidden, but re-export of the rare earth OR THE PRODUCT MADE WITH THEM, under risk of losing the Chinese supply. This means that Korean or Japanese components will also be hard to get for the Pentagon, and impossible for SMEs.

This puts the US in Russia’s situation of having to smuggle chips and other key components, but likely in insufficient quantity to avoid a major supply chain shock.

Losing Competitivity

Meanwhile, every factory in the US trying to export their goods will face a problem: Every factory on Earth, except those located in the United States, can get the inputs they need from China, without paying an additional 145 percent markup. As China is often by far the most efficient supplier, in price but also quality and flexibility, this is a definitive competitive advantage against everyone else.

In addition, who can assume that buying equipment from the US will not be a bad idea if future tariffs and retaliations made impossible to gets parts?

A sign of things to come is that EU airlines are looking to buy Chinese planes instead of Boeing. At this rhythm, COMAC production lines will be unable to ramp up quickly enough…

Overall, the picture is bleak:

• 46% of Toy Companies in the US say they expect to go out of business within "weeks"

• Shoes are expected to go up 87% in price

• Apparel is expected to go up 65%

• US Exports expected to drop 18%

• Tourism to the US is down 20%

The weirdest gap right now is between the markets and anyone who works in the logistics industry

Hard for the markets to reconcile Visa saying “we have seen no change in consumer behavior” and logistics companies not having any idea what the world looks like in a month.

Please note this is NOT a comment about the necessity of tariffs or declining dependency on China.

It is, however, a stern criticism of the borish and amateurish implementation of these ideas. Too high tariffs, too fast, too unprepared, and too aggressive toward allies and friends are causing a lot of unnecessary self-inflicted damage.

Besides, this is ignoring a very basic principle of economics 101: no one is starting US factories to replace China’s capacity amidst this uncertainty of tariffs changing every other day and consumer spending potentially collapsing next month.

As a result, we already see a sharp decline in US corporate capital expenditure plans

The Bifurcation

Altogether, these datapoints indicate to me that it is increasingly likely, as each day passes, that the macroenvironment will radically differ between the USA and the Rest of the World, with one looking at an inflationary crash, and the other dealing with deflation.

It took me a while to think it out, hence the relatively long time before writing this piece.

Somehow, I see everyone getting it wrong on who will suffer what…

Read more

Moving forward, while there will still be stock reports, a focus on accurate macro prediction will take over, as this will be the determining factor in any profit in markets, or even mere survival.

Instead of discussing the petty details of the tariffs, I wanted to try to take the long view and do a few things:

• Understand the underlying logic of the tariffs to correctly predict their future direction.

• To assess the shape international trade is taking.

• To judge if this is an ominous sign of more breakdown of the international order.

Why Tariffing Everyone?

After April 2025, it will appear that the US international trade strategy can be resumed in a simple meme:

The longer answer is that every country got hit by a minimum 10% tariff, and others with varying tariff burdens, which were claimed by the US administration to be in response to unfair tariffs and trade imposed on US goods.

In practice, it became clear very quickly that local tariffs had little to do with it, and that a very simplistic mathematical formula was applied not to reciprocal tariffs, but to trade balance as a whole.

This is why close and obedient allies like Japan and Taiwan got hit with tariffs in the 30% range, and why Vietnam, a country that has actively courted the US and rejected China was hit by almost 50% tariffs.

Behind this logic is the often-repeated motto that “other countries have taken advantage of the US, and it is stopping now”.

The (own?) Goal?

The first thing is to understand what the goal is here.

If the goal is to get a perfect trade balance or trade surplus with every individual country on Earth, this is going to be quite difficult or even impossible.

In addition, punishing fiercely close allies like Taiwan, Vietnam, and Japan might be antithetical to other more important US goals than trade balance, like containing China, keeping control over the global semiconductor industry, managing to rebuild the US Navy (virtually every ship on Earth is built in China, Korea and Japan), not lagging in drone tech and automation, etc.

The end result would more likely be a USSR-style autarchic economy, as potential partners run away and escalatory tariffs break down the US empire at full speed.

A second possibility is that, in true Trump fashion, the goal is to strong-arm other countries into coming to beg for relief. This seems to be the more likely goal, with more factories relocated to the US, IP transfer, purchase of US weapons, etc. the likely goal.

This interpretation seems to be corroborated by rumors of what the US is asking for lifting the tariffs, essentially “buy our stuff or else”.

For countries like Vietnam, deeply integrated with Chinese supply chain, this might however not be enough. They tried to give complete surrender, eliminate ALL tariffs to the US, and got rebuffed.

If that is the case, they will have no choice but to turn to China for help. Doubtful this is a good strategy for any long-term goal to push all SE-Asia into China’s arms.

The EU too seems to be dealing with more and more demands, even if they initially were ready to cave in. What's the point in negotiating then?

Fighting Back?

Another problem is that some countries are just not going to submit so easily.

China here is the leader in pushing back against a unilateral push by the US against all. It immediately replied with its own set of retaliatory tariffs at 34%.

China also sold another $50 billion in Treasuries, potentially the reason why even in a market crash, treasury yield (and therefore US debt costs) went UP, although other institutions’ de-risking was likely also to blame.

It also added a few companies and individuals to a sanction list, and put a limit on the export of all the last non-restricted rare earths.

Predictably, Trump is going nuclear in response, pushing the tariffs on China above 100%!

As I am sure all my readers are aware, financial markets did not really enjoy watching the 2 largest countries in the world completely breaking down the international supply chain…

Predicting Trump

I am rather surprised not by the tariffs, but by the way they were announced and handled.

First, it was simply amateurish and not really well put to just crudely apply a mathematical formula instead of a more case-by-case approach. Reforming the international trade system would require a bit more subtlety than the “break things first” approach of DOGE.

It is clear that the method chosen is basically a global shock therapy applied to any trade with the USA. Basically, going so quickly, so hard, that the “patient” has no time to adapt and must radically change direction.

This might work for politically controlled vassals, but most likely the larger or less US-dependent countries will just prefer to walk away from trade with the USA entirely.

Contrary to such a situation, if it had occurred in the 1970-2000s, there are credible alternatives like China for goods and technologies, even cars and chips, and Russia for food, energy, weapons, and materials.

Still, the US establishment in general and Trump in particular, seems to be religiously bound to American exceptionalism. So they will take any defiance as a quasi-war declaration.

So I expect Trump to just double down, and triple down, all the way to going to the deep end of this policy. Also, the more it will be dug in, the less he will be able to change course without “having been defeated”, an unacceptable proposition for domestic political reasons.

So for my free subscribers, you can have at least this prediction. This is not a drill, not a temporary aberration, and this will likely be the determining decision shaping the next 4 years. At least if a war with Iran and the subsequent WW3 is avoided, which is another topic…

Others see it this way too:

Predicting Economic Impacts

If I have so far been critical of the tariffs, it is not to say that they are necessarily a bad policy. Some tariffs can help reindustrialize the USA, and are likely to be necessary. The baseline 10% on all imports is likely even a good idea in my opinion.

The 25% targeted tariffs on steel, aluminum, and automotive are likely also not too bad, even if a progressive rise of the tariffs from a lower level would have been better.

But the serious issues are the intensity of the tariffs, the total absence of consideration for damage they cause to important diplomatic relations, and the lack of coordination or even warning to the very same industries that are supposed to be helped by this policy.

Because there is going to be a lot of damage, both short-term and long-term, something that the MAGA supporters seem to be oblivious to.

Effects on Manufacturing

Killing The Factories To Save Them?

The very first issue is the disruption of the existing supply chain. Let’s say you are a producer of cars, jet engines, or toasters. You likely have to compete locally with other producers, and globally with imports.

If you managed to survive the past 4 decades, you have somehow handled the Japanese industry and the cheap goods from China. But you likely import machines, raw materials or parts from some of the tariffed countries.

If you are unlucky enough, it is not from the 20% EU or 25% Mexico/Canada, but from 50% Vietnam or 100% China (I am rounding the numbers).

The immediate consequence is that you are likely now bound to many contracts requiring you to sell below your production cost. Selling dollars for 90c is not a good business. Good luck renegociating with Boeing or Walmart…

The second-order effect is that because your input costs have risen, you are likely even less competitive in export markets. So you stop all exports, maybe fire a few thousand workers, close a factory, and lose economies of scale.

A third order effect is that at the end of the year, when writing your business plan, you cancel all expansion plans. Calculating the future profitability of long-term investment is nearly impossible if you cannot know if you will even have inputs in the first place, and at what price you find them.

Overall, this will ONLY benefit completely vertically integrated producers, and even then, only the ones with no now risky exposure to export markets.

For example, an LNG exporter that sold previously to the EU or China might in May face business-killing tariffs. Or maybe not. Who knows? Certainly not the White House.

Meanwhile, most MAGA public figures and supporters are ready to call any company doing any imports a traitor. Which virtually means EVERY manufacturer still left in the country.

Overall, yes, tariffs would help companies produce more locally.

But a sudden supply shock will close factories instead. More warning, and progressively rising tariffs would instead be a viable solution.

Directly Killing Small Businesses

Read more

So I interrupt the planned program for a dedicated report on the topic.

It creates a massive set of problems for Big Tech and especially Nvidia, as well as now for-profit OpenAI.

The time could also not have been worse, as it came the day after Trump announced Project Stargate, a plan to spend burn $500B in building massive AI data centers in the US, under the guidance and financing of Oracle, OpenAI and Softbank.

So Many Problems

Too Efficient

Problem #1 for AI, is that DeepSeek requires MUCH less computing power. So little in fact that people are reporting managing to run this AI from high-end desktop computers.

Other research claims to be able to retrain the AI for much less than the already very low $6M DeepSeek claim to have spent. Maybe as low as … $30 (no zero forgotten).

So this creates the #1 first order consequence for all of Big Tech, which have burned HUNDREDS of billions in building computing power that might not be needed after all.

Already, the mere normal depreciation of these assets was going to hurt the profit of these companies. But if they need to write it off entirely, it will REALLY hurt.

Open Source

Now the dastardly Chinese did something even worse than improving AIs. They released the code for FREE, open source. That is problem #2.

This means that despite tentatives to scream it is an evil CCP operation to spy or steal data, it is clear that very soon there will be dozens of “forks” of DeepSeek, retrained to fit specific needs or biases of specific users.

Not only is it now out there for free, but it is also already virtually impossible to destroy or ban efficiently.

This is a death blow to all the closed-source methods used by OpenAI, Google, Meta, as well as Alibaba, ByteDance (TikTok maker), etc.

So Cheap!

Problem #3 is that DeepSeek makes its money by trading, like a good hedge fund. So it is planning to commercialize its AI essentially just at costs, for the sake of demonstrating the superioty of its talent, which will no doubt bring billions in assets to be managed by the hedge fund.

And as these costs are much lower than ANYONE in the industry has managed until now, it utterly destroys the planned business model of all AI companies.

Not Even Sanctioned!

Apparently, DeepSeek trained its AI with older, less performant H100 Nvidia hardware, and not even that many of them.

Some claim that this is not true, and that DeepSeek had access to “illegal” (as in “not approved by the US interferences”) smuggled more advanced chips.

In any case, it already does not matter, because DeepSeek has now tested if they could use Huawei chips instead, and it turns out it is pretty much he same as Nividia chips…

This is a big problem, #4, for Nividia, obviously, as it might lose the entire Chinese market. Which when taking into account “illegal” re-exports and other by-passes (like Chinese companies using data center compute power abroad), might be 30-40% of its sales.

But this is also a massive problem for the American government.

Biden and now Trump have bet the house that hindering China's progress in AI would give the USA the advantage in an upcoming conflict against China, through drone swarms, cyberattacks, broken encryption, etc.

Now it appears that Huawei chips will do the job and that Chinese AI is superior… Oops…

2nd order Consequences

Except if you are a trader that reacted quick enough to grab the -17% in one day on Nvidia stocks, money is usually made from correctly predicting 2nd and 3rd order consequences.

Like betting rightly that remote work will explode due to a pandemic.

So let’s discuss it.

Sanctions Failed? MORE SANCTIONS!

An obvious second-level effect is that the US will panic and triple down on sanctions, in a reflex.

Already, DeepSeek is “banned” in Italy (good luck with that). And many AI big shots are trying to make the case that more needs to be done to break Chinese AI companies.

This will likely fail, and reveal even further the true impotence of the US in blocking China's rise.

AI Generalization

Read more

A good model for it is the one of an earthquake. Tectonic movements are slow and steady, invisible to the naked eye. As long as the present situation persists, the rock barely moves, at best bends a bit.

But the force of geology, or of history, is not so easily satisfied with stagnation. The more time passes, the more invisible pressure accumulates. The immobility turns into a shiver, and a few slight tremors.

And then a brutal bang.

Suddenly, all the pent-up forces are released at once in one catastrophic event.

Because the rupture point is invisible and impossible to predict until after it happens, the timing of a (geopolitical) tectonic shift is impossible to forecast. But when the bend turns into a shiver, and then into a tremor, you know you are getting real close.

The end of 2024 has been such a moment.

I am now sadly convinced that we are heading for a major global conflict, and as citizens and investors, we’d better prepare for it.

This is probably the last report that will deal with that topic. All my readers should consider themselves warned, and subscribers will see the reasoning behind it.

As a result, further investment reports will be either focused on “safe zones” or sectors that will benefit from the mounting conflict.

Read more

At times, I realize that investors, and especially value investors, like to make it more complicated than needed. This stems from a few conflating factors:

• If it is complicated, it explains why the market has “missed” it.

• It makes us feel smart to have figured it out.

• By definition, value investing is a contrarian game.

This goes double for investment writers. People in my position may not only be driven by the thrill of chasing interesting ideas, but they also feel like they need to give their readers something truly unique, that no one else has ever covered.

On average, this has paid off for my readers, including with rather obscure ideas like Georgia Capital, for example, up more than 50% since publication.

But this also means sometimes not covering rather simple and boring options, with nothing hard to understand about the business.

Sometimes, a good price and no special event is all you need.

This will make for a slightly shorter report than usual, but hopefully an equally good stock pick.

Read more

A few days ago, the CEO of a S/P500 company was assassinated by gunshot in the streets of New York, an event caught on CCTV as well. In itself, this is rather noteworthy.

But 2 elements are worth discussing further, with broader implications for investments in US stocks.

Let’s unpack them and see if there is some warning for a sector which is 13% of the USA’s GDP, and for other sectors as well.

A Controversial Target

The CEO targeted and shot in the street was Brian Thompson, CEO of United Healthcare, the #1 healthcare company in the US, mostly selling healthcare insurance, with a market cap above $500B.

It is maybe no surprise that the large health insurance group in the country would be less than popular, with the US spending more than any OECD country in healthcare, for much poorer results.

In fact, life expectancy has started for a decade to decline in the USA, a unique situation among developed nations.

And maybe no other company than UHC has been more at the center of healthcare denial that can more often than not bankrupt an entire family or represent a death sentence.

And doctors themselves are not too happy with United Health, either.

A Less Than Empathetic Public Reaction

For an overview of the public reaction to what is a shocking turn of events, let’s look at the public post of the company announcing the news.

Around 15x more laughing emojis on Facebook than tears.

This of course was not the only reaction, with many shocked by such a display of public hate, especially among financial analysts:

A comment that itself would get hammered by counterpoints largely dominating the responses.

Not only does it get ugly, but it quite really gets bloodthirsty at times:

Today, we mourn the death of United Healthcare CEO Brian Thompson, gunned down.... wait, I'm sorry - today we mourn the deaths of the 68,000 Americans who needlessly die each year so that insurance company execs like Brian Thompson can become multimillionaires.

Innocent in the same way that George Bush is innocent regarding the Iraq War…

It was his leadership decision to use AI to deny medical claims and having the highest denial percentage rate of all insurers. He valued money over lives. That’s why no one cares about his

Despite paying expensive premiums I routinely have to pay out of pocket for any kind of imaging for a lifelong ailment that I need imaging for every year. I’m not sad about what happened.

Bad things happening to bad people is a good thing.

He wasn’t innocent, he is responsible for the deaths of thousands of people.

Nah man, people like you need the reality check. This is real pain and anger coming out that is a direct result of UHC’s unethical practices. This wouldn’t have happened at all if UHC didn’t operate like the mafia. Get a grip.

"Innocent" is doing a lot of heavy lifting there. Maybe they shouldn't have been denying so many claims? Sympathy has been declined because it is out of network.

It's gotta be tough on his family to see that he is being publicly declared to be just as disposable as all the rest of us have been treated by insurance companies.

Overall, social media were flooded with comments comparing the assassination of the CEO to US healthcare and insurance denial of medical care.

Assassination Of Company Policies

ABC News reports that the shooter of UnitedHealthcare chief executive Brian Thompson wrote “deny”, “defend”, “depose” on the shell casings left at the scene.

This echoes the title of a book that details how US insurance companies have made a business of giving people life-saving medical treatments.

So while hard to fully confirm, it is likely that this might be not so much a professional hitman than a very, very angry person over a health insurance claim denied.

The personal wealth the victim derived from his position might have been a trigger for the assassin as well:

First Order Analysis

The first level of takeaway for investors is that UHC policies are going to be in the spotlight, and for all the wrong reasons.

Expect it to become a major topic, especially with the upcoming Trump presidency, Elon’s DOGE department, and overall fewer distractions from the elections.

This will be true not only for UHC but also for all of its competitors.

If your portfolio contains these stocks, it might be the best time to just take a break for a few weeks at least.

As a European, I will mention I have no dog in this fight, and no strong opinion on what needs to be reformed in US healthcare.

Personally, I think healthcare should never bankrupt someone in a moral/Christian position, as you do not choose to get cancer or a heart attack (although some actions like those leading to obesity blur the line).

At the same time, public socialized healthcare European style can be as poor and as deadly as greedy private US healthcare. No system is perfect and Europeans are often too smug about it, while Americans have likely been too passive about it.

Elon might be onto something, too many bureaucrats per doctor.

Second Order Impact

Overall, the highly profitable business of charging Americans 2-10x more than the rest of the world for healthcare and drugs might be not as sustainable as thought.

This goes way beyond just health insurance, but the entire US healthcare system, with insurance the most in-your-face part for the majority of people:

• Pharmaceutical companies charge 6-7 digits for cancer treatments.

• Generic drugs selling at 20x than the price in neighboring Canada, creating absurd smuggling operations.

• Surgery and medical care costs so much that it can be worth traveling to the other side of the world to get better care in private clinics in places like Spain and get months of recovery/holidays for cheaper.

This has always been a looming issue with all the Big Pharma, ambitious biotech startups, and other hospital and care stocks.

All at hoping to get this juicy American tax and insurance payers to subsidize R&D costs, keep dividends flowing, and execs compensation sky high.

Third Order Impact

A secondary impact is to analyze how angry the people truly are. And interestingly, it seems to transcend the political faction line. Essentially everyone who is not rich and had to deal with healthcare insurance in the USA seems to hate it.

The thing is that when the rich and powerful get murdered by the plebes and the plebes cheer in unison, the elite should listen.

It is maybe not a coincidence that the movie Joker, depicting exactly similar sentiments from a society at the edge of social implosion had been such a surprise box office hit and instant media & meme sensation.

As a French citizen, I had to study extensively the “glorious” murderous French Revolution and the times that led to it.

I can positively say that the public sentiment on most of the US elite feels very similar.

This is true for CEOs and execs of most industries that have taken a definitively parasitic behavior in the last decades, through a toxic mix of corruption lobbyism, monopoly/oligopoly, regulatory capture, opaque pricing, offshoring, and media collusion:

• Healthcare

• Pharma

• Defense

• Tech

• Etc.

If you thought the socialist woke mobs and Trump deplorables were a problem, wait until they find a common cause.

Currently, a few political issues are crystalizing such potential common causes crossing factions to fight against “them”; especially among the 16-35 year olds, the demographic that matters when it comes to mob violence:

• Endless overseas wars.

• Unconditional support to Israel.

• Out of control profiteering on healthcare.

• Unaffordable housing.

• Crippling student debt.

• Untouchable banks and financial institutions.

• Upcoming collapse in federal spending, public employment, and de facto bankruptcy of Social Insurance and public healthcare programs.

For now, such opinions are completely without serious political representation.

• Trump's “peace through strength” or support to Israel will not stop any war, it might even start a few small ones or a big one, and we saw the Democrats’ program over the last 4 years.

• No politician can target the “donor class”, a telling fact being that such a word exists in the first place.

The danger is not that those opinions are growing, at least this is not the ONLY danger.

The issue is that they are becoming so prevalent that only 2 options appear on the horizon:

1. A clever and daring politician seizes this unexplored segment of the political market and breaks the 2 party system.

   1. If successful, this can create radical change.

   2. If failing, move to option 2.

2. No politician responds or manages to enact change. Anger keeps building up until a Bastille moment emerges from a random riot, likely in New York, DC, or LA.

A Useful Warning?

This could be wake-up call for the US elite to disarm the ticking bomb in social relations.

At its core are the 3 components of Revolutions:

1. Ever-mounting inequality.

2. Immunity from repercussions of parasitic actions and incompetence.

3. Arrogant, hypocritical elites who stopped performing any social role.

It should noted that it is not so much deprivation than “unfair” inequality that drives popular revolt. People do not revolt solely from hunger, but from seeing others doing far better than them.

Removing any of ONE of these 3 would be enough.

1. If inequality shrinks, it will remove the main cause of resentment.

2. If top-level executives, from health insurance CEOs to defense CEOs or judges and politicians and such face consequences for pillaging the public treasury, lawlessness in the streets, insider trading, etc. the feeling that only violence can work will fade away.

3. If the elites are seen as sacrificing something, like for example the way medieval nobility performed its grueling military duty, the feeling of unfairness will disappear, even with crushing economic inequality.

(A key reason why people like Elon Musk more than other oligarchs is that he has an image of not actually caring much about his wealth besides going to a few parties. It is well known the man has a poor family/personal life and still works massive hours).

Conclusion

The point I am trying to make is not a general comment on the US soon turning into Mad Max, although some days it feels like this is a possibility.

More that the past few decades of Buffett's style of investing is coming to an end. The strategy of focusing on oligopoly/monopoly and parasitic industries or addictive products is being met with an increasing amount of backlash.

When an industry can forever increase its margins because of regulatory capture, lobbyism, shady practices, exploitation of its consumers, and oligopolies, it works until it does not.

It is a perfect business model until the mark/peon starts to kick back. The same way that Victorian-era abuse of workers led to massive strikes, powerful unions, and the rise of Communism.

This kind of backlash usually comes with a bit of collateral damage as well.

So this is a warning call to avoid some of the worst offenders of the healthcare sector, very likely to become an easy target for populists like Trump:

• Overpriced cancer drugs soon targeted by Elon.

• Massively bureaucratic hospital corporations.

• Abusive insurance companies.

And overall, this might even extend to other sectors if no pressure valve starts activating.

Rather vulnerable are the tech giants, especially Meta and Google, but also Apple, for their obvious monopolistic practices, as well as having to some extent been anti-Trump for years. Make no mistake, Zuckerberg and Jeff Bezos claiming neutrality toward the end of the election cycle was not an accident. And everybody hates Big Tech by this point, so it would be popular.

I expect the all-powerful defense sector to be least affected, but as said before, companies like General Dynamics (ships and Abrams tanks) are a lot less vulnerable than let’s say, Lockheed Martin and its over-expensive/under-delivering weapons (F-35).

We are talking 4-5 standard deviations above the “normal” level that had only been breached in the last 2 major bubbles in the last SIXTY YEARS.

The Financial Times itself commented and called it the mother of all bubbles, written by Ruchir Sharma, a chair of Rockefeller International:

So of course, the answer would be to avoid US equities.

But this is not so simple, even if I am somewhat of an advocate of this idea.

For example:

• Russian and Central Asian equities are off-limits for 99% of Western investors.

• The Middle East is on fire and it will likely get a lot worse.

• European and Japanese industries are suffering greatly from terrible energy policies and lagging in innovation compared to China, the EU even more than Japan.

  • Both have also terrible demographics and social issues, the EU even more so if you don’t count the recently arrived and economically net negative non-European population.

• China is grossly undervalued (see that topic on next article), but is also likely to stay so with Trump tariffs and the risk of WW3.

• Africa is a perpetual mess, and only specific opportunities like SBSW I covered in the last report are good enough to make sense.

• India’s IT service economy is likely to be hammered by the arrival of AI, and so are the low-value industries where automation and robotics are replacing cheap manual labor.

So this leaves only a limited geography, which I have been covering relatively extensively: South America & neutral-enough SE-Asia countries like Indonesia.

But maybe this is not the answer at all.

After all, look at this curve. This time it IS truly different. So what is going on?

Financialization

The obvious trend is the terminal financialization of the economy.

This graph with equities and financial assets going parabolic is the other side of the coin of why the USA can no longer make icebreakers, frigates, electric transformers, drones, batteries, shells, etc.

If your business is mostly to get everything done somewhere else and give pieces of paper in exchange, you can as a collective become very, very profitable.

Libertarians will tell you that there will be hell to pay for this imbalance.

They are likely right, but they are also expecting it to happen any time, you’ll see, very soon, for … a few decades now?

The right thesis wrong on timing is the same as being wrong in investing.

Nowhere To Go

Another factor at play here is that international capital has very little place to go.
I have discussed the geography issue but there is an even bigger factor at play here: the bloodbath in bonds.

I mean … look at the hundreds of billions in unrealized losses:

Talking about investing and stock, we often forget that the bulk of the world money is actually NOT in equities.

It is in bonds, real state and cash.

Now, with inflation and rising rate hammering cash holds and bonds, this is a stockpile of 420T that might be considering flowing into equities.

However, this is very, very, dumb and easily scared money. This the liquid assets of pension funds, insurance companies, utilities companies, retired baby boomers, etc.

So they will flow were the consensus is.

And after a decade of easy money, the consensus is S&P 500, and especially tech stocks of the Magnificient 7.

How To Play It (Safe)?

Frankly, I am still mostly looking for myself at South American oil stock, Indonesia coal mines, defense companies, and such.

This is because I have a high volatility tolerance, I invest without having to justify it to anyone, like returns above 15% and above would not do well with my nerves if my money was on the Mag7 stocks.

At the same time, other people will have other constraints:

• Investment funds with geographical or market cap size mandate.

• Family office with very conservative clients.

• etc.

In these cases, I think it might make sense to bet on the recent winners, at least for now, and here’s why:

The USD Dies Last

There is a definitively non-zero chance that we are entering the end game of currency devaluation.

For sure, gold seems to be trying to tell us just that the last few months:

So are the US interest payments, having jumped above a trillion and larger than the already massive and wasteful defense spendings:

And can you notice how ineffective the Fed cutting interest rates has been:

The problem with the “imminent demise of the dollar” is that by all metrics, at least 2 other major currencies are in way worse shape: the Euro and the Yen.

As long as these die QUICKER than the USD, this is the capital of economies as large as the US flowing into the dollar and out of these currencies. This will be reflected in US equity pricing positively.

So yeah, the USD might die soon-ish.

But as long as the Euro and Yen die quicker, it will actually stay afloat.

Yen

Our squirrel-level collective attention span has already forgotten, distracted by the US election and the Ukraine war, but it was in August THIS YEAR that the yen carry trade almost crashed the global market.

Since then, Japan has not been doing better. At all. Just look at Japanese car exports in Asia:

How will that do for the yen do you think?

Euro

Meanwhile, the main economy in the Eurozone, Germany, is having every major industrial company in the country cutting jobs by the tens of thousands: Bosch, Volkswagen, BASF, Deutsche Bahn, Ford, etc.

This is a mix of manufacturing dying from too high energy prices and a general malaise in the continent that just keeps getting worse.

The perspective of a hot war with Russia, unspeakable openly, is nevertheless slowly making its way into the collective subconscious as well.

The Eurozone is HUGE. This is a lot of capital looking for refuge in Nvidia and Meta. Of for that matter, in Exxon and Chevron for the bad climate unbelievers heretics that still live in the EU.

The Trump Effect

Talking with people with large businesses, and seeing sales in e-commerce personally, I can say that the whole world was holding its breath before the US election of this year.

Now that there seems to be a Trump presidency with no assassination, massive voter frauds, riots, or even a hint of civil war, the USA looks a lot more appealing.

Meanwhile, even if it turns out to be just a show without proper actions, Musk’s DOGE initiative will give the hope of reforming the US bureaucracy.

This too will alleviate the fear of an imminent currency crisis.

Expect the EU to be in parallel busy shooting itself in both feet for good contrast.

How To Trade The Mother Of All Bubbles

On one hand, we reasonably know that one day the music will stop for a bubble fed by the breaking down of the American Hegemony.

On the other hand, the looting of its European and Japanese satellites, as well as money flowing out of bonds and cash will keep propping up equities for the foreseeable future.

So what I see emerging is a strategy where you want exposure to not only US risk assets, but the most OUTRAGEOUS ones.

Here a short list of such uber-speculative assets that might added to a portfolio:

• Bitcoin and other cryptos.

• Microstrategy, which is basically a Ponzi inside a Ponzi at this point, a sort of ultra-leverage call on Bitcoin.

• Nvidia, as the AI spending might just keep going in the mania.

• Tesla, as the Musk-Effect will now be in overdrive after his victory alongside Trump. Expect Tesla and SpaceX to become the reshoring/remanufacturing savior of America, as Musk will likely not be below a little bit of self-serving push for his own company when he heads DOGE.

• All the uranium and SMR companies in the nuclear space. Something will need to power as these Tesla factories and AI datacenters and it will not be solar panels.

• Anything quantum computing related. Quantum is easy to hype and utterly esoteric, perfect for mindless speculation.

• Space-related companies, like Rocket Labs will work as a proxy for SpaceX, despite much worse economics. The stock price is likely to not care and go to the Moon much before NASA figures how to do it again.

• Intel, which I explained previously.

• Palantir, as it is as much Peter Thiel as Trump & Musk who won the elections, with Vance deeply tied to Thiel.

• Defense industries, especially General Dynamics, are less likely to be Musk’s target compared to white elephants like Lockheed’s F-35 already bashed by the DOGEmaster.

How to do it: here the step-by-step approach:

1. Put a double-digit percentage of the portfolio in these ideas. Exact level should be how you can sleep at night doing it as a max threshold and how much your clients need to see to be reassured as a minimum threshold.

   1. The more speculative, the higher the P/E, the better. Enjoy the 50-100% returns on this ultra-volatile part of the portfolio before the music stops. These will either go up or down, but never stay put.

2. Monitor CLOSELY the emergence of a real crash. Anything that might indicate that something in the US financial system is breaking or that the mania is losing steam.

   1. Ignore completely any crash originating from the EU or Japan, these will only create volatility, but ultimately accelerate the flow of capital toward US equities.

   2. US bond-related crashes are a little more tricky, but you can assume a repeat of the Silicon Valley Bank salvage. Nothing too bad will happen here, not with the Fed printing at will when needed. The USD will die before its bond market unrealized losses are acknowledged.

   3. Inflation going fully out of control should be a warning sign. I am not talking of 8-10%. More like 20%+ and accelerating. This is when to start taking your chips off the casino table.

   4. On the other hand, a major NATO/US military disaster, like a crushing defeat in Europe or the upcoming removal of Israel from the map, both likely possibilities at this point, should be the warning signs of the Wall Street rats getting ready to leave the ship. Follow them and try to outrun them.

An Upside Down World

The funny thing is that I personally would consider putting money in the Magnificient 7 a very risky and speculative move, considering their valuation.

And Colombian oil stocks for example a flight to safety.

But for most money managers, their clients will have nothing to say seeing at least part of the portfolio in Mag7.

The positive thing is also that by waiting for a more visible crisis, it will be easier to sell at the right time, instead of suffering years of “underperformance to the benchmark” that can be a career killer.

Electric Vehicles (EVs) were supposed to progressively take over the automotive industry as soon as us peasants realized a Tesla costing 50k is actually cheap when taking into account lower fuel costs and maintenance.

Together with the inexorable march of technological progress and the pressure of global warming, this made EV domination all but a certainty.

Except it did not happen like that.

Don’t get it wrong, EVs WILL one day dominate the auto industry. This is because from an engineering standpoint, electric motors are superior in many ways (yes really):

• Convert almost 90% of its “fuel” into motion, compared to 20% in Internal Combustion Engine (ICE) (the rest is waste heat).

• Accelerate better from 0, giving every electric car great acceleration performance, especially where it matters the most.

• Can use regenerative braking to collect back energy when using the brake, improving performance in traffic and town driving.

• Almost no moving part and almost no maintenance required, while very small and light

  • ICE engines are instead incredibly complex, having to synchronize what is essentially constant mini-explosions.

• Electric motors are ultra-durable, opening the possibility of cars lasting 20-25 years if the rest of the material is of high enough quality.

The problem with EVs is with the power source: the battery.

Lithium-ion batteries have gone a long way but are still found lacking when compared to oil:

• Much lower energy density, leading to a lot of extra weight of EVs, reducing performance (fuel efficiency, acceleration, etc. )

• Slow to charge, leading to problems for long-distance travel and waiting time at charging stations.

• Loss of power in cold temperatures, which can decrease the EV range by 3x in winter.

  • This is compounded by the absence of ICE “waste heat”, so the battery gets drained to keep the passengers from freezing.

• Low lifespan of the battery, with severe capacity loss at 10 years.

• High price, often 40-60% of the EV total price.

The combination of higher price (due to batteries) and less practicality (charging time, low range) makes for a poor-selling argument beyond the green activists and tech enthusiasts.

Changing Auto Market

Vindicating this position are a few recent data points:

Mobility Consumer Pulse for 2024 conducted by McKinsey & Co., the survey found that 46% of EV owners were likely to switch back to owning a gas-powered vehicle.

In another study, it is “only“ 29% wanting to switch back.

Interestingly, the strongest factors are the ones that are hardest to mitigate are the main reasons why people want their ICE car back:

Most people in cities live in flats and do not have their own chargers. It means the inadequate public charging stations, either too slow, to crowded, or too spare/far are a hassle. This combines well with the “cannot charge at home” and “needing to worry about charging is stressful“.

The charging stations problem makes most urban dwellers (out of suburbs) actually unlikely to buy an EV anytime soon.

For the rural population, other issues block EV adoption: too high prices + driving over long distances is unpractical.

The 16% of “Changing mobility requirements“ is interesting. Maybe getting kids or different jobs now need more reliable batteries for daily commutes?

So overall, EVs will not see mass adoption as long as BOTH battery technology progresses AND charging stations are ubiquitous and as easy to access as fuel stations.

Remember, this is about the people WITH an EV. If they are not convinced anymore, it is unlikely that the mass of ICE users will switch any time soon. And in many countries, improper electricity infrastructure will anyway limit adoption for a long time.

This means that we are likely to see EV mass adoption only in countries that are VERY good at infrastructure. This includes China, likely Japan, and a handful of Northern European countries.

It most likely does not include most of the world, including the South of Europe, the USA, South America, MENA, and South Asia.

Still, battery tech and EV tech progress has made viable an alternative to ICE: hybrid cars.

Why Hybrid Sales Are Exploding

Sales of hybrid vehicles have increased by 44% year-over-year last October in the US. The demand has also risen for vehicles priced between $20,000 and $30,000 in new cars and $15,000 to $20,000 in used cars.

The story is of course the combination of rising interest rates making living more expensive, through growing mortgage payments and more expensive car loans.

And an over-cost of living crisis due to real inflation higher than reported and economic stagnation in the midst of an energy crisis.

This is a segment where EVs are struggling, with only Chinese EVs able to compete, and only with their cheapest model like the Seagull from BYD at $10,000 in China and $20,000 in the EU.

Chinese EVs

Chinese EVs are definitely competitive in some contexts and are going to upend the auto markets in:

• Developing countries, where total costs (purchase + maintenance + fuel) is everything and cheap EVs’ technical limitations will be tolerated.

  • Most have good relations with China and no domestic auto industry, meaning no tariffs.

• Among Western militant EV buyers looking to reduce purchase costs, at least in the EU tariffs are low enough to keep Chinese EVs competitive + many will be built locally in Hungary, Serbia, and other friendly EU countries.

• As a secondary cheap electric car for small local commute.

Because this is actually a lot of use cases globally, it seems to me rather unwise to bet on any legacy auto manufacturer. Competition from China will be brutal. Add an ever-looming recession risk, and you do NOT want to bet on a cyclical industry like automakers.

Some will make it, like Toyota & Hyundai, both hybrid leaders, and probably Volkswagen, but many will not (Stellantis makes for a sort of a good stock to short) and become absorbed by Chinese companies or go bankrupt.

Best Of Both Worlds

Why are hybrids suddenly popular? Blame EVs!

First, hybrids have acquired the image of a “compromise EV”. It can run partially on electric, cost less to operate, and all the other EVs’ advantages.

But it ALSO has an ICE engine with 600km+ autonomy, can be refueled at any station in 5 minutes, and runs well in winter.

Compare that to the only 350 km average range for EVs.

Meanwhile, the 50-70km hybrid’s electric range is enough for most commute travels, just not the occasional but important for drivers long-distance trips.

Source: Statista

Many drivers have been convinced by EV enthusiasts of the cheap fuel costs of running electricity in traffic jams and short commutes. If they can not sacrifice range or practicality the better.

Another reason is that the tech in EVs also makes hybrid better.

• Mass production has created giants like CATL that benefit from massive economies of scale. This provides cheap batteries to EVs, but also hybrids.

  • In the same way, an elaborate supply chain for lithium, cobalt, nickel, etc at the purity required for EV batteries has been built and itself achieved a massive economy of scale.

• Denser batteries in EVs make for denser batteries in hybrids. You need less total battery volume in a hybrid, so you need very few ultra-dense batteries.

• Mass production of EVs created a whole ecosystem of suppliers for electric motors perfected for the auto industry.

• Software designed to optimize battery usage can be used to optimize how to combine EV & ICE modes.

• The tooling and engineering expertise needed for EVs, like designing and integrating battery packs, wiring, manufacturing, testing, etc. have already been bought and hired by all automakers.

So we have a situation where both legacy automakers and drivers have an interest in switching to mass hybrid adoption.

• Automakers are to make money on EVs as they do not sell well, and are too expensive.

  • But the same automakers are desperate to utilize the billions they poured into electric mobility technology.

• Drivers want the advantage of EVs for daily commutes (low fuel costs) but none of the downsides (low range, high purchase price, impractical charging, and long travels).

How does this look globally:

• In France, hybrid vehicles accounted for 36.7% of registrations in the first two months of 2024.

• In Estonia, it was 53% of total sales.

• More than half of China's car sales were plug-in hybrids, up 51% year-to-year, so even in the EV center of the world, hybrids are making a killing and will soon replace most ICE cars.

In the US, due to cheap fuel prices, it is a bit lagging behind in giving up pure ICE cars but we are getting there as well.

You can notice that where EVs stumble, hybrids keep rising:

Hybrids’ Win Is Platinum’s Salvation

EV rise was to be played with Tesla and BYD when no one believed in them.

A collateral damage to enthusiasm for EVs has been the platinum metal group.

You see, platinum and similar metals of the same chemical family like palladium are mostly used in catalytic converters in ICE cars. The metals have many other applications, but fuel engines and pollution-reducing converters are by far the largest consumers.

Platinum is also very rare, mostly only found in South Africa in concentration commercially viable, even at the current high price. Palladium is a bit more diverse, with important production in Russia.

In both cases, the “imminent EV domination” has depressed these metal prices and even more the price of the associated miners.

Except we know now EV will not dominate the market for at least another decade.

Meanwhile, hybrid ICE engines often start cold and need MORE platinum to stay within the parameters of air pollution.

Every additional million hybrid cars sold creates a demand for roughly 150,000 ounces of PGMs.

And there are plenty of ICE cars waiting to be turned into Hybrids over the upcoming decade of car purchases, with around 60 million sold every year:

Source: Our World In Data

Assuming only half turn to hybrid over the upcoming decade, this will make on average 30 million cars, or 150,000*30=4.5 MILLION ounces extra needed.

Or 140 tons.

For reference, the world’s production in 2022 was 190.

This is a VERY small market, subject to brutal moves due to its concentration and overall small size, as well as the rarity of decent mineral deposits over the world.

Just compare it to other metals:

And in the platinum business, there is really only one name that should excite the value investors.

Read more

This is a funny topic as people feel the need to adhere religiously to one camp or another:

1. The green team, where renewables and fairy dust will power the energy grid tomorrow.

2. The grey team, where oil and gas will forever stay important.

A key driver is that there is plenty of money and careers to be made in either of the teams. It also overlaps nicely with the left/right divide.

When you look at real statistics, both teams feel a little retarded.

It makes for poor analysis, understanding, and investing.

This will likely be a somewhat controversial post, as it will necessarily challenge almost everyone's assumptions.

What The Green Get Right

Let’s start with a few facts the green team got right:

• Electric motors are radically more efficient than combustion engines, which convert only 20% of the energy in fuel into movement, the rest being heat.

• Renewable energy is getting cheaper every day, especially solar.

• Battery density of the newest chemistry is becoming remarkably good.

• EVs are cheaper to maintain and more long-lasting overall.

What The Green Get Wrong

• Green energy so far has only been an addition to the energy mix.

• EVs only last as long as their battery.

• Most people want the reliability of liquid fuels, and it is vital to have them in times of crisis (hurricanes for example).

• Renewables are not so cheap when taking into account intermittency, hence the need for energy storage.

• Even the most politicized projections like from the EIA still show fossil a major energy source in 2050 in ALL scenarios.

• Currently, most renewable energy is still from hydro.

What the Grey Get Right

• Fossil fuels will be needed for the decades to come.

• Stable electricity production is a must, batteries will likely never be enough.

• Most of the energy demand is from goods and industry, not transportation: fertilizer, steel, chemicals, shipping, mining, etc.

  • another big segment is residential (cooling, heating), and it’s getting bigger as the Global South is getting richer.

• Some sectors might forever need liquid fuel, e.g. aviation.

What the Grey Get Wrong

• Much more can be electrified than initially thought: Tesla Semi can drive 700km in tests ran by DHL, green steel is a possibility, etc.

• Most people like EVs if they are reliable, cheap, and long-range.

• We are running out of easy fossil fuel, which is why we need to dig thousands of meters deep to find more. Or in unstable countries (Namibia, really?) or hostile environments (the Arctic).

• Fossil fuels are not really cheap in the long term, as easy deposits are all depleting, including US shale oil.

Green Reality Check

• Renewables are getting cheaper, but not cheap enough due to intermittency.

• EVs are getting better, but only the latest battery chemistries make sense for mass adoption.

• Focusing on EVs hides the forest of total energy demand.

Grey Reality Check

• Fossil fuels are cheap only because of capital misallocation of US shale.

• They are going to be less important as EVs take over transportation, including logistics on land.

• As easy supply dries out, alternatives become more interesting and speed up the replacement of fossil fuel.

Synthesis

Because of the joint failures of green energy to be actually cheap (when taking into account storage) and the growing rarity of fossil fuel, we are heading for an energy crisis.

The obvious solution is to own stocks of energy producers. But only those with resources that are not depleted.

Frontier markets like South American oil is still one of my favourite picks.

Reliable, fuel-less renewable energy, hydropower, is the other one.

Nuclear

Another option SHOULD be nuclear energy.

The problem is that it is very hard to play.

Building more nuclear power plants requires we get our regulatory procedure under control. Good luck in a late stage of decline for the Western/American empire.

In theory, the sudden push for more nuclear by Big Tech should help. But never underestimate the ability of petty leftist bureaucrats to screw things up.

Uranium is also in theory a way to play it. But a stockpile of uranium in a fund is not very attractive to me (no cash flow, holding costs).

And uranium miners are either horribly overvalued or in terrible jurisdiction at the crossfire of Eurasian tensions AND strategic assets (Kazakhstan).

And anyway, if no new nuclear power out of China/Russia, not so big a demand for uranium.

Hybrid Vehicles

Now, there is a way to have vehicles that have today’s high range, but also the efficiency of EVs on most of the travel done by someone in his daily commute of going to work, kids to school, etc.

These are hybrid vehicles, especially plug-in hybrids, which are essentially a normal car + an EV with a very small battery all-in-one.

The small battery means it does not bump up the car price much. But it is enough to cover 50-90% of total mileage on electricity, depending on the user.

A leader of the segment is Toyota, which is also getting ready to finally enter the fray with EVs, but taking its time, having correctly identified that the near future is dominated by hybrids, not EVs, not fossil fuels, to the displeasure of both the green and grey teams.

However, there is another way to play this upcoming energy crisis that is mostly focused on the EVs vs hydrids story, and even has a little bit of a uranium story on the side.

And that will be the topic of the November report.

“Gold is for the mistress

silver for the maid

Copper for the craftsman cunning at his trade

"Good!" said the Baron, sitting in his hall,
"But Iron -- Cold Iron -- is master of them all.”
― Rudyard Kipling

The Allure Of Commodities

When looking at cyclical investing, it is hard to not get automatically drawn to commodities.

The tales of quick fortune and massive disasters are the thing of epics and legends.

And there is also the adventurous vibe of it, a remote location in an undeveloped country, and the ore motherload that can make the daring and lucky miners and mining company (or its shareholders) rich.

There are the usual suspects that draw the attention of the crowd:

Gold, silver, diamond, platinum, and other shiny things.

Then there are the expert and technical ones, whose appeal is secret knowledge missed by the market at large, ideally with some looming shortages due to upcoming explosive demand growth:

Lithium, copper, rare earth, tungsten, titanium, and other exotic materials for a new space age.

If this interests you, I have already covered some of that in a previous report:

Then there is the stuff that powers the world and always seems at the edge of running out as we are always collectively eager for more power, more air conditioning, more cars, MORE!:

Oil, gas, coal, uranium, etc.

And then there is the key commodity-like manufactured products and machines, the raw material needed to keep the world functioning:

Polysilicon, semiconductors, steel, ships, etc.

The Boring Stuff

This leaves some commodities in the “boring” category. The stuff that is displaying some characteristics that are too dull to make a good story of.

• Not rare enough to be worth a fortune or be hard to find.

• No new technology to justify a bull case.

• No true scarcity nor chronic deficit.

And most industrial commodities fall into this category:

Aluminum, sand for concrete, and more than anything, IRON.

Iron is that element that humankind has built its civilization on since at least the Hittite Empire, at the end of the deep Antiquity of the Bronze Age.

From swords, horseshoes & plows to the steam engine & the Eiffel Tower, iron is the literal backbone of every technological leap made by humankind.

Today, it is used not so much in the form of pure iron but also in the shape of steel (most steels are 95-99% iron).

And we need a lot of it. Actually almost an unimaginable amount of it.

In 2023, we consumed 1.6 billion tons of iron, or 1.6 TRILLION kilos. This is 195kg per person in the world.

So we are lucky this is the 4th most common element on Earth's crust, just below aluminum and above calcium or sodium.

It is a somewhat invisible consumption, embedded in our cars, trucks, ships, concrete, pipelines, etc.

Who Does What?

Over time, the leading producer of steel, the most strategically important form of iron consumption, keeps changing along with the mantle of geopolitical influence.

The Swedish empire was a powerhouse in large part thanks to its massive artillery park, and so was Great Britain and later the US thanks to their large steel-made warships. Each peaked around 50-60% of the world’s steel production, plateaued for 50 years, and then declined.

Unsurprisingly, China is the new rising power of the world, and its steel production is moving accordingly.
Note that the graph is not fully up to date, the current China share is 57%.

A chart in relative percentages tells us the relative power story, but not the raw consumption.

China's rise in the percentage of steel production is accompanying a parallel rise in global steel (and iron demand).

Can you spot the rise of the China era?

The production of steel over the last few decades is larger than the CUMULATED production since the birth of civilization!

Where does it go?

It used to be in construction and infrastructure, which is no surprise when entire megapolises emerged from nowhere and the country is covered with tens of thousands of bridges and hundreds of thousands of kilometers of railroad.

But this is less and less true, with most of the production now going into machinery, from industrial robots to tractors, excavators, tools, ships, and even drones (more than half of the world's ships are made in China).

When it comes to future demand, cars & trucks (lump in transport above) will certainly be a growth story, especially as China’s automotive exports look like this:

6x in 4 years!

They’re not selling solely EVs: they’ve taken share in multiple segments and powertrains.

China will ship 6 million cars to 120 global markets this year. That will be almost two million more than second-place Japan, for 30 years the world’s preeminent exporter of automobiles.

Surrender to China - Or Punch Back

You can read more on the excellent Dunne Substack for more info about how China is quickly storming the world of automotive production:

The Dunne Insights Newsletter

The Dunne Insights newsletter gives you high-quality and up-to-date intelligence on the electric car, battery, and charging markets.

By Michael Dunne

We will come back to that topic later.

Where Does It Come From?

While abundant, the world’s iron ore reserves are unequally spread.

Explaining its original lead, tiny Sweden is today among the Top 12 larger iron reserves on Earth.

It is also abundant in the usual suspects of Russia & Ukraine (mostly in the Donbass for that matter), and China.

The largest reserve is in Australia (50 billion tons), which made the core business of mining giant BHP and Rio Tinto, now diversified global miner, even if the core of their business is still iron.

And make no mistake, these are 2 solid companies and I even owned Rio Tinto shares for a while.

Unfortunately, Australian miners are not necessarily cheap, reducing the attractiveness of their stock, even if the business is solid.

Another country, with the 2nd largest reserve, is Brazil, with 34 billion tons of iron ore. And as my regular readers certainly know, it is a country whose stocks are dirt cheap currently.

Brazil is also very much a global player in this field, ranking second in total production. But as you can notice below, it produces barely twice more as India, despite ore reserves 6x larger.

So there could be plenty of room for growth.

And at the core of Brazilian iron production is one company: the iron ore giant Vale

Read more

As I am writing, rumors for an Israeli large-scale attack on Lebanon are mounting, following the unprecedented explosion of thousands of pagers in an attempt to decapitate Hezbollah, or at least, “terrorize the terrorists”.

And apparently, also plenty of other devices spread throughout the country far beyond Hezbollah militants, and among civilians.

This follows 12 months of war in Gaza that reduced pretty much the whole area to rubble and killed most likely what is estimated to be hundreds of thousands of civilians.

It has severely damaged Israel's international standing. Not helping is the abysmal optics of regular genocidal rhetoric by government leaders or parliament debates about the right or wrong of raping prisoners.

Slow Escalations

Since the attack by Hamas on 7th October 2023, Israel has been in the midst of a grueling war that was expected by many to either stop sooner or escalate into a full-blown regional conflict.

Instead, a few curious things happened.

The first is that Israel seems to be trapped in a death spiral of escalations against civilians, while also never truly achieving military victory against Hamas, a much smaller force.

The second is that despite extremely strong rhetoric and regular very demonstrative threats, Iran and its allies, especially Syria and the Lebanese Hezbollah, have done very little so far.

An exception is Yemen, which against most expectations (except if you followed me back then), has for all practical purposes defeated the US Navy and managed to keep the Red Sea closed. For that matter, poor and distant Yemen has caused as much or more damage to Israel than Hezbollah so far.

This led to this strange situation:

• Most Israeli supporters are dismayed by the poor performance of what propaganda described as “the best army in the world”, seeing it unable to defeat Hamas in any durable fashion.

• Most anti-Israel commentators are dismayed by the “weakness” of Iran and the lack of escalation, even after the direct assassination on Iranian soil of the Hamas leader.

This is a strange war where both sides are talking big threats but seem to do their best to avoid escalation. Israel because it needs to “finish” with Gaza first, and Iran because it clearly considers itself not ready.

So there is more to this than meets the eye. And getting it right will clarify why investors should build a portfolio with a base case of a much wider Middle East war happening soon.

(as a preamble, I must emphasize that I assume both pro and anti-Israel people are among my readers, please stay civil in the comments. For my part, I will as always focus on accurate as possible forecasts)

The Israeli Position

Read more

Much has been said about the market distortions created by a declining and then zero interest rate environment. One is however overlooked.

A common take among value investors and libertarian-leaning commentators is to see them as responsible for the emergence of tech monopoly and overall inefficient capital allocation.

By providing money “for free”, it has kept alive zombie corporations, given unlimited capital to bloated conglomerates and tech giants, and overall financed the casino economy we live in.

Of course, it also allowed for public debt and overall green & DEI madness to go on unpunished.

At the same time, the very same groups are deeply enamored with stocks of “compounders” and “serial acquirers”, due to the outstanding long-term performance of these investments.

But I believe they are very misguided to believe this will be true in the future.

The End Of Buffett’s Playbook?

The rationale behind pushing for buying high-quality compounders is the one pushed by Warren Buffett and the late Charlie Munger is that as long as the ROIC is high (ideally large double digits), your returns will be fine in the long run.

There is a lot of truth in this argument, and it made Berkshire the $1T giant it is today, with purchases like Coca-Cola or American Express decades ago.

Some key elements of the modern “Buffett Doctrine” beyond the general value investing principle are:

• You should bet on America.

• Industries dominated by monopolies or oligopolies are highly profitable (credit cards, tech, banking, processed food, etc.)

• Invest in large corporations (to be fair, in part due to the sheer size of Berkshire Hathaway).

• Buy large insurance corporations to leverage their float into extra cash for investing.

• Moderate leverage usage.

• The importance of moat and brands.

This differs from the strategy of for example Peter Lynch, which prioritized smaller stocks, in unloved industries, with long runaways for growth.

In my opinion, Lynch practiced a more “pure” form of contrarian value investing. He would also sell a lot quicker when the discount was not there anymore.

Buffett instead has been pursuing a strategy that benefited from the progressive hollowing-out of the US economy.

The goal of Berkshire’s investments is actually (far more than admitted by Buffett) to maximize rent-seeking from corporations acting as middle-men and “tollbooth” of the actually productive economy:

• Credit card processors.

• Banks, insurance, etc.

• Broadcasters, media, advertisement. (Sirius)

• Telecom

• Tech giants with rent-seeking monetization methods (Apple once it had a mature app store).

On top of it come a few addictive products, like alcohol and sugary drinks.

Not all these companies are pure rent-seeking activity, but when they are not, they are monopolies/oligopolies able to extract more from the broader economy than they would if exposed to true competition.

Almost all are also active in very tightly regulated industries, where lobbyism, corruption, and collusion with politicians help create and defend the monopolies industry structure.

The goal here is not to target Buffett but to question if the so-called compounded, truly excellent rent-seekers, can keep up this performance in the future.

The Role Of Cheap Money

By now, it is pretty clear to all honest observers that the US (and Western at large) economy is hollowed out by special interest, rent-seeking and corruption.

Why make good weapons or spaceships when you can get DoD contracts anyway (Lockheed, Boeing)?

Why keep innovating when you can squeeze the entire mobile ecosystem (Apple)?

Why invest carefully and intelligently when you can take risky bets and let the taxpayers foot the bill (banks, insurance)?

A key factor in creating this situation, and almost entirely undiscussed, has been too low interest rate. The process goes as such:

1. Larger, more connected corporations get access to lower capital than their competitors.

2. They alone can use this cheaper capital for a few actions:

   1. Acquire smaller competitors with cheap debt.

   2. Break sub-sections of the market with year-long losses, to bankrupt competitors.

3. Rinse and repeat in new segments until most competitors in most sub-sectors are bankrupted, kicked out of the market, or acquired.

4. Rise prices continuously, as consumers/clients have no alternative left.

It is worth noticing that even for smaller, actually innovative companies, the same phenomenon plays out in a low-rate environment:

1. Build an actually good product using raised (cheap) money.

2. Keep raising as much money as possible as fast as possible to outrun the competition.

3. Build a monopoly in your niche through the aggressive growth financed by 1-2 decades of losses, produced by selling below costs.

4. Exploit the built monopoly and rent-seeking to give money back to investors.

The End Of Cheap Money

When you understand the phenomenon above, you get why it was profitable to invest in massive, rent-seeking tollbooth companies.

The cheap money allowed for continuous growth and industry consolidation, leading to higher margins for the rent seekers, and lower productivity for the whole economy.

The problem happens when these corporations meet rising interest rates.

This triggers at once several deadly obstacles:

• No cheap debt means buying profitable smaller competitors becomes expensive.

• Massive accumulation of debt suddenly matters and interest now eats money needed for R&D and capex.

• No additional cheap debt means no ability to finance share repurchase keeping stock prices afloat with artificial bids.

Serial acquirers are also following a similar playbook:

• Buy companies in the same or unrelated industry with cheap debt.

  • Industries keep consolidating, helping rent-seeking behaviors. Better if you are an active actor in the consolidation, like a franchise chain buying all the independent restaurants, garages, plumbers, dentists, etc.

• Built scale so you can save on overhead, branding, etc.

• Larger sizes mean even cheaper money, so keep buying forever with ever more debt, after all, interest only goes down when you need to roll the debt, right...

Internal Rot

Not being able to wrestle out more efficient competitors is a problem, the consequence of easy cruising for decades is another additional problem.

No competition, corruption, and complacency have a deadly effect on complex organizations, as we discussed recently.

For example, Boeing is not even (yet) endangered by scrappy smaller competitors. But simply by dangerous designs, corner cutting, low-quality manufacturing, etc.

The Currency Reserve Role

A lot of these issues were tolerable for the last 3-4 decades because the US owned the dollar, the world’s reserve currency.

As such, it could progressively destroy all its physical productive activities, especially manufacturing, with only subsidized farming and oil&gas surviving today).

They would be replaced by a globalized version of domestic rent-seeking, with employees of tech giants and financial institutions extracting value from the rest of the world. Any refusal to comply would be met with devastating sanctions or outright invasion.

Fake Economy

This also means that a lot of the US economy could tolerate the rent-seeking, as it was financed by a massive trade and fiscal deficit. These deficits would in turn pay people to do economically unproductive activities as :

federal employees/bureaucrats, military (especially high-pay consultants and contractors, more than the “grunts”), bankers, lawyers, marketers, NGO activists, politicians, etc.

The growth of these activities, as well as speculative bubbles, would also finance the blue-collar “servants” of the newly minted “intellectual upper class” with too much money on their end and endlessly pursuing status-seeking spending:

house builders/craftsmen, cleaners, Uber drivers, landscapers, house flippers, wedding planners, luxury hotel workers, drug dealers, prostitutes, etc.

The Western economy has turned into essentially rent seekers living of accumulated capital and money printing. Or people selling the rent seeker services.

The production of actual goods is for the third world, clothes from Bangladesh, minerals from Africa, food from South America, manufacturing from China/SE-Asia, etc.

Moving Forward

Moving forward a few factors will have fundamentally changed.

Each factor will act on damaging the previous winners (rent seekers, compounds, and serail acquirers) so beloved by value investors.

Rising Rates

The rising rate will make most acquisitions not profitable. It will also wreck corporations with too much debt on their balance sheet.

Either the rollover of debt will cripple their finance and ability to reinvest. Or it will bankrupt them outright.

Chinese Competition

Rent-seeking works well only if you can stay protected from real competition. Consumers will happily buy the cheaper, better alternative if they have one.

With the globalized US-centric economy, competition was not an issue.

But now, cheap and high-quality Chinese EVs, drone, semiconductors, software, planes, solar panels, batteries, etc. are “flooding the market with overcapacity”.

What flowing means here ACTUALLY means cutting price in half with superior products.

This is a mortal threat to the likes of GM, Ford, BMW, Boeing, Intel, Amazon, Facebook, Google, which have not innovated in 1-3 decades depending of the company.

No wonder the US Congress got the memo from their owners sponsors and push legislation on its returns like:

• End Chinese Dominance of Electric Vehicles in America Act of 2024

• Protecting American Agriculture from Foreign Adversaries Act

• Protect America’s Innovation and Economic Security from CCP Act

• Countering CCP Drones Act

• No Foreign Election Interference Act - Foreign Grant Reporting Act

• To prohibit the Secretary of Homeland Security from procuring certain foreign-made batteries

• Hong Kong Economic and Trade Office (HKETO) Certification Act

As Arnaud Bertrand explains:

The first bill's name says it all: "End Chinese Dominance of Electric Vehicles in America Act of 2024". Yet all Chinese EV makers combined must have something like less than 0.1% market share in the US... For instance BYD, China's largest EV company, has literally never sold a single passenger vehicle in the country and doesn't plan to: no wonder if Congress already legislates to "end their dominance" when they're not even there

Multipolarity

Moving forward, the abuse of sanctions will make the privilege of getting real manufactured goods in exchange for printed paper fade away. Slowly, but inexorably.

This is how it (the dollar) ends, not in a bang but a whisper.

This will be a good thing, as it will make unproductive activities fade away as well, replaced by domestic manufacturing and less income & wealth inequality.

If the crisis period can be passed successfully, this will do more to defuse US social and political tensions than anything else.

How To Invest In This New World

Atoms Over Bits

An obvious and constantly repeated theme of my analyses is the importance of rebalancing portfolios toward real assets.

This includes commodities (oil, food, metals, etc.) but also manufacturing, or even real estate in areas not in a bubble for whatever local reason.

This is because the fake, financialized economy, born in the 1990-2000s is not dead yet, but is bleeding to death by a thousand cuts:

• Slow de-dollarization.

• Deglobalization.

• Collapsing productivity & internal rot.

• Rising competition from Chinese firms.

• Declining rule of law.

• The social and political consequence of maximizing rent-seeking:

  • Exploding inequality.

  • Drug abuse and deaths of despair.

  • Political polarization.

  • Mass immigration.

  • Activist hysteria disconnected from reality (climate, gender, etc.).

Invest Globally

Another theme is internationalization, as the new productive companies can be located in China, Indonesia, Africa, South America, etc.

Different jurisdictions might be more risky in a period of international tensions and war. But declining domestic jurisdictions are not the answer as well.

The answer is looking for returns so high that the occasional issue is compensated by gains somewhere else.

Get paid for your risk!

No more 1% dividends from Western pharmaceutical or tech companies.

But 10-20% dividends +5-10% buyback from foreign firms instead.

Beware The “Compounder”

Lastly, as you gather, what is currently a heresy for value investors is to avoid the Coca-Cola-style compounders.

The same holds true for MacDonalds, Goldman Sachs, Apple, Google, etc.

It might take generations before we see again such durable expansion of global brands.

This is because, in the short and medium term, we will not see rising a cultural hegemon like the 1950s USA.

China will rise, but not reach the same dominance. Neither will Russia, India, Indonesia, Japan, etc.

Where To Invest?

Each emerging block will consolidate its own ecosystem of local car manufacturing, search engines, social media, messaging apps, marketplace, fintech, energy production, etc.

So what will matter is a cheap enough stock price, good profit distribution habits, and a large enough LOCAL/REGIONAL market.

It is also worth noticing that most of the world will not completely lock itself away Soviet-style, so money will still flow between jurisdictions.

The only ones at risk of complete Sovietization are the USA+ Europe. If you have a lot of money, a trading account in Singapore, Hong Kong, or Dubai is probably worth it.

Along these guidelines, the ideal hunting grounds will combine growing quality /climbing the value chain + large population + cheap energy.

Together, they will form the basics of future profitability for real assets production and investor returns

Where to find it?

• China

• Russia (if accessible to you, like for Asian readers)

• SE-Asia

  • Bonus to Indonesia in particular for its population size.

• South America

  • Bonus to Brazil in particular for its population size.

• Central Asia

Somewhat lacking in quality and real growth (as in “not driven by population growth”), but potentially making it up if prices are cheap enough:

• India

• Africa

To avoid because of too high geopolitical risk is the Middle East (see upcoming report for a detailed explanation).

Commodities’ Exception

This excludes commodities, which are likely to stay globalized because a barrel of oil is just too fungible.

So invest in commodities wherever you like the geology + price + jurisdiction.

As the ultimate cyclical, commodities should be looked on a case-by-case basis.

I made the argument for oil, gas, tungsten, food, and coal before.

You can probably add in order of potential: antimony, titanium, platinum-group metals, iron, rare earths, silver, lithium, and uranium (yes uranium is at the very last, barely making the list, because it is very hard to invest in).

So it is not an accident I write a lot about the fate of empires, nation-states, and entire civilizations.

Each human-built structure goes through a path tracing from obscurity→growth→peak→decay/fracture.

And let’s be honest, the growth and decay parts are the most fascinating ones, as they contain so much more drama and action than the relatively boring peak phase.

Many will fail on the way and never achieve much growth, not achieving any peak.

The same which works for nations is true for businesses.

The world is full of successful but stagnant pizzerias and industrial SMEs with excellent records in one field, but which are stuck in the same spot for decades.

Interestingly enough, such “failure” can last a lot longer than the more accomplished sort. The oldest businesses in the world are of the boring type.

In Estonia, the oldest continuous business is a small pharmacy in the old town, open continuously since …1422. Over the world, you will also find similar small-building companies, hot springs inns, vineyards, or Irish pubs.

What you do not find is large manufacturing or trading companies. Over a certain size, the only path for a company seems to be growth or death.

Let’s study a little how and why it happened through 3 recent examples.

First is Intel, for the obvious reasons of the bloodbath the stock has been in the last few days.

Second is Boeing, for the continuous trainwreck of a technical failure the company has been in the last few years.

And last is GE for its uniquely American way of failing by over-financialization.

Intel’s Chips Are Down

What prompted the idea of this article was Intel's surprise news of firing 15,000 people, despite being touted as the future of US-based chip manufacturing, together with the forever delayed TSMC factories in Arizona.

Suspending the dividend also increased the investors’ exodus from Intel’s stock.

Here the problem seems to be a simple case of complacency.

I have been recommended 2 articles that go deeper into details:

Intel's death spiral took another turn

Intel’s Immiseration

The short version: Intel made so much cash from server CPUs that it never felt the urge to embrace anything else.

There are a lot of more complex details of course, but this is the crux of it.

This cash cow kept bringing revenues, so the company could keep growing its headcount anyway, despite degrading fundamentals.

The historical equivalent would probably be Imperial China. So long at the top, so wealthy and comfortable that it could never imagine that the upstart small nations like France or the UK could ever threaten it from the other side of the globe.

Similarly, Intel managed to fail to grab the chips for the smartphone market, and the GPU market (that turned out to be also a crypto chip and AI chip market).

The dominance of TSMC from using EUV, something Intel contributed to inventing is rather striking.

We are reminded of how China invented gunpowder, only to be forced by European gunboats to open for the devastating opium trade a few centuries later.

Boeing’s Technical Crash

Boeing is in another situation than Intel’s slow erosion of a competitive moat and missing a new market.

Instead, when still dominant in its industry, it started to fail from a technical and safety point of view SO hard that its reputation is falling like a stone.

This includes many high-profile crashes and panels taking off mid-flight, due to faulty design, poor manufacturing.

And for something as fragile & technical as airplanes, so many mistakes are rather unforgivable.

When Intel fails, some other companies make better chips. When Boeing fails, hundreds die.

The latest failure is the less dramatic but maybe even more high-profile, with an 8-day trip to the ISS potentially turned into being stranded for 8 months at least.

As usual, the jokes are the best part of a pretty lame situation. At least this time no one died.

The rest of Boeing’s space program is going as well as Starliner:

NEWS: NASA report says Boeing rockets are 7 years behind schedule, significantly over budget, and are built with an unqualified workforce with an inadequate quality management system.

You can read in detail more about Boeing’s recent failures in “Boeing’s tragedy: The fall of an American icon“.

Cutting Corners To Death

When studying the failures of Boeing, a recurring theme emerges: corner-cutting.

When Boeing, a famously excellent and engineering-focused company, absorbed the MBA-type sharks of McDouglas in 1977 (that had already run McDouglas into the ground) they essentially took over Boeing.

The difference is that for a while, the excellence of Boeing's previous design, in-house engineers and overall accumulated capital allowed for the company to cruise on past achievements from a technical perspective.

At every turn, when safety or technical excellence entered into conflict with short-term profits, the company took the wrong decision:

• Firing or harassing the “asshole” engineers that insisted on costly quality control and redundancy in designs.

• Plenty of share repurchases and sells of assets to maximize financial metrics.

• Distribution of its supply chain all over the world at the lowest cost, instead of preserving vertical integration and in-house manufacturing.

It took a long time for these decisions to really impact the company, but now it is hitting from all angles at once.

The 737 MAX crashes were due to a deadly mix of only 2 sensors for the angle of the plane, leading to the software being confused when one captor malfunctioned (which one should the computer believe?).

This broke a golden rule that any important sensors should be in 3 copies, so when one fails, the computer can assume the 2 functioning are the “right” ones.

In addition to the improper data input, the software also made grave mistakes like forcing the plane to perform the wrong maneuver when the sensor failed.

This led to the 2 deadly crashes costing the lives of hundreds, and Boeing’s reputation.

The software programming was subcontracted to an Indian firm winning the job for $9/h, with the quality we can assume for such a low price.

“Rabin, the former software engineer, recalled one manager saying at an all-hands meeting that Boeing didn’t need senior engineers because its products were mature. “

Bloomberg

Improper fuselage riveting leading to panels flying off mid-flight was also linked to a growing “it’s good enough” attitude in Boeing’s factories.

Overall, there is some touch of the same arrogance as at Intel, the “we will sell anyway” mindset.

But more dramatically, it is clear that financial profits and pleasing shareholders every quarter were more important than not killing passengers or ensuring the company's long-term survival.

It is a classical case of corporate self-cannibalism, where the company is stripped of its assets silently until the damage to the foundation is so great that the collapse is almost inevitable.

Now, remember that Boeing is also one of the largest defense companies in the world, and I let you guess what it means for the quality of NATO equipment.

General Electric's Loss Of Direction

General Electric, or GE, was founded by engineering and business legend Thomas Edison. It would grow into the quintessential American company.

Starting from the lightbulbs, it went on to invent so much more:

GE inventors developed X-ray tubes and radio voice broadcasts. They created an electric car and an electric train. In the ’20s, GE got into home appliances. It built the first U.S. jet engine in the ’40s, and by the ’60s it was making the plastics and silicones used in the moon landing.

A 1950s television commercial declared, “At General Electric, progress is our most important product.”

Later on, GE would get involved in nuclear energy, laser, and CT scans.

By 1999, GE employed 340,000 people worldwide. It was in everything modernity wanted, from trains to electronics to jet engines.

This sort of peak is usually when, would GE be an empire in Antiquity, imperial outreach & corruption start to creep in.

From that point, the structure is just so big that management has only a tenuous connection to the ground-floor operation. The way the Roman Emperor would barely hear about a bad harvest or a revolt in Britain months after it happened.

This is also when complacency can grow without consequences.

The taxes from Britain keep flowing to Rome anyway.

The revenue stream from GE jet engines and patents keeps flowing anyway.

But this was not enough.

It would take a legendary CEO, praised beyond all others, Jack Welsh, to destroy GE's long historical legacy.

Instead of cutting corners (although there was plenty of that), greed and corporate hubris were the fuel that would burn GE to the ground.

In 2024, GE would be broken up into 3 different companies, after almost 2 decades of slow decline.

Greed

Despite solid results, GE activities were all of the heavy industrial type, with plenty of required R&D spending as well as capex to keep at the top.

This resulted in an okay, but not great return on invested capital.

However, the sheer size of GE and its network gave it a great advantage in raising funds. GE Capital, the financing /shadow bank (at the time, the 7th US largest) branch of GE, would bring a lot more “capital” efficiency than clunky, boring, dirty factories.

A new culture of firing anyone not performing enough every quarter would take over the slow and steady rise of excellence in new technologies.

The nickname "Neutron Jack” appeared, after Jack Welsh the neutron bomb, only the building was left, but none of the employees.

Exit the workers and engineers, and enter the bankers and accountants.

Unsurprisingly, the incentive to pamper numbers lead to many accounting frauds and dubious practices.

More importantly, capital started to flow to “investment” instead of R&D.

Hubris

And there was plenty of investment. The pressure for division managers to perform and grow perpetually meant an easy way out for acquiring competitors.

Or unrelated businesses.

Or even better, loan money to your customers, so they can buy more of your products.

As a Reddit user put it:

“My wife worked for GE Capital called GEHFS. They were the golden boys for sure. They were cowboys financing anything to anyone with zero shits given. Broke hospitals with negative books leasing 50 million dollar MRI machines? SURE!

GE Medical would just "buy them back" when the hospital stopped paying which they almost always did. Then a couple of years later they'd turn around and do it again. Too risky? Not for GEHFS!“.

Another user in the same thread discusses interesting accounting practices to pamper the annual report earnings by laying with inventory:

I worked on an account that supplied locomotive components to their train manufacturing division in 2008-2011. The thing I distinctly remember was they did the same thing every year in the last quarter and first month of every year (exact months may vary I can't remember if their fiscal year was differerent) From Feb - Sept they would order a consistent number of components every single month (matching their locomotive production requirements). Oct/Nov/Dec they would stop ordering almost completely unless they ran out and then January they would order 4 months worth of the components.

Why would they do something so ridiculous? So that they could draw down inventory to juice their end of year financial reporting... of course that only worked the first year they did it... and then they were subsequently forced to keep doing it or people would lost their bonuses.

Considering what came out over the years, these accounts, while unconfirmed, feel accurate.

There was nothing GE could not do. It acquired 600 businesses in 20 years, or one every 12 days. It owned the NBC network.

Most acquisitions would later collapse or be resold at a massive loss.

GE Post Mortem

More than just corner-cutting and outright stupid decisions like in Boeing (like saving a few hundred bucks on a third key sensor), there was a true callousness to GE's methods.

Accounting fraud, careless loans, tens of billions in share repurchases to get management’s outrageous bonuses paid, etc.

If Boeing is Imperial Rome in decline, GE was at that stage of decline where the corrupt elites pillaged their own city before leaving it defenseless.

Takeaway

There are really only 3 types of corporate and national crises:

1. An external crisis, brought by an exogenous shock, like a new technology or an invasion.

   1. A healthy corporation or empire can see these coming in time and normally anticipate and reduce its impact.

   2. If it has catastrophic consequences, it is very likely that the real cause is not the external one, but the complacency.

   3. While problematic, this can be solved if the shock induces enough of a change of tactics and the end of complacency.

   4. Intel seems so far a good case of such an issue, with the jury still out to determine if the shock has been enough to change its course.

2. A crisis of competency, where bad decisions are taken as the wrong people are in charge, and they are too stupid and/or shortsighted to take the right ones.

   1. Competent people, either good engineers or good generals, get replaced by incompetent finance and politician types.

   2. The new management can for a while make things seem not only okay but better.

   3. This however hides an ever-deepening rot building into the organization.

   4. This seems to be mostly the case with Boeing, with decisions like removing a cheap sensor or updating poorly the software of Starliner not so much short-sighted than outright stupid. You can be sure there was somewhere in this team an engineer who pointed out that could cause a problem and got told to shut up and stop “being difficult”.

3. And then, there is the last case, outright malice and fraud.

   1. While it can be difficult to distinguish from crisis #2, a key factor is the ruthlessness of it.

   2. Instead of bumbling idiocy that does not even save money, you see the organized and systematic pillaging of the healthy part to feed the parasitic parts.

   3. Welsh clearly knew what he was doing. He also knew that with the right lobbying, he would be perfectly shielded from the fallout of his accounting shenanigans and failed empire-building.

   4. Funnily enough, most of the CEO followers of Jack Welsh, Boeing executive included, seem to have truly believed him a hero and genius, making them commit #2 type of mistakes. Because the smart one would have figured it was all a fraud to fill a few people’s pockets.

An organization tends to have different types of crises at different stages of its life cycle.

Still, dynamic structures will fall for #1 when they get too successful or big.

Past their peak organization will often commit #2 errors. They might or might not survive them.

Type #3 however tends to always be fatal. The way type #2 is an accident you might survive, but type #3 is premeditated murder.

Investing Takeaways

Intel

As it was the Intel stock crash that prompted this article, let’s discuss it briefly.

As far as I can say, Intel's failure is more akin to a series of technological wrong turns than outright stupidity or malice.

So while I would not want to buy the stock yet, there is maybe a point where the company can rebound.

Especially if it keeps getting cheaper.

As the company is now below its 1997 price, and on the way to its $12/share of 2009, it might be one of these trades like buying Apple or Amazon after the dot com bubble imploded.

Boeing

Boeing’s problems are however a lot deeper. Not only did it make bad decisions, but instead of complacency, it is outright incompetence that is killing it.

A dangerous situation for a company producing fragile and mission-critical products like missiles, helicopters, planes, and spaceships.

I am under the impression that the accumulated loss of top talent, bad manufacturing practices, and poor management flowing from the top down to the team leaders is likely incurable.

In any case, the bad news are almost certainly not done coming.

The only case where I would invest in Boeing would be after a massive restructuring, downsizing, and re-establishment of an in-house supply chain.

It could make for a good short I guess, but I don’t short. And most likely, neither should you.

For sure, the stock does not look cheap when it is barely below its recent peaks and still above its 2016 stock price.

Others

Of course, corporate post-mortems are fun, because you can sound smart on something you have enough data to talk about.

But if you had forecasted the downfall of GE in 2005, few would have appreciated your genius.

Looking back, what warning signs can you detect that a corporate collapse is brewing?

Here are a few common features, of all 3 types of crises:

• Too big, with size either the driver of complacency or a good way to hide fraud.

• Technologically sensitive, as a company Coca-Cola would not be so easily disrupted (points to Buffett here).

• Degrading performance with little to no reaction, including declining headcount.

In general I would not recommend shorting any of these, as we are in very bubbly times.

Tesla

Of the #1 crisis I can see forming is Tesla.

• The company is starting to severely lag behind its Chinese competitors of technology.

• The branding that relies on no marketing costs thanks to Musk might suffer badly from Musk's entry into politics.

• A focus on gimmicks and wonder technologies (cybertruck, self-driving software, humanoid robots) instead of fixing the degrading core business.

A Musk-centered company, I am not sure Tesla can survive without a crisis after the de-facto departure of Musk, too distracted by politics/Twitter and SpaceX to deal with it.

NVidia

Of course, Nvidia's price rise is reminiscent of Cisco in 2000, which is a problem in itself.

But I suspect it is getting complacent in the face that most of its main clients (Facebook, Google, Microsoft, etc.) are actively pouring tens of billions into developing their own AI chips.

Almost a decade of growth from crypto and AI has made the company complacent and greedy.

In the long run, if its profit margins are too high, either a competitor (AMD?) or its own clients will create a cheaper alternative.

It also seems that NVidia is starting to do a lot of the “loaning money to your clients so they can buy your products” shenanigans.

So it might be more of type #3 fraud than simply complascence. The most dangerous type.

Visa / Mastercard

Exploiting a duopoly for decades in an unavoidable middleman position will for sure make you complacent.

Crypto enthusiasts claim they will bring down the legacy payment systems and they might for all I know.

What I am a lot more certain about is that the business model of dominating the world finance from New York, simply because your company is American, is over.

It died when the West seized Russia's currency reserves and the US State Department started sanctioning everyone everywhere.

Progressively, national or regional equivalents will be taking over, breaking the steady growth of these companies.

Amazon

Another one that seems obvious to me is Amazon.

The company has evolved from the cheapest retailer destroying everyone's margins and wiping out entire industries to an overpriced reseller of Aliexpress and Temu products.

It is also losing the battle to stay the number one e-commerce site in South America (MercaLibre, see previous report), Eastern Europe (Temu/Alibaba), and SE-Asia (SEA).

The company's future entirely relies on its AWS business, the only real money maker.

But like Visa, do you want all your business and data in the hands (at the mercy) of an American company in 2024 if you are Muslim, Russian, Asian, African, etc.?

Besides, I have the impression Jeff Bezos is sort of distracted for a while…

This would explain how the company can blow up $1B on the Ring of Power. In case you missed it, it managed the feat of being universally loved by critics, hated by viewers, and literally makes people cancel their Prime subscription.

I mean, imagine making a Lord of the Rings series and losing money.

This is a blunder as big as Disney almost killing Star Wars.

When your organization cannot handle such a simple task, the problems are piling up quickly at the horizon.

Disney

Speaking Of Disney, the only branch of the company making money seems to be the amusement parks.

But the parks make money only thanks to Disney’s IP, of which the last successful one was … Frozen … in 2013. ELEVEN YEARS AGO.

Meanwhile, it managed to sink cultural icons like Star Wars, Indiana Jones, and the Marvel movies.

Very much a #2 crisis, utter incompetence, in this case, due to terminal infiltration by political activists.

Not much to say, except a big KEEP OUT sign.

But each of these will be alternating during our lives in a major way, for we are living in a tumultuous period.

These will affect what sector we should be invested in.

Today we will discuss the … eventful … American elections. This is by no means because it is the only thing happening, but that is a good start.

Here are a few of these events:

• The breaking down of American domestic politics. (Today’s report)

• The coming Great War in the Middle East (August report)

• The coming defeat of Ukraine (I guess for the September report, baring change in the news)

• The growing instability and impoverishment of Europe (a strong contender for September, considering the recent UK riots).

• The steady rise of China as a technological power. (mostly already covered, see link below).

In these, I will get my neck on the line and make actual predictions of things to come, as it is becoming clearer (to me) what shape the second half of the 2020s will take.

Over these reports, we will see together what companies and sectors to avoid, a few stock ideas or a specific stock pick, and how they articulate with the other macro ideas.

So this is not just a news commentary, but as much as possible, an actionable report from an investing point of view.

Probably by the year-end, I will also do a dedicated report on how each of these large events will interact with each other.

Read more

NAURA Technology Group Co Ltd (002371.SZ)

Naura is maybe the most interesting one, as it was rumored/announced in 2024 that it is going into the lithography market, entering into direct competition with SMEE.

Naura was in 2023 the semiconductor equipment manufacturer that made the most revenue. On the surface le…

Read more

So this report is a bit late, my apologies.

July will see 2 reports to compensate for the delayed June report)

The Last Missing Industry

As discussed in the previous report, the new strategy for economic growth of the CPC is based on an industrial push into innovation and new technology.

The whole with a focus on the so-called 4th industrial revolution, which relies on the mass adoption of robotics and automation, as well as embraces the (eventual) productivity gain from digitalization, IoT (Internet of Things), and AI.

None of these can happen without a very solid supply of semiconductors. So for decades, the Chinese government has been hard at work to create a semiconductor industry.

As this is a complex topic, it had to fit into a report of its own.

Semiconductors

Creating an entire domestic supply chain for semiconductors is a big deal for China.

Actually, it is probably bigger than all the other sectors, as none of the planes, high-speed trains, renewables, nuclear plants, etc. can be built without a supply of chips and simple semiconductors.

The rest of its industry is equally dependent, both domestic and export, with China consuming half of the world's semiconductors.

Semiconductors can be roughly divided into 2 segments:

• Legacy: the larger type of chips and memory, built with older technology. Think about the type of electronics you had in PCs 5-7 years ago or the ones you will find in appliances, military equipment, low-cost electronic gadgets, etc.

• Edge: the most advanced chip allowed by our current technology. That’s the chips, memory, antennas, etc. found in the latest smartphones, top-of-the-line data centers, AI applications, etc.

Legacy Semiconductors

This is the bulk of semiconductors consumed in the world, going into virtually everything built and assembled today, from washing machines and alarm clocks to printers and most cars.

While a lot less glamorous, this is actually the most strategic segment.

Most missiles, nuclear plants, and other strategic components rely on tried-and-tested designs, with high reliability and relatively low cost.

China seems to target the domination of this segment.

It is also “flooding the market” with older chip types, the ones not useful for AI or smartphones, but everywhere in missiles, cars, washing machines, robots, etc. with pure-play foundries like SMIC at the forefront.

“U.S. nervous about 'flood' of older-generation chips from China” - Nikkei Asia

In the 50- to 180-nm range, China currently controls around 30% and within a decade could control around 46% of global capacity.

"Legacy chips underpin everything from dishwashers to military weapons systems," Hogan wrote. "Just as it did with solar, China could box out foreign competitors through dumping, rendering the United States -- and the rest of the world -- dependent on China for mature chips."

Edge Semiconductors

The most advanced chips are often considered in the 7nm and smaller range. Currently, 5nm is mostly the sole domain of TSMC and 3nm is in the view.

Until recently, this scale of precision seemed out of reach for Chinese manufacturers.

And an endless stream of sanctions was designed to keep it this way.

For a bit more background on the efforts by China to develop its semiconductor industry since the 1960s, I warmly recommend Asianometry’s latest video (Asianometry author is a friend and a true reference when it comes to anything semiconductors related):

Catching The Bleeding Edge Of Semiconductors

At the forefront of the efforts to make domestic 7nm chips have been Huawei (privately owned by its own employees, so no stock recommendation here).

The key partner for Huawei has been SMIC (Semiconductor Manufacturing International Corporation), in a complex saga described in this article from Ars Technica.

To resume it shortly, SMIC managed to use less advanced DUV machines to engrave chips instead of the sanctioned EUV machines from Dutch ASML.

However, this came at the cost of efficiency, with production costs of 7nm chips much higher.

So let’s talk about SMIC first.

Read more

So I will try to organize events a little, by theme and by order of importance as well as in a somewhat coherent narration (as much as possible), starting with the most significant news first.

Gold Woke Up

The price of gold and silver is shooting up, with both hitting their highest points in 5 years and gold at its highest point ever!

Physical silver traded at around $35 in China, essentially sucking the “paper” silver out of the West through arbitration.

This is emblematic of the progressive return of gold into the monetary system, something I discussed almost a year ago.

The reason is that gold will be the natural, and truly ONLY possible currency for intra-BRICS trading, especially with the association expanding to new members quickly.

This does NOT mean that ordinary people will start paying in gold coins, nor that we will see a gold standard quickly replace fiat currencies.

But what it does mean is that monetary reserves will not anymore be stored in sanctionable dollar bonds that can be stolen at any time by Washington DC, even from nuclear superpowers.

Nor will trade imbalance between multiple partners be settled in USD or local currency, less say for example the triad Russia-India-China.

India's trade deficit with Russia will be settled in gold, which will use it to buy what it needs from China, which will use it as a reserve or as a financing tool for Belt and Road initiatives.

In the long run, losing the USD reserve status would cost the US at least 1 TRILLION per year, which is roughly what it pays currently in interest on the debt OR the whole military…

Tariff, Sanctions & High-level Visits

Visiting China

The US sends Blinken and Janet Yellen citing China, respectively to threaten them for selling stuff to Russia, and to beg them to buy more US debt.

Blinken’s visit has been accurately resumed by X users as:

Yellen’s visit success can be measured by China's sale of USD -denominated bonds, the largest EVER.

Meanwhile, Putin visited Xi Jinping with:

• Multiple industry leaders

• Former defense minister Shoigu

• Foreign minister Lavrov

• CENTRAL BANK DIRECTOR Elvira Nabiullina

Sanctions

Meanwhile, trade wars and diplomatic activities are on overdrive.

The US is looking to sanction everyone not complying. This of course includes Russia, but also China, under the nonsensical accusation of “overcapacity”, aka. higher productivity than the West.

• The 100% tariff on Chinese cars is just the beginning. It comes together with more semiconductor sanctions, quantum computing sanctions, green energy sanctions, etc..

  • China’s semiconductors will be the topic of the next report in this newsletter as a result

No wonder China is feeling that the West is a little hostile.

At this point, the West is all stick, and the carrot has rotten.

The likely result is that the Western block will start lagging behind the way the Soviet Union did.

Where the USSR missed the boat on computers and automation, the West will miss the boat on 4th generation nuclear power, 4th industrial revolution (automation, smart factories), drones, EVs, renewables, superconductors, advanced biotech, etc.

MORE sanctions

Even countries intended to be used as tools against the Eurasian Tripod (Russia+Iran+China) like India are not immune from sanctions threats, because they dared … get a stable energy supply from the first Iranian deep sea harbor of Chabar.

Another country that can brace for a flurry of sanctions is Georgia. They dare want to know when an NGO is financed abroad.

Mind you, not banning said NGOs. But force them to declare who pays their bill. Never mind the proposed law is almost a copy-paste of a US law, it is of course a “Russian law”.

With 25,000 NGOs in a 3.7 million people country, or 1 NGO for every 154 inhabitants, elderly and newborn included, foreign interference seems a likely realistic occurrence.

A protest of up to 60,000 people against the law would also mean 3/NGO, not really surprising that this amount would fear losing their “job”.

Visits in person by foreign ministers and parliament members from the Baltic states, Germany, or Iceland to support the protesters reinforce the idea of a Maidan-like coup tentative to push Georgia into the meat grinder.

Ukraine Weakening?

The other big news is that Ukraine seems to be increasingly on its last leg militarily.

This will not surprise my readers, but it is important to notice that it cannot be hidden under propaganda anymore.

Some of the signs:

• Ukraine lost almost all the small amount of territory gained during its summer “offensive”.

• A new front opened around Ukraine's second-largest city, Krakhov.

  • Despite the limited size of Russian troops (less than 30,000 soldiers), Russian advances have been surprisingly quick, breaking the pattern of a static attritional war.

  • The region apparently has no defensive line built, mostly because all the money was stolen and the equipment purchased just piled up in the woods instead of installed correctly.

    

• Forced mobilization is turning even more brutal, and a new mobilization law will now hunt for every man from 18-60 without restrictions.

• Rumors of ANOTHER front opening in SUMY in the next week would stretch Ukraine’s reserves even further.

• In the upcoming months, an attack on Kyiv from Belarus could even be possible, but not very likely yet. Another option could be crossing the river toward Kerson in the south.

As mentioned before, the moment of truth about Ukraine escalating into a global conflict is getting closer.

Tactical nuclear drills by the Russian army made the risks pretty clear.

Either the USA abandons the failed Zelensky project like it did South Vietnam, or it doubles down with NATO boots on the ground, and all bets are off, with European soldiers expected to bear the most of the casualties…

World Disorder: Riots, Assassination, Mass killing

While these larger-scale events happened, the Slovakian Prime Minister Robert Fico was almost assassinated for political reasons.

A strong proponent of NOT helping Ukraine, Fico even predicted these risks a few weeks before in an interview.

Only days later, the Iranian president and foreign minister die in a helicopter crash.

Fico's wannabe assassin might be a “lone wolf”. And the Iranian presidential crash could have well been an accident.

But of course, it is hard not to feel something fishy is going on with opponents to Western power.

Especially in the case of Iran, as the president was coming back from Azerbaijan, a country that received a lot of weapons from Israel recently, as well as murky intelligence connections:

In the same weeks, Turkey claims to have foiled a new coup attempt against often double-faced Erdogan. To make it more complicated, remember: Turkey is Azerbaidjan's most enthusiastic supporter.

Also, rumors of an assassination attempt against the Saudi crown prince floated on social media, with the veracity hard to assess.

Secret CIA armies in foreign countries, including Europe, committing assassinations? I will just let you read about Operation GLADIO for the ones who do not know yet about it, and let you judge for yourself if it is likely…

Israel

These political turmoils also came on top of the bombing of Iranian diplomatic personnel in Syria by Israel, a big red line to cross.

The bombing led to a short lived attack by Iran on Israel, consuming 1-1.5 billion dollars of air defense to shoot $50M of Iranian drones and missiles.

The same cost imbalance persists in the Red Sea and Yemen as well, with a cargo ship hit every other week.

Israel's situation keeps degrading militarily, as it struggles to beat Hamas in Gaza while displacing starving civilians once more in Rafah.

The final goal seems still to be the deportation out of the country of the whole Palestinian population of Gaza.

This led to a warrant for an arrest of Netanyahu issued by the International Criminal Court (ICC) for a wide array of war crimes and essentially genocide attempts.

This degrading of international capital & goodwill is a dramatic threat to Israel's survival, more than any military pressure could ever be.

It is not clear what will be the consequence of the last days’ Iranian helicopter crash and ICC warrant, but the risk of a broader escalation of conflict in the Middle East keeps rising.

Also, to stay true to form, the US senators had already preventively threatened with sanctions the ICC judges AND THEIR FAMILIES a few weeks ago.

Others

Meanwhile, somewhat of a sideshow and a distraction, France’s colony of New Caledonia is in chaos from independentist insurgents.

It might be good for nickel spot price, with Caledonia the 3rd largest producer.

And insurgents have oddly enough been armed by … Azerbaidjan, in retaliation for France's support of Armenia. And yes, this is an official accusation by the French government.

I swear it feels like Baku could be the theater of a new Casablanca movie these days.

As a more disheartening sideshow, but one with potential consequences, the Baltic states (where I live) are looking to persecute (no other word possible here) Russian pensioners and an Orthodox monastery that barely survived the Soviet persecution.

although representatives of the Ministry of the Interior have previously promised that no churches will be closed either way, Läänemets told err.ee that if they don’t willingly leave the Moscow Patriarchate, the state “will have to apply through the court for a forced termination of activities.”

As an Estonian Orthodox myself (converted from Roman Catholicism), but not under Moscow jurisdiction, I cannot express how short-sighted such policies are.

Are we attacking religious communities in a worse manner than the Soviets now?!

Let’s keep politics out of religion, shall we?

Conclusion

The last months have vindicated my strategy, with unfortunately most areas evolving toward the predicted directions of growing instability and Western decline.

From an investing point of view, defense stocks seem the way to go, or maybe even better as technology risk is real for individual defense stock, just the ONLY tungsten mine available in the Western bloc.

Chinese hardware technology stocks are also a buy. Consider that the US had to put a 100% tariff to become somewhat competitive against Chinese automakers. Guess who will sell more cars in the coming decade in South America, SE-Asia, Russia, India, the Middle East, and Africa?

Oil & gas are also still a good way to edge a close of the Hormuz Straight, especially the Colombian stocks previously discussed.