Last week, Scott Bessent stood up at the Reagan forum and gave a speech worth reading in full (here). Strip away the occasion and the message was this: the United States can no longer run trade and national security as if they were separate ledgers in separate rooms. The invisible hand was never going to quietly correct a strategic vulnerability. Resilience must be weighted alongside efficiency now — just-in-case alongside just-in-time — even where it costs you. He conceded the calibration is up for argument while insisting the underlying read is not.

What struck me was not that a Treasury Secretary said it, but the level of awareness behind it. Bessent is describing the world order as it actually is — layered, dynamic, governed by different logics in different places — rather than the tidy single settlement most commentary still assumes. I’ve been writing about this multi-layered reality for years, often into a headwind, so I’ll permit myself to feel a little validated. His framing of the silo problem — that we let trade and security drift apart and must now reintegrate them — is a deliberate diagnosis, because he is arguing for elevated economic security in order to secure foundational national security. That is the challenge the Trump Administration has taken on.

I’d put one layer of emphasis underneath it. Trade and security were never one ledger that got carelessly split. The split came from a misguided belief that trade would drag political systems toward convergence — that commerce was a solvent for regime type. It isn’t. They are two different layers of international contact, each running on its own logic, its own clock, and its own kind of trust. They were always distinct. The mistake of the hyper-globalisation era wasn’t separating them; it was letting the optimism of one layer write cheques against the other — behaving as if climbing the trade ladder with a rival was the same thing as climbing the security ladder with them.

Circles of Trust

Long-time readers will know I’ve been writing about Circles of Trust — the way the new world order is actually being built, not through grand multilateral consensus but through overlapping coalitions organised by shared risk within a specific domain. The Quad, AUKUS, the maritime-awareness partnerships, the space-operations groups: built to functional spec, scored independently, where membership in one circle guarantees you nothing in another. Trust built on demonstrated operational confidence, not on a pledge signed by leaders who left office decades ago.

What I have argued in the past, and what this piece intends to flag, turns that idea ninety degrees. Instead of looking across partners within one domain, look across domains for a single relationship. Take any two countries and you won’t find one relationship at all. You’ll find several, stacked at different heights, often pointing in different directions at once. Here’s the whole thing in one line, for those of you who think in market terms: trust between two countries is not a number, it’s a vector. We collapse it into a scalar — ally, rival, partner, adversary — because a single label is easy to file. The same counterpart can sit high on one layer, mid on another, and at the floor on a third, all at the same time.

What sets a layer’s height on that spectrum is how much you stand to lose if the other side fails you — call it trust at risk, the diplomatic cousin of the value-at-risk every trading desk already lives by. Sharing actionable intelligence or your most sensitive military technology puts an enormous amount of trust at risk: defection is severe and you never get it back. Whereas, selling consumer goods or hosting each other’s university students puts very little trust at risk: if it sours, you recover by Friday. Everything else falls in between these extremes, and the activities sort themselves by that single measure of trust at risk rather than by which department they belong to.

Three broad bands on that spectrum of international interactions can simply be thought of as Security–Trade–Culture, with many interwoven elements in between — finance, law enforcement, education, regulatory standards, and more, each sitting at its own height on the trust spectrum. The political-model layer is well know; democracy against autocracy, though I’ll leave it mostly alone here, as it has become an unreliable marker now that the world holds so many hollow democracies and a few competently benign autocracies. The label has stopped tracking the behaviour. The three bands of Security-Trade-Culture are enough to make the spectrum legible. Take them as samples, not as the full count.

Security

Ordering principle: survival. Nothing else gets a vote until survival is satisfied, which is why this band sits lowest on the trust spectrum almost regardless of who’s across the table. You can’t earn your way up it the way you can the others, because the cost of being wrong once is the whole game. This is the deterrence-trained band, and at its outer extreme — the handful of powers who can end civilisation several times over (MAD) — trust stops being earned at all and becomes a matter of pure necessity. There the bridge isn’t integration, it’s deconfliction: hotlines, agreed buffers, respected spheres, the no-threat signalling whose only job is to stop a misread from becoming a mushroom cloud. Good fences, with very good communication.

Trade

Ordering principle: prosperity — though, as Bessent flagged, resilience is muscling up the stack and demoting raw efficiency. This is the band you can climb, because it was trained by reward: open up, the dividend arrives, open up a little more. The bridges are the familiar machinery of mutual gain — deals, mutual recognition of standards, the co-funded vehicles springing up between Washington and Tokyo, with land and permits on one side and capital and underwriting on the other.

This past year of chokepoint debacles taught everyone the hard way — and I’ve laboured the point through the Strait of Hormuz and critical-minerals episodes — that this band has a baseline it should never have abandoned and a frontier it should never have over-trusted. Between free-market democracies across the Atlantic and Pacific, with proven track records and broad economic differentiation, the rational level of dependency is high; the current instinct to treat all dependency as toxic is an overcorrection. The error was never trading at high levels of dependency within the West. The error was reconfiguring an entire manufacturing base into a single-party state with no track record on property rights, or routing national survival through one geographic chokepoint, and filing it under efficiency. The band climbs safely only as far as the partner’s track record will underwrite. Much of the world climbed too high with the wrong partners and not high enough with the right ones.

Culture

Ordering principle: legitimacy — identity, values, the story a society tells about itself and will defend. The easy assumption is that this is the soft, friendly band: student exchanges, goodwill, a little soft power, and the hard layers soften in sympathy.

This is one place I’ll push back against the consensus, because the consensus is dangerous here. Culture is not always the friendly band. On the current map it carries some of the thinnest trust and the fastest contagion. Trade converges over time through repeated deals, breeding familiarity, and familiarity lifts the ceiling. Security at least has the brutal clarity of survival to anchor it. But values don’t converge on a schedule, and a great many of the world’s systems are organised around an ordering principle forged in deliberate opposition to the liberal-democratic one. There is no exchange rate between them. And narrative — the currency of this band — is the cheapest weapon ever built. Authoritarian states long ago learned to turn open society’s own dissent against it, and after two decades, with a layer of AI bots on top, the organic grievance and the manufactured one are no longer cleanly separable. The colour revolutions now run in reverse, aimed at elected leaders instead of dictators.

So the cultural band is where hostile actors strike first — cheap, deniable, below every threshold that would trigger a response elsewhere. Which is why the right bridge here is the counterintuitive one: not integration, but disciplined non-interference. Encourage what emerges organically; resist the urge to impose your model from outside. The fastest way to poison the trade and security bands is to evangelise on the cultural one — to treat another society’s internal ordering as a thing to be corrected. At home it reads as standing up for your values; abroad it reads as subversion, and it re-prices trust everywhere along the spectrum. The one-planet, one-system reflex assumes culture is where we will all eventually agree. It is closer to the opposite: it’s the band where we are most entitled to differ.

Same country, different answers

Stack the bands and the practical instruction is easy to state and hard to follow: with the same counterpart you run a different strategy at each height on the spectrum, and you don’t let the posture from one bleed into another by accident.

US–China is the standing example, and it’s why I keep describing it as no iron curtain, just roadblocks and checkpoints. Security and frontier technology: a low ceiling, falling, managed by denial and deconfliction. Trade: constrained but emphatically open — effective tariffs down from above 100% a year ago to around 30%, a critical-minerals truce extended, a grand bargain still being floated. Culture: cold and contested, each side’s legitimacy the other’s target. One relationship, several heights. Pricing it as a single number, full decoupling or business as usual, is reading the label instead of the position.

It runs the same with friends. Washington and Tokyo at the moment: a trade band climbing fast through co-funded industrial vehicles, a security band converging hard under shared deterrence and First Island Chain investment, a cultural band that mostly runs on respectful distance. The word “ally” carries almost none of that. The Asia-Pacific allies have read the components separately and acted intelligently; Europe, tangled in the EU superstructure and a misreading of what NATO is for, has not.

Why the old order collapsed by itself

Hold all of that in mind and the central question of the last decade answers itself differently than the more popular account allows. The liberal world order did not get blown up. It collapsed of its own weight, endogenously, and it did so for two reasons that the layered system view makes plain.

The first was blindness. The custodians of the order managed it as though it were one thing — one settlement, one set of standards, one relationship with each member — when it was always many layers at many heights. Manage a multi-layered system as a single tier and you will keep extending high-trust access on the strength of low-trust familiarity and keep mistaking a good quarter on the trade band for progress on the security one. The tracking error between the order on paper and the order in reality widened year after year until it could no longer be ignored.

The second was a slow accumulation of trust violations. Across thirty years, a great many states drew access at one height on the spectrum and then behaved as though they owed nothing for it — took the market access, the technology, the capital, the seat at the table, and violated the trust threshold that level of access was supposed to require. Most of these were small, and small violations at low trust barely move the dial; they’re almost priced in. But trust does not respond in a straight line. A violation at the top of the spectrum, where access is greatest and exposure deepest, can downgrade a relationship for decades — trust convexity, if you like, the same asymmetry that makes a single high-trust betrayal cost far more than a hundred routine ones. Stack enough of those against a system whose managers weren’t even reading the right layer, and it doesn’t need an arsonist. It comes apart on its own.

This is the part that still needs saying, because not everyone agrees, and I’m content to take the other side of it plainly. Trump did not break the liberal world order. The reverse is closer to the truth. The thing that tells you his policy was built on an accurate read is precisely its wholesale character. There were no quick fixes on offer, and nothing left to fine-tune, because the misalignment was foundational and spread across layers — a structurally failed system, not a mistuned one. Wholesale change is what correcting a multi-layer failure looks like. It resembles demolition only to those still convinced the building was sound. This is what Bessent’s speech reaffirmed.

World order as a process, not a thing

Step back far enough and this is one argument about what “world order” is. The moment you capitalise it — make it a thing, a settlement, a set of standards everyone signed — you’ve already misdescribed it, because for half the world that order arrived after the fact, exogenous to their input. Natural laws you accept ex-post; they sit beyond human construction. Everything humans negotiate on top is provisional, transitory, a high-probability state rather than an assured one.

There is no single natural law running across the bands of international interactions the way gravity runs across all of physics. Survival, prosperity, legitimacy — different ordering principles, different weightings, set by different histories and re-rankable by choice and by shock. That’s why the layers can’t be collapsed into one relationship, why a settlement that tries to govern all of them at once keeps drifting from reality, and why the healthier model is continuous recalibration from a floor of minimal trust upward — only as far as each layer will voluntarily underwrite, only as fast as the track record earns. Lift the floor where you can. Leave the peripheral areas of difference unregulated. Don’t build houses in the flood zones behind a provisional dike.

The message from the Watchtower

The mispricing in geopolitical risk comes overwhelmingly from scalar thinking. An analyst reads one alarming headline off one layer — a laser-lock on a plane, an embargo, a leaked doctrine revision — and re-prices the whole relationship off it.

For the second half of 2026 that means treating the US–China security and frontier-tech ceiling as low and contested without extrapolating it into a full commercial rupture that isn’t coming; treating the US–Japan complex as a genuine multi-layer upgrade rather than a headline; and watching the cultural band everywhere as the cheap-to-strike, fast-to-contaminate early-warning system it has become. The volatility lives in the cross-layer feedback, not on any single band.

None of this is a forecast. It’s a set of guard rails. But guard rails are what let you keep surfing the big waves while everyone around you reacts to one number at a time.

The full apparatus — trust at risk, the circles, the convexity that makes a high-trust betrayal so much costlier than a low-trust one, and the diagnostic for how far any two systems can safely climb before survival says stop — is the book I’m finishing. This is one slice of it. More soon.

Taking stock as we approach mid-year 2026. Reviewing thematic progress, and strength of growth tailwinds from frameworks grounded in reality, as opposed to the verbose and conjecture-based political narratives. Conjuring up a degree of optimism for 2H-26.

Gulf

Firstly, on the Persian Gulf conflict, viewing the impressive & compressed timeline, and within a Strategy of Denial framework, progress remains sufficiently on track. Oil prices remain elevated, with 160 oil tankers still stuck inside the SoH, and a further 50 LNG-LPG carriers idle/stuck as well. This keeps anxieties high, but progress in reshaping the post-conflict ME dynamic continues.

So far globally, most nations have chosen to draw down stockpiles or pay a bit of ransom to the IRGC rather provide naval escort for their merchant fleet.

The media narrative treats this as an immoveable constraint when it is actually an economic choice. The US ended hostilities, agreed to a ceasefire with Iran, UN passed resolution 2817 upholding Freedom of Navigation (11 March), allowing countries to defend their ships, and yet the world still did nothing.

The media prefers to frame this as some kind of US military failure, while the reality is, the world needs to read up on the Strategy of Denial doctrine. This defines the US’s measured global power projection now. It denies enemies and adversaries leverage and certain threat levels, but it is not a global police force. Other countries must provide security for their own people, their own commercial fleets, and they must restructure their own global supply lines. The US won’t be doing this for them.

The announcement over the weekend of Trump’s broad regional leadership call that resulted in a MOU towards a peace deal with Iran, fell along the lines I proposed early on in the conflict (15 Mar). The GCC countries + regional military powers have all signed on to take this leadership role. The US doesn’t want responsibility for keeping peace in the region. It simply wanted to level the hard power playing field and eliminate Iran’s nuclear program. The peace framework was always going to require GCC and regional leadership to succeed.

While another 60-day extension to the ceasefire sounds tortuous, if the ships are passing through the straight and the transport backlog is clearing, the world will be far more patient than it has been these past 2 months. Market focus will migrate elsewhere. This is positive news for risk appetite.

Tariffs & trade

On the issue of tariffs and trade wars, the year over year effects are beginning to drop out, modified trade is settling into its new equilibrium. The China excess capacity dump from 2024-25 has peaked and is now declining. The ROW has made many of the basic trade-offs necessary to align with US tariff objects vs China, or independently attempted to recalibrate their bilateral trade with China.

The US is still pursuing a grand bargain with China, floating various versions of a Board of Trade, and a Board of Investment. The recent Xi-Trump summit in Beijing has advanced the new framework of Strategic Stability. The critical mineral export control truce was extended/augmented (WH Factsheet) beyond the Nov-26 expiry, giving more time for the US (and others) to innovate their way out of the problem. Effective tariffs on China are down to 30% now, compared to levels above 100% this time last year. It has been 12 months of progress.

Central banks & inflation

Central bank policy is another area where a mid-year update is necessary, as the Fed gets its new Chairman and global inflation receives another kick higher from another energy shock.

There are not a lot of success stories out there. First, central banks spent the disinflation-psychology dividend early on amid a post-Covid surge in prices, then it tried to ignore a broad external supply shock from the Russia-Ukraine war in 2022, then it sought to pre-emptively cut rates in search of growth before inflation returned to target in 2024, believing that mean reversion forces were unchanged from the previous decade.

An end to disinflationary forces like globalisation, and a transition from efficiency to resilience as the defining global supply chain mantra, caught the central banks out . . . again. They were busy risking their multi-decade credibility on a goldilocks inflation soft-landing, when President Trump took office again in 2025 and began disrupting what was left of the status quo. This has perpetuated the impression that central banks are routinely behind the curve now. Global shocks keep coming and policy has not successfully anchored inflation expectations.

The worst offender has been the BoJ, as it failed to keep to a normalisation pace sufficient enough to get rates to neutral before the next inflation shock hit. It only managed 3 rate hikes up from zero in 2 years.

Most other central banks managed to restore real rates sufficiently before this latest energy shock hit, but the market penalty has still come via LT inflation expectations and bond market term premium. Previously compressed spreads and renewed fiscal concerns certainly have played a part in the move higher, but few countries truly showed signs of tight monetary policy before the shock hit.

Will a Warsh Fed have an impact beyond the US? I think he will. The change of framework, and the change of big picture view that Warsh will try to instil within the FOMC will resonate with many central bankers globally. Central banking circles are quite collegiate, and good ideas will cross pollinate quickly. A hard-money inclined Fed Chair is something the world hasn’t seen for a long time.

Even if the market remains skeptical for the first year (as they should), eventually, data will validate the approach. Higher short term real rates will eventually flatten the yield curve, validating a successful transition. But first the Fed must deal deftly with the current short term inflation risks (at least one rate hike), downsize the balance sheet, collaborate with Treasury on GSE privatisation, integrate tokenisation & stablecoins, and lower regulatory friction for banks. Compressing inflation through domestic efficiency rather than globalised efficiency is the new playbook.

A Chokepoint view of the world

As the world reels from one chokepoint lesson after another, eventually it will start to see chokepoints everywhere. True chokepoints, ie, those bound by natural laws and geography, are hard to hedge, but still, hedges exist.

The best remedy for all chokepoint risk is time. With time, countries can adjust strategy, develop alternatives, improve diversification. This time-buying strategy has featured prominently through the Russia-Ukraine war shock, Trump tariff shock, China critical minerals shock, and with the current SoH shock.

Given that these shocks hit energy, mining, and critical inputs markets strongly, one of the simplest responses has been hoarding, stockpiling, and buffer building. Even Covid triggered hoarding of certain medical supplies. The problem with hoarding as a strategy, eventually, once the crisis has subsided, these stockpiles become expensive and deflationary forces. They compress profit margins and weigh on investment.

While categorised different (national reserves, precautionary reserves, strategic reserves, import buffers), they are essentially excess inventory. The stockpiling strategy eventually hits an economic limit, no matter how volatile the geopolitical arena. Barring out-right war, stockpiles eventually reach an economic peak. The problem is that this peak differs greatly between state-owned economies vs free market economies.

State-owned economies hoard and stockpile as a general operating rule. They rarely have to transparently account for these types of inefficiencies. In free market economies, the drag on performance is quickly revealed, and the new tolerable buffers find their economic equilibrium. No where is this more evident than in chokepoints that are driven by cost and innovation hurdles. Scarcity driven by proprietary, competitive advantage is unique amongst the chokepoint dilemmas. This is what makes the semiconductor & AI space such a powerful geo-economic arena.

Semis, a different kind of chokepoint

At the moment, Taiwan is a single country chokepoint for semiconductor chips, which lends itself to some of the traditional chokepoint analysis; China blockade or forced integration risk. However, the core of this issue is a technological one. Taiwan began offshoring 5-6 years ago, with TMSC’s Arizona and Kumamoto projects representing the consequential dimension of this strategy.

Not only did Taiwan chose two strategic destinations geographically (China’s primary rivals), but it chose two top manufacturer/consumer markets for these highest-end technologies. Innovation will therefore eventually drive virtuous cycles in both of these locations, forming new ecosystems that are part of the Taiwan elite’s geopolitical hedge, and the host nation’s strategic arsenal.

TSMC manages 16 Fabs world-wide, with 11 of them, and the primary hubs in Taiwan. It has 2 new Fabs in the US, 1 in Japan, and 2 in China. The Arizona project will see a further 3 Fabs added, including a cutting edge 3nm-capable Fab. One more Fab for Kumamoto, and Germany also just broke ground with its first TSMC joint venture, targeting automotive microcontrollers.

The point is that by 2030, the US will have gone from 13% of total semi production globally to over 25%, and Japan will have increased its share to 15%. This is how the chokepoint is being managed. But demand for AI investment has created a subcategory of its own.

For the ultra-advanced, high-performance logic processors (nodes under 7-nanometer and 3-nanometer), manufacturing concentration in Taiwan is even higher, over 90%. TSMC is building 3nm Fabs in Arizona and Kumamoto, but the majority will still be in Taiwan.

This is why innovation and new entrants are the only true solution to this technology chokepoint. Samsung’s 3nm chips and Intel’s sub 2nm are adding competitor depth, as will xAI’s TeraFab collab with Intel.

But the world needs time disburse the over-concentration in Taiwan. Seen from this perspective, one can understand why managing the cross Strait risk with China is the intelligent play. The world needs about 5 years to dilute the chokepoint.

The TSMC Arizona Project is now up to $165bln, while Kumamoto is a further $20bln. It is sending up to 3,000 highly skilled engineers to the US to manage this mega project, and 400+ to Japan. The Arizona project is built to service the supercomputer & AI value chain, while the Kumamoto project initially started its focus on the Industrial, Automotive, Edge AI value chain, and has since seen an upgrade with the second Fab to meet surging AI-related demand.

This is the largest offshoring, geopolitical hedging investment plan in history. Years in planning, with long lags, and a heavy diplomatic responsibility to keep the waters calm in the interim. Compared to a 3 months shipping bottle neck in the ME, this level of chokepoint management is 10x levels higher in complexity.

Fortuitous execution

Successful execution of these strategic plans and logical cross-border investments between allies at this ultra-high level of tech is cause for optimism. This is what keeps risk appetite strong, this is what drives the tech stocks higher year after year.

There are so many ways for either the general environment, or the politics, or actions of rivals to disrupt this ascending wave. Every time we successfully cut the tail risk off a kinetic conflict, or avoid a diplomatic disaster, or find bilateral common ground with our allies, this is an opportunity to cheer. This feeds the optimistic scenario. Organic transitions in the new world order are happening.

The task doesn’t get easier, but the level of energy displayed, and some of the impressive wins recorded reflects excellent work by skilled practitioners. The collection of corporate leaders in US, Japan, Taiwan, and South Korea at this particular moment, and those that have lent their global expertise to the public sector, is of the highest level.

The bureaucracy may still be a drag, and public sector investment may still have multiples of less than 1, but the idea generation, and the public-private partnership to see it implemented has never been this impressive in my life time. I stand amazed.

I keep voting with my dollars, and they keep validating my good faith. Looking for more gains in the second half of 2026.

Listening to a lot of intelligent market participants on podcasts and reading their collective thoughtful posts across the domain specialisation spectrum (IR, global macro, politics, national security, etc), I notice a few reoccurring flaws in framework analysis. Frameworks define both the way the problem is being viewed and definitions of success.

Fluid definitions of success then produce lower confidence levels when either right or wrong, because reality isn’t very consistent with your mental map. This lowers conviction. This makes you more reactive and less strategic overtime. In this way, even small blindspots within your frameworks can produce major deviations in intended outcomes.

What do I mean by that? Well, firstly, let’s start with the popular frameworks for war fighting doctrine. Most analysts think in terms of nation building vs the Powell doctrine, as these are the two relevant frameworks in modern history (90s onward). However, if due consideration is given to all that has been written by policy advisers to Trump 1.0 & 2.0, there is clearly a philosophical break with the past. Much of this credit is given to Under Sec Colby, and his Strategy of Denial thesis.

If the press narrative and global political judgements on US’s power projection in the Gulf were analysed via a Strategy of Denial framework, the conclusions would be different, the definition of success would be different, and therefore the political calculus for Trump’s actions would be different. Venezuela provided a useful case study on this, and yet most don’t view the two military interventions taking place within the same framework. This is a mistake.

Part of the problem is that Colby’s book has been mostly referenced in relation to its Indo-Pacific China containment focus. But the Strategy is better understood as a holistic shift in US global power projection, as a correct interpretation of the NSS 25 document succinctly communicates. The Strategy distilled is a framework for prioritisation, better power projections globally amid a scarce resource environment. Everything from NATO reform, to allied burden sharing, to space & maritime vs land war resourcing follow from this framework.

Measuring what exactly?

The second framework in need of change is analysis of the capital market => real economy nexus, and how we choose indicators that predict real economic outcomes. There are at least two factors driving a breakdown in cause & effect here. One is proliferation of political/policy/economic risk indices used to replace real, bottoms-up analysis of the economy and macro-economic change. Measurement of the volatility of discussion, or degree of polarisation, or discussion of risks is not the same as measuring real outcomes.

Another factor muddling market behaviour is growth of capital markets as an independent (from policy constraints) allocator of capital. With non-bank risk capital in surplus, competition for new thematic winners pushes inflows beyond what current financial conditions, or transient macro risks would dictate.

Added to this is the rise of capital market dynamics as a tool in geo-economic warfare. Hoarding, storing, investing, embargoing, and trading derivatives to pre-empt or respond to geopolitical risks is increasingly showing its footprint in the markets.

Both of these factors obfuscate underlying economic reality, but still, endless models train, track, and predict markets on these price & flow data.

The third framework that needs updating is how global wealth (both private & sovereign) defends its capital. When financial wealth becomes 10x your real asset wealth, you behave differently. Similarly, when a SWF is 3-5x larger than the country’s GDP, policy makers behave differently. Risk aversion is compartmentalised.

Strategic economic and security policies now dictate a kind of barbell strategy. They have one set of policies to keep the real economy chugging along and preserve minimal national wealth, while simultaneously deploying a geo-strategic investment strategy aimed at both enriching the nation further and hedging existential risks. Policy behavioural chains of cause & effect depend on which part of the barbell you are looking at.

Likewise, when entrepreneur wealth is 100x greater than needed to change your life-style further, then decisions are driven by different metrics. Middle-aged savers are now advised to seek 25x annual income to be secure in retirement. This ratio of financial assets to reoccurring daily cost of living (life-style) creates very different incentives and risk-taking strategies.

Risk taking behaviour doesn’t lag policy outcomes anymore, it pre-empts them—both concurrently and strategically. Interest rates, government policy, even oil (the most recent shock to wreak havoc) do not carry the same impact they once did when capital was more scarce, when credit from banks drove investment, when job or resource security determined consumption.

Like the Fed operating in an ample vs scare reserve regime, much of the real economy now operates in an ample reserve, supply resilient, buffer & storage regime. Reaction functions have changed, but people expect traditional high frequency economic data and risk indicators to tell the same stories.

Alternative frameworks

If viewed through these different lenses, alternative conclusions become possible. The US military operation in the Gulf is a conservative strategy of denial. Primary power projection capabilities of Iran have been eliminated. The regional power imbalance has been corrected. Countries in the region and/or midsize maritime powers can cope with whatever disruptions Iran wants to try going forward. The risk of nuclear blackmail is eliminated.

The US is free to stick with a maritime posture or to withdrawal whenever it suits. That is a successful implementation of the Strategy of Denial. Costs were limited, both in terms of time allocated and loss of life. Regional and national security goals were achieved, and global strategic posture was also improved. No extended commitments. No nation building. No new open-ended resource drain (the infamous quagmire). Success.

The only way anyone could conceive of this operation being a failure is if they impose their own framework, such as immediate, and definitive regime change. A surgical strike that did not disrupt any economy or financial market. Or, pulling it out of a military success framework completely and declaring it “not universally popular” among voters, or resulting in “loss of the midterm election”, etc.

These metrics are media created, and peripheral to military operational planning. They are typical salvos in information warfare. They are sequelae to be managed, they do not drive strategy.

Indicator misdirection

Given how much the fundamental landscape has changed, and how different today’s structure is to post-90s globalisation phase, there are very few leading indicators that still predict or maintain a stable, singular relationship with underlying domestic drivers. Policy makers want to follow economic and geopolitical surprise indexes as a short cut. Investors what to heed warnings from VIX, MOVE, CDS, Gold, BTC, and term premium. Its frustrating. Risk indicators don’t flag what they used to.

Instead of worrying about the Buffet indicator or Ferguson’s Law, perhaps we need more focus on Goodhart’s Law and the Hirschman Index. Context is everything. Structural change drives pronounced yet transitory overshoots in indicators. Transitions can create bubbles. But grasping what’s rational in totality vs what’s rational for the first movers is a difficult game to play.

Relative risk assessments break past relationships. Models misinterpret that signal. They don’t predict new equilibriums.

What we can trust in turbulent times like these, at least for the free-market democracies, is that companies will all be battling for survival. The collective result of thousands of unique survival decisions taken by this group of leaders with true skin in the game is the closest we can get to understanding a fragmented economic trend. For that reason, I am singularly focused on corporate earnings and profitability these days.

Stock markets are the best growth indicator we have now. The ultimate diffusion index. When official rates were below neutral and financial market volatility was low, there were questions about what stock market gains meant for some companies. Not now.

High vol and uncertainty are forcing companies to run the gauntlet, to be both lean and resilient. Court both private and public money. Perceive their businesses pre, mid and post the AI revolution. Macroeconomic volatility is a drag, but so are all the other challenges. Winners from this environment are true winners. They are worth backing for the future, regardless of what some relative indicators may suggest about the future.

Corporate profits are also the best relative indicator for competition between market economies and state-owned. Market share and export volumes can temporarily distort reality, but profits never lie. That’s where the final bill for state-owned economies gets paid. If SOEs can’t make a profit, they become state liabilities. Instead of paying taxes, they become wards of the state. That’s how socialism has always failed in the long run. China is not winning.

Wealth preservation

One of the most providential aspects of wealth is its latent utility. With wealth and abundance you can neutralise the volatility that would typically disrupt your life. Hedging, provisioning, stocking, hoarding, diversifying, reenforcing, exploring, speculating . . . all these behaviours are possible with wealth. This is why wealth always begets more wealth.

The proliferation of wealth has allowed many countries, companies, and individuals to build the equivalent of financial fortresses. Once you’ve built a fortress, your behaviour inside vs outside changes. Outside, the world sees a mixture of excessive risk taking and exaggerated hedging.

This is a visual example of the barbell strategy. One set of rules for the fortress, another for outside the walls. Wild risks taken outside the fortress, almost none inside. Many rules, routines, disciplined risk management, etc., permeate the castle. But much of this is invisible to the external world. The external world sees only your aggressive risk taking behaviour, or occasionally, your inexplicable and hasty retreats.

In a world where core positions are never traded, . . . those are allowed to grow and compound over time, . . . but hedges and minor discretionary trading ranges churn continuously, can others observing really back-out true investor attitudes from price movements and trading volumes? All that is actually seen is the speculative, provisional and redundancy decisions.

Analysis of investor core views requires expert inference, insight, and extrapolation. Skills developed by specialists over many years, cycles, and regime changes. Dimensioning the full iceberg from just views of the tip. It used to be that large flows meant something directionally for the market. Now, it can simply be the hedge of a large whale with no intention of changing underlying views. Size of flow is no longer a sufficient filter for noise.

Big wave surfing

Trading geopolitical volatility and global macro-economic structural change is big wave surfing. Size of flows, magnitude of moves don’t mean the same thing as they do in trending markets. Predicting when the iceberg underneath is going to strategically change direction, or when one of the fortress walls is about to be redesigned, this can only be done by mirroring their reaction function. Knowing their framework. Predicting how their core holdings must recalibrate to a changed reality.

Demographics, a new world order, tech races won, these longer term structural drivers paint a new picture of the future. These are uncovered through deep digging, or proximity and familiarity to the main players driving the change.

Price action, market narratives and historical behaviour patterns are head fakes. Lasting big wave surfers have a unique skill. The rest have a few big days out, and hopefully get to take a few good pictures before a swift retirement.

Tweaking frameworks and staying current with reality is essential. Big waves on any given day don’t mean the ocean floor has changed, but it does mean you will need totally different equipment and backup measures to survive. Or, you can simply wait for this swell to pass.

How did we travel so quickly from the modern foundational principle in International Relations; that democracies don’t go to war with each other, to the current state of affairs where historical trading partners and allies in the West are seemingly afraid of all dependencies with each other? This is extreme. This is an overreaction to a system that came under challenge from a few revisionist powers, and a failure to heed the always-present requirement of intelligently managing natural resource scarcity, and geographic chokepoints.

In disengaging, or de-risking from revisionists that suddenly appeared in a system dependent on high levels of trust, the new landing place for de-riskers should not be a perceived system of zero trust. Democracies, free traders, open societies; they are still predictable and reliable enough to tolerate higher levels of dependency between each other.

In correcting various negligent levels of over-dependency with unproven trading partners, based on single metrics like lowest price, western countries should not go so far beyond the logic and proven track record of global trade between the Americas, Europe and Asia-Pacific. This baseline need not change.

Pre-90s dependency

Pre-90s, before hyper-globalisation kicked off with an end to the Cold War, there were rational levels of dependency between free nations across the Atlantic and Pacific oceans for reasons other than simply politics. Limited geographic chokepoints and broad economic differentiation amongst trading partners on either side of the oceans facilitated supply-chain and target market diversity.

Over-concentration risk accrued mostly to the benign hegemon; a risk that trading partners were generally willing to accept, given its consistency with overall security dependencies. And, within a free-market democracy ecosystem of nations, the hegemon is the largest market, ie, dependency = largest share of sales, number of customers, net profits, etc. Basic point being; export & sales dependency is not the same thing as supply chain and crucial input dependency.

This pre-hyper globalisation period represents a baseline that the western, or free world should not lose sight of. From the 90s onward, far flung, complex logistics and supply lines proliferating in pursuit of newly opened markets, or to source cheap inputs. This created exposure to latent risks. Global players knowingly took these risks, pre-empting future development in institutions, counterparty trust, and other concrete structures commensurate with true system expansion.

Geographically, Eurasia and the Middle East do not offer the same unencumbered space for transport and freedom of navigation that the Atlantic and Pacific offer. Nor do the countries of these regions enjoy the same degree of economic differentiation. End of the Cold War eliminated one of the major political systemic risks (communism), but it did not alter these other fundamental economic realities. The rush to develop and exploit these untapped opportunities was a calculated risk—wilfully taken—imaging that history had ended, and that the world was now safe. An errant, but calculated risk because history actually told a very different story.

This is not to say that global trade and investment should not have pushed into the frontier markets created by the end of the Cold War. This was most certainly the right thing to do economically, but with caution, and due respect paid to history. Doing business with Russia was logical. Establishing extensive energy dependency was not. Investing in China to gain access to a billion-person market was logical. Reconfiguring your global manufacturing platform so that it was concentrated in a single-party communist state with no track record of respecting private property rights or a free & open capital account was not. The hubris was extreme. Unnecessary strategic risks were taken.

The world having been through multiple energy shocks emanating out of the Gulf Region over the past four decades should not have required reminding about excessive dependency on single shipping-chokepoints like the Strait of Hormuz. Maybe it was forgivable pre-Covid when half the world still wore rose-coloured glasses, but in 2026? Really?

Therefore, as global trading nations mean revert from these historical strategic errors, remembering the original pillars of the so-called western free-market system must not be lost. The US and Europe are not going to go to war with each other. The Asia-Pacific nations ex-China have a long enough track record of free trade and anti-imperialism to trust. South American democracies have matured substantially in the past 5 decades, and equally, have not fought wars for territorial expansion.

There is sufficient long term evidence to accept higher dependency levels between these trading blocs than those levels now in rapid readjustment from overzealous dependency risk assumptions. Commerce sped out ahead of system structure. These experiments need adjustment, not the historical baseline in the West. Post-Cold War territorial openings and errant risk assessments: Russia, China, Black Sea, Persian Gulf, Red Sea, these are where the recalibration must occur.

System framework first

In contrast to these risk assessment failures noted above has been the careful and methodical construction of an Indo-Pacific framework by the US and Japan. This is an important domain for global commerce expansion, but is encumbered with more geopolitical chokepoints than the open deepwater shipping lanes of the Atlantic and Pacific. For this reason, both Japan and the US have invested energy in this trade-heavy / security-light framework to build something more dependable, something that could permit higher levels of supply line dependency. Essential structure before greater commerce . . . that’s the lesson.

China is another instructive case study. Clearly understanding its supply line dependencies through Eurasia, and from historical memory, it launched new iterations of the old Silk Road simultaneously to its increased supply demands. It built out new overland routes to connect to newly constructed deepwater ports in Myanmar and Pakistan, providing additional access points to the Indian Ocean and East Africa.

None of these mega BRI projects have eliminated dependency risk on their own, but the breadth of them has reduced overall supply line dependency risk for China. The West irresponsibly skipped this step in the frontier markets. It trusted the newly expanded Liberal World Order to facilitate free and open transport of goods. They knowingly took all these logistic risks based on faith in ‘the project’.

Not to get knocked off track here, but these risks were primarily taken by nations imagining that the US had underwritten the totality of this free and open transport system, when it clearly had not. Not even the US directly stating, “this is not solely our responsibility,” or a major rising revisionist power stating, “we do not accept the US dominance of this system.” Neither of these full-on alarm warnings seemed to prompt adjustment to over-extended supply-line dependency.

Even the Covid pandemic, widely recounted as a wake up call on supply dependency, failed to drive comprehensive strategic adjustments. Government responses were minimal, national economic risks were not reduced. February 2022 proved that. Then October 2025 proved it again (critical minerals). And now, March 2026 has proven it yet again.

In spite of these diverse economic shocks revealing pronounced strategic vulnerability in multiple areas, many nations seem to singularly focus on the personality of the current leader in the White House as the catalyst from which they must re-position now. This conflates the dilemmas of managing alliance relationships with basic economic dependency analysis. Never mind that the current US President will only be in office another 2 1/2 more years, viewing your broad and diverse economic dependency risks through the lens of a single country factor, or single person lens is misguided, and shows ignorance of system dynamics.

Geopolitical positioning and economic risk vulnerability analysis require independent, bottoms up approaches before eventually being cross referenced and netted out in final deduction. Particularly in free-market open societies, because private sector initiatives accrue over time and produce exposures independent from national policy. Election cycles produce reshuffling of priorities, etc.

A global supply strategy should have—like a credit securities portfolio—individual security (country) limits, sector (geographic) limits, and a macro tilt that has implications for risk appetite and default risk (hegemonic & security relationships). The first two constraints are typically pretty consistent. A country’s natural endowments and geographic position on the map don’t change. This analysis should be based on hard economic reality, and should address the necessary factors to achieve generalised shock-agnostic diversification.

The general macro, or systems risk, ie, hegemonic relationship, is more dynamic and requires constant recalibration. The 90s produced a major recalibration in one direction, then global events since 2015 have been driving hegemonic shifts in the other direction, but much of the world has been slow to adjust their macro risk analysis.

Default to the baseline

In the process of making these recalibrations, most countries will default back to historical baselines, because the baselines are driven by the first two constraints (country & geography). And, the macro risk analysis will inevitably be based on the same system polarity, with the US as the free-market, democratic hegemon in their alignment.

Those that sought alignment with the free-market, democratic hegemon in the 40s, 50s, 60s, 70s & 80s, will ultimately make the same choice again. Those that experimented with strategic risks, or were part of the experiment in the 90s, 00s & 2010s, will recalibrate based on new net assessments.

The China model may appeal to some where the Soviet model did not. Some will choose based on avoiding a repeat of their Cold War trauma. Others may have their choices made for them. Ukraine, Moldova, Armenia, Azerbaijan, Georgia, Syria, and Taiwan are countries already pre-empting this reality.

Asia-Pacific allies have mostly responded to the global dependency shocks in an intelligent way, led by Japan. They have clearly distinguished between resource, chokepoint, and China dependency risks on the one hand, and US market-access risk on the other. The former a security dilemma, while the latter is a trading-partner / security-partner relationship management issue.

Europe’s reaction has been muddled by the existence of the EU super-structure and the NATO multilateral structure. It prevents individual countries from recalibrating independently with the US, which is far simpler to do. It also deludes Europe into imaging they have more hegemonic power than they do.

Collective security arrangements, and middle power economic cooperation improves upon the prospects of an individual country acting on its own, but does not solve all of its security dilemmas, or economic dependency risks. Therefore, collective bargaining via a common market or multilateral configuration is still not a complete answer. Not in negotiations with the US; the benign (free market democracy) hegemon they would naturally align with.

Basically, the hegemon would have to agree to recalibrating bilaterally with a friendly common market or a multilateral security arrangement, voluntarily accepting the less attractive conditions. This doesn’t describe the circumstances very well in 2026. EU and middle-power configurations make more sense in negotiating with Russia or China, but not the US. A new equilibrium alignment with the US is the final goal, whereas a more defensive posture with Russia & China is predestined there.

System optimism

While it may not feel like it now, 2025-26 will be remembered as this period where economic dependency risks in their most hubristic hyper-globalisation form were finally addressed. And, the free-market, open society democracies eventually recalibrated their relationships with each other while tolerating the majority of their interdependencies.

The revisionist axis (China, Russia, Iran, North Korea) are still part of the system, but they have chosen a deviant path from the overall system norms, and therefore must be treated with exceptions to the rest of the system.

Interdependencies in the core of the system are not the bugs to fix. Adopting a two-tier approach within the system in order to safely engage with the recognised high-risk components is the best way to preserve system stability. Coordinating this task with allies naturally results in some internal adjustments, but the end goal must be clearly focused on the recalibration toward security risk dilemmas.

And finally, dependency risk on your major export market within your geopolitical configuration is a totally different dependency risk than essential supply line vulnerabilities. The tariff shock event should be treated differently than the energy shock event with the US.

Market access gatekeeping is part of a country’s sovereign right. Future stability will be based on managing profitable outcomes for both trading partners, not geopolitical leverage.

Energy dependency with the US, however, must be managed within a strategic risk framework. Risk tolerance should be much higher than that with a geopolitical rival, or belligerent, but it should not totally replace diversification logic.

Diversification protects a country from all sources of risk; political, environmental, sabotage, economic failure, etc. Each friendly country should increase US energy relationships to the degree logical from their countries economic demands, geographic proximity, and characteristics of their alternatives.

But historical baseline alignment argues for greater diversification to US energy sources away from the ME, particularly from East Asia allies (South Korea, Japan, Taiwan, Philippines), and a few European countries like Italy, Slovenia, France, Poland, Lithuania. Let’s see if that can happen.

US foreign policy in 2026 has brought the maritime domain decidedly back into focus. Black Sea and Baltic Sea antics during the early part of the Russia-Ukraine war kicked it off in 2022, but the US has now used a classic naval blockade strategy in both the Caribbean Sea and the Gulf of Oman arenas. Historians and naval veterans are busy dusting off their Korean War books, now lying on their desk next to books on the Monroe Doctrine and Roosevelt Corollary.

There were signs this was coming last year. The NSS 25 delineation of first island / second island deterrence strategy, the Trump Corollary, the interest in Greenland. Multiple public papers on Taiwan Strait wargaming, including the blockade scenario. I wrote a piece on the Miyako Strait after the China jet fighter jet radar-lock episode on a Japanese aircraft in December.

While the US partial blockade on Venezuela was not announced until 17 December, the US began exerting naval control over the Caribbean back in August, when the build up for Operation Southern Spear began. Lessons learned from this successful operation became part of the strategy foundation for Epic Fury, as I noted in a recent Thematic Edge podcast episode: not the same playbook, but the same toolkit.

A maritime operation gives the US both staying power for a war of attrition, and maritime engagement has a rich history of international precedents, including UNSC resolutions that clear the way for other nations to be involved.

While the Korean War blockade may serve as the most recent applicable precedent for review, the global circumstances have significantly changed. Russia will not boycott UNSC votes again, having learned a painful lesson, and China has replaced Taiwan as the fifth permanent member wielding veto.

Therefore, the current UNSC resolution 2817, condemning Iran’s attacks on its neighbours, and authorising nations to self-defend freedom of navigation rights, . . . this is about as explicit as the mandate will get. The rest will be fluid and adaptive precedents set, just as the Trump Corollary was in January. The US is currently redefining the domain rules it can dominate and project power in.

Command of the seas

In the space before war is formally declared, the merchant fleets and the major shipping ports get co-opted for strategic purposes. This is yet another domain of hybrid warfare under the umbrella of geo-economic strategy.

Trumps executive order (restoring America’s maritime dominance) and the SHIPS for America Act were put forward last year April, and have been followed up by a series of major announcements since then (list below). These events followed the opening salvo in January when Panama came under pressure to eliminate all Chinese influence over its ports & canal.

• July/Aug major shipping building pledges from South Korea ($150bln)

• Oct $6bln partnership deal with Finland to build icebreakers

• Oct-25 Section 301 port fees on Chinese ships

• Dec-25 successful review AUKUS partnership

• Universal port fees on foreign ships to help fund the Maritime Security Trust Fund (Feb)

• Announcement of America’s Maritime Action Plan (MAP) in February

• Maritime Prosperity Zones (MPZs) included in MAP

• The The Port Infrastructure Development Program (PIDP) Grants announced last month.

While the US starts from a position of strength in the purely naval asset competition, it lags in commercial fleet and major port development. Partnering with Japan, South Korea, and Turkey has been the administrations ‘quick fix’ remedy. MAP and PIDP plans make up the longer term strategy. Concrete results will take time, but the direction is clear.

In the meantime, a few concentrated US naval blockade strategies have marked this domain for significant global attention - from national security to financial market circles. You can see a proliferation of shipping chokepoint maps circulating in the market these days as people try to guess what comes next. The important point to note, however, is that blockades are considered an act of war, unlike quarantines, or embargoes.

The US SOUTHCOM describes its actions in the Caribbean as a quarantine, while those in the Gulf of Oman have been declared a blockade by CENTCOM. These precedents are not accidental. The US has broadened its operational mandate vs Iran while the ceasefire negotiations are still under way. One of the first de-escalation steps can likely be the downgrade of this blockade to a quarantine.

Incidentally, the US also ran quarantine interdictions in the Indian Ocean in February. These boats were tracked from the Caribbean and boarded in the Indian Ocean. More activity along these lines can be expected everywhere from the South China Sea to the Greenland Strait. Like all forms of hybrid warfare, there will be heavy definitional exploitation of this grey area between acts of war and enforcement of a sanctions regime. Markets must brace themselves for the brave new world.

Next iteration for the new world order

So what is likely to be the next precedent set that will reveal more elements of the new world order? I think the US has rediscovered the sea as a country-agnostic platform from which it can more freely project its power. This validates a similar view I have been thinking about in terms of Space. Both the Deep Sea and Space offer domain-action-freedom to the US that is rapidly disappearing from host allied territory.

These two domains are also attractive from their high barriers to entry. Competing from the Deep Sea and Space domains requires enormous economic capacity. This brings a hierarchy back to the great power wars that was becoming complicated by middle power resistance on other plains of competition.

I’ve been meaning to write something on recent attempts at middle power multilateralism for a while, but other topics keep overtaking my attention. Suffice to say, everything coming out of the Gulf region these past two months spells further subordination for the middle powers. The entry level for great power competition just keeps rising.

So, new precedents? I’m thinking a post-conflict strategy may entail redefining NATO configuration to free up the US from its continental European duties and to make room for its hemispheric strategy and enhanced global (Sea & Space) domain strategy. This means more of the US MIL budget directed toward new power projection nodes (Greenland, Morocco, Jordan, Philippines, Australia), and onboarding some new NATO Global Partners like Argentina.

There is a positive way to move on from historical NATO role definitions and there is a negative one. It feels like both sides (US - Europe) understand that the status quo is no longer effectively contributing to the deterrence message, nor does it have any positive spillover effects on the economic relationship. A proactive, positive upgrade can be a positive precedent that surprises this year.

A potential negative precedent would be the US adopting some kind of paid security service role in the world. The US is no longer interested in the role of global policeman for free, provided as a public good, but it may be willing to perform part of the role, if paid to do so. The Maritime Security Trust Fund needs to be funded somehow (think East India Company letters of marque and reprisal). It may be more than just new port fees and co-investment in the Maritime Prosperity Zones that secure this funding. Legal privateering would be a disaster.

Global free movement of goods was once considered a system feature of globalisation, but now we understand that it was simply a mis-priced, unattributed service cost. The US was eating this expense (it does not recoup this expense via exorbitant privilege, as main claim), it stopped being able to afford the cost, the new financing model has yet to emerge.

Like the banks that discovered a hundred different transaction and services fees they could levy on depositors post-GFC, as the end to massive, leveraged trading profits were no longer on offer. The US (China, and others) will find a way to get paid for providing the public goods needed to keep trade flowing. Let’s hope it is a positive one.

The alternative would be, adjustments to transport, energy, and insurance pricing across all goods. Someone has to pay in the end. This never was a public good, we just got used to treating it like one.

In the past, freedom of navigation (FoN) issues were typically something the world could agree on. Absolute freedom of navigation upon the seas was a key principle for postwar peace after WWI, influencing the creation of the League of Nations. The Atlantic Charter (1941), signed by Roosevelt and British Prime Minister Winston Churchill, affirmed principles like freedom of the seas and equal access to trade, serving as a foundational vision for the postwar world. World order begins with accepting FoN.

The last time FoN and maritime issues were addressed by the UNSC was a counter-piracy effort against Somalia between 2008-22. A series of resolutions were passed that encouraged states to take collective action by all means necessary. It passed unanimously, including Russia and China.

Prior to that, there was an important resolution backed by Kuwait and Saudi Arabia in 1984 (Iran-Iraq war) that called for respect of FoN in the Gulf where commercial ships had come under attack. This resolution also received unanimous backing.

While it didn’t include any specific calls to collective action, it did reaffirm FoN in the Gulf and documented Iran’s violation of international law. It was this 1984 resolution that was referenced on 11 March when the new Bahrain-sponsored Resolution 2817 passed with unanimous support in the UNSC.

This was followed by a more strongly worded draft resolution that failed to pass on 7 April, calling for ‘coordinated efforts’ to ensure safe & secure navigation across the Strait of Hormuz, including escort of merchant and commercial vessels. Russia & China vetoed.

This seemed to validate the perception that the UNSC can often vote to condemn, but usually balks when it comes to calling for collective action. But Resolution 2817 wasn’t completely toothless. It did include these essential points;

• Reaffirmed navigational rights and freedoms for merchant and commercial vessels under international law.

• It condemned Iran’s attacks on Gulf states, Jordan, and any threats or actions aimed at closing, obstructing, or interfering with navigation in the Strait of Hormuz (and Bab al-Mandab).

• It determined that such Iranian actions constitute a threat to international peace and security.

• Importantly, it reaffirmed the inherent right of states to protect their vessels and exercise selfdefense in accordance with international law when facing attacks or provocations that undermine FoN in the Gulf.

This language implicitly supports states taking defensive measures, including coordinated naval protection or escorts, without the Council needing to create new authorisation.

While it did not explicitly call for a multinational naval operation to provide escorts for merchant vessels, it provided UN validation for those prepared to defend their merchant fleets. It gave them the cover of international law that many require.

This explains why President Trump went on the wires shortly after that vote calling on countries highly dependent on shipping through the Strait to come and police/escort their ships. A UN resolution was typically the prerequisite for these countries to act, and now they had that. Trump imagined the world wouldn’t hesitate.

Dependencies cause subordination

In spite of running narratives in mainstream press, those that would have you believe the world doesn’t wish for the largest state-sponsor of terrorism to experience regime change, the stuttering response from the world is mostly about stalling for time, not protesting US unilateral action. Any such protest would equal self-harm in any case.

Caught out by yet another embarrassing dependency, the world needs time to pivot. Countries like Japan, South Korea, Taiwan, they have no interest in seeing the US power projection fail. They were not impervious to Trump’s call for collaboration. They simply needed time to secure alternative energy sources, and needed to avoid triggering an embargo from Iran.

The lesson from this latest iteration of Gulf War will not be that association with US foreign policy is a liability. The lesson taken from this crisis will be how dependencies limit your options, subordinate your national interests, inhibit decisive actions that would otherwise help build your reputation as a solid ally or partner.

There were several courses of action available to those insistent on adhering to all matters of international law, those that seek UN validation for diplomatic and public opinion cover in advance, and yet these proactive measures were still not taken after Res 2817 passed. This highlights subordination to Iran’s coercion, not risks of close affiliation with an unpredictable US. Dealing with an unpredictable US involves very different measures.

Misunderstanding NATO

Europe continues its run of bad luck. Every crisis seems to shine bright light on past poor decisions. Not rushing to help coordinate a maritime escort for merchant vessels based on a commitment to FoN was a perplexing sign of weakness. This has been a European rallying point for many decades. By contrast, restricting airspace and military base access by Spain, Italy, and France for US military flights was a serious blunder on a totally different scale.

Firstly, such overflights would have done little to change the IRGC’s attitude toward Europe. They will still be paying toll to get their ships out of the Gulf. But most importantly, these decisions taken by three of Europe’s largest countries demonstrates exactly why the US is not interested in some kind of lease deal for Greenland.

Europe may think of NATO as a grand collective defence framework for fortress Europe, but for the US, it is a forward platform for power projection. The US, and any other global hegemon, uses power projection as a deterrence in order to not have to fight endless wars.

If Europe imagines that NATO is only to be used for its own territorial defence and nothing else, then it will soon be overseeing a major downsizing of US bases. The US North Atlantic flank will soon become just Greenland. Like the second island chain in the Pacific. Continental Europe has become the battlefield again.

Japan’s pivot is coming

It may look like Japan, along with other North Asian countries highly exposed to the Gulf conflict, reacted similarly to Europe and a few other US allies, but there is reason to believe that Takaichi is methodically laying the groundwork for policy change. She has been very active securing alternative energy sources since the conflict began, and was able to announce in Parliament last week that Japan has secured oil imports through to the end of the year.

Japan has worked with the G7 in releasing large amounts oil from its strategic petroleum reserve, and it has increased energy imports from North America 20% for the month of April. Japan is addressing Gulf dependency issues straight away. Pivoting to a maritime policy objective is likely to be Takaichi’s next move.

In 2019, when tankers were last attacked in the Gulf and President Trump asked for assistance then, Japan didn’t join immediately, but eventually sent a MSDF escort flotilla, conducting surveillance and standing ready to protect its merchant fleet. It remained positioned outside the Gulf of Oman, but it saw the mission as consistent with its ‘free and open Indo-Pacific’ policy banner.

Takaichi, keen to continue normalising Japan’s Self Defence Force, will be eager to set new precedents when the correct circumstances present themselves. UN Resolution 2815 provides the cover, the tenuous ceasefire provides the opportunity, escorting Japan’s merchant fleets to safety will register as a positive application of the modified SDF Law. She can be seen as a good ally while furthering her domestic objectives.

As the war shifts gear into the second phase where the US is actively trying to wind it down, it will be easier for allied nations to join in where circumstances suit. FoN is likely to be the most attractive rallying point. While continuing to chastise Trump for yet another global disruption, they will grow equally intolerant of Iran’s attempts to convert the international strait into controlled territorial waters. Innocent passage applies for all merchant vessels. UNCLOS, Articles 37–44. It’s been in effect since November 1994. Iran doesn’t have any wiggle room on this one.

The FT and other publications have tried to make a story out of Trump’s pressure on Takaichi, but they are mostly colouring events through their own politics. Trump hasn’t asked Japan or another country to break constitutional constraints. Bombastic comments made on Truth Social like “you’ll have to start learning how to fight for yourself, the U.S.A. won’t be there to help you anymore… Go get your own oil!” or “build up some delayed courage, go to the Strait, and just TAKE IT,” were meant to direct the focus to the remaining collective issue at hand; freedom of navigation.

By making this a maritime issue now, Trump has drawn the whole world into the solution, even China. Iran must now justify its actions in front of the world and in light of international law. This is no longer about Great & Little Satan . . . this is obstructing commerce.

European nations have run to confer with GCC states amid the lull in fighting. But the number one topic on their minds will also be international law, FoN, opening the region for business again. Europe will hear the same message from everyone involved. This aligns everyone against Iran.

Next moves are not about aligning with Trump. They are about upholding freedom of navigation, international law, and getting back to business.

Welcome to the Trump doctrine.

How does the world move on without a cathartic break of trend from the past? It desperately craves this event, as the incremental, fragmented and seizure-laden regime change trend has apparently grown tiresome. The endless battles between the incumbents and the disruptors is exhausting to watch, read, or listen to. So let’s move on already, right.?

What died with China’s ascent to WTO, the GFC, the EMU crisis, Russia’s bloc of NATO eastern expansion, Brexit, US strategic realignment under Trump, and Xi Jinping ending China’s collective leadership was the belief that a set of global standards and consensus building are means to a static (and stable) world order. World order, when capitalised ((W)orld (O)rder) and considered a thing, immediately becomes party to its own demise.

The ‘order’ of the world is a process, not an outcome. It isn’t meant to describe a few predominant characteristics that have generated some positive outcomes in recent history. To define this collection of interstate actions as a definitive World Order implies agreement, consensus, acceptance of your state’s position, acceptance of the current hierarchy implicit in this so-called World Order. Acceptance implies ex-post validation.

And yet, for half the world, much of their experience with this fabled World Order is ex-post, exogenous to its creation. The natural laws of the world and this planet that we live on . . . these must be accepted ex-post. They exist beyond human construction. However, everything that is constructed, negotiated, or agreed upon by humans - in a broad sense - is provisional. Transitory at best. Even a de facto truism such as hegemonic predominance is transitory, lacking completeness, a state of high probability rather assured stability.

Because of this failure to understand that world order is not concrete, that it shapes reality differently for ever country, and that it is traveling through time just like we are, there is a tendency to define certain change events in extreme terms like World War III, collapse of an empire, death of the World Order, etc. I personally find little utility in this framework of extreme pronouncement. It appears directed more at breaking mental constructs than describing actual structural pillars of world order.

If humanity were capable of viewing the order of things as a constantly evolving system, with layers of natural laws and physical constraints, combined with a human-constructed layer on top to better facilitate certain international transactions, then continuous change would be expected. Incremental shifts, and evolutionary advancements would not trigger hysteria and battles for narrative. If the organic part of a system is dynamically recalibrating, then why would the human-constructed component not attempt to simultaneously recalibrate?

The more common result is for incumbents benefiting from the last iteration of the world order to fight like hell to convince everyone else that nothing has changed. That the natural laws remain unchanged, that the geographic constraints haven’t shifted, that this last technological advancement need not replace the legacy system, but rather, it can be fused on to the status quo. Meanwhile, the tracking error between reality and the arguments of self-interest deviate further, and further apart.

War is change, change is war

Organic systems have built-in cycle renewal. Ecosystems find endless ways through diversity to compensate for scarcity and abundance. Natural life-cycles vary in both time and amount of ‘creative’ destruction needed to achieve sustainability. As scientists, or scholars we analyse, we experiment, and we try to observe what natural laws are at the foundation of these stable systems we discover in our external world. We accept it as given, if the system has longevity and is stable, that it has arrived at this state over millions of years of trial & error. That evolution has created this optimal outcome. This is how we typically relate to our external environment.

Then why do humans somehow imagine their recently constructed World Order is optimal? Why is change viewed with such horror? What process are we blocking when we cling irrationally to illusions of stability? Most would quickly reply that it is cruel, or inhumane to allow the international system of human interaction to experience periods of ‘creative’ destruction to simply recalibrate the system to a more optimal status quo. Because of course, the term we most often use for this recalibration is war.

To end war (the act of killing each other) is an admirable goal, in compassionate human terms. To end war simply as a linguistic term for the process of major system recalibration in the direction of stability; this stance points to a number of potential problems.

If war - the killing kind - is to be replaced with some other form of dramatic system change, then what should we call that (system rupture?)? And, if we take as given that the objective is to avoid war (the killing kind) at all costs, is that premise accompanied by the notion that all members of the system equally accept that dramatic change is in fact some times necessary to recalibrate the system? It won’t always be that incremental change, the kind that preserves incumbent privileges, occurs. Some major regime shifts will clearly shuffle the deck. Is that accepted as the trade-off for no war?

Dilemmas of world order

My purposes for posing these questions in this way is that I feel it is essential to distinguish between the various dilemmas inherent in the popular World Order debates. Perhaps we can disaggregate these dilemmas in this way:

• Can World Orders actually be constructed with super-majority agreement from all states?

• How much of international interactions is the World Order expected to cover? How are the activities that lie outside the agreed World Order treated?

• Is it an accepted belief that constructed World Orders must have dynamic change mechanisms built into their DNA and system architecture?

• Can all members agree on acceptable methods for incremental system change, and fundamental system ruptures from time to time?

• What is the starting point, who are the project managers?

• What level of violence is acceptable in preservation of the system rules, once they are agreed? Who determines when violence is necessary, and who implements it?

• Should World Order have any hierarchy at all?

My purpose for writing this piece is that international structures with certain names are clearly in need of recalibration. The names can change, and the rules defining their construction will certainly change. However, what need not change is agreement on why certain countries collaborate in order to fill the void of anarchy of our natural international system.

At the local level humans do this through forming tribes, developing a common culture, and establishing loyalties. On the international level there exists enough common ground to replicate some of this. However, it must be accepted that it will never equate to the full level of consensus and security possible at the local and tribal level. Furthermore, it has to be accepted that these modest achievements are not the template for World Order. Too much variability exists at the global system level.

Domains where World Order enjoys a super-majority consensus will be quite limited. Still very much worth pursuing, as the void of anarchy must always be reduced where possible. What should be avoided in the future is imagining that all of these constructed institutional frameworks; regional security frameworks, cultural affiliations, multilateral trade agreements, freedom of movement arrangements, etc., none of these are templates or building blocks for the definitive World Order. The underlying philosophical thread that drives these localised arrangement does not exist at the global level. The philosophical alignment at the global level is so limited, that it should never feature as a starting point.

The starting point for a World Order that has the potential to evolve and expand its utility over centuries must be built on simple premises of minimal trust and enhanced predictability. Practical arguments and pragmatic solutions to narrowly defined problems. If the World Order does not over commit to what it intends to address, then it has the potential to preserve its validity. Once utopian aspiration and unique world views start to drive system change, risks abound.

From Abstract to real world

To depart from the abstract briefly, let me relate this to four pressing challenges for the US. 1) recalibrating NATO, 2) recalibrating USMCA, 3) recalibrating the UN, 4) recalibrating the WTO.

The North Atlantic as a geographic sphere does lend itself perfectly to a collective security treaty such as NATO. North America, predominantly settled and developed from European ancestry, make for an ideal expanded cultural grouping. Many opportunities to collaborate within this grouping exist. Starting from a clean sheet, terms of agreement are clearly achievable by this group of nations. Effecting this recalibration without pissing each other off is the only challenge.

Recalibrating USMCA is also imminently possible without abandoning a logical base. Geographic economic integration is both rational and economically effective. Having this process driven by certain trade metrics like sovereign component definitions, and a rival import-fortress mentality was not the right approach. North and Central America have a logical integration strategy based on proximity and economic efficiency, but targeted outcomes must still satisfy each country’s societal-wide objectives. How to geo-economically block China requires different calculus and different tools.

The UN is the entity in need of the most change. There is not much within its structure that doesn’t need significant recalibration. UNSC reform has typically been the starting focal point for most, because it is viewed as the authority layer, and presumably a changed authority layer would then drive broader institutional change.

However, in my opinion, the UNSC and the General Assembly have very different, and obviously incompatible, founding principles. Power-determined hierarchy and veto power, etc., are completely divorced from a concept of global, voluntary association and representation at the GA level.

The UN is an example where a clean slate starting point might be most useful. The starting point is not about nations that are united, or the eradication of colonialism, it is about the recognition and the assembly of all nations that exist on this planet. The starting point is simply a role call for Nations on Earth. The NoE would be more fitting name.

The Main Committees drive the agenda: 1) Disarmament and International Security, 2) Economic and Financial 3) Social, Humanitarian and Cultural, 4) Special Political and Decolonization, 5) Administrative and Budgetary , and 6) Legal Committee. And the Regional Groups drive the politics: Africa, Asia-Pacific, Eastern Europe, Latin America & Caribbean, Western European & Others Group.

These configurations make the UNGA a huge lobbyist brawl, rather than civic forum. Decisions have little sway over the UNSC power structure, nor do they produce legitimised coalitions of the willing on regional problems. The system structure is the failure, not the effort or the ideas of the nations.

As for WTO, the organisation has two potential directions it can evolve toward in search of renewed relevancy. Firstly, it either becomes solely a global trade arbitration forum, dealing in voluntary conflict resolution between nations. Or, it attempts to set a few minimum trade parameters that encourage the world to produce and trade (share) primary essentials for human survival. Like water, food, medicine, and energy.

If the world can agree to raise the floor on natural anarchy, it would be worthwhile to try. But again, what is essential as a starting point of reform is to abandon all illusions of rules-based trade equilibrium, and to focus on minimum thresholds. The minimum common ground level must be discovered and then lifted only incrementally as much as the world will voluntarily underwrite over time. And exceptions for crisis behaviour must be built-in to the system rules.

Under construction

In all of these cases of reform, the temptation to judge history as good or bad, the status quo as good or bad must be avoided. Instead, a more healthy conclusion is that the structure deviated significantly from reality over time and dynamic structural change was not built-in.

It must also be accepted that philosophical and aspirational motivations are ultimately not helpful in the long run for global architecture. Successful applications of these at regional and the cultural domain level do not validate global applicability.

Change is good, change in necessary. Update and recalibrate continuously without war, if possible.

But if incumbents are so entrenched that they would rather die than change, the world faces a familiar dilemma. That has been the dilemma historically. World order change has historically only ever come following major war.

Given that this World Order has greater collective ownership than any of the previous iterations, perhaps it is our responsibility to collectively condemn it to reform . . . now, in advance, in order to prevent the world war path from gaining traction.

The spectre of private credit markets finally delivering some broader contagion to financial markets has reached the point where even old global macro guys like me are writing about it. I am not a credit analyst and I won’t be predicting the acceleration of default risk in the SaaS sector, or anything useful like that. What I am writing about today is what appears to be some classic signs of concern in the market structure, eg, the recent proliferation of institutional buyers with long cycle views disrupted by less liquidity than needed in short term hedging venues, rebalancing demands, and a volatile macro environment messing with their core views.

In a recent Thematic Edge podcast with Marvin Barth and Zoso Davies, I flagged what I considered to be the risk of a potential institutional buyers’ strike, driven by general sector caution, as fears of illiquidity and failed diversification outcomes from their risk factor analysis complicate portfolio construction. This can produce good old fashion taps on the shoulder from risk management & governance procedures.

Given that selling your illiquids at a steep discount is not an option for the large institutional set, a halt to new allocations is the default risk management decision, should they conclude that they are now more bearish. Along with aggressive over-hedging in derivatives and overselling of their liquid-markets portfolio. In short, sub-optimal portfolio management decisions.

What I am speaking of here is my fear surrounding the risk management function at the core of the novel Total Portfolio Approach (TPA) . TPA is a philosophical asset allocation approach that has incrementally transformed investment decisions at many of the largest pension funds and SWFs in the world. TPA was meant to be an evolutionary journey away from the rigid, asset class silos of Strategic Asset Allocation (SAA) that dominated the industry for decades, and that produced armies of specialist external asset managers, of which I was once one.

Begun as an efficiency drive, aimed at eliminating inter-mandate redundancies, expensive manager incentives, and a desire to stop paying high fees for generalised market beta, the question is; has it morphed into something that goes beyond efficiency?

Natural portfolio diversification achieved through multiple asset class benchmark silos has now been lost to global, generic risk factor analysis. Primary liquidity features inherent in public markets have been lost to the notion that core risk-asset holdings need never be traded. The combined wisdom & skill of many specialist external fund managers, often run by PMs with decades of market and geographic experience, are now lost to a single, small, internal team of strategic forecasters . . . and omniscient models. What could go wrong?

Was TPA the correct solution?

This is a world I know well. Having managed large mandates for the world’s top pension funds, SWFs, and life insurance companies for 25 years, I’ve been through every iteration of this process. And, uniquely, our investment team managed uncorrelated products that played the essential role as everyone’s diversifier, or ‘Opportunity Allocations’, as the TPA world calls them. We were paid higher fees and given greater latitude in our investment mandates because our role in the portfolio was as a pure alpha provider, and/or a macro hedge.

With a track record that spanned three decades, we delivered outsized positive returns in crisis years (1997-8, 2000-01, 2005, 2008, 2011, 2015), validating our clients opportunistic allocations. Unfortunately, our clients still lost money overall in those years because we were such a small allocation compared to the majority of their portfolio that turned out to be highly correlated to general equity market, growth, or geographic risk factors.

Even on the fee and liquidity fronts, we were constantly innovating to address the concerns of these major institutional clients. We designed an Alpha-Beta split product that would allow them to make a single allocation to us, replacing the managers that had high correlation to general market beta. Passive beta, active alpha. A simple, but elegant solution.

We managed the majority of our global macro thematic risk in FX markets so as to offer maximum liquidity. In our opinion, an external manager employed to function as a macro hedge MUST deal in liquid markets, as any true systemic risk scenario will most certainly be a liquidity event as well. We were able to commit to our clients that their entire $1bln+ portfolio could be liquidated within 24 hours. That’s an absolute return manager, an uncorrelated macro hedge that you can trust.

So, all of these objectives that have driven the adoption of TPA are well understood. These historical grievances amongst the funds did exist. The question is, did they correctly address their portfolio concerns? Did they allow the pendulum to swing too far? Did they swap a lot of external portfolio management expertise and benchmark structure-driven diversification for modelled risk factor analysis . . . equally prone to correlation spikes during crisis? We’ll soon see.

Models to the rescue

This TPA issue as it relates to private credit markets is this; if a sharp rise in financial market volatility (measured in liquid markets, as the private markets don’t trade) triggers downward adjustments to overall portfolio VAR, can derivative hedges and adjustments to the liquid portfolio components produce an optimal rebalance or not? Particularly, when something like the Iran war shock is generating growth, inflation, and capital impairment risks simultaneously. This is on top of the already existing sector risk in SaaS, the single largest allocation within private credit.

When I read pension industry journal articles like this I see only red flags.

The Ortec Finance Economic Scenario Generator integrates short and long investment horizons consistently across all asset classes and economies. Instead of the traditional complex, and inconsistent mix of models, a wide range of investment and risk management applications are now served with one model.

It is not possible that the Iran War can be both ‘the worst energy shock since the 70s’ and also fit neatly into model-generated risk management outcomes for growth, inflation, equity beta, currency, etc. in 2026. The level of uncertain is too high. There hasn’t been a major credit cycle event since 2008, and since then we went through the most extreme phase of monetary accommodation in history. What data have these models been trained on? Who would realistically trust the output of these models over a roster of top asset class PMs with long term track records?

It is for this reason I fear the default decision at the top of Asset Allocation Committees will be a moratorium on new allocations to private credit. The TPA asset allocation teams will need time to update models, arrive at some level of confidence, monitor rising default rate patterns, etc., and come to a conclusion on sector reduction. Given the constant demand for refinancing in the private credit space, a buyers’ strike from these major pension allocators, and others, represents tremendous stress. Together Pensions, Insurance, and SWFs provide 70% of the capital to private credit.

The only way this demand-pipeline interruption plays out benignly is for new money to suddenly arrive. Calpers, for example, announced at the end of 2025 that it too was transitioning to TPA going forward. Its commitments to private markets are growing. Major life insurance companies and a few high profile pension funds announced large new allocations to private credit at the start of this year. If you read top private credit research from February, just a month ago, they were positive and expecting a strong market in 2026.

If the new money arriving is sufficient to meet rollover and new loan demand, then curtailed buying from those already in strongly over these past few years might be covered. Or, perhaps relaxed banking regs this year will encourage banks to step into a market they have avoided. One can construct an optimistic scenario if pressed. The question is, how likely is that to happen, and how dependent is that scenario on an early end to the Iran war?

Basis risk

The other fear I have, while reading about TPA risk management strategies, is the basis risk from their liquid markets and derivative hedge book. Never mind the risk to correlation stability within their core portfolio factor analysis, how likely is it that the liquid-markets derivative book becomes massively over-skewed by attempting to hedge their non-trading, private markets allocations? What can go wrong within their multi-layer synthetic hedge strategy: (1) selling total return swaps & ETFs to hedge systematic credit repricing, (2) buy sector-matched CDS for idiosyncratic risks, (3) manage a broad index overlay for basis risk.

The long experience of dynamically hedging simple asset class buckets in risk parity funds makes it clear that it won’t be effective in managing drawdowns on factor-driven allocations. It is therefore unlikely that multi-layer synthetic hedging VS a multi-factor portfolio, using primarily more blunt (to find liquidity) hedges that are engineered more closely to the siloed asset classes from which TPA wants to escape, will work as planned. Success at a smaller scale for Family Offices or HNW individuals during modest credit events should not offer much solace. The industry is now huge! $1.5 trillion. The derivative hedges haven’t kept pace . . . not with symmetric liquidity.

The TPA strategy - as it is currently being deployed - is misconstruing a simple concept that our good friend at Convex Capital David Dredge is always repeating about ‘staying long your growth (or compounding) strategy using tail risk hedges’ by equating illiquid risk assets with positively convex assets. Owning private credit to pick up 3-4% is not positively convex, it is merely collecting premium in lieu of liquidity.

Of course, if your allocation to private assets is safely calibrated, and you truly never need to sell or reduce percentage allocations, then picking up 3-4% on your bond bucket can be a solid win. However, if your macro view is hit by rolling unexpected shocks, and both vol and correlation produce unexpected outcomes, then selling down your liquid assets to rebalance produces a continuous, passive increase in illiquid components.

Tail-risk hedges can mitigate shocks to short term portfolio structure, but eventually you either have to take profit on the hedge and/or find a way to reduce the underlying. Shocks that pass and the macro environment quickly returns to where it was before the shock are easier to address than those that permanently alter the outlook.

A non-bank ‘bank run’

Focusing on the buyers pipeline is typical of a macro investor, while credit and equity analysts are likely to prefer the bottom-up risk view. I am more focused on the buyers’ shifting behaviour because early stages of crisis are typically marked by a new class of investors piling in to a different asset class in search of return, only to discover too late that much of the recent outperformance (and liquidity) was an illusion. Created by the single-direction, wall of money effect.

Private credit (and private equity) fits this definition because we haven’t had a major credit cycle event since 2008, and the industry has spent the last 10 years constructing ways to get more institutional and retail investors into the market. When the first major down cycle comes, a lot of lessons will be learnt and the industry will adjust. However, under what macro-economic conditions this ‘first event’ happens can determine whether it morphs into a systemic event or not.

I’m not alone in this focus. The IMF through its GFSR and major central banks have all recently published commentary on whether or not they see a transmission channel from private credit into the banking system. This is because they view their responsibility primarily as managing systemic risk to the banking sector. They are warning only about what they see from that angle. There is less focus on what impact a heavy blow to private markets would have on general risk appetite. All markets would ultimately suffer.

The ‘bank run’ analogy is one well known by all; regulators, central bankers and depositors alike. There have been enough episodes over past years to remind people how they play out. Deposit flight is always considered the primary catalyst, which quickly undermines a heavily leveraged business model like a bank.

While rapid withdrawal risks in private credit don’t resemble that of bank deposits, there is still a series of dominos that are analogous to a bank run in slow motion. And in my opinion, the institutional buyers strike would be the first domino. It doesn’t represent a panicked withdrawal, but it sends a signal to all borrowers that new credit to address refinancing demand is about to become scarce.

The first to move are those that can. Withdrawals and NAV repricing of the publicly traded BDCs has begun. But this group is only 10-15% of the total market. This is retail and HNW individual money. They often cut losses based on short term performance momentum, and CWBDC is down -10% ytd.

The whales in this sector are the pension funds and SWFs. And many of them have shifted to a TPA. You can add Calpers to this list below (CalPERS Board decided to adopt a TPA framework in November 2025, which is scheduled to go live on July 1, 2026).

How their new risk management approach and strategic AA reaction function plays out on scale is an event I am keen to observe. I have my hunches on how they will react to circumstances, but I would like to see its impact implemented on scale (now that we’ve achieved scale) amid a major market dislocation.

Covid happened before this TPA trend became too pronounced. Liberation Day shock was too brief. The 2022-24 inflation episode would have been the first extended event under TPA, however, US growth was above 2.5% all three years, underpinned by enormous fiscal stimulus. The mini banking crisis in 2023 was driven primarily by duration risk losses (SVB, First Republic), not credit defaults. The modest tick up in defaults were more or less confined to the consumer sectors (credit cards & autos).

The growth in software & tech enablers, the largest sector component of the private credit market, saw their surge during this stress period for the consumer sector. Attractiveness of the sector out-weighed tighter lending conditions more broadly. In fact, the higher nominal rates across the economy made these growth sector ideas even more attractive.

Therefore, what I am flagging is a concern about how a major credit event plays out amid this new era of TPA at scale and amongst a collection of investors - both institutional and retail - that have previously never been involved.

Publicly traded BDCs provide our first data points. Now, the institutional response needs validating.

Are we sill early enough in the private markets transition that new institutional investors will be keen to capture better entry levels? Or, does a risk management driven buyers strike by those already fully invested trigger caution everywhere?

The rollover/refinancing demand will build throughout 2026. Risk of a buyers strike rises the longer the macro outlook remains clouded by the Iran war.

An inflation shock that forces central banks to tighten will damage risk appetite further. Q2 needs to be a period of stability and recovery or the risks flip the other way.

It’s crunch time.

In a virtual meeting timed to coincide with the Trump-Takaichi summit, the PIPIR met and concluded on two additional steps to enhance supply resilience in the expanding Indo-Pacific defence industrial base. The PIPIR continues to add partners and increase new projects for integration. PIPIR is one of the most important examples of new-New World Order building. I wrote about this reorganisation in previous posts and in my book, what I’ve called overlapping Circles of Trust .

The PIPIR is a classic form of new Trust Circle within the Security Domain. New international agreements are driving resource allocations that are targeted toward a specific geographic or domain threat, and organised by degree of trusted collaborators and geographic relevance. The NSS 2025 gave clear indications on where these would be expanded and strengthened. US foreign policy critics wrongly described these strategic shifts as ‘isolationism’ or ‘death of multilateralism’ or even simplistically as an ‘Asian pivot’. None of these are accurate.

The evolution of the US global role and the shifts in mutually shared national security interests amongst States have simply led to a major adaptive reconfiguration of US multi-domain strategy (security, technology, trade, finance). The US is recalibrating its resource allocation to both changed system risks AND changed relationships with its historical allies. The new realignment starting point must be shared domain and geographic risks, and then worked back toward newly established Circles of Trust (CoT) that capture the countries that share a common view of these system risks. Historical allied trust is an important prerequisite, but not sufficient on its own to maintain the same level of Trust within these new CoT configurations.

CoTs overlap, and a State’s position within one Circle does not guarantee the same Trust level in another. The New World Order is about multi-domain relationships, which differs from a world order based on multilateralism. The key determinant of preferential interaction is not a consensus on a set of standards or static rules, but rather, a dynamic status of evolving alignment on each set of risks within each domain. Fragmented is an unhelpfully superficial description of this.

There are certainly thresholds and categories that ensure a fairly standard level of privilege, such as members, partners, democracies, free markets, open economies, peace-loving nations, historical affinity, shared religion-culture-language, wealth levels, respect for human rights levels, etc. But importantly, none of these general labels guarantee universal, or the highest levels of Trust within all domains.

These domains are scored independently now. In particular, the Security domain had to be significantly recalibrated. Primarily due to the changed system risk (revisionist powers: China, Russia, Iran, North Korea), but also due to changed World Views relative to the US (allies and friends).

In terms of sequencing, Security domain CoTs need to be reconfigured first, as the other three are subordinated in an international system with higher geopolitical risk. This reality has been the source of most confusion under the two Trump administrations, as much of the world had grown accustom to the reverse hierarchy during the phase of hyper-globalisation/peace-dividend 1995-2015.

As with other domain strategy shifts, the world tends to regroup after the initial shock and then convergence behaviour begins. This is not to say that convergence with US-driven realignment equals full agreement, but rather, following a US strategic shift, net assessment by allies tends to lead them to discover they still have greater overlap with the new US system risk assessment than prevailing revisionist alternatives. This is realpolitik, pragmatic international relations, not simply US acquiescence.

The Quad that changed it all

While national security scholars and economic historians may conclude differently over time, in my opinion, it was the revival of the Quadrilateral Security Dialogue in 2017 that marked the change in World Order system dynamics, and set the stage for Trump 2.0 to apply it more globally.

Quad’s origins are also relevant, as it was firstly a global response to the horrific Indian Ocean tsunami disaster in 2004, and regional collaboration efforts to deliver humanitarian relief in an area lagging behind globally in infrastructure & supply resilience. This realisation inspired former PM Abe in 2007 to envision an ‘Asian arch of democracy’ from India to Japan (the largest country donor in that crisis) that would invest in and protect this essential maritime corridor.

But, it then took until 2017 to be revitalised into something more, when China’s South China Sea assertiveness combined with US concerns about China’s deep water naval strategy in the Indian Ocean led Trump & Abe to agree at their November Summit to coordinate on this Free and Open Indo-Pacific (FOIP) security concept. The FOIP Quad was the first of the new-New World Order-type organisations I am highlighting here, where the definition of the domain and system risks drive the organisational structure and choice of partners, rather than simply historical affiliations.

The partners could agree on a Global Commons-defined freedom objective, well enshrined in historical legal and convention precedent, that did not require new bilateral or multilateral security commitments. The CoT within the Quad was not high enough with India included, or with Australia’s foreign policy divergence at the time. This form of pragmatic, domain-objective-driven organisation with various levels of voluntary commitment was the blueprint. It allowed the US to envision a model beyond the calcified multilateral organisations that no longer served its national security interests globally. This part of the Asian Pivot gave the US a chance to redefine its strategy for superpower projection. And, it wouldn’t be a new NATO for Asia.

Policing the Commons

The evolution of the Quad and its primary goals have influenced the US national strategy ever since its 2017 revival. The focus on pragmatic objectives such as maritime security, emerging technologies, critical minerals, and cybersecurity showcase the organisation’s functional agenda, its more ideologically-agnostic focus on basic management of the Global Commons. The Quad has spawned a list of similar new-new world order collaborations. Examples:

AUKUS (Australia–UK–US)

NTIB (National Technology and Industrial Base) framework expansion for ‘Five Eyes’ countries: US, UK, Australia, Canada, and NZ.

IPMDA (Indo-Pacific Partnership for Maritime Domain Awareness). Focus on combatting “dark shipping,” IUU fishing, smuggling, and gray-zone coercion in the maritime commons.

PDI (Pacific Deterrence Initiative) and EDI (European Deterrence Initiative): China/Indo-Pacific domain focused and Russia/Europe domain focused.

NDIS (National Defense Industrial Strategy) and RFS (Regional Sustainment Framework). These are overarching US strategies that embed ally co-production for artillery shells/missiles/equipment, etc. (Quad partners)

CSpO Initiative (Combined Space Operations), significantly expanded and operationalised post-2017 (US, UK, Canada, Australia, France, Germany, NZ, Italy, Japan, Norway). Core objectives are: Enhance space domain awareness, interoperability, information sharing, mission assurance, and resilience; deter conflict and ensure freedom of action in the orbital commons; prepare for combined space operations against threats (ASAT weapons, jamming, debris).

What these configurations all have in common is this ‘mini-lateral’, military-operational, agility. They are built to functional specs, not built for discussion and oversight. The trust is being enhanced through operational improvement, rational application of resources to risk assessments. Greater faith in succeeding at the mission builds greater trust. Not trust built on historical pledges & commitments, or cultural affinity, but trust built on shared operational confidence. This is a partner-ownership form of collective security, not paying fees for umbrellas.

The Institute of Trust

There will be those that still call this multilateralism under a different name, or method. But I think it is import to change the terminology so that fluid definitional evolution doesn’t further confuse people. This is a change in both philosophical view and operational delivery. It is not a higher form of global government than multilateralism. It is - at its core - a desire to make many of the promises made by a multilateral-based global government actually work.

Without a centrally funded, centrally controlled, centrally human-resourced form of global government to police the Global Commons, pragmatic and decentralised coalitions of the willing must take responsibility for ensuring security. Freedom of navigation. Freedom of access to the Commons, etc. Allowing the US and other permanent UNSC member superpowers to ‘fill in the gaps’ of global security not covered by a severely limited and dysfunctional UN was a mistake. It undermined the UN’s primary principles and lead the most vulnerable countries in the world to image their rights were protected.

Real trust does not come from a piece of paper or a pledge from leaders in power many decades ago. Trust resides in the track record of institutions repeatedly upholding a principle, ensuring a promised outcome. And, the starting point of maintaining this trust is presenting transparent, compelling truth that what is being promised could actually be delivered, if needed. First, the pledge must be credible. Then, it must be repeatedly delivered. It must survive changing circumstances, changing times. Trust is a fluid concept maintained with great effort. Its dilution first begins with lack of belief in capacity to deliver, not loss of conviction or desire to deliver.

The process of re-establishing this belief in World Order by building the actual capacities to deliver is what I am calling the Institute of Trust. If the Institute of Trust (IoT) is successfully built, it will be because people again believe that what their government promises them, what their government says is true about international institutions, or anything else, is actually true. This is a very bottoms up process. Basic capacity building.

People have been sold a lot of promises, and been given explanations of reality that were simply not true. Their faith in government, politicians and treaties has understandably declined. Now, the IoT must be rebuilt separately in every domain. Beginning with national security. You can’t verbally convince the people that they are safe anymore.

You need to show them the improved security structure, resources, personnel, plans & protocols, storage facilities, stocks & supplies, contingencies, partnerships, overwhelming evidence that they are well protected from most of the conceivable external risks. And once that is complete, you need to do the same thing in other societal domains, like domestic politics, healthcare, education, judicial system, etc.,

We are too far past the conjecture and verbal reassurance phase. We have learned too much about virtual reality now to accept opaque descriptions of reality. Trust must be built, earned, and repeatedly upheld for a long period of time before the IoT is metaphorically rebuilt in modern society.

Like the temple on the mount in religion, without an Institute of Trust in society, believers descend into dispair.

The financial markets are like a jilted lover that keeps returning to the same source for validation and solace. I empathise with the challenge of seeking out real information in modern times, but still, once you’ve burnt your fingers in the fire 4 or 5 times, normally you stop.

What must be everyone’s starting point now when observing the discourse between Trump and the legacy press is that this is full-on informational warfare. This is not news. This is not an informational communication strategy. The press are determined to flag all inconsistencies, signs of failure, perceived theoretical gaps in strategy, precedents that may have been broken, norms that may have been violated, absolutely anything they can find that can be used to discredit his policies. That’s their MO. That is their singular mission. And, of course, Trump is 100% aware of this.

This leads to tortuous displays of simultaneous informational warfare between the President and those charged with reporting on him. He uses everything from insults, to grandstanding, to hint dropping, time horizon muddle, flood-the-zone content, to antagonist baiting. This is not just political theatre for Trump, it is the warfare strategy chosen to deal with a hostile press. If you aren’t able to disaggregate this public display of warfare from underlying signal, it is better to not watch or listen to it at all. It will only serve to confuse.

Trump’s team are equally fully engaged in informational warfare with the traditional press/communication channels. They play the game differently than Trump, but they do so fully aware that they are engaged with the enemy in one of the domains of hybrid warfare. Whatever information that is left out, is done intentionally. Truncated timelines on plans, refusal of detailed plan descriptions, etc., all of this is intentional. The press would have you believe it is evidence of negligence. The truth is that a hostile press requires a particular communication strategy. Unfortunately, this happens at the detriment to society, but is understandable, given what is at stake.

While the press will demand full action plans, contingencies, live assessments, and damage reports, those fighting the war have zero incentives to provide such details to a hostile press and an observing adversary. The press knows this and yet they do it anyway. What is shocking is that this was a well understood phenomenon in the past, but was always directed at the enemy’s communication strategy. In modern times, domestic press direct this tactic at their own government, raising the costs of all policy implementation.

Young people today would be shocked to see the role that CNN used to play covering every proxy war and colour revolution around the world. A time when the West was aligned on the need to defeat communism and usher in a world of free markets, democracy, and greater human rights. I remember being in Manila February 1986 for the first colour revolution, when the Aquino supporters, all dressed in yellow, brought down the 21 year dictatorship of Marcos. The press sought to shine light on all the atrocities hidden from the world’s eyes. They facilitated change for good. Now they view their role as some form of 4th branch of government, necessary to thwart elected power that doesn’t share their world view.

The lack of focus on the organic Iranian people protests that have grown steadily since 2022, or the persistent state sponsorship of terrorism is astounding. These types of topics used to dominate the press narrative. This was a role society relied on the press to perform. Live, real-time war strategists they are not.

The US playbook

In my last Global Watchtower report I argued that it was far too early to make any conclusions on the Iran war. There were too many questions that needed to be answered first, and it was unlikely we will have answers before the end of the month. 8 days later, that still seems like a pretty prudent recommendation.

I listed a number of data points I was particularly interested in, of which almost none have received a solid update yet. The US invitation to China to assist with maritime safety is a partial answer on my question about the role of Russia & China post-conflict. The US is not trying to block China’s access to the Gulf, on the contrary, it wants China to assist in making the Gulf Region a much safer and pro-business environment.

The important role for the GCC countries & Turkey to play has so far not manifested strongly enough. The GCC states have first reacted to ensure their own safety & stability. However, there will be no fruitful progress on successful regime change if the GCC nations don’t step up and take leadership. Iran provoking them to join the war on the US-Israel side is not positive progress, which is why GCC states have mainly deployed missile defence tactics.

The GCC must begin overtly courting the Iranian people and technocratic leadership. They must establish themselves as the bridge to peace. This is hard to do while missiles are flying in, but it needs to start now.

Many people seem surprised by the timing of the US decision, but there were actually many indicative factors. The recent purges in China’s military made it clear China was in a state of distraction. These purges continued even after the Venezuelan regime-change event, indicating that the military purge was a higher priority for Xi Jinping.

Secondly, the so-called 12-day war last June, when bombing raids destroyed Iran’s nuclear weapons program were met with little resistance, it lowered the threshold for a second campaign.

And finally, initial support for the Abraham Accords, combined with massive investment in a 21st century economy by GCC states had shifted tolerance for Iran’s foreign policy of destabilisation.

Another lesson in dependency

When Gulf states were simply resource extraction economies, a rather simplistic national security policy was possible. However, with economic diversification into everything from tourism, to wealth management, to global sports, and to futuristic cities and AI data centres; the new GCC economy is dependent on regional stability. Suddenly, the GCC national interests began to align with the West. Iran had become a problem for all.

How do we get out of the messy phase and on to a path that allows markets to envision a brighter future for the Gulf Region? I flagged a few of these in my last report. Working with China to make it clear that the Persian Gulf is not the Caribbean. The US wants/needs a stable, pro-business regime in Iran that allows long term investments to flourish. It is not trying to create a new military sphere of influence. It wants what China wants, what the other GCC countries want; a stable regional partner.

The fact that neither the GCC states or Turkey have fired back on Iran continues to be a very positive sign. Keeping the kinetic war between US-Israel and Iran creates the greatest space for peacemaking ex-post.

Multi-nation maritime efforts to police the Strait of Hormuz is an obviously positive development, if it can be maintained. This will have to be constructed, but it is likely to gain momentum with time. Iran avoiding the temptation to spoil these efforts with terrorism will be a sign that the regime change reality is slowly being accepted.

The primary role of the observer in the Watchtower is to report unusual activity, collect signals & signs of emerging threats. It is an early warning framework that reports to a command & control centre. In many cases, a seasoned observer can formulate conclusions quickly because the early signs make intuitive sense. The pattern is familiar. The existing conditions on the ground lend themselves to easy extrapolation. However, another lesson learned from years of observation is the need to be patient in the early days of a crisis.

The current regime-change event in Iran is one of those developing events. While the shear scale and effectiveness of the initial US-Israeli bombing campaign suggests imminent success on degrading Iran’s regional military threat, it doesn’t answer the many other questions needed to project a clear, low-vol outcome down the road. I for one am still very much in the data collection mode. I still have too many unanswered questions.

What I’m not concerned about are: 1) US & Israel losing a war of attrition in terms of missiles, drones, and air superiority, 2) high oil prices spikes translating into a last energy shock, or 3) any major impact on synchronised global growth in 2026.

Answers to questions I am waiting for are:

1) How strong is the regional coalition (surrounding Sunni states) backing regime change?

2) Who are the internal Iranian interlocutors for Saudi Arabia, Turkey, UAE, etc., to negotiate with? What ideologically unites this Iranian group of technocrats?

3) How broad is support for crown prince Reza Pahlavi, or NCRI?

4) Are the Abraham Accords the basis for negotiation and peace, or will their be something else ex-Israel, like an expanded GCC (add both Iran & Iraq)?

5) Is Iranian territorial integrity guaranteed, or is there a concession required in the north?

6) Are Russia & China allowed to play a redevelopment role post-regime change?

7) Does Turkey+NATO extend a security guarantee to the Middle Corridor (TITR, BTC, TCP) to ensure stable energy & transport supply for Europe?

The list of questions in my mind is much longer, but these are the important ones to start framing the post regime-change playing field. Given that the US has no intention of playing a role on the ground, actions from allies and collaborators in the region will dictate progress in scenario building.

Where the US is certain to be present for months to come is providing naval and air support aimed at keeping the Persian Gulf open for business. This will of course expose US hardware to constant attack, but this is the minimum cost the US has to pay for getting so decisively involved.

Building blocks

While the GCC Ministerial Council has activated its collective defence clauses, at this stage it is still in defence mode. No offensive attacks on Iran have taken place. The Qatari fighter jets that shot down an Iranian jet took place over its own air space, and claims of Qatar firing missiles into Iran following the targeting of its Hamad Int’l Airport are still unconfirmed. GCC countries appear to be waiting on Saudi Arabia to take offensive action first, given their collective liability under defence agreements. GCC states pivoting to offence would be building block number one.

Defense Ministers from Saudi Arabia and Pakistan met today and activated their recently signed mutual defence agreement (here), which so far has resulted in Pakistan sending air defence systems (LY-80, FM-90, Anza-series missiles) and troops to Saudi. In a joint statement today they have agreed to a coordinated response to Iran’s aggression. Confirming Pakistan’s solid backing in advance was a necessary prerequisite before embarking on offensive action. Another building block.

Another essential building block to the current conflict will be the actions taken by Turkey, the nearest NATO ally to the conflict. The Iranian missile shot down over Hatay province on 4 March has not elicited a retaliatory response against Iran, as it was more than likely aimed at Cyprus or Israel and veered off course. Cyprus not being part of NATO has led to it being included in Iran’s missile barrage. Therefore, Turkey has yet to definitively show its hand in this conflict.

Publicly Erdogan has denounced both the US/Israeli attack and Iran’s broad retaliatory response. Its actions taken to date can all fall in the defensive category, such as preparing to establish a refugee buffer zone on its SE border, and protecting trade routes with Iran. It’s NATO obligations so far have only amounted to enhanced surveillance, given the rogue missiles that have been flying around.

Apart from kinetic military action, there are also building blocks of finance and trade sanctions. Europe, for example, labeled IRGC a terrorist organisation on 19 Feb and froze all its assets. The UAE (Dubai), Iran’s primary external finance hub, has threatened to freeze all assets, estimated to be $9bln. Qatar still holds $6bln of Iranian oil revenues in a reserve fund, and Iraq about $6bln. Actions in coming days to tighten the stranglehold on Iran will define the degree of coalition commitments.

Russia & China

I’m inclined not to preemptively react to what the Revisionists might do, as my assumption is simply that they will be opportunists. Both Russia & China will sell weapons to Iran and facilitate energy trade. Both would be happy for the US to get bogged down in another forever-war in the ME. However, their actions are not linked to the existence of a theologically-driven dictatorship in Iran. A more pragmatic and economically open Iran would be better for them as well.

China is not the first East Asian country to be attracted to a strategic energy relationship with Iran. Both Japan and South Korea successfully navigated this trade in the past, both were large trading partners with Iran before the US withdrew from the JCPOA nuclear deal and began applying sanctions.

The US can reduce Russia/China influence in this initial kinetic phase of the conflict by making assurances about post regime-change economic openness. Iran is not Venezuela. The US will not be acting as custodian for Iranian oil exports. Both OPEC and GCC can take the lead and make assurances to China about stability of future energy sales.

The bigger concerns look to be where some hybrid warfare is likely to ensue around the Middle Corridor region. Trump’s trade corridor, which made further advancement just last month (TRIPP), is a direct block to both Russia’s North-South strategy with Iran and China’s BRI East-West strategy. A friendly and economically-partnered Iran with the US would greatly undermine their Central Asia goals. Disrupting and engulfing this region (Armenia, Azerbaijan, Georgia) in chaos may end up being a strategy the two can agree on.

The stock market

While volatility and initial phases of geopolitical shock always hit risk assets hard, once the dust settles, the winners float to the top. An interestingly, in this case, this shock would seem to be another engine of growth for high-compute chip demand and AI. The type of war that the US & Israel have decided to fight adds billions to the pipeline demand for chips and dual-use tech. The same sectors that led in 2025 just received another boost. It won’t be just the hyper-scalers driving insane chip demand, it will be the national military budgets of all countries watching, learning or participating in this conflict.

It has been a major thesis of mine since the start of 2025 that geopolitical system pressure rising implied higher vol for risk assets. The end to monetary extremism and reform at central banks (less liquidity) would further contribute to this trend. This thesis has now become reality.

The primary portfolio impact should be an increased AA shift toward risk-free assets, ie, high-grade sovereign bonds, that will again show consistent defensive characteristics. This is not to imply a bear market in equities, it is merely an adjustment to an overweight that made sense during surplus liquidity conditions. Credit markets may see a similar trend, should private credit deliver the pain it is currently threatening.

Buckle up for a rough ride in 2026, but resist early conclusions. It is still early days on Venezuela, Cuba, and Iran. The Trump Admin is taking an immense calculated gamble at the start of this year. The hard push will come to and end by June.

Then, the dressing up for 250-year anniversary in July and Midterms in November begin. It can go either way, or be mixed. Positive for Venezuela & Cuba, negatively for Iran . . . or positive for all three. Plenty of scenarios still possible.

Global Watchtower

Drawing on some themes from recent podcasts and market dislocations, I layout the background framework I’m operating on this year. Easy trades or high conviction political views don’t easily drop out of this framing because there are simply too many variables in play. What it does offer, however, are some useful foundational planks and guard rails to steady oneself amid the stream of breaking news events.

Thematic Terrain Analysis

Supercycles

• Demographics (population peak)

• International Systems Pressure (fragmenting hierarchy)

• Frontier Domain Dominance (land, sea, air, space, cyberspace)

• Frontier of Capability (Agentic AI => AGI)

Major themes for hegemons

• US strategic repositioning

• China crossroads (revisionist VS integrationist)

• Russia’s final decline

• EU crossroads (federal union VS customs union)

Major themes for large system hubs

• Japan’s final normalisation phase

• Anglo Sphere devisions

• Global South identity search

Regional trends

• Indo Pacific militarisation

• ME strategic pragmatism

• Turkey and the Middle Corridor

• Arctic Security

• Donroe Doctrine

High profile market narratives

• Sovereign debt crisis

• Currency reserve system & debasement trades

• Central bank credibility

• AI dominance race

• Autonomous technology

• Energy & supply chain resilience

• Healthcare & longevity

This is definitely a lot to take in, but when laid out together it is easy to see how Market Narratives are usually based on solutions or risks identified in the Major Themes. Rising pressure from the pending regime shift forces a perceived policy change that has a concentrated impact on tradable market proxies. For example;

Demographic trends produced fears of sovereign debt crisis in the developed world, which led to over reliance on monetary policy, that led to currency debasement fears. And, a shrinking workforce increases the necessity for investment in autonomous technology, while simultaneously creating high demand for healthcare & longevity consumption.

US strategic repositioning alters investment strategy for frontier domain dominance, fuels a shift in allied partner behaviour (EU crossroads, Japan’s normalisation, Anglo Sphere divisions, Global South identity search, etc), that in term impacts the fundamental risks in all Regional trends listed. All of these drive market narratives on AI dominance race, investment in autonomous tech, and a national security policy of energy & supply chain resilience.

In addition to causal and sequential relationships, there are feedback loops and policy failures to factor in. Both policy failures due to alternative beliefs and those due to constraints. Cross referencing current events against this backdrop of evolving forces is the analyst’s job in 2026.

Correct valuation, pricing and direction relative to this broad and complicated pervasive force is impossible to assess on a single metric, and therefore lends itself to speculative interpretation. Assessing when most known information and extrapolations are effectively discounted in price is the live & constant market debate.

The scoreboard

In sizing up the market narratives and rendering a few succinct net assessments, my conclusions land something like this:

Sovereign debt crisis: the focus for me should be on a country’s ability to generate a primary surplus. Most developed countries over used fiscal space during the Covid pandemic, which was treated as an existential crisis, and therefore justified. It is natural to then conclude that it will take decades to recover. Recovery should come in three stages: consolidation (debt/GDP stabilises), primary surplus (new supply reduction), stock adjustment (debt retirement). The race for most countries has moved into phase two. The markets will be punishing those still lingering in phase one, while rewarding those in phase three.

Currency reserve system & debasement trades: in tracking this narrative it is important to break it down into its two parts. The currency reserve system fears/stress are comprised of geopolitical challengers (EUR & RMB), custody risks (revisionists VS Western-led world order), technological change (DeFi, digital currencies), and collateral advantages (depth & allure of capital markets).

The debasement part of the narrative gets entangled with collateral advantage dimension of the story, as it hones in on store of value and portfolio preference (precious metals). This is why risk-asset performance metrics are now being applied in comparative analysis, even though a currency is not supposed to appreciate in value. It is simply meant to be stable.

Central bank credibility: the CB narrative also has multiple dimensions, most popular being independence, policy exhaustion, and reform. Suffice to say that if CB’s had performed well during the last two decades there wouldn’t be any calls for reform, and therefore, poor performance lies at the heart of the matter.

AI dominance race: it remains early days. As this technology cuts across all domains, and diffusion still limited, the global pursuit will remain relentless. Particularly in the military and security sectors. Like with the introduction of nuclear weapons to the international system, AI will drive a new form of sovereign hierarchy.

Autonomous technology: a natural solution or factor in all major themes listed above, implies investment flows will be massive. Like AI, this theme comes with both optimistic and extremely dangerous implications. With lower barriers to entry, it will be a larger competitive battlefield than even AI.

Energy & supply chain resilience: primary catalysts have been geo-economic warfare and industrial policy so far. The competitive playing field will shift as tipping points in dependency, stockpiles, and innovation adjust perceived leverage. Price pressures where overvalued face certain types of cliff risk.

Healthcare & longevity: the demand variable for this narrative/theme is currently high, but will adjust to demographic cycle contours and the cost curve. For most of the Western countries plagued by a baby boom pension liability bulge, we reach peak system stress in 10 years. After that, the fiscal drag begins to recede. Therefore, if no major wars are fought during the next 10 years, it seems plausible that all can escape this demographic scourge, albeit, with a massive hangover.

What’s in the price?

As with major themes feeding the background narrative in markets, it is about the potential for crisis, rather than actual crisis. The market collects themes that flag fragilities in the system and then tracks them for path to tipping points. This makes the valuation deduction highly subjective. Everyone is willing to pay a different price for insurance. This difference of opinion can be driven as much by individual exposure as by conviction. For this reason, narrative directional analysis dominates.

When the introduction of a new narrative emerges, articulating the latest observed system fragility, a phase of rising vol convexity can validate this risk as real (discounting), a rising probability of adverse outcome. However, after some aging (without crisis), a major theme or narrative will eventually see extrinsic risk peak. This directional flip in skew can often signal sufficient discounting of theme risk/disruption.

For rotating sectoral or purely capital market themes, I have typically in the past declared that a theme is “fully discounted” when we reach this point, meaning (in my case) I no longer see the risk/reward for concentrated my energy (research & trading) on this theme attractive. However, often, when we are talking about financial market risk pricing through convexity, or vol skew, or term structure for geopolitical risk, then equating a certain derivative price peak as “fully discounted” is dangerous. It can simply mean that financial markets have reached some limit on its relative redistributed of risk premium. Structural breaks in geopolitics (war, sanctions, threats to sovereignty) are competing for share of risk premium in portfolios.

For that reason, historically, I’ve used other subjective determinants of what I considered to be “sufficiently discounted”, with the primary one being broad market awareness. Or in some cases, initial - but significant - policy response. Why? Because I rationalised that once I start reading my own strategy views popping up in Wall Street bank research and the mainstream press, first movers advantage has expired. Once I see initial policy measures taken, then I can conclude that Authorities are now fully aware of the system risks and have begun corrective measures to mitigate those risks.

While there are certainly exceptions to this rule, and I can easily list a few memorable ones here (Bernanke’s sub-prime speech to Congress in 2007, Biden’s 18 Feb 2022 WH press conference on imminent risk of Russia invading Ukraine), but this is a point about what constitutes an attractive risk/reward opportunity for deploying additional risk capital against superior understanding of the directional dynamics of a theme. In most cases, this form of subjective attribution of “fully discounted” has been useful.

Typically, I continue to track the unresolved - but beginning to be addressed - system risk theme until full resolution, while moving my energy and forward-looking focus elsewhere. This is an investment framework approach, not a policy & remedy one. Geopolitical events have a way of belatedly breaking from exhaustion rather than lack of deep understanding of an issue, or comprehensive remedy.

2026 Playbook

With all this in mind, I am still allocating my focus much more on AI, Autonomous, and supply chain resilience themes. These are the more commercially driven themes that will have recognisable discounting signposts. They will be faster moving and more closely tied to opportunistic risk capital allocation.

The reserve currency & debasement theme is poorly considered and futile to chase. Whatever dollar declines we see in 2026 will be driven by cyclical and asset allocation stories, not a change in the relative strengths of USD as a reserve anchor. Precious metals are clearly a risk asset play now. Swapping them for equities may make sense, but not for Treasuries, and other hard currency sovereign bonds. Apples & oranges.

The sovereign debt risk theme is slow moving. The risk has been more broadly assessed by policy makers and voters than at any other period in recent history. Most investors are going to give the system time to incorporate better fiscal discipline, including harsher democratic outcomes for failure. This theme may argue for lower valuation, but it doesn’t signal crisis.

Similarly, central bank independence is under question due to poor performance and maturity of wilfully-taken collateral risks. Critical views are now present in both the bureaucratic and general public domain. Reform is coming. If implemented correctly, reform will enhance institutional independence. In the meantime, the world must cope with the political meddling and partisan interpretations of change. From what I have observed so far, there is less risk being taken by monetary policy makers now, not more. Central banks are treading cautiously again, at last.

The long term background forces that look most likely to push harder in 2026 are: 1) Frontier Domain Dominance, 2) Frontier of Capability, 3) EU Crossroads, and 4) Japan’s final normalisation phase. The former two because they are well funded, already decided, and have entered the implementation phase. EU Crossroads driven by necessity. The environment has force change to the front. And, for Japan, the Takaichi political victory ensures she will push hard on national restructuring, similar to how Trump implemented his 2025 Agenda following a decisive electoral victory. Japan will come out of this better prepared to respond to whatever external threats are directed toward it. This will be a trend that gains momentum.

The Donroe Doctrine and ME Pragmatism also have legs, as they now have some autonomous inertia. It took a major policy shift by the US to kick them off, but now they are taking on a life of their own.

This list of major themes and narratives seem to initially paint a negative backdrop for financial markets in 2026, but it isn’t baked into the cake. Compared to the last 5 years where tremendous political energy or thought leadership were needed post-Covid to kick start the global economy and alleviate caution. This year will see synchronised global growth and better management of ‘cost of living’ shocks to the general public.

The broadening out of growth and lower interest rates will boost household confidence more than the spectacular out-performance stories of a two-tier economy and unsustainable government hand outs. Feels like a year for positive surprise economically, as we hold our breath on geopolitical & war risks.

Her gambit has paid off. Hat tip to her advisers who clearly understood how the youth & women vote would trump historical party inclination. Takaichi won a classic populist victory. She will be a rockstar / icon-like PM for the rest of her career. Nice.

An LDP single party majority eases pressure in navigating coalition demands, although Takaichi is still likely to honour past Ishin no Kai pledges like reducing number of LH MPs and allocating backup resources to Osaka as Vice Capital. But, the big win is the supermajority. The LDP now does not have to worry about lacking a majority in the Upper House. The Lower House supermajority overrules.

From 18 February, when the Diet resumes, public debate will begin about what exactly the new ‘Takaichi Mandate’ means. The FY26 budget might see swift acceptance, but it will be other policies in 2026 that determine what the new Takaichi Mandate implies.

Given what she has learned during her 4 months in office, navigating an extremely complex geopolitical and financial market inflection point, one can expect Takaichi to be keen to optimise her surroundings. Whatever compromises and limitations she voluntarily took on back in October to secure the prime ministership will be adjusted. She’s won herself the right to self-determination. Jesper Koll captures this perfectly in his recent Substack here.

Resurrecting Koizumi

What has caught my eye and triggered a little walk down memory lane has been the seemingly spontaneous manifestation of former PM Junichiro Koizumi talking points. Takaichi was quick to reuse “no growth without reform” references to Koizumi back in October, particularly when defining the mission of the newly created HQ for Japan Growth’s Strategy, but still, the general public saw her as Abe 2.0.

I get the distinct feeling that battling with Abe’s leftover advisory crew on messaging around monetary & fiscal policy has been tiresome. Their instincts have proven divorced from financial market reality. And, the thrust of Takaichi’s growth agenda announced back in October was predominantly Third Arrow stuff anyway.

Now, post election, as the emphasis on deregulation, investment, and innovation takes centre stage, Takaichi may find greater inspiration in Koizumi’s famous mix of pre-requisites for Japan’s renaissance. Importantly, they don’t rely on monetary & fiscal policy dependency. And now that deflation psychology is dead, there is no need for Yen depreciation dependency either. Takaichi - the quick study - may have learned enough from market protests already to put Abe’s first two arrows to rest now. The markets would cheer such an outcome.

Takaichi has already announced that there aren’t any plans for a Cabinet reshuffle, so we assume the same Economic Team will be in place. Katayama and Kiuchi both easily won reelection for their LH seats. Interestingly, Kiuchi invoked Koizumi in his victory celebration press conference. He had this to say:

Once again, I will run with all my might to accelerate the Koizumi administration's "growth strategy" even further and powerfully regenerate the Japanese economy.
"Investment for the future. Make growth tangible."

To see what a Koizumi-inspired growth strategy VS an Abe one might look like, I created a side-by-side look at essential components. Koizumi was much more privatisation & DOGE focused than Abe, but this can be reconciled in terms of sequencing. Abe’s Third Arrow very closely emulates Koizumi’s Neoliberal Reform Agenda, it simply considered overcoming deflation first (Arrows 1 & 2) essential in order to generate the growth momentum needed to facilitate reform.

The views of the future are consistent enough for Takaichi to incorporate Koizumi talking points going forward, drawing on reference points that will resonate with the people, prove to be market friendly, and allow her to mould her own leadership persona out of the shadow of Abe. A fusion of Koizumi & Abe legacies - the two most popular LDP figures in recent history - would be smart politics and match well the limitations currently manifesting from the financial markets.

US-Japan Investment Deal

Momentum on this growth & innovation path were not allowed to be delayed by election campaigning, as first projects; part of the US-Japan Investment & Trade Deal, were announced last week.

Economy, Trade and Industry Minister Ryosei Akazawa and U.S. Commerce Secretary Howard Lutnick presented initial details, all aimed at completion before the Japan-US Summit on March 19.

• Construction of a port for crude oil exports capable of docking large tankers, Texas & Louisiana as target location. U.S. port construction company Max Energy is expected to play a leading role, along with major Japanese general contractor.

• Softbank-led gas power generation project to supply data centres. GE & Vernova cited as US partners.

• Synthetic diamonds for industrial application. De Beers Group will build a US plant to service Japanese companies.

The structure is SPVs formed by both Japan and the U.S. Funded from JBIC, Japanese banks, and insurance from NEXI. The U.S. will contribute land and other assets, and fast track federal permits and approvals.

This is some serious hybrid international partnering on industrial policy. This shows profound conceptual alignment on the solution to both global imbalances and the real external threat.

No one is celebrating Takaichi’s win more than President Trump.

In 2022, following the Russian invasion of Ukraine and subsequent NATO/ROW acquiescence to the violation of UN founding principle of sovereign integrity, I wrote that nuclear non-proliferation (NNP) was dead. Following this initial rupture of illusion on UN/NATO commitment to member/partner sovereignty, came frightening Russian efforts to reduce Nuclear first-use taboo. A sign that not only was NNP dead, but that the dark days of Cold War mutually assured destruction (MAD) logic were set to be revisited and stress-tested again.

Nuclear war calculus has a habit of paralysing national leaders and halting necessary decisions impacted by its tremendous foreboding. This clearly played a role in Europe/US decision-making stutters during early months of the Russian invasion, and it clearly continues to influence NATO/Europe’s strategic hesitancy amid peace negotiations.

Just as they did in 1950s, the existence of Russian thermonuclear, hypersonic ICBM stockpiles that can destroy the world many times over tends to render other security dilemmas inconsequential until the elephant in the room is addressed. This is where the world finds itself again in the 2020s.

Russia stole Crimea from Ukraine in 2014, it orchestrated a separatist movement in the Donbass, and then it launched a full-scale invasion in 2022. It violated the very agreement used in 1994 (Budapest Memorandum) to convince Ukraine to give up its Soviet-era nuclear arsenal in exchange for external security assurances. Assurances, underwritten by three nuclear powers (Russia, US, & UK), ie, resting on the immutable logic of nuclear MAD. For this reason I wrote in March 2022 that NNP was dead. The world’s nuclear powers’ assurances meant nothing to Ukraine.

Then, soon after, the next illusion to be broken was the ‘immutable’ logic of MAD itself. Putin (and other Russian leaders) regularly discussing the logic of, and threatening to use low-yield theatre nuclear weapons altered the trigger events essential to maintaining Nash Equilibrium. It was no longer a case of managing only the classic risks of non-rational actor & accidental use, but now the risk of NUTS (nuclear utilisation target selection) had become real.

Equally relevant to post-Ukraine nuclear security dilemmas was Russia’s revised Basic Principles of State Policy on Nuclear Deterrence, updated in 2024 (Putin). NUTS was now part of Russia’s notorious ‘escalate to de-escalate’ doctrine, along with other impossible amendments to accept (below).

• Conflict Termination (Escalate-to-Deescalate): The doctrine explicitly states that nuclear deterrence aims to prevent the escalation of hostilities and to stop them on “conditions acceptable for the Russian Federation”. This reflects a NUTS dimension by treating nuclear use as a functional military option to end a conventional war in Russia’s favour.

• Lowered Threshold for Conventional Threats: The requirement for nuclear response was changed from a threat to the “very existence of the state” to a “critical threat to sovereignty and/or territorial integrity”. This provides a more permissive, tactical opening for first use against non-existential threats.

• “Joint Attack” Clause: The wording now classifies aggression by a non-nuclear state (e.g., Ukraine) supported by a nuclear power (e.g., the U.S.) as a “joint attack,” allowing for a nuclear response against either party.

• Response to “Massive Launch”: Russia now reserves the right to use nuclear weapons upon “reliable information” of a massive launch of conventional air and space attack means (cruise missiles, drones, or aircraft) crossing its border.

This revised military posture also extended Russia’s nuclear umbrella to Belarus, which by itself did not alter doctrine, but by following this up with deployment of ICBMs in Belarus in December 2025, it changed the status quo.

These factors, and several others have necessitated the aggressive Greenland deployment strategy now pushed by Washington, but we’ll get to that later. For the moment, let’s continue on the topic of nuclear precedent erosion.

Risks to deterrence

The desire for individual States to possess a defensive nuclear arsenal is difficult to refute. In particular, for countries/regimes geographically positioned where external threats perpetually exist.

The little success UNSC proponents have had in persuading countries to adhere to NNP treaty objectives was achieved by offering economic incentives and/or the benefit of an existing nuclear powers’ security umbrella. The problem is/was that if the external threat is existential, and the nuclear power umbrella is viewed skeptically, then these incentives fail to compel.

It is difficult to argue that North Korea and Pakistan are not better off with their nuclear arsenals. It is difficult to argue that nuclear opacity does not underpin Israel’s defence posture. Threshold countries like Japan and Iran clearly create regional insecurity for some of their neighbours. This phenomenon is undeniable, and its calculus painfully realpolitik.

Acknowledging that economic incentives really only work for small or poor countries that can’t really afford to build/maintain a credible nuclear deterrent, inevitably places all weight on the nuclear superpower deterrence component. Therefore, loss of superpower nuclear deterrence credibility is the definitive change to status quo.

This is the painful essence of the fear surrounding current US isolationist instincts. Even incremental isolationist gestures immediately call the nuclear deterrent into question. Putin was quick to exploit this known vulnerability once his conventional weapon-based Ukraine invasion stalled, and now we are stuck addressing this society-defining issue once again, until the genie can be put back in the bottle.

The umbrella is leaking

Before we get to discussing US strategy under Trump that addresses this ultimate security dilemma, let’s review what those caught in the middle have done. Firstly, the reaction from the Scandinavians has been interesting.

Jeppe Kofod, a former Danish Foreign Minister & ex-Deputy Sec Gen NATO, in May 2025, called for the creation of a Nordic Defence Union with its own nuclear weapons. Johannes Kibsgaard, researcher at NDUC, Norway’s equivalent of West Point, wrote an incredibly well-reasoned paper last month calling for a Nordic Nuke. A program to be embedded in both NATO and European collective defence structures. Poland’s leaders have repeated offered to join the NATO nuclear sharing program (IISS).

Other threshold countries like Japan (here), South Korea (here), Australia (here), have also begun the intractable debate, all countries that I listed back in 2022. The reaction function was predictable. If you have the financial strength & the technological sophistication, and you currently operate under a US or European nuclear deterrent, you are compelled to review your options at times like this.

The deterrent gap that needs to be closed is that which was opened by Russia’s Basic Principle amendments. The unique nature of these amendments can be seen as a nuclear extension of the hybrid warfare theme in-train since Putin called an end to EU/NATO collaboration following 2008 NATO Bucharest Summit.

What had previously been a non-war, hybrid warfare strategy: military incursions to create territorial disputes (Georgia, Ukraine, Moldova), thereby blocking NATO ascension, cyber warfare, political interference, assassinating dissidents on foreign soil, etc., eventually became a hybrid nuclear doctrine post-Ukraine invasion.

Where previously conventional weapon & alternative warfare methods were based on plausible deniability and below-threshold war declaration, the Basic Principle revisions were aimed at below-MAD threshold domain tactics and punitive threat-based deterrents directed at the escalation ladder.

MAD was like a straight jacket. It greatly restricted conventional conflict escalation toward nuclear. It kept the peace with the primary actors in all global conflicts the Soviets and Americans. Now, we not only have a world where many conflicts might not include either, we also have scenarios where neither may come to the rescue of an ally. That makes Putin’s hybrid nuclear doctrine changes post-2024 live triggers . . . until proven otherwise.

The US response

I’m going to call this the US response rather than Trump response because the US would have been forced into a response regardless of who was in the White House. Trump may be a champion of the Golden Dome within this strategy, viewing it as the easiest decision to embrace from the menu, but the Golden Dome isn’t a one-dimensional strategy. It skews the MAD calculus in various was, much like various second-strike capabilities do, but it isn’t THE strategy.

Ultimately, what the US has to do that no other member of the alliance can do is to alter the MAD calculus in a way that restores definitive balance. And in conjunction with the Europeans, it needs to deploy alternative, non-nuclear weapons that neutralise the Russian use-case threat of theatre nuclear weapons, and to diffuse the Russian regime’s existential fears. These address each one of the Basic Principle amendment triggers.

What is perhaps not appreciated widely enough, is that this total vertical recalibration of the MAD deterrent must be US-created, controlled, deployed, and maintained. That’s the only way it halts Russian escalation strategies. Third country involvement with a straight forward collective defence treaty doesn’t do it. What it actually does is leave slivers of daylight to be exploited via hybrid doctrine.

This is the difference when it is a single country (Russia) VS an alliance of many (NATO). The playing field presents infinite combinations for hybrid warfare on Russia’s side. The bipolar world pre-90s had the de facto clarity of two superpowers squaring off against each other, and this allowed MAD to be the dominant doctrine. Hybrid warfare from the Cold War period rarely flirted with the MAD calculus. In the 2020s, Russia is actively exploiting ever inch of pre-conventional war domain AND NOW, every inch of pre-MAD nuclear domain as well.

Greenland

While the primary focus on Greenland the past 5 years has been Arctic sea lanes opening and US military bases, in 2025-26 the topic was blown wide open with additions like critical minerals, policing the GIUK Gap, and Monroe Doctrine sphere-of-influence claims. Davos provided the stage, Trump provided the thunder, Europe provided the outrage.

However, one never knows how much is actually agreed upon quietly in advance. Trump has been the master of providing political cover for all. His bombastic outbursts suck all of the media attention and public opinion angst away from the other decision makers that may not have the political capital to agree to hard choices directly in front of camera. I won’t risk slipping into this quagmire, because frankly, there is no way I would have access to the truth.

Instead, seen purely from a strategic deterrence framework, Greenland offers the US the perfect opportunity to reset the MAD deterrence calculus, while simultaneously achieving many of the other stated objectives: 1) guard the Northern Gate to the Atlantic, 2) build a safer, back-up space/satellite station to Svalbard, 3) major Golden Dome hub, 4) expand the Monroe Doctrine (to block Russia-China, not Europe), 5) critical mineral operations (primarily to generate income that could be used to sustain military bases). This list is already long enough to encourage NATO to make a deal, but why might NATO grant the US even more autonomy?

This issue of clarity on application, deployment, escalation management - including pre-emptive strike, and maintenance of the MAD+ deterrent is only achieved when 100% ‘owned’ by the players engaged in the MAD standoff. All the exceptions, all the pre-emptive security measures put in place, the emergency hotline protocols, and discretionary risks must be hardcoded and agreed by the two MAD participants. You are building trust where none exists. Three participants (China) change the calculus, but that’s for another paper.

The US needs complete control in Greenland in order to professionally, successfully, safely play this societal-imperative, deterrence role. There can’t be any third party or non-MAD doctrine related intervention sources clouding the circumstances.

Greenland, which falls under Denmark’s parliamentary rule, including the Nuclear-Weapon-Free Zone (NWFZ) doctrine, has historically voted to ban nuclear power (1985), promoted the Arctic as a nuclear free zone (2013), and is only able to tolerate current US nuclear activities on Greenland under the 1951 & 2004 defence Agreements by turning a blind eye.

Historical arrangements authorised military operations of a defensive nature, with any deployment of offensive military architecture or nuclear weapons requiring advanced consultation with Denmark & Greenland. The1968 supplement to the 1951 defence Agreement still strictly prohibits nuclear weapons. It is only now in 2026, after the Davos shocks, that Danish Prime Minister Frederiksen is reportedly willing to discuss ‘nuclear stationing’.

Therefore, not only for US clarity to manoeuvre in a high-stakes MAD stand-off with Russia, but also for Denmark’s own parliamentary consistency, separating these functions - a national NWFZ doctrine & Greenland’s role within NATO/US defence - is a logical path forward.

Neutralising sub-MAD nuclear risks

Even with US freedom to operate expanded in Greenland and US credible nuclear defensive posture re-enforced to the degree that MAD equilibrium is assured, Europe will not feel secure until other Russian nuclear escalation tacks are offset: 1) use of theatre nuclear weapons, 2) lower threshold for nuclear use (State existential threat), 3) “joint attack” clause: right to use nuclear weapons against a non-nuclear State, if it is backed by a nuclear power.

To address the first risk, all conventional military planning must incorporate provisions to work around the circumstances that might invite this type of weapon use. In Johannes Kibsgaard’s excellent paper noted above, Russia firing an Oreshnik missile last month at an aviation repair plant south of Lviv invites this review.

Moscow’s “Oreshnik” strike on January 9, 2026 is best understood as strategic signaling designed to shape what NATO will and will not do. Russia’s use of nuclear-capable delivery systems in the Russo-Ukrainian War underscores a returning logic: nuclear weapons as instruments of coercion and risk manipulation, not only city destruction.

On the second risk, externally-driven regime change can never be a military strategy for the West. For all the shrieking about Putin being a war criminal and how the world can never return to interacting economically with Russia as before, better reflection on how this problem is realistically addressed is necessary. Internal regime change will remain the only option. The path to internal regime change is a totally different game.

And with regard to the third risk, one can more easily understand why Europe has been so reluctant to put troops on the ground in Ukraine without a peace deal in place. This is why I wrote in August last year that the Trump-Putin Summit in Alaska was a watershed, as it purported to have achieved agreement for European troops on the ground. Given the severity of the risks to country implied, few will want to put themselves in this situation even with an invitation. That’s the new reality in dealing with Putin’s Russia.

Over & out

This Global Watchtower report was not intended to be a definitive treatise on nuclear weapons and the MAD doctrine, that’s above my paid grade. I felt compelled to write this because I saw no commentary along these lines since Russia deployed ICBMs in Belarus in December, and fired its new Oreshnik in early January. Everyone was watching Venezuela when they should have been watching Russia.

The fact that Davos was used as a stage to force through the Greenland strategy looked clearly to me as the sense of urgency needed in order to respond to Russia effectively. MAD equilibrium is as much psychological as it is measured hard power.

These old Cold War frameworks remain unfamiliar to most, and frankly are depressing to dredge up. But it must be done. The battle between good & evil never ends.

There’s a reason financial markets dominate the mainstream press over geopolitics, the news cycle is so much shorter. Every week one of the major asset classes moves sufficiently to generate a news headline: Dollar Collapse, JGB Crash, Gold Save-haven Surge, AI Stocks Soar, Volatility Spikes, etc.

Geopolitics, on the other hand, are marked by fissure followed by narrative backfill, shock followed by policy recalibration, breakthrough improves or levels a trajectory, etc. Essentially, an event followed by reflective time interval.

The net result of this is that political discourse too often finds its way into financial market narratives in search of dots to connect to a broader World View thesis. The time intervals between meaningful events in geopolitics must be filled with something. The flow of fear and distress must not be interrupted. Mustn’t give the population time to think!

So, here are a few quick bullets to calm the nerves.

• The dollar is 10-15% overvalued on REER and other mainstream models. It has been in an uptrend since 2011, since the EMU crisis began, Japan’s First Arrow devaluation 2012, and the commodity cycle rollover 2014-15 (China & commodity currencies).

• Rising demand for commodities and an end to Yen debasement will correct this overshoot. Strong growth (some day) and recovery in Europe will correct it further.

• This is not dollar debasement. This is not an end to USD reserve status. This is not the end of the US strong dollar policy. This is not a sign that US dominance is collapsing and that BRICS and China are set to take over. This is a rational correction from overvaluation.

• Gold is rising as a minor component of FX reserves. Many investors may now diversify some of their ‘alternatives’ holdings into gold. China, already the No.1 producer of gold, wants to be the largest global trading/storage centre.

• Tokenisation creates greater utility for all forms of previously less liquid assets and stores of wealth

• Pure financial and efficiency considerations no longer dominate. Resilience and contingency planning now receive greater weight.

With these major fundamental background factors firmly in mind, there are cyclical and shorter term trends to trade, there are still ways to make money amid the hysterical cries of media and its chosen pundits. Shorting North Asian currencies VS the dollar is a valuation trade, even if you use FX intervention or random Trump comments as your entry trigger.

Buying one form of overvalued risk asset VS another because of less concentration risk is still a RV trade. A hysterical narrative-dominated world does not mean you don’t participate, is just means you must delve a few layers deeper to conclude on your analysis.

Anchored in the basics

It’s important to know what the US STRONG DOLLAR POLICY really is. It is important to understand what the first COLD WAR really was. It is important to understand the very different and UNSYNCHRONISED POLITICAL CYCLES that dominate the media-hyped Western World.

It is important to remind oneself of just how little real, transparent information/data actually comes out of places like Russia and China. It is important not to be fooled by the illusion of manipulated LOW MARKET VOLATILITY. It is important to remember just how many seemingly independent private sector and non-government actors actually coordinate their messaging with the government.

If one can keep all of that context in mind while surfing the global narratives and cherry picking trade opportunities, then you are ready for investing in Year 2026.

Basics distilled

The US strong dollar policy is not about the level of the dollar or the current direction it is travelling. It is a constructed narrative via speeches given by previous US Treasury Secretaries over the past 3 decades that reinforces the bone-head logical premise that sound economic policies and economic growth will naturally lead to a strong dollar overtime. There is no way to splice it into parts or nuance. There are no tea leaves to read. It literally states the bloody obvious. Read: not a trading signal.

The current growing rivalry between US & China differs from the historical Cold War on too many metrics to equate global technology, trust, and military spheres of influence bifurcation to full separation on economic, trade, and humanitarian operational planes. There is no iron curtain. There are simply road blocks & check points.

The current political cycle in the US (ahead of midterms) dictates the pace and nature of the policy agenda as much as a Presidential election year. Japan’s rolling series of parliamentary dissolutions is endemic of a polarised population, much like the US and Europe. Europe’s fragmentation under the umbrella of an EU parliament is analogous to domestic polarisation in the US and Japan, it just doesn’t have a single political cycle to validate this clearly. Erosion rather than flipping of consensus marks this trend change.

The correlation between financial market volatility and real world events should strike everyone as odd and inconsistent. Don’t let this illusion allow you to relax. System characteristics like excess central bank liquidity provision, growth in industry of Vol sellers, limited number/size of vol instruments relative to size of capital market risk exposure, and moral hazard perceptions of truncated tail risk, ie, systemic risk beyond a certain threshold is de facto underwritten by the Authorities.

The year 2026 is starting with a bang. The degree of confluence in major structural themes and cyclical trends is one for the record books. It has the potential to be a highly profitable year, or a classic bust. Anchoring the basics establishes a few guard rails where there might seem to be none.

When Japan suddenly comes into focus, the full end-of-the-world theories come out of the wood work. This phenomenon has been going on for as long as I can remember. This perspective is understandable, Japan presents a lot of material to work with.

Firstly, Japan is a highly visible, deeply integrated part of the what is typically called the Western World. As a result, it is hotly debated, closely watched, and perpetually seen as an anomaly. So much about its financial and political structure never quite make sense to the Western audience.

Its debt/GDP levels of 240%, comparable only to Sudan, is paired with a global sovereign credit rating similar to Italy and France.

• S&P: A+ with stable outlook (unchanged since around 2015/2020 updates).

• Moody’s: A1 with stable outlook (equivalent to A+ on S&P/Fitch scales).

• Fitch: A with stable outlook (affirmed in January 2026; one notch below the others).

Japan’s $3.6trl NIIP makes it the second highest G10 country behind Germany, and at 88% of GDP, 2nd behind only Switzerland. Its private debt levels are approximately 170% of GDP, slightly above that of the US and in line with countries like Belgium & Canada.

It runs the most negative real rates in the developed world and yet its 30Y bond yields still trade below the US and UK.

Japan’s currency is estimated to be undervalued by 40% on a PPP basis, and between 20-25% on various market measures. The REER has fallen 30% since 2020, making it the lowest in the G20.

Japan’s dominant single party (LDP) parliamentary democracy may appear stable on the surface, but its high turnover of Prime Ministers signals continuous factional dynamics within the LDP. Compared to Italy where coalition instability and multi-party fragmentation, or France: parliamentary shifts and presidential influence end up driving turnover, this becomes a less transparent and more opaque form of political stability.

Japan living under a Peace Constitution since 1947, while collaborating with the US during the Korean, Vietnam, Afghanistan and Iraq Wars, and funding the 8th largest military, is yet another conundrum for the outside world to process.

The asset bubble peaks in both equity markets and some property segments (new condos) were surpassed in 2024/25, is this the sign of a renaissance or another leverage-fuelled bubble?

The enigma that is Japan makes it possible to projecting a variety of scenarios when market volatility hits, including the epic global bond market collapse that so many famous market voices have been calling for (Dalio, Dent, Burry). It lends itself to everyone’s first domino. However, the wobble we see in January 2026 is not yet that event. It shines light on the fault lines, for sure, but in my opinion, it does not have all the characteristics necessary to be THE event.

Mapping out scenarios

Perhaps the best way of going about this is to lay out various scenarios with a slightly different - but important - mix of sequencing and policy responses. This will then shed light on what cascading risks we are dealing with.

Scenario 1: MoF intervenes in the FX market to establish near term bottom in the Yen, the BoJ upgrades its growth & inflation forecasts on Friday - setting up potential for a rate hike at the March meeting, Takaichi concludes an 11th-hour compromise with Opposition (and internal LDP power brokers) to propose a slightly modified FY26 budget, cancels dissolution of Lower House, pension or life company officials are quoted as saying that JGBs now look like good value in a well-placed Nikkei article over the weekend.

Scenario 2: MoF doesn’t intervene, the BoJ upgrades growth outlook, but not inflation outlook, doesn’t hike rates, doesn’t hint at March meeting being live for rate hike, Takaichi dissolves Lower House on Friday, campaigning begins in earnest and Takaichi sticks with “an end to austerity” platform, radio silence from domestic investors about value of LT JGBs at these levels.

Scenario 3: MoF doesn’t intervene in FX market, BoJ hikes rates on Friday and threatens more, ie, March also becomes a live meeting, Takaichi dissolves Lower House, radio silence from domestic LT JGB buyers.

Scenario 4: MoF intervenes in FX, BoJ hikes 25bps on Friday, but no hawkish forward guidance, USDJPY doesn’t fall much, Takaichi dissolves Lower House, radio silence from JGB investors, USDJPY goes back above 160 next week.

Scenario 5: MoF intervenes, BoJ doesn’t hike but says it is ready to buy LT JGBs to stabilise the YC, Takaichi dissolves Lower House, radio silence from JGB domestic investors.

For those that have been reading my Watchtower Series for most of 2025 will recognise Scenario 1 as my base case, what I have been writing about since the summer in both the BoJ Watchtower and Dollar Watchtower reports. Essentially, this is the traditional Japan Playbook, the approach to policy coordination that worked effectively throughout the pre-Abe and post-Abe period.

Japan never needed Three Arrows to define its natural inclination to coordinate policy in order to deliver the best outcome for its financial markets, economy, and nation back in the 80s & 90s. The Ministry & zaibatsu systems were set up to implement it naturally. Abe’s explicit Three Arrows policy coordination that included directly inserting a compliant BoJ Governor (Kuroda) and signing an Agreement with the BoJ on policy coordination were emergency settings. They were interventions driven by perceived policy coordination failure during 2001-11.

Now, the Government and the economic management team must coordinate effectively without such draconian influence. That’s Scenario 1, that’s what’s been used repeated throughout history to navigate stress moments for the economy & markets, that’s what I am positioned for until I get the next data point.

Scenario 2 is the extreme scenario in the opposite direction. The Gov woefully fails on adjusting a single policy lever, it proves to be totally tone deaf to the market, this week’s price action accelerates further. This would likely be followed by a series of damage control responses, but that is already a different train in motion to forecast. So we’ll leave the disaster responses for later, should that scenario become live.

Scenario 3: this scenario implies that all weight is thrown on the BoJ. That the Gov has suddenly concluded that FX intervention doesn’t work unless monetary policy is at least neutral, ie, dismissing the effectiveness of the FX intervention episodes from 2022 & 24. The BoJ is on its own, has to be as hawkish as possible, likely triggering a stock market crash that they would be blamed for.

Scenario 4: this scenario encapsulates the risks that FX intervention will be challenged, that the market now truly believes that it is more powerful, that it is a vigilante that can demand tighter monetary policy via massive Yen sales. This is ‘break the BOE’ redux (1992), or collapse the THB AFC collapse (1997). Never mind that Japan has $1.3trl in FX reserves. It’s battle on!

Scenario 5: this is the debasement trade, the worst outcome for the LT, where Japan continues to add fuel to the ultimate collapse scenario, the debt market Armageddon. The BoJ is not only slowing QT from next quarter, but now it is back to buying long-dated JGBs for YC purposes. MoF FX intervention is undermined. Huge signalling error. Helps a bit in the short term, but corners the BoJ for the future.

Japan is traditionally interventionist

The good news is that we will all know soon enough. Friday will provide most of the essential data updates. Some version of Scenarios 1-5 will start to unfold. We’ll update it and take it from there.

What I would conclude with is that Japan has historically and always been interventionist in its own economy. It hasn’t just recently undergone a philosophical shift like the one we see in the US under Trump 2.0.

Coordinated intervention between MoF, the BoJ, the banks, the Dealers’ Association, GPIF, etc., it has been ongoing for decades. Why would Takaichi’s newly formed Japan Economic Growth Council not activate all the usual levers to bring stability to markets and the economy at this crucial moment? Even if it were for no other reason than to stabilise the markets so that market volatility doesn’t dominate her campaigning dialogue.

I personally think this election is a bad decision, which I’ve already written about before. It presents even greater event risk to me than correlated JGB yields & Yen weakening. A devastating electoral loss for the LDP typically results in the Party President resigning and taking responsibility.

Takaichi’s truncated term as a PM would be immensely disruptive to everything from the domestic economic momentum, to US-Japan relations, to China opportunism, not to mention a sad outcome for a leader with such potential. I think she is unnecessarily playing with fire. Blame it on the heavy metal music.

But first things first, let’s get through the end of the week.

The spectre of US Department of Justice subpoenas to the Federal Reserve triggered Chairman Powell into making a personal video claiming that the threat of criminal indictment (if the Fed failed to comply with the Subpoenas, or a resolution is not achieved) was actually as a consequence of the Fed not cutting rates according to Trump’s preferences.

As the suggested criminal indictment threat is assumed to be related to accusations of perjury made by Rep. Anna Paulina Luna (R-FL) in July 2025, Powell’s pre-emptive video manoeuvre is aimed at broadening the issue to a threat on central bank independence from Trump. Even though it was Rep Luna that made the criminal referral to the DoJ, and did so in her capacity as member of the House Oversight Committee; the Committee charged with oversight and accountability explicitly encompassing oversight of the Federal Reserve’s operations, budgeting, and compliance with laws.

The alleged perjury occurred during Powell’s semiannual monetary policy testimony before the Senate Committee on Banking, Housing on June 25, 2025. Powell delivered identical prepared remarks to the House Financial Services Committee on June 24, 2025, but the referral and probe specifically cite the Senate hearing, including questions from senators like Tim Scott and Mike Rounds.

The controversy stems from Powell’s sworn testimony where he pushed back against criticisms of the Federal Reserve’s renovation project, and specifically during a Q&A exchange with Senators Scott and Rounds who had questioned Powell about reported “lavish” or excessive features—such as rooftop garden terraces, ornate water features/fountains, custom/VIP elevators, premium/white marble finishes, beehives, and a private art collection—citing media reports (e.g., likening it to the “Palace of Versailles”). Powell denied or downplayed many of these elements in his answers with statements like:

• No new marble finishes.

• No VIP dining rooms being constructed (noting historic multi-use rooms used for conferences/meals were being renovated/preserved instead).

• No special elevators limited to board members/governors.

• Certain features (e.g., new water features or rooftop terraces) had been scrapped or were not part of the current plans.

• The project focused on essential safety upgrades, infrastructure modernization (e.g., electrical, plumbing, HVAC from the 1930s), historic preservation, and cost efficiencies, rather than luxury additions.

DOGE in the air

This exchange, when widely reported last summer, was typical of the DOGE-inspired environment in Washington where GOP members in all branches of government were seeking out waste and looking to restore trust with the public. The Fed, like all other agencies that suffered the intense focus of DOGE inquiry should not have been surprised by this unpleasant attention. After all, it was coming from exactly the Congressional Oversight Committee whose function establishes the social contract (between unelected officials & the public) that grants the Fed policy independence. Oversight dependence in exchange for monetary policy independence. That’s the deal.

By broadening the issue to a generic challenge on central bank independence, Powell hoped to tip the scales of public opinion, while raising political capital costs for the Trump Admin. This has been a tactic used by every other government agency attacked by DOGE investigation or Trump Admin accusations of entrenched partisanship. The Fed’s gambit even included the now familiar pattern of a statement from international peers standing in support against White House attempts to ushering in reform and smaller government. Unfortunately for many, this pattern of international consensus attempting to help resist change in domestic US policy trends has validated the very concerns behind attempts to reform.

The question is whether or not we are really dealing with a challenge to central bank independence in the classic sense that financial markets have tended to fear over the past decades. The kind of threat that leads to monetisation, currency debasement, hyperinflation, etc.

Bureaucratic resistance

Trump’s beef with Powell from the beginning was his apparent willingness to act pre-emptively to cut rates in Sep-24 ahead of the election when very few in the market believed cutting rates made sense, given that inflation had yet to return to trend, and the Fed had lost a lot of credibility over the previous 8 quarters, and yet he wasn’t willing to act pre-emptively in Q2-25 when the economy was clearly hitting a soft patch. Criticism of the Fed’s track record was echoed in the private sector by enough people to make Trump’s complaints seem not unreasonable.

Furthermore, Trump made it clear that he wanted to replace Powell as Chairman and urged him to resign. Meaning, Powell had other options to protect Fed independence, if that was his primary motive, by resigning and allowing the newly elected president to implement his preferred economic team. Insisting on staying on no matter what, and framing your role as an administrative obstacle, or a kind of 4th branch of government to perform the role of checks & balances was inviting unwelcome pressure on the Fed. It is hard to argue that Powell has not acted politically throughout this process, even if one wishes the environment wasn’t so politically charged. A political head of the central bank is by definition undermining future independence.

The Fed would have a stronger leg to stand on, if we hadn’t witnessed such mission creep over the past few decades, and we hadn’t see such aggravation of income & wealth inequality as a result of its excessive use of alternative monetary policy tools. The classic fears of monetisation, debasement, and hyperinflation from lack of central bank independence were realised without any threat to Fed independence. These were voluntary decisions taken without having claimed to be under duress. Why would calls for smaller balance sheets and system reform, offset by lower nominal rates be considered more dangerous than what we’ve just been through?

My concern is that initial calls for reform by the executive branch of government on an independent agency might always look unavoidably like encroachment on independence. That initial phase will always be called political. What will ultimately determine whether or not proper oversight and reform have been implemented is a well articulated, transparent, and successful outcome.

Like so many changes that are attempting to be implemented by the Trump Administration, they suffer the initial set-back of being articulated in a crass and belligerent way. In many cases, it is hard to conclude whether progress would have been made if a more diplomatic and conventional method was used to effect change. A clogged and calcified system, failing to adapt to the will of the people is what put Donald Trump in office. Unelected officials having outsized impact on ordinary people’s lives is what led his base to grow. It is unlikely that his supporters will see this D.C. skirmish with the Fed in any different terms than we saw surrounding USAID, DOE, HUD, IRS, etc.

Reform

Let’s say the goal is reform rather than dying at the alter of some notion of central bank independence, what do we hope for as an outcome? What would be best for helping to engineer a transition back toward sound money, less polarisation of wealth, cheaper and more efficient financial services, greater trust in our fiat banking system? Is a one-size fits all global model for central banking and regulatory standards for commercial banks really optimal? Or, was it also part of the borderless, standards-driven convergence of a fully integrated global world that neo-liberalism imagined? Is that blueprint still the correct fit for managing what lies ahead?

Given the poor track record of ‘delivery on mission’ that we’ve seen since the 2008 GFC, it is not unreasonable to request extensive staff turnover as new reforms are sought. Unelected bureaucrats and technocrats that have occupied decision-making seats for the past two decades should make way without fuss. This is not unfair treatment. It is the same pressure to perform that all of us in the private sector or publicly elected government sector have to endure.

The best way the Fed, or the BoJ, or the BOE can protect their tenuous independence is to model the meritocracy that exists in the private sector. Staff and management turnover needs to have some relationship with performance. There is a reasonable argument for shorter Fed Governor terms. 14 years seems excessive. Longer terms are meant to enshrine independence, but independence from political influence should not equate to independence from poor performance. Central banking is not analogous to exercising judicial review. Monetary policy does not function on the basis of Law as Integrity. Older and longer in the job does not necessary equal better.

The Trump Admin is regularly accused of autocratic behaviour, because Trump continuously attempts to push the envelope of executive branch limits. Perversely, unelected officials routinely push the limits of their authority and then cry foul when the oversight function of elected officials seek their replacement. If having elected officials implement reform, change, and accountability to the unelected components of our government is not democratic, then what is it?

I spent all of my career arguing for greater central bank independence for the BoJ. It’s starting point from the 1980s as an operational arm of the MoF made this a logical position to take.

Like many others, I cheered when the BoJ Law and banking reform were implemented in 1998. I held my breath during PM Abe’s first & second arrows. I cursed when former BoJ Gov Kuroda continued to debase the Yen well after inflation shot above trend in 2023, and when the BoJ was forced to pause after Ishiba’s election in 2024, and again fo Takaich last year. But what I see in the US today is debate of a different variety.

There is clearly animosity and challenge going on between the executive branch and the central bank, but it does not look like the kind that produces the classic risks of insufficient independence. It might actually result in Fed reform, a smaller balance sheet, less emphasis on using the portfolio channel to deliver monetary stimulus, and lower system-wide leverage. We may have more idiosyncratic volatility initially, but acting pre-emptively and generating volatility from institutional reform can perhaps spare us the infinitely more difficult challenge of correlated, systemic volatility.

Treasury Sec Bessent and potential Fed Chair Kevin Warsh are not amateurs. They should be given a chance to implement change. Incumbent Fed officials should welcome the trend for reform. Draw a line under the past, allow the process of change to proceed. Stonewalling change produces petty challenges like we are witnessing now. This is politics, not loss of disciplined monetary policy independence. Unbridled monetary policy independence is what got us here.

This is how you avoid civil war, this is how you minimise a humanitarian crisis. A democratic transition must be implemented carefully, methodically over time.

One day soon, Machado will surely be President of Venezuela.

Translated from X:

Delcy, Balaguer, and the Logic of Continuity: Why Don’t the Great Powers Impose the Popular Leader After the Dictator’s Fall?

When a personalist regime collapses, whether through the capture of its leader, as is happening today with Nicolás Maduro, or through his physical elimination, as happened with Rafael Leónidas Trujillo in 1961, an inevitable question arises: Why isn’t the most popular opposition leader immediately imposed? Why not María Corina Machado today, or why not the candidate with the greatest popular support in the Dominican Republic back then?

The answer is not moral or ideological; it is geopolitical and about risk management.

In Venezuela, the United States had the material capacity to neutralize Delcy Rodríguez or to reject any continuity of Chavismo and force a direct transfer of power to the opposition. However, it did not do so. On the contrary, it tolerated, though it does not legitimize, Delcy Rodríguez, an organic figure of the regime, remaining at the head of the state apparatus on a provisional basis. This does not amount to political support, but rather a classic strategic decision: to preserve administrative continuity, control of the armed forces, the chain of command, and minimal stability while a transition is being planned.

Dominican history offers an almost perfect mirror. After Trujillo’s assassination, the United States could have immediately removed Joaquín Balaguer, a figure intimately linked to the Trujillo regime, and imposed another leader. It did not. Joaquín Balaguer remained as formal president because he represented the institutional continuity of the regime without Trujillo, allowing tensions to ease, preventing a civil war, and ensuring that the state apparatus did not collapse.

The popular leader of the time was not Balaguer; that leader was Juan Bosch, who enjoyed social legitimacy and genuine democratic support. However, Bosch was not imposed after the dictator’s death; he came to power later, through elections in 1962, when the system was at least minimally stable. Even so, he was overthrown the following year, demonstrating that transitions are not won solely through popular legitimacy, but through effective control of real power.

This pattern repeats itself: the major powers do not prioritize the most popular leader, but rather the one who minimizes immediate risk. The popular leader represents rupture, the continuity leader represents containment. In stark terms, stability precedes democracy, not the other way around.

That is why Delcy, like Balaguer, is not the desired future, but a temporary buffer. And Corinna, like Bosch, represents democratic legitimacy, but also a challenge to the still-surviving apparatus. The real transition begins later, not at the very moment of the dictator’s collapse.

The historical lesson is uncomfortable but clear: negotiated transitions almost never begin with full justice or with the most legitimate leader, but with the lesser evil that guarantees the state does not implode. The risk is not recognizing this logic; the risk is confusing the containment phase with the final outcome.

My Substack experience evolved quite a bit in 2025. What started as a project to channel my frustration during Covid lockdowns, turned into something more in 2025. My original Substack - Observer’s Log, was rebranded as Global Watchtower, and the much improved App and Notes platform made it more interesting than simply email dumping on my friends.

With new readers seemingly thrown off by my posts jumping from geopolitics to markets to central bank critiques, I decided to make Global Watchtower into a Substack Series, launching Dollar Watchtower and BoJ Watchtower in June. This allowed for some topic concentration and gave subscribers the predictability they seemed to want.

Between the three Watchtower channels my subscribers have grown to over 2.3k, with Dollar Watchtower actually hitting the 1k mark the fastest. In 2026, I will be migrating the BoJ Watchtower behind a paywall, along with the Dollar Watchtower, but Global Watchtower will remain free. The big picture topics in the Global Watchtower, the major risks surrounding geopolitics and world order regime change impact everything, and therefore act as a fundament background narrative for the other Watchtower reports.

Summarising a few of the 2025 highlights and first to market calls

The Q2 events launched by Trump’s WH gave rise to a great deal of systemic speculation, mostly along the lines of dollar, fiscal or rule-based world order collapse. A flurry of dollar collapse theses were floated by such famous names as Rogoff, Yu, Ferguson, Dalio, & PTJ, motivating me to write counter points to the dollar demise narrative for about 6 months. As I wrote in the beginning, unless someone is arguing for total, open-ended war involving the US, there was little risk of a dollar collapse. That there wasn’t any replacement infrastructure in place, nor a scenario where the US suffers but no one else does made me confident in my assertions. The relative story always puts the dollar atop the heap.

(Dollar & All Its Parts)

Should the USD face the spectre of total war, an open-ended conflict that requires substantial increases in military spending (5-10%/GDP) for up to 5 years, then default risk gets priced in. This scenario is not 0%, but still remains very far off. Without war and destruction pointed specifically at the US, all of the macro scenarios are relative trades. There is no scenario where the US bond mark blows up, but the European & Japanese don’t. There is no scenario where US equity markets crash from their lofty heights, but the rest of the world doesn’t. There is no scenario where the US-China trade war doesn’t deliver equal-to-higher pain to third party countries in the supply chain. If the macro factor is spread amongst enough countries, then the USD and US markets always outperform on relative depth & liquidity.

The 1970s analogue was also a favourite early in the year, simplistically matching the only well known inflation shock in modern history with the present. Never mind that oil prices traded on average around $65-70 for the year, inline with 2018-19 markets, and supply-driven inflation issues in 2025 were more idiosyncratic and diverse across countries. Tariffs, for example, were both inflationary and deflationary, depending on the country and sector.

No, the analogue for 2025 was still the 90s, in my opinion, the decade where a confluence of geopolitical shifts (collapse of USSR), a technology revolution (internet/mobile), and strategic cross border capital flows drove risk assets higher . . . somewhat independently from the real economy. Whereas the 90s were an unwind of the Cold War bifurcation, the 2020s are the reintroduction of a new Cold War bifurcation.

Here is a thematic analogue table (below) from one of my Substack posts in 2021. I was flagging parallels with the 1990s back then, replacing old catalysts with possible 21st century varieties. Technology was a bit of miss, as AI (even though I was an SME on a few LLMs at the time) was not added to the list. Decentralised finance continued to impact markets in 2025 (stablecoins, tokenisation), but AI was the dominate capital flow catalyst.

The other three were pretty spot on though. This framework implied certain types of changes, policy shifts, and evolving political trends. Armed with this view of change in advance, Trump 2.0 policies were less of a shock to me, and seemed more like a continuation. With the Russian invasion of Ukraine, the post-Covid realist epiphany was immediately validated. Global Bifurcation further solidified. The Axis of Revisionists were clearly defined and now making their move.

Not over reacting to Trump’s Liberation Day shock was essential to getting the markets right for 2025, and so was a skeptical view on central bank resolve. The pre-emptive instincts to cut rates in the face of market volatility, threat of crisis, or risks of disinflation remained entrenched at most central banks. Balance sheet runoff was creating anxiety. The strong flows into gold and steeper yield curves were seemingly not registering with policymakers. Monetising debt and supporting risk-asset liquidity rallies remained national policy.

Anglo Saxon economies in general typically make best use of such financial conditions, but even North Asia and hard money countries like Sweden & Switzerland managed to leverage global capital flows.

Another theme promoted through a few of my Global Watchtower posts (here), (here) & (here) was in relation to World Government and UN reform. From the polarised battles between ‘Custodians’ of the old world order and the forces of change (populist, revisionists, anarchists), arose fear of Great Power wars and deteriorating regime change.

My argument was that this has been literally going on since the birth of the post-WWII world order, where USSR’s immediate revisionist tack led to the Truman Doctrine, Marshall Plan, and formation of NATO. We’ve limped along for 80 years with 2 out of the 5 permanent members on the UNSC both communist and revisionist. Stability provided by the old world order was not inherent in its design, it was forged via Cold War détente and a 15 year delay between the fall of one communist Great Power and the rise of the other.

Central Banks

The dismal state of central banking featured in many of my posts, and various podcasts, as the topic of independence, forward guidance, and inflation targeting missing dominated debates. The hangover from the 2022-23 inflation episode continues. Transitory became the word of heretics, headline inflation drove populist political trends, and the market actually debated whether inflation targets should be raised.

As with many trends, the US appears to be leading on structural central bank reform, and is set to start in earnest after appointment of a new Fed Chairman in 2026. If the outcome is rational and the reform goals well articulated, it should be the beginning of a global trend toward smaller CB balance sheets, greater emphasis on narrow banking services (deposits & loans), and a rethink of concepts like ‘cost of living’ VS inflation as a target.

Mr Ueno’s world

My BoJ Watchtower reports throughout the year tracked the methodical, calibrated efforts of Gov Ueno and a revised Monetary Policy Board (MPB) to continue with policy normalisation. The steeper YC was addressed in the summer in collaboration with MoF, and the JGB Underwriters Assc. The pace of QT was set to slow from Q2-26, and MoF agreed to reduce Superlong issuance. Long duration managers had already set AA decisions for this FY, but the summer intervention by BoJ/MoF was surely part of a tacit agreement to buy more long term JGBs in FY26.

Allowing LT yields to rise further, above inflation, and to find a demand/supply equilibrium sets the stage for increased domestic investor buying from next year with decent entry levels.

Labour shortages and corporate profits kept the wage growth story percolating throughout 2025, even as tariff-induced growth fears produced policymaker caution. And, the arrival of yet another PM in October, just as the BoJ had constructed its case for hiking rates, led to a very public test of BoJ independence. Gov Ueda deserves a Nobel prize for diplomacy for negotiating a ‘historic’ second rate hike in 2025; Jan & Dec. A pace not seen since the late 80s. Hurrah!

Coordinating with Takaichi’s team will be a continuous task, not least because Gov Ueda sits on all the same growth committees. For the team to be effective, MOF Katayama needs to execute at least one powerful intervention episode to establish credibility. She is already well overdue for this. MoF also needs to be actively lobbying the long duration domestic investors to make an AA shift with home bias in FY26. Look for GPIF to lead the way on this.

Minister in Charge of Japan’s Growth Strategy - Minoru Kiuchi, is now a central figure to monitor. His tone on monetary and fiscal policy coordination will effectively define Gov Ueda’s latitude to act. He, along with PM Takaichi have the difficult task of spinning Japan ‘wise’ fiscal spending.

So far this has taken the shape of emphasising reduced deficit bond issuance. If rising tax revenue does not materialise as an offset, then other sources of revenue must be found, such as privatisations. Even without increased government bond issuance, BoJ balance sheet run-off ensures that secondary market bond supply will be rising for many years.

Life’s golden

The parabolic rise of Gold the past two years has created a perplexing view of reality. End of the Fiat World narratives have circulated continuously since the GFC, EMU crisis and Japan’s ZIRP-QQE-YCC bonanza delivered repetitive blows to G4 FX reserve credibility. While the BTC and DeFi challenges to the Fiat system at least tried to conjure up replacement currencies and payment rails, Gold doesn’t even try.

Vague notions of a gold-backed BRICS currency, or some other RMB-linked version get tossed around along side Gold’s meteoric rise, but no one really tries to construct new currency architecture for it. Buying Gold can simply be what you hold during the USD-centric system crash, presumably keeping your powder dry in order to buy what comes next. Seems a highly speculative approach to trading currency architecture transition, if that’s still the trade.

Nevertheless, precious metals are in a ferocious uptrend, rivalling the power of any meme stock on the year. How the proponents have managed to convince the market to buy weekly on the same story of inflation, fiscal stress, and dollar demise, repeatedly, is nothing short of a miracle.

The backstory is not going to change in 2025 (although inflation might be quite low in some countries) so the price-pump stories are sure to continue. But as these lofty entry prices keep getting higher and higher, the big gold longs are starting to look like MicroStrategy and its singular bet on BTC.

Concentrated risk on a high-vol asset is not hedging anything. You have to be right. I can think of about 20 stocks I would rather take the price risk on. When trading highly speculative risk assets, it is always an individual comfort thing. For me, gold has moved well beyond the comfort zone.

Wishing everyone more good luck in 2026. Markets finishing on their highs for 2025, and the world having successfully navigated a big year of geopolitical shifts (volatility at its lows), gives one optimism for a bull-market extension in 2026.

Let the games begin.