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You cannot create experience. You must undergo it – Albert Camus
We are at an historical turning point in the global economy and it’s creating a massive investment opportunity – as well as massive risk. The financialization cycle of our economy is over evidenced by the growing trouble in private equity and private credit. Yet the US is starting to re-industrialize after 50 years of de-industrializing. This is creating a burgeoning opportunity in the real economy.
Cycles don’t turn over seamlessly. The winners of the old cycle clash with the upstarts of the new cycle. Today, it’s the financial interests versus the industrial interests – Wall Street versus Main Street. But it’s broader than just the national stage because the financial interests include London, Paris, Singapore, Hong Kong, Amsterdam, Zurich, Dubai and the Caribbean banking interests, including global central banks.
The financial interests wrote checks that US citizens have to cash - $40 trillion in government debt, a lost industrial base, and now another financial crisis. If you want to see the end point of their actions, just look at Europe. France, Britain, and Germany have been destroyed economically and financially. Europe’s currency, the euro, is collapsing in value and that creates domestic inflation.
One of the disruptions caused by this clash is the rise of long-term interest rates in the US. I consider this one of the greatest investments gifts of my lifetime and I plan to take full advantage of it!
Higher long-term interest rates are a function of three things. The first is the decline of the Japanese yen “carry trade” where giant financial players borrow money in Japanese yen at close to 0% interest rates and buy long-term bonds in the US and Europe where they can earn a sizable spread – or profit. This trade is ending because Japan is looking to re-direct their domestic savings into domestic industrial projects.
The second reason is the inflation narrative that has been promulgated by the financial press. Between 2020 and 2024, M1 money supply in the US, which measures cash and checking accounts, rose by 80%. This was the initial cause of inflation and was due to increasing money supply.
Rising prices over the last year are a function of a supply shock, not increased money supply; the difference is critical. Supply shocks are ultimately disinflationary because they force consumers and businesses to choose between desirable goods. The result is a net reduction in consumption as marginal purchases are eliminated, further resulting in declining net economic activity.
The third reason, perhaps the least understood yet most powerful, is the draining of US dollars from the global economy. This has forced global central banks to sell their positions in long-term bonds to raise cash for purchasing food and energy. If you visit the 2nd Derivative Section of our website, www.geovestadvisors.com, I’ve written two important pieces on this topic – The End of Europe and The Main Event where I explain this situation fully.
The second driver of higher interest rates has been reversed; Congress went overboard in response to Covid and a bad economic experiment known as Modern Monetary Theory. Money supply drivers are no longer supportive of future inflation.
The supply shock is still in place due to Ukraine bombing Russian oil refiners. Russia is the world’s second largest diesel fuel refiner, behind the US. We also have a supply shock in fertilizer and wheat due to the Ukraine war and military action in the Persian Gulf. This shock may linger a bit longer but will ultimately be resolved.
The third driver has created initial dislocation in the bond markets but is ultimately supportive of 0% long-term interest rates in the US. The US is draining dollars from the global financial system and bringing those dollars home. Those dollars will support lower interest rates in the US and higher interest rates abroad – simple supply and demand.
Interest rates in the US are headed lower even as they spike in Europe. Europe is becoming irrelevant in economic and financial matters around the globe which is why money is leaving the region. When money leaves a region, the scarcity of money raises interest rates. Before long, I expect London to lose control of metals and energy trading, ending more than 100 years of natural resource control in global markets. This represents opportunity for the US.
Credit Crisis
There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures – William Shakespeare
It’s not yet well-known but we are in a negative credit cycle comparable to the problems in 2008 but this time, the US government is ahead of the curve and already taking action to ensure it doesn’t turn into a contagion. You can see from the chart below that the Federal Home Loan Banks, chartered to provide liquidity for home lending, are being used to supply credit to life insurance companies. This is just one measure to avoid contagion.
According to AM Best, private credit makes up 46% of life insurance debt holdings or roughly $1.8 trillion as of the end of 2025. This debt is in serious trouble as much of it is invested in software suppliers that are experiencing trouble navigating the volatile fortunes of artificial intelligence. In addition, private equity funds borrow heavily in their portfolio companies, similar to leverage buy-outs from the 1980’s and that debt is securitized into funds or sold to investors such as insurance companies.
The primary problem with private equity is that valuations are imputed, not set by a market, and this invites dishonesty. This gives them a LOT of leeway in determining returns and whether this debt retains its value during negative credit cycles, like today, until they attempt to liquidate the funds. Warren Buffett was quoted in the 2019 Berkshire Hathaway annual meeting saying: “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest.” Enough said!
Presently, there is an estimated $1.2 trillion sitting in private equity funds that are older than 10 years. Funds are supposed to cash out in 6-7 years and return those funds to investors. The problem is that the assets in these funds are effectively unsellable at values that make bondholders and equity holders whole. This is dead money, for all intents. It represents a time-bomb of financial losses, one of many.
But the credit cycle is more widespread than just private equity/credit. Office delinquencies in Commercial Mortgage-backed Securities (CMBS) have spiked to 12.2%, much worse than the during the Great Financial Crisis (GFC). Total CMBS delinquency rates, which include office, retail, and multifamily properties, sits at 8.02%. This paper sits in many bond funds.
According to Standard & Poors, corporate bankruptcies are at the highest level since 2010. We were exiting the GFC in 2010. The New York Federal Reserve Bank tracks consumer credit card delinquencies and they have risen to 6.97% on $1.25 trillion in receivables. This compares to peak of 7.17% during the GFC, or Great Financial Crisis.
Artificial Intelligence
When sorrows come, they come not in single spies, but in battalions – William Shakespeare
Credit problems are not limited to private credit. Artificial intelligence represents another impending credit disaster. Last quarter, I discussed the two major “frontier AI” companies, OpenAI and Anthropic. In 2025, OpenAI lost $1.60 for every $1.00 of revenue while Anthropic lost $2.75 for every $1.00 of revenue. Both want to come public with market capitalizations of $2 trillion each. This may be the most insane idea I’ve ever seen. Neither company has a realistic path to profitability even though their models are the most advanced in the world. I expect both to be owned by the US government at some point.
The investments tied to these two companies are in desperate straits. The debt of Softbank, Coreweave, and Oracle trade at rates above junk bond levels. Softbank is paying 9.75% for new bonds, Coreweave’s debt trades at 10% to 11%, depending on the issue, and Oracle’s debt trades between 7.85% and 8.44%.
Oracle declared “force majeure” on debt tied to its New Mexico data center because they can’t get electricity to the site. There is similar talk about a data center in Wisconsin. Blue Owl, which provides financing to data centers, has had to stop redemptions as 39% of investors have sought to redeem their money. That money is gone. On October 1st, Oracle announced a deal to lease 100,000 AI chips for 5 years to China’s Tencent for $7 billion, 30% upfront. The price was cheap, suggesting financial stress.
The economics of these data centers are catastrophic. They can’t get sufficient electricity and water to operate as promised and there are insufficient high-value services to justify the investments to date. The investors that supplied the capital for data centers are experiencing massive losses. Based on electricity usage, it is estimated that hundreds of billions of dollars of Nvidia chips are still unused, and are now being used as collateral for new loans.
The initial wave of AI investment was a failure. Even Nvidia and Micron have terrible futures because the only way AI can succeed is if the prices of GPU’s and RAM drop precipitously. We’re witnessing a buildout that was RUSHED, improperly coordinated and financed, and where the engineering necessary to link data centers at scale involves massive infrastructure investment that is presently impossible.
This won’t be apparent until after the election because political expediency dictates that the stock market must remain elevated until the mid-terms have passed. Microsoft, Meta, Nvidia, and the rest should perform well over the next month but the growth is over.
Google owns 14% of Anthropic. Amazon owns between 15% and 21% of Anthropic. Microsoft owns 27% of OpenAI. Softbank, Amazon, and Nvidia own significant stakes in OpenAI. Based on these ridiculous $2 trillion market value estimates, Google, Amazon, Microsoft, and Nvidia have been able to carry these companies on their balance sheets at premium values. These companies are pouring massive amounts of money into the two companies but unless they can create a real market for the models, I see no future and gigantic write-downs are inevitable. Roughly 50% of users still pay nothing for the service. Ultimately, the US government will need to invest in these two companies at significantly lower valuations.
Instead, open-source AI models such as the Chinese offerings like Deepseek and Tencent dominate the market because they offer AI at a fraction of the price. Look for Elon Musk’s Grok to re-enter the market as an open-source variant that ultimately takes market share in the US.
The second wave of AI is going to be successful. AI is outstanding at solving complex mathematical and scientific problems through brute force of attempting every conceivable solution to these problems, based on mathematical and scientific guidelines. The computational power will help solve big problems to unlock new forms of energy such as nuclear fusion.
The first wave of AI was financed with debt and that debt is going to cause massive losses for investors. We are avoiding the fallout of the first wave even as we study the potential of the second wave.
Re-Industrialization
Autumn is a second spring when every leaf is a flower – Albert Camus
This is the REAL story of the US economy and it will be the dominant investment theme for the next ten years. It doesn’t get much fanfare but it’s happening. Essar Group is building a $15 billion integrated steel plant in Iowa, the first such plant since the 1960’s. Two new shipyards are opening in Brownsville, Texas and Baltimore, Maryland.
The chart below comes from Peter Navarro’s Substack presentation. It shows that foreigners are aggressively investing in US manufacturing. Why foreigners? It’s because we’ve forgotten how to build stuff and also because we’re too involved in parsing Fed speak and betting on Nvidia’s earnings.
Before industrialization can become widespread, the US must re-build the electric grid and I expect that to start in earnest in 2027. It’s going to take an act of Congress to supply the kinds of funds necessary for such an undertaking so the results of the mid-term will determine whether the US re-industrializes quickly or slowly.
We’re going to need low interest rates to re-industrialize and become less-dependent on China and other hostile parts of the world. The Chinese Miracle is long over; I’ve written about this extensively. The independent small and mid-sized manufacturers that astonished the world have been crushed by policies of the Chinese Communist Party. They have been replaced by the sclerotic state-owned enterprises that preceded the Miracle.
Some people claim that Vietnam will replace China as the dynamo of globalism but globalism is dead. It ended when the US stopped exporting dollars for oil in 2014. The World Economic Forum is yesterday’s news after Klaus Schwab spilled the beans that the WEF is a conduit for Marxism. “You will own nothing and be happy.”
There is only one side of the market and it is not the bull side or the bear side, but the right side – Jesse Livermore
The European financial elite that gave us globalism and the WEF have shepherded Europe into irrelevancy after hundreds of years of primacy. Congratulations, you reap what you sow.
In the US, we followed the European model for decades and now we have similar conditions to the start of the Great Financial Crisis in 2008 but the US government is prepared and is keeping the fallout from spreading. But unlike 2008, the financial interests ARE going to lose power and influence. The Federal Reserve is going to lose its independence before this is over.
The US needs 0% interest rates to reduce the fallout which is why long-term US bonds represent a massive opportunity. Money is going to flow to US Treasuries and away from the bad credit that is destroying domestic wealth.
We don’t expect a stock market crash but we do expect the Mag 7 stocks to effectively become dead money. Even Blue Owl seems to have found a bottom. The US government needs to maintain confidence to pull off the transition to an industrial economy and a stock market crash would make the job more difficult.
We remain bullish on the US. The country is in a transition phase and transitions always include ugly rhetoric and noise. We remain focused on our nation’s innate competitive advantages and the fact that we are the most successful nation in existence at assimilating people from all over the world that want to be better.
Philip M. Byrne, CFA