The Precipice

“What’s the concern about there being more process?”

Justice Brett Kavanaugh, 21 January 2026

THIS IS NOT INVESTMENT ADVICE.

We have never had as abrupt a global power realignment when it was this easy to move capital from one part of the world to the next. The abrupt shift in US global allegiances is triggering a shift in capital that is just beginning. Importantly, the markets where money is being pulled from are large and the markets that capital is being redirected to are often smaller, so the price impact of the former is modest and the latter more significant.

In more detail:

1. Global growth is on a sugar high. This is driven by monetary and fiscal easing. The US cut taxes last year when unemployment was low in the hope that cash in voters’ pockets this year would then tilt November’s vote. Plus, the Fed and other central banks cut rates. This sugar high, in addition to constant, dramatic headlines, obscures what is going on under the surface.

2. Competition for capital is intensifying. Foreign governments, concerned by how erratic White House policy has become, are spending to protect their borders now that the US security umbrella does not exist. Germany and Japan are rearming. Think about this: For the first time in 100 years, Germany and Japan need to rearm. Together, this creates a scramble for capital against the backdrop of AI investment. While the US has a strong military, it is financed by wealthy foreigners—foreigners who are now being attacked by the borrower.

3. Foreign investors are being forced to recognize that US exceptionalism is over. Investors can be long Mag-7 and still short America. Modern finance easily allows one to create such an exposure: you buy the stock and sell the dollar, hedging back to your own currency. A little like the way COVID forced us all to use Zoom, abrupt policy shifts are forcing investors to hunt for good investments and hedges in places they might have overlooked before.

4. Alternative investments to the US are often less liquid than US investments. The market cap of the entire Brazilian stock exchange is a fraction the market cap of Nvidia. Bonds in Brazil or South Africa are deemed safer than bonds in the US, but there are fewer of them, so a movement of capital from one area to another has a disproportionate price impact. This is also one reason why the movements in the yen and the euro (which are more liquid) have so far been more modest than movements in the real or the rand.

5. Can the AI frenzy shift this? While the epicenter of AI is indeed inthe US, AI is now known. Jensen Huang’s talks no longer resonate the way they once did. We are all using an AI model of some sort; the models change. We know spending on data centers is coming. That’s in the price. It is now about finding the areas where the AI shift is not discounted to have an impact or is over-discounted. Some of that is in the US. For instance, there are large publicly traded companies that are involved in designing buildings. This is labor-heavy and one of the professions likely to be easily replicated by AI. So companies that are not “AI companies” will reap the benefits of AI. But much of that innovation can be outside of the US as well. What is stopping large companies in the rest of the world from using AI to cut costs? Nothing.

6. By summer, the sugar in the US will be past its peak and the impact of AI on weakening demand for labor will be more evident, while the shift in global capital flows will continue. This leaves me bullish on stocks, bearish on long-end bonds, bullish on short-term bonds in places that are expected to tighten policy, and bullish on the currencies of places that are net savers relative to the currencies of those places that are net borrowers.

7. Risks are higher than they appear. The quote at the outset of this piece came from a US Supreme Court justice. He was asking the US Solicitor General what the problem was with having a process that is followed and agreed upon to make big decisions, like stripping the central bank of its independence. That this is up for debate tells you that the risks are sky-high, even if stocks are buoyant. We are at the precipice, one foot over.

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