Equity markets in the US are calmly making new highs even as chaos seems to grip the world. As I’ve been writing for years, this is the lesson government financial managers learned from the 2008 crisis. Keep equity markets elevated and chaos can be managed.
The US Treasury Secretary Scott Bessent implied this in interviews which is why we’re inclined to stay fully invested – for now. Things can change very quickly so we remain alert even as we plan for what we are going to do when things change. And things always change.
Chaos is everywhere. We get inundated in the media with the social chaos in the US but the changes that will ultimately impact market values are grossly under-reported. For starters, we’re in the early stages of an ugly credit cycle where student loan, credit card, and auto loan delinquencies are spiking to 2008 levels. These levels partly caused the financial crisis.
Outside the US, Japan just elected its fourth Prime Minister in three years even as the third French Prime Minister in the past year has just resigned. Conservative political parties in Germany, the UK, the Netherlands, France, and the Czech Republic are upending the political balance of power in Europe as voters show disdain for the failures of today’s leaders.
In China, we will know in the next three weeks whether Party Secretary Xi Jinping will be forced out of the top spot. Party elders and high-ranking military leaders appear to have checked his power after more than a decade of administrative, economic, political, military, and geostrategic blunders. Removing him from power may prove messy which is why internal strife is an underappreciated risk.
Amidst this wreckage of global harmony, we have artificial intelligence and the supposed race with China to be the world’s leader in this emergent technology. But even in this futuristic mania, we have some disturbing inconsistencies, mainly revolving around the fact that it doesn’t work particularly well. This lack of successful products is well-known and documented by leading global universities and consulting companies yet the zeal for machine intelligence keeps increasing unabated. Further proof that truth is stranger than fiction.
US Economy
Among major developed nations, the US economy is far and away the strongest and most stable. That’s the good news. The bad news is that interest rates are MUCH too high for our economy. It’s hurting housing, autos, and commercial real estate. The real estate boom in the Southeastern US that started during Covid is rapidly reversing and institutional buyers such as mutual funds are trying to get out with difficulty.
Auto sales are still 2 million vehicles per year shy of levels that reflect a strong US economy. Not only are they being hurt by high interest rates but the cost of new cars has spiked as a direct result of former President Biden’s 2021 Executive Order 14037 “Strengthening American Leadership in Clean Cars and Trucks” which aggressively raised minimum fuel economy standards. People can’t afford to purchase new cars and those that can, quickly learn that the cost to service new cars has spiked due to expensive electronics to save fuel.
When Walmart, McDonald’s and Dollar Tree stores tell us that they can’t raise prices because shoppers can’t afford higher prices, it tells us that we’re in a form of economic decline that is not being captured in official statistics. Tricolor Auto, a major sub-prime auto lender, just filed for bankruptcy protection.
The consumer price index may no longer be growing but the damage that was done in previous years was never reversed. We can see this from credit card debt that is roughly 30% higher than before Covid. People are using their credit cards to get by.
Meanwhile, the Federal Reserve is doing little to soften the impact on US consumers. Interest rates are going to need to approach 0% once again. The longer they wait, the more damage is being done to our underlying economy.
Things are slowly getting worse in the US economy but the rest of the world is hurting badly. Not to minimize the financial suffering of our domestic neighbors but we’re in great shape compared to the populations of Europe and Asia, with China being the worst.
China
The Chinese Communist Party has stuck to the myth that its economy has been growing 5% per year for the past five years but it’s simply not true. If I had to guess, I would say that their economy has declined by a minimum of 20% since 2019. If you follow the official statistics and nothing more, you’re missing the story entirely.
Nationwide, nearly 1/3rd of all offices are vacant. To some extent, this is due to foreign companies exiting China following the Covid lockdowns – nobody wants to work there. But it’s also due to the collapse in white collar jobs throughout the nation and the lack of jobs for university graduates. Local governments are ¥10 trillion in arrears to employees and contractors – they lack the money to pay their immediate obligations. This equals roughly 7% of Chinese GDP and it’s a clear sign of a country in economic depression.
The restaurant industry is in complete collapse. In the first half of 2025, 8,800 restaurants closed daily – equaling an astonishing 6 closures per minute. The lucky Chinese workers with jobs that receive regular pay are hoarding as much money in banks as possible. Even well-established bureaucrats have been forced to take pay cuts between 20% and 30%. This is why estimates of growth in retail spending are unbelievable.
Instead, the whole economy is gripped by the Paradox of Thrift where excess savings and declining consumption destroys an economy because declining sales lead to layoffs and business failure. Exports are critical for China but the global trade war is closing this avenue. Banks aren’t lending; nobody wants to borrow. The Chinese economy is imploding exactly as we expected.
The CCP may be lying about economic data but you can get a sense of how bad things are from other measures. For instance, we know their birth-rate is half what is stated (1.00) because the number of injections administered for tuberculosis is half the number of reported births. All infants must get the vaccination by law. The Chinese population is collapsing. This is supported by a sharp decline in kindergartens and primary schools across the nation.
The Ministry of Transportation published urban transportation statistics in late August. It shows a precipitous decline in urban subway traffic – a nearly 50% decline from 2019. From 2019 through the first half of 2025, Shanghai rail traffic declined 34%, Beijing declined 35%, and Guangzhou declined 41%. Secondary cities have declined more. If people aren’t commuting, it implies they’re not working.
The decline in transportation, restaurants, and births is consistent with anecdotal evidence from Chinese social media that depicts empty streets and closed shops. This is critical for understanding the global economy because China is believed to be the second largest economy in the world after the US. If the above information is correct, we can expect a decline in demand for oil, gas, and industrial metals. This would suggest lower prices in the future as demand recedes. The world is betting on inflation but deflation seems more likely.
Artificial Intelligence
The deeper I delve into AI, the more I see it as an agent for chaos as opposed to being a benefit for society. Here’s a link to a popular piece on our website: https://geovestadvisors.com/is-ai-a-trojan-horse/ I see AI as a tool for hackers and other enemies of society.
Leading universities such as MIT, Oxford, Stanford, and Harvard have all questioned the utility and functionality of AI. This is because models such as Chat GPT and Grok represent a category of programs known as “Large Language Models” or LLM’s for short. Unlike computer programs that excel at computations, these models are statistical predictive engines which offer results that represent the highest probability response whether that answer is intrinsically right or wrong – or even makes sense.
In essence, LLM’s are only as good as the information they draw from yet the internet is full of bad information. This is why there are relatively few functional applications today and why a new term has been created for AI output called “workslop.” AI can’t be relied on for broad applications because it makes far too many mistakes.
Like 2000, the AI environment is full of charlatans who will ultimately destroy investor savings. No amount of market intervention will prevent this. Furthermore, a lot of AI functions have already been commoditized such that companies will never be able to monetize their services because few are unique. This goes for ChatGPT, Grok, Gemini, MAI, and Nova.
OpenAI, Tesla, Google, Microsoft, Meta, and Amazon have already spent tons of money on this first phase of AI, paying exorbitant sums to get Nvidia’s chips and to train these models without any demonstrable value-added products. I expect these investments to be a drag on future earnings.
My fear is that rushing to integrate AI into the internet will allow hackers and bad state actors such as China and Russia to use AI models to create autonomous malware that destroys our ability to use the internet profitably. Global cybercrime is estimated to hit $10.5 trillion annually this year. Globally, consumers have lost an estimated $1 trillion to fraud and scams over the past year. It is believed that the Chinese Communist Party is a big sponsor of such schemes and AI is going to make it easier for them.
AI has reached the point of being a mania, much like tulip bulbs and dot com stocks from the past. Market values have eclipsed anything rational which is why we’re looking to profit from the next stage of the AI push – higher spending on cybersecurity and eventually, people returning to bank branches. If we can get past this initial threat, AI has the potential to benefit society in many ways but not today.
The GeoVest Approach
This AI mania is very similar to the dot com bubble but with two important differences. First, everyone was clamoring to use the new dot com tools like email and on-line shopping but few today know how to use AI apart from making goofy videos and memes. Second, the government coordinates equity markets to a much greater degree than 25 years ago. They saw how the dot com bust happened and will try to prevent the same from happening this time.
The global economy is in much worse shape than the year 2000 and it’s rapidly getting worse. Nobody views China as the next great market, instead countries are turning inward. The elevation of Japan’s version of Britain’s “Iron Lady,” Sanae Takaichi, is a sign that Japan is going to prioritize Japan over the global economy. Europe will eventually follow.
Paul Hurley continues to expand our presence on Linked-In where he is posting updates regularly. I’ve been adding to our analyses on our website www.geovestadvisors.com under the 2nd Derivative section of Insights. I post at least two insightful pieces a month. These represent a deeper dive than what I can cram into this newsletter. You’ll see that we are viewing the present climate opportunistically and without trepidation.
I am optimistic that we’ll be able to convert our “war thesis” bet into AI-specific cybersecurity bets before much longer. The drop in long-term interest rates is taking a little longer than expected thanks to the Fed’s truculence towards the Trump Administration but with global deflation getting worse, it won’t be long.
Neither of our two indicators of a bear market in stocks has yet flashed. The dollar hasn’t spiked and the value of copper has yet to fall. This being the case, we remain guardedly optimistic about the stock market.
We continue to stay alert to the inherent threats of today’s markets but mostly, we’re looking for the next great investment cycle. I think it’s going to involve Americans getting back to work making things and re-developing the competitive advantages that put the US on top in the first place. Thank you and it is our continued pleasure to serve you.
Philip M. Byrne, CFA
