LETTER TO READERS

For the past year we have been making one argument in a dozen different ways. The world that produced the last four decades of investment returns is gone, and it is not coming back on the schedule most portfolios assume.

We made that case in Borders Before Balance Sheets, in The Backyard, in Triumph of Geopolitics, and as plainly as we know how in The End of Peacetime Portfolios, where we argued that the mean reversion investors treat as a law of nature is no such thing. It is a feature of one particular environment, built on cheap energy, open shipping, credible deterrence, and a quiet assumption that nobody would deliberately break the machinery everyone depends on.

This report is about one piece of that machinery.

At around 4:30 in the morning on 8 July 2026, Australia’s largest telecommunications carrier lost roughly 45 percent of the nation’s calls and data sessions. Emergency calls failed. Regional rail was suspended. Payment terminals stopped working. Nearly nine million customers were cut off.

Yet nobody had attacked Telstra.

A technician restarted a time synchronization server built roughly two decades ago and worth about thirty thousand dollars. Because of a quirk in how GPS broadcasts the date, the device came back on believing the year was 2006. Telstra ran too few of these servers for the network to outvote the one that was wrong, so systems across the network began reading their own security certificates as invalid and refusing connections.

In short, a country lost its phones because its phone network could not agree on what day it was.

The manufacturer had been warning about this specific failure since November 2020, with a reminder as recently as January of this year. Australia’s own Cyber and Infrastructure Security Centre had flagged timekeeping as a strategic vulnerability in 2024. But the patch was never applied.

This is not a cybersecurity report in the way that phrase is normally used. We have no interest in another vendor taxonomy or another threat feed summary. We are interested in a narrower question that the Telstra failure answers with unusual clarity.

How much margin is left in the systems that developed economies actually run on?

In our opinion the answer is very little, and the reason is not incompetence. It is optimization. Every redundant server, every spare transformer, and every maintained backup that never gets used is a cost that returns nothing in any quarter in which nothing goes wrong.

For thirty years, almost nothing went wrong. Operators who stripped that margin out were rewarded for capital discipline. Operators who kept it were asked why their returns trailed the peer group. The market got precisely what it paid for, and it paid for efficiency.

That was the peacetime dividend.

It was real, it was enormous, and it has already been banked. What was never priced was the other half of the trade. Those same systems now have no slack at all in an environment where someone is deliberately looking for the seam.

And now someone is.

Since 2021, a China-linked campaign that Microsoft named Volt Typhoon has been inside American communications, energy, water, and transportation networks. In a joint advisory in February 2024, CISA, the FBI, and the NSA described the activity not as espionage but as pre-positioning, meaning access held specifically to enable disruption in a future crisis. Espionage is an old game, and everyone plays it. Pre-positioning is something else. It is the quiet placement of a capability to be exercised later, at a moment of someone else’s choosing, inside infrastructure that belongs to civilians.

Meanwhile, in the Baltic, GPS jamming and spoofing has moved from occasional to routine, prompting thirteen European coastal states and Iceland to issue a joint warning in January. The same signals Telstra’s server misread are being interfered with on purpose, every day, a few hundred miles from Frankfurt. Note the failure mode because it is identical. Not a system that goes dark, which is obvious and gets fixed. A system that keeps running while being confidently wrong.

This is why we treat cybersecurity as a national security question rather than an information technology budget line, and why this report sits in a series about geopolitics rather than one about software. The distinction between an accident and an attack matters enormously to a court. It matters far less to a hospital, a freight network, or a bank.

Telstra is not the warning.

Telstra is the free demonstration, run at no cost to anyone who wished us harm, of what the cost would be.

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You have watched this for years. The list of reasons it should break gets longer every quarter, and every quarter it holds. Plenty of smart people have stood up and said this cannot go on. They have been right about the risks and wrong about the outcome, and being right about the risks has not helped them one bit.

So the question is not whether the risks are real. They are. The question is what keeps bidding anyway. Because something is bidding, mechanically, without regard for any of the news you are reading. Name that thing and you have a real edge. You start to see what would actually have to break for the tape to break, instead of waiting on a headline that never quite does the job.

Here is what holds the market up. And here is the part almost nobody says out loud: the same machinery that holds it up is what will eventually take it down.

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The rise of passive management is the eternal bid

Start with the biggest one. The rise of passive management.

You have heard us reference our friend Mike Green on this. If you do not know his work, stop reading us and go read him, because he built the framework and it reshaped how we think about the whole tape. The core of it is simple. The passive machine does not think. It gets cash, it buys. It is asked for cash, it sells. It does not read the balance sheet, it does not care what the management team is doing, and it never asks the price. It is the simplest algorithm in market history, and it is price-insensitive by design.

That last phrase is the whole thing. A buyer that does not care about price will pay any price, and higher prices can pull in still higher prices. The bid feeds on itself.

This is not a fringe corner anymore. Twenty years ago passive was under twenty percent of equity fund assets and active was the overwhelming majority. That relationship has flipped. Passive crossed above active around 2019 and now sits above half of all fund assets. The buyers who once held cash and hunted bargains are a shrinking share of the tape.

Make no mistake about what that does. It does not mean the market only goes up. It means that when it sells off, a mechanical buyer is waiting on the other side of every paycheck, which is why recent drawdowns have recovered faster than the fundamentals alone would suggest. The bid is automatic, swept in on autopilot no matter what prices are doing.

Roughly seventy million people hold an active 401(k), most contributions default straight into target-date funds, and those funds buy the market blind. Retirement assets in this country run near forty-nine trillion dollars. Every payday, a portion of it goes in, no questions asked. As long as people are employed, that steady bid is simply there.

That is the engine. It explains a great deal of why the thing will not break on schedule. But an engine that runs one direction can run the other, and the reason is buried in the same mechanism that makes it feel so safe.

Here is where it gets dangerous.

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Week ending Friday, July 24, 2026

Two fires burned at once this week, an oil war that pushed Brent past a hundred dollars for the first time since spring and a second straight week of selling in the AI trade that gutted Tesla and Alphabet, and between them they left equities lower even as crude ripped higher and the bond market began, for the first time in months, to brace for a Federal Reserve that hikes rather than cuts.

Stocks fell for the second week running, and the damage again ran deepest where the crowd had been thickest. The Nasdaq Composite dropped 2.1% to 24,975.82 as the reassessment of artificial intelligence spending rolled off the memory chips and into the megacaps, with Tesla and Alphabet both punished after their Wednesday results. The S&P 500 slipped 0.6% to 7,411.98, a shallower loss but a losing week all the same and its second in a row. The Dow held up best once more, off just 0.4% to 51,947.25, leaning on the energy names that rode the crude rally and on a run of solid industrial earnings.

Crude did the heavy lifting on the macro side. WTI climbed about 11% on the week to settle near $90.12 a barrel, a third straight weekly gain, while Brent crossed $100 midweek for the first time since May before easing back to just under $99 as barely a tanker dared the run through Hormuz. Gold finally caught the bid it had missed the week before, rising roughly 2% to $4,056 an ounce and pushing back above the four thousand line, as the war premium and a softer tone in the dollar pulled buyers back to the metal.

The bond market told the more interesting story. The 10-year Treasury yield backed up to 4.68% from 4.55% the prior Friday, and oil was only part of it. Weekly jobless claims fell to their lowest since 1969, and with a labor market that tight and energy screaming higher, traders started pricing a genuine chance that the Fed meeting now days away delivers a hike instead of the cut that looked a lock a few months back. The VIX barely moved, holding near 18.7 against the prior Friday's 18.77, though it jumped midweek when the selling in technology was at its worst.

"There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." – Charles Kindleberger

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THINK

There is a small dish on nearly every table on earth, and almost no one looks at it twice. Salt is the most ordinary thing we own. We knock it over and toss a pinch over a shoulder out of a superstition we no longer remember the reason for. We are told to eat less of it. It is cheap enough that we treat spilling it as an annoyance rather than a loss. And yet for most of human history this dull white mineral sat closer to gold than to garnish, and the story of who controlled it is very nearly the story of civilization itself.

Start with the strangest part, which is that we are, in a quiet way, made of it.

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You know the line. The strong do what they can, and the weak suffer what they must.

That single sentence made Thucydides the patron saint of realism. It is the load-bearing quote for realpolitik, for power politics, for gunboat diplomacy, for the entire school of thought that says stated principle is decoration and capability is the only thing that actually moves. Last week Jonathan Kirshner argued on Dmitri Kofinas’s Hidden Forces that the line has been read backwards for 2,400 years.

I disagree with a good number of his conclusions. That is not a reason to skip the episode. That is the reason to listen to it. The most valuable thing an expert can do is take a text you thought you understood and show you that you have been holding it upside down.

What the Thucydides trap actually says about rising powers

We have been circling this text all year. In January we ran a guest piece by John Butler built around the Peloponnesian War, the Melian dialogue, and the Thucydides trap, published as The Triumph of Geopolitics. A podcast with him followed after the Iran conflict broke out. In May we walked through the framework again in The Thucydides Trap, after Xi opened a bilateral summit with Trump by naming it directly.

Three passes at the same 2,400-year-old text in a single year, on a research service that is nominally about capital markets. Kirshner’s reading is the reason for a fourth.

The popular version most people carry comes from Graham Allison’s Destined for War, which examined sixteen historical cases of a rising power confronting an established one and found that twelve ended in war. When the chairman of the Chinese Communist Party uses a Harvard professor’s frame as his opening statement in a room with the American president, the frame has stopped being academic.

Kirshner does not think much of the book. And his reading of the source material puts the trap somewhere else entirely.

Athens did not fall because it took on a bigger power. Athens fell because of what it became while it was winning.

That is the reversal. Here is what it costs you if you have the direction right and the mechanism wrong.

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"Walking the path of global markets, one step at a time."

Friday, July 17, 2026

War came back to the Strait of Hormuz this week and the June ceasefire collapsed with it, yet the selling that finally hit stocks did not come from the oil shock at all, it came from the semiconductors that had led the market higher all year and cracked hard, leaving crude screaming up on a naval blockade while the AI trade broke underneath it.

Equities fell across the board, the first real crack in months. The Nasdaq Composite took the worst of it, dropping 2.9% to 25,520.24 as the memory chips buckled and Netflix cratered. Samsung's results early in the week set off the slide, and by Friday Micron, SanDisk, and SK Hynix had been dragged toward a bear market on fears that memory pricing had peaked and that the boom in AI spending was being reassessed. Even a clean beat from Taiwan Semiconductor could not stop it, the stock sold off anyway as investors looked past the numbers to the capital pouring into new capacity. The S&P 500 fell 1.6% to 7,457.69, its first losing week in three and only its third since the end of March. The Dow Jones Industrial Average held up best, off 0.9% to 52,146.42, cushioned by the energy names that rode the oil rally and by a set of blowout bank earnings.

Crude was the story everywhere else. WTI surged about 13% on the week to settle at $80.86 a barrel, its second straight weekly gain and a far more violent one than the last, after the United States reimposed a naval blockade on Iran and tanker traffic through Hormuz collapsed. Brent ran to $88.10. Gold, strangely, could not catch the safety bid. It fell about 3.4% on the week to roughly $3,965 an ounce, its worst stretch in months, as traders bet that the energy spike would force the Fed to lift rates rather than cut them, and higher rates are poison for a metal that pays nothing. The 10-year Treasury yield barely moved, easing to 4.55% from 4.56% the prior Friday, the long end shrugging off both the war and the oil in a way that said more about growth worries than about calm. The VIX woke up at last, climbing to 18.77 from 15.84, the chip rout and the blockade finally putting a bid under protection after weeks of quiet.

"It is easier to make war than to make peace." – Georges Clemenceau

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LETTER TO READERS

This paper is a departure, and I want to say so up front rather than let you discover it three pages in and wonder whether you subscribed to the wrong publication. We typically write about the dollar system, capital markets, the great power contest, and the machinery underneath them all.

This one is about 1776. It is not unrelated, and I will get to why, but I am not going to pretend the connection is the reason I wrote it.

The reason I wrote it is that I just came back from the Fourth of July weekend, the 250th, and I could not stop thinking about it. That is an honest answer, and I would rather give it to you straight than construct a thesis-shaped excuse.

And here is what kept nagging at me. The American Revolution is the most thoroughly told story in our national life, and it has been told, as these things always are, by the winners. But we have flattened it into a pageant. Powdered wigs, a bell, a few signatures, some snow at Valley Forge, and then everybody goes home free.

What that telling loses, almost completely, is how absurdly improbable the actual sequence of events was, and how thin the margin was at every single step.

Just consider the accounting.

Nine thousand men are ferried across a mile of open river on the night of August 29, 1776, with the entire Continental Army facing capture, and a fog so dense the men cannot see six feet in front of them descends at dawn and covers the last boats.

In December of that year the enlistments of most of the army expire on the 31st, meaning the war has an expiration date five days out, and Washington crosses the Delaware on the 26th and beats it by five.

In October 1777 a British general surrenders at Saratoga, and the news reaches Franklin in Paris on December 4, and two days later the King of France agrees to negotiate, and that one battle converts a colonial tax revolt into a great power war.

In September 1781 a French admiral fights a British fleet to a stalemate off the Virginia Capes, and the stalemate is the victory, because Cornwallis loses the sea. Yorktown is won by a Frenchman in a naval action Washington was not present for.

If you brought that script to a movie studio, they would laugh you out of the room. Too many coincidences. Too many miracles. Too much weather. The fog alone would get cut. And then there is the part that I think is the most remarkable of all, and the part we have gotten so used to that we no longer see it.

The United States declared independence at the beginning of the war.

Not at the end, when they had something to show for it. At the beginning, when they had nothing, when a professional army was landing at Staten Island and the outcome was not merely uncertain but genuinely lopsided against them. They announced the result before the contest.

It is the single cockiest act in the history of statecraft, and it remains, to this day, quintessentially American.

Which brings me to George Washington.

In March 1783 his own officers were on the edge of turning the army against the Congress, and he stopped it by reaching for his spectacles and saying he had grown gray in service to his country and now found himself going blind.

And then in December of that same year, the man who could have been a god handed his commission back to the Congress. Every incentive, almost every precedent in human history, and virtually all the men around him would have supported the opposite decision.

Yet he chose to remain a man, and that choice is the reason the thing held.

The connection to what we normally write about is real and it is not just decorative, and you will find it in the pages that follow. The credit of the United States, the thing that every report in our catalog ultimately rests upon, was manufactured out of a dead currency and a mountain of unpayable debt in the space of a few months in 1790, and it worked only because of what Washington had done in 1783.

Trust was the collateral that got it started. What holds the thing up now is much colder and more durable than trust, and regular readers will already know what it is.

But mostly I wrote this because it is an incredible story, and it deserves better than the pageant. Let’s dig in.

EXECUTIVE SUMMARY

A competent analyst in Philadelphia in July of 1776, looking honestly at the observables, would have concluded that the rebellion fails. No navy, no treasury, no power to tax, a professional army landing against a force that had never won a battle, and an army of its own whose contracts expired in December. And he would have been right about every fact except the only one that mattered.

That gap, between being right about all of the evidence and wrong about the conclusion, is the subject of this paper. It is the most expensive analytical error in finance, it is being committed at scale right now, but the direction it is being committed in has flipped.

We lay the 1776 case out in full in the body of the report.

The 250th anniversary of the Declaration is the occasion for writing this. But it is not the reason. The reason is that the American founding is the cleanest available demonstration of a problem every investor has and almost none can solve, which is that we read history backwards from the outcome and then mistake the surviving path for the likely path.

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"Walking the path of global markets, one step at a time."

Week ending Friday, July 10, 2026 (published on Sunday, July 12, 2026.)

An oil shock came back to life this week, and for a few days it looked ready to swamp everything else, yet the money still found its way into the technology names that have carried the market all year, leaving the tape split between a crude rally that reignited inflation fears and an AI trade that refused to quit.

The Nasdaq Composite did the leading this time, a clean reversal of the week before. It rose 2.1% to 26,281.61 as Nvidia jumped about 4% on Friday and Meta added close to 6%, and the debut of SK Hynix's U.S. listing gave the AI memory trade a fresh test. The S&P 500 climbed 1.2% to 7,575.39. The Dow Jones Industrial Average went the other way, slipping 0.5% to 52,637.01 even after tacking on 149.60 points on Friday, its financials and industrials unable to keep pace with the chips. A week earlier the Dow had set records while tech could not hold a bid. This week the tape flipped the roles.

WTI crude snapped its long slide. It settled Friday at $71.41 a barrel, up close to 4% on the week and its first weekly gain after a long run of losses, once attackers struck three vessels in and around the Strait of Hormuz on Tuesday, among them a Saudi oil tanker and a Qatari gas carrier. Crude briefly pushed past $72 before easing back. Gold could not hold its bid. It settled at $4,104.10 an ounce, off about 2% on a whippy week that saw it swing more than a hundred dollars, as the oil-driven jump in yields pulled against the metal's safety appeal. The 10-year Treasury yield climbed to 4.56% from 4.49% the prior Friday, firm services data and the crude rebound stacking inflation worries back onto the long end. The VIX drifted lower to 15.84 from 15.97, the equity grind leaving little demand for protection.

"The Stone Age came to an end not for a lack of stones, and the Oil Age will end, but not for a lack of oil." – Sheikh Ahmed Zaki Yamani

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THINK

At every hour of the day, something on me or near me is telling me what time it is. My wrist, my phone, the corner of the laptop, the microwave, the car. I am never more than a glance from knowing, down to the minute, down to the second if I want it. What I could not tell you so easily, not without going quiet for a while, and maybe going quiet for longer than I would like to admit, is which direction my life is actually pointed.

That gap is the thing I want you to think about.

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In 2013 you had a legend sitting across from you, telling you to be careful, and you did not listen. It cost you more than money. This is the story, and the lesson underneath it is the most useful thing you will read this week.

Start where the story starts. In 2012 you set up a small gold fund. You wanted physical metal, held outside the banking system, held outside the United States, with the freedom to hedge and to own a few mining shares, all in one vehicle instead of scattered across a dozen separately managed accounts. And because you were, in your own words, a nobody, you went looking for people who were not nobodies. Rick Rule agreed to sit on the advisory board. Don Kagan, one of the foremost numismatic experts in the country, the man they call when treasure turns up in the Sierras or off a sunken ship near Florida, agreed too. And then there was Jim Rogers.

How you get a legend on your advisory board

You did not have Jim Rogers’ phone number. You had his email, and you are still not sure how. So you wrote to him and said you would be in Singapore, where he lived, could you come by. You were not going to be in Singapore. He wrote back and said he would actually be in New York. Funny thing, you said, my flight to Singapore connects through New York. He kept responding. He kept asking who you were again. Eventually he told you to meet him outside the gym at the Hilton on Avenue of the Americas at eight in the morning.

So you flew to New York, which you had also not planned to do, and you showed up at 7:30 in a three-piece suit, and you waited, and he was not there. You finally walked into the gym and found him across the room on a stationary bike, pedaling, sweating. You sat down on the bike next to him in your suit. He looked over and said, what do you want. You told him. He said this was very unusual, he had never done anything like it. Then he said the thing you did not expect. He said he appreciated the effort it took to get there. Not yes. Not no. Send me what you have.

He said yes a few weeks later. You negotiated the fee down to about half of what he first asked. Then, ten minutes after you hung up, the real problem hit you. It does not help to say Jim Rogers is your advisor if the first question every client asks is whether he is actually in the fund. So you called him back and asked him for money. He asked how much he had to invest. You told him to send whatever he wanted. He sent a check. It was enough that you appreciated it.

That is how the board came together. Rule, Kagan, Rogers. You had built exactly the room you wanted, full of people who had lived through more cycles than you had. Which is what makes the rest of this so instructive.

The 2013 gold drawdown that taught the wrong lesson first

Then came 2013, and if you were anywhere near the precious metals market that year, you remember it in your body. Gold had topped in the summer of 2011 above $1,900 and had spent 2012 grinding sideways. Then in April 2013 the floor gave way. The World Gold Council’s own Q2 2013 market update recorded gold falling from a London PM fix of $1,535.5 an ounce on Friday the 12th to intraday lows near $1,320 the following Tuesday, driven by heavy selling in the futures and gold-ETF markets, with roughly 350 tonnes flowing out of ETFs by the end of April. The LBMA later described the same episode plainly: gold lost 25.4% in a single quarter, and did nearly half of that in two days. It kept bleeding into the summer and found its low of $1,180 on the last trading day of June.

You had hedged the book, because the freedom to hedge was one of the reasons you built the fund yourself rather than handing capital to someone else. The hedges helped. It was still brutal.

Here is what you learned first, and it was the wrong lesson. Behind the scenes, the same people you watched on conference stages telling everyone to be contrarian and buy when there is blood in the streets were, privately, coming apart. They were scared they would lose their businesses. You knew these people. You talked to them. And because you had hedges on, you were down less than they were. So you told yourself the thing that felt obvious in the moment. This is it. This is the blood-in-the-streets bottom everyone claims to be waiting for. Everyone is panicking, and you are positioned better than all of them.

So what did you do at what you were certain was the bottom? And why did the smartest man on your own advisory board go quiet at the exact moment you felt smartest? The move you made next looked like genius for about eight weeks. What Jim Rogers refused to say to you that afternoon in San Francisco took a decade to fully land, and it is the reason this story is worth your time. Here is what he told you instead, and what it cost you to ignore it.

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A jobs report weak enough to bury the threat of another rate hike sent money pouring out of the technology names that had carried the market all year and into the banks and industrials that had been left behind, even as the Gulf ceasefire frayed at the edges, oil kept sliding, and gold found its footing again.

The Dow Jones Industrial Average did the leading this week, climbing 2.0% over the holiday-shortened run to close at a record 52,900.07, the peak set Thursday when it jumped 594.83 points, or 1.14%, on the back of financials and industrials. The S&P 500 added 1.8% to 7,483.24, though it barely budged on Thursday itself. The Nasdaq Composite told the other side of the story, up 2.1% for the week to 25,739.80 yet sliding into the holiday as chip stocks sold off for a second straight session and Tesla dropped nearly 7.5%. A Dow printing fresh records while the technology tape can't hold a bid has become the market's defining split.

WTI crude kept leaking lower, settling at $68.59 a barrel, off close to 3% on the week and its cheapest since the war in the Gulf began in February, as tankers moved through the Strait of Hormuz no matter what Tehran said about closing it. Gold went the other way and rose to $4,191.50 an ounce, up roughly 4% and clawing back the prior week's plunge after a fresh U.S.-Iran military exchange put the safety bid back into the metal. The 10-year Treasury yield climbed to 4.49%, up from 4.40% the prior Friday, firm data early in the week outweighing the soft payrolls print that closed it. The VIX slid to 15.97 from 18.89 a week earlier, the equity recovery draining volatility back out of the market.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay

But the headline numbers only tell half the story. Below the paywall, I walk through the exact day this week the market’s entire narrative flipped…and the one revision buried in Thursday’s jobs report that most people are going to miss. I’m also breaking down what’s really happening beneath the surface of the Gulf ceasefire (it’s shakier than the oil price suggests), what Warsh and Lagarde each signaled from Sintra that the headlines glossed over, and the one commodity positioning chart that’s quietly flashing a warning most investors haven’t caught yet. Plus, the five events landing this week that could decide whether this record rally has legs or whether it’s about to crack.

Join us beyond the paywall if you haven’t done so already.

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LETTER TO READERS

A few times a year we hand these pages to someone else. We invite a guest author whose work we read closely and whose judgment we trust, and we give them the floor. This month that author is Michael Nicoletos of DeFi Advisors.

I met Michael about ten years ago at an investment conference. I knew the name before I knew the man. The format that week required every attendee to put a thesis on the table and let the room take its shots. One of the speakers, a brilliant and widely respected investor, laid out his idea. When he finished, Michael raised his hand and said, as politely as anyone has ever said it, that he would like to politely disagree, and here was why.

What followed was the most gracious demolition I have ever watched. He took the thesis apart piece by piece, with the charm of a diplomat and the precision of a surgeon, and he did it without raising his voice or scoring a single cheap point. I have never forgotten it. That was the afternoon I decided Michael was someone whose opinion I would always seek and always value. In full disclosure, in the years since he has become not only a voice I value but also a close personal friend.

He is not planting a flag on a brand new idea, and he would be the first to tell you so. The notion that China’s reported numbers understate the damage inside its financial system is not his invention. What he has done is come at it from a different angle. He issues no large, rigid proclamations. He sets down one careful observation after another, then asks the simple questions the official numbers cannot answer.

How does the largest property correction in modern history sit inside the largest banking system on earth and leave a bad loan ratio of 1.52%?

How does an economy whose largest single component is shrinking still grow at close to 5%?

He lays the facts out, asks the question any honest reader would ask, and then invites you to answer it for yourself. That restraint is the whole point, and it is vintage Michael.

We are sharing this for a straightforward reason. His work sits directly on top of ground we have already covered. Readers of Who Gets the House and Turning Japanese will know the terrain: a debt-financed property complex, a banking system that will not mark its losses, and a state that chooses the slow workout over the sudden reckoning. Michael carries that framework to its largest and least transparent application, the Chinese banking system, and sizes the hole.

This is a subject we believe every investor should understand, and not only the ones holding Chinese assets. Most readers will tell themselves they have no position here. The knock-on effects say otherwise.

A banking system this size, spending a decade absorbing losses, cannot buy commodities, foreign assets, or finished goods at the pace the world has come to expect, and a currency that pays the bill in real terms pulls on everything priced against it. What happens inside China’s loan book does not stay inside China’s loan book.

Read it with an open mind. Michael has earned that much, and the questions he raises deserve a real answer rather than a reflexive one.

P.S. You can find and follow Michael’s work directly at his Substack, substack.com/@mnicoletos, and through DeFi Advisors at defi-advisors.com. We highly recommend you do so. 

EXECUTIVE SUMMARY

This research note is a thought experiment with consequences. It asks one simple question. If the largest property correction in modern history is unfolding inside the largest banking system on the planet, why do the official numbers show almost nothing?

China’s real residential property prices ended the fourth quarter of 2025 at their lowest level in 20 years, down roughly 23% in real terms from the September 2021 peak. As of June 2026, new home prices have now fallen for 35 consecutive months, the longest streak on record. Independent estimates put the number of empty or unsold homes at somewhere between 65 and 80 million, enough to house the population of a large country. And yet Chinese commercial banks report a nonperforming loan ratio of 1.52%, essentially unchanged from before the property bust began. That number has no historical precedent. No comparable property crash, anywhere in the world, has ever produced an outcome remotely like it.

The purpose of this report is not to predict a collapse. The Chinese state has tools that other economies lack, and the most likely path is a slow, Japanese-style workout rather than a Lehman-style rupture. The purpose is to measure the gap between what the official numbers say and what global precedent says should already be visible. That gap is the story.

Three findings stand out. First, on conservative assumptions consistent with the United States after 2008, Chinese banks are sitting on roughly $2.53 tn of unrecognized credit losses. On a Spain- or Japan-style outcome, the figure is about $4.89 tn. On an Ireland-style outcome, it reaches roughly $7.65 tn. Second, these are losses on the banks alone. Once the damage that sits just outside the banking system is added, in trust and wealth products, in insurance, in overseas lending, and in the fiscal cost the central government would have to absorb, the full economic loss is larger still. Section 9 sets it out in detail. Third, the buffers that exist inside the banking system today, the full stock of loan loss provisions plus a full year of profits, total roughly $1.28 tn, which is less than even the most optimistic estimate of the banks’ own losses.

Pulling every piece together into a single consolidated estimate, the property complex, local government debt, the core loan book, regional banks, wealth and trust products, insurance, the overseas Belt and Road lending, and the unrealized losses buried in bond books, the triangulated total economic loss in the Chinese financial system lands at roughly $3.86 tn in the best case, $7.68 tn in the base case, and $12.20 tn in the worst case. Set against the $520 bn in bad loans and $1.08 tn in provisions that China actually discloses, this leaves an unreserved gap of between $2.78 tn and $11.12 tn, equal to roughly 4% to 16% of all banking assets and 13% to 54% of the entire 2025 economy. The disclosed provisions appear to provide more than two times the coverage of the official bad loans. However, when measured against historical precedents, the real coverage is closer to one-seventh.

The reported 1.52% nonperforming loan ratio is not an observation about asset quality. It is an accounting choice, made systematically across a banking system that now controls roughly $70.20 tn of assets. That choice has limits. This report explains where those limits sit and what it would mean if they were ever tested.

The case does not rest on the banking numbers alone. It rests on the gap between those numbers and the real economy behind them. Across 2025 and into 2026, every major engine of the Chinese economy has been deteriorating at once. Property sales have more than halved from their peak, manufacturing has spent most of the year in contraction under more than three years of factory deflation, and consumption has retreated as households save rather than spend. The economy as a whole has slipped into deflation, which quietly raises the real burden of every existing debt. An economy under this much simultaneous strain does not produce a banking system with almost no bad loans. The charts in this report show the deterioration directly and trace the line from each cracking pillar of the economy into the loan book that is not yet showing the damage.

None of this requires believing that Chinese officials are simply inventing numbers. The mechanism is subtler and better documented than that. The International Monetary Fund, in its 2025 Article IV review published in 2026, wrote plainly that expanded restraint measures covering property, local government vehicles, medium-sized enterprises, and retail borrowers may veil underlying asset quality and delay loss recognition. The same report noted that China’s national asset managers absorbed about RMB 16 tn ($2.37 tn), nearly 18% of GDP, of nonperforming assets between 2012 and 2024, often at potentially inflated prices with limited pricing visibility. When the system’s supervisor says the disposal prices may not be accurate, an outside analyst is entitled to ask what the actual losses are.

The IMF’s broader read on China points the same way. The April 2026 World Economic Outlook, an edition dominated by the energy shock from the war in the Middle East, projects Chinese growth slowing from 5.0% in 2025 to 4.4% in 2026 and 4.0% in 2027, and to an average of just 3.1% a year over 2028 to 2031, well below the pre-pandemic norm. The Fund urges Beijing to use fiscal policy to stabilize the property sector and confront the local government debt overhang. The supervisor is describing a managed deceleration that still needs active intervention on exactly the two fault lines this report measures. That is corroboration, not coincidence.

There is one more thread, developed in Section 4, that makes the whole picture worse rather than better. The losses estimated here are measured against the size of the Chinese economy, and that denominator is itself almost certainly overstated. Investment is roughly 40% of Chinese GDP, the highest share of any major economy in history. That investment is now shrinking, with fixed-asset investment falling and private and property investment down by double digits. An economy whose largest component is contracting cannot honestly grow at close to 5%, yet that is what the official numbers claim. The same habit of never writing down bad debt that produces an impossible 1.52% bad-loan ratio also inflates GDP because investment that costs more than it is worth is carried at full value rather than written off. The result is that the true economy is smaller than reported, which means every loss figure in this report, expressed as a share of GDP, is, if anything, understated.

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Six months ago, the debasement trade was the only trade. Gold to the moon. Silver to triple digits. The dollar back to the 80s, maybe the 70s, never to return. Goldman and JP Morgan had targets in the low 90s. Everybody was short the dollar. Selling the dollar and investing abroad was the trade of the year.

Then the dollar broke out to a thirteen-month high. It closed Friday a little over 101, back above its 50-day, 100-day, and 200-day moving averages. Gold closed below $4,000 on June 24th, off roughly 25 to 28 percent from its peak. Silver is down more than 40 percent from where it traded when the crowd was calling for $300. Crude has pulled back around 20 percent. Copper is off 8. Wheat, corn, the whole complex. Every hard asset the debasement crowd told you was a one-way ticket has been hit at the same time, and they have been hit while the dollar rose.

Why the debasement trade is unwinding right now

Here is the thing that matters, and it is the thing almost nobody saying “the debasement trade is dead” will tell you. The thesis is not wrong. Across decades, fiat loses value and real assets compound above it. More people, more innovation, more currency printed into existence. That is the whole reason you invest rather than stuffing cash under the mattress. The direction was never the argument.

The path was the argument. And the path is where people get hurt.

In Why Gold Just Sold Off, published in April 2026, we laid out the mechanic in plain terms. A thesis can be structurally correct and still produce violent corrections inside the bull move, especially when the consensus gets loudest. That was true in April when gold was drifting back from its parabola. It is even more true now that the dollar has firmed, the inflation conversation has turned hawkish, and the same banks calling for the low 90s are quietly explaining why the trade was always going to run out of steam.

So what actually flipped? Why does the dollar keep rallying even though everybody says it should fail, even as central banks print and inflation ticks higher? Why did gold, the asset everyone owns precisely for a crisis, fall during a Middle East war instead of soaring? And why does understanding one currency index decide whether the next leg of this trade pays you or wipes you out?

That is what the rest of this piece is for. Below, we walk through the dollar mechanic that governs all of it...the reserve-asset paradox that explains the gold sell-off, the two carry trades the rest of the world is trapped between, and the band the dollar has to trade inside before something breaks. If you have ever wondered why your hard assets all fell on the same day, the answer is mechanical, and it is knowable.

The mechanics below the paywall are the part that keeps you from getting wiped out on the path to a destination you were right about. The full breakdown, plus the Sunday Macro Pilgrim’s Ledger and the complete paid archive, sits on the Premium side of the wall. And the timing matters this week: our quarterly promotion for the Pro report The Band closes soon. The Band is the 80-plus-page report this entire podcast is built on. Right now an annual upgrade gets you everything below this line and access to The Band before it goes back behind the Pro paywall. Reading the report alongside this piece is the difference between knowing the conclusion and understanding the machine.

→ Upgrade to annual ($399/year) to keep reading and to read The Band before access closes:

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Introduction

The Fed's hard line on inflation ran straight into a buckling technology trade, with the central bank's preferred price gauge climbing to a three-year high just as money fled the artificial-intelligence names that had carried the market all year, even as the war premium kept draining out of oil and the Iran ceasefire held in practice if not in rhetoric.

The S&P 500 fell 2.0% to close at 7,354.02 and the Nasdaq Composite dropped 4.6% to 25,297.62, its worst week since the spring, while the Dow Jones Industrial Average bucked the tape and rose 0.6% to 51,876.11 as money rotated out of technology and into defensive corners of the market. The Nasdaq lost ground in every session of the holiday-shortened week, five in a row, capped Friday by a report that OpenAI is weighing a delay of its initial public offering into next year after SpaceX's rocky debut and the broader wobble in AI shares. The damage was no longer about one stock. It was a wholesale exit from the trade that had defined the rally.

WTI crude kept sliding, settling near $70.54 a barrel, down about 6% on the week and its lowest since the conflict began in February, as tankers moved back through Hormuz and the last of the war premium came out of the price. Gold tumbled to around $4,037 an ounce, off roughly 5% and a fresh low for the year, the safety bid gone with the war scare and a firmer dollar pressing on the metal. The 10-year Treasury yield eased to 4.40%, down from 4.46% the prior Friday, cheaper oil and a cooler growth read outweighing a hot inflation print. The VIX climbed to 18.89 from 16.40 a week earlier, the equity selloff putting a bid back under volatility.

"The real price of everything is the toil and trouble of acquiring it." – Adam Smith

This week’s Ledger answers the questions the headlines leave open. Whether the Iran ceasefire is actually holding or just being narrated that way, and what the 60-day clock does to oil from here. Why money walked out of the AI trade for five straight sessions and where it went instead. And what the gold and silver positioning is quietly telling you that the price drop is hiding.

Then the charts. More than thirty of them...every index, yield, spread, currency, and metal that matters, each read in plain language so you can see where momentum is turning before it shows up in the price. Let’s dig in.

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THINK

A German soccer fan named Freddy walked into a Waffle House at one in the morning somewhere in the American South, ate a small mountain of food, and reported back to the internet that it was great, the prices were fair, the staff were friendly, and that he would absolutely be coming back. Ten out of ten. By then he had already stood inside a Buc-ee’s and typed, in something close to awe, that he could not believe a gas station could be that big.

Elsewhere in the country, fans from Morocco were filming themselves in the cereal aisle of a Walmart, stunned by the sheer wall of choices, and a generation that grew up on neighborhood markets was wandering American supermarkets the way earlier tourists wandered cathedrals. Somewhere along the way, Walmart quietly became the unofficial attraction of the tournament. Nobody planned that. Nobody could have.

And almost none of it was supposed to happen.

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The memorandum of understanding between the United States and Iran was signed this week, and within hours the verdict was in. Iran won. The strait stayed open. The IRGC outlasted the world’s most powerful military. In the court of public opinion, that read as a clean victory, and on the optics, it is hard to argue otherwise.

But a memorandum of understanding is not a binding resolution. Nothing final has been exchanged. The MOU is an agreement to keep negotiating without fighting while the negotiating happens. That is the whole of it. So before you file this one under “Iran wins, dollar loses, the empire is cracking,” step back and ask a different question. Not who won the battle. What did winning the battle cost.

What the US-Iran MOU actually says

Read the document for what it is, not for what the headline writers want it to be. The full 14-point text is public, and it reads as exactly that: an agreement to stop shooting while both sides argue about terms they have not yet agreed. Point 5 reopens the strait to commercial traffic with no charge, for sixty days only. Point 3 gives both sides sixty days to reach a final deal. The strait reopened because the West needed it open, not because Iran extracted a settlement. Trump pushed hard for a halt for one reason above all others: the United States, the West, and even China had been spending real effort keeping energy prices in check, and they were running out of room to keep that plate spinning.

Here is where the honest read lands, and it is not the comfortable one. You can make a strong case that the United States did not win this round. Iran did, or the IRGC did. But apply the same lens that has been used on American primacy for years. The US still sits atop the global pyramid, and every time someone says so, the response is the same: yes, but at what cost. It cost a manufacturing base. It cost purchasing power. It cost lives in forever wars. Staying on top has been brutally expensive. So hold Iran’s victory to the exact same standard. If they won, what did the win cost them.

If you would rather read than watch, the full breakdown is below. The case runs in three moves. What the MOU actually says, as opposed to what the headlines decided it said. What Iran’s victory cost them...the hardware, the human toll, the uranium, the rial, the rebuild bill...laid out in the numbers. And why the gold selloff and the American-defeat read are the same mistake the crowd keeps making about the dollar. The strait stayed open. The question below is who actually paid for that, and what it tells you about who is still standing on top.

That last thread connects to something bigger we just put on the table. The Band: Strength, Death, and Reserve Regimes is live...eighty-three pages, built with Michael Peregrine, on why the dollar does not die of weakness, and why, if it ever dies, it dies of strength. Through July 1, Premium ($399/yr) members have the full report open to them. If you want to see the framework that sits underneath this whole argument, or you are weighing which membership level fits, the details are here.

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Introduction

The war that had gripped markets since late February finally bent toward peace this week, with Washington and Tehran signing a framework to halt the fighting and reopen the Strait of Hormuz, even as a new and hawkish Federal Reserve told investors in plain language that its next move on rates is more likely to be up than down.

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Letter to Readers

Almost every dollar in the world started life as someone’s debt.

That is not a metaphor. Under the credit-based monetary system the planet has been running on for the better part of a century, money is loaned into existence. Banks extend credit. Sovereigns issue credit. Central banks accommodate credit. New dollars enter the system as liabilities matched to assets that have not yet earned them.

The one narrow exception is base money, meaning physical currency, coins, and reserves held at the Federal Reserve. Base money is not anyone else’s liability. It exists as a direct claim on the issuing authority, and only the US Treasury and the Federal Reserve can create it. Everything outside that perimeter is created by someone, somewhere, willing to extend dollar credit against their own balance sheet, which means putting their own capital at risk to bring a new dollar into the world.

The broader dollar supply is, by construction, the broader dollar debt outstanding. You cannot have the one without the other, and nothing about the design lets you separate them.

That single fact changes how the dollar system has to be understood.

We have written before about carry trades, a trade where capital borrows in a low-yielding currency, parks the proceeds in a higher-yielding one, and collects the spread until something moves and the trade unwinds.

Based on the monetary systems design, countries outside the United States must run two carry trades at all times, whether they want to or not, and the reason is structural. Because the overall global monetary system is debt-based. And each individual country’s monetary system is also debt-based.

Those are two separate facts, but they stack.

The first creates the global carry trade. Because dollars are the unit needed to operate on the global stage, every economy of meaningful size sources dollar funding in the eurodollar market, earns dollar revenue against that funding from exports, trade-finance receivables, and offshore operations, and runs a constant dollar book on top of its local book.

The second creates the local carry trade. Each country’s own banking system loans its own currency into existence the same way the dollar system loans dollars into existence, which means every domestic balance sheet is also long real assets funded by liabilities denominated in the local credit unit.

Both carry trades exist simultaneously, and both have real world implications.

The reason this combination is dangerous is that currencies trade relative to each other. Both carry trades cannot work at the same time. When the dollar is weak, dollar funding is cheap and the global carry runs easily, but the local currency strengthens, the export economy that feeds the local carry stops competing, and the local carry tightens. When the dollar is strong, the local currency depreciates, the export economy regains its margin, and the local carry eases, but the dollar funding cost climbs, the dollar book gets harder to service, and the global carry tightens.

Whichever way the relative pair moves, one of the two carries is going against them.

That is the structural fact countries outside the United States cannot get out from under. There is no setting of the dollar at which both carries work. The dual carry is not a description of two books on a balance sheet. It is a description of a position the rest of the world is forced to hold in which one side is always under pressure, and the only question in any given cycle is which one.

The United States runs only one carry trade.

The country that issues the reserve currency runs a debt-based domestic banking system, like everyone else, and carries the local carry that comes with that. What the United States does not carry is the second one, because its external obligations are also denominated in the same unit it issues, which means the relative-currency move does not generate a second front of pain on its balance sheet the way it generates one on every other balance sheet on earth.

That asymmetry is the structural advantage the rest of the world has been trying to escape for half a century, and the structural advantage the rest of the world keeps failing to escape.

The deeper point sits underneath both observations. Because the broad global dollar supply is loaned into existence, the entire global monetary system, outside the monetary base, is itself a single, planet-scale carry trade.

Every credit-created dollar in circulation has a corresponding dollar liability somewhere on the other side of the ledger, and the system stays alive only by rolling that liability forward. The act of expanding the broad dollar supply, which is the only thing that puts sustained downward pressure on the dollar index, is the same act that creates more dollar debt. The act of withdrawing the broad dollar supply, which is the only thing that lifts the index, is the same act that liquidates the carry that the prior expansion built.

The system is not designed for either extreme. It is designed to keep rolling, inside a workable band, and the moment the band breaks in either direction, something on the other side of someone’s balance sheet has to break with it.

We are calling this paper The Band, because the phrase does several jobs at once.

It is the price corridor the dollar has to stay inside for the system to function, in the same sense that Tommy Norris on Landman lays out the price corridor crude has to stay inside for the oil patch to function. It is the act the United States is supposed to be managing, the one the Fed and the Treasury are meant to keep on tour and inside the arena, even though the rock star has its own gravitational pull and does not always listen. It is the band the kids cannot stop listening to, even as their parents warn of its dangers and try to ground them. It is the band that no matter how many obituaries get written, keeps showing up to play.

We use the Rolling Stones as the spine of the piece. Their arc and the dollar’s arc track each other almost beat for beat from the early 1960s forward, and the catalog of songs gives us a vocabulary the reader already knows.

The Dollar Milkshake is referenced throughout this paper as the lens through which we view the dollar system, but we do not re-derive the framework here; readers new to the concept can find the original treatment in prior Santiago Capital work and on our website.

Simply put, our view is that the dollar is not dying. And the system is built so that it cannot die of weakness, because every move toward weakness creates more of the dollar debt that keeps the world inside the system. If it ever does die, it will die of strength, because only strength forces defaults severe enough to push the rest of the world to actually build the alternative.

As such, the endgame the consensus keeps writing about has been kicked much further down the road than the consensus believes, and the reasons are structural, not cyclical.

One last structural point belongs in this report, because it sits underneath everything that follows.

Only the US Treasury and the Federal Reserve can create base money. Every other dollar in existence is credit, loaned into existence against someone else’s balance sheet, somewhere outside the perimeter of US base money.

The eurodollar market sits entirely outside that perimeter, by definition. There is no base money in the eurodollar market, with the exception of whatever physical bills and coins are currently circulating there. In other words, every eurodollar deposit is a claim on a bank that itself holds claims on other banks that hold claims on still other banks, with no settlement asset at the bottom of the chain that is not itself someone else’s liability.

To be clear, the eurodollar market is not partially levered. And it is not selectively levered.

It IS leverage, end to end, all the way down.

That fact does not show up in the regular conversation about the dollar system because the regular conversation about the dollar system is mostly about US-domestic monetary aggregates, which are anchored by base money. The conversation that matters for the rest of the world is the eurodollar conversation, and that conversation is a conversation about pure credit.

We come back to this in the Sympathy for the Devil section because the structure of where the leverage sits determines the structure of where any eventual break would propagate.

The pages that follow lay out the case.

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Too much debt. Too many deficits. Too much printing. The story has been the same for forty years, and for forty years the people telling it have been early, wrong, or both. Meanwhile the dollar firmed again this month, against a consensus that swore it would fall.

Here is the problem with the story you have been handed. It points you the wrong way. If you are positioned for the dollar to collapse, you are positioned for the one outcome the last four decades have refused to deliver. And the real risk... the one almost nobody is pricing...runs in the opposite direction.

That is what The Band is about.

On Wednesday, June 17, we release The Band: Strength, Death, and Reserve Regimes. Eighty-three pages, built with Michael Peregrine, on a single idea that reorganizes how you see the entire system: the dollar does not die of weakness. If it dies, it dies of strength.

There is a range the dollar has to stay inside for the global system to function. Push above it and the rest of the world breaks directly, the way it broke during the Volcker surge, the Fragile Five, and the 2022 gilt crisis. Fall below it and the system breaks on a lag, as the cheap-funding carry builds and the next snap-back liquidates it. The center holds. The edges are where the damage lives. Forty years of evidence draw the line for you.

Who should read this? Anyone whose portfolio has a view on the dollar baked into it, whether you put it there on purpose or not. If you hold international exposure, emerging-market debt, gold, long-duration bonds, or you simply want to understand why the dollar keeps embarrassing the people who bury it, this is the framework that makes the next move legible instead of surprising.

What it solves is the thing most macro commentary leaves you with: a strong opinion and no map. The Band hands you the map. You will not have to guess which way the stress travels. You will know where the edges are, what trips at each one, and what the center means for the assets you already hold.

We are taking the obituaries apart, one by one, and showing you what they keep missing.

Here is how to read it.

If you are a Premium ($399/yr) or Pro subscriber ($2399/yr), you are already in. The Band lands in your inbox Wednesday, nothing to do.

If you are on the free list, this is the window. For two weeks only, June 17 through July 1, Premium subscribers get full access to The Band. You do not need the top tier. Upgrade to Premium for $399 a year, and the entire report is yours the moment it goes live on Wednesday for two full weeks.

The dollar is not behaving the way you were told. It is time to read why.

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Introduction

Inflation pushed to a three-year high and the bond market leaned hard into the prospect of a rate hike from a new and hawkish Fed chair, even as a midweek war scare gave way to talk of an Iran ceasefire that pulled crude back under $85 and let stocks claw out a winning week.

The S&P 500 rose 0.6% to close at 7,431.46, recovering most of the prior week’s loss in two frantic sessions. The Nasdaq Composite added 0.7% to 25,888.84 and the Dow Jones Industrial Average gained 0.7% to 51,202.26. The headline gains hide the violence beneath them. By Wednesday’s close all three averages sat well into the red on the week, the Dow down 953 points that day alone after the inflation report landed and fresh American strikes hit Iran. Thursday and Friday brought the snapback, a two-day rally on hopes that Washington and Tehran were closing in on a deal, with Friday’s session lifted further by the trading debut of SpaceX.

WTI crude settled near $84.88 a barrel, down roughly 6% on the week, though that figure masks a round trip. Brent spiked to $94.93 on Thursday as Iran threatened once more to seal the Strait of Hormuz, then both grades sank as ceasefire chatter took hold. Gold slid to around $4,220 an ounce, a second straight weekly loss of about 3% and a fresh low for 2026, as a firmer dollar and the inflation prints drove real yields higher. The 10-year Treasury yield finished at 4.53%, a basis point below the prior Friday’s 4.54%, after climbing midweek when CPI and PPI both ran hot. The VIX ended near 19, up from 18.20 a week earlier, the spring calm now a memory.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” – John Maynard Keynes

This Wednesday: The Band

On June 17 we release The Band: Strength, Death, and Reserve Regimes...83 pages on why the dollar doesn’t die of weakness. If it dies, it dies of strength.

This is Pro-level research. For two weeks only, June 17 through July 1, Premium subscribers get full access. Current Pro subscribers get it 24 hours in advance.

Already on Premium? You’re in. It lands in your inbox Wednesday. Reading on the free list? Upgrade to Premium ($399/yr) and The Band is yours for two full weeks on launch day.

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The Week That Was

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