Hey everyone, welcome to another episode of Academia Obscura. I'm your host, Chris. Today we're taking a detour from our more esoteric topics, and we're going to talk economics. Wanted to chat for a second about what I'm calling a tail-end risk analysis. Everything I'm about to show you on the board is problems that I see as blinking red. This is not a doom prediction. This is a there are multiple blinking red lights lighting up the dashboard, and they're all primed to have a chain reaction. So just wanted to take a quick moment, chat through the world as I see it, and hopefully some of y'all find this interesting along the way. So starting off, we're going to start off in current events with the energy crisis that we're all living through right now, largely because of the Iran war. Not going to go into the politics of it, but it has shut down the Strait of Hormouths. The Strait of Hormuz is what transports 20% of the world's oil supply, and it has basically been at a standstill for months. At time of recording, we are back at it. Crude oil has crossed over $100 a barrel, and there are no signs that this is going to end anytime soon. The Defense Secretary B. Texkeff even slipped to Congress that he was requesting funding through September 30th. A soft hint that the administration expects this war to go through September 30th. So, yeah, that's a whole thing. Aside from that, the hormones blockade means oil is not getting out. Also, with the Ukraine war ramping up, Ukraine has been able to manage some deep drone strikes deep into Russian territory and has been severely hampering their gasoline refineries. Refineries are what turns crude into usable fuel, mostly gasoline and diesel. And Ukraine has been hammering those. Every single one of Russia's main reactors have been hit. Their country is literally on a fuel crisis right now. Gasoline is not available to be sold or purchased in parts in large parts of the country, and let alone for export. And the refined products were the main money drivers and income streams for Russia. All that fuel is now no longer even available for the market because Russia's not even doesn't even have enough to secure its domestic supply. From Ukraine's perspective, this is great for the war effort because Russia's not having to choose between manning trucks and missiles that is firing on it or have or serving a civilian population. But for an oil market, it's coming in at an already severe supply crunch because of the Iran War. Add to that the fact that when the Iran War first kicked off, uh the US and most of the developed world didn't end to the strategic reserves in order to cushion the oil market. Right now, the U.S. strategic petroleum reserve is near the statutory limit. What that means is that there are only a few more weeks, basic curse estimates that I was seeing earlier today. There's maybe eight to eleven more weeks, depending on how you count it, of available petrol in there to use period before everything left in the reserve is simply the bare minimum that's required to be available for the military at all times. Once that happens, the government runs out of being able to provide supply to Cushion any price free fall. At the same time, Cushing, Oklahoma is near its floor. Cushing is the civilian clearinghouse for oil in this country. It is what connects all the major oil pipes, and they are nearing sludge bottom. If you know what a large-scale oil tank is, it's a man-made cavern that's dug in the ground and then petrol's just put in. But sludge bottom is the gross mixture of gasoline and water and sediment at the bottom that's technically gasoline, but it's not really usable as it is. And that's where all the commercial oil plumbing is nearing at the same time. Also, OPEC plus capacity is at a record low, largely because, thanks again, the Iran War. OPEC needs to largely ship through the Strait of Hormoons. Yes, there's some pipelines and some routes out of it, but Iran has also been successful at damaging other pipeline and refinery infrastructure from drone and missile strikes in order to make the Gulf regions pay for hosting U.S. bases, which are the only targets available for Iran to hit. It's not like Iran can actually hit U.S. soil. So it's retelling at the countries hosting the U.S. forces that are then attacking it. Giant mess. All of this, uh, and this is the part that's not being reported in the mainstream media as much, is that the spread between crude oil and refined oil is rising. So at time of recording, the 321 benchmark for refined crude is about $60. Uh healthy is 10 to 20. What that means is that there is a such a crunch on supply that we are not able to accurately make enough gasoline to fuel and heat to meet demand. All of that coming in right as there's no longer any supply for any government to do anything about. Yes, the US makes enough oil, but just because you pump oil into the ground means nothing if your refineries and the global refineries can't turn into gasoline and diesel at an efficient rate. And $60 a barrel is not an efficient rate whatsoever. Next up, stock market bubble. This one started getting in the headlines today because there's a mini sell-off going on in AI. This has the potential to become much worse. Largely because AI-related stocks are, depending on how you on how you include and which companies you include, currently make up 35 to 45% of that the essence. And their valuations are underwritten by growth assumptions from a little over $3 trillion in data center build-up that is still planned through the next couple of years, which is now getting stalled across the board. You're running into power grid issues. There's massive uh social pushback to even building out the data centers. Turns out if you go around yelling at people that AI is going to take your job for a couple of years, then no one wants to fund AI or let the AI data centers be built in their backyard. Very it was a pretty bad marketing ungull, which is why they're not even talking about that anymore. But damage is done, regulations are kicking in to slow to slow the data center to a crawl. And that is causing GPU depreciation. All of these data center companies went and bought chips, GPUs, in order to build out the data centers. But because they can't physically build the data centers, those GPUs are sitting in a warehouse. While they're sitting in a warehouse, they are losing usable lifecycle value even while they're not being used, which is what's threatening this $3 trillion valuation. The thing that made the 2000s.com bubble spectacularly bad was circular financing among rivals. For example, you had Wall Street, right? Probably not two different sides of the same pyramid. For example, Wall Street would invest in Lucent, right? Lucent was a gear manufacturer. They made shit uh wires and switches for the internet. Lucent would then lend money to a provider, like an internet provider, such as Winstar, which was also financed by Wall Street. And then Winstar would use the money that Lucent lent it to turn around and buy gear and supplies for the build-up from Lucent. So the same money for the lending and the buying was just reported on two different sides of the ledger, right? Luce was essentially lending on the income side of its balance sheet because of how the contract was structured. And Wall Street was just exposed to the same transaction. Today it's one level deeper. For example, you've got a big tech company that owns data centers such as Microsoft, and on both sides, they are working with a platform such as OpenAI. So MicroGolf goes in, invests in OpenAI, and the contract says OpenAI then has to buy compute from Microsoft Azure and run OpenAI models in the Microsoft Cloud. Microsoft that turns around and buys its chips from NVIDIA to go and build out those data centers. OpenAI has got its own relationship with NVIDIA because OpenAI gets investments from NVIDIA in order for OpenAI to then go and buy their own chips from NVIDIA and optimize their models to run on NVIDIA GPUs. So in the 2000s, we had one double bracketed relationship where lending and buying was reciprocal. Here you have two. And Wall Street isn't exposed on this. It's all tied up in this $3 trillion stock valuation because you've got investments and sales all running on both sides. What this means is that with OpenAI, as of right now, they're projecting a $14 billion operating loss. If anything happens in this cycle, then all of a sudden revenue that stalled revenue from OpenAI now starts appearing as losses for Microsoft and NVIDIA in a downward spiral, the same way that the dot-com era bubble produced a downward spiral. Only Wall Street is not exposed through the ownership of the stock, not necessarily as much through the stocks and bonds because it's all internal money amongst the same three players, just being traded around and trading it around is somehow creating income because of how accounting works. When in reality is this the same money like going around in a circle. NVIDIA is the most exposed player in this chain because they make the chips that run everything. Like I said, they're already having GPU depreciation issues because they sold GPUs to build data centers that now can't be built. And so there's going to be a little bit of supply gun. Bigger issue, no one can really seem to agree on how long the usable lifespan of a GPU is. Every single company, it looks like, has different uh ranges ranging from about two to six years before you start getting to green and have to be replaced. NVIDIA just changed their recommendation a couple months ago. What this means is that no one knows what supply or delay looks like and what data center maintenance currently looks like in order to keep these data centers running to power AI. All by the time when TSNC, which makes all of the chips for Nvidia's GPUs, is starting to come under Taiwan razone pressure. This is the kicker in this chain. So energy crisis, stock marple bubble, military readiness crisis. So because of how the Iran war has gone, not getting into politics right now, we are at a missile interceptor and munitions crisis. The U.S. has spent way too much of its inventory of patriot missiles and smart bombs and drone strikes on firing everything the U.S. possibly can at Iran, and Iran is just still standing there defying it. The U.S. is woefully unprepared in order to meet a global conflict. You see Pete Hexov going around talking about begging for extra money from Congress, about having another $80 billion supplemental, largely to replace munitions. Not to mention the fact that even if they got the money, most of these munitions are on a two to four year manufacturing timeline, which is why Ukraine is trying to go beg and scrounge up Patriot missiles and can't even shoot down Russian incoming volleys anymore. Add to that, there is right now, and at the same time we're having a missile interceptor shortage, there is a naval and drone capabilities gap largely between the U.S. and China. China currently has surpassed the U.S. military in terms of number of ships, and their drone technology is ahead of the U.S. Because China has been on the drone game for about five extra years before the U.S. caught up. The U.S. was just clinging to conventional forces and never really saw drones evolving in the current way that they have in the Russia in the Wandron War. China just has more experience with them at this point. The biggest problem is that from the MOU that Trump signed with Iran the first time around was the case in point where economic pain is what moves policy. Trump flashed as hard as possible that he did not want to be Herbert Hertzberg. And that is why he signed that MOU at Versailles. Which, fun fact, Versailles is a terrible place to sign a treaty. The Versailles Treaty for World War I was so bad and humiliating for Germany that that is what led to World War II. So signing a treaty that led to the greatest war in the history of mankind is not the grand historical reference you really want to call for. Obviously, that thing we didn't last long. Uh, neither Iran nor the U.S. could seem to even agree on what they agreed to, and we're back to shooting. All this to say, U.S. deterrent capability for the for the entire uh Middle East, Eurasia, and the Pacific is down. We don't have the firepower to enter into a conflict. What this means is that Taiwan is the most vulnerable it's been pretty much ever. Uh, present uh President Xi of of China has said that recapturing Taiwan is a civilizational imperative for the country. Taiwan is the one breakaway province from the Chinese Civil War that has still never been brought under Communist Party control. And Taiwan is, by luck of the draw, is where all the migrantships remain. The risk of a full-scale Chinese invasion is small, but China using gray zone pressure of a partial blockade or administrative checks to disrupt traffic around Taiwan is starting to pick up. You've already been seeing the Chinese Navy start harassing commercial shipping around the strait, telegraphing war games and slowing things down, especially because the U.S. cannot physically resupply Taiwan with any more military technology, because the U.S. can't manufacture it and we don't have the stocks. So if TMC starts hitting inventory problems and Nvidia can't even provide the chips for the data center build-out at all, that's already slowed. This entire stock market bubble bursts. That is before we can even get into any income valuations from the losses that are currently still being run. This alone is a tanking spiral. Add to all of that, we're running up on a debt crisis. So debt to GDP just passed 100%. That is debt held by the public. Technically, um, the total US government debt is 120% because the government owes itself money in the form of IOUs to Social Security and Medicaid, but the debt held by the public, it just crossed 100% of GDP. Interest on the debt is now the second largest I wide item in the federal budget, uh, second only to Social Security. We spend more money on interest than we do on the military, which is crazy. We've also lost our triple-A credit rating, which is causing interest rates to go up at the same time that foreign central banks are agazing treasuries and running to gold. This is the red flag when central banks start dumping your currency because all of a sudden the reserve currency of the world is looking more risky than the standard. We're also hitting higher interest rates on rollover. A lot of U.S. government debt that was sold during the time of ultra-low rates near zero is now having to be refinanced at modern rates, which are coming in at about 3.5%, varies depending on the treasury auction. Uh, what that means is all that debt that we've never paid off, we're now rolling over to a higher interest credit card, which is going to continue to eat up more interest money. Also, uh, because of how the volatility in the treasury market, we are now not really selling 10-year bonds or the long-term 30-year bonds. We're selling the short-term bills, which means we're going to be having to roll over all of this debt more frequently. And and and as the spiral continues, the interest rate we're paying on those bonds is slated to keep increasing. So the amount of interest we're paying on the same debt, the interest rate's just going to keep going up. The one particular gray area is the basis trade is completely exposed. So, what is the basis trade? Part of the financial plumbing is that there are a whole bunch of offshore head funds located mainly in the Cayman Islands that exploit the tiny gap between what a treasury is worth and what a treasury future is. It's usually like a penny. But they can buy in bulk and then hold those treasuries, borrow against the cash value of them, because most banks will treat a treasury as cash for lending purposes, and then go and buy more treasuries and just collect all of the pennies around the board to make money. Normally that's risk-free because treasuries are always converged to zero and are stable. But when there are spikes or freezes in the option, and there have been a couple in the past few years that infrastructure ceases and you have margin calls because all these basis trades are leveraged at uh almost 101. If this happens, then this starts impacting banks and the and the entire treasury's marketability. Because these hedge funds are 3.5% of the total market. We're also going staring at the early phases of a potential currency crisis. So with the debt going up and rates going up, that's getting into a spiral. Right. Congress can't pay off the debt. Uh they're just ramming it through reconciliation to increase the deficit. And then tariffs are also reducing dollar demand. Tariffs reduce international trade because they make foreign imports not as competitive with it with internal logs. That reduces the amount of dollars that are needed in order to trade with the United States. All of and all of the terrorists and trade wars and political drama that we've been engaging across the world is leading to backlash against U.S. financial leadership and the U.S. financial infrastructure. So global de-dollarization has trending up. Russia and China built out their own payment networks to facilitate oil trade. Uh, even Brazil created their PICS network for mobile payment infrastructure. And the current administration is trying to levy trade sanctions against Brazil because they're not using the visa mastercard infrastructure anymore. They built their own in order to save on payment fees. The pet from dollar system that has kept Treasury stable since the 1970s is currently trending down, starting to trend down as some of the Gulf states are toying with diversifying and allowing more settlements for non-dollar payments. Dollars still predominantly the leader there, but you're starting to see the cracks for in the name of diversification because they're trying to hedge against any US problems. That's a loss of confidence. And the SWIFT payment network, like I said, is decreasing. Russia and China are building their own. Europe is floating around building their own now. Other global South states like Brazil are teaming up. All this is creating an alternative pathway to the dollar and the US financial system that is challenging it like never before. Why this matters? Stag all these things on top of a shadow banking crisis. What is shadow banking? So right now, 51% of the world's money currently sits outside the banking system completely. So if you think about the banking system, you go to a bank, you plug your money in, you see that FDIC sticker. That means that your deposits are insured by the federal government, and that even if that bank collapses, your money is safe. With a shadow bank, there are no such guarantees. This is largely hedge funds, funds like BlackRock that guarantee dividends, stable coins, buy now, pay later, those Venbo accounts, that you just have money sitting in an app. That's not really a bank anymore, that's not insured. All of those things are shadow banking and are completely outside the regulated financial system. That is the Google Bank. Is the largest growing share of financial services in the country. And there's a similar problem growing in there to the 2000 bubble, only this one looks a lot like the 08 bubble. Because just like in 08, you had subprime mortgages that were bumped together and traded up in packages and then sold off to banks. Banks had to eat the losses and eventually get bailed out by the government in order to stay solvent. In 2026, you've got these hedge funds, private equity, stable coins, the bind out pay later, all of them sitting on a pile of debt that subestimates put in at a 5% delinquency rate already. That's unheard of compared to the 1% deliquency rate in the commercial banking market. Once that happens, there is no fail safe to protect these. All of these losses that we are going to get passed on directly to investors, 401ks, and pensions. Some of it will fall on the banks because the banks have lent these shadow banking companies about $2 trillion. So there are some losses that are going to get cut off. But any failure mode here is going to risk a mass sell-off, which then fuels a stark market bubble because these shadow banking companies are also overvalued because compared to their debt leverage, as well as more pressure on treasuries. Because right now the U.S. is having to sell record treasuries at record rates at times when it's very exposed. During a crisis, people go and they have to raise capital to meet margins in these funds. What are you forced to do? Sell treasuries. And selling treasuries in a time when the U.S. needs to raise records amounts of money is what causes a seizure because there's not enough demand in the market. This is where, because of this unique configuration of what's going on, the Fed happens to be in a triple lock scenario. So there are three things in general the Fed can do to stabilize the economy. The Fed can hike the interest rate, the Fed can cut the interest rate, or the Fed can print money. It's usually done through quantitative easing, but there are other ways that the Fed can just make money appear out of tenure that doesn't exist. We can argue about that, about whether or not that should be done or they should be able to do that. But long story short, they can't. The problem is that no matter what the Fed does, each individual action makes other folks worse. So if the Fed, for example, hikes interest rates, that is good for inflation and good for the dollar because you want higher interest rates to cool demand in order to stabilize prices. This is why the Federal Reserve is even talking about possibly hiking the rate going into the current year because inflation currently stands at about 4%, which is well above the 2% target rate. However, hiking the interest rate is terrible for the debt because all of a sudden the interest we're paying on the debt and the Fed is the buyer of last resort. This is going to raise the interest rate that the federal government is then paying to services debt, which creates more budgetary problems. And it's terrible for banks because banks are sitting on a pile of treasuries, long-dated treasuries, in order to provide capital cushion. There was a bank called Silicon Valley Bank a couple of years ago that went bust and had to be completely bailed out by the federal government and the Fed because they had a cash crisis where their long-dated treasuries were at such a low interest rate that they were functionally taking a loss on their books by holding those treasuries and they became insolvent because of that loss while they were having a run of the bank. That bank was just completely bought out. Everything was guaranteed above the FDIC limit, very on pipeline story. But that same contagion of losses existing on the books because interest rates are on current treasuries grossly outmatched with what are held by the banks is a systemic risk in the banking market still today. And any hike contributes to that, to the bank losses that are then on the books. It's also terrible for stocks. Stocks like growth because the stocks thrive on demand. Higher interest rates crimp demand, which crimp stock earnings, which then fuels the bubble because stocks are going to run to safety. If they cut the rate, inflation risk spiraling out of control because all of a sudden you're reducing demand. However, that is now good for the debt because the debt can be serviced cheaper. It's good for banks because their losses are easier to manage, especially in the Shannon banking world and this basis trade exposure. And then it's good for stocks because it juices growth, but it tanks inflation and starts wrecking the dollar if um inflation is too out of control and runs away. Their other option is print money, which is what they did in order to stabilize everything the last time around. That's still bad for inflation because it's the most inflationary. The debt is technically fine. They could just buy the treasury examinate rate they want. The risk, though, is if it looks like the Fed is just bankrolling it too much, then the interest rates no longer matter themselves and it collapses the market. This is a double-edged sword for the debt. Banks obviously love this because they come out great. However, while normal banks would love this, this is a mixed record, especially with the shadow banks, because all of these people, where all the all the big contagions are, aren't regulated. They have no relationship to the Fed. They have no oversight. And the and any printing or quantitative easing the Fed would do for banks would not be available for the investors, the 401ks of the pension that would get wiped out from the contagion in the hedge funds, in the private equity funds. And these people would just lose their money. So printing doesn't really help anyone here. Um, and stocks end up okay with this because the Fed just buying their stocks and holding it prevents a sell-off. So this is why the Federal Reserve is trapped. No action they can take solves the board. And each action they take reinforces a different spiral that could pop, which reinforces the others. Right. If the Fed increases the rate, they're going for stable prices of strong dollar. If they decrease the rate, they if they cut the rate, they are keeping the government debt financeable and keeping a stable financial system. They have to choose between stable prices and the stable government debt and the stable financial system. All this landing on Kevin Walsh. So Kevin Walsh is the anti-Benn Bernanke. Ben Bernanke was the one that invented quantitative easing back in the opening crisis because he straight up said, I'm going to save the economy no matter what it takes. And the Fed just stepped in and did whatever it took to make things work. Warsh's whole career has been basically the thesis that Ben Bernanke was completely wrong, that the Federal Reserve should not have stepped in and done quantitative easing. All that has said is distort the market and led to a whole bunch of risks that are just the building up that never got property burdened dealt with in the meantime. So in the middle of a crisis, the guy that says Fed, direct Fed intervention is a categorical error, is the guy running the Fed. Which means that even if they try to do something, my money's on them being late, especially with the fact that there is still strong division on the board, with a former Chairman Powell keeping his seat on the board of governors and the Lisa Koch drama with her still keeping her seat. Right now, the only thing unifying the Fed is the fact that they can all redefine inflation. Once there's a crisis and they have to start making decisions among three, there is no single unifying block across the board with the chairman that is opposed to Federal Reserve intervention like that in the economy to begin with. So the Fed is trapped and deadlocked, both in what they in what tools they have to fix the situation, but also uh interpersonally, like within the personal dynamics on the board itself. And this is coming at a time of like the crowning achievement of this whole thing is the severe political dysfunction we have in this country right now. Regardless of which side you're on, Congress isn't capable of wiping its own ass, let alone passing a piece of paper. And the administration has been floundering from the war in Iran, from foreign crises, nonstop court losses on economic fronts, when everything hits the fan, uh, do not count on Congress being able to pass anything, especially if Democrats take control of the chambers in the midterms. TARP only worked because uh the Congress, against Democrats, was willing to hand Bush a blank check because while they disagreed with him on policy, they still trusted him enough as an individual to run the country. Uh, Democrats do not trust Donald Trump in the same way. Whether you agree with what Donald Trump has done or not, Democrats do not like him. And they are not going to hand him a blank check. And the House and Senate already passed a resolution to uh end the war in Iran. The House just passed another one here at time of reporting yesterday. It looks like that will pass the Senate again. Um and after Trump forced out multiple uh city senators over personal grudges from voting against impeachment or voting against some of policy issues, he does not have the friends to muscle anything through uh the Senate, let alone get it through the House where they only functionally have maybe a two-vote majority. So, where does this all lead? Most of these crises intersect with another one. And the risk is that not if one of these breaks, it starts breaking the others. Because Taiwan, because military readiness crisis produced from the energy crisis, right the war to wrong, then feeds into the AI stock market bubble, which feeds into shadow banking and the debt crisis and the currency crisis, which then feeds back into the stock market bubble. All of these feed into each other on so many different levels. So, like I said, there is no date. I'm not predicting the do or the future. I'm just saying here is the state of play on multiple fronts, and why all of these are blinking red on the dashboard, and they require being managed perfectly in order to knock overall. And right now, my money is currently not on everything going perfectly. But we'll see how this goes. Thank you. And a quick programming note I will be doing an extra podcast this week. Uh, my friend Victoria and Demetria are hosting an astrology seminar, and that'll be dropping on Saturday. So thanks for tuning in. I'll see you next time.