Finance
The search for safe havens
Do Expect
A US sovereign wealth fund. Trump wants one, and Scott Bessent is busy revaluing national assets.
A major multinational to list in the Gulf.
The stock exchange in Abu Dhabi, the
self-styled “capital of capital,” is a more
likely home than the Saudi Tadawul.
Don't Expect
A Beijing bazooka. China’s 2008 consumer stimulus was a disaster. It will try smaller, indirect jolts this time and focus on cleaning up local government finances rather than juicing consumer spending.
Forever unicorns. Building data centers
and rockets is expensive, and startups will eventually need to tap the public markets.
Watch This Space
Country-first capital. The giant, boundary-less pools of money that defined the financial world in the 2000s and 2010s are retreating inward. Saudi Arabia’s $925 billion Public Investment Fund is shrinking its foreign holdings to build up the kingdom’s non-oil economy. Japan is doing the same to prop up the yen. Europe’s investors are being called on to fund military buildups at home, and Canada’s giant pensions are embracing a
“buy Canada” ethos as a brushback to Trump. Biden’s restrictions on US investments abroad were a sign: Countries increasingly see their capital as a national resource worth guarding.
“Globalization in its current form may have run its course.”
“We still have an inflation problem.”
“The roots of economic discontent lie in the [strong] dollar.”
Black Swan
A treasury auction fails.
Asian governments, once the most reliable buyers of new US government bonds, have gradually lost appetite, and despite more uptake from the US, UK, and Canada, recent auctions have seen thinner order books. “People have been willing to buy our Treasury bills,” Carlyle’s David Rubenstein says. “At some point, people won’t be willing to do that.” A failed auction — or one that requires the government to strongarm banks into bidding — would reprice trillions of dollars in global securities, devaluing collateral everywhere and forcing margin calls on a scale unseen since 2008.
The New Lexicon
“Convergence”
Public markets are shrinking. Private markets are exploding. Public securities are getting harder to trade, and a humming bazaar is developing to buy and sell private ones. Where they meet — and which firms stake out that territory first — will determine finance’s winners over the next decade. “Investors are already starting to ask … what’s the difference?” said Apollo CEO Marc Rowan, who has bet his firm’s future on this convergence.
Finance
How AI might
trigger the next
financial crisis
Financial markets are not the economy. But both are yoked right now to the American tech sector in ways that threaten to unravel.
What’s often ignored in the public hand-wringing about the Trump administration’s attacks on institutions — courts to interpret contracts, exchanges to provide price discovery free of ideological pressures, and regulators to set rules of the road — is that those institutions are even more important to this red-hot corner of commerce than most seem to think.
Innovation thrives when people trust that good ideas will be rewarded, when the financial system enables successful technologies to scale up, and when the judicial system limits corruption and bolsters competition.
That is doubly true for investments in AI. In most other sectors, investments bear fruit in a few years. Much of the spending on AI today will take decades to return a profit. Institutional stability is vital.
The tech sector was fragile even before Trump’s second term. Hundreds of billions of dollars are being put behind AI’s hazy promises to solve climate change, cure cancer, and reinvigorate anemic industrialized economies. Those hopes have stretched tech valuations and concentrated a huge portion of the equity market into a handful of stocks.
Even more dangerously, exchange-traded funds have sprouted up that use borrowed money to amplify the financial returns of those stocks. In 2016, single-stock “leveraged” and “inverse” funds — which, through the magic of derivatives, magnify the gains or losses in shares of Tesla, Nvidia, and others — accounted for 2% of the ETF market. Now, they are almost 8%, and like the hot tech stocks they track, are heavily owned by individual investors rather than sober-minded institutions.
By itself, this would not be a major problem. The dot-com bust in the early 2000s did not end the internet, in part because it was obvious how this nascent technology would transform the economy by producing new services, novel platforms, and previously unimaginable ways of sharing information.
“A recession may turn into a depression that the US takes years or even decades to recover from.”
Three things are different today. First, it is far less obvious how AI in its current form will deliver huge productivity gains. None of these companies’ products has yet proven its potential for transforming industrial and business processes, with a few exceptions like software engineering. Despite all the hype, corporate customers are cautious in their spending, leaving the AI economy — and the stock market — reliant on shareholders of Microsoft, Meta, and a few other giants to subsidize everything.
Second, the Trump administration’s assault on institutions, its haphazard and fickle tariffs and regulations, and its vindictive attitude to political opponents mean that new companies face uncertainty about both the economic climate and the rule of law.
Third, lighter regulation may bolster the tech giants, making it much harder for new companies to get a toehold, especially when the same uncertainties make investors increasingly jumpy.
My own research suggests that the AI technologies we have now will increase US GDP by about 1% to 1.5% over the next 10 years — not annually, but in total. This falls greatly short of the promises that the industry boosters are making. In my assessment, those promises can’t be met without new approaches that go well beyond the foundational models of AI’s incumbents.
Without these advances — and soon — tech stocks could tumble. If that happened, those debt-fueled bets would unwind quickly. Retail investors would see their shareholdings shrink in value and start to curb their spending. That is how the stock market becomes the economy, and how recession fears become self-fulfilling.
The effect could be far worse than after the dot-com collapse. With eroded institutions, the possible emigration of tech and scientific talent, loss of expertise in government, and weak rule of law, the recession may turn into a depression that the US takes years or even decades to recover from.
In Why Nations Fail, published in 2012, James Robinson and I argued that a country could not prosper economically without the right political climate. “While economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has,” we wrote. At the time, we had middle-income and developing nations in mind. Who would have thought that today, we would be aiming this advice at the world’s technological leader and its most innovative industry?
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