3 Worries for 2026 (and historical analogies)
The Bill is Coming Due.
To be honest, I am not worried personally.
In fact, I am excited to see these setups unfold and create opportunities for us going forward. Those who should be worried are those with backward-looking perspectives that cannot adapt to current realities.
Some thoughts on what will break investors (and their pocket’s) going forward.
- the infinite belief (to the point of dogmatism) in passive investing
- sovereign bonds and fiat money remaining sound regardless
- those that continue to extrapolate the recent past to the future
The Misunderstanding 🪃♠️
I’ve spent more than twenty years occupying myself almost exclusively with finance and money, and I’ve come to a simple conclusion: most people get the focus backwards.
Nearly all effort goes into making money, while very little goes into keeping it. But the thing is, long-term outcomes are driven less by how money is made and more by how it is lost.
Outcomes are non-linear to amounts. i.e. It won’t matter as much to your future self or the current and future generations of your family whether you have $5mln or $15mln (today’s value!), but it will matter if you have $5mln or $0.
What follows are my thoughts on the market’s three greatest traps — illustrated through historical analogies.
Some of the analogies are: 1) The Oil Crash and OPEC crisis of 1985, 2) the official end of Bretton Woods and the transition from the Gold Standard to the Dollar Standard and 3) the Canary Wharf-induced bankruptcy of the Reichmann Brothers property empire.
By the way, the 3rd worry is on AI.
I listened to Jim Chanos’s interview with Jack Farley and realised Jim Chanos’s team used the same method we used last year in Downside at AI to calculate Cloud profitability 👇
Oil, Geopolitics & the Illusion of OPEC Control
Core worry: Sovereign producers are overstretched. Oil can’t get a break.
- Key oil producers are running structural deficits.
- Massive capex and rising military spend is straining budgets.
- OPEC keeps signalling unity via supply cuts, but price action isn’t buying it.
OPEC is trying to signal to markets collective/strategic cohesion and restraint — to keep the price of Oil from crashing further.
WTI has been cut in half since June ‘22, while countries that rely predominantly on Oil revenues are behaving like it’s all good. To be clear, they need that Oil money or else things start to break down.
Sovereign producers continue to be underfunded, running large deficits, and have extended themselves in big projects whether domestic or geopolitical.
Saudi needs the money to fund their mega projects and to highlight MBS as a leader worthy of becoming King in his own right.
Note: That worth is going to cost about a trillion dollars!
As for Russia, we are nearing the 3 year anniversary of the Russia - Ukraine war and things don’t seem to be calming down. The Americans have almost completed their strategic retreat from Ukraine — but the Europeans are doubling down!
Zelenskyy still walks Brussels like everyone owes him money. And European leaders don’t really seem to mind. To me this looks like the war in Ukraine isn’t ending anytime soon and that the Europeans are actually ready to wage war with Russia if need be.
Merz seems to be using this tool to achieve two goals.
1) Strengthen his industrialists and his economy via an explosion of military expenditure and 2) Use “War with Russia” as his political slogan for the remainder of his term, with intentions for a second one!
But less than 2 months after his elections, Merz’s party is no longer first in the polls.
3.5 years ago when we published this piece the AfD was at 12% — today it’s at 26%.
Philoinvestor
In any case, the EU seems to be ready (I mean, only in words and in intent) to wage war with the Russian Bear — the bear is going to need all the oil revenues it can get.
The Analogy
In the 1980s OPEC was in a similar spot as it is today.
- OPEC tried to defend falling oil prices via quotas
- Saudi Arabia was the “swing producer” and cut production from 10 mb/d in the early 1980s to less than 2.5 mb/d in 1985
- Members said they would cut, they cheated
- Fiscal pressure made cheating inevitable
- Non-Members increased production in the meanwhile
- Until one day Saudi decide to bring out the sledgehammer
- By late 1985 Saudi became frustrated with the lack of discipline in OPEC, its market share loss and its declining revenues and decided to ramp up production.
- This trigger the oil price crash of 1986
The Opportunity
A recessionary climate coupled with problems with OPEC nations results in overproduction and a further drop in the price of oil.
That would affect the equity values of O&G producers and set the stage for a major subsequent rally when things line up again.
Fiscal decay and late-stage Keynesianism
Core worry: The West is compounding the fiscal problem — not solving it.
We see a parabolic move in Keynesian and post-Keynesian playbooks across the Western word. Europe, Japan and the collective West are trying to extend the Keynesianist lifecycle — as opposed to biting the bullet of their mistakes for decades.
It’s like everyone capitulated and tossed fiscal restraint out the window.
And so I expect a reckoning there 👇
- Europe, Japan, and the US are locked into parabolic deficit spending.
- This isn’t counter-cyclical anymore, it’s the pattern.
- Politically, austerity is impossible — so the bill just grows.
- This is why real assets keep working underneath the surface.
- The excuse seems to be, “The debt problem will be solved through growth”
- It’s the only politically palatable move — so they all adopt it
Trump 2.0 is the last nail in the coffin of American Exceptionalism. To be fair, Trump only played a small part in it — with subsequent administrations adopting the same playbook. And you can put Japan and the collective EU in the same bucket.
In case you missed it 👇
Philoinvestor
The Analogy
In 1971 the Bretton Woods agreement broke down when President Nixon froze US Dollar convertibility into Gold — US deficits and overspending meant the US could not maintain Gold convertibility and Nixon was forced to abandon it.
—> That was the end of the Gold Standard and the beginning of the Dollar Standard.
Today trust in the Dollar is eroding fast, and I see no light at the end of the erosion tunnel.
As a consequence, we seem to be in a parallel-dimension macro situation where US Treasurys are still selling for lowish yields and the Dollar remains strong — while Gold is pricing in above-average currency debasement for a long time.
But no need to get lost in the conundrum, — operational success is what matters and not having the best theories about what’s happening.
Philoinvestor
Excerpt from the piece:
The US benefitted from almost a century of global dominance. First it was under the Gold Standard — since Bretton Woods broke down it has been under the Dollar Standard (Bretton Woods 2).
But now even the Dollar Standard is breaking down as trust is eroding and the US is walking into insolvency territory. Their deficit is out of control and no one seems to care, in fact it’s accelerating.
This crisis of confidence is pushing us out of the Dollar Standard and towards the NO STANDARD territory — benefitting Gold in the process.
There are no guarantees as to how this plays out, as it depends on the decisions of important actors that affect the process. There are still many questions that remain unanswered but we will answer them as we go along.
When the Gold Standard broke, Gold exploded in value. Now that the Dollar Standard is breaking — real assets are exploding in value. I called this the NO STANDARD phase of the post-Bretton Woods life cycle.
The Opportunity
The opportunity here has been the Gold and wider Precious Metals trade which we covered across Philoinvestor and executed via Breakout by Philo issues.
In my view, going forward the opportunity remains in shorting fiat currencies (it’s all relative), shorting Western sovereigns and going long Precious Metals — all opportunistically and with a proper trading mindset.
An AI Reality Check
Core worry: The market is starting to ask questions, this could lead to major re-ratings.
- AI capex is real, AI ROI is mostly not
- The whole process was being underpinned by visions of AGI
- And an existential/supremacy race between Big Tech and East Vs West
- The market is no longer blindly buying the “build now and monetize later” story
- Oracle was an early tell, so are moves in CoreWeave and Nebius
- This narrative can move up the stack: Hyperscalers, Big Tech, Semis
- 2026 may be the year AI shifts from a narrative-backed trade to a show-me story
The AI boom/bust process has been the biggest influence in markets since late 2022. And the AI trade has worked marvellously for those that have been long, until recently.
Our warning on the ROI in AI investments like Data Centres etc. from October ‘24 finally got picked up by the market just a few months ago. Satya himself admitted that the ROI needs to be proven at some point… Read the two part-series here.
We wrote more on the theme with the AI Tech Playbook, and after mapping the whole stack — we highlighted risks in investing in it. We touched on themes like creative destruction and a “race to the bottom” in the broader AI sector — and mentioned the rise of Custom Silicon (e.g. ASIC/TPU).
But things only turned right around the time we published the first part of The Central Bank of NVDA series, as we recently saw some catalysts coming out of the Oracle move post-Open AI deal. Created a video to discuss it here.
Philoinvestor
You could argue ORCL repriced down because of debt fears and not because the market isn’t believing the AI trade anymore — but for me they go together.
The greatest misconception now is this.
“Big Tech like MSFT, GOOG and AMZN are very well capitalised and so they are safe from the AI Trade turning south. It’s only the weak players like ORCL and CRWV that are going to suffer.”
Philo is fading this view.
While ORCL and CRWV are fragile because of financial leverage — MSFT et al. are fragile from operating leverage and their shareholders revolting due to excessive value destruction!
These names are collectively worth north of $10 trillion right now — the whole world relies on them keeping their value and growing it. Or do you not remember what happened to META post-Metaverse flop?
The Big Tech trade can turn, and it will on a dime — those names are already overpriced anyway..
The Analogy
Many historical analogies have been used to explain what’s happening with AI today — railroads, the telecom buildout, Dot Com etc.
—> And they all have some analogy to the AI Boom of the early 20s, but I choose two analogies that fit the setup in AI today: Railroads and the Reichmann Brothers (i.e. think levered property empire going down).
1) Railroads
On the one hand railroads isn’t a great analogy because a railroad lasts 100 years while GPUs last 5 years at best!
The railroad analogy that does match with AI today is the massive capex spend that ends up bankrupting those who pay for it because the capex is front loaded while the returns are back loaded!
2) Levered Mismatch of Projections
The second analogy is the Reichmann Brothers who infamously went bankrupt as their Canary Wharf was underperforming and a crisis hit causing funding to dry up.
The Reichmann’s were over-levered and overextended themselves with a major project: that of Canary Wharf. The massive debt on their balance sheet and reality falling short of their rental income expectations + a crisis in property markets was the perfect storm that caused their demise.
Refer to Wake Up Call for high-quality memes — but let me repeat one here. Money-losing Open AI (see below) is consuming all that compute, and keeping the hyperscalers going — which by extension keeps the picks and shovels trade going.
And as I try to show in the Spidermen meme above — $1 in actual revenue ends up being reported as $5, $7 or even $10 across all the players in the space.
And so interventions by Trump 2.0 in the form of Stargate, indirect funding and/or facilitating deals so Open AI can keep going are just short-term measures so
Atlas can keep holding everything up.
When Open AI’s funders are no longer willing to burn cash is when we will have a reckoning.
Personally and in the end, I don’t think Open AI will make it and Masa Son will be known as the man who has burned the most capital in the history of investing.
As for the opportunity of the AI boom going bust: beyond the obvious shorting I would say it’s the opportunity to pick up solid names from the ashes and buy the beneficiaries of the next wave of AI on the cheap.
Note: That would be primarily on the interface and application layers.
Philo 🦉
