Why War, AI, Private Credit and A Soft Labor Market Won't Ruin The US Economy

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There was a great article recently in Bloomberg titled “ Markets Buffeted by War, AI Stress and Credit Cracks All at Once. ” The three reporters who put it together wrote: “Trump’s decision to attack Iran, no matter what he may now declare, has injected a new and potentially long-lasting shock into the global economy at a time when investors were already grappling with an array of forces threatening to upend investor confidence that, until recently, had seemed bulletproof. That’s fanning the most intense market volatility since April last year, when prices were roiled by Trump’s unveiling of global tariffs. And Iran is only part of the story. There’s also the emergence of AI as a disruptive technology capable of suddenly wiping out, as well as creating, wealth for shareholders and creditors. There are the soured loans that are starting to pop up in growing numbers in the booming private-credit industry. There’s the softening of the US job market. And there’s the stubbornly high inflation that’s casting doubt on whether the Federal Reserve will be able to resume cutting interest rates — and possibly even force European central banks to start raising them.” Now I agree with Bloomberg’s assessment on most of the things every investor should be aware of: AI, war, private credit, and a soft labor market. Where I disagree is on inflation. There is really two ways to think through this aspect of the US economy. First, the real-time measurements of inflation are showing that current inflation levels are under 1% nationally. This is largely being driven by drops in housing and other material aspects of an American’s daily life. Now remember, products and services can feel expensive because past inflation drove prices really high, yet at the same time current inflation can be low, which means prices are not getting worse at an accelerated rate. That conversation has been beat like a dead horse though. What I find more interesting is that each of the potential threats outlined by Bloomberg is actually a deflationary development that would lead to lower inflation. For example, private credit has been on the rise as financial organizations lend money to small and medium sized businesses in recent years. This opportunity opened up because of the Dodd-Frank Act which prevented most banks from lending to these businesses in an easy way. 🚨Beating the Bear Market with Anthony Pompliano & Arch Public I am hosting a webinar with Arch Public this Thursday @ 2pm ET where we will discuss how to turn today’s volatility into the precise moment high-net-worth investors build their strongest long-term positions. If you are an investor and want to learn different strategies on how to navigate the downside volatility in today’s market, this webinar is for you! Register Here So now that cracks are starting to show up in the private credit industry, we must recognize that any sort of market downturn in those activities would be highly deflationary. As we see defaults, redemptions, gating, or forced deleveraging, we will see Lenders stop making new loans, existing loans will get restructured or written down, and companies will lose access to refinancing. Because the US economy relies on credit expansion for a good portion of growth, if these issues start to materialize then you can expect reduced business investment, hiring freezes or layoffs, lower M&A activity, and lower economic growth. This is also known as deflationary forces! This is not a story exclusive to private credit though. A soft labor market is deflationary because wages are the largest source of income and demand in the economy. When labor weakens, income growth slows, which reduces spending and pricing power across the system. More deflationary forces! And we know AI is highly deflationary as we squeeze ineffiencies out of the economy, which allows companies to produce more profits with fewer employees. Elon Musk believes the rise of AI will be a supersonic tsunami that hits the US economy with such force that the government will be overwhelmed and need to start printing more money in an emergency fashion. Who knows if that will happen as quickly as he believes, but no one can argue that AI is not deflationary. And then this brings us to war. Normally this is an inflationary force because governments need to borrow a significant amount of money to afford the war, but the inflationary forces may never materialize if the war is short and doesn’t become a prolonged affair. Given that all the communication coming from the current administration is the goal of a short war, I am less worried about the current Iran situation creating meaningful inflation that causes issues in the economy. So this brings me to what I think is going to happen from here. First, when it comes to monetary policy, I believe we will see more interest rate cuts than most people are expecting. If we get deflationary forces in the US economy, that will force the Fed’s hand. But we also know Fed nominee Kevin Warsh has explicitly said he believes interest rates should be lower as well, so I wouldn’t bet money that he says one thing publicly and does another thing once he is the Fed Chairman. Second, asset prices have been incredibly resilient this year. We violently extradited Nicolas Maduro from Venezuela, we negotiated more access to Greenland, we bombed the hell out of Iran, we have been bombing narco terrorists in Ecuador, and now we are threatening Cuba with regime change, yet the S&P and Nasdaq are both down less than 2% year-to-date. Just look at these charts from Public.com - you would expect the stock market to be substantially lower, but that is not the case. Gold is up 20% during the same time frame and my guess is that asset prices will continue to do fairly well given the economic backdrop. The tougher areas for asset prices have been software stocks and bitcoin, which seem to be trading in lock-step with each other. And lastly, I believe we will see an immense wave of innovation that drives GDP growth higher. I still think people are drastically underestimating the power of artificial intelligence and robotics. These technologies are going to be pervasive throughout our lives and we barely understand how profound the impact will be. As the innovations start to appear, we should enter a zone of exponential production. Robots will be helping to create more robots. AI software will start writing more software. As we hit that escape velocity, my greatest hope is that we are able to claim victory on an age of abundance that is driven by the economic golden age. There is no promise this will happen, but I am optimistic that it can happen. Have a great day and I will talk to everyone next time. - Anthony J. Pompliano Founder & CEO, Professional Capital Management How Bitcoin Millionaires Use Their BTC Without Selling It Shehzan Maredia is the Founder & CEO of Lava, a bitcoin-backed lending platform that allows users to borrow against their bitcoin without selling it. This conversation was recorded live at Bitcoin Investor Week in New York. In this discussion, we cover why many bitcoin holders are borrowing against their BTC instead of selling it, how everyday workers have quietly built wealth by consistently saving in bitcoin, and why bitcoin-backed loans are increasingly being used to fund major purchases like homes. We also discuss stablecoins, global access to dollars, and the future of bitcoin-native financial services. Podcast Sponsors Figure – True DeFi Democratized Prime to earn ~9% APY! They also have the lowest industry interest rates at 8.91% with 12 month terms! 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