Can AI Save Us From Inflation And Make US Rich 1/2?

Why Does It Feel Like Global Markets Are Stuck in a Blender?

From volatile trade disputes to wild market swings, the predictable formulas we used to rely on just don't seem to work anymore . What's really driving this persistent chaos, and why does the term "volatility" seem to be the only guaranteed keyword for the next few years? Let's dive into some of the powerful forces reshaping the global financial landscape, focusing specifically on geopolitical tensions and the surprising impact they have on asset prices.

Is Geo-Politics the New Engine of Market Volatility?

Here’s the thing about modern markets: they don’t just move based on whether a company reports good earnings or if the GDP is strong; they are increasingly reactive to sudden, unexpected political friction . When the geopolitical rulebook gets tossed out, uncertainty spikes, and investors instinctively pull back. Remember last year? The US, feeling confident about its own robust economic growth (some even predicting 5% Q4 growth!), started using tools like tariffs and trade threats—sometimes just days after agreements were inked—to achieve political goals, like negotiating for Greenland . This aggressive, unpredictable use of trade policy, often termed Trump 2.0, isn't just about localized skirmishes; it reads across the entire global risk profile.

What's particularly startling is how quickly investor sentiment can flip. I've found that just one unexpected political move can cause a 180-degree shift in market confidence . For instance, in Q1 of last year, the prevailing narrative was "American exceptionalism"—that the U.S. was the only game in town due to its dominant growth . Money poured into U.S. assets. But by Q2, following tariff disputes and trade volatility, the conversation suddenly shifted to "Sell America," causing significant market tremors as investors dumped assets . This reaction shows that when a major player like the U.S. disrupts the established "rule-based" trading system, countries lose the trust needed to sustain stable commerce, leading them to question the safety of U.S. assets themselves, which is a massive paradigm shift . This brings us to a potentially surprising conclusion: volatility isn’t a byproduct of political action; sometimes, it’s the intended tool.

This heightened instability forces major economic blocs, like the Eurozone, to think defensively. If they can’t rely on stable trade with the U.S., why keep accumulating massive amounts of U.S. dollars and Treasury debt? This fear isn't just theoretical; it moves capital. We saw reports of Danish pension funds starting to divest U.S. Treasury holdings, even if the initial $100 million sale was small in the grand scheme . However, behind that token sale lies a massive threat: the Eurozone collectively holds about $10 trillion in dollar-denominated assets, and if they start a mass sell-off to retaliate against trade disputes, it could create capital market shockwaves that dwarf simple tariff effects . Essentially, when trade uncertainty spirals, it escalates quickly into capital market instability, making volatility the defining characteristic of our current era.

Can AI Save Us From Inflation (And Make Us Rich)?

Now, let's pivot from the doom and gloom of geopolitics to something truly transformative: technological innovation, specifically Artificial Intelligence. Major institutions like BlackRock and JP Morgan are betting big on AI, suggesting that its macroeconomic impact will really start to manifest this year . For those of us who look at macro trends, we know that genuine technological leaps—like the Industrial Revolution, the Internet, or the smartphone—don’t just create new products; they fundamentally change the entire economic structure from the bottom up.

The core impact of AI revolves around one beautiful economic concept: productivity innovation. Usually, when growth is strong, demand surges, causing inflation, which forces central banks to hike rates to cool things down . But productivity innovation flips this script; it generates strong growth while simultaneously stabilizing or even lowering prices . Think about the smartphone: in the early 2000s, brick phones were expensive luxury items . Once supply side innovations made them cheaper (around $100), massive global demand was unlocked, creating new jobs, massive supply chains, and strong growth without rampant inflation . AI promises this same incredible scenario: strong growth paired with low inflation—a scenario so rare it’s considered "truly beautiful" in economics.

This beautiful scenario isn't unprecedented. It’s what former Treasury Secretary Mnuchin referenced when pushing the Fed for rate cuts, pointing to the 1990s as a precedent . During the initial internet revolution, Fed officials feared inflation and wanted to hike rates, but Chairman Alan Greenspan resisted, recognizing that the wave of productivity was stabilizing prices despite the strong growth . Greenspan was ultimately right, and that period saw robust expansion. The challenge now is that current inflation figures look high, but the argument from the administration is that much of that is temporary, tariff-induced noise—not a fundamental problem with an overheating economy . If the optimists are right, we could see an incredible combination: 4% growth and 1% inflation, a truly golden age for markets .

Is the AI Boom a Bubble, or Just a Great Business Model?

The big question lingering over this high-growth technology, of course, is the "B" word: bubble. People keep comparing the AI boom to the dot-com era, wondering if this enormous influx of capital and enthusiasm is sustainable . Here's a key distinction: the leading AI companies, particularly the "Magnificent Seven" (M7) and chip giants like Nvidia, aren't just selling ideas; they are making staggering amounts of money right now.

Consider the margins: Nvidia's operating profit margin is currently over 50%, and the M7 average is above 20% . To put that in perspective, many thriving retail and distribution companies rarely break 5% operating margins . These companies are generating immense amounts of cash, which raises an interesting dilemma: should they return this cash to shareholders via dividends, or should they reinvest every penny to expand their infrastructure (i.e., open more "branch stores") ? Since growth is paramount, they choose expansion. But here is the surprising counterintuitive fact: even with those record profits, rapid growth often means they still don't have enough cash on hand.

This leads to increased borrowing. The current trend is that these high-growth AI giants are dramatically increasing their debt and issuing bonds to fund their expansion plans . While borrowing to invest in high-margin growth is a smart move, it absolutely hinges on the technology delivering on its promise this year . If the market's high expectations for AI are not met by tangible, revenue-generating reality in the near future, then the rapid borrowing and inflated valuations will look less like smart investment and more like a classic bubble about to pop. The pressure is on for AI to demonstrate commercial viability and profitability, not just potential, in the coming year.

Why Are Long-Term Interest Rates Going Up When the Fed Cuts?

If you took an economics course, you likely learned that when a central bank cuts its policy rate (the short-term rate), the long-term interest rates should generally follow suit. Yet, what we often see today is the opposite: the Fed lowers the short-term rate, but long-term Treasury yields often rise . What gives? It’s a classic case of supply and demand reflecting economic outlooks, but it also reflects deeper, more concerning global shifts.

The standard "textbook" explanation for this phenomenon is surprisingly positive: economic confidence . When the Fed cuts short-term rates, it signals they believe the economy is ready to stabilize and grow . If companies and individuals believe the economy will be stronger, they want to borrow money for long-term investments—think mortgages, factory building, and infrastructure . This rush of demand to borrow over the long term (which involves selling long-term bonds) naturally pushes the long-term interest rates up, even if the short-term rate has dropped . In this scenario, rising long-term yields simply reflect a strong U.S. economic outlook.

However, the surprising reality is that this long-term rate hike isn’t confined to just the U.S. Long-term bond yields are also rising in the Eurozone and Japan . Are those economies equally robust? Probably not. This suggests that growth is only one of four major factors driving long-term yields higher . The other three factors introduce significant risk: rising long-term inflation expectations, massive fiscal deficits (like those seen in France and Japan), and, crucially, the new global uncertainty . As global trade ties fray due to aggressive political maneuvers (like the Greenland tariff threat), countries are rethinking their reliance on U.S. dollar assets . When international demand for U.S. Treasuries falls, their price drops and their yield rises . This change in the world order—away from U.S. debt and perhaps toward assets like gold—is one of the most fundamental forces pushing long-term rates higher, fundamentally shifting global financial stability.

What Should Investors Expect from Central Banks Moving Forward?

So, after considering volatility, AI's potential, and the complex mechanics of interest rates, what does this mean for your money? We must manage our expectations regarding central bank action. Historically, markets tend to get overly optimistic about how quickly and aggressively the Fed will cut rates. For instance, in recent years, investors anticipated the Fed would cut rates multiple times, yet the reality was often fewer cuts, or sometimes, even hikes.

Here's the key takeaway for investors: Central banks will likely cut rates less than the market expects and later than the market wants . Why? Because they are intensely worried about letting high inflation become entrenched . They would rather wait and ensure price stability is absolutely guaranteed before opening the monetary spigots. This caution means that the "Everything Rally" of previous years—where virtually all assets soared due to the anticipation of easy money—is unlikely to repeat itself frequently . This year demands selectivity and a keen eye on fundamentals, because the old safety net of boundless liquidity won’t be there to catch every asset class. Staying prepared for persistent volatility, while keeping an eye on the transformative power of AI, is the best strategy moving forward.