CRACKPOTS #39: MONITORING THE SITUATION (Patreon)

Hey, it's Liz. I can't stop saying Monitoring the Situation. I'm monitoring the situation. No one really knows whats going on but everyone is monitoring the situation. I love to monitor the situation. I'm always monitoring the situation. I need to get back to monitoring the situation. Here's some monitoring that I've been doing. No forecasts, no calls, just things I'm watching and trying to metabolize in real time before they full rot. The vibes aren't great. The numbers are confusing. And yet: all-time highs. Everyone is deeply calm and completely insane.

Schrödinger’s TACO

I want to try and tease out a concept I'm kicking around called Schrödinger’s TACO. By now, everyone should be familiar with the base case: Trump Always Chickens Out. FT's Robert Armstrong gets credit for naming it back in May, though fintwit had been joking about it long before it became canon. The pattern is simple: Trump announces some deranged policy—tariffs on allies or critical commodities—markets sell off, panic sets in, and then, like clockwork, someone walks it back. Sometimes it's Bessent, sometimes it's Karo Leavitt. Most of the time it's Trump himself insisting he never said anything at all. The result is the same: markets snap back, the trade is obvious, the cycle reboots. Trump Always Chickens Out.

The most recent iteration was the Powell firing memo—an allegedly real draft order removing the Fed Chair and ending the last shred of central bank independence. The memo hits the wires, yields spike, the S&P pukes, the dollar crashes. An hour later, it's declared fake news. Not real, never happened. By the close, we're flirting with all-time highs again. The TACO cycle in two hours flat: threat, wobble, reversal, cheers.

So the trade writes itself: buy the dip, hedge the drama, assume the bailout. There's always a tweet, always a phone call, always a shadow Fed put just beneath the press release. And for a while—maybe too long—that worked. It worked because the market still believed in consequences. It worked because each threat still carried the possibility of follow-through. But now there is a problem: everyone knows TACO. It's been months of TACO. Your mom knows about TACO. It's in spreadsheets, it's in the bloomberg terminal, it's embedded in the risk models and front-run.

But once TACO becomes consensus, it stops being functional. If markets rally on the expectation of a walk back, then there's no real sell-off. And if there's no real sell-off, there's no real pressure. And if there's no real pressure, there's nothing to chicken out from. The expectation of reversal prevents the conditions required for the reversal itself.

So we have a Schrödinger’s TACO: the bailout exists, the bailout does not exist. It's priced in, and then it happens—but only as choreography. Markets wobble, someone walks it back, the S&P rallies. But everyone expects it, everyone pre-positions for it, so the cycle completes without impact. The market never truly breaks, which means the reversal never really matters. It performs function without meaning: the bailout arrives on time, and still, nothing is saved.

How can you test TACO if you can't actually let the market fail? If everyone already knows the next plays of the game? TACO is real—until you look too closely. And by then, it might be too late.

The central paradox is the expectation of collapse is what prevents collapse. Everyone believes if things get bad enough, Trump will fold or the Fed will step in—so no one lets things get bad enough. Risk is hedged, dips are bought, volatility is dampened in real time. The system never breaks, so the bailout never really arrives. And because it never really arrives, we keep screaming upward—never actually learning if it still exists.

Don't Say It, I'm Gonna Say It: The Case for St*gfl*ion

I don't know if you noticed but you are more than 10% poorer than you were 6 months ago. Unless you trade fx or send money overseas, you may not have noticed your relative decline. The dollar has been quietly sliding, in fact the steepest drawdown to the start of the year since 1973, a year famous for nothing historically destabilizing happening.

Some people are calling this de-dollarization but I don't think that's quite right. No one is exiting the dollar entirely. Trade is still overwhelmingly settled in USD and Treasury auctions still find buyers. But what's happening now—quietly, steadily, and across the margins—is diversification. Central banks, sovereign funds, institutional allocators: they are all rebalancing. Out of dollars and into .... basically anything else: euros, yen, yuan, gold, lol bitcoin. The whole point is to reduce risk, specifically American risk. Thats all thanks to multipolar trade networks and geopolitical instability, not to mention the continued and relentless weaponization of the dollar—and then there's the funny business between Trump and the central bank. Not great for the rest of the world. What all this does is weaken demand for the dollar on the margin, especially outside core energy trade.

This then has its own set of rolling consequences: import prices rise (foreign goods cost more), commodities tick higher (they're priced in dollars). A kind of fun house mirror wealth effect kicks in—not off wages or growth, but off foreign inflows and relative discount. You get risk-on flows into US equities, chasing all time highs and the rich feel richer when they look at their little net worth apps so they spend. Demand increases. And what you get is inflation, driven not by earnings and growth but by monetary debasement and discounted capital inflows. The next step here is thinking about how this squares with AI hitting white collar work, because that’s already happening too, just slightly out of frame.

Because while capital piles into equities and housing and anything else that might survive the next rate cycle, it’s also being explicitly decoupled from labor. Not just low-wage labor, but the kind of work that was supposed to be safe: software engineers, copywriters, analysts, entry-level law, finance, design, anything upstream of language. The same AI trade that’s driving market euphoria is also quietly deindustrializing the professional class. Reddit threads are full of mid-career developers telling each other to sell vested shares and stack cash. No one knows where the work is going or what the new floor looks like. And so the labor market, especially for white collar, is freezing up just as asset prices melt up. That’s the stagflation setup: low growth, rising prices, productivity illusions everywhere. The market isn’t where it's at because Trump has mastered some 4D tariff strategy. It’s where it is because capital still thinks there’s a chance AI is real enough to justify the multiples. That belief alone is sustaining the rally, even as the humans behind it are cashing out, downsizing, or getting quietly offboarded.

STACY ABRAMS OOPSIE

I've was thinking about Stacey Abrams tweeting something written by ChatGPT, not because it was shocking but because it wasn't. It's been some time now, the almost undetectable creep of AI into everything. I can't even believe in some future-shock event when it's already here, woven into the fabric of our everyday lives, only marginally noticeable like background noise: dull, constant, corrosive. Every headline reads like it might've been written by a bot. Every social media account feels vaguely synthetic. You start second guessing the texture of a sentence, the cadence of a reply. The economy has turned us all into paranoid forensic linguists, forced to parse whether we are speaking to a person, a prompt or a ghost.

And then, of course, we do the work for the models. We say aha, there, that's a bot—I found it—the quote tweet was written by ChatGPT, not the politician. The politician, of course, is just an avatar, an earlier form of internet fakery, but that doesn't matter to me, nor does it matter that the account is manned by some underpaid comms staffer running five quote tweets deep on three hours sleep. For me to feel smug, I need to pretend it's real. I need to pretend it matters. I need to act like I've revealed something about people in power, like catching the bot behind the message restores meaning to the feed.

We know it doesn't. Maybe that's why online feels so cheap now. It's turtles all the way down—models mimicking staffers, mimicking candidates mimicking sentiment, all talking to or at least at each other but mechanically incapable of listening. There's no original, just latency. Just loop. AI is no longer the anomaly, I am. This is how the internet feels to me now. Not because I'm special or resistant but because I'm still engaging with all of it as if it's real, as if there's something to still hold onto. But the system doesn't care if anything is real so long as it circulates. We keep pointing, keep decoding, keep calling things out like it matters. Look, there's the glitch. But we're wrong: the glitch is you and me. I know Dead Internet Theory is played out but it's hard to see how the system isn't designed to complete that arc.

GLOBAL AI SUPER WAR 3000

I noticed no one really talks about GDP anymore, or even fiscal policy. Is there fiscal policy? Not really in any meaningful sense. Instead we have AI. Not as technology, not even as industry, but as geopolitical shorthand: for spending, for securitization, for escalation. AI is what you invoke now when you need to explain why you're pouring billions into something you can't define. It's not a plan, it's a front. It's AI.

The US has Nvidia and OpenAI. China has Baidu and Deepseek. Europe has .... some promising press releases. Japan is building something. Korea is printing. Actually, everyone is printing—but only if it can be routed through AI. You can't propose stimulus, but you can propose "compute sovereignty." You can't sell deficits, but you can sell "alignment." Every country is on the same path: subsidize fabs, stand up domestic LLMs, harden the stack, hoard the chips. I'm not sure if anyone needs the stuff to work, they just want to not be the last one standing without a model to point at.

AI has replaced not just fiscal strategy but geopolitical vision. It is the new shorthand for national power, national competitiveness, national legitimacy. The new cold war is being staged through the language of inference speeds and GPU clusters and frontier model safety protocols, but it's still a cold war. A race for control over trade routes, resource flows and the semi-automated production of ideology.

States are moving fast because movement itself is the strategy. There is no coherent endpoint. The future is not being negotiated, or even forecasted. It's being brute-forced, with money and panic and industrial contracts no one will ever read. We are not preparing for AI, we are are enacting it. Not the thing itself, but the political conditions that justify it, a continuous state of exception draped in code.

What's being built isn't intelligence but something more akin to infrastructure, for stuff no one wants to name yet: tariffs, blockades, defense budgets, speech controls, platform consolidation. A hardening of the stack, yes, but also the state. And not even as a response to any clear threat, but as a precondition for what comes next. AI will come to carry the narrative burden of governance. It can absorb money, justify escalation and flatten dissent under the weight of inevitability. Or at least that's the bet: it doesn't have to work, it just has to hold the line.

THE FINAL COUNTDOWN

Everyone keeps asking me why the market is ripping. The S&P at all-time highs, bitcoin over $120k, Nvidia at $4T. It's become such a common question that my only response is: you're not supposed to ask.

It's starting to look less like a market rally and more like a transfer. The last wave of retail liquidity flowing into inflated assets most people can no longer afford to touch except at the absolute top. For younger people, there are no good choices left. You can buy the dip at the highest valuation in recorded history. You can YOLO into crypto and hope you're not the last one in. You can try to get one of the 20,000 internships at Google or Blackstone that still pays rent in cities where jobs exist. Or you can sit out, get mad, and start looking for someone who promises to take it all away.

The math is bleak. Everyone who got in early—whether it's real estate, equities, ETH (ok maybe not ETH), whatever—is sitting on decade-plus earnings they didn't earn, just timed. And now the structure is being held up by nothing but flows. No one cares about earnings or growth but about keeping prices high enough to make exit possible.

I saw a news item: they want to open up 401ks to private markets. lol. After years of lobbying, the floodgates are being loosened. The idea is that retail investors—especially young workers who've been priced out of traditional accumulation—should now have access to "growth opportunities" in private equity, venture, infrastructure and credit. In practice, it's a final pump. Exit liquidity for assets that institutional holders can no longer offload to each other.

It's easy to call this corruption: it is, but it's also worse than that. Corruption implies deviation from the norm, but all of this shit, this is now the norm: the planned expropriation of a generation in order to make the system's numbers line up. The fact that it could happen through tax advantaged retirement accounts is just a bonus.

I do not believe any of this is accidental or a miscalculation. I think that everyone involved knows exactly what is happening—they just don't think there is another option. Money finds its flow. You either believe in the line going up, or you believe in your ability to sell before it doesn't. Either way, someone is buying at the top.

The other side of this is that all that's left is to get angry. I have to believe that eventually people will: at the rigged pricing, the institutional theft, that access to ownership is at a terminal multiple. We have to get angry before our brains atrophy from TikTok AI goo on demand. This is usually when people start to look for those that want to seize things, who talk about capital controls, wealth taxes, asset forfeiture. Not out of ideology but because it feels fairer than being asked to play the game from the worst seat at the table. This is the flipside of ATH: the rage accumulates too.

Debt Reckoning: Has the Treasury market started to crack? Mary Childs, Harpers

The financial system is much safer now because all parties use the safest-possible collateral. But how safe can such a collective dependency be? If everyone has promised their Treasuries away, and Treasury prices fall, then everyone suddenly needs more. This could spark a spiral, the kind we maybe saw glimpses of after Liberation Day and that seems, at best, difficult and expensive to stop. “We’ve rebuilt our entire financial system’s regulatory environment after the financial crisis, and a fundamental linchpin in that whole system is that the Treasury market functions well,” Meli told me. “If it doesn’t function well, this system that we built is on a house of cards.”

Who Benefits From the Dollar's Dominance? An Interview with Mona Ali, Jacobin

A really wonderful explainer of everything from treasury markets to USD dominance, trade imbalances, Liberation Day whiplash and more.

Adam Tooze Climbs the China Learning Curve, Sinica Podcast w/ Kaiser Kuo

Tooze goes full China guy on this. Some choice quotes:

"This is the biggest laboratory of organized modernization that has ever been or ever will be. All of our previous social theoretic theorizing was a prelude to this. The industrial history of the west was a preface to China's industrial history...this is the material dethroning of the west as a central driver of world history. This is really what the provincalization of the west really looks like."

Keep monitoring.

Yours,

Liz