War, AI, private lending, and the labor market will not destroy the US economy.

Author: Anthony J. Pompliano, Founder and CEO of Professional Capital Management; Translated by: Shaw & Jinse Finance

Markets are experiencing severe volatility, and investors are scrambling to find solutions. The U.S. economy is swinging like a pendulum between a potential golden age and fears of the next Great Recession.

So, what exactly is causing this turmoil and uncertainty? It's not caused by a single factor, and that's precisely what makes the current situation unique. The dot-com bubble was driven by the tech industry, the global financial crisis was triggered by an over-leveraged housing market, but right now, we can point to numerous economic threats from all sides.

Bloomberg recently published a great article titled "Markets are simultaneously impacted by war, AI stress, and credit cracks." The three journalists who wrote this report stated: "Regardless of Trump's current stance, his decision to attack Iran has injected a new and potentially prolonged shock into the global economy. Just recently, investor confidence seemed unshakeable. This has exacerbated the most severe market volatility since last April, when Trump announced global tariffs, causing sharp fluctuations in asset prices. Iran is only part of the problem. Artificial intelligence is emerging as a disruptive technology that can both create wealth for shareholders and creditors and wipe it out in an instant. The number of non-performing loans is also increasing in the booming private lending industry. The US job market is weakening. Furthermore, persistently high inflation is casting doubt on whether the Federal Reserve can resume interest rate cuts—and may even force the European Central Bank to begin raising rates." I now agree with Bloomberg's assessment of what most investors should be watching: **artificial intelligence, war, private lending, and a weak labor market.** My disagreement lies in inflation. There are actually two ways to look at this aspect of the U.S. economy. First, real-time inflation data shows that the national inflation rate is currently below 1%. This is mainly due to declining prices for home prices and other everyday necessities for Americans. Goods and services feel expensive because past inflation has driven prices up, but at the same time, the current inflation rate may be low, meaning prices are not accelerating. However, this topic has been discussed extensively. What I find more interesting is that each of the potential threats listed by Bloomberg is actually a deflationary factor that would cause inflation to fall. For example, private lending has been growing in recent years as financial institutions lend to small and medium-sized enterprises. This opportunity arose because the Dodd-Frank Act restricted most banks' access to easy loans to these businesses. (Note: The Dodd-Frank Act, formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a U.S. federal law passed on July 21, 2010. This act aims to protect consumers, address systemic risks in the financial industry, and prevent a repeat of the 2008 financial crisis.) Given the emerging cracks in the private lending industry, we must recognize that any form of market downturn will lead to severe deflation. In the event of defaults, redemptions, funding restrictions, or forced deleveraging, we will see lenders stop issuing new loans, existing loans be restructured or written down, and businesses lose access to refinancing. Since U.S. economic growth largely depends on credit expansion, if these problems begin to emerge, reduced corporate investment, hiring freezes or layoffs, decreased M&A activity, and slower economic growth will be inevitable. This is also known as deflationary pressure! However, this is not a problem unique to the private lending sector. A weak labor market leads to deflation because wages are the largest source of income and demand in the economy. When the labor market is weak, income growth slows, reducing the consumption and pricing power of the entire system. This further exacerbates deflationary factors! We know that artificial intelligence has a strong deflationary effect because it eliminates inefficiencies in the economy, enabling businesses to generate more profit with fewer employees. Elon Musk believes that the rise of artificial intelligence will impact the US economy like a supersonic tsunami, so powerful that it will overwhelm the government and force it to urgently print more money. No one can predict whether this will happen as quickly as he predicts, but the deflationary effect of artificial intelligence is undeniable. This leads to the issue of war. Typically, war triggers inflation because governments need to borrow heavily to pay for war expenses. However, if a war is short-lived and doesn't escalate into a protracted conflict, inflation may not occur. Given the current government's overall message of a swift resolution, I'm not overly concerned that the current situation in Iran will trigger severe inflation and consequently impact the economy. This leads to my prediction of what will happen next. First, **regarding monetary policy, I believe the interest rate cuts will be larger than most people expect.** If the US economy experiences deflationary pressures, this will force the Federal Reserve to act. However, we also know that Federal Reserve Chair candidate Kevin Warsh has explicitly stated his belief that interest rates should be lowered, so I don't think he will contradict himself publicly after taking office. Second, asset prices have shown remarkable resilience this year. The US extradited Nicolas Maduro from Venezuela, negotiated greater access to Greenland, launched a massive bombing campaign against Iran, bombed drug cartels in Ecuador, and now threatens to overthrow the Cuban regime; yet, the S&P 500 and Nasdaq have both fallen less than 2% year-to-date. You might think the stock market should have plummeted, but it hasn't. Gold prices have risen 20% during the same period, and given the current economic climate, I expect asset prices to continue performing well. Software stocks and Bitcoin have struggled, appearing to move in a highly correlated manner. Finally, I believe we will witness a massive wave of innovation that will drive GDP growth. I still believe the potential of artificial intelligence and robotics is severely underestimated. These technologies will permeate every aspect of our lives, and we can barely comprehend the depth of their impact. As innovations emerge, we will enter a period of exponential growth. Robots will help create more robots, and AI software will begin writing more software. When we reach that escape velocity, my greatest wish is that we will usher in an era of abundance driven by a golden age of economic prosperity. While this is not inevitable, I am confident it will happen.