Iceberg. Dead Ahead.

The gaslighting has already begun. President Trump is taking every opportunity to blame Joe Biden for any negative economic news. I said a year ago that Donald Trump would destroy the economy in a second term after I read Project 2025. But I thought it would actually take his full term to do it. Now it’s pretty clear that it’s only going to take him about six months. What made me say that last year is that it was clear he was going to enshrine his original tax cuts while gutting entitlement programs and social safety nets. Eventually, he would break the working class and what’s left of the middle class. But there was something else.

My central critique of Biden’s “bottom-up, middle-out” strategy was that it would take ten years to fully realize the benefits of it—by design—and that those benefits would flow largely to the corporate class and that the working class was already in crisis. It just wasn’t adding up. But knowing that at best it would take ten years to fully realize a return on investment from the Inflation Reduction Act and the American Rescue Plan, then the one thing that could derail it was Trump dismantling all of it. And so here we are.What I didn’t bank on was the Trump economic plan that lives outside of Project 2025. This whole tariff regime nonsense. I’ve listened to every policy rationale they’ve offered and have come to the conclusion that this is the stupidest group of people we could possibly have in charge of the economy. The only funny thing is that even they are beginning to realize how badly they screwed this all up, so now they’re covering their tracks with yet another big lie—that it’s all Biden’s fault. Now there are two things you have to do in order to sell the lie, something Trump has mastered. First, you have to believe it. Second, there has to be a kernel of truth in it, no matter how small.

So things on the surface are bad enough and we can see it coming. But what really worries me is what’s below the surface. There’s a crisis brewing in the financial markets that could be far more catastrophic than the Great Recession.

Taking Stock

There is so much at play right now and the temptation is to isolate certain data points to try and make sense of the global economy. I’ve done it before, even recently, by looking at ISM manufacturing data, labor participation rates, inventory stocks, core inflation, market inversions and so on. Today I want to take a step back and just talk it out. I find narratives more compelling than charts and graphs anyway. But if you’re interested in charts and graphs, Apollo Global Management just released a report that basically shows just how bad things are going to get and how the economy is going to come to a standstill by the summer.

For context, Apollo has half a trillion dollars in assets under management. They don’t exactly benefit from being a doomsayer. The only chart that shows anything positive, though you could argue it’s not, is that retail consumer spending has held steady thus far in 2025. The downside of that is that credit risk is through the roof, which means people are buying stuff on credit and they’re starting to pay late. Like I said, even the good news isn’t all that good.

Outside of that their data show that new orders are collapsing in manufacturing, and inventories are spiking. Part of that is a reflection of over-orders to get ahead of tariffs, but companies are definitely bracing for impact. CapEx, or the amount companies are planning to spend this year and next year has plummeted. The price of goods for manufacturing is already spiking so it’s only a matter of time before the costs are passed through to the consumer. Every trackable confidence measure from CEOs to consumers is in the toilet. The flow of goods from China has halted, which has already led to a 25% reduction in activity at the Los Angeles port alone. European travel to the United States is down between 30% and 40% depending upon the country. More than 10% of credit card holders are paying the minimum, a 2% increase just this year. Delinquencies are growing every month. And cash home purchases fell off a cliff last month.

So there’s plenty of charts, graphs and data to blow your mind but here’s the overarching narrative theme: Through a combination of intention and incompetence, Donald Trump’s administration is on a path to drive the U.S. economy into a 1930s level crisis, which will pull the world economy down with us. But, and this is a big “but,” his recklessness is an acceleration of a late stage capitalist trend that has been building since the mid 1990s. Now, you hear a lot of these kinds of hyperbolic pronouncements about late stage capitalism, the decline of the U.S. empire, the reordering of the global economy, an end to U.S. hegemony in the world, etc. Big fancy concepts, right?

For the most part I think these kinds of academic conversations about systems and ISMs are lost on people. Not because they don’t understand them, but because they don’t matter in the moment. Debating which stage of capitalism we’re in is horseshit if you’re late on your bills. Don’t get me wrong, I live for these debates, but they border on mental masturbation if we’re not having pragmatic discussions about meeting basic human needs under the system we have now.

But I do want to make some of these bigger concepts more tangible because there are events on our doorstep that relate to them and involve everyone. So permit me to offer a simplistic take on a very broad theme to help explain where we are in the economic lifecycle of U.S. capitalism. For political centrists or fans of capitalism, don’t freak out but I’m starting with a Marxist theory called the Total Circuit of Capital. It’s a straightforward explanation of the capitalist system that shows how capital, or money is used to purchase labor and machinery to modify a commodity into something productive that can be sold. The surplus value generated from this process—i.e. profit—goes back into the capitalist’s pocket to be reinvested and the cycle continues.

Basically, it takes money to make shit and if there’s money left over it goes back to the person who made the investment. That’s the world we live in.

The reason this is an important starting point is because Marx made certain assumptions and predictions about what would happen when those with the money accumulated way more capital than the people making the goods or performing the services. He believed that it would lead to exploitation and social imbalances. On the other hand, capitalists don’t care because they believe in the risk/reward theory that the person putting up the money deserves more than the labor component; labor gets to come along for the ride and should be grateful. Super basic stuff.

Sometimes I think some people forget that Marx wasn’t some figure from antiquity; he was writing during the time of Lincoln, just to timestamp this discussion. So forget about the political systems that surround the debate, the argument over who decides how capital is deployed, who owns the means of production, who deserves the distribution of profit and how we order society around these questions, it is still a timely argument in that it’s only 150 years old. We’re still making this up as we go along.

The “Financialization” Stage

Great political and economic minds have been trying to figure out the best way to settle these disputes and certain predictions have been altered over time through lived experience. The one I want to draw attention to, because it holds great relevance to this moment, is an idea put forward in the 1990s by an economist named Giovanni Arrighi.

Arrighi built on Marx’s Total Circuit of Capital theory by examining certain periods that were dominated by great capitalist powers—the Iberian powers, Netherlands, UK and the U.S. He noted that they all followed a similar trajectory in three distinct phases. The first is the “material expansion” phase where manufacturing and production is growing. Then, at a certain point the economy moves to a service based economy because manufacturers will move the production base away from domestic to foreign markets where labor can be more easily exploited. He calls the final stage the “financialization” phase where profits begin to decline, the service base erodes and capital seeks return through financial markets and increasingly risky and complex instruments. So, in order, the base of a capitalist economy over time will move from manufacturing to service to finance. This very much tracks with Marxian analysis as well. Great.

Not everyone agrees fully with his assertion that this represents the inevitable decline of a hegemonic power or that it’s necessarily the last chapter. Nevertheless, there is generally consensus that the phases themselves are accurate and that the United States is indeed in the financialization stage.

So now, let’s put that in real terms over the past few decades before we talk about what Trump’s team is attempting to accomplish.

In the post World War Two/Bretton Woods era, the United States emerged as a hegemonic global superpower for two reasons. The first is that the wartime economy laid the foundation for a modern industrial economy with wide labor participation. This is distinct from the early stages of industrial capitalism in the 19th Century, which was immature and rapacious to the labor class. We were still very much an agricultural-driven economy though the seeds were certainly planted for what was to come.

The second piece was the reordering of the global financial system on the strength of the U.S. Dollar. The Bretton Woods system viewed the United States as the most stable economy in the world so it made sense to tie the international monetary system to the value of the dollar, with gold as an underlying valuation. The multitude of moving parts and innovations that stemmed from Bretton Woods were all tied to this invention.

So if we’re to use Arrighi as our guide, this was our material expansion phase, which lasted through to the 1990s. One of the hallmarks of this era was a strong labor market with positive economic mobility and capital expansion, especially when Nixon took us off the gold standard and allowed the treasury to flood the market with dollars. Nixon didn’t necessarily divide the pie differently, he just made it bigger.

Marx believed that the capital class would increasingly exploit labor and that worsening conditions and inequality would cause the working class to revolt and ultimately take back the means of production. Again, an over simplification. But theorists as early as Rosa Luxemburg correctly predicted that capital would simply flow out of domestic markets and begin exploiting labor in other markets. This would lead to dislocation among the working class that would ironically prevent them from rising up. That’s exactly what happened, which brings us closer to what Arrighi describes. The increase in capital and growth of foreign markets and favorable trade agreements gave U.S. firms access to labor in other countries beginning in the 1970s.

So if we think about the exploitation of labor through the ‘70s and ‘80s through union-busting and the rise of inequality through Wall Street returns on complex financial instruments, real estate, and the buildup of non-union sectors, we can see the transition from material expansion to a service-based economy. The Reagan wing of the GOP and the so-called “New Democrats” personified by Bill Clinton and Al Gore thrust us into the service economy stage by offshoring manufacturing.

Wage protections started to dissipate as unions became less relevant, workers were separated from the production lines and financial investment returns began growing faster than the real economic base of the country. The rise of Chinese manufacturing and trade agreements like NAFTA—in conjunction with fewer and fewer labor protections—sealed the transition in the 1990s. Manufacturing might have been happening elsewhere, but new opportunities emerged domestically like the growth of intellectual capital and tech in Silicon Valley, global headquarters setting up in U.S. cities, warehousing and fulfillment centers, finishing techniques that required highly skilled labor, service centers and so on.

But, from the dot-com bubble through the financial crisis, the aughts were nothing short of a disaster for the working class in the United States. The manufacturing jobs left here at home were being rapidly automated. China’s GDP was growing at double digits. And something called Business Process Offshoring (BPO) began to take hold with the growth of the internet and foreign-based customer support centers. The higher end of the middle class jobs, derided by many as the professional managerial class (PMC), and the wealthy continued to get ahead because of the returns on their capital and growth in their wage base. But the middle class and working poor started falling behind. At the same time, the deregulation of the ‘80s and ‘90s paved the way for the creation of complex financial instruments and leverage in the markets—something I’ll return to in a minute because it’s really important.

The confluence of these trends, bringing us from one phase to another, has led to the current financialization phase. Outside of the energy sector, which is the most robust export market we possess, the United States economy is wholly dependent on the financial markets, intellectual property and real estate. As we’ve talked about many times before, the prime aged labor market of U.S. residents between the ages of 25–54 are still gainfully employed. Outside of that center, however, there are tens of millions of people who exist on the periphery of the high functioning economy. Older Americans live on Social Security and savings, with some augmenting with part-time work. Large swaths of younger Americans are participating in the gig economy, cobbling together bits of continuing education and living off their parents.

So when Trump says that the economic downturn is all Joe Biden’s fault, that’s where the kernel of truth comes in. Since the mid-1990s it has been the official policy of the United States to offshore manufacturing jobs and to financialize this economy. So to the extent that Biden was in office as a Senator throughout, as Vice President under Obama and then President, he’s not wrong. But the reality is that the fundamentals of the economy that those in the domestic and international financial sectors value were stable under Biden.

An Explanation, Not an Excuse

Now understand what I’m saying here. I’m saying that under Biden things were continuing to deteriorate for the working class, but that the middle, upper middle class and the wealthy would have been stable. We were mid-expansion in a normal capitalist market cycle, which meant we probably had a couple more years to go before the next “official” downturn. What Biden and his team were betting on is that the long-term investments made in the two major bills would have taken root by then and artificially stimulated the economy without having to resort to the massive interventions we’ve gotten used to.

Again, that was the warning flag people like me were raising at the time, essentially saying that if Biden didn’t do something in the interim to lift the bottom rung of the economic ladder, then the Democrats wouldn’t be around to see it through; Donald Trump would become an inevitability.

So if you want to take a generous interpretation of the Trump agenda, here’s what they were banking on with the trade war, because they’re stupid. To understand how Trump overplayed his hand, you have to look at the cards he’s holding, as he likes to say. He thought that we could threaten the world with tariffs and that by doing so it would bring in a ton of money and bring nations back to the negotiating table to make better deals so he could eventually take off the tariffs. These goals are incongruous.

You see, Trump said he would bring in so much money from tariffs that he could theoretically eliminate income taxes—he said that—but that the world would be so terrified that they would come to the table immediately and make better trade deals so he could take off the tariffs. When people pointed out to him that you can’t actually make better deals because we bring in goods we don’t have—under agreements we negotiated—he made it a national security issue. This is how we secure the border and stop the flow of illegal immigrants and fentanyl. When people pointed out that immigrants aren’t coming anymore and that the majority of countries he tariffed don’t move illicit drugs here, he declared victory and started backing off the tariffs. Except for China, which I’ll get to.

So if the tariffs came off the other countries and China basically called his bluff and stopped sending stuff here for us to tariff, then we basically blew a hole in his “I’m going to make us so much money from tariffs that I can get rid of taxes on the middle class” thing. This was really all about China.

The number one thing we export to China is energy, through oil and gas primarily. China on the other hand exports minerals, electronics, manufacturing parts, finished goods, toys, makeup, building materials, nuclear reactor components, you know, basically everything.

Trump’s response to this is that children will have two dolls at Christmas instead of 30.

Here’s the thing about our imbalance. The energy we export is fungible. Meaning, they can get it from anywhere. The goods we get from them, on the other hand, are not. That’s why you see new orders and shipments plummeting. In other words, he never had the cards and everyone knew it but him.

We just lived through what it’s like to completely reorient a supply chain after COVID. Not only did the initial shock generate inflation almost immediately, it wasn’t transitory, it was persistent. We’re still living with it. And it took almost two years to straighten out the snarls. That’s why the Apollo reports look like that. You see, we’re already fucked. It’s predestined. He did it. He fucked around and by the summer we’re all gonna find out.

In the meantime, the bottom rung of the economic ladder was never tended to and government layoffs have already made it more difficult to access key government services, the bottom is falling out.

As we’ve illustrated recently, the impact is already being felt in the “subprime” markets as loan defaults and late payments are on the rise. By subprime we mean people who use debt to purchase things like cars and homes but pay higher rates because they have lower credit scores. But big purchases aren’t the only things being affected by the American credit crunch. A new survey from Lending Tree shows that the increasingly popular “Buy Now Pay Later” (BNPL) loans are heading into troubled territory with a quarter of these borrowers using loans to buy groceries. Even more troubling, 41% of BNPL borrowers reported making late payments within the last year.

Okay, so that’s where things stand and there’s no going back. We’re screwed. But that’s not what’s keeping me up at night. This is just what we can see.

The macro take I’m working through at the moment is like nothing I’ve ever seen. When you line up what’s happening in the financial markets and layer in the Federal Reserve’s policy options, impending tariff outcomes and slumping global demand it paints an ugly picture.

But there’s one thing that I’m actually losing sleep over that I cannot pin down for the life of me: leverage.

Upside Down

One of the things you’ll hear about on the financial channels is how firms are “de-levering.” This is a negative signal in and of itself because it means large firms, investment banks and hedge funds are derisking by limiting their exposure to riskier asset classes. Fine. That’s easy to understand. But this is only in the market that is visible. There are hedge funds that run leverage into the thousands. Yes, you read that right. There are funds with 50 to 2,000 times leverage on their cash base. These are the gamblers. Their owner/managers have nest eggs in offshore accounts and couldn’t give a flying fuck about the effects of their hedges on the rest of us. So that’s one invisible piece that I’m struggling to wrap my head around.

The other is the “off book” overnight settlement market, which has some of the same players in it mind you. There’s something called a repo market, which is just a liquid clearinghouse for overnight trades to make sure everyone has the money to cover what they’ve bought and sold that day. Then there is the “off book” or “shadow repo” market that exists just to the side of it. Those are the mystery puzzle pieces that have taken down the financial system before. So follow this thinking for a second and then I’ll bring in the Fed piece…

• There are institutions making bets on the economic system that are leveraged to the hilt. And we can’t see many of them.
• Up or down, when they make bets they have to clear funds.
• Central banks and investment banks that put up the money to clear in the repo markets are all de-levering.
• The world is selling off our securities, which is what funds our central bank outside of taxes.
• Republicans are twisting themselves in knots to cut taxes on the wealthy in the one big beautiful bill, which Trump just released by the way, so I’m digging through it.
• Tariff income won’t be enough to offset the loss of tax revenue if they cause a slump in demand.

Add these together and if everything blows at the same time, then it’s 2008 all over again. Except in 2008 the Dollar was still the most stable, revered and valuable commodity on earth.

When the financial markets crashed and the dollar lost value, the yield on the ten year treasury went down. The lower the yield on the ten year treasury the greater the confidence in the U.S. economy. So even though it was our reckless behavior that nearly brought down the global economic system in ‘08 and ‘09, everyone believed that we would figure it out. In the short term people were banking on Fed intervention, something referred to as the “Fed put.” Basically, a bailout. In the long-term, the world bet that we would diagnose the problem, fix it and regulate it going forward.

So when the dollar fell and the ten year treasury yield went up last month it signaled both a weakening in our actual economy and everyone’s faith in it. That brings us to Jerome Powell, the Federal Reserve and the tools at its disposal.

They can raise or lower interest rates. Trump would like them to lower them immediately, that’s why he was threatening to get rid of Powell, which caused another market meltdown. But the Fed typically uses interest rates to spur or slow the economy. Conventional wisdom holds that lower interest rates boost the economy through refinancing and new borrowing to spur investments. But this eventually contributes to inflation because it heats things up. Since Trump just guaranteed an increase to inflation through his tariffs, that’s kind of off the table as a useful tool. Not to mention, credit is going to be so tight it almost doesn’t matter how low rates go—banks aren’t about to loosen up their standards when everyone is predicting a tariff driven recession.

That leaves the Fed balance sheet. During the financial crisis they did everything all at once. They expanded their balance sheet by issuing a massive amount of debt to raise capital, then they purchased toxic assets from the banks and held them on their balance sheet. They put so much free money into the market for so long the big banks came out ahead on arbitrage alone for a decade. For the past several years, however, the Fed has been trying to bring things back to normal to achieve the “soft landing” that you’ve heard so much about. A bit of inflation. A bit of unemployment. Normal interest rates. No more free money. More controls. And then here comes Dr. Orange Von Fucknugget with a bundle of ACME dynamite to light the whole fucking thing on fire. It’s unbelievable.

Now before I explain the final opaque threat, understand that the reason the Fed isn’t panicking right now is because Jerome Powell came out and basically said, I get it. Things aren’t great. We’re worried too. But the downturn, the selloffs, derisking and delivering isn’t a bad sign in the eyes of the Fed. In their eyes, this is a rational response that signifies the markets are “functioning.”

The financial crisis and COVID—those were examples of complete market dysfunction because liquidity disappeared. In other words, there were more people looking to get out than to get it. A classic run on the banks but global.

When the dollar and the ten year went upside down for a couple of days, that was a signal and why everyone panicked. But when things calmed down and institutions steadily worked through their trades it showed that there was enough liquidity in the system to manage the upside and the downside activity.

Okay. But if you listen to nearly every financial analyst that covers the market right now, you’ll hear the same thing over and over. The “Fed put”. At some point the Fed will have to intervene with liquidity when things go upside down by the summer. That’s literally everyone right now.

The problem, however, lies below the surface in those repo markets I just told you about. There have been a couple of occasions when the Fed had to step in to provide liquidity into the repo markets because there wasn’t enough money to cover the settlements. The Great Recession and the March shutdown in 2020 are the obvious ones. But the one that spooked everyone happened on a random September day in 2019. A sudden spike in volatility combined with liquidity demands surrounding corporate tax filings and treasury issuances caused the repo market to collapse overnight.

Are the pieces coming together yet?

The Bummock

I learned a new word while researching this piece. “Bummock.” That’s what the submerged part of an iceberg is called. The repo market is the bummock. The tip of the iceberg (hummock) is visible. That’s the open repo market that is visible because it’s controlled by the Bank of New York Mellon, JPMorgan Chase and the New York Federal Reserve. But it’s the off book settlement institutions in the “shadow repo” market that operate on something called a basis trade that isn’t as visible. Here’s how it works.

Let’s say I’m selling something for $100 but the cash won’t be available until tomorrow. I can go to the repo market and get $98 bucks tonight from the New York Fed, but I can get $99 bucks tonight from a hedge fund. Great. A buck to settle this out is the price of doing business. The hedge fund is taking that buck for the trouble of putting up the money so they get to wet their beak. But here’s the thing, a buck isn’t much of a business. But if they do that trade a million times a night, now we’re talking. It’s just an overnight risk so it’s a pretty good business as far as being a sure thing because your customers always come through, right?

Now, they might have the money to do this a couple hundred thousand times, but a million is more than they have. Because they have such a good thing going, they convince another lender to give them money at a low rate so they can do five times the amount of business they normally would. So now we have some guy giving another guy money so he can give another guy money. Everyone taking a piece of that dollar up and down the line. And just in case something goes bad, there are two failsafes.

One is the Federal Reserve, like in the 2019 example. Or during March of 2020 when it flew in with $100 billion in one day to prop up the settlements when there was a selloff. If everything suddenly goes tits up, the Fed is the only one that has the dough to fly in and save everything. Another is insurance. Remember AIG during the financial crisis? The company that insured all the shitbag mortgage backed securities because the ratings agencies didn’t understand what was in them? And how the government had to bail out the insurance company and the financial institutions to keep the global economy alive?

So you have a party, a counterparty, a counterparty to the counterparty all backed by insurance and the Federal Reserve as a last resort. All dependent on the belief among nations and institutions that the United States is creditworthy, the dollar is stable and our leadership is sound. In other words, an entire economy built on faith.

If the economy seizes up as the shelves run dry, supply chains snarl, inflation grips the consumer and layoffs build, the Fed’s usual interest rate tools won’t work because we’ll have stagflation. And if tariffs aren’t bringing in money, and tax revenues decline because we’re in a recession and give tax cuts to the wealthy, the Fed would theoretically have to release more money into the economy by raising debt, which will widen the budget deficit. And when all these events spook the market and there’s a rush to liquidity, the Fed would theoretically have to step in here as well—the aforementioned Fed pu— because we have no idea how much leverage is in the shadow repo market. Not even the Fed can see the whole iceberg.

So when someone like Scott Bessent talks about reordering the global financial system, never has someone been so right by being so fucking wrong. ‘

Bring It Home, Max

There are a couple of things to bear in mind as I wrap up here. First off, job one is to make sure they don’t get away with blaming the prior administration. All of the topline data coming into 2025 was relatively strong, though it certainly left the bottom wage earners out of the equation. The rapidly approaching global crisis is entirely Trump’s doing. Second, don’t put yourself in harm’s way if you’re a non-seasoned investor looking to jump into the markets. We’re in uncharted territory and the big guys have the wallets and risk tolerance to bet on the crash. You do not want to be on the other side of them. Bitcoin and gold are all the rage in the trading world right now so it might be tempting but just don’t. Be small, stable and nimble.

Of course, remember our mantra. The market is not the economy. The investor class is going to fuss about and be noisy. Let them. All that matters is your personal health, ability to pay your bills and keep your head about you when everyone else is losing theirs. But the last thing I want to say is don’t be afraid of having big conversations about systems. Dems like Elissa Slotkin have been criticizing Bernie and AOC for their “Stop Oligarchy” tour saying words like oligarchy don’t connect with the average voter. Stop patronizing us. Like you’re so fucking smart. The voters understand way more than you think they do and that’s why they’re packing arenas.

The main takeaway here is that Trump is the accelerant on top of a capitalist brush fire that has been burning for a long time. People are being left behind. They deserve an explanation and we can have grown up conversations. As I’ve said before, these establishment dems are an even bigger impediment to taking back the country than the transparently destructive GOP. We’re going to talk more about that in the weeks to come as we push our 5 Non-Negotiables of the Left initiative challenging progressives to make some demands.

For now, get small but think big. Don’t let the bastards get away with the blame game. And bone up on your systems and strategies because if Arrighi is right and we’re in the final stage, then the opportunity to shape what comes next belongs to us.

Here endeth the lesson.