Economic, monetary, financial and geopolitical. These are my 4 horsemen of risk, a descriptive shorthand for categorizing sources of uncertainty. They are unique, but they overlap, and they interact. In today’s climate, this interaction is intense. What follows is a discussion about market prices, set against the uniquely uncertain times in which we live. Specifically, I wish to share with you a view I’ve developed over the past few years, and that is, unfortunately, that the US is a chief component of the risks that could be disruptive to the market. I’ll bring in four recent Alpha Exchange discussions with expert guests to do so. My hope is that this will contribute to your thought process on risk.
As my main man Logan Roy would say, “let’s get into it”.
As I write this, we face one of the most daunting backdrops for appreciating the set of uncertainties in front of us. The pace of change – in technology and in geopolitics – is unimaginably rapid. In the meantime, the architecture of the financial system is being redesigned. And also in the meantime, the US fiscal condition only deteriorates.
Let’s start with technological advancements which are coming at breakneck speed. The promises and the potentially positive outcomes are incredible. The threats, however, are daunting. AI is forcing a wholesale re-underwriting of assumptions about the value of knowledge work. And in the process, about future cashflows and annual recurring revenue. About industries like insurance, wealth management, logistics, cybersecurity and, of course, software.
A Substack memo, written about a future that looks back on the past, catalyzes a giant sell-off in sectors deemed exposed. There’s no earnings announcement or unwelcome economic statistic the market is confronted with. It is the thought experiment alone that is the risk-off. It leads to downside vol in the very way that a thought experiment a year earlier led to upside vol. Then, it was endless possibilities. Now, sky’s the limit became the sky is falling.
What should we take away from the impact of the Citrini memo? First, I believe its framing was highly effective. The piece zooms forward but looks back. We are in 2028 and I am showing you news stories that occurred a year earlier. There’s something about reading a headline from a press story you are told has already happened. That feels definitive. It’s a statement of fact – a review of the past - about something that hasn’t happened yet.
Second, Substack and Twitter. The memo has 16mln views and counting on Twitter. On its best day, the Goldman tech research team couldn’t dream of such exposure. The speed with which information gets shared is new and powerful. We live in an era of attention capitalism. Remember the Nick Shirley video on “Learing Center” fraud in MN? That got, wait for it, 135mln view on Twitter. It went live on December 26th. Tim Walz withdrew his bid for re-election 10 days later. Action, reaction. And here we thought it was gonna be Sean Hannity that took down Walz.
Our second takeaway from Citrini is that market prices are always built on assumptions and sometimes those assumptions become fragile. What makes them so? Price does. When we pull forward a future based on especially optimistic assumptions, we embed them in price. I’ve often said that market vol events are the result of a confrontation between the existing and a new set of assumptions. Markets are incredible mechanisms for allocating capital. But, of course, they are wrong on a regular basis.
Sometimes these errors are small – a mistaken assumption on NFP or inflation. Occasionally, the market gets it very, very wrong. As a view is underpinned by a stronger consensus, it becomes baked into market prices. It means that when the consensus is shattered, the repricing can be violent. Two decades ago, as the real estate market sizzled and all kinds of derivatives were built around the notion that housing prices could not decline on a national basis, the price of credit risk for mortgages melted away.
There’s a scene in the Big Short book in which, in late 2006, a trader at Deutsche Bank working for Greg Lippmann is buying protection on a super senior tranche of subprime CDS from a counterpart at Morgan Stanley. As he forks over 28 basis points to get 2bln of short exposure, he says, “we both know there is no risk in these things”. Of course, nothing could have been further from the truth. The point is that the more convinced we are of something, the lower the probability we assign to that not being the case. The Citrini memo succeeded in having the market reprice a tail outcome.
Of course, as “death of knowledge work” deflationary outcomes are contemplated, the existing set of exposures, underwritten on assumptions now tested, becomes stressed. Blue Owl is largely the poster child for publicly traded vehicles engaged in private lending. The stock’s 2m realized volatility has doubled from 30 to 60 since last September. There is furious trading in the shares. Option volume, almost non-existent last year, is up, averaging almost 100k contracts daily. As we watch the AI displacement theme play out, we must recognize that a financial risk-off, one that is sponsored by wrong-way exposures, is a possibility. Illiquidity breeds illiquidity and we are seeing various episodes of gating.
Cliffwater, Morgan Stanley, BlackRock and Blackstone have announced that they are limiting redemptions because they cannot satisfy them. I can’t help but think of the scene in Casino when Nicky Santoro tells his hapless banker, “Frank, I think I want my money back.”. Not being able to turn your exposure into cash in a moment’s – or in this case even a quarter’s notice – is a problem.
If there’s one lesson, I believe investors consistently fail to learn it’s the value of liquidity. We underprice liquidity risk. It’s fine to bear liquidity risk, but in hindsight, amidst a shortage of it, we almost never believe we were properly compensated for doing so.
I’m old enough to remember 1998 and the LTCM debacle. It was a superb example of when the risk of a portfolio really found its way into the market’s crosshairs. It was a preview of the big one that would occur a decade later. Of course, nothing was more protracted than the GFC, when the entire system was upside down. There’s a lot of discussion of whether today’s circumstance is similar. The answer is yes in the sense that more people want their money back than can be satisfied. Let’s hope those redemption lines don’t resemble those at the Houston or Atlanta airports.
Yes, there’s a liquidity mismatch which is similar to the GFC. Bloomberg reports that “A wave of redemption requests across the private credit industry has left more than $4.6 billion of investor capital trapped behind withdrawal limits, with more asset managers expected to impose curbs in the coming weeks. Investors have looked to pull roughly $13 billion from over a dozen funds so far this quarter.”
The important caveat when looking at today’s dynamic and comparing it to seismic events like the GFC is around the degree of leverage in the system. There’s far less of it today. In 2008, the XLF was realizing 100 vol for stretches of time. It’s realizing below 20 now. When it comes to systemic financial risk, we ought not to ever shut the door to the possibilities. But the core of the system is not currently showing any real stress relative to that suffered in prior events.
So, let’s take stock of where we are. We have a groundbreaking technology called AI. It’s singlehandedly created a massive capex cycle and been responsible for trillions of dollars of additional market cap assigned to mega cap tech stocks. Google alone added 1.5 trillion in market cap in 2025. The SPX rose by 86%, an annualized return of 23% from 2023 to 2025.
And because there’s two sides to AI, the promise of productivity, but also the displacement of it, the market recently went from “the sky’s the limit” to “the sky is falling” in it’s what-if exercises. From industry to industry – software, logistics, insurance, recruiting, real estate brokerage – we’ve seen significant selloffs. And as investors reprice securities, it could be the case that certain vehicles – like private credit – are viewed as increasingly vulnerable and find themselves unable to meet redemptions.
Now, let’s introduce the second main catalyst for risk, the war (or should I say, engagement) in Iran.
Around the world and across the asset classes, it’s hard to find a risk premium that isn’t considerably higher now than it was on February 26th. VIX, MOVE, credit spreads, credit vol, break-evens, FX vol. Look further and more nuanced measures like volatility skew and implied correlation are steeper and higher. In Europe, there’s been a spike in realized correlation among stocks (in the SX5E, it’s 52% over the last month) as the repricing of the ECB’s path has been dramatic.
These risks are priced into US and other major developed markets, but EM volatility has also surged. The EEM VIX started the year at 17 and was recently north of 35. EM credit spreads are similarly wider.
These are all financially centric risk measures. In market risk, a rising tide lifts all vols. But it’s not all that applicable to soft commodities. Until now. Claude tells me that roughly 1/3 of globally traded fertilizer transits the Straight. An index of 1m implied vol on corn, wheat, sugar and soybeans, currently maps well against the VIX. The correlation of these two over the past month is 72%.
If there’s one thing we’ve learned about vol events over the years it’s that a supply shortage and resulting imbalance of supply/demand is at the heart of nasty price moves. LTCM in 1998, VW in 2008, the 2010 blowup in long dated equity variance, the 2011 surge in the Yen after the nuclear disaster, the 2018 VIX implosion, the GME event in 2021, and the surge in nickel prices in 2022. Nothing leads to vol more than a material imbalance of supply and demand.
Supply shortages resolve through the demand destruction that results from much higher prices. Easy to write, but it’s a process that imposes incredible risk on the global system of asset prices. “Move fast and things break” I say. In the same way that higher prices are the cure for higher prices, higher rates can be the cure for higher rates. At some point, if the market sees a material economic slowdown as likely, the US bond market sell-off will reverse as the “stag” part of stagflation is prioritized by policymakers over the inflation side.
This could clearly be wrong. And the reason is that the US, long viewed as a stabilizing force in the world, is now becoming a chief source of risk. In the process, the treasury bond market may be losing one of its most important characteristics: the insurance feature. That is, its capacity to be durable to and even benefit from market shocks. We’ve all got to be asking how can US government bonds be a shock absorber when the US government is the source of the shock?
Now strange things to do happen. For example, who could forget the epic bond market rally in August of 2011 as a stand-off between Obama and the Republicans took us to the brink of a debt-ceiling induced default? About to default, let’s make the market rally. The 10-year effectively rallied from 3% to 2% in August’11. These things are sometimes difficult to understand. It was the case then that US debt was 15t, its now 39T. Interest costs per year have increased by 770bln. Debt to GDP has risen from 97% to 122%.
Those numbers are daunting to be sure. But it is the reason we got there that matters and this is where I want to go next. Our politics are poisoned. We’ve lost the capacity to compromise.
There was a time when investors thought of the United States as the place where political risk went to die. Political rancor in Washington is certainly not new. Elections have been ugly in the past and the two parties could fight, but beneath all of it sat a deeper assumption: the institutions were strong, the rules would hold, and this would lead, the country’s political machinery, however messy, would ultimately produce continuity.
It’s impossible not to see that this is breaking down.
One of the most important shifts in the global macro landscape is that the United States is no longer simply the absorber of political risk from abroad. Increasingly, it is a producer of it. Avoid Trump Derangement Syndrome and Trump Apologist Disorder equally. Just notice things and then ask yourself, “what are the market implications?”.
As I have been thinking a great deal about this question, I began engaging with experts on geopolitical risk and hosting them for conversations on the Alpha Exchange. Traditionally, that term always conjures up conflict with other countries, like Russia, China and Iran. But it needs to include not just our strategic rivalries around the world, but internalized strife at home and its global implications.
Here’s what Alex Kazan, Head of the Geopolitical Practice at the Brunswick Group had to say:
“The US is now the world’s major source of geopolitical risk and uncertainty. That’s a big, big deal. It may sound sort of obvious thinking about that right now, given all the policy volatility that we’ve seen around Washington, but it’s actually pretty spectacular in terms of a macro development. I’ve been doing geopolitical risk analysis for most of my career, 25 years or so, and what I work on has evolved a lot.”
And that matters because of the vulnerabilities this imposes on one of our most prized assets: the government bond market which has long been priced as the global risk-free benchmark. This market has historically been a destination for capital seeking safety. It has exhibited an insurance quality, rallying in times of uncertainty. I’ve walked through this a great deal over the years, tracking the negative correlation between stock and bond prices quite closely.
Here’s what Ken Rogoff, former Chief Economist at the IMF, had to say about this:
“You flock to the United States because the dollar’s stable, because the economy’s stable, because policy is stable. And to the extent we become more unpredictable, to the extent our court system is replaced by the whims of an executive, not necessarily Donald Trump, it could be some later president. It’s less reliable, it’s less safe.”
With respect to the consistency with which the bond market rallies on a risk-off, it simply doesn’t work that way anymore, at least not on a reliable basis. Remember the tariff tantrum last year? The SPX experienced a large drawdown, the VIX spiked to the 50’s and the Treasury market actually sold off in the process. And, in 2026, the TLT is down almost 5% since February 26th, 2 days before the US and Israel attacked Iran.
About the 2025 tariff event, Libby Cantrill, Head of Public Policy at PIMCO, had this to share on a recent Alpha Exchange podcast:
“You also saw dollar weakness, currency weakness, rates backing up, plus risk assets selling off. That’s a characteristic of an emerging market country, not the US historically. And so, I do think that was a bit eye opening. The behavior, during that period in time. You saw a little bit of that during this Greenland bout as well. Obviously very short-lived. But it is a good reminder that Sterling was a reserve currency until it wasn’t. These relationships exist until they don’t. You can’t take them for granted.”
I’ll just repeat what Libby said: these relationships exist until they don’t.
Ken Rogoff added this:
“People all too often think if you look at 10 years, 20 years, 30 years, you just know everything and forget these tail events... China would grow to the moon forever. Real interest rates would be zero forever. And also that the dollar’s dominance, which had been rising steadily, is something you could just count on.”
The US and by extension US markets have served as the anchor of the postwar alliance system, and the jurisdiction where institutional credibility was deepest. That’s been earned over many years of durable global leadership. It can be un-earned as well.
Mark Rosenberg, founder of GeoQuant, a firm that models geopolitical risk, said this:
“The United States has a particularly vulnerable set of political institutions. There isn’t really another developed market that has something like the electoral college...a Senate that is constructed to kind of overrepresent rural areas. And so what we have is a particular set of institutions that, as social risk starts ramping up, the institutional risk is vulnerable to ramping up as well.”
When confidence in those foundations begins to erode, even gradually, the consequences do not stay confined to politics. They can spill into market prices like rates and FX. They can impact global capital flows, and into the premium investors demand to hold long-duration US financial assets.
The first issue imposing risk on our institutional framework is polarization. Political disagreement in America is as old as Bernie Sanders, but what has changed is its intensity and its character. It’s longer simply a contest over tax rates, spending priorities, or who champions big business versus the little guy. Politics has become fused with identity, culture, geography, and media consumption. The opposing party is not just viewed as wrong, but increasingly as dangerous, illegitimate, or even un-American. That kind of negative partisanship changes the way a system functions. It makes compromise more costly, trust more fragile, and procedural conflict more likely.
And when polarization deepens, the risks are not limited to rhetoric. Investors need to think about process risk. And this is what has me most concerned. Markets are generally comfortable pricing outcomes. That’s the business. They can price a tax hike, a tariff, a change in regulation, even a war if they can map the channels.
What markets struggle with is uncertainty around the process itself: disputed election mechanics, contested certifications, legal escalation, executive-legislative confrontation, or battles over who has the authority to decide and enforce political outcomes. The underappreciated risk in the US today is that process instability is becoming more central.
I think a logical question to ask is, “how did we get here?” Many blame Trump. He’s an easy target. Alex Kazan suggests otherwise:
“I want to be very emphatic about this point. It’s not primarily about Donald Trump. It really isn’t. These things are structural, and we’ve seen signs of them emerge in the US for the past 10 years or so. Part of that is the deep, deep partisanship in the U.S. which makes it much, much harder for the U.S. political system to align around and have consensus around major foreign and economic policies.”
It’s certainly not difficult to link the increasing loss of faith in the US political system with the global financial crisis. Alex adds this:
“The response from political, economic, business elites to these massive, massive crises were self-serving, did not represent the interests of the average American. And at the end of the day, as we came through those crises, the people who many Americans view as responsible or partially responsible paid no price...And ultimately the narrative matters more than the specifics of the fact.”
The numbers are not subtle. Pew found that only 4% of Americans say the US political system is working very or extremely well, while 72% say it is working not too well or not at all well. A full 63% say they have little or no confidence in the future of the political system. More than eight-in-ten Americans say elected officials don’t care what people like them think. And trust in Washington remains near historic lows: Pew reported 17% of Americans in late 2025 say they trust the federal government to do what is right always or most of the time. These are alarming statistics.
Let’s build on this with some of the analysis done by Mark Rosenberg, His work, which did an excellent job of assessing the 2016 election where the mainstream media missed the bid for Trump, focuses on the polarization that has been brewing for years. Mark said this on a recent podcast:
“There’s even a term for that called a threatened majority, that they tend to start becoming more radical in politics and start seeking out more ethnopolitical entrepreneurs or kind of candidates that speak to ethnic grievance more. And that was what we saw in the United States.”
There is also a deeper fragmentation underway in how Americans consume reality itself. Pew’s 2025 work on media trust showed Republicans and Democrats not merely preferring different outlets, but often mirroring one another in trust and distrust. For example, 58% of Democrats trust CNN while 58% of Republicans distrust it. On the other side, 56% of Republicans trust Fox News while 64% of Democrats distrust it. That kind of split does not just produce polarization. It produces separate informational universes, which makes shared political outcomes harder to accept. Half the country thinks the 2020 election was stolen. The other half thinks that is an absolutely outrageous claim.
Abortion, guns, immigration, taxes, climate, healthcare, gender identity, affirmative action. On each of these, one side is convinced that the other is simply on the wrong side of history. There’s no scope for compromise when this is the case.
Then there is the international dimension. Domestic political fracture in the United States does not stay domestic. Allies watch American elections not as spectators but as stakeholders, because the continuity of US policy has clearly become less certain.
The erosion of America’s standing internationally is no longer a matter of conjecture — it is now quantifiable, and the numbers among our closest allies are striking. According to Gallup’s 2025 survey of all 31 NATO member states, median approval of U.S. leadership fell 14 percentage points to just 21% — a level comparable to the low-water marks of Trump’s first term and the George W. Bush years.
Germany saw approval crater by 39 points in a single year, Portugal by 38, and across the Nordic countries — Sweden, Iceland, and Norway — approval sits around one in 10. Perhaps most sobering: Washington and Beijing now receive nearly identical approval ratings across NATO, with China at 22% and the U.S. at 21%. The deterioration in European public opinion has been equally swift and measurable. The Spring 2025 Eurobarometer showed that positive views of the U.S. among EU citizens collapsed from 47% in October 2024 to just 29% by March/April 2025 — an 18-point drop in a matter of months — with Denmark experiencing the most dramatic fall, from 47% to 13%. Across the EU, unfavorable views of the United States have now jumped to 67%, meaning the U.S. scores no better than China in European public opinion.
The security dimension is equally troubling: in every European country surveyed by the Institute for Global Affairs, fewer than 10% of respondents were fully confident that a NATO Article 5 would trigger an American military response. A March 2025 European poll placed Trump’s trust score at just 2.6 out of 10 — second worst among 14 world leaders, behind only Vladimir Putin at 1.5 — a data point that would have been unimaginable just a few years ago. Rogoff’s warning that dollar privilege rests on the perception of American stability and trustworthiness is not abstract — it is being stress-tested in real time, and the early returns from our allies are not reassuring.
Trade relationships have been redrawn more abruptly, and arguably in haphazard fashion. Security commitments are being offered with greater conditionality. Longstanding alliances increasingly look less like treaty-bound arrangements and more like relationships subject to political improvisation. The result is not just geopolitical anxiety abroad. It is a subtle repricing of US reliability.
Alex Kazan framed it this way:
“The administration views access to the US market as its primary point of leverage. And so, negotiations on any set of issues, even if they aren’t purely economic issues, that is a point of leverage. So, the active use of trade policy, of investment policy, of tax policy in order to further other policy gains. That’s been, I would argue, the defining feature of the Trump administration from a global perspective.”
One of Trump’s gifts as a politician is his flexibility. Because he’s untethered to any real ideology, he’s often able to pursue highly unconventional policies. But on tariffs, he’s had a strong view for years. Libby Cantrill said this
“If you just sort of look at President Trump, where did he spend his time as a public figure, as a private citizen? In the 1980s he was really focused on trade deficits. At that point it was mostly with Japan. But he was very consistent in terms of his view that trade deficits are bad, that they’re effectively a scorecard between the US and the rest of the world, that tariffs are good not only as a means to an end in terms of leverage over negotiating partners, but also ends in themselves. He really believes that tariffs work in terms of making manufacturing and US industry more broadly more competitive. He was against NAFTA in the 1990s. He was against China’s accession to the WTO in the early aughts.”
On Tariffs and now war, Trump’s playbook is becoming better understood. Here’s how Alex Kazan described the strategy on international trade:
“You escalate to de-escalate. You start by throwing out a bunch of obstacles...And it’s really to build leverage to gain what you want in more of a steady state going forward. The problem is you risk not ever being in a steady state after...
And this is certainly true. We saw the giant climb-down on April 9th of 2025. After driving the VIX to the mid 50’s, generally an unwelcome development, and swap spreads to substantial inversions, also unwelcome, Trump responded to Bessent’s claims for no mas. A big fat never-mind over a mid-afternoon tweet lifted the QQQ by 12% on the day, the 3rd largest one-day move since 2000.
But Trump, strangely does have a strong view that tariffs create wealth for your country. Libby Cantrill said this:
“We think the President believes that tariffs work. He believes that trade deficits are bad. And as a result, I think we should expect trade policy to be volatile, to be a source of volatility over the next three years and the tariffs remain high.”
Of course, for now, given the focus on Iran and the court’s judgement that tariffs in their current form were not legal, trade negotiations are off the front page of the Wall Street Journal. In the movie starring Bud Foxx and Gordon Gekko, it was called the Wall Street Chronicle, by the way.
But let’s put tariffs – and the Iran war – as examples of the United States acting in increasingly unilateral fashion. In 2003, the Bush administration devoted enormous diplomatic capital — roughly 18 months — to building international legitimacy before the invasion of Iraq. The framework was explicitly multilateral: Colin Powell’s February 2003 UN Security Council presentation was designed to persuade skeptical allies with intelligence evidence (however flawed it later proved). The U.S. sought to assemble not just military partners but political cover — the “Coalition of the Willing” ultimately included 49 nations.
The contrast today is stark on almost every dimension. Military action came first; coalition-building was not a precondition. Only Israel is fully on board with the U.S.-Israeli strikes on Iran that began in June 2025.
The European response has been fragmented and reluctant rather than enthusiastic. France’s Macron warned that military action outside international law risks undermining global stability and called for emergency UN discussions, while the UK under Keir Starmer initially restricted U.S. use of the Diego Garcia base.
When Trump did seek allied help — specifically around securing the Strait of Hormuz — the string of refusals indicated his stock of European goodwill was low, having put allies through the wringer over tariffs, Greenland, and other issues. None of this is to suggest that a confrontation with Iran was not building and necessary. It is to highlight the “go it alone” instinct of Trump.
I recently watched The Apprentice. No, not the show that made “you’re fired” famous two decades ago. The movie about the Donald under the tutelage of Roy Cohn that was released in 2024. It’s worth a watch and Jeremy Strong is exceptional as always. We learn a lot about how Trump was taught to think in the movie the Apprentice. Roy Cohn’s 3 rules:
“Rule one: Attack, attack, attack.
“Rule two: Admit nothing. Deny everything.
“Rule three: This is the most important rule of all. No matter what happens, no matter what they say about you, no matter how beaten you are, you claim victory and never admit defeat. Never admit defeat.
So, with Tariffs as with war, Trump follows a similar playbook. Agress substantially, see what happens and then react to what happens. “We’re gonna hit them as hard as ever” quickly becomes “talks are going well.” A day later, and re-escalation has occurred. Hopefully Susie Weiles isn’t speculating on polymarket.
It should be clear; this is not the ideal setup for prudently allocating capital.
I’d like to finish this less than optimistic discussion on two topics. The 2026 midterm elections and US fiscal dynamics. Back to my four risks: economic, monetary, financial and geopolitical. Here, a weakening of our capacity for effective governance threatens our financial condition, possibly leading to a self-imposed risk premium.
Again, what we are doing is simply noticing things and asking whether what we see is sufficiently priced.
Now is a good time to repeat one of my sayings on vol and risk: “Politics, like asset returns, are not normal”. We know that indices like the SPX are famously leptokurtotic, or fat tailed. Any conversation that includes leptokurtosis is a good one, by the way. For the SPX, there’s no model using the normal distribution and a reasonable volatility assumption that allows for a 20% one day plunge as we saw on October 19th, 1987. Stock returns are not normal. And, neither are politics, especially US politics, especially today’s version of them.
This brings us to the election cycle and the 2026 midterms. Midterms are often treated as a referendum on the incumbent administration, but in the current environment they may be something more consequential. They may become another stress test of the country’s election infrastructure, legal norms, and administrative legitimacy. We are in an era where every close contest has the potential to become a procedural contest. Vote-counting rules, certification disputes, court challenges, district maps, ballot access, and federal versus state power are no longer arcane matters for election lawyers. They are becoming market variables.
And tied to that is the redistricting fight. Redistricting used to be something most investors ignored completely. Now it sits inside a broader struggle over the rules of representation and control. The issue is not simply who gains a few seats in the House. It is that repeated rule fights reinforce the perception that politics is no longer a contest within stable guardrails, but an argument over the guardrails themselves. Once investors begin to sense that the legitimacy of the system is regularly up for debate, they should at least ask whether US assets deserve to trade with the same institutional discount rate they once did.
Our politics are a civil war in which the objective is to win at any conceivable cost. Right now, the Trump presidency is on the wrong side of polls and thus the midterms.
The SAVE Act — formally the Safeguard American Voter Eligibility Act, now reintroduced as the SAVE America Act — is ostensibly about preventing noncitizen voting. Democrats will say that the evidence available shows that this problem barely exists. Reasonable people, myself included, and a giant share of voters favor voter ID. Pew Research found that 83% of U.S. adults favor requiring government-issued photo ID to vote — including 95% of Republicans and 71% of Democrats.
The legislation has become, in Trump’s own words, his “No. 1 priority” one he has declared so urgent that he vowed not to sign any other bills until it passes. The bill passed the House in February 2026 by a vote of 218 to 213, with only one Democrat in support, and now sits in the Senate, where it faces a 60-vote filibuster threshold that Republicans — holding just 53 seats — cannot clear.
Democrats warn that Trump appears to be constructing a pretext: if the bill fails and Republicans lose seats in November, he will have already laid the groundwork to claim the elections were rigged. The cynical view is that the bill may have been introduced to make the point that elections aren’t secure, so that a loss can be contested before a single vote is cast. Trump himself told Republican lawmakers that passing the SAVE Act “will guarantee the midterms,” adding “if you don’t get it, big trouble.” For anyone watching the arc from 2020 forward, that framing should sound familiar.
Kalshi has a healthy dollop of political bets waiting for you to entertain. The Blue Tsunami is the parlay where the Dems take both the House and Senate. It’s the one line going up these days. It’s now nearly a coin flip at 47%, having started the year as a 1 in 4 chance. Trump, in case you haven’t noticed, does not like to lose.
Disentangling the components of the risk premia embedded in a security is always difficult. 10y yields are currently up substantially since the start of the US / Iran engagement, mostly on the back of higher inflation expectations. Is this contested mid-term election scenario priced? I can’t say for sure, but I don’t think so.
It’s not just Trump that calls foul on election integrity. The data on election confidence is striking not just for how low it has fallen, but for the way it has become a mirror image of itself, flipping entirely based on who wins. Heading into 2024, Gallup recorded a 56-point partisan gap in confidence that votes would be accurately cast and counted — 84% of Democrats expressing faith in the process versus just 28% of Republicans, the latter having fallen 16 points from even their 2020 level and down from a majority of 55% as recently as 2016.
An AP-NORC poll from the same period found only 22% of Republicans held high confidence that votes would be counted accurately, compared to 71% of Democrats — a near-perfect inversion of where each party stood in 2018. Then Trump won, and the numbers flipped: post-election, PRRI found that 66% of Republican voters expressed confidence in the fairness of the 2024 results, while Democratic confidence fell to just 44% — and 63% of Republicans simultaneously maintained the 2020 election had been stolen.
What this tells us is that election confidence in America has become almost entirely outcome-dependent — less a measure of institutional trust than a running score of how your team did. If the losing side in any future election begins from a baseline of deep skepticism the question isn’t whether there will be controversy — it’s how severe.
I think the odds are non-trivial that this conflict spills out into the open, consuming our news cycle and possibly impacting market prices. Everything is an action and then a reaction. In this context, we need to watch the ratings agencies. Two recent downgrades of the US Sovereign, one by Fitch and one by Moody’s have cited not just the unsustainable debt trajectory – more on that in a second – but also the erosion of governance, the main topic of this podcast. Here’s what Fitch said in the press release accompanying its Aug 2023 downgrade:
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.”
The press release goes on to say:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
If I am correct, and there’s escalation of the US political war around the 2026 midterms, we should expect the ratings agencies to weigh in.
Mark Rosenberg did not mince words:
“I’m trying to choose my words carefully because I still am an employee of Fitch, but from my perspective and from the perspective of the Geoquant data, the US should be downgraded again based on its level of governance and political risk and institutional risk, just given where it sits relative to other developed markets.”
Now layer onto all of this the fiscal backdrop, because this is where political risk and market risk truly converge.
The United States is running deficits at a scale that would historically have been associated with recession, war, or national emergency, yet it is doing so in a period of low unemployment and reasonably good nominal growth. That tells you something important: the fiscal imbalance is no longer cyclical. It is structural.
The wedge between what the government spends and what it takes in has become embedded in the system, and neither party has shown much political capacity to close it. The agency costs are immense and if anything, polarization makes it harder. One side resists tax increase, the other resists entitlement reform, and both have incentives to promise more than they are willing to finance.
That matters because debt dynamics are not just an accounting issue. They are a confidence issue. As debt rises and deficits persist, Treasury issuance must be absorbed by an investor base that may become more price-sensitive over time. At the same time, interest expense rises, which worsens the deficit, which requires more issuance, which can lift term premium further. It becomes a reflexive loop.
For years, the US benefited from deep foreign demand, reserve-manager sponsorship, and the belief that Treasuries occupied a category of their own. But if foreign official demand becomes less dependable at the margin, or if geopolitical realignment weakens the appetite of traditional buyers, then the Treasury market becomes more exposed to ordinary market discipline.
And then we arrive at the place where political risk and market risk truly meet: the fiscal position.
Here the numbers are stark. CBO’s February 2026 outlook projects a $1.9 trillion federal deficit in fiscal 2026. Debt held by the public is projected at 101% of GDP in 2026, rising to 120% of GDP by 2036 — above the previous record set just after World War II. CBO also projects net interest outlays rising to $2.1 trillion in 2036, or 4.6% of GDP. Meanwhile, CBO said the actual 2025 federal deficit was 5.9% of GDP, in an economy that was not in recession.
That last point is crucial. These are not classic cyclical deficits associated with recession or emergency. This is a structurally large gap between what the government spends and what it takes in during a period of ongoing expansion. In other words, the fiscal deterioration is not an accident of the cycle. It is becoming a feature of the system.
And politics makes it harder to fix. One party has little appetite for higher taxes. The other has little appetite for entitlement reform. Both parties remain comfortable making promises that expand the fiscal burden. Polarization doesn’t just make politics louder; it lowers the probability of credible fiscal consolidation.
That matters because debt dynamics eventually stop being a bookkeeping story and start becoming a confidence story. The Treasury market has long benefited from a kind of exceptionalism: deep liquidity, reserve-currency status, foreign official sponsorship, and the belief that US paper occupies a class of its own.
For years, the Fed accumulated bonds, even during periods where there was no emergency. Bernanke and Yellen’s bid was completely price insensitive. From 2011 until the end of 2016, 10-year real interest rates averaged 19bps. The current level is 2.1%.
A market financed more by price-sensitive private buyers and less by the country’s central bank and official reserve managers is a market that may require a higher term premium. And when the borrower is the United States, even a modest change in required compensation becomes a global event.
And that is really the point. Political risk in the United States does not need to culminate in some dramatic constitutional rupture to matter for markets. It only needs to alter the probability distribution. It only needs to make investors ask for a little more yield, a little more optionality, a little more compensation for uncertainty around policy, fiscal direction, and international credibility. A modest repricing in the issuer of the world’s benchmark collateral is not a modest event. It is a global event.
Here’s what Mark Rosenberg shared:
“It’s now we’re in a space where the US sovereign could be the source of that crisis. And that is a fundamental change in the way that I think investors should think about global financial markets. That doesn’t mean that the S&P 500 is going to crash. That doesn’t mean that the dollar is no longer the reserve currency or that treasury yields aren’t still the cleanest, dirtiest shirt in the global economy. But what it means is that the expectation that the US sovereign will act and has the tools to act to allay or seriously mitigate the next financial crisis is seriously in question.”
The question is whether political dysfunction is becoming durable enough to impact market clearing prices by weakening the dollar and increasing the cost of credit. Ultimately, this is a market risk premium that is a proxy for a weakening view of the credibility of American institutions.
And that may be the biggest change of all. For decades, the United States exported stability and imported capital. Today, it risks exporting uncertainty while asking the world to keep financing it at privileged prices. That is not an equilibrium that should be taken for granted.
The challenges to righting the ship are certainly about our fractured politics. But they are also about math. Here’s what Libby Cantrill had to say:
“There’s this joke that the government is basically an insurance company with an army attached to it. That’s what the budget looks like. 60% entitlements, 13% defense, and then the balance is what’s called non-defense discretionary spending and then interest expense. So especially if you’re not getting into the real source of the expense, you’re not going to actually change the trajectory.”
Alex Kazan had a more sanguine take.
“I don’t want to overstate it where we’re talking about the US as having a crisis of governance that will undermine faith in the robustness of our financial system. I think we’re incredibly far from that. I don’t think the dollar-based financial system is going away anytime soon because all of this is a relative game. And for all of the challenges that the US is going through, much of the western world, many developed economies are going through similar challenges.”
He’s of course very likely correct. This is certainly a low probability event. Playing for a “US government debt event” might be like waiting for Godot. But, while unlikely, it sure would be high of high impact. I’m only here to make the point that while the probability remains low, there’s good reason to believe that it is under appreciated by way of market prices.
So, we should be contemplating the implications for additional risk premium in the US government bond market and what that means for the sister asset classes. It strikes me that corporate credit protection could be cheap in such a scenario. Interest rate vol, the shape of the yield curve, the pricing of FX vol…these are all really interesting prices to do some thought exercises on should unhappy scenarios actually unfold.
Well, that’s it for me for now. Remember, “risk management suffers from a failure of imagination”. We’ve got to keep thinking through this stuff. As we do, let’s hope that Kalshi and Poly don’t have bets on there around the timing of a US default. That wouldn’t be a great sign.
I wish you an excellent week. I’ll catch you next time.
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