The markets are calm. They shouldn’t be

Instead of flowing into education or healthcare, billions are pouring into the defense sector – and it is precisely this mechanism that is driving today’s stock-market gains. Are investors right to ignore geopolitical risks? Financial analyst Piotr Kuczyński explains what really threatens the financial markets and why the debt market could face a collapse.

Despite the war in Ukraine and the Middle East, Donald Trump’s unpredictability and high oil prices, stock markets have recently been hitting record highs. What lies behind this paradox, and where should we look for the real risks? We speak to Piotr Kuczyński, a financial-markets analyst.

The war does not frighten investors

Łukasz Ostruszka, XYZ: What is actually happening? How would you explain the fact that we are seeing stock-market gains? Poland recently hit record highs, but it is not alone – Wall Street did the same. At the same time, there seems to be more geopolitical uncertainty and unpredictability than ever. How can this be explained?

Piotr Kuczyński, analyst at DI Xelion: Of course, geopolitics is hardly doing us any favors – that much is true. When it comes to the Polish stock market, or indeed Europe as a whole, I would say that the current events surrounding the Strait of Hormuz are certainly a problem, but not nearly as serious as Russia’s war against Ukraine, which is happening right on our doorstep. That war has forced certain processes, such as the rearmament of the Polish military. We are rearming because of Vladimir Putin, rather than spending that money on culture, education and healthcare. It is not an optimistic scenario, but it is driving gains in the defense, fuel and metals sectors.

Defense spending is boosting economic activity, which is also benefiting the stock market. As for geopolitics itself, oil prices are currently relatively high. Before the war in the Middle East broke out, they were around USD 57–58 a barrel. Today, they are considerably higher, at more than USD 90 a barrel for Brent crude – an increase of at least one-third. That could be a cause for concern, but I believe the concern is “illusory,” because at the beginning of the war, in April, the price of WTI crude reached $115 a barrel. It even approached USD 120, whereas today it stands at USD 80–90. When an investor looks at that, the conclusion is that, fundamentally, nothing particularly alarming is happening. If nobody panicked when oil was at USD 115 a barrel, there is even less reason to panic when it is around USD 80–90.

Oil prices have been higher

Moreover, over the past 20 years, we have seen higher oil prices, and they did not pose a major problem for the global economy either. That is why markets are reacting relatively calmly to developments on the geopolitical stage, although it is a challenge because it pushes up inflation and bond yields. What concerns me is that commentary on this issue has so far remained somewhere on the sidelines – it is only mentioned in the mainstream, although it became more pronounced in the final weeks of August.

Should inflation be worrying us by now?

Inflation – and above all, what is happening in the bond market. I am talking about yields, for example on 30-year US Treasuries. I saw yields reach 5.35%, the highest level in 19 years. As a result, yields on other countries’ bonds are rising too, including Poland’s, where they are now approaching 6%. I am referring to 10-year bonds, which is a very high level indeed. These yields are climbing very rapidly, creating a bubble that could eventually trigger a collapse.

On the stock market, the narrative matters most

What are the risks we face?

In financial markets, it is often not the actual occurrence of an event that matters most, but the narrative that builds up around it. Once a particular narrative begins to dominate the market, it is immediately reflected in the prices of various assets. Take January this year, for example. The prevailing narrative was that artificial-intelligence companies were investing too much and that those investments would never pay off, triggering a sell-off. By July, however, investors had decided that AI companies were generating higher revenues from their cloud businesses, which was seen as an excellent result and a reason for markets to rise. Supposedly the same factor – high capital spending – yet a completely different market reaction. Why? Because the narrative had changed.

We are seeing a similar situation in the bond market, particularly with government bonds. In the United States, articles are now proliferating in Bloomberg, Reuters and CNBC expressing a degree of disappointment with Kevin Warsh, the Fed’s new chairman. His approach – offering no advance guidance, refraining from discussing the future and declining to provide forecasts – is a major question mark for many investors. They do not like it. But that is only part of the problem. The crux of the matter is that I was skeptical about his nomination from the very beginning.

Donald Trump calls him every day

Kevin Warsh was widely expected to take a hawkish stance because of his track record. From the outset, however, I argued that he was a hawk in dove’s clothing. In reality, he is merely creating a smokescreen. He takes a sufficiently hawkish position to keep inflation from rising above 2% and to prove that he is not Donald Trump’s puppet. Those were, after all, the accusations initially leveled against him. As a result, everything he says is extremely cautious and hawkish. During his semiannual testimony before congressional committees in July, he was asked whether he would act in line with Donald Trump’s expectations. He firmly denied it, of course. Yet the press reports that Trump speaks with him almost every evening about monetary policy and the economy.

So, as I mentioned, his words are hawkish at the moment, but his actions are dovish because there has been no interest-rate hike. A rate increase is theoretically expected in September, but the market is beginning to anticipate that Kevin Warsh will give in to pressure from President Donald Trump. Trump, for his part, wants to weaken the dollar and cut interest rates, which would lead to higher inflation down the road. This is one of the reasons why 30-year Treasury yields are so high. That, in turn, could have further consequences, because debt levels are enormous in many countries. In the United States, government debt is already around 125% of GDP – USD40 trillion, equivalent to more than 40 years of Poland’s GDP – and Poland is gradually joining that group. In Europe, France has a huge debt burden of around 116% of GDP, as do Italy at 137% and Greece, where the figure is around 145% or higher.

Poland is living in the moment – for now

Poland’s situation is rather peculiar because our debt is rising very rapidly. And this is not something that will leave our economy unscathed. Over a five-, 10- or 15-year horizon, it will certainly hurt us. For now, however, the ratio remains below 80%, and this year it is expected to come in just below 70% of GDP. Financial markets therefore look at our situation and conclude that, since Poland is below the EU average, there is no debt disaster – yet. That is how we are perceived at the moment.

There is no doubt, however – as the World Bank, among others, has pointed out – that the entire world is piling on debt at an astonishing pace, with virtually no political oversight. It suits politicians: the more money they distribute, the better the mood among voters. In my view – and I have not checked whether anyone else is making the same argument – this is all leading toward a global crisis within 10 to 15 years.

That will become a serious problem for financial markets and many societies. But we will worry about it later, like Scarlett O’Hara in Gone with the Wind. What is happening in the debt market today – in other words, the market for government bonds – nevertheless worries me greatly. A moment may be approaching, and arguably should already have arrived, when the narrative we have been discussing turns more firmly toward this issue. When that happens, it will have a real and negative impact on the economy. For now, to quote the classic line, we can say: “Stay, moment, stay – you are so beautiful.” The bull market is unfolding beautifully both in the United States and Poland. I do think, however, that in August we are already seeing the first signs of stock distribution – in other words, the beginnings of a correction. To be clear, I am not talking about a crash, but a correction.

Crisis is a time for reform

And what might such a debt crisis look like 10–15 years from now?

The situation is relatively straightforward. It all comes down to supply, demand and the relationship between the two. If a market stall has a huge amount of carrots – far more than can be sold – but demand is weak, what happens to the price? It falls. And if there are very few carrots but demand is enormous, the price rises. Why am I using carrots as an example? Because the same mechanism applies to the dollar, the zloty, the euro and other currencies. If there is an excessive amount of them in circulation – and when the United States has debt exceeding 120% of GDP, that means it is effectively issuing money out of thin air – their value gradually depreciates.

As more and more money enters the market, and people begin to realize that its value depends entirely on political will – that someone can simply add a zero to a bank account and increase the amount of money overnight – it becomes increasingly worthless. At some point, unless the situation is brought under control globally, this will inevitably lead to a crisis caused by excessive issuance of money with no underlying backing.

Inflation will eventually hit

At that point, inflation will hit hard, and we will be facing a global debt problem. Yet crises are often used as an opportunity to implement sensible reforms. Such reforms would be particularly warranted in Poland, because we have three systems that are, frankly, dysfunctional: healthcare, taxation and pensions. All three are in need of a complete overhaul, but that cannot be done under normal circumstances. We remember what happened when Prime Minister Donald Tusk and his colleagues tried to raise the retirement age – something that, incidentally, needed to be done. They immediately lost the election. I wrote at the time that, although they were right on the substance and were proposing to raise the retirement age very gradually, they would lose politically. It was obvious. Only in the midst of a deep crisis can difficult but necessary reforms be implemented.

Greece provided a clear example. When the country was on the verge of total collapse, the government even cut pensions and imposed drastic austerity measures. People did not protest en masse because fear prevailed. I am not saying that people cannot be hurt in the process, because that is certainly possible. But a crisis can provide an ideal environment for implementing change. Some 20 years ago, Naomi Klein published a fascinating book, The Shock Doctrine. It described the mechanism by which reforms are carried out when people are overwhelmed by fear.

AI comes at a cost

And what role will artificial intelligence play in all of this? It is, after all, one of the main drivers of corporate earnings. Some are already talking about another bubble. Yet there is no shortage of factors that could slow investment, including environmental challenges and regulation. I have the impression that we are at a major point of uncertainty, and that in reality no one knows where AI is heading or how it will affect stock-market valuations – or, looking at the bigger picture, the economy as a whole.

Yes, there is one thing we can be certain about – and you are absolutely right about this: the level of uncertainty is enormous. Every person, every opinion, a different perspective. Ask as many experts as you like, and you will get just as many assessments of artificial intelligence. One of the more interesting, albeit rather challenging, books on the subject is by Nick Bostrom. He presents various scenarios for the development of the technology, although it may turn out that even he has not exhausted the full range of possible outcomes. It is also true that artificial intelligence will survive. In my view, it will outlive all of us and every human being currently living on Earth. It will probably remain with us until the end of humanity, evolving continuously. The direction of that development, however, is subject to the uncertainty you mentioned.

I am not going to play the futurist and predict how events will unfold. I do assume, however – and this is not merely my personal opinion – that the enormous financial investments in data centers, with their massive consumption of electricity and water, which you rightly highlighted in the context of environmental protection, may ultimately fail to pay off. I believe the development of artificial intelligence is more likely to move in the direction that is gaining momentum in China and Japan – a trend that is less visible in the United States and almost completely overlooked in Europe. I mean humanoid robots equipped with advanced AI, effectively creating a new breed of “pseudo-humans.”

Humanoid robots will change the world

I therefore believe that over the longer term – not in a year or two, but in 15–20 years – we will see a direction much closer to these expectations. It is easy for me to imagine a situation in Japan, where the loneliness of elderly people without adequate care has become a societal problem, and artificial intelligence begins to provide them with companionship. In my view, this is where we are inevitably heading. Although massive investment in data centers currently dominates the market, this could change over time.

And what about the price? For now, we are being introduced to the benefits of AI, but eventually we will have to pay for them. And not just in environmental costs.

The biggest AI models, such as ChatGPT and Gemini, are backed by the largest US technology companies. So far, their services have been offered to users free of charge or on a subscription basis, at least at the most basic level. Pay a set subscription fee and you gain access. Some of these subscriptions are genuinely expensive, particularly when it comes to newer, more powerful generations of these models.

The high cost of running data centers

The point is that we are essentially getting these services for free at the moment, but eventually we will have to pay the bill. These fees do not come close to covering the enormous costs of running data centers, both direct and indirect.

That is exactly what I mean. If something is free, the costs are not recovered at all, but even subscription models are proving insufficiently profitable. That is why leading technology companies are gradually and systematically moving toward charging based on actual computing power used. Instead of paying a flat subscription fee, users pay for the actual amount of computing power they consume.

In the world of artificial intelligence, a unit of computing power is called a token. The term is used in various fields, but it has also come to be used for this unit here. Apparently, the cost of such a unit of computing power in the United States would be around $20 per million tokens, while in China it is just over 20 cents – more than 100 times less. We rarely pay attention to this; every now and then, a piece of news about developments such as DeepSeek or Moonshot flashes across our screens. These solutions turn out to be better, open-source and significantly cheaper than their American counterparts. We are completely underestimating what is happening in China, and reports of this kind barely register in the media.

What is going on inside Donald Trump’s head

Donald Trump has, for example, banned the import of Chinese robots into the United States. This includes autonomous cleaning devices that vacuum rooms. The argument was that they could be used to spy and transmit data, which became something of a media sensation in the US. But that is merely the humorous side of the story. In reality, technological development will be extremely broad. I believe that the shift to a token-based pricing model – that is, paying for the computing power actually used – will cause many companies to turn away from the US technology giants. Their services will simply become too expensive. It will then become clear that the enormous investments in infrastructure were excessive. There simply is not enough demand to generate such vast amounts of computing power. That is, of course, my personal view, which not everyone has to share.

Since you mentioned Donald Trump, it seems investors have become desensitized to the US president’s statements. Is that good news or bad news for us? At some point, he could say something that really has a significant impact on the market.

Yes, that is a very astute observation and an extremely sensible question. You are both right and wrong, however, in saying that investors have become desensitized. A few weeks ago – or rather, quite a few weeks ago – a Memorandum of Understanding (MoU) on a ceasefire in the war with Iran was signed. It was a preliminary agreement whose 60-day term expired last week. Of course, the ceasefire lasted just one week, rather than the announced 60 days, and so far it has led nowhere. Before the memorandum was signed, CNN counted 37 occasions on which Donald Trump had announced that a great deal with Iran was just two or three days away. Thirty-seven times! After those two months, such announcements are now being made almost every day.

How much weight do the president’s words carry?

We keep hearing that an agreement is just around the corner, so there have probably been around 50 such announcements in total. Yet, surprisingly, it works remarkably well. On the one hand, this devalues the president’s words and makes him sound increasingly unserious – to the point where soon no one may believe him – but for now the market still does. Why? Because investors are simply worried that, just perhaps, the president is telling the truth and a deal really will be reached shortly. As a result, there is a reluctance to bet on higher oil prices in the futures market. If investors positioned themselves for prices to rise, but the president turned out to be right and announced peace, oil prices would plunge. They would suffer enormous losses. So, when someone says for the 50th time that peace is just around the corner and the situation will soon return to normal, oil prices do rise, but only gradually. There is certainly no runaway rally.

TACO: the key to understanding Donald Trump

If Trump were not saying these things and markets were convinced that peace was still a long way off, oil could already be trading at USD 200 a barrel rather than USD 80. That is the reality. So while the president’s statements undermine his credibility, they have an almost remarkably effective impact on the oil market. I watched this with amazement. Every time Trump said that peace would come the next day, the price of oil fell by USD 2–3 a barrel.

More broadly, markets are convinced that the TACO principle applies: Trump Always Chickens Out. The idea is that Trump ultimately always backs down. He retreats, and although he talks a great deal, the outcome turns out to be far less threatening than he had suggested. I have even seen a mathematical formula based on this principle. It incorporated several factors, including oil prices, stock-market indexes and US Treasury yields. The formula suggested that when these conditions occur simultaneously, Trump backs away from his harsh rhetoric and threats to destroy Iran and the like.

And it works. For now, it works. It is almost amusing that even though everyone knows how he operates, the mechanism remains effective. But it is also dangerous because, as you pointed out, at some point Trump could say something genuinely dangerous. The world, as usual, would not believe him – and he could go ahead and do it anyway. There is simply no way for us to predict that.

Key Takeaways

1. War is fueling the stock market rally. Rather than weakening markets, geopolitics and the war in Ukraine have forced governments to ramp up defense spending. Increased military spending is benefiting the defense, fuel and metals sectors, helping drive stock-market gains.
2. Oil prices no longer trigger panic. Although oil is now considerably more expensive than before the conflict in the Middle East (USD 80–90 a barrel), markets view the concern as “illusory.” Since investors weathered prices of USD 115–120 a barrel at the start of the war, current levels are being absorbed calmly.
3. The real threat is a bubble in the debt market. The biggest risk to the economy is not geopolitics itself, but rising inflation and rapidly climbing bond yields, including those on 30-year US Treasuries and 10-year Polish government bonds. The speed at which yields are rising is creating a dangerous bubble that could eventually trigger a collapse.