Open your favorite business paper or news site right now and you will be confronted with a scene of spectacular cognitive dissonance.
We have a historic disruption to energy supplies and profound uncertainty about the future of the order in the Middle East. Brent crude is hovering around $100 and there are real fears about the supply of diesel and jet fuel, with worse to come. And yet the S&P 500 is reaching new records.
The complacent view peddled by the Trump administration is that the dissonance is false. The Straits of Hormuz are a passing storm. America’s economy is going strong. The AI boom is real. In their “heart of hearts” American consumers actually feel great.
Another source of complacency is the talk of the TACO trade – “Trump Always Chickens Out”. As bad as things look, there will be some way out of the looming energy crisis.
By contrast, harsher critics conclude that America’s elite just don’t care how things actually are. They care only about the bottom line and, right now, AI makes that look good. As if echoing David Dayan in the American Prospect, the FT’s report from this year’s Milken Institute conference was titled, “Blissful ignorance”:
Milken elite bask in glow of roaring markets Financiers at the Beverly Hills gathering brush aside concerns over Iran conflict and private market strains … Despite war and tariffs driving worries about US affordability, attendees at this year’s Milken Institute conference were notably untroubled — gliding between Spago dinners, a speech by Tom Brady and parties at billionaires’ Bel Air homes. Many of the investors, bankers and corporate chieftains who took over the Waldorf and Beverly Hilton this week have become desensitised to President Donald Trump’s whims. … Financiers largely brushed off concerns that have dominated conversations on Wall Street in recent months, including the war with Iran, which has driven up petrol prices across the US and is now dividing policymakers at the Federal Reserve over whether they can eventually cut interest rates. “Does anyone really care if the Strait of Hormuz is open?” one high-powered banker posited. … The mood at the Milken conference remained relatively buoyant even as the tectonic plates of geopolitics continued to shift thousands of miles away … “They might not like a lot of what’s happening in Washington, but at the end of the day, everyone’s focused on their own investment portfolios, especially here,” said Ted Koenig, chief executive of Monroe Capital. … “People are glossing over the war with Iran,” the head of one private credit firm said. “They’ve become desensitised to it. …. The outward-facing optimism was belied by private comments from financial executives and investors who described the “weird” schism between the record-setting stock market and broader consumer sentiment. “The stock market doesn’t care about the war,” said one executive based in the Middle East. … One London-based hedge fund manager said the conference had crystallised how relatively removed the US has been from the conflict’s effects, despite being an active participant in the war. “No one in Europe has this level of optimism,” he said. “There is enthusiasm based on the greater adoption of AI and positivity about the economy. In Europe, the tone is at best cautious optimism or healthy scepticism.” … “The room was half empty most of the time,” the person said. “People were only tuning into Jensen Huang or Tom Brady.”
The next question is whether this fecklessness is ultimately down to cynicism or foolishness.
Of course, the looming market debuts for SpaceX, Anthropic and OpenAI are exciting. But you might think that even on the basis of narrow self interest, a boom sustained by only a handful of stocks ought to be worrying.
Private equity boss Marc Rowan likes to quip that America has levered its entire retirement system to the performance of Nvidia. With the chipmaker sporting a market capitalisation of more than $5tn, the Apollo Global Management chief executive is not entirely wrong. What’s more, Big Tech’s heft is obscuring emerging weaknesses elsewhere. According to a recent UBS analysis, 42 stocks are driving the bulk of the S&P 500’s returns; typically, around 100 do. The index is up 12 per cent since the end of March on the back of AI-fuelled tech blue-chips, which also include Alphabet, Microsoft, Apple, Meta Platforms and Broadcom
Of course a boom is nice. But can a K-shaped economy be sustainable? As we discussed on Ones and Tooze this week, America’s economy and society are increasingly divided (the Thatcher segment is good too!):
Consumer staples like Planet Fitness, Shake Shack and Whirlpool are all ailing.
And, if the predictions of the AI boosters come true, the polarization is only set to intensify. AI will make a few rich but the majority will face unprecedented adjustment shocks. The graph of the moment, which has now appeared in numerous outlets, was, to my knowledge, first published by the Dallas Fed in the summer of 2025. It shows the US economy either spiraling to infinity or collapsing to extinction.
We go to the moon (or to Mars) or we collapse to the stone age. It could be one or the other, and no one even flinches. It is as though we were living through the Cuban missile crisis and no one even notices. Is it not time to wake up? At this point even OpenAI is calling for a new industrial policy to meet the challenge.
And can the predictions of giant AI-driven transformation possibly be real? Lift the lid on the black box of the AI boom and the cognitive dissonance only deepens. As Robin Wigglesworth points out, the entire big tech-AI nexus is self-feeding to an extraordinary degree. It does not take rocket science to figure out that the balance sheets of players like Alphabet and Amazon, newly stressed by the hundred-billion demands of hyperscaling, are being propped up by the inflated valuations of AI players, who are in turn the biggest customers of their sponsors’ cloud businesses.
Alphabet, for example, booked $37.7bn of “other income” in just the first three months of the year, accounting for over half the company’s net income over the period. Amazon reported “other income” of nearly $16bn in the first quarter, up from $2.7bn in the same period last year. That was nearly half its overall net income for the three months. … Accounting nerds and other clever readers will probably have guessed from the pattern what constitutes “other income” in this case: the ebb and (mostly) flow in the valuations of their sizeable private investments in companies like OpenAI and Anthropic. Alphabet is the biggest investor in Anthropic, and Amazon is one of the biggest. Thanks to their slugs of money, Anthropic’s valuation has vaulted from $183bn in September to $380bn today, according to PitchBook (and there’s another mammoth funding round in the works right now). This has then allowed Alphabet and Amazon to mark up the value of their existing stakes. … As Goldman Sachs analysts said in a note last week: “The hyperscalers’ earnings growth this quarter was boosted by an unusually large contribution from equity stakes in private companies. Alphabet and Amazon generated “other income” totalling $53 billion in Q1 2026, which accounted for nearly 60% of those two companies’ income in Q1 and 34% of the total $155 billion in income this quarter across the five largest hyperscalers. This represents the group’s largest collective share of earnings attributable to “other income” in at least a decade. Of this $53 billion in “other income,” $49 billion was explicitly due to equity stakes in private companies.” … Not only have private investments and increasingly engorged funding rounds become a meaningful driver of the hyperscalers’ aggregate earnings, but the money the hyperscalers have pumped into the likes of Anthropic and OpenAI has allowed the AI companies to sign huge computing deals with Alphabet’s Google Cloud, Microsoft’s Azure and Amazon Web Services. In fact, The Information has crunched the numbers, and OpenAI and Anthropic now make up about half of the entire cloud computing order books at Oracle, Alphabet, Amazon and Microsoft.
So, the money is going around and around.
Perhaps what is at play is the old adage that if the music is playing you have to dance.
Or perhaps. as Gita Gopinath argues, it is all down to moral hazard. The markets don’t actually have to believe that all is well. They just need to believe that if something does go wrong they will be bailed out – the so-called “bliss trade”. COVID, Ukraine and now Hormuz may all be symptoms of polycrisis, or what James Meadway calls “permament crisis”. The idea that the world ever “returns to normal” may be naive. But what has also changed is the response function of policy. To each successive crisis since 2020, as Gopinath points out, fiscal policy has reacted with “big lasting state support”. At some point this is priced into the market:
Such a belief is consistent with government actions over the past several years, actions that have driven public debt levels ever higher and expanded central bank balance sheets. Global public debt is now projected to reach 100 per cent of GDP by 2029. During the pandemic, the balance sheets of households and firms were not just rescued but boosted by very large government support that averaged 25 per cent of GDP for advanced economies, including assistance in the form of equity injections, loans and government guarantees to companies. This boost has buoyed consumer and business finances for several years. When Russia’s invasion of Ukraine set off an energy crisis, governments in Europe spent 2.5 per cent of GDP in energy support in the form of broad-based price-suppressing measures when it would have required only 0.9 per cent of GDP to fully compensate the bottom 40 per cent of households for the entire rise in energy costs. Germany, Italy and Spain have all reactivated price-distorting taxes and subsidies to insulate people from the current energy price surge. There are plenty of good reasons for the state to provide support in a crisis. However, the past several years of government support have gone against sound fiscal advice by being large and lasting instead of targeted and temporary. … The urge to rush to the rescue, regardless of merit, was recently evident in President Donald Trump’s attempts to bail out the US budget carrier Spirit Airlines as he mused “I’d love to be able to save an airline”. While the bailout ultimately did not go through, it does not take much imagination to predict that in a real crisis, government support in the US would be excessive. Moreover, while Taco is idiosyncratic and dependent on the psychology of the US president, Bliss is structural. Research shows that political parties of all stripes, from socialists to conservatives, all now favour higher government spending, and fiscal restraint has few champions.
Of course, a policy of crisis-management is better than none. But in a model of moral hazard each bailout results in a build-up of ever greater risks. Speculators are more irresponsible and financial leverage builds up. And it is the public balance sheet that absorbs the hit. As Gopinath points out:
The Bliss trade is reflected in the divergence between the prices of stocks and government bonds. While equity markets have held up surprisingly well, government bonds have suffered even as long-run inflation expectations have stayed mostly anchored. Since the start of the Iran conflict, long-term government bond yields have risen across major economies including the US, Europe and Japan. This divergence has become a pattern over the past several years. Term premia on 10-year US treasury yields are now close to 100 basis points higher than they were before the pandemic, driving up the interest rate bill. … The IMF predicts that in a severe scenario, the Iran conflict could cause global growth to fall to 2 per cent (instead of the reference forecast of 3.1 per cent) and global debt could rise past 120 per cent of GDP. … As compared to before the pandemic, the scope to deliver on fiscal largesse is limited. Even in advanced economies, the sensitivity of borrowing costs to debt issuance has increased, which then spills over into emerging and developing economy borrowing costs. Even as bond prices have declined, markets may be too sanguine about the consequences of rising debt on fiscal health.
To say that the inherent fragility of the system is not addressed is an understatement. Deregulation being pushed by lobby groups and their friends in the Trump administration is opening the door to all manner of risk-taking. Meanwhile, the underlying problems, whether that be the disorder in US politics, the unresolved tensions in the Middle East or the possible impacts from AI go completely unaddressed or denied. Indeed, in the Middle East, the US is fully backing the all-out disruption being pushed by Netanyahu’s government.
Gopinath urges that
Policymakers would do well to use this period in which stock markets seem disconnected from heightened risk to craft a new playbook for crisis support that is both fiscally sustainable and supportive of long-term growth. The experiences of the pandemic and Ukraine war provide a valuable lesson in what that should look like: support targeted to the vulnerable; bailouts only to companies that are liquidity constrained but otherwise viable — and whose failure poses systemic risks; and co-ordinated fiscal and monetary policy so they do not work at cross-purposes.
But this kind of systemic, holistic risk management looks increasingly like a pious fiction, out of touch with reality. That for Gopinath risks an escalating unmooring of once conventional policy norms:
If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk.
A progressive might welcome such outcomes. Financial repression and Treasury-central bank cooperation are topics to which we should definitely return. But it would be dangerous to assume that financial markets will take the same view. For now, the bond vigilantes may be in abeyance. But don’t count on it. As Gopinath warns, if investors wake up with a start to the world they are actually in the reaction could be nasty.
None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there.
In short, the complacency of the current moment may morph into something far more unstable and potentially dangerous.
All this is the fruit of reading just a few days of coverage in one newspaper – admittedly the world’s best ;).
So here is the question in the spring of 2026: How much cognitive dissonance can you handle?
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Source: adamtooze.substack.com