Destructive Hubris

The week ended on October 2, 2026, interesting news items to look at for the past fortnight are:

Destructive Hubris: My family is on heightened alert as we cross into the final quarter of 2026. Yes, Trump displayed a certain level of courtesy and respect toward Xi and the two great nations kept their swords in their sheaths. But what was not announced was the off-ramp presented by Xi to ease global tensions and the looming economic disaster—simply for Trump to honor the MOU already signed with Iran. Allow me to draw a too-simplistic analogy: Trump, as an ex–real estate developer, should know that both Israel and the US’s cheap bids for real estate in Gaza and Iran were inadequate. Rather than a revision to give better terms, Netanyahu and Trump instead employed gangster tactics and totally alienated all other stakeholders, particularly their creditors. I can only draw the conclusion that they are both exhibiting “destructive hubris.” (Fig. 1)

Destructive hubris is extreme overconfidence, arrogance, and pride that causes a person to ignore warnings, overstep human limits, and trigger a catastrophic downfall. The consequence of destructive hubris are: (i) Sudden, severe failure that harms not just the individual, but organizations, teams, and innocent bystanders, and (ii) complete loss of trust, broken relationships, and poor decision-making within groups.

1. Expiring Deadlines & Escalation Risks: (i) September 28: Expiration of a deadline issued by Mohsen Rezaei regarding the U.S. naval blockade. (ii) September 30: A crucial 45-day deadline set by Iran on August 16 for the U.S. to lift its naval blockade, after which Iran threatens to shift from a defensive stance to an active offensive posture. (iii) September 30: An Iraqi resistance deadline demanding a full military exit by the U.S. forces from Iraq. (Fig. 2)

On Thursday, September 29, U.S. forces pulled out from their last bases in Iraq, a departure celebrated as a victory by Iran and its allies, who now have deep influence in the country where 4,500 Americans died during more than two decades of war. (Fig. 3).

To every political and military analyst, the departure from Iraq signaled that (i ) the U.S. cannot defend her final 2,500 troops in Iraq, (ii) by extension, the US cannot defend her Gulf allies, and (iii) a new security arrangement will emerge in the region, pivotal around the relationship with Iran. Cast our memories back to 2009, when the U.S. built her largest embassy in the world at a cost of $750 million. She felt invincible and had grand plans to totally dominate the richest oil region in the world. 7 wars in 7 years to remove all resistance from Iraq, Syria, Lebanon, and finally Iran. The plan failed. The petrol dollar use-by date officially expired on September 29, 2026.

2. Yen Carry Trade: The Pillar of Japan’s Industry—The Auto Industry is under severe stress, with Toyota and Honda set to reduce annual production by 800,000 vehicles. (Fig. 4).

With import costs rising rapidly and export revenue down, speculators are having a field day shorting the yen. Yet with destructive hubris, the US Treasury Secretary challenged the world with his yen and bond intervention that “He is the House.” It took just thirteen days for Bessent to eat humble pie. (Fig. 5).

The term “I am the House” came from a pop culture reference in the Netflix television series The Gentlemen (Season 1, Episode 6: "All Eventualities"). (Fig. 6).

The unwinding of the Yen Carry Trade is by no means out of the woods. Of course, this has happened before in the neo-mercantilist period of pre-WWI, when countries weaponized their FX rates to compete and national exchange rates were like cannonballs rolling on a ship’s deck. (Fig. 7).

A single country’s attempt for own survival will result in defensive measures by other countries.

Compare and contrast the proxy for creditworthiness expressed in terms of the yield of the 10-year notes. (Fig. 8).

Within the same period, the exchange rate of CNY has strengthened against the other currencies despite the fact that China was the sole nation that lowered its interest rates. (Fig. 9)

3. Destructive Hubris in AI Trade - Although the IPO of Anthropic was delayed, its Form S-1 was leaked and showed that in 2025, Anthropic had revenue of $4.6 billion, an operating loss of $8.06 billion, a net loss of $42 billion, and $518 billion of future computing commitments, of which $400 billion is non-cancellable take-or-pay. On this very skewed set of financials, Anthropic is targeting a valuation of $2 trillion. So far this year in 2026, Amazon and Google have booked unrealized profits due to the increase in the valuation of Anthropic by $70.2 billion for Amazon and $78 billion for Google in the first half of 2026. Had Amazon and Google had a slightly larger stake, they would have been required to adopt equity accounting for Anthropic’s operating loss instead of a huge profit on a private valuation. When we put this into context, the reported first half of Amazon’s profit was only $62.65 billion ($70.2 billion from Anthropic valuation), and Google’s first half was $174.77 billion ($78 billion from Anthropic). These tech titans’ results are not as robust as they appeared.  

For critics who may have doubts about my thesis regarding AI valuation, may I present below the credit market’s overall assessment of AI (Fig. 10).

The takeaway points from the credit market observation is:AI-related credit is trading at a wider spread than non-AI credit in both Investment Grade (IG) and High Yield (HY). The divergence is much larger in High Yield than in Investment Grade.

(a) IG AI–non-AI spread difference: 18 bp → 37 bp from January to September. HY AI–non-AI spread difference: 110 bp → 165 bp.

(b) The AI credit premium has generally widened during 2026. IG: approximately +19 bp increase in the AI/non-AI differential. HY: approximately +55 bp increase.

(c) HY shows the strongest evidence of investor discrimination. The much larger spread differential suggests investors are demanding substantially more compensation from AI-related lower-rated borrowers.

(c) The divergence accelerated during the year. By August/September, the difference between AI and non-AI credit was considerably greater than at the beginning of 2026.  

4. Which Domino to Fall first: We had a long history to guide us of how and when a fiat currency fails. The cycle of life is remarkably simple. Rise: Driven by initial trust, convenience, and commerce.  Fall: Caused by debasement, over-issuance, and inflation.  Replenish: A forced return to hard assets like gold or silver after trust collapses.

There are 4 primary reasons behind a fiat currency failure: 

(a) Over-Printing: Violates scarcity.  (b) Unsustainable Debt: Violates Solvency.  (c) Loss of Confidence: Violates trust.  (d) War & Crisis: Violates economic stability.

Allow me to capture this history from experiences both in the West and the East. (Fig. 11) and it does not matter which domino falls first.

Unlike the GFC in 2008, the world is polarized and divided, and countries are not working in concert to hold the old system together. Even within a single country, the K economy is against nationals uniting to share the burden of making amends for a failed social order. There is no more energy to prevent chaos from breaking out.

My friends, be warned and be prepared.

Proverbs 16:18  Pride goes before destruction, And a haughty spirit before a fall. 19  Better to be of a humble spirit with the lowly, Than to divide the spoil with the proud. 20  He who heeds the word wisely will find good, And whoever trusts in the LORD, happy is he. 21  The wise in heart will be called prudent, And sweetness of the lips increases learning. 22  Understanding is a wellspring of life to him who has it. But the correction of fools is folly. 23  The heart of the wise teaches his mouth, And adds learning to his lips.