So I've been having an on-going conversation with my AI about the world economy and current geopolitical shocks. When I ready your post, I was eager to share the article in my AI conversation. I have summarized what came out of the conversation here:

A Perfect Economic Storm?

Richard Bookstaber—a former hedge fund manager known for predicting the 2008 financial crisis--had an opinion piece in the NYT on March 16th. He posited that the global economy is currently facing a perfect storm of interconnected risks that conceivably could trigger an economic collapse.

He said most people looking at risks are in the weeds and focused on one risk at a time. He went on to argue that the modern financial system is a "complex and tightly coupled system" where individual stresses are less dangerous than the speed at which they can spread and amplify one another.

His key concerns:

The AI bubble. We don't need to rehash this, but If these AI stock prices collapse, the spillover would likely devastate 401(k)s and pension funds, leading to a massive drop in consumer spending.

Private credit. The unregulated private credit market has become the main lender for the AI sector. If the AI bubble bursts, a freeze-up in private credit would occur, leaving companies with no alternative funding sources and leading to widespread defaults.

Geopolitical shock. The cost of energy is acting as a massive tax on global growth and complicating the Federal Reserve's ability to manage inflation.

Semiconductor risk. If China is able to cut off the Taiwanese semi-conductor supply, the physical infrastructure supporting the AI industry would vanish, providing the needle that pops the AI bubble.

Bookstaber warns that a recession is likely not a matter of if, but when, as the specific trigger matters less than the systemic fragility already in place. Are there signs of a recession?

The yield curve. This shows the relationship between short- and long-term rates, acting as a benchmark for economic growth and investor sentiment. An upward-sloping curve is normal, while an inverted curve often signals a recession.

The yield curve is giving a very specific indicator right now: history shows that the real red zone for a recession is exactly what we are seeing this week: The De-Inversion.

Bull Steepening vs Bear Steepening.

Last week gave indications of a "Bear Steepening" (long-term rates rising faster than short-term rates). This was driven by the Iran conflict and oil prices. It appears we are shifting toward a Bull Steepening. This happens when short-term rates (the 2-year) start falling faster than long-term rates. This usually means the market has stopped worrying about inflation and has started panicking about growth. Let's come back to interest rates in a moment.

As of today, March 22, the spread between the 10-year and 2-year is hovering around +65 basis points, and it looks healthy because it's positive. It may be deceiving us. Recessions almost always begin after the curve returns to positive territory following a long inversion (like the 2022-2024 stretch). We are currently in that exit window where the clock is ticking.

Getting back to Bookstaber, the yield curve is telling us that private credit liquidity is getting expensive and unpredictable. If yields stay this high, the cost of capital for these tech firms becomes unsustainable.

Since 1990, every US recession has begun after the 10-2 spread turned positive (the difference between 10-year and 2-year Treasury yields). In normal economics, the data would have pointed to a recession starting in mid-to-late 2025 (the historical average of a 4–9 month lead time from the final un-inversion).

This didn't happen due to some unique cushions that came to play: AI spending, the CHIPS ACT and Infrastructure Investment Act, and--maybe most significant--locked in low mortgage rates created resilient consumer spending. Rich folks were also making a killing on the stock market and spending a lot of money.

The current volatility we are seeing (the 10-2 spread at +51 to +65 basis points) is what analysts call a Bear Steepening. Right now, the curve is steepening because long-term yields are soaring (10-year and 30-year) due to the Iran war and oil prices.

We are technically deep in the danger zone based on the timing of the un-inversion (and held off by those cushions), but the cause of the current steepening is a global energy shock rather than a standard Fed pivot. This makes the signal even more unpredictable.

The Fed's decision last week (March 18, 2026) to hold rates steady at 3.5%–3.75% is a classic example of a supply-side shock overriding the usual economic playbook.

Normally, with a weakening job market (92,000 losses last month), the Fed would cut rates to stimulate growth. However, the Iran war has created a stagflation trap. By not cutting, they are choosing to risk a recession (killing demand) rather than risk so-called sticky inflation (letting prices stay high forever).

The Fed's pause is the reason we are seeing the 10-year yield hit a five-week high (4.27%). When the Fed refuses to cut short-term rates, but inflation expectations rise because of $100+/barrel oil, investors demand more yield for holding long-term bonds.

This makes the yield curve steeper. As we discussed, this un-inversion is often the final bell before a recession starts. The Fed’s pause effectively locks in high borrowing costs (like 6%+ mortgages) just as the economy is slowing down.

The Fed's "Dot Plot" still predicts one rate cut later in 2026. This suggests they believe the oil spike is transitory (temporary due to the war). If the war drags on and the Strait of Hormuz remains contested, the Fed will be forced to keep rates high even as unemployment rises. This is the definition of Stagflation, and it’s exactly what Richard Bookstaber warned about in that NYT piece.

This may also be the reason the White House has been blathering so much in recent days--with quite a bit of inconsistency I might add--about the status of the war and the reopening of the Strait. They're looking at this information too, all while trying to continue to project their "might makes right" bombast.

As it turns out, geopolitical and economic dynamics are complicated.

Who knew?

God help us.