Inside View: Time to Stress-Test Everything

 

“After the 2008-09 financial crisis, the Treasury and then the Federal Reserve ran stress tests on banks: What happens if unemployment hits 13%, equity prices decline by 50%, and housing prices drop 21%? In our current unpredictable world and seat-of-the-pants policymaking era, those are plausible scenarios. It's time to stress test everything:

 

-- China and Taiwan. Will China invade or blockade the island where most Nvidia artificial-intelligence chips are made in 2026? In 2028? This would be disruptive to Western economies but worse for China. Our first move would be to "hit" China, cutting it off from world financial markets. Then a true blockade would follow, severely limiting trade, including nearly $2 trillion in net exports along with critical imports like food and oil. Little talked about is that China's food self-sufficiency dropped from 94% in 2000 to 66% in 2020. That's our leverage.

 

China burns a lot of coal, but tanks and ships need oil. Beijing still imports more than 70% of its crude -- much of it from Russia. Nearly 14% of it comes from Iran, which, last I checked, has no air defense thanks to Israel. There are 150 countries that are part of China's Belt and Road Initiative, and we could seize these ports and other infrastructure quickly. Yes, China has a formidable navy, but America still dominates the waters with our almost-silent nuclear submarines, which can pop up almost anywhere undetected. I assume China is running similar stress tests and smartly holding off its invasion.

 

-- Data center overbuild. There are a lot of circular deals going on. Microsoft invested in OpenAI, which received credits for data-center computing, boosting Microsoft's revenue. Same for Google and Anthropic. Oracle announced a $300 billion deal for data centers with OpenAI -- money it doesn't have. This was followed by Nvidia's $100 billion investment (cash on hand is $56 billion) in OpenAI, which will then turn around and buy Nvidia chips.

 

Meta is borrowing $26 billion to fund a Louisiana data center and signing engineers to NBA-like contracts. But where are the customers? AI demand needs to grow like weeds on steroids to justify these deals, or else they'll implode. During the dot-com era, America Online cut similarly circular "eyeballs for equity" deals. It didn't end well.

 

-- Stock-market selloff. An AI bubble bursting or plain old inflation could whack the market, which feels as frothy as a Heineken beer ad. What happens if it falls 10%, 20%, more? A lot of recent buying has been via single-stock leveraged exchange-traded funds. I've seen leveraged funds advertised in the Hong Kong subways like they were videogames. A quarter of new ETFs this year have been these leveraged funds. The three largest "2x" single stock funds in the U.S. are for Tesla, Strategy and Nvidia. You know this means two times the selling on the way down as fund holders redeem.

 

-- Crypto selloff. In the 1929 film "The Cocoanuts," Groucho Marx exclaims, "You can have any kind of a home you want, you can even get stucco. Oh, how you can get stuck-o!" At some point, "greater fool" investing runs dry. South Korea live-streams highly leveraged crypto "perp" trading like it's horse racing. Stress-testing is sorely needed.

 

The poster child of hype, bitcoin treasury company Strategy (formerly MicroStrategy), has recently been valued at more than three times its bitcoin holdings. Greater fools indeed. Now it's 1.3 times. What happens if bitcoin sells off and then marginal holders and ETF funds start dumping? The train runs in reverse, with Strategy likely valued at half or less of its bitcoin holdings' value. Could get ugly.

 

-- Dollar drop. The dollar is quietly down about 10% in 2025. No one seems to care because the stock market is roaring. What if it drops another 10%? Will we see interest-rate increases to support the currency? Ten-year Treasury yields more than 5%? I hope someone in Scott Bessent's Treasury is stress-testing this.

 

-- Private credit implosion. New to this economic cycle is the growth of private credit, now about $2 trillion in size. This can be lower-credit-rating, higher-yielding debt that hasn't been through a real downturn. We may find the sector's warts the hard way.

 

-- Progressive and MAGA mangle: Historian Victor Davis Hanson notes, "I don't even think there is a Democratic Party right now, it's just an amalgamation of a bunch of different groups, but they're all way to the left." And the MAGA anger over a potential Trump administration coverup of Jeffrey Epstein's files was put on hold temporarily after the brutal Charlie Kirk murder. It may come back. Does anyone know where the center is anymore?

 

-- Late-night TV: Already stressed itself to irrelevance.” [1]

 

1. Inside View: Time to Stress-Test Everything. Kessler, Andy.  Wall Street Journal, Eastern edition; New York, N.Y.. 29 Sep 2025: A17.