In the 1940s, economist Joseph Schumpeter gave us a phrase that would become gospel in the world of innovation and investing: creative destruction. It’s the process by which the old, inefficient parts of an economy are swept aside to make room for the new.
We’ve used the metaphor of a forest fire clearing out underbrush so stronger trees can grow to describe Trump’s Great Reset strategy.
A perverse and distorted example of creative destruction on a grand scale, on this day in 1945, the U.S. dropped an atomic bomb on Hiroshima. Roughly 80,000 people were killed instantly. The city was obliterated — not renewed.
Japan’s economy, reduced to rubble in 1945, went on to become a global powerhouse. From 1945 to 1956, per capita GDP grew at an astonishing 7.1% annual rate.
By the 1960s, Japan had engineered an economic miracle, doubling its economy in just seven years through industrial expansion, high savings, and export-driven growth.
History can be cruel and ironic.
By the late 1980s, the miracle gave way to the “Lost Decade,” as a bloated asset bubble collapsed and economic stagnation set in.
In a cautionary tale for the United States, demographics and a reliance on debt at the government level to finance a Western-style democratic welfare state have yet to turn the economy around.
With a debt-to-GDP ratio of 240%, Japan has twice the total relative debt as the U.S. – and decades of slower growth with it.
Japan’s “Lost Decade” of the 1990s gave way to two more through the first years of the new millennium. We detailed the demographic and financing woes the Japanese have endured in our best-seller, Financial Reckoning Day; Surviving the Soft Depression of the 21st Century. (Source: Yahoo! Finance)
As we review today’s stock news, we propose a conundrum: Are we watching the tectonic plates of capitalism grind together in innovative progress? The beginning of something more dire, like an economic Hiroshima leading to a robust AI-driven future? Or even worse, like a long, slow depression in the real economy?
Ha. Trick question. Today’s offering is somewhat of a choose-your-own adventure because there is plenty of data to support all three conclusions. Let’s begin…
The $1 Billion Palantír
Stocks stumbled yesterday, tripping over new tariff threats and weak economic data like a clumsy waiter at a cocktail party.
The ISM services index — measuring the sector that makes up the lion’s share of the U.S. economy — barely budged above contraction. Cue the sell-off.
Investors tried to rally in the afternoon, but all three major indexes closed lower.
Meanwhile, Palantir stormed ahead, clocking over $1 billion in quarterly revenue for the first time ever.
The Lord of the Rings–inspired data firm is riding high on defense contracts, AI hype, and a retail investor base that still thinks it’s early 2020.
Shares jumped nearly 8%, helped along by Jim Cramer declaring the stock “dramatically undervalued.”
Our colleague Ian King is loving this one… he picked Palantir as his number one stock back in December of, wait for it, 2022.
There is, of course, this thing known as the Cramer Curse, in which outcomes are invariably the opposite of Cramer’s forecasts. Our Grey Swan Trading Fraternity is betting the latter, and that high-flying tech stocks may be due for a breather over the coming weeks.
If you’ve joined us for the beta version, you should have received your trade by email yesterday.
Big Banks, Bigger Bonuses
Bank stocks took a hit on reports of a new executive order targeting financial firms accused of discriminating against conservative customers. JPMorgan, Bank of America, and Citigroup all slipped.
At the same time, here’s something to keep in mind as we keep tabs on record retail investment pouring into the stock market’s toniest tech stocks:
Wall Street’s annual bonuses are separating the winners from the rest, too. Equity traders may see payouts rise up to 30%, while retail and commercial banking bonuses could shrink by 5%.
Johnson Associates put the average bonus last year at $244,700 — because nothing says middle-class America like six-figure “thank yous” for pushing paper.
Trump’s $2 Trillion Ante
A $2 trillion market for securities linked to U.S. inflation data may be the first to splinter if the Bureau of Labor Statistics becomes politicized.
That’s the fear swirling after Trump abruptly fired BLS chief Erika McEntarfer on Friday. The dismissal of the nation’s data czar, amid claims of rising unemployment, has investors questioning the integrity of CPI data—the very backbone of Treasury inflation-protected securities (TIPS).
Having, perhaps correctly, dismissed the head of the less-than-accurate Bureau of Labor Statistics, President Trump has invited the unintended consequence of questioning the integrity of data used to calculate inflation, too. (Source: Bloomberg.)
As JPMorgan’s Michael Feroli puts it: “The integrity of this data is at least as important as the employment data. Here, even seemingly innocuous technical changes can matter.” Especially with July’s CPI report due next week and expectations running hot.
If inflation continues to tick up. And if Trump gets his way at the Fed and rates are cut to meet his Reset agenda, TIPS will continue to be a good way to defend your money against inflation.
Divergence: The Illusion of Growth
Earnings are diverging from price at record levels. According to market analysts, S&P 500 earnings are now the most deviated from their long-term growth trend… ever.
Retail investors, ignoring fundamentals, have driven stock prices to the highest deviation from the current growth trend on record. (source: Real Investment Advice.)
To compound the distortion, the top 10 companies in the S&P 500 — your Apples, Metas, Microsofts, and Googles — have seen net income rise by ~180% since 2019.
The other 493 companies? A paltry 45% increase in profits. The divergence has only grown more extreme this earnings season: more than half of the companies reporting have seen shrinking margins.
It’s a classic “tail wags the dog” scenario. The entire market narrative hinges on a handful of mega-cap stocks, while the bulk of American business quietly struggles.
Not So Industrial Strength
Caterpillar posted disappointing earnings, missing expectations and blaming Trump’s tariffs for increased costs.
Operating profit plunged 18%, and construction profits dropped 29%. Eaton and TransDigm followed suit with dismal forecasts. Despite previous outperformance, the industrial sector is starting to creak under pressure.
The bigger picture? Trump’s tariff regime has made long-term planning a game of whack-a-mole for manufacturers. Even with a slight revenue outlook raise from Caterpillar, uncertainty is the new norm.
Meanwhile, U.S. consumer spending adjusted for inflation fell -0.15% in the first half of 2025 — the biggest decline since the pandemic. Personal consumption is growing at its slowest two-quarter pace since 2020.
Let’s Not Call It ‘Stagflation’
Even outside the BLS, economic indicators are flashing yellow. The ISM services index fell to 50.1 in July — barely in expansion territory. The employment index dropped to 46.4, contracting for the fourth time in five months.
According to Steve Miller, this contraction doesn’t appear to be coming from layoffs but from a slowdown in hiring activity. A smarmy distinction, but same results.
There’s a word for it: “stagflation” – a stagnant economy, while consumer prices continue to rise. Unfortunately, like a lot of buzzwords in our business it’s misunderstood and often misused. So… it’s lost most of its impact. (Source: ISM and Bloomberg)
Eleven industries, including transportation and finance, reported growth in July, while seven industries contracted, led by accommodation and food services.
Services firms are cutting headcount as costs rise and demand stalls. This is not a soft landing — it’s more like a bumpy ride on bald tires.
Pharma’s Shot in the Arm
Two stocks bucked the trend.
Pfizer’s shares jumped 5.18% after beating revenue and earnings expectations — and raising its guidance. But the good news was tempered by Trump’s announcement of new pharma tariffs, potentially rising as high as 250%.
CFO David Denton downplayed the impact, citing savvy inventory stockpiling. For now, Pfizer seems immunized from the worst of it.
Meanwhile, Trump hinted at semiconductor tariffs coming next week. With most chip production tied to Taiwan, and the Biden-era CHIPS Act barely broken in, expect volatility.
BP Strikes Oil… Pun, Intended
BP shares rose 3.42% after the company revealed its biggest oil discovery in 25 years — off the coast of Brazil. The company also announced a pivot away from renewables, a sweeping cost review, and more fossil-fueled profits to come.
The energy sector may be politically unfashionable, but the returns are still very much in vogue. And the valuations, after years of neglect by investors, are attractive.
Google Builds A 3d World in Real Time
For those who are ral le bol (French idiom: had enough!) with this world, maybe try an alternative one: Google unveiled “Genie 3,” its newest AI model capable of generating 3D worlds in real time — 24 frames per second for a few minutes.
According to Google, this technology brings them one step closer to AGI, with applications ranging from robotics to logistics.
It’s still in research mode. For now, the idea of AI designing its own virtual physics sandbox is either thrilling, or unsettling, depending on your caffeine intake.
The Fed Soap Drama: “Shadow Fed”
Yesterday, President Trump nixed speculation that Treasury Secretary Scott Bessent would be the next Fed Chair. “He wants to stay where he is,” Trump told CNBC yesterday, adding Fed Governor Christopher Waller and NEC Director Kevin Hassett are now in the running.
Powell’s still at the podium, despite ongoing threats and the occasional Truth Social tantrum over interest rate policy.
Whoever’s in control of writing the script for the ongoing dream has dropped teasers in social media for next week’s episode: Will Trump leave Powell at the helm of the Fed and create “The Shadow Fed”… (cue dramatic music and video close-up of Powell’s bespectacled visage).
Stay tuned.
~ Addison
P.S. In the meantime, paid-up Grey Swan Investment Fraternity members can catch Grey Swan Live! With Mark Jeftovic tomorrow – Thursday, August 7 at 11 a.m.
We’re going to take a deep dive into some intriguing research Mark has been highlighting on behalf of the fraternity. We’ll look at what technologists call “The Quickening,” or the rabid pace at which AI is becoming superintelligent, and the real-world impact massive AI investment is having on historical patterns in the stock market.
We’ll assess today’s market in the context of what Austrian economist Ludwig von Mises called the “crack-up boom” – the final phase of inflation-induced speculation and how to trade “the most terrifying bull market in history” without losing your shirt.
Going to be a good one. Please join us.
Your thoughts? Please send them here: addison@greyswanfraternity.com
