The theory that AI will trigger an economic collapse has dealt a heavy blow to the market, and van Geelen also warns not to give up on the expectation of interest rate cuts.

What economic new signs is AI · van Geelen’s rate cut warning based on?

Source: Global Market Report

Over a month ago, James van Geelen’s dystopian description of an economic collapse in the AI era triggered a stock market crash. Now, he is betting on another panic-driven sell-off—this time in the bond market—that he believes has gone too far.

The founder of Citrini Research unexpectedly entered the global spotlight after a 7,000-word Substack post. The article went viral because it coincidentally aligned with Wall Street’s most serious concerns. At the time, investors were selling stocks of any companies potentially replaceable by AI.

However, after President Donald Trump launched an attack on Iran, causing oil prices to surge, these long-standing worries were temporarily set aside, as war brought a more urgent risk: an economic shock reminiscent of the 1970s, prompting central banks worldwide to start raising interest rates to prevent runaway inflation.

This, in turn, led to a sharp decline in global bond prices. In the U.S., as traders abandoned bets on rate cuts, U.S. Treasuries experienced their biggest drop since October 2024; at that time, markets had speculated that Trump’s election would further fuel an already strong economy.

It turned out this view was incorrect. Instead, the trade war initiated by Trump brought widespread uncertainty, and employment growth noticeably slowed.

In a post on Wednesday, van Geelen stated that rising oil prices could likely cause a new shock to the economy, strong enough to prevent the Federal Reserve from raising interest rates.

He wrote, “If oil prices stay high, then just keeping rates at current levels would already be sufficiently restrictive; meanwhile, higher oil prices will gradually transmit to other parts of the economy, leading to a slowdown that could be countered with rate cuts.”

Van Geelen expects the Fed to ignore this oil shock and is unlikely to raise rates.

He said that if the war is resolved within a month, “consumers will be slightly weaker,” but inflation concerns will fade. If the war drags on, he predicts stock prices will fall, and “the wealth effect will cause the economy to weaken too much, making it impossible for markets to accept the Fed not cutting rates over the next 12 months.”

He mentioned that his firm is buying three-month futures contracts on the secured overnight financing rate and shorting U.S. stocks; if the economy suffers a heavy blow, both bets will profit.

These views suggest he joins other Wall Street institutions in predicting that an economic slowdown in the U.S. could overshadow inflation effects. Castle Securities stated this week that “demand destruction” caused by rising energy costs might support certain bond market segments. Pimco also indicated that central banks in various countries might ultimately cut rates.

As the war continues, some signs suggest this view is beginning to be accepted by the market. On Wednesday, U.S. Treasury yields declined slightly, with European market yields falling even more earlier, although futures markets still reflect a certain probability of the Fed raising rates this year.

The last time a war pushed energy prices higher was after Russia invaded Ukraine in 2022, when the Fed did tighten monetary policy afterward. But at that time, the economy was recovering strongly from the pandemic, and inflation was already rising rapidly.

Van Geelen wrote, “We are now living in a different world.”