Sovereign musical chairs, except one player doesn’t realize, or didn’t plan for, it being musical chairs
Imagine being a participant in a game where a group of ten people are perpetually walking around a group of nine chairs while multitasking on other projects with their smartphones. Imagine further that one member of the group is an imposing bully who is hurling insults at every other participant while physically shoving some of them as a means of distraction. Going deeper still, consider that none of the players being shoved around have the physical means to confront their tormenting bully individually.
Now, while this setup sounds a lot like the version of hell described in Jean-Paul Sartre’s 1944 one-act existential play, “No Exit,” imagine one level deeper: consider that all the players being bullied have one vital piece of information that the bully does not. These players all know that they are in a game of musical chairs and are waiting for the music to stop… while the bully has no idea…
Last spring, the writer could not have been more wrong about being ultra-cautious on domestic markets, to the point of including in portfolios measured short positions on the S&P 500 in the wake of US military difficulties encountered in Iran. Since that time, President Trump and his team have declared total victory over Iran well over 60 times, while this war, waged at Israel’s behest (based on Marco Rubio’s initial assessment of the war), has continued. And domestic markets have, until just recently, generally believed the false claims of continued US hegemony in the Mid East. Meanwhile, the answer as to whether the Strait of Hormuz is open or closed changes by the day.
When the land of accrual accounting meets physical limits in the real world
Interestingly, despite the clouds of uncertainty that have been building in the physical world in the Mid East, the world of accrual accounting practices governing the companies that comprise the S&P 500 and other US equity indices hasn’t missed a beat. Under these accounting practices, markets price perceived future realities in real time. Said differently, “contracts” from the government, or from the likes of a software giant like Oracle that benefit certain corporations such as CoreWeave, extend years into the future and propel stock prices today.
And given what can be described as a haphazard and epic US AI data center build-out, where maximum benefits come years in the future, as described in the Wall Street Journal’s September 23rd article, “The AI Build-Out Is Becoming the Biggest Economic Bet in US History”, an arguable chasm has developed between the world of accrual accounting and the physical world that makes today’s “contracts” a future economic reality.
Wall Street Journal: The AI Build-Out Is Becoming the Biggest Economic Bet in US History
When the music stops, so too does “just in time” everything…
In a “normal” world, this disparity between the world of accrual accounting and physical realities exists but tends to wash out over time. But today’s world is far from “normal.” Iran appears to some to hold the upper hand in its conflict with the US and Israel, and this war has also exposed the limits of US military might and the security umbrella it has provided for the Mid East since the end of WWII. Beyond this sobering reality is the additional complexity posed by the rise of the Houthis, an ally of Iran, who are capturing “hearts and minds” in the Mid East by standing up for Palestinian rights and, as such, are diametrically opposed to the interests of Israel and the US in the region.
Away from the Mid East, Ukraine’s so-far-successful defense of itself against a war started by Russia has revealed the limits of a 20th century superpower when it faces 21st century drone technology deployed by a people determined to retain their sovereignty. These collective sobering realities for 20th century superpowers considerably raise the economic stakes of the Iranian conflict, to the point that a US withdrawal from the region also arguably represents an existential threat to the state of Israel itself. For this reason, despite any claims to the contrary, the war in Iran appears poised to potentially last until the end of Trump’s term, as some of Trump’s advisers have recently begun to warn.
It is in processing the narrative above that the writer came across the September 24th Bloomberg article, “Strains, Shortages Persist Across US Economy: Supply Lines,” which opens with the following two sentences: “US companies reported robust earnings in the past few weeks, outpacing analysts’ expectations by a near-record amount. The quarter would have been even stronger if it wasn’t for the supply constraints seeping through the economy…”
Bloomberg: Strains, Shortages Persist Across US Economy: Supply Lines
And if anyone is scratching their heads as to why President Trump has literally “rolled out the red carpet” for China’s Xi Jinping this week, consider the following speculation. At Israel’s behest (the writer believes Secretary of State Rubio’s initial and unscripted remarks about starting a war with Iran at the conflict’s outset are telling), could it be that the US started a war with Iran with a lightning strike that killed approximately 40 of the country’s senior leaders in the opening hours of the war? The hope of such a decapitation strike was, arguably, twofold. First, it would destabilize Iran to the point that its leadership could be replaced with pro-US and Israeli proxies, allowing for exploitation of the country’s vast oil resources; much as the US had done to Venezuela in January 2026, just before attacking Iran.
Secondly, with Venezuelan and Iranian oil under control, the US likely aimed to use this petroleum leverage as a mechanism to gain more favorable terms of trade with specific regard to rare earth minerals crucial to US defense initiatives. But as we are all now becoming increasingly aware, thanks to its Mosaic Defense strategy and decades of preparation, not only is Iran still standing, but it also now appears to some as an emerging regional power in the Mid East. Against this backdrop, the US now finds itself not only in an extended conflict but also short on missiles that heavily require certain rare earths (China has them…) for their completion. Thus, the red carpet…
It is against the confluence of developments described above that the writer queried Gemini with the following: “Is there a flaw in evaluating stocks when earnings look great from an accrual accounting perspective when physical shortages exist in the real world?” The response:
Yes, there is a fundamental flaw. Evaluating a company solely on strong accrual-based earnings during real-world physical shortages can mask severe structural vulnerabilities.
Accrual accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. In a crisis characterized by physical shortages (e.g., raw materials, microchips, energy, or labor), this disconnect can create an illusion of corporate health.
Among multiple vulnerabilities cited by the AI, the following point hits home the hardest from the writer’s perspective:
Constraints vs. Order Books — A manufacturing firm might boast a record-shattering backlog of orders, translating into highly optimistic forward-earnings models by Wall Street analysts. But accrual models assume a linear scale where demand equals revenue. If a physical shortage means the company cannot physically source parts to build the products, they cannot convert that backlog into realized revenue. The ‘great earnings outlook’ hits a physical wall, leading to sudden guidance cuts and a stock price crash…
Bottom Line
In bringing this abbreviated note to a conclusion, the writer recommends “Get Ready for the Worst: America at the End of the Long Peace,” found on Substack, where the following quote stands out:
The country (the US) is not “broke” in the way a household is broke. It is something more unstable: rich in paper claims, thin in the real capacity those claims are supposed to buy, and increasingly alone in the assumption that the paper will always be someone else’s problem.
Substack: Get Ready for the Worst: America at the End of the Long Peace
In a world where the US is less able to project power as it has in the past (as a direct result of the Iranian War), while at the same time turning its back on historic allies and threatening Iran and Cuba in front of the entire world at the September UN meeting, the US Dollar is now on an arguable glide path to become its own problem for the US.
This reality also means that it may not be an ideal time to be broadly invested in now-concentrated passive alternatives. Instead, it is time to hold more cash and to scrub the fundamentals of every holding an investor has, as the music of the post-WWII world order gets ready to stop playing.