Do you remember the huge shock in the US stock market caused by the "AI ghost stories"? The instigator has spoken again...

Ask AI · How has the predictive logic of James van Geelen evolved from AI events to geopolitical risks?

Financial Associated Press, March 26 (Editor: Huang Junzhi) Earlier this year, James van Geelen, founder of Citrini Research, published a 7,000-word “AI (Artificial Story) Horror Story,” unexpectedly triggering a sharp decline in the U.S. stock market. Now, he has sounded the alarm again: Under the backdrop of U.S.-Iran conflict, the U.S. stock market will continue to fall, and the market should not give up on interest rate cut bets!

The U.S. stock market still has to fall

On Wednesday, van Geelen warned in a post on Substack that the economic slowdown caused by skyrocketing oil prices could push the stock market lower. He explained that persistently high energy prices might pressure consumer and corporate profits, making it difficult for the stock market to recover even if the Federal Reserve eventually shifts to cutting interest rates.

“If the war does not end, the stock market will fall,” he wrote. He also emphasized that geopolitical tensions are a key driving factor behind the sustained increase in oil prices.

Van Geelen’s current core argument is that high oil prices act as a tax on economic growth, weakening purchasing power and tightening financial conditions, while the Federal Reserve does not need to take further action. He believes that since policy rates are close to neutral, maintaining rates unchanged is sufficient to act as a constraint as energy shocks gradually permeate the entire economy.

He wrote: “We are now in a different world, with rates near neutral. If oil prices remain high, even if rates stay at current levels, it is enough to be restrictive, as rising oil prices will impact other areas of the economy, leading to a slowdown.”

Van Geelen further stated that this dynamic makes the stock market particularly vulnerable. Even if geopolitical tensions quickly ease, the upside potential for the stock market remains limited. He pointed out that consumers, after digesting higher fuel costs, will still experience a “slight decline” in purchasing power, which will dampen any rebound.

Citrini’s latest views also challenge the common bullish argument that interest rate cuts will support the stock market. Van Geelen believes that any eventual easing policy may be in response to an economic slowdown, and historically, economic slowdowns often lead to further declines in the stock market, rather than sustained increases.

Do not give up on interest rate cut bets

Van Geelen noted that President Trump’s attacks on Iran have led to soaring oil prices, thereby increasing the risk of a shock similar to that of the 1970s, which would force central banks around the world to start raising rates to prevent runaway inflation.

This has led to a significant decline in global bond prices. In the U.S., as traders abandoned expectations of interest rate cuts, U.S. Treasury prices saw their largest drop since October 2024, when the market had anticipated that Trump’s election would further boost an already strong economy.

Before the outbreak of the Middle East war, according to the CME FedWatch tool, the market expected at least two interest rate cuts this year, with nearly a 40% probability betting on larger-scale easing. However, with rising oil prices, this expectation has completely reversed—the market now expects rates to remain unchanged this year, with an 18% probability of a rate hike.

However, van Geelen believes that the surge in oil prices is likely to bring a new and sufficiently severe shock to the economy, which would prevent the Federal Reserve from raising rates. He anticipates that the Federal Reserve will ignore the impact of the oil crisis and is unlikely to raise rates.

He believes that if the war is resolved within a month, “consumers will be slightly weak,” but concerns about inflation will dissipate. If the war continues, he predicts that stock prices will fall, “the wealth effect will cause the market to weaken to the point where the Federal Reserve cannot avoid cutting rates in the next 12 months.”

He stated that his company is long on guaranteed overnight financing rate three-month futures contracts and short on U.S. stocks. If the economy suffers a heavy blow, both bets will be profitable.

(Financial Associated Press, Huang Junzhi)