MacroVoices #544 Viktor Shvets: How Markets Survive Disruption

Viktor Shvets argues that disinflation is the dominant long-term structural trend, driven by technology pushing marginal costs toward zero across labor, products, and capital. Inflationary spikes are policy-created overlays on this disinflationary backdrop, including COVID responses, the Russia-Ukraine war, the Iran conflict, and chaotic trade and immigration policies. Without the disruptions introduced by the Trump administration, Shvets contends U.S. inflation on a three-month moving average would likely be at or below 2% today. He distinguishes transient from permanent inflation by watching inflation swaps, where one- and two-year swaps spiked to 3% to 5% during the Iran conflict but have since normalized below 2%, while five-by-five and ten-year swaps remained anchored at 2.2% to 2.4% throughout. The risk is that stacking multiple transient episodes causes businesses to raise prices preemptively and workers to unionize, making inflation feel permanent.

Shvets describes the Federal Reserve as the only remaining independent U.S. institution following Supreme Court decisions that emasculated most other federal bodies. He characterizes Kevin Warsh as a politician rather than an inflation hawk or dove, and argues that Warsh's stated goals of reducing Fed communication and returning risk to markets are laudable but not practically achievable given how far financialization has progressed. The Fed chair holds one vote out of 19, with 12 active at any given time, and Warsh as an untested chair does not yet command the internal respect that Greenspan, Bernanke, or Powell eventually acquired. Stephen Merran argues real neutral rates are close to zero in the U.S., implying a policy rate of about 2.5%, while Fed dot plots imply a real neutral rate of 1% to 1.5%, pointing to 3.5% to 4%, which is where the Fed sits today. Shvets says the key difference is that risks have been expelled into polarization, geopolitics, climate, and technology, domains where central banks have close to zero capability of assessing or timing impact.

The VDAM database tracks polarization from minus four, a well-functioning democracy, to plus four, equivalent to civil war. The U.S. scored approximately minus one in the mid to late 1980s and has now reached plus 2.3 in 2025 to 2026, described as the highest and fastest polarization in the database's history. Shvets identifies three possible resolutions: violent upheaval, redistribution of wealth and income, or a rapid and sustained rise in productivity, and says he does not believe a sustainable productivity rise will occur within the next five to ten years. U.S. wage share of GDI is at its lowest point since 1947, corporate profit share of national income is approximately 16% to 17% versus the 6% to 7% Warren Buffett considered too high, and the top 0.1% of U.S. households, roughly 135,000 households, hold an average net worth of nearly 200 million dollars and control about 15% of national wealth compared to approximately 8% in 1980.

On AI, Shvets argues it cannot be defined as a single thing and encompasses chips, LLMs, robotics, biotech, and quantum computing. LLMs are already commoditizing through open-weight systems and Chinese competition, and Shvets predicts most LLM valuations will fall far below current levels. Quantum computing will make many data centers obsolete and will unscramble almost everything within five to seven years. The real danger from AI is not mass unemployment but a slow erosion of marginal utility and rewards for ordinary workers, with those directly involved in AI potentially becoming 100,000 times richer and making the wealth gap effectively irreversible.

Shvets argues the United States has already completely lost the electrification stack, including EVs, batteries, solar panels, and wind turbines, to China, which is now extending that dominance into robotics and automation. China maintains a national saving rate of approximately 45% and invests roughly 11 to 12 trillion dollars per year, nearly triple Japan's GDP, making it the biggest global deflator while misallocating capital at a faster pace than any economy in human history. Shvets frames the core tension as China building the world without delivering return on equity while the U.S. delivers return on equity but is losing the world.

On markets, the S&P 500 rally was mechanically driven by SPX call option volume eclipsing 4 million contracts in a single session, forcing dealers to chase prices higher. Positive geopolitical headlines around a potential Iran ceasefire knocked crude oil toward 75 dollars, easing inflation pressure, while strong Magnificent Seven earnings reinforced the move. The Nasdaq 100 faces key technical resistance at 30,000 and 31,000. Gold broke out decisively by 4%, reclaiming its 50-day moving average, with silver, platinum, palladium, copper, and uranium equities turning higher simultaneously, which Patrick Suresna interpreted as a broader rotation into hard assets. Nominal gross shorts in the yen reached a record 264,000 contracts before intervention stretched the yen from 163 to 158 per dollar, and Suresna warned that if the yen holds its gains, forced short covering could trigger additional systematic yen buying.