We anticipate monitor and comment on market-moving global economic and geopolitical issues. No dark side brooding, no wanting the world to end, no political rants. Traders, investors, policymakers, or market observers can’t afford to ignore us. In one word, perspicacity.
An educated citizenry is a vital requisite for our survival as a free people. – Thomas Jefferson
To honor Veterans’s Day, we are reposting our June 2017 butterfly piece, which illustrates how sleepwalking can lead the world into a war that nobody wants.
History’s Biggest “Butterfly Effect” Occurred On This Day
The butterfly effect is the concept that small causes can have large effects. Initially, it was used with weather prediction but later the term became a metaphor used in and out of science.
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state. The name, coined by Edward Lorenz for the effect which had been known long before, is derived from the metaphorical example of the details of a tornado (exact time of formation, exact path taken) being influenced by minor perturbations such as the flapping of the wings of a distant butterfly several weeks earlier. Lorenz discovered the effect when he observed that runs of his weather model with initial condition data that was rounded in a seemingly inconsequential manner would fail to reproduce the results of runs with the unrounded initial condition data. A very small change in initial conditions had created a significantly different outcome. — Wikipedia
On this day in history, June 28, 1914, the driver for Archduke Franz Ferdinand, nephew of Emperor Franz Josef and heir to the Austro-Hungarian Empire, made a wrong turn onto Franzjosefstrasse in Sarajevo.
Just hours earlier, Franz Ferdinand narrowly escaped assassination as a bomb bounced off his car as he and his wife, Sophie, traveled from the local train station to the city’s civic city. Rather than making the wrong turn onto Franz Josef Street, the car was supposed to travel on the river expressway allowing for a higher speed ensuring the Archduke’s safety.
Yet, somehow, the driver made a fatal mistake and tuned onto Franz Josef Street.
The 19-year-old anarchist and Serbian nationalist, Gavrilo Princip, who was part of a small group who had traveled to Sarajevo to kill the Archduke, and a cohort of the earlier bomb thrower, was on his way home thinking the plot had failed. He stopped for a sandwich on Franz Josef Street.
Seeing the driver of the Archduke’s car trying to back up onto the river expressway, Princi seized the opportunity and fired into the car, shooting Franz Ferdinand and Sophie at point-blank range, killing both.
That small wrong turn, aminor perturbation to the initial conditions, or deviation from the original plan, set off the chain events that led to World War I.
Stumbling Into The Great War Fearing Russian support of Serbia, Franz Josef would not retaliate by invading Serbia unless he was assured he had the backing of Germany. It is uncertain as to whether the Kaiser gave Franz Josef Germany’s unequivocal support. Russia, fearing Germany would intervene, mobilized its troops forcing Germany’s hand.
The great European powers thus stumbled into a war they didn’t want through complicated entanglements and alliances, and miscalculation. Russia backing Serbia; France aligned with Russia, Germany backing the Austro-Hungarian Empire; and Britian, who really didn’t have a dog in the fight except her economic interests, aligned with France and Russia.
Later the U.S. would enter the war due to Germany’s unrestricted submarine warfare threatening American merchant ships and the Kaiser floating the idea of an alliance with Mexico in the famous Zimmerman Telegram, which was intercepted by the British.
Of course, some will argue that Great War in Europe was inevitable
The great Prussian statesman Otto von Bismarck, the man most responsible for the unification of Germany in 1871, was quoted as saying at the end of his life that “One day the great European War will come out of some damned foolish thing in the Balkans.” It went as he predicted. – History.com
Nevertheless, maybe the course of history would have been different if not for that wrong turn on June 28, 1914, which created the humongous butterfly effect, which we still experience the consequences this very day.
The botched Treaty of Versailles sowed the seeds the for World II. The War contributed to the Russian revolution and Cold War. The redrawing of borders in the Middle East after the War created the conditions for the instability and breakdown to tribalism the region experiences today.
A map marked with crude chinagraph-pencil in the second decade of the 20th Century shows the ambition – and folly – of the 100-year old British-French plan that helped create the modern-day Middle East.
Straight lines make uncomplicated borders. Most probably that was the reason why most of the lines that Mark Sykes, representing the British government, and Francois Georges-Picot, from the French government, agreed upon in 1916 were straight ones. — BBC News
If Franz Ferdinand had not been murdered on this day in history, that conflict between the Serbs and the Austro-Hungarian Empire may have been contained to just the Balkans. Maybe.
The butterfly effect. Think how many small events, decisions, mistakes, one small turn, or “minor perturbations” in plans have had enormous consequences in your own personal life.
Below is a table of the casualty list of the market’s generals, the stocks that have lead the bull market to recond highs and are now nursing wounds of their own. Some have suffered more than a routine flesh wound. Yet a glance at the major indexes barely hints at the damage. Stunning.
The S&P 500 sits just 3.4% below its intraday all-time high. There is plenty of blood beneath the surface, but the headline index has scarcely needed a bandage.
That divergence deserves attention. An index can remain resilient while individual leaders suffer substantial declines, provided other constituents take up the slack. The question is whether this represents a healthy rotation into a broader group of stocks or a gradual erosion of leadership that the averages have yet to fully reflect. The casualty list alone cannot settle that debate.
For now, investors appear reluctant to abandon equities altogether. They may be changing horses rather than leaving the racetrack.
One possibility: the crowd is already positioning for another round of bigly inflation. If investors expect cash and fixed nominal payments to lose purchasing power, shares in businesses with pricing power may offer an appealing place to hide. That does not make every stock an inflation hedge. Higher input costs, rising bond yields, and falling valuation multiples can still inflict plenty of damage.
Still, the market’s resilience raises an intriguing question: Are investors holding on because they like the earnings outlook or because they like the alternatives even less?
Credits spreads are blowing out and that makes us nervous.
Everyone knows a wave is coming, the only question is size. Will it wash away buildings on shore or leave them standing? Will it be towering or tallish? – Peggy Noonan, WSJ
Midterm elections are often described as a referendum on the sitting president. History suggests that description is well deserved. From Reconstruction in 1866 to the Republican Revolution of 1994, midterm elections have repeatedly reshaped the balance of power in Washington and, at times, altered the direction of the country. Five Midterm Elections That Shaped America, highlighted in the section at the end of this post, offer a compelling look at just how consequential these elections can be.
This year may be no exception.
Blue Tsunami With nine days to go before the November 3 midterm elections, the outlines of a potential Blue Tsunami are coming into view. Kalshi, the prediction market, now gives Democrats a 90% probability of capturing the House of Representatives and a 63% probability of taking the Senate.
If the markets have it right, Republicans could be facing a long election night, and the Trump administration could spend the remainder of its term contending with a hostile Congress: stalled legislation, aggressive oversight, and a steady stream of subpoenas.
Why I Trust the Prediction Markets More Than the Polls One lesson I took away from the 2024 presidential election is that it pays to put your money, literally, where your predictions are. Prediction markets such as Kalshi and Polymarket proved to be particularly useful indicators of the eventual outcome, while much of the traditional polling and political commentary continued to characterize the presidential race as essentially a toss-up.
On Election Day 2024, prediction markets were assigning Donald Trump approximately a 62% probability of winning. They ultimately moved toward his victory considerably faster than many traditional polling models and political commentators.
Why do I put more faith in these markets? There are several reasons:
Real-time price adjustments: Traditional polls take days to conduct, weight, analyze, and publish. Prediction markets, by contrast, continuously incorporate new information. Breaking news, campaign developments, debates, and changing voter sentiment can be reflected in market prices almost immediately.
Financial incentives for accuracy: Participants in markets such as Kalshi and Polymarket have real money at stake. Unlike political pundits, who can make predictions with little personal consequence when they get them wrong, market participants have a financial incentive to get things right. Poor judgments can cost money; accurate assessments can be rewarded.
A different pool of participants: Prediction markets draw from a different population than traditional polling organizations. Their participants include traders, political enthusiasts, data analysts, and others who may be particularly attentive to developments that conventional surveys sometimes miss. This doesn’t necessarily make them more representative of the electorate, but it does provide another way of aggregating information.
The ability to recognize momentum: Markets can respond quickly to changing conditions in individual states and congressional races. Rather than relying exclusively on polling averages or statistical models, they incorporate the collective judgments of participants who are constantly reassessing the odds.
Of course, prediction markets are not infallible. Their prices represent probabilities, not guarantees. They can be influenced by limited liquidity, trading volume, speculation, and unexpected developments. Still, I have found them a valuable complement to, and often a more useful indicator than traditional political polling.
A Few Reasons for Caution There are, however, a few reasons not to declare victory for the Democrats just yet.
First, Democrats have a tendency to snatch defeat from the jaws of victory; in other words, they are not good closers. The probability of their capturing the Senate has actually declined from 69% on October 22 to 63% tonight. That is a meaningful movement in just three days, although the market still considers Democrats the favorites.
One of the party’s recurring problems is its inability to resist taking the bait on issues that play directly into Republican campaign strategies. The progressive wing, in particular, sometimes seems incapable of recognizing when an issue that energizes its own base can alienate the much larger pool of independent and swing voters needed to win elections.
2020 Election: The Blue Senate Lost I was reminded of this during the 2020 election cycle. As American cities experienced widespread unrest following the murder of George Floyd, the “Defund the Police” movement gained traction among prominent voices on the left. Whatever the merits of the broader debate over policing and racial justice, the slogan proved politically damaging. Democrats risked allowing a relatively small but vocal faction of their party to define its message at precisely the wrong time. With businesses being burned and looted in some cities, the party’s chances of taking the Senate went up in flames as well.
It is a lesson worth remembering in 2026. Winning elections requires more than energizing the party faithful. It requires persuading voters in the political middle, many of whom are less interested in ideological battles than in economic security, public safety, and competent government.
The Democrats may have a favorable political environment, but they still have to avoid the kind of unforced errors that have undermined their victory in previous elections.
Brazil’s Electionand Prediction Debacle Second, prediction markets can be wrong. Just this morning, for example, Flávio Bolsonaro, the son of the man often dubbed the “Tropical Trump,” was given an 82 percent probability of winning Brazil’s presidential election. As the votes were tallied tonight, he ended up losing handily to Luiz Inácio Lula da Silva, widely known as Lula. With the victory, Lula, the incumbent, has secured a fourth term as president of Latin America’s largest country.
We are also following the Israeli national election closely, with voting scheduled for Tuesday. The prediction markets give Prime Minister Benjamin Netanyahu just a 27 percent chance of remaining in power, while assigning Gadi Eisenkot a 50 percent probability of becoming Israel’s next prime minister (see “Addendum” below).
What the Prediction Markets Are Saying With that in mind, here are the Kalshi prediction market odds for the November 3 midterm elections, as of Sunday evening, October 25, 2026.
The numbers make for interesting reading. And if the markets are right, we could be looking at one of the more consequential midterm elections in recent history.
As always, the odds can change and we will be watching.
Five Midterm Elections That Shaped America History offers a useful perspective on the importance of the midterm elections. In its PBS American Experience program, “Five Midterm Elections That Shaped America,” PBS examines five elections that did far more than reshuffle seats in Congress. Each reflected the political climate of its time, tested the standing of a sitting president, and, in several cases, fundamentally altered the direction of the country.
The lessons are particularly relevant as we approach the November 2026 midterms.
1. 1866 – A Referendum on Reconstruction
The first midterm after the Civil War became a referendum on the future of civil rights for formerly enslaved Black Americans.
President Andrew Johnson opposed the more expansive Reconstruction policies supported by congressional Republicans.
Johnson campaigned personally for his preferred candidates, but his speaking tour backfired.
Republicans won a landslide, gaining enough congressional seats to override presidential vetoes and advance their Reconstruction agenda.
Key takeaway: Midterms can be a direct rejection of a president’s policies and give the opposition the power to fundamentally change the country’s direction.
2. 1898 – The Wilmington Coup
Wilmington, North Carolina, had developed a multiracial political coalition that brought Black citizens and working-class whites together.
White supremacists used intimidation, voter suppression and outright election fraud to seize political power.
Following the election, local officials were forced to resign at gunpoint.
The events became the only successful coup d’état in American history.
Key takeaway: Elections are not always simply about competing political parties. The integrity of the electoral process and the protection of voting rights are fundamental to democracy.
3. 1918 – Wilson Loses Congress
President Woodrow Wilson needed congressional support to advance his vision to end World War I and establish a lasting peace.
His suppression of political opposition during wartime and support for segregation alienated progressives.
Democrats suffered significant losses in the midterms.
Wilson subsequently faced a Republican-controlled Congress, complicating his ability to secure support for his international agenda.
Key takeaway: Even during wartime, a president’s political standing matters. Losing congressional support can undermine a president’s ability to accomplish major national objectives.
4. 1982 – Reagan’s Economic Backlash
Ronald Reagan’s popularity declined as the economy deteriorated.
Unemployment reached its highest level since the Great Depression.
High interest rates hurt farmers, businesses failed, and homelessness increased.
Voters responded by removing 26 Republicans from Congress, expanding the Democratic majority in the House.
The Reagan administration was put on the defensive until the economy recovered.
Key takeaway: Economic performance can have a powerful influence on midterm elections. Voters often hold the president’s party accountable for their economic circumstances.
5. 1994 – The Republican Revolution
Bill Clinton’s presidency was weakened by scandal and the failure of his health care reform initiative.
Republican Congressman Newt Gingrich organized a national strategy to make the election a referendum on Clinton.
Republican candidates ran against the president, effectively nationalizing local congressional races.
Republicans gained 54 seats in the House and eight in the Senate.
They took control of Congress for the first time in 40 years.
Key takeaway: A coordinated opposition party, a weakened president, and a national political message can produce a dramatic electoral realignment.
What History Tells Us About 2026 Taken together, these five elections illustrate just how consequential midterms can be. They can serve as a referendum on a president, a verdict on the economy, a rejection of an administration’s policies, or an opportunity for an opposition party to seize control of Congress. Sometimes, the results do more than change the political balance in Washington. They change the course of the nation.
There is no guarantee that 2026 will follow the pattern of any one of these elections. Political circumstances are different, and prediction-market odds are probabilities, not promises. But the historical parallels are worth considering. A president’s party can lose congressional control surprisingly quickly, particularly when voters are dissatisfied and the opposition succeeds in making the election a national referendum.
If the current Kalshi odds prove accurate, November could deliver another major political realignment, with Democrats taking control of both the House and the Senate. That would leave President Trump facing a Congress controlled by the opposition for the remainder of his term, substantially complicating his ability to advance his agenda.
The final word belongs to the voters. And history reminds us that when Americans go to the polls in a midterm election, they are not simply choosing members of Congress. They are deciding how much power to give a president,.and, sometimes, how much to take away.
Source and credit: PBS American Experience, “Five Midterm Elections That Shaped America.”
Addendum Israel holds its national election on Tuesday. Here’s what the prediction markets are forecasting.
A recent report byEmpower, a major financial services company based in Colorado, found that 24 percent of Gen Zers experience intense pressure to display material wealth on social media, even as 41 percent of all Americans don’t consider themselves financially well-off. The math is simple, brutal and undeniable. Millions of broke people spend borrowed money to convince other broke people they live like oil barons.- The Hill
A new Wall Street Journal piece by Konrad Putzier and Justin Lahart (“The AI Build-Out Is Becoming the Biggest Economic Bet in U.S. History,” Sept. 23) puts hard numbers on what our website has been flagging for a while: the U.S. economy has become a leveraged wager on a single theme.
Citing new Brookings estimates from economist Stijn van Nieuwerburgh, the Journal reports that data-center and AI infrastructure spending is projected to reach $10.3 trillion from 2025 to 2032, roughly 3.6% of GDP per year. On an average-annual basis, that dwarfs the canals, railroads, electrification, the interstates, and the ’90s fiber build. Goldman puts 2026 AI investment alone at 1.9% of GDP.
Crowding out is real. Private data-center construction ran about $9 billion ahead of last year through July, while all other private construction fell roughly $46 billion. Hyperscalers are soaking up electricians, land, and power. The Journal notes a Mississippi aluminum smelter, and its roughly 1,000 jobs, went to Oklahoma after a nearby data center claimed the electricity. The capital cycle is picking winners, and it’s not picking manufacturing.
The financing is the tell. FactSet analysts see $4.2 trillion of capex from Alphabet, Amazon, Meta, Microsoft, and Oracle over the four years through 2029, with a rising share funded by debt. Much of that runs through off-balance-sheet vehicles with banks and private credit, where disclosure is thin. Opacity plus leverage plus a single end-market: we’ve seen that movie before.
The wealth effect is propping up the consumer. Household equity and fund holdings hit $63 trillion in Q2, nearly double end-2022. That is carrying spending even as real wage growth stalls, but the gains skew heavily toward the top. It’s K-shaped consumption financed by an AI-driven equity rally.
And it’s inflationary. Import prices for computers, peripherals, and chips were up 20% year over year in August. Austin Goolsbee has flagged wage pressure in AI-adjacent trades, and Fed Chair Warsh has pointed to hyperscaler borrowing as one driver of higher long-term rates. Electricity bills are climbing wherever the server farms cluster.
The GMM take: The risk isn’t that AI fails. It’s that monetization arrives slower than debt service comes due. Growth, household wealth, and the long end of the curve are now all correlated to one capex cycle. We’ll be watching hyperscaler credit spreads, private-credit marks, the term premium, and forward capex guidance. Any wobble in that guidance is no longer a tech story. It’s a macro event.
Diplomacy begins with understanding the person across the table. In negotiating with Vladimir Putin, Jared Kushner and Steve Witkoff see a businessman. Putin’s record suggests that he is something very different.
We anticipate monitor and comment on market-moving global economic and geopolitical issues. No dark side brooding, no wanting the world to end, no political rants. Traders, investors, policymakers, or market observers can’t afford to ignore us. In one word, perspicacity.
