In The Wager: A Tale of Shipwreck, Mutiny, and Murder, David Grann masterfully recounts the harrowing true story of HMS Wager’s 1741 shipwreck off Patagonia’s desolate coast. Tasked with raiding Spanish colonies in the Pacific, the British naval ship braved Cape Horn’s ferocious storms—infamously dubbed “Cape Stiff” and “The Sailors’ Graveyard” for their deadly toll—only to run aground, stranding its crew on a barren island. Starvation, disease, and desperation fractured the survivors, igniting mutiny and moral collapse as rival factions fought to survive. Through meticulous research and conflicting survivor accounts, Grann unravels the chaotic aftermath and the sensational court-martial that followed their return to England.
Much like the HMS Wager, the global economy is navigating its own “Sailors’ Graveyard,” battered by storms and now seemingly shipwrecked. As I noted last month in Whiffs of Stagflation in the Air, global trade has been rocked by disruptions: unexpectedly high tariffs, abrupt tariff reversals, a temporary pause, a stock market rebound, and—most critically—the stabilization of bond yields without meaningful improvement. These developments leave the economic outlook for the United States and the world no brighter than it was at the start of April.
The unusual convergence of an inflationary supply shock and a deflationary demand shock makes a US recession increasingly likely, potentially beginning now or within the next few months. To clarify, this is not a recession in the classical sense of two consecutive quarters of negative GDP growth. Rather, it is a period of time where the normal economic cycle reverses: declining employment and investment lead to falling incomes and consumption until the trend is reversed by interest rate cuts or government stimulus.
The Federal Reserve is likely to intervene with an interest rate cut in late summer, while Republicans are expected to pass a tax bill or stimulus package by July. Meanwhile, Europe and China are expected to roll out stimulus measures by summer as tariffs bite hard. Collectively, these actions should provide enough momentum to reverse the economic downturn and avert a prolonged contraction. However, the depth and duration of the recession will hinge on the timing and scale of these interventions.
Every recession brings structural shifts to the global economy. Just as the HMS Wager’s crew splintered into factions and mutinied against authority, today’s world economy shows signs of fracturing into three distinct blocs: Southeast Asia, Europe, and Fortress America.
In Southeast Asia, China has been laying the groundwork for a zone of monetary stability centered on the renminbi since 2008. Through central bank swaps, alternative payment systems to replace SWIFT, and the expansive Belt and Road Initiative, China has built a robust foundation. US policies—such as Trump’s 2019 tariffs, Biden’s 2022 semiconductor ban, and renewed tariffs in 2025—have accelerated this decoupling between rivals. Southeast Asian nations, where 70% of countries now trade more with China than the US but rely on American security, face a stark choice: economic alignment with China or military protection from the US (more on this below). Meanwhile, everything is in place for massive infrastructure plans to integrate the Asian bloc, with Hong Kong’s substantial savings poised to finance them.
In Europe, concerns are mounting that the US may scale back its role as a security guarantor, as suggested by Vice President JD Vance’s Munich speech, President Zelenskyy’s White House meeting, and Defense Secretary Pete Hegseth’s proposed spending cuts. Coupled with Trump’s tariffs on the EU and demands for increased defense contributions, these developments have set off a chain reaction. Germany’s recently announced plans to expand deficit spending—a significant shift from its historical fiscal restraint—marks a turning point for the EU. The region is now poised to increase spending on rearmament, reindustrialization, and securing critical commodities, likely through targeted stimulus measures.
In the United States, the vision of “Fortress America” is taking shape. As noted above from Vance’s Munich speech to Zelenskyy’s White House discussions and Hegseth’s budget proposals, the US appears less willing to serve as the world’s policeman (this will cause more Asians countries to turn to China rather than US). This explains why the US is trying to push Denmark out of Greenland, China out of Panama, Argentina and Venezuela, and why President Donald Trump keeps talking about a US protected by its “two beautiful oceans”. The administration aims to repatriate manufacturing or at least relocate it closer to home, reducing dependence on China. To achieve this, the US will need to strengthen ties with North and South American nations.
These three blocs will take time to fully materialize. As they do, excess US dollars may need to find a new home as capital flows back to Southeast Asia and Europe. While a ‘capital flight’ is occurring away from the US dollar today, this does not represent the end of its status as world’s reserve currency. Such claims may be exaggerated, but a weaker dollar is plausible as central banks liquidate dollar reserves to finance infrastructure booms in Asia and Europe.
In short, 2025 is poised to be a defining year, with profound shifts in political, geopolitical, and economic currents reshaping the global landscape, much like the turbulent seas that doomed the HMS Wager. Just as the Wager’s crew faced uncharted perils and fractured under pressure, today’s world economy is navigating its own treacherous waters, splitting into new factions. The trends unfolding in financial markets align with these developments and reinforce a long-held belief of mine: money managers are not paid to predict the future but to adapt to it.
