Who’s right: Druckenmiller or Bessent?

Happy Tuesday out there, Team 42. It's your skipper here, Darius Dowell, to present our Macro Minute for Tuesday, August 25th, 2026. Hope everyone's having a great week. So as always, we'll start with the executive summary from today's lead-up warning note. So let's dive right in. Today's key macro question is, who's right, Druckenmiller or Besson? The short answer is, obviously, Stanley Druckenmiller, arguably the greatest fundamentally oriented investor of all time, is correct to highlight the associated risks and likely failure of the recent Treasury market manipulation by his former colleague at Soros Fund Management, Treasury Secretary Scott Besson. The most commonly cited risk associated with this latest episode of Treasury market manipulation is that it forestalls the substantial fiscal contraction required to end the geopolitically driven supply, demand, and balance in the Treasury bond market, of which the U.S.'s fiscal largesse is the key driver. In our view, allowing Congress a few more years to kick the fiscal reckoning can down the road is far from the largest and most likely risk. Those distinctions belong to the risk of pulling forward Paradigm D, aka controlled print, or durable and aggressive monetary debasement via Fed yield curve control. So today's lead-up warning note, total doozy, definitely don't want to miss this. We did a deep dive, kind of updating our members on where we are in the context of that geopolitically driven supply, demand, and balance in the Treasury bond market, which has been our core research theme since we authored it back in the summer, of 2023. Obviously, it's now making front page news again today with Druckenmiller, you know, essentially calling out Besson for his market manipulation, manipulation that we think will largely prove to be unsuccessful in the context of our 10-year fair value of about 5.77%. We run five independent models to ascertain the fair value of the 10-year nominal Treasury yield through the dimension of yield curve, slope, the term premia, inflation expectation, real yields, as well as the relationship between the bond market and the nominal growth in the economy. And those five independent models on an unweighted mean basis tells you that the 10-year nominal Treasury yield has got about 113 basis points to go just to get to fair value. Who's to say it doesn't overshoot fair value in the context of the geopolitically driven supply, demand, and balance in the Treasury bond market, of which the U.S.'s fiscal largesse is accelerating its contribution to at the same time, where our foreign creditors are accelerating their pulling back from? Obviously, Japan being front-page news in recent weeks. China's been front-page news in recent years. You're going to have Europe become front-page news in the coming years in the context of their remilitarization and their increased capital needs, and then ultimately what will be a capital call home for their bond market. And so this is a big, big intractable problem. We talked about it at NAZI in last week's Macro Voices episode. Obviously, this has been core to our whole liberal research process in the context of our paradigm A3 framework over the past three and a half years. And that framework has made a lot of 42 macro members a lot of money in recent years. And more importantly, or just as importantly, it saved them a lot of money and a lot of wasted opportunity costs in the context of not being long bonds, wasting time, money, energy, effort, and ultimately capital being long this crashing bond market over the past few years. And so obviously, that capital has been freed up to take advantage of things like gold, take advantage of things like Bitcoin, take advantage of this raging bull market that we've largely had our members on the right side of since January 2023. So as I also transitioned to and wrap up with the question from our community, this was titled Fabricated AI Competition with China. It says, hello, all. Recently, I heard Didi mention something along the lines of AI competition with China as a fabrication. I follow AI China news relatively closely, and this was a different perspective from the narrative I've largely subscribed to that is a different perspective from the narrative I've largely subscribed to that is a different perspective from the narrative I've largely subscribed to that is a true competition with implications on national security for anyone interested in the South, Sharp China, Stratechery Podcasts are really good for these topics. Just curious if Didi has mentioned the why behind his view in any materials that I may have overlooked. My guess is he thinks it's a fabricated narrative to justify booming the economy via massive capex as a way to mask the otherwise weak economy. That's not true. I'll explain why later. Not looking for an argument, just some data points that I can better understand Didi's view and better calibrate my own as I may be overly leaning into the true competition narrative. So thank you for the wonderful question. You know, in our opinion, this US-China race, and I'm making sure you see my fingers do the air quotes, this race is little more than a marketing campaign. I mean, this is -- it's a marketing scheme that is designed to separate you from your money so that you can give as much money as possible as quickly as possible to the people in and around the AI ecosystem. That's it. That's it. And so if you want to get better details on why we've arrived at that conclusion, review our July 18th, 2026, Around the Horn webcast and presentation. This chart here, slide 79 from that presentation. I'll just read the headline. The manufacturer, quote, AI race fails under a simple reductio ad absurdum test. What happens if China actually wins the AI race? Will the Chinese cross the Pacific and enslave our children? Or will they just quietly out-compete us like they've done in many other key industries? FYI, China is ahead of the US in 66 of 74 critical tech -- now let me say that again. China is ahead of the US already in 66 of 74 critical technologies according to the latest ASPE critical technology tracker update. FYI, China has amassed 600 nuclear weapons, 600 nuclear warheads. None have been used against the US target to date. Maybe I'm wrong on that. I'll have to do some more research. But to my knowledge, China has not used any one of its 600 nuclear warheads on the US. And so this view that because AI has national security implications that if somehow China beats the US to whatever the winning of the race is, I just haven't anybody actually defined what winning means. And that's how you know it's a marketing scheme. It's not an actual strategy. It's just a marketing scheme. It's a marketing campaign. You know, I haven't had anybody explain to me why. Like, China -- what does China winning actually mean? Does it mean that the people in DC and Silicon Valley and Mar-a-Lago not make as much money as they otherwise would have had the US, you know, won? And by winning, we mean acquire more customers around the world? You know, in terms of perpetuating, you know, US chip dominance, US large language model dominance, US AI infrastructure dominance, you know, again, those are positives. I'm not arguing against those things being positive. They're obviously positive for the US if we win. But in my opinion, that is not a national security thing. That is more a somebody wants to get paid on all this CapEx discussion. And so they're using the guise of national security to tickle your amygdala and get you to separate -- to separate you from your money as quickly as possible -- separate you from as much as your money as quickly as you possibly can so that you can continue capitalizing this -- this business. So, again, China is not going to cross the Pacific and enslave our children if they quote unquote "win" the AI race, which by the way, if you look at all the data, they are currently winning the AI race. And they're definitely going to win on the international scale because they have cheaper models and more energy, more compute. They're definitely going to win internationally. We may do some sort of regulation that prevents them from winning domestically. That seems like a high probability outcome. But again, who cares? China is not going to use AI to destroy America or use AI to take over America. They don't want anything to do with us. You know how hard it is to conquer this continent? We have oceans on both sides of us. We have 400 million guns in this country just on their citizens, just among the citizens, not the military. There's no way China wants to go to war with the U.S. Nothing bad will happen if China wins the AI race. It's a fabricated marketing scheme that was created and concocted and being perpetuated by people who just want to get more rich using your AI. It's a fabricated marketing scheme that was created and concocted by people who just want to get more rich using your AI. So pay attention. We'll wrap it up there. Derry's still here presenting our macro minute for Tuesday, August 25th, 2026. Best of luck out there today. We'll catch you back here tomorrow. Cheers. If you enjoyed this content, please remember to like and subscribe. Thank you. This content is for informational purposes only and does not constitute an offer or a solicitation. 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