Summer time is usually a slow season, both in business and politics. Last year we had the US campaign keeping us busy through the hot days along with a highly volatile Israel-Iran situation.

While markets now are more scarce and it seems that the weekly events of 2024 are far behind us, there are several developments in the making. Today I will go through main possible events in the coming months and show what preparations are taking place.

It’s nice to be back to global events after spending three weeks deep in Polish politics. Although the Polish case might not be entirely over. And ultimately, there is no rest with Trump at the helm.

Below is a regularly paid article from Prophet, made available to readers of adj.news

Intro

Well, the focus will be on wars, but not only:

1. Ukraine-Russia: incoming escalation?
2. Indo-Pacific: is flexing enough?
3. Tariffs, bonds and other financial indicators: what about the recession?
4. Bonus: Poland: second election coming?
5. And another article in the pipeline: US-Iran deal.

Spider’s Web

We are way past the point of hope in terms of Ukraine ceasefire. The short and medium term markets have little doubt while the 2025 market is tilted towards No at the moment. Overall, the situation looks bleak for peace:

Adjacent index is also clear on that matter. But let’s bring some context to it.

For a brief moment it looked like there is a fair chance of peace. The negotiations were at an advanced stage, Trump’s peace proposal was actually quite decent and the momentum was there. However, peace was not actually desirable for all.

In hindsight the situation was and is complicated for Europe. With Trump coming in, it was clear that Europe would need to take care of its defense. The hard American stance on this made Europe to increase its military spending and reevaluate its strategic goals. Ultimately Ukrainian peace would be difficult for Europe for two reasons:

1. Need for peacekeepers in Ukraine - strain on European militaries.
2. Need to establish deterrence on other borders.

The combination of the two with the addition of significant backlog in military spending forced their hand. After all, it’s easier to maintain the Ukrainian front. Developed supply lanes, decent military industry in Ukraine (drones) and possibility of US assistance due to the Fund. Easier than what you may ask.

Well, easier than establishing deterrence on the entire eastern flank ie. the border of Finland, the Baltics as well as Poland. Even if you don’t believe that Russia has imperialistic tendencies, having a war economy country with sudden new access to international markets is not something you want to leave alone from a strategic perspective.

After all, Russia is increasing its military presence along the Finnish border, following the same directive - having a strong enemy at the border is something you don’t leave unattended.

Especially since Finland is a new member in NATO. At the same time it’s not really integrated in defense plans. So long borders, lack of plans and general backlog in military expenditures would make for a difficult feat to accomplish, especially on the clock.

In the current strategic thinking, as long as Russia is preoccupied in Ukraine, Europe can simply build industrial capabilities around supporting it, while slowly developing their militaries and establishing new bases along the eastern flank.

Europe also counts on “integrating Ukrainian military industry in the European markets” which between the lines means using Ukrainians and their expertise to help build European militaries. All of this without any explicit defense treaty.

And based on the markets the situation is not that dire. Looking at potential Russian advances in 2025, we are presented with a very conservative picture. Based on several markets on Russia capturing frontline cities, we have a following index:

Weighted 30.5% chance of Russian advances. But what does it mean exactly? Considering that the index weighs chances of Russia capturing several frontline cities in 2025, this basically means that there is overall 30.5% chance that Russia will “significantly” push the front westward. Not that significantly as the index doesn’t include main cities like Kherson, Kharkiv or Zaporizhzhia which are further westward.

What’s Next?

There is one more point to touch upon - can Ukraine actually win the war?

Well… no. Without direct help from NATO there is no way Ukraine can push eastward. From insufficient personnel to equipment, going through highly entrenched Russian army would be close to impossible.

Thus the outlook for the war is simple - a very slow grind westward with little developments from either side. It is my growing conviction that Europe will work as long as it possibly can to prevent the ceasefire as the outlook of speedy establishment of eastern flank deterrence is scary for them.

Currently the best annualized returns are on the end of September market and with majority of my bankroll free, I’m looking to accumulate on this market

Pete Hegseth Flexing

On Friday, we saw Pete Hegseth flexing muscles on the IISS Shangri-La Dialogue conference. Over the 35 minute speech he went over the future of Indo-Pacific and his message was crystal clear - this future is American, dressed in Star Spangled Banner.

The basis of his speech was that China is trying to alter the balance of power in the region by military force. From current navy flexing to rehearsals of Taiwan invasion, the American view is that China is a threat to regional stability, but one that, at least for now, can be tamed by deterrence.

For now, because Hegseth mentioned the well-known 2027 timeline for Chinese army readiness for Taiwan invasion. For once though, Pete here might be a bit ahead of the curve:

While the overall China risk index is relatively high, the military components of this index are still on the lower side, mainly because the timelines on these markets don’t go beyond 2025:

Overall, in the short-term a military confrontation is unlikely, simply because neither side is ready for it. However in the medium-term, the only constraint is that any kinetic confrontation is the last resort for solving issues.

It’s costly, risky and high-risk. Thus what Pete Hegseth announced on the conference is a set of actions disincentivizing any Chinese military aggression.

Taking lessons from the Ukraine war, where simply putting, NATO was not ready for it, the US is already reacting, seeking allies and announcing changes. From increased military spending in general (both domestic as well as urging regional partners to invest now), through showcasing military capabilities to strategic troops repositioning, meaning to increase US presence in key regions.

One remark that was especially interesting to me was that he outright invited new allies to join the US in counterbalancing China’s ambitions. Between this and the trade war, the region will be brewing now.

The ultimate result of this side-picking and Trump’s trade war will determine if China has enough military and political capital to advance. For the short-term though I am short invasion and neutral in tech race.

Tariffs, Bonds & Recession

Well, the tariffs. The most important revelation in the recent days was TACO (Trump Always Chickens Out). Throughout all the chaos, a pattern emerged - however high the tariffs go, they are always paused. Meaning that the base rate of 10% is all that really applies, bar China that enjoys 51% tariff. And some specific products, like steel, aluminum, cars that get anything between 25% and 50%.

It is partly true that small tariffs are meant to raise some revenue for the US government and at least partially bridge the deficit. But ultimately tariffs are about China. It’s a cold war and the premiere frontier is tech. And simply one of the weapons that the US is using is economic pressure ie. tariffs. This is on top of the actions in the previous section.

What we have now is a bit of an absurd situation. Somehow, thanks to sky high initial tariffs, people now think that what we currently have is great. But it isn’t. The effective average import tariff in the US was around 2% in the previous years. Currently, even with all the pauses it’s around 13% (Grok estimate).

TACO or no, the damage is done. The only big question mark is China as I expect EU to reach a deal that is fairly close to the floor level. Assuming that what we have now is neutral to best case scenario for China, the overall image looks pretty bleak.

I have a small Yes position on this market that I intend to keep for now. In my opinion the market overreacted to the anticipated positive GDP print for Q2. It is mostly fueled by significant decrease in imports (while Q1 negative print was mostly fueled by significant increase in imports in anticipation of tariffs).

Starting Q3, the situation will balance out and fundamentals will start to matter again. And to understand these, we can look at 10Y yield and inflation:

With inflation and yields remaining stubbornly high and trending higher, traders now anticipate only one rate cut this year (or even zero!). This is simply because Powell reacts mainly to inflation (high) and unemployment (low). If either starts to trend in the different direction he has an opening.

But for now the tariff threat keeps him in check. Their impact on inflation keeps him from lowering to avoid fueling rising prices and their possible impact on GDP makes him want to have room to cut if recession comes.

And I’m not even touching the topic of fiscal (ir)responsibility. This is also something that keeps him anxious as the US debt balloons. Higher rates may force Congress to curb spending.

Ultimately I’m still long recession. Q3 and Q4 are ripe to be a disaster for businesses and I believe that traders don’t take it into account that much. I’m planning to increase my Yes position on recession market once good Q2 numbers are out and odds drop even more:

Currently I’m at 1/2 odds for a recession this year, to be adjusted in the future.

What’s Next For Poland

And lastly Poland. After Nawrocki win, the current government is in a bit of a pickle. They were counting on Trzaskowski win to be able to push through at least some of their more controversial campaign promises. Obviously that won’t happen.

What will happen now is that not only will the government be severely limited in terms of action, but will now also be weaker internally and potentially face a more adversarial president considering the atrocities of the campaign.

As you may have heard, next week there will be a vote of confidence in the Polish government. While I do believe that Lewica has all the incentives to break the coalition, I think next week is still to early. That being said I see two probable paths to snap election:

1. Eventual collapse of the coalition at the hands of Lewica (more probable) or Trzecia Droga (less probable as it would require some of them to join PiS in the opposition).
2. Budget impasse in the second half of the year, led by Nawrocki (highest probability scenario in my opinion).

While this is still thesis in progress, I wanted to alert you to the possibility considering the upcoming vote and new market on the event:

Wrap up

That’s all for today! After taking a victory lap on The Oracle by Polymarket.

I am now back on focusing on the wider world.

The articles came in slower recently (although with superior quality ;)), but I have a few brewing in the pipeline:

1. Trading tips & tricks on Polymarket.
2. Deep dive on Polish snap election.
3. Much needed update on the Middle East with focus on the Iran deal.

Stay strong and we will see each other soon!