The most common explanation one hears for the continuing rally stateside is that investors are pricing in the phenomenal productivity growth being unleashed by the AI revolution. Those espousing this viewpoint to the regular ratcheting-up of earnings expectations among market analysts as evidence, arguing that rising optimism regarding future profits suggests investors are already seeing the benefits of the boom. With firms planning investments of some $3 trillion in AI over the next three years, they argue, the potential payout ahead should the technology live up to its hype could well be massive.

Except, there’s a minor flaw in that reasoning: if AI really explains the American market’s performance, that may be a bad omen. A gain since the start of the year of 13% for the S&P 500, or 17% for the tech-heavy NASDAQ, might sounds mighty good, but only until you see what’s happening in other markets. Investors are hedging their dollar holdings, which suggests they’re getting anxious about long-term exposure to the US. As a result, the dollar is 10% weaker than it was at the start of the year, canceling out most of the gains in US share prices.

More from this author

Is the AI bubble about to burst?

By John Rapley

Meanwhile, over the same time period, Germany’s market gained nearly 20%, Italy’s even more, Spain’s more than 30%, and Greece’s over 40%. Meanwhile, the markets in Mexico, Brazil and Canada all appear to be shrugging off the effects of Trump’s tariff war, with all of them up more than 20%. Over in Hong Kong, the market is up a third since the year began. But none of these can hold a candle to what’s happening in Africa’s markets: Nigeria’s market is up 40%, Kenya’s nearly 50% and Ghana’s a dizzying 70%. That’s to say nothing of gold, up 50%, or silver, up 60%.

Throw a dart at a board with all the world’s markets today and you’ll probably land on one in rally mode. Which is strange, because almost everywhere growth is either anemic, or slowing quickly. So this isn’t about anticipated profits. In fact, outside a handful of tech giants which are making money hand over fist selling the hardware for the AI buildout, US profits have been flat this year. The same goes for investment: although the tech behemoths are pouring vast sums of money into what remains a speculative AI bet, overall corporate investment is down in the US this year. That would suggest expenses are rising just as sales are slowing — good news neither for the economy nor for share prices.

What, then, is behind these spectacular rallies? You can get a feel for what’s going on by looking at any of the star performers of the world economy this year, little stock markets such as Ghana or Kenya or Greece. While they may be small — you could probably fit the traders on the Accra and Nairobi stock exchanges into a large living room — such minnow stock markets aren’t for the faint of heart. Thinly capitalized and dominated by a small number of companies, they can swing wildly from low to high. An influx of new money is all it takes for share prices to surge.

And that’s essentially the story of our time: major central banks and governments are pumping money into the world economy, and it’s bidding up virtually all asset prices. Over the last five years, US real GDP grew about 14%; in the same period, the US money supply grew by 40% — nearly three times the pace of the growth of the economy. That helps to explain the surge in inflation, which knocked nearly 24% off the purchasing power of the dollar. But it also explains the explosion in asset values: the S&P 500 stock market index rose some 85% over the last three years.

Add to this the massive fiscal stimulus in which the US government has been engaged since 2020, first with the pandemic rescue packages, then with the Biden administration’s industrial policy, and latterly with the Trump administration’s Big Beautiful Bill of tax cuts. Over the last five years, the US government has thereby pumped over $13 trillion of borrowed money into the economy. Yet the economy has expanded by roughly half that much in that time, which means a lot of the money is being parked in savings, or just leaving the economy.

And therein lies the basic problem. Most of the money is flowing into an increasingly small number of hands, limiting the boost from consumption the stimulus can give the economy. At one time, Western governments responded to economic downturns with Keynesian fiscal stimulus, putting money directly into workers’ hands through public works programs or other employment-generating policies so as to boost consumption, which would then drag investment along. But ever since the neoliberal turn of the late-20th century, this strategy has been reversed: amid fiscal austerity, governments have left it largely to central banks to stimulate investment by injecting cheap money into the economy, the idea being that these investments would create jobs.

It hasn’t worked out that way, but that hasn’t stopped governments from repeatedly trying it. Prior to the Eighties, Western governments on average spent about 1% of GDP on fiscal stimulus during recessions; that figure rose steadily, and by the time of the 2008 crash it had reached 12% of GDP. Meanwhile, the flood of cheap money debases the currency: one way of looking at it is that expressed in gold, the US economy has not grown since 1990.

Of course, the US isn’t on the gold standard. Yet even when expressed in dollars, economic growth has been slowing for decades. Meanwhile, prices have kept rising, eroding the real value of wages while raising the share of total wealth held by the bulk of the population (since prices on assets have risen much faster than wages). In 1990, the wealthiest 1% owned 23% of the wealth while the richest 10% owned 60%; today, those figures are up to 31% and 67% respectively. Meanwhile, half the American population today own a mere 2.5% of their nation’s wealth.

Suggested reading

The battle for the Fed

By Leah Downey

In effect, the neoliberal model has become one in which a minority of the population continue to enjoy rising living standards through the redistribution of wealth from the bottom to the top. That explains why today in the US, 10% of the population accounts for nearly 50% of the economy’s consumption — a fragile base on which to build a recovery: should asset prices begin to wobble for any reason, the reverse wealth-effect could make them pull in their horns, tipping the economy into recession and thereby creating a self-perpetuating downward spiral in markets. Now, the internal contradictions of this strategy appear to be driving it closer to a crunch point. Workers feeling the squeeze have begun turning on immigrants, and nativist sentiment is rising across America.

Although their anger may be misplaced, the effect of immigration restriction will be to tighten labor markets. Since the beginning of ICE raids in the US, for instance, the labor force has stopped growing. That tightened supply will keep wages from falling as fast in downturns as they previously did and will cause them to rise faster in any upturn, either squeezing profit margins or raising inflation, or both. If interest rates rise as a result, given that margin debt is at a record high, the need to liquidate holdings to pay debts could produce a harsh turnaround.

This makes for a fragile US market. Aware of this, foreign investors appear to be keeping their money at home rather than rushing into America as they were before. That raises an interesting possibility. The rule amid past global market crashes has been that in a storm, the whole world heads to the safe port of US assets. However, the old rules may no longer apply. While on the way up, money being pumped into the American market appears to be fueling booms across the world; on the way down, that money may not come back. America’s spending binge may end up leaving everyone else with the prize.

Given the magnificent performance of the stock, it should be little surprise that many in Reddit’s “r/rycey” community share the view of the user “globalpm-retired”. He or she put it plainly in an update two weeks ago: “I am not selling any shares, I hold it like it was one of my children.”

Every part of this story feels quintessentially American. But the memes aren’t of Joe Exotic, but Roger Moore. The man they call Turbo isn’t a silent-retreat-attending founder, but an ex-BP executive living in St John’s Wood. And the company is far from a NASDAQ darling, but a stalwart of the pale, stale, FTSE100. What these devotees call Rycey, you and I would call Rolls-Royce.

The name still conjures polished wood, hand-stitched piping, and the hum of an electric clock at 60mph: the company Charles Rolls and Henry Royce envisioned when they met at Manchester’s Midland Hotel in 1904. But today, it makes no cars, having sold the brand to BMW in the late Nineties. Instead, it builds the kind of technology nations depend on but barely notice.

First, the jet engine: specifically, the advanced gas turbines that power modern commercial aviation. The company has dominated this space since the late Sixties, when it developed the RB211, its first engine built specifically for a new generation of wide-body aircraft (twin-aisle planes designed for long-haul travel). The RB211 evolved into the Trent. This is the flagship of Rolls-Royce’s current fleet of engines, and it has powered aircraft carrying over 3.5 billion passengers.

These engines are so commonplace we forget they are miracles. The XWB, the most advanced in the Trent series, inhales 1.3 tonnes of air per second — a squash court’s worth — while each of its 68 high-pressure turbine blades generates around 900 horsepower. That’s the equivalent of the entire Formula 1 grid, tripled, with extra cars to spare, strapped beneath an airplane wing.

Rolls-Royce is one of only three companies on Earth that are capable of building these engines. The other two are American, making this one of Britain’s few genuinely sovereign capabilities. They are our largest high-value manufactured goods export, generating $27.4 billion annually: roughly 1% of GDP.

The company’s reach, however, extends far beyond commercial aviation. Its engines lift the F-35B, the only fifth-generation fighter jet capable of vertical takeoff, as well as the Eurofighter Typhoon, Europe’s air superiority workhorse. Rolls-Royce will also keep the B-52, NATO’s largest heavy bomber, flying into the 2050s.

At sea, the company drives the world’s most advanced warships — from the Royal Navy’s aircraft carriers to the USS Zumwalt, the US Navy’s experimental destroyer. This ship was recently pictured test-firing a directed-energy weapon known as Helios — though the specifics of how, and even if, its Rolls-Royce MT30 engines power the system remains classified.

Yet, the company’s most vital contribution to national security lies beneath the sea. In 1965, as Harold Wilson entered Downing Street and Rubber Soul hit the charts, the PWR1, Britain’s first naval nuclear reactor, went critical. Since then, Rolls-Royce has designed three generations of pressurized-water reactors, the core (quite literally) of the UK’s continuous at-sea deterrent.

Rolls-Royce remains at the frontier of nuclear engineering. The latest generation of its reactors will power Australia’s new AUKUS-class submarines, while its Small Modular Reactor program, launched in 2021, will adapt submarine-proven technology to use on land. It’s the only company in the SMR race that has actually built and operated this kind of reactor before.

Most of this power will go to homes: each of Rolls-Royce’s proposed 470-megawatt SMRs will be able to power around a million of them. But in an era where new energy demand is being driven less by households and more by the demands of hyperscale computing, the company couldn’t be better positioned: already, it’s the world’s third-largest supplier of emergency power systems to data centers.

For security reasons, its clients in this space remain undisclosed. But one is described in official materials only as a “well-known provider of search engine, web portal, and email services”. If you need to Google it, you probably already have your answer.

Despite all this, Rolls-Royce remains oddly absent from the public imagination. Perhaps that’s because we expect the companies of Britain’s future to look new, and different: not the fourth or fifth reinvention of a 100-year-old company that has experienced its fair share of challenges.

Take the RB211: an engine so advanced it bankrupted the company in 1971, after costing $7 billion in today’s money to develop. Rolls-Royce was nationalized, only clawing its way back to private markets in 1987. Three decades later, the Trent 1000, designed for the Boeing 787 dreamliner, ran into critical durability issues, forcing an expensive redesign and a public dispute with British Airways.

To solve its financial problems, Rolls-Royce perfected a model they call power by the hour. Instead of simply selling the engines outright, their products today are sold on a subscription basis, whereby customers make payments based on their usage.

In theory, it’s brilliant. Instead of making money only when an engine is sold, Rolls-Royce keeps earning for years. For example, the Trent 700, a three-decade-old engine, still generates revenue. Airlines keep flying it, and Rolls-Royce keeps maintaining it under long-term contracts.

However, if you wanted to design a business model to implode during a global pandemic, you’d struggle to do better. When global aviation ground to a halt in 2020, so did Rolls-Royce’s revenue, taking the company into its second existential crisis.

Emergency measures kept it alive, but the rebuild would, it was assumed, take years. It’s here we return to r/rycey, and to the man they call Turbo: the ex-BP executive Tufan Erginbilgiç, who has been the Rolls-Royce CEO since January 2023.

US tech companies are now so culturally dominant that our image of a CEO is almost entirely Silicon Valley-coded: athleisure by day, Loro Piana by night; a rotation of niche hobbies, and a faintly (or not so faintly) messianic presence. Despite the “Turbo” nickname, this most certainly is not Erginbilgiç.

We’ll never see Turbo writing Substack essays about the future of energy or publishing books about the fate of the West. Instead, when Erginbilgiç makes headlines, it’s usually for his brutal honesty. Most famously, in a 2022 all-hands meeting, he called Rolls-Royce a “burning platform”.

On arrival, Turbo moved fast. He replaced the company’s heads of civil aerospace and defense, and he brought in BP allies Helen McCabe (CFO) and Nicola Grady-Smith (Chief Transformation Officer): both firm favorites of r/rycey. Entire divisions — electric flight, fuel cells, and direct air capture — were sold off or shut down. Prices went up. Customer contracts were renegotiated.

Last month came the 2024 results: a financial blowout. Profits surged by 57% to £2.5 billion. Operating margins hit 13.8%. Free cash flow nearly doubled to £2.4 billion. Key turnaround targets — originally set for 2027 — are now on track to be hit this year. The company also announced a £1 billion share buyback and reinstated its first dividend since Covid.

Yet beyond the r/rycey subreddit and the writings of a handful of financial commentators, the company is little-discussed. Perhaps it’s understandable. This is not a charismatic founder story, a moonshot bet, or a desperate Hail Mary. Rather, it is a brutal return to business fundamentals: cut costs, raise margins, sell more.

And in an era where tech companies live and die by narrative, Rolls-Royce refuses to play the game of hype. According to the company website, their mission is to “build a high-performing, competitive and resilient business with profitable growth; grow sustainable free cash flow; and build a strong balance sheet and grow shareholder returns”. Not exactly Mars by 2028.

Yet, Rolls-Royce embodies everything Britain claims to want — a homegrown industrial champion, a provider of sovereign capability, a builder of the hardest things in the world. Not vaporware, not hype, but physical technology of weight and consequence, positioned at the intersection of the defining forces of the next decade: energy and war.

While most moonshots exist as demos and press releases, Rolls-Royce is actually building leading-edge nuclear reactors, laser-firing warships, and micro-reactors designed for space. Yet Britain, fixated on the next big thing, refuses to look up.

Suggested reading

How the UK sacrificed its car industry

By Ian Birrell

A week after Rolls-Royce’s blowout results, the Ministry of Defense announced a new partnership: not with a British firm, but with the American defense startup Anduril. The announcement caused a stir not for its substance, but for its wording: the company was described not as American, but as “Anglo-American”. The basis for this claim appears to be nothing more than the presence of a UK subsidiary. In the absence of homegrown industrial champions, the Ministry of Defense felt the need to invent one.

But the ability to build great things isn’t something Britain has lost. Instead, it’s something we’ve chosen to overlook. This is because Britain’s industrial struggles aren’t just about the obvious — energy costs, planning permission, regulatory inertia — but about a deeper failure of political imagination.

In every economic roundtable featuring ministers or government advisers, the same question is, at some point, inevitably asked: What would it take to create a trillion-dollar company in the UK? But before we even ask that, perhaps we should start with a simpler one: If we had one, would we even notice?

Simone Weil wrote: “We do not obtain the most precious gifts by going in search of them, but by waiting for them.” And yet, when we imagine Britain’s economic future, we picture something new, disruptive, exciting. Not a century-old company with a CEO whose favorite word is “efficiency”.

But efficiency built the modern world. And for those who want Britain to succeed, the real failure isn’t a lack of ambition, but a failure of attention.

Needless to say, this is not the conventional reading of China’s recent attacks on fin-tech, internet monopolies and private education companies. Take Stephen Roach, former chief economist at Morgan Stanley, who recently decried Beijing’s actions “as a tipping point for the economy”. He goes on to lament the heavy-handed use of regulation “to strangle the business models and financing capacity of the economy’s most dynamic sector”.

As the proverbial expression goes, you can take the boy out of Morgan Stanley, but you can’t take Morgan Stanley out of the boy. Roach still retains a Wall Street-centric bias in a country — the United States — where the stock market remains the ultimate arbiter of the American experience. Indeed, if one were to assess America’s “entrepreneurial spirit” via stock market metrics, then that would suggest that US has been stunningly successful. As economist David Goldman has noted, “in 2010, the five biggest tech companies accounted for just 11% of the market capitalisation of the S&P 500”. Today, however, “ten companies in the S&P 500 hold two-fifths of all the cash balances of index members, and all but one is a tech giant… The top three cash holders in the S&P — Microsoft, Apple, and Google — hold a fifth of all the cash held by index companies”.

But as Goldman observes, these companies’ profits have increasingly been the product of oligopolistic rents, rather than product innovation: “Apple is so cash-rich that it has bought back $327 billion of its stock since 2012. That explains why its stock price has risen by 82% in the past six years even though its operating income has barely changed.”

Suggested reading

Chinese censorship is coming

By Jamie Bartlett

Far from deploying cash toward productive R&D investment, Apple’s behaviour provides a case study of precisely the kind of situation that Beijing is seeking to avoid: companies deploying cashflow toward stock buybacks, rather than investing in stateside facilities to enhance the nation’s productive investment and employment capabilities.

How many times do we find ourselves in an elevator, in an airplane terminal or at home, looking at a screen with stock numbers whizzing by, and people fretting over whether America is about to disintegrate because of a 5% swing in Apple’s share price? How did we get to point where our national economic conversation is dominated by chatter on the stock gyrations of GameStop, when this just an economic irrelevance for most of the 330 million people who live in America, and are struggling to sustain a modicum of economic security?

We ban the use of Chinese 5G equipment in US networks, but few ponder the question as to why there are no longer any American telecom equipment companies. After all, in the 1970s the two largest telecom equipment manufacturers were US companies: Western Electric and ITT. With this story of increasing manufacturing irrelevance as our backdrop, is it really fair to suggest that China is on the road to economic perdition because its government decries the “spiritual opium” of computer games?

A harsh charge, especially when one considers China’s own tragic history pertaining to opium addiction. Yet it seems there is some moral force to the Government’s argument which pressured China’s largest gaming company, Tencent, to announce new restrictions to limit gaming time for children under 12 to just one hour a day and two hours a day during holidays.

Suggested reading

Bankers are running the country

By Peter Franklin

Here in the United States, we lost our way decades ago, when we decided that the only social responsibility of a corporation was to increase its profits, community considerations and employees be damned. This laid the groundwork for economist Milton Friedman’s “stockholder theory”: the idea that shareholders, being the owners and the main risk-bearing participants, ought therefore to receive the biggest rewards.

But while tying corporate decision-making and stock price to innovation and production may have sounded superficially attractive, the champions of this theory, including Friedman himself, never bothered to show how these outcomes could be achieved in the real world. In fact, the historical experience has been abysmal.

Boeing and GE, to cite two prominent examples, were once poster boys for the success of American capitalism. Today they are but a shell of their former glory. With its Max 8 737 plane, and the 787 Dreamliner, Boeing has become synonymous with airplane crashes and shoddy engineering, whilst GE, once a byword for thriving manufacturing and innovation, suffered the indignity of being yet another target of Harry Markopolos, the accounting expert who first raised red flags about Bernie Madoff’s Ponzi scheme.

Both managements are now focused on financial engineering rather than manufacturing, much of which has been sold off, or outsourced to China. In doing so, they reflect an ethos that prioritises finance above all else in an economy increasingly characterised the layering of debt on top of debt. It means a greater share of GDP going to the financial system, going to interest rather than profit, and away from a goods-producing economy.

Beijing has been paying attention as it increasingly bets on real innovation, and targets various companies as strate­gic components within a broader industrial ecosystem to promote national development. True, the Government has fought to protect and promote its own companies within this sector. But what has been caricatured in the West as governments incompetently picking winners and losers has in fact created world-class companies such as Huawei.

At the same time, American “free market” solutions have resulted in a hollowing out of companies that were once world-class innovators, and a corresponding degradation of economic know-how and social capital as highly skilled jobs have been outsourced.

Suggested reading

Will China invade Taiwan?

By Tom Chivers

This is the context in which we should understand Beijing’s recent crackdowns. What Stephen Roach and others characterise as Beijing’s politically motivated attacks on big tech behemoths such as Jack Ma’s Alibaba, could more accurately been seen reining in Ma’s attempt to convert his company into bank, all the while seeking to circumvent increased banking regulation. In other words, regulatory arbitrage.

Likewise, China’s State Administration for Market Regulation has been criticised for its fines on Alibaba Group, Tencent, and SF Holdings. But a closer look at the situations shows that these firms were singled out for what China’s chief regulator called “monopolistic corporate behaviour”, and the fines were levied “to protect consumer interests”. That sounds like the sort of thing that we are used to in the US, before our tech behemoths — Apple, Google, Facebook, Microsoft — gobbled up smaller competitors and began stifling competition and actively suppressing competitive innovation. These days, Beijing appears to believe in market competition more than we do.

Similarly, the crackdown on private education companies should be seen as an attempt to curb a credential arms race as we have in the US. Attacks on cramming factories such as TAL Education Group and Gaotu Group are not an attack on education, but a deterrent to the need to furnish students with worthless diplomas while businesses lament a skills deficit.

It’s not as though Beijing’s authorities are saying mathematics is Western and needs to be replaced with Han math or Confucian physics — which would be the real equivalent of what we are currently doing in many of our universities, where the extremes of progressive ideology mean that medical school professors are forced apologise for referring to a patient’s biological sex on the grounds that “acknowledging biological sex can be considered transphobic”.

In America, among the biggest beneficiaries of the current economic system are not entrepreneurs or innovators, but parasites who owe their wealth to rigged markets or government subsidies. But they are merely a symptom of the bigger problem: a newfound scepticism in the ability of American capitalism to deliver on its economic promise of prosperity.

Suggested reading

China's Communist Party owes it all to colonialism

By Bill Hayton

That is precisely the kind of thing that China is seeking to avoid. Stock market investors may be unhappy, but far from destroying consumer confidence, the measures now being undertaken by Beijing might have precisely the opposite effect.

As Chinese fund manager Yuan Yuwei has argued, “housing, medical and education costs were the ‘three big mountains’ suffocating Chinese families and crowding out their consumption”. Yuan went on to describe these measures as “the most forceful reform I’ve seen over many years, and the most populist one. It benefits the masses at the cost of the richest and the elite groups.”

Unlike America’s Federal Reserve, whose increasing tolerance and support of financial bubbles continues to engender profound systemic fragility in the American economy, Beijing is prioritising social cohesion above the narrow interests of financial rentiers. If only American policymakers had demonstrated such foresight in decades past.