The Watchdog – Home and Abroad
Scott B. MacDonald, Ph.D. – February 17, 2026
Summary: Last week was marked by what some are calling “the dark side of AI”, broadly defined as a loss of faith in the AI mega trade, which cascaded into other sectors, of them primary users of the new technology such as wealth management, transportation and logistics. Other sectors whipsawed by the AI fear trade were enterprise companies, such as Salesforce and ServiceNow, as tasks traditionally managed by these firms will be replaced by AI. Three things to take from last week’s upheaval with a look ahead:
1. Will the buy the dip trade eventually reassert itself (probably though more market turmoil is likely)?;
2. Investors may shift away from the AI trade and most likely move into the “pick-and-shovel trade”, focused on those sectors supplying tools, services or infrastructure to an industry rather than investing in the industry’s final products; and
3. Economic data is likely to be supportive of economic expansion, reducing (for now) the focus on the Fed.
Headlines – At Home
The week ahead. The focus is most likely to remain on the AI sector, earnings (which have been relatively strong), and economic data. The consumer and inflation loom large. This week’s data drops are Personal Consumption Expenditures, the University of Michigan consumer index, housing data (housing starts, building permits, and pending home sales) and 4th quarter 2025 GDP (advance estimate). According to the Atlanta Fed’s latest GDPNow, Q4 2025 real GDP expansion is estimated to be at 3.7%. Sticking to the consumer theme, earnings will be released for Walmart, Carvana, DoorDash and Deere. The corporate reports are well worth watching as they provide a non-government bit of data that is both backward looking and forecasting for the next quarter.
Tariffs, tariffs, tariffs. Tariffs remain one of the more controversial parts of the Trump administration’s economic agenda. On the pro side, tariffs addressed longstanding trade tensions with China and Europe, creating a more level playing field for American companies and incentivizing US onshoring. Moreover, US tariff revenue has risen substantially and could reach between $287 billion to over $300 billion in annual collections. On the con side, most Americans don’t like them and blame them for higher food prices, especially for beef, coffee, chicken, and fruits and vegetables, most of which is imported. According to Pew Research, 6 in 10 Americans disapprove of the Trump tariffs. Moreover, a recent study by the New York Fed reported that nearly 90% of the economic burden from tariffs in 2025 was borne by US companies and consumers.
What does Smiths think? Tariffs will remain a controversial matter through 2026, though Americans might become more accustomed to paying more for goods. Much will also depend on what the Supreme Court decides about the Trump tariff program. All eyes will be on the Supreme Court on February 20, when it is expected to decide the legality of Trump’s use of tariffs for national security reasons or if it is taxation, which is under the authority of the Congress.
How the Bahamas keeps California’s economy running. California’s economy is one of the largest in the world, with a 2025 estimate of $4.1 trillion, ranking it as the world’s 4th or 5th largest economy. The Bahamian economy is ranked somewhere between 137th and 142nd. How is it that The Bahamas has become so important to one of the world’s largest economies? The answer is gasoline, California’s onerous energy regulations, and US shipping regulations. California has some of the toughest environmental regulations in the country, which makes it costly for energy companies to operate. Indeed, the state is facing several refinery closings: Phillips 66 closed its Los Angeles refinery in October and Valero plans to shut another refinery in the spring. According to Bloomberg, the closures could raise the cost of gasoline for consumers by between 5 and 15 cents a gallon. Moreover, the state lacks interstate pipelines.
The Jones Act also plays a role. This is a 106 year-old maritime law that requires that goods shipped between US ports must travel on US-built, owned and operated ships. The problem is that these vessels are in short supply and expensive to charter. It is cheaper to charter foreign ships to carry gasoline from non-US supply centers. The Bahamas fits into this picture as it is a significant regional hub for storing, blending and re-exporting refined petroleum products. And one of its major customers is California. In 2025, the Golden State sourced more barrels of gasoline from the Bahamas than it had in the prior nine years combined, which according to Vortexa, accounted for around 12% of gasoline arriving in California by ship all year.
What does Smith’s think? There is something wrong with this picture. While the US is the world’s leading oil and gasoline producer, California is an “oil island” with no pipelines from other states. Consequently, it relies heavily on imports, with some of the largest sources being from Japan, India and South Korea, which have the refinery capacity to make the less polluting blend demanded in California. This is great business for The Bahamas, but for Californians it means that their state, according to AAA, consistently has the highest gasoline prices in the nation by a wide margin. As more refineries close, the price gap with the rest of the nation is only expected to widen, a factor that could impact growth prospects and the state’s fiscal standing. California’s fiscal deficit for the 2026-2027 fiscal year is projected to be around $18 billion. Happy motoring.
Headlines - Abroad
Restless in the Caribbean. The Caribbean is a hotspot for US policymakers. It is a soft strategic underbelly to the continental US; its waters serve as an important transit point for goods moving from the Atlantic to the Pacific as well as from North America to South America; it sits between the cocaine producing states of Colombia, Peru and Bolivia and the major global markets in Europe and North America; and the region holds considerable resources that the US needs, such as oil and gas as well as potential for critical materials.
Three policy planks are guiding US policy. First is the Trump administration’s push to claw back US influence in the region from China, its main global rival, and from other countries regarded as adverse to US interests, namely Russia, Iran and the terrorist organization, Hezbollah. This has come in the form of a revitalization of the Monroe Doctrine (informally referred to as the Donroe Doctrine). Second, pressure is being exerted on those local regimes that have closely aligned their policies with China and Russia. Prior to January 2026, this group included Venezuela, Cuba, and Nicaragua. Venezuela is now being steered in another direction, while Cuba’s authoritarian communist regime is being pressed hard by the Trump administration’s hardball politics vis-à-vis other countries supplying oil to the island nation. Cuba’s economy is imploding due to a US driven effort to reduce foreign oil sales to the Caribbean island, chronic economic mismanagement and endemic corruption. The third plank is to resolve Haiti’s governance crisis. This is driven by domestic US concerns over more migrants seeking refuge in the US as well as the island-state being a source of disruption for the Caribbean neighborhood.
What does Smith’s think? In many ways US policy vis-à-vis the Caribbean is to clean up problems that have gone on for a lengthy period and can impact US security, touching upon such issues as China’s listening posts in Cuba and transnational drug and human trafficking. Not everything is the fault of local and external actors; the US is the largest supplier of illicit weapons to gangs in the Caribbean, hence making its own contribution to the Caribbean security problems. The bottom line is that the high level of US activity in the Caribbean is not going away any time soon, with the key points of focus being the Southern Caribbean’s oil/natural gas matrix; Haiti; and Cuba. The last may be the next pro-China and pro-Russia domino to fall, possibly along the lines of Venezuela. On January 11, President Trump indicated that Cuba’s communist regime should reach an agreement with the US “before it’s too late”, adding that they were already “talking with Cuba”. Cuba’s leader, President Miguel Díaz-Canel denied any talks and vowed to resist US aggression “to the last drop of blood.” Good luck with that. Maybe he can tap into some of the Cuban military’s $18 billion cache (some of it in offshore bank accounts) and find a cushy exile in Moscow.
