Apple Research Paper "The Illusion of Thinking" says AI Reasoning models like Claude, DeepSeek-R1, and OpenAI's o3 are NOT really "thinking" BUT they are just throwing more compute towards pattern matching which completely collapse (dropping to zero accuracy) beyond a model specific complexity threshold as complexity increases despite having adequate token budget.

*As problems get harder, reasoning models initially think more (good!) but then START THINKING LESS despite having plenty of token budget left. They give up right when they should work harder!

*LOW complexity: Standard LLMs actually outperform reasoning models (and are more efficient!)
*MEDIUM complexity: Reasoning models gain advantage.
*HIGH complexity: Both models completely collapse to 0% accuracy.

accuracy progressively declines as problem complexity increases until reaching complete collapse (zero accuracy) beyond a model specific complexity threshold. We observe that reasoning models initially increase their thinking tokens proportionally with problem complexity. However, upon approaching a critical threshold—which closely corresponds to their accuracy collapse point—models counterintuitively begin to reduce their reasoning effort despite increasing problem difficulty. Notably, despite operating well below their generation length limits with ample inference budget available, these models fail to take advantage of additional inference compute during the thinking phase as problems become more complex. This behavior suggests a fundamental scaling limitation in the thinking capabilities of current reasoning models relative to problem complexity.

https://machinelearning.apple.com/research/illusion-of-thinking

The Week Ahead: infinityhedge

Mon:
*Saylor expected to announce another BTC purchase
*US, China trade negotiations in London With Focus on Rare Earths
*Apple’s WWDC Event; Apple’s AI strategy

Tue:
*Strategy’s $1B STRD preferred stock sale set to close
*GameStop Earnings

Wed:
*U.S. May CPI: expect a soft print. As the recent beige book flagged, some firms are passing through tariffs costs.
*Bessent to testify before house panel

Thu:
*U.S. 30-Year Bond Auction
*Strategy, GameStop annual shareholder meeting

*More about the week Ahead and What Happened last week:
https://open.substack.com/pub/infinityhedge/p/the-7-days-553

META HAS AGREED TO TAKE A 49% STAKE IN DATA LABELING FIRM SCALE AI FOR $14.8 BILLION

*Zuckerberg is Personally Recruiting New ‘Superintelligence’ AI Team at Meta to Achieve AGI

*Zuckerberg aims to hire around 50 people for the new team, including a new head of AI research.

*Zuckerberg is building that team in tandem with a planned multi-billion dollar investment in Scale AI. Scale AI founder Alexandr Wang is expected to join the superintelligence group.

*Meta has offered seven- to nine-figure compensation packages to dozens of researchers from leading A.I. companies such as OpenAI and Google.

*Scale AI is Meta’s largest external investment to date.

Musk: I regret some of my posts about President Trump last week. They went too far

Major DAY:

~US CPI:
Median Estimates:
*headline: 0.16% vs 0.22% M/M prev.
*headline: 2.4% vs 2.3% Y/Y
*Core CPI: 0.27% vs 0.24% M/M
*Core CPI: 2.9% vs 2.8% Y/Y

SPX reaction (rxn) on Core MoM:
*> 0.35%: -rxn
*0.3%-0.35%: ±0.25%
*≤ 0.3%: +ve rxn

Core MoM Forecast:
GS: 0.25%
JPM: 0.31%
BNP: 0.27%

~US-CHINA London Meeting details Release Coming:
*US, China Officials Agree on Plan That Awaits Xi, Trump Sign-Off. After the negotiations, US officials said they “absolutely expect” issues around rare-earth to be resolved. “There were a number of measures the US put on when those rare earths were not coming,” Lutnick said. “You should expect those to come off — sort of, as Trump said, in a balanced way.”
*China's Lin said there is no information to offer on US-china meeting in London.
*A Source said China has agreed to start exporting rare earths to the US, and the US will lift export controls on Chinese products that have been in place since the Geneva talks & both actions will take place simultaneously.

~US 10Y Note Auction

TRUMP: OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME.

*TRUMP: FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA. LIKEWISE, WE WILL PROVIDE TO CHINA WHAT WAS AGREED TO, INCLUDING CHINESE STUDENTS USING OUR UNIVERSITIES.

*TRUMP: WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%.

*US MAY CONSUMER PRICES RISE 0.1% M/M; EST. +0.2%
*US MAY CONSUMER PRICES RISE 2.4% Y/Y; EST. +2.5%
*US MAY CORE CPI RISES 0.1% M/M; EST. +0.3%
*US MAY CORE CPI RISES 2.8% Y/Y; EST. +2.9%

*US TO KEEP 10% BASELINE TARIFF, 20% FENTANYL TARIFF ON CHINA

*TRUMP TO HOLD NEW CHINA TARIFFS AT 30%

*US TOTAL EFFECTIVE TARIFF RATE ON CHINA WILL BE 55%: OFFICIAL

Note: 55% tariffs calculation: 10% baseline reciprocal tariffs + 20% fentanyl tariffs + 25% tariffs were already their before 2025

PAYMENT COMPANY STRIPE TO ACQUIRE CRYPTO WALLET PROVIDER PRIVY

*The Privy news follows Stripe’s $1.1 billion acquisition of Bridge

*Privy was last valued at $230 million in March of this year, according to data compiled by Pitchbook.

*LUTNICK : WE ARE NOT GOING TO GIVE CHINA OUR BEST CHIPS

MIDDLE EAST TENSION ⚠️

*U.S. DEFENSE SECRETARY HAS AUTHORIZED VOLUNTARY DEPARTURE OF MILITARY DEPENDENTS FROM LOCATIONS ACROSS THE MIDDLE EAST AMID IRAN TENSIONS

*U.S. MILITARY DEPENDENTS, NONESSENTIAL PERSONNEL AND FAMILY MEMBERS IN BAHRAIN & KUWAIT TO TEMPORARILY DEPART DUE TO SECURITY RISKS

*US EMBASSY IN IRAQ PREPARING FOR ORDERED EVACUATION DUE TO SECURITY RISKS

*CONTEXT: BBG Today Reported that UK Navy issued a rare warning to mariners that higher tensions in the Middle East could impact shipping, including through the Strait of Hormuz— NYP reported that Trump is ‘less confident’ about Iran Nuclear deal — Reuters reported that Iran threatened to strike U.S. bases in region if military conflict arises with U.S. — U.S.-Iran Nuclear Talks expected to resume this Sunday —Trump told Netanyahu he still wants to defuse Iran crisis with talks, not bombs —In May Axios reported that Israel preparing to strike Iran fast if Trump's nuclear talks fail

HEAD OF U.S. CENTRAL COMMAND GENERAL KURILLA'S TESTIMONY SET FOR TOMORROW POSTPONED DUE TO TENSIONS IN THE MIDDLE EAST: REUTERS

GLOBAL NUCLEAR WATCHDOG IAEA DECLARES IRAN NOT COMPLYING WITH ITS OBLIGATIONS, FOR FIRST TIME IN TWO DECADES

In response to the decision Iran ordered launching a new enrichment center at "a secure location" & replacement of IR-1 centrifuges with advanced IR-6 ones at Fordow underground nuclear facility. Additional "countermeasures" will be revealed later.

Note: US and Iran will hold 6th nuclear talks on Sunday, Mossad chief and Minister Dermer to meet with Witkoff ahead of US-Iran talks.

US STATE DEPT: U.S. GOVERNMENT EMPLOYEES AND THEIR FAMILY MEMBERS ARE RESTRICTED FROM TRAVEL OUTSIDE GREATER TEL AVIV, JERUSALEM, BE’ER SHEVA AREAS UNTIL FURTHER NOTICE

NVIDIA WILL STOP INCLUDING CHINA IN ITS FORECASTS AMID US CHIP EXPORT CONTROLS: CNN

Asked whether the US will lift export controls after trade talks with China in London this week, Nvidia CEO Jensen Huang told CNN’s Anna Stewart in Paris: “I’m not counting on it but, if it happens, then it will be a great bonus. I’ve told all of our investors and shareholders that, going forward, our forecasts will not include the China market.”

MASSIVE OUTAGE ⚠️

AWS DOWN
CLOUDFLARE DOWN
GOOGLE CLOUD DOWN

SPOTIFY, GOOGLE, DISCORD, TWITCH, CURSOR, FIREBASE DOWN

*OUTAGE APPEARS TO BE RELATED TO CLOUDFLARE

COINBASE TO LAUNCH PERPETUAL FUTURES IN US

BINANCE: BTCUSDT LONG LIQUIDATED: $201.31M

RIP ⚰️

SHARPLINK GAMING DOWN 76% AFTER HOURS

Context: SharpLink Gaming, a publicly-traded company on Nasdaq announced a $425M strategic ETH reserve strategy several weeks ago & Consensys CEO Lubin was appointed as chairman of SharpLink's board of directors.

*STOCK HAS ERASED ALMOST ALL GAINS MADE SINCE ETH RESERVE ANNOUNCEMENT

*MOHAMMED BAGHERI, CHIEF OF STAFF OF IRGC AND HIGHEST RANKED COMMANDER AFTER SUPREME LEADER KHAMENEI WAS KILLED BY ISRAELI AIRSTRIKE: STATE MEDIA

*Hossein Salami, The head of Iran's IRGC was also killed in Israel's strikes.

*Israel Launched Overnight Airstrikes in Iran, Attacked Nuclear, Military Targets

*Iran confirmed that Natanz nuclear site has been impacted and that there are no elevated radiation levels.

*Iran's supreme leader vows to retaliate for Israel's attack

*Netanyahu says the strikes could last for days

*Oil prices Jumped more than 10%

*Trump said US will defend itself and Israel, if Iran retaliates.

*TRUMP: IRAN MUST MAKE A DEAL, BEFORE THERE IS NOTHING LEFT

TRUMP: GAVE IRAN CHANCE AFTER CHANCE TO MAKE A DEAL, THEY COULDN'T GET IT DONE.

*TRUMP: US MAKES BEST AND MOST LETHAL MILITARY EQUIPMENT ANYWHERE IN THE WORLD AND ISRAEL HAS A LOT OF IT, WITH MUCH MORE TO COME - AND THEY KNOW HOW TO USE IT ⚠️

TRUMP: IT WILL ONLY GET WORSE, THERE IS STILL TIME TO MAKE THIS SLAUGHTER, WITH THE NEXT ALREADY PLANNED ATTACKS BEING EVEN MORE BRUTAL ⚠️