Capital Flows and Asset Markets

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I had barely sent out an update on GLD/TLT when market action has come to test me. If you have been living under a rock, the AI trade has swooned as the bonds of Coreweave has been sold aggressively. They are now yielding 15%, or perhaps more importantly, as a big discount to par - signalling fears of default.

I took a good look at Coreweave, and came up with two totally different outcomes. In one we enter a deflationary spiral in the tech space, with huge financial repercussions. Coreweave goes bust, and sets off a doom loop in the AI trade. In the other, inflation continues unchecked, and Coreweave is a buy here. GLD/TLT should point the way here, but as it happens, technically GLD/TLT is right in no man’s land at the moment.

So let me explain the logic of these two outcomes, and which I think is more likely.

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Years ago when I came up with GLD/TLT, I thought it was a great trade - but super simplistic. So simplistic, I thought people would laugh at me. But I have been pleasantly surprised at how many people have been influenced by this trade. I have even seen people use it in their own research. Now this is all great and dandy, but I had another investment catchphrase back in the day - “long bonds/short equities” which worked great, until it didn’t. But this is a risk for all managers - they become wed to an idea that is no longer valid. So even though GLD/TLT has been good to me, I am acutely aware that one day I will need to do a “Reverse Lawrence Stroll (aka Kaiser Soze)”, which is I will need to cut my progeny off, and move to greener pastures. But is that day today?

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Back in 2025, I shorted Nvidia on the back of the DeepSeek LLM model - but fortunately covered at a profit. It seemed very logical to me that the appearance of a much cheaper LLM model should be deflationary across the whole AI stack. But this analysis was wrong.

Today, we are seeing another sell off in tech, on the back of announcement that Chinese chip company CXMT has made a breakthrough in memory chips.

To be honest, Deepseek methods seemed to me to be very replicable, and so very likely to change the industry, while CXMT claims are very hard to verify, and also much easier to be kept out of the western AI chain. In other words, if DeepSeek was not a problem, then I struggle to think that CXMT will be either. That being said, its a good time to run through my AI checklist to see if its time to either get out of the way, buy the dip or that greatest feeling of all, time to short!

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There is a widely held belief that the cover of the Economist is a contra indicator. The Economist itself also covers this question in an article. The quantitative analysis concludes no. For me, I feel like the cover is too narrow. I feel you need to read the main lead article to see what their logic is to really get an idea of it contra indicator ability. For me, reading the article, it feels generally good news I think, as least in regards to short TLT.

( I sat down today to try and work my way through the AI conundrum - below is a stream of consciousness style analysis - I suspect some with think me insane, and some will think me genius. Time will tell.)

The weird thing about the AI boom is how familiar it seems to me. Back in the day, I made my name shorting mining and emerging markets, based on a very simple observation. I was looking at Chinese production of steel rising almost continuously from 2000.

But I noticed from 2008 onwards, Chinese steel companies share prices were moving in the opposite direction to steel production. Basically, over production in China was driving margins down

China rebar (type of steel) prices are published daily, and when they started to fall in 2011, I knew that the entire industrial commodity (iron ore, coking coal, copper, nickel) trade was at risk.

This is capitalism at is finest, and best (in my view). What is so fascinating about AI, is that in China, they seem to have embarked on a similar price war model with tech. Every time I look at AI, Chinese AI pricing is much cheaper. See DeepSeek and MiMo below.

And we see it in the performance of the Hang Seng Tech Index - which basically is so uncorrelated to either the Nasdaq or the Semiconductor index, you wonder if its really tech and not actually steel related!

So like steel before it, Chinese tech industry competes via price. This is deflationary, and we see this in Chinese bond yields. Remember this is China, the other tech superpower, and its bond yields are low, and its stock market moribund.

I will not put up graphs of the US stock market or bonds yields, everyone knows they are the complete opposite of China. How can we explain the difference? I think where as Chinese corporates are competing on price, US corporates are competing on capital. Who can invest the most, rather than who is the cheapest. This has lead to a capex boom.

As I tell everyone, I think this is rational behaviour. If I saw Elon Musk entering my industry, I would also spend everything I could, because the other option would be eventual market share loss and decline, as we have seen with legacy car makers who failed to invest heavily in EVs. The problem for the legacy hyperscalers is that SpaceX has a USD 2 trillion market cap, for its current USD 55bn in revenue, which Musk can use to raise capital. He apparently wants to raise USD40bn. This is in addition to USD 20bn raised in corporate debt markets. For the hyperscalers, with cashflow, they generally do not issue equity (buybacks are more common), so they have also become heavily reliant on the bond market.

And here is the big question. Do rising tech spreads indicate credit concerns? Or that the capital borrowed is so great, that they need to offer higher prices to get investors to lend to them?

If I wanted to, I could easily paint this as tech rerun of the Chinese steel overcapacity story. And I am very tempted to do so, as many of financial guys on Substack has done, because its great marketing. But for me, I have a big problem. There is no sign that capital markets are buckling. What we have seen is equity do well even as high yield does poorly (macro trading has been poor of late due to these breakdowns).

What I find fascinating as I think through this, is that corporate bond investors are basically now creating the inflation that is eating their principal. What I mean is that inflation is now being created by corporate bond issuance - not government bond issuance. Normally credit spread widening is a deflationary event. 1991 - Savings and Loans, 1998 - Asian Financial Crisis, 2007 - GFC, 2015 - China Deval, 2020 - Covid.

But as noted above, we are seeing spread widening on RECORD issuance of tech related bonds. This issuance is going straight into data centres and Nvidia chips, which drives growth, and inflation. The spread widening is INFLATIONARY. Hence, when investors buy tech bonds, they are creating inflation, which also hurts treasury yields.

Most financial chat has been about how Oracle CDS blow out marks the end of the AI trade (so far so wrong).

If AI is driving inflation, then we can rely on our tried and tested deflation lead indicator, the 10 year JGB. Its track record in picking deflationary events remains unrivalled. Usually with credit concerns, as seen with HYG or Oracle CDS, you would expect JGBs to rally (ie yields fall) - but not this time, and this above analysis explains why.

Amusingly, if seems if governments want lower bond yields, its looks like they would need to regulate the tech companies, as China has done. The weird thing is that this would be politically popular with voters, but difficult in practice given the amount of money in US politics these days.

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Without question the worst investors over the last ten years have been macro investors. The one trade I probably talk about the most on this substack has been long Yen, which I now call the widowmaker trade. There was a time when Yen would rally when US stocks were weak - but not anymore.

Another foolish trade from the macro community is that higher Japanese and US bond yields would have some sort of negative effect on US stock valuations. Very wrong indeed.

Macro investors used to insist that large fiscal deficits would lead to a weak currency. Brazil has a 10% budget deficit, which outside of Covid is the highest deficit since the 1990s.

And yet the Brazilian Real remains near levels first seen in 2002.

The macro community have been leaning heavily on comparisons with past investment booms to drive a bearish view on AI. This chart from NBER is indicative.

And yet this fear of overinvestment that stalks the market, all I see is pricing in the compute space still rising.

As are DRAM prices.

Some of the other more amusing macro calls has been bullishness on Chinese tech. And yet, this somehow also does not work.

The reason I am pointing this all out, is that I too used to use macro thinking for investing. But, it has not been a winning strategy for a long time now. The best reason I can come up for it not working is that governments now operate much more openly to secure desired economic outcomes. Both the Chinese and West are acting to keep Chinese tech down, so that does not work. The Americans have only just showed some interest in strengthening the Yen, after years of benign neglect. And the market is obviously saying that fiscal spend is bad for bonds, but good for equities. Macro is good, but when it does not align with politics, its a waste of time.

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September was a long month - but a satisfying month. It proved, to my mind at least, that political analysis is superior to old school analysis. First and foremost in this was the merit of GLD/TLT. I think many “investors” and “macro commentators” find it much easier to go all in on debasement trades. But politically I found it much more difficult. There is always the chance that politics or circumstances forced central banks and governments to run much tighter money than expected. When gold was surging last year and early this year, I did say I felt it was time for the short TLT side of this trade to exert itself. And over the last few months it has.

Gold and other precious metals have and remain lacklustre. But that’s the whole point of GLD/TLT - you can only jump and shout about debasement IF yields are not rising. I know logical and rational thought is at a premium these days (Donald Trump and Elon Musk rallying against the establishment strikes me as odd, when one is the most powerful politician on the planet, and the other is the richest man on the planet - if they are not establishment - then who is? If establishment is holding them back, then how are they so powerful and rich? Like I said logical thought is at a premium these days).

In case you have been living under a rock, French bonds have been under pressure. Typically, sovereign bonds cannot default, but with European bonds there is a risk that you are forced to leave Eurozone, so with European bonds, CDS can actually work as an indicator. French CDS have soared in recent weeks.

France has a lot of debt - but so do most countries. But it does have a budget deficit that is very high by European standards. 3% is the supposed limit.

One of the weird things about the “French bond crisis” is that until this month, Euro was strengthening against the Swiss Franc.

Since the beginning of debt problems in 2007, you have tended to want to be long Swiss Franc vs Euro - but as of today, CHF is no stronger versus Euro than in 2024. Very odd behaviour indeed. Why?

One reason may be the French political reaction. I was stunned to see that Marine Le Pen has suggested a debt brake be added to the constitution.

I find this very bullish for the French bonds if implemented (big if), but also seemingly send a big signal that Le Pen is not seeking to leave the Euro. This is also “deflationary”, and has been reflected in the stock market.

What I find so interesting about the current set up, is that the macro signals are very bearish Euro, while the political signals would be bullish. Eurozone debt levels as a whole are very manageable.

In both Italy, and now potentially France, the populist leaders have signalled a preference for fiscal consolidation. The biggest headwind for the Euro has been very expensive energy prices. TTF Gas is back at USD 24, a big premium to the US prices, and so a competitive disadvantage.

But while higher energy prices led to collapsing activity in Germany in 2022 (most reliant on cheap energy), in 2026, there has been no noticeable decline in PMIs in Germany.

All of this reminds me of something that I learnt when first starting to managing money. Almost all US statistical releases get revised downwards, and almost all European statistical releases get revised upwards. Here, we are focused on the price of French bonds, but not on the political response or even the surprising strength of European economic data.

Old school macro models will probably be bearish Euro here, while I think the politics is bullish. For the last few years, political analysis has won over macro analysis. Lets see if that happens again.

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I just got back from a couple of days in Switzerland, where I spent most of my time talking about markets. I also met quite a few Substack subscribers. Here are my thoughts.

SUBSTACK

Substack tells me that my average article gets 8,000 views. I thought this was exaggerated as the usual 10 to 15 people are commenting on it, and a typical article now only generates maybe 5 or 10 new subscribers. I suspected that number of people that actually read my substack was lower than what I was told. This trip has made me think the opposite. Almost everyone I met in Switzerland did read the Substack. And given that I only have 500 subs in Switzerland (or so I am told) - I think the Substack reach is more substantial that I thought. And thank you for everyone who turned up for a beer and a coffee. It was great meeting you all.

TLT

In case you have been living under a rock, TLT got smashed in September. This was nice, as I had suggested earlier this year, it was time for TLT to do more work in the GLD/TLT trade, and so it has come to pass.

The question to be answered now, is the TLT trade done? I think there are two ways to approach this question. Lets call its the mathematical, logic driven approach, and the political approach. We will start with the mathematical approach. 30 year Treasury yields have risen from 1% to 5.6% - a substantial move. But in 1970s and 1980s, they were well above 10%. So yields could go higher.

TLT has a duration of 15.

And a current yield of 5% (this is different to the current yield in the bond market, because TLT owns bonds with different coupon rates).

Duration tells you how much capital values fall from a rise in yields. So if yields rose 1%, the TLT would fall 15%. But it pays a yield of 5% - so you only get 10% total return from a short. By definition, we will get less bang for a buck with a bearish view on TLT. Back of envelope calculation makes me think at 8%, TLT will no longer be an effective short as higher coupons reduce the duration and the coupons will overwhelm the fall in capital values. If anyone has a better calculation, please get in touch. One thing to remember with TLT, it has no pull to par, so rising yield environments will see PERMANENT capital impairment. So TLT is still good - not as good as it was, but good. It also pleases me to see the share outstanding in TLT rise again.

So mathematically, TLT is still good to go. But its politically that really gets me going. This time next year, we will start thinking about who will be running for the White House in 2028. According to betting markets, AOC is the most likely Democrat candidate. Even if she does not win the primaries, the presence of AOC should drag all candidates to the hard left.

What is most likely then? I think bond yields go higher, and potentially USD lower. Unless I see a sudden shift right in US politics, a short TLT position still makes sense.

CHF

I was hoping my trip to Switzerland would give me clarity on what to do with the Swiss Franc. I want to be bullish on the Swiss Franc. When compared to the Great British Pound, over almost any time frame the Swiss Franc has been a much better currency.

If the main currency of the world was Pounds, owning Swiss Francs would be a no brainer. But sadly the default option is US dollars. Against the US dollar the Swiss Franc still has an appreciating bias, but not as reliable. It tends to have big moves like 1970s or 2000s, and then spends a long time in a range, before then breaking higher again. The Swiss Franc peaked against the US dollar 0.72 in 2011, and has been in a range since then.

Complicating the view on Swiss Franc is the long term Japanese Yen v Swiss Franc Chart. There is no question that the Yen is cheap versus the Swiss Franc, or that Japan is cheap now. It is hard not to look at this chart and think perhaps I should be long Yen and short Swiss Franc.

If that was the tactical set up, what was Swiss prices like? Well Switzerland IS expensive, but in line with London on some things, and cheaper in some ways too. The only place I felt that prices were total out of whack was Geneva airport - but airport prices don’t count. A beer at the train station as around 9CHF - so 8GBP. Expensive - but London prices. But Switzerland is a financial centre - it should be expensive.

So what to do with Swiss Franc? Well it reminds me of gold. Everyone is keen play debasement trades (long Swiss, long precious metal, long crypto) and I understand that. The issue is that if US bonds yields are rising, then the debasement trades loose water - and that is what we see. US 2 years up - gold, Swiss Franc down.

So its a political call - and if you feel confused, you should. The political sounds out of the US are very confusing. President Trump wants lower rates, and Bessent is the House on Yen and does bond buybacks, but the Fed is suddenly hawkish. Ultimately, all I can say, is there is a reason I said GLD/TLT and not long GLD or short TLT. These themes need each other to hedge out political risk, which is what last month showed. Given what I said about US primaries starting next year, long CHF still makes sense.

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I will be at the NZZ bar from 4.30 to 6pm at Zurich HB tomorrow, and Café Tartines - Champel in Geneva from 8am to 9am on Wednesday if you would like to say hello.

I have tended to make fun of “macro” analysts on this Substack - mainly because they are such easy targets. One of their consistent problems is that they apply economic or accounting logic to sovereign bond markets. Through the mega bull market in bonds, were bearish all the way up (or as yields went lower). Short JGB trade was called the widowmaker because so many of these analysts convinced hedge funds there was no way 10 year JGB yields could fall below 2%. They or course went to negative yields for a while.

Now, the “macro” analysts are not bearish on US treasuries, even though the 10 year treasury yield is through 5.2%

So why are the macro “analysts” not that bearish. Their argument, in simple terms, is that the US cannot afford the interest payments, and hence will be forced into “financial repression”. In other words, government will control or force yields lower, and hence you should not be bearish bonds - but bullish “repression trades” like gold.

I don’t deny that financial repression is a very real possibility. But I think this “macro” analysis misses the real purpose of bond markets. And what is this purpose I hear you ask? I am almost certain that sovereign bond markets exist to discipline left wing politicians. This has been clear in emerging markets for decades. When Lula was first elected President in 2002, the Brazilian Real tanked, and bond yields soared until he committed to even tighter fiscal targets. 1 year swap rates went from 30% to 60%

The Brazilian Real lost 50% of its value.

What has been the political transformation that has led to bond markets being weak? Well, the Washington Consensus, of free markets and balance budgets began to fray back in 2000. If you think we had Ronald Reagan, George HW Bush, Bill Clinton were all relatively serious politicians. But at a certain point, the Republicans could no longer win elections by appealing to business minded Americans, and started to reach out to “other communities”. George W Bush, was noticeably different in style and substance to previous Republican presidents. Both John McCain and Mitt Romney were throwbacks to older Republican politicians, and both lost to Obama. You should also note that John McCain nominated Sarah Palin as Vice-President - again reaching out to “other communities”. It took President Trump to break the mould. While the traditional pitch for Republican was to cut taxes and entitlements, Trump has ditched the unpopular part of that offering, and now cuts taxes and increases entitlements. This leaves bond markets in a tricky place. They know the policy is inflationary, but they also know that a debt crisis that forces out Trump would mean a likely replacement by a more left wing politician? What to do? I think the obvious answer, and one that is part of the “starve the beast” thinking of the Republicans, is to wait until left wing politicians are in charge, AND then have a debt crisis. Here is the Polymarket odds of the Democrats winning the Texas Senate seat (Texas!). Remind you of anything?

Around the world, the traditional right wing parties are under siege, and are either transforming themselves, or at threat of being wiped out. And hence bond markets are behaving as they should. Yields reflect the sensibilities of policy making or the ability of governments to resist populist movements. In that interpretation, only Switzerland and China can seemingly resist. Politically, this makes sense to me.

As a final note, I had a chat with George Noble about being on his podcast in a few weeks. And he mentioned something that I had forgotten. I said to George, I like to always have two sides of a trade, just to hedge against political changes. But in my experience, investors always look at my ideas, and stick with the ones that are working. GLD/TLT is a perfect example of this. GLD/TLT has been volatile this year, but it is up for the year.

But in 2024 and 2025, it was the GLD part of the trade that worked. This year, gold is down year to date. I suspect many people just stuck with the GLD side of this trade - certainly that’s what I see in the “macro” community on Substack.

This is why I downgraded “macro” analysis in my approach - it is too black and white - and does not allow for politics. For me, there is a yield where US treasuries becomes attractive again. That yield is when it forces all sides of politics to be sensible. We are not at that yield yet. GLD/TLT still looks good to me.

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