Capital Flows and Asset Markets

The say the key to happiness is low expectations. I thought my expectations of central bankers were low enough - and yet I still find myself unhappy with them. There have been many reasons for central banks to tighten monetary policy over the years - rampant asset prices (Bernanke would argue it better to cut rates to cause this outcome - moron), surging oil prices, rising wages, collapsing currencies (again Bernanke thinking is a falling currency is a good thing - moron). So market thinking is that no matter what, central banks will want to cut rates it they get the chance. And it is hard to disagree with market thinking - central bankers are a pretty sad bunch of losers. But there is one think that does seem to wake this group of bureaucrats from their slumber - food inflation. If we take Japan, a nation that introduced the world to QE and ZIRP, it had no food inflation for nearly 20 years, but is now dealing with severe food inflation.

The BOJ has responded to this inflation push with the higher interest rates since the early 1990s - although overnight rates are barely 0.7%.

And the 30 year JGB market has correctly noted, this is not enough. Rising food prices guarantees rising wages, which guarantees rising inflation. You don’t need a PhD from MIT to understand this.

If that is the Japan story - the US is even more egregious. Unlike Japan, the US has never had stable or falling food prices since leaving the gold standard - except briefly after the GFC. Or in other words, QE and ZIRP never made any sense in the US - except to the deranged mind of Ben Bernanke.

Even with my low expectations of the Federal Reserve, I have been surprised at the keenness to cut interest rates.

A lot of my surprise of central bank dovishness stems from the fact that agricultural commodities, which have deflationary trends, have not fallen like they did during the 1980s and 1990s, or in the 2010s. Agricultural commodities spiked in 2022, and have stayed high. For me, this would point to the need for much tighter monetary policy.

As many of my fellow substack writers have pointed out - closing the Strait of Hormuz does affect the price of fertiliser - namely Urea. US Urea prices are up a lot.

Even if there is some resolution to the Iran War, which remains my base case, it seems pretty apparent to me that ANOTHER round of food inflation is coming down the pipe. One thing about food inflation is that it directly feeds to rising wages. You can car pool or get the bus when oil prices are high - but when you have to cut back on food - people get angry. When we look at the US 2 year v the Fed Fund Rate, its starting to think the Fed might need to raise rates.

Best place to look might be the wheat market. The movement in wheat seems to offer a good guide to monetary policy. In simple terms, the 2 year yield moves above Fed fund rate when wheat is going up, and 2 year moves down when wheat is falling. Today wheat is going up.

Where urea prices are now, wheat looks like a buy. And if wheat is a buy, I would expect yields to rise. Will the Fed raises rates or not? Well I am going to lower my expectations further and assume they cut into a food price spike. That would be on a par with the uselessness of this institution since Ben Bernanke showed up. But if history is a guide, the bond market will not like this at all.

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The founding idea of Iran is conflict with the US. In some ways, it has been surprisingly successful. The Soviet Union only became enemies with the US post World War II - if you mark the beginning of outright hostilities as the beginning of the Korean War in 1950, to the collapse of the Soviet Union to 1991, this was only 41 years. Modern Iran was founded in 1979, and survives today, 47 years later. This is despite far less industrial might, and population. Why has Iran survived so long? Well for most its life, the US needed to import oil, and confrontation with Iran was just not worth it. But in 2020, the US became a net oil exporter and the calculation changed.

Of course Iran survived because it threatened all Middle Eastern oil and gas production. But with surging US production, it has been losing market share. North America is nearly a larger producer than all of the Middle East.

Closing the Strait of Hormuz was supposed to be so traumatic, that this would stop the US or anyone else attacking Iran. But with changing energy dynamics, the US has called the Iranian bluff here. The problem Iran has is that Russia already tried using energy as a weapon and failed. When it stopped sending gas to Europe, natural gas prices in Europe surged from EUR/MWh 20 to 350. This is well over USD 400 a barrel equivalent.

Germany, which has built an economic model on cheap Russian gas, has seen unemployment stay at levels on part with boom times. That is the energy weapon did not work.

What is extremely problematic for Iran is that surging oil prices only affect nations that are diplomatic allies of a sort (Europe and Asia would prefer a peaceful resolution). At least the Russians use of the energy weapon was directed at the nations funding Ukraine. The Iranian energy weapon can only cause collateral damage. In fact, by drawing in other regional players, it makes the Iranian endgame of regime change even more likely. If they cannot be relied on to keep the oil flowing, the Saudi and other nations will also come to see the need for regime change. Generally speaking the markets are saying the same. When I look at long dated US natural gas futures (January 2030 in this case), you can see when the Russians turned off the gas in 2022, but you struggle to see the closing of the Strait of Hormuz in this price graph.

While it is easy to think the US is heading into a quagmire like Iraq or Afghanistan, in this case other regional powers are also keen on regime change. What exactly is going to stop Israel from attacking Iran while the IGRC are still in charge? How can Saudi tolerate a nation that closes the Strait of Hormuz? With Donald Trump, the IGRC have a US president that could cut a deal, and enforce a deal. The longer they wait, the more likely that US politics changes, and then they face a long war of attrition which they can not win. And all the time, the Middle East becomes seen as an unstable supplier of oil, and their market share fall further. All options now for the IGRC are bad - but there is an incentive to try and make things worse to get better terms on a final deal - but the outcome is the same - the end of the IGRC has a regional power. Either this happens through regime change, and the Iranian people are finally allowed to prosper, or IGRC digs in, and leads the nation to be destroyed as happened in Syria and Afghanistan.

From an investing perspective, this makes things tricky. The short term outlook gets messier and messier, but the long term outlook gets better and better. No matter what happens, the energy market will become more stable. If Iran capitulates, then the region becomes safer. If Iran does not, then more and more energy production will move to politically stable regions like the US or Australia. But what the War in Iran does do, it accelerate the trends that were already clearly visible - a rising cost of capital. 30 Year JGBs have resumed their sell off, with yields back to near highs.

Maybe oil goes to USD 200 a barrel, or maybe it doesn’t. That is in the hands of the Iranian leadership, who probably know the gig is up, but don’t know what else to do. But for me, rather than bet on an unknowable actions, I think I would rather focus on a rising cost of capital - a trade that is driven by western politics - and much easier to track and follow.

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Its funny talking about interest rates. Whenever I say I think long bonds are going to 10% - people with mortgages look like I basically said the world is going to end. I will keep this short - as it is a very simple analysis. Essentially, I think we are in a pro-labour era that sees the back end sell off until political change comes. We are at 5% now, I could see an Iran war sell off drive that to 6%. This is NOT unreasonable in my view.

Back in the 1970s, short term bond yields tended to trade ABOVE long term yields. That is central banks had to work HARD to keep government driven inflation in check. When governments have deflationary policies, central banks just need to raise short term rates to where long term bond yields are to create deflation. When government have inflationary policies, short term rates need to be above long term rates. We have seen this inflection already, when the yield curve became heavily inflected in 2023, and every macro strategist screamed recession - but none came.

Just like in the 70s, the 2 - 30 spread is moving lower again - and in my view back to be 100 points over the 30 year. So as I said, I think the 30 year heads to 6%, this implies 7% for 2 year treasuries. Is the market ready for that? Absolutely not! Fun times for short sellers beckon.

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Most, if not all, of my big thinking is based on watching the markets, and wondering why something you expect to happen does not happen, and what does that mean. In the earlier part of my career, I looked at JGBs, and wondered why they never sold off despite every major macro thinker being bearish on them. I made a career out of working out why JGBs were strong.

When JGBs did start to trade bearishly during COVID, I knew something had changed, so in the end I took a break to work out why that was, and then used those ideas to set up Brumby. A changing political view of the world let me to invest with the idea of GLD/TLT, and the rising cost of capital as the driving principals behind the fund. Exceptional performance of the fund has been in no small part driven by the exceptional performance of GLD/TLT. This month will likely see the first meaningful weakness in this trade since late 2023.

I have a strong incentive to brush off the weakness in GLD/TLT as positioning led. That is the oil shock has meant winning trades get sold to raise cash. The problem is that even if that was true, an oil shock really should be bullish for this trade, not bearish. And even now, three weeks into this shock, gold is still negative correlated to oil price.

I think the “problem” with this trade this month is that TLT is focused on the long end. The reality is that the cost of capital is rising again. The US 2 Year treasury yield has risen nearly 60bps in March so far.

The long end, where short TLT would make money, has moved a tamer 30bps - to be back where it was in January. If the 30 year had sold of 60bps, then the drop in GLD/TLT would have been far less precipitous.

What I am saying is that GLD/TLT worked, but the oil shock has been more pronounced in the short end rather than the long end, which means the short book has not made as much as the long book has lost this month. But I could also say, I over earned in the preceeding months, as short TLT did not hurt me as much as it would have if has been short the shorter end of the Treasury market.

So where to from here? What this whole episode has made clear is that European and Asian allies of the US need to spend, and spend aggressively. Japanese and German inflation outlooks (to me) are much much higher than the US, and yet their bond yields are below US yields.

This of course reflects the much more savings focus of European and Asian investors, but the market knows this as well. I have bored people with JGB graphs for years, so will use the German 30 year graph to tell the same story. It is at cycle highs.

Everywhere I look, the demand for capital is rising. AI investing, energy investing, defence spending. The cost of capital is rising. And this has become apparent in problems with private credit. When capital was free, no problem. But put a cost on that capital, and its not so great.

The temptation and advice I get from markets is that short Europe and Japan as a trade on higher energy costs. I feel like this is foolish. The time to short is when people DO NOT know they have a problem. Once a problem is known, its normally better to be long. It contrary to human instinct, but very typical of human experience.

Japan knows it has an energy problem. Japan closed down most of it nuclear power after Fukushima in 2011. This is when its problems began. But Japan has come to realise this is creating an energy insecurity problem, and is trying to switch is back on. Japan probably will not get back to is 1993 highs, but maybe 200 Terrawatt hours.

What is curious about this chart, is an energy secure Japan used to have a strong yen, and energy insecure Japan now has a weak yen. If Japan gains energy security again should we expect a strong Yen?

Japan has been slow to restore nuclear energy, for understandable reasons, but the direction is clear. And as we are all aware, renewable energy is also much more feasible than it used to be. The step change from 2022 is obvious. This equates to about half of peak nuclear generation.

In reality, I am turning more bearish on fossil fuel. Once you weaponize it, you reduce demand for it. This is the same argument for gold over treasuries - once you weaponize US payment systems, you naturally kill demand over time. All of this may seem overtly political to you - particularly for a fund manager. But as we should all know now, politics is everything. Politics makes me think GLD/TLT is still good, and its makes me think the relative outperformance of the rest of the world versus the US is likely to continue. Why? Well I suspect energy security will return to Asia and Europe, but at the cost of a rising cost of capital. And a rising cost of capital should be bearish for the US. Or in other words, I am long Japan, which knows it has a problem, and short the US, which is oblivious to its future problems.

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For the first time in years, the market has presented me with another option to the rising cost of capital trade. As we all now, the War in Iran has seen oil prices rise precipitously.

Given the lessons of the 1970s, you would think GLD/TLT would do well. This has not been the case. The long term trend of gold higher versus treasuries remains, just that the reaction to higher energy prices is odd.

The rising cost of capital trade was driven by rising wages, and the need for higher interest rates to keep inflation in check. It was also driven by the knowledge that the US could not be relied on militarily, so Europe and Japan needed to spend to rearm. I also saw the breakdown of Treasuries as a reserve asset, so saw gold doing well. I imagined US equities doing poorly as cost of capital rose. All of these trades worked well until this month, when spiking energy costs saw most of these trades reverse.

Lets assume, there is a “security” trade here, rather than a cost of capital trade. What evidence is the market providing for a “security” trade”? Perhaps bond yields are rising in the regions that are at most risk of getting dumped by the US government? Security here mean both militarily and energy supply in this discussion. Japan is obviously highly exposed, and has seen yields rise a lot.

Switzerland, which has a policy of armed neutrality, has seen its bond yield diverge from the US, and are quite low. It also has a strong domestic hydro system for its energy supply.

Likewise, China which has always sought to be independent of US influence, has seen domestic yields stay low.

Perhaps even more unusually, India bond yields look relatively well behaved. India also has strived to maintain some independence.

So the market is now providing evidence for two different macro regimes or trades. Both rising cost of capital and energy security trades are bad for JGBs, Bunds and Gilts. It should also be bad for Treasuries, because why would anyone own them when the US is not providing security in return. So short TLT makes sense from both perspectives. Energy security trade should be theoretically good for gold, but unlike the rising cost of capital trade, is not necessarily bad for US equities. A trend change in GLD/SPX would probably tend to support an energy security trade. It has reversed recent big moves this month.

So would a SPX/MSCI World trade - which had looked to have inflected lower - but is back through the 200MDA average again.

The thing is, when I think back to the 1970s, it was also an era of energy insecurity - its just happened that the US was the economy most exposed at that time. I think this really is the fault line between the cost of capital trade, and energy security trade. Cost of capital trade should see Europe and Japan outperform the US, energy security would see US outperform the rest of the world. I prefer the cost of capital trade - as it matches up with what I see globally. The energy security trade - really only benefits a narrow group of US industrialists. The problem is that energy security is now a play thing for Donald Trump - so who knows which way he will turn. From a historical perspective, forcing Japan and Germany to rearm, and then pointing out their lack of access to natural resources would seem to be quickest way possible to awaken the worst possible instincts in both these nations - a problem I am sure that will be left to future administrations.

In practical terms, I would much prefer the cost of capital trade to be correct, as it would much better suit my skill set - short selling, Japanese equities and if investors found the S&P 500 to be an unsafe asset, would drive business my way. But what I prefer and what is the truth are two different things. I suspect the market will tell us one way of the other in next couple of months.

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First things first - I am not a gold bug. In my career I have been both long and short gold. In fact, if gold is done, gold and silver miners are excellent shorts here, as I can guarantee there is a huge number of investors who will be buying it all the way down.

I like gold as I saw wage inflation taking off, something I still continue to see. And I envisioned something like the 1970s, where inflation becomes entrenched, UNTIL we get a political change, and central banks that become pro-active rather than passive. Like the 1970s, I expect soaring gold prices, and long term bond yields of 10% or so. This is the long term graph I look at - and yes that small dip in 2026 is including today’s move.

On a smaller time frame, you can see that Gold v Treasuries are back to the 200MDA for the first time in 2 years. That is, if you had this trade on for a while, yes you are giving back some gains, but you should be well up. I suspect most money came in near the top.

Late last year, and early this year I was asked why I did not like silver or gold miners. The answer was that silver was too speculative, and gold miners are very very poor way to play gold. In my experience, whenever you get an “analyst” or “fund manager” telling you that gold miners still look cheap versus gold, you should run a mile the other way. Gold mining is a terrible business and will always be a terrible business and over any long term horizon will underperform gold. This is the NYSE Arca Gold Miners Index, relative to gold. Whenever you tell a gold bug that gold mining is a terrible business, they will then spend next hour to half hour telling you about cost curves, and how this mine they own is “special”. Anyway, I digress. For gold mining to work, you need gold to rise without energy costs to rise. Which is what we had until this month. If this trend of oil up and gold down continues, expect gold miners to get destroyed.

Silver was the precious metal that I really did not understand peoples excitement. Why would anyone want to be involved with a commodity with a price history like this? Bitcoin would probably make a better speculative asset than silver.

I was aware that gold was becoming popular - and when I was at the pub on Saturday, I had a number of people ask about it - which is always a worry. But Bloomberg keeps a tally of all known ETF holdings, and to my mind, this does not seem excessive.

Where I did see excess was in the shares outstanding of the SIL - Silver Miner ETF. Shares outstanding doubled in a year. Silver miners are also terrible businesses. I assume SIL US will open down 10% today, will open somewhere around 70 - or around where it priced in 2011. As mentioned before, precious metal miners are NOT long term investments, and anyone advising as such is not a serious investor.

My road to gold was built on a “pro-labour view” which means I prefer real assets to financial assets. I don’t like treasuries, as I see long dated treasuries going to 10%.

And I don’t like the S&P 500 as equity valuations make no sense relative to where interest rates are going in my view. Gold had turned higher against the S&P 500.

Even with today’s fall gold is trending higher against the S&P 500.

So what are markets telling us? Obviously they are expecting monetary policy to tighten (correct in my view), so inflation trades like gold and silver which had done well need to be sold (fair enough). But what the markets are saying to me, is that with gold weaker, the attraction of other assets is also weaker, especially the S&P 500 and Treasuries. While all the talk is of gold and silver, which shot up and then shot down, the S&P 500 has quietly broken is 200 MDA.

Likewise so has TLT US.

As has HYG US.

What all this says to me, if that markets believed central banks would keep the party going, so felt okay holding physical AND financial assets. Now central banks are stepping away, physical AND financial assets are falling. But I do not see austerity on the horizon, or deflation. I suspect physical assets outperform financial assets. With gold and silver looking weak - then the next step will be for financial assets to get destroyed. I do not know where precious metals go from here - but the outlook for financial assets is poor.

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Since I first came up with the GLD/TLT trade, its having its first meaningful drawdown. To be fair, it has been on a blistering run.

The idea behind GLD/TLT was that we are in a rising cost of capital world, not because things are bad, but conversely because things are good. Governments are focused on demand management, full employment and rising wages. This means “systemic” inflation will be much higher going forward, UNLESS central banks stop being the natural born losers they have become in recent years and raise interest rates to keep asset prices in check. In 2022 central banks grew a pair, and declining asset prices checked rising inflation, but since then they have returned to type and have been desperate to cut interest rates. Intellectually, central banks are trapped in a world that no longer exists, but politically they are on the hook for the inflation that current policy settings are producing.

The market has been clearly telling them that the world has changed. 30 Year JGBs have continually sold off.

But central bankers, like many fund managers, are very keen on backtesting. That is they only want to do what worked in the past, so are reluctant to raise interest rates. The GLD part of GLD/TLT was meant to capture this reluctance, which it has done. It seemed to me that if the market started to think Central Bankers were not totally useless, we would begin to see gold outperform equities. And starting in early 2025, that has been the case.

Plainly the much tighter energy market is causing the market to price in much tighter monetary policy.

If there is a problem with GLD/TLT it is the TLT side. US 30 years have been in a range for three years now. This should be surging higher in my view.

Also Japanese banks have diverged somewhat from 10yr JGB yields. Over the long term there is a very strong correlation.

But this month has seen a divergence.

You could make the argument that surging oil prices will lead to central banks tightening, and we then get a recession. This is what happened back in 2007 for example. In that case, you want to sell gold and equities and be long bonds. But talking a look at UK 10 year Gilts, and JGBs, the market is pretty clearly saying that politics will more likely lead to governments spending what they can. Clearly that is what happened during Covid and the energy shock of 2022, and what the voting public expect. It is also my expectation.

For me, the GLD/TLT trade still looks good, it just looks more likely the “negative” side of this trade needs to give more - that is weak equities and bonds. I suspect that is coming - just a bit of a sequencing issue.

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When I first started looking at the GLD/TLT trade, I really liked the long term graph. It suggest as some point a crisis would send gold to the moon, and treasuries into a tail spin. The peak in the late 1970s was around the time of the second oil shock.

Foolishly, I had assumed War in Iran, and a spike in oil prices would provide the same time of move. On the contrary, GLD/TLT is going to be down 9% this month when the US opens, and nearly 12% from the highs seen in January. I am surprised by this - and trying to work out what it means.

A weak gold price could make sense if short end bond yields in the US were soaring higher. They have had a pretty small move so far, and nothing like we were seeing in the late 1970s.

Maybe its just gold has done so well, it just needed a breather. And the shock of war meant that trend following funds de-gross which leads to gold selling. This is possible.

Another possible macro reason is that surging oil prices will reduce the buying power of China - that is it will cause its trade surplus to shrink - reducing the need for China to buy gold. The problem with that is back in 2022, spiking oil and gas prices did nothing much to reduce the trade surplus then. Energy prices would need to go much higher for this to come into play.

The best reason I can come up with for the failure of GLD/TLT to perform during the Iran War is that soaring energy prices have much obviously affected Europe and Japan more than the US, which has led to dollar strength. In 2025 and early 2026, short US dollar seemed like a slam dunk trade - with President Trump demanding it, and also attacking the Federal Reserve, this was a very popular trade. In mid 2025, according to CFTC data, the market had never been longer Yen than at that time.

With the Euro, CFTC data still points to long position that has not washed out yet.

Most currency trades are a version of “tomorrow will look like today”, and with the Euro only just breaking through its 200MDA, trend following strategies will be selling Euro positions aggressively now. That is weak dollar trades will be getting replaced with strong dollar trades now - obviously bad for gold and other similar trades.

The big question is will 2026 look like 2022 when Russia turned off the taps? Tricky - as most of the middle East wants to sell its oil and gas, but they are being stopped by Iran. Back in 2022, both Russia and Europe knew the relationship was over. Is this going to be the same? Can Iran indefinitely stop the oil and gas trade? Politics would suggest not, but as the US and Israel kill more Iranian leaders, I wonder if their is still a political infrastructure than can actually cut a deal in Iran anymore. Against that, the temptation for a ceasefire, to cool prices and allow for a possible uprising in Iran must also be a factor in political calculations.

It is easy to see GLD/TLT as a weak dollar trade - although at its heart it is not - not the way I understand it. I see GLD/TLT as the breakdown of the US led economic system - and the Iran War seems very much in line with that. I also see it as governments willing to spend whatever it takes to keep growth going - which is a political observation - which I also think it correct.

The more I think about the Iran War, the more I think we are heading for another huge macro economic change. Back when shale production started to get going, for decades US oil priced above Brent (European) oil. Below is a simple chart of the percentage difference between WTI and Brent - which now trades at a significant discount. This big macro change was a precursor to the political changes we have seen in the US.

What the Iran War, the Ukraine War and the Liberation Day Tariffs has made clear is that the US will no longer act as a guarantor of energy, peace or trade. Obviously, the mainland US is unattackable, can survive on domestic trade alone, as it is energy self sufficient - so we (the rest of the world) are cast off to fend for ourselves. China is obviously by far the most self sufficient having never fully trusted the Americans, perhaps followed by the French. The defeated powers of World War II, Germany and Japan, are by far the most exposed, as politically they had no choice but to be vassal states. The big macro change that I think is coming is that German Bund yields and Japanese JGB yields need to price above US yields. Both nations cannot afford to not spend anymore - but to build, build, build. As above, the oil market gave a hint that change was coming, with spread between WTI and Brent falling between 2003 and 2009, before inverting, bond markets are also giving warning of such a change. JGB yields have been rising as US treasury yields have gone sideways.

With Japanese wages maybe one third of the US, a severe energy shortfall, a need to build out a defence capability and the need for data centre buildout, the outlook for Japanese inflation would seem to me to be far above that of the US, which is what bond markets are saying.

GLD/TLT is not working, in part because it was caught up in a weak dollar trade that the War in Iran has disrupted. But the politics of the War in Iran makes rising bond yields even more likely in my mind. But one of the ways I work is always to have two parts to any trade - Long Gold and Short Treasuries. I have had many clients over the years who always take the winning side of the trade (long gold in this case) and ignore the hedge (short Treasuries), because they just see it as a cost. But as I always say, the hedges are there for a reason!

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I like to think I am smart - and I am smart enough to know that I am not smarter than the market. Generally speaking, I like to get an idea of where we going, and then bet WITH the market on that direction. So before I get to individual trades (and the paywall), let me look at the overall market trends. As mentioned in an early post today, I still like ROW v S&P 500. This is back at 200MDA - so corrective reversal - implying good to short US, and buy non-US.

GLD/TLT has been a phenomenal trade - but is at least back to its 50DMA. In a rising oil market, hard to see this fall too much.

It looked very overbought in January, now looks more reasonable. This is the MACD function on Bloomberg. Lower chart gives an idea of how far from trend you are.

Gold is still outperforming vs S&P 500. It is still a long way from 200MDA.

That being said, on a long time horizon, when this breaks higher you don’t really want to get too cute with it.

Finally, my lodestar - Japanese 30 Year bond yields still look to be moving higher.

So what trades have I put on?

President Trump is the first “social media” president. You can see it in how he looks to not only dominate the social media narrative, but remains heavily influenced by it. If a policy gives good traction on social media, you should expect him to run with it. But ultimately, all his policies seem to be advancing an “America First” agenda. The Liberation Tariff day sell off was all about giving Trump leverage over US trade partners - which he largely achieved. Selling markets on the “Dump Trump” theme then was a disaster, as markets surged 40%.

A better trade was to trade the reaction of allies who understood there was no alternative but to push the fiscal spend button. I liked Japan for this reason, which has been good until this month. Up 70% from the lows.

Even when you think Trump has decisively turned against someone - as he did with Elon Musk in 2025, Tesla has been a bad short. This is even with 2026 EPS forecast falling from USD 8 to USD 2 - the stock has held up. I hope I have mentioned that short selling is not for the overly logical or faint of heart (there is a decent argument that short selling is for no one).

Given this history - lets start from a “Smart Trump” assumption, and work from there. First of all, getting rid of an Iranian nuclear weapon program is an admirable objective. Various agreements to stop nuclear proliferation have obviously failed with India, Pakistan and North Korea all now in possession of nuclear weapons. And given the weakness of Iranian proxies, and Russia being tied down in Ukraine, if you were going to wage war on Iran if not now when?

The “Dumb Trump” argument here was that that there is a risk that this turns into a quagmire - but perhaps that suits the US. I can see three reasons this would be the case.

Firstly, if the rest of the Middle East is pulled into conflict, this would make the whole area an unreliable partner for fossil fuel, which would suit US producers, who would be poised to take market share.

Secondly, a prolonged war would likely pull China into the Middle East. For all their build out of military might, no one has actually seen the Chinese military actually do anything for nearly 50 years. Can the Chinese navy secure oil supply? And if the Chinese navy is pinned in the Middle East, would they also have the capability to attack Taiwan? You can see how this would be a positive for US policy makers.

And finally, it enhances US leverage over its trade partners. If Europe and Asia build up their own military, it is US interest to replace military reliance with energy reliance. In other words, the War in Iran actually helps Trump advance an America First agenda. As pointed out before, if the War in Iran was really going wrong, I would not expect Israeli shares and currency to be doing so well. The stock market is near all time highs.

And Israeli Shekel is strong, even what has been a conspicuously strong dollar environment. Down is strengthening here - i.e. you need less Shekels to buy a US dollar.

What does this mean? Perhaps a quagmire actually suits Trump - as far as an America First agenda concerned. This will give the US more power over energy markets ultimately, while making the Middle East a Chinese problem. If we assume this is the case (and I think we should until more information comes forward), then what is the reaction? As I have mentioned many times, I prefer trading the reaction rather than the action, as its tends to be safer. Chasing oil prices here risk all sorts of losses. The most obvious reaction is that European and Asian nations will realise that the US is trying to create leverage in the energy markets, to replace the defence and trade leverage that Trump has used up. The most obvious options for Europe and Japan are to beef up domestic energy sources. Market is ahead of me on this one - with the GS EU Renewable Index at all time highs, and doubled over the last year. The strength of this index this month is conspicuous.

That being said, I do wonder if wind energy stocks that have been pummelled by Trump’s anti renewable energy policies might be worth a look. Orsted is one stock that comes to mind. It had lost 85% of its peak value.

As a policy agenda, reducing reliance on energy suppliers such as Russia and Iran is not really a bad agenda. The problem is that is totally feasible for the US, but less so for its allies. But as the market shows, policy makers in Europe are at least aware of this.

So what am I thinking? Well there are two stages to a crisis. The first stage is when things are going wrong, but you don’t know they are going wrong. And the second stage is when you know they have gone wrong, and are now trying to fix. The crisis for Europe and Japan was phasing out of nuclear power without having a suitable replacement at hand. But judging by the performance of nuclear power stocks - governments and companies know this. One stock I owned from 2006 to late 2007 was a company called Doosan Infracore - now Doosan Enerbility (yes - I also don’t know how they choose these English names). What I loved about this stock is that one of its key business lines is to refurbish old nuclear power plants. The stock price tells you business is good. Is it still a buy? No idea - but you should be aware that shares outstanding has increased 4 fold since 2006, and revenue is flat from that period - so you are not getting a bargain…. and its Korean.

So what am I seeing and thinking? The War in Iran, like the Liberation Day tariffs, are meant to shock US allies out of the reliance on the old world order - reliance on the UN and treaties. This system no longer works for the US, and the US is trying to get their allies to free themselves from this system too. My best guess is that this will be successful, and markets are indicating this. I put the chances of recession very low - governments will spend whatever it takes. I see the cost of capital still rising - and I see Europe and Japan reforming. The market has been signalling a long Rest of the World versus the US for a year and a bit now. The War In Iran has shaken that up a bit - but it still looks valid to me.

On the longer time frame its still seems to have miles to run.

If I make the argument that Europe and Japan are at a turning point to my American and Israeli friends, they generally like to list all the reasons these nations are useless. But knowing you are useless is what happens at turning points. I think Europe and Japan still look okay to me - and strangely this is what Trump wants, in so far his agenda is to break apart a multilateral world, and encourage Western Allies to adopt their own Europe First and Japan First agendas. For fans of history, I am reminded of Admiral Perry and his Black Ships (Kurofune) who forced political change on Japan. They arrived in 1853, and from a starting point of a feudal society, a furious pace of industrial change was ushered into Japan. So much so that a mere 50 years later Japan beat Russia in a major war and secured control of Korea and Manchuria. Politically and more importantly in the equity market, I see a similar change underway. Rather than Admiral Perry and his Black Ships, perhaps we should talk of President Trump and his Orange Wave.

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