Capital Flows and Asset Markets

A few years ago, I looked at the rise of populism as the rise of “pro-labour” politics. I saw the return of industry policy, tariffs, unions and fiscal spend as all designed to raise the share of wealth going to workers and to reduce the share going to the owners of capital. To me it meant inflation would be entrenched, UNLESS, central banks acted to tighten monetary policy. So I put on a long gold, short treasury trade. It has done well.

Now if I was a typical fund manager or substack writer, I would just say, “hey, I am a genius - pay me tonnes of money please” and leave it at that. But I am not typical. I thought an environment where yields were rising, and gold was rising would NOT be a good environment for equities. Owning the S&P 500 has been absolutely fine for investors - although recently you have lagged gold.

I could make an argument that I was right about gold outperforming S&P 500 But I did not see the Korean market breaking out to new highs in this analysis.

Or the Nikkei for that matter.

How can we make sense of all this? What is becoming increasingly apparent, to me anyway, is that the corporate world has been underinvested for the surging demand created by “pro-labour” policies. Insourcing or friend sourcing and various industrial policies have created huge demand back in the developed world. But many developed world corporates, there has been such a focus on building moats, raising prices, and returning capital to share holders, we have become chronically underinvested. If you look at shares outstanding in the US, they have only just started to rise. A rising share count implies selling equity to raise capital to me.

China, which does not have the same focus on share buy backs, seemingly faces less of the capacity constraints that faces US corporates.

In a way, what I am saying is that when markets reward share buybacks over investing, at some point you will get a surge in inflation. Japan was like China until 2020 or so, and now looks like the US in 2012 to 2018 era.

As Mark Wilson over at GS points out, the market has rewarded capital light businesses for years now. Or in other words, markets have rewarded companies for not investing.

But that is beginning to change.

The market is screaming out for companies to sell equity to fund growth. But so far, corporates remain constrained in their equity issuance, despite the market signals.

So I am now left with two possible reasons for the movement in GLD/TLT. One is political, that we are shifting pro-labour, and wages will rise dramatically. Or a second one, that years of share buy backs and “pro-capital” policies have left the western world (or everywhere but China), chronically underinvested. From this interpretation, looking at relative government bond yields, the market decided that the US was underinvesting in 2021 relative to China. But if you look at China, it has surging production in almost all good, and electricity, while the rest of the world faces backlogs. The market seems to imply China still over invests.

So GLD/TLT could well be moving because the world (outside of China) is chronically underinvested. That would chime with the surge in capital heavy stocks. The question will be when will we have invested enough? Or alternatively, when do politicians act to restrain demand? Looking back at the “pro-capital” era that ran from 1980 to 2016 or so, it was driven by a US that felt it had no real rivals. Both the Soviet Union and Japan, both seen as military and economic rivals, were beaten back in this era. A US that feels safe in its own position, could then revert to its free trading ideal I think. But for the US to feel safe today, it would need to feel it has defeated China, or at the very least engineered some sort of regime change in China. For me, the US and West missed their opportunity to change China in 2015. Then the economy as in freefall, with capital fleeing. If the US has instigated tighter fiscal and monetary policy at that point, then an Asian Financial Crisis style disaster would have befallen China - and regime change would have followed. Instead we chose more QE and negative interest rates. What GLD/TLT tells me now, is that the price of regime change will be much higher. But I guess that’s politics.

And to answer the original question, pro-labour policies have created capital scarcity - they are two sides of the same coin. Now we just need to wait for much higher interest rates.

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I have like gold as a part of a pair trade - long gold short long dated treasuries, or GLD/TLT (using the ETFs codes that capture this trade). GLD/TLT has been a great trade, but I am old enough to know that nothing lasts forever, so have to wonder if we are near the end on this trade?

I did manage to create a very long term GLD/TLT charts, which suggest we still have a ways to go.

Clearly, GLD/TLT is a “debasement” trade of some sort. But if this is working, why isn’t Bitcoin working? Bitcoin is basically back to levels first seen when in 2024, and before Trump basically “decriminalised” crypto.

As I wrote a few months ago, Bitcoin worked best when people were “bearish” on it. The problem is that despite the absolute “beasting” that Michael Saylor’s Strategy has taken recently, short interest is subdued. No one wants to short it. Bad bad sign.

I have not wanted to short Bitcoin, because I look at Tether as a liquidity guide to Bitcoin. Tether market cap has continued to climb - suggesting liquidity is not a problem.

However, it has come to my attention that Tether is better described as a gold bug than a hodler. As of the 31 December 2025, Tether held USD 17.4 billion of gold, compared to USD8.4 billion of Bitcoin. Reserve breakdown is below.

For my own interest, I tried to tease out the movement in volume in Bitcoin and Gold holdings at Tether over time. It is curious to see that the stablecoin allocation to precious (read gold) has increased substantially in 2025, while bitcoin has been largely flat. Trying to adjust for price changes - I think they invested USD 5bn into gold in 2025. They now have over twice as much in gold than they do in bitcoin. In Mid 2024, the value of the bitcoin holding was larger than gold, so its quite a turn around.

Tether also have a gold stable coin Tether Gold - I read this as Crypto Gold ETF. Its current market cap is USD 2.4bn, so pales in comparison to GLD US with USD 172bn of market cap. But we can see that they have doubled their ownership of gold in 2025.

I suspect Michael Saylor is on the phone to the guys at Tether pounding the table to sell some gold and buy bitcoin. Especially as the word on the street is that the Strategies average entry point into Bitcoin is $76,052 - or above current price of $70,687 or so.

The problem with Bitcoin, as far as I can tell, is its transparency. Ever since Russia’s access to it’s foreign reserves were frozen, foreign reserve holders have to think hard about where they put their money. And as China has by far the biggest trade surplus, its their views that dominate the most. And they do not like Bitcoin. In fact the problem for China is that they have excess US treasuries and not enough gold.

The other thing is that President Trump in his ardour to “make a deal” has slapped tariffs on friends and foes alike. Not just China, but democracies like Brazil and India probably are keen to get rid of their treasuries as well. It is this “switching” that drives gold demand I think. I have seen a number of charts saying that gold holdings are now worth more than Treasury holdings. This one looks at all official holdings.

Looking at the above, the old powers of the US, Germany, Italy and France are around 70% of reserves. So may be we are getting close? Or if I just look at China, it needs another 4,000 tonnes to get to a holding commensurate with its GDP, which is about USD 70bn of buying. If I had to guess a number - maybe US 10,000 for gold?

The problem here is that I think it suits China greatly to see the gold price surge. It adds to a narrative of the US being a power in decline. And they still have USD 680bn of treasuries to get rid off.

As well as trying to figure out what to do with annual trade surplus of US1.2 trillion.

Of course there is one answer to all of this. And that is to MAKE TREASURIES GREAT AGAIN. MTGA would require the Fed to raise interest rates to at least 7% and the for the US fiscal deficit to be reduced from spending cuts - or pretty much what Reagan and Volker did in 1980. This is possible of course, as anything in politics is possible, but I would say unlikely. The politics of the world, makes me think gold keeps outperforming bitcoin. Strangely Tether seems to agree. Sorry Michael Saylor - you chose the wrong debasement trade.

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I have been sceptical about the AI trade. The main reason was that pricing for AI chips looked so out of whack for pricing for other chips, my assumption was that eventually supply would overwhelm demand and pricing would fall. I looked at TSMC pricing history, and thought we were similar to the dot com bubble. In other words, I felt like I missed the move, and it was all downside from here for AI related themes.

Adding to my caution was the lacklustre (until recently) performance of ASML. Equipment manufacturers tend to be very sensitive to order outlooks, and the weakness of ASML added to my caution.

But recent data points and ASML show that something has changed. And now I see the action, I am trying to trade the reaction.

Korean VIX is not your father’s VIX. Typically, VIX spikes when markets are falling - as people then rush to buy insurance. This was the case in 2008 , 2011 and 2020. If I was told KOSPI VIX was 47, I assume the market had fallen apart.

The truth however is that the Kospi 200 (which is used to price VIX) has more than doubled over the past 6,7 months.

If the market is going up, then why is the KOSPI VIX so high? The most likely answer is autocallables, a product that Koreans love. In the flat equity market and low interest rate environment that has existed since 2010 in Korea, investors have tried to juice returns with autocallables (structured products) that generate a yield by selling volatility. Its a retail product that packages up the premium from selling insurance on the market and turns into “yield” product. I have written about it many times, so please see an old note for more details. It is not hard to find the reason for the Kospi 200 surging. Looking at a Kospi 200 ETF - you can see two stocks make up more than 50% of the index. Samsung Electronics and SK Hynix.

Both these companies make memory chips, and both have surged over the last few months. Samsung in particular has been pulled out of a particularly long funk.

SK Hynix is on another planet.

The weird thing about these autocallables is that they work best in a flat market. If markets go too high or too low, they have to be reset. With the Kospi continually hitting new highs, these long term sellers of volatility are constantly getting knocked out, which has meant that “supply” of volatility is reduced, and spot VIX has to rise. In December there was record issuance, probably driven by resetting of knocked out autocallables.

The thing is that Korean do not just sell volatility on the Kopsi200, they sell it on just about anything. Below is a list of popular underlyers No 2 is Samsung Electronics. No 6 is Hyundai Motors. But Eurostoxx 60, Nikkei and S&P 500 are popular too.

While Eurostoxx and S&P 500 VIX is well behaved, Nikkei VIX has spiked recently.

But like the Kospi, Nikkei is at highs, and used to spike on a falling market, not rising market.

What to make of all this? Well for vol targeting funds, they must be getting very weird signals. They normally sell when volatility rises, and buy as it goes lower, but in Korea and Japan, that strategy would now be badly lagging the market. I also wonder what it does to VIX if there was a sell off now. Volatility is already expensive - does it get more so? My guess is that CTA and trend following funds are positioned in very weird ways - which means the chance that the market does weird things is elevated. I also see the MOVE Index at lows, even as the JGB market continues to be weak.

If January was crazy, the signs are we will see more odd months in 2026. Buckle up.

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Sadly, I am going to have to change the format of the portfolio review. Previously paying subscribers could not only see my positions, but also the weightings of those positions. I now have enough external investors to make this untenable. For those that are looking for more timely updates on positions and markets, you can try Slice. Slice is new website I am also publishing on, which is far more finance friendly, and I have direct access to the founders to get changes to the app made if I want. They have already made a change to how the “portfolio” function works to suit me. I am finding I use Substack for fully formed ideas - while Slice is more like a “jotting book” - where you get a stream of consciousness. For example, I put a speculative short on Take Two (TTWO US), last month which has paid off so far.

Find me on Slice here. I am offering half price for 6 months using the code Rusty50.

Your other option if you want more detail is to sign up to official Brumby Capital newsletter - which comes out after the NAV is audited - normally the second week of the month. You can do that at my newly renovated website (www.brumbycapital.com). January was surprising good, even though I entered the month net short. You can see positioning over time below.

Like all the best months, the long book, currency book AND the short book made money in January. We have made money in 6 months in a row - so February may well be cruel to us. Lets see.

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I hate making money from being long gold. When I was bearish China back in the day, and running net short, a lot of my investors were also long gold. I told them it was a bad idea, but they held on to their gold and gold miners and got smoked. They were not quite Smeagol/Gollum - but they were close. Here I am “Smeagolling” my way to making money. I have been long gold as part of a pair trade of short US treasuries for years - the basic driver being that the Chinese/Indians/Brazilians etc would never by a US treasury for their foreign currency reserves again, and crypto was still untouchable, which only left gold. Of course, if the US got serious about monetary policy (like putting interest rates to 7% or so), then gold would suffer, so I have been long gold, short long dated treasuries. It has been good.

I am often asked about the other precious metals, and I would say, I don’t know if central banks are buying silver/platinum etc - so I would rather stick to gold. The problem is that as the chart above shows, we have moved a long way now. Are we done? Are we all Gollum grasping at gold ring as we fall into the lava of Mount Doom? Well lets start with the bearish parts first. Total ETF holdings are back to relatively high levels. Being long gold from 2022 to 2024, falling ETF holdings offered a lot of comfort. No more.

Surging gold has pushed the market capitalisation of gold to USD 35 trillion. As gold supply does not increase that much - this is just telling you the price has moved a long way.

We can normalise this to GDP, as we start getting into a scarier chart.

Adding to the unease is that silver, which is equivalent of golds sleazier young brother is cashing in on the boom. When silver has spiked, we are near the end historically.

Finally, we have gold dedicated funds and Substack writers doing victory laps - which is hubris inviting nemesis, if I have ever seen it. So these are all bad signs. What are the good signs then?

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One of the hardest things to do as investor is knowing whether or not to chase a trade. Ever since gold broke higher in 2024, if you have been waiting for it to get back to its 200 MDA to buy gold, then you would not have bought any. In the move from USD 3,300 to USD 5,080 is has not even touched the 50MDA.

I have owned gold as a reaction to US policy. First was the freezing of Russian reserves - which is my view would lead the Chinese to sell their US Treasuries. This would not be replaced with JGBs or Bunds, and the Chinese government is negative on crypto, leaving gold as the only alternative. So far the Chinese have only sold half their Treasuries, but with a large current account surplus, would need to be large buyers to offset the currency appreciation pressures.

So for me, gold was a reaction trade to something that happened back in 2022. I also thought there was risk that surging treasury yields could hold gold back - so have paired long gold with a short TLT trade. This has been good.

The obvious “reaction” to this trade would be for the US Federal Reserve to raise interest rates, and I am beginning to position for that - but this is how I think about markets. I am now trying to trade the “reaction” to another market action.

Passive investing gets a lot of heat. The Economist has a recent article talking about the potentially distorting features of passive investing. I also know that Michael W. Green has written about the problems with passive on multiple occasions. Don’t get me wrong, I think there are some big problem with index and passive investing. One of them fits in with my personal “bete noire” of clearinghouses. ISDA-SIMM set out model risk weightings for equities as priced by clearinghouses. Indexes (sic), Funds and ETFs have a weighting of 17, nearly half the weighting of an individual stock. This naturally drives financial firms to passive investing over individual stock investing, and creates a distortion bias.

But this just tells me clearinghouses are bad at pricing risk - which I already knew, and which has been proven over and over again. The real criticism levelled against passive is that is causes markets to be mispriced. On many measure, US equities do look overpriced. Take this one which I like which compares S&P 500 dividend yield to JGB yields.

Or US net worth to GDP, which has broken well above its long term trend.

Part of the criticism of passive comes from active managers who are looking for someone to blame for their underperformance. Implicitly they are saying current pricing is crazy, and its been driven by flows to passive. If market was priced by active managers, then it would be much more reasonable. Maybe this is true, but maybe not.

From my perspective, what has really changed in share buy backs. Back in the 2000s, when stocks were expensive, corporates were incentivised to sell shares, and did so with abandon. But over the last 15 years or so, the share count of the S&P 500 has fallen, even as the market has become expensive.

A good single stock example is Microsoft. A leading stock in the dot com bubble, and a leading stock today. If we look at shares outstanding (ignore the volatility in 1998/9) the trend is clear - issuing shares until 2007, and buying them back since.

Using EV/Sales, you should not be surprised to see that Microsoft’s valuation has moved higher in recent years.

Nvidia also buys back shares

What I am saying is the reaction function of corporates has changed, and so have valuations. If Microsoft and Nvidia as willing to buy back share at valuations of 10 times EV/Sales or more, then until there is some event that destroys the cashflow to these businesses, why would they rerate lower? In my view, the rise of passive is due to passive naturally remaining fully invested in the biggest and best businesses, something most active managers struggle to do (active implies activity). The risk to passive is the same risk that all investors face, a shock like the GFC or Covid destroying cashflow, and forcing share buybacks to turn into share issuance. But in a world of fiscal dominance, how likely is that? The bigger risk to passive investors is a change in regulations or taxation. We saw this in China with its tech companies, and the stocks derated massively.

For me, in the world we have lived in for the last few years, passive has been a very effective investing strategy. If you believe that politics, industry policy and tax policy won’t change, then passive will remain effective. My view is that all of these things will change - but passive investing is not the bad guy here.

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I am generally an upbeat guy, but this morning I woke up and felt down for some reason. When I feel down, I don’t try and cheer myself up, I lean into it, I wallow until I hate it so much, I drive myself to live again. I feel like writing about death and loss, so I shall write on bonds. And as I write, and wallow, I shall listen to sad songs. First up is “Richter: On The Nature Of Daylight” .

I should note, my downbeat mood does not come from markets or my strategy. GLD/TLT has been wonderful. If you have not looked at GLD/TLT, I provide a long term graph here.

The question, I think, everyone wants an answer to, is why has the sell off in JGB yields not had a greater effect on the US. I look at this graph, and ponder this myself (I have now changed music to It’s Quiet Uptown from Hamilton)

I do have some thoughts on this. When I look at the GLD/TLT graph, there are three distinct periods of gold outperformance - 1970s, 2000s and now. For me, the 1970s and now are pretty easy to explain. US (and global) government was “pro-labour” which was an era of rising wages and costs. Good for gold, but bad for bonds. The problem is that 2000 to 2010 was the golden age of globalisation, and yet gold outperformed treasuries. My first thought was that this was driven purely by rising Asian wages (or weak US dollar - different sides of the same coin). We can use the Chinese Yuan as a proxy for Asia in this case.

The problem with this analysis is that the Chinese Yuan has been weak, and so have most other major Asian currencies. Korean Won, Indian Rupee, Japanese Yen are either at all time lows, or decade lows against the US Dollar. Or in other words, if you showed me how well GLD/TLT has done, I would have assumed the US dollar would be in the toilet. But its not. (I have changed music to Merry Christmas Mr Lawrence - its a sign my mood is lifting. I spent most of Covid learning to play this). In fact, as predicted many times, long Yen has become the new Widowmaker trade. Bonds and currencies have changed - buy why and how?

I think the simple answer is the market is signalling lack of investment everywhere. For a world where the US is not willing to play peacemaker, everyone now has to beef up defence, and secure supply chains. The deflationary influence of technology has looked to have ended, which I blame not on Moore’s law, but on the relentless consolidation of tech companies, and the relentless focus on returning capital to share holders through share buybacks. For the US, which had for years outsourced manufacturing to emerging markets, this made sense, but as we can see, raising equity from the stock market is beginning to return to the S&P 500. However we are still a long way from what we saw in the 2000s.

Japan, which has tried to maintain a manufacturing base, also has been focusing more on share holder return in recent years than investing - as we can see from the now falling share count of the Topix.

What is so interesting about this graph, its that 30 Year JGBs also bottomed as shares outstanding started to fall.

And at the same time, the Yen became reliably weak.

Everywhere I look in the Western World, the markets are crying out for more investment, and sending price signals to encourage this investment. And yet, corporates demur. There is only one country that has maintained investment necessary for the modern world, China. It has developed it military, and spent to develop its tech industry (and avoided the consolidation we see in US tech). This probably explains why the Chinese bond market is closer to lows than highs.

The Chinese never really caught the buyback bug.

Why are bond yields rising? Because corporate investment now lags behind needs greatly - leading to surging prices. And this also explains the move in GLD/TLT we saw from 2000 to 2010, at the time, we had underinvested for the needs of an industrialising China. Now are underinvesting for period of military and technological confrontation. Equities understand this - bond investors are deluding themselves. The really bad news for bond investors is the longer corporates keep capex low and prices high, the greater the catch back in wages and inflation will be. I still target 10% on the US 30 year treasury.

As I finish writing this note - I am listening to Skyfall by Adele. The lyrics are strangely apposite for a song about Bond…

This is the end

Hold Your Breathe And Count To Ten

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I have thought fast food restaurant chains were a short for a while now. Basically three reasons:

1 - Rising costs, particularly labour would put pressure on profitability.

2 - Rising interest rates would pressurise indebted franchisees, leading to profitability problems for the franchisors

3 - Ozempic and other weight loss drugs were reducing demand from “big eaters”.

I am still bearish on fast food chains, but I happened to come across this note by Brevarthan Research on UK listed Dominos and Greggs. Its a good note, so I am now recommending his substack, and have become a paid subscriber. Both stocks have been poor over the last year or so. I am not short them as they are popular shorts. I could go into my history of popular shorts, but it still too early in the morning for me to recount short squeezes like Volkswagen in 2008. Just to say, popular shorts often work, but when they don’t, the really don’t work. So I avoid them.

I happen to quite like Greggs as a chain. Unlike other chains like KFC or McDonalds, Greggs is still very affordable. Stealing shamelessly from his post, he shows the profitability split on franchised versus owned stores.

If you look at the above, the franchisees has to invest these days around £260k to own a Greggs franchise. In 2019, a 10 year UK gilt yield 1%, today they yield 5%. In other words, the interest cost of being a franchisee has risen dramtically.

Greggs is still growing its store base, but as can be seen above, the market is not sure this is profitable growth.

McDonalds and other big chains have realised that running a restaurant these days is just not that profitable, so have been dumping restaurants on franchisees as quickly as they can.

Big restaurant chains remind of me US banks in 2007. Selling a product to investors that is probably not going to make money. So far, with employment holding up, for the big chains, everything is just about holding together, but if a recession does hit, I suspect a lot of franchisees to go to the wall. Junk food business indeed.

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