Capital Flows and Asset Markets

I have been pretty sure that bond yields would keep rising, mainly because governments are going to keep spending. But I did think rising bond yields would act as a break on equity valuations. This is very typical in emerging markets, where high interest rates and bond yields have tended to depress equity valuations. Brazil is a good example, where it has historically had high interest rates, mainly due to high inflation rates.

In 2020, interest rates reached an all time low, and then rose again. Using Price to sales, the Bovespa traded at its highest price to sales in the 2019 and 2021 period (Covid did kill the market in 2020). But derated from 1.5 times sales to around 1 times today as interest rates rose.

However if we take the US, the opposite has happened. US 30 year Treasury yields now offer 5.2%, the highest level in 20 years.

But again using price to sales, US stocks have rerated higher, from 2 times sales in 2019 to nearly 4 times sales today.

One argument you could use is that as bonds are so unattractive, they are driving money into stocks. Which sort of makes sense - I think Hartnett at Bank of America, calls this the Anything But Bonds (ABB) trade. But there is a good reason to think that high bond yields should derate the market. In the US, mortgage rates are closely tied to 30 year treasury yields. When ever mortgage rates have been rising in the US before, bad things have happened. 1970s Stagflation, 1991 Savings and Loans crisis, 2008 GFC. But we have been in a long period of rising mortgage rates - and equities have done just fine.

What is different this time, or at least so far, is that we have not seen a sharp increase in unemployment.

One of the reasons I can find for this is that loan growth has remained strong. Typically as consumer spending has softened due to higher interest rates, corporates have cut borrowing, and we have a down cycle. This time, corporate lending has accelerated.

Loan growth seems to be the key here. That is higher interest rates have tended to see loan growth slow, but now loan growth seems unfazed by higher interest rates. Japan is a good example. From 2000 to 2013, loans shrank, but have been growing since.

Does this mean loan growth is good for equities? As long as loans are increasing we should be bullish? The problem with this analysis is that loan growth in 1970s was very strong, but US equities were poor.

The answer seems to be something along the lines of Adam Smith’s “animal spirits”. When investors think the returns will be much greater than the borrowing costs, then they borrow and invest and growth is good. Of course the higher the interest rate, the less likely that will be true, but not necessarily wrong. The most intriguing thing about the current investment boom, is that is remarkably concentrated. We have the hyperscalers and the AI labs and their backers, and we have Nvidia all financing it. Softbank just issued a bond well above prevailing rates in Japan. While the average analyst is probably unsure about future returns on AI, in my experience, Masayoshi Son and Elon Musk have never been unsure about any future returns, and they are the ones making the investment decisions.

That leaves me in a tricky position. Higher bond yields HAVE had the expected effect on US consumers, which SHOULD be negative for equities. And we have seen this in US facing consumer businesses. But the new technology is leading to an investment boom. But when does boom turn to bust? When do higher bond yields become a problem? I thought a good sign of this is when gold begins to outperforms equities. So now? Maybe?

Markets are never simple, as people are never simple. Could a slowdown in the US consumer lead to falling revenues at the hyperscalers, which leads to falling investment? Totally possible. Could the US government keep spending, which keeps everyone else spending and yields keep rising and rising until we get a change back to austerity. Also possible. For me, the relative turn in gold versus the S&P 500 will keep me thinking we are near the point where higher yields start to hurt equities. Time will tell.

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After the surge in DRAM and NAND prices, I thought wafer prices would be the next to go. For context, DRAM prices remain substantially higher than a year ago.

If you want an industry primer on wafers, have a look at this note from Brevarthan Research. So what has been going on in the wafer space?

The most pleasing aspect of August was the rally in GLD/TLT to recapture the 200MDA. My view on this is that this will continue to do well until rising bond yields forces the US government to take fiscal deficits seriously. The two big events of the month was that the US Treasury tried to control bond yields rather than control spending (expected and good for gold) and that the Federal Reserve was more hawkish than anticipated (also expected and bad for gold, but also bad for bonds). I did wonder what happens to GLD/TLT when Donald Trump comes to the end of his term - but over the summer I realised that Donald Trump is just the face of a political belief system that is now heavily entrenched in US politics. There is no going back, not until crisis forces change.

I was also happy to see Japanese bond yields to go higher. 30 year JGB yields have moved through 4%.

I thought this would have a negative “reaction” on US stock valuations. This has not been the case at all. Valuations have moved higher. I use price to sales below

Another way to look at this would be that financial assets relative to income would fall. This has not really happened yet either. Below is the Fed Fund Flow data, household net worth divided by GDP. This is slightly out of date - but we are still around 600% of GDP.

Or to borrow a chart from MacroStrategy, labour share of GDP continues to fall in the US. For what it is worth, I always felt that 1999 was the pinnacle of the US - asset prices were reasonable, workers fairly compensated, and politics was far more cordial. I did think Donald Trump would make more of an effort to take care of his base - but plainly he has other ideas now. Still, when the political reset comes - inflation will be all the higher for it.

What intrigues me most about markets at the moment is that credit is sending negative signals. Hyperscaler CDS is one example, but also the KDP High Yield Daily. It has risen this year.

But according to Goldman Sachs, the most shorted stocks have surged over the last year. What does this mean? It means short sellers have been driven to the wall, even as the credit signal is saying its time to get short. That tends to be a bearish set up.

I have also found historically speaking, when wheat prices rise, markets do poorly. Why? Well the breadline is called the breadline for a reason. When food prices go up - the political and economic pressure to do something increases dramatically.

Anyway, to my mind, the short term outlook looks bad. Particularly with a VIX on a 15 handle.

The funny thing is that it has been such a long bull market, and even though everything above is logical, even I am not sure equities can be weak. Time will tell.

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The big market news over the summer was the unwind of the momentum trade. The Goldman Sachs High Beta Momo Index suffered a 42% drawdown, and the dead bodies in hedge fund world have slowly been rising to the surface.

While everyone knows that memory stocks in particular got smashed, the above MoMo index is made up momentum longs AND momentum shorts. Momentum shorts generally work. That is falling stocks have a habit of keep falling. But was has been most interesting is the momentum short index has had its biggest rally since 2021. I can tell you from experience, you want to be short when this peaks, and cover at lows. As of today, we are really closer to a high than a low.

A good time to short is also when the KDP High Yield index is rising. And it has been rising this year.

ここ1か月ほどの間に、米国は2つの異なる市場介入を発表した。

ひとつは長期米国債市場への介入で、国債の買い戻し（buyback）を拡大するというものだ。もうひとつは為替市場への介入で、円高を促すUNAGASUためのものだった。

長期債市場への介入は比較的理解しやすいし、過去にも例がある。ただし、これまでのところ債券利回りには特に変化は見られていない。

一方で、円への介入のほうが興味深い。こちらは少なくとも、市場に目に見える動きをもたらした。

しかし、そもそも円高がどのように米国債市場を助けることになるのだろうか？

私には、この円介入は「もはや存在しない世界」に市場を戻そうとする試みCOCOROMIに思えてならない。

では、その「世界」とはどのようなものだったのか。

1990年から2016年にかけて、日本国債（JGB）の利回りは一貫して低下し、最終的にはマイナス圏にまで入った。

しかも、日本政府のグロス政府債務が1990年代初頭のGDP比約70％から、2015年には約250％にまで増加したにもかかわらず、JGB利回りは低下し続けたのである。

日本では、債券利回りが低いまま推移する一方、円は強かった。

しかし利回りが上昇するようになると、円は弱くなった。

つまり、円安と債券利回り上昇の間には相関関係がある。

だが、為替市場に介入するということは、単なる相関だけでなく、そこに因果inga関係があると考えていることになる。

すなわち、円安そのものが債券利回りの上昇を引き起こしていると考えているということだ。

私が考える日本における最大の変化は、食料価格の上昇である。

日本の食料価格は約30年間ほとんど停滞していたが、2013年頃から上昇し始めた。

なぜ日本の食料価格が突然上昇し始めたのかについて、私には確信の持てる説明はない。

しかし、ひとつ確かなことがある。

食料価格が上がれば、賃金chinginも上がらざるを得ない。

もし賃金がそれに追いつかなければ、大きな政治的反発が起きることを覚悟しなければならない。

ひとつの可能性として、日本が食料輸入に依存していることが挙げられる。特に、中国から野菜や果物を多く輸入している。

中国人民元 (RMB)に対して見ると、円は1992年以来の安値yasuneまで下落している。

これは過去とは大きく異なる状況だ。

これまでは通常、円安になると他のアジア諸国も通貨を切り下げる傾向があった。

ところが今回は、中国人民元が強いまま維持されている。

そして、ここが問題の核心なのだと思う。

1980年代、1990年代、そして2000年代を通じて、日本と米国は世界最大級かつ最も豊かな2つの国として、いわば自分たちが世界経済の「天候を決める」ことに慣れていた。

しかし今では、そこに第3のプレーヤーがいる。

中国である。

中国も低金利の国ではある。

だが日本とは異なり、中国は米国債を買うことを選んでいない。

したがって、本当の問題は、中国が通貨を切り下げていないことにある。

その結果、他国、特に日本に対して物価上昇圧力が生じている。

そして同時に、中国は米国債を買うことも選択していない。

では、円が継続的に上昇すれば問題は解決するのだろうか？

もし本当の問題が「人民元が強すぎること」なのであれば、おそらく答えはノーだ。

むしろ円高は、世界の他の地域にさらにインフレ圧力を生み出すだけかもしれない。

中国がかつて世界の商品市場（コモディティ市場）の構造を変えたのと同じように、今度は中国が世界の金融市場の構造を変えつつある。

米国財務省による債券市場や為替市場への介入は、日本と米国が世界の支配的な経済大国だった時代へ時計の針を戻そうとする、叶わぬ願いのように見える。

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In the last month or so, the US has announced two separate interventions. One in long dated Treasury market, where buy backs have been increased, and another one, where it intervened in the currency markets to strengthen Yen. The intervention in the long dated bond market is pretty easy to understand, and has some precedence. So far though, no change on bond yields.

The Yen intervention is more interesting. And the intervention did at least a discernible movement in the market.

But how exactly is Yen strength supposed to help the US bond market? I can’t help but feel the Yen intervention was an effort to get markets back to a world that does not exist anymore. Which world was that? Well from 1990 to 2016, JGB yields continually fell, and even went negative.

And JGB yields fell even as gross government debt of the Japanese government from 70% in early 1990s to 250% by 2015.

In Japan, yields stayed low, and the Yen was strong. But as yields have gone up, the Yen has weakened. So there is correlation between weak Yen and higher bond yields. But to intervene in the currency market you have to also believe there is causation. Or that the weak Yen is causing bond yields to be higher.

For me the biggest change in Japan has been rising food prices. After stagnating for three decades, they have been rising since 2013. I do not have a strong explanation for why Japanese food prices suddenly started to rise, but I do know that when food prices rise, wages HAVE to follow. If they do not follow then expect huge political repercussions.

One possible explanation is that Japan does rely on food imports, and particularly vegetables and fruits from China. Against the Chinese Yuan, the Yen has weakened to the lowest level since 1992. And this is very different to before. Usually a weak Yen has caused other Asian nations to devalue - but Chinese Yuan has remained strong.

And now, I think we get to the rub. Japan and the USA as the two biggest and richest nations in the 1980s, 1990s and 2000s have gotten used to setting the weather. But now there is a third player - China. And China does have low yields, but unlike Japan, is choosing not to buy US treasuries.

So the real problem is that China is not devaluing, so creating upward price pressure elsewhere (particularly in Japan), and it is not choosing to buy US treasuries. Would sustained Yen appreciation help? If a strong Yuan is the problem, then probably not. It would just create more inflationary pressure in the rest of the world. Just as China changed the commodity world, now China is changing the financial world. The US Treasury interventions in bond and currency markets is a forlorn wish to try and turn back the clock to a world where Japan and the US were the dominant powers.

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I have been on Substack since 2022, and generally speaking its been pretty good for me. I am on the UK Bestseller rankings, I am slightly above Dan Wotton, but below Dominic Cummings. There is a joke in there somewhere, but it escapes me at the moment. I also do well in the US Bestseller for Finance list.

As a London based bestseller, I have been invited to “Bestseller Summer Drinks”. I was amazed at how young most of the Substack writers were, but ended up talking to one of the other over 50s there - Brian Cox. I did some work with one of his friends, so we got chatting. I don’t like selfies - but Substack photographers managed to prove how photogenic Brian Cox is, and how unphotogenic I am. He is a very nice guy.

I am also amazed at the reach that Substack has given me. Special shout out to my solitary subscribers from the following countries: Greenland, Mali, Cote d’Ivoire, DRC, and Yemen. Make yourself known to me for a free upgrade.

I have also made some decent money from Substack, so I should not really complain about it - but I did see this article in my feed, from Scott Carney entitled “The Real Reason that Substack is Collapsing”. This article is by far the most liked article he has written. It is not a long article, but basically it says engagement is up, but revenue is down for Substack writers. There are two drivers of this, one normal, and one bad. The normal one is that everyone has seen some hack come on to Substack, and write something and generate some decent income, so has tried it themselves. Basically every failed macro fund manager and short seller is on here now. And honestly, why would people pay for more than one subscription to hear about how “the AI trade is about to implode”? This is normal, and we can lay this saturation problem directly at the feet of normal capitalism. And this is what Scott Carney is writing about. It is a bit like complaining about why we can’t all be NBA players, or all win a Nobel prize for something. Competition makes everything harder - and that’s life.

But there is a bigger problem with Substack, which Carney picks up on, but does fully understands the significance. I generally publish two to three articles a week, and occasionally more. That is 761 post, with another 147 drafts to boot.

It used to be that every post would generate a few more subscribers, and then the occasional viral post would see subscribers jump up. But a year ago that relationship broke down. Subscribers stopped rising.

At one of the Substack drinks, I met a Substack employee and mentioned this, and they said the algorithm was now promoting “notes” over posts. Her reasoning was that substack was trying to generate more internal subscribers for writers. The thing about notes, is that it tends to generate more followers than subscribers. If you are subscriber, you are a follower, but if you are a follower, you are not a subscriber. I can download the follower and subscribers numbers directly from substack, and you can see clearly when the policy changed.

Part of me was happy that I am still increasing my “online reach” - all those posts were still generating growth. But the more I thought about it, the more negative I think this development is. With my subscribers, I can see details like their email address, and also how often they access my notes. I can see that most of my most active subs have paid me some money - and if I wanted I could hassle the non-paying ones if I wanted to.

Followers, however give me nothing. I don’t know anything about them - and I don’t even know if they are real. And I can tell you this for sure - revenue follows subscribers not followers.

For me, this creates two big problems. The share of followers in my audience is increasing. If I decided to leave substack, I cannot easily take those followers with me. Subscribers I can, as I back up the list of subscribers every now and then. So I could set up somewhere else and move my subscribers there (in fact I run a Slice account for exactly that possibility). But the other problem is that if you are moving from an environment where substack works for you, to where you work from Substack, this makes new writers desperate for attention. In the finance part of Substack, clickbait is already very common (the coming AI bust and/or energy prices to the moon and/or coming sovereign debt default etc etc). I also get a weekly email from some rando asking to swap recommendations to try and build an audience. For what its worth, I only recommend Substacks that are good, and I have learnt something from. For reference I am recommended by 83 other Substacks, I recommend 10. I only recommend Substacks that I actually read - this is the “Russell Clark guarantee”. I am not going to risk my reputation for the sake of a few extra subs.

So the problem with Substack is the same problem that has afflicted every other social network. The pursuit of growth and revenue is driving them to make the product “worse” for users. And once you start down this route, it is very hard to change. I think I need to prepare for the inevitable time when Substack starts raising fees to compensate for slowing growth.

If you are currently only a follower - my recommendation is to change to a subscriber ASAP, so I can make sure you continue to get my views, and not be at the whim of a Substack algorithm. And I will continue to prepare a contingency plan for when Substack goes full “Twitter”.

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I know many of the substack/macro community like to pile bitcoin, gold, silver, platinum into a dollar debasement trade. And intellectually that makes total sense. But for the past few years, I have thought GLD/TLT makes more sense (long gold / short treasuries). For me, this felt a much safer trade, than a straight out dollar debasement trade. GLD/TLT has been good, but I wont lie, the 25% drawdown earlier this year did make me nervous.

I know in the more “excitable” corners of substack they have been all in on other debasement trades like bitcoin, silver and even platinum. I generally avoided these assets, for one reason and one reason alone. I know People Bank of China buys gold, but I don’ think it buys any of those other assets. Silver and platinum are really poor alternatives to gold, and have traded as such, with gold outperforming over a long period of time. Gold was looking expensive versus silver earlier this year, but looks okay here.

Bitcoin is not being purchased by the PBOC, and in fact China has a hostile view on crypto. But Bitcoin is very popular in emerging markets, and so COULD do well in a weak dollar environment. So lets look at some of the indicators on Bitcoin. I look at shares outstanding on IBIT to gauge enthusiasm. Shares outstanding fell slightly in June, but hard to say that investors had completely given up on the trade. Short interest did rise somewhat in IBIT recently, but very small compared to outstanding.

The best days to buy bitcoin was when the market was very negative on it. A good proxy for this was Strategy short interest. Short interest remains at lows, and a quick check shows that cost of borrow remains GC.

I also have a view that the market cap of Tether was a good lead indicator on Bitcoin. When Tether market cap was rising, you knew money was coming into the crypto environment - which would be bullish for crypto assets. Tether market cap is actually falling.

Given the weakness in bitcoin this year, I would have assumed the trend following community would be short - but CFTC data actually shows record longs.

The most bullish thing about Bitcoin are the technicals. It has broken above its 200 MDA, which has usually been a good time to buy.

When I started writing this note, I thought the data would point to good risk reward. But it looks like everyone is long already. I don’t like that set up - at least with gold you have the PBOC as an anchor buyer.

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Americans love freedom. Perhaps they care about freedom in the rest of the world a bit less these days, but they certainly love freedom in the US. Donald Trump certainly likes the freedom to act as he wishes. Fiscal restraint seems downright un-American. If President Trump wants to run a 6% fiscal deficit, why can’t he?

Other nations have tried to work free from constraint - Turkey now, and Argentina until recently as least. Typically the price of being fiscally liberal has been higher interest rates, and usually a weak currency. Turkish Lira has NOT been a safe store of value.

But even with large fiscal deficits, the US dollar has been conspicuously strong to stable against other currencies.

And perhaps most importantly, corporate borrowing costs have stayed at low levels, with only the Covid era seeing lower yields. In fact corporate yields have fallen under Trump 2.0. Why worry about fiscal deficits if corporate American can borrow cheaply?

But a lot of the lowering in corporate bond yields has been driven by collapsing spreads. Of the market pricing corporate and sovereign yields very similarly. Spreads are as tight as they get.

For the last few years I have marvelled at the ever lower gap between lets say 30 year JGBs and US corporate debt. Both have inflation risk. The JGBs are long dated, KDP is short dated but has default risk. Essentially the market has been saying, inflation is the problem, but default is not. This sort of makes sense, but also doesn’t. If inflation is a problem, eventually governments will do something about it, and then default risk will go up a lot (this assumes a policy of austerity and increased competition to get prices down).

Originally, I though the market was saying the time to worry was in 2025, when gold started to outperform the S&P 500, but S&P 500 has been fine, even as gold has done well.

To be brutally honest with you, market based signals worked well in the 1990s, 2000s and early 2010s, but since 2016, policy has been the much better signal. That’s why recent policy changes are so interesting. First of all the US and Japan tried to intervene in the currency market. This is pretty easy to understand. Persistent Yen weakness has caused inflation to rise in Japan, and bond yield to rise. Strengthen the Yen should hopefully allow JGB yields to fall. The problem is that real Yen strength would probably require austerity from the Japanese government - and that looks unlikely.

And now the US treasury has increased its purchases of 30 year treasuries via selling more bills.

While still early days, neither the Yen or 30 year treasury have moved that much. Why? Well the problem is the Yen and the Treasury are both reacting to loose fiscal policy. When you intervene in bonds or currency markets, you send a big signal that nothing is going to change. You are going to keep spending, your just trying to find ways of making it cheaper. It would be like going to your bank and saying, I am really struggling with my mortgage, could you cut my interest rate please? A good bank would probably ask you to start paying more, or make changes. That is by saying your bill is onerous, you invite it to become more so.

The reason I call this the beginning of the end is that yields have been rising for a few years now, and markets have generally speaking been happy with this. But now the US government is saying, things are a problem. A good proximate reason is that interest payments are now greater than defence spending in the US.

So here is the rub. In Turkey, President Erdogan, who shares much in common with President Trump, has tried very hard to get interest rates lower. The problem is that when the market thinks interest rates should be higher, the only way to get capital is to basically steal it. And once you start stealing capital, more of it wants to leave, creating a viscous cycle. Now Turkey is Turkey. And the US is US. The US has far more leverage to convince people to lend to it and uncommercial rates. So maybe the party can carry on, who knows? But what we learnt this month is that for the US treasury we are now at a pain point. I wonder is markets try pushing a bit further to see what breaks? The key issue would be a derating of US equities. Typically equities de-rate in an inflationary environment - but in the US have seen the opposite.

I thought 2025 was the beginning of the end. Maybe its 2026. One thing I have learnt in life, when something can’t carry on, then it does end. Just sometimes takes a bit longer than you think.

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A few years ago, I ditched a purely macro approach to investing, to incorporate a political angle first. I do not regret this decision. I was away last week, and I was catching up with various emails, and all the “macro” investors remain relentlessly bearish. Most no longer manage funds, but I suspect are chomping at the bit to get back into markets once markets stop “acting funny”, and macro works again.

Politically, markets seem to be doing what I would thought they would so. Growth would be good, and government bond yields would rise. The ONLY issue is when do rising government bond yields begin to act as a brake on asset markets. My first guess at when this would be the case, was wildly wrong. Higher JGB yields has had no effect on the S&P 500 (I did mention macro investing doesn’t work anymore - yes?).

What has worked is just looking at corporate spreads. This one is from Bloomberg. Plainly when this widens, equities do bad, and when its low, equities do good. Simple.

What is unsettling is this measure is so at odds at most other measures I look at. Below is the Morningstar leveraged loan index - 100 is good here. Below 100 is not so good. It has been at 95 or so most of 2026.

Leverage loans are mainly used by private equity, so in a rising rate environment, you are right to be cautious. But even in the still relatively unleveraged balance sheets of tech, CDS have been selling off. How does this not feed into corporate credit spreads?

But what is really bugging me is a sudden rise in the KDP High Yield daily. It has risen from a low of 5.4% to 6.5% this year - with a spike this month. Usually when this goes up, equities go down.

I normally look at this as a spread to the 5 year treasury. And to be fair the spread is tight - but I still find markets tend to be weaker when this spread goes up - not at all time highs.

I must say I thought markets were headed for a bit of credit driven weakness - especially when I see HYG trading down through its 200MDA.

So credit says that US equities should not be doing so well. Interesting. I also note that S&P Dividend Futures have also not confirmed the break out in the S&P 500. If the dividend future was falling, and S&P 500 going up, that would be a VERY bad sign. At the moment it is just not confirming.

I also note that the GS High Beta Momentum Short Index has been breaking higher. This tends to happen before market problems. Why? When you crush short sellers, you force them to buy back shorts - which is a one time trade. Once they cover, its bombs away!

Basically, both equities and credit are sending mixed signals. My best guess is that everyone has learnt to “buy the dip”. See leverage ETF flows.

I thought the time to worry about rising government bond yields was when gold started to outperform S&P 500. This happened in 2025, but has had a huge reversal this year. One wonders if this is turning again?

All is really adding up to a bearish outlook again. Maybe the macro guys won’t look like idiots for a month or two. Lets see.

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