I was lucky enough to start working at GAM in 2002. GAM was a leader in the fund of hedge fund business just as it was booming. The source of this success was not hard to find, and being at GAM was a great place to see it. The dot com bubble was coming to a head in 1999 - and as one investor told me - funds had to sell value stocks to buy growth stocks or risk underperforming. This Morgan Stanley Growth v Value index gives an idea of how extreme it was.

Many of the hedge funds started in 2000 had a value versus growth bias, and did extremely well. The S&P 500 also fell 50% from 2000 to its low in 2002, and had three down years in a row. Hedge funds did well just at large cap US stocks were doing poorly, and this drove huge inflows into the industry.

The GFC was good for me, and for SOME hedge funds. But in 2008, you could see the problems were starting. The average hedge fund lost money. Part of the problem with the hedge fund space then and now, is that it is often just a fee strategy looking for an investment strategy. If you don’t know what that means, basically fees are higher in hedge fund space, so everyone wants a hedge fund, even if they don’t know what they are doing. What I remember so clearly about 2008/9 was that it destroyed momentum strategies. In 2008, everyone went short banks and long commodities, which worked great until half way through 2008, when the market suddenly remembered financial crises are bad for commodity demand, and then just as everyone got short in 2009, the market rebounded hard. Looking at the GS Momentum Long/GS Momentum Short index shows the carnage.

I remember in the period after 2009, hedge fund investors changed dramatically. No longer did they trust big names to know what they were doing. Questions became more pointed, and no one paid hedge fund fees for beta any more. They were happy to allocate to low cost passive funds if they replicated hedge fund strategies. This lead eventually the decline in hedge fund launches, although not in the total number of funds.

Over the years, the hedge fund space has become increasingly detached from the market. What do I mean by that? Well the industry has become increasingly prone to drawdowns from “rotation”. As the 40% drawdown in momentum strategies above shows. It is probably easier to see with GS VIP Long vs Most Short Index. Since 2016, any spike in VIP Longs v Most Short has been met by brutal reversals. That is the core long/short strategies no longer work.

Why is this? In the hedge fund space, I have noticed the rise of various different styles of fund - pod shops, or what I would call volatility management style of funds. I would add first loss capital in to this bucket. What all these management styles have in common is an incentive structure that rewards upside, but hugely punishes downside. In pod shops, it is common to hear that 2% drawdown will be met with huge capital reductions to the managers. With first loss capital, a typical structure is that a fund manager can charge a high monthly fee on profits, they need to take 100% of a loss. Another way to interpret this is that while headline fees are high, the manager is forced to sell a zero cost put option to the first loss capital investor. This is great for first loss investors, not great for managers.

This creates a huge incentive to cap downside risk. In theory, the best way to create an investment strategy with asymmetrical risk is to use options. I don’t like options - but I can see the appeal. Option volumes have exploded. I am not sure this is the right index, but it fits in with what I have heard.

Why do I say “in theory” that option strategies are the best way to create asymmetrical risk? Two reasons. First of all the cost of buying options tends to destroy returns - called time decay. The second reason, is that selling puts tends to be a great strategy until it is not. In my experience, the only winner from option trading are investment banks, which is why they are so keen on selling them.

What has all this got to do with long short funds being so bad? Well, option trading has also become the drive of asset prices, no the derivative. Ladder attacks, where investors buy a series of call options with progressively higher strikes to force investment banks to buy have become increasingly common. One problem I have always had with options is that hedging is almost impossible, and so when option strategies work, they sow the seeds for their own destruction. And if you are downside risk averse, you need to be constantly hedging successful options.

This is why momentum strategies tend to break to new highs and then suddenly fail, with both long book and short book moving in opposite directions. This probably explains why long short hedge funds have a similar return profile to CTAs. Option strategies create mindless momentum trades, and CTAs being mindless momentum traders follow. Since 2008, CTAs have also been a waste of time.

What changes this? I do think higher bond yields will at some point destroy the attraction of pod shops. You can now get a guaranteed 5.3% return by leading to the US government. Why are you bothering with a black box fee machine?

A good bear market would also help the long short community. Again, this would probably need investors to allocate away from equities back to bonds.

I have my views on the “political” changes that would be needed for long/short to thrive again. Time to be patient I think.

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One of Prime Minister Abe’s aim was to get Japanese investors to stop being conservative. He was particularly keen on getting Japanese investors out of JGBs. The main was was to get the Bank of Japan buying basically the entire JGB market. In USD terms, the BOJ balance sheet went from USD 1.7tn to about USD 7tn

And this has led to Japanese investments in domestic bonds falling dramatically. In other words the BOJ bought bonds of JGB investors at a very high price.

The good news for Japanese investors is that they sold most of their JGB holdings before yields rose. Or if you are more cynically minded, Japanese banks saw what was coming and dumped their holdings on the BOJ. Long dated yields in Japan have surged in recent years (bond values have fallen).

But as the graph earlier pointed out, Japanese investors have not sold their foreign debt holdings. As GS point out, the largest holdings are now held by investors that do not hedge (there are good technical reasons for this). But basically, Japanese have large UNHEDGED fixed income positions.

Even life insurers, who usually hedge their portfolios - they have let hedging ratios fall a long way.

Over half of their foreign holdings are in the US.

Anyway you cut it, Japanese investors (pension funds, retail and insurers) have a large unhedged position in US Treasuries. This might seem odd - TLT US - which gives a good guide to the capital value of US treasuries has been very poor.

But in Yen terms, it has been fine (ish).

This is particularly true when compared to a 10yr JGB return index.

In the old “free market” days of 2016, this combination of very unhedged positioning in the USD assets would make me EXTREMELY bullish on the Yen. Covering the unhedged position would drive Yen higher, which would cause more covering and so on and so forth. Of course the problem with that outcome is that it would drive investors back into JGBs - the very thing they have been trying to stop. But maybe Japanese investors just stop allocating money to US treasuries? US 30 Year Yields are at new highs.

But the Japanese would probably feel a bit miffed that the US is suddenly forcing the Yen higher, after they have loyally helped the US finance its budget deficit. What would I do to try and mollify miffed Japanese investors? I would probably announce a buy back (bit like the BOJ and its QE to help them out of JGBs), to support the market as Japanese try and sell. The treasury has already upped the buyback once. The next step will be to make the buyback big enough for Japanese investors to sell into. What sort of numbers would that be? Lets say US 4 trillion total investment by the Japanese. The total treasury buy back is currently USD 65bn a quarter. To help out the Japanese, it probably needs to be USD 200bn a quarter. I expect the buy back to be increased.

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Like almost everything in my life, if something works, then I keep using it, but when it stops working, I move on. Currencies used to be so reliable in finance, I build my whole investing process around it. I am provoked to write this note, because the Korean Won has just had a straight line 15% move.

What is noteworthy for me, is that for the life of me, I could not understand why Korean Won was at all time lows to start with. Korea has a cyclical currency, which tends to follow equity markets. It also tended to move with semiconductor cycle. Given semiconductor prices, it should be much stronger than it is. The lack of currency adjustment has fed into by far the largest trade surplus ever booked by Korea.

Taiwan has a 24% of GDP trade surplus, and while not weak like Korean Won, the currency has done nothing. One reason for this was the weakness of Japanese Yen. Until recently it was trading at 30 year lows.

The trigger for this has been, seemingly, the US treasury deciding that the Yen was too weak. So one side of the currency market has been currencies that should be strong, have been weak. On the other side of the market is that currencies that should be weak, have been strong. One such currency is the Mexican Peso. On of my best trades was shorting Mexican Peso in 2011 until 2016. I remember someone tried to convince me it was a long, not a short. All about cheapness relative to the US, and higher interest rates than the US, manufacturing was moving there etc etc. I just remember saying, “yeah…. but its still Mexico”.

“Why so mean on Mexico?”, you may ask? Am I MAGA man in disguise? No, numbers drive me - and the numbers associated with state owned Pemex are so poor, its diabolical. This Economist article explains.

Mexico also has an inflation problem. Since 2000, prices have risen 200%.

One trade I used to love putting on was long Yen, short Mexico Peso (you could call this the “reverse carry” trade - or the “work in practice but not in theory trade”). This was a super successful trade in 2008 and 2015/6, but since then the Peso has been much better than the Yen.

Over the same period, Japanese prices have only risen 20%.

Currency markets use to reward success (Korean semi exports for example), or ability to keep price low (Japan), and punish poorly run state owned businesses (Mexico). But these days not so much. But the quid pro quo of currencies not adjusting has been much higher inflation, and bond yields.

In practice, weird currency moves seem to be driving higher bond yields. There is no good theory for it - other than maybe pointing out that weird currency moves indicate a move away from free markets, which is itself inflationary.

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I decided to get in to finance in 1998, when living in HK. I was fascinated at how currencies, interest rates and equities were so tightly bound, and this fascination led me to a hedge fund career. You can read about it my book. In my experience, politicians often intervene in the value of their own currencies. Either to weaken it or strengthen it. Plaza Accord was a multinational accord to weaken the USD for example. And then you have currencies pegs, which governments promise to defend, but often find the cost prohibitive. Getting a break in a peg right can be incredibly lucrative. The move in the Korean Won in 1998 was huge.

In HK, they were only able to defend the peg by offering much higher interest rates than in the US. At one point, HIBOR was 20% higher than Libor.

But to devalue or not to devalue was a domestic decision. What seems to have happened in Trump 2.0 is that other nations exchange rates have become a US policy choice. We first saw this in Argentina, where the Trump administration came into set an exchange rate of around 1400 to 1475 for the Argentinian peso. This was to help the administration of Milei in elections. Currently the exchange rate is beyond that level, but depreciation has slowed since the intervention.

But borrowing costs have fallen in Argentina - so in many ways the intervention could be considered a success.

After the “success” in Argentina, the Trump administration now wants to strengthen the Yen.

I find this gives me very mixed feelings.

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The BUY case for Yen is straightforward. As millions of tourists will happily tell you Japan is cheap. Using the BIS real effective exchange rate measure, the Yen has collapse in value. This measure takes in relative inflation AND exchange rate - so makes the Yen even cheaper than just looking at straight exchange rates.

I have in previous post called “long Yen” the Widowmaker trade. It used to be short JGBs were the widowmaker trade, as various “macro thinkers” used to always think JGB yield should rise, and instead they always went lower. Even with recent moves, long Yen has been a widowmaker trade still. Anyone hyperventilating over a 6% move in the Yen needs to get out more.

The most recent Yen strength has probably been driven by the realisation that the BOJ will likely raise rates more than the US. This can be seen in the relative movement of 2 year bond yields. The question you do have to ask yourself, is why didn’t Yen rally more in 2024 and 2025, as these two yields began converging?

If you look at the Yen versus other “safe haven” currencies like the Swiss Franc, then it looks mega cheap, and this makes it a buy.

The US wants Yen to go up, interest rates differentials are converging, and it looks like its turning against the Swiss Franc - for most people this would be a buy signal. And yet… I have a problem.

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First a bit of housekeeping - I will be in Zurich and Geneva on the 29th and 30th of September. If you would like to catch up - drop me a line.

Also I am trying Substack video for the first time - feedback appreciated.

When I first came up with the idea of GLD/TLT, it was so simple and so obvious, I was almost ashamed to publish it. But as old boss once told me, simplicity breeds elegance. And I do like to be elegant. GLD/TLT has been good, and its bounced back nicely from a sell off earlier this year.

Generally speaking, I thought GLD/TLT will end as a trade when politics turns again, back to culturally liberal, and fiscally conservative. Who knows when that will happen. I thought you would need a crisis era like the 1970s for that to happen. The long term graph of gold versus treasuries shows you the 1970s clearly.

But Hartnettt out of BOA produced this chart. Long dated treasuries have even worse returns now that in the 1970s. This is partly due to the very low coupons they have, which pushes out their duration (the lower the coupon, the move of your value is exposed to rising long term interest rates). But still, the best time to short an asset it when it goes from being good to bad. I wonder - should I still be bearish TLT?

Then there was this chart - where the 10 year returns of commodities have been pretty good.

What I am saying, is that GLD/TLT made total sense politically, but also from a return perspective. When I first suggested it, we were coming to an end in a bond bull market, and the beginning of a commodity bull market. The most tricky thing with fund management is that there are two things you need to get right. The first is holding onto a good trade - especially if you got a good entry point. What the crypto guys call HODLing. But the other thing is knowing when the trade is done, and time to get out. The guys at Situational Awareness were good at the first part, but not good at the second part. While I feel my own track record is mixed on this - compared to other so called “perma bears” - I am way out in front.

So if GLD/TLT done? Probably not. With populist parties still on the march globally, policies that help GLD/TLT are still more likely. As soon as I see a head of the Fed say, “I don’t care what the unemployment rate might be - we need to crush inflation”, is the day I reverse this trade. That day is not today. The other good thing about GLD/TLT is that US retail still don’t get it. Share count of TLT has bounced back, even as ETF flow into GLD remains restrained.

Net/net - not the end of the road. But I can’t help but feel its time for TLT to perhaps do a bit more work in this trade. The gap in US and Japanese 30 year government bonds feels too low to me.

What does this mean? I got into GLD/TLT at a good time, and I probably just need to sit tight for awhile longer.

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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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I was sitting at a conference. It must have been 2012 or 2013, and most of the talk was about commodities, and in particular how boring the oil market was. Basically the oil price had been hovering around the USD 110 a barrel since 2011. While people knew that US oil supply was growing, there was a belief that OPEC would keep prices high.

I had made some good money shorting iron ore producers over the last two years, so I was looking around for other areas to short. I had started to short coking coal producers, as weaker steel and iron ore prices weighed on their selling prices. So I was inclined to be bearish commodity producers if supply looked to be increasing, especially as Chinese demand was slowing.

Oil was more difficult, as China was still building out its road fleet, and its per capita consumption was well below Western levels, so it did not seem like a great area to short. Unlike most industrial commodities, Chinese consumption was not that dominant in the oil market. But as I was sitting listening to various people speak, I heard something that piqued my interest.

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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?

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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.

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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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I remember thinking one day, it was pointless, I was never going to get a chance to manage money, when my phone rang, and a head-hunter called and asked if I wanted to manage an emerging market hedge fund. Of course I did, and after serving my gardening leave where I got married and finished a marathon, I was sitting at my desk, and wondering how exactly I get started. My new boss, John Horseman, calls me over and says: “Paper portfolios are pointless. Let’s get you trading real money.”

John gives me USD 20 million to manage out of his big fund, which is about USD 1 billion at the time. This is for emerging markets. I say to John: “I think it’s quite late in the cycle for emerging markets. How much juice do you think is left?” And he says: “Don’t worry about it. Just go for it.”

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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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The thing about the US/Japan Yen intervention is that it is less about currencies and more about bond yields. Japanese bond yields have led US bond yields lower for more than half a century. And since 2020, they have been leading US bond yields higher.

The sell off in the long end is basically saying that Japanese short rates remain too low, and should be higher if the BOJ is serious about curtailing inflation. You can see this most clearly in food inflation in Japan. Japan had no food inflation form 1990 to 2013 or so. I think in that period, low interest rates make total sense. But in a period of rising food inflation, loose monetary policy is a political and economic mistake.

The BOJ has not been TOTALLY negligent. Interest rates have risen from lows. But still remain at below 1%.

But plainly this is not enough to stop food inflation or Yen weakness. The obvious answer it to raise interest rates to slow down growth, or strengthen the Yen or both. The Japanese yield curve is a bit odd - it only really inverted in the late 80s, early 90s. Even then, getting back to 50bp spread seems a reasonable target. This would imply raising BOJ rates another 70bps.

Plainly the US treasury and BOJ want to avoid that - hence the FX intervention. Yen appreciation would help deal with inflation - and particularly food inflation. Its not hard to understand why the US doesn’t want Japan to raise interest rates. The US treasury is already at the upper limits of Bill issuance. Having more competition for issuance at the short end would be a problem.

It is easy to see this is a a borrowing problem. US and Japanese governments are borrowing too much, and trying to keep interest rates down. I see it differently. The growth outlook for Japan is now so good, deposit flows are starting to slow.

While loan growth is accelerating.

In essence, the pool of available money to invest in to JGBs is declining. And if there is less money for JGBs, then there must be less money for Japanese to buy Treasuries as well.

The Yen intervention could help with Japanese inflation, and maybe the BOJ would not need to raise rates. But the real problem is growth is so strong now, the pool of capital for governments to borrow from is shrinking. And Yen intervention will not help with that - only a recession. But that is not on the cards either. I think the greater risk is that Japanese start bringing money home to invest domestically. Then the Americans will really be in trouble. Then the Yen will surge and Treasuries will collapse - but that is a problem for another time.

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Technology changes, and the world changes. Back in the original dot com boom, a tightening of the energy markets in 2000 heralded the end of the tech boom, and a rising China then drove an old school “commodity super cycle”. For investors of a certain age (lets say 50 or so), this confirmed an old rule, oil is the dominant driver of markets and economics. Spiking natural gas prices in the US tended to be a catalyst for recession and bear markets.

A similar dynamic was at play in Japan. Rising energy prices tended to coincide with weak equity markets, and poor growth. Here we can look at Japanese Energy CPI has a proxy. The period from 2007 to 2011 was particularly dire for Japan. But despite high energy prices from 2020 onwards, Japanese economy and equity markets has been fine.

Being an oil exporter was (usually) the only way to record a very high current account surplus. Norway for instance has had a current account surplus over 10% for most of the 21st century.

Taiwan now runs a 22% of GDP current account balance, with Korea not far behind.

Korea has always been a diversified export powerhouse - but now semiconductors dominate.

The big change is that semiconductor pricing no longer falls.

This is the log scale of semiconductor pricing. But oil was very similar. For decades the crude price of oil was fixed, but when supply became restricted, oil pricing surged, and the modern macro world was born. In real terms, oil fell through most of the 1900s. I expect when oil spiked, it was as great a surprise as I feel looking at DRAM prices up 500%

And as we have seen rising semi prices is NOW good for the equity market, even more than the negative of rising oil prices. The surge in oil prices this year, historically associated with weak equities. Not this time. The big question is whether surging semi prices are come to be seen as inflationary or not? It seems like they should be.

The other very interesting comparison to oil, is that the US great economic rival has a very different approach to semiconductor industry. The USSR kept energy prices low, even during the 1970s, which undoubtedly was seen as a political and economic advantage at the time. China seems to be pursing a similar economic model where AI is cheap, but so is its semiconductor pricing. SMIC prices much cheaper than TSMC (not totally apple for apple comparison - but indicative).

Chinese AI pricing is also much cheaper than the US. The “great” thing about capitalism is the boom/bust cycle does mean that capacity gets built, as pricing encourages it. In China, given pricing and the lacklustre equity performance, it must be driven in some parts by diktat.

What are the implications of semi as the new oil? Well one would be that central banks should be raising interest rates more. Korea has started to raise rates.

Given the enforced supply restraint on semiconductor supply (ASML monopoly, and restrictions in China), the only way pricing can fall is if a monetary policy is used to create a recession. This was what happened in the 1970s, until supply side reform saw an increase in oil production. From a practical point of view, the implication is that inflation and interest rates are likely to go higher.

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