I have been engaged in a number of side projects for the last few months. One of them is writing a book about myself. I have written about eight chapters, but I am struggling to finish it off - there is just so much happening in the world today. So I have decided to serialise the book - that way, I am setting a deadline for myself to get my act together. Below is a taste….

OUTSIDER TRADER

They were the last big investor, the last hope, and the last chance to keep the dream alive. I was running out of time. The partners had given me a few years to work things out, but I was a loss-making venture; I was running on borrowed time. I had known it would be hard taking over from John, but I had never contemplated failure before. Not really. Now it was staring me in the face. And I was calm.

It is live here - OUTSIDER TRADER. I have also added a podcast for those who prefer to listen than read.

Also as previously announced, I have been working with a new website Slice. Slice is still a relatively new website - but it does offer competition to substack. They have improved both the front facing and back facing aspects of their website over the last few months, so I am making a renewed effort with this website.

With Slice, I think it works better with the “short selling” part of my business. Short selling naturally requires more trading, and by definition can not just short and forget (unlike long investing where buy and forget works). I also know that more trading oriented of my substack subscribers are very keen on short selling (as a rule, people tend to pay more for short selling as it so difficult to do). For that reason, I am skewing my Slice page to more short focused ideas.

Another feature I like is the portfolio part of the website. Again I am going to skew this to more short ideas.

Slice is more expensive than substack, and does not offer a free option. But if you are interested in trying, I am offering 50% of for the first 6 months - use BRUMBY50 as code. Any problems, drop me a line. With Slice, you get more a stream of consciousness, and less of the considered thought you get here. Find it here.

Enjoy!

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I was calm, because I knew I was right. I had seen this story play out before, and my strategy was ideally placed. The problem was how to get other people to see that. So, I sat in the meeting room, running over the ideas in my head, waiting for the investor to come.

It’s a strange feeling to meet, for the first time, someone who has complete power over whether you fail or succeed. I was already perceived as a failure. I knew that. A big ex-client had recently told me so at a conference: “Why do you keep going?” he said. “You know your fund is a dead product, right?”

I could see where he was coming from. Assets had collapsed, and we had lagged the market badly in the rally back from the 2008 crisis. Changing managers added to the problems. Even though I had worked for the same firm and I had the same style, clients told us that changing managers meant everything was reset. We were back to zero. The optics were poor. A USD 5bn fund was now just USD 100m. It was barely breakeven, and here I was meeting the last big client. A client that held over 60% of the assets in the fund. A client I had never met before.

We were meeting in New York. The client was one of the biggest funds of fund investors in the world. I was expecting to meet one of those clients who had already made up their mind. This meeting was, surely, just to deliver the bad news. Soon I would be unemployed, and thinking of some way to make it back from the abyss. The average life span of a hedge fund manager back then was only about 4 years, so I would be bowing out bang on average. As I day-dreamed about my idle future, the client walked in. To my surprise, he seemed like a “nice guy”. Generally speaking, in finance, nice guys are rare, but he seemed like a nice guy to me. Anyway, he asked me what I was doing, and why I was doing it. And so I told him: China was following the road map of Asia in the late 1990s and consequently was heading for a currency crisis. This made me want to be positioned for deflation – long bonds and short equities – particularly those dependent on China, which at the time was most of the market. For me, this was the easy part. I had been in HK for the Asian Financial Crisis, and my thesis at university was on currencies. I was convinced I was right, even as the market was going against me.

After I talked, the client thought for a few minutes. At last, he spoke: “My team is telling me we should redeem from you and move on, that we should stick with bigger, better older managers.” He paused. “But I think you are smart. If we don’t give younger managers a chance, then what do we do in the future?”

I waited. Not sure where this was going.

“I tell you what I am going to do,” he continued. “I am going to redeem a small amount, but I want you to keep doing what you think is right.”

And that saved me. Right there and right then. That client’s willingness to give me a little longer. That saved me. It didn’t turn things around, but it kept me in the fight. And that fight led, ultimately, to the biggest turnaround story in hedge fund history.

This is my story. I want to share it with you. And along the way, I want to share with you some investing rules I use, and how I discovered them.

Chapter 1

Consensus Often Signals Risk, Not Safety

I did not grow up in a place that produces hedge fund managers. That was a huge hinderance to start with, but once I made it, it has been a huge advantage.

Canberra, in the 1970s and early 80s, was not a financial centre, not an industrial hub, not even especially ambitious. It was a purpose-built capital city dropped into the middle of the Australian bush — a town of public servants, tidy lawns, wide roads, and a sense that the rest of the world happened somewhere else. If you follow the logic of how success is “supposed” to work, nothing about my upbringing pointed toward global markets.

But that was the gift.

Canberra was isolated, but it was still connected. That’s the distinction. The state schools in Canberra were unusually good ones. My classmates weren’t drawn from one tribe. They came from everywhere. Children of diplomats. Refugees from Vietnam and Cambodia. Kids from government housing. Children of academics, activists, small business owners, truck drivers. It was an unusual mix for such a small city.

As a child, I didn’t think of this as diversity. I just thought it was normal. It was only later when I realised that these early experiences had taught me one of the most important lessons of my life. What looks “normal” depends entirely on where you are standing.

One of my primary school friends, Huy, had arrived in Australia as a refugee from Vietnam. He once wrote a school story about the sound of grenades exploding around him when he was three or four years old. At the time, he was just another kid in class. We chased each other around. We did homework. But his “normal” and my “normal” had nothing in common.

Another close friend, Piseth, was from a Cambodian family. His parents were elegant, calm, self-contained. They carried a quiet dignity that, as a kid, I couldn’t explain but instinctively noticed. Their lives before Australia had been nothing like ours.

Growing up around people whose experiences were fundamentally different from mine did something subtle but permanent. When I later encountered ideas, cultures, or market views that didn’t match my own, my instinct was not to reject them, but to dig a little deeper. Why does this make sense to them? That question — more than any economics textbook — shaped how I look at markets.

At home, there was another influence running in parallel. Sunday lunches were not quiet affairs. My father cooked, but politics did most of the talking. My mother worked in Parliament House, researching and writing briefings that ministers would later deliver as their own. She was one of the early women in that role. She understood, in practical terms, how decisions were made.

Dinner-table conversations weren’t about slogans. They were about motives.

Why would a politician take that position?

Who benefits?

Who loses?

What is the long-term aim?

I learned early that outcomes were rarely the product of simple logic. They were the result of incentives, pressures, trade-offs and personalities. People didn’t act because something was “correct.” They acted because it served their interests, solved a problem, or bought time.

Later, in markets, this translated directly. Prices did not move because spreadsheets said they should. They moved because of flows, positioning, policy, fear, career risk, and crowd behaviour.

But I didn’t know that yet. As a kid, I was just absorbing a worldview in which the surface story was never the full story.

Canberra itself reinforced the lesson. It was a capital city with barely 200,000 people in 1980s. At the time, it only had one nightclub, which as a teenager I was shocked to discover my parents had been to. Endless open space. Kangaroos on the outskirts. You could walk or cycle almost anywhere. It felt remote from the “important” parts of the world.

And yet, because it was the capital, embassies and international institutions were there. You could be in a small suburban classroom and sitting next to someone whose parents were negotiating trade agreements or had fled a war zone.

This combination — isolation and global exposure — was powerful. It meant I grew up slightly outside every centre of gravity. Not rural. Not metropolitan. Not elite. Not disadvantaged. Just… adjacent.

That “adjacent” position matters. When you’re fully inside a system, its assumptions become invisible. When you’re fully outside, you lack the tools to engage. Being adjacent lets you see both the system and the gaps in it.

In markets, that’s where edge lives.

As a child, I didn’t think of myself as contrarian. I just noticed that different people believed different things with equal conviction, and that reality somehow held all of them at once. What one group saw as obvious, another group saw as nonsense.

Years later, when I would hear phrases like “the market consensus,” I always felt a quiet resistance. Consensus sounded comforting, but it also sounded fragile. It reminded me of being in a room where everyone shares the same background and reaches the same conclusion — not because it is true, but because no one in the room sees the missing piece.

In school, in Canberra, I had seen too many missing pieces.

This is the foundation of my first investing rule. Consensus often signals risk, not safety.

Not because the crowd is stupid. Often the crowd is well informed. But crowds are shaped by shared experience, shared incentives, and shared blind spots. The more universal the agreement, the more likely it is that an assumption has gone unchallenged.

I learned to be comfortable slightly outside the group. Not aggressively opposed. Not rebellious for its own sake. Just willing to sit with the discomfort of holding a different view and asking, quietly; What if the people in this room are all seeing the same thing — and missing the same thing?

That question would later guide trades, positions, and career decisions. But it began long before finance.

It began in a small city at the edge of the world, where nothing was quite as simple as it first appeared.

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One of the questions I am often asked is surely the US government or the Fed will step in to stop yields rising too much. And usually I answer this question - with yes that true but that is why you need to own gold, as a hedge against exactly that. And that is a nice, simple answer, but could also be wrong. I could see another reason why long dated US yields rise, one that would closely echo the 1970s.

One of the more weird features of the current inflationary period we live in has been the total lack of improvement in the US government fiscal position. IMF is forecasting big deficits as fare as the eye can see. The contrast with Japan or the UK is striking.

And the yield premium over JGBs keeps falling.

But there is another, political, way to think about US treasury yields. Back in the 1960s and 1970s, yields were constantly going higher.

But unlike now, debt to GDP ratios were falling in the 1960s and 1970s. That is yields kept going up, even as the “creditworthiness” of the US was improving, while US yields today stay stable, despite the US government ability to pay declining.

As we have seen in recent years, the US government has used trade flows (via tariffs) as political weapon, financial flows (via sanctions) as a political weapon, and military dependence as a political weapon. We are also beginning to see oil and natural gas flows as a political weapon. So, logically, we should also see bonds and bond yields as a political weapon. In simple terms, owners of capital demand higher yields from the Democrats. Generally speaking, we tended to see bigger falls in yields in the 10 Year Treasury with Republican presidents, and yield rises under Democrats. Under President Trump, 10 year yields have generally behaved well over his entire term.

As mentioned in a previous post, there is a conservative political strategy called “Starve The Beast” which entails cutting government revenue, which then ensure that Democratic administrations must cut spending - a policy that worked well with both Clinton, and Obama - but one that Biden conspicuously ignored. Starving the beast strategy would probably accurately reflect the second Trump Administration - large scales tax cuts, plus the gutting of the IRS would be in line with this. The Democrats recognising that they were getting played, have joined in the tax cutting frenzy.

Since the 1980s, until Biden, the Democrats feared the bond market - and have broadly enacted Washington Consensus policies. But as we have seen with Biden, and now with Trump - there seems to be no fear. Or perhaps the Democrats have their own starve the beast strategy - spend aggressively, and let the Republicans be the ones to cut spending.

The UK is an intriguingly example. In 2022, Liz Truss announced an aggressive budget, and yields surged, and she was ejected from government. Since then, more conservative budgeting has happened, and yet yields have continued to climb. Is this because Labour is in power? Is it because the Greens and Reform are leading the polls? I don’t know, but I do not think the US political environment is too different - both the Democrats and the Republicans look fiscally irresponsible.

I guess what I am saying is that, markets could give up on US treasuries if President Trump announces a fiscally aggressive policy, or, should the Democrats starting doing well politically, bond markets should begin to act skittishly to try and convince them to enact austerity. Either way I cut it, short TLT still looks good politically.

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Video only today.

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Yesterday, I gave a presentation to ANU Alumni of UK. It was just a quick presentation on AI, which I am now posting here.

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I have used the red pill/blue pill analogy before. I like using it because it does capture the idea of do we choose to continue to stay in an artificial world, or do we choose to face reality? I also like it as the original Matrix was filmed in Sydney, and in fact in the lobby of UBS. The lobby that they destroy, was indeed the lobby I walked past everyday. I felt cool by association.

It goes without saying, I am a red pill type of guy. Bull markets are about dreams - blue pills, and bear markets are about realities - red pills. A lot of people are going to say the AI boom is a blue pill. I disagree, AI boom is straight out of US Business Strategy 101 - spend as much money as possible to try and destroy your competition - exactly what we saw with Amazon, Netflix and other big tech companies. Capex as a moat. Its just with AI, the competitors have more money than any other corporates have ever had before. At some point, someone will lose the AI fight, and cut spending - and when that is, I don’t know. And I am more than happy to make money from AI plays where I feel the risk reward makes sense. So no, blue pill, red pill does not refer to AI. It refers to bonds and interest rates. First of all, plainly the US fiscal position make little to no sense. With Donald Trump essentially withdrawing US security guarantees - why would any foreigner want to own this “asset”?

Much of the MMT model, which seemingly the current and former US administration lean heavily on, was driven by the extremely low bond yields in Japan despite large fiscal deficits. The problem is that yields are not low in Japan anymore.

Since 2020, the best way to play this MMT approach is to be long SPX and short TLT. This was the exact opposite of how I used to think about markets, and as I like to point out, is an ideal market for passive. Many people say passive distorts markets, but I see the success of passive being driven by a market that is very supportive of passive investing. In recent years, we have seen some sharp reversals in this trend, but so far the trend is still holding. I see this as tremors before a bigger shock - but I could be wrong.

Why is the SPX/TLT a blue pill type of trade? Equities are highly correlated to corporate debt markets. The yield of KDP High Yield has rarely been lower in nominal terms.

Or another way to look at it, US equities have never been more expensive relative to JGB yields.

So going back to the title of this substack, “Capital Flows and Asset Markets”, my expectation is that capital should look to leave the US at some point, which should become a mutually reinforcing shock. As capital leaves, the cost of capital rises, which makes US assets less attractive, causing more capital to leave, so on so forth. For me, the best sign of this happening would be gold beginning to outperform the SPX. Why? Because in essence, US fiscal spending has socialised all corporate risk - so if the US government gets into trouble, everyone is the US is in trouble. And in that scenario, all US assets are unattractive.

So the red pill/blue bill analogy here is that gold and JGBs are saying that markets can see yields going higher. High yield debt, and the SPX are saying yields are going lower. Looking at a graph of US 30 year yield, market is in no man’s land. You can believe what you want to believe here - blue pill or red pill.

I think red pill from here - but if yields fall, AND gold falls from here - then we know we are in a blue pill world, and the best trade will be SPX/TLT. But it does feel like a pivotal moment for me - markets are confused, trend followers are all over the place. These are the moments when big moves can happen - red pill or blue pill. We will find out soon.

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I have an investor day this week, and one of the questions was whether we actually need hedge funds? Its a good question. When I look at markets now, I think probably yes which is why, early last year, I launched Brumby. That being said I can (easily) see the case for why you don’t need hedge funds. If we are just in an inflationary world, asset prices will just keep rising and being passively invested makes sense.

When I first got into markets, Japan was already 10 years into its bear market. And I had seen numerous “deflationary” busts, that had wiped out investors. From my perspective - you needed a hedge fund, because the deflationary forces of capitalism made equities perilous. The idea of a 50/50 bond equity portfolio emerged from this era. If you look at how S&P 500 and total return index of US treasuries traded from lets say 1976 to 2016, if equities when too far relative to bonds, they would then correct back. You can see the top in 2000 and in 2007 very clearly.

But since 2016, and especially since 2020, a long SPX, short TLT trade has been fantastic, it has generated a near 500% return, with barely a drawdown.

In my mind, the obvious driver of this has been the US government, which has been running 7% deficits during boom times, and is forecast to continue to do so.

In simple terms, the US government has boosted the economy, by trashing its own balance sheet. Corporate credit spreads have collapsed, because all the money is being transferred from the government to corporates.

The bull argument is that the US government cannot go bust, so this situation can continue to forever - which in case, Long SPX or Long QQQ with a short TLT position makes sense - or in other words passive investing is the right answer.

The bear argument is that historically speaking, when other governments have tried to enact this policy - bad things have eventually happened to them.

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I try not to take absolute positions, but relative positions. In the inflationary world that we live in, I think inflationary assets will do well, UNLESS central banks run tight monetary policy. What that means in practice for me, is that I like Gold (GLD) relative to Treasuries (TLT). GLD/TLT has been good.

I have always worked in relative terms - as I always fear political reaction to one side of my trade working. If one trade works (gold goes up, lets say), I run the risk that the Fed suddenly gets hawkish, and gold tanks. This make sense to me. But after the fact, people will say to me : “hey Russell, your short TLT isn’t working, why do you still hold it?” This is always the way - people always love the winning side of the trade, and hate the losing side. For me, personally, I cannot take the GLD side of the trade without the TLT side of the trade - it would be too risky for me.

In my career as a fund manager, I have had many client conversations like the above, and a year or two later, even though I have done well, they suddenly redeem. When I ask why (nothing more frustrating that redemptions when you are doing well), the answer inevitably is “we copied your trade, but we left off the hedge as it was not working - and we just got smoked, because you were right, we needed the hedge”. If something is inevitable, just because it did not happen today, does not make it less likely in the future, in fact the opposite is true - but investors and markets will always be backward looking.

So the question is, does short TLT still make sense? If I think we are still in a pro-labour era, then yes. Back in the 1960s and 70s, when wages rose quickly, the Fed needed to run tight monetary policy (policy rate above the 10 year yield - the opposite of what we saw in the pro-capital era from 1980 to 2020). In concrete terms, I think pro-labour era policy rate tends to be higher than 10 year Treasury yield, and in a pro-capital era, the policy rate tends to be below the 10 year Treasury yield.

For me, the politics of a short TLT trade still make sense. But I was reading through a Chris Wood’s post on substack on Treasuries. I have read Chris Woods for a long time - and he was early on Fannie Mae and Freddie Mac, and the Eurocrisis. I always sleep better when my positioning is aligned with Chris - and he was pointing out the increasing messiness of the US treasury market. I steal some of his charts below. Let me start with some IMF charts The left hand side chart shows the rise of “Other Investors” in the US public debt (read as hedge funds) - who were virtually non-existent until 2022. This makes sense to me as “official” buyers (other countries) stop buying treasuries.

There was a time when Japan really stood out for unsustainable debt load - but Japanese debt load is falling as the US is rising - which is what you expect in a rising wage, strong stock market environment. The continuing rise in US debt is very unusual.

US 7% of GDP fiscal deficits are very eye catching - especially given relatively strong economic growth.

As is the reliance on short term debt for the US. The implication is that if the Fed did raise rates, the US debt dynamics would worsen very rapidly.

You can see how much bill issuance has increased in the US. This chart is from Chris Woods.

For long time readers, they know I hate the clearinghouse reform. It essentially moves risk pricing in markets from forward looking banks, who can go bankrupt if they get it wrong, to backward looking clearinghouses, which cannot go bust - and then require governments to bail out markets when they get it wrong. Much of the demand for treasuries come from basis trades, which the below article makes clear. The basis trade is run through clearinghouse these days. When margin calls are made, treasuries can and do fall as cash needs to be raised for margin calls, which can then exacerbate liquidity issues. The Gilt Crisis after the Liz Truss budget is an example of this.

Probably the most killer chart from Chris Woods is this one. Net Interest and entitlement make up near 100% of government receipts - even though interest rates still look too low to me, and unemployment is low in the US. This is probably why treasuries fall when recession fears arise - there will be no money to pay for treasuries.

While this note is about TLT, it also answers one of the questions I have been asked to address in my upcoming investor day. Do we need long/short funds? My read, for what it is worth, is that much of the US growth story is a pure fiscal one. All the extra money that inflation and growth generates the US government is just spent - nothing is now saved for a rainy day. Or in other words, back in 2006, the US was abusing the mispricing of mortgage backed securities, today the US is abusing the mispricing of sovereign debt. The simplest trade might indeed be just long gold - but back in April of 2025, we saw treasuries sell off during the Liberation Day Tariffs sell off.

For me, this was a sign that the Treasury market was breaking, and that the growth story for US equities was weakening. When this was followed up with the break out of gold versus the S&P 500, and general weakness in private equity/credit - it felt to me like it was time for a long/short fund, and time for weakness in TLT.

All of this makes for a good story, and so far matches up with market action. But I am also aware that it could just be a good story and market moves are just spurious correlation. But all good trades start with a good story - and this story seems to say that TLT should be a good short. Lets see.

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As predicted, markets would generally speaking look through the current crisis and spike in oil prices. Equities are long lived, and its hard to believe this crisis will be long lived. Already oil majors are rushing to add capacity elsewhere, and countries are turning to coal and other energy sources. For me, this is fundamental proof that the energy weapon of Russia and OPEC is a spent force. At some point, Iran and Russia will need to come to some understanding with the US. And this is in many ways bullish asset markets. I am sure many “analysts” will disagree - but the market agrees with me - and that is all that counts.

I have been doing this job a long time (too long maybe?) and I have come to realise that I am good at two distinct things. The first thing I am good at is drawing together lots of different assets classes and ideas to make a single theory. Call this “macro thinking”. Traders tend to love the macro thinking. Why? Because traders love owning things that are going up - but do not want to admit they own it just because its going up - so if I can give them a macro reason - it makes them sound smarter. For example, a trader could say, I own gold or silver because its going up (see Jesse Colombo for example) OR they could say I own gold because no central bank wants to own US treasuries anymore (Russell Clark Macro Thinking).

The other thing I am good at is “sausage making”. So once I have a theory, I then need to find assets that are going the right way to make the macro thinking actually look sensible. I call it sausage making, because it is often just me sitting at Bloomberg wondering why an asset is not moving the way it should be, or liking the way as asset is moving, and wondering if it fits in the framework. Its not “beautiful” like macro thinking - but if macro thinking is the recipe, sausage making is the cooking. You need both.

I am looking at the bounce in markets, and thinking about whether I need to change the cooking a bit.

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I find that AI defies almost every investment technique I have ever developed. When DeepSeek was released last year, I thought we would see some correction in pricing in Western AI relative to Chinese AI. That is pricing for Nvidia/TSMC chips would fall back towards SMIC levels (SMIC makes chips for DeepSeek). Contrary to my expectations, the pricing differential has continued to widen.

I then thought the financing troubles of Oracle might also signal signs of a rethink on AI spend. Previous spikes in Oracle CDS in 2022 and 2008, were years of weak markets. The market has happily ignored Oracle weakness.

But these potentially negative signals have not worked. If anything, the AI boom seems to be broadening out. We have now seen with the recent surge in DRAM and Nand prices. Or in other words, the pricing of commodity semiconductors are starting to close the gap with the cutting edge Nvidia ones.

The broadening out of the AI boom has also including the share prices of electricity generating equipment producers. Doosan Enerbility is one such company - and the share price has returned back to the peak of the China boom.

2008 was the time to get rid of your Doosan shares - as this is a VERY cyclical industry. And back in 2008, China was the real driver of electricity generating growth. China did not stop adding generating capacity, but it did grow at a slower rate, from 2008 onwards, and Doosan fell 99% from peak to trough. When I look at Oracle, Nand pricing and Doosan, I do get flashbacks of 2008.

If that is the bear case for the AI boom, then this is the bull case. The “idea” of a modern economy has been set in stone since the 1960s or 1970s. Access to constant electricity, a working road network, and various other mod-cons. The US was the first to achieve this modern society, and basically the world has been striving to catch up. Mexico, which is a neighbour and shares many features with the US, was dirt poor in the 1960s, and now inching closer to developed status, we can see its development in its use of electricity. I have used log scale for ease.

What you can see is the Mexican growth in energy consumption skyrocketed in the 1960s and 1970s as it developed, and then slowed from 1980s, to stagnation since 2010. The US growth has really seen stagnating growth from 2000. What I am saying, is that in essence, we had reached a lifestyle that did not require more energy (in fact on a per capita basis, energy consumption was falling). Whenever you hear that the US has not built a new refinery, or new power station for 40 years - this is not market failure. This is the market saying that the outlook for power demand did not justify the investment. Obviously this is starting to change with AI. EIA predicts growing demand and supply going forward.

The trillion dollar question then, is how many data centres do we need? And how much energy would this consume? If we look at data centres, plainly the US is in the lead. But what we are seeing is that US demand is now constrained by its ability to produce electricity. China has less data centres, but obviously not constrained by energy capacity.

Ask ChatGPT how many data centres does the US need and you get an estimate ranging from 100GW to 500GW - so large multiples from what we have today. One of the big problems with this is that the US power grid is constrained by connection capacity. That is, data centre supply is constrained. When supply is constrained, companies tend to over pay and over order. The reason for this is by making them themselves the biggest and most important customer, they are hoping to jump up the queue in getting supplied. This leads to a negative doom loop when supply catches up, as double orders get cancelled. This is why these industries are considered cyclical. That being said, power generation equipment supplier, GE Vernova has powered to new highs even with oil price doubling.

I have started to think about semiconductors in a different way. If the post war growth model was built around cars and fossil fuel usage, then this growth was only really constrained in the 1970s, when energy prices surged. Using a Bloomberg analysis, energy costs stayed below 4%of GDP until the 1970s, and then surged to 12%, and this ushered in the era of Washington consensus, and age of energy efficiency. That is total power generation stayed constant even as GDP grew.

Lets say we are in an AI age, where the limiting resource is now semiconductors. Can we make a graph like above? Well I am going to try. This uses data from Semiconductor Industry Association. Using a few estimates, I get to a 1% spend of world GDP on semiconductors in 2026, from a 0.4% in 2000s. So the build out of personal computer through the 1980s and 1990s drove the first bull market in semis, which then stabilised, and now we are in a new era of AI. The big bullish argument for semiconductors is that AI is going to permanently increase semiconductor demand going forward, as more and more of our activities require AI and data centres. Could we be spending 3% of GDP on semiconductors going forward? 5% to 6% on energy is normal, and 3% of defence is considered the going rate. Are semiconductors now the life blood of the modern world? Probably, would be my guess. The question is when does supply catch up.

Backward looking, mean reversion believers would tell you that we are back at dot com peaks, and we are going to see a crash. But having seen the use of AI in the battlefield in both Ukraine and now Iran, and the various AI related lay offs been conducted by tech companies, AI seems the real deal to me. As also pointed out before for companies like Microsoft, AI is now a life and death issue, so they will keep spending, and this will likely keep everyone else spending too. If I look at Nvidia/TSMC chips, NAND and DRAM, they all seem to reflect this reality. But with the semiconductor stack, I find areas that are not pricing in this future yet. I quite like the wafer business, where pricing has been weak due to slow smartphone and PC volumes, but an increasing share of wafers are now going to AI products. This reminds me of the DRAM set up - but before prices skyrocketed. That is pricing is discouraging capacity expansion in wafers, even though pricing is encouraging capacity expansion everywhere else in the tech stack. I like that risk/reward.

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If you have not heard of the “Gays of the Hormuz”, there is a viral tiktok where an interviewer ask people if they think its unfair that we only talk about the Straits of Hormuz. What about the Gays of Hormuz he asks people. Its quite funny.

I feel like I SHOULD be worried about the Strait of Hormuz, but part of me just cannot. When I usually see trouble in the market, I am happy to dive in and try and make money from it. And I am inundated with reports of how we have an imminent, oil, LNG, food and economic crisis. I have friends email me to tell me we are about to run out of helium, which will destroy the semiconductor industry, and another that has likened the market to pre-Covid - irrationally calm. I have also had various investors write to me and ask me what I think - and what I am doing.

Here is my take for what its worth - and it is more upbeat or “gay” than most takes. Lets start with the oil market. Brent has surged from USD 60 to USD 110 today - so a big price shock. But it still below USD120 we saw in 2022 and not that much above the USD90 we saw in 2023.

LNG prices to Asia, are at about USD 20, compared to a peak of USD 70. This a MMBTU price - so directly compares to Henry Hub prices. Again, a big jump but not at levels we have not seen before.

In Europe, we are at EUR 53 per MWh - which is up from lows, but same price we saw last year!

When I look at US natural gas prices at sub USD 3, it seems very “Gays of Hormuz” to me.

Chinese thermal coal prices is also giving me a very “Gays of Hormuz” vibe too.

This is not to say that things could go wrong - but when the main energy source for the US (natural gas) and for China (coal) are not spiking - should we really be preparing for a recession? More likely, growth is okay, and inflation spikes.

But what if this crisis drags on you may ask? And here is where it gets complicated. A complete and permanent closure of the Straits of Hormuz today - would probably indeed cause a recession. But lets say, the War in Iran continues for a year as it has done so far. Disrupting shipping, adding political risk to Middle Eastern supply, and then the Strait of Hormuz is closed completely. I would suspect, the world would probably be able to deal with it and move on in a years time. That is the longer that the Strait of Hormuz is an issue, the less it matters. Contingencies are being activated, alternative energy sources are being sanctioned, and deals are being done. And this is just to reiterate a point I made in an earlier post. Iran hurts itself the most in the long run by closing the Straits of Hormuz. Its a short term gain for a long term pain - and probably driven by desperation. To me it explains the conspicuous strength of the Israeli Shekel.

Israel does not seem to be suffering from trouble in the Straits of Hormuz. Israel is also the most gay friendly nation in the region. May it is “Gays of Hormuz” after all….

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If you are an investor, prospective investor, or a paid subscriber - then this is the last day to RSVP. I already have more than enough responses to fill the room - so sadly I cannot accept free subscribers to the Substack.

As a reminder, it is from 4.30pm to 6.00pm at Home House, 20 Portman Square, London, April 23rd.

You can email me at russell@brumbycapital.com - or leave a response in the comments. RSVP is essential as this is a private members club - and entry is via a guest list.

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I have friends who know nothing of my work life. When they find out I have a social media following of a sort, they ask why do people follow you? It is an interesting question. My best guess is that I really have a holistic approach to the world, and I do think everything is connected, even if those connections are not always easy to see. And then I do my best to explain these connections as simply as possible.

These days, in the chaos of the modern world, it is often hard to feel like there is any rhyme or reason to life. I suspect for some people, they feel like things just keep happening to them that are not supposed to happen. Or in other words, they feel like they have done everything right - but are not as successful as they think they should be. When I hear this, and when I look around, I see the same theme. Deinstitutionalisation. An ugly word for a simple idea.

I am going to try and talk through the idea of deinstitutionalisation, so hopefully you can understand where I am coming from - and I am also hoping that as I explain this to you I can more fully understand the concept and implications, and go make some money from it (I am very practical man - I don’t need fame, but money helps make life easier).

WHERE WE STARTED

In simple terms, we started with a feudal society. Peasants farmed the land, earned enough to survive, and paid taxes to their lords, and tithes to their church, as these were the two organisations that took care of security, and social welfare respectively. And this system was broadly in place for a thousand years.

The industrial revolution upended this system as it concentrated wealth in cities, and moved peasants from working for landed gentry to factory owners and inventors. This placed huge strain on the political systems, and led to the French Revolution, Meiji Restoration and a plethora of other revolutions, which were all about overturning the old social order. The revolutions removed landed gentry from power, and replaced them with industrialists and financiers.

WHERE WE WENT NEXT

The industrial revolution also changed that ultimate form of politics, war. War went from who had the most manpower to which nation could produce the most output, would be the ultimate winner. The Japanese, with the Meiji Restoration, and industrialists in charge, were able to conquer large parts of China in 1900s, an outcome that would have seemed ludicrous in the 1800s. You could almost argue that War was necessary partner to the industrial world to offset the naturally deflationary tendencies of industrialisation.

Mass war required mass production, which in turn required mass mobilisation . And so nations, needed to form institutions to organise mass output. This required mass education (compulsory schooling), mass labour (unions) and mass communications (government broadcasters). In fact success in life from the 1940s onwards was driven by joining a large institution and rising to the top.

What this meant, especially lets say from 1940s to 2000s, is that people generally judged you my your institutional association. You are a judge? You must be wise and successful. You work for Goldman Sachs, you must know about finance. You were a government minister? You must be a great person. You are a doctor at a hospital? You must know about health. Another way to think about this, is that information was siloed, so if someone worked in an institution with access to that information, they must be better informed than you - and hence you should be deferential to them.

This “institutionalisation” of society, meant that success was driven my entry into an institution. We still see remnants of this today. Why do people work so hard to get into an Ivy College - because it grants you institutional access. And having access to an institution was the only way to get things done. Despite the wide and varying quality of UK Prime Ministers over the years, since MacMillan, only Major and Brown were not graduates of Oxford (yes even Truss went to Oxford).

WHERE WE ARE TODAY

But from 2010 onwards, I would say society has steadily but surely deinstitutionalised. Now some people will read this as society is falling apart - this is NOT what I am saying at all. What I am saying is that access to large institutions are no longer necessary for success. The availability of information, and the ability to directly access people have destroyed the need for most legacy institutions. Do you really need to go to Oxford to learn about the most cutting edge ideas? Maybe. More likely there is an online forum that will be just as good somewhere.

I see this theme of deinstitutionalisation over many different fields, but often they are different from field to field.

Finance

There was a time when you needed to be in a big institution, not only for the credibility, but for the sales and distribution. Merrill Lynch brokers were the thundering herd, for their ability to drive clients to products. Fund managers needed access to analysts to tell them about new companies and prospects. All of this has been deinstitutionalised. Online forums can drive stocks, fund managers can reach clients directly, and star fund managers can operate on the back of their own name, not an institution.

Military

War in Iran and Ukraine has shown that clever individuals and smart strategy can thwart the institutional might of both the Russian and American military . We have even seen the rise of distributed intelligence, where amateurs study publicly available intelligence to to comment on military matters. In Ukraine, we have seen commanders stream combat action and gain social media following. We are a long way from the shroud of secrecy that covered all military activity in the past.

Politics

The legacy idea of political parties is largely being destroyed by the rise of social media. Why join a party when you can directly connect with a leader? And why create a manifesto, when you can float a political idea on social media and gauge the positive or negative reaction in real time?

Judicial Matters

You would have to be wilfully blind not to see how the power of social media can overwhelm the judicial institutions. Whether this is good or bad, will depend on context and your political leanings. Controlling a social media narrative is probably more important than the evidence that can or cannot be presented in court. In some cases, this undoubted righted a wrong, and in others, created an injustice. But it is hard not to see how judicial institutions have been challenged by the social media.

Health

The ability to self diagnose will greatly reduce the prestige of the health care sector. This in turn, will lead the health sector to be profit driven, and broader questioning of all features of public health. Something that is very clear in the US.

Employment

This has been apparent to me for a long time. Institutional reputation is no longer enough to guarantee success. Success is now individual driven. People care far more about your social media profile than your CV - at least in my experiences.

When I hear the word “viral” what I hear is that an individual has managed to bypass traditional media institutions to achieve success. And now with Twitter, Substack, Instagram, we can directly contact the individuals without need for a institutional middleman.

The positive part of this transformation is that anyone can now be successful - without the need to go to the right school, or know the right people. They just need to be clever. The negative part of this transformation is that people who have followed the institutional pathway are finding that job opportunities are not offered to them in the same way. That is “professional” jobs are seeing stagnating wages, while more manual jobs that are not tied to any institutional access continue to do well.

One feature of this “deinstitutionalisation” is that people that would otherwise be deemed untouchable in the institutional age, thrive. Most of the current White House cabinet probably fall into this category as do most “populist” political leaders. Elon Musk is very different in his attitude and demeanour than Bill Gates.

What is important to understand is that this “deinstitutionalisation” is not driven my political currents - but by technology. By moving information out of siloes, institutions lose their natural advantage. In other words, this is a structural change, that will not be reversed.

WHAT DOES THIS FUTURE LOOK LIKE THEN?

The US is by far the most advanced in this deinstitutionalisation process, and so offers the most likely outcome. And the Republican party is probably closest to a deinstitutionalisation party. Below, I best sum up the political logic as I see it.

If government is not the driver of mass organisation, then corporates must be the driver. If corporates are the driver, then governments should do their best to allow them the most leeway possible - deregulation and no tax. If corporates are not to be taxed, then to pay for essential government activities (mainly military in this case) then tax revenues should come from workers (who will benefit from strong corporate hiring anyway) and foreigners (tariffs - although workers also pay tariffs).

There are some extremely frustration aspects to this deinstitutionalisation of society. Extremely social media popularity seems to offer almost total immunity. Large parts of crypto are indeed fraudulent, but remain popular and hence relevant. The need to drive social media following drives people to commit to actions or opinions they would not normally hold, purely to drive interactions.

The problem with looking at the negative issues of the deinstitutionalisation of society is that ultimately you are saying that society has a choice. It does not. Society is reacting to technological change, and that is change that cannot be reversed. And despite some conspicuous counter examples, it drives power and prestige to those with the most natural ability - and away from those that have some how mastered institutional politics.

CONCLUSION

The deinstitutionalisation of society is unavoidable, so no point trying to make a judgement call about it. But it does make building a social media profile imperative for all people. If you are not visible in the public space of the internet, then generally speaking most people will assume you have nothing interesting to contribute. Institutional reputation is now largely irrelevant.

The big question, and the one I most worry about, is that the deinstitutionalisation of society naturally places more power with the rich and influential. Will this naturally blunt the inherently democratic nature of the mass communication involved with social media? Or will only those capitalists that move with mass opinion be the ones that can survive and prosper? On this, I do not have a conclusive opinion. But all I can say, is for the young and up and coming, building a social media profile is vital. You can no longer rely on an institution to bring you fame and a success - you need to go out and get it.

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Sorry guys - you need to be a paying sub to watch this one. It’s about what I am trying to do, how its going, and whether market moves in March invalidated or validate the thesis.

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There are many reasons I like gold - but I am not a gold bug. To me its just an asset choice among many. One thing that definitely disturbs me about gold is that it has become very popular among retail investors and second rate macro analysts. I also find the recent popularity of silver also a big warning sign. Below is a graph of silver.

The tops in silver in 1980, 2008 and 2011 were also tops in the gold market. It has just been that gold has been much better than silver.

I liked gold, because I thought it would do well if the Federal Reserve was too dovish. The US 2 Year Treasury is a good measure of “dovishness” - it has recently spiked - so not oil that is pulling down gold, but changing market views on Fed dovishness.

Looking at the US 2 year - there was a brief spike in the 2 year in 2024. Was gold weak then? Less weak - but stagnant. The biggest drawdown you had to wear was 6%.

Obviously gold has become much more sensitive to changing views on interest rates. Also back in 2024, interest in gold was much less, which we can see from shares outstanding in GLD. In 2024 it was at a low, but today it has risen, but not that much.

So is gold going to get the Bitcoin treatment? Bitcoin since peaking at USD125,000 USD has dropped back to USD67,000.

The most bearish signal I found on Bitcoin was surging shares outstanding in IBIT US - which have yet to fall. That is investors remain committed to bitcoin despite the fall. This is never a good sign. Bear markets tend to end when everyone has given up.

One reason I preferred gold over Bitcoin, sliver, copper or any other physical material was that there seemed to me a committed buyer - namely central banks. If China is running a USD 1 trillion trade surplus, but also does not want to buy treasuries - which is what official holdings data shows, then the only option is gold. (Brad Setser argues Chinese commercial banks are now holding treasuries instead - which may well be true - but does not affect the argument for gold).

There are other central banks, and much has been made of Turkey lending out gold to prop up its currency - but China is really the big daddy here. If China had felt it had enough gold, and it stopped buying, then we would really have a bear market in my view. How likely is this? Official Reserves of gold in China are about 2,300 tonnes - which is about USD 350bn at todays valuation. US official reserves are closed to 8,000 tonnes - which I think it a reasonable target for China. Assuming some undercounting by the Chinese, and lets say they are at 4,000 tonnes, this still leaves some 4,000 tonnes to buy, leave USD 650bn of buying. This is greater than current ETF holdings of gold, and this also ignores other nations potential diversification away from Treasuries into gold.

Ultimately the problem with gold is that is has been a great trade, and it has run ahead of other assets. I like gold on a “relative” basis. Gold versus TLT has been great, but it is still a long way from its 200 day average.

I also prefer gold to S&P 500. But has the same problem - its a long way from its 200 MDA.

Lets assume I am mindless technical analyst - and we assume TLT and SPX do not move, how much could gold fall? Gold could fall 10 to 15% and still be in relative bull trends. I am of course bearish on both the S&P 500 and TLT - so we could get another March, where gold falls more than TLT and SPX - which could mean golds fall more like 20%. That type of thinking then puts gold at USD 3,800. If TLT and SPX falls further, gold could also fall further. All of this implies I should probably just go massively short the market. And there is a time when I would have done exactly that - but as you, I and everyone else knows, President Trump has a habit of managing to markets. When I think about an investment strategy - it has to past the “sleep test”. The sleep test is basically can I run that strategy and still sleep at night. The corollary of this is that if I am not sleeping at night, I need to cut risk. Naked short does not pass the sleep test.

What would the above thinking mean for silver? Well lets say gold falls 20%, and silver correct back to a ratio of 80/1 that has be the average of the last few years (it is at 65 now) - then that would imply a silver price of USD 48/oz, basically putting it back to the price in November. This feels relatively likely to me - mainly judging by the “quality” of the silver bulls. I am tempted to short silver miners like WPM US and PAAS US - I suspect it would be a lot of fun, as they are widely held names these days. But I also know I would have no holding power in these shorts - that is if they rallied I would probably cover. To really have conviction on shorts like this, I would need to have clarity on the War in Iran, and on a much more hawkish Fed - which I do not. These are both Trump trades now.

Ultimately, what I am think I am saying, is that we could finally be in the bear market that I have wanted for a long time. In this bear market, I expect the S&P 500 and Treasuries to decline, and gold to decline “LESS” than these assets. My worry, is that in the short term gold MIGHT fall more that treasuries and the S&P 500, but I think it is too big “political” risk to not have gold to offset bearish positions.

To answer my original question - yes - gold could do a Bitcoin. But if gold is doing a Bitcoin - then other assets will likely be doing much worse! And ultimately, I think the Chinese will be buyers of gold, even if it is a bit lower than where we are today. Bitcoin (and silver) does not have that backstop.

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March was as tough as January and February was easy. It was a volatile month, and I put a number of trades on intra month. My best guess of performance is we gave up half of what we had made this year. This is disappointing - although still well up for the year.

Months like this tend to really tempt you to move away from your core strategy. Or in other words, what you thought was important has now been superseded by something else more important in the market. While I would like to say that suddenly changing strategies is foolish and that you should always keep to the plan, there have definitely been times when listening to market volatility and changing plans has be the right thing to do. For me, late 2007, as the GFC started to take hold, a long EM strategy (predicated on a weak dollar) was winning but did not make sense anymore. At the time Fed rates cuts were seen to supercharge emerging markets, did it really make sense to be buying cyclical assets as the US went to a deep recession? Of course not.

Then again, in early 2009, Chinese fiscal stimulus of over 10% of GDP meant a deflationary strategy which worked so well in 2008 no longer made sense. And again in 2016, the First Trump Presidency was a time to flip from a deflationary strategy to an inflationary strategy. Early on in my career, I used movements in bond markets and currencies as signals to when to flip - and this worked well. But since Trump in 2016, this has been a failed strategy. What has worked much better is reading the politics. And so I now put politics above all things.

So the question to ask is whether the War in Iran is another key moment? A moment when we should move from an essentially inflationary position to a deflationary position? The key question here will be whether policy makers in the West try to shield consumers from the effects of the War in Iran, or are willing to allow market forces to do their work. In other words, will governments respond with a fiscal push, or austerity? With populists still holding the whip hand in most countries, I see governments spending until they are forced to stop by bond markets. That is , I see no real change in the idea that long dated yields are going higher. I still think US yields go to 10%. Fed fund rate was nearly 10% in the late 1980s, which does not feel that long ago to me - but I suspect feels like another planet for most people.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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