Chapter 3 of my book. The other chapters are here.
Capital flows are a funny thing. Everyone knows they cannot go on forever, but then again, no one wants to miss out on the fun. And for some reason, everyone thinks they can get out before the tide turns.
Usually capital flows need some catalyst to make them change. The most common is central banks raising interest rates, as this usually makes some assets look expensive, and money starts to flow out. The problem is that there can be a substantial lag between rates going up, and changes in capital flows. But in my long career in financial markets, I have been lucky enough to stumble on the most extreme, and most transparent of all capital flows, and was lucky enough to be short when the flows reversed.
Back in 2014, I was made aware of Japanese funds that offered very high dividends to Japanese investors, often over 20%. I wondered how this was possible. The one that most stood out to me was the Japanese listed US REIT funds. A REIT is a Real Estate Investment Trust, a structure that allows the owners of Real Estate to avoid tax as long as all rental income is paid to the underlying investor. They tend to offer high yields, and are very attractive to retirees. They are a well understood investment product. US REITs managed in the US tended to have around 5% dividend yields. These Japanese managed REIT funds had exactly the same investment profile, yet offered yields of 20% or more. Where was this extra 15% coming from?
Intrigued, I dug further into it. Oddly enough, there was no mystery. The managers promised to pay out 20% regardless of what the cash flow was. These had some tax advantages for Japanese investors, but during the first bout of Yen weakness under Abe, the REIT funds were able to make these returns through a combination of Yen weakness and REIT appreciation. This meant they were able to make cash pay outs while not selling any of their REIT positions. This performance caused more money to come into the REIT, which further helped them to meet their cash pay outs.
The largest of the funds, Shinko US REIT saw assets explode from 16bn Yen at the beginning of 2010, to a peak of 1,500bn Yen in early 2015. By then, this one fund owned 10% of the Simon Property Group, then the largest REIT in the US. But its transparency was a problem. It was committed to a 20% dividend yield, which meant if it did not generate the asset gains from stock appreciation, dividend yields or Yen appreciation, then it would become a forced seller. That is the capital outflows that had come from Japanese retail investors would turn, and become capital inflows as managers needed to sell US assets to make Yen dividend distributions.
At the time, this was not only high yielding self feeding fund in Japan. They were funds linked to Brazilian Real, Turkish Lira, and plenty of other REIT funds, all paying Yen yields over 15% or higher. And all needed Yen to keep weakening, or they would become forced sellers. But Yen weakness was getting harder to sustain, and it was mechanically very easy to see when capital flows would turn for these funds.
The market was running record net Yen shorts in 2016, but as the capital flows reversed, Yen strength returned, which caused capital flows increase further, and Yen strengthened from 120 to 100 - destroying many macro funds in the process. Theses capital flow created its own bull market and bear market.
Before I understood markets, I saw what money does to a place. Not in charts. In the streets.
In 1990, I went to China as a teenager. It was my first real exposure to a country that felt like it was moving — not smoothly, not efficiently, but with force. It was full of dust, noise, disorder, half-built structures, and constant activity. It wasn’t “developed” in the Western sense, but it had momentum. People were trying. Trading. Building. Selling. Improvising.
It felt alive.
In 1991, I started a one-year high-school exchange in Kobe, Japan. It was the peak of the bubble economy and Japan at that time felt like the future. The trains were spotless and fast. Cities were dense and hyper-organised. Shops were full. Technology was everywhere. Even the vending machines seemed advanced. Compared to rest of the world at the moment, Japan looked and felt like a civilisation several steps ahead.
I didn’t know it then, but I was looking at two different stages of the same force: Capital Flows.
When money flows into a system, it doesn’t just make prices go up. It changes behaviour.
In Japan during the bubble years, capital had been pouring in for decades. The Plaza Accord (1985) had weakened the US dollar and made investors think long Yen was a winning trade. Capital had subsequently flooded in. Asset prices had risen. Corporate balance sheets were flush. Banks were lending. Property was valuable collateral. Confidence fed more confidence. Companies invested because markets were rewarding growth. Workers spent because wages were rising. Rising asset prices justified more lending.
The system reinforced itself.
The surface story might have been about productivity, culture, or technology. But underneath it was a powerful feedback loop driven by capital. Money flows in, asset prices move higher, higher collateral values support more lending, this creates more activity, which in turns encourages more capital flows. And so the cycle continues until something breaks it.
This feedback loop doesn’t need perfect fundamentals. It needs flows of capital. At some point however those flows will reverse, and the process goes into reverse. More becomes less.
China, when I first saw it, was earlier in the process. Less polish. Less capital per person. But you could feel that something was building. There was a lot of energy without the infrastructure to support it yet. It was a system on the way up: still rough, still chaotic, but propelled forward by the movement of people, trade, and investment.
At the time, I didn’t have a framework. I just had an impression. Some places feel heavy, whereas some places feel like they are being lifted. Later, I would understand this feeling as capital flows.
One of the mistakes investors make is thinking bull markets are rewards for good fundamentals. Sometimes they are. Bull markets are often the cause of improved fundamentals, not the result.
When asset prices rise, companies can raise money more easily. They invest. They hire. They expand. Consumers feel wealthier. They spend more. Governments collect more taxes. Banks lend more willingly.
The rising market creates the conditions that justify its own rise. It becomes self-reinforcing.
You could see it physically in Japan. Property values were so high that balance sheets looked bulletproof. Banks were willing to lend because collateral values kept rising. Corporations invested heavily because capital was available and cheap. The system looked strong because asset prices were strong — and asset prices were strong because the system looked strong.
It’s circular. But it works — until the flows reverse.
What struck me, even as a teenager, was how environments shaped people.
In Japan, confidence was embedded in the infrastructure. Everything worked. Systems were reliable. The country felt efficient and modern. It was easy to believe that this success would continue because the surrounding physical world confirmed the story.
In China, belief came from motion. From visible change. Markets. Construction. Trade. It wasn’t yet polished, but you could see the direction of travel.
If you compare that to places where capital has left, the contrast is stark. Infrastructure decays. Investment slows. Confidence erodes. People become defensive. Risk-taking falls. The environment feels static or brittle. Capital doesn’t just move numbers. It moves psychology. This became one of my core beliefs: Capital flows create their own bull market.
When money moves into a country, sector, or asset class, it sets off a chain reaction. Higher prices improve balance sheets. Improved balance sheets encourage lending. Lending funds expansion. Expansion attracts more capital. Optimism becomes rational because the flow itself is supportive.
This is why markets can look expensive and keep going. Investors who focus only on valuation ask: “How can it still be rising?” Investors who watch flows understand that the system is still being fed.
The reverse is just as powerful. When capital leaves, the loop works in the other direction.
Falling asset prices weaken balance sheets. Lending tightens. Investment slows. Confidence drops. More capital leaves. What looked stable begins to look fragile very quickly.
Bull markets and bear markets are not just about earnings. They are about whether the tide of money is coming in or going out. You don’t need to know the exact level of the tide. But you do need to know the direction in which it is flowing.
My early travels gave me something that spreadsheets could not: a physical sense of what a system under inflow feels like versus one under outflow. Years later, when I analysed markets, I often came back to that instinct.
Does this place feel like Japan at its peak — polished, confident, fuelled by capital? Does it feel like early China — messy but being lifted by flows? Or does it feel like somewhere capital has quietly stopped arriving?
Those questions don’t replace analysis. They simply guide where you look.
Long before fundamentals show up in earnings, capital has already started moving. And when capital moves, markets follow.
