Red pill/blue pill is an analogy I have used before. I like it, because it goes to heart the angst markets put me through occasionally. Red pill is for the hard truth, and blue pill is for the comfortable lie. But in financial market terms - you want to be taking the red pill, when everyone else is taking the blue pill. My red pill is that governments are now “pro-labour”, so we will see a prolong period of rising inflation, rising interest rates and a rising cost of capital - but no real rise in unemployment.
Blue pill is a return to the deflationary environment that existed from 1980 to 2020. US markets are starting to say deflation again. My preferred trading idea, GLD/TLT, it taking a beating - and is now down for the year. Technically, this looks dire, and the first time since 2021 it has breached its 200 MDA. As a rule, if the 200MDA starts to turn down, I tend to just walk away - but as descent have been so quick - the 200MDA is still rising.
I know that gold got caught up in a speculative frenzy with precious metals at the beginning of the year. Silver has now fallen 50% from its peak. As I told people at the time, I don’t like silver as I don’t think central banks buy it. My biggest concern is that precious metals just got caught up in a speculative bubble - like a meme stock - and the price action is actually meaningless. This is more likely with silver than gold, but it is my biggest fear.
What made me like gold, and still like it today, was its break out versus the S&P 500 from 2025.
Previous breakouts have rewarded perseverance with the trade. But moves this year are signalling a false break out. This adds to the fear of precious metals just being an investing meme.
Even more disturbing, the 30 year US treasury briefly topped 5%, and has promptly rallied back to 4.86%. You could argue that yields have topped out.
The problem for me is that the market is starting to say deflation but I read the politics as inflationary, and remaining so. In the UK, Andy Burnham will be likely next PM - who will likely move left to try and out manoeuvre the Greens and Reform. In the US, the Democrats are now talking of more tax cuts, again abandoning any fiscal restraint as it has become a political trap. But more than that - my lodestar market, Japan continues to point to inflation. 10 year yields continue to surge.
Even more impressive have been Japanese banks that are outperforming on a relative basis. This is even more impressive when you think how well tech stocks have performed, of which Japan has many. What I also like is how Japanese banks picked up deflationary turns in the market well before it was apparent, in the early 1990s, again in 2007 and then again in 2011. But as of today - everything looks great.
Here is where push comes to shove. Has the nationalistic/populist political winds changed? I don’t think so. Have governments moved away from industrial policy? Nope. Do governments have any mandate for austerity? Not that I can see. But markets have to price what they see - and they see short term rates going up, and that has been deflationary since 1980. But the politics of 2026 is not the politics of the 1980s. Or to put another way, Japan signalled deflation all through 1990s and was correct - and today its signalling inflation, and I am thinking it is correct. Perhaps I should be asking “赤い錠剤 or Blue Pill?”. That is do I believe the Japanese markets or the US. I think I pick Japan.
