Capital Flows and Asset Markets

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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 7tnAnd 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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comI 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.

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comThe 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.

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comAfter the surge in DRAM and NAND prices, I thought wafer prices would be the next to go. For context, DRAM prices remain substantially higher than a year ago.If you want an industry primer on wafers, have a look at this note from Brevarthan Research. So what has been going on in the wafer space?

The most pleasing aspect of August was the rally in GLD/TLT to recapture the 200MDA. My view on this is that this will continue to do well until rising bond yields forces the US government to take fiscal deficits seriously. The two big events of the month was that the US Treasury tried to control bond yields rather than control spending (expected and good for gold) and that the Federal Reserve was more hawkish than anticipated (also expected and bad for gold, but also bad for bonds). I did wonder what happens to GLD/TLT when Donald Trump comes to the end of his term - but over the summer I realised that Donald Trump is just the face of a political belief system that is now heavily entrenched in US politics. There is no going back, not until crisis forces change.I was also happy to see Japanese bond yields to go higher. 30 year JGB yields have moved through 4%.I thought this would have a negative “reaction” on US stock valuations. This has not been the case at all. Valuations have moved higher. I use price to sales belowAnother 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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comThe big market news over the summer was the unwind of the momentum trade. The Goldman Sachs High Beta Momo Index suffered a 42% drawdown, and the dead bodies in hedge fund world have slowly been rising to the surface.While everyone knows that memory stocks in particular got smashed, the above MoMo index is made up momentum longs AND momentum shorts. Momentum shorts generally work. That is falling stocks have a habit of keep falling. But was has been most interesting is the momentum short index has had its biggest rally since 2021. I can tell you from experience, you want to be short when this peaks, and cover at lows. As of today, we are really closer to a high than a low. A good time to short is also when the KDP High Yield index is rising. And it has been rising this year.

ここ1か月ほどの間に、米国は2つの異なる市場介入を発表した。ひとつは長期米国債市場への介入で、国債の買い戻し（buyback）を拡大するというものだ。もうひとつは為替市場への介入で、円高を促すUNAGASUためのものだった。長期債市場への介入は比較的理解しやすいし、過去にも例がある。ただし、これまでのところ債券利回りには特に変化は見られていない。一方で、円への介入のほうが興味深い。こちらは少なくとも、市場に目に見える動きをもたらした。しかし、そもそも円高がどのように米国債市場を助けることになるのだろうか？私には、この円介入は「もはや存在しない世界」に市場を戻そうとする試みCOCOROMIに思えてならない。では、その「世界」とはどのようなものだったのか。1990年から2016年にかけて、日本国債（JGB）の利回りは一貫して低下し、最終的にはマイナス圏にまで入った。しかも、日本政府のグロス政府債務が1990年代初頭のGDP比約70％から、2015年には約250％にまで増加したにもかかわらず、JGB利回りは低下し続けたのである。日本では、債券利回りが低いまま推移する一方、円は強かった。しかし利回りが上昇するようになると、円は弱くなった。つまり、円安と債券利回り上昇の間には相関関係がある。だが、為替市場に介入するということは、単なる相関だけでなく、そこに因果inga関係があると考えていることになる。すなわち、円安そのものが債券利回りの上昇を引き起こしていると考えているということだ。私が考える日本における最大の変化は、食料価格の上昇である。日本の食料価格は約30年間ほとんど停滞していたが、2013年頃から上昇し始めた。なぜ日本の食料価格が突然上昇し始めたのかについて、私には確信の持てる説明はない。しかし、ひとつ確かなことがある。食料価格が上がれば、賃金chinginも上がらざるを得ない。もし賃金がそれに追いつかなければ、大きな政治的反発が起きることを覚悟しなければならない。ひとつの可能性として、日本が食料輸入に依存していることが挙げられる。特に、中国から野菜や果物を多く輸入している。中国人民元 (RMB)に対して見ると、円は1992年以来の安値yasuneまで下落している。これは過去とは大きく異なる状況だ。これまでは通常、円安になると他のアジア諸国も通貨を切り下げる傾向があった。ところが今回は、中国人民元が強いまま維持されている。そして、ここが問題の核心なのだと思う。1980年代、1990年代、そして2000年代を通じて、日本と米国は世界最大級かつ最も豊かな2つの国として、いわば自分たちが世界経済の「天候を決める」ことに慣れていた。しかし今では、そこに第3のプレーヤーがいる。中国である。中国も低金利の国ではある。だが日本とは異なり、中国は米国債を買うことを選んでいない。したがって、本当の問題は、中国が通貨を切り下げていないことにある。その結果、他国、特に日本に対して物価上昇圧力が生じている。そして同時に、中国は米国債を買うことも選択していない。では、円が継続的に上昇すれば問題は解決するのだろうか？もし本当の問題が「人民元が強すぎること」なのであれば、おそらく答えはノーだ。むしろ円高は、世界の他の地域にさらにインフレ圧力を生み出すだけかもしれない。中国がかつて世界の商品市場（コモディティ市場）の構造を変えたのと同じように、今度は中国が世界の金融市場の構造を変えつつある。米国財務省による債券市場や為替市場への介入は、日本と米国が世界の支配的な経済大国だった時代へ時計の針を戻そうとする、叶わぬ願いのように見える。 This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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”. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comThe pro-labour theory of markets has played out in all ways but one in my view. First growth would be good, and unemployment would be low. Correct. Second, cost of capital would rise. Correct. Third, equity markets would suffer from higher cost of capital. Not so true. I am going to focus on this third part. Ever since Covid, when the Federal Reserve stepped in as a buyer of corporate credit, credit spreads have become tighter and tighter. This is bullish for equities, and as of today, these spreads are at very tight levels.Binding corporate and sovereign credit together is pretty common in emerging markets. While it is great for corporates, it tends to not be so good for sovereign yields. So the question is when do rising sovereign yields begin to affect equity markets?

Is there one market that western macro investors just can’t seem to get right - its Japan. The only thing that is constant is that once they think they get it, they really don’t. For someone who used to live in Japan, I can say with 100% confidence, foreigners are always the last ones to get the memo. The closest I have ever come to being an insider was near the end of my high school exchange, and I have been playing with the basketball team for an two hours a day, during school term, and six hours a day during the summer. We had shed blood, sweat and tears together, when at the beginning of training one of my teammates mates came over to me and said “we are not talking to Tanaka today - he skipped training yesterday. Ok?” I said ok, and did not talk to Tanaka as instructed. I had mixed emotions - I felt sorry for Tanaka, but I was also pleased I have finally made it to the inside. If you have never heard of Japanese high school club training, “bukatsu”, perhaps watch some Japanese high school baseball videos on Youtube. Intense is the key word here. And team spirit is everything. Anyway, the key issue is never trust a foreigners view on Japan - they know nothing.I remember in 1997, Steve Roach, a very famous economist for Morgan Stanley, was very bearish on JGBs. If memory serves, he called the 10 year JGB at 3%, the short of the century. They or course went to zero, or where the greatest long of the century. In fact short JGB trades destroyed so many hedge funds, it came to be known as the widowmaker trade.Associated to this was Yen strengthening during times of US recession. Early 1990s and again after the GFC gave rise to Yen being seen at a “safe haven” currency.I always felt this trade was easier to understand in terms of Korean Won. Macro traders often preferred Korean won to Japanese Yen as it had higher interest rates, and similar industrial structure. The Won/Yen carry trade was always popular with macro traders. Periods of Yen weakness against the Won tended to be followed by periods of Yen strength. The “macro community” has learnt from this, and have been pushing long Yen trades for a while now.In recent days the US and Japanese government have intervened to strengthen Yen.The macro community has started melting down again. Here is a couple of choice selections from Twitter.Lee Roach seems to be pushing for a huge carry trade unwind (what is with people called Roach and Japan?!?) and Michael A. Gayed thoughts are not totally clear to me, but I do know he is “VERY EXCITED” about Yen moves.What do I think? Well in the political world we live in I have a really simple view on Yen. I think it goes exactly where the government thinks it should go. Which basically means, they like it weak, but not too weak. Do I think we are going to be a catastrophic Yen carry trade unwind? Well the Japanese (who would know if this was going to happen) would be buying JGBS in that case. They did that in 2007. Today, not so much.Do I think Yen is about to be catastrophically weak? Like an Argentinian Peso or Turkish Lira? I think you need to see Japanese interest rates ABOVE US rates and still weakening to really believe that. That may happen - and then we would have to consider that risk. But for the time being Japanese yield remain below US yields.I think the simple story is Japan has inflation now, and is much more a “normal” country now. Why was it so special for so long? Japan challenged the US in the 1980s, so agreed to economic policies that hamstrung it for three decades. But now that China is the challenger, Japan is free to do as it pleases. And it chooses inflation. And we know, inflation is good equities and bad for bonds.Personally I look at the above, and I am neither bullish or bearish on Yen. I am bearish on JGBs, but also bullish on Japanese equities. As a for “macro investors”, they are so much like the generals of old, always fighting the last war. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

It was a wild month in equities, where momentum investing got destroyed. The GS US High Beta Momentum Index shows it well. You have to go back to 2008 to see a similar size move.Semiconductors were the area to get nailed in July. Philadelphia Semiconductor Index fell nearly 30%.What really stood out to me was the rally in heavily shorted names. The GS Short Momentum Index rallied through the month. Certainly what I saw during the month.We now know that the hedge fund Situational Awareness became aware it was in a situation, and was forced to sell longs and buy back shorts. This was very reminiscent of LTCM, back in the day. And it was noticeable that markets stabilised once it had deleveraged. The VIX finished the month at 16 which feels VERY at odds with individual stock volatility.Amidst all the drama, the Federal Reserve decided not to raise interest rates, despite the largest investment boom in modern history, and the largest fiscal deficit in modern history. The market decided to sell off Treasury yields, and the 30 year finally pierced 5%.The other, and in my view, highly related move was in Japanese Yen. But for me, the move in Yen was not the big news. It was the amount of Treasury selling that was needed to make Yen move was the big news for me. Estimates range from USD 50bn to USD 100bn. If we look at Japanese official holdings of Treasuries, at USD 1,143bn - it is pretty clear that they spent a big chunk, just to get Yen back to where it was a month ago. That is, if they just intervene, and do not change fiscal or monetary policy they will run down the foreign reserves very quickly.The market clearly wants higher interest rates in Japan, but the BOJ is afraid of what has happened previously. Raising rates in mid 1990s started the Asian Financial Crisis, in 1999 the Dot Com bust, and 2006 the GFC.The thing is that the JGB market sniffed out trouble pretty early in those situations. This time, it keeps selling off. Or in other words, the JGB market sees inflation. I agree.I think people are starting to wake up to what I have been saying for a few years. We are in a rising cost of capital world, driven by rising investment needs, and the realisation that neither our governments (which are populist, or populist threatened) or our central banks are acting to keep inflation at bay. This incentivises people out of cash, and makes inflation even worse. Warsh could have ended this vicious cycle early - I think a 50bp even a 100bp increase was called for. Now the Fed is in catch up mode. What I mean by that, is both the BOJ and Fed will come under pressure to raise rates by a lot more. They could have avoided this outcome - but they chose not to. GLD/TLT has had a long rest, but looks interesting to me.But I think the short TLT looks more interesting than the GLD side here. What I think is more likely is that bond yields rise, and at some point President Trump or American business will ask the Fed to “fix” the bond market. If they attempt YCC, or QE or something like that - THEN gold goes to the moon. That is Fed inaction - causes yields to rise. Fed intervention - causes gold to rise. The only way to get bond yields down now it to jack short rates way about the 30 year yield - which would be 6 or 7%. I don’t see them doing that - especially after blinking in this meeting. The real mystery here is at what level do higher bond yields hurt the S&P 500? Exciting times. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

At the heart of the AI discussion is one issue and issue alone. Are the hyperscalers spending too much? The Economist provides a nice guide, basically showing that we are twice the dot com boom in half the time!Goldman Sachs also provides a comparison, which puts total amount of capex on a par with the dot com boom.So basically we have huge amount of capex - more than any other boom on some measures. Adding to this bearish set up - the Capex is now debt financedAnd you are seeing the CDS respond to debt issuance.And then to cap it all off, the US AI models are getting undercut by Chinese models. If you are bearishly minded, then this is a slam dunk short case.For me, I understood all this, but I saw the capex spending as defensive. With Elon Musk joining the AI party - Google, Microsoft and even Meta could feel threatened, and so would all need to spend aggressively to defend their turf. Or to put it another way, Volkswagon should have massively raised R&D on EVs when Tesla was launched, and now its too late. The big tech was not going to make the same mistake. From this line of thinking, the bear signal would be someone giving up. But I was reading the Microsoft results, which was excellent, and could not stunned by the future contractual obligations they reported. Well over USD 700bn.The most recent quarter also saw their cloud business become their largest single business line - with over 30% year on year growth. If I saw this type of “contractual obligation” growth in my own businesses, I would also be spending big.So the question is can Anthropic and OpenAI actually meet the the US 1 trillion backlog they have built up with the hyperscalers? These two companies alone make up the commitment to the hyperscalers.And here is where it gets hard. Microsoft, Oracle, Google and Amazon must all know that they are extremely reliant on OpenAI and Anthropic. But they also must have their own visibility of the demand for AI related areas. And they should also have good visibility on the capability of Chinese AI, and yet they still spend. So to be bearish you need to take a view that the tech giants have missed something, or have gotten something wrong. And this does happen. The GFC was basically caused by a belief that AIG could not go bust (the investment banks bought CDS from AIG to hedge their MBS business risk. When AIG failed, they were no longer hedged.).What could I see that the big tech companies not see? I don’t know. I think the biggest risk could potentially Chinese AI completely upends the AI system. But Chinese cloud pricing has been cheaper that the West for years without slowing cloud growth. I would also think this was more likely if Nvidia GPUs did not still trade at a premium in China. That China still wants and needs GPUs means that their AI is still built along similar lines, and not a completely different infrastructure.Having lived through big busts in the 1990s and 2000s, I understand the fear that investors have. But I think to really commit to a bearish trade you need to find something that the market has wrong. My personal view is that markets have interest rates expectations wrong - and I have good reasons to think that. But on AI, what I see is that OpenAI and Anthropic have huge obligations to the hyperscalers, which they seem willing to invest on the back off. Given their greater transparency, I find that hard to call that bearish. However, if they are basing their investments on the idea that US 10 year treasury yield is going to stay below 5% - then they have a problem. But that is really not tech specific. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

I have done a LOT of short selling in my life. In my previous career I ran a hedge fund of one sort or another from 2006 to 2021, so a 15 year continuous stretch. I was long from 2006 to 2007, then short 2008 to 2010, when briefly long, and then went short again, where I stayed short until 2020. I probably should have gone long in 2016 - but that’s another story. In 2013 and 2014, we were probably the only fund in London to still be net short - so much so that the GS stock loan desk took us out for Christmas drinks. Apparently we were there best customer by far. I was short Volkswagon all through its squeeze, and eventually made (a small amount of) money on it. That was unpleasant.I also tried and failed to short oil in 2008, putting on shorts in Petrobras in early 2008, but getting squeezed out before it collapsed.Actually my ideal short is a cyclical stock you run long all the way up, and then switch to short when the fundamentals breakdown. The reason I am thinking about this is the ongoing momentum bloodbath in markets. The GS High Beta Momentum Index has lost 43% in just over over a month.The only comparable move that I can remember was 2008. There was a mini one I was on the right side off in 2016, but 2008 was the really big one.What happened in 2008, was that as the GFC started to unfold, the Fed starting cutting interest rates, which weakened the dollar. The China boom was still going, so commodities, and specifically oil and iron ore were going to the moon. But as recession took hold, this cyclical stock that has attracted momentum money got destroyed. Looking at SK Hynix and other memory stocks, its easy to see this type of market again - down 50% this month.The thing is that back in 2008, the commodity stocks moved one for one with commodity prices. Petrobras peaked around the same time as oil. Vale peaked around the same time as iron ore.This time the memory stocks have pre-empted a fall in the underlying. Memory prices are still at or very near all time highs.Or to put it another way, Micron stock is falling even as earning expectations are being revised up.The obvious short case is that hypercalers CDS is beginning to sell off and this will cause Capex to fall. I would be a bigger believer of that if I was seeing long dated bond yields falling - the market would be agreeing that recession is coming. But if you do want to short memory stocks, I can offer one interesting argument. Before memory stocks became THE AI play, power equipment stocks were THE AI play. In the US, GE Vernova was the go to play. It is weak in July - but not broken - not yet anyway.Koreans being Koreans, pushed their own electricity generation equipment stock up 700% in a year, but has halved in the last 2 months.Chinese electricity equipment maker, Harbin Electric, peaked in February, and then halved before bouncing a bit this month.There is a reasonable argument to say Asian stock markets are a lead on the US. As they make physical goods, they tend to have a longer lead time, and can see when things slow earlier. Sometime the Kospi does seem to turn well before the S&P 500, and sometimes it seem to be simultaneous.One of the big problems with this analysis is that other reliable “tells” on the market do not really work. Normally the time to buy Korea was when its currency began to appreciate, and sell when it weakened. In this cycle, Kospi has soared as the currency has weakened, and fallen as the currency strengthened.What I am trying to say is that short selling is hard. I used to only take on shorts when I could see three different catalysts to make money. Right now in memory stocks, you need to memory prices fall. And to make that work, you are basically saying that the hyperscalers will see their rising CDS and decided to cut capex aggressively. I would bet on that if I saw their core businesses going into decline - but I don’t see that (yet). Or if I saw recession - but I don’t see that yet either. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

Bloomberg notes that CDS on hyperscalers are all beginning to sell off. Oracle has by far the highest CDS - because it has so much debt. USD 167Bn of debt, with a big increase in 2026.I am a bit surprised by the increase in Nvdia CDS, as it has USD 80bn of cash on the balance sheet -with relatively little debt. Google now has 118bn USD of debt from USD 25bn two years ago. Microsoft has USD 125bn of debt - up from USD 100bn a year ago. And Meta has risen from USD 40bn to 87bn this year.In the GFC - rising CDS was definitely “BAD”. But its usefulness since then has been diminished somewhat. Tesla had Oracle level CDS or higher for most of 2018 to 2022. The high CDS sent a message about financial issues with Tesla, which led to high short interest, which eventually got obliterated, when Tesla generated cash. Short interest is the middle graph below. Being bearish on Tesla was very popular and very wrong.My point is that CDS does represent increasing debt levels, but is largely agnostic on the future profitability or lack thereof of that investment. But the movement in CDS is interesting. It matches up with a move lower in HYG US. Which I would consider bearish.Which is wildly at odds with the behaviour of equal weighted SPX - which is at all time highs.If I look at the KDP High Yield daily - this is generally correlated to equities. You would think US equities would be broadly weaker.Following on from my autocallable note, US equities are not following dividend futures.Something funky is definitely happening. GS Momentum Index getting obliterated again, with longs down and shorts up. Now down 5% for the year, from up 70% in June. Yowser.If I had to take a view, and I guess I do, the market got over long AI trade, and we have seen some negative pricing in CDS from big bond issuance. This led to some selling, which because of the presence of leveraged ETFs, caused more selling. This hurt long books, so hedge funds degrossed, and so bought back shorts and underweights. You end up with equal weight S&P 500 going up -see Apple at new highs. But actually, credit is not looking great - so short covering is happening at the wrong time. It does make me wonder if another momentum trade that suddenly reversed early this year is about to make another reversal? Gold has underperformed S&P 500 hugely since a February peak? Time for a turn?This would fit more closely in with my pro-labour view of the world. That is one of volatility, as rising cost of capital fights with growing revenue. And the S&P 500 was very volatile in the 1970s.In some ways I love this market - because I have a theory about how it should work, and we are going to see if its right or not. That theory is pro-labour politics is great for growth but raises the cost of capital - which should be more problematic for the US. Cost of capital is rising now - lets see if the theory holds. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

For a long time Goldman Sachs have published a pair trade of momentum longs versus momentum shorts. It tells you what everyone who works in asset management knows - momentum is great until its not. We have once again entered the bloodbath stage of momentum investing. It may look like this falls apart when the long book crumples. But back in 2002, everyone was short tech names, and these rallied, the short book caused problems back then. You can see that more clearly when you look at the momentum long part of this trade in isolation. Big falls in the long book are highlighted. Hedge fund long investing has generally been good.But what really hurts is when the shorts move against you. These are highlighted below. And that is what we are seeing today - momentum longs falling and momentum shorts rallying. Keen eyed observers will probably recognise that the only time you really want a short selling fund is AFTER short selling has not worked - that is 2000, 2005, 2011, 2021 and maybe, 2026.The GS momentum pair has dropped 40% from its June peak, and is back to flat for the year. I don’t know exactly what goes into GS Momentum Long Index, but we can use the data from a iShare Momentum ETF to get a good idea. Broadly speaking - AI trades are about 50%.Typically in my experience this market action tends to cause weird behaviour all over the market - mainly as sudden arrival of risk in one part of a hedge fund manager book then requires risk to be cut everywhere. One area I am surprised not to see action is in currencies. Carry trade has had its best run since the 2000s.And Yen shorts are at Max short levels. I would have suspected a Yen rally of some sort.As are Swiss Franc shorts. I would also have expected a Swiss Franc rally of some sort.Despite this, the dollar remains near one year highs. Given the centrality of AI to US growth in recent years - if stock prices are to believed, then short dollar trade should make a comeback. I guess what I am trying to say, is that while all the action is centred on AI, the outlook for short selling and potentially short dollar trades look to be improving.Alternatively, the AI sell off is purely positional - and this is not causing any problems in the rest of the market, because the weakness in AI stocks is not reflecting any real underlying weakness in the AI trade. If I would have to find a similarity to this market, it was the blow-up in the XIV ETF back in 2018. This fund gave you twice the negative return of VIX, or essential selling VIX. It did well, but when a small shock came along, VIX doubled over night, and it went to zero. But the reason it doubled overnight was because it was so short VIX. There was no information content in the price action, other than the XIV ETF was a bad product.The S&P 500 fell 10%, and then carried on up -the VIX spike was the death of a bad product rather than anything genuinely market related.It does seem to me, that leveraged long memory ETFs are the new XIV. I think you need to see far more confirmation from markets to really believe something has changed, like a weak dollar, or change in bond markets.. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comCalling a top in semiconductors has been a tough gig for nearly ten years now. I thought 2018 was a top and was wrong. 2022 was a head fake too, and was 2025 Deepseek sell off. But here we are again, with the SOX down 20% from a peak in June.The bull market in semis is very easy to understand. Pricing power has been phenomenal. TSMC, which I have been covering for 20 years, has been able to push prices up massively over the last few years. The only other time this happened was the dot com bubble.As of today, we are seeing a very big fall in leading memory stocks. SK Hynix, which recently listed ADRs, is now down 50% from its peak. Amazingly, it is still above its 200MDA.So was that the top? I see two different explanations for current price action.

Bear markets are funny things. They tend to start small, and isolated, and then suddenly they become a big problem. Almost all the talk now is about whether the AI “bubble” is bursting. From the numbers being reported out of Google last night, maybe you could argue this is as good as it gets, but bursting seems a stretch at the moment. The backlog number and token usage numbers look great to me.My working theory on markets was that growth would be good (see Google numbers above), but the cost of capital would rise. And this rising cost of capital would be the problem for markets. This has already been a problem for parts of the market. Private equity and private credit equities have traded poorly. Invesco Private Equity ETF is pretty indicative.But for broader markets, things have been okay. Generally speaking the S&P 500 tends to follow HYG US - the high yield ETF. When this is falling - equities don’t do so great.First of all, the 200MDA on this is now inflecting lower, like it did back in 2022. Secondly, HYG is falling even though credit spreads are tight. To restate what HYG says, when credit spreads widen, equities don’t do so great. Currently we are near life time lows on spreads.Another measure of credit is the leverage loan index. This is pretty heavily tied to private equity, and again when this is going lower, bad things tend to happen. This tends to match up well with movement in the Invesco Private Equity ETF. It was weak at the beginning of the year, stabilised, but not able to get back to old highs as it has done before.What all of this credit metrics do not need would be a treasury sell off. As pointed out, credit spreads are probably TOO tight. The US 5 year is really having a good look at breaking higher.What I am saying is that conditions for a bond market led sell off in equities are starting to look ideal. The best example is more like 2022, which was a repricing of assets, rather than collapsing revenue or earnings. How bad could it get? Its a tough question. The relationship between rising government bond yields and US equity valuations has been unstable of late. In 2022 it seemed to matter, but since then, not so much.The big issue is that the US government would be forced to raise more revenue. Stealing a graph from Grizzle on Substack shows the problem.Looking at US interest payments highlights the problem.What I am trying to say is that AI trade will someday come to an end, as all trades do. But bear markets tend to come from areas that people know are problem, but are no longer invested in. People know that private credit is bad, they know that private equity is bad, they know the government is bankrupt, so they have already minimised their exposure there. The problem is that it is very hard for markets to ignore higher sovereign yields. I think the next sell off in sovereigns will be particularly problematic as it will likely send a number of hedge funds doing the treasury basis trade bankrupt overnight. I live in hope. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comI have been talking about GLD/TLT for so long, even I was getting bored of it. Since starting to talk about it in 2022, it has been on absolute tear.But from a high in February, it has had a chunky 26% fall. And for the first time since 2022, went through the 200 MDA, and completed a dark cross. For technical only investors (CTAs etc) this is very bad. It has had a rally recently - but should this be sold?

I have been pretty sure that yields on JGBs were going to go much higher, and this has been right.I did have an expectation that this would drive yields much higher elsewhere. This has not been so true. US yields are higher, but still within a level that we have seen before within living memory.And the biggest surprise have been the collapse in Chinese bond yields, to close to all time lows.What disturbs me about this, is that my view on bond yields was driven by a view that the world is becoming more “populist” or pro-labour. Generally speaking, this would also include China - and yet its bond yields remain at low levels. If I just look at Japan, I could speculate that loan demand is what drives bond yields. Japanese loan data inflected in 2013, and have not looked back.FDIC data for US banks show aggressive loan growth has become in recent years, and in particular in contrast to slower loan growth in the 1990s.The problem is that Chinese loan growth also seems pretty good.One thing that is different between China and Japan, is that foreign investment is dropping in China, and rising in Japan. The best was to see rising FDI in China is in the increase in it NIIP. Falling FDI into China, and rising FDI out of China should drive a higher NIIP.While from Japanese NIIP data, we can see that foreign investment into Japan is rising from a low base.The problem with FDI as a driver of bond yields is that the US has FDI into the US even through the period of low yields.So that leaves government spending. Going back to the US, government spending seems to drive yields. Government expenditure rose rapidly in 1970s and in 2020s.And a similar dynamic is playing out in Japan. The increase in spending matches the inflection in JGB yields higher.Chinese data is a bit hard to compare but there is definitely a slowdown in government spend in 2025 at least.There is a way to check this hypothesis. In Europe, the UK has the higher government bond yields. Government expenditure looks like this.Switzerland has the lowest bond yields in Europe. Its government expenditure looks like this.This seems to prove what I always thought. Sovereign bond yields reflect markets belief in governments ability to control spending. And in the UK, with Reform on the right and Greens on the left - there is no belief. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

I always think of this as one of my all time great notes, for two reasons. First, almost no one had looked at this before I did, and second, after I looked at it, I had research providers trying to sell me this as their own research. In some ways, this is a timely note - as once again ETFs (this time leveraged single stock ETFs) are causing market havoc.Japanese US REIT funds and the Buy Case for Yen (2015)The last few years in Japan have seen the emergence of and selling of some innovative high yield funds. These asset management products are designed to pay out very high yields, while sadly almost guaranteeing the destruction of capital. There are numerous examples of this but this note shall deal with only US REIT Funds sold in Japan.According to Goldman Sachs, the largest 20 Japanese US REIT funds have 50bn USD under management. The single largest is the Shinko US REIT fund (Bloomberg Ticker: 06311049 JP), which has an AUM of around 14bn USD. For comparison the Vanguard US REIT Index fund has 26bn USD of assets, total US REIT market capitalization is 720bn USD.Japanese US REIT funds tend to offer a dividend yield in the high teens. The Shinko fund has a yield of 17% currently. For reference the US based Vanguard REIT Fund has a yield of 3.4%. The extra yield of 13.6% does not come from leverage. In fact the assets owned by the funds are very similar. Rather Japanese funds will sell down assets to ensure that a higher yield is paid out.From 2005 to 2010, the Shinko fund and Vanguard fund had very similar performance, after 2010 a huge divergence opened up. In my view, Shinko noticed that assets under management at their fund grew aggressively when funds offered a high dividend yield. Talks with participants in Japanese financial markets indicate Japanese investors prefer funds that offer at least a 1% monthly dividend yield.As can be seen from above, Shinko AUM exploded higher once it began to offer a yield in excess of 12%, and it continues to rise. The other major funds that I have looked at all offer similar yields and are presumably managed in a similar way.With such high dividends, assets under management can fall as the fund needs to sell assets to pay dividends. To get an idea of when this can happen we can use the change in the share count of the fund multiplied by the fund price and then subtract the dividend payout to calculate net cashflow movements in the fund. We can see that there have been two times when assets raised have fallen below the cash needed to pay out.This has a very clear effect on the shares outstanding for the Shinko fund, which fell in 2012, and again in recent months.I suspect this new fund structure will have a big effect on the Yen. Typically, the flow of investment funds relative to currency movements is unknown. The reason for this is that sometimes investors will see the currency depreciation as a chance to buy an asset cheaper. Certainly US listed Japan equity funds tend to see rising share count (i.e. raising assets) when the yen is weakening. In other cases, weak currencies tend to correlate to weak returns and investors selling assets. The latter is what we have seen more recently with emerging markets fundsWhat I find most intriguing is that at constant values, ie US REITS remain constant, and the Yen exchange rate does not change, and Shinko does not raise any more assets, then this fund will be forced to sell 14% of its holdings in the US to repatriate to Japan to pay dividends each year. What is true for Shinko would be true for the industry as a whole.The implications of this are intriguing for me. Firstly, assets in these funds are very unstable, as the high yields destroy assets under management very quickly. Secondly, if there was a shock that caused yen to appreciate or US REITS to fall in value, funds like Shinko would be forced to liquidate their assets very quickly to meet redemptions and dividend payments. Their liquidation could cause yen to appreciate further and possibly REIT to fall in value locking them into a vicious cycle. Even more disturbing, that this is only one of seemingly many assets classes that have this feature.For investors nervous about the state of global markets, a long yen position seems to offer a good hedge in my view.Japanese US REIT Fund – an Update 2016In 2015, we released two market views about Japanese investors being short Yen via fund products. One was long Turkish lira (TRY) and short Yen (JPY), while the other was long US Reits (Real Estate Investment Trusts) unhedged. Both of these assets classes are relatively concentrated, the two largest TRY funds account for 80% of assets, while the two largest US Reit funds make up 50% of assets. This year we have seen Yen rally significantly. While the size of the Turkish lira funds (Amundi European High Yield – TRY Course and Nikko Pimco High Income Soverign Fund – TRY Course) have shrunk dramatically, the US Reit funds (Shinko US Reit and Fidelity US Reit Fund) have increased.The contrasting fortunes of Turkish lira funds and US Reit funds in Japan are undoubtedly connected to the divergent performance of these assets. The Turkish lira has been very poor, while US Reits have performed well.While the US Reit funds and the Turkish lira funds are very different assets, they both offer Japanese investors very high dividend yields as the main selling point for Japanese yield hungry retail investors. The largest Turkish lira fund, the Amundi Europe High Yield fund Turkish Lira Course, still offers a 25% indicated yield. The largest US REIT fund in Japan, Shinko, also offers an indicated yield of 25%. This level of dividend yield is typical of the funds in this space.US Reits do not offer 25% dividend yields, and the Japanese US Reit funds are not leveraged. Instead, they commit to maintaining these dividend yields from capital. Fortunately, for these funds they have been able to raise enough funds and realise enough capital appreciation to grow their funds’ assets significantly. The problem is that with increasing share count, and large yields the two largest funds are paying out 64bn JPY (640m USD) a month. Since 2015, a period of significant capital raising, they have on average raised 80bn JPY a month. If Japanese investors just cease adding capital to these funds as they did in 2012 and 2014, it would precipitate significant selling of US Reit holdings to pay dividends.It is also interesting that US Reits, in contrast to the trend for most US corporates, have generally been issuers of shares, some quite dramatically. In general terms, Japan based US Reit Fund use the FTSE North America Reit Index as a benchmark. According to the index provider, the top five stocks in this index is Simon Property Group, American Tower Corp, Public Storage, Crown Castle Intl and Prologis.Reits have various tax advantages, as long as they pay out the majority of their income as dividends. This means that to grow assets, they need to issue shares to buy assets. The Reits above are typical in that share count has a tendency to rise over time. It seems to me that for the Reits to grow, they need to be able to find buyers of new shares at ever higher prices, while Japanese based US Reit funds need to find new investors to not become sellers of Reits to meet dividend commitments. This strikes me as particularly unstable. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

Republican and in particular Trump energy policy can be summed up as “Drill, Baby Drill”. It has become de rigueur in Substack and elsewhere to praise US policy, and the criticise European energy policy. The UK has come in for particular abuse. The main nature of this abuse is that high energy costs in the Europe and a pursuit of net zero has led to business stagnation. This Economist article is pretty much standard. The key graphic is below.The political view on this is that the UK has been “too woke” and heavy taxation on oil and gas production, as well as trying to upgrade an electricity grid has made UK and Europe uncompetitive. Data from one my favourite publications, the Energy Institute Statistical Review of World Energy 75th edition provides compelling evidence. North American natural gas production has surged, while European gas production has collapsed.But as I read through the rest of the publication, I was struck by how much it made the US policy of increasing fossil fuel production looks like a short term win, but long term loss. This review starts strong by highlighting how renewable energy became the biggest source of new energy in 2025 - the first time outside of a recession. Now you may have, like President Trump, a natural born hatred of renewable energy. But last year it proved it can add capacity at a fast enough rate to not slow GDP growth.And I find it stunning that Pakistan gets 20% of its energy from solar panels. This does hold out the possibility of decarbonised future. If developing markets can adopt renewable energy early, then the outlook for fossil fuels looks negative to me. For places like Pakistan, building out a decentralised system seems like a good option. We can see that the relationship between GDP and fossil fuel supply is already breaking. This is probably the most negative chart you could possible produce on fossil fuel in my view.China, where EV usage is higher, is already slowing oil consumption at a much lower per capita level. This is almost a reverse of the emerging market investing model. When I started, it was assumed emerging markets would converge on western consumption levels. Not it looks like Western consumption levels will converge to Chinese levels. Potentially you could see western demand for road fuel drop by half.The world is moving towards an electrified future, with renewables meeting much of the demand growth.It follows it up with this very arresting graph of US exceptionalism. When I look at this, I start to see a potential problem for the US. A decarbonised world does seem inevitable to me - despite the protestations of corporates and older voters. Eventually the Greta Thumbergs of the world will be politicians and not activists. North America is alone in making its energy supply more carbon intensive.Here is where the politics gets interesting. European carbon prices have remained at a high level for a few years already. Which comes back to the original argument that European electricity costs too much. But does it really cost too much, when it incentivising the growth of renewable energy and true energy independence? Does it make sense to switch reliance on Russian energy exports to US energy exports?Which is a much higher level than markets elsewhere. California Carbon Allowance is one third of European levels.But this has had the effect of leading to a much more thoroughly decarbonised electricity generation system than either the US or China. Europe is much closer to fossil fuel independence than either China or the US.In this pro-labour world we live in, with tariffs and industrial policy. It would be very easy to see Europe seeing US renewable energy policy as “carbon dumping”, or race to the bottom deregulation. Why not tariff US exports to price the externality of the carbon heavy energy production? What I am saying is that the data already shows that fossil fuel consumption has already broken away from GDP growth, something that markets have already shown when Russia turned off the energy supply in 2022, and again this year with the closing of the Straits of Hormuz. In fact, sometime the best way to think about US foreign policy changes, is going from a free trade era to ensure maximum oil supply, to a competitive era, where it is looking to reduce competition for its exports. But long term, do you want to be investing in an industry that looks to be heading for decline? North America already lags badly behind China and Europe in Wind capacity.Likewise in solar capacity.For the first time, I wonder if we could see US LNG exports actually decline at some point? While the Straits of Hormuz are closed, this should be fine. But in my mind, the pieces for globally falling fossil fuel consumption are coming together.I do wonder if US shale producers see this same world as me. Permian drillers have been running down their stock of wells now for a few years. Even with the supply disruptions in Russia and the Middle East.If there is one thing I have learnt in my life, is not to bet against technological change. And it is hard to not see technology making fossil fuel yesterdays energy. The interesting part for me, is that we are already beginning to see signs of the benefits of European investment into renewables. Negative pricing is becoming more common.And this negative pricing in driving a build out in battery storage.Putting it all together, it looks more and more like fossil fuels are a dead industry. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

From a peak in June, SK Hynix, a DRAM and NAND manufacturer has seen its share price fall 37%. Given the huge run up over the last year, this still leaves it well above its 100MDA.Generally speaking, SK Hynix follows the DRAM price. So it is odd that it has been weak as DRAM prices have hit new highs.You could perhaps argue that we have hit the end of the AI trade - and capex is going to be cut, as we saw all the way back in 2000. This is of course possible, but the JGB market gave a pretty good heads up that we were heading to a deflationary environment back in 2000. These days it keeps sending an inflationary signalMuch more likely is the announcement that SK Hynix will double capex to help reduce memory short fall has been the negative priced into markets.The market does not like capex. An increase in capex makes it more likely it becomes cashflow negative in the future. This is both as natural consequence of spending more, and the second order effect of increasing supply leading to lower prices.A similar logic has been holding back the hyperscalers, who have been lagging the market for a year now.Even more intriguing has been the break out in that decidedly non-capex spending company, Apple. Apple, has not raised capex in years, despite surging cashflow.This is where this market gets very interesting to me. You have Warren Buffett style capital discipline in Apple, up against Elon Musk style capex heavy investing. Both have become rich with very different investing styles. Steve Jobs probably would have Apple investing as well, as he would no doubt fear that Apple could become obsolete, while the money managers are happy to see capital returned. And this I think goes to the heart of the problem for the markets. Not investing keeps cashflow high, but exposes you to competitors, something that is being priced into other software companies. My view, which remains unchanged, is that with SpaceX entering the AI race, everyone has to invest. If you see capex spend as negative - then being bearish is correct. But if you bearish think that capex is going to suddenly stop, and prices are going to collapse, then I think that is far less likely. And this seems to be what sovereign bonds are saying too. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

I have been thinking about markets in a political way for a few years. I have this theory that we were moving to a “pro-labour” era, which would be good for wages, but higher interest rates would be bad for asset markets. In some ways we have seen this, with market doing very well while 2 year yields were falling, and now we are getting all sorts of market weirdness now that 2 year yields are rising.What has been most interesting is that rising yields HAVE been hugely negative for SPECULATIVE assets. Silver, which does have central bank supporting it, has gotten smacked this year, down 55% from its peak.Crypto has been given the same treatment - with Ethereum at 2020 prices.I have mentioned private credit and private equity have also been at the mercy of this speculative asset smackdown. But the trillion dollar question is whether AI is a speculative asset or not? Lets take a closer look at Korea. The Kospi, which has broken out of a long term ranges, has become a memory/AI trade.But weirdly, the Kosdaq, another speculative Korean index has been very poor this year. What I am trying to say here is that generally speaking Korean stocks have been difficult, but the memory/AI plays have been good.Now here is the rub. I think many people think AI is entirely speculative. I think this is not correct. But I do think speculative structures have been erected around AI trades. Why is AI not speculative? Well memory prices have moved, and remain at highs.If the AI boom is done, then why does TSMC remain at all time highs?If you are bearish, then you could point at Korean memory stocks or Micron, and say, look these stocks are down 30% - its the beginning of the end.But the thing is, the memory stocks sit at the intersection of AI and speculative trading. When I look at MUU - the 2x levered Micron ETF - and see shares outstanding up 8 times from a year ago (market cap USD 4bn), I see speculation has run wild.What I am saying is that it is right to be bearish on speculation, but I am not sure it is right to be bearish on AI. I am also going to follow that up with a view that perhaps we are near the end of the “speculation” bear trade. As pointed out, memory prices and TSMC local shares remain strong. But demand for TSMC ADRS (the US listed stock) has historically been so strong, it has traded at a premium to locals for many years. As of today, the premium has fallen to 6%, down form 25% not so long ago.Typically the collapse in premium happens at lows. That is speculative unwind may have run its course.VKOSPI, which is VIX for the Kospi200, is running at about 80. This is a level I normally associate with a washout in markets, and potential buying opportunity.So what am I try to say? The pro-labour trade should be good for growth, but higher yields should be and has been bad for speculative assets. From where I sit, AI trade does not look speculative, but the market has built up a range of “speculative” assets around AI. For my money, I think the chat about AI crash or not is missing the bigger picture. If short term rates are bad for speculative assets, their remains one speculative asset that really moves markets - the US 30 year treasury. Very quietly, yields have passed through 5% again.As my substack colleagues over at Grizzle Research and Quant point out, the US government really does not have any money anymore. Everything that comes in the door goes out in interest payments and entitlements.I do think it is right to be bearish speculative assets here - but I am not sure AI is speculative. On the contrary, the “safe asset” that underpins all finance looks to be more problematic to me. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comMemory stocks, namely Micron, SK Hynix, Samsung and Sandisk have been wild of late. These stocks have been whipsawed by the increasing use of leveraged ETFs, and the capital raisings from SK Hynix and (potentially) Samsung. A good example would be KORU US, which is a 3 times leveraged South Korean bullish ETF. South Korean markets is dominated by SK Hynix and Samsung. KORU US has been volatile.The volatility of KORU US does not match up with the still soaring DRAM prices.Same can be said of leverage Micron ETF - MUU US.The presence of such leverage makes the memory stocks tough holds here. Wafer stocks on the other hand still seem to lack the leverage ETF presence.

Below is a note from 2013 - In Italics, with added thoughts afterGold buying as a leading indicator of financial distressI wrote a note on gold late last year, pointing out that the gold price and the Indian rupee seemed to be correlated to me. With that view I suspected that if the Indian rupee fell, gold would then also fall. However market action has been the reverse, with gold falling before the Indian rupee fell, and the fall in gold was greeted with a record surge in gold buying in India. These Indian gold buyers have been rewarded with gold once again moving to new all time highs in rupee terms as India has entered a period of currency and possible financial crisis.This led me to thinking about whether it was common to see elevated gold buying prior to financial crises. Certainly, the most motivated buyers of gold will be those depositors who take a view that their banks could go bust, either through their own reckless behaviour or government’s reckless behaviour. I went to the World Gold Council website (www.gold.org) to collect data on consumer (not official) buying of gold. Alas there was no single spreadsheet which I could consult, so the data had to be complied from a number of news releases. Below I present gold buying over time with what I believe is the best visual representation of financial distress in each market.ThailandWe can see an increase in Thai gold buying before its major devaluation 1997.IndonesiaLikewise Indonesian gold buying spiked and peaked before its currency devaluation.JapanJapan has never faced a meaningful currency crisis, but an ongoing financial crisis. Japanese gold buying peaked as Japanese banks started to underperform the markets. That is Japanese investors perceived the weakness of their own financial system and started buying gold.USAMuch like Japan US gold buying seems to peak at the same time as banks peaked versus the market, and seem to reflect depositor’s views on US banks that they were undertaking reckless lending behaviour.ConclusionWe have recently seen big increases in gold buying by emerging market countries with the World Gold Council reporting a 71% increase in Indian buying, Chinese buying was up by 87%, Turkish buying was up by 73% and Russian buying up by 184% in volume terms in the second quarter of this year. For gold bulls they take this as a sign of ever increasing emerging market demand for gold potential driving gold prices higher. For me I take it as a sign of domestic emerging market investors voting with their feet against their own currencies and financial systems. Investors should be aware of the rising financial risks in emerging markets.In a recent note, I showed how Chinese consumers had gone all in on gold.And since this buying orgy, GLD/TLT has fallen back below its 200MDA. Looking at this note from 2013 (which I reposted because the data is chore to find, and putting on Substack means I will be access it for ever), the implication would be that China is about to enter a financial crisis of some sort. China devaluing would be very negative for GLD/TLT - so it stuck me as a good note to repost. All the crises above were in part property/financial crisis. China has already seen a slow down in construction.And the Asian High Yield Market was very poor in 2022, mainly driven by Chinese debt problems.The HSCEI Index has been very poor since 2007, reflecting these problems.But the Chinese Yuan has been strong this year in contrast to Japanese Yen or Korean Won. Could Chinese buying be signalling a potential devaluation?Here is where I reflect on how much the world has changed from when I first wrote this gold note. Back then I would be convinced that Chinese gold buying was a sign of trouble. But now, in the modern world we live in, I think it reflects the political world we live in. In the 1990s and 2000s, central banks were sellers of gold, and the lack of tariffs and industrial policy make devaluation a popular policy choice. But today, what would a Chinese devaluation solve? Nothing, as almost certainly tariffs would follow. And with trust in the US ebbing, central bank act at buyers of last resort for gold - just as they used to do with treasuries. A changed world indeed. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

Peak Oil PriceFrom $10 per barrel in 1999, crude oil has been in bull market with the brief exception of the financial crisis in 2008/9. So much so, that the recent rise in Brent oil to $119 per barrel barely generates a mention in the financial press. However, the reality is that the current spend on energy is similar to the level of spending seen during the second oil shock in the late 70s (see chart below). At that time, in a decade, oil went from $2 per barrel in 1970 to $35 in 1980 before falling gradually back to $10 over the next twenty years.To try and adjust for the emergence of China, I have looked at its energy spend as percentage of GDP and then compared it to both Japan and South Korea. As can be seen in the chart below, China is currently tremendously inefficient in its usage of energy. Japan has always been far more efficient in its use of energy to produce GDP than either of its neighbours. While China has spent more energy as percentage of GDP, this was in the 1970s when the Chinese economy was imploding.Of course one of the big differences is that China has huge domestic resources of coal which allows it to be inefficient with its energy. However, even then it still compares badly with the US. Recent US numbers are also overstated as I use the Brent price rather than WTI, and ignore lower cost of natural gas in the US.China already consumes more energy that the US, even though its GDP is half that of the US. I like to look at energy usage in terms of per capita and also in terms of how much energy is needed to produce a dollar of GDP. As seen below, China is around half the per capita level of Japan, UK and Germany. Given that Chinese energy consumption has more than doubled over the last ten years, this implies a slowdown in consumption growth going forward in my mind. Or in other terms, the base level of consumption has increased so much that the Chinese growth rate must begin to slow. Regarding GDP produced per unit of energy, China is around 25% less efficient as Germany, UK, and Japan, and half as efficient as the US. Again, efficiency gains should reduce the growth rate of Chinese energy consumption going forward.One of the reasons I scrutinise Chinese energy demand, is that oil demand has become increasingly dependent on China. If you look at the chart below, you can see that in the five years to 2007, oil demand grew in most regions. However, since 2007 China has continued to grow while the US, Europe and developed Asia have reduced consumption. Furthermore, other areas that are growing demand for oil also tend to be oil exporters, hence their demand for oil tends to move with the oil price rather than increase at lower oil prices. Hence the drivers for oil are becoming increasingly narrow.While demand growth is increasingly reliant on Chinese demand, supply is also beginning to respond to higher prices. As can be seen below US oil production is surging.We are seeing signs that increasing oil production and slower demand growth from the western world is starting to cause spare capacity at OPEC producing nations to rise. Historically this has occasionally preceded a fall in the oil price.What is also surprising about the oil market is that speculative investors no longer seem willing to bet on lower oil prices. In the late 90s speculative investors were often willing to take a net short position in the oil market – but particularly since 2007 the market seems to have become structurally long. This may reflect the rise of passive investors in the commodity market via ETFs, or possibly the effect of zero interest rates making speculation cost free. I suspect a combination of these two reasons explains the long bias of investors in oil.The sustained rise in oil prices has also led to a huge surge in government spending in oil producing nations, with Russia in particular needing $100 per barrel to balance its budgets. Some analysts take this to imply that oil now has a floor at 100 USD a barrel. I think this is unlikely. Far more likely is that if and when oil prices begin to fall, either through slower Chinese growth or higher interest rates, we are likely to see large currency devaluations from oil producing nations in order to balance their budgets. The most recent example of this is Venezuela, which just devalued by 47% in a single day. When I see record inflows in to emerging market bonds funds, which in my view, are the most exposed assets to this type of devaluation, I feel compelled to be short areas that I believe will fall in value when the oil price begins to fall. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

For various reasons I have been having discussions about gates. A gate for an investment fund is pretty common these days - as it seen as a way to protect investors from themselves. It is so common that is just usually added into many investment fund articles. Personally, I hate gates. I have on occasions had opportunities to impose gates, and have turned them down. When I took over the management of the Horseman Global fund, we had redemptions of well over 80% of assets - but chose not to gate. The only time I can think a gate might make sense maybe in time of total crisis, like GFC or Covid, when there is no liquidity anywhere - but even then your investors will likely have other concerns so a gate makes little sense. But gates tend to be standard parts of most funds these days - but my advice is for most fund managers to be extremely cautious in using them.In the midst of the on/off war in Iran, and an epic AI boom, and all sorts of other shenanigans, you may have forgotten that private credit funds have been gating their clients.And this gating has been why the Invesco Listed Private Equity ETF (PSP US) (many private equity firms do private credit as well) has been poor on both an absolute and relative basis.For me, once you gate a fund, it pretty much a dead product. Fund management is a trust game - and if people want their money back you should give it to them. And once you gate, you create terrible incentives for other investors. Gating means or implies you have a bunch of assets that cannot be priced or sold. And for investors who have not asked to redeem, they start asking themselves some difficult questions. Will the fund manager have to sell the liquid positions to meet redemptions, leaving the fund only with illiquid assets? The answer is almost certainly yes in my experience. And does anyone want to then invest into this fund, with only illiquid assets that cannot be priced? Not really. Cliffwater is a good example of this phenomenon.And with more money going out that coming in - you would wonder if that NAV is correct.Cliffwater has capped redemption at 5% of assets, despite have 17% redemptions. Following the logic laid out above, this looks to be a dead product. Who would put money in this now? The one thing I find very odd about this is that Cliffwater is getting into trouble when high yield spreads are at all time lows.For reference - Blackstone listed in 2007, just before credit spreads blew out - and fell 90%.One wonders what private credit would actually do in a recession?!?Anyway, the point of this notes are gates are bad, and there is almost never a good reason to use one, and using one will likely make a bad situation worse. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

I was cleaning up some files from my laptop, and I found a stash of my oldest research I first published back in the early 2010, when I was trying to convince everyone China was going wrong (tough sell back then). I am just going to put it here for posterity, so I can easily reference going forward. Enjoy. Three notes, first is on iron ore, second on mining, and third on Brazil - all from 2011 and 2012.A follow up note on mining.And a note on a potential Brazilian debt crisis.And in conclusion, yes, I have always been this boring. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

If you wanted to get bearish on the whole AI trade - then you could look at Meta, Microsoft and Oracle share prices and say that the market is taking a dim view of AI. All have been lacklustre recently.There is no mystery to their share price weakness. All are investing heavily in data centres, and so free cash flow after capex is falling. Microsoft it a good example.All of the above is factual. Share price has been weak as investment has grown. What does it mean - well that is where the analysis comes in. There are various options. The first I would call the traditional Wall Street MBA version - “Maximum Bullish Always” which would centre around exploding demand, and capex is needed to keep up with demand, and would see current share price weakness as a buying opportunity.The second style of analysis is also MBA, but a macro/short seller interpretation so “Maximum Bearish Always”. In this analysis, the weakness is hyperscalers is direct analogy to the dot com bubble, where the internet stocks weakened first. The analogy here is internet stocks like Amazon topped out late 1999, and then hardware stocks like Cisco followed with a lag, as the internet stocks cut spending. In this analogy, now is the time to be shorting memory stocks, as hyperscalers have topped out.For me, both these analyses seem wrong to me. What I see is that AI is booming, but it is also a threat to existing tech companies. Probably the biggest threat comes from SpaceX. Elon Musk has been a disruptive entrant in payments (PayPal), autos (Tesla), rocket launch (SpaceX) and telecommunications (Starlink). If I saw Elon entering my industry, I would also become super defensive as well. In this case, I would be trying to push up the cost of entry AND secure infrastructure to try and keep xAI from becoming a serious competitor. Unfortunately for the existing players, SpaceX was able to list, and Elon will about to keep investing. As a reminder, Tesla invested far more than cashflow and was the biggest short in the market for years before finally taking off.So Russell’s non MBA read of the AI market is that hyperscaler’s shares are weak not because AI is a failure, but because a powerful new player has entered the industry. I admit the rise of leveraged semi ETFs, like MUU make memory stocks volatile - its hard for me to get too bearish when TSMC is near all time highs.Or when Taiwan listed wafer company, Global Wafers is at at all time highs.If Microsoft, or Meta or Oracle were suddenly to cut capex - yes that would be bearish for semiconductors, but it would probably be even more bearish for these hyperscalers. It would be boosting short term cashflow at the expense of long term market share. What I think is very telling was that in the dot com boom, credit spreads starting rising in 1998, but the dot com bubble did not burst until 1999/2000. Currently credit spreads are at all time tights - which suggests the cash will keep on flowing to drive the AI trade.If you want to be bearish, legacy hyperscalers are probably the best bet - not AI infrastructure. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

In my first stint as a macro hedge fund manager, I used to obsess over capital flows into and out of Japan. When the capital was flowing out - you wanted to buy, and went it was flowing back, you wanted to sell. I now realise I was studying the symptoms of a pro-capital world, but having only lived in a pro-capital world, how would I know any different? But now we live in a pro-labour world, and symptoms have changed. Capital is no longer getting build, up but being run down.I think the easiest way to understand it is that in a pro-capital world, we were creating huge pools of capital, and Japan was creating the largest pools. In fact, Japanese pools of capital were so large, the BOJ and the government had to go out of their way to force capital out of Japan. Hence, NIRP, QE and YCC were all invented in Japan.One feature of this was that whenever US 10 yields fell, the spread to JGBs would fall, and the Yen would rally. This was a feature of markets from 1994 to maybe 2020. But since then, the spread between JGBs and treasuries have collapsed, but Yen continues to weaken (see my posts on “long Yen as new Widowmaker”)If we break out the spread line above in to its components, then what we have is the yield on the Japanese 10 year rising rapidly. While Japanese yields are rising, the US 10 year has been stuck in a range since 2023 now. This seems a bit odd, as Japanese have far more savings than the US. It feels like higher Japanese yields should drive higher US yields. But over the last two years, nothing.If you believe in my pro-labour theory, what the market is saying is that inflation, and the rise of populist politics is causing investors to reduce idle cash balances to a minimum. Another big change is that governments do not buy treasuries as foreign reserves, but buy gold instead. Corporates do not hoard cash, but spend it. And so capital is getting scarce. For Japan, I think we are getting ready for the other shoe to fall. And that is, Japan needs to start selling treasuries if it wants the currency to appreciate. Japan holds the majority of its foreign reserves as US treasuries. It is the largest holder at USD 1.2 trillion.If you wanted just one graph to explain the new world order, the BOJ foreign intervention graph is a pretty good one. They used to have to sell Yen and buy USD. Now they need to sell USD and buy Yen.The Ministry of Finance has a similar graph, although not loaded on Bloomberg. In 1998, during the Asian Financial crisis, Yen was weak against the USD, but very strong against other Asian currencies - which is why we see some Yen buying then. But the flip from USD buying to Yen buying in recent years is extreme.So the shift from a pro-capital to a pro-labour world is leading Japan to sell foreign assets. It is also leading to rising interest rates in Japan. You could argue that Japan now runs an overall trade deficit, and so this is why we are seeing a changing dynamic. The problem with that view, is that Korea, a country that has similar economy to Japan has record trade balance.This record trade surplus has not seen the Korean Won appreciate. In fact is has a record weak exchange rate. What is bad about this for US treasuries was that when Korean Won or Japanese Yen used to appreciate from having a trade surplus, they became buyers of treasuries. Now that currencies do not follow trade flows, there is no natural buying of treasuries.For me, everything seems to be working in reverse, which means that the next economic surprise should be higher yields - the opposite of what happened in the 1990s and 2000s. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

Before the Nasdaq - there was the Nikkei. I was lucky enough to first live in Japan in 1991 as a high school exchange student. If you had told me at the time, that Japan was heading for 30 years of relative decline, I would have not believed you. But that has been the case. MSCI Japan versus MSCI World is a tale of neglect and decline.I have a great deal of respect for Japan and Japanese people. But the Japanese economic story since 1991 has constantly felt like one of missed opportunities. Japan led the mobile phone market in the early 1990s. In 1996 I got my first mobile phone in Japan was cheaper and better than the Nokia brick I bought in 2000, and yet, Nokia, Apple and Samsung dominated this market. Going back even further, the Japanese OWNED the semiconductor market in 1980s, generating more sales than the US. But since then, they have been in decline.For an old report, I made a very nice chart, showing the relative performance of Japanese sales compared to the US, pretty much tracks Nikkei underperformance. In a way, it links semiconductor sales to market dominance - something we are seeing again today.For a long time, I like many other people, blamed the Japanese for their monumental economic fumble. But in this new era we live in, my thoughts on Japan are changing. I am starting to think Japan committed a form of corporate harakiri, mainly to placate the USA. In 1986, Japan basically agreed to stop competing with US semiconductor companies.It was also around this time, Japan agreed a steep appreciation of the Yen in the Plaza accord.In many ways, it seems that Japan chose to accommodate the US by choosing to stop investing in Japan. Given the outcome of the last time Japan had confronted the US, this is entirely understandable political, if not economic, decision. But there are two things, I want you to take from this analysis. First off all, its was politics, not markets that bought Japan undone. And secondly, the political agreement of 1986, and the Yen appreciation of 1984 should have stopped the Japanese market stone dead, but the Nikkei did not top out until 1989, as Japan unleashed a credit bubble to offset its now obvious industrial problems. The reason I am talking about all this, is that I see a similar set up in the US. I know many people see the US “value creating” machine as unstoppable, and that is totally understandable if you look at just current business and economic trends, but when I look at political trends, the top looks in. I know I am going to regret writing this, as I will be inundated with email and charts showing how dominant the US in tech, market cap, and all other markets. But that is all backward looking. I will start with the easiest areas to see US topping, and move on from there. First of all, is the rejection of US treasuries as reserve assets. I continue to see the weaponization of treasuries as a huge own goal by the US. And this can be seen in the divergence of treasury yields from Swiss bond yields.Under the Trump administration, NATO allies can no longer take it for granted that the US will offer military security. This has led to allies greatly increasing military spend, which was a Trump administration aim. The huge long term downside for the US is that allies are now developing competing and often cheaper technologies. The DAPRA model that has served the US so well, is now being rolled out globally. In my view, stocks like Lockheed Martin reflect this long term deterioration in their outlook.Finally US policy on taxation, AI and other issues have revived industrial policy in the rest of the world. As mentioned in a recent post, the most ardent free trading nation in the world, the UK, will no longer allow its tech companies to be bought by the US. DeepMind would not be sold to Google today, and ARM would not be sold to Softbank. Politically, these changes are being made today, but it will take some time to feed through the system, just as it took time to feed through to Japanese asset markets. But they will come. For those with a sense of history, the rise of Socialism felt unstoppable post World War II, but slowly but surely the US and other free nations worked to undermine the USSR. The normalisation of relations between the US and China probably marked the beginning of the end, which started in 1970s, but took until the end of the 1980s to be fully realised. The rest of the world can see that reliance on the US is no longer a tenable political model, and are beginning down the road to sovereignty. If the political process has begun, when does the market recognise it? Maybe it has already. Japan seems to be outperforming US equities again, bond spreads are widening against Switzerland, and gold is still doing better than treasuries. The irony is that the US forced Japan into decline. The US seems to have chosen decline - but perhaps that is why US politics is so febrile. The liberal trade order than made the US so successful it no longer a vote winner, and so nationalism is the political driver of the day. But US nationalism drives nationalism elsewhere, and undercuts the system that has made the US the leading nation it is today. In my thirty years of adulthood, I have seen Japan top out, and now bottom out. I wonder if I will still be around for the bottom in the US. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comAs mentioned in a recent post, I have liked gold since 2022, because when Russian foreign reserves were frozen, I assumed most central banks would stop buying treasuries, and start buying gold. Data has confirmed this view as correct.If central bank buying was the only variable, then there would be no reason to be particularly bearish on gold. Looking at shares outstanding in GLD, the biggest gold ETF, retail did not seem that frenzied in their buying.Buy going through the data on the World Gold Council website - Chinese retail went bonkers for gold bars in Q1 this year. At 200 tonnes, Chinese retail alone bought more than all central banks in Q1.I also realised the Bloomberg measure of total gold ETF holdings did not include Chinese Gold ETFs. Given the above, I thought I should try and get a better idea of Chinese retail gold flows, both physical and ETFs if I was going to judge gold price risk accurately.

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comMarket moves in June could convince you of any and all of the following set ups:* Deflation is about to return, and market will implode* Inflation is here to stay, and market will keep surging* AI is a failure* AI is a winnerThat is markets have become a Rorschach diagram, and you can see whatever you want to see.

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comGold has been pretty weak this year since it peaked back in February. I liked gold ever since Russian foreign reserves were frozen. For me, this would drive other big nations to diversify away from treasuries, and for China this could only mean gold. I also took the view that gold would do poorly if US yields rose enough, so have been bearish on TLT. This trade did look overbought earlier this year, but has smashed through the 200MDA.The idea that central banks would buy more gold has been borne out by the data. And to be brutally honest, nothing has changed in the US to change this dynamic.People talk that Warsh has ended the dollar debasement trade, but the funny thing is there has been remarkably little dollar debasement to end. Gold tends to do well when Asian currencies are strong - something we have seen relatively little off. Asian currencies remain at low points, and look distinctly undervalued.A more valid concern was that retail investors were overly bullish and leveraged long. I could see that more clearly in silver than in gold. Silver does not have central bank buying behind it, and is a much more easily manipulated market. But I did worry that a top in silver tends to mark a top in gold as well.The problem was when I looked at gold ETF holdings, I did not really see any frenzy at all. Holding were still below levels seen in 2020.Plainly something did not add up. And over the weekend I had a think, and I think I have worked out what’s going on.

I get asked who in financial markets do I read? The answer is not many people. For some reason, people with not much to actually say will pad out their comments with all sort of superfluous gunk (quoting ancient Greek history or alluding to some esoteric science are classic signs of a time wasting financial writer). But if I do read someone, and they made me money, then I will keep reading their stuff. GS research has made me money, and Chris Woods out of Jefferies, have both made me money. As of the moment, they are on opposite sides of the AI trade - so I will lay out the bull and bear case for you.The AI boom is driven by a huge increase in Capex by the AI scalers. Bloomberg has provided an estimate of the spend.Basically we are in peak acceleration of AI spend, with 2026 seeing capex rise by USD344bn to a total of USD 833bn. But the forecasts still have capex rising to 2032.But GS are arguing that market may be too bearish, and capex grows even more in 2027.And essentially saying big capex booms have been larger in the past.AI is a transformative technology, so capex can be even larger than market expects. And that is the bull case.Chris Woods has come out with the bear case. He looks at OpenRouter data, which is a website that allows you to access multiple AI models. What Chris is saying is that Chinese AI models are now dominating US models.Or in essence, what “free markets” have always done, let the low cost producer take market share. And this has been highlighted by numerous people, that Chinese AI models are very cheap. The cheapness of Chinese AI is in part driven by the cut throat competition of Chinese tech companies. The Hang Seng Tech index bares no resemblance to the Nasdaq.The key point that Chris is making is that half of OpenRouters users are in the US, which implies that US customers are opting for Chinese AI models. Here are the most recent top 10 models.So Xiaomi, Tencent and minimax are all listed, and their shares are near cycle lows. And that is your bear case - cutthroat Chinese competition in AI will undercut the big US models.So now time for a wealth warning. I thought Chinese EV competition would hurt Tesla earnings. And it has, earning expectations for Tesla in 2026 have fallen from USD 7.50 a share in 2023 to less than USD 2.00 a share today.Collapsing earning expectations have had almost no effect on Tesla stock price.Politically, I understand this paradox. President Trump has based his electoral success around defending American businesses. Chinese AI might be cheaper, but how many big US businesses can realistically use Chinese AI? And it seems at odds with the revenue numbers we are hearing out of Anthropic. And here lies the problem - I respect GS, and they are bullish, and I respect Chris Woods, and he is bearish. What I will say, is that the amount of leverage being applied to the AI trade means you probably need the market to price in some of Chris Woods bearishness first. Or what I am saying you can be tactically bearish - but you would need some other signal to get really beerish on AI. You need one of the hyperscalers to quit - and cut capex. That might happen - but usually the market forces this by crushing share prices. Only Microsoft comes close to fitting that description.And my guess is that Microsoft is suffering from its software business looking exposed, rather than its Capex. If politics in the US has not changed - my guess is that Chinese AI will comes under more political pressure going forward. And perhaps that is why Chinese AI is trading so poorly. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

One thing I love about being a in the markets is you develop and idea, and then apply and you are almost immediately told if you are right or wrong (or too early or too late). GLD/TLT has been such a good trade, I am surprised its managed to be as weak as it has this year. Down 26% from the highs, and down 8% this year.This has indeed focused my mind. What could have changed in markets to drive such a move? I like GLD/TLT because it fits in with the political world that I see, and which continues to be nationalist, populist and inflationary. If anything the politics is getting more populist, not less so. But markets have not reacted to this. I look at 30 year Gilt yields, and with the elevation of Andy Burnham to Prime Minister in waiting, I would expect yields to spike higher. But actually they have fallen.My guess is that the markets have looked at Kevin Warsh, and decided that the US is going to run tight monetary policy, and this is going to be deflationary. So sell gold, buy TLT, and strong dollar. So here is EXACTLY where I differ from the markets. I don’t think central banks have any control over inflation, and never have. Central Bank independence coincided with an acceleration in globalisation - so they looked really good. Now central banks are trying to control inflation in an era of political populism. They are doomed to fail in my view - but it does excite me that Kevin Warsh is going to try and control inflation. This should drive the next leg higher in interest rates and yields in my view. While I worry about gold, I should mention I am happy with my bearish view on Private Equity. The Invesco Private Equity ETF is at new lows.So the real mispricing in markets is now the 30 year bond market, which has rallied because they think central banks will bring inflation under control. I just don’t see it, although I understand their logic. Where we are now is the reverse of the bull market in bonds from 1980 to 2020. Then, after every rally, bonds would sell off, and everyone would be waiting for them to keep selling off - but instead yields went lower. Now, I think people are worried that with a new Fed, long bonds may rally again, but politics tells me they go higher. GLD is acting as it should, but I think TLT is going to trap some bulls. The next big move in 30 Year Yields should be higher.Finally, in my last note, I used the CRB Food Index to say food inflation was not an issue. A very sharp subscriber pointed out this was discontinued in March. My bad, but when I had looked at other food indicators, they said the same. Urea prices are back at lows.And wheat prices are subdued.I still come back to the same conclusion. Either politics pushes up inflation despite the efforts of the Fed, or the inflation will undershoot in the short term, and Fed will seem more dovish sooner rather than later. That is, no need to chase recent move in markets. If you still like gold - you can hedge that position with a good short book potentially - but there are not many good short sellers left out there. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

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. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

Since a peak earlier this year, GLD/TLT has entered a bear market, down nearly 23% from the peak.At the time I expressed my surprise at this move, as it coincided with a steep rise in the oil price - which I would see as gold bullish and bond bearish. We have also seen a period of pronounced dollar strength.What seems to be driving movements in GLD, TLT and DXY is short term interest rate expectations in the US. The spike in the oil price has coincided with a rise in 2 year US treasury yields, as tighter Federal Reserve policy has been priced in.The question now then, is do I expect the Federal Reserve to get even more hawkish? Probably not. PPI, which tends to be more volatile than CPI, has tended to be better at predicting Federal Reserve dovishness or hawkishness. Almost all bear markets are preceded by a spike in PPI, and falls in PPI mark dovish turns. Currently, we are at 9.1% YoY - one of the higher numbers seen.You do not have to be a genius to understand that PPI tends to move with the oil price - which after spiking earlier this year, is now turning lower.As a sense check, I also look at CRB Food Stuff Index, and this remains with in the recent range.What I think is likely is that softer inflation numbers will start coming in, and President Trump, who has seen his popularity fall with War In Iran, will get impatient with either a strong dollar or high interest rates or both, and this should reignite the weak dollar trade. I particularly like this because of three other reasons. Firstly, the Renminbi remains at strong levels. If it was weakening, I would worry about gold and short TLT.Secondly, strong dollar trades, as seen with weak Yen positioning is back at near peak levels.Open interest in gold has collapsed to lowest levels in at least 10 years.But to be clear, this is a political bet first. And that bet is that President Trump starts putting pressure on the Fed and his trade partners for a weaker dollar and lower interest rates. The economics and positioning are supportive - but it is a bet that with lower oil prices, weaker inflation prints will encourage President Trump to return to this theme. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.russell-clark.com/subscribe

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comThe use of levered ETFs has grown substantially over the years. This year has seen record notional volumes.200 stocks have their own levered or inverse stock ETF now.It should be unsurprising that long leveraged ETFs dominate.

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comThere are an increasing number of divergences in markets, which typically signal caution. Furthermore, there are signs of increasing amount of leverage in the both bond and equity markets.