Capital Flows and Asset Markets

Hosted by Russell Clark

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Jun 2026

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June 15, 20269 min

THE ECONOMIST, CLEARINGHOUSES AND GLD/TLT

With the bull market and now bear market in gold, I had lost sight (temporarily) of what I am trying to do with GLD/TLT. My thoughts for the last few weeks were all on why was gold so weak. And this is fair enough. But the real issue is why has TLT not been weaker? My thoughts on TLT were reignited when I was reading a Special Report on the treasury market in the Economist. Generally speaking a good report - but one paragraph really exercised me. The writer foolishly believes that central clearing will improve liquidity for treasuries.I have written a letter to the Economist, explaining why this is wrong, which is below, but I doubt it gets published.I have been intrigued by clearinghouses for years now, ever since I read about a Nordic power market central clearinghouse going bankrupt back in 2018. It took some digging to work out what went on, but to cut a long story short - clearinghouse have no ability to price risk, and no incentive to do so. So they basically assume tomorrow will look like today, which creates huge momentum trades. The better something is doing, the more leverage they will supply. And in essence, what happened in Nordic power in 2018, is getting primed to happen in treasuries.You may well say, how can you be sure the treasury market will blow up? Well the good news is we had a dry run in the gilt market already. When Liz Truss shocked the gilt market, it caused UK gilts to diverge radically from other bond markets for a good month or so.And we almost realised a Treasury blow up during the liberation day tariff sell off in 2025.So how do clearinghouses cause illiquidity in gilts and treasuries? Well clearinghouse are owned by profit maximising corporates, and so have a naturally tendency to try and maximise volumes. If you look at the middle chart below, you can see that banks used to be borrowers from repo markets, but are now lenders. This chart is 7 years old, but as we have seen above, hedge fund borrowing would have only increased.Why does this create illiquidity? Well hedge funds buy physical treasuries and then sell futures against them. There is a small arbitrage profit - but with leverage it can be substantial. Pre GFC - you could not use clearinghouses to do this trade, as the cost of initial margin would make this prohibitively expensive. The only way to do it would be to borrow from banks - which is what LTCM did. LTCM was very secretive about how much it had borrowed to do this trade - but once the banks found out the size of the borrowing, they cut lending, positioned themselves the other way, and scalped LTCM.Theoretically, with central clearing, this should not be possible. All trades are done with the central clearinghouse and require initial margin. However, this ignores another change in regulations - compression. Essentially, clearinghouses will look at your trades, and if they think they are similar enough, will allow you to compress the trades, and return initial margin to you. LCH (the main fixed income clearinghouse) used to boast of the amount of compression it did a year. The last number I have is USD 800 trillion in 2019. Treasury cash futures basis trade should qualify for compression.In my view, compression trades make clearinghouses as dangerous as banks pre GFC. It removes the excess margin which kept them safe in 2008, and has a nasty side effect of making the market bifurcated - that is in this case, hedge funds on one side, and banks on the other. The banks know all about this - and have been urging reform - but on deaf ears.Anyway, given the size of the basis trade market, and the relative unattractiveness of US 30 year treasuries, the market looked primed for a big move.If you read this far, then I can tell you what I think will happen, and why I like short TLT so much. At some point, there will be a shock - tariff increase, big increase in fiscal deficit, something. And Treasuries will fall. The clearinghouse will raise margins, and both lenders and borrowers in the repo market will have pay more initial margin. That is BOTH sides of the market will have to put up cash, meaning that BOTH sides of the market suddenly do not have cash, and the market become illiquid, leading to further falls in treasuries. The treasury market will become very illiquid, and traders will be looking for other ways to hedge their position. TLT being and ETF - can provide liquidity - and I see it trading to a big discount to NAV, as all the hedge fund will need to reduce their physical holdings of treasuries. Of course the Fed will be motivated to act, although Kevin Warsh and Scott Bessent have indicated a tendency to want the Fed to do less - there is a chance they let this play out. That is I expect the treasury market to totally freeze up, and TLT will act as grey market for US 30 year treasuries - which will be much lower than it is today. I would also expect US assets to do poorly in this situation. Why is weak gold good for this trade? I owned gold as a hedge against the Federal Reserve not allowing the market to clear properly. If gold is falling because the Fed is reducing liquidity - then the risk of a treasury blow up should be rising substantially. 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

June 11, 20269 min

PASSIVE AND GOLD

I think gold still looks interesting - mainly because Donald Trump is still President. This makes owning treasuries seem unattractive, AND makes it likely he will pressure the Fed. That being said, it is some 25% down from it peak, and squarely in bear market territory.These days people typically talk about passive investing distorting the market - see Michael Green’s work. Personally, I have found market tends to find a way to make money from distortions. If we look at ETF flows into gold, if it was truly distorting, gold should still be at highs!That being said, there are two style of “passive” investing that I do think distort the market - factor investing and CTAs. Both these styles are dominated by “robots”, who tend not to really think about what they are doing, but follow “rules”. The rules tend to be pretty self explanatory - and you see them in many big funds like Bridgewater was well. We will just look at gold and factor investing for the time being. Factor investors tend to love gold when the US dollar is weak. So I was bearish gold in 2012, and been bullish since 2022 - in part because this “factor” looked to be turning at both these points. Gold this year peaked at the same time time dollar hit its low.Gold also tends to do well when US rates are falling - but for me this is much more a secondary consideration. If the US is raising rates, but the US dollar is still falling, expect gold to do very well. That being said, gold also peaked when US 2 year yields were at their lows.There are lots of different assets and different factors, but for gold these are the key. What I can tell you is that factor based investors robots just move money in and out of assets based on these factors. I am 99% certain factor investors were buying gold in 2025 and early 2026, and now they have become sellers. And should dollar weaken, they will likely become buyers again.Even dumber investors robots are CTAs. Who are basically momentum investors. If you ask a CTA they will tell you they are not a momentum investor, but they are. They will probably claim they have “better stops” than anyone else, but this plainly b******t. CTAs love buying assets going up, and selling assets going down. Typically they use moving averages to determine buying and selling. My guess they went very long gold in early 2024, and are now fully out of gold as of today, and possibly even short selling.What happens in markets these days - in my view anyway - is that some factor changes (interest rate cut, oil price surges etc) and the factor investors duly move money around. This causes the CTAs to start buying this new trend, and can push as asset like gold up a long way. But then factors change, and the process goes into reverse. As mentioned above, I like gold, mainly because President Trump is still President. What are the chances that he begins to complain about a strong dollar, or interest rates being too high, between now and the end of his term? 90% seems reasonable. Where is market positioning on a weak dollar? Pretty close to max short on Yen.And also pretty bearish on the Swiss Franc.Not so bearish on Euro, but still below recent highs.The funniest thing about all of this, is that even though I am looking at Euro, Yen and Swiss franc - there is one currency above all that should be linked to the price of gold - and that is the Chinese Yuan. For me a strong Yuan tends to imply a strong gold price. Chinese Yuan has been conspicuously strong.I find it really hard to be negative on passive ETFs that buy and hold indices - its an efficient way to hold an asset that is designed to go up over the long term (sorry Michael). But I do find it easy to be negative on passive “rules based” investors like factoring investing and CTAs. They are always doing dumb stuff. Basically they seems to have said, “oh dollar has rallied against Yen - sell gold”. When I see Chinese Yuan is still strengthening against the US dollar and has USD 1 trillion trade balance to deploy, and President Trump is still President, I struggle to get bearish gold. CTAs and factor investors are probably short and out of gold, and short Yen and Swiss Franc. Yep - makes no sense to me either - but this has always been the problem with investing using historical data - you are fighting the last war, not this one. 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

June 10, 202613 min

IS THERE A PROBLEM WITH GOLD?

I have like gold as part of GLD/TLT trade for a long time, and it has been a great trade - but last few months it has been very lacklustre. It has traded right back and now through its 200MDA, which might mean its time to add, or its breaking down. What follows is a stream of consciousness analysis…..The truth of the matter is that all the price action has been in the gold part of the trade. I think the market got VERY excited about gold when it started to outperform S&P 500. This meant you could be BEARISH (owning gold), and outperform the S&P 500. Sadly, this trade, GLD/SPX, has smashed through the 200MDA to the downside, and as of today has created what “technical analysts” call a dark cross. That is the market is saying you should sell gold to buy SPX.What’s the problem with gold? In the last few months, and contrary to market expectations earlier this year, markets have started to price in the Federal Reserve ACTUALLY doing its job.Gold has been far more sensitive to central banks tightening than the long end of the bond market or equities.Equities have not being bothered by rising bond yields at all. That is financial assets have been very resistant to rising yields.I guess another way to put even when bonds have a higher yields, investors still prefer equities.So the problem with gold, is that it has reacted EXACTLY as you would expect to higher bond yields, but equities and long dated bonds (or financial assets) have not. To be fair, some financial assets such at Bitcoin and Private Equity have been weak, but broader indices have been fine.While I had a good fundamental reason for buying gold - mainly on central banks getting out of treasuries - I did worry about speculative excess. There was only limited signs of excess in gold. Back in 2012, we had seen ETF holdings of gold rise from 20m troy ounces to 80m, and in the 2016 run up it went from 50m ounces to 111m ounces. Both marked tops. So far we have seen a run up from 80m to 98m troy ounces. This was not screaming speculative excess to me.On the other hand, silver did take on a speculative nature in late 2025 and early 2026.Looking at flows into a silver mining ETF (SIL US), it definitely became excessive - but has seen some meaningful outflows recentlyUnlike most people, I have been bullish and bearish on gold in different parts of my career (my experience is that people choose to be either bullish or bearish gold, and then never change their views). Back in 2012, I was bearish on gold, as I saw Indian Rupee weakness and broad based US dollar strength being bad for gold. Indian are big buyers of gold. However in this market, gold has moved independently of the Indian Rupee.I had assumed that the most recent bull market in gold has been driven by central bank buying out of China and Eastern Europe. I have no reason to believe that this buying has ended. China still has an annual USD 1 trillion trade surplus that needs to be deployed somewhere, and it is not going to be US treasuries. And here we get to the crux of the problem. Do I believe that the US is about to undergo fiscal austerity? No. Do I think that Donald Trump won’t try and influence monetary policy again? No. These are bullish for gold.The real problem is whether I think AI trades makes a better hedge than gold on monetary craziness? Now we get to the crux of the problem. In the 1970s, oil and gold was the best hedge on monetary craziness. Are semiconductors a better hedge these days? Is this was SPX/GLD already saying? If the 1970s was about cars and oil, maybe the 2020s are about compute and semiconductors? If we do Philadelphia Semiconductor Index (SOX) v gold chart, then we get a very interesting chart indeed.What I love about this chart is that it did pick up the when you should have flipped from gold to semis in 2012, and it does give exactly the mixed vibes on gold versus equities that existed for the last few years. And it does pick up the very toppy vibe in semis that exists today. But also suggests that the craziness might not yet be done. But the story seems clear - hyper competition is driving a capex frenzy, that will end in a bust. At that time, a US fiscal deficit of over 10% will likely drive a weaker dollar, higher gold and probably a weaker long end of the treasury market. Just not yet, or that is, the gold trade is still early. 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

June 9, 20268 min

AI AND THE RISING COST OF CAPITAL

When I first starting to think about the idea of a pro-labour theory of markets, I assumed the cost of capital would rise for political reasons. The long period of "pro-capital” policy had lead to the creation of large pools of capital. The first, and most exceptional in my view were foreign reserves. The idea of buying another countries fixed income was a completely foreign idea before 1980. All foreign reserves were gold, but from 1980, led by the Japanese, buying US treasuries became accepted as a “better” form of foreign reserves.It also happened that from 1980 to 2000 or 2015, owning treasuries was much better than owning gold, which reinforced the idea of owning bonds over gold. This has since reversed.I saw buying treasuries as foreign reserves as pro-capital policy, as much of the Japanese buying of foreign reserves was meant to keep the Yen weak - that is to keep labour costs low. Competitive devaluations is most clearly a “pro-capital” policy (devaluations reduce labour costs, and boost competitiveness - which favours the owners of capital). In the new pro-labour world, I envisaged governments endeavouring to keep their currencies strong, and hence foreign reserve growth should slow or reverse. Japan shows this trend, but official holdings of treasuries have been falling for a while now. Total official foreign holdings of treasuries has been weak.I also saw that rising interest rates should begin to kill interest in “alternative asset managers”. These businesses held huge amounts of “dry powder” - but it is hard to square this dry powder with redemptions that most of these businesses are now seeing. The performance of the Invesco Private Equity ETF confirms these problems. That is two big pools of capital - foreign reserves and private equity are already displaying signs of problems.I also assumed rising wage demands would start to effect the cash piles that had grown in American corporates, the third biggest pool of capital. Microsoft for example had seen cash and equivalents go from USD 25bn in 2007 to USD 140bn in 2021. This cash pile has now fallen to USD95bn or so.Google claims to have USD120bn of cash and equivalents, but are choosing to raise USD80bn in an equity raise. Obviously, around USD 100bn of cash equivalents seems to be the line in the sand for Google, and they are already spending everything they make on AI. But they want to spend another USD80bn, so raising equity is the obvious answer.So to my surprise, rather than wages rising, it has been the price of semiconductors that have been the driver of inflation, or perhaps more correctly, the biggest beneficiary of governments working to halt recessions. For many other firms I look at rising labour costs have drawn on capital reserves, but with big tech, is is spending on semiconductors that has reduced their pool of capital.And the AI boom has ended one of the enduring features of capitalism. Technology should make things cheaper. But technology itself is no longer becoming cheaper.From what I can see, the rising cost of capital continues to work its way through the system. It has already stunted the use of debt markets and private equity. It has reduced the size of foreign reserves, and also seen central banks try and reduce the size of their balance sheets. Some how corporates have managed to keep their cost of capital relative to government costs very low, but for how much longer?Hence corporates are now turning to one final source of capital, equity markets. And here we can see that 2026 is big year for IPOs.The question then is when or if does a rising cost of capital begin to impact equity markets? Or has it already done so? Gold vs S&P500 has been indicating issues for over a year now.For big US corporates, they have engaged in “capital wars” with each other to dominate the AI trade. But how much capital is left? And it is making capital expensive for everyone. I can see the political winds shifting to try and get costs lower, but I can not see how that will come via wages or unemployment. At some point, governments will want to see price wars among corporates. I just don’t know when. 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

June 8, 20267 min

WHAT'S GOING ON?

The big news is that Nasdaq fell 4% on Friday, which takes it all the way back to where it was a month ago. The AI trade has become huge. And it is noticeable that equities have diverged from HYG. When HYG is going down, then equities tend to follow.But credit spreads remain tight.The real driver is the market reassessing the likely interest rate path of the Federal Reserve. US 2 year rates sold off on strong data.So my main view is that a negative shock on bond yields led to a sell off in momentum stocks. The big problem is that if I look at memory spot pricing, its hard to see any big change in the market. That is AI demand is still pushing prices up. The proposed equity raises seems to encourage that view.We have seen a big increase in announced IPOs in 2026. Could this mark a top? Unlike 2000, buybacks will still be greater than issuance.As a share of nominal GDP, it is a large number, but not outside of historical ranges, but certainly at levels that suggest caution.This issue here is that AI is now the main driver of growth and inflation. Could the Fed really end the AI boom by raising rates? My guess, given the AI/Cloud cartel that now exists, interest rate policy would be almost totally ineffective. JGB yields for me still reflect government policy that is inflationary rather than deflationary. A real change would be government policy to encourage competition and lower prices - something I do not expect from a Trump Presidency.The price action of JGBs in the 2000s was starkly different.My best guess is that the market is worried that new head of the Federal Reserve, Kevin Warsh, could be a Paul Volcker in disguise. With consumer expectation of inflation running at 6%, to my mind short rates in the US should be closer to 8 or 9%.Politically, I find the Fed being uber hawkish very hard to believe. To me it looks like a position clearing sell off - but not a top. If I saw evidence that AI adoption was slowing, then I think we could read a top. 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

June 3, 20266 min

SHOULD I SWITCH FROM GOLD TO COPPER?

The way I work is I try and think about the world we live in, and what are the most likely long term outcomes. As of today, I still think a pro-labour world which drives higher inflation, and an eventually dearth of capital. My favourite way to play this has been GLD/TLT. This has been a great trade - but to paraphrase Monty Python, is seems to be having a bit of a lie down after a long squawk.I don’t really read much other financial research. I do read Chris Wood, and I also quite like IMF reports. But one person I do pay attention to is Jeff deGraaf from RenMac. Why I like Jeff is that he only looks at charts, and then just publishes the most interesting ones. This chart showing an inflection in industrial metals versus precious metals.He follows it up with this chart on general industrial metals breaking out..And then this one on aluminium in particular. Aluminium in particular is related to war in the middle east as this has reduced supply.I have been surprised by the relative weakness in gold since the war in Iran started, so maybe switching gold to industrial metals makes more sense? I do remember that copper/gold ratio and the US 10 year yield were highly correlated for a long time - but that this relationship broke down in recent years. Looking at the above chart, you could argue gold is too expensive relative to copper, given the move in bond yields. For me, it just says that gold became a much more attractive reserve asset from 2022, when Russian foreign reserves were frozen. So gold has been much better than copper in recent years. Should I switch? My read of markets is that Central Banks remain far too dovish. And politically, cost of living hurts politicians far more than a bullish stock market helps them. So at some point, central banks will be forced by markets to raise rates (the long end has a huge sell off), or central banks raise short term rates to a high level to prove their inflation fighting skills. See circled part below.I can not help but think, in either a long bond sell off, or a central bank induced slowdown, gold will outperform copper. I think what I am saying, is that in a free market world, treasury yields and copper/gold would indeed move based on economic activity. In this new pro-labour world of tariffs, and industrial policy, yields reflects lack of faith in central banks and governments, and gold also reflects lack of faith in central banks and governments. How will copper do with 10% on 30 year treasury? I don’t know. Maybe okay? But I think gold could keep going higher.I guess what I am saying, is that backward looking models make industrial metals look attractive. But political analysis, which I think is more important these days still favours gold. 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

June 2, 202611 min

IS FERTILITY DECLINING BECAUSE WE DON'T NEED HUMANS FOR LABOUR ANYMORE?

I have been generally very bullish on fertility rates rising again. I saw three big changes - first was rising wages, the second was improved reproductive technology, and thirdly was the rise of “work from home” culture, which made raising children easier. The one country that might be the first to show an inflection higher in birth rates was Denmark, which has greatly liberalised its access to reproductive technology. Sadly, month birth data has not really supported this view. Laws were liberalised in 2015, which saw a birth spike, but post Covid birth rates have fallen again.I also liked Denmark, as Scandinavian nations tend to be quite progressive, with strong maternity rights. Despite this, Danish fertility rates remain low.My brother forwarded to me a post on Facebook under the account name The Visible Hand which I found interesting. Basically, Visible Hand is arguing that fertility rates are declining because children are no longer a necessity, but a luxury. Whereas a hundred years ago, you needed kids as free labour and potential pension pot, now these needs are met through other means. The comparison he made was to horses. We used to need horses for everything, but as mechanised transport took off, horse population has collapsed, and owning a horse became a luxury/prestige item.And we can compare this to say the numbers of chickens that exist today. Obviously we still need chickens for sustenance, and so their numbers continue to increase. For anyone familiar with chicken breeding will be familiar with the extreme use of technology to optimise chicken production.It is an interesting argument, and it does raise the question of free-will. Horse and chicken populations are closely controlled by humans. And after the Malthusian fears of over-population in the 1960s and 1970s, humans made a conscious effort to reduce population growth, most notoriously with China’s one-child policy. But for the last ten years or so, politics has switched from reducing population growth, to promoting it. But as the Danish data shows, with still little to show for it. As anyone with children knows, raising kids is expensive. And getting more so. Below is an inflation adjusted cost of raising a child from birth to 18. If we divided these numbers by 18, we get that annual cost in 2026 dollars in 1960 was USD 6,000 a child. In 2026, you are looking at USD 20,000. Or in other words, for the money you pay for one child today, you could have raised 3 children back in 1960.As someone who grew up in the 1970s and 1980s, I can tell you that some of the cost savings came from a blatant disregard of modern health and safety norms, and I don’t think we are going back to a time when 6 years old are allowed to walk home from school unsupervised. The other big change has been the rising cost of housing. Rents have been rising as a share of income for decades.One of the reason I am still bullish on fertility rates is that women increasingly are freezing their eggs, and then using IVF later in life, presumably when their incomes have risen. In the UK, we have seen a share rise births from frozen embryos, and a decline in births from fresh embryos. The bullish argument on fertility is that with rising female participation in the work force, the age that couples started families were pushed back, and this naturally reduced fertility rates. But now that IVF is “solving” that problem, fertility rates should rise back above replacement rates, but with a lag.The bearish argument is that capitalism required more labour in the post World War II period, so humans responded to the low cost of raising children, and relative high wages by producing more humans. And now, as automation and AI reduce the relative wages that labour can command, we are reducing supply, and turning child raising into something akin to raising thoroughbred horses. When I write both arguments down, both are reasonably convincing. Even from my personal experience. I would liked to have had more children, but after having our second child at nearly 40, one more was a bit daunting. On the other hand, the two children we have are far better educated, travelled and trained than I was at that age. They are also more expensive than I ever was.I guess what I like about both arguments, is that they both point to a world that is getting “better”. If its the first argument, technology is solving the issue of women having children at an older age - which I like. If it is the second, falling population growth is due to substantially more investment into children, which is creating a “super-generation” of humans. Right now, I would say the evidence is evenly split. As a fund manager, I would argue that the markets are not priced for rising fertility rates, which is what makes it more interesting - but this type of thinking is why most people hate finance people. 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

June 1, 20260 min

MAY UPDATE

This is a free preview of a paid episode. To hear more, visit www.russell-clark.comGLD/TLT actually lost 1.7% in May, as gold remains lacklustre, and TLT which looked like it was ready to break down, staged a rally. The US 30 year treasury briefly broke 5%, but came back again.Coming into the month, it was beginning to look like credit markets were backing away from endlessly financing AI spend at both Softbank and Oracle, both firms closely related to OpenAI. Oracle CDS was perhaps the clearest example of these concerns.

May 28, 20269 min

IS GLD/TLT DONE?

I had lunch with an old client a few months ago. One thing he said to me was the GLD/TLT was my only idea. A little harsh, but maybe is is the only idea I have been REALLY committed to for the last four years or so. And why not? It WAS a great idea. But since a blow off peak in January it has been going sideways.The really problematic part at the moment is gold. For the first time since 2024, its threatening to break below its 200MDA.If I had to put a reason to its weakness, it would be almost exclusively with the movement in short term interest rates in the US. Since the War in Iran, markets have been pricing in a more hawkish Federal Reserve (and changing governor as well).The 30 year has sold off a little bit, which is why GLD/TLT has held up, but we have not had a decisive move lower.Now in a pro-labour world, I expect the long dated bonds to LEAD the Fed fund rate higher, as it did in the 1970s.If that line of thinking holds, then I expect the 2 year treasury yield to move higher from here - back to 4.5%, where there 10 year is now, and possibly 5%. Given that the Atlanta Fed GDPNow forecast if 4%, this does not seem excessive.Looking at the 2-30 spread on US treasuries, it seems possible that 2 year yields could rise another 1% before forcing the back end 30s higher. The 0.7% higher move in 2 years, has seen gold drop nearly 20%. Could another move of a similar magnitude see gold drop 20% again? That would take gold back to USD3,800 an oz, or where it was late last year. The problem would come if the yield curve flattens, and TLT does not fall. In rough number, that would imply a fall back toward 4 on GLD/TLT.That is the risk if I just looking at market movements this year. Fed Fund rate expectations rise, gold weakens, and yield curve flattens. Against that, US 30 year yields are already trading at one of the lowest premiums to JGBs ever.In absolute terms, its only just about 1%.In percentage terms, the gap has probably never been lower. Typically treasuries have been 200% of JGB yields. IF the gap between JGBs and treasuries were to revert to historical norms, that implies a US 30 year yield of between 6% and 8%. So this leaves GLD/TLT in an interesting place. If the Fed tightens, TLT could rally and gold fall - which would be bad for a already sideways moving trade. If the old relationship between JGBs and treasuries reasserts itself, then TLT should fall between 20 and 40% (based on TLT having a duration of about 20).Normally, I do not like 50-50 bets like this. Maybe JGBs yield trade through US treasury yields? It seems odd - but odd things happen alot in this market now. The big kicker for me is that there is still USD 3.5 trillion of official treasury bond holdings out there. Given the freezing of Russian treasury holding - who is buying this debt?The largest holder is Japan, which needs to sell treasuries to support its currency, and the second largest holder is the UK, which is probably hedge funds doing basis trade, and the third largest is China, which is a seller.I think it is possible that GLD, and other precious metal do nothing, especially true given the massive retail participation they drew during their run up. But, GLD/TLT still looks good - but mainly the short TLT side. 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

May 27, 20266 min

IS THE PRO-LABOUR TRADE WORKING?

The original thinking behind the Pro-Labour trade was that politicians everywhere were being forced to address imbalances in the economy. The main one was sky high property prices. After the GFC, another property crash was off the political cards more or less. This left politicians with only one choice, raise wages while keeping property prices flat in nominal terms. This issue, as I saw it, was that rising wages would have an upward bias on property prices, so yields would have to be quite high to keep property in check. In the UK, 30 year bonds yields have indeed risen substantially.And London house prices have stagnated.And UK wages have surged.Broadly speaking, this has generally been repeated across the western world. I also assumed private equity would struggle in this world of higher wages and higher interest rates. The Invesco Global Private Equity fund has confirmed that view.So far so good. I had assumed that higher yields would also put a dampener on equity valuations, like we saw in 2022. On this matter, I could not be more wrong. Using price to sales as a valuation metric, stocks have gotten more expensive, not cheaper.If you use an equal weight index, you could maybe argue there has been a slight de-rating, but it is pretty flimsy.The place to be has been semiconductors. If dominates both the S&P 500 and momentum indices.Weirdly, AI almost now makes a direct connection between wages and semiconductor prices. The higher wages go, the more corporates are incentivised to use compute, rather than labour. Whereas oil was the substitute for labour (or oil prices moved with rising wages) in the 1970s, semis now seem the substitutes for labour in 2020s. Oil rose 1800% during this era, as the market worked out the “right” price for oil.Semiconductors have done even better than that.If the analogy between oil and semis hold, then the market breaks only when politicians decided that rising unemployment to break inflation is a political winner. I don’t know when that is. 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