• Oil prices just broke out, dragging inflation expectations higher with them.

• Meanwhile, AI firms have also started printing debt.

Read them together and you get the new normal. The term premium shock is here to stay, and the problem is that most portfolios are not even aware of how unprepared they are for this new reality.

My assessment is that the next 2-3 months could be very tricky, as these risks converge on the same timeline. In this post I won’t talk about the market. I will talk about my portfolio: how it was constructed along a coherent and adaptable macro view, and what the role of each basket is.

This post is not about showing the portfolio per se. It is about going through each basket to understand why it is in the portfolio, how they all fit together, and more importantly, how I would handle a 20% market drawdown with it.

I don’t know if we get a drawdown like that, but my guiding principle is that I always want a portfolio with which I could weather one and still get enough sleep in the meantime.

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This post is the foundation of the week. The market big picture from a systematic framework: where we are in the cycle, where we are going, when to be careful, and when the nowhere-to-hide moment arrives. Which assets to favor and which to avoid, the setups the framework generates, and the positioning view that ties it together.

Short on time? Skip to the Positioning Overview.

Last week, I wrote that we are at an intersection where several risks could converge at the same time. Navigating these changes requires level-headed, well-thought-out analysis.

There has now been an important development in that thesis. This is no longer just a risk scenario. The market appears to have taken the first step toward actively pricing it in.

Regional banks are underperforming the broader financial sector, which suggests that credit and growth concerns are beginning to surface at the margin. Small caps and equal-weight indices are also now underperforming the broader market. This narrowing breadth is another sign that market participants are becoming increasingly alert to these risks.

Add to that Warsh’s Jackson Hole speech, the muted reaction of the AI theme to Nvidia’s earnings report.

The good news, however, is that the typical response to this kind of late-cycle market action is not necessarily to short the market. More often, it is about rotation.

Just as fear and risk awareness develop in stages in the real world, they also develop in stages in financial markets. Our task is to identify those rotational stages as they unfold.

The main themes I am covering now:

• Warsh, monetary policy, and the rules of the game - after calling the bottom in gold in July, it is time to map out the next steps

• How the macro backdrop has changed the stock-selection game

• The next stage of market rotation - and where I am looking

• What would make me bullish on the AI trade again?

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This is the most important work I do. Running 36 intermarket ratios through the same framework every week forces me to see the market the way it is, not the way I want it to be. Most of my trade and article ideas start here.

For longer-term positioning, the bigger sustained moves get set up here first, weeks before the price action makes the regime shift obvious. For swing trading, the false divergences inside a larger trend are some of the cleanest entry points the tape produces, and they only show up clearly with a cross-asset map running underneath.

The map covers leadership, factors, credit, commodities, rates, and global FX. Below is this week’s diagnosis. The opening reads where capital is sitting and where it still has room. The scenarios that resolve the next two to four weeks come after, with the cross-asset signals that print each one first. The nine block-by-block reads underneath build the layered view.

The Monday Macro Playbook is where this gets translated into positioning. The Map says what is happening; the Playbook says what to do.

The Big Picture: The Market Started Running Against Its Own Trends

The entire board has revolved around one variable all year: what the long end does. For a year the answer was up, and a whole trend structure was built on that direction. Financials beat utilities, real estate beats long bonds, bank loans beat investment grade, small cap value beats small cap growth. These are the same trade in different clothes: short duration, sectors that earn from rising yields. Mature, confirmed trends, running for months. The one outlier was the AI trade: the longest-duration equity on the board, rising relentlessly through the same yields that were repricing everything else. That anomaly has ended.

Last week two events landed on top of each other:

1. After the Treasury’s announced long bond buybacks, the fastest segments of the market moved: bitcoin against SPY and ARKK against QQQ flipped into fresh bullish regimes, the dollar kept weakening, AUD/JPY broke out of its multi-month range.

2. Then on Friday at Jackson Hole, Warsh took back the narrative this pricing could have leaned on, and the dollar printed its strongest bounce of the bearish regime.

So this is where the board stands. The old, confirmed trends sit on one side of the yield question, the fresh one- and two-candle signals on the other. The market started front-running against its own standing structure, and Friday’s repricing hit exactly the fresh legs, none of the old ones. This is not risk-on versus risk-off. Old trades and new trades face each other across the same variable, and there are two hands on the long end: the Fed and the Treasury.

The Bounce: Positioning Stays the Base Case, the Front-Run Is the Challenger

The fresh bullish flips in bitcoin and ARKK can be read two ways:

• either a simple rebound in the most beaten-up assets,

• or the market already pricing the Treasury buybacks.

The sequence favors the second, because the fastest assets turned first, which is how intervention pricing usually looks.

I still lean to the first, on my own argument from last week: I wrote that the next speculative wave doesn't come in the old addresses, ARKK, unprofitable tech, bitcoin, the flagships of the last cycle, but in the miners, where the term premium repricing actually pays. The fresh flips arrived at exactly the old addresses instead, and that is the signature of a short-lived bounce, not a new wave.

Bank loans against investment grade decides between the two reads: if the buyback pricing is real and the duration story is turning, that pair has to break; if it holds its range while the speculative legs fade, nothing happened. One side note: the yen-carry risk I flagged last week has eased with the AUD/JPY breakout.

Small Caps: The Break That Reaches Beyond the Board

The leadership unwind has produced its first actual breakdown. Small caps against the broad index closed below their August range. The signal sits on a single candle and is provisional, but it arrived at the end of a completed sequence: discretionary over staples topped first, then high beta over low vol, then small caps, then equal weight. Nothing on that page trends higher anymore, and this is the first rung to actually break rather than stall.

Why it matters beyond the ratio itself: most stock selection strategies work when small caps can at least keep pace with the index.

When IWM breaks down against SPY, that is when stock pickers take their worst losses. A falling IWM/SPY means the average stock is losing to the index, breadth is narrowing, and the market is paying for size and index membership rather than fundamentals. Alpha from picking gets structurally harder exactly in these stretches, and no amount of screening discipline offsets a tape where selection itself is the losing style. If the break confirms, that is the regime the board is describing.

The qualifier belongs right next to the claim: through August, this break moved almost point for point with regional banks. If it is the same money, the signal is narrower than it looks, one sector bleeding into the indices it sits in at heavy weight, rather than a broad breadth failure. Held below the break, the move confirms and the read above applies in full. A close back inside the range fails the break, and the page returns to trendless but unbroken.

The Most Important Fact of the Week: The Regional Bank Breakdown

One fresh signal on the board stands confirmed across multiple sessions: the regional bank breakdown. Every other fresh signal, the small cap break included, sits on a single candle.

The break matters because regional banks have a property that doesn’t fit the board’s logic: no yield scenario resolves their breakdown.

• If yields go up, securities books and CRE keep dragging them lower.

• If yields come down as a bull flattening, the margin squeeze tightens further.

Only one configuration rescues the regionals, a bull steepener with calm credit, and nothing on the board is pricing that.

Two things qualify the picture.

1. First, as flagged above: the small cap break and the small cap value weakness moved almost point for point with regional banks through August. What the board shows as three separate signals is most likely one flow of money, selling in the weak banks, bleeding into everything they sit in at heavy weight. The board’s apparent breadth of deterioration is, at this point, one sector.

2. Second: the test is cheap and clean. On the next yields-down day, if the banks don’t bounce, the break is credit, not rates. That would be the board’s only fact that survives both yield outcomes, and it is bearish.

Which leads to the scenario the market isn’t pricing: the long end comes down, because the buyback works or because growth weakens, and the equity internals keep breaking anyway.

In that world, the duration bid is not liquidity but growth fear, the financials rally gets exposed as a defensive trade, gold’s monetary leg accelerates, and the speculative legs get carried out while being right on the yield direction. The KRE break is quietly consistent with exactly this.

The AI Trade: The Market No Longer Extends the Benefit of the Doubt

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Back then I launched my Substack because everywhere I looked I saw a gap.

• Everybody agrees that we are living in a changing world. Supply shocks, the US debt problem, a currency regime that is cracking, while governments are increasingly activist. The global economy is transitioning from a financialized world defined by demand to a physical world constrained by supply. Macro moves everything. Yet there is no one who connects macro systematically with stock selection.

• The other thing I saw was that writing about investing is not just about sharing trade ideas. It’s about sharing the process, the way I look at the markets in good times and bad times.

When I looked at these gaps, I realized my investment process might be of interest. I have a macro background with strong knowledge in equity research, and my realization is that

Another important observation is that you don’t have to be a genius to succeed in investing, but you have to be curious, you have to be really hard working and you have to be disciplined.

1. First we track the macro regime and what forces are shaping it. Knowing where you are and the direction gives you the broad hunting ground.

2. With a sophisticated intermarket analysis system we track the flow of capital on many markets at the same time. By looking at many markets and their (economic) relationships to each other, we are able to see the first signs of change in positioning, and this gives us an edge to rotate in time.

Investing in gold, software companies, or the European defence niche is not different trades for us. They are the output of the same system.

We have institutional models for gold and copper, as well as stock valuation models. No matter what trade idea we have, there is an important set of rules that must be satisfied.

• The macro regime must be supportive.

• The stock or other instrument must be undervalued.

• The technicals must align with the fundamentals.

If any of these criteria is not met, we don’t invest in that idea.

After one year, you may ask how Defy the Odds is doing, and your question is warranted. After one year, there is enough track record to make it public. Every trade is timestamped, either in a post or in the chat. The summary is below, the detailed track record is here.

Our win rate is extremely high: 77%. This is for two reasons. We don’t trade much and we only take those trades where the above rigorous criteria are met. But more importantly, our losses are small and our gains are extremely high compared to our losses. That’s risk management and discipline. The most important aspect of longevity in markets. Our average trade outperforms the S&P 500 by 10.7%.

Our holding period is just roughly one month on average, but this is the output of the system, not a fixed number. We are late cycle, households’ equity share of wealth is at levels never seen before, while leverage is extremely high and there are frequent outside shocks. In that setup, rotations are fast and no major trend starts when everybody is in equities up to their nose. If we were in the early stage of a bull market, our holding periods would be longer.

Finally. The result is not due to one very good trade, it is due to a series of well timed trades, in different themes, sectors and geographies, proving in real time how the intermarket rotational framework finds opportunities.

Last December I said the term premium shock is an under-the-radar story, and in July I warned every week that it will corner the market. This was the macro view. But we only acted when our rotational framework told us to act. Energy in the first months of the year, scarcity and quality later, and Europe and other stuff recently. And every time, I made the same call. The term premium shock is a risk the market is not pricing. On August 19, Scott Bessent intervened, validating our thesis. While the Nasdaq is going nowhere, our rotational framework performs. And make no mistake. Paid subscribers already know when I would be pro-AI again.

What is important is that we had but one AI trade during that time, proving that you don’t have to be in AI to massively outperform the market.

Most importantly, we timed the rotation well and we were systematic and methodical in that regard, which makes me confident we can manage a market downturn. And I deem that especially important, because we are here for the long term.

Now let me show you how the Defy the Odds investment process works in a week, because this way you understand the value of the process.

• On the weekends I look at the whole market with intermarket analysis, and the result is the Intermarket Macro Map. This is a long, diagnostic post, but every rotational idea we had started here. This is the most boring, but the most useful part of the Defy the Odds Substack. As it should be. Hard work, rarely glamorous.

• On Monday, I write the Monday Macro Playbook, which is your macro and market guide for the week. This is the synthesis of our macro and liquidity regime framework, the Intermarket Macro Map and market technicals. Some trade ideas are part of the Monday package, but never forced.

Additionally I prepare three kinds of posts:

• Global macro: if I see an opportunity in gold, oil, copper, the stock market, or bonds, I do a detailed write-up on it. Every trading idea is preceded by a rigorous write-up. No exception.

• Company deep dives: Sometimes the macro points my attention toward companies that are sitting at multi-decade trendlines. These are special setups and they warrant a very thorough look. This is when the deep dives happen. Not every week.

• Megatrend research: There are trends which are with us for at least 5-10 years. Not understanding them well is a mistake. What differentiates our megatrend research is that every one of them comes with a monitoring system. I want to know the megatrend, but I don’t want to be in it when it ends. Hence the monitoring system.

Substack chat: Every weekday, if I see or hear something important, I write it in the chat for paid subscribers, and sometimes for free subscribers as well.

And finally, markets will change. Our opportunities will change. I won’t sugarcoat it. We will have good times and difficult ones.

I am really glad this systematic approach resonates with you, because there are more than 2,000 of us and Defy the Odds just became a Substack Bestseller.

But the process will remain the same: do the work, stay disciplined, manage risk and go where the weight of evidence takes you.

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Glossary for Defy the Odds is here.

Disclaimer: Nothing here is financial advice. These are reflections on macroeconomics and markets, meant to spark ideas and sharpen decision-making. To truly Defy the Odds, think independently, question everything, and do your own homework.

The reason was China, which cut its crude imports, stopped competing for the scarce seaborne barrels, and ran its economy off stockpiles that nobody outside China can see. That freed the barrels the rest of Asia needed, and together with the strategic reserve releases it bought the system a summer. We missed that in our early analysis.

But now, as El Niño is upon us, the scarcity thesis evolves, and there is a place where there is nowhere to hide and not even China can help, because these two converge on the same timeline.

The war has settled into an equilibrium where somewhere between 70 and 90 ships transit per week where 130 used to transit per day. Iran has set up a permit authority and said out loud that management of the strait will never return to the pre-war order. It is now a new commodity regime you live inside. The shortage of diesel, fertilizer and sulfur is the new baseline, for a while at least.

And now El Niño is already here and strengthening and it can be the strongest one since the 1950s. (NOAA’s official index puts the October-December median at +2.66°C and gives a 69% chance the three-month value goes above +2.5°C. No El Niño since 1950 has reached that.) This is a huge problem because El Niño peaks between October and January. In that same window sit the Brazilian soybean and corn planting, the peak of Brazilian fertilizer buying, the Australian wheat harvest, the Indian rabi sowing, the dry season for Indonesian and Malaysian palm oil, and the tail end of the Northern Hemisphere harvest.

The question of this post is simple: how do we profit when, not if, these two events land at the same time?

Where is the bottleneck?

The reflex is buy agriculture commodities. But this does not work this way. El Niño does not cut the global harvest, it moves it around: Australia dries out, Argentina gets rain, and the market nets the two sides against each other. Unreliable trade.

What did run in those years was always the same kind of thing:

• In 1997-98 it was palm oil.

• In 2015-16 it was sugar and palm oil.

• In 2023-24 cocoa tripled, sugar and robusta went to multi-year highs, and India banned rice exports.

Two or three countries supply most of the world, El Niño hits exactly those countries, and there is no other hemisphere to offset it.

What I am looking for has three properties at the same time:

1. Supply is concentrated, and El Niño and the war hit the same concentration.

2. There is no buffer: no strategic reserve, no other hemisphere, no invisible Chinese tank.

3. Supply does not respond to price.

Grain fails on the first. Oil fails on the second. Refiners fail on the third, since the high margin already pulled the supply response. If there is a commodity that passes all three, that is the checkmate. Fertilizer is where to look, and the first thing to do there is rule out the wrong answer.

A specific kind of fertilizer is the answer

Fertilizer is not one commodity but three: nitrogen, phosphate, potassium. When the news says “fertilizer crisis,” it means urea, because that is the largest volume and the Gulf supplies half of all traded urea.

The spring story was about this: the Indian tender on April 15 which was the top. It came in, but it did not hold for two other reasons:

• The largest buyer swapped the product: Brazil moved to ammonium sulfate, which is cheaper and comes from its own steel industry.

• China exported 5 million tonnes of urea last year, nothing through May this year, and it has 10 to 15 million tonnes of idle capacity that can come back any time the domestic price allows.

So the nitrogen market has a reversible supply side. A higher price does bring more supply, only delayed and at Beijing’s discretion. We do not build on that.

Potassium is no story at all: not a Hormuz commodity, Canada and Russia supply it, and the farmer drops it first, because what is already in the soil lasts a year or two.

Now let’s talk about phosphate

Phosphate is different because it has a step that nitrogen does not. Urea is gas plus one process. The phosphate rock mined in Morocco or Florida and to make it available to the roots it has to be broken down with sulfuric acid, and sulfuric acid is made from sulfur. Most of the world’s sulfur is a refining byproduct, pulled out of crude oil and natural gas. So behind every tonne of DAP there is a tonne of refined oil somewhere.

Seen through that lens the numbers say something different. DAP is at $795 and rose in August while urea fell. China is holding back 50 to 80% of its phosphate exports. Russia is running quotas. Producers with plenty of rock are cutting output because they cannot get the acid to process it. Morocco, sitting on the world’s largest rock reserves, imports its sulfuric acid.

There is a chain behind that DAP number. Sulfur, sulfuric acid, phosphate fertilizer: three steps, and at each step a little inventory and a little lag.

1. The sulfur price has already moved, up 261% on the year.

2. The acid price is moving now.

3. DAP is only starting.

The market watches the last step, and there it sees only that DAP “got a bit more expensive.” What arrives at the third step today already happened at the first two months ago. The move is not over, it has barely reached the product the farmer actually buys.

Now let’s run DAP against our three filers:

• Is the supply concentrated? Concentration: 44% of the world’s sulfur comes out of the Gulf, and the refineries that are down are the same ones that sat on the diesel map in March.

• Is there no buffer? There is no strategic reserve of sulfur, no bypass route, and China stands on the side closing the door.

• Is supply respond to price? Sulfur output is a function of refinery run rates, and a refinery runs when it has crude and diesel demand. The sulfur price plays no part in that decision. With nitrogen, Beijing can release more urea with one decision. Here there is nobody to make the decision. More sulfur arrives when the Gulf refineries restart, and that is not a price question. It is a Hormuz question.

Phosphate passes all three, and on the third it passes because of sulfur.

The trade is phosphate, and the reason is sulfur.

Why this is not a year the farmer can skip

One final item we have to cross. Can it be left out from the agricultural process? If the farmer can go a year without phosphate, the way he does with potash, the locked supply does not matter. And in Iowa he can: decades of phosphate are banked in the soil, and skipping a year barely shows.

But global phosphate demand sits in the Brazilian cerrado, India, Southeast Asia, Africa, where the soil is tropical and rich in iron and aluminum oxides that bind phosphate on contact. There is no bank to draw on, and it has to go on again every year. Brazilian soy and corn do not exist without an annual phosphate dose. Demand is inelastic exactly where it is largest.

Now put El Niño on top. Phosphate is the root nutrient: in the first weeks of growth the plant builds its root system out of it, and root depth decides whether the crop survives a dry spell. A phosphate-starved plant roots shallow and folds in the first week of drought. So in an El Niño year phosphate is the nutrient the farmer least dares to save on.

China sees the same thing in its own fields. If El Niño threatens the North China Plain, Beijing keeps its phosphate at home.

Timing matters

• Brazilian phosphate buying runs from August to December, ahead of September soybean planting and the January safrinha.

• India’s rabi sowing is in October.

Demand arrives now, in the next four months, and what happened in the first half was deferral, not destruction: Brazilian fertilizer imports fell 9% because buyers waited for prices to come down, and the Brazilian farmer is barely half covered. That demand will buy now, into peak season, into the tightest supply. India cannot step back either: it sells phosphate fertilizer to farmers at a fixed price, the state pays the difference, and the state cannot let the rabi sowing go without phosphate in an El Niño year. Of the two largest importers, one is locked in agronomically, the other politically.

Yes, grain is cheap and margins are thin, so there will be demand destruction at the edges. But the edges are the Midwest and Europe, where the soil holds a reserve. The core, Brazil and India, cannot destroy demand, only pay for it.

So supply is locked, demand is inelastic and arriving now. What remains is how this becomes a position, and here is the twist: the obvious buyer, the phosphate producer, is both the winner and the loser of this trade at the same time.

Who wins on the phosphate fertilizer-sulfur spread

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This post is the foundation of the week. The market big picture from a systematic framework: where we are in the cycle, where we are going, when to be careful, and when the nowhere-to-hide moment arrives. Which assets to favor and which to avoid, the setups the framework generates, and the positioning view that ties it together.

Short on time? Skip to the Positioning Overview.

Two months ago I said that US government debt is one of the most important megatrends of the coming decade. Its evolution will shape the financial system. The rise in the term premium and the deliberate move by Bessent are one aspect of this. What happened was foreseeable.

Since December, I have repeatedly warned of a coming term premium shock, and my warnings intensified over the last few weeks. This was also part of the reason we got into gold, sold Micron, and bought stuff over the last few months that sits outside the realm of yield-sensitive assets.

None other than Bessent confirmed our concern, because he just announced an increased amount of Treasury buybacks. But make no mistake, this solves nothing, as I warned the day the news came out. The bond market so far agrees.

But this is yesterday’s news. Unfortunately, there are three other risks converging on the same timeline as the term premium pressures equity markets. This won’t be another doomer short call. We don’t do that at Defy the Odds.

My approach is always the same. Map the macro regime and find the rotations within that regime. Now, the greatest rotations are born in uncertain times like these, so what we will do in this post is map out the new regime under a constant term premium shock, how the three risks change the market’s perception of value, and how that affects portfolio mapping.

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The term premium big picture

First things first. Somewhere along the way over the last 10 years, US politicians decided not to care about the future. They started spending like there was no tomorrow while cutting taxes at the same time, because why not. They were not alone. Europe is doing the same, just a little more cautiously. India and Brazil were never fiscally responsible to begin with, and I did not have the stomach to look up how bad the debt situation in China is. And I don’t even want to mention what’s going on in Japan.

The world went all-in on fiscal spending, and we are now at a threshold where global bondholders no longer believe their money is safe in real terms, so they demand higher compensation. That’s the rise in the term premium, and the only thing that can bring it down is fiscal discipline. And there is your answer as to whether we can get a meaningful decrease in the term premium from here. No, we can’t. This will be a constant source of pressure on the bond market.

However, this is not new information. This was true a month ago and even five years ago. What is new is that this is the first time a US Treasury Secretary has made a costly mistake, just a few weeks after Warsh made a costly mistake. And it comes at a time when three risks have just started to converge. And this is what makes the situation so dangerous.

Bessent made a mistake

In the last few weeks, US yields have risen so much that Bessent had to intervene on two fronts.

• Helping Japan prevent further Treasury selling

• Propping up Treasury buybacks to keep a lid on the long end

Fed QE bought $45bn of Treasuries a month, not $4bn. So despite many calling this Yield Curve Control, it is merely an attempt at a weak and ineffective form of Yield Curve Management. What happened is just a signal, and a weak one. Bessent just told the world where his pressure point is: the 30-year yield above 5.3% and the 10-year above 4.7%.

Bessent at odds with Warsh

The other huge problem with the Treasury buying longer-dated bonds is that it puts Bessent at odds with Warsh. Warsh welcomed the tightening at the long end; Bessent basically said enough is enough. So it is like a tug-of-war between the Fed and the Treasury, which deteriorates the credibility of the Fed. When we are talking about a bond market under stress, this matters.

The problem is that the bond market is just one of our problems. On its own, it is pressing, but there are three risks that can hit roughly at the same time as the term premium shock, and together they can corner the market. The goal here is to stay long as long as possible, but know the risks in order to know when to ac.

Risk convergence 1: inflation

So far, the rise in bond yields has come down to two factors: a higher term premium and higher real yields. Inflation expectations have even declined.

Inflation expectations came down, which slowed the rise in bond yields. But now that is changing.

Oil prices are edging higher, but my problem is diesel which is the workhorse fuel of the physical economy: trucking, rail, farming, construction and shipping all run on it, so its price feeds into the cost of moving and producing nearly everything. Companies absorb it in margins first, then pass it through. And unlike a crude rally, a diesel rally driven by tight refining capacity does not even need higher oil to keep going.

Food is queuing up behind fuel. NOAA now has a very strong El Niño as the base case for the coming winter, at over 90% probability, which historically means drought across the key growing regions of Southeast Asia, Australia and parts of South America, hitting rice, wheat, sugar and palm oil supply. Layer fertilizer scarcity on top and the pressure on agricultural prices builds from two directions at once.

Here is why this matters for the bond math. The recent rise in yields came almost entirely from the term premium, while inflation expectations actually drifted lower and cushioned the move. That cushion is now at risk. If fuel and food push inflation expectations just 20 to 25 bps higher while the term premium stays where it is, the 10-year sits near 5% and the 30-year near 5.5%. Those are above the levels Bessent already revealed as his pain threshold, which means the inflation channel alone can force the next round of intervention.

Risk convergence 2: growth

The latest US data has been disappointing. The labor market is weak, retail sales data has softened, and the latest GDP data already showed signs of a slowdown in AI-related investment. Having said that, the ISM data batch is still very strong and earnings growth is also healthy. But if you think about what is not priced in, slower growth is not priced in.

Risk convergence 3: AI debt and the stock market

Many don’t remember this, but bubbles are often burst by higher energy prices and the bond market. The same happened in 2000 and 2007. This is just a warning that history tends to repeat itself.

In that environment, what really matters is that AI debt issuance is flooding the market. In 2024, it was $17bn; this year, it is expected to be $280bn. And this is just the US. Globally, it could be more than $500bn. That is a lot of debt that needs to find fresh buyers.

Risk convergence

The most important question over the next few months will be how these risk factors converge.

• The term premium shock is here to stay because it cannot be solved without fiscal discipline. That won’t happen.

• AI debt issuance could put additional pressure on the bond market at the margin.

• Inflation expectations can easily rise from here.

• Growth is slowing down.

• And then there are the midterm elections, with their own twists.

What does it mean for positioning?

I like to go back to our macro quad for guidance. The current setup is reflationary, where inflation risk is elevated but growth is still OK. In that setup, almost everything does well as long as rates remain in check. Now, with the term premium shock, duration-sensitive sectors like AI, tech, and unprofitable companies could underperform, while value and quality companies and commodities could outperform.

If you think about our past trade ideas, positioning in energy and scarcity trades, undervalued software companies, US and European defensive plays, and some special-situation opportunities like Ferrari is our way of preparing for the term premium shock.

My worry is that if the current situation persists, it can feed into stocks and the economy. I always say that no major drawdown happens when growth is high. But when growth falters and we move into stagflation, that’s when I will become increasingly bearish on stocks.

Here is how this squares with the Intermarket Macro Map, because the two can look like they disagree this week. The Map already shows the cycle turning: regional banks broke down against their own sector, industrials printed a new relative low, and small caps ignored the buyback. Relative ratios pick up the turn first and showed us that the market has actually started to care about growth risks, but this is not yet a big enough concern to have a market-wide effect. When it becomes one, meaning the deterioration reaches the aggregate growth picture, the quad flips to stagflation and the trimming starts. The book is already positioned for that regime anyway.

But look at what usually outperforms in stagflationary territory: Gold, USD, Energy, and Defensive sectors. Now look at my trade recommendations. They are mostly Gold, Energy, and Value sectors, which are relatively safe in a stagflationary environment (this is never a guarantee, of course).

To sum up the big picture:

• Risks can converge from here, forcing yield-sensitive assets lower. This does not bode well for the AI trade and non-profitable companies.

• As long as growth is OK - and that may be questionable at this point - rotation is the trade, not outright shorts or keeping everything in cash.

• If growth deteriorates further and we move from reflation to stagflation, that’s when I will become very worried about the stock market and start trimming heavily.

As you can see, I am thinking about a lot of risks nowadays, but at the same time I keep buying specific trades when the opportunity presents itself. These trades, however, are largely outside the headwinds created by the current risks. I think that in this market regime, this is the right way to approach it.

What the technicals have to say

The table below is a short overview of major market technicals. It’s simple, fast, and helps align my thinking with the fundamentals. The trend regime is self-explanatory, while stretch shows how far the price has moved within its trend regime. We don’t want to open new longs in an overbought market, but we can stay in them if the trend structure is OK. Energy shows how much volatility there is. Low volatility means that large moves may be ahead of us, while high volatility means that large moves are likely behind us and that markets need time to gather strength again. So how are we looking?

• The S&P 500 is still in an uptrend, but the Nasdaq is in a correction within its uptrend. This underperformance is consistent with the term premium shock as duration pressure builds.

• Europe looks clean, is not stretched, and the energy reading is not high. This is a healthy trend.

• Bitcoin just moved into an uptrend, but the spike was so sharp that the price gave back all of its strength. This needs time to sort itself out.

• The dollar is in a downtrend, while every major commodity is in an uptrend.

So the technicals confirm the reflationary setup.

If we transition into stagflationary territory, I want to see defensive sectors outperform alongside Energy. If we look at the table below, Energy is outperforming, but Consumer Staples and Utilities are not. Healthcare is a slightly different story right now, with XBI exploding.

So the technical picture does not confirm a move toward stagflation just yet, and the macro picture is still mostly about risks rather than realized deterioration.

Is there a way out of this?

Maybe.

Growth can improve, because we only have one month of soft labor and retail data. ISM is still strong, earnings growth is healthy. If the next data batch comes in firm, the growth leg drops out and we are back to reflation with a term premium problem. Rotation handles that.

Second, the midterm. Fiscal discipline will not come from conviction. It never does. It comes from market pressure meeting political pain: US 1993, Canada 1995, UK 2010. High mortgage rates are voter pain. The term premium is mostly an uncertainty premium, so even a credible signal of a path change takes a meaningful slice out of it. Not priced in.

Third, the intervention escalates until it works. Bessent has already shown his pain threshold and fired the first shot. The buyback was too small, but the toolkit behind it is not: larger buybacks, shifting issuance to the front end, SLR relief so banks can absorb duration, and the stablecoin bid growing into the short end. Each of these can be deployed in weeks, not years. The first attempt failing does not mean the fifth one does. If the next round is sized to matter, the duration trades unwind fast. This is the least priced outcome.

What I watch: inflation expectations first, then the next labor and ISM prints for the growth leg and of course what Bessent and co. does.

Positioning Overview

The big picture in one paragraph: the term premium shock is structural and will not resolve without fiscal discipline, so it stays. Three risks are converging on it:

• inflation expectations turning higher on fuel and food,

• growth softening on one month of data,

• and a flood of AI debt looking for buyers.

The setup is still reflationary, growth is OK on the aggregate score, so rotation is the trade, not shorts or cash. The Map already shows the cycle turning beneath the surface, but it has not reached the profit layer yet. There are psotive outcomes on the table, but we need a little bit of luck for that: growth can firm up, the midterm can force a fiscal signal, and Bessent can escalate until the long end caps. Until one of those doors opens or the growth score rolls, the book stays long, tilted away from duration, and lets the bond market lead.

Hold:

• Gold: the trend is intact, ride it. But the entry window is closed, no fresh capital here.

• Energy and scarcity trades: they work in the current regime and survive the stagflationary one.

• Europe: the cleanest trend on the technicals table, not stretched.

• Dollar is expected to depreciate further

Avoid:

• TLT, both directions. Long fights a confirmed process, short buys a crowded mature trend. No edge. But use the bond market as the guiding market: every other position on this page answers to it.

• High-duration assets (AI, tech, unprofitable growth) are not preferred here. This can change fast if Bessent wins the battle for the long end. SMH/SPY is the key ratio to watch for that turn: if it bases and flips while yields cap, duration is coming back. Watch it for timing, not for entry yet.

How to trade this regime:

• This macro setup does not reward breakout strategies. It rewards mean reversion on extreme sentiment: buy pullbacks when sentiment washes out, fade extension. Breakouts without credit confirmation are the ones a single bad long-end session takes back.

What I watch:

• Inflation expectations first: they gate every exit above.

• Further moves by Bessent.

• I am confortable with the current book

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Glossary for Defy the Odds is here.

Disclaimer: Nothing here is financial advice. These are reflections on macroeconomics and markets, meant to spark ideas and sharpen decision-making. To truly Defy the Odds, think independently, question everything, and do your own homework.

This is the most important work I do. Running 36 intermarket ratios through the same framework every week forces me to see the market the way it is, not the way I want it to be. Most of my trade and article ideas start here.

For longer-term positioning, the bigger sustained moves get set up here first, weeks before the price action makes the regime shift obvious. For swing trading, the false divergences inside a larger trend are some of the cleanest entry points the tape produces, and they only show up clearly with a cross-asset map running underneath.

The map covers leadership, factors, credit, commodities, rates, and global FX. Below is this week’s diagnosis. The opening reads where capital is sitting and where it still has room. The scenarios that resolve the next two to four weeks come after, with the cross-asset signals that print each one first. The nine block-by-block reads underneath build the layered view.

The Monday Macro Playbook is where this gets translated into positioning. The Map says what is happening; the Playbook says what to do.

The Big Picture: the bond market has rejected the state intervention

The Treasury is buying the long end, and yields are not coming down. This is the most important fact of the year. The market drew the conclusion that the state has lost control over the long end of the yield curve, and now every asset class is pricing to this. Gold is not buying inflation, it is buying this loss of control. The dollar broke its trendline. BTC and ARKK are not running on risk appetite, they are running as bond substitutes. Banks and real estate are rising against utilities and TLT, but this is the same single trade in nine costumes: short duration. Seven blocks of the board are measuring a single variable.

Semiconductors sit on the losing side of the same variable. They are the longest-duration equity exposure on the board, priced on cash flows years out, and they have been in confirmed relative downtrends since yields stopped falling.

Small caps are pinned by both halves at once: they carry the floating-rate debt that refusing-to-fall yields keep expensive, and they carry the domestic cycle exposure that the weakening data hits first. That is why they did not respond even to the buyback announcement. There was nothing in it for them, because the announcement changed neither the level of yields nor the direction of the economy.

Value against growth is where the single variable produces a standoff instead of a trend. Yields that refuse to come down argue for value, that is the duration channel again, while the incoming data argues for large-cap growth and quality as the growth scarcity trade. The two pulls run through the same bond market and keep cancelling, so the ratio sits in stalemate, and it will stay there until the yield fight resolves one way or the other. Momentum against value is the exception that proves the structure: momentum is simply long the winners of the duration flight, so it keeps trending while everything around it stalls. Seven blocks of the board are measuring a single variable, and the factor board is where that variable, pulling in two directions at once, visibly cancels itself out.

Underneath this, the real economy cycle is turning down

This is the second process and it looks exactly the way the start of a cycle turn tends to look: first the highest credit-beta segment breaks (regional banks against their own sector), then the broad cyclical layer (XLI/SPY broke to a new relative low last week), then the relative strength of the big banks starts running out from its summer peak.

Small caps did not react even to the buyback announcement, which in this reading is not a disappointment but a confirmation. Four prints, three weeks, in descending credit-beta order.

The market is repricing toward a stagflationary outcome, but not all at once

Through two separate channels, and the two channels have not yet met. The duration channel is pricing the "yields will not come down" half. The cyclical channel is pricing the "growth is weakening" half. Credit is at zero, HYG/SHY is doing nothing, so there is no risk appetite in the system, only flight from bonds. What looks on the surface like a risk-on rally (high beta rebuilding, ARKK breaking out, carry rebuilding) is not that.

It is the broadening of the anti-bond flow, without credit, and precisely for that reason it is fragile: a single bad long-end session takes it back.

Where are the new opportunities?

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But ninety seconds into the trailer I felt something I had not felt since the original trilogy. Chills. Then I watched the new Avengers: Doomsday trailer, and it happened again. Then I scrolled through the 2027 release calendar, and by the end of it the chills had turned into a suspicion: something is changing inside Disney.

A 60-year-old trendline. When you see a price chart of a company, with a well defined moat, you are obligated to have a look. So here we are.

Disney is a company where sentiment moves the stock price and in this case sentiment is how the company is handling its IPs and the perception of the people. So understanding the dynamics around its moat is the key to understand what will happen.

We have simple goals here:

• Understanding the real moat of Disney

• Understanding how and why it was damaged in the last few years

• Establish that can it be repaired

• If yes, does the management has the ability to do it and did they gave signs they understood the lesson

• Only understanding and answering these can we give a proper valuation of Disney.

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Understanding the real moat of Disney

It grabs you when you are a child and never lets go - that’s the moat

Imagine Disney’s CFO walks you through the company, not through the org chart, but through the actual machine that makes the money. The tour does not start in a studio or a spreadsheet. It starts with a memory.

The moat starts with a shared memory

Because the raw material of this business is not film. It is the fact that you, your parents, and quite possibly your grandparents all have a Disney memory, and it is a warm one. Very few companies on earth can speak to a six-year-old, her father, and her grandmother at the same time, with the same characters, without losing any of them. That shared, inherited warmth translates into something commercially priceless: trust that operates below conscious decision-making. When a family picks a film for the evening or plans a holiday, Disney is not one option being weighed against others. It is the pre-approved default. Everything else on this tour is built on top of that bond, which is why the tour starts here.

Disney is a mythology which passed on to generations

The next stop is what that bond attaches to. On paper, Disney owns a content library. In reality, it owns something closer to modern mythology: Mickey Mouse, the Princesses, Pixar’s worlds, Marvel, Star Wars. The distinction matters, because a normal film behaves like a normal asset. It earns most of its money quickly and then decays into a catalog item. These franchises behave the opposite way. Parents actively hand them down to their children, which means each one can be reintroduced to a fresh generation of consumers, essentially forever, at a fraction of the cost of inventing something new. Snow White is pushing ninety and still sells. Most content depreciates. Disney’s best IP compounds.

Multiplication at the fraction of the cost

Now the CFO shows you what happens when one of these stories works, and this is where your eyes start to open. The box office is only the opening act. The same characters then flow through streaming, toys and apparel, licensing, gaming, park attractions, themed hotels, cruise ships. One story, running for decades, with five or six cash registers attached to it. Frozen is a film, but it is also a merchandise empire, a stage show, a ride, and a reason a family books four nights at a resort. A traditional studio collects a ticket price and a licensing check. Disney collects the ticket, the subscription, the doll, the dress, the hotel room, and the photo with Elsa.

The same IP worth more if owned by Disney

Which leads to the quiet economic engine of the whole company, the part outsiders most often miss. Because Disney owns the entire stack of those channels while competitors own one or two, the identical franchise is simply worth more inside Disney than inside anyone else. This is economies of scope, and it has a hard consequence: Disney can rationally outbid everyone for characters, because it can extract more from them. When it bought Marvel and Lucasfilm, the commentary focused on box-office potential. The real logic was that Disney could run those characters through parks, cruises, merchandise, and streaming simultaneously, channels the previous owners never had. The math only worked for Disney. That was the point.

Every step is geared toward more craving

Then the CFO draws the loop that ties it together. These businesses do not merely coexist, they feed each other. A hit film sends families to the parks. But the park visit is not passive consumption: a child walking through a physical world built around her favorite characters comes home more attached to them, not less. That deepened attachment shows up as more viewing, more toys, and anticipation of the next film, which restarts the cycle. Each turn of the wheel strengthens the emotional bond the tour started with, and a stronger bond makes every subsequent turn more profitable. A competitor can copy any single station on this loop. Copying the loop itself is a different problem, because its power comes from owning all the stations at once.

The last stop on the tour is the place where the moat stops being an argument and becomes a physical fact: the Experiences business, the parks, resorts, and cruise lines. Here four barriers stack on top of each other. The IP that makes the gates worth walking through. Tens of billions of dollars of infrastructure that took decades to build. Operational craft in moving, feeding, and delighting tens of millions of guests a year, refined since 1955. And the brand equity that lets Disney charge premium prices for all of it. A challenger would need all four simultaneously. Capital can be raised. Seventy years of operating know-how cannot be bought, and characters that three generations of your customers already love certainly cannot. This is why the world contains exactly one full-scale Disney and no replica.

The walls are not so wide everywhere

At the end of the tour the CFO tells you one caveated secret. The fortress does not have equally thick walls everywhere. The wide moat surrounds the owned IP and the Experiences ecosystem. Streaming sits outside it: canceling Disney+ takes thirty seconds, costs nothing, and the competition is one click away, so the switching costs that protect the parks simply do not exist there. ESPN carries a different flaw: its value rests on sports rights that Disney rents rather than owns, and a rented advantage must be repurchased at auction, at rising prices, against deep-pocketed rivals. The accurate picture is a fortress with a wide moat around its core and thinner defenses at the edges, and knowing which businesses sit inside the walls is essential to knowing what the company is worth.

The moat can be destroyed by one thing only: Disney itself

Before you leave, the CFO stops you at the door. The tour-guide confidence is gone. What comes next, he says, is not something he read in a strategy deck. It is something this company did to itself, and he watched it happen from the inside.

Everything you have just seen can be broken. Not by a competitor, not by technology, not by regulation. By Disney itself. He knows, because for a few years, that is exactly what was happening.

Go back to the start of the tour, he says. The whole machine rests on an involuntary emotional response, the warmth when the castle appears on screen. Which means the asset was never the film library and never the castle. The asset is the feeling. And feelings, unlike trademarks, can be worn out. He used to treat that as a poetic footnote. Then he watched it become the single most important line item in the company, the one that never appears in any filing.

Here is the mechanism, as he lived it. The flywheel you toured runs on heat. IP generates a film, the film feeds streaming, streaming feeds the parks, the parks feed merchandise, and everything flows back into the IP warmer than it left. For decades, Disney generated new heat faster than it spent it.

The proven elements went onto a conveyor belt: another sequel, another spin-off, another series, another remake. He sat in the rooms, and he wants you to understand the trap properly. Every one of those decisions was rational in isolation. Every one added revenue that year. But each withdrawal came from a finite reservoir.

Marvel and Star Wars are not inexhaustible wells. Part of their value was always scarcity, the sense that a new installment is an event. Somewhere along the way, releases stopped being events and became a schedule.

He does not have to argue this from theory, because the man running Marvel eventually said it in numbers. Twelve years of the Infinity Saga produced roughly fifty hours of content. The six years that followed produced more than a hundred. Twice the volume in half the time, and for the first time in the studio’s history, quantity beat quality. When the person who built the machine admits the throughput broke it, the debate is over.

But if you want to feel what the erosion looked like, he says, look at Star Wars. Not at any single flop. At the silence. Disney bought the most valuable cinematic mythology on earth, and then, after 2019, released nothing into cinemas for seven years. Seven years, which were filled with announcements: a film from Patty Jenkins, a trilogy from Rian Johnson, projects from the Game of Thrones showrunners, even a film from Feige himself. For most of a decade, the franchise existed on screen only in press releases. The most expensive IP in the vault, and nobody with the authority and conviction to put it in front of a paying audience.

And when the decisions did get made, he says, you could read the fear inside them. The saga’s grand finale hinged on resurrecting its ultimate villain, and the film explained this, in full, with three words: somehow, Palpatine returned. He brings this line up not to mock it, though everyone did, but because of what it encodes.

The audience turned it into a meme within hours, and the meme named the moment the storytelling stopped being led and started being managed.

Now connect it back to the machine, he says, because this is the point of the whole detour. None of these individual failures showed up as a catastrophe in any given quarter. But the emotional response faded. Each mediocre installment, each broken promise, each managed-instead-of-told story shaved a little off the involuntary warmth, and every shave was too small to register against the noise. Revenue held. Until the fatigue showed up everywhere at once, in box office, in engagement, in the way audiences greeted the next announcement not with anticipation but with a shrug. Short-term revenue had gone up for years. The thing generating the revenue had been going down the whole time.

Which brings him to the sentence he learned the expensive way: creative quality is asset maintenance capex.

A factory owner knows that skipping maintenance flatters this year’s numbers and destroys the machine. Disney’s machine is intangible, but the logic is identical, and he no longer treats it as a metaphor. A great film does not merely earn its own box office. It services the asset: renews the bond, restores the sense of event, hands the franchise to the next generation in better condition than it found it. None of that ever appeared in any film’s own P&L, which is exactly why it was so easy to stop paying for. And a bad film is not merely a flop that loses its budget. It is deferred maintenance on a multi-decade asset. It amortizes the very intangible the parks, the cruises, the merchandise, the entire flywheel stand on. The box-office loss was always the visible cost. The write-down of accumulated emotional capital was the one that compounded, and the one nobody ever booked.

He goes quiet for a moment, and something in his expression changes. Because here is the thing, he says, and this is where the story stops being an autopsy. Once you see the failure in these terms, the fix stops being mysterious. If the disease was treating the IP as a mine, the cure is treating it as a machine that needs maintenance. Fewer withdrawals, larger deposits. Make releases scarce enough to be events again. Put someone in charge who can say no, and mean it, for years if necessary. Spend on quality the way you would spend on a turbine overhaul, not because it pays this quarter, but because everything downstream depends on it. None of this is exotic. It is the discipline the company ran on for most of a century and simply stopped enforcing.

And the reason he is telling you all this now, he says, is that he can see it in the pipeline.

The question is no longer whether Disney understands what it broke. The question is whether the repair has already started, and whether the market has noticed.

That is where the tour ends, and where the CFO’s job ends too. He can show you the machine, the damage, and the repair plan. What he cannot tell you is what any of it is worth. That part is ours.

Because everything you just walked through collapses into three questions,

• One: has the company understood what it broke? Not in interviews. In behavior.

• Two: is the audience’s perception turning? Sentiment moved first on the way down. It will move first on the way up.

• Three: does that turn convert into paying products before the market reprices? The window between the perception turning and the financials proving it is where the return lives.

If the answers to the first two are yes, today’s price is wrong, because it was set by extrapolating the erosion forward, and the erosion has stopped. The third question only determines when the market admits it, not whether.

Below the line, I go through the evidence, question by question, and show you whether the answer is yes.

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This post is the foundation of the week. The market big picture from a systematic framework: where we are in the cycle, where we are going, when to be careful, and when the nowhere-to-hide moment arrives. Which assets to favor and which to avoid, the setups the framework generates, and the positioning view that ties it together.

Short on time? Skip to the Positioning Overview.

Last week the market got what it wanted, and it did not care. After a disappointing NFP, inflation and producer inflation came in below expectations, while retail sales were disappointing. In a normal scenario, bond yields would fall hard, lifting risk assets, especially long-duration assets, higher. But not this time. Only gold wanted to go up.

This is how a term premium shock starts unfolding. At first, things don’t move when they should. If the term premium rises more, the consequences will be more direct.

So far this behavior is consistent with how the market reacts at times of term premium pressure.

This is apparent in how the market reacts to AI earnings. AMAT and Cisco reported last week, above consensus, and still sold off. The market still punishes too much AI spending, and rightly so.

But there are signs that some parts of the AI trade are intact. Memory. The Kospi rebounded from the support zone we gave, and China started to underperform. It means that the Korea-to-China safety rotation is over, and investors are starting to look for a way back into the Korean trade. That’s why we bought Micron last week.

The biggest risk is that the market is trying to bounce into a term premium shock, just when the consumer is weakening.

Let’s go deeper into that thought.

Understanding the market is understanding the context

Usually this is behind the paywall, but I can explain the story better with this chart. The DTO Cycle Allocator Model is a long-term asset allocator based on the stage of the business cycle. It beats the S&P 500 with smaller drawdowns. Usually the greatest outperformance happens in the recession and stagflation quadrants, by putting us out of the market in time. But most importantly, it gives us an edge by giving us the long-term view even in times of extended volatility.

Here is how I look at it. As the incoming CPI and PPI data was benign, while inflation expectations remained low, the inflation impulse faded and is now around zero. It means that no change is the most likely path. We won’t achieve 2 percent inflation, but there is no fear of runaway inflation either.

But my worry is the growth quad. I use forward-looking indicators, like ISM PMIs, earnings breadth, and some intermarket ratios. No current data like retail sales or non-farm payrolls, because they are lagging. Now the forward-looking indicators say growth is strong, while the current indicators point to much lower growth.

It could happen that the growth impulse goes toward zero, and we arrive at a state where no growth or inflation pulse is pushing the system in either direction.

It would mean a range-bound market, where aside from a few trends, mean-reverting forces dominate. This is the longer view now. The immediate threat is an overvalued market meeting a term premium shock.

Watch the small caps

The SPX/RUT ratio (large cap vs small cap) will be an important indicator going forward. Lower rate hike expectations are good for the Russell, but the term premium shock and the growth scare could hurt it the most. If the RUT starts to underperform, the shocks have started to bite. I don't want to see this happening together with the outperformance of defensives.

There is good news

DeepSeek is raising its prices (4-fold), meaning Chinese AI is not free after all. This is a relief for Western AI providers and shows the market that there is no clear winner, and in today's context this is good news.

What I think

The market is not bullish or bearish here. It is balanced between three outcomes, and I know what I am watching to see which one wins.

• The bull case: reflation turns into goldilocks. The inflation impulse is already around zero. If the forward-looking growth indicators hold up and the term premium pressure eases, we land in goldilocks. That is a very strong setup for risk assets, and it is a live possibility, not a fantasy.

• The base case: range-bound. If the growth impulse fades toward zero as well, nothing is pushing the system in either direction. Mean reversion dominates, with swings to both sides. In this regime, beta earns you little. Theme selection is what pays, especially themes uncorrelated to the AI trade. This is exactly why the European themes below matter.

• The risk case: a bounce into a term premium shock. The market tries to rally just as the consumer weakens and the term premium bites. The tell is the one I gave above: the RUT starting to underperform, together with defensives outperforming. If I see those two at the same time, the risk case is winning.

One more thing. The lack of one-sided positioning is information in itself. There are bulls and bears on both sides, which means no squeeze risk in either direction, and none of these three scenarios is priced out. The market is paying you to wait for the trigger, not to guess.

Not to mention the fact that despite the risks, the Nasdaq trend is intact and we cleared the main VWAP line.

Gold is profiting from the term premium shoch, because this is the debasement trade

I don’t want to write much about it now, because the thesis is wroking out nicely. But I encourage you to read the pieces below about gold:

A selective case for Europe

The chart below is the DAX/SPX chart, and usually around here the investor world wakes up and realizes there is a Europe on the investment horizon. And look at 2022, where the outperformance started at the height of the energy crisis, so there is no strong reason to be pessimistic again.

Now remember, we have two stocks from Europe. One is up 25%, the other is up 7% in the 5 weeks since we recommended them. But I dug deeper, and I found 3 interesting themes we are going to dig deeper into.

Below the paywall:

• Most of the time everybody speaks about the AI trade, but I find it increasingly important to find trades uncorrelated to the AI trade. If they have the potential and do not go down if the AI trade goes down, it’s a powerful diversification tool.

• Behind the paywall I show you two trade ideas I find to satisfy these criteria. One is from the US, the other is from Europe.

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This is the most important work I do. Running 36 intermarket ratios through the same framework every week forces me to see the market the way it is, not the way I want it to be. Most of my trade and article ideas start here.

For longer-term positioning, the bigger sustained moves get set up here first, weeks before the price action makes the regime shift obvious. For swing trading, the false divergences inside a larger trend are some of the cleanest entry points the tape produces, and they only show up clearly with a cross-asset map running underneath.

The map covers leadership, factors, credit, commodities, rates, and global FX. Below is this week’s diagnosis. The opening reads where capital is sitting and where it still has room. The scenarios that resolve the next two to four weeks come after, with the cross-asset signals that print each one first. The nine block-by-block reads underneath build the layered view.

The Monday Macro Playbook is where this gets translated into positioning. The Map says what is happening; the Playbook says what to do.

The Big Picture: The Bounce Is Positioning, the Ceiling Is Term Premium

The market got the news it wanted and refused to trade on it. That’s the whole thing. Soft CPI, soft labor data, exactly the setup where the rate-sensitive stuff is supposed to rip. And it didn’t. Not in one place, in five, and they’re five instruments that have nothing to do with each other structurally.

• Homebuilders still can’t take leadership back from real estate after six months of trying.

• Regional banks quit leading their own sector in July and haven’t come back.

• The dollar wouldn’t go lower on dovish prints.

• Investment grade against Treasuries is still printing fresh downside, right now, in real time.

• And value only stays alive because yields won’t come down, which is the same fact from the other side.

When five unrelated gauges all say no to the same question, that’s the answer. It’s a discount rate event wearing a growth scare’s clothes. The long end is repricing term premium and everything downstream is reacting to that, not to a demand problem. Despite lower NFP and retail sales prints.

There are two different kinds of damage on the board and they have completely different half-lives:

• The equity-internal damage is positioning. Momentum failed, semis got washed out, high beta went back into its range. That stuff mean-reverts in weeks. It’s just people getting out of crowded trades.

• The long-end damage is macro and it does not mean-revert. It’s a level shift in the cost of duration.

If you hold both at once, you get a shape that almost nobody is positioned for: a high beta bounce into a rising discount rate. It works, and then it stops working higher than the bears expect and lower than the bounce makes people believe.

That’s uncomfortable to trade and uncomfortable to write about, which is probably why nobody’s saying it. The bulls want the bounce to be the start of something and the bears want the long end to break everything immediately. It’s neither.

The tell that separates them is one relation. Investment grade against Treasuries is the only thing on the entire board still actively moving. Everything else is either a finished regime change, a range, or a stalemate. So that’s your ceiling gauge. If it stops printing fresh lows, the ceiling lifts and the bounce runs. If it keeps going, the bounce dies.

Speculation isn’t ending, it’s changing address

Look at how leadership topped. Discretionary over staples went first, then high beta over low vol about a month later, then small caps, then equal weight in August. Every peak was set by a more defensive version of the same appetite. That’s a ladder, and the market climbed all the way down it. There’s no rung left.

But then look at the gold complex. Juniors are still range-bound against seniors. That’s early, not late. In a mature speculative leg the juniors are running. If both of those readings are true at the same time, and I think they are, then the next high beta episode doesn’t happen in equity beta.

It happens somewhere else, and the miners are the obvious candidate because that’s where the term premium repricing actually pays.

Which reframes the metals story completely. The miner regime change isn’t a risk appetite signal. It’s the leading edge of the same discount rate repricing that’s killing homebuilders. Same event, opposite sign.

And the trigger to watch isn’t the gold price, it’s juniors clearing that range against seniors. Until that happens you’re early. When it happens, that trade is crowded.

Third thing, and this one only exists because two blocks that never talked to each other happened to overlap.

The carry leg is intact

The MoF has a level they’ve already defended once, and if they go again and carry traders loses the fight that’s a global liquidity event landing directly inside the high beta bounce. Carry funding and that bounce are the same money.

The next steps in the AI-trade and semis

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As an investor, interest rates are at the very top of my mind because we usually can profit from a monetary policy mistake. And these mistakes happen all the time. Think about it.

• The market melt-up in 2021 was driven by a classic policy error: the Fed refused to hike rates when inflation was already climbing.

• The run-up to both the dot-com bubble and the financial crisis was similarly marked by loose monetary policy, with those bubbles ultimately burst by a hawkish Fed.

Knowing what the Fed will do next is everything. To figure that out, understanding the labor market is key. It dictates what happens to consumer spending and determines how deeply an inflation shock can seep into the service sector, turning into a persistent, structural problem.

The timing could not be better. I have just finished upgrading my traditional Excel models into a fully integrated, live proprietary dashboard. So, it is time to show what the data actually tells us about the labor market.

First, a warning. This post is not for the faint-hearted. It relies on a coherent framework built from multiple charts to make sense of the labor environment.

To be clear, this is not a traditional econometric model. Instead, it reads various charts in an economically rational way, telling a clear story of how incoming labor market data shapes the Fed’s view on the future path of the federal funds rate. When evaluating the labor market, the Fed cares about two things. No more, no less:

• Is the labor market inflationary or disinflationary?

• Are there early signs that it could slow down consumption and, by extension, economic growth?

Every piece of data that comes in every month goes through this lens. I ordered the labor market data into 6 brackets, and it is organized to lead each other.

• Labor demand data contains data which usually leads the labor market by 3-6 months. So it is an early warning indicator.

• The Stress tab shows you whether these early warning signals are starting to materialize or not. It is important that an early warning could mean improvement and deterioration as well.

• The Stock is the result. So, do the early warning signals and their realizations affect employment and unemployment?

• The Income section asks how the labor market situation affects consumer income.

• The Consumer tab shows us how all of it influences how consumption is taking shape.

• The final tab gives us a clue how the Fed usually thinks about it.

1. Labor Market Leading Indicators

Taken together, labor demand has stopped falling (A1), and that is all it has done. Job postings sit barely above their pre-pandemic index level against a much larger labor force, and the one vacancy series (A2) that jumped was the lagging monthly survey, not the weekly data that runs a month more current. The quits rate (A3) stays flat at a weak level, which is exactly what happens when the overall hiring rate is low and there are few outside offers worth taking. Average weekly hours (A3) have not been rebuilt, and temporary employment has stopped falling without starting to grow. This indicates that firms are serving what demand there is without committing to new permanent headcount. (A4) Consequently, wage growth stays soft because pay accelerates through job switching, and right now, nobody is switching.

Ultimately, the market looks healthier on the surface but would break faster under pressure.

The working week has already been cut, so the operational cushion firms normally use before touching headcount is remarkably thin.

Labor Market Stress Indicators

There is no broad-based firing in the labor market (B1), and the unemployment rate does not point to an imminent recession (B4). However, actual hiring runs well below what the headline vacancy counts imply. The median unemployment spell has barely improved, and some job seekers have stopped looking altogether, a dynamic the next section explores in detail (B3. Jobless claims only capture workers who actively file, meaning anyone walking straight out of the labor force never appears in these metrics at all.

Ultimately, this is a low-turnover market. Whoever currently holds a job is safe, but whoever does not is largely locked out.

The Labor Market Big Picture

The divergence between the two employment surveys (C4) has widened to 1.2 index points over three years, representing a discrepancy of roughly two million jobs on a base of 160 million.

Historically, this gap always resolves. If it ultimately resolves toward the weaker household survey, it implies that actual payroll growth has already been negative for some time. In this scenario, initial jobless claims would not move. Employment shrinks without a spike in layoffs when hiring freezes and natural attrition continues, perfectly reflecting the low-turnover market described earlier. This dynamic would also reconcile the current macroeconomic contradiction where headline payrolls appear positive while the prime-age employment-to-population ratio steadily falls.

Ultimately, this is the most uncomfortable combination a labor market framework can produce.

Jobless claims stay low, the Sahm rule remains dormant, no traditional early warning indicators trigger, yet underlying employment is falling the entire time. The reality only surfaces in a structural revision notice months after the fact.

Connecting the Labor Market to Income

The income side of the equation is actively decelerating, yet consumption is not. Over the past eighteen months, withheld payroll taxes have slowed from around 8 percent to below 6 percent, while the retail control group has actually accelerated.

Currently, two primary sources fund this growing gap:

• a household saving rate that has compressed from 4.9 percent down to 2.7 percent,

• and income accruing at the top decile through bonuses and equity compensation.

Ultimately, this dynamic leaves two possible exits:

1. either equity markets must move continuously higher to sustain the wealth effect,

2. or aggregate wages must reaccelerate.

Since absolutely nothing in the underlying labor data supports a wage reacceleration, the consumer remains heavily exposed to asset prices, a variable the labor market data inherently says nothing about.

From Income to Consumer

On the surface, the consumer appears remarkably strong today. Goods consumption is outpacing services, credit growth remains normal rather than distressed, delinquency rates are falling, and banks are not tightening lending standards.

However, three of these four metrics are inherently backward-looking. Credit card delinquency typically turns four to six quarters after an initial income shock, and the data series itself is already two quarters stale upon release.

The only truly forward-looking indicator in this block is restaurant spending, which currently sits more than two percentage points below the retail control group.

This means the most deferrable discretionary item in the household budget is actively lagging while the broader aggregate accelerates.

The Labor Market Verdict

The labor market is effectively frozen. While there were signs of improvement at the beginning of the year, that momentum has completely stalled. As the momentum diffusion chart below illustrates, the data has shifted away from green (improving) and settled definitively into yellow (unchanged) and red (deteriorating). The forward drive is gone.

What the Fed should do?

The message from the data is clear. The labor market wants the Fed to ease a bit (F5), yet the bond market is still pricing in some tightening due to lingering inflation risks (F3). Crucially, there is no massive disequilibrium here.

The labor market is not screaming for immediate rate cuts, and the inflation outlook does not warrant emergency rate hikes.

So what does this mean for monetary policy? Despite the official end of forward guidance, Chairman Warsh will have to provide exactly that. How will he navigate it?

• When inflation prints hot, he will use the press conference to repeat relentlessly that the inflation target remains paramount.

• When inflation risks temporarily recede, he will pivot his rhetoric to emphasize the softening labor market.

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Glossary for Defy the Odds is here.

Disclaimer: Nothing here is financial advice. These are reflections on macroeconomics and markets, meant to spark ideas and sharpen decision-making. To truly Defy the Odds, think independently, question everything, and do your own homework.

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However, what is happening in the market right now is far more critical than that summer turning point.

The true confirmation of a debasement regime is a specific market behavior: gold rising concurrently with a selloff in the long end of the curve. Gold up, yields up, together.

We are seeing that exact signature right now. The term premium on the 10-year Treasury just printed a fresh high, reaching levels not seen in well over a decade. The 30-year yield is pressing new cycle highs. The bond market is demanding higher compensation to hold government paper than at any point in this cycle.

Crucially, gold is rising with those yields. This is the debasement trade moving from a theoretical scenario to reality.

But for us, this is old news. Why I write to you is because gold miners are on the verge of a multi-year breakout.

Look at the miners

The traditional rule in this environment is straightforward: own the metal, avoid the miners. Rising yields compress equity valuations, so the GDX/GLD ratio lags while the metal runs. That lag is not a bug; it is the regime confirming itself, just as it did in April, May, and July.

But right now, the miners are outperforming.

The GDX/GLD ratio has broken the downtrend it carried since February. More importantly, it is eyeing a breakout from a 13-year-old range.

In a standard debasement regime, this outperformance should not be happening. Many believe that miners are always the better choice, but this is not true. It depends on the gold regime we are in.

The term premium shock is the debasement trade

Earlier this year, the bond market began signaling a shift from pricing in an energy shock to pricing in fiscal realities. The missing element for a true debasement regime was gold’s participation. The confirmation required gold to rise alongside a selloff in the long end of the curve.

Today, the evidence is clear. The term premium has pushed through decade highs, and the 30-year yield is riding the top of its two-year channel.

To confirm this is a fiscal repricing rather than just a returning energy shock, we can look at the relationship between oil and gold. In March, rising oil meant hotter inflation prints, a hawkish Fed, higher real yields, and lower gold prices. That transmission mechanism is currently broken. Oil is rising, and gold is rising with it.

That break tells you what the market has stopped expecting. It is watching the inflation impulse build and it is no longer pricing a Fed response to it.

Recent labor market data provided the catalyst for this shift. Softening employment figures gave Fed Chair Warsh the necessary cover to pause the inflation fight.

Typically, if the market interpreted weak labor data as an impending recession, the long end would rally and yields would fall. Instead, the long end is selling off.

The bond market is pricing in a choice. It anticipates a Fed that will tolerate warmer inflation to support employment, leaving the long end of the curve to absorb the fiscal premium.

As long as this dynamic holds, the debasement engine runs unchecked: the Fed sits, the bond market charges more for duration, and gold rises with yields.

The Asymmetry of the Real Yield Ceiling

Everything above describes a market buying gold in spite of rising yields. What makes this setup asymmetric is a chart that is not moving at all.

For months, the ten-year real yield was the single line that decided gold’s direction. Every inflationary print pushed it higher, and gold took the hit. It has now stalled at a multi-year ceiling, the same resistance band that has capped and reversed it repeatedly. It is standing still while the long end sells off and oil climbs, precisely the environment that should be driving it higher.

That standstill creates a highly asymmetric distribution of potential outcomes.

• First, if the real yield simply remains flat at this ceiling, the debasement bid continues unopposed. Gold rises with the term premium, without the headwind of rising real rates.

• Second, if the real yield rolls over and declines from this resistance level, a traditional tailwind joins the debasement engine. A falling opportunity cost attracts additional capital, further accelerating the move in the metal.

The primary risk is a decisive breakout above this three-year ceiling. Such a move would invalidate the thesis and pressure gold lower. However, this invalidation would be clearly visible on the tape, offering a defined level for risk management.

The Mechanics of Miner Outperformance

This brings us back to why miners are currently outperforming the metal, breaking the conventional rule of a debasement regime.

The traditional headwind for miners during a period of rising yields is the discount rate applied to their future cash flows. Specifically, it is the real rate (nominal yield minus expected inflation) that compresses equity multiples, not the nominal yield.

That is the real leg that just stalled. Nominal yields are rising on inflation compensation and fiscal risk premium, so the mechanism that normally punishes miners is inactive.

Simultaneously, miners are experiencing significant margin expansion. Revenue is increasing alongside the gold price. While energy input costs (particularly diesel and power) remain a critical variable to monitor, the gold price is currently repricing higher at a faster rate than the cost base can follow.

With margins expanding and the discount rate neutralized, miners gain a structural advantage. Furthermore, if the real yield begins to fall from its current ceiling, miners will benefit from both margin expansion and multiple expansion simultaneously.

The 13-Year Resistance and Systematic Flow

Zooming out on the GDX/GLD ratio reveals a critical technical structure. There is a horizontal resistance level that the ratio has not managed a weekly close above since 2012.

This level was tested in 2016, during the post-pandemic rally, and earlier this year. Each time, the ratio failed to break out.

For over a decade, the market has consistently signaled that the macroeconomic configuration was never quite optimal enough to justify owning the equities over the physical metal.

As outlined above, gold is repricing higher on fiscal risk, margins are expanding, and the discount rate is parked at a ceiling. This specific configuration provides the conditions necessary to clear a 13-year technical hurdle.

The implications of a monthly close above this level for the second time extend well beyond technical analysis.

Systematic money, trend followers, and institutional allocators driven by long-horizon technical mandates typically ignore a ratio grinding sideways in a long-term range. They wait for a definitive structural signal.

The sequence unfolding here has three distinct stages.

1. The debasement engine is the ignition, and it is already running.

2. The real yield rolling off its ceiling represents the second stage.

3. The structural breakout and the subsequent arrival of systematic flow constitute the third. Each stage can operate independently, but together they compound the momentum.

The third stage is currently being tested. Recognizing the fundamental mechanics driving this test before the technical breakout is widely confirmed is where the true opportunity lies in this trade.

The macroeconomic analysis concludes here. The stock selection system and the specific miners that pass our quality filters are detailed below.

The gold screener

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This post is the foundation of the week. The market big picture from a systematic framework: where we are in the cycle, where we are going, when to be careful, and when the nowhere-to-hide moment arrives. Which assets to favor and which to avoid, the setups the framework generates, and the positioning view that ties it together.

Short on time? Skip to the Positioning Overview.

Three developments are interesting for markets

The mother of all TACO and a Middle East without Trump

Trump Hints US Will Let Economic Pressure on Iran Do the Work. Translation: the US lacks the ammunition to continue precision bombing and cannot afford the high inflation a Middle East escalation would bring. At the same time, Saudi Arabia, Pakistan and Turkey signed a pact to defend each other against outside attack, while Iran is working with Oman to negotiate passage through the Strait.

Reading them together, the Middle East is beginning to reorganize itself around a world without the US.

My fear is still that a physical constraint sits nearby, and we will hit it eventually. But

They will price it in once real shortages emerge and hurt GDP, causing the kind of inflation shock we saw this year. Honestly, this suggests markets are more resilient than we assume. For now, this remains a tail risk until the market prices it.

But this tail risk may not be far away.

Trouble in Data Center Land

On August 3, Governor Abbott ordered ERCOT and the state utility commission to audit every data centre project seeking grid connection and paused approvals until the audit is complete. The queue holds more than 474 gigawatts across roughly 1,800 projects, about 90% of them data centres. Texas has never drawn more than about 95 GW at once.

Connection requests are nearly free, so developers file for the same project at multiple points, and speculative sites sit in the queue alongside funded ones. Nobody knows which is which, including the grid operator. The audit aims to sort them by making each project document its power plans, water use, tax incentives and ownership.

The constraint is timing, not demand. Texas was the release valve for projects blocked elsewhere, and it now faces a queue that cannot move until an audit with no published deadline finishes. Expect delays in data centre buildout, and the same delays could ripple across other states: Georgia, Virginia, Arizona, Ohio.

Is the US labor market in trouble?

Last week non-farm payrolls came in at negative 23k, and the market reacted as expected: US growth is slowing, rate cuts are coming. This is dangerous, so let me show you the base rate.

These are seasonally adjusted data, so this should not happen, but in the last three years US job growth dips every summer, and the same pattern is playing out now. The market prices in rate cuts, and any bad news pushes equities higher because rate cuts are treated as a solution to everything. I do not buy this logic, but that is how things work now.

What we can do instead:

• Don’t panic about growth. In recent years the labour market has been a poor predictor of growth. (I will write this up separately, because there is real confusion here.)

• This seasonal behaviour is tradeable. The market already gave us a signal. (More in the paid section.)

One thing matters here

In the last few years, bad NFP prints pushed bond yields lower. This time, the long end does not budge. That is a signal in itself. It affects how we think about duration, the broader bond market, the Fed, and gold. More on this in the relevant sections below.

Below the paywall:

• Asset allocation from the DTO Cycle Allocator

• A new intermarket trade

• Can the AI rally continue?

• An important update on gold

• Two trades posted in real time in the chat

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These megatrends are:

• Physical constraints and the electrification bottleneck

• Sovereign debt and modern financial repression

• Structural inflation volatility (the Rug-Pull Regime)

• Geopolitical supply chain fragmentation

At the end of this note, I will also share a quick preview of what comes next and the new systems we are building at Defy the Odds to track these shifts.

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1. The Physical Constraint: Electrification and the Copper Bottleneck

The transition to AI and green energy is colliding with a hard physical ceiling. Total electricity use is growing significantly faster than traditional GDP-linked models allow. The true crisis sits in the 2030s when the operating base of existing copper mines melts down, leaving a deficit that a high price today cannot quickly fix.

To trade this reality without getting shaken out by cyclical volatility, you need to read the financial plumbing. Our framework utilizes metrics like the China Credit Impulse and the AUD/JPY cross to separate cyclical forces from structural signals, telling us exactly when to buy the deficit.

• Wiring the Megatrends: The Copper Constraint on AI and Electrification

• Reading the Plumbing: When to Buy the Copper Deficit

2. The Sovereign Debt Endgame and Financial Repression

The US debt problem is fundamentally misunderstood. The US spends like Canada but taxes far less, driven heavily by healthcare costs and demographics. This forces a hard decision point in the early 2030s when major trust funds deplete. The government cannot default, so it must innovate. Warsh is utilizing five task forces to quietly reshape the Fed and build the plumbing for modern financial repression. The goal is to make government bonds so cheap to hold that captive demand absorbs the debt.

• Mapping the Point of No Return for US Debt: Why It Arrives in the Early 2030s

• Five Task Forces, One Agenda: Warsh’s Blueprint for Reshaping the Fed by Proxy

3. The Rug-Pull Inflation Regime

Forget a straight-line repeat of the 1970s. We are entering the Rug-Pull Inflation Regime, a volatile era where a 2.5% to 3.0% base is violently punctuated by 5.0% to 6.0% spikes. The disinflationary pull of AI and China is locked in a tug-of-war with the inflationary push of massive capital expenditure and global fiscal dominance. In this environment, “buy and hold” is dead. You have to master the rotation and that idea shaped how Defy the Odds looks at markets.

• The new Rug-Pull Inflation Regime: The End of Stability

4. The Geopolitical Fracture of Supply Chains

The war with Iran is not just an oil shock and the disruption does not arrive all at once; it moves sequentially from LNG and helium to diesel and petrochemicals. This creates a timeline where critical industries face physical shutdowns, not just higher costs. Understanding this sequence allows you to position your portfolio before the downstream damage hits the broader market.

• Mapping the Damage from the Iran War I: The Timeline of the Supply Chain Shock

What Comes Next

These materials cover four primary megatrends that will dictate market returns for the foreseeable future. But we are just getting started.

Looking ahead, we will expand our coverage to include the next wave of structural shifts, categorized into three distinct pillars:

1. The Physical Reality

• Nuclear Renaissance and Baseload Energy: The realization that the AI and green energy transitions cannot survive without round-the-clock nuclear power.

• Resource Nationalism: The weaponization of critical minerals beyond copper, from uranium to rare earths.

• The US-Europe Decoupling: How shifting trade policies, capital flight, and industrial subsidies are permanently fracturing the transatlantic economic alliance.

2. The Financial Plumbing

• The Mechanics of Modern Financial Repression: How the state quietly forces captive demand for its debt, and whether stealth yield control can actually survive in a highly financialized 21st-century market.

3. The AI and Technology Layer

• Sovereign AI and the Physical Compute Bottleneck: Why nation-states are beginning to hoard compute infrastructure like strategic reserves, and how advanced packaging and liquid cooling are becoming the new geopolitical chokepoints.

• Defense Technology and Dual-Use Infrastructure: The structural tailwind for aerospace and defense tech driven by a fragmenting global order and autonomous systems.

The Engine Under the Hood: The AI Capital Flow Monitor

On Monday, we mapped the tactical capital rotation. Today, we laid out the structural megatrends. But understanding the macroeconomic theory is only half the battle. You have to track the execution in real time.

Right now, we are operating in Stage 1. This is a purely price-based layer that tracks 20 distinct nodes across the global semiconductor and hardware space. It continuously answers three critical questions:

• which nodes is capital moving into,

• is the move broad or narrow,

• and what exactly has changed since our last evaluation?

It mathematically flags early capital rotations and structural leadership without relying on media narratives.

But this is just the foundation. We are actively building Stage 2 and Stage 3.

These will integrate the physical reality into the model. This means plugging in hard macroeconomic data, TSMC monthly revenue figures, global export and import volumes, and shifting analyst estimates. Once complete, it will give us a real-time, structural pulse on the entire AI value chain.

We are not reinventing the wheel here. We are doing exactly what Michael Burry did before the 2008 financial crisis

We are digging deep into the unglamorous, tedious data that everyone else skips because they find it too boring. We are systematically checking the plumbing of the market, day after day, to find the structural truths hidden underneath the daily price action.

This monitor is being designed to seamlessly complement our existing institutional frameworks, like the Intermarket Macro Map and the DTO Cycle Allocator and the stock selection screeners we use.

It will run quietly in the background, doing the heavy data lifting and powering the next evolution of our macro research.

I will share more details on the final rollout and how to access this system in the coming months.

Enjoy the deep dives, and I will be back in next week.

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Glossary for Defy the Odds is here.

Disclaimer: Nothing here is financial advice. These are reflections on macroeconomics and markets, meant to spark ideas and sharpen decision-making. To truly Defy the Odds, think independently, question everything, and do your own homework.

Leave a comment

• The AI trade is overcrowded and this is already spilling over to small caps.

• At the same time, the Iran situation is worrying, as seen in diesel prices and other critical commodities. This is a waiting game probably ending in disaster.

• And then there is the carry trade, which could serve as a severe liquidity shock to the market.

Long-term yields are being pushed higher by a rising term premium. This is not an improving growth outlook. This is the market demanding a higher premium for knowing less about the future.

But we do what we always do. In this article, we look at the base rate probability. In other words, we take a deep look at how the market usually handled these kinds of shocks between 2021 and 2026 in order to understand what could happen now.

The post below gives you a clear understanding of how the rising term premium affects asset classes and sector rotation. From that, we map how the current situation could play out.

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While I am stepping back from the screens to recharge, the macroeconomic landscape remains as dynamic as ever.

We have a dovish Fed in a hawkish disguise, a Yen-tervention, a developing AI story and an ongoing rotation out of AI, growth and momentum factors.

Not to mention that a quick and severe drawdown is not out of the question. Not the base case, and our rotational ideas serve as protection to some degree, but if we think in probabilistic terms, this is not a zero-probability event.

Fortunately, I have discussed this event many times in the past few months. I selected the most important articles to re-read in order to understand the big picture. Not what is happening this week, but what the main trends are for the second half of the year, how you should think about them, and what the trigger points are.

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The macro big picture

The macro quad is an essential part of the DTO Cycle Allocator, and its main benefit is that it helps us think clearly about where we are in the cycle. This is especially useful at times like this, when there is the possibility of a drawdown and everybody is worried about the end of the cycle. But in investing, one of the most important things is to establish a base probability so you know what USUALLY happens in a given setup. After that, we can discuss the caveats.

So let’s tune out the noise for a minute. The most important thing to keep in mind is that no bear market has ever started while we are in a Goldilocks (high growth, falling inflation) or Reflation (high growth, rising inflation) regime. This means that, for now, we don’t need to worry about a prolonged bear market.

We can go one of two ways from here:

1. We stay in these two regimes. The market will eventually trend higher, and our rotation ideas will likely work out well. (High probability)

2. The market goes rangebound or experiences a sell-off that gets bought back, but in the meantime, our macro quad shifts into recession or stagflation territory. In this scenario, we could say the market has put in a top, and the probability of an extended downtrend has risen significantly. (Low, but not zero probability)

The common denominator between the two outcomes is that less crowded trades will take the smallest hit, and rotational plays could continue to work even if the broader market chops sideways. Therefore, rotation serves as both a defensive and an opportunistic move at the same time.

Liquditiy is deterioraring

Liquidity conditions have been deteriorating for roughly two months now, and this is what is hurting positioning.

This is all related to the Fed and the side effects of the Iran war, and this is what is forcing the stock market to rotate. I was the first on Substack to write about this two months ago:

What is happening behind the scenes?

Over the last two months, capital has started rotating out of Semis and into other areas of the market. Value first, Quality second, while Momentum and Growth suffered. This is exactly why Europe and even China have started to outperform.

If you want to know how to track this ahead of the crowd, our intermarket framework is the key:

The rules just changed

The Iran war changed the behavior of markets, and we have to adapt to it. This macro environment changes how the market views the AI trade. This information, coupled with how the market reacted to tech earnings, gives us the roadmap of where the AI rally goes next.

Durable trade ideas

I use an institutional-grade stock screener that identifies stocks with durable moats (we model this with a blend of five factors). I find these ideas especially attractive when they are sitting at multi-decade trendlines and I can comfortably argue why the macro environment provides a tailwind.

This post outlines the methodology and reveals five stock candidates. Among these, we initiated positions in Microsoft, Adobe, and Netflix a month ago.

In this article I suggested two European stock as part of the rotation out of Semis theme:

Bond market is in the driving seat

While others looket at Semis, we quitly wrote about Three weeks ago that the bond market as it quitley getting in the drivers seat. If you understand how the real rates and inflation expectations and the term premium interacts and shapes the nominal bond yields, you can understand why the market behaves a certain way.

Thanks to the Fed

With all the hawkish talk, Warsh is dovish in reality and just handed the drivers seat to the bond market. This is official now.

The dollar got the message

This post provides a comprehensive framework for thinking about the dollar and identifying which assets perform best in different dollar environments. In this article, I argued that calls for dollar depreciation were premature, and I outlined my reasons why. That was a month ago, but those catalysts have now played out, meaning dollar depreciation is firmly back on the table.

We have great hopes for gold

In this post, I use our in-house gold framework to map out the next steps for gold. Don't forget that gold is essentially four assets disguised as one, and there are specific regimes where we can be highly confident in both direction and magnitude. We have just entered a regime transition, and if it persists long enough, a gold breakout is likely. More importantly, if you want to understand how institutions think about gold, this is the article for you.

What Paid subscribers has to say:

Finally: we also have to talk about the tail risk

The current setup is highly reminiscent of the summer of 2024. History doesn't repeat itself, but it often rhymes. Therefore, it is still worth examining how the market behaved in similar scenarios.

Summary

To sum up, I will be largely offline this week to recharge. However, I am still keeping a close eye on the macro landscape and tail risks. If any major market event or significant structural shift occurs, I will drop a quick update in the Substack chat. Otherwise, I hope you find this reading list valuable. Have a great week, and I will be back with fresh analysis soon.

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Glossary for Defy the Odds is here.

Disclaimer: Nothing here is financial advice. These are reflections on macroeconomics and markets, meant to spark ideas and sharpen decision-making. To truly Defy the Odds, think independently, question everything, and do your own homework.

Leave a comment

This is the most important work I do. Running 36 intermarket ratios through the same framework every week forces me to see the market the way it is, not the way I want it to be. Most of my trade and article ideas start here.

For longer-term positioning, the bigger sustained moves get set up here first, weeks before the price action makes the regime shift obvious. For swing trading, the false divergences inside a larger trend are some of the cleanest entry points the tape produces, and they only show up clearly with a cross-asset map running underneath.

The map covers leadership, factors, credit, commodities, rates, and global FX. Below is this week’s diagnosis. The opening reads where capital is sitting and where it still has room. The scenarios that resolve the next two to four weeks come after, with the cross-asset signals that print each one first. The nine block-by-block reads underneath build the layered view.

The Monday Macro Playbook is where this gets translated into positioning. The Map says what is happening; the Playbook says what to do.

The Big Picture: The Dollar Breaks While the Unwind Picks Its Winners

Semiconductors are in a bear market relative to the index, but intermarket ratios confirm that it is only a positioning unwind without a growth scare.

The rotation runs through every definition. Large-cap growth loses to value, small-cap growth to small-cap value, high beta to quality. Momentum made a fresh low after its July rally failed. What leaves is arriving in quality, not in value proper.

High beta against low volatility and discretionary against staples are in confirmed downtrends. Small caps lost their regime against the index and equal weight is close behind.

The regions moved in the order of their AI hardware exposure. The most concentrated basket sits below the level it broke. Japan probed under its July shelf and recovered within days. Europe pushed at the top of its range instead of breaking lower. China has abandoned the bearish regime it held since spring, a change that took weeks to build.

Liquidity conditions are worsening, while credit is stable but confirming a rate scare. Stable credit makes this correction a buy-the-dip opportunity at this point.

Real estate against long bonds leads the page, driven by a selloff at the long end with the front end anchored. Homebuilders break down on the same force. Large banks reaccelerated over utilities, regional lenders refuse to join. The page prices a steeper curve coming from the long end. Easing is not in it.

The dollar index gave up its rising trendline and its horizontal support in one session, and the Australian dollar collapsed against the yen in the same session. Both moves run through a currency that was intervened in.

Energy changed regime against utilities and returned to the zone that capped it this year, with gold firm alongside. Every equity route into gold still loses to the metal.

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The Delta: The Dollar Breaks and Credit Reorders

• The dollar gives up its trend: DXY lost its rising trendline this, and AUD/JPY collapsed in the same session. Both moves run through the dovish Fed and the intervened yen.

• The semiconductor break confirms: last week the ratio was losing ground, this week it flipped against both the broad index and the tech sector, and both references confirm. RSPT/XLK, flat for a week, jumped in a single vertical session that has not yet proven it can hold.

• Small caps lose their regime: they held it last week without generating upside. Now the regime is gone and equal weight is close behind. The beta unwind reached the structure of the market, not just its factor expressions.

• China completes the turn: last week it was mounting a counter-move, this week the bearish regime held since spring is formally abandoned. The slowest signal on the page has finished building.

• The miner stabilization cracks: last week GDX/GLD and GDXJ/GDX stopped eroding, the first sign the market treated the gold price as durable. This week XME/GLD gave up its stabilization attempt outright and juniors sit back at the bottom of their range. The one demand-facing pair on the page is the weakest element again.

Rotation vs. Liquidation: Critical Inflection Points

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I am not going to answer that with a gut call, because the setup does not allow for one. Three forces are pressing on this market at once.

• Semiconductor positioning built up over more than a year, and crowding of that size does not clear in a few weeks.

• Real yields are grinding higher, and the long end is repricing risk in a way that compresses valuations for anything long-duration.

• And the Chinese AI story is quietly rewriting the economics of the entire frontier-model build-out. None of these resolves on its own timetable, and none of them is fully priced.

So the picture is genuinely complicated. But this week delivered two things that made me think.

• The macro, and how the Fed reacts to it, gives us the playing field: which parts of the market get pressured and which parts work as relief valves.

• On the micro side, four megacap earnings reports landed this week. Read together, they give me a fingerprint, a profile of what the market is now paying for, and that profile points to the tradeable setups in the next leg.

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In this post I dissect the Fed’s new reaction function and how the bond market should be read from here. From that we can map what markets are likely to do over the next few months.

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This was a dovish Fed in hawkish disguise

Watching today’s press conference, I remembered an old saying: do not listen to what I am saying, watch what I am doing.

Applied to Warsh, this was a dovish Fed in hawkish disguise. He repeated more than twenty times that the Fed has a 2% inflation mandate and that the Committee will do everything in its power to deliver price stability. And what did they actually do?

They did not raise the policy rate while inflation sits significantly above target. Instead they point to supply shocks and productivity growth.

Sell the bonds

Warsh said the bond market, and real rates in particular, have partly done the Fed’s job for it. There is an important distinction to make here. Yes, real rates have risen, but not because of good data, as the Fed suggests.

Rising term premium = bond holders had enough

More than half of the rise came from a higher term premium. First, uncertainty around the future rate path is higher, and that shows up directly in the term premium. Second, the bond market does not believe the Fed will be hawkish enough, and it needs to be. So the long end works as a release valve.

That is why the 10-year and especially the 30-year yields are rising. Today's curve shows it cleanly. The two-year fell four basis points to 4.24%, the ten-year rose five basis points to 4.66%, and the thirty-year rose more than nine basis points to 5.19%. The front end says no hike is coming. The long end says pay me for the risk.

Warsh’s real mistake: he invited in the bond vigilantes

The usual framing here is that Warsh just created a catalyst for the bond vigilantes. I would put it differently. Vigilantes fight the Fed. This Fed invited them in and then endorsed the result. Warsh treated the rise in market rates as evidence that participants are now pricing the data instead of the central bank, and he called that a change for the better. That is not a Fed losing control of the long end. That is a Fed delegating the tightening to it. If the Fed will not hike, the bond market will, and Warsh is comfortable with that arrangement.

Today another release valve opened: the dollar

For the first time in a long while, the dollar is down today while bond yields are up. That is the fingerprint of the debasement regime, and on a risk reward basis I treat it as a high probability signal.

I wrote a month ago that the dollar only needed a trigger to weaken. The trigger arrived today.

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In Part 1, we established the physical reality of the market. We mapped out the structural supply constraints of depleting mines alongside the massive demand shocks from electric vehicles, grid upgrades, and data centers to build the secular bull case.

Retail investors frequently buy a brilliant structural story at the worst possible time, only to get shaken out by cyclical volatility. Institutional macro managers know that to successfully capture a decade-long tailwind, you need a system to optimize your entry, manage your sizing, and monitor the ongoing health of the thesis.

That is exactly what Part 2 delivers. The metrics below act as the tactical dashboard for our long-term position.

Copper is a highly financialized collateral asset and the most sensitive barometer of global growth. If the secular story ever begins to crack, the cross-asset proxies and liquidity gauges in this framework will flash warning signs long before the shift appears in headline supply or demand data.

This is the Defy The Odds framework for copper. We are leaving the mainstream narratives behind to focus strictly on the asymmetrical "tells" and structural plumbing that dictate the cycle.

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