• The Software/ hardware trade in H1 was effectively a growth/value trade, but not in the traditional sense of active investor style bias.

• Hundreds of billions of dollars tracking style or factor benchmarks like ‘Value’ were actually long Micron, Sandisk and Google and then flipped them out at end June, replacing them with what were previously called growth stocks like Microsoft and Apple.

• Meanwhile, growth benchmarks that were long Microsoft and Apple, now have Micron and Google.

• This was nothing to do with active management or an investment ‘style’ and everything to do with index construction, but managers will be rewarded or ‘punished’ for the theoretical ‘Alpha’ they delivered relative to these benchmarks.

• It is quite possible that Leopold Aschenbrenner was ‘Situationally unaware’ that his longs were being sold and his shorts were being bought into and after this rebalance. And that his former friends on Wall St knew exactly what was happening.

• Once again, liquidity and market mechanics triumph over ‘fundamentals’.

Value investors have had a strong year so far in the US, up around 21% - not because they were avoiding AI, but rather because two of the biggest stocks in the benchmark, Micron and Sandisk, were up over 200% and 500% respectively in the first half.

By contrast, growth investors ‘suffered’ from the fact that Microsoft, Apple and others had a poor six months, with the growth index being up only around 5% year to date, with the best performing of the MAG 7 being Alphabet (Google) which was, curiously, also in the value index.

Now, of course, after the June rebalancing, that is all turned on its head. Sandisk and Micron have now flipped according to the FTSE Russell (and by extension most other indices) from 100% value to 100% growth, as has Google. Meanwhile, Apple and Microsoft are shifted to half value and half growth.

This obviously produces a problem for active managers benchmarked against these indices. As a value manager did you have 10% or even 15% of your fund in Micron as many value ETFs did? It would have been a huge bet - not even ‘lucky Leopold’ Ashenbrenner had that much concentration (well apart from a huge options position in Intel). If not, you undoubtedly underperformed a benchmark world value factor ETF that would have around 13% in Micron and be up 37% ytd.

But fear not, that isn’t your problem anymore, instead, you now have to think about how much Apple and Microsoft you have, since they are in your benchmark now. Micron and Sandisk (Lucky Leo did have a lot of that one) are now the growth guys’ problem. The fact that Sandisk is off almost 40% since the end of June is instructive in itself - although it did have a nice 30%+ ‘pop’ after Citadel bought it off Lucky Leo (plus the discount of course).

To confuse matters further, we have two Value ETFs from the same provider, Blackrock. Their MSCI world Value factor ETF had a very good first half, since it contained a large position in Micron and by the end of June, it was up 37%, twice the return for the Blackrock Russell 1000 Value ETF. Over the last three months however, the position has reversed, since the Russell 1000 Value ETF no longer holds Micron, but the MSCI Value ETF still has a 13.6% holding in the company

On the flip side, the equivalent IShares Russell 1000 growth Factor ETF now has a stake in Micron, but also a 15% stake in Nvidia.

When benchmarks can be dominated by one or two stocks and when there is so much money officially and unofficially pegged to these benchmarks then the impact on underlying equities can be magnified dramatically - as can the so called skill or lack of skill of the underlying manager.

The drive to passive investing continues to produce perverse behaviours in markets that often run contra to the underlying principles of investing. By effectively allowing the robots to run the allocation while benchmarking active managers against this, the ‘rules’ determine the outcome. The robots buy and you have to buy to manage your relative return. No matter that you then effectively take on layers of risk, such as concentration risk, volatility risk and stock specific risk (UCITS rules prevent managers having more than 10% in a single name for example), to match the ‘benchmark’ return, you have to match the risk it is taking - even if that risk is objectively not in the interests of the underlying investor.

But then the underlying investor rarely comes into it these days.

While most long term thematic investing is aimed at long term growth stories, there are shorter term, but still meaningful, themes that are more cyclical in nature and reflect the sharp rise in profitability from operational leverage. Indeed, we have often said that the biggest reason that economic forecasts and stock market profits diverge is that the economic forecasts tends to ignore operational leverage – they assume that a 5% rise in nominal GDP equates to a 5% rise in sales and thus a 5% rise in profits.

Except that’s not always what happens. Bottom up investors, as opposed to top down macro traders, known that sales can rise by market share gains, by a shift in pricing power independent of GDP or by new products and services. ( An early lesson for all bottom up analysts should include a section on Porter’s 5 forces of competitive advantage). Profits can rise by lower costs, operating efficiencies, or inbuilt operational leverage. The latter often occurs in companies with relatively low operating margins, ones with high fixed costs but low marginal costs.

If the high fixed costs also mean that competition is limited, at least in the short to medium term, the excess returns can make for a highly attractive investment and this simple maths has long been behind the cyclical waves of investment into commodity related stocks.

This is, in effect, what has happened recently in the Memory sector. Notoriously cyclical, memory producers had shrunk to just three major players, the Koreans, SG Hynix and Samsung and the US chip producer Micron. Their strong performance over the last 12-24 months has all been associated with the sharp upturn in demand and sharp rise in price for high end chips connected with the AI build out, but, as we discussed (in DRAMatic Price Moves) when looking at the new competitor CXMT of China, even at the commodity end of things, the volume impact and operational leverage has been phenomenal in terms of profitability.

The Memory thematic remains intact until we start to see signs of excess capacity, or signs of weakening demand such as rising inventory or, most obviously price declines. This is of course separate from the amount we might be paying at any given time for investment in the underlying stocks. (Please note that, as ever, none of this should be considered investment advice. Please do your own research and always consult your investment advisor).

If Memory Stocks are the picks and shovels of the AI buildout, then mining stocks are leveraged winners in their own, more literal, goldrush

This analysis reminded us of another heavily cyclical sector which is seeing the value of its underlying commodity rally, pause and then rally again; Gold miners. Very heavily operationally geared, they had a powerful run on the back of the gold price hitting $5000 into the early part of 2026 before Gold faltered, the Iran War started and the attention switched to AI and the Memory stocks (helped of course by Situational Awareness and its clones as well as highly leveraged Korean Retail investors).

Now, as the Memory stocks recover from a much needed one step back after several steps forward and the old macro concerns – as much about the $ as geo-politics- return to support the underlying gold price, the miners look interesting once more.

Take for example, Canadian junior Gold miner Agnico Eagle mines, as an example of operational leverage. We have chosen in on the basis that, while relatively small, it happens to be the largest stock in the Van Eck junior Gold miners ETF as well as most other similar ETFs. A $110bn market cap company, it trades on 19 times 2025 earnings and 7 times sales. However, over the last three years, its total revenues have doubled, from $6bn to $12bn, obviously heavily impacted by the gold price, while its cost of revenue line has only gone up from $4.4 to $4.9bn over the same period. Pre tax income has accordingly jumped from $2.4bn to $6.7bn. Classic operational leverage.

Merely correlating with the Gold price is to make the same mistake that revenue growth equals profits growth. The average estimate for 2027 is a $15.5bn of revenue with a pretty large spread of $14bn to $21bn(!) reflecting a mix of assumptions about both price and volume.

However, in terms of Earnings Per Share, which doubled from $1.5 in 2022 to $3.7 in 2024, and then more than doubled again in 2025 to $8.9, for 2027 EPS are forecast to be between between $9.5 and $19.1. Again, a huge amount of uncertainty in that spread, revealing the operational leverage impact on the bottom line.

This of course translates into valuation uncertainty. Is it on 8x or 5x next year’s sales? Or, put another way, is it on 22x next years EPS. Or 11x? Note that we are not advocating for this stock in particular, rather using it to highlight the huge uncertainty that can come with operational leverage.

When looking thematically, this can translate into a whole sub-sector view. Some will have more operating efficiency, some will be closer to the ‘flip’ from negative to positive EPS and others will be carried along more directly by the price of the underlying commodity.

With Gold rallying 13% over the last month, the mining stocks are also tracking higher, which we would interpret as the market shifting their view to the higher revenues and EPS and by extension the uncertainty premium shifting lower. Market are about two questions: What is it going to earn? And what am I prepared to pay for it? The first is always uncertain, but as far as mining stocks go, the answer to the second looks like…a bit more than I was two weeks ago.

• US markets gyrated wildly beneath the surface in July and we recently found out a key reason why; a young, inexperienced and wildly over-leveraged trader from the West coast was in the process of being ‘taken out’ by the seasoned hunting dogs of Wall St. What we saw as software stocks surged and plunged while hardware stocks followed was the killing process.

• However, we see this as part of a much bigger turf war over who gets to create money. On the West Coast, you raise $2bn from a group of VC investors on an idea with no product (literally) and you are immediately ‘worth’ $32bn and until it went bust Silicon Valley Bank would lend you money against that valuation. Every bro is a billionaire, or at least a ‘centi’ (the new, yuck, expression for being worth $100m or more).

• On the East Coast you raise money from institutional investors for a fund and then apply 10-15x leverage to generate ‘low risk’ returns from exploiting arbitrage opportunities revealed by your ‘information edge’. Alternatively you get paid large fees to transform the pretend money of the West Coast into real money via IPOs sold into pension funds.

• ‘Lucky Leopold’ appears to have crossed from West into East Coast territory. His first year returns appear to have come from a ‘lucky’ IPO allocation, while his year 2 returns mainly came from putting an enormous ‘lucky’ call option on Intel, just before the US government (and Nvidia) took a stake.

• Year 3 and the Hunting Dogs of Wall St decide to take him down. Lucky Leo had now heavily leveraged his fund and confused being long stocks that will ‘win’ under your thesis and short ones that will ‘lose’ as being a hedged position rather than what it actually was, which is doubling down on the same bet.

• The problem with Wall St leverage is that you can get margin calls and even if you are a very big client, you may be worth more dead than alive. The Prime Brokers know exactly what your positions are and once your competitors do then all that East Coast leverage becomes your enemy rather than your friend.

Leopold Ashenbrenner is now something of a household name in financial circles, albeit not in a good way. Linked-in is full of articles about inexperience, hubris, poor risk management and ultimately nemesis in the form of grizzled Wall St trading titans like Ken Griffin and Izzy Englander.

The destruction of young Leopold’s somewhat ironically named Situational Awareness fund brought to mind a safari trip from a few years ago when we witnessed a pack of African hunting dogs track down a gazelle and strip it to its skeleton in a matter of minutes. (the still at the top is from a video of something similar). Once Wall St decided he was worth more to them dead than alive, he basically didn’t stand a chance.

While most people were unaware of Leopold until very recently, we have actually been following him for a couple of years now, indeed much of what is below is from a draft post that was written over a year ago. We publish it now, because it tells a rather different story to the now conventional one of hype, inexperience and an Icarus like rise and fall. Rather, we see it as one of West Coast leverage mixing with East Coast leverage and Leopold as the public victim of a brutal turf war over who gets to create money in the US.

We first noticed Leopold when he raised $225m in June 2024 on the basis of zero financial experience and a curious CV that involved graduating from Columbia in 2021 at the age of 19, attending two ‘unusual’ institutes at Oxford - the Future of Humanity Institute (closely aligned with the effective altruism movement backed by Elon Musk and other Silicon Valley luminaries) and the Global Priorities Institute - and then joining Sam Bankman Fried at FTX, resigning from his FTX foundation the day FTX filed for Bankruptcy in November 2022.

He next popped up six months later at Open AI in their ‘Superalignment’ team, where he lasted a year before being fired, whereupon he wrote his now famous essay on AI called Situational Awareness and almost immediately launched a fund of the same name. In this he was backed by the Collinson brothers (the founders of Stripe) and two powerful Silicon Valley insiders, Nat Friedman and Daniel Gross - who had been early investors in a lot of Silicon Valley businesses, including Stripe.

According to the Fortune article written in October last year (see here) Patrick Collinson reportedly met Ashenbrenner in 2021 at a 2021 dinner set up by a connection “to discuss their shared interests”, which, given he would have been 19 at the time, was another curiosity to our mind.

The Fortune article highlighted how ‘lucky’ Leopold had been in his second year to have a $500m position in Intel call options, approximately a third of the fund, shortly before the US government (and Nvidia) took a stake - and the share price went from $14 to $125. This is indeed (another) curious issue, but we had actually been looking at his big ‘winner’ in his first year, which was down to another piece of ‘good luck’, when he committed 20% of the fund to an IPO, that went from $40 to $125 and by our calculations was responsible for almost all of his year 1 performance.

A curious web we (Core)weave.

Back in April 2023 Coreweave, a specialised GPU cloud provider raised $221 in Series B funding, led my Magnetar Capital, with contributions from Nvidia and two Silicon Valley investors, Nat Friedman and Daniel Gross. It is perhaps worth noting that Silicon Valley Bank had just gone bust the month before and Friedman and Gross were active in financing a lot of start ups at this point. Nvidia of course is involved almost everywhere in Silicon Valley, especially in funding potential buyers of its GPUs. In May that year it raised a further $200m and in August 2023 secured a $2.3bn debt facility, again led by Magnetar Capital.

In December 2023, Coreweave announced a minority equity investment round of $642m, led by Fidelity with participation from Jane Street, JP Morgan Asset Management and inter alia Nat Friedman and Daniel Gross again.

Then, in May/June 2024 Ilya Sutskever, the Chief scientist of Open AI, who ran the Superalignment team that had briefly employed Leopold, ousted Sam Altman in a coup, but Altman came back and Sutskever then left. He then set up a company called Safe Intelligence Inc (SII) with Daniel Levy, former head of the Optimisation Team at Open AI and Daniel Gross (him again).

In September 2024 SII raised $1bn from Silicon Valley VC firms like Andreeson Horowitz and Sequoia and in March 2025 raised $2bn more, which apparently valued the business at $32bn. Despite having no product. This is leverage West Coast style. SII is incredibly secretive and its claims to be worth $32bn have echoes of the famous quote from the South Sea Bubble about ‘“A company for carrying on an undertaking of great advantage, but nobody to know what it is.”

In March 2025, Coreweave had an IPO to raise $1.5bn, anchored by Nvidia and the new and, by IPO standards small and insignificant, Situational Awareness Fund was allocated 1,225,000 shares at an estimated price of $40. That was basically 20% of their NAV, for a new fund, with a completely inexperienced manager who would normally be laughed at by Morgan Stanley et al.

The allocation of course had absolutely nothing to do with the fact that two of the backers of his fund were also early stage investors in Coreweave. It would however have allowed them to effectively operate a hybrid Fund, benefitting from both the Pre-IPO and the IPO.

According to the 13F filings, at some point during Q2 SA then sold all that stock for anything up to $175, but likely around the $100 level, giving then a $70m profit on $225m. A great start for first year returns and obviously all down to the fact that Leopold knew all about investing in AI….

As can be seen from the graph from WhaleWisdom, the growth in 13F AUM really took off from the end of last year, although it is difficult to separate new investors from new leverage. Plus of course those Intel options.

Meanwhile, in June 2025, Ilya Sutskever rejected an offer from Meta to buy the secretive SII and in July 2025 Daniel Gross left and now works at Meta Superintelligence labs. As does Friedman.

Meta, is driving a bidding war in AI and just spent $14.3bn buying Scale AI and its CEO Alexandr Wang. Wang, coincidentally is mentioned in the above referenced Fortune article as being the person to whom young Leopold was accused of giving away confidential information about the number of GPUs that Open AI had.

In July 2025, Coreweave announced a merger with former bitcoin miner Core Scientific, which, as also noted in the Fortune article, was a significant (5th largest) holding in the Situational Awareness fund at the end of q2 2025. Indeed, the June 2025 13F shows a holding of 8m Core Scientific shares, up from a little over 4m previously - worth $125m, with the share price having jumped from $6 to $17. Another hit for lucky Leopold! Worth noting that at this point SA had nothing in Coreweave - although they subsequently bought back in with a whole deck of call and put options on top.

Also worth noting is that the Core Scientific deal subsequently failed and in March 2026 the company was hit by a class action for securities fraud for misrepresenting consumer demand and hiding data centre delays.

Which brings us to the recent events. Depending on who you ask, Situational Awareness has anything from $25 to $45bn in market exposure, much of it through put and call options and utilising large amounts of leverage from Prime Brokers who had presumably forgotten most of the lessons from over-extending to Bill Hwang and Archegos back in 2021. Of particular interest to us about this story is the recent discovery that Jane Street, the secretive financial giant, apparently lost $15bn in July thanks to the turmoil in the tech sector (they are still up $40bn year to date mind).

Jane Street were early backers of Coreweave and also subsequent backers of Situational Awareness, which raises the question of how tangled up their trades were. More intriguing is that we only know about these losses because of disclosure required for holders of some Jane St bonds, bonds that, as the FT points out have just been refinanced at great expense for seemingly no other reason than to avoid any further such disclosures.

We also know that Jane Street have investments in Anthropic - as of course does Situational Awareness, where coincidentally Leopold’s new wife works as Chief of Staff. Did they join the pile on to Situational Awareness to help recoup some of their gains? We will now probably never know.

As with so much in the US, everything makes sense through the lens of the movies of the Godfather. This is a turf war - it’s hookers and gambling in Vegas versus drugs and ‘running the numbers’ in New York and Chicago. Beyond the African Hunting Dogs imagery, the other image that sprang to mind is that of West Coast ‘entrepreneur’ Moe Greene in the Godfather, looking up from his massage table only to see East Coast entrepreneur Michael Coreleone’s hitman before he shoots him through the eye.

Nothing personal Leopold. Strictly business.

• July was a month of market mean reversion; stocks that were up more than 100% in the first half, fell back an average of 25% in July, while stocks that were down more than 50% rallied by an average of 11%. In most cases, this still left the longer term themes intact, but for those who live and die by monthly returns it is fair to say it was a tough month.

• The biggest hits came in the crowded tech hardware stocks, where we discovered at the end of the month one particularly large and heavily leveraged fund was forced into a dramatic unwind. Not unconnected, over 1 million S. Korean retail investors apparently received margin calls on positions in the two big Korean memory stocks - Samsung and S K Hynix - the latter having just launched an ADR.

• The two Korean giants dominate not just the Kopsi, but a number of regional ETFs like the Asia 50 and even the Emerging Markets ETFs. As such, their stock specific technicals have tended to create false messages for the markets about some of the more traditional macro trends. For longer term investors it remains important to stay focussed on the underlying signals rather than be distracted by the noise.

• Otherwise, a lot of the rotation was likely down to traders closing their books and heading for the beach, but there were also constraints on liquidity from the Space X IPO back in June and the general soaking up of liquidity by Silicon Valley giants previously throwing off cash flows.

• Meanwhile, oil was up above $100, then down $12 and then back up again as the on/off switch on war in Iran flicked up and down and the bond markets appeared to give up trying to price it in terms of inflation - just as the Fed gave up giving forward guidance.

• August is traditionally low on liquidity but high on noise and volatility and there is no reason to suspect this year will be any different. Time on the beach though to consider the bigger competitive trends emerging - from AI as a business more than a job disruptor to a China’s IPO conveyor throwing up global competitors all up the value chain. Meanwhile, we would not rule out an Autumn currency accord between Japan, the US and China.

  As usual, none of this should be considered investment advice. Please do your own research and always consult your financial advisor.

Short Term Uncertainties - Price Driven Narratives

Sometimes narratives drives markets and sometime price movements drive narratives. July was the latter sort of month. The sell off in the chip sector, while heavily technical and connected with, inter alia, profit taking, margin calls (especially for Korean retail investors) and closing out of the large hedge fund bet of long tech hardware/short tech software, has led to a (rightful) questioning of the risks to the AI build out. The previous certainty - encouraged of course by the hype around the Space X IPO - gave way to uncertainty.

We noted last month that “we would not be chasing hardware stocks from here, nor trying to bottom fish in, allegedly oversold, Mag 7 stocks” and nor did we, because we are not traders. But plenty did.

SK Hynix raised $26.5bn in the US in early July, the largest foreign IPO in history, but which briefly dropped 15% before month end as the market turmoil hit memory stocks. The company is also actively trying to lock in 5 year contracts, both actions suggesting that they see this as the top of a cycle. When the stock fell 20% despite posting a 600% increase in profits, retail money started to notice - not least as more than 1 million Korean retail investors were reportedly hit with margin calls. This in turn has shifted the narrative to one where. maybe, not all those AI datacentres are actually going to be built. Or are actually needed.

It is also raising some interesting questions about market earnings and valuations. Tech hardware stocks are very cyclical and 600% increases are obviously not sustainable. But at least there is real cash being generated. Contrast that with earnings announcements from Google and Microsoft - both of whom wrote up the value of their investments in pre-IPO AI companies Anthropic and Open AI as ‘investment income’. Along with every VC in town they are counting their metaphorical chickens before they are hatched.

‘Investment Income’ for hyper-scalers from higher marks to private valuations in Open AI and Anthropic are ignored at the stock level, but may be distorting Index EPS…and hence valuations

At the stock level, these ‘higher earnings’ were given relatively short shrift, but we suspect that, at the macro level people are merely seeing index EPS higher, but prices lower and are viewing this as ‘good value’. Just as not all GDP is equal, so not all EPS are.

Red Run

Part of the concern over the ‘investment income’ stems from the ‘failure’ of the Space X IPO and the risk that US retail ‘won’t be fooled again’. The downhill ride from the day 2 peak in Space X now exceeds 50% and 30% from the day it went into NASDAQ. Price discovery can be painful. As we noted in the contrasting IPO for CXMT in China in mid July, an IPO like Space X, designed to get insiders out at the highest price at the expense of the next buyer is not going to help the overall system. The next one or two big IPOs are going to have to leave more on the table ‘for the next man’.

Meanwhile, the CDS Canaries are still chirping. The chart below shows the Credit Default Swap spreads for two of the most vulnerable players in the AI build out - both heavily dependent on Open AI and the circular financing story. Back in 2008, it was the CDS spreads that gave the warnings (and made the money for the traders who called the crash).

Coreweave, incidentally, was at the heart of the over-leveraged strategy for the Hedge Fund Situational Awareness that has eviscerated by the markets at the end of July.

Medium Term Risks - cash is not recycling

The self licking ice Cream that we referred to last year as the new zAIbatsu and the questions about the return on Investment in all the AI that we discussed in Where are the customers’ yachts are all starting to come to the fore as the memory stocks give back most of their recent gains. Speculators have been burned, but we note that retail has been selling into the technical bounce. As the chart at the top of the note shows.

Retail, whether through ETFs or 401ks, are the ultimate source of liquidity for multiple leveraged financial structures assembled over the last decade. The Middle East Sovereign wealth funds, previously seen as a cornerstone for most exit strategies (sorry opportunities) are facing cash constraints thanks to the war and other demands for future spending such that they certainly aren’t going to tie themselves up in illiquid strategies. The cash rich tech companies are no longer recycling cash via buybacks or using their stock to buy out all the smaller tech startups and indeed are sucking up huge amounts of available liquidity via debt and equity issuance (see the Silicon Valley liquidity sponge).

Meanwhile, the first Mega IPO, of Space X, looks like it was spoiled the party for those wanting to follow on. Down between 25% and 50%, it is going to be difficult to hype up retail a second time. Fool me once…

401K are down 25-45%, who is going to buy Open AI and Anthropic?

The AI Bubble is not just in Equities, indeed the problem is that, as usual, it is really in the debt markets. This is much more like 2008 than 2000. For all the hype about the Space X IPO raising $80bn, Google raised more than that in debt the previous week, while Meta has huge contingent liabilities associated with its underwriting of its future customers.

But pressure is mounting. Amazon just issued $25bn of debt that was barely 1.3x covered and Oracle, the centre of the circular financing bubble, just saw its credit downgraded to one notch above junk by S&P Global (as reported by the great Ed Zitron.) The S&P Global rationale makes sobering reading. Oracle is down 20% over the last month, while Coreweave, the cloud based GPU provider sometimes referred to as a neocloud and a competitor for selling ‘compute’ is down over 30% and, as shown in the graphs above, the CDS price (essentially the cost of insuring against default on the debt) keeps going higher.

The gap between committed spending and the ability to raise debt to fund it is now key. Coreweave has already raised $23bn in debt and needs even more to match its guidance of $35bn of cap-ex. The fact that the same $ of spend has appeared on multiple income statements and balance sheets means that, should the debt not be forthcoming, or the build not happen, then that same missing $ collapses multiple business plans.

Ed Zitron writes long and quite dense (as well as occasionally potty mouthed) pieces on all this that are definitely worth reading and in this one he highlights, inter alia, the role of Nvidia and Softbank in holding the ring on all this circular financing and how an affiliate of Softbank, with no experience of building datacentres is looking to raise debt by getting a backstop from Nvidia, which will then sell it hundreds of billions in GPUs and then Softbank will use a contract signed with Open AI to take the affiliate public and give it and Open AI a huge equity gain.

If it sounds complicated, it is because it is. And, as Ed puts it, highly unlikely to happen (although he puts it more bluntly). Currently 54% of revenue and 64% of accounts receivable of the biggest company in the world by market cap come from just three customers.

And don’t forget the Chinese competition. The IPO of CXMT in July, (see DRAMatic Price Moves) raised $8.5bn, not to allow insiders to exit so much as to allow the number 4 player in Global Memory to compete at the cutting edge. The fact that Apple are considering using them is an interesting exercise in shifting pricing power, as is the growing use of Chinese AI models for scale users. The price difference is so vast that the premium pricing for Open AI and Anthropic - essential to their IPO valuations, looks unsustainable.

The risks to the IPOs and the risk of a synthetic ‘downround’ are real and growing. Google, Microsoft, Softbank and others have all reported large ‘investment gains’ on their positions in Open AI and Anthropic - EPS growth viewed cautiously at the stock level, but not, we suspect, at the aggregate level, where sector and market multiples look ‘cheaper’ than they really are.

Long Term Trends - energy, AI and banks

One reason why a resumption of the war in Iran may have led to lower rather than higher crude oil prices is that refining capacity is being targeted, meaning gasoline prices might be going higher worldwide, but not in the US , which is the only real place it is politically significant at the moment. Lower demand for crude due to lack of refining capacity means lower crude prices but higher prices for refined product and is then better for crack spreads. The US and refiners win, everybody else loses.

When the Iran War broke out, hot on the heels of the seizure of Venezuelan oil assets, we noted that one of the few explanations that made sense from a US Foreign Policy perspective was that there was a plan to control the world’s oil and gas assets. In a note back in April (Art of the no deal) we highlighted two, closely aligned, theories from Brian Berletic and Richard Medhurst, The first, that targeting global energy supplies is specifically an indirect attack on China and the second that it is all about preserving the hegemony of the US petro $, or as Richard Medhurst puts it, the Petrogas-dollar. The theories are also supported by Economist Michael Hudson, whose work on Super-Imperialism is a must read, but his theory is broader, that the Team Trump mindset is one of creating monopoly rents, of controlling energy, of controlling AI.

Whether deliberate or not, the Ukraine war, sanctions and the sabotage of the Nordstream pipeline pushed Russian energy out of Europe, while the Iran war has taken out both Iran’s supplies of gas and also the number 2 competitor to the US, Qatar. The US is now comfortably the world’s biggest exporter of Oil and gas and, unlike previously, is a beneficiary of high oil prices.

It is also of course a key reason why Trump is interested in Greenland, not just for its rare earths, but because of its strategic position to enable a blockade of Russian tankers in the Arctic/Baltic. Since then, there have been multiple attacks on Russia’s ‘shadow fleet’ of tankers to further disrupt supplies to China and, again possibly coincidentally, the Ukraine drone attacks on the Russian mainland all seem to be focussed on its energy facilities and infrastructure - just as much of the US attacks on Iran seem to be on pipelines serving the new Silk Road. As he puts it, the three US initiatives all appear to have the same ‘result’, restricting oil and gas exports to China.

Which brings us, inevitably, to China itself.

Currently, we can think of China as importing energy from the rest of the world and then exporting ‘processed energy’ in the form of energy intensive goods back to the world. The US is currently keen to keep the payments for the imports in US$, which is a key reason, acknowledged by Scott Bessent, for seeking to control energy supplies. If and when it stops doing this, it will be because it has created energy independence through a combination of nuclear, coal, renewables (and their mass storage) and, ultimately, but coming on at a pace, Fusion (what the great Pippa Malgram calls ‘a star in a box’).

As to controlling AI, that plan is also unravelling as the US ‘leaders’ are not only being caught up but even overtaken by Chinese Open Source models which cost a fraction of the price that the US companies are charging in order to fund their trillion dollar roll-outs. And just as CXMT, the Chinese chip manufacturer is not at the cutting edge of technology, the bulk of the profits in a scale business are made at the average, not the peak, price.

Long term equity returns are around 7-8%. In recent years, they have been two or even three times that, helped by multiple expansion as interest rates fell, but also by a US market index increasingly dominated by high margin businesses with economic moats derived from technology, but also regulation and ‘aggressive’ use of financing.

China is challenging all of this.

• The DRAM supply demand gap has brought forth an IPO for the fourth player, CXMT of China, whose share price jumped almost 500% at the opening on the Shanghai STAR 50 exchange today.

• The biggest IPO in China since 2010, it was oversubscribed by 570x for the institutional portion and 244x for the retail side. For context, at an initial price of $1.28, that means Chinese retail had to lodge $1.2tn with the exchange. That is a lot of liquidity that will ultimately ‘stick’ in investment markets. Which is of course part of the long term plan to develop China’s capital markets.

• Korean retail is currently ‘all in’ on Samsung and SK Hynix, while US retail has replaced Nvidia with Micron as their ‘top stock’. As such, they need to be aware of this new competitive threat. The money being raised is to help CXMT move into the leading edge High Band Memory (HBM) sector, which should raise risk premia on the big three.

• Currently with a market share of 7.7%, estimates for its valuation depend on a market share gain as well as the current volume plus price super-cycle and current estimates range from 10-17%.

• The dramatic ‘pop’ on day one of almost 5x also reveals the difference between IPOs to raise capital for expansion, where giving away a bit too much equity is not a big issue (and encourages retail participation) and IPOs where the principal aim is seemingly extracting as much money as possible for insiders.

• It is also a further ‘nudge’ to international investors to take a proper look at the Chinese Star market 50 Index, which is where all these IPOs are heading.

The IPO of CXMT in China has attracted a lot of attention, not least because it soared 500% on its debut, with lots of questions over the Nomura report suggesting it could be worth Rmb7trn (around $1.2tn), i.e. 10 x as much as the IPO valuation. Lots of chat about how bad the investment banks were in pricing the IPO, but in our view this western-centric approach rather misses the point.

To us, it raises a different set of questions, most notably, what is the IPO there to achieve? In this case, it was to raise $8.5bn, which according to the FT was “to expand production as well as research and development of DRam (sic) chips, which store short-term memory in computers. It operates three DRam wafer factories in Beijing and Hefei and wrote in its IPO prospectus that it was “committed to continuously expanding production capacity and increasing its global market share”.

As such, ‘giving away’ more equity than you technically needed to in order to raise this money for Cap-Ex is very different to insiders ‘selling out for the maximum price possible’, which is the US model. The former leaves (more than a little) something for the next man, in obvious contrast to the latter approach, eg the Space X IPO, which was designed to shift risk from insiders to, basically, 401k investors, many of whom are currently sitting on a loss of between 25% and 45%.

If you want more IPOs to build your capital markets, it is better to leave insiders a bit short and early participants with a 25-40% gain, rather than the other way around

In terms of valuation, CXMT made over $7bn of revenue in q1 this year, around half of what Micron did in the same period and Micron is currently valued at $1tn market cap. This is similar to the target market cap number reached by Nomura for CXMT, which has attracted headlines with a valuation that implies a 13x gain from the IPO price and a market cap of around Rmb7.8trn. Meanwhile Northeast securities have an upper end estimate of around half of that. The details can be found in a useful discussion here.

In essence, the different valuations rest on a combination of the chip cycle and market share, where both research houses suggest that CXMT can overtake US retail favourite Micron.

Chip companies are notoriously cyclical, that is why they trade on apparently much lower valuations than, say, software companies. Micron revenue was twice as much as CXMT in q1 2026, but also twice as much as its own revenue from a year ago. Meanwhile, CXMT revenue was 7x that of a year earlier, driven largely by the cycle - both operational gearing and pricing.

In terms of market share, CXMT is definitely the fourth player in the chip sector at the moment, with an estimated $50bn of annual revenue, close to Micron’s current forecast quarterly level, but, as with so much technology, the western companies are losing the huge Chinese market to domestic suppliers. Over the last two years, Micron’s revenue in China has halved, while CXMT’s domestic capacity expanded from 90,000 to 260,000 a month and, as the IPO prospectus highlights, it is on track to draw level with Micron next year.

As was pointed out in this article, poignantly titled, CXMT is eating Micron’s lunch in China, leading edge parity in technology is not required to drive domestic substitution in China, but the article also notes that a key part of the reason for the IPO is to fund R&D into getting closer to that frontier, which is where the competitive threat starts to rise.

This is not to say that CXMT are about to flood the international markets with competitor chips, rather that is is an important player in the global market and likely to dominate Chinese supply while indirectly affecting global prices. In particular, with Apple rumoured to be considering using CXMT chips, the pricing power for the whole group is inevitably going to come under pressure.

With the usual Caveat that this is not investment advice (please do your own research and always speak to your financial advisor), investors who have enjoyed the ride in the Chip stocks should think about some parallels with other industries.

CXMT’s origins lie in the purchase of patents from a German company called Qimonda, that went bust in the GFC, along with access to its China based R&D centre in Xi’an. Just like the car industry, it recruited key western engineers and returning Chinese and built on that original legacy. Also like the car industry, it benefited from the VC approach of Chinese local government, which is very different from the catch all complaint of ‘subsidies’. In this case Hefei province, which had successfully nurtured both BOE the world’s leading display panel maker and NIO, a leading EV maker, helped assemble the local supply chain around CXMT. There is a great description of the process as well as a proper deep dive on the company to be found here.

The bottom line is that returns in (primarily US) stock markets have been running at double or more long term averages, at least in part because quasi monopoly status and high margins in US tech, combined with share buybacks and other balance sheet manoeuvres have delivered 20% plus EPS growth. Software companies and the MAG7 have, rightly, sold off this year as AI challenges those quasi monopoly moats, allowing tech hardware companies to become the new darlings as the Cap Ex from the hyperscalers feeds straight through to the bottom line of the Chip makers selling the picks and shovels to this particular gold rush.

Swapping structural winners for cyclical ones means shifting valuation models

However, these are very different beasts, operational gearing is huge and so is pricing power when Demand exceeds supply. But they are also (brutally) cyclical and symmetrical. The arrival of a new supplier from China, one with a powerful state backer is a reminder that, ironically perhaps, the biggest source of capitalist creative destruction is currently the People’s Republic of China

Gary Lineker famously quipped that football was a game of two halves..and then Germany win. Well obviously that hasn’t aged well, as not only are Germany out of the World Cup (and dropped from number 1 in the world in 2018 to number 12 now) but also, with FIFA’s latest changes and ‘hydration breaks’ football is basically now a game of four quarters. And FIFA win.

Like the football, the market seems to be more heavily focussed on this being the end of the second quarter of the year, rather than the end of the first half, with profit taking and rotation into the quarter end and, seemingly a lot of traders closing books for the summer. And like FIFA, it is also focussed on liquidity.

June itself was also split in two, the first half, into the Space X IPO, was full of liquidity and upward momentum, while the second half has seen momentum stall, lower liquidity, profit taking and an interesting battle between Korean Retail and US institutions over the Korean Tech hardware stocks, which have gyrated wildly within a widening band.

There was also the ‘peace deal’ on Iran, that led to some selling in energy related stocks and profit taking in cyclicals, even though the demand/supply imbalance remains extremely favourable. It has been our contention that the market was already looking through to a post war period and, callous as it sounds, only really ever cared about the Strait of Hormuz. As such, they don’t really care if the underlying conflict is not really ‘solved’, so long as the supply chain restrictions are lifted.

Meanwhile, the huge hype about AI into the IPO had already reached a level of saturation required to pull in the buyer of last resort - US retail - leaving them to deliver the price discovery as insiders got out and, as the hype has subsided, the subsequent drop from the first day ‘pop’ has re-ignited concerns about the huge cash burn and liquidity drain of the AI build out (see Silicon Valley Liquidity sponge).

There was also however, a third big event, one that would normally have attracted a lot more attention, which was the first meeting of the new Chairman of the Fed, Kevin Warsh, who removed forward guidance and re-emphasised price stability, causing the fixed income markets to flip from expecting rate cuts to now expecting a September rate hike. This in turn led to a rally in the $ and a sell off in long duration assets, particularly some of the big growth stocks.

The need for liquidity is likely a factor behind the weakness in gold, but the drama once again unfolding in so called digital gold, bitcoin, is more structural in our opinion. Its recent weakness was undoubtedly affected by the decision by the long term under-bidder for Bitcoin, Michael Saylor’s Strategy, to turn seller, even of only a small amount of Bitcoin, in order to pay a dividend on its convertible, which took away a major prop to the price.

Is Trump promising to save Michael Saylor and Bitcoin? Or is that Larry Ellison?

Perhaps Donald Trump was offering to save Michael Saylor in his famous AI generated picture? It certainly looks like him. And it’s certainly a growing question of who else will do so other than the US Government. The price has broken down through $60,000 and is threatening the 2024 support levels around $54,000, below which is, not very much.

However, the bigger problem as we see it, and which we discussed back in December (see Untethered from Reality), is the emergence of stablecoins as a preferred instrument for transactions - one backed by many governments - which has seriously challenged a key part of the use case for Bitcoin, together with the fact that the US government has seized upwards of $30bn of Bitcoin (and is not a strategic holder) also significantly undermines the ‘scarcity’ angle.

Stablecoin can grow if government doesn’t stop it. They are not savings instruments , they are a transactional solution, removing frictions from the system. Bitcoin looks to be the opposite, it wants to be an investment, but that removes the transactional use case, while the volatility continues to undermine the investment case.

Or, perhaps Trump is saving Larry Ellison? After concerns that Open AI may delay its IPO, there are obvious questions around Oracle, for whom they will be one of its biggest customers and after a powerful counter-trend rally in May and June, the stock is back down close to its year lows and off heavily (34%) since the start of the year. But then so is Microsoft, which owns a stake in Open AI, (down 18% on the month) as was another major stakeholder, Softbank, which was 20% down.

The recognition that the AI boom may be destroying shareholder value hasn’t come to the big Tech stocks quite yet, but remains the biggest threat to US markets

The tech hardware companies all continued to thrive, but we should not forget that everything connects. If the Hyperscalers call even a modest Hydration break in H2, the rush for the doors in the tech hardware stocks could become a stampede.

During the second quarter, the dollar has rallied against, Gold, Bitcoin, the Yen and the Euro, but interestingly not against the Yuan, which is currently at the bottom of the range since late 2022. We still suspect some deal is to be done here, even if Iran is back to selling Oil in US$. More important perhaps is that China is selling Open Source AI for a fraction of what the big, pre-IPO US companies are, which raises serious questions about the total addressable market. If it’s winner takes all who’s to say it won’t be China? Perhaps Trump needs to save Sam Altman too?

Short Term Uncertainties - leverage and liquidity

The level of volatility on the surface may be modest, but below the surface it is significant. As we noted (in where are the customers yachts) the volatility on the Nasdaq is much higher, as are implied volatilities on a number of ETFs and of course on the Korean Index, the KOPSI, which is really a tech hardware play.

Part of the problem is a massive growth in use of leveraged ETFs, mostly as ‘hedges’ against single stock options. As the chart from Zero Hedge shows, this is leading to a dramatic rise in Gamma as the dealers are trying to ‘hedge the hedges’. So instead of selling when others are buying, they are buying too. And selling when others are selling.

This is creating a see sawing effect of large daily moves in both directions.

Leverage is increasing elsewhere too, and it is the rate of growth in margin debt that should be of concern. Here we can see the growth in margin debt is at levels not seen unless we are heading for a significant air pocket.

Meanwhile, we see that , after the underwritten ‘pop’ in the first two days, the Space X share price traded back to essentially its IPO price, with some support perhaps appearing ahead of the NASDAQ inclusion next week. We note that the AI generated comment on the stock on Yahoo Finance says the following:

This may well mark the top in this iteration of the AI bubble, with suggestions that Sam Altman will delay the Open AI IPO until next year, while Dario Amodei at Anthropic is probably starting to question the wisdom of a marketing strategy that pumps up your pre-IPO price by telling the government how scary and powerful your model is and then leaves you stranded when the Commerce Department agrees with you and bans it. Not allowing any of your own foreign born staff to use your models certainly limits your total addressable market.

Medium Term Risks - Return on Investment in AI

We remain concerned that the amount of capital being committed by the hyper scalers is out of proportion to the prospective returns currently embedded in their share prices. To quote David Cameron at Tony Blair “you were the future once”, these companies got to be the biggest in history by running on rails that others had built. Now they have to build the next set of rails.

A switch from a free cash flow positive, asset light business able to buy back hundreds of billions of dollars of its own shares and grow by acquisition using their inflated share prices, to a cash flow negative, asset heavy business needing to issue both equity and debt to build the infrastructure on which currently cash flow negative start ups are promising to pay them to use. And lending them money to do so.

Indeed, the first of the big AI firms to raise equity capital, Space X, may well have cornered all the available cash and the insiders in Open AI and Anthropic must be feeling somewhat nervous that the US public might not agree on their epic valuation metrics.

Already we have seen the MAG 7actually down year to date as the rest of the market is up, dented by the recognition that most are about to turn cash flow negative. Certainly, the traders have switched aggressively into the tech hardware stocks as selling the proverbial picks and shovels into a tight market, but the worry for the rest of the eco-system has to be that, possibly as part of a stand-off with the US government, the hugely economically and politically influential hyper-scalers start to talk about scaling back on AI infrastructure spend. The first whiff of that would leave the current real bubble in tech hardware stocks looking very vulnerable.

This would obviously be very bad news for the S&P500 market cap weighted index, where IT is now the biggest ever single sector weight and June once again saw a significant outperformance by the equal weighted rather than market cap weighted S&P500 index.

Long Term Trends - policy induced stagflation

The resignation of yet another UK Prime Minister is reducing the UK to the level of political ridicule that used to be directed at Italy. It is interesting to note that, by September this year, Georgia Meloni will have been the longest serving PM for the post war era -although many served multiple terms. Perhaps that is Tony Blair’s plan?

Economically, the real issue in the west is not the person, it is the structure. Fiscally incontinent governments are partially kept in check by notionally independent central banks, but in may cases they too have fallen for a dogma of their own. Thus, globalist, social democrat governments in UK, Europe, Canada and Australia all, variously, impose cripplingly high minimum wages in a virtue signalling fashion, only to find that they create not only youth unemployment but also cost push inflation and extreme pressure on operating margins for many businesses. Similarly, the cross border consensus in all these countries for ruinously high energy prices in line with UN strictures on Climate Change is having a similar economically deleterious effect.

And the response of the central banks? The same as it would be if the governments were cutting taxes or boosting demand by simply pumping money into the system, they raise interest rates. The ECB has just done so and the US is now expected to. Keynes once said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” but so too are economists. The idea that the best response to rising costs that are crippling demand is to increase some other costs in order to so cripple demand as to lower inflation via depression is crazy. But seemingly policy.

With the usual caveats that this should not be considered investment advice (do your own research and speak to your financial advisor), the current situation makes us nervous and we would not be chasing hardware stocks from here, nor trying to bottom fish in, allegedly oversold, Mag 7 stocks. Diversification, by sector, by theme and by country, offers the best risk management, as does a focus on the medium and long term. Short term volatility is the enemy of the trader rather than the investor and the best advice may be to go to the beach, turn off the screens and Re-Hydrate.

Grateful for a long segment which let us range across a wide range of issues and also that this clip covered quite a lot of it. (Click on image to play).

The key point not in the previous note was an old one - that interest rates impact economies differently depending on whether they are savers or borrowers. Completely obvious, but not part of the economic orthodoxy. When rates all went in the same direction regardless of the economy, so did markets. Now they are diverging, so too will markets, which is good news for active managers and risky for so called ‘low risk’ (but really just low cost) trackers.

• In a week dominated by the Space X IPO, markets feel fragile, high beta stocks are selling off and the issues that led to the concerns over private credit and the SaaS-pocalypse earlier this year have not gone away.

• Nor, of course, have the war(s), now turned into a social media newsflow for traders as the Apprentice plays out in real time. The inflation impulse from lower supply is real and the bond markets don’t like it. This is hitting long duration stocks.

• The Equity index weakness also partly reflects selling of MAG 7 as funding for the liquidity for the Space X and other IPOs, with an estimated $14bn of forced buying needed just to remain neutral (FT) across a range of benchmarks, and warning signals are rising.

• Volatility as measured by VIX looks OK, but things are happening beneath the headlines. Single stock volatility is high, as is the volatility of some of the leveraged ETFs being used as hedges by traders. This is adding a new dimension to market volatility overall.

• The window dressing ahead of the IPO is having a lot of economic distortions as well, particularly the AI will take your jobs hype, which is simultaneously mis-allocating capital into AI (which is its aim of course) and mis-allocating investment into human capital as well.

• More importantly for the 401K investors is to ask, what is the Return on Investment of all this AI? We can see who is making the money today, but….

It looks like the wobble a week last Friday was triggered as much if not more by the bond markets than by the concerns over equity supply that were heightened by Meta’s talk of coming to the market. All our market indicators and the AI conditioning signals we overlay on our Funds are telling us that the main driver was a duration shift as the Bond markets started to price in rate rises rather than rate cuts, despite having previously seen new Fed Chairman Kevin Warsh as a rate cutter on political grounds. Next week is the start of his tenure, so if traders can tear themselves away from short term betting on Space X they can go back to the old game of short term betting on the Fed.

A week later and the Space X IPO is done, Musk is a trillionaire by the magical thinking of Market Cap maths and widows and orphans around the world where regulators won’t even allow you to buy a diversified mutual fund without 90 pages of paperwork are now the proud owners of ‘a piece of the future’ on 100 times sales.

Everyone is trading, no one is investing and the traders are using a wider range of instruments to ‘hedge’, such that those on Wall St selling them those instruments have to hedge themselves and in doing so are generating some choppy conditions. In our sailing analogy, the wind has turned against the tide and things are getting choppy.

Looking at the correct indicator

Meanwhile the ‘plumbing’ of markets is showing signs of stress. Traditionally people look at the VIX index, the measure of implied volatility in the S&P 500, as a measure of market risk appetite as in effect it is the price of put options. The more people want to hedge the downside, the higher the VIX.

Currently the VIX isn’t showing much stress, but the equivalent for the NASDAQ definitely is and is back to the levels in early March. The chart from ZeroHedge shows the ratio of the two.

This reflects the increase in both realised and implied volatility in the tech sector, but also the fact that hedges are now being done through different instruments, in particular, leveraged ETFs. Traders are going long single names and then buying protection through related three times leveraged inverse ETFs. This is not a bad development per se, so long as we realise it is going on, but it can become a problem when those creating the leveraged ETFs try to manage their risk.

This is the hidden world of ‘the Greeks’, Delta, Gamma and Theta, but particularly Gamma. When the market Gamma is negative, as it is at the moment, then rather than dealers acting as an automatic stabiliser - buying when others are selling and vice versa, they act as an amplifier, when things go up they also buy and when things go down they also sell. We are in one of those moments right now. This is why every tweet seems to cause traders to run from one side of the boat to the other.

Markets becoming nervous about liquidity

Meanwhile, our thesis on the Silicon Valley Liquidity Sponge, is certainly becoming more mainstream thinking, the chart below is from the FT on Wednesday, quoting a Goldman report about net supply.

After more than a decade of high margin software companies with an asset light, low cap-ex model buying back their own shares, they are now switching to an asset heavy, high cap-ex model that is collapsing free cash flow and requires share issuance rather than share buybacks.

We have long regarded the share-buyback structure as pernicious and it has undoubtedly been a major factor in the K shaped economy in the US. Initially it made a degree of sense due to the different taxation of income and capital gains to buy back shares rather than pay a dividend, but, as in all things, it has taken on a (corrupting) life of its own.

Management award themselves generous options packages (see Ratchet, Ratchet and Bingo) that vest on some easily achievable metric which the company effectively buys back via the share buyback programme. This has the added advantage for companies that use Non GAAP earnings that a lot of employment costs then drop out of the P&L, flattering EPS and apparent margin. The EPS are then boosted further by buying back more shares. Salesforce isn’t the only company doing this, but it’s a textbook example. (As ever, none of this should be considered investment advice, please do your own research and speak to your financial advisor).

The problem is then made worse by the computers. The quant models that focus on EPS and EPS momentum buy stocks who produce smooth progression in EPS, even if it’s only from the balance sheet, other models then follow that price momentum and, as the market cap grows, the index trackers give a dis-proportionate amount of 401k money into a small number of stocks that, until now, didn’t need the capital.

So they bought back more shares and the magic money machine built the Silicon Valley Billionaire boys club. Behind them, the self-serving C suite crowd happily awarded themselves options for targets on things like Diversity and ESG and also got to buy Yachts, albeit smaller ones.

The tax treatment of debt versus equity hasn’t helped either, as profitable tech companies take on debt purely for the tax shelter. Owning shares, not options, in the company you work for and that company paying a dividend to you and all other shareholders is a much better alignment of incentives, as is the fact that investors can then allocate new capital to where it can generate a sustainable Return on Investment (ROI)

Obviously the vested interests won’t let that happen, for now, but the end of the share buyback spree will start to unravel at least part of this gravy train. Indeed, we might also suggest that this IPO spree is another sign of the end game.

Where is the RO (A)I?

Outside of the Wall Street crowd, the Social Media world of substack and YouTube (and others) is highly sceptical of this upcoming raid on the savings pot of the US middle classes. In particular the fact that in the AI world there is no discernible - or even measurable - ROI

With some irony, Uber just announced that it couldn’t justify spending much on AI as it didn’t see how it could improve the product. Ironic because, ahead of its own IPO, Uber used similar subsidy tactics to boost its usage and thus its valuation metrics, before switching to cost pricing and thus a fall off in usage thereafter. The two years after IPO saw the share price halve.

Now that companies are having to pay for tokens, they are suddenly asking for a return on the tokens they are buying

The always excellent Ed Zitron points out that Anthropic lets you burn anywhere from $8 to $13.50 in tokens for every $ of subscription cost, which is why they, and others, are quietly shifting to token-based billing.

To hide the sticker shock, customers were incentivised to spend tokens, so the incentives trickled down the organisation and nobody had any incentive to ask what all the spending was going on other than dashboards to monitor…dashboards. Because, as Ed puts it, these “enterprise customers are run by business idiots” with no connections to actual work, they actually encouraged people to use as much as possible - even though they were now paying for it - the equivalent of getting an Uber from New York to Chicago. Indeed the equivalent of the whole firm taking separate Ubers from New York to Chicago.

Hiding the ROT - Return on Tokens

The head of AI in every business was like a civil servant maximising his headcount - success is measured in amount spent, usage, number of agents used and how many millions of lines of code have been shipped. The question of how useful any of this code actually is was not asked. What is the return you are getting for all these tokens you are now paying for?

Until now. Amazon notably closed down its AI leaderboard, Walmart are setting usage limits and suddenly a lot of senior executives are admitting they don’t know what they got in return for all that money. This is a problem for analysts who had taken the growth of subscription models and then switched to annualised assumptions based on the new consumption models, assuming that these were just the early adopters.

Even some of the bigger boosters like the All in Pod crowd are adding to the concern -s albeit not necessarily deliberately. A tweet from Chamath Palihhapitiya for example made the point about the pricing gap versus the capability gap.

Unsurprisingly, now that they are no longer being subsidised, companies are switching from US models to the cheaper Chinese AI. And, like the Chinese EVs they are also starting to see through the Veblen Goods Effect - that higher priced goods are necessarily better.

This is important for the concept used by Space X - and likely to be rolled out by Anthropic and Open AI as well - of the Total Addressable market for AI. While clearly a fraction of the $28.5 trillion Musk claims, there is also the question of why it won’t largely go to Deepseek. Or if not the business go there, then the price go there?

Volume is already going that way.

The Good News…AI isn’t going to destroy everyone’s job. That’s (pre IPO) marketing hype.

Brendan Dell, a technology, not a finance, guy makes the point that the Head of Marketing at Anthropic has a long history of manufacturing dramatic headlines to attract attention and, in this case, boost the pre-IPO price of the company. He points to the latest example of Mythos, apparently so deadly that it can’t be released to the public such that the White House demanded they come in and talk with the politicians and the major banks. It turns out this was on the very day that they made their announcement - so quick work then. The fact that, as Brendan points out, Anthropic had been using the lobbying firm that White House Chief of Staff Susie Wiles (who apparently demanded they come in) used to work for is, of course completely unrelated.

More broadly, this has significance for all the rest of the AI will steal your jobs crowd. The song and dance show about Mythos is part of a constant narrative about the power and inevitability of AI, but is really designed to pump the pre-IPO valuation. Anthropic’s valuation jumped from $350bn to $1trn on the Mythos announcement. Mythical indeed.

Our view remains that the benefits of AI will accrue to small and mid-sized corporations the most and actually threaten the profitability of the larger ones.

We acknowledge that the plural of anecdote is not data, but we recently built a Client Relationship Management (CRM) in a few days without ever reaching a daily/weekly/monthly limit on a $100 monthly plan. To be clear, we were never going to spend $200k on Salesforce, but neither were we going to get the lesser version for half, a third or even a quarter of that.

The point is that the value of someone with domain expertise spending money on tokens to make a better product for their own business can be realised by selling that to someone else. To the earlier allusion, it might make sense to take a taxi from new York to Chicago, if you take three other people with you and then set up a cheap autonomous bus system. We have gone from no CRM to a good one, but if at some point we need a better one, it’s highly likely that someone who used to work for salesforce (them again) will have spun out and set up a 10-man company that will so it for 10% of the price.

At the stock market level - if the Hyperscalers succeed in delivering AI, it’s going to benefit the rest of the market more than it benefits them - except the software companies where they have huge margins based on barriers to entry that have just disappeared.

AI is going to deliver operational gearing at one end and massive competition at the other. The question for all those 401k investors has the system forced me to invest in the next set of winners, or in the utility companies that are going to enable them?

What Gets Measured, gets managed.

The quote (attributed to Peter Drucker) that “"If you can’t measure it, you can’t manage it”, is sometimes represented as “what gets measured gets managed”, shifting the focus from a need for accountability to an unnecessary focus on things that can be quantified. As it is sometimes said in this context, “Not everything that matters can be measured and not everything that we can measure matters.”

Here we would point to Government’s obsession with GDP numbers or the bond market’s obsession with employment data that gets revised away almost immediately, or, more pertinently for fund managers, the focus almost exclusively on volatility and correlation as measures of risk for long term investors. They can be measured, so they can be managed - and duly are managed regardless of whether they are the right things to measure.

However, there is a third interpretation of this - if something can be measured and is deemed to matter, then there is an incentive to manage it. Which brings us to markets right now.

Oil Prices and Stock Markets can be measured - so they matter. Ergo, are they being managed?

Much has been made of President Trump’s 3,700 trades in US Tech Equities in the first quarter alone and there are widespread concerns that insiders appeared to trade in equities and Oil around the time of significant posts on Truth Social. The oil trades should definitely be investigated and so indeed should the President’s - although the sheer volume suggests that he has probably got an AI driven high frequency quant algo working for him. However, our focus is on the ‘management’ of the measured indices to support a narrative.

Right now, the US stock market has become a measure in its own right, Team Trump point to the stock market at all times highs, suggesting that all is right in the world and that ‘the market agrees’. Same with the oil price (as measured on the screen). But is it? And does it?

It certainly appears that the US stock market is indulging in some magical thinking at the moment. The longer the war with Iran goes on, the more pressure there is on the global economy, and the more long-term damage is done. To the extent that stocks ultimately reflect earnings per share and to the extent that these ultimately depend on a robust Global economy, the powerful rally in April, extending into May certainly looks counter-intuitive.

The daily swings in the news cycle about on/off ceasefires do not obscure the issues over an inflation pulse already in the system and the bond market is saying that it doesn’t know if it is an inflationary boom or an inflationary bust. But the stock market only seems to care about AI.

Which brings us to what is being measured - and what is being managed. This is a third interpretation of the quote, the management/manipulation of the thing being measured - in this case the passive index funds and the market cap weighted benchmarks.

With ‘everyone’ looking forward to the exciting - or should that be exiting? - IPOs from Space X, Open AI and Anthropic, looking to raise in the region of a combined $230bn, Silicon Valley and Wall Street need the Market Cap weighted indices like the S&P500 and NASDAQ to be confident and at all-time highs, because they need the passive index funds to soak up the issuance - and enable the insiders to get out.

Distressed sellers and forced buyers cause the most dramatic moves in prices

To this end, what can be measured (Indices) are being managed to ensure this happens. Listing rules and free float rules have just been changed such that the Indian rope trick of inflating valuations from VC through PE and PC can continue and Elon Musk - first off the rank - can sell less than 10% of Space X on a valuation that would rank it at almost 3% of the index, creating a completely false market as the passive funds become forced buyers.

This will probably work, but it’s not without risk. Meta popping up again will probably trigger a few memories of how its IPO went; a 50 per cent fall. The fact that it has done so well since is a not a reason to buy, rather the opposite. If you are a long term investor, why be part of the price discovery process? Why not wait a bit? (At this point we should probably say that none of this should be considered investment advice, please do your own research and speak to your licensed representative)

Meanwhile, the steady realisation that, having enriched themselves massively with share buybacks over the years, the tech-lords are going to be issuing stock, not buying it, is starting to sink in.

Short Term Uncertainties

As we head into the summer season, markets have a distinctly ‘toppy’ feeling to them and many are starting to wonder about the concept of ‘sell in May’ coming a week or so late. Certainly the wobble in NASDAQ on Friday will have triggered a few stop loss signals as well as a few more qualitative thoughts about ‘banking profits’.

This should make for some nerves in places like Goldman Sachs and Morgan Stanley as they need the hype and excitement to extend into the Season of Summer Sales as they plan to generously allow Retail Investors to participate in the exciting upcoming IPOs of Space X, Open AI and Anthropic, or perhaps more correctly to allow a whole host of industry insiders to get out of their existing positions while the banks take hundreds of millions in fees (around $500m for Space X and $600-900m for Open AI).

Wall Street is looking at $1bn+ in fees over the summer. Just need those passive investors in 401ks to participate

Elon Musk has started the ball rolling with his Space X issuance - a mind boggling $1.75trn valuation is based on a ‘modest’ actual raise of $75-80bn. As with everything Musk, his S-1 prospectus is full of symbolism - he is issuing 555,555,555 new shares for instance and 5% of those will be set aside for employees who can sell with no lock up. Musk, along with other early-stage investors, including Google are under a 180 day lock up.

In fact, Google went first

Next up is Open AI, looking to raise a $100bn similar amount and straight after that Anthropic, looking for $50bn plus. This, note, is straight after raising $122bn and $65bn respectively from the private markets. All of this is going into a massive Cap-Ex build out for AI. It is worth noting however that Alphabet (Google) just raised $80bn for the same purposes. And that has shocked investors, after years of buybacks, it is suddenly issuing.

Bitcoin is also facing a flip from a constant bid to a sudden offer

Meanwhile, after a brief rally at the beginning of the year and a post war bounce, Bitcoin is heading back towards 60,000. As we discussed before Christmas in our December Market Thinking (see Untethered from Reality ), the rise of Stable Coins like Tether has undermined a big part of the use case for Bitcoin beyond that of moving ‘hidden’ money, something which admittedly saw a sharp increase in demand in both Venezuela and the Middle East earlier this year. But even this is under threat; the US government has recently seized a significant amount of Bitcoin associated with scams in South East Asia (and allegedly linked to Iran) and clearly prefers a world of traceable and indeed programmable crypto.

The fact that the US Government now holds in excess of $24bn of Bitcoin is something the market is trying to get its head around - tightness of markets, rather like the squeeze being attempted by Space X et al, has been a key prop for the price of Bitcoin. A steady seller is hardly welcome.

This is why the market is now so worried about Strategy and Michael Saylor, who just sold a small amount of bitcoin to fund the dividend on their preferred shares. Having previously advised investors to sell a kidney before selling Bitcoin, this change of narrative has seriously damaged sentiment. If the big investors flip from bid to offer, the share price always goes down.

Medium Term Risks - the New zAIbatsu

The medium term risks are thus those we discussed back last October (see the New zAIbatsu) as high margin capital light software companies transform into lower margin, capital-heavy AI hardware owners.

Here is the image from that previous note, highlighting how the previous Capital Investment from Telecoms had delivered a ‘free ride’' for what has become the Mag 7, benefiting from a perfect feedback loop where the same mechanics now being used to fund the IPOs- passive funds buying based on market cap - were supporting share prices as cash flows were recycled into share buybacks and creating the tech Oligarchy.

Now we are seeing that loop broken - cash is coming out of the closed financial loop and is driving real world inflation - a lot of which is now being captured by a different part of the market - the whole switch from tech software to tech hardware is based on dramatic jumps in earnings for Micon, Sandisk, Intel and of course Samsung, SK Hynix and TSMC.

Structural High Margin Software companies are shifting to lower and more cyclical margin Capital Intensive Industrials

The listing of Space X, but also Open Ai and Anthropic it will also start to impact on the earnings of the Mag 7. Microsoft for example owns 27% of Open AI, having invested about $13bn so far. If the stock floats for around $1trn, then that’s a 17x on their investment, except it will be very difficult for them to sell any of it straight away due to regulatory and other reasons. They will however, likely sell it down over time to fund their own AI related expenditures, meaning a stock overhang. At the same time, they will have to account for the ongoing cash burn from Open AI. The temptation to offload stock will be high, adding to the insider (is) out environment likely to emerge soon.

Softbank is a prime example as well. It owns a further 13% of Open AI, which they recently valued at $80bn, the mark up on their balance sheet briefly pushing them to become the largest company on the Tokyo Stock exchange. When it floats, they will have to adjust their earnings. To the extent that Quant models trade on headline earnings numbers (or their rate of change) this will be another example of mechanics flipping into reverse.

Amazon and Alphabet (Google) meanwhile are in a similar position with Anthropic. Something to watch, as earnings downgrades can trigger a different set of rules based systems.

Long Term Trends - AI as a major disruptor

All of the short and even medium term issues for the market are tied up with AI, which of course is long term story. Sure, we can use AI to generate the title image in a matter of seconds and, while that is fun, I am not prepared to pay much money for it (in fact Google Gemini did it for nothing). Indeed, the programmes like Sora that produced a flurry of (expensive) high quality video output that suddenly filled YouTube with PanVision retro versions of Hollywood movies have all quietly been dropped and, for us at least, the growth is more in areas like Robotics and automation.

Which raises questions about the total addressable market for AI. Musk says $28.5tn, which for context is around $4000 per person for the entire world. If you focus on the so called Golden Billion in the west, that is $28,500 per head, an obviously ridiculous number. More magical thinking, requiring Wall St analysts to try and earn their share of the $1bn fees to twist their valuation logics to the extreme. There are also echoes of activities pre IPO for stocks like Uber, where huge ride volumes were generated from ultra low prices as volumes, like clicks, were the metric being measured (and thus managed).

If we step back and look at the process that got the Mag 7 where they were most recently, it was that the products they created sat on the back of infrastructure that they didn’t pay for, just as happened with previous investment booms in Railways, electrification and industrialisation. Forecasts of future VodaFone revenues made in 2000 were not far off, it’s just that they ended up being valued on 0.8X Sales rather than 8x.

We can see how AI can transform smaller businesses - the operational efficiency gain with one smart analysts and 30 AI Agents is far greater than the saving of swapping 20% of an existing large analyst team for AI - but for larger organisations, the institutional inertia looks too big. The boss class might like the excuse for what is essentially a hiring freeze/layoffs, but, as is always the case, the people you need are most valuable to the smaller competitor looking to upskill.

Ultimately, it’s about the economists’ concept of a Producer Surplus or a Consumer Surplus - who gets the excess return? History tells us that competition ensures that it is always the consumer, even if, as with the MAG7, the consumer is another corporate - which serves to drive down margins for the incumbent.

AI is great for system architecture, enabling small businesses to get the benefit of scale business, without the cost. As such it is going to be tremendous for competition - good for the consumer, if not necessarily share prices of large corporations. This is what the market was starting to tell us is the SaasPocalyspe earlier this year.

As a real example, we can use Claude Code to build a CRM system for almost nothing. It won’t be as good as the Salesforce version, but as a small business we would not have bought that anyway. But if we need to expand/upgrade the likelihood is that another middle man can offer something almost as good for a much lower price.

As for the Bloomberg terminal…..

• The recent announcements of the need for the UAE to raise US dollar swap lines raises a red flag for global liquidity, since to date they have been the main cornerstone investor for most of the new illiquid products coming out of Wall Street.

• The mark to model financing of US tech has been kept alive since Covid by financial engineering. The traditional Corporate/IPO exit has been replaced by ‘Private Markets’.

• But they also need an exit, which has led to a series of ‘pass the parcel’ trades within the Private Markets, including continuation funds and new funds to capture private investors as a proxy for the IPO market.

• A new angle that emerged at the end of last year was the Buffet Insurance Float trade, PE/PC companies started to buy insurance companies and then sell to them packages of their accumulated private debt, realising their performance targets and creating liquidity. For themselves.

• These insurance companies then in turn sold the debt to related reinsurance companies in places like the Caymans, and Bermuda, where there are legitimate concerns as to the levels of assets to liabilities.

• The illiquidity problem hasn’t been solved, it has just been passed around the system, allowing the intermediaries to clear their balance sheets, but not the underlying investors. Their liquidity remains somewhere in the Bermuda Triangle.

Before the war, there was legitimate concern about many parts of the Private Credit world, mainly because of the move to sell to private investors in a semi-liquid form and the associated problems with redemptions of illiquid assets. These still remain, but, to us, they point to a wider issue, which is the ongoing search for an exit strategy for the VC, PE and PC financial complex. A post-war world will need to deal with this.

Meanwhile, as I explained on CNBC this morning - and following on from points made in the May Market Thinking note, the current Asset Rich, cash poor situation for the UAE and other Gulf states takes them off the table as a cornerstone investor for the new products Wall Street needs to keep the whole liquidity band wagon rolling (click image to watch).

Mark to Model

There was an old adage, made famous in the episode of the fabulous 2015 TV series Silicon Valley known as the Sand Hill shuffle, whereby the start up is advised that it is better to accept $10m at a $50m valuation for its series A than $20m at a $100m valuation. The reason is that if you don’t raise a series B at a higher valuation, then you are basically in a ‘death spiral’.

The message is that for the VC’s this is all about the perceived valuation as they sell to the next person in the chain. Traditionally that was either a corporate or an IPO and certainly in Silicon valley companies like Apple and Google have hoovered up large numbers of smaller companies as part of their Cap-Ex programme. As we discussed in a previous post ( A New ZAibatsu), Apple is 130 companies and Google 263. Meta is 90. Each one has been bought for cash or else equity in the bigger entity.

The self-licking Unicorn ice cream

This led to the concept of the Unicorn, where, by round 6 or 7, the latest $50m or so goes in at a $1bn+ valuation and Cross-over funds, like Tiger Global push the IPO to even higher valuations, winning both sides of the IPO, creating profits in the illiquid and then the liquid parts of the business. As long as the IPO worked.

At this point it’s perhaps worth a little detour into the now somewhat forgotten episode of Silicon Valley Bank, (SVB) which collapsed so spectacularly in March 2023 in a classic liquidity mismatch type bank run. At its peak, SVB was basically providing a one stop shop for over half of all Silicon Valley startups, offering mortgages for founders, payroll and bank facilities. Most important, it provided so called ‘Venture Debt’, advancing loans backed by the collateral of the shares valued in the VC rounds. They also provided short term loans to VCs to invest in start-ups without waiting for cash from their investors.

It was, as the expression goes, a self-licking ice cream. VCs, flush with cash, invested in startups with an escalation ladder for valuation, while banks like SVB enabled participants to extract value via debt. The debt would be paid off by selling to a corporate or an IPO.

Tiger Global and SVB marked the end of an era

This all fell apart when the era of free money ended in 2022. The problem SVB had was that, during the pandemic, start-ups, now flush with VC cash, put their money on short term deposit, which SVB then invested in long term bonds. When the Fed started to raise rates in 2022 and the Ukraine linked inflation started to pulse through the system, bonds sold off, leaving SVB with some big losses.

Technically, SVB could avoid recognising the loss by claiming it would hold the bonds to redemption, but a flood of cash calls from start-ups broke that mechanism and the government had to step in.

Meanwhile, unlisted unicorns were marked down by a third, entering the down round death spiral, while Tiger Global linked IPOs like Coinbase, Roblox and Toast were, well toast, being marked down 70-90% and the IPO market basically froze.

Increasingly, therefore, without the IPO ‘bigger fool’ exit, it has been Private Equity/Private Credit who have stepped into the ‘value chain at the pre-IPO’ level, keeping the ever-expanding Indian Rope trick of valuations going. The problem is that, since SVB and the flight to liquidity, the IPO market is not offering the exits that many are looking for, which has led to the chain extending. PE selling to other PE, PC selling to PE and continuation funds - effectively a PE fund selling to itself.

The Bermuda Triangle

Which brings us to the latest iteration of the financial engineering, which is to borrow from Warren Buffet the notion of the insurance float. Owning an insurance company - as Berkshire Hathaway does - enabled Buffet access to a form of free money - the insurance premiums paid in need to earn a return to match their liabilities. Traditionally that has made insurance companies the main buyers of fixed income products, but if, as Buffet used to say, their holding period is forever, they can be put into equities.

Or, in this case, Private Credit. Several large Private Equity/Private Credit firms, the most high profile being Apollo, have recently acquired Insurance companies, which have, helpfully, been buyers of structured products designed to provide liquidity for the underlying PE/PC funds. The added twist is that those products are then sold on to (usually linked) reinsurance companies based in places like the Caymans and Bermuda, where the scrutiny over the asset liability provisions is considered more, shall we say, flexible.

• The announcement at the end of April that the UAE (and others) need to access US dollar swap lines has potentially huge implications for the illiquid parts of US$ asset markets. If they try and redeem, price discovery could be brutal, but even if they don’t, where is the cornerstone funding going to come from to keep the show on the road? The only answer is governments, i.e. taxpayers.

• The latest ceasefire from Donald Trump looked to be taking him through to the delayed meeting with Xi in Mid May, at which point he will try to look for a ‘Grand Bargain’, albeit with a weaker hand than he hoped. As of early May that appears to be fracturing, but the end game looks the same.

• In effect, the Ceasefire in the Hot War leads to a Ceasefire in the Cold (Supply Chain) War. The US will ease pressure on Chinese energy imports, allowing it to build resilience, while the Chinese will ease pressure on the US imports of everything else, notably rare earths, but also things like base chemicals for pharmaceuticals.

• Rebuilding strategic resilience - including cornerstone capital - will be a key driver of Cap-Ex globally and by extension profitability going forward. The ‘Post War/Cold War’ era is already well underway.

As usual, none of this should be considered investment advice. Please do your own research and contact your financial advisor.

Short Term Uncertainties - policy and liquidity

While the equity markets squeeze higher and oil reacts to every piece of news flow, the bond market is steadily voting for higher inflation - the only question now is whether we get an inflationary boom or an inflationary bust. In this, obviously the Straits of Hormuz are central, but we should also not lose sight of the issues around illiquid markets that the market was focussing on ‘pre-war’. These have not gone away and what has been largely overlooked so far in our view is that the Middle East were the cornerstone of almost every Alternative Investment in recent years.

At the end of April, the UAE made a couple of significant announcements which we discussed in more detail in a separate note (see swapping out of OPEC). First, they - apparently along with others - asked for access to US dollar swap lines from the US Treasury, implying they are facing a liquidity squeeze and second, they announced they are leaving OPEC with immediate effect.

Both have increased uncertainty and the initial reaction of spot oil markets, to rise on higher risk and uncertainty, was contradicted by the long end of the curve, which sold off on the prospects of higher supply. However, in our view the market has yet to digest fully the implications of the swap lines. Our take is that the US is offering (limited) Treasury swap lines as a signal to the Fed that they may need to offer unlimited swap lines because the last thing the US wants is for the asset rich but cash poor Middle East to start trying to sell illiquid assets.

The last thing that ‘low risk’ assets want is a mark to market 30-40% lower for a distressed seller. This would trigger a ‘margin call’ on the pyramid of leverage sat on top of that cornerstone.

This is not about liquid assets like Treasuries - the US can simply print money and buy those and indeed, not paying out hundreds of billions in coupons to go outside the country would be seen as a positive. Rather, they are concerned, rightly, that Middle East investors would try and redeem some of the illiquid assets they have been sold in recent years. The myth of low risk as measured by low volatility risks being exposed by a forced mark to market and it won’t be pretty.

But even if they can hold off selling, a more existential question appears, who is going to be the cornerstone buyer for all the new investments required in the US and, even more important (for them) who is going to buy the products designed to create liquidity for the US Financial intermediaries? To keep the whole show on the road, VCs, PEs and PCs need IPOs or trade buyers and with Software as a Service Companies no longer buying up startups, the MAG 7 spending on physical AI infrastructure and the IPO markets still largely closed, the Middle East Sovereign Wealth Funds had been key players. Until now.

The Growing importance of ETF flows

In liquid markets, liquidity is also important. The chart from Goldmans shows the dominance of ETFs as a % of the tape dropping sharply over the last month, from over 40% to around 26%. Our interpretation would be two fold; first that the macro traders use ETFs as a ‘'fast hedge’ and second that there has been a growing shift to US Retail investing via ETFs and that, as per our comment last month, US retail stood aside during March and April (but came back at the end).

We believe that the rotation in early 2026 into the diversification trades that we prefer was partly driven by US retail buying ETFs in areas like Emerging markets, Mining and Nuclear, all of which then saw considerable ‘profit taking’ followed by first, short selling at the stock level and then subsequently by sharp squeezes higher during April.

A classic example would be Nuclear, an obvious beneficiary of the long term shift from fossil fuels, which nevertheless sold off heavily in March, before gaining most of it back in April - as shown in the chart below.

As previously noted, US Retail was largely absent during April as the CTAs and other traders first went aggressively short, then flipped to long as the squeeze kicked in. As US retail returned, they resumed buying many of the themes they just took profit in - exaggerating the squeeze.

Elsewhere, ‘the only game in town’ for traders appears to be the Semi Conductors index (SOX), as part of the 'Hardware not Software’ trade in AI.

The biggest driver of this is, of course, Micron, which is why the South Korean market - dominated by the other two main ‘hardware plays’, SG Hynix and Samsung - is also up almost 30% from the end of March and over 50% year to date. This is also a reason why another ETF that we like, EMXC (Emerging Markets ex China), has also had a great month in April, it is basically dominated by Asia tech hardware like SG Hynix and Samsung, but also TSMC.

Macro traders had sold ‘emerging markets’ on a strong dollar and an imported energy thesis only for bottom-up investors to play the AI infrastructure trade more globally. The US and other retail investors basically re-appeared and started buying up the narrative names, which had read across via stocks to other ETFs such that chasing Global Semis or Korea had the effect of pushing up the EMXC ETF.

Medium Term Risks - the supply chain cold war.

To talk of the US stock market hitting all-time highs is basically to say that it has recovered from the war sell-off and is up around 5% year to date. Once again, the ‘do nothing’ strategy looks like it has paid off. At the index level at least. The split between Software and Hardware has been spectacular of course, but, as an example, the VanEck Rare Earth and Strategic Metals ETF, REMX, was up 17% in April month and 36% year to date. Global mining (GDIG) and Copper miners (COPP) are up around 16% year to date, while as discussed earlier, Nuclear has regained most of its profit taking from the start of the war to be up a similar year to date.

This is showing some significant opportunity for generating that elusive thing, ‘alpha’ and there are echoes of the early 2000s after the TMT bubble burst, when most strategies that were equal weight outperformed anything (like an index) that was market cap weighted.

The post war likely glut in oil production is currently priced into the long end of the oil curve - exaggerated by the prospect of OPEC collapsing and with all governments looking for supply chain resilience the strategic metals and minerals part of the materials sector continues to attract a lot of attention.

We should not forget the other pre-war obsession - Greenland and the Arctic

The medium term is thus essentially about a continuation of the pre war trends focussing on issues like the Arctic and Greenland, as well as the incorporation of the resources of Latin and South America into US supply chains. This is a return of Dirigiste Government as the US government, ironically, learns two lessons from China, first that industrial policy needs to be seen as a form of venture capitalism (in 2019 there were 500 EV companies in China, now there are 125) as opposed to a gravy train for Crony Capitalists and the CEO class. Second, they need to secure vertical integration of their supply chains rather than outsource in order to maximise short term profits.

Europe’s best hope is that technology and outside forces save them from themselves

Meanwhile, the ongoing economic self-harm in the UK and Europe - with seemingly the entire political class focussed on a combination of economically destructive Climate Change Policies and maintaining the war in Ukraine - is leading investors to, rightly in our view, vote with their feet.

They may, however, be saved by external forces, Battery Technology for example is evolving fast with Sodium and Aluminium rather than Lithium and copper allowing for lower costs and removing bottlenecks and offering the opportunity for scale storage, the only way renewables make economic sense.

Many small players, but also, particularly, the big players, CATL and BYD are now working on Grid level Sodium storage solutions which would transform renewables to reliables and offer the opportunity for Europe to actually deliver on its promises of cheap renewable energy and energy security.

Equally, for all the rhetoric, the end game for the Ukraine conflict lies not with the EU but with Russia and the US. As with the Iranian situation, there may be escalation to achieve de-escalation, but ultimately the economies of the EU may be bailed out despite the best efforts of their ‘leaders’. In the meantime, international capital is not sharing the vision of a ‘regulatory superpower’.

Long Term Trends - shifting alliances and building resilience

While the Iran War is not (yet) over, we continue to see the building of the alliances for the Post War era. Team Trump continues to make noises about leaving NATO, which now appears to be coalescing around a re-arming and German led NATO 3.0 (nothing alarming there then!) The biggest losers of both the Ukraine and Iran wars have been Europe, and the biggest winners so far have been China and Russia.

As discussed, with the UAE leaving OPEC, it will be trying to pump more oil than its current cap at 3m bpd, likely as much as 5m a day. In the short term this is obviously not going to happen due to the war - and the Iranians have just bombed UAE’s outlet on the Gulf of Oman that was allowing it to bypass the Straits of Hormuz to guarantee that. Longer term however, the fracturing of OPEC means lower oil prices.

This is only going to be compounded by the ongoing developments in energy tech, meaning, strange as it may seem right now, we are likely to move to an energy abundant world, which is going to be very important for the most energy constrained in the emerging world, particularly we think places like Africa.

However, for every 10 winners there is a loser and lower oil prices are not good for Saudi Arabia in particular, which needs $90-$120 oil to balance its budget and this will leave no room for investment in trophy assets like Football clubs and illiquid US alternative investments. Similarly, the UAE, which can survive on lower oil prices, is also very dependent on tourism and other financial services, for whom the post war landscape is very uncertain. Again, as some of the biggest buyers of US illiquid assets and weapons, their liquidity constraints will threaten two of the US’s largest export sectors.

Team Trump had previously been pushing for Petro Dollars to be recycled into ‘real assets’, with trillions promised for AI data centres and other investments to MAGA. Those are obviously very much under question now, with fewer petro dollars to go around, it spreads the threat from the Jenga tower in the heading picture into the whole AI infrastructure space. The only alternative is government spending, which is not going to make the bond markets happy.

Finally..can the world be saved by Lego?

China and Russia have almost zero propaganda impact on the west, but Iran is proving a very different opponent. They produced a series of powerful AI ‘Lego’ videos that were then deleted from YouTube but they continue to surface on X and elsewhere (like substack). This one is, as the commentator says, pretty Wow.

The United Arab Emirates was involved in two, almost certainly connected, news events at the end of April, both of which we think have longer term implications beyond the short term headlines.

The first was the request, granted by the US, for access to US$ swap lines, in effect asking for access to US $ to meet its short term liabilities, its cash flows having obviously been heavily impaired by its inability to export since the Straits were closed.

The second was the announcement that the UAE was going to leave OPEC, with effect from May 1st. While a surprise, this is something that has been brewing for quite some time, as the UAE has been fighting against the OPEC cap on its production at a little over 3m bpd, whereas it has the ability - and the ambition - to sell almost 5m bpd.

The Oil markets initially jumped on the announcement and certainly in terms of higher short term risk premium this makes sense, but ultimately the fracturing of OPEC means more supply and lower oil prices. Outside of the big oil and gas interests, this is certainly what the US wants as well, so we would not be surprised if the two announcements were a form of ‘deal’.

UAE leaving OPEC reflects a fundamental different view of the future to that of Saudi Arabia

This is bad news for Saudi Arabia - whose relations with the UAE have been ‘somewhat tense’ for a while, including the Saudi backing for opposition to the UAE’s ventures in Yemen and Sudan. Saudi Arabia needs oil in the $90-$120 a barrel region in order to balance its budget, as it seeks to transition away from dependence on oil revenues. The UAE by contrast can tolerate oil at $50, or even below and its vision of the future is clearly to extract as much oil as it can before alternative energy sources are developed.

The Gulf states are estimated to be ‘losing’ as much as $50bn so far in this war, but timing for the UAE is interesting in that, in fact, it does have a bypass to the straits of Hormuz, to the Indian Ocean via a pipeline to Fujarah on the Gulf of Oman. The pipeline can only handle a little over half the current quota at around 1.8m bpd, but it does raise some questions about the true impact on the UAE’s finances from the current closure of the Straits.

There was actually a third, largely overlooked, announcement, which is for a long term lease deal with Jordan for the Port of Aqaba on the Red Sea. This is part of the broader Indian Middle East Europe Economic corridor we have discussed before, the project of Jared Kushner and Steve Witkoff (as well as Bibi Netanyahu), which is actually from the UAE perspective about securing supply lines for imports from Europe that reduce exposure to the Straits in the other direction. This of course requires rail lines across Saudi, which suggests that relations between the two can not become too strained. However, once OPEC is broken - and all those currently ‘cheating’ drop the pretence - then Saudi will lose its leverage as UAE becomes the swing producer.

The swap lines look to be more about helping the US than the Gulf

Which brings us to the swap lines. Treasury Secretary Bessant is presenting these as requests from Gulf States and other allies and the western narrative is that the US is bailing these countries out. However, depending on exactly how you measure it, the Gulf states have between $6trn and $9trn in US$ assets - hardly surprising after decades of the Petro $ - so what is going on here?

Our best guess is that the US government is actually, once again, bailing out the US Financial system. As we noted right at the beginning of the conflict, the Gulf States and their Petro Dollars have been everybody’s piggybank in recent years, with Trump’s visit last year resulting in pledges of trillions of dollars of investments into US AI infrastructure, overpriced weapons and to provide the liquidity needed for the Private Equity and Private Credit markets to get out of their liquidity trap (although obviously it wasn’t presented like that).

The current swap lines are limited however as they come from the Treasury and are not open ended like the 2008 ones that came from the Fed. As such, we suspect that Bessant is giving a signal to the new Chairman of the Fed, that the open ended ones may be required.

Some are discussing the idea that the US are worried about the Gulf States selling their US Treasuries, but we doubt that is the real concern as the Fed can - and would - buy them. Selling Gold to fund short term liquidity is something that we saw early in the War, but that looks more like it came from Asia (not China). What the US doesn’t want is distressed selling of illiquid assets like property and Private markets for the obvious reason that the Gulf States were the main providers of liquidity

Rather this feels like a form of vendor financing - the US will let the Gulf have access to US$ cash in order to effectively keep the liquidity taps open for US ‘exports’ - principally from the Military Industrial Complex and Wall Street. It is a bit like Bear Stearns making it very difficult for its employees to sell stock, encouraging them to borrow against it instead such that when it went bust they lost twice as much money….

Once again we are discussing financial fragility from de-dollarisation and the end of dollar hegemony and this is obviously yet more pressure on Team Trump to declare victory and retreat. Perhaps they can use the vote on the War Powers Act - now due - as cover, declaring it the democratic will of the people for the US to leave and then focus on delivering a Grand Bargain with China.

Here’s hoping.

• This week has the moon over the Persian Gulf at its ‘darkest’, marking the ideal time for a military assault on Kharg Island, coinciding with the arrival of significantly more US naval and marine power.

• The end of next week marks 60 days since the Military Operation started, after which it ‘needs’ Congressional approval. Political self interest flips from not stopping it, to not supporting it.

• The last tankers to cross the Straits are now arriving in Asia, meaning an air pocket is now in the supply chain meaning political pressure from the rest of the world is building on America not to cause a Global depression.

• Trump’s visit to China is in three weeks time. It has already been delayed a month and he needs control over Iran’s oil, as well as Venezuela’s as a key ‘card’ to play in his trade talks with China

• These multiple converging deadlines suggests that we are about to see an imminent escalation from the US Military to go for a ‘big win with an invasion of the oil terminals at Kharg island the likely headline to hit the screens.

Ahead of the actual attack on Iran at the end of February, we were nervous about markets, not because we thought there was going to be an attack, but because we thought one was now technically and logistically possible.

As part of that information set, we partly relied on Charlie Garcia, an open source intelligence analyst whose substack can be found here. In a (long) recent post, he has highlighted how the logistics of a serious escalation of the war are all dropping into place - such as a Nuclear powered carrier coming from the US at such speed that it has left its support ships way behind.

This suggests it has a deadline. One that Charlie suggests coincides with the lack of moon this week. He also suggests that the ceasefire was purely to buy time while the US moved up its armaments. Below is a summary of his thesis, which we must concede is quite compelling.

Deadlines

1. Military Deadline, as just outlined above.

2. US domestic political deadline. The Democrats have already tabled a number of applications for a vote on the war, which have been blocked - the latest by only a slim majority. However, voting to not have an early vote is not the same as voting for the war when there IS a vote - as is likely to happen at the end of April, when the 60 day limit expires. As we noted recently, in The Art of No Deal, the upcoming Election calendar means incumbents will face challenges for supporting an unpopular war. Trump needs a major victory by the end of the month.

3. Global Economic pressure. We need to recognise that the oil markets we watch on the screens, currently showing oil at $90, is not the same as the oil on the street, which trades around 50% higher than that. Oil arriving in Asia is oil that left before the Straits closed and is already priced high, but that means there is already an air pocket in the supply chain such that, even if they open by the end of the week, disruption, and price pressure, is already built in.

   This suggests that a deadline, in terms of, basically, rationing is approaching very rapidly as even China has only limited reserves to draw on. And don’t forget Europe, where not only are supplies of aviation fuel running low, but where the US Air force is currently consuming huge stocks of it.

4. Middle East politics. While many commentators, including Charlie Garicia, are of the ‘we’ve got all the bombs and can destroy Iran’ school, Iran still has a lot of missiles and we should not forget the previously ‘unexpected’ response by Iran to attack US bases in the region, triggering a lot of tension from the gulf states in particular and also pressure for the US to leave. The US can only ignore the complaints on economic pressure from Europe and political pressure from its Middle East allies for so long

   Israel too, has maintained pressure on the one hand for continued fighting, while on the other is getting hit hard by Iran such that there is growing internal political pressure - especially from those close to the India Middle East Europe Economic Corridor plan that we discussed at the start of the war. That of course includes Jared Kushner and Steve Witcoff, the two special emissaries.

5. Finally there is the deadline of the planned visit to China. It remains our view that the original ‘plan’ was to go to China with control of both Venezuela and Iran oil in order to leverage Xi into a Grand Bargain on trade, especially in the dominant areas of the supply chain like rare earths. China will keep supplying them while the US builds out its own supplies, while at the same time the US/Iran/Venezuela will keep supplying China while it builds its own energy supply chain.

Five deadlines, all coinciding, let’s hope that the announcement today of a continuation of a ceasefire in the wake of an apparent coup and counter coup in Iran isn’t another mis-direction.

So the talks in Islamabad didn’t last the weekend, seemingly the US, having apparently broadly conceded to discuss the 10 key points put forward by the Iranians, turned up and wanted to talk about something different, primarily the points on Nuclear weapons that they were in the middle of ‘negotiating’ right when they attacked Iran in the first place.

At literally the same time two US destroyers were confronting the IRGC in the Straits of Hormuz and now, in yet another bizarre narrative twist, Donald Trump and his team are planning to apparently blockade the Strait themselves in order to open it. Or something.

Most of us didn’t expect this weekend to be the off-ramp, but pressure is mounting and one will be coming

The pressure on the Trump administration to resolve this is likely to come from multiple directions. Most obviously from its ‘allies’ facing a Ukraine redux in terms of disrupted supply chains, inflation pressures and resource scarcity, but also from internal pressure - the US may be self sufficient in Oil and Gas, but it still needs to import almost everything else, including of course the rare earths and other minerals, like Tungsten, it needs to maintain its war effort.

And then there are the politicians…

Who wants to go into a Primary as having backed this war?

Perhaps more important is that the Mid-terms are currently being spoken about as a mainly a problem for Trump, but they are really an issue for all US politicians. Under the War powers act, there is a theoretical 60 day limit within which the President can act without congressional approval and even though that can possibly be extended by 30 days, any commitment to boots on the ground or further escalation is likely to challenge that.

60 days after start of hostilities takes us up to April 29th. Two weeks later Trump goes to China. He was originally scheduled to go this next week, so this looks like our new time frame.

US politicians are a) acutely aware of how unpopular this war is and b) even more aware that if they back it after 60 days then they, rather than Trump and definitely rather than their opponents in the primaries, will own it.

The Election Calendar is important

Markets

As I said on CNBC this morning here in HK, every weekend at the moment seems to produce a huge amount of drama and markets will presumable sell off on the US open and oil will likely head back towards $100, but the noise to signal ratio is so high as to mean that most investors are sat on the sidelines, with almost all the activity being the macro traders. Evidently, a lot of ETFs last week were bought to cover macro shorts, although the hedge funds seem to still be actively short their pre war trade of software (versus long semis).

Broadly though, this remains a classic duration trade across markets, long bonds are rightly worried about the inflation pulse coming through and elevated risk premia are crushing multiples on a lot of long duration/secular growth stories, by as much as 30% in some cases (Goldmans). A lot of this of course has been a function of the AI threat to the US Software as a Service space as well as increasing scepticism around the earnings flywheel allegedly coming from a huge build out of AI infrastructure.

Earnings support for the markets is fading outside of resources and financials, mostly driven by expectations of margin compression as input costs rise.

The Straits of Hormuz remain the key focus right now, with the new twist that the US Navy (greatest in the world etc, etc) is apparently going to intervene against any vessel that has paid the new toll to pass through the Straits - the toll that last week Team Trump said they were going to ‘share’ with the Iranians. Fine for me, but not for thee. The fact that he used the expression “interdict every vessel in International Waters that has paid a toll to Iran” reads like the tweet was written by someone else.

We have noted in the past that perhaps the best way to understand the US is through the movies of the Godfather, but this takes it to the next level. From a protection racket “Nice country you got here…buy our weapons and let us have military bases in your country and nothing bad will happen to it” to “buy our oil and gas and don’t even think about buying it from another source” and now on to a full takeover of the world’s oil and gas supplies by shutting down the competition and ‘liberating’ tankers trying to get to Asia and the global south. The US is the OG, as they say.

Trump has lost most of the media, including the alternative MAGA media

Along with so much else in recent years, very little of the official narrative on the war makes much sense. Western governments are extremely good at propaganda and the manufacturing of consent to support the political establishment, but the rise of alternative media has presented a strong challenge in recent times and is, obviously, behind the co-ordinated official campaigns against ‘dis-information’.

In recent years, alternative media have, rightly, questioned the official narrative on the climate crisis, the covid lockdowns, the Ukraine war and now Iran and, in many cases, have proven to be far more accurate than the mainstream media. These people are incredibly sceptical about this war

Here the algorithms can help - so long as you don’t let them drive you into an echo-chamber. YouTube for example now has most podcasts in some shape or form and interviewers like Glenn Diesen and Danny Haiphong have a roster of really interesting guests like Prof John Mearsheimer, Jefferey Sachs, Scott Ritter, Douglas Macgregor, Michael Hudson, Max Blumenthal, Alex Krainer, Larry Johnson and Alastair Crooke, all of whom have their own channels and their own areas of expertise that are far ahead of most if not all mainstream talking heads.

It is also interesting to see that while there have been a lot of alternative media out there questioning narratives, Team Trump have also lost much of their mainstream media support for this war. The New York Times in particular is highlighting the lack of a plan on the prosecution of the war - albeit while still maintaining the claims about the ‘reasons’ for the war, none of which really stack up and are actually the focus of the alternative media.

They are obviously trying to pin the blame for the war on Trump alone, but the narrative that the US has made a huge mistake and Iran has won a tactical if not a strategic victory is becoming mainstream. When he stood up at the State of the Union Address in January, the Republicans looked comfortable for the mid terms. Now they are panicking.

The US mainstream media now has a stick to beat Trump with

More important we think is that the Alternative media are also turning on Trump, in particular high profile “influencers’’ like Tucker Carlson, Megan Kelly and Candice Owens, who were previously all a major influence behind the rise of Donald Trump as an anti establishment figure. Indeed we have previously argued that it was Trump’s performance on Joe Rogan’s 3 hour podcast that cemented his victory as the long form content is suited to the ‘airpod generation’ and blue collar workers who no longer get their political opinions from mainstream media and five minute soundbites.

While he has also lost many alternative media MAGA supporters that helped bring him to power

It seems that Trump has ‘lost the room’ outside of a narrow group of insiders and that the coalition that got him into power now sees their own prospects being extinguished with his. The pressure to salvage their careers is intense and self interest is a bi-partisan characteristic.

Many of these right wing influencers are now openly criticising the apparent influence of Bibi Netanyahu on this venture and the polling on the popularity of the war is heavily against. Trump is very aware of this, but is struggling to find an offramp. Meanwhile he is hoping to scapegoat others rather than ending up as the ultimate scapegoat himself.

These influencers are in turn promoting the experts mentioned above and the fact that, for example, John Mearsheimer, Jefferey Sachs, Scott Ritter and Douglas Macgregor have also been highly critical of the official narrative on Ukraine for several years now means that their criticisms on Iran are also leading more and more people to question previous narratives.

Alternative media and alternative theories

For us, it is a case of reading alternative viewpoints to come to our own conclusion, not least because, as investors, the consensus view, while usually correct, is like betting on the favourite in horse racing. We are on the lookout for opportunities with asymmetric return profiles. It means we read a lot of interesting ideas…and a lot of rubbish.

Here then are a few of the broader theories about ‘what is going on’.

While many of the alternative experts listed above are becoming almost mainstream, others, like Brian Berletic, (also here with Glenn Diesen) are journalists who have broader theories ‘explaining’ what is happening right now. In Berletic’s case his theory is that this is all about containing the growth of China via control of its energy imports (see for example his paper US Plans for China Blockade Continue to take shape, Nov 2025).

Below is a screenshot from a different video from Berletic about the activity going on around China’s access points for energy imports and how the US is trying to control or destroy them all.

Another journalist, Richard Medhurst has a similar, but broader theory, that this is all part of a plan not just to control China, but to control all oil and gas supplies as a way of maintaining what he calls the Petrogas-dollar. In this theory, China is more of a collateral damage issue rather than a specific target, but the real aim is to preserve US dollar hegemony and to force the rest of the world to move their manufacturing to the US on account of it controlling the world’s energy supply.

Others have a view that everything is about the rival to the silk road, something that we mentioned in our original post on the A to Z of the Iran conflict , the India Middle-East Europe Economic Corridor (IMEC). This substack by Patrick Wood takes things a lot further - arguing that it is absolutely central to the conflict.

Patrick Wood’s point is that President Trump’s son-in law, Jared Kushner, has been central to a plan to stabilise (and profit from) the Middle East for many years now, starting with the Abraham Accords. IMEC is a rival to China’s Belt and Road initiative and connects India → Gulf → Israel → Europe via ports, rail, and shipping and Kushner is central to the whole exercise, having set up an investment company to profit from the new technocratic enterprise and raised billions from the Sovereign Wealth Funds (SWFs) in the region.

As Patrick Wood puts it: “Whoever controls the architecture of that system controls the flow of goods, energy, data, and money across three continents.” His argument is that ‘stablising Iran’ is central to the scheme’s success.

Meanwhile, a number of smart minds from the Bitcoin world, like Simon Dixon see this as all being part of a Great Reset and what we are seeing is a grand deal already planned out between different factions of power and that this will resolve itself. Here the villain is transnational capital, building on the ‘all wars are bankers wars’ theories.

In many ways any or indeed all of this could be true, there might be a number of cunning plans that sometimes overlap and sometimes cancel one another out and it would be strangely rather more reassuring to think there was a plan of sorts, at least somewhere.

A True MAGA believer should welcome Operation Epic Fail

In fact, if you were truly MAGA and wanted to break the power of the establishment and the corporates, then replacing trad with tech would be the way to do it. Show that the shiny toys don’t actually help in the real world. Tell them to replace the aircraft carriers and stealth fighters with satellites, missiles and drones and the MIC export market - and by extension the incentives for ‘forever wars’ diminishes.

Close all the military bases in the Middle East and withdraw to the Americas, stop being the world’s policeman and shut down foreign adventurism. Encourage the world to invest in the US economy rather than simply recycle Petro dollars earned by selling oil to the BRICS into US bonds that require sending billions out of the country in coupon payments every year. Petro dollars were needed when the US was an oil importer, now they are simply a tool of foreign policy and supporting big oil exporters - who are as powerful a lobby as the MIC.

Replace traditional, insecure, energy supplies with alternative energy and particularly scale batteries and you reduce the power of traditional energy barons. Pushing oil and oil insecurity achieves this.

Meanwhile, replace traditional methods of paying for Middle East oil with new ones using Yuan, Euro and stablecoin and you diminish the power of the banking lobby that runs the control side of the Petro$ world.

If you wanted all that, if you wanted to take down the corporate lobbyists who run the US, then this botched Military Operation looks like it may make all your dreams come true - in an epically ironic fashion.

Who knows, maybe there is a plan after all?

For some of us, the job was not to look at companies, but rather at the bigger picture, the portfolio of sector opportunities. We were the Equity Strategists, usually economists by training and our clients were the senior investment team, making us ‘the face’ of the firm. All the analysts in all the ‘sell-side’ firms were judged on (and largely valued on) their External ranking, which made for some intense, but usually friendly, rivalry.

My friendliest rival back in the 1990s was almost certainly Richard Kersley of BZW and later Credit Suisse. We got on well and the clients that liked me tended to also like him. I moved to the buyside 20 years ago, but many of my friends and colleagues on the strategy side from back then - Rob Buckland, Peter Oppenheimer, Andrew Garthwaite, Niall Macleod and Albert Edwards stayed on the sellside as ‘lifers’.

In Richard’s case it was almost literally true. I was shocked to read last year that shortly after his, well deserved, retirement, he had been diagnosed with brain cancer and was both encouraged and angry in equal measure to read about his battles with the cancer but also his battles with Axa, his health insurer, to get the treatment he needed. He was a reader of this substack and would occasionally comment and it was thus both a surprise and with great sadness that I heard of his passing last weekend.

Goodbye Richard. You will be missed.

Writing a monthly note when the news - or often perhaps just the noise - changes daily is always tricky. Waiting till after the easter holiday has left us finishing on the morning of the ceasefire announcement and markets spiking…..nevertheless….

• The Oil markets have been in record backwardation - which basically means that Oil traders are pricing oil in 12 months time over $30 below prices one month ahead.

• Bond markets however are already pricing a Ukraine style inflation impulse - even if things were resolved tomorrow.

• Equities were less aggressively positioned than last April before the tariff sell-down and have steadily sagged rather than crashed, with a little end month/quarter bounce to add further uncertainty as only short term traders are engaged right now.

• The flight to liquidity that helped the $ has faded, but everything now is focused on the Straits of Hormuz. Unblocking them is in the gift of Iran and the rest of the world may choose a diplomatic rather than a military route.

Unsurprisingly, Markets have spent the last month thinking about Iran and in particular about the Straits of Hormuz. A protracted period of restriction to Middle East exports of Oil and Gas will have clear negative effects for the Global Economy and even if the situation was resolved tomorrow, the inflationary impulse is already in the system. Most obviously this is coming in gasoline and jet fuel prices, but arguably more importantly in natural gas and fertiliser costs. We know from the Ukraine conflict that, as well as the backup power for renewables, particularly in Europe, natural gas is the key feedstock for the production of Urea and thence nitrogen based fertilisers. Disruption to supply ahead of the planting season is already pushing food prices higher.

In places like India, bottled gas is essential for cooking, while fractured supply chains means that places like Australia, despite being rich in natural resources don’t have access to refined products and are on the brink of fuel rationing.

Meanwhile, the Middle East is also a major supply of Helium, needed to make semi-conductors. Disruption is already baked in here too.

Bond markets are already reacting to the inflation risk, while equities, after a relatively calm start to the month continued to deflate as the prospect of an extended hit to global growth began to be factored into return expectations.

Importantly, the Straits are not closed, they are under Iranian control and opening them up is now a key focus for the Global Economy. As such, the resolution to the restrictions is not limited to the US proposal of taking them by force, the world can simply agree to ignore US sanctions and pay the toll to Iran (in Iranian currency or perhaps Yuan) to get their energy.

Today’s (Wednesday 8th April) announcement of a ceasefire that will open the Straits of Hormuz has understandably led to a bounce and likely a squeeze in equity markets, but it also focuses the markets on what really matters - energy.

Short Term Uncertainties - internal technicalities dominating

The fog of War continues, with Donald Trump’s statements seemingly contradicting each other on a daily basis, from the war lasting ‘two or three days’ (Axios Feb 28th) to ‘it’s always been a four week process’ (Daily Mail March 1st). From demanding unconditional surrender on March 6th to saying it was ‘complete’ on the morning of March 9th and that the Straits were open, to acknowledging that it could also be ‘only just the beginning’ (as Pete Hegseth had said the day before) in a press conference the same afternoon.

And so it went on all month, with ultimatums, apparent peace deals, the Strait not being important, then very important, ‘winding down’ followed by ‘massive escalation’. See here for a good exposition.

Short term traders thus spent the first half of the month trying to front run US policy announcements - the most suspicious being the moves ahead of March 23rd - but by the end of the month appear to have largely given up. Donald Trump’s expletive filled rage at the Easter weekend is testament to the fact that his ability to control the narrative is slipping badly.

The Commodity Roll

The chart at the top illustrates the extent of the backwardation in oil prices in early April. However, importantly, we should remember that the commodities markets are very much more about technicals than just economics. Some may recall the events back in April 2020 when the Oil price went to minus $37 a barrel. This was linked to concern about demand, but the reality was that a lot of (allegedly Korean retail) investors found themselves long and, obviously, unable to take physical delivery.

The moves in Oil markets on the ceasefire announcement will be as much about this positioning as any insights into the economics.

As for the asset allocators, the March options expiry is always important for them and this year it revealed them as staying on the sidelines for a while longer. With asset allocators absent, US retail, who were dominating the last six months or so, having retreated almost entirely (Morgan Stanley suggest that US retail volumes are in the lowest 5th percentile of activity since 2016) and Sovereign Wealth funds understandably focussed on a bigger picture, it has been the short term traders who have dominated activity.

Hedge Funds and CTAs have flipped from long to short - as short as they were after the tariff ‘crash’ in April last year and with dealers now short Gamma, we have a technical set up where moves are exaggerated in either direction. (Briefly, dealers are normally long gamma, which means that they sell into rallies and buy dips. When they are short gamma - as now- instead of acting as natural stabilisers to moves, they act to amplify them.)

As of today, that amplification is as likely to be to the upside as it was to the downside last week.

Medium Term Risks - existing issues haven’t gone away

Even if this ceasefire works, the inflation pulse is already in the system, but the flight to liquidity, rather as happened with Ukraine, has exposed a lot of emerging issues elsewhere that haven’t gone away, such that multiple subsectors and even asset classes face serious challenges, not just bonds.

Before the war in Iran started, a lot of issues were emerging - as we discussed in the last monthly note (Cracks appearing) - notably in the US Software as a Service space, but also in Private Credit markets and of course the dollar itself.

None of these issues has gone away and indeed, what looks like the imminent breakdown of the Petro $ will have further exaggerated many of these trends.

One of the less plausible (of many) statements from the US administration over the last month has been the expression of apparent surprise about Iran closing the Straits of Hormuz, This was obvious to almost every think tank, blogger and geo-political commentator out there, amateur or professional, and Iran itself had threatened to do so on multiple occasions.

The restrictions on the Strait have become the primary obsession of the rest of the world - and now the US - precisely because they all knew this. With 20% of oil and gas coming through the Straits and, as noted above, the importance of gas for everything from fertiliser to microchip manufacture, is the Ukraine supply issue writ large.

Except for two things; first, the west is not unified behind this war in the way they were in support of Ukraine and the sanctions imposed upon Russia (and even those required some additional help form ‘someone’ blowing up the NS2 pipeline) and second, the Straits are not closed, they are under Iranian control and are open to anyone willing to pay the correct price - which is not just a monetary amount in Yuan or Iranian Rial, but effectively to break support with Israel and US and to not use US$.

The interesting twist is that the IRGC operating the tollbooth will accept Stablecoin. This is about the whole PetroDollar system

The 50+ year experiment in Petro-Dollars was another thing that was cracking at the seams before the war started, not least because the US administration seemed keen on it doing so, Team Trump had made it clear that it didn’t want trade surpluses recycled into US capital markets, whereby most of it went to the 1% and into share buybacks for the richest 0.1%. It wanted them recycled into building real assets and bringing back jobs.

If the oil and gas exporting countries of the Middle East are no longer receiving payment in US$ - albeit perhaps in US$ stablecoin - then the cashflows are no longer routed through the US banking system

Long Term Trends - the end of the $ centric system

The most powerful corporations in the US are intrinsically linked to the Petro Dollar. Most obviously the traditional energy companies, who have benefitted from the recent increases in energy prices - particularly the unconventional oil and gas sector and the fracking/LNG complex. Secondly, the Military Industrial Complex, as the Middle East Oil exporters have recycled tens of billions of US$ into US weapons systems - much of it now proving not to be of much use against the one enemy they were supposed to be prepared for. Third, of course, is Wall St and the US banking system, which controls/channels all the US $ payments - and in doing so provides a control mechanism for US sanctions and thus the soft power of US Foreign policy.

Basically, the key US exports of guns, gas and money are all part of the system that is now breaking down and, interestingly none of them are keen on Donald Trump - or vice versa. To say that this war thus suits a President looking to reduce the power of his internal rivals is probably to overthink it, but the trends are in place as his real backers - the tech bros- look to take over from the trad bros.

Just add tech. To everything

Traditional energy is the focus right now, but battery technology is the key to making renewables no longer unreliable and destabilising. As is nuclear fission - and fusion. Meanwhile traditional defence in terms of hugely expensive aircraft carriers and ‘stealth’ bombers have been proven to be outdated, with drones, satellites and space tech the new focus of attention and of course, with the emergence of stable coin as a payments system, trad- fi is being truly bypassed.

This is not about bypassing the US economy, it is about bypassing its post war systems. Post this war, their is going to be a new post war system

The Fog of war continues, with escalations into the energy sector spooking markets already starting to recognise that while the timing of the start of this war came from Israel and the US, the timing of the end of it will come from Iran.

The straits of Hormuz are not closed, they are, and remain, under Iranian control and are obviously central to any resolution of the conflict. Our best hope is to see some form of Grand Bargain for a multi-polar solution, albeit perhaps not the exact one Team Trump planned for in the first place.

Russia and, particularly, China are standing by, for now, but as higher energy prices start to hurt the rest of the world, they will inevitably get involved - not militarily but diplomatically. This may involve a wider set of regimes changing across the Gulf region and even beyond.

Markets demonstrated their concerns at the options expiry last week and now look to be making a regime change of their own in US Equity markets - from bull to bear. Whether that extends to world markets - already seeing a meaningful rotation away from the US - depends on the nature of the Grand Bargain.

Last week we noted that risk aversion was going to remain high going into the - always important - March options expiry. Behaviour around this would tell us as much about positioning as anything else, but would, inevitably, be presented as a market prediction about the war in Iran.

Suffice to say that it did not go well and technically we would say that the S&P500 is now looking really quite sickly. It had broken its medium term supports at the end of February with the start of the war and, with the options expiry, it has now broken its longer term support.

By contrast - and this may be short lived - the MSCI World index has been stronger this year, reflecting a rotation and re-allocation trade out of the US and has yet to break long term support.

The way we like to think of these indicators is that the short term technicals help explain trading behaviour, while the medium term ones help capture asset allocators’ attitudes. The break in these at the end of February reflected a rotation away from the heavy concentration in the US MAG7 that we had been flagging for several months.

The fact that the S&P500 long term support has now broken, shifts us to thinking about the long term buy and hold investor and whether they will now buy the dip, or sell the rally. This is essentially our approximation of a bull or a bear market.

The flight to quality/liquidity trade

The initial reaction to the attacks on Iran was a flight to liquidity - US Treasuries and the US$ both went up, along with Gold and Bitcoin. That is now unwinding; US 10 year yields are now back above the levels of last September at just under 4.4%, while Gold is back to ‘pre-war’ levels - possibly as a funding trade to buy oil. Bitcoin - which we noticed as a source of liquidity for moving ‘fast money’ back in early January after the Venezuela regime change - is now back below 70k.

The $ is broadly weaker, back below 100 on the DXY and against all the major crosses - including China, which is a key one to watch in our view.

Diversification and re-allocation

The war is, naturally, dominating headlines, especially with respect to energy prices but as we noted in early March, there are other tensions behind the scenes, notably in software companies and private credit.

The software stocks remain well under water and AI related mega caps such as Meta, Microsoft, Google. Amazon and Nvidia are all down on 6 months and also year to date, although their 1 year performances vary, reflecting the breakdown of the Magnificent 7 correlations.

US Fixed income is already in a bear market and is obviously now worrying about inflation in a repeat of the supply chain disruptions we saw following Ukraine - and indeed Covid. Perhaps inevitably, the fixed income noise traders have ‘pivoted’ from calling for Fed cuts to demanding ‘rate increases’.

In our view, neither are warranted and tightening liquidity in the face of a supply shock is highly counter-productive. However, the noise traders are simply trying to drive a directional market. What they are getting though is increased volatility - which they like, even if investors don’t.

Thus the end of last week saw the MOVE index of bond market volatility jump sharply as the narrative flipped and a lot of positions were stopped out.

As with the equity expiry, a lot of the move is actually technical - leveraged ‘steepener trades’, i.e. the largely consensus pre-war betting on rate cuts but long bonds selling off , hit their stops or faced margin calls. The rise in volatility is now likely to affect the risk parity funds whose models sell assets as their volatility rises.

A selloff in bonds is obviously going to increase pressure on other aspects of credit, particularly Private Credit - as we discussed in the March Monthly Cracks appearing.

Meanwhile, that liquidity is obviously not going to rotate into equities either and will likely stay in cash for now. Equally, the new year trend for diversification out of the US equities has been also put on hold we suspect, as the obvious areas to rotate to - Asia and Europe - are currently seen as disproportionately ‘hit’ by rising energy costs.

This is more profit taking and a pause in buying rather than a major selloff at this point. The reaction in markets like Korea is a case in point - off 5% or more on a month, but still up 20% year to date. Similarly, the Nikkei is down 6% on the month but still up 7% year to date.

There is always a bull market somewhere

This raises the interesting point about positioning (please note, as ever, none of this should be considered investment advice, please do your own research and speak to your financial advisor). The economic pressure on these Asian countries is rapidly translating into political pressure on the US/Israel to find an off ramp for this war and it seems inevitable to us that Russia and China are about to participate in the discussions about this.

If we see some resolution, or indeed a Grand Bargain of sorts, then we believe that this diversification trade will resume and be compounded by a reversal of an over-sold positions in Asia and Emerging markets.

Depending on the exact diplomatic outcome, for example if it extends to a resolution of the Ukraine conflict and access for Europe to Russian energy once more, then there could be a rapid allocation of capital that would benefit Europe and the Middle East as well as Asia.

That $2-7trillion from the Middle East coming to invest in the US? Probably not.

What it will not do, we believe, is lead to a return to the high multiples in US AI related stocks. It is difficult to see the US as being the most likely destination for global capital in a post war environment - certainly not the anywhere between $2 and $7trillion that was Trumpeted (sic) less than a year ago.

It is too early to actively position for a Grand Bargain as yet, but it is important to think about how things might be resolved. The clock is ticking politically for Team Trump and economically for much of the rest of the world and particularly for US ‘allies’.

As previously noted, as investors we recognise that doing nothing is an active decision, but thinking about how to adapt as the fog of war clears is our priority right now.

Regular readers will recognise the homage to the market-thinking.com website image of Caspar David Fredrich’s ‘Wanderer above a sea of fog’ showing the author contemplating the Chamonix valley through a sea of Clouds. The imagery is that of the strategist trying to catch glimpses of what is happening down below instead of merely relying on the traditional narrative (hence the original subtitle of the blog, repeated here, of Making sense of the narrative).

So what to think of what is happening now? We said when this war first broke out that it would not be quick and that there were strong echoes of Ukraine and while that was sadly correct, we are now once again we are peering down through the fog of war trying to make sense of what is actually going on.

They say that the first casualty of war is Truth. but we live in a world where the opposite of mis-information is not truth, but official information. We saw that with Covid, we continue to see it with Ukraine and now we see it in Iran. As traders we might prosper from being ahead of the official narrative, or even setting up a contra narrative, but as investors, we need a bigger picture.

The Pain Trade

To start with, there are some obvious contradictions to make us doubt the western view; we are to believe, for example, that in less than 48 hours of ‘cracking down on protests’ the Iranian police and military managed to kill more people than died on the first day of the battle of the Somme, or three times as many as the allies suffered on the first day of the D-day landings and yet after two weeks of heavy attacks by drones and missiles from Iran on US bases around the region, no more than a handful of US service personnel have been killed. One of those numbers is wrong. Or both.

The issue for us has always about who can take the most pain and, as previously discussed, the Iran/Iraq war should tell us of the capacity for pain that Iran has, but we need to question the capacity of ‘the west’. Obviously the Gulf states are already suffering, but the Iran narrative - that they were attacking US military sites rather than civilians seems to have held up better than the western version that they were ‘foolishly’ extending the war to the region.

It appears that the attacks in the rest of the Gulf were, as advertised, on US bases and in particular defensive radar capacity

Movement of sophisticated radar systems from places like South Korea appears to support Iranian claims that most of the ultra sophisticated radar systems in places like Jordan, Qatar, Kuwait and Saudi Arabia were disabled in the first few days of the conflict.

This makes us worry about the so called Iron Dome. We are repeatedly told that the Iranian missile capacity is depleted, yet heavy rockets continue to be fired, the US fleet is over a 1000km offshore and there is a de-facto news blackout from Israel. This has echoes of the claims that the Russians running out of artillery shells in the summer of 2022, as do the promoted articles showing the latest ‘wonder weapons’ from the technologically superior west that will change things ‘at any moment’.

Supply Chains (again)

Perhaps most importantly for the global economy and the markets is the control of the Straits of Hormuz and the Oil and Gas trade. But not just for energy. As we saw with Ukraine, while Oil is important, natural gas is even more important since its role extends beyond power generation into areas like fertiliser.

Higher gas prices = higher fertiliser prices = higher food prices

Natural Gas is the key feedstock to produce ammonia, central to most nitrogen fertilisers. The Middle East accounts for nearly 49% of global urea exports and about 30% of global ammonia exports. Major exporters include Iran, Qatar, Saudi Arabia and Egypt. All of this is being disrupted - just as US planting season begins.

As we (should) remember from Ukraine era, global supply chains often lead back to Russia. Also that the pricing is global, and if Brazil and India are struggling to access supplies then prices in the US will also go up.

None of this is to take sides - rather to emphasise that the ‘all over by next week’ approach adopted by many (not including us) at the beginning is foundering and its major proponents (mostly in the US) are floundering. President Trump in particular appears to be going through the second stage of the Kubler Ross stages of grief at the moment and we have to hope that he soon gets to phase three - bargaining.

Europe is, once again, exposed to its dependence on gas and while the US is, in may ways, relatively unaffected by the consequences of its actions, the pressure for a solution beyond carpet bombing is growing by the day.

A policy that harms all your allies and potential allies is difficult to sustain

Places like Japan and South Korea are once again exposed for their energy vulnerability, but so too are major population centres like India, Thailand, Indonesia and Sri Lanka. They are all becoming increasingly stressed and, likely trying to put pressure on the US - as well as to China, something the Europeans are also doing.

What then, of China?

There are many quotes from SunZhu and the art of war that might be regarded as appropriate at this moment, but we like this one in particular:

China is standing by, watching and waiting. As previously mentioned, there is a big summit between the US and China coming up next month and one school of thought is that this whole exercise, combined with the moves in Venezuela is about gaining leverage over China in the upcoming talks around ‘A Grand Bargain’.

This might suggest that Trump has indeed moved to the bargaining stage, but asking for China to intervene in the straits of Hormuz looks a relatively weak move as, according to reports, China itself continues to have access to oil and gas. It could intercede on behalf of others, but that risks breaking their (heavily cultivated) links with the US.

Perhaps the most obvious card the US would be handing to China would be over Taiwan - which is heavily dependent on imported oil and gas for its energy needs. Once again, the aims of one faction in the US contradict those of another. Same as Ukraine driving Russia and China closer together.

We suspect that one group might think that this was all about China - certainly it’s a new narrative being aggressively pushed, but other agendas are also at play - not least the jockeying for (next) President between Team Rubio and Team Vance we discussed in the sister substack (see Is Venezuela a Power Play for the post Trump era) in early January.

Interesting that Rubio initially implied the US attacked pre-emptively to lessen the retaliation by Iran to an already planned Israeli strike - but then walked that back. Also that Trump himself initially made this a regime change issue, but has also gone quiet on this as a motive.

It seems to us that there are many groups with a dog in this fight, but that for now at least, the timing remains largely with Iran.

Looking for the off ramp..regime change elsewhere?

Which brings us to an as yet only whispered question of ‘could Trump be removed over this?’ We are not talking about an Iranian decapitation strike, nor about a false flag, rather that the powers behind the scene in the US needing to get out of the situation and sacrificing Trump in order to do so.

There are as many theories and rumours about his state of mind as there are about Putin’s or Xi’s and, to our theme, we have no idea what is true and what is not, but as someone pointed out, Trump’s messaging is starting to resemble the Downfall parody clips and he is staring to lose his base.

At the same time, the carefully cultivated ‘friendly regimes’ in Bahrain, Kuwait, Saudis and the Emirates are also wondering about whether the term regime-change might be something they are subject to rather than are helping to bring about in other countries.

We previously (slightly tongue in cheek) suggested that the best way for Iran to stop the war would be to go for the paymasters’ yachts and private jets, but in a sense they already are, targeting US assets in neighbouring countries, spreading from US radar systems and embassies to other connected assets - nobody is going to want to be in a Trump Tower anywhere in the Middle East right now, and anecdotally, we heard that nobody wants to be in any building with a Palantir office.

Doing nothing is a conscious decision

Such is the fog of war at the moment and so varied the possible future pathways that we are consciously doing very little with our diversified (and admittedly cash heavy) portfolios. We understand the book squaring and deleveraging that has already taken place but are, like China, watching and waiting, certainly until after the major options expiry this week.

Narrative and contra narrative surround us, but since covid and certainly since Ukraine, a lot of independent media is available and many of those who proved to be correct over the first two episodes (the difference between fact and a conspiracy theory is about six months) are currently providing useful counterpoint on this war.

Just as buyers of a stock need to talk to a stock analyst with a sell position, so it always makes sense to check both sides of the story. Even (or especially) in fog.

• Events in Iran are obviously driving significantly increased uncertainty across markets. The March options expiry will be more important than ever this year.

• Equities generally were not particularly leveraged going into this event which has helped headline numbers. However, a flight to liquidity can trigger sudden unwinds - think LTCM after the Russia default.

• As pressure grows, more cracks appear and other areas become exposed. Some of this was already happening; the sell off in the Software stocks for example and the concerns in part of the Private Credit Markets are not going to go away and will do more damage to a lot of portfolios grown fat in recent years.

• Wealth effects aside, consumer confidence is fragile and will become very news cycle dependent. If, as we suspect this is going to be a messy period of hybrid warfare, then risk premia will remain elevated.

The analysis of what has been happening in markets during February has clearly been pushed aside by events in Iran. We are obviously uncertain as to exactly what happens next but, as we discussed in a separate note titled AI agents to Zugzwang.and everything in between, there multiple potential paths from here.

The events in Ukraine a little over four years ago are an interesting template of sorts, not only because they are relatively recent in terms of the broad market environment, but also because they also involved similar oil prices shocks, disruptions to trade and a flight to liquidity - not necessarily to quality or safety.

What has resonance to previous conflicts or disruptions - when for example we didn’t have the role played by China, or when there were fewer systematic quant funds, macro traders and retail investors using ETFs - is that a flight to liquidity always exposes weaknesses in the system - weaknesses that we already starting to show in the last few months.

In the meantime, we highlighted that there have been a number of important signals already coming from markets during February that should not be ignored.

Short Term Uncertainties

Some observers might be puzzled by the fact that the markets appear to have sold off less on the announcement of a War than they did on the announcement of tariffs last April, but that actually tells us a lot about how markets were positioned ex-ante. In effect there was not a large amount of leveraged trading money in high beta stocks.

US Markets already positioned defensively before Iran attacks

The Chart from our friends at Libra Investment Services demonstrates this succinctly. As of the last trading day of February, their calculation of the net beta position of the US market was as heavily positioned to low beta defensives before the Iran attacks as it was after the Tariff Tantrum.

This apparent defensive prepositioning was not some clever prediction of conflict, rather it was a function of the ongoing story of 2026 so far; an unravelling of the concentrated position in the MAG7 for many investors, prompted by an emergence of stock specific risk associated with the huge rollout costs and implications of AI.

New year rebalancing had started to shift allocations towards energy, materials and utilities and this was accelerated by the so called SaaSpocalyspe, as the latest iterations of AI models triggered a run for the exit in many Software as a Service companies, something we discussed here (Don’t look down).

This then triggered some rotations into AI-proof stocks like Pepsi and consumer durables in general, while short term leveraged traders were in many cases net short. A very different set up to last year.

In truth, many of these software companies had already been coming off heavily in the second half of last year, but as we noted in early February - a stock that is down 90% is one that fell 80%. And then halved.

Obviously Iran is the key driver to uncertainty at the moment, which will keep risk premia elevated - and asset allocation short duration. The closure of the straits of Hormuz is obviously key, but an attack on a Russian LNG tanker in the Mediterranean - allegedly by Ukraine - will obviously not help things, especially for Europe, but we also note that concerns over the escalation in LNG prices is starting to affect Japan and South Korea as well.

As we discussed in our note AI Agents to Zugzwang, linked above, we think that there is a high probability of hybrid warfare and its associated disruption, but we suspect that the target will not be the general public, but influencers of all kinds.

From social media influencers in Dubai now posting videos of drone attacks, or of themselves leaving, to the Billionaire Donor class being seriously disrupted (to be clear, we are not saying that Iran should target unprotected Superyachts and Private jets rather than the military equivalents, but it would only take a few drones to make the toys of the donor class uninsurable.

The angle is to put pressure on the Chartering Classes rather than then Chattering Classes

The new Royalty of the Chartering Classes who we discussed in the Summer (see Class dismissed) are a key pressure point, as they alone appear to influence policy. Also there are the Corporate Classes, something of an overlap - certainly when it comes to Private Jets for CEOs - but much (much) more focussed on their share options.

Strategic hits to corporate profitability through financial or even reputational attacks, perhaps China backed sanctions would hit this set of influencers where it hurts. In the wallet.

Meanwhile, with the AWS server in Dubai apparently down and general disruption, the long duration plays like Middle East property and even Digital assets that require sustained confidence look vulnerable.

Medium Term Risks - dollar, software and credit

Iran moves a lot of short term uncertainties into Medium Term Risks.

The dollar for example is currently benefitting from a flight to liquidity, but remains uncertain as to whether it is going to break decisively one way or the other, However, as previously noted we have a suspicion that some form of ‘Grand Bargain’ in on the cards between the US and China. perhaps as soon as April.

We still see a meaningful risk that Team Trump will engineer some form of Mar -A -Lago accord to deliver a depreciation of the $ against the Rmb - and likely other Asian currencies like the won and the Yen

As noted elsewhere, Trump’s discussion of a four week timetable for Iran fits into this plan for a ‘trade victory’.

AI isn’t breaking SaaS business models, it is just crushing future margins

Elsewhere, the big moves in February were obviously in the Software as a Service businesses (SaaS), where the release of the latest AI tools and their approximation to agents that can build software using a new coding language (English) triggered a re-evaluation of the barriers to entry for these corporates. The biggest of these, Salesforce, was down 17% in February, almost 27% year to date and 32% over 1 year. This last number is important, for the stock is now almost half its peak from February last year; it has been in a steady down trend for the best part of 12 months before it broke sharply on this ‘news’.

Here, there are clear echoes of the end of the TMT boom, where positive momentum + market cap weighting and passive investment (Salesforce is still a 180bn market cap) + tech narrative meant nobody asked too many questions. On Salesforce (just to continue with this example) the gap between GAAP and non GAAP earnings, largely attributable to much of their cost of sales being stock based compensation and acquisition left them on modest forward P/Es (18x) but very high valuations on other metrics - for example almost 6x revenues.

When the stock is going up, nobody minds. Until they do. (Please note, as ever, none of this should be considered investment advice. Please do your own research and speak to your investment advisor).

Private Credit - Blue Canary?

One of the other main pre Iran shocks to investors in February was the announcement from Blue Owl, the Private Credit Fund, that many of the illiquid investments in some of its funds were, well, illiquid, halting redemptions in a fund aimed at retail investors.

Many investors still remember the August 2007 issues with three BNP Paribas hedge funds due to ‘the complete evaporation of liquidity in certain market segments of the US securitisation market’.

This is not to say that there is the same systemic risk as back then, rather that the assumption that there is zero risk is being challenged and that, rather like everyone pretended that the additional return from a concentrated portfolio of MAG7 stocks did not contain any additional (concentration) risk, so they pretended that the additional return from an illiquid portfolio did not contain any additional (illiquidity risk).

Private market stocks, like the SaaS stocks, have been in a steady decline for some time, Blue Owl is off almost 60% from its 2025 high, while Blackstone is some 40% lower.

The VanEck ETF BIZD is a useful indicator here. As a proxy for private credit, is is essentially a concentrated portfolio for Income investors. It offers a 12% yield based on its holdings in a small number of Business Development Companies (BDCs) that lend to mid market companies. It has exposure to Ares Capital, Blackstone and Blue Owl and then some structured instruments (total return swaps) that allow it to add leverage.

Unfortunately, it is down almost 20% over the last 6 months and that 12% yield is being cut to 8%.

Not a secondary banking crisis. Yet

We are not in the territory of a secondary banking crisis yet, but the history, from the UK in 1973-5 to the US Savings and Loans in the early 1990s, the Scandinavians in the early 1990s were a combination of property and sharply rising rates while the Japanese in the 1990s were more about asset price deflation and hidden Non Performing loans. Generally though it is a story of ‘secondary banks’ crowding out traditional lenders and often being far less careful with their lending standards.

As such it is looks more like the recent Silicon Valley bank sell-off. Not systematic, but damaging to general confidence.

The Asian Financial Crisis in 1997/98 had the added feature of a currency mismatch, while the shadow banking failures of the GFC were a combination of a duration mismatch and then a dash for liquidity in repo and securitisation markets.

Typical Pattern of Secondary Banking Crises

Across history they tend to follow a four-stage cycle:

1. Credit boom (often after deregulation)

2. Asset bubble (property or financial assets)

3. Monetary tightening or recession

4. Failure of weaker or specialized lenders

These institutions often depend on:

• wholesale funding

• concentrated loan books

• rapid growth strategies.

Quite a lot of boxes being ticked here…..

And Finally -some uncomfortable truths from substack

Trying not to be too gloomy, but this substack from Manufacturing Dissent makes some telling points on the collapse of the illusion of neutrality in Dubai and the significance of its hub role in the hub and spoke airline connectivity.

Manufacturing Dissent

Dubai’s Mirage Collapses

Dubai has spent years pretending it lives above the region it sits in. A shiny bubble floating over the Middle East, untouched by the chaos around it. Then February 28 arrived, and Iranian ballistic missiles tore through the sky. Within hours, the busiest international airport on earth went quiet. Not slowed. Not partially disrupted. Quiet…

Read more

6 months ago · 2559 likes · 250 comments · Kathy

A second substack, - Collapsed Intelligence Agency - then sets out a lot of uncomfortable truths about Iran, in particular its long preparation for this moment and the, uncomfortable truth, that western/Israeli decapitation strike tactics will actually make things worse as there is not one command hub, but 32 of them.

The whole article is worth reading, not only because it paints a very different picture of the Iranians system than we are hearing from the politicians, but also because it makes some powerful points on the risks to de-salination plants and other strategic targets in the region like the offshore gas platforms.

News flow on these remains a reason for elevated risk premia.

Ukraine is a decent enough analogue as not only does it allow for the modern set up in markets and the increased role of China (not relevant for most previous conflicts), but it has similar issues around disruption to energy supplies and supply chains generally, a need for liquidity and exposing a number of structural issues that were already starting to come to light - illiquid markets in particular. Stagflation is once again the risk, especially as it compounds on the existing Russia/Ukraine situation.

Overall, we see this as different from what has gone on previously. There is no pretence that this is anything other than a regime change operation and that covert action is now overt. Worst case scenarios abound, but even best case means highly elevated risk premia.

Just as the Ukraine conflict was not resolved by a quick strike, so the decapitation strikes on Iran are unlikely to work. It is not a small country like Libya, or a factional one like Iraq, or a tribal one like Somalia. As such, we have sketched out a number of thoughts and ideas as to what might happen. This is not investment advice, as usual, but neither are we trying to be partisan. Rather, we are looking to highlight possible paths and events and, as ever, hoping for the best, but preparing for the worst.

The A-Z list is not exhaustive, we just thought it a useful framework for some ideas….

A

AI was already staring to cause problems for the Software as a Service sector over the last few months as users realised that ‘Agents’ were able to allow users to bypass the tech barriers to entry. In this we would make the comparison to Apple and the App store, which allowed users to bypass the tech barrier of Microsoft systems which were almost a closed user group to the IT crowd. This is a margin compression story and is hurting the passive investment industry and benefitting Active management. This will obviously be enhanced now as risk premia is elevated.

The other aspect of AI of course and particularly for this new situation is in the modern warfare. We know for example that Palantir and others have already developed AI weapons targeting (in this case for Hamas operatives) in particular a system called Lavender. Unfortunately, asymmetry in warfare does not last long and we can/should expect Iran to ‘develop’ something similar.

Assassination. Decapitation strikes have now set a dangerous precedent, similar to the reason that spies generally don’t assassinate other spies - it raises the threat levels to themselves - so Presidents and Prime Ministers authorising leadership assassinations are escalating their own risks. However, we wonder if Hybrid warfare (see below) means that money and assets, more than people, will be the target.

B

The Billionaire Class that has dominated so much of the west since the financial crisis are, again in our opinion, in a dangerous position, for they are the soft underbelly of the Western power dynamic. Traditional terrorism works on encouraging regime change (see R) by making life intolerable for the average voter. Iran will be aware that the average western voter does not support these attacks, but also that they have no power to change policy. The billionaire donor class however are different. Making life really uncomfortable for them would be a very effective form of Hybrid Warfare (see below)

Peter Thiel’s (of Palantir’s) private jet, like others is tracked wherever it goes by Climate activists among others. Imagine if one day it couldn’t take off, or, more pertinently, after several attacks on other Private jets (see Yachts and jets below) it became impossible to insure the billionaire lifestyle? That would put pressure on the politicians.

Bitcoin has caught a small bid, but we wonder if that is more of a flight to liquidity for people caught in the wrong geography at the moment?

C

Cash is king is the default of markets when uncertainty rises an this is clearly what is starting to happen. As active investors, doing nothing is an active decision, raising cash is a risk decision.

China. Trump is visiting Xi in April (see below Xi) and this will clearly be central to how events unfold.

Meanwhile, it looks to us like certain elements of the US Foreign Policy Establishment eg known China hawk and heir apparent Rubio, see an angle here whereby taking control of Iran is a way of controlling China’s energy imports (similar to the calculus on Venezuela) as well as the IMEC Trade corridor shown below.

This is probably not the main motivation, but some clearly see it as a side benefit. This is part of the continued attempts to break up BRICS and isolate China and is part of India trying to play both sides (see I). Rubio’s speech at the Munich Security Conference essentially blamed China for US de-industrialisation and sought to position the US as the leader of a wider western empire. The fact that this was only two weeks ago should not be overlooked, as it gives a clear insight into the Foreign Policy mindset - see also Cuba.

China is giving technical and other assistance to Iran because it recognises the strategic importance/threat.

Clark, Wesley. General Wesley Clark famously (to those reading non traditional media at least) outlined the long term Pentagon plan in a speech in 2007, but it emerged in the aftermath of the 9/11 attacks as part of a plan to remake Africa and the Middle East.

Iran has been under no illusion that certain elements of the US foreign Policy establishment have been pushing this line for decades. Nor will it have missed the point that, most recently, the new, and perhaps even primary, advocate for attacking Iran has been MBS of Saudi Arabia.

Consequences. To date, support for the attacks on Iran have largely been without consequences for the Gulf Arabs and the Donor Class. Iran has already demonstrated its willingness to attack Israel and US ‘allies’ in the region - hitting civilian areas on the basis that they say they house US military, the plan, no doubt, being to pressure the civilian populations of Kuwait, Qatar and the UAE to push the US (and the risk of collateral damage) out of the region.

As for the Donor class, it probably doesn’t even require violence, just huge inconvenience to ‘The Money’ for it to change it’s policies (see Regime Change). In ‘Godfather’ terms, it’s the equivalent of the horse’s head in the bed.

We shouldn’t forget Cuba in all this. As a likely part of the new Donroe doctrine, the emboldened US Foreign Policy officials, recognising that all Foreign Policy needs to be cleared for a focus on domestic policy for the Mid Terms will be agitating here.

D

The likely progress of the war will be framed around a counter Demand from Iran, that the US exit the Middle East. Attacks and counter-attacks will be accompanied by such a demand, with an increasingly narrow window for the US to comply without appearing to ‘lose’. This is the realpolitik driving things now.

We already know from Ukraine that Drones are now a key feature of modern warfare, both land based and sea based (see yachts and Jets below). Iran has significant capability in this area with its Shaheed drones and thus significant ability to create long term nuisance against soft targets. Any US or Israeli embassy, anywhere in the world could receive a drone attack at any time. As could any Trump, or donor related building.

Dubai has already been hit by a drone attack and while the ex-pat community is currently being stoic, one wonders if there is an air of J G Ballard’s Empire of the Sun in 1941 Shanghai about it all. At the very least, one wonders if there will be a repeat of an expat exodus similar to that after the Japan earthquake in 2011 or the SARS outbreak in HK in 2002-4. ‘My Tax shelter has become my bomb shelter’ is not a meme to encourage further investment in Dubai real estate. HMRC will doubtless be pleased, but few others.

E

Energy prices are the obvious first impact as closing the Straits of Hormuz chokes of 20% of global supply of oil and gas. Traders are obviously playing the futures markets, but the economic impacts will take longer to ripple through.

Europe has been steadily committing economic self harm since the Ukraine invasion and the obsession with net zero. Politicians have committed to sanctioning Russia for its ‘unprovoked attack’ on Ukraine, by insisting European corporates and consumers pay 6x as much for their gas to import it from the US and have literally just announced cutting remaining Russian imports to zero. Their intention to replace this with more LNG from Qatar has obviously now foundered as the Straits of Hormuz have closed and which is ‘good’ for Norway and the US, but not many others. Their plan to import from Australia(!) apart from having 3x the carbon footprint of piped gas (if you think that sort of thing is important) will put pressure on S Korea and Japan.

Stating that the US/Israel attack was pre-emptive, but that the Iranian response was unjustified is putting the ‘EU leaders’ into something of a bind with respect to the stance on Russia.

F

Fear is the most powerful of emotions and is a major constraint on the US plan for a popular uprising in Iran. Many US Foreign policy advisors see this as a Berlin Wall moment and they may be right, but Iran has been expecting/planning for years. Certainty, and in particular moral certainty - in this case that this is the right thing to do for the Iranian people - is a very dangerous condition.

However, fear is also the key strategy of the terrorist. It is not the bomb so much as the constant fear of the bomb that wears down the will of the people. In markets, this more prosaically expresses itself as elevated risk premia - or more simply de-rating and is reflected in the rise in the Vix - the so called Fear Index.

Fool around and Find Out. FAFO - usually in its less polite version - is a popular meme in the US, usually when a bully makes a miscalculation and picks on the wrong guy. We can’t help thinking that this is where we are now. Iran is clearly not going to fold and allow ‘the west’ to impose a new regime. This suggests a longer conflict than the US is likely willing to sustain - not least with simple logistics.

H

Hormuz - Straits of. Iranian control of the Straits is obviously key for markets concerned about Oil, but also, more generally for LNG. The EU leadership has literally just announced that it will no longer import the existing 15% of its supplies from Russia - so with the straits closed this is presumably good for Norway, Algeria and (of course) the US. Also, in line with their green credentials the EU are planning to import more gas from..Australia. (Only around 3x the carbon footprint).

Hong Kong (OK, we’re biased) will likely emerge as a western friendly investment environment for international money concerned about investing in the Middle East at the moment. Building on its role as ‘offshore Rmb centre and the prospect of a revaluation of the Rmb, this all adds up to an interesting opportunity, especially as East Asian money will now be very nervous about going to ‘West Asia’.

Hybrid Warfare. As noted elsewhere, it is the threat of attack that is often so much more destabilising than the actual attack. Will Iran now play at the World Cup? Or will they ‘spoil it’? Imagine for example, if there was an attack at a World Cup match between, say, Mexico and Saudi Arabia in Mexico city at the end of June and it was blamed on the cartels - but no-one really believed it wasn’t Iran. It wouldn’t even have to be real, just a ‘credible threat’ an hour before the kick off.

What then would happen to the showpiece game in Texas on July 4th? All major ‘events’ in the US could then be sabotaged with a simple phone call. Tie that in with a simple demand that the US leave the Middle East and look for popular pressure to emerge. (Note this is not tactical advice either!)

I

India under Modi swings between being part of BRICS and moving closer to the EU and US. This is a tricky tightrope to navigate and risks elevated risk premia here too. A misstep and a big drop.

The fact that Modi chose to side with the US and Israel in these attacks, having visited Israel literally days before is important for the broader dynamic around BRICS. The recent visit to Israel involved various trade agreements and highlighted that India takes almost 40% of Israeli arms exports.

L

Lebanon. As of this morning, Israeli ground troops have launched a ground invasion of Lebanon - not entirely surprising given the previous orders to evacuate embassy personnel. Similar to other, previous, attacks on Lebanon and also on Syria, this is positioned as a defensive move - although the IDF Chief of staff has just referred to it as going ‘on the offence’. Like the attack on Iran, they are no longer pretending.

The Israelis invaded in 1978, 1982 and occupied until 2000, Then conflicts began again in 2023. To paraphrase Michel Bernier, who said about the Brexit talks - when you see a fight start in a bar, you don’t punch the guy who started it, you hit the one you have always wanted to punch.

We should not discount the fact that various factions have scores to settle such that nobody has control over the timetable.

M

MIC * MIC. The Military Industrial Complex that Eisenhower warned against over 60 years ago has been joined/enhanced by the Media Intelligence Complex that drives relentless ‘information’ about ‘our enemies’ to generate consent for war and of course seeks to suppress ‘dis-information’.

This is currently working on overdrive, but the spread of alternative media is hampering this and is definitely a factor in limiting the governments of the West from convincing their populations of the ‘right’ to do this.

The election of Donald Trump was, rightly, linked to the podcast phenomenon with YouTube channels like Joe Rogan heavily influencing US public opinion outside of the white collar liberal classes. They will again be important between now and the mid terms.

N

Nuclear proliferation is probably the biggest perceived threat, but we suspect that in fact the Iranian response will be to escalate up to a level just below what could be ‘justified’ in the western public eyes. Hence our point about Hybrid Warfare and assassinations. Physically attacking Trump or Netanyahu or their families, may well lead to escalation. Certain war monegering Senators or high profile donors, perhaps less so. But making life very uncomfortable for Trump and his donors without triggering an escalation is the most likely option in our view.

O

Oil is the instinctive response to all of this and prices obviously spiked, but we would add that the natural gas market is more important economically, particularly for Europe (see Hormuz, straits of, above). European gas prices just jumped 50%.

P

Propaganda has been relentless, basically since Covid, when the establishment realised that the tricks and techniques used for the so called Climate Crisis worked very effectively to control opinion over Covid. Since Putin’s move into Ukraine (Unprovoked or Preventative?) the Media and Intelligence Complex has co-ordinated with the Military Industrial Complex to manufacture consent for further (and permanent) war. This is not new, Edward Bernays, who literally wrote the book on Propaganda, used similar tricks to get support for US war efforts including WW1.

Q

As one of the biggest LNG exporters and trapped by the straits of Hormuz, Qatar has close ties with Iran and has reportedly been pushing for restraint. The drone attacks on Qatar and other Gulf Allies have so far been targeted at US assets and are part of a campaign to leverage the Gulf states into restraining the US and Israel.

R

Regime Change is the stated plan by the US and Israel, but that works both ways. Before the strikes, 80% of the US population and 90% of Democrat voters opposed attacking Iran, but 100% of Congress supported it. Go figure as they say over there. Equally the ‘leaders’ of European countries, like the UK, France and Germany are also supportive of the attacks, but generally also have support below 20% and their collective focus on foreign rather than domestic policy is starting to lead to significant unrest.

Opposition to the establishment has been steadily building across the West and, without necessarily supporting Iran, this conflict could trigger a lot more unrest and uncertainty than its architects have considered.

Risk Premia have obviously jumped, but we suspect will remain elevated, This is obviously better for cyclicals and short duration assets rather than long duration assets

Russia is a likely beneficiary of much of this. First the Global South will largely now be anti-US and on the basis that my enemy’s enemy is my friend, this should help Russia. Second, as noted above (Europe) the clumsy use of ‘pre-emptive’ rather than ‘unprovoked’ to describe the attack on Iran whilst using the term unjustified for Iran’s response (by the EU) isn’t fooling anyone and undermines any remaining pretence at using international law to criticise Russia. Third, restrictions on Middle East exports of oil and gas will force EU and others to be nicer to Russia and maybe accelerate a deal on Ukraine with Europe.

S

All the Shah’s men, a book about the overthrow of the Iranian government in 1953 looks to be playing out in some aspects of this planning and the fact that the late Shah’s son is being promoted as the potential new leader after an uprising is also an echo, although his support appears to be from a younger generation that don’t remember the corruption of the previous era. It was an early example of regime change and also, of course, about the vast Oil reserves.

T

Team Trump’s Timetable will be looking to clear everything up by the third quarter, allowing them to focus on domestic issues and the midterms. This obviously places them as ‘forced buyers and thus at a disadvantage in negotiations. Trump himself is obviously looking to secure a win in China in April and then focus on the World Cup and the 250th anniversary celebrations. Which is exactly why we raise those as possible points of escalation (see hybrid warfare).

U

The Ukraine conflict is a useful template for markets to respond to events because it involves tighter energy supplies, restrictions on trade and a flight to liquidity exposing trouble in illiquid parts of the markets. Ironically, if Iran starts to absorb too much time, energy and resources, it may actually break the stalemate on resolving the conflict.

V

Venezuela undoubtedly encouraged the US foreign policy establishment of the ‘ease’ with which they could enact regime change. Also connected with China and oil imports it is less serious than Iran when it comes to China’s priorities, but will remain part of the Rubio faction’s focus.

W

War is a racket a short book by General Smedley Butler makes the point about the MIC and the history of propaganda in a more punchy fashion. Sometimes this is quoted as ‘All wars are bankers’ wars’, but we sense that these sentiments could reappear and escalate should this conflict become extended.

X

President Xi of China will obviously be heavily involved in the ultimate resolution of all this which is why the planned meeting with Trump in April will be interesting. Unlike Venezuela, Iran is strategically very important to China and if, as we suspect, Trump’s visit was originally around a plan to revalue the Rmb and ‘win’ a trade war, then the recent announcement that this war will last no longer than 4 weeks plays into this timetable.

Y

Yachts (and Jets). Larry Ellison’s yacht Musashi is currently in the South of France. It takes a few seconds to find it and as we have seen in the Black Sea a Seadrone could probably sink it in minutes. Not that we are advocating this (at all), but a lateral thinking Iranian might be.

In the same way a missile could take out Michael Dell’s Gulfstream G700. Or anyone else’s to be fair, but as a starting point, being a high profile donor on this list might not be quite so popular any more.

Z

Zugzwang is basically a position in chess where any move you make can only make your position worse. This is where we believe Trump found himself at the end of last week. Not to invade made things worse and so did invading. We suspect he will soon find himself in another such bind. Withdrawing from the Middle East will make things worse, but so will not withdrawing. Nothing good basically.