FED AND TREASJURY BUYING SHORT AND LONG END

24 June 2026

The civil war is here: Warsh v. Bessent

OVERVIEW

A little-noticed battle may be unfolding inside US economic policy. While the Federal Reserve keeps short-term interest rates relatively high to contain inflation, the US Treasury is simultaneously buying back longer-dated government bonds. Some analysts argue this is creating a form of "shadow liquidity" that partially offsets Federal Reserve tightening. Whether this amounts to a hidden stimulus or simply prudent debt management remains fiercely debated, but it has important implications for bonds, equities, housing and the future sustainability of America's debt burden.

The civil war is here: Warsh v. Bessent

---

1. THE TWO ENDS OF PENNSYLVANIA AVENUE

The conventional narrative is straightforward. The Federal Reserve sets monetary policy and attempts to control inflation through interest rates and balance-sheet management. In 2026, the Federal Reserve has maintained a relatively restrictive stance, signalling that inflation risks remain a concern.

At the same time, the US Treasury has expanded its bond buyback programme. These buybacks involve purchasing previously issued Treasury securities from the market while funding the purchases largely through the issuance of short-term Treasury bills.

Some market observers describe this as a policy conflict. The Federal Reserve is attempting to tighten financial conditions, while the Treasury is simultaneously improving market liquidity and supporting demand for longer-dated government bonds.

The result is what some analysts call a "split-screen economy", where different arms of government are exerting opposing influences on financial markets.

Glossary and Key Concepts

Federal Reserve (Fed) - The US central bank responsible for monetary policy.

Treasury Department - The US government department responsible for federal borrowing and debt management.

Monetary Policy - Actions taken by a central bank to influence inflation, growth and financial conditions.

Financial Conditions - The overall ease or difficulty of obtaining credit and financing.

---

2. WHAT THE TREASURY IS ACTUALLY DOING

The Treasury buyback programme is not secret. It has been publicly announced and documented in official Treasury statements.

The Treasury purchases existing government bonds, particularly older issues known as "off-the-run" securities. These are bonds that are no longer the latest benchmark issue and therefore tend to trade less actively.

To finance these purchases, the Treasury issues large quantities of short-term Treasury bills.

In simple terms:

• Buy long-term debt

• Issue short-term debt

• Reduce the average maturity of government debt

• Improve liquidity in less active bond markets

Officially, Treasury officials describe the programme as debt management and market-liquidity support.

Critics argue that its practical effect resembles a form of monetary easing.

Glossary and Key Concepts

Bond Buyback - Government purchase of previously issued bonds.

Treasury Bill (T-Bill) - Short-term government debt, typically maturing within one year.

Debt Management - Strategies used by governments to finance borrowing efficiently.

Liquidity - The ease with which an asset can be bought or sold without significantly affecting its price.

---

3. THE IMPORTANCE OF OFF-THE-RUN BONDS

Many investors overlook the distinction between newly issued and older Treasury bonds.

When a new 10-year Treasury note is issued, it becomes the market benchmark. The previous issue becomes "off-the-run".

These older securities often trade less frequently and can become difficult to sell in large quantities without affecting market prices.

The issue became more important after the sharp rise in interest rates during 2022-2025. As yields rose, prices of existing bonds fell sharply.

Banks, pension funds and other financial institutions accumulated large unrealised losses on these holdings.

By purchasing off-the-run bonds, the Treasury effectively provides a buyer for securities that may otherwise face limited market demand.

Supporters argue this improves market functioning.

Critics argue it transfers risk away from private investors and onto the public balance sheet.

Glossary and Key Concepts

Off-the-Run Bond - An older Treasury issue that is no longer the current benchmark.

Duration - A measure of a bond's sensitivity to interest-rate changes.

Unrealised Loss - A loss that exists on paper but has not yet been crystallised through sale.

Market Functioning - The ability of financial markets to operate smoothly and efficiently.

---

4. WHY SOME ANALYSTS CALL IT "SHADOW QE"

Traditional Quantitative Easing (QE) occurs when the Federal Reserve creates bank reserves and purchases bonds.

The Treasury buyback programme differs in its mechanics.

The Treasury is not creating money. Instead, it is using cash resources and short-term debt issuance to purchase longer-term bonds.

Nevertheless, some analysts argue that the economic effects can be similar:

• Increased liquidity

• Greater cash balances within the financial system

• Lower long-term borrowing costs

• Reduced pressure on bond markets

For this reason, critics describe the programme as "shadow QE".

Others reject this label entirely, arguing that no new money creation occurs and that the comparison exaggerates the programme's significance.

The debate therefore centres on outcomes rather than mechanics.

Glossary and Key Concepts

Quantitative Easing (QE) - Central-bank bond purchases financed through money creation.

Shadow QE - Informal term describing Treasury actions that may mimic some QE effects.

Balance Sheet - Statement of assets and liabilities held by an institution.

Money Creation - Expansion of central-bank reserves within the banking system.

---

5. THE YIELD CURVE BATTLE

The most important macroeconomic implication concerns the yield curve.

The Federal Reserve primarily controls short-term interest rates.

The Treasury buyback programme primarily affects longer-term bond markets.

This creates two opposing forces.

The Fed attempts to keep short-term borrowing costs elevated.

The Treasury's actions may contribute to lower long-term yields than would otherwise prevail.

As a result, some analysts believe the yield curve no longer reflects purely market-driven expectations.

Instead, it may partially reflect policy interventions occurring at both ends simultaneously.

This complicates one of the most widely followed indicators in global finance.

Glossary and Key Concepts

Yield Curve - A graph showing interest rates across different bond maturities.

Short End - Short-term maturities, heavily influenced by central-bank policy.

Long End - Longer-term maturities, influenced by growth, inflation and debt expectations.

Term Premium - Extra yield demanded by investors for holding long-term bonds.

---

6. WHY THIS MATTERS FOR INVESTORS

If the Treasury continues purchasing long-duration bonds, long-term yields may remain lower than many investors expect.

This could provide support for:

• Equities

• Housing markets

• Corporate borrowing

• Government financing costs

However, there is another possibility.

If Treasury buybacks are reduced, political opposition emerges, or funding conditions change, the support for long-term bonds could weaken.

In that scenario:

• Long-term yields could rise sharply

• Mortgage rates could increase

• Corporate financing costs could rise

• Equity valuations could come under pressure

The key point is that some market stability may depend on a policy mechanism that many investors are not monitoring closely.

Glossary and Key Concepts

Equity Valuation - The market value assigned to shares.

Mortgage Rate - Interest charged on home loans.

Corporate Borrowing Cost - The interest rate paid by companies on debt.

Repricing - Rapid adjustment of asset prices to new information.

---

7. CONCLUSION

The debate is not whether Treasury buybacks exist. They clearly do.

The debate is whether these operations merely improve market liquidity or whether they effectively offset part of the Federal Reserve's tightening campaign.

Evidence shows that the Treasury is actively buying longer-dated securities while issuing short-term debt.

Inference suggests this may reduce long-term yields and support financial markets.

Speculation is the claim that this constitutes a hidden form of monetary easing comparable to quantitative easing.

Regardless of where one stands, the interaction between Treasury debt management and Federal Reserve monetary policy has become one of the most important forces shaping modern financial markets.

Investors who focus solely on the Federal Reserve may be watching only half the story.

Glossary and Key Concepts

Evidence - Information directly supported by official data or documented facts.

Inference - A conclusion drawn logically from available evidence.

Speculation - A hypothesis that remains unproven.

Debt Sustainability - The ability of a government to service its debt without major disruption.

---

REFERENCES

US Treasury Quarterly Refunding Statements

https://home.treasury.gov

US Treasury Fiscal Data

https://fiscaldata.treasury.gov

Federal Reserve FOMC Statements

https://www.federalreserve.gov

Congressional Testimony of Treasury Officials

https://waysandmeans.house.gov

Read More

SLOWING LIQUIDITY

24 June 2026

The Liquidity Tide Is Slowing

There is a distinction that most market participants miss, and missing it is costly. The absolute level of global liquidity - somewhere in the region of $193 trillion by recent measures - continues to inch higher. But the rate of change is slowing, and it is the rate of change that markets price. That inflection is now underway, and it matters enormously for how portfolios should be positioned.

The broad implication is a rotation from financial assets towards real assets, and within real assets, towards those most sensitive to monetary inflation.

Where We Are in the Cycle

The current phase is what analyst Michael Howell at Cross Border Capital describe as the speculation phase. The label is apt in ways that are not entirely flattering. Certain segments of the market - AI, semiconductors, robotics - have delivered spectacular short-term gains, but the broader market is not participating equally. This is a narrow market, built on narrow foundations, and that narrowness is itself a late-cycle signal. Volatility is rising. But trees do not grow to the sky.

What comes next, historically, is a turbulence phase: a period in which liquidity drains more quickly and the directional bias in risk assets reverses. We are not there yet, but the transition is the time to prepare, not the time to react.

Three conditions currently confirm the late-cycle read. First, commodity markets are performing strongly - precisely what you would expect as liquidity begins to roll over and real economy activity accelerates. Second, yield curves are exhibiting a bearish flattening: long yields are rising, but short yields are rising faster, compressing the curve. This was almost universally non-consensus at the start of the year; it is now the reality before our eyes. Third, equity market breadth is narrowing even as headline indices hold up. These three boxes are all ticked.

Why Is Liquidity Slowing If Central Banks Are Still Loose?

This is the question worth thinking about - how can this be and how does this fit in with maganomics? Central banks, broadly speaking, are not tightening. So why is financial liquidity decelerating?

The answer is that money must always be somewhere. What the data is showing is a significant migration of capital out of financial markets and into the real economy. All we as investors have to do is to find out where money is heading and get there first, before prices rise. That migration is fuelling what appears to be a robust - perhaps stronger than consensus - US economy. Nominal GDP growth in the 7–8% range is not an unreasonable estimate when you account for the scale of AI capital expenditure, the size of the fiscal deficit, and growing energy export revenues. 

This dynamic is good for certain things: commodities obviously, and earnings in parts of the corporate sector. But it is not straightforwardly good for financial asset prices. The earnings multiple P/E - the P in ratio may rise as capital moves in, then compress as underlying earnings (the E) good news materialises. Wall Street has had three or four years of excellent returns. Main Street is now getting its turn. That transition is always awkward.

To repeat, the sequencing is important to understand. Liquidity leads the real economy; it does not follow it. Capital moves in fast. Stock markets are leading indicators precisely because money gets there first, pushing prices up before the underlying earnings materialise. As that same capital migrates into the real economy, it justifies the earlier price appreciation ie the E in P/E now appears - but the fuel for further multiple expansion is no longer flowing in.

The Debt Architecture and Its Implications

The structural backdrop here is one of extraordinary debt accumulation, not just in the United States but globally. An estimated four out of every five primary market transactions worldwide are now debt rollovers - refinancing of existing obligations - not new capital formation for investment or consumption. Capital markets have been quietly transformed from engines of investment into debt recycling mechanisms.

The liquidity-debt nexus is a closed loop that is worth understanding clearly. Liquidity is needed to roll over debt. If it is not there, you get financial crises. But liquidity itself is largely created through collateralised lending these days - roughly 75 - 80% of all lending worldwide, on World Bank figures, is collateral-based. The value of that collateral, largely government debt and real estate, underpins the whole system. Disrupt the debt markets and liquidity can spiral downwards rapidly.

The historical exit from excessive debt accumulation is, without exception, monetisation. You cannot default on sovereign debt at scale. The only route is dilution - printing money, engineering inflation, reducing the real burden of obligations over time. 

Japan demonstrated this after its 1990s bubble: Abenomics, quantitative easing, a collapsing yen. China is now on a structurally similar path, having accumulated vast real estate-related debt after the post-GFC boom. Capital controls allow Beijing to print without immediate external leakage, and that money is finding its way into one traditional Chinese store of value above all others: gold. The Shanghai exchange, not COMEX or London, is now the primary driver of the gold price.

The United States is not exempt from this dynamic. It is already participating in it. The Treasury is issuing debt heavily at the short end - bills rather than bonds - with something approaching 50% of US government debt now maturing within two years. The weekly refinancing requirement runs to around $600 billion. Banks absorb this short-dated paper willingly because fiscal deficits are simultaneously filling their deposit books; they have the money deposited in their reserves but they want assets that generate interest to match the liability growth. When banks buy government debt, they monetise it. Milton Friedman would not have approved.

Suppressing the Signal: The MOVE Index

One of the less-discussed mechanisms currently at work is the active suppression of bond market volatility through Treasury buybacks. The MOVE index - the bond market's equivalent of the VIX - has been kept artificially low, and the mechanics are worth understanding.

Hedge funds have become the dominant buyers of US Treasuries, running what is known as a basis trade: buying physical bonds while shorting futures contracts and clipping the spread between the two. The trade is highly leveraged and is entirely dependent on low volatility. If the MOVE index spikes, the leverage unwinds and those buyers disappear.

The MOVE also matters through the collateral multiplier. Around 80% of lending in financial markets is collateralised, and dealer banks determine haircuts based on the perceived quality and volatility of the collateral. Low MOVE means small haircuts, high collateral multiplier, abundant liquidity. Elevated MOVE compresses the multiplier and drains liquidity through the system. This is why the Treasury intervenes with buybacks each time the index threatens to break higher - replacing illiquid off-the-run Treasuries with fresh on-the-runs to keep the market functioning smoothly.

The question is how long this suppression can be maintained. A new Federal Reserve chair will be tested by markets, as is traditional. And the arithmetic is challenging: if nominal GDP is genuinely running at 7–8%, 10-year yields at around 5% represent a deeply negative real return on long duration. The long end of the curve looks structurally mispriced. The Treasury is currently starving that end of the market of supply - insurance companies and pension funds wanting duration simply cannot get it - which is providing an artificial dampener. But artificial dampeners have limits.

What This Means for Positioning

The broad implication is a rotation from financial assets towards real assets, and within real assets, towards those most sensitive to monetary inflation.

The distinction between monetary inflation and consumer price inflation matters here, and it is routinely conflated. CPI reflects two components: cost inflation (inputs, technology, productivity, energy) and monetary inflation (the debasement of the paper currency in which prices are denominated). For decades, cost deflation - cheap Chinese goods, cheap energy, technological productivity - held consumer price inflation well below the rate of monetary expansion. That gap is why Wall Street dramatically outperformed consumer purchasing power. Gold, as a direct monetary inflation hedge, has outperformed both: up roughly 15 times since 2000, compared to six or seven times for US equities.

If US federal debt continues to grow at 7–8% annually - the Congressional Budget Office's own projection - that is the hurdle rate your wealth must clear simply to stand still in real monetary terms. The instruments that clear that hurdle are precious metals, prime residential real estate, energy and resource equities, and - with appropriate caveats around volatility - leading cryptocurrencies.

Within commodities, the sequencing historically runs from precious metals to base metals to food commodities. That process appears to be underway. Oil looks cheap relative to gold on a long-run ratio basis - the gold-to-oil ratio has historically averaged around 20; at current gold prices, a mean reversion implies oil well above current levels. Energy stocks and gold miners offer leveraged exposure to these underlying trends.

The contrarian call worth flagging is that the Federal Reserve may be forced to raise interest rates within the next twelve months. The US economy is generating substantial inflationary pressure - in nominal GDP terms and in the lived experience of consumers - even as official messaging attempts to frame inflation as contained. If that pressure breaks through, the Fed's hand will eventually be forced, regardless of the short-term political calculus.

The immediate task for investors is context, not prediction. Understanding which phase of the cycle we occupy - late speculation, approaching turbulence - determines the architecture of a sensible portfolio: a diversified core weighted towards monetary inflation hedges, real assets, and late-cycle equity sectors, with a smaller, actively managed trading allocation for those with the appetite for it. The direction of the liquidity tide has changed. The wise response is not to fight it.

Read More

HOW CHINA'S CONTINUING RISE IS RESHAPING THE WORLD ECONOMY PT 3 of 3

22 June 2026

PTS 1 & 2

https://www.livingintheair.org/2026/06/chinas-historical-worldview-empire.html

Overview

China Shock 2.0 may prove more disruptive than the first China Shock. The original wave delivered cheap consumer goods that lowered inflation and raised living standards across the West. The new wave involves electric vehicles, batteries for EVs etc, solar panels, robotics and advanced manufacturing. What once appeared to be a source of inexpensive imports has evolved into a direct competitor to the industrial heartlands of Europe, Japan and North America. The central question is no longer whether China can manufacture. It is whether the rest of the developed world can continue competing with China's scale, efficiency and state-backed industrial strategy.

The transition from cheap-export China Shock 1.0 to high-tech China Shock 2.0

---

1. China Shock 1.0: The Great Deflationary Wave

China Shock 1.0 began after China's accession to the World Trade Organization in 2001. Hundreds of millions of Chinese workers became integrated into the global economy. Factories across China produced enormous quantities of low-cost consumer goods, ranging from clothing and footwear to toys, furniture and household items.

The effect was profound. A huge increase in global manufacturing capacity created downward pressure on prices. Consumers in Europe and North America enjoyed access to cheaper products, which effectively increased purchasing power and improved living standards.

Inflation remained unusually low throughout much of the early twenty-first century. Many economists argue that China's manufacturing expansion was one of the most important factors behind this phenomenon.

The benefits, however, were unevenly distributed. Consumers gained, but many manufacturing regions suffered factory closures, job losses and long-term economic decline. The result was a politically complex situation. While workers in industrial sectors in rust-belt constituencies especially, faced disruption, multinational companies and consumers often benefited.

Glossary

China Shock - The economic disruption caused by China's rapid integration into global trade and manufacturing.

World Trade Organization (WTO) - An international organisation that establishes and enforces rules governing global trade.

Deflation - A fall in prices across an economy or sector.

Purchasing Power - The quantity of goods and services that can be bought with a given amount of money.

Globalisation - The increasing integration of economies, trade networks and production systems across national borders.

China's unprecedented trade surplus as a share of the rest-of-the-world GDP

Chinese Trade Over World GDP ex. China

Trade Surplus as a Share of Rest-of-World GDP

---

2. China Shock 2.0: Moving Up the Value Chain

China today is no longer primarily a producer of inexpensive consumer goods. It has moved into advanced manufacturing sectors traditionally dominated by developed economies.

Chinese firms now compete in electric vehicles, battery technology, solar panels, telecommunications equipment, robotics and sophisticated electronics. Companies such as BYD have emerged as globally competitive producers whose products increasingly receive favourable reviews on quality and performance.

Modern Chinese factories are often highly automated. Some operate with minimal human intervention, sometimes described as "lights out" manufacturing because production continues without workers present.

A key driver behind this transition has been deliberate industrial policy. Chinese authorities have directed investment towards strategic manufacturing sectors while attempting to reduce dependence on property-led growth.

The result is a manufacturing sector that continues to expand even as domestic demand remains relatively weak. Unlike the first China Shock, China's export growth is no longer accompanied by rapidly rising imports from the rest of the world.

This creates a more challenging environment for competing economies because Chinese exports are increasing without generating equivalent opportunities for foreign producers.

Glossary

Value Chain - The sequence of activities involved in producing a good or service, from raw materials to finished product.

Industrial Policy - Government actions designed to support specific industries or economic sectors.

Advanced Manufacturing - Production using sophisticated technology, automation and engineering.

Automation - The use of machines and software to perform tasks with minimal human intervention.

Trade Imbalance - A situation where a country's exports and imports differ substantially.

---

3. Germany: The First Major Casualty?

Few countries illustrate the challenge of China Shock 2.0 more clearly than Germany.

For decades, Germany built its prosperity on exporting high-quality manufactured goods. German companies became world leaders in automobiles, industrial machinery, engineering equipment and precision manufacturing.

That model is now under pressure.

Chinese firms increasingly compete in many of the same sectors where German companies once enjoyed technological advantages. The automotive industry provides perhaps the clearest example. While German vehicle exports have stagnated, Chinese vehicle exports have expanded dramatically.

The challenge extends beyond cars. China is increasingly competitive in industrial machinery, renewable energy systems and advanced manufacturing technologies.

Germany faces a strategic dilemma. Its prosperity depends heavily on global trade, yet its traditional export strengths are increasingly challenged by Chinese competitors.

Germany's exports stalled, China's surged

Net exports' contribution to growth as a % of domestic GD GDP

China's car exports have skyrocketed

Glossary

Export-Oriented Economy - An economy that relies heavily on selling goods and services abroad.

Industrial Base - The manufacturing and productive capacity of a nation.

Competitive Advantage - A characteristic that allows a firm or country to outperform rivals.

Precision Engineering - The design and manufacture of highly accurate machinery and components.

Productivity - Output produced per unit of labour or capital.

---

4. Tariffs, Trade Wars and the Return of Industrial Competition

The economic consequences of China Shock 2.0 have increasingly become political.

Trade balance on machinery, electronics, transport equipment and medical equipment

The United States responded through tariffs and trade restrictions during the US-China trade dispute. European governments are now debating similar measures.

Supporters of tariffs argue that Chinese manufacturers benefit from advantages unavailable to most foreign competitors. These include subsidised financing, state support, industrial planning and currency management.

Critics respond that tariffs ultimately increase costs for consumers and can trigger retaliation, reducing overall economic efficiency.

The debate reflects a deeper tension between two competing objectives.

One objective seeks maximum economic efficiency through free trade.

The other prioritises national resilience, strategic independence and industrial capability.

As geopolitical competition intensifies, many governments appear increasingly willing to sacrifice some economic efficiency in exchange for greater industrial security.

Glossary

Tariff - A tax imposed on imported goods.

Trade War - A cycle of tariffs and trade restrictions between countries.

Subsidy - Financial support provided by a government to businesses or industries.

Currency Management - Government actions intended to influence exchange rates.

Economic Efficiency - The production of goods and services at the lowest possible cost.

---

5. Manufacturing and National Power

A broader lesson emerges from the China Shock debate.

Throughout history, major powers have generally possessed strong manufacturing capabilities. Britain's rise was linked to the Industrial Revolution. America's emergence as a superpower was reinforced by its extraordinary industrial capacity during the twentieth century.

Manufacturing creates more than economic output. It generates technical expertise, supply chains, skilled labour, engineering capabilities and strategic resilience.

Financial wealth alone cannot produce ships, aircraft, semiconductors or energy infrastructure.

This has revived an old question in economics and geopolitics:

What constitutes real national wealth?

One view emphasises financial markets, consumption and services.

Another emphasises productive capacity and the ability to manufacture essential goods.

China's rise has forced many policymakers to reconsider the balance between these two models.

Glossary

Industrial Revolution - The period of technological and manufacturing transformation beginning in Britain during the eighteenth century.

Productive Capacity - The ability of an economy to produce goods and services.

Strategic Resilience - The ability to withstand economic, military or political shocks.

Supply Chain - The network involved in producing and delivering goods.

National Power - The ability of a state to influence events through economic, military and political means.

---

6. The Globalisation Trade-Off

The story of China Shock is ultimately the story of globalisation itself.

Globalisation delivered lower prices, greater consumer choice and higher living standards for hundreds of millions of people.

At the same time, it weakened some domestic industries, increased dependence on foreign suppliers and contributed to social and political tensions in many developed countries.

China Shock 1.0 largely benefited consumers.

China Shock 2.0 challenges producers.

The first wave transformed retail shelves.

The second wave is transforming industrial competition.

Whether the future brings deeper global integration or a more fragmented world economy remains uncertain. What is clear is that the era in which China was merely the world's low-cost workshop has ended. China is now competing for leadership across many of the most advanced sectors of the global economy.

Glossary

Fragmentation - The breaking apart of previously integrated economic systems.

Economic Sovereignty - The ability of a nation to control its own economic policies and development.

De-Globalisation - A reduction in international economic integration.

Industrial Strategy - A coordinated plan to strengthen specific sectors of an economy.

Multipolar Economy - A global economy with several major centres of economic power rather than one dominant power.

---

References

World Trade Organization: https://www.wto.org

OECD Trade Statistics: https://www.oecd.org/trade

International Monetary Fund: https://www.imf.org

World Bank Data: https://data.worldbank.org

United Nations Conference on Trade and Development: https://unctad.org

Brad Setser, Council on Foreign Relations: https://www.cfr.org

China Customs Trade Statistics: http://english.customs.gov.cn

German Federal Statistical Office: https://www.destatis.de/en/home.html

Read More

THE INVERTED YIELD CURVE: WHAT IT IS AND WHY IT MATTERS

21 June 2026

The Inverted Yield Curve: What It Is and Why It Matters

---

I. The Setup: What Is a Yield Curve?

Before we get to the inversion, we need to understand what a yield curve is and why it normally slopes upwards.

When governments borrow money, they issue bonds - pieces of paper that promise to repay the lender after a fixed period, with interest. The United States government issues these across a range of maturities: 3 months, 2 years, 5 years, 10 years, 30 years. The interest rate paid on each of these - the yield - varies depending on how long you agree to lock your money away.

Under normal conditions, the longer you lend, the more interest you receive (annualised interest rate is the yield). This makes intuitive sense: if you lend a friend money for a week, you might do it for nothing. If you lend for ten years, you want compensation - for the risk that circumstances change, that inflation erodes the value (buying or purchasing power) of your money, or simply that you might need those funds back before the decade is out. The line connecting yields across all these maturities is the yield curve, and in ordinary times it slopes upward, left to right: low short-term yields on the left, higher long-term yields on the right.

Glossary

Bond - A loan made by an investor to a borrower (here, the US government). The borrower promises to repay the principal at a fixed future date and to pay interest - the coupon - along the way.

Yield - The annual return an investor receives on a bond, expressed as a percentage. Yield and price move in opposite directions: if a bond's price rises (because many people want to buy it), its yield falls, and vice versa.

Maturity - The date on which a bond's principal must be repaid. A 2-year Treasury matures two years after issue; a 10-year Treasury, ten years.

Yield curve - A graph plotting the yields of bonds of the same type (here, US Treasuries) against their maturities. The shape of this curve tells us a great deal about what markets expect the future to look like.

Duration risk - The risk that arises from lending for a long period. The longer the loan, the more time there is for inflation to erode the real value of your return, or for interest rates to rise and make your existing bond less attractive. Long-term lenders demand higher yields as compensation for taking on this risk.

---

II. The Inversion: When the Curve Goes Wrong

"The one sure way to cure an inflation problem is to create a recession."

When the gap between 10-year and 2-year Treasury yields goes negative - meaning short-term debt pays more than long-term - that's an inverted yield curve. In modern economic history it has preceded virtually every recession.

Why? Because markets are pricing in a sequence: the Fed raises short-term rates now to fight inflation*, but that tightening kills growth, which later forces the Fed to cut rates later. The long end reflects that expected future cut, staying low even as the short end rises.

*The 17 June meeting left rates on hold but markets are expecting one or two 1/4% 25bp rises this year.

Think of it this way. The 2-year yield reflects what markets expect the Fed to do over the next two years - and right now, they expect it to keep rates high, even raise them. The 10-year yield reflects a longer horizon: over a decade, markets expect that the current tightening will have done its work, a recession will have followed, and the Fed will have been obliged to cut rates back down again. So the 10-year stays lower than the 2-year - ie, the curve inverts.

This is not a technical glitch. It is the bond market - the largest and most sophisticated financial market in the world, this is where the really serious money is - delivering a verdict on where the economy is heading.

Glossary

Inverted yield curve - The condition in which short-term bonds yield more than long-term bonds of the same type. An abnormal and historically significant configuration.

The Fed (Federal Reserve) - The central bank of the United States. Its principal tools are the federal funds rate (the overnight lending rate between banks) and large-scale asset purchases. Its dual mandate is to maintain price stability (low inflation) and maximum employment.

The policy rate / federal funds rate - The interest rate at which banks lend to each other overnight. When the Fed "raises rates," it is raising this rate. Because it flows through into all short-term borrowing costs, it is the most powerful lever the Fed possesses.

Tightening - When a central bank raises interest rates or reduces its balance sheet in order to slow the economy and reduce inflation. The opposite is easing or loosening.

Basis point (bp) - One hundredth of one percentage point. 16 basis points = 0.16%. Used in financial markets because the differences that matter are often too small to express clearly in whole percentages.

Pricing in - When market prices already reflect an expected future event. If markets are "pricing in" a recession, bond and equity prices are already adjusting as if a recession were coming, even before it arrives.

---

III. The Signal: What Happened Last Wednesday

Last Wednesday, 17 June - Warsh's first FOMC - confirmed this is where we are now. When Warsh announced the rate decision, the 2-year yield jumped 16 basis points - the largest single-day move on an FOMC announcement day since 2008. And notably, his closing line contained no mention of the 2% inflation target. He said only that the Fed would do "whatever it takes" to preserve price stability. Markets heard that as open-ended tightening.

That phrase carries weight. "Whatever it takes" is the language of commitment without limit. When Mario Draghi used it in 2012 to defend the euro, markets took him at his word and bond yields in southern Europe fell immediately. When Warsh used it last Wednesday without attaching any numerical target to it, markets drew the obvious inference: rates will go as high as they need to go, for as long as they need to stay there. There is no pre-announced ceiling.

The 16 basis point jump in the 2-year yield is the market adjusting to that message in real time.

Glossary

FOMC (Federal Open Market Committee) - The committee within the Federal Reserve that sets monetary policy, specifically the federal funds rate. It meets eight times a year. Its decisions move markets worldwide.

Kevin Warsh - The current Chair of the Federal Reserve, appointed in 2026. Previously a Fed Governor and financial advisor. His tone and word choices in press conferences are scrutinised intensely by markets.

"Whatever it takes" - A phrase associated with decisive, open-ended central bank commitment. First made famous by Mario Draghi, then-President of the European Central Bank, in July 2012, when he pledged to do "whatever it takes" to preserve the euro.

2% inflation target - The Federal Reserve's official long-run inflation goal (not achieved in the last five years). When a Fed Chair omits reference to this target, markets notice: it may suggest that the near-term priority - crushing inflation - has displaced the usual framework.

Open-ended tightening - Monetary tightening without a specified end-point or ceiling. More alarming to markets than tightening with a stated target, because it removes the implicit promise of relief.

---

IV. The Mechanism: Why Rate Hikes Cause Recession

Most borrowing today is at the short end - buyers generally do not want the duration risk of long-term Treasuries (and normally, higher long-term rates are offered to entice them in). So rate hikes bite hard and fast, they slow down the economy and eventually will stop it... recession. The inverted curve is the market's verdict: the medicine works (it cures inflation), but it causes the disease (recession).

The Fed raises the policy rate. Short-term borrowing costs rise immediately - business credit lines become more expensive, floating-rate loans reprice, and the cost of overnight lending between banks climbs. Longer-term rates, including mortgages, are priced off the 10-year Treasury and move differently - but as the yield curve inverts and uncertainty about growth rises, long-term lenders also become more cautious and credit conditions tighten across the board. Businesses find new investment costlier or simply harder to finance; they slow hiring or begin laying off. Consumers, squeezed by tighter credit and higher borrowing costs, spend less. Demand falls. Eventually, falling demand brings inflation down - but by then, the economy has contracted. That contraction is the recession.

The inverted yield curve does not cause this sequence. It predicts it - because millions of market participants, each making their own assessment, are collectively concluding that this is the most likely outcome. History suggests they are usually right.

Glossary

Short end / long end - Shorthand for short-maturity and long-maturity bonds respectively. "Short end" typically refers to maturities of two years or less; "long end" to ten years and beyond.

Floating-rate debt - Loans whose interest rate adjusts periodically in line with a benchmark rate, typically the federal funds rate or a related short-term rate. When the Fed raises rates, floating-rate borrowers feel it immediately.

Credit conditions - The overall ease or difficulty of obtaining credit in the economy. When credit conditions tighten, borrowing becomes more expensive or harder to obtain, reducing spending and investment.

Recession - Conventionally defined as two consecutive quarters of negative GDP growth, though the official US definition (determined by the National Bureau of Economic Research) is broader and considers employment, income, and industrial production as well.

GDP (Gross Domestic Product) - The total monetary value of all goods and services produced within a country in a given period. The primary measure of economic output and the basis on which recessions are formally declared.

The bond market as forecaster - Bond markets are widely considered the most sophisticated financial markets in the world, attracting large institutional participants - pension funds, sovereign wealth funds, insurance companies - with long time horizons and deep analytical resources. When the bond market signals recession, it is worth taking seriously.

References

Bond auctions explained

The Year Curve just hit a recession level... history says this ends badly

Read More

CHINA'S HISTORICAL WORLDVIEW: EMPIRE, ORDER AND CONTINUITY ; THE RISE OF CHINA PTS 1 & 2 of 3

19 June 2026

INTRO

This is a geopolitical interpretation that uses Chinese history to explain contemporary Chinese behaviour. 

Cts 1 to 7 is a first part focused on the historical narrative. The second part, Ct 8, relates China's rise to power.

PART ONE

Short History of China

As it concerns the West

Part 1 - a potted history of China and its relations with the West

1. China's Historical Worldview: Empire, Order and Continuity

China is one of the world's oldest continuous civilisations. What is civilization ? When we speak of "high civilisations", we speak of writing, developed mathematics and extreme attention to the cycling of the planets through the constellations - this cycling is the great critical factor in the transformation of consciousness at this time as it allowed the early Chinese leaderships from Qin onwards to make records, precise records, of the passage of the planets through the constellation. And so since its political unification under the Qin Dynasty in 221 BCE, successive Chinese governments have generally viewed the country as a unified civilisation-state rather than simply a nation-state.

A central feature of Chinese political culture has been the pursuit of order, stability and prosperity through hierarchical relationships. Influenced by Confucian philosophy, Chinese society traditionally emphasised duty, respect for authority, family obligations and social harmony.

Unlike many Western political traditions, which often stress individual rights and competition between centres of power, the Chinese tradition has generally prioritised collective stability and strong central authority.

Chinese leaders frequently draw lessons from thousands of years of dynastic history. They study how periods of strength and prosperity were achieved and how dynasties declined through internal division, financial weakness, foreign invasion or natural disasters.

Confucianism – A philosophical tradition emphasising social harmony, hierarchy, duty and moral leadership.

Dynasty – A ruling family or governing order that controls a state for an extended period.

Civilisation - A settled and enduring cultural Order through which a people express a shared identity, history and worldview. According to Joseph Campbell, civilisations are held together by common myths, symbols and stories that give meaning to life and connect individuals from birth to a larger community. These cultural values become visible in cities, architecture, institutions and traditions that survive across generations.

The Chinese case illustrates this very nicely. The continuity is not merely political. Dynasties came and went, but the civilisation remained visible in its cities, writing system, bureaucracy, family structures, philosophies, monuments and collective memory. That is why many Chinese thinkers describe China as a civilisation-state rather than simply a nation-state.

Unified Civilisation-State - A political entity that sees itself not merely as a nation created by modern borders, but as the continuation of an ancient civilisation, culture and historical tradition. In the Chinese view, the state derives legitimacy not only from government institutions but also from thousands of years of shared history, language, customs and collective memory.

 Morphology - The physical form and structure of buildings or cities. China displays a highly legible civilisational "language" in its vernacular architecture, shaped by imperial continuity, philosophical ordering principles, and climate adaptation across vast regional variation and dynasties. The concretisation of this (!) can be found in the rooflines, materials, window and door treatments, ornaments and motifs, in the town and street pattern - these five features of a built environment usually reveal the civilisation, region, and historical period within seconds. China's vernacular architecture is no exception and is proof of a millenial civilisation.

The high civilisations of the river valleys

---

2. The Tribute System and China's Regional Influence

For much of the period between roughly 200 BCE and the nineteenth century, China operated within what historians call the tribute system.

Under this arrangement, neighbouring states acknowledged China's pre-eminent position in East Asia through diplomatic missions and symbolic gestures of respect. In return, they received trade opportunities, political recognition and access to Chinese markets.

The system was not an empire in the European colonial sense. Rather than direct occupation, influence was often exercised through diplomacy, economic relationships and political prestige.

Chinese rulers generally regarded this arrangement as a practical method of maintaining regional stability while recognising differences in power between states.

Tribute System – A historical diplomatic framework in which neighbouring states acknowledged Chinese primacy in exchange for trade and political benefits.

---

3. Strategy and the Influence of Sun Tzu

Chinese strategic thinking has long been influenced by the military philosopher Sun Tzu and his work, The Art of War.

One of its most famous principles is that the highest form of victory is achieved without direct warfare. Success comes through preparation, deception, diplomacy, economic leverage and psychological pressure rather than battlefield confrontation.

This strategic tradition remains influential in discussions about Chinese statecraft and foreign policy.

The Art of War – A classical Chinese text on strategy, conflict and statecraft.

---

4. The Century of Humiliation

One of the most important historical memories in modern China is the period often called the "Century of Humiliation".

This period began with the First Opium War in 1839 and lasted until the establishment of the People's Republic of China in 1949.

During the nineteenth century, China was forced into a series of unequal treaties with foreign powers including Britain, France, Russia and Japan. Hong Kong was ceded to Britain, foreign powers gained special commercial privileges, and Chinese sovereignty was repeatedly compromised.

China also suffered devastating internal conflicts, including the Taiping Rebellion, one of the deadliest civil wars in human history.

The humiliation deepened after China's defeat by Japan in 1895, which resulted in the loss of Taiwan. Further trauma followed the Boxer Rebellion, foreign occupation of Beijing, Japanese expansion into Manchuria and the atrocities of the Second Sino-Japanese War.

These experiences remain central to modern Chinese national identity and help explain the importance Chinese leaders place on sovereignty, territorial integrity and national strength.

Century of Humiliation – The period from roughly 1839 to 1949 during which China suffered foreign intervention, military defeats and political fragmentation.

---

5. Civil War and the Division over Taiwan

Following Japan's defeat in 1945, China resumed its civil war between the Chinese Communist Party and the Nationalist Kuomintang government.

The Communists emerged victorious in 1949 and established the People's Republic of China on the mainland. The Nationalist government retreated to Taiwan, where it continued to govern separately.

Since then, the status of Taiwan has remained one of the most important and sensitive issues in Chinese politics.

The government in Beijing maintains that there is only one China and that Taiwan is part of it. Different political groups within Taiwan hold differing views regarding independence, reunification and the island's future relationship with the mainland.

Kuomintang (KMT) – The Chinese Nationalist Party that governed China before losing the civil war to the Communists.

---

6. Reform, Growth and China's Return

After decades of relative isolation under Mao Zedong, China began major economic reforms under Deng Xiaoping from 1978 onwards.

These reforms opened China to global trade, foreign investment and market-oriented economic activity while maintaining Communist Party control over the political system.

The result was one of the fastest and largest economic transformations in history. Hundreds of millions of people were lifted out of poverty, industrial capacity expanded dramatically and China emerged as a major technological, financial and military power.

Today, China is widely regarded as one of the two most influential powers in the international system alongside the United States.

Economic Reform – Policies that introduced market mechanisms and international trade into China's economy from the late 1970s onwards.

---

7. Historical Memory and Contemporary China

Modern Chinese leaders frequently present contemporary policy objectives through the lens of history.

Themes such as national rejuvenation, sovereignty, self-sufficiency and overcoming the legacy of foreign domination are often linked to lessons drawn from China's long historical experience.

Whether one agrees with current Chinese policies or not, understanding China's historical narrative helps explain how Chinese leaders view their country's role in the world and why issues such as Taiwan, national unity and economic development are treated as matters of fundamental national importance.

PART TWO

8. China's Rise: From Reform to Technological Power - overview

Part 2 - The Rise of China : Rural China → Factory China → Export China → Technology China → Military China → Global China.

The Historical Record

• Henry Kissinger and Richard Nixon opened relations with China in the early 1970s primarily to counter the Soviet Union.

• Formal diplomatic normalisation occurred under Jimmy Carter and Deng Xiaoping in 1978-79. 

• The economic transformation was driven principally by Deng's "Reform and Opening Up" programme, Special Economic Zones, export-led manufacturing, foreign investment, and the migration of hundreds of millions of workers from rural China into factories. 

• American consumers and multinational companies provided the demand and investment that accelerated China's rise, particularly after China's entry into the WTO in 2001. 

China's rise is the result of three interacting forces:

1. Chinese reforms and labour.

2. Western capital and consumer demand.

3. Globalisation and technology transfer.

The Military Story

From Beijing's perspective, military modernisation is a response to:

• The memory of the Century of Humiliation. • US alliances surrounding China. • US military forces in Japan, South Korea, Guam and elsewhere. • Taiwan-related tensions. • US technology restrictions and containment concerns.

From Washington's perspective, Chinese military expansion is viewed as a challenge to the existing regional order and a potential threat to Taiwan and US allies. Recent Pentagon assessments point to rapid Chinese naval, missile and technological growth. 

8. China's Rise: From Reform to Technological Power

China's rise in the twenty-first century emerged from the convergence of Chinese reforms, Western investment, global trade and technological progress.

Following the opening of relations between China and the United States in the 1970s, Deng Xiaoping launched a programme of reform and opening-up. Special Economic Zones attracted foreign capital, while hundreds of millions of workers moved from rural areas into expanding industrial cities.

Western companies gained access to abundant labour and rapidly growing production capacity. Consumers in Europe and North America gained access to inexpensive manufactured goods. China gained investment, technology, industrial know-how and export earnings.

Over the following four decades, China experienced one of the fastest economic transformations in human history. It became the world's largest manufacturing nation, a leading trading power and a major centre of technological innovation.

The first phase of development focused on low-cost manufacturing. The second phase focused on infrastructure. China built the world's largest high-speed rail network, modern ports, airports, power systems and digital communications networks. The third phase focuses on advanced technology, including electric vehicles, batteries, robotics, artificial intelligence, aerospace, biotechnology and semiconductors.

Today China leads the world in several industrial sectors and files more patents annually than any other country. Chinese companies increasingly compete at the technological frontier rather than simply manufacturing products designed elsewhere.

Military modernisation has accompanied this economic transformation. Chinese leaders argue that a stronger military is necessary to protect sovereignty, secure trade routes, prevent a repetition of the Century of Humiliation and respond to perceived containment by rival powers. Critics view the same military expansion as a challenge to the existing international order. Both interpretations influence contemporary geopolitical debates.

For many Chinese leaders, the ultimate objective is not merely economic growth but national rejuvenation: restoring China to a position of prosperity, security and international influence comparable to that enjoyed during earlier periods of Chinese history.

Reform and Opening Up - Economic reforms launched from 1978 that integrated China into the global economy.

National Rejuvenation - The idea that China is overcoming the legacy of foreign domination and restoring its historical strength and status.

Technological Frontier - The most advanced level of scientific, industrial and technological development.

References

Ray Dalio, Principled Perspectives, June 2026.

The Search for Modern China

The Cambridge History of China

The Art of War

Read More

IRAN NEW DEFENDER OF AMERICAN INTERESTS IN WEST ASIA

IRAN NEW DEFENDER OF AMERICAN INTERESTS IN WEST ASIA

Overview

On 17 June 2026, after months of war, blockade and brinkmanship, the United States and Iran signed a 14-point Memorandum of Understanding. The Strait of Hormuz reopens. The naval blockade lifts within 30 days. Up to $100 billion in frozen Iranian assets becomes available. A $300 billion reconstruction plan is to be built with regional partners. Sanctions are on a path to termination, contingent on a final deal within 60 days, itself to be endorsed by binding UN Security Council resolution.

Most analysts are reading the document for what it does to Iran's economy and to the oil market. Fair enough - both matter. But the document is also a text, in the way Joseph Campbell taught us to read texts: as the surface expression of a much older structural pattern. And read that way, the MOU is not really about Iran at all. It interestingly allows us to see this story as one where Iran is being written into a new role as Defender of American Interests in West Asia, replacing a failed Israel. Iran also offers the advantage of a pristine market with unmatched resources and consumer population untouched for 47 years.

The pattern Campbell described

Campbell's Hero's Journey runs through a recognisable sequence of figures: the weakness that traps the hero in ordinary life, the demon that weakness curdles into, the protector who does not slay the demon for the hero but equips the hero to face it, and the transformation that follows. The detail people skip past is that demon and protector are not fixed roles. They are functions that a story assigns and reassigns as the plot requires. The dragon of one chapter can become the guide of the next, if the story's needs change and someone is willing to write it that way.

That is precisely what happened in Washington this week, except the author is a superpower and the manuscript is a memorandum of understanding.

What makes this geopolitical moment feel decisive rather than merely a 39th tactical move is when the story's functions finally match the facts on the ground. But of course this could all be a Minsk-type trap for Iran.

The Minsk analogy — a framework designed to look like resolution while buying time for the other side to rearm. Iran's hardliners are certainly reading it that way, and they have 47 years of evidence for their scepticism.

Israel: the rising power that exhausted its role

For two decades, Israel occupied the protector function in America's Middle East story: the regional partner whose threat assessment Washington adopted as its own, whose intelligence and strikes did the work US policymakers wanted done without US fingerprints, whose enemies became, by extension, American enemies. That arrangement reached its operational peak in the February 2026 war — joint US-Israeli strikes, a campaign with the explicit ambition of breaking Iran's nuclear infrastructure and possibly its regime.

It did not deliver a clean result. It delivered a 14-point memorandum that Israel was not shown until after it was substantially settled, and reportedly continued not seeing for some time after that. Netanyahu's own coalition and opposition are now united in calling the war's outcome a strategic failure, his domestic position has become an open question ahead of autumn elections, and a former prime minister has said in public what Israeli officials have been saying anonymously: Iran emerged stronger, Israel emerged weaker. Whatever one thinks of the merits, that is the protector function visibly failing to protect the thing the story needed protected — stable, cheap transit through Hormuz, a contained Iran, an American position in the region that didn't require permanent military overwatch.

A protector who cannot deliver protection stops being cast as the protector. That is not a moral judgment. It is just how the role works in any story, mythic or geopolitical.

Iran: the demon being recast

Here is the move almost nobody in the commentary is naming, because it inverts forty-five years of received categorisation. The MOU does not just de-escalate. It assigns Iran a new function in the story. Iran becomes the guarantor of free transit through Hormuz, in active dialogue with Oman and the Gulf states on the strait's future administration. Iran becomes the recipient of a $300 billion American-coordinated reconstruction plan — not a punished adversary, but a project America is now invested in succeeding. Iran becomes the counterparty whose "good behaviour," in the words of one US official, is rewarded on a dial, not a switch — meaning Washington has committed itself to a relationship that continues, that requires tending, that has stakes in continuing to work.

None of that is friendship. It is something more useful than friendship: function. America's interest in the Gulf — open shipping lanes, contained nuclear risk, a check on chaos that disrupts energy markets and currency flows — increasingly requires Iranian cooperation to deliver, and Washington has just put $300 billion and a UN-endorsed deal architecture behind making that cooperation durable. The demon has been handed the protector's job description. Whether Iran performs the role well is a separate, open question — and Israeli officials are right that the missile programme, the proxy network and the regime's durability are all unresolved. But the role has been offered, and Tehran has signed for it.

Why this is the part everyone is missing

The analyst consensus I'm seeing frets that Iran "rises to become a fourth global power." That framing assumes Iran is acting alone, accumulating power against American interests. It misses that the more consequential rise here is being engineered, not resisted, by Washington. A power that the United States needs and is actively building up to perform a function for it is a fundamentally different geopolitical object than a power rising in defiance of the United States. Saudi Arabia, since the 1940s, has been the textbook case of the former. Iran, as of this week, has been handed the application.

This is also why the Lebanon clause matters more than its brief mention suggests. The MOU folds Israel's war in Lebanon into the same ceasefire architecture, over Israeli objections about freedom of action. That is not incidental housekeeping. It is the new protector being given authority over the old protector's remaining theatre of operations — Iran's position on Hezbollah and Lebanon now sits inside the framework America is building, while Israel's position sits outside the room where the framework was written.

The economics: what a 90 million-person market unlocked looks like

Set the mythic frame aside for a moment and look at the balance sheet, because this is where the thesis stops being interpretive and starts being investable. Iran has roughly 90 million people, a young and reasonably well-educated population, a domestic engineering and manufacturing base built under decades of sanctions pressure (which forces self-reliance the way nothing else does), the second-largest natural gas reserves on the planet, and oil infrastructure that has been running under sanctions constraint rather than capacity constraint. Layer on $100 billion in unfrozen assets, a $300 billion reconstruction commitment, and a sanctions-termination pathway, and you have the outline of one of the largest single-country reopening trades available anywhere in the world economy — bigger, in raw addressable-market terms, than anything else currently on offer in emerging markets.

Reconstruction capital flows first into energy infrastructure, ports, and the Hormuz transit and demining work the MOU itself specifies. Behind that comes telecoms, healthcare, consumer goods and financial services serving a population that has been cut off from global supply chains for most of two generations and has pent-up demand to show for it. None of this happens on the original 60-day clock — the nuclear question is still open, the "minimum methodology" for down-blending enriched material is unresolved, and Israel's continued operations in Lebanon are a live spoiler risk to the whole architecture. But the direction of travel, and the scale of capital Washington has now committed to that direction, is the signal worth pricing.

The closing irony

It is worth sitting for a moment with the country that doesn't get this treatment. Russia has comparable resource depth, a comparable case for reconstruction-led growth once a settlement exists, and no equivalent path on offer from its principal antagonists. Europe, unlike Washington with Iran, shows no sign of being willing to write Moscow into a protector role at any price, on any timeline, however reluctantly. Whether that reflects sounder judgment about Russia or simply a different story being told is a question for another post. But the contrast is a useful reminder that what looks like geopolitical reality is often, underneath, a choice about which character gets cast in which part.

The Minsk objection mentioned above is serious. But in the case of Russia, Minsk cost NATO nothing if it failed. This Iran deal has already cost Washington something that can't be clawed back - its posture towards Israel, now visibly subordinated to a framework Israel didn't write and wasn't shown.... and Trump has made himself a heap of enemies by signing this MoM (memo of misunderstanding).

Reality Check

Prof Pape says there is no graceful way out of the escalation trap for America in its conflict with Iran, but ...

The truth about the Iran deal that no one seems to have noticed (perhaps for good reason and it's me missing something) is that this is a classic case of demon-transformed-into protector - America is replacing a failed Israel with a winning Iran. 

America gets two things:

- a new and competent protector of its interests in the Gulf ;

- and a far more monetisable market of over 90 million people, with a work force that is skilled in Engineering and Technology, and a land full of resources, fueled by the return of its frozen assets and the lifting of sanctions.

It's a great deal though it relies on

- Iran following the American lead & breaking with its allies; and

- the neocon hardline zionists in Washington n Tel Aviv "shutting their clappy".

Read More

SLOWING LIQUIDITY

17 June 2026

Overview

The Liquidity Tide Is Slowing

Most investors focus on the level of liquidity. The smarter question is whether liquidity is accelerating or decelerating.

Global liquidity continues to rise, but the rate of increase is slowing. Markets price the change in momentum, not the absolute level. That shift is already producing familiar late-cycle signals: strong commodity performance, narrowing market breadth and a bearish flattening yield curve.

The reason is simple. Money is leaving financial assets and flowing into the real economy. That supports growth, investment and corporate earnings, but it also removes some of the fuel that previously drove asset prices higher.

Historically, this has been the transition period between speculation and turbulence.

For investors, the implication is not panic but repositioning. Real assets, precious metals, energy, resource equities and other monetary inflation hedges tend to outperform when liquidity growth slows and debt monetisation becomes the preferred policy response.

The liquidity tide is still coming in.

It is simply no longer rising as fast as before.

 the liquidity tide is still coming in - late-cycle signals, debt dynamics, and capital rotation into real assets. Know where the capital is flowing to and get there before it arrives.

Glossary

Bearish Flattening Yield Curve

• This is a market condition where:
  • Long-term bond yields fall faster than short-term yields, or
  • Short-term yields rise while long-term yields fall
• The result is a flattening of the yield curve (the gap between long and short rates narrows) combined with a bearish signal for growth assets, especially equities.

The bond market is signalling that future monetary policy will need to be easier than currently priced. Note Kevin Warsh threatens to raise the policy rate to curb inflation.

Yield curve – the line plotting government bond yields across different maturities (e.g. 2-year vs 10-year).
Flattening – a reduction in the spread between short and long-term yields.
Bearish – expectations of economic slowdown, tightening conditions, or risk asset weakness.

This needs a bit more explanation, which is offered at the end of this piece...

1. THE LIQUIDITY TIDE IS SLOWING

There is a distinction that many investors miss, and missing it can be costly.

Global liquidity continues to rise in absolute terms. Recent estimates place it at around US$193 trillion. However, markets do not primarily react to the level of liquidity. They react to the rate of change.

That rate of change is now slowing.

The implication is significant. A liquidity environment that is still expanding, but expanding more slowly, tends to favour a rotation away from financial assets and towards real assets. Within the real asset universe, the greatest beneficiaries are often those most sensitive to monetary inflation.

The direction of the tide matters more than the height of the water.

Glossary

Liquidity - The availability of money and credit within the financial system.

Rate of Change - The speed at which a variable is increasing or decreasing.

Real Assets - Physical or tangible assets such as commodities, property and natural resources.

---

2. WHERE WE ARE IN THE CYCLE

According to Michael Howell of CrossBorder Capital, the current phase is the speculation stage of the liquidity cycle.

The description is apt.

Artificial intelligence, semiconductors and robotics have generated extraordinary returns. Yet the broader market has not participated equally. Leadership has become increasingly concentrated. Market breadth has narrowed while valuations have expanded.

Historically, this combination has often appeared late in a cycle.

Volatility is beginning to rise. Market leadership is becoming narrower. Expectations have become elevated.

Trees do not grow to the sky.

The phase that has historically followed is what Howell describes as the turbulence stage. During this period, liquidity begins to drain more rapidly and the direction of risk assets often reverses.

That transition has not fully arrived, but the prudent time to prepare is before it becomes obvious.

Three conditions currently support the late-cycle interpretation.

First, commodity markets have begun to outperform. This is consistent with liquidity moving away from financial markets and into the real economy.

Second, yield curves are experiencing bearish flattening. Long-term yields are rising, but short-term yields are rising even faster, compressing the spread between them.

Third, market breadth continues to narrow despite resilient headline indices.

All three conditions are now visible.

Glossary

Market Breadth - The proportion of shares participating in a market move.

Bearish Flattening - A yield curve compression caused by short-term interest rates rising faster than long-term rates.

Yield Curve - A graph showing government bond yields across different maturities.

---

3. WHY IS LIQUIDITY SLOWING IF CENTRAL BANKS REMAIN LOOSE?

At first glance, the slowdown appears puzzling.

Most major central banks are not aggressively tightening monetary policy. Yet financial liquidity is clearly decelerating.

The explanation is straightforward.

Money must always be somewhere.

What appears to be happening is a migration of capital away from financial assets and into the real economy.

That migration is supporting stronger-than-expected economic activity, particularly in the United States.

Nominal GDP growth of 7 to 8 per cent is entirely plausible when considering:

• Massive AI-related capital expenditure

• Persistent fiscal deficits

• Expanding energy export revenues

This shift benefits commodities and many operating businesses.

However, it is not automatically positive for financial asset valuations.

For years, Wall Street received the first wave of liquidity. Asset prices rose well ahead of underlying earnings.

Now the process is reversing.

The earnings are beginning to appear, but the liquidity that previously expanded valuation multiples is increasingly flowing elsewhere.

Main Street is receiving its turn.

That transition is rarely smooth.

The key principle is sequencing.

Liquidity leads economic activity.

Financial markets rise first because money arrives first.

The real economy improves later because investment eventually creates output, employment and profits.

When capital leaves financial markets and enters productive activity, earlier optimism becomes justified. However, the fuel for further multiple expansion begins to diminish.

Glossary

Nominal GDP - Economic growth measured without adjusting for inflation.

P/E Ratio - Price divided by earnings, a common valuation measure.

Multiple Expansion - Rising valuations caused by investors paying more for each unit of earnings.

---

4. THE GLOBAL DEBT MACHINE

The backdrop to the liquidity story is unprecedented debt accumulation.

Across much of the developed world, capital markets increasingly function as debt refinancing systems rather than engines of productive investment.

Some estimates suggest that roughly four out of every five primary market transactions globally are debt rollovers rather than new financing.

Liquidity and debt form a closed loop.

Debt requires liquidity for refinancing.

Liquidity is increasingly created through collateralised lending.

According to World Bank data, approximately 75 to 80 per cent of global lending is collateral-based.

The principal collateral consists of government bonds and property.

The system therefore depends on maintaining confidence in both.

Should debt markets become unstable, liquidity can contract rapidly.

Historically, there has been only one durable solution to excessive sovereign indebtedness.

Monetisation.

Governments rarely default outright.

Instead, they reduce the real burden of debt through inflation and currency dilution.

Japan demonstrated this following its post-1990 collapse through quantitative easing and prolonged monetary expansion.

China appears to be moving along a similar path after decades of debt-fuelled property investment.

Much of the resulting liquidity has flowed into gold, traditionally viewed as a store of value.

Increasingly, price discovery in gold is being influenced by Asian demand, particularly through the Shanghai market.

The United States is not exempt.

The Treasury has increasingly favoured issuing short-dated bills rather than longer-term bonds. Roughly half of federal debt now matures within two years.

Weekly refinancing requirements approach US$329 billion.

Banks willingly absorb this debt because expanding fiscal deficits simultaneously create deposits that require income-producing assets.

The result is a form of ongoing monetisation.

Milton Friedman would have recognised the implications immediately.

Glossary

Debt Monetisation - Financing government debt through money creation.

Collateralised Lending - Lending secured against assets.

Quantitative Easing - Central bank asset purchases designed to increase liquidity.

---

5. THE SUPPRESSION OF VOLATILITY

One of the least discussed aspects of today's system is the active management of bond market volatility.

The key indicator is the MOVE Index, often described as the bond market's equivalent of the VIX.

A growing share of Treasury demand now comes from hedge funds operating highly leveraged basis trades.

These trades involve purchasing physical bonds while simultaneously selling futures contracts, profiting from small pricing differences.

The strategy works only when volatility remains low.

If volatility spikes, leverage must be reduced and demand disappears.

The implications extend beyond hedge funds.

Collateral values throughout the financial system depend on volatility assumptions.

Low volatility means lower collateral haircuts and a larger collateral multiplier.

This supports greater lending and greater liquidity.

High volatility has the opposite effect.

Liquidity contracts.

Treasury buyback programmes appear designed, at least in part, to support market functioning by replacing less liquid bonds with newly issued securities.

Whether this can continue indefinitely remains uncertain.

The arithmetic is becoming increasingly difficult.

If nominal GDP is growing at 7 to 8 per cent while ten-year Treasury yields remain around 5 per cent, long-duration investors are accepting negative real returns.

That imbalance may eventually require adjustment.

Glossary

MOVE Index - A measure of expected US Treasury market volatility.

Basis Trade - A leveraged strategy exploiting price differences between bonds and futures.

Collateral Multiplier - The amount of lending supported by a given quantity of collateral.

---

6. WHAT THIS MEANS FOR INVESTORS

The broad implication is a gradual rotation away from financial assets and towards real assets.

Understanding the difference between monetary inflation and consumer price inflation is crucial.

Consumer inflation reflects both monetary factors and real-world production costs.

For decades, powerful deflationary forces such as globalisation, cheap energy and technological productivity offset much of the inflation generated by monetary expansion.

As a result, financial assets substantially outperformed consumer purchasing power.

Gold performed even better.

Since 2000, gold has risen approximately fifteen-fold, compared with roughly six to seven times for major US equity indices.

If US federal debt continues expanding at 7 to 8 per cent annually, as projected by the Congressional Budget Office, investors require returns above that level merely to preserve purchasing power measured against monetary dilution.

Historically, the assets most capable of achieving this have included:

• Precious metals

• Prime residential property

• Energy and resource companies

• Food / agricultural

• Select cryptocurrencies (dangerous)

Within commodities, the traditional sequence often begins with precious metals, followed by industrial metals and finally agricultural products.

There are signs that this progression is underway.

Oil also appears historically inexpensive relative to gold.

The long-term gold-to-oil ratio has averaged around 20. Current pricing implies substantial upside - $200? - for oil if that relationship reverts towards historical norms.

Energy producers and mining companies provide leveraged exposure to these themes.

A further possibility deserves consideration.

If inflationary pressures continue building, the Federal Reserve may ultimately be forced to raise interest rates despite widespread expectations of easing.

Such an outcome remains controversial, but it cannot be dismissed.

And finally, geopolitical. Middle East and Ukraine rebuilding contracts anyone? Iran, former demon, is being recognised and will be made into the new Protector Of West Asia... with all its resources, technological and engineering capabilities, plus a market of 90+m consumers, once sanctions are off and frozen assets restored. Pity Europe cannot see the same for Russia.

Glossary

Monetary Inflation - Expansion of the money supply that reduces currency purchasing power.

Consumer Price Inflation - Rising prices paid by households for goods and services.

Gold-to-Oil Ratio - A valuation measure comparing the relative prices of gold and crude oil.

---

7. CONCLUSION

The immediate challenge is not prediction.

It is context.

Markets move through identifiable liquidity cycles. Understanding the phase of the cycle matters more than forecasting the exact timing of every turn.

The evidence increasingly suggests that the speculation phase is maturing and the turbulence phase is approaching.

That does not guarantee an imminent market decline.

It does suggest that the balance of probabilities is shifting.

In such an environment, portfolio construction becomes more important than market forecasts.

A diversified core allocation tilted towards monetary inflation hedges, real assets and late-cycle sectors appears increasingly rational.

The liquidity tide has not yet gone out.

But it is no longer rising as quickly as before.

For investors, that distinction may prove to be one of the most important developments of the coming years.

NOTE ON FLATTENING YIELD CURVE

Did you spot an apparent contradiction? - long-term yields will be lower not higher than yields today, though we are in aperiod of higher inflation. Surely yields will have to be higher for longer?

This apparent contradiction is exactly why yield curve analysis can be confusing.

The key point is that long-term bond yields are driven by three things - not only by inflation, but by expectations of future growth and expected future short-term interest rates.

If investors believe that:

• Inflation is currently high, and

• Kevin Warsh central bank (or any other CB) may raise rates further in the short term (as is currently expected)

• Those higher rates will eventually slow the economy,

• > then investors may conclude that rates will have to be cut later.

• Higher rates will raise the dollar, making gold - which has no yield - less attractive

In that case they sell some gold perhaps, to buy long-dated bonds today, locking in current yields before future rate cuts arrive. The increased demand pushes bond prices up, long-term yields down, gold down, equities down.

So the market is effectively saying:

"We think policy may become tighter in the near term, but so tight that it ultimately forces easier policy in the future."

A simplified example:

• 2-year Treasury yield = 5.0%

• 10-year Treasury yield = 4.5%

The 10-year yield is lower because investors expect that over the next decade the average policy rate will be below today's 5%.

The bond market is not saying inflation is harmless. It is saying that future growth will be weak enough that inflation and interest rates will eventually fall.

A useful way to think about it is:

• Inflation risk → pushes yields up.

• Recession risk → pushes yields down.

• In a bearish flattening, recession fears are beginning to outweigh inflation fears at the long end of the curve.

That is why long bonds (price up = yield down) can rally even while central bankers are still talking tough on inflation. The market is looking beyond the next few meetings and pricing the entire economic cycle.

Read More