WHAT EFFECT SPACEX IPO ON THE INDEXES

7 June 2026

WHAT EFFECT WILL THE SPACEX IPO HAVE ON THE INDEXES?

Overview

Last week, we considered Damodaran's advice to not buy SpaceX at its IPO.

Most investors think the big event is the SpaceX IPO itself... they may have got it wrong...

This week we will look at the effect of including SpaceX in the usual indexes.

The bigger story could be what happens afterwards, when index funds managing trillions of dollars are forced to buy SpaceX shares regardless of valuation. This piece examines how index inclusion works, why the rules are being changed, who may be forced to buy, and why some analysts believe the IPO could become one of the most important tests yet of passive investing.

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1. The SpaceX IPO and the Index Inclusion Problem

The critical point many retail investors could be missing is that the real market event is not the IPO itself, but what happens immediately afterwards.

Once SpaceX becomes eligible for major stock market indices, passive funds that track those indices may be required to buy billions of dollars' worth of SpaceX shares.

This buying is not based on a judgement that the stock is cheap or attractive. It is mechanical... if a stock enters an index, index funds must buy it, that's all.

For decades, this process has worked relatively smoothly because most companies entered indices gradually and at valuations that were large but manageable.

SpaceX may be different.

If the company debuts at a valuation between $1.5 trillion and $2 trillion, it would instantly become one of the largest listed companies in the world.

The result could be one of the largest forced-buying events in stock market history.

Glossary

ETF (Exchange Traded Fund) – A fund that trades on a stock exchange and usually tracks an index.

Index – A basket of shares designed to represent a market. Examples include the S&P 500 and Nasdaq 100.

Types of Index

- Market-Cap Weighted Index: Constituents are weighted by their total market value, so larger companies have greater influence. In the S&P 500, Apple or Nvidia moves the index far more than a smaller member.

- Equal-Weighted Index: Every constituent carries the same weight regardless of size. A small company and Apple influence the index equally — producing very different returns from the same underlying stocks.

- Factor/Smart Beta Index: Weights constituents by a specific characteristic — dividend yield, low volatility, quality of earnings — rather than size or equal share. A middle ground between passive and active investing.

Passive Fund – A fund that follows an index automatically rather than selecting stocks actively.

Index Inclusion – The process of adding a company to an index.

Market Capitalisation – The total value of a company's shares.

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2. Why Index Funds Matter

The rise of passive investing has transformed financial markets.

Today, trillions of dollars are invested through index funds. Many pension funds, retirement schemes and private investors simply buy an index fund and hold it for decades.

This means a growing share of investment decisions are no longer made by analysts assessing value. Instead, they are made by index rules.

If a company enters an index, money flows in.

If a company leaves an index, money flows out.

The larger passive investing becomes, the more powerful these flows become.

This is one reason why the SpaceX IPO is attracting so much attention among institutional investors.

Glossary

Passive Investing – Investing by following predetermined rules rather than selecting individual shares.

Active Investing – Investing based on analysis and judgement by portfolio managers.

AUM (Assets Under Management) – The total amount of money managed by a fund.

Institutional Investor – Large organisations such as pension funds, insurers and investment firms.

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3. The Scale of the Potential Buying

Analysts estimate that major index funds may eventually need to purchase between $22 billion and $27 billion of SpaceX shares.

The largest funds potentially affected include:

• VOO

• IVV

• SPY

• QQQ

Each manages hundreds of billions, and in some cases trillions, of dollars.

A 0.5% weighting in the S&P 500 may sound insignificant, but...

When applied across trillions of dollars, even a small weighting creates enormous buying pressure.

This is why index inclusion often pushes a stock price higher in the short term.

Joseph Wang. Offset 11'.

Demand becomes guaranteed.

Glossary

Weighting – The percentage representation of a stock within an index.

Buying Pressure – A situation where demand exceeds supply.

Liquidity – The ease with which shares can be bought or sold.

Rebalancing – The periodic adjustment of index holdings.

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4. The Rules Are Being Rewritten

One of the most remarkable aspects of this story is that some index providers have modified their rules to allow large new companies to enter more quickly.

Historically, newly listed companies often had to wait months before becoming eligible.

Today, that waiting period is shrinking.

- MSCI has shortened its inclusion timetable.

- FTSE Russell has done likewise.

- Nasdaq has introduced a fast-track mechanism that may allow SpaceX to enter the Nasdaq 100 within weeks.

- Yet the S&P 500 has largely resisted pressure to change.

It continues to require seasoning periods, profitability standards and minimum public float requirements.

This means SpaceX may enter some indices rapidly while remaining excluded from the most influential index of all.

Glossary

MSCI – One of the world's largest index providers.

FTSE Russell – A major global index provider.

Seasoning Period – A waiting period before a newly listed company becomes eligible for inclusion.

Eligibility Criteria – The rules a company must satisfy before joining an index.

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5. The Float Problem

One of the biggest obstacles facing SpaceX is its relatively small public float.

The company reportedly plans to sell less than 5% of its shares to public investors.

The S&P 500 generally requires at least 10%.

Why does this matter?

A small float means relatively few shares are available for trading.

When large index funds attempt to buy billions of dollars of stock, there may not be enough sellers available.

That can drive prices sharply higher.

Critics argue that this creates an artificial market where prices are determined by index mechanics rather than investor judgement.

Glossary

Public Float – The proportion of shares available for public trading.

Low Float Stock – A company with relatively few shares available to investors.

Supply and Demand – The economic relationship between available shares and investor demand.

Price Discovery – The process by which markets determine a fair price.

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6. The Timeline

Different indices operate under different rules.

Current expectations suggest:

• Nasdaq 100 could potentially add SpaceX within weeks.

• Russell 1000 may include SpaceX later in 2026.

• S&P 500 appears unlikely to admit SpaceX before mid-2027.

This staggered timetable means buying pressure may occur in waves rather than all at once.

Each inclusion date could become a significant market event.

Glossary

Nasdaq 100 – An index dominated by large technology and growth companies.

Russell 1000 – An index covering many of America's largest listed companies.

S&P 500 – The most widely followed stock market index in the world.

GAAP Profitability – Profit measured under Generally Accepted Accounting Principles.

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7. The Displacement Effect

Whenever a new company enters an index, existing constituents must make room.

This means passive funds may need to sell small portions of Apple, Microsoft, Nvidia and hundreds of other holdings.

The proceeds are then used to purchase the newcomer.

For a normal IPO this effect is modest.

For a company potentially valued at $2 trillion, the effect becomes much larger.

The phenomenon is unlikely to damage existing mega-cap companies significantly, but it does create a temporary headwind.

Glossary

Constituent – A company that forms part of an index.

Displacement Effect – The need to reduce existing holdings to accommodate a new entrant.

Headwind – A factor that creates pressure against rising prices.

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8. The Bigger Question

The deeper issue concerns valuation.

At roughly 96 times sales, SpaceX is trading at levels normally associated with extremely optimistic growth expectations.

Supporters argue that SpaceX is not an ordinary company.

It dominates commercial launches.

Starlink is growing rapidly.

Future opportunities may include defence, AI infrastructure and eventually space-based industries.

Critics counter that even extraordinary companies can become poor investments if investors pay too high a price.

This debate sits at the heart of the SpaceX story.

-Should passive funds be required to buy regardless of valuation?

-Or does that process itself create market distortions?

Reasonable investors can disagree.

Glossary

Price-to-Sales Ratio – A valuation measure comparing company value with annual revenue.

Price-to-Earnings Ratio (P/E): Compares a company's market value to its annual profit. A P/E of 30 means you are paying $30 for every $1 of earnings. Unusable when a company is loss-making — as SpaceX currently is.

Price-to-Book Ratio (P/B): Compares market value to the accounting value of the company's net assets — what it owns minus what it owes. A ratio well above 1 means the market is paying a large premium over the balance sheet, betting on future returns that the assets alone do not guarantee.

Growth Stock – A company expected to expand rapidly.

Valuation – An estimate of what a business is worth.

Market Distortion – A situation where prices are influenced by factors other than fundamental value.

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9. Conclusion

The SpaceX IPO is not merely another technology flotation.

It is a test of the modern passive investing system.

For decades, index investing has been praised for its simplicity, low cost and strong long-term performance.

Yet the SpaceX case highlights a potential weakness.

When trillions of dollars follow rules rather than judgement, enormous sums of money can be directed into a single company regardless of price.

Whether that ultimately proves wise or unwise will depend on SpaceX's future performance.

What is certain is that the IPO represents more than a corporate listing.

It is a live experiment in how modern financial markets allocate capital.

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References

Reuters

Yahoo Finance

SpotGamma

ETF Stream

Quartz

Fortune

The Motley Fool

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This article is for educational purposes only and should not be considered investment advice. Investors should conduct their own research and consider their own financial circumstances before making investment decisions.

My original text has been reformatted by AI to make it more readable and glossary items added to make comprehension easier.

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WHY DAMODARAN WOULD NOT BUY SPACEX AT THE IPO PRICE

7 June 2026

WHY DAMODARAN WOULD NOT BUY SPACEX AT THE IPO PRICE

Is SpaceX Worth $350 Billion? A Valuation Sceptic's View

Based on publicly available analysis by Aswath Damodaran, Professor of Finance at NYU Stern

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A few weeks ago, Professor Aswath Damodaran — one of the world's leading authorities on corporate valuation — published his assessment of SpaceX ahead of its anticipated IPO. His conclusion was pointed: the private market pricing of around $350 billion is, in his view, extraordinarily difficult to justify from the numbers alone. What follows is a walkthrough of his argument, written for readers who want to understand not just the SpaceX story, but the analytical tools used to tell it.

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2. Part One: How You Value a Company

Before examining SpaceX specifically, it helps to understand the framework Damodaran uses. He calls it "The Valuation Story" — the idea that every valuation is ultimately a narrative about how a business will evolve, translated into numbers.

That story rests on five interconnected components:

1. Target Revenues — how large the business will eventually become, which depends on the total size of the market and the share of that market the company can realistically capture

2. Target Operating Margin — how profitable the business will be at maturity, which depends on unit economics and whether costs fall as the business scales

3. Reinvestment — how much capital must be continuously ploughed back into the business to sustain growth

4. Capital Intensity — the infrastructure, R&D, and capital expenditure required to generate each unit of revenue

5. Growth Lag — the time delay between investing capital and seeing that investment produce revenue

When these five inputs are assembled honestly, they produce a valuation. The discipline of the exercise lies in internal consistency: you cannot claim enormous revenues and high margins and low reinvestment simultaneously without justification.

Glossary — Part One

IPO (Initial Public Offering) – The moment a private company first sells shares to the general public on a stock exchange. Before an IPO, only selected investors — typically large institutions, venture capital funds, or wealthy individuals — can own shares. After the IPO, anyone can buy them.

Valuation – An estimate of what a company is worth in monetary terms. This can be calculated in several ways — by comparing it to similar companies, by projecting future cash flows and discounting them back to the present, or by looking at what buyers have recently paid for similar businesses.

Operating Margin – The percentage of revenue that remains as profit after paying all operating costs (staff, infrastructure, raw materials) but before paying interest on debt or taxes. A 20% operating margin means that for every $100 of revenue, $20 is kept as operating profit.

Unit Economics – The profitability of a single transaction or customer. If a rocket launch costs $30 million to execute and generates $60 million in revenue, the unit economics are positive. Strong unit economics at small scale do not automatically mean the whole business will be profitable — fixed costs matter too.

Capital Expenditure (CapEx) – Spending on long-lived physical assets — factories, rockets, satellites, machinery. Unlike operating expenses (salaries, fuel), CapEx is spread over many years in accounting terms. Capital-intensive businesses require large ongoing CapEx to maintain and grow.

R&D (Research and Development) – Spending on creating new products or improving existing ones. For a company like SpaceX, this includes engineering work on new rocket designs, Starlink satellite generations, and the Colossus supercomputer.

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3. Part Two: The SpaceX Prospectus

SpaceX filed a prospectus — the formal disclosure document required before a public offering — containing its financial statements and business descriptions. Damodaran worked from this document rather than from press leaks or analyst speculation, which is itself a methodological statement: value what can be verified, not what is rumoured.

The prospectus covers three distinct businesses operating under the SpaceX umbrella:

• Launch — the original rocket business, carrying satellites and cargo (and people) to orbit. Revenue here has grown modestly.

• Connectivity (Starlink) — the satellite internet service beaming broadband to homes, ships, and remote locations globally. This is the growth engine, with revenues roughly doubling between 2023 and 2024.

• AI — centred on Colossus, a massive computing cluster leased to Elon Musk's xAI venture for $8 billion annually. This is new, concentrated in a single related-party contract, and raises governance questions.

Damodaran's revenue estimates for these three businesses, built from the prospectus data, produced an enterprise value of $8.2 billion — a fraction of the $350 billion private market price.

Glossary — Part Two

Prospectus – A formal legal document that a company must file with financial regulators before selling shares to the public. It contains audited financial statements, descriptions of the business, identified risk factors, details of how IPO proceeds will be used, and information about management. It is the primary source document for any serious valuation analysis.

Enterprise Value – The total value of a business, capturing both its equity (shares) and its net debt. It represents what an acquirer would theoretically pay to own the entire company outright, assuming they also took on its debts. Enterprise value is distinct from market capitalisation, which reflects only the equity portion.

Market Capitalisation – The total value of all a company's shares at the current market price. If a company has 100 million shares trading at $50 each, its market capitalisation is $5 billion. This does not include debt.

Related-Party Transaction – A business deal between two parties with a pre-existing relationship — for example, SpaceX leasing its Colossus computing infrastructure to xAI, another Elon Musk company. Such transactions attract scrutiny because the pricing may not reflect genuine arm's-length market rates, and the arrangement may benefit one party at the expense of outside shareholders.

Revenue – The total income a business generates from selling its products or services, before any costs are deducted. Revenue is sometimes called "turnover". It is not profit — a company can have large revenues and still lose money if its costs are higher.

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4. Part Three: The TAM Problem

The prospectus claims a Total Addressable Market of $426 billion across SpaceX's three business lines. Damodaran regards this figure as substantially inflated — a product of what he calls "shooting the arrow, then painting the target".

The pattern works like this: a company decides, often with its investment bankers, what valuation it wishes to achieve. It then constructs a TAM large enough to justify that valuation, using optimistic assumptions about which markets it competes in and how broadly those markets should be defined. The $26 trillion figure cited in the prospectus for the enterprise AI space — used to validate the Colossus business — is a clear example: it includes virtually every business on earth as a potential customer, which makes the number functionally meaningless as a forecasting tool.

Damodaran's own TAM estimates are substantially lower, and he still finds the $350 billion valuation unjustifiable even against his more generous assumptions for the space launch market.

Glossary — Part Three

TAM (Total Addressable Market) – The total revenue that would be available to a company if it captured 100% of its defined market with no competition. In practice, no company achieves 100% share, so TAM is used as a starting point: you estimate TAM, apply a realistic market share, and derive a target revenue. The problem is that TAM is easy to manipulate — define the market broadly enough, and any number becomes achievable on paper.

Investment Banker – A financial professional who advises companies on raising capital, mergers, and public offerings. In an IPO context, investment banks ("underwriters") help set the offer price, market the shares to institutional investors, and earn fees proportional to the amount raised. Their financial interest is in a successful, well-priced offering — which can create incentives to support optimistic valuations.

Arm's Length Transaction – A deal between two unrelated, independent parties acting in their own separate interests. Arm's length pricing is considered the fairest benchmark for whether a transaction reflects genuine market value. When two Elon Musk companies do business with each other, the transaction is by definition not arm's length.

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5. Part Four: The Share Count Problem

One of Damodaran's more technical criticisms concerns how the share count is presented in the prospectus. The stated share count used to calculate per-share value does not include the full diluted count — the total number of shares that will exist once all options, warrants, and employee share awards are exercised.

This matters enormously. If you divide a $350 billion valuation by a smaller share count, the implied price per share looks more attractive. But once all the additional shares vest and are exercised — which will happen — the ownership of existing shareholders is diluted: each share represents a smaller fraction of the company than it appeared to at the time of purchase. Damodaran uses the fully diluted share count of approximately 2.5 billion shares, which changes the per-share arithmetic materially.

Glossary — Part Four

Share Dilution – The reduction in existing shareholders' ownership percentage caused by the creation of new shares. If you own 10 shares in a company with 100 shares total, you own 10%. If the company issues 100 new shares (to employees, or to raise capital), you now own only 5% — your stake has been diluted, even though you still hold 10 shares.

Stock Options – Contracts giving an employee or investor the right to buy shares at a pre-agreed price (the "strike price") at some point in the future. If the market price rises above the strike price, the option is valuable — the holder can buy cheaply and sell at market price. Options are not shares until they are exercised, but they represent future shares that will dilute existing holders.

Warrants – Similar to stock options but typically issued to outside investors rather than employees, often as a sweetener attached to a debt or financing deal. Like options, warrants represent future shares and contribute to dilution.

Fully Diluted Share Count – The total number of shares that would be in existence if every option, warrant, and convertible instrument were exercised simultaneously. This is the honest denominator to use when calculating per-share value, because it reflects what ownership will actually look like once all commitments are honoured.

Vesting – The process by which an employee earns their share awards over time, typically subject to continued employment. A four-year vesting schedule with a one-year cliff means nothing is earned in the first year, then 25% vests at the one-year mark, with the remainder vesting monthly or quarterly over the following three years.

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6. Part Five: The Elon Premium

Damodaran acknowledges something that pure numbers-based analysis cannot fully capture: the Elon Musk optionality premium. Musk has demonstrated, across Tesla, SpaceX, and other ventures, a capacity to enter markets and reshape them in ways that defy conventional forecasting. Investors who believe this will happen again with SpaceX — perhaps through a Mars mission, a defence contract, or some currently unimagined application — are paying for that possibility.

This is not irrational. Optionality has real value. The question Damodaran raises is whether $350 billion — or, as he notes, now apparently $400 billion — is a reasonable price for that optionality, given what the underlying businesses actually generate. His answer is no: at that price, the market is assuming not just that Musk will continue to be exceptional, but that every business line will simultaneously achieve its most optimistic scenario.

He would not buy the stock at the IPO price.

Glossary — Part Five

Optionality – In financial terms, the value of having the right but not the obligation to pursue a future opportunity. A company with optionality has credible paths to large future revenues that are not yet reflected in current financials. Investors sometimes pay a premium for this possibility. The difficulty is that optionality is genuinely hard to price — it can be used to justify almost any valuation if invoked loosely enough.

Priced for Perfection – A colloquial phrase used when a stock's market price already incorporates every optimistic scenario, leaving no margin for error. If growth disappoints even modestly, or one business line underperforms, the stock falls sharply — because none of that disappointment was priced in. SpaceX at $350 billion, Damodaran argues, is priced for perfection across all three businesses simultaneously.

Discount Rate – The rate used to convert future cash flows into present-day values. A dollar received in ten years is worth less than a dollar today — because of inflation, risk, and opportunity cost. The discount rate captures this time-value-of-money principle. Higher-risk businesses warrant higher discount rates, which reduce the present value of future earnings and therefore reduce the calculated valuation.

Cash Flow – The actual movement of money into and out of a business. Profit (as reported in accounting statements) can diverge significantly from cash flow because of timing differences, depreciation, and non-cash charges. Investors focused on intrinsic value typically prefer to analyse free cash flow — the cash generated after all necessary reinvestment — rather than reported earnings.

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7. Conclusion

Damodaran's SpaceX analysis is a masterclass in disciplined valuation under conditions of narrative excess. The company is genuinely extraordinary — technically, operationally, and in terms of the ambition it embodies. Starlink is a real and growing business. The launch franchise is world-class. The Colossus AI infrastructure is formidable.

But a great company and a great investment are different things. The price you pay determines the return you receive. At $350–400 billion, SpaceX's private market valuation requires a sequence of best-case outcomes across multiple business lines, a TAM that holds up under scrutiny, a share count that doesn't obscure dilution, and a continuation of Elon Musk's track record indefinitely into the future.

That is a lot to assume. As Damodaran puts it: he would not buy this stock.

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References

Reuters

https://www.reuters.com/legal/government/spacex-sets-135-price-blockbuster-ipo-upending-wall-street-convention-2026-06-03/

https://youtube.com/shorts/C3zCYkMPhXA?si=yt8QXj-UaWZfybbc

Patrick Boyle's analysis

https://youtu.be/IHD8BDFYyGI?si=0RoSS2rwnyPDoYfn

This post draws on publicly available analysis. All valuation figures and prospectus citations are sourced from Damodaran's published work. This is not investment advice.

This AI version preserves my text and applies my preferred blog structure with numbered headings, section dividers, and glossary formatting.

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5 JUNE 2026 CRASH - WHEN GOOD NEWS QUICKLY TURNED TO BAD

5 June 2026

The Crash of 5 June 2026: When Good News Quickly Became Bad News

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THE CRASH OF 5 JUNE 2026: WHEN GOOD NEWS BECAME BAD NEWS

1. What Actually Happened?

On 5 June 2026, financial markets suffered a sharp reversal after the release of the US Non-Farm Payrolls (NFP) report.

Economists had expected approximately 85,000 new jobs. Instead, the US economy created 172,000 jobs during May, more than double expectations. Previous months were also revised upwards. Unemployment remained steady at 4.3%.

At first glance this appeared to be excellent economic news. The labour market was stronger than expected and fears of an imminent recession diminished.

Yet investors reacted negatively.

Demand for labour indicates a strengthening economy and suggests inflation which the Central Bank will tackle with rising interest rates.

Stocks fell sharply, Treasury bond prices declined, yields rose, the US dollar strengthened and gold weakened.

This was a classic example of financial markets focusing not on today's economy, but on tomorrow's monetary policy.

2. Why Stocks Fell

The immediate market conclusion was simple.

A stronger labour market gives the Federal Reserve less reason to cut interest rates.

Indeed, many investors began pricing in the possibility that rates could remain elevated for longer or even rise further later in the year.

Higher interest rates matter because stock valuations depend heavily on discount rates.

When interest rates rise:

• Future corporate earnings become less valuable in today's money as the rate used to discount future earnings increases.

• Growth stocks become particularly vulnerable because much of their expected value lies far in the future.

• Investors can obtain more attractive returns from supposedly risk-free government bonds.

The result is a compression of valuation multiples.

In effect, investors decided that yes, economic growth is strong; but no, without expected rate cuts (ie tighter monetary conditions) stock valuations would fall.

The technology sector was hit particularly hard because it remains highly sensitive to interest-rate assumptions.

3. Why Bonds Fell

Bond markets reacted even more directly.

Bond prices move inversely to yields.

When investors expect future interest rates to remain high or increase, existing bonds paying lower coupons become less attractive.

Consequently:

• Treasury prices fell.

• Treasury yields rose.

• The short end of the yield curve moved particularly sharply because it is most sensitive to Federal Reserve policy expectations.

The bond market effectively repriced the probability of future rate cuts.

Before the employment report many investors expected monetary easing.

After the report those expectations were pushed further into the future.

4. Why the Dollar Rose

The stronger dollar followed naturally.

Currencies are strongly influenced by interest-rate differentials.

If US rates are expected to remain higher than rates elsewhere:

• International capital is attracted towards US assets.

• Demand for dollars increases.

• The dollar strengthens against other currencies.

This mechanism is one of the most powerful forces in global capital markets.

Money tends to flow towards the highest perceived risk-adjusted return.

A higher-for-longer Federal Reserve policy therefore supports dollar demand.

5. Why Gold Fell

Gold's decline surprised many observers because geopolitical tensions and fiscal concerns remain elevated - an environment where gold benefits as a safe haven.

However, gold faces a challenge whenever real yields rise.

Gold produces no income.

It pays no interest and no dividend.

When investors can earn higher yields on Treasury securities, the opportunity cost of holding gold increases.

As real yields rose following the jobs report:

• Capital flowed towards interest-bearing assets.

• Gold became less attractive in the short term.

• Prices weakened despite longer-term concerns about debt and inflation.

This is one of the most misunderstood aspects of gold investing.

Gold often trades not against inflation itself but against real interest rates.

6. The Market's Time Horizon

The key to understanding 5 June is recognising that markets operate on different time horizons.

The market reaction reflected a near-term narrative:

"Strong economy means fewer rate cuts, maybe a rise."

That narrative dominated trading.

However, longer-term investors are watching a different set of issues:

• Exploding federal debt.

• Persistent fiscal deficits.

• Rising interest costs.

• Increasing dependence on debt-financed government spending.

• Structural inflationary pressures.

These concerns did not disappear on 5 June.

They were simply pushed into the background by a powerful short-term monetary-policy signal.

7. The Bigger Structural Question

The deeper issue concerns confidence.

Modern financial systems depend heavily upon trust in government debt, central banks and fiat currencies.

As long as investors believe these institutions remain credible, financial assets can continue to dominate portfolios.

However, if confidence begins to weaken, capital allocation may change dramatically.

The transition would likely occur in stages.

First, investors favour financial assets.

Then they favour cash and short-duration instruments.

Eventually, if confidence deteriorates sufficiently, attention shifts towards tangible assets.

History shows that during periods of monetary instability investors often migrate towards:

• Gold.

• Silver.

• Energy.

• Agricultural commodities.

• Strategic metals.

• Productive land.

These assets possess intrinsic physical utility independent of the financial system.

8. A Three-Layer Interpretation

The events of 5 June can be understood through the lens of the Three-Layer Market Model.

Layer 1: Physical Assets

Energy, agriculture, metals, water, infrastructure and real estate.

Layer 2: Financial Claims

Shares, bonds, ETFs and bank deposits.

Layer 3: Derivatives

Options, futures, swaps and other leveraged claims.

The market reaction occurred primarily within Layers 2 and 3.

Investors rapidly repriced expectations regarding interest rates.

No equivalent change occurred in the underlying physical economy overnight.

Factories did not suddenly become more productive.

Oil fields did not expand.

Copper reserves did not increase.

The adjustment was largely financial.

The longer-term question is whether capital eventually migrates from financial claims back towards physical assets.

If fiscal strains continue to intensify, that possibility becomes increasingly relevant.

9. Conclusion

The crash of 5 June 2026 was not caused by economic weakness.

It was caused by economic strength.

The labour market proved more resilient than investors expected.

That resilience forced markets to reconsider assumptions about future Federal Reserve policy.

Stocks fell because higher rates reduce valuations.

Bonds fell because higher rates reduce bond prices.

The dollar rose because higher rates attract capital.

Gold fell because rising real yields increase the opportunity cost of holding non-yielding assets.

The immediate market message was clear:

"Strong growth means tighter money."

The longer-term question remains unresolved:

At what point do investors become more concerned about the sustainability of the financial system itself than about the next Federal Reserve meeting?

That question may ultimately determine whether capital remains in financial claims or begins a broader migration towards physical assets.

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Glossary

Non-Farm Payrolls (NFP) – Monthly US employment report excluding farm workers.

Real Yield – Interest rate adjusted for inflation.

Discount Rate – The rate used to calculate the present value of future cash flows.

Fiat Currency – Money whose value depends on government authority rather than physical backing.

Monetary Policy – Central bank actions affecting interest rates and money supply.

Physical Assets – Tangible assets with intrinsic utility, such as land, metals and energy resources.

References

Joseph Wang

https://youtu.be/zZNx1m3aeP4?si=6SA53Lrfhtw5JmHa

• Reuters analysis of the May 2026 employment report and market reaction: payrolls rose 172,000 versus expectations near 85,000, while Treasury yields and dollar expectations increased. 

• Markets repriced interest-rate expectations following the jobs data, contributing to equity weakness and higher bond yields. 

• Contemporary market commentary highlighted the "good news is bad news" dynamic, particularly for rate-sensitive technology stocks. 

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7/6 SUMMARY OF POSTS 1 TO 6 - BACK TO REALITY - HOW IT ALL CONNECTS

5 June 2026

Here's a summary of the six articles as a connected series: it is all about liquidity and the flow of capital - can you figure out where the capital is flowing to next and get there before it arrives?

1. https://www.livingintheair.org/2026/06/financials-v-physicals.html

2. https://www.livingintheair.org/2026/06/rotation-from-financial-into-physical.html

3. https://www.livingintheair.org/2026/06/rotating-into-physical-assets.html

4. https://www.livingintheair.org/2026/06/three-layers-of-capitalism.html

5. https://www.livingintheair.org/2026/06/the-three-layer-economic-machine-and.html

6. https://www.livingintheair.org/2026/06/beyond-market-whole-dalio-machine.html

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The overarching argument

 is that forty years of financialisation — capital piling into stocks, bonds, derivatives and debt — has left the physical economy chronically underinvested, and that a structural rotation back toward tangible assets may now be underway.

Post 1 — Financials v. Physicals

 lays the conceptual foundation: two economies coexist, a financial one (claims on future production) and a physical one (energy, food, minerals, infrastructure). Financial claims have expanded far faster than the productive base they depend upon. Inflation is framed not merely as a monetary signal but as a message from the physical world that demand is outrunning supply capacity.

Post 2 — The Hormuz Catalyst

 gives the thesis a concrete trigger: the closure of the Strait of Hormuz in February 2026 following the Iran-Israel-US conflict. Tanker traffic reportedly collapsed, oil surged and insurance markets became stressed [livingintheair](https://www.livingintheair.org/2026/06/rotation-from-financial-into-physical.html) , dramatising how dependent the global economy remains on a handful of physical chokepoints. The article argues that Hormuz didn't create the underlying scarcity — it merely made it impossible to ignore.

Post 3 — ETFs for Physical Rotation

 turns the framework into a practical investment roadmap, mapping out a five-phase rotation sequence: first gold and silver (monetary defence against currency debasement), then energy including uranium (the master commodity), then industrial and strategic metals like copper and rare earths, then agriculture and fertilisers, and finally long-duration infrastructure and water assets. ETF suggestions accompany each phase, and defence spending is noted as a complicating sidebar — resource consumption without productive expansion.

Post 4 — Three Layers of Capitalism

 provides the structural explanation for why markets can seem so detached from reality. Modern capitalism operates across three levels: Layer 1 (the real economy — factories, farms, mines), Layer 2 (the ownership market — shares and bonds), and Layer 3 (derivatives — futures, options, swaps). Each layer is progressively more abstract and more responsive to speculation and leverage rather than underlying production. Global derivatives markets are often measured in hundreds of trillions of dollars of notional value, vastly exceeding annual world economic output. [livingintheair](https://www.livingintheair.org/2026/06/three-layers-of-capitalism.html)

Post 5 — Capital Rotation Through the Pyramid

 synthesises posts 1–4 into a single image: during periods of stability, capital climbs the pyramid from physical assets up through shares into derivatives. During crises — Weimar Germany, 1970s inflation, Russia in the 1990s — it reverses, descending back toward tangible ownership. The series' central claim is crystallised here: for forty years capital climbed the pyramid; today there are signs it may be starting to descend again.

Post 6 — The Dalio Machine

 widens the lens furthest. Drawing on Ray Dalio's framework, it argues that beneath all three financial layers sits a deeper foundation — the global trade network of shipping lanes, banking systems, currencies, laws, governments and military protection. Everything else rests on this. The series as a whole has therefore been moving progressively deeper: from financial claims, through physical assets, to the underlying institutions that make the entire structure possible.

Taken together

the six posts form a coherent macro-investment thesis: the age of paper abundance may be giving way to an age of physical scarcity, and the investors best positioned for the coming decade will be those who understand — and own — the foundations rather than the superstructure.

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6/6 BEYOND THE MARKET - THE WHOLE DALIO MACHINE

5 June 2026

"The machine" - previous post in this series described, more or less, Ray Dalio's trade networks.

However, Dalio's machine is even bigger than the trade networks alone.

1. The Trade Networks Are Part of the Machine

The shipping lanes, ports, payment systems, banks, contracts, insurance markets and supply chains are the plumbing.

They allow:

• Oil to move
• Food to move
• Components to move
• Money to move
• Information to move

Without them, the modern economy would seize up very quickly.

2. The Machine Includes Several Interlocking Systems

Dalio tends to view the world as a collection of interacting systems:

• The economic machine
• The credit machine
• The monetary machine
• The political machine
• The geopolitical machine

Each influences the others.

For example:

A container ship leaves Shanghai carrying goods.

That is trade.

The shipment is financed by banks.

That is credit.

The payment is settled in dollars.

That is money.

The route passes through strategic waters protected by navies.

That is geopolitics.

The legal contracts are enforced by governments.

That is politics.

All of these together form the machine.

---

3. Relating This to The Three Layers

The machine sits underneath all three layers.

Layer 3

• Derivatives
• Futures
• Options

depend on

Layer 2

• Shares
• Bonds
• Financial claims

which depend on

Layer 1

• Production
• Resources
• Labour
• Energy

which depend on

The Machine

• Trade routes
• Banking systems
• Energy systems
• Legal systems
• Governments
• Military protection
• Social stability

Without the machine, the layers above cannot function.

---

4. A Useful Analogy

Think of a theatre.

The actors on stage

• Shares
• Bonds
• Derivatives

These are what investors see every day.

Behind the stage

• Factories
• Farms
• Mines
• Energy systems

These produce the real output.

Underneath the entire building

• Shipping networks
• Banking networks
• Governments
• Laws
• Currencies
• Security arrangements

These are the foundations.

Most people watch the actors.

Dalio spends much of his time studying the foundations.

---

5. An Interesting Extension

• Physical assets
• Energy
• Agriculture
• Commodities
• Infrastructure
• Geopolitics

The recent series of posts have gradually moved attention downward through the layers.

Many investors spend all their time analysing Layer 3.

Some analyse Layer 2.

Dalio's framework, and these recent posts, ask:

"What supports the entire structure?"

That question leads directly to:

• Trade networks
• Energy systems
• Monetary systems
• Debt systems
• Geopolitical power

In other words, the machine itself.

Glossary

Economic Machine - Dalio's term for the interconnected system through which production, spending, credit and wealth creation occur.

Plumbing - Informal term for the underlying infrastructure that allows a financial or economic system to operate.

System - A collection of interconnected parts whose behaviour depends on their interactions rather than on any single component.

Foundation Layer - The underlying institutions and physical networks upon which economic and financial activity depends.

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5/6 THE THREE LAYER ECONOMIC MACHINE AND CAPITAL ROTATION

5 June 2026

Capital migration between these three layers.

Layer 1: The Physical Economy

• Energy
• Agriculture
• Water
• Metals
• Infrastructure
• Manufacturing
• Real estate
• Transport

These are tangible assets and productive activities. They satisfy physical human needs.

Layer 2: Financial Claims

• Shares
• Bonds
• ETFs
• Investment funds
• Bank deposits

These are claims on Layer 1 assets and cash flows.

Layer 3: Financial Abstractions

• Futures
• Options
• Swaps
• Structured products
• Leverage
• Synthetic exposures

These are claims on claims.

What makes your recent series interesting is that it can be interpreted as a story of capital moving down the pyramid.

Historically, during periods of stability, capital often moves upward:

Physical assets → Shares → Derivatives

Investors become increasingly comfortable holding paper claims because they trust:

• Governments
• Financial institutions
• Currency systems
• International trade networks

The financial layers expand faster than the underlying physical economy.

However, during periods of uncertainty, the process can reverse:

Derivatives → Financial Assets → Physical Assets

Investors begin asking:

"Who actually owns something real?"

That question has appeared repeatedly throughout history.

Examples include:

• The inflationary 1970s
• Weimar Germany
• Argentina's recurrent crises
• Russia in the 1990s
• Various emerging market currency crises

In each case, confidence in paper claims weakened and ownership of tangible assets became more attractive.

---

A useful image for readers is this:

The Pyramid of Claims

Layer 3: Claims on claims (Futures, options, swaps)

↓

Layer 2: Claims on assets (Shares, bonds)

↓

Layer 1: Assets themselves (Land, energy, food, metals, factories)

The lower one moves in the pyramid, the closer one gets to physical reality.

The higher one moves, the greater the reliance on trust, law, liquidity and financial stability.

---

This also ties directly into your recent theme of:

"The Rotation from Financials to Physicals."

The argument is not necessarily that financial assets become worthless.

Rather, it is that after decades in which Layers 2 and 3 expanded much faster than Layer 1, investors may increasingly favour ownership linked to scarce physical resources.

That is essentially the story behind:

• Gold
• Silver
• Copper
• Agriculture
• Energy
• Water infrastructure
• Commodity producers
• Real assets generally

Viewed this way, your three recent posts are really one larger narrative:

For forty years capital climbed the pyramid. Today there are signs that it may be starting to descend again.

Whether that proves correct remains to be seen, but it is a powerful framework because it links financialisation, globalisation, debt expansion and the renewed interest in tangible assets into a single coherent picture.

Glossary

Financialisation - The increasing importance of financial markets, financial institutions and financial instruments relative to the productive economy.

Real Assets - Physical assets with intrinsic utility or scarcity, such as land, energy resources, metals and infrastructure.

Derivative - A contract whose value depends upon another asset rather than direct ownership of that asset.

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

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4/6 THREE LAYERS OF CAPITALISM

5 June 2026

The Three Layers of Capitalism

Overview

Most people think of "the stock market" as a single entity. In reality, modern capitalism operates through three distinct layers. 

First comes the real economy, where businesses produce goods and services. 

Above that sits the ownership market, where shares and bonds are bought and sold. 

Above both lies the derivatives market, where investors trade contracts linked to the value of underlying assets. 

Each layer becomes progressively more abstract. A factory makes steel, shareholders trade ownership of the factory, and derivatives traders speculate on the future value of that ownership. 

Understanding these three layers helps explain why financial markets can sometimes soar or crash even when little appears to be changing in the real economy.

1. Seeing Capitalism as a Three-Layer System

Many people think "the stock market" is a single thing.

In reality, modern capitalism can be viewed as three interconnected layers.

- The first layer is the real economy.

- The second layer is the ownership market.

- The third layer is the derivatives and financial engineering market.

Understanding these three layers helps explain why financial markets sometimes seem detached from everyday economic reality. For example an ordinary company carries on its ordinary operations from day to day and yet the share price can swing high and low - why? The company might just carry on its daily life but investors come to different conclusions about the net present value NPV of its future earnings, and even on the value of its assets today.

────────────────────────────

2. Layer One: The Real Economy

At the foundation are actual businesses.

Factories produce goods.

Farmers grow food.

Mines extract minerals.

Shipping companies move products.

Retailers sell to consumers.

This is where real economic activity takes place. The economic machine produces physical goods and services. When you look at the production process for goods, it starts with extraction of basic commodities, these are then processed into real goods, which consumers and other manufacturers can buy. So...

Companies have employees, customers, revenues, expenses, assets and liabilities.

A steel mill produces steel whether or not its share price rises.

A supermarket sells groceries whether or not traders are buying options on its stock.

This first layer creates the wealth upon which everything else depends.

Without layer one, the upper layers could not exist.

Glossary

Real Economy – Economic activity involving the production of goods and services.

Assets – Resources owned by a business that have economic value.

────────────────────────────

3. Layer Two: The Ownership Market

Companies often need capital to expand.

They may therefore issue shares to investors.

When a company first sells shares to the public, it enters the primary market through an Initial Public Offering (IPO).

Investors provide capital to the company.

The company receives the money.

After that, the shares begin trading between investors.

This is known as the secondary market.

Importantly, when investors buy and sell existing shares, the company itself usually receives no money from those transactions.

Ownership simply changes hands.

The share price becomes a constantly updated estimate of what investors believe the business is worth.

Layer two therefore represents claims on productive assets rather than the assets themselves.

Glossary

Primary Market – The market where new securities are issued and sold to investors.

IPO (Initial Public Offering) – The first sale of shares by a private company to the public.

Secondary Market – The market where investors trade existing shares with one another.

────────────────────────────

4. Layer Three: The Derivatives Market

Above the ownership market sits a third layer.

This layer consists of derivatives.

A derivative is a financial contract whose value depends upon another asset.

The underlying asset might be a share, bond, commodity, currency or stock index.

Examples include:

• Futures contracts

• Options contracts

• Swaps

• Structured products

A wheat farmer may use futures to lock in harvest prices.

An airline may hedge fuel costs to stabilize its cost base.

An investor may buy options to speculate on share prices and make money.

Unlike layer two, participants in layer three are often trading exposure rather than ownership.

They may never own the underlying asset at all - they are betting their (possibly borrowed) capital on future share price changes.

The further one moves up the layers, the more finance becomes separated from direct productive activity.

Glossary

Derivative – A financial contract whose value is derived from another asset.

Future – A contract to buy or sell an asset at a specified future date and price.

Option – A contract granting the right, but not the obligation, to buy or sell an asset.

────────────────────────────

5. Why the Layers Matter

The distinction between the three layers matters because each layer behaves differently.

Layer one responds to production, technology, labour and consumer demand.

Layer two responds to expectations about future profits.

Layer three often responds to volatility, interest rates, leverage and speculation.

A factory may be operating normally.

Its shares may fall because investors fear recession.

Options traders may experience even larger gains or losses because derivatives magnify price movements.

The higher the layer, the greater the potential for amplification.

Small changes in the real economy can produce large changes in financial markets.

────────────────────────────

6. When Finance Becomes Larger Than Industry

Now here's the problem. Historically, finance was intended to serve production.

Savings were channelled into businesses that created goods and services.

Over time, however, financial activity has grown much faster than the underlying economy. How can you have claims on assets that are worth more than the assets themselves?

Global derivatives markets are often measured in hundreds of trillions of dollars of notional value, vastly exceeding annual world economic output.

Critics argue that excessive financialisation diverts talent and capital away from productive enterprise.

Supporters argue that derivatives improve liquidity, reduce risk and allow more efficient allocation of capital.

Both arguments contain elements of truth.

The challenge is maintaining a healthy balance between productive activity and financial activity.

────────────────────────────

7. A Useful Analogy

Imagine a large farm.

The farm itself is layer one.

The ownership deeds to the farm are layer two.

Insurance contracts, betting contracts and price agreements linked to the farm are layer three.

The farm grows the crops.

The ownership deeds determine who owns the farm.

The contracts determine who gains or loses money based upon what happens to the farm.

The higher layers can become extremely active even when nothing much changes on down on the farm itself.

That is often what people observe when they say that Wall Street seems disconnected from Main Street.

────────────────────────────

8. Conclusion

The modern financial system can be viewed as a three-storey structure.

The ground floor is the real economy where goods and services are produced.

The first floor is the ownership market where shares and bonds are traded.

The top floor is the derivatives market where contracts are traded based upon the value of assets below.

Each layer serves a purpose.

But the further one moves away from production and towards abstraction, the greater the possibility that financial markets break out a life of their own.

Understanding these three layers provides a useful framework for making sense of modern capitalism, financial bubbles and recurring market crises. 

The size of the layers often resembles a pyramid. The real economy is relatively small but tangible. The ownership market is larger. The derivatives layer can become vastly larger than both, because multiple contracts can be written on the same underlying asset. 

Read More

WHAT IS GLOBALISATION

3 June 2026

Globalisation

The deepening integration of economies, societies and cultures across national borders, driven by trade, investment, technology, migration and the free flow of information. 

History of

More than a process, globalisation is a condition... and one that has been accelerating since the post-war liberalisation of the 1940s, intensifying sharply after 1990 with the opening of China and the collapse of the Soviet bloc.

In practise

At its core, globalisation allows goods, services, capital, labour and ideas to move with fewer frictions across borders. In practice this means supply chains that span continents, financial markets that react in milliseconds to events on the other side of the world, geopolitical cooperation, and cultural products - music, film, food, language, clothes and shopping malls - that diffuse globally with little regard for geography.

Arguments for and against

Proponents argue it raises living standards through comparative advantage (David Ricardo...see below), drives innovation through competition, and binds nations together in webs of mutual dependence that reduce the incentive for conflict. 

Critics counter that the gains are unevenly distributed - concentrating at the top of the income scale and in capital-exporting nations — while the costs fall on workers in industries exposed to low-wage competition, on communities hollowed out by offshoring, and on states that find their policy autonomy constrained by mobile capital and international treaty obligations.

The debate is not simply between winners and losers. It is also about who decides - who are the rule-givers of global integration, and whether those rules are set in the interests of citizens broadly or of the corporations and financial institutions best positioned to exploit them. Who are the rule-takers - developing nations, displaced workers, tax-arbitraged governments.

The developing nations that arrive at the WTO, IMF and World Bank to find the architecture already built, the terms already set, and the price of admission a surrender of the very policy tools - capital controls, industrial subsidy, tariff protection - that the rule-givers themselves used to develop? 

The worker in the Midlands or the Mississippi Delta who was told that comparative advantage would lift all boats, and found instead that his boat had been offshored? 

The sovereign government that discovers its tax base can be arbitraged away by a corporate treasury in Dublin or the Cayman Islands? 

The rule-taking is not incidental to the system. It is the system - the necessary complement to capital liberation, without which the extraction cannot function.

Financialisation

Globalisation's gains have concentrated not simply in wealthy capital-exporting nations but in the financialised rentier class that operates across them. 

The mechanism is capital mobility: while labour remains largely rooted, capital moves freely to wherever returns are highest, giving its owners structural leverage over workers and governments alike. Trade liberalisation opened the markets; capital account liberalisation gave finance the speed and scale to dominate them. 

The result is an economy where the largest returns come not from making things but from owning the flows - intellectual property, financial instruments, platform chokepoints - with profits repatriated to shareholders while wages and tax revenues are competed down across all nations. 

This is not a free trade story. It is a capital liberation story, and the geopolitics follow accordingly.

Intellectual scaffolding

The intellectual scaffolding for this architecture was built in stages. Adam Smith dismantled mercantilist hoarding and established the market as a self-regulating system; David Ricardo gave free trade its mathematical spine through comparative advantage, demonstrating that specialisation and exchange produce mutual gains even between unequal partners; John Stuart Mill refined the terms on which those gains are actually distributed, introducing reciprocal demand and conceding space for infant industry protection where bargaining positions are weak. 

What the classical tradition collectively provided was a principled, internally consistent case for open borders for goods and capital - powerful enough to survive two centuries of political challenge. Yet all three wrote within a moral framework that assumed markets served society, not the reverse. Smith's market was embedded in The Theory of Moral Sentiments; Ricardo was preoccupied with the distribution of income between labour, capital and land; Mill was explicitly a social reformer who believed political economy had to answer to human welfare. 

Confronted with a system in which financial engineers extract rents from productive economies, corporations buy back shares rather than invest in workers and production, and capital rewrites the rules of its own taxation, all three would likely struggle to recognise what passes today for capitalism. 

Production and exchange versus extraction

They theorised an economy of production and exchange. What financialisation built is an economy of extraction - and that is a different thing entirely.

Read More

WHY BIG GOVERNMENT IS SO BIG

4 June 2026

Why Government Grew

Governments did not simply decide to become larger on their own, mre, they grew like Topsy. Expansion was driven by a combination of public demand, economic change, political incentives and historical crises.

Economic Change

In the 19th century, most people lived in rural communities where families, churches, local charities and mutual aid societies provided much of the support needed during illness, unemployment or old age. 

But then as societies industrialised and urbanised, workers moved from country communities to anonymous towns. Their traditional support networks weakened. Large populations became dependent on wage income, aswhere before this families largely met their needs through farming, barter, craftsmanship and local community support. 

The result was a new underclass where unemployment, workplace injury and old-age poverty became more visible social problems.

Major shocks accelerated the process. 

The two World Wars required governments to mobilise entire economies and populations. The Great Depression of the 1930s convinced many citizens that markets alone could not always provide stability or employment. In the UK in 1942, William Beveridge identified "The Five Giants" - the five social evils: poverty, disease, poor education, bad housing and unemployment. Their elimination became the central goal of Britain's post-war welfare state... Voters across much of Europe and North America supported pensions, healthcare, unemployment insurance and public education as protections against future hardship.

Politicians also had incentives to expand government. 

New programmes often created identifiable beneficiaries who supported them, while the costs were spread across the wider population through taxation and borrowing. Once established, programmes developed constituencies that resisted their removal.

Thus big state

Critics argue that government growth went beyond what was strictly necessary, creating bureaucracy, dependency and unsustainable public debts. 

Supporters argue that modern industrial societies could not function without large-scale public provision of healthcare, education, infrastructure and social insurance.

The debate therefore is not whether government should exist, but how much government is necessary and where the balance should lie between the state, the market, families, communities and voluntary institutions.

Welfare State - A system in which government provides social protection such as pensions, healthcare, unemployment benefits and income support.

Social Insurance - Programmes that pool risks across society so that citizens receive support during illness, unemployment, disability or old age.

Bureaucracy - administration for the benefit of those working the process, prioritising compliance over achievement of purpose

Public Choice Theory - The study of how political incentives influence government decisions, often treating politicians and bureaucrats as self-interested actors rather than purely public servants.

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3/6 ETFs FOR ROTATING INTO PHYSICAL ASSETS

2 June 2026

Overview

For four decades capital flowed into financial assets as falling interest rates, rising debt and globalisation inflated stocks, bonds and property. Today the pendulum seems to be swinging back towards the physical economy. 

Gold, energy, industrial metals, agriculture, infrastructure and water all sit at the foundation of modern civilisation, and growing scarcity is forcing investors to take notice. 

This article examines the possible sequence of that rotation between physical asset classes, and explores the ETFs that provide exposure to the tangible assets in those classes.

1. ROTATING FROM FINANCIAL ASSETS INTO PHYSICAL ASSETS

---

For almost four decades investors have lived through an extraordinary era of financial asset inflation.

Falling interest rates, globalisation, expanding debt, and central bank liquidity pushed capital towards stocks, bonds, property and financial engineering. Financial claims multiplied far faster than the growth of the underlying physical economy.

Today that relationship is changing.

A growing number of investors believe we are entering a period where scarcity of physical resources matters more than abundance of financial capital. Energy security, supply chains, demographics, rearmament, reshoring and geopolitical fragmentation are all placing renewed emphasis on tangible assets rather than paper claims.

If this thesis proves correct, capital may continue rotating from financial assets towards the physical foundations of industrial civilisation.

The key question is not whether such a rotation occurs, but in what sequence.

Financial assets – Claims on future cash flows such as shares, bonds and derivatives.

Physical assets – Tangible resources such as energy, metals, farmland and infrastructure.

---

2. PHASE ONE: MONETARY DEFENCE

The first destination is usually the monetary metals gold and silver.

Gold requires no economic growth, no earnings and no productive activity. Its primary function is monetary defence. When investors become concerned about inflation, excessive debt, currency debasement or geopolitical instability, gold often becomes the first refuge.

Historically, gold tends to move before most other commodity sectors because it responds directly to monetary fears.

Silver occupies a unique position. It is both a monetary metal and an industrial metal. Early in a cycle gold often leads. Later, as industrial demand strengthens, silver can outperform.

Mining companies typically lag the initial rise in bullion prices before accelerating as higher commodity prices flow through to profits.

Possible ETF examples include:

• Physical gold funds such as SGLN, GLD, IAU and SGOL

• Gold miner funds such as GDX, GDXJ, AUCP and RING

• Silver funds such as SLV and SIVR.

A common hierarchy is:

Physical gold (SGLN, IAU, GLD)

Senior miners (AUCP, GDX)

Junior miners (GDXJ)

Monetary defence – Preserving purchasing power during periods of financial instability.

Senior miner – A large established producer with multiple operating mines, significant reserves and substantial cash flow.

Junior miner – A smaller producer, developer or explorer with higher growth potential but greater operational and financial risk.

---

3. PHASE TWO: ENERGY BECOMES THE FOCUS

Energy is the master commodity and priority in America's strategy for global hegemony, explaining much of its foreign policy.

In 1971 US spending and inflation were soaring because of the Vietnam and public spending programs. President Nixon left the Bretton Woods system which linked the dollar to gold. But with high inflation and no gold backing, would the world still want to hold dollars? In 1974, Nixon (Kissinger) put it back - not on gold, but on oil. 

The US reached a deal with Saudi Arabia to price oil exclusively in US dollars in return for US military and economic support. Other OPEC nations soon followed. From that point on demand for energy meant global demand for dollars. This was the start of America's "exorbitant privilege".

Every mine, farm, factory, truck, ship and data centre depends upon energy. Rising energy costs eventually spread through the entire economy.

This phase becomes particularly powerful when investors conclude that supply constraints are structural rather than temporary.

Recent tensions around the Strait of Hormuz are illustrating this dynamic. Markets can tolerate cyclical disruptions. They react very differently when critical transport routes appear vulnerable over extended periods.

Oil and gas producers often benefit first. Pipeline operators follow. Uranium has become increasingly important because nuclear energy requires long planning horizons and substantial capital investment.

Unlike many commodities, new uranium supply can take a decade or more to develop, creating the potential for prolonged shortages.

Possible ETF examples include:

• XLE, VDE and IXC for broad energy exposure

• URA and URNM for uranium exposure

Structural shortage – A shortage caused by long-term supply limitations rather than temporary disruptions.

---

4. PHASE THREE: INDUSTRIAL AND STRATEGIC METALS

Once energy pressures begin filtering through the economy, attention often shifts towards industrial metals.

Copper is frequently called the metal of civilisation.

Electric grids, renewable energy systems, electric vehicles, data centres, military equipment and industrial reshoring all require enormous quantities of copper.

Aluminium plays a similar role across transport, aerospace and manufacturing.

Rare earth elements occupy a special category. They are essential for modern electronics, advanced motors, missile guidance systems and defence technologies. Yet production remains highly concentrated geographically, creating strategic vulnerabilities.

As governments pursue both energy transition and military rearmament, demand for these materials may remain robust for years.

Possible ETF examples include:

• AIGI for industrial metals

• COPX for copper miners

• PICK for diversified mining exposure

• REMX for rare earth and strategic metals

Rare earths – A group of strategically important elements used in advanced technologies and defence systems.

---

5. PHASE FOUR: AGRICULTURE AND FERTILISERS

Food inflation tends to arrive later - although as much as half of the world's fertilizer is produced from compounds from the Gulf putting very large numbers of people into food scarcity possibly by autumn this year.

Governments intervene aggressively when food prices rise because food security is politically sensitive.

Nevertheless, agriculture remains heavily dependent on energy and fertilisers.

Nitrogen fertiliser depends largely on natural gas. Phosphate production is concentrated in a small number of countries. Potash supply remains influenced by geopolitical developments involving Ukraine Russia and Belarus.

These dependencies mean agricultural markets can become vulnerable after prolonged energy shocks.

Agricultural commodity funds offer one route for investors, although many rely upon futures contracts and therefore incur roll costs that may reduce long-term returns.

Agribusiness companies and fertiliser producers often provide a more durable route into the sector.

Possible ETF examples include:

• DBA for diversified agricultural commodities

• WEAT and CORN for specific crop exposure

• MOO and VEGI for agribusiness exposure

Roll cost – The cost incurred when futures contracts are repeatedly replaced as they approach expiry.

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6. PHASE FIVE: INFRASTRUCTURE AND WATER

The final stage often involves long-duration real assets.

Water systems, electricity grids, ports, pipelines and transport networks are difficult to replicate and essential to economic activity.

These assets often possess pricing power and inflation linkage. They may therefore attract institutional capital seeking both income and protection against inflation.

Unlike commodity producers, infrastructure assets frequently behave more like inflation-resistant utilities.

Water deserves particular attention because population growth, industrial demand and climate pressures continue increasing its strategic importance.

The grid for demands from AI.

Possible ETF examples include:

• PHO

• FIW

• CGW

Real asset – A physical asset whose value is linked directly to tangible economic activity.

---

7. WHAT ABOUT DEFENCE?

Defence occupies an unusual position.

Unlike energy, agriculture or metals, defence does not directly expand society's productive capacity. However, geopolitical competition is causing many governments to increase military expenditure substantially.

As a result, aerospace and defence companies have become beneficiaries of the current geopolitical environment.

Investors seeking exposure commonly use funds such as ITA or XAR (some non-US brokers and platforms do not offer XAR).

Whether defence spending represents productive investment or resource diversion remains a matter of debate. Economically, resources directed towards defence - like insurance - cannot simultaneously be invested elsewhere.

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8. THE BIGGER PICTURE

The deeper issue is not simply inflation.

It is the possibility that the developed world is moving from an era dominated by financial abundance towards one constrained by physical scarcity.

For years capital flowed disproportionately into financial assets. Debt expanded faster than production. Asset prices rose faster than physical output.

Now the world faces ageing populations, fragmented supply chains, rearmament, energy security concerns and growing competition for strategic resources.

As these trends seem likely to persist, investors may increasingly favour ownership of the physical foundations of the economy rather than claims upon them.

Summing up

To repeat and sum up.

1. Gold as the opening chapter.

Confidence in financial claims is gradually weakening. For forty years investors have trusted: government bonds, bank deposits, property, equities, pension promises.

All are ultimately claims on future economic performance... but gold is different because it is not someone else's liability ie there is no counterparty.

We have seen how as debt rises faster than productive capacity, some investors begin preferring ownership of tangible assets rather than financial promises.

Gold's rise is being driven by four forces that appear to be acting together:

• Continuing fiat currency debasement.

• Central bank diversification away from excessive dollar dependence.

• Geopolitical fragmentation and sanctions risk.

• Growing doubts about the sustainability of debt-based financial systems.

This is the theme of this post: rotation from financial assets towards physical assets. Gold is not simply anticipating inflation, it is signalling a gradual shift in the global monetary order itself.

2. Energy as the catalyst.

Gold responds to doubts about money. Energy responds to shortages in the real economy.

Every farm, factory, mine, ship, aircraft and data centre depends on energy. When energy becomes scarce, the cost of producing and transporting almost everything rises.

This is why energy often acts as the catalyst in the rotation from financial assets to physical assets. Gold may signal the problem, but energy spreads its effects throughout the economy.

3. Industrial Metals, Agriculture, Infrastructure and Water: The Longer Story

Gold protects wealth. Energy powers the economy. But industrial metals, agriculture, infrastructure and water are the foundations upon which civilisation itself depends.

Copper, aluminium and rare earths are essential for electrification, rearmament and industrial production. Agriculture feeds populations. Infrastructure moves goods, power and information. Water sustains every economic activity.

These sectors tend to attract capital later in the cycle because shortages take longer to develop and are often masked by government intervention. Yet they may ultimately prove the most important, because they represent the physical systems that modern societies cannot function without.

4. Defence

ITA — largest and most established.

PPA — broader exposure and less concentrated.

DFNS — best UCITS choice for UK/European investors.

SHLD — focuses on newer defence technologies.

XAR — equal-weighted approach, but not available everywhere.

Glossary - gold

Financial repression - the aim is to reduce the real value of the debt ie in pp terms aka "burn off the debt". Governments achieve this with policies to keep interest rates artificially low. If interest rates can be kept low this helps government pay the interest on their debt and if kept below inflation this reduces the real value in purchasing power terms.

Financial repression is achieved with low interest rates, inflation above interest rates, regulations requiring institutions to hold government bonds - eg stablecoin must be collaterised with U.S treasuries - and limits on capital movement.

Limits on Capital movement

Governments can limit financial freedom by restricting access to foreign currencies, limiting transfers abroad, taxing overseas investments, imposing withdrawal restrictions, requiring institutions to hold government debt, or making it harder to move savings outside the domestic financial system.

The common objective is to keep capital at home and help finance government borrowing at lower cost.

Fiat currency - A currency whose value depends on government authority rather than convertibility into a physical commodity such as gold.

Monetary debasement - A reduction in the purchasing power of money through inflation or excessive creation of currency.

Reserve diversification - Holding a variety of reserve assets rather than concentrating entirely in one currency.

Real interest rate - The interest rate after inflation has been deducted.

Monetary Order - The system of rules, as maintained by institutions and agreements, that determine how money is created, stored, exchanged and trusted within an economy or between nations. Examples include the gold standard, the Bretton Woods system, and today's fiat currency system centred on central banks and money issued by banks, CBs and government treasuries.

A monetary order ultimately answers three questions: What is money? Who controls it? Why do people trust it?

Real burden of debt - The value of debt after allowing for inflation - monetary or financial repression is intended to reduce what govt debt is worth in purchasing-power terms.

Glossary - energy

Master commodity - A commodity whose price influences the cost of producing and transporting almost everything else in the economy.

Catalyst - An event or force that accelerates a larger change already developing beneath the surface.

Energy security - The ability of a nation or economy to obtain reliable and affordable supplies of energy.

Glossary - Metals, Ag, Infrastructure and Water

Industrial metals - Metals such as copper and aluminium that are essential for construction, manufacturing and energy systems.

Infrastructure - The physical networks, such as grids, pipelines, ports and transport systems, that support economic activity.

Real economy - The production and consumption of actual goods and services, as opposed to financial transactions and asset trading.

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REFERENCES

SGLN

SPDR Gold Shares (GLD)

iShares Gold Trust (IAU)

VanEck Gold Miners ETF (GDX)

AUCP

Energy Select Sector SPDR Fund (XLE)

Global X Uranium ETF (URA)

AIGI

Global X Copper Miners ETF (COPX)

Invesco DB Agriculture Fund (DBA)

VanEck Agribusiness ETF (MOO)

Invesco Water Resources ETF (PHO)

iShares U.S. Aerospace & Defense ETF (ITA)

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