One week / one topic: Weathervanes

What happened?

It. Just. Never. Stops.

War, inflation, AI-induced extinction risk… but also record profits, a history-making capex boom, massive wealth creation.

On balance, markets are grappling with the possibility of a less benign regime characterized by sticky inflation, structurally higher bond yields, and a maturing AI boom – with Middle East-driven oil shocks acting as an additional inflationary tail risk.

Surprise, surprise – the implications are showing up in asset prices of all stripes.

Negative, for long-duration bonds:

Challenging, for expensive growth equities:

Supportive, for energy and commodity-linked assets:

From an asset-allocation perspective, the most striking observation is that almost every major theme ultimately circles back to the same question: are real and nominal discount rates settling at a higher equilibrium than investors became accustomed to during the 2010s?

That appears to be the market's central debate right now, and at some point, it will be resolved.

It will, of course, also be obvious in hindsight… But what to do in the meantime?

Our observations

• Fundamentals: If the debate is really around where rates will eventually settle, nobody has the answer…

  The current oil-driven inflation is precisely the kind that central banks can’t do much to address directly, as you can’t print oil.

• Price action: Bonds and equities continue to largely rise and fall together, with either higher energy prices or AI-weakness as the negative culprits.

  We haven’t seen a ‘classic’ growth-scare in a while, so the portfolio insurance properties of government bonds have remained untested for a long time. What’s your belief?

• Investor beliefs: ‘Extreme’ short bonds positions sit awkwardly next to an equity market that might have just started to question the ‘AI boom’ story.

  Is this conviction, or crowding? And what are the implications either way?

So what?

The really uncomfortable thing about a discount-rate regime change is that it doesn’t announce itself.

There is no single day or TV headline confirming that the market has decided that the 2010s are properly, finally over.

Instead, you get a run of weeks like this one, where every story – central banks, oil, AI capex – morphs into a single overarching narrative which can impact all assets.

If markets are genuinely re-anchoring the long end higher, you would assume that long-dated bonds have indeed the most to suffer.

Unfortunately, the value anchor is indeed unknowable and – looking at total returns of long-dated US Treasuries – they don’t look obviously oversold.

Carry on, then… with caution.

Mood music: John Mayer – Belief (live)

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.