Hello my friends. Today is August 1st. Wow, it's already August and this is Markets Weekly. So the last the big news the past week of course was Kevin's meeting. It was a disaster. But we also had a few things smaller things to talk about. So today first let's talk about the what I think of as a deadcat bounce in the AI trade. All right, starting with the AI trade. So, over the past couple weeks, we've seen a dramatic dramatic implosion in the AI trade. Of course, the vanguard of this is the COP index, which basically imploded, I think down about 40% in just a month. However, though, over the past few weeks, we've seen a rekindling of the AI trade. Coal speed was up double digits. you had the memory darlings up I think almost 20% so in a single day now is the AI trade back on are we just going to go up to the races so that is definitely a possibility and you can see that playing into the major indexes in the US whereas the major indexes regain their 50-day moving average but again thinking about the coast as the leader if you if you look at a you know zoom out a bit you can see that even though there's been a very strong rebound this past week that that is kind of a very large tumble, right? And it's it's it's hard to look at this and come away with anything other than the impression that you know this is probably over. Again, think back to what happened to silver earlier in the week. It's not about fundamentals or whatever you think fundamentals are. It's always about momentum and leverage. Like looking at the memory companies, they're still really great companies, still making a lot of money, still have great outlooks. But again, actually over a million retail speculators just levering up, buying it, pushing it higher. And as we know now, many of them got wiped out. And when you're wiped out, you kind of can't come back, right? I'm sure you'd like to come back, but you lose a lot of money and maybe you're not able to buy as much and maybe you are a little bit more cautious about buying again. In addition, you have to think about all these real speculators that bought maybe 40% higher and there's a lot of them, right? And maybe they are scared, maybe they want to get out. And so, you're going to have a lot of people who bought high and who are going to try to exit the moment that they have the chance. So, just psychologically, I think once you have these big big moves lower, it's really difficult to say anything, but it's probably over again. Prices are supply and demand. People buy for many reasons. There are actually are some people who buy because of PE or or whatnot. But overwhelmingly in this context, it's just going to be momentum and leverage. And I think a lot of those buyers are going to be pushed out. now the big interesting news last week of course was we had Leopold's situational awareness hedge fund basically get liquidated. So Leo is obviously a genius. he graduated top of his class at Columbia at 19. So obviously Genius went on to work in OpenAI and then eventually started his own hedge fund. And I think we mentioned him in an episode a few a few months ago maybe last year whereas it was kind of a sign of the times where a early 20some person with no investing experience could raise a multi-billion dollar fund which he did. And then he went on to according to reporting highly levered up 400% leverage and basically pile into semiconductors and all sorts of AI stuff and that probably contributed to the upward rise. But of course when you have such a big implosion it's not just Korean speculators get liquidated but also very fancy American young speculators that get liquidated as well. And you have to think that LEO is probably just the tip of the iceberg. there are going to be many many people retail investors in the US and probably a whole source of other smaller funds that are in the same situation. So this is significant damage. some people are saying this is a liquidation event now all the force selling is gone and we can pile back in and that could be and I could be totally wrong. We just go up to alltime highs. but just looking at the tape, you know, it kind of seems like bare market behavior, you know, such a huge huge aggressive rally where everyone who missed it tries to pile in only to forget that not understand that the magic is over.

All right. The next thing I want to talk about is what was the next? Oh, yes, of course. So, we talked about last week how it seemed like the Iran war might escalate on Tuesday, last Tuesday and BB met with Trump and apparently he had a great meeting and now Friday after market close the president is announcing that he's going to strike Iran hard and potentially Israel is going to come back in and they're going to strike Iran and not this time not just on military targets but also economic targets as well. Now, a big change in the world in the war has been that now it seems like it's not just tit for tat. We saw Iran take the initiative and actually just openly target US bases in the region and a lot of US bases have been moving further and further away from Iran and more US military assets are being stationed in Israel which is farther from Iran and much safer. Now recall one of the demands from Iran was for the US to vacate its military bases from the Gulf which are obviously just kind of outposts to try to contain Iran. So as of this morning, Saturday, it doesn't seem the attacks have happened, but it looks like they are going to happen. Now, one of the interesting things in the reporting is that the president seems to be emphasizing that, you know, this is just going to be a few days, and there was overt concern about the financial markets. Now, you want to fight a war, but as we know from the past, you don't want any US soldiers to die. And also, you don't want the financial markets to go down. And if these are your two constraints, you just need to go home. Like you're not going to win. Full stop. You're going to lose badly because, you know, you're trying to inflict significant damage on another country, but you don't want to pay any pain at all. Not even wanting your stock market to go down. So obviously, you don't have the endurance and you don't have the willingness to have any meaningful confrontation, whereas the other side does. So again, if this happens, I fully expect this to be another catastrophe and the president to basically capitulate and have to give an even more embarrassing memorandum of understanding in favor of Iran. Now the risk here of course is that maybe Iran doesn't let you go so easily. So maybe they just it's not just you go and attack someone and then they attack you back. What if they this time just take the initiative because as we know at the moment oil stock prices are low and although crude oil is still only $90 and it could go higher that's not really what we consume. Well, we consume our refined products. And if you look at prices like gasoline, for example, looking at gasoline futures, they're actually quite elevated. And this is because that we have constraints on refinery side. You have Ukraine, of course, blowing up Russian refineries. And you also have attacks on Gulf refineries by the Houthis and by Iran as well. So that's going to be limiting global supply of refined products and that is actually what people consume. And so that could be impacting inflation and actually causes much more economic damage. So oil could be lower than it otherwise would simply because the actual demand for crude oil is refineries and the refineries are bottlenecked and this is also of course leading to upward continued upward pressure in interest rates. Now, if you look at the 10 year and the third year, they just keep surging higher and higher. And my observation is that it's very sensitive to crude oil right now. So, it's not just what Kevin said or did not say at the Fed meeting, but the higher oil prices are pushing up global yields and that is eventually going to weigh on financial markets and more importantly, it's going to weigh on real economic activity. I mean, think about housing. Mortgage rates as of last week are the highest it's been in a week. So that's definitely taking a toll on the US economy and puts constraints on how far this escalation can go. So one path for Iran to protect itself is actually to cause as much economic damage as it can so that Trump loses the midterms badly and a new Congress comes in and defunds the war. And that is actually how the Vietnam War ended as well. So that is a theory of victory for the Iranians and it looks like it's something that they could potentially pursue. So I think there's is a lot more turmoil to come in the coming weeks.

Um third thing we'll talk about again a lot of small topics this week is of course intervention in the yen. Now, if you look at the Japanese yen, you'll notice that it's basically been on a one-way street for the past several months, right? The yen just keeps depreciating. And a lot of that is just due to the stance of monetary policy. In Japan, inflation is comfortably above 2% and yet the central bank has been very slow to raise interest rates where interest rates are still only about 1%. And that's been leading to again higher Japanese bond yields as bond investors maybe price in more risk premium for inflation and also of course a much weaker currency. Now, you know, potentially the Bank of Japan is not doing a good job. Potentially, I mean, honestly, it seems like he might potentially be a little bit maybe he should retire. But I also hear that there is political concerns in that the government there, Prime Minister Takichi is doesn't let the Bank of Japan raise rates, right? So we we worry about political control over monetary policy in the US, but it's the same everywhere and not familiar with Japanese politics, but that's what I read and that sounds totally reasonable to me. And so if that's the case, again, if you can't address the root cause of why your currency is depreciating, all you have is intervention. And the Jamaica of Japan and the Ministry of Finance have been intervening in the market periodically over the past couple years. But as you can see from this chart, it doesn't really work. It buys you time, but it doesn't address the root problem. And the root problem is interest rate differentials. And honestly, should the Fed continue to hike, which they potentially could, and the market continued to push up 10-year yield, 30-year yield, you know, that interest rate differential is going to get worse. But in any case, we intervene this past week. We it was actually done, I think, multiple times, and you have a pretty pretty big strengthening of the yen by, you know, a few figures. This time it wasn't just the Ministry of Finance plus the Bank of Japan. But as we know from apparently some reporter took a snapshot of Bessant's notes. Apparently the US intervened as well. We have reporting that suggests that US maybe bought 105 billion as well. Now the US Treasury actually does have some foreign currency. In this case I think they believe they sold euro and bought Japanese yen but it's a very small portfolio. I think there's maybe I don't know 30 billion or something like that. So, it really doesn't have that much firepower to to intervene. Again, they can always find ways. We do have the Fed that can print dollars, but I I think there's some more maneuver to be able to get that. What the Treasury has direct control over is its exchange stabilization fund. So, that's again not that much money. And so, they apparently they used it some of it and I think this will buy time, but again, it doesn't address the root problem. Now, one thing I'll I'll note though is that some people are saying that, you know, this is done because they want to protect the bond market because they don't want the Japanese selling treasuries to get dollars to defend their currency. so I I don't think that's true at all actually. So Japanese have enormous amount of dollars. They have about a trillion dollars in sovereign in foreign exchange. Not all of it is dollars, but most of it is. But a lot of it is actually held in overnight money parked at the foreign report pool. So that's like a checking account for foreign central banks. And if you are a foreign central bank, you don't actually buy, you don't actually hold your dollar reserves in 10 years or 30 years. It's largely overwhelmingly held in the front end to the belly. So basically parts of the yield curve where there's strong demand that are liquid, not a lot of interest rate risk. So, you know, there's really not much of a risk for actually any foreign central bank selling treasuries to disrupt the treasury market simply because they don't really hold treasuries in the more I think sensitive sectors like the 10 year and the 30-year. So, I'm not really sure why Besson wanted to help out Japan. It could be that they, you know, do they also perceive the ongoing rapid depreciation of the yen to be a problem. Maybe it's just a favor or something like that. But in any case, it's obviously not going to work. And so, we'll see what happens. Maybe, no, maybe some big change in the financial markets could stir on some kind of, riskoff trade. Now, historically, strengthening yen has been correlated with riskoff. That hasn't really been the case in many, actually, maybe a couple years, right? We did have a big carry trade blow up a couple years ago, whereas we had a massive strengthening of the yen corresponding with a decline in risk assets, but I think the sentiment is that that trade is really not as big as it used to be. And just by looking at the market, you can see that the yen is kind of decoupled from from everything. It just kind of goes progressively weaker. So higher JPY. So, I'm not sure that connection between a strengthening and with risk assets is as strong as it used to be.

All right. So, the last topic we'll talk about today is this very interesting report from Kobe from the New York Times reporting apparently that Kevin would like to have fewer Fed meetings. According to law, the Fed only needs to have four meetings a year, although it's been doing eight a year. And this is consistent with Kevin's plan that he would like to have less communication. Again, no dot plot next year. Probably maybe maybe briefer press conferences, maybe no press conferences. And again, I did not expect this. Maybe he would just cut it down to fewer meetings. Doesn't have to be four. Maybe it could be six. Maybe it could be seven, but it could be four. Again, this is the whole point of course is to try to have less Fed communication. Now, from his based on his Fred press conference, the theory seems to be that we should let the market decide interest rates rather than the Fed. And honestly guys, that's just so stupid. It's just ridiculous. And again, it concerns me because it comes back to Kevin's ideological approach to the world. Whereas he his understanding of the world comes from textbooks and ideology and cannot be updated from how the world actually works. A lot of magical thinking. So this is magical thinking because the markets price treasury yields based on the expected path of Fed policy. All right. So, not all the way to like the 30-year, 20-year, but let's say from let's say from overnight to to the 10-year most certainly. So, say you're investor, what should you pay for a 5-year Treasury yield? Well, you know, the way that you're going to price this is where you think the path of the overnight interest rate, which the Fed firmly controls, will be over the next 5 years, right? your opportunity cost of buying, let's say, a five-year Treasury is to just continue to lend it to the Fed for overnight for a period of five years. And so, it's always going to be what you think the Fed will do over the past five years. Now, you can look at data, inflation, employment, and so forth. And you can have your view of what the Fed should do, what interest rates would be, whether or not, you know, the Fed will value inflation, whether or not inflation is transitory, whether or not the Fed will value employment or inflation or so forth. But again, you don't set interest rates. It's never about what you think the Fed should do. Actually, it's another about whether or not it's what the Fed is doing is right or not. It's what the Fed you think the Fed will actually do. Okay? So, it's not what you think is right, but what you think the Fed will do because it's not you that has the tools to set interest rates. It's the Fed that has the tools to set interest rates. So, pricing Treasury yields, it's always about what the Fed thinks. It's never about what you think about the data. So, this is some seemingly some maybe some kind of, you know, Kevin has a background in right-wing think tanks. Maybe it's some free market mumbo jumbo which is true in some aspects but when it comes to interest rates in our monetary system where the Fed controls the overnight rate no that that's not how the market works. Interest rate markets a big input to it is how the Fed will react because the Fed has the tools. So this is just not correct thinking. Now in any case if you were to reduce meetings I think you would have well okay what if you reduce meetings and have more emergency meetings. Okay well maybe that balances out but if you were to reduce meetings then you have less opportunities to change interest rates. Now that means that well when you do change interest rates maybe you have to move by bigger increments right so maybe you'll have in higher interest rate volatility in in the front end because let's say that the Fed usually would have gone 25 25 incrementally but because it's meeting less maybe sometimes it would have to go 50 so maybe sometimes it have to go 75 now in the past let's say in the Greenspan era sometimes they did go 75 and maybe Kevin grew up in that era and he is nostalgic about it and so maybe that's what he's trying to trying to bring us back towards. So this is something that I guess we'll see if the FOC decides to do that but I think this is something that suggests greater interest rate volatility. Now it's possible that he could just have more emergency meetings. So unscheduled meetings such that you could still have steady 25 25 but my sense is that these unscheduled meetings really only happening happen during crisis and we don't have have crises all that often. So if you just have a run-of-the-mill let's say hiking cycle and so forth, you're probably not going to have emergency meetings. So again, this is going to be more volatility in the markets and we'll see how things digest. I think interest rates are probably going to all things equal because you have less more volatility and less certainty that calls for a higher risk premium and so that actually pushes I think the entire curve a little bit higher. All right, so that's all I prepared for today. Thanks so much for tuning in. Talk to you guys next week.