The market is not the story – the 30-year treasury is

A better month for markets, investors have bought the dip after July’s tech correction, but not all the damage has been undone.

This is not the story though. the real news is rising treasury yields.  

Long treasury yields reached the highest levels in 15-20 years across all major markets.  The Treasury Secretary Scott Bessent intervened mid-month to bring down long treasury yields, which he did successfully, but it also served to weaken the dollar. To the gold market, it was the “smoking gun”, proving the dollar debasement trade is on. The US treasury will control interest rates to manage debt costs. This will have the corollary of weakening the dollar. The response of gold was emphatic, retracing five months of downward drift in 4 weeks.  Gold is back above $4,600. 

The month’s top performers reflect this turn around with Gold-linked funds back dominating the top 10. 

It is noteworthy that as yields have risen, gold, contrary to popular wisdom, has risen too.  Normally it is the opposite, fund managers sell gold in favour of treasuries which have a yield! 

The best performers over the last 4 weeks

Inflation

Alongside interest rates, inflation is the other big story in the month, overshadowing stocks.  The developments in the Gulf of Hormuz have not led to a resolution.  President Trump threatened D-Day on the 21st, but oil prices responded hopefully a week later on hopes of a rapprochement. 

The longer-term impacts of disruption in the Gulf and Russia on oil and grain are yet to be felt: US farmers are losing money for the sixth year in a row on “major row crops” as bad weather and doubling diesel and fertiliser prices hit. 

LNG prices are also going up as European inventories are at low levels. 

A sobering outlook for 2027. 

Won’t tech save us all? Alas, the numbers are not what they seem

Nvidia published analyst-beating results for the July quarter end on the 26th, but this is one of relatively few tech stories this month, it is difficult to keep hoping for continuing good news from the tech sector and the tone of the press is becoming increasingly sceptical.  Arguments that the market is not expensive are predicated on treating one-off revaluation gains on stock holdings as continuing earnings.  

If we ignore these the S&P is trading on 24X not 16X.  If SpaceX, OpenAI etc. don’t revalue up next year, then 15% of S&P earnings will disappear at a stroke. 

There is the further question of where will AI earnings come from? Anthropic is promoting itself on having a total addressable market (“TAM”) of $30tn.  What the company does not say is that that represents 50% of the global annual wage bill. The job destruction from AI is already happening. 

There is also a potential debt crunch ahead for OpenAI in particular. OpenAI will, if it meets its own forecasts, have to raise $132Bn in 2027 to cover contracted data centre lease costs and purchase commitments. The number goes up 2028. This doesn’t include operating costs. Write-downs of investments in OpenAI and delaying/mothballing of data centres will hit earnings at the hyperscalers who have funded them.  There is over $2Tn of compute contracts on the balance sheets of the data centre providers.  If this is materially impaired, it will be the next nail in the coffin of private credit, already systemically, painfully exposed to leveraged loans to SAAS companies being damaged by AI. The impact on rental costs for data centre will be catastrophic. Could it be as bad as the COVID crisis was for container ship leasing rates?  Rates fell from $4,000 to ship a container form Asia to Europe to $400.  One of the world’s biggest container shipping lines went bust.  Could the stock of companies like Coreweave and Nebius go to Zero? 

Is there any good news ahead from tech? Email me if you find any. 

Our portfolios

So how have the portfolios performed?

The strategy has had a better month, but we have underperformed the SWDA quite comprehensively. Our portfolios are not very diversified, following the momentum which has become more concentrated in a small area of tech and tech-adjacent themes, they have all done badly. Although Tech and Asia-tech have recovered, they have not recouped all their losses.

We have missed out on the stability coming from the broader exposure to US markets and those geographies that mainstream investors are rotating into to reduce tech exposure.

Once again, perhaps what we have done is to show that in the longer run, rather than a high-risk strategy like momentum, were we normal investors, we would be better served by leaving a substantial piece of our portfolios in SWDA! Winning the Losers game (to quote the author Charles D. Ellis)!

We have now passed the second anniversary of the experiment, next month merits a review of the first 24 months of “trading”. Was it worth the trouble to not be in SWDA? We shall see.

Momentum in August and a new portfolio Twenty-eight

If we look at the momentum over the last four weeks, then the ranking would be:

It is difficult to find an enduring theme in the data and portfolios we’ve been following. However, we at least will not find it difficult to make a diversified portfolio from the top four themes.

This month’s Positive momentum portfolios