Watching flows helps us to look for influences other than fundamentals. We are watching Money Market inflows show a sign of slowing and reversing, the trader flows into the Magnificent seven (the only part of the market with inflows) doing something similar - also demonstrated in the long NASDAQ short S&P 500 flow and the trade to switch from EM to EM excluding China also appears to have stabilised. The first stop for those money market funds we suspect will be longer dated bonds, while the second will be shorter duration equities with strong cash flows and higher yields. While the world sits in cash it is worth doing some research as to where to go, when, not if, they start to deploy. Here too, flows can help us with our searching.

The usual positive seasonality for q4 has not appeared and we suspect that mark to market losses in bond markets are to blame for distressed selling. There are strong echoes of the 1994 bond rout, coincidentally the last time Japan featured heavily in bond market selling. De-globalisation of capital flows is leading to a lack of 'eastern savers' wanting to buy western financial assets as well as geo-political de-risking by the west in eastern capital markets - especially China. Currently, both sides are selling, but nobody is buying. Instead, everyone is in US$ cash. Deliberately or otherwise, the Fed is creating a liquidity crisis.

The real legacy of Covid is not so much inflation per se as the fact that it ended the follies of QE and, in Japan, Zero Interest Rate Policies. Not only did these policies achieve almost the very opposite of what they set out to do, but they also caused huge distortions in capital markets. Now that they are unwinding they are causing aftershocks across markets, particularly in US long bonds and we suspect that as Japan awakes from a three decade self induced coma, that the necessary reboot of the Japanese financial sector is going to continue to cause a lot of pain.

Recency Bias makes us focus on what just happened and ignore even recent history, while the end of history illusion makes us think that there will be less change in the next five years than in the last five. A quick recap on the last 5 Q4 periods reminds us of the dramatic changes we have seen, and while the next 5 years may not be as dramatic, we would see these changes as pressaging further changes on paths now revealed, be it BRICS+ disrupting the financial system, AI and working from home disrupting the service sector globally or just the retsoration of the proper price of money and liquidity through the end of QE.

Two steps forward, one (or two) step(s) back. After a strong July, when markets seemed to broaden out from the narrow concentration on mega cap tech stocks, investors were once again frustrated to see most stocks and markets give everything back in August, leaving many sectors, stocks and themes once again flat for the year. We believe that the proximate cause of the weakness in August was the late July bond sell off from Japan that spilled across to trigger trading stop losses in equity markets at a time when many were closing books for the holidays. Meanwhile, the high returns available on risk free $ cash are helping the dollar while continuing to impose something of a liquidity drought across other markets, including further out on the bond curve and many medium term risk managers are happy to delay the decision on searching for real returns in equities. China has dominated the narrative in August, but the long term investors need to start to think of the implications of the new BRICS 11 grouping, not least on account of the dominance of resource rich nations and the Sovereign Wealth funds they support...and how they are going to spend that money going forward.