I’m watching one date on the calendar more closely than anything else right now: August 27–29, when Fed Chair Kevin Warsh delivers his first Jackson Hole address since taking over from Jerome Powell in May. A slight hint of hawkishness there could force a serious rethink for a lot of investors who, in my view, are still positioned for continuity — an accommodative Fed and an unbroken AI/data-center trade. It’s worth remembering that Warsh has already made a point of withholding forward guidance and that his committee has flagged the possibility of a hike, not a cut, to counter the inflation spike coming out of the West Asia conflict. That is not the backdrop a market priced for calm usually gets.
One data point that sums up how one-sided this positioning has become: the most recent round of large-fund portfolio disclosures showed a decisive pivot deeper into AI infrastructure — data-center operators, cloud capex plays, and chip-adjacent names — even as some of last cycle’s semiconductor favorites were being sold down. When funds of that size are still adding to a single theme this late in the cycle, it tells me positioning risk, not conviction, is doing a lot of the buying.
Zoom out, and the bond market is telling a simpler story: something has to give. Either asset prices crash and deflation sets in, or a large, coordinated QE program gets launched to buy bonds back down. It’s worth remembering that as recently as five years ago, close to $18 trillion of developed-market long-dated government debt traded at a negative yield. We have travelled a very long way from that world.
The 30-year US Treasury yield touched 5.31% this month — its highest level since June 2003. Japan’s 30-year is at a historical high of its own. A huge cohort of fund managers across the US, Europe, and Japan have simply never operated in a 4.0–5.5% long-yield world, and by my base case, they will not like what the history books tell them about what happens next. Savers, endowments, pension funds, and insurers are all searching for a light at the end of the tunnel. The argument that high inflation lowers the real cost of that debt offers savers little comfort — though fiscal policymakers will certainly take what relief they can get. Financing the fiscal profligacy unleashed since Covid was always going to get harder from here; it is now becoming a genuine strain.
The global financial crisis was met by a coordinated G-20 response that helped prevent a repeat of 1929. I don’t see that same coordination available today. The current state of US relations with the rest of the G-20 is not exactly fertile ground for a joint monetary-and-fiscal rescue, should markets freeze up again.
The optimist’s scenario
By my read, a genuinely benign outcome from here would require all five of the following — and that’s a demanding list:
· an immediate cessation of hostilities in West Asia, with a full US withdrawal from the Strait of Hormuz and a resulting fall in energy prices;
· an end to the recurring tariff uncertainty out of the US, freeing up global trade;
· a meaningful, coordinated bond-buying program (QE) from the Fed, ECB, and BoJ together to bring yields down;
· a negotiated settlement between Russia and Ukraine, easing the tension in Europe; and
· an orderly, controlled unwind of the overheated AI/data-center trade.
My base case
A more realistic outcome, in my view, looks like this:
· a material correction in asset prices, led by a disorderly unwind in the AI/data-center trade, followed by a fragmented (not coordinated) QE response once the damage is done;
· continued stalemate in both West Asia and Ukraine; and
· elevated energy prices — Brent averaging around $85/bbl — for at least the next couple of quarters, before demand destruction and alternative shipping routes ease the supply constraint. That figure isn’t a contrarian call on my part; it’s roughly where the EIA’s own outlook already sits, which only adds to my conviction here.
Notice the sequencing in my base case: I’m not expecting central banks to ease into live, war-driven inflation out of choice. I expect them to be forced into it — a crisis-triggered QE that follows a disorderly correction, not one that pre-empts it. That’s an important distinction, because it means the path to easier money likely runs through a genuine drawdown first, not around one.
How to navigate through this
A disorderly correction in US/global AI names would hit Indian equities too. My preference into this kind of setup remains a larger allocation to cash and short-duration debt.
My best trade for the next six months is unglamorous: hold cash, be patient, and go all-in only when the sharp correction actually arrives and the world around you looks and feels like the apocalypse.