Higher for Longer

Last week the US Federal Reserve (the Fed) did what the market had already priced in – it raised the federal funds rate by 25 basis points, its first hike since 2023, and left the door open for at least one more move before the year is out. Two days later the Bank of Japan (BoJ) followed with its own 25bps increase, taking its policy rate to 1.25%, the second hike of the year, and the highest level Japan has seen since 1995. Earlier in the month, the European Central Bank (ECB) had already lifted its deposit rate by 25 basis points to 2.50%, its second increase this year. Add to this list the central banks of Australia, New Zealand, South Korea, South Africa, Norway and Denmark, all of whom have raised rates in the past three months, and a pattern is hard to miss. The developed world’s four-year experiment with rate cuts has stalled, and in several places, reversed.

To me five things are clear from this trend –

1. Supply-side stickiness is real, and it will not resolve on its own

The inflation we are seeing today is not the demand-driven inflation of 2021-22. It is coming from the supply side – erratic weather hitting agricultural output, and energy prices kept high by the conflicts in West Asia and Ukraine, which have damaged infrastructure, disrupted shipping lanes and pushed up transportation costs. That second-round effect is now visible in user industries such as chemicals, fertilizers and metals, where input costs have simply nowhere to hide. Besides, tariff actions taken through the year in several large economies are adding a second supply shock on top of the energy one, which makes the case for stickiness even stronger than it first appears.

2. The AI deflation story is being asked to do more work than it can

It is tempting to lean on artificial intelligence as the great disinflationary force that offsets everything else. The evidence so far is much narrower than that – lower prices in IT services, and wage pressure easing for some categories of skilled labour. AI is not a one-sided deflationary force. The capital being poured into data centers, chips and the power grid to run all of this is itself adding to demand in construction, electricity and industrial metals – the same industries already feeling the energy squeeze. Netting the two effects out, I would not count on AI to meaningfully soften the inflation picture in the next year or two. If anything, the investment boom around it is currently a mild net contributor to price pressure, not a relief valve.

3. “Higher for longer” is now the working assumption, not a tail risk

Four major central banks hiking within weeks of each other, ten-year US treasury yields pushing back above 5%, and rate-setters at every one of these institutions choosing to keep their options open rather than signal a pause – this is about as clear a signal as markets get. The cost of the capital regime the world built its valuations on through 2020-24 is not coming back in a hurry.

4. Emerging markets face a harder version of this problem, but the response is not automatic

The pressure on economies like India to defend their currencies and retain capital is genuine. But it does not translate mechanically into higher policy rates. The RBI’s own conduct this year is the evidence – it has held the repo rate at 5.25% through a period when the rupee slid to record lows near 97 to the dollar, choosing instead to lean on FCNR(B) inflows, external commercial borrowing windows and direct market intervention rather than touch the policy rate. That is a rational choice: a defensive hike raises borrowing costs across the whole economy at a time when growth is already being marked down. The emerging market central banks are being forced to spend more of their other tools – reserves, swap lines, capital account measures – to buy themselves room before they are cornered into raising rates outright.

5. The gold trade

Gold touched an all-time high near $5,600 an ounce in January this year, driven by – (a) central banks diversifying out of dollar assets after the freezing of Russian reserves in 2022, and (b) a market pricing in lower yields ahead. Since then, as the rate-cutting narrative has been replaced by an actual hiking cycle, gold has already given back a meaningful part of that rally, trading closer to $4,400 in recent weeks. The “higher for longer” leg of the gold trade is not something to watch for next year – it is unwinding in real time, even as the “diversify away from the dollar” leg continues to bring in steady central bank demand and keeps a floor under prices well above where they traded before 2022.

Will share my thoughts on what it means for investment strategy later this week.

 

Cash, Patience and the Apocalypse Trade

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.

The balloon could pop faster than the market expects

A few weeks ago, I wrote about a group of people standing in a dark room, each holding a pin, none of them knowing whose hand would find the balloon first. I think I can now name one of the pins. It is called a rate hike.

This is not a small, one-line risk. It sits at the intersection of everything I have been tracking this month: India’s stickier-than-expected inflation, America’s own hawkish undertone, a US political calendar that could remove the last source of pressure on the Fed to go easy, and an AI investment cycle that has been priced for perfection. Put these together, and I think the probability of a rate-hike-triggered correction is higher than most portfolios are prepared for — even though I continue to believe that the longer-run destination for global monetary policy is easier money, not tighter.

Inflation is not cooling the way we hoped

India: a stall, not a reversal

July’s CPI print came in at 4.45% year-on-year, above where most estimates had it pegged, and above June’s 4.38%. Food inflation is running hot at 5.5%, durable food inflation has climbed to 5.1%, and even core inflation — stripping out food and fuel — is holding near 3.9%, with the ‘super-core’ reading (core excluding gold and silver) creeping up to 2.5%. None of these numbers is alarming in isolation. Together, they tell me the disinflation trend of the past year has stalled, not reversed, but stalled at a level still uncomfortably close to the upper end of the RBI’s comfort zone.

My own base case is FY27 CPI inflation averaging around 5%, with a genuine risk of topping 5.5% if the monsoon turns uneven in its closing weeks or crude prices find a bid again. On that math, it would not be unreasonable to expect ~50bps of cumulative tightening in 2HFY27 — a meaningful shift from a market that has spent most of this year debating rate cuts, not hikes.

The US: a hawkish Fed the market isn’t pricing in

The view that the Federal Reserve may hike interest rates by 50-75bps points before this year is out is strengthening gradually, against a Fed Funds futures market that is currently pricing in barely 25 basis points of hikes. That is a large gap between what I think is coming and what the market has actually priced in — and gaps of that size tend to close abruptly, not gradually, once the data forces the market to catch up.

In my view, successful policy needs many conditions to align at once — growth, inflation, credibility, fiscal discipline — while failure can come from any single one going wrong. Right now, resilient growth and sticky inflation are both arguing against the rate cuts the market has been hoping for, which is why my own reading of US rates and the dollar stays firmly on the hawkish side for the next two to three quarters, not the dovish one.

The political overlay nobody wants to say out loud

If the Republicans lose ground in this year’s US midterm elections, the Trump administration effectively becomes a lame-duck presidency for its remaining term. A weakened White House has historically had less leverage — political or otherwise — to lean on the Federal Reserve to keep money cheap. Whatever informal pressure exists today to ease policy in an election-conscious environment would diminish sharply once the electoral calculus behind such pressure disappears.

That matters because a Fed chair with a hawkish reputation, freed from midterm-related political pressure, has every incentive to hold the line on rates for longer than the market currently expects — partly on principle, partly to protect their own legacy. The direction of travel over the medium term may still be lower rates, for reasons I laid out a few weeks ago, but the road between here and there could run through more tightening first, not less.

Why a hike could pop the AI balloon faster than anyone expects

This is where the rate-hike story stops being an isolated macro debate and starts becoming a market-structure problem. Ruchir Sharma and Michael Burry, among others, have separately warned that if US rates move higher from here, the unwind of AI-linked positioning could be sharper and faster than currently priced. I think the underlying numbers explain why that warning has teeth. The RIC report by BoFA strategist digs deeper:

●    Capex without proof of productivity. AI capital expenditure is sitting at record highs relative to sales, while economy-wide productivity growth is running at just about 2.2% — barely above the roughly 2% average this economy has managed since 1987. By my own read, AI’s actual contribution to that number is only about 0.1 percentage point a year, a fraction of what the dot-com capex cycle delivered relative to its own spending. That is a very large bet resting on a very thin evidence base.

●    A crowded, one-way trade. Fund manager surveys consistently show semiconductors as the single most crowded trade in the market, cited by well over three-quarters of respondents, even after brief rotations toward defensives. Crowded trades unwind violently precisely because everyone is trying to exit through the same door at the same time.

●    Concentration risk in the index itself. The ten largest companies in the US market now represent more than $24 trillion, or roughly a third of the broad index. When an index is this concentrated, a reversal in mega-cap leadership does not stay contained to a sector — it drags the benchmark, and every fund benchmarked to it, down with it.

●    A discount-rate problem. AI and other long-duration growth stocks are priced on cash flows expected many years out. Higher rates mechanically shrink the present value of those distant cash flows more than they shrink the value of a bank or an energy company earning cash today. A rate hike does not just raise the cost of capital for AI companies — it re-prices the entire long-duration growth complex at once.

None of this means AI itself is a mirage. There are real, if narrow, productivity gains showing up in areas like software development, and history shows that transformative technologies — railroads, fibre-optic cable, shale — usually do create genuine value eventually, even when the first wave of capital that funds them is destroyed along the way. The risk is not that AI fails as a technology. The risk is that AI-linked equity valuations are pricing in a smooth, uninterrupted path to that value creation, and a rate shock is exactly the kind of event that interrupts smooth paths.

Reconciling this with my ‘more QE eventually’ view

Regular readers will remember that I have also argued the opposite-sounding case: that America’s over-levered household sector, its habit of rolling short-dated Treasury debt, and a banking system running low on reserves all point toward more monetary easing eventually — potentially a ‘super QE’ larger than 2008 or 2020. I still believe that. The two views are not actually in conflict; they describe two different points on the same timeline.

“What’s much less certain is what happens in the interval between ‘everyone knows QE is coming’ and ‘QE actually arrives.’ That gap is where currency stress, bond-market air pockets, and credit events tend to live.”

A rate hike in late 2026 or early 2027 would not contradict the eventual-easing thesis — it would be the disorderly middle chapter that forces the eventual easing to happen.

Higher rates now would be deflationary in their immediate effect: they would raise the cost of AI-related capex, slow the investment momentum that has been propping up GDP growth, and puncture the wealth effect that has kept US consumption resilient even as real household finances have deteriorated. That combination — weaker growth, a wounded wealth effect, and credit stress already visible in pockets of leveraged loans and private credit — is precisely the kind of shock that eventually forces a central bank’s hand toward emergency easing. The path there, though, could be considerably more painful.

Strategy

Indian Equity: Cut to underweight; trim froth. Nifty offers only moderate upside on my own math, and valuations are rich, so macro risk (rate hike + global AI shakeout) argues for buying dips, not chasing rallies. Reduce high-beta, high-PE, story-driven names; favor quality, cash-generative large-caps and domestic-demand plays over globally-linked cyclicals.

Global Equity: Cut exposure. Reduce concentration. Prefer diversified international and value-tilted funds over concentrated AI-themed funds.

Debt/Fixed Income: Rising rates hurt long-dated bonds first and hardest. Prefer accrual, short duration and high-quality corporate paper over long gilts.

Cash/Liquid Funds:  Overweight. Keep dry powder to redeploy if the ‘gap’ between hawkish talk and eventual policy easing turns disorderly. Liquid and ultra-short funds, not idle savings accounts.

(Note: I am not considering gold and cryptocurrencies in my strategy as my understanding of these assets is extremely poor. Each investor may consider these as per his\her understanding.)

The bottom line

The probability of a rate hike — in India, and more importantly in the US — is higher today than the market’s own pricing suggests. If that hike arrives while AI-linked valuations remain this stretched and this concentrated, the resulting correction could be faster and sharper than the consensus ‘soft landing, gentle AI cooldown’ narrative currently assumes. I do not think this changes the eventual destination — a more accommodative monetary regime once the strain becomes visible enough to force policymakers’ hands. But the road between here and there is the part investors actually have to live through, and it is worth positioning your portfolio for a bumpier middle chapter: equity that leans toward quality and away from crowded themes, debt that stays short in duration; and adequate dry powder (cash).

As always, I could be wrong about the timing, the trigger, or the severity — markets have a way of staying irrational for longer than any single argument accounts for. But positioning for a plausible, non-trivial risk is not the same as predicting it, and that distinction is the whole point of risk management.

The next round of QE might break something

Last week, I found myself doing the most boring kind of research an investor can do: comparing grocery receipts, gathered from friends, across four cities. A basic basket — some fruit, dairy, a few staples, nothing fancy. The bill ran close to US$90 in San Francisco; US$32 in Singapore; about US$25 in Johor Bahru, just across the Malaysian border, and US$21 in New Delhi. Singapore is one of the most expensive cities on earth; but San Francisco was still ~40% pricier than that, and more than four times pricier than Johor and Delhi.

Those grocery receipts are a better macro indicator than most of what crosses my desk. Because if you strip away exchange rates and just ask what a US dollar, a Singapore dollar, a Ringgit or a Rupee can actually buy, the picture of the US economy that emerges is very different from the one in the headline GDP numbers. And once you sit with that picture for a while, a few other things I’ve been tracking — household debt, the shape of Treasury issuance, and the politics at the Federal Reserve — start to line up into a story that should worry anyone holding US assets on autopilot.

The GDP number is flattering itself

US GDP is measured in nominal dollars, and consumption is about 70% of that number. But nominal dollars in an economy where a basic grocery run costs three to four times what it costs across large parts of Asia are not the same thing as real purchasing power. See the US output through the purchasing-power-parity lens, which economists use to compare living standards across countries, and a meaningful chunk of America’s GDP lead evaporates. It isn’t that Americans are producing that much more; it’s just that everything they buy is priced that much higher.

This matters because Washington keeps pointing to a 3% year-on-year inflation print as evidence that the inflation problem is basically solved. It isn’t. 3% this year sits on top of a price level that has already doubled or tripled relative to large parts of the world over the last few decades. A “controlled” 3% on an already-inflated base is not the same as price stability — it’s a slower march up a mountain you’ve already climbed most of. When your starting altitude is this high, the next few percentage points matter a lot more than the official narrative suggests.

The debt picture looks better than it is

The standard rebuttal to any US-fragility argument is the debt chart: household debt as a share of GDP has fallen from roughly 98% at the 2008 peak to around 70% today (or from about 86% to 62% on the narrower Federal Reserve measure). In real, inflation-adjusted dollars, total household debt is still just below its 2009 high. On the surface, that looks like a system that deleveraged responsibly.

Look under the surface and the story changes. The composition of that debt has shifted away from mortgages — which are secured, long-dated, and mostly held by higher-income, higher-asset households — into student loans and auto loans, which are unsecured or attached to rapidly depreciating collateral, and which are concentrated in the bottom two-thirds of the income distribution. That’s not a healthier balance sheet; it’s the same debt burden redistributed onto households with the least capacity to absorb a shock.

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And the shock is already showing up in the delinquency data. Student loan forbearance ended, and serious delinquencies jumped from under 1% to over 16% in a single year, with roughly one in ten dollars of student debt now 90-plus days past due. Credit card serious-delinquency flow is running near 7%, on balances carrying interest rates north of 22%. Auto loans have roughly doubled in dollar terms, stretched out to six- and seven-year terms on assets that lose value the moment they leave the factory, with negative equity now common. Put it together and the flow of debt going seriously delinquent across the household sector has nearly doubled year-on-year. That is not a slow-burn statistic — that is a system starting to crack at the load-bearing joints.

Why the next move is almost certainly more easing

Here is where the fiscal and monetary threads meet. The US Treasury has been quietly running its own version of quantitative easing by issuing an unusually large share of new debt — well over 80% — as bills with maturities under a year. That’s the fiscal equivalent of financing a house with an adjustable-rate mortgage instead of a thirty-year fixed: it looks cheap when short rates are low, and it becomes a rolling crisis the moment they aren’t. It works fine right up until it doesn’t.

Meanwhile, the buffer that used to absorb funding stress — excess bank reserves — has been drawn down. The last time reserves got this thin, in September 2019, the overnight repo market seized up and the Fed had to step in with emergency liquidity almost overnight. We are closer to a repeat of that than most portfolios are priced for.

Add the politics. Whoever ends up leading the Fed inherits an institution that is still majority hawkish, at a moment when the Treasury’s own borrowing structure and a fragile household sector are both quietly begging for lower rates and more liquidity. Any new chair with an inflation-hawk reputation has every incentive to hold the line as long as politically possible — partly on principle, partly to protect their own legacy — before the pressure becomes unavoidable. But the direction of travel is not really in question. Between an over-levered household sector, a Treasury that has to keep rolling short-dated debt, and a banking system running low on reserves, the destination is the same: more balance-sheet expansion, on a scale bigger than 2020 or 2008. The only real question is how much pain arrives in the gap between now and then.

The dangerous part is the gap, not the destination

This is the part that is genuinely hard to model, and it’s the part most investors are ignoring. Everyone can see the endpoint — easier money is coming, eventually, because the alternative is a funding crisis nobody in Washington wants to own. What’s much less certain is what happens in the interval between “everyone knows QE is coming” and “QE actually arrives.” That gap is where currency stress, bond-market air pockets, and credit events tend to live. History doesn’t move in a straight line from problem to solution; it moves through a chaotic middle where things break in ways nobody predicted, before policymakers are finally forced to act. Anyone who lived through 1997, 2000, or 2008 as an investor remembers that the crisis wasn’t the eventual policy response — it was the disorderly scramble that forced the response.

And if the policy response, when it comes, is aggressive — a real “super QE" rather than a modest top-up — the inflationary consequences could be severe. An economy already running elevated inflation on top of an inflated price base, hit with a large new wave of liquidity, does not necessarily settle back into 2–3% inflation. It can just as easily accelerate toward double digits, especially with a fiscal deficit that shows no sign of shrinking.

Why this time the social risk is not purely theoretical

Here is the part that doesn’t usually make it into investment commentary, but probably should. A generation of young Americans is coming of age with weak job prospects in traditionally high paying sectors, high living costs, record levels of unsecured consumer debt, and a wall of delinquencies already forming under their feet. Layer double-digit inflation on top of that combination, and you are not just looking at a market risk. You are looking at a social one.

Civil unrest as a tail risk for the US used to be the kind of thing you’d mention only half-seriously, a footnote in a scenario-planning deck. I don’t think it’s purely theoretical anymore. It doesn’t need to become the base case to matter — even a modest, non-trivial probability of serious social instability is the kind of risk that reprices currencies, sovereign spreads, and equity risk premia long before it shows up on the evening news. Markets are usually terrible at pricing tail risks like this until the tail starts wagging the dog.

What this means for how I’m positioning

None of this is a call to panic or to abandon US assets wholesale — the United States remains the deepest, most liquid capital market in the world, and that doesn’t change overnight. But it is a case for taking seriously a scenario the consensus is currently pricing at close to zero: a period of genuine monetary, fiscal, and social stress in the US, sitting between now and the eventual “everything gets easier” resolution. That argues for holding real assets and inflation hedges; for not over-extending duration into US paper on the assumption that rates only fall from here in an orderly way; and for treating US-dollar cash as a tool rather than a safe haven by default.

The lesson from every cycle I’ve watched — 1997, 2000, 2008 — is the same: the eventual policy response is rarely the dangerous part. The dangerous part is the disorderly stretch of road that forces policymakers into that response in the first place. We may be entering that stretch of road now, and it’s worth positioning for the possibility that it gets bumpier before it gets smoother.

 

Gold and Silver – Raging rivers, stay safe

Heightened volatility in the prices of gold and silver in recent days has tempered the rampant euphoria to some extent. Silver traders, in particular, have grown more cautious following such extreme volatility, with trillions wiped from market caps in a single session.

The lingering question is whether this represents a brief pause in the ongoing bull market for precious metals, as many optimists claimed until recently, or if the party has ended, and the cows are now ready to return home.

I have long held firm views on investing in precious metals, which I have shared with readers on multiple occasions. I am pleased to reiterate and expand upon them here, incorporating recent market developments for clarity.

In my view:

•      Gold and silver remain deeply embedded in our culture, religion, and traditions. Purchases for social, cultural, religious, or traditional obligations should typically be viewed as consumption rather than investment.

Of course, in times of severe financial hardship, these assets can be liquidated for cash, functioning as a form of insurance or hedge. However, under ordinary circumstances, they fall short of qualifying as true "investments" due to their lack of intrinsic yield or productive capacity, unlike equities or bonds.

•      The latest arguments supporting gold and silver as investments often fail scrutiny. For instance, the case for soaring gold prices hinges largely on expectations of a weakening and diminishing US dollar (USD). The two main drivers cited are (i) erosion of its dominance in global trade and finance, and (ii) the US government's unsustainable debt burden, now exceeding $35 trillion.

If that be true, the USD's hegemony could fracture through de-dollarization efforts, such as those discussed in BRICS forums. Yet, if the USD loses its reserve status, a divided global landscape is unlikely to agree on a single alternative—or even a basket of fiat currencies. The uneven distribution of gold reserves across nations makes a gold-backed system improbable as a universal replacement.

Furthermore, should the USD weaken significantly, commodity pricing (including gold) might shift away from dollars toward stronger currencies like the JPY, EUR, CNY, GBP, or AUD, potentially driving sharply lower nominal prices for these assets.

Second, a depreciated USD could enhance US export competitiveness, incentivizing reshoring of manufacturing and leaving excess capacity in Asia—a scenario that proved massively disinflationary during past trade shifts, as seen in the 2010s.

Third, if the US attempts to inflate its way out of debt by devaluing the USD, funding its escalating fiscal deficits becomes precarious. Investors would shy away from depreciating US Treasuries (USTs), forcing austerity measures. Such fiscal tightening could emerge as the most potent disinflationary force of the 21st century, as evidenced by recent market reactions to hawkish Fed nominations.

In this disinflationary environment holding gold as an inflation or currency hedge loses much of its appeal, as safe-haven flows reverse during deleveraging events.

•      The rationale for silver's upward trajectory is equally unpersuasive. A core economic tenet holds that industrial commodities are predominantly price takers: demand for end products dictates raw material prices, not the reverse.

A 250% surge in silver prices—anticipating future industrial demand years ahead—defies this logic, especially when recent crashes reveal overleveraged speculation rather than fundamentals.

Moreover, economic historians recall that silver once rivaled or surpassed gold as a monetary metal for decades, with demand far exceeding today's levels. If heightened industrial use (e.g., in solar or EVs) does materialize, it wouldn't be unprecedented. Recall the repeatedly hyped "peak oil" narrative, peddled until 2009 but now obsolete due to technological advancements like shale extraction—similar innovations could temper silver's supply constraints.

•      Regarding the recent sharp upmove and subsequent collapses in gold and silver prices, I regard them as raging rivers swollen by speculative floods. Traders can choose to dive in and ride the current or wisely observe from the banks. Attempting to navigate with full control, as if in a sturdy boat, is illusory.

History shows that in nearly every precious metal bull cycle—from the 1980 silver bubble to the 2011 peak—most participants suffer losses, while only a fortunate few emerge profitable. The 2025-2026 euphoria, fueled by geopolitical hype and retail frenzy, followed by trillion-dollar wipeouts, proves this time is no different.

Fed cuts 5bps, ends QT, clouds December cut

 The Federal Open Market Committee (FOMC) of the US Federal Reserve lowered its benchmark overnight borrowing rate by 25bps to 3.75%-4%. The decision was taken by 10-2 vote, with one member voting for a 50bps cut and another voting against the cut. The Fed also announced that it would terminate the current process of the reduction of its asset purchases (quantitative tightening or QT) on 1^st December 2025.

The Fed chairman, Jerome Powell, however, cautioned the market against expectations that the December rate cut was a “foregone conclusion,” saying that it is “far from it.” He cited that there is a “a growing chorus” among the Fed officials to “at least wait a cycle” before cutting again.

Notably, after the September FOMC meeting, the Fed officials had indicated the probability of three cuts, including the one in December.

Job risks prompt the cut, tariff inflation seen as one=time increase

The FOMC decision to cut rate was primarily driven by the cooling job market. The post meeting statement of the FOMC stated that, “Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments.”

Raising concerns over the job market, the FOMC statement read, “downside risks to employment rose in recent months.”

The statement also noted that “Inflation has moved up since earlier in the year and remains somewhat elevated.” However, Powell felt that the inflation increase due to tariffs will be a “one-time increase” and “it will come to end”.

QT set to end in November

Along with the interest rate decision, the Fed said its process of reducing the amount of bonds it holds on the central bank’s $6.6 trillion balance sheet will end on 30^th November 2025.

The Fed expanded its portfolio of Treasurys and mortgage-backed securities during the Covid crisis, pushing the balance sheet from just over $4 trillion to close to $9 trillion. In the past couple of years, the program, popularly known as QT, had unrolled appx $2.3 trillion off the Fed’s portfolio.

There are signs of tightening in short-term lending markets. To improve short term liquidity, From December the Fed will be investing proceeds from maturing mortgage securities into shorter-term bills.

Mr. Powell however clarified that “while the Fed found it necessary to shrink its holdings, he did not foresee a return to pre-pandemic levels”.

Market reaction

S&P500 and Nasdaq ended the day higher, though lower than the highs recorded before Powell’s cautionary note. Crypto ended 23% lower. Bond yields rose slightly (10-year Treasury to 4.12%), reflecting tempered cut expectations.

Beyond the Debt Conspiracy: What we need to be bothering about

Several readers have commented on my yesterday’s post (“USD, Gold, Crypto and a mountain of $38trn debt”). Some agree that the “debt manipulation” theory was far-fetched, others argued that I was underplaying the seriousness of America’s fiscal overhang. Both reactions are valid. My intent, however, was not to trivialize the US debt issue, but to put it in its proper context — and to focus attention on the much larger transitions now underway in the global financial order.

I would like to elaborate to convey my point in the right perspective.

The Debt Problem Is Real — but Not New

The US federal debt now stands around $38 trillion, or roughly 120% of GDP. That sounds alarming, but the ratio has hovered near that level for over a decade. The composition, though, has changed dramatically.

After the dotcom bust, debt piled up in corporate and household balance sheets. After Lehman, it migrated to banks. Post-Covid, it has firmly shifted to the sovereign. In essence, the debt hasn’t disappeared — it has just changed owners.

This doesn’t mean the US is immune to a confidence crisis. But it does mean that debt is a chronic structural feature of modern fiat economies — not an engineered plot to reset the system.

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1933, 1971 — and the temptation of simplistic parallels

Many commentators love to invoke 1933 or 1971 to suggest a looming “USD reset.”

But both those episodes happened in very different institutional and political contexts — gold standard rigidity, post-war reconstruction, and early Cold War dynamics.

Today’s world operates on a networked, digitalized, and politically fractured global economy. If history rhymes, it does so in free verse, not repetition.

The better historical analogy might not be 1933 or 1971, but the slow disintegration of older orders — Roman, British, Ottoman or Mughal — when economic dominance eroded gradually, not overnight.

What the real transition looks like

The true story of this decade isn’t gold manipulation or crypto suppression. It’s the slow-motion rebalancing of global power, as the post-WW2 order strains under its own contradictions:

·         Fiscal dominance is replacing monetary orthodoxy — politics increasingly dictates central bank balance sheets.

·         Fragmentation is replacing globalization — parallel payment systems (like China’s CIPS and India’s UPI stack) are nibbling at the dollar’s monopoly.

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Asset inflation remains the political lifeline of democracies — as long as homes, stocks, and jewellery rise in nominal value, grocery inflation can be tolerated.

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Digital money: Evolution, not Revolution

The tokenization of debt and the emergence of digital treasuries is definitely worth watching. But speculating that Crypto or stablecoins could “replace” outstanding treasuries may be a little far-fetched.

These aren’t part of a grand conspiracy to devalue debt — they are the next evolutionary stage of financial plumbing, blending liquidity, programmability, and regulatory control.

Think less “Nixon shock,” more “software upgrade.”

The real risk: A world without a coherent order

While investors debate gold and Bitcoin, the bigger risk is that the rules of the global system — trade, capital flows, reserve currency privileges — are eroding without a clear replacement.

This “interregnum” between the US-led order and an undefined multipolar system may prove far more destabilizing than any Fed balance sheet maneuver.

In such a world, volatility will not come from conspiracy or manipulation — it will come from institutional entropy.

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Investment implications: focus on what’s observable

Instead of gaming hypothetical resets, investors may be better served by tracking:

·         Real yields and the pace of balance-sheet normalization

·         Fiscal-monetary coordination trends in major economies

·         Shifts in global trade invoicing patterns (USD vs CNY vs others)

·         Political tolerance for inequality and asset inflation

The Takeaway

Markets thrive on stories, and conspiracy is a powerful story. But history suggests that disorder, not design, drives most turning points.

The bigger challenge ahead is navigating a world that’s losing its monetary anchor and political consensus at the same time.

The “debt conspiracy” may fade, but the era of permanent volatility is just beginning.

Powell refuses to toe the Trump line, India stay guarded

 The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) maintained its policy rates at 4.25% to 4.5% range, by a majority vote. It was the first occasion since 1993 when two Fed governors voted against the majority decision. Fed governors, Michelle Bowman and Christopher Waller, wanted a 25bps rate cut at the meeting, concluded on Wednesday.

The majority decision of the Fed to not cut rates is apparently against the wishes and open demand for a rather drastic cut in the Fed policy rates by the US administration, especially President Trump.

Strong April-June quarter GDP data and July private payroll data perhaps weighed on the Fed decision. The Commerce Department’s advance gross domestic product (GDP) report on Wednesday showed growth of 3.0% for the April to June period, above the 2.5% growth expected. US GDP shrank by 0.5% in the January-March 2025 quarter. U.S. private payrolls also increased more than expected July, rising by 104,000 jobs in July 2025 after a revised 23,000 decline in June.

Powell stays defiant

The Fed chairman Jerome Powell stayed defiant, not showing any sign of conforming to the political wishes and sticking to his mandate of keeping the prices under control and making employment conditions strong. In the post meeting conference Powell emphasized that there is no place for the central bank to consider government financing needs when setting interest rate policy. He said, “we don't consider the fiscal needs of the federal government. No advanced economy central bank does that, and it wouldn't be good”. Further adding that “it wouldn't be good for the Fed to do so as it would compromise its credibility”.

Important to note that the Fed has faced aggressive pressure from President Trump to cut rates. Trump has been claiming that said a large move down in rates (300bps) is justified by several factors, including stable inflation and improving fiscal conditions. At $1.1 trillion in interest rate payments last year, the cost of managing government debt has more than doubled since 2020 and that’s in some part driven by the high rates the Fed has in place to cool inflation levels.

Trade policy impact, a key variable

While the market participants agreed that it is important for the central bank to maintain its autonomy and make policy decisions on the basis of available and expected data, in order to effectively keep the prices under check.

Though Fed officials said that they “continuing to weigh data to see how big changes in government import taxes are affecting the economy, as financial markets continue to eye a possible September easing in short-term borrowing costs”, Chairman Powell suggested that he would like to wait for more data on impact of trade policy on prices, before taking any decision on rate cuts. Powell said the central bank has “made no decisions” about a potential policy change in September. He added, “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”

The US administration is pursuing a volatile and aggressive trade policy, in order to reset the terms of trade with its trade partners. It is still far from clear how the situation will finally appear once all trade related issues are settled. While the President has claimed that many trade deals, including with the EU, have been signed and the US is already on course to collect more than US$300bn in additional import duties this fiscal, reports suggest that a fresh round of trade negotiations in Sweden between the U.S. and China failed to result in a major breakthrough following two days of talks. Vietnam has also denied signing any trade deal with the US, as claimed by the president.

On Wednesday, Trump also announced that the United States will impose a 25% tariff plus penalties on India starting August 1, citing the country’s purchases of Russian military equipment and energy.

The impact of the increased tariffs on the domestic economy and inflation would be only known in a few months.

India’s reaction to tariff

The Ministry of Commerce has issued a guarded statement in response to Trump's announcement of tariffs and penalties on Indian exports to the US. The press release issued last night read as follows:

“The Government has taken note of a statement by the US President on bilateral trade.  The Government is studying its implications.

India and the US have been engaged in negotiations on concluding a fair, balanced and mutually beneficial bilateral trade agreement over the last few months. We remain committed to that objective

The Government attaches the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs.

The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements including the latest Comprehensive Economic and Trade Agreement with the UK.”

Though the markets may react today to Trump's tariff announcement, it is too early to assess the impact. It is still not clear, whether key Indian exports like Pharma, that were part of a separate trade negotiation are also part of this 25% tariff announcement. The “penalty” is also a vague term at this point in time. A team of the US trade negotiators is scheduled to arrive in India later this month. It is possible that the tariffs are stayed till the negotiations are complete, or be reversed to a more favorable rate, just like it has been done in the case of South Korea yesterday.

This tariff announcement is at best a temporary measure, pending the finalization of a comprehensive trade deal likely to be finalized later this year.

I would therefore like to have more clarity before reacting to the tariffs. This includes not jumping to buy if the market falls sharply today.

A Tremendous Day in the White House – The Best Ever!

 Trump: Hey Susie, you’re looking absolutely fantastic, nobody does it better! How’s the morning going? Did my posts on Truth Social and that failing platform “X” – terrible name, by the way – absolutely ROCK the world last night? Total game-changers!

Susie Wiles: Sir, you’re the greatest President in history, nobody even comes close! The entire planet is glued to your accounts. Your posts are sending shockwaves across the universe – markets trembling, governments in a frenzy. We’re doing phenomenal, the best any administration has EVER done!

Trump: Fantastic, just fantastic. I knew it! Show me the posts we’re dropping today – we’re gonna dominate!

Susie Wiles: Right here, Sir, the absolute best ammo for today’s battle!

Trump: Susie, you’re a genius, just brilliant. I love you, you’re tremendous. Fire off a post every 10 minutes, keep ‘em shook! Oh, and send Little Marco in, pronto.

Marco Rubio: Good morning, President. How’s the greatest leader in the world doing today?

Trump: Marco, we’re doing unbelievably great. I’ve made the world so peaceful, nobody’s done it better. What’s the latest?

Marco Rubio: Sir, Putin’s being stubborn, refusing to back down on the war. We need to hit him hard.

Trump: Vlad’s a tough guy, plays it close, but I’m tougher! Let’s slap a massive 500% tariff on any country touching his dirty oil. That’ll teach ‘em! What else?

Marco Rubio: The BRICS clowns are making noise in Rio, talking about ditching the dollar. It’s a disgrace!

Trump: Disgusting! Sleepy Joe let this garbage BRICS nonsense grow – total loser! Modi’s a great guy, loves me, always listens. I’ll tell him to dump BRICS – without the “I,” it’s nothing! Tell Ice Maiden to draft an order: 10% extra tariff on all BRICS countries. Done! Anything else?

Marco Rubio: That’s more than enough winning for today, Sir. Tremendous!

Trump: Absolutely, MAGA is unstoppable! Send Scott in, quick!

Scott Bessent: Good morning, President. I’ve got incredible news – the best! MAGA’s working like never before. Inflation’s down, lower than any president in history. Jobs are rocketing through the roof, corporations are raking tons of profits, and the people LOVE us!

Trump: Scott, that’s spectacular, nobody does it better than me! I’m posting this RIGHT NOW. Posts on truth Social – “I brought down costs more than any President in recorded history. The Crooked Democrats are using the opposite narrative, even though they know it is a total LIE. Remember this when you hear their phony soundbites. MAGA!!!” Takes a screen shot of the post and posts it on “X”.)

Why hasn’t that clown Powell cut rates by at least 2%? He’s a disaster!

Scott Bessent: Absolutely, Sir, Powell’s clueless, ignoring your genius advice!

Trump: We’re firing him ASAP, believe me. Anything else?

Scott Bessent: Just some MAGA chores to keep the momentum, Sir!

Trump: Tremendous work, Scott. Send Pete in, let’s keep winning!

Pete Hegseth: Good morning, President. How’s the greatest Commander-in-Chief doing today?

Trump: Pete, I’m fantastic, nobody’s better! Did you talk to Bibi? He’s a great friend, just terrific.

Pete Hegseth: Yes, Sir. Bibi says he’s not stopping until Gaza’s becomes the seventh district of Israel.

Trump: Bibi’s a winner, always delivers! I love him. Tell him to fake a ceasefire – just until I lock in that Nobel Peace Prize, it’s mine! Any ideas?

Pete Hegseth: Sir, he won’t listen to me, but invite him for a big Independence Day dinner – ask for the ceasefire as a gift!

Trump: Pete, you’re brilliant, just brilliant. Tell Ice Maiden to send Bibi a YUGE invite. Now get Howard in here!

Howard Lutnick: Good morning, President. How’s the greatest dealmaker in history today?

Trump: Howard, I’m phenomenal, nobody negotiates like me! What’s the deal with trade? Have we crushed all 195 countries yet?

Howard Lutnick: Sir, we’ve got ‘em all shaking! Threatened tariffs at 5%, 10%, 20%, 26%, 45%, 60%, 100%, 200%, 500% – they’re terrified!

Trump: Perfect! Is China paying up like I told Jinping?

Howard Lutnick: Sir, seems like they’re cheating, rerouting shipments through other Asian countries.

Trump: Jinping’s sneaky, but I’m smarter! List every country helping China and hit ‘em with a 45% tariff – BOOM! Anything else?

Howard Lutnick: Powell’s whining that tariffs are inflationary, says he can’t cut rates.

Trump: Powell’s a low-energy fool, but he might have a point. Pause new tariffs until end of July – by then, everyone will bow to my deals, and the Nobel folks will see my genius. That’s enough winning for today. Time for a quick nap – I’ve earned it!