Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients. Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter. Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
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Prepare for China Shock 2.0 and its Gold Impact

Key Points

  • China’s first deflationary shock flooded the global economy with cheap labor in the early 2000s and hollowed out low-tech manufacturing industry in developed economies.
  • A credit-fueled boom followed, with huge investment in infrastructure and real estate to sustain economic growth.
  • A massive speculative real estate bubble developed, forcing Beijing to intervene.
  • The real estate bubble collapsed in a controlled implosion after banking regulators restricted credit to the sector.
  • Plunging real estate prices destroyed household wealth, setting off a deflationary spiral in China’s domestic economy.
  • The government channeled investment into high-tech manufacturing to offset collapsing demand.
  • Weak local demand forced manufacturers to focus on export markets.
  • Booming Chinese exports of electric vehicles and other high-tech products threaten to hollow out high-tech industries in developed economies.
  • However, export markets aren’t large enough to absorb China’s demand shock, and pushback from trading partners will likely trigger a major contraction.

Last week we focused on the slowdown of China’s economy. This week, we examine the root cause of the problem. Credit.

China experienced a credit-fueled boom in the early 2000s. This went into overdrive with massive government stimulus during the 2008 global financial crisis.

Unrestrained lending led to a massive speculative bubble in the real estate sector. Alarmed by the rate of credit expansion, Beijing put the brakes on, restricting sector access to credit in 2022.

The collapsing real estate bubble has destroyed household wealth.

China: House Price Index

Consumer Confidence collapsed in 2022 and has not recovered.

China: Consumer Confidence

Household Debt, which had grown rapidly as a percentage of GDP, plateaued until 2024, and has now started to decline.

China: Household Debt Percentage of GDP

Property Investment has contracted since 2022, and is now shrinking at an annual rate of 18%.

China: Property Investment

Loan growth from financial institutions has rapidly decelerated to a low of 5.2% in June 2026.

China: Outstanding Loan Growth

Credit is the lifeblood of an economy, and rapid deceleration in credit growth triggers a domino effect of demand contraction across the economy.

Manufacturers turned to export markets to offset declining domestic demand, with exports peaking at $412 billion in June 2026.

China: Exports

China’s trade surplus jumped to $126 billion in June, falling back to $113 billion in July.

China: Trade Surplus

The People’s Bank of China (PBOC) has steadily expanded its balance sheet, employing QE to suppress long-term interest rates and stimulate the economy.

China: PBOC Balance Sheet

The Chinese government is also running deficits to support the economy, with government debt rapidly expanding to 99.2% of GDP in 2025.

China: Government Debt to GDP

Overall debt in the economy shows a similarly steep growth path despite slowing household credit growth.

China: Government Debt to GDP

Developed economies are not much better off (below), with average total debt at 260% of GDP and government debt at 100% of GDP. However, the difference lies in the growth rate: developed economies are no higher than in 2010, while China has almost doubled.

Developed Markets: Government Debt to GDP

Conclusion

China has enjoyed a debt-fueled boom for more than 20 years, but is now sliding into a deflationary contraction. The Chinese economy is addicted to credit, and regulators’ attempts to rein in the speculative real estate boom have triggered a deflationary spiral. Falling real estate prices have destroyed household wealth, leading to a contraction in domestic demand. Beijing boosted investment in high-tech industry to sustain economic growth, leading to a massive trade surplus as manufacturers turned to export markets to offset shrinking domestic demand.

However, export markets are not large enough to absorb China’s deflationary surge without themselves suffering a domestic contraction. We expect trade surpluses to fall as trading partners push back with tariffs, import quotas, and other trade barriers.

China will then face a stark choice between a collapsing economy and debasing the Yuan through high inflation. We believe that Beijing has chosen the latter option, as the lesser of two evils, and will rapidly expand credit in the economy to that end while the PBOC expands its balance sheet to suppress long-term interest rates.

China’s debasement of the Yuan has fueled a rapid growth in domestic demand for Gold as a store of value, leading to a close correlation between Gold and the PBOC’s balance sheet.

China: PBOC Balance Sheet

Acknowledgments

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Trump Backs Off as SPR Reaches 40-Year Low

Key Points

  • President Trump says the US is backing away from a renewed military offensive and will rely on the blockade of Iran.
  • Iran says the Strait of Hormuz will remain closed.
  • Brent Crude rose to $87.70 per barrel.
  • US Strategic Petroleum Reserves fell below 300 million barrels for the first time in more than forty years.

US President Donald Trump has signaled he’s prepared to let economic pressure take its toll on Iran rather than launching further military strikes, as Tehran insists the Strait of Hormuz will only reopen if Washington agrees to several conditions.

Trump, who last week projected confidence in an imminent deal between Washington and Tehran, told Axios on Sunday that he is prepared to wait for economic distress to mount in Iran, backing away from a renewed military offensive.

“We are low-keying it,” Trump said, “We are only semi-negotiating with them. We are just watching Iran with its huge inflation and the fact they have no money.”

Brent Crude is sneaking up again, with October futures above $87 per barrel. A recovery above $90 would signal another test of $100 per barrel.

Brent Crude Futures (ICE October'26)

NEW DELHI, Aug 11 (Reuters) – Shipping traffic through the Strait of Hormuz fell to six on Monday, compared ​with a 10-day average of about 11 vessels, ‌shipping data showed, amid fading hopes of a peace deal between the US and Iran.

Four commodity vessels, including two empty ​oil product tankers, entered the waterway, according to Kpler data as of 0420 ⁠GMT on Tuesday. Two vessels — a small tanker laden with ​liquefied petroleum gas and another carrying residual fuels — exited ​the Strait, the data showed.

In pre-war days, about 130 to 140 ships typically transited the strait.

It is unclear how long the Trump administration will manage to keep a lid on crude oil prices.

Kieran Tompkins, senior climate and commodities economist at Capital Economics, said the relatively “low” level of oil prices reflects that investors have continued to factor in two opposing scenarios — a quick and imminent resumption in energy flows, and a prolonged Hormuz closure….

“If the strait remains closed and oil inventories in OECD countries continue to be depleted quickly, the oil market could reach a tipping point around the start of Q4. This would be consistent with much higher prices, possibly in the region of $120-140 per barrel based on historical form.”

….China “singlehandedly balanced the market in May with its cut-back in [oil] imports,” Amrita Sen, founder and director of research at consultancy Energy Aspects, told CNBC’s “Morning Call” on Friday. However, with Chinese crude imports recovering in July and set to rise further in August, Sen warned that “crude can’t stay down forever.” (CNBC)

Strategic petroleum reserves in the US are falling, with the SPR below 300 million barrels for the first time in more than forty years.

EIA Strategic Petroleum reserve (SPR)

Crude oil stockpiles in the U.S. Strategic Petroleum Reserve have fallen below 300 million barrels, the lowest level in more than four decades, as global inventories stay under pressure due to the Iran war.

The SPR fell by 6.1 million barrels to 298.7 million barrels last week, according to data released by the Department of Energy on Monday. The reserve, created in 1975, is at its lowest level since January 1983.

President Donald Trump ordered the release of 172 million barrels in March after Iran choked off oil exports through the Strait of Hormuz, triggering the largest disruption of crude oil supplies in history.

The drawdown in the SPR, whose authorized storage capacity is 714 million barrels, has raised questions about whether U.S. government stockpiles are on the verge of depletion. The minimum amount of oil needed to safely operate the SPR is about 70 million barrels, an Energy Department spokesperson told CNBC in July.

There is enough oil left in the SPR to do another release if needed, said David Goldwyn, who served as a State Department special envoy for international energy affairs under President Barack Obama.

“I’m not worried about the stability of the reserve or our ability to do another drawdown, if we needed to,” Goldwyn told CNBC.

The SPR may have capacity for one more draw, but no more.

The SPR’s operational capability is at risk due to aging infrastructure, according to a May report from the Government Accountability Office. More than a quarter of its inventory was “not available for drawdown due to a combination of construction outages and cavern outages” as of December 2025, GAO investigators found. (CNBC)

Conclusion

President Trump is backing away from forcing through a peace deal before the November midterms. Iran will likely endeavor to make the interim as uncomfortable as possible for the US, closing the Strait and attacking US allies and bases in the Middle East. We expect Iran to go after the UAE’s Fujairah pipeline, which bypasses the Strait of Hormuz. An attack that closes the pipeline would remove another 5 to 6 million barrels per day of crude oil from global supply.

UAE Fujairah Pipeline

US Strategic Petroleum Reserves will likely last until November, but low levels are bound to raise prices as refiners attempt to lock in supplies ahead of production runs.

Acknowledgments

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Defence experts warning after undersea internet cables cut off WA coast | The Nightly

Defence experts warn the suspicious severing of two vital undersea cables off the West Australian coast over the weekend highlights the country’s high vulnerability to being cut off from global internet communication.

The head of SUBCO, which owns several of Australia’s key optical fibre links, revealed the Indigo West and Indigo Central systems were damaged amid “some very suspicious activity from a vessel near the location”….

Read more at The Nightly

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US & ASX Leading Indicators

US Stock Market

The composite valuation indicator uses the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

US Bull-Bear

We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of the five indicators signal risk-off, indicating medium risk of a US bear market.

Bull/Bear Market Indicator

Cyclical employment increased to 27.550 million in July from 27.533 million in June. A 300K decline from the September 2024 peak of 27.671 million would signal risk-off. Cyclical Employment

The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.

Treasury Yields: 10-Year minus 3-Month

The new Fed Chair, Kevin Warsh, wants to eliminate Fed guidance.

For Warsh, saying less is a virtue. It protects the committee’s judgment. If policymakers issue a forecast, they start crediting evidence that confirms it and discounting evidence that doesn’t. He also believes a quieter Fed gets a cleaner read on what investors think about the economy, rather than hearing an echo of its own guidance. Investors “are upset with me already that I’m somehow not feeding them all the information they’d gotten before,” he told lawmakers. (WSJ)

Warsh's tight-lipped approach will likely fuel greater bond market volatility, driving up long-term yields. A steeper yield curve would restrict demand growth and help to curb inflation.

The latest FOMC meeting kept the fed funds rate target range unchanged at 3.5%-3.75%. There have been no rate cuts for more than 75 days, so the signal has reverted to risk-on.

Fed Funds Rate Target (Upper Limit)

US heavy truck sales slowed to 38,900 units in July, down from 40,700 in June. The 12-month average fell to 31,200 and would need to reverse by 10% for the risk-off signal to switch to risk-on.

Heavy Truck Sales (Units)

Heavy truck sales reflect the transportation industry's confidence in the economic outlook. A fall of more than 10% below the preceding peak signals risk-off, while a 10% rise above a trough indicates risk-on.

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The ratio of stock market capitalization to GDP is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

The S&P 500 Price-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.

S&P 500 PE of Highest Trailing Earnings

The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.

Dow Jones Industrials Forward Price-Earnings Ratio

We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.

The change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.

Dow Jones Industrials Price-to-Sales Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, flags a bear market, while the composite Stock Pricing indicator warns that stocks are extremely over-priced.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

ASX Bull-Bear

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators have a 40% weighting in the ASX Leading Index, China 20%, and the US Leading Index carries the remaining 40%.

The ASX 200 Financials Index (XFJ) is above its 50-week weighted moving average, continuing the risk-on signal.

ASX 200 Financials Index

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

ASX Stock Pricing

ASX stock pricing indicates that stocks are overvalued, but not as extreme as the US market.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

The Warren Buffett indicator compares stock market capitalization to GDP, providing a stable, long-term ratio with a long-term mean of 1.03.

ASX Market Capitalization/GDP

The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.

ASX 20 Price to Sales with 20% Trimmed Mean

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

The All Ordinaries dividend yield is below its long-term mean of 4.1%, indicating values are on the high side. A fall below the 3.0% threshold would signal that stocks are extremely overpriced.

ASX Dividend Yield

Note: Lower yields indicate higher values, so we reverse the z-score for the ASX dividend yield.

The S&P 500 Price-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.

S&P 500 PE of Highest Trailing Earnings

The All Ordinaries price-to-earnings (PE) ratio PEs above 20 indicate high pricing. We need to ignore the 2020 distortion caused by low earnings.

ASX Price Earnings Ratio

The PE ratio is based on the latest trailing earnings (red below), but produces extreme readings if earnings per share (EPS) rises or falls sharply, as in 2008 or 2020, which is why we also calculate a PE based on the highest trailing earnings.

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the composite Stock Pricing indicator signals stocks are over-priced. China is on bear watch after NBS Manufacturing PMI fell sharply to 49.2 in July, close to its risk-off signal.

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Weak Dollar Boosts Gold & Copper

Key Points

  • Gold is testing resistance at $4,250 per ounce.
  • Copper (COMEX September futures) jumped to $6.72/lb.
  • US Treasury intervention in the Japanese Yen has rattled bond market investors.
  • The ISM Services PMI signals expansion, but signals weak job growth and strong inflationary pressures.

Gold rallied to test resistance at $4,250 per ounce. A breakout would signal another test of $5,000.

Spot Gold

Copper jumped to $6.72/lb on the COMEX futures exchange (Sep’26), continuing its long-term uptrend.

CNBC: Copper

The Dollar softened after last week’s joint intervention by Japan’s Ministry of Finance (MoF) and the US Treasury to support the Yen. Bond market traders are questioning why the US Treasury was involved and not the G7. Coordinated action by G7 central banks has supported past interventions. This time, the G7 were not involved, and the conclusion is that the US Treasury was acting to protect its Treasury market. The US Treasury repo operations circumvented the MoF being forced to sell US Treasuries to support the Yen, a move that would have driven up yields. (Reuters)

Dollar Index

Stocks & Financial Markets

Bitcoin1 continues to consolidate in a narrow range above 60000, a bearish sign in a downtrend. A breakout above 65000 would signal that financial market risk aversion is easing, while a break below 60000 would warn of a major liquidity contraction.

Bitcoin (BTC)

Dow Jones Industrial Average broke out above 53000, and is headed for a test of 55000. Trend Index troughs above the zero line confirm buying pressure.

Dow Jones Industrial Average

ISM Services

The ISM Services PMI increased to 54.1% for July, signaling a broad economic expansion.

ISM Services PMI

However, the Employment index fell to 47.4%, warning of weak job growth ahead.

ISM Services Employment

Services Prices also increased to 70.3%, a level similar to Manufacturing, signaling strong inflationary pressures.

ISM Services Prices

Conclusion

US Treasury operations to assist Japan’s intervention in support of the Yen underscore the fragility of US Treasury markets. The move fueled a rally in Gold and Copper, as well as the Dow, as confidence in US Treasury markets was shaken.

The ISM Services PMI signals continued expansion, but warns of weak job growth and strong inflationary pressures.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
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Strategic Petroleum Reserve (SPR)

Crude oil futures are being manipulated by White House spin about an imminent “peace deal” whenever Brent reaches $100 per barrel.

Brent Crude Futures (ICE October'26)

However, the Strategic Petroleum Reserve (SPR) is declining at a rate of 1 million barrels/day as the government draws from the reserves to offset the shortage.

EIA Strategic Petroleum reserve (SPR)

Conclusion

Acknowledgments

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4 Key Takeaways for the Week

Key Points

  • Long-term Treasury yields climbed after the Fed kept rates unchanged.
  • The Japanese Yen is weakening as the Bank of Japan slow walks rate hikes.
  • Gold absorbs selling pressure as long-term rates rise.
  • China’s economy is slowing.

Treasury Market

The bond market has been anticipating a rate hike. This has been signaled since the 2-year Treasury yield broke above the Fed funds target range in March 2026.

2-Year Treasury Yield & Fed Funds Target (Upper Limit)

The FOMC voted to keep the Fed funds rate unchanged, with a target range of 3.5% to 3.75%. There were 3 dissenting votes, calling for a rate hike. The new Fed Chair, Kevin Warsh, is encouraging opposing views, and we can expect more dissent in the future. Warsh has also avoided forward guidance, which is likely to increase volatility in the bond market and consequently the term premium.

10-year Treasury yields climbed to 4.745% on Friday, reflecting market concern that the FOMC is not taking a more hawkish stance on inflation.

10-Year Treasury Yield

GDP grew at 6.5% over the 12 months to June, suggesting that the 10-year yield needs to rise by at least 175 basis points if the Fed is serious about containing inflation. Long-term interest rates below nominal GDP growth (the rate of return on new capital investment) encourage rapid credit growth, with demand expanding faster than output.

10-Year Treasury Yield & Nominal GDP Growth

Japan & the Sovereign Bond Market

Japan’s GDP grew by 3.6% over the 12 months to March 2026. The 10-year JGB yield is 2.8%, indicating that monetary policy remains stimulative, but less so than the US.

10-Year Treasury Yield & Nominal GDP Growth

The Bank of Japan kept its policy rate at 1.0% at last week’s meeting despite an upturn in CPI to 1.7%. The weakening Yen drives higher inflation.

Japanese CPI Inflation

The low BOJ policy rate and ongoing bond purchases aimed at suppressing long-term JGB yields undermine the currency. The Yen has steadily weakened, breaking above 160 against the Dollar in June 2026 to reach its highest level in 39 years. Japan’s Ministry of Finance intervened on Thursday to support the Yen, driving the exchange rate to 157 against the Dollar. However, the effect of these MoF interventions is short-lived because of BoJ policy.

Japanese Yen

Rising long-term yields in sovereign bond markets reflect growing concern over sovereign debt levels and the risk of fiscal dominance. When central bank policy is dominated by government bond markets’ need for support, with lower interest rates prioritized above containing inflation, the currency’s purchasing power is eroded, as in Japan.

The US 30-year Treasury yield has climbed to 5.275%, reflecting concerns over currency debasement.

30-Year Treasury Yield

The Japanese JGB yield is lower at 3.98%, but this reflects sizable ongoing QE by the Bank of Japan aimed at suppressing long-term rates.

30-Year JGB Yield

The Bank of Japan has higher debt levels relative to GDP than the UK and should theoretically trade at a higher yield. The difference in the 30-year Gilt yield lies in central bank monetary policy: the Bank of England is steadily shrinking its balance sheet, while the BoJ is actively buying JGBs in the secondary market to suppress yields.

30-Year UK Gilts Yield

Dollar & Gold

Rising short-term yields are strengthening the Dollar, with the 1-Year Treasury yield gaining more than 50 basis points in the last 6 months.

1-Year Treasury Yield (CNBC)

Gold has softened considerably from its peak of $5,500 per ounce and has been testing primary support at $4,000 over the past 8 weeks.

Spot Gold

Gold ETF inflows slowed in the first half of 2026 but remained positive, driven by continued inflows into Asian funds. North America experienced an outflow of $7.7 billion, European inflows slowed to $3.2 billion, while Asia recorded a strong inflow of $12 billion.

Gold ETF Flows

Average daily trading volumes surged to a record $488 billion in the first half of 2026.

Gold Average Daily Trading Volumes

OTC trading, led by the LBMA, averaged US$249bn/day, substantially above 2025 levels and underscoring the depth of institutional participation. Exchange-traded volumes also jumped, reaching US$227bn/day – 22% higher than the 2025 average – supported by elevated investor activity. Meanwhile, global Gold ETF trading averaged US$12bn/day – up 73% from 2025 – fueled primarily by robust trading in US funds as investors increasingly turned to Gold amid heightened macroeconomic and geopolitical uncertainty.

Comex futures net longs increased to 538 tonnes, up 16% since May, and the highest month-end level since January despite a weakening gold price. A closer look shows retail participation (non-reportable net longs declined in June, while other reportables, which capture large trades outside the managed money category, were up 16% from May. Managed money net longs remained broadly stable, declining by just 43 tonnes year-to-date. Again, H1 investor behavior differed: retail positioning largely tracked short-term price movements while larger traders’ positions have, in general, stayed stable since mid-March. (WGC)

Comex contracts standing for delivery jumped to 13,123 in July from 8,838 in May, and a 9.0% increase over July last year.

Spot Gold

China

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction in the manufacturing sector.

China: NBS Manufacturing PMI

The OECD Composite Leading Indicator for China fell to 98.6 in June, below its long-term average of 100, signaling a contraction.

OECD: China Composite Leading Indicator

The RBA’s activity indicators for China show industrial production is holding up, boosted by record exports. However, real retail sales growth has stalled, while fixed asset investment has contracted sharply following Trump’s tariff blitz last year.

OECD: China Activity Indicators

Household credit growth (purple below) has also stalled. Business credit has taken up the slack, but government credit growth is also contracting.

OECD: China Total Social Financing

Conclusion

10-year US Treasury yields jumped to 4.745% after the Fed kept its funds target range at 3.5%-3.75%, reflecting bond market concerns over inflation.

The new Fed Chair’s strategy is to keep short-term rates low and allow long-term rates to rise, to slow the rate of demand growth in the economy and curb inflation. However, nominal GDP is growing at an annual rate of 6.5%, which means that 10-year Treasury yields would need to rise by 175 basis points to keep inflation in check. An increase to 6.5% would likely cause a sharp contraction in stocks.

Japan’s Ministry of Finance has intervened to support the Yen. However, the effects will likely be short-lived, as the Bank of Japan continues to maintain stimulative monetary policy, which fuels inflation and undermines the currency.

Rising long-term sovereign debt yields reflect bond market concerns over rising sovereign debt and the risk of fiscal dominance, as in Japan, where the central bank has prioritized maintaining an orderly bond market above price stability. Erosion of the currency purchasing power is the inevitable outcome.

Gold has found strong support at $4,000 per ounce, with long-term investors prepared to wait out the turmoil in the Middle East. Demand from Asian investors has been particularly strong, but could be undermined if China goes into recession.

China’s economy shows increasing signs of contraction, precipitated by a decline in business investment following President Trump’s 2025 tariff attack. Household credit and real retail sales have stalled, and the NBS Manufacturing PMI fell to 49.2, signaling a contraction. Higher fuel prices would be an added headwind that could tip the economy into recession.

Acknowledgments

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US & ASX Leading Indicators

Thank you for the feedback on our new format for the weekly market snapshots.

US Stock Market

Two axes emphasize the weekly rises and falls in the composite valuation indicator, which uses the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

US Bull-Bear

We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of the five indicators signal risk-off, indicating medium risk of a US bear market.

Bull/Bear Market Indicator

The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.

Treasury Yields: 10-Year minus 3-Month

The new Fed Chair, Kevin Warsh, wants to eliminate Fed guidance.

For Warsh, saying less is a virtue. It protects the committee’s judgment. If policymakers issue a forecast, they start crediting evidence that confirms it and discounting evidence that doesn’t. He also believes a quieter Fed gets a cleaner read on what investors think about the economy, rather than hearing an echo of its own guidance. Investors “are upset with me already that I’m somehow not feeding them all the information they’d gotten before,” he told lawmakers. (WSJ)

Warsh's tight-lipped approach will likely fuel greater bond market volatility, driving up long-term yields. A steeper yield curve would restrict demand growth and help to curb inflation.

The latest FOMC meeting kept the fed funds rate target range unchanged at 3.5%-3.75%. There have been no rate cuts for more than 75 days, so the signal has reverted to risk-on.

Fed Funds Rate Target (Upper Limit)

US heavy truck sales slowed to 38,900 units in July, down from 40,700 in June. The 12-month average fell to 31,200 and would need to reverse by 10% for the risk-off signal to switch to risk-on.

Heavy Truck Sales (Units)

Heavy truck sales reflect the transportation industry's confidence in the economic outlook. A fall of more than 10% below the preceding peak signals risk-off, while a 10% rise above a trough indicates risk-on.

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The ratio of stock market capitalization to GDP is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, flags a bear market, while the composite Stock Pricing indicator warns that stocks are extremely over-priced.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

ASX Bull-Bear

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators have a 40% weighting in the ASX Leading Index, China 20%, and the US Leading Index carries the remaining 40%.

The ASX 200 Financials Index (XFJ) is above its 50-week weighted moving average, continuing the risk-on signal.

ASX 200 Financials Index

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

The 3-month moving average of private housing approvals increased to 17.8K in June, from 16.6K in May, while the 3-month MA increased to 16.9K, well above the 20-year MA. The uptrend in the Australian housing sector remains strong.

Australian Private Housing Approvals

A cross of 3-month MA values (navy) below the 20-year MA (red) would signal risk-off.

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction, and a fall below 49.0 would signal risk-off.

China: NBS Manufacturing PMI

ASX Stock Pricing

ASX stock pricing indicates that stocks are overvalued, but not as extreme as the US market.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

The Warren Buffett indicator compares stock market capitalization to GDP, providing a stable, long-term ratio with a long-term mean of 1.03.

ASX Market Capitalization/GDP

The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.

ASX 20 Price to Sales with 20% Trimmed Mean

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the composite Stock Pricing indicator signals stocks are moderately over-priced. China is on bear watch after NBS Manufacturing PMI fell sharply to 49.2 in July, close to the risk-off signal.

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US & ASX Leading Indicators

Thank you for the feedback on our new format for the weekly market snapshots. One request was that we use a single axis for the chart below. We will display both this week. Let me know which you prefer.

US Stock Market

One axis illustrates how extreme stock pricing is, with the composite valuation indicator hovering close to 100 percent.

US Bull/Bear & Market Valuation Indicators

Two axes emphasize the weekly rises and falls in the composite valuation indicator, using the secondary axis on the right.

US Bull/Bear & Market Valuation Indicators

We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of the five indicators signal risk-off, indicating medium risk of a US bear market.

Bull/Bear Market Indicator

US Stock Pricing

US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.

The ratio of stock market capitalization to GDP is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.

Buffett Indicator: Stock Market Capitalization to GDP

Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.

The current advance on the CAPE ratio is the second-highest in history, behind only the Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Ratio

Conclusion

The US Bull-Bear indicator, led by the transportation sector, flags a bear market, while the composite Stock Pricing indicator warns that stocks are extremely over-priced.

ASX Stock Market

ASX Bull/Bear & Market Valuation Indicators

The ASX Bull-Bear Leading Index signals a mild bear market.

ASX Bull/Bear Market Indicator

Australian leading indicators have a 40% weighting in the ASX Leading Index, China 20%, and the US Leading Index carries the remaining 40%.

The ASX 200 Financials Index (XFJ) is above its 50-week weighted moving average, continuing the risk-on signal.

ASX 200 Financials Index

The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.

ASX 200/Gold in Australian Dollars

Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.

ASX Stock Pricing

ASX stock pricing indicates that stocks are overvalued, but not as extreme as the US market.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.

ASX 20 Forward PE with 20% Trimmed Mean

Conclusion

The ASX Bull-Bear indicator signals the early stages of a bear market, while the composite Stock Pricing indicator signals stocks are moderately over-priced.

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Allianz SE (ALIZF)

30 June 2026

Allianz SE (ALIZF.OTC) provides property-casualty insurance, life/health insurance, and asset management products and services worldwide.

The company’s Property-Casualty segment offers motor liability, accident, fire and property, general liability, credit, and travel insurance, as well as assistance services, to private and corporate customers.

Its Life/Health segment provides a range of life and health insurance products on an individual and group basis, including annuities, endowment and term insurance, unit-linked and investment-oriented products, private and supplemental health, and long-term care insurance.

The Asset Management segment offers institutional and retail asset management products and services to third-party investors, comprising equity and fixed-income funds, cash, and multi-asset funds, and alternative investment products, including real estate, infrastructure debt/equity, real assets, liquid alternatives, and solutions business. In addition, it provides banking services for retail clients and digital investment services.

Allianz SE was founded in 1890 as a transport and accident insurance firm by Carl von Thieme and Wilhelm von Finck, the founders of Munich Re (MURGY). It expanded into Europe and North America, was listed in Berlin, and added the life business in the 1920s. After World War II, Allianz lost its foreign business and was forced to relocate its head office to Munich. It set about reacquiring its foreign interests, starting with Austria, and became the largest European insurer during the postwar boom.

Market Position

Customers in the insurance business tend to shop around based on price, and insurers have limited pricing power. Return on invested capital (ROIC) at 15.9% is not in the league of Progressive (30.3%), but is close to Zurich Insurance AG (ZURVY) at 16.7%, and well above Sun Life (SLF) at 10.5%, Berkshire Hathaway (BRK.A) at 9.3%, AXA (AXAHF) at 6.7%, and Swiss Life (SWSDF) at 6.1%.

Growth & Earnings

ALIZF has demonstrated strong revenue and earnings growth over the past 3 years, averaging 25.9% and 21.4%, respectively, and trades at a reasonable forward P/E of 13.3x earnings.

Profit margins weakened during the COVID-19 pandemic, but have since rebounded to new highs.

Allianz (ALIZF) Revenue & Profit Margins

Financial Position

The company’s Debt-Equity ratio is reasonable at 0.53, and it generates healthy free cash flow.

Allianz (ALIZF) Debt-Equity Ratio & Book Value per share

Dividends

Allianz’s forward dividend yield is respectable at 4.4%, and dividend growth since 2016 has averaged 8.4%. Using the Gordon Growth Model, we combine the two for a total projected return of 12.8%.

Allianz (ALIZF) EPS & Dividends

Chart

Allianz (ALIZF) is in a long-term uptrend on the monthly chart, holding above its 12-month weighted moving average. The stock has consolidated between 400 and 450 over the past 14 months, and a breakout above 450 would signal another advance. The Trend Index has declined during the consolidation, and an upturn would reinforce a buy signal.

Allianz SE (ALIZF) Monthly Chart

Recommendation: BUY

We recommend ALIZF as a long-term addition to the PVT portfolio.

Acknowledgements

Fundamental data is from Morningstar.

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