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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Fed’s Warsh Hawkish But Won’t Hike

Key Points

  • Fed Chair Kevin Warsh’s keynote speech at Jackson Hole had a distinct hawkish tone.
  • Financial markets responded with a sharp jump in the 2-year Treasury yield to 4.36%.
  • However, Warsh’s hands are tied by political considerations, and no rate hike is likely.

We are convinced that the FOMC will not hike rates at its September meeting despite the Fed Chair’s hawkish speech at Jackson Hole on Friday, August 28.

The new Fed Chair set a hawkish tone in his keynote address to the Fed’s Jackson Hole economic symposium in Wyoming.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, ‌we have work to do. That’s our job … our mandate … and our charge to keep,” Warsh said.

….”The Fed’s predominant focus right now should be on prices.”

The 2-year Treasury yield jumped by 9 basis points within 20 minutes of Warsh’s speech and ended Friday up 13 basis points at 4.36%, more than 60 basis points above the Fed’s current target range of 3.5-3.75%.

2-Year Treasury Yield (CNBC)

However, Warsh is unlikely to support a rate hike before the November midterms because of the political implications.

Warsh has strong Republican credentials, having served in President George W. Bush’s White House and as the youngest board member in the Federal Reserve’s history. He has also spoken about the importance of free trade, the Fed’s political independence, and a strong Dollar — views that could lead to conflict with the current President. However, he has close links with Treasury Secretary Scott Bessent, having worked as partners at Stan Druckenmiller’s Duquesne Capital. He also has strong MAGA ties through his father-in-law, Ronald Lauder, son of Estee Lauder, who is a decades-long friend and ally of Donald Trump.

One of Warsh’s two appointees at the Fed is Paul Winfree, who authored the chapter on the Federal Reserve in the Project 2025 blueprint. The other is Daniel Heil, a fellow at Stanford’s conservative Hoover Institution, where Warsh served before joining the Fed.

Warsh enjoys the trust of President Trump, who regularly consults him on economic matters. A far stretch from the strained relationship with his predecessor, Jerome Powell, whom Trump did his best to undermine, including having him investigated by the Justice Department.

President Trump has a long history of turning on his political allies if they do not do his bidding. He repeatedly criticized his earlier appointee, Fed Chair Powell, for not lowering interest rates, going so far as to suggest that Powell was a bigger threat to the United States than Chinese President Xi Jinping. Powell insisted that the Fed made decisions based on data without regard to politics, but that did not seem to placate the President. The Fed then cut rates in September 2024, two months before the last presidential election, which seems to have convinced Trump that Powell was politically motivated.

We believe that Kevin Warsh is politically astute, having won nomination as Fed Chair despite his old-school Republican values. As a recent Trump appointee, presiding over a Fed that hikes rates two months before the upcoming midterm elections would likely be taken by the President as a betrayal of his trust. It would invite similar persecution to what his predecessor faced. That would be politically stupid.

Conclusion

The new Fed Chair is unlikely to convince President Trump of the need to hike rates ahead of the November midterm, and is unlikely to support such a move without his assent.

The President will not want to upset his predominantly blue-collar MAGA base, especially after the Iran debacle, when he needs a strong turnout in the November midterms. Your typical MAGA voter is not that sophisticated and is unlikely to be persuaded by arguments that higher interest rates will reduce inflation in 12 months’ time, but will instead be incensed by an increase in interest payments on their car loan and credit card.

This is kitchen table economics. That is what is driving Fed monetary policy.

Acknowledgments

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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

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 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 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 1999 peak during the Dotcom bubble at 44.2, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Index

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.

A 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 the early stages of 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) retreated from resistance at 10000, crossing below its 50-week weighted moving average. A breach of primary support at 9000 would signal risk-off. 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.

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable 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 over-priced. China is on bear watch after NBS Manufacturing PMI fell to 49.2 in July, close to its risk-off signal.

Related Links

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Australian CPI Sticky But No Rate Hike

Key Points

  • Australian CPI remains stubbornly high, with a 1.0% monthly increase in July.
  • Trimmed mean CPI was unchanged at 3.6% on a year-on-year basis.
  • However, the unemployment rate rose to 4.5% in July, suggesting the RBA is unlikely to raise rates.

Australian CPI remains stubbornly high, with the Trimmed Mean, the RBA’s favored measure, holding firm at 3.6% for the 12 months to July.

Australian CPI & Trimmed Mean CPI

Headline CPI eased to 3.5% for the 12 months, but that reflects base effects from the 1.3% increase in July last year compared to a jump of 1.0% in July 2026.

Australian CPI - Monthly & Annual

Strong CPI in July increases the motivation for another RBA rate hike, but Justin Smirk at Westpac points out that the labor market is softening.

Unemployment rose to 4.5% in July, up from 4.4% in June.

Australia: Unemployment

Monthly hours worked declined by 12.5 million hours in July to 1,998 million hours in seasonally adjusted terms, a monthly fall of 0.6%.

Australia: Aggregate Monthly Hours Worked

Conclusion

We agree with Westpac that the RBA is unlikely to raise rates:

Market services inflation is above target but a softer than expected labour market and wage outcomes reduce the likelihood of a November rate hike. We believe the RBA is likely to remain on hold for the remainder of this year.

However, credit is growing at an annual rate of 8.5% and broad money supply at 8.0%. Real GDP growth of 2.5% for the 12 months to March 2026 suggests that underlying inflation is between 5.5% and 6.0% (the spread between the two measures and growth in output/GDP).

Australia: Credit and Broad Money Growth

Our calculation of underlying inflation is more than 1.0% higher than the RBA’s current cash rate target of 4.35%.

We will likely be stuck with high inflation for a while.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ~ Milton Friedman

Acknowledgments

Notes

  1. Credit and money supply represent two sides of the same coin: bank lending and bank deposits. They only tend to diverge when the RBA injects liquidity to rescue the economy from a deflationary spiral, as in 2008, 2010-2013, and 2020.
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How High Can Gold Rally?

Key Points

  • Gold is rallying to test $5,000 per ounce.
  • The Dollar Index is falling steeply.
  • The new Fed Chair is unlikely to hike rates before the November midterms.
  • But crude oil may spoil the party.

Gold has rallied to $4,635 per ounce and looks set to test resistance at $5,000, but will it have enough momentum to carry further?

Spot Gold

The Gold rally was caused by a dovish FOMC meeting at the end of July. The bond market had expected a Fed rate hike to establish the new Fed Chair’s hawkish credibility. Warsh disappointed, with strong words but no action. The 1-Year Treasury Bill rate broke its 6-month trendline, signaling a shift in expectations.

1-Year Treasury Yield (CNBC)

Also, the Dollar Index broke support, signaling a test of primary support at 97.

Dollar Index

The last steep rally in Gold was after a dovish keynote speech by former Fed Chair Jerome Powell at Jackson Hole on August 22 last year. Gold climbed $2,000 per ounce within 6 months.

Spot Gold & S&P 500 ($INX)

The first divergence between Gold (orange above) and the S&P 500 index (blue) occurred shortly after President Trump’s inauguration, when he launched his tariff onslaught on trading partners. The second massive divergence after Powell’s speech was followed by a sharp fall starting in March 2026 after the attack on Iran forced some countries to sell reserves, including Gold, to provide liquidity. Selling will likely resume only if there is another spike in oil prices.

A breakout of Brent Crude above $100 per barrel would be cause for concern.

Brent Crude Futures (ICE October'26)

Conclusion

We don’t expect the new Fed Chair to hike rates before the November midterms, which should give Gold plenty of time to break resistance at $5,000 per ounce, setting off a fresh advance.

The wild card is crude oil prices. A spike in Brent Crude above $100 per barrel could trigger further selling of Gold reserves by major oil importers to defend their currency, and Gulf states to cover lost export revenues. High energy prices could also force the Fed Chair to hike rates.

We are convinced that Gold will eventually reach $10,000 per ounce, but are unsure whether that will be in one year or ten years. Trends seldom travel in a straight line, as the first half of this year has just reminded us.

Acknowledgments

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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

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 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 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 1999 peak during the Dotcom bubble at 44.2, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Index

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.

A 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 the early stages of 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) retreated from resistance at 10000, crossing below its 50-week weighted moving average. A breach of primary support at 9000 would signal risk-off. 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.

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable 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 over-priced. China is on bear watch after NBS Manufacturing PMI fell to 49.2 in July, close to its risk-off signal.

Related Links

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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

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 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)

The Cass Freight Shipments Index 12-month moving average remains in a downtrend, signaling risk-off. The index highlights broad freight shipping levels in the mainstream economy, and a rise or fall of more than 3 basis points signals risk-on or risk-off, respectively.

Cass Freight Shipments Index

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 1999 peak during the Dotcom bubble at 44.2, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Index

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.

A 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) retreated from resistance at 10000, crossing below its 50-week weighted moving average. A breach of primary support at 9000 would signal risk-off. 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.

NAB Forward Orders dipped in July 2026, and the 3-month moving average remains below zero, signaling risk-off.

NAB Forward Orders

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.

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable 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 over-priced. China is on bear watch after NBS Manufacturing PMI fell to 49.2 in July, close to its risk-off signal.

Related Links

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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 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 1999 peak during the Dotcom bubble at 44.2, with values far above their long-term average of 22.4.

Robert Shiller's S&P 500 CAPE Index

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.

A 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) retreated from resistance at 10000, crossing below its 50-week weighted moving average. A breach of primary support at 9000 would signal risk-off. 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.

Warren Buffett's favorite long-term valuation indicator compares stock market capitalization to GDP, providing a stable 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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