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Pretiorates’ Thoughts – Still Waters Run Deep

Global stock markets have continued to show their volatile side over the past few weeks. The Japanese stock market, in particular, took another hit, even though savvy investors have recently been stepping up their buying activity. The red areas on the chart also indicate that the pullbacks in the Nikkei Index were accompanied by a significant “exaggeration.” This is usually a harbinger of a technical rebound—especially when it’s accompanied by “strong action.” The odds of a counter-movement are therefore quite good.

As we mentioned in last week’s thoughts, it’s worth paying special attention to the Korean stock index. It has since emerged as a true trendsetter for the AI sector. Unsurprisingly, it, too, has taken a significant hit recently. Unlike with the Nikkei, however, our indicators here are not yet fully convinced that a technical rebound is on the horizon.

Although sentiment is deep in the valley of pessimism—usually a promising contrarian indicator—the risk that the index will slip below its July low is by no means off the table. And that would be yet another sell signal that investors would likely prefer to do without.

Turning our attention to Europe, developments in France naturally take center stage—and not just those in the financial markets. The spread between market yields on French and German government bonds has widened once again and now stands at a hefty 160 basis points, or 1.6%. Très inquiétant!

So far, however, the stock markets seem to care very little about this. Many investors even interpret this composure as a sign of strength. We wouldn’t necessarily agree with this view, however, and continue to approach the situation with due caution. Even so, there is certainly some merit to the theory circulating among stock traders that capital is fleeing government bonds and seeking a new home in the private sector—and thus also in stocks. At the very least, the sentiment indicator is now showing a more positive side again.

The Swiss stock market has put on a remarkably strong performance over the past few days. Compared to other stock exchanges, it has been playing in the “Champions League,” so to speak. The reason is obvious: The Swiss market is dominated by defensive heavyweights: Nestlé, Novartis, and Roche account for nearly 50% of the SMI Index. But a similar preference is evident across the Atlantic as well: On Wall Street, defensive companies are currently also being favored over their cyclical counterparts.

On the Swiss stock market, savvy investors have been buying heavily of late—and without any significant overvaluation. This is a thoroughly healthy mix that points to a continuation of the positive trend…

There are now less than two weeks until the U.S. midterm elections. We stand by our assessment that these elections are unlikely to proceed as quietly as in previous years. Regardless of who wins the House of Representatives and/or even the Senate, the other party is likely to present a decidedly “dissatisfied” front.

Actually, the stock market should have been suffering from nervous jitters long ago: turbulent bond and energy markets, geopolitical tensions, and the flood of quarterly earnings reports are all testing investors’ nerves at the same time. Yet, in the face of this turmoil, the U.S. stock markets are displaying an almost stoic calm—almost suspiciously so.

For beneath the seemingly mirror-smooth surface of the water, things continue to bubble violently. The swap market offers a warning signal: When credit investment-grade spreads there narrow significantly, it usually doesn’t take long before the stock market marches in the same direction.

This almost eerie calm also has an interesting side effect: Investors apparently no longer feel it’s necessary to hedge against price losses. The skew index—which reflects the valuation of long-term put options with strike prices well below the current market level (so-called out-of-the-money puts)—speaks volumes here. These hedges are now strikingly inexpensive. Or to put it another way: the demand for this “safety belt” is surprisingly low. Apparently, hardly anyone expects the ride to suddenly get bumpy.

A particularly intriguing—yet also somewhat unsettling—development can currently be observed in the currency futures market: Short positions in the euro have been massively expanded over the past few days. Apparently, more and more market participants are betting that the European single currency will come under further pressure …

At the same time, long positions in the Swiss franc—the classic safe-haven currency—have been increased quite dramatically. And with this, an individual or group of investors is sending a pretty unambiguous message: While the stock markets are still basking comfortably in the sun, some investors with particularly deep pockets are already taking precautionary steps to secure their positions. They clearly expect that this deceptive calm could soon come to an end…

We’ll be watching closely!

We wish you successful investments!

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Pretiorates

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Pretiorates’ Thoughts – Cash is King

Last week, we speculated that ECB President Christine Lagarde would likely comment very soon on the situation surrounding rising market yields on French government bonds. We didn’t have to wait long. Just a few days later, confirmation came from the highest level: The central bank has sufficient tools at its disposal to combat “unfounded” and disorderly market dynamics. As expected, this statement initially brought some calm to the bond markets. The spread between German and French government bonds did not widen further—though it hasn’t narrowed yet either…

Elsewhere, in an interview with CNN, Lagarde confirmed a second expectation we had described last week: One of the tools in the ECB’s toolkit, the so-called “Transmission Protection Instrument” (TPI), is unlikely to be deployed. She called on the French government to take responsibility: The country must get its debt problems under control on its own through fiscal consolidation. In doing so, she indirectly confirmed our assessment that France does not currently qualify for this.

The ECB does not yet intend to deploy the rescue umbrella at a spread of 140 basis points, or 1.4%. Nevertheless, we’re willing to make a bet today: Should the spread widen to over 200 basis points, today’s “no” is likely to turn into “we’re monitoring the situation very closely” rather quickly—and, as is well known, that is often just the prelude to action on the part of central banks.

It is therefore not surprising that the insurance premiums against a French default—known as credit default swaps (CDS)—remain significantly higher than those for neighboring Germany—and have not yet declined even after this verbal reassurance.

For the moment, however, some calm has returned to the bond markets. In contrast, the stock markets—just as one would expect in October—are becoming increasingly nervous. We’ve already mentioned the arguments for a correction several times in recent Thoughts. What’s interesting, however, is this: Anyone looking only at the major indices might think everything is still fine. Only upon closer inspection does one realize that the correction began long ago: While the good old Dow Jones Industrial Average has been in reverse since early August…

…the S&P 500 is still trading very close to its all-time high. There’s a simple explanation for this: While the Dow Jones—comprising 30 companies—does include some of the “Magnificent Seven” or “Hyperscalers”, the S&P 500 is now much more heavily weighted toward IT, AI, and related companies. AI and data center equipment providers, in particular, have performed exceptionally well recently, helping the S&P 500 set new records time and again. At the same time, however, stocks in the financial, banking, utilities, and other traditional sectors have long been in a correction phase. It’s just that these companies now carry significantly less weight in the S&P 500.

The real test for AI companies, however, likely lies ahead. In recent months, the Korean stock market has almost become a pioneer of the AI movement. And after the KOSPI triggered a minor global AI earthquake back in the summer, the index now appears to be taking a significant hit once again. Distribution by professional traders has recently increased sharply once more. Should the Korean KOSPI index fall below its late-July low in the coming days, the pulse of AI stocks on Wall Street is also likely to quicken noticeably.

Another concern for the stock market is the upcoming midterm elections. The polls aren’t going the way Wall Street would like.

Precious metals—gold and silver—are also behaving almost as if following a script. The inflation figures released today triggered a wave of selling.

It would be more accurate to say, however, that the inflation figures—which came in barely higher than expected—provided traders with a welcome excuse to sell. If they had actually been the trigger for the sell-off in precious metals, bonds would also have come under greater pressure—which was not the case.

But as is so often the case at the start of major corrections in the stock markets, precious metals are the first to take a hit. We recall 2009, 2015, 2020, and 2022: In the early stages, gold and silver were among the biggest losers—only to subsequently be among the first assets to post the strongest gains. But precious metals are, after all, the assets with the greatest market liquidity. That’s why investors usually hit the “sell” button on them first when cash becomes king again.

But… as you’ve read here before: Should the stock markets come under greater pressure, today’s expectations of further interest rate hikes could turn into fantasies of lower interest rates surprisingly quickly—including QE as a possible additional option. That’s exactly what could then trigger the next rally in precious metals and likely in cryptocurrencies as well. Until then, however, the rule remains: Cash is King…

We wish you successful investments!

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Pretiorates’ Thoughts – Whatever It Takes… Again?

We showed this chart two weeks ago: The spread between 10-year German and Swiss government bond yields has widened from practically zero to about 3 percent—or 300 basis points—in just four years. That’s not a small step, but rather a significant leap.

Nevertheless, compared to the other EU countries, German government bonds—the good old Bund—continue to look remarkably solid. The spread between German and French government bonds, which we discussed two weeks ago, has since risen to over 150 basis points. That’s a whopping 1.5%.

And the problem of excessively rising market yields is concentrated primarily in France. While the spread between German and Italian government bonds has also risen, it remains almost unremarkable by comparison.

Even UK government bonds show no signs of unusual nervousness. The spread relative to German Bunds has hardly changed in recent years.

So the big question is: Why are French yields, of all things, rising so sharply—or rather, why are the prices of French government bonds falling so significantly? There are several reasons for this:

1. The French government has been running a budget deficit of more than 5% of GDP for years.

2. With rising interest rates, this deficit is likely to grow even larger by 2027.

3. The political landscape is so fragmented and divided that a sustainably healthy national budget can hardly be considered a realistic scenario in the coming years.

4. New elections are scheduled for April 2027. The likelihood that any of the numerous parties—even in a coalition—will have enough political leeway for genuine reforms is, to put it mildly, limited.

5. At the same time, major cities are currently experiencing numerous and, in some cases, violent demonstrations: students are protesting overcrowded classrooms, a shortage of teachers, and dilapidated school buildings in need of renovation. All of this costs money—money that isn’t available. Meanwhile, government employees and labor unions are demonstrating against austerity measures. These demands, too, can hardly be met—for the same reason: there isn’t enough money.

6. Asian institutional investors, in particular, are among the major investors in French government bonds. In light of points 1 through 5, they are currently—and will likely remain so for some time—understandably reluctant to make new investments. If such an important source of demand were to disappear, it would put additional pressure on French bonds.

The white knight that France is now eagerly awaiting is likely to be the ECB. President Christine Lagarde could soon publicly assure the market that the ECB is strong enough to restore calm to the French bond market. Much like her predecessor, Mario Draghi, put it during the last major sovereign debt crisis in July 2012: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

We do not belong to the camp that is convinced of sustained support from the ECB. It is not to be expected that such support will go significantly beyond verbal interventions. The ECB’s bond purchases under the APP or PEPP have expired, and a resumption in the near future seems unlikely.

There is still the ECB’s TPI program—the Transmission Protection Instrument—which was created specifically for such situations. This allows the ECB, if necessary, to selectively purchase government bonds of individual eurozone countries if, in its view, their yields are rising excessively and unjustifiably.

However, the TPI is likely to be one thing above all else: a threat intended to deter, which, ideally, should never actually be used. And France does not even clearly qualify for this instrument at present. The TPI is intended for countries that adhere to the European Commission’s recommendations regarding their deficits yet are still exposed to speculative market forces. Given France’s current deficit figures, it is difficult to argue that the country is already taking all appropriate steps to bring its fiscal situation under control. In short: If the ECB were nevertheless to come to France’s aid with the TPI, it could end up creating a credibility problem for itself.

This points to a development we have already described several times here: The U.S. dollar is likely to lose support in the long term. But before it finds itself with its back against the wall, the euro could face precisely this fate first. European countries and the ECB have significantly fewer tools at their disposal for managing financial crises than the U.S. or the Fed. A capital flight is therefore likely to begin in Europe first—and then seek a new home. The most obvious alternative? The U.S. dollar. The euro is already showing initial signs of weakness. It is striking that the onset of this recent weakness coincides almost exactly with the weakness of French government bonds.

The trend in the European Central Bank’s balance sheet total shows a very high correlation with the trend in the European currency—with a lag of about three months. This indicator suggests that the euro is likely to remain on a downward trend in the coming months as well.

The U.S. dollar could benefit from this — both from a potential capital flight from Europe and from the higher interest rates that the market is now pricing in. The futures market has currently priced in interest rates that are about 69 basis points higher. That would mean the Fed could implement two or three rate hikes by July 2027.

But this is precisely where the next problem lies: Investor concerns about government debt are also growing in the U.S. Market yields have also risen sharply recently. Inflation, energy prices, and similar factors are often blamed for this. But it’s not that simple: Unlike nominal yields, real market yields exclude expected inflation. If rising inflation expectations were the main reason for the rise in yields, the spread between nominal and real yields would have had to widen significantly recently. But that is precisely what has not happened. Nominal and real yields have risen largely in tandem, while their spread has remained surprisingly stable for about five years. Ergo: The rise in yields is likely attributable primarily to investors demanding higher yields to compensate for increased credit risk. The strength of the U.S. economy is likely to play only a minor role in this.

The next chapter of Pretiorates’ Thoughts: However, further rises in market interest rates on the bond markets are unlikely to leave the stock markets unscathed. Nervousness is likely to increase. And with that, we remain on the course whose direction we have already outlined here several times: Should the stock markets spiral out of control, quantitative easing (QE) is likely to be back on the table. This would be the Fed’s classic tool for calming interest rates — and the additional liquidity would simultaneously help stabilize the stock markets as well. However, the strength of the U.S. dollar would then likely be called into question quite quickly. And Fed Chairman Kevin Warsh would have to put his top priority—fighting inflation—on the back burner.

Is this scenario possible? We don’t know. But the long-term cycles of the U.S. dollar and U.S. Treasuries over 20 years offer interesting clues: The 43-month cycle of the U.S. dollar suggests a possible peak around the turn of the year.

The 20-year yield cycle for U.S. Treasuries is somewhat more complex and consists of several cycles. If the track record to date holds true, we could see a massive correction in market yields in the final weeks of this year.

We wish you successful investments!

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Pretiorates

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Pretiorates’ Thoughts – When Bonds Start Talking, Stocks Should Listen

Market yields continue to rise. The yield on the 10-year U.S. Treasury note now stands at 5.09%, well above the psychologically important 5% mark. This is the highest level since June 2007—that is, in nearly 20 years. Generally speaking, higher interest rates are positive for a currency. Accordingly, the U.S. dollar continues to gain ground against other currencies.

The euro, on the other hand, has once again taken a significant hit in recent weeks. And this despite the fact that market yields are also rising steadily in Europe.

It’s obvious: The market has recently undergone a shift. The focus is moving away from inflation and monetary policy—toward fiscal credibility. The key question is no longer primarily how aggressively central banks need to combat inflation. After all, interest rate hikes are only of limited help when rising prices are primarily caused by a supply problem. Higher interest rates, after all, do not produce any additional diesel. On the contrary: in a tight spot, they make investments more expensive and tend to make supply even scarcer.

The crucial question now is whether policymakers are credible. Will deficits ever be reduced? Will the debt burden finally be addressed? Are there credible measures to put public finances back on a sustainable path? Because such a development is currently hardly foreseeable in any country, the market is increasing the pressure—not with a sledgehammer, but slowly, steadily, and extremely effectively.

In Europe—if not worldwide—there is really only one country left that has its finances comparatively well under control: Switzerland. As recently as four years ago—that is, roughly until the outbreak of the war in Ukraine—Swiss and German 10-year government bonds yielded nearly the same rate. Since then, the spread has widened continuously and now stands at around three percentage points. Financial professionals refer to this as 300 basis points, which is an enormous amount. This is no longer a minor blemish, but a clear message from the market.

We’ve seen in recent weeks, with the elections in various federal states, that unity in German politics isn’t exactly at Champions League level right now. Things are even less harmonious in France, however. For years, the yield spread between French government bonds and German Bunds stood at around 0.20% or 20 basis points. Over the past two years, it has risen to around 80 basis points. In recent days, the next stage of the rocket has been ignited: the spread has climbed to well over 100 basis points, or more than 1%. The market’s message could hardly be clearer: confidence is waning, and the fuse is getting shorter.

Consequently, the willingness to invest in German, French, and other European assets is also declining. And this gives rise to a debt and currency problem that marks a crucial difference from the U.S. dollar: The euro is not a global reserve currency like the greenback. An international corporation or a government doesn’t really need euros to purchase many commodities. At the same time, the ECB has significantly less leeway to implement programs like QE without putting the euro under even greater pressure.

So what do global investors do when they want to pull out of the euro? They look for alternatives. And there aren’t too many of those left. The yen—which recently even had to be propped up—and the U.S. dollar. As a result, the capital of major international investors almost inevitably finds refuge in the greenback, aside from their respective home currencies. Ironically, the U.S. dollar, of all things, thus becomes the last safe haven. Our greenback strength indicator confirms this picture: The U.S. dollar has recently reached a strength of 100% again against all other major currencies.

At the same time, we’re seeing a significant increase in investments in traditional safe-haven currencies. Long positions in Swiss franc futures have risen sharply recently.

And even the Japanese yen, which was still clearly struggling just a short while ago, is suddenly making a comeback. There, too, demand in the futures market is rising sharply. International capital is apparently searching quite urgently for a new home.

Corporate bonds and stocks are also potential alternative destinations when capital flows out of government bonds. However, this is only to a limited extent. Experience shows that the stock market, in particular, becomes nervous as soon as developments in the bond market indicate increasing risks. This is exactly what we’ve observed again for the first time in recent days: the spreads between bonds of different credit ratings are beginning to widen. In other words: The market is once again taking a closer look at whom it’s actually lending money to. Our chart shows this trend in inverse terms.

Historically, such a widening of spreads in the stock market has often been a harbinger of a faster heart rate—or, to put it in less medical terms: a correction.

Sentiment in the S&P 500, however, has not yet suffered any major damage. For several weeks now, it has merely been hovering slightly in negative territory. Today marks the beginning of fall. And we know from experience: the fiercest storms tend to strike during this time of year.

And once again, the conclusion is the same as in several of Pretiorates’ Thoughts over the past few weeks: Precious metals and cryptocurrencies are likely to be among the biggest beneficiaries of the current trend. Experienced investors know, however, that even these two asset classes won’t escape unscathed in the initial phase should an “autumn storm” indeed sweep through the markets in the coming weeks. Precisely because they are liquid, they tend to be sold off during such periods when investors suddenly want only one thing: cash. Experience shows, however, that this is usually only a temporary phenomenon—as soon as the storm subsides, the structural arguments come back to the forefront.

We wish you successful investments!

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Yours sincerely,

Pretiorates

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Pretiorates’ Thoughts – A Harsh Dose of Independence

Yesterday’s Fed meeting was eagerly anticipated. Not so much because of the decision itself—the quarter-percentage-point rate hike had long been priced in by the market. Much more intriguing was the question of how independent the new chairman, Kevin Harsh, would appear to be and how he would frame the rate hike. Remember: Every additional increase in the U.S. interest rate also increases the pressure from the very top—from the White House and from U.S. President Trump.

To make a long story short: He passed the test. What’s more, the market was just as unenthusiastic as President Trump when Harsh hinted that another interest rate hike might be in store this year—in October or December. It was also noteworthy that yesterday’s interest rate hike was approved unanimously—a stark contrast to the vote at the Fed’s last meeting this summer.

The markets reacted with significant losses, but that was likely just short-term noise. Fed Chair Kevin Harsh presented himself as an independent decision-maker—and that is precisely what should help the recently quite nervous U.S. bond market, at least for now. New confidence is what the U.S. bond market needs most of all.

In fact, our Market Pendulum is also showing a surprisingly confident side – in the short term: Last week’s sharp rise—and with it, the rise in market yields—may have peaked for now. Although the key 5% threshold was briefly breached, the trend could reverse downward again in the coming weeks.

Fighting inflation is at the top of the Fed Chair’s priority list; by now, everyone should know that. An overheating economy, which is driving inflation due to excessive consumer demand, can certainly be reined in with higher interest rates. That’s exactly by the book. Thus, the rate hike is justified, because our preferred economic indicator—the Philly Fed Order Intake—shows that the U.S. economy continues to gain significant momentum.

However, the more intriguing question remains: how does he intend to combat rising energy and food prices—the production and transportation of which still largely depend on diesel-powered machinery and vehicles?

If farmers are unable to produce as much due to massive increases in fertilizer and diesel prices, thereby driving up food prices, a rate hike does very little to help. On the contrary: for many food producers who rely on short-term loans, this tends to raise the hurdles even higher. Nor is a higher interest rate likely to have much impact on price pressures in the energy markets. This certainly raises the question of whether the interest rate hike is actually the right tool to combat current inflationary pressures this time around. We’re opening the discussion…

Once again: The credibility conveyed yesterday is likely to provide short-term support to both the bond and stock markets. And it will now be all the more interesting to see how hedge funds react to this in the coming days. In any case, since the end of August, they have been pursuing an asset allocation strategy that is decidedly bearish. If the effect of yesterday’s “calming pill” lasts a little longer, this could very well lead to a temporary short-covering rally.

Temporary, that is, because the actual problems haven’t suddenly disappeared, of course. Interest rates and excessive debt remain high, as do energy prices, and the broader geopolitical landscape still doesn’t exactly invite a sense of calm.

Smart Investors Action—that is, the behind-the-scenes moves of major investors—also continues to show distribution. Equity exposure is being gradually reduced. However, this is happening without panic and, so far, without any discernible time pressure.

It’s also interesting that, despite the recent noticeable selling pressure on U.S. stock markets, sentiment has by no means become excessively pessimistic. This can have a stabilizing effect in the face of negative news and new headwinds and continues to support the possibility of a short-term rally. The underlying medium-term trend, however, is likely to point downward.

The price of gold also remains exceptionally interesting in the short term. With the latest interest rate hike and the resulting rise in real market yields, gold should actually have come under significantly greater pressure. The fact that this did not happen can certainly be interpreted as a sign of relative strength.

The selling pressure was enormous: the Money Ratio Index fell to its lowest level in more than three years. However, this wave of selling left surprisingly few traces on the gold price itself. Is this a sign that someone with considerable clout was standing by in the background and gratefully snapped up the entire supply?

Even the Smart Investors Action indicator in the Chinese gold market recently showed significantly stronger distribution. The indicator has now, however, fallen to a level at which, in the past, the heaviest selling pressure had usually already subsided. This actually presents a rather interesting starting point suggesting that the gold price could trend upward again in the coming days and weeks…

We wish you successful investments!

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Yours sincerely,

Pretiorates

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Pretiorates’ Thoughts – Cracks in the System

The war in Iran shows no signs of abating. And judging by the latest statements and actions of the parties involved, it doesn’t look like peace is just around the corner. Unfortunately.

As a result, oil markets are rising again. Crude has reclaimed the $100 mark, while Brent is even trading at around $107. That’s significantly higher than before—and is slowly returning to a level where not only drivers but also central bankers are nervously watching the gas pump.

Still, considering that the war has been raging since February 2026 and the Strait of Hormuz has been effectively closed ever since, the oil market is reacting with surprising calm. This is because the Brent futures market shows backwardation of no less than 28% for the 12-month contract. The futures contract for delivery in twelve months is thus trading at a price approximately 28% lower than the current spot price. The market’s message is therefore quite clear: in twelve months, the crisis will be over and the Strait of Hormuz will be largely open again.

That’s an extremely optimistic bet, and we’d tend to think the market is assessing the situation too optimistically. Especially since the Iranian regime is once again emphasizing today that it will not yield under any circumstances.

According to various sources, however, evidence is mounting that the Strait of Hormuz isn’t nearly as blocked as is generally assumed. Many tankers are crossing the strait at night with their transponders turned off—in a sort of maritime stealth mode. Analysts at Goldman Sachs and Kpler even estimate that nearly 70% of the volumes originally transported through the Strait of Hormuz are now available again on the global market—either via alternative routes such as pipelines or, in fact, through the strait itself. Combined with the fact that China has significantly reduced its imports since the outbreak of the war, this likely explains why the oil market hasn’t completely skyrocketed so far.

In fact, there appears to be sufficient crude oil available on the global market. Accordingly, there have been hardly any warnings so far that the strategic crude oil reserves of various countries are dramatically dwindling. So the oil supply isn’t the real problem.

The growing problem begins one step further down the chain—at the refineries. Some facilities in the Gulf states have been damaged or partly destroyed, whether by Iranian drones or by U.S. and Israeli attacks on refinery capacity in Iran. And as if the situation weren’t complicated enough, Ukraine has also been deliberately targeting Russian refineries with drones for months. As a result, Russia is exporting fewer refined products—such as diesel, kerosene, and gasoline—to countries like China, which have so far not complied with Western sanctions.

The consequence is simple: these countries are now buying more on the global market. Unfortunately, this very market is already under strain because the Gulf states, too, are unable to supply as many refined products. Repairing damaged refineries is likely to take months, and in some cases, years. On top of that, the usual annual maintenance for many facilities is scheduled after the summer season. So refinery capacity is being lost not only due to missiles and drones, but quite simply because of wrenches and maintenance schedules as well.

The result: The production of refined products has become massively more expensive. This cost difference between a barrel of crude oil and, for example, diesel is known in technical jargon as the crack spread. Historically, this has typically ranged from about 20 to 30 U.S. dollars per barrel. However, with refinery capacity lost worldwide, it has now risen to over 100 U.S. dollars. The price of oil itself hasn’t skyrocketed to the same extent—but the blow is still felt at the gas station. The crack spread is to blame.

While all refined oil products are affected, the significantly higher diesel costs are particularly problematic. Diesel powers trucks, agricultural machinery, construction equipment, mining vehicles, ships, trains, and military vehicles. In other words: Diesel is practically at the table everywhere something is produced, transported, or moved.

Rising diesel prices can therefore hardly be magically eliminated simply by reducing demand. It’s far more likely that the higher energy costs will eat their way through the entire economy via transportation, agriculture, and industry. And that brings us back to the topic of inflation.

Of course, rising government debt is also likely contributing to investors demanding higher yields. What’s striking, however, is that the swap markets are already pricing in interest rate hikes of around 50 basis points by June 2027. The market thus seems increasingly convinced that the inflation problem is not yet resolved.

The yield on 10-year U.S. Treasuries currently stands at around 4.95% and is likely to approach the 5% mark soon—which would probably lead to significantly higher nervousness in the stock market. The yield on 30-year Treasuries is now well above 5.30%—the range that Treasury Secretary Bessent recently described, in essence, as the upper pain threshold. The bond market seems largely unimpressed by this.

Rising government debt and rising interest rates, however, have a particularly unpleasant characteristic: they reinforce each other. The higher the interest rates, the greater the interest burden. The greater the interest burden, the more must be financed. And the more that must be financed, the more bonds end up on the market. It’s a cycle that no one really invited.

Two weeks ago, we already pointed out that the current debt ceiling of 41.1 trillion U.S. dollars could potentially be reached as early as the end of this year or in early 2027. In Congress, the knives are likely already being sharpened—especially depending on the outcome of the midterm elections.

The big question now is how the U.S. government intends to cool down the increasingly hot water—before it boils over. Treasury Secretary Bessent claims to have more than one trillion U.S. dollars in the Treasury General Account for potential Treasury buybacks. As we’ve already discussed here at Pretiorates, there is indeed nearly one trillion U.S. dollars in that account. But the government also needs that money to pay its ongoing bills.

Realistically speaking, Bessent probably couldn’t use much more than 100 to 200 billion U.S. dollars from this fund to support the bond market—and even that might not be enough. Additional Treasury issuances would also be a delicate matter. The more bonds enter the market, the higher the yields investors might demand.

We don’t have the big solution either. But the idea that, sooner or later, the topic of quantitative easing could come back onto the table at the Fed is gaining increasing traction. The Fed would have to act as a buyer of U.S. Treasury bonds to increase demand and thereby push down yields. Officially, of course, it wants nothing to do with that. The new Fed Chair, Kevin Harsh, emphasizes at every opportunity that inflation is his top priority. At the same time, however, the Fed has been buying Treasury bonds again since December 2025. By early July 2026, it had purchased securities worth approximately $250 billion. Officially, of course, this isn’t called QE, but rather “Reserve Management Purchases.” It sounds technical, harmless, and, above all, much less like a money-printing machine. The stated goal is merely to ensure sufficient reserves in the banking system.

But will it stay that way? That’s exactly what’s likely to be exciting in the coming weeks and months. We’re curious to see what remedy will ultimately be prescribed for the rising fever curve of the U.S. bond market. If the government and the Fed wait too long, the stock market is likely to become unsettled sooner or later—and by then, at the latest, QE could suddenly transform from a forbidden word back into a desperately needed beacon of hope.

That’s still a long way off. But gold, silver, and even cryptocurrencies should, just to be on the safe side, start lacing up their shoes and slowly make their way toward the starting line.

We wish you successful investments!

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Yours sincerely,

Pretiorates

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Pretiorates’ Thoughts – The Bulls Are Dancing Near the Fire

The first stress test for the new Fed Chair, Kevin Harsh, has long since begun. The yield on 30-year U.S. Treasury bonds has already touched the 5.3% mark in recent weeks. Treasury Secretary Bessent has tried to take some pressure off the U.S. debt bubble—but so far with rather limited success.

In Jackson Hole last Friday, Harsh’s speech did at least one thing: trigger a sharp sell-off in precious metals. Otherwise, the market is still puzzling over exactly what he actually meant to say. Communication, in any case, does not seem to be his strong suit.

Whether the market and its participants will have to get used to Harsh—or whether Harsh will eventually have to adapt to the market—is a question best left to the philosophy department. Historically, however, the matter is less philosophical: Following the inauguration of the 16 new Fed chairmen since 1914, the stock market has, on average, experienced a correction of 10.5% within the first six months. The average maximum decline during those first six months was actually 15.2%. New Fed chairmen thus seem to have a certain tradition of initially underestimating Wall Street’s sensitivity. Alan Greenspan learned this the hard way in 1987, with a 23% drop after just two months. Paul Volcker in 1979 and Jerome Powell in 2018 also learned quite quickly that the stock market doesn’t automatically roll out the red carpet for new leaders.

Wall Street measures the extent of these fluctuations using the VIX volatility index. The more nervous the market, the higher the VIX—which is why it’s not without reason that it’s called the “fear gauge.” A few months ago, in Pretiorates’ Thoughts, we already pointed out that the VIX had been tracking the average seasonal pattern since 1991 with remarkable precision. Well, at least until August. Since then, the market seems to have decided to rewrite the script of the past 35 years without further ado. The correction that was actually due has either been called off or is taking its sweet time…

A correction in IT and AI stocks, on the other hand, already took place in July. In Korea in particular, investors took a real beating with credit-financed stock purchases—so-called margin debts. In the U.S. as well, margin debts indicate that speculation with borrowed money has recently been fueling another round of champagne celebrations. Whenever this debt rises too sharply within a 15-month period, it’s a fairly reliable sign that greed is slowly unbuckling its seatbelt. Still, last month, margin debt in the U.S. declined for the first time in quite a while. That’s generally reassuring. However, it remains at a high level. Should a sharp correction suddenly occur, these credit-financed investments in particular could come under massive pressure—and forced sales could quickly turn a normal correction into a self-reinforcing market decline.

Any reader of Pretiorates’ thoughts knows that we remain extremely optimistic about AI and quantum stocks for the coming years. Quantum computers, with their enormous computing power, could catapult AI to an entirely new level—not to mention that AI itself is currently making strides so rapid it’s hard to keep up. In short: We probably haven’t even seen the opening credits yet…

That doesn’t mean, however, that these stocks are immune to corrections. On the contrary: We’re quite amazed at how tenaciously the stock markets are defending their current levels. For while stock prices are pointedly maintaining their composure, the bond markets—with rising yields—are shaking the foundation ever more vigorously. At the same time, the geopolitical developments in Iran and Ukraine certainly give us no reason to break out the party hats just yet.

After a long bull market, however, stock markets practically never simply change direction from one day to the next. That’s exactly what our Chart of the Week illustrates. If we compare the performance of the S&P 500 between 1995 and 2002 with that since 2022, the picture that emerges is nothing short of astonishing. Essentially, we’re comparing the Internet age with the AI age. The correlation coefficient stands at an astonishing +0.98—which is very close to mathematical perfection. If the current market continues to follow this trajectory, we could be in for a wild roller-coaster ride from now until spring 2027, though the market could ultimately remain above today’s level. After that, however, the historical pattern would point to a multi-year bear market. Exciting? Definitely. A guaranteed stock market roadmap? Certainly not. Above all, the chart shows that investors, acting as a herd, repeat the same mistakes, fears, and bouts of euphoria with astonishing frequency. But any comparison only holds true as long as it holds true. Anyone who doubts this is welcome to take another look at the VIX chart from earlier.

But even if the future trajectory were to eventually deviate from the pattern seen between 1995 and 2002, that would by no means be a free pass for the bulls. The market has recently begun to price in another interest rate hike. Currently, a rate increase of a quarter of a percentage point is expected soon. This is not bullish for the stock markets—and certainly not for Nasdaq stocks, which often pay no dividends.

And although market yields have already risen sharply—making it increasingly difficult to sweep the U.S. debt problem under the rug—the market is currently pricing in a total interest rate hike of half a percentage point by mid-2027.

This is likely one reason why hedge funds have recently shifted their net exposure back toward short positions.

If even professional speculators are becoming more cautious, we “ordinary” investors don’t necessarily have to be the last ones to storm the dance floor. After all, there are quite a few fuses lying around right now. And on the stock market, it sometimes takes surprisingly little spark to turn them into a pretty big fireworks display.

We wish you successful investments!

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Pretiorates

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Pretiorates’ Thoughts – Don’t fight the Treasury

This week is one of those stock market weeks where forecasts are about as useful as weather forecasts for a wandering hurricane. Tomorrow, Wednesday, after the market closes, Nvidia will report its quarterly earnings. On Friday, Jackson Hole follows, where Fed Chair Kevin Warsh will deliver what is likely to be his most important speech since taking office. Two events, two potential price fireworks.

That’s why we’re sparing ourselves the effort today of trying to assess the markets for the coming days. The sidelines are our preferred spot. Nvidia could once again give the AI euphoria rocket-fueled momentum—or explain to the market that even trees don’t grow to the sky with GPUs. And with Warsh, every word is likely to be dissected anyway. This is especially true because he hasn’t yet managed to convince the market when it comes to communication.

We’d rather use this waiting period to focus on Scott Bessent and the U.S. Treasury Department. Because while all eyes are on the Fed, a remarkable shift is taking place in the background.

The trigger is the Treasury Department’s decision to significantly expand its repurchases of long-term Treasury bonds. For certain maturities, the maximum volume per repurchase is increasing from $2 billion to at least $4 billion. The term ‘Bessent Put’ quickly began circulating online: the Treasury is propping up the bond market and essentially engaging in quantitative easing through the back door.

It sounds spectacular. But it’s only partially true.

First misconception: The Treasury is buying back old, low-interest bonds and replacing them with new, much more expensive debt. That sounds like someone canceling a 1.5 percent mortgage to take out a new one at 4 percent. However, this overlooks the fact that many old bonds are trading well below par. The Treasury therefore pays significantly less than the original face value when repurchasing them. Higher interest costs can thus be partially offset by a lower principal amount.

Second misconception: The buybacks are an American version of Japan’s yield curve control (YCC). With QE or YCC, the central bank buys bonds using newly created reserves—that is, with newly created dollars. With the Treasury, however, things work differently. It repurchases old debt and ultimately finances this through revenue or new issuances. The Fed is not involved, and no additional bank reserves are created.

So why is Bessent doing this?

Because the U.S. bond market is littered with old bonds that are about as popular today as a fax machine at an AI conference. Bonds with yields below two percent are currently trading at significant discounts and are, in some cases, illiquid.

The Treasury replaces old, hard-to-trade securities with fresh ones. This improves liquidity and can reduce pressure on long-term bond prices. This is the core of the ‘Bessent Put’—less a secret money-printing machine than active market-making. It actually injects liquidity into the illiquid market for long-term bonds.

Things get really interesting with the latest idea, which brings the Treasury General Account (TGA) into play. Put simply, the TGA is something like the U.S. government’s checking account—its current account at the Fed: taxes go in, government spending goes out.

Recently, headlines have been circulating that Bessent could mobilize nearly one trillion dollars from the TGA to finance buybacks. In fact, the TGA is currently quite well-funded at around $950 billion, and according to the budget, it’s expected to grow further to about $1,050 billion by the end of October. In recent months, it has fluctuated between $800 billion and $1,000 billion.

That sounds like a bazooka. Technically, it’s about as surprising as the news that you’re paying the restaurant bill from your own bank account. Every dollar the Treasury spends goes through the TGA—including, of course, a buyback. So what matters isn’t whether the Treasury uses the account, but whether it deliberately reduces the balance more aggressively, thereby postponing the timing of new bond issuances.

That’s exactly where things get interesting for the markets. Reducing the TGA balance can inject liquidity back into the financial system in the short term. But the fundamental problem remains: the U.S. continues to run enormous deficits. Repurchased debt therefore doesn’t magically vanish into the mountain air of Wyoming. Sooner or later, new debt will be needed. Bessent can postpone the timing and change the structure—but he cannot change the math. This simply means that the liquidity currently used for redemptions from the TGA will have to be replenished at a later date through the issuance of new Treasuries.

There is, however, one problem that should not be underestimated: The government will reach the $41.1 trillion debt ceiling by the end of this year or early next year. Unless Congress raises the debt ceiling in time, the government will have to draw on the TGA to finance its ongoing deficits. If Congress fails to raise the debt ceiling for an extended period, the Treasury Department will have to exhaust the TGA down to the last available dollar. However, if the Treasury uses a significant portion of the TGA as early as September and October to finance buybacks, it will have less cash later on to bridge the debt ceiling debate—and correspondingly less time before funds actually run short.

Furthermore, this strategy has an interesting side effect. If long-term debt is increasingly replaced by shorter-term debt, debt service becomes more sensitive to short-term interest rates. The old bonds with interest rates below 2 percent are simply cheaper than new, shorter-term bonds with interest rates of 4 percent or higher. Paradoxically, this increases pressure on the Fed to keep these interest rates low. The Treasury and the Fed are thus increasingly in the same boat.

And with that, back to Jackson Hole, Wyoming. On Friday, Warsh will speak about inflation and monetary policy—at 10:00 a.m. EST or 4:00 p.m. CET, and this can be followed live here. It will be at least as interesting to see how he reacts to a Treasury Department that is acting ever more aggressively on the Fed’s turf. Warsh wants to fight inflation and keep interest rates high accordingly. But Bessent is interfering more and more in the Fed’s territory—and the Treasury has a very strong interest in lower interest rates.

Perhaps the old adage still holds true: “Don’t fight the Fed.” But some market participants are already rephrasing that old mantra: “Don’t fight the Treasury.”

By next Monday, we’ll likely know who actually had the bigger bazooka this week. Precious metals and cryptocurrencies have apparently already made their decision: in any case, they’ve been behaving in recent days as if the U.S. financial market were facing lower interest rates.

If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. And don’t forget to recommend us - with the button below. Thank you!

We wish you successful investments!

Yours sincerely,

Pretiorates

Find out more about Pretiorates.com

Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!

If you like our short analysis, please recommend us to your friends!

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Pretiorates’ Thoughts – Bessent Blinks at 5.3%

There’s quite a bit to talk about right now: The U.S. stock markets continue to hold up surprisingly well near their all-time highs, while precious metals appear to have finally broken out, bringing an end to a correction phase that lasted about half a year. However, it’s unlikely that Gold and Silver will sprint back to their peak levels at record speed just yet. That will require a bit more groundwork. But the broader conditions are beginning to shift in favor of precious metals again: First, the U.S. Dollar appears to have largely exhausted its bullish momentum, and second, the U.S. Treasury is now intervening in the interest rate landscape—which could mean that real market yields have also peaked for the foreseeable future. But first things first:

Let’s recall the carry trade in the Japanese Yen. For new subscribers, here’s a quick recap: Many investors have taken on debt in Japanese Yen at extremely low interest rates in order to then invest the equivalent amount at higher yields—for example, in U.S. Treasuries. To do this, the borrowed Yen must, of course, first be exchanged for U.S. Dollars. The interest rate differential is the profit—as long as a stronger Yen doesn’t put a damper on this lucrative deal. After all, at some point the loan must ultimately be repaid in Japanese Yen. So far, however, the strategy has been highly profitable: thanks to the falling Yen, investors were even able to reap substantial currency gains on top of that. Just how large is the volume of these Yen carry trades? No one knows for sure. Some estimate it at many hundreds of billions, while others put it at several trillion.

The current situation: Japanese market yields have risen sharply in the meantime, and new loans at rock-bottom interest rates are no longer available. This means the moment is approaching when many of these loans will have to be repaid. To do so, U.S. Treasuries are being sold, and the U.S. Dollars received from these sales are being exchanged back into Japanese Yen to pay off the loans.

Then there are the Japanese investors themselves. And, as is well known, they aren’t exactly short on cash. While Japan does have one of the highest levels of public debt in the world—measured as a percentage of GDP—Japanese investors could, in theory, finance this debt with their own savings—in stark contrast to the situation in the U.S. However, because interest rates in Japan have been extremely low over the past 30 years, many Japanese, just like professional investors, preferred to invest their savings abroad for higher returns—for example, in U.S. Treasuries. To do so, they first had to buy U.S. Dollars and sell Japanese Yen.

The current situation: Japanese investors are now once again earning quite respectable returns in their own country and in their own currency.

To prevent Japanese investors from selling their U.S. Treasury holdings, the U.S. Federal Reserve is offering the FIMA Repo Facility. This allows Japanese investors to lend their U.S. Treasury bonds instead of selling them and receive U.S. Dollars in return. This way, the bonds do not have to be sold on the open market, and market yields would not be driven up as a result. It’s a nice idea, but why would Japanese investors do this—instead of simply cashing out their investments?

With their investments in U.S. Treasuries, they have also—thanks to the depreciation of their own currency—accumulated huge currency gains in U.S. Dollars. In the past five years alone, the U.S. Dollar has risen by no less than 45% against the Yen. No one would likely hold it against Japanese investors if they were now to sell their U.S. Treasuries and, in the process, pocket the currency gains as well. To do so, they would have to sell their U.S. Dollars and buy Yen again.

With approximately 1.1 trillion U.S. Dollars, Japanese investors are the largest foreign investors in the U.S. Treasury market. And they have already begun selling off their holdings.

China, on the other hand, still holds about $600 billion in U.S. Treasuries, though it has been reducing this holdings for more than 14 years.

To summarize: Two very large investor groups in the U.S. Treasury market have entirely understandable reasons for reducing their positions: those investors who have financed their investments through Yen carry trades, and the Japanese investors themselves.

It is therefore hardly surprising that the yield curve in the U.S. Treasury market has undergone a remarkable reversal over the past twelve months. In the chart, the light blue line shows that a year ago, short-term yields were even higher than long-term yields. Since then, short-end market yields have fallen and have remained virtually unchanged since the end of last year. At the long end or at the far right end of the chart, however, the situation looks quite different: yields there have continued to rise. Market professionals refer to this as the yield curve becoming steeper at the long end.

In fact, the yield on 30-year U.S. Treasuries clearly illustrates what has happened: from a low of around 1% in the first quarter of 2020, it has since risen to 5.3%.

When interest rates rise, investment in the economy declines and economic growth slows. In fact, the Citi U.S. Economic Surprise Index already indicates that recent economic data has been largely disappointing. Strictly speaking, that would be an argument for lower interest rates again.

But then there’s the U.S. national debt—an issue that is likely to return to the forefront very soon. In a few weeks, the U.S.’s total debt will exceed the 40 trillion U.S. Dollar mark. This is likely to reignite the debate, which doesn’t exactly make investments in U.S. Treasuries more attractive. Consequently, market yields are rising. The law of the market is, after all, not very romantic: those who take on more risk also demand a higher return. Incidentally, at nearly 1.4 trillion U.S. Dollars, the annual cost of servicing the U.S. national debt is now higher than the GDP of more than 175 of the world’s 195 countries.

The futures market is also reacting: Hedge funds’ large short positions in the Japanese Yen have recently been drastically reduced.

Thus, this week’s summary highlights much of what we already knew about the current situation in the U.S.—but now with a much bolder stroke:

1. Yen carry trade investors are likely to sell U.S. Treasuries and U.S. Dollars and buy Yen instead.

2. Japanese investors are also likely to increasingly sell off their U.S. Treasury holdings, while simultaneously realizing their profits in U.S. Dollars and buying Yen as well, in order to reinvest the capital more heavily in the domestic market.

3. The U.S. Treasury is aware of this, is concerned about the Yen’s weakness, and—for the first time since 1998 during the Asian financial crisis and 2011 following the Fukushima disaster—intervened jointly with the Bank of Japan just under ten days ago. This is less a friendly favor to Tokyo than an expression of concern for the U.S. Treasury market.

Today, the U.S. Treasury Department also announced that it would increase repurchases of long-term U.S. Treasury bonds with a 30-year maturity from $2 billion to $4 billion.

Now, one might argue that an additional $2 billion in this gigantic market makes about as much of an impact as a glass of water in a swimming pool. And indeed: purely in terms of volume, the effect is modest. But what matters is the message and the timing—and they reveal a great deal between the lines:

1. A market yield of 5.30% on 30-year U.S. Treasuries seems to be slowly becoming the pain threshold.

2. Apparently, the U.S. Treasury Department is prepared to bring the first elements of yield curve control into play to defend this pain threshold.

3. Just two weeks ago, the U.S. Treasury presented its planned schedule for buybacks this quarter. That’s why today’s update comes as a complete surprise. Nerves are clearly on edge.

The increased buybacks will dampen the pressure, but not eliminate it entirely. This is also not quantitative easing—that is, not classic QE. Nor are any additional U.S. Dollars being printed. But the market now knows at least this much: U.S. Treasury Secretary Scott Bessent’s pulse is likely to beat a little faster at 5.3% on the long end.

This situation is particularly positive for precious metals, whose “insurance premium” is likely to become more expensive again: a U.S. Dollar facing selling pressure; interest rates that can hardly be allowed to rise much further; and U.S. government debt that is once again coming into sharper focus.

If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. And don’t forget to recommend us - with the button below. Thank you!

We wish you successful investments!

Yours sincerely,

Pretiorates

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Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!

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Pretiorates’ Thoughts – From Margin Calls to Bargain Calls

At the end of June, we warned that margin calls—that is, leveraged investments—could lead to a sharper correction. The correction did indeed come. However, it didn’t quite follow our script: Instead of affecting the overall market, it hit AI stocks the hardest. Even reports from South Korea indicated that numerous investors lost everything they had through speculative trading on credit. Still, we stand by our view: Margin debt remains a hot topic...

Our own AI Index vividly illustrates just how severe the correction was: In extreme cases, it lost over 45% in less than two months. That’s no longer just a minor dent.

What’s interesting, however, is what’s happening beneath the surface. The after-hours activity of our AI Index shows that massive accumulation has been taking place behind the scenes for a few weeks now—even though the index itself is still falling. So while selling continues at the front, shopping carts seem to be filling up again at the back.

A very similar picture emerges in our Quantum Index. In mid-May, accumulation practically stopped overnight—and since then, the Quantum Stock Index has also lost more than a third of its value. But here, too, the picture behind the scenes is already shifting again: accumulation has long since resumed.

We are convinced that the computing power of quantum computers will expand the capabilities of AI many times over. And not sometime in the distant future, but within just a few years. The management teams of the hyperscalers are likely convinced of this as well—otherwise, their incredible investments, which now run into the trillions, can hardly be explained. So here’s a little reminder to everyone talking about an AI bubble: Are you really convinced you’re smarter than the management teams at Microsoft, Alphabet, Nvidia, Amazon, Meta, or SpaceX??? Perhaps the current correction in some AI stocks is less of a warning sign and more of an opportunity?

In our latest issue, we also speculated that the Bank of Japan’s meeting might be more important than that of the Fed, which took place exactly two weeks ago. We received remarkable confirmation of this as early as the beginning of last week. For the first time since 1998 and 2011, the U.S. central bank has helped prop up the Japanese yen. 1998 was marked by the LTCM and Asian crises, while in 2011 Japan had to cope with the Fukushima disaster. The fact that the Fed is now supporting the yen for the first time since then should clearly demonstrate how seriously central banks are taking the current developments among the major currencies.

Japanese investors are the largest foreign buyers of U.S. Treasuries. If their own currency falls, the temptation to sell these investments—along with substantial currency gains—naturally increases. However, if Japanese investors were to exit the U.S. Treasury market on a large scale, U.S. market yields could rise even further. Then a currency problem would suddenly turn into a bond problem—and the high level of U.S. debt would be back in the spotlight faster than Washington would like. It is therefore hardly surprising that the U.S. Treasury has a very strong interest in helping the yen regain its former strength.

It is therefore quite possible that at its next meeting in September, the Bank of Japan will have to deploy what is arguably its most effective tool for strengthening the currency: higher interest rates.

This, however, brings us to the next topic we’ve discussed here on several occasions: carry trades—that is, positions financed by borrowing that take advantage of Japan’s very low interest rates to invest profitably in other currencies.

No one knows exactly how many billions—or even trillions—of these positions are still outstanding. We have often speculated that at some point these positions will no longer be refinanced, which would likely cause the yen to rise. So far, however, there has been little reason for the holders of such carry trades to rush. Although interest rates have risen, they remain comparatively low worldwide. At the same time, the yen has fallen, making repayment even cheaper. But with every interest rate hike by the BoJ—and as the yield spread between U.S. Treasuries and Japanese bonds narrows—interest in continuing these trades is likely to wane. When the loans are finally repaid, yen will have to be repurchased to cover them. And that is precisely what could give the Japanese currency a strong boost.

Is this scenario just speculation? Yes. But the alternative isn’t necessarily more reassuring. Should the yen continue to lose value, the resulting tensions could eventually spill over into the U.S. Treasury market—and things there would likely become quite uncomfortable and, above all, very expensive.

Over the past 30 years, the Japanese yen has been, in a sense, the “academic gold.” Just over twenty years ago, gold and the yen were quite comparable: neither paid interest. Mathematically minded investors, however, saw at least some “equivalent value” in the Japanese currency. That perspective has since shifted again. This makes what we’ve been observing for the past few weeks all the more interesting: gold’s Power Index is once again showing a clear upward trend…

Incidentally, it’s also intriguing that market discussions are already speculating about a possible replacement currency for the yen carry trade—a currency that also offers low interest rates. The candidate? The Swiss franc. But that’s a topic for a future issue of Pretiorates’ Thoughts …

If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. And don’t forget to recommend us - with the button below. Thank you!

We wish you successful investments!

Yours sincerely,

Pretiorates

Find out more about Pretiorates.com

Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!

If you like our short analysis, please recommend us to your friends!

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Pretiorates’ Thoughts – From Carry Trade to Scary Trade

As we write this new issue of Pretiorates’ Thoughts, the U.S. Federal Reserve (Fed) has not yet announced its interest rate decision. Whether it raises the benchmark interest rate by a quarter of a percentage point, as the bond market has already priced in, or decides against it, we do not consider this to be the decisive factor. In the short term, Wall Street will of course react to the decision—though likely not with stoic composure.

The reason is that the market is still struggling to assess how the new Fed Chairman, Kevin Warsh, will communicate. In any case, Wall Street is openly displaying its nervousness: The Dow Jones is down about 800 points, and market participants are so unsettled that even small bets ahead of the decision suddenly seem like high-risk ventures.

You can’t really blame the market. The Fed Chair’s aversion to traditional “forward guidance” increases unpredictability—and, as is well known, unpredictability is just a fancier word for uncertainty on the stock market. At the same time, the market is feeling increasingly uneasy given the high valuation levels and the geopolitical developments that are nearly impossible to assess. The stock market has already reacted accordingly: Investors have already sold off cyclical companies—which are more dependent on a robust economy—as well as more speculative sectors, many of which still lack significant cash flow. The latter, of course, include numerous stocks in the AI and quantum sectors.

Nevertheless, we stand by our assessment: Both of these still-young sectors are likely to reach new heights, especially if they converge in the not-too-distant future. We therefore believe this is more likely to be a fierce summer storm than the definitive bursting of the bubble. Furthermore, our Quantum Strength Index has now reached its lowest level since February 2025—precisely the point in time when the penultimate major uptrend began.

Currently, Wall Street favors defensive stocks—that is, companies that offer products for everyday needs and are less easily disrupted by economic cycles.

In the medium to long term, however, the Bank of Japan’s interest rate decision this coming Friday is likely to carry greater significance. In economics, one learns that interest rate differentials have a decisive influence on currency movements. In practice, however, the market doesn’t always follow the textbook. The yield spread between 10-year U.S. and Japanese government bonds has narrowed significantly in recent months, as shown by the light blue area in the chart below. One would therefore expect the Japanese yen to have gained ground against the U.S. dollar. But far from it: the yen continues to lose value, as shown inversely in the chart.

As recently as the spring of 2025, speculative investors in the futures market were betting on an appreciation of the Japanese currency. At the time, the market assumed that the many billions in loans taken out via the yen carry trade would be gradually unwound. This would have meant that yen would need to be purchased to repay these loans. However, the extremely opaque market suggests that this has hardly happened at all. On the contrary: Over the past few months, investors have built up immense short positions. These are now approaching the historic record set in May 2025.

It is also interesting to note that there has recently been increased betting on a falling euro. It’s important to keep in mind that investors are often correct in their long and short positions. It is therefore entirely conceivable that the euro could come under greater pressure in the coming months.

When several major currencies weaken at the same time, another usually benefits. Unsurprisingly, the US dollar’s internal strength has risen to 100%. The strength of the US dollar was, in fact, one of the developments we had already identified in January as a potential surprise for the current year. However, history also shows that the US dollar was often already in the final stages of an uptrend when this strength chart reached its peak. The chart below shows that only the uptrend of 2021 untill 2022 lasted longer.

The answer to the question of which of the three currencies will take the lead in the coming months is therefore likely to depend largely on the Bank of Japan’s interest rate decision. The U.S. dollar could soon relinquish its role as the favorite—but for that to happen, the geopolitical situation would have to calm down. The long-term outlook also appears to be clouding over against the euro, while the Japanese yen is heavily oversold. A potential reversal could be correspondingly sharp, especially given the enormous short positions in the futures market and the still massive carry trades that remain open.

The market pendulum for Japanese bond yields is showing a positive trend, suggesting that higher interest rates are to be expected. This could also have a positive effect on the Japanese currency—even if, as noted at the outset, this correlation has recently failed with surprising reliability.

The Japanese stock market could also behave differently from the usual script. Normally, a weak yen is positive for export-oriented Japanese companies. However, over the past few months, the weak yen has led to rising costs for energy, which Japan must import almost entirely. The market’s focus is therefore clearly on inflation—and that is precisely likely to be the Bank of Japan’s main topic this coming Friday.

As a result, the Japanese Nikkei Index has recently corrected significantly, while pessimism has now reached extreme levels.

This, of course, is precisely where the preferred playing field of contrarians begins—those investors who feel particularly at home when the masses are moving as uniformly as possible in the opposite direction. In fact, Smart Investors Action shows that distribution has decreased significantly in recent days. There is therefore a good chance that both the Japanese currency and the stock market are poised for a revival.

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Pretiorates’ Thoughts – The Fine Art of Flexible Logic

In one of our recent issues of “Thoughts,” we explained that the price of Gold had come under pressure due, among other things, to the war in Iran. Every journalist assumed that Gold would rise during a war. However, higher Oil prices fueled inflation fears and, with them, concerns about higher interest rates. Furthermore, Gold fever was still in full swing at the end of February, even though the correction was already in full force. Many investors remained heavily invested in Gold. They were forced to sell, and the Gold market first had to absorb this.

The situation in Iran has temporarily calmed down, the Oil price temporarily fell back to its original level, and the most recently published consumer price index CPI came in significantly lower than expected. Did this give the Gold price the green light to set its sights on previous highs again?

No. By then, the market had come to believe that the U.S. economy might be performing better than expected. A lower Oil price could further fuel the economy—and in turn, stoke inflation. The real market yield—that is, the yield on 10-year U.S. Treasuries minus inflation—continued to rise. For the price of Gold, this meant continued headwinds rather than a surge …

Let’s paint the following scenario on the wall, even if we aren’t really convinced of it—yet:

The war with Iran escalates once again. In addition to the Strait of Hormuz, the Houthis also block the Bab al-Mandab Strait, which controls access to the Red Sea and thus to the Suez Canal. The price of Oil shoots up again. This time, however, the price of Gold also rises sharply, summarily ignoring the potential threat of inflation.

Logical? Not necessarily. But as is well known, the market has mastered the art of flexible logic. As recently as this spring, a large portion of market participants assumed that the war with Iran would soon be resolved and thus brought to an end. Every hint from U.S. President Trump that an agreement was imminent was readily interpreted as a green light for higher stock prices. We are still near the all-time high.

However, should the market come to realize that the war will last longer and become significantly more expensive, the issue of government debt is likely to make a very rapid comeback. Yields on U.S. Treasuries have already risen significantly recently… This could be bullish for the price of Gold, as investors would once again place a higher premium on safety. Furthermore, following the sharp correction in the first half of the year, many investors are now significantly underinvested in Gold.

Journalists who, as recently as this spring, were puzzled that the Gold price did not react to the outbreak of war in Iran are likely to shake their heads in bewilderment once again…

In fact, the price of Gold is on the verge of breaking out of the downtrend—which has been discussed repeatedly in recent times—sooner than expected. The corresponding chart is being closely monitored by numerous market participants. A breakout could therefore trigger a heightened self-fulfilling effect simply because of its signaling power.

Silver could also benefit from a Gold breakout. What’s particularly interesting is that the premium on the only physically backed Silver ETF available in China has now risen again to around 20%. This is a clear indication that Chinese investors are repositioning themselves.

We are not yet fully convinced by the scenario described above. A breakout in Gold and Silver would undoubtedly be a blessing for any investor who remains invested—and indeed should remain so. However, Wall Street continues to give us cause for concern. We know from experience that as soon as the bears take control of the stock market, Gold and Silver usually come under immediate, short-term but intense selling pressure. When fear sets in on Wall Street, the magic word is “liquidity.” Selling Gold and Silver is a quick and easy way to secure it. At this point, stock positions are often already in the red—and who wants to voluntarily part with an investment at a loss?

In previous posts, we’ve shown several long-term charts that point to a more significant correction and suggest reducing the allocation to stocks. As usual, we won’t know for sure whether this correction will actually happen until after the fact. If it doesn’t materialize, you’ve missed out on nothing more than potential gains. If it does, however, the losses will be significantly smaller. It increasingly appears that we are entering a phase in which one should not chase potential gains, but rather secure one’s capital as best as possible.

Recently, several savvy market participants have warned that the market is currently underestimating economic and geopolitical risks. We agree with this assessment. In addition, the latest figures from FINRA also show that credit-financed investments by U.S. investors have continued to rise sharply. So-called margin debt has now reached a volume of 1,500 billion U.S. dollars. The chart vividly illustrates just how much speculation has surged in recent months.

The scale of this is also evident when viewed relative to U.S. gross domestic product: Margin debt—which is ultimately nothing more than credit-financed speculation—could soon reach the 5% mark of U.S. GDP. We are already in uncharted territory.

Almost more important than the absolute magnitude, however, is the speed of the increase. If the growth in outstanding margin debt continues to accelerate, this suggests that investors are increasingly driven by the fear of missing out. Then greed takes over. And greed typically emerges when a market reaches a long-term peak—just as panic does at the other end of the spectrum.

The so-called “rate of change” measures this pace of growth over a rolling 15-month period. With the new margin debt data, one of these rare sell signals has now been triggered. This happens when the rate of growth in loans becomes too high.

And then there is another chart that is highly interesting. The average annual trend of the volatility index since 1991—that is, over the past 35 years—shows that volatility rises significantly between August and November. Higher volatility is typically accompanied by falling stock markets. Of course, this does not mean that the coming months will necessarily follow the same script. Yet in the first half of the year, the market adhered to it with astonishing precision. That is why we view this seasonal pattern with great respect. It isn’t necessarily logical, either. But perhaps investors are best served when not only the market but they themselves think flexibly.

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Pretiorates

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Pretiorates’ Thoughts – Not Much Gas in the Tank, Nor Gold in the Bank

Investors seem to have already gone on summer break. Wall Street is consolidating at high levels, the U.S. dollar is following suit, and precious metals continue to recover from their hangover after years of partying. Apparently, the party was a bit wilder than expected—and the morning after is lasting longer than we would have anticipated.

The Strait of Hormuz is also effectively closed again after U.S. President Trump declared the ceasefire over. Bombing has resumed, while reliable information is reaching the markets only in dribs and drabs. The oil price has nevertheless gotten the message and has risen from its interim low of $72 back to $85.

While the market stares spellbound at the oil price, natural gas—or Liquefied Natural Gas (LNG)—is almost falling by the wayside. Russia has the world’s largest gas reserves, but Europe has decided, through its sanctions, that no Russian gas should flow into EU storage facilities in the future. At the moment, however, Belgium, the Netherlands, France, and other EU countries still source about four-tenths of their gas from Russia. A significant portion of this is even forwarded to Germany. According to EU plans, this is set to end once and for all as of January 1, 2027.

Qatar, the country with the world’s third-largest gas reserves after Russia and Iran, has suspended its efforts to repair the destroyed LNG infrastructure following the renewed outbreak of war. It is highly unlikely that exports through the Strait of Hormuz will resume in the foreseeable future. Norway, for its part, can supply only about 40% of the EU’s daily LNG needs.

It is therefore hardly surprising that the German Association for Gas and Hydrogen Storage (INES) has issued a stark warning. Gas storage facilities in the EU are currently only 52% full, and in Germany, as low as 44%. This is well below the long-term average for this time of year, which stands at around 72% in the EU.

In the summer, gas storage operators typically purchase gas at lower prices. However, due to the war in Iran and the resulting high prices, they are holding back this time. The problem is this: the potential for daily gas injection into storage facilities is only about 0.2%. At this rate, storage facilities are likely to reach only about 70% capacity by the start of winter around November 1—that is, in just over 100 days. Sooner or later, purchases will have to be made. And when that happens, the bottom line is: price aside, the storage facilities must be filled.

In addition, of course, there’s the tried-and-true principle of hope: hopefully, winter won’t come too early. In the event of a cold winter, the INES Association is already forecasting a gas shortage of up to two terawatt-hours per day in February and March 2027. In that case, up to 40% of Germany’s daily natural gas needs could be missing. That wouldn’t be a small gap, but rather a full-blown hole.

Norway can’t supply everything. Russian gas is no longer wanted. LNG from Qatar could be off the table due to the Strait of Hormuz being blocked once again. Thus, the resurgent U.S. energy powerhouse will likely have to step into the breach once more. Do American LNG exporters know about Europe’s plight and are they therefore turning up the price screw a bit? You can judge that for yourself. Perhaps that’s why it might be interesting to bet on rising gas prices—for example, via an ETF.

It turns out that even though the gas price has recently lost further ground, the situation is by no means as negative as it appears at first glance. Buyers are simply waiting it out. For now.

The situation is similar for precious metals. The consolidation—or let’s call it a correction—is taking significantly longer than many had expected. In one of our recent issues, we highlighted the triangle pattern in which the gold price continues to trade. It is marked on the chart by the two red lines. Additional support is provided by the green line, which previously acted as resistance and has now become a support level. The purple Fibonacci extension with the golden ratio of 0.618 also runs at the same level, providing further support. When multiple technical levels converge at the same point, the market usually takes a closer look.

We can assume that a breakout is imminent in the coming days or weeks. Should a final washout occur before then, this would likely represent a buying opportunity. Many investors are now barely exposed to gold at all. This is evident from the number of open futures contracts on the COMEX, which has fallen to its lowest level in more than 15 years. Investors are underinvested because, according to numerous media outlets and analysts, there is currently little to support gold.

It’s true: Real market yields have risen, which is negative for the gold price. The national debt of many countries is not currently a focus, even though military operations are lasting longer and costing more as a result. U.S. national debt is therefore likely to become an issue again sooner or later. And Germany isn’t spared either: The market is already signaling that it no longer trusts the former EU powerhouse unconditionally. Market yields in Germany and its small neighbor Switzerland remained at similar levels for a very, very long time. However, the spread between the two countries has been rising steadily for four years.

Meanwhile, China continues to sell U.S. Treasuries—and has been doing so at an even faster pace in recent months.

In contrast, gold purchases continue. The figures for June have not yet been released, but in May, China imported 163 metric tons of gold—the highest amount in two years. The 12-month moving average of the import rate shows that the pace has picked up significantly again since the beginning of the year. It is therefore fair to argue that China is taking advantage of lower gold prices to buy.

However, China’s gold imports become truly impressive only when one looks not just at the tonnage, but at their value. The monthly volume of imports may not be that much higher, but due to the rise in the price of gold, their value has increased massively compared to the previous year. The fact remains: China has not simply increased the pace of its gold imports over the past three months—it has multiplied them. Why? How? To what end? You can once again draw your own conclusions.

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Pretiorates

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Pretiorates’ Thoughts – When Liquidity Leaves the Party

Investors are currently struggling through some nerve-wracking weeks. In the stock market, everyone is watching AI companies with bated breath, wondering whether the much-discussed “bubble” will burst soon or keep going for a few more rounds. Gold investors, on the other hand, are fixated on the psychologically important $4,000 mark and are asking the legitimate question of when this correction, which has been ongoing since January, will finally come to an end.

We’re therefore showing the key chart from last week’s analysis once again. While the 4,000 mark may exert a certain psychological pull, what’s truly decisive is the cluster of support levels around $3,965 and slightly below. On the positive side, this zone has been confirmed several times so far—though, of course, that doesn’t mean it’s now set in stone. At the same time, we can see the green, downward-sloping downtrend line. Should the gold price break above it, the correction will likely have reached its final chapter. It’s also interesting to note that this green line—currently at $4,280 per ounce of gold—will already reach the current level by the end of July. A major decision is therefore likely to be made before the end of this month.

Today, the new Fed Chair Harsh did have a small silver lining in store for gold bugs, but the U.S. jobs report coming out this Friday could trigger fresh selling pressure if the economic data comes in very strong.

This really leaves only one strategy: If support gives way contrary to expectations, we’re likely to see another sharp sell-off. That would be less of a doomsday scenario and more of a great opportunity to buy at even lower prices.

Hopes for a successful defense are rising, as the Balance of Power has shown an upward trend over the past few days for the first time since mid-April. This indicator does not show the trend of the asset itself, but rather the balance of power between the two camps: bulls and bears. If the indicator points upward, the bulls have the advantage. In soccer terms, they would be the team in possession of the ball—hopefully with more conviction than many of the major soccer nations at the current World Cup.

Sentiment in Western gold trading is also showing positive signs: the pessimistic mood is steadily brightening.

In China, too, many investors have been caught off guard in recent months. It is therefore all the more encouraging that the cautious mood is gradually coming to an end in Asian trading as well.

The fact that Chinese investors—who are particularly interested in physical metal—were recently caught off guard is also reflected in measurements of silver’s physical availability. The shortage has continued to ease recently, likely because some investors had to sell. This may be a disappointment for those hoping for another parabolic price rally. However, a renewed price rise is by no means off the table.

A look at the overall market. As mentioned several times in previous posts: The most important driver of a rising stock market is liquidity. And this is determined not least by the central banks, particularly the Fed. It is therefore hardly surprising that there is a high correlation between the percentage change over the past twelve months in the M2 money supply and the S&P 500 Index. But we must note: While the U.S. stock index still shows an increased percentage change over a twelve-month period, that of M2 has long been falling—and not exactly at a homeopathic pace. So the stock market is still dancing, even though it’s increasingly running out of steam…

It explains why the stock market has shown such fear of higher interest rates in recent months: Higher interest rates curb lending, thereby slowing the generally steady growth of M2. And when liquidity flows less freely, the hangover after the party sets in much faster.

In previous posts, we’ve also toyed with the theory that the performance of cryptocurrencies is heavily dependent on liquidity. The more liquidity is available, the more money investors have at their disposal for investments outside of traditional assets. Accordingly, it comes as little surprise that the crypto markets have recently performed rather weakly. When the liquidity tap is turned off, the speculative players are usually the first to tone down their exuberance. The fact is: the balance of power shows that the bears are still in control of Bitcoin, and the correction is likely not over yet…

Bottom Line: Precious metals are facing their ultimate test over the next few weeks. However, sell-offs should present buying opportunities. The stock markets are also likely to face their own tests—only they’ll be entering the fray with significantly less breathing room…

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Pretiorates’ Thoughts – Gold Catches Its Breath, Stocks Hold Their Breath

In last week’s thoughts, we pointed out that a long-term but very reliable indicator had generated a sell signal. Margin debt—that is, stock investments made on credit—has grown by more than 60% over the past twelve months. A classic sign of greed—that magic word that, at the end of a major uptrend, almost always eventually takes control away from caution. And remember: Investors who use borrowed money to invest don’t have much staying power.

Even though last week’s commentary explicitly mentioned a long-term sell signal, sentiment in the financial markets has since taken a new turn—with immediate and, in some cases, dramatic effects on precious metals, stock markets, and market interest rates. The trigger: the new Fed Chair.

When war broke out in Iran, the general narrative was: “Higher oil prices = higher inflation = higher interest rates = bad for precious metals.”

This market formula has thus shifted to “lower oil prices fuel demand in an economy that’s already running hot—and that drives inflation even higher.” And, as is well known, inflation is combated with higher interest rates, which led to a painful sell-off in precious metals.

This week, we want to focus on the strength of the U.S. economy. But first, let’s address the most pressing of all questions: Have precious metals hit bottom?

With a little help from traditional technical analysis and Fibonacci numbers, there’s a very good chance that the pain for gold bugs should now slowly begin to subside. Today, the gold market touched—and confirmed—a very important support level at USD 3,960: the yellow line, which has already proven itself multiple times as both resistance and support, as well as the purple 0.618 extension line. 0.618 is a well-known mathematical number from the Fibonacci sequence, aptly named the “Golden Ratio.” Fibonacci numbers are particularly effective when emotions are running high in the markets.

The fact that the gold price has now overshot on the downside is also evident from its correlation with percentage performance over the past six months—just as it overshot on the upside in early year.

Pessimism in the gold market has recently intensified even in Shanghai, despite the fact that the Chinese central bank, the PBoC, imported 163 metric tons last month—the highest volume in two years.

During the first five months, the central bank’s imports rose by no less than 76% compared to the previous year. This puts us back in a situation similar to two years ago: physical gold is flowing from the West to the East—even as prices fall.

What is surprising, however, is the shift in sentiment in the West: after being deeply pessimistic until recently, sentiment now appears to be brightening. An important prerequisite for market prices to rise again…

Another factor that should act like aspirin: EquityClock.com tracks price movements over several years—in this case, over 20 years. According to this seasonal analysis, gold tends to rise on average from July through August.

In the short term, however, the gold price is likely to remain constrained by the interest rate environment. Since Fed Chair Harsh’s first appearance last week, the market has been anticipating at least one interest rate hike this year, possibly even two.

A strong U.S. economy and, consequently, rising interest rates? That doesn’t align at all with the University of Michigan’s consumer sentiment index, which recently hit a new low.

Yet the vast majority of recent U.S. economic data has come in stronger than expected. Of course, much of the credit for this goes above all to AI companies, which invest several hundred billion annually. This leaves fewer jobs for private consumers, which explains the subdued sentiment.

But it’s not just the AI companies: The Cass Corp Freight Index has also risen sharply in recent months. This index indicates whether more or fewer goods are being transported in North America. When it rises, it suggests that corporate business is doing well.

It’s therefore no surprise that investors have recently become more cautious. Hedge funds have now neutralized their above-average equity investments.

Short positions in the very large Nasdaq-100 ETF QQQ have been massively increased since the start of the last uptrend at the end of March…

And market breadth within the S&P 500 has eroded significantly in recent days and weeks.

Bottom Line: The start of a Wall Street correction might be coming sooner than expected after all. Whether interest rates will actually rise remains to be seen. Rising interest rates would also bring the issue of government debt back into the spotlight—which, in principle, should also be a positive for gold.

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We wish you successful investments!

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Pretiorates

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Pretiorates’ Thoughts – The Calm Before the Margin Call?

On Friday, the framework agreement is set to be signed in Switzerland by the U.S. and Iran. This will mark the start of a 60-day period during which technical negotiations are intended to lead to a lasting solution. Not all details of the agreement are known yet, but what has already been leaked is likely to at least significantly undermine the hoped-for belief in a lasting peace. Israel does not accept the agreement, which means that the problem in Lebanon is far from resolved. For Iran, however, this point is of great significance. It therefore remains to be seen whether the Strait of Hormuz will indeed be fully and unrestrictedly reopened. The risk that the final chapter of this conflict has not yet been written thus seems quite real. The stock market’s reaction to the progress of the peace talks was correspondingly cautious—rather subdued.

The “Smart Investors Action” indicator uses the light blue area to show whether large investors—who typically act patiently and rather inconspicuously in the background—are accumulating or selling shares. These are always long-term investments, as is typical for this type of investor. It is striking that the sell-off at the beginning of the month was excessively strong, triggering a red area—a so-called “exaggeration.” Such exaggerations are almost always met with equally strong counter-movements. During the rally of the past few days, however, it is noticeable that the Smart Investors Action no longer indicated accumulation. The large investors therefore seem to have used the rising stock prices to take profits rather than to buy aggressively.

The same picture emerges in professional trading, as depicted by the After Open Action indicator. Here, too, it appears that the rising stock prices of the past few days have been used primarily to sell off investments. In other words: The pros haven’t necessarily used the bullish market to cozy up to it, but rather to exit through the side door.

For the first time since late March—when we turned bullish on the U.S. stock market again due to the rising sentiment indicator, which compares optimism and pessimism—that indicator has now fallen back into the pessimistic zone. From this point on, the overall market therefore needs fundamentally positive news if further gains are to be achieved. A positive mood alone is no longer enough; the market wants to see solid arguments again.

In the short term, the Market Pendulum still seems to indicate that the positive underlying tone is likely to persist somewhat. It can therefore be assumed that the index will not suddenly lose momentum, but will rather consolidate at a higher level, possibly accompanied by increased volatility. So the music is still playing, but the volume control seems a bit more erratic than it has been recently.

What is striking about the European market is that, unlike the U.S. market, it did not exhibit any signs of overreaction during the sell-off at the beginning of the month, but is now showing such signs during the recovery (red area). This is a clear indication that there has been cautious distribution in recent weeks, while the recent rise in stock prices has actually been used quite aggressively for selling.

The IFO Economic Expectations Index shows that the outlook for Germany isn’t exactly rosy. This leading indicator for German GDP suggests that Europe’s most important economic zone could soon fall into a recession. That sounds less like a spring awakening and more like a weather report with a storm warning.

So the thick, dark clouds on the horizon seem to be drawing nearer. The new margin debt data for May has just been released and provides an important clue in this regard. As a reminder, these are investments acquired through borrowing. The more these loans increase, the more US investors are speculating. It therefore stands to reason that they tend to rise particularly sharply near long-term highs. At the same time, this makes the market more nervous because investors who finance their investments with debt do not have particularly deep pockets.

In fact, margin debt rose massively again in May, and at first glance, the figure is quite alarming: for the first time, the amount of credit for investments rose above 1.4 trillion U.S. dollars.

However, simply looking at the raw figure for credit extended for investments doesn’t really make much sense. This growth should also be compared to the growth of U.S. GDP. Yet even from this perspective, the trend appears quite dramatic. In recent months, this key metric has risen to a new all-time high even relative to GDP.

Relative to the growth in the market capitalization of all U.S. stocks, however, we are still at a lower level than during the past decade.

What is truly interesting, however, is the speed at which margin debt has increased. Over the past 30 years, the percentage change over the last 15 months has consistently proven to be a reliable indicator. A long-term sell signal has not yet been generated.

Another indicator is the percentage growth over twelve months. Whenever margin debt has increased by more than 60 percent within a year, the market has plummeted quite sharply in the following months. The 60 percent growth threshold is marked by the red line, and we must note: Investors are apparently so confident that they have expanded their investments using a great deal of credit. This is a serious, long-term sell signal for the overall market.

The health of the stock market is also reflected in the breadth of stocks showing positive performance. Here, too, a long-term sell signal appears: Although the S&P 500 Index recently reached new record highs, many stocks within the index have fallen to new 52-week lows. So the index is wearing a suit and tie, while beneath the surface, a few shirt buttons are already missing.

Bottom-Up: It’s worth noting that almost all of the charts discussed in today’s Thoughts are long-term in nature. So if the market continues to rise in the coming weeks, it might be time to lock in some profits…

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Pretiorates’ Thoughts — When Everyone Leaves the Gold Party, Contrarians Check In

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Pretiorates’ Thoughts – Rock, Paper, and Scissors

We at Pretiorates are always delighted to share our thoughts on the markets with you—thoughts that we hope will serve as a useful compass for your investment decisions. But of course, we too rely on input from which we distill our assessments. Among the sources we find particularly valuable is cycle analyst Eric Hadik of InsiideTrackTrading.com. He has described the behavior of the U.S. dollar, gold, and Bitcoin in a simple and intuitive way: They function like the game of rock, paper, and scissors. Each can beat the other—and one is always on top.

We have attempted to translate this theory into a trend model using our own strength indicators. It quickly became apparent: one of these assets always takes on the role of favorite—but can rarely defend this position over the long term. As soon as one of the three candidates reaches full strength of 100%, the leading role is usually passed on again. And the dynamic seems to work the same way on the other end of the spectrum: absolute weakness at 0% is only evident for a short time. What’s important for trend analysis, however, is that whoever is at the very bottom usually doesn’t stay there long.

Given current events, it’s hardly surprising that the U.S. dollar is currently gaining strength and is likely to remain in the lead for the foreseeable future.

Bitcoin, on the other hand, had temporarily taken the lead back in April, but May turned out to be anything but a merry month. The strength index suggests that little will change in this regard for the time being.

It is equally unsurprising that the third member of the trio, gold, had to endure a dismal spring. But—and here comes the big “but”—the strength index has nearly reached its absolute low. If this dynamic continues, there is a high probability that the precious metal will next take the lead. Gold could thus rise again from substitute to captain.

This assessment may be based on the principle of “hope for the gold bugs.” But let’s try to confirm it based on current events: If the U.S. dollar were to actually cede its leading role to gold and enter a consolidation phase in the coming weeks, gold would very likely benefit from this. The trigger could be of a geopolitical nature. Perhaps the parties involved in the Iran conflict will come to their senses after all. This would also ease inflationary pressure, and US Treasury yields could fall. Of course, this, too, is to some extent based on the principle of “hope.” Yet the reliable “Balance of Power” indicator from the US bond market has just generated a sell signal for US Treasury yields…

The Bitcoin cycle has also been working very well recently and suggests that the cryptocurrency—barring technical rebounds—can likely not expect a sustained upward trend until the fall.

Gold bugs can therefore hope that the cycles will continue to function in the coming months as they have in recent years.

Another question is currently pressing: Following the minor tremors of the past few days, should equity investors also expect a correction?

If we analyze the current asset strategy of hedge funds, they continue to show their bullish side. Long investments clearly outweigh short positions. Hedge funds are thus betting on further rising stock prices.

The smart investors—that is, those who tend to position themselves discreetly in the background with large investments—are not accumulating further. However, the indicator’s red area suggests that the market has recently overreacted on the selling side. This would make a rising index quite likely.

Of course, optimism has waned along with the recent decline in stock indices. Yet it remains on the positive side. Accordingly, Wall Street is expected to remain resilient.

But let’s not kid ourselves: The war with Iran has led to an energy shock. While this is currently still relatively mild, the disruption to oil exports through the Strait of Hormuz could only be mitigated because many nations—particularly China and the U.S.—are drawing on their oil reserves, with China importing significantly less and the U.S. simultaneously exporting significantly more. But these reserves are not bottomless. In the second half of the year, we will be heading from a supply deficit toward a shortage unless the Strait of Hormuz reopens soon. Then consumers’ already strained wallets are likely to come under even greater pressure. And we know from previous observations: Consumers’ real income correlates strongly with the stock market. If people cannot save, they can also invest significantly less. Investors would therefore be well advised to take profits as markets rise again.

We wish you successful investments!

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Pretiorates’ Thoughts — Bond Relief, Bullish Belief

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Pretiorates’ Thoughts – When Everyone Leaves the Gold Party, Contrarians Check In

The real market return—typically calculated as the yield on 10-year U.S. Treasuries minus the inflation rate (i.e., the CPI)—continues to show a very high correlation with the price of gold, as measured by the percentage change over the past six months. This confirms our view: interest rates play a very significant role in the gold market. And not just since the outbreak of the Iran war.

In fact, it has become clearer again since the start of the Iran war: higher oil prices fuel inflation fears, which in turn drive interest rates higher. A chain reaction that doesn’t exactly bode well for precious metals.

The stock market has so far weathered these fears and higher market yields remarkably well—the S&P 500 Index has just reached a new all-time high. Behind this, however, lies a healthy dose of confidence that the problem in the Strait of Hormuz will soon be resolved. Then the many tankers blocked in the Persian Gulf could finally resume supplying the global market. The price of oil would fall again, and with it, inflation fears and interest rates.

That sounds like a very nice idea. But there are other factors influencing the development of U.S. interest rates. The U.S. economy itself, for example. When the economic engine is humming, interest rates usually rise as well.

In the high-tech sector, business continues to thrive—thanks to AI. The virtually immeasurable investments in the high-tech sector now account for a significant portion of U.S. GDP. Other sectors are also benefiting from this: utilities, mining companies, and other suppliers to the digital gold rush. With fossil fuel exports from the Middle East blocked, the U.S. has also emerged as an energy powerhouse, much to the delight of the major U.S. energy companies.

In fact, the latest development in the Citi U.S. Economic Surprise Index shows that recent economic data has almost without exception come in better than expected. This pushes market yields higher and doesn’t bode well for precious metals.

But it wasn’t just the Citi Surprise Index that delivered a strong surprise recently. The ISM Manufacturing Index, released on Monday, has also made a significant jump above the critical 50-point mark in recent months and now stands at 54 points. When this index is above 50, it signals growth in the U.S. economy. Below 50, the outlook is less favorable.

An end to the Iran conflict does not necessarily have to lead to falling market yields. With the strong U.S. economy, there is a factor that should not be underestimated and that could prevent the Fed from cutting interest rates. A strong U.S. economy also usually leads to a stronger U.S. dollar.

For gold and silver prices, this is, of course, anything but supportive. The consolidation has now lasted over four months and is testing the patience of gold and silver investors. In fact, the situation in the silver market has long since fully normalized: as recently as the turn of the year, there was far too little physical silver in the market. Currently, this no longer appears to be an issue.

Even when investors lend out their physical holdings, they no longer earn much from it. After the lease rate briefly exceeded 30% at the end of the year, it has since returned to its usual long-term level of just under one percent. So the former silver fever has cooled back down to a lukewarm room temperature.

Even in China, the picture is similar: Chinese investors have only one silver ETF at their disposal. After a premium of over 100% was paid at times for the silver held in this ETF—and the ETF manager himself had to warn against further investments—this premium has since settled back down to well below 10%.

It thus appears that the bullish days for gold and silver are over. In fact, many market participants have already turned away from the two precious metals. Open interest shows how many futures contracts are open across all maturities. For gold, this figure has recently fallen to 455,000 contracts. The increased margin requirements in recent months are likely partly responsible for the lower number. We have now reached the lowest level since 2008.

The same picture emerges for silver futures: Open interest has now fallen to just under 120,000 contracts—the lowest level since 2009. It certainly seems as though investors have given up on this market. Lights out, doors closed; the silver bugs appear to have lost their optimism.

But whenever interest in an asset class is particularly low, contrarian investors’ interest rises. In fact, gold’s Power Index has also fallen to its lowest level since October 2023. October 2023—that rings a bell, doesn’t it? Oh yes, that’s right: that’s when the gold price began to rise at a significantly faster pace. So don’t give up too soon…

We wish you successful investments!

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Pretiorates’ Thoughts — My name is Bond, Bear Bond

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Pretiorates’ Thoughts – Bond Relief, Bullish Belief

The focus remains on the Middle East, even as the situation becomes increasingly unclear. Reports of progress from the U.S. government and denials from Iran are now coming in at ever-shorter intervals. However, as expected, the price of oil appears to be stabilizing at a lower, more comfortable level, and with it, the bond markets. The recent rise in interest rates was ultimately responsible for some headaches on Wall Street. In fact, as described in last week’s Thoughts, the Balance of Power indicator shows a significant loss of momentum. This indicator measures the balance of power between bulls and bears, and the current trend suggests that the decline in market yields is unlikely to be a flash in the pan.

A stabilization or even a renewed decline in market yields would be pure fuel for the Wall Street bulls. In fact, the Smart Investors Action chart shows that accumulation continues in the background: the light blue area remains on the positive side.

A key prerequisite for Wall Street to venture the next leap to a higher level is positive sentiment. While the corresponding indicator shows that optimism has waned somewhat, it remains very strong. As a result, the market is likely to generously ignore negative news for the time being—while positive developments are met with standing ovations.

Unsurprisingly, the same indicator also points to a similar scenario for Nasdaq stocks. This comes as no surprise, as it is primarily high-tech stocks in the semiconductor, AI, and quantum sectors that are currently leading the charge.

European markets, on the other hand, which unfortunately play a less leading role in these sectors, are being pulled upward by Wall Street, yet the environment remains significantly less robust. There is hardly any sign of strong accumulation by smart investors. So if Wall Street were to catch a temporary cough, Europe would likely soon find itself in bed with a full-blown flu.

It is also striking that sentiment in Europe does not radiate any real optimism. It gives the impression that the indicator is lagging behind market developments rather than running ahead of them. Sentiment improves only after price gains—or darkens again when these fail to materialize.

Many market observers point to poor consumer sentiment in the U.S., yet one of the most important leading indicators for the U.S. economy paints a significantly more positive picture: The Conference Board U.S. Leading Indicator is composed of ten sub-indicators, and its upward trend points to a strengthening economy.

Our own SESI Warning Index, which measures the strength of particularly cyclical stocks, also provides confirmation. If sentiment in the U.S. economy were truly that poor, these cyclical stocks would hardly be performing so strongly.

Another of our key indicators, which prompted us to switch to the bull camp at the end of March, also remains positive: the ratio between the S&P 500 Index and defensive utility stocks. Whenever Wall Street outperforms the sector where investors tend to seek refuge during turbulent times, “risk-on” is the order of the day. This indicator is particularly interesting when it reaches an extreme value, as it did in March. Although the ratio has since risen significantly and is approaching an upper extreme, it does not yet appear to be acting as a brake.

Of course, there are also warning signs, such as the Happy Friday indicator: If Wall Street underperforms on a Friday, the negative sentiment can take hold over the weekend—and often leads to a rather pessimistic following week. Conversely, the new week often starts with a lot of momentum after a strong Friday. If such developments become frequent, the Happy Friday indicator sounds the alarm. After we received the green light for the bulls several times in April, a red dot has now appeared for the first time. However, one swallow does not make a summer—a single red dot is not yet a game-changer.

Bottom Line: Those who missed the rally are now warning particularly loudly about the next correction. We’re letting our investments run their course, as the chance remains intact that Wall Street will soon make its next move. That doesn’t mean we’re ignoring negative developments. The clouds are getting darker, but the storm is likely still a ways off.

Next week, we’ll take another look at precious metals. Things finally seem to be picking up again, especially with silver.

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We wish you successful investments!

If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. Thank you!

Yours sincerely,

Pretiorates

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Pretiorates’ Thoughts — Wall Street Bulls Don’t Blink

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Pretiorates’ Thoughts – My name is Bond, Bear Bond

Another week has passed, yet the Strait of Hormuz remains closed. As mentioned in previous Thoughts, Iranian storage facilities are getting full. The country is therefore increasingly forced to rely on old tankers as floating storage for the oil that continues to be produced but cannot be exported.

After all, you can’t simply turn off an oil field like a faucet. If production is abruptly halted, the pressure could collapse. Water or gas could seep into the geological formation, making a later resumption of production very expensive—if it were even possible at all. Iran is therefore trying to cut back production as much as possible while still maintaining it, and at the same time finding additional storage options.

The Financial Times has also covered the topic and reports that, according to the commodities research firm Kpler, 42 million barrels of crude oil are now being stored on Iranian tankers. According to Al Jazeera, the country has storage capacity in the form of floating tanks or ships at anchor totaling around 127 million barrels.

This makes it clear: Iran is indeed under pressure due to the U.S. blockade—though significantly less so than previously assumed in many quarters. The financial markets will likely have to scale back their hopes for a quick solution somewhat. Meanwhile, global oil reserves continue to deplete. Should these reserves be depleted before they can be replenished via a reopened Strait of Hormuz, the oil shock that many experts worldwide are warning about is likely to become a reality. Depending on the country, this could be expected in late summer or fall. However, the financial markets still assume that it won’t come to that. On the contrary: Reports are coming in from Pakistan right now that the Iranian government might be preparing a new offer. Long live hope—as we all know, it still wears water wings even when the tanker is already listing.

Last week, the effects of high energy prices were reflected in the inflation figures—and we discussed them accordingly. The Consumer Price Index rose to three percent, while the Producer Price Index more than doubled to 6.4%. Many market participants now fear once again that the high PPI will feed through to the CPI and cause a sharp spike in the consumer price index within a few months. We refuted this last week—and we’ll reiterate it right away: The PPI is often significantly more volatile than the CPI, but the two move in tandem; there is no lasting time lag observed in the CPI.

Other market participants also see a flaw in the fact that discussions of both inflation metrics usually focus on the core rate, while the development of energy and food prices is excluded. At first glance, this does indeed seem somewhat strange, since consumers are, after all, dependent on energy and food. For macro analysts and market strategists, however, it is crucial to know whether an inflation trend has arisen from the economy itself—and is thus more long-term in nature—or whether it stems from a short-term, usually political, and therefore temporary shock in the food and energy sectors.

The core rate—i.e., excluding the volatile components of energy and food—provides better guidance in this regard. The current inflation fears have, in fact, arisen almost exclusively from higher energy prices. Should the Strait of Hormuz open in the coming days, a global flood of oil is likely to follow. The many tankers could finally head toward their destination ports, and the UAE, which has withdrawn from OPEC, could increase its production by over 50%. The oil price could potentially plummet from the current $100 to $60, resulting in a 40% decline in the inflation calculation over roughly twelve months. However, the Fed is unlikely to base its interest rate policy on these volatile components and therefore prefers to focus on the core components. The seasoned market strategist does the same.

In our outlook for 2026, we did anticipate increased volatility in bonds, but not primarily due to oil-price-driven inflation fears. Market yields on U.S. Treasuries have risen more sharply in recent days, and the fixed-income market is now pricing in a further increase of 3/8 percentage points by summer 2027.

Citi’s US Economic Surprise Index indicates whether recent economic data has come in above or below expectations. Not entirely surprisingly, there is therefore a certain correlation between this indicator and the trend in market yields. In fact, it is becoming apparent that the US economy has recently performed better than expected. This provides some confirmation that market yields have not risen solely because of the oil price.

However, we are also seeing signs that the rise in US market yields could soon lose momentum. The Balance of Power indicator, which measures the strength of bulls and bears, has already reached a very high level.

A second, short-term indicator—the Market Pendulum—provides a similar signal. The nervousness may persist for a few more days, but should then also subside—bringing lower market yields once again.

The rise in market yields over the past few days has also led to some calming on Wall Street. Higher market yields are a negative for growth, which has created a strong headwind for tech stocks, which had recently led the rally. This has caused the bull market to stall somewhat. However, “smart investors” continue to accumulate, meaning Wall Street is likely to remain dominated by the bulls. Today’s upcoming Nvidia earnings could support this scenario—or, if disappointing, cause only a brief stumble.

The rise in market yields has also had a negative impact on precious metals. But let’s remember: if inflation were to rise faster than interest rates, the resulting negative real market yield would be a bullish factor for precious metals. Yet hardly anyone seems to be anticipating that. Precious metals have fallen out of investors’ focus. This lack of interest is evident, among other things, in the number of open futures positions. Open interest in Comex gold futures has recently fallen to its lowest level in over a decade.

And the same picture is evident in silver futures. For contrarian investors who like to invest countercyclically against prevailing market sentiment, this is a particularly interesting indicator. However, this alone is not yet a buy signal. The bearish bond market is likely to generate too much noise at the moment. But let’s keep this point in mind.

We wish you successful investments!

If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. Thank you!

Yours sincerely,

Pretiorates

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These thoughts will be available as an AI video on Youtube.com within 48 hours: https://www.youtube.com/@Pretiorates

And don’t forget to recommend us - with the button below.

Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!

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