Welcome to another Inside Solution One blog post. On today’s agenda: markets fearing bond yields while indices hit new highs, the Japanese carousel and the ongoing intervention – as usual, from Thursday into Friday – the weakening of the zloty after the rating downgrade, what’s going on in Turkey, and cryptocurrencies growing ever stronger.
Markets fear rising bond yields
Something rather unusual caught my attention: the Nasdaq, DAX and S&P 500 are practically at the peaks of the bull market, yet the Fear & Greed Index is sitting at very low levels. In other words, fear reigns at new index highs. And that’s good news, because as we know, a bull market feeds on fear. They say that fear is the fuel of rallies and hope is the fuel of declines. If a market falls on hope, the trend will continue. If it rises on fear – likewise. The worst thing that can happen is the end of fear and the onset of euphoria. And there is no euphoria here – quite the opposite.
What are markets afraid of? What always happens at this stage of the Kitchin cycle – yes, I know, people say I only ever talk about Kitchin, which is why there’s no chart today. We are in the transition from the recovery phase to the next one, in which equity trends can reverse at any moment. What’s characteristic of this stage is that yields rise, bonds fall, and the market starts wondering at what point it all tips over.
Statistics show that in the early stages of yields accelerating, equities usually keep rising – and that’s probably how it will be this time too. It will be a wave motion to the rhythm of hope and fear: bonds will climb to successive yield levels, with each such wave the indices will correct and then bounce back. The market will adapt to a new yield equilibrium point, until the next move higher and the next pullback. We need to get used to that. During this time we’ll see corrections in metals, in commodities and in equities. But the order is such that equities turn first and commodities much later. So as long as equities aren’t turning – and there’s no sign of that – I wouldn’t worry too much about commodities either, especially copper, which I keep talking about.
It’s also worth knowing that the final waves of a bull market are usually the most spectacular and the fastest. So a final, strong phase is probably ahead of us.
By the way, a bit of news from the fringes of AI. There’s a project built by a guy who left OpenAI and has a completely different approach: he doesn’t use LLM models, but other processing systems that reportedly consume hundreds of times fewer tokens and less computing power, yet perform quite well. I haven’t had time to dig into it yet, but it’s an interesting lead – if this were the next big thing, it would be a massacre for the likes of Nvidia. For now, as you can see, Nvidia is doing just fine.
And what about those yields? US 10-year yields have powered through 5%, and Japanese ones have finally broken 3%. I told you this would happen – and here it is. If someone had told you six months or a year ago that US bonds would be above 5% and Japanese ones above 3%, they’d probably have added that this meant a crash in the indices. Nothing of the sort is happening; the indices are doing very well. Everything in line with the Kitchin model – it will explain it to you. As for the Fed’s path – I think it should rather head towards 5%. It’s not without reason that 10-year yields are at 5%.
The Japanese carousel and an intervention in progress
Fuel is being added to the fire, because at this very moment – literally as I’m recording this – an intervention is under way: the US dollar is being sold off to strengthen the yen. A clear pattern is already visible: the intervention starts from Thursday into Friday, ends on Monday–Tuesday, and on Monday morning there’s one more attempt to push the market on thin liquidity. It’s a very silly idea and a very unsustainable one, but who’s going to stop the rich – meaning the Bank of Japan and the Fed. On that note, I’ll probably have to move Wabank a day earlier, because on Thursdays I can’t close positions properly because of this.
An intervention is an artificial suppression of the dollar’s value. I’m not saying the dollar is weak – only that it’s too weak relative to the market equilibrium point. And if the dollar is too cheap, exports become more profitable, imports less so, and inflation rises because imported goods are too expensive. What would happen if there were no intervention? Exactly that.
I get the impression both central banks have changed strategy: previously there were quick, aggressive dumps; now they’re going in with a steamroller, slowly. That’s the better strategy. But the carousel keeps spinning: the Nikkei is above 66,000 again. Let me remind you what the Japanese carousel says – the Nikkei is to rise, bond yields go to the moon (i.e. bonds go to zero), and the Japanese yen goes down the drain.
On the yen index you can see it: intervention, decline, intervention, decline again. This time the bankers decided to start a bit earlier – USD/JPY was already almost at 160, a level they themselves once cited as being watched, but they intervened before it. Rational, not to always do it in the same spot. My bet is that around 174 on the yen index the supply of yen will be enormous – it’s once again a fight against the whole world. They’ll probably keep fighting until Monday, so if they continue to push the market this aggressively, I’d jump into long positions – whether on USD/JPY or AUD/JPY – on Monday or Tuesday. Right now it may still be a little too early.
Weakening of the zloty
The Polish zloty weakened with a delay. Last Friday, rather unexpectedly, Moody’s downgraded Poland’s rating for the first time in history – from A2 to A3, fortunately with a stable outlook. One notch lower, not a nice situation. But it’s hard to say this was the main cause. The main cause is probably the rise in US bond yields: Polish 10-year bonds yield around 6%, US ones 5%. Why hold Poland when you can hold the States, a bit safer and not much less profitable? And with Japanese yields above 3% on top of that, developed markets have started sucking in capital, and emerging markets are starting to run short of it. Hence the weakness of the zloty.
Here’s a thought I’ve had: looking at how the zloty has moved against the euro over the last 10 or 20 years – it has practically not changed – while inflation in Poland was significantly higher than in the eurozone, I don’t think we’ll see below 4.20 per euro for a long time, maybe never. By the shopping basket, by purchasing power parity, the zloty was simply excessively strong. And Poland’s huge and growing debt, which Moody’s pointed to, doesn’t help either.
Since there’s bad news, here’s some better news I’ll catch up on, because I skipped it earlier: at the end of August S&P – the agency the index takes its name from, by the way – classified Poland as a developed country. This is already the second such move of Poland from the emerging to the developed basket. It’s always nice and will probably affect how capital is allocated worldwide, because we’ll land in baskets where there’s a bit more money.
I borrowed from Daniel Kostecki on X a comparison of the zloty with other emerging market currencies: dollar against the zloty, the peso, the forint and the Romanian leu. The zloty comes out worst of the four – although, as I said, Poland already has one foot out of emerging markets. The WIG doesn’t care at all, and rightly so: a weaker currency usually helps the stock market, because many exporting companies benefit from a weak zloty. And Polish 10-year bonds at well over 6% per year – theoretically this should pull capital away from equities, but not at this stage of the Kitchin cycle.
What’s going on in Turkey
I told you about the informal crawling peg of the lira to the dollar – and it really is materialising. Since April you can see they’ve tweaked the algorithm a bit, because the line has a steeper slope – probably an economic-political decision to devalue the lira a little faster. But it’s running like clockwork. Those wicks on the candles are probably midnight spreads or momentary liquidity gaps in one price source; I wouldn’t worry about them. It’s clear this is not a free-floating rate – it’s informally tied, because there is absolutely no formal peg of the lira to the dollar.
That’s why I often repeat: if you want to play a strong dollar, it’s better to play the lira – for example euro against the lira – because there the swap points are very high, rates well above 30% per year. The lira is at its weakest in years, but so what, if it pays such high interest that after accounting for swap points it performs better than the dollar by about 8% per year. That is, it weakens by that much less than it pays. That’s no accident – it’s the central bank’s goal: the lira is supposed to regain credibility. I find it hard to believe the Central Bank of Turkey would give up on this strategy after so much effort has gone into it and so many gold reserves have been sold. At most they’ll calibrate it. In their shoes I’d simply let investors make money to regain trust – if they want to have their own currency, they have no other choice. Markets assume gradual rate cuts from 38%, and no wonder with such a strong currency. It reminds me of Poland in the 1990s.
Cryptocurrencies gaining strength
As you know, for a dozen or so episodes now I’ve been a turbo bull on crypto – essentially since the moment Scott Bessent so eagerly started buying up US bonds and the Fed started tinkering with market-based monetary policy. Because what else would you call bond buying if not an intervention? If the dollar’s interest rate is suppressed and its value is additionally pushed down by partner interventions with Japan, that plays right into the hands of cryptocurrencies. Hence the rally.
On Bitcoin, the dominance of demand over supply was enormous – remember, I said every pullback should be used for buying. That dominance is still there, but it’s no longer so crushing, so going higher will probably be a bit harder from here. Sizeable liquidations sit at 83,000 – the market should be pulled there like a magnet – and at 87,300. If Bitcoin reached 87,300, then honestly I’d sell it and wait for a better price.
Thank you for your attention!
