August 03, 2026

The 60/40 portfolio is broken because equity returns are driven by AI concentration rather than the business cycle, while bond returns are now driven by fiscal constraints rather than cycle dynamics. With the AI trade slowing down and government debt projected to reach 175% of GDP (see chart below), neither the 60 nor the 40 responds to what made it work in the first place. The bottom line is that the 60/40 portfolio has lost its diversification benefit, with fundamental implications for asset allocation. The real risk emerges if the AI trade reverses or markets become more worried about government deficits. In either scenario, both stocks and bonds would face pressure simultaneously, leaving investors with no hedge.

August 02, 2026

For decades, the carry trade dominated USD/JPY, as investors borrowed cheaply in yen to buy higher-yielding dollar assets, and the currency moved in lockstep with the US-Japan interest rate differential, see the first chart below. That link broke down after Liberation Day in April 2025, when trade wars unleashed the kind of volatility that makes carry trades dangerous, since the strategy earns a slow, steady yield that a single sharp move in the yen can wipe out, prompting investors to unwind their positions regardless of the still-wide yield gap, see the second chart below. With the carry trade's pull now diminished, the currency has taken its cue not from the yield math but from Japan's deteriorating fiscal outlook. Alongside this currency shift, a deeper transformation is underway in Japanese equities, where corporate governance reform has driven a record rise in shareholder activism and pulled foreign ownership to around a third of the market, see the third and fourth charts below. The bottom line is that the yen carry trade has broken down, and the yen is no longer a rates story. Until volatility subsides, it will trade on Japan's fiscal outlook rather than the interest rate gap. For more discussion, see our chart book available here.

August 01, 2026

The chart below looks at what Fed chair Kevin Warsh said during the press conference minute-by-minute: There was no specific moment during the press conference where long rates jumped higher. There were several instances when Warsh said something hawkish where rates began to go down. Rates went up more after the press conference was over than during the press conference. This pattern reveals something important about what's driving the market reaction to Fedspeak, including the steepening of the yield curve. One interpretation of what happened is that markets understand the Fed’s commitment to 2% inflation, but with no forward guidance, the market does not understand how the Fed will get to 2% inflation. Is the way to 2% inflation through higher rates, a smaller balance sheet or tighter financial conditions? The answer to this has significant implications for the yield curve and how and when we will achieve 2% inflation. The lack of clarity about how to get there is what's pushing yields higher because there is now a risk that it may take longer or involve a policy mistake. Imagine saying: “I will take you from New York to Los Angeles, but I'm not telling you how quickly, what it will cost or how you'll get there." By not explaining these important elements, you may question if we are actually getting to Los Angeles. The risk with abandoning forward guidance is a steeper yield curve with investors asking more questions about the journey ahead, which is what we have seen since the statement came out. The bottom line is that an important part of the Fed’s credibility is not just to say that it has certain goals but also to explain how it will achieve those goals.