The AI story is on the cusp of a meltdown as MSFT enters into a long-term bear market.

The Oracle 5Y CDS is now at its highest level since the GFC, as market participants panic and seek avenues to hedge their tech exposure.

The tech investors will have to endure extreme pain over the next few months (maybe years) as Mr Market resets valuations, as companies' FCF plummets and the Mag7, once known for hoarding cash and buybacks, are now turning net cash negative.

For the first time since the war began, we have also begun writing about the “post-war” analysis, in which we discuss the macro outcome based on probable scenarios.

Some of the outcomes are now certain, given the geopolitical situation and the further escalation over the last 24 hours from both sides (and post the entry of the Houthis).

Paid subscribers can directly jump to the geopolitical section for the analysis.

Since the beginning of the year, we have, for the first time, reported a negative YTD return, and the PF is down 7 bps, compared with a 356 bps drawdown for the benchmark.

It is also our largest drawdown from the highs since inception, as we were of the view that the war would be short.

However, as we became certain of weak technicals and a protracted war, we reduced duration and initiated short positions, which have helped us limit our drawdowns.

Let’s dig deeper into the world of macro, geopolitics and cross-asset relationships.

Macro!

The first signs of the Middle East conflict taking a toll on consumers were visible in Germany’s GfK Consumer Confidence.

Note that last week we saw the first signs of worsening business sentiment as Germany faces significant headwinds from higher energy prices.

The GfK consumer sentiment index dropped by 3.2 points to -28.0, the weakest reading since 2024.

Furthermore, Income expectations have fallen back into negative territory, while economic expectations have declined to their lowest level since Dec 2022.

If there is no respite in energy prices in the coming weeks, expect a “recessionary” reading across both soft and hard data.

In the UK, headline CPI came in line with expectations.

The February Consumer Prices Index, including owner-occupiers’ housing costs (CPIH), rose by 3.2%.

Service price inflation was hotter than expected, and core prices rose to 3.2%, up from 3.1%.

However, the good news was that the CPI all-services index rose by 4.3% YoY, down from 4.4% in January.

The rate is the lowest since March 2022, when it was 4.0%.

Clothing made the largest upward contribution, while Alcohol and tobacco put downward pressure on the CPI.

Note that these readings were before oil prices surged. BOE has already raised the CPI target.

Furthermore, there are unintended second-order effects of a spike in energy prices, and we expect CPI to surprise higher if the war is prolonged.

In the land of the rising sun, the headline CPI fell to 1.3% YoY, its lowest level since March 2022.

The disinflationary impulse stemmed from government fuel subsidies and the fall in rice prices (base effect).

The Core CPI, which includes oil products but excludes fresh food prices, rose by 1.6% YoY, missing economists’ median estimate for a 1.7% annual gain.

Core-Core inflation, which excludes food and energy, came in at 2.5%.

Since the Japanese government has vowed to keep fuel prices low (subsidies), we can expect the CPI to remain below 3% despite higher gas/oil prices.

However, a prolonged disruption could lead to higher prices across the board.

Equities!

In equities, we will stick with our allocation and thesis that

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With oil rallying to $67, Gold to $5200, equity VIX stubborn at 20, and the bond markets sensing a risk-off mode despite a hot PPI, Mr Market, to some extent, priced in a war.

However, there are different scenarios which can play out in the coming days. The response from Iran and the participation of other Gulf countries will dictate the intensity and duration of the war.

We will discuss the probable scenarios later on.

We closed at YTD highs and are up by 5.32%, compared to 3.3% for the benchmark.

The bond rally has been a tailwind for us, along with our positions in the US and RoW.

Let’s take a deep dive into the cross-asset universe!

Equities!

Roughly 18 months ago, we introduced the Thematic Investing Series, in which we discussed themes that are likely to outperform the markets in the coming decade.

We invested in several of the stocks and have delivered 6-7 multibaggers in the Thematic Investing series.

In Thematic Investing Part 1 & 2, we researched and analysed the Aerospace and Defence sector in detail and bought two stocks (it’s an equal-weight portfolio).

The equal-weighted PF outperformed the benchmark ITA ETF for most of the time since inception and has generated significant alpha.

While we didn’t buy the others due to valuation concerns, one of the recommended stocks turned out to be a multi-bagger.

In October 2023, we wrote about a theme which we believed had long-term potential.

Although there have been several challenges since we wrote the piece, especially the demand for luxury goods in the world’s largest market (China), we have been able to deliver superior returns.

We finalised two stocks and are currently holding one stock in the PF (purchased it late).

We are up 58% on Thematic Investing Part-3, outperforming the benchmark LUX ETF by a huge margin.

In Thematic Investing-4, we were early to the commodity supercycle, believing that the massive green transition would be a boon for the industry.

Thematic Investing Part-4 is an equalweight PF of 4 stocks.

We are up 81% compared to 87% returns for the benchmark ETF XME.

Last year, after a hiatus of more than a year, we wrote Thematic Investing-5, in which we discussed stocks that will benefit from billions of dollars in hyperscaler capex (particularly data centres).

In just one year, we are up 72% as one of the stocks has turned a multi-bagger (up 5X since liberation day).

Furthermore, in August last year, as tariffs took hold, there were concerns about stagflation in the US economy.

We formed a stagflation basket at that time, which is up 10% since inception compared to 5% for the benchmark.

PS: Benchmark here is 60% ACWI and 40% GLAG (SPDR Bloomberg Global Aggregate).

Except for these, we were in the process of writing Thematic Investing Part-6, which we never completed, but recommended a stock where we made a cool 30% returns last year. The Thematic Investing Part-6 was about the electrification theme.

Note that we still hold 1 position (an ETF) in the Portfolio dedicated to the electrification theme, which we believe will outperform the broader markets due to the gigantic AI rollout.

Before we proceed further, paid subscribers can find the list of all the stocks covered in Thematic Investing Series in the spreadsheet.

Since the last 15-18 months, we have been of the view that the Rest of the World (RoW) would outperform the US equity markets in the coming years, as the weight of the US in the ACWI Index has reached unprecedented levels, and the ROW has underperformed the US since the 2008 GFC.

Since Liberation Day, we have seen peaks in the SPY/EEM and SPY/VGK ratios, indicating that Emerging Markets and Europe have outperformed the US.

When we dig deeper, the outperformance was led by only 3 stocks as the flagship EEM ETF saw massive gains due to South Korea (Samsung and SK Hynix) and Taiwan (TSMC).

Furthermore, Latin America, led by Brazil and Peru, has been the outperformers due to the commodity gains we have witnessed in the last few months.

We believe that while the EMs will continue to outperform, the rally will broaden in the coming months, and we are very well prepared for it.

In developed markets, Japan and the UK have been the biggest outperformers YTD (the two markets outperforming the benchmark EFA ETF), and ironically, Japanese markets have witnessed a sea-change with valuations now approaching levels last seen decades ago.

Note that all the returns mentioned above are in dollars.

Since most currencies have significantly appreciated against the dollar, the returns have amplified.

While the benchmark indices (S&P 500, NDX) are subdued, small caps and Dow Jones have been relative outperformers.

In fact, when we dig deeper, some of the constituents have been massive outperformers.

The energy sector has witnessed massive short covering and is the biggest gainer YTD (XLE is up 25%).

Other cyclical sectors, such as XLB, XLI and XLRE, have also given double-digit returns, while consumer staples, led by Walmart, is up a whopping 16%!

As private credit concerns rise, especially after the default of the UK-based MFS, banks took a massive hit yesterday (also post Dimon warning about structured products in the market, similar to what transpired before the 2008 GFC).

As a result, XLF is now the worst performer YTD.

XLK and XLY (due to AMZN) also posted negative returns amid concerns about hyperscaler capex.

Equity Charts (Monthly)!

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2025 in financial markets was marked by elevated cross-asset volatility as the world was stunned by a “Global Trade Reset”.

We successfully navigated the turbulent times by limiting the drawdown during the crash on Liberation Day.

Although we outperformed the benchmark (60% MSCI ACWI and 40% Bloomberg Global Aggregate) for most of the year, in the last month, we underperformed as we raised cash significantly and protected the gains made throughout the year.

We ended the year with 21% YTD returns (the best year since the launch of our Substack).

We accurately predicted the cross-asset moves.

We had 34 winning trades and 16 losing trades.

Overall, a win rate of 68% with an average gain of 7.3% and an average loss of 4.66%.

Note that we have four open trades.

Furthermore, except for this trade book, we also booked profits in the thematic investing bets in our equity portfolio (stock names hidden).

Across these trades, the average gain was 60%.

We could have maximised the gains and ended the year up by more than 30% if we had held to our positions a little longer.

Nevertheless, with our proprietary momentum strategy ready to be deployed in 2026, we will likely address this weakness and further enhance our returns.

Winners!

Some of our best calls this year have been:

1. In Q1, we got the long-bond call right and made a massive gain by taking the bet through a leveraged ETF. We also traded long bonds multiple times with a hit rate of 80%+ (only one losing trade out of 7).

2. We were in cash (around 30%) during the liberation day crash and went all in in the first week of April. As a result, we nailed the bottom in global equities.

3. We predicted the massive breakout in Japanese stocks and took long positions thrice via DXJ in April, June and August. Glad we were able to capture 80% of the upmove in NIKKEI.

4. Out of the 90% gains in the South Korean ETF EWY this year, we were able to capture a quarter of the move. We exited early and could have maximised the gains here.

5. We caught the Gold breakout in August and captured the move to $3800. Furthermore, we also took long Silver positions multiple times last year.

6. We also took positions in Gold and Silver miners multiple times and exited each time with gains. We had been bullish on miners and PMs for most of the year.

7. We also got in early in URA (Uranium) as we have been big believers in the nuclear renaissance.

8. We called the top in USDJPY twice and made money by shorting the FX pair throughout the year.

9. We successfully traded the enormous Ethereum breakout in August and also traded BTC profitably by shorting it around $108k (called the top in BTC around $121k in October).

10. Despite a bear market in Oil, we had success with long positions, catching the bottom in May.

Open Positions/ Current Asset Allocation!

Equities!

PS: Note that paid subscribers can access the detailed portfolio via the spreadsheet (link in the end).

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It was a really challenging 9 months, and we are glad to inform you that we weathered “multiple” storms and emerged unscathed, limiting the drawdowns and outperforming the benchmark for the most part.

We are up 21.5% YTD against a 21.86% benchmark return. The recent (last week’s) underperformance is due to our high cash allocation.

We are happy to protect profits as we close the curtains on 2025, a year that will forever be remembered for a historic reset in global trade.

Today, we will analyse the cross-asset relationship and also some intriguing technical data on precious metals.

Macro Data!

While the headline PPI came in line with estimates at 0.3% MoM, the Core PPI came in a tad softer at 0.1% MoM, against the estimates of 0.2%.

Nevertheless, the internals indicate that pressure is building in commodities, with the YoY change in PPI (All commodities) surging to 3.8%.

The next macro data point markets eagerly awaited was Retail Sales, which came in significantly softer than expected.

Retail Sales Control Group came in at 0.1% v/s 0.3% Exp, and Retail Sales Ex-Auto came in at 0.3% MoM v/s 0.3% Exp.

Unsurprisingly, the weakness was led by items related to housing, which is in a “recession” as the housing market becomes increasingly unaffordable for the average American.

When we zoom out and look at the broader picture, real retail sales (inflation-adjusted) have grown by just 1% over the last few years, while nominal retail sales are up by 16%.

This further signals what we have been advocating for the past few months (K-shaped recovery).

One data point that JayPo monitors closely, which was absent from the social media, was the Beige Book.

Note that the following statements from the Beige Book are self-explanatory:

Beige Book:

“Employment declined slightly over the current period with around half of Districts noting weaker labor demand. Despite an uptick in layoff announcements, more Districts reported contacts limiting headcounts using hiring freezes, replacement-only hiring, and attrition than through layoffs”

“There were multiple reports of margin compression or firms facing financial strain stemming from tariffs. Prices declined for certain materials, which firms attributed to sluggish demand, deferred tariff implementation, or reduced tariff rates.”

The Beige Book was also a factor that increased the probability of a Fed rate cut at the upcoming December FOMC.

Moving on to Europe, we got Germany’s IFO Business Climate Index.

Since the ECB began the rate-cut cycle, the IFO Business Climate Index has shown a steady recovery; however, as the Trump administration implemented tariffs, the recovery stalled.

In the land of the rising sun, we received the Tokyo CPI.

The core CPI came in at 2.8%, higher than the 2.7% YoY estimate.

As we can observe, while food inflation has cooled off (as rice prices have eased), there are clear signs of inflation stickiness across categories.

Equities!

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As we head into the last week of October, we will have:

• BOJ and Fed rate decisions next week.

• Trump-Xi meeting likely as POTUS travels to South Korea for the APEC Summit.

• Mega Tech (Mag 7) earnings ex-NVDA.

There are enough catalysts this week that could alter the direction of global financial markets for the rest of 2025.

As AI capex heads towards max throttle, it’s imperative to assess funding for the enormous capex.

Even the most cash-rich companies are now taking on debt, raising fears about their health if returns on investment are subdued in the coming years.

In fact, banks will now finance $38 billion for Oracle’s data centres, despite Oracle having the highest Debt/Equity ratio among large tech companies.

Furthermore, as the private credit cockroaches emerge, we finally have the exposure of individual banks to the private credit universe.

Although we believe there is nothing to worry about in the near term, the above data points undoubtedly indicate that risks are piling up across the banking sector and the AI Capex story.

Our PF hit ATHs yesterday, with a YTD return of 23.21%, beating the benchmark by over 150 bps.

Furthermore, the drawdown has been shallow, and we have successfully nailed the breakouts in Gold, Silver, Oil, Copper, and Ether over the last few months.

Overall, it is turning out to be a glorious year despite elevated volatility and extreme uncertainty.

Global Macro!

The most-awaited macro data of the month was released yesterday despite the US Government shutdown.

The headline and core CPI came in softer than expectations.

While the headline CPI came in at 0.3% MoM v/s expected 0.4%, the Core CPI came in at 0.2% v/s expected 0.3%.

When we analyse in detail, the shelter, as we have been mentioning for the past few months, has been the one which is putting downward pressure on the CPI.

On the contrary, the overall trend shows that Core Goods have been moving higher over the past few months due to tariffs.

We expect the core goods to remain sticky as the old inventory replenishes and the full effect of tariffs materialises in the next few months.

Further digging deeper, JayPo’s popularised measure, the Services-Ex Shelter or the Supercore CPI, moderated slightly but is still running at 0.352% MoM.

The one chart you don’t want to miss is the share of different cell imputation, or the chart that shows the CPI is becoming less precise with each passing day.

Despite enough evidence out there to portray that the data is being manipulated, according to our estimates, the CPI is going to print:

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According to Polymarket, there is an 83% probability that a US Government shutdown will occur within the next 72 hours.

In the event of a government shutdown, the government operations deemed “nonessential” will be shut down, including the BLS and other government statistical agencies.

As a result, no government reports will be released during the shutdown, which might begin on Wednesday morning.

Note that the longest government shutdown was 35 days from December 2018 to January 2019 (Trump 1.0).

If a shutdown of similar magnitude transpires, there will be no NFP and CPI report and the Fed would have to decide the policy on 29th October without the key macro data causing chaos in the financial markets.

Furthermore, geopolitical tensions are escalating with every passing day as the peace talks appear to have stalled.

We have positioned our portfolio to weather any storm in the coming days and weeks.

We are glad to inform you that we are up by 21.8% YTD compared to a return of 19.54% for the benchmark (more than 240 bps of outperformance).

PS: Benchmark is 60% MSCI ACWI & 40% Bloomberg Global Aggregate.

Global Macro!

The Fed’s preferred inflation measure is the PCE, which was released yesterday.

US PCE and Core PCE came in line with expectations at 0.3% MoM and 0.2% MoM.

JayPo told us at the FOMC presser that the entire move up in inflation was led by Goods inflation.

We can see from the chart that Core Goods inflation has been rising relentlessly from the bottom.

Nevertheless, the silver lining has been the Housing Inflation, which has fallen off a cliff. Furthermore, with the immigration situation, we can expect a further fall in housing inflation.

The Supercore (Services Ex-Housing) and the Core PCE are once again on the rise. With the Fed's cut and elevated asset prices, expect inflation to rise further.

Although we are not a big fan of GDP due to its lagging nature and a lot of revisions, we would like to draw your attention to the volatility in the GDP data due to the trade data in the last two quarters.

Furthermore, a large drawdown in inventories was a significant drag this quarter.

Nonetheless, the private domestic final purchases (PDFP), JayPo’s favourite measure, was revised up by almost 100 bps.

For us, the highlight of the week was the significant increase in durable orders.

Durables Ex-Transports came in at 0.4% vs expected 0%. If we analyse in detail, we can see that the trend here is strong and is likely due to the boost from the AI Capex.

Moving on to Europe, the IFO Business Survey remains stagnant, having failed to move further higher after a sharp recovery in the last few months.

We believe that the transmission of lower rates aided the sentiment in the past few months.

We will closely monitor future readings to gauge the trend here.

In the East, Chinese Industrial Production is off its peak and has fallen to nearly a 12-month low.

The data can be distorted due to the front-loading of the tariffs that took place in Q2 and

Nevertheless, if the downtrend persists, one should be cautious of the impending global slowdown.

Equities!

Total Equity Allocation as of today:

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Goldman Sachs reports its Speculative Trading Indicator is at its highest level since the dot-com and pandemic bubbles, driven by heavy trading in unprofitable, penny, and high EV/sales stocks. Trading volumes are high in "Mag 7" names, digital assets, and quantum computing, reflecting rising risk appetite. Call option activity has surged to its highest since 2021, and IPO/SPAC issuance is at a multi-year high, with SPACs raising $9B in Q2.

We are officially in Meme Stock Mania 2.0 as the retail crowd is once again pumping the stocks with extremely high short interest.

As a result, Hedge Funds (HFs) running long/short (L/S) strategies are facing unprecedented drawdown, the highest in the last few years.

Furthermore, the HF pain was exacerbated by the momentum names witnessing unwinding this month (-7%).

All in all, nobody in their wildest dreams anticipated the price action that we are witnessing three months ago.

Nevertheless, we have not only outperformed our benchmark but also outperformed all hedge funds.

When we examine the Macro HFs, the discretionary directional strategy has been the best performer with an average return of 7.4%.

Compared to them, we are up by more than 17.5% YTD (just 15 bps from ATHs achieved on Thursday).

Furthermore, we are outperforming our benchmark by more than 135 bps.

PS: Before we begin, we will increase our paid subscription prices to $29.99/M or $ 299.99/Yr starting 1st September 2025.

Note that subscribers who are currently enrolled or will enrol by September 1st will be subscribed at the mouth-watering current prices ($24.99/$249.99) “FOREVER”.

Furthermore, those who have subscribed at the original price of $14.99/$149.99 two years back will see no change in their plans.

Therefore, anyone who wants to take advantage of a 16% lifetime discount can subscribe until midnight on August 31st at the current prices.

Equities!

When we examine the overall performance, we are unsurprised by the YTD returns of equity markets globally, as we were among the first to question the “American Exceptionalism” narrative that was prevalent before Trump took office in January.

The chaos he has caused due to tariffs and the constant questioning of the Federal Reserve as an institution is leading to credibility issues. As a result, we have seen a 10% depreciation in the dollar (DXY) across the basket of currencies.

Nevertheless, there are structural issues at play here, and today we will discuss our macro view, which we are altering for the first time this year.

We have had a roaring success with our Thematic Investing Series.

Since we first introduced them in 2023 (after going paid), we have had multiple multibaggers and significant outperformance.

Thematic Investing Part 1 & 2 focused on the Aerospace and Defence Sectors (A&D).

We had two stocks on our watchlist and bought the other two. Even one of the stocks on our watchlist is now up 80% since we recommended it.

Overall, the equal-weight basket is up 112% against an 80% performance by the benchmark ITA.

Thematic Investing Part-3 was released in October 2023, and since then, the two-stock equal-weight PF has risen by 54% against a modest increase of 6.6% for the benchmark LUX.

The Thematic Investing series focused on the luxury segment, and despite the slowdown in the sector, our stocks have massively outperformed.

Thematic Investing Part 4 focused on clean energy and the green transition.

We had selected around four stocks, and the PF is an equal-weight portfolio with 25% weightage to each of the stocks.

We have selected XME as the benchmark here, as the traditional clean energy ETFs have underperformed with negative returns.

The Thematic Investing Part 4 is up 76% against the benchmark's 40% performance since February 23, 2024.

Our title for Thematic Investing Part 5, written in March this year, was “Amid Doom and Gloom, the AI Capex Beneficiaries”, as the Deepseek announcement led to concerns that the AI bubble had burst.

Guess what?

The Thematic Investing Basket, comprising two stocks that we screened out of the 5 potential stocks, has blown even our expectations by an enormous margin.

Since we wrote the piece, the equal-weight basket is up by 72%.

We were pleasantly surprised by the demand for data centres as one of the companies reported earnings on Thursday and was up by more than 20% yesterday.

Let us explore the details:

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Nevertheless, we have successfully navigated the chaos. As a result, it has been the best H1 since the inception of our Model Portfolio, thanks to our stupendous returns from Thematic Investing bets, buying the dip across equities, and some notable jackpots, such as capturing the Silver and Oil bull run/breakouts.

We are up by more than 16.5% YTD in comparison to the benchmark’s 14.39% return.

PS: Benchmark is 60% MSCI ACWI and 40% Bloomberg Global Aggregate rebalanced monthly.

We are making public our trade book (all closed trades).

Overall, we executed 23 trades in H1 (excluding 6 open positions), resulting in 6 losses and 17 gains.

The accuracy has been 74% with average gains of 8.65% and average loss of 3.84%.

We encountered numerous narratives, the tariffs saga, multiple wars and elevated volatility. However, thanks to our disciplined approach we were able to overcome all the obstacles and limit our drawdown during the April madness.

We experienced a maximum drawdown of -2.53% (due to our high cash holding at that time), compared to -5.55% for our benchmark.

As of 31st May, the average macro hedge fund return was just 3.4%, and thus we have achieved industry-beating returns in H1.

Let’s discuss the asset class performance and also look at some of the macro data released this week.

Equities!

Our Thematic Investing bets have been outperformers with Thematic Investing Part-1 & Thematic Investing- Part 2 (focused on Aerospace & Defence) benefiting significantly from the rising geopolitical skirmishes globally.

Furthermore, the focus on nuclear energy by President Trump and a general nuclear renaissance wave among countries such as Canada, Japan, and select European countries has led to significant gains for us, as we had bottom-fished the flagship Uranium ETF (URA) during the chaos surrounding Liberation Day.

There were two stocks that we selected from Thematic Investing Part 1 and 2. We have exited both stocks now. The first one (we traded twice) for a total gain of 96% and 60%, and the second one for a total gain of 68%.

Nonetheless, the basket (equal-weight) has delivered a return of 107% since inception, compared to a 65% return for the benchmark ITA ETF.

Thematic Investing-Part 3 focused on the luxury theme. We were unable to buy the two stocks we selected due to valuation concerns. Nevertheless, the basket is up 54% since its inception, compared to a return of 6.6% for the benchmark LUX ETF.

Thematic Investing-4 focused on the clean energy and green transition. One stock overlapped from Thematic Investing 1 and 2 (nuclear bet), and the other stock was added to the PF. The stock is up 17%.

Thematic Investing-5 focused on the upcoming Capex boom in the AI sector. We are pleased to inform you that we published it in March, just as the AI names experienced significant drawdowns. However, we used the opportunity of the Liberation Day drawdown to buy our Thematic Investing-5 bet, and we are up by more than 45% on the bet.

Overall, after booking profits, we still have 6.7% exposure to the Thematic Investing names.

We will likely buy more if the valuations are comfortable (the target remains 15% of the total allocation).

For paid subscribers who made money buying these names, we have some good news as we are working on a Thematic Investing-6 write-up which will focus on the modern warfare (rare earth metals, drone technologies, electronic warfare etc); and most probably be out in July/August.

Let’s now discuss the open positions and our equity book in detail.

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However, market participants who sold early in May, after a blistering rally from April lows, missed one of the best May returns since 1990!

Yes, folks, May 2025 was the best in the last 25 years as the S&P 500 was up by more than 6%.

While the equity markets rebounded with a vengeance, the bond markets, led by Japan, experienced a global panic attack.

The Dollar Index and Gold experienced wild swings, but closed absolutely flat MoM.

Thanks to our substantial dip buying in April, we have had a fabulous May, where our PF was up by more than 3.5%.

As a result, we are now up 12.5% in the first five months of 2025 and are on a track to deliver double-digit returns this year.

Furthermore, we have experienced limited and shallow drawdowns, thanks to our high cash allocation during turbulent times over the last three years.

Note that we are down only 20 bps from the top.

Let’s begin today’s newsletter by briefly comprehending this week’s macro data and then jump to our performance and asset allocation strategy!

Macro Data!

The two most important macro releases in the US this week were the Personal Income and Spending reports.

Let’s begin with Personal Income. When we zoom out from the monthly noise, we have a sordid state of affairs in the US.

The Real Personal Disposable Income (Adjusted for inflation) remains below the trendline five years after the deadly pandemic and the trillions of dollars in stimulus.

There is a discrepancy with the lower-income households suffering, as indicated by the high frequency indicators that we discussed last week, and then we have higher income households (and asset holders)/ the top 5%, to say who are still spending due to buoyant asset prices and positive wealth effect.

As a result, we are witnessing a K-shaped recovery, which may worsen if interest rates remain high and the macro outcome for the economy is stagflation.

Moving on, the Fed’s preferred gauge for tracking inflation is the PCE, which came in line with estimates, with the headline index at 2.2% YoY and the Core PCE at 2.5% YoY.

Upon examining the internals, the trend in Services Ex-Housing is encouraging, as the measure has reached its lowest point since 2021.

Nonetheless, Core Goods have begun to rise albeit on a low base.

Furthermore, this is before we have witnessed the impact of tariffs on inflation. We have previously mentioned that there will be a considerable lag in the inflation data as it will take at least a quarter or so for tariffs to appear in inflation data (this is “IF” companies do pass on the tariffs to consumers whether partially or wholly).

However, there is one tool by which we can almost accurately predict the upcoming rise in inflation.

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Furthermore, it was not only the volatility but also a sea change regarding safe-haven assets that stunned investors.

We successfully navigated the turbulent times and deployed significant cash earlier this month.

As a result, we reaped the benefits and are glad to inform you that our PF hit YTD highs yesterday and continues to outperform the benchmark.

When we zoom out and look, the severity of drawdowns in our portfolio has been significantly below the benchmark on almost every occasion.

Equities!

Our paid subscribers would appreciate that we bought the dip at the right moment when the S&P 500 was around 5000.

We must never forget: “Be fearful when others are greedy and greedy only when others are fearful”.

However, one can’t ignore the repercussions of the US Administration’s policies and the looming disruption due to draconian tariffs.

Though there has been progress on the deal front, we can’t deny that significant damage has been done. Due to “The Great Tariff Disruption,” we expect significant business bankruptcies and layoffs in the coming months.

We have begun to see the effects of the trade embargo on China as the number of container ships sailing from China to the US has fallen drastically in the past few weeks.

If a deal does not materialise in the next two weeks, we expect a scenario similar to COVID-19.

As a result, there is a high probability that the equity markets in the US haven’t bottomed out, and we might see lower levels in the next few months.

Nonetheless, bulls have something to cheer about: the Volatility Index (VIX) has plunged from 50+ levels to below 25.

If we are in a bear market, VIX should remain around 21-25 levels in the coming weeks.

Let’s move on to some crucial macro data points we stumbled upon this week, before we head towards a series of charts to comprehend the move in cross-asset markets.

Macro Data!

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However, investors are not panicking, as the credit markets remain “relatively” calm, and the equity fear gauge (VIX) has not breached the danger levels.

Note that High-Yield Credit Spreads (HY) are much lower than the 2022 equity bear market highs, implying that credit investors are optimistic about the growth prospects/ don’t see bankruptcies rising.

Nonetheless, uncertainty is off the roof, as we have indicated for several weeks. The Trump administration's policy flip-flops are making investors jittery, and they have been running to buy safe-haven assets (Gold).

We have now crossed the COVID highs in the US Economic Policy Uncertainty Index as Liberation Day (2nd April) nears and wild negotiations are underway.

Amid all the chaos, we have significantly outperformed our benchmark thanks to our high cash allocation and short position on the S&P 500 (underweight equity stance).

PS: Benchmark is 60% MSCI ACWI Ex-US and 40% Bloomberg Global Aggregate.

If we include MSCI ACWI, then the outperformance is enormous (600 bps), but since we have minimal exposure to the US markets, we have undertaken the MSCI ACWI Ex-US.

Let’s comprehend the cross-asset performance.

Equities!

Before we begin the equities section, we want to analyse yesterday's PCE data. For those who are unaware, Core PCE is the US Fed's preferred inflation measure.

The Core Goods jumped higher as the base effect kicks in. Note that this was before the impact of tariffs on the prices of goods.

Furthermore, the Supercore PCE (Services Ex-housing) also rose rapidly, which was the sole reason the core PCE came in hotter than expected (2.8% vs 2.7%).

Thus, there is no reason to believe that inflation will cool down for at least next 6 months; and we expect the core PCE to be sticky around the current levels unless the economy rapidly slows and enters into a recession which lead to a demand slowdown and crash in prices.

Moving on, one shouldn’t be surprised that the best sectoral performance YTD came from

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2025 has begun with a roller coaster ride as the Trump administration's focus has diverted from “equities” to “bonds,” a marked change from the first presidency stint (covered in detail last week).

Furthermore, Gold has been on a tear, defying all the odds with enormous physical demand from the US.

Nevertheless, the biggest news this week emerged from Japan.

In a surreal development, Japanese inflation came in higher than the latest US CPI reading.

Nobody in their wildest dreams would have thought about this possibility. Moreover, the Japanese 10Y bond yields surged to unbelievable 1.4% levels. This is a warning signal that can’t be ignored at any cost.

Moving to our performance, we have modestly underperformed our benchmark with a YTD return of 3.61%.

Equities!

Over the last few years, the trend has been a positive correlation between most equity markets globally except for a few (China, etc.).

However, since the last few months, we have seen massive rotation as liquidity chases the undervalued markets while sell-off has been witnessed in the “overcrowded” trades.

In other words, cheap Chinese tech names, European stocks, and certain Latin American markets have significantly outperformed the “overcrowded” big tech names in the US.

Furthermore, when you examine deeply, all the AI-related sectors, including data centres and nuclear power (except some of the semis), are down significantly from their peak, indicating that markets are pricing in some kind of slowdown in AI Capex in the coming months as Deepseek disrupts the industry. Markets fear the meagre return on the enormous capital spending by the big tech names.

Moreover, there are rumours about MSFT cancelling data centre contracts and paying penalties.

As a result, the time has come to be cautious about the future guidance of the AI capex.

When we wrote about the “Explosive Setup” a few weeks ago, we had predicted the following:

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The average performance of macro HF up to 30 November was 8.88% (we were at 9%+); thus, we slightly outperformed the global macro HFs.

Furthermore, though we had limited US exposure due to valuation concerns, our bets on Japan, Europe, and China helped us deliver superior equity performance.

When we look at our performance since inception, we have had 16%+ overall returns with minimal drawdowns (a lot better than the benchmark, with the maximum drawdown being the current 3.9%).

As always, there were hits and misses. Today, we will reflect on what went wrong and how we could perform better in 2025, fine-tuning our macro framework further.

Winners!

Let us go through all our winners first:

Total Profitable Exits/Trades/Partial Exits across Equities :

• BWXT (Thematic Investing): Profit of 80% (holding period 1 year)

• GDX (Gold Miners): Profit of 28% (holding period 3 months)

• XLU (Utilities): Profit of 28% (holding period 14 months)

• DBEU (European Hedged Equities): Profit of 25% (holding period 16 months)

• SIL (Silver Miners): Profit of 22% ( holding period 2 months)

• EWJ (Unhedged Japan): Profit of 15% (holding period 10 months)

• TSLZ (Short TSLA): Profit of 15% (holding period few weeks in August)

• NVDD (Short NVDA): Profit of 14% (holding period 1 month)

• BRK.B: Profit of 14% (holding period 7 months)

• XOM: Profit of 13% (holding period more than 15 months)

• Long MSFT/Short NVDA: Profit of 9% (around 2 months).

• EWY (Unhedged South Korea): Profit of 8% (holding period 5 months)

• DXJ (Hedged Japan): Profit of 7% (holding period 3 months)

• AMZN: Profit of 5% (holding period few days)

• CXSE/CQQQ (Chinese ETFs): Profit of 4-8% (holding period 12 months)

Total Profitable Exits/Trades/Partial Exits across Bonds:

• TLT: Total gain of 10% (2-3 months)

• IEF: Total gain of 10% (3-4 months)

• TMF: Total gain of 7% twice

Total Profitable Exits/Trades/Partial Exits across Commodities/PMs/FX :

• Gold (GLD): Profit of 45% (holding period 20 months)

• UCO (Long Oil): Total Gain of 19% in 2 trades in Jan/Feb

• UCO (Long Oil): Total Gain of 11% in 1st week of October

• URA (Uranium): Profit of 6.5% (holding period 15 days in August)

• SLV: Profit of 5% (less than a week in August)

• FXY: Short USDJPY (July): Profit of 4% (holding period 15 days)

Some of our best calls this year have been:

1. We had enormous gains via Gold and Gold Miners (GDX). We captured the rally from $1800 to $2700, generating a tremendous return of more than 45% on GLD and 28% on GDX. The biggest takeaway was that we exited timely and rightly predicted the top in Gold.

2. BWXT, our top Thematic Investing bet, almost became a multi-bagger. However, we sold it at $121 due to valuation concerns and the hype that was generated after the big tech companies became bullish on nuclear.

3. Entering the Silver Miners (SIL) just when Silver was ready to take off, we could have played via SLV, but since miners were undervalued, we decided to jump in early April. Booked gains when Silver touched $31 in H1.

4. We bought utilities (XLU) when it was the most hated, as bond yields reached 5% last year. The top defensive bet got us 28% returns, and we sold at the peak euphoria (when utilities were pumped using AI).

5. The long oil trade worked wonders in January/February, as we captured the upmove nicely despite Qatar's fake news.

6. We had been bullish on Japanese equities since the inception of our Model PF, and we rode the whole move higher in DXJ from $64 to $88, again entering at $101 and exiting at $109. Along with EWJ in between, we garnered a sizeable return via Japanese equities (around 50%+).

7. Europe via hedged ETF (DBEU) has been a stark outperformer, and we had our European exposure via DBEU to avoid currency risks. We logged significant gains before we decided to sell it off.

8. We gradually entered long-duration bonds in April and May when the yields were above 4.5-4.6% and booked all the profits when the yields moved down to 3.6-3.7% in August/September.

Equities!

We have beat our benchmark by 140 bps in our equity portfolio with minimal drawdowns.

Let us look at our open positions:

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Furthermore, the gush of global liquidity is exiting the global equity markets and entering into the US equities, with crypto attracting significant flows as the pro-crypto president sits in the White House, leading to insane valuations across the board.

Despite our limited exposure to US equities, we have significantly outperformed the benchmark thanks to our highly profitable trades in the bond, PMs and FX markets.

Thanks to massive equity market gains for the second year, the 60:40 PF has outperformed cash (bonds have been in the bear market for the last 2.5 years).

Let’s look at our positioning (which changed a little this month as we were travelling for half of the month) and outlook for various assets.

Equities!

Equities performance has been in line with the benchmark.

Nonetheless, we haven’t been able to generate significant alpha due to our very high cash allocation (now reaching 40% of the equity portfolio). We find the equity markets (mainly the US) highly unattractive due to their astronomical valuations.

In fact, the US has been facing an unprecedented situation due to the global liquidity being sucked by the US equity markets, especially post the 5th November results.

In last month’s portfolio update, we explored in detail the various valuation metrics we used to track the US equity markets. Our stance has not changed, as multiples across the US markets have continued to rise.

In fact, the valuation gap to its peers has seen an astronomical rise due to the US tech supremacy and significant multiple expansion in the US, as Donald Trump promises to lower corporate tax rates and deregulate the industry.

Furthermore, the equity risk premium continues to compress and is now at levels last seen during the dot com bubble.

Moving on, we spotted a potential red flag this week.

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We are glad to announce that we have generated significant alpha this year despite irrational market moves across assets.

As of today, we are outperforming our benchmark (60% IN MSCI ACWI Ex-US and 40% Bloomberg Global Aggregate) by 320 bps.

We also got the crucial results of the US Presidential elections, and Donald Trump is now the 47th President of the USA (results were as per the market’s expectations). Nonetheless, a Republican sweep was a surprise (the House is also most likely going to the GOP).

Furthermore, JayPo announced a 25 bps cut, as the street expected. However, the bond markets are still jittery, as the new President is expected to announce tariffs that will be “inflationary” in the short term.

The BOE cut rates as expected by 25 bps, but the policy was termed a “hawkish” cut as the budget was termed inflationary by the BOE. Moreover, the BOE mentioned that they don’t see “rapid” cuts.

Let us begin with our analysis and portfolio update!

Equities!

Let us start today with our Thematic Investing bets. In the last 14 months, we have written four pieces on the topic.

In Thematic Investing Part 1&2, we discussed the opportunities in the Aerospace and Defence (A&D) space. Out of the stocks discussed, we bought two stocks in our portfolio and massively outperformed the benchmark ITA.

Note that we exited one of the stocks completely this week after a return of 70%.

Those who want to read about Thematic Investing 1 &2 :

PS: Note that markets are becoming excited about the “nuclear theme” when we have been bullish for the past year and a half. We also made some big money in URA.

In Thematic Investing Part 3, we selected two stocks (we didn't add them to the PF due to valuation concerns).

Nonetheless, those who would have heeded the advice and bought would have outperformed the benchmark by a wide margin.

Thematic Investing Part-3, those who want to read:

Note that we had a Part-4 as well, and we only added one stock to our PF from Part-4. Nevertheless, the stock we didn’t add is up 40% thanks to the AI rhetoric (the company is an indirect beneficiary of AI)

Before we talk about the burning topic of valuations in the US equity markets and jump to some of the earnings of our PF stocks, we look at the performance of our equity portfolio relative to the benchmark.

The underperformance beginning in May was due to the very high cash allocation of our equity PF.

We continue to hold sizeable cash in our PF due to waning opportunities ( valuation concerns).

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Nonetheless, the slight underperformance of 50 bps relative to our benchmark is due to the very high cash levels (around 30%) we have maintained for the last few weeks.

We have been right in most trades this year (and profitable), while some have been disappointing.

Nonetheless, the total return and the alpha generation ultimately matter when investing.

We strive to do our best even though some parts of the equity markets are “irrational” and have reached insane valuations.

Let us look at the performance and review the trades for September!

Equities!

Last month, we wrote that the portfolio suffered severe underperformance due to a significant drawdown in one of our equity holdings.

However, we recovered from the drawdown, and now the equity PF is at YTD highs.

Furthermore, the PF's underperformance is due to our high cash levels, which we have maintained due to political uncertainty and our negative view of US equities (valuation concerns).

One of the trades that worked favourably for us (which we completely exited this week) was the long XLU (utilities) trade.

We were early in the trade and entered last year as we expected utilities to outperform other sectors due to recession concerns (defensive play) and a potential fall in long-term yields (100 bps fall in 10Y since we bought).

Unsurprisingly, XLU is the best-performing ETF YTD as market participants dumped the expensive tech names and went all in on defences.

Nonetheless, utilities had now become an overcrowded and consensus trade. Furthermore, the recent AI pump indicated that the risk reward was unfavourable.

Overall, we expect US equities to remain rangebound as we enter the earnings period and a blackout period for buybacks (note that the most significant demand for stocks YTD has been by buybacks).

Moving on, many market participants have been surprised by the Chinese rally.

We have been bullish on China because of extreme pessimism (though macros are horrendous), and the valuations for the large-cap Chinese names have been dirt cheap.

As a result, the lightning rally in Chinese names has led the Chinese ETFs to outperform the US markets by an enormous margin.

PBOC launched a stimulus package early this week, the largest since the COVID-19 pandemic. The package also included a surprise fiscal stimulus, which involved doling out cash payouts, aka the “helicopter money,” to the poorest residents.

To summarise:

• 50bps RRR cut providing RMB 1 trillion long-term liquidity (guidance of another 25bps to 50bps cut before year-end).

• 20bps rate cut of the 7-day reverse repo.

• 30 bps rate cut of the 1-year China Medium-term Lending Facility (MLF).

• Lowering existing mortgage rate.

• Announced RMB 500 billion in liquidity from the PBoC to buy equities!

• Lowering the deposit rate to mitigate the impact on bank margins.

• Injecting up to 1 trillion yuan ($142 billion) into its biggest state banks.

Nonetheless, we are not optimistic about the prospects of the recovery in the Chinese property market.

The first step is the “bottoming out,” as the prices have been in a free fall.

Secondly, we have mentioned multiple times this year that the Chinese

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As we mentioned a fortnight ago, Mr Market cited the reversal of “carry trade” as the potential reason for the sudden exponential rise in VIX and drawdown in risk assets.

However, leverage and skewed positioning are the sole reasons the FX market exploded with other risk assets.

As we head into the last few months of the year, we remain cautious about the global financial system's environment, as risks are piling up across various economies.

We have been outperforming our benchmark for the last few weeks/months; however, a sudden underperformance of a particular stock earlier this week negatively affected the performance.

Nonetheless, we remain confident about the full-year prospects. We believe that the PF will outperform and generate significant alpha before the end of the year as macro takes centre stage once again in the markets.

Equities!

Overall equity performance was robust until last week when we had an ugly “accident” in the PF early this week.

Nonetheless, we will recoup the losses in the medium term as we focus on the rigid top-down and bottom-up stock selection process with a sharp reliance on macro developments.

When we discuss equities and their relationship to macro, we gain a lot of clarity on future returns.

Equity market performance in a standard scenario (if we leave the extremes of greed and fear) depends mainly on future earnings.

Thus, digging deeper into what market participants are factoring in for future earnings becomes paramount.

Market participants expect healthy EPS growth for the S&P 500 in the next few quarters, with an expected YOY growth of more than 14% for Q2 25.

If we look at the full-year estimates, markets expect an EPS of $276 for 2025, and thus, the S&P is today sitting at 20.5X Fw PE (276*20.5= 5650).

Now, when we bring macro into the story, we can easily conclude that the rosy expectations have two big issues (except the AI-led deceleration of earnings momentum in big tech that’s coming next year):

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In fact, the sharp reversal can be attributed to extreme positioning across various assets (FX, Mag 7, etc.), which led to enormous unwinding and, thus, rapid moves.

We highlighted this risk in one of our newsletters last month, where we discussed the largest bearish positioning in JPY since 2007.

As one can observe, we raised the risk of unwinding in mid-June, when the positioning was the most bearish since the GFC. However, last week's short-covering rally led to some unwinding.

Overall, our cautious approach has led to some alpha generation despite a significant equity bubble.

Furthermore, since inception last year, our risk management has kept drawdowns minimal compared to our benchmark, thanks to our high cash levels periodically and conservative approach.

In fact, as you can observe, our PF has never witnessed more than a 4% drawdown, even during the worst-case scenarios (SVB, last year's equity correction).

Let’s dig deeper and understand how we are positioned for a cracker H2.

Equities!

Equity performance has been in line with the benchmark performance despite our underweight stance and high cash position.

We wrote about the valuation in detail a few months ago, and we mentioned that

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1. Political uncertainty across the West has elevated to unprecedented levels with a likely change of guard in the UK and France. Furthermore, the events of the last 24 hours in the US indicate that H2 will be a deadly political circus for which nobody is prepared, but we are confident in our ability to weather the storm.

2. Markets are at a turning point across FX, Equities, and Bonds. Given the recent macro data, the soft landing thesis will be tested at length in H2, but it also opens doors for potential gains.

3. Parts of equity markets are in bubble territory as an “AI” theme, also known as. since the earlyMachine Learning has been used for epic pump and dump across the spectrum.

Until 31st May, the average Macro-based hedge fund YTD returns were 3.63%, while L/S was up 6.86%.

We are glad to inform you that up to 31st May, we were up 3.95% YTD.

However, the PF had a negative return in June as equity markets, except Mag 7, witnessed a substantial drawdown.

Nonetheless, as we have repeatedly mentioned, we will patiently wait and not jump in out of FOMO.

As a result, short-term returns can be subdued if the trend persists. However, we believe that in the long run, 6-12 months, we will generate significant alpha.

Let us look in detail at our trades in H1 this year and our performance across assets.

Equities!

Until 31st May, the YTD performance was 6.14%, marginally below the average Equity L/S Hedge Fund performance of 6.86%.

Furthermore, this month has been poor for us in terms of equity performance as we have been increasing some of our positions, which have been against the tide.

Total Profitable Exits/Trades/Partial Exits:

DBEU (European Hedged Equities): Profit of 25% (holding period 16 months)

SIL (Silver Miners): Profit of 22% ( holding period 2 months)

UCO (Long Oil): Total Gain of 19% in 2 trades in Jan/Feb

EWJ (Unhedged Japan): Profit of 15% (holding period 10 months)

BRK.B: Profit of 14% (holding period 7 months)

XOM: Profit of 13% (holding period more than 15 months)

XLU: Profit of 11% (holding period 11 months)

EWY (Unhedged South Korea): Profit of 8% (holding period 5 months)

DXJ (Hedged Japan): Profit of 7% (holding period 3 months)

Some of our best calls this year have been:

1. Entering the Silver Miners (SIL) just when Silver was ready to take off, we could have played via SLV, but since miners were undervalued, we decided to jump in early April. Booked some gains when Silver touched $31 and some last week.

2. The long oil trade worked wonders in January/February, as we captured the upmove nicely despite Qatar's fake news. However, despite some early signs, we missed the current rally.

3. We had been bullish on Japanese equities since the inception of our Model PF, and we rode the whole move higher in DXJ from $64 to $88, again entering at $101 and exiting at $109. Along with EWJ in between, we garnered a sizeable return via Japanese equities (around 50%+).

4. Europe via hedged ETF (DBEU) has been a stark outperformer, and we had our European exposure via DBEU to avoid currency risks. We logged significant gains before we decided to sell it off.

   

5. Anticipating a melt-up in mid-December, we increased our US exposure via BRK.B and added to EWY (South Korea). Both trades worked well, and we received multi-digit returns.

Open Positions/Unrealized Gains!

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There is a very famous quote: “Nobody knows anything beyond a certain point”!

Thus, as we manage money, we need to account for all the probabilities of the macro outcomes. If we position our portfolio with only one outcome, then there is a serious risk of underperformance as the tail risks arrive, or the macro outcome is contrary to which one expects.

Nonetheless, there can be periods of extreme cross-asset price movements when markets price in only a single outcome with a cent-per-cent certainty.

In the past few weeks, Mr. Market has oscillated between a “soft landing,” a late-stage euphoria known as the “Last Hurrah” (we wrote about this month), and a potential “stagflationary” scenario. Thus, one needs to be aware of the social media narratives floating around and position/churn their portfolio by making informed decisions based on the incoming data.

Due to our sound approach and focus on the macro framework, we have been able to generate alpha this year and beat our benchmark.

However, we believe that superior returns are still far away. The market pricing of a soft landing will eventually fade, and the frenzy in the equity markets will soon end as reality about the macro fundamentals sets in.

Equities!

Equity performance has been in line with our benchmark despite high cash levels, as we are unable to discover opportunities to invest in at the current juncture and valuations.

Furthermore, as macro signs of a slowdown in the world’s largest economy become apparent, there are considerable doubts about future earnings growth.

The prominent reason is the operating margins.

Nothing excites or disappoints markets as the margin expansion or margin contraction respectively. Interestingly, the largest companies in the S&P500 (Mag 7) have collectively witnessed margin expansion.

When we dig deeper, we can conclude that the margin expansion is due to the following reasons:

• Accelerated layoffs after they overhired post-pandemic, thus resulting in lower employee costs over the past year.

• The subscription model aids margins as it’s a high-margin business (rise of subscription business in overall revenue mix).

• Pricing power due to changes in long-term structural trends (example-Netflix)

Nonetheless, we have seen some margin erosions from the post-pandemic highs as inflation cools down.

One needs to appreciate that inflation is a double-edged sword. When the economy is buoyant, and consumers are strong, an inflationary environment results in margin expansion across the board.

However, as demand normalised and excess savings vanished, margins fell for small-cap companies. This resulted in a double whammy of higher interest rates and falling EBIT margins, leading to an enormous earnings contraction and underperformance.

Furthermore, market participants believe that AI

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