Here’s a couple of things I’m thinking about today…
1) Bond yields are “flashing red”, according to some.
Governments in Japan, UK and the USA are all saturated in debt, so every swing higher is going to cause concerns like this. I think we can expect this to be a constant theme for years.
The problem you and I have is we never know when the feared debt “heart attack” is going to come.
For example, last August Japan caused a “blink and you miss it” panic moment in the Aussie market. In hindsight, the sell off was a chance to grab stock on the cheap and let things run to now.
That was then. This is today. The ASX is down, but seems orderly. Market participants are watching, not panicking. Gold shares are green. They’re a good hedge for days like today.
Overall, if you’re invested in the medium to long term, I don’t think there’s much to do, except watch.
2) Where should one invest for the longer term? This is not as “easy” as it was 12-24 months ago.
I was pounding the table to buy back then. But the market is well and truly reflated now. The bargains aren’t there in the same way.
We also know the trend of artificial intelligence is encroaching toward the job market. What does this mean?
I think markets are going to diverge in a powerful way between AI winners and losers. Companies that cater to a broad middle class buying segment might find their customer base eroding.
And, of course, there are ways to try and sidestep the immediate AI danger. The sector that springs to mind here is resources.
Metal in the ground cannot be “disrupted”. It’s either there, or it isn’t. It’s either profitable to extract, or it’s not.
AI will eventually seep into every facet of running mining operations, driving the trucks and operating the drills, etc.
This should, all else being equal, make miners much more profitable. But also think about the deeper point.
A shareholder always has a claim on the deposit itself. That’s a real asset in a world drowning in paper claims.
Perhaps the real risk for resource investors is governments coming to grab a bigger share once their rickety finances become too acute under the present system. Look at the way the Queensland government snatched at the coal profits during the boom times a few years ago.
That’s always a permanent risk in commodities, but becomes more elevated as Western finances become even more dire than they are now.
Here’s two that spring to mind. Both coal and lithium are going through a “down” part of their cycle.
Lithium seems to be emerging out of this, while coal is, arguably, a touch behind.
But the world needs energy, and lots of it. Coal still has a big role to play.
We could easily make a strong case for both sectors off demand alone. Neither sector has big supply coming anytime soon.
We also know that resources are becoming strategically valuable in a way that wasn’t appreciated over the previous 5-10 years.
It’s why Trump wants Greenland. It’s why China is so happy to have a chokehold over the rare earths market. Resources are power.
That’s good news for Australia and Australian investors. We’re a resource powerhouse, and in many different sectors.
My focus over the next few years will be, at least at a personal level, on resources.
There’s been so little major investment in this space for the last decade, I see a big demand squeeze coming.
I say it with confidence, because for the 14 years I’ve been at Fat Tail, resource investment was pushed out to the future the entire time.
I watched it happen, or, to be pedantic, not happen.
It’s hard to believe how fast those 14 years have gone. It seems like a blink.
In other words, the future is here. Resources are odds on to rumble in a big way.
Best Wishes,
Callum Newman,
Australian Small-Cap Investigator and Small-Cap Systems
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Murray’s Chart of the Day –
30-Year Bond Yields
Source: TradingView
[Click to open in a new window]
The relentless rise in bond yields at the long end of the yield curve around the world is now entering a fragile phase.
A year and a half after Japan ended their policy of yield curve control (YCC), it is not only Japan’s 30-year bonds searching for the right level.
UK and French bonds are currently selling off sharply as their respective fiscal situations are questioned.
The unwelcome aspect of bond yields rising in a country with a suspect fiscal outlook, is that the higher rates go the worse the outlook.
Which leads to further rises in yields.. which leads to a worse outlook.
That is a vicious circle if ever I’ve seen one.
With the Bank of Japan the unhappy owner of half of outstanding JBG bonds just imagine what their mark to market losses are looking like at the moment. Ouch.
Japan’s life insurers are also copping it.
Bloomberg reports that paper losses for Japan’s top four life insurers have quadrupled over the last year.
Bond yields up, prices down
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| Source: luxuo.com |
The 8.7 trillion yen loss equates to US$60bn. Yields have risen further since the data above was compiled in Q1 2025.
The prospect of US bonds being sold to cover some of the shortfall if very real. Who knows perhaps they are selling UK and French bonds as well.
Perhaps the ending of Japanese yield curve control is feeding into the current steepening of the yield curve everywhere.
Stocks have remained oblivious, but we are starting to see some selling pressure emerge with commentators starting to link the current surge in yields to the weakness.
The spike in gold and silver is feeding into the possibility that we aren’t far off seeing this issue explode onto the front pages as a serious problem.
Regards,
Murray Dawes,
Retirement Trader and International Stock Trader
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