Watching flows helps us to look for influences other than fundamentals. We are watching Money Market inflows show a sign of slowing and reversing, the trader flows into the Magnificent seven (the only part of the market with inflows) doing something similar - also demonstrated in the long NASDAQ short S&P 500 flow and the trade to switch from EM to EM excluding China also appears to have stabilised. The first stop for those money market funds we suspect will be longer dated bonds, while the second will be shorter duration equities with strong cash flows and higher yields. While the world sits in cash it is worth doing some research as to where to go, when, not if, they start to deploy. Here too, flows can help us with our searching.

Institutions that were regulated into buying bonds now find the same 'rules' forcing them to sell. The ultimate buyer won't be the Fed, but the trillions sitting at the short end of the curve and in Money Market funds. For them to move the Fed need to signal an end to tightening and a modest cut. More important is that the asymmetric nature of the bond math(s) is such that while a 50bp rise in yields would leave a 12 month return flat to down slightly, a 50 bp drop would give double digit returns. For bond investors not forced to sell because of regulatory rules, this looks compelling and we suspect that many are thinking that, either when the selling stops or the Fed signals there won't be a second chance to get that duration trade on.

The usual positive seasonality for q4 has not appeared and we suspect that mark to market losses in bond markets are to blame for distressed selling. There are strong echoes of the 1994 bond rout, coincidentally the last time Japan featured heavily in bond market selling. De-globalisation of capital flows is leading to a lack of 'eastern savers' wanting to buy western financial assets as well as geo-political de-risking by the west in eastern capital markets - especially China. Currently, both sides are selling, but nobody is buying. Instead, everyone is in US$ cash. Deliberately or otherwise, the Fed is creating a liquidity crisis.

The real legacy of Covid is not so much inflation per se as the fact that it ended the follies of QE and, in Japan, Zero Interest Rate Policies. Not only did these policies achieve almost the very opposite of what they set out to do, but they also caused huge distortions in capital markets. Now that they are unwinding they are causing aftershocks across markets, particularly in US long bonds and we suspect that as Japan awakes from a three decade self induced coma, that the necessary reboot of the Japanese financial sector is going to continue to cause a lot of pain.

Fifteen years ago Ben Bernanke had to ask for $700bn to bail out the US Financial system otherwise "We might not have an economy on Monday", but the often overlooked reason why a financial crisis became an economic one was the role of the Money Market Funds which were effectively funding corporate working capital through Commercial Paper markets. When they froze, so did the economy. Fifteen years on, they are once again dominant, but this time crowding out bank deposits rather than bank loans. Let's hope they don't cause a similar, but different liquidity problem this time.