Recency bias might lead us to think that the weakness in October was all about Gaza, but there were clear signs of fragility already appearing in bond markets as the mark to market impacts of the bond bear market continue to lead to forced selling, particularly in Japan. The key to stability is for cash to move out along the bond curve in fixed income even though we would not expect cash rates to fall much. however, the narrative will likely turn to slowdown to support the bond narrative, and we suspect the cash pile destined for equities will go to high quality dividend yield stocks offering the prospect of quality compound real returns. We thus expect a flip in Asset Allocation - from Long Duration Equities and short duration bonds, to Long Duration Bonds and Short duration equities

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.

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.

Recency Bias makes us focus on what just happened and ignore even recent history, while the end of history illusion makes us think that there will be less change in the next five years than in the last five. A quick recap on the last 5 Q4 periods reminds us of the dramatic changes we have seen, and while the next 5 years may not be as dramatic, we would see these changes as pressaging further changes on paths now revealed, be it BRICS+ disrupting the financial system, AI and working from home disrupting the service sector globally or just the retsoration of the proper price of money and liquidity through the end of QE.