by David Robertson, CFA
August 2026
Program note: With this issue begins an experiment to move my commentary piece away from the quarter-end, which tends to be extremely busy anyway, to the middle of the quarter which more easily allows for reflection.
Two Wars, No Confirmation
The dog days of summer are a good time for the beach, a vacation, or — for the more restless among us — a hard look at the dynamics that will drive investment performance for years to come. Two stand out as genuine "difference makers." One is the emerging war on capital, in which nations compete against one another for a limited pool of savings as capital requirements (for national defense, AI buildout, energy security, reindustrialization, etc.) skyrocket. The other is the widening arc of conflict in the Middle East. Markets, so far, are barely registering either one.
The Capital War Arrives
The capital war isn't yet known by that name. It surfaced in late July as a currency intervention in the Japanese yen. The headline detail wasn't the mechanics of the intervention; it was that the US Treasury participated alongside Japan (Observations, 8/7/26). Barry Eichengreen ($) called the move a source of "troubling information about the dollar". He reads it as a sign that Treasury Secretary Scott Bessent is worried that propping up the yen by selling dollar securities would add further strain to the long end of the US Treasury market.
Russell Napier frames the joint intervention as a much bigger inflection point in the ongoing saga of Japanese debt (The Solid Ground, 8/5/2026). For decades, Japanese savers have parked money abroad chasing yields unavailable at home, where authorities suppressed interest rates. The imbalance this produced is enormous. Japanese investors now (latest measure, as of June 2025) hold approximately $2.9T of liquid US securities – including stocks, Treasury bonds, and agency and corporate debt.
Japan has spent the past couple of years taking tentative steps to unwind that imbalance including nudging rates higher and intervening periodically in currency markets. Thus far, neither have triggered a disorderly devaluation nor a rate hike severe enough to break its economy. However, this cautious program of tinkering hasn’t alleviated longer-term concerns about debt sustainability either.
Napier compares this cautious approach to the "Phoney War" of September 1939 to May 1940, when Europe saw plenty of declarations of war but little actual fighting. His point: in 1939, the declarations were the real signal, not the quiet that followed them. He argues the joint yen intervention marks the same kind of turning point. Since "capital wars have moved beyond the phoney war of the past two years”, Napier argues, “capital flows will now more quickly be politicised."
Two consequences follow, in Napier's view:
It is important to realize the potential scale of the conflict if it does broaden out into widespread retaliation. To give some sense for size, the US has about $37.4T in liquid securities that are owned by foreign entities which could ostensibly be sold in a capital war. That is notably bigger than an entire year’s worth of GDP (at about $31T). If even a fraction of that total flowed out without being offset by comparable buying, it would be enormously disruptive to US markets.
The Middle East Conflict Widens
At the same time, the conflict in Iran has broadened from a narrow confrontation with a rogue state into a much larger entanglement across the Middle East. Robert Pape called this early: the US has fallen into an "Escalation Trap," where the political cost to President Trump of walking away exceeds the cost of continuing to escalate. That trap has let Iran expand the conflict's scope — from a dispute over nuclear weapons, to control of the Strait of Hormuz and the oil that flows through it, to a broader claim on increased regional influence.
Iran shows no interest in giving that influence back. Vali Nasr, an Iran specialist at Johns Hopkins, told the FT that Tehran no longer views a negotiated settlement as realistic. White House statements about ongoing talks notwithstanding, the facts on the ground suggest otherwise.
Meanwhile, global cushions of oil storage and strategic reserves keep shrinking. As inventories approach operational minimums, the odds of outright shortages rise sharply. At the same time, Pape and Nasr (and other geopolitical experts) suggest a resolution is unlikely before the end of the year. Insofar as this continues, parts of the global economy will quite literally start running out of gas. The clock is ticking.
Where the Two Wars Meet
These two dynamics reinforce each other. The clearest lesson of the Iran conflict, for Middle Eastern states and everyone else watching, is that US military strength hasn't delivered the political outcomes it was meant to secure. Washington didn't achieve regime change in Iran, didn't curb its nuclear program, and lost effective control of the Strait of Hormuz. It has struggled to fully protect regional allies, and its munitions stockpiles are known to be badly depleted.
The net effect has been to erode the perceived value of America's defense guarantees worldwide. That's a problem for the capital war specifically: a credible defense guarantee is exactly the kind of leverage that matters when nations are competing for capital. As the guarantee's credibility fades, so does the leverage it once provided.
Why the Market Isn't Reacting
Two arguably historic shifts are underway — a decades-long flow of Japanese savings starting to reverse, and a Middle East power balance being redrawn in ways likely to ripple globally. Markets could hardly seem to care less. That's unfortunate for the many investors it will eventually catch offside, but it's also one of the rare setups for real outperformance by those paying attention.
Part of the disconnect is structural. Passive investing has reshaped how markets process information, and not merely by reducing the number of investors doing fundamental analysis. As Mike Green has explained, it changes what's rational for the remaining active investors to focus on in the first place: instead of estimating fundamental value and waiting for price to converge to it, the more profitable strategy becomes anticipating what the largest mechanical flow of capital, i.e., the passive bid, is about to do next.
The upshot is that prices increasingly reflect guesses about where money will flow rather than judgments about what securities are actually worth. That can involve chasing hot narratives such as semiconductors or hyperscalers or guessing that grifters will continue to grift without consequences. The main point is that the trade is about flow, not value. As a result, market prices conceal risk because they contain so little fundamental information.
The Bottom Line
History is being made on two fronts at once. A generational tide of foreign savings is starting to ebb which will be especially problematic for US financial assets. In addition, the balance of power in the Middle East is being rewritten in ways that will ripple far beyond the region. In the meantime, investors are being rewarded for guessing where money will move rather than for judging what things are worth.
This unusual combination sets the stage for the kind of historic reversal in fortunes that occurs every once in a great while. Most notably, there will be a tremendous opportunity to significantly mitigate downside risk by recognizing these important dynamics and acting on them.
August 2026
Program note: With this issue begins an experiment to move my commentary piece away from the quarter-end, which tends to be extremely busy anyway, to the middle of the quarter which more easily allows for reflection.
Two Wars, No Confirmation
The dog days of summer are a good time for the beach, a vacation, or — for the more restless among us — a hard look at the dynamics that will drive investment performance for years to come. Two stand out as genuine "difference makers." One is the emerging war on capital, in which nations compete against one another for a limited pool of savings as capital requirements (for national defense, AI buildout, energy security, reindustrialization, etc.) skyrocket. The other is the widening arc of conflict in the Middle East. Markets, so far, are barely registering either one.
The Capital War Arrives
The capital war isn't yet known by that name. It surfaced in late July as a currency intervention in the Japanese yen. The headline detail wasn't the mechanics of the intervention; it was that the US Treasury participated alongside Japan (Observations, 8/7/26). Barry Eichengreen ($) called the move a source of "troubling information about the dollar". He reads it as a sign that Treasury Secretary Scott Bessent is worried that propping up the yen by selling dollar securities would add further strain to the long end of the US Treasury market.
Russell Napier frames the joint intervention as a much bigger inflection point in the ongoing saga of Japanese debt (The Solid Ground, 8/5/2026). For decades, Japanese savers have parked money abroad chasing yields unavailable at home, where authorities suppressed interest rates. The imbalance this produced is enormous. Japanese investors now (latest measure, as of June 2025) hold approximately $2.9T of liquid US securities – including stocks, Treasury bonds, and agency and corporate debt.
Japan has spent the past couple of years taking tentative steps to unwind that imbalance including nudging rates higher and intervening periodically in currency markets. Thus far, neither have triggered a disorderly devaluation nor a rate hike severe enough to break its economy. However, this cautious program of tinkering hasn’t alleviated longer-term concerns about debt sustainability either.
Napier compares this cautious approach to the "Phoney War" of September 1939 to May 1940, when Europe saw plenty of declarations of war but little actual fighting. His point: in 1939, the declarations were the real signal, not the quiet that followed them. He argues the joint yen intervention marks the same kind of turning point. Since "capital wars have moved beyond the phoney war of the past two years”, Napier argues, “capital flows will now more quickly be politicised."
Two consequences follow, in Napier's view:
- US policymakers will fight to direct any repatriation of global capital away from US assets. In other words, if Japan and other net-saver nations start bringing capital home, Washington will do what it can to make sure they liquidate non-US holdings first.
- Other countries will retaliate in kind. Each country will employ whatever leverage it has to protect its own markets. One of the most direct courses will be to “weaponize” domestic savings institutions by selling US assets and buying domestic assets. This “Mexican standoff” of asset sales will push bond yields up and stock prices down around the world.
It is important to realize the potential scale of the conflict if it does broaden out into widespread retaliation. To give some sense for size, the US has about $37.4T in liquid securities that are owned by foreign entities which could ostensibly be sold in a capital war. That is notably bigger than an entire year’s worth of GDP (at about $31T). If even a fraction of that total flowed out without being offset by comparable buying, it would be enormously disruptive to US markets.
The Middle East Conflict Widens
At the same time, the conflict in Iran has broadened from a narrow confrontation with a rogue state into a much larger entanglement across the Middle East. Robert Pape called this early: the US has fallen into an "Escalation Trap," where the political cost to President Trump of walking away exceeds the cost of continuing to escalate. That trap has let Iran expand the conflict's scope — from a dispute over nuclear weapons, to control of the Strait of Hormuz and the oil that flows through it, to a broader claim on increased regional influence.
Iran shows no interest in giving that influence back. Vali Nasr, an Iran specialist at Johns Hopkins, told the FT that Tehran no longer views a negotiated settlement as realistic. White House statements about ongoing talks notwithstanding, the facts on the ground suggest otherwise.
Meanwhile, global cushions of oil storage and strategic reserves keep shrinking. As inventories approach operational minimums, the odds of outright shortages rise sharply. At the same time, Pape and Nasr (and other geopolitical experts) suggest a resolution is unlikely before the end of the year. Insofar as this continues, parts of the global economy will quite literally start running out of gas. The clock is ticking.
Where the Two Wars Meet
These two dynamics reinforce each other. The clearest lesson of the Iran conflict, for Middle Eastern states and everyone else watching, is that US military strength hasn't delivered the political outcomes it was meant to secure. Washington didn't achieve regime change in Iran, didn't curb its nuclear program, and lost effective control of the Strait of Hormuz. It has struggled to fully protect regional allies, and its munitions stockpiles are known to be badly depleted.
The net effect has been to erode the perceived value of America's defense guarantees worldwide. That's a problem for the capital war specifically: a credible defense guarantee is exactly the kind of leverage that matters when nations are competing for capital. As the guarantee's credibility fades, so does the leverage it once provided.
Why the Market Isn't Reacting
Two arguably historic shifts are underway — a decades-long flow of Japanese savings starting to reverse, and a Middle East power balance being redrawn in ways likely to ripple globally. Markets could hardly seem to care less. That's unfortunate for the many investors it will eventually catch offside, but it's also one of the rare setups for real outperformance by those paying attention.
Part of the disconnect is structural. Passive investing has reshaped how markets process information, and not merely by reducing the number of investors doing fundamental analysis. As Mike Green has explained, it changes what's rational for the remaining active investors to focus on in the first place: instead of estimating fundamental value and waiting for price to converge to it, the more profitable strategy becomes anticipating what the largest mechanical flow of capital, i.e., the passive bid, is about to do next.
The upshot is that prices increasingly reflect guesses about where money will flow rather than judgments about what securities are actually worth. That can involve chasing hot narratives such as semiconductors or hyperscalers or guessing that grifters will continue to grift without consequences. The main point is that the trade is about flow, not value. As a result, market prices conceal risk because they contain so little fundamental information.
The Bottom Line
History is being made on two fronts at once. A generational tide of foreign savings is starting to ebb which will be especially problematic for US financial assets. In addition, the balance of power in the Middle East is being rewritten in ways that will ripple far beyond the region. In the meantime, investors are being rewarded for guessing where money will move rather than for judging what things are worth.
This unusual combination sets the stage for the kind of historic reversal in fortunes that occurs every once in a great while. Most notably, there will be a tremendous opportunity to significantly mitigate downside risk by recognizing these important dynamics and acting on them.
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