Regulatory constraints on pension funds and insurance companies are deliberately pushing them into domestic bonds. France, for example, requires savers to hold life insurance policies (tax-advantaged) which funnel into domestic bonds, with regulatory restrictions limiting equity allocation to 20-30%, preventing diversification into gold or other assets. Similar patterns exist globally, creating structural capital control.

Gavk has been wary of the AI/semiconductor trade and lost money to colleagues who played it (his Asian opportunities fund manager had a monster year with semis), suggesting he lacks consistent edge in tech trends and is more confident in international opportunities where he's written extensively.

Semiconductors have grown from 10% to 18% of the S&P 500 in just two years, and this concentration is concerning because semiconductors are historically one of the most cyclical and capital-intensive sectors, yet the entire industry is now seeing capital intensity levels so extreme that they would 'make steel makers blush with embarrassment.'

To hedge the 'Godzilla' (Japanese repatriation) tail risk, investors can buy out-of-the-money calls on the yen at attractive prices because FX volatility is extremely low despite significant equity/bond market moves and geopolitical uncertainty. Yen calls are cheap insurance analogous to fire insurance on a house.

International stocks have outperformed the S&P 500 in both 2025 and so far in 2026, but this outperformance is entirely driven by semiconductor stocks, particularly TSMC, Samsung, and SK Hynix which comprise approximately one-third of the Asian MSI index, meaning ex-semiconductors international performance is actually quite poor.

Banks are a leading indicator of systemic economic health and should be monitored carefully—when banks perform well, money is moving through the system and the economy is healthy; when banks perform poorly, it signals systemic stress regardless of other economic data.

China's economy is divergent: exports are booming but consumer/domestic demand is crushed by real estate bust, government interference in lending, and destroyed business/consumer confidence. Recovery requires real estate stabilization in major cities (Shanghai, Hong Kong, Shenzhen showing signs) but remains problematic in smaller cities.

Latin America is experiencing pronounced political rightward shifts (Salvador, Argentina, Bolivia, Ecuador, Chile, Peru, Colombia) with market-supportive policies and corporate governance changes, plus growth of local pension funds creating demand for local assets. These deeply undervalued local assets represent significant opportunity versus crowded global AI trade.

Between 2026 and 2030, the US is supposed to spend $6.7 trillion on AI capex, which would require the AI industry to generate roughly $2 trillion in annual revenue every year to justify this spending level given depreciation rates and reasonable profit margins—yet global advertising is only $1 trillion annually and AI currently generates nowhere near $2 trillion in revenue.

The story of every boom and bust follows the same pattern: you never know when you've had enough until you've had too much—there is no way to know in real-time when the cycle will reverse, only in retrospect.

Despite the exciting products powering the AI boom (Claude, ChatGPT), the pattern of booms and busts is universal because exciting markets attract FOMO and capital flows, but the cycle is driven by capital availability and sentiment, not fundamental durability—just as many picks-and-shovels companies (Nortel, Lucent, Global Crossing) went bust despite the internet ultimately transforming the world.

Any investor evaluating the AI trade should assess it through four critical prisms: (1) fundamentals (stretched today), (2) momentum (undeniably strong), (3) investor positioning (crowded), and (4) valuations (make no sense). When all four are either stretched or crowded, the risk-reward becomes unattractive regardless of the underlying business quality.

Japanese financials have crushed it in 2026 due to a steep steepening of the yield curve, pickup in capital spending, and fiscal stimulus; Canadian financials have also performed extremely well despite expected weakness from real estate troubles; US financials have been flat despite strong economic data—this divergence is a key indicator of where systemic risks are not showing up.

AI capex spending accounted for more than three-quarters of the increase in US GDP growth this year, meaning without AI capex the economy would be showing minimal growth—this creates a dependency where continued capex becomes essential to avoid recession.

Gavk's analytical framework divides all economic scenarios into four quadrants: (1) deflationary boom (capitalism's natural state—entrepreneurs always try to do more with less), (2) inflationary boom (democracy's natural state—politicians always try to promise more without paying for it), (3) inflationary bust (energy price spikes), and (4) deflationary bust (when banks overlever and credit collapses). Asset allocation should be based on which scenario you believe is least likely, then eliminate exposure to that scenario.

The inflationary boom is the most likely scenario today because: (1) oil prices are capped near $100 (China stops buying above this), (2) US deficits remain at 7% of GDP, and (3) oil prices were capped at $120 during the recent Middle East crisis but didn't get there, so inflationary bust from energy spike is now unlikely. In an inflationary boom, the winning assets are value stocks, metals, and financials.

Bonds are dead as an asset class for the next several years because: (1) central banks are deliberately creating inflation above target to deal with debt burdens, (2) the Fed has failed to hit its 2% target for 64 consecutive months, suggesting inflation above target is now a feature not a bug, and (3) without meaningful fiscal/monetary policy changes, inflation will remain elevated and bonds will underperform other assets.

Japan is the template for where the Western world is heading: negative yields, QE, zero rates, and now positive yields with 300 basis points of term premium, all while maintaining 3.5% inflation. This represents the 'endgame' where governments use inflation to reduce debt burdens and bonds stop being an effective portfolio hedge.

Korea recently implemented a policy offering capital gains-free treatment for citizens who repatriate foreign assets and buy domestic stocks, while implementing capital gains taxes on foreign stock investments. This tax policy is designed to encourage repatriation and has contributed to Korean stock outperformance as investors sell Microsoft/Nvidia to buy SK Hynix.

Japan's Prime Minister Takahashi is nationalistic and focused on re-industrializing and building defense spending domestically, similar to Trump's stated goals. However, Takahashi may strategically wait for the 2026 midterm elections and Trump's potential political weakness before implementing repatriation policies, avoiding immediate US political blowback.