Yen intervention will not change fundamentals

 

The coordinated Yen intervention continues as we see the currency has continued to improve. Short-term intervention can reduce volatility, but this is not a volatility problem. This is a policy problem, and nothing has changed in policy. The Bank of Japan has moved its target rate to 1% and has provided forward guidance that it expects rates will continue to move higher. If this is the policy, then the yen carry trade will be reversed, and there will be further upward pressure on US Treasury rates.

The expectation is that short-term intervention will stop the yen slide and reduce pressure on global rates, but that is not how markets work in the longer run. There is no change in BOJ policy, no change in Fed policy, and no change in global imbalances. Hence, the markets will readjust their positions and currency rates will have to adjust. The process can be slowed but not reversed. 

What makes me worry about the markets - August 2026

 

The markets are connected, and the message is not good:

1. The Korean tech bubble is bursting, and some return to normality; however, it is not done yet. US retail investors are net sellers. We just saw a US fund blow-up with Situational Awareness. It is a one-off, but investors need to realize that investor euphoria led to the excessive money flows.  

2. Coordinated intervention in the yen market to stop a massive currency slide. Japan rates moving higher, so global fixed income is being reset. 

3. Long-term Treasuries at levels not seen since 2007. Real rates continue to move higher. Housing market declines will continue given high mortgage rates. Cost of borrowing for all AI projects is going higher. 

4. Consumer sentiment continues to move lower. 

5. Continued war in Ukraine and the Middle East, which impacts the oil market. Oil inventories are reaching low levels. 

What can LLMs do and more importantly, not do?

 

A very interesting position paper worth a read for any follower of AI: “LLMs Can't Jump: Why the Abductive Leap is the Final Frontier of AI Discovery.” The thought is simple. AI may be good at some forms of inference, like deduction and induction, but it is not able to do the third type: abduction. “While AI can compress data (Induction) and prove theorems (Deduction), it cannot yet recreate the intuitive leap Albert Einstein took to formulate the axioms of General Relativity—a process rooted in embodied physical simulation rather than symbolic manipulation.”

The Three Pillars of Inference

The paper adopts the framework of Charles Sanders Peirce to categorize AI’s missing link:

• Deduction (Rule + Case → Result): Applying a known law to a specific situation. (AI status: SOTA - Achieved)
• Induction (Case + Result → Rule): Spotting patterns in data to find a general rule. (AI status: SOTA - Achieved)
• Abduction (Rule + Result → Case/New Rule): Inventing a hypothesis to explain a surprising or singular phenomenon. (AI status: The Missing Jump)

There is still room for importing thinking by analysts. The market has to understand which skills are important for analysts and what can be done by quants.  

More than a Korean bubble problem - US retail is selling

 

The bubble in Korea has been viewed by some as an isolated event. There is no question that Korean-specific regulation and behavior were a strong contributor to this bubble, yet we should look at what is happening in the US. One, the semiconductor sector is showing strong declines. Not like Korea, but the pattern is similar. Two, the move in the AI and IT sectors has been driven by retail, and retail within the US is reversing. The market is changing, and the marginal retail investor is a strong seller who is moving to more protective assets. 

Market sentiment is changing, and the positive forecasts in the last quarter are being revised.