Dear Clients and Investors

Something slightly different in this, the latest edition of our company newsletter. Firstly we are passing on the economic thoughts and market assessment of our long standing and highly regarded friend and associate Charles. His surname for confidentiality reasons kept secret, it should also be noted that Charles’s newsletter is not to be regarded as advice.

First from Charles, ‘ infrequent musings for those unusual people who find themselves interested in Politics and Economics.’

‘Greetings from Gdansk. The pages of history sometimes turn too slowly for my taste. Since my last missive in early June much remains the same. The US is still trapped in a nonsense conflict that is costing a fortune and appears to be demonstrating primarily a loss of hegemony rather than the opposite. What else…England threw away the opportunity to be in a World Cup final by putting the ball up their jumper. Oh and also drifted further left…watch out gilt yields.

For older patients, like me, the memory of fast moving times & people like Lech Walesa are still alive (well I am in Gdansk). Those guys , assisted by serious politicians, Reagan & Thatcher, brought down the Berlin Wall very quickly. Fast history to be admired .

Back to the slow lane… sorry I have been boring you for months now about the problems of the G7 debt trap. This story is very much alive and the recent problems for the Yen may well be the proverbial canary.

I am also somewhat uncomfortable about how much money is being invested into AI and the circular nature of many investment streams.

The Chinese are producing free to use AI. I have yet to be convinced that the anticipated revenue stream will support the level of western investment. This could well be the spark that lights a fire under our very overvalued markets.

I know precious metals have proved an uncomfortable ride over the last 6 months, but keep the faith. There could well be trouble at mill.

Happy investing.

 

Pip Pip

Charles’

We follow that up by putting his thoughts and words to the now all encompassing AI, (which for so long I believed to be about the Great North Road connecting London and Edinburgh) to see what it would make of them.

Needless to say, the great brain in the ether, destined to rule over all our future working lives, produced an answer ten times longer than the original text, therefore we have attempted to precis it with reference to the more salient points in order that you don’t give up the will to live before reaching the end.

As might be expected any downplaying of AI Is treated with caution. After all turkeys don’t usually vote for Christmas, but generally, I think you will agree our colleague’s thoughts are generally accepted and validated

Here then is AL abridged response,

‘I think there is a serious and interesting macro thesis underneath this letter, but I would separate the genuinely strong observations from a few rhetorical leaps. The author is essentially arguing that the world is moving from a period of abundant, cheap capital and Western dominance into one of fiscal constraint, higher real yields, geopolitical fragmentation and potentially disappointing returns on enormous Al investment.

Importantly, some of the things he was warning about are not hypothetical anymore.

1. The Japan/yen point is probably the strongest part

This is the bit I would pay most attention to. The yen has been under extraordinary pressure. Japan and the US recently intervened together to support it, with the yen initially rising about 5% before giving back some of the Markets are now pricing a much greater probability of Bank of Japan rate hikes.

At the same time, 30-year Japanese government bond yields have approached 4%, a remarkable development after decades in which Japanese yields were extraordinarily low. That matters internationally because Japan has been one of the world’s great sources of cheap capital. If Japanese investors increasingly find attractive returns at home, some of the enormous pool of capital previously invested abroad can potentially come home. That’s the “canary” argument, and I think it’s legitimate.

The danger isn’t simply “Japan has too much debt.” Japan has had enormous government debt for decades without a conventional debt crisis. The more interesting question is: What happens when the cost of servicing that debt rises at the same time that the central bank can no longer suppress bond yields? The IMF was already projecting Japanese gross public debt at above 200% of GDP, while expecting monetary policy to normalize gradually.

So I would take the author’s warning seriously-but I’d describe it as a potential regime change, rather than an imminent Japanese debt collapse.

2.  “G7 debt trap” is directionally right, but too broad

This is where I think the author gets slightly carried away. The US, Japan, UK and much of Europe undeniably have a difficult combination of: high government debt; persistent fiscal deficits; ageing populations; large entitlement commitments; higher interest rates than they became

accustomed to during 2009-2021; enormous refinancing requirements.

The UK is a good example. UK public-sector net debt is now around the size of annual GDP, and borrowing in the first quarter of FY2026/27 was among the highest comparable periods on record. But “debt trap” doesn’t necessarily mean imminent crisis. A sovereign government

issuing debt in its own currency has considerably more flexibility than a company or household. The real constraint eventually becomes inflation, interest costs, currency confidence and the willingness of investors to absorb new debt at acceptable yields. That’s why I’d watch bond

yields rather than debt/GDP alone. And there is something quite interesting happening here: the Bank of England’s latest financial stability report says UK gilt markets have experienced significant volatility, with yields rising particularly in response to the energy shock, although market functioning has remained resilient. So the author’s underlying argument is better

phrased as: The era in which governments could accumulate enormous quantities of debt while borrowing at exceptionally low real rates may be over. That’s a much stronger argument than simply saying “G7 debt is too high.”

3.  The Al argument is the part I find most interesting

I actually think this may be the most consequential investment question in the letter. The

author is not really saying “Al is useless.” He’s asking something much more important: Will the economic profits generated by Al be large enough to justify the capital being committed to it?

Those are very different questions.

You can have a technological revolution that is completely real while simultaneously having an investment bubble around it. The railway revolution was real. The internet was real. Electricity was real. But investors could still pay prices that ultimately proved excessive.

And the circularity concern is worth examining. Nvidia’s ecosystem, hyperscalers, Al

companies, infrastructure providers and financiers are increasingly intertwined. Just this week, Nvidia announced more than $500 billion in new partnerships involving outside financing for Al infrastructure, partly in response to concerns about how Al compute is being financed. That

doesn’t prove a bubble. In fact, bringing third-party capital into the system could make it less circular. But it does tell you that the financing structure has become large enough that people are beginning to worry about it.

4.  But “China is producing free Al” doesn’t quite kill the investment case

This is where I’d push back on the letter. DeepSeek demonstrated that highly capable models could be produced much more efficiently than many investors had assumed. Its V3 technical report, for example, describes a very large model trained with techniques designed to reduce computational requirements. But cheap/free models can actually increase Al demand. Think about it this way: If intelligence becomes cheaper, people may use vastly more of it.

The really important question isn’t “Can China make a cheap model?” It’s: Where in the Al value chain will economic rents ultimately reside? That’s the question I’d want answered before making a big investment decision.

5.  The “spark that lights a fire under overvalued markets” is plausible-but timing is impossible

This is probably the weakest part of the investment argument. Al could be the catalyst. But so could: a US Treasury-market shock; Japanese repatriation; an inflation resurgence; an oil shock; a recession; credit deterioration; a major geopolitical event; disappointing Al earnings; or simply a change in investor expectations.

The more useful question is therefore not “Will there be a crash?” but: What would cause the market’s discount rate to rise materially while expected corporate earnings fail to compensate?

That’s where the debt and Al arguments connect. If government borrowing pushes long-term yields higher and Al investment disappoints, you potentially get a nasty combination: higher discount rates + lower earnings expectations = falling equity valuations.

That’s a much more compelling thesis than “Al is a bubble.”

6.  The England/left-wing comment is mostly colour

The football prediction aged rather badly in one respect: England actually did reach the semi-final, losing 2-1 to Argentina, and then beat France 6-4 in the bronze-medal match. So “threw away the opportunity to be in a World Cup final” is fair as an opinion about the semi-final, but “putting the ball up their jumper” is essentially sporting shorthand rather than an economic argument.

The “drifted further left → watch out gilt yields” part is more interesting. There is a legitimate relationship between fiscal credibility and gilt yields. But I wouldn’t automatically equate left-wing politics = higher gilt yields. The bond market cares much more about: deficits + inflation + growth + credibility + debt supply + monetary policy.

A left-wing government that maintains fiscal discipline could have low yields. A nominally conservative government that pursues reckless unfunded spending could have high yields. The UK gilt market is already telling us that the fiscal/inflation problem is real; the political label is secondary. UK debt-interest costs remain very large even though June 2026’s figure fell substantially year-on-year.

A left-wing government that maintains fiscal discipline could have low yields. A nominally conservative government that pursues reckless unfunded spending could have high yields. The UK gilt market is already telling us that the fiscal/inflation problem is real; the political label is secondary. UK debt-interest costs remain very large even though June 2026’s figure fell substantially year-on-year.

The bit I’d really take away

I think the letter is making a much better argument than it initially appears to.

Its various observations actually connect into one chain: 1970s-2020s model low inflation → low rates → cheap capital → rising asset valuations → governments accumulate debt → companies invest aggressively. versus potentially: 2020s-2030s model inflation volatility →

structurally higher rates → expensive government financing → fiscal constraints → less liquidity → higher required returns → pressure on asset valuations.

And then Al is potentially sitting right in the middle of the transition. Al requires enormous amounts of capital. If capital remains cheap and Al generates enormous productivity gains, it’s

fantastic. If capital becomes expensive at exactly the moment investors discover that Al revenues aren’t going to justify the investment, you’ve got a potentially nasty valuation adjustment. That’s why I think the author’s yen observation + debt observation + Al observation are much more interesting together than separately.

Where I agree most strongly

I’d rank the arguments:

1. Japan/yen as an early warning signal –
2. Higher-for-longer sovereign borrowing costs changing asset valuations –
3. Al investment potentially outrunning eventual economic returns –
4. G7 “debt trap” , but needs qualification
5. China/DeepSeek automatically undermining Western Al investment

And there’s an important irony in the letter: precious metals are probably one of the few assets that make sense under both sides of the author’s thesis. If the problem is persistent inflation/fiscal debasement, gold benefits. If the problem becomes a severe financial/monetary crisis, gold can benefit.

The thing that hurts it most is a prolonged period of genuinely high real interest rates combined with a strong dollar. So I wouldn’t dismiss the final “keep the faith” line-but I also wouldn’t interpret it as evidence that precious metals must go higher.

Overall, I’d call this a thoughtful macro warning, but not yet a complete investment thesis. The missing piece is valuation: which assets are actually pricing in the regime the author fears, and which aren’t? That’s where the argument becomes actionable rather than merely intellectually interesting.’

So there we have it, an interesting exercise, I hope you’ll agree. For me, I’m just grateful that I am as old as I am. The future is obviously AI and while it can’t yet predict the outcome of football matches and the winner of the 3.30 at Kempton Park, I don’t really want to be around when it can!

Happy Investing
Mike Towning