A brief note from the road, tonight in London.

In meetings with investors, the sense of trepidation—rather than opportunity—regarding AI is palpable.

It is true that if AI is a mirage, the economy will indeed crack. But to me it looks real, which is why the big spenders at the epicenter of this have committed to investing $1T in 2027 and even more in later years.

Investors remain skeptical, even as everyone I spoke with acknowledges the technology itself is transformational.

Two perspectives I find useful:

1. The market is differentiating between the people writing the checks and the people receiving them, as you can see below.

   

2. If you break down the returns of the spenders, their profits are growing; the market is simply paying less for them. Microsoft, which is down the most, is representative—EPS up, PE down. Google has outperformed, but based on earnings growth, not multiple expansion.

   

Said differently, the market is pessimistic about this investment cycle working even as the evidence to date shows that the investments are working. That’s why EPS is growing so fast.

We are in a global productivity boom, the epicenter of which is the US. Global growth is strong, but that is because the US is strong; growth in Europe and China is weak. This is bullish for US stocks and the dollar, and probably bearish for US bonds, in part because a wave of issuance is coming—even if inflation cools from here, which, with tariffs and the oil shock receding and labor displacement ahead of us, it almost certainly will.

I’m on a plane next Friday and won’t write.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

This month, the ECB and the Bank of Japan are expected to raise interest rates, but the Fed isn’t. However, the odds (as reflected in bond pricing) of the Fed hiking this year have gone from 0% before the war to now pricing in one hike by December.

The truth is, the people at the Fed have little idea whether they will hike or not. They will make a decision on the day, once they know whether the Strait is open or closed and whether the stock market is up or down.

However, once a Fed hike is in play, the game shifts. Gold, Bitcoin, and copper stop going up. In fact, Bitcoin hit fresh lows. The yield curve begins to flatten (long-end rates fall relative to short-term rates, shown below). It may take some of the fluff out of the equity market. Yes, the Fed is that powerful—if they choose to exercise their authority.

The story had been that the Fed would lose independence and DJT would appoint someone who follows orders. But while the new Fed chief may be quite political—that’s how he got the job—once he has the job, he has it and is independent. What little is known about his thinking from his past comments leans more hawkish. A number of notable voting members of the Fed have said the next move might be a hike.

Markets are a game of expectations—numerical and emotional—relative to reality. The expectation until recently was dovish. Now it is turning more hawkish, and market pricing is shifting with it.

Prior to today’s market action, I had changed my view on the dollar and am reassessing long-end US bond yields. The violent sell-off in long-end bonds was in part due to the market thinking monetary policy was too loose. The war is now triggering a set of policy choices that may end that looseness. Europe will hike first into an economy that is already not showing many signs of life.

I will be traveling for the next two weeks and will write a note if time allows, but may not if it doesn’t.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

The Iran war is roughly 75% over. There is approximately a 25% probability of escalation and another significant spike in energy prices.

Months in, a few key observations stand out:

1. It is wiser to trade the consequences of the war — primarily higher inflation — than to trade the war itself.

This is because:

a. There is little edge in trying to predict near-term moves by Trump or Tehran. Questions such as “How exactly will the US incentivize Qatar to pay off Iran to reopen the Strait?” or whether either side will overplay its hand are coin flips with wide bid-offer spreads.

b. The oil market shows signs of informed positioning and insider trading. Large, well-timed bets have appeared ahead of key White House announcements. As a result, heavy buying of 5,000+ $110 calls this Friday afternoon triggered concern. After the initial spike, oil has gone roughly sideways for two months amid persistently high volatility — a difficult combination for most portfolios.

c. In contrast, the transmission mechanism from oil to the broader economy is clearer. Sustained higher oil prices feed directly into higher inflation. With oil inventories already low, the risk of another spike remains live. As bond markets have sold off (shown below) and real yields have risen, inflation-linked bonds have become more attractive as are outright short positions in nominal bonds. Markets are currently pricing inflation as ultimately contained.

d. A prolonged conflict also drives higher military spending, which is fiscally expansionary and therefore negative for bonds.

Some countries, like the US, are less exposed to the war, while others, like Europe, are more exposed. This creates the opportunity for differential bets, long one shot the other.

Even if the conflict de-escalates, the combination of elevated inflation, continued fiscal impulse, and massive AI-driven capex spending should keep upward pressure on both growth and prices.

2. The AI story is also fundamentally a military story.

a. While technology has always played a role in warfare, today’s AI represents a far more powerful leap than canals, railroads, or even the internet. AI is almost like nuclear energy.

b. The United States holds a significant structural advantage through its dominance in leading AI models and advanced chips even if it is far behind Ukraine in figuring out how to apply this knowledge on the battlefield. The US AI lead puts adversaries like Iran, Russia, and China at a clear disadvantage. However, aggressively pressing this technological edge carries risks. Hubris could provoke unpredictable counter-reactions. The more effectively AI helps the US and its allies win battles, the greater the incentive for China to act aggressively on Taiwan before the gap widens further, for instance. This at a time when the supply chain for robotics is entirely dependent on China.

c. Within the defense sector, AI is creating the same pattern of creative destruction seen elsewhere in the market. Just as software stocks were disrupted while semiconductor memory stocks surged, capital is now flowing toward next-generation defense companies while leaving legacy military contractors behind.

In short, war is now a feature not a bug and we all need to learn how to manage through such turbulence. This week, Russia sent a clear warning signal that the Baltics may be next on their agenda.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

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3 Restacks

During the railroad boom, there were regional wars, like the Anglo-Zulu War, that today almost no one remembers. We remember the railroads, however. A bridge in my town—a massive wrought-iron structure—was built in 1884 and still handles railroad traffic. The point is: for investors, the AI boom is more important than a regional conflict, despite how much attention the conflict attracts.

Like most of you, I am not a technology specialist. But also like most of you, I can’t understand the world without studying technology. Since launching Kate, AI has fundamentally changed the way we operate as investors—from what we study to how we study it. What’s happened to our company is happening to the global economy. To cite but one of hundreds of perspectives, compare two stocks, Walmart and Nebius. Nebius builds efficient AI data centers in the cloud. It rose 14% on Thursday and is up 162% this year, while Walmart fell on weak earnings and is now up about 8%.

The AI upcycle is powerful for a few key reasons and, I suspect, will not slow down despite the increasing likelihood of Fed hikes. Here is what is catching my eye:

1. This is a true productivity revolution. Everyone I know who uses AI, including non-tech-savvy people, is amazed by it. It’s a visceral “wow” despite us being nearly four years since ChatGPT launched.

2. No one knows, as far as I can tell, how many of these data centers we ultimately need. Thousands are getting built and they are all getting used. I would like to know how many tokens (the basic unit of information in an AI model) Kate Capital has used. I don’t know the answer, but I know it is big. Now visualize companies all over the world doing this, and none of us—including the model makers—knowing exactly where this will stop. The AI network is a sort of cognitive rail network.

   

3. This is not a debt-fueled boom. The Mag 7 has taken on about $50 billion in debt against $600 billion in profits. As a result, much of their spending will not shift dramatically due to interest rates.

4. I didn’t hear much about rising interest rates or energy prices in the Mag7 (AAPL, MSFT, NVDA, GOOGL, AMZN, META, TSLA) quarterly calls. Yes, Amazon noted higher fuel prices and Apple’s CFO noted the cost of memory going up, but these were footnotes.

5. Many, but not all, of these companies hold significant investment portfolios. Google, for instance, has shares in Anthropic and SpaceX. If the environment is good for Google’s stock, it is exceptionally good for their private holdings—meaning an upswing is supercharged. That can also work in reverse if there is a downturn.

6. The US is the epicenter of these models—Anthropic, OpenAI, and Gemini (Google) are all in the US—which creates enormous strategic power. There is emerging evidence that Ukraine is doing better against Russia because it has both a numerical and technical (AI-enhanced) advantage in drones, which cause 80% of all casualties in the war. Much as better cannons determined who colonized whom in the 18th and 19th centuries, the same is now true in war. If AI helps determine who wins wars, then the US government will be fully behind the success of these companies, adding fuel to the rally. These are thus not normal companies. They are national treasures.

7. Due to the war and higher interest rates, fund managers have big “hedges” on—long their favorite stock names but short the index as a hedge. This creates a potential mismatch if the index goes up while the stocks they love go down. If they then cover the index, we could see a short squeeze.

8. A risk premium has built up on US assets due to unpredictable policy. Policy will remain erratic. But the center of the global productivity shift is in San Francisco (or driving distance from it), far from Washington, and will suck in capital from all over the world. Trying to build truly world-class AI in a place that controls thought—like China—is structurally harder, which is why they lag (even if they have cheaper costs and better access to energy). In the US, I can ask AI if White House policy is erratic and get a nuanced answer. In China, of course, plenty of questions are forbidden.

In short, the boom is bigger than the war. That’s the big picture.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

We are going to get a tightening in monetary policy, which is bad for assets. Inflation, as shown below, is around 4% in the US and 3% in Europe and is going higher due to the war in Iran and the resulting higher energy prices. It is increasingly clear that whatever resolution comes in Iran will take a long time, so oil prices remain elevated.

Tightening is generally bad for assets. Below I show the S&P index alongside the Fed Funds rate in 2022. Stocks fell around 15% the last time this happened.

Tech stocks may well correct but will go back up because we are in a productivity boom and

a) prices are rising at the same time as earnings, so stocks aren’t yet that expensive,

b) U.S. households keep buying, and

c) some managers are short indexes and get squeezed, so they buy to cover, driving prices up.

Bonds go down, however, because:

a) nominal growth is around 7 percent while bond yields are well below 5 percent,

b) households don’t buy as many bonds as they do stocks,

c) the government is running a big budget deficit,

d) the tariffs were judged illegal and the government now needs to refund the revenue it collected,

e) the US is in a war with tactical victory but strategic defeat, which requires yet more money,

f) the new Fed chief is probably reluctant to hike rates, boosting the risk premium on longer-dated bonds amid an increasing lack of confidence in US institutions (like what happened to UK bonds), and

g) capex booms require debt.

Currencies in the short term will be driven by oil and the Fed. Elevated oil prices are bad for the euro and yen but good for Brazil and Norway; a Fed tightening shifts the pressure to more dollar bullish. Tightening is generally bearish for precious metals like gold, silver, and copper. European central banks are already discounted to tighten, but in 2026 the Fed is not.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Oil is having an outsized impact on the price of all other assets. Bonds, for instance, are full of oil. Below I show 2-year bond yields (white) in the US versus oil (blue). The recent rise in bond yields is mostly driven by the rise in oil, and similar dynamics are evident in most markets. That’s why the whiff of a possible compromise in Iran matters a great deal.

The market is pricing the war will continue. The clearest evidence for this is the premium at which oil delivered soon (like next month) trades relative to oil delivered next year. Nearby oil is trading at a premium similar to what you saw during the early days of Russia’s attack on Ukraine, as shown below.

Mechanically, to keep prices this high, speculators need buy a lot of oil futures because producers (people who own the oil coming out of the ground) are selling oil to lock in these high prices. So far, these two sides are roughly offsetting. Since the initial lurch higher in prices in March, oil prices have roughly gone sideways. The passage of hundreds of ships through the Strait, increased US production, and the shipment of oil via alternative means (like a pipeline from Saudi Arabia) also help.

No one is privy to what everyone is thinking, so we need to guess. Given the risks, even signing a one-page memorandum will be seen as progress.

Here is how I see the perspectives of the different players:

1. China, the GCC, and the G20 want the Strait to open. China wants its oil, the GCC wants to export, and no G20 leader wants to face voters irate over rising prices. Because China is Iran’s most important client, China’s public affirmation this week of its support for negotiations is important. But it is also nuanced: China also wants to see the US lose.

2. The US is almost desperate. Energy prices are high, inflation is rising, Trump’s popularity is ebbing, and even some MAGA faithful don’t like the war. Gasoline can jump from $5 to $10 a gallon if the Strait does not open soon. Israel has said it doesn’t want to end the war until the current Iranian regime falls, but the US can agree to a deal with Iran even if Israel doesn’t like it.

3. Iran would like to end the war if doing so involves (a) getting paid off in the form of sanctions relief and having assets unfrozen (likely) and (b) being granted some form of control/tribute collection over the Strait, much as Egypt and Turkey retain over their respective straits (less likely). I still don’t understand how the US and Iran come to agreement on Iran’s nukes.

Iran has discovered that even if they don’t have a bomb, controlling the Strait is sort of like having one. It’s possible Iran, knowing Trump’s constraints, digs in and the worst-case scenario unfolds: a spike higher in oil, a violent sell-off in bonds that then crushes the stock market rally. But the odds appear to be shifting away from that maximalist position. Despite Iran launching missiles at the UAE and firing on the US Navy, Brent oil, as I write this, is down on the week. The market is smelling the chance of, if not a resolution, then at least an improvement in oil flows.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

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The tattered campaigners surged on, some now holding aloft cups that had been pressed upon them, waving to the ladies clustered on the balconies in their putrescent hats and elevating the bobbing heads with those strange half-lidded looks of ennui into which the features had dried…

Blood Meridian, McCarthy, 1992

In the last week, the themes have not changed. They remain the tech boom, oil shortage and erosion of institutions. The data points that caught my eye all fit into this schema.

Regarding the tech boom,

1. A firehose of money is being directed to companies that make the guts of AI. In the last few months, many of their stocks have jumped by 50% or so. I show one here that I don’t own now but I have owned, ENTG. They make the chemicals that go in the chips.

2. The companies that are spending the money, like Meta, are not benefiting.

3. In recent earnings announcements, AI capital spending was revised up yet again. In essence, the companies at the center of this must feel that they are fighting a war and need to fund it to win it. I notice in my own behavior that I am using AI more and more, AI is a constant companion that has transformed Kate Capital. People at the epicenter of the spending say it has 10 more years to go. Could that be?

4. Regarding oil, Brent prices are hovering where they were after Putin invaded Ukraine. Storage is now dropping precipitously globally. Even if a deal is announced the moment this article is posted, we will already get a wave of inflation this summer. Last week, Brent and WTI broke out of the broad, post invasion ranges they have held to. If a deal is not imminent, prices are going to vault yet higher. Given that the stock market is buoyant, I suspect we will get a protracted negotiation because the White House will sense less urgency. In the Suez crisis that accelerated the decline of the British Empire, the closure lasted six months.

5. Regarding the breakdown of institutions, the United Arab Emirates withdrawal from OPEC is significant. The lattice work that has stitched together global governance, from disease monitoring to security treaties to OPEC, is giving way. It is more every nation for themselves. In the US, the government announced a second attempted prosecution of James Comey, alleging an image he posted was criminal. This is similar to the tactics that Russia and China use against adversaries. Amid the tech boom and the oil disruption, few notice.

6. Going forward, investors must “pick a side” in terms of outcomes. I think the most likely is higher oil prices and a continued tech boom followed, once the Capex boom ebbs and oil has risen enough to destroy demand, by a significant deflationary downdraft. That’s not now though, not today. An oil squeeze creates a dollar squeeze, but that will also reverse down the line.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Last week, for a moment, it appeared the Strait was open.

“In line with the ceasefire in Lebanon, the passage for all commercial vessels through the Strait of Hormuz is declared completely open…,” Foreign Minister Abbas Araghchi said on Friday, April 17, on X.

It turns out there are two Iranian foreign ministers, and the second one—the IRGC—sees it in their interest to keep the Strait closed.

This fact brings us back to counting the oil flow, product deficit and the level of demand destruction, all of which are large. Each day the oil doesn’t flow, the pressure on prices grows. For instance, chemical products that most of us don’t pay any attention to, like ethylene—22% of which goes through the Strait—are in short supply, particularly in Asia. Higher ethylene prices mean higher prices for all sorts of goods, like yogurt or toothpaste containers.

Trading the “will it open, will it not open” is a mug’s game. If the Iranian Foreign Minister doesn’t speak for the government, who does? The odds are higher for an opening because doing so is one of the few issues both China and the US agree upon. But the closing to date has put into motion enough disruption that we may be on the verge of Covid-style price disruptions. Note that the Covid pandemic was declared in March 2020 and prices did not start rising until around six months later. Now, six years later, prices were finally supposed to return to a low level after being temporarily boosted last year by tariffs.

Most of the return on assets comes when central banks are easing. These price disruptions might mean we are on the cusp of tightening. The only meaningful bear market in the last 15 years occurred the last time such a tightening happened, in 2022. Once the market smelled the coming withdrawal of liquidity in early 2022, stocks stopped going up. The actual tightening didn’t come until three months later, as you can see below.

Since 2024, the path has been easing, reversing the tightening related to Covid-era disruptions. That easing, as well as the AI boom, has been bullish for assets. Below I show the current policy rates from the Fed, ECB, and RBA and others.

The RBA diverged from this path once price pressures emerged. Particularly given the resilience of stock markets, an easing this year now seems implausible. The US, UK, and Europe are well above target, as I show below. Only Canada and Switzerland are in range.

Of them all, US pricing is the most extreme—the Fed is discounted to ease modestly, even though inflation is now likely to be close to 4% this summer.

In the short term, the energy shock outweighs the deflationary AI shock. If central banks are slow to boost the policy rate, the long end will sell off. What would you do if you were the central bank? At this point, probably nothing. But if inflation starts to print at 3% in Europe and 4% in the US, will they do nothing? At two months, maybe you begin to do something. At three months, for sure, you do.

The inflation shock is due to bad luck and erratic policy—first Covid (bad luck), then, years later, tariffs, now a war with a less and less obvious exit ramp. A template for policy blunder is Brexit. Post-Brexit, UK growth, employment, and productivity are all lower. As a result, the UK is having a tough time attracting financing because their income is weak, which then creates a self-reinforcing negative loop. Unemployment is almost 5% in the UK, but inflation is high, in part because productivity is too low to get interest rates lower. Yes, the AI boom in the US offsets some of this, but each day oil prices remain elevated, the inflation risk grows.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

The war and the incipient energy shortage are over, just like that. There is a WSJ report the US will allow Iran to “access” $20 billion if they hand over uranium. We came perilously close to the Strait seizing up, which would have triggered a massive energy shock in products like gasoline, jet fuel, and diesel. Ship traffic is still snarled, but markets are forward-looking, and the forward-looking picture is a global disinflationary boom driven by a wave of labor-saving technology amid erratic US policy.

In more detail:

1. The main thing that distinguishes us from “us” 200 years ago is technology. We’ve been through waves of change and are in another one now. I notice today’s technological shift changing how I and everyone around me operate. First-hand examples in just the last 18 months include AI writing code, overhauling research, creating new employment opportunities and eliminating others, and even helping an acquaintance with screenwriting. What will the next 18 months look like?

2. Technology changes everything. In 1800, about 75% of the US population worked in agriculture; now it is around 1%. In 1800, the world’s top companies were the British East India and Dutch East India Companies. Today they are Nvidia and Google. In 1800, the top global powers were Britain and France. Today they are the US and China.

3. Everyone is now scrambling to master this technology before their competitors do. The tech is powerfully labor-saving, shifts cash flows, and is redistributing power away from the US.

• In terms of economics, workers in aggregate are accepting a lower rate of wage growth. In the US, wage growth has fallen to 3.5% from 6% a few years ago. While tying this directly to AI is difficult, the simplest explanation is that companies are doing more with less, so demand for labor is ebbing. Hiring rates are in the fourth percentile, even though unemployment is not rising. Pay for “professional services” jobs — essentially college-educated workers with spreadsheets — is slowing fast.

  

• In terms of markets, while the S&P 500 is up on the year, there are sharp divergences inside the index between AI winners and losers. SanDisk is up 150% this year on AI demand, while Workday is down 40% because it is viewed as an AI loser. Ten-year Treasury interest rates have risen this year (prices down) due to the war. Within the bond, real yields have fallen due to expectations that higher oil prices will slow spending, while expected inflation has risen. This year the dollar is losing ground to the Chinese RMB, and US stocks are underperforming emerging-market stocks (+5% versus +15%).

• In terms of politics, the recent war highlighted how fractured and chaotic global policy and power have become. I am still not clear what exactly the goal was. In addition to the belligerents, China, the EU, Pakistan, Japan, the GCC, and many other countries all had a significant say in the policy outcome.

4. The optimal portfolio this year so far has been long emerging markets (unhedged), short US ten-year bonds, and short the dollar. Put differently, the highest-expected-return portfolio looks quite different from what would have made sense in the past. Policy is indeed erratic. With no reliable US security guarantee, the scramble for AI mastery is now overlaid on a scramble for energy and defense autonomy.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Long week, brief note.

1. An oil shock is a growth/inflation shock. Money that went to spending now goes to energy. In Los Angeles, where I was traveling this week, gas was well over $5 a gallon. Core inflation won’t move much, but growth will slow. This is not discounted in bond markets (many of which are pricing tightening), the most expensive equity markets, or certain commodity markets, like copper.

2. Negotiations are underway and China’s involvement, even if indirect, is important and tilts the scales toward resolution. China’s influence is also a sign that global power is shifting rapidly. China’s capital markets look like a sea of calm compared to turbulence elsewhere. Negotiations will perhaps go until the very last day and maybe beyond. Relatively soon, however, it gets too hot for a ground invasion. Troops can’t fight in 120-degree weather.

3. Partial closing of the Strait has already created high enough prices to incentivize shifts in behavior, from rerouting oil-carrying boats from the US Gulf Coast to Asia or bilateral deals between Japan and Iran or outright demand destruction. The data we are getting on oil flows is also lagged because some ships are turning off their transponders and then turning them back on once they are clear of the Strait. There is only hard evidence of a few ships paying tolls, so precision about the exact oil flows is not possible. It looks like a trickle.

4. While the oil shock will hurt growth in aggregate, it is a bonanza if you own a ship that can move oil from America to Japan, or a refiner in a country that is not being attacked. Ditto refiners and many others in the commodity complex, as long as the government does not impose sudden taxes on their profits. That’s more likely in Europe than the US.

5. The initial oil shock dislocated tech stocks, and the last week has seen investors scrambling to get back in, forcing those short to cover, what’s known as a short-squeeze in the business. Year-to-date, the Nasdaq is still negative.

6. The initial reaction to the war was dollar positive because of a big unwind of holdings of non-US exposure. That has now faded and the dollar looks once again vulnerable. The US imports capital and is now exporting people. Not a good mix.

7. Trump has been in office 445 days and has 1,011 left. Any portfolio needs to have certain positions (like different structures on oil) that benefit if we go completely over the edge, even if the most likely outcome is that we don’t.

8. The practical consequences of kinetic action has produced deleterious enough results (measured in casualties in Russia and Ukraine or the price of oil everywhere else) that it may usher in something, as yet not fully evident, different. The rules-based order was created after the chaos of the 1930s and 1940s and the advent of nuclear weapons. Perhaps the current, so far less severe, chaos inspires a similar counter-reaction. Drones have fundamentally shifted the playing field. My plan is to remain liquid, adjust as I get new information and pounce on dislocations.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

The war is moving markets and while I am not a military expert, I talk to them.

Seth G. Jones is president of the Defense and Security Department and Harold Brown Chair at the Center for Strategic and International Studies. He served in the Office of the Secretary of Defense and U.S. Special Operations Command and has written widely on both Russia and Iran. Said differently, he has expertise I lack, and I thought sharing our conversation would be of interest to you.

Given that things are moving quickly, I’m releasing this conversation unedited (yes, there are a few background noises and “umm”s that are normally edited out). I will likely not post later in the week.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

If a deal is not agreed to soon, there will be a Covid/2008-style abrupt slowing in growth as oil-derived products go into acute deficit. In more detail:

1. The US and Israeli attack on Iran did not envisage the Strait of Hormuz (SOH) being closed. It is now mostly closed. Below is the ship traffic, though there is a slight up-tick more recently not shown in the data below.

2. Asia gets most of its oil via the SOH. The crude mostly goes to India and China, who refine it into products that Asia consumes. There are now acute shortages of these refined products. Asian airports will run out of jet fuel in the near future if the SOH remains closed. That’s the part of this that is like Covid. There will be acute, abrupt cessations of activity, empty roads. In the poorest countries, those most dependent on energy imports, this is already underway. Pakistan has closed schools to reduce oil consumption. The Philippines has implemented a four-day work week. Airlines are cutting back routes.

3. Once the shortage becomes acute in one part of the world, it will spread. From jet fuel, it will move to diesel in Europe. The Americas are less impacted because the US, Canada, Brazil, Argentina, and others all have domestic oil production.

4. There has been an abrupt tightening of financial conditions. Oil is obviously higher, but interest rates (shown below) are too. These shifts are rapidly removing money from the economy that would otherwise be spent and is daily increasing the risk to stock markets. If nothing changes, growth will begin to contract.

5. Stock markets are holding in there because of a belief that a US Iran deal is imminent. Many remember the violent stock market reversals in April. It’s true that the closer the global economy is to a precipice, the more pressure there is on Trump to pay the Iranians whatever they want (sanctions relief) to open the SOH. But it’s plausible that Iran waits for as long as they can, making the fuel shortages more acute.

6. Each time financial markets have been closer to the precipice, like Monday morning, the White House verbally intervenes to say a deal is close. This is policy makers trying to delay a market panic. In March 2020, President Trump also said the Covid virus is “going to disappear, it’s like a miracle, it will disappear” and the comments about an imminent deal have that flavor.

7. I can’t predict how the Iranians will respond to US entreaties. What I can say is that if they delay we are going to see an acute, undiscounted decline in growth that is bearish stocks and bullish short-term interest rates.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Each day, the odds of another big leg up in oil prices increase.

For investors, true north is the flow of oil and gas.

Three weeks in, and the oil and gas is not flowing. The ships that move it are largely frozen. A few are getting through, but mostly not. If you interrupt the flow, you can store it for a while. But now storage is filling up. Wells are being shut in. The supply destruction is permanent. When demand fell by this much during Covid, prices went to zero. The opposite can happen now, supply is down roughly as much as demand was during Covid.

Central banks are on hold. Given how almost unglued inflation expectations became in 2022, central bankers now must contend with the fact that inflation expectations could become unhinged. Inflation prints this summer will be high. I don’t think central banks tighten, but the discounting that they may tighten can get more extreme, driving short-term interest rates yet higher—which is what happened this week.

Short rates (2 years) are rising faster than long rates (10 years and beyond), meaning yield curves are inverting, meaning the bond market is discounting weaker growth ahead and a spike in inflation. In past episodes, like the Iran-Iraq tanker war in the late 1980s, interest rate expectations shifted dramatically higher.

Stocks are cash flows discounted back to today. The higher interest rates go, the less attractive that distant stream of earnings, so stocks fall. The more stocks fall, the bigger the negative wealth effect. We are in a self-reinforcing negative market dynamic, and only the opening of the Strait short-circuits that.

The higher energy prices go, the more the pressure builds for a solution—which is the point, meaning it is in Iran’s interest to get energy prices as high as possible. Stocks are trading at the extreme end of their valuations, and the sharp rise in short-term interest rates and energy prices is unambiguously bearish.

Opportunities for diversification are limited. Long oil and short stocks is a bet that things get worse. Long risk parity is a bet that things get better. The risks are tilted to the downside.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

There are two big pressures in global markets, pushing in opposite directions.

The AI boom is a productivity shock that is good for profits, reduces inflation, and spreads wealth around the world. That’s the trade many had on.

The war in the Middle East is a negative productivity shock that boosts inflation and lowers growth. Many had hedges on for this risk, but these hedges were small in proportion to the primary risk.

The first force was supposed to be the dominant one and the second force an intermission. It isn’t working out that way, forcing the sale of billions of dollars of assets.

The war lacks clear goals and involves 18 countries—not including reports that both Russia and China may be involved. The market is pricing in a rise in energy prices, monetary tightening, and falling profits. So far stocks are down a few percent, but they will be down a lot more if energy doesn’t start flowing soon—and, from what I can tell, it won’t. Perhaps many investors were whipsawed last April following Liberation Day and are reluctant to do the logical thing now, which is to buy more oil and sell stocks.

In more detail:

1. Iran mounted a more chaos-causing defense than anticipated. While Western military experts assert the war is going well; from the seat of an investor, the same regime remains in place and oil, natural gas, and other prices are substantially higher than before the attack. In literal terms, the money you would have spent on going out to dinner instead goes to filling up a car with gas.

2. Many of the assets that were supposed to hedge such a risk—gold, bonds—have added to risk. The only trades that have worked are long oil and short stocks. The risk of a significant stock market decline has increased. Higher energy prices and interest rates are colliding with high valuations. Short-term interest rates are up 30 to 50 basis points in 11 days.

This market is now pricing in rate hikes in many parts of the world. The bond market is ignoring the coming growth shock and focusing on inflation, which might be because 2022 is fresh in people’s minds and central banks might indeed raise rates if energy prices don’t rapidly fall.

A return to more normal P/Es, which higher interest rates will induce, would suggest a 20% decline in stock prices. If stock prices fall, discretionary spending will grind to a halt. P/Es have not mattered for a few years, but they might now.

The consensus is that Trump will de-escalate and that, after a few days, so will Iran. Longer-dated oil contracts are now hitting new highs, however; traders are pricing in a freezing of traffic in the Strait of Hormuz.

Once the Strait closed, prices rose. Then producers stop exporting and storage begins to fill up. Once that storage fills up, they shut the pumps, which then causes another rise in prices. We have yet to see that second rise in prices, but it could come any day now.

4. This is happening amid jitters in the credit market and a gating of fund withdrawals by more institutions. Essentially, there is a bank run on illiquid credit. By our calculations, the actual amount of bad debt is small, but the gating adds to market stress.

5. The build-out of AI data centers continues but is dependent on cheap energy. So the second trade (oil shock) begins to impinge on the first force (productivity shock).

6. Selling of stocks begets selling. Trend-following investors are now turning negative, which will create even more algorithmic selling.

   

7. The market is no longer responding to Trump’s tweets the way they once did. On Monday when he said the war was almost over, stocks reversed. He repeated this later in the week, but traders could see oil prices picking up and sold stocks. It looks like the market is losing confidence in leadership.

Maybe this ends soon, but one needs to have a plan if that is not true—and that plan needs to include the possibility that stocks fall substantially.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

We are in the midst of a shift in market pricing and expectations driven by erratic policy that will continue until policy shifts.

I like short-term interest rates of central banks that are suddenly discounting tighter monetary policy, and stocks getting dislodged amid a panicked flight for cash, but doing so in a way that hedges my risk to an equity market meltdown.

In more detail:

1. The energy shock of the US and Israel attacking Iran is roughly the same as the one where Russia invaded Ukraine. Crude prices rose 46% then and are up about 50% now. European gas prices are up 100%. The root cause is the same—reckless policy.

   

2. The 2022 energy price spike coincided with an inflation acceleration that led to substantial central bank tightening and a significant drawdown in equity markets. This episode is probably different because Putin is still fighting and the White House says this is not a forever war. But they also said they would not get involved in such wars in the first place, so to manage money I need to be prepared that the White House will not change course, even if the most likely case is that it does. I still don't understand the goal and neither, perhaps, do many of the participants.

3. Markets price off of discounted conditions, constantly looking forward. In Europe, interest rate expectations have risen almost 50 bps in 5 days. That seems wrong. If I were the ECB, I’d do exactly nothing, not abruptly jack up rates. Moreover, European inflation is tame. In the US, labor market indicators are uneven but do not give the Fed ammunition to do much.

   

4. Equity indexes are a different matter. We track the “risk premium” in equity markets. Given the strong run of equities and the sell-off in bonds, the earnings yield—a rough proxy for the risk premium—for most major indexes is low. I show our measure of the risk premium in Europe below (to match with the bond yields above). The risk premium could rise quite a bit higher before being competitive with now-higher yields. The US and other major indexes look the same. When markets are stable, this does not matter much. When the wheels come off the bus, this matters.

   

5. Individual stocks are priced differently. While I don’t have a position, it’s interesting that the forward PE of Samsung is now 7 after the Korea market crash this week.

   

6. Finally, the dollar rose this week as investors, particularly dollar-based ones, closed positions and moved to cash. US policy is now at least as, if not more, erratic than that in foreign countries, and this is leading both to Americans leaving the US and will, once the dollar squeeze ebbs, lead to a rise in foreign currencies. Yes, the US is home to leading-edge tech companies, but so are a number of countries, like Korea, and their policy is orderly.

   ---

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

All eyes are on the war. War is terrible, the outcomes unpredictable.

The most likely moves are oil, gold and the Swiss franc up, probably the yen too. The reaction of stocks and bonds is less certain. In 1991, stocks rallied. So far, bitcoin has moved down but then up modestly perhaps following Israeli reports that the senior Iranian leadership suffered losses.

The war is unfolding against the backdrop of major, disruptive technological change.

AI is today’s tractor.

In 1900, when the majority of the global population worked on farms, the tractor was a terrifying innovation. Opponents even founded The Horse Association of America to resist the shift. In the process of freeing a population from arduous labor, mechanization overturned an economic, social and political order that had existed for centuries.

Once the order is disrupted, two things follow—enormous wealth creation and, as wealth shifts, political instability. In the last month you can see the AI shift violently rippling through all the vectors that impact us—income, borrowing, and saving and, as that happens, the political reverberation.

AI’s Impact on Income
Growth is driven by spending, and spending is fueled by income and borrowing; both are currently being disrupted. Last week’s data point: Jack Dorsey, the founder of Twitter, and now CEO of Block, fired 50% of his workforce in one day. Large cuts at Amazon, UPS and others have also been announced. Dorsey said that AI, paired with “smaller and flatter teams,” are enabling a new way of working. This will bring wealth to those that keep a job and the opposite to those that lose it.

While Block may have been overstaffed relative to its peers, the broader analytical question remains—will AI boost profits (by cutting costs) faster than it reduces income (by letting people go)? Said differently, can a company grow EBITDA per employee using AI? If the answer is yes, profit margins will grow. If it’s “no,” top line growth will falter due to weak demand. This might explain why labor turnover has ground to a halt. One lawyer told me AI has transformed her practice. “We aren’t hiring junior lawyers any more,” she said, because the functions they used to do can now be done far faster and more accurately by AI.

AI’s Impact on Borrowing
Interest rates for most borrowers are falling as inflation cools, with ten-year U.S. bond yields dropping below 4%. War with Iran will accelerate that. There are many forces driving down inflation, but technology is certainly one of them. However, interest rates for companies being disrupted by AI are rising as their cash flows deteriorate and credit quality worsens.

Investors have narrowed their focus to Business Development Companies (BDCs), a lending vehicle designed by Congress to support small and medium-sized businesses. While the global corporate bond market is over $40 trillion, the BDC market is small (around $450 billion). Firms at the epicenter of this shift face risks when investors pull capital from illiquid credit markets, causing borrowing costs to spike—a secondary form of disruption. Blue Owl, the firm at the epicenter of this, has seen its stock fall 60% because their investors can pull money while their assets, many of them loans to tech companies, are illiquid.

AI’s Impact on Saving
Asset prices are generally up since ChatGPT was unveiled. But investors are also punishing companies tethered to legacy processes—such as traditional HR, word processing, and insurance brokerage—fearing they cannot pivot as quickly as Block. But it’s messy. Microsoft (which owns a significant stake in OpenAI) sees its price-to-earnings ratio (shown below) compressed due to “disruption fears,” even though MSFT owns a big chunk of OpenAI.

AI’s Impact on Politics
Regarding politics and geopolitics, AI is exacerbating existing tensions, fueling surveillance states or intensifying partisan friction. The US shift in domestic politics is unsettling enough that record numbers of citizens are seeking more stable jurisdictions, as the WSJ pointed out last week. This mimics the pattern of capital flows, dollar down.

Like with the tractor, the most likely outcome is a period of lower inflation and solid profits, but also significant and sometimes terrifying employment and geopolitical disruption. Creative destruction lives on. I particularly favor liquid assets because it allows me to adjust my views and jurisdictions as the facts shift, as opposed to be locked into long-term illiquid commitments.

And as we all watch what unfolds in the Middle East, the loss of human life deeply pains me.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Isaiah Berlin, 1947

Not Investment Advice.

Is the US going to bomb Iran? I don’t know. I also don’t know what the US is seeking to achieve. Yes, the world would be a safer place if Iran operated more like Switzerland, but how does bombing it change that dynamic? So I put those questions to the side and focus on what I can understand, the facts.

1. Growth is solid.

   

Source: Goldman Sachs

2. Inflation, as I mentioned last week, is quiet. Easing last year led to a pickup in growth but no rise in inflation, which is good.

   

3. Yield curves (10-year bonds vs. 2-year bonds shown below) steepened in recent years, and are now stable. That creates a floor. Below I show the yield curves of the US, Canada and Germany. They all look the same.

   

   Source: Bloomberg

4. Stocks are expensive (97th percentile) and earnings are solid. Below is EPS, earnings per share. Note the negatives in 2008 and 2020. No sign of that here. Inflows into stocks are seemingly on automatic pilot; P/Es of certain blue-chip stocks have detached from reality, meaning even strong earnings can only lead to mediocre or even negative returns for widely held stocks. If the momentum in the US stock market slows, so too, rather rapidly, will economic growth.

   

5. The US needs to attract a lot of capital to keep the dollar stable and according to Pew, the world doesn’t like the US as much as it used to, so presumably they will be less enthusiastic about investing here though, looking at the (TIC) inflow data, the money still seems to be flowing but investors are “hedging” their exposures (creating modest dollar selling).

   

6. Dollar bearish is bullish for rest-of-world assets. Looking at the world from China’s perspective, they probably feel under attack and need to build an even deeper moat. That’s driven a move in gold and, if the US does go after Venezuela and Iranian oil, China’s oil supply gets more uncertain. Though of course cutting off Russian supply, a chunk of which goes via the East Siberia-Pacific pipeline, isn’t possible.

   

7. China’s stranglehold on heavy rare earths (as opposed to light rare earths) remains a countermeasure, as do their holdings of US Treasuries. Heavy rare earths are indeed concentrated in China. Brazil is not a substitute. The key ingredient is “ion-absorption clay deposits.”

8. For these medium-term forces to play out, we must get past Iran. Oil has been grinding higher this year but each weekend the US doesn’t attack, the price sinks.

   

9. The moment oil prices rose this week, other markets ground to a halt. Rallies were sold, sell-offs bought. The decision of whether to attack boils down to one person. Likely Iran is another intermission in the same old story, though of course there are low odds of a catastrophic series of miscalculations. Meanwhile, companies make money, AI gets better, inflation grinds lower. A more fundamental decision comes in November, when the US ability to smoothly transition power via the voting booth will undergo a test. But that’s too far ahead for markets to process right now.

10. One closing thought—I wonder if AI will reduce market volatility over time. The ability to quickly synthesize information is improving exponentially. This might lead to faster price discovery and less volatility. I don’t normally go “oh wow” over new technology, but the latest tools elicit exactly that reaction.

    ---

    This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

    If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

    An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

    Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

    The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

We are in the midst of a violent repricing of relative cash flows amid AI and an erosion of US rule of law. No one fully understands how this new technology will end up working, including the people who make it, so when highly convicted sellers enter the market, others who would normally buy are scared and don’t step in—and stocks like Microsoft, below, drop a cool 20%. This drama is playing out across a complex terrain that can’t be separated from the institutional shifts.

In more detail:

1. Either the decline in stocks like Microsoft is an overreaction (possible) or many, many people are about to get fired. If MSFT is worth 20% less because their AI agents don’t measure up to Claude, then for sure some significant part of the 228,000 people who work there need to go.

2. If these people are let go—and they are certainly being let go in large numbers from Amazon, UPS, FedEx, and other companies that can automate/AI themselves to a smaller headcount—then inflationary pressures are ebbing… fast.

3. The labor market data is hard to parse because of the radical tilt in US immigration policy. On the face of it, however, the unemployment rate is falling and claims for unemployment insurance are not rising. This is possibly because an engineer fired from Amazon is not filing for unemployment while on severance, and these adjustments are happening quickly; it’s also probably because the workforce is shrinking. Soon the US will have labor force growth like China or Japan, which is deflationary. The jobs that are being created are in elder care.

4. There is no inflation, despite the AI capex spend. Below is a snapshot of CPI. Just as the politicians on the left and right are declaring new solutions to combat rising prices… prices have already fallen. CPI is a little high in outliers like the US (tariffs) and Australia (low productivity), but CPI is below two and closer to zero in Europe and China. An equal average of the three of them (China, US, Europe) is 1.7%, and if the US had not implemented tariffs, inflation would be even lower.

   

5. If the range of outcomes on stocks has widened (could my favorite company get destroyed by Claude?) and this technology is simultaneously accelerating technological disinflation, then the relative appeal of long-term bonds to stocks is rising. The return to risk ratio of stocks is going down because volatility is going up. So far this year, a 10-year US government bond is outperforming the S&P 500.

6. The other axis is foreign currency. The US needs to attract $1.2 trillion a year to keep the dollar stable. That’s what running a 4% current account deficit on a $32 trillion economy means. The reason the dollar has not gone down a lot more is because foreign investors like buying US tech stocks. But if US tech stocks stop going up, the dollar inflows grind to a halt or at a minimum slow. For the biggest savers, like the Japanese, the currency-hedged returns of buying US bonds are not attractive.

   

7. The “where to put your money” question gets even trickier when precious metals stop operating the way they once did. Because there is so much speculative money long metals, they trade in line with tech stocks as opposed to as a diversifying asset. Both fell sharply at the exact same time Thursday, in what looked like programmed selling.

8. Finally, Bitcoin. It cannot catch a bid. There is no intrinsic value in Bitcoin, and it appears to trade more in line with the White House popularity, which is to say not high. The simplest explanation is often the hardest to come by but most accurate. It seems a disruptive deflationary technology shock is unfolding at the same time as the US severs 80-year-old institutional linkages, and capital flows are in a messy rush to find a safe harbor. This is bullish for foreign stocks, US bonds and some foreign bonds, and foreign currencies—and bearish for US stocks and US short-term bonds.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

The momentum went out of the market. What shifted?

1. Since Warsh was announced as the new head of the Fed, stocks have declined five days out of six. Perhaps the White House effort to neuter the Fed backfired. Warsh got the job he always wanted, but he is the least dovish of the people who were up for the job. Will he truly be hawkish once he is in the chair? That seems less likely, but it is also true that his calls on inflation in 2008 were bad and wrong at a time when the debate on future inflation is robust.

2. Earnings have been strong, well above expectations, but the amount of capital expenditures from the Mag7 is higher than expected. The more capex, the less share buybacks. Less buybacks = more shares on the market = less bullish stock market. The spending from the cash-flow-generating companies (like Meta and Google) might be big enough to put OpenAI out of business. Maybe the spending is even designed to do so. What happens to OpenAI’s backers if it collapses?

3. The capex spending so far is reaping benefits. Google’s earnings were great, and it doesn’t take more than a click on your browser to see that their AI engine is powerful. How will AI impact companies? It is a complex question, and it is easier to go sector by sector, company by company, to know. This then creates uncertainty—what stock is safe?

4. We know that there are two parts to the US economy: a wealthy upper tier responsible for most of the discretionary spending, and everyone else. The “everyone else” part of the economy is weak. Job openings are at their lowest level since COVID.

   

The upper-income part is highly tuned to the stock market, which is now negative year to date. If this continues, the momentum in the US economy can switch quickly.

5. Valuations of US stocks have been in the 99th percentile for a few years. When valuations are extreme and the investment community is max long, small shifts can cause big downward adjustments in price.

6. There are at least 50/50 odds of the US attacking Iran. The odds on Polymarket are 100%.

   

7. Bitcoin has fallen almost 50% and is now back to where it was when Trump took office. About 25% to 30% of the US population owns some form of Bitcoin. In Europe and Japan, those numbers are smaller, more like 10%. In any case, there is a wealth effect impact. This also may be a symptom—are households selling Bitcoin to raise cash?

   

8. Rule of law in the US is weakening, though much could change depending on how the mid-term elections go. The US dollar has weakened about 7% since the changes began, a far cry from an emerging-market-style sell-off. But that may be because it is hard for people to adjust their mental model to see the US as a weak rule-of-law country.

   

9. If stocks don’t bounce, then there are billions and billions of dollars of program sellers that begin to sell stocks, so it can feed on itself. All else equal, the above leaves me more bullish on bonds and less bullish on stocks.

10. So what changed? It was not one thing. It’s a lot of smaller things hitting at once. The “Fed is easy” narrative took a hit on the cusp of a potential regime change in Iran, along with reduced buybacks and a collapse in crypto—when the market is long stocks and short bonds—forcing investors to reverse positions, in turn causing a scramble and price adjustment.

    ---

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Bank of Canada Governor Tiff Macklem, 28 September

To understand what just happened with Warsh being selected as chief of the Fed requires imagining the power dynamic at play, even if we can’t obtain all the corroborating evidence. On the face of it, Warsh makes no sense. His claim to fame is opposing Ben Bernanke and advocating for tight money during the global financial crisis—a decision that would have been a bad policy error. Not the type of guy Trump would want running things, it would seem.

So I look elsewhere for an explanation. To run the Fed, a nominee must get approved by the Senate Banking Committee, chaired by Republican Tim Scott. Scott’s policy preferences are traditionally conservative. He has been explicit that the Fed should remain independent. Is it possible that the Senate let the White House know that they preferred a “hard money” candidate? Perhaps. Then Warsh’s tight-money credentials go from a seeming weakness to a strength. That’s the most plausible explanation I have for Warsh, and it sets up the possibility that if the economy weakens in the second half of the year—which I expect—and Warsh is at the helm, the Fed will be late and wrong. This would tend to hurt stocks, help the dollar, and be bullish for the long end.

If the Senate did push back on the White House, quietly, the break comes at a critical time—investors are applying a higher risk premium to US assets. Once this risk premium kicks in, it can trigger self-reinforcing actions that exacerbate the initial move, boosting the US cost of capital.

In more detail:

1. Copper prices moved 10% on the day Thursday morning. This is the physics of liquidity—the prices of things that are rising a lot are not as liquid as the prices of things that are losing relative value, so the shift in one relative to the other is disproportionate.

2. The table below is a rough, back-of-the-envelope calculation of what is going on. The table is a list of assets that macro managers are involved in that might be off your radar, depending on where you live: Korean and Hungarian stocks, the South African Rand… you probably know Nvidia.

   

As I have noted previously, the Brazilian stock market has a fraction of the liquidity of Nvidia. Silver and gold have more liquidity, but that is because prices have skyrocketed recently (prices are as of Thursday). While both Nvidia and the Hungarian forint are up this year, the forint is up more because 9 million people live in Hungary and 330 million people live in the US, and if a small amount of capital leaks out of Nvidia, it is a lot of capital for Hungary to absorb. Prices adjust. Similarly, while gold was up a cool 24% this month before plunging around 10%, there isn’t much of it to trade. Most of it is held in vaults.

3. The risk premium hinges on Fed independence and rule of law. The conversation shifted from “will the Fed cut/hike” to “will the Fed remain independent.” Optimists note that the Supreme Court didn’t seem receptive to administration arguments to strip the Fed of independence and that whoever is Fed chairman will need to corral votes and does not have autocratic control. But that misses the point. The odds of the Fed losing independence have gone from zero 24 months ago to perhaps 10% or 20%. As Macklem said in further remarks, it is such a big change it’s difficult to comprehend what it would look like. Some people aren’t waiting to find out.

4. Recognize that when the dollar falls and a foreign currency rises, it is a deflationary shock for the foreign country. The cost of all their imports begins to decline. The more open to trade an economy is, the bigger the impact. This means that foreign central banks will be easing policy, which would then boost their asset prices, attracting more inflows because a foreign investor gets rising assets and a rising currency. For US investors invested unhedged in Japanese stocks, they are up 7.8% this year versus about 1.5% in the US. How will Warsh act once he gets power? We will find out soon enough.

This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). This letter is presented for discussion purposes only and is not intended as investment advice, an offer, or solicitation with respect to the purchase or sale of any security. Any unauthorized copying, disclosure, or distribution of the material in this presentation is strictly forbidden without the express written consent of Paul Podolsky or Kate Capital LLC.

If an investment idea is discussed in the Letter, there is no guarantee that the investment objective will be achieved. Past performance is not indicative of future results, which may vary. Actual results may differ materially from those expressed or implied. Unless otherwise noted, the valuation of the specific investment opportunity contained within this presentation is based upon information and data available as of the date these materials were prepared.

An investment with Kate Capital is speculative and involves significant risks, including the potential loss of all or a substantial portion of invested capital, the potential use of leverage, and the lack of liquidity of an investment. Recipients should not assume that securities or any companies identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by Kate Capital or that investments in any such securities have been or will be profitable. Please refer to the Private Placement Memorandum, and Kate Capital’s Form ADV, available at www.advisorinfo.sec.gov, for important information about an investment with Kate Capital.

Any companies identified herein in which Kate Capital is invested do not represent all of the investments made or recommended for any account managed by Kate Capital. Certain information presented herein has been supplied by third parties, including management or agents of the underlying portfolio company. While Kate Capital believes such information to be accurate, it has relied upon such third parties to provide accurate information and has not independently verified such information.

The graphs, charts, and other visual aids are provided for informational purposes only. None of these graphs, charts, or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.