I’m not convinced the US wants the Strait of Hormuz open

Vaughan Nelson CIO and CEO Chris Wallis discusses what caused the recent volatility in AI stocks as well as the latest developments in the Middle East and the future prospects for global equities and the US economy.

Podcast recorded on 12 August 2026

This is a lightly edited transcript from the podcast

Dan: Welcome to the Vaughan Nelson Podcast. With me today is CEO and CIO, Chris Wallis. Welcome, Chris.

Chris: It's great to be here, Dan.

Dan: Chris, great to have you back. Here we are mid-August, and it has been a volatile summer, record dispersion. And then, you know, kind of looking at the correction that we experienced in AI infrastructure stocks and looking past that, they've now begun to recover over the last couple of weeks. First question for you today: do you think the single-stock volatility is being driven mainly by shifting fundamentals or money flows and market structure?

Chris: Yeah. Everything with hindsight is 20/20, and when you look back, it's a combination of the two. I think what you can point to is that the fundamentals will dictate the direction of the move, but probably not the power and the nature of the move. So we saw an increase in usage and an improvement in the economics in and around token use that spurred money to move in that direction. But it was a combination of market structure, being leveraged ETFs, single-stock ETFs, as well as baskets, and it was the structure that I think drove it to the extremes.

Then, as is usually the case, once you get a very crowded trade, it just tips over on itself. So the unwind can sometimes create a false narrative, meaning, "Oh, it must have just been a bubble," when that may not be the case; it may just be a fragile market structure.

And it looks like, in hindsight, the vol-control funds were really pinning the indices over the summer. When you get light volume in combination with those trades, it forces dispersion. Meaning, if one stock goes up a lot, if the index is going to be relatively neutral, then another stock has to go down a lot. The arbitrage of some of those structures creates a lot more dispersion than what we've seen historically. It's a combination of insufficient liquidity or very low volumes that allows that to happen. So I think a lot of the extremes we've seen have been driven by market structure, while fundamentals just dictated the direction—whether something went slightly higher or a lot higher, or a little bit lower.

Dan: Yeah. So following up on that volatility in the AI trade, we continue to see some more ink spilled on the issue of circular financing. The expansion of financing opportunities through the recently announced memorandums of understanding for about 500 billion via structures that mimic CDOs. Do you think market participants should be concerned about the sustainability of the CapEx spending for AI infrastructure, or do you think that there's more funding capacity available?

Chris: So, look, I think this is what Wall Street does. If there's a demand for money, they're going to go find it, and they're going to go find a source for it or a structure for it. So I think the concern we should have is not the demand to spend the money. I think the participants, whether it's the hyperscalers, some of the cloud providers, or the infrastructure components, are more than happy to spend the money. The question is, to what degree do they have access to capital? How much can be funded from operations? How much can be funded from their own balance sheet with leverage?

It's very clear that we've kind of tipped over and we're pushing the boundaries on what's available through traditional credit structures. I think what we saw this week was—I don't want to call it a novel structure, but the adoption of structures we've used in the past, which is: let's find a way to take the compute and treat it like asset-based lending or create a kind of a synthetic CDO structure. They were able to find a way to relax some of the collateral standards such that they could do that.

So it's probably an indication that while Nvidia has been willing to use off-balance-sheet financing to provide some very generous vendor financing¹, it may be reaching its capacity limits to do that, whether it's an actual limit or just a desire to not take as much direct exposure. So, by providing the residual value for what effectively will look like a CDO structure, that may open the door to alternative pools of capital.

But I think what's really critical, if we look over the next kind of three to four quarters, is that the level of AI investment we have right now is not being funded out of customer gross profits. This isn't third-party customers using the returns they're generating by buying the AI services to fund their investment. What we're really seeing is the initial investment, and it was being funded out of equity financing. As we've kind of reached those limits and operating cash flow limits, we turned to credit, and now we're kind of reaching those limits. We have to go find alternative pools.

So I think it's really critical that the revenue starts showing up. There is a lot—when you look at the circular financing, no matter who you're looking at, Nvidia or the cloud providers within the hyperscalers—there's a heavy reliance on spending by OpenAI and Anthropic. So it is critical that they continue to have access to capital, which is why Anthropic probably needs to go public, and it's why we need to find alternative sources.

We're kind of balancing the rate of improvement in products and services that will come out of this technology and the ability for incremental revenues to fund it, with investors' appetite continuing to provide capital with the hope that something comes out on the other side. When you're relying on hope, it just creates a little bit of fragility. So 

Dan: Okay, great. Shifting gears a little bit here. We've witnessed an intervention by the US to assist Japan in stabilising the yen. This is occurring simultaneously with a global rise in the long end of the sovereign yield curve across most G7 countries. The one exception that we're seeing within major economies is China, whose sovereign yields have remained quite stable. A two-part question here: what is behind the rise of the long end of the sovereign yield curves, and is this a harbinger of sustained higher inflation expectations?

Chris: Yeah, look, I think the move higher we've seen in sovereign yields at the long end of the curve for most of the G7 isn't related to higher inflation expectations. We may end up with higher inflation expectations because of the policy response to the move in higher yields, but that's not what is driving it.

I think all we've really seen is large buyers step away. What I mean by that is you had large central banks that were holding Treasuries and potentially increasing their weight in Treasuries as a reserve asset over time that, quite frankly, have stepped back. Some of that has been replaced with gold, and some of it has probably been replaced with purchasing more of their own sovereign debt as well. You've also seen—and we can't underestimate—the impact of the higher rates in Japan.

So, if you were a large Japanese pension plan, or more likely a large Japanese insurance company, you can now get a sufficient return by investing domestically at the higher rates without needing to go overseas and try to hedge a volatile currency and pick up yield in the US. The interesting thing is, it's not even a question of whether US yields back up high enough so you could hedge out the volatility of the dollar, get rid of your currency risk, and pick up yield. It doesn't mean that those insurance companies are going to do that. They don't need to. They're making more than enough money domestically to cover the implicit cost of their liabilities. So there's no reason to even enter into the transaction even if you could double the yield.

This gets back to what we've been talking about for the last couple of years, which is that the US has been able to absorb a lot of foreign capital.

I think what we've seen with the US-coordinated intervention is the early implementation of a form of capital control, meaning that money is going to stay in Japan. They've been pretty explicit that they're asking their financial institutions to keep more capital at home.

The US is trying to implement a soft form of yield curve control with the way they allowed, or have set up a vehicle to allow, the Bank of Japan to not have to sell their Treasuries to get the dollars they need to defend the yen, but to just borrow against them, and we'll provide those. You're probably going to see the US Treasury liberalise that program more broadly, because we have a severe, significant issue with the supply and demand imbalance for US sovereign debt. We have a lot we have to issue, and it's the only way we're growing.

I suspect over time we're going to end up in a situation where we have more explicit yield curve control, more explicit quantitative easing, or quite frankly, just the monetisation of those deficits. That may end up putting us in a position where we have higher inflation expectations, and the market may be sniffing out some of that. So, we'll see.

Dan: Yeah. And onto inflation. One question that remains: if there's no resolution to the Iran war, does that change your view on inflation?

Chris: As we look at what is happening with the closing of the Strait of Hormuz, I think one of the most interesting characteristics of it is that I think the US has chosen to close the strait, and they're pursuing policies that will keep it closed.

There's the knee-jerk reaction of: this is all about our battle against China and maintaining dollar supremacy, blah, blah, blah. I'm sure that's a part of it. But we're at a point where we need a stronger demand for dollars, and one way to do that is to get oil prices higher. I know there's been some ink spilled based on the Iran oil embargo from the '70s and that the US may have had a hand in encouraging it, because that spike in oil prices certainly increases the demand for dollars.

So I think if you really just step back and look at what's happened with our activities in Venezuela, with the Russia-Ukraine war beginning in 2014, with us closing the Strait of Hormuz, and with our ability to displace Russia's LNG within Europe—where we had virtually no exports and now we're a major player—I think we're fighting over LNG globally. And I think this is not only tied into what we're going to export.

As a country, what we have exported was our Treasuries, and we used those funds to then turn around and export our consumption and import goods from around the world. That is breaking down. So, how do you address that? Maybe we're going to export more energy instead of Treasuries, and we've got to find a way to address our imbalances. A combination of higher nominal GDP is one way to do that, and a weaker dollar may, in fact, help out some of our allies as well.

Dan: All right. Well, this is what happens when we don't jump on a podcast for a couple of weeks! A lot of ground to cover. Talking about some of these issues we discussed, underlying earnings, and economic fundamentals, last question for today: any outlook you want to share for the equity markets through to year-end, and any real positive or negative threats to that outlook?

Chris: Yeah. Look, what's interesting is I think we've been through, from a volume standpoint, fairly thin liquidity over the summer, and that's created a lot of dispersion and a lot of volatility. We're actually set up reasonably well.

We were set up really well this year going into the midterms with the fiscal impulse and the boost of liquidity that began last December. Had we not had the war in Iran and the spike in energy prices, we wouldn't be talking about inflation or higher rates; we'd be talking about an increase in home turnover activity and just a broadening of economic growth. Now we've had to deal with that, and the market and the economy have done a reasonably good job of absorbing the higher energy prices.

The setup economically from now through year-end is a peaking and rolling over of near-term inflation and a bit of an acceleration in economic growth. So earnings should be fine, liquidity should start to increase, and we'll start to see vol come down within the equity market and Treasury vol start to come down. I think we're past the inflationary scares.

Seasonally, we should have a fairly normal market environment. It should be strong through the midterm elections and into Q4. We're set up for a bit of a slowdown in the early part of next year, and whether that starts sneaking into stock price performance in Q4 is yet to be determined.

The biggest unknown—the unknown unknowns—who knows? There's always something out of left field that could change things. I think we have to see what happens after the midterm elections. It's less to do with the election outcome, because quite frankly, I don't care—there's just not a lot of policy flexibility. It is more: is Trump somewhat guarded in what he's done year-to-date because of the midterms, and post those midterms, is he just going to be a junkyard dog off the leash? Are we going to get more aggressive within the Middle East or elsewhere, or less aggressive? What is going to happen once we get through those midterms and you effectively have a lame-duck president that still thinks he has a lot on his to-do list to accomplish? That could have fairly significant implications on inflation expectations and interest rates, and could bleed into the markets.

Dan: Good. All right. Good one. Thank you so much. Great having you back, and we'll see you soon.

Chris: Sounds good.