The Impossible Trinity Behind the Melt Up
Why the US sits at the center of every other country's impossible trinity, how Japan's open capital and yield curve control forced the entire move into the yen
Today, Jaymes and I broke down the impossible trinity framework that sits underneath the entire credit cycle melt-up. Every country can only control two of three variables: independent monetary policy, capital mobility, and FX stability. The US has open capital, sovereign policy, and a floating dollar, which means the rest of the world’s flows recycle into US assets.
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LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. The impossible trinity is the framework that ties every macro move together. Every country can only run two of three: independent monetary policy, capital mobility, and FX stability. China caps capital and FX, which forces its trade balance to absorb everything. The US runs open capital, sovereign policy, and a floating dollar, which only works because the dollar is the global reserve currency. Every other country sits between those two extremes and is functionally cross collateralized with the US.
2. The US is the center of every other country’s impossible trinity. That privilege creates dependency on the rest of the world to recycle dollars back into Treasuries or US equities. The Fed’s reaction function is the global cost of capital benchmark. Treasuries are the safe asset that every other country’s capital flight runs toward. When the Fed pauses into inflation and lets real rates fall, every other country has to react, which is why the entire global rate complex is moving in correlation right now.
3. Japan capped two pipes with yield curve control and the yen took the full load. That is why the dollar yen moved from 100 to 160. When you constrain rates and keep equities calm, FX is the only release valve. The Nikkei is now valued above its 1980 market cap to GDP levels because Ministry of Finance spending is replacing yield curve control as the main mechanism. The yen is going to be where the next major unwind shows up, but we are not there yet.
4. The dollar is going to keep falling until the returns on the dollar drag on foreigners enough to force selling. Everyone is structurally long dollars because they assume they can always get them from the Fed or from trade. If the dollar falls fast enough, foreigners have to sell US equities to repatriate, which is the same mechanic that triggered the 2025 tariff shock. We are not at that level yet, but it is one of the two scenarios that ends the melt up.
5. The other scenario that ends the melt up is long end rates blowing out and delinquencies rising in the AI sector. Most of the credit growth in this cycle is AI capex debt. For that to break, you would need defaults across data center financing, but the debt just got issued and demand is still accelerating. Neither end of cycle scenario is showing up in the data right now, which is why I stay positioned for continuation.
6. Real rates are still the entire macro story. Two year real rates rose during COVID, because the Fed didn’t keep pace with inflation. In 2008 they rose because the Fed was behind. This time the supply side is being retooled by AI at the same time as real rates fall, which is why valuations can keep expanding without breaking.
7. The ECB is being more restrictive than the Fed because Europe is short crude. That is the entire reason DAX and Eurostoxx have not made new all time highs. Once crude falls and the ECB pivots, you get the catch up trade where European stocks rally hard. Watch the Euribor curve for the first sign of that flip. Until then, the rate differential keeps capital flowing into euros while suppressing European equities.
8. The Qualcomm trade hit our channel today and we trimmed half the position. Jaymes called this at $135 a few weeks ago. False breakdown on the long term chart, every other semi competitor was ripping, and the company was forgotten by FinTwit. The leaps are now up around 700%. The framework worked because we stacked the macro regime, the SMH sector flow, and the idiosyncratic mispricing. Stack edges, hold the trade, and let the framework compound.
See the recent video by Jaymes here:
Slide Deck and Playbooks
Here is the slide deck from today’s stream:
FX Drivers, AI Flows, and Sector Flows on a Cross-Border Basis
Tomorrow I map FX drivers, AI flows, and sector flows for every major country on a cross border basis. Every country sits in a different position on the impossible trinity, which means each one has different FX drivers, different AI exposure, and different sector flows that absorb the macro pressure. This is how you turn the impossible trinity framework into specific positioning across global equities, FX, and rates.
TOMORROW’S LIVESTREAM: LINK
I laid out my public view on the addition of the first Hyperliquid ETF and its impact on PURR here: LINK. Important points below.
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