‍

When we spoke with Andrew Hunt in late July, his advice was to stay at the party. Getting defensive, he said, would be like standing on a railway track in front of an oncoming locomotive: you might know the track is broken behind you, but the train won't notice you. The impetus  was extraordinary, a US credit boom that refused to stop, and trillions of dollars of Asian trade surpluses being recycled into global markets. The level of the market is faith times liquidity, and while faith may have peaked, liquidity had not.

The risk he was watching then was the Federal Reserve. Would Warsh cool the froth, and would he prove too blunt about it?

A month on, that has changed. Not his conclusion — he is still not calling the top — but the thing he is watching. The question is no longer when the Fed takes the punchbowl away. It is whether foreigners keep paying for the punch.

America runs a current account deficit, and a budget deficit that already absorbs around 150% of domestic savings. Something has to fund the gap, and for the past year that something has largely been sovereign wealth funds: Korean, Chinese, Singaporean, Middle Eastern. Hunt has long called this the economy's Achilles heel, while accepting the bar for those flows being interrupted was very high.

His view now is that recent months may have cleared it. Military support withdrawn from South Korea, threats directed at Oman, sanctions talk naming China. And the tell: the renminbi has begun to appreciate, meaning Beijing has stopped intervening as heavily and therefore stopped buying as many US assets. You don't need to be Sherlock Holmes, as he put it, to connect the renminbi rallying with Treasuries selling off.

The shift matters because the character of the risk has changed. A Fed decision is a policy choice — debatable, reversible. A funding strike is neither. It runs on a sliding scale. If the deficit stays broadly financed, the US ten-year drifts towards 5.25%, growth stalls, and markets call it a soft landing. If it doesn't, yields push through towards 6% and the word recession appears. He invoked 1987, when a public spat with America's creditors preceded the crash by three days.

What it means for portfolios

As it happens, and perhaps not coincidentally, most of what Andrew now recommends is where our positioning has been or is heading. He is not yet a buyer of duration, and the level at which he becomes one — a little above 5% — is the same line in the sand we have come to. He prefers real businesses with real cash flow and genuine cost control to long-duration themes, which is the case we have been making for value, global small caps, and emerging markets outside Korea and Taiwan.

Two ideas came out of this conversation though. He would express this view through the US dollar rather than through bonds, which raises a fair question about how much offshore exposure we hedge by default. And he points to European government bonds: those deficits are large but, unlike America's, genuinely financed at home.

What to watch

The Asian currencies first, principally the renminbi, but also the Korean won and Singapore dollar. Sustained appreciation is the signal that America's funding is going.

Then the US ten-year around 5.25%. That is either where the slowdown pauses, or where it accelerates through into something worse.

And the diplomatic calendar. Several state visits fall in the next two months, and this has become a story about whether creditors are kept on side.

His base case remains muddle-through. China needs its export machine roughly as much as America needs China's savings. Mutually assured weakness has held so far - here’s to hoping. Meanwhile, we will keep our eye out for the principal left tail risk - a foreign buyers strike and tiger knock on effect that would have on US credit markets and then the economy.