A month after our year-end review, Andrew Hunt's message when we spoke to him earlier this week had sharpened: the U.S. credit boom continues at a blistering pace, but the foreign capital that sustained 2025's rally is becoming erratic. The result is an increasingly binary outlook where timing matters more than ever.

Domestic Strength, External Fragility

Hunt's U.S. credit indicators are pointing "straight up", some showing near-exponential growth. The administration's determination to keep credit flowing ahead of the midterms is evident, from Trump's Davos calls for ever-lower rates to speculation about the next Fed chair. This domestic momentum has continued supporting asset prices into January.

Yet the foreign capital picture has shifted markedly. After record inflows last year, Andrew observes that flows into the U.S. have become "very erratic and basically smaller" over the past few weeks. Private sector flows from China and Europe are weakening as Chinese corporate liquidity hits its lowest levels in the modern era. This represents an "orange warning"—not red, because the PBOC remains active, purchasing over $100 billion in foreign assets in December alone. It’s an interesting time for the US financial system to be so reliant on the kindness of strangers. 

Markets Seem To be Confirming  This Thesis

Recent price action corroborates these concerns. The dollar index has slid to its weakest in four months, as the "sell America" trade persists. Treasury yields remain stubbornly elevated despite Fed easing, the long end refusing to respond to improved liquidity, a warning signal Hunt has flagged. Government shutdown fears and uncertainty over Fed leadership add to the unease.

Looking forward, Andrew believes that the PBOC's allocation decisions have become incredibly important and probably matter more than macro narratives. The issue for investors is that they are as inscrutable as Trump is unpredictable. When Japan's prime minister mentioned Taiwan and moved military assets, China appeared to stop buying JGBs—yields spiked. When Macron lectured Beijing, French bond purchases reportedly cooled. The UK, notably quiet on China, has seen relatively better gilt performance. Even gold's rise, Hunt argues, reflects PBOC portfolio allocation rather than pure inflation hedging.

Investment Implications: Don't Be a Hero

Hunt's tactical advice remains measured despite growing concerns. With U.S. equities capitalised at an unprecedented 350-360% of GDP and dividend yields below bond yields, this is clearly bubble territory. Yet fighting the Fed while domestic credit expands aggressively is equally dangerous.

For Australian investors, Hunt sees domestic bonds as an "oasis of calm", different inflation dynamics due to population growth, but already priced for rate hikes and potentially benefiting from a weaker U.S. dollar. The rotation trade toward less volatile, cheaper non-US assets makes sense for medium-term investors, with European equities offering particular appeal given strong balance of payments and turning credit cycles.

On gold, Hunt advises pragmatism: it has outperformed significantly and may warrant some profit-taking, but any correction driven by PBOC policy shifts would present buying opportunities given the inevitable "easing for the ages" that will follow any market stress.

The Watchlist

Hunt provides a clear monitoring framework for the weeks ahead. 

- Watch the dollar, particularly against the yuan. 

- Monitor treasury demand and auction dynamics. 

- Track weekly capital flow estimates. 

If these deteriorate simultaneously alongside weaker price action, it's time to become "really quite cautious." Without those signals, participation remains reasonable but entering a late-stage bubble would be, in Hunt's words, "a brave decision" with "a fair chance you could be left holding the can."

The year's direction may ultimately depend on whether Beijing decides to stress-test Western financial systems or continue recycling its surplus to support global growth and its own export machine. As Hunt concludes, trying to predict what a non-market, non-profit-maximising institution will do based on geopolitics is inherently difficult, which is precisely why staying close to benchmarks and remaining vigilant beats bold positioning in either direction.

For our part, this aligns broadly with our current positioning - leaning towards Aussie duration, hiding in the highest quality credits, leaning further into the rotation trade, broadly neutral in terms of the growth defensive split and, of course, trimming but holding tightly onto our remaining gold exposure! 

The more difficult question will be in the future, when we could be managing FOMO if the frothiest markets surge or worrying about catching falling knives if things go the other way.    Andrew feels that this is a time for Hunt Economics to be working harder than ever on monitoring fickle capital flows and credit conditions. Our mandate is to keep kicking the tyres to make sure that our risk exposures are resilient while retaining as much upside as possible.