Blain’s Morning Porridge Feb 2, 2026 – Skating on very thin ice…

Let’s paint the town, we’ll shut it down….

Just how thick is the ice? Everything juddered last week – from AI to perceptions of Geopolitics. There are so many take aways. Are markets vulnerable to an AI/Credit Cascade event? How vulnerable are The Middle Nations (J-CAKE). China is a rising risk. Just how well will the USA handle a crisis? Is it time to exit Gold? But go where?

LINK TO PODCAST

As has been said many times before: “there are decades when nothing happens, and weeks when decades happen.” The World is a complex place. I got a feeling… we are skating on very thin ice indeed.

Apologies for the lack of Morning Porridge last week. I was at the annual Interbourse Ski Week with some 400 other market folk. There was plenty to talk about. I listened, watched, and now I’m trying to draw some conclusions – which ain’t easy when there is so much to consider.

Experience teaches wobbles and crashes are exciting and often expensive… but markets swiftly bounce back stronger. Since 2010 a whole market generation has grown up believing in the Fed Put, convinced any market threat will be averted by bailouts and support, thus every price tumble isn’t analysed for lessons to be learnt, but is simply seen as a buy-the-dip opportunity.

If we are in for a correction…. this time might be different. In the past traders, investors, governments, treasuries, central banks have all been professionally aligned and determined to create solutions and foster stability. That’s no longer a given. There is less sense of doing the right thing for the sake of doing that right thing… Today it feels more about self-interest, which is incompatible with trust – a fundamental driver of stable markets.

What are the critical points for markets to think about:

US Fed:

Apparently, the markets are happy because Trump has nominated Kevin Warsh as the new Fed Chair… Phew. Relief rally. Yet markets are still weak. The perception is Warsh is not a complete Trumptard or sycophantic lackey. But he’s close to Scott Bessent and fought a clever campaign to undermine rivals to win the nomination. (Would-be Roman Emperors would bribe the Pretorian Guard to win the laurel crown. just saying.) The US papers say he will manage Trump – not the other way round. Maybe he will…

Trump didn’t praise Warsh’s economic background or achievements in his previous term. Instead, the president talked about Warsh’s “film star” looks as if that’s a prerequisite for a Fed Chair. And that sums up the big issue. Leaders are only as good as their teams. That becomes acutely apparent in times of crisis. Have you ever come across the expression “Potemkin Village”? If not… happy to explain.

Bonds, Gold, Stocks and AI:

For the big picture, look at the details. The trade of the day in credit markets is buying protection on Oracle. It looks a busted flush on rising debt costs and falling margins as the costs of AI build out soar – look at the price of copper! On the back of stories of massive write-offs in more speculative private credit markets souring sentiment and raising concerns about how sustainable this market is, Oracle could be the first pebble to visibly tumble down the hill, potentially triggering a cascading credit landslide.

Keep a close eye on the flood of comments about how much AI-related firms are now trying to row back on the circularity financing between them. Nvidia is now taking about billions rather than hundreds of billions… Doubts multiply swiftly. Might be time for a rethink on highly speculative IPOs planned for this year. I have a feeling the biggest losers will be speculative hypsters like Musk and Altman.

When exchanges increase margin requirements – as they did on Gold and Silver – that’s a toppy signal. Gold in now down 18% from its top. We can fret about what Gold’s tumble, the rising concerns on AI build-out costs, the dollar etc, all mean… but it’s clear risk appetites are fundamentally changing. If the current wobble turns to crash, then who will buy Treasuries in this new world? Rather than Gold playing the safe-haven store of value, it may prove the liquid asset – the one that can be sold into the mayhem. Perversely in a world of rising risk, I’m beginning to think it’s time to take profits on Gold – but where to park the proceeds?

Geopolitics:

Sir Keir Starmer could not have picked a worse week to visit China. The last thing on beleaguered Emperor Xi’s agenda was to play nice with a middling European state. As I suggested last Monday, it looks like Xi averted a possible coup, but his control of party and state is less than we thought. If Europe though China was going to welcome them into its new Belt & Road co-prosperity sphere as equals, forget it. It confirmed Trump’s world view is the same a Xi – the strong will dominate the weak. The message sent to the UK was clear – you are small and pitiful and come as supplicants to the jade throne. The UK came away with nothing.

The takeaways are clear. The Middling Small Democratic states, the new Mark Carney world of Japan, Canada, Australasia, Korea and Europe – “J-CAKE”– are individually weak. Can they be collectively strong?

Defence:

The establishment of J-CAKE’s collective strategic deterrence to deter aggression and demonstrate relevance is critical. The upside would be greater stability and increased competition and trade. The challenge is making it happen.

Many politicians appear deliberately blind to the coming challenge – focused on immediate political challenges while denying the reality the next war has begun. It’s underway in cyberspace and has turned kinetic in Ukraine.

Faced with the challenges of out-of-control welfare costs, and soaring budgets Governments, weak politicians (fractured by Russian financed right wing populist instability) are praying for peace to enable them to balance the books. They are in cloud-cuckoo-land. This is 1938 – the dash to re-arm to create a credible deterrence should be the paramount for all J-CAKE nations.

Yet, national self-interest still dominates thinking. France is trying to block the UK from participation in European defence initiatives – hoping global instability will enable it float to the surface of the small European bowl. The UK is failing to make spending commitments, putting J-CAKE’s best hope of a 6^th generation stealth fighter, The Tempest, at risk. It is being developed jointly by the UK, Italy and Japan. France is too difficult to work with, but Germany, rightly wants in… causing bureaucrats in London, Tokyo and Rome to fret their nations might then lose critical contracts to entice Luftwaffe orders!

The real issue for the J-CAKE nations is how much time they have. Xi’s purge of the top ranks of the PLA hints not all is well within China’s much lauded military (or it might be a clever maskirovka). Is the PLA ready to seize Taiwan, or will it take longer to prepare? Xi faces strategic compression – knowing the Democratic West is waking up, and the USA is developing counters to China’s ballistic and hypersonic carrier killers… Might he chose to go kinetic early in order to consolidate his power?

Conclusions:

We are on thin ice… proceed with caution. (And I haven’t even written about the economic challenges that may arise… )

Out of time, and back to the day job..

Bill Blain

Author of the Morning Porridge

CEO Windshift Capital

Advisor – Spitfire Strategic Capital