Blain’s Morning Porridge Sept 25^th 2025 – The New Investment Approach: Follow The Money!

“An investment in knowledge pays the best interest.”

It’s a mighty confusing market out there. Is the US headed for recession or boom? Is the AI bubble going to inflate or pop? Is the IMF about to be buried in bail-out requests? How do you follow the narrative, trade and invest into the news flow. Or is it time for a new approach – follow the money, less the story.

After a long chat with a client about where markets are headed yesterday and a debate about passive vs active investment, I am going to go off on something of a tangent this morning… bear with….

Last weekend there was a fascinating “Lunch with the FT” interview in the FT with Jean-Philippe Bouchard. A chat with a French investor few outside a tiny group of investment academics have heard about might be about as stimulating as a Pret sandwich, but this one has got folk thinking; “The whole bull run is because of an influx of money”. More than a few clients have been asking about it. I’m not going to precis the article, or try to explain the “inelastic markets hypothesis” behind the strategy, but offer my own take on it.

Bouchard is chair of Capital Fund Management, a French quant fund described in the article as “a physics dept with a few traders bolted on”. The gist of Bouchard’s argument is the foolishness of current market theorists – maybe he means folk who award themselves lofty titles like strategist (like myself)? His core problem is belief markets are somehow efficient : “it’s all wrong. It’s not weakly wrong – it’s badly wrong,” he says.

I don’t have any problem with the perspective efficient market theory is utter bollchocks! One of my many market mantras is: Markets are not clever – they simply reflect the weighted stupidity of participants.

That’s why I’ve spent the last 10 years railing against investment narratives that make little sense – ranging from Tesla, Crypto, NFTs, SPACs, passive investment strategies etc.

However, I am beginning to understand why such bogus, false-speculative investment concepts gather followers and take root. It’s not just the power of the narrative – it’s momentum and effect of the inflows and outflows of money behind them that drives the market.

This is a pretty fundamental observation that’s been hidden in plain sight for decades: the history of investment is the story of money chasing money.

The drivers of such behaviour might be in the psychology of FOMO or the lines on a Chartist’s chart – but there is also an underlying financial gravity: money attracts money, thus money flows into or out of a market have a disproportionately large impact on prices. That makes perfect sense in large markers and imperfect, illiquid markets – that a relatively small change in the flow can trigger exorbitant up or down price movements. For instance; the recent falls in Bitcoin appear to have been triggered by relatively small exits by retail whales rather than any fundamental change or the mumbo-jumbo that passes for crypto investment theory.

The gravitation pull of money chasing money explains the rise of speculative and passive investment since 2009. Financial authorities saw fit to flood markets with liquidity following the Global Financial Crisis though QE and absurdly cheap money at zero interest rates. The thinking was that cheap capital would stimulate economic recovery. Nope. It flowed into financial assets, stimulating the massive rally in US stocks. I’ve often pointed out how unbalanced it looked, asking how a rally of 400% in the underlying US stocks was justified when the economy only doubled in size?

Over the years I’ve written many times about the difference between:

• Trading – which I define as short-term reading the markets sentiment and following the money, and
• Investment, which is understanding which investments are likely to play off long term – the great American Investor Ben Graham would describe such investment as the “weighing machine” aspect of markets.

I assumed these happened in a closed system.

Bouchard observes that similar kinds of feedback loops that occur in physics also occur in the way money flows – not that I understand Econophysics (referenced in the article), but he illustrates his approach by pointing out Archimedean principals: if you throw a pebble in pond, it displaces water to increase the depth of the pond. The same is true for investments – you put money into the market, and it increases the size of the market.

You throw trillions of dollars into a market through QE and Covid loans, and sure enough… it increases the size of the pool. But does not make it any less prone to financial storms.

It appears that new financial ecosystems have sprung into existence on the back of the distortions of the QE era, largely due to the flows of money into markets:

• Large funds and sponsors of ETFs and other mass-market retail products are telling investors to follow passive strategies – it earns fees.
• Specialist investors rail against passive firms – declaring the complexity and confusion in markets can only be navigated with specialist skills – earning fees. (Cathie Wood’s ARKK is an example.)
• Shysters invent new speculative scams, and seek to draw in funds knowing FOMO will pull more in its wake – Meme coins are just the small waves breaking on the shore of the Crypto shell-game.
• Technology is key – it’s the part of the economy when invention and innovation occurs, so its natural bubbles founded on the back of easy money occur in Tech – hence the current bubble in AI.
• Some individuals get it. I don’t believe Elon Musk is the greatest inventor or innovator of all time – but he is extremely skilled at narrative and understand money attracts money.

It begs the question – which came first? The idea or the money?

Financial gravity is part of the overall investment equation – inelastic markets theory explains why prices move so dramatically. But it’s also critical to understand all the other aspects of markets and the complexity of market economics.

At present markets are riven with uncertainty – is the dollar about to collapse or be replaced? Can governments maintain their competency in times of overburdening debt and increasing national spending bills? Is the AI bubble about to burst? Should we be investing on a passive or active basis?

I don’t know, but I can make educated guesses. I can also follow the money. One of my chums recently reminded me how the largest institutional investors take long-term views and change their investment allocations at glacial speed – but their size means they still dictate capital flows, which we now know also drive markets. Maybe they are the equivalent of control rods in a financial reactor?

I might suggest watching the US$ more closely – it it continues to wobble, forget all thoughts of managed devaluation, and see it as a fundamental redirection of money. It will flow elsewhere. Perhaps time to go with that flow.

Out of time and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital