One question sits at the center of the latest investor letter from The Mispriced: if capital stays expensive, how does every asset you own answer that test?
Translated by TechFlow, the piece argues that if the rate structure has undergone a lasting shift, holding an index can no longer be treated as a neutral portfolio decision. The letter ties that view to AI capital spending, the liquidity cycle and a reset now taking shape across crypto markets.
The old era of ever-cheaper capital may have ended
The author writes that for most of his investing life, falling interest rates were part of the background. From the early 1980s through 2021, the world lived through a long decline in rates. The drivers changed over time, but the direction stayed intact: lower inflation, globalization, demographics, central-bank credibility, technological progress and, eventually, quantitative easing all helped create a world where capital kept getting cheaper.
That cycle broke in 2022. The letter does not claim certainty about whether a 40-year reversal is now beginning, and explicitly says nobody knows. Still, the author says it is a mistake to build a portfolio that depends on the old world simply returning.
Once investors can earn higher real risk-free returns, every other asset has to compete with that hurdle. Long-duration assets become more sensitive to assumptions. Weaker businesses have to refinance at higher cost. Growth stories built on cheap money become harder to sustain. Most importantly, the required rate of return on investment rises.
The key risk is being in the wrong assets, not making a simple market call
The letter says the most useful question today is not whether markets as a whole will go up or down. A better question is what happens to each holding if capital remains expensive.
That leads to a different portfolio. In the author’s view, the biggest risk is not necessarily a full market collapse. It is owning the wrong companies, the wrong sectors or the wrong assets in an environment where the cost of capital is structurally higher, inflation is harder to predict and performance becomes more dispersed.
This point matters because, after years when owning the index was often enough, stock selection may again be worth more. The letter cites George Noble, who recently made a similar observation, saying dispersion is rising and drawdowns are happening below the surface. The author adds that he is not bearish on equities in general. He is simply becoming more selective about which stocks deserve capital.
Index ownership now carries a larger implicit concentration bet
The piece says passive investing remains one of the greatest financial innovations ever created. It does not argue that indexing is dead. It does argue that in some periods, the expected return from simply buying the index becomes less attractive relative to doing the work beneath the index.
As of the time of writing, the top 10 companies accounted for about 38% of the S&P 500, with Nvidia alone close to 8%. That does not make the index bad, the author says. It means buying the index today amounts to a larger implicit bet on a small number of companies than many investors may appreciate.
Some of those companies are also changing in a basic way. Large technology firms are beginning to look more like industrial companies.
AI is starting to look like a capital-intensive industrial business
The argument is not that software is disappearing. It is that AI requires enormous physical infrastructure and therefore huge amounts of capital. The letter says recent reporting shows financing needs have grown large enough that bond investors are now distinguishing between traditional issuers and AI-linked borrowers.
That changes the question. The author is not asking whether AI will change the world, and says it probably will. The investor’s question is whether returns on capital deployed into AI will be sufficient to justify the scale of that capital.
Those are not the same thing. A technology can transform society and still leave some of the investors who financed it with disappointing returns.
The debate is shifting from valuation to earnings assumptions
The letter says this is where the AI debate becomes more interesting. Many people focus on valuation. The author is increasingly focused on the possibility of an earnings bubble. Not because current earnings are necessarily false, but because today’s earnings expectations may assume that very large capital expenditures will eventually produce extraordinary economic returns.
That assumption needs to be tested. Growth creates value only when incremental returns on invested capital exceed the cost of capital. If returns on capital fall below that cost, more investment destroys value. The principle is simple, but it matters much more when both investment scale and financing costs are rising.
That is also why free cash flow matters. Growth capex can be highly valuable, but only if those investments ultimately create economic value. Spending more money does not by itself make a business more valuable.
The author then asks who ultimately captures the economics: model providers, chip companies, hyperscalers, utilities, data centers, software firms or end customers. He says he does not yet know. That uncertainty is precisely the point. If market prices already assume a very favorable answer, the burden of proof is higher.
The letter invokes a Graham-style idea as well: the more growth a valuation requires, the more sensitive the investment becomes to small errors in those growth assumptions. Price and quality cannot be separated because price determines the odds.
Liquidity still matters as much as rate levels
Another variable receiving more attention in the letter is liquidity. Modern financial markets do not depend only on the level of rates. They also depend on the availability of balance-sheet capacity and the direction of liquidity flows.
The author references Michael Howell’s framework in Capital Wars, which examines the relationship between debt stock and global liquidity. The core idea is that a highly indebted financial system continually needs liquidity because large amounts of existing debt must be refinanced.
When liquidity growth runs ahead of refinancing needs, financial assets tend to benefit. When liquidity becomes scarce relative to debt, pressure builds. The letter does not treat any single macro indicator as a trading system, but says the framework helps explain why liquidity can move markets even when the fundamental story has not changed very much.
That view also supports the author’s case for cash. Cash does not mean he has no idea what to buy. Cash is an option. Its value is not just the yield earned while holding it. Its real value lies in the ability to deploy capital when expected value improves meaningfully in the future. If markets become more dispersed, that optionality becomes more valuable.
Gold and gold miners serve different jobs in a portfolio
Gold plays a different role. It does not need earnings growth to do its job inside a portfolio. If confidence in fiscal discipline, monetary stability or the purchasing power of fiat currencies deteriorates, gold can benefit.
The letter is careful not to frame gold as a one-way trade. It notes that Cathie Wood currently holds a view that is close to the author’s opposite base case. In her framework, technology-driven productivity gains, lower inflation and a potentially stronger US dollar could create conditions for a sharp decline in gold. The author says that scenario deserves attention.
His interest in gold is therefore not based on certainty that currencies must lose value. It is based on the payoff if that risk becomes more important.
Gold miners are a different expression. They introduce operating, political, management, cost and execution risks, but they can also offer operating leverage to gold prices. The letter cites the World Gold Council, which reported that in the first quarter of 2026, average producer margins rose much faster than the gold price because realized prices increased by more than mining costs.
So the author treats the two exposures differently. Gold is the hedge. Gold miners are the leveraged equity expression of that view, and position sizing should reflect the difference.
Crypto is recalibrating, with Bitcoin and selected protocols showing stronger momentum
Crypto sits at the other end of the portfolio. The letter says Bitcoin has regained strength after a long cooling period and reached an eight-month high in September.
The author is also watching improving momentum beneath Bitcoin, especially in what he describes as higher-quality protocols on the watchlist, including NEAR, Uniswap, Raydium and Jupiter.
He does not read that as permission to chase. Quite the opposite. His personal approach is to use short periods of overheating to reduce risk, or to express tactical downside views through selectively sized leveraged short positions, while using meaningful weakness to accumulate crypto assets where he still sees attractive long-term asymmetry.
The word “daily” matters, he adds, because daily reset, path dependence, volatility and compounding can make leveraged inverse products behave very differently from a simple long-term short. For him, that makes them tactical tools rather than long-term holdings.
Crypto itself remains a high-volatility allocation. That means a position can still go wrong on sizing even if the directional view is correct.
This is a probability framework, not a black-swan portfolio
The letter says it is easy to build a portfolio around everything that could go wrong: a debt crisis, a currency crisis, or the next disaster. The author does not consider that useful. Black swans are hard to predict by definition, and building an entire portfolio around forecasting them is simply another form of market timing.
He prefers to think in probabilities. The task is not to pretend we know which future will arrive. It is to outline several plausible futures, assign rough probabilities and then ask how current decisions perform across those scenarios.
The author says he remains optimistic about technology, entrepreneurship, productivity and long-term economic progress. But optimism is not a valuation method. Diversification does not mean owning 50 things that all depend on the same macro backdrop.
In his view, an optimal portfolio should not require low interest rates, record margins, ever-expanding valuations, abundant liquidity and extraordinary AI growth to happen all at once. It should have several different ways to work.
- High-quality businesses that can compound capital.
- Selected stocks where expectations are low enough to create asymmetry.
- Cash that preserves optionality.
- Gold with a different monetary return driver.
- Gold miners, when the potential return justifies the added operating risk.
- Crypto assets where upside is still large enough to justify volatility.
- And, importantly, the ability to do nothing.
What matters is what current prices already demand
The letter closes by saying the author does not know where the S&P 500 will trade next year. He does not know whether the 10-year Treasury yield will be 3% or 6%. He does not know where Bitcoin will end this cycle. He also does not know whether today’s huge AI investment cycle will produce extraordinary returns on capital or simply extraordinary capital spending.
Fortunately, he argues, he does not need to know. The aim is not to forecast the future with precision. It is to understand what kind of future current prices already require, then compare the upside if reality is better with the downside if reality is worse.
The opportunity he sees today is not necessarily in calling the next bull market or bear market. It is in the widening gap between two classes of assets: those that need almost everything to go right, and those that have almost no success priced in at all. Dispersion, he argues, is the opportunity. And if the world has truly entered a regime where capital once again carries a real cost, that distinction may matter far more than it did over the past decade.
