By now most KEDM readers get how bearish we are. We are not going to regurgitate it; we’ve beat that horse to its bloody death. But as we’ve talked to 50+ hediges over the past week, the common response is “sure I am bearish, but we are 1 tweet away from a tariff deal and the market roars…” And they aren’t wrong. Trump came in strong at the negotiating table and we will eventually get some good news with spoo ripping to the upside.
But what seems to get lost is that this isn’t just about tariffs, that’s just the headlines…for now. This goes far beyond tariffs and far beyond Trump and his Truth Social account. Tariffs were just the spark to this potential credit tinderbox. The US was/is barreling towards a solvency crisis, a Gini crisis and private debt cycle regardless of who took the Oval. Staring at a crisis, decades in the making, you can either hope for the best/limp it along until the next guy takes over, or bring it all to a head under your terms and rip off the bandaid. Trump isn’t a guy to risk being the scapegoat so he chose to take matters in his own hand – force a recession and reset so he can restructure ahead of a Raegan ‘84 style lift off for Trump 2028…
Overall I think most people are missing the forest for the trees. Yes, we will get a good tweet in the coming days/weeks/months and the markets will fly. But the economy is rolling and Trump & Co actively want to drain the wealth effect and told foreigners to fuk off. Who cares if the market rips for a few weeks when the underlying economy is rolling and foreign capital flees?? Who cares if you leave a few points on the table. You take liquidity when you can, not when you need it most.
The risk, of course, is that a managed recession and walking the market down gets out of hand. As we’ve seen in past crisis, a highly leveraged system creates all sorts of cross asset spillover effects that are difficult to predict or contain. We are one domino away from the whole thing cascading into a waterfall of forced deleveraging and fire sales.
How could this work? Well, take a topical headline this week with Yale and Harvard both looking to unload $6b and $1b in their PE stakes, respectively.
We all know private marks are fake. What happens in real price discovery when a third of all endowment’s books start marking real marks on their privates? And who is the logical buyer when the IPO window is all but closed and firms are stuffed to the gills with PE deals. And what happens to these endowment’s risk models when a third of their book gets marked to the real market with no buyers? Guessing its not going to be “contained” in just privates…
WSJ.com
Or pop over the couple trillion dollar private credit market, where 40% of borrowers had negative FCF from their businesses, PIK is ramping, and over a fifth of loans were classified. And that’s as of 2024. Guessing things haven’t gotten better since then…
FinancialTimes.com
And to top it off, when you see the smartest guys in the room offloading to the sheep, its gotta raise some eyebrows…
Crises pop up when it hits credit and illiquids. And here we have both…
As most KEDM readers know, we are not gloom and doomers here. We don’t operate to get clicks like Zhedge. We actually trade from the long side and look to run leverage into sweeping trends and ED trades. But taken from a purely objective risk/reward, we see the reward of being long capped, while the risk is a chop with a downward bias if managed correctly by the administration, at best, and a full blown crisis if the fire starts burning out of control- the r/r seems skewed to the downside.
Call us panicans or call us veterans, either way, we’ll take the prudent path of raising cash, hiding in non-US assets and playing in shorter duration ED trades. Stay liquid, my friends…
Kuppy’s Event Driven Monitor (“KEDM”) is not a financial or investment advisor and the information contained in this publication is not intended to constitute legal, accounting, or text advice or individually-tailored investment advice and is not designed to meet your personal financial situation. The investments discussed in this publication may not be suitable for you. You are required to conduct your own due diligence, analyses, draw your own conclusions, and make your own investment decisions. Any areas concerning legal, accounting, or tax advice or individually-tailored investment advice should be referred to your lawyers, accountants, tax advisors, investment advisers, or other professionals registered or otherwise authorized to provide such advice. KEDM makes no recommendations whatsoever regarding buying, selling, or holding a specified security, a class of securities, or the securities of a class of issuers, and all commentary is for educational purposes only. The investment examples noted are intended to provide and example of the events and data KEDM flags each week and is not representative of typical returns generated by each event or any future returns.
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A Bearish PSA, Part Duex
A low frequency but juicy strategy where the edge is government incompetence.
Let’s dig in…
By now most KEDM readers get how bearish we are. We are not going to regurgitate it; we’ve beat that horse to its bloody death. But as we’ve talked to 50+ hediges over the past week, the common response is “sure I am bearish, but we are 1 tweet away from a tariff deal and the market roars…” And they aren’t wrong. Trump came in strong at the negotiating table and we will eventually get some good news with spoo ripping to the upside.
But what seems to get lost is that this isn’t just about tariffs, that’s just the headlines…for now. This goes far beyond tariffs and far beyond Trump and his Truth Social account. Tariffs were just the spark to this potential credit tinderbox. The US was/is barreling towards a solvency crisis, a Gini crisis and private debt cycle regardless of who took the Oval. Staring at a crisis, decades in the making, you can either hope for the best/limp it along until the next guy takes over, or bring it all to a head under your terms and rip off the bandaid. Trump isn’t a guy to risk being the scapegoat so he chose to take matters in his own hand – force a recession and reset so he can restructure ahead of a Raegan ‘84 style lift off for Trump 2028…
Overall I think most people are missing the forest for the trees. Yes, we will get a good tweet in the coming days/weeks/months and the markets will fly. But the economy is rolling and Trump & Co actively want to drain the wealth effect and told foreigners to fuk off. Who cares if the market rips for a few weeks when the underlying economy is rolling and foreign capital flees?? Who cares if you leave a few points on the table. You take liquidity when you can, not when you need it most.
The risk, of course, is that a managed recession and walking the market down gets out of hand. As we’ve seen in past crisis, a highly leveraged system creates all sorts of cross asset spillover effects that are difficult to predict or contain. We are one domino away from the whole thing cascading into a waterfall of forced deleveraging and fire sales.
How could this work? Well, take a topical headline this week with Yale and Harvard both looking to unload $6b and $1b in their PE stakes, respectively.
We all know private marks are fake. What happens in real price discovery when a third of all endowment’s books start marking real marks on their privates? And who is the logical buyer when the IPO window is all but closed and firms are stuffed to the gills with PE deals. And what happens to these endowment’s risk models when a third of their book gets marked to the real market with no buyers? Guessing its not going to be “contained” in just privates…
WSJ.com
Or pop over the couple trillion dollar private credit market, where 40% of borrowers had negative FCF from their businesses, PIK is ramping, and over a fifth of loans were classified. And that’s as of 2024. Guessing things haven’t gotten better since then…
FinancialTimes.com
And to top it off, when you see the smartest guys in the room offloading to the sheep, its gotta raise some eyebrows…
Crises pop up when it hits credit and illiquids. And here we have both…
As most KEDM readers know, we are not gloom and doomers here. We don’t operate to get clicks like Zhedge. We actually trade from the long side and look to run leverage into sweeping trends and ED trades. But taken from a purely objective risk/reward, we see the reward of being long capped, while the risk is a chop with a downward bias if managed correctly by the administration, at best, and a full blown crisis if the fire starts burning out of control- the r/r seems skewed to the downside.
Call us panicans or call us veterans, either way, we’ll take the prudent path of raising cash, hiding in non-US assets and playing in shorter duration ED trades. Stay liquid, my friends…
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Kuppy’s Event Driven Monitor (“KEDM”) is not a financial or investment advisor and the information contained in this publication is not intended to constitute legal, accounting, or text advice or individually-tailored investment advice and is not designed to meet your personal financial situation. The investments discussed in this publication may not be suitable for you. You are required to conduct your own due diligence, analyses, draw your own conclusions, and make your own investment decisions. Any areas concerning legal, accounting, or tax advice or individually-tailored investment advice should be referred to your lawyers, accountants, tax advisors, investment advisers, or other professionals registered or otherwise authorized to provide such advice. KEDM makes no recommendations whatsoever regarding buying, selling, or holding a specified security, a class of securities, or the securities of a class of issuers, and all commentary is for educational purposes only. The investment examples noted are intended to provide and example of the events and data KEDM flags each week and is not representative of typical returns generated by each event or any future returns.