Boooring…

Turning to the markets, as traders, we recognize that sometimes there’s a whole lot to do, and sometimes the best thing to do is absolutely nothing. In this game, you get no points for fighting boredom. Sometimes, it’s best to just sit and wait it out. We’re in such a world. While we are outright bearish on the economy, our favorite ideas are trending, and we expect them to keep trending (check out the Insights section of KEDM to re-read each thematic):

• When Trump first got elected, we wrote a few pieces on EMs and particularly LatAm. That part of the world is now ripping, especially as Bessent just backstopped Argentina. Will Trump take out Maduro, scare the snot out of Petro, and bring economic growth to the whole continent?? We think so. KEDM is long and wish we were even longer.
•  We were the rare China bull when Trump got into place. We had our bullishness shaken after Liberation Day, but we only shifted our bullishness to Hong Kong. For better or worse, China has decided to keep a closed-loop currency that they can control (CNY), but they also want a currency for global trade, and that will be the HKD. We think that Xi looked at the US capital markets, realized that it gave us a unique strength here in USA, and he wants one of those capital market things. He’s going to do everything possible to internationalize Hong Kong, and force it to become the main economic hub of Asia. While Westerners have been leaving since 2017, other foreigners are now taking their place. We think Hong Kong real estate is bottoming with upticks in commercial space this summer, and office likely bottoming as we write this. We’ve built out our HK real estate positions, where lease prices are down and cap rates are up materially from peaks around 2017. It seems silly that you can buy high quality real estate at a single-digit earnings multiple, when it’s near what we think of as trough earnings. We also fleshed it out with some financials. We think Hong Kong is the city to be long in Asia, if only because you need an entry port into China for a foreign business, and Singapore doesn’t quote show fealty in the same way. We’ll physically be in Hong Kong in a month to actually see the assets, which should tell you about our level of bullishness.

• We’ve been gold bulls. We remain gold bulls. It’s run a very long way, and probably needs a rest, but we’re staying with it. We see the imbalances only getting worse and you own gold because those imbalances terrify you. For that matter, you can say something similar about most productive hard assets. Paper is going to zero. We all know this, but it’s always important to remind ourselves anyway.

• We’re long financial and geopolitical volatility through our long vol plays. We think that volatility comes and goes like the tides, but the overall trend is higher volatility. We want to be long those businesses that prosper off of this.

• Overall, we remain bears on the economic situation in the US and globally. We remain of the view that European policymakers hate economic growth, Japan is a nursing home and China only knows how to export. That leaves the US as the only engine of consumptive economic growth, and we cannot hold up the world, nor should we. Trump will continue to increase tariffs and make the US economically immune from the problems of the world, but this will create a lot of economic volatility as global trade resets. For MAGA to work, Americans need to consume less and produce more. It should therefore be no surprise that consumer names are suffering, that’s a necessary part of the plan. As a result, we really don’t want any GDP exposure.

• What we want are themes with massive consolidation and no new supply, as we also believe in long-term economic growth. Even better if the USA is a dominant producer, and the businesses benefit from a lower US Dollar. We’re long refiners. We see Ukrainian drone attacks as an interesting, though short-term boon to our thesis. Longer term, we see Third World countries failing to operate their refineries as a core portion of our thesis. You see, when the consultants look at global balances, they’re rather balanced. The difference is that American can run it hot, Europeans can keep scrapping theirs, and the Third World mostly stands around and wonders where all the gasoline went. Therefore, it warms our heart deeply to see the Nigerians fighting over who gets to steal the profits, as the Dangote Refinery goes quite, possibly for many months. We want to own the US versions of these assets.

Overall, we just want to stay dramatically de-grossed and focus on Event-Driven trades. We have one of the lowest equity exposures that we can remember, as we usually back-fill cash rather quickly. This time, we’ve been slow to re-gross, because frankly, there’s not much that interests us. While markets keep grinding higher, it’s mostly concentrated in a handful of mega-cap tickers that do not interest us, except as shorts. Yet, we know enough to avoid shorting until they roll over. We remain of the view that most of the money will be made on the volatility as policy-makers panic over the recessions that they’ve created. We want to buy the dips, which means we have excess liquidity. We want to own hard assets. We want bulletproof assets. We want stuff that is anti-fragile. We want to avoid GDP. We want to be nimble, but mostly we want to let our core themes keep trending.

Boring trading, is often profitable trading.

Maybe it’s suboptimal for a weekly letter, but we don’t make the rules here.