Liberation Day

We were all looking forward to Liberation Day. We even had something of a celebration planned. Honestly, we thought Trump would do a flat tariff. Maybe something in the 10-20% range. Instead, he came out swinging. He literally carpet bombed every CUSIP. We don’t blame him. These tariffs are the right thing to do—though he could have been a bit more Presidential with it all. On the other hand, he avoided leaks to the press, by making it all up about an hour before…

In any case, it’s all out there. This is his starting point. Some nations will bargain and get consessions. Some won’t. It will be chaotic. We expect equities to keep declining. As noted many times, MAGA is NOT bullish for risk assets. Just go re-read our past 3 months of commentary (or you’ll get the gist just based on the titles: Bear Porn, The Bell Is Ringing, More Bear Porn, Mean Reversion is Imminent, Where Did the Margin Go, TINA Died in 2025)  

We’ve been long puts, put spreads and even short equities at times since Trump won. We’be been raging kodiak bears. On Friday, we booked the last of the downside exposure. We think equities go a good deal lower. Maybe 3500 on the S&P?? But it won’t be a straight line and we’re always a tweet away from a monster rally—hence taking the down-side positions off. That said, Trump will keep doing the madman routine until he gets equities down enough to get real outflows from foreigners. The goal is the Dollar, and since equities are the reason for all the inflows, they must be murdered. We’ve had a hunch he’d do this, but we were also surprised that the really cheap stocks also got killed. As always, we were too exposed when correlations went to 1.

Fortunately, we’ve been at this game a long time and know the drill. Step 1 is to panic first. We tossed all of our trading positions. We got out of our China theme (actually sold just before Liberation day). We tried to get exposure down. We still feel too heavy, but we’re not about to have a firesale into the hole on core names. However, we made room, because we want to BTFD when the real selling climaxes… (though we’ll probably end up doing the less risky thing and writing high IV puts)

What happens next?? Without any positive news, we think the real selling starts soon. We’re still bothered that retail is in full BTFD mode. You don’t get a real bottom without capitulation. They aren’t even scared. They’ve won a few times now when they BTFD. We think that this may be the time they get run over…

Retail BTFD (h/t Luke Gromen)

You’ll know it’s the bottom when it feels really scary. When you don’t want to buy them. This isn’t that moment (yet). For all we know, Trump will do another carpet bombing run later in the week.

We’ve been pretty clear that the US is likely going the path of Brazil. Despite lighting the market on fire, bonds barely even rallied. We think they simply melt when the panic equity selling ends. Don’t forget that Klaus, the stereotypical pension fund manager in Europe, still has hundreds of billions to sell, and now the Chinese want out as well. I keep asking my Brazilian friends, what worked in Brazil as rates went higher and equity multiples dropped to 2x EBITDA. They all tell me “Kuppy, the only thing that worked, was getting capital out and buying overseas assets.” I think they’re right. In fact, it’s already happening. Here’s EWZS (Brazil midcap) to QQQ YTD. Probably worth reminding you that Brazil is one of our favorite markets right now. It was even green on Thursday, before the real selling started Friday.

Anyway, we have been bearish on the US for almost a year when we started harvesting some PnL. We got far more bearish when Trump won. We knew an accident was coming, now it’s here. Next we’ll see the wealth effect hit. It’s amazing to see that MAGS (the MAG7 ETF) is down approximately 25% this year. There’s a whole lot of global wealth tied up in that thing. Do you think they’re going to be in a mood to spend more?? Oddly, we think that despite a lot of volatility, the US economy does just fine. Over time, MAGA is really bullish for wages. It’s bullish for economic growth. It’s bullish for the heartland, and bearish for the coasts. We think that as the wealth effect hits, Trump is going to have to pivot even harder on ‘running it hot.’ We want to be long for that, but not yet.

At the same time, we mostly plan to mostly hide out in EM and short duration ED. We also think that after the initial panic fades, countries will realize that they need to restructure their economies. That will use globs of commodities, at a time when the DXY is weaker. We’ve been long-suffering commodity bulls. We think their time is finally near.

Look at the jaws below. We think they partly close. Don’t forget, Europe is the EM with the best food and history.

Also, if things get a bit spicy in the coming weeks, just PSA/remainder how big the pods are.  The real fun begins when 10x levered funds get the tap on their shoulder by the CRO…

Anyway, we think the next few days will be for the history books. We’re in uncharted waters here. Stay safe.