April 13, 2025, Vol. 220

It’s said that there’s no such thing as a quadruple bottom in finance. That’s terrifying as TLT (yeah, we know only retail track it…) looks to be teasing a 4^th bottom.

We’re increasingly of the view that TLT fails. When that happens, we really don’t know WTF happens. Just think about all the things that suddenly blow up:

• Commercial Real Estate has 5-yr paper to roll from 2020 and 2021 at silly rates, while cap rates scream higher
• Corporate paper from the same duration that has to roll this year as well (what happens to debt service??)
• No one knows what toxic sludge sits within PE and Private Credit (though publicly traded BDCs keep taking nasty impairments, while Private Credit seems oddly immune (hmmm…??)
• And high borrowing costs put the US Fiscal situation into a tailspin.

Where do 10-year bonds go?? We’re of the view that they’ll end the year around 6%. Which isn’t particularly crazy. 200bps spread to Fed Funds is a rather normal sort of thing historically. Besides, who would lend to the government at 4 and change when we’re doing 7% fiscal and talking about tax cuts?? And that’s before cap gains taxes swoon (with stonks swooning). And before we do anything else insane on the global stage.

We think we get a recession, and a credit crisis at the same time. We also think it’s coming soon.  

We’ve been bearish the US since last summer. However, when we saw bonds sell off with stocks this past week, we had a “it’s pretty fuct, isn’t it??” sort of moment.

 We don’t want to do this, we are not perma-bears. We hate grabbing charts and scaring people. We’re the Project Zimbabwe periodical, but we genuinely think that this feels a whole lot like the spring of 2008. Sure, we’ll get a bounce after things got really oversold. Trump has even announced that he’s going to take a break on his Tariff War. But this isn’t about tariffs, this is about fund flows and reallocation. This is about our bond market, and how it’s blowing up.

https://x.com/SharpeShark

 As a nation that relies on foreign credit, we cannot go around pissing off our lenders. If we have to actually fund our debts internally, the rate will have to be higher- especially with Bessent, Lutnick and Musk doing a roadshow to tell everyone how screwed up things are. They even told you that bondholders = baggies.

In 2006 and 2007, we were bearish. We told everyone we knew, that large banks would fail. We knew that the financial systems was wobbly. Then, somehow, in 2008, we got clobbered, even though we had lots of shorts on the books. Our mistake, was that since we knew that the Fed would have to QE, and take rates to zero, we hid out in gold miners. The problem was that on the path of gold going from $600 to $1900, many gold miners lost 80% or more in the last 6 months of 2008. We weren’t wrong on gold, and we weren’t wrong on the gold stocks we chose (though some had to dilute when anticipated funding fell through). Overall, our gold stocks did spectacularly well AFTER the selling ended, but we were wrong on the timing. In a global margin call, EVERY-F*CKIN-CUSIP gets sold. We had to learn that lesson once in our career.

We’ve been spending the weekend trying to sort through one and only one question.

If US Treasuries break down, and as a result, the US financial system detonates; does capital get reallocated, or is there a global margin call. On the day after Liberation Day, we felt like the markets had decided on a reallocation trade. Many of our EM stocks were firmly in the green. Then the selling started everywhere. Now, we’re not as sure. We still think it’s a reallocation, but if the US financial system really, truly, detonates, the shock waves may ricochet through everything else. There’s an expression about old and bold traders. We’re getting older, and maybe less bold. We plan to use any strength to further reduce longs, particularly anything exposed to the US. Making money is easy, holding onto it is hard. We have PTSD from 2008 when we got the thesis right, but got crushed anyway, as we were a bit too early. For now, our working view is that it’s just better to play with less on, and maybe make up the difference through OTM put writing.

The real money in investing is buying into one of those crises that seems to come along every 5 or 10 years. It’s the Buffett Trade in a way. We’ve been well rewarded buying the washout in the past, unfortunately we’ve also shown up fully invested and had to rely on margin to keep adding. This time, we’re going to try and show up with more room to buy.

But, won’t the FED just lower rates at the first sign of trouble?? We don’t think they’re going to do that. They are not going to bail out Trump from his trade war, unless a SIFI (systemically important financial institution – e.g. JPM, HSBC) gets in trouble. Even then, they’re likely to investigate the corpse, rather than ride to the rescue. JPOW simply doesn’t care about a property speculator failing. Honestly, the Fed would probably prefer to see Private Credit fail, as it’s outside of their purview. They are annoyed at Trump threatening their independence. And they know that when you’re an EM, at the first sign of trouble, you raise rates, not lower them. We think that EM rules now apply to this unfolding crisis. The Fed can’t just step into highly inflationary tariffs, and add stimulus.

For that matter, we’re old enough to remember guys telling us that COVID would be deflationary, and we laughed at them. Destroying global supply chains is ALWAYS inflationary. Liberation Day is now a global supply chain pandemic. Even if Trump undoes it tomorrow, no one wants to invest, or order, or quote, or literally do anything. It’s just too hard, too exhausting. There’s now a 90-day period of negotiating. Do you think any major business decisions will be made until the resolution?? Nope. We’re going into a recession here in USA, despite 7% fiscal. DOGE found maybe $150 billion in savings. It’s not enough. Not when entitlement spending is expanding rapidly simply due to demographics. As no one will ever touch the entitlement issue, no one will ever fix the deficits. It’s the endgame. We’ve arrived. We ain’t doing a thing til a SIFI goes to the wall.

EMs are ready for EM interest rates. They raise and lower rates in Turkey all the time. Business plods forward. They took Selic rates in Brazil from 2 to 14.25 in 4 years. Business plodded forward. They have bulletproof balance sheets. Anyone over-levered failed ages ago. The US isn’t like that. The PE and McKinsey bros convinced everyone to run high leverage to juice ROE. We have Just-In-Time inventory, so no one has a buffer for tariffs. No one in USA is ready. US companies are not anti-fragile. We think this goes really, really, badly.

Anyway, we don’t do the doom porn thing often (ever actually). We remember covering our shorts in the spring of 2008, and then watching it freefall a few months later. We have covered our shorts again on Liberation Day. The difference this time, is that in the spring of 2008, we saw gold running, and we maxed out our exposure to miners. This time, we’re cutting exposure.

We think this is the crisis that sets off “Project Zimbabwe.” The moment when the Fed and Fiscal both intervene and never step away again. But first, we need the crisis. In our minds, there’s no reason to buy a CUSIP, until the FED panics. We worry that’s a long way down from here…