Wall Street

The last time was half a month ago. The trigger was the global tariff war initiated by Trump, and the entire Wall Street collectively misjudged Trump.
At that time, Bessant, a former Wall Street trader and now U.S. Treasury Secretary, found an opportunity to try to persuade Trump: he discussed the idea of ​​suspending tariffs with Trump while on Marine One to the White House.

Bessant needs to take on the responsibility of being a bridge between Wall Street and Washington. He tries to reconcile between Trump's erratic and capricious policies and his old friends on Wall Street who advocate debt reduction, tax cuts, and deregulation. This is undoubtedly a difficult task. Behind the game of capital markets is the game of major powers. To some extent, the influence of Wall Street has surpassed capital itself. In the past, the combination of Wall Street and Washington formed the "Washington-Wall Street complex", which has always been the dominant force in the US political and economic situation.

But today, cracks are emerging. A year ago, Bessant, who was regarded as "one of our own" by Wall Street, told clients: "The tariff gun will always be loaded and on the table, but it will rarely be fired." But now many people on Wall Street feel that they have been betrayed by him. Trump is firing everywhere, almost without being constrained by these previous relationships.

The rift has a tendency to tear further. Trump is still threatening to fire Fed Chairman Powell, which has shaken the century-old foundation of the Fed's independence. Trump is also confronting the Ivy League schools in the United States. The university endowment funds in the United States hold about $500 billion in private equity assets. If they sell off, it will be enough to set off a storm in the market.

Wall Street's attitude is worth observing. Last week, "Waves" interviewed 30 people on the front lines of the tariff war. We then interviewed a Wall Street hedge fund person: Rob Li. He has personally experienced the ups and downs of the market in New York these days and is well aware of Wall Street's rationality and anger in this tariff storm.

Rob Li worked at Morgan Stanley Private Equity Fund and is now the managing partner of Amont Partners, a global equity investment management company based in New York. Their investment strategy holds positions for a long period of time. Compared with hedge funds that generally hold positions for only about three months, their core investment portfolio holding period is more than two to three years.

Rob also travels frequently around the world. He has adopted a global asset allocation strategy, focusing mainly on the three sectors of technology, consumption and industry. Currently, about 40% of his assets are allocated in the United States, 10% in Asia, and the rest in Europe and South America.

"There is no one on Wall Street who is not hostile to Trump." According to Rob's observation, he believes that the mainstream perception of Wall Street was misled. At first, everyone thought that Trump 2.0 would be like Trump 1.0, "there would always be a way to keep things from being too outrageous." But now, the script has completely changed.
As Peter Drucker wrote in "Managing in Turbulent Times" - the greatest danger in turbulent times is not the turbulence itself, but acting according to the logic of the past.

Now, with a number of key Wall Street figures, including Ray Dalio, founder of Bridgewater Associates, Bill Ackman, founder of Pershing Square Capital, Jamie Dimon, CEO of JPMorgan Chase, Larry Fink, chairman of BlackRock, and Howard Marks, chairman of Oaktree Capital, changing their attitudes and standing up against Trump’s radical tariff policy, investors have formed an important counterforce, although their primary goal is still profit.

Part 01 Wall Street elites also misjudged Trump’s script

Rob : An important moment was April 2. That afternoon, Trump first said that he would impose a 10% tariff on all countries. At that time, the market actually rose by two points because many people thought this was within expectations.

But a few minutes later, Trump took out his giant form and said that he would impose different levels of tariffs on different countries. At this time, the market immediately collapsed, and everyone realized that Trump was actually going to do it for real.

Now 80% of the trading volume in the US stock market is completed by machines. The algorithm will set some strategies in advance: for example, if the tariff announced by Trump is within 15%, you can buy; if it exceeds 15%, sell. Of course, the actual strategy must be much more complicated. The automated trading speed of the machine is very fast, so once the market collapses, it will be very fast.

"Undercurrent" : But why did those smart people on Wall Street have no foresight about "Trump's huge table"? I remember when Trump just won the election, the term "Trump trade" was very popular, but it became "Trump put" in just two months .

Rob : The mainstream thinking on Wall Street, including myself, had not anticipated the "extent" of reciprocal tariffs. The mainstream thinking was that Trump's second term in office would continue the "much ado about nothing" performance of his first term.

Everyone should remember that when Trump defeated Clinton in 2016, Wall Street was very panicked because Trump talked about a lot of crazy ideas during the campaign, and the entire business community and Wall Street were very afraid of him. But later everyone knew that 99% of his crazy ideas did not come true, but instead formed a very friendly environment for the business community in those four years.

"Undercurrent" : So this is also a kind of market inertia, but I didn't expect the script to really change.

Rob : At least until he took out that giant form on April 2, this "much ado about nothing" scenario continued.

In February, Trump also scared the market when he said he would impose tariffs on Canada and Mexico. At that time, the US stock market also began to plummet. But just one day later, Trump posted again that he had spoken to Canada on the phone and would not attack them again. A few hours later, he said that he had also spoken to Mexico on the phone and would not attack Mexico either. Everyone buy the dips the buy the dips, and everyone rebounded. They all felt that Trump 2.0 was just like that.

But later he took out that huge table, and the market started to really collapse. Everyone found that the script had changed, which was completely beyond expectations.

Part 02 Winners and losers in the shock

Rob : Although they are all called hedge funds, they actually do completely different things. There are hedge funds on Wall Street that specialize in macro, such as trading various currencies. There are hedge funds that specialize in stocks, such as ours. There are also hedge funds that do not trade stocks, but specialize in bonds. I am only talking about the stock part.

For equity hedge funds, there are actually no particularly good options now, because Trump may say one thing today and another thing tomorrow. After experiencing the turmoil in March and early April, many funds have basically become relatively low-leveraged and zero-net-positioned.

This "zero net position" is also called "neutral position", which means that your long position minus your short position is basically equal to zero. This is a very conservative attitude. No matter which direction Trump's policies go, whether the market rises or falls, just maintain a net position and go flat this month. Unless you are sure to judge the direction, it may be a better choice to reduce the net position to the minimum.

Of course, for macro hedge funds, a very popular trade now is short the US dollar, because what Trump has done is a major negative for the US dollar, and short the US dollar at this time is obviously profitable.

"Undercurrent" : Who lost money ?

Rob : The most obvious ones are quantitative funds. I heard that many quantitative funds have suffered losses.

Although quantitative funds are using all kinds of high-tech equipment to monitor Trump's own Truth Social and his X account, Trump changes his attitude too quickly. This back-and-forth reversal makes it difficult for quantitative strategies to keep up with Trump's speed.

Quantitative funds generally require very high leverage. The problem with leverage is that even if your judgment is proven correct ten days later, your position may be liquidated on the third day as Trump goes back and forth over and over again, and you may not live to see the final judgment proven correct.

A typical example is: a quantitative fund that trades Nvidia. When AI captured the news that Huang Renxun had dinner with Trump, AI judged that the dinner was meaningless and Trump would still ban H20, so we had to short Nvidia. But before the news of the ban on H20 was released, if the market thought that the matter was settled during the dinner, everyone bought a lot first, and the price rose. If you added a high leverage, you would be liquidated directly at this time - although the restriction order on H20 was eventually issued.

Another large part of the losses are from long-only mutual funds, or some funds with higher risk exposure, with long positions far exceeding short.

"Undercurrent" : Are those Wall Street people who voted for Trump now regretting their decision?

Rob : If I were to tell you my true thoughts, I think there is no one on Wall Street who is not hostile to Trump now , regardless of whether they voted for him or donated to him last year. I have also had dinner with many people from various Wall Street funds recently, and I have hardly met anyone who still strongly supports Trump.

"Undercurrent" : Later, Trump announced a 90-day tariff suspension. How much does this have to do with Wall Street? It is reported that former hedge fund manager and US Treasury Secretary Benson is under great pressure now. He needs to balance the contradictions between Trump's radical policies and financial forces.

Rob : Bessant used to teach at our school. He also used to work in Soros’ fund and has deep roots in Wall Street.

I have a confirmed source who said that at least when the first round of tariffs were drafted, that is, the tariffs launched on April 2, Bessant was not a core member. The tariffs were basically set by Trump, Stephen Miller, and Peter Navarro, and Bessant was most likely not involved in the discussion at all.

In the end, Trump told Bessant a result, and then asked Bessant to use his connections on Wall Street to communicate with Wall Street and appease their emotions, but the decision-making power was not in his hands. Of course, this was the situation before April 2. Later, the market fell into turmoil. Does Bessant have more say now? I think this is very likely.

"Undercurrent" : What about you? How shocked were you during this process?

Rob : The current situation of the tariff war has definitely exceeded my expectations. Everyone has psychological expectations for a trade war, but no one expected Trump to be hostile to Europe, Japan, Canada, etc.

However, if we look at the decline, it is nothing compared to the real big crisis in history. If you have experienced the 2008 financial crisis, you will not have any anxiety now. It is like a new soldier who has just joined the battlefield and is very anxious. But if you have gone through the cycle and are a veteran for ten years, you will not be anxious.

Part 03Who will be bought and who will be dumped?

"Undercurrent" : You have done a lot of company research recently . What are the results? In the face of this macro turmoil, which companies will be sold first by fund managers?

Rob : The negative impacts are first and foremost, and I divide them into two categories:

The first category is those directly affected by tariffs, such as clothing, shoes, bags, and toys related to daily household items, which are basically produced in Asia. The first to be affected are basically these consumer brand companies. Of course, if the tariff policy is reversed in the future, they will also rebound strongly.

The second category is indirectly affected by tourism-related industries, such as hotels, theme parks, airlines, etc., because the demand side will decline very quickly. Since Trump has been involved in tariff conflicts for a month, the number of foreign tourists to the United States has dropped by 50%. Although the impact on Americans going out to play or traveling within the United States has not yet been reflected, if the trade war continues for a year, it is clear that the US economy will be affected. In the future, all industries with high economic sensitivity, such as real estate, discretionary consumption, tourism, cinemas, theme parks, casinos, etc., will be affected.

"Undercurrent" : Google's recent sharp drop seems to have been caused by accidental injury. The market began to worry that if the EU retaliates against the United States, the EU is likely to take action against these technology companies because Trump's crude tariff calculation formula does not include service income, or income from the virtual economy, but the EU spends a lot of money on this every year.

Rob : Yes, this kind of side damage to technology companies has two aspects. On the one hand, if the EU wants to retaliate, it can take action against not only Google but also Meta, Amazon, Microsoft, etc. in the United States at any time. This is a major weapon of the EU. On the other hand, the business of Google and Meta itself, most of their revenue comes from advertising, and we know that advertising revenue is very sensitive when a country's economy declines.

Recently, Omnicom, the world's second largest advertising and communications group and an important advertising agency for platforms such as Google and Meta, said in a financial report call that although they have not seen advertisers cut spending, they feel that if Trump continues to do this, clients will inevitably cut spending, so they lowered their performance guidance for the next quarter, which also led to the decline of Google and Meta.

"Undercurrent" : We have talked about many companies that have been negatively affected by tariffs. Are there any companies or industries that have benefited from this?

Rob : The key for companies that benefit is that tariff conflicts have led to price increases, but companies can push the costs downstream.

For example, we have long held a company called AutoZone. This company is one of the two giants in the sale of auto aftermarket parts in the United States, and it is still continuing to consolidate the US market. Why is the tariff conflict beneficial to it? Because the tariff conflict has raised the price of cars. In the past, you needed $30,000 to buy a car, but now the tariff may increase by $10,000. Many consumers simply don't buy it for the time being, and wait until the tariff conflict ends and the price returns to $30,000 before buying it.

But if consumers don't buy new cars now, they will only drive old cars. The longer the old cars are driven, the more maintenance problems they will have. This is good news for a company that specializes in selling auto aftermarket parts. Engines, spark plugs, brake pads, engine oil, etc. all need more.

"Undercurrent" : What about the funding side? Are some funds choosing to leave the United States and invest more in other regions ?

Rob : Yes, take Europe for example. In the past ten years, people have basically not allocated to it. They have allocated more to China and Japan than to Europe. But recently, many European stocks have gone out of independent market trends. For example, European defense stocks have risen a lot this year.

Some high-quality European companies have been "wrongly killed" in this round of tariff conflicts . For example, in the field of automotive semiconductors, there is a German company called Infineon. This company is deeply involved in China's new energy vehicle industry chain. It is the exclusive supplier of Xiaomi and an important supplier of BYD.

This company's production capacity is distributed globally, with 15% of its local production capacity in the United States, while its sales in the United States are only 12%. Therefore, its domestic production capacity in the United States can fully cover its sales in the United States. The impact of tariffs will be relatively small, and local supply can be achieved. This type of company is also good.

Another example is Mercardo Libre, another company we hold, which is the largest e-commerce company in Latin America. It is a purely local business and has no direct relationship with the US market or the trade war. Therefore, when the US market plummeted in April, it actually rose.

Part 04This is not a financial crisis, it is a man-made crisis

"Undercurrent" : The tariffs between China and the United States have now reached 125%. If the United States adds the 20% for fentanyl, it will be 145%. This tariff is meaningless. What do the entrepreneurs you interviewed think?

Rob : It is generally believed that this tariff is basically equivalent to a trade embargo. I have been traveling around recently to find out what entrepreneurs think.

For example, I have recently conducted intensive research on the upstream of a group of footwear and apparel companies (supply chains of companies like Nike, Adidas, and Lululemon). For a pair of shoes, assuming that the tariff is only increased by 10-15%, and a pair of shoes with a sales price of US$140 costs US$35-40, then for the company, the total cost will increase by 3-5 yuan. In this case, the manufacturer will absorb 1/4, the brand will absorb 1/4, and the remaining part will be absorbed by the channel and passed on to consumers. Therefore, when consumers buy this pair of shoes, the cost will only increase by less than two yuan. Although it will eventually affect the gross profit margin of the brand and the supply chain, the absolute gross profit amount they can earn for each pair of shoes can absorb 100% of the impact.

But now with a 125% tariff, the cost will be 70-90 yuan. At this time, the company will not consider who will bear the cost - because the shoes will not be sold. If the cost is passed on to consumers, sales will directly drop by more than 50%.

Many entrepreneurs in Southeast Asia are waiting and watching during this 90-day tariff suspension. A common prediction is that after 90 days, other countries, except China, may become new 10%-20%. Although gross profit margins will definitely be affected, everyone can continue to live.

"Undercurrent" : There is another key issue here: International trade has long been dominated by " intermediate products " (that is, parts or semi-finished products are first imported from one country to another for processing/assembly, and then exported to a third country ). How should we define where something is produced?

Rob : There are actually many loopholes here. For example, in the semiconductor field, the United States said that it would define that the U.S. content must be greater than 20% to be exempt from tariffs, but how do you define this so-called U.S. content? The Trump administration has not given a clear judgment yet, and the U.S. Customs also does not know how to implement it. These are important negotiation points in the future.

For example, in the field of footwear and clothing, there is now a way that may have been pure re-export trade in the past, where shoes were produced in China, then shipped to Vietnam, and then a label was changed to "made in Vietnam" and shipped to the United States. Now such a simple path is no longer feasible, but you can still do some complex processes in China, take the remaining simple processes to Vietnam, and then label it as "made in Vietnam", and then ship it to the United States.

If Trump wants to close this loophole, he can, but it will require a very high implementation cost, because you need to formulate very detailed rules, and it is difficult for regulators to keep an eye on it. If you are more optimistic, it will depend on how the parties negotiate next.

"Undercurrent" : Tariffs will also have a negative impact on US consumption. Some pessimistic views say that tariffs will gradually lead the US into a structural bear market from an event-based shock . Especially as we are about to enter the first quarter earnings season, companies need to give guidance for the second quarter. If they are all bad, it will lead to a new round of sharp declines. What do you think?

Rob : I think the key is whether the tariff policy will come back. If Trump insists on doing it like he has been doing recently, it will definitely be a major blow to the US economy.

Many institutions have also made estimates that a 1% increase in the actual tariff rate in the United States will lead to a 0.1% increase in inflation, resulting in a negative impact of 0.05%-0.1% on the U.S. economy. The average tariff actually levied by the United States is currently less than 3%. If the average tariff rate becomes 10% in the future, an additional 7% will be required. The impact of 7% on inflation is 0.7%, and the impact on GDP is about negative 0.35%-0.7%.

But if Trump insists on his own way and imposes a 25% tax on the entire world, the negative impact on GDP will be 1%-1.5%, and the impact on inflation may be close to 2%, which is a relatively large impact. The US economy will be in danger of collapse, and the stock market will naturally not be good.

"Undercurrent" : How is this comparable to several financial crises in history?

Rob : The so-called recession risk at present is purely man-made and has nothing to do with the economic cycle. It is not like the 2008 financial crisis - that was a structural risk.

But today, the US economy, from the perspective of economic structure, has no major problems. People say that the US debt is high and the government owes a lot of money, but in fact there are many countries that owe more money than the US government. For example, the Japanese government debt is much higher than that of the US, and the debts of most European countries are also higher than that of the US. But now many people regard Japan as a safe haven.

Part 05In an uncertain era, how can we find a certain way to live?

"Undercurrent" : Howard Marks of Oaktree Capital recently published an investment memo saying that the market has entered a "no one knows" state and no one can predict the future. If we learn from history, what lessons can we draw?

Rob : I think the most important thing is to beware of the risk of leverage . Just like Buffett once said, every decade, countless people have earned more than him, but looking back sixty or seventy years later, those who did better than him in every decade are gone. Why? Because Buffett does not use leverage, there is no risk of liquidation, no matter what black swan events happen (financial crisis, economic recession, epidemic, trade war, war, currency devaluation, etc.).

Many funds that bring high returns through leverage can perform well for 3-5 years or even ten years, but once there is a big fluctuation - and such events are often impossible to predict in advance - all those who use leverage will collapse.

For example, the earlier LTCM (Long-Term Capital Management), whose founders were all Nobel Prize winners, achieved an annualized return of more than 40 points in 4-5 years, which was very impressive. However, it eventually collapsed in the 1998 Russian financial crisis, also because of the high leverage. The Russian incident was not only not anticipated by LTCM, but also by Soros, and the whole world.

Another example is Bill Huang, who had his account blown up in 2021. After leaving Tiger Fund, he founded Archegos Capital Management. In his heyday, he made $35 billion from his own family office with $200 million, which is hundreds of times more. This is undoubtedly amazing, but you can also go from $35 billion to zero overnight because he used a high leverage. In those years, Buffett basically just kept pace with the index.

But in the end, Buffett survived and Bill Huang went bankrupt.

"Undercurrent" : Therefore, stability will always be the only way for the financial industry.

Rob : If you want to sleep well, don't pursue unsustainable high returns through high leverage. It implies high risks, but you should seek a long-term steady flow without the risk of liquidation.

"Undercurrent" : This round of tariff game continues to escalate. There is still a 12-hour time difference between Beijing and New York . Can people on Wall Street sleep well?

Rob : In terms of market turmoil, it is actually not as turbulent as the 2008 financial crisis, the 2015 RMB devaluation-induced turmoil in the global capital market, or even the four U.S. stock market circuit breakers caused by the pandemic. If you have experienced these three turmoils, you will be very calm now.

Take 2008 for example. There was a lot more panic back then than now. In the spring of 2008, from the collapse of Bear Stearns to its acquisition by JPMorgan Chase, the market had already started to fluctuate greatly, and then the sharp drop lasted for a whole year. At that time, everyone really thought that the global economy was going to end. Moreover, Morgan Stanley and Goldman Sachs almost went bankrupt at that time. That was the real panic. Now it is far from that level.

Today, everyone just feels that so many things have happened in less than two months, and it is a very intense psychological experience.

"Undercurrent": Yes, if we calculate the S&P now, it has actually only fallen by 15% from its peak. This decline should not have reflected some long-term risks?

Rob : If the US really enters a recession, the decline will be far more than that. And this is a decline that started when the valuation was relatively high. The market does not price in the risk of a US recession this year. If it really happens, it is far from the end of the decline.