Warring States Wall Street

Author: Liu Yiming

Last night, the “triple kill” of U.S. stocks, bonds, and currency occurred again.

The last time was half a month ago, triggered by the global tariff war initiated by Trump, and Wall Street collectively misjudged Trump.

At that time, Bessent, who had served as a Wall Street trader and was now the U.S. Secretary of the Treasury, found an opportunity to try to persuade Trump: he discussed the idea of postponing tariffs with Trump while on board Marine One flying to the White House.

Besant needs to take on the responsibility of being a bridge between Wall Street and Washington. He tries to mediate between Trump’s erratic and ever-changing policies and his old friends on Wall Street who advocate for debt reduction, tax cuts, and deregulation. This is undoubtedly a tricky task.

The game of capital markets is, in essence, a game between great powers. To some extent, Wall Street’s influence has surpassed capital itself. The historical alliance between Wall Street and Washington has formed the “Washington-Wall Street complex,” which has always been a dominant force shaping the political and economic landscape of the United States.

But today, a rift has appeared. A year ago, Bessent, who was regarded by Wall Street as one of their own, told clients: “The gun of tariffs will always be loaded and placed on the table, but it is rarely fired.” However, many on Wall Street now feel that they have been duped by him, as Trump shoots in all directions, nearly unrestrained by the usual relationships.

The rift shows a further tendency to tear apart. Trump is also threatening to fire Federal Reserve Chairman Powell, shaking the century-old foundation of the Fed’s independence. Furthermore, Trump is confronting the Ivy League schools, while the university endowment funds across the U.S. hold about $500 billion in private equity assets, which, if they were to sell off, could create huge waves in the market.

The attitude of Wall Street is worth observing. Last week, “Dark Waves” interviewed 30 individuals on the front lines of the trade war, and we subsequently interviewed a Wall Street hedge fund individual: Rob Li. He has experienced the ups and downs of the market in New York during these days and is well aware of Wall Street’s rationality and anger in this tariff storm.

Rob Li previously worked at Morgan Stanley’s private equity fund and is now a managing partner at Amont Partners, a global equity investment management company based in New York. Their investment strategy involves longer holding periods; unlike typical hedge funds that hold positions for around three months, their core investment portfolio holds positions for two to three years or more.

Rob often travels around the world for business. He has adopted a global asset allocation strategy, primarily focusing on three sectors: technology, consumer goods, and industry. Currently, about 40% of his allocation is in the United States, 10% in Asia, and the remaining portion is allocated to Europe and South America.

“There are no longer any people on Wall Street who do not oppose Trump.” According to Rob’s observation, he believes that the mainstream perception on Wall Street was misled, and everyone initially thought that Trump 2.0 would still have “ways to prevent things from getting too outrageous” like during the 1.0 era. But now, the script has completely changed.

As Peter Drucker wrote in “Management in a Time of Turbulence” - the greatest danger in times of turbulence is not the turbulence itself, but acting with yesterday’s logic.

Today, as core figures on Wall Street such as 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, have all changed their stance and come out against Trump’s radical tariff policies. Investors have formed an important counterforce - although their primary goal remains profit.

Part****01 Wall Street elites also misjudged** Trump’s script**

“Undercurrents”: From what moment did Wall Street start to realize that the entire financial market was about to change?

Rob: A big moment was April 2nd. That afternoon, when Trump first said that he would impose 10 percent tariffs on all countries, the market rose by two points. Because a lot of people think it’s expected.

But a few minutes later, Trump pulled out his giant chart and announced that he would impose different levels of tariffs on different countries. At that moment, the market immediately collapsed as everyone realized that Trump was serious.

Currently, 80% of the trading volume in the US stock market is completed by machines, which set up some strategies in advance: for example, if the tariffs announced by Trump are within 15%, then buy; if they exceed 15%, then sell. Of course, the actual strategies are definitely much more complex. The speed of automated trading by machines is very fast, so once the market collapses, it happens very quickly.

“Underflow”: But why did those smart minds on Wall Street have** no**** foresight regarding “that massive form from Trump”? I remember when Trump was just elected, the term “Trump trade” was very popular, but it turned into “Trump put” in just 2 months.**** **

Rob: The mainstream thinking on Wall Street - including myself - had not anticipated the “degree” of reciprocal tariffs. The mainstream thought was that if Trump were to take office for a second term, he would continue the performance of his first term, which had a lot of noise but little action.

Everyone should remember that when Trump defeated Clinton in 2016, Wall Street was very panicked because Trump had said a lot of crazy ideas during his campaign, and the entire business community and Wall Street were very afraid of him. But later everyone also found out — 99% of his crazy ideas did not come to fruition, and instead, those four years created a very friendly environment for the business community.

“Undercurrent”****: So this is also a kind of market inertia, but I didn’t expect the script to really change.

Rob: At least before he brings out that gigantic form on April 2nd, this “much ado about nothing” script is still ongoing.

Trump also spooked the markets once in February, when he said he would tax Canada and Mexico, when U.S. stocks began to plummet. But just a day later, Trump posted again that he was on the phone with Canada and would not engage them again. A few hours later, he said that he had also spoken to Mexico on the phone and was no longer engaged in Mexico. Everyone buys the bottom and rebounds, and they all think that Trump 2.0 is nothing more than that.

But then he took out that huge form, and the market really started to crash; everyone realized that the script had actually changed, completely exceeding expectations.

Part****02 Winners and Losers in Volatility

“Dark Tide”: Later, the S&P 500 Index fell by as much as 25%, the Nasdaq Index dropped by 21%, what actions were the hedge funds on Wall Street taking? Who made money?

Rob: Although everyone calls them hedge funds, what they actually do can be completely different. Wall Street has hedge funds that specialize in macro strategies, such as trading various currencies. There are hedge funds that specialize in stocks, like us. And there are hedge funds that focus on bonds and do not trade stocks. I will only talk about the stock part.

For stock hedge funds, there aren’t really any particularly good options right now, as Trump might say one thing today and another tomorrow. Many funds now, after experiencing the turmoil of March and early April, have basically turned into a state of relatively low leverage and zero net positions.

This “zero net position” is also referred to as a “neutral position,” which means that your long positions minus your short positions are basically equal to zero. This is a very conservative stance; regardless of which direction Trump’s policies go, whether the market rises sharply or falls sharply, simply maintaining a net position means taking a neutral stance this month. Unless you are confident in judging the direction, reducing your net position to the lowest possible level might be a better choice.

Of course, for macro hedge funds, a very popular trade right now is shorting the dollar, because what Trump is doing is a significant negative for the dollar, and at this time, shorting the dollar is clearly profitable.

“Underflow”: Who lost money?

Rob: The most obvious thing is the quantitative funds; I’ve heard that many quantitative funds have suffered losses.

Although the quantitative funds are using various high-tech devices to monitor Trump’s own Truth Social and his X account, Trump’s speed of turning against people is really too fast. This back-and-forth makes it difficult for quantitative strategies to keep up with Trump’s pace of turning against.

Quantitative funds generally require high leverage. The problem with leveraging is that even if it turns out your judgment was correct after ten days, you might face a liquidation by the third day during the repeated back and forth of Trump, and you may not even survive to see your final judgment proven right.

A typical example of this is trading Nvidia’s quantitative funds. When the AI grabbed the news and said that Huang and Trump had a meal, and the AI judged that the meal was meaningless, Trump would still ban H20, so we were going to short Nvidia. But before the news of the ban on H20 was released, if the market felt that the matter was discussed at dinner, everyone bought a handful first, and the result was a wave, then if you added a high leverage, then it would be directly liquidated at this time - although in the end the H20 restriction order was issued.

Another major part of losing money comes from long-only mutual funds that purely go long, or from certain funds that have a higher risk exposure, where the long positions far exceed their short positions.

“Undercurrent”: Those Wall Street people who voted for Trump back then, are they regretting it now?

Rob: To be honest, I think there is no one on Wall Street who is not hostile to Trump now—regardless of whether they voted for him last year or donated to him. Recently, I have had meals with many people from various funds on Wall Street, and I have hardly encountered anyone who still strongly supports Trump.

**“Undercurrent”: Later, Trump announced a 90-day tariff moratorium, how much does this have to do with Wall Street? There are reports that former hedge fund manager and US Treasury Secretary Bessant is now under pressure to balance the contradictions between Trump’s aggressive policies and financial power. **

Rob: Besent used to teach at our school, and he also worked at Soros’s fund before, having deep connections with Wall Street.

I have reliable sources saying that at least during the drafting of the first round of tariff policies, which was introduced on April 2, Bessent was not involved as a core member. This tariff was basically determined by Trump, Stephen Miller, and Peter Navarro, and Bessent most likely did not participate in this discussion at all.

Ultimately, it was Trump who told Besant a result, and then had Besant use his connections on Wall Street to communicate with them and soothe their emotions, but the decision-making power did not lie with him. Of course, this was the situation before April 2nd; later, the market fell into severe turmoil. Has Besant’s influence increased since then? I think there is a strong possibility of that.

“Undertow”****: So what about you? How intense was your shock during this process?

Rob: The current situation of the tariff war has definitely exceeded my expectations. Everyone had some psychological expectations regarding the trade war, but indeed, no one expected Trump to turn against Europe, Japan, Canada, and others.

However, in terms of the decline, it is still nothing compared to the real major crises in history. If you experienced the financial crisis of 2008, you wouldn’t feel any anxiety right now. It’s like a new soldier just entering the battlefield; they are very anxious at first, but if you have gone through the cycles and are a ten-year veteran, why would you feel anxious?

Part****03 Who will be bought, who will be abandoned?

“Undercurrent”: Recently you** have conducted**** a lot of company**** research,**** what are the results?**** In the face of this macro turbulence, which companies will be the first to be sold off by fund managers?**

Rob: The negative impacts are the first to be affected, and I categorize them into two types:

The first category is directly affected by tariffs, such as clothing, shoes, bags, and toys related to daily household items, which are mostly produced in Asia. The companies of these consumer brands are the most impacted. Of course, if tariff policies reverse in the future, they will rebound strongly.

The second category that is indirectly affected is travel-related, such as hotels, theme parks, airlines, etc., because the demand side will decline very quickly. Since Trump started a month of tariff conflict, the number of people coming to the U.S. for tourism has already dropped by 50%. Although Americans themselves have not yet shown an impact when traveling or within the U.S., if the trade war continues for another year, it is clear that the U.S. economy will be affected. In the future, all industries that are highly sensitive to economic fluctuations, such as real estate, discretionary consumption, tourism, cinemas, theme parks, casinos, etc., will be impacted.

“Under Currents”****: Google’s recent sharp decline seems to have been somewhat collateral damage. This is because the market is beginning to worry that if the EU retaliates against the US, it is not accounting for these service-related revenues or the income generated by the virtual economy in Trump’s rough tariff calculation formula. However, the EU spends a lot of money on this every year, so it is very likely that the EU will take action against these tech companies.

Rob: Yes, this side impact on technology companies has two aspects. On one hand, if the EU decides to retaliate, it can target not only Google but also Meta, Amazon, Microsoft, and so on. The EU can strike at these companies at any time; this is a significant weapon for the EU. On the other hand, it relates to the businesses of Google and Meta themselves, where the majority of their revenue comes from advertising. As we know, advertising revenue is highly sensitive during an economic downturn in a country.

Recently, the global second-largest advertising agency group Omnicom has just stated in its earnings call that, although they have not yet seen advertisers cutting spending, they believe that if Trump continues to operate this way, clients will inevitably reduce their expenditures. Therefore, they have lowered their performance guidance for the next quarter, which has also led to declines in Google and Meta.

“Undercurrent”****: We’ve talked a lot about companies negatively affected by tariff issues, but are there any companies or industries that benefit from this instead?

Rob: The core of the benefiting companies is that the tariff conflict led to price increases, but the companies can pass the costs downstream.

For example, we have been holding a company called AutoZone for a long time. This company is one of the two giants in the United States selling automotive aftermarket parts, and it is continuously consolidating the American market. Why is it said that the tariff conflict is beneficial for it? It’s because the tariff conflict has raised the price of cars. Previously, you needed $30,000 to buy a car, but now the tariffs may have added $10,000. Many consumers simply choose not to buy for now, waiting until the tariff conflict ends and the price returns to $30,000 before making a purchase.

But if consumers do not buy new cars now, they can only drive old cars. The longer an old car is driven, the more maintenance issues arise. For a company that specializes in selling automotive aftermarket parts, this becomes a favorable situation, as more engines, spark plugs, brake pads, engine oil, etc., are needed.

“Undercurrents”: What about the funding side? Are some funds choosing to leave the United States and move more towards other regions?

Rob: Yes, take Europe for example, over the past decade, there has been basically no allocation, with more allocation to China and Japan than to Europe. But recently, many European stocks have shown independent market movements—such as European defense stocks, which have already seen a significant rise this year.

Some high-quality enterprises in Europe have been “mis-killed” during this round of tariff conflicts. For example, in the automotive semiconductor field, there is a company in Germany called Infineon, which is deeply involved in the Chinese new energy vehicle supply chain, and is the exclusive supplier for Xiaomi, as well as an important supplier for BYD.

The company’s production capacity is distributed globally, with 15% of its domestic capacity in the United States, while sales in the U.S. account for only 12%. Therefore, its domestic capacity in the U.S. can fully cover its sales there, resulting in relatively small tariff impacts. Supplying locally is sufficient, and such companies are also quite good.

For example, another company we hold, Mercado Libre, is the largest e-commerce company in Latin America. It is a purely local business and has no direct relationship with the U.S. market or the trade war, so it actually rose in April when the U.S. market fell sharply.

Part04 This is not a financial crisis, this is a man-made crisis

“Undercurrents”****: Now the tariffs from both China and the United States have reached 125%. If the additional 20% for fentanyl is added by the U.S., it will be 145%. Such tariffs have lost their meaning. According to the entrepreneurs you have interviewed, what do they think about this?

Rob**: **It is now generally believed that these tariff numbers are essentially equivalent to a trade embargo. I’ve been traveling around recently just to figure out what entrepreneurs think.

For example, I recently conducted intensive research on the upstream of a group of companies in the footwear and apparel sector (such as Nike, Adidas, and Lululemon’s supply chains). For a pair of shoes, assuming the tariff has only increased by 10-15%, and with a selling price of 140 dollars and a cost of 35-40 dollars, this means an increase of 3-5 dollars in total costs for the company. In this case, the burden would be shared with the manufacturer absorbing 1/4, the brand owner absorbing 1/4, and the remaining portion absorbed by the distribution channel, which would be passed on to the consumer. Therefore, when the final consumer buys this pair of shoes, the cost increase is less than two dollars. Although this will ultimately affect the gross margin of the brand and the supply chain, the absolute gross profit amount they can earn on each pair of shoes can fully absorb the impact.

But now that a 125% tariff has been added, the cost will become 70-90 yuan. At this point, companies will no longer consider who will absorb the cost issue—because these shoes will no longer be sold. If this cost is passed on to consumers, sales will directly drop by more than 50%.

Many entrepreneurs in Southeast Asia are taking a wait-and-see approach during this 90-day tariff suspension, moving step by step. A common** prediction**** is**** that after 90 days, apart from China, other countries might see a new increase of 10%-20%. Although profit margins will definitely be affected, everyone can continue to get by.**

“Hidden Currents”: Here is another key question:** International**** trade has long realized that “intermediate goods”**** dominate (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 in this. For example, in the semiconductor field, the U.S. says it wants to define that the American content must be greater than 20% to be exempt from tariffs, but how do you define this so-called American content? The Trump administration has not provided a clear judgment on this, and U.S. customs also does not know how to implement it. These are all important negotiation points for the future.

For example, in the footwear and apparel sector, there is now a method where previously it might have been purely re-export trade. Shoes are produced in China, then shipped to Vietnam, where they simply change the label to “made in Vietnam” and send them to the United States. This straightforward path is no longer viable, but you can still carry out some complex procedures in China, take the remaining simpler tasks to Vietnam, and then label them as “made in Vietnam” to send to the United States.

If Trump wants to close this loophole, he can indeed do so, but it would require a very high execution cost, as you need to formulate very detailed rules, and regulation will also be hard to monitor. If we are optimistic, the next step is to see how all parties negotiate.

“Undercurrent”: Tariffs will also have a negative impact on American consumption. There is a pessimistic view that tariffs will gradually lead the United States into a structural bear market from an event-driven shock.** Especially since we are about to enter the first quarter earnings season, companies need to provide guidance for the second quarter. If the guidance is poor, it could lead to a new round of significant declines. What do you think?**

Rob: I think the key is whether the tariff policy will come back. If Trump continues to be obstinate like he has been recently, it will inevitably be a major blow to the U.S. economy.

Many institutions have also conducted calculations, estimating that a 1% increase in the actual tariff rate in the United States would lead to a 0.1% rise in inflation, causing a negative impact on the U.S. economy of 0.05% to 0.1%. The current average tariff actually imposed in the U.S. is approximately less than 3%, so assuming the average tariff increases to 10% in the future, an additional 7% would need to be added. The impact of 7% on inflation would be 0.7%, and the impact on GDP would be approximately negative 0.35% to 0.7%.

But if Trump insists on going his own way and imposes a 25% tariff on the whole world, the negative impact on GDP would be around 1%-1.5%, and it could have a nearly 2% effect on inflation, which is quite significant. The U.S. economy would be at risk of collapse, and the stock market would naturally not perform well.

“Underflow”****: How does this compare to past financial crises?

Rob: The current so-called recession risk 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’s U.S. economy, from the perspective of economic structure, there is no big problem, everyone says that the United States is very indebted and the government owes a lot of money, but in fact, there are many countries that owe more money than the U.S. government, for example, the Japanese government has a lot more debt than the United States, and the vast majority of European countries are also higher than the United States. But now many people are looking at Japan as a safe-haven option.

Part05 How to Find a Certain Way of Life in Uncertain Times?

“Dark Tides”: Howard Marks of Oak Tree Capital recently published an investment memo stating that the market has entered a realm of “unknowns” where no one can predict the future. If we are to learn from history, what experiences can we draw from?

Rob: I think the most important thing is to be wary of the risks of leverage. As Buffett once said, in every decade, countless people’s returns exceed his, but looking back after sixty or seventy years, those who did better than him in each decade have disappeared. Why? Because Buffett doesn’t use leverage, so there is never the risk of liquidation, no matter what black swan events happen (financial crisis, economic recession, pandemic, trade war, war, currency depreciation, etc. ).

Many funds that generate high returns through leverage can perform well for 3-5 years, or even ten years, but once a major fluctuation occurs—an event that often cannot be predicted in advance—everyone using leverage will collapse.

For example, the earlier LTCM (Long-Term Capital Management), several of its founders were Nobel Prize winners, achieving an annualized return of over 40% for 4-5 years, which was very impressive. However, it ultimately collapsed during the 1998 Russian financial crisis, also due to high leverage. The situation in Russia was not only unforeseen by LTCM, but also by Soros, and the entire world did not anticipate it.

For example, Bill Huang, who went bankrupt in 2021, founded Archegos Capital Management after leaving Tiger Global Management. At one point, he grew his Family Office from 200 million USD to 35 billion USD, which is several hundred times. This is undoubtedly impressive, but you could also go from 35 billion to 0 overnight because he used very high leverage. During those years, Buffett basically just followed the index.

But in the end, Buffett survived, while Bill Hwang went bankrupt.

“Undercurrent”****: Therefore, stability is always the only way in the financial industry.

Rob: If you want to sleep well, don’t pursue unsustainable high returns through high leverage, as it carries high risks. Instead, seek a steady flow with no risk of liquidation.

“Undercurrent”: The tariff game is escalating, there is a 12-hour time difference between Beijing and New York, can the people on Wall Street sleep well?

Rob: If we’re talking about market turbulence, it actually doesn’t compare to the 2008 financial crisis, nor does it compare to the global capital market turmoil caused by the depreciation of the RMB in 2015, and it doesn’t even compare to the four circuit breakers during the pandemic. If you have experienced these three turmoils, you would be very calm now.

Take 2008 as an example, the panic back then was much greater than now. In the spring of 2008, when Bear Stearns collapsed and was later bought by JPMorgan Chase, the market had already begun to fluctuate significantly, and it continued to decline for an entire year. At that time, everyone really thought the global economy was going to fail. Moreover, Morgan Stanley and Goldman Sachs were very close to collapsing; that was the true panic, while we are still far from reaching that level now.

Today, everyone feels that it has only been less than two months, yet so many things have already happened, which is a very intense psychological experience.

“Undercurrent”: Yes, now if you calculate the S&P, it has actually only fallen by 15% from its peak, and this drop may not yet reflect some long-term risks?

Rob: If the United States really enters a recession, the decline will be much more significant. Moreover, this is starting from a relatively high valuation, and the market has not priced in the risk of an economic recession in the U.S. this year. If it does happen, then it is far from having hit the bottom now.