The Biggest Market Crash Since 2020, What Next? | Felix Jauvin & Quinn Thompson

Okay, here are the detailed, narrative-driven show notes tailored for Crypto AI investors and researchers, based on the provided transcript and adhering strictly to the enhanced guidelines.

Show Notes: Navigating Crypto in a Shifting Macro Landscape

Episode: The Biggest Market Crash Since 2020, What Next? | Felix Jauvin & Quinn Thompson (Empire Podcast)
Guests: Quinn Thompson & Felix Jauvin (Forward Guidance Podcast)

1️⃣ Episode Introduction

This episode dissects the surprising market downturn challenging early-year bullishness, revealing how unexpected policy shifts, fragile economic underpinnings, and shifting market liquidity are forcing crypto investors to reassess strategies amidst heightened volatility.

2️⃣ Structured Narrative & Insights

Revisiting Early-Year Bearishness

• The conversation kicks off by revisiting the beginning of the year when market sentiment, including Jason's, was overwhelmingly bullish ("2025 is the year"). Quinn Thompson explains why he turned bearish despite record-high asset prices and the Trump election, which many compared to the low-volatility, high-return period of 2016-2017.
• Quinn points out that aggressive Fed rate cuts in late 2023 (100 basis points) fueled liquidity and asset prices, but the starting point for valuations was already extremely elevated, similar to 2021 highs. He notes, "a lot of this was being driven by unsustainable government spending [and] liquidity facilities that the Fed was basically winding down."
• Key factors underpinning Quinn's caution included the unsustainability of government spending, the winding down of Fed liquidity facilities, and a misunderstanding of the cadencing of Trump's policy initiatives. Growth-negative actions (deficit cuts, trade policy shifts, immigration changes) were prioritized early, pushing pro-growth measures later.

Felix's Complementary Growth Concerns

• Felix Jauvin arrived at a similar cautious conclusion via different factors. He observed a growth slowdown emerging mid-December, coinciding with a newly hawkish Fed shifting from proactive easing to intentional complacency ("slow to react").
• Felix highlights the impending fiscal cliff around January 2025, as state and local government coffers, filled during the COVID era, were running dry. This spending had significantly driven government hiring and masked underlying economic deceleration.
• He notes the tension between a slowing economy and a Fed unwilling to ease policy created vulnerability. Furthermore, market expectations, particularly in crypto ("pricing in like an all-out strategic Bitcoin reserve"), were euphoric and disconnected from these underlying economic realities.

Market Pricing and Reversion to the Mean

• Both guests emphasize the importance of understanding what's already priced into the market, referencing Howard Marks. Quinn notes that after several years of strong returns, a "reversion of the mean" is statistically common.
• Quinn states, "it's when things are priced to perfection, it doesn't take much to derail markets." The combination of high valuations and high earnings expectations left little room for error.
• Strategic Implication: Investors must constantly assess whether market expectations align with underlying economic and policy realities, as highly elevated valuations increase vulnerability to negative surprises.

Portfolio Management and Time Horizon

• The discussion shifts to how managers adapt. Quinn mentions that market tops form slowly, necessitating patience. His fund took small, high-reward shots (e.g., gold, short ETH/long BTC pairs) rather than making large directional bets early in the year.
• Felix stresses the critical importance of defining one's investment time horizon before major events occur. He asks, "are you allocating for a one-day flip, a two-week hold, a multi-month swing, or are you just completely tuning it out?" This determines how one reacts to sudden volatility like "Liberation Day."
• Actionable Insight: Crypto AI investors must clearly define if they are trading short-term volatility or investing for long-term technological shifts. This dictates risk management and reaction functions during market turmoil.

Analyzing the Tariff Shockwave ("Liberation Day")

• Felix recounts the market reaction to the tariff announcements. Initial optimism (pricing in a 10% flat tariff) quickly reversed as the details revealed a much higher effective rate (around 30%).
• This triggered rapid deleveraging. Felix notes the advantage of smaller, nimble funds: "you can get out in 2 minutes versus some of these big... multistrat pod shops... it takes a few days for them."
• Cross-asset correlations shifted dramatically. Initially (pre-Thursday), bonds rallied while equities fell (classic flight to safety). Post-announcement (Friday/Monday), the US dollar rallied strongly as all asset classes sold off (including gold and non-US equities), indicating forced selling and margin calls ("pod shop capitulation").
• Recently, a reversal occurred with capital seemingly leaving the US – evidenced by a bond market sell-off alongside a falling US Dollar Index (DXY or "Dixie").
• Dixie (DXY): The US Dollar Index, measuring the value of the US dollar against a basket of foreign currencies.

Policy Context: Bessant, Deficits, and China

• Quinn emphasizes that the administration's direction, particularly regarding trade and deficits, wasn't a complete surprise if one listened closely to advisors like Scott Bessant. He argues many ignored the signals, focusing only on headlines.
• The administration's goal isn't to crash markets but a willingness to endure short-term pain ("pain before pleasure") to achieve long-term goals: balancing the budget (growth-negative initially), reshoring critical supply chains, and confronting the potential China/Taiwan threat.
• Quinn states the administration believes achieving these requires bold moves: "you kind of have to swing pretty big and and ruffle some feathers."

Scenario Planning: Bull, Bear, and Base Cases

• Bull Case (Quinn): A gradual, "lockstep stairstep approach" to deficit reduction and deregulation (especially energy), balanced with extending pro-growth tax cuts. This calms the bond market and anchors inflation, leading to a choppy but range-bound market.
• Bear Case (Quinn): Feeling pressured (e.g., by 2026 midterms), the administration rips the band-aid off quickly with deep cuts now, backloading pro-growth measures. This risks tipping the economy too far negative, hurting receipts and the labor market, potentially requiring larger stimulus later (worsening inflation). Quinn calls the desired path a "controlled burn" with the risk of it becoming uncontrolled.
• Geopolitical Risk: The China/Taiwan issue looms large. Felix notes the tariff strategy aims to align Western allies against China, potentially creating an "off-ramp" if a deal is reached, but risks losing faith in the US bond market during the process. Taiwan's dominance in semiconductor manufacturing (60% overall, 90%+ advanced chips) makes conflict a potentially catastrophic "extreme tail scenario."

Bond Market Dynamics and Fed Watch

• Felix dives into the recent bond market volatility, attributing ~70% to leverage unwinds (like the basis trade) rather than solely foreign selling (which he discounts).
• Basis Trade: A strategy involving buying Treasury bonds and shorting corresponding futures contracts to capture the price difference (spread), often using significant leverage. Akin to delta-neutral strategies in crypto.
• He draws parallels to the UK's Liz Truss situation, where fiscal concerns caused the bond market to "go on strike," forcing Bank of England intervention (temporary QE). The key risk is losing the US bond market, counter to Bessant's goal of lowering long-term yields (the 10-year Treasury).
• Fed Intervention Triggers: Felix clarifies the Fed cares less about equity levels and more about market plumbing. Key indicators to watch:
• SOFR/IORB Spread: The difference between the Secured Overnight Financing Rate and Interest on Reserve Balances. SOFR rising above IORB outside quarter-ends signals funding stress. Felix notes this happened recently.
• Treasury Market Liquidity: Specifically, the market for off-the-run bonds (older, less liquid issues). A freeze here, like in March 2020, forces Fed action. Treasury buybacks aim to mitigate this.
• High Yield Credit Spreads: Rapid widening indicates stress in corporate credit markets.
• Actionable Insight: Crypto AI researchers should monitor these specific plumbing indicators (SOFR/IORB, off-the-run liquidity, credit spreads) for signs of stress that could precipitate Fed intervention, potentially boosting risk assets like crypto.

Influential Voices and Tariff Objectives

• Beyond Bessant and Hasset (Trump team), the discussion mentions listening to experts on Twitter (Andy Constan, Joseph Wang, Warren Pies) and established figures like Jamie Dimon (though often "talking his book.") Contrarian signals might come from figures like Chamath Palihapitiya.
• The core objective of the tariffs is debated. Quinn argues it's primarily strategic realignment against China (the latter point Felix agrees with), not primarily to lower bond yields. Lowering yields is linked more to deficit reduction (Doge policy proposals) and deregulation. Tariffs might even be inflationary near-term, hindering the yield-lowering goal.
• Doge (in context): Likely refers to deficit reduction proposals associated with the Trump administration (e.g., related to the Debt Ceiling and Oversight Group Enhancement Act), not the cryptocurrency.
• Felix adds deregulation (especially banking) and potential revenue generation (funding tax cuts) as other tariff-related goals. Both agree the idea that tariffs caused yields to fall initially was a "convenient coincidence."

Crypto Outlook Amidst Macro Uncertainty

• Quinn expects an elevated volatility regime (VIX in high teens/20s) for the rest of the year. He sees a potential for Bitcoin decoupling from equities, driven partly by gold's strength and Bitcoin acting as a "50/50 NASDAQ goldish combo."
• He's become more bullish on Bitcoin since the start of the year, seeing a strong case for authorities needing to intervene ("fix something"), which often benefits Bitcoin. However, he cautions against blindly buying alts. "I continue to believe Bitcoin dominance just goes up and up and up." He suggests levering Bitcoin might offer better risk-reward than chasing many alts.
• Felix sees near-term crypto upside mainly as a mean reversion trade. Significant upside past all-time highs for Bitcoin, in his view, is effectively a bet on the failure of Trump's policies (e.g., deficits increasing, Fed forced into QE, loss of faith in the dollar/bond market).
• However, Felix is bullish on the technological innovation side of crypto (stablecoins, specific applications) regardless of the macro outcome, seeing deregulation under Trump as a tailwind. This creates a distinction: Bitcoin as a macro hedge vs. crypto tech as an innovation play.

Expressing Views and Portfolio Allocation

• The conversation touches on new ways to express crypto views (ETFs, public stocks like COIN, HOOD) potentially reducing the scarcity premium previously enjoyed by stocks like MicroStrategy or Coinbase.
• Santi (host Jason) frames his approach: hedge macro uncertainty (cash, mindful of mean reversion) while staying long transformative tech (AI, crypto, biotech) over 5-10 years.
• Quinn emphasizes cash is king in downturns but notes the recent dollar weakness ("Dixie just went from 107 to... 100.") He favors rotating into mission-critical industries, resources (energy, commodities), or potentially high-dividend/lower-volatility equities over sovereign bonds. He expects a range-bound market, suggesting active management (raising cash on rips, deploying on dips).
• Felix provides a sample allocation: 30% Gold, 20% SPX (equity beta), 20% Bitcoin, 30% "High Beta Technological Optimist" trade (representing AI/Crypto innovation). The Gold/Bitcoin split reflects volatility (beta) sizing.
• Strategic Consideration: Crypto AI investors need to decide how much to allocate to Bitcoin as a potential macro hedge versus specific AI/crypto projects based on technological merit and long-term innovation potential, adjusting sizing based on volatility and conviction.

Coinbase vs. Robin Hood Analysis

• Quinn reveals he's been more on the short side of Coinbase (COIN) recently. He argues increased regulatory clarity and TradFi entry (Robin Hood, prime brokers like StoneX, big banks) erode Coinbase's moat built on regulatory capture and high fees (e.g., staking, retail trading).
• While acknowledging deposit stickiness, Quinn sees fee compression as inevitable. He prefers Robin Hood (HOOD) due to its more diversified business.
• Felix echoes the bearish sentiment on exchange "branding" premiums, especially as institutional adoption grows and focuses purely on execution/settlement. He sees Robin Hood as a better play, having bought it recently.
• A potential saving grace for Coinbase could be acquiring Deribit, gaining a moat in the complex crypto options market. However, even then, competing with TradFi options venues (like IBKR) on spreads will be challenging.
• Actionable Insight: Carefully evaluate exchange tokens/stocks like COIN. Competitive pressures and fee compression are significant headwinds. Consider diversification and the sustainability of current business models versus TradFi encroachment.

3️⃣ Reflective and Strategic Conclusion

This discussion highlights heightened macro risks and policy uncertainty impacting crypto markets. Investors and researchers must actively monitor trade developments, Fed liquidity signals, and differentiate between Bitcoin's potential macro-hedging role and the distinct, technology-driven growth narrative within the broader crypto and AI space for effective strategic allocation.