This episode dissects the market turmoil following Trump's unexpected tariff strategy, revealing how geopolitical maneuvering and forced liquidations are reshaping investment landscapes for both traditional assets and crypto.
Market Reaction to Tariff Announcements
- The discussion kicks off by analyzing the intense market volatility triggered by the Trump administration's tariff announcements, referred to by the speakers as "Liberation Day." Felix Jauvin recounts his initial reaction, attempting to trade the news based on early Wall Street Journal reports suggesting lower-than-expected tariffs, only to be caught off guard by the subsequent sharp market downturn.
- Felix notes the lag effect, suggesting the initial drop was followed by broader market participants like "pod monkeys" (likely referring to portfolio managers at large multi-strategy hedge funds or 'pod shops'), multistrats, and CTAs (Commodity Trading Advisors, systematic trend-following funds) unwinding positions over subsequent days, culminating in significant degrossing, where even safe-haven assets like gold sold off.
Analyzing Trump's Tariff Strategy and Market Implications
- Avi expresses surprise at the administration's method for calculating tariff rates (imports vs. exports), arguing this removes logical negotiation pathways. He contrasts the current situation with a scenario where tariffs are purely a tactic to reduce foreign tariffs, highlighting the difficulty in resolving vague accusations like currency manipulation.
- Avi suggests the market's severe reaction stems from a shift in perception: "prior to liberation day i think even you know even like the top 25% of bears were probably thinking this is a negotiation tactic and i think that that has shifted a ton now to hey maybe maybe these things are sticking around for a while." This uncertainty makes the situation more dangerous for investors.
Navigating the Sell-Off: Forced Liquidations and Trading Psychology
- Jonah candidly admits he was bullish heading into the event and emphasizes the importance of managing psychology when wrong, especially as an independent trader without external risk managers. He shares insights from his network indicating significant stress and potential blow-ups within pod shops over the past month, particularly the last few days.
- The speakers identify the sell-off in gold alongside equities as a key indicator of forced liquidations, where funds are compelled to sell assets regardless of fundamentals to meet margin calls or due to risk limits being breached. Felix notes seeing record trading volumes on US exchanges, suggesting a capitulatory phase where forced sellers dominate.
Strategies for Buying the Dip
- Felix discusses the rationale for starting to buy aggressively during the peak selling on Friday and Monday, viewing the indiscriminate selling as an opportunity. He references veteran traders discussing the need to "eat a few [ __ ] sandwiches" – enduring some initial losses – when trying to catch a falling knife during periods of forced deleveraging.
- Avi shares his more cautious, scaled approach, identifying an extreme downside level (e.g., SPY 460) as his "100% long" point and incrementally buying as the market approaches it, aiming to deploy most capital before that absolute low. He attributes this caution partly to "PTSD" from the March 2020 crash.
- Jonah, referencing a tweet from Yanowitz, notes how experience in volatile crypto markets can desensitize traders to equity sell-offs. He prefers to wait for signs of stabilization ("buy a green shoot style rally") rather than catching the exact bottom, acknowledging he might miss a sharp V-shaped recovery but aims to capture a U-shaped one.
The Nature of the Crisis: Man-Made vs. Exogenous Shocks
- Jonah raises a critical point: this crisis feels different because it's "man-made," directly resulting from a policy decision rather than an external shock like a pandemic or financial crisis. He questions whether this makes it an easier buy (as it could be reversed quickly) or harder (due to the perceived unpredictability of the decision-maker).
Economic Context: Pre-Existing Fragility and Scarring Effects
- Felix pushes back slightly on the idea that the economy was "fine and dandy" beforehand, noting he saw signs of a growth slowdown and labor market cooling emerging even before the tariffs. He argues this pre-existing fragility created a "nasty recipe" when combined with high equity valuations and crowded institutional positioning in US assets.
- He emphasizes that even if tariffs are reversed, economic scarring (delayed hiring, canceled capex) is likely already occurring. The sheer scale of the import shock is compared by economist Brad Setzer to a sudden $70/barrel rise in oil prices overnight, indicating significant, unavoidable negative growth impacts.
Potential Market Catalysts and Tariff Stickiness
- Avi draws an analogy to a fake Bitcoin ETF headline, suggesting the sharp (though temporary) positive market reaction to a potentially erroneous report about tariff negotiations could indicate significant upside potential if real positive news emerges. He anticipates a potential "bear market rally" driven by such news.
- However, Avi remains concerned about the long-term "stickiness" of the tariffs, particularly those on China, believing Trump is genuinely committed to boosting US manufacturing, which requires sustained protectionism. He sees potential for near-term relief for the rest of the world but lasting pressure on China.
Geopolitical Endgame: Isolating China and Burden Sharing
- Felix introduces analysis suggesting the broader strategy might be to align Western allies against China. He references insights from Danny Dean and points made by CEA Chair Steven Moore ("Steven Moran" in transcript) about improved "burden sharing" for US geopolitical and financial security guarantees.
- Moore's outlined options for burden sharing include accepting tariffs, opening markets, boosting defense spending, investing in US factories, or even direct payments ("write checks to Treasury"). This frames the tariffs as a tool within a larger geopolitical realignment aimed at consolidating Western power and isolating China.
- Jonah outlines a potential "blue sky scenario" where the US forms new free-trade agreements with allies (EU, Japan, LatAm, Canada), effectively creating a new trade bloc excluding China, which could face escalating tariffs. He notes the disconnect between financial market consensus (viewing tariffs negatively) and potential Main Street perspectives.
- Avi connects this back to capital flows, suggesting that forcing allies to absorb US debt (potentially through mechanisms like buying century bonds) could be a way to counteract China potentially selling its Treasury holdings as geopolitical tensions rise – a form of "controlled demolition" to manage US debt financing.
Capital Flows and Treasury Market Dynamics
- The speakers discuss the recent sell-off in Treasury bonds, acknowledging speculation about China selling but leaning towards market dynamics like profit-taking and rebalancing after a panic flight to safety. However, they agree that China weaponizing its Treasury holdings remains a significant tail risk in a deepening capital war scenario.
Market Limits and Political Constraints
- Jonah reflects on underestimating Trump's willingness to implement his long-stated tariff goals. However, he believes there's a limit to how much market pain Trump can inflict before facing political consequences, such as losing ground in midterms or facing congressional overrides, suggesting a U-turn or moderation is likely if markets fall significantly further. He views a >30% drop as politically untenable.
Bitcoin's Resilience and Short-Term Bull Case
- Avi pivots the conversation, arguing the current environment is "pretty damn good for crypto," potentially even in the short term. His core framework rests on value and momentum. While price drops can create value, he sees the current geopolitical situation as providing a fundamental positive catalyst.
- He argues that as traditional global commerce pathways are disrupted by rising nationalism and tariffs ("delocalization"), the demand for globally interconnected, censorship-resistant assets like Bitcoin increases. Crypto can fill the void as a cross-border asset and value transfer mechanism. Jonah adds that Bitcoin, like commodities, becomes valuable in a multipolar world as an intermediary asset between conflicting blocs (using India trading with both Russia and the US as an analogy).
- Felix reinforces this with his global liquidity thesis: Bitcoin often reflects global liquidity trends (potentially lagging M1 money supply). With many countries outside the US now likely to stimulate fiscally to offset tariff impacts (e.g., China frontloading stimulus), this creates a positive backdrop for Bitcoin, even if US liquidity remains tighter. His earlier "short QQQ / long BTC" trade thesis played on this divergence.
- Avi also points to favorable market structure and flows, noting heavily stacked bids below the current price and suggesting that momentum traders who might typically short Bitcoin during risk-off moves were preoccupied with shorting equities instead. He interprets the weekend Bitcoin sell-off as traders positioning for lower equity opens (using Bitcoin as a "weekend spoo" or proxy for S&P 500 futures).
Interpreting Negotiation Signals (Bessant vs. Lutnik)
- Felix highlights the news that Scott Bessent (perceived as more measured) is leading Japan negotiations instead of Robert Lighthizer ("Lutnik" in transcript, known for a harder line) as a potentially significant positive signal. Whether it represents a strategic shift (good cop/bad cop) or a reaction to market turmoil, it suggests a move towards de-escalation on the margin.
Crypto vs. Equities: Relative Performance
- Jonah notes the resilience of the BTC/S&P ratio during the downturn as a positive sign for crypto potentially outperforming equities going forward. Felix agrees, seeing potential for Bitcoin to reach new highs on global liquidity alone, but requiring US participation (Fed easing) for a broader altcoin rally.
Trading Execution: Equities vs. Bitcoin
- Felix shares that on Friday, he focused more on buying equities than Bitcoin, concerned about a potential breakdown in Bitcoin's recent decoupling. However, with Bitcoin recovering strongly, he's now more constructive on crypto. Avi notes he bought some Bitcoin on Friday but waited for Monday's dip-buying confirmation.
Altcoin Market Dynamics and Trading Opportunities
- Avi discusses actively trading altcoins during the sell-off, specifically buying oversold alts against shorts in ETH and BTC on Friday. He posits that altcoins, being higher beta and often the first to be sold, can sometimes bottom before Bitcoin in sharp downturns.
- He views buying deeply sold-off alts near a perceived market bottom (while shorting BTC/ETH as a hedge) as a historically strong trade due to their potential for sharper bounces. The strong performance of assets like "Fartcoin" (likely a specific meme coin) is seen by Jonah and Avi as a potential indicator of retail sentiment bottoming and risk appetite returning, even if institutional players avoid such assets.
Macro Outlook: Fed Policy, Liquidity, and Inflation
- Felix argues that the equity market sell-off might be the "last shoe to drop" for inflation to return to target, especially combined with falling oil prices. He believes the Fed (specifically Powell) might be welcoming the market correction to curb inflation driven by asset wealth effects (the "K-shaped" recovery benefiting top asset owners).
- He interprets Powell's recent reluctance to signal imminent cuts as "Fed theater" – maintaining a hawkish stance publicly to ensure inflation is truly defeated before potentially pivoting towards easing later (perhaps around the May meeting), especially if hard data confirms disinflation or markets deteriorate further. The bond market is already pricing in several cuts, fading Powell's rhetoric.
Oil Market and Inflationary Pressures
- Jonah provides an oil market update, seeing downside risk ($10-20 lower) unless a major geopolitical flare-up occurs (e.g., conflict in the Persian Gulf). He notes the peculiarity of oil selling off while remaining in backwardation (front-month price higher than deferred months), suggesting OPEC+ is actively trying to support prices but may eventually fail, leading to a sharper drop if supply discipline breaks. This reinforces the view that broad-based inflation is unlikely without a war scenario.
Market Volatility and Final Trading Thoughts
- The speakers agree that volatility is likely to remain high. Jonah emphasizes that cash is more valuable now, allowing traders to capitalize on swings. Felix reiterates that extreme readings like VIX near 50 and a 20% equity drop are historically signals to start buying, albeit cautiously.
- Avi stresses the TINA ("There Is No Alternative") argument – capital eventually needs to be deployed somewhere. He also warns against getting "bearholdled" – becoming permanently bearish and missing the eventual recovery, emphasizing the goal is to navigate the current volatility, not bet on total collapse.
This volatile period, driven by geopolitical shifts and potential policy errors, underscores Bitcoin's growing role amidst global uncertainty and shifting liquidity. Investors should monitor geopolitical negotiations and Fed signals for tactical entries and strategic positioning in a potentially delocalizing world.
