Wall Street in Troubled Times

Author: Liu Yiming

Editor: Liu Jing

Last night, the "three kills" of US stocks, bonds and foreign exchanges were staged again.

The last time was half a month ago, the fuse began with the rise of Trump's global tariff war, and the entire Wall Street collectively misjudged Trump.
At that time, Becent, a former Wall Street trader and now the U.S. Treasury Secretary, found an opportunity to try to persuade Trump: he discussed with Trump the idea of ​​suspending tariffs while flying to the White House in Marine Corps One.

Besent needs to take responsibility for the bridge between Wall Street and Washington, trying to reconcile between Trump's changing and capricious government orders and old Wall Street friends who advocate debt/tax/deregulation. This is undoubtedly a difficult task. Behind the game in the capital market is the game of great powers. To some extent, Wall Street's influence has surpassed capital itself. In the past, the combination of Wall Street and Washington formed the "Washington-Wall Street Complex" and has always been the dominant force in the political and economic aspects of the United States.

But today, cracks appear. A year ago, Bescent, who was regarded as "their own" by Wall Street, told clients: "The gun for tariffs will always be loaded and will be placed on the table, but it will rarely fire." But now many people on Wall Street feel that they have been cheated by him. Trump fired everywhere, almost without being restricted by these previous relationships.

There is a tendency for cracks to tear further. Trump is also threatening to fire Fed Chairman Powell, which has shaken the century-old foundation of the Fed's independence. In addition, Trump also confronts the Ivy League universities in the United States, and the U.S. university endowment funds hold a total of about $500 billion in private equity assets. If they sell it, it will be enough to cause storms in the market.

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

Rob Li, who worked for Morgan Stanley Private Equity Fund, is now a managing partner at Amont Partners, a global equity investment management company based in New York. Their investment strategy holds a longer period of time. Compared with hedge funds whose general holdings are only around three-month cycles, their core portfolio holds a period of more than two or three years.

Rob also often travels business around the world. He adopts a global asset allocation strategy, focusing mainly on the three sectors of technology, consumption and industry. Currently, the allocation accounts for about 40% in the United States, 10% in Asia, and the remaining allocations are in Europe and South America.

"There are no ones who do not stand against Trump now." According to Rob's observation, he believes that the mainstream understanding of Wall Street was misled. At first, people thought that Trump 2.0 would still be like the 1.0 era, "there is always a way to prevent things from being too outrageous." But now, the script has been completely changed.
Just as Peter Drucker wrote in "Management of Turbulent Ages" - the greatest danger of turbulent Ages is not turbulence itself, but acts in the logic of the past.

Now, with Bridgewater Fund founder Dalio, Pershing Plaza Capital founder Bill Ackman, JPMorgan Chase CEO Jamie Dimon, BlackRock Chairman Larry Fink, Oak Capital Chairman Howard Max and other core Wall Street figures have changed their attitudes and stood up to oppose Trump's radical tariff policies. Investors form an important counter-force—although their primary purpose remains interest.

Part 01 Wall Street Elites also misjudged Trump 's script

" Under surge" : From what moment on, Wall Street began to realize that the entire financial market was about to change?

Rob : An important moment is April 2. That afternoon, Trump first said that he would increase 10% tariffs on all countries, and the market would rise by two points. Because many people think this is 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 collapsed immediately, and everyone found out that Trump was actually coming.

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

" Undercover" : But why do those smart minds on Wall Street have no predictions about "that huge Trump table"? I remember when Trump just won the election, the word "Trump trade" was very popular, but it became "Trump put" in just 2 months .

Rob : The mainstream idea on Wall Street—including myself, I had never expected the "level" of the reciprocal tariffs before. The mainstream idea is that Trump's second time to take office will continue his first term with "thunder and raindrops".

Everyone should remember that when Trump defeated Clinton in 2016, Wall Street was very panicked because Trump said 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 were not realized, but instead, in those four years, they formed a very friendly environment for the business community.

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

Rob : At least until he took out the giant table on April 2, the script of "thunder and raindrops are still going on.

In February, Trump also scared the market once, saying he wanted to impose taxes on Canada and Mexico, and US stocks also began to plummet. But just one day later, Trump posted another article saying that he was on the phone with Canada and would not mess with them anymore. A few hours later, he said again that he had also spoken with Mexico and would not mess with Mexico anymore. Everyone thinks that Trump 2.0 is just the same.

But later he took out the huge table and the market began to collapse. Everyone found that the script had changed, completely exceeding expectations.

Pa rt 02 Winners and losers in the shock

" Undersurge" : Later, when the S&P 500 index was at its peak, it fell 25%, and the Nasdaq index fell 21%. What are the operations that Wall Street hedge funds do? Who made money?

Rob : Although everyone is called hedge funds, what they do may be completely different. Wall Street has macro hedge funds, such as specializing in trading various currencies. There are hedge funds that specialize in stocks, such as us. There are also hedge funds that do not invest in stocks but specialize in bonds. I'll only talk about this part of the stock.

For stock hedge funds, there is actually no particularly good choice now, because Trump may talk about East today and West tomorrow. Now, many funds have basically become relatively low leverage and zero net holdings after experiencing turbulence in March and early April.

This "zero net position" is also called "neutral position". It refers to the long position minus the bearish position, which is basically equal to zero. This is a very conservative attitude. No matter which direction Trump's policy is going, whether the market rises or falls sharply, just maintaining a net position, it will flatten this month. Unless you are confident in judging the direction, minimizing net positions may be a better choice.

Of course, for macro hedge funds, a very popular transaction now is shorting the US dollar, because these things Trump does are a major negative for the US dollar, and shorting the US dollar is obviously profitable at this time.

" Undercover" : Who has lost money ?

Rob : The most obvious thing is quantitative funds. I heard that many quantitative funds have losses.

Although quantitative funds are holding various high-tech equipment to keep an eye on Trump’s own Truth Social and his X account, Trump’s speed of turning against each other is too fast. This back and forth reversal makes it difficult for quantitative strategies to keep up with Trump’s speed of turning against each other.

Quantitative funds generally need to add high leverage. The problem with leverage is that even if it is finally proved that your judgment is correct ten days later, it may be that Trump will lose his position during the repeated repetition of the third day, and he will not live to prove that the final judgment is correct.

A typical example is: trading Nvidia's quantitative funds. When AI caught the news, saying that Huang Renxun and Trump had a meal, AI judged that this meal was meaningless and Trump would still ban H20, so we have to short Nvidia. But before the news of banning H20 was released, if the market felt that this matter was agreed upon during the meal, everyone would buy one first, and it would rise a little, then if you add a high leverage, you would directly lose your position - although the H20 sales restriction order was finally released.

Another part of the loss is Long-only mutual funds that are purely long, or some funds have relatively high risk exposure, and the long one is far higher than that they are short.

" Undercover" : Are those Wall Street people who voted for Trump regretting their intestines?

Rob : If you think about the real idea, I think there are no ones on Wall Street who are not against Trump now - no matter whether there are people who voted for him last year or donated to him. Recently, I have also had dinner with many people from various Wall Street funds, and I have hardly met anyone who still strongly supports Trump.

" Undersurge" : Trump later announced a 90-day suspension of tariffs. How much does this have to do with Wall Street? It is reported that former hedge fund manager and US Treasury Secretary Becent is under great pressure now and he needs to balance the contradiction between Trump 's radical policies and financial forces.

Rob : Becente taught in our school before, and he himself worked in Soros's fund before, and has a deep connection with Wall Street.

I have a definite source saying that at least when the first round of tariff policy was drafted, it was the tariff launched on April 2, and Bescent did not participate as a core team. This tariff was basically set by Trump, Stephen Miller and Peter Navarro, and Bescent had a high probability that he would not participate in the discussion at all.

In the end, Trump told Becent a result, and then asked Becent to use his relationship on Wall Street to communicate with Wall Street and soothe their emotions, but the decision was not with him. Of course this was the situation before April 2, and the market fell into violent turmoil later. Have Becent had more say now? I think this is very possible.

" Under surge" : What about you? How strong is your shock during this process?

Rob : The current situation of tariff war is definitely beyond my expectations. Everyone had psychological expectations for the trade war, but no one expected that Trump would be hostile to Europe, Japan, Canada, etc.

But if you want to be bearish, it is nothing compared to the real big crisis in history. If you experienced the 2008 financial crisis, you will not have any anxiety now. Just like a new recruit who has just started fighting, he is anxious as soon as he goes to the battlefield, but if you pass through the cycle and are a veteran of ten years, how can you be anxious?

Par t 03 Who will be bought and who will be abandoned?

" Undercover" : You have done a lot of company research recently, what are the results? Faced with this macro turmoil, which companies will be the first to be sold by fund managers?

Rob : I have two categories of negative impacts:

The first category is directly affected by tariffs, such as clothes, shoes, bags, and toys related to household daily necessities. These are basically produced in Asia, and the companies that are mainly responsible for these consumer brands. Of course, if tariff policies move back in the future, they will also rebound very significantly.

The second type is indirectly affected by tourism, such as hotels, theme parks, airlines, etc., because the demand side will decline very quickly. Since Trump has been in a tariff conflict for a month, the number of people traveling to the United States from foreign countries has dropped by 50%. Although the impact of Americans going out to play by themselves or traveling in the United States has not yet been reflected, if the trade war continues to fight for a year, it is obvious that the US economy will be affected. In the future, all industries with high economic sensitivity, such as real estate, optional consumption, tourism, cinemas, theme parks, casinos, etc., will have an impact.

" Under surge" : Google 's recent sharp drop seems to have been accidentally injured. Because the market began to worry that if the EU countered the United States, it was not included in Trump's rough tariff calculation formula, such service income, or the revenue brought by the virtual economy, was not included, but the EU spent a lot of money on this every year, so the EU is likely to attack these technology companies.

Rob : Yes, there are two aspects of this side damage to technology companies. On the one hand, if the EU wants to counteract, it will not only Google, but also Meta, Amazon, Microsoft, etc. The EU can use these companies at any time. This is a major weapon of the EU. On the other hand, Google and Meta's own businesses are mostly based on advertising. We know that advertising revenue is very sensitive when a country's economy is declining.

Omnicom (Hongmeng Group), the world's second largest advertising communication group, is an important advertising agency for platforms such as Google and Meta. He just said on the earnings call that although he has not seen advertisers cut spending, they feel that if Trump wants to continue doing this, customers will inevitably cut spending, so they lowered their performance guidance for the next quarter, which also led to a decline in Google and Meta.

" Undersurge" : We talked about many companies that are negatively affected by the tariff issue. Are there any companies or industries that benefit from this instead?

Rob : The core of the company that benefits is that tariff conflicts lead to price increases, but companies can push costs downstream.

For example, we have long-term holdings of a company called AutoZone. This company is one of the two giants selling after-sales accessories in the United States, and is continuing to integrate the US market. Why is it said that tariff conflicts are beneficial to it? It is because the tariff conflict has raised the price of cars. In the past, you had to buy a car for $30,000, but now the tariff may be increased by $10,000. Many consumers simply stop buying it, and wait until the tariff conflict ends and buy it when it returns to 30,000 yuan.

But if consumers don’t buy new cars now, they can only drive old cars. The longer the old cars take, the more various repair problems there will be. For a company that specializes in selling after-sales accessories for automobiles, this has become a benefit, such as engines, spark plugs, brake pads, oil, etc., all need more.

" Under surge" : Where is the capital side? Did some funds choose to leave the United States and invest more in other regions ?

Rob : Yes, take Europe as an example. In the past ten years, people have basically not configured, and they have more configurations for China and Japan than for Europe. But recently many European stocks have gone through independent markets - for example, European defense stocks have risen a lot this year.

There are also some high-quality companies in Europe who were "mistaken" in this round of tariff conflict . For example, in the field of automotive semiconductors, there is a German company called Infineon. This company has deeply participated in China's new energy vehicle industry chain. It is Xiaomi's exclusive supplier and an important supplier of BYD.

The company's production capacity is distributed around the world, with 15% of its local production capacity in the United States, while its sales in the United States are only 12%. Therefore, its local production capacity in the United States can fully cover sales in the United States, and the impact of tariffs is relatively small, so it is better to supply locally. This type of company is also good.

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

Par t 04 This is not a financial crisis, this **is an

artificial crisis**

" Under surge" : Now the tariffs on both China and the United States have increased to 125%. If the United States adds the 20% of fentanyl, it will be 145%. This tariff is meaningless. According to the entrepreneurs you interviewed, what do they think?

Rob : Now it is generally believed that this tariff number is basically equivalent to a trade embargo. I have been on business trips all over the world recently just to figure out what entrepreneurs think.

For example, I have recently intensively investigated the upstream of a number of shoe and clothing companies (the supply chains of companies such as 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 will cost between US$35-40, which will increase the total cost of RMB3-5 for the company. In this case, 1/4 of the manufacturer will be digested by 1/4 of the brand, and the rest will be digested by channels and transferred to consumers. So in the end, when consumers buy these shoes, they only increased the cost by less than two yuan. Although it will eventually have an impact on the gross profit margin of the brand and supply chain, the absolute gross profit they can earn per pair of shoes can be 100%.

But now that the 125% tariff is added, the cost will become 70-90 yuan. At this time, the company will not consider who will digest the cost - because you should not sell this shoe. If this cost is passed on to consumers, sales will drop by more than 50%.

Many Southeast Asian entrepreneurs are waiting and watching during the 90-day tariff suspension, taking one step at a time. A common prediction is that after 90 days, other countries except China may eventually become 10%-20%. Although gross profit margin will definitely be affected, everyone can continue to live.

" Undersurge" : There is another key question here: international trade has long achieved the dominance of " intermediate products " (i.e., import parts or semi-finished products from one country to another to process/assemble, and then export to a third country ). How should we define where a thing is produced?

Rob : There are actually loopholes in it. For example, in the semiconductor field, the United States said that if the US content is greater than 20%, it can exempt tariffs, but how do you define the so-called US content? Now the Trump administration has not made a clear judgment, and the US Customs also does not know how to implement it. These are important negotiation points in the future.

For example, in the field of shoes and clothing, there is now a way. In the past, it might have been pure re-export trade. Shoes were produced in China, and then shipped to Vietnam. Change a sign and sent to the United States as "made in Vietnam". Now such a simple path is no longer possible, but you can still use some complicated processes: do it well in China, take the remaining simple processes to Vietnam, and then make it "made in Vietnam", and then send it to the United States.

If Trump wants to block this loophole, it can block it, but it requires a high execution cost, because you need to formulate very detailed rules and it is difficult to keep an eye on the regulatory side. If you are more optimistic, it depends on how the parties negotiate.

" Under surge" : Tariffs will also have a negative impact on US consumption. There are pessimistic views that tariffs will gradually lead to the United States entering a structural bear market from an eventual impact . Especially as the first quarter financial report season is about to enter, the company needs to provide guidance for the second quarter. If they are all very poor, it will lead to a new round of sharp drops. What do you think?

Rob : I think the key is whether the tariff policy will come back. If Trump is so determined as he has been during this period, it will inevitably be a major blow to the US economy.

Many institutions have also made calculations that an estimated increase in the actual tariff rate in the United States by 1%, which will lead to a 0.1% increase in inflation, causing a negative impact of 0.05%-0.1% of the US economy. The average tariff actually imposed by the United States is about 3%. Assuming that the average tariff will become 10% in the future, it will be a new increase of 7%. The impact of 7% on inflation is 0.7%, and the impact on GDP is about 0.35%-0.7%.

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

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

Rob : The so- called recession risk is purely artificial and has nothing to do with the economic cycle. This is not like the 2008 financial crisis - it is a structural risk.

But today's US economy, from the perspective of economic structure, has no major problems. Everyone says that the US is in high debt 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 has much more debt than the US, and most European countries are also higher than the US. But now many people regard Japan as a risk-averse option.

Par t 05How to find a certain way to live in uncertain times ?

" Undersurge" : Howard Max of Oak Capital recently published an investment memorandum saying that the market has entered a "no one knows" state and no one can predict the future. If we learn from history, what experience can we learn from?

Rob : I think the most important thing is to beware of the risks of leverage . As Buffett once said, in every decade, countless people have gained more than him, but looking back sixty or seventy years later, those who have done better than him in every decade are gone. Why? Because Buffett does not need leverage, there is never a risk of liquidation, no matter what happens to a black swan (financial crisis, economic recession, epidemic, trade war, war, currency depreciation, etc.).

Many funds that bring high returns through leverage can do well in 3-5 years or even ten years, but once there is a big fluctuation - and no one can predict such events in advance, and all those who use leverage will collapse.

For example, the earlier LTCM (Long-term Capital Management Company), several founders were Nobel Prize winners, and they achieved more than 40 points in annualized periods in 4-5 years, which is very impressive. But it eventually fell in the Russian financial crisis in 1998 because of the high leverage. Not only LTCM did not expect this incident, but Soros did not expect it, and the whole world did not expect it.

For example, Bill Huang, who broke his position in 2021, founded Archegos Capital Management after he came out of Tiger Fund. When he was glorious, he once went from a Family Office of $200 million to 35 billion, which is a few hundred times more. This is undoubtedly amazing, but you may also go from 35 billion to 0 overnight because the leverage it uses is very high. In those years, Buffett basically just leveled with the index.

But in the end, Buffett survived and Bill Huang broke the position.

" Under surge" : So stability is always the only way to the financial industry.

Rob : If you want to have a good sleep, don’t pursue unsustainable high returns through high leverage. It implies high risks, but seek a long-term flow that will never have the risk of liquidation.

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

Rob : If you want to talk about market turmoil, it is actually far from comparable to the financial crisis in 2008, nor is it as turmoil in the global capital market caused by the depreciation of the RMB in 2015, and it is even less than the four U.S. stock circuit breakers caused by the epidemic at that time. If you have experienced these three turmoils, you will be calm now.

Take 2008 as an example. It was much more panicked back then than now. In the spring of 2008, the market began to fluctuate greatly from the outbreak of Bear Stearns and was later bought by JPMorgan Chase, and then it continued to fall sharply for a whole year. At that time, everyone really felt that the global economy was about to end. And at that time, Morgan Stanley and Goldman Sachs almost went bankrupt. That was the real panic, and they are still far from reaching that level.

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

" Under surge": Yes, if S&P counts now, it actually fell by 15% based on its highs. This decline should not reflect some long-term risks?

Rob : If the United States really enters a recession, the decline will be far more than that. And this started to fall when the valuation was relatively high. There is no risk of a recession in the United States this year. If it really happens, it is far from falling to the bottom.