Wall Street

Author: Liu Yiming

Last night, the "triple kill" of US stocks, bonds and currencies was staged again.

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

At that time, Bessant, who was a Wall Street trader and now the US Treasury Secretary, found an opportunity to try to persuade Trump: he discussed the idea of ​​suspending tariffs with Trump on the way to the White House on Marine One.

Bessant needs to take on the responsibility of a bridge between Wall Street and Washington. He tries to reconcile between Trump's erratic and capricious decrees 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 the capital market 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 political and economic development of the United States.

But today, cracks have appeared. A year ago, Bessant, who was regarded as "one of our own" by Wall Street, told his clients: "The gun of tariffs will always be loaded and placed 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 also threatening to fire Federal Reserve Chairman Powell, which has shaken the century-old foundation of the Federal Reserve's independence. Trump is also confronting the Ivy League schools in the United States. The national university endowment funds hold a total of 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, "Undercurrent Waves" interviewed 30 people on the front line 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 knows the rationality and anger of Wall Street in this tariff storm.

Rob Li used to work 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 longer period of time. Compared with hedge funds that generally hold shares for only about three months, their core investment portfolio holds shares for more than two to three years.

Rob also travels around the world frequently. He has adopted a global asset allocation strategy, focusing mainly on the three sectors of technology, consumption and industry. Currently, the allocation is about 40% 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 now." 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 "Management 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 the core figures of Wall Street, such as Ray Dalio, founder of Bridgewater Fund, Bill Ackman, founder of Pershing Square Capital, Jamie Dimon, CEO of JPMorgan Chase, Larry Fink, chairman of BlackRock, Howard Marks, chairman of Oaktree Capital, etc., changing their attitudes and standing up against Trump's radical tariff policy, investors have formed an important counter-force - although their primary purpose is still profit.

Part01 Wall Street elites also misjudgedTrump’s script

"Undercurrent"From what moment did Wall Street begin to realize thatthe entire financial market was about to change?

Rob:A key 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 table 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": Butwhy did the smart minds on Wall Streethave noprediction of "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 idea is that Trump's second term in office will 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 at the time, 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 also knew that 99% of his crazy ideas did not come true, but those four years formed 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 until he took out that giant table on April 2, this "much ado about nothing" scenario was still going on.

In February, Trump also scared the market once when he said he would impose tariffs on Canada and Mexico, and the U.S. stock market began to plummet. But just one day later, Trump posted again that he had spoken to Canada on the phone and would not go after them again. A few hours later, he said that he had also spoken to Mexico on the phone and would not go after Mexico either. Everyone was buying at the bottom, and everyone was rebounding, and they all felt that Trump 2.0 was just that.

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

Part02 Winners and Losers in the Shock

"Undercurrents"

Later, the S&P 500 index fell by 25% at its peak, and the Nasdaq index fell by 21%. What operations were the hedge funds on Wall Street doing? Who made money?

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 bonds. I am only talking about the stock part.

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

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 sharply, 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 transaction now is to short the US dollar, because what Trump has done is a major negative for the US dollar, and it is obviously profitable to short the US dollar at this time.

"Undercurrents": Who lost money?

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

Although quantitative funds have all kinds of high-tech equipment to monitor Trump's own Truth Social and his X account, Trump's change of attitude is too fast. This kind of back and forth reversal makes it difficult for quantitative strategies to keep up with Trump's change of attitude.

Quantitative funds generally require high leverage. The problem with leverage is that even if your judgment is finally proven to be correct after ten days, it may be liquidated on the third day when Trump repeatedly repeats himself, and you will not live long enough to prove that your judgment is correct.

A typical example is a quantitative fund that trades Nvidia. When AI captured the news that Huang Renxun and Trump had dinner, AI judged that the dinner 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 thought that the matter was settled during the dinner, everyone bought a lot first, and the price rose. If you added a high leverage, your position would be liquidated directly at this time - although the restriction order on H20 was finally issued.

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

"Undercurrent": Those Wall Streeterswho voted for Trump, are they now regretting it now?

Rob: If we talk about the real thoughts, 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 also had dinner with many people from various Wall Street funds, and I have hardly met anyone who still strongly supports Trump.

"Undercurrents" : 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: Benson used to teach at our school. He also worked in Soros's fund before and has deep roots in Wall Street. I have a confirmed source saying that at least when the first round of tariff policy was drafted, that is, the tariff launched on April 2, Benson did not participate as a core member. This tariff was basically set by Trump, Stephen Miller and Peter Navarro. It is highly likely that Benson did not participate in this discussion at all.

In the end, Trump told Bessant a result, and then asked Bessant to use his relationship with Wall Street to communicate with Wall Street and soothe 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 violent 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 tariff war situation is definitely beyond my expectations. Everyone has psychological expectations for a trade war, but it is true that 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 battle. He is very anxious when he enters the battlefield, but if you have gone through the cycle and are a veteran for ten years, how can you be anxious.

Part03 Who will be bought and who will be abandoned?

"Undercurrent": Recentlyyouhaveresearchedmany companiesand what are the results?In the face of this macro turmoil, which companies will be the first to be sold by fund managers?

Rob:Those who bear the brunt of the negative impact are divided into two categories:

The first category is directly affected by tariffs, such as clothes, shoes, bags, and toys related to daily household items. These are basically produced in Asia, and the companies that bear the brunt are basically these consumer brand companies. Of course, if the tariff policy goes back in the future, they will also rebound strongly.

The second category is indirectly affected by tourism-related, such as hotels, theme parks, airlines, etc., because the demand side will decline very quickly. Since Trump has been engaged 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 a bit of a mistake. Because the market began to worry that if the EU retaliates against the United States, because Trump's rough tariff calculation formula does not include this kind of service income, or the income brought by the virtual economy, but the EU spends a lot of money on this every year, so the EU is likely to take action against these technology companies.

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

It just happened recently that Omnicom, the world's second largest advertising and communication group, is an important advertising agency for platforms such as Google and Meta. It just said in a financial report conference call that although it has not seen advertisers cut spending, they feel that if Trump continues to do this, customers will inevitably cut spending, so they lowered their performance guidance for the next quarter, which also caused Google and Meta to fall. "Undercurrent": We talked about many companies that are negatively affected by tariffs. Are there any companies or industries that benefit from it? Rob: The core of the companies that benefit is that tariff conflicts have led to price increases, but companies can push costs to downstream. For example, we have long held a company called AutoZone. This company is one of the two giants selling auto aftermarket parts in the United States, and it is still continuing to integrate the US market. Why do you say that tariff conflicts are beneficial to it? Because tariff conflicts have raised the price of cars. In the past, you needed $30,000 to buy a car, but now tariffs may add $10,000. Many consumers simply don't buy it yet, 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 can only drive old cars. The longer the old cars are driven, the more repair problems they will have. For a company that specializes in selling aftermarket auto parts, this is a good thing. Engines, spark plugs, brake pads, engine oil, etc. all need more.

"Undercurrents": 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 basically had no allocation. They 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.

There are also some high-quality companies in Europe that 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 around the world. It has 15% of its domestic production capacity in the United States, but only 12% of its sales in the United States. Therefore, its domestic production capacity in the United States can fully cover its sales in the United States, so the impact of tariffs is relatively small. Local supply is sufficient. 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 or the trade war. Therefore, when the US market plummeted in April, it actually rose.

Part04This is not a financial crisis, it is a man-made crisis

"Undercurrent"：Now the tariffs between China and the United States have been increased to 125%. If the United States adds the 20% of fentanyl, it will be 145%. This tariff is no longer meaningful. According to the entrepreneurs you interviewed, what do they think?

Rob：Now everyone generally believes that this tariff figure is basically equivalent to a trade embargo. I have been traveling around recently, just 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 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 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 2 yuan.