It was a brisk start to the week yesterday, with tariffs top-of-mind and top-of-media again. Letters were sent. Strongly worded letters, which markets didn’t really like. Then the deadline was extended to August 1 from July 9, which markets did like.
Joining me to discuss it all on Talking Markets was the wonderful Macro Tourist,
. And he had a few warnings for us…Thank you , , , , and many others for tuning in live on Substack!
Tape Bomb Summer
Kevin thinks people (read: markets) have been pretty complacent about tariffs. “I think they’re assuming this is just a negotiating tactic… and the reality is, he thinks tariff is the most beautiful word in the dictionary,” he said. “He loves it. He is Tariff Man. And I suspect when all this is said and done, that he’s going to end up somewhere between 15-20% across the board tariffs.”
At that point, Kevin said, the big question is how the economy reacts and how the market adjusts. “And if someone tells you they know the answer to that, I think you should just ignore them, because the reality is we haven’t had that sort of dramatic change in tariffs in 70-80 years,” he said.
Kevin says markets kind of expect 15-20%, but have trouble digesting higher than that - partly why announcing 25% tariffs for the likes of South Korea and Japan yesterday caused some indigestion.
💡“I suspect we’re going to get all sorts of tape bombs all summer long, and that’s just the reality,” he said. “And yes, as traders we need to react to every headline and every squiggle, but as investors, we need to think about what does this mean for the economy over the longer term.”
Big Beautiful Bill: “Stimulative and Regressive”
President Trump’s ‘big, beautiful bill’ that passed last week was “very stimulative,” and at the same time “very regressive,” Kevin said.
“It’s really tax cuts for the upper echelon,” he said. “As a trader, I have to trade the market that’s in front of me, so if we get tax cuts to the upper echelon and they’re going to have more money in their jeans, it probably means stocks are headed higher. And I think that’s what you’re seeing here, is that the market is correctly interpreting the big beautiful bill as stimulative for financial assets.”
Employment Fragility?
Kevin recently had BCA’s Peter Berezin on The Market Huddle podcast, and they were discussing the Beveridge curve.
Here’s the robot explanation of the Beveridge curve:
“One of the reasons we’ve had this immaculate recovery as we’ve tightened rates and as the job openings have declined, is that we actually had full unemployment,” he explained. “So in essence, while the economy slowed, people still found it easy to find jobs.”
However, the Beveridge curve may be changing: Peter showed Kevin that “we’re at the kink, meaning that as we get less job openings from here, instead of it staying at full employment, we could actually have a situation where unemployment starts to rise.”
It’s important to look beyond the headlines when it comes to last week’s strong jobs report, Kevin said. “On a headline basis it was better than expected,” he said. “But when you dug into it, you realize that private sector employment was down, and as well as that, the beat was actually all the result of state level educational workers.”
Not Saying It’s 2007 But…
“I’m not trying to say that we’re about to experience some great financial crisis, but I think this story illustrates how wrong the markets can be,” Kevin said:
(Here’s the complete transcript for the “They Know Nothing!” rant Kevin mentioned.)
Vol Control Funds “Increasingly Driving Markets”
Kevin thinks vol control funds are “increasingly driving markets.” His central thesis here is that these funds operate on a unique principle: they are “backward looking” and set their exposure on realized volatility rather than implied or forward volatility.
So, during volatile periods, such as the Liberation Day panic, these funds “degrossed, and they sold, sold, sold, and made it worse than it probably would have otherwise been,” he said.
Kevin pointed out that the subsequent rally was “very volatile,” which kept realized vol “extremely high,” which mean vol control funds “didn’t buy back as quickly as they usually do.” (Still with me?!)
However, in recent weeks, realized volatility has compressed, and the vol control funds have “started to buy back” and are still in that process - one of the reasons why the market has been “kind of grinding higher” even on “no news,” whereas before these funds existed, you would have expected markets to be neutral rather than positive on no news.
Basically, vol control funds are a relatively new ingredient in the market that Kevin thinks is having a real impact on market flows.
Kevin on…
The Dollar
Kevin thinks the US dollar is in “a secular bear market,” for a bunch of reasons but not least because “Trump wants a lower dollar.” “He wants to get the trade deficit down,” he said. “So I am a US dollar bear over the long run.” Of course, that doesn’t mean we won’t get a “snapback rally” soon, but Kevin suspects that “the bounce will be weaker than everyone expects and the real surprise will be how quickly it rolls back over.”
Gold
Kevin has been a gold bull for a long time and got very bullish when Russia invaded Ukraine, and subsequently the West, “led by the US, zeroed Russia’s central bank reserves.” Based on that, he thought the People’s Bank of China “is going to be on the bid for gold for years to come.” He thinks that’s going to continue: “I don’t think you need to overthink that,” he said. “Gold will continue to have that bid from the central banks of the world.”
Oil
“From a trading perspective, I don’t know anyone that’s not bearish,” he said. “Nobody. And so it really worries me how much people are assuming that oil is in this secular bear market.” Especially, he added, when the global economy might be picking up and countries worldwide ex-US are becoming more willing to run their economies hot.
The International Trade
There’s been a lot of “false starts along the way in terms of people getting excited about non-US stocks,” Kevin said. But ultimately he sees the “money going home trade” continuing, and a “whole lot of non-US buying throughout the rest of the world.” “I think that’s what’s occurring and I don’t think you should overthink it,” he said.
And Finally… We Won’t Realize it was 2025 Until 2028 (Maybe)
Enjoy,
Maggie
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and determine if an allocation to oil aligns with your overall financial plan.
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