And in the live chat, if the Squirrel ever wants to change career:
Thank you , , everyone else who tuned in live on Substack!
Trend Shift
“It looks like we’ve got a trend shift,” the Squirrel said. “I think we’re way past the worst on the trade war - This administration clearly cares a lot more about stocks than they were pretending.”
And stocks were clearly happy, with a “sugar rush in equities” yesterday (May 12).
Still, Rupert thinks it’s likely that even at the end of the trade war, we’re still going to have at least 10% tariffs on goods entering the US, and so we have to start figuring out:
How much supply chain damage has been done over the last 4-6 weeks?
How long will it take for CEO confidence to be restored?
“I think this pause in the trade war is enough to keep recession odds down below 50%,” Rupert said. “My gut feel is that if we do get a recession it’ll be a technical one that we read about in 6 quarters’ time.”
💡That doesn’t mean the Squirrel is suddenly mega-bullish on the US. “I’m still a medium-term dollar bear, I’m a big believer in the great asset rotation,” he said. “I’m not a Kodiak bear when it comes to US equities, I just think there are better opportunities elsewhere right now.”
Jay Powell Has a Tough Job
There’s still so much up in the air that it makes it tough for the Fed to game out what’s going to happen. “Even if [tariffs] are just 10%, these prices are going to get passed on to consumers,” Rupert said.
And while we’ve “probably avoided a bone-crusher of a recession,” employment may still be at risk. “I think he’s going to take more risk with the employment side of his mandate [than the inflation side of his mandate],” Rupert said. “And [employment] is a lagging indicator, so he has to wait longer, and so the chance of him being too late is the real risk.”
Why is No One Talking About the Budget?
The Squirrel thinks it’s remarkable that no one is talking about what’s going on ( or not going on) on Capitol Hill with the budget reconciliation.
When are markets going to switch their focus from trade to US budget negotiations where agreement seems a long way off as deadlines loom? Without tariff income, the deficit is clearly heading in the wrong direction and that is before adding proposed tax cuts. 10-year yields are now only a few basis points away from the 4.5% pain point level that was enough to trigger the 90-day pause on reciprocal tariffs. CPI had better not come in hot on Tuesday!
A quick interruption… 🐿️
If you’re not already subscribed to Blind Squirrel Macro, Rupert has kindly given Talking Markets viewers a 20% discount on one year memberships through this link.
Blind Squirrel Macro was one of the first Substack publications we really got into when we joined Substack. It’s incredibly thoughtful, has a genuinely unique perspective, and it’s fun as hell to read, too. That’s not a sales pitch - we don’t get a cut of sales or anything like that - we are just big fans of the Squirrel.
Back to the budget…
“If the TCJA goes through - $4.5 trillion of additional deficit spending - I think the bonds freak out,” Rupert said. “And if the bonds freak out, equities freak out too. The administration’s got a tough choice - they like stonks up, they also like tax cuts. They’re going to have to make a choice, I guess.”
And that choice may be politically costly. “They will get some tariff income, which helps with the deficit, but if they want to get that full four and a half trillion through, they're going to have to make some pretty painful political decisions on pay-fors,” Rupert said. This is a very slim majority he's got in Congress. It only takes one or two rebels and he's back to square one.”
On That Great Asset Rotation…
The Squirrel has been writing about the Chart of Truth below for quite some time:
The chart is the SPY (S&P 500 ETF) relative to the MSCI EAFE (Developed Markets ex-US). “We’ve been in a trend break since late December,” said the Squirrel, and that trend break would “represent a significant regime shift and trend break in major global asset classes, following 15 years of one-way traffic in the opposite direction.”
The momentum trade that worked for 10-15 years has “clearly stalled,” Rupert said.
And “other governments have a green light to stimulate with fiscal, and equity markets tend to follow fiscal largesse more than anything else.”
Trading Acorns from the 🐿️
“I still really dislike long bonds and I'm positioned short those. I'm probably happier to just hang out in the two-year note rather than be too sort of levered up into the front end of the curve right now.”
“Financial exchanges have been a wonderful way to trade this great rotation.”
“I have a big overweight position in Chinese equities, but I steer away from the classic China tech names because they really get buffered a bit too much on sentiment. I own a bunch of consumer plays around the beer companies, the spirits companies, some of the restaurant chains.”
“I recently rejoined the Canadian oil mafia after a 3-year hiatus… My thesis is that the geopolitical events of the last few months have made it essential for governments of either stripe to make the Canadian economy and energy sector less reliant on a monopsony [like a monopoly but where the buyer controls the market/price] relationship with the US when it comes to their energy.”
It’s “game over for the business of selling dollar bills for 50 cents until you have a monopoly share of a market when you can extract rents,” Rupert said. “The DoorDashes, the Instacarts… a lot of the consumer and enterprises SaaS plays are not making enough money.”
The Squirrel has written a great piece on robotaxis which you can find here, but he gave us the TL;DR yesterday, which is that the wild - up to $1 trillion - valuations being thrown about for Waymo are insane.
💡“I think we’re very much in a ‘show me’ world,” the Squirrel said. “Going forward generally, you just need to be much closer to shorter duration assets that are generating real cash.”
Enjoy,
Maggie
P.S. If you’re considering joining the Squirrel, here’s that discount code link again.
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 overall financial plan
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