Below is what Bill Fleckenstein just sent to subscribers.
Danger: No Net04-03-2025
To state the obvious, the supposed "Liberation Day" only liberated people's untaxed capital gains. Also obvious is the fact that there are going to be many direct consequences from these tariffs, along with unintended ones, as well as plenty of head fakes, too. Therefore, I don't want to spend a lot of time trying to parse what some of the details may mean.
Stocks Go Free Solo I think the important point to understand is that, as it pertains to the stock market, it is now operating without a net. By that I mean the Fed is not able to cut rates just yet. Besides, they don't like Trump, so they are going to drag their feet, and the Trump administration for now isn't concerned about lower stock prices anyway.
Meanwhile, many companies have been driven to ridiculous valuations by a combination of the passive bid and the momentum investing that got reverse engineered on the back of that, along with wild speculation, options, everything else. Thus, we have finally hit a point that, when those companies stumble, they can get splattered (see Restoration Hardware today), though the overall market has been able to hold together due to the passive bid.
We may now be at a moment in time where so much selling is triggered that the passive bid isn't big enough on a daily basis, even though we haven't seen the layoffs that I had presumed would be required to put a dent in that. There's also the possibility that people start to freak out and take and reduce some the exposure in their 401(k)s.
When Activity Overwhelms Passivity What that means is I think we have a chance for the stock market to be able to hit air pockets in a way we haven't seen probably since 2000 to 2001. I don't like to compare this to 2007-2008, because the epicenter of that debacle was the leveraged financial institutions that were able to operate in a completely reckless manner thanks to the lack of oversight on the part of the Fed and the rest of the government. What we have now is wild speculation with virtually everyone long, because folks have been playing by the rules of the last 15 years, and those rules may be inoperable for some period of time. Thus, we could see some real downside devastation.
I concluded basically all of that last night within an hour of seeing the tariffs, which told me that the pressure to the downside today would be immense, and we would have a chance to see the circuit breakers get hit, which would of course precipitate more panic selling.
I don't think there's much point in describing the action of the last 24 hours other than to say that when the tariffs were announced yesterday afternoon, the SPOOs momentarily spiked up about 0.75% (in a display of delirium) before getting hammered. As for today, the indices were about 5% lower without ever having a serious rally. In other words, there was basically "no bounce," which is a very negative development in my opinion.
Put Some Spin On It Before leaving the stock market, one constructive point I would like to make is that we could see over the next group of months some rotation once enough selling has been done to lower everyone's exposure. When the market starts to come back from that, we could see the end of the dominance of the Magnificent 7 while other value-oriented smaller-cap companies do better (though these overpriced beats will have a huge rally at some point). I'm not saying that will happen, but I can see it as one potential outcome that might be exploitable, although it is also way too soon to think much about that.
Away from stocks was of course a wild ride, as green paper was absolutely shattered (I increased my yen position by about 50% last night almost immediately in the wake of the tariff news). Meanwhile, predictably, fixed income enjoyed the show. The next thing we should expect to see is an absolute avalanche of 10-year paper get issued by the Treasury.
Up-and-Down Bounces for the OuncesTurning to the most volatile sector, the metals, at one point last night gold was up 1% before falling about 2% this morning. It then rallied back to 0.5% green before selling off again and closing down 1%. Silver saw a similar though more volatile ride, but without ever having done as well as gold, as it was under much more pressure and finished about 7% lower. The miners were interesting in that they initially were hit pretty hard, although not like they would have been in the past. Then they rallied substantially, with many of them up over 2%, only to give back much of the rally. Overall, however, they still behaved pretty admirably for the most part.
It is also worth noting that oil was clocked for about 7%. So be prepared for when the combination of oil and the hammering of stock prices means your favorite bond bulls will soon begin preaching about deflation, which will continue to be an extremely low-probability event.
Positions in stocks mentioned: none. |
