Chaos on Wall Street

Author: Liu Yiming

Editor: Liu Jing Last night, the "triple kill" of U.S. stocks, bonds, and currencies played out once again.

The last time this happened was half a month ago, triggered by the global tariff war initiated by Trump, and Wall Street collectively misjudged him.
At that time, former Wall Street trader and now U.S. Treasury Secretary Mnuchin found an opportunity to try to persuade Trump: while flying on Marine One to the White House, he discussed the idea of postponing tariffs with Trump.

Mnuchin needed to bear the responsibility of being a bridge between Wall Street and Washington, attempting to reconcile Trump's erratic orders with his old friends on Wall Street who advocated for debt reduction, tax cuts, and deregulation. This was undoubtedly a tricky task. The game of capital markets is, at its core, a game among great powers. To some extent, Wall Street's influence has surpassed capital itself. The past combination of Wall Street and Washington formed the "Washington-Wall Street complex," which has always been a dominant force in shaping U.S. politics and economics.

However, today, cracks have appeared. A year ago, Mnuchin, who was seen as "one of their own" by Wall Street, told clients: "The gun of tariffs will always be loaded and placed on the table, but it will rarely be fired." But now many on Wall Street feel betrayed by him, as Trump fires off tariffs indiscriminately, almost without being constrained by these past relationships.

The cracks show signs of further tearing. Trump is threatening to fire Federal Reserve Chairman Powell, shaking the century-old foundation of the Fed's independence. Moreover, Trump is at odds with Ivy League schools, while university endowments across the U.S. collectively hold about $500 billion in private equity assets; if they start selling, it could create significant turmoil in the market.

Wall Street's attitude is worth observing. Last week, "Dark Waves" interviewed 30 individuals on the front lines of the tariff war, and we followed up with a hedge fund professional from Wall Street: Rob Li. He has experienced the ups and downs of the market in New York during these days and understands the rationality and anger of Wall Street in this tariff storm.

Rob Li previously worked at Morgan Stanley's private equity fund and is now a managing partner at Amont Partners—a global equity investment management firm based in New York. Their investment strategy involves longer holding periods; compared to typical hedge funds that hold stocks for about three months, their core investment portfolio is held for over two to three years.

Rob also frequently travels around the world, adopting a global asset allocation strategy, primarily focusing on technology, consumer, and industrial sectors, with about 40% allocated to the U.S., 10% to Asia, and the remaining portion to Europe and South America.

"Currently, there is no one on Wall Street who does not oppose Trump." According to Rob's observations, he believes that Wall Street's mainstream understanding has been misled; initially, everyone thought Trump 2.0 would behave like 1.0, "always finding a way to keep things from getting too outrageous." But now, the script has completely changed.
As Peter Drucker wrote in "Management in a Time of Turbulence"—the greatest danger in turbulent times is not the turbulence itself, but acting according to past logic.

Now, with core figures on Wall Street such as Bridgewater founder Dalio, Pershing Square Capital founder Bill Ackman, JPMorgan CEO Jamie Dimon, BlackRock Chairman Larry Fink, and Oaktree Capital Chairman Howard Marks all changing their attitudes and standing up against Trump's radical tariff policies, investors have formed a significant counterforce—though their primary goal remains profit.

Part 01: Wall Street Elites Also Misjudged Trump's Script

"Dark Waves": At what moment did Wall Street begin to realize that the entire financial market was about to change?

Rob: An important moment was April 2. That afternoon, Trump first announced a 10% tariff on all countries, and the market actually rose by two points because many thought this was within expectations.

But just a few minutes later, Trump pulled out his giant chart, saying he would impose different levels of tariffs on different countries. At that moment, the market immediately collapsed as everyone realized Trump was serious.

Currently, 80% of the trading volume in the U.S. stock market is done by machines, which have pre-set strategies: for example, if Trump's announced tariffs are within 15%, buy; if they exceed 15%, sell. Of course, the actual strategies are much more complex. The speed of automated trading is very fast, so once the market collapses, it happens very quickly.

"Dark Waves": But why did those smart minds on Wall Street fail to anticipate "Trump's giant chart"? I remember when Trump was just elected, the term "Trump trade" was very popular, but it turned into "Trump put" in just two months.

Rob: The mainstream thinking on Wall Street—including myself—did not anticipate the "degree" of reciprocal tariffs. The mainstream thought was that if Trump were to take office again, he would continue his first term's pattern of "loud thunder but little rain."

Everyone should remember that when Trump defeated Clinton in 2016, Wall Street was very panicked because Trump had said many crazy things during his campaign, and the entire business community and Wall Street were very afraid of him. But later everyone realized—99% of his crazy ideas did not materialize, and instead, those four years created a very business-friendly environment.

"Dark Waves": So this is also a kind of market inertia, but no one expected the script to really change.

Rob: At least until April 2, when he pulled out that giant chart, the "loud thunder but little rain" script was still continuing.

In February, Trump also scared the market once when he said he would impose tariffs on Canada and Mexico, causing a drop in U.S. stocks. But just a day later, Trump tweeted that he had spoken with Canada and would not impose tariffs on them. A few hours later, he said he had also spoken with Mexico and would not impose tariffs there either. Everyone was buying the dip, bouncing back, thinking Trump 2.0 was nothing to worry about.

But then he pulled out that giant chart, and the market really began to collapse, and everyone realized the script had changed, completely exceeding expectations.

Part 02: Winners and Losers in the Turbulence

"Dark Waves": Later, the S&P 500 index dropped by as much as 25%, and the Nasdaq index fell by 21%. What were Wall Street's hedge funds doing? Who made money?

Rob: Although everyone calls them hedge funds, what they do can be completely different. Wall Street has hedge funds that specialize in macro trading, such as trading various currencies. There are hedge funds that specialize in stocks, like us. And there are hedge funds that do not trade stocks but specialize in bonds. I will only talk about the stock portion.

For stock hedge funds, there are actually no particularly good options right now because Trump might say one thing today and something completely different tomorrow. Many funds, after experiencing the turmoil of March and early April, have basically turned into a state of low leverage and zero net positions.

This "zero net position," also known as "neutral position," means that the long positions minus the short positions are basically equal to zero. This is a very conservative attitude; regardless of which direction Trump's policies go, whether the market rises or falls, simply maintaining a net position means staying flat for the month. Unless you are confident in predicting the direction, reducing the net position to the lowest possible level might be a better choice.

Of course, for macro hedge funds, a currently popular trade is shorting the dollar because Trump's actions are a significant negative for the dollar, making shorting it obviously profitable.

"Dark Waves": Who lost money?

Rob: The most obvious losers are the quantitative funds; I have heard that many of them have incurred losses.

Although quantitative funds use various high-tech tools to monitor Trump's Truth Social and his X account, Trump's speed of turning against people is simply too fast, and this back-and-forth makes it difficult for quantitative strategies to keep up with his rapid changes.

Quantitative funds generally need to use high leverage; the problem with leverage is that even if your judgment proves correct ten days later, you might get liquidated on the third day during Trump's back-and-forth process, never living to see your judgment validated.

A typical example is a quantitative fund trading Nvidia. When AI picked up news that Jensen Huang had dinner with Trump, the AI judged that the dinner was meaningless and that Trump would still ban H20, so they decided to short Nvidia. But before the news of the H20 ban was released, if the market thought that the dinner had resulted in an agreement, everyone bought in, causing a price surge. If you had high leverage, you would have been liquidated—although the H20 ban was eventually announced.

Another large portion of the losses came from long-only mutual funds or certain funds with high risk exposure, where the long positions far exceeded the short positions.

"Dark Waves": Do those Wall Street people who voted for Trump now regret it?

Rob: To be honest, I think there is no one on Wall Street who does not oppose Trump now—regardless of whether they voted for him or donated to him last year. Recently, I have had dinners with many people from various funds on Wall Street, and I have hardly encountered anyone who still strongly supports Trump.

"Dark Waves": Later, when Trump announced a 90-day tariff pause, how much did that relate to Wall Street? Reports suggest that former hedge fund manager and U.S. Treasury Secretary Mnuchin is under a lot of pressure to balance Trump's radical policies with financial forces.

Rob: Mnuchin previously taught at our school and has deep ties to Wall Street from his time working at Soros's fund.

I have reliable sources that say Mnuchin was not involved as a core member in drafting the first round of tariff policies, which were introduced on April 2. This tariff was basically determined by Trump, Stephen Miller, and Peter Navarro, and Mnuchin likely did not participate in that discussion at all.

Ultimately, Trump told Mnuchin the outcome and then asked him to use his connections on Wall Street to communicate with them and soothe their emotions, but the decision-making power was not in his hands. Of course, this was the situation before April 2; after the market fell into severe turmoil, has Mnuchin's influence increased? I think there is a strong possibility of that.

"Dark Waves": And how about you? How intense was your shock during this process?

Rob: The current situation of the tariff war has definitely exceeded my expectations. While there were psychological expectations regarding the trade war, no one truly anticipated that Trump would turn against Europe, Japan, Canada, and others.

However, in terms of the drop, it is still not comparable to real major crises in history. If you experienced the 2008 financial crisis, you would not feel any anxiety now. It’s like a new soldier who feels anxious when first entering the battlefield, but if you have been through cycles and are a ten-year veteran, you wouldn’t feel anxious.

Part 03: Who Will Be Bought, Who Will Be Abandoned?

"Dark Waves": Recently, you have conducted a lot of company research; what were the results? In the face of this macro turbulence, which companies are likely to be sold off first by fund managers?

Rob: The companies most negatively impacted can be divided into two categories:

The first category is those directly affected by tariffs, such as clothing, shoes, bags, and toys related to daily household items, which are mostly produced in Asia. These consumer brands' companies are the first to be hit. Of course, if future tariff policies reverse, they will rebound significantly.

The second category is those indirectly affected, such as tourism-related businesses, including hotels, theme parks, and airlines, as demand will decline rapidly. Since Trump initiated a month of tariff conflicts, the number of foreign tourists coming to the U.S. has already dropped by 50%. Although domestic travel by Americans has not yet shown significant impact, if the trade war continues for another year, it will undoubtedly affect the U.S. economy. All industries that are highly sensitive to economic fluctuations, such as real estate, discretionary consumption, tourism, cinemas, theme parks, and casinos, will be impacted.

"Dark Waves": Google's recent sharp decline seems to have been somewhat collateral damage. The market is beginning to worry that if the EU retaliates against the U.S., the crude tariff calculation formula used by Trump does not account for service income or income generated by the virtual economy, which the EU spends a lot of money on each year. Therefore, the EU is likely to target these tech companies.

Rob: Yes, the side effects on tech companies have two aspects. On one hand, if the EU retaliates, it will not only target Google but also Meta, Amazon, Microsoft, and others. The EU can easily take action against these companies, which is a significant weapon for them. On the other hand, regarding Google and Meta's own business, the vast majority of their revenue comes from advertising, and we know that advertising revenue is highly sensitive during an economic downturn.

Recently, the world's second-largest advertising group, Omnicom, which is an important advertising agency for platforms like Google and Meta, stated in their earnings call that although they have not yet seen advertisers cut spending, they believe that if Trump continues his current approach, clients will inevitably reduce their budgets. Therefore, they lowered their performance guidance for the next quarter, which also led to declines in Google and Meta.

"Dark Waves": We have talked a lot about companies negatively impacted by tariffs. Are there any companies or industries that are benefiting from this?

Rob: Companies that benefit are primarily those that can pass on the increased costs due to tariff conflicts downstream.

For example, we have long held a company called AutoZone. This company is one of the two giants selling automotive aftermarket parts in the U.S. and is continuously consolidating the U.S. market. Why is the tariff conflict beneficial for it? Because the tariff conflict has raised car prices; previously, you needed $30,000 to buy a car, but now tariffs might add $10,000. Many consumers are simply choosing not to buy for now, waiting until the tariff conflict ends and prices return to $30,000 before purchasing.

However, if consumers are not buying new cars, they will have to drive old ones. The longer old cars are driven, the more maintenance issues arise. For a company that specializes in selling automotive aftermarket parts, this becomes a boon, as they will need more parts like engines, spark plugs, brake pads, and oil.

"Dark Waves": What about the funding side? Are some funds choosing to leave the U.S. and invest more in other regions?

Rob: Yes, take Europe for example; for the past decade, there has been little allocation to Europe compared to China and Japan. But recently, many European stocks have shown independent trends—such as European defense stocks, which have surged significantly this year.

There are also some high-quality companies in Europe that have been "wrongly killed" in this round of tariff conflicts. For instance, in the automotive semiconductor sector, there is a German company called Infineon, which is deeply involved in the Chinese new energy vehicle supply chain, being a sole supplier for Xiaomi and an important supplier for BYD.

This company's production capacity is distributed globally, with 15% of its capacity located in the U.S., while its sales in the U.S. are only 12%. Therefore, its domestic capacity can fully cover its sales in the U.S., resulting in a relatively small impact from tariffs; local supply for local demand is sufficient, making such companies quite good.

Another company we hold, Mercado Libre, is the largest e-commerce company in Latin America. It operates purely locally, with no direct ties to the U.S. market or the trade war, so it actually rose in value during the significant drop in the U.S. market in April.

Part 04: This Is Not a Financial Crisis; This Is a Man-Made Crisis

"Dark Waves": Now that tariffs between China and the U.S. have reached 125%, and if the additional 20% on fentanyl is added, it becomes 145%. These tariffs have lost their significance. What do the entrepreneurs you interviewed think?

Rob: Currently, there is a general belief that these tariff figures are essentially equivalent to a trade embargo. I have been traveling extensively recently to understand how entrepreneurs view this situation.

For example, I recently conducted intensive research on the upstream of footwear and apparel companies (similar to the supply chains of Nike, Adidas, Lululemon, etc.). For a pair of shoes, assuming the tariff is only increased by 10-15%, and the retail price is $140 with a cost of $35-40, that would mean an increase of $3-5 in total costs for the company. In this case, the burden would be shared: the manufacturer absorbs 1/4, the brand absorbs 1/4, and the remaining portion is absorbed by the distribution channel, ultimately passed on to consumers. So, the final cost increase for consumers when buying these shoes would be less than $2. Although this will ultimately affect the gross margins of brands and supply chains, the absolute gross profit they can earn per pair of shoes can fully absorb the impact.

But now, with a 125% tariff, the cost would rise to $70-90. At this point, companies no longer consider who will absorb the cost—because they simply won't sell the shoes. If they pass this cost onto consumers, sales would drop by more than 50%.

Many entrepreneurs in Southeast Asia are observing during this 90-day tariff pause, taking it step by step. A common prediction is that after 90 days, other countries may face new tariffs of 10-20% in addition to China, and while gross margins will certainly be affected, everyone can continue to get by.

"Dark Waves": There is also a key question: international trade has long been dominated by "intermediate goods" (i.e., importing parts or semi-finished products from one country to another for processing/assembly, then exporting to a third country). How should we define where something is produced?

Rob: There are actually many loopholes in this. For example, in the semiconductor field, the U.S. says it will define that the American content must be greater than 20% to qualify for tariff exemptions, but how do you define this so-called American content? The Trump administration has not provided a clear judgment, and U.S. customs also does not know how to enforce this. These are all important negotiation points for the future.

For instance, in the footwear and apparel sector, there is now a method where previously there might have been pure transshipment trade—shoes produced in China, then shipped to Vietnam, relabeled as "made in Vietnam" for export to the U.S. This simple route is no longer viable, but you can still take some complex processes: produce in China, take some simple processes to Vietnam, and then label it as "made in Vietnam" for export to the U.S.

If Trump wants to close these loopholes, he can, but it will require high enforcement costs because you need to establish very detailed rules, and regulatory oversight will be difficult. If we are optimistic, it will depend on how all parties negotiate moving forward.

"Dark Waves": Tariffs will also negatively impact U.S. consumption. There are pessimistic views that tariffs will gradually lead the U.S. into a structural bear market, especially as we are about to enter the first-quarter earnings season, and companies need to provide guidance for the second quarter. If the guidance is poor, it could lead to a new round of declines. What do you think?

Rob: I think the key lies in whether the tariff policies will return. If Trump continues to be obstinate as he has been, it will undoubtedly be a significant blow to the U.S. economy.

Many institutions have calculated that an increase of 1% in the actual tariff rate in the U.S. will lead to a 0.1% rise in inflation, causing a negative impact of 0.05%-0.1% on the U.S. economy. The average actual tariff currently imposed in the U.S. is about 3%, so if the average tariff were to rise to 10%, that would mean an additional 7%. The impact of that 7% on inflation would be 0.7%, and the impact on GDP would be approximately negative 0.35%-0.7%.

However, if Trump insists on imposing a 25% tariff on the entire world, the negative impact on GDP could be between 1%-1.5%, with inflation potentially rising close to 2%. This would be a significant impact, and the U.S. economy would be at risk of collapse, which would naturally not bode well for the stock market.

"Dark Waves": How does this compare to previous financial crises in history?

Rob: The so-called recession risk today is purely man-made and has nothing to do with the economic cycle; it is not like the structural risks of the 2008 financial crisis.

However, from an economic structure perspective, there are no major issues with today's U.S. economy. People say that the U.S. has high debt and that the government owes a lot of money, but there are many countries with more debt than the U.S., such as Japan, whose government debt is significantly higher, and most European countries also have higher debt levels than the U.S. Yet many people still consider Japan a safe haven.

Part 05: How to Find Certainty in Uncertain Times?

"Dark Waves": Howard Marks of Oaktree Capital recently published an investment memo stating that the market has entered a state of "unknown," where no one can predict the future. If we learn from history, what experiences can we draw from?

Rob: I think the most important thing is to guard against the risks of leverage. As Buffett once said, every decade, countless people outperform him, but looking back after sixty or seventy years, those who did better than him in each decade have disappeared. Why? Because Buffett does not use leverage, and there is never a risk of liquidation, regardless of what black swan events occur (financial crises, economic recessions, pandemics, trade wars, wars, currency devaluations, etc.).

Many funds that achieve high returns through leverage can perform well for 3-5 years or even ten years, but once a major fluctuation occurs—and such events are often unpredictable—all leveraged players will collapse.

For example, LTCM (Long-Term Capital Management), whose founders were Nobel laureates, achieved annualized returns of over 40% for 4-5 years, which was impressive. However, they ultimately collapsed during the 1998 Russian financial crisis due to high leverage. The situation in Russia was not only unforeseen by LTCM but also by Soros; no one in the world anticipated it.

Another example is Bill Hwang, who collapsed in 2021. After leaving Tiger Fund, he founded Archegos Capital Management and, at his peak, grew his $200 million family office to $35 billion, which is several hundred times. This was undoubtedly impressive, but he could also lose everything overnight due to high leverage. Meanwhile, Buffett's performance during those years was essentially flat with the index.

In the end, Buffett survived, while Bill Hwang went bankrupt.

"Dark Waves": So being prudent is always the best approach in the financial industry.

Rob: If you want to sleep well, do not pursue unsustainable high returns through high leverage; it carries high risks. Instead, seek a steady stream of income with no risk of liquidation.

"Dark Waves": As this round of tariff battles escalates, with a 12-hour time difference between Beijing and New York, can people on Wall Street sleep well?

Rob: In terms of market turbulence, it is still far less than during the 2008 financial crisis, and it does not compare to the global capital market turmoil caused by the devaluation of the yuan in 2015, or even the four circuit breakers triggered during the pandemic. If you have experienced these three turmoils, you would feel very calm now.

Take 2008 as an example; the panic back then was much greater than now. In the spring of 2008, when Bear Stearns collapsed and was subsequently bought by JPMorgan, the market began to fluctuate significantly, continuing for an entire year of declines. At that time, everyone genuinely felt that the global economy was about to collapse. Moreover, Morgan Stanley and Goldman Sachs were on the brink of failure; that was real panic, and we are nowhere near that level now.

Today, people feel that so much has happened in less than two months, which creates a very intense psychological experience.

"Dark Waves": Yes, if we calculate it, the S&P 500 has only dropped about 15% from its peak, which likely does not reflect some long-term risks?

Rob: If the U.S. truly enters a recession, the decline will be far greater. Moreover, this decline is starting from a relatively high valuation, and the market has not yet priced in the risk of a recession in the U.S. this year. If that happens, we are far from having reached the bottom.