“The Big Chill” is a 1984 movie that won three Academy Awards. It tells the story of a group of college friends, now in their thirties, who gather for the funeral of one of their classmates, who has committed suicide. Although the circumstances are grim, the gathering brings new purpose to each life.
I lovedthe movie when it came out, and I hought that watching it again this weekend might give me some comfort after a week in which a great “reset” occurred in the world order, sending shockwaves across global markets. To be honest, reminiscing about the eighties and the presidency of Ronald Reagan, did little to relax me. Especially since President Reagan was decidedly anti-tariff.
We have repeatedly pointed out that Trump is not concerned with stock prices and will continue to send chills through the global economic order since he fired the first salvos of the Great Trumpian Trade War in February. Since then, the S&P has fallen 20%.
Last week, we wrote:
“Trump’s potentially positive agenda of disruption has become a potentially toxic agenda of destruction.”
What does an investor do then? Be chilled by the $5 trillion of market cap that vanished Thursday and Friday, or chill out because there is little one can do about it?
The word “chill” has two meanings, and interestingly, they are perfectly contradictory, which makes it a perfect term for this week’s post.
TO CHILL:
The Big Chill 1
We have argued controversially that Trump is impervious to public opinion, that he is not worried about losses in the stock market, and that he is motivated uniquely by leaving a legacy where he is remembered as another George Washington, a President that changed the world order.
Trump decided on “Liberation Day” last week to slap a universal 10% tariff on every import from every trading partner plus a surcharge based on the trade deficit the United States has with that country. These tariffs will be “stacked” on top of existing levies, meaning, for example, that Chinese imports will be taxed at 54%.
This is the table Trump proudly brandished in the Rose Garden of the White House as he announced the end of the existing world order:
It doesn’t take a PhD. in economics, political science, or geopolitics to see how Trump’s decision sent a chill across the world.
Business leaders from Main Street to Wall Street are now scared and postponing investments.
Economists and academics are now appalled by the shoddy methodology and reasoning the Administration used to calculate the tariff rates.
Consumers are now alarmed that inflation will exacerbate the affordability crisis and, in certain sectors and industries, threaten their employment.
World leaders are now petrified that they face a terrible choice between kowtowing to a tyrannical Trump or fighting fire with fire to appease their constituencies and retaliating with tariffs of their own.
And the markets have been terrified by all of the above.
The Big Chill 2
Sometimes, the markets become so difficult that it makes sense for a trader or an investor to ease up and slow down.
Consider the historical context of this week’s market meltdown. Thursday and Friday’s blood on Wall Street was only surpassed nine times since the Smoot Harley Tariffs took effect back in 1930.. (Chart courtesy of Michael McDonough.)
Momentum/Sentiment is one of the key factors evaluated by the weekly Macro Monitor. The momentum of the S&P is clearly down, but other technical indicators are flashing caution to short sellers.
First, individual investors, as surveyed by the American Association of Individual Investors, have not been less bullish on the markets since the early nineties. This is a huge contrarian indicator
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Second, the Relative Strength Index for the S&P is now down to 23, the lowest oversold reading since Covid. This is another contrarian indicator where extremes must be respected.
In other words, for the first time in its four-year history, the wolf of wall street will NOT be assessing this coming week as “risk-off” or “risk-on.”
We are going to chill out with regard to a volatile market and an even more volatile President Donald J. George Washington in the White House.
We are in good company. The Chairman of the Fed, Jerome Powell, admitted this week that,
“We are well-positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”
If the Fed can chill out, we can too.
The Big Chill 3
I hope readers of the newsletter diversified into non-dollar assets. In “Make the Dollar Break Again” (read here), we wrote:
“I hypothesize that Trump’s Make America Great Again policy may also be termed “Make the Dollar Break Again.” Whether intentional or not, Trumponomics may be permanently altering the flow of investor funds. Why should surplus countries continue to recycle their export dollars into US treasuries, real estate or Magnificent Seven Stocks, when, for the time being, US friendship, protection, trade policy, and rule of law is uncertain?
I don’t like to give investment advice here but should point out that diversification is important in any portfolio, which should not only have a mix of asset classes (equities, bonds, and commodities) but also a mix of currencies”.
The performance of the dollar last week, and indeed since the beginning of the year, has been chilling:
The wolf of wall street is NOT unwinding his view that the yen, pound, euro, and gold, among others, will continue to outperform the US dollar.
There is still time for investors to position themselves before the Big Dollar Chill makes US dollar holders poor. That is the hopeful message.
Here is the Macro Monitor for the week, which, as mentioned above, will be de-stressing this week in the equity markets but looking to sell dollars.
Disclaimer: The content of this post reflects only the views of the author and not necessarily those of Armor Capital