Black Swan Friday

As I described in my last blog post, a Black Swan trade war escalation took place this week catching both retail investors and professional investors fully off guard.

Below we see the retail allocation to stocks going into this seminal week that Trump has been calling "Liberation Day". As we notice, since 2009 investors have become more and more complacent towards risk. Now they merely claim to be "bearish" on sentiment surveys but without changing their asset allocation.

Going into this weekend, there is now major trade war escalation risk as countries are now ratcheting up tariffs on the U.S.:

"World leaders were still processing Trump’s complex new tariff regime Thursday and few were prepared to unveil specific trade retaliation. But a number of them promised it was coming, raising the specter of an escalating tit-for-tat trade war that could devastate the global economy."

Treasury Secretary Scott Bessent had the following advice for countries hit by the tariffs: “Do not retaliate. Sit back. Take it in. Because if you retaliate, there will be escalation"

Overnight, China already escalated by doubling their tariff on the U.S. and that of course is why the futures collapsed Friday morning. Does anyone honestly think that Trump won't double down over the weekend? Suffice to say, markets will be a smoking crater on Monday if he does.

Powell delivered his economic outlook today but he was extremely vague on how or when the Fed would bail out markets. Today's hotter than expected jobs report contributed to the backward looking "hard data" that is causing the Fed to be paralyzed during what is surely the biggest global economic shock since the pandemic. The word "uncertainty" is now getting thrown around by every pundit and policy-maker like a corporate legal disclaimer.

Needless to say, Powell's speech today did not sit well with stocks, which further imploded after his speech ended:

This Fed paralysis is very reminiscent of the Bernanke Fed in September 2008 right after Lehman collapsed. At the time they too were preoccupied with inflation so they were slow to cut rates in response to Lehman implosion. They had already bailed out multiple other banks and felt that there was too much moral hazard to continue with ongoing bailouts. Of course, within days of announcing there would be no bailout forthcoming, they went into full panic mode as markets went into meltdown in October 2008.

Similarily now, I believe the Powell Fed could panic cut rates at any time. However, during the pandemic their first rate cut of .5% actually caused panic in markets, because investors then wondered "what do they know that we don't know". In addition there was a massive rotation out of stocks into bonds. And the Yen carry trade went risk off causing all manner of dislocation, which we got a minor taste of last August.

In the chart below, that first March 2020 Fed rate cut is shown on the left side circled in blue. As we see, the S&P ultimately fell -35% and as of this writing the S&P is down -17%. So there is still a long way to go for "derisking" in markets. Of course there could be massive short covering rallies at any time - as there were during the pandemic.

The problem for stock bulls is that there is nowhere to hide in these markets. Every sector is imploding at the same time, due to various trade war exposure. Even sectors such as Energy and Commodities that are usually associated with high inflation are now going bidless. As of this writing, U.S. crude is down -8% today.

But the REAL PAIN from this trade war is the implosion of the Artificial Intelligence super bubble that I've been warning about since its inception. Another Wall Street / Silicon Valley scam bites the dust.

Below I show regional banks updated from yesterday's blog post, having the worst two days since the bank run in 2023.

In summary, we are now in a global 24 hour rolling selloff and come Sunday night the ball will be back in Asia's court, which is the epicenter of the trade war.