“Going Full Reagan” | Tian Yang on Trump Administration’s Bet To Shrink U.S. Trade Deficit, Signs of Market Panic, and Dollar Outlook
59:58 Share

The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the f***ing door.

Extremely pleased to be joined by Tian Yang, CEO and Head of Research at Variant Perception. Tian is a quantitative macro analyst, so he specializes in looking at what the data says for short-term positioning as well as longer-term, more secular themes. Tian, welcome to Monetary Matters.

Yeah, great to be with you, Jack. Interesting times. Tian, how are you thinking about tariffs, about what their impact will be on global growth, China, the US, and then specifically markets too?

Yeah, so that's a very big question. So broadly speaking, we try and delineate very specifically three time horizons. The tactical is essentially next one week to a month, your trading horizon. The cyclical will be six to 12 months. So what's going to happen with the business cycle? And then the structural is kind of beyond that, right? The big picture, two to five years. Ultimately, is this a regime change or not structurally? So I think tactically, you know, we're doing this on a Monday morning.

we've seen the first genuine liquidation day on Friday. So if you see the S&P and gold have single day crashes of that magnitude at the same time,

That has been very, very rare historically. You have to go back to the teeth of COVID and you go back to basically after Lehman was allowed to go under in the GFC. So the market is behaving as if we need an emergency policy easing of some kind. And obviously on Friday, Powell did disappoint the market with his still relatively hawkish tone.

and yields obviously stabilized. Today is not good. The yield curve is steepening. So I think we're getting to that pressure point. This doesn't mean the Fed is supposed to act now. It just tells you the market is into that phase. Historically, that's when the market's either sniffed out emergency action or the market is in the mood to force emergency action. Now, I think from here, Trump's obviously spent the weekend doubling down. So

I think this is very much a case of, I think it's on Powell, but Powell is not going to move yet until he has enough cover from the equity market to act. So you're going to need the market to get stressed out enough for Powell to want to have to cut rates. I think it's really dependent on him to at least take the first step to try and arrest markets here. So obviously we can get into that, but tactically,

The key point is the gold S&P down that much is typically only being seen in truly historic liquidation where you need some kind of policymaker bailout to kick in. Cyclically, we wrote before about the Trump going full Reagan 2.0, the Reagan playbook. So I think they've committed to it more than I even probably anticipated originally with Scott Besson's interview with Tucker Carlson.

last week, they are definitely committed to that analogy, which kind of suggests, you know, Reagan had a pretty bad recession in 81, 82, right? They judged it necessary. Obviously, it was alongside Volcker, hiking rates, getting inflation under control, right? There's various national emergencies in that view. But they kind of did that and then managed to get the economy to bottom out. They took some losses in the midterms, but ultimately managed to, like,

you know, re-stimulate the economy. And obviously Reagan won a landslide in '84. So I think cyclically that feels kind of a reasonable assessment of the facts. Like in my mind, I'm bucketing this into policy-induced recession. So you had that in COVID. COVID lockdown was decided, right? We need a policy to force a recession.

But not to force, but the policy is to do something else. The recession is unavoidable or an unfortunate consequence. And obviously Volcker was the same. They needed to do something. They don't want a recession, but it was an unfortunate consequence. So I think those are in my mind, the mental models and rough kind of guideline.

And then structurally, you know, we don't need to overreact. I don't think we need to overreact too much to whether it was smart or not smart to use a bilateral trade deficit, all these things that we've got to, you've got to look at it as it is. The focus is bilateral trade deficits.

Right. So to me, it's unambiguous the message they're sending. So even if you get walked back, that is the focus. So this is being analyzed historically using the tripping dilemma framework all the way back to the 60s. So the US is unambiguously saying we're going to shrink. We want to shrink our trade deficit. We don't care how we're going to do it, but we'll find a way. Ultimately, the flip side of that is obviously inflows into US assets and the US is kind of US dollars world globally.

I think even before then, just based on how Besson and Moran, everyone talked, normally these things are quite measured and sequenced when you do it. Just going for it this hard, even if we back off now and we just end up at 10% tariffs, it feels like the sequence is a bit off. So the implication is

Now I think, yeah, this does say ultimately dollar weaker. They want it weaker. The economics of this now suggests that it will go weaker. It's a question of whether Moran can get his plan through and execute each of the steps now. And then that also obviously implies like real assets, gold and stuff ultimately turns out does have a lot of tailwind, even if it has gone up a lot. So I was somewhat skeptical gold at the end of last year. We weren't sure, but we kind of took some profits. We're quite happy having had a two, three year run.

owning gold. But the magnet to me, like when you see that bilateral trade deficit focus, that was a pretty big wake up call for me in terms of updating my expectations that, oh, okay, I really don't appreciate how aggressive they were that this is about the deficit outright. That is a target.

So if you take that as a constraint and work backwards, then the implications obviously follow. President Trump is not seeking to balance tariffs or non-tariff measures. He's seeking to balance the trade balances themselves. And you're saying implicitly that means that he's going to weaken the US dollar because that's one of the few ways that US goods can become competitive. So are you a bear on a cyclical framework on the US dollar? I would say structurally, yeah. So I think cyclically it's hard to say because obviously

There's a few particularly is probably a bit lower. I think this is more again, going back to tactical is next one week to a month trading. Cyclical is kind of six to 12 months and a structural three to five year. I think this really does change the three to five year. Right. Ultimately, you know, the stuff around whether the dollar is going to be the main reserve.

currency of choice, right? The friendly countries, sure, they can still hold some perpetual US dollar bonds on the plan, but the countries that you're not so friendly with, they're going to keep buying gold then, right? If it's this obvious to them, the US doesn't want to trade. So structurally, I think that's quite a big impact. Cyclically, yeah, if yields are going lower, the dollar weaker, you have the reversal, the capital outflow from the US does also make sense, but I wouldn't say it's as high conviction cyclically.

that it's going to be super obvious from here what the dollar does. Like even in the 2001 dot-com peak, right? That was like the last time the dollar valuation was high. You had a lot of comparable things around US tech, US valuations, exposure to US assets from foreigners in their own portfolio. Right. And there's a lot of similarities. Even then the dollar does end up chopping for a while before ultimately goes lower. So yeah, that's probably the outlook.

And what's your cyclical outlook on US stocks and US bonds? So if we follow that Reagan analogy of ultimately the recession is an unfortunate consequence, but ultimately once they get a lot of things done, they will stimulate their way out. There's probably at some point you do want to buy it cyclically in Q2 or Q3 sometime. I think from here,

the tactical horizon comes in, I think we need to see some kind of tangible signs that the policymakers are going to panic. Right. That's the old, you know, I first heard it from Michael Hartnett, right? The markets start panicking when policymakers start panicking. The two I laid out was on trade. You know, I think Trump is pretty serious. So

which are the countries at the front of the queue where it's the easiest politically to give those countries, throw them a bone, right? And like I say, Israel and Vietnam are very obvious because they're the ones that preemptively cut their tariffs and now taking it to zero ahead of Liberation Day. They still got hit on Liberation Day. They are obviously reaching out

you know benjamin netanyahu is in the us today so if we see some signs there then at least we have a tangible piece of evidence that this isn't just about revenue there's room to negotiate and where it's obvious the deal can be made quickly then you can go back to your base case this is just 10 permanent tariffs that you know which the market can live with

But I think it's a little bit beyond just the tell me mode, right? The market is in show me mode. You got to show me you're going to negotiate and get this done. And that's the thing. You can't jump the gun here. And then moving more towards a tactical view, tell us about your work. Why did you decide to monetize your model's long volatility positions? And what is kind of a capitulation sign? You said on Friday that stocks and gold crashing together is a very rare sign. It typically occurs

before a market bottom or before policy intervened. But is that conditional on the Federal Reserve or other policy intervening? I think in terms of what the goal of an S&P one day move, it's not a...

like they typically anticipate emergency Fed cuts. So it's kind of like, yeah, emergency cut like you had in COVID. Emergency kind of meet, right? Or I guess in COVID's case, it would be like the Fed eventually went all the way up to do crossover debt, right? So I think it's about the market forcing the policymakers' hand. I would say that's probably the most logical way to think about it. But you still kind of need to see how long it takes the policymakers to react. On the monetizing vol hedges, I think...

you know, that's just like, because

I mean, I saw you put out a podcast earlier this week with Ben, right? Volatility is mean reverting. You can't expect it to stay up. The whole point of owning low, owning vol is to monetize in these times. You can't expect it to be like the one time in history keeps going. And then obviously from here, there's no cheap vol anymore. So the only way you can be hedges is just have some cash, right? It's like the base case is so against you to pay up for hedges now that you might as well just sell.

If you're too long, you have to just sell. So I think it's just more when you see both of these levels, just base case wise, you almost certainly need to monetize it. Otherwise what's the point being long vol for your portfolio. So yeah, I don't think that's necessarily outright at that. Obviously that's an implicit directional view, but it's more like an outright when you, when you look at vol get that extreme, right? We have obviously some fair value models and things like that. You know, you see how inverted the curve gets, how it can be. Yeah. That makes sense. Tell us about your what's LPPL and what does that indicate?

Yeah, so LPPL stands for log periodic power law. It's the best tactical trading model we found. And we put a lot of resources into it and really, really, really put a lot of weight on it tactically. It was popularized originally by Didier Saunet when he wrote his book, Why Stock Markets Crash. And in academia, it's very, very popular. If you just Google it on Google Scholar, like tons of people write about it. So it's kind of quite well known. It's more about the

making it practical rather than make it just theory. So the basic idea is that when you have bubble and crash behavior in the markets, there's actually a signature pattern that emerges from the market that is more than just an exponential or parabolic shape, right? That's just more than RSI extreme or anything like that. Like there's actually implicit kind of

wave pattern speeding up. The analogy is almost like, think about like how it's like a disease infection in a way, right? So you have a cell order that infects three cells, which infects nine cells. At some point, the infection rate is too high, which leads to a certain behavior in the oscillational markets.

I think for traders, I would describe it as a bit like that last leg of the truly disorderly. Things are sold off enough, but it's that last WTF kind of leg down that tends to trigger the model. So we tend to put a little bit more weight on LPP over the top of other factors just to

have a better chance of flagging kind of true exhaustion. And most of the time these tend to go off in like smaller single name assets, but for markets as a whole in historically extreme times, it can. The most recent example for a big asset class

that I think fit the narrative was when yields peaked in October 2023. That was like the first time yields went up to five. That was like across the board kind of LPPL crash in bonds. Obviously, it's a bubble in yields. So I think we're just on the lookout to see this. And ideally, obviously, this time around, because of the sticky inflation we've had coming in,

And because where equity valuations are, equities have had to bear the brunt of the risk adjustment, right? There's a limit how much bonds can move when inflation is sticky. So because things are concentrating in equities, we ideally want to see more kind of true capitulation, crash exhaustion, LPPL patterns there. And so you would typically look for clusters of them, right? So we're running all the single names, we're running all the equities globally. And right now it's been pretty...

paltry, I would say relative to even the, you know, compared to COVID low compared to the true low in 2022. So they're all pockets, but it's been surprising that it's like I say, maybe it's because Friday was the first capitulation day. So maybe Friday is the first day that is the, you know, oh, SHI, right. That was the first moment. And then people actually

in that panel of potentially you're not selling because it's a discretionary choice. You're getting to that potentially you're selling out because it's a

it's a full stop loss which is probably what lpp are supposed to pick up so if we are truly in those kind of markets you would want to see the cluster clusters of it go up like typically market bottoms we would at major major bottoms it would be like five percent plus of like single names and stuff will be on an active pattern i think we've been around one to two percent so far on s p so you know

So you had a crash like pattern in on Friday with stocks and gold, but overall in the stock market you're seeing, as you say, it's paltry, not that many crash patterns. That's interesting. Moving towards a more long term view, are tariffs

Are they inflationary, stagflationary or deflationary recessionary? In other words, like both a scenario in which the extremely high levels that President Trump announced get fully implemented on Wednesday or even just I guess now it's kind of looking like the lowest scenario, only 10% tariffs on the rest of the world.

What is your economic modeling and view say about those impacts? Obviously, it's not just tariff. The tariffs are a response to the geopolitics, response to labor movements. There's a bunch of things here. So this isn't just necessarily purely tariff and isolation. But the bigger picture remains that security is a priority over efficiency. Right.

Right. So anytime you have systems and obviously by definition, security is about adding redundancy as well. Right. When I think about the global economic engine. So you're going from like a super efficient engine that has minimal redundancy. And COVID was the first massive wake up call for people to everyone going, right, we have to.

we have to be more resilient right but resilience literally the same way we're saying we need some redundancy by definition redundancy is more ineffective and obviously that's the big track right we're moving away from efficiency towards all these other goals so in that sense that is obviously structurally a bit more inflationary on a structural basis right like and you know trade was supposed to improve efficiency so if obviously if you trade less that's kind of the structural

I would say structurally, it's probably inflationary. Obviously, when you do it, you don't tend to do tariffs in isolation. I'm a big fan of Russell Napier kind of framework that ultimately will see more fiscal, you'll see government-led industrial spend, prioritizing workers, those kinds of things, probably alongside this kind of policy. So I would say structurally,

you know, big picture, three to five years, I think you have a slightly higher equity level of inflation if you just look at tariffs. Cyclically, if you do, obviously, if you do enough, it's demand disruption, right? Which we see. So, you know, that is going to be beyond the one-off price effects. That's going to be disinflationary when you hit the economy hard. But I think

you know, the path was narrow anyway, right? If you read Steve Moran's, you know, the white paper in depth, I think he originally did acknowledge the sequencing was important. His first steps were get inflation under control,

get the fiscal deficit right a bit more under control then do tariffs for negotiating and then ultimately use that leverage to engineer weaker dollar so i think that the speed at which they've gone for this before inflation is truly there obviously this is why the market is looking at the fed and going oh right you know it's going to take a lot now we're going to need equities to force the fat hand right it's not that easy and obviously they've done this when doge hasn't quite

Doge has been more buck than bite so far because you haven't seen it in the hard numbers, right? Because the treasury publishes the cash inflow out there. So I think by jumping the gun a little bit, it's offset his sequence on having

I still think the leverage is generally obviously with the country that has the demand, that has the consumer market, but it's probably offset a little bit because you are bringing issues around. In a recession, automatic stabilizers kick in, the fiscal deficit is going to widen. So if you don't have it under control, it's going to be as we're seeing, right? Then maybe nominal bonds can't give you as much protection. And so those are...

that's why I would tell me there's a little bit of playing with fire here. It does feel like the game of chicken against power to cut rates, they all know that there's this backdrop that's pretty concerning. That's probably the part that...

Yeah, like it's probably going to throw off the sequencing of how we get to that cyclical structure. That's the part to me, it feels like it hasn't been thought through that if they did follow the logical sequence, it probably wouldn't be this dramatic a shock. My view is that I think structurally it's a bit more inflationary because you're making a system more resilient by adding redundancy.

right but cyclically the the magnitude and the hit to sentiment from doing this is going to lead to demand destruction this is more like a covet lockdown scenario where by it's just unintended consequence of policy but unlike covet when the government chose to do massive fiscal to offset because of the fiscal room today it's going to be hard to do that much discretionary fiscal to offset the impacts right

So on a cyclical view, you think it could be disinflationary and bad for growth, structural, more inflationary. But OK, so cyclical, does that view not a lot of fiscal stimulus and demand destruction from tariffs? Does that mean that it's causing you to be more conservative with stocks and more bullish on bonds, given that you have a deflationary view? Yeah, I think cyclically that

I think that would be true. I think it's like from here, having a slightly more balanced allocation would make sense. But I think we've leaned heavy into tips instead of nominals. And I think, as I mentioned earlier, because of the focus on bilateral trade and really remaking the world trade order, these things that ultimately suggest that we are in that financial, the pace of us getting to a global financial repression scenario in terms of who needs to finance government bonds is

is probably faster than anticipated so that does also mean yeah sure if we truly get a pretty quick deflation recession and clearly bonds can rally but ultimately i think coming out of this you want to be flipping your nominal bonds into gold again right like it can it can obviously rally in the short term but i don't you know as we've already seen right it's not going to give you as much

you know, in general, you shouldn't expect the nominal bonds to be giving you as much of the risk off performance as you would have normally hoped for during risk off. So there really is not that many places to hide.

And what are your leading indicators say about growth inflation? I know you've done a lot of work on the service sector in the US. I think you characterized growth in the US economy as resilience before tariffs. Yeah, share your analysis just of all the indicators and what that says about the US economy. And if you think they're going to change rapidly.

Yeah, because obviously there's only so much the data can capture. So heading into this, the US economy was pretty resilient. It wasn't bonanza, but it was fine. It was just kind of

going along, I think the magnitude of this shock is too much. That's why I would say the analogy is very similar to when COVID hit. The data is not going to update in time. This is just a straight up exogenous policy shock type of mental model to overlay here. So yeah, you would think from here, and obviously all the sell side, everybody's revised up all their expectation, but there's no reason to fade the consensus

So in my mind, this is more about having a plan on what are the signposts to then reassess. This is a recession by policy, unless they change something very quickly. But the tangible signpost needs to be that they show some sign they want to negotiate. Like I say, Israel, Vietnam will be the easiest to give something on, to throw the market the bone they want.

But I do think from here that there's enough damage done already on policy credibility. The game of chicken is being set off already between Trump and Xi and between Trump and Powell, right? And the whole point in game theory is the game of chicken is like, you know, it's basically impossible to predict. It's very hard to have edge. So I think if you look at all that, it's clearly going to be pretty painful. I think the question is, is it going to be a mild recession or is it going to be a big one?

And this is where I think that Reagan analogy is important. And obviously for the people that believe it's going to be a relatively quick recession, there's been a lot made of trying to get oil prices down. Right. And, you know, if you, if your conspiracies, you know, obviously I don't know, but obviously MBS did is try to time the OPEC supply increase. Right. So you could argue, maybe they're talking, I don't know, but I think for us, for this to be a, a relatively quick recession,

recession, they will need to have generally enough of probably a disinflationary force that inflation truly gets taken off the table, which enables rates to get cut a lot. And then you're into that Reagan recovery playbook, right? If we still do this and then you have inflation still be somewhat sticky for a while, even though the Fed does an emergency cut, which I think they'll have to do if equities just keep going, you're ultimately probably

you probably create more questions around fiscal sustainability, you create more questions around long-term viability of nominal bonds as a risk-off hedge and so forth. And I think those things will actually probably weigh on how much the economy can recover. So, yeah, obviously...

There's a lot of moving parts right now. But yeah, I think the question is just more how deep would the recession be? If they follow the Reagan playbook and execute it correctly, then you would expect maybe a few quarters and then they can start trying to stimulate and juice the economy again.

So how are you calculating the odds of a recession? Based on what you just said, it sounds like you think they're somewhat high. I mean, definitely elevated. If you assume the policy stays here, then I think most sensible people would view this as like, okay, you've really disrupted business. All the marginal decisions on hold, equities are screaming and tanking lower, right? They're screaming at you to be like, there's stuff going on. If you just keep it going for a while, eventually that's obviously hurting sentiments, hurting a lot of

Yeah, just activity, right? Everyone's going to go into defensive mode. People are going to wait and see. I mean...

It's a bit like even if they back off now, I think there's enough damage done on uncertainty. It's going to be quite hard to walk us back from those. Just have things go back to the way they were. Right. It's more like once Putin decided to invade and say, and he immediately moved the soldiers out, you know, the sanctions, there's things still coming, right? There's still shifts. It feels like we've just crossed the Rubicon enough here that if we did this and then there was very quick deals, things are fine and it quickly gets better.

taken down to 10%, there might be some window in which people are like, oh, this is truly just negotiation. 10% is here to stay. But I think the way they've gone about it, the window is very, very narrow. I've called over some different contacts in China and stuff. Factories have decided, yeah, we need to just make layoffs, put everything on pause. What are you going to do with this much tariffs? And a lot of businesses will be looking at it and just being on pause, being paralyzed. And that's a pretty big

hit to the momentum, right? So it's going to be very hard to restart it once people have that in their minds. It's kind of just if it's in memory, it changes behavior.

And Tian, I'm looking from a note you sent out over this weekend, looking at different asset classes, the 10-year, the S&P, industrial commodities, high yield spreads, credit spreads, and indicating the probability of recession based on that asset class. And so from industrial commodities and the S&P, it's elevated 60% to 70%. From high yield spreads, it was, quote, only at 20%. But the data was from April 5th. The data may be different now. So talk about what your model says about median growth.

recession, recession odds? And then also, how do you, you know, give investors advice based off of, okay, my model is saying, recession odds are, you know, x, but I kind of think it's going to be 1.5 x or 2x. And just the interplay there between the systematic and the discretionary.

Yeah, so I think the way I frame it is kind of, you know, the Garry Kasparov quote, right? Man plus machine can be man or machine alone. So the models hopefully give you an anchor and then you kind of have, you do have to make a judgment call.

From our point of view, we try to be empirical. We look at history, try and read about history. I spent a lot of time reading about the Reagan era and just trying to have this other Monroe Doctrine analogy and just use that to give some context to what's going on. I was chatting with a colleague on the weekend about the analogy when the Arab conquest happened, how that shifted global trade flows. So you kind of have to overlay some historical empirics over the top of the models.

But I think in times like this, all we know is that coming in, it wasn't particularly recessionary. They've done this one-off exogenous shock to make it recessionary. Ultimately, that does mean if you back off quickly, the recovery can be potentially relatively fast if you do it fast enough. But I think the window is very, very narrow now because they've done it over the weekend. They've kind of doubled down. So it's going to be very hard to back down right now. So I think, yeah, it seems...

Yeah, it seems pretty likely. I would say at this point, it's not even necessarily news, right? Like we all, like I would say most, like the majority of people look at this going, if things in place, it's definitely bad. Even if they remove it tomorrow, it's still pretty dicey, right? I would say most people are there and there's no reason to fade that until, you know, like in my mind, the next moment to reassess tactically is if we do crack

crash enough to get the Fed to do something on the emergency. And let's see if they give meaningful relief to Israel or Vietnam, which will be the easiest deal. At least you can see a little bit at that point how the high frequency data is looking. You can see how the bond market is reacting to get some sense in real time. But yeah, it was easy to give advice before on at least

you know, monetize long roll hedges, right? Even from here, it's given that there's not even any, any kind of asymmetric hedges that are very obvious life because the ball is already so high. Yeah. From here, it's kind of,

You kind of do have to just hunker down a little bit and see how this plays out. I mean, for choice, I do think you're getting pockets in the market that are getting to pretty distressed valuations, obviously only certain pockets. So I think for investors who are comfortable with certain assets and they know it well, they know it's ultimately necessary for the world we're moving to, then you would probably be looking at starting to nibble at some point this week. But I do think you need, for tangible science, it's normally...

It's normally been policymaker panic, but that's done it. And what sectors are you looking at? I know you've done fair value analysis of the different sectors as well as earnings expectations. What are your thoughts? Yeah, well, so I think even like before Liberation Day, there was still an implicit assumption that global trade flows probably wouldn't be able to change that quickly. And that was stopped, right? That would be a somewhat gradual process. And I think now, yeah,

That's been disrupted so much that again, everything is somewhat contingent on what happens here in terms of policy. But I would say at the margin, it does make sense to lean into the things that ultimately link to a domestic-led, US manufacturing-led kind of play, right? Whether it's the picks and shovels, the materials you need, the transportation you need linked to that play. We're obviously now in every stock is down. This is full on liquidation mode, right?

And there are assets and companies that ultimately very exposed to that theme that was previous starlings that are getting sold off, right? Whether you're building warehouses in the US, whether you're moving things by train, by barge, by whatever, right? There's a lot of stocks that ultimately, I think, align with that secular scene, getting down to more reasonable valuation, right? Ultimately, we are going to build more things in the US. So I think that would be

Something that even that's still consistent with the big objectives that President Trump wants to do. I think right now, a lot of questions up in the air on many assets that optically look very cheap, but it just feels like one of them three to five year, the rules of the game is changing. Like, for example, I think we've traded China pretty well. We thought it was a tradable bazooka.

in September, you know, I think, you know, deep seek and stuff. I do find a lot of Chinese tech companies quite compelling in doing good work. The government is going to back them. But this is like full on

economic trade war game of chicken type thing, right? And then you have to ask lots of questions like, okay, it might be cheap for a reason. It's kind of buy beware. Maybe the answer isn't zero allocation, but you wouldn't want to take too much risk on those things, right? I think that's what the really tricky thing. I think it's important to assess does the structural picture, the rules of the game almost, are the rules of the game still aligned to the companies you want to own? And I think that's why this is such a shocking moment

for the market that actually this is fairly clear indication the rules of the game are changing so even your three to five analysis has been difficult and obviously for people who follow China that was that's been the whole problem since the peak in 21 right it's suddenly like when the rules the game change things can look cheap but like you kind of constantly reassessing if you don't know what the rules of the game are how can you assign kind of a decide what the right valuation is so

Yeah, I think those are the questions in my mind and a lot of them in the bucket of too hard. But there's some things in the US that I think can work. So that's why I let off that note with kind of the serenity prayer

you know, the variant perception of serenity prior for investors, right? We just need to have serenity to understand what are the things we don't know, have courage to act on the things we do know, and then hopefully have the wisdom to know the difference. I feel like it's, we can be create reasonably courageous on the U S domestic exposed things that ultimately aligned and should be relatively shelter, right? That I wouldn't feel that bad about nibbling at, but there's a lot of things that's just too hard. Don't know right now. And,

And what would an example be of a pure domestic or mostly pure domestic stock, whether a sector or a basket of types of companies? When you look at our capital cycle, marine transportation and things like that are very, very high up. So you have domestic exposed names.

like that. So that's pretty good. Obviously, I mentioned the railways are starting to start to join in the sell off. Ultimately, we're going to need domestic railways to do stuff. Sure. Maybe yes, when there's changes in global trade flows, you do need to rejig a little bit what products you move, where you import export. But maybe probably these things are going to be fine. Ultimately, do you still need aggregates and cement and minerals for the things you're going to build?

That would make sense. Yes. Sorry, what did you say? Marine? Are you talking about shipping or what type of marine? You said? Yeah, more domestic. Yeah. So you have companies that benefit from Jones Act. Okay. That makes sense. And then on Chinese equities, are they in the too hard pile? I think we need to just adopt the tactical, cyclical, structural framework. So I would say...

So I've been quite surprised. So my first reaction on Liberation Day and the thing I put out was I thought one should bet on a China deval as a tail risk the markets aren't expecting. It turned out they didn't really change the fixing that much and just slapped tariffs back. But the PBOC has been leaking reserves consistently for about six months. So there's a real pressure point there. The economy was a bit moribund anyway. So now with this

It's almost like sanctioning China. Before they've done anything in Taiwan, you sanction China effectively. The pressure is really on China cyclically. So I think we're going to have to wait and see. We're obviously in a margin called liquidation territory right now. It was a holiday on Friday. They've obviously opened this limit down on lots of things. So I think cyclically we'll have to see where things go. But yeah, I think the outlook is pretty dire. It's very hard for the economy to hold up in the face of this much pressure.

structurally is quite interesting because this year since deepseeks probably the first time i feel like a lot of people i know i'm sure have changed their tune to be a bit more optimistic on china that it feels like china tech there is a lot there so i think that would be the the positive aspect and obviously the valuations are still reasonable but i am concerned on

So if you look like a map of European trade before and after the Arab conquest, there's a complete change in what the centers are. You have the Mediterranean that absolutely dominated everything. And obviously after the Arab conquest, that previous center decays and trade migrates to the Franks and then obviously the Arab places and you have these shifts. So the obvious answer is usually

you know the winner and loser but then there's often this third party place where things go and they benefit right so I I think right now it seems like China structurally even though there's a lot of great things going there great things going on there the the US has decided they're in the in the fully in the enemy bad box bucket right so this is where at least

Besson and co have talked about their view of how they want to reestablish a Bretton Woods type system. And obviously, Stephen Brown put in his paper that you'll have the friendly country, allied countries who's in the green box, who's in the red box, and that kind of thing. So I think given China's in the red box, you would need to feel like you have some edge on. They either aren't going to go in the red box, which, yeah, that would be probably the part I would say is kind of too hard right now.

I mean, it's possible. I think President Trump seems to show he likes President Xi. That's the part that's tough, right? Like that's in the too hot bucket probably. But for now, they're in the red box.

And Tian, it's a little more simple talking about numbers, but just take specific companies like, for example, Nike. I just looked up their gross profit margin. You'd think it'd be higher, but it's only 43%. If tariffs on China are now at 54%, that's the entire gross margin of Nike. What happens? Do they stop selling entirely from China? Do they sell at a loss into the United States just because they have to sell the shoes somewhere? Do they import it into Europe?

Are they making moves? Will they make moves to go into the United States? How long is that going to take? Like, obviously, for Nike, you know, it's a complete unknown, but maybe combining all these companies together that have huge China exposure, for example, like Apple, just like what happens, you know? Yeah, I mean, again, I have to think about what is just pure speculation versus what is something tangible. I think we can say, I think most sensible people acknowledge that

These things take a lot of time to redo, right? So it's not so much a question of these things are going to change overnight. And obviously, if you impose the tariffs overnight, then it's an instant impact on margins and hit, right? That is fairly clear. I have noticed former Secretary Steve Mnuchin has given probably one of the most thoughtful finessing the problem solutions, right? Which is,

let companies make announcements on, you know, he gave the Apple example, right? Build something not necessarily related here. You'll get credit for that and then your things can avoid import. So that would be probably a good one if they adopt it as something I think the market is going to accept. I mean, it's probably acceptable to President Trump. But yeah, like it has to be some kind of something that can help you through the adjustment.

cost period, right? Like that's kind of obvious, right? Like, you know, it's going to be very hard to shift, to shift these supply chains. I do think it's a wake up call and that people realize this is a structural trend that they will need to reassess. For now, my basics would be that I'm going to put credence in the Steve Moran-Besson framework that ultimately there are ally-friendly countries in the bloc and the countries that are outside the bloc. So for example, NAFTA

USMCA, it was conspicuously absent in terms of reciprocal tariffs and stuff that the automakers did get through on their messaging. Like the entire North America is like one integrated supply chain that maybe ultimately these countries will have to pay. There will be burdens put on them, but ultimately those can still form part of a block. And

And I think that's the, those are probably the areas to look for where, where, yeah, if you're a multinational, you need to, you know, rejig your supply in, at least in terms of which countries are close to the US sphere of influence that will matter. Right. And then this goes back to the Monroe, Monroe doctrine analogy that ultimately the US sphere of influence is America's primarily, right. So that's why it's, you know, it's, it's Panama, it's Greenland, it's Canada,

you know, LATAM is going to be in there. So if that's ultimately the US sphere of influence the US cares the most about.

We all know wage differentials, right? And sure, maybe you can do AI, use robots to build factories in the US, but the wage differential is real. So it's probably more the nearshoring and friendly countries. And there's some other ways they extract revenue by the tariffs and find some other ways to compensate the US workers who've been left behind. That is probably the most...

or at least a self-consistent potentially path to how we get there. Yeah, like I think, I find myself rereading Stephen Moran's whole paper. It feels like every week we need to reread that to just get some sense of, okay, where are we on this playbook? Yeah.

Tim, what is your work saying? The variant perception process, what is that indicating right now? We understand tactical, cyclical, structural, but what are you actually looking at? Can you explain that? Tactically, I'm looking for those tangible events like Israel, Vietnam, Fed emergency meeting, emergency cut. Those, I think, tangible evidence of policymakers'

throwing the market a bone, which can arrest, at least put a floor under the sell-off of it. We have to acknowledge that starting valuations are high. So a very simple way I look at valuations is often look at what our price is relative to like five-year peak EPS and five-year peak forward EPS, because it tends to be a bit more stable and give you a look, right? So for us to get to the COVID low and the 22 low, it's more closer to 4,000 points on S&P than not to match those values.

those capitulation moment multiples relative to previous peaks. So that gives you a sense that there might still be some room if they don't step in. So quickly, I've got in my mind that Reagan playbook. So I wouldn't be using all my bullets in terms of deploying risk. My mental model is to very much follow that, that we get the recession, we'll see how inflation ultimately is. And that helps you decide how quickly they can re stimulate into next year. Or maybe even it's a bit more delayed.

structurally my main you know I think we've had a a you know big you know we did we wrote a big report last year called the structural limits of fiscal policy and looking at all the historical examples of very high deficits very high government to that and what the solutions were and generally ultimately the solutions have been financial repression of some kind you have you know it's too costly to

generally raise taxes sufficient enough to offset and it's too costly usually to do austerity, right? So you normally have to do financial repression and try to inflate it away a little bit. So

I think that logic hasn't changed. Obviously, tariffs can cover you for a little bit, but we know we have unsustainable entitlements in the US, right? You would need the Moran plan to work. Other countries have to exchange the duration of their debt. You have to get people into bills, get the FETA lower rates, you get interest expense down. So there's a lot of those moving parts that I'm looking at to see if they can ultimately square that circle a little bit. But for now, it feels like the financial repression story

you're going to get a better entry point to get into that longer term structural theme if you don't have it already. That ultimately, I think the future path is probably more inflationary as a result of this and not. But I think that's probably the biggest call you have to make, right? And that's, I would say that's definitely a lot of smart people on both sides. I've had this debate with some pretty thoughtful clients a lot. And there's very, very strong views on either side. Yeah.

So the cyclical view is there will be a one-time price adjustment and that will cause demand destruction and likely a recession. Structurally though, you think it will be inflationary, not because we're buying from China and there's huge tariffs on it, but because we're buying from America and it's more expensive to build in America. Yeah. I think the question is, will we get a sufficient supply side response in response to this to make it

disinflationary to offset the fact that we are moving from a previously very efficient global system towards a much less efficient global system whilst at the same time there is the kind of you know inequality labor angle right which does necessitate a lot of government policy to support them

And so that's the trade off. I would say for now, going back to AI, I remember a very good framework I saw on that was this idea of point solutions versus system solutions structurally. So what we're all excited by and the disinflationary impact is the point solution. Okay, all your customer service reps you replace instantly. Look at how deflationary that is or the cost saved. And there's a bunch of these point solutions that get adopted very, very quickly.

But to fully realize that this inflationary benefit, though, usually you have to have a system solution in place. So analogy was, say, originally with electrification, factories were steam powered factories, right? So your steam engines built in the middle of the factory and your entire, you know,

assembly line, whatever's built around it. You need to be located next to a river because you need to run your steam engine. You needed those things, right? So when electrification comes in, you move the steam engine out, bring your electric engine there, but you haven't changed the location of your factory. You haven't changed how you set it up.

And then when the next guy builds a new factory, they realize, oh, I don't need to be next to this river. The land here is super expensive. Everybody's next to this river. It's electricity now. I can just build it somewhere cheaper. Oh, I can just redo my supply chain completely differently and take advantage of this. So I think that there's a lot of these system design things that take time to come through that the impact on a year-on-year basis might not be as big, but obviously they add up cumulatively. And I think those are the parts where I'm like,

That's the part where it's probably not enough if we're forcing this bigger contraction in trade and you're forcing this bigger shift from efficiency to redundancy, i.e. higher costs, just in terms of the global supply chain or the adjustment costs that come with it. So, yeah, like I say, there's obviously a lot of uncertainty, but for NET, that's kind of a judgment call.

And so just you think it's likely we're going into a recession. Is it is the case then that your tactical and cyclical like overweight bonds and underweight stocks that is that true or not? And if not, why? Given that your economic view? Yeah. So I think, you know,

I think gold is the more obvious answer to me as a hedge. Gold and tips, I would say it's a more obvious answer as a hedge. I think on the equity side, yeah, there's still a lot to go down if you are exposed to kind of the previous big tech trends

kind of more expensive valued or unprofitable tech, if you're overexposed to those very sexy areas and arguably the valuation rating has a long way to go. But I think it's not just a blanket sell everything moment because obviously if you truly believe this is just chaos and there's no plan, then sure. But like I say,

I think there's a reasonable probability they are trying to follow the Reagan type playbook. We've hit on many of those that are US domestic exposed. You need to be on the mindset of trying to pick those names up as we go. So yeah, that's why I would say it's a bit more nuanced. But sure, in general, yeah, there's going to be a need to de-rate a bit and for some of the valuations to come lower. It kind of depends on the starting point. But in general, I would say, yes, you need to have sufficient risky

assets tilt a bit more towards golden tips in my mind for now, just because it's not obvious that bonds will give you as much protection as you need because of the size of fiscal deficit as a starting point. On the equity side, I would say there's a lot under the hood. I think there's going to be a lot of rotation under the hood analogous to maybe 2001, 2002. That's a very good analogy that even though the headline collapses, there's a lot of very good opportunities in some of the kind of

you know, names that have not been as sexy for the previous world. So yeah, but sure, in general, yes. But I think there's more nuance that this is a such a historic moment that it's actually changing a lot of under the hood what you need to be exposed to that isn't just as simple as just stocks and bonds that there's a few dimensions to it. It feels like. So risk off, but the risk off hedge is not nominal treasury bonds. It's treasury inflation protected securities and gold. Yeah. And

I've got my buy list on all those companies I think I'd like that. Like I say, let's see if

present trouble pile froze to the bone we'll see where the markets are and then you can start nibbling a little bit and then tell us about your leading economic indicators is it kind of that the economic data has just not reacted quickly enough so you're mainly paying attention to the tariff news flow and and markets which are pricing things in because the data hasn't come in yet and sort of yeah tell us because i know that's very you know key to the process as well i think heading into this

only some of the survey data was picking things up. So if you look at, say, the average of all the regional Fed surveys on future activity or employment on prices paid, so you could start to see all those going in a more stagflationary direction. So the margin, they were kicking a little bit. But yeah, it's only been a few days. We know there's a delay to the announcement of all these data points. So I think, yeah, it's kind of...

It's a COVID recession kind of analogy that, yeah, right now what we know is that this is the setup coming in. It wasn't so bad, but this is a pretty big reset. And so we can see how the data evolves as an anchor.

But if you're trading tactically, you have to react, right? Obviously, if you're a cyclical mindset, I think from here, you kind of, it might be slight, you know, like I say, there's probably more things to be doing, to be done in terms of rotating your exposure than just panicking now too hard, right? But structurally, that's probably like the biggest shift this has in terms of reassessing. Yeah. Where fair value for different assets should be. I think this is a pretty big moment. Yeah.

And does your Reagan 2.0, we have a recession, but we emerge from it glorious. Does that kind of assume a tariff reduction case? Or is that possible or probable even in a world where we still have 50% tariffs, 54% tariffs on China? Yeah, I mean, I think implicitly you probably need to get back down to more towards the 10 base case for most countries. But like I say, China has been carved out to be in this red box, right? They want, and given it sounds like

President Trump and Xi aren't even talking yet. It's going to take a bit of time to get us to the point of being able to make a deal. I think for most countries, it's politically relatively easy to come and make a deal with the US and say, okay, what do you need? What does it take to make a deal? The problem for China is I think just given how we've got here, the path dependence of what they both said and done, it's going to be probably a lot of work to get a deal through. So I think China probably is a slight carve out.

in that specific example. But yeah, I guess I'm implicitly assuming a lot of other countries will have made a deal within the next two quarters. And by which time you've removed the uncertainty from markets somewhat, and the economy might have given you a couple of ugly prints. And then from there, they'll feel confident to try and stimulate the economy again. So let's wait and see.

Yeah. So you mentioned two sectors that you think could do well or might benefit from this new tariff world, rails and shipping. What about... Demand, agri-goods, just lots of things linked to building stuff in the US, right? Yes. Maybe construction companies...

Yeah, I think, yeah, depending on which one, you know, for example, even like home builders, obviously recessionary, you know, there's lots of affordability, there's tons of issues. But once you start, you know, some of them are starting to trade below book value, below tangible book value. So you're starting to pricing impairments on like best holdings of land and things like that, right? So you are starting to see some pockets of distress. Now, it's obviously always a tricky thing to catch the falling knife that I think, you know, you can't just...

you know, spend all your risk exposure. But certainly when you start seeing some of those things, it does start getting a bit more interesting. What about like, for example, two sectors that for me, I noticed are down a lot semiconductor industry, but also banks and financials, banks as well as non-bank alternative investment companies. What about those types of sectors or any other sectors that you think are interesting, either, you know, overweight or underweight? You could say, for example, like, you know, goods that make a lot of stuff in China that's an underweight.

Yeah, so I think banks are an interesting one because obviously when President Trump first got elected, there was a lot of excitement over deregulation. And that probably is coming. But this move on trade first probably puts us back into a bit more of the financial repression.

things slightly. So ultimately, it's a question of who's going to need to eat all the government bonds that they're going to issue. Obviously, you can force someone to foreign countries, but historically, you have to force someone to your domestic financial institutions, right? And normally, this is linked to the, you know, there'll be regulations on what, you know, risk-free assets and things like that, right? And, you know, for example, there's a lot of talk about the changing some of the supplementary labor ratios on these regulators that make it easy for banks to hold bonds, which I will cut into the

from the big picture wise we're putting to the financial repression bucket on you know making it easier for your domestic institutions to hold your bonds

So I think that's the thing that makes it a little bit tricky on banks. Right. And obviously right now, lending stands is going to be have tightened for a while. So they are obviously a traditional cyclical. It might take a bit of time for lending standards to, to, to, to widen again. Sorry to ease again. Sorry. They've obviously deteriorated a lot. So yeah, banks, I would put in the, I can, I can understand if you like it for me, I think

Our capital cycle model was pretty cautious even before SVB. And because we have this broader financial repression concern on a structural basis, I'm generally not being a huge fan of

of the financials, right? If we truly go into a world of financial repression, it's gold, it's hard assets, but it's also things like CTAs, right? There's a bunch of things. And then the kind of soft nominal financials, it's tricky. So in that sense, I think that's quite hard to do structurally. From a cyclical point of view, the time to buy banks is usually after a recap. Historically, they save his time.

So once you see a recap and you buy a cyclical, it makes the most sense. So from here, you use kind of valuation alone. That means too hard. For what it's worth, in our data on the fair value models, tech is somewhat fairly valued for now. Now that we've crashed this much, it actually thinks it's somewhat fair. It's not cheap, but it's somewhat fairly valued.

But we'll kind of see, right? Obviously, there's a, you know, Semi is one of the most complicated global supply chains. And if this is truly about shifting supply

global trade patterns, that it's going to be hard to see how that shakes out. Yes, I only brought it up just because semis are selling off alongside the market. And it appears that semis are so far exempt, but there could be new sector specific tariffs. So there's so much uncertainty at this time. Tian, I loved your capital cycle model, and particularly, you came up with the idea of the commodity super cycle, which really had legs. And now it's the phrase everyone's

familiar with in terms of oil in 2020 and 2021, just that no one was investing in oil at all. So there was just no new supply coming online and demand was gradually increasing. So you would have the

the price go up and it'd be a good time to invest in energy, which of course it was. What does your capital cycle model say about energy right now? President Trump says he's drill, baby, drill. But a lot of oil analysts say who the president is does not have a huge effect on how much oil is drilled. For example, a lot of oil was drilled under President Biden, who was a lot certainly more anti-oil than President Trump. And then also any other capital cycle insights from any other industries that you think would be of interest?

Yeah. So, well, firstly, the capital cycle is a pretty long-term structural model, right? It's quite slow moving. I would mentally think about it as it's a proxy for

competition in a way. So if you see an industry that's sexy and loads of capital flows into it, you're generating too much competition today, which actually lowers future profits potential. Right. And so this normally shows up over the next full cycle. So mentally, I think of it as like, normally when people value companies,

that have cycles, you would value them at mid-cycle level. The capital cycle is saying, if this was capital scarce, you should mark up your mid-cycle valuation next time around, right? And if you're super capital bundling, you would need to mark it down. So that's probably the framing and thinking about it, at least for me. And probably the main quirk we do is we embed a marginal operational ROIC component. So our model is a bit more sensitive when demand supply gets a bit of traction. So that's kind of it. So, well, and it's just a whole, I think for EMP,

its capital cycle is still relatively good, obviously not as amazing as back then. But in general, for energy, I think the capital cycle models are fine. It's still capital scarce, but it's come off a bit. Like I mentioned, the top names are things that

you know, like the marine transportation and some of those sectors that are still ultimately slightly cyclical in nature, perhaps, but like I say, have a slightly different angle. I think the, it's obviously very hard to keep coming up with these very catchy catchphrases, but I think, you know, going all the way back to the end of 22, I still think there's legs to this in terms of it's more like a capex approach

super cycle than a commodity super cycle. So it's more from here, the capital cycle did heavily flag a lot of the capex super cycle stuff. And the capital cycle was flagging a lot of infrastructure plays globally. So you're getting components of real earnings, safety, but also like investment needs, right? So things like within North America blog, you have things like Mexican airports as a good example that that flag then, which I think is still quite interesting.

So, yeah, but this is obviously a very long term thing. So yeah, you've described a little bit about, you know, even this weekend, our process is like, okay, I think we, you know, Friday is the first capitulation sign. Let's see when power moves, what is on our buy list, you go through the top capital cycle names, you think about, okay, does this still logically make sense in the future we're going to, okay, these are domestic ones. So these are the warehousing names, this is transportation names, and then you have your list, right? And then you can dig further.

So that's kind of the process and how to use it. And what does your capital cycle process indicate about semiconductors where you've had a huge surge in capital expenditures? Where do you think we are in that cycle? Or do you think it's a super cycle in AI CapEx? So the capital cycle model, I can't remember exactly. I think it peaked more towards the end of 22, 23 in terms of the peak capital scarcity reading.

Because obviously, because we have this operational ROIC component, the marginal return you get from the investment matters a lot. And the marginal return of investment has been coming off quite a lot, right, in 24 and up to now. So I think the capital cycle has turned a decent amount. It's not one of the worst. It's not one of the best. I think it's just in the middle. So yeah, I will say it's kind of more in the pretty neutral bucket right now.

Tian, I've read your work for a while and I've really found a lot of value in it, both through our interviews, but just also my investment process, your analytical framework. So I appreciate you coming on the show, having this partnership for our audience. And I thank our audience for listening. Yeah, no, thank you, Jack. Glad we can do it. And yeah, I love your podcast. Keep going. You put out a lot of content, but it's so good.

Thank you. Just close this f***ing door.