JD Straight Up - 14Apr25 - The "Wreckoning"

The 'Wreckoning'

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5406 – down 4% from 5612 two weeks ago - down 8% YTD

VIX at 38 – up 74% from 22 two weeks ago

10yr Treasury yielding 4.49% (up 6% from 4.25% two weeks ago)

Agg (US Aggregate Bond Index) at 97.61 – up 1% from 98.92 two weeks ago

Gold at 3227 per oz (up 2% from 3165 two weeks ago) - all time high - forecasts for 4000

Crude Oil (WTI) at 62 per barrel (down 14% from 72 two weeks ago) - recession predictor

Bitcoin at 85k (up 3% from 82k two weeks ago)

JPM shares at 235 (down 4% from 245 two weeks ago)

Deutsche Bank shares at 23.10 (down 3% from 23.83 two weeks ago)

Truist shares at 36.18 (down 12% from 41.15 two weeks ago) - down 17% YTD

Blackstone shares at 130.47 (down 7% from 139.78 two weeks ago) - down 24% YTD

Magnificent 7 Index at 281 (down 2% from 288 two weeks ago) - down 18% YTD

US unemployment: at 223,000 in latest claims – down 1% from 224,000 two weeks ago

EUR at 1.14 USD (up 6% from 1.08 two weeks ago)

GBP at 1.32 USD (up 2% from 1.29 two weeks ago)

Macro Environment

Reciprocal tariffs between the US and most trading partners are implemented.  Inflation in US and EU steadies well above its 2% target.  Economic growth shows signs of further slowing.  Cue stagflation.  Consumer and corporate confidence declines.  War persists in Ukraine and Gaza.  US applies spending cuts and continues with flurries of executive orders.  Equity market volatility spikes to levels only seen in prior crashes or historic selloffs or crises.  Gold breaks through repeated all-time highs.  Financials and Tech test bear market territory.

Macro View

Capital markets activity and capital formation are driven by confidence.  Confidence of issuers to raise capital and adjust capital structures.  Confidence of bankers to underwrite and market transactions.  Most importantly, confidence of investors to allocate and deploy capital to countries, sectors, companies and concepts.  When this confidence is challenged or eroded, it takes time and effort to reestablish it.  Underlying all economic activity is capital.  Shaking the confidence in the capital formation and allocation process results in decreased activity and a decline in growth.  The question is how long it takes and what measures it takes to restore confidence.  Unpredictability and incomprehension are the obstacles to confidence.  Too much inexplicable action or too much complexity erodes confidence and leaves issuers and investors alike sitting on the sidelines waiting for clarity and comprehension.  The stalling of capital deployment frequently results in recession of economic growth.

Relevance

The last two weeks required the coining of a new word to describe the havoc wreaked in the market by tariffs, reciprocal tariffs, economic warfare, government bond gapping, basis trade unwinding and other bouts of madness driving uncertainty.  Enter the 'wreckoning'.  Arguments could be made early in the month that the US administration was intentionally tanking the equity market to drive a flight to safety to rally treasuries and bring down yields.  This was a fairly rational concept in that high treasury yields evidenced an existential threat while deteriorating equity markets would directly impact only a minority of citizens.  The equity market decline would have a concentration in the wealthier classes while heightened capital costs would directly impact everyone and the lower classes most acutely.  A temporary hammering of the equity market could serve to bring down inflation and yields at the same time and help drive growth and investment that could benefit all.  This argument seemed plausible until the interlinked nature of portfolios and the financial system was manifest in a selloff across nearly all assets.  This flood served to drive yields back up at the same time equity markets were going down precipitously.  In particular, the ever-important 10yr treasury whipsawed and climbed back up over 4.5% en route to a critical 5% level.  There is an argument to be made for US success requiring 3% on the 10yr treasury and for 5% to be the route to a disastrously widening deficit, stagflation, and ultimately default.

Compounding the problem is the alienation of foreign governments that own more than 25% of treasuries and frequently take up more than 50% of auctions.  If foreign governments boycott US paper while the Fed is out of the QE game because of an already inflated balance sheet, where does the bid come from?  Who steps in should there be a soft auction?

Thus, the ultimate in uncertainty arrives as the US sits down with its biggest trading partners to play a game of high stakes poker.  The stakes in this game are unusually high as they are arguably the global financial system, the dollar reserve currency, and worldwide trade.  It is unclear if the US is bluffing its way through the game or intends to go all-in with the entire interconnected global monetary system at stake.  Markets are bouncing up and down as everyone attempts to determine whether it is a prolonged and tactical negotiation or a reconstruction of all trade and finance.

Head Scratchers

1 - Will the DOGE or anyone else ever get around to pursuing the trillions of dollars that were tossed out in the pandemic with minimal control?  Much taken up fraudulently or against intended use? 

2 - Is territory also negotiable in this game?  Perhaps Russia can keep chunks of Ukraine and China can exercise more sovereign control over Taiwan if the US can assume Greenland?  Or Canada in a package deal?

3 - Will tariff revenue make up for the decline in domestic tax revenue as the IRS is depleted of staff?

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#15 - 14Apr25