Market rebound suggests investors think Trump will smell the coffee

Rattling the Masters of the Universe on Wall Street might initially appeal to the wider public. But when their retirement funds begin to suffer, the mood will quickly change.

via 2XH8RRX/ Alamy

In the last three months, there has barely been a Friday when my musings have not begun with something along the lines of it having been, yet another “unsettled” week, that word being replaced since “Freedom Day", 2 April, by “bruising”. But where do we really stand?

Risk asset markets, having taken an adult pounding, are now on a rebound. The key question has to be whether the markets’ apparent optimism is any more than skin deep.

To that, behold, there are of course two answers, either of which might be right. The reassignment yesterday of Mike Waltz as Donald Trump’s National Security Advisor is a case in point. The official version is that he has been identified as an incomparably strong candidate to become America’s UN ambassador. We all know that’s rubbish and that he has been fired for the clusterf*ck that was “Signalgate” - though, instead of being sent into exile, he's been offered a fairly decent alternative role. This is not Trump 1.0 but Trump 2.0 in which unwavering loyalty to the Supreme Commander and to the MAGA cause will irrespective not go unrewarded.

The defenestration of Waltz was pretty immediately followed by JD Vance, Trump’s flag-waver-in-chief, assuring us that Pete Hegseth is safe in his job. As we know, however, the Donald’s opinions can turn on a sixpence and what is valid a few minutes before the hour, might a few minutes after it no longer be. It was John D Rockefeller who coined the phrase that a verbal agreement isn’t worth the paper it’s written on. Turn over the rock and Donald Trump’s immutable truths aren’t either.

There is little doubt that Waltz’s firing was held over until after the great 100 day address in Michigan although the negative Q1 GDP release did kind of spoil the party. And yet risk asset markets went higher. Fact is, and don’t let yourself be deceived, any Q1 release with which you are presented, be that official statistic or corporate earnings report stands a pretty good chance of being what we learnt under Trump 1.0 to know as “fake news”. The world before 2 April and after 2 April is a very different place but despite all the bluster from the Rose Garden and then the Oval Office maybe not quite as different as might have been planned. Trump, a self-promoter of the first order, has developed a way of making U-turns and then selling them as acts of supreme magnanimity.

The relationship between the world’s two biggest trading nations, China and the US, is currently unhinged and only a drunk would place a one-way bet on how this ongoing so-called trade war is going to play out. It’s only 29 days since the Rose Garden speech with all its tables and declarations that tariffs would make America rich again. The President had at this point already pronounced that he didn’t give a fig for what was going to happen to Wall Street, but that Main Street was his concern. Before the rubber has properly hit the road, however, his promise that tariffs would be paid for by exporting countries – something that nobody with any sense could ever quite follow – is wearing thin. The threat of widespread empty supermarket shelves might be slightly exaggerated, but price rises are inevitable, and Joe and Megan SixPack will not be happy.

Reports are that volumes going through the port of Los Angeles, the prime entry point for Sino-American container traffic have collapsed. The full impact will not be felt for a good few weeks or even months as importers have in many cases been busily building up inventories ahead of the tariffs kicking in.

Don’t forget that there was the interregnum between 6 November and 20 January in which the imminent, and for all intents and purposes inevitable, imposition of some shape of tariffs was on the table for everyone to see. Financial markets might have the attention span of a goldfish, but other trades and sectors are perfectly capable of thinking further ahead. A range of statistics therefore are distorted as they are impacted by business and households across the country having taken a variety of preparatory measures. All three of Newton’s laws of motion can in one form or the other be applied although the conclusion has to be that what we now see might not at all be with what we end up. One technically big month is often followed by an equally poor one or vice versa, so it will not be until month three that it might become clear whether changes will stick.

Trump’s rethink on Canada and Mexico, his first day targets, then on reciprocal tariffs, then on China and tech, then on automotive components point to, from a strict MAGA perspective, a slippery slope. Michael Cohen is credited with having taught Trump never to show weakness or doubt - I myself was indoctrinated when working for US investment banks with the central rule which is to deny everything and to admit to nothing – and Trump has been a model student. The negative US GDP reading for Q1 of -0.3% made headlines, conveniently disregarded by US stock markets, but it really is a hard figure to see through. The shifting dynamics in both imports and exports will have distorted the result to such an extent that it is on its face of little predictive value.

Meanwhile, the latest AAII reading is worth looking at. The AAII Investor Sentiment Survey is based on individual investors’ thoughts and opinions with a six month forward horizon. As of 30 April, the results were 20.9% bullish, 19.8% neutral and 59.3% bearish. In the past, it has been a good tactic to keep an eye on this index and, when it begins to flatten out, to trade against it. In other words, with the bearish sentiment at nearly 60% - it bottomed at 61.9% immediately after Freedom Day – there would have been a strong argument to buy the living daylights out of the market. The last time it was this low, buyers within a year booked a 25% performance although for once it might be right to suggest that this time it will indeed be different.

Trump is a populist and as such loves to be popular. Self-promotion can carry him so far but not further and, when his middle-American power base begins to feel on Main Street the pinch of rising prices and possibly declining choice, he will need to act. Threats of emerging shortages on the shelves of toilet paper – most of it apparently comes from Brazil - are probably exaggerated but there is little doubt that the fear of toys that largely come from China being either in short supply or wickedly expensive come Christmas is not unfounded.

Just over 100 days into his second term and 30 days after Freedom Day, the full impact of the 145% tariffs on Chinese imports – for the moment let’s forget the rest - are only just beginning to bite. My guess is that day by day new variations on the one-size-fits-all tariff regime will be announced which means that in essence we will continue to be aiming at a randomly moving target.

In his most recent column for Reaction, “The many faces and deceptive goals of Donald Trump”, Gerald Warner takes a pretty unconventional path to explaining what he suspects to be Trump’s longer-term strategy. He sees a lot of the headline-grabbing controversies as a means to an end and not as is widely assumed an end in itself. As he rightly notes, Canada is the most woke country on the planet – I can’t disagree with that – so why would he want to make that the 51^st state of the Union and in consequence guarantee Democrat government in perpetuity?

So, let us assume that the Trump revolution really is only just beginning – if the shark does not keep swimming forward it dies - but at the same time let us also wonder where he will have to make concessions, always in the knowledge that they will emerge unannounced, unpredictably and apparently randomly.

I was yesterday chatting to another old bond dog. He is still closer to the active markets than I am and told me of some of his contacts in both private equity and private debt who are beginning to get rather nervous. He mentioned one smallish private equity firm – there are thousands of them – which is fearful. It has in the past two years succeeded in neither disengaging itself of any of its investments by either trade sale or IPO. Now there loom the worries of refinancing debt. I have long argued that private equity has little to do with equity and everything to do with debt. Read Connie Bruck’s 1988 study of the rise and fall of Drexel Burnham and of Michael Milken – that’s where Rudy Giuliani as a prosecutor in the Southern District of New York made his name – and see how the corporate raiders did their deals.

They might have sprayed their business pink, renamed it private equity and convinced the investment industry that they are angels and not demons, but the key features remain the same. Leverage up the capital structure and make sure you have the deal sold before the cost of loans – this is pretty much where the junk bond market was invented – cripple the deal. Like with any other trading book, the speed of turnover is essential. Even if prices are falling, money can be made because the next purchase will be at a lower price. Death creeps up when the market dries up and assets cannot be churned. That is currently the case. Not that anybody would publicly admit that the refinancing risk is the sword of Damocles hanging over private equity but, trust me, it is.

Donald Trump has made a virtue of keeping everyone guessing. Rattling the cages of the Masters of the Universe on Wall Street might initially appeal to the wider public although when their 401K retirement funds begin to suffer the mood will quickly change. The bounce back of the past week or so across most asset classes points to investors feeling positive that in the end both President Trump and his Treasury Secretary Scott Bessent will smell the coffee and back down. Though the former will not want to lose face by exposing himself as a wimp rather than the towering ideologist who has it all in hand. When the behemoth is shot between the eyes, it's impossible to determine which way it will fall.