Author: Liu Yiming

Editor: Liu Jing

Last night, the "triple kill" of U.S. stocks, bonds, and currencies played out once again.

The last time this happened was half a month ago, triggered by the global tariff war initiated by Trump, and Wall Street collectively misjudged him. At that time, former Wall Street trader and now U.S. Treasury Secretary Mnuchin found an opportunity to try to persuade Trump: while flying on Marine One to the White House, he discussed the idea of postponing tariffs with Trump.

Mnuchin needed to bear the responsibility of being a bridge between Wall Street and Washington, attempting to reconcile Trump's erratic and capricious orders with his old friends on Wall Street who advocated for debt reduction, tax cuts, and deregulation. This was undoubtedly a tricky task. The game of capital markets is, at its core, a game between great powers. To some extent, Wall Street's influence has surpassed capital itself. The past alliance between Wall Street and Washington formed the "Washington-Wall Street complex," which has always been a dominant force in shaping U.S. politics and economics.

However, today, cracks have appeared. A year ago, Mnuchin, who was seen as "one of their own" by Wall Street, told clients: "The gun of tariffs will always be loaded and placed on the table, but it will rarely be fired." But now many on Wall Street feel betrayed by him, as Trump fires shots everywhere, almost without the constraints of these past relationships.

The cracks are showing signs of further tearing. Trump is threatening to fire Federal Reserve Chairman Powell, shaking the century-old foundation of the Fed's independence. Moreover, Trump is confronting the Ivy League schools, while the university endowment funds across the U.S. collectively hold about $500 billion in private equity assets. If they start selling, it could create significant turmoil in the market.

Wall Street's attitude is worth observing. Last week, "Dark Waves" interviewed 30 individuals on the front lines of the tariff war, and we subsequently spoke with a hedge fund professional from Wall Street: Rob Li. He has experienced the ups and downs of the market in New York during these days and understands the rationality and anger of Wall Street in this tariff storm.

Rob Li previously worked at Morgan Stanley's private equity fund and is now a managing partner at Amont Partners—a global equity investment management firm based in New York. Their investment strategy involves longer holding periods; compared to typical hedge funds that hold stocks for about three months, their core investment portfolio is held for two to three years or more.

Rob also frequently travels around the world for business, adopting a global asset allocation strategy, primarily focusing on technology, consumer, and industrial sectors. Currently, about 40% of their allocation is in the U.S., 10% in Asia, and the remaining portion in Europe and South America.

"Now on Wall Street, there is no one who does not oppose Trump." According to Rob's observations, he believes that Wall Street's mainstream understanding was misled; everyone initially thought that Trump 2.0 would behave like 1.0, "always finding a way to keep things from getting too outrageous." But now, the script has completely changed. Just like Peter Drucker wrote in "Management in a Time of Turbulence"—the greatest danger in turbulent times is not the turbulence itself, but acting according to past logic.

Today, with core figures from Wall Street such as Ray Dalio, Bill Ackman of Pershing Square Capital, JPMorgan CEO Jamie Dimon, BlackRock Chairman Larry Fink, and Oaktree Capital Chairman Howard Marks all changing their attitudes and standing up against Trump's radical tariff policies, investors have formed an important counterforce—although their primary goal remains profit.

Part 01 Wall Street Elites Also Misjudged Trump's Script

"Dark Waves": At what moment did Wall Street begin to realize that the entire financial market was about to change?"

Rob: An important moment was April 2. That afternoon, Trump first announced a 10% tariff on all countries, and the market actually rose by two points because many thought this was expected.

But just a few minutes later, Trump presented his giant chart, stating that different tariffs would be imposed on different countries. At that moment, the market immediately collapsed as everyone realized Trump was serious.

Currently, 80% of trading volume in the U.S. stock market is done by machines, with algorithms pre-setting strategies: for example, if Trump's announced tariffs are within 15%, buy; if they exceed 15%, sell. Of course, the actual strategies are much more complex. The speed of automated trading is very fast, so once the market collapses, it happens very quickly.

"Dark Waves": But why did those smart minds on Wall Street fail to anticipate "Trump's giant chart"? I remember when Trump was just elected, the term "Trump trade" was very popular, but it turned into "Trump put" in just two months.

Rob: The mainstream thinking on Wall Street—including myself—did not anticipate the "degree" of reciprocal tariffs. The mainstream thought was that Trump 2.0 would continue his first term's performance of "loud thunder but little rain."

Everyone should remember that when Trump defeated Clinton in 2016, Wall Street was very panicked because Trump had said many crazy things during his campaign, and the entire business community and Wall Street were very afraid of him. But later everyone realized—99% of his crazy ideas did not materialize, and instead, those four years created a very business-friendly environment.

"Dark Waves": So this is also a kind of market inertia, but no one expected the script to really change.

Rob: At least until April 2, before he presented that giant chart, the "loud thunder but little rain" script was still continuing.

In February, Trump also scared the market once when he said he would impose tariffs on Canada and Mexico, causing a drop in U.S. stocks. But just a day later, Trump tweeted that he had spoken with Canada on the phone and would not impose tariffs on them. A few hours later, he said he had also spoken with Mexico and would not impose tariffs on them either. Everyone was bottom-fishing, and those who thought Trump 2.0 would be just like that.

But then he presented that giant chart, and the market really began to collapse, and everyone realized the script had changed, completely exceeding expectations.

Part 02 Winners and Losers in the Turbulence

"Dark Waves": Later, the S&P 500 index fell by as much as 25%, and the Nasdaq index fell by 21%. What were Wall Street's hedge funds doing? Who made money?

Rob: Although everyone calls them hedge funds, what they do can be completely different. Wall Street has hedge funds that specialize in macro trading, such as trading various currencies. There are hedge funds that specialize in stocks, like ours. And there are hedge funds that do not trade stocks but specialize in bonds. I will only talk about the stock portion.

For stock hedge funds, there are actually not many good options right now because Trump might say one thing today and another tomorrow. Many funds, after experiencing the turmoil in March and early April, have basically turned into a state of low leverage and zero net positions.

This "zero net position" is also known as "neutral position," which means that the long positions minus the short positions are basically equal to zero. This is a very conservative attitude; regardless of which direction Trump's policies go, whether the market rises or falls, just maintaining a net position means staying flat this month. Unless you are confident in judging the direction, reducing net positions to the lowest may be a better choice.

Of course, for macro hedge funds, a very popular trade right now is shorting the dollar because what Trump is doing is a significant negative for the dollar, making shorting it obviously profitable.

"Dark Waves": Who lost money?

Rob: The most obvious losers are quantitative funds; I have heard that many quantitative funds have incurred losses.

Although quantitative funds use various high-tech devices to monitor Trump's Truth Social and his X account, Trump's speed of turning against them is simply too fast, and this back-and-forth makes it very difficult for quantitative strategies to keep up with Trump's rapid changes.

Quantitative funds generally need to use high leverage; the problem with leverage is that even if your judgment proves correct ten days later, you might get liquidated on the third day during Trump's back-and-forth process, never living to see your judgment validated.

A typical example is a quantitative fund trading Nvidia. When AI picked up news that Jensen Huang had dinner with Trump, the AI judged that the dinner was meaningless and that Trump would still ban H20, so they decided to short Nvidia. But before the news of the H20 ban was released, if the market thought the matter was settled during the dinner and everyone bought in, resulting in a price surge, then if you had high leverage, you would get liquidated—although the H20 ban was eventually announced.

Another large portion of losses comes from long-only mutual funds or certain funds with high risk exposure, where the long positions far exceed the short positions.

"Dark Waves": Do those Wall Street people who voted for Trump regret it now?

Rob: If I were to express my true thoughts, I believe that now on Wall Street, there is no one who does not oppose Trump—regardless of whether they voted for him or donated to him last year. Recently, I have dined with many people from various funds on Wall Street, and I have hardly encountered anyone who still strongly supports Trump.

"Dark Waves": Later, when Trump announced a 90-day tariff suspension, how much did that relate to Wall Street? Reports indicate that former hedge fund manager and Treasury Secretary Mnuchin is under a lot of pressure, needing to balance Trump's radical policies with financial power.

Rob: Mnuchin used to teach at our school and has deep ties to Wall Street, having previously worked at Soros's fund.

I have reliable sources that say, at least during the drafting of the first round of tariff policies, which was the tariff announced on April 2, Mnuchin was not part of the core team. This tariff was basically determined by Trump, Stephen Miller, and Peter Navarro, and Mnuchin likely did not participate in that discussion at all.

Ultimately, Trump told Mnuchin the outcome and then asked him to use his connections on Wall Street to communicate with them and soothe their emotions, but the decision-making power was not in his hands. Of course, this was the situation before April 2; after the market fell into severe turmoil, has Mnuchin's influence increased? I think there is a strong possibility of that.

"Dark Waves": And what about you? How intense was your shock during this process?

Rob: The current situation of the tariff war has definitely exceeded my expectations. While there were psychological expectations for a trade war, no one really anticipated that Trump would turn against Europe, Japan, Canada, and others.

However, if we look at the drop, it is still not comparable to historical major crises. If you experienced the 2008 financial crisis, you would not feel any anxiety now. It's like a new soldier who is anxious when they first go to battle, but if you have gone through cycles and are a ten-year veteran, where would the anxiety come from?

Part 03 Who Will Be Bought, Who Will Be Abandoned?

"Dark Waves": Recently, you have conducted a lot of company research. What were the results? In the face of this macro turbulence, which companies are most likely to be sold off by fund managers?

Rob: The companies most negatively impacted can be divided into two categories:

The first category includes those directly affected by tariffs, such as clothing, shoes, bags, and toys related to household daily necessities, which are primarily produced in Asia. These consumer brands are the most directly impacted. Of course, if tariff policies reverse in the future, they will rebound significantly.

The second category includes those indirectly affected, such as the tourism sector—hotels, theme parks, airlines, etc.—because demand will decline rapidly. Since Trump initiated the tariff conflict a month ago, the number of foreign tourists coming to the U.S. has already dropped by 50%. Although domestic travel by Americans has not yet shown significant impact, if the trade war continues for another year, it will clearly affect the U.S. economy. All industries that are highly sensitive to economic fluctuations, such as real estate, discretionary consumption, tourism, cinemas, theme parks, and casinos, will be impacted.

"Dark Waves": Google's recent sharp decline seems to have been somewhat collateral damage. The market is beginning to worry that if the EU retaliates against the U.S., the rough tariff calculation formula used by Trump does not account for service income or income generated by the virtual economy, which the EU spends a lot of money on each year. Therefore, the EU is likely to target these tech companies.

Rob: Yes, the indirect harm to tech companies has two aspects. On one hand, if the EU retaliates, it can target not only Google but also Meta, Amazon, Microsoft, and others. The EU can strike at these companies at any time, which is a significant weapon for them. On the other hand, the business of Google and Meta relies heavily on advertising revenue, which is highly sensitive during an economic downturn.

Recently, the world's second-largest advertising group, Omnicom, which is an important advertising agency for platforms like Google and Meta, stated in their earnings call that although they have not yet seen advertisers cut spending, they believe that if Trump continues his current approach, clients will inevitably reduce their budgets. This led them to lower their performance guidance for the next quarter, which also contributed to the declines in Google and Meta.

"Dark Waves": We have discussed many companies negatively impacted by tariff issues. Are there any companies or industries that are benefiting from this?

Rob: The companies benefiting are those that can pass on the increased costs due to tariff conflicts downstream.

For example, we have a long-term holding in a company called AutoZone. This company is one of the two giants in the U.S. selling automotive aftermarket parts and is continuously consolidating the U.S. market. Why is the tariff conflict beneficial for them? Because the tariff conflict has raised car prices. Previously, you needed $30,000 to buy a car, but now tariffs might add $10,000. Many consumers are simply choosing not to buy for now, waiting until the tariff conflict ends and prices return to $30,000.

However, if consumers are not buying new cars, they will have to drive old ones. The longer old cars are driven, the more maintenance issues arise. For a company that specializes in selling automotive aftermarket parts, this becomes a positive situation, as they will need more parts like engines, spark plugs, brake pads, and oil.

"Dark Waves": What about the funding side? Are some funds choosing to leave the U.S. and invest more in other regions?

Rob: Yes, take Europe for example. For the past decade, there has been little allocation to Europe compared to China and Japan. But recently, many European stocks have shown independent performance—such as European defense stocks, which have surged significantly this year.

There are also some high-quality companies in Europe that have been "wrongly killed" during this round of tariff conflicts. For instance, in the automotive semiconductor sector, there is a German company called Infineon, which is deeply involved in the Chinese new energy vehicle supply chain, being the exclusive supplier for Xiaomi and an important supplier for BYD.

This company has a global production capacity distribution, with 15% of its capacity located in the U.S., while its sales in the U.S. are only 12%. Therefore, its domestic capacity can fully cover its sales in the U.S., resulting in a relatively small impact from tariffs, as local supply meets local demand. Companies like this are also doing well.

Another example is Mercado Libre, which we hold, the largest e-commerce company in Latin America. It operates purely locally and has no direct relationship with the U.S. market or the trade war, so it actually increased in value in April when the U.S. market fell sharply.

Part 04 This is Not a Financial Crisis, This is a Man-Made Crisis

"Dark Waves": Now that tariffs between China and the U.S. have reached 125%, and if the additional 20% on fentanyl is included, it becomes 145%. Such tariffs have little meaning. What do the entrepreneurs you interviewed think?

Rob: Currently, there is a general consensus that these tariff numbers are essentially equivalent to a trade embargo. I have been traveling extensively to understand how entrepreneurs view this.

For example, I recently conducted intensive research on the upstream of footwear and apparel companies (similar to the supply chains of Nike, Adidas, and Lululemon). For a pair of shoes, assuming the tariff is only increased by 10-15%, and the retail price is $140 with a cost of $35-40, this would mean an increase of $3-5 in total costs for the company. In this case, the burden would be shared: the manufacturer absorbs 1/4, the brand absorbs 1/4, and the remaining portion is absorbed by the distribution channel, ultimately passing on to consumers. So, the final cost to consumers for that pair of shoes would only increase by less than $2. Although this will ultimately affect the gross margins of brands and supply chains, the absolute gross profit amount they can earn per pair of shoes can fully absorb the impact.

But now with a 125% tariff, the cost would rise to $70-90. At this point, companies will not consider who absorbs the cost anymore—because they simply won't sell the shoes. If they pass this cost onto consumers, sales would drop by more than 50%.

Many entrepreneurs in Southeast Asia are observing during this 90-day tariff suspension, taking it step by step. A common prediction is that after 90 days, countries other than China may face new tariffs of 10-20%. Although gross margins will certainly be affected, everyone can continue to get by.

"Dark Waves": There is also a key question: international trade has long been dominated by "intermediate goods" (i.e., importing parts or semi-finished products from one country to another for processing/assembly, then exporting to a third country). How should we define where something is produced?

Rob: There are actually many loopholes in this. For example, in the semiconductor field, the U.S. says it will define that the U.S. content must be greater than 20% to qualify for tariff exemptions, but how do you define this so-called U.S. content? The Trump administration has not provided a clear judgment, and U.S. Customs also does not know how to enforce this. These are all important negotiation points for the future.

In the footwear and apparel sector, there is already a method where previously it might have been pure transshipment trade—shoes produced in China, then shipped to Vietnam, relabeled as "made in Vietnam" for export to the U.S. This simple path is no longer viable, but you can still take some complex processes: produce in China, take the remaining simple processes to Vietnam, and then label them as "made in Vietnam" for export to the U.S.

If Trump wants to close these loopholes, he can, but it will require high execution costs because you need to establish very detailed rules, and regulatory oversight will be difficult. If we are optimistic, we will see how all parties negotiate moving forward.

"Dark Waves": Tariffs will also negatively impact U.S. consumption. There are pessimistic views that tariffs will transition from an event-driven shock to a structural bear market in the U.S. Especially with the upcoming first-quarter earnings season, companies need to provide guidance for the second quarter. If the guidance is poor, it could lead to a new round of declines. What do you think?

Rob: I think the key lies in whether tariff policies will revert. If Trump continues to be obstinate as he has been, it will undoubtedly be a significant blow to the U.S. economy.

Many institutions have conducted calculations, estimating that a 1% increase in actual tariff rates would lead to a 0.1% rise in inflation, causing a 0.05%-0.1% negative impact on the U.S. economy. The current average tariff rate imposed in the U.S. is about 3%. If the average tariff were to rise to 10%, that would mean an additional 7%. A 7% increase would impact inflation by 0.7% and GDP by approximately -0.35% to -0.7%.

However, if Trump remains obstinate and imposes a 25% tariff globally, the negative impact on GDP could be between 1% and 1.5%, with inflation potentially rising close to 2%. This would represent a significant impact, putting the U.S. economy at risk of collapse, and the stock market would naturally not fare well.

"Dark Waves": How does this compare to past financial crises?

Rob: The so-called recession risk today is purely man-made and has nothing to do with the economic cycle. It is not like the 2008 financial crisis, which was a structural risk.

However, from an economic structure perspective, the current U.S. economy does not have major issues. People say that the U.S. has high debt and the government owes a lot of money, but there are many countries with much higher debt than the U.S., such as Japan, whose government debt is significantly higher. Most European countries also have higher debt levels than the U.S. Yet many people view Japan as a safe haven.

Part 05 How to Find Certainty in Uncertain Times?

"Dark Waves": Howard Marks of Oaktree Capital recently published an investment memo stating that the market has entered a realm of "unknowns," where no one can predict the future. If we learn from history, what experiences can we draw upon?

Rob: I think the most important thing is to guard against the risks of leverage. As Buffett once said, every decade, countless people outperform him, but looking back after sixty or seventy years, those who did better than him in each decade have disappeared. Why? Because Buffett does not use leverage, and there is never a risk of liquidation, regardless of what black swan events occur (financial crises, economic recessions, pandemics, trade wars, wars, currency devaluations, etc.).

Many funds that achieve high returns through leverage can perform well for 3-5 years or even ten years, but once a significant fluctuation occurs—and such events are often unpredictable—all those using leverage will collapse.

For example, earlier, LTCM (Long-Term Capital Management), founded by several Nobel laureates, achieved annualized returns of over 40% for 4-5 years, which was impressive. However, it ultimately collapsed during the 1998 Russian financial crisis due to high leverage. The situation in Russia was not only unforeseen by LTCM but also by Soros and the entire world.

For example, Bill Hwang, who faced a collapse in 2021, founded Archegos Capital Management after leaving Tiger Management. At his peak, he grew his $200 million family office to $35 billion, which is several hundred times. This is undoubtedly impressive, but you could also go from $35 billion to $0 overnight because he used very high leverage. Meanwhile, Buffett essentially just tracked the index during those years.

But in the end, Buffett survived, while Bill Hwang collapsed.

"Dark Waves": So stability is always the best approach in the financial industry.

Rob: If you want to sleep well, don’t pursue unsustainable high returns through high leverage; it carries high risks. Instead, seek a steady stream of income with no risk of collapse.

"Dark Waves": This round of tariff battles is escalating, and there’s a 12-hour time difference between Beijing and New York. Can people on Wall Street sleep well?

Rob: If we talk about market turbulence, it’s actually nowhere near the level of the 2008 financial crisis, nor does it compare to the global capital market turmoil caused by the depreciation of the yuan in 2015, or even the four circuit breakers triggered during the pandemic. If you’ve experienced those three upheavals, you would feel quite calm now.

Take 2008 as an example; it was much more panicked than now. In the spring of 2008, when Bear Stearns collapsed and was later bought by JPMorgan, the market had already begun to fluctuate dramatically, and it continued to decline for a whole year. At that time, people genuinely felt that the global economy was on the brink of collapse. Moreover, Morgan Stanley and Goldman Sachs were very close to failing; that was real panic, and we are far from reaching that level now.

Today, people feel that so much has happened in less than two months, which creates a very intense psychological experience.

"Dark Waves": Yes, if you calculate it, the S&P 500 has only dropped about 15% from its peak, which may not yet reflect some long-term risks?

Rob: If the U.S. really enters a recession, the decline will be much more significant. Moreover, this decline started from a relatively high valuation, and the market has not yet priced in the risk of an economic recession in the U.S. this year. If that happens, we are far from having seen the bottom.

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