FAFO -- GeopoliticsFor those of you not familiar with the lexicon, 'FAFO' is an endearing acronym for ‘F— around and find out,’ and is probably the most apt description we have of the current global landscape.
With President Trump off to a volatile start in his 2nd term, perhaps even beyond what his most fervent supporters might have expected, US asset markets have been riled as sentiment has been sourced on his extreme tariff and military negotiations with USA's former and current allies, while Wall Street is starting to come to terms that an intended economic slowdown might be on the horizon as they attempt to re-private major parts of the US economy. This was something we had covered at length in last week's letter.
A quick look at some of the media headlines of the past week points to continued chaos on the back of the President's geopolitical moves:
Trump Pares Back Canada, Mexico Tariffs in Latest Whipsaw on Trade -- WSJ
Trump’s On-Again, Off-Again Tariff Strategy Sows Confusion -- Bloomberg
China Sets Retaliatory Tariffs on Canada Rapeseed Oil, Pork -- Bloomberg
Fed’s Powell Says Still No Need to Hurry to Consider Rate Moves -- Bloomberg
While markets are apt at looking past bad news, they are terrible at dealing with uncertainty, with Wall Street staring to call 'mercy' against the President's precarious narratives thus far.
FAFO -- Equity Markets
Since the YTD high in mid-Feb, the MSCI World index has fallen by 4.6% with the SPX being down more than 6%, and is currently flirting with the 200D moving average that it has held since late 2023. The tech-heavy Nasdaq dropped nearly 10%, Nvidia is off by ~20%, while emerging market stocks have outperformed US equities by the largest delta over the past decade. Is this the end of US market exceptionalism?
We already covered the oft-misunderstood 'Trump-put' in length last week, and this point was reiterated recently with Trump claiming that he's not even 'looking at the market' and blaming the recent sell-off on jealous 'globalists'.
“I think it’s globalists that see how rich our country’s going to be, and they don’t like it,” he said in a press conference in the Oval Office.
“Nothing to do with the market. I’m not even looking at the market, President Trump stated. -- CNBC
In response, US investors sharply unwound their crowded momentum trades, leading to an unprecedented pace of factor collapse on widespread liquidation and deleveraging of systematic strategies. Stock return dispersion has also jumped to the highest levels since Covid, and cross-asset portfolios saw the largest losses since 2023 on weakening growth, tariff overhang, and a game-changing pivot in European fiscal policies.
FAFO -- US Economy
Aside from just capital markets, the market now also realizes that the Trump administration is also experimenting with some highly unorthodox changes to the economy, with the cumulative impacts of higher tariffs, stricter immigration and DOGE spending cuts overwhelming positives from tax cuts and corporate deregulation. With growth estimates being ratcheted down, the consensus is now calling for more back-loading growth policies post the 2026 mid-term elections, and to brace for more pain in the meantime while the aggressive policies work their way through the system.
The slowing trajectory has manifested through recent data, with Friday's NFP details showing tangible weakness under the headlines. A large spike in 'underemployment' to 5 year highs has added fuel to recession fears and drove yields lower as rate cuts were pushed forward into early summer.
Although Powell tried to strike a confident note during his speech at the Chicago Monetary Forum on Friday:
*POWELL: FED DOESN’T NEED TO HURRY, CAN WAIT FOR GREATER CLARITY
*POWELL: US ECONOMY IS STILL IN GOOD PLACE DESPITE UNCERTAINTY
*POWELL: TARIFFS DRIVING NEAR-TERM INFLATION EXPECTATIONS HIGHER
-- Bloomberg
Treasury Bessent went the other way and claimed that while the economy they have inherited has started to "roll [over] a bit", he cautioned that “there’s going to be a natural adjustment as we move away from public spending to private spending". As if the warning was not stark enough, he further added that:
“The market and the economy have just become hooked, and we’ve become addicted to this government spending,” Bessent said. “There’s going to be a detox period.” -- CNBC
More explicitly, on the topic of the "Trump put", he flatly stated:
“There’s no put,” he said. “The Trump call on the upside is, if we have good policies, then the markets will go up.”
“It’s a much-needed course adjustment,” Bessent said of Trump’s economic policies. “We’ll see whether there’s pain,” he added. “I’m confident if we have the right policies, it’ll be a very smooth transition.” -- CNBC
Basically, the administration claim they are adjusting-out of Democrat-run economy, and people should expect some pain as they FAFO on how far they can push the re-privatization agenda. Strap in.
FAFO -- European ReArm
One of the major fallouts with Trump's pivot on the Russia-Ukraine conflict is with how Europe is approaching the topic of defense and fiscal spending in light of the US military pull-out. European & German bunds suffered their worst yield sell off since the start of the Euro, with bund yields rising by a 30bp on a single day to shatter previous records, as investors were spooked by the ReArm Europe initiative and fiscal spending packages.
Specifically, the EU announced their "ReArm Europe" plan, which will earmark €800bn over the next few years for European defense, with 650bln of that funded at the individual country level. Following the announcement, Germany further announced a massive u-turn for for the country’s fiscal policy to include a €500bn Special fund for infrastructure spending over the next decade, and an exemption granted to defense spending to go above the 1% of GDP limit and other initiatives to raise their own debt ceiling in the coming years.
Without wading into the dangerous discussions of a re-militarized Germany in continental Europe (not going there), that's a lot of bunds to issue as far as the eye can see. Yikes.
FAFO -- Crypto Strategic Reserves
Crypto assets had a volatile week that ended mostly in disappointment, as the shock 'announcements' of including SOL/XRP/ADA in the 'purported' digital reserve and the high profile crypto summit did not lead to any factual buying plans.
In short, the 'Strategic Bitcoin Reserve' will simply be taking the seized BTC assets and accounting for that as a reserve, instead of outright selling them back in the market. In the similar vein that 'gaining weight slower' is considered as 'losing weight' as a typical new resolution, this is most certainly not the bullish development that crypto natives were hoping for.
"A 'Strategic Bitcoin Reserve' will be capitalized with bitcoin owned by the federal government that was seized as part of criminal or civil asset forfeiture proceedings" -- David Sachs via X
The administration tried to throw the market a bone by keeping the executive open to possibly buying bitcoin (and other tokens) in the future, but the damage was already done as the legislative hurdles to establishing any marginal crypto buying was indeed too complex for the administration to tackle at this time.
The U.S. commerce and treasury secretaries "are authorized to develop budget-neutral strategies for acquiring additional bitcoin, provided that those strategies impose no incremental costs on American taxpayers," - White House
IN ADDITION, the Executive Order establishes a U.S. Digital Asset Stockpile, consisting of digital assets other than bitcoin forfeited in criminal or civil proceedings.
The government will not acquire additional assets for the Stockpile beyond those obtained through forfeiture proceedings.
The purpose of the Stockpile is responsible stewardship of the government’s digital assets under the Treasury Department. -- David Sacks via X
Token prices fell 10-20% on the week, after a series of mishaps with the initial reserve 'basket selection' and the subsequent non-action taking the wind out of the sails across the ecosystem. Price action has turned technically very negative and the high realized volatility has worsened the BTC risk-adjusted profile, with few (if any) immediate positive analysts on the horizon.
In the meantime, we expect to see continued weakness (or unwinds) in BTC ETF flows as retail de-lever their positions given the cross-macro liquidation across risky assets.
With 'mission accomplished' from the political purview of strategic reserves, the administration is now pivoting their attention to re-establish the digital USD and institutional dominance via the upcoming stablecoin policies. So much for getting away from the US-fiat hegemony...
“I also want to express my strong support for the efforts of lawmakers in Congress as they work on bills to provide regulatory certainty for dollar-backed stablecoins and the digital assets market,” Trump said during a gathering of crypto executives at the White House. “They’re working very hard on that.”
“We are going to keep the US the dominant reserve currency in the world, and we will use stablecoins to do that,” Besset said.
-- CNBC
FAFO -- Government Shutdown?
So, what to look forward to from here? Can we get a break with all the FAFOs?
Risk assets should be due for a tradeable bounce with the equity Fear & Greed index trading close to 'extreme' lows, and most US indices showing tactical over-shold conditions as well.
Furthermore, some aspiring minds have mapped the launch of GPT against the start of the Netscape internet browser, given how the former has been credited as seismic moment to introduce AI or LLM to the masses.
We do not have strong feelings about this comparison, but it makes for interesting data-mining nonetheless.
Furthermore, US financial conditions remain very easy given the fall in treasury yields, which would have normally been positive for crypto / gold / risk assets if markets weren't fretting about a serious and incoming economic slowdown.
So, is it safe to buy the dip now? Will the Trump administration take a break from all the wild proclamations?
Sorry to say friends, but the US congress is scheduled to hit their debt ceiling shenanigans this week, with additional stakes on the line given the volatile behaviour of the White House. Will they actually force the govt into a temporary shutdown as both sides overplay their bluffs at the negotiation table? Will it be one of those on-and-off moves similar to what we saw with the US-Canada/Mexico tariff developments?
Logic says yes, and it might be time to dip one's feet back into the risky waters... But who knows? That would be the ultimate FAFO indeed.
Good luck with trading this week friends!
