A Pause in the Down
THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.A confluence of events caught my attention this week. Here’s what I noted:* The Chief Justice of the Supreme Court verbally intervened to defend the judiciary.* The Federal Reserve said they won’t raise rates if tariffs boost inflation, but they will cut them if tariffs hurt growth.* The April 2 deadline to impose sweeping, across-the-board tariffs (the administration is calling it “Liberation Day”) turns out to be a day where they might announce high tariffs—subject to discussion and lawsuits, which could take months—rather than implement them.* Technical, flow-based measures on the stock market became more two-sided and possibly, temporarily, supportive.I suspect a bear market has been set in motion, but there will be ebbs and flows. The ingredients for the bear market are high valuations, tariffs, and long positioning. I say “suspect” because, so far, we lack hard data on a sharp decline in actual economic activity, which will be required for the bear market to manifest. We only have soft data that reflects high uncertainty. The key question is—will many people lose their jobs? So far, fears of this have skyrocketed, but actual evidence of mass firings is scant. If tariffs are aggressively implemented, firings will come.Recent bear markets unfold in five stages—down, up, down, up, and down—and it is only in the final down phase that most investors finally retch into a can, declare defeat, and swear off stocks. Timing such ebbs and flows is devilishly complex, and even the best practitioners can capture only parts of them, which is why bear markets are so destructive to wealth. Either they hurt your compounding (some popular stocks like Meta fell as much as 70% only a few years ago), or shorting them causes massive oscillations in wealth and mood.As a result, once a bear market arrives, I look for catalysts that could catch people unawares—either making things worse or leading to a squeeze higher. This week has a number of them, hence this note. I’ll discuss each in turn as well as, further down, introduce my podcast guest. The administration launched a policy blitzkrieg, large parts of which have been judged illegal. These challenges will now make their way through the courts. Musk and the administration have attacked judges who challenged their decisions. As a result, Chief Justice Roberts stated:“For more than two centuries, it has been established that impeachment is not an appropriate response to disagreement concerning a judicial decision. The normal appellate review process exists for that purpose.”He is making it clear that the Supreme Court is not, unlike the Senate, a pliant observer. They want to uphold the balance of power.Second, the Fed met this week and did nothing in terms of policy but did provide guidance. Powell dismissed inflationary pressure in the data as irrelevant. In essence, he said that if the Fed sees any weakness in growth, they will cut rates, regardless of inflation. Stocks and bonds rallied, but now bonds are priced such that if any data turn out not to be weak, bonds will run into a problem, which will then hurt stocks.Third, the administration went quiet on tariffs—until this morning when Trump tweeted about Liberation Day. In recent months, any time key administration members opened their mouths about tariffs, stocks promptly fell, which is what happened again today. What exactly happens on April 2? We don’t know. It may be a day when they claim to apply tariffs but, in reality, only name their levels. I try to visualize the incentives of different leaders. While Putin operates with geopolitical and territorial ambitions involving overt aggression, Trump’s approach is centered at least as much on maintaining prominence in the national conversation. These are different objectives. In Trump's case, the trade policy narrative—like the use of tariffs—can function as a serialized story, drawing ongoing attention much like a long-running TV drama. So, an April 2 announcement may simply transition into the next chapter or it may be something more dire. To help frame my understanding, I interviewed Jennifer Dresden, a strategist at Protect Democracy.org and an expert in authoritarianism. I found the conversation helpful and hope you do as well.Lastly, stock market flows: There is a cottage industry of people who analyze equity flows at major banks. The net of this “wisdom” now is that a lot of fast money (like commodity trading advisors) is short stocks, meaning that if pension funds or others come in to buy stocks at the end of the quarter, they could trigger a short squeeze and drive stocks (temporarily) sharply higher. Eventually, I suspect protracted drama will crush the economy, but it may take a while. We have yet to see hard data demonstrating this. Until we do, US stocks might go violently sideways or even up. If evidence emerges that this policy is hurting growth, watch out—markets will move so fast you won’t be able to keep up. Bear markets are tough. I’m told that teams of traders have already been fired due to the AI rout. This document is strictly confidential and is intended for authorized recipients of “A Letter from Paul” (the “Letter”) only. It includes personal opinions that are current as of the date of this Letter and does not represent the official positions of Kate Capital LLC (“Kate Capital”). 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