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Hello readers,
What a week. We hope everyone is weathering the volatility out there ok.
Given the historical significance of everything going on right now, we thought it would be good to zoom out a little bit to start this week’s report.
After all, we’re living through (we think) a once-in-a-century structural change in world trade and global markets.
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.
Let’s go.
Everyone is focused on tariffs right now. I get it. But let’s not get distracted. Let’s not lose sight of the big picture. Let’s not forget that we are currently in the middle of a “Fourth Turning” — an event that comes around about once every 80 years.
If you’re not familiar with the “Fourth Turning,” it’s defined by Neil Howe and William Strauss (authors of the book) as a period of upheaval and reconstruction that occurs roughly every 80-90 years. In the Fourth Turning, society enters an existential crisis, often catalyzed by war, revolution, and other disruptions, during which old institutions are destroyed or fundamentally remade in response to perceived threats.
They tend to coincide with the end of the long-term debt cycle (which we are also navigating).
These are the “winter” seasons of history, where dramatic change occurs across all facets of life:
Social Upheaval
Political Turmoil
Changes in Global Monetary Systems
Economic and Technological Disruption
Cultural and Moral Reset
Geopolitical Upheaval
In many ways, the “Fourth Turning” represents a reset of society. An era of destruction and rebirth. Examples throughout history include the American Revolution (1775), the Civil War (1861), and The Great Depression/World War II (1939).
The end of the “Fourth Turning” gives rise to the “First Turning,” in which optimism returns and a new societal order is solidified.
Now. Look around you. Look at how divided America is. Look at the inequality. The class wars. The social wars. The breakdown of institutions in America and around the world. The populism. Geopolitical conflict. The rise of Bitcoin, crypto, and AI.
You’re living through a “Fourth Turning.”
Donald Trump is a byproduct of these underlying conditions. The man just happens to be made for “Fourth Turnings” — periods in which voters tend to elect “strongmen” leaders to deal with the challenges of the day.
I’m sharing all of this because I believe you need to have the right perspective to be able to observe what’s happening today with clear eyes. If you don’t study history, you have no reference point to make sense of what we’re living through.
We recommend checking out Ray Dalio’s “The Changing World Order” as another great resource on this topic.
So with this context, the Trump Tariffs make sense, right?
About those tariffs…
The tariffs don’t make a lot of sense on the surface. Of course, the Trump administration will defend them in the media with a debate about:
Bringing manufacturing back to America
Fairness to Americans
Restoring the middle class
Some of this is true. We know the middle of America has been gutted as manufacturing moved to China over the last several decades. But it still doesn’t explain “Liberation Day.” Because “Liberation Day” doesn’t make any sense.
I won’t go into the details because I think everyone understands that free markets function better than those distorted by government intervention.
We analyzed the tariffs that Trump put on China during his first term to see if we could find some clues to help us make sense of it all. Lo & behold, we found one key clue that has led us to conclude that the tariffs put on other countries on “Liberation Day” were implemented with the intent to bring stress to China.
What’s the clue?
When the U.S. raised tariffs on Chinese goods in 2018-2019, China actively redirected its exports to other markets and via third-party countries. Instead of simply losing sales, Chinese firms found alternative buyers. For example, shipments to the EU and ASEAN countries (Cambodia, Malaysia, Singapore, Thailand, Vietnam) rose to compensate for the loss in sales to the U.S. By the early 2020s, China was exporting more goods to the EU ($580b) than to the U.S ($440b) — a trend that started accelerating after the initial tariffs were put on China in 2018/2019. Many Chinese manufacturers also transshipped products through neighboring countries to avoid U.S. tariffs.
One study at Harvard Business School found that Vietnam replaced almost half of China’s lost U.S. import market share between 2017 and 2022 (growing from $42b to $109b), while at the same time, Vietnam’s Chinese imports climbed — an indication that Chinese products were being routed through Vietnam. Similar patterns were observed in Taiwan and Mexico.
In short, Chinese goods were able to reach the U.S. indirectly. In fact, China’s own statistics show their exports to the US barely fell, while U.S. data indicates a significant drop.
The divergence in data reveals a growing “import gap” of over $150b from what China says it sends vs what the U.S. says it receives — implying a significant volume of Chinese exports were rerouted or mislabeled.
Who benefited the most from this? Countries like Vietnam, Taiwan, Malaysia, Cambodia, Thailand, Mexico, and Europe.
Who got hit the hardest with tariffs on April 2?
Cambodia (49%), Vietnam (46%), Thailand (36%), Taiwan (32%), and the EU (20%).
Starting to make a little more sense?
In our view, Trump doesn’t really want to impose tariffs on these countries to collect income. He wants to back them into a corner, using the tariffs as leverage. We think the goal from there is to negotiate and incentivize them to keep Chinese products out of their markets. In return, we assume he might offer reduced tariffs, increased trade with America, and security guarantees.
We think Mexico and Canada may have already agreed to keep Chinese products out of their markets. Why? Neither country was on the “Liberation Day” list. We also think it was strategic for Trump to go after them first — to send a message to others that if he can go after his neighbors, nobody is spared.
To be clear, we don’t have any inside information about this or endorse the strategy. It’s just the conclusion that we came to as we studied the past tariffs on China and questioned the motivation for reciprocal tariffs on everyone else. Our goal is to find the signal amongst all the rhetoric, and game things out from there based on incentives. We think it’s U.S. vs China.
As Charlie Munger (RIP) used to say, “Show me the incentives and I’ll show you the outcome.” The U.S. is incentivized to impose tariffs on Vietnam (and others) so that it can shut China out of these markets + transition supply chains away from China.
[Google “Exports in Disguise” if you’d like to download a Harvard Business paper on the topic]
We think Scott Bessent is the primary architect of the plan (and the person who convinced Trump to put the 90-day pause on to save the bond market). Yes. The man who helped take down the Bank of England may now be trying to bring China to its knees.
Bessent often makes statements (referencing China’s trade surplus) such as “China is the most imbalanced economy in the history of the world.” If you watch his interview with Tucker Carlson, almost everything he talks about has been playing out. We think he sees an opportunity to drastically reset China’s trade imbalances — and he deeply understands the levers behind it all. For example, consider that the PBOC takes in U.S. dollars from exports and uses them to manipulate its currency (to make its exports cheaper).
We think there is a much bigger game being played here. Remember. This is about The Changing World Order in the big picture.
Negotiations. We think the Trump team will seek to negotiate with everyone except China.
The market rallied hard on Wednesday after the 90-day pause was announced. Notably, crypto assets saw weaker rallies than equities.
We’re fading this as a bear market rally for now. It’s typical to see a roughly 50% retracement like this after a big sell-off. If the S&P holds 5,550 and the Nasdaq 17,600, we will reassess.
But the “big one” is China. There will be no negotiation here, in our opinion. Trump doesn’t want to negotiate. He wants to corral support from others on the “Liberation Day” list and then work to re-route supply chains away from China. This is a power struggle. It’s not about tariffs and “fairness.”
If deals are struck with countries like Vietnam to shut China out, we should expect China to hit back with more than just reciprocal tariffs.
To be clear, we think the market would view the initial announcement of deals as positive. But a retaliation from China could then sober the market, as the realization sets in that trade wars can lead to capital wars and potentially hot wars. Remember, we have a 90-day pause right now. But there has been no solution put forth yet that can give investors and business owners confidence to plan for the future with greater certainty. In fact, the opposite is happening as Trump increased China’s tariffs once again to 145%.
And now we’re seeing reports like this:
The setup for Bitcoin is beginning to improve as we look out on the horizon. We recently deployed about 15% of our dry powder into BTC ($77k entry) and a small bag of TIA ($2.34 entry) as long-term holds.
What’s making us more bullish despite the swirling uncertainty?
Given the volatility in the markets, we think the timeline for better liquidity conditions is moving closer:
Inflation is at 1.4% (per Truflation)
Growth is slowing. We think tariffs will accelerate this. Meanwhile, the Atlanta Fed is anticipating a 2.4% contraction in GDP in Q1.
Data: Atlanta Fed
The probabilities of a recession are quite high (we think greater than 50%). Based on the Atlanta Fed projections, we may already be in a recession.
The Treasury needs to refinance $2.5 trillion of debt and issue another $2 trillion (to pay for the deficit) by year-end, with even more coming in ‘26
The dollar has dropped significantly (down to 100)
Furthermore, China has begun stimulating. We think more is to come. As the yuan comes under pressure, capital will flee China, and we think BTC will get a bid (as it did when China devalued the yuan in 2015, and during the trade war escalation in 2019).
With that said, we’re still leaning cautious given the volatility, lack of resolution/certainty on tariffs & China, and Bitcoin’s recent tight correlations with equities.
In terms of momentum indicators, Bitcoin’s 50-day moving average dipped below its 200-day moving average this week (“death cross”) as it currently trades below the all-important 200-day moving average. We are now watching the prior all-time high level. If it breaks ($70k), this would be further confirmation for a more drawn-out bear market. Hence the caution. As this plays out, we are also beginning to see signs of seller exhaustion. We’re keeping an eye on this.
Below, we can observe how BTC has performed in the past after the “death cross.”
Data: The DeFi Report
It’s also important to consider that the Fed may be boxed in a bit here. Bond yields have been rising again. If the Fed starts easing, the long end of the yield curve may not like that (as we saw last September). Bitcoin should do well in this more stagflationary environment. The challenge is that equities may not (as well as alts). Given correlations to the Nasdaq and other risk assets, this could present a headwind for BTC in the near term.
We think it’s prudent to keep the big picture in mind. We believe that we’re in the early innings of a once-in-a-century event (in terms of the potential domino effects). If we’re right, a resolution will take some time. That’s why we want to keep plenty of powder dry. Of course, we have to balance these views against the fact that the narrative can change fast if 1) China comes to the table, 2) Trump backs off, 3) the courts step in to block tariffs or mitigate them. We just think the probability points to further tension and uncertainty in the near term.
We believe the real game being played is an attempt to lock Chinese goods out of many key markets globally. It’s still very unclear if the strategy will work. Our base case is that China views Trump’s actions as adversarial, rather than someone looking to negotiate. We anticipate further escalations as a result.
Trump’s aggressive style works well in many settings. However, it may be a critical flaw in this one. Why? He cannot bully the bond market. The more he ratchets up pressure on China, the more pushback he gets from the long end of the curve.
Despite the 90-day pause, the markets still have no long-term resolution. Furthermore, given the 145% tariff imposed on China, the revised tariff mix (with 10% on others) is actually worse for consumers than what was rolled out on April 2nd (due to the volume of imports from China).
If tension with China escalates and economic conditions continue to deteriorate, we expect market prices to drop further and the Fed to step in with QE (or signal as such). This would be the key catalyst to aggressively move back into risk assets such as BTC.
As always, we’ll be back as conditions evolve.
Take a Report.
And Stay Curious.
Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.