Attack the Week (ATW)

February 2, 2025

Sunday Thoughts

Dry January is finally over. This is the second year of not indulging in a glass of wine or a delicious beer. It wasn’t too difficult, to be honest. I stuck to deliciously tasting alcohol-free beers and 0% gin and tonics. I didn’t miss it. Do I feel better for it? I definitely slept better, but that’s about it. It’s probably futile to just be dry for a month, as health benefits usually take longer to materialise.

Source: Dall-E

With the clocks still showing January as Trump was declaring his tariff policies on Friday evening, I told myself what the heck and cracked open a bottle of wine. Why wait for a few more hours? It’s meaningless. I have done my part to detoxify myself.

I started reflecting on January’s volatile market environment and concluded that this was probably just the warm-up. The consensus thought Trump wouldn’t be as aggressive on tariffs as he previously threatened. Well, maybe we are all underestimating the President. Why would he be soft? He wants change and doesn’t have many years to enact it. There is certainly a clash of visions. His advisers, including Miran and Bessent, want a more pragmatic approach of phasing in tariffs and giving countries time to adjust their supply chains. Donald possibly thinks that’s too cute. Just hit them hard and see what happens. I don’t blame him.

While drinking my delicious wine, I thought about the whole tariff thing and what the impact could be. Listening to Miran and reading his paper, he clearly has only the 2018/2019 tariff episode as a guiding post. Consequently, he thinks they aren’t inflationary. I think he might be spectacularly wrong. The setup back then to now is totally different. The difference is in the psychological elements of inflation. Back then, importers took margin hits rather than pass on higher costs to the end consumer. In the current environment, it is very likely that prices will be passed on to consumers. Why? Because that’s what has been happening over the past few years.

There are many complexities when it comes to tariffs, and I am very happy to be wrong, but I fundamentally think we are underestimating the repercussions. Maybe it’s the wine doing tricks on me, or maybe it just helped my creative thought flow.

As I opined in Friday’s charts, I think the world is shifting. There are many moving parts, and this current constellation is one which I don’t think has been in place in anyone’s trading career. I will share more thoughts in another post soon. The US is trying to change the very system which has served its capital markets extraordinarily well. Massive implications are upon us. Before understanding where we are going, we need to have a robust idea of how the current system works. I have written about it below. I think you should check it out.

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Paper Alfa’s 2025 portfolio is up 4% YTD. You can see the chart below. So far, it’s beating the SPX by just a bit more than 1%.

I read so much fluff and nonsense out there. I am shaking my head in amazement at how people try to complicate things. If you listen to any interview of Druckenmiller or any of the other greats, they keep things very simple. Any macro vision or trade idea can be reduced to a very simple equation. If you overcomplicate, you will likely be steamrolled. I wrote about trade dominance in the Macro book series. I suggest you revisit it.

Let’s now read Macro D’s latest thinking before we briefly scan the week’s upcoming calendar. Given the volatility expected with this weekend’s tariff announcements, we shall revisit some charts in the mid-week update. and map out likely paths forward. We close with a look at the output of our asset allocation model. Has it changed its view on bonds? We shall find out.

Let’s go!