From Trump bump to Trump slump

Price action in risk assets and sentiment on Fintwit have taken a darker tone since last week. It started with the repeated attempts and failures of the S&P 500 to break above the year’s high of 6150. On Friday came a shockingly weak US services PMI (49.7 vs 53.0 expected) that seemed to be the straw that broke the camel’s back. Normally the market would shrug off a weak data print like that (“bad news is good news”, etc). Perhaps the data print, which was the first hint of how the economy did in February vs January, confirmed the sneaky suspicion that the strong eco data from Q4 until recently was propped up by positive Trump vibes and the frontloading of purchase orders in expectation of Trump tariffs.

The reality is that economic data has been undershooting expectations since mid-November. However, markets usually don’t notice when economic data goes from hot to warm - they usually react when the economic goes from warm to cool, and I suspect that’s where we are at now.

Citi Economic Surprise index - US

To add to economic fears, the market focused on a TD Cowen report that said Microsoft cancelled some leases for AI data center capacity.

Microsoft Corp. has canceled some leases for US data center capacity, according to TD Cowen, raising broader concerns over whether it’s securing more AI computing capacity than it needs in the long term.

OpenAI’s biggest backer has voided leases in the US totaling “a couple of hundred megawatts” of capacity — the equivalent of roughly two data centers — canceling agreements with at least a couple of private operators, the US brokerage wrote Friday, citing “channel checks” or inquiries with supply chain providers. TD Cowen said its checks also suggest Microsoft has pulled back on converting so-called statements of qualifications, agreements that usually lead to formal leases.

After the selloff triggered by Deepseek earlier this month, this report intensified concerns that the AI-related spending and revenue that propelled the last two years of tech earnings is slowing. IO Fund analyst Beth Kindig also highlighted the risk of delays to Nvidia’s rollout of their new line of Blackwell GB200 systems - a potential bearish catalyst for the market going into Nvidia’s earnings tomorrow.

I previously highlighted tariffs as a threat to economic growth and the markets, and this hasn’t changed. Indeed, Trump reiterated his desire yesterday to impose tariffs on Mexico and Canada, and the market did not like this at all. We now have two additional bearish catalysts - market fears of a deflating AI bubble, and the real economic impact of DOGE’s aggressive cuts on federal spending.

When DOGE was created, I don’t think many people expected Elon Musk’s cost-cutting efforts to have much of a social and economic impact. Elon and Trump are pushing the limits of what is legal and constitutional to an extent that few people have predicted. It’s now clear that Elon is applying the playbook from when he acquired Twitter - cutting 80% of the workforce, observing what breaks, and using that information to rebuild in a leaner way.

The economic impact of DOGE will be felt in jobless claims and non-farm payrolls data over coming months. Estimates of direct and immediate layoffs range from 20-50k, with another 75k employees getting offboarded over the course of this year after accepting severance packages. DOGE is also targeting the 200k employees currently on their first year of employment, as they are easier to let go due to their probationary periods lasting 12 months.

Job cuts in the government are just the first order effects. I’ve read estimates that for every civilian government employee, there are two employees working for government contractors. Based on this estimate, there may be two contractors laid off for every government worker fired. A worst case scenario would be for 300k government employees laid off in the first six months of this year followed by 600k government contractors laid off - a total impact of 900k workers. We are just one weak NFP number away from seeing an August 2024-style volatility event that sends equities and crypto crashing lower and Treasuries crashing up.

I’ve been preparing for a risk-off move for several weeks by raising cash, going long Treasuries, shorting equities, and shorting USD/JPY. I’ve been telling readers to reduce crypto exposure to prepare for the coming volatility. Crypto was one area where it looked obvious to me that a correction was due. Everyone went long on Trump’s election victory, expecting Trump and the institutions to buy their bags. Unfortunately, retail’s obsession with memecoins has resulted in a lot of capital destruction this cycle. Everytime capital flows out the risk curve from BTC into the altcoin market, it eventually ends up getting wiped out in memecoins. This is why altcoin rallies have failed to sustain themselves and instead have rolled over violently. If the Strategic Bitcoin Reserve doesn’t become a reality this year, then we might have seen the highs in BTC and most other crypto assets for this cycle.

Sorry to be spewing doom and gloom over recent weeks. I rarely turn bearish, and when I do, I strive to call it with surgical precision. This time I was a couple weeks early, but now my scenario is playing out exactly as I expected. When the dust settles, there will be some assets I would like to buy on a dip that I believe can deliver 50%+ returns over the remainder of the year. If you’re a paid subscriber, read on…