.png){kind=small}
The Fog of Wars
- Marcus Nikos
- Apr 16
- 8 min read
45 Rockefeller Plaza 69 th Floor , New York, NY 10111, United States
Call 646.953.3332
The President unveiled his new tariffs, a different one for each country, depending on how successfully it met US consumer demands. The more it offered to US househols, the greater the punishment.
The big story in the financial world is still the trade war.
Wars are serious business. Nations tend to get edgy when they think their material welfare…or military power…is in danger.
Japan bombed Pearl Harbor after the US cut off its oil supplies. Napoleon invaded Russia because he thought it was undermining his trade sanctions (against England). Hitler made his disastrous decision to send the 6th Army into Stalingrad in order to get access to oil.
Tariffs were the centerpiece of the Trump administration’s economic plan. And they are the biggest challenge to the world economy since the Covid hysteria. And yet, nobody seems to know what the plan is. What is the idea? Even the ‘why’ of it is still not settled. What problem is the Trump Team trying to solve?
Springfield News-Leader:
Trump, in a Truth Social post April 13, wrote that the U.S. needs to make products in the U.S. and won't "be held hostage by other Countries, especially hostile trading Nations" such as China. He said the U.S. is reviewing tariffs involving the entire technology supply chain."NOBODY is getting 'off the hook' for the unfair Trade Balances, and Non Monetary Tariff Barriers, that other Countries have used against us, especially not China which, by far, treats us the worst!" Trump wrote in a Truth Social post later on April 13. "There was no Tariff 'exception' announced on Friday. These products are subject to the existing 20% Fentanyl Tariffs, and they are just moving to a different Tariff 'bucket.'”
Fentanyl? Deindustrialization? Child labor? Currency manipulations? Buckets? Trade imbalances?
There seems no end to the possible breaches of Trump’s Fair Trade ideal, whatever it is. So, we ask ourselves: what kind of show is this — a comedy? A tragedy…or a farce?
“A farce!” say many commentators.
In a much-watched press conference, the President unveiled his new tariffs, a different one for each country, depending on how successfully it met US consumer demands. The more it offered to US households, the greater the punishment. And then, to underline the lack of intellectual rigor, the tariffs were only assessed at half the level of the supposed injustice. If America’s deficit with Iceland were 50%…the new ‘reciprocal’ tariff was only 25%.
Then, the stock market sold off. The Great Helmsman must have panicked. It was as if Eisenhower had called off the D-Day Landings because of clouds over the English Channel. Liberation Day would have to wait.
*** Special Offer ***
JPMorgan Predicts That The Biggest Short Squeeze Yet Begins Next Month
While markets, regulators and even Maxine Waters have been obsessing over the various rolling short squeezes orchestrated by Reddit and Robinhood raiders (with or without the help of hedge funds who ended up being the biggest beneficiaries of the Gamestop surge) which first targeted the most shorted mid-cap names, before moving to biotechs, pot stocks and eventually pennystocks, the reality is that such squeezes are tiny in the grand scheme of things for two reasons: with stocks trading at record highs, overall short interest across equities is at all time lows...
... so one needs to do highly targeted campaigns looking only for illiquid small and mid-cap names which have a very high short interest to float ratio, and second the real systematic shorts are to be found not in stocks but futures and specifically commodities; after all the original widow-maker trader refers not to Gamestop but to nat gas, where as we showed yesterday moves tend to be fast, furious and especially brutal (just ask Amaranth's Brian Hunter). In fact, anyone who was short any midcontinent nat gas overnight is now out of business.
We bring all this up because while equity squeezes - while dramatic and exciting - tend to go as quickly as they come, the real squeezes in commodities tend to last for a long, long time especially if they are accompanied by a shift in sentiment.
Well, according to JPMorgan's Marko Kolanovic, such a squeeze may soon be coming to commodities in general and oil in particular.
Recall that on Wednesday, JPM's famous quant, Marko Kolanovic argued that ""
... a very contrarian thesis to the prevailing conventional wisdom that oil - which is clearly overbought after soaring more than 50% since November - may soon resume its slide if and when more covid-related shutdowns return, and one which was predicted on a series of fundamental factors which he laid out below. And after all, just 10 months ago WTI was trading at a negative $43 per barrel, an experience that has scarred a generation of oil bulls for life.
To be sure, Kolanovic listed a variety of fundamental drivers behind his highly contrarian call, among which...
... of which he noted postpandemic recovery (‘roaring 20s’), ultra-loose monetary and fiscal policies, weak USD, stronger inflation, and unintended consequences of environmental policies and their friction with physical constraints related to energy consumption and production." as the key ones.
He may or may not be right - after all commodities (and macro) is hardly Kolanovic's specialty. But what grabbed our attention, and what Kolanovic truly excels at, was his views on the upcoming dramatic shift in technicals and flows in the commodity sector.
Specifically, while the fundamental factors may well support a "sypercycle" thesis, any true commodity surge would require a buying catalyst spark. And according to Kolanovic this will come in the form of quant, momentum and other systematic investors being forced to start covering - initially slowly and then faster and faster - what is a historic short across the energy sector. The timing of this squeeze? One month from today.
Here's why:
In a market where - occasional reddit-inspired microcap short squeeze aside - algos and CTAs have established themselves as the dominant price-setters, it is hardly a surprise that Kolanovic - whose specialty after all is precisely derivative and futures flows - focuses on their influence as the driver behind a commodity supercycle. Indeed, he writes that after "CTAs played significant role in the 2014 oil price downturn" more recently, "CTA funds have been adding Energy exposure. The reason is that 12-month momentum turned positive on Oil, and going forward signals will remain solidly positive." However,
And since vol-control funds are some of the dumbest money around and their actions can be anticipated well in advance, JPM notes that "a further decline in volatility will likely result in larger and more stable cross-asset quant allocations. A larger momentum impact may affect Energy equities, which is the only sector that still has a strongly negative momentum signal and is hence heavily shorted in the context of factor investing." Indeed, until recently, oil was the only asset that was still below its covid pandemic highs. But, not any more with Brent having finally risen above its pre-pandemic highs.
That - and this is the punchline of Kolanovic's thesis - will "change in mid-March, when the momentum signal for energy equities turns positive" which is also a gentle hint from the JPM quant to all the redditors out there: if you want to spark a truly historic short squeeze, one which forces systematic shorts to not only cover but to go long, do it where it hurts and buy some energy stocks.
Kolanovic was kind enough to even give you the timing: you have about a month to do so because JPM's model momentum factor "will need to rebalance in March by closing ~20% of its allocation to Energy equity shorts, and adding ~2% to energy longs, for a ~22% net buying in Energy."
What is the quantitative significance of these flows?
Well, the Croatian quant calculates that if one roughly assumes that there is about ~$1Tr in equity long-short quant funds and that half of these funds are not sector neutralized, "the flows could be quite significant, roughly $20-$30bn." It could be far, far more. As shown in the chart below, the ratio of energy shares shorted vs all other S&P 500 shares shorted, closely followed the commodity supercycle. And, remarkably, the most recent number of shares shorted for energy was 4 times the S&P 500 average.
In other words, one doesn't even need to squeeze the shorts: come March - absent some major new crisis - as a result of broader market technicals the existing systematic shorts will quietly start closing them on their own and go long, in the process injecting tens of billions of new capital. And then, once retail, passive and institutional accounts - all of whom have a record low allocation to energy...
... jump on board once the momentum gets going, there's no telling how high oil could go although judging by this week's surge in crude which is clearly frontrunning the "supercycle" the thesis laid out by Kolanovic, the answer is "very."
90 Day Trial JOIN NOW
But instead of giving China the same break as everyone else, the world’s largest exporter was subjected to even higher tariffs. This was seen by some as an act of ‘genius,’ since it ‘isolated China’ from the rest of the world.
Instead, like choosing a prisoner for an especially brutal beating, it merely made the other prisoners realize how vulnerable they were. They appear to be joining forces to get away and leave the US on the sidelines. The Daily Express:
Europe appears to be shifting its gaze from west to east, as leaders lean towards China for trade agreements rather than aligning with President Donald Trump of the United States, with the news coming just days after China's huge economic decision that was described as an 'act of hybrid warfare' and designed to 'punish Trump.'Euronews has reported that following President Trump's infamous "reciprocal tariffs" - which China responded to with huge tariff hikes on certain goods - speech at the White House earlier this month, the first call made by European Commission President Ursula von der Leyen was to China.The European Commission, which had previously provided President Trump a stern warning over his tariffs, issued an official statement saying: "In response to the widespread disruption caused by the US tariffs, President von der Leyen stressed the responsibility of Europe and China, as two of the world's largest markets, to support a strong reformed trading system, free, fair and founded on a level playing field.
Then, this past weekend, after promising ‘no exemptions,’ Team Trump provided exemptions for some electronics, whose vendors must represent an important source of financing for Republican candidates.
And just when the buyers and sellers got comfortable with that, yet another pronunciamiento declared that the reprieve would be temporary, not permanent.
AP:
Tariff exemptions announced Friday on electronics like smartphones and laptops are only a temporary reprieve until the Trump administration develops a new tariff approach specific to the semiconductor industry, U.S. Commerce Secretary Howard Lutnick said Sunday.
But the result of this improv trade policy could turn it into a tragedy, says Oxford Economics. City AM:
[If Trump follows through with his tariffs] the fall in trade would nearly match those seen during the Covid-19 pandemic in 2020 and the US recession of 1975. Oxford Economics claimed their estimates were “conservative” given the unpredictability of retaliation and uncertainty regarding how consumers and firms respond to tariffs.
The IMF estimated that the Covid epidemic cost the world economy $12.5 trillion. Fortune magazine put the cost to the US economy alone at $14 trillion.
So, who knows?
But maybe the US won’t roll out the tariffs as threatened. More pauses? Delays? Exceptions?
Maybe Trump was looking to score political points at home as a tough hombre…getting even with foreigners who have been ‘ripping us off’ for years? Or maybe the idea is to trigger ‘negotiations’ that might lead to…well…we don’t know.
Or maybe the whole point is just to lower the value of the dollar…in order to make US exports more competitive? If so, it’s a dangerous game for a country that has $2 trillion deficits…and $37 trillion in debt. Investors are likely to lose their appetite for more US bonds.
But trade wars, like other wars, don’t always go as planned
