So there we sit, mon ami, with our espressos going cold, watching a spectacle not a single European leader—nor poor President Zelenskiy—saw coming: President Trump 2.0’s entourage kicking back with Sergei Lavrov in Riyadh, politely drafting a plan to end the war in Ukraine. Yes, Ukraine, whose president wasn’t even invited—perhaps a clerical oversight, but one that spurred Zelenskiy to cancel his own Saudi trip in protest. The bigger irony is that the occupant of the White House seems convinced he can wrap up a war unilaterally, as if the side that started it can sign off without the side still fighting it. Yet from the markets’ vantage point, even a hint of a ceasefire—real, half-real, or purely rhetorical—can’t be ignored. Any sign of calm can jolt everything from airline plays and Eastern European banks to chemical giants thirsting for stable gas supplies.

In a bid not to look thoroughly irrelevant, Emmanuel Macron rushed to convene an “emergency summit,” which, if we’re honest, resembled more of a book club lamenting how the main event was happening halfway across the globe without them. Meanwhile, Secretary of State Marco Rubio, National Security Advisor Mike Waltz, and envoy Steve Witkoff flashed smiles in front of cameras, tossing around phrases like “lifting sanctions,” “ending conflict,” and “future cooperation.” One wonders if the occupant of the White House is aiming for a foreign-policy victory lap before Macron can even say “sacrebleu.” But if calm does emerge—sending markets sprinting into “peace-trade” mode—it’s worth owning a bit of tactical risk on our books. After all, illusions of sovereignty aside, Europe’s crises are a fertile ground for trading opportunities.

Mean Reverting War Premium

Ever since Russia ramped up its offensive in 2022, the consensus was that sky-high energy costs and a booming defense sector were here to stay. But if the occupant of the White House manages to cut a deal that actually stops the shooting, all those assumptions might get tossed in a hurry. A credible ceasefire could entice investors back into Eastern European and German markets—long hammered by conflict jitters (and energy policy regrets)—especially given Europe’s comparatively modest valuations (around 15× earnings in the Euro Stoxx 50 versus almost 27× for the S&P 500). Of course, defense names and utilities enjoying windfall margins might take a hit if rearmament mania wanes, and none of this is guaranteed to last if Zelenskiy refuses to sign off on a pact that overlooks Ukraine’s core interests — let’s not forget Ukraine gave away it’s nukes for security guarantees.

Still, even the hint of peace can reshuffle capital flows in a hurry, and easing tensions might soften Europe’s elevated energy premiums—though it won’t magically piece together its energy puzzle. (For a deeper dive into these entrenched energy issues, see my prior article, “The Roundtable Hold of EU Trades – Greens With a Side of Thermal” where I dissect Europe’s reliance on imported fossil fuels and the region’s patchwork approach to renewables.

Meanwhile, should the occupant of the White House succeed in trimming the U.S. trade deficit or gently weakening the dollar, a shift of investors toward cheaper non-U.S. equities could help narrow the stubborn valuation gap. That might sound like a green light for broad ETFs such as VGK or FEZ, but splashing money across Europe may leave you overexposed to sectors that thrived purely on wartime realities. A more targeted approach—picking companies set to benefit from resumed trade routes, cheaper gas, and recovered consumer demand—might serve you better.

More arguments for the convergence of valuation multiples between U.S. equities to Non-U.S. equities can be found here:

For note, any idea expressed below I am setting up with 6 month to 1 year options and depend highly on an agreement in Ukraine being hammered out. The total premium across all ideas maxes out at 2.5% of NAV and I intend to not let the size grow above 3% after which I take profits (or let it whittle away into nothingness).

European Industrials: Flirting with Cheap Gas

We’re rummaging through the numbers, tracing how Europe’s 2022 energy crisis hammered core industrial output and prompted unprecedented cost surges across steel, chemicals, fertilizers, and building materials. Even as we enter 2025, the aftershocks remain visible in financial statements. By Q3 2023, many energy-intensive sectors still showed pronounced revenue declines versus the early-2022 highs—Lanxess’s 2023 sales sank 17% to €6.71 billion, Covestro’s top line fell ~20% to €14.38 billion, and BASF’s revenue slid 21% to €68.9 billion, well below its €87.3 billion peak. Profits likewise remain subdued. Covestro’s EBITDA for 2023 slipped to about €1.08 billion, further pressured by a second consecutive net loss in its European operations, and ArcelorMittal’s EBITDA halved in 2023–24 from the $14 billion range. Some companies, like Lanxess, managed to boost free cash flow by slashing expensive inventories built up when gas prices soared, yet many continue to see net income near breakeven or below historical averages. Although 2024 brought partial relief, with European gas costs easing from their 2022 extremes, the damage to margins and capacity lingered. EU industrial gas usage in Q3 2022 was down ~25% year-on-year, leading to a roughly 8% output dip in fertilizers, steel, and base metals that carried through 2023. Europe even became a net importer of chemicals for the first time on record. Surveys show 25% of German chemical companies and 16% of automakers cut production in 2023, with some only slowly restoring volumes through 2024. Meanwhile, smaller operators—in aluminum smelting, zinc refining, or glass—either closed permanently or operated at half-capacity just to avoid repeating the meltdown that hammered them two years prior.

On the “unhedged” or heavily exposed side, ArcelorMittal (AMS:MT), Covestro (ETR:1COV), Lanxess (ETR:LXS), BASF (ETR:BAS), and Heidelberg Materials (ETR:HEI) continue to show muted results, with recurring references to how 2023–24 sales and earnings remain 10–20% below pre-crisis levels. Covestro reported a near-20% top-line decline in 2023 and posted another net loss, though narrower than its 2022 red ink. Lanxess’s 2023 sales fell 17% from 2022, and by 2024 its EBITDA margin dipped into the high single digits—far from its 2019–20 marks. Although some free cash flow rebounded in 2023–24 as they offloaded expensive inventories and cut discretionary capex, these companies still wrestle with compressed margins, high net debt (Lanxess is hovering above 4× net debt/EBITDA), or forced capacity closures—such as BASF’s permanent downsizing at Ludwigshafen. Meanwhile, more resilient or flexible names—Holcim (SWX:HOLN), Saint-Gobain (EPA:SGO), Wienerberger (VIE:WIE), Yara (OSL:YAR), and Linde (NYSE:LIN)—have, on the whole, kept healthier balance sheets and margin profiles into 2024–25. Holcim’s net income rose further in 2023, aided by relatively contained petcoke and coal costs plus strategic hedges. Saint-Gobain just concluded a year of double-digit operating margins thanks to ongoing energy coverage, a record €48–50 billion in sales, and fresh acquisitions in high-growth insulation lines. Yara, though forced to idle as much as 35% of its European ammonia capacity in 2022, improved 2023 EBITDA to over $2 billion once fertilizer prices moderated but stayed profitable. Linde’s global pass-through contracts and continuing share buybacks underscore how effectively it hedged local volatility. Although all these “hedged” names also endured some 2024 volume weakness, their multi-year swaps, integrated supply, or ability to pass through costs in real time curbed the bulk of the crisis’s impact, leaving them less encumbered by debt or impairments.

That difference underpins a potential paired trade. Going long the battered cluster—ArcelorMittal, Covestro, Lanxess, BASF, and Heidelberg Materials—targets companies still suffering margin pressures or working down high-cost inventory from 2022, yet poised to rebound if EU energy prices keep sliding and volumes normalize further in 2025. If natural gas returns to the teens or low €20s/MWh and lost capacity restarts (Covestro’s core polymer lines, ArcelorMittal’s mothballed blast furnaces, BASF’s scaled-down ammonia plants), these could quickly reprice. Meanwhile, shorting the “energy fortress” group—Holcim, Saint-Gobain, Wienerberger, Yara, and Linde—allows investors to fund those longs in a market-neutral position. The rationale is that, should Europe’s crisis premium fade, the advantage these hedged names enjoyed when gas was 6–10× normal levels will erode. Indeed, recent 2023–24 earnings show how robust hedges or pass-through soared in 2022–23 but began waning once costs and selling prices both eased. By going short these disciplined industrials and long the battered, an investor could ride any upside from an eventual end to the war in Ukraine or a resurgence of Russian gas flows—pushing TTF back down and reversing the cost burdens that hammered unhedged industrials, all while avoiding direct macro bets on the broader European industrial market and it’s cyclical tendencies.

Travel & Tourism: Eagerly Eyeing an Eastern Revival

One of the more dramatic transformations of the war was how quickly airlines had to abandon Ukrainian routes or circumvent Russian airspace. Now, with the occupant of the White House and the Kremlin forging a new “understanding,” carriers like Wizz Air (LON: WIZZ) are salivating at the prospect of reopening 30 or so routes they had in Ukraine pre-war. They’ve publicly stated they could do it within weeks if a stable ceasefire emerges. That’s an immediate tailwind to Wizz’s bottom line, if it materializes.

Ryanair (NASDAQ: RYAAY), the giant low-cost airline, also stands to benefit from any broad rebound in Eastern European travel, though it doesn’t have quite the direct Ukraine exposure that Wizz does. And then we have Finnair (HEL: FIA1S). Before the war, Finnair’s unique selling point was short Asia-Europe travel via Russian airspace over the top of the globe. With that airspace shut, Finnair had to operate lengthy detours, killing its cost advantage.

If these US–Russia talks lead to a partial reopening of Russian skies, Finnair might reclaim that profitable niche. The big question is whether a newly minted peace arrangement includes a side deal on aviation. If the occupant of the White House is serious about normalizing ties with Russia, anything’s possible.

Banks in the Region: War-Sponsor Lists and Cheering Relief

A “peace soon” scenario offers a powerful jolt for banks active in Eastern Europe or saddled with Russian operations. Trump 2.0 seems keen to remove “irritants” like sanctions, which have forced certain lenders to freeze or exit profitable but politically fraught businesses. Austria’s Raiffeisen Bank International (VIE: RBI / OTC: RAIFY) shows how lucrative that can be: it’s the largest Western bank still in Russia—where, by late 2024, nearly 60% of RBI’s revenue originated—and also has a deep footprint in Ukraine. With war raging, this double exposure has been a regulatory headache. But if peace arrives, RBI might recoup value from its Russian unit, plus capture financing opportunities as Ukraine rebuilds. Investors clearly anticipate some upside: the stock soared ~80% in late 2023 on the mere possibility of reconstruction.

Hungary’s OTP Bank (BUD: OTP) finds itself in a similar predicament. It was blacklisted by Kyiv as a “war sponsor” for keeping ties with Russia, though Ukraine has reportedly suspended that label. If Washington or EU donors tie reconstruction funds to removing OTP from blacklists, the bank’s shares might reprice—assuming Zelenskiy, who wasn’t exactly invited to these “peace” talks, goes along.

Italy’s Intesa Sanpaolo (BIT: ISP) also stands to benefit. Though its Ukraine exposure is smaller than Raiffeisen’s, Intesa owns Pravex Bank (45 branches, 780 staff) and continued supporting Ukrainian customers through the conflict. That on-the-ground presence might position Intesa to finance major Italian (and broader EU) contracts in a post-war economy. On the Russian side, Intesa had historically facilitated over half of Russia–Italy commercial transactions, so a deal could restore some lines of business (Italy’s Melony has cozied up to Trump, I expect that will pay off for Italy in an agreement with Russia).

UniCredit (BIT: UCG / OTC: UNCRY) rounds out the cast: it too runs a Russian subsidiary that produced around 8% of group profit as of late 2024—a precarious but potentially valuable asset if sanctions ease. In addition, UniCredit’s broad network in Central Europe means it can help funnel reconstruction dollars or EU-backed guarantees into Ukraine. All these banks, however, must navigate a thicket of political demands. If Zelenskiy or the EU balk at any “peace deal” hammered out without Ukraine’s input, the whole scenario might implode, leaving these stocks languishing. But in the short term, Trump seeking a deal to cement his reputation as the great dealmaker, could lift the clouds hanging over them. War-sponsor labels might be erased, Russian units could be spun off more profitably, and new cross-border loans or donor-backed guarantees might turbocharge the region’s credit growth. In short, a genuine ceasefire—however uneasy—would likely spark relief rallies for these Eastern-exposed lenders.

Defense Stocks: Might the War Premium Dip?

It’s no secret that Europe’s defense spending has skyrocketed in recent years, hitting an eye-watering $345 billion across Central and Western Europe in 2022—eclipsing even the old 1989 peak. Germany alone whipped up a €100 billion war chest, Poland is leading the charge with some 5% of GDP on its military, and Finland’s 36% budget jump in 2022 shows just how alarmed everyone got after Russia marched into Ukraine. All this money doesn’t just vanish into the bureaucratic ether: it flows straight into corporate coffers at the likes of Rheinmetall, BAE Systems, Leonardo, Saab, Thales, and Airbus Defence & Space, turning them into juggernauts with record surges in revenue, free cash flow, and multi-year backlogs. BAE’s top line soared over 20% since 2020 to £23.1 billion, Rheinmetall’s soared 22% to €7.2 billion, and Saab clocked an incredible 46% bump to SEK 51.6 billion, just to name a few headliners. Meanwhile, we’re seeing 11–12% EBIT margins and order books so fat that they’re worth anywhere from two to five times annual sales—Rheinmetall alone has racked up nearly €40 billion in backlog (over five times its 2023 revenue), while BAE is sitting on a comfortable £77 billion pipeline. Factor in the EU’s newfangled R&D grants, cross-border fighter jet collaborations (like FCAS and GCAP), and the not-so-subtle “please build more ammo” requests from multiple ministries, and it’s hard to overstate how golden these days are for Europe’s arms makers.

On top of that, numbers don’t lie: from multi-billion helicopter deals (Leonardo’s AW149 contract in Poland) to full-blown expansions in Sweden (Saab hiring thousands to meet NATO-level production), the new defense mania has catapulted net profits and free cash flows. Companies are reinvesting in capacity—more lines for artillery shells, more workers for next-gen fighter jets—and still rewarding shareholders with dividends and buybacks. Thales’s EBIT cracked €2.1 billion in 2023 on €18.4 billion in sales and an expected 6.5% growth on the year when they report their Q4 2024, BAE’s operating profit rose to £2.57 billion with a robust 11% margin, and Airbus Defence & Space bagged a 15% increase in new orders, crossing €15.7 billion even though it competes with its better-known commercial sibling. Throw in France’s Big Three (Thales, Dassault, MBDA) collectively raking in €27.7 billion in revenue and over €101 billion in backlog, or the unstoppable backlog expansions at Saab, and you get a picture of an industry on multi-year upswing—fueled by NATO expansions, fear of further aggression, and full-blown EU policies that practically beg these firms to keep cranking out tanks and jets.

Yet all that “war premium” could unravel in the short term if a ceasefire is negotiated with Moscow. Markets that have priced in a perpetual arms boom may pivot the moment headlines hint at peace, penalizing stocks like Rheinmetall—up nearly fivefold since 2022 on the back of 12.8% operating margins and €535 million net profit in 2023. A sudden lull in new contracts or a perceived break in hostilities might tempt investors to lock in gains across the Euro military industrial complex at any U.S.-brokered “compromise” that underpinned Europe’s reorder cycle. That’s why I’m eyeing short positions on select defense names—particularly Rheinmetall—via six-month options to catch a knee-jerk sell-off. Be warned, though: multi-year budget laws, 2–5% GDP targets, and unstoppable advanced R&D pipelines mean these companies could roar back once the peace euphoria fades. So the trade is all about timing that initial correction—beyond that, the fundamental drivers of Europe’s defense renaissance still look locked in for years.

Quick Macro Round

• Long EUR and GBP: A credible peace deal in Ukraine would remove one of the biggest geopolitical overhangs on the euro, which has traded at a “war discount” ever since energy prices soared and recession fears took hold in Europe. Lower energy costs would immediately help cool Eurozone inflation, giving the ECB scope to slow or pause rate hikes—particularly with nominal German 10-year yields already near their cycle highs around 2.5%. Meanwhile, the euro’s correlation with gas prices suggests a strong bounce if Russian supply fears ease: natural gas could drift back to the low €20-25s per MWh, and that tailwind should quickly flow into the euro’s exchange rate. Sterling (GBP) would similarly stand to benefit, despite the UK’s “twin deficit” vulnerabilities. While gilt yields have climbed partly due to fiscal concerns, a more stable European environment plus reduced global risk aversion could lift the pound off its recent lows—especially if the Bank of England pivots from tightening as economic pressures and inflation expectations recede. In short, both EUR and GBP have room to appreciate when Europe is no longer the epicenter of a high-stakes geopolitical crisis.

• Long European Bonds: Beyond currency appreciation, an end to hostilities in Ukraine would likely catalyze a bullish move in European government bonds. Peace lowers tail-risk scenarios, reduces inflationary energy shocks (but let’s remind our selves more in Europe is leaning deflationary), and alleviates some of the market’s term-premium anxiety. From the data, German Bund yields have already priced in a hawkish ECB stance (2y yields near multi-year highs), yet a plunge in gas-driven inflation could shift the monetary policy outlook dovishly. That sets the stage for rallies in both German core duration and peripheral markets like Italy (BTPs), where spreads have widened from 100bp to 120bp, despite Italy’s relatively stable political situation and service-oriented growth resilience. A quick drop in inflation expectations also reduces the risk that central banks will have to maintain restrictive rates for long—traders may even start pricing faster cuts through 2025. Taken together, the combination of receeding energy inflation coupled with lagging growth (although cheaper energy should be a boost to growth, but European fiscal drama likely outweighs this benefit), receding geopolitical tensions underpins a near-term bullish case for European bonds, making long positions (especially in the 2-year segment) an appealing risk-reward proposition over the next 6 months.

• Short Taiwanese Semi’s: less obvious but depending on the type of agreement struck, it could embolden further Chinese aggressions on Taiwan; specifically semi’s given they are their most high value add and high multiple industry which also works as a hedge for both our U.S. tech exposure and our Chinese tech exposure simultaneously. (More on this when I cover Chinese equities, we have been long BABA with calls as mentioned in the Chat and broad Chinese Tech Equities)

• Long Gold, plenty of reasons we have gone into to own Gold and we remain gold in case no deal comes up. Do not expect a deal on Ukraine falling through would materially impact the price though positively and if a deal comes up, I’ll own more long term OTM calls. (this has been a 5% of NAV in 1+ year option premium position and will maintain it as long as the curve is structurally steepening.)

• You could also short some energy companies that benefited from the windfall of war though higher energy prices and remapping energy flows, my views here remain bullish for these equities given our last article on European energy issues, so I am not putting a short on these. Remaining long is also a hedge to a no-deal scenario.

Infrastructure and Construction: The Next Marshall Plan

Ukraine’s reconstruction needs now hover around $486 billion—far exceeding the country’s economic capacity given that its GDP is only forecast to reach about $183.59 billion by the end of 2025. In the immediate term, efforts focus on repairing damage in safer areas—restoring basic services, clearing debris, fixing housing that absorbed $80 billion of losses, and stabilizing core infrastructure amid periodic attacks on power grids and transport routes. Medium-term plans revolve around ramping up large-scale projects for roads, railways, bridges, and utilities, with a blend of donor funding (G7, IMF, World Bank) and private capital drawn by new war-risk insurance frameworks and a proposed “reconstruction bank” designed in partnership with BlackRock and JPMorgan. These measures aim to close persistent funding gaps and reduce corruption risks (good luck with that), allowing broader rebuilding even while the conflict remains unresolved in some regions. Execution still faces steep hurdles—demining vast areas, procuring building materials in quantities rarely seen on a single front, and mobilizing both a depleted domestic workforce and international firms brave enough to operate in a high-risk environment.

From an investor’s perspective, a set of publicly traded names stands out. Heavy-machinery leaders like Caterpillar (NYSE: CAT) and Volvo Group (STO: VOLV-B) appear poised to supply bulldozers, excavators, and trucks needed to reconstruct highways, clear rubble, and restore farming infrastructure. Building-materials giants CRH (NYSE: CRH) and Holcim (SWX: HOLN) should see soaring cement demand; CRH has already expanded its Ukrainian cement capacity. ArcelorMittal (NYSE: MT) can ramp up steel output at its Kryvyi Rih plant for rebar and beams once large-scale housing and industrial projects come online. Engineering and consulting specialists such as AECOM (NYSE: ACM) and Jacobs Solutions (NYSE: J) can secure project-management roles, while Schneider Electric (EPA: SU) and Siemens (ETR: SIE) will likely modernize outdated/damaged electrical systems. In logistics, Maersk (CPH: MAERSK-B) and Deutsche Post DHL (ETR: DPW) are well-positioned to handle the flood of raw materials across Poland and Romania, and energy companies like RWE (ETR: RWE) or Ørsted (CPH: ORSTED) could benefit if Ukraine’s future power grid relies more on renewables and decentralized technology. Although war-time conditions persist, the scale of the rebuild—essentially Europe’s largest in generations—suggests these firms may tap a substantial revenue stream once the bulk of donor money and private investment starts flowing into major contracts.

I have no trade here but an idea that some could enjoy the risk/reward of, I don’t think this can be appropriately expressed with options. Spot only strategy would work best. I would likely wait for real progress to be made and move the 2.5% to this bucket for longer term investment. Not all the companies mentioned above would make for good trades btw. Just initial ideas while we wait and see how things take shape.

Our Espressos are Stone Cold by Now

So yes, mon ami, our espressos are stone-cold and the Trump team is off forging a “peace” that forgets to invite the side still under attack—yet from a purely mercenary vantage, the whiff of a ceasefire might whip markets into a frenzy, sending battered industrials, airlines, and Eastern European banks soaring just as defense darlings and scarcity-chasing energy firms deflate like an old soufflé. Of course, if Zelenskiy denounces this diplomatic theater or Europe breaks out in a moral rash at letting Russia claim any gains, we’ll pivot right back to risk-off—and the Trump may refocus to a new spectacle altogether. But for the moment, it seems likely that capital will allocate to the range of “peace trades,” buoyed by the idea that cheap gas and open air routes are a necessary part of a European deal (keeping in mind American energy has strongly benefited from this war with increased costly LNG exports to the EU). At it’s core, this situation is darkly comedic: Trump once scorned for ignoring alliances is now waltzing with Russia, leaving Ukraine on the sidelines and Europe grumbling in the background. Meanwhile, I’ll keep swirling my Bordeaux, half-expecting the White House to auto-declare a Nobel Prize, while the EU scrambles to remember its strategic autonomy. Still, c’est la vie; keep your cynicism and your trading discipline tight—because if this deal-in-name-only gains traction, markets could indulge in a giddy rally before confronting geopolitical realities. Bon courage.

Cheers!

We regulate minutiae—like plastic bottle caps shaped to reduce litter (and yes, probably the shape of cucumbers, too)—yet beneath this meticulous policymaking, we juggle a trio of major headaches: a war in Ukraine that shattered illusions of perpetual peace, a likely Trump 2.0 with an allergy to trade deficits (bad news for the EU’s prized exports), and an energy debacle that has factories and households paying record-high bills. As if that weren’t enough, we’re also determined to push green energy agendas, insisting we can decarbonize and keep the lights on economically—despite shuttering nuclear reactors and passionately embracing wind and solar. Welcome to modern Europe, where illusions of sovereignty crumble around what feels like a continent-sized museum.

Figuring Out What European Sovereignty Means

For decades, we assumed the Cold War’s end let us shift budgets from tanks to social good. France, Germany, Italy—all savored the “peace dividend,” kindly underwritten by the leader of the free world. Then 2022 arrived, bringing Russian forces shelling Ukrainian cities. Suddenly, Europe realized it needed an actual army, not just parades. Germany launched a special €100 billion fund to fix its famously under-equipped Bundeswehr. Poland jumped to spending 4% of GDP on defense. Ministers clamored for artillery shells, drones, advanced jets. Investors, in turn, showered European arms makers—like Rheinmetall and BAE Systems—with capital, doubling or tripling their share prices in under two years.

Yet behind triumphant announcements about new tank orders lies an awkward truth: modern defense production devours energy. Steel mills for tank hulls, chemical plants for explosives, aluminum smelters for aircraft frames—these processes are exceptionally power-hungry. If your kilowatt-hour price is two- or three-times the global average, courtesy of costly imported gas, you’re building a “strategic” army on a very wobbly economic footing. Meanwhile, the White House might slam 25% tariffs on your biggest exports unless you sign a contract for F-35s. There’s the tension: do we plow new defense euros into American gear so they spare BMW or Hermès from tariffs, or attempt a purely European defense buildout, even if our electricity costs are sky-high?

Why Trump 2.0 Will Likely Target Europe

Washington has already shown it’s willing to tariff neighbors like Canada and Mexico—close allies who basically have to follow along. Europe, in contrast, can be a messy friend, often squabbling about digital taxes, climate policies, or ignoring U.S. pleas to buy more U.S. jets. For an administration that sees trade deficits as an insult, Europe’s large surplus (especially in autos, luxury, chemicals) is a sitting duck. It’s not hard to imagine a White House ultimatum: “Buy my missiles, or I’ll slap 25% on your cars and handbags.” For smaller EU states specialized in a single export niche, that’s disastrous. For bigger ones like Germany, losing the U.S. car market can complicate the next election. In a flourish, officials might accept large Lockheed Martin or Raytheon deals to appease Washington—despite loud claims of wanting a pan-European defense project.

But consider our deeper problem: an overdependence on foreign energy that, by 2022, covered over 62.5% of our total consumption. Historically, we had cheap Russian gas while we wrote “green transition” laws, closing domestic coal mines and nuclear plants faster than new renewables could fill the gap. Then the Ukraine invasion cut off that pipeline flow, sending prices five- to tenfold higher. So just as the White House could brandish tariffs, we can’t easily retaliate by banning American LNG. We rely on it now! If a new Trump standoff emerges, it’s the U.S. that holds the bigger leverage—thanks to our lingering energy vulnerability.

Still, there’s a silver lining for Europe’s broader markets: if U.S. data continues to show ~150k jobs added per month, stable productivity, and subdued inflation, the overall risk environment often favors both equities and bonds simultaneously. Historically, that has led to strong inflows into under-owned European stocks and government debt, especially from countries like France or Italy that have a mild “credit” component.
(starting to form a deflationary impulse case for the U.S. which I will dig into more after we get the next CPI and PPI prints)

2022 Energy Crisis is Still Here Today

In the blink of an eye, Europe’s “energy sovereignty” mantra went from polite dinner talk to a screaming siren. For years, we told ourselves that scaling wind and solar—plus some Russian gas as a “bridge”—would suffice. Then that “bridge” became a weapon for Moscow in 2022. We learned we couldn’t pivot to renewables overnight: reaching 50% or more of the grid with intermittent power demands robust storage, backups, and strong interconnectors. Meanwhile, Germany and others had already closed nuclear plants, phased out local coal under climate pledges, and cut gas production in the Netherlands. So when the crisis hit, we lacked fallback options. TTF gas soared above €300/MWh, metals and fertilizer plants shut, and governments spent hundreds of billions on subsidies.

Wind and solar power compensated for about one-third of the shortfall, coal and gas plants covered another 10%, but using scarce gas to produce electricity meant we still had to cut electricity demand by around 5%. Now that we pivoted to LNG from the U.S. and Qatar, we’re somewhat more diversified but remain heavily import-dependent. Even if peace arrives in Ukraine tomorrow, returning to cheap Russian supplies is politically unlikely. That suggests we’ll keep paying higher prices for alternative sources, hoping renewables ramp up fast enough to stabilize costs. The deeper paradox: we champion a green transition, but until we solve intermittency and baseload generation, we’re tethered to fossil imports—especially from new suppliers like the U.S. That’s an uneasy place to be if Washington starts threatening duties in other areas.

Europe’s Green Side Quest vs Reality

It’s not that our green ambitions lack merit. We’ve built a robust framework for decarbonization, from emissions trading to the European Green Deal, boosting renewables to 41% of EU electricity in 2022. By 2030, we aim for at least 42.5% of total energy from renewables. That, in principle, reduces reliance on imported fossil fuels. But the transition so far has been disorderly: some states closed local gas fields (for environmental reasons) faster than new technologies arrived, meaning in 2021–22 we still needed massive Russian gas to keep German factories running. Then we lost that pipeline supply and discovered our wind turbines can’t fill gaps during calm weather—prompting a coal usage spike or greater LNG imports.

We have limited gas storage, minimal battery capacity, and a smattering of cross-border interconnections. Whenever a big lull in wind occurs—like the infamous German Dunkelflaute—we resort to gas or coal, draining reserves just when we need them most. Our local fossil production keeps shrinking, and although we add solar and wind aggressively, we still rely on global fossil markets. That’s not exactly robust “sovereignty.” For now, energy prices will continue at a premium in Europe.

Even so, from a market perspective, Europe’s under-owned, lower-valuation profile can still draw capital—particularly when global growth is “not too hot, not too cold” and inflation hovers near central bank targets. In past cycles (like early 2019), that dynamic led to strong risk-adjusted returns for European stocks.

When the Wind Don’t Blow and the Sun Don’t Shine…

Against this fraught backdrop, two nations stand at a crossroads, epitomizing Europe’s tangled energy future. Germany, the self-styled renewable champion, is suddenly exposed by the very revolution it heralded. Meanwhile, Norway—long hailed for its clean hydropower—continues to derive significant prosperity from oil and gas, leaving it tethered to the old-energy world.

Germany’s Energiewende was seen as a beacon, supposedly guiding the planet toward a wind-and-sun-powered utopia. But the winter Dunkelflaute of 2025 unmasked painful vulnerabilities: renewable generation plunged to 5 GW on February 5—far below the levels of December 2023—compelling coal, dismissed as a relic, back online at 8.1 GW (its highest usage since early 2024). Because Germany is integral to Europe’s interconnected grid, any shortfall there sends shockwaves throughout the region. When Berlin must import electricity, neighbors like the UK and France see prices spike, exposing just how dependent everyone remains on stable baseload. Natural gas still props up the rest, yet it’s hardly the pristine solution once pitched.

Amid Germany’s coal resurgence, Norway emerges as Europe’s reluctant savior. Harnessing hydropower for 90–95% of its electricity, Norway plugged the gap again in 2024 by exporting 9 TWh to the UK and 14 TWh to Germany whenever German renewables fell short. But this altruism strains domestic reserves. Norwegian electricity prices rose 35% year-on-year, fueling public outcry over “exporting away” cheap power. The Centre Party withdrew support for Oslo’s energy policy, while Prime Minister Jonas Gahr Støre proposed price freezes to placate voters. Underlying it all, Norway depends on oil and gas for about 15% of its GDP. A sudden slump in global gas demand could jolt Norway’s economy, while an EU energy meltdown might intensify calls to clamp down on exports—potentially fracturing Europe’s fragile unity.

Paradoxically, Norway is also pushing the decarbonization envelope in offshore oil and gas. By electrifying fields like Sleipner, cutting 300,000+ tonnes of CO₂ annually, and pioneering the Hywind Tampen floating wind farm (which powers oil platforms with renewable electricity), Oslo pulls off the neat trick of burning fewer hydrocarbons to produce hydrocarbons. Battery-powered supply vessels reduce offshore emissions further. Yet behind this green veneer, Norway’s wealth hinges on fossil exports. Even “bridge fuel” natural gas might fall from grace if Europe’s climate fervor accelerates, raising profound questions about Norway’s long-term energy identity. Every TWh diverted abroad drives up local utility bills, triggering political backlash and tarnishing Norway’s once-unassailable reputation as an eco-paragon.

Germany’s quick pivot to coal, meanwhile, underscores the precariousness of leaning heavily on intermittent renewables without robust backups. Norway’s simmering domestic tension spotlights how being Europe’s “green battery” comes at a steep political cost. Ultimately, this tug-of-war reveals a sobering fact: transitioning from fossil fuels is infinitely more complicated than glossy policy brochures suggest. If solidarity frays—perhaps Norway caps exports to safeguard its own citizens, or Germany doubles down on coal for grid security—Europe’s dream of a seamless renewable future faces mounting challenges. These two nations stand on the front line of a puzzle the entire continent must resolve: how do we reconcile lofty climate ambitions with the unyielding demands of energy security?

New Defense Spend, Old Energy Fault Lines

So, can we truly rearm while saddled with high energy costs? If steel, aluminum, or chemicals are battered by gas bills, producing artillery or advanced drones becomes pricier. Some states—like France, with 70% nuclear electricity—are less exposed to gas shocks. But many rely on gas-fired power, and a White House ultimatum might coerce smaller EU nations into buying American arms just to dodge new tariffs. It’s hardly the ideal blueprint for a cohesive European defense industry, already fragmented by local job protection and procurement feuds.

EU policymakers now scramble to fix these glaring gaps: more strategic gas reserves, new LNG terminals in Germany built in record time (they had none before), and a possible partial nuclear revival in once-nuclear-shy states. The Ukraine war accelerated all of this. But it doesn’t magically lower near-term power bills. Our domestic fossil output keeps shrinking; renewables, though scaling quickly, can’t cover the full shortfall anytime soon. We remain net importers for ~63% of our total energy—limiting our scope to retaliate if the U.S. brandishes tariffs. They know it, we know it—so guess who holds the stronger hand?

Even so, if global investors continue to see decent productivity gains in the U.S. and moderate inflation readings, risk appetite can support both European credit and sovereign bonds. In prior periods of stable 1.5–2% growth and ~2% inflation, bonds from countries like Italy and France delivered strong, predictable returns—a trend that might repeat if energy worries subside.

Could a Peace in Ukraine Spark a Mean Reversion?

One might hope a Ukraine ceasefire helps global energy prices dip, removing the “war premium” and letting battered European equities rebound. Historically, the end of conflict in Europe can deliver a “peace dividend,” lifting cyclical sectors, restoring business confidence, and nudging the ECB to friendlier rate stances if inflation cools. That scenario would see BASF or steelmakers reactivating capacity, consumer shares rallying, and maybe the euro strengthening as war risk fades.

But we likely won’t revert to cheap Russian pipeline deals. Politics and trust are shattered—especially in Eastern Europe. So the best we get is partial relief: enough for cyclical names to bounce off lows, but not enough to fix structural supply gaps. Our precarious green transition lurches on, with short-term reliance on LNG at steep prices. Still, in a “goldilocks” global setting—steady U.S. job growth, mild inflation, modest global GDP—European equities historically flourish. A partial Ukraine peace could amplify that rally by easing energy jitters.

Greens With a Side of Thermal

One might assume Europe’s policy chaos is cosmic punishment. But for markets, these swirling tensions aren’t just comedic fodder: they produce investment opportunities. Our scramble to square the circle—go green but still burn coal, protect trade while risking tariffs, build up defense while energy costs soar—creates winners and losers. Below are the near-term trades that could thrive as the Old Continent wrestles with modern crises.

A Barbell Philosophy: Rebound Plays vs. Energy-Secure Winners

Underneath these specific trades, there’s a unifying strategy: two-speed Europe. On the one hand, companies in energy-reliant countries (like Germany, Italy, Czechia) got pummeled by the 2022 crisis and could rebound strongly if energy normalizes. On the other, energy-secure economies (France, Iberia, Norway) and their flagship firms may continue chugging along—or even flourish—thanks to stable domestic resources or structural policy support.

How It Works:

1. Rebound Potential in Hard-Hit Industrials
   Think of chemical and manufacturing giants like BASF (Germany) or steelmakers like ArcelorMittal (with major EU exposure). If gas prices keep easing and costly imports fade, battered margins could jump back. The risk is that some capacity has permanently moved overseas, but a decent stretch of stable gas would still give these firms a hefty upswing off depressed share prices.

2. Steady Gains for Energy-Secure Markets
   Meanwhile, Norway’s Equinor or Spain’s Iberdrola enjoy robust domestic supply or diverse renewables. Even if Europe’s gas troubles flare up again, they remain comparatively shielded—and might even capitalize on the next scramble for non-Russian supply. This half of the barbell provides a hedge if cyclical, high-energy industries fail to bounce.

Use this dual approach as a guiding principle across the trades outlined below. It helps reconcile the tension between short-term cyclical rebounds (in hammered industries) and long-term structural advantages (in resource-rich or renewables-savvy economies).

Coal Producers: The Zombie Industry

(Potential Winners: Glencore (GLEN.L), Peabody Energy (BTU), RWE (RWE.DE), Whitehaven (WHC.AX), Yancoal (YAL.AX), Thungela (TGA.L)) - Not my favored area but a small allocation might be warranted

It’s a paradox for the ages: the more the EU talks up net-zero ambitions, the more it resorts to extending or restarting coal-fired plants whenever Russian gas falters or the wind refuses to blow. Glencore and Peabody Energy saw record profits thanks to Europe’s scramble in 2022–23, while RWE continues to rely on its “dirty” coal fleet to balance renewable capacity. The short-term story is clear: nobody wants to admit Europe still needs coal, yet that’s exactly what keeps happening each winter.

Why They Benefit

• Fallback Hero When Gas Is Costly
  As long as gas prices remain elevated—and renewables remain intermittent—coal serves as the unwanted-yet-essential Plan C. Countries like Germany may announce coal phaseouts, but those targets often slide once cold winters or energy shortfalls loom.

• Asia’s Demand Outweighs Europe’s Decline
  Europe gets the headlines for phasing out coal, but the real growth engine is Asia. China and India, in particular, continue building new coal plants to meet surging electricity demand. Even if Europe slightly curbs its usage, Asia’s expansions more than offset those reductions. This keeps the seaborne coal market tight and price-supportive.

  

• Chronic Underinvestment Keeps Supply Tight
  Investor pressure, ESG mandates, and a widespread narrative of “coal is doomed” have starved the sector of capital. That ironically sustains higher prices: few new mines, minimal exploration, and cautious producers mean global supply can’t ramp quickly when demand spikes. The result? Coal remains a reliable cash generator for those who still produce it.

• Thermal and Met Coal Both in the Picture
  While thermal coal (power generation) grabs the spotlight, metallurgical (coking) coal for steel is equally crucial. Cities keep rising, infrastructure expands, and steel remains indispensable in emerging markets. Many coal companies (e.g., Peabody, Whitehaven) tap both thermal and met markets, enjoying a more diversified earnings base.

• The Zombie Resource
  Coal is the zombie of energy generation, the tomb-stone has been planted but its still slowly walking around. Even as Europe claims the moral high ground by trimming usage, global seaborne markets remain firm. Combine that with cost inflation and production constraints, and coal often becomes the reluctant fallback whenever anything else fails. No matter how disliked, it’s still there in the corner—thriving on necessity.

Risks to Keep in Mind

• Regulatory Crackdowns & Sin Taxes
  Coal is the easiest political target in the EU, so watch for sudden taxes, forced early closures, or strict emissions penalties that could hammer profits. Australia’s Queensland royalty hike shows how local governments can swoop in on windfall earnings.

• Reputational & ESG Pressures
  Even if fundamentals are bullish, reputational risk can depress valuations. Many funds simply refuse to hold coal, shrinking the pool of potential buyers—though the flip side is that low valuations can present outsized return potential for those willing to stomach the stigma.

• Demand Shocks or Policy Swings
  A synchronized global recession could momentarily cut power demand and steel consumption, denting coal prices. Meanwhile, any big breakthrough in renewables-plus-storage—or a genuine nuclear renaissance—could reduce coal’s fallback role over time.

LNG Majors: Ride the Transatlantic Gas Express

(Potential Winners: Equinor (EQNR), Shell (SHEL), TotalEnergies (TTE), Cheniere Energy (LNG) - plenty more dyor) - Higher conviction here than Coal

Why They Benefit

Europe’s Gas Lifeline: The Pivot to LNG

Russia’s invasion of Ukraine shattered Europe’s energy assumptions. Almost overnight, pipeline gas from Moscow—once the backbone of Europe’s energy system—was no longer an option. Desperate to keep the lights on and factories running, European governments turned to liquefied natural gas (LNG)—a market previously dominated by Asian buyers.

U.S. exporters like Cheniere and global trading houses like Shell and TotalEnergies found themselves in the trade of a lifetime. With Europe scrambling for supply, LNG prices soared, and sellers dictated the terms. Norwegian energy giant Equinor, traditionally a pipeline supplier, also saw its influence grow, stepping in as Europe’s new “reliable gas champion” amid the chaos.

The Reality: Europe Still Needs LNG

Even as the immediate crisis subsides, Europe’s dependency on LNG isn’t going away anytime soon. Governments are spending billions on regasification terminals, betting that Russian pipeline gas is a thing of the past. And while renewables are ramping up, they’re not yet reliable enough to replace the role gas plays in heating, industry, and power generation.

For companies like Cheniere, this means locked-in demand for years to come. LNG exporters with existing infrastructure—especially those with operational terminals—are in a sweet spot: Europe can’t afford to wait for new projects to come online, so it’s stuck paying a premium for existing supply.

Limited U.S. Shale Expansion Keeps the Market Tight

Investors hoping for a surge in U.S. shale gas production to flood the LNG market may be in for a disappointment. Top-tier shale fields are maturing, and supermajors are favoring share buybacks over aggressive drilling. That means the pipeline of new LNG projects remains constrained—good news for incumbents like Cheniere and Equinor, who will continue to command strong margins.

The LNG Majors Are Locking in the Future

Knowing that today’s tight market won’t last forever, LNG giants are locking in long-term contracts at highly favorable rates. The Qataris, who boast the world’s lowest-cost LNG, are aggressively expanding, but most of their new supply won’t be online until later this decade. In the meantime, Shell and TotalEnergies are securing multi-decade deals with Asian and European buyers, ensuring steady cash flows even if spot prices fall.

Risks

What if Russian Gas Makes a Comeback?

If Europe finds itself warming up to Russian pipeline gas once again, even in limited amounts, other sources of LNG imports could fall sharply, hammering prices. While trust in Moscow is deeply damaged, economic pragmatism can be a powerful force—especially in energy-hungry, price-sensitive economies.

Europe’s Shift from “Crisis Buyer” to “Phase-Out Mode”

While LNG demand remains high today, Europe has no intention of being this dependent on fossil fuels forever. The EU’s energy transition is accelerating, with massive investments in renewables, energy efficiency, and electrification. This means that by the late 2020s, Europe could be buying far less LNG than it does today—potentially leaving suppliers with a surplus.

A Global Supply Glut Is Coming

Over the next few years, massive new LNG projects in Qatar, the U.S., and Canada will come online, potentially tipping the market into oversupply. If Europe’s demand peaks just as new supply floods the market, LNG prices could nosedive, slashing profits for today’s biggest winners.

Regulatory & Political Risks

Governments are already taxing windfall LNG profits, and new regulations—such as carbon border taxes—could increase costs for high-emission gas producers (like those in the U.S.). Political pressure to accelerate the shift away from fossil fuels could also lead to premature shutdowns of LNG infrastructure, forcing companies to adapt faster than they’d like.

Midstream & Energy Infrastructure: The Unlikely Rock Stars

(Potential Winners: Snam (SRG.MI), Engie (ENGI.PA), Excelerate Energy (EE))

You wouldn’t think pipelines and floating storage units would steal the limelight, but in an era of “sovereignty at any cost,” that’s precisely what’s happening. Italy’s Snam, France’s Engie, and U.S.-based Excelerate (the FSRU specialist) are capitalizing on Europe’s frantic push to plop down new terminals wherever coastline exists.

Why They Benefit:

Europe’s LNG Infrastructure Boom

Europe didn’t just start buying LNG—it built an entire import network from scratch. Governments threw billions at new terminals, storage facilities, and pipelines, ensuring that even if Russian gas returned, they’d never be fully reliant on it again.

Companies like Snam and Engie are now at the center of this transformation, owning and operating critical gas infrastructure across the continent. Excelerate Energy, which specializes in floating storage and regasification units (FSRUs), found itself in high demand as countries rushed to add import capacity overnight.

FSRUs: The Ultimate Flexibility Play

FSRUs—essentially floating LNG terminals—became Europe’s quick fix for supply shortages. Germany, Finland, and the Netherlands all rushed to lease them, with Excelerate Energy reaping the rewards.

The beauty of FSRUs? They can be moved. If European demand falls, Excelerate can simply relocate these assets to Asia or South America, ensuring continued utility and profitability.

Stable, Utility-Like Cash Flows

Many of these infrastructure assets operate under regulated return frameworks or long-term contracts, meaning that even if LNG throughput fluctuates, revenue streams remain stable. For investors seeking low-risk exposure to the energy transition, Snam and Engie offer an attractive, predictable alternative to commodity-price-sensitive producers.

Risks:

Overcapacity and Stranded Assets

Europe may have overbuilt LNG import capacity. If demand falls faster than expected, some of these assets could become underutilized or even obsolete, forcing midstream operators to write down investments.

Demand Destruction from Renewables

As wind and solar scale up, gas-fired power plants will lose market share, reducing pipeline and terminal utilization. Electrification of heating could further erode demand for natural gas infrastructure—a risk that midstream investors must weigh carefully.

Regulatory and Political Uncertainty

European policymakers may decide to cap fees, impose stricter emissions regulations, or even accelerate the decommissioning of fossil gas infrastructure. Midstream companies that fail to adapt (e.g., by integrating hydrogen capabilities) could find themselves at a serious disadvantage.

OSV & Offshore Drilling: The Under-the-Radar Upcycle

(Valaris [their warrants are interesting], TDW, SDRL among others) - think this will be one interesting place to allocate for these next 2-3 years

While Brussels preaches “net-zero at any cost,” a quiet offshore revival is charging ahead—driven in part by Europe’s sudden hunger for non-Russian hydrocarbons. Deepwater and North Sea projects are back in the spotlight, ironically powered by the same European majors who pledge green ambitions on Monday and sign new offshore drilling deals on Tuesday. Global rig utilization now hovers near 90%–94%—a stark shift from the 2015–20 glut—while dayrates for top-tier drillships flirt with $450k–$500k/day. Offshore Support Vessel (OSV) operators, which deliver everything from drilling fluids to crew, report 70%+ hikes in charter rates since late 2021. With practically no new rigs or OSVs under construction, supply remains tight and ripe for a multi-year run.

Why They Benefit:
Energy Security Frenzy: Europe’s scramble to replace Russian pipelines has North Sea drilling back on the agenda (climate PR be damned). Meanwhile, European majors like TotalEnergies and Equinor are doubling down on deepwater fields (Brazil, Guyana, West Africa) and need more rigs and OSVs than ever.

Underinvestment Hangover: After years of cold-stacking and scrapping rigs, the fleet is drastically smaller—just as Europe decides it actually needs oil supply. That shortage buoys dayrates for rig owners and keeps vessel utilization tight for OSV firms.
Big Corporate Wallets: Operators flush with 2022–23 oil revenue are greenlighting multi-year drilling campaigns. That locks in rig capacity at dayrates reminiscent of 2014’s heyday, giving OSV providers stable revenue and plenty of headroom to push rates higher.

Risks:
ESG & Cost Inflation: For all Europe’s renewed talk of “energy security,” a quick political U-turn could throttle offshore permits. Meanwhile, reactivating or building rigs is more expensive than ever, so if dayrates don’t track inflation, margins can get crushed.
Oil-Price Wobbles: An abrupt recession or OPEC mischief can sink oil prices. That would freeze final investment decisions (FIDs) on big offshore fields, pulling the rug from under this rig-and-OSV party.
Possible 2027 Oversupply: If rates stay sky-high, eventually someone orders a newbuild flotilla or reactivates cold-stacked units en masse. By 2027, a fresh wave of capacity could dampen the upcycle just when it seems unstoppable.

In the end, Europe’s vow to “move beyond fossil fuels” curiously requires more offshore drilling—particularly if U.S. shale stalls and liquefied gas remains pricey. A well-timed bet on OSVs and rig contractors could pay handsomely if these contradictory policies keep fueling a market starved of modern assets. Welcome to Europe, where a pipeline snipped in the East can catapult dayrates in the West.

The Steel Boom That Just Became a Fizzle

(Potential Names: ArcelorMittal (MT), U.S. Steel (X), Tenaris (TEN.MI)) - 25% blanket U.S. tax might create a great buying opp on EU names…. but keeping in mind demand is weak - no trade here for now

Conventional wisdom said that if Europe was busy building LNG terminals, upgrading defense gear, and resurrecting industrial lines, then steel producers would be popping champagne. Except, in a twist that’s almost too on the nose, the White House slapped a fresh 25% global import tariff on steel and aluminum—just in time to snuff out that optimism.

Why It Still Half-Works:
There is indeed a structural bump in steel demand for defense hardware and energy infrastructure. Companies like Tenaris thrive on pipeline orders, and ArcelorMittal might still see volumes creep up. But coking coal costs could stay lofty if global miners keep underinvesting. While Europe’s steel output might shrink, Asia (especially India) is forging ahead—keeping metallurgical coal markets tight and ironically hiking input costs for EU mills. So, a fleeting uptick in steel volumes could get whacked by expensive raw materials.

Risks:
U.S. tariffs create cross-border friction, hurting mills already burdened by insane Euro power bills. A steel “trade war” could overshadow the underlying demand story, leaving this once-promising tailwind more like a mild breeze. But this might create a great buying opportunity down the line after some pain. I am waiting on this one.

Defense Contractors: Weapons, the New European Language

(Potential Winners: Lockheed Martin (LMT), Raytheon (RTX), Rheinmetall (RHM.DE), BAE Systems (BA.L), Thales (HO.PA), Rolls-Royce (RR.L))

If there’s one bright spot in a region that once bragged about pacifism, it’s arms manufacturing. Germany is plowing a special €100 billion into the Bundeswehr, Poland’s spending spree is off the charts, and even the holdouts are scouring the catalogs for advanced drones or fighter jets.

Why They Benefit:
The rearmament wave is real; Europe’s appetite for American hardware looks insatiable—especially if that’s the only way to dodge tariffs on Porsches and Hermès scarves. Meanwhile, EU-based players like Rheinmetall and BAE soared on tank orders, Thales profits from avionics expansions, and Rolls-Royce supplies the engines that keep fighter jets airborne.

Risks:
A Ukraine peace might reduce urgency, but spooked governments rarely undo defense budgets overnight. So, arms makers might bask in multi-year tailwinds, all while politely ignoring Europe’s prior talk of “peace dividends.”

Bonus round:

Heat Pump Makers: Europe’s Next Holy Grail—or Just Hot Air?

(Potential Winners: NIBE Industrier (NIBE-B.ST), Daikin (6367.T), Carrier Global (CARR) - Carrier is best positioned here and benefited from a Trump Election pullback for entry-demand is not going anywhere for now though. The first two are higher risk recovery plays.

You’d think Europe’s big dream—kicking natural gas out of every house in favor of sleek heat pumps—would be the triumphant badge of “energy sovereignty.” Naturally, that’s turned into a messy scramble of subsidies, new regulations, and a frantic wave of consumer confusion: “Wait, I have to replace my boiler with a what?” Enter the heat pump makers, who stand poised to convert Europe’s fear of gas bills into scorching sales. But dig deeper, and you’ll find some drafts of reality wafting through the hype.

Why They Benefit

• Europe’s “No More Gas, Ever” Obsession
  Brussels and countless national governments have unleashed a flurry of pledges and deadlines to ban new gas boilers by 2025, 2027, 2035—pick a year, any year. Even if half these mandates slip, that’s still a colossal market for heat pumps. Every homeowner who used to sign up for a shiny new gas boiler might be forced into a heat pump unit. Manufacturers like NIBE and Daikin are practically licking their chops at the legislated demand.

• Subsidy Candy
  From Germany to France, subsidies for installing heat pumps can reach thousands of euros, turning home retrofits into a discount bonanza. Governments want to brag about “decarbonizing home heating,” so they’ll shovel money at anything that hums on electricity instead of gas. Providers who can jump through the bureaucracy hoops get to charge top dollar—sorry, top euro—on systems suddenly made affordable by taxpayer generosity.

• Rising Electricity Reliance
  The old fear was that electricity prices might cripple heat pumps’ advantage. But with pipeline gas no longer cheap (thanks, Russia!) and Europe frantically building out more renewable capacity, policymakers are banking on stable-to-lower electricity costs. If that bet holds true, it cements the operating-cost argument for heat pumps. Manufacturing margins improve as volumes scale, creating a tidy virtuous cycle—for the pump producers, at least.

• Eco Image + ESG Capital
  Heat pumps are the new ESG darling. Even if they’re powered partly by coal-tinged grids (who’s checking?), they’re still sold as planet-saving upgrades. As a result, big institutional investors with net-zero pledges like plowing money into “clean tech” stories. Heat pump makers can ride a wave of cheap capital to expand capacity—even if the actual carbon math is a bit fuzzy.

Risks to Keep in Mind

• Grid Strain & “Oops, The Power Went Out”
  Replacing millions of gas boilers with electric devices is sort of like hooking a thousand new Tesla Superchargers into local distribution grids. Are those wires up to snuff? Maybe not. If winter demand spikes and local grids can’t cope, expect frantic political finger-pointing—and potential slowdowns or halts in new heat pump mandates. Nothing kills a policy craze faster than rolling blackouts.

• Pricey Installations & Sticker Shock
  Sure, subsidies help, but heat pump installations can run double or triple the cost of a boiler, especially in older homes requiring major insulation. People might balk—even with rebates. There’s a real risk that once the first wave of “eco-passionate” homeowners is done, mass adoption stalls unless governments keep sweetening the pot. And if budgets tighten? Goodbye lavish subsidies, hello resurgent gas boilers.

• Raw Material & Supply Chain Hiccups
  Heat pumps need compressors, refrigerants, specialized electronics—and a ton of copper piping to move heat around. If supply chain drama rears its head (again), or if raw material prices surge, these units get costlier to produce. The industry can pass on higher costs only so far before politicians cry foul or consumers run for the cheapest alternative. Meanwhile, new environmental regulations on refrigerants could force pricey design changes, hammering margins.

• Possible Tech Shifts & the Hydrogen Wildcard
  A few years ago, hydrogen boilers were the Next Big Thing—some governments still flirt with that idea. If hydrogen or another magical technology emerges (or if Europe invests heavily in hybrid solutions that keep partial gas usage), the heat pump mania could deflate. Companies that bet everything on heat pumps might be stuck with warehouses of specialized parts no one wants if policymakers pivot again.

Cheers!

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I was halfway through drafting an article titled “AI CapEx is Dead, Long Live AI” while driving across France toward the Alps. My plan was simple: soak in the panoramic views of Mont Blanc, reflect on those days when some well-timed puts saved my portfolio, and finalize fresh insights on AI-driven capital expenditures. But—call it a real Veni, Vidi, Tariff moment—President Trump suddenly unveiled 25% tariffs on imports from Canada and Mexico (with a partial carve-out for Canadian energy) and 10% on Chinese goods, and my AI conversation had to shift to second priority. It’s the kind of environment where, yes, I hope you bought your life jacket.

In a last-minute twist, Trump also agreed to a 30-day delay for tariffs on Canada, mirroring a one-month reprieve granted to Mexico. Canadian Prime Minister Justin Trudeau says this buys time for further negotiations, though the White House insists that both neighbors remain under threat of duties if they fail to address U.S. demands. For now, the peso and loonie both rebounded against the dollar, while U.S. stocks erased some of their initial losses—but my sense is that the tension hasn’t evaporated; it’s merely postponed.

When tariffs this broad come into play, even if some are temporarily delayed, they can reorder global supply chains, rattle markets, and reshape the narrative around government deficits and foreign capital flows. Indeed, the price of everyday goods—including cars—now looks set to rise, with inflationary pressure hitting American consumers who were already feeling the pinch in areas like food and housing. While many still assume these moves are a negotiating ploy that might be reversed any day, the complacency in equity markets seems dangerously high if those assumptions prove false. This is starting to smell like the beginning of the end for the World Trade Organization (WTO) and the entire post-war consensus on global free trade—a moment that could send us sailing into uncharted waters. That, in turn, has ramifications for nearly every asset class and we will do our best to keep an eye out for good risk-reward trades along the way.

I’ve repeatedly noted—especially in my earlier piece, The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song—that abundant liquidity can mask all kinds of structural vulnerabilities. Even if these tariffs prove temporary, they might accelerate the very liquidity drain I warned about, particularly if foreign investors reprice the risks of parking capital in American assets. So I’m paying close attention to this development, because whether we see an immediate or delayed pullback in equities could hinge on the outcome of trade negotiations and potential ripple effects on liquidity flows.

The Two Big Gaps: Government Shortfalls and External Flows

When Budget Overruns Become a Tailwind

Since COVID, the U.S. has repeatedly deployed outsized government spending to shore up economic growth. Whether one calls it stimulus or pro-labor policy, the effect has been to inflate corporate earnings, consumer demand, and overall liquidity—effectively turning the budget deficit into a powerful engine for risk assets. Add to this the muscle memory companies gained during pandemic supply shocks—where they got comfortable raising prices without losing customers—and the result is a persistent inflation tailwind.

However, if higher deficits are fueling inflation, the government might tighten the spigot. That would yank away a crucial support for equities, particularly those whose valuations ride on easy capital. This tension also reflects a broader pivot toward reindustrialization, where domestic wages and manufacturing capacity hold greater political priority, even if it means structural changes (and cost pressures) for corporations.

We have extensively touched on the themes of the shift to pro-labor from pro-capital and the Fiscal Spending put in prior works. I recommend giving those a quick glance as the themes will remain relevant moving forward:

The External Trade Gap as a Source of Liquidity

Now Trump is not a fan of the word “deficit” and has created a department of government efficiency to reduce the one we talked about above, but his trade war against the world is meant to tackle the current account deficit. For decades, the U.S. thrived under a system in which it imports real goods but exports financial assets. Foreign suppliers—China, Mexico, Canada—collect dollars from selling goods to American consumers, then reinvest those dollars in Treasuries, corporate bonds, or equities (this helps them avoid selling those dollars to buy back local currency and keep their currency competitive). This arrangement effectively lowers U.S. borrowing costs and inflates U.S. valuations across the risk curve.

This is probably my favorite chart on the subject which I read on the MacroTourist’s article on twin deficits and illustrates this idea beautifully:

But if the White House truly shrinks the trade gap (via tariffs or onshoring) while also cutting deficits to contain inflation, it risks choking off that synergy. I’ve seen some studies suggesting that even a 25% tariff on all imports from Canada and Mexico might only generate some $200 billion in “savings,” nowhere near enough to eliminate the U.S. external deficit (can’t find the source anymore given my very mobile set-up). Meanwhile, such a move can hammer Mexico, which sends $500 billion of goods a year to the U.S.—a huge share of its <$2 trillion GDP—and also ding Canada, whose economy is more diverse yet still reliant on cross-border auto parts and energy exports. For Americans, that likely translates into higher consumer prices—which can quickly morph into both lower real purchasing power and a potential shift in how foreigners see the U.S. as a destination for their capital.

And if trade becomes a political tool for all manner of policy—perhaps culminating in threats to exit the WTO—global investors might not view U.S. assets with the same uncritical fervor. That’s precisely the synergy I underscored in The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song: big deficits plus a free flow of foreign capital have buoyed valuations. Undermine either, and the foundation of lofty equity prices starts to wobble.

Enter the Tariff Storm: Risks of Shifting Capital Flows

Over the past few days, I watched what many wrote off as bluster morph into real policy: 25% tariffs on Canada and Mexico (with adjustments for Canadian energy) and 10% on Chinese goods. Now we hear about 30-day extensions for both neighbors. Yes, these might vanish in a swirl of last-minute negotiations, but I wouldn’t bet my bitcoin on it. If the administration is serious about re-shoring production or using tariffs to fund deficits, these delays are merely short-term concessions.

Shocks and Retaliation

Tariffs tend to hurt both sides, but the degree of pain varies. I recall the 2018 washing machine tariffs, studied by Flaaen, Hortacsu, and Tintelnot, which revealed how manufacturers used the new levies to justify not only higher washer prices but also dryers—even though dryers weren’t directly tariffed. This is a classic example of how tariffs spark broader inflation: domestic companies raise prices “just because they can,” and that cost is shouldered by the consumer.

Those researchers also found that while some U.S. manufacturing came back, the cost to consumers per job created was roughly $800,000 a year—a hefty price tag (for the profit margin of your most beloved equities). Whether or not one deems that “worth it” misses the broader economic point: it’s inflationary, contractionary, and stokes major uncertainty. Multiply that by an entire supply chain (like autos, consumer staples, electronics), and you get a scenario reminiscent of stagflation: rising prices and stagnating growth. The market isn’t priced for that, in my opinion.

Moreover, I see no reason why Canada, Mexico, and China would just swallow the pain. Retaliation can cut into U.S. companies’ margins, especially if they depend on exports or cross-border supply chains. And let’s not forget the financialized nature of the U.S. system—where a significant drop in equity or bond markets can reverberate into the real economy far more than linear economic math would suggest.

The Larger Story: Balancing Liquidity and Real-World Headwinds

The fundamental question remains: how long can liquidity alone sustain markets if structural pressures keep piling up? In latest note on liquidty, I pointed out that high-flying valuations rely heavily on abundant capital. If tariffs erode global confidence in U.S. trade policy—especially if they widen into new fronts—liquidity could retreat far quicker than many expect. Should government deficits also contract to fight inflation, two key liquidity pillars could crumble simultaneously (although I think government deficits would likely still go up in an inflationary scenario and the Fed would end up being a policy taker under our fiscal dominance framework).

The Mechanics of Fiscal Dominance

Fiscal dominance arises when fiscal priorities—namely deficit financing—dictate systemic liquidity flows, reducing the effectiveness of monetary policy as the primary driver of economic conditions.

There’s a valid argument that reindustrializing America justifies these tradeoffs, possibly revitalizing places like Appalachia or the Rust Belt. From an investor standpoint, though, that path raises production costs, fosters higher consumer prices, and erodes corporate margins (if it was more capital efficient to do it, it would have been done) —especially if wages get priority over capital returns. Pair that with potential retaliation from major trading partners, and we’re staring at a stagflationary mix: persistent inflation, lower growth, and a market increasingly concerned about risk premiums.

I’ve heard the refrain that “Trump will fold if the S&P falls 20%,” but I’m not so sure. That complacency alone concerns me. This is why I’m examining ex-U.S. opportunities—if the White House genuinely pursues a lower trade deficit, the U.S.’s old synergy of massive deficits plus abundant foreign capital might end, forcing a reevaluation of valuations across the board. I remain strongly invested in China and Brazil now for 7% of book along with some other like Colombia which have substantial tailwinds; I went over some of the ideas in the article below and will elaborate more (soon-ish).

Gold is also highly attractive in this environment as reasoned through in this piece:

Time to Sail Away Before the Lake Runs Dry?

That one-month extension for both Mexico and Canada shows how fast tariff decisions can flip, allowing the peso and loonie to rebound while U.S. stocks (futures and post market trading) pare losses. But these fleeting reprieves don’t erase the core tensions: 25% duties still loom if neighbors don’t meet U.S. demands, a 10% levy on Chinese goods remains in play, and the administration has signaled it’s willing to expand this policy arsenal further.

Meanwhile, my earlier warnings in The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song feel especially timely: once the liquidity pond starts receding, it can evaporate faster than most imagine. If tariffs truly shift cross-border flows—or if the government reduces deficits to combat inflation—two critical liquidity streams could dry up simultaneously. Markets keep banking on a quick return to normal trade. I’m not so sure.

So for now, I remain cautious. A broader re-rating of valuations might await if these tariffs don’t just fade away or if major trade partners decide to respond in kind. Think of the 2018 washing machine tariffs, where higher prices bled into unrelated products and created a big consumer tab per job saved. Scale that up to automotive or electronics, and it’s easy to see how inflation meets decelerating growth. That’s a combination the market has barely accounted for.

If you’re counting on the White House folding the minute the S&P sinks, remember that the stated goal is lowering the trade deficit, not necessarily propping up equities. Even if the market wobbles, it may not force an immediate reversal of this agenda. The complacency embedded in current valuations only heightens the risk. Because, as I wrote before, when valuations hinge on liquid capital, the pond can vanish just when you’re most transfixed by your own reflection.

The Investor’s Playbook: Managing the Trade & Deficit Crosscurrents

Below is how I’d think about positioning, keeping in mind that day-to-day negotiations can briefly soothe or inflame volatility, but the broader risk of a structural shift in trade policy remains.

Read more

Let me start with a confession: this note is half-baked, and for good reason. As we publish this, the NFP print is moments away, and the market’s collective pulse is quickening. But sometimes, a dish straight out of the oven captures the essence of the moment better than a perfectly plated gourmet. So, here’s a hot take on what this jobs report could mean for markets navigating the treacherous terrain of tightening liquidity.

The Liquidity Backdrop: Systemic Buffers Are Fading

The real star of today’s show isn’t the jobs number—it’s liquidity. After two years of exceptional support through the Reverse Repo Program (RRP), TGA drawdowns, and short-term Treasury issuance, markets are facing a stark new reality.

1. The Decline of the Reverse Repo Program
   The RRP once served as a $2.5 trillion reservoir of excess liquidity, allowing MMFs to recycle cash into short-term T-bills. This helped stabilize short-term funding markets and masked some of the effects of QT. However, with balances now at $250 billion, the RRP is no longer a meaningful buffer. Its depletion signals a transition where future QT will directly reduce bank reserves, tightening liquidity across the financial system.

2. Bank Reserves: Still Adequate, but Potential to Trend Lower
   Reserves remain above stress-inducing thresholds for now, but the path forward is clear. With the RRP nearly tapped out and the TGA drawdown concluding, reserves will soon face unbuffered declines. Historically, falling reserves have amplified funding market volatility, though we aren’t yet at the levels that sparked the 2019 repo crisis. Instead, the current environment increases the system’s sensitivity to shocks—a crucial consideration as markets digest today’s NFP data.

3. Treasury’s Long-End Shift
   Scott Bessent’s pivot from short-term T-bills to long-term bonds adds a new layer of complexity. T-bills, historically favored by MMFs, provide operational flexibility and liquidity. Long-term bonds, by contrast, depend on slower-moving institutional demand, which requires higher yields to absorb increased supply. This dynamic tightens short-term liquidity while steepening the yield curve, creating challenges for both bond and equity markets.

The NFP Scenarios: Market Reaction Framework

The consensus for today’s NFP stands at 160,000 jobs, with whispers edging higher. Here’s how each scenario could play out, given the current market setup:

Scenario 1: Overshoot (>160k)

A stronger-than-expected print would confirm labor market resilience, reinforcing inflationary concerns and raising the likelihood of prolonged Fed tightening. The immediate market reactions:

• Bonds: Yields rise as markets price in higher terminal rates and steeper term premiums. Long-duration Treasuries, already under pressure from increased supply, face additional selling pressure.

• Equities: Rising rates compress valuations, particularly in growth-oriented sectors. Liquidity constraints further amplify downside volatility, especially in stretched positioning scenarios.

This scenario aligns both legs of the trade for maximum payoff, with simultaneous pressure on bonds and equities.

Scenario 2: Undershoot (<160k)

A weaker print points to cooling economic momentum, easing inflation fears but raising concerns about slowing growth. The likely market reactions:

• Bonds: Rally as expectations for future rate hikes soften, providing a tailwind for duration.

• Equities: Decline modestly as recession fears emerge, though downside may be tempered by hopes of eventual Fed easing.

This mixed outcome balances the trade, with equity short gains offsetting potential losses on the bond short leg.

Scenario 3: Near-Consensus (160k ± 20k)

A consensus print would initially appear uneventful, but in today’s liquidity-constrained environment, even minor surprises can trigger volatility. Markets are stretched, and systemic buffers are gone, leaving little room for complacency.

The Trade: Dual 15-Delta Puts on Bonds and Equities

To navigate the asymmetric risks posed by today’s release, I’ve structured a trade using 15-delta puts with 30-day maturities on 30-year Treasury bonds and S&P 500 futures (ES).

Why Short Bonds?

Long-duration Treasuries sit at the intersection of inflation expectations and supply dynamics. A strong NFP print would push yields higher, driven by expectations of persistent inflation and additional long-end supply from Treasury issuance. This leg captures downside risk in an inflationary scenario while capping potential losses in a bond rally with the defined-risk structure.

Why Short Equities?

Equities face valuation compression as rates rise and liquidity tightens. Growth-oriented sectors are particularly vulnerable to higher discount rates, while liquidity constraints amplify selloffs in overbought markets. Even in a weaker NFP scenario, equities could decline on growth concerns, making this leg a hedge against scenarios where bonds and equities decouple.

Why This Note is Half-Baked (and Why That’s OK)

Let’s be honest: publishing this just before the print ensures it will either age like fine wine or curdle faster than milk in the sun. But that’s the nature of markets—reaction often matters more than prediction. What’s undeniable is that today’s NFP lands in a financial ecosystem with fewer safety nets and greater potential for volatility. Whether the print delivers a shock or aligns with expectations, the liquidity story is just beginning to unfold, and it’s one that will dominate 2025.

For now, I’ll leave you with this slightly undercooked, hopefully satisfying, take. Let’s see how the market digests its first big data release of the year.

The Fed’s final meeting of the year is shaping up to be the headline act of this holiday season, and markets are already trimming the tree in anticipation. With a 25-bps rate cut priced in at a near-certain 97%, it’s as if Jay Powell has donned his Santa hat and sent advance word that the presents will be delivered on time and be plentiful. But as every good economist knows, it’s not just what’s in the box—it’s how it’s wrapped and what’s scribbled on the gift tag (and if the price tag is still on). Three scenarios sit under the tree, and each one carries its own surprises for the yield curve.

Here’s the thing: we’re not here to play Fed oracle—that’s a job for the STIR traders still obsessing over their dot plots. Instead, our job is to prepare portfolios for whatever comes down the chimney, an approach far less stressful and (hopefully) much more rewarding.

Here’s the game plan: First, I’ll walk you through a low-cost, asymmetric hedge that’s worth unwrapping ahead of the meeting. It’s a small price to pay if the Fed delivers the expected cut, but it provides a bit of protection in case Powell swaps the Santa suit for a Krampus mask. Then, in the next note, I’ll unveil the ultimate structural hedge—a timeless, shiny package that defends against both growth scares and inflation volatility, no matter how the Fed guides its sleigh into 2025.

So sit back, pour the eggnog, and let’s get tactical. The Fed’s message might bring holiday cheer—or it might come with a lump of coal for markets. Either way, we’ll (try to) be ready.

Recap of the inflationary ghost.

Feel free to skip this section if you also complain to your shrink about inflation…

A core position in the portfolio has been our inflation volatility hedge: a short on long-duration bonds, first unwrapped after the Fed’s September Big Mac rate cut—a gift that’s been anything but standard fare. Historically, 30-year yields tend to drop 10-50 bps in the months following the Fed’s first rate cut, like clockwork. But this time? Yields climbed a head-turning 40 bps. The last time we saw anything remotely similar was in 1995’s elusive soft landing, and even that pales in comparison.

To be clear, this is the largest post-cut rise in 30-year yields on record, a flashing neon sign of market skepticism toward the Fed’s ability to juggle growth and inflation. When markets normally roll out the red carpet for easing, long bonds have instead been met with a frosty reception. Below is a quick recap conveniently wrapped up with a bowtie of the key arguments from previous notes:

1. Pro-Labor Shift and Implications for Capital Markets
   The pivot toward pro-labor policies signals a structural shift: prioritizing domestic manufacturing, reducing trade deficits, and boosting employment. This marks a sharp departure from the pro-capital, globalization-driven era that turbocharged financial assets. A labor-centric framework comes with trade-offs—higher costs, compressed corporate margins, and pressure on earnings, particularly for sectors reliant on cheap global supply chains. However, targeted fiscal stimulus to offset these labor costs could soften the blow, opening opportunities in infrastructure, energy, and industrial equities poised to benefit from reshoring and domestic investment tailwinds.

   

   Post-Election Implications and Trades

2. Fiscal Spending Put and Inflation Volatility
   The administration’s pro-labor agenda strengthens the fiscal spending put, making deficit spending the go-to tool for averting economic slowdowns and preserving full employment. What was once considered wartime-level deficit spending has become the new baseline, funneling liquidity into the real economy to provide a growth backstop—albeit at the cost of heightened inflation volatility. As a result, inflation is now structurally anchored at or above 2%, posing a persistent challenge to the Fed’s price stability mandate even as it grapples with the economic trade-offs of this fiscal shift.

   

   Quick rates update

3. Reverse Repo Program and Liquidity Mechanics
   The interplay between the Fed’s Reverse Repo Program (RRP) and Treasury General Account (TGA) is crucial for understanding monetary liquidity dynamics. The RRP, which has shrunk to $118b from its peak ($400b when we first talked about it!), has been a significant absorber of excess liquidity in the financial system. Concurrently, Treasury issuance and TGA drawdowns inject liquidity into the real economy. This dual mechanism offsets the liquidity-draining effects of quantitative tightening (QT) and provides a net easing effect on financial conditions. As fiscal deficits rise, the TGA balance is expected to contract further, directly supporting liquidity and creating inflationary pressures.

   

   A Reverse Repo Story

4. Dollar Weakness, Inflation Risks, and Strategic Contradictions
   Weakening the dollar to enhance export competitiveness aligns with the pro-labor agenda but risks stoking inflation through higher import prices. This approach conflicts with Trump’s and Bessant’s stated objectives of maintaining a strong dollar and preserving the U.S. dollar’s reserve currency status. The contradiction highlights a key tension: a strong dollar supports global confidence in U.S. financial assets, while a weaker dollar boosts domestic production at the expense of inflationary pressures. Staying alert to policy nuances and their execution will be critical in assessing the broader implications for capital flows and inflation volatility.

   

5. Mispriced Term Premium Creates Asymmetry on the Long End
   Long-duration bonds remain a glaring mispricing, offering meager compensation for rising inflation risks and ballooning deficits. Despite persistent inflation volatility driven by fiscal largesse and pro-labor policies, the term premium remains stubbornly low, a sign of market complacency. The irony? Rate cuts, far from easing Treasury pressures, loosen financial conditions, fueling even larger deficits and speculative excess. Investors then demand higher yields to fund the debt, creating a toxic feedback loop. The disconnect is clear: short rates fall, but long yields climb—a warning shot from the bond market that policy easing without fiscal discipline is self-defeating. This dynamic makes short positions on 30-year Treasuries (via ZB or TLT) an attractive risk/reward play, as deficits steepen the curve and structural inflation volatility takes center stage.

We tactically closed our short position on long-duration bonds—our core inflation hedge—following Scott Bessent’s Treasury appointment, a move that signaled fiscal restraint to markets. While I remain skeptical about meaningful spending efficiencies materializing (even with the D.O.G.E.’s tech-driven ambitions), I wasn’t keen on fighting the new narrative. That said, I quickly reloaded the hedge—via a May 2025, 115 put on ZB futures—just ahead of last week’s CPI and PPI prints, aligning with our inflation volatility thesis. The trade climbed 30%, and while taking profit now could prove prudent, the structural risks remain firmly intact.

The Bessent and Lighthizer Dilemma

Are these bond bears you talk about in the room with us?

One concern with the trade is the growing crowding in bearish bond sentiment, which has begun to undermine its asymmetric appeal. The iShares 20+ Year Treasury Bond ETF (TLT) serves as a telling proxy for investor positioning. Despite its price relentlessly falling since early 2022—a direct consequence of rising yields—it continued to attract inflows as investors sought safe havens during growth scares. This dynamic reflected a persistent belief in long bonds as a hedge against economic slowdowns and disinflation risks, even as inflation volatility surged.

Now, however, that sentiment has flipped. We are witnessing the largest outflows in TLT’s history, leading to the deepest drawdown in its assets under management since inception. This sharp reversal signals a broad capitulation on long bonds, as skepticism surrounding Treasuries becomes increasingly mainstream. With investors exiting en masse, the trade’s edge could be diminished. A crowded trade becomes vulnerable to short squeezes, sudden positioning reversals, and narrative shifts, particularly if growth fears return or the Fed signals dovish intent. While the structural case for shorting long-duration bonds remains intact, the growing consensus around this view demands a more tactical approach.

This can also be observed in the put skew for bond options. Hedging costs for a selloff in the long end of the Treasury curve have ticked notably higher over the past week. The options skew on the 30-year bond has tilted decisively toward puts—now pricing at the widest premium since early November—reflecting heightened caution among investors. This shift coincides with 30-year yields touching their highest levels since mid-November earlier this week.

A reality of historical tightness guiding the Fed…

While inflation remains a persistent concern, the U.S. economy faces a dual reality: weakening growth on one side and robust fiscal spending on the other, which risks reigniting inflationary pressures. This tension creates a tricky backdrop for the Fed’s upcoming decision, where a rate cut is a valid possibility as policymakers may tilt their focus toward the employment mandate over price stability, particularly with monetary conditions still historically tight.

The case for a 25-basis-point cut this week rests on the restrictive nature of current policy. Despite the cumulative 75 bps of easing delivered so far, the real Fed Funds rate remains near +2%—a level of tightness last seen in 2007. For context, core PCE inflation has cooled to 2.5% year-over-year, meaning monetary policy continues to run well above underlying price pressures. Historically, such elevated real rates have preceded economic slowdowns. With the labor market showing early signs of moderation, the Fed may opt to manage risks preemptively, shifting toward a neutral stance without destabilizing the broader economy.

The private sector’s resilience adds support to this approach. U.S. private sector debt-to-GDP stands at roughly 145%, the lowest level since 2003, reflecting a decade of deleveraging. Combined with robust nominal wage growth, this lowers the economy’s sensitivity to higher interest rates, giving the Fed room to ease without sparking immediate imbalances. Moreover, current market expectations see terminal Fed Funds rates settling around 3.50% in three years, a shift reflecting confidence in higher neutral rates amidst private sector resilience and nominal growth trends. However, the government’s fiscal position paints a starker picture: deficits remain stubbornly elevated at over 6% of GDP, and higher refinancing costs at current rates have added further strain.

The Fed’s final meeting of the year might not feel merry

Markets are all but certain Santa Powell will deliver a 25-bps rate cut, but the real intrigue lies in the message he leaves under the tree. Will he hand out a hawkish pause like Krampus slipping coal into stockings? Will he deliver the expected cut but pair it with a stern “don’t get greedy” warning for 2025? Or will he surprise us all and promise a deeper easing cycle, channeling his inner Santa with a sack full of future rate cuts? Each scenario brings its own curve dynamics and market implications, so let’s break down what’s at stake as Powell and his team prepare to close out the year.

The hawkish pause: Krampus comes to town

Let’s begin with the least likely—but most disruptive—scenario: the hawkish pause. Markets have assigned almost zero probability to this outcome, so if Powell decides to channel his inner Krampus and leave rates unchanged, the reaction would be swift and brutal. Short-term yields would be the first to reprice higher. Traders, caught on the wrong side of easing bets, would scramble to unwind positions, pushing the 2-year yield up 10–15 bps in a single session. This isn’t just about repricing expectations for this meeting—it would represent a broader reassessment of the Fed’s willingness to cut into an economy that, while showing signs of moderation, is hardly in freefall.

What about the long end? Here’s where it gets more nuanced. A hawkish pause might introduce some upward pressure on the term-premia as concerns about lingering inflation volatility take hold. After all, staying restrictive signals that Powell remains wary of cutting too soon while deficits run hot. However, risk-off flows—investors fleeing equities and riskier assets—could partially offset this move. Long-duration Treasuries often act as a safety net when markets get jittery, providing a counterbalance to rising yields on the short end.

The result? A bear flattening of the yield curve, with short-term yields rising faster than the long end. This is classic hawkish policy in action: monetary conditions remain tight, the curve flattens, and markets are left scrambling for cover.

The broader implications are clear. A hawkish pause would reinforce the message that the Fed isn’t in a rush to cut rates. Equities—already priced for holiday cheer—would not react kindly to this lump of coal, and risk assets across the board would likely see sharp corrections. Meanwhile, the bond market would deliver its own warning shot: restrictive policy isn’t going anywhere, and Powell isn’t here to hand out gifts just because it’s December.

The cut with a 2025 pause: santa’s here, but don’t get greedy

This is the Fed’s version of “splitting the wishbone”—a 25 bps rate cut, as expected, but with a stern message: don’t expect more goodies in 2025. Powell gets to play Santa this meeting, handing out the long-anticipated rate cut, but he’ll also drop a hawkish pause into the stocking to keep the kids (read: markets) in line. Call it a dovish cut with hawkish guidance—just enough cheer to avoid a tantrum, but a warning not to overindulge.

For the yield curve, the outcome is relatively measured. Short-term yields (think 2-year) would likely drift modestly higher—call it 5–7 bps—as traders rein in their overly ambitious rate-cut bets for next year. After all, if Powell signals a prolonged pause, there’s no need for short-term yields to keep pricing in an aggressive easing cycle. Markets would grumble a bit but stop short of full-blown disappointment.

The long end? Largely unmoved. A single rate cut is unlikely to sway the 30-year yield much, as the balance of forces at play—growth stabilization from immediate easing versus persistent inflation risks—keeps things roughly neutral. There’s no bear steepener here, no major moves in duration. Instead, we get a bear-neutral curve: the short end drifts slightly higher, while the long end remains flat, mirroring the mixed signals of a cautious Fed.

The bond market will parse every word of Powell’s guidance, searching for cracks in the Fed’s resolve. A hawkish pause signal caps just how far short-term yields can fall, limiting the upside for bond bulls. But the long end remains vulnerable to fiscal realities. Powell may want to stabilize the curve, but deficit spending isn’t slowing down, and inflation volatility isn’t going anywhere.

For equities, this outcome is like Christmas morning with a note attached: “One gift only—don’t ask for more.” Stocks would likely cheer the rate cut, but gains could be tempered by Powell’s restraint on 2025 easing. Risk assets love dovish surprises, but this isn’t one—it’s Powell threading the needle between growth concerns and inflation realities.

So what’s the takeaway? This outcome gives us a small reprieve but no lasting solution. Short-term yields edge higher, term-premia remains steady, and markets are left hoping Santa Powell’s sleigh returns next year. But with fiscal largesse and inflation still at the party, investors would do well to temper their expectations. Powell might be cutting rates, but he’s not ready to hand out endless candy canes—and the bond bears are still lurking by the punch bowl.

More cuts for 2025, Santa decides to move in with you

Now, what if the Fed not only cuts by 25 bps but also signals a deeper cutting cycle in 2025 than the market expects? Picture Jay Powell channeling his inner Santa, delivering not just this year’s 25-bps gift but stuffing the market’s stockings with promises of more in the year ahead. Such a move would leave short-term yields hopping on the sled downhill, with the 2-year likely dropping 5–10 bps as traders price in a continued easy policy.

The long end of the curve, however, wouldn’t join the celebration. Long-duration Treasuries would likely sell off, as markets grow wary of what more cuts really mean—with inflationary pressures getting a second wind. Investors, now tasked with funding ballooning deficits amid looser financial conditions, would demand higher yields as compensation for long-term debt, steepening the curve in a bear steepener dynamic. This mechanic would be added to Bessent’s likely push towards focussing on issuing on the long end unlike his predecessor (but more on that in a following note).

This scenario creates an uncomfortable tension. The front end throws a party for easier monetary policy, while the long end sulks, skeptical that fiscal discipline will follow. It’s the bond market’s version of an extended family Christmas dinner: short-term yields toast to rate relief with a bit too much boxed wine, while 30-year yields shoot side-eye across the table, muttering about inflation risks and deficits.

For bond traders, the implications are sharp: a dovish pivot amplifies curve steepening and exposes duration to outsized downside risks. At the same time, equity markets—who, let’s be honest, never met a rate cut they didn’t like—might rally initially, only to confront rising long yields, which quietly sabotage lofty valuations.

Well… what is the trade?

To be clear, I do not hold a specific view on whether a cut or pause is the appropriate policy path; I think the tensions between economic weakness and inflation provide plenty of ambiguity and nuance to meditate through. That being said, with a cut fully priced in and our extensive work building the case for structural inflation, a pause appears underpriced at the market-implied probability of just 3%.

To balance the near-term risks of hawkish surprises with the longer-term structural pressures, I’m structuring a two-legged hedge as follows:

1. Short ZT (2y bonds) via Jan 24 ATM puts

   • Objective: This leg hedges against a hawkish outcome—either a pause or a cut with hawkish guidance. In both cases, short-term yields would reprice sharply higher as markets unwind aggressive easing bets. A pause, in particular, could trigger a swift repricing of 10–15 bps on the front end, offering strong asymmetric risk/reward.

2. Short ZB (30y bonds) - taking profits on our short and allocating to the 2y leg

   • Objective: This leg targets the third scenario—a dovish Fed that signals deeper cuts in 2025. While short-term yields would drop, the long end remains highly vulnerable to rising term premium and deficit-driven issuance. Deeper cuts would loosen financial conditions, exacerbating fiscal pressures and stoking inflation volatility, forcing long-duration bonds to sell off in a bear steepener dynamic.

   • Bonus Protection: This position also serves as a hedge against a “Liz Truss moment”—where additional tax cuts or fiscal stimulus are implemented without a commensurate reduction in spending. Such policies would amplify deficit pressures and demand for long-term debt, causing a rapid repricing higher in yields.

I will have equal duration adjusted exposure on both legs (to keep things simple) and have the whole structure at 85bps of NAV.

This approach creates a balanced trade that navigates both near-term volatility and longer-term trends. It’s a hedge against complacency on the front end and a reassertion of our core thesis: inflation volatility, fiscal realities, and policy risks leave duration highly vulnerable to repricing. The hedges I put on are always executed with the idea of hedging a lazy long equity book, the first two scenarios we laid out might continue the equity weakness we have seen today. I will however keep my tap-dancing shoes on and take off the 2y leg if Santa decides to move in with us.

Typical financial disclaimers, use your brain or a financial advisor. This article is just jolly good fun and not financial advice etc etc…

Cheers!

Scott Bessent: Wall Street’s Comfort Blanket

Markets have embraced Scott Bessent’s appointment as Treasury Secretary, interpreting it as a signal of renewed fiscal discipline. A seasoned Wall Street figure with a history of advocating for balanced budgets, Bessent’s “holy trinity” of goals—3% real economic growth, a 3% budget deficit by 2028, and 3 million barrels of daily U.S. oil production—has catalyzed a rally in Treasuries. The market’s enthusiasm reflects confidence in a Treasury Secretary who aligns with the narrative of spending efficiency.

This narrative has been further supported by the creation of the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy. Their mission to trim excess government expenditures through tech-driven solutions and streamlined operations reinforces the perception of a government focused on fiscal prudence. However, as I noted in “Post-Election Implications and Trade Sketches,” this newfound emphasis on efficiency stands in stark contrast to Trump’s broader policy objectives, which remain structurally pro-labor and growth-oriented.

Short-Term Optimism is Overdone

Markets are treating Bessent’s appointment and the establishment of DOGE as harbingers of a new era of fiscal restraint. However, as I’ve written previously, Trump’s economic priorities are rooted in Main Street-focused initiatives—reshoring, pro-labor policies, and protectionist trade strategies. These are fundamentally inflationary and require significant government spending to support industrial and economic revitalization.

The current bond rally, while understandable, reflects optimism disconnected from these structural realities. As I emphasized in the prior note, fiscal discipline is unlikely to take precedence over pro-labor economic imperatives, and inflationary pressures will persist. While markets are temporarily enthralled by the fiscal discipline narrative, reality will eventually reassert itself.

Fighting the Prevailing Narrative is Expensive

Markets run on narratives, and the current storyline—centered on fiscal discipline under Scott Bessent and the newly established Department of Government Efficiency (DOGE)—is dominating sentiment. While this narrative may eventually clash with the broader policy realities, challenging it prematurely can be costly. The rally in bonds reflects the market’s embrace of this perceived shift toward austerity, even if it’s at odds with the administration’s underlying priorities of growth and labor protection.

Tactically stepping aside and taking profits on the trade we set up when the Fed cut 50bps in the article titled: Fed and China go big or go Home allows me to avoid the expense of pushing back against a sentiment-driven narrative at its peak. Instead, I’ll wait for the disconnect between perception and policy outcomes to surface, presenting a more opportune moment to re-engage.

Why I’m Still Long-Term Bearish on Bonds

Robert Lighthizer: Trump’s True Spirit Animal

Robert Lighthizer, Trump’s long-time trade advisor and advocate for protectionist economic policies, exemplifies the administration’s broader vision. His focus on tariffs, reshoring, and trade realignment underscores the inflationary core of Trump’s economic strategy. While Bessent’s fiscal restraint narrative may dominate headlines, Lighthizer represents the administration’s deeper commitment to pro-labor, pro-industry policies that inherently drive inflation.

Lighthizer’s trade policies are structurally aligned with Trump’s economic vision, prioritizing American labor and domestic production at the expense of cost efficiency. This makes his influence a critical counterbalance to the perceived austerity of Bessent’s Treasury leadership. The result is a dual narrative: fiscal prudence as a short-term market driver, but inflationary labor and trade priorities as the long-term structural reality.

The Illusion of Government Efficiency

Efforts to address the U.S. federal budget through efficiency initiatives face significant hurdles. While politically appealing, the structural realities of federal spending severely limit the potential impact of the Department of Government Efficiency (DOGE). Here’s why these efforts are unlikely to succeed, leaving fiscal deficits as a persistent feature of the U.S. economy:

1. Discretionary Spending is Too Small to Move the Needle

The vast majority of federal spending is concentrated in mandatory programs—Social Security, Medicare, Medicaid, and interest payments—which account for 72–78% of the budget. Even if the entire remaining discretionary budget were eliminated, it would barely cover the current deficit.

2. Structural Drivers of Spending are Inflexible

• Aging Demographics: The growing retiree population is placing increasing pressure on Social Security and Medicare. Social Security payouts already exceed contributions, with the trust fund projected to be depleted by 2033.

  

• Healthcare Costs: Medicare and Medicaid expenses are growing at 7% annually, far outpacing GDP growth. This trend shows no signs of abating, driven by rising enrollment and healthcare inflation. You can reference the Centers for Medicare & Medicaid Services guidance with their NHE Fact Sheet

3. Rising Interest Costs

Federal debt servicing costs have doubled since 2021, reaching over $1 trillion annually. With higher interest rates being rolled into new Treasury issuance, interest payments are becoming the fastest-growing component of federal outlays. This dynamic reinforces a vicious cycle: deficits drive higher borrowing costs, which in turn exacerbate deficits.

4. Political and Legislative Constraints

Many spending programs, especially entitlements, are statutory and require Congressional approval to alter. While the DOGE and Bessent might achieve marginal gains, addressing the core drivers of deficits requires legislative consensus and coordination between branches of the Federal bureaucracy.

The Holy Trinity May Not Be Fully Achievable

Breaking down the holy trinity:

• 3 million barrels of oil per day: Achievable and consistent with Trump’s energy independence goals.

• 3% real economic growth: Difficult without significant fiscal expansion, as I’ve discussed in “Fed and China Go Big or Go Home.” Sustained growth at this level would require substantial government spending, adding inflationary pressures.

• 3% budget deficit by 2028: A political challenge, given the competing priorities of infrastructure spending, defense, and reshoring. Fiscal restraint faces inherent limits in a policy framework designed to support employment and wages.

This disconnect between the aspirations of the holy trinity and the realities of policy execution underscores why my long-term bearish outlook on bonds remains intact.

Inflation Risks Are Brewing

As I explored in prior articles, inflation risks are embedded in the shift toward pro-labor economic policies (this would have been true under either presidential candidate). Trump-specific policies of tariffs and reshoring industrial production could lead to increased production costs as an inflationary driver, even in the face of potential deflationary energy price declines. The structural forces at play ensure that bonds will struggle to maintain stability over the long term due to inflation volatility, even if the market temporarily overlooks these risks.

Pivoting to U.S. Bank Stocks

Exiting the ZB short trade aligns with a broader realization: the short-term narrative driving Treasuries higher—a perception of fiscal restraint under Scott Bessent—is dominating market sentiment. Yet, this very policy narrative also creates an exciting structural opportunity elsewhere: U.S. bank equities.

Scott Bessent’s appointment as Treasury Secretary and his explicit advocacy for deregulation herald a policy environment where financial institutions are poised to thrive. While bond markets rally on optimism about fiscal discipline, bank stocks stand to gain from the long-term structural shifts these same policies are set to unleash.

Bessent’s views on removing regulatory burdens align seamlessly with Trump’s broader deregulatory agenda. In his own words, Bessent has championed a “big push in bank deregulation,” emphasizing the need to “get a lot of the lending back into the banking system, and let our banks lend.” This vision underscores the critical role of banks in driving private-sector-led credit creation—a cornerstone of the administration’s strategy to sustain economic momentum amid a reduction in government spending.

The Role of Bank Lending in Trump’s Economic Strategy

At the core of Trump’s economic vision lies a significant shift in the source of money creation, moving from government-led deficit spending to private-sector-driven credit expansion. This desired transition makes banks indispensable to achieving the administration’s ambitious policy goals. To understand their role, it’s essential to delve into the mechanics of money creation and why banks are positioned at the center of this strategy.

Quick Mechanics of Money Creation

In any economy, money creation happens through two primary channels:

1. Government Deficit Spending:

   • By spending more than it collects in taxes, the government directly injects liquidity into the economy. This spending is financed through borrowing, typically by issuing Treasury securities. The proceeds flow into the hands of businesses, households, and state/local governments, stimulating demand and supporting economic activity.

   • This method gained prominence during the COVID crisis, when fiscal stimulus programs such as direct cash transfers, enhanced unemployment benefits, and small business loans were deployed at an unprecedented scale. While effective in averting an economic collapse, this approach significantly increased the federal debt, pushing it to levels that are now raising alarm over sustainability.

2. Private Sector Credit Creation:

   • When banks issue loans, they essentially create new money. Here’s how it works: A bank extends a loan to a customer, and simultaneously credits the customer's deposit account with the loan amount. This action increases the money supply, as the loan becomes new purchasing power in the economy.

   • Unlike government spending, private-sector credit creation depends on demand for loans and the willingness of banks to lend. This process is driven by the availability of creditworthy borrowers and banks’ confidence in the economic outlook. As businesses and consumers borrow to invest, spend, and grow, economic activity is organically stimulated.

Trump’s government appointees’ having common guidance on fiscal discipline suggests a deliberate pivot away from government-driven liquidity injections toward private-sector credit creation. If the desire is for government spending to contract, a robust lending activity becomes essential to sustaining economic momentum, positioning banks as the linchpin of this strategy. Now, keep in mind, that policy can fail to implement spending deficit reductions but achieve to loosen regulations around banks.

Why Bank Lending is Critical

Trump’s policy framework relies heavily on banks to expand credit and drive economic growth. This reliance is not just a preference but a necessity in an environment of shrinking government deficits. Here’s why bank lending is so vital:

• Bridging the Liquidity Gap: Without sufficient private-sector lending, a reduction in government spending would lead to a contraction in the money supply, slowing economic activity. Banks must step up to bridge this gap, ensuring liquidity remains adequate to support growth.

• Empowering Local Economies: As Bessent noted, banks are sitting on “plenty of liquidity” but remain hamstrung by regulatory hurdles. Easing these restrictions will enable banks to lend more effectively to small businesses, infrastructure projects, and community initiatives—directly supporting Trump’s pro-growth, pro-labor agenda.

• Sustaining Employment and Wages: Expanding credit fuels business growth, which in turn supports job creation and wage increases. Robust lending activity is particularly critical for labor-intensive industries such as manufacturing and small enterprises, aligning with Trump’s promise to deliver a higher standard of living for American workers and providing credit lines to re-shore industrial production.

The Economic Stakes of Credit Expansion

The stakes are high. If banks fail to expand lending sufficiently and the government manages to step back spending, the broader economy risks stagnation or even contraction. This is the clear bear case for banks and equities broadly.

Historical data highlights the importance of loan growth if government spending steps back:

• Before the Global Financial Crisis (GFC): Real bank loan growth ranged between 4% and 11% averaging at around 8%, fueling strong economic cycles.

• Post-GFC: Regulatory overhang has averaged loan growth at approximately 4%, limiting banks’ ability to drive the economy forward.

Bessent’s deregulation agenda aims to reverse this trend, empowering banks to return to pre-GFC loan growth levels and tying in directly with our rotation trade to RTY.

Why U.S. Bank Stocks?

This combination of structural necessity and policy alignment makes U.S. bank equities a particularly compelling investment opportunity. Here’s why:

• Deregulation as a Growth Catalyst: Over a decade of stringent post-crisis regulation has constrained banks, capping both profitability and loan growth. With Bessent leading Treasury, these barriers are set to be dismantled, unlocking growth potential.

• Filling the Gap in Money Creation: With a reduced government footprint, the private sector must lead credit creation. Banks are pivotal to this transition, and Bessent has explicitly emphasized this, stating: “Our banks are dying to make loans, but regulatory restrictions prevent them from meeting local demands.”

• Attractive Valuations: U.S. banks, trade at significant historical discounts to the broader market. This undervaluation, paired with deregulation-driven growth, presents a strong upside case for a convergence in multiples.

  

  

• Regional Banks Positioned to Benefit: Smaller regional banks, often burdened by commercial real estate exposure and heavy regulatory oversight, are positioned for outsized gains as they capitalize on enhanced lending capabilities and regulatory relief.

Long Term Investment Implications beyond the exit of ZB shorts

The alignment of policy priorities, leadership focus, and market opportunity makes U.S. banks a cornerstone of Trump’s economic strategy. Deregulation under Bessent’s leadership is not merely a boon for the sector; it’s a structural necessity for the administration’s broader vision. As Bessent himself stated:

“We need a big push in bank deregulation to unlock the growth potential that’s been held back for too long.”

This trade is not new and has been fueled since the election outcome, but I believe there is room to run for years to come on a multiples convergence basis and further revenue expansion from what is currently priced in. In no way a contrarian trade but one that pairs nicely with our bearish view on bonds which I expect to re-enter if market conditions align as can be seen in the two following basic scenarios:

Banks and Falling Bond Prices (Rising Yields)

1. Positive Impact: Improving Net Interest Margins (NIMs):

   • Rising bond yields often signal higher interest rates, which can improve banks’ net interest margins. Banks borrow at short-term rates (e.g., deposits) and lend at long-term rates (e.g., mortgages, business loans). When long-term rates rise faster than short-term rates, this "steepens" the yield curve, boosting profitability.

2. Negative Impact: Mark-to-Market Losses on Bond Portfolios:

   • Banks hold significant bond portfolios for liquidity and regulatory purposes. When bond prices fall (yields rise), these portfolios may experience mark-to-market losses, especially for securities classified as "available-for-sale."

   • While unrealized losses don’t always affect earnings, they can hurt equity valuations and weaken regulatory capital positions, as seen during the 2023 regional banking crisis. I do expect this to have raised awareness to hedge ones duration risk???

3. Impact on Credit Demand:

   • Rising yields can discourage borrowing as loans become more expensive. This can slow credit growth, which is a key driver of bank revenues. The extent of the slowdown depends on whether yields rise in a controlled environment (e.g., strong economic growth) or a crisis setting (e.g., a credit crunch). I expect that we will be in the former and deregulation to counteract tighter financial conditions which benefit out short long duration leg of the trade.

Banks and Rising Bond Prices (Falling Yields)

1. Negative Impact: Squeezed Net Interest Margins:

   • Falling bond yields, often associated with lower interest rates, can compress banks’ NIMs, particularly if short-term deposit rates don't fall as quickly as long-term loan rates. If yields do come down hurting our bearish view on bonds, I believe that the credit expansion from both lower borrowing costs and deregulation outweigh tightening NIMs.

   • This is a common challenge during economic downturns when central banks lower rates to stimulate the economy.

2. Positive Impact: Gains on Bond Portfolios:

   • Banks benefit from rising bond prices through unrealized or realized gains on their bond holdings. This can boost earnings, especially during periods of declining interest rates. I don’t expect this to be a plus given the expected hedges but digging into this for a potential bank specific thematic equities note.

3. Impact on Credit Demand:

   • Lower yields often stimulate borrowing by reducing the cost of credit, which can support loan growth and offset some of the margin compression. This is the objective for the Trump administration and one that can be achieved independent of yields with de-regulation.

Given the doubts over the administration achieving its fiscal deficit reduction goals, there is an other inflationary risk to the economy which I had not mentioned before and supports this pair trade:

Trump’s pivot toward private credit creation reflects a broader economic philosophy of empowering the private sector while reining in government expenditures. However, this dual goal requires a delicate balance. The success of this strategy depends on banks stepping up as robust credit providers without triggering excessive risk-taking or financial instability. At the same time, the administration must grapple with the reality that fiscal discipline is difficult to implement, as entrenched structural deficits make deep cuts to government spending politically and economically challenging. If deficit reductions fail to materialize, deregulation could still succeed, resulting in increased lending and credit expansion while fiscal deficits persist. This scenario would likely amplify inflationary pressures, aligning with a secular bearish view on long-duration bonds.

This duality underscores a key point: even if deficit reduction efforts falter, deregulation and enhanced credit creation could still drive significant economic activity, keeping banks at the center of the administration’s strategy. For investors, this makes U.S. bank stocks a compelling play, while also reinforcing a bearish long-term outlook on long-duration bonds as inflationary pressures continue to loom.

Current Implementations of Trade Ideas from "Post-Election Implications and Trade Sketches"

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The week of November 4, 2024, was one for the books and possibly more significant than November 2016. During Trump’s first mandate, the major policy change his administration ushered in was a shift in China relations. This became apparent during VP Pence’s October 2018 Reagan-like speech criticizing China’s “whole government” approach to rivaling the U.S., denouncing the Uighur treatment, debt diplomacy strategy to acquire strategic assets in emerging markets, and plans for tech dominance by 2025. This stance on China, previously entrenched to select political class members in the swamps of Washington, is now mainstream on both sides of the aisle.

Trump also put on the public’s radar the possibility of protectionist economic policies in the hopes of a made-in-America industrial revolution. The primary tool to incorporate this economic policy shift was the China trade war, tariffs on steel and aluminum, 30-50% on washing machines, and tariffs on French Wine and Cheese (Sacrébleu!). The tariffs were implemented along with a tax and jobs act, designed to reduce the the tax burden and “right to work” policies in conjunction with broad de-regulation around banking, the environment and healthcare. Tax burden and “right to work” policies combined with broad de-regulation around banking, the environment, and healthcare. None of the policies instituted on the economy were fundamentally groundbreaking regarding their impact. The first trump administration also embarked on a mission to remove its military umbrella from its allies. However, this remained mainly in the domain of rhetoric, save for some 12k troops moved out of Germany.

In this second term, we will likely see a re-invigorated, more focused, and more widely supported president. If the first term ushered in the most significant China-U.S. policy shift since Kissinger’s arrival to China in 1971.

It was also potentially a geopolitical shift in the league of the Marshall Plan, the 1990s shift to globalization, and the war on terror. What could be achieved with this second round?

I want to note that my job is not to agree or disagree with policy or politics nor debate what should be done. My job is to estimate the most likely paths of policy implementation and their ramifications in markets. What I do think is that Trump’s economic and geopolitical agenda, agree or not, good, bad, or nuanced, will create exciting and impactful trading and investment opportunities across geographies, which we will seek to capture.

So what can be achieved in this second trump presidency?

My wild guess is that Trump will come into office to finish what he has started. I expect a decisive and durable shift towards pro-labor economic policies away from pro-capital with protectionist policies. We have discussed the impacts of such pro-labor policies on various occasions focused on the notion of a federal fiscal spending put (à la Fed monetary policy put), and this political and social shift in the electoral climate has been one of our arguments justifying setting up the 2s10s bull-steepner since April, along with shorting on the 30-year and buying long-dated gold futures around the first Fed cut.

Quick rates update: one month anniversary

There will be fiscal spending put (a la Fed put), which will smooth over recessionary pressures. This is due to a shift from pro-capital economic policies to pro-labor. Governments, whether democratic or autocratic, realize that there is little tolerance for inequality-generating economic adjustments such as contractions in labor demand or wages. Fiscal spending which directs liquidity into the real economy has a direct and supportive impact to reduce the effects of economic impulses that increase inequality in a first order view.

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Quick rates update post NFP

Our view on inflation comes from a pro-labor environment in which governments prioritize deficit spending in lagging sectors of the economy over fiscal discipline at the expense of growth in those industries. The objective behind this politically popular economic policy shift is to avoid corrections in the labor market, both in quantity and wages, by providing capital for those industries that would contract otherwise and maintain full employment and growing wages. The tradeoff of policy shifting away from being pro-capital to pro-labor comes in the shape of the structural risk in the economy moving away from growth to inflation. We concluded in the prior note that U.S. inflation will maintain above the 2% target while its volatility will remain heightened (hence our view to short long duration bonds).

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Fed and China go big or go home

A compelling argument in favor of a pickup in inflation comes in the form of the shift in economic policy from being pro-capital to being pro-labor, where stagnation in wages in real terms (both adjusting from inflation and international purchasing power from FX) is little tolerated by the electorate. Policies that provide fiscal stimulus by increasing spending and borrowing in order to smooth over recessionary impulses, hence, a reduction in the quantity of employment and purchasing power are taking the front seat in driving the economy.

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I also expect the U.S. military umbrella to shrink dramatically, forcing U.S. allies, namely Europe, to increase spending, improve coordination, and work to secure strategic autonomy, first with defense and energy but also access to computing, artificial intelligence, and the space economy. We kicked off this discussion around the space economy and European autonomy with our first thematic equities primer. Following a detailed review of the industry, the universe of solutions Europe provides to the space problem still has a long way to go before being competitive with the U.S. and China.

Thematic Equities: Star Wars – A New Hope

Europe’s defense strategy has always been a bit… scattered. But with increasing security concerns, the EU is finally seeing the importance of stepping up its own defense game. In 2023, the EU hit €265 billion ($281 billion) in defense spending, equal to about 1.55% of the region’s GDP. Sure, it’s not quite at NATO’s target of 2%, but the trajectory is pointing up. Major players like Germany, France, and Poland are ramping up their defense budgets by 10% or more every year through 2025, trying to reduce their dependence on the U.S. and bring more capabilities under the European roof.

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The next Star Wars article focused on the defense sector will review the European military-industrial complex’s competitive advantage and why we have a thematic equities basket allocated explicitly to the European push towards defense autonomy.

One thing is certain: regardless of what is achieved during this presidency, fiscal deficit spending is here to stay and will likely accelerate.

What world order will we leave behind?

One of Trump’s main gripes and campaign focus points is the U.S. trade deficit.

The balance of trade is currently at a $80bn deficit, one of its lowest historical points. However, as a percent of GDP, it has actually been rangebound since the 08 GFC, with 2005 being the year when the trade deficit had its heaviest weight as a percent of GDP.

If we split the balance between goods and services, we note that the U.S. is an exporter of services while increasingly dependent on imported goods.

From his economic agenda, he is clearly laser-focused on addressing the goods part of this equation. This makes sense, as it is not the jobs of Mag-7 salaried employees that “need” re-shoring but that of blue-collar workers, the pillars of this socio-political shift towards pro-labor policies.

One piece of the puzzle that seems to fly under the radar and not accounted for in the campaign calculus is that the U.S. is an exporter of financial assets. Let’s let some graphs speak for themselves:

This relationship between America and the rest of the world where the U.S. exports services and financial assets while importing goods makes apparent one thing. The dollar’s strength is in part due to this dynamic. As foreign countries export goods to the U.S., they park the dollars they receive into American financial assets. Which leads us to another gripe on the weakness of foreign currencies relative to the USD:

As for most things in the natural world, there is a tradeoff. While the U.S. could obtain cheap goods today in exchange for the promise of more dollars in the future, putting an eternal bid on the USD; it created a bifurcation in the economy between the haves and the have-nots. The haves are those who work in services that are exported globally, able to benefit from both increased economic growth and cheaper goods. The have-nots are the blue-collar workers who had their jobs exported or their wages compressed in exchange for those more affordable goods.

This was the pro-capital world where financial assets and capital could trade with minimal friction and allow wages and economic output compression and expansion. This meant that it would be less and less likely to work your way into the American dream; the key was being an owner of equity as return on equity was being generated at the cost of return on labor. The second part of this relation is precisely what the incoming Trump administration will attempt to reverse, hence a move to pro-labor economic policy. This will be a fundamental change to the structure of the U.S. economy if achieved and with dramatic re-pricings of assets across the board.

I believe in a simple economic idea: if it is more profitable for corporations to do something, they are likely already doing it. If they are constrained to adapt their economic approach, someone will bear the burden of this transition. The current status quo has been a blessing to American corporations relative to the rest of the world, benefiting from flexible labor forces worldwide.

Here are some questions I have that will be clarified as policy takes shape.

• Will the pro-business deregulations sufficiently counter the pro-labor shift’s impact on the bottom line for U.S. manufacturing companies?

• Are U.S. equities going to be negatively impacted by protectionist policies that reduce the trade deficit and, hence, the allocation of earnings in USD to U.S. financial assets?

I want to explore trades that don’t require further clarification from the data we have today. These ideas have the most asymmetry and benefit from the general direction of policy rather than its specific implementations.

What trades does a pro-labor and protectionist U.S. provide?

U.S. treasuries will be in a secular bear market and the curve will further steepen

Reference our various articles on the subject:

• Quick rates update: one month anniversary

• The macro setup for equities

• Quick rates update post NFP

• Fed and China go big or go home

• STIR butterflies from Yield curve flip flops

I am interested in the 2s10s steepner and short the 30-year outright. Our current profit-taking target for the outright short is when the 10-year yield gets to 5%. This was modeled by ignoring Trump-specific policies and only focusing on fiscal deficit spending, which was common to both presidential candidates. I expect the protectionist policies will accentuate further inflation volatility, and hence, our price target could be moved up. I also take profit on the trade to keep the short at 3.5%-4% of NAV (I use long-dated 25-10 delta put spreads on ZB to express this trade). I use those profits to put on the 2s10s steepner which is now at 3% of NAV.

But let’s not forget that the Japanese invented yield curve control in September 2016. Given Trump has at length criticized the Fed for embarking on a path to raise rates, it is not inconceivable that Trump finds the right people to put on the Fed board that would be willing to act not only on the short end but across the curve to control borrowing costs.

The dollar/YEN will enter a secular bear market and possibly the dollar more broadly.

This is an explicit policy objective of the Trump administration: to improve goods exporting competitiveness and incentivize corporations to bring labor back stateside. Remember when we talked about who bears the burden of the costs of this transition? An obvious one is increased prices on imported goods due to the weakening dollar, which impacts consumer spending. We did a deep dive on consumer health in this report, if anything changes substantially, it will be updated.

What is the likely path for growth now? – What is my credit card limit?

To understand the current state of the economy and estimate which sectors are set to outperform this cycle, we need to take a look at where everything starts… the American consumer. After all, what’s the point of credit card debt if not to buy H100 pro max’s?

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But how will weakening the world’s reserve currency work? Given the continued real growth of the U.S. economy and the strength of its service sector, which is a sponge for foreign capital, the frictionless path for the dollar is to remain where it is.

The first thing that comes to mind is a Plaza Accord round 2.

The Plaza Accord of 1985 was an first of its kind deal between the United States, Japan, West Germany, France, and the United Kingdom to tackle some serious economic headaches of the time. By the mid-1980s, the U.S. dollar had become so strong that American goods were priced out of international markets, creating a huge trade deficit and putting pressure on U.S. manufacturing jobs. Meanwhile, countries like Japan and West Germany had economies heavily dependent on exports to the U.S., and this imbalance was straining everyone. The solution? An ambitious, coordinated effort to bring down the value of the dollar and boost other currencies, aiming to level the playing field and ease some of these global pressures.

Under the Plaza Accord, the five nations agreed to take action in the currency markets, actively working to lower the dollar’s value and raise the value of the Japanese yen and German Deutsche Mark. It worked—within two years, the dollar dropped by around 25%, which made U.S. exports cheaper and somewhat improved the trade balance. But while this was good for American exporters, it threw a wrench in Japan’s export-driven economy.

The Plaza Accord was both a triumph and a cautionary tale. On the one hand, it showed how much could be achieved when major economies worked together—proof that currency intervention could work if everyone was on the same page. On the other, it highlighted the risks and unintended consequences of such a move. Japan’s struggles in the wake of the Accord underscored how even well-coordinated policies can ripple out in unexpected ways.

The Plaza Accord’s impact on Japan was transformative, sparking drastic economic shifts backed by stark numbers. After the agreement, the yen appreciated from 240 yen per dollar in 1985 to 128 yen per dollar by 1988—a nearly 50% rise that severely impacted Japan’s export-driven economy. To offset this shock, Japan’s central bank slashed interest rates, dropping from 5% in 1985 to 2.5% by 1987, which fueled an investment frenzy. The result was a historic asset bubble: the Nikkei 225 stock index soared from roughly 13,000 points in 1985 to nearly 39,000 by 1989, while commercial real estate values in Tokyo tripled. When the bubble burst in 1990, Japan’s economy fell into turmoil. The Nikkei lost over 60% of its value from its peak, urban land prices plummeted, and GDP growth slumped to below 1% by 1995, far from the 4–5% growth rates of the early ’80s. Japan’s debt-to-GDP ratio also surged, doubling from around 50% in the mid-1980s to over 100% by 1997 as the government tried to revive the economy. The Plaza Accord’s legacy remains a cautionary example of how sweeping currency adjustments can reshape an economy for decades.

A Mar-a-lago accord (plaza round 2) might be more challenging to install than its predecessor, given the potential to repeat the Japanese experience, and that is without mentioning that China would need to be a part of any agreement of this kind. I suspect the trump administration will use the threat of trade wars against various countries to attempt such coordination, but some goods exporting/manufacturing countries might prefer to bite the bullet of tariffs rather than currency appreciation.

Okay, great. Given the uncertainty in executing this Dollar devaluation, why put on a short USD long Yen trade? This is likely the most asymmetric currency pair for a few reasons. I’ll jot out some bullet points, but this deserves a full primer.

• It is a form of protection against another carry trade unwind, so we can look for it as a hedge against our long positions in U.S. tech and services.

• The BOJ has a line in the sand at 160; further weakening in the yen could complicate already weak consumer spending in Japan and raise energy prices, impacting the JCC (Japan Crude Cocktail / Japan Custom Cleared) in dollar terms which has been higher than the central bank target for the past 3 years.

• I don’t mind buying some cheap yen now to make sure I get a good bang for my buck on my next Japan trip.

• Central bank benchmark rate differential between the Fed and BOJ will be narrowing (although I suspect that the Fed won’t be able to cut as much as they anticipate due to inflation and the BOJ to hike as much as they would like)

I also acknowledge that a long yen position is somewhat at odds with my bearish view on long-duration U.S. treasuries, but that also makes it a convenient hedge to our treasury shorts.

There is a reason for this relationship. Japan was a pioneer in the purchases of U.S. Treasuries for its reserves rather than gold, which began in the 1980s and grew rapidly as Japan’s trade surplus with the U.S. surged, hitting over $46 billion by 1985. This trade imbalance brought vast inflows of U.S. dollars into Japan, which the Japanese government often used to buy U.S. Treasuries after intervening in currency markets to keep the yen from appreciating too much. By selling yen and buying dollars, Japan could stabilize the yen’s value, making its exports more competitive. Treasuries offered Japan a safe, liquid way to hold its dollar reserves, making them ideal for managing these large inflows without disrupting exchange rates.

This approach helped Japan build a significant buffer of foreign reserves—essential for economic stability, especially after the 1997 Asian Financial Crisis underscored the need for such protection. By 2000, Japan’s foreign exchange reserves were near $350 billion, with a large portion in Treasuries, and by 2012, Japan’s Treasury holdings had surpassed $1 trillion. These reserves acted as insurance against speculative attacks on the yen. Today, Japan consistently holds around $1.1 trillion in U.S. Treasuries, making it one of the largest foreign holders, often trading the top spot with China. This explains the correlation between the Yen and U.S. treasury yields. This leads us to our last bullet point supporting the trade.

• This correlation is what I expect to break during Trump’s second mandate due to a fundamental change in trade relations between the U.S. and the rest of the world that directly impacts Japan. This is how I cognitively justify bearish views on U.S. treasuries but bullish on the Yen. If the correlation does not break due to failed trade policy changes, we could have at least an effective hedge against being wrong on Treasuries from inflation volatility, potentially moderating.

Commodity exporting economies

Given my bearish view of the dollar, one natural extension of this thesis is through equities in geographies that are net exporters of commodities. Two core ideas back this thesis.

• The trading multiples on U.S. equities and Foreign equities will start converging.

  • The U.S. has sustained a growing trade deficit, reaching $916.8 billion over the last year. This nearly trillion-dollar gap means the U.S. imports significantly more than it exports, with foreign countries accumulating and reinvesting these dollars in U.S. financial markets to fill the funding gap.

  • Foreign holdings of U.S. financial assets—including Treasuries, stocks, and corporate bonds—have grown to over $33 trillion as of 2023. These substantial inflows have been pivotal in driving up demand and supporting high asset valuations in U.S. markets.

  • U.S. stocks trade at a significant premium over global markets. The S&P 500’s P/E ratio is 27.5x earnings, while Europe’s Euro Stoxx 50 is around 15x, and emerging markets often have P/E ratios closer to 10x. This premium is partly fueled by steady foreign capital flows seeking returns in dollar-based assets.

  • A weaker dollar boosts the appeal of international equities for U.S.-based investors, as currency gains add to potential returns. This can lead to increased capital flows out of U.S. markets, pushing U.S. and international valuations closer together.

  • Since high U.S. stock valuations are largely supported by consistent foreign inflows tied to the trade deficit, reducing this deficit could bring U.S. P/E ratios closer to global averages. A shrinking dollar advantage could make international equities more attractive, driving capital outflows and reducing the valuation premium on U.S. stocks.

• A weaker dollar leads to stronger commodities and strengthens commodity exporting countries

  • Commodities priced in dollars become cheaper globally when the dollar weakens, boosting demand. For example, the U.S. Dollar Index (DXY) fell about 10% from mid-2020 to early 2021, during which time oil prices rose nearly 80%, from $40/barrel to over $70/barrel, reflecting increased demand fueled by dollar weakness.

  • Gold, oil, and agricultural products often surge with a weaker dollar as they’re dollar-denominated. Historically, a 1% drop in the dollar index has corresponded with an average 0.5-1% increase in gold prices. This relationship supports commodity-exporting economies, as higher global demand boosts their revenue from exports.

  • Commodity-exporting nations experience increased revenue in local currency terms as prices rise. In 2022, Brazil—a major exporter of soybeans, iron ore, and oil—saw its export revenues grow by 19% with a weaker dollar boosting commodity prices, contributing to 2.9% GDP growth that year despite global headwinds.

  • Currency appreciation for commodity-exporting countries like Canada, Australia, and Russia often follows a weaker dollar, as demand for their exports grows. For instance, during a dollar decline in 2017, the Canadian dollar appreciated by 8%, benefiting from rising oil prices, which contributed to 3% GDP growth that year for Canada.

  • Emerging markets with commodity-heavy exports, such as Chile (copper) and Indonesia (nickel and palm oil), often outperform when the dollar weakens. In 2021, Chile’s copper exports reached $53 billion, a record high, as copper prices surged over 25% with dollar weakness, fueling GDP growth of 11.7%.

These two views converge to propose a unique macroeconomic setup that could spell a multi-year run for commodity-exporting countries.

Brazil seems especially well positioned to benefit

Brazil’s economy is heavily dependent on global commodity markets, with exports of soybeans, iron ore, oil, coffee, and sugar making up nearly 60% of total exports and contributing around 10% to GDP. In 2023, Brazil achieved $335 billion in export revenues, benefiting from robust demand in commodities. As the world’s largest soybean exporter and a major exporter of iron ore and oil, Brazil’s economic health remains closely tied to global demand, particularly from China, its largest export partner, which absorbs over 30% of Brazil’s exports. This deep connection to global commodities provides Brazil with both growth opportunities and risks, depending on international market trends.

The Brazilian real’s strength often mirrors global commodity cycles and dollar fluctuations, with significant impacts on inflation and trade. For example, in 2023, periods of dollar strength pressured the real, making exports more competitive but raising import costs and driving inflation up to 5.6%. In contrast, a weakening dollar phase strengthened the real, helping to stabilize inflation and improve affordability for imported goods. This currency sensitivity directly affects economic stability, as inflation and purchasing power respond closely to dollar movements.

Despite this dependency on commodities, Brazil’s stock market, the Bovespa Index, trades at a discounted valuation, with a P/E ratio around 9x, compared to the S&P 500’s 27.5x. This low valuation reflects both market risks and potential for growth, particularly if commodity demand remains strong. Domestic sentiment toward Brazilian equities, however, remains pessimistic; a dramatic rotation from equities to fixed income has taken place as the Brazilian Central Bank’s tightening raised real rates to 6.2%. This has fueled local investors’ preference for bonds, which, by comparison, would yield nearly 9% nominal—an attractive proposition in a historically fixed-income-dominated domestic market. However, with real yields high and sentiment at lows, Brazilian equities may offer substantial upside potential.

Brazil’s economy is moderately diversified, with 65% of GDP from services and 20% from manufacturing, but commodities remain crucial. The country thrives during commodity price booms, such as in 2021, when Brazil’s economy grew by 4.6%. Conversely, downturns in commodity prices present risks to GDP growth, trade balances, and inflation. The ongoing high real rates could slow domestic inflation, making space for the Brazilian Central Bank (BCB) to ease rates, which could attract new equity inflows as rate cuts are anticipated.

Politically, Brazil faces potential shifts, especially with the 2026 election on the horizon. If, as many anticipate, Brazil swings back to the right with a pro-business successor to Bolsonaro, the market may experience a boost similar to Argentina’s Milei effect. This scenario could offer substantial upside given Brazil’s deeper financial markets and higher liquidity, which would allow for larger institutional inflows compared to Argentina. In this context, the Brazilian equity market offers convexity: if political reforms align with a pro-business agenda, Brazil could attract major foreign capital inflows, particularly if sentiment around fiscal stability improves. Even if political conditions remain steady, Brazil’s fortunes will likely still hinge on commodity performance, limiting downside risks.

The EWZ ETF provides a diversified entry into Brazil’s economy, yielding around 7% in dividends, allowing investors to benefit from Brazil’s growth potential while collecting income. With notable cross-currency divergences and foreign investors reducing allocations to Brazilian equities, the setup resembles past buying opportunities, where both local and foreign sentiment was low. Combined with Brazil’s economic sensitivity to global commodity cycles and potential political shifts, Brazilian assets offer a compelling case for growth-oriented investors. A key downside to monitoring the Brazilian story is China’s balance sheet recession covered at length here:

Fed and China go big or go home

This story can be summarized with the term: balance-sheet recession (idea formulated by Koo in 1996). What is it? A typical recession, as the one investors are currently worrying about in the US, is caused by overproduction or rising inventories, decreasing consumer spending, inflationary pressures, and corporations being profit-maximizing; this forces job losses, productivity declines, and reductions in growth. Now, balance sheet recessions have the odd behavior that corporations stop being profit-maximizing but rather debt-minimizing, even with extremely low or zero interest rates.

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Here is an other interesting geography to consider:

Argentina, ARGT

• Primary Commodities: Argentina’s economy is driven by exports of soybeans, soybean products, corn, wheat, beef, and increasingly, lithium. Together, agriculture and commodities contribute around 10% of GDP and account for over 60% of total exports. Soybeans and soybean products alone make up roughly 30% of Argentina’s exports, positioning the country as one of the world’s leading exporters of these critical crops. Demand from major importers like China directly impacts Argentina’s trade balance and economic stability, given its sensitivity to global agricultural prices.

• Emerging Mining Sector: Argentina is making substantial moves to expand its mining sector, particularly in San Juan Province, which is now positioned as one of the country’s premier mining regions. The province has attracted significant foreign investment due to its pro-mining policies and abundant mineral resources, especially in lithium and precious metals. Argentina’s lithium reserves, largely located in the Lithium Triangle, are crucial as global demand for electric vehicle (EV) batteries continues to rise. In 2023, lithium exports grew significantly and are expected to account for an increasing share of export revenue, making lithium a valuable diversification from agriculture and a hedge against agricultural price volatility. San Juan’s gold and copper mining projects further add to Argentina’s portfolio, supporting the broader narrative of Argentina as a diversified commodity exporter. Argentina is also diversifying with a growing industrial and energy sector, including oil production in the Vaca Muerta shale formation.

• Inflation Pressures: Argentina’s economy is highly inflationary—recently recording inflation rates near 120% annually—and fluctuations in agricultural prices or adverse weather conditions, like droughts, can strain fiscal positions and exacerbate inflationary pressures. With the mining sector’s growth, Argentina has another avenue to accumulate foreign currency, which could provide more stability to the peso and help manage inflation pressures.

• With two more years of Milei in power, there is still room for the Argentine trade to run. I would focus on its mining opportunities for additional torque.

Along the trump v2 repricing theme, here are other trades that I find interesting, which I will leave here without too much additional explanation (potentially future notes)

• Sibanye Stillwater, South African platinum group metals miner with additional exposure to Gold and uranium.

  • Strong Leverage to Precious Metals Upside Amid Depressed PGM Prices: Sibanye is a major player in PGMs (platinum, palladium, rhodium) and gold, with substantial upside as these metals rebound from multi-decade lows. PGMs, trading at historic discounts, offer significant asymmetry; for example, platinum is trading at a 60% discount to gold—the largest discount on record. With supply constraints and strategic demand from hybrid vehicles, Sibanye is well-positioned for price recovery.

  • Strategic Geographic Hedge and Production Diversity: Sibanye’s U.S. operations, comprising 21% of PGM revenue, provide a hedge against political risk in South Africa, which produces 80% of global platinum. Although U.S. operations are currently loss-making on an all-in basis, their potential closure could tighten the palladium market by 7%, supporting prices. This operational flexibility mirrors strategies in other commodities, such as Cameco’s uranium production management.

  • Structural “Economic Moat” from Low-Cost, Debt-Free Assets: Post-restructuring, Sibanye holds assets at a fraction of replacement costs, creating an economic moat. For instance, its $16 million per OSV replacement cost is significantly below the $70 million newbuild cost, giving it a competitive advantage as new market entrants face prohibitive initial costs, limited shipyard space, and financing burdens.

  • Robust Supply Constraints: PGM supply growth is flat, with platinum production capped at 7.1 million ounces in 2023 (of which 1.5 million ounces came from recycling). With no significant new supply expected, PGMs are set up for a supply-demand imbalance, particularly if hybrid vehicles continue to outpace EVs. Hybrid engines require 10-15% more palladium than traditional ICE vehicles due to more frequent start-stop cycles, adding an unexpected demand tailwind for palladium and rhodium.

  • Resilience in South African Political Environment: Despite South Africa’s political volatility, recent coalition changes have eased risks of nationalization and over-taxation. Sibanye’s management, led by experienced CEO Neal Froneman, has a track record of successfully navigating this challenging environment. Furthermore, the company’s significant operations in South Africa, combined with proactive security investments, allow it to continue operations effectively despite regional risks.

  • Liquidity and Cost-Cutting for Downside Protection: Sibanye maintains over $1 billion in cash and a $1 billion undrawn credit facility (maturing in 2026), providing ample liquidity. The company has implemented strategic cost cuts, including shaft closures and asset restructuring, enhancing its financial stability and positioning it to weather continued price weakness.

  • Optionality in Uranium and Rhodium Markets: Sibanye offers additional upside through its 59.2 million pounds of uranium resources and a significant position in rhodium (22% of global production). With South Africa producing 85% of the world’s rhodium, Sibanye can leverage this niche, high-demand market, particularly in an environment of constrained supply and stringent emissions regulations.

• M&A beneficiaries with an energy angle. Along the line of deregulation, I expect Trump to put more M&A-friendly people in decision-making positions. As M&A activity picks up, we should see investment bankers work hard for their year-end bonuses. One sector which I find is at the crossroads of the energy push and M&A are Offshore Service Vessels (OSV’s). This really deserves a full length note but here are some quick thoughts:

  • Tight Supply and Limited Shipyard Capacity: Global shipyard capacity has fallen 60% since 2008, with current capacity levels similar to those seen in 2001. Most capacity is occupied with containerships and LNG carriers until late 2027, leaving dry bulk, tankers, and offshore vessels, including OSVs, competing for the limited remaining shipyard space. This capacity squeeze extends build times and raises costs for new OSVs, tightening supply and supporting higher charter rates.

  • Aging OSV Fleet and Low Newbuild Orders: The OSV fleet includes 4,160 vessels, of which 943 are currently laid up. Only a third of these are “premium” vessels (under 15 years old), with the remaining vessels aging rapidly. The OSV order book is below 5% of total fleet size, indicating limited new supply. With rising scrapping rates due to age restrictions, a constrained supply of newer, capable OSVs supports continued rate inflation in the sector, making existing assets more valuable.

  • Increasing Costs and Replacement Value of OSVs: The cost to build a new premium OSV has risen by 30-40% over the past three years, with newbuild costs for high-quality vessels estimated at around $60 million. Yet, companies like Tidewater and Seacor Marine are trading at 41% and 55% of newbuild parity, respectively, with Seacor’s fleet valued at around $11 million per vessel. This substantial discount to replacement value makes current OSV valuations attractive, offering upside potential as demand strengthens.

  • Higher Day Rates from Industry Consolidation: Recent mergers, such as Noble’s acquisition of Diamond Offshore, consolidate market power and create larger players with improved pricing leverage. For OSVs, consolidation could lead to a “seller’s market,” where fewer, larger operators can command higher day rates for their assets. The rumored merger between Transocean and Seadrill illustrates this trend, with combined scale potentially allowing greater control over fleet utilization and pricing, which would benefit OSV operators indirectly as support demand rises.

  • Lack of Appetite for Newbuilds Sustains Demand for Existing Assets: Due to uncertain contracting and high capital costs, there’s minimal interest in new offshore rig and OSV builds, with shipyards instead prioritizing higher-margin projects. This sustained lack of new supply supports higher rates, particularly as demand for offshore assets rebounds. 86% of marketed drillships are already in use, and demand for reactivating cold-stacked rigs is growing, with reactivation costs ranging from $75 million to $150 million per rig, further limiting supply.

  • Beneficial M&A for Balance Sheet Strength and Access to Contracts: M&A activity, such as a potential Seadrill-Transocean merger, would strengthen the balance sheet of leveraged companies, improving Debt/EBITDA ratios and access to cheaper financing. For Seadrill, merging with Transocean would provide access to a robust backlog of contracts, reducing “white space” (idle periods) and stabilizing revenue. This improved financial structure could attract more favorable lending terms and reduce refinancing costs, ultimately supporting profitability in a recovering market.

  • Discounted Asset Prices and Limited Downside Risk: OSVs are currently trading below replacement costs, with Tidewater’s fleet valued at around $25 million per OSV, or 41% of newbuild parity. Seacor Marine, while more leveraged, has an attractive asset base, with 55 OSVs valued at approximately $11 million per vessel. Investors have an opportunity to acquire assets at a significant discount with potential upside as day rates increase, while downside risks are mitigated by the low supply of new OSVs and the high cost of replacement.

  • I also see Valaris warrants as being particularly interesting

• The Japanese Bank complex

  • Inflation and Rising Interest Rates Boost Profit Margins: Japan’s core inflation has been steadily rising, hitting 3.1% year-on-year as of mid-2024—one of the highest levels Japan has seen in over three decades. As inflation persists, the BOJ has started relaxing its yield curve control (YCC), allowing 10-year JGB yields to reach 0.65%. This shift enables Japanese banks to expand their net interest margins (NIMs), which had been squeezed for years under a near-zero-rate environment, directly enhancing profitability.

  • U.S. Protectionism Drives Domestic Investment in Japan: As the U.S. continues to push for supply chain diversification away from China, Japan has emerged as a preferred alternative, especially for industries tied to U.S. markets. Japan’s FDI inflows, although still relatively low at $250 billion in cumulative stock compared to China’s $4 trillion, are starting to rise as global companies seek stable, geopolitically secure production hubs. Japanese banks stand to benefit from increased loan demand as companies finance new projects domestically, tapping into Japan’s competitive wage and property costs, which are now on par with much of developed Asia.

  • Potential Investment Boom Driven by Pro-Investment Policies: Similar to the government-led tourism boom, Japan is well-positioned for a domestic investment surge if policymakers enact pro-investment reforms. In recent years, Japan’s tourism sector has turned a deficit into a surplus, with inbound tourism spending exceeding $33 billion annually. If similar policies target industrial investment, Japanese banks could see substantial growth in lending activity, as industrial production is still at 1984 levels, leaving significant room for expansion and modernization.

  • Yield Curve Control (YCC) Adjustments Favor Bank Profits: As the BOJ gradually relaxes its YCC policy, Japan’s yield curve is steepening, with the 10-year JGB yield hovering around 0.65% and forecasted to increase further. This steeper curve improves banks’ NIMs by widening the spread between short-term funding costs and long-term lending rates. While U.S. Treasuries signal potential recession with the 2-year yield dropping to 4.85% amid economic concerns, Japan’s JGB market reflects optimism, allowing Japanese banks to benefit from rising rates without severe economic contraction fears.

  • Pro-Labour Economic Environment Supports Bank Lending: Japanese wages have been gradually increasing, with recent reports showing 3.1% growth year-on-year, supported by pro-labour policies that aim to improve household purchasing power. This wage growth, combined with inflationary pressures, creates a favorable lending environment for banks, as households and businesses are more likely to seek credit in a rising-income landscape. In a reversal from the 1980s-2000s low-wage, pro-capital era, Japan’s tighter monetary policy is supportive of long-term loan demand.

  • Stable Economic Signals from Japanese Markets: Japan’s high-yield and JGB markets are showing resilience, contrasting with recessionary indicators in U.S. Treasuries. Japan’s JGB market has historically been a reliable indicator of economic stability, with Japanese 10-year yields now showing strength and domestic credit markets stable. This stability reflects Japan’s advantageous position in the current geopolitical environment, as global demand shifts away from China. For Japanese banks, these dynamics mean steady growth in capital inflows and a supportive environment for expanded lending opportunities.

• XME / XLB / XLE Metals and Mining / Materials / Energy ETF’s

  • Moving back stateside, it seems wise to maintain exposure to the areas in the crosshairs of Trump’s labor revival. I suspect this sector will be a primary fiscal beneficiary over the next four years. One way to hedge inflation is to allocate to companies that will benefit from fiscal deficit spending. Moreover, I expect deregulation around these companies to take shape. The green transition agenda is rapidly losing steam, and no prominent world leader plans to attend the next COP meeting. This is unsurprising, given that rising geopolitical concerns and economic risks are taking the forefront of discourse. People will only care about the energy transition in times of calm and prosperity. I would likely be more picky than just allocating to these ETF’s broadly. On the energy segment, I particularly like names operating in liquid natural gas, considered a transitional energy source. Note I would stay away from utilities and focus on producers.

• Russell come back?

  • Pro-Business, Domestic-Focused Policies: Trump’s economic policies favor deregulation, lower corporate taxes, and pro-manufacturing initiatives, particularly for U.S.-based companies. This could benefit smaller, domestic-focused firms in the Russell 2000, which have less international exposure than tech-heavy Nasdaq companies. By incentivizing U.S. production and reducing dependency on global supply chains, a Trump presidency might shift capital flows towards smaller-cap, domestically-oriented firms.

  • Rising Interest Rates and Inflation Concerns: Smaller-cap stocks in the Russell tend to be more sensitive to changes in U.S. fiscal policy and domestic economic trends. Should a Trump administration lean into policies that drive inflation or necessitate further rate hikes, it would make the case for high-multiple, growth-heavy Nasdaq stocks harder to justify, pushing investors toward value-driven, economically-sensitive sectors like those in the Russell.

  • Economic Nationalism and Infrastructure Spending: Trump’s past emphasis on infrastructure spending and economic nationalism may continue in a second term, spurring sectors like industrials, energy, and materials. Many of these sectors are more prominent in the Russell 2000 than the Nasdaq, which is tech-heavy. A focus on domestic investment could make smaller-cap industrial and service firms more attractive to investors.

  • Historical Parallel: Early 2000s Rotation: A significant rotation from the Nasdaq to the Russell last occurred after the dot-com bubble burst. From March 2000 to early 2003, the Nasdaq declined by nearly 80% from its peak, while the Russell 2000 fell by only 45%. As investors fled overvalued tech stocks for smaller, undervalued companies, the Russell 2000 gained traction, and from 2003 to 2006, it outperformed the Nasdaq with a cumulative return of 70%, compared to the Nasdaq’s 50%. Stimulus-driven, pro-growth policies helped smaller-cap stocks recover faster and outshine tech-heavy indices, a trend that could repeat under a second Trump administration if fiscal and regulatory policies favor the domestic economy.

  • I expect to layer in 25 delta LEAP call options for about 2% of NAV on this trade.

• European Military Industrial Complex

  • With the shift towards a more isolationist U.S. foreign policy, Europe has started investing heavily in defense autonomy, improving the bottom line of European defense contractors. (coming up in the next thematic equities primer)

That is probably enough trade idea’s to chew on for now.

Cheers!