Summary

After cutting exposure, the market may be nearing a short-term bottom, but it is still too early to go all-in for the long term. The speaker has advised keeping exposure below 60% since December and reiterated the call to reduce risk after the Lunar New Year; in hindsight, he may have been “not decisive enough,” but given the unpredictability of Trump’s policies and recession risk, he still would not have recommended going to cash. Allocation capital should remain on the sidelines; tactical capital is only suitable if it can be exited quickly around NVIDIA GTC on March 18.
DOGE and tariffs have broken the two optimistic assumptions underpinning the “Trump trade.” The market had been betting that tariffs might not be implemented, that the Fed put remained in place, and that DOGE and tax cuts could improve efficiency; DOGE may now weaken the economy or trigger a recession, while the 25% measures targeting Canada and Mexico far exceed the earlier expectation of only an additional 10% on China and no major increases elsewhere. Leading indicators including ISM and Walmart sales have weakened, while the risks from immigration policy have yet to fully emerge; the speaker still puts the odds of a US recession below 50%, but stresses that he cannot give a definitive answer.
Whether US equities are cheap depends on whether the economy enters recession. If the economy remains healthy, current prices are “very cheap”; if recession hits, using the framework he later gave at Friday’s levels, another roughly 7% decline would put the S&P 500 at about 18x P/E, still above the CSI 300 at roughly 13x. P/E alone is not enough; investors must also consider the equity risk premium relative to long-end rates. The essence of buying the dip is whether the price is low enough for the earnings outlook—not whether a falling knife will soon rebound.
Extreme de-leveraging means much of the incremental mechanical selling pressure has already faded, but it only supports tactical trading. Including Monday’s decline, de-grossing reached roughly 4.5 standard deviations, an extreme reading in the approximately 0.5% tail; CTAs have already turned net short, so they will not keep selling into further declines and may even buy if markets stabilize. Vol-control strategies are also largely flat and would only rebuild positions if volatility falls. Traders who focus solely on positioning rather than recession risk can trade a short-term move around GTC, but the speaker would not do so himself.
Germany’s fiscal expansion is transmitting to the US through the yen carry trade. Germany plans to commit 500 billion to public infrastructure while increasing defense spending, though the package remains a proposal; the speaker estimates the eventual stimulus could reach 3%–4% of GDP, with the near-term budget deficit potentially reaching 5%–6%. His cited estimate is that every 1-percentage-point expansion in the fiscal deficit typically lifts long-term bond yields by 40–50 basis points, implying a theoretical increase of roughly 80 basis points; the German 10-year yield could ultimately break above 3%. German yields initially rose about 30 basis points, which then pushed Japanese rates up roughly 15 basis points—approximately one BOJ hike—and forced an unwind of carry trades funded in yen and invested in dollar assets.
Even a Tesla selloff toward $220 has not yet met the conditions for a value-driven entry. The stock fell from roughly $480 after Trump’s election to $400 and then to around $220, but declining global deliveries, the loss of left-leaning environmental buyers, and Chinese EV competition will continue to weigh on results. The speaker would need at least 2 of 3 developments—robotaxi, Hardware 5, and Elon’s return to the company—to occur before concluding that the downtrend is largely over; he has withdrawn his earlier call to “buy with your eyes closed” at $220.
“The East rises, the West falls” is not an optional scenario for the speaker; China remains constrained by demand, demographics, balance sheets, and deflation. Another decline in CPI and an 8.7% drop in imports show that deflation has not been resolved; the roughly 14% share of trade attributed to the US is merely a statistical convention, because re-export flows mean China’s ultimate consumption base remains deeply dependent on the US. “Economic growth comes from demand, not supply”; if the US reduces government demand, China and other emerging markets as suppliers could repeat the deep selloff that followed 2008.
A US strategic retrenchment will lift European defense spending, while Trump may soften some policies in the near term. Former MI6 chief Alex Younger’s framework is that the US will reduce its long-term commitment in Europe and against Russia while concentrating its core strategy on China; Germany is leading Europe’s effort to rebuild its military architecture, global defense spending will rise, and defense is an investable theme to watch this year. The speaker also notes that Elon has shifted from leading DOGE to serving as an adviser and that Trump has softened somewhat on Ukraine, raising the odds of further near-term policy moderation; this remains only his personal judgment, and allocation capital should wait for clearer signals before adding exposure.

Deep dive

1. After Cutting Exposure: A Possible Short-Term Bottom, but Still No Case for Going All-In

The speaker’s position review is straightforward: he advised cutting exposure below 60% starting in December and called for another reduction after the Lunar New Year. In hindsight, he may still have been “not decisive enough,” but given that recession was not the US economy’s base case at the time, he could not have recommended going fully to cash.
The uncertainty in this cycle reminds him of the 2008 subprime crisis: no one knew how large the risk was or whether it would actually erupt. Trump’s 3 risks are tariffs, DOGE’s deficit reduction, and immigration; the first 2 have already materialized, while the third has yet to fully surface.
The key is to separate 2 questions: whether the market is nearing a short-term bottom because positions have been cleared out, and whether prices are cheap enough for the long term. The first may be true; the second still depends on whether Trump, “the man who governs by tweet” (“推特治国的人”), implements his campaign agenda in full.

2. Tariffs and DOGE Have Overturned the Market’s Original Trump Trade

When Trump was first elected, the market bet that tariffs might never arrive, that the Fed put remained in place, and that DOGE and tax cuts would improve efficiency. That somewhat wishful pricing drove the 10-year yield toward 5% even as equities continued to rise.
The first reality check came through DOGE: cutting government spending could slow growth and even trigger a recession. At the same time, forward signals including ISM and Walmart sales weakened; nonfarm payrolls are more backward-looking, or lagging, and cannot eliminate forward-looking concerns.
Tariff expectations also shifted from “10% more on China and little increase elsewhere” to 25% measures against Canada and Mexico. The speaker believes the impact of any one of these measures would be more severe than the combined effect of the 2 rounds of tariffs imposed on China. Some measures have been delayed until April 2, but the policy has already fractured US relations with its allies, especially Canada and Mexico, and the market is still trying to determine how far Trump will take it.
The market is now pricing a world in which the government put disappears once the economy weakens; whether the original Fed put exists is also unknown. The speaker initially thought Trump might tolerate weaker aggregate demand and deliberately push the economy into recession, but now believes he may seek a more gradual slowdown.

3. The Valuation Floor Depends on Recession; Tesla Has Not Completed Its Fundamental Washout

The speaker’s conditional judgment is direct: without a recession, US equities are “very cheap” at current levels; with a recession, there is still downside. In one instance he estimated that a 10% further decline would bring the P/E to roughly 18x, and later said that at Friday’s levels, a decline of about 7% would produce the same multiple. Either way, the figure remains above the CSI 300’s roughly 13x.
P/E alone is insufficient because it must be compared with rates through the risk premium. A deteriorating economy would push long-end rates lower, so even another 10% decline in equities might not produce a risk premium consistent with a true buying opportunity. The allocation question is whether prices are cheap enough, not whether the market will rebound immediately.
Tesla’s fall from roughly $480 to around $220 does not change that standard. Global deliveries, the loss of left-leaning environmental buyers, and Chinese competition continue to pressure earnings; only if at least 2 of robotaxi, Hardware 5, and Elon’s return materialize will the speaker revive his earlier plan to “buy with your eyes closed” at $220.

4. Germany’s Fiscal Expansion Is Transmitting to the US Through the Yen Carry Trade

After the CDU/CSU election victory, the party proposed a fiscal package that would break through the debt constraints, including 500 billion in public infrastructure investment and higher defense spending. The speaker estimates that the eventual stimulus could reach 3%–4% of GDP and the near-term budget deficit could reach 5%–6%, though the package remains a proposal.
The speaker cites an interest-rate rule of thumb: every 1% increase in the fiscal deficit as a share of GDP typically lifts long-term bond yields by 40–50 basis points. Public and defense spending together amount to at least 2% of GDP, leading him to say that yields could theoretically rise by roughly 80 basis points. If enacted, the 10-year German yield could ultimately break above 3%. The market has already moved about 30 basis points, but must continue pricing the probability that the package passes.
Rising German yields also drove Japanese rates up roughly 15 basis points in a single day, with an effect similar to a BOJ hike. Carry trades funded in yen and invested in higher-yielding dollar assets then unwound; these flows can amplify asset volatility in the short term, while over the long term the move may simply reverse—“what goes up comes back down.”

5. Mechanical Selling Is Nearing Its End; GTC Is Only a Tactical Trading Window

Monday’s decline was neither purely a gamma squeeze nor entirely a US domestic event. It was driven mainly by carry-trade unwinds layered on top of a macro shock; with order-book depth “an order of magnitude worse” than at the start of January, cross-market forced selling combined with negative-gamma hedging to push the NASDAQ down nearly 4% and Tesla down more than 10%.
De-grossing had already moved more than 3 standard deviations outside its normal range over the prior 2 weeks; including Monday, it reached roughly 4.5 standard deviations, an extreme level rarely seen in recent years. CTA positioning is now almost entirely negative: CTAs will not keep selling into further equity declines and will buy if markets stabilize. Vol-control strategies are also largely flat and, if volatility falls, will rebuild positions rather than create additional selling pressure.
The VIX did not show a proportionate spike relative to the roughly 4% decline in equities, suggesting that this selloff was driven more by global macro forces and the carry trade than by a US short-vol blowup. In the latter case, the VIX could have risen above 40. Listed-exchange options are only “the tip of the iceberg”; the major institutional positions sit in the OTC market between hedge funds and investment banks, and institutions will not keep chasing index puts once they become too expensive.
The external carry unwind may not be over, but incremental US domestic selling pressure is limited. That creates room to trade a short-term rebound around NVIDIA GTC on March 18, provided positions are exited quickly beforehand or after the event; long-term investors cannot mistake a positioning bottom for a valuation bottom.

6. China’s Problem Is Not Supply Capacity but Demand Capable of Absorbing Supply

China’s CPI fell again and imports dropped 8.7%; even without seasonal adjustment, the data point to unresolved deflation. The roughly 14% share of trade attributed to the US is merely a statistical convention, since re-exports mean that more of China’s supply is ultimately consumed by the US.
The speaker’s causal chain is simple: “Economic growth comes from demand, not supply.” Demographics, balance-sheet contraction, and severe deflation are suppressing domestic demand; having more supply or breaking through a “chokepoint” does not automatically translate into domestic growth.
Trump is simultaneously using DOGE to cut government demand and global tariffs to bring manufacturing back home, which the speaker calls “an absurd fantasy” (“天方夜谭”): when demand falls, it is difficult to increase supply. If the US reduces demand, suppliers such as China will be hit first. That is why an “East rises, West falls” scenario is not viable; China is more likely to see the east rise or hold steady while areas outside the east decline, or to experience an across-the-board downturn.
Chinese policy still asks the private sector to keep levering up, consuming, and investing, but balance sheets have already shrunk, making new leverage less effective. The pattern could resemble 2008, when capital flowed into the BRIC countries, South Africa, China, India, and Vietnam; once the US entered a genuine recession, those suppliers could “fall until nothing is left.”

7. As the US Retreats from Global Responsibility, European Defense and a Softer Trump Emerge

Alex Younger’s view at a Goldman Sachs weekend event was that the US no longer has the capacity to “reach the world and make it prosper” (“达而兼济天下”); a Democratic administration would not reverse the long-term trend, only change its pace. National strategy will become more concentrated on China, with less spending and effort directed toward Russia and Europe.
Even if Ukraine reaches a ceasefire, Ukraine and the 3 Baltic states remain an open-ended question for Europe; Russia has been weakened, but another expansion could become a risk in 3–5 years. Europe must rebuild its military system from a welfare model dependent on the US, and Germany is leading that shift.
The speaker therefore believes global defense spending will “inevitably rise,” making European defense an investable theme to watch this year. At the same time, US tariffs and competitive pressure on China will continue to increase; the 2 trends are not contradictory.
Near-term policy could nevertheless soften: Elon has shifted from leading DOGE to serving as an adviser, which the speaker speculates may be related to his dispute with Marco Rubio; Trump has also softened somewhat on Ukraine. The speaker still puts the probability of a US recession below 50%, but emphasizes that this is only his personal judgment and that allocation capital should wait for clearer signals before adding exposure.

Kelly Granat - Investing At Lone Pine John Palazza - Vice President of Global Sales @ CentML ( sponsored)