Summary

The speaker’s core positioning call is straightforward: stay lightly positioned over the next few months and do not try to catch a so-called ironclad bottom, because the market has not bottomed and tail risks can still run in either direction. This selloff was entirely policy-made and could just as easily be reversed or amplified by policy; a possible 90-day grace period, failed bilateral negotiations, Chinese retaliation, and the volatility-heavy window from April 2 to July 2 could all change the market’s direction. Over a 2-3 year horizon, AI and America’s pro-business backdrop still support optimism, but the depth of a recession and the policy path over the next few months are unknowable. “Don’t take the money you had no idea how to make over the past few years and diligently lose it over the next few.”
Powell explicitly said there is no Fed put, but the speaker believes there is still a put in practice—one with a higher threshold, a lower strike, and employment as its only target. A May cut is “almost zero” because the Fed wants to wait for hard data, and unemployment may need to rise above 4.5%; if the data soften somewhat in June, the Fed might test a cut once, then try again later. If growth runs near 0—1, unemployment crosses 4.5%, and inflation remains in the 3%-plus range from year-end through the first quarter of next year, the Fed may treat tariff inflation as a one-off supply shock, choose employment, and cut rapidly—even by 50 basis points at once. “The real put is there, but the strike on this put is relatively low.”
The Fed is not backstopping the White House because tariff policy has yet to take shape: cutting rates early could repeat the inflationary mistake of the 1970s while giving the administration more room for an even more aggressive policy experiment. The speaker stressed that this is not merely Powell’s personal judgment; the voting officials are almost uniformly waiting for the White House to clarify the policy. In the speaker’s view, Powell will leave office next April and cares more about his legacy after inflation has been brought under control; if he cleans up after Trump, the benefits accrue to the White House while any inflation rebound may be blamed on the Fed. This is therefore different from the 2019 trade war: “The Fed is completely unwilling to cooperate with Trump’s policy.”
Tariff front-running will severely distort the data over the next 2 months, and the recession feedback loop may not become clear until after the second quarter. Empire, Philadelphia surveys and consumer sentiment have already deteriorated, while capex has cooled sharply; yet inventory restocking, early procurement and consumers buying ahead of price increases are supporting retail sales and consumer spending. The speaker places the likely trough in the real economy around the fourth quarter through the first quarter of next year and estimates that the market may bottom in the fourth quarter; he also says the real economy should bottom roughly before the market does.
The simultaneous decline in the dollar, Treasuries and US equities currently looks more like a repricing and outflow of capital from the United States than a breakdown of the financial system. A brief liquidity shortage in Treasuries has eased as off-the-run and on-the-run yields have reconverged; the speaker believes the banking system remains healthy. If there were a genuine hedge-fund default, forced liquidation or systemic liquidity crisis, the dollar and Treasuries would instead be rising.
Neither European fiscal expansion nor a Chinese consumer recovery offers a reliable safe haven, and the relative strength of non-US assets may last only 1-2 months. Government spending in Europe will push up German and other bond yields, creating latent pressure in European sovereign debt; China is more likely to direct money toward military projects, 5G, Huawei and compute than hand it directly to households, while consumer loans leave the ultimate risk with highly leveraged families. Gold, bitcoin and other non-US assets may continue to attract money in the short term, but “when the nest is overturned, no egg remains intact”; after a strong run, they may themselves become short targets. Oil is explicitly classified as “untouchable.”
The indexes still do not fully reflect an earnings recession, but the long-term US bull case has not been destroyed. Full-year EPS expectations are still around 3% growth; if a recession lasts 2 or 3 quarters, the speaker believes EPS could turn to -5% or even -10%, a scenario not yet reflected in the indexes. Many technology stocks now have roughly balanced upside and downside, while “the rest of the S&P has not fallen enough.” Conditions for a longer-term recovery may emerge around year-end through next year: AI remains, the GOP remains pro-business, and tax cuts, deregulation and the Fed’s employment put could converge.

Deep dive

1. A Policy-Made Selloff Has No Traditional Bottoming Template

The speaker opened with a blunt call: over the next few months, “spend more time playing games” and do less going long, shorting or trying to catch the bottom. Volatility is extremely high, tail risks have not gone away, and “tail risk can run either up or down.”
Unlike a conventional cycle such as 2008, this selloff was entirely policy-made and could therefore be suddenly reversed or intensified by the same policy. A possible 90-day grace period, the lack of agreements between Mexico and the United States and between Japan and the United States, and Chinese retaliation all invalidate any single-pathway scenario almost immediately. The speaker also identified July 2, 90 days after April 2, as a volatility-heavy date and warned that tariffs currently reduced to 10% could be reinstated.
The tariff conflict has spread into a global free-for-all: if Europe, Japan and South Korea follow the United States in raising tariffs on China while facing Chinese retaliation, they will also have to reassess their own inflation outlook. “The result is still very uncertain.”
The speaker does not believe Trump can complete this “major surgery” on the global trade system smoothly. Free trade is built on reciprocity: one side produces more low-end goods, the other produces more advanced technology, and both benefit. Trump, by contrast, sees trade as a zero-sum game—“either you win or I win.” The operation may ultimately fail, but the attempt itself is enough to inflict serious pain.

2. Powell Refuses to Pay for White House Policy

Asked whether a Fed put exists, Powell’s answer was “No.” The White House is deliberately manufacturing uncertainty, while the Fed has preferred predictable policy since Greenspan; when tariffs may be withdrawn tomorrow and increased the day after, the Fed has to wait for the executive branch to explain the policy before assessing its actual economic impact.
The speaker stressed that this is not Powell’s decision alone. The voting officials have almost unanimously chosen to wait. He described them as broadly left-leaning and said they would not accept proposals thrown out at will by Navarro and others, nor a process that excludes the Treasury secretary and other officials from major decisions. Trump’s attacks on Powell via Truth Social have not changed that collective judgment.
The second constraint is the shadow of the 1970s. Powell would rather tolerate roughly 6 months of economic pain than allow inflation that has just been subdued to spiral again; once wages and prices begin pushing each other higher, the cost could drag on for another 2 or 3 years. “Better to endure some pain than make another major mistake.”
Personal incentives also matter. The speaker says Powell will leave office next April and is now focused above all on his “legacy.” He has already released policy during COVID to rescue an economy on the brink of collapse, then brought inflation down without breaking growth. If he cuts rates for Trump now, the policy gains go to the White House, while any loss of inflation control could be written into the Fed chair’s record.
Rate cuts would also reduce the government’s interest expense and give the White House more room to keep experimenting. The speaker’s summary: “I clean up your mess now, and Trump gets more room to make policy chaos.” The White House has not even clarified how tariffs will be collected, how origin will be determined or who will negotiate with each country, and that policy confusion further strengthens the Fed’s case for waiting.

3. The Fed Put Has Not Disappeared; It Is Anchored to Unemployment, Not Stocks

Unlike during the 2019 trade war, Powell is now emphasizing hard data rather than accommodating Trump or easing preemptively based only on forward-looking indicators. A May cut is “almost zero”; if the data weaken somewhat in June, the Fed might front-run with one trial cut and possibly try again later, but that would not mean sustained easing had begun. The speaker says the Fed is currently comfortable with the level of rates and, despite risks on both sides, still wants to see hard data deteriorate.
The real threshold is employment. The speaker treats an unemployment rate of roughly 4.5% as the key reference point: before that, the Fed can tolerate pain in markets and the economy; once it is breached, the internal doves will turn collectively. “The strike is not referenced to the stock index … it is referenced to the actual unemployment rate.”
If inflation remains in the 3%-plus range while growth falls toward 0—1 and unemployment exceeds 4.5% between year-end and the first quarter of next year, the speaker expects the Fed to “choose unemployment, not inflation.” As long as it determines that tariff inflation is a one-off supply shock rather than a wage-price spiral, cuts could come quickly; a single 50-basis-point cut or even more is possible. He noted that there has previously been a 1-percentage-point cut. In his view, this is not specific to Powell: a new chair after next April could make the same choice.

4. Front-Running Temporarily Masks the Deteriorating Trend

The weakest readings are currently the forward-looking Empire survey, Philadelphia survey and consumer sentiment, while corporate capex has also cooled sharply as capital markets have deteriorated. Retail sales and consumer spending, however, are holding up, and the hard data have not yet given the Fed enough grounds to act.
The contradiction comes from front-running tariffs. Companies are rebuilding inventories and buying early, while consumers are purchasing imports before prices rise; in the short term, this makes some data look better. Chinese data are also confused: exports were strong before April, so the data over the next 2 months will not provide a clear picture.
June data may begin to capture the tariffs themselves, but still may not reflect the full impact of a recession. The actual chain is tariffs hitting corporate investment and consumption, unemployment rising and incomes falling, and only then feeding back into retail sales. That transmission naturally takes months.
Under the current policy timeline, the speaker believes the real economy may not truly bottom until the fourth quarter through the first quarter of next year, and estimates that the market may bottom in the fourth quarter. He also points out that the real economy should bottom roughly before the market does. Even with Goldman Sachs putting the probability of recession at about 45%, he does not think that proves the risks have been fully priced, and considers Goldman’s forecast more optimistic than his own.

5. A Simultaneous Drop in the Dollar, Treasuries and Stocks Is Not Yet a Systemic Crisis

The United States has long used capital inflows to offset its current account deficit. Now tariffs are eroding its growth advantage, prompting capital to reprice and flow out; the result is a weaker dollar, higher Treasury yields and falling US equities. The speaker sees this “three-way decline” as evidence that the worst phase has not yet arrived.
If hedge funds default, are forced to liquidate or the financial system experiences a liquidity squeeze, the typical reaction would be falling risk assets alongside a stronger dollar and higher Treasuries. The speaker believes the banking system remains healthy. After the Silicon Valley Bank episode, he says, the Fed signaled that financial institutions could not be allowed to fail and would be supported through the discount window.
The Treasury market did experience a short-term liquidity shortage: off-the-run bonds traded at anomalous levels relative to on-the-run bonds, indicating a lack of arbitrage capital and high financing costs. But the yield spread had largely disappeared a week later, making the episode look more like a migration of capital than a rupture in the financial plumbing.

6. There Is No Genuine Safe Haven Outside the US Engine

US growth depends on 2 engines: high corporate margin and strong household balance sheets. High profits support wages and capital markets, while rising capital markets improve household balance sheets in turn. The speaker believes US corporate margins are materially higher overall than those of Chinese companies such as Huawei, Alibaba and Tencent. Tariffs weaken both engines and have “nothing whatsoever to do” with whether manufacturing returns.
The speaker’s train analogy best captures the cross-asset reaction: “When the locomotive is about to fall, people run toward the rear of the train.” Money can flow into gold, bitcoin or other regions, but once the US growth engine disappears, the rear carriages cannot escape a contraction in global demand.
Markets are pricing in a restart of European government spending and a Chinese consumer recovery through Hong Kong-listed equities. European fiscal expansion will push up German Bund yields and lift rates across other bonds, potentially evolving into a European debt crisis; it is also uncertain whether the European Central Bank would be willing to fully rescue the periphery.
The Chinese consumer recovery traded in Hong Kong is, in the speaker’s view, “even more of a joke.” China is more likely to direct spending toward the military, 5G, Huawei and compute than hand it directly to households. He cited claims that Huawei chips supposedly consume 4x as much electricity, with the difficulty rising by 2 or 3 orders of magnitude, yet the state may still spend on such projects. What households receive instead is consumer credit; with leverage already too high, consumption cannot be sustained, and the households taking on the debt ultimately pay the bill.

7. Earnings Have Not Cleared; a Long-Term Recovery Awaits a Policy Convergence

The indexes still do not fully reflect a recession. Even with Goldman’s relatively optimistic forecasts for first-quarter 2025 economic performance and full-year growth, full-year EPS expectations still imply about 3% growth. If the economy falls below zero for 2 or 3 consecutive quarters, the speaker asks whether EPS could turn to -5% or even -10%; that scenario is not yet reflected in the indexes.
Structurally, many technology stocks have already fallen sharply, leaving “roughly equal room to go down and up,” while the rest of the S&P has not adjusted enough. Oil is explicitly excluded. Gold, bitcoin and non-US assets may benefit for 1-2 months, but could become short targets once the global recession spreads.
The conditions for a sustained bull market have not yet appeared, and a single rebound cannot be mistaken for a reversal. The strategy is therefore to stay lightly positioned and wait for policy and hard data to become clearer. If he had to trade, the speaker would rather wait for Hong Kong or Europe to rally too far and then look for short opportunities than rush to buy the US market’s decline.
He also warned that it is impossible to know whether this episode will be short and sharp like COVID, with policy support arriving quickly, or resemble 2022, when capital continued flowing out of the United States for an extended period—the latter could last 1-2 years. Over the long term, he remains bullish on the United States: AI is still here, the GOP remains pro-business, and although Trump has no coherent playbook, his direction is not to destroy everything in one blow. If tax cuts, deregulation and the Fed’s employment put converge from year-end through early next year, the market may finally have the conditions for a sustained recovery. Until then, “keep your hands off the trade and do not act rashly.”

Matt Huang - Investing At The Frontier - [Invest Like the Best, EP.420]Are Fundamentals Finally Bullish?