MY HOT TAKES
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Markets hate uncertainty more than they hate bad policy
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Tariffs could wipe out recent market gains if expectations aren’t met
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The president’s track record suggests he won’t back down without a clear market signal
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Risk taking is a learned skill—one that still defines Wall Street success
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This administration’s bluff better land—or April’s lows could be back
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You can quote me: “Tariff negotiations are more like Liars Poker than coin flips—and I’d bet the President knows the game.”
Heads, tails, losers all. I was graduating college in only a few weeks when I landed a meeting with a family friend who was a top trader on Wall Street. It wasn’t just Wall Street, it was 1980’s Wall Street, as in Gordon Gecko Wall Street. My contact was a Treasury Bond Trader, and during those days, bond traders were the power players on the street.
I showed up in my poorly fitted but brand new suit. My bow tie was perfectly straight and my black shoes were freshly shined (you wouldn’t dare wear anything but black shoes back then). My hair (yes I had quite a bit of it back then) was perfectly slicked back. I carried the briefcase I received as a graduation gift, and it contained the following: empty legal pad, fountain pen, Wall Street Journal (unread), and an HP 12c Calculator (still on my desk ‘till this day).
The receptionist greeted me and walked me onto the trading floor and I gasped. It was awe-inspiring. I could barely see the other side of the massive room which was lined with desks and what seemed like thousands of traders and brokers. On their desks were piles of green screens with flashing numbers. Every wall was covered with tickers on which news headlines scrolled faster than any human could even read. The room was filled with a cacophony–”buy, sell, DONE, bid, offer, topped, %@#& YOU, loud laughs!” It was alive, and the hairs on the back of my neck stood up.
We walked down one of those long rows of traders. Each was sharply dressed. Mirror-shined wingtips, beautifully tailored suits, braces (aka suspenders), waistcoats, and probably the largest collection of pink, yellow, and orange Hermès ties outside of France. As we approached my family friend, I noticed something odd. He was wearing poorly fitted bluejeans, dirty sneakers, and what appeared to be the T-shirt he slept in the night before. Back then many of the desks had ashtrays with chomped-on cigars, but his desk had cigarettes, a bunch of empty matchbooks, and several half-drunk cups of cold coffee. He stuck out like a sore thumb. The receptionist rolled a chair over for me and I squeezed between him and his neighbor.
He didn’t even say a word to me for probably 10 minutes, though it seemed like hours. He was screaming at someone on the phone trying to get a trade done. “What, he topped my bid,” he yelled. “Lock it at 15+, 50 million up–screw that guy!” He kept the receiver on his shoulder as he mashed the keys of his massive calculator writing a bunch of gibberish on the back of a trade ticket. “What, he hit my bid,” he asked. “For how much, pull my offer, I’ll take another 100 million at the price!” He then slammed the phone down on his desk and it bounced twice or three times before ending up on his neighbors desk.
He looked over at me and I noticed that he had a big bushy and unkempt beard. Back then, clean-shaven was a rule on Wall Street. I was so confused. He greeted me, “Hi Markie, how is your dad?” I was so confused. First of all it is Mark-O not Mark-E. I didn’t even know where to start. Thankfully, he took the reins as he opened with “I bet you are wondering why I am dressed like this.” Brilliant, that is EXACTLY what I was thinking. I nodded. He said, “I look like this because I make more money for this firm than every other $^&*#%’er on this trading floor!” He continued, “this is Wall Street and we are here to make money, and the ones who do it best, make the rules.” Lesson 1.
That night, my family friend took me out to dinner with a bunch of his buddies. After quite a few drinks, one pulled a massive pile of $100 bills from his pocket and said simply, “let’s go gents.” I had no idea what they were doing, though I soon learned that they were playing Liar’s Poker. “Five 3s, two 8s… CHALLENGE!” After awhile they grew bored with the game and resorted to flipping $100 bills. I was beside myself. First, I never saw so much cash in a person's pocket, but also, I could not believe the amount of risk these guys were willing to undergo. It became clear to me that I needed to learn how to take risk. Lesson 2.
That was my first unofficial day on Wall Street. I realized my mission at that very moment, though I had no interest in wearing jeans and sneakers. I had to learn how to make money and take risk. I was just a neophyte economist turned bond trader but in my untrained mind, it seemed easy-squeezy to me. Of course, it wasn’t.
I soon learned that taking risk and making money were inexorably linked. To make the latter, you had to accept some level of the former. My career-long mission has been all about that relationship, and how to minimize risk while maximizing the potential return. In fact, that is the mission of all of us on Wall Street, though we all approach it differently.
Turn the clock forward decades and here we are. Markets are at all-time highs. There are risks, for sure. Valuations are stretched, geopolitics are a mess, the exact health of the economy is not at all clear, and then there are… wait for it… tariffs. Tariffs have the potential to slow the economy, destroy companies, and completely derail the markets.
At this point, the risk is not even so much the tariffs themselves, as much as that we have no idea where they will end up, and on whom or what they will be exacted upon. Now, it is clear that the President is using aggressive negotiation tactics, but still there is the very real risk that we end up with high tariffs and a gummed up supply chain. That all translates into… well, not good for consumer wallets or corporate income statements. More jobs in the US? Maybe, though whether we need more job openings in the manufacturing sector is up for debate. Security? Definitely! Leveling the playing field with countries that have taken advantage of the US? Absolutely! But still, until all that is sorted, all the brinksmanship to arrive at a conclusion has to be cleared by the markets, which are very much on tenterhooks.
Markets have already put a price on full “Liberation Day” tax. And that price was the April lows. However, markets have since factored in a far lower average tariff of 10%. We are 1 day past a 90-day tariff delay, but the President has extended that through August 1st. That’s 22 days!
This week, 21 letters have been sent out to US trade partners. Sloppy, back-of-the-envelope math shows us a weighted average tariff of 30%. That is far higher than what the market is expecting. Can the administration get that level down to the 10% that is expected by the market in 22 days? The President made it clear just 2 days ago that there will be no additional delays. Will the President relent if those 21 countries call his bluff?
The President is coming off of some really big political wins, which tells me that he is not wanting to sully his perfect record. He is confident and the market is willing to let it ride. Now, as you know from my detailed intro, I have been in the business of risk assessment for the better part of 35 years, and something tells me that the President will not back down unless the market delivers him an April-proportioned message.
On that night all those years ago, those hotshot traders (likely showing off for me) played two games. They played an expensive coin flip, which is purely a game of chance which can yield no consistent winners over time. Liar’s Poker, the other game, is a hybrid. It has an element of chance/risk, but success depends on skill and game theory. The skill element in the game comes down to a player’s ability to estimate probabilities, bluff convincingly, and read their opponent’s psychology.
Thankfully, tariff negotiations are more like Liar’s Poker, and I presume that the President is a skilled negotiator. I am not sure who won that night, but I soon became one of the more skilled players on my trading desk. I don’t play it any more, but I do still wear a bowtie every day. My briefcase has evolved into a backpack; in place of my empty legal pad is a computer or two, my fountain pen is still present, and my Wall Street Journal is read through, every day.
YESTERDAY’S MARKETS
Stocks powered higher yesterday, led by tech, on nervous energy. More and higher tariffs along with more nastygram letters were not enough to quiet the bulls.
NEXT UP
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Initial Jobless Claims (July 5th) came in slightly below estimates at 227k, lower than last week’s 232k claims.
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Continuing Claims (June 28th) continued to crawl higher to 1.965 million from 1.955 million.
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Fed speakers today: Musalem and Daly.