The Biggest Bear Case [Dangerous for Stocks]

The good old bears over at TS Lumbard

are back with another bear piece. Uh, so

let's see what a sing a simple song bear

piece today is. Looks like it has to do

with bonds. They say the economy is

slowing, inflation is going to rise.

Well, I dispute that. And financial

conditions are going to tighten. Okay.

Well, this could be a problem. But

remind you for a moment. Financial

conditions are not just uh a measure of

stock prices. So high stock prices would

mean lower financial conditions. lower

stock prices would mean tighter

financial conditions. Uh but they also

this also has to do with lending. So if

banks start restraining lending uh then

we might end up seeing an economic

slowdown because of the lack of access

that companies have to

credit. Okay. So before liberation with

the Treasury to sell around 1 trillion

in new debt. This simple song is hot fun

in the summertime. By then the rest of

the world could look even worse. global

boost from US exports in Q1 are done.

Okay, this is this is what we've seen of

a lot of the uh earnings in Q1. This big

boost in exports and imports in Q1. US

net exports were big enough to be the

18th largest economy. That's

interesting. That's the net imports

rather. Bank credit more critically has

begun to slow. Okay, this is where

things get poopy and market pricing

discourages extensions moving forward

except to the government bank extensions

of debt basically. So repayment terms

banks will lend to

Treasury. Uh

okay, that's fine. While waiting for

Trump's Fed to get underway, Powell's

closing chorus remains the same data or

the message message. So while we wait to

receive one and until then keep the

short end inverted to hold in reserves

talking about probably the 310s

uh 3 month 10 anyway. So it is a muddle

through or stuck in the mud or something

else in the economy. Is it okay got it?

This this is a little weird wording

we've got here. Muddling through is an

illusion. The underlying process have

been let loose and are ongoing with the

intention of changing the mean. with the

averages uh to keep one from okay very

fancy like some highlevel college level

writing crap here let's try to get to

some actual bottom lines growth will be

slower than consensus in

Q3 inflation higher and still higher in

the coming years I'm not that bearish on

on inflation how much higher depends on

how much the Trump Fed allows global

capital flows to dictate the domestic

economic outcome. My bet is not much.

Travel has always been one of the best

early indicators of a turn in the

economy because it is an

expensive most easily deferred because

it is expensive and most easily

deferred. So in other words, they're

telling you that travel often gets cut

early and it could be a leading

indicator of economic pain. Here is

airplane traffic which is negative

yearover-year and historically is always

a bad sign for growth. It actually just

went negative, too, which is quite

interesting. Uh you see that right here.

We just went negative in uh May of 2025.

We'll keep an eye for that. Uh mind you,

the volatility on the 7-day moving

average is pretty high, but you want to

look at that 90-day moving average, and

that 90-day moving average has really

been collapsing since 2024. That's quite

interesting. Growth in bank lending has

begun to slow in line with the return of

a negative curve from three month to

threeyear yields. Fine. So now you're

just picking yield curves. Fine. Growth

in loans and leases also dovetales with

M2 money uh growth which is now also

about to slow. See, now this is

interesting because what you really have

so far is you have the TS Lombard

saying, uh, look, Q1 was great. Uh, we

had a bigly boost and it was sexy. Okay,

now they're saying, uh, bank lending

growth slowing, travel slowing, M2 about

to slow, right? So, they're really

setting up for a creme de la creme

explosion here, it sounds like. Let's

see what they say. Inverted curve at the

short end begins to show slow loan

growth. Fine. In the coming quarter, the

Treasury is going to raise 1 trillion of

new net cash, 560 billion to finance the

deficit, and the rest goes back into the

Treasury general account. The cost is

going to be higher, notably at the long

end. Real yields using tips as a measure

are higher and so is the term premium

and both began to rise before liberation

day. With higher term premium, the break

even inflation rate is lower for the

purpose of this chart. Okay, that's

fine. That's fine. That's fine.

Everything Trump is doing, including the

future course of Treasury financing

uh needs and who will be running the

Fed, raises the long-term risk. So Trump

is raising basically long-term cost,

long-term term premium. Fine. Odds are

the high water mark for term premium the

cycle is yet to come. Okay. So they also

argue these bears these dirty bears they

also argue uh at the same time term

premium so basically we'll just call it

total uh you know uh term premium total

yield will rise on on bonds which is bad

news for bonds. Another sign that

financial conditions have tightened is

that the two fives 10 butterfly is more

negative. Uh going back to the banks

looking at I think these are highquality

loan asset levels and loan loss

allowances as a percent of loans

outstanding. The higher IQLA is in line

with higher alliance allowances. I'm not

sure about that. I have to look at

these. This is a proxy total assets.

This I'm less sure about. All right.

Small banks holding higher. Okay. We got

to look this up.

HQLA. HQLA banking. It

is high quality liquid assets. Oh, I was

so close. Okay, got it. So, high quality

liquid assets as a percentage of loan

losses. Oh, that's interesting. Large US

banks holding higher high quality liquid

assets in line with greater loan loss

reserve. So, in other words, we want

more cash to

offset, you know, potentially higher uh

losses. It's a little nominal there.

Here we have more losses than we have

liquid assets. Not uncommon for small

banks. inverted curve at the small end

is a strong incentive for banks to hold

liquid assets rather than lend in some

growth is slowing heading into Q3.

Treasuries are ramping up and the real

costs are higher. Okay. All of which

adds to the potential for a difficult Q3

as the economy will begin to see how

much firms can pass tariffs onto retail.

I think that'll be nearly zero. The more

that it can, the more inflation goes up.

the more that it cannot payrolls

decline. See, and I think that's

actually a very reasonable uh

conclusion. That line right there, the

more of the tariff prices we pass on,

the more inflation we get, which delays

rate cuts. The more we can't pass on,

the more earnings go down, the worse it

looks for corporate earnings, and the

more payrolls go down. given the

distortion to spending to avoid tariffs,

employment will be a better, more

contemporaneous gauge of the economy

than topline leading spending numbers.

So, I agree with this. You know, I'm I'm

of the mindset that uh employment, well,

I should say unemployment

uh

unemployment uh may skyrocket by year

end because of the lack of pricing power

corporates have. My take given the

distortion to spending to avoid tariffs

employment will be a better more

contemporary. Okay. As far as the Fed,

they will wait for the numbers to speak.

Of course, this is why we call him too

late Powell. Thanks Trump for the

nickname. Okay. Financial conditions are

tighter than they were when the year

began. Yes, that's true. And having

lower financing costs by 100 basis

points. That's ironic.

Actually, this is a big irony which is

worth paying attention to. We already

cut rates by 100 basis points at the end

of last year and now things are actually

worse. So data is their guidance. Data

is their guiding guidance. The timing of

the first cut in 2025 will depend on

when or if the unemployment rate jumps

over 4 and a.5%. Yep. Totally agree. And

it's a shock that happens fast. So I I

sort of like I don't agree with all that

TS Lombard says, but I think this is a

very good outline of the current bare

case. You know, that's what we could

call it, the current bare case. The

current bare case is basically, look, Q1

was great because we had the pull for of

tariffs. Q2 looks good because we're

importing less. Q3 is when the poopy

starts hitting the fan, assuming we

don't yet have any deals. Given that

we've only had one deal with a trade

surplus nation, things aren't looking

great for actually getting deals. Now,

there's a lot of opium. I'm hopeful too

that we're going to get great news on

these Chinese trade talks, but so far

things are dead quiet on where we stand

with these trade talks other than, you

know, Slutnik, I mean, Nut, sorry,

Lutnik, uh, saying that, you know, talks

are going well, but it's going to be a

long day. Okay. So again, maybe Nvidia

will get a boost because we'll get a

resumption of the, you know, what is it?

The H20 chips or whatever for China, the

Chinese designated chips, basically the

software dialed. Think about those chips

as kind of like, and I'm oversimplifying

here, but it's kind of like Tesla

selling you the Tesla car, but then they

disable the seat heaters unless you pay

for the software upgrade. So it's kind

of like the technolog is there. You just

need to unlock the software. I'm

oversimplifying because I'm sure there

are a few fewer transistors on the

actual boards uh in Nvidia's case. But

but the point is like yeah there could

be some upside here for Nvidia on this

Chinese trade talk uh and and certain uh

companies including Tesla mind you uh

because of the exports of rare earths if

we can unlock some of that again. But

until

then or or I mean even if we get that

sort of sort of like despite the

assumption that we're going to get those

things, we don't have a broader trade

deal on toys or furniture, clothing,

these are all things that are impactful

to companies that are already suffering.

I mean look at for example, you know, a

Nike stock. Uh we jump into Nike. We are

off bottoms for

Nike, but you know, they have margin

problems as well as growth problems, and

tariffs hurt them even more. So, it's

important to see how things evolve here.

China, by the way, or Tesla, by the way,

just broke its 318 line. Look at this.

Uh, this is the line we've been talking

about in the alpha report. Very

important to watch. We just bounced on

318. That's actually quite bullish.

Let's see if it can hold that. But, B

like look at that. broke through 318,

came back literally to test it. You know

what that is right here? That right

there, that's an advertisement for the

alpha report. It's like, see, if you

were part of the alpha membership, you

would have known not to speculate on

coreweave today because the momentum's

over. Instead, you would have been

watching this line. It's exactly what we

talked about in the alpha report this

morning. Get it at

me.com. Circle's over as well. So, here,

no more research. We've got okay demoral

research. Let's get weird and unpack my

rationale rationale for the path of US

equities up then down. Okay, let's see

what their thesis is on why we're going

up then down. The Trump caller has both

simultaneously contributed to recent

compression in realized volatility.

Basically, things are slowly melting up

because volatility is going down. Yet

also now in real time is building the

risk for wingyear outcomes in equities.

Okay, this would be like left and right

tails basically. So okay fine as the

assumptions of the caller therein create

lazy conditioning with regards to Trump

selling upside call, Trump activating

downside put which can then get stopped

through with a modification in

anticipated behavior. Fine. Taco on the

way

out or on the way up. Trump always

chickens out on the way up. That is

yesterday's Trump gives US negotiators

room to lift export controls. Right?

Okay. So in other words, markets right

now like in English in English markets

going up because taco since April 9. Uh

so basically Trump equals baddie April 2

to 9. Trump equals taco since April

9. Okay. All right. Okay. As I've been

saying for a while now, however, there's

a there's already been a greater risk of

a right tail. Equities move at this

juncture because nobody owned it. This

is basically like institutions buying

in. So like an explosion to the upside.

So this is explosion to upside as people

are underallocated

uh with so much embedded macrobearer

economic skepticism hence weak exposure

fine grossly uncaptured V-shaped

recovery thanks to taco. So now the

right tail holds fine instead of seeing

breath increasing with the S&P within 2%

of all-time highs. Fine. Now, even the

unloved parts of the market are

rallying, too. Okay? Even trash is now

going up because people missed the

V-shaped V-shaped uh rapid recovery

thanks to Taco. I'm just translating

this into English because this person

writes like he's a computer, not talking

to another human, but talking to another

computer. Year-to- date equity

performance, but the past week has shown

significant unwinding degrossing of

themes.

Okay, got some charts and something else

to ponder. Notionally speaking, by an

order of magnitude, the single most

consequential flow from Trump's trade

policy shocks is the perverse dynamic

where corporate uncertainty has instead

led to equities being bullish via

repurchase authorizations. Okay. Yes,

this this is also true. So, uh, tariffs

should be bad for corporates, but

corporates buy back everything, baby.

So, this is basically a way of

saying corporations are propping up

their own stocks through massive buyback

authorizations, which to some extent is

true. And

corporates are typically

uh bad at timing when to buy back. Like

they they tend to buy back at highs and

higher levels rather than like in

recessionary times. Not

uncommon.

Okay, that's a very human problem. So

here we are now. We've rallied up into

that location where dealers are actually

short index calls from right tail

hedgers and call skew I've been noting

blah blah blah upside this short upside

gamma for dealers could act as an

accelerant flow which pushes the market

higher more more catch-up flow okay fine

people trying

to chase market will lead it higher

thanks

to market dynamics

oversimplifying

gamma. Plenty of dealer short call which

could act as an accelerant. Fine, fine,

fine. All

right. Uh, AUM

9995. Okay, fine. Let's see here. What

do we have here? And for what it's

worth, 3 mil involved. That's fine. Roll

out. Okay, that's fine. Broad theme of

recent market tours that the vast

majority of entities remain

psychologically embedded in the macro

bear camp. Hence the theme of

underpositioning equals under capturing

the equity rally. Instead, most ask when

crash, right? Okay. Basically,

um many got bearish in April and are

still off sides equals stons can keep

going. sticks. Fine. But like I always

like to remind in order to have the

conditions for crash you first need

excess positioning speculative froth

uh a steep skew and typically

accelerated flows. Fine. So in other

words up first then down as we do then

ultimately see by midsummer that labor

is indeed cooling and layoffs pick up.

There it is. Okay. So this is the same

bare thesis that has been prevalent

since July of last year. Same bare

concern as July of last

year. Layoffs cometh. This is where the

persistent US economic miracle led by

consumers ability to digest headwind

after headwind finally cracks and they

can no longer absorb the pricing

pressures which corporations have

previously been successful in passing

through by continuing to grow EPS. In

other words, the consumer is effed. So

layoffs, then consumer pain. That's when

you have recession. Okay. At that point,

labor finally succumbs and the jig is

up. We'll get our volatility event just

like last year's August 2nd to 5th when

we thought for the first time that labor

did indeed break, right? The fake labor

break of last year. Uh Japanese carry

trade.

Okay, so the completely unrelated uh in

macro sensing S&P long fine flo around

my desk find let's see autopilot pow

okay I hypothetically then see today as

a ragingly finger in the air zero date

and 50 days is something into early

August where the projected downturn

would begin that event risk between now

and then all of the VIX upside

seasonality and awful liquid liquidity

of peak summer and time for labor data

to cool into something more ominous

between now and then. Okay,

basically the clock is ticking 50 days

to hell where

uh seasonality and illquidity crush the

market and labor market implodes.

Okay. And that's

that. All right. That's very

interesting. So, this actually kind of

like adds to the previous bear piece.

And look at that. Whoever hit the sell

button just created an intraday Vshape

as Tesla now has regained 3182. Barely

though, barely retesting 31882 right

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