Warming Up to a Rally

In our Monday note “Feeling the Heat,” we mentioned that the macro backdrop to recent tariff-fueled volatility is for a market rally. We thought we would provide some longer form detail here.

April 2nd, “Liberation Day,” brought about a 10% drop in the stock market and subsequent days of further declines, liberating us from the hard-earned gains we’ve fought for over recent months and years. We like the way economic historian Sir Niall Ferguson sums up the prevailing narratives around these events:

You probably understand the recent chaos one of two ways: Either “a committed protectionist is trying to Make America Great Again by killing ‘globalism,’ ending ‘forever wars,’ and bringing manufacturing jobs back to the United States;” or “an unhinged demagogue is crashing both the world economy and the liberal international order, mainly to the benefit of authoritarian regimes.” Trumps Tariffs and the End of American Empire

Either way, as investment advisors to our families and friends, we’re far from pleased. While an initial knee-jerk sell-off was anticipated, the scale and ferocity of the Trump administration’s global tariff rollout caught Wall Street, and us, off-guard.

However, we believe the result of this chaos could have positive results, including a market rally. For months, we’ve highlighted in our letters the following Macro Factors that would lead the next leg of the bull market:

• Lower bond yields

• A weaker dollar

• Fed rate cuts

• Increased Central Bank money-printing

Entering Tuesday’s trading session, here’s where we stand:

• 10-year Treasury yields have dropped from 4.8% to 4%, lowering borrowing costs and potentially the refinancing expense of the $9 trillion US debt coming due.

• The USD basket has fallen from a high of $114 to $98 or below, boosting global trade and, in particular, raising the chance of China stimulating their moribund economy.

• The Fed hasn’t acted yet, but pressure is mounting to lower short-term rates, and some market commentators suggest 3-4 cuts are coming later this year.

• Global M2 money supply has surged in recent months, and liquidity drives trade and asset prices.

• Oil prices and other commodity prices have plummeted, lowering inflationary pressures. 

One important wildcard: tariffs could reignite inflation/inflation expectations by hiking import prices, offsetting deflationary gains from commodities.

The downside scenario? The odds are now higher of a mild recession, the temporary pain the Administration says may be necessary on our way to greater gains. Our models now peg the odds of a U.S. recession in 2025 at 35-40%, up from 20% pre-Liberation Day. We see this recession fear play out in the commodities market where most assets—except natural gas—have shed 10-15% last week.

From a macro perspective, lower rates, a weaker US dollar, and Fed printing have fueled risk assets for two decades. Today’s catalysts are broader, but the playbook—lower rates and liquidity—remains a proven winner. Despite the tariff-driven volatility, we still see the ingredients for higher asset prices ahead.

Raoul Pal of Real Vision offers a compelling take, which we’ve enriched with his broader macro insights:

People don’t yet grasp that [Scott Bessent] a macro hedge fund manager, not a former central banker, is running the Treasury. He gets liquidity’s ripple effects—how to loosen financial conditions, boost liquidity, and drive markets and the economy. His playbook? Lower the dollar, rates, and oil to juice the business cycle. [The] GMI Financial Conditions Index is surging, as is Global M2 and total liquidity. The impact should hit in a week or two, sparking a sharp recovery in asset prices and economic data that could persist.

Tariffs are a sideshow—liquidity is the main event. The dollar’s drop is rocket fuel for Bitcoin and crypto, which thrive when fiat weakens. Lower yields will ignite tech and growth stocks, too. Sentiment’s in the gutter now, and that’s the signal: the crowd’s fear is your edge. This is the Everything Code at work—every asset class lifts when liquidity flows.

We share this optimism but remain cautious. We warned of 2025 volatility, though we didn’t foresee this magnitude or expect Trump to risk equity markets so boldly. In 2020, we had two lifelines: Fed rate cuts and Congress’s money printing. Today, those levers are constrained. The Fed won’t cut rates without clearer inflation signals, and Congress can’t undertake new “Inflation Reduction” Acts after the $7 trillion spree that fueled this mess. Tariffs aren’t the sole issue—our $36 trillion debt is the root. Still, global liquidity, falling rates, and a softer dollar should eventually lift the system.

Lest we sound like we’re only macro traders, let us reaffirm our commitment to creating and managing long-term portfolios of growth and diversifying assets balanced between public/liquid and private/less liquid investments. Our asset allocation includes private equity, venture capital, private credit and private real estate funds and opportunities, to which we’re adding natural resources, all for enhanced returns and cash flows. As recent events have shown, neither we nor most (or all) market participants can “call the market,” so our best approach is to balance our investments across global opportunities with great managers. Humility, at the end of the day, wins.

We’ll close with one more note of caution. Markets look poised to rally Tuesday as predicted. However, hot on the heels comes an additional China tariff scheduled to come into effect on Wednesday. Absent a grand bargain, this could bring more volatility from uncertainty and potential retaliatory action.

Hoping for better market days, we remain your friendly neighborhood investment guys,

Jeff & Biff

April 7, 2025

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CrossGrain Family Investments, LLC

2213 Loreines Landing Court

Henrico, VA 23233 

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