How will we know it's the bottom?

First up. Be careful before buying. For a few reasons.

• Selling breeds selling. This is not something we bounce from quickly. The consequences of this sort of market event will only reveal themselves over time. You bleed, others break.
• When markets fall, passive funds start working against us. JPMorgan estimates volatility targeting strategies and leveraged ETFs had $US60 billion of stocks they needed to sell on Friday. We were blaming passive funds for blindly buying the market. Watch them now blindly sell it.
• Margin calls are now being triggered. Hedge funds (by definition, leveraged to juice up returns), leveraged fund managers (particularly long-short funds), retail traders using margin accounts (small cheese), family offices (they use leverage to chase yield), proprietary trading firms (aggressive, fast, automated, using highly leveraged strategies), high-net-worth individuals (they borrow against their portfolios - which they can't sell because they have capital gains tax), structured products (whose customers are locked in to leverage), and shadow banking players (deep dark invisible consequences), are all getting margin calls. Most of us are long-only investors losing money on paper. It's painful, but it's not brutal. In the recesses of leverage, some people are getting shredded, they are being asked to pay money, and the only way they can pay is to sell more. 
• There will be unseen consequences of a market collapse. Remember the regional banks in the US that got caught out by higher interest raises in 2023? It was the unseen consequence of higher rates. Things are going on in the boardrooms of many financial institutions today. We do not know how bad it is. People are being caught out. We don't know who. All will be revealed, just not yet. Think leveraged funds going broke - that's the front line. 
• Contagion - The main trouble with sharp losses if they cause problems for financial or other institutions is contagion. Everyone is exposed to everyone else. It's complex. It's unpredictable. It's scary.
• New risks are forming - Counterparty risks. Solvency risks. Falling credit ratings (higher costs of debt). Trading desk losses. Forced selling.
• Lending freezes up if companies go bust. No one wants to lend to anyone who might present a counterparty risk. That was the problem in the GFC. Lender suspicion. It's not obvious yet, but when the first financial institution runs into trouble, it starts.
• The huge investment portfolios of banks and insurers are rapidly devaluing, damaging their balance sheets. Damaging dividends.
  
• Corporate deals die - IPOs, takeovers, and the ability to raise capital (to rescue yourself) through rights issues and corporate bond issues will dry up. 

Investment bank activity just peaked. Corporate ambition just died.

• It will take time - We do not know the pain some institutions are going through until it hits a tipping point. Remember the GFC and the revaluation of MBS assets and CDOs. No one knew where the tentacles of exposure led. It took almost a year for Lehman Bros to go bust.

The fallout from a market collapse isn't immediate, it develops, unseen, and, like a landmine, only becomes apparent when you tread on it. Forget tariffs. If this sharp, unexpected, now significant sell-off isn't miraculously rescued soon, the danger becomes the market itself. A market collapse can trigger a market collapse or worse, a prolonged bear market. Buy now and you are buying into problems you cannot yet see, that experience tells us, are there. Somewhere.

Bottom line - Don't rush to buy. This is not some trivial trading dip that can be recovered without cost. Trump has said everyone has to take their medicine. It doesn't look like he's about to rescue anything. 

As Alan Kohler said on his Business News slot on Friday:

"We are in the hands of one man, and he doesn't know what he's doing". 

HOW TO CATCH THE BOTTOM

Our Strategy Portfolio is in 100% cash. We started cashing up at the end of February and were all out by March 3. The only game now is to time the bottom. How do you do that?

The anatomy of every market pivot point is different. From the 87 Crash to the Tech Wreck, the GFC, and the Pandemic, the ingredients were always different. So the indicators that accompany the bottom differ as well. 

The anatomy of the Trump Tariff Tumble is different again.

• Recession fear is the key driver of markets.
• The bottom will come when recession fears peak. That depends on the very volatile development of the tariff landscape, which is going to evolve daily. 
• The permanence of tariffs is the key driver of recession fears. Any signs that they are not permanent and the correction will pause. Any signs that tariffs are being walked back and that recession fears have peaked and the correction will bottom.
  
• The evidence of recession fear is currently visible in many charts, and the recovery will be visible when those charts reverse. They include bond yields (dropping hard), the US dollar (a reflection of the US economy), commodity prices (metals and oil most obviously - slower growth = lower prices), commodity currencies (A$ and C$ - we're under 60c) and the equity markets (enough said). 
• The bottom will come when all these indicators change direction together, most likely quickly. Watch for a sharp two-day rally in the US markets, the US dollar, a rise in bond yields, a basing of commodity prices and a bottom in the oil price, all accompanied by a meaningful change in the macro backdrop. Without a meaningful change in the macro backdrop, it's not worth chasing. Rallies without guts don't mean much. Oversold rallies don't last.
• You will never know it's the bottom, you will have to take a leap. By the time the bottoming is obvious it'll be over. The sharpest gains are always at the beginning. Any decision to buy will have to be based on a balance of probability. Don't expect certainty. How early you buy will depend on your risk profile. Your safeguard is knowing that you can always sell again if you get it wrong.
  

The billion (trillion?) dollar question is not the percentage of tariffs but the permanence. The market appears to be discounting the worst (permanent), so anything else will be a relief. As Macquarie says - "The key upside risk is a Trump pivot" (ie the roll back of tariffs, tax cuts, and deregulation). This correction could be reversed with one utterance from Trump.

So we assume nothing. We have to be flexible with Trump. There will be many twists and turns to come. The key is to wait for the bottom, not predict it.

AN ASIDE

• Trump has played golf multiple times since announcing tariffs. On Thursday, April 3, he attended a LIV Golf dinner at his Trump National Doral Golf Club in Miami, Florida. The following day, Friday, April 4, he played golf at the Trump International Golf Club in West Palm Beach. Over the weekend, on April 5 and 6, he participated in the Senior Club Championship at Trump National Golf Club in Jupiter, advancing to the Championship Round on Sunday.
• Protests against tariffs (and Elon, job cuts and immigration) have occurred in all 50 US states and other countries hurt by tariffs.
• Canada has initiated a "Buy Canadian" campaign. Coffee shops now sell Canadianos instead of Americanos. The US risks an ugly global backlash against American products. 
• They are also demonstrating at Mar-a-Largo in West Palm Beach, where Trump plays golf. One sign says, “Markets Tank - Trump Golfs".
• Trump is posting videos on Truth Social as we write, showing him playing golf. It is the stuff of revolutions. Click here.

A quote comes to mind: "Nero fiddled as Rome burned"