Handcuffed perpetual optimism

The Trump tariff "step-downs" may have taken the edge off of the worst-case trade war scenarios. Between the Treasury Bessent floating interventionist tools (including the "not-so-subtle nod to buybacks) and Waller softening up the Federal Reserve tone, there's a clear effort to engineer a sentiment floor.

What about the underlying fundamentals? Yeah, that one is still deteriorating. We're no longer in the acute crisis phase.

There's no Lehman-style moment, but we are in what feels like a slow-grinding contraction.

• Fiscal isn't going to save the day, especially if tariffs are still structurally inflationary.
• Monetary wants to cut preemptively, but the inflation side of the mandate (still sticky) makes that a tough sell.

So what we have right now

• Not in a recession officially
• Not in recovery either
• Just stuck in a sluggish margin-compression, cost-passing stalemate

Risk assets may not collapse here, but they are unlikely to break substantially higher unless either growth or policy surprises to the upside.

In the meantime, we're in a rotation-heavy cross-asset chop-fest. More about factor dispersion and relative trades than outright direction.

What options do we have?

1: Pass through costs

Companies try to protect their margins by passing higher input costs (from tariffs on imported goods or intermediate goods) onto consumers. They keep operating margins intact 'on paper', but in reality

• Consumers pull back on spending as prices rise
• Volume falls
• Revenue growth slows
• Earnings per Share still get hit, just from the top line instead of cost base

This path feels defensive at first, but in a weakening demand environment, it's risky. We're already seeing this in consumer discretionary names, can't fully pass on costs without seeing traffic drop off a cliff.

2: Eat the costs

The other option is for companies to absorb the hit to avoid alienating price-sensitive customers

• Gross margins compress
• Operating leverage turns negative
• Earnings per share take a hit anyway (through cost pressure instead of sales shortfall)
• Eventually, this forces companies to tighten belts (layoffs, Capital expenditures (CapEx) cuts, Operation Expenditure (OpEx) reduction

Rising prices paid while prices received stagnate - textbook margin squeeze

• Small caps are especially vulnerable here. They don't have the pricing power or scale to manage either option well. That's why we've seen rotation out of small into quality/low-beta
• Supply chain dependent sectors such as industrial machinery, retail, tech hardware are getting boxed in the most
• Labor markets may reflect this in the coming months, not through a collapse in Non-farm payroll prints but a slow uptick in continuing claims and more caution on hiring plans

Tariffs were supposed to be inflationary, but the long-term effect might end up being stagflationary, raising costs while draining growth and profitability.

The New Orders Index dropped to its lowest level since early 2020, following the COVID crash. That's a red flag. New orders are the most forward-looking part of the manufacturing complex, and this demand is evaporating fast.

Prices Paid vs. Prices Received: Classic margin squeeze setup

• Prices paid are still climbing, firms are paying more for inputs, materials, and shipping
• Prices Received are flat to lower, meaning businesses can't fully pass those costs along

→ That spread = margin compression in real-time

Employment, a big month-over-month drop, may already happening. Not layoffs en masse yet, but definitely a pullback in hiring hours worked.

Shipments also went negative month over month. Companies aren't just seeing fewer orders; they're also sending out fewer goods, confirming this slowdown isn't just in the pipeline; it's already happening.

ISM manufacturing PMI a national manufacturing print in the low 40s. That's a deep contractionary period.

We're not in "crisis mode" like we were in 2020, but this data consists with

• The corporate sector is under cost pressure
• Weakening real economic demand

The Federal Reserve is now facing a policy bind. Do they respond to labor softening or watch for inflation to remain sticky due to tariffs?

Where to hide?

Long Curve steepeners

• With the Federal Reserve not willing to cut aggressively (tariff-driven inflation risk), the front-end stays anchored
• Weak foreign demand, heavy treasury issuance, and deteriorating fiscal outlook
• A perfect setup for steepeners (2s/10s, 5s/30s) especially if growth fears soften and inflation risk lingers

Long Gold/EUR/JPY (Basically an FX bet against the dollar without shorting)

• Rotating away from "US exceptionalism trade". Central banks abroad are done tightening and now the Fed is sounding dovish too
• USD lots its relative yield advantage and reserve diversfication is picking up steam
• Gold benefits from a mix of a weaker dollar, sticky inflation and macro hedging

My own portfolio had 20-25%, and on my Bybit account, I used to have PAXG (digital gold;) however, one can now buy XAUT (Tether gold) on Bybit

Low Beta

• Classic late-cycle rotation into "quality" and away from small caps
• Small caps are the most exposed to higher borrowing costs, labor market softness and supply chain noise
• Low beta (think utilities, staples, mega-cap tech) has outperformed as investors look for margin stability and predictable earnings

Long Vega in USD Rates & Lower Right Swaptions

Long-dated rate vol, especially in the "lower right" of the swaption matrix, is a hedge against tail outcomes (both stagflation and abrupt easing) . With macro uncertainty and elevated curve convexity high, this trade has paid.

Okay but what did I just read? I couldn't follow the last part

A swaptation is an option on an interest rate swap to enter into a swap at a certain rate at a future date. Swaptions to hedge or speculate on interest rate volatility (not just direction)

The swaptation matrix is basically a grid

• Vertical axis = option maturity (how long until the option expires)
• Horizontal axis = underlying swap tenor (length of the swap if exercised)

The lower right

• Long-dated options (e.g., 5y into 10y swaps, or 10y into 30y)
• On long-dated swaps (10y+, like the 10y or 30y rate)

If inflation rises, the long end of the curve might sell off aggressively (yields rise) and volatility jumps. The option gains value.

If the Fed panics and cuts hard (abrupt easing) --> long end rates crash --> again, long rate vol spikes = option gains value

Vega exposure, sensitivity to volatility itself. So you're not just betting on the direction of rates, but also betting that rates will move a lot in either direction.

Can't follow? Read my option series articles

So we aren't Institutions, but we do have a broker. If you're a reader of mine or are in my Discord, you have an account at IBKR broker.

Buy long-dated Treasury options

1: Buy long-dated Treasury options

• Think: LEAPS (long-term equity options) on ETFs like TLT (20y+ Treasuries) or EDV/ZROZ (zero coupon long bonds).
• Calls or straddles give you exposure to long-end rate volatility.
• This is a direct way to express rate vol exposure, though not as precise as swaptions.

2: Long TLT straddles or strangles

• You’re betting that TLT (or rates) will move a lot—up or down.
• These mimic long Vega behavior, as higher implied volatility equals higher option value.

3: Use rate futures + options

Only do this if you are advanced. If you're advanced enough, you know how to do it.

4: Volatility ETFs

• ETFs like IVOL (ConvexityShares) try to replicate long interest rate volatility strategies

It's a basket with optionality and curve steepener exposure built in. These are still imperfect but worth looking into if you want exposure for hedging.

For more info or step-by-step building instructions with your broker, join Discord (or are willing just to learn more about finance, hedging, and wealth preservation)

Again, read my Medium articles first, so you know all the basics of options

Handcuffed

Yes, equities have rallied since I tweeted to buy, wrote on Discord, (April 4th) and published this article on April 6th

So yes, equities rallied, but risk-adjusted participation has been weak. It's not that people were bullish, it's even the bulls are underexposed

The market had a series of big moves and liquidation events, and most systematic strategies have vol-based exposure caps.

So even if you're constructive, you can't size up the position meaningfully.

Handcuffed optimism

People want to be long, but their risk tolerance is too low for that. For institutions, their models say "no"

1-month and 3-month realized vol sitting near the 100th percentile. Vol-targeting frameworks (risk parity, CTAs and vol control funds) high-realized vol = auto-reduction in gross exposure

Volatility is an exposure toggle

--> When vol is low, funds can crank up the notional

--> When vol high high, they have to cut, even if the market is going up

Even with "good news" like tariff rollback or soft-landing Goldilocks print, the rally is mechanically choked by

High vol, which is forcing low-risk budgets, leverage is low across discretionary and systematic books. Marginal flows are a defensive factor, not risk-on chases.

That's why the tape feels thin on the upside, you're not seeing net-on behavior (adding fresh exposure). Instead, you're seeing rotation, factor dispersion and short-covering. Not real risk appetite returning.

Right-tail hedging

Many missed the move off the lows, or were structurally capped in size. Think about risk managed books, systematic models etc.

Now for a desperate attempt in case there's a right-tail move to upside, call-spreads and the likes of Nvidia, Apple, Amazon, Microsoft. NOT because of being bullish but JUST IN CASE if the tape rips higher

Right tail hedging, defensive in origin but bullish in impact if it catches

Any meaningful breakthrough on the Trump tariff front (rollbacks, delays, or "framework agreements) would disproportionally benefit

• China-linked U.S. multinationals (Apple, Tesla, semiconductors)
• Emerging market equities
• China ADRs (KWEB, FXI proxies)

Option market: Out-of-the-money call buying in KWEB

Some EM upside skew

It's not being macro bull on China, it's a tactical hedge that recognizes asymmetry

I don't necessarily want to be long, but not having exposure if this thing breaks right would suck

Mag8 upside flow and China call demand are signs that people don’t believe the rally, but they also don’t want to miss it

If tariffs do get scaled back or a deal emerges, expect an outsized reaction in under-owned corners like EM, China tech, or even U.S. industrials with global exposure.

Since Trump is imposing tariffs, here is the opposite - 50% discount forever on yearly subscription https://www.romanornr.io/reciprocal-tariffs

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That's where the real money is made with actual long-term stress-free trades.