Firing tweets (Weekly summary 01/03/2025)

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• The victory of Friedrich Merz in the German elections marks a turning point in European politics at a time when the continent is facing significant economic, geopolitical, and strategic challenges. Merz has warned the United States that isolating itself from its allies would be a grave mistake, but he has also urged Europe to strengthen its defense capabilities, stating that it is “five minutes before midnight for Europe.” His statements reflect the growing concern within the EU about Trump’s moves, particularly his apparent willingness to negotiate with Russia over Ukraine without involving the Europeans.

  Merz and his conservative bloc have won the election, but they now face complex negotiations to form a government. The AfD has achieved its best historical result with 20.8% of the votes, making it the second-largest political force in the country, while Scholz’s Social Democrats have fallen to third place. Despite pressure from some sectors, the main parties continue to rule out any alliance with the AfD, forcing Merz to seek agreements with the SPD and other parties—an arduous task given their previous clashes, especially on immigration issues. In fact, looking at the German electoral map brings back memories of another era, as if the wall had never fallen…

  

   

  The new coalition will have to make key decisions in a fragile economic context, with German industry calling for measures to regain competitiveness and an electorate divided on issues such as military spending and fiscal constraints. Merz has made it clear that he intends to reform the debt brake to boost investment, but his room for maneuver is limited since the AfD and the radical left hold enough seats to block any constitutional changes needed to modify fiscal rules. Meanwhile, relations with the U.S. will be a point of friction. Merz has criticized the Trump administration’s attempts to divide the EU with preferential tariff offers for certain countries and has labeled some statements from Washington during the campaign as outrageous.

  Time is working against the election winner. If he fails to form a government quickly and deliver concrete results, the AfD—now the main opposition force in the Bundestag—could consolidate itself as a real alternative for 2029.

• U.S. consumer confidence saw its sharpest decline in three and a half years in February, reflecting growing concerns over the economic impact of the Trump administration’s policies. Repeated mentions of tariffs and trade barriers, along with escalating geopolitical tensions with multiple blocs, emerged as key factors behind the drop.

  

   

  At the same time, 12-month inflation expectations surged to 6%, the highest level since May 2023 (despite positive PCE data), while perceptions of the labor market also worsened. Discontent has been further fueled by massive layoffs of federal employees, a measure pushed by the Department of Government Efficiency (DOGE), led by Elon Musk. This public spending cut threatens to reduce liquidity in the economy and negatively impact hiring in the private sector.

  Short-term economic prospects have weakened. While an immediate recession is not expected, analysts anticipate a prolonged period of moderate growth with elevated inflation. The Federal Reserve, which paused its rate cuts in January, is now under pressure to intervene again, with markets pricing in a 70% probability of a 25-basis-point cut in June and another in September. As a final blow, on Friday, the Atlanta Fed’s Q1 GDP growth estimate plummeted from 2.3% to -1.5%!

  

   

  The stock market is extremely important for the United States, as a large portion of citizens’ wealth is invested in it—especially with the baby boomer generation on the verge of retirement and needing access to liquidity. Given this, Trump’s room for maneuver and grace period are coming to an end. I expect to see a moderation in rhetoric to stabilize sentiment in the coming months, as the political risk of doing otherwise is simply too high. Moreover, a market downturn directly impacts consumer confidence due to the strong link between wealth and stock prices.

• The United States and Ukraine have agreed on the terms of a draft minerals agreement, a key component of Kyiv’s strategy to maintain Washington’s support while Trump pushes for a swift end to the conflict with Russia. However, the deal does not include security guarantees or explicit commitments on future arms deliveries, a point that remains under discussion. Still, the rhetoric has begun to shift, offering some hope of regaining lost ground in future negotiations.

  The agreement would grant the U.S. access to Ukraine’s vast mineral wealth through the creation of an Investment Fund for Reconstruction, to which Kyiv would contribute 50% of net revenues from the exploitation of minerals, hydrocarbons, and other resources until reaching $500 billion. In return, the U.S. would commit to supporting Ukraine’s economic development, though without clear military commitments. For now, industry insiders remain highly skeptical about the development potential of these mineral resources and view their near-term exploitation as little more than a fantasy.

  

   

  Trump has framed the agreement as a way to recover U.S. taxpayer money, justifying previous financial support for Ukraine, which he claims amounts to $350 billion in aid and military equipment. However, this approach has sparked criticism, with some analysts likening it to a form of economic piracy aimed at securing financial returns rather than focusing on regional stability.

  From Europe, the news has caused unease, as Trump has engaged in direct talks with Russia without involving Kyiv or European allies. This reinforces the perception that the U.S. is redefining its role in continental security, prioritizing economic deals over strategic commitments.

  Hopes for a quick peace agreement, however, largely evaporated on Friday following a tense confrontation between Trump, Zelensky, and Vance, which ended with the Ukrainian president storming out of the White House and his American counterpart threatening to immediately cut off all military and political aid to the European nation.

• The arrival of Bitcoin ETFs has permanently changed the price dynamics—for better and for worse. Over the past two weeks, despite all the pro-crypto signals from this new administration, we have witnessed massive capital outflows from these vehicles, which have fed into significant price declines, pushing Bitcoin below $80,000/BTC—levels not seen since the elections. In the following chart, we can observe the correlation between Bitcoin’s price and net capital flows into ETFs, and right now, we are experiencing the downside of that relationship.

  

   

  However, all is not lost. The current correction is yet another example of the extreme volatility in this space, but it is nothing new in the context of previous cycles—neither in duration nor magnitude.

  

   

  There is often talk about Bitcoin’s correlation with the Nasdaq or other risk assets, given its beta >1 to them. However, the reality is that the true correlation is with global liquidity (with a lag of about ~3 months). After a period of decline, we are now seeing a strong rebound, which suggests that Bitcoin’s price should follow.

  

   

  The crypto space has gone through too many scam episodes in recent months—many promoted by celebrities, including the president and the first lady—as well as excessive diversification (at the peak, over 1 million new tokens were being launched daily). This has significantly diluted liquidity and likely driven many newcomers out of the market for the rest of this cycle. My outlook for the sector remains highly constructive, as it holds enormous transformative potential, especially in Bitcoin, whose value proposition is particularly compelling. However, the focus must shift back to value and away from extreme speculation (memecoins and the like). I believe we have already seen the bottom of this correction and expect to witness new all-time highs in this cycle within the year.

Model Portfolio

Despite the fact that the indices have barely pulled back from their recently reached all-time highs, an atmosphere of extreme panic and constant negativity has settled in the market (with the exception of yesterday’s last-minute rebound, which could signal a trend reversal). We’ve already touched on this sentiment in previous paragraphs. Fundamentally, however, nothing major has happened: we’ve seen news about tariffs and trade wars, but nothing that wasn’t already known. The starting point for valuations—demanding in some cases (MAG7) and outright bubbly in others (PLTR)—has led many investors to sell first and ask questions later (a perverse game of musical chairs).

If you’re going to panic, it’s better to panic first.

Trump will soon be under pressure to stop firing off tweets that create so much market volatility (especially downward, of course), given the stock market’s importance to American wealth and how easily stock prices can be used as a benchmark for presidential success.We should view these episodes of non-fundamental volatility as opportunities to generate extraordinary medium-term returns.

In our case, the companies in the model portfolio have not been immune to declines, as the market pulls everything down in the short term. However, I remain confident in the themes we are playing and believe we will comfortably achieve our yearly targets:

• Positive, double-digit returns

• Outperforming any benchmark index

The key is to have a clear understanding of what we hold and why, without letting emotions dictate our decisions. The portfolio should be viewed as a whole, with its components having different maturation timelines, where the only thing that truly matters is its overall performance.

In our Discord, when talking with community members, I often see impulsive decisions, emotional attachment (both positive and negative) to positions, and an excessive focus on information that is ultimately just noise. These behaviors, over time, erode returns and alpha. Achieving extraordinary investment results requires both a rational mind and a strong stomach.