Paulo Macro — The North Star vs. Liquidity

The North Star — a Nash-equilibrium read of the war

• Nash Equilibrium: a single player's optimal strategy doesn't change no matter what the others do. Iran's optimal play for regime survival is to make the war so economically costly (constrained oil/gas/fertilizer, "the boats stop moving") that it forces "Never Again" and boomerangs regime-change onto the US via the midterm ballot box.
• This strategy is invariant to Trump's tweets or back-channel talks (Turkey/Pakistan/Qatar — "doesn't matter"; the IRGC runs the show, no chain of command until the Ayatollah's 40-day mourning ends April 9). Trump goes home and tells Europe/China to deal with the Strait? Nothing changes — flows stay constrained. Boots on the ground? Same logic. "It's lose/lose."

Why the market ignores it — the TACO Misconception

• "TACO"/look-through worked during Liberation Day and other crises of Trump's own making and in his control to reverse. This one isn't up to him — but investors don't easily abandon a concept that's worked. The flip needs a "Tom Hanks Has Covid" common-knowledge moment when "Can't Print Molecules" overruns "they can print/spend/negotiate their way out" — and it can happen suddenly.
• Robert Pape (author of Bombing to Win and Dying to Win) laid out an "Escalation Trap" (five stages) that backs into the North Star: "Iran does not need to win militarily. It needs to sustain disruption at a level that forces the global economy to adjust under constraint." Like Covid, it hits Asia first, then Europe, then the US; arrival is "baked in" by the oil balances and the time-lag to get ships back in and restart production.

Liquidity primer — RRP, TGA, bank reserves

• The three drivers: liquidity rises when Fed balance-sheet assets rise (growing bank reserves) or Fed liabilities (RRP + TGA) fall. Even shadow liquidity (private credit) ultimately relies on central-bank funding. RRP is now drained to basically zero.
• History: in 2023 Yellen's TGA rebuild was offset by a falling RRP even amid QT (no reserve drain); in 3Q25 QT + a TGA rebuild drained reserves ~$600bn, sparking "Quant Quakes" and short rates above Fed Funds (a Sept-2019-style repo signal) — which forced the Fed to abandon QT and launch its RMP program in December.

Why the quarter-end "Risk On" happened — and why it fades

• The TGA drew down ~$300bn from late last year (>$200bn since end-March) as Bessent held back issuance ahead of April 15 tax receipts, while RMP injections lifted bank reserves ~$250bn — conditions "ripe for a liquidity-fueled, headline-induced ramp in risk" (which he admits he didn't catch).
• The catch: on April 15 the TGA rebuilds as tax payments leave the banking system, removing the tailwind and leaving only the small RMP. Markets react to fresh liquidity "like an elevator" but roll over on draining liquidity "by the stairs, until it trips and falls" — the classic "Sell in May" seasonality set-up.

Positioning — hedges dumped, room on the downside

• Hedge funds net-bought macro products at the fastest pace since May '25 (largest weekly ETF-short covering in a decade); CTAs/vol-control have tens of billions to buy back. Retail panicked and sold/bought puts in late March; only sticky long-only mutual-fund money held. Overall equity positioning is the 27th percentile since 2010 — far from Liberation Day/2022/2020 lows, but "negative all the same" if your view needs a rebuild of euphoric weights.
• Dealer gamma is negative on the upside / positive on the downside (accelerates rallies, dampens dips); corporate buybacks roared back despite plunging hyperscaler FCF (sustainable if energy-cost pass-through works?). Momentum L/S ripped to new all-time highs, dragging the Beta pair up — though Momentum kept working deep into the GFC (to July 2008), Covid, and 2022, so it's "not the be-all and end-all of risk."

Pick your fighter — tech "must own" vs Broadening-Out endgame

• A strong new consensus (retail + GS/Barclays/Vanda) that tech is a "must own" out of the hole gives him pause; Kevin Muir's latest argues Mag7/bigcap tech is not where to be, and Paulo is sympathetic. "On the other hand," major tops often show a "Broadening Out" into small caps followed by one final megacap ramp (1972, 2000, 2021-22) — maybe we're in that last megacap move while small/mid lag on a "cleanest dirty shirt" US rotation (Asia/Europe get the energy crisis first).
• Bottom line: the crowd is biased higher and "we didn't feel The Fear" — but maybe Fear isn't needed anymore in a mechanical world of quants/CTAs/passive/retail. The barrels have been counted and we're "past the point of no return"; the boats coming out are already in the balances — it's the boats going back in to drain Gulf storage that dictate restarts (and shut-in production is lost forever). "Rallies in bear trends make the market weaker" (JJ). Bear or bull? "You decide."