Written by Peter Tchir from Academy Securities
Strategic Thinking or Random Chaos?
Whenever I hear about 3D Chess, my mind immediately goes to Star Trek and I can’t help but question the necessity of a game more intricate than chess. On the other hand, 52-Card Pickup is a game often played by siblings, albeit only once or twice. Typically, the older sibling tricks the younger one into playing 52-Card Pickup. The unsuspecting younger sibling, eager to engage with their older counterpart, agrees without hesitation. Little do they know, the older sibling then scatters a deck of cards across the room, exclaiming – there you go, 52-Card Pickup!
As we navigate through the first full week of the Trump administration, opinions are divided on whether the team is executing a brilliant strategic game of 3D Chess or engaging in a chaotic round of 52-Card Pickup with the nation.
It is premature to determine which viewpoint is accurate, and the truth will likely lie somewhere in between. However, several recurring themes have emerged from discussions, calls, and interactions with clients.
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The presence of established processes to safeguard the system. Can these safeguards be circumvented through Recess Appointments? While the concept of Congress going on recess has always amused me, recess appointments would represent a bold move. They allow Trump to bypass the confirmation process (for up to a year) for certain positions, presumably the most challenging ones. This mechanism, deemed “part of the system and process,” suggests that there was a perceived necessity for such a provision. Like many aspects of the system, this may be a reflection of the logistical challenges of travel in bygone eras. The outcome of these appointments will be intriguing to observe.
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In the quest to overhaul D.C., often characterized as “draining the swamp,” the selection of non-traditional candidates seems logical. While some nominees may lack extensive experience, are they too entrenched in the existing system to drive meaningful change?
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The Department of Government Efficiency (DOGE) has generated considerable interest. This entity has captured the curiosity of many, with hopes that it could lead to reduced spending without compromising services. It is evident that Musk, a prominent figure in the financial realm, will play a pivotal role in this administration as a key advisor to President-Elect Trump.
These developments align closely with the recent discourse in Learning to Speak Trump Again. The volatility induced by D.C.-related headlines is expected to persist in the financial markets.
However:
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The 10-year Treasury yield has reverted to 4.44%, essentially retracing its position on November 7th. Despite substantial daily and intraday fluctuations, the yield remains unchanged. I maintain the belief that concerns regarding the deficit (and inflation due to tariffs) are currently overpriced.
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Both the S&P 500 and Nasdaq 100 are below their November 7th levels (despite the hype surrounding “growth”). Notably, the Russell 2000 has dipped below its November 7th close, plummeting over 5% since reaching a recent peak on Monday. This serves as a stark reminder that equity markets should align with the bond market’s closure on Veterans Day.
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Gold exhibited strength leading up to the election but has since receded. Copper, which is anticipated to benefit from economic growth according to the “Dr. Copper” theory, has declined by over 12% since the beginning of the month. While the oil sector has encountered challenges, energy stocks have fared well, with XLE maintaining its gains. This trend is rationalized by the anticipated surge in energy production, which could curb energy prices while fostering substantial profit growth.
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Bitcoin has witnessed remarkable resilience. Despite occasional volatility, Bitcoin remains buoyant on the premise that a Trump administration will be favorable for cryptocurrencies, particularly Bitcoin (and Dogecoin). Given the pro-Bitcoin sentiment within Trump’s inner circle, this trend is logical. However, Trump does not exert control over Bitcoin, and his inclination toward control may eventually sour his current affinity. Despite speculations about the U.S. government amassing a “Bitcoin reserve” (a prevalent topic on various platforms), the feasibility of such an initiative remains uncertain. Most individuals, myself included, anticipate substantial resistance to government adoption of Bitcoin (favoring clearer regulations but opposing governmental adoption). While resisting this upward trend may seem challenging, I am inclined to view it as a game of 52-Card Pickup rather than 3D Chess.
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Several Commercial Real Estate ETFs have underperformed. Some ETFs are nearing their annual lows rather than highs, despite the overall positive performance of stocks. This disparity presents an intriguing opportunity, as concerns about yields may be exaggerated, and the Work From Home trend is likely to face obstacles in the upcoming year. Many companies are steering away from remote work arrangements, advocating for a return to office settings. This shift in momentum is self-reinforcing, encouraging more companies to adopt a pro-office stance. While the focus has been on potential layoffs impacting D.C.-centric real estate values, I anticipate a favorable trajectory for commercial real estate in D.C. over time. My divergence from the consensus view is most pronounced in the realm of CRE at present.
A Compelling Data Point
We featured this data point in our NFP analysis, but its significance prompts a revisit. Perhaps this is akin to our version of 3D Chess, or maybe we are fixating on a trivial matter. Despite our skepticism of the Jobs Available metric in the JOLTS report, the QUIT rate from the same report has captured our attention. I interpret the QUIT rate as a form of “crowd-sourced” data. Each individual possesses insights into their job prospects, reflecting in the QUIT rate.
During the financial crisis, the QUIT rate did not dip to its current levels until May 2008. Notably, the official declaration of a recession came later, underscoring the potential predictive value of this rate.
In times when job opportunities abound, it becomes challenging for employers to revoke remote work privileges. Plans to offer voluntary severance packages for downsizing (an idea floated by DOGE) may falter when alternative job prospects are scarce (my interpretation of the QUIT rate).
A substantial improvement in the job market could alter this scenario dramatically. New job openings may emerge, vacancies previously filled by undocumented workers could become available, among other possibilities. Thus far, the job market sentiment mirrors the trajectory of stocks – initial optimism has evolved into cautious optimism regarding tangible achievements.
Key Takeaways
Anticipate heightened volatility. Ambiguous headlines and announcements will challenge interpretation. What do they signify? How likely are they to materialize? While this administration seeks change, the specific nature of this change remains ambiguous in many respects. The feasibility of their objectives is even more uncertain.
An unprecedented flurry of announcements underscores a sense of “urgency.”
A strategy of buying Treasury dips and selling stock rallies may prove advantageous.
While clarity may emerge in the future, the market is likely to grapple with more questions than answers in the coming days and weeks. The initial market reactions post-election, characterized by a wave of short-covering and newfound bullish sentiment, hint at potentially precarious market positioning. While conventional wisdom suggests that Wall Street thrives on uncertainty, the current level of ambiguity may not be conducive to market stability. Whether this is all part of a grand 3D Chess scheme, or if we are witnessing a flawed master plan, remains to be seen.
While I advocate for an overweight position in duration and an underweight stance on equities, I recommend a cautious approach rather than an aggressive allocation. This strategy aims to navigate the anticipated volatility effectively.
Regarding Bitcoin, the incessant projections of a $1 million price target are becoming tiresome. However, current circumstances do not suggest any impediments to this upward trajectory, given the pro-Bitcoin sentiments within Trump’s circle. Yet, Trump’s inclination towards control may pose a threat to this trend over time. Despite speculations about a potential “Bitcoin reserve” by the U.S. government, the feasibility of such a venture remains unclear. While resistance to governmental adoption of Bitcoin persists, the current rally appears relentless, reminiscent of a game of 52-Card Pickup.
My analysis has bypassed inflation, job data, and other economic indicators (excluding the QUIT rate). As policies crystallize in the upcoming months, the relevance of recent economic data is likely to diminish, paving the way for a focus on the impact of these policies on economic metrics.
This week heralds the most crucial earnings report for the AI narrative. While optimism prevails in this sector, predicting the extent of priced-in expectations poses a challenge.
Stay vigilant and remain attuned to unfolding developments, as unexpected headlines may shape market dynamics. If you missed our Around the World Podcast from earlier this week, I highly recommend giving it a listen.
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