There Are Three Main Themes Driving Markets

By Peter Tchir of Academy Securities

It’s a summer Sunday, so hopefully you aren’t spending too much time on T-Reports.

If you missed last weekend’s Fixing the Data, please read. Had a lot of interesting conversations on the topic this weekend. Anything from jobs data, to more broadly, all data collection, to worries about “fabricating” data. Since Garbage In, Garbage Out has been such a long-running theme in T-Reports, it is exciting that it is near the top of everyone’s list of issues.

In a completely different direction, if you are on vacation somewhere, check out our piece titled – Could The U.S. License Privateers to Combat Crypto Theft? A little more “out there” in terms of thought pieces, but something we find interesting and a great starting point for discussion. Wound up on the Wolf of All Streets (more of a crypto show than traditional finance media), but we had a great discussion around crypto treasury companies (access), stablecoins (the potential growth), and Ethereum as being the more institutionally palatable use case out there.

In the meantime, we think there are three main themes driving markets. Each of which has some potential positives as well as some potential downside associated with it.

Finally, outside of that construct, it is well worth thinking about what is next on the President’s to do list. He has checked off a lot of boxes already (for better or worse depending on your perspective) but there are more items on the horizon that could affect your investments.

Tariffs and Trade

The clear positives are:

Generating revenue (for now). Whatever you (or I) think about tariffs, they have been and will continue to generate revenue for the U.S. government. We’ve sent charts on this and it is real income to the government. It remains to be seen who will ultimately pay for it (and we think it will take quarters before that becomes evident).

There is some risk that existing tariffs, executed under certain emergency clauses, may be deemed invalid. Ultimately we are months away from this, as it will go to the Supreme Court, no matter what the next ruling is. There is a market (I’m told) for trading paid tariff duties. If they are overturned, even if the administration invokes different rules to implement them, there might be rebates available to those who paid. I think this is months away from any certainty, but it could hurt the deficit and may cause some countries to “slow play” deals they have apparently agreed to in principle.

Deals and investment. There have been a lot of commitments to investing in the U.S. via some of the trade deals. International airlines buying U.S. planes (great but weren’t they going to anyways?). Chips (ditto). U.S. military equipment (ditto). Enforceable? Who knows. The deals are interesting, but with the exception of opening up markets to top chips from the U.S. (where sales were restricted, not by demand, but by U.S. rules), not sure how much has been truly added to the economy.

The potential negatives are:

If someone with the flu sneezes on you, and you don’t have flu-like symptoms within 10 minutes, it doesn’t mean that you don’t have the flu. So many victory laps on “tariffs have been absorbed” when they’ve barely hit the economy. Importers still have inventories of non-tariffed goods and haven’t begun finalizing future deals with suppliers, let alone their customers. We live in an era where so much information is available instantaneously that we sometimes forget these things take time.

On balance, I think markets are a bit complacent on the risks of tariffs to consumption and corporate profits (I am less worried about inflation, but that is because I’m more worried about the overall economy).

AI and Big Data

The positives are obvious:

• The capital spending on data, AI, etc., has been driving corporate spending. We live in a world where the more you spend, the more your value increases (a bit of hyperbole, but not too far off base). How long can that continue? But the reality is that so many companies, faced with uncertainty, decided it was best to spend more on AI/Efficiency than anything else, as true efficiency (if achieved) will be important regardless of the direction of the economy.
   
• Stock returns have been driven by AI. Not here to argue about breadth, etc., but the Russell 2000 is up less than 1% on the year, while the Nasdaq 100 is up around 13%. I have read, but not verified, that even within the Nasdaq 100 the returns have been concentrated to a handful of stocks.

The “mixed” impact:

• For anyone who equates energy with oil, you are just dead wrong (I’m trying to retrain my brain on this). Energy is electricity.
   
• The demand for electricity (aka energy) will drive innovation, new businesses, and huge opportunities for investors and companies. It may also lead to backlash as many individuals (consumers of a regulated product in most jurisdictions) may become concerned about how energy is allocated when you have demand from customers who might have a much higher price point (due to the revenue they are generating) than the average individual. Not at the “pitchforks” stage, but I can see some battlegrounds developing as the intense demand for electricity potentially competes with the traditional consumer. But make no mistake, the opportunities for those who can deliver the electricity efficiently is big!

The downside?

• Jobless economy? While that take is a bit extreme, one does have to wonder what the job outlook is for many employees who will now effectively have to compete with AI? The best and brightest (and hopefully those that write the T-Report) will be able to use the new technology to enhance their product. But how many “minions” won’t be able to do that? The weakness in the job market amongst recent college graduates (and the spike in law school applications) is worrisome for our economy. Our society has been built on these “entry level” jobs creating the opportunity to rise up the corporate ladder. Does that disappear, shrink dramatically, or just change who makes money?. We don’t know, but something to keep an eye on.

The energy play seems obvious, but a little less clear is what is left for the companies directly benefiting. There is also a lot to be seen on the job front and whether the technology is truly cost effective. The cost is rising, and it is unclear what level of “decisions” will be trusted to machines.

ProSec

National Production for National Security is quite a mouthful. “Drill Baby Drill” is catchy, but too limited to oil.

“Refine baby Refine” was an attempt to point out that it is the refined/processed versions of rare earths and critical minerals that are in short supply and dominated by China. This administration still seems too focused (in my opinion) on access to the rare earths and critical minerals, and is not spending enough time on ensuring that the U.S. can refine and process them. We can find sellers of the commodities, but it is the next step that is crucial and we need to do more – though we’ve seen some progress on that.

“National Production for National Security” tried to take this a step further. It is Chips. Pharma. Healthcare. Basically, any number of things that a country needs to produce (at some base level) to ensure their security.

ProSec tries to refine this further.

• Production for Security is so much simpler than National Production for National Security. It isn’t up there with BRICs or Mag 7, but it is getting closer?
   
• Security goes well beyond national security. Job/Income security. If you know your country is supporting your job in a way that it didn’t previously, you have a lot more “security.” You don’t fret after every meal about what “bad things” might happen. It lets you dream. It lets you invest in the future. While I’m not saying “National Security” doesn’t matter, I am saying that it is easy to underestimate the sense of peace people can have knowing their careers are safe and they can plan for the future. While it wasn’t incorrect to focus on National Security, it was too restrictive. Security comes in many shapes and forms, all of which are important to the economy and the health of a country. I always live in constant fear of this being the “last T-Report”, and AI has done little to help that, but if we can bring a lot of industry (and national importance) back to the U.S., it will help the “vibe” of the country.

More on this in future reports.

Deregulation.

That’s it. That’s the entire section. Deregulation. Deregulation. Deregulation.

It is something the President excels at and something we need, especially if ProSec is going to reach its full potential.

The Presidential “To Do” List

My understanding, from those who have worked with Trump before and those that “know” the current administration, is that he is well aware of the promises he made, and the expectation that he delivers. There are a few things currently out there that may impact markets.

• Russia/Ukraine Truce. This is out there and something we cover in SITREPs, but it does seem that it is impacting energy prices (secondary sanctions) and also potentially straining relations with Europe again (potentially giving Russia too much land, etc.). Again, we will dive deeper into this in a future SITREP as the President prepares to meet with Putin.
   
  • Somewhat related, but off the radar, is the risk that the President goes after Brazil’s purchase of Russian Diesel. For those of us stuck with Energy = Oil, that is too simplistic. We’ve already started trying to condition ourselves to see Energy = Electricity, but we’ve also been trying to point out that oil is somewhat useless. Gasoline and Diesel are very useful. Currently Brazil is buying a lot of Russian Diesel and given the 50% tariffs linked (potentially questionably) to Bolsonaro, we could see other tariffs imposed on their purchases of diesel. That could upset markets more than sanctions on oil.
     
• Marijuana Rescheduling. We’ve seen stocks in this sector bounce recently (MSOS as an example of an ETF linked to the sector), but I am not getting a sense that this is a high priority. The current scheduling seems so arbitrary, that it could be shifted, and likely will be, but when you compare this admin’s focus on crypto to marijuana, one clearly resonates and the other seems to be a “sidebar” at best.
   
• Cruise ships. There was fear that the “Big Beautiful Bill” would target registrations (and tax implications) for the cruise industry. It didn’t happen, but this is the exact sort of thing that could resonate with the President now that he has “ticked the box” on so many other issues. If there is any President who would “love” to see big beautiful American flags flying from every cruise ship and generating as much tax revenue as possible from the industry, it would seem to be this President. Watch out for some headlines on this front.

Bottom Line

A few competing narratives, all of which have some upside potential, with downside risk.

• Tariffs have seen too much good and not enough bad priced in, but it is at the margin and will take time to show up in the data. Rent declines and a slowing economy mean that tariffs are more likely to hit corporate profits than create inflation.
   
• The direct AI beneficiaries have benefited so much that each incremental dollar of upside is more difficult to achieve. The demand for electricity, already somewhat priced in, seems to have more upside. The risk to jobs and a slowdown in the economy (losing what used to be “entry level” or even “mid-level” corporate jobs), resulting from advancements in AI will take a toll on employment and spending, and not enough fear of that is out there.
   
• ProSec is my focus on the long side of risk assets. And even on the job front, while AI may displace certain jobs, ProSec may not only create new jobs, but it will also create jobs with a higher degree of “security” (certainty), which is a benefit in and of itself.
   
• Don’t forget the To Do list. While many big issues have been addressed/tackled, there are a lot of other issues that the admin will likely focus on in the coming months, and getting those right at the margin will influence returns.

This was not AI generated, but hopefully still useful.