No Lonesome Doves

By Peter Tchir of Academy Securities

If you were dovish coming into this week, you are no longer alone. 

We’ve been arguing for 3 to 4 cuts this year. We thought the Fed should have cut at the last meeting and the Fed would have cut at the last meeting if the June jobs data remotely resembled what it got revised down to when the July jobs data was released (had to re-read that to make sure it makes sense, but I think it does – just all so confusing when the data gets revised so massively).

But we thought Powell might try to channel some hawkishness. That he might look for “bright” spots in the jobs data – it was an “anomaly,” the unemployment rate is low, or that the number of jobs to keep unemployment steady is well below 100,000 jobs per month. But we got none of that!

It is certainly possible that the August jobs data, released ahead of the next Fed meeting, will be strong enough to keep the Fed on hold. But we doubt it.

Also, the strategy of having so many potential Fed candidates all make reasonable arguments for a cut in September certainly helped.

It also seems likely, in hindsight (and not obvious from the recently released minutes) that while there were “only” 2 dissenters, the conversation to not cut may have been a lot closer than previously thought.

The market didn’t get all the way back to pricing in a September cut, but it likely will and we still think at least 3 (instead of 2.2 priced in) is the right number of cuts for the year – unless we get a strong turnaround in jobs, which is possible as various policies kick in – accelerated depreciation and ProSec (Production for Security).

Inflation and Tariffs

We will get the big monthly tariff revenue. If it is a big number it should help bonds (less of a monthly deficit) but we will see and hear more conversations about who will ultimately pay for the tariffs. We continue to expect this to take months and even quarters to play out, as the progression will be:

• Push suppliers for discounts (that will be product dependent and also depend heavily on how big or powerful the buyer is).
• Absorb some costs while figuring out the longer-term strategy (and even the longer-term policy as that remains in flux and is still winding its way through the courts).
• Slowly pass prices on to the consumers – while trying to not just keep consumers happy with prices, but also trying to avoid becoming a focus of the administration which continues to argue that foreigners pay for all the tariffs.

Tariff-related slowdowns in the economy are a bigger risk than tariff inflation, which is why we are still in the 3 to 4 cut camp.

A Couple of Equity Narratives

Despite the big rally on Friday, when the Nasdaq 100 was up 1.5%, it lost 1% on the week. There have been some small “cracks” in the AI/Data Center narrative of late. Anything from how data centers are being funded, to the availability of electricity (and water), to concerns about whether companies are actually deriving big benefits from the AI spend. Even lately, there are questions about which chips China will be allowed to buy along with which chips China will actually buy. Nothing major, but I think there is a “lurking” concern, at least for me, that the risk is we are spending as though we have 2030 technology (the cost has grown rapidly as this industry has dominated capital expenditures) with “only” 2025 technology. Yes, the technology is awesome, but is it delivering versus cost? Is “prediction” or “probability-based prediction” truly AI?

This industry has been such a strong driver not just of the stock market’s rebound off the lows, but also for the economy in general, that we should watch closely for any sign of a sniffle, let alone a cold.

Which we think means this is a good time to introduce this chart.

We used ETFs here rather than indices as it is an easy way to get everything “normalized” on U.S. hours and in USD.

The fact that FEZ, a Euro Stoxx 50 ETF, is ahead of QQQ (Nasdaq 100) for the year, probably doesn’t surprise many people as European growth (and spending) has been a big story. As has been the appreciation of the Euro (up 13% since the start of the year).

I cannot remember the last time I’ve seen anyone tout Chinese stocks. Emerging markets, heck yes. Emerging Markets ex-China, definitely. But Chinese stocks? Who in their right mind would buy stocks in the country that remains the “public enemy #1” of the trade team? Yet, FXI (China large cap ETF) just closed at its highest levels of the year, up 30% year-to-date and 55% for the past year.

Maybe Chinese stock performance is because of the trade deals? Or maybe, and I suspect this is the case, it is in spite of the trade deals. Their control over processed and refined rare earths, critical minerals, and commodities has become a clear issue for economies across the globe (the U.S. has taken some steps, like investing in MP, but so much more still needs to be done, which will fuel our ProSec™ trades).

The U.S. represents about 15% of Chinese exports, a big number, but only a portion of their economy, and while the U.S. is taking major steps to become less dependent on China (a move we agree with especially on issues surrounding National Security, broadly speaking), not every country has such strong views (or the ability to do anything about it, even if they have strong views).

The Russell 2000, which has lagged badly, finally had a good week, maybe even great week. It was up almost 4% on Friday, accounting for a big chunk of its year-to-date performance of 6%.

When we look at shares outstanding, IWM has seen outflows almost the entire year, though this started to reverse in August. QQQ, on the other hand, saw a lot of dip buying and has had pretty steady inflows, resulting in the largest number of shares outstanding on August 19th (more dip buying, but we saw outflows on Friday – which is interesting). Short interest in IWM is much greater than short interest in QQQ, which is interesting as a contrarian.

Is it time for a significant period of outperformance for the Russell 2000 versus Nasdaq 100? At the moment, I’m not convinced, but it is certainly worth a look.

The Gloves off With Russia?

President Trump this week basically accused the Biden administration of handcuffing Ukraine too much during the early years of the war.

It is safe to say that when Academy’s Generals and Admirals discuss prosecuting wars, they all mention the need to disrupt supply. When the U.S. is at war, it will try to take out supply lines immediately. That is hitting depots. Destroying transit (railways in particular as they are most efficient, but then bridges and “choke points” on roads). Not allowing an enemy to “easily” retreat and regroup is also standard operating procedure. Logistics are a huge component of warfare (I almost wrote modern warfare, but historically, logistics have always been key – hence why we have phrases like “an army marches on its stomach”).

With the administration comfortable selling weapons to Europe, which in turn can provide them to Ukraine (it solves the U.S. issue of “donating” versus being paid), we could see more weaponry available to Ukraine.

There are clearly risks of escalation by attacking into Russia more aggressively, but from the start, we’ve argued that Putin won’t negotiate towards a realistic deal unless he faces the “stick.”

On the energy and sanctions side of the equation we continue to watch:

• Russia’s trade with Europe. Europe has been weaning itself off of complete and utter dependence on Russia’s commodities, but there is still a meaningful reliance that we haven’t seen the will to break. That might be necessary to push Putin.
• India’s purchases of Russian oil have attracted the most attention. That is in no small part because of allegations that India then mixes Russian oil (bought very cheaply) with oil from other sources to then sell it for nice profits. This seems like an easier one for the Trump administration to go after.
• China. Will the U.S. risk escalating tensions with China over Russian oil? Do we risk losing supplies of processed rare earths and critical minerals? Is China well prepared with large stockpiles of oil anyways? This would be a big step as it would likely have negative consequences for the U.S. economy.
• Brazil is more interesting. The admin is unhappy with Brazil and, at the moment, they are threatened or under much higher tariff rates than most countries. Brazil and Russia remain large trading partners. Those two facts would indicate that we could go after more tariffs related to Russian trade with Brazil. The issue is that much of what Brazil imports from Russia would impact agriculture, globally. Diesel and “fertilizer” are big on the list of what Brazil imports and tariffing those items, while effective in forcing Russia to the table, has the risk of disrupting the agriculture industry as price increases in diesel and fertilizer would flow through the food chain, potentially rapidly.

Balancing the carrot and stick with both Russia and Ukraine will be tricky, but it seems that the world is now trying to navigate this, which is optimistic from the standpoint of getting a real accord in the region.

Crypto Corner

As discussed on Friday in Crypto Privateers, the Cybercrime Marque and Reprisal Authorization Act to Combat Foreign Scam Syndicates was introduced to Congress. We think this is an interesting development and will shed light on what we have argued is an idea that should be explored.

As mentioned in last weekend’s Crypto Corner, ETH continued to outperform Bitcoin.

Bottom Line

Look for the market to price in more rate cuts, sooner than it currently has without a significant steepening of the yield curve. It is still a bit early to put on flatteners, but that is the direction we are leaning towards in terms of curve shape. Doves are no longer lonesome after Powell’s message on Friday.

Corporate credit – steady as she goes and we could see more paper issued than expected after Friday’s “everything” rally created another great opportunity for issuers.

On equities, has a reversal in market leadership started? It is early, but it seems like we could be poised for small and medium sized companies to outperform the megacaps that have led the way forward since April.

Weirdly, if I had to pick a “rest of the world” trade, I’d focus on China rather than some of the other current outperformers, in no small part, because it still seems awkward to suggest owning Chinese stocks “even if just for a trade.”

It seems almost impossible to believe that this is the last official week of “work summer” in the U.S. 

Good luck, enjoy, and get ready for what is likely to be a hectic few months, despite what the MOVE and VIX indices are telling us (low vol, really?).