By Peter Tchir of Academy Securities
I could be extremely lazy this weekend and just repost (with an updated chart) the Heads I’m Smart, Tails I’m Stupid report as the market continued to flip-flop around. On Friday alone, the Nasdaq 100 rose 1.2%, gave it all back, and then ended up 1.2% (with a good chunk of the gain coming in the last 10 minutes of trading). And that was somewhat “mellow” compared to the price action after some earnings reports. I continue to remain concerned that liquidity is abysmal, though maybe that will improve as we enter September.
But I won’t be totally lazy, though we will try to keep this weekend’s note short.
Two weeks ago, I had the pleasure of attending and speaking at the Naval War College. I learned a lot about wargames, both from a historical perspective and regarding their current application. I did not know that Fleet Admiral Nimitz credited much of the success in the Pacific to the time they had spent wargaming (and that the main thing they had not prepared for was Kamikaze pilots).
Our wargame was centered on a theoretical blockade of Taiwan by China in 2027. It was very interesting to watch how the teams responded and how easy it was for miscommunication to occur, even in a small room, with no separation in time zones. I was part of the China team (almost as though the organizer had read a lot of T-Reports and felt that was fitting). Despite what seemed like efforts to deescalate, it was eye-opening to see how easy it was to slip into escalation as one nation’s “deterrence” was another’s “provocation.” The organizers of the wargame did admit that earlier in the month they had run the same wargame, mostly with economists, and it very rapidly descended into calling in aircraft carriers (the one I participated in had a mix of people, including many veterans).
There were a few recurring themes, none of which were a major surprise, but still warrant just a couple of moments:
Whether we need a “Man on the Moon” or “Manhattan Project” type of moment to rapidly grow our capabilities remains unclear. That sort of “national agenda” might not be necessary, but it would go a long way and seems to create a lot of potential for the next president to act.
The “Fog of War” describes uncertainty (and to some extent confusion) in military planning and decision making. It seems to apply incredibly well to the economy (and markets) at the moment.
Understanding the current state of the economy is difficult enough with the data we have, let alone when we really start to question the accuracy and timeliness of the data.
Given all the uncertainties, I’m still in the “bumpy” landing camp. Not a hard landing, but an economy where the data, over time, shows that both the job market and the consumer are slowing. Not necessarily to recession levels, but to levels that make current valuations questionable.
8 rate cuts in 8 meetings is too aggressive, unless the data slips to worse than “bumpy.”
“Rotation” trades should continue in the equity space. The setup seems similar to last November where we developed consistent outperformance rather than the “crazy” moves we had for a couple of days last month.
Credit. I remain comfortable with credit as my concerns are far more about “valuations” than they are about any deep cuts to earnings and growth (bumpy isn’t the same as recession).
Liquidity remains my number one fear and I think it continues to create asymmetric risk, where moves to the upside are bigger than normal, and moves to the downside will be bigger than normal on steroids!
Normally, we’d be welcoming everyone back to “normality” after a “slow summer,” but this summer was anything but slow.
Trust but verify might be the best motto for all data in the coming weeks!