We Got Some Data, But It Didn’t Change Peoples’ Minds

Submitted By Peter Tchir of Academy Securities

I did not know refried beans are not, in fact, fried twice, but it still seemed like a decent working title for a report where we will highlight what we’ve learned on the topics we covered in last weekend’s Tariffs, AI and ProSec.

The Alaska Summit largely met Academy’s Geopolitical Intelligence Group’s cautious predictions. It didn’t end up with new, tougher sanctions, nor did it wind up with a ceasefire. It seems to have set the stage for Zelensky to meet with President Trump, maybe to set up a trilateral meeting in the future? Probably not going to matter much to markets unless we get some leaks that a lot more was agreed to behind the scenes than was let on at the press conference.

Academy had a busy Friday on Bloomberg TV (6:00 mark), Bloomberg Radio (9:45 mark), and Tom Keene’s Single Best Idea podcast. We covered a variety of topics with a lot of good feedback on our takes on both radio and TV (it helps when the news flow fits right into your narratives – the war in Ukraine, ProSec (Production for Security), the Fed, jobs, and inflation).

Let’s zip through a few things we learned this week that are impacting our outlook on the three main themes that we have been focused on.

Inflation

The only thing I’m “certain” about after the inflation data this week is that the data is confusing. Separate from all of our usual arguments and complains (Owners’ Equivalent Rent, etc.), it is extremely difficult to judge the “steady state” of the economy when corporations (and even individuals) have been altering their behavior to first get ahead of tariffs and then to deal with the evolving tariff rates. Teasing out what was pulled forward, or what was delayed, is extremely difficult. That “issue” also makes it even more difficult than usual to gain a lot of useful information from consumer spending. Academy did get a nice and a “fun” quote in the FT after the PPI release, which we view as a relatively 2nd tier report in terms of providing a lot of useful insight into the direction that inflation is headed.

Sad to say, but the assessment here is that we got some data, but it didn’t change peoples’ minds. You could cherry pick what you wanted to back almost any narrative. Most of us (I believe) are left with our inflation outlooks intact as the data just wasn’t compelling enough to change outlooks.

Electricity

We published a report on A “New” Interesting Chart – Electricity CPI Inflation. The response was quite extraordinary, and we have a deluge of material to go through that clients thought would be helpful in thinking about the electricity industry (trying to get away from the natural word association of energy = oil, to energy = electricity/power more broadly). This theme has implications for AI/Data Centers, but also possibly manufacturing as a whole. Not to mention the consumer element.

While this is something that we have been talking about for some time, it feels like we have underestimated just how important (even crucial) this is, and we haven’t done enough to figure out how great the opportunities are. Yes, a lot has been priced in (XLU, a utility ETF, is up more than QQQ YTD and over the past year), which as a contrarian by nature would give me pause, as it seems like this story might not even be close to being played out. My concern is that we thought we were thinking about this at the varsity level, but it may have been only at the JV or even freshman level. We are going to be spending more time digging into this for the opportunities and for the risks.

ProSec and Sovereign Wealth

Until someone gives us a better acronym or name for our National Production for National Security theme, we are going to try to get ProSec to catch on. It might be a losing battle (it really isn’t that catchy ), but we haven’t given up just yet.

The Intel news was the biggest news in this space on the week. The Intel CEO first seemed to be in the President’s doghouse last week, then moved to having an “interesting” story this week, then transitioned to a potential investment in Intel by the U.S. government.

We continue to believe that the government will take action to spur domestic growth (and some element of control) over industries crucial to national security (chips, pharma, biotech, and many commodities, and more importantly, the processed or refined versions of those commodities).

The accelerated depreciation dovetails well with these attempts.

MP organized an investment with funds from Department of Defense. They were also able to borrow at presumably favorable rates as part of the DOD’s efforts to get them more capital. This is an investment and if it turns out to be a good one, then the American public will benefit from this ownership (rather than via subsidies or other methods that largely accrue to the receivers).
The “chatter” is that if an investment is to be made, it could possibly come from funds allocated to the CHIPS Act. While subsidies, etc. and other provisions of the CHIPS Act helped the company, little went to benefit the entire nation. The CHIPS Act also had a lot of rules about how companies could behave if they wanted the CHIPS Act money, something that dramatically slowed demand for that money. The intangible costs seemed high to many in the industry. An investment (and presumably a push on the debt side, like the MP deal) could provide capital that can be used more efficiently by the beneficiary, while at the same time, giving American taxpayers the possibility to benefit from the upside of the investment (if it turns out to be a good one).
The “template” for what this administration wants to do on the ProSec side of things seems to be developing and could be very interesting.
The two deals (one that was done and one that is just in discussion) are interesting, but are a bit “ad hoc.” To truly develop the template, the government is likely going to need something akin to a Sovereign Wealth Fund to make these types of deals programmatic rather than a one off (if that is truly the direction we are headed).
I see no problem with a nation that is in debt having investments as part of the asset side of the equation.
To a large degree, investments (rather than subsidies or handouts) seem better for the taxpayer, but some of the latter are likely going to be required to enable this style on a greater scale – across many more areas of national security importance.

Expect positives in this arena and in the closely associated arena of DEREGULATION

More Than National Security

Last weekend we briefly discussed a more “altruistic” benefit (that the jobs in these areas will seem more “secure” to their holders). Letting those working feel more content (assuming job security makes most people more content as they have fewer things to worry about). Could it even have a “sense of pride” instilled into it?

Yeah, now we are going full “rose-colored” glasses, but there may be something to the “intangible” benefits of industry around security.

Too Much Control?

OK, just to prove that the T-Report hasn’t been replaced by a pod (attempted reference to Invasion of the Body Snatchers, where the ending with Donald Sutherland’s character turning on them still creeps me out), we need to bring up this subject, which is lurking in the background.

This administration, to some extent, seems to be getting more directly involved in things that can have an immediate effect on the bottom line and the future of companies (or industries).

Direct Investments. What control will be exerted? Will any special benefits be received? Can tariff policy be altered to help? What is the impact, if any, on competitors that don’t receive government investment?
Special Export “Charges.” Paying a few to sell certain goods to certain countries may help balance corporate needs with national security interests. But that could also be a slippery slope.
Industry or even company specific tariffs. It isn’t that difficult to see that while well-crafted policies can drive the turnaround in domestic manufacturing the administration wants, it could also become a very difficult world for CEOs to navigate.

I’m not lying awake at night worrying about this, but it is certainly something that causes my “Spidey- sense” to tingle.
We might not have addressed it, but it felt like the two previous sections needed a counterbalance.

Quick Crypto Corner

In our work, we’ve been thinking that Ethereum would benefit the most from the current push on stablecoins prompted by regulation and the GENIUS ACT. It is “modular” and can be part of many projects. Institutions seem to prefer it to Solana for example. It has a “use” case, very different than Bitcoin, which currently seems to have a “scarcity” and governments are back to the case of printing money.

We should continue to see active trading in crypto as new products are developed and launched. Products that provide ACCESS should continue to do well. Anything from stablecoins designed for various audiences (some stablecoins may wind up “specializing” in a certain type of investor, for example). Certain products have limited or no ability to pass on either interest from holdings or revenue/fees from “staking.” Solutions to those issues will likely be met with demand.

You see this in the ETF flows as well, where since the end of June inflows into ETH ETFs have outstripped inflows into Bitcoin ETFs, though both have done well.

Definitely an area of renewed excitement and growth as investors and companies try to take advantage of the landscape that this administration has created, not just the traditional crypto community, but also potentially new entrants – anything from startups to household names.

Expect more on this, and the “concept” we laid out in Crypto Privateers is getting more, rather than less, interest as people have taken Academy up on our offer to discuss or brainstorm what to do about crypto crime, especially from Nation State/Nation State-Sponsored criminals.

The Bond Market

Look for the bond market to continue to move towards pricing in 3, or maybe 4 cuts. One interesting thing about how the search for potential candidates is being conducted is that the market is exposed to interview after interview of prominent figures who are all advocating for rate cuts. I think that is an interesting approach and while inflation may make that difficult, my belief is that the job market will nudge the Fed along faster than is currently being priced in.

The long end will continue to struggle as it has to price in uncertainty about the quality of data or the willingness of the Fed, going forward, to treat data in the way it had been treated in the past. Not necessarily a bad thing as we try to ignore “garbage data” and focus on where the puck is going, not where it has been, but that could cause longer dated yields to remain stubbornly high, relative to front end yields.

Which leads me to what I think is the next obvious question – what will the Fed do if 10s (or 30s) stay higher than where the administration thinks they should be? The admin has had goals of getting 10s to a 3 handle, so couldn’t we see versions of Operation Twist done to achieve that goal? Lots to be done before we get to something like true yield curve control, but people seem so fixated on whether people would cut or not, and not interested enough on what future potential Fed picks would do with policy to impact the longer end of the yield curve. Seriously, if we want lower mortgage rates, the admin will need to do something on 10s and I expect cuts alone won’t get us there as the risk premium will grow.

Not sure I’m at the point of “pounding the table” that flatteners are interesting here, but I think that we may be getting to that point.

Equities

Largely unchanged from last week. Be careful on many of the high-flyers as a lot of good is priced in and there is some resistance, at least in the narrative, starting to develop. Look for companies that can benefit from ProSec to do well, and after the news around INTC this week, expect the search for those types of companies to intensify as it could be a catalyst to “unlock” value – which often seems difficult to unlock.

Finally, my fears remain that the smaller and less well-capitalized companies (many private) will have more difficulty navigating the tariffs, as much as I’d like to see them break out and take over the leadership of the market.

Bottom Line

The Central Banks may push back on cuts a bit at Jackson Hole, but I don’t think markets will believe it for long. It all still comes down to growth, what is priced in, and you have our thoughts on that.

For those in the corporate debt market, presumably it will be a bit slower in the last two weeks of August than it has been, but spreads are tight, demand is strong, and yields are at decent levels, so there may be very little rest this summer for corporate bond investors.

It is a bit scary how quickly Labor Day (and the “official” end of summer) is approaching since it hasn’t felt very quiet or dull at all!