By Peter Tchir of Academy Securities

3D Chess or 52-Card Pickup?

3D Chess always makes me think of Star Trek and wonder who the heck thinks that we need a game more complex than chess? 52-Card Pickup is a game most frequently played by siblings, and even then, only once or twice. Typically, the older sibling asks the younger one if they want to play 52-card pickup. Without knowing the game, but excited that their older sibling wants to do anything with them, the younger one instantly agrees. At which point the older sibling throws a deck of cards across the room and yells – there you go, 52-card pickup!

Depending on who you listen to, talk to, or follow, in its first full week, the Trump team is either playing an incredible game of 3D Chess, or is playing the equivalent of 52-Card Pickup with the nation.

It is far too early to say which side is right, and the final answer will likely fall somewhere in the middle. Having said that, there are a few things that have come up consistently in meetings, calls, and interactions with clients.

• There are various processes in place to effectively protect the system. Could they be bypassed by using Recess Appointments? I have to admit that Congress getting recess, like schoolchildren, has always amused me, but recess appointments would be a very aggressive tactic. They allow Trump to bypass the confirmation process (for up to a year) for some positions, presumably the most difficult/contentious ones. For some reason, this is also “part of the system and process,” so someone must have thought that there was a need for this. To me, this, like many things (including the 2+ month timeframe between the election and the inauguration) is likely a function of how difficult it was to travel across the country back in the day. It will be interesting to see how the appointments go, to say the least.

• If you are going to try to radically change D.C., often described as “draining the swamp,” it does make sense that non-traditional candidates would be selected. Yes, there are people with more experience than some of the nominees, but are they too close to the system to try and change it?

• D.O.G.E (the Department of Government Efficiency) has generated a lot of buzz. It seems to be the one thing that everyone is curious about and wants to see how it all plays out (even with a tinge of optimism that some spending can be cut without reducing or hurting services). It is also quite clear that Musk, one of the richest people on the planet, will play a major role in this administration, as a key advisor to President-Elect Trump.

Thinking about this dovetails well with last weekend’s Learning to Speak Trump Again. For better or worse, we should expect D.C. headlines to continue to create volatility for the markets.

Having said that:

• The 10-year Treasury is back to 4.44%, basically where it closed on November 7th. We’ve had some pretty big swings on a daily and even intraday basis, but wound up unchanged. I remain firmly in the camp that the deficit fears (and concerns about inflation from tariffs) are more than priced in right now.

• The S&P 500 and Nasdaq 100 are both below where they closed on November 7th (for all the “growth” hype, that certainly grabs your attention). Maybe even more surprising, given the attention, is that the Russell 2000 is back to below its November 7th close, having dropped over 5% since it hit a high on Monday (maybe a good reminder that equity markets should shut down along with the bond market on Veterans Day).

• Gold was strong into the election, but has faded hard since then. Copper, which should benefit from growth if the “Dr. Copper” people are correct, is down over 12% since the start of the month. Oil has struggled, but energy stocks have done well, with XLE holding onto its gains. This makes some sense (see “Drill Baby Drill” from Fox Business this summer) as energy production should increase, helping to keep energy prices at bay, but creating some potentially strong profit growth.

• Bitcoin. Bitcoin has been incredibly strong. Yes, some volatility, but it has clung to the idea that a Trump administration will be very positive for crypto in general and Bitcoin (and Dogecoin) in particular. Given how many of the people in Trump’s inner circle are very positive on Bitcoin, it makes sense. On the other hand, Trump doesn’t control Bitcoin at all, and he does seem to like to control things, which may tarnish his current love affair over time. Also, for all the chatter about the U.S. government building up a “Bitcoin reserve” (it is hard to miss it, if you spend any time at all on X), I have not heard from anyone that this is really feasible. Most, which includes me, think that there will be an immense amount of resistance to government adoption (yes on clearer and helpful rules and regulations, but no on adoption by the government). You cannot fight this rally right now and maybe it is 3D Chess being played out, but it has the smell of 52-Card Pickup to me.

• Many of the Commercial Real Estate ETFs have done poorly. In some cases, they are much closer to their annual lows than highs, even as stocks in general perform well. I think that this is actually a very interesting opportunity as yield fears are overdone, and Work From Home is really going to struggle next year. More and more companies are limiting work from home as they push for a return to the office. That momentum feeds on itself. Many who were afraid to push for work from office will be emboldened. I cannot see a world where the Department of Government Efficiency (I’m not sure it is an actual department, but that doesn’t really matter given the attention that it’s getting) won’t be looking at getting more government workers back into the office. Everyone has focused on the potential for layoffs dragging down D.C.-focused real estate valuations, but I think that net/net over time, it will turn out to be good for D.C. commercial real estate. I see CRE as where I have the biggest difference of opinion with consensus views right now.

One Chart That I Cannot Stop Thinking About

We included this chart in our NFP reaction, but I feel a sense of urgency to highlight it again. Maybe this is our attempt to play 3D Chess, or maybe we are getting ourselves overly wound up about a non-event. Since we often discuss how dubious the Jobs Available calculation is for the JOLTS report, it may seem weird that the QUIT rate, from that same report, has grabbed our attention. My take on the QUIT rate is that it is “crowd sourced” data. Every individual has a pretty good idea about their own job prospects and that gets reflected in the QUIT rate.

During the financial crisis, the QUIT rate didn’t get this low until May 2008. If I remember correctly, we technically were not in a recession at the time, and only later did the powers that be declare that we actually were in a recession. That fits with my view that this rate is important and may have a predictive element to it.

I certainly think that when anyone and everyone felt like they could quit and get a better job, it was extremely difficult for management to take away work from home. I suspect that plans to offer severance packages to reduce the workforce voluntarily (one idea floated around by DOGE) won’t be that effective when workers don’t see outside opportunities readily available (that is my interpretation of the QUIT rate).

If we see a lot of progress made on the “Make America Great” front, this could change abruptly. There might be plenty of new jobs created. There might be jobs that were being done by undocumented workers becoming available. A lot could happen, but so far, I think the outlook on jobs is following the same path as stocks – initial jubilation has turned into a wariness about what might actually be achievable, let alone accomplished.

Bottom Line

Expect more volatility. We are going to get headlines and announcements that are difficult to interpret. What do they really mean? How likely is it to get accomplished? We know this administration is looking for CHANGE, but exactly what type of change they want is still a bit unclear in many areas. What they can achieve is even more unclear.

There is a clear sense of “urgency” as I cannot recollect any other election winner coming out so quickly with so many announcements!

I think we want to “fade” growth. We can buy dips in Treasuries and sell rips in stocks.

Maybe we will get a clearer picture, but I suspect in the coming days and weeks, the market will have more questions than answers. The fact that the original reaction to the election was so strong (with so many shorts being taken out, and so many newly minted bulls emerging) leaves us with potentially treacherous positioning. While legend has it that Wall Street likes to Climb a Wall of Worry, I don’t think it likes the current level of uncertainty. Maybe it is all 3D Chess, and we are just too naïve to see the master plan, or maybe we are all seeing enough things to question how effective this master plan will be?

While I like being overweight duration and underweight equities, I would not be a very aggressive overweight or underweight. It is more of an attempt to trade the volatility that is likely to continue.

On Bitcoin, if I hear one more $1 million price target, my head might explode, but for now, I can’t think of what will slow this down given the team around Trump, but then again, Trump himself might say something showing that he has had a change of heart (which is what I suspect will happen, but it seems too early for that to occur).

I did not focus on inflation, jobs, or other economic data (except to highlight the QUIT rate). I think that the data of the past few months will likely be irrelevant early next year as policies become clear and we can focus on what those policies will do to the economic data, and not worry about economic data that probably reflects a set of policies that will no longer be relevant.

We do get the most important earnings report for the AI story this week. Everything seems rosy in the space, but it is increasingly difficult to guess what has already been priced in.

Good luck and don’t stray too far from the desk, because you never know what headline might come out next! If you missed our Around the World Podcast from earlier in the week, it is a good listen.