The 7 Month Combo

THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.

If you dig yourself into a hole, the first thing to do is stop digging.

Buffett

We are seven months into an unusual combination of outcomes. The headlines are mind-bending—the US is punishing a Brazilian Supreme Court Justice? Beyond the theatrics, the policy shifts and impact on the economy and markets are real. The trick is integrating a wave of unprecedented policy into trusted rubrics for what is cheap and expensive. There is no living investor who has managed through policy changes like these. As always, the facts ground reality.

Below is where we stand.

1. Since coming to office, President Trump has done what he vowed to do. We know the list, but here it is: imposing the highest tariffs in 100 years, cutting taxes, and initiating mass deportations. Compared to a clumsy first term, this is surprising.

2. There have been two notable policy pivots—rescinding tariffs until stocks bounced, and shifting from coddling Russia to confronting it. You may be a fan of his policies or detest them, but he is accomplishing the goals he laid out and pivoting abruptly when necessary.

3. Pushback has been minimal. Yes, there has been some resistance from China, but with few exceptions, he has forced reality to bend to his will—cutting taxes amid a massive budget deficit or inveighing on the Europeans to swallow 15% tariffs. When smaller countries like Canada push back, they get crushed.

4. Despite the radical policy shifts, US stocks are up about 8%. Ten-year bond yields are lower, the dollar is weaker, and unemployment is unchanged. Global stocks are stronger. Said differently, the vital signs look fine. The stock market rally (+30% from April) has been remarkable. It’s been waves of investors taking off hedges or running to catch up.

5. While higher tariffs go into effect tomorrow, the pass-through so far is mostly to goods inflation in a services-based economy. Only a portion (no one knows how much) of this is paid by the end consumer, so the inflationary impact is more muted than initially feared.

6. Within this apparent calm, there is huge volatility. This morning Invisalign (the folks that give you straight teeth) came out with weaker guidance—the stock tanked 30%. As the economy softens, the budget for straight teeth dries up. Microsoft reported stronger cloud sales—the stock went vertical. Copper prices are swinging wildly (tariffs), yet oil prices are little changed this year despite the US and Israel bombing Iran.

7. The AI boom is bigger, faster—and also more disappointing. Bigger in that the spending, chips, and margin improvements are beyond easy grasp; more disappointing because when you ask AI to do real work, it often can’t. I tried using ChatGPT to create a chart today and it failed miserably. Figma’s IPO was +150% today.

8. The dollar, after initially getting crushed, has bounced back violently as the AI boom in the US sucks in foreign capital—similar to what happened in 1999.

9. As the US pulls back from defending others, these others are forced to defend themselves, leading to increased military spending, particularly in countries that started the Second World War. These countries have significant savings and traditionally low bond yields—but now that momentum has shifted and their bond yields have begun climbing to US levels. The White House is hopeful that big increases in US tariff collections will make US bond yields fall to their levels.

So where does this leave me? The picture is dynamic to say the least, but the big things I see are:

a. A US-based tech bubble forming that no one wants to chase—until they are forced to.

b. Improving margins for large multinationals using AI to cut internal tech, admin, and other costs and worse competitive conditions for those companies that don’t have the resources to make such shifts.

c. Lower bond yields in the US and higher bond yields in countries with ample fiscal stimulus.

d. Fiscal tightening and slowing growth in the US and monetary/fiscal easing abroad, at least for the next six months.

e. A wave of military spending, mostly in response to Russia attacking Ukraine and all the worries that triggers globally.

f. A higher dollar.

g. A global increase in grift as one-man rule spreads and rule of law weakens.

h. More surprises.

Now out in Korean, Italian, Estonian, Chinese and many other languages:

The Uncomfortable Truth About Money

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