Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
The Art of the Deal: How Trump's Negotiation Style Is Reshaping Markets
April 28, 2025 | Season 7 | Episode 16
President Trump's negotiation tactics are reshaping financial markets, and understanding his playbook might be your best investment strategy. His approach, detailed in "The Art of the Deal," reveals a philosophy of aiming high and pushing relentlessly to achieve his goals. As he states, "I play to people's fantasies... a little hyperbole never hurts." This perspective helps explain the market's volatility following his tariff announcements and subsequent modifications.
Surprisingly, it's professional investors – not individuals – who've been fleeing during recent market turbulence. Hedge funds have sold over $1 trillion more shares than they've purchased this year, while everyday investors have steadily bought approximately $50 billion monthly. This upends Wall Street's traditional "smart money vs. dumb money" narrative. Individual investors, increasingly invested through 401(k)s and index funds, have demonstrated remarkable stability – Vanguard reports 97% avoided making trades during early April's market volatility.
Gold has emerged as 2024's standout performer, appreciating approximately 30% year-to-date to around $3,400 per ounce. Over the past two decades, SPDR Gold Shares has surged 630%, marginally outperforming the S&P 500. This contradicts conventional wisdom that productive assets should outperform non-yielding assets over time. For investors considering gold now, mining stocks like Barrick Gold and Newmont Mining might offer better opportunities than the metal itself.
Municipal bonds represent another opportunity area, with long-term munis yielding about 95% of comparable treasuries – essentially offering tax exemption benefits at minimal cost. For investors in tax brackets of 20% or higher, these bonds can generate tax-equivalent yields of 6-8% in high-quality assets.
As we navigate an environment of heightened uncertainty – with international trade negotiations, geopolitical tensions, and domestic policy shifts – understanding these market dynamics becomes essential for making informed investment decisions that align with your long-term goals and risk tolerance.
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lanton.
Keith Lanton:Good morning. Today is the last Monday of April. Almost one third of the year is in the books. We're almost at the 100 day point of President Trump's start to his second term and, as usual, we've got a lot to talk about today. So we're going to take a look back at last week, markets having a very strong week in the equity markets and the fixed income markets also strong. We saw a little bit of stabilization in the currency market as well. We've talked a lot about currency markets, treasury markets, how much those markets can give us some very good insight into what's taking place in terms of international investing and international investing flows, and we're learning how much of an impact that those flows can have here in the United States. Regardless of what domestic investors are doing, those flows can wag the dog as well. So we saw a reversal of that last week. We'll talk some more about that.
Keith Lanton:We will also today take a look at the number one driving force arguably behind the financial markets in the last 97 days, and that is one person and that's President Trump, is one person and that's President Trump. So what we're going to do is take a look back at his book that was written back earlier in the decade, the Art of the Deal. Many of you may have read it, many of you may have revisited it now that he's become president again, but I think there's lots of insights we can take away from some of his comments in that book and give us some insights into how he's thinking and it's important how he's thinking because he's president and he's having a super strong impact on the investments that we do make. And then we'll take a look at some psychology. We've talked a lot about this before, but there was an interesting article in the Wall Street Journal talking about the investment decisions we make and how they are influenced by our prior experiences, not necessarily influenced by what has taken place historically. We'll talk about the news flow this morning, what's going on this week super heavy week in terms of both economic data and earnings. Barron's ran a headline article on gold, which certainly has been on a significantly strong uptrend. Also talk about Barron's commentary on the markets. And then I will conclude Brad will not be joining us, but Barron's had an article again on municipal bonds, the relative attractiveness of municipal bonds to other bond investments, and we will dive into that and talk about what's taking place in the municipal bond market and how there may be opportunities there for investors that are in even modest tax brackets, but certainly in higher tax brackets.
Keith Lanton:So let's start out here and just take a look back at last week after President Trump announced that he would not be removing Fed Chair Jerome Powell. He said he's not thinking about it, at the very least. And then also some commentary that President Trump said that the tariffs on China would come down. There was some back and forth Trump administration President Trump himself saying that there had been discussions with the Chinese, the Chinese saying that that was untrue. This morning some comments out from Treasury Secretary Scott Besant saying that any movement forward would have to come from the Chinese, basically saying the ball's in their court to make the next move. We'll see if markets react to that comment at all, that comment just coming out a few minutes ago. Also last week we noticed that the VIX or the volatility index some people call it the fear index that mitigated significantly as well.
Keith Lanton:So, president Trump, his book, the Art of the Deal how can we learn from what he wrote, or at least co-wrote, about 15, 20 years ago? And what can we learn from it? I would argue that President Trump is not someone who has made significant changes in the way that he thinks about things. He's certainly made significant changes in the way that he thinks about things. He's certainly made significant changes in some of his positions on different issues. But whether or not that is a reflection of him being a person who has gone through a change, I would argue that the changes in his position are more in line with his personality to do things like that than they are actual re-engagement of something that he's really thought deeply about and made a personal change on. I think it all comes back to who he is at his core and the way that he thinks about things, and that's why I think some insights into his thinking are so interesting.
Keith Lanton:So what he says in the Art of the Deal is he says my style of dealmaking is quite simple and straightforward and we can think about this with tariffs or other positions that he takes with, let's say, negotiating over the budget. He says I aim very high and then I just keep pushing and pushing and pushing to get what I'm after. I like thinking big. I always have To me. It's very simple. If you're going to be thinking anyway, you might as well think big.
Keith Lanton:Most people think small, because most people are afraid of success, afraid of making decisions, afraid of winning, and that gives people like me, donald Trump, a great advantage. He says the way that I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can get very excited by those who do. That's why a little hyperbole never hurts, so think about that when you're getting yourself excited or agitated by what he's saying, depending on your viewpoint. People want to believe that something is the biggest and the greatest and the most spectacular. Now think of this.
Keith Lanton:When it comes to tariffs, I always protect myself by being flexible. I never get too attached to one deal or one approach. For starters, I keep a lot of balls in the air because most deals fall out no matter how promising they seem at first. Now, when it comes to negotiation which is something that has been certainly rocking the markets back and forth, when it comes to negotiating on different trade deals or negotiating with Russia and Ukraine some points here that I believe are still relevant today. And one thing that President Trump values very greatly as do most people engaging in the deal, but I think he thinks of it even more uniquely is the leverage he has. And when you're negotiating with the leverage of the United States of America, you certainly have arguably amongst the strongest leverage in the world. When you are negotiating with the purchasing power of the greatest consumer in the world, the United States consumer, you've got a lot of leverage. When you're making trade deals and he says my leverage comes from confirming an impression that people are predisposed to believe the best thing you can do is deal from strength, and leverage is the biggest strength.
Keith Lanton:When talking about how to maximize leverage, well, you utilize the media, something we've certainly seen President Trump do, and he's certainly a master at using X, or formerly Twitter or Truth Social, his platform. He says one thing I've learned about the press is that they are always hungry for a good story and the more sensational the better. When making a deal, he said, the worst thing you can do is seem desperate to make it so. He doesn't want to seem weak. That makes the other guy smell blood and then you're dead. You can't be scared. That makes the other guy smell blood and then you're dead. You can't be scared. You do your thing, you hold your ground, you stand up tall and whatever happens happens. I'd rather fight than fold, because as soon as you fold once whether we voted for him or not as really the chief decision maker here in the United States. So how does he make those decisions? Well, listen to your gut, no matter how good something sounds on paper. So again, he's telling you a long time ago what you're seeing today. He says you're better off sticking with what you know, and sometimes your best investments are the ones that you didn't make.
Keith Lanton:And in terms of like following the experts, bringing on people who are perhaps, you know, truly knowledgeable about specific areas because they've worked there a long time, he's learned a different lesson with his experience in New York and New York's real estate lesson with his experience in New York and New York's real estate. He says I have learned much more from conducting my own random surveys than I ever could have learned from the greatest of consulting firms. They send a crew of people down from Boston, rent a room in New York and charge you $100,000 for a lengthy study. And he says you know what they do is and you know sometimes you know he's got a point that at the end of the day they come up with this or that. Well, this could happen or that could happen, and perhaps there's no real solid decision at the end of the day, and therefore he felt that his gut was was the key determinant in terms of making decisions, and he's he's managed himself that way, certainly hasn't taken conventional advice and it has so far served him well in terms of getting elected and getting his policies implemented.
Keith Lanton:So some things to think about as we think about what's going to affect our investments and our portfolios over the next several years, and certainly we may be thinking a little shorter term what's going to take place the next three, six months, one year, and how we should be investing our hard-earned money and how we should be thinking about what the future may look like. So Wall Street Journal, on that score, talked about what individual investors are doing and what institutional investors look like. So Wall Street Journal, on that score, talked about what individual investors are doing and what institutional investors are doing. So in the market chaos of recent weeks, it's the professional investors who have headed for the exits, while the individual investors have held steady, and this is a dynamic that upends the conventional wisdom about how individual investors behave during market turmoil, traditionally on Wall Street. So so far this year, it's hedge funds that have run for the exits, they've sold over $1 trillion more shares than they've purchased, even as individuals have been making net purchases of $50 billion a month with very little interruption, according to JP Morgan.
Keith Lanton:Wall Street has long derided everyday investors as quote-unquote dumb money, prone to making decisions based on fear and greed. By contrast, hedge funds and institutional investors were dubbed quote-unquote smart money for their historic ability to lean on reams of data and analysis somewhat similar to those consultants that President Trump was talking about, and these institutional investors were at least given credit for being unemotional and not being driven by market swings. But in recent years, big funds have become more likely to flee the market in a downturn to avoid potential losses, and amateur investors have altered their approach as well. They have changed how they invest. Individual investors have been stampeding into passively managed index funds, they've been growing their 401ks and they have been buying the dip, and so far and we'll talk about this as well they have been rewarded for buying the dips in the last several downturns instead of running for the exits, for buying the dips in the last several downturns instead of running for the exits, and many individual investors now storm in or simply stay put. Now, time will tell. It's unclear at the moment which group will look more intelligent later in the year or the beginning of next year, but so far, it's a coin toss.
Keith Lanton:What are individual investors doing? Well, these days they are investing in their 401ks. In fact, vanguard out with a report last week that individual investors avoided making trades in their portfolios About 97% of them. In early April, when the markets were in their greatest moments of turmoil, 97% of individual investors at Vanguard 401ks. They stayed put. Currently, let's talk about the power 401ks. More than half of private sector workers are now saving in their 401ks.
Keith Lanton:Let's talk about the institutional investors. We talked about them selling. Well, on April 3rd and 4th. Goldman Sachs is reporting that their hedge fund clients sold more in those two days than in any 15-year period. Any day in the last 15 years were selling. And individual investors, well, they were buying. Individual investors bought $4.5 billion worth of stocks and ETFs on April 3rd, which was a day when the S&P plunged almost 5%, which makes it the strongest buying day on record, according to JP Morgan. Now individual households are starting to have a lot greater influence on the financial markets, because US households now collectively hold $35 trillion in stocks, or 38% of the market, making them the largest owner of American equities and be giving their behavior incredible heft in the market, according to both Goldman Sachs and the Federal Reserves.
Keith Lanton:Now, why do hedge funds sell? Well, they don't necessarily sell because they are panicked, but they are using leveraged or borrowed money to juice their returns. And when stocks fall, the collateral they've given their lenders to back these loans drops in value. They get more concerned about getting calls or margin calls, and one of the reasons that they may be pulling back and selling in those moments of weakness. Also, many institutional investors now have limits on how much they say that they will lose in a given day or week or month. So these limits impose on them requirements to free up cash when they're getting near or approaching those limits. So another reason that these hedge funds may be selling into market weakness or market volatility.
Keith Lanton:And finally, many of these hedge funds, the investors that invest in those funds, expect them to be nimble, quick. That's what they're paying them for. That's what they're paying these huge fees 2% management fees, 20% up to performance fees, management fees, 20% up to performance fees. Well, in order to potentially justify those fees, it's expected, perhaps, that you are constantly looking for the next opportunity and in order to be ready for the next opportunity when things get dicey perhaps, you have to add to your cash holdings.
Keith Lanton:So, individual investors we talked about how they're holding pat, maintaining their positions by and large. Certainly it's a broad statement, not an individual statement, but the Wall Street Journal talks about you just got to be mindful that you are making the right decisions and not making decisions based on what we've talked about before, which is recency bias. So you may be making decisions without the full breadth of market history, just based on your personal history, and that doesn't necessarily make it the right or the wrong decision. But you should be aware of why you are thinking the way that you're thinking, so that you can make the best decision that you make, so that you are thinking objectively about how you think. So, with turmoil and tariffs jolting the markets, the most significant question for investors might be what's in your memory bank? So, if you're young, you know that stocks and Bitcoin can be very volatile and they can drop at lightning speed. Think back to March of 2020 or 2022. But if you're young, your experience also tells you that things may bounce back even faster and markets may go on to new highs.
Keith Lanton:Now, if you're a middle-aged bond investor maybe even a little older than middle age these days you've lived through almost nothing but falling interest rates and bountiful returns on bonds from 1981 through early 2022. So those folks who were investors from 1981 to 2022, who were bond investors, saw interest rates decline from almost 20% to almost zero, not only collecting the coupon on their bonds but also getting great capital appreciation. So example quite a shock when interest rates for the first time in their lives made a meaningful move up. Bonds dropped significantly in value is an example of when the paradigm that you're used to can and does shift. So folks who didn't live through the market collapse of 1929 or the Great Depression when equities dropped, let's say, 70%, 80%, 90% that generation, that memory bank, is no longer in our financial markets.
Keith Lanton:What we have in our financial markets predominantly are younger investors who have experienced markets that declined, but very frequently and very often, even in 2008, took a little while longer. They do bounce back, but if you are a student of history, then you'll know that there have been periods in the stock market where there were long periods where money in the stock market was money that took a long time to recover. If you were an investor in the markets in 1928, 1929, you're looking at recovery periods of almost 15 years. If you're an investor in the stock markets in the early 70s, you're looking at recovery periods of almost a decade. So most investors who are currently in the markets don't remember those periods. Most investors also remember that interest rates had been very low for a long time.
Keith Lanton:In fact, the mantra for a while was cash is trash, and many investors still view their cash, even though it might be paying over 4%, as a way station, a holding point, as opposed to an asset class in and of itself and therefore may not be as comfortable holding cash. And then, of course, there's the investment that has been tearing things up this year and we'll talk a little bit about that and that is gold, and gold has the reputation for shining during crises. But your memory bank might include gold, might not include gold's historically dull performance after peaks in its price. Gold didn't surpass its January 1980 record closing price of $834 until nearly 28 years later, and it didn't rise above its August 2011 closing high of $1,892 for nine years. Even at its recent price of $3,300, it is yet to exceed its 1980 closing high after adjusting for inflation. So as you examine your beliefs, be sure to consult the longest term data available to capture periods that you didn't personally experience. All right, let's move on.
Keith Lanton:Let's take a look at the financial markets this morning. We are seeing futures pretty flat this morning. A little bit of downside bias, but relatively unchanged. Dow futures are down 15. S&p futures down about 4. Nasdaq futures down about 16. Oil is only down about 5 cents a barrel this morning. Gold is up about $5 an ounce to 3304. 10-year treasury yield ticking modestly higher. We're now up to about a 429 from a 427.
Keith Lanton:Equity indices in the Asia-Pacific region started on a mostly higher note. Shanghai down about two-tenths of a percent in China. Hong Kong flat. Japan up modestly. India up. The biggest up mover up 1.3 percent. Most European indices trading in the green, amid lingering hopes for easing global trade tensions in Europe and news.
Keith Lanton:This morning we talked about Treasury Secretary Besant talking about China needing to make the first move. Over the weekend he said it could take months for a trade deal with China, but he said good behavior from other countries could prevent tariffs from ratcheting up. According to ABC News, new York Times reporting that President Trump's job approval rating dropped to 42 percent, as most voters in this poll believe he has gone too far. On tariffs, forty five percent of voters prefer Democrats take control of the House after the midterms and 42 percent of voters want Republicans to maintain control. So do the math. That still leaves 13%. So still very much a toss-up, but we've got quite some time still for that to play out. Today, canada is holding elections amid ongoing tariff threats from the United States. Over the weekend, ukrainian President Zelensky met with Trump President Trump in Rome at the funeral for Pope Francis. Mr Zelensky said it was a very symbolic meeting that has the potential to become historic, and President Trump threatened possible Russian sanctions after getting frustrated with Vladimir Putin in Russia. Wall Street Journal reporting the US and Iran remain divided on key issues amid their nuclear talks. Bloomberg reporting that South Korea has ruled out a trade deal with the United States before the election there, which is on June 3rd.
Keith Lanton:Cnbc reporting some good news on inflation. Not such good news to the airlines Airline ticket prices are falling due to weak demand, they say. Bloomberg reporting that advertising firms are preparing for spending cuts. And back to Treasury Secretary Scott Besson he will meet with Republicans to discuss a reconciliation bill this week including ideas for tax cuts. Looking forward to this week Well, we are entering the heart of earnings season.
Keith Lanton:Roughly one-third of the S&P 500 are reporting earnings the busiest week of the first quarter calendar. Coca-cola and Visa tomorrow, followed by Meta and Microsoft on Wednesday. Tomorrow, followed by Meta and Microsoft on Wednesday. Amazon, apple, eli Lilly, mastercard on Thursday. Chevron and ExxonMobil on Friday. Chevron was mentioned positively over the weekend in Barron's Economic reports.
Keith Lanton:Well, on Wednesday we get the Bureau of Economic Analysis releasing the Personal Consumptions Expenditure Price Index for March. Keep in mind, this is the Federal Reserve's favored measure of inflation. Consensus estimate is for a 2.2% year-over-year increase. The core PCE, which strips out volatile food and energy, is seen rising 2.6% year-over-year compared with 2.8% previously. Percent year over year compared with 2.8 percent previously. If these readings come in as expected, they would be the lowest reading since March of 2021. On Friday we get the Bureau of Labor Statistics releasing the jobs report for April, because come Friday will be May 2nd we will be in May. Economists forecast 130,000 gain in non-farm payrolls. The unemployment rate is expected to remain unchanged at 4.2%.
Keith Lanton:Barron's talking about equity markets two headlines expressing some concern going forward. Talking about last week stock markets surged the past week and they suggest the next move. They say why the next move could be lower. Another article in the Up and Down column saying time is running out for the stock market. Trump's next move is crucial. Why do they say the S&P 500's next move could be lower? And a lot of that has to do with concerns about profits going forward. This is not necessarily a tariff policy but the knock-on effects of all the back and forth and the negotiations and the businesses kind of freezing in their tracks as they're uncertain what to do.
Keith Lanton:Current consensus estimates is for the S&P 500 earnings per share to be about $264. With the S&P trading at around 5525, that means that the market's trading about 21 times those estimates and one. You could be concerned about the current market price, meaning the S&P's level based on earnings, or you could be concerned based on the multiple on earnings, or you could be concerned based on the multiple. So the multiple is 21 and that multiple is based on earnings coming in at $264. Some analysts are speculating that that 264 is too optimistic, others suggesting that the 21 times earnings is too significant of a premium, given all the uncertainty, given the fact that earnings might be falling, given the fact that international investing may start to look more attractive and therefore there'll be more competition for USS, especially if the dollar weakness were to persist. So if you were to take that new level of earnings, that 250, which may or may not happen and you were to apply that 19 multiple instead of 21, well, you would come up with a target for the S&P of 4,750. That is significantly below current levels of 5,550, which would imply a downside to the market of almost 15% if that were to happen. Now that may, of course, not prove accurate.
Keith Lanton:There are reasons for optimism. A truth post-social about trade negotiations could lead to a rally at any time. So, with any suggestion that inflation is cooling and the job market is weakening, all of that potentially could lead to further talk that the Federal Reserve could cut interest rates and that, therefore, is something that the markets also may react favorably to. It's real hard to predict what's going to happen going forward, but we are at a point where things are even more uncertain than usual, given all of the different balls in the air at the moment with respect to trade, with respect to international negotiations with Iran, with the international negotiations with Russia and Ukraine, with what's taking place in the Middle East between Israel and Lebanon and Palestinians, and what's taking place with the Houthis and the US involvement, as well as, of course, all the different policies here in the United States A lot more change taking place at the moment, which, arguably, is what the American people voted for, and at the moment, that's what we're getting. But that does create a lot of uncertainty, and markets need to reprice based on A the uncertainty, and B the probabilities of outcomes.
Keith Lanton:So let's talk about gold, which has gone on a historic run of late. Gold bugs, who have been holding out hope that gold would appreciate for decades, are getting their due. At a recent price of around $3,400 per troy ounce, gold is up about 30% this year, the envy of the stock bond and even holders. For a long time, you may remember that folks were saying what do we need gold for? Bitcoin is the digital gold Over the past 20 years. The exchange-traded fund SPDR gold shares has surged 630% over the last 20 years, and that is about 85 basis points more than the S&P 500, which tracks the biggest US companies. Now, that's not something that's supposed to happen when you have gold outperforming the S&P 500 over 20 years.
Keith Lanton:We pointed out that there are lots of periods of poor performance for gold, but the last 20 years is not one of them. If you knew that gold was going to outperform over the last 20 years, of course you would have put your money into that yellow metal. In fact, the shareholders would probably demand that many of the companies in the S&P 500 shut down and kind of do like what MicroStrategy did with Bitcoin and just hold on to gold. What do you need to run a company for if you could just hold gold and it'll appreciate more than your earnings?
Keith Lanton:But gold has had the wind at its back, especially of late. We've had the United States placing sweeping sanctions on Russia and its largest banks. That as well as some concerns about the dollar remaining the reserve currency and international banks wanting to diversify away from the dollar, international banks wanting to diversify away from the dollar, and this has led to a foreign reserves in 2000, and it's now down to 57%. But of late it's not just bankers. Individual investors are getting onto the investment train for gold and demand for gold bars and coins has been surging. Some dealers are reporting sporadic shortages, including Costco. Gold ETFs were bucking the trend, meaning people were not putting money in but taking money out, but their flows have turned positive since last summer.
Keith Lanton:Now there's about $4 trillion worth of gold held by central banks and about $5 trillion by private investors. Of gold held by central banks and about $5 trillion by private investors, if you're wondering. Well, what percentage of financial assets does that represent? There's about $260 trillion of financial assets in the world, including cash, cash alternatives, stocks and bonds. So gold represents about 3.5% of total assets in the world, and some investors suggest that individual investors' allocation to gold, depending on their proclivities and their beliefs, should be somewhere around plus or take a few percentage points from that 3.5%. So what to do now? If you said, hey, you know what, I'm below that 3.5%, or I'd really prefer to have 5% or 6% or 7% and I'm underweight, am I too late? Well, this article in Barron's is suggesting perhaps the place to look would be the gold miners. They are trading about 30% below pre-COVID levels relative to their earnings and their earnings have been accelerating as gold prices have moved higher, have been accelerating as gold prices have moved higher. Some mentioned favorably in this article are Barrick Gold, newmont Mining and Endeavor Mining, as some gold mining stocks that might be worth considering.
Keith Lanton:All right, let's change gears. We talked a little bit about international investing and investors are starting to think not just uh, so us, focused, us central, even uh, us investors. So it's uh good to revisit, uh, when you're investing uh internationally, what the nomenclature is, what the wording is and what it means. So terms such as international, global and world are anything but interchangeable when it comes to funds. So keep this in mind.
Keith Lanton:Global and world funds include the United States market. So if you're buying a fund that has the word global or world in it, think you're buying something that is truly not US. That is not correct. Those funds can, and most do, hold US holdings, and some have significant holdings in the US, even in excess of 50%. So you really need to do your homework. When it says global and world, if you're looking for international diversification, you really got to see what that manager is doing and what their beliefs are. Well, international funds, so funds that have the word international in them, generally don't hold US equities.
Keith Lanton:If your goal is to diversify away from the United States and that may be increasingly your goal is you're seeking diversification. You're seeking diversification. International funds may focus on developed or emerging markets or a combination of both, and how funds allocate to region and holdings will certainly affect performance. Judging by inflows this year, at the moment the flows are tending towards developed international stocks is where the majority of flows that are going overseas. That's how US investors are making those diversification investments.
Keith Lanton:To conclude today's discussion, discussing municipal bonds once again, because I feel that there is a unique opportunity in the municipal market. Barron's agrees. They feature a column on bonds in Barron's entitled Tax and Tariff Fears of Rock Municipal Bonds. Why they Are Still Appealing.
Keith Lanton:Things have gotten crazy in the normally boring world of municipal bonds. Concern that munis might lose their crucial tax-exempt status as part of the budget process has been an unpleasant backdrop all year for investors. Then came President Trump's Liberation Day tariff announcements, which rocked global markets and sideswiped munis. At first, yields on bonds, including munis, fell as investors saw bonds as potential havens. Bond yields move inversely to prices, so when yields dropped, the prices went higher. But then unexpectedly, as folks got concerned about investing in the United States we've talked a lot about that Dollar weakened, bonds weakened and treasury yields soared higher. On those fears about US stability, stocks plummeted and investors dumped an array of bonds, including MUNIs, which are traditionally favorites of wealthy investors.
Keith Lanton:Muni exchange traded funds, which are ETFs, owning municipal bonds. They have been growing significantly in size and that adds to some of the volatility in municipal bond markets because it's a lot easier to trade the ETFs than it is to trade individual bonds when things get dicey. And these ETFs hold three times the assets that they did the last time things got really dicey, which was during the pandemic back in the late 2000s, and that is added to the frenzy as these ETFs had to sell to meet redemptions. This is what has created an opportunity. Long-term munis, barron saying, are especially appealing based on their after-tax comparison with treasuries. Yields on 30-year municipal bonds are now at about 95% of those on 30-year treasuries, and we're talking about high-quality long-term bonds. So that means you're getting the benefits of tax exemption practically for free.
Keith Lanton:If you say to yourself, well, long-term's, not for me, I'm looking a little bit more intermediate. Well, for 10-year high quality AA, aaa rated munis, you're looking at about 80% of the 10-year treasury. So anyone who's in a 20% or higher tax bracket would benefit from owning munis over treasuries. You can generate a tax equivalent yield of 6% to 8% in high quality asset class, which is pretty attractive Now can generate a tax equivalent yield of 6% to 8% in high quality asset class, which is pretty attractive. Now, what does the tax equivalent yield mean? Well, what that means is that if you're earning 4% on a municipal bond and you're in a 50% tax bracket, you'd have to own an 8% taxable investment in order to equal the benefit of that 4% municipal bond. Because if you own a taxable investment and your overall tax rate on that investment is 50%, well you'll earn eight, but you'll pay 50% to the government. You'll wind up with four, which is what you'll wind up with on that 4% municipal bond that we just used in this example.
Keith Lanton:Of course, one reason yields are still elevated is because risks remain, but the biggest risk we talked about is that perhaps the Republicans will tax municipal bonds. In fact, tom Kozlik, the head of municipal strategy at Hilltop Securities, earlier this year said that his feeling was that bonds might lose their tax exemption. He put a 50 percent probability on that earlier in the year. But in early April he said the House of Representatives passed a budget framework that targets $1.5 trillion in spending cuts, down from earlier discussions of $4 to $10 trillion in cuts, and now he sees only a 10% chance of the muni exemption being revoked. Now he sees only a 10% chance of the muni exemption being revoked, although he still believes the budget bill could include smaller changes to municipal bond tax exemption affecting specific sectors.
Keith Lanton:Also need to be mindful of different categories of municipal bonds. Cuts to Medicaid could have a major impact on hospital bonds. Black Rock suggested in its April muni report that investors underweight small private colleges, safety net hospitals. Those are hospitals that serve a lot of Medicaid patients, senior living and long-term care facilities. Those may also see Medicaid cuts and speculative projects with weak sponsorship, unproven technology or unsound feasibility studies. While that sounds like a wide net, it actually leaves the bulk of the muni market looking quite strong.
Keith Lanton:Muni gives 19 states AAA ratings, 28 states AA ratings and only New Jersey and Illinois get an A rating. That's for state general obligation bonds. The only state with a negative outlook at this point is Maryland. Maryland is a AAA rated state, so even if they were to be cut, it still would be a strong credit rating. All the other states outside of Maryland have a positive or stable outlook. Also, municipalities have the ability to raise taxes and fees if they need to.
Keith Lanton:If all of this sounds like a lot to keep track of, well, one option, instead of owning individual bonds yourself, is to hire a professional, invest in a municipal bond fund or ETF. And if it's an actively managed ETF, well, hopefully the professionals will be able to manage the intricacies of how policy changes can affect individual bonds. But if you are looking at individual bonds, keep in mind the bulk of issuers are providing essential services, so they historically tend to be resilient. All right well, futures are ticking a little bit higher. Dow futures are now positive about 50. S&p futures positive about 5. Nasdaq futures are up about 13 points. As we await the big tech earnings, progress on trade deals, further data on inflation and employment, so to be continued next week and we'll pick this up in May and hope everyone has a fantastic week. That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern.com.
Sophie Cohen:Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.