Tariffs, Yields and a $40 Billion Bet On AI - The New Market Playbook

Trump’s tariff threats, Apple’s iPhone challenge, bond yields on the rise, and a $40 Billion bet on A.I. —this episode breaks down the week and how to adapt to the new market reality. 

Welcome to The Money Runner with David Nelson.

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

0:03

Let's put the important news right at the top. Trump is ready to hit the EU with 50% tariffs and Apple. They are looking at 25% tariffs on iPhones made outside the United States. All of this hit the wires before the open Friday. If you are hoping to coast into a long holiday weekend, you didn't get the memo. The trading was fast, furious and stayed that way right up until the closing bell. This is the news cycle that does not sleep, people. Welcome to the Money Runner. I'm David Nelson and this. We've got a lot to unpack. But before we sign off for a long weekend, I wanted to share a few thoughts. On the heels of a week that saw markets and policy collide once again, forcing everyone to rewrite their playbook in real time. Like it or not, we're now playing a game without clear rules, or at least one way the rules keep changing. Friday's reaction says a lot about how investors have adapted to the unpredictability of Trump's policy signals. Before the bell even rang, futures were down more than one and a half percent from Thursday's close. Likely a knee jerk reaction from the bots or tape readers. But by the end of the day, stocks clawed back more than half those losses. Why? Because investors have learned something critical when Trump says he doesn't want a deal that usually means he's open to one. If the terms are right, he's talking tough. Sure. Saying he's content with 50% tariffs unless companies move production to U.S. soil. But he's also signaling flexibility, even floating the idea of delays if EU firms step up. Treasury Secretary Scott Bessen says talks with Europe are not going well, but negotiations with Asia are moving fast and that tracks Europe's fragmented political structure isn't built for speed. And that's part of why the continent continues to lag the U.S.. And then there's Apple, which closed out eight straight down sessions. A 25% tariff may be the least of Tim Cook's problems. There's growing frustration over Apple's struggle to monetize A.I.. And now, former design legend and rock star Johnny Ive is teaming up with Sam Altman and Openai to design next gen devices. I use a number of large language models, including Chatty Beatty, Elon Musk, Rock and Google's Gemini. At least from my vantage point, Chatty Beatty is the all around winner. I'd say Grok is improving very fast, but catchy. Beatty, most creative and certainly the most humanlike. We can debate whether A.I. stocks are overvalued ahead of themselves, whatever. But what is in it for debate is that this is the most powerful technology shift in decades. In fact, just before the market close, Oracle announced it was going to buy 400,000 Nvidia chips for Openai's new data center.$40 billion. That's serious money. Everyone headed into the weekend focused on Friday's tweet about tariffs on the EU. But the bigger news of the week was the passing of the GOP tax bill in the House. And a bond market that was not impressed. I'm going to be covering this in more detail in a substack post. Maybe sometime later this weekend. But for the moment, let me say this. It's too early to say what the final bill is going to look like, as it still has to make its way through the Senate. But it was clear to conservatives and bond traders that the deficit wasn't going to narrow anytime soon. In fact, some parts of the legislation have key cost reductions kicking in later than expected. And that did not go unnoticed by the bond market. Early in the week, bond yields kicked higher and as a result, the broad market ended the week lower, giving back just about half of last week's gains, down about 2.6%. Why are bonds so important to stock investors? Because most valuation models start and end with the risk free rate. Stocks have to outperform bonds. So what's the point of putting your money at risk? Let me put it another way. When the risk free rate goes high enough, it sucks capital out of risk assets like stocks. And that's exactly what happened this week. We've seen it before. Take a look at this chart of the S&P 500 on top with 30 year Treasury yields on the bottom. You can see the last time yields broke above 5%, the markets struggled. Here we are again looking at exactly the same picture. What makes it a little more challenging this time is what we see in this next chart. Same chart. Only this time we aired another section showing valuations. What you're looking at there is a blended p e ratio looking six months forward, six months backwards. And you can see back in 2023, we were a full five turns lower around 17 times. Today we're looking much closer to 22 times. That's a challenge because if history is any guide, stocks struggle when the 30 year yield gets above 5%, or at least been that way for the last 20 years. This next chart is another way to look at it. You can see here the real total return for stocks struggle when rates are this high, real total return. What am I what am I talking about? You take your stock price, your price appreciation, your dividend. All right, that's your total return. And then you subtract the 30 year yield, right? That's your real return. So if you're up 10% in stocks, you get a 30 year yield, you real returns 5%. So when it's negative, right. Doesn't mean stocks can't push higher. But the story and growth have to be that much better. A few trade deals would help change the current narrative, and if I continues to deliver like I think it will, the productivity boost will help drive stock prices higher. Yeah, I get it. There's a lot of ifs in that sense, but it's a Friday heading into a long weekend and it's worth remembering that markets are constantly recalibrating policy shifts, rate moves and new technologies all bring challenges, but also opportunities. If you're focused on the long game, staying disciplined and open to change is what matters most. All right. It's a Friday. It's late. Going home to my wife, and it's a long weekend. Hope you enjoy yours. Don't forget if you want to learn more about yours truly or the money runners, go to my substack site. D.C. Nelson 1 to 3 at substack dot com. I'm David Nelson. And this is the money runner.