I shot the tariff, but I didn’t shoot no equities (yet) is an apt summary for the U.S. government’s view of the fully valued equities market despite the recent establishment of the tariffs for most countries. July’s inflation rate showed increased inflation in services, largely tariff free, and no change in inflation in goods, which are heavily tariffed. However, last week’s report on inflation at the wholesale level showed the biggest sequential spike in three years as prices in July rose .9%. U.S. companies absorbed the interim tariff announced earlier this spring as they awaited the final numbers. Now that most tariffs are permanent, price increases and increased inflation are looming. The U.S. auto companies reported billions of dollars of tariff payments were absorbed by them and hinted at plans to pass along the charges to consumers. Rumored cuts in interest rates will likely be fewer and further between as the Fed watches increased inflation, a growing deficit and declining employment evolve. Wage gains are less than current inflation rates. Amidst all the chaos caused by the tariffs, a court case continues to percolate, a proceeding that will determine if a President can unilaterally impose these tariffs by using emergency powers. Remember, Smoot-Hawley was passed by Congress. If the courts ban the tariffs, chaos will again ensue. To date, the logic of how these tariffs have been applied is no clearer than the offsides rule in soccer. Perhaps the courts will bring some logic to them.
Recent events find governments getting increasingly involved in private markets. President Trump went to Alaska and returned with a proposal to turn the Ukraine into a Continuation Vehicle with U.S. security guarantees. The UK government wants to force UK pension funds to back British assets. Chancellor of the Exchequer Rachel Reeves missed the memo on how poorly similar state plans, known as Economically Targeted Investments, worked in the U.S. in the nineties as the investment performance was poor and many money managers and state officials were convicted of bribery. Blending political goals and fiduciary duties never ends in victory. The U.S. administration has also clarified its regulations to encourage individual participation via 401(k) plans in private markets. Be careful what you wish for. The Securities Act of 1933 established accredited investor rules to protect less experienced investors. The proposed change is the triumph of hope over sense as it risks retirement money in search of the next Google. The sad stories of valueless 401(k) accounts, litigation and Federal bailouts are inevitable as it will only increase the chances for abuse of the naïve investor. We have never sought individual investors to avoid these difficulties.
The administration’s interest in private equity now reaches the level of ownership as it competes with private equity. Nvidia and AMD have agreed to pay the government 15% royalties on sales to China. The Pentagon has become the largest shareholder in MP Materials, a rare earth mining company, in return for a ten-year price guarantee that is double the current market price for NdPr, a metal widely used in industrial magnets. This arrangement echoes price guarantees for farmers with the added feature of equity. Rumors of the government taking a 10% ownership position in Intel abound. Not since the formation of the Tennessee Valley Authority have we seen this kind of public presence in the private sector. Even the Solyndra debacle was only a loan guarantee, $535 MM, lost by the federal government. A potlatch was a custom among the Coast Salish tribe in the Northwest where leaders would try to outdo each other in giving gifts and destroying goods to demonstrate wealth and power. Surrounded by great ceremonies, a potlatch would involve a great destruction of wealth. Both the Inflation Reduction Act and the Big Beautiful Bill were Federal forms of potlatch that gave away much and will likely destroy wealth by increasing inflation, not reducing the deficit and encouraging loose credit. Per S&P and Fitch, 11.4% of all private credit is now paid in kind, as certain creditors cannot pay their current interest bill. Private
credit defaults rose nearly 20% from the first quarter to 5.5% in the second quarter. Investing in private credit has been flavor of the month for some time but the flood of capital has contributed to softer standards. Despite this expansion of private credit, DPI remains at a low level for the industry as valuation legerdemain continues. We have been told in several processes that our offer does not reach the seller’s mark so they will be creating a CV. Abe Lincoln had it right about fooling some of the people. I’m Rob Morris and I approve this blog.