Who Wore it Better? Macro and Some Portfolio Maintenance

Your favorite Unemployed Value Degen has returned from the family road trip. Seeing so much of the country reminds me of that line from Tolkein, “I don't know half of you half as well as I should like; and I like less than half of you half as well as you deserve.”

The last thing I wrote was that things were feeling a bit frothy in the market, and since then a lot of small cap value names are a bit lower. I don’t know how long this drawdown will last, and for megacap tech it isn’t a drawdown at all. Still, as money rotates from one asset class to another, megacap tech can act like a sponge and pull all the liquidity out of other sectors. My best guess is that things will be bullish again for small cap value before long, possibly as the majority of earnings are announced this week, or possibly by the end of August.

Since my last writeup, Trump has announced trade deals with the EU, Japan, and South Korea. While it remains to be seen if all aspects of these deals will eventually be implemented, as they are not exactly treaties to be ratified, I was surprised that they did not include many instances of other countries lowering their trade barriers against the US. It looks like Trump is happy to collect 15% tariffs across the board instead, higher than the 10% I had thought was his goal. That would represent the US having a tariff rate about equivalent to India or Turkey’s. It seems that raising revenue was more important than fixing trade imbalances. I feel a bit foolish to not have foreseen that motive given the emphasis on the fiscal situation.

As more and more major trade deals are finalized, the uncertainty that has been paralyzing the economy can fade away. As uncertainty fades away, businesses can unclench and proceed with their long term plans. This uncertainty paralysis is probably one of my larger gripes with the current administration, but perhaps the fog of war was necessary for the negotiations. I’m outside of my circle of competence when it comes to the Art of the Deal.

The most recent GDP growth number was just released, and in Q2 of 2025, the economy grew at a 3.0% annualized rate in real terms. This is a huge improvement over Q1 2025 which was an annualized decline of 0.5%. But both of those numbers were driven by imports, first the frontrunning of tariffs, and then the bullwhip of collapse. The two numbers average out to a 1.25% annualized growth rate, but as uncertainty diminishes, Investment can finally start to pick up.

Even with the Artificial Intelligence revolution and reshoring, last quarter investment was a huge drag on GDP. If Trump really deregulates as much as he says he will, and the tariff uncertainty is gone, given the AI revolution and reshoring, that Investment component of GDP is should start picking up some slack. Continued weakness in Investment would be a huge red flag.

The enormous consumer import frontrunning bullwhip can be seen here:

Falling imports is one of the goals of Trump’s new tariff policy, to redirect consumption dollars away from other countries and back into something that the US can provide. A common retort is that import tariffs are a tax on US consumers, which is true, but US consumption is 50% driven by the top 10% of consumers. There aren’t a lot of imported European or Japanese goods in my grocery bill. The US is a major agricultural powerhouse, so the burden shouldn’t fall too heavily on the working man. This makes Trump’s policies a “tax the rich” regime. I have long held the opinion that Trump has always been an old -fashioned Democrat, cut from the FDR cloth, authoritarian and populist. Who wore it better?

Artificial Intelligence doesn’t quite seem to be able to capture the essence of Trump yet.

But back to GDP, when you add back inflation to the 3.0% annualized number, you get about a 6.6% nominal GDP growth rate currently. This is why some pundits are commenting that Trump is “running the economy hot.” At a nominal GDP growth rate that high, the debt to GDP figure has the ability to fall, although serious progress won’t be seen unless Trump is successful in getting interest rates lower. And speaking of interest rates, Jerome Powell just held rates constant, even after getting visited by the Orange Man himself, and getting a pat on the back and a punch in the shoulder. This is what the media has been proclaiming is a fascist regime?

But the market participants believe that Powell will still cut twice in 2025, with the first cut coming in September. And by May of 2026, Trump will hand pick a Fed chair specifically based on the criterion of lowering rates. A lthough I am starting to reconsider by how much even his hand-picked replacement will do so. I had started to fall for the whole “Trump is a fascist” rhetoric, but even if Trump wants a 1.0% overnight rate, he might not get it. This last fed meeting saw two dissenting committee members, a first since 1993. The era of autopilot zero interest rates is over, and we are now in a world where the decisions are hard, and trade-offs are real. We might find out if the Federal Reserve is a democratic institution or a dictatorship if Trump’s nominee disagrees with the committee.

The Federal Reserve has to balance inflation with unemployment, and however much everything these days is all about Trump, the elephant in the room this time is the Artificial Intelligence revolution. We are already starting to see white collar unemployment tick up meaningfully. Will we also see the productivity gains that could drive meaningful deflation? Cathie Wood seems to think so. We are already seeing unemployment with a graduate degree higher than unemployment with an associate’s degree for young people. That is a shocking statistic, it is easier for a 27 year old from community college to find a job than a 27 year old with an advanced degree. In the past, when the Fed had to choose between fighting unemployment or inflation, they typically chose to fight unemployment and let the inflation run a little hot. Why would this time be different just because the unemployment is from creative destruction instead of being from a business cycle?

So to me it looks like an economy with room to run, there is pent up demand for investment, consumption dollars that need to find new domestic substitutes, interest rate cuts on the horizon. At some point in the next six months, if the deficit keeps shrinking, the media won’t be able to obfuscate it anymore, and that should bolster confidence. Aside from the recent pullback after the frothiness of the market, there are a lot of reasons to be bullish for the foreseeable future, that is until the low interest rates blow some awful bubble from overbuilding data centers. But we are still a few years away from that can of worms.

In the meanwhile, some of the companies that I wrote about in the past aren’t feeling as cheap as they once did. I have a harder time buying DOUG at $2.82 than at $1.17 when I first wrote about it last year. I can’t stomach buying more LEU at $225 when my mind is anchored to the $41.80 from August of last year. And I even trimmed some SBSW, although I hope to be able to buy it back. It’s time to look through my old writeups and see what is still cheap and good for allocating new funds.