Dear Valued Clients and Friends –
A traditional trip around the horn today with a long-forgotten Against Doomsdayism for those who like that sort of thing!
Dividend Cafe did a refresher on inflation, what it is, what it isn’t, and what bigger issues persist in public policy that are not being discussed enough in the present tariff moment. The written commentary is here (my favorite), the video is here, and the podcast is here.
Off we go …
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Market Action
- Markets opened flattish today and zigged and zagged in a very tight range throughout the day.
- The Dow closed down -34 points (-0.08%) with the S&P 500 and the Nasdaq totally flat.
*CNBC, DJIA, Aug. 18, 2025
- The earnings yield of the S&P 500 is the current earnings of the companies of the index divided by the price of the index. The “real earnings yield” takes that number and subtracts the inflation rate as priced in the TIPS market (i.e., actual market breakevens). By that measure, we essentially have as low an earnings yield as we have had in thirty years. This is not because earnings are low or inflation expectations are high – it is because prices are high.
- That very low real earnings yield is very compatible with the quite high price-to-book ratio of the S&P (highest ever at 5.3x; it was 5.1x in March of 2000). Is price-to-book a great valuation indicator? Not really – capital intensities have changed a lot, profit margins are higher and the index composition is different and tangible vs. intangible asset weightings are all different. So it isn’t something I would draw a strong conclusion from, but it is a data point along several other data points that point to the same, not differing, themes (h/t Callum Thomas).
- 30% of the S&P 500 is trading over 10x revenue (not profit, but sales)!
- The ten-year bond yield closed today at 4.33%, flat on the day
- Top-performing sector for the day: Industrials (+0.40%)
- Bottom-performing sector for the day: Real Estate (-0.95%)
- We got the data for the month of June on Friday regarding foreign purchases of U.S. stocks. It proved to be a record month with foreign investors buying $163 billion of U.S. stocks. Past record months for foreign purchases were February 2000 and May 2007 (h/t Peter Boockvar)
Top News Stories
- President Trump met with Vladimir Putin in Alaska on Friday, and very little was released on what was discussed and where they may or may not be trying to go regarding Ukraine talks. European leaders confirmed over the weekend that President Trump was purportedly offering U.S. security guarantees to Ukraine. Today, the President hosted Ukrainian President Volodymyr Zelensky at the White House, along with other key European leaders.
Public Policy
- My friends at Strategas Research believe that the tariff threats of April 2 were sitting near $700 billion in annual cost to the economy, and will settle somewhere near $375 billion, with an effective tariff rate of about 14% (their projection is lower than some studies like Yale’s that put the number closer to 17% or 18%). They point to the watering down of sectoral tariffs (semiconductor, pharmaceutical) that has played out in the last couple of weeks.
- The federal appellate court approved the dismantling of the Consumer Financial Protection Bureau. Another appeal is coming, but so far, the administration has had success in setting up the table for significant efficiencies in the vast (and apparently unconstitutional) apparatus of financial sector regulation that has developed with the CFPB.
- The various legal ramifications of where some of this may go are getting more interesting. The administration has some backup plans for some tariffs if some of them are properly ruled to be out of bounds legally. But if the courts continue ruling against these tariffs, and if the Supreme Court does end up taking the case, and if the high court does rule against them (all big ifs, but all things that seem prima facie possible), here is how Strategas Research believes the administration responds:
“We believe the Trump Administration will institute legally settled tariffs to replace IEEPA tariffs, which include Balance of Payment tariffs for up to 150 days. This gives the administration time to institute Section 301 investigations and when those investigations are concluded, more permanent tariffs can be imposed. This is a lengthier process than IEEPA, but on better legal grounds. We also expect Trump to use the reconciliation process to push for Republicans to codify the tariffs to get around the courts.”
Economic Front
- Industrial Production declined -0.1% in July as activity fell for the first time in four months. Every category was modestly lower.
- Retail Sales rose +0.5% in July (expectations were for +0.6%) and now sit up +3.9% versus a year ago. Building Materials, Restaurants, and Bars were all down.
- The six-month business activity outlook fell by eight points (to 16) in the NY Manufacturing Survey. That capital expenditure plans fell in the first survey after OBBBA passed (with new capital spending incentives) is a surprise.
Housing & Mortgage
- The NAHB Home Builder Sentiment Index fell one point and is now at the lowest print since December 2022. Prospective Buyers Traffic remains anemic. 38% of builders cut prices in the month.
Federal Reserve
- Odds now sit at 85% for a quarter-point cut at the next FOMC meeting in September (it had been 100% after CPI last week and came down to 85% after PPI). We are at 38% odds for a full 75 basis points worth of cuts between now and the end of the year (so a fed funds rate ending at the year between 3.5% and 3.75% versus the 4.25% and 4.5% range it has now). That had been over 50% a few days ago.
- All eyes will be on the hawkish vs. dovish nature of Chairman Powell’s comments in Jackson Hole, Wyoming, this Friday. In the meantime, the race is on for the Senate to approve Stephen Miran to the Fed before the September meeting.
Oil and Energy
- WTI Crude closed at $62.63, up 1%
- Midstream stocks were flattish last week (Canadians mostly up, with U.S. mostly slightly down)
- Some of the takeaways from the Midstream Energy conference in Las Vegas that interested me the most (still working through a lot of the analyst commentary):
- Overbuild of Natural Gas Liquids pipelines is a concern for some, but not at all a concern for some of the largest players who have ample upstream volumes from other assets that can be easily redirected
- U.S. LNG exports are a huge topic of conversation in light of the administration’s regulatory favorability for such relative to the prior administration, but also in light of the approach the President is taking in trade talks (i.e. U.S. LNG is right up there with soybeans as two of the only goods we really have a lot of that other countries do not)
- Capex is increasing, but not at an unreasonable pace, and financial flexibility is strong for companies, versus past years, where excess leverage limited flexibility.
- Obviously, the capital expenditures have to turn into profit growth, and some companies seem to have a more compelling case for that than others.
- One thing that I do not think gets enough attention is how many publicly-traded players have left the MLP space over the last five to ten years. This consolidation really helped thin the herd, eliminate bad allocation of capital, and clear the deck for a more grown-up universe of investible candidates in this vital industry (h/t Hinds Howard).
- Energy remains the only sector below its 200-day moving average
Against Doomsdayism
- It has been a while since I did an Against Doomsdayism. Sometimes, a picture tells a thousand words:
Ask TBG
| “In the newsletter, if I read it correctly, tighter money supply and increased production is good. With the Fed reducing QT and holding off on rate cuts, at least until now, and the investment incentives in the OBBBA, should we be heading in that direction?” ~ Joe |
| Unfortunately, the supply-side of the current tax policy is more complex (some good incentives in OBBBA against the impediments of tariffs). It remains a tension that is not going to be resolved any time soon. On the monetary side, I do not believe QT/QE or even the fed funds rate are directly related to M2 Money Supply. Those things are tools of monetary policy, but not exactly the same as increasing money supply. QT/QE speak to excess bank reserves, not money in circulation. And the cost of capital is not directly related to M2 Money Supply or inflation, as the post-crisis period (2009-2021) made abundantly clear. I believe money supply in excess of the supply of goods and services is the determinative factor, not bank reserves or cost of capital. At the end of the day, the fed funds rate is used to try and affect money supply, but new money is created when new loans are created, and sometimes the interest rate is an ineffectual tool relative to manufacturing loan demand. |
On Deck
- Clients will receive their Weekly Portfolio Holdings Report on Wednesday, per usual.
- I will be speaking at a conference in Seattle on Wednesday morning
- The annual Jackson Hole event is this weekend, and Chairman Powell speaks on Friday
Enjoy your Monday night. The painful sports boredom of summer is about to end.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
