MARKETS JUMP on Trump’s Japan Trade Deal | Prof G Markets

MARKETS JUMP on Trump’s Japan Trade Deal | Prof G Markets

Today’s number 50. That is the percentage of time that 10day weather forecasts will accurately predict the weather. Put another way, Scott Galloway should have been a weather man. Welcome to Profy Markets. I’m Edson. It is July 24th. Let’s check in on yesterday’s market vitals. The major indices all rose on news of a trade deal with Japan and word that the EU and the US are progressing toward an agreement as well. The S&P had its 12th record close of the year and the NASDAQ closed above 21,000 for the first time in history. Meanwhile, meme stock mania continued with Crispy Cream and GoPro ripping in early morning trading. And finally, Tesla shares were volatile in postmarket trading after reporting a second consecutive quarter of year-over-year revenue declines. Okay, what else is happening? Trump announced a US Japan trade deal via his social media platform, Truth Social. The agreement lowers tariffs on auto imports and spares Japan from further tariffs on other goods. Auto stock surged on the news, sending the Japanese markets to a one-year high. Honda closed up 11% and Toyota posted its biggest single day gain in over 15 years. So, Trump has completed a quote massive deal with Japan, perhaps the largest deal ever made. That is according to his Truth Social Post. What does the deal actually entail? Well, America will reduce its tariffs on Japan from 25% to 15%. Okay? And in return, Japan will quote invest $550 billion into the United States. According to the president, that investment will occur at his direction. It will create quote hundreds of thousands of jobs and the US will receive quote 90% of the profits. So, it sounds pretty good. Now, what exactly will Japan invest in? We don’t know when will the investment occur. What is the timeline? We don’t know how will it be structured. What are the deal terms? We don’t know. And has this agreement even been signed? Well, on that question, we actually do have the answer, no, it hasn’t been signed. Rios Akazawa, Japan’s negotiator, said that he will quote receive a report on the details in the future. Not exactly a binding agreement here. In fact, we’ve seen it a number of times. Back in May, Trump said that Saudi Arabia had pledged to make a $600 billion investment into the US. That was in contrast to his other claims that they would invest $1 trillion and then other claims that they were going to invest $300 billion. Multiple competing claims. And since that announcement, no actual investments have been made and no actual deal terms have been signed. Before that, Trump announced the Stargate project, which was supposed to be a $500 billion investment from OpenAI and SoftBank. New reports are now saying they actually haven’t raised that money, and they are actually struggling to get that project off of the ground. Around the same time, we saw this Apple investment announcement. They were going to invest $500 billion into the US, which Trump was parading around to the media. Soon everyone realized, wait actually this is just a continuation of plans that Apple already had. And then Apple of course started moving its supply chain to India. And then in Trump’s first administration, he made a very similar announcement with China. China was going to make a $200 billion commitment and that never happened either. And so on and so forth. We’ve seen these investment commitments time and time again and so far none of them have panned out. So, do we have a deal here? Well, in the sense that we’ve lowered tariffs, sure. But remember, we were the ones who put the tariffs on in the first place, and lowering them was supposed to be a quid proquo. We were supposed to get something. So, if history is any guide at all, then you will conclude that this $550 billion commitment is not actually a commitment. It’s it’s more of a press release. And in fact, the markets would agree. We saw huge gains in the Japanese stock market, especially the auto stocks. We saw a lot of complaints actually from the American car makers and we saw an overall reaction not to the investment proposal but to the tariff change. As Charu Chanana, the chief investment strategist of Saxo put it, the market sees this investment as quote political theater rather than a tradable catalyst, i.e. not real. So if you want to call this a deal, have at it, be my guest. But in our view, a deal means you sign something. Specifically, something that is actually new. So a a non-binding framework, not a deal. A commitment in principle, not a deal. A provisional expression of intent, not a deal. A deal is a contract or a treaty that is signed and ratified into law. This isn’t that. So, let’s check the scoreboard. Let’s look at the deal tracker. We are still at zero deals. Let’s get Scott’s reaction to this and see what he has to say. [Music] Scott, good to see you. Good to see you, Ed. We’d love to get your reactions to this US Japan deal. Uh, one of the biggest deals in history, apparently. Any any thoughts? Let me get this. We have a 0% tariff of our cars going into Japan, which was an easy gift for them. And by the way, that’s what the deal was before. But the reality is it doesn’t matter because the Japanese don’t want our cars. We sell 2 billion into Japan. They sell $55 billion of cars into our nation. If you want to talk about just a cultural or a sociological delta that that props up in terms of consumer preferences, we basically sell boats with steering wheels and the Japanese have no desire to buy our cars. They want they just don’t want our cars. Whereas we want Japan did to Detroit what Netflix is now doing to LA. They basically globalized it. You don’t remember this, but in the 80s they showed up with something called a Honda Civic and it revolutionized the automobile market. The USC7 monopoly on it and they came in with this little ugly car called the Civic that cost 40% less than an equivalent product and was cheaper to maintain. When I went to graduate school, I sold my BMW 3 series, which I had bought with my first bonus check from Morgan Stanley so I could attract a lovely Zed. I hung swim goggles from the rear view mirror because I thought that would make me sexy even though I don’t swim. Uh, by the way, it didn’t work. It didn’t work. Anyways, one of your one of your most embarrassing stats. Oh, no. They just me that’s nothing. We’re going to need a bigger boat. But the the point is I sold it when I got into business school. I sold it to pay for business school, but I still needed a car. So, I bought a 1984 Honda Accord. And I’m not exaggerating. I’d put five bucks of gas in that thing and it would just go. I don’t think in two years I ever even put oil in it. I mean, Japanese are amazing cars. But back to my original question, other than this weird press release that they’re investing $550 billion in the US, which is not enforcable, which is not a legally binding agreement, what exactly is different about this? The way I put it, you know, we’re up to maybe 50 tariff announcements, probably probably more. Still zero deals. This doesn’t count as a deal to me. I think just going meta for a second, I think 2025 in retrospect will be amongst other things the year it was the end of late night television, different talk shows, so to speak. But I also think this year is really signals the decline in the beginning of the end of the US automobile industry. If you look at the nonsense with the tariffs, General Motors just reported they took a billion dollar hit to earnings. um because directly related to tariffs. So to your point, it’s finally creeping through the supply chain. I also think it’s going to give international car buyers an opportunity to just buy fewer of the kind of bigger truck gas guzzling cars that America produces to our hero, our kind of our national champion, which was Tesla, the most valuable automobile company in the world, just reported a sales decline of 12%. Tesla, which has a trillion dollar market cap and a PE of 190, uh, is effectively their revenues are declining faster than any automobile company in the world. And no amount of announcements around robots or flamethrowers or tequilas or drivethroughs or yeah is going to distract the markets for long enough before Tesla collapses. And in addition, you have BYD, which is the most ascendant company arguably in manufacturing in the world, which is going after the heart and lungs of Tesla. So what do we have? Our traditional champion, General Motors, is taking a huge hit because of tariffs. Our national champion Tesla appears to be just not competitive in and waving and doing all jazz hands around any manner of things to get people to look away from an unsustainable market cap. and we have quote unquote new tariff deals that seem to me to be not only not good for us but seeding advantage to other automobile manufacturers. So I think that you’re going to when we look back on the decline of the US automobile industry but look at the 80s cuz we were making just shitty cars. You don’t even remember you weren’t even around for the Pacer, the K car, the AMC Grenland. Watch Breaking Bad, uh the Pontiac Aztec that sort of embodied the American auto industry. It did have a bit of a renaissance with trucks, but my sense is the the EV race has been lost now because Tesla has lost it to BYB. Tariffs have given international buyers another reason not to or this tariff nonsense not to buy our cars. And we’re just struck a deal with Japan that made it easier for Americans to buy quite frankly their superior cars. This is the beginning of the end of the Co Bear, Jimmy Fallon, and Jimmy Kimmel uh era. And it’s also the end in my opinion. It kind of signals a another step down in the US automobile dominance globally. The market really does absorb millions of points of light and issues a decision on what actually is going on. And it’s based on fear and greed, which are pretty unbiased emotions, right? And look at what’s happened. The president has said that his tariff policy will be good for America. And the markets decided that this is really good. a step change in positive economic value for Japan. The NIK just hit an all-time high. These auto Japanese automobile companies have had some of their best days in the history of the markets and American automobile companies are flat to down. So the market and granted the market could get it wrong, but the most neutral arbiter absorbing millions of points of light have said this deal is absolutely a win for Japan and not the US. We’re we’re in agreement now. Well, thank you, Scott. Enjoy your afternoon. Looks lovely. I’ll see you tomorrow. We’ll do Ed. Thanks, man. We’ll be right back. And if you’re enjoying the show so far, be sure to US home prices just hit another all-time high. The median price for an existing home climbed to $435,000 in June, up from $423,000 the month before. That is a 5% jump from last year and a nearly 50% jump from 2020. Meanwhile, existing home sales fell almost 3% to a 9-month low. And at the same time, mortgage rates remain above 6 12%. Put another way, it has never been less affordable to own a home in America. That was true last month. It was true the month before that. But what we are witnessing is that somehow the problem continues to get worse. I honestly can’t believe it. Every month I think to myself, okay, this is probably it. This is probably the top. There’s no way prices could go even higher. Not when the 30-year rate is near 7% and not when prices are six times household income. There’s there’s there’s just no way. It doesn’t make any sense. But every time I’m proven wrong and the month of June was no exception here. So the question is why? Why are prices still going up? What is actually driving this? Our producer CLA spoke with Jake Krimmel, a senior economist at realtor.com. The big question is obviously, you know, how and why are prices still going up despite the fact that we’re seeing almost 7% interest rates um and more houses on the market and time of market still uh increasing? How is it the case that you know prices are actually still going up? Uh and part of it still has to do with the fact that you know demand and supply are still out of balance. So um classic economist answer um but that’s sort of where we are and and where we’ll probably continue to be for um for some time. I think there’s sort of a good news and bad news here for um prospective home buyers. Um especially for perspective first-time home buyers. Um you know, so on one hand, sticker prices, list prices, and sale prices are all still um quite high. And you know, despite uh again growing inventory, high interest rates, those prices haven’t come down much um against a lot of economic models that were uh that were put in place and forecasts for that matter. Um so prices are still stubbornly high. Um, that’s the bad news for prospective home buyers, especially first-time home buyers who really need, you know, quite a significant down payment to be able to, you know, hit their payment to income and loan to value ratios to qualify for a mortgage. The good news for these perspective home buyers, though, is that, you know, they’re entering into a market that is actually um probably the most buyer friendly summer that we’ve seen, uh, at least as far back as Realtor.com data go, that’s the 2016. A perennial feature of the US housing market um you know during the co uh postpandemic period but even before um was that we were in a strong sellers market um and so what does that mean for prospective buyers is they basically had you know very little leverage you heard stories about you know folks waving all the contingencies getting in bidding wars things like that and those weren’t just anecdotes that was born out in the data and that was part of what was driving um you know prices up were those sorts of bidding wars um what we’re seeing now is you know one benefit of sort of softer demand um and homes staying on the market longer and for that matter more homes being on the market is that buyers have, you know, in general more choice than they’ve had before. They have more time to make those choices and they’re actually competing against fewer buyers um at the same time. So there’s some more leverage at the negotiating table. That being said, it’s not necessarily a great time for uh folks to try to be able to afford um you know, a $600 $700,000 house uh as a starter. That’s still very difficult to do for uh most folks, right? I mean, that would be my followup. It’s that it’s a great buyer market if there’s no comp competition, but maybe there’s no competition because everything is just too damn expensive. So, how do you square that? So, I mean, it’s one of those things where if you’re already in the market and you know, maybe you’ve saved up, maybe you’ve hit a windfall, maybe you’re moving from a very expensive market, uh, where you’re renting or renting into a sort of a less expensive, um, metro. Um, if you’re fortunate enough to be in that position, yeah, you’re potentially like the winner of the the more buyer friendly market. Um, but as far as like where do we actually go? I mean, these are sort of much more entrenched problems. Um, housing supply um housing shortages um those are sort of perennial um decal long issues um that we’re only being uh beginning to being able to tackle. Um not to mention that, you know, single family home construction has slowed a lot recently as a result of uh you know, high mortgage rates weighing on on builders. Um more uncertainty um macroeconomically and also this sort of like pullback from uh buyers as well. So we kind of are in a bit of a holding pattern uh on the supply side unfortunately because you know that’s ultimately going to be the only thing that um can actually help to moderate prices sort of in the the longer run in a more you know more permanent fashion um for prospective first-time home buyers. That was Jake Krimmel, senior economist at realtor.com. And you may have noticed Jake mentioned economic uncertainty at the end there. I think an assumption a lot of people might have after hearing that is that Trump caused this. And as we’ve discussed, yes, Trump’s policies are inherently inflationary, especially to the housing market. Steel, aluminum, lumber, all of those things are essential to build homes and the prices on all of those things are going up. So, you know, an understandable conclusion, but is that really the reason that prices rose in June? Probably not. I think you have to remember that one, we’re looking at existing home sales here, so the tariff effect probably isn’t going to show up here. And two, as Jake says, there are other factors at play, factors that have been around for a really long time, and that we still haven’t resolved. You’ve got this supply shortage that’s been around for more than a decade, really, since 2008. You’ve got this rate lock effect where a lot of homeowners bought houses when rates were low. They locked those rates in and now there’s very little incentive to sell. You’ve got multiple different pieces that are all fitting into this giant housing puzzle and Trump is only one piece. Having said that though, there is no doubt that we are only adding fuel to the fire here. If you want to reduce housing prices, then you should be making construction materials cheaper, not more expensive. You should also be making labor cheaper. And in the case of housing, one in five construction workers are undocumented. So tariffs and deportations, while they’re probably not the cause of this bad news, they are certainly set to make this bad news even worse in the future. Now, before we move on, just a quick check-in on young people. This obviously affects young people. In the past 50 years, the home ownership rate for young people has been cut in half. The average age of a home buyer just hit a record high of 56 years old. For comparison, in 1980, the average age was 30 years old. And many of us are indeed still living at home. A third of adults aged 18 to 34 still live with their parents. So, not great, not great, and not likely to change anytime soon. We’ll be right back. And if you’re enjoying the show so far, be sure to a beat on the top and bottom lines. Overall revenue rose 14% compared to this time last year. Cloud revenue increased 32% and Google search revenue saw doubledigit growth. They beat on essentially every metric in what CEO Sun Bachai called a quote standout quarter. However, the stock initially fell as much as 2% in after hours trading. As we record this podcast, it is beginning to tick back up. So, joining us now to break down these earnings is Scott Devett, managing director of equity research at Wedbush Securities. Scott, thank you for joining us. Thanks for having me, Ed. So, we want to get your reactions to these Google earnings, which were pretty much impressive across the board. A beat on revenue, a beat on uh EPS, kind of a beat on everything, and yet we saw this initial sell-off in after hours. Your reactions to the earnings and also the market’s reaction to the earnings. It’s up now, but the initial reaction was it had been up 10 consecutive days going into the print. So, it was probably just in response to that. If there was a little noise in the quarter, the reported operating margin percent was a little light, but there was a onetime charge, so you know for that, and that wasn’t the case either. So, like you said, it was clean across the board and and where investors are most concerned is the search business, and that accelerated from 10 to 12%. In addition, the company’s paid clicks, which is a closely followed metric in terms of, you know, the health of the business, accelerated from 2% to 4%. So, it’s really clean across the board uh in supporting, you know, Google as an AI winner. What are your thoughts on the capex number, which was raised to $85 billion for the year? That’s their estimated guidance. Um, from what I’ve heard and from what I’ve seen, people and investors are a little bit worried about that. um that it’s too high. Any thoughts on on the capex? Would you agree with that? Uh what do you think? Well, you know, you have to spend the money to make the money, right? So, um and right now it’s spend the money time because we’re going through a platform transition. And so, in prior cycles, you know, Google’s proven to be very sensible in terms of their spend. You’re seeing these types of numbers elsewhere as well. So, the question becomes, it’s not just an alphabet question. And it’s a question for everybody on the front edge of this that’s spending um the capex to build products is you know is there going to be a return uh as they get through this period you know it’s important to kind of monitor the margin profile of business which is why I highlighted that um but you know you have to believe that AI is going to lead to stronger businesses on the other side or else we’re going to have a major problem and so we do believe that but um but investors will question it until you start getting to the point where the capex numbers stop going up. But I’ll tell you when you do that, if you start seeing the returns, I mean that’ll be very ne negative for infrastructure companies but very positive for consumerf facing companies. Yeah, we also saw this huge growth in the cloud business which to me reflects a level of AI demand that seems to warrant more investment in capex. 32% growth beat expectations of 27%. Um, any thoughts on the growth in that business and what it says about Google’s positioning in AI? Well, Google’s doing a good job with the cloud business. I mean, they are in third place. Well, Microsoft’s doing better, Amazon’s doing better, but Google’s in a good position. There’s room for three given the size of the market and given the efficiencies that it creates throughout the entire ecosystem of these companies to be, you know, in this business. So, being three benefits, you know, the rest of Alphabet as well as on a standalone basis. So the business itself was healthy. It did accelerate to 32% growth this quarter. But in that context, you know, I I think Microsoft and Amazon are doing better in the cloud business. For for for Alphabet, you know, cloud was still good. Where the controversy is is more in the advertising business. And so that was the big surprise and why you’re likely to see the stock go up tomorrow and probably continue its momentum, you know, that started the last couple weeks. Yeah, we also saw uh some detail on Whimo. Senator Pai said that Whimo has now driven over 100 million miles. Uh Whimo in our view is the number one in autonomous almost like a monopoly in America. Um, but we don’t feel that or it doesn’t seem like Wall Street cares that much or at least that doesn’t seem to be reflected in at least the the valuation of Google which is still a lot lower than the rest of big tech. Um, any thoughts on Whimo? How does Wall Street feel about Whimo? Um, and do you think it’s perhaps undervalued? Well, I mean there’s a huge opportunity for for investors owning Alphabet for the possibility that this biscuit gets rerated up really across the board. The search business gets rerated up because it’s viewed no longer as structurally impaired because of AI. YouTube gets rerated up because investors be respect its competitive position in terms of time spent and the ability to monetize that. and things like Whimo, you know, start to be valued as um separate business units, not necessarily on current free cash flow, but on the longer term prospects. I think Whimo and what Tesla’s doing, they’re very different strategies. Uh the Whimo approach works today and is a linear progression. The Tesla approach is more of an S-curve in terms of that if it does work, watch out because it will change the world. And um and I think that investors, you know, are a bit more excited about that possibility, which is maybe why it gets a little bit more embedded valuation in the stock even though, you know, outside of maybe 30 35 cars in Austin yet they’re not really seeing it live and certainly not without a human being in the passenger seat. And just to as we wrap up here, any thoughts on the valuation as a whole? I mean, as I said, uh I think trading around 21 times earnings, uh lower than big tech, lower than the average of the S&P 500. Um why is this? What is the market pricing in? And what you you mentioned the possibility of some reratings on those businesses? Why hasn’t that come yet for Google? And as another example, lower than eBay in in um in e-commerce. So the market believes that the search or is pricing in the possibility that the search business is impaired or that AI search is not as profitable profitable as legacy search because it’s 55% of the business and a higher percentage of the margin for Alphabet that they’re effectively saying no it doesn’t trade at 21 times earnings you know it trades at 28 or 30 times earnings because their numbers are going to get hit in the future. I don’t subscribe to that myself and I actually think that Google should trade in line to a premium if you believe this is more of like a hundred-year company that’s structurally sound and then has all these options on top of it as well. But you you go through these periods like the mobile transition you know where uh advertising facing companies had multiple compression during that period because nobody knew how they could monetize from desktop to mobile and they figured it out. For Alphabet, you had the emergence of Amazon Prime back in 2006, you know, and Amazon’s been very successful with Prime, but but Alphabet and Google Search has continued to be successful over that 20-year period as well. So, it’s another one of these controversies. And when the controversy passes, as it looks like it’s beginning to do, I think you get that rewrite. And with Alphabet, I think you probably have two, three turns in the multiple to go. Mhm. All right. Thank you very much, Scott. Appreciate you joining us. Thank you. Have a good day. That was Scott Devbit, managing director of equity research at Wedbush Securities. To summarize, Google beat on revenue. Google beat on earnings. They beat on search, which despite concerns that it would get beaten up by AI or OpenAI, it grew 12% year-over-year. They beat on YouTube, still the most popular streaming platform in America, up 13%. And they beat on cloud, the AI business, up 32%. The only thing that you could possibly criticize, the only criticisms I’m seeing is that they are overinvesting in capex. They’re overinvesting in AI. But is that really a bad thing or does it just mean that cloud demand is growing and Google’s getting ahead? As Scott said, you got to spend money to make money. So, we think the market’s going to come to its senses here. In fact, it kind of already has. The stock initially fell in after hours, but it is climbing back up. We’re still looking at a 21 times PE multiple for one of the most ascendant companies in AI and media and autonomous. You can’t forget Whimo. We were long Google last year. We were long Google this year and we’re still long Google today. Thank you for listening to Profy Markets from the Vox Media Podcast Network. If you liked what you heard, subscribe to our YouTube channel and tune in tomorrow for more.

Ed and Scott break down the new U.S.-Japan trade agreement and what Wall Street’s reaction tells us about who really came out on top. Then, Ed digs into what’s pushing U.S. home prices to record highs. Finally, Ed and Scott Devitt, Managing Director of Equity Research at Wedbush Securities, break down the key takeaways from Google’s second-quarter earnings.

Timestamps
00:00 – Today’s Number
00:23 – Market Vitals
00:56 – U.S. – Japan Trade Deal
05:24 – Scott Calls In 📲
11:37 – Break
11:55 – Home Prices Climb
13:11 – Interview w Jake Krimmel, Senior Economist at Realtor.com
19:24 – Ad Break
20:33 – Alphabet Earnings
21:03 – Interview w Scott Devitt, Managing Director of Equity Research at Wedbush Securities
29:46 – Credits

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