Eye On The Market podcast

Good afternoon and welcome to the June 2025 Eye on the Market podcast. This one’s called “OK Boomer.” Which refers to the response that people like me get whenever we have questions on, or suspicions on things related to crypto or the metaverse or any of the, those kinds of things. So most of this week’s, month’s piece is on stablecoins, but also some important information to share on S&P profits, an analysis of tariffs versus tax cuts for the corporate sector, and then a history of presidential breakups, given what just happened in DC.

So to start out, let us begin with some good news on the Q1 earnings season. I, there’s a team that’s run by Dubravko and his group at J.P. Morgan Securities and Equity Research, and they do a great job. And they summarized some of what was going on in their piece last week. Earnings surprise of around 7.5%, compared to 4% over the prior four quarters. EPS growth for the first quarter was revised up to 12% year-on-year. Net income margins of around 13% was higher than expected. And the consensus thought there would be margin compression in seven of 11 sectors. And then on company guidance, only 25% raised, which is below the normal numbers for the last few years, but only 15% cut, which was the lowest share of companies cutting guidance in Q1 in five years. And only 1% of companies withdrew guidance. So I take that as a positive, given how bad it could have been given all the uncertainty around tariffs.

The Mag 7 stocks continue to blow the doors off—28% year-on-year earnings growth. And stock buybacks were up around 25%, with new programs announced by Apple and Google, and Goldman and Wells Fargo, and Verizon. So a pretty good Q1 earnings season.

A couple of charts in here. Look at the earnings surprises from the Mag 7 were almost 14%. The rest of the market was a bit lower for an average. Again, it’s another, another example of a very bifurcated market, for the Mag 7 are driving capital spending and earnings, and a lot of other things. And earnings growth, again, you know, in the neighborhood of 30% for the Mag 7. Rest of the S&P is puttering along at about 9%, which isn’t bad in a low-growth, low-inflation kind of environment.

Now, the only caveat, and it’s a big one, is you don’t want to get too excited about Q1 earnings and economic data if some of it was influenced by a massive ramp-up of imports, where companies were on a precautionary basis accumulating inventory.

And if you look at this, we have a chart here on real imports of consumer goods, excluding cars. And in the first quarter it shot up, you know, enormously, and has since come back down. And then if you also look at imports of pharmaceutical and other medical goods, those also went bananas in the first quarter. So there’s going to be some payback in the second and third quarter in terms of lower earnings growth, lower economic growth.

But I think this was it was a pretty good quarter for the S&P in a demonstration that the, the Mag 7 are right now a pretty, formidable freight train.

Now that gets to the question of what will tariffs do to the S&P 500 from a profits basis. The tariff stuff is all over the place. We, you know, they, they were up as high as 25%. They started the year at two, then they were at five and they were at seven. And we’re now waiting for a lot of the judicial cases to be resolved regarding the reciprocal on the fentanyl tariffs. If Trump loses there, he’s going to do Section 232 and Section 301 investigations. But Empirical Research did an interesting analysis. They looked at a point in time of a couple weeks ago, and they said, as things stand right now, how, how much of the tariffs hurt profits, and how much would the tax cuts in the reconciliation bill help profits? Now we haven’t talked a lot about incremental new corporate tax cuts in the reconciliation bill because there aren’t that many. Other than extending the existing corporate tax cuts, there’s not a lot of new stuff. But there’s a few additional depreciation benefits for companies related to section 199A and section 179. If you, if you happen to enjoy that kind of, of stuff.

And we have a chart in the piece that shows that the corporate tax benefits are probably only, let’s say, a 20% of what they were from when the TCJA was passed in 2017. That said, Empirical’s estimate was that for most of the manufacturing sectors, the tariff costs would be offset by the impact of some of these reconciliation bill depreciation benefits. And so I thought that was, that was interesting and a good sign. So if it turns out that we don’t get the left-tail high-end tariffs, some of the depreciation bill benefits in the reconciliation bill, if it passes, could offset some of those moderate tariff costs.

Okay. Also, what are U.S importers doing? Imports from China are way down, but imports from other Asian countries—India, Taiwan, Vietnam, Malaysia, Singapore—these are up a lot, unsurprisingly, and so there’s a shift taking place that one would expect to continue.

And then one last quick thing on trade, after the Russian invasion of Ukraine, there was this kind of flag-waving, we’re not going to export to the, to Russia anymore going on in the EU. In Europe, nothing is ever quite what it seems. The Germans cut their quarterly exports to Russia, but they know full well what’s going on. Their, their exports to Turkey and the other former Socialist republics went up by a little more than half of that amount. So the transshipment process is alive and well, not just with respect to the U.S. and China, but also with respect to Germany and Russia.

Okay. So, the, the, what’s called the hero image for the Eye on the Market this week is a stylized version of me at a stablecoin IPO launch, which is a bunch of young people enjoying their popcorn, watching the movie, and me rising in fear because I think, or not so much fear, but concern, because I think I’ve seen this movie before. As a matter of fact, I’m pretty sure I have. So I’m not going to go into all the details on exactly what stablecoins are. If you’re listening to this podcast and you’re listening to this part, you probably know what stablecoins are. I will tell you that they had a pretty rough start. More than 20 stablecoins collapsed between 2016 and 2022, and every single one of the world’s stablecoins lost its reference peg on multiple occasions between 2019 and 2023. And if you think that’s a thing of the past, just last, just two months ago in April, the third-largest stablecoin lost its peg to the dollar for a few days after an unrelated crypto executive claimed that the other thing was insolvent, and it dropped to $0.87 on the dollar until they had to buy back a billion bitcoins and push it up again.

Now that said, stablecoin volatility has quieted down a little bit since the collapse of Luna and Terra, and the, the pegging of Tether and USDC, which took place when FTX failed. As things stand right now, Tether’s USDT and Circle’s USDC account for almost 90% of global stablecoin market cap and a similar percentage of stablecoin transaction volume. So it’s essentially, you know, controlled by a market that’s controlled by those two entities.

Now, there’s a chart making the rounds in the VC community, as these things tend to do, showing that stablecoin transaction volumes have soared and are now several trillion and are only a little bit below Visa, okay, and Visa’s at around, you know, 10 or 11 trillion. This chart is, needs a lot of explanation because it’s, it’s kind of misleading.

The easiest way to think about that is these are transaction volumes that are fact that are, that are affected by anytime money moves from one thing to some other thing, even within the crypto universe. And so the real value proposition that people claim that stablecoins can provide is traditional payment rails, not just being used as poker chips inside a crypto exchange, but being used for business-to-business transactions, consumer transactions and things like that outside crypto exchanges. And when you look at those numbers, they’re not 6 or 7 trillion. They’re 1% of that number. They’re around 70 billion. And there was a really good piece that came out recently from Artemis Analytics that looks at this. And they added up all the stablecoin payments on, on business-to-consumer, peer-to-peer, business-to-business, and it’s around $60 or $70 billion. So it’s not nothing, but it’s 1% of that other amount.

And I have a lot of questions about this GENIUS Act that’s being debated in Congress, which is essentially a stablecoin protection act. And I’m not going to go through all the questions. I lay them out in the Eye on the Market with some charts and tables and things like that, but I’m just going to walk through a few of them here.

If the value proposition for creators of these offshore collateralized stablecoins like Tether is the ability to hold some stuff not in T-bills and cash equivalents, in other words, Tether holds some Bitcoin, some precious metals and unsecured loans and things like that. And if this kind of an entity doesn’t have a large backup bank facility or a central bank discount window to draw from, how is this any different from the SIVs, for those of you that remember, that existed before the financial crisis, or the banks, frankly, that existed before the creation of the FDIC, I don’t know how they’re different.

How much stablecoin demand is being driven by entities who are primarily interested in anonymity since their core purpose is offshore gambling, money laundering, extortion, drug trafficking? The, there’s, a there’s a crypto analytics firm that already shows that it, that stablecoins account for like 60 to 70% of all, of all kind of crypto-related crime. And if they’re saying it, you know, it’s probably worse than that.

The big question for me is what is stablecoin offer that existing regulated channels don’t? Existing channels for legitimate commerce, you’ve got the Automated Clearing House, you have wire transfers, your card networks, correspondent banking relationships. You have this new thing called Fed Now that enables instant payments, and where you can deliver funds to households and businesses in seconds. There are Clearing House real-time payments. And then there’s private firms that offer instant ACH transfers. And so it’s unclear to me, I know there’s a lot of excitement about these stablecoins, but it’s unclear to me if a blockchain-based system can do better than the existing networks. And I thought it, a couple months ago, the CEO of Airwallex came out and said stablecoins can be more expensive than Western Union and other options, but if, particularly for, for people outside the country. There’s a lot of talk about, well, if you’re a cab driver in Turkey or Indonesia, and you want a store of value that you’d want to buy the stablecoins. Yes, you can do that if you have the local bank account, and it’s pretty seamless to get in.

The other question is why does the Genius Act, why did the capital, liquidity, custody and risk management standards for the stablecoin industry, why are they so much less demanding than they are for FDIC-insured banks when they effectively do the same thing? And, and why does the Act provide a state exemption for certain state stablecoin issuers with, with respect to federal supervision and enforcement? There’s a lot of weird stuff in this bill. Then if large tech companies issue their own uninsured stablecoins, that looks like it would end run the Bank Holding Company Act of 1956 that separates banking and commerce. And there are some other weird things that we describe in the note this month that would effectively give uninsured national banks that issue stablecoins access to the Fed’s discount window and other Fed goodies. So that’s weird. Then is the Act going to allow these entities to pay a yield or not? And even if they don’t, it doesn’t, it seems like it would only apply to the issuers themselves and not prevent affiliates of the issuers, crypto exchanges, DeFi blockchains and other crypto trading venues from paying rewards and yields to holders of stablecoins.

So for everybody that wanted this clause, like no yields on stablecoins because we don’t want to see money flow out of the traditional banking system, which could reduce the availability of capital that gets lent to small and medium-sized businesses, you’re going to end up in the same place if yields can be paid on stablecoins just from affiliated entities rather than the direct issuer itself.

There’s all sorts of weird loopholes in here that would allow the Treasury Secretary to issue safe harbors and waive reserve requirements and, and other provisions for, for offshore entities like Tether to have their coins sold in the U.S. And then, you know, you got to ask the question, what explains the administration’s commitment to this GENIUS Act? And, and how is this affected by the fact that the crypto PACs were, accounted for nearly half of all the donations in the 2024 elections by the launch of a stablecoin affiliated with the administration’s people, called World Liberty Financial? Abu Dhabi made a decision to use World Liberty Financial’s stablecoins to invest $2 billion in Binance. It’s just a lot of questions you have to ask in terms of what’s driving the administration’s commitment to this GENIUS Act.

What I will give them is that essentially this could act like a magnet for all sorts of offshore dollars, whether they’re illicit or not, and provide more demand for T-bills and dollars at a time when you’ve got rising budget deficits and concerns about Section 899 taxes on entities with countries with unfair foreign taxes, and you know, at the, at the same time that everybody’s handwringing about reduced demand for dollar assets, this could start sucking them in another direction. So anyway, take a look. That’s the stablecoin section. A lot more questions and answers. And again, I think I’ve seen this movie before.

Then to close, just a brief Dogespierre update. Obviously there was a big, breakup, a Taylor Swift style breakup between the president and Dogespierre. Dogespierre was upset about the reconciliation bill. Shed no tears for Dogespierre. Many of the DOGE spending cuts have substantially hampered the agencies that regulate his various businesses, something that we covered in detail in the May 1st Eye on the Market. Another thing about DOGE. The federal government is now scrambling to rehire a bunch of federal employees that were dismissed by DOGE after its initiatives wiped out entire offices, in some cases affecting things that the military and the commercial sector need, like weather forecasting and drug approvals.

And you know, just to end, you know, there have been presidential breakups before. I’ve put in a few that I thought would be of interest. The one that’s amazing to me is, and obviously much worse than the one that just happened, was the breakup between George Washington and Thomas Jefferson. While he was Secretary of State, Jefferson secretly established and funded a partisan press effort to target Washington’s own administration, and he funneled confidential information from cabinet discussions to, to Madison, who then drafted anonymous resolutions for House Republicans to censure Alexander Hamilton. Jefferson tried to convince Washington that Hamilton and his supporters were plotting to transform America into some kind of pro-British monarchy, and Washington was really upset about that. Their relationship, which had existed for decades, was damaged, and Jefferson resigned as Secretary of State in December of 1793. When Washington delivers his famous farewell address, a lot of the clauses in there can be read as strong critiques of Jefferson when Washington warns against excessively favoring or disfavoring foreign nations. Then, after retiring, the first, what does Jefferson do? The first thing Jefferson does is organize a new party to run in opposition to Washington’s Federalist Party. So, I think that kind of ranks up there, similar to the rupture that we’ve just seen.

And then the, my favorite one, just because of all the drama involved, is when John Dean testifies against Nixon in Congress. And I watch this as a kid, and he said, “I began by telling the president that there was a cancer growing on the presidency. And if the cancer wasn’t removed, the president himself would be killed by it.” I think people had a lot more dignity and, and, and, and shame back then. Anyway, that’s, and that was the beginning of the end for Nixon.

Another part of Dean’s testimony he actually testified against, he had testified that Nixon asked him specifically how much more he would have to pay to silence the, the Watergate break-in burglar defendants, and when he told them that it was about $1 million more than he paid so far, the president said, no problem, we can pay it. And then a lesser known fact, even before the Watergate break in, Dean was forced to intervene to scuttle another plan. The Nixon people had to firebomb the Brookings Institution, where certain incriminating papers were held regarding the 1972 election.

So there’s been a lot of strange breakups between presidents and their cabinet members and other senior advisors, and, and the one that just took place with Dogespierre is just one example of that.

Thank you for listening. And I look forward to connecting with you at the end of June when our 20-year anniversary retrospective piece comes out. Thanks for listening.