Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
The Canary in the Coal Mine: Why the Dollar's Weakness Matters More Than You Think
March 31, 2025 | Season 7 | Episode 12
The weakening US dollar may be the canary in the coal mine for broader market troubles ahead. Despite conditions that should strengthen it—high interest rates, geopolitical uncertainty, America's military dominance—the greenback has fallen against nearly every major global currency in 2025. This unusual pattern suggests foreign investors are losing confidence, potentially withdrawing the capital that traditionally supports US stocks and bonds.
Meanwhile, markets are bracing for what President Trump calls "Liberation Day" on April 2nd, when new tariff policies are expected. Reports of a possible 20% universal tariff on all imports have sent tremors through Wall Street, with Goldman Sachs cutting its S&P target twice this month. The potential $11,000 price increase on imported vehicles illustrates the real-world impact these policies could have on consumers and businesses alike.
The artificial intelligence sector appears to be entering a crucial transition phase where investors demand tangible returns on massive investments. Drawing fascinating parallels to the 1990s internet boom, experts remind us that only 1% of today's internet giants existed just 2.5 years after Netscape Navigator launched. Today's market leaders may not be tomorrow's AI champions, suggesting opportunities in companies like Snowflake, Intuitive Surgical, and cybersecurity firms that will protect increasingly vulnerable AI systems.
For fixed income investors, discussions about potentially eliminating municipal bond tax exemptions to fund Trump tax cut extensions present both risk and opportunity. While concerning, municipal bonds have already priced in some of this uncertainty, potentially creating value for long-term investors willing to weather the volatility.
As we navigate these complex market currents, watch the dollar's trajectory carefully—it may tell us more about where markets are heading than traditional economic indicators. What signals are you watching as we enter this period of heightened uncertainty?
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lanton.
Keith Lanton:Good morning. Everyone Enjoy their weekend as March wrapping up here on a challenging note for US equity markets, although we are seeing some flight to safety into fixed income markets. We're going to talk a lot about that this morning. We're going to talk about what's taking place here as we wind up the first quarter of 2025. We have the potential for April 2nd when we're going to get some more clarity potentially on tariffs here in the United States and what that may mean for US markets. We're going to talk about US markets and what to look for. What is perhaps the leading indicator, so to speak, or perhaps what is it the chicken or the egg? What is it to look at when we're looking at US markets and perhaps give us greater clarity and some insight into which direction stocks and bonds are heading? We'll talk about this morning's open, where we're looking at futures to the downside, talk about why that might be. We'll also move on to Barron's.
Keith Lanton:Barron's had a cover story talking about artificial intelligence and where to look going forward. Perhaps there is opportunity right now. In all this chaos and this panic, this is an opportunity to set ourselves up to look at what may be the leaders emerging going forward. Barron's pointing out that artificial intelligence perhaps like the internet age in the 1990s, where a lot of the companies that are leading the world today and the leaders in the online space and the cloud storage space didn't even exist in the mid-90s and some of those companies were just in their infancy, and perhaps we can get ourselves a potential list of where we should maybe be thinking of investing now to capitalize on the next great growers and not be caught up on what's worked in the past. So we'll talk some more about that. And then we're going to finish up talking about the bond market, municipal bonds coming under pressure, talk that municipal bonds could be an item that the Trump administration has in their crosshairs as a revenue raiser, perhaps some watering down or elimination of the tax exemption on the table. This has happened before and there's been lots of talk in my career over the years about eliminating the tax exemption. None of it's ever come to pass or gotten really close to the finish line, but we'll talk about what pitfalls and opportunities there may be as a result of this discussion and perhaps how we can take advantage of that.
Keith Lanton:So, getting started this morning, taking a look, here we are finishing this first quarter. The tech-heavy NASDAQ 100 stock index has not had a good start to 2025. Before today, we were looking at this benchmark being down about 8% year-to-date. It's very possible if where we are continues and closes, that we could wind up close down to 10% as a drive in force here for the NASDAQ 100 for the first quarter, as we have fears about recession spending cuts driving the narrative this morning, as investors remain more fearful than greedy, and we will talk about what's the setup for this morning, but first we're going to pull back. We're going to push back and try and make some sense, if that's possible, as to what's perhaps some of the driving forces behind some of the reactions that we're seeing in the financial markets and what is it that is causing perhaps, or at least what are some of the indicators that we could look at in terms of trying to figure out what's going on in the financial markets.
Keith Lanton:And I would say and suggest and Bloomberg talked about this a little bit this morning is to take a look at the US dollar. Just two months into President Trump's second term, his escalating tariffs and bid to roll back decades of globalization is shaking confidence in the dollar. The dollar has had a privileged place at the heart of the world financial system for about the last 80 years, since the end of World War II is sort of when the preeminence of the dollar was solidified. Yet so far, in 2025, the dollar has dropped against all but a handful of major currencies over the last three months. Dollar index is down about 3% to start the year. It's worst start since 2017. Now you may say to yourself well, the dollar is very high, so a pullback is reasonable. But when you look at what's taken place in the world instability, when you look at that US interest rates have been fairly high or have been holding steady while the Europeans have been cutting their interest rates and other major markets have been reducing interest rates, here in the United States, our rates remaining at four and a quarter to four and a half on the Fed funds rate Greatest military in the world usually a sign of strength.
Keith Lanton:In an uncertain world, typically, folks would even gravitate more to the dollar, and that is not what's happening currently. In fact, the dollar year-to-date is down almost 10% against the Swedish krona, down about 8.5% against the Norwegian krona. We're down about 5% against the Japanese yen, about 4.5% against the euro, 3.5% against the British pound, 3% against the Swiss franc. At the same time, the price of gold, which is a rival to the dollar in terms of a safe haven asset, has surged to a record high of more than $3,100 an ounce. In fact, strategists have been as fast as they've been ramping up their calls for gold to move higher. Goldman Sachs, just last week, I think, raised their target again on gold to $3,300. And this morning Goldman Sachs once again cut their year-end price target on the S&P 500, I believe, to $5,700. So you see these two things moving in opposite directions, directions.
Keith Lanton:By mid-March, speculative traders started betting against the dollar for the first time since President Trump's election about fears that his policy could drive the US intoa recession. So what we have right now is an environment where the dollar is weak and an environment typically it would be strong in. So we need to think about the dollar, what it may mean for financial markets and what is the chicken and what is the egg, what is the cause and what is the effect. And I think you can make a reasonable argument right now that the dollar perhaps is the leading indicator of where other US financial markets are moving. So it is possible that we could perhaps predict that when we see dollar weakness, that perhaps we will see weakness in stocks and bonds. Now we are seeing relative strength this morning in bonds but overall, given the magnitude of the fear in the marketplace and what's taken place with respect to US interest rates versus the rest of the world, the rally that we're experiencing in bonds is very muted, to say the least, and what we are seeing is the strength in gold. And the question is is the strength in gold being driven by a lack of confidence in the dollar Internationally?
Keith Lanton:Until late February or March, the dollar was where most foreign investors, as well as US investors, I think could argue still do, but is where most foreign investors stored their wealth. They viewed the dollar and the US for what it represents its military strength, its stability of rule of law as the best place to store their wealth outside of their home country. So typically, most cases, home country and we're talking the developed world is where you would store a lot of your wealth, your assets, and you would put it into your home country's currency because you need that currency in order to affect transactions. So if you're in the European Union, you'd hold euros. If you're in Great Britain, you hold British pounds. If you're in Australia, you'd hold the Australian dollar and a secondary currency that you might hold for a store of value would be the US dollar.
Keith Lanton:So investors in the US and elsewhere, what they do is they take those dollars that they're holding and they may sit in cash, they may sit in treasury bills, but after a while they say, hey, how can I get a greater return with my dollars? And what they do is they go out and they take those dollars and they buy into US markets, and that helps push up the value of US markets. They buy US stocks, they buy US bonds, so they take that cash and they convert it into dollar investments. As investors change their calculus on the safety of the dollar, well then, they may no longer take those excess funds that they have and buy dollars, and they may therefore take those excess funds and keep it more in their home currency. Or they may take it and buy gold, and that's one of the reasons we're seeing gold move up. They could also take it and buy crypto, and that's one of the reasons we're seeing gold move up. They could also take it and buy crypto assets, perhaps one of the reasons you see strength in Bitcoin.
Keith Lanton:Who knows, but what these investors do when they are no longer holding their dollars or losing confidence in dollars. Well, that may be one of the reasons you're seeing some weakness here in the United States. The marginal buyers, these foreign holders, are taking their dollar-denominated assets, which are, in this case, stocks and bonds, and they are selling them so that they could take those dollars and move them elsewhere. So far, the dollar has wobbled, but not buckled, but what we see is pressure building every day. So my suggestion is to watch the dollar, and it very well may give you further insight into where US stock and bonds are heading Now.
Keith Lanton:Perhaps a greater concern with respect to the dollar is what it may mean for our future, because we are a country that is addicted to running deficits and growing our debt pile, and we've been able to do that because we have enjoyed a special privilege of being the world's reserve currency, and this privilege has afforded us the opportunity to run up our debts without the typical increase in interest rates. And why is that the case? Well, because when we've engaged in things like quantitative easing, what does that mean? Well, it's the Federal Reserve buying some of our debt. And when the Federal Reserve buys some of our debt, that means that the debt does not have to be sold into the marketplace. Therefore, there's less supply of that treasury bond or bill in the marketplace. Therefore, there's less pressure to push up interest rates in order to absorb that supply.
Keith Lanton:But when the Federal Reserve does buy our debt, what they are doing is they are, in effect does buy our debt. What they are doing is they are, in effect, printing money or creating new money. Typically, economics 101 says, is if you print money or create new money, you now create a greater supply of something that we would kind of view as cash, and if there's more cash in the marketplace, then the market can absorb. What typically happens is you have inflation and the Federal Reserve engaged in quantitative easing following COVID during the financial crisis, and a lot of that cash was absorbed without a typical increase in interest rates.
Keith Lanton:Now, during COVID, when we printed so much money, as all of us have observed, we did see a pickup in inflation, so it's a good warning sign that if the rest of the world no longer wants to hold as much dollars as they currently do, and if we need to engage in quantitative easing in the future and the foreigners aren't willing to hold our currency to the same extent that they are willing to hold it today, well, that could set us up for a crisis going forward where the ability of our treasury to engage in quantitative easing would be limited if, in fact, these international investors weren't comfortable holding our debt going forward. So these are some of the things to think about. Think about the US dollar, look at it, follow it, see if it in fact is an indicator as to the direction of interest rates. There's a lot of different moving parts when you're looking at the value of a currency, so it's not just being driven by any one factor. So you need to be mindful of many different factors, and this is why this is not as simple as looking at one specific pinpoint of data, but nevertheless, it is indicative of many things and it is an important characteristic. Now, when we think about financial markets and we think about what's taken place this morning, let's take a peek.
Keith Lanton:Investors right now, could be argued, as we see futures moving to the downside this morning. Investors are jittery. Dow futures off their worst levels in the morning, down about 260 points. Nasdaq futures down about 50 points, I'm sorry. S&p futures down about 50 points. Nasdaq futures down about 260 points, as it could be argued that investors are starting to, in the words of Bloomberg freak out over President Trump's plan for fresh tariffs coming Wednesday, something that President Trump calls Liberation Day. In the run-up to Liberation Day, strategists at Goldman Sachs, as I mentioned earlier, cut their S&P target for a second time this month, citing a higher recession risk and tariff-related uncertainty.
Keith Lanton:President Trump over the weekend says he plans to start his reciprocal push with all countries tamping down speculation he might limit the initial scope. Over the weekend, in an interview with NBC, he said he couldn't care less if automakers hike prices because he expects buyers will switch to American-made cars. Maybe they will think twice before forking out that dream Ferrari. That's not from President Trump, that is from Bloomberg. Also over the weekend, president Trump gave his first criticism of Vladimir Putin. He told NBC he is quote pissed off, unquote and quote very angry unquote with the Russian president for casting doubt on Ukrainian President Volodymyr Zelensky's legitimacy. So other factors taking place here Wall Street Journal reporting that the Trump administration is including is considering a 20 percent universal tariff on all imports from all countries. That is another factor weighing on concerns this morning.
Keith Lanton:Mega caps, tech stocks all lower this morning. Nvidia down about 4%, heading into the open. 10-year treasury yield right now is down about five basis points to about a 421. The two-year yield is down six basis points to 385. Some other companies in the news this morning TikTok. President Trump says a TikTok sale could come before the Saturday deadline.
Keith Lanton:We are seeing weakness in biotech stocks. Over the weekend one of the top officials at the Food and Drug Administration resigned top vaccine official and concerns there leading biotechs lower that there could be slower reviews for breakthrough treatments. Speaking about breakthrough treatments, eli Lilly over the weekend came out and revealed a very promising study that a high dose of an experimental drug significantly reduced levels of a genetically inherited risk factor for heart disease by an average of 93.9% versus a placebo. After six months of trials with this drug versus a placebo, that is quite an impressive result. So perhaps another opportunity and breakthrough drug there for Eli Lilly certainly would be great for everyone who's got that condition.
Keith Lanton:Other news this morning Elon Musk in the news. Musk delivered an unexpected win for X, which used to be known as Twitter investors, who endured two years of uncertainty since his takeover of the social media platform. His artificial intelligence startup, xai, will buy X, which was Twitter, in a deal valuing the company at $33 billion, excluding debt. It means X investors now own shares in a nascent AI startup with much more upside potential than Twitter probably had. Elon Musk also said in his role to cut the size of government that it is quote costing me a lot. Unquote in terms of his job as CEO of Tesla. What they're trying to do is put massive pressure on me and Tesla, I guess to. You know, I don't know. Stop doing this, he said, meaning stop running the Department of Government Efficiency unquote. Last night there was a suspicious fire in Rome 17 Teslas were destroyed at a Tesla dealership and that is being investigated for arson.
Keith Lanton:Some other companies in the news this morning Apple in the news this morning. They are in the Wall Street Journal talking about their let's call it a disagreement or clashing of wills between Tim Cook over at Apple and Elon Musk. Apple is seeking to expand into satellite communication so that those of us who utilize iPhones will be able to have coverage throughout the globe. But in order to do that, starlink is one of the leaders, and Elon Musk has been strongly encouraging Apple to choose him and his Starlink service and utilize SpaceX to launch satellites into space, and they have a different vision of how to divide the benefits of utilizing those satellites. Apple has a relationship with a Starlink competitor, global Star, and there is a clash going on between those two titans.
Keith Lanton:At the moment, apple is also working to revamp its health app. This is an interesting story. The health app, if updated, as Apple is discussing, would include a health coach powered by a new artificial intelligent agent that would replicate to some extent a real doctor. A release could come as early as spring or summer of next year. The plan fits into CEO Tim Cook's broader vision that the company will make its greatest contributions to society in health care. Consider, for instance, its work on a long-awaited no-prick glucose monitor. The health app plan first emerged a few years ago and right now Apple is training the agent with data from on-staff physicians.
Keith Lanton:Taking a look at overseas markets, equity indices in the Asia-Pacific region are beginning the week on a lower note the Nikkei down over 4% in Japan. Other markets in Asia down significantly, as South Korea's Kospi down over 3%. China Shanghai down a more muted half of a percent. The Hang Seng down a little over 1%. So we are seeing weakness, certainly in Asia and in Europe. We're also seeing markets down in the generally in the range of 1% to 2%. Overseas Bloomberg reporting that China is going to inject $69 billion into its four largest banks. The Information reporting that some large customers are slowing down AI spending. Perhaps that's one of the reasons we're seeing some weakness in NVIDIA.
Keith Lanton:This morning. Bloomberg reporting that car buyers are rushing to dealers to avoid tariffs. Reports that dealerships have 60 to 90 days of inventory on hand to meet demand, perhaps hoping that some of the tariff policy will be modified before then and consumers trying to get cars before those tariffs potentially feel their full force. Goldman Sachs out this morning suggesting that if the tariffs go into effect the way they anticipate, the cost of a new car could go up by $11,000. Speaking about those new car prices increasing, nbc News, in an interview with President Trump, quoted President Trump saying he couldn't care less if automakers increase prices on imported cars because he believes it will be an incentive for people to purchase American-made cars.
Keith Lanton:All right, what's going on this week? Lots of data. Tomorrow, the Institute for Supply Management releases manufacturing and servicing purchases indexes for March, looking for 49.5 on manufacturing PMI and 53 on services. Both would be slightly lower than February. Also on Tuesday, bureau of Labor Statistics releasing what's called the JOLTS, the Job Openings and Labor Turnover Survey. This is a report that says how many job openings we have here in the United States. This is a report that says how many job openings we have here in the United States and the greatest trade imbalances with the United States, and that's taking the attention of markets right now. Above all else, friday would normally be the biggest economic report, or the biggest report of the week would be the Department of Labor releasing the jobs report, which is certainly still going to get lots of attention, but tariffs are certainly overwhelming that report at the moment. But for the jobs report, we're expecting $138,000 increase in nonfarm payrolls After $151,000 gain in February. The report is expected to show that unemployment remained unchanged at 4.1% First quarter of this year.
Keith Lanton:We did not get the boost to mergers and acquisitions that was expected, given that the Trump administration was going to be lowering a lot of regulation, but that benefit was overwhelmed by a lot of uncertainty with respect to economic policy like tariffs. So a lot of companies and countries on hold as they wait and see what it is that the United States will do with respect to government policy. So we did see mergers and acquisitions down almost 30% last quarter from 2024. And that's 44% below the recent peak in 2021. Another effect of the potential tariffs are that copper prices have been skyrocketing 30% rise in copper prices so far in 2025, driven by tariff fears. Another interesting number 70%, and that is the estimated reduction in flight bookings through the end of September between the United States and Canada.
Keith Lanton:All right, moving on, I mentioned Barron's talking about the next phase of artificial intelligence. They provided some expert picks. I'll talk about a few of those. They had a roundtable Speaking about artificial intelligence. It has so far not cured cancer or we haven't even driven a car across the country on its own, but artificial intelligence has upended corporate strategy and spending plans and opened the door to an age of rapid problem solving, enhanced productivity and machine-driven creativity.
Keith Lanton:Barron's arguing that the AI cycle has entered a new phase, with investors looking not only for investment but now looking for payoff, as some of the early enthusiasm fades, tech stocks have entered a correction. So where do we go from here? Barron's put that question to some veteran stock pickers. Question to some veteran stock pickers Felice Arganoff, who is a portfolio manager for the multiple tech JPMorgan Asset Management Funds Division, out saying that AI capital spending leading up to the end of 2024 was perhaps as good as it's going to get for the near term. He says that they see some risks that there could be a lack of upside to capital spending in the intermediate term. We need to digest the massive growth in capital spending that we've seen. Given some of these concerns, we've been paring back on the names in our funds that are directly exposed to AI capital spending.
Keith Lanton:Another panelist, gavin Baker, saying that the spot availability of graphics processing units is down significantly after the release of DeepSeek. Saying it is now much harder to rent as a hot IPO, open up and keep going up. That wasn't what took place on Friday. Corweave priced below expectations at $40 a share and Corweave also cut the number of shares that they were bringing to market. This article does not address Corweave specifically, but does address the business that CoreWeave is in. Here from Gavin Baker saying that the business that CoreWeave is in is renting out these clusters of NVIDIA chips NVIDIA, a big backer of CoreWeave, and Gavin Baker saying that there is still very strong demand for that business. So it'll be interesting to see how CoreWeave behaves, given that it is perhaps a bellwether for tech stocks and tech stock performance. When you have an IPO, that's supposed to be exciting and it's not, well, that's a good indicator of sentiment.
Keith Lanton:So right now, in terms of where to look for artificial intelligence stocks and what the future winners may look like, mr Argonoff saying we are seeing the benefits from the use of AI agents, which are programs and systems that can perform tasks without human intervention intervention, and he said some of the companies that are the clear beneficiaries of this ability are companies that utilize products and services that are very rules-based, kind of easier to train, as the technology is still being developed and built out. And he suggests one such company and this is timely given the time of year that we're at here, at almost April 15th tax time is Intuit symbol I-N-T-U, suggesting that Intuit can generate much higher accuracy rates than perhaps some of their competitors in the artificial intelligence space when it comes to utilizing their products and services to replace humans, arguably because things like accounting and IRS rules and tax regulations are things that artificial intelligence doesn't necessarily have to interpret. These are items that they can incorporate into their thinking because these are items that have clear rules and the artificial intelligence can access those rules and use some logic and determine what is the appropriate strategy for you and your taxes going forward. So he says, a company like Intuit can really add value and they can differentiate themselves significantly when talking about artificial intelligence and the opportunities in the space. What the panelists talked about is the fact that there's roughly $100 trillion of global gross domestic product and of that $100 trillion of global gross domestic product, 55% is labor and 5% is tech. So if you think about that and when I say tech, it's tech spending so if you think about that, if you were to take that labor component down just 1% or 2% and we're able to replace that labor with tech, that would be a huge percentage increase in the amount of tech being deployed. Replace labor with technology. Well, you could get some really big investments in technology to offset those labor costs.
Keith Lanton:Taking a look backwards and assessing the current artificial intelligence boom, and if we were to go back to the previous time period when there was a similar new technology, and we were to go back to the mid-1990s. Mr Baker in this interview points out that only 1% of current global internet market capitalization had been founded in the first two to two and a half years after the introduction of Netscape Navigator. So for those old enough to remember Netscape Navigator, when that was launched, arguably it was the beginnings of the internet revolution. And if you go back to that point and you add two and a half years, still only 1% of the entire internet capitalization of today had been around back then. So at this point in the Internet cycle, for example, mark Zuckerberg was still in middle school and many of the iconic companies that exist today had not even been conceptualized, much less founded. And of course you can't help but notice many of you who are not of investing age, or perhaps not even born in the mid-90s when Netscape was launched, will certainly know that you don't even know what Netscape perhaps is and you certainly know that we don't use it anymore, despite it having been the product that kind of launched where we are today with the Internet, that kind of launched where we are today with the internet.
Keith Lanton:One difference in this cycle versus past tech cycles is that the companies that are spending have massive amounts of cash flow. So we're not in a scenario where companies are spending money that they don't have. In this scenario, kind of more similar to an industrial company, scale matters, as is your ability to spend to build out your artificial intelligence models. There are very few companies that can compete against what big tech is spending today.
Keith Lanton:When you think about moving forward and implementing this tech stack and this artificial intelligence, well, these panelists say that you've got to make sure that you have your infrastructure and your data good before you begin utilizing that data to do anything or to analyze that data. So the first thing that you need to do is make sure that your infrastructure layer is solid and your data is good. And all three panelists suggest taking a look at Snowflake, perhaps as one to put on your radar screen SNOW, as they argue that they are well positioned to take advantage of the work that needs to be done on the integration and infrastructure side. Also, thinking about artificial intelligence and the fact that artificial intelligence will make it easier for bad actors to take advantage of vulnerabilities and systems. Well, what does that mean? Well, that means that you are going to need greater and greater cybersecurity to integrate, to combat other folks using artificial intelligence a true arms race. So you may want to look at some of the cybersecurity companies, like Palo Alto Networks.
Keith Lanton:Then also, perhaps, think about healthcare Interactive Surgical, which is the leader in robotic surgery, and they just came out with a next generation robot, and it is at the early stages of using the data that they gather during surgery to improve surgical outcomes. So they take that data that they see during the surgical process outcomes. So they take that data that they see during the surgical process and then they adjust the surgery based on that data. Perhaps a company that isn't developing as life-enhancing technologies as Interactive Surgical, but one that keeps us entertained and that we use just about every day, and that is Netflix that they have gotten themselves to the point where they have significant economies of scale and market leadership. One of their biggest expenses is the creation of new content. Well, imagine using artificial intelligence to be able to create more content, more realistic-looking content. Then you currently have significantly lower costs.
Keith Lanton:A couple of other names. One is Harmonic Drive Systems. In Japan, it's the world's leading gear reducer for actuators for robots. Well, what does that mean? That means, if you start making humanoid robots, well, you're going to need parts from Harmonic Drive Systems, and this one from Mr Kim. I thought this was a fascinating company, potentially, and the name of this company is eMemory Technology. They are based in Taiwan. He says think of it as a version of an intellectual property company selling to Taiwan Semiconductor and other foundries. But he says it has something new coming and this is called post-quantum cryptography. What does this mean? Well, when quantum computers arrive and that's when and if they arrive so this is something you've got to believe that quantum computers are coming. These quantum computers will be big enough to break encryption coding. You will then need to upgrade all the encryption in the world and e-memory has an intellectual property standard, he says, for post-quantum encryption that he believes will be on every chip going forward in the post-quantum cryptography world. So he says every motherboard will need to have immunization of a new encryption standard and he believes that e-memory is the leader and has the most likelihood of having that technology embedded in the future.
Keith Lanton:You may have heard that the key provisions of the 2017 Tax Cuts and Job Act, also known as the Trump Tax Cuts, are set to expire at the end of this year. As a result, republican lawmakers, who control both houses of Congress at the moment, are exploring several controversial proposals to pay for what the Congressional Budget Office estimates could be $4.5 trillion in extended tax breaks over the next 10 years. So that's the cost of extending the Trump tax cuts. So how do you pay for it? Well, one option on the table that could affect millions of US households is eliminating or limiting the tax exemption on municipal bond interest.
Keith Lanton:This potential change is raising an alarm in the $4 trillion municipal bond market. Well, how much revenue could they bring in? The estimate is $32 to $42 billion annually, and Kiplinger is suggesting that the architect of this strategy is a gentleman by the name of Stephen Moore, an informal advisor to President Trump, who has been vocal about taxing municipal bond interest, and he argues that targeting municipal bonds aligns with the Republican goal of widening the tax base and he says it's politically feasible because it primarily affects high-income investors who benefit the most from the investment the exemption. So if you want to impose taxes on the wealthy, he says this is an effective method. So, while lawmakers are discussing and emphasize the word discussing eliminating the tax exemption and again emphasize in my career this has probably happened three or four times where this has been discussed and to date has not happened, but doesn't mean that this round we won't see some more progress.
Keith Lanton:But other approaches other than straight taxation of municipal debt are reportedly under consideration as well. One could be to target specific bond types, like private activity bonds. Another is that there could be a phased-in approach or a gradual reduction of the tax exemption to mitigate market disruption. Perhaps only new bond issues, for example, would be taxed and old bond issues would be grandfathered. Republicans have identified this taxation as a source of income, as I mentioned, and they are estimating that if they did put the taxation of municipal bonds into place, it would save about $250 billion over 10 years.
Keith Lanton:Now keep in mind that $250 billion relative to that $450 trillion is very small, and the argument is that the tax advantage of municipals goes a long way in helping states and local governments and therefore the proverbial juice may not be worth the squeeze. What does that mean? That means that the amount that is saved for the federal government is relatively small in scale. The amount of benefit to the states and local governments is very large in scale, and if the state and local governments did not get this tax benefit well, they would have to raise your state and local taxes, so any benefits you're potentially getting from the federal government would be offset by higher taxes at the state and local level. It's also been argued that some of the biggest beneficiaries of the tax exemption are not necessarily only red states, but blue states as well, states like Texas and Florida, big issuers of municipal debt and may not be so comfortable going along with taxing municipal debt. So important to note that nothing has been so far introduced into Congress to repeal the muni exemption, that this is a benefit that predominantly benefits investors that are individual investors.
Keith Lanton:So politically it may not be super popular, but nevertheless, as a municipal bond investor, it is getting priced into the municipal market.
Keith Lanton:The treasury market has been moving higher in price, lower in yield.
Keith Lanton:The municipal market has not been following, and this is possibly because of this potential for taxation.
Keith Lanton:On top of the fact that we are approaching tax deadline, april 15th, investors typically sell some municipal bonds ahead of that period in order to pay their taxes, and also we're seeing a lot of issuance currently also weighing on municipal bonds. So you put those three factors together. It's hard to decipher what of those three is what the weighting of each of those is out there, but I think you can certainly say that the concerns about the taxation of municipal bonds are weighing on municipal bonds and, arguably, are either something that could be a significant opportunity for investors or, arguably, we could be in for a future where municipal bonds don't enjoy the same tax benefits that they do today. We will see how this story continues to develop, but I was talking to Brad earlier and he was emphasizing that long-term municipal bonds, currently having not participated in the recent upward movement in price of treasuries, are already almost reflecting the fact that there may be some taxation. So perhaps at this point, depending on your view of the probabilities, there may be more opportunity than risk.
Keith Lanton:That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.
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