Motley Fool Hidden Gems Investing - Tariffs Enter a Liminal Space

Episode Date: April 14, 2025

The old order is gone. When will the new one arrive? (00:14) Asit Sharma and Mary Long discuss: - How to make sense of “tariff buckets.” - What a French ethnographer can teach us about the current moment. - Earnings from Goldman Sachs. Then, (18:23) Tim Beyers joins Mary to talk about the green flags he loves to see in a company. The Axios article mentioned during the show is available here: https://www.axios.com/2025/04/14/trump-tariffs-transition-discomfort Companies mentioned: AAPL, GS Host: Mary Long Guests: Asit Sharma, Tim Beyers Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to The Inbetween. You're listening to Motley Fool Money. I'm Mary Long, joined on this fine Monday morning by Mr. Asit Sharma. Asit, good to see you. How you doing? Well, Mary, happy Monday. Happy Monday to you too. We'll kick things off today by trying to clarify some stuff because we got some alleged clarification yesterday on the state of tariffs. The key word in that phrase is actually the word alleged rather than clarification, because we once again find ourselves in a position where, well, there's new information, but nobody actually knows what comes next or where we are. Howard Lutnick, the Commerce Secretary, said Sunday that smartphones and other electronics will be included in future semiconductor sectoral tariffs.

This came, though, two days after the same administration had said such products were exempt from the China tariffs. Trump said on Truth Social yesterday that there was no tariff exception announced on Friday, rather that the products would be moving to a different tariff bucket. Still, certain tech products are no longer exposed to the 145% reciprocal Chinese tariffs. That's a lot of words, a lot of back and forth, Asit. With the caveat that all of this is subject to change in the days ahead, the weeks ahead, what is the bottom line?

of all this back and forth. What in all of this should long-term foolish investors actually be focusing on right now? Mary, the bottom line here is that there is no bottom to these tariff buckets. I mean, this is so difficult to follow, and it's only getting more complex as it goes along. For what Lutnick said about these exceptions, basically, I think the Commerce secretary is just trying to take his smoke signals from President Trump at this point and just be flexible enough to allow that any type of tariff could have a different outcome on any day of the week. But what I think is behind this is that consumers were really in a position to squawk very soon once everyday electronics started spiking the cost of those to buy those.

So we have this exemption here. As for the bottom line for investors, I'm going to go back to something that you and I talked about a few weeks ago, which is to accept that this is going to be a feature of the markets and accept that it's going to be a feature of companies that we invest in. And I know as we talk today, we're going to touch on this again. So I will pause now to get either your reactions or we can move to another question. So, okay. I'm curious about the reaction here, because in pre-market trading this morning, stock futures for all three major indexes were up about 1% to 2%. Apple was up over 6%. Okay, that's pre-market trading. We're recording this close to 1230 Eastern Time. And I just checked before we hopped on air, all those indicators now seem to

be moving in the opposite direction. So we had markets seemingly interpreting the back and forth of yesterday with a little bit of optimism, and now that's moved. What changed, Asit, between 6am this morning and noon this morning. Mary, part of it is a little bit of a big tech effect, especially with Apple, because Apple has so many of those consumer products that it manufactures overseas coming into the US. And the thought of an iPhone going from an average selling price of maybe 800 bucks, take the low and high models, all the way up to 12, 1500 bucks and more. I saw some calculations that it could be 3000 bucks for the top of the line iPhones. You had a sense of relief from major players who wanted to plow back into big tech this morning. But then what

happened later on is the market realized that, okay, we're back to where we started after this initial excitement wears off, and that we have a game of incomplete information. So markets usually play a game of near-complete information. It's widely disseminated what companies are earning. It is widely disseminated what trade policies are. They don't change that rapidly. It's widely disseminated that players know how to import and export their goods and that consumers have that stability as well. So when you go from this to a game of very incomplete information, it just is tough to figure out on a daily basis for most market movers where they should be placing their bets. So they're moving money out of the US markets. They're moving money to the

sidelines. Even in those brief periods where they want to put money to work, they keep coming back to the same level of unpredictability. I want to hone in on this phrase you just said, back to where we started. Because for all the ups and downs that we've seen in the market, especially last week, but also zooming out over the past weeks and months, things are relatively in line with where they were eight months ago. And so we see all these big headlines about how the market's moving up, moving down, and all that's been lost or gained. But on Friday, the S&P closed only 0.4% higher than it was on August 9th. That comparison between, okay, Friday and August 9th doesn't capture at all any of the volatility that we've been covering

on this show over the past several weeks. Is that still something that's worth calling out, that means anything? When you see that, when we talk about how, okay, the market has remained relatively unchanged, even though there's been so much movement in the days between Friday and August. What do you make of that? What does that comparison tell you, if anything at all? It sort of forecasts for me additional volatility. So take a look at the VIX. So this is a measure of forward volatility. It's an index that's based on options prices as we look 30 days forward. when times are very calm and easy, the VIX trades at a low level. It spikes when the expectation of volatility increases. So that's peeled off a bit in the past few days, but it's still at

really elevated levels. It also shows me that we are at a little bit of a sea change here, because, Mary, the period that you talk about included a lot of time where the VIX was trading at just a stable level. And markets were moving up in an almost incremental step fashion. In fact, the last three years have been a lot like this. We've had very great returns in the stock market. The US economy has been an outlier in the global stage. We have led developed nations in growth. We have had a lot of technology, think GPUs, that has spurred innovation and brought lots of dividends to investors. I don't mean actual dividends, but appreciating stock prices for those who are invested in the market. Even if you were in an S&P 500 index fund, you enjoyed

this propulsive wave as the U.S. reaped its value out of the strides it had made in artificial intelligence. And also the high-tech manufacturing we do do here. We don't do the old school hand piece manufacturing. So, I mean, that's all up in the air now that we can continue to do this because the tariffs don't seem to have either a real trade imbalance goal or a real goal about making tariffs reciprocal. Again, it seems to change day by day. Without this, you see so many of the capital outflows leaving the US. You see trouble in the bond markets. It all points to one thing, that the nearest bit of volatility we've seen in these past few weeks and months is going to be the forward bit going forward. We can expect to see some more of this. Now, if it

stabilizes next week, don't come back and call me on that. I'm doing my best here. So Axios had a piece out this morning in their markets newsletter talking about what it means to exist in the liminal period. And I knew I was talking to you this morning, and I thought that this might be a topic that you especially would have some interesting insights on. So the whole idea behind this liminal period is that there was a French ethnographer who defined a rite of passage as having three parts. So first you get this right of disengagement, which is when the old order ends. Then you get this liminal period, which is the transition between that old order and the new. And that liminal period continues for an undetermined amount of time. It's that

volatility that you were just talking about, right? Then lastly, you get the right of re-engagement. So that's when this promised new order actually begins. This is especially interesting to me as as we think about how to interpret and analyze announcements and news around these tariffs, because April 2nd was very much touted by the Trump administration as a right of re-engagement. They didn't use those specific words, but the language was very much, hey, this April 2nd is the day when everything changes. But Felix Salmon and Emily Peck, who wrote this Axios article, argue that Liberation Day, April 2nd, was actually more of the first step. So it marked the end of something old rather than the beginning of something new, which means that right now we're

stuck in this in-between period, this liminal period of unknowns. I think this is interesting, Asit, but I wanted your take on this. Do you think that that linguistic difference, that the point of, hey, no, we're actually at the end of the old thing, not quite at the beginning of a new thing, do you think that that distinction is significant for investors? Yeah, and I think they got it right, Mary. In fact, the whole rite of engagement or the rite of passage, I should say, is a term that was coined by Arnold Van Gennep. So it's sort of interesting. It's just like a cliche now, but it stems from this ethnological study that Van Gennep did. And he really laid it out in a very clear fashion. So if you're a young person in a tribe

somewhere, wherever tribes still exist, right? In some obscure corners of the world that you know when your rite of passage is coming, you prepare for it. And then you have sort of a bit of time where you're put away from the rest of the tribe. Then you go through the rituals, then you welcome back into the tribe as someone who belongs, you've gone through the rite of passage. So the Trump administration tried to argue that the very beginning of this process, which is, hey, everyone, we're going to sort of separate you out. We're going to prepare you for for this transition, they tried to skip that stage or confuse the two. So really this Liberation Day was the beginning of the process where it became clear to everyone in one fell

swoop at 4 p.m. on Liberation Day. I've already forgotten, was it like the 2nd of April? It's all running together. That was the introduction of the ritual. And so, yeah, I think we're in a period of transition. Even with this 90-day pause, you have some, what, 180, 190 countries on earth that have to come and try to negotiate their position relative to the tariffs. So we are in a liminal period. And I think it will extend beyond the point where the Trump administration says, okay, everything's settled now. We have new tariffs in place because the trading order has changed in the world. All the flows that we took for granted that the US would be an exporter of technology, It would be an importer of cheap goods and services. That stuff takes years to reorient. So it's going to be a while unless the administration decides in a few months that let's go back to the way things were because everyone's tired now and this is really unpopular. That's one outcome that could still occur.

We've talked a lot about volatility on today's show, but largely what that means on the macro level. So we can zoom in and look at a company that actually plays at that specifically. For all the volatility that's out there, for all that we've talked about it today, it is not slowing down Goldman Sachs. Equity trading revenue at that investment bank rose 27 percent this quarter compared to the year before, with a company raking in nearly $4.2 billion from that segment alone in the first quarter. JP Morgan and Morgan Stanley both reported last week, and they too boasted near-record revenue in the stock trading departments. If you're somebody that thinks that market volatility is only going to continue, is it a smart bet to maybe load up on some banks that might profit from all of the buying and

selling that you expect to see moving forward? It could be, Mary, if you have no fear that what might follow is a period of lessened activity or inactivity. So sometimes shocks like this signal a recession. And when recessions hit, the investment banks' trading revenue goes down because people don't want to trade as much. What we're seeing now in the markets is sort of like when a storm is coming and people are very active around their houses.

They're making sure that everything is tied down. The windows are shut. There's this flurry of activity. We're seeing institutions unwind some derivative bets. We're seeing short sellers close positions. We're seeing retail traders like yourself and myself maybe buying some companies that we like that are on sale, maybe trimming some speculations that we shouldn't have been in the first place to raise some cash.

So everybody's busy. But if the net effect of this is that we head into a recession, which is one possibility, you'll see those trading volumes slow. And in fact, in Goldman's earnings, that activity that they had on the trading side masked some other weakness they had on the M&A side, on the fixed income side. So I'd be careful. It might be a smart bet, but you've got to make sure that you're pretty confident in your outlook for the U.S. economy for the next few quarters before you take that bet.

You mentioned weakness in other segments of the business. Investment banking revenue came in 8% lower than last year, as did top line numbers from the financial advisory and the equity underwriting parts of the business. That said, when I last checked before we recorded, Goldman stock was up about 3% this morning. It seems that Wall Street is pretty unbothered by that underperformance. What say you? Yeah, I think Wall Street is okay to be unbothered. Goldman is a company that lost its way for a little bit. It lost its mojo. It got into all kinds of things which were collateral to their core business. Just thinking of some of their extensions into private banking,

which probably they didn't even need to invest in. And now they're back to being an investment firm at heart, an investment banking firm at heart. And I think with the trading activity, they look like a company that's more focused on its core mission. And they really can't help what goes on in the larger mergers world. We're seeing mergers and acquisitions dry up everywhere as the effects of the tariff policy roll on. So that will come back for them as it will for the other trading houses. So I get that Wall Street isn't penalizing something that's out of Goldman's control, and hence why the stock would be up. But I bet, Mary, by the time we finish taping, like the rest of the market, it's going to be closer to the break-even point or negative.

Yeah, who's to say? Who's to say? Asit Sharma, always a pleasure having you on. Thank you so much for helping to make sense of the continued uncertainty for us. Thanks a lot, Mary. This was a lot of fun. Last week, food analyst Tim Byers and I talked about Management X, the things a company does that make us shudder. Today, we take the opposite view and talk through Tim's analyst kicks, aka the moves he loves to see a company make. Frequent listeners of the show, Tim, might have some guesses as to what you love to see management do. Number one on that list, solving a migraine level problem. But for those who are

maybe not such frequent listeners or unfamiliar with that terminology. What's a migraine level problem, Mr. Byers? A migraine level problem. So if you have a migraine, you'll pay just about any amount of money to get relief because a migraine is intense. It is not something that you can just lay down and get rid of it. It's just pounding. It's relentless. It requires requires extraordinary relief. So you will take measures, you will pay what is required to get relief for that. So a migraine level problem is one that causes genuine corporate pain. You know, like people who have money and big checkbooks, they will write checks in order to get that pain solved. So for example, a massive supply chain problem,

or a massive competitive problem. Things like that are significant. So in the case of a company that I've talked about many times, still my favorite stock that solves this is Toast. And so who has the pain here? If you are a restaurant operator and you have somewhere between five and 20 restaurants, restaurant operations do require digital systems in order to run. You have an ordering system, you have inventory, you have reservations, you have so many things that you have to do. And all of those can be different systems. And if they are different systems, Mary, then the point of integration for all of those systems is either you spending a boatload of money on a systems integrator to go out and integrate all those systems.

The point of integration is you. You either have to figure it out or you make somebody else figure it out. And so what Toast decided is that they could be that point of integration. They could do that. They could go into a restaurant group, make it cheap on the front end to get all the systems installed and set up. And then over time, you would pay them a subscription fee and you would pay them part of the fees that you generate doing business there in the restaurant. And so they could win right along when the restaurant won. And that to a lot of restaurant operators is like, that is sweet, sweet relief. I don't have to be the point of integration. And your business model allows me to only pay you more when I am earning more. That sounds pretty good.

And so for that particular group, there's a real migraine problem there. I'm not a technologist. Don't make me integrate all of these systems. And Toast came in and said, we won't. We won't force you to do that. We'll help you out here. So the thing about a migraine is that if you are not the one experiencing the migraine, it can be hard to actually understand just how painful that migraine that someone else

is experiencing actually is. right? So what advice do you have for retail investors to spot migraine level problems in industries that they don't play in? It's one thing if you're a consumer and you use the product as a consumer and can understand, oh, this solves a massive gap in my life. This addresses a massive problem. But it's another thing to try to look into an enterprise relationship and distinguish a migraine from what might just be a headache. Any advice for kind of how to spot that when you're on the outside? Well, listen for complaints. I mean, if there's anything that is, is a human trait, it's that we love to complain. And so listen, listen to where the complaints are

and that might lead you to not always, but it might lead you to, you know, migraine level problems. I'm struggling to think of one at, at, at the moment, other than, other than toast, but like anything that you complain about consistently i mean here's here's another that i think you you could have thought about how backbreaking did it used to be to be constantly picking up if you have a dog dog food from the grocery store no thanks i don't want to do that it is something that you will complain about bad food choices for your dog big bags that are just heavy and onerous and just dumb to bring to bring in like could you fix that problem and chewy isn't the first one to fix that problem but they fixed it in such a way by virtue of how they you

know they treat their customers that they've won some very very loyal fans to their customer base so they combined they did something that's pretty interesting they leaned into a way to solve a migraine-level problem, but they solved it in a better way than most did by creating a massive customer service operation that made people love Chewy by caring about your dog, your cat, your bunny, your chinchilla, and so forth in ways that another retailer just really doesn't. But yeah, follow the complaints. Complaints are a great place to start. A company that we can use as an example to highlight another kick that you pointed out, but that interestingly kind of sits at the intersection of migraine and joy is Duolingo.

So the kick in question is solid unit economics. And I vividly remember once upon a time, we were at the old Denver office and Duolingo had just dropped earnings and they like totally blew things out of the water. And you were just floored by the company's ability to convert free users into paying members by its ability to generate so much from those paying users that the company was paying so little, honestly, to acquire. And so you launched then into a lesson on unit economics and why that matters so much. So walk us through what the Duolingo playbook is. What do they understand about unit economics that investors can look at and try to try to apply to other companies and see if they they hit the same marks yeah they have a

way they have created a go-to-market mechanism or a customer acquisition mechanism that spends very little to generate interest they primarily do it through social media and engaging social media i do not follow duolingo on instagram but i am told that you you make duo the owl you know sad at your peril at your peril so like okay you know fair enough but yeah what i i it doesn't matter that i'm an old man and don't know anything about what this really means what matters is that i know that there is a genuine following here that leads to some amount of conversion and that conversion to using the app is essentially free. It's as close to a frictionless, captive go-to-market app as I've ever seen. They use social media creatively to get interest in the brand.

That brand interest leads to app usage. In some rare cases, it's a very small minority. It's like eight percent i believe it is of the the usage that the customer base is the paying customer base but there are paying customers and what's interesting is those are the subscription customers a larger portion of those will be members who use duolingo they have a big streak it's a gamified app it is it's a language learning tool but it's really a game and people pay to play the game. So if you miss the streak and you want to pay to keep that streak alive, you can do it because it's a game. It's not really a language tool. So it has this unique dynamic of being a fun, playful brand that people like to follow. And then that creates interest and interest leads

to curiosity. Curiosity leads to usage and then usage sometimes, but not always leads to commitment. And so the end result is that it tends to cost for every dollar of revenue that Duolingo will bring in in a given quarter, new revenue to bring in, it's sometimes like 10 cents or something crazy, 20 cents to get that dollar of new revenue. That's amazing. I mean, that really is something. So that is the benefit. Great unit economics is the cost to get an additional unit of revenue. Really high, bad unit economics. Really low, good unit economics. And in the case of Duolingo, very low, exceptional unit economics. So we'll close out on another green flag that you flagged for me when we were building out this conversation. And that is that third parties commit to the platform in increasing numbers. So an example of this might be NVIDIA. Another example might be Apple's App Store. Is this effectively the network effect or are you talking about something a little bit different? Yes, it is the network effect. The network effect is that as usage goes up, more value is created. So as the number of users increase, the net value of the entire networking increases as a result. like you're the value of the product to you and in general goes up but it starts with to you so as

as more people are engaged in the network the value of being part of that network goes up so my participation and the value i get goes up as the network grows that is network effect but then the net benefit of that is and that network wow that's really valuable this is very big what i'm talking about here with an ecosystem is oh i you know what i want to work with you so let's say you're a rising star mary you're gonna make me money if i hitch my you know wagon to you so i want to be working with you because you're gonna make me money that's what an ecosystem is so i want to commit to the app store i want to be part of the app store because if i want to make money i want to get involved with these people because that's where money is so a platform that has

ecosystem benefits is a place where somebody who has an economic interest will go to and they'll get plugged into that ecosystem because they know that that ecosystem is going to make them money this is why you see for example back in the 1980s 1990s why did so many developers commit to windows because that's where the money was. That's what we're talking about here. You're getting into a platform where money is being made. So lots of money to be made in the app store, lots of money to be made as an app connecting into HubSpot's platform, for example, here. You want to be connected to platforms where usage is high, economic value is present. And so by your participation in that platform, you get the benefits, the economic benefits of being there.

And we'll end it there. Tim Byers, always a pleasure. Thanks so much for walking through and highlighting kind of what these icks and kicks are for you. Thanks, Mary. As always, people on the program may have interests in the stocks they talk about, And The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. For The Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.