Big Beautiful Bill, Write-Off Revolution & Tariff Tempest — The Friday Market Wrap!

R&D expensing for research and development conducted in America benefits medtech, pharma, and biotech; the structure creates two distinct types of winners — sellers of goods who get sales and earnings, and buyers of goods who get to write them off.

“There's something in there called R&D expensing. So, your research and development costs are also going to be expensed if that research and development happens here in America. It is very important for like medtech and pharma and biotech”

The business tax cuts function as a 'tariff sterilization': by offsetting the price increases caused by tariffs, the bill prevents the tariffs from causing the recession they otherwise would have, making the combined package a sterilization rather than a pure stimulus.

“what I call the tariff sterilization. Think about that first podcast you and I did on the morning of April 3rd... our whole point was these tariffs have to be sterilized. This is going to be a recession. And the business tax cuts are the way they do it.”

The US has entered its first period of austerity in 30 years because interest cost relative to tax revenue is ~18%, above the ~14% threshold where austerity historically kicks in; extending existing tax cuts financed by new tariffs is itself a form of austerity, and the country is now moving into 'budget trench warfare' with recurring fiscal battles year after year.

“this is the first time that we're in austerity in 30 years. Austerity comes to America when your interest cost goes up really high... Right now we're about 18%. Usually once you get over about 14% that's where you see austerity kick in”

Industrial and materials companies (e.g. FedEx, UPS, Lockheed Martin, Boeing) that do large investments and large buying are the big winners from 100% expensing, evidenced by their membership in a '100% expensing coalition'; tech/software companies also benefit because software is included in the definition.

“industrial companies really benefit from these changes and we know that because there's a 100% expensing coalition... FedEx and UPS and Lohee Martin and Boeing... there's tech companies that benefit because software is included in the definition”

States finance Medicaid by raising taxes to put more money into the system, which triggers more federal matching money; the bill caps these provider taxes (House at ~6%, Senate going to 3.5%), which will cause pain for states, but the changes don't take effect until 2028 — a presidential election year — and a ~$100 billion rural hospital stabilization fund cushions the impact.

“what they do is they raise taxes. And when they raise taxes, they put more money in the Medicaid system. And then that triggers more federal Medicaid money. So Congress is like, well, we got to clamp down on these tax increases”

The bill loosens the corporate interest deduction limit from 30% of EBIT to 30% of EBITDA, a more generous standard that is less growth-oriented but important for utilities.

“you can deduct more of your your corporate interest off your taxes. Right now it's a very strict standard 30% of EBIT. It would go to 30% of Ebida becomes a little bit more generous overall”

The big beautiful bill makes the expiring individual tax cuts permanent, eliminating a year-end fiscal cliff and removing second-half-of-year uncertainty for businesses, and notably patches the alternative minimum tax which would otherwise have added a $400 billion tax increase on January 1st.

“The alternative minimum tax is patched... we would add a $400 billion tax increase on January 1st and that's no longer going to happen”

The only real way to hedge against a US downturn while remaining long-term bullish is to buy out-of-the-money puts on the S&P or NASDAQ, because if the market rises you still profit on the portfolio and only lose the premium paid.

“if you really want to hedge, I think the only thing you could do is buy out of the money puts on the S&P or NASDAQ. But I'm long-term bullish, so I'm not advocating this.”

Pre-financial-crisis money market funds that advertised risky short-term holdings as not risky all blew up in the crisis, so investors should ensure their fund holds only short-term US Treasuries.

“some of them were in very risky short-term stuff that they advertised as being not risky and it all blew up in the financial crisis”

The bill makes 100% expensing of capital goods orders permanent, which feeds directly into non-residential capex and GDP; companies like John Deere and Caterpillar will use it as a sales tool ('buy this tractor now and write it off immediately').

“you get to write off 100% of those cap good orders immediately, which is called 100% expensing... that's permanent... that feeds right into non-residential capex, so fixed investment. So you'll see it translate right into GDP”

Although the CBO says the bill increases the deficit by $3.4 trillion over 10 years, it also says Trump's tariffs will raise $2.8 trillion over 10 years, and with another ~$600 billion in newly added tariffs the gap is effectively bridged, so the two must be analyzed together — leaving the deficit roughly status quo at ~6.2-6.3% of GDP rather than the 9% claimed in the Moody's downgrade.

“the Congressional Budget Office says that one big beautiful bill will increase the deficit by $3.4 trillion over the next 10 years. The CBO also says that Trump's tariffs are going to raise 2.8 trillion over 10 years. So, it almost pays for that whole deficit gap.”

A money market fund is a substitute for a bank deposit that lacks FDIC insurance but generally pays slightly higher interest; the safest version invests only in short-term US Treasuries, giving you effectively the same safety as an insured deposit because you are buying US government debt.

“A money market fund is what I would call a substitute for putting your money in the bank... if you put your money in a money market fund, you are not guaranteed by the FDIC. And generally, you will get slightly higher interest”

The recent market rally is not the result of a government or Wall Street conspiracy, because such a blatant conspiracy would have leaked by now; the most consequential conspiracies are instead unspoken ones that develop over time, like predatory lending to the middle class becoming an industry ethos in the 2000s.

“I don't think there's some conspiracy theory, some government agency out there that is trying to manipulate the equity markets. If that were true, I am quite convinced it would have it would have leaked by now”

The bill allows 100% immediate expensing of factory construction in America, effectively making a new factory ~30% cheaper by capturing the time value of money instead of depreciating over a 30-year life cycle, which neutralizes tariff-driven cost-prohibitiveness and is likely to trigger a building boom in data centers, factories, and LNG export terminals.

“if you build a factory in America, you can write it off 100%... it's like, are you saying that I get to write a billion dollars off my taxes”

The bill raises the debt ceiling by $5 trillion, and Treasury Secretary Bessent stated Treasury will take its time refilling the Treasury General Account rather than flooding the market with debt immediately, which has calmed fixed income markets regarding near-term issuance.

“we raised the debt ceiling by $5 trillion... they're going to take their time refilling the Treasury General account... so that they don't have to put a lot of debt on the market almost immediately... made the fixed income markets a little bit calmer”

Student loan reorganization clamps down on Biden's SAVE program and income forgiveness and restructures the high-default Graduate PLUS program, saving the government money while pushing the system toward privatization, creating potential opportunity for private lenders like Sallie Mae.

“clamping down on President Biden's uh save program and in income forgiveness. Um changing the graduate loan plus program, which is very important because there's a high default rate... you're moving it more into a privatization mode”

R&D expensing benefits a much broader set of companies — the Magnificent Seven tech companies, healthcare companies, and industrials/materials — while factory-building incentives could produce 'ghost factories' that employ no one, but the economy still benefits from riding the construction wave while they are being built.

“on the R&D it is much broader. This is tech companies. This is the big magnificent seven companies that love that R&D expensing. It's healthc care companies and it's industrials”

Trump's tariffs are currently subtracting from growth and slowing the economy, having peaked at ~$700 billion on April 2nd before being reduced to ~$330 billion; Bessent's strategy of delaying tariffs to let fiscal policy sterilize them first has produced a far more optimal policy mix today than the bad mix of three or four months ago.

“Trump's tariffs are subtracting growth right now and they're slowing the economy. So, we always view this more as a sterilization than a growth package... We got up to about $700 billion in tariffs. Today, we're at 330.”

Pharma and biotech stocks were eviscerated this year due to threatened most-favored-nation price controls and a 25% pharma tariff, but the bill plus Trump's decision to delay pharma tariffs 12-18 months (to encourage reshoring under 100% factory expensing), the exemption from IRA price controls for companies with two or more orphan drugs, and R&D expensing collectively make the sector more attractive after a massive derating.

“Pharma and biotech stocks have just gotten eviscerated this year... the president was threatening price controls through what's called most favored nation... putting tariffs on the pharmaceutical industry at a 25% rate”

The conceptual purpose of the Medicaid changes is to wipe out the $800 billion January cost increase via work requirements, twice-yearly income verification (saving over $100 billion), and reducing waste/fraud/abuse (~$250 billion), rather than absolute cuts.

“Congress just came in and said... We're going to make policy changes to wipe out that $800 billion cost increase... by more work requirements... income verification... you save over a hundred billion dollars”

The expensing and consumer-aid provisions will add roughly 100 basis points (1%) to GDP growth, front-loaded into 2025-2026 because the business provisions are retroactive to January 1, with companies already paying less in corporate taxes in anticipation; this replaces the fading IRA/infrastructure stimulus.

“I think it's going to add 1% to GDP growth. 100 basis points in GDP growth... it's very front-loaded. You're like the business stuff is retroactive to January 1 this year.”

Drug companies like Vertex argue that price controls limit innovation in isolated, hard-to-treat areas (e.g. cystic fibrosis) where research is most needed, which is the policy rationale behind exempting orphan drugs from price controls.

“if you look at what Vertex is doing on cystic fibrosis... the price controls can limit innovation where we need the research in these more isolated areas which are kind of harder to get... remedies and cures for. So that that's the rationale behind it.”

The bill cuts taxes by $4.5 trillion while cutting spending by $1.5 trillion, with the four spending-cut areas being renewable energy/IRA (over $500B), Medicaid (~$1T over 10 years, achieved by slowing growth not absolute cuts), food stamps (impacting consumer staples), and student loan reorganization (~$350B savings).

“this bill does is it cuts taxes by four and a half trillion, but it cuts spending also by one and a half trillion. And the four major areas that they cut spending are renewable energy through the IRA... Then you have Medicaid cuts... a trillion over 10 years. When I say cuts, they're actually slowing the growth of Medicaid spending”