Pod Insights Prof G Markets Do Japan & the U.S. Have a Deal? Google’s Q2 Earnings & Home Prices Hit a Record (Again) About this episode Ed and Scott break down the new U. S.-Japan trade agreement and what Wall Street’s reaction tells us about who really came out on top. Then, Ed digs into what’s pushing U. S. home prices to record highs. Finally, Ed and Scott Devitt, Managing Director of Equity Research at Wedbush Securities, break down the key takeaways from Google’s second-quarter earnings.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:29 Ed Elson? Today's number: 50. That is the percentage of time that 10-day weather forecasts will accurately predict the weather. Put another way, Scott Galloway should have been a weatherman.
1:53 Ed Elson? Welcome to Profitec Markets. I'm Ed Elson. It is July 24th. Let's check in on yesterday's market vitals. The major indices all rose on news of a trade deal with Japan and word that the EU and the US are progressing toward an agreement as well. The S and P had its 12th record close of the year and the Nasdaq closed above 21,000 for the first time in history. Meanwhile, meme stock mania continued with Krispy Kreme and GoPro ripping in early morning trading. And finally, Tesla shares were volatile in post-market trading after reporting a second consecutive quarter of year-over-year revenue declines. Okay. What else is happening?
2:34 Ed Elson? Trump announced a US-Japan trade deal via his social media platform, Truth Social. The agreement lowers tariffs on auto imports and spares Japan from further tariffs on other goods. Auto stocks surged on the news, sending the Japanese markets to a one-year high. Honda closed up 11% and Toyota posted its biggest single-day gain in over 15 years. So, Trump has completed a "massive deal with Japan," perhaps the largest deal ever made. That is according to his Truth Social post. What does the deal actually entail? Well, America will reduce its tariffs on Japan from 25% to 15%. Okay.
3:18 Ed Elson? And in return, Japan will "invest $550 billion into the United States." According to the president, that investment will occur at his direction. It will create "hundreds of thousands of jobs and the US will receive '90% of the profits." So, it sounds pretty good. Now, what exactly will Japan invest in? We don't know. When will the investment occur? What is the timeline? We don't know. How will it be structured? What are the deal terms? We don't know. And has this agreement even been signed? Well, on that question, we actually do have the answer: no, it hasn't been signed.
4:00 Ed Elson? Ryose Akizawa, Japan's negotiator, said that he will "receive a report on the details in the future." Not exactly a binding agreement here. So we've seen this movie before. In fact, we've seen it a number of times. Back in May, Trump said that Saudi Arabia had pledged to make a $600 billion investment into the US. That was in contrast to his other claims that they would invest $1 trillion and then other claims that they were going to invest $300 billion, multiple competing claims. And since that announcement, no actual investments have been made and no actual deal terms have been signed. Before that, Trump announced the Stargate project,
4:41 Ed Elson? which was supposed to be a $500 billion investment from OpenAI and SoftBank. New reports are now saying they actually haven't raised that money and they are actually struggling to get that project off of the ground. Around the same time, we saw this Apple investment announcement. They were going to invest $500 billion into the US, which Trump was parading around to the media. Soon everyone realized, wait, actually, this is just a continuation of plans that Apple already had. And then Apple, of course, started moving its supply chain to India. And then in Trump's first administration, he made a very similar announcement with China. China was going to make a $200 billion commitment and that never happened either.
5:23 Ed Elson? And so on and so forth. We've seen these investment commitments time and time again. And so far, none of them have panned out. So do we have a deal here? Well, in the sense that we've lowered tariffs, sure. But remember, we were the ones who put the tariffs on in the first place. And lowering them was supposed to be a quid pro quo. We were supposed to get something. So if history is any guide at all, then you will conclude that this $550 billion commitment is not actually a commitment. It's it's more of a press release. And in fact, the markets would agree. We saw huge gains in the Japanese stock market, especially the auto stocks. We saw a lot of complaints actually from the American carmakers.
6:08 Ed Elson? And we saw an overall reaction, not to the investment proposal, but to the tariff change. As Charu Chenana, the chief investment strategist of Saxo put it, the market sees this investment as, quote, "political theater rather than a tradable catalyst, i.e. not real." So if you want to call this a deal. Have at it, be my guest. But in our view, a deal means you sign something, specifically something that is actually new. So a non-binding framework, not a deal. A commitment in principle, not a deal. A provisional expression of intent, not a deal. A deal is a contract or a treaty that is signed and ratified into law.
6:54 Ed Elson? This isn't that. So let's check the scoreboard. Let's look at the deal tracker. We are still at zero deals. Well, we want to get Scott's take on this situation. So let's give him a call.
7:10 Ed Elson? Scott, good to see you.
7:11 Speaker 05 Good to see you, Ed.
7:12 Ed Elson? We'd love to get your reactions to this US-Japan deal. One of the biggest deals in history, apparently. Any thoughts?
7:21 Speaker 05 Let me get this. We have a 0% tariff of our cars going into Japan, which was an easy gift for them. And by the way, that's what the deal was before. But the reality is, it doesn't matter because the Japanese don't want our cars. We sell $2 billion into Japan. They sell $55 billion of cars into our nation. If you want to talk about just a cultural or a sociological delta that props up in terms of consumer preferences, we basically sell boats with steering wheels and the Japanese have no desire to buy our cars. They want, they just don't want our cars. Whereas we want, Japan did to Detroit what Netflix is now doing to LA.
8:05 Speaker 05 They basically globalized it. You don't remember this, but in the eighties, they showed up with something called a Honda Civic and revolutionized the automobile market, the USC seven monopoly on it. And they came in with this little ugly car called the Civic that cost 40% less than an equivalent product and was cheaper to maintain. When I went to graduate school. I sold my BMW three series, which I had bought with my first bonus check from Morgan Stanley. So I could attract a lovely Zed. I hung swim goggles from the rear view mirror because I thought that would make me sexy, even though I don't swim. By the way, it didn't work. It didn't work.
8:42 Ed Elson? One of your most embarrassing stats, I will say that.
8:45 Speaker 05 Oh, no, they that test me. That's nothing. We're gonna need a bigger boat. But the the point is, I sold it when I got into business school. I sold it to pay for business school, but I still needed a car. So I bought a 1984 Honda Accord. And I'm not exaggerating. I put five bucks of gas in that thing and it would just go. I don't think in two years I ever even put oil in it. I mean, Japanese are amazing cars. But back to my original question, other than this weird press release that they're investing $550 billion in the US, which is not enforceable, which is not a legally binding agreement.
9:20 Ed Elson? Correct.
9:20 Speaker 05 What exactly is different about this? What's the fuss about? What's different about it this time?
9:26 Ed Elson? The way I put it, you know, we're up to maybe 50 tariff announcements, probably probably more. Still zero deals. This doesn't count as a deal to me.
9:36 Speaker 05 I think just going meta for a second, I think 2025 in retrospect will be amongst other things, the year it was the end of late night television, different talk shows, so to speak. But I also think this year is really signals the decline in the beginning and the end of the US automobile industry. If you look at the nonsense with the tariffs, a general motors just reported they took a billion dollar hit to earnings because directly related to tariffs. So to your point, it's finally creeping through the supply chain. I also think it's going to give international car buyers an opportunity to just buy fewer of the kind of bigger truck, gas guzzling cars that America produces. Two, our hero or kind of our national champion,
10:19 Speaker 05 which was Tesla, the most valuable automobile company in the world, just reported a sales decline of 12%. Tesla, which has a trillion dollar market cap and a TE of 190.
10:31 Speaker 05 Is effectively their revenues are declining faster than any automobile company in the world. And no amount of announcements around robots or flamethrowers or tequilas or drive-throughs. Or it is going to distract the markets for long enough. Before Tesla collapses. In addition, you have BYD, which is the most ascendant company arguably manufacturing in the world, which is going after the heart and lungs of Tesla. So what do we have? Our traditional champion, General Motors, is taking a huge hit because of tariffs. Our national champion Tesla appears to be just not competitive and and waving and doing all jazz hands around any manner of things to get people to look away from an unsustainable market cap.
11:17 Speaker 05 And we have quote unquote new tariff deals. That seem to me to be not only not good for us, but ceding advantage to other automobile manufacturers. So I think that you're gonna, when we look back on the decline of the US automobile industry, we'll look at the eighties because we were making just shitty cars. You don't even remember, you weren't even around for the Pacer, the K car, the EMC Gremlin. Watch Breaking Bad, the Pontiac Aztec, that sort of embodied the American auto industry. It did have a bit of a renaissance with trucks. But my sense is the, the EV race has been lost now because Tesla has lost it to BYD. Tariffs have given international buyers another reason not to, or this tariff nonsense, not to buy our cars.
12:00 Speaker 05 And we're just struck a deal with Japan that made it here for American to buy, Americans to buy, quite frankly, their superior cars. This is the beginning and the end of the Colbert, Jimmy Fallon and Jimmy Kimmel era. And it's also the end, in my opinion, it kind of signals a, another step down in the US automobile dominance globally. The market really does absorb millions of points of light and issues a decision on what actually is going on. And it's based on fear and greed, which are pretty unbiased emotions, right? And look at what's happened. The president has said that his tariff policy will be good for America. And the markets.
12:38 Speaker 05 Decided that this is really good, a step change in positive economic value for Japan.
12:47 Ed Elson? Yep.
12:48 Speaker 05 The Nikkei just hit an all time high. These auto Japanese automobile companies have had some of their best days in the history of the markets. And American automobile companies are flat to down. So the market and granted, the market could get it wrong. But the most neutral arbiter absorbing millions of points of light have said this deal is absolutely a win for Japan and not the US.
13:12 Ed Elson? We're in agreement there. Okay. Thank you, Scott. Enjoy your day and I'll see you tomorrow.
13:17 Speaker 05 We'll do it. Thanks, man.
13:22 Ed Elson? US home prices just hit another all time high. The median price for an existing home climbed to $435,000 in June, up from $423,000 the month before. That is a 5% jump from last year and a nearly 50% jump from 2020. Meanwhile, existing home sales fell almost 3% to a nine month low. And at the same time, mortgage rates remain above 6.5%. Put another way, it has never been less affordable to own a home in America. That was true last month. It was true the month before that. But what we are witnessing is that somehow the problem continues to get worse.
14:04 Ed Elson? I honestly can't believe it. Every month I think to myself, okay, this is probably it. This is probably the top. There's no way prices could go even higher. Not when the 30 year rate is near 7% and not when prices are six times household income. There's, there's, there's just no way. It doesn't make any sense. But every time I'm proven wrong and the month of June was no exception here. So the question is, why? Why are prices still going up? What is actually driving this? Our producer Claire spoke with Jake Kremel, a senior economist at Realtor.com.
14:42 Speaker 06 How and why are prices still going up despite the fact that we're seeing still six, almost 7% interest rates and more houses on the market and time of market still increasing? How is it the case that prices are actually still going up? And part of it still has to do with the fact that demand and supply are still out of balance. So classic economist answer, but that's sort of where we are and where we'll probably continue to be for some time. I think there's sort of a good news and bad news here for prospective home buyers, especially for prospective first time home buyers. So on one hand, prices, sticker prices, list prices and sale prices are all still quite high.
15:25 Speaker 06 And despite, again, growing inventory, high interest rates, those prices haven't come down much against a lot of economic models that were put in place and forecasts for that matter. So prices are still stubbornly high. That's the bad news for prospective home buyers, especially first time home buyers who really need quite a significant down payment to be able to hit their payment to income and loan to value ratios to qualify for a mortgage.
15:54 Speaker 06 The good news for these prospective home buyers, though, is that they're entering into a market that is actually probably the most buyer friendly summer that we've seen at least as far back as Realtor.com data go, and that's to 2016. You know, a perennial feature of the US housing market during the COVID post pandemic period, but even before, was that we were in a strong seller's market. And so what does that mean for prospective buyers is they basically had very little leverage. You heard stories about folks waiving all the contingencies, getting in bidding wars, things like that. And those weren't just anecdotes that was borne out in the data, and that was part of what was driving prices up were those sorts of bidding wars.
16:34 Speaker 06 What we're seeing now is one benefit of sort of softer demand and homes staying on the market longer. And for that matter, more homes being on the market is that buyers have, in general, more choice than they've had before, and they have more time to make those choices. And they're actually competing against fewer buyers at the same time. So there's some more leverage at the negotiating table. That being said, it's not necessarily a great time for folks to try to be able to afford a $600, $700,000 house as a starter. That's still very difficult to do for most folks.
17:05 Speaker 07 Right, I mean, that would be my follow up. It's a it's a great buyer's market if there's no competition, but maybe there's no competition because everything is just too damn expensive. So how do you square that? Like, where do we go from there?
17:20 Speaker 06 Right. So I mean, it's one of those things where if you're already in the market and, you know, maybe you've saved up, maybe you've hit a windfall, maybe you're moving from a very expensive market where you're renting into a sort of a less expensive metro. If you're fortunate enough to be in that position, yeah, you're potentially like the winner of the more buyer-friendly market. But as far as like, where do we actually go? I mean, these are sort of much more entrenched problems. Housing supply, housing shortages, those are sort of perennial, decadal-long issues that we're only beginning to being able to tackle. Not to mention that, you know, single-family home construction has
18:00 Speaker 06 slowed a lot recently as a result of, you know, high mortgage rates weighing on builders, more uncertainty macroeconomically, and also this sort of like pullback from buyers as well. So we kind of are in a bit of a holding pattern on the supply side, unfortunately, because, you know, that's ultimately going to be the only thing that can actually help to moderate prices sort of in the longer run and in a more permanent fashion perspective first-time homebuyers.
18:28 Ed Elson? That was Jake Kremel, Senior Economist at Realtor.com. And you may have noticed Jake mentioned economic uncertainty at the end there. I think an assumption a lot of people might have after hearing that is that Trump caused this. And as we've discussed, yes, Trump's policies are inherently inflationary, especially to the housing market. Steel, aluminum, lumber, all of those things are essential to build homes, and the prices on all of those things are going up. So, you know, an understandable conclusion, but is that really the reason that prices rose in June?
19:04 Ed Elson? Probably not. I think you have to remember that one, we're looking at existing home sales here. So the tariff effect probably isn't going to show up here. And two, as Jake says, there are other factors at play, factors that have been around for a really long time and that we still haven't resolved. You've got this supply shortage that's been around for more than a decade, really since 2008. You've got this rate lock effect where a lot of homeowners bought houses when rates were low, they locked those rates in and now there's very little incentive to sell. You've got multiple different pieces that are all fitting into this giant housing puzzle and Trump is only one piece. Having said that, though,
19:45 Ed Elson? there is no doubt that we are only adding fuel to the fire here. If you want to reduce housing prices, then you should be making construction materials cheaper, not more expensive. You should also be making labor cheaper. And in the case of housing, one in five construction workers are undocumented. So tariffs and deportations, while they're probably not the cause of this bad news, they are certainly set to make this bad news even worse in the future. Now, before we move on, just a quick check in on young people. This obviously affects young people. In the past 50 years, the homeownership rate for young people has been cut in half. The average age of a home buyer just hit a record high of 56 years
20:29 Ed Elson? old. For comparison, in 1980, the average age was 30 years old. And many of us are indeed still living at home. A third of adults aged 18 to 34 still live with their parents. So, not great, not great, and not likely to change anytime soon. After the break, we'll take a look at Google's second quarter earnings. Stay with us.
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22:33 Ed Elson? We're back with Prof G Markets. Google kicked off big tech earnings with a beat on the top and bottom lines. Overall revenue rose 14% compared to this time last year. Cloud revenue increased 32% and Google search revenues saw double digit growth. They beat on essentially every metric in what CEO Sundar Pichai called a, quote, "standout quarter." However, the stock initially fell as much as 2% in after hours trading. As we record this podcast, it is beginning to tick back up. So joining us now to break down these earnings is Scott Devitt, Managing Director of Equity Research at Wedbush Securities.
23:20 Ed Elson? Scott, thank you for joining us.
23:22 Speaker 08 Thanks for having me, Ed.
23:23 Ed Elson? So we want to get your reactions to these Google earnings, which were pretty much impressive across the board. A beat on revenue, a beat on EPS, kind of a beat on everything. And yet we saw this initial sell off in after hours. Your reactions to the earnings and also the market's reaction to the earnings.
23:45 Speaker 08 Well, the initial, I think, I think it's it's up now. But the initial reaction was it had been up 10 consecutive days going into the print. So it's probably just a response to that. If there was a little noise in the quarter, the reported operating margin percent was a little light, but there was a one time charge, so you analyze for that. And that wasn't the case either. So like you said, it was clean across the board. And where investors are most concerned is the search business. And that accelerated from 10 to 12%. In addition, the company's paid clicks, which is a closely followed metric in terms of the health of the business, accelerated from 2% to 4%. So it's really clean across the board in supporting, you know, Google as an AI winner.
24:26 Ed Elson? What are your thoughts on the CapEx number, which was raised to $85 billion for the year? That's their estimated guidance. From what I've heard and from what I've seen, people and investors are a little bit worried about that, that it's too high. Any thoughts on on the CapEx? Would you agree with that? What do you think?
24:48 Speaker 08 Well, you know, you have to spend the money to make the money. So and right now it's spend the money time because we're going through a platform transition. And so in prior cycles, you know, Google's proven to be very sensible in terms of their spend. You're seeing these types of numbers elsewhere as well. So the question becomes, it's not just an alphabet question. It's a question for everybody on the front edge of this that's spending the CapEx to build products is, you know, is there going to be a return? As they get through this period, you know, it's important to kind of monitor the margin profile of business, which is why I highlighted that.
25:28 Speaker 08 But, you know, you have to believe that AI is going to lead to stronger businesses on the other side. Or else we're going to have a major problem. And so we do believe that, but investors will question it until you start getting to the point where the capex numbers stop going up. And I'll tell you, when you do that, if you start seeing the returns, I mean, that'll be very negative for infrastructure companies, but very positive for consumer-facing companies.
25:53 Ed Elson? Yeah, we also saw this huge growth in the cloud business, which to me reflects a level of AI demand that seems to warrant more investment in capex. Thirty-two percent growth beat expectations of twenty-seven percent. Any thoughts on the growth in that business and what it says about Google's positioning in AI?
26:14 Speaker 08 Well, Google's doing a good job with the cloud business. I mean, they are in third place. Microsoft's doing better. Amazon's doing better. But Google's in a good position. They're showing for three, given the size of the market and given the efficiencies that it creates throughout the entire ecosystem of these companies to be in this business. So being three benefits, you know, the rest of Alphabet as well as on a standalone basis. So the business itself was healthy. It did accelerate to thirty-two percent growth this quarter. But in that context, you know, I think Microsoft and Amazon are doing better in the cloud business. For Alphabet, you know, cloud was still good. Where the controversy is, is more in the advertising business. And so that was the big surprise and why you're
26:59 Speaker 08 likely to see the stock go up tomorrow and probably continue its momentum that started the last couple of weeks.
27:05 Ed Elson? Yeah, we also saw some detail on Waymo. Sundar Pichai said that Waymo has now driven over one hundred million miles. Waymo, in our view, is the number one in autonomous, almost like a monopoly in America. But we don't feel that, or it doesn't seem like Wall Street cares that much, or at least that doesn't seem to be reflected in at least the valuation of Google, which is still a lot lower than the rest of big tech. Any thoughts on Waymo? How does Wall Street feel about Waymo? And do you think it's perhaps undervalued?
27:46 Speaker 08 Well, I mean, there's a huge opportunity for Investors owning Alphabet for the possibility that this biscuit gets rerated up really across the board. The search business gets rerated up because it's viewed no longer as structurally impaired because of AI. YouTube gets rerated up because investors being respect its competitive position in terms of time spent and the ability to monetize that. And things like Waymo, you know, start to be valued as on separate business units, not necessarily on current free cash flow, but on the longer term prospects. I think Waymo and what Tesla's doing, they're very different strategies. The Waymo approach works today and is a linear progression. The Tesla
28:26 Speaker 08 approach is more of an S curve in terms of that if it does work, watch out because it will change the world. And, um, and I think that investors, you know, are a bit more excited about that possibility, which is maybe why it gets a little bit more embedded valuation in the stock, even though, you know, outside of maybe thirty, thirty-five cars in Austin, yet you're not really seeing it live and certainly not without a human being in the passenger seat.
28:51 Ed Elson? Yeah. And just to, as we wrap up here, any thoughts on the valuation as a whole? I mean, as I said, uh, trading around twenty-one times earnings, uh, lower than big tech, lower than the average of the S and P five hundred. Um, why is this? What is the market pricing in? And what you, you mentioned the, the possibility of some reratings on those businesses. Why hasn't that come yet for Google?
29:17 Speaker 08 And as another example, lower than eBay.
29:19 Ed Elson? Yeah.
29:20 Speaker 08 In, in, um, in e-commerce. So the market believes that the search is pricing in the possibility that the search business is impaired or that AI search is not as profitable, profitable as legacy searching because it's fifty-five percent of the business and a higher percentage of the margin for Alphabet, that they're effectively saying, no, it doesn't trade at twenty-one times earnings, you know, it trades at twenty-eight or thirty times earnings because their numbers are going to get hit in the future.
29:48 Ed Elson? Yeah.
29:48 Speaker 08 I don't subscribe to that myself, and I actually think that. Google should trade in line to a premium if you believe this is more of like a hundred year company that's structurally sound and then has all these options on top of it as well. But you go through these periods like the mobile transition, you know, where advertising facing companies had multiple compression during that period because nobody knew how they could monetize from desktop to mobile and then they figured it out. For Alphabet, you had the emergence of Amazon Prime back in 2006, you know, and Amazon's been very successful with Prime, but Alphabet and Google Search has continued to be successful over that 20 year period as well. So it's another one of these controversies and when
30:29 Speaker 08 the controversy passes, as it looks like it's beginning to do, I think you get that re-rate and with Alphabet, I think you probably have two, three turns in the multiple to go.
30:40 Ed Elson? Thank you very much, Scott. I appreciate you joining us.
30:43 Speaker 08 Thank you. Have a good day.
30:48 Ed Elson? That was Scott Devitt, Managing Director of Equity Research at Wedbush Securities. To summarize, Google beat on revenue, Google beat on earnings, they beat on search, which despite concerns that it would get beaten up by AI or OpenAI, it grew 12% year over year. They beat on YouTube, still the most popular streaming platform in America, up 13%, and they beat on cloud, the AI business, up 32%. The only thing that you could possibly criticize, the only criticisms I'm seeing, is that they are over investing in CapEx, they're over investing in AI. But is that really a bad thing? Or does it just mean that cloud demand is growing and Google's getting ahead? As Scott said, you got to
31:33 Ed Elson? spend money to make money. So we think the market's going to come to its senses here. In fact, it kind of already has. The stock initially fell in after hours, but it is climbing back up. We're still looking at a 21x PE multiple for one of the most ascendant companies in AI and media and autonomous. You can't forget Waymo. We were long Google last year, we were long Google this year, and we're still long Google today. Okay, that's it for today. Thanks for listening to Prof G Markets from the Voss Media Podcast Network. I'm Ed Elson. Join us tomorrow for our conversation with Stuart Simpson, the CEO of Vertical Aerospace.
32:14 Ed Elson? Lifetime.
32:23 Ed Elson? You have me in kind reunion.
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