The FED Goes To War With Trump

Key Concepts

• Department of Justice (DOJ) Investigation of J. Powell: Allegations of perjury related to testimony regarding Federal Reserve building renovations, potentially politically motivated to influence interest rate policy.
• Federal Reserve Independence: The importance of the Fed operating without direct political pressure, particularly regarding interest rate decisions.
• Duolingo CFO Transition & Preliminary Q4 Numbers: Impact of CFO departure and initial Q4 results on stock performance, focusing on DAU growth and bookings.
• Apple & Google Gemini Partnership: Collaboration leveraging Google’s Gemini models for Apple’s AI features, a significant win for Google.
• Paramount & Warner Bros. Discovery Merger Attempt: Paramount’s persistent, now litigious, efforts to acquire Warner Bros. Discovery despite repeated rejections, impacting Netflix stock.
• Price to Sales (P/S) Ratio: A valuation metric used to assess Duolingo’s stock price relative to its revenue.
• Daily Active Users (DAU): A key metric for Duolingo, representing the number of users engaging with the app daily.
• Bookings: A metric used by Duolingo representing the value of products and services sold.

The Federal Reserve & DOJ Investigation

The episode centers on an unprecedented two-minute video released by Federal Reserve Chair J. Powell detailing an ongoing Department of Justice (DOJ) investigation. Powell alleges the investigation, centered around his testimony before the Senate Banking Committee last June regarding a multi-year renovation project of Federal Reserve buildings (initially budgeted at $1.9 billion, now estimated at $2.5 billion), is politically motivated. The DOJ claims Powell committed perjury by misrepresenting the scope of the renovations, alleging “lavish upgrades” like special elevators, water features, and rooftop gardens.

Powell vehemently denies these claims, asserting the DOJ’s focus on the renovation is a “pretext” – an excuse to pressure him into lowering interest rates to align with President Trump’s preferences. He emphasizes his commitment to setting interest rates based on economic data, independent of political influence, a principle he’s upheld across four administrations. He states, “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public rather than following the preferences of the president.”

The investigation stems from a public exchange where Trump questioned the renovation budget, pointing out discrepancies between figures presented by Powell and those including a previously completed building. This interaction fuels Powell’s belief that Trump is orchestrating the DOJ investigation. While Trump publicly denies involvement, his past criticisms of Powell (“terrible,” “low IQ,” “stupid”) and direct pressure during their meeting regarding the renovation budget raise significant doubts.

The core argument is that maintaining the Fed’s independence is crucial. The episode draws parallels to the Nixon-Burns era, where presidential pressure on the Fed led to lowered interest rates, short-term economic gains, and ultimately, rampant inflation in the 1970s. The timeline mismatch between presidential political cycles and the long-term focus of fiscal policy necessitates an independent Fed.

Duolingo: CFO Departure & Stock Analysis

The episode then shifts to Duolingo, focusing on the recent departure of its CFO and the release of preliminary Q4 numbers. The CFO’s transition triggered investor concern, prompting Duolingo to release early data: a 30% year-over-year increase in Daily Active Users (DAU) to approximately 52 million, and bookings at or slightly above the previously guided range of $329.5 - $335.5 million.

Despite these positive indicators, the stock is down 7% due to the CFO’s departure. The analysis highlights a common market behavior: extrapolating trends. Duolingo experienced rapid growth and monetization, and any deviation from that trajectory triggers investor panic.

Currently, Duolingo trades at a Price to Sales (P/S) ratio of 7.8, lower than the average software company, despite a projected revenue growth of 25%. This suggests the stock is undervalued due to investor skepticism. The company is already profitable, generating positive EBITDA and free cash flow, differentiating it from other high-growth, unprofitable companies. The speaker maintains a holding in Duolingo, believing its long-term potential outweighs current concerns, and anticipates a potential valuation correction as the company continues to grow.

Apple & Google: A Strategic Partnership

Apple and Google have entered a multi-year collaboration where Apple’s next-generation Foundation models will be powered by Google’s Gemini models and cloud technology. This partnership will enhance Apple’s “Apple Intelligence” features, including Siri.

This is viewed as a significant win for Google, solidifying its position as a foundational technology provider. It’s also seen as beneficial for Apple, potentially improving the performance of its AI features, which have been criticized as underwhelming. The speaker notes that competitors like Grock will likely object, but Google’s technological advantage makes it a logical choice for Apple.

Paramount, Warner Bros. Discovery & Netflix: A Contentious Merger

Paramount continues its pursuit of Warner Bros. Discovery, despite repeated rejections. Their latest tactic involves launching a proxy fight for board seats and filing lawsuits to compel Warner Bros. Discovery to disclose more information about its merger agreement with Netflix.

Warner Bros. Discovery has responded with a statement emphasizing its commitment to constructive discussions. This ongoing battle is negatively impacting Netflix’s stock, which is down 30% from its highs. The speaker views this uncertainty as a potential buying opportunity, arguing that Netflix remains a valuable asset even if the merger doesn’t materialize, due to its profitability and operating leverage. Investing during periods of high uncertainty can yield better returns.

Conclusion

The episode covers a range of topics, from the unprecedented political pressure on the Federal Reserve to specific company analyses. The central theme is the importance of independent institutions (like the Fed) operating free from political interference, and the opportunities that arise from navigating market volatility and investor skepticism. The speaker emphasizes the need for long-term perspective and a willingness to invest in companies with strong fundamentals, even when facing short-term challenges. The portfolio update highlights the importance of diversification and accepting that not every investment will be a winner.