3Q25: Some Like It Hot

Some Like it Hot

There is an old joke about a time where Marilyn Monroe supposedly said to Albert Einstein, “if we had children, they would be the most intelligent and beautiful people in the world.” Einstein responded, “what if they get my looks and your brains?”

The “America First” policies of the Trump administration have a clear goal: to prioritize economic growth above all else. This approach is evident in several key areas. The recent tax cuts, from the “One Big Beautiful Bill,” extended tax reductions from the previous term and provided new relief from lower taxes on tips, overtime and Social Security.

Beyond tax policy, the administration has used tariffs as a tool to encourage domestic production. This “stick” is intended to make it more expensive to manufacture goods abroad, thereby incentivizing companies to bring their operations back to the United States. Additionally, there has been consistent pressure on the Federal Reserve to lower interest rates, with the goal of further stimulating the economy.

The Trump administration wants to run the economy hot, as investors we still must be mindful of Einstein’s warning.

International Markets

The Trump administration has a simple diagnosis for a complex problem: the U.S. consumes too much and produces too little, while the rest of the world has a reverse problem. Its remedy, a broad package of “Liberation Day” tariffs, is now in place, and the global fallout could have serious implications.

The tariff policy has the potential to hurt the nations that have built their economies around selling cheap goods to the U.S. Tariffs could artificially suppress American demand, then factories abroad would run at reduced capacity, leading to impaired capital and mass layoffs. The “America First” policy, it seems, has the potential to devastate economies around the world.

But will foreign governments stand by and watch this happen? I believe it’s unlikely. To avoid a severe recession, they will have to boost their own consumption, and they have a modern playbook to follow. The COVID-19 pandemic showed governments worldwide how to use unprecedented stimulus to drive consumer spending, even in the most restricted of circumstances.

The tariffs have essentially given these governments a license to “run it hot.” They will be able to pursue aggressive fiscal and monetary policies, and they’ll have the Trump administration to thank for the political cover. And when the bill come due from years of deficit spending, one of the ways to deal with the massive debt is to inflate it away. This is not just a trade policy; it is a catalyst for a global economic shift that could lead to widespread inflation and a new era of economic nationalism.

US Market Outlook

The American stock market has been living in a golden age, outperforming the rest of the world for years. The current sentiment is that a hot economy drives higher profits, which in turn justifies ever-higher stock prices. But this simple narrative overlooks the most critical metric: Return on Invested Capital (ROIC). The advantage the US market holds is the incredible concentration of asset-light, high-ROIC businesses in technology and service sectors. Unlike low-margin manufacturing, these companies – the likes of Google, Apple and Microsoft have historically generated immense profits with minimal capital investment.

That era may be over. A profound shift is now underway, and it’s driven by two powerful forces that will fundamentally change the math for American business. First, the AI arms race is forcing tech titans to spend staggering sums on new data centers and infrastructure. The days of being capital- light may be a thing of the past. The spending spree on AI could be a drag on their ROIC for years to come.

At a conference over the summer, Microsoft CEO Satya Nadella and Meta CEO Mark Zuckerberg were asked about the payoff timeline for their massive AI Investments. Nadella said, “I hope it doesn’t take 50 years,” while Zuckerberg quipped, “we’re all investing as if it’s not going to take 50 years.” The disconnect is striking: two of the world’s most aggressive capital allocators are discussing a potential decades-long wait for returns, yet the core semiconductor components driving these investments have a useful life of just 3-5 years. As a close observer of incremental ROIC, these anecdotal comments are a cause for concern.

Second, the “America First” policy of bringing manufacturing back onshore-while a popular political slogan-is inherently a capital-intensive endeavor. Building factories and domestic supply chains requires massive investment which could further depress the ROIC of American companies.

This is a critical turning point for investors. If a company’s earnings increase due to inflation, but its ROIC falls from increased spending on AI or new factories, we are not better off. This shift could leave less for investors, who could find that their returns are being consumed by a constant need of capital to remain competitive.

Endless Adaptability

Returning to Einstein’s punch line at the start of the letter, genetic variation is a key element in biology. This natural optionality is precisely what enhances the adaptation and survival of a species.

In this quarter’s letter, I’ve presented a simplified, linear narrative that connects a series of events: tariffs lead to foreign stimulus, which causes global inflation, resulting in lower returns on invested capital (ROIC), and ultimately, disappointing equity returns. While a tidy cause-and-effect story helps to illustrate a potential market outcome, it’s crucial to remember that reality is rarely so straightforward. A minor change to any of these assumptions could dramatically alter the entire chain of events.

The market, the news, and social media are filled with overconfident narratives that assume a proportional, predictable outcome for any complex subject, such as tariffs, interest rates or the hypothetical payoff of AI investments. However, if there’s an “Einstein-like unified theory” of the financial world, it’s that the universe is fat-tailed and unpredictable. This means that extreme, unexpected events are more likely than traditional models predict.

As investors, our focus should be on acknowledging that blind spots and risks are embedded in these narratives – risks that only become apparent after they deliver a surprise. Following the wisdom of Ben Graham, the father of modern investing, we at Park River Advisors ‘aim to invest in a manner that makes the forecast unnecessary.’ We continuously build optionality and convexity into our portfolios. This strategy ensures we are not dependent on a bold macroeconomic prediction and are prepared for a wide range of outcomes, both positive and negative.

We believe that ignoring new economic realities is a recipe for disappointment. The economic and business landscape is undergoing a profound shift, and we are not locking ourselves into a single point of view.

Given the current environment, our guiding principle is to proceed with caution. A period of global inflation paired with compressed returns on invested capital could adversely impact traditional stock and bond portfolios. For this reason, we have been implementing investments that limit our downside while preserving upside potential.

Cautious Investing,

Eric Wills

P.S. Please let us know if you have experienced any significant changes in your financial life recently. Adam Ogle, my new partner, has also contributed a short letter this quarter, which you can read below.

Your 2-Minute Guide to Not Lose Everything

The numbers are stupid huge: over $12.5 billion lost to fraud last year. Up 25%!  Hackers are getting better at taking your money. And they don't even need to be a movie-style keyboard hacker. They just need to be a good liar on email, a text, or a phone call. That's called social engineering. It’s trickery, not high-tech wizardry.

So, here’s how to build a better door and check who's knocking.

1. Two-Factor Authentication (2FA) is Mandatory. But Don't Get Lazy.

2FA is your second lock. After you type your password, they send a temporary code to your phone. It works. Use it everywhere.

The one rule you must burn into your brain: NEVER give that code to anyone. Not your bank. Not "Amazon support." Not your mother. Nobody legitimate will ever ask for it. If they ask, they’re a thief. Hang up. Now.

Most sites ask if you want to mark your computer as "secure”, so you don't have to enter the code next time. I always say no. It's annoying to type that code every single time. But if my laptop is stolen, I know a thief can't get into my financial or email accounts. It's an extra minute of effort for a lifetime of peace of mind. Trade a little inconvenience for a lot of security.

2. Voice Passwords are a Bad Idea.

Some companies think they're being clever by letting you use your voice—"my voice is my password."

This is terrifying. AI can clone your voice from just a short recording now. All a scammer needs is your voice saying the magic phrase. If I don't know the number, I don’t answer. I let it go to voicemail. That way, I'm not giving them any new audio to work with. The less audio they have, the harder it is for them to impersonate you. Simple.

3. Phishing: Hover Before You Click.

This is the classic trick. They send you an official-looking email—it looks just like Google or your bank. They change one single link in the whole thing to take you to their fraud site.

The Fix: If an email is asking you to click a link, stop. Hover your mouse over the link. Don't click it! Look at the actual address that pops up. It needs to be google.com, not google-support.com or go-ogle.com. The difference is tiny, but the result is huge.  Always verify the domain name and ensure it’s in the right location!

Be skeptical of any notification you didn't trigger. Did you just log in? Then it's probably real. Did you get a notification out of the blue about "suspicious activity" or a "new device login?" Check the sender's actual email address. It should end in something you recognize, like @bankname.com. If it's…

· g@mail.com,

· @akldjf.com,

· @aol.com,

· @go-ogle.com,

· @google.net,

· @no-reply-google.com, or

· Any other combination not associated with the company that sent it

Delete it. Trust your gut.

4. Phone Scams: Don't Answer.

The simplest rule in the book is still the best.

The Fix: If you don’t know the number, don’t pick up.

If it's important, they'll leave a voicemail. If they don't, it wasn't important. Also, if you accidentally answer, don't talk first. Let them speak. You don't want to unknowingly give a scammer a recording of your voice that they can use against you or your family.

You're a trusting person. That's a great trait. But the world has a few rotten apples, and you must act like they're all knocking on your door. Be smart. Be critical. Stay safe.

In your corner,

-Adam Ogle

Reference: New FTC Data Show a Big Jump in Reported Losses to Fraud to $12.5 Billion in 2024 | Federal Trade Commission

“No Bamboozlement Here” I recently saw that line at the start of another legal disclaimer. It caught my attention and hope it captured yours as well. Disclaimers boil down to the following statement – if you choose to believe any of this, then you are on your own. Jeepers! Given the ramifications, I too must disclaim liability for errors, omissions, and offer no warranties. I encourage you to verify my information, point out and forgive any errors. I am human and prone to mistakes, though I always strive for honesty.

While I do not intend to mislead, I cannot guarantee the accuracy of my content or the interpretation of my ideas. As an investor, I strive to do a good job and provide informative updates on my actions and thought processes. I hope these letters are read in the same spirit in which they are written.

Common sense tells you that the price and value of shares can vary greatly, and while I do not aim for this, we must also recognize that impairment of capital is possible.In my communications, I refer to clients as “partners.” I do this to convey a relationship that I seek where we share an experience and common destiny. I do not mean to suggest that there is a partnership in a strict legal sense of the word between clients, prospects or others that have an interest in the content produced by Park River Advisors LLC.