Chip Deals May Not Be Secure, Why Index Investing Disappoints, The Economy Is Stronger Than You Think, Leverage Risks, Here Come the Robots & More

Those Long-Term Chip Deals May Not Be as Secure as Investors Are Led to Believe

When you listen to memory chip companies like Samsung Electronics, SK Hynix, and Micron Technology discuss their businesses, they often make it sound like customer contracts—some extending as long as five years—are essentially set in stone. Unfortunately, that's not entirely true.

Yes, these companies have long-term agreements in place, but contracts in this industry are often renegotiated when market conditions change. If demand for memory chips weakens significantly, chip manufacturers have a strong incentive to work with their customers rather than strictly enforce every contractual commitment.

The reason is simple: preserving long-term customer relationships is often far more valuable than maximizing short-term revenue.

Imagine a customer that suddenly doesn't need as many chips because its own sales have slowed. If a supplier forces that customer to accept unwanted inventory, those chips may simply sit in a warehouse until demand recovers. By the time the customer needs additional chips, it may choose to reduce future orders or move business to a competitor that proved to be more flexible during difficult times.

Competitors are always looking for opportunities to gain market share. If one supplier refuses to work with its customers, another is usually willing to offer better pricing or more favorable terms. Losing a major customer over a rigid interpretation of a contract can cost far more in future profits than making temporary concessions during a downturn.

This isn't just theory and it has happened before. During the COVID-era, many long-term agreements were adjusted as demand shifted. Rather than forcing customers to take products they no longer needed, suppliers often renegotiated delivery schedules and purchasing commitments to preserve long-term partnerships.

The same principle applies across many industries. Companies frequently modify or delay large commercial agreements when business conditions change. While contracts provide a framework, successful businesses understand that maintaining trust with key customers is often more important than enforcing every clause to the letter.

Investors should remember that a signed contract does not necessarily guarantee future revenue will be recognized exactly as originally planned. Management teams often emphasize the value of their long-term agreements during earnings calls, but those agreements can evolve if market conditions deteriorate.

At the end of the day, great businesses understand that customer relationships are built over years but can be damaged in a matter of weeks. In many cases, giving a customer flexibility during a downturn is a much better investment than insisting on strict contract enforcement. That's why investors should view long-term chip contracts as valuable, but not invincible.

Why Index Investing Could Leave You Disappointed Long Term

I often hear people say, "Just buy the S&P 500 and forget about it. You'll be fine." While that sounds simple, investing is rarely that easy.

Many investors don't fully understand how an index works or why it has performed so well in recent years. The S&P 500 has been driven largely by a handful of technology and AI companies. By blindly investing in the index, many people are simply participating in a momentum strategy without realizing it.

Very little thought is given to what those 500 companies are actually worth. There is no effort to trim positions that have become extremely expensive or overly concentrated. As valuations climb, the index simply gives those companies an even larger weighting, leaving investors with greater exposure to the stocks that have already gone up the most.

Some people respond by saying, "I won't put everything in the S&P 500. I'll diversify into other index funds." But once you go down that road, investing becomes much more complicated and you’ll likely underperform the S&P 500. Should you own an international index? A European index? A bond index? A growth index? A value index? Small-cap funds? REITs? There are hundreds of ETFs and mutual funds to choose from.

Now you have another challenge: deciding how much to allocate to each one. When your portfolio declines will you understand why? More importantly, will you know what to do next? Many investors don't, and that uncertainty often leads to emotional decisions at exactly the wrong time.

This is why I prefer managing a portfolio of individual value-oriented stocks, combined with money market funds and selected real estate investment trusts (REITs). That approach still provides diversification, but I understand what each investment is worth and why I own it. In my view, that's a much better foundation than owning five or ten different index funds without truly understanding what's inside them or how they're valued.

Another common argument for index investing is lower fees. While fees certainly matter, they shouldn't be the only factor. The number that ultimately matters is your total return after all fees and expenses. A lower fee doesn't automatically translate into better long-term performance.

If you own index funds, take some time to look under the hood. Do you really understand what you own? Do you know which sectors dominate your portfolio, which companies make up the largest holdings, and how expensive those businesses are today?

If the answer is no, don't assume you'll be comfortable when the market experiences its next major decline. Investors who don't understand what they own are often the first to panic, and that confusion can lead to costly investment mistakes.

The U.S. economy is still in much better shape than many people think.

This week brought three major events for investors: GDP, PCE inflation, and the Federal Reserve meeting. While the headlines may have sounded mixed, the underlying data still paints a healthy consumer.

Second-quarter GDP grew at a 1.5% annualized rate, below economists' expectations. At first glance, that may seem disappointing. But when you look under the hood, the economy continues to show resilience. Consumer spending, which accounts for nearly 70% of U.S. GDP, increased 3.2% after a weak first quarter where it only climbed 0.5%. That tells me the American consumer is still in good shape, and that's one of the biggest reasons the economy continues to avoid the recession that so many have been predicting. Major drags on the headline GDP figure included government spending, which reduced growth by 0.14 percentage points, as well as the more volatile components of trade and the change in private inventories, which subtracted 1.01 and 0.67 percentage points, respectively.

Inflation remains the biggest challenge.

The Fed's preferred inflation measure, core PCE, increased 3.3% over the past year. While that's an improvement from where we've been, it's still well above the Federal Reserve's 2% target. I continue to believe inflation will remain sticky until energy prices become more stable. Energy impacts transportation, manufacturing, and virtually every supply chain, so it's difficult to see inflation falling sustainably while energy costs remain volatile.

The Fed, as expected, left interest rates unchanged. What stood out wasn't the decision, it was the growing disagreement among policymakers. The 3 dissents that voted for a 25-basis point increase highlight just how uncertain the economic outlook remains. When inflation is still elevated but the economy continues to grow, there isn't an easy policy answer.

One thing I do like so far is Kevin Warsh’s changes at the Fed. I like the simplified statement, the encouragement of differing viewpoints, and rather than projecting absolute confidence in economic forecasts, he has acknowledged the uncertainty surrounding them. That's a refreshing change. Economic forecasting has never been an exact science, and I would rather have a Fed Chair who recognizes the limitations of those projections than one who pretends they are precise.

What's surprising is how quickly some of the talking heads have claimed Warsh already has a credibility problem. I don't see it that way. Credibility isn't about making bold predictions that later need to be revised. It's about being honest about what we know, what we don't know, and allowing incoming data to guide policy.

The takeaway for investors is simple: don't let one headline drive your investment decisions. The economy continues to expand, consumers are still spending, inflation remains stubborn, and the Fed is navigating a difficult policy environment. Looking beneath the surface is often where you'll find the real story.

Leverage Is Fuel... Until It Becomes the Fire

The last few weeks have been a reminder that leverage looks like a wonderful tool on the way up... but it’s a devastating one on the way down.

FINRA's new margin rules have effectively replaced the 25-year-old Pattern Day Trader rule, allowing traders with as little as $2,000 to make unlimited day trades using intraday margin. While this opens the door for more retail participation, it also means more investors have access to leverage, something that has historically magnified both gains and losses. This is a big problem considering FINRA margin debt climbed 49% year over year to another record in June of roughly $1.5 trillion. This comes as investor net credit balances have fallen to a record negative $1.06 trillion. In other words, investors collectively owe more on margin than they have sitting in cash accounts. For comparison’s sake, in March 2000 this measure stood at a negative $0.13 trillion. That's an aggressive setup if volatility returns.

We also saw this past week the spectacular collapse of Leopold Aschenbrenner's AI-focused hedge fund, Situational Awareness, which shows what can happen when conviction is paired with excessive leverage. The near 25-year-old Aschenbrenner was painted as a genius with strong credentials like being Columbia University’s valedictorian at age 19. His fund was launched in July 2024 and he had no experience managing money before that.

Before this month’s decline the fund had gains of more than 1,000% since inception. The fund used tons of leverage with some saying as much as 400% to build massive positions in AI and semiconductor stocks while shorting stocks in the software space like Adobe. The problem is when names like Coreweave, Nebius, and Sandisk fell more than 50% from their highs and the software stocks rallied, margin calls forced the liquidation of most of its public equity portfolio. The result was staggering considering the fund peaked at above $45 billion in assets and with the selloff they plunged to around $10 billion. This forced a fire sale of assets at a discount to Ken Griffin’s Citadel.

Some speculate that the forced selling may have helped create the bottom. Once one of the market's largest leveraged sellers had finished liquidating, the selling pressure eased and many AI stocks staged a sharp rebound.

Others believe the selling is not over as Michael Burry reportedly used Thursday's powerful rally as an opportunity to increase several of his bearish positions in Micron, Nvidia and the VanEck Semiconductor ETF. Whether he's ultimately right or wrong remains to be seen, but it's a reminder that some experienced investors still believe AI-related valuations and leverage remain stretched.

Here Come the Robots!

Robots have been making their way into manufacturing for decades. The first industrial robotic arm, called Unimate, was installed in 1961 on the assembly line at a General Motors plant in Trenton, New Jersey. But today's robots are very different. They're no longer just stationary robotic arms bolted to the factory floor, they're starting to look and move like humans.

That reality is beginning to make workers uneasy. At a Hyundai Motor plant in South Korea, employees have gone on a partial strike, with concerns over automation playing a role. Hyundai recently unveiled its humanoid robot, Atlas, which stands 6'2", weighs about 200 pounds, can lift up to 110 pounds, and can continuously carry nearly 70 pounds. It's easy to understand why workers are wondering what these machines could mean for their jobs.

South Korea is already the world leader in industrial robot adoption, with approximately 1,220 industrial robots for every 10,000 manufacturing employees. By comparison, the United States has around 307 robots per 10,000 workers. One statistic that surprised me was China, which currently has only about 166 industrial robots per 10,000 manufacturing workers.

If Elon Musk has anything to say about it, those numbers could change dramatically over the next several years. Tesla is aggressively developing its humanoid robot, Optimus, with the goal of having it help build vehicles in its factories before long. If that vision becomes reality, other manufacturers will almost certainly follow.

The idea of humanoid robots can be unsettling, but the transition is likely to be slower than many people expect. Industry forecasts suggest that global annual production of humanoid robots could reach roughly 1.2 million units by 2030. While that sounds like a large number, it's still a tiny fraction of the global workforce.

So, we're probably still a few years away from living like The Jetsons. If you're not familiar with the cartoon, it debuted in September 1962 and imagined a future filled with flying cars and household robots. I guess I will have to wait a few more years to get a maid like the Jetsons had named Rosie the robot.

Financial Planning: Tax Relief Coming for Older Home Sellers?

The federal home sale capital gain exclusion has remained unchanged since 1997, allowing homeowners to exclude up to $250,000 of gain if single or $500,000 if married filing jointly when selling a primary residence.

With home values rising significantly over the past three decades, particularly in high-cost areas like California, many long-time homeowners now face substantial capital gains taxes when downsizing.

A new proposal, the Nest Egg Protection Act, would increase the exclusion to $1 million for homeowners age 65 and older who have owned and lived in their home for at least 25 years. This would allow more seniors to keep the equity they've built over a lifetime.

In addition to providing tax relief, the proposal could encourage more older homeowners to sell, increasing housing inventory and making homeownership more attainable for first-time buyers.

While the legislation has not yet been enacted and homeowners should continue planning under current law, the proposal reflects a growing recognition that the existing exclusion no longer aligns with today's housing market.

AI May Not Be Taking Away as Many Jobs as Expected…. At Least Not Yet

As companies report second-quarter earnings, investors have a great opportunity to learn what is really happening inside businesses. One trend that has stood out this earnings season is that companies across a wide range of industries from railroads and technology firms to industrial and tool manufacturers are acknowledging that AI has not been able to replace human employees in many roles. As a result, some companies have resumed hiring to fill the gaps.

This doesn't mean AI has failed or that it's going away. Instead, businesses are discovering what I've been saying for quite some time: employees won't be replaced by AI, they'll increasingly work alongside it. The companies that successfully integrate AI with skilled employees are likely to see the biggest gains in productivity.

Even technology companies are emphasizing the importance of human interaction. For example, ServiceNow recently discussed hiring more sales executives to meet face-to-face with prospective customers because those relationships still matter. Other companies have brought back workers they previously laid off, while some are once again hiring for entry-level positions.

That doesn't mean employees can ignore AI. Quite the opposite. Every employee should be learning how to use artificial intelligence effectively, because those who can combine their skills with AI will likely become more valuable to their employers. Those who fail to adapt could find themselves at a disadvantage as businesses continue integrating the technology into their operations.

It's also still unclear just how much AI will ultimately improve corporate profitability. The technology continues to evolve, and so will the way companies use it. One factor that may slow widespread adoption is cost. Many businesses are finding that implementing and maintaining AI systems is more expensive than initially expected. That gives employees valuable time to develop AI-related skills and position themselves as indispensable contributors who know how to work alongside the technology rather than compete against it.

The Annual Gift Tax Explained

The term "gift tax" often causes unnecessary confusion because many people assume it means someone will owe income tax when a gift is made. In reality, the gift tax is part of the federal estate and gift tax system, not the income tax system.

For 2026, you can give up to $19,000 per person, per year without any reporting requirements, and there is no limit to the number of people you can gift to. For example, you could give $19,000 to each of your children, grandchildren, nieces, nephews, and friends without triggering a gift tax return.

If you're married, you and your spouse can combine your annual exclusions and gift up to $38,000 per recipient each year.

If you give more than the annual exclusion, you generally only need to file IRS Form 709 to report the gift. The amount over the exclusion simply reduces your lifetime estate and gift tax exemption, currently $15 million per person, and no tax is typically owed.

The recipient does not owe income tax on the gift, and the donor generally won't owe gift tax unless they have already exhausted their lifetime exemption.

For most families, exceeding the annual exclusion is simply a reporting requirement rather than a tax liability.

Why You May Need Less Income in Retirement Than You Think

Many people assume they need to replace 100% of their salary in retirement to maintain the same lifestyle. However, one of the biggest changes in retirement is often the amount of income lost to taxes.

Consider a married couple earning $300,000 of W-2 income while working. Their last dollar of income is taxed at a combined 43.15% marginal rate (24% federal, 9.3% California, 6.2% Social Security, 2.35% Medicare, and 1.3% California SDI).

This results in a total tax bill of nearly $100,000, with an effective tax rate above 32%, leaving them with approximately $17,000 per month in take-home income.

Now consider that same couple in retirement. Instead of wages, they receive $85,000 of Social Security, $80,000 from a traditional IRA, and $50,000 from a Roth IRA, for total annual income of $215,000.

Because payroll taxes no longer apply, a portion of Social Security is tax-free, Roth withdrawals are tax-free, and taxable retirement income fills the lower tax brackets first, their combined marginal tax rate would only be 16%, with an effective tax rate of less than 6%.

Their total tax bill is less than $13,000, leaving them with nearly the same monthly spendable income—about $17,000 per month—despite having significantly less gross income.

Everyone's tax situation can change dramatically in retirement. Understanding the difference between marginal tax rates while working and effective tax rates in retirement can help you make better decisions today, including how much to save in pre-tax accounts, Roth accounts, and how to structure retirement income in the most tax-efficient way possible.