If you have found yourself waiting on pins and needles for another one of these updates – the last one having arrived nearly 10 months ago – well, today is your lucky day! I apologize for any anxiety or sleepless nights it may have provoked – left without my pages of endless dribble about equity valuations, or the integrity of the Federal Reserve…
No, the delay in this update was not a function of our finally completed move south. The new home office was completed and fully functional a full 2 months before we moved, and as hoped, hasn’t had a single blip. It also wasn’t Reagan’s softball, which most definitely has taken up any free time that Dad (now coach) might have after market hours, when these updates are usually completed. The dozens of still unopened moving boxes are a testament to that reality. And finally, while this may burst more than a few bubbles – no, I also haven’t simply decided to stop writing them.
So, what gives? As I’ve found myself mentioning a few times before in these updates – I simply had nothing new to say. In our outlook for 2024, we discussed at length all of the risks that we perceived – not the least of which being good ole valuations on the stock market. The risks we discussed then for markets or the economy have largely not changed – maybe become slightly more concerning both in terms of indebtedness (personal and certainly government), and ever-rising valuations on equity indices.
We also discussed what we believed to be the biggest opportunities for this year. The biggest by far stemmed simply from the fact that this is an election year – and the politicians have certainly not disappointed in their efforts to “juice things”. I’m looking at you Mrs. Yellen – well played! But overall, the biggest opportunity we saw for retired investors – or others who might have a proclivity to be “responsible” in the face of a rather treacherous backdrop – lied with bonds and interest rates. This is not the first time of late stocks have risen over 20% in a calendar year, and if anything, we are positioned even more conservatively this time around, for reasons I just mentioned.
The difference this year – outside of one well-timed stock selection – was that you are actually earning interest on the monies not allocated to the stock market. And with interest rates having come down, there has been appreciation with duration to boot. It’s amazing to remember what the presence of interest rates can do to a more conservative portfolio when the Fed doesn’t have them locked at zero for a decade!
And that’s it. That’s your update for the year - there really is nothing new. Sure, the Fed has actually cut rates while telling us there are more ahead. And yes, we now have two global conflicts which seem to be escalating to potentially dangerous (for the world) levels. But neither of these are catching anyone – certainly the markets – by surprise…
So, why am I choosing to write this now, since virtually nothing has changed since the last one?
Because the “election year” that everyone was so laser-focused on, is now bumping into the actual election itself. And it promises to be another doozie from the looks and sounds of things. We hear it directly from some of you. We see volatility appearing in markets – sometimes openly, sometimes “in the weeds”. You see it on the news, on social media and every time it comes up at social events. The time is upon us!
Now we’ve been doing this long enough to know that many – if not most – adamantly believe that the election outcome will have an immediate and direct effect on the direction of the stock market and economy. 50% believe that if Big Orange is elected, the markets will “moon”. The other half believe the markets will tank and that the world will likely end. With that, I will not wait for the last page of this update to deliver my conclusion:
It won’t, and it won’t – regardless of the election outcome. At least not immediately.
The President simply does not matter that much in the short-term, and one could rather easily make the argument that they don’t matter all that much over the long-term either. Especially given what “both sides” are running on this time around, I will actually make that exact case below. What follows will be my explanation for this – doing my absolute best to make this as void of political opinion as one can in a piece purely about politics (as it pertains to your money) – in an effort to put everyone’s mind at ease while instead simply enjoying “the show”…
First and by far most important, I want everyone reading to think about this. Imagine this election was 10, 20, 30 or even 50 years ago – and we were facing the same government debt/deficit situation that we are actually facing today. That is, looking more and more like a third world country in terms of the amount and rate of growth of our debt. In any previous period, the side not currently in power would be talking about nothing other than the “unsustainable government spending”. In today’s political world, both sides would be talking about it – as our politicians (oligarchs) have become increasingly emboldened to simply and directly lie to our faces - rather than at least trying to hide their lies like in the past. Politics 101. The trajectory of our debt and deficit is literally the lowest of the hanging fruit.
Anyone watch the last presidential “debate”? I don’t think the debt or deficits were even mentioned. Not once. Not by the candidates, and certainly not by the moderators. Instead, we saw two presidential candidates on either side of the two major (only) political parties – fighting with each other about who could spend even more money (that we obviously do not have) going forward. It was truly astounding to me, and I am not easily astounded by politicians these days…
Why does this matter to your money? Between now and the end of the year, it likely does not. Longer term, however, we believe it to be the single most important issue at hand. In fact, it is the only item I’m going to discuss here today (with apologies to immigration, climate change, geopolitics, reproductive rights, gun control and every other shiny object that they will spend their time fighting about between now and election day). But I just got done introducing my case that the results of this election won’t even matter over the long-term – so I am now contradicting myself, right? I am not, because if we are correct in our assumptions, here is the thing:
Who wins this election would be entirely irrelevant – because they are both arguing for the exact same thing. That is, even bigger deficits – and even more debt.
So, based on their own words – and the words of virtually every other politician on both sides – we don’t even need to know the outcome of this election to start thinking about what it means for your money over the long-term. The deficits are exploding already – and we haven’t even gone through a recession. That is not troubling, it is flat out frightening. And the fact that no one even mentions it would be flat out comical, if it were not so flat out terrifying.
To be sure, there are talking points that either side make that would matter short-term – if one actually believed that these talking points had any chance of becoming law. Apparently, now both sides (insert “laughing” emoji here) believe that tips should be taxed differently than other income. That is, not taxed at all. One of them, and I honestly can’t remember which at this point, apparently wants overtime pay to be tax-free as well. So yeah, that would make a big difference to your money for sure if you are a waiter or get a lot of overtime pay. That is, assuming that either proposal actually had any chance at all of coming into law, which they do not – as the “other side” would most certainly then decide they are now against it.
But let’s suspend reality for a minute, and pretend that either of the above were actually passed into law. Before doing so, let’s make sure we are all on the same page about what the “government deficit” actually means. Super simple. It’s the difference between the amount of money the government takes in, and the amount of money the government spends. If we are spending more than we take in, we are running a “deficit”. If we take in more than we spend (another laughing emoji here please), the government has a “surplus”. Now ask yourself, if we suspend taxes on tips and overtime pay across the country (less money coming in via taxes) – does this make our current deficit larger, or smaller? Now, ask yourself the same thing about virtually every other “issue” that either side “debates”. Find me one – outside of tariffs (which is a 10-page exploration in and of itself) – that wouldn’t serve to increase our already mind-blowing deficits. You’ll be hard-pressed to do so.
I (think) I already know that the discussion of government debt and deficits will play a large part of our 2025 outlook. Additionally, my intent of this update was to put everyone’s mind at ease from any anxiety that this election might be causing them in terms of their monies. For those reasons, I am not going to spend another 20 pages delving into our perceptions of what the above-described means to your money long-term. A cliff hanger if you will. But I do want to share a picture for context:
Now I get to have some fun again. Before skipping ahead to hear my pontificating on the next page, take a minute and ask yourself what you see. Let’s see if we arrive at the same conclusion(s)….
So first, this is a graphical explanation of what I mentioned earlier. That is, that we are at mind-blowing deficit levels – and we are not even in a recession. Not even close. Employment is historically strong, and our GDP is running ahead of long-term government / Fed (insert puking emoji here) projections. And yet, the only time in history we ran deficits larger than what we are currently was during Covid. That’s right. When we literally shut the entire economy down, then decided to helicopter “free money” out to everyone. We didn’t even run this high a current deficit after the great financial crisis – when our major banks were arguably bankrupt and the economy, stock market and housing market were completely decimated. If I didn’t get your attention with my words prior to the picture, I hope I have now…
Next, and last – until our outlook for the year ahead – a teaser. Ask yourself this: what is the single biggest “finance-related phenomenon” that you have experienced since the Covid deficits? The answer:
Inflation.
Yeah, inflation was caused solely by “supply chain issues”. Uh huh. Much more on that to come in the outlook for the year ahead I am sure…
Side note, and I have absolutely no idea why I am doing this to myself. While I did not highlight this on the chart above, I will draw your attention to the deficits beginning in 2016. I promise you, there is not one of you that dislikes the tax system more than I do. I could write 20 pages on why I think that income taxes are not even constitutional. All of that said, there is a reason that I say that “Trump (half) died to me, the day that he signed those tax cuts into law”. It’s not that I want to pay more in taxes – I don’t want to pay any taxes. But maybe, just maybe, we shouldn’t hand billions of dollars back to corporate oligarchs to use for buying back stock – without cutting government spending first? (Insert winking, crying, cussing emojis here)
In the end, I hope we have alleviated at least some of the election-related anxiety you might feel about your investments. To summarize super simply – in our view – the outcome doesn’t much matter. At least to your money. Both sides are in essence saying “deficits be damned”, and that is likely what will matter the most to your money over the long-term. A very, very important final note:
The deficits as described above do not necessarily signal a negative outcome for your monies. In fact, it could very well mean quite the opposite – largely determined by one’s faith in “Modern Monetary Theory”, while inflation remaining muted. It’s extremely complicated - and as always the case (see our very first blog entry over 10 years ago) – it is unknowable with any degree of certainty, as much as we would prefer otherwise. But while we might all agree that ever-growing government deficits and debt are not in the best long-term interest of our country, it doesn’t necessarily mean that it is “bad” for your money. As has increasingly been the case in the “Fed-driven, casino markets” of the past 30+ years, what is “bad” can be “good” and vice versa (see also: war, unemployment, debt, etc. – see also, also: the lack of hair left on my head). We cannot possibly underestimate the importance of this observation…
Finally, as for our views on this election, and its impact on the many non-finance related issues our country faces?
Yeah, no thank you…
As always and most important – to all of our clients – we cannot thank you enough for the trust and confidence you have placed with us.
Sincerely,
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