Into Murky Water We Wade
Nothing today can be more controversial than politics. What is the old saying “never talk politics or religion”. The other side of that is long-term investing, Fed, and government policy matters. I’ve tackled plenty of Fed policy issues and have written extensively about such matters. Today we take the leap of trying to wade through the poor news coverage and get to things that matter. I have mentioned that the president doesn’t really shape stock and bond returns, policy does. However, policy does have a secular impact on markets. I’ll try to keep this focused, letting you decide where you sit on the isle.
Just to be clear I am a fiscal conservative and quite frankly neither left nor right have done a very good job of managing our nation’s budget. The debt has climbed over $11 trillion in the last four years, up 50%. In 2000, the debt was 56% of GDP. By 2008, it was 73%, 2016 – 105%, First Quarter 2020 – 110% and today it stands at 125%. Why did I pick those dates? Three reasons, changes in the Oval Office, the Great Recession and COVID. By the end of this year it will stand at 125%. Projections by the Congressional Budget Office (CBO) under the current budget set by the Whitehouse, are that by 2034 it will be 134%. A word of caution is in store. There are a lot of ways to measure the debt, calculate deficits and assign expected growth numbers to GDP. The point is we are on an unsustainable path in the government debt cycle. The current budget outlays are projected to run deficits for the next 10 years averaging $2.0 trillion a year. A lot can change but that is the CBO projection. Trump racked up $6.6 trillion in deficits albeit COVID caused about $3.0 trillion $2.0 in stimulus package and the balance from decreased revenue by a slower economy. Estimates are that Biden will clock in at about $8.0 trillion. We can roughly estimate that $2.7 trillion was COVID related to Biden. If you are so inclined to read the CBO Budget, it is 162 pages long!
The bottom line here is that we are addicted to government spending and I don’t see either party reeling that in to any degree in the short run. How do we cure that? Revenues have to increase by almost 50% (more taxes) or spending has to decrease by 33% (less economic stimulus). Either one or both has the potential for a sustained economic downturn. Now this is where you are probably saying “uggg”. The next question is when is there too much debt and an ensuing economic collapse happens? The best guesses are when debt as a percentage of GDP is about 125% and there is a rapid rise to 150%. Economic projections by the CBO suggest that 150% of GDP happens around 2040. Japan’s debt rose to 200% and was in economic stagnation for the better part of 30 years averaging around 1% growth. There are other contributing factors.
Let’s Talk About Economic Platforms.
There are two sources of information you can find where each party stands on what they want to accomplish. The RNC platform is 16 pages long and the DNC platform 92 pages long. Unfortunately, you won’t find much hard data on the cost of the wish list. You have to look for independent analysis and sanitize for which way they lean politically. No easy feat!
Penn Wharton Budget Model Both Candidates
Vice President Kamala Harris
- Harris Campaign Policy Proposals: PWBM estimates that the Harris Campaign tax and spending proposals would increase primary deficits by $1.2 trillion over the next 10 years on a conventional basis and by $2.0 trillion on a dynamic basis that includes a reduction in economic activity. Lower and middle-income households generally benefit from increased transfers and credits on a conventional basis, while higher-income households are worse off.
- We project that spending increases by $2.3 trillion over 10 years while conventional tax revenue increases by $1.1 trillion, for a difference in primary deficits of $1.2 trillion. Accounting for negative economic feedback effects, primary deficits increase to $2 trillion.
- Relative to current law, GDP falls by 1.3 percent by 2034 and by 4 percent within 30 years (year 2054). Capital investment and working hours fall, thereby reducing wages by 0.8 percent by 2034 and by 3.3 percent by 2054.
- Low- and middle-income households in 2026 and 2034 fare better under the campaign proposals on a conventional basis, while households in the top 5 percent of the income distribution fare worse. These conventional gains and losses do not include the negative impact of the additional debt burden on future generations who must finance most of the spending increases.
For more information search:
The 2024 Harris Campaign Policy Proposals: Budgetary, Economic and Distributional Effects
Former President Donald Trump
- Trump Campaign Policy Proposals: PWBM estimates that the Trump Campaign tax and spending proposals would increase primary deficits by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes economic feedback effects. Households across all income groups benefit on a conventional basis.
- We project that conventionally estimated tax revenue falls by $5.8 trillion over the next 10 years, producing an equivalent amount of primary deficits. Accounting for economic feedback effects, primary deficits increase by $4.1 trillion over the same period.
- While GDP increases during part of the first decade (2025 – 2034), GDP eventually falls relative to current law, falling by 0.4 percent in 2034 and by 2.1 percent in 30 years (year 2054). After initially increasing, capital investment and working hours eventually fall, leaving average wages unchanged by 2034 and lower by 1.7 percent by 2054.
- Low, middle, and high-income households in 2026 through 2034 all fare better under the campaign proposals on a conventional basis. These conventional gains and losses do not include the additional debt burden on future generations who must finance almost the entirety of the tax decreases.
For more information search:
The 2024 Trump Campaign Policy Proposals: Budgetary, Economic and Distributional Effects
Random Points to Consider as We Approach the Election
Harris is rising in the polls – Investors need to put their political bets on pause. This may be close and it may take beyond November 6th to resolve. Harris is a weak candidate and the last time she was in the national spotlight she lasted just 35 days. She may prove in the end to be a weak candidate once again. That being said, her poll numbers have increased. The campaign strategy of staying on script and no tough interviews is working. They can’t have too much of “the children of the community are the children of the community”. Her latest unintelligible comment.
Harris has changed her position on 14 different strategies since her bid for president in 2020. It does not appear to be affecting her polling numbers.
Kamala Harris overwhelmingly impressed voters during the debate.
Good news! Close elections mean no bond riot.
Investors supporting Trump should not lose hope on Trump 2.0. If there is any president that can pivot out of ideological positions, it is Trump.
What to expect from a Trump foreign policy. Expect him to use seven steps of maximum pressure (Art of the Deal)
1.Ask for the moon
2. Follow up with the madman behavior
3. Punch someone in the mouth
4. Breal\k Bread make new friends
5. Leave the bride at the alter
6. Kiss and make up
7 Make a deal and then proclaim it is the best deal ever!
It worked with North Korea. Missiles launched were close to 30 a year when he took office and by the time he left around 10. In 2023, back up to 30.
Are Trump’s trade and foreign policies bullish for the US Dollar? I don’t think so but the USD has many variables – growth and interest rate differentials are two of the most important inputs.
A Global War is at Risk
Russia, China, Iran and North Korea are an “axis” of coincidence. We wouldn’t say they are allies but share a common goal of increasing their reach. Trump and Harris need to be concerned early in their administration. Our military is woefully unprepared for this event. The one area where we have substantial superiority is the navy.
Monster debt and deficits
Neither candidate is discussing this because both economic plans expand both. At some point, the chickens will come home to roost. When is that? Probably when the national debt reaches somewhere beyond 150% of GDP. This is just a consolidation of the research I read.
Conclusions
What about the Stock Market?
It is no secret that I have been advocating that stocks are overvalued in just about every metric. That doesn’t matter as long as they continue to rise. This is why we are never out. Ultimately, when cash on the sidelines is limited, investors are fully invested, and earnings metrics are stretched, an adjustment is made. Presidents rarely impact stock market returns in the short to medium term. They can cause volatility and capital gains tax policy can matter. What would it take for us to be right on our tactical shift? The s & P 500 would have to be below 4700 (about 20% lower) and international stocks would have to correct by 10%. This is clearly possible given the elevated state of valuations.
What about bonds?
This is primarily driven by the Fed on the short end of the curve and inflation drives the long end. I expect the bond trade over the balance of the decade to be volatile. We have gotten this pretty much right over the last few years and since it represents about 40% of Chasefield’s collective portfolio it is equally important as getting equity calls correct.
I am rethinking our 3% call on 10-year treasury as aggressive Fed cuts may reignite inflation.
Expect the political environment not to get any better and could be the cause of long-term discourse. Ray Dalio in The Changing World Order and Big Debt Crisis discusses this in detail if you are so inclined to read his books. A few other books are those written by Peter Zeihan. They take a positive view of USA but his later works discusses populism and maps out the next world: a world where countries or regions will have no choice but to make their own goods, grow their own food, secure their own energy, fight their own battles, and do it all with populations that are both shrinking and aging. Dalio is verbose and detailed. Zeihan is more humorous and can be a bit frightening. I disagree with Dalio’s take on China and fall more in line with Zeihan. China is declining nation with poor demographics. If they want to expand their reach, the time is now.
In the end, forecasting is a dangerous business but geopolitics and macroeconomics make for interesting reads. At least from my perspective.
America is a resilient country and there is always opportunity to be had. Debt crisis’s get resolved and a new era is ushered in following the pain of readjustment. Financial markets adjust to manias and returns and volatility stabilize.
Chasefield is in the business of managing risk where we see it. Maximizing returns in the short-run means taking on exceptional risk. None of our clients can take extensive drawdowns for an extended period of time. If we have to give up some return in the near-term, we are prepared to accept that outcome.
Disclosure
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