Month: February 2025

Savvy vegetable gardeners understand the first hard frost is a game changer for the home-grown food plot, introducing a whole new growing environment. Such a shift may be occurring in the global stock market dynamic that has been dominant in recent years. The “U.S. exceptionalism trade”, in which American stocks have soared while global stock prices have remained subdued, has reversed sharply since the swearing in of Donald J. Trump as 47’th President. What force is behind this changing investment theme, and will it continue or reverse?

The consensus opinion suggested President Trump’s business-friendly administration would give further advantage to U.S. stocks over foreign equities. While this thesis may prove true in the longer term, there is a more relevant factor playing out today. The “twin deficit”—the U.S. trade deficit and federal budget deficit—has played a major role in inflating U.S. asset prices. This cycle works by the U.S. borrowing money to purchase foreign goods, with trading partners then reinvesting that money into U.S. assets, fueling stock market growth. Historical trends show that when the twin deficit grows, U.S. stock prices rise, but when it contracts (as in 2022), markets suffer significant declines.¹

The Trump administration’s efforts to reduce both the U.S. trade deficit and federal budget deficit may lead to a decline in high U.S. asset prices in the short-term. While the President’s tariff policy is aimed at upending the trade deficit, a reduction in the federal budget deficit could come from Elon Musk and his “Department of Government Efficiency” (DOGE) implementing significant spending cuts.² The first half of President Trump’s second term may involve the market discovering which of the President’s arguments are negotiation tactics aimed at gaining concessions, and which are convictions he will indeed act on. The universally dismal record of historical tariffs has the financial world hoping Trump’s tariffs are short-lived, and that a full-blown trade war is averted. The issue of whether ‘The Administration’ allows DOGE savings to marginally reduce government deficits or uses it as an opportunity to “give” cash to American consumers (to prevent a reduction in U.S. consumption), is worthy of our attention due to its effect on earnings and stock prices.

While we applaud the reduction of government overspending and waste, we don’t want to be ignorant of the pain the corrective process requires. The savvy gardener is acquainted with the ‘first frost date’ in their respective zone and watches daily temperatures closely as it approaches to ensure a successful transition into the winter gardening season. As investors we want to do the same as we wait for these two issues to play out by:

• Watching for a market rotation away from U.S. equities.

• Keeping a short leash on high valuation securities.

• Staying alert to policy changes that could affect trade and corporate profitability.

Think about it and may God bless your gardening and investing efforts!

Shaun

“Be wise as serpents, and innocent as doves” ~Mathew 10:16

1,2 Porter & Co., The Big Secret on Wall Street, “A One-Two Punch to U.S. Stocks”, February 27, 2025

While the endeavors are in ways dissimilar, successfully planning and surviving a big mountain expedition, and building and multi-generationally retaining a financial estate have much in common. The mountaineer must be conditioned (with strength, endurance, balance, and cold tolerance), equipped (with appropriate clothing and gear, and know how and when to use every item), and familiar with the chosen route (to remain within the skill set, maintain a margin for error, and stay on course). The mountaineer is afforded little tolerance for error, but so is the multigenerational wealth builder! Consider the skills and practices applied in their success:

• Maintaining a net positive cash flow by working hard, increasing specialization in the chosen field, spending less than earnings, and investing the difference productively is foundational.

• Effective Asset Management, among other things, requires:

  • Diversification into numerous non-correlated investments. Today 33% of SPY, a popular S&P 500 ETF, is invested in 10 stocks! That’s not diversification, as millions of American investors heavily exposed to this ETF may be about to discover.

  • An understanding we dwell in an inflationary culture, which forces more risk-taking than is natural, a concentration on assets with historical returns exceeding inflation coupled with avoidance of those which haven’t, and judicious risk mitigation strategies to sidestep the occasional meltdown unavoidable to fiscally reckless and heavily indebted societies.

  • Minimization of investment expenses, which directly dilute returns and compound the reduction indefinitely into the future.

• Advanced Tax Planning, contrary to what most CPA’s suggest, involves:

  • Replacing the idea taxes should be minimized each year, with the more thoughtful idea lifetime taxes should be minimized.

  • Applying the means (Tax Loss Harvesting, Strategic Roth Conversions, QCD’s, CRT’s, etc.) to maximize taxes paid in low bracket years, minimize taxes paid in high bracket years, and prevent (not merely delay) every tax dollar possible.

• Advanced Estate Planning goes beyond protecting the primary residence, naming trustees and executors, and properly designating beneficiaries, and:

  • Utilizes the lifetime gift tax exemption and GST exclusion.

  • Exploits the “step-up in basis” benefit for eligible assets.

  • Accounts for the possibility the Tax Cuts and Jobs Act of 2017 sunsets on December 31, 2025.

• Logistical Retirement Income Planning arranges for a passive, sustainable retirement income stream that a) evaluates each possible source, b) meets expenses, c) satisfies Required Minimum Distributions, d) is prudent from an investment perspective, e) is compatible with the long-term tax strategy, and f) doesn’t interfere with the estate plan. What an interesting puzzle!

• Asset Protection Strategies include the use of trusts, corporations, LLC’s, and liability insurance to isolate and minimize risk exposure with each wealth-building endeavor.

The complexity of both the large mountain expedition and the creation and retention of a financial estate requires a team effort. Both involve risks that must be identified and mitigated, and threaten deadly consequences for incompetence or neglect. Apply a thoughtful, diligent, holistic, and team approach to maximize your probability of success.

God bless your wealth-building and estate retention efforts! Shaun

“A good man leaves an inheritance to his children’s children” ~Proverbs 13:22

Though an attempt is being made to present the concept in a favorable light, tariffs must be judged by their record. Free and open trade has Biblical roots and is mutually and highly beneficial in many respects, but ‘Protectionism’, a national trade policy seeking to protect domestic manufacturers by imposing tariffs on the imports of foreign producers, grows from the destructive root of subsidization. Voluntary subsidy wastes precious capital, feeds apathy, encourages substandard performance, and stifles creativity and effort. Tying one arm of a superior boxer behind his back is neither a noble, nor a fruitful solution for the inferior boxer, who might otherwise have learned from the beating. What is the record on tariffs and why, as investors, should we think about it?

The long record of tariffs proves that after subsidizing uncompetitive domestic manufacturers, tariffs increase prices, reduce employment, interfere with free-market supply-demand dynamics, and antagonize trading partners (Frederic Bastiat famously recognized that “when goods don’t cross borders, soldiers will”). The record on tariffs is so universally dismal that many on both sides of the aisle understand “A trade war has no winners”. Consider the facts:

• The nation against which a tariff is applied doesn’t actually pay the tariff, consumers of imported products do in the form of higher prices. A Howard Marks study of President Obama’s 2011 tire tariffs revealed Americans were forced to spend $1.1 billion more on tires to preserve 1,200 domestic jobs, an average cost of $1 million per job, each of which paid $40,000. Marks cited similar results from a study of steel tariffs imposed by President Bush in 2002.¹ Tariffs represent a tax on Americans.

• The Smoot-Hawley Tariff Act of 1930 triggered the most prominent trade war of the 20’th century. The retaliatory tariffs on U.S. goods caused a 61% plunge in exports by 1933, and a repeal of Smoot-Hawley in 1934. There is widespread agreement among historians and economists the Smoot-Hawley Act and its associated trade war amplified and prolonged the agonies of The Great Depression.²

• Trade wars produce extensive uncertainty in the global business environment. What company wants to risk capital in a hostile nation that might over-tax its products or nationalize its assets?

President Trump’s tariffs introduce a significant new uncertainty to an expensive stock market and are capable of stoking inflation, ushering in a bear market recession, and/or inciting new military conflicts. It’s noteworthy the President wants lower interest rates, yet imposes inflationary tariffs which may force the Fed to increase rates. It’s also mentionable our Commander in Chief understands tax cuts are good because people and businesses generally make wiser financial decisions than the government, resulting in increased production, jobs, and economic growth, which in turn provides more revenue for the government, yet puzzling he fails to see that government taxes in the form of tariffs won’t produce opposite results.

At minimum we should expect increased volatility in 2025 as a result of the new dynamic.

Think about it, Shaun.

“So Hiram supplied the cedars and evergreens Solomon needed, and Solomon supplied Hiram annually with 20,000 cors of wheat and 20,000 baths of pure olive oil. So the Lord gave Solomon wisdom, and Hiram and Solomon were at peace and made a treaty.”   ~ 1 Kings 5:10-12

1 Howard Marks, “Political Reality Meets Economic Reality”, Memo to Oaktree Clients, January 2019

2 Foundation for Economic Education, “The catastrophic results of the Smoot-Hawley Tariff Act of 1929-1930”, December 10, 2016