Ever since the new administration was sworn in on January 20, there seems to be a rising tide of actions designed to obfuscate what is going on. Based on those appointed, it would appear at least some of the actions are to detract from the fact that the Heritage Foundation’s Project 2025 program is being implemented. Other issues are a smokescreen designed to keep people from focusing on what is actually happening. Needless to say, the stock market does not like the uncertainty this is creating. All the gains since the elections last fall have been wiped out. More losses may come as the economy loses direction and support.
A good example of a distracting argument is the idea that Canada will become America’s 51th state, or that Greenland can be purchased. Neither country has expressed any desire to be part of the US. As a practical matter, should Canada join the US, its 46 million citizens would create a state larger than California in terms of population. After redistricting, Canada and California with their liberal biases would keep the Democrats in power for years. The Republicans need to think through what they wish for.
Not that it will happen, which is exactly the point. Espousing lost causes keeps people from focusing on the real issue of cutting the regulations and expenditures of government by reducing its services. There is a second cause, to cut taxes, but this will depend on the willingness of investors to continue to fund the government’s deficits. You can use expenditure savings to reduce the deficit or reduce taxes. You cannot do both.
This administration is the first to prevent the funding of programs passed previously by Congress and signed into law by previous presidents. The idea that a President can block expenditures originally approved by legislative majority will require a court test to see if it can stand. In the meantime, investors are uncertain as to what firms are affected, just as personnel are as uncertain as to their employment.
Federal employees are being sacked with much fanfare. The reality is that, if all jobs proposed thus far were cut, the expenditures of the government will decline by less than one half of one percent. Attaining serious cuts call for reducing Social Security, Medicare, and Medicaid.
Of the three programs, Medicaid is considered the most vulnerable due to the fact that its beneficiaries are the least likely to vote. For this reason, cutting Medicaid seems to be the first target.
Medicare and Social Security would be next. There is an idea being floated that people enrolling in the programs after a certain date will be entitled to a lower level of benefits. In the case of Social Security, that would mean a smaller check each month. Details have not been worked out. Another idea is to make the annual cost of living adjustment for everyone less by watering down the formula for inflation adjustment. Yet another idea is to raise the age of enrollment in both programs to 70 or 72 going forward.
Two observations: the push to reduce expenditure is taking the current tax structure as a given. The idea of raising taxes to provide for others never comes up. Indeed, there is much discussion of lowering taxes, especially among the wealthiest. If such tax cuts were to make a government deficit worse, it would result eventually in an economic reckoning.
This is especially true in that there is no means test offered for those who receive Social Security. As matters stand, the taxpayer who pays for his golf club membership with Social Security will be impacted the same in terms of dollars of government assistance, but proportionally less in terms of total income and assets.
Second: cutting taxes for the wealthy mostly results in more assets and savings for them. Cutting taxes for the lower income household usually results in more spending and economic activity, as such families have fewer if no assets to fall back on.
Given the forecasts of more people looking for work, the stock market is right to be concerned. The bond market will respond to any effort to siphon off the reduced expenditure for lower taxes. There are not a lot of good options here. Until people can be convinced that their personal financial situation is stable, they will have a problem in spending for the future.
The Economy
Economic activity has decelerated in the past three months. According to data provided by the Federal Reserve Board of Atlanta, the GDP numbers for the first quarter will decline between two and three percent compared to the prior period.
There needs to be some restoration of stability. How to do so is anyone’s guess. The style adopted by this administration of moving fast and breaking things may be entertaining until it is realized that real people and lives are involved. Most companies have suspended earnings and revenue guidance for the rest of the year given that they cannot ascertain the shape of the economy going forward. When such stability is realized, the market may advance on a firmer footing.
One challenge to stability is the on again/off again nature of tariffs. Imposing them, only to reverse the exercise a day or two later, does nothing for economic or financial planning. At some point our trading partners stop taking us seriously.
Inflation
An original goal of the current government was to reduce prices paid by the populace. This has yet to be addressed.
The tariffs have shown the public how dependent we are on goods from other countries. Rising cost of food will showcase how dependent domestic farmers are on migrant labor. A falling dollar will make imports more expensive, as will tariffs if implemented. All of this is inflationary.
One troubling sign is that the popular expectation now is for prices to rise indefinitely. This inflationary bias will make it more difficult to rein in prices should that again be a priority.
Interest Rates
With a rise in inflation will come a rise in interest rates. People will not invest in debt that does not provide an after-inflation return. Hopefully, foreign investors will continue to invest in US Treasury debt as we do not generate enough funds domestically to replace them.
The Stock Market
Stocks have not responded to the current instability well. The issue is how long the instability will last, and what the investment environment will look like once stability is restored.
At this point it is assumed that the market will have a correction and resume its upward trajectory. A challenge to this assumption is the fact that no one as yet seems to know how to restore stability or even care to. In investing there is a fine line between being too earlyand too late. Gradualism may help investors, as will an awareness of what is going on.
Warren M. Barnett, CFA
March 7, 2025
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