“It’s tough to make predictions, especially about the future.”
“You can observe a lot by just watching.”
–Yogi Berra
Hi everyone,
I received several calls from relatives and friends wondering what the election result meant for their investments, money, and futures.
The questions made me think again about my response. I have a good idea about what I should do. However, I only have a general idea of what guidelines I should recommend for MMH readers.
That is because there are significant crosscurrents, short—and long-term opportunities, and dangers that I still need to sort through. In addition, some of the reforms are in the formulation stage. So, what follows is preliminary. As the situation clarifies and legislation is enacted, I will comment more in future posts. Like Yogi, sometimes I am going to watch and see what happens when the next administration implements new tax and regulatory rules.
Any personal strategy must consider several contradictory factors when adjusting to the changes Washington has in store. These are:
- Rising interest rates and economic activity
- Lower tax rates.
- A Federal Reserve that may be less effective at dampening the intensity of economic swings as the deficit increases.
Let’s explore how those work, interact and affect your future financial and investment actions.
INTEREST RATES, DEBT AND THE ELECTION
The impact of this election result is already playing out in the bond market, where ten and 30-year treasury bonds have risen in the last few months. The rise is because the markets expect more significant deficits due to increased spending and stronger economic growth.
The size of the Federal debt is more significant than ever and will also affect future actions. In many ways, the election was a referendum on how to cope with rising debt.
We have chosen to try to outgrow the debt. That is the gist of the coming policies.
That change in approach will come in a situation that will be markedly different from the past. In 2024, we are spending 15% on interest alone in the federal budget, which is bigger than the entire defense budget. The cost is expected to increase, eventually crowding out some private borrowers and increasing interest rates. The debt load has never been this extensive or expected to take up so much of the budget.
The increase in debt over the past few years may curb the Federal Reserve’s ability to intervene and blunt economic dislocation. I rely heavily on that potential factor in the following analysis and how I will approach the aftermath. I suspect the economy will be more volatile and that the Fed may not be as effective as in the past.
OTHER PLAN COMPONENTS
As part of an overall response, the new administration will increase tariffs on imported goods, analogous to imposing a tax on some imports. The amounts mentioned range from 10 to 60 percent, depending on the country from which the goods are imported and the kind of product imported.
In the short term, tariffs are expected to provide new federal revenues and increase prices.
However, it is hard to know what foreign governments will do in response to rising tariffs. Some will raise tariffs on American imports, hurting our multinational companies. As you can imagine, opinions are split on how much that will matter. Different industries will have different effects and repercussions; see here.
There are also promises to further restrain debt issuance by significantly cutting expenditures. You can read about that here.
There will be impacts on immigration, too. See here.
POST-ELECTION TAX RATES
Rates will not change and may even go down in some cases. Before the election, the lower rates were expected to expire and rise to former levels.
That anticipated decrease in tax rates should increase growth and provide some short-term relief, especially to businesses.
It will also increase the viability of many business investment opportunities.
TUG OF WAR BETWEEN GROWTH AND DEBT
In short, the future will be determined by whether tariff revenue and economic growth will outstrip the rate at which debt costs increase.
We do not have much national experience combining tariff increases and deficit spending, so the impact is hard to gauge. We have previously combined those two factors, but not on the proposed scale.
DON’T FORGET ABOUT THE OTHER CHALLENGES
There is much more to the world economy than US debt and tax policy. The following factors dwarf any US-only concerns and must also be considered by investors.
Global warming—a brief post covers this vast subject here.
AI and its impact on jobs—the effect will be profound. Still, predicting the impacts and when they will occur is hard. Here are some possibilities.
Reinforcement of the trend toward haves and have-nots—this is an indirect measure of social stability. As interest rates rise, the use of debt by consumers as a potential springboard to start a business, buy a house, or other uses will become more expensive. High rates may restrict social mobility.
WHAT I AM GOING TO DO POST-ELECTION
My situation is different from many of my readers. I mainly want to keep what I have, improve my finances, and invest strategically and conservatively in growth initiatives.
So, the most significant factor for me is the possibility that the Federal Reserve will have less power to intervene and bail out the US when the economy declines. It has taken 30 years and many presidents to get to the point where the deficit is a problem. The Federal Reserve’s waning power may lead to greater economic extremes, which drives many of my actions below.
I’m also optimistic. I feel there will be significantly increased opportunity–but less margin for error when things go wrong.
Again, what is written below is what I will do. You must decide for yourself what course of action is best for you. My strategy might not be appropriate for you. As always, get good advice and engage a financial fiduciary before you act. Here are a few things I will do.
1. Continue long-term investing (but consider more frequent short-term profit-taking)—I have preached the virtues of saving and long-term investing. Compounding over a long period will eventually make you rich. However, selling and locking in gains will sometimes be more appropriate in the coming years if volatility increases.
2. Keep better tabs on new opportunities—this action is critical. I want to stay informed more than ever, and you should, too. There are tremendous opportunities in fast-changing industries, but the tax incentives and breaks that Congress enact will amplify some. Knowing what they are and how you can profit will be critical. So far, tech and financials have benefitted, the latter because of potential deregulation. Here are a few ideas about where opportunities will present themselves.
3. Keep adequate reserves—rely more on reserves and less on insurance. This change comes from recent experience and is unrelated to election changes.
4. Consider the worst case before investing or taking risks—nothing new here, but understand that the diminished effectiveness of the Federal Reserve will make the investing environment less forgiving than ever.
5. Invest in more hard assets to offset inflation—I will not stop investing in real estate and stocks, but I will change the mix slightly: more precious metals, collectibles, etc. Hard assets could outperform as money becomes less valuable and interest rates rise. Who knows, I might even think about cryptocurrencies (and, of course, I may not).
6. Evaluate debt use more carefully. This change will take several forms. Since debt will be more expensive and the environment less predictable, there are several actions to take:
- Arbitrage—I will use this strategy when opportunities arise that allow me to borrow at low rates compared to long-term inflation. See here. With rising rates, there may not be as many chances to use this strategy.
- Debt Character–I will usually choose shorter maturities and fixed-rate debt to increase certainty.
- Leverage—I have almost one-third of my net worth in traditional physical properties secured by real estate loans. Instead, I will probably invest more in real estate funds that keep debt to a minimum rather than physical real estate, which will reduce leverage.
7. Consider foreign investments more than before—this is strictly to diversify assets, which may be more important in the future.
8. Reevaluate real estate investment as the new rules emerge. High rates tend to make real estate less desirable as an investment, so new rules on deprecation losses, etc., may matter as I consider investments in this investment class. We will see.
9. Monitor social conditions closely—change may widen the gap between the haves and the have-nots. See above.
CONCLUSION
It will be interesting to see how all of this plays out. As the details of new economic plans become more apparent, I will revisit various investment opportunities and provide you with information.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Joshua Woroniecki
License: Unsplash