Market and Portfolio Commentary 11152024
Picture generated with AI: Government cuts are coming
Markets: Jay Powell recently told a Dallas audience, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” There’s nothing new about these comments. Recent data suggest a less compelling need for cuts. GDP growth is solid, although employment numbers are not clear, given that reports were disrupted by storms and strikes, and inflation is still high. In September and October, the biggest inflation contributors were shelter, medical care services, and airfare. Shelter’s weight in this balance is far heavier than that of any other component of the CPI, and shelter inflation is rising because rents are rising due to high mortgage rates. According to the New York Times, realtors have already noted a shift in demand from buying to renting, which is putting upward pressure on rent prices, backed up by an upward increase in the Zillow Rent Index.
Q&A session: What are the implications of Trump 2.0 on the economy?
As the Trump cabinet takes shape, it is increasingly apparent that the President-elect is not planning a subtle policy approach. One clear difference between his first and second term is the speed at which the President-elect is making appointments. Trump’s second-term agenda is ambitious on many fronts, implying a range of possible outcomes affecting inflation in both directions.
Potential inflation sources:
1. Tariffs are inflationary: Trump is talking about two kinds of tariffs. First, a general 10%–20% tax on all imports, intended as a revenue source. Second, big, targeted tariffs to induce more favorable terms of trade. Both will not make our European counter-parties happy.
2. Tax cuts reduce revenue and inflate deficits.
3. Mass deportation would reduce the labor force, increase costs, and boost wages.
4. The federal deficit, not the Federal Reserve, is the primary cause of inflation. Deficits are by definition inflationary.
Potential inflation offsets:
1. Deregulation boosts growth and productivity, and productivity is one of the most important deflationary forces in an economy.
2. Government spending cuts: Ramaswamy and Musk’s Department of Government Efficiency (DOGE) has been ridiculed because of its silly name, but this is going to be more than a department. It’s a philosophy and an AI-led process that they aim to bring to every aspect of governance and across every agency and arm of government. It’s the ultimate audit.
3. Immigration reform, allowing enough people in to offset deportations.
4. Establishing the proposed universal regulatory clearing house so that companies can put together one application rather than applying to every applicable agency separately—millions of dollars and years of time could be saved on every major construction project. That could have a big impact on housing costs, the primary source of inflation, because new construction is currently very difficult and expensive.
Inflation is not dead, and soon it will be Trump’s problem: his basic instinct of cutting government spending is correct, but he will have to look at the revenue side as well. Changes will be painful. Everything Trump wants to do will face powerful opposition, and not only from Democrats. Much opposition will come from other Republicans, or people who supported his campaign. Cutting non-defense discretionary spending (~$948 billion last year), which includes education, foreign aid, law enforcement, regulation, etc. will not be enough to stop the national debt from growing, while cutting defense spending (~849 billion last year) will see opposition from both Republicans and Democrats. Healthcare is another big chunk of spending. Medicare and Medicaid are nearly $1.7 trillion a year and growing fast. That’s what Trump, Musk, and Ramaswamy are up against. Simply having slim Republican majorities in the House and Senate is not sufficient. The spending impulse is bipartisan and pervasive. Just this week the House passed a bill giving government workers an increased $196 billion Social Security benefit, by a vote of 327-75. Some Republicans who voted against increasing the debt limit voted for this bill!
Learning Session: Biggest SPX options expired in history
November’s expiration is one of the largest options expiration in history, with more than $2.9T in notional value set to expire… including some $1.4T in SPX (S&P 500 Index Options) alone.
What does this mean for your money? This event is a technical one and a major volatility creator in the market: If you’re a trader, volatility is your lifeblood. If you’re an investor, this usually creates opportunities, since the market has a very defined upside bias over time. Get your list of good names ready. I will be here if you need help.
Best wishes for Health and Wealth, Rosanna
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