SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
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SKEPTIC’S GUIDE TO INVESTING
Trump’s Domestic Agenda: Success or Failure?
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Steve Davenport and Clem Miller discuss President-Elect Trump’s domestic agenda: deportations, tariffs, taxes, and energy. Will Trump have a durable Congressional majority to enact his policies? What can he do by Executive Order? Will he squander too much political capital on distractions or retribution? Even if his policies are enacted, what would be their true economic impact? Won’t deportations of employed immigrants, and broad-based tariffs lead to recession and higher inflation? What are our investment takeaways?
Straight Talk for All - Nonsense for None
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Hello everybody and welcome to Skeptic's Guide to Investing. I'm here with Steve Davenport and today, in this episode, we're going to talk about domestic economic policy. About domestic economic policy in light of the election we just had and what we know about some of the latest developments with appointments or I should say nominations to the cabinet and some of what we've heard about potential policies going forward with respect to immigration, illegal immigration, with respect to tariffs, with respect to taxes and some other things. So in this episode we're focusing on domestic and in another episode we're going to be focusing on international. So, steve, I think the big question here, the very big question, is what we're seeing right now. Is it going to lead to economic improvements or are we going to see a recession coming out of this Big question?
Speaker 2:Well, that's kind of the big question for the last two years is when is this? I don't want to swear, but when is this darn recession going to just come, whether it's a hard or soft or medium landing, I've never seen, you know, in the Olympics, when they look at the divers, we all talk about how it enters the water, and I don't know when this. You know, this rock keeps falling, but it doesn't enter the water ever. So I am pretty much certain that we're already seeing the unwind of the Trump trade. Well, the first three or four days were very strong. We've already started to see some of that unwind and I think that when we think about our leaders in America, we always make it sound like this is their policy and this is what they did and this is how it ended up benefiting us.
Speaker 2:And when you tell those stories, they sound so believable, but in reality there's a lot of other things happening and I think what you're seeing now is the other stuff the Ukraine, the Israel, the China, north Korea adding troops to Ukraine. The things that you can't expect are the risks. The things you can expect and interpret and understand well, they're not as risky as the things we don't expect. So when I look at this, I see a lot of unexpected things that could happen. And first I guess I'd like to start with what is this majority of the Republicans? And when you look at it in the Senate 53-47, with also the vice president voting in a tie, gives you a four-vote majority. And when you think of that in the Senate of 100, it's better than a two-vote majority, but not a lot, because you're going to have senators sick. You're going to have senators who are in transition who resign, and some of that is going to. You know, immediately you're going to have Rubio resign for Secretary of State and he's going to be appointed. His replacement will be appointed by the governor of Florida. Now that could all work very quickly and very well, or it might not, and I think that expecting this transition on such narrow majorities to be so successful is really painting a picture where you're creating a scenario that's not realistic, and I think that's what the market is starting to digest right now. And when I think about Rubio, I see someone who has been around a lot longer and worked on these issues in more depth than Trump has ever even thought of, so I see someone who he might feel great that he's Secretary of State, but being Secretary of State in a Trump administration might not be the picnic that he was counting on. That he was counting on. And then, if I get back to majorities, the House right now is 220 to 213, with two vacancies One vacancy for Goetz in Florida since he resigned, and another vacancy in New Jersey for a Democrat who passed away. So in reality, you have a House majority that is smaller than the Senate majority. There are four times as many members in the House, so if your majority is three or two in the House, how on earth are you going to expect that majority to maintain itself through all the trials and tribulations of being present for votes and being available to agree unanimously? Because if they have any dissenters, if there are any mansions out there in the House, then those people are going to have a lot of influence. And then, once those people step out and say I disagree and I have a different interest, guess what's going to happen to some of the other bills. Everybody's going to see this gravy train and they're going to get in line because they know they can negotiate it. They put their hand up and say, hey, I disagree. I think we need to do this. My district needs this.
Speaker 2:America is made up of eight what I'll call sub states or areas of the country that vote and act very similarly. And when we think about those, that's where the problems are going to come in terms of implementation for a Trump administration. And so, when I think about the job domestically or internationally, I think there's going to be an unbelievable amount of uncertainty with a Trump administration internationally, but I also believe there's going to be some uncertainty domestically, and that uncertainty is going to be how do we get people to agree? Can you get any Democrats to cross over? Let's ask that question, colin. I'll tell you how successful we're going to be based on how many Democrats the Republicans are going to be able to get to cross over and vote with the Republicans. Do you have an idea of that number? Is that greater?
Speaker 1:than equal to a zero. I don't, but you know. The question is, you know, isn't a relatively divided Congress actually good for the country? I think it might be good.
Speaker 2:I think it is good.
Speaker 1:I mean divided within Congress not necessarily divided among the different branches, but I think it's. I think it's actually good among the different branches, but I think it's actually good. I think it might lead. It'll either lead to complete deadlock or it'll lead to some modest policies on both sides, modest policy outcomes. I think it's more likely to be deadlock, to be honest with you.
Speaker 2:Right. Gridlock is good, was the expression.
Speaker 1:The issue. The issue is how much can President Trump get away with in terms of doing things by executive order and not being overruled by the Supreme Court? I think that I think in my mind, that's the fundamental question. You know, how much can he do on the on the illegal immigration front, on that, how much can he do on tariffs? And those are the two big economic issues that the US will be dealing with confronting over the next few years, given that they are President Trump's policy priorities domestically, I think, regardless of Congress. If Trump controls the illegal immigration issue and the tariff issue, I think, down the road, you know, within a matter of a year or two before the midterm elections, I think the US will be headed toward a recession and potentially an inflationary recession. When you consider the number of illegal immigrants in this country who are actually gainfully employed, that's 5% of the US workforce, 5%. So, you know, do we really want to see 8% and 8% unemployment rate? What about, you know, tariffs? You know tariffs are basically a tax. They're a consumption tax and you know that consumption tax, you know, is going to impact US. You know US consumers Right. So I think the issue is, you know, one of scale? You know, will the tariffs only apply to China, will they apply to only to certain things coming from China, or will there be this sort of broad tariff that you know that some people fear and that Trump has talked about too? I would call that a Smoot-Hawley type tariff, and for those of you who don't know who Smoot and Hawley is, hawley were, take a look at it. Those are the guys who basically caused the Great Depression by putting on big across the board tariffs.
Speaker 1:You know, back in the old days, I think that, with regard to immigration, I think the extent of the recession that would result from sending immigrants back and taking them out of their gainful employment, I think that also depends on what percentage of the immigrants will be removed. I think right now there's just not the infrastructure really to remove so many immigrants. I think right now, the focus in the near term, at least the new borders are has indicated this is going to be on illegal immigrants. Of course, you have to question the logic of taking illegal immigrants out of jails and then sending them back home, right? I've always, I've always wondered about that. Why would you release an illegal immigrant from a jail and send them back home where they could come back into the US. But nevertheless, I think that you know that scale is everything. What's the scale of the tariffs? What's the scale of the illegal immigration?
Speaker 1:And then somebody would say well, clem, what about taxes? Aren't taxes going to go down? I'm not sure they are going to go down. And that comes back to your point, steve, about Congress, about the House, because tariff measures have to come out of the House per the Constitution. And the other issue is is that we're not really talking about, well, we're not talking so much about tax reduction. We're really talking about the extension of prior tax policy coming out of the first Trump administration. So I see a lot of downside coming out of what could happen, especially out of the out of executive orders that that our new president elect might, might sign that our new president-elect might sign.
Speaker 2:Yeah, I guess I'd like to take the cabinet first and try to look at some of the appointments made. I think that Lutnick at Commerce is going to be in the forefront of this tariff debate. As you mentioned before the tariffs, there are two types of tariffs the 232, which are directed by commerce, for national security, and 336, which help balance the cost and eliminate or control dumping that some countries could do, like steel in the US, and I think Lutnick is very close to Trump and I think he will be trying to implement this in as direct a way as possible to affect China. And I look at China at this position in their economic cycle and I don't think they're really in a position where they can afford this extra friction. So I get worried about China and poking the bear and saying, okay, if they were trying to operate and get done something, and they keep getting disrupted by the US.
Speaker 2:The one variable that China has that the US has looked at as a wildcard is Taiwan, and I look at all the work and all the returns that have come from AI in the last 18 months not just NVIDIA but a lot of other names and I say those are all going to be in danger if we see any kind of aggression towards Taiwan. So when I think about foreign policy and I think about Marco Rubio being the director of that policy, and I think about Marco Rubio being the director of that policy, I think his anti-China rhetoric has been pretty strong and that's why they put him in this position. And so between Lutnick and tariffs and commerce and Rubio and Secretary of State, I think China is going to be in the crosshairs. And I think the reaction of China to these increased tariffs and to the questions of what they're doing with the islands and what they're doing with the oil supply coming to them, it's all related. And when we talk about doing this domestic and international it's sometimes hard to differentiate because they all flow in between and together is directly related to what's happening with the Houthi and the Iran, aggression against Israel and trying to control what comes through the Red Sea.
Speaker 2:So I'm a little bit skeptical that this rally for Trump can continue, because I think there just isn't the strength in his majorities to allow him to get things done in a way that is going to be very quick or very successful. So I'm going to have to go down here as a skeptic that this transition goes smoothly and doesn't bring with it more volatility. Goes smoothly and doesn't bring with it more volatility. I think adding to that volatility right now will definitely make it an interesting 2025. The tax question I have is really about how can such a slim majority be satisfied on an extension of these tax cuts. I think there's going to be conservative members of the Republican Party who look at this and say our budget deficit is too large and this is going to have too much of an impact on the national debt. Unless they come up with offsets, which I've heard, nobody so far give me the idea of what's going to make this extension. How are we going to pay for it?
Speaker 1:Do you know? Well, I think what they're counting on is Elon Musk and his doji department to come up with cuts. But I think what a lot of folks, including Trump's people, don't realize is that there's a lot more institutional opposition and barriers to them doing that kind of thing than perhaps they really realize.
Speaker 2:Right. I think that there's going to be a desire just like there always is with Trump to satisfy his base, and that base is going to want to see something in the immigration area his base and that base is going to want to see something in the immigration area. I think they're going to want to see something in the tariffs for China and I think they're going to want to see something in terms of the taxes, and I think it's going to be hard to deliver on all three because the tariffs are inflationary and if those inflationary numbers get worse and the Fed stops lowering rates or the Fed has to turn, and if those inflationary numbers get worse and the Fed stops lowering rates or the Fed has to turn around and raise rates, that's going to be a pretty big X. Next to, will the Republicans add to their majorities in the midterms?
Speaker 2:I think people's reaction so far that this is going to be four years of fire and brimstone and the world is going to come to an end. Forget the fact that midterm elections are only two years away. So in a year we're going to be starting to campaign and I think the checks and balances of our system are stronger than, I think, any leader. So while we keep talking about what Trump can do, I think it's what the system can do led by Trump is a much better way to look at this, and I think the system will have trouble with such slim majorities. What do you think the biggest domestic issue will be for?
Speaker 1:Trump. I think it's the combination Well, I think it's really immigration plus tariffs, as I've mentioned. I think that those are ones that are going to, you know, lead us into some kind of economic slowdown, you know, if not a recession, you know, depends on the entire scale of what, of what they try to achieve. So I I think those are the two biggest issues and I think that Trump is going to have a lot of influence on them, regardless of what happens, you know, regardless of what happens in Congress, and I think that I think that Trump is going to be distracted by a lot of issues, and I think it's clear that, apart from a couple of two or three decent appointments, I think he's made a lot of appointments that indicate that his desire is one of retribution and of trying to basically achieve purely political rather than economic ends, and that's a distraction from being able to do things on the economic front. I mean, if you want to have positive economic policies, let's assume that you are one who believes that deficits are good if we can get tariffs down or get taxes down how much effort and political capital is he going to be putting into that, or is he's going to be able to put into that. If he's spending all of his political capital on trying to get Matt Ga nominated, you know he's spending political capital right now and I'm not I'm not the one who's using this term political spending, political capital.
Speaker 1:A lot of the Republican senators who are skeptical of of the Matt Gates nomination are using the same expression. They don't. They don't understand why president Trump is spending a president elect. Trump is spending so much time, uh trying to an effort, trying to get Gates uh nominated, uh, when he could be doing that to uh, you know, to do things like, uh, the immigration issue and the tax issue and the tariff issue. Why is he doing, why is he spending all of his time on these nominations, which really appear to be at least to my perspective, appear to be a little bit on the crazy side, but you know why. So you're skeptical of some of the appointments.
Speaker 2:What so you're skeptical of some of these appointments?
Speaker 1:Absolutely right. Let me just say that the ones I'm not skeptical about are Lutnik and Rubio about are Lutnik and Rubio and I think that you know some of the other ones just seem like people who are just not qualified to be in those positions and you know there may be, you know, some degree of you know, I think they're being appointed to those positions for other reasons.
Speaker 2:Yeah, I just look at what happened in 2016 or in 2017 when he came in his first Trump 1.0. Trump 1.0 focused on overturning Obamacare, and he had in front of him an infrastructure bill, which would have been a great thing to pass and would have shown he's reaching across the aisle and doing something that benefits the whole country. Instead of focusing on that, he focused on the anger and the issue of Obamacare, which was not something that he had the votes or the will to overturn, and so all of his political capital went into an issue that didn't end up resulting in any benefit. And I agree with you he has the same.
Speaker 2:You know that this may not be the same song, but it definitely rhymes, and I think that what we're seeing is somebody who has trouble getting off of an issue and focusing his time and energy in the right places. So I believe that, yes, we will have trouble on the domestic side because of Trump's distractions, and some of those distractions, like long-range missiles by the Ukraine against Russia, are not of his making and not of his desire to be involved in. But guess what? When you're the president, it's on your desk and you're the one who has to do something.
Speaker 1:Well, it's just like I mean. You talk about the long range missiles in Ukraine. It's very similar to what Trump did to Biden in terms of Afghanistan, you know, making a deal with the Taliban that required the US to leave Afghanistan by a certain date and Biden had to abide by that date. So you know it's a similar thing. Poison pill issue and it's not new with Biden and Trump. It's something that lots of presidents have done in the past for their successors.
Speaker 2:Sure, here's a little gift that we're going to give you for beating me Obstacles in the road to this, and I think that those obstacles in the road, we don't even know what all of them are going to be know what all of them are going to be, but I think this is going to be a very shaky, very volatile year or two.
Speaker 1:I think we're going to see questions about recession. I think we're going to see questions about a reinvigoration of inflation. I think we're going to see that as well. I think there's going to be some risk that the Federal Reserve will stop decreasing rates and will start to increase rates again. I think that's going to create even more political instability, because I think Trump is going to want to try to get rid of the federal, of the current Federal Reserve Board, and put some of his own people in. So I think there's going to be a lot of political instability around. You know especially who's going to be in charge of what types of policy.
Speaker 2:Yeah, I'd like to. I think there's going to be personalities and they're going to be issues, and I think there are in every administration. The things that I see are a lot of the economic reaction to Trump in terms of interest rates and other things appear to be inflationary, and it appears to be that a lot of the voters who exited voted for Trump because of his promise to extend the tax cuts and potentially even lower tax cuts more for businesses. So I believe that the only issue we haven't really covered in our initial domestic here is taxes. Do you believe that we will get the extension of the existing personal rates?
Speaker 1:Yes, you do. I think it's easier. It's much easier to continue something that's already in place than it is to come up with something new. So, yes, I think that will be continued.
Speaker 2:And what about lowering the corporate rates from the 21 to a rate lower?
Speaker 1:than that. That's much less certain.
Speaker 2:Yeah, okay, but if you think about it.
Speaker 1:I mean it depends on who Trump is trying to to appeal to, right, I mean he's going to try to do that and that's going to be aimed at trying to get his big business support and but you know what? The average voter for Trump doesn't really care about what the corporate tax rate is, right. So if he, you know, if he cares about the average voter and I think you know, unlike some people, I think he does care about what the average voter, you know, average supporter of his thinks, you know, I don't think they care about that. I think they care about immigration and I mean they don't think they care about that. I think they care about immigration and I mean they don't understand tariffs, but they certainly care about immigration because, because Trump has been hammering that one with them.
Speaker 2:Yeah, I think they care about inflation. I agree that if any of the actions he does increases inflation or causes inflation to rear its head and the Fed stops lowering, I think that will have a significant impact for individuals as we wrap up this domestic 2025,. What do you think people should do with their portfolios from a domestic standpoint in 2025 to prepare for, to react to or to just stabilize themselves in case things do get more volatile under a new administration?
Speaker 1:So you know I'm increasingly skeptical about big tech, so I've been lowering my big tech percentages. You know I continue to be a supporter of looking at stocks that have low short interest ratios. Short interest is a percentage of free float because I think that the market is saying that these companies are more protected against market downside. So I continue to believe that I try to have my average sensitivity to the market that is beta to the S&P 500. I'm trying to have the average for my portfolio being below one. It might be something around 0.85 right now. So that means that when the market goes up I don't quite capture all of the upside but I protect myself on the downside. So I'm looking at that too. Obviously I'm looking for profitable companies and you know, ones with relatively modest peg ratios, although I'm not so I'm not so hung up on peg ratios, at least for some stocks. We've talked about Costco before. I still have that in my portfolio.
Speaker 2:One thing we haven't talked about, and my suggestion and my own comment is that I think energy is poised to benefit from a Trump administration.
Speaker 2:I think that his use of or attempts to reduce regulation, especially in the energy space, whether it's the Doge Musk who is going to clean out all of the inefficiencies of government and make them effective, or whether he just clears out government and lets whatever happened happen, I think the first area of focus will be energy, and I think energy is one of those areas that, you know, just adjusting the leases for sale changes the picture very quickly, right?
Speaker 2:I mean, there are certain leases in parklands and US properties and deep sea that are going to be very lucrative for whoever can get them, because it's going to increase US production and it's going to do it in areas that might not be as difficult as some of the shale locations that we're currently working on. So if I was to look at an area that I think there's going to be some upside, I think the energy has been beaten up by this tech move in AI, and I think that it will be probably the first place to bounce in the new year. So I would, uh, agree with your maybe lighten up text and and maybe put things back into the basic materials of oil and other metals in mind. Well, here.
Speaker 1:Here's the issue about about energy. Right, you know you mentioned uh, leases and um and on. You have to be very specific about the companies that you invest in. I don't think that investing in, say, an energy ETF is that smart, to be honest with you, because you're going to have that's going to be heavily weighted towards the large energy companies that have a lot of global exposure, a lot of international exposure, and are going to be impacted heavily by some of. One has to be very selective about the particular companies that you're looking at in that area. So, and I would say the same, thing.
Speaker 2:Yeah, I'd say something goes in writing too. I'm just saying that if we look at things in terms of, will he be effective at some deregulation Probably, and the areas that I think there is a lot of impetus for is, as we see things in Israel and Gaza get more heated with Iran, the likelihood that that causes us to benefit more from our domestic production. It could be strengthening our own production and also finally adding something back to our reserves. I think that lower energy prices and gas prices are an easy thing for consumers to focus on, and they focused on the bad side when they were going up, and I think his thing will be let's focus on getting it down and whether it's good for us environmentally, whether it's good for us longer term.
Speaker 2:I don't think we have a real clear answer, but I can see it being an opportunity for the Trump administration to show some progress. Opportunity for the Trump administration to show some progress, because I think there are going to be people who realize that our energy policy overall has been a little disjointed, being anti and not really being for anything. So I look at what's happening with this. You know server farms and the idea of smaller nuclear being very interesting in terms of creating another opportunity for US excellence in an area I know we haven't done a lot of large scale nuclear, vogel being the only one in Georgia but I think think that overall, this idea of having smaller units, you know, could be something that does transform, because nuclear has been around for a long time and we know a lot about it.
Speaker 1:So yeah, I don't know that there are right now a lot of opportunity, a lot of um, distinct discrete opportunities in nuclear, but in if you take a look at solar, over the last five, six, seven years there've been a lot of discrete opportunities to invest in solar and they haven't really played out that well. A lot of volatility, you know, for somebody in my shoes, I think those have been, you know, pretty weak, pretty volatile types of investments that that I've learned to stay away from. And I would do the same thing for for nuclear too, even though I think there's there's positive, a positive road ahead and I think that nuclear may make sense for you, sense for a larger company to dabble in. I wouldn't invest in discrete nuclear-related stocks, or solar, like I'd said, or wind for that matter.
Speaker 2:Okay, how would you wrap it up for 2025 domestically? What do you think our investors and our listeners on Skeptic's Guide should think about?
Speaker 1:I think we're going to see a volatile environment for the stock market. I think we're going to see I don't think you can make any kind of assumptions about where the market will end up at, say, june 30th or December 31st 2025. Not just way too early, but just too much volatility. I think that the probability of recession by the end of 2025, early 2026, is going to go up. I think that there's going to be a lot of distractions in the new Trump administration, political distractions that are going to frustrate the ability to make you know make economic policy.
Speaker 1:I think that you know illegal immigration and you know what to do about illegal immigration, and you know tariffs. Those could be very serious problems for the economy. If the scale of those things is is pretty significant depends on whether the scale is is very high. I think taxes you know obviously low taxes are good. I'm not sure how much more oomph you're going to get out of tax decreases or of taxes if, in fact, you know it's just a continuation of the prior taxes, prior low taxes that were implemented under Trump one. So, yeah, I think you know we're in for a lot of volatility. I think it's prudent to be relatively conservative within a stock portfolio, as I suggested before. That I am with mine, sure.
Speaker 2:I like keeping the advice simple, so I like the ideas that we talked about. We've had a great run in tech. It's time to trim, and I think that what you do with that proceeds, whether you put it into bonds, because interest rates are going to probably stay higher than we expect because of Trump's inflationary bias, or we put it into more conservative equity names with betas more like 0.7 or 0.8. So I think we're on the same page. We're both skeptical about how smooth the ride will be for 2025 domestically, and I think we should approach it with a skeptical and cautious outlook. So thanks for listening everybody. Thanks, clem, for your comments and insights, and we look forward to helping you with more insights on the international side of 2025 and Trump's new administration in our next podcast. Thanks everyone.
