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!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
Politics Over Prudence: Understanding the True Cost of the BBB
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The political theatrics behind Trump's "Big Beautiful Bill" mask a troubling economic reality that could reshape America's fiscal landscape for years to come. This massive 900-page legislation, passed by the narrowest of margins, reveals how calculated political maneuvering drives fiscal policy more than sound economic principles.
Diving deep into the mechanics of the bill, we uncover how the administration strategically front-loaded tax benefits while pushing Medicare and Medicaid cuts beyond the 2026 midterm elections. The raised SALT deduction cap from $10,000 to $40,000 primarily benefits wealthy Americans in high-tax states – a surprising reversal from Trump's previous stance that suggests political calculation rather than ideological consistency. Meanwhile, tax relief on overtime pay and tips provides immediate benefits to working Americans that will be highly visible during campaign season.
The macroeconomic implications are concerning. With an estimated $3.5 trillion price tag, this legislation substantially increases America's already troubling national debt. The combination of fiscal expansion and proposed tariffs creates inflationary pressure that could force the Federal Reserve to maintain higher interest rates despite Trump's public pressure for cuts. For everyday Americans hoping to buy homes or finance major purchases, this could mean persistently high borrowing costs. For investors, bond markets may react with higher yields, potentially causing significant price declines for those holding longer-duration fixed income securities.
Most troubling is the distributional impact: analysis suggests the top 10-20% of Americans will see benefits between $6,000-$20,000, while the bottom 20% may experience a net loss of $5,000-$6,000 once all provisions are implemented. This regressive outcome stands in stark contrast to the populist messaging that typically accompanies such legislation and represents a significant departure from traditional Republican fiscal conservatism.
Want to understand how these sweeping changes might affect your financial future and investment strategy? Subscribe now for our continued analysis of evolving economic policies and their market implications.
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
Hello and welcome everybody to Skeptic's Guide to Investing. This is Clem Miller, I've got Steve Davenport here, and today we're going to talk about the so-called one big beautiful bill, or, as some people say, the big ugly bill, or the big bloated bill, or whatever you want to call it. Or whatever you want to call it. Steve, personally, when I look at this thing, I see a bill that's so big, so complex 900-something pages that I don't think it's really possible to get your arms around the whole thing. So can you share with me what sort you know sort of the top? You know three or four things that you get out of this bill? That, uh, that you think our listeners should, uh, understand.
Steve Davenport:Sure, I think that when Trump was trying to get elected, he realized he made a mistake in giving the corporations a tax cut that was permanent, and he didn't give a permanent tax cut to individuals. But he needs individuals to help his administration continue. So this time he put the big beautiful bill in front of everyone and he said I'm going to make sure these tax cuts that I put in place prior and expire at the end of this year will be made permanent. And so when you think of that for the individual, the first of all, let's talk about BBB or the big beautiful bill I don't know of any president who's tried harder to be a showman and to show people how much he cares and he wants and he does things for the people. Now I think the question is what people? And I think, when you look at the big beautiful bill, he did deliver on a lot of his promises, and so my question is okay, he delivered on those promises because he's a man of integrity and he doesn't want to say something that's not true or he's concerned about midterm elections and he knows if he doesn't address these things, he will be looked at as a fraud, and some of those people who voted for him just so that their tax rates stayed the same will be very, very disappointed if they have overtime pay or if they have other areas where they're going to benefit other areas where they're going to benefit. I find that the Big, beautiful Bill has done a lot for a lot of people. The question is, are those people really in need of some of those aspects of not having the tax rates go up? I think that it was irresponsible of him originally to just do business and not do the individual in a permanent way. If you were going to make a choice, I would have rather he choose people in 2016 and not companies. So now he's gotten this bill through and this bill will have a major impact in that we will avoid a recession, probably because if the tax rates did revert to normal, where they were in 2016, that would have been an economic drag unlike any we've seen for a while. So, yes, he's done something here that is going to help people not see their tax rates.
Steve Davenport:What has he done in the major states with the SALT? He basically said that state and local taxes, that he put a limit of $10,000 for people to deduct was really hurting New York, california and other high-tax states. And now he's decided oh, all those high-tax states, I don't dislike them as much. I'm going to make the limit go to 40,000 from 10,000. So if I was a middle class American in the middle of the country, I would say he just gave a lot to those people with a lot of money and I thought that he was trying to discipline those states and get them to change. And now he's given up and he's letting the people who have higher deductibles, you know, continue to have a benefit from the federal government.
Steve Davenport:So I think that some of this is really just a payback to different people and different situations. Why is it should I be surprised that paybacks in government and bills that favor one group over another, paybacks in government and bills that favor one group over another? I think Clem a long time ago. I have this idealistic thoughts about how government should operate, whether it's Voltaire or whether it's any of the great writers talk about democracy. Socrates and Aristotle, and I think of those ideas when I think of democracy and I'm not really living in the present, which is we have a very disjointed democracy with two choices and neither choice is really looking very good right now and neither choice is really looking very good right now.
Steve Davenport:So I think the big, beautiful bill, in summary, does rectify and stabilize our tax situation, so we'll know what our rates are going forward, which will make it easier. The fact that we increased the limits for estate planning, the fact that we did some things with SALT, the fact that we did some things with overtime pay I think all of those things will help Trump and all of those things will help some of America. But in the end, the people who will benefit most are the top 10 and 20%. They'll see a benefit somewhere between 6,000 and 20,000. And I think in the bottom we'll see a detraction of something like 5,000 to 6,000, in the bottom 20% of the population.
Steve Davenport:So is it equal to everyone? No, are any bills usually equal to everyone? Probably not. Should I give up on this concept of equality and treatment under the law and under the way that we're governed? I think I might have to. But, bottom line, it's a big bill. I don't know if I can use the word beautiful, because I think that what I find most disturbing about this bell Well, I'll get into the problems those are the good things about the bell. I think that you know we could talk about some negatives and talk about the timing, but let's let's stop there and see if you have any comments on what I said.
Clem Miller:Let's stop there and see if you have any comments on what I said. Well, you know you focus right now on the benefits to individuals from the bill and I would like to hear your thoughts about the consequences. But even more so, I want to know from you, Steve, what you think about the macroeconomic and investment implications of this bill. I mean, after all, we are going to be seeing higher deficits, probably an acceleration of the high deficits we already have. We're going to see higher debt levels, the high deficits we already have. We're going to see higher debt levels, you know. Do you think that all of that is going to impact borrowing costs and just make our fiscal situation even more untenable in the future? Or do you think some of these benefits that you just laid out to individuals create incentives for growth that will help, you know, provide the revenues in order to, you know, help pay for these higher deficits and debt?
Steve Davenport:I think this is where the big, beautiful bill gets ugly and why I think that is that the way they have structured this bill is the benefits accrue in the first three years, and in the next seven years all of the cuts to Medicaid and Medicare come through. And so, when we look at the purpose of legislation, it is to improve the economy and improve the overall livelihood of US citizens, and I think that when I look at this bill, it improves and provides stimulus to lower income individuals through not taxing, to lower income individuals through not taxing tips and overtime, and that's going to be good for stimulus for the next two years. Now, why would they want to do something for the next two years and not do it for all 10 years One? If they did it for 10 years, it would be more expensive and it would have been harder to get passed. The bill is already going to cost, based on estimates, somewhere around $3.5 trillion, that's trillion with a T, and so they front-loaded it so that the midterm elections, which start, basically the campaigning, will start in January of 26, the elections in November of 26. And guess when the Medicare cuts start to go in effect? January of 27. So they are playing a political game here with all of those voters who they hope will say, oh, he got rid of my overtime tax. I'm really happy about that, and it will be that way for the first two or three years, but then it will go away. And so why is he front-loading it? Why are the Medicare cuts not happening right away? Because he doesn't want any blowback from any of the negatives of this bill.
Steve Davenport:I look at that and I think it's politics as usual, and he's trying to satisfy groups that he thinks will be key for Republicans to win in the midterm elections. Is that a strictly political endeavor? Is there other reasons why he couldn't have done it differently? Absolutely. It's all about politics and it's all about getting reelected. And it's not about the national debt, it's not about the people, it's not about trying to make lives better, it's about getting reelected.
Steve Davenport:As you know, james Carville once said it's the economy, stupid. And he wants this economy to run on a stimulated sense for the next two years. Why is he pushing Powell so hard to lower rates? Because he knows that the housing problems and the higher rates are causing a slowdown in real estate, which, if we lowered rates one and a half 2%, we would see a rebound also in the housing areas and that would create even more inflation. So the bill is going to be inflationary, the inflation is going to further give us problems and I think the one thing that he's trying to change, which is Powell's and rates, still might not change. It might not change at all, and if it doesn't and we start to get more and more debt added on to these auctions, we're going to see higher rates. And if we see higher rates, his goal all along was I'm going to provide stimulus and strength and I'm also going to get help from the Fed, and that help from the Fed is going to guarantee my reelection.
Steve Davenport:I think what he hasn't really thought about is the bond vigilantes and some of the people out there who say our debt is enough. We're at 30 trillion, now we're going to add three more. I think it's really unrealistic to think that you can have a blank check and just do something and there won't be any byproduct or any ramifications. There are people who are going to pay and those people are going to be the homeowners who want to buy a house and the people who have to pay higher interest on car loans and everything credit cards. So when we look at this, we could say, well, that's all Powell's fault, but I think he's missing the point, which is inflation. Is inflation is inflation, whether it's caused by breakdowns in supply lines during COVID, whether it's caused by the Fed increasing rates to try to address the inflation and therefore the rates have to stay high and somewhat stagnate the economy so that we start to see inflation weaken and decline. We've seen inflation come down, but it's still not where it needs to be. And guess what, when you do things that is stimulatory to the economy, they are going to cause more inflation. So tariffs are going to cause more inflation whenever they get implemented.
Steve Davenport:And so now I think he's realizing some of this tariff talk could be what prevents him from getting that cut from Powell. And so he has to decide do I want to continue down this path of tariffs and do I want to continue to do this and risk a rate cut before the midterm elections? If he does, it could backfire in that some of those same people are trying to become homeowners, who are working overtime and getting tips, and so if they can't become homeowners because rates stay high, they're going to feel that impact. They're going to be on the lower side of the credit spectrum, they're going to be the ones paying the highest rates and therefore I think he's missing how all these things are related. I think he wants to have a talking point. He's got talking points now with tips and overtime I think he's going to have talking points.
Steve Davenport:I don't know what the salt increases is really going to. Is he going to win New York? Is he going to win California because he increased the salt deduction? No way, that's not going to happen. So what did he do it for? He did it for some of those Republicans who think they can take more seats in those states. I don't think that's necessarily going to be the case, because the truly large donors have probably already moved out of the state and moved to Florida or Texas. So I'm not sure he's going to get what he wants from that SALT increase.
Steve Davenport:But again, it comes down to the Fed, interest rates and the overall economic environment. I don't think we've seen what is going to happen yet with these tariffs, so I don't think we can say how inflationary or non-inflationary they're going to be. But let's just say if they start to be more inflationary than they estimated, the rates are going to go higher and there's going to be no way we get a cut and when that happens, that squeeze on the economy. I'm not sure that the tips in overtime tax breaks are going to be enough for him to sail through the midterms.
Steve Davenport:I still believe we're a divided country and we're narrowly divided, and I'm not sure there's a lot of goodwill when I look at the immigration actions and I look at some of the other actions of this administration. So my thing would be the bond vigilantes are going to sniff out that inflation and when they do, I think they're going to start to react and I don't think it's going to be good for treasuries, which means higher rates and higher rates for everyone who wants to be a homeowner, and I think we've already seen the average age for homeownership go up in the last five years and I think it will continue to go up and it will continue to be a narrow group of people versus a wider group who've enjoyed the American dream of owning their own home, american dream of owning their own home. So I think that the ownership of this bill will be interesting as we start to see reactions. But I think he made a mistake, going after tariffs too early.
Clem Miller:Yeah. So, steve, sort of two things that came to my mind as you were talking there. One is that you know, with regard to rates, you know the Fed has control over short-term rates, doesn't have control over long-term rates, so it's not guaranteed by any means that, you know, by Trump putting in another Federal Reserve chair or a shadow one, that he'll be able to get longer term rates down. There's no guarantee, because the Federal Reserve does not control long rates, it only controls short rates, and long rates reflect inflation expectations, and so if inflation expectations go up, as you were suggesting, they might, uh, we might actually see higher long-term rates and thus higher borrowing costs for the government, for homeowners, for uh, for car loans we may all see all that.
Steve Davenport:I'm just going on the assumption that we stay pretty flat yeah if we saw a steepening as well, then yes, it's going to be very harmful and the stiffening really, if you take those five-year notes as a proxy for mortgages, I think the five and 10 years could go higher without anything happening. With Powell and the short-term rates.
Clem Miller:So then, steve, the other thing I wanted to mention, apart from the rates, is that you know you had this group of fiscal hawks in the House of Representatives who, for the longest time, did not want to go along with this one big, beautiful, whatever bill, right, and?
Clem Miller:And the reason they were able to be convinced at the last minute is apparently Trump had a meeting with them and said, hey, don't worry about this, we'll make additional cuts in the future within the White House, in other words, after the bill is passed.
Clem Miller:And so you know the question, you know that goes to the whole legal question that you know is, you know, not fully resolved, as to whether the White House can actually do rescissions on spending, actually do rescissions on spending. Now, it was partially resolved because the Supreme Court ruled that, you know, overturn this temporary restraining order of a judge who said that they couldn't go forward with spending cuts and reorganizations and whatnot, but left the left the entire implementation of the litigation to the lower court judges. So they didn't say I mean, contrary to what Trump and his people might say, they didn't say, oh, you can do whatever you want to government agencies to cut spending, they said at lower courts can look at that on a case-by-case basis and honor the litigation, but still, trump may have told his House fiscal conservatives that don't worry about it, we're going to do more Doge-type cuts in the future and thus reducing expenditure. So I think that's something we might see in the future is more of these Doge-style cuts.
Steve Davenport:I believe you're right, clem. There's a lot of room between here and when these things start to take effect and what could be the economic issues and what could be the result of this. I don't have a crystal ball and I'm just giving you my opinion, and these are not clear to everyone and they're certainly not clear to me. I'm just trying to give you my best judgment. The one thing I'd say about this bill that showed me it was politics as usual was Murkowski in Alaska was against the bill, but then when some additional items were added for forestry and fire protection and some other things that benefited just Alaska, she suddenly went from a no to a yay and I just I thought, at a bill this large, there's no way they're going to throw in, you know, items just for one senator. But they threw in whatever they had to to get it through, both bills passing by one vote, I think it. Actually in the Congress it was more than one vote, but it was a narrow victory. A victory is still the same, but narrow, and I think that what that tells you is we're a narrowly divided country and it's not going to be easy for these things to last, especially if he loses the midterm election. So again, I know I may sound like a broken record about midterms, but if you want to make sure that Trump doesn't have success in his last two years, the Democrats are going to try and independents are going to try to make sure that that he isn't able to pass further legislation in the last two years.
Steve Davenport:I think that the Republicans in the House were naive to think that this big, beautiful bill was not going to be. I think the Republican Party has walked away from the fiscally prudent mantra that they've tried to hold, even though they really tried to hold that. Well, mostly benefiting the rich. Well, mostly benefiting the rich. So I think that it's going to be hard to determine how to primary you. I'm going to go after you and again is threats in politics the way we should operate? No, but we are where we are.
Steve Davenport:We are being led by a person who believes in personal threats on social media, and that's just the way he operates, and so, therefore, I think it's great that he got this bill done in terms of his own agenda, but I'm not sure his agenda is the agenda of all of the American people. Am I glad that my taxes aren't going to go up Somewhat, but I'm somewhat disappointed that it's going to come at the loss for those people on Medicare and those people who will have to find work in order to satisfy and qualify for their coverage. It's sad. I don't think it really needed to come to that. I think they could have probably passed a bill that was a little more balanced and I like the fact that when he was doing this, he was considering all. If they want to do a millionaire's tax, we'll consider it.
Steve Davenport:I think there were ways to do this bill in a more reasonable structure and I still think that the two major items are when and if the Fed will lower and two, when and if. At some of these auctions we see higher rates and bond vigilantes not willing to see lower rates, because higher rates, as we saw, can quickly turn around an economy and make it difficult for everyone. So let's watch the rates, let's watch the bonds and I don't know. Clem, what do you think is the most important item in this bill? What do I think is the most important item?
Clem Miller:on this bill. What do I think is the most important? I think the Medicaid cuts are a very significant issue politically and also economically, because it's really the first cut at trying to eat into the so-called entitlements and might uh pave the way for, uh, you know, cuts to social security and cuts to uh, you know, bigger cuts to medicare, uh. But I think the medicaid issue is very significant. I think that it has a political dimension in that there are a lot of people on Medicaid in red states and so I think, as soon as a lot of people in red states start seeing their Medicaid requirements being shifted around, I think there might be some opposition to that growing and could impact the midterms, as you were pointing out. But, steve, I wanted to ask you one last question, since you mentioned that you thought yields might go up in the future, rates might go up. Is future Rates might go up? Is this a?
Steve Davenport:time to hold bonds. I've. I think everyone who holds bonds is going to worry about higher rates and I've tried to mitigate some of what I think is government risk by looking more at corporates and looking at like an LQD, which is a corporate bond ETF, versus an AGG, which is all bonds including treasuries, and I think that corporations are in better shape than the US government after this, because I think the US government, although it can print, that printing will cause inflation and that inflation will hurt everyone associated with treasuries and issuing more. The way to avoid that is to go shorter and also to go in other spaces like municipalities. I think some municipalities and munis are going to do well because I think the taxes I believe are still a major consideration and I think that states like Massachusetts that have added a millionaire's tax I think we might see more states like that because the salt and some of those things is not going to be enough to help their fiscal situations in California and New York. So I believe that we'll see in the next five years, more millionaire's tax to help with this and I think that what that does is ultimately makes people feel less confident in the bonds of the United States. I think the $5 trillion addition to our debt ceiling is quite a move. Our debt ceiling is quite a move and it does give us some time in terms of how do we adjust to that and how do we do it better.
Steve Davenport:I think Trump's dream of all the tariffs paying for a lot of this are not likely to come true and I think it will be absorbed by the consumer and it will be absorbed by the importer to a degree, and some of it will come to the US, but I think that it usually leads to higher prices. Those higher prices will eventually filter through the consumers and lead to more inflation. More inflation is my message for today. I think that more inflation is likely. Therefore, look at your duration of the bonds in your portfolio and try to make sure you're comfortable.
Steve Davenport:If rates were to go up by 2% and your duration is five years, then you're going to see a 10% decline in your bonds. That's reality. If you can live with 10% less in your bonds, if it's paying you 3%, 4%, that kind of makes it eat up two years worth of coupons. Three years worth of coupons. I don't think that's really the best place. I'd probably say that you should shorten and think about more corporates, Shorten duration, include more corporates and, as always, I like munis because I think that some of that tax benefit is hard to get in other ways. So I don't know if that answered your question or not.
Clem Miller:It sure did so. Appreciate it, steve. So I think we'll wrap up there. We really appreciate everybody joining us today and if you have any thoughts about this particular podcast or about the podcast in general, or, you know, moving uh onto video, you know, should we uh should Steve change his shirt, uh color, or uh, should I? Should I uh cut my hair?
Steve Davenport:or let's both smile for the camera as I go off.
Clem Miller:All right, okay, thank you. Thank you everybody.
