In the past two weeks, I’ve read at least a dozen essays and articles about Trump’s campaign against the raison d’etre of the Federal Reserve (which makes great sense to me) and his recent campaign to get the Fed to lower the rate. The betting was that they would bring it down but by, at best, half a point. Well, they did. They brought it down 250 basis points (one-quarter of a point) and I figured that was a compromise that probably wouldn’t have an effect on the economy one way or the other. Yesterday, I came across two good pieces that challenged my assumption. The first suggests that gold might be a way to deal with or profit from Trump’s campaign. The second provides four alternatives that are stocks. – MF

Three Good Reasons You Should Not Buy Gold Now…
and One Good Reason You Should 
From Ashwin Thapar, D.E. Shaw Investment Management

“Here are some good reasons not to invest in gold. First, it earns no dividends or interest. Second, you can’t live in it, like real estate. Third, it has doubled in the past few years, so forget about buying at the bottom. 
 
“Nonetheless, a prudent, diversified investor should consider owning gold today. This isn’t about potential return. It is about insurance. Gold tends to go up when bad things happen, from inflation and runaway government debt to war and political instability. Those things seem more likely now than they have for a long time.

“In a new report, Ashwin Thapar, of D.E. Shaw Investment Management, argues that as global wealth grows, so should gold holdings. He estimates that since 1975, gold has ranged from 1.8% to 7.3% of developed market liquid wealth. (It has recently broken above that range.)

“Newly mined gold increases the stock of gold less than 2% a year, according to JPMorgan Chase. The remainder of gold wealth comes from a rising price. Over the long run that is probably enough to keep up with Treasury bills, but not a plain vanilla mix of stocks and bonds. The purpose of gold is to damp the impact when something hammers stocks, bonds, or the dollar. The trick is to figure out what that something is.

Inflation: Gold’s Best Friend

“Gold does best when fiat currencies (the kind central banks issue) lose purchasing power. Gold soared during the 1970s as stocks and bonds foundered amid double-digit inflation.

“US inflation, at around 3%, is hardly a disaster. And the Federal Reserve thinks it will be lower in a year in part because of a weaker labor market, which is why it is likely to trim interest rates on Wednesday. [Note: It did. See Porter Stansberry’s piece, below. – MF]

“But the structural forces that kept inflation below the Fed’s 2% target before 2020 have switched direction. Globalization, which brought a flood of low-cost goods to American shores, is out; tariffs, protection and reshoring are in. Before, legal and illegal immigration compensated for an aging labor force. That inflow has been. Cut off even as fertility rates hit new lows.

“These structural pressures need not push inflation higher. The Fed can ensure inflation stays low by raising the real interest rate (the nominal rate minus inflation), which weakens demand and pricing power. As D.E. Shaw points out, higher real rates are bad for gold.

“But making such tough decisions requires the Fed to remain independent. And before long, it may not be. President Trump told reporters the Fed should be independent, ‘but I think they should listen to smart people like me.’

“He is taking unprecedented steps to ensure the Fed listens. He has just installed the chairman of his Council of Economic Advisers, Stephen Miran, as a Fed governor. Miran will retain his White House title while on the Fed. Trump is also trying to fire another governor for alleged mortgage fraud. By next May, he can replace Chair Jerome Powell. He is forthright about his goal: Get interest rates down faster.

“Investors don’t seem to think this will lead to higher long-run inflation, and they might be right. But an end to Central bank independence is the sort of once-in-a generation risk investors struggle to price, and for which gold is well-suited.

Stocks and Bonds

“When interest rates go up, bond prices go down, and gold usually rises. So gold can hedge bonds. But that hedging value depends importantly on why interest rates are going up. In low inflation eras, rates rise and bond prices fall because of better economic prospects, and stocks rally. So stock and bond returns are negatively correlated, and hedge each other.

“But at times of rising inflation, bond and stock prices rise and fall together. Their returns are positively correlated and no longer hedge each other. This makes gold even more attractive, because it can hedge both. There are signs of this now.

“You could hedge against inflation with Treasury inflation-protected securities, or TIPS. But last month, Trump fired the commissioner of the Bureau of Labor Statistics after it reported unflattering jobs data, and nominated a partisan supporter to replace her. Investors must now weigh the risk the BLS will change the consumer-price index to lower reported inflation. That would undercut the protection offered by TIPS, which are indexed to the CPI. Gold isn’t.

Debt and the Dollar

“The publicly held federal debt is on track to rise from almost 100% of gross domestic product now to 120%, exceeding the all-time high during World War II, according to the Committee for a Responsible Federal Budget. Neither political party has a credible plan to stop the rise.

“High debt poses two risks, both of which make gold attractive. The more remote is that the government defaults. The other is ‘fiscal dominance,’ in which the central bank gives priority to keeping the federal debt burden manageable over inflation. Indeed, Trump regularly cites debt costs as a reason why the Fed should cut rates.

“Gold also competes with the dollar as a reserve asset for central banks, sovereign-wealth funds and individuals trapped in kleptocratic regimes. The dollar, however, has lost some of its reserve appeal since early 2022, when Western governments froze Russia’s foreign-exchange reserves because of its full-scale invasion of Ukraine. Goldman Sachs estimates central bank buying accounts for most of gold’s doubling in price since. Trump’s trade war this year further soured investors on the dollar, no doubt helping gold.

“If high inflation, fiscal dominance or a loss of reserve status threaten the dollar, you could buy foreign currencies. But other countries also have high debt and political instability. You can’t be sure the euro will exist in a decade, given the rise of euroskeptic parties in Germany and France. Gold hedges against a collective loss of trust in fiat currencies.

Gold as Insurance

“Fear of inflation, fiscal dominance, dollar depreciation, war and political instability are why gold has already risen so much. Since these risks are already reflected in its price, why buy now? This argument sounds like what you hear at the top of a market.

“The case for gold doesn’t depend on where its price is going, but its role in your total portfolio. According to D.E. Shaw, someone optimizing both return and risk might allocate anywhere from 0.5% to 9% of a portfolio to gold. The share is higher when stocks and bonds are positively correlated, or a financial disaster, such a stock market crash or inflation spike, are a concern. This allocation isn’t right for everyone; it depends on personal risk tolerances.

“And what if your gold goes down? Think of it as an unused insurance policy. And be glad your house didn’t burn down.”

Investing in This Post-Rate-Cut Economy 
From Porter Stansberry

“Rate cuts just might ignite a fire.

“US gross domestic product (GDP) grew 3.3% in Q2. The current unemployment rate is 4.3%. And the latest consumer price index (CPI) showed prices are rising at close to 3% year-over-year. All of this points to a tight economy with little slack. 

“And 3% inflation is nowhere near the 2% rate that the Federal Reserve has officially targeted. 

“Further, many analysts believe the full effects of the Trump administration’s tariff policies have yet to fully feed into the CPI reports. That means inflation could potentially accelerate in the coming months.

“And despite all the promises about Elon Musk and the Department Of Government Efficiency (DOGE) cutting the federal budget, government spending continues to run completely out of control.

“So, given that backdrop, of course the Federal Reserve has decided to… cut interest rates – reducing the Fed funds rate 25 basis points to around 4.25% from 4.50% – and hinting at more to come later this year. As irresponsible as this might seem, this is the current state of affairs.

“Adding liquidity to financial markets in this economic environment is akin to throwing a match on a towering inferno. Gold, one of the clearest barometers of inflationary pressures, has taken another leg up in the last month to yet another all-time high at nearly $3,700 per ounce. Hard assets are sending a very clear signal that inflation is not going away.

“While it might seem like party time for stocks, investors should be wary.

“So far, the reflexive reaction to Fed cuts has been for longer-term US bond rates to fall. The 10-year yield has now dipped from around 4.3% a month ago to just above 4.0%. That is pretty close to panic lows hit immediately after Liberation Day, when on April 2, President Donald Trump announced his tariff plans, and about the lowest levels in close to a year. But the last chapter on this has yet to have been written.

“It isn’t clear why financial markets will just give the US a pass and allow the government to fund such recklessness at lower rates. In fact, if inflation picks up – as gold is signaling – and government spending continues unabated, it seems possible that longer-term rates will end up higher after the Fed executes its series of rate reductions, not lower. That would likely act as a shock to equity prices and force a potentially significant market correction.

“And that would leave the Federal Reserve with no good options.

“So what is an investor to do in such an environment? Certainly, continue to focus on gold and other hard assets that perform well in an inflationary backdrop. And look for equities with strong cash flow, good balance sheets, and high-quality businesses that can thrive even in a volatile economic environment.”

Note: If you’d like to hear more from Porter, he has a free advisory called The Big Secret on Wall Street, which is currently recommending four stocks that he thinks will perform well in the future, despite these economic uncertainties. One is a leader in health and wellness that continues to capitalize on its loyal following. Another is an energy-drink powerhouse in the midst of a potentially transformative acquisition. There is more feedback on a company taking the industry reins in weight-loss drugs. And finally, a value story in the energy space that looks to have dodged a political bullet. Click here to subscribe to The Big Secret on Wall Street and read the full issue.

David Stockman on the Recent Jobs Report 

A recent government report on US employment numbers included the surprising fact that state and local school authorities hired an additional 64,000 teachers and administrators in June. In June! When school lets out! And that number accounted for 44% if the entire gain of 147,000, which was heralded as a great achievement and a meaningful reason to believe the US economy was robust and growing. However, as David Stockman pointed out in an article I read last week (I don’t remember when it was published, but it doesn’t matter), there were hints in that same job report that notwithstanding Washington’s best efforts, America is not spending, borrowing, and printing its way to prosperity after all. It turns out that fully 144,00 or 98% of the alleged “new jobs” reported for the month were in government, including education (73,000), private health and education services (51,000,) and Hospitality & Leisure services (20,000). Here is his take on all that… – MF 

“All the new jobs are either funded by government spending, entitlements or tax subsidies like in Medicare and employer health plans, respectively; or they amount to low-wage, part-time, low-productivity jobs in restaurant kitchens and hotel room-cleaning operations. 

“This underscores the significance of that, it might also be noted that on the other end of the economy in the goods-producing sectors where the high-pay, high-productivity jobs are located, the gain was only a tiny 6,000….

“If we look at the entire past year, we see that these same three sectors, which accounted for 98% of the new” jobs this month, also accounted for 1.492 million or 82% of the total job gains of 1.809 million since June 2024….

“There is nothing new about this pattern….

“Ever since the turn of the century the US economy has been churning out modest overall labor utilization gains… with the index of aggregate hours worked for the entire private sector up by only 0.72% over the last 25 years….

“[And for the past quarter century, those have mostly been] in the government-funded health, education and social services sector and the bars, restaurants, hotels and entertainment venues they frequent outside of working hours….

“During this same 25-year period in which total private sector labor hours rose by just 19.5%, the net worth of the top 1% rose by 327%, the Federal debt increased by 537% and the Fed’s balance sheet exploded by 1,100%….

“[In other words, while] while the Fed was running the printing presses at white hot speeds over the last quarter century, the main street economy suffered a 15% loss of its high-pay, high value-added jobs. In turn, that gap was back-filled by jobs largely attributed to government spending, meaning that the simulacrum of a growing labor market was fueled by the proceeds of public sector taxation or borrowing….
 
“The Fed’s printing press have been running at double digit rates for the past quarter century yet the high pay, high productivity sectors of the labor market have actually been inflated away and off-shored owing to America’s high, uncompetitive cost structure resulting from the Fed’s pro-inflation policies.

“And yet and yet. Here we are again with both Wall Street and Washington clamoring for a new round of ultra-low interest rates and printing press inflation. In the spirit of Einstein’s famous definition of insanity – doing the same thing over and over and expecting a different outcome – it might be wondered as to what will it take for both ends of the Acela Corridor and both wings of the UniParty to grasp the obvious?

“To wit, the trend level of inflation is now stuck smack on 3.0% per annum, as has been posted month and months by the steady 16% trimmed mean CPI, while for all practical purposes rates in the Fed pegged overnight money markets stand at 4%.
 
“So where in the hell is it written in the economic texts – Keynesian, supply side, monetarist or eclectic – that an advanced industrial economy can’t stand real rates of 1.0%?”

The United States to the Rescue… Again! 

Most of what I’ve been reading about London in recent years has been bad news: rising crime, falling property values, and stories about political corruption and social discord.

But just this week, a bit of good news: According to Beauchamp Estates, a luxury real estate agent based in London, and reported on in the WSJ, 25% of high-end home sales in London were made to Americans.

The attraction for Americans – wealthy Americans – is the steadily lowering property prices in the city, particularly for luxury residences in the most coveted neighborhoods. And that is the result of a slew of tax-the-rich policies that the city’s liberals began implementing in 2023.

The policies shockingly led to what they have always led to in cities throughout the developed world: the flight of the wealthiest residents from their beautiful homes to homes outside of the city’s tax jurisdiction, where the cost of home ownership – including the asset itself, the property tax, and the maintenance costs – are less onerous. And that has led to a glut of multimillion-pound houses on the London market today.

This isn’t the first time this has happened in London.

In past decades, the buy-side of the housing market has been dominated by a constant supply of international buyers who see London for what it has always been: one of the best cities in the world to make money and preserve wealth. And for as long as I can remember, a sizeable portion of those international buyers were Arabs from Saudi Arabia, Qatar, and the UAE. Though the Arabs’ share of the buying has been dropping since the growth of the city’s Arab population, as a whole, has started to come predominantly from the poorer Arab countries, such as Somalia, Syria, Yemen, and Pakistan, the overall changes in terms of racial, ethnic, and cultural diversity have been enormous. Today, a gobsmacking 41% of London’s population is comprised of people born overseas.

For reasons I can only guess at, these demographic changes haven’t worried wealthy American buyers as much as they’ve worried “native” Londoners.

Just the Facts 

* In 1980, London’s population was 6.7 million. In 1980, it was just a bit more. In 2000, it was 7.3 million. In 2010, it was 8 million. And today, it is 9.9 million.

* 41% of London’s population is now comprised of people born overseas. Of these, approximately one-third were born within European Union countries, while the other two-thirds were born outside of the European Union.

* Most of the London residents born outside of the UK were born in India.

* About 20% of London residents consider themselves to be Christian; 20% consider themselves to be non-religious; 16% consider themselves to the Muslim; and the other 44% do not specify any religious affiliation.

The Investing Strategy That Made Bridgewater Big and Dalio Rich 

Since I’ve already written about and introduced you to Ray Dalio as a business builder, you may be interested to know something about his approach to investing.

According to the company literature, Bridgewater’s overall investment strategy is based on Dalio’s investment philosophy, which is simple: Follow big economic trends – like changes in interest rates, inflation, or global growth – and invest based on where things are headed. Instead of focusing on traditional asset types, like stocks or bonds, Dalio’s analysts look at how much risk each piece adds to the mix.

Then they balance the portfolio around that, with a strategy Dalio calls “risk parity.” (This is where it gets a little complicated, at least for me.) Dalio says his analysts use leverage (betting on borrowed money) and short selling (betting against stocks) as a means of diversification.

As I said, I don’t understand how he uses leverage and short selling to somehow increase yields and decrease risk. And since Commandment Number One in my Investment Rulebook is: Don’t invest in anything you don’t understand, I’m not going to be putting any of my money with Birdgewater now. But Dalio’s track record merits further study.

Uncle Mark: Where Should I Put This Money?
(Why Silver Might Be a Better Investment Than Gold) 

TH, a nephew whom I greatly admire because he may be the only nephew who has read any of my books, emailed me to say:

Bonjour!

I hope you are enjoying France and eating some lovely snails.

At the moment, I have some money that I’m not sure what do with. Usually, I’d put it in your Legacy Portfolio, but I am lately feeling I should have some other investment options. I have looked at Gold, which is now at £2,444.85 per ounce, so I wouldn’t be able to purchase much. And based on your lessons on collecting art, I’m thinking that might be another option. However, I feel like the best decision for the long run is the stock market. Are you able to advise me or point me in the right direction please?

Thanks
TH

I told him that I thought his thought about the stock market was a safe bet for the long term because of the sort of stocks I keep in the Legacy Portfolio – but, at the same time, the thought he had about putting this extra cash into another asset class was a good idea.

“The primary benefit of putting this money outside the stock market is not the eventual ROI, but the opportunity for you to begin to explore and understand another asset class now, while you are still young,” I said. “The knowledge you can get from reading about alternative investments is one thing. The knowledge you’ll acquire by investing in them will be deeper and more valuable.

“If you do decide to diversify, I’d avoid art for the moment. First, because art collecting is more complicated than investing in gold. And second, because investment-grade art is too expensive for you now.

“Gold is, as you point out, expensive. But since I see gold as a hedge against inflation and hyperinflation, it doesn’t matter terribly how much you pay for it.

“One thing you can consider is an investment in silver. The value of silver tracks gold in the long run, but sometimes you can buy it as a relative discount. That’s true now.”

I sent him the following argument I found that explains the advantages of silver:

1. Affordability and Accessibility 

Silver is significantly less expensive than gold on a per-ounce basis, making it more accessible for small investors. This lower entry point allows for greater flexibility in investment amounts and the potential for higher percentage gains.

2. Industrial Demand 

Approximately 50% of silver demand comes from industrial applications, including electronics, solar panels, and medical devices. This industrial demand can drive silver prices higher, especially as technology and renewable energy sectors expand.

3. Gold-to-Silver Ratio 

As mentioned above, the gold-to-silver price ratio is currently above 100, meaning gold is over 100 times more expensive than silver. Historically, this ratio averages around 60-70. A reversion to the mean could imply a significant upside for silver prices.

4. Potential for Higher Returns 

Due to its lower price and higher volatility, silver has the potential for greater percentage gains compared to gold. During certain market conditions, silver has outperformed gold, offering substantial returns for investors willing to accept higher risk.

5. Supply Constraints 

Silver mining is often a byproduct of other metal mining, which can lead to supply constraints. Additionally, recycling rates for silver are relatively low, potentially leading to shortages and price increases as demand grows.

My First State of the Economy Report: January 2025 

I try to limit the reading I do on the state of the economy to no more than 30 minutes per day. Not because I don’t hold economic theory in high regard. I do. But I’ve only a rudimentary understanding of economic theory and the metrics of economic analysis. And, at age 74, I’m not going to spend a big part of my days trying to catch up. What I do instead is the same thing I do in terms of investment theory and advice. Read just enough to understand what’s at stake. Put questions to experts (friends and colleagues) when I have them. And then do my best to hedge my bets.

For this issue, being the first of 2025, I’ve been trying to figure out what’s at stake for investors in the next 12 months and in the longer term.

Based on the reading I’ve done, I feel optimistic about most of my financial investments (stocks, bonds, cash instruments) in the short term. And that’s primarily because of the optimism I see among all the people I know in the banking and investment industry over Trump’s victory. I see that propping up the stock market and several other asset classes (high-end art and collectibles, certain debt instruments, and segments of the cryptocurrency market) throughout 2025. But after that… Well, continue reading and you’ll see.

Consumer Holiday Spending: What Does It Tell Us? 

Spending over the holidays fell in line with voting in November.

Americans spent about 4% more from 11/1 through 12/24 than they did during the same period last year, according to a Mastercard survey.

But the spending mirrored the results of the election, with high income ($100,000+) shoppers, fat on a 25% boost in their stock portfolios, spending considerably more than they did last year, while the rest of the country, pinched by stagnant wages and higher costs, spent less.

According to a report in the WSJ:

“Retailers noticed the difference. Williams-Sonoma, the upscale kitchen and furniture retailer, posted strong quarterly sales and said in late November it was having success moving away from promotional fluctuations. Meanwhile, discounters Dollar Tree and Dollar General said in early December that they were suffering from belt-tightening among their core consumers.”

This supports my optimism. Stocks and other asset classes favored by high-net-worth and high-income investors will stay strong. However, I don’t feel that way about investments in manufacturers and vendors of relatively expensive things to middle- and lower-income workers (e.g., housing and cars). Nor do I feel good about chain restaurants and large retail chains.

The Not-So-Good Numbers on Jobs

In the Dec. 27 issue of “Just One Thing,” I wrote about how the Biden administration was touting some positive economic indicators, such as job openings, as an example of Bidenomics. I said that most of those metrics related to the recovery from the COVID shutdown, not to anything that the Biden administration did during his tenure.

This was confirmed by recently published government data that showed that job openings had dropped 33% from 12 million in the first half of 2024 to less than 8 million in the second half of the year. There were an estimated 7.4 million unfilled jobs on the last day of September, a drop from August’s revised tally of 7.86 million openings, according to new data released by the Bureau of Labor Statistics. The largest drop-offs in openings were in industries that have driven much of the job growth in recent years: healthcare and social assistance and government, according to the report.

This doesn’t bode well for the industries I mentioned above.

Meanwhile, major employers continue to shed workers all over the nation.

For example, the US lost 46,000 manufacturing jobs in October, bringing the total loss to 78,000 during the third quarter of the year.

“Once we get past the holiday season,” one commentator I follow said recently, “retailers are going to be dropping like flies.”

This feels to me like a genuine possibility. For example, Party City, a craft retailer with 850 stores across the nation, is considering filing for bankruptcy, after the company surfaced from Chapter 11 bankruptcy.

Also in the news: 670 Family Dollar stores have been shut down.

And this comes after tens of thousands of retail stores in the US have been shuttered in 2024.

And as anyone following the US economy knows, inflation has continued to eat away at the dollar’s spending power. One recent survey found that about a third of all US households have been forced to cut back spending just to make ends meet.

Most Americans Are Feeling the Pinch 

A recent Lending Tree study that analyzed US Census Bureau Household Pulse Survey data from Aug. 20, 2024 to Sep. 16, 2024 found that more than 34% of respondents said they had to cut back or skip spending on certain necessary expenses at least once over the past year in order to pay their energy bills.

However, my prediction is that none of this will have a significant short-term effect on the stock market and the other assets favored by high-net-worth and high-income consumers. In other words, I’m not anticipating seeing the market crash any time soon. But “soon” for me means 6 to 12 months.

Based on the reading I’ve done on the US economy as a whole, I am anticipating a major correction of some kind during Trump’s second term. And that’s because the macro-economic facts are so bad.

Here’s What Really Concerns Me…The Incredible Size of US Debt 

There is no doubt about it in my mind. The biggest threat to the future of the US economy is US federal debt. As I write this, it is $36 trillion and counting.

To give you a sense of how big that is, consider this: Non-defense outlays were barely 5% of GDP until after WWII. Now they are around 20%.

And as David Stockman points out: “That’s just the annual charge. Regulation and debt are cumulative. And they’ve been building up for decades. They now cause so much delay and useless expense that much of Americans’ output is squandered… or never produced at all.”

And get this: The interest payments that our government must pay on that debt is more than $1 trillion a year!

That trillion dollars is about 4% of our entire economy’s entire economic output.

And remember, debt payments are not for future projects but for programs already enacted years and in some cases decades ago.

If that isn’t bad enough, the National Association of Manufacturers estimates that federal government regulations are costing US taxpayers an additional $3 trillion per year.

“Between the two,” Stockman says, “that’s about 15% of America’s entire GDP.”

No wonder most people have made very little real economic progress in the last half a century.

Government Overspending Continues 

As you probably know, the Senate voted 76-20 a week ago to pass what is called the Social Security Fairness Act. It was promoted as a measure that would bring the retirement benefits for public employees to the same level as private employees receive.

In fact, according to the WSJ, it was a package of extra bonuses and benefits – so much so that Senate majority leader Chuck Schumer called it a “well-deserved Christmas gift.”

“This is political flim-flam,” a WSJ opinion piece stated. “Retirement benefits for government employees are at least comparable to similarly paid private workers, and they are often much more generous for those who meet requirements for a defined-benefit pension.”

In fact, the bill reversed reforms passed in the 1980s to rescue Social Security that kept public employees in step with everyone else under Social Security’s benefit formula. It will cost taxpayers an estimated $196 billion over 10 years.

Mandatory social benefit programs like Social Security consume more than 70% of the federal budget. The bill would add additional billions in costs.

Meanwhile, Social Security is already running a $4 trillion 10-year deficit, and it’s on pace for an automatic 21% benefit cut by 2033.

This is not a Democrat/Republican issue. The GOP-led House passed the changes, 327-75, with Republicans in favor by nearly two to one. And 27 GOP senators voted in favor.

Can Anyone Fix a Problem This Big? 

Trump has recruited Elon Musk and Vivek Ramaswamy to head up a team to drastically slash federal spending and eventually put the US fiscal and monetary system back on solid ground.

But that’s an enormous job. Some would say impossible. I’d like to believe the dynamic duo can make it happen. But based on what Congress just did, I’m not sanguine.

P.S. As I said above, Trump is in position to fix a lot of things that are broken right now in America. The fixes won’t be easy, but with the right expertise to carry out his plans along with a Congress and media that is open to improvements, we could be looking at four years of extraordinary reform and progress in many sectors. But of all the challenges Trump and his administration will face, none is greater than US federal debt. Here are two pieces by David Stockman that spell out the enormous problem of the US’s $36 trillion in debt.

Part I: The Mother of All Debt Crisis

Part II: The Fiscal Jig is Up

David Stockman to Elon Musk and Vivek Ramaswamy
Advice on the Nearly Impossible Job of Cutting $2 Trillion from the Federal Budget 

When Ronald Reagan was elected in 1980 on a call to bring the nation’s inflationary budget under control, the public debt was $1 trillion. By the time Donald Trump was elected the first time, it had blown up to $20 trillion. It is now $36 trillion, and under built-in spending and tax policies it will hit $60 trillion by the end of the current 10-year budget window.

Most economists agree: Absent some incredible and incredibly unlikely economic boom of some kind, US debt is a financial atomic bomb, just waiting to be triggered.

To obviate this probability, Trump appointed Vivek Ramaswamy and Elon Musk to DOGE, the Department of Government Efficiency, to cut $2 trillion from the federal budget.

That task is enormous. And given the fact that all the major economic lobbying groups, including the Military Industrial Complex, Big Pharma, and Big Farming, will do everything they can to thwart the effort, the chances that Musk and Ramaswamy can accomplish the goal is, according to David Stockman, highly unlikely.

Nevertheless, if they mean to try, Stockman has a series of recommendations for them, beginning with the elimination of 15 government agencies that he believes could be safely closed.

But, he says, even if they are successful in shuttering all 15, with the combined 70,000 employees fired or furloughed, the savings would be only about $11 billion – a small fraction of the $2 trillion goal Musk and Ramaswamy have agreed to.

Click here.

Tech Giants’ Big AI Bets Are Starting to Pay Off 

Revenue from cloud businesses at Amazon, Microsoft, and Google reached a total of $62.9 billion last quarter. That figure is up 22.2% from the same period last year and marks at least the fourth straight quarter in which their combined growth rate has increased. In this article, Miles Kruppa and Tom Dotan examine the companies’ accelerating growth in cloud computing, the surest sign yet that spending by AI customers is beginning to justify the tech giants’ huge investments in infrastructure to power the technology.

Meanwhile, in this essay, Jason Furman argues that although some regulation is needed to reduce the very serious possibility that AI technology might go wrong, overly regulating it, as he contends the EU is now doing, will backfire. He then provides six “principles” that governments should consider when drafting AI regulation.

Masterpiece by René Magritte Sold for Over $120 Million

René Magritte’s great 1954 painting “L’empire des lumières” sold at Christie’s last month for a record-breaking $121 million, nearly $28 million above the auction house’s estimate, and the first Magritte to sell for nine figures. Art dealers are hoping this could be the turning point for a struggling art market.

Click here.

Warren Buffett and Charlie Munger Are Recalibrating the Berkshire Hathaway Portfolio… Shouldn’t We Be Paying Attention? 

For several years, Warren Buffett has been warning investors that there are fundamental weaknesses in the economy generally and in the banking industry in particular that concern him. Now he is moving big chunks of the Berkshire Hathaway portfolio from stocks and into presumably safer assets like cash and debt instruments.

Click here and here for two perspectives on that.

Chart of the Week: Inflation Cools Again – What’s Next? 

I’m halfway through writing an essay about the state of the US economy as I see it, including my analysis of US inflation. Reading Sean’s piece on inflation this morning, I thought it would be a good introduction to my piece, so I’m not going to say anything more here – but I am grateful to him for once again looking at popular economic and financial ideas with a contrarian perspective and then breaking down the myriad details into a few observations and insights that I can understand and agree with. – MF 

Back in April, I shared a breakdown of CPI inflation, showing why high inflation remained “sticky” in the first part of this year.

But I also made a prediction:

We should [see] prices level out a bit on their own in the months ahead. Without monetary policy intervention.

So right now, I am still thinking that the Fed might still be on track for at least one rate cut later on in 2024.

My prediction was made based on simple logic and observation. Inflation isn’t magic. It’s just a mathematical model. If you understand how the model works, you can predict what’s coming pretty easily.

But I cannot tell you how many people expressed to me that this prediction was delusional. How many people still expressed concern despite me standing next to the numbers like Vanna White, saying, “Just look!”

Well, here we are in August, and CPI inflation has fallen below 3% for the first time since 2021.

In fact, average inflation in the US over the last 10, 20, and 30 years is somewhere between 2.5% and 2.8%.

So right now, this month, we are officially in the territory of “normal inflation” for this economy.

Why has inflation calmed a bit?

As I said back in April, the high inflation rate was being caused by supply and demand problems in markets like (for example) used cars, which had knock-on effects to other industries such as auto insurance.

But we’re not out of the woods yet…

We are still seeing some areas of the economy experience really bad inflation: hospital and healthcare services; shelter, rent, and housing; and food (especially restaurants).

Because these areas of the economy are inflating too much and too fast, I’ll bet $8 we’re not going to see an emergency cut from the Fed, as some have called for.

But I also still think we’re going to see at least a few cuts in the coming months.

And it’s going to happen simply because the Fed’s monetary policies don’t have much impact on the portions of the economy that are still experiencing inflation.

What is the Fed going to do? Force hospitals to charge less? Build more apartments and plant more farms?

No. Those prices are affected more by market forces, geopolitics, and fiscal policies (i.e., Congress).

The Fed is going to cut rates because the cost of paying the public debt in the US is getting out of control. They’re also going to do it because banks are currently sitting on hundreds of billions of dollars’ worth of unrealized losses.

(Many of these banks hold massive amounts of long-term treasuries. The price of bonds goes down when interest rates go up. This is why we saw several big banks fail last year.)

So we have to ask what the big takeaway from all this is for investors.

There is a big one: Own bonds in your portfolio 10 months ago, like I recommended then.

Now? It’s getting close to too late for you to capture any meaningful total returns as rate cuts are getting “priced in” to bonds.

So make that move now to get a decent interest rate while you can.

And then prepare to sell those fixed income assets when rate cuts end – possibly a few years from now.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: More Pain Inbound? 

As Sean mentions this week, I’d been concerned that the stock market was cruising for a bruising for some time now. Between our government’s $34 trillion debt problem, the serious problems in the retail industry, the crazy price inflation in some real estate markets, and the threat of nuclear war, I thought, “How long can this last?” 

Well, it didn’t last. I’m sure you’ve been reading about the Japanese “carry trade problem” and how it eventually triggered the recent stock market drop. So, the question I have for Sean, and the one he addresses here, is: What now? How should we feel about the state of the US economy and the future of the US stock market? And what, if anything, we should do about it? – MF

Mark Ford asked me, two months ago, why the market seemed to keep going up.

I do not think anyone is asking why the market keeps going up anymore. Now, I think, people have the level of caution and concern they should have possessed months ago.

On Monday, Aug. 5, the Japanese “carry trade” began to unwind at the same time markets were processing a slew of negative economic data about the US economy.

We do not have the space here to explain the carry trade or its implications on your retirement fund. Nor would you be able to make it through the first two pages of necessary context before you fell asleep.

So in the meantime, we have to ask ourselves a simpler question: Is the market bloodbath over? Or just beginning?

We can look at historical trends for some clues:

The table above shows the number of “significantly down” days we’ve seen in the market each year since 1928. As you can see, 2024 is the third-least-volatile year in the last 30 years, with only 10 of these drops.

So far, 2024 is an anomalously good year for stocks.

You may also notice that, going back to 1970, the market cycles between these extremes.

Low-volatility years are almost inevitably followed by higher-volatility years. And vice versa.

There’s a fairly simple investing takeaway from this.

When the market has been performing hilariously badly, and it seems that the blood will not stop flowing (like in 2022, 2020, 2011, 2009, 2008, 2002, and so on)…

Put aside money to buy more stocks.

Investors with patience understand what study after study has shown: There is a nearly inverse relationship between the realized return of stocks and their expected returns.

When stocks dip? Their future returns tend to spike. When stocks soar? Their future returns become middling.

And because stocks have soared, I expect a little bit more volatility ahead in the near term.

– Sean MacIntyre

Chart of the Week: US Debt Reaches $35 Trillion 

Today, Sean provides visuals to illustrate the greatest threat (next to a nuclear war, which is also looming) to the world’s economy right now: US debt.

This is a subject I’ve referred to dozens of times in past issues, and I’ve been meaning to write about it at length because so many of my well-educated friends are unable to see it as a real and present danger. 

I’ll leave it to Sean to set the picture. – MF

While the media prattled on about Kamala calling Donald Trump “weird”…

A much weirder story got pushed to the back pages last week. One that will impact America far more than whoever becomes president in November.

I’m talking about the US national debt, which just hit a whopping $35 trillion.

Since January 2020, the debt has ballooned by 50%, mainly due to the wide gap between what the US government spends versus what it brings in.

And right now, 2024 is shaping up to be another year of high spending and low tax revenues, which puts us on track to add an estimated $1.9 trillion to the debt this year.

Now, the debt is just a number. It becomes a problem only when the US can no longer service that debt, putting the country at risk for default.

Higher credit risk can halt lending, which seizes the financial system, which cascades a long way down to you eventually saying, “Hey! Why can’t I buy bread anymore? And why is my retirement money worthless? And are those gunshots I hear?”

So the number we want to pay extra close attention to is how much it costs to service that debt, and what percentage of the US government’s revenue that is.

Here’s what we’re seeing: Interest payments on federal government debt has already surpassed $1 trillion over the last year.

As a share of federal revenues, federal interest payments are expected to rise to 20.3% by 2025, exceeding the previous high of 18.4% set in 1991.

This number, if it gets too high, is the “danger number” – the number that matters.

Because if the US is spending all of its tax revenue to service its debt, it won’t be able to spend money on anything else. That means more money printing, which means hyperinflation, which –I reiterate – is double-plus ungood.

How close are we to the danger number?

Well, think about this. Lenders often require that the ratio of debt to a person’s income should be less than about 30% to 40%.

The higher your debt-to-income ratio, the less likely it is that an institution will lend to you.

The US is probably going to hit 20% next year. The higher this ratio goes, the fewer people will want US government bonds.

And that puts everything we know, like, and cherish at greater risk.

This number is going to keep creeping higher under three conditions: (1) more deficit spending, (2) lagging tax revenue, and (3) high interest rates.

Since 2020, we’ve had the perfect storm of all three. And neither political party has proposed a meaningful fix.

It will be some years before we hit the point of no return, however. About 20 to 30 years at the current pace, by some estimates.

That means that, for now, bonds are still an attractive speculation – especially heading into interest rate decreases.

But otherwise, it might be wise to buy and hold a basket of stocks that generate revenue internationally. That can include American companies that do business overseas, like some of the stocks in the Legacy Portfolio.

But it can also include a portion of your portfolio going into emerging market funds or international stocks. (Just don’t expect them to offer the wild returns of tech stocks.)

And if you’re truly, immensely, can’t-sleep-at-night worried about the debt collapsing the whole economy? Here’s what you want: international real estate, foreign cash, and a mix of the three most precious metals in a crisis – gold, silver, and lead.

Personally, I’d mostly just stick to bonds and stocks.

– Sean MacIntyre

Check out Sean’s YouTube channel here.