Better Budgeting

The FY24 budget deficit was $1.8 trillion, 6.4% of GDP. Keeping the debt-to-GDP ratio flat requires the deficit not to exceed nominal GDP growth. Assuming that’s 4%/year, the deficit shouldn’t exceed $1.2 trillion in FY25, a decline of $600 billion or 8.9% of spending, a huge amount. Keeping the budget unchanged for one year would reduce the deficit by $270 billion, for two years roughly $600 billion. Hard, but doable.

Consumer Confidence

Pre-election, consumer sentiment rose slightly. However, sentiment among the middle class slid, as did sentiment among the prime breadwinning 35–54-year-olds. Moreover, median wage growth expectations through 10/25 were very weak. Yet 60% of households think the bull market will rage on for at least another year, and expectations of improved personal finances in one year rose substantially. It’s the mercurial stock market, not the bread-and-butter economy that’s driving sentiment.

Cut Constraints

While strongly desired, reality will constrain Republican tax cutters. Trump’s 2016 victory came with a 47 seat House majority, this time it’s maybe 11. In 2016, the deficit was 3.1% of GDP, it’s now 6.1%, and the national debt was 100% of GDP, not 123%. Moreover, in 2016 debt service was 2.4% of GDP, today it’s 3.4% and rising. Lastly, the debt ceiling comes back into play on 1/2/25.

Tortured Taxation

Increasing personal income tax rates across-the-board by 10% without any income exemptions would raise $221 billion/year in new revenue. With a $100,000/year exemption, this policy would raise $166 billion/year. With a $250,000/year threshold, revenue growth is $90 billion/year, and at Biden/Harris’ $400,000/year threshold, which excludes 95% of all payers, revenues raised are only $71 billion/year. Exempting large portions of the tax base seriously stymies revenue raising, forcing other tax increases.

Weakening Work

October employment growth was 12,000, the worst gain since 12/20. However, the Boeing strike reduced employment by 46,000 and the hurricanes undoubtedly also hurt. The unemployment rate held steady at 4.1% but only because the labor force declined by 220,000. Moreover, August and September were revised (you guessed it) down by 112,000! Despite the extenuating circumstances, the generally lousy tenor of this report probably ensures a 25bps Wednesday Fed cut.

Energy Employment

From 1973-1983, U.S. oil & gas extraction employment doubled from 130,000 to 260,000. In the ensuing bust, employment sank to 120,000 in 2004. During the shale boom, employment largely recovered and peaked at 200,000 2014/15. It’s since steadily declined, bottomed out in 2022, and is now up slightly to 120,000. Yet, U.S. 2024 production is projected to be a record 13.2 million bbl/day. Higher efficiencies and less need for exploration.

Presidential Promises

While VP Harris has a bachelor’s degree in political science and economics, and former president Trump graduated with a degree in economics, you would be hard pressed to know it from their campaigns. Both candidates haven’t just demoted economic principles this year, they’ve jettisoned them. They have collectively recommended price controls, tariffs, discriminatory taxation, and wider budget deficits when the deficit is already huge. The loser in this election, economics.

Fiscal Follies

In late August, the Penn Wharton budget model showed former President Trump’s fiscal policies running up the debt by an added $4.1 trillion through 2034, and VP Harris by -$2 trillion. Since then, it’s gotten worse. According to the bipartisan Committee for a Responsible Federal Budget, the proposed added spending and tax cuts by the candidates now shows Trump worsening the debt by $7.5 trillion, Harris by $3.5 trillion. OMG!

Rate Reviews

Since the Fed cut rates by 50bps on 9/18/24, the 10-year Treasury has steadily risen from 3.68% to the current 4.23%. This is because investors think the rate cut is better for stocks than bonds because there is now increasing hope that a soft landing gets replaced with no landing. Add rising inflation fears, massive Treasury debt issuance, a bellicose Fed, and now the possibility of a Republican sweep.

Fiscal Fitness

Portions of Trump’s 2017 tax cut have already sunset, others will expire in 2025. Extending the unexpired sections will cost $5 trillion through 2034 but will have no impact on GDP or inflation as they will simply extend existing policies. However, lowering corporate taxes, exempting tips, Social Security, and overtime from taxation, and making car loan interest and S.A.L.T deductible will boost GDP but raise the deficit by $4 trillion.

Stock Success

While you can get exceedingly wealthy buying just one stock, chances are this approach will fail you. From 1926-2022, over 50% of firms had a cumulative negative total return over their lifetime, 59% underperformed T-bills, a very low bar. Moreover, three stocks were responsible for 10% of the stock market’s total return, just 72 firms were responsible for 50%. Buying one or two stocks almost guarantees excluding these few champions.

Downpayment Data

For the five years ending 1/20, the median down payment was 10% of the home purchase price. Since then, it’s almost steadily risen and is now 18.6%. Consequently, the down payment dollar amount has jumped from $30,000 pre-Covid to almost $70,000. Reasons for the rise include the rise in stock prices, the decline in first-time buyers, and the rise in home equity for buyers who are selling another home.

Haunted Housing

August existing home sales came in at a seasonally adjusted annualized rate of 3.86 million. This is down 2.5% M-o-M, 4.2% Y-o-Y, and marks the 36th straight month of year-over-year sales declines. August is the third straight month of sub-4 million sales, a level rarely seen. Sales are scraping all-time lows. With inventory at 4.2 months, up from 3.3 Y-o-Y, and rates down 110bps Y-o-Y, further sales deterioration is over.

Great Growth

24Q3 GDP came in strong at 2.8% annualized inflation-adjusted, with consumer spending rising a heady 3.7%, and not one component on the consumer side declined! Capital expenditures rose 11.1% and government chipped in with 5% growth, led by defense spending. What’s amazing is that Y-o-Y GDP growth is 2.7% despite a very high Fed funds rate. This means the Fed may not cut rates as much as was recently expected.

Abode Absence

At the onset of the 2008 Housing Bust, there was an excess supply of houses of 1.25 million, and that exacerbated the subsequent steep decline in home prices. Currently, there is a shortage of housing. Estimates, using very different methodologies, peg the gap at between 1.5 million and 5.5 million units. The average is 3.4 million, equivalent to slightly over two years of production, a very large amount.

Global Growth

Global Growth The IMF expects 2024/25 global growth to be 3.2%, down from 3.3% in 2023, and well down from the 3.8%/year it averaged between 2000-2019. It sees U.S. growth at 2.8% this year, and in 2025, it forecasts U.S. growth of 2.2% as it sees the deficit shrinking. However, advanced economies, which include the U.S., are expected to collectively see 2024/25 growth of just 1.8%. U.S. economic growth is tops!

Munchies Magnification

Economists have recently found that the rise of recreational marijuana laws (RML) over roughly the past decade has resulted in an increased number of grocery store trips that involve the purchase of junk food including snacks, cookies, and candies, presumably due to the munchies. RML is also temporally associated with decreased exercise (aka couch-lock), particularly cardio, as more time is spent at home. There’s no free lunch.