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By John De Goey, CFP, CIM
Special to Financial Independence Hub
Around the middle of December, advisory firms and the people who work for them start putting out their retrospectives regarding the year that is just about to end and / or offer their forecast for the new year. I have long argued that forecasting is a mugs game. To the extent that I have grudgingly participated in the exercise previously, I have found it to be humbling. As such, I want to stress that what follows is not so much a forecast as it is a concern for what may – and I stress MAY – come to pass in light of what we already know about the incoming administration south of the border.
To begin, the President-elect is a criminal. He has literally been convicted of 34 felonies. This is in addition to two impeachments, various infidelities, an attempted insurrection, and the stealing of highly classified state secrets. We now have a good sense of what his cabinet will look like: assuming most of his forthcoming nominees are ultimately appointed. This is a man who is quite willing to appoint incompetent sycophants who will help him expand his ongoing criminal activity at the expense of more traditional character traits like relevant education, experience, and character. The notion of traditional public service seems to be foreign to many would-be cabinet appointees.
Will Trump manufacture a Recession?
Early in December, I was in Southern California and spoke with the founder of an AI company in Silicon Valley. He told me there is a theory making the rounds that Donald Trump intends to do something highly unconventional in his longstanding pursuit personal self-interest. The executive told me that a number of thought leaders are of the opinion that Trump intends to deliberately manufacture a recession immediately upon taking office.
Their view is that, given the experiences of both the global financial crisis and the COVID crisis, it has become apparent that when the economy is severely threatened and bailouts are required, billionaires and plutocrats end up doing very well. Meanwhile, ordinary middle-class people and those even lower on the social spectrum fall further behind.
In the aftermath of the election on November 5th, American capital markets responded favorably based on the presumption that lower taxes and less regulation would be highly stimulative and favourable for the economy. This view held sway even though the President-elect campaigned on a platform of indiscriminately-high tariffs, mass deportations, and a draconian cutting of government services via the department of government efficiency (DOGE).
There are some who fear that the promise to rein in the debt will be used as an excuse to cut back on government programs that ordinary Americans rely on. As it stands, approximately three quarters of all U.S. annual expenditures are fixed in law and allocated toward entitlements such as Medicare, Medicaid, and Social Security, as well as interest on the national debt.
Cutting US$2 trillion from the budget is simply impossible without encroaching on at least some of these programs. Stated differently, even if Trump were to cut all other programs (including the CIA in the SEC) to zero, the savings would still be less than the $2 trillion a year he pledged to cut. He will, of course, blame Joe Biden for “the mess he inherited” either way.
No fiscal Conservatives left in America
Meanwhile, the evidence shows that for over half a century, the U.S. accumulated debt has been growing under both major parties. It seems there are no fiscal conservatives left in America. Again, I stress, this is not a forecast, but rather a recounting of a narrative that several thoughtful people who live south of the border believe to be plausible. If you think wealth inequality and income inequality are a problem now, you could be in for a rude awakening if anything close to this narrative comes to pass.
As many people know, I have long been a proponent of efficient capital markets. Any person who espouses this view believes that prices reflect all available information to the point where it is impractical to think that mispricings are sufficiently large and identifiable so as to allow people to engage in trading that would allow that person to make material profit. The American stock market clearly does not subscribe to the narrative I’ve just outlined. Of course, consensus opinions can be wrong. In this instance, perhaps more than any other in my lifetime, I actively want the consensus to be correct.
As a follower of politics, I cannot help but think that even if the acceleration of inequality is not the ultimate goal, even more pedestrian motives might provide a reason for pause. As we all know, the U.S. economy has been doing remarkably well for some time now, and stock markets are hitting all time highs despite (because of?) exceedingly high valuations. The CAPE index on the S&P 500 is now approaching 39, the highest level in history except for the.com bubble.
The so-called Buffett indicator (total stock market capitalization divided by gross domestic product) is over 200 for the first time in recorded history. It seems extremely likely that we will have a major pullback in the next 4 years. If a significant pullback is coming, it might be politically expedient to “rip the Band-Aid off” so the hard times are front end loaded in the hope that the economy will have rebounded four years hence and that voters with notoriously short memories will forget about – or at least forgive – the hard times they experienced at the beginning of the mandate.
Sky-high stock valuations
I reject the notion that optimism is the only realism. Instead, I believe investors need to be as clear headed and realistic as possible in assessing the wider world. It is entirely possible that Donald Trump will do few if any of the harmful things I have recounted here. Then again, few people would be genuinely surprised if he did most of them, either. I repeat: this blog is not a forecast. It is, however, a cautionary and plausible example of what could happen. The ongoing concern about sky-high valuations is an objective fact that no one disputes.
My fear is that much of America has been lulled into a sense of overconfidence by a man who projects strength through self-determination while being blind to the risks of his agenda because of their longstanding views regarding American exceptionalism. What we need more than ever is realism.
Sadly, we in Canada will have to endure whatever the incoming administration throws at us. It is widely accepted that Donald Trump did not expect to win in 2016 and therefore had little choice but to appoint diligent careerists to senior positions when he took power. Now that he has a clear sense of what he can do and a fresh mandate to do it – including majority control of both levels of government – there can be little doubt that he will move further and faster this time around. Candidly, my fear is that those people who voted for him because they felt the country was ‘headed in the wrong direction have no idea how good they’ve had it until now. Again, I hope I’m wrong.
John De Goey, CIM, CFP, FP Canada™ Fellow, is a Portfolio Manager with Toronto-based Designed Wealth Management. He is the author of three books on the financial industry: The Professional Financial Advisor, Standup to the Financial Services Industry and most recently, Bullshift. This blog is republished from John’s December 2024 blog and is republished on Findependence Hub with permission.
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