Nick Hodge,
Publisher
Feb. 18, 2025
You’re forgiven if your head is spinnin’.
President Trump’s foray into second-termhood has come with a barrage of threats, actions, and social media posts.
Some of the threats are empty. Some of the actions are already being challenged in court. Some of the social media posts are incredible to read from a sitting US president. Nearly all of them contain ALL CAPS.
Amid much bluffing, blaming, arm waving, and misdirection, there are a few discernable truthly Trump trends that impact our interests here:
- He is serious about reshoring jobs and production;
- He is keen to reduce interest rates; and
- He is looking to shrink government and Americans’ tax burden.
What does that look like? And what does it mean for how we allocate capital?
Reshoring Jobs & Production
This looks like using tariffs to get manufacturing jobs back in the US. It looks like deregulating industries, including energy, to foster job growth and energy production.
That translates to no danger of a recession for several quarters to come. The first quarter, which we’re halfway through, is shaping up to be closer to 3% growth than 2%.
GDP, you might recall, is the sum of Consumption (C), Investment (I), Government Spending (G), and Net Exports (Exports (X) - Imports (M)).
The formula is GDP=C+I+G+(X−M).
Consumption is typically ~70% of the input, Investment is ~20%, Government is ~20%. Net Exports are normally a negative contributor because we run a trade deficit, i.e., we import more than we export.
One cause for concern with Trump’s approach, at least at this desk, is that the cutting of government spending would negatively impact GDP, and would not be made up by any gains from trade balance improvement.
I still think this is a risk heading into Q2. Not a recession risk. But a risk of GDP going back closer to 2% than incoming Treasury Secretary Scott Bessent’s goal of 3%.
That 3% is one leg of his 3-3-3 economic plan, the other two of which are reducing the federal budget deficit down to 3% of gross domestic product (GDP) and producing an additional three (3) million barrels of oil per day. (For context, in 2024 the budget deficit was $1.8 trillion, or 6.4% of the $29 trillion GDP. And the US is currently producing ~13.5 million barrels of oil per day.)
The risk is not lost on the administration. Trump himself acknowledged in one of those all-cap social media posts:
“WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!) BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.”
Though I think the pain he’s referring to is different from the slight pullback in growth that I mentioned. He is talking about the pain of higher prices, which will likely be felt as the reshoring of jobs and production comes with higher costs that have previously been exported.
Reduction of Interest Rates
This line of thinking gets convoluted and paradoxical quickly.
It goes like this…
The administration plans to produce more oil, which will bring down prices/inflation, which will in turn bring down the 10-year bond yields.
What about the aforementioned and self-proclaimed inflationary tariff fears? You think too much.
If the oil thing doesn’t work, the administration will point to the holiest of the trinity: shrinking the federal deficit to 3% of GDP. Surely, if the government has less to fund, it will issue fewer 10-year bonds. And needing to sell fewer bonds would lower the interest rate needed to entice people to buy them.
What about the promised tax cuts? How is the deficit going to be lowered if you also cut tax revenue? You are again thinking too much.
I hope that clears it up.
Shrink Government and Tax Burdens
We know a bit about what the plan is to shrink the government.
We have seen the slashing of USAID, the buyout offers for federal workers, and the tweets of Elon Musk. It looks like many of the DOGE’s bites will be chewed over in court, so their true impact remains hard to gauge even if their bark is well-heard.
According to the New York Times, the jobs slashed so far total just over 9,000, most of which come from USAID and the Consumer Financial Protection Bureau. That translates to 0.3% of the three million people the government employs, not including the 1.3 million active duty military.
That math says a mountain is being made out of a molehill of cuts. (Though as we go to publish there are reports of thousands more workers taking buyout offers.)
As of now, it looks like we’re still going to grow our deficits and our debts, with interest payments alone this year on pace to hit $1.3 trillion. And the most recent budget plan in the Republican Congress increases the debt ceiling by $4 trillion while setting a goal of cutting $2 trillion in mandatory spending. It also calls for up to $4.5 trillion in tax cuts mainly by extending Trump’s 2017 Tax Cuts & Jobs Act that was set to expire at the end of this year.
You can see why they want lower bond yields. But with inflation stair-stepping higher, I’m not sure they’re going to get them without some good-old-fashioned market interventions.
Editor’s Note: You just read the intro to the February issue of Foundational Profits, published last Friday. That service has already closed three winning large cap positions this year, and has a position in Papa Johns, which just received a buyout offer. The portfolio reflects how I’m positioning my own retirement funds. You see how much I own of each position in every issue. Click here to get the full February issue.
Call it like you see it,
Nick Hodge
Publisher, Daily Profit Cycle