E10: Trade, Taxes, and Immigration: The Post Election Trio

Post-election changes, they are coming. As with any change in administration, there are new policies and changes that go into effect that can have an impact on the market and economy, some significant. Let's talk about it.

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Transcript

Trade, Taxes, and Immigration: The Post-Election Economic Trio

SUMMARY KEYWORDS

credit spreads, tariff impact, government efficiency, immigration policy, tax cuts, federal spending, market volatility, inflationary pressures, deflationary impact, regulatory reduction, economic uncertainty, labor market dislocation, interest rates, deficit spending, economic policies

00:05

Welcome to The Point Podcast. We have informed, intelligent conversations about today's financial topics submitted by viewers like you. Let's go ahead and get started. Here are your hosts, Landis Wiley and Allen Wallace. 
 
 

00:23

Landis, hello and welcome to The Point sponsored by Basepoint Wealth. I'm your host. Landis Wiley, sitting here, as always, Chief Investment Officer, Allen Wallace, we thank you for tuning in. This is our first episode since the big election. Yeah. So, as always, we've received lots of questions and comments from folks who tune into this, as well as the team members around here, and I bet folks out there can't guess what we're going to talk about today, but we'll get to that here in a little bit. For those that are new format here at The Point, really simple, actually, we just like to sort of demystify topics around finance, the economy, markets, what have you all based around questions that we get from you who are tuned in, as well as the advisor teams here and the clients that work with Basepoint. So, before we get into today's topic, we always kick this off with a brief segment from Allen on “The Most Important Thing” that's affecting the world of finance. So, with that, I'm going to turn it over to Allen. What's our most important thing? 

01:24

The most important thing right now is credit spreads. Credit spreads tell us how much we are getting compensated for taking on the risk of default in non-government bonds. Spreads are organized by credit quality, starting at the best possible credit quality, or AAA, all the way down to D, which means the issuer is already in bankruptcy. Triple B is the lowest rating that is still considered investment grade. Credit spreads are very tight right now, which means that we are not receiving much compensation for taking on the additional risk of default. AAA spreads are currently at .3, 2% triple B spreads are currently at 1%, and high yield spreads, also known as junk bonds, currently average 2.69% when spreads expand, the price of bonds with credit risk go down, and when spreads contract, the price of these same bonds goes up with spreads as tight as they have been since 2007 there is little room for improvement. And historically, if we enter a recession, credit spreads will expand significantly, causing significant declines in current bond prices. We continue to hold very little credit risk and are monitoring spreads for signs of expansion. We will not add significant credit risk until we were adequately compensated for the risk of default. Keep your eyes on credit spreads heading into the new year and the new presidential administration.

02:28

Imagine having the peaceful rhythm of ocean waves as the soundtrack to your well earned retirement helping make retirement dreams come true. Basepoint Wealth, the only advisors provide you with independent and transparent wealth management advice, because from here, you can go anywhere. Schedule a complimentary consultation with a Basepoint Wealth advisor now at basepointwealth.com Basepoint Wealth is a registered investment advisor. Visit basepointwealth.com for important disclosures.

02:57

Great, Allen, thanks for that. We'll pay close attention to what happens with interest rates and bond spreads going forward, so it'd be interesting to see here in the new year. So again, thanks for tuning in here to the point, once again, for those who may be new Allen, I just like to sit and talk about all things finance and economy and markets. Happens all the time, and so the point of this whole podcast has always been to just welcome you into the conversation and join along. We never really know what we're going to talk about. It's always coming in from folks that are watching the podcast, from clients, from the advisor teams that are here, obviously being our first episode back post election. Big topic on everybody's mind. Big topic in the news, of course, is the outcome of the election and sort of the policies that have been proposed by what looks to be a Republican sweep of the White House, the House and the Senate, which we talked a little bit about that dynamic in the last episode, but we did get several questions around how those policies may impact markets and may impact the economy going forward. And so we've kind of pulled that together into what we think is an interesting topic, kind of wide-ranging, and really it boils down to now that we know that Donald Trump is going to be the 47th president, it looks that Republicans will also have the House and Senate. What are the implications of some of the major campaign promises that have been made, specifically around the implementation of tariffs, reducing the size of the federal government, cutting taxes, and the potential for efforts to deport a large number of undocumented immigrants that have come in over the past several years, that's quite a bit. It's a lot. It's a lot. And obviously, you know, it's, it's been a big focal point in the news and in the headlines since the election, some of the initial nominations for key cabinet positions, there's been a lot of focus around the Department of Government Efficiency, involving Vivek Ramaswamy and, of course, Elon Musk. And I think everybody is kind of wondering how all of this could potentially play out and impact us going forward. 

05:26

So, I think what we probably need to do is take them one at a time, and then take them together, right? Because you've got a bunch of different moving parts here, and they don't all move the ship in the same direction, right? So it's a little bit more like a blender, right? And then you also have, you have the economy itself, and then markets are sort of a derivative of the economy, so just because something helps or hurts the economy doesn't mean it's going to have the same impact on markets, whether you're talking bond markets or stock markets or commodities markets or those type of things. So, I think what we should do is address them, maybe one at a time, and then sort of think about how they would act together. And I think the overriding thing we have to keep in mind here is that markets hate uncertainty, right? And when you have a bunch of competing policy proposals here and you don't know how things are going to end up, then typically that's going to be a check mark in the bad column when it comes to investment markets.

06:21

Now, one thing you know, obviously, our focus is on the financial impacts of all of this, not so much the politics that go around it. And you know, most of these topics there's at least some historic precedent for a lot of them. So, I know you're, you're probably one of the most, well, first people that I know in the history of all things finance, and so I think that'll be a valuable, maybe, point of view to share, to give people some context as they're hearing about these things as we go forward. 

 06:50

So I mean, from an economist point of view, tariff is a bad word. I think Donald Trump himself said that tariff is the most beautiful word in the dictionary. So, you've got a big gap there between what the economists think and what the person in charge thinks. But because we've been in this sort of free trade environment since the since the post World War 2 order, I think we have a bias against tariffs, right? Because we've been told, even going back to my freshman economics class, that free trade is good right now, good for whom? Is a separate question, right? Is it good for the entire world? Is it good for a separate population? And that's something maybe you know we're not going to be able to work out in advance. But oddly enough, the second law that Congress ever passed in the United States was the Tariff Act of 1789, okay? So, the first thing they did was they decided how to swear in officials. The second thing they did was they started slapping tariffs on things. And so, we have a long, rich history of tariffs in the United States. Now, it's important to note that the Constitution gives the power of levying tariffs to Congress, not necessarily to the president, but we'll sort of get to that as we work our way through this really quick history, right? So in 1789 we established the very first tariffs. 1828 we have the tariff of abomination law, which is where the North sort of started fighting with the South as far because the North is industrialized, they want protection. And so, they started putting tariffs on imported goods from Europe, whereas the South is exporting to Europe because they're agricultural. And so, you have this competition between the North and the South, because the South really did dislike the tariffs the North. The North really wanted the tariffs because it was protecting their industry. There's really two reasons why you'll do a tariff, one to raise money, and the other is to protect industry. Well, the tariff of abomination of 1828 was clearly protectionist for the North only. And really that entire progression is what led into the Civil War, right? Because you started having things like nullification, where South Carolina said we're not going to follow this law because it's unconstitutional. And that sort of led into 1861 when the next Tariff Act was passed, which is sort of how we paid for the Civil War. And then you get to 1930 and you have the Smoot Hawley Tariff Act, which is like, you know, it, every economist will tell you that that's what causes the Great Depression to happen so. And then you get in the 60s, and  you've got the trade expansion act of 1962 that's sort of where the Congress started passing some of the control over to the President so he can do what are called Section 232, tariffs, where he's trying to protect national security. And then you've got the trade act of 1974 where now it's just if someone's cheating on tariffs, then the President can actually step in. And that's really where most of the tariffs that Donald Trump implemented came from, right? So those are the two. The act of 62 and the act of 74 are really where Trump is going to try to supersede Congress and add these tariffs. He's thinking about 60 to 100% on China, 25 to 75% on Mexico, and then 10 to 20% on the rest of the world. That's a little bit of history, maybe too much.

10:07

You know, really, since almost the founding of the country, right, we have a history of implementing tariffs for different reasons. You know, you mentioned the 1800s sort of the split between North and South, between industrial and protectionist viewpoints on that. It's interesting, because you fast forward to today, and we don't have that delineation of North and South, right? But certainly, a lot of what seems to be from the exit polling from the election, is a lot of Donald Trump's support came from maybe, you know, the traditional Rust Belt, right? You know, the more industrial areas of the country, right, right? 
 
 

10:44

And those are the areas that have had their jobs, sort of, you know, removed over the last, I don't know, 40 years. If you go back to the election where Ross Perot was running, you know, and he said, NAFTA is going to be a giant, there's going to be a giant sucking sound. And that's all your jobs, you know, heading to Mexico. Some of our viewers probably remember that well. If you look at, you know, what's happened in the Midwest and the Rust Belt in those areas. I mean, there might have been some truth to what he said, as far as that act was concerned. Now, I think there's probably been economic prosperity for some people, and maybe, you know, despair for others. So again, whenever you're weighing economic policies, you have to sort of balance between, you know, the winners and the losers, right? I mean there's no such thing as an economic policy that's just good for everyone. There's, there's always you know, unintended consequences, right, which sometimes are difficult to measure, so  yeah, I mean, the country ran on tariffs until 1913 when the 16th Amendment was passed, right? I mean, before the 16th Amendment, an income tax was actually unconstitutional. So we ran a tariffs and excise taxes from 1789 until, you know, 1913, 1914, when the income tax sort of started taking over that ability to raise income, right? 
 
 

11:57

So one of the things that has been floated out there, by some in that circle, is exactly that of this notion of, could they abolish the income taxes we know it and replace them with revenues from tariffs?

12:11

I don't think the numbers quite work out just based on the amount of imports that we have. I mean, we import just under $4 trillion a year in goods, you know, and the federal budget is, you know, significantly larger than that, right? You know, you know, we've got, I don't think we, I don't think we have enough trade activity in order to basically replace all the income that we would need to from the income tax. You know, we're raising somewhere around four or $5 trillion a year in income tax, which is, you know, equal to the amount of

12:44

imports that we have, right? So, one, when you talk about, you know, prior to 1912 you know, really say prior to 1920 era, when the bulk of the federal government was funded through tariffs, certainly, the scope of the federal government was substantially different, right, than what it is today, which obviously is another part of this question, is getting into reduction of size of our government in a way, but before we get to that, from a tariff policy perspective, what's the most the argument seems to hinge on if that we're being treated unfairly by other countries when we try to export our goods that are made here into those countries, many of them apply their own tariffs onto our goods, right? And we're not necessarily doing the same coming in. And so therefore it's disadvantaging producers here relative to their counterparts overseas, right? And therefore, companies are moving jobs into the places where it's cheaper to produce the good, and then shipping it back in here. And it's not really costing them anything to do that. And our workers, you know, wages, are being impacted, and so on and so forth. That seems to be kind of the argument around why we need to revisit and look to expand the tariff policy if they were to move forward with that. What's the most practical immediate impact if some of these tariff proposals actually were put into effect?

14:10

Yeah, so I mean, that is the important thing, right? Is you have to think about short term, medium term and long-term consequences, and some of those are a little bit more clear, obvious than others. But the fear is that the tariffs will be inflationary, right? So, if you slap a 20% tariff on something, the price immediately goes up 20% that's going to get passed on consumers. Data shows, though, that tariffs are really more deflationary than they are inflationary, and the reason for that is because people don't just pay the extra 20% they might buy substitute goods, or they might go without, or they might, you know, buy a lesser quality brand. And so, in general, the tariffs themselves tend to be deflationary. And the data from the Trump tariffs of 2018 show this. The data from the 1930s show this. You know, during the 1930s we had one of the largest periods of deflation ever, and that's because economic activity was slowing down, right? So there's less pie, because the tariff is sort of causing a frictional cost on all the goods that are being traded. So, I mean, I think that the fear of immediate inflation is probably misguided. Now you may have some industries where, once the tariffs are implemented, all of the sudden they start to produce things domestically. The goal here is that companies are going to move their production into the into the US, right? The goal isn't that we're going to penalize them and we're going to keep the, you know, keep the tariff as the tax. This is a purely protectionist type of maneuver. And so the goal is that Toyota is going to build their cars here, instead of building them elsewhere and then moving them into the country. So, if the intended consequence happens, then what we should see is increased employment. If we have unintended consequences, you know, we might see decreased employment because we might have retaliation from other governments that say, well, now your goods are going to, you know, you're going to tariff, you're going to tariff us 20% we're going to tariff you 20% and so then companies that export a lot of goods are going to, you know, start to see slowdowns, and probably have to reduce their labor force.

16:10

We've already seen some of that, even in anticipation of these policies. Believe it was John Deere. You know, locally, John Deere was one that announced that they were going to shift a significant amount of production into Mexico right. Ford was another one and they've since scaled back some of those, or at least said that they intend to revisit, you know, those announcements kind of in light of this. So would you take that as in, you know, supporting, or, I guess, evidence of what you're saying, where the end goal of this may be that these companies ultimately choose to move those, those productive capacities back into the US, just to avoid that, that tariff. 

16:54

Well you know, I'd say we're not even in the first inning. We're maybe at the singing of the national anthem here. So, it's really hard to tell, you know, these are all sort of anticipatory moves, and it's difficult to say, you know how to shake out, but sure, I mean, I think that that's the goal, right? The goal is that there's more jobs here, and if there's more jobs here then the communities are more solid. Tax revenue goes up and so, you know, but it's, it's good for certain pockets of the US population, but maybe not for the country as a whole. And it's good for some people, maybe not. Others mean people who are used to being in those type of factory jobs. You know, having those jobs come back may be very helpful for them, but, you know, you might have lack of training. You might have, you know, you're going to have the costs of building and putting factories back online, those type of things. And I think the other thing is that we've got some key industries maybe that we shouldn't be importing, you know, especially like the precursors, the medications that are mostly coming from India and China, you know, we had some events during COVID where those companies or those countries stopped allowing exports, you know, and so I think that there are some true national security concerns here, as far as medications, as far as computer chips. And I think we're supposed to try to build 20% of the advanced chips in the US by like 2030, or something like that. But, you know, I think having a manufacturing base is probably a good thing, especially in a period of geopolitical turmoil. And you know, we've got wars in Eastern Europe. We've got wars in the Middle East. China is sort of saber rattling and talking about taking Taiwan, which is where all of our chips come from. So, I do think that returning the US to a manufacturing base is a positive thing. It's just, is it worth the price that we have to pay over the next five or 10 years in order to get there? But there's no question that the protectionist policies of the 19th century are sort of what fueled that economic engine that we had going into World War Two, right? And so that doesn't necessarily mean it was the most efficient, right? But for our population, it was probably a positive. It moved people from the farms into the

19:12

cities, right? So, the initial thought behind that is okay, tariffs get established. You know, certainly with a longer you would assume, of the longer-term goal of trying to repatriate some of the jobs that go on with it. So initial revenue impacts probably revenue positive from the standard, from the government perspective, from the budget perspective, from the tariffs that are initially being paid. The idea behind that is eventually those tariffs, if that policy works, and theoretically all of that were to come back. Well, those tariffs are going to diminish, right? But behind that, the increase in labor, the increase in production here should shift, then the ability to collect additional tax to sort of offset that diminishing tariff rate. Yeah. So look, I guess when you look at that, you know one of the problems that's underpinning all of this that's in the background is deficit spending, right, right? Annual deficit. You know, it peaked during COVID, obviously, with PPP, and a lot of the stimulus spending that was, that was done out there, that's continued, you know, we're now sitting at between two and $3 trillion in an annual deficit.

20:20

It actually went down last year. And I think the estimate is about one and three quarters trillion for this year. But you know, you never know until you get the rounding errors.

20:27

At some point, just take a zero off the end of it. But you know, so it seems as though we need more revenue. Tariffs would certainly be a way to get there, getting more income, more jobs, to come back here, to generate more income tax would certainly be a way to do it. But fundamentally, we have a lot of spending, right and which, which kind of, then, I guess, is tying into a second piece of this, which is reduction in size of the federal government. Because you know, we talked earlier there about the entire federal government was really funded by tariffs up until the early 1900s but it was a much smaller

21:02

enterprise. Yeah, I mean, it was nothing like it is today, right? So, recent

21:05

data shows that there are approximately 3 million federal employees, right? There's another six to 7 million contractors, right, that are essentially doing the work of the federal government, but not directly employed by the government. Those are mostly defense and health care, right? So you know, figure nine to 10 million, somewhere in that range of you know, folks that are being paid by the federal government to do things, to provide the various services and what have you. Of the government, you've got another 10 to 15 million,

21:38

16 million, local and state on local

21:40

and state. So, you put all that together, you got close to 25 million people employed in government at various levels in this country, which is sort of shocking, because what's the total employment base of the entire country will be

21:54

62% of 330 million. 

21:58

So 180 million. So, you've got well over 10%

22:04

the number I read was 16 to 70% of the labor force is employed by the government. Okay,

22:10

so, and obviously that has been on an upward trajectory considerably over the last, you know, four to five years post COVID, I think we've seen a tremendous spike in that. But really, you could trace that back to the 1960s and 70s, as far as some of the government agencies starting to bloat up. So, this idea of going in and slashing the federal government, you know, Elon Musk, you know, I think people are probably familiar with the Twitter story, right? He took it over, and he slashed 80% of the workforce. And the argument is, it works better, it's more innovative, and far more cost effective. I don't know that you could walk in and or that the desire would be to slash 80% of the government workforce by any stretch. But if you were to look at the tariff conversation as a revenue generating opportunity, and you were to look at, are they going to approach and be serious about implementing cuts to the federal government, the two potentially together, maybe work towards closing that deficit. Now, whether they get there or not, that's a whole other story, but what's the practical impact of walking in and, you know, cutting 10 or 20%

23:24

Well, the immediate impact is higher unemployment, right? So these are people that are making, on average, $70,000 to $80,000 a year, which is higher than the median household income in the United States. So these are good paying jobs, and there's, you know, somewhere around 10 million of them. And so you're going to have, you know, some percentage of 10 million people immediately unemployed that we're earning somewhere around 70 or $80,000 a year. So that's immediately going to probably be deflationary and recessionary, right? Because you're going to have less people employed in the labor force. The second thing it and there's, there's a couple different layers of cuts we're talking about here, right? There's employment, right? And then there's just outright terminating agencies, right? I read that no one actually knows how many federal agencies we have. There's no list, but it's somewhere around 435 right? 435 federal agencies that do all kinds of things, right? And so you're going to have less services. Now, whether those services are necessary or whether they're worth the cost, I would say some are probably more important than others. But, you know, I once saw an interview with Milton Friedman, and the person was asking him, hey, which federal agencies would you get rid of? And at the end of the conversation, there were four left. So, you know, we're somewhere between four and 435 is probably the right answer. We just have to determine which of those services are meaningful, which ones are worth the money that we're paying for them. So immediately higher unemployment, and then, you know, less services for people depending some of those are going to be more important than

25:02

others well, and certainly that's going to draw a headline, right? Sure. I mean, the spike in the unemployment rate, you know, you can pretty much anticipate how that's going to play out across the nightly news, right? Yeah, you know. So certainly there's some political dynamics that are going to go into that type of it's going to

25:20

be an uphill battle, right? Because there's no way. I don't think there's any way to implement all these policies without having negative headline numbers right? And so the headline is going to be, policies are failing. We saw that in Argentina, right, where they came in and they started just closing down government agencies. Inflation was somewhere around 26% and all the headlines immediately were, this isn't working, this isn't working because all these economic numbers are getting worse. Well, eventually inflation fell all the way down to 4% right, right? So that's

25:52

been relatively quick. I mean, that's only been underway down there for about a year,

25:57

right? Yeah. So, I mean, it's going to be very difficult to monitor the situation and know what's working what's not working, especially when the media is diametrically opposed to the administration. If that continues to be the case, there have been some signs of white flags being waved, so it'd be interesting to see how vehemently the media tries to fight this. But I definitely there are going to be levers in government that are going to try to fight it, right? And we're already seeing that with the nominees for the cabinet positions, and, you know, the officers of the United States, there's already a lot of fist waving and tooth mashing as far as who the people are that are being proposed, right? So even at step one here, we're already sort of having some Well, self

26:45

preservation, right? Sure, yeah, at the end of the day, nobody wants to lose their job. Yeah,

26:48

10 million people here as jobs are on the line, and you know, you would expect them to try to fight for that,

26:53

right? Right? Well, it'll be interesting to watch. What do we sense is the if the feeling is, there's going to be a lot of noise as this unfolds, especially initially, and maybe some pain, and maybe some pain, some real pain. And Elon Musk and others in that are involved in putting this strategy into effect, I don't think they've been shy about that. You know, Elon himself was on a on a podcast and flat out said that it would be a period of pain, which is a

27:25

talking point that can be immediately turned against him, because when a billionaire tells, you know, 10,000 errors, right, feel some pain, right? You know, there's, there's a, you know, there's an immediate ability to point out hypocrisy there, right, right? Well, we're

27:39

very unused to anybody in the in the political system, being willing to express that there might be some bumps before we get to the positive. It's always

27:49

about the next election, right, correct? You know, there's never a period where you're not campaigning, right, right.

27:54

So, you know, as we look at that, you know, we always talk about separating signal from noise, right, right? And lots of things. So if, if we can reasonably anticipate that the noise is going to be very loud, right, right, and it's likely to be very negative and very pessimistic thinking, you know, thinking a little bit here about, you know, you have the economic factors, the deflationary potential of this, the recessionary potential of it shift. And let's think about the markets a bit here. How can we anticipate that the markets will digest this? How will they work to separate you know, are these policies going to lead to a more stable, productive, stronger, sustainable economy, which is the argument, right? You know, get away from deficit spending, which is highly inflationary, and get us to a point where, you know, our government isn't driving inflation by way of overspending. How will the markets work through that? 

28:56

Well like I said at the beginning, the markets hate uncertainty, and so, you know, you have to take a look at valuation. And you know, if the market is cheap, it can stand a little bit more uncertainty than when the market is expensive. And I don't think there are any metrics by which you can measure the 

S&P t500 and say, you know, this is a cheap market that we're dealing with. So, I mean, I definitely think that if you're indexed in a broad sense, especially capitalization weighted indexing. You're probably going to, you know, experience some volatility here, especially if there's uncertainty, and so you have to, you know, make the decision of whether you're just going to try to ride that storm out, or whether you're going to try to make some shifts in order to limit volatility, we don't invest in those kind of things. So, I mean, I think we're sort of positioned for volatility. We have, you know, we have significant cash how we've got short term, high credit quality instruments that can be redeployed if we get discounts in market prices, and we have gold and silver, so if there are inflationary pressures, we're. Going to be okay. So, I mean, I don't think we need to make any large shifts here based on possible volatility. We've been waiting for volatility for a year or two. But, you know, to the average investor that has their 401k, 80% the S&P 500, you know, which is 35%, 10 stocks, that are highly dependent on technology. And I think that there's definitely some danger in that.

30:21

Okay, let's, let's shift gears a little bit and go on to kind of another hot button, one that's been floated, which is the topic immigration. Yeah, you know, certainly there's a strong case, and fact based case, that our country has been built on immigration, really, from its founding. We have a long history of, you know, welcoming immigrants into the country, or at least wanting immigrants to come into the country. In recent years, most of the focus has moved past the legal immigration conversation, and it's turned the focus to large numbers of undocumented immigrants that have come in. There's really no definitive number of how many have come in in recent years. 10 to 11 million is what I hear, right? And I think that's a number that they feel confident in saying, right? But it could be double. The counter to that is, is nobody knows the numbers that they haven't had contact with. Either way, it's a large number, right? I mean, you think about, you just think about 10 million, that's basically three states of Iowa, right? That have crossed, you know, crossed over a border or entered the country in some way. That's any 10 over the last 40 years, though. So, correct, yeah. So, you know, that's a that's a large impact in recent years. You know, there's been varying times where the focus has come on housing shortages, you know. And certainly, you know, even if you were to bring a million people into the country in a relatively short period of time, the question is, well, where do they go? Right? And you know, so as we look at this, part of the conversation has been, we need to get this under control. It's having lots of impacts. You know, the arguments are, you know, wage suppression of American citizens, because you have now lots of people competing for jobs. Part of the proposal that's been put forward has been not only to, you know, secure the border, but to go to the next level of saying, we need to start removing people, right, that aren't supposed to be here. And that's really something that hasn't been attempted, you know, in mass in this country, for a long, long, long time, right? Right? What is that, I mean, from a policy perspective, what does that look like? What's the impact to our economy, if, if we were to move forward with efforts at large scale deportation or removal? 

32:47

Yeah, so the number that I see somewhere between 10 and 11 million, that could be, I mean, that could be double that, who knows, and that 60% of that population is employed, right? So that 6 million people with jobs now those jobs on average that are held by undocumented immigrants are in the 20 to $30,000 year range, so significantly below that number for government, right? Jobs, right? So, but your unemployment numbers are going to start to go up again, right? So if you have the combination of removing undocumented immigrants and firing government officials, all of a sudden you've got this weird dislocation in the labor market where, you know, you've got a bunch of jobs at the lower end of the pay scale, usually agriculture, construction, hospitality, that are going to be open, and then you've got all these unemployed people at the upper end of the income scale who are in defense, manufacturing, healthcare, and so you're going to have sort of a dislocated labor force. You're going to have a bunch of job openings at one end of the scale, and you're going to have a bunch of unemployed people at the upper end of the scale. Now whether or not some of those people filter down into those jobs, or whether they start forcing the cost of those jobs up, and it sort of meets somewhere in the middle, remains to be seen. But if you, you know, if you had 6 million immigrants there were that, you know, removed from their jobs, and you've got, let's say, 4 million, 5 million government employees that are suddenly unemployed, then you're going to have a problem there, right, right? And so, I mean, I think immediately you've got all these jobs that aren't going to be done anymore. That's going to be maybe inflationary, because you're going to have supply constraints, right? So all of a sudden, the things that these people were doing are no longer available, and so you're either going to have wage pressure on the upside, or you're going to have shortages on, you know, on the agricultural side. So, I mean, you have to be sort of careful what you wish for here, right? I mean, now there's something like a million and a half undocumented immigrants who have already been served with deportation notices. So I think you can start there. I mean, there's already been a court order. There's another million or so that have been, you know, convicted or accused of crimes either here or in their home country before they came here. And so I think you know, that's a lot. Second place to go. But, you know, I as far as someone that's already been here 20 years as a productive citizen, that's it. That's a tough question to try to answer, right? Like, I mean, are you, is the goal here to try to make us safer, or is the goal here to just be mean, right? Right? And you really have to think about, you know, which of these different areas you're going to implement,

35:20

right? Well, it's something you mentioned there. That's, this is probably one of the first topics where you've said that the potential impact here is inflationary, right? You know, much of what we've talked about sort of counter to, maybe what some of the narrative has been, you know, narrative is primarily around tariffs, well, it's inflationary, right? Narrative around, you know, affecting the federal government is sort of all over the place, right? But primarily what you've mentioned is those, those effects could very well be deflationary or recessionary. This is the first time where we're talking about something is inflationary.

35:54

So it has both, right? Like having less people here, in itself is deflationary, but having the supply constraints and the wage pressures are inflationary. So again, you've got these competing forces, and it depends on which, it depends on which of those variables dominates, right? So again, more uncertainty, right?

36:11

And maybe that's the that's kind of the underlying theme here. As far as people are like, you know, I think most people watch this, and part of the reason they're tuned in is, well, what's this going to do to my portfolio, and what have you I and what have you, and you've said several times markets, besides everything else, they generally just dislike uncertainty, right? And it seems as though competing inflationary, deflationary pressures, I don't know how you get much more uncertain if you're the market Right, right? Trying to figure out, well, how do I value something when I don't know what anything is worth potentially tomorrow or, you know, a year from now,

36:44

I mean, I definitely think it's going to I mean, that's the very definition of uncertainty, right? More things can happen than will happen, right? So we just have to make sure we're being careful, and we're always careful, so we're always prepared for this type of environment, and it's when our principles are most necessary. So, I don't have any fear of these sort of things, but I think the average person out there that's trying to do this on their own should have some fear, because, you know, there's a lot of competing forces. There's a lot of variables that the magnitude is going to matter a lot more than the direction, and so mean, you really have to make sure that your portfolio is a balanced whole that is comprised of securities that are going, you know, that are going to counterbalance each other in a wide range of contingencies.

37:32

And a phrase that we, we've used intermittently, but it's been a while around portfolio construction, is know what you own and know why you own it, right, right? And this is maybe one of those periods of time going into potentially a large amount of uncertainty, maybe to the degree that many of us haven't seen our lifetime, let alone the period of time where, you know, we have a portfolio that has a big enough number that we pay attention to it, right? That it may be more important now than most to really understand what you want and what's there.

38:02

There’s definitely a push here to change the status quo. And I think the post world war two environment has been very, very stable, and I think in some ways unsustainable, because we have so much debt now in comparison to GDP and so, I mean, this is the first real effort I've seen to come in and make some changes. Whether those work out or not, remains to be seen, you know, but at the end of the day, I do think that there is going to be some pain if these policies are implemented, if only in the fact that it's uncertain right now, maybe all this stuff settles out in two or three years. We know what the outcomes are, and we're singing along. But you know, historically, when you have a very large geopolitical shift like this, there are unintended consequences.

38:54

Well, and you mentioned earlier, there's no such thing as a policy doesn't have winners or losers, right? Exactly. And you know, part of, I think what's underlying this is the changes that are being proposed very likely will introduce some degree of pain, maybe affecting some more than others. But it's probably also reasonable to say that continuing on the status quo, which is, you know, led us to this very real and growing question of the sustainability of our debt situation in this country. I think we also need to acknowledge that continuing on that path very well entails its own type of pain, absolutely.

39:27

And it may be more pain, right? Sometimes you have to make the choice of what you know, do I do? I suffer a small amount of short term pain in order to avoid a catastrophe later, right? And we may be in one of those situations right now,

39:41

right? So the last piece of this that was kind of built into this question is the question around tax policy. So last time that Trump was in was the 2017 tax cuts and Jobs Act. Believes 2017 it was the. At reduced tax rates, broadly across the board, instituted some of the more hot button issues, like the SALT tax cap, you know, which for Iowans, even though we're not traditionally viewed as a blue state, we certainly have a high tax burden relative to a lot. So, I think it's coming down. A lot of our folks have experienced that, that effect. So, you know, coming up on the horizon there, there is a lot of question around tax policy, because that 2017 law does expire at the end of 2025 where many of the provisions of that reset back, which would result in an increase in effective taxes, or for most everybody, right? You've got the potential for a reset in things like the estate tax, which really hasn't been a topic of much discussion for most people over the last 4,5,6, years, because the limits on the exemption have been so high, right? Let's talk a little bit about the policy proposal, I guess, that have been put out. I mean, generally, I think a Trump administration, a Republican administration, is viewed as lower taxes, less regulation, lower taxes. You know, we spent a lot of time here talking about the deficit, the impacts of spending trying to create additional revenue. How do we square all this? 

41:24

Well, I mean, if there is a significant reduction in the size of the government, then we'll obviously need less revenue. I don't think, you know, Trump has said in some of his speeches that he would like to get rid of the income tax, but I don't know that that's going to be feasible. You know that would definitely require Congress to play along with that, you know, so I'm not very optimistic about that. Now, getting the tax cuts and Jobs Act extended, I think that's probably doable. And that's a very subtle that would be a subtle shift. I mean, it's not going to be a gigantic increase or decrease for anyone. I don't think that they let the estate tax limitation go back to a million or below. You know, when I first started in this career, it was, I think, 600,000 and so a lot of people that I was meeting with had an estate tax problem, and we had systems in place that we had to use in order to avoid that. And then, you know, we've sort of gotten out of the practice of doing that, as this thing has ballooned up to, like, what is it, $26 million now, or something like that. So if that returns significantly down towards impacting most of our clients, we have experience dealing with it in the past, we'll have to, you know, just dust off some of the techniques that we used to use, right, right? So that's not, that's not the end of the world, but, but I don't think giving our given our spending, and giving the composition of our spending, how there's all this talk about cutting the government, but remember, the significant portion of that is interest on debt, Medicare, Social Security and Defense, right? And those are going to be very hard areas to cut. So I really think you only have 20 or 30% of the entire pool that's even up for discussion. So I mean, there, there are very large limits to how much you're going to be able to cut spending, right? So if

43:05

they were to come in and, you know, make an effort to extend the existing tax rules, probably doesn't change a whole lot. No, I don't know that. There's been a whole lot of discussion around them trying to go further with tax reduction. 

43:19

Trump has said he wanted to reduce the corporate tax rate even further, I think down to 15% I believe it's at 21% right now, but that's the major proposal that I've heard. Hey, but, you know, there's been a lot of talk about things like getting rid of tax on tips, getting rid of tax on Social Security. You know, those may just be campaign speech items, and getting that built into a comprehensive tax law might be a lot more difficult than it sounds, right,

43:44

right? Well, you touched on something there, and I think it fits around this overarching topic, and I want to hit on it just here for a second. You mentioned in there that the composition of our spending, which is underlying a lot of this push right? The argument around a lot of these policies is, our government's too big. We spend too much money. The debt is going to, you know, wipe us all out, right? And so we're going to try to pull on all these different levers in various ways to try to address that, along with some of the, you know, ancillary issues around immigration and so on and so forth. As you look at that, I think, you know, I've seen numbers that interest on the national debt is now in excess of a trillion dollars, right, right? There's a large wave of outstanding US debt that matures over the next couple of years. It has to be refinanced. Much of that debt is sitting at, you know, 1 to 2% interest rates, right? They're very likely, you know, as of now, would be refinanced at 4 to 5% interest rates. So the potential for the composition of that spending is to become even more difficult to chip away at, right, because so much of it is out of our control. We have entitlements, we have social security, we have Medicare. You know military spending, all of these things. Much of it is sort of baked in. So sort of tying in to it is this question that's also out there around pressure that the President may choose to exert on the central bank, around interstate policy. Yeah. You know, certainly, if they were to go in and lower interest rates to zero, you know, there's an argument out there of, well, that takes care of the interest piece of this. 

45:28

Well, they only control short term interest rates, though, and the more that they've been lowering short term interest rates, the higher long term interest rates have been going, right? So we've seen that since September, right? Exactly. I mean, I think what do we have? 80 basis points, yeah, or something like that, somewhere between 65 and 80 basis points, depending on the day, right? Depending on the day, right? So, you know, be careful about thinking that the Fed can control the interest that we pay on our debt. Now they can on short term debt, but the longer-term debt is a little bit more nebulous, right? And

45:53

unless we want our government to basically be perpetually refinancing three-year treasury bills, right? Or three, three-month treasury bills, probably not the best, best approach there. So well, it's interesting. I mean, I think the takeaway is the next several months are going to be fascinating to watch. Obviously, we don't know where any of this is going to go. Lots of proposals. You know, nominations seem to be the nominations that have been put forward so far seem to be in support of, you know, taking a serious effort at addressing a lot of these issues, right? But certainly we don't know where that's going to

46:29

go, right? And one thing that we only mentioned in passing, that I think is probably the most important, is the reduction in actual regulation, right? I mean, last I checked, there's something like 180,000 pages of Federal Regulations, right? You know, talking about everything from, you know, cabbage to, you know, I mean, all these sort of weren't our

46:47

tax code is 10 million pages long now, just reading that. And that's craziness,

46:51

right? So, but I think making it easier to get things done, if you look at what it took to start an airport in the 1940s It was basically, you went out and bought an airplane, right? And now there's so much, there's so much paperwork, so much red tape, that it's impossible for any now, you may say, oh, I want that because it's safer, but I mean, I think some of the regulations that we have here, like, you know, it takes two years to be able to cut hair, and so, you know, that's not a federal regulation. But still, I mean, it's very hard to get anything done, and that hurts construction, that hurts innovation, it hurts technology. And so I do, I mean, I really do think that moving away from that regulatory state is what's going to be most beneficial here to home.

47:38

and a lot of that, obviously, is going to be dependent on Congress playing along to a degree. Well,

47:43

the regulations are, are in the executive branch, right? So those are, those are written by the departmental agencies. So, I mean, I and that's one of the things that Obama did really well, well, I mean, did effectively, I guess, in his administration was he was pumping out 1000s of pages of regulations every year. And so you know, when you look back and look at the legislative landscape, other than the Affordable Care Act, there wasn't a lot of legislation, but there were 1000s of pages of regulations entered into record. So one of the things that Trump and his team want to do is just start taking the weed whacker out to all those sort of burdensome regulations that are holding back the gears of commerce, right? Well,

48:24

and in theory, that sort of dovetails into reduction in federal government size, right, right? You know, in theory, if there's less regulations to enforce, you need fewer people to sit around and enforce them. That's the theory. Anyway, that's the theory. See how it works so well. It'll be interesting next several months to watch. You know, obviously new administration, you know, doesn't come in until January, 20, and then it's a long slog through the political machinations of our system of cabinet approvals and what have you I mean, it's going to

48:55

heat up a lot, right, depending on whether or not we try to get recess appointments in which there's a couple different ways to do that, but that's, that's probably a conversation for a different

49:02

day, right, right? Well, fascinating topic, certainly one that you know beyond all else. I think, for those of you watching out there, I think we can take away from this is expect a lot of noise and a lot of uncertainty, probably at least for a period of time as we work through this. Yeah, and make

49:19

sure that you stay in you know your long term thinking right. Don't try to, don't try to outsmart the market based on short-term moves right. That never, that's never an effective way to implement a strategy. 

49:32

Going to be very difficult to be able to accurately pick winners and losers exactly as we go through this so well with that, hopefully it's been informative. I think we covered a whole lot of ground, certainly on a topic that is front and center for a lot of folks out there. So as always, we very much appreciate you taking the time to join us here on The Point. As always, if you have any questions or you're seeing things in the news or having conversations with friends and coworkers that you're curious about and you'd like to hear us banner about feel free to visit our website, basepointwealth.com and send in your questions, and who knows, maybe it'll show up here on a future episode. So, until next time, thank you and take care.

50:15

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