January 2025
As the media devolves into short-term sound bites, partisan biases and even misinformation, it becomes ever more crucial to step outside of the status quo and maintain an objective viewpoint of the happenings around us. This necessitates a skeptical approach as opposed to just accepting the news information we receive at face value. I understand how a skeptic may be branded as a negative person, someone who believes that the sky is falling and that retrenchment and protection are the only strategies to pursue. Not the case, especially with a “healthy” skeptic. Yes, questioning is at the forefront of a skeptic’s approach, but this questioning is bolstered by curiosity, a quest for continued learning and knowledge, and a focus on long-term solutions as opposed to short-term quick fixes. Optimism is a core component of our long-term viewpoint, but that comes with our eyes wide open to the realities we currently face.
At Morton Wealth, I’m humbled to be surrounded by employees, clients and investment fund partners who share in this pursuit of healthy skepticism. It can be scary to veer from the status quo and groupthink that is so pervasive within traditional and social media. But I’m grateful to be a part of a firm with a legacy (40+ years and counting) of embracing independent thought. Our culture and history give us the confidence to tune out the noise and pursue strategies that we believe will result in better outcomes for our clients, no matter if those strategies are tried and true or if circumstances require us to think outside of the box and pursue alternative approaches.
More to come in my next newsletter on the mindset of the healthy skeptic that you, the Morton Wealth investor, embraces. But there is plenty of time for philosophy—more time sensitive is that 2025 is now upon us and uncertainty abounds. So, let’s put our healthy skeptic hats on and dive into some of the pressing issues that are top of mind.
Around this time last year, I rang in the New Year with a Perspective article on our predictions for2024. Scratch that—in that article, I actually proclaimed that predictions are not only a waste of energy since market “experts” are right only about 50% of the time, but that they are also an illusion of control against the backdrop of an inherently uncertain world. The conclusion of that article was instead of trying to outsmart uncertainty through the false power of predictions, we should embrace the uncertainty and focus on trying to build a resilient portfolio designed to generate consistent returns, no matter what scenarios unfold.
As we face 2025, guess what? Uncertainty is staring us in the face, as always. Geopolitical risks with China, Russia/Ukraine and the Middle East, unknowns around many of Trump’s economic policies (more on tariffs below) and continued inflationary pressures, to name a few. How do most traditional investors react in the face of such uncertainty? Typically, in one of two ways: 1) obsess about these risks, let fear get the best of them and invest ultra-conservatively with heavy cash and/or Treasury bond positions, or 2) completely ignore these risks and take the “all-in” approach of being fully invested in stocks with the hope that luck or the government will keep the risks at bay.
How does the Healthy Skeptic react in the face of these uncertainties? Because they have worked to craft a more resilient portfolio designed for consistency, whether or not these risks materialize, they can avoid the extremes of obsessing about these risks on the one hand or ignoring them altogether on the other. With the confidence of having a more thoughtfully designed portfolio in place, the Healthy Skeptic can more calmly and objectively evaluate these risks and position their portfolio accordingly.
With that backdrop, let’s dive into President Trump’s proposed tariff policies and how they could impact our investment portfolios. The latest proposals include a 10%–20%across-the-board tariff on all trading partners, a 25% tariff on imports from Canada and Mexico, and a 60% tariff on imports from China. The rationale for these tariffs is multifold: 1) protection of domestic industries by making imported goods more expensive, thereby weakening foreign competition; 2)preserving and creating jobs within these strengthened domestic industries; 3)revenue generation from the tariffs collected; and 4) trade negotiation to combat unfair trade/business practices on the part of other countries, namely China.
Sounds like a no-brainer, right? Not so fast. Like with many simplistic policies imposed by governments to even the playing field, the second-order effects are typically wildly underappreciated. Tariffs may produce the temporary benefits listed above, but the potential long-term harmful effects are overlooked and misunderstood.
Starting with inefficiency, by protecting struggling domestic industries from free competition, you are rewarding industries where the United States is at a competitive disadvantage. We are the strongest country in the world because of our innovation and flexibility in shifting resources from one industry to the next over time. Think of our shift from agriculture and manufacturing in decades past to healthcare, technology and professional services over the last several decades. Tariffs are backward looking in that they support industries where we are weak at the expense of those where our competitive advantage lies. The short-term benefit of strengthening our struggling industries comes at the long-term cost of shifting resources away from those industries where we excel. Tariffs result in stagnation, not innovation.
Also, many products we make domestically rely on subcomponents from various countries in the world. Think about the costs that will now be borne by our domestic companies. Take a furniture manufacturer that sources its wood from Indonesia. Or how about a shoe manufacturer that imports its leather from abroad? Since we import more leather from China than any other country, some domestic shoemakers will now be subject to 60% higher costs on the leather they import. We are potentially harming the very domestic companies we are trying to protect.
Another concern is retaliation and outright trade wars. Other countries will likely respond in turn with their own tariffs, thereby harming our industries that depend on exports to those foreign countries. Furthermore, we live in a time of heightened geopolitical tensions and the fuse of past wars has often been lit by the match of economic strife between countries.
Finally, tariffs are inflationary. Tariffs are simply a tax, which means that consumers will be paying higher prices on a variety of goods. Many Americans voted out the Biden/Harris administration due to inflation and the higher costs of living. Tariffs implemented by the new administration may exacerbate these inflationary pressures. An unintended consequence of inflation is the potential for elevated interest rates as well. The rock-bottom interest rates we have been spoiled with since 2008 finally rose with the inflationary spike of 2022. The Federal Reserve is hopeful that it can lower interest rates in 2025. But if inflationary pressures persist, then the lowering of interest rates may not come to fruition.
Despite these risks, it’s important to keep in mind that geopolitical dynamics are incredibly complex and nuanced. The COVID-19 pandemic showed everyone the risks of depending too much on foreign governments for essential items necessary to function in times of crisis. At the end of the day, the risks to economic prosperity may be worth the potential strengthening of national security.
A proposed policy initiative tied to inflation and interest rates is the Department of Government Efficiency (DOGE), the advisory commission led by Elon Musk. The goal of the commission is to cut the federal budget by $2 trillion through weeding out inefficient government spending.
At Morton Wealth, we have been harping on the unsustainable imbalances of our federal debt levels for many years. So we applaud the intention behind striving for more efficiency in government spending. But we believe that the herculean task that DOGE has outlined is unlikely to succeed. It just comes down to math. Our current government receipts, primarily generated from taxes, amount to roughly $5trillion per year. Our government outlays amount to $7 trillion, with the gap resulting in a $2 trillion annual deficit. This amounts to 7% of our GDP (size of our economy), which, on a percentage basis, exceeds any historical deficit outside of wartime or a deep recession. Simply unsustainable!
So where can DOGE cut from? Here are the main budget line items:
Mandatory Spending
- Social Security:$1.5 trillion
- Medicare: $1.1trillion
- Medicaid: $600billion
- Interest Expense: $1 trillion
- Other mandatory(veteran’s benefits, other income/benefit programs): $800 billion
Discretionary Spending
- Military defense:$900 billion
- Non-defense discretionary: $900 billion
Most of the categories are “mandatory,” which are required by existing law and hard to change. In addition, President Trump has declared that Social Security and Medicare will not be touched. On the “discretionary” side of things, military defense is unlikely to budge much from here given the stance of the Trump administration and current geopolitical environment. That leaves the $900 billion bucket of non-defense discretionary spending, which encompasses dozens of individual line items. So even if that broad bucket is meaningfully reduced, that would barely put a dent on in the $2 trillion annual deficit.
A pressing issue is the annual interest expense on our $35 trillion of federal debt. With the rising interest rates of the last few years, this annual cost has ballooned from $500billion in 2020 to north of $1 trillion and climbing. Revisiting the discussion around tariffs above, this raises the question of the counterbalancing effects of certain policies. If tariffs result in continued upward inflationary pressures, then elevated interest rates may be here to stay. If that’s the case, then this enormous expense in our budget is unlikely to come down any time soon.
So, what are the implications for your investment portfolio? While I lay out a number of implications to proposed policies that may or may not come to pass, I take tremendous pride in the work our investment team does to craft portfolios that are meant to march ahead, no matter what economic scenario unfolds. It’s incredibly empowering to say that whether our economic predictions are right or wrong, your portfolio is designed to be consistent and generate cash flow no matter which way the wind blows. My hope is that you, the Morton Investor, feel the same—that when headlines abound and other investors obsess about portfolio positioning and which of their stocks are “winning” or “losing,” you are at ease with a thoughtfully constructed portfolio that is resilient and more removed from the conflicting aims of politicians and the whims of global markets.
Disclosures:
Information presented herein is for illustrative purposes only and is not intended as investment advice. Each investment opportunity is unique, and it is not known whether the same or similar type of opportunity will be available. Morton makes no representations as to the actual composition or performance of any security. All investments involve risk, including the loss of principal. Past performance is no guarantee of future results. You should consult with your financial advisor to thoroughly review all information before implementing any transactions and/or strategies concerning your finances.
Read Jeff's latest Perspective letters here:
Rethinking What "Long-Term" Means for Stocks
Resilient Investments to Combat Uncertainty
