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I was wrong in my prediction regarding the 2020 election season. I thought it was most likely the red team would retain the senate with Biden in the oval office or what I called “Scenario 3”. I wrote “Scenario 4” was second most likely and that is what happened: Biden in the White House with the blue folks in control of the Senate.

My understanding of the Senate also lacked nuance. While the blue team does have a simple majority in the Senate thanks to 50 members plus Vice President Harris breaking ties, only certain legislation can be passed without a 60 Senator majority. With a simple 51 vote majority the Senate is (somewhat) limited in what legislation it can pass to what is authorized in the budget reconciliation process.

My very superficial understanding of the reconciliation process is that it must pertain to spending and revenue and can only be used once per year. It could be used to raise or lower taxes (for the blues it would be raise) and who knows what other tomfoolery.

Taxing and Spending

But even with the blue group being somewhat limited by the reconciliation process, I can guarantee new taxes and more spending. Perhaps Wall street either likes the tax and spend approach, or the market had already priced in a Biden-Harris Administration, or perhaps it is simply the removal of the election uncertainty for the next two years, combined with vaccine optimism, regardless of how the election turned out.

In any case the S&P 500 is up nearly 9% since November 5th.

Wall Street does seem to love spending, and doesn’t seem to care about the national debt. So while I wouldn’t expect the stock market to crash because of Biden’s tax and spend approach, I do think the economy would fare better under low taxes and fiscal discipline.

Perhaps Trump will say the stock market is magically back in a big, fat, ugly bubble again now that he isn’t in power. I think the stock market has been in a bubble for a while. However, the ability of the powers that be to keep the bubble inflated has far surpassed what I believed possible.

Debt

Even though the blue team is known for spending, their tax hikes don’t cover the bill. To be fair red team doesn’t have many fiscal conservatives either. The national debt goes up regardless of who is in power.

I predicted back in January of 2017 that the US nation debt would go to $40 trillion under Trump. However, under the Trump administration, the debt only went from about $19.9 trillion to about $27.7 trillion. Granted I thought Trump would win reelection at the time I made that prediction and he would have 8 years to run up the debt by over $20 trillion.

Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds122016.pdf

Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/2020/opds122020.pdf

Unless Trump runs for office again and wins, my $40 trillion prediction was wrong. However, I think the national debt will go to $40 trillion by the end of 2024.

I think over the next four years it will go from $27.7 trillion to over $40 trillion. It would mean about $3 trillion per year. In 2020 the national debt increased by $4.2 trillion. I’m sure Biden will be looking for a big spending package in 2021 to get his administration started off with a bang.

Source: https://www.thebalance.com/us-deficit-by-year-3306306

Government spending financed by debt reduces the value of dollars, so more dollars are required for later stimulus in order to have the same effect. For example in 2008, when the banks were being bailed out the debt went up by about $1 trillion. Then the next year the debt went up by $1.8 trillion.

Granted 2020 had COVID-19 and lockdown crisis, but that hasn’t gone away. In 2018 and 2019, with the economy supposedly humming along and no large-scale military engagements, the debt still increased by over $1.2 trillion each year.

My $40 trillion prediction is based on the national debt going up by $4-5 trillion in 2021, followed by $2.5 trillion per year after that.

This is one reason why interest rates can’t rise. The treasury issues debt at a variety of maturity rates. But as interest rates rise, that means the government has to pay out more money on the debt. The treasury is already paying about $393 billion per year in interest at current rates.

Source: https://www.thefiscaltimes.com/2020/10/09/Cost-Interest-National-Debt-Falls-Despite-Surging-Deficit-CBO

Interest Rates Rising

In June of 2007 the yield on a 10 year treasury was 5%. In the wake of the 2008 financial crisis it has steadily fallen. While still stupidly low, the 10 year treasury yield has been rising. In July of 2020 it was as low as about 0.5%. Since then the yield has risen to about 1%. As I said before it is still stupid low, in contrast the 10 year treasury yield was 15% in the early 1980s.

However, the market is addicted to low interest rates. If the 10 year yield continues to rise and gets to 3 or 4% I think that would be devastating for stocks. As mentioned above it would also dramatically increase amount the treasury would need to pay in interest. For example at 0.5%, $2 trillion would cost $10 billion, but at 3% it jumps up to $60 billion. But it isn’t just the new debt, as older debt expires and the borrower gets paid back, the treasury issues new debt to pay for it, which must be issued at the new rates.

I’m sure the Federal Reserve will step in and drive the yield back down before that happens. The Washington elite definitely don’t want a stock market crash to happen when the blue team is in control of the government.

Warfare

I think the Biden-Harris administration is much more likely to increase hostilities in the world. Despite all his faults, and alienating allies of the United States, Trump didn’t start any major military engagements in the world. I believe Biden-Harris will follow the Bush II and Obama approaches to foreign policy.

More war is good news for “defense” contractors, but less positive for everyone else. The loss of human life in war is the most tragic element and the most important reason to avoid military action except as a last resort. A distant second reason for avoiding war is that bombs, drones and aircraft carriers are expensive and contribute to the national debt. Surely the military action, as it always is, will be dressed up flowery rhetoric to make it seems necessary, noble and courageous.

Wealth Management

I think a 10-20% allocation to precious metals is as important now as it ever was. Gold has been down and sideways since the new high was made in August of 2020. It seems to have support at around $1,790 per troy ounce. I think this is consolidation prior to the next leg up.

Stocks only seem to go up. Valuation and fundamentals don’t seem to matter.

While I always have some exposure to the stock market, I’ve missed out on the some of the gains of the last 8-9 years since I’ve been underweight US stocks. I’ve been waiting for a buying opportunity. I was considering buying in around March of 2020, but I expected the markets to go lower.

I was wrong.

The powers that be are able to maintain the stock market prices far beyond what makes sense to me. I’m planning on averaging into various mutual funds over time. Perhaps my capitulation is a sign that the top is near!

Despite all the challenges from higher taxes, more regulations, debt and lockdowns, there are still productive businesses out there. While I think Biden/Harris and their allies on the blue team will make things worse, there are still plenty of reasons to be optimistic. Being in a “bunker mode” for the past 8 years has cause me to miss out on a significant stock market rise. At some point I think the dollar will crash and maybe stocks will go down too, but that is what the precious metals are for.