January 24, 2025
Dear Clients and Friends,
Much has been made of the Trump Trade and in the short-term it paid off for those investors on the right side of that trade. Post-election, the financial sector, energy and crypto all shot up. Why? Think young child in a candy store: sugar is good in the here & now, tantrums can wait. The sugar is less regulation, an embrace of fossil fuels, lower taxes, and the awakening of animal spirits, which encourages risk taking. To be clear, I am not saying that the Trump Trade winners are like small children; some correctly and rationally predicted how certain segments of the markets would react. What I am saying, however, is that the rush can fade.
Speculation has a dark side, history is replete with examples. An anti-immigration policy can have inflationary effects – somebody has to work the fields, frame the houses, and write code. But it is not just about cheap labor. The tech sector would be hampered in its innovation if it can no longer attract foreign talent on H1-B visas; a point of contention in an otherwise loving relationship between Musk and MAGA. Tax cuts that aren’t paid for raise the deficit, keeping upward pressure on interest rates, and tariffs are a tax on consumption.
Now, it can all work out, stock market wise. During Trump 1.0 the stock market (S&P 500) advanced 67%, similar to, though ahead of the 56% advance under Biden. However, at the start of 2017 the stock market was much cheaper than it is now and any downturns this time around could be more pronounced as stocks are priced for perfection. Tying it all together: the stock market is pricing a rosy outcome. The bond market disagrees, pricing in higher inflation and higher-for-longer rates, and I too have my doubts.
The market as a whole has been less giddy since the start of the year than the Trump Trade might suggest, up 3.7%, outpacing bonds (+0.2%), but lagging gold (+5.6%) and international stocks (+3.8%). We don’t have to wait long to find out who is getting 2025 right. This market environment, I believe, calls for a reactive rather than a predictive approach, and avoiding unforced errors. With “reactive” I mean that financial assets tell you what they offer in expected return through their price and you can let that be your guide. An example illustrates the point: Apple is trading at an earnings yield of 2.7%. So if all Apple does this year is reproduce last year’s earnings result and the stock did not trade, you will get a 2.7% return on your investment. Why is anyone willing to buy Apple? Because they think a) Apple will grow its earnings substantially, or b) they think other investors are willing to pay even more for the stock down the road, irrespective of its earnings.
Nike on the other hand, has an earnings yield of 4.4%. Why is the market offering Nike at a much higher earnings yield? Because the company lost a step under the helm of its previous (overpaid) CEO and the market is unsure whether Nike can right the ship. It therefore offers you the stock at a higher earnings yield. To come full circle, I believe we are entering a volatile period, and rather than trying to predict what will happen, we can just observe where the markets offer attractive earnings yields (and bond yields) and decide whether those attractive yields warrant investment.
Gifting and Taxes – The Sky is the Limit
I am often asked by clients how much you can give each year to your children without triggering gift tax. Yes, my parent clients are very nice and their deserving kin have much to be thankful for. I raise the topic because there is this perennial misconception about gifting and taxes. People often anchor to the annual gift tax exclusion amount, which is $19,000 per recipient for 2025. If you give more than $19,000 to a single person, you need to file a gift tax return; fairly straightforward and due at the same time as your income tax return. However, the fact that you have to file a form, does not mean you owe taxes.
The amount you gift to any one person over the $19,000 threshold just reduces your lifetime gift & estate tax exemption amount, which is currently pegged at $13.99 million per person, or $27.98 million per married couple. So the gift tax filing is just for the purpose of keeping track of your lifetime exclusion amount. Now, you may want to keep capping your gifting at $19,000 per child for other, very sensible reasons, but know that the true tax free limit is orders of magnitude higher. In fact, practically speaking, for most households, tax free gifting is unlimited and fewer than 0.1% of estates end up paying any estate tax when they are distributed.
At the risk of stating the obvious, there are different philosophies about gifting during your lifetime versus at the time of your death, or whether or not to limit the amount your children inherit. It is a very personal decision. In my case, should I be so fortunate as to have the problem of a large estate, I like what Warren Buffett had to say on the topic: “Give them enough so they can do anything, but not enough so they can do nothing.”
Winning Two Consecutive Decades in the Stock Market
If you look back 20 years from 1/1/2025, you will find that the US stock market outperformed international stocks two decades in a row. American exceptionalism, plain and simple. However, if you do the same look back exercise for each of the last 10 years, you will find that only 2 out of 10 times the most recent decade’s winner was the same as the preceding decade’s winner. In other words, if history is any guide, most of the time the next decade will have a different winner than the past decade, when comparing US stocks to international stocks. Further considering the fact that the market is much more expensive now than in 1996 and 2005 – the 2 years that were followed by two straight decades of out-performance – I assign increasingly higher odds to the pendulum swinging the other way and crowning a new winner for the next decade.
Should you be in international stocks instead of US stocks? No, perhaps the US will put up another winning decade. Besides, as a US investor your liabilities (future expenditures) are in US dollars, so your assets should have a US tilt. However, it does mean that returns over the next decade might come from surprising corners and your portfolio should include different exposures, as you invest in the future, not the past.
1878 All Over Again
In 1878 silver mine owners and investors managed to get Congress to pass the Bland-Allison Act, relatably, graft in government affairs was rife those days. The law required the US government to support the price of silver by accumulating a strategic government stockpile. It’s fascinating stuff, if you ever have the time to read about the Comstock Lode. What happened to the price of silver? It went up. But eventually it petered out, because the purchases were not going to be unlimited and the coinage of silver added to the money supply, which also constrained the amount of appreciation. More currency chasing the same amount of goods & services tends to have a cooling effect on the price of that currency. So who won? For some time, the silver barons and their believers, assuming they cashed out some.
Fast forward 147 years and we are at it again. This time, the talk is of a ‘“revolutionary” idea to create an alternative monetary stockpile of one million bitcoin. Few ideas in politics are ever new, but of course no one remembers 1878, much less the time that the Spanish thought they could get out of debt in 1545 when they discovered the mother lode of silver in Potosí (present-day Bolivia).
Why does any of this matter? Well, investors think that the price of bitcoin will go up if the stockpile comes to pass and it very well might. It is also possible that its current price bakes in a fair amount of that appreciation already, because investors don’t have to wait to bid up the price. However, it is also possible that it does not come to pass, or that it follows in history’s footsteps and peters out.
Why might it not come to pass? When one of its most ardent supporters, Sen, Cynthia Lummis (R-WY), talks of having the 12 Federal Reserve banks buy into bitcoin with their excess reserves, it is important to note that there are no excess reserves. Collectively, the banks have a capital shortfall of $145 billion, which they have to borrow to fund their own expenses.
But even if the banks didn’t have a capital shortfall, the Federal Reserve Act would have to be amended to allow the Fed to expand the Fed’s open market operations to allow for the purchase of anything other than government obligations or instruments backed by the government, like government-insured mortgages. Also, bitcoin is not the only crypto in town and other coins would want a piece of the action, diminishing the size of the bitcoin purchase.
Anything is possible, so maybe these hurdles are overcome. David Sachs is in charge and he is a smart guy, of PayPal founding fame, with a background in venture capital, blockchain and cryptocurrency. But it does feel a little like your broke relative asking for money so he can invest in crypto, become infinitely rich, and pay you back double. And he is not $33 trillion in the hole like our government.
The Future of Wind Energy
Trump didn’t waste time putting a moratorium on offshore wind development. Additionally, the government will stop permitting wind projects on federal lands. Why does Trump not like wind energy? He never has. It obstructs the views at his Scottish golf resort, it screams “Biden”, it competes with fossil fuels, and it kills birds, much like cats do. Maybe there are better reasons, but at the end of the day, the “why” doesn’t matter. Will this doom the wind industry? No. As an investor in wind energy – for clients with that interest – I have some skin in the game, of course. But it is good to remember that the stock prices of wind energy companies were already accounting for this possibility.
The reason this will not be the death knell is threefold: 1) the turbine manufacturers can sell globally, and the rest of the world is not hitting the pause on wind energy, 2) fewer new projects in the US does not mean less revenue for existing projects, just less supply coming online, and 3) Utilities who purchase clean energy have investment horizons that exceed 4 years. They are planning projects today that will come online in the next few years and extend 20 -30 years into the future. The current 4-year period might mean or justify a delayed start, but is less relevant over the course of the project’s life.
To be sure,even though it is not a death knell, it might well be a gut punch. I would be careful investing additional capital in the domestic wind industry and bide my time with existing investments until the clouds clear and the winds shift.
Winter came to the North, the East and the South, but in the Pacific Northwest, I have yet to see a flake of snow, from my vantage point of West Linn, Oregon. My thoughts are with my clients and friends in Los Angeles, who could certainly use some winter weather. May you build back stronger and better, I think the human spirit is enduring in that way.
Kindly,
Jan P. Schalkwijk, CFA
JPS Global Investments