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INAGURATION DAY

I have been waiting to write my next CIO Corner post and figured Inauguration Day would be at least mildly interesting. No matter what side of the political aisle you favor, there was something to please you and anger you. President Biden provided a last-minute list of preemptive pardons for a number of his family members after some other controversial pardons. President Trump took little time in issuing executive orders, including a sweeping pardon of those involved with the actions on January 6, 2020. My wife was getting ready for her day and had Good Morning America on the television. George Stephanopoulos and Jonathan Karl were wringing their hands about the actions of Trump, and I listened to Fox News on my way into the office as the coronation of Trump continued.

What does this mean for the markets? I will leave the political punditry to others but have been thinking about the change in the political landscape. President Trump has promised to move the country back into a deregulation mode and to work to get the government out of the way of business. Personally, I believe this to be a good thing as most of our elected officials seemingly have very little understanding of how business actually works. Congress believes that their selection of winners and losers is capital allocation at its best. For the rest of us, we are not so sure.

One key factor has been the decline in the 10-year Treasury yield. In the run-up to the inauguration, the yield on the 10-year Treasury note reached 4.79% on January 14th[1]. There was a growing sense of inflation and that the size of the federal debt and deficit would materially weigh on the country’s ability to grow. As I write this at 8:10 AM on January 21st, the 10-year yield has fallen to 4.57%[1]. The sense is that the imposition of tariffs will somehow solve the debt issues. I am having a hard time with this logic because tariffs will ultimately be passed onto the consumer, so we still need to keep an eye on inflation.

As I wrote in a post several weeks ago, I remain concerned that neither party has raised a serious plan to combat our growing debt and continuing budget deficit. Unfortunately, the incoming administration is no better than the outgoing administration on this particular issue. If we do start to increase energy production and consider things like nuclear power, focus on deregulation, and truly rights-size federal spending, we have a chance at getting the budget under control. If we can get the budget under control, we can then think about deficit reduction. These are tall orders indeed, but if we continue to build debt the cost of servicing that debt will have a crowding-out effect on other borrowers. This keeps the government from investing in the country because tax revenue will be needed to service debt and the increased pressure of higher federal debt is inflationary.

I hope the President can begin attacking these real problems so America can remain on a growth trajectory.

[1] Source: Bloomberg

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