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WILL TRICKLE DOWN ECONOMICS MAKE IT RAIN…

Let’s face it…it’s a race to create enough GDP to outrun the avalanche of spending and U.S debt.

The big beautiful tax bill will add a plethora of individual and business benefits. But it will also add approximately 3.4 to 6 trillion dollars to the national debt over 10 years. If you listen to the noise, economists will dig into historical comparisons comparing Trump’s tax bill to Reaganomics saying that supply side economics doesn’t work.

The real question is who does supply side economics work for? Instead of painting a grim picture of how Trump’s trickle down economics will throw the U.S. economy into the arms of stagflation.

Let’s look at the data—a real comparison based on raw data.

Ronald Reagan’s presidential tenure was from January 20, 1981, to January 20, 1989. He served two full terms as the 40th president of the United States. During this timeframe we saw a tremendous increase in the stock market.

From 1981 to 1989, the S&P 500 had the following approximate annual returns (including dividends):

• 1981: -4.7%

• 1982: +20.4%

• 1983: +22.3%

• 1984: +6.15%

• 1985: +31.2%

• 1986: +18.5%

• 1987: +5.8%

• 1988: +16.5%

• 1989: +31.5%

The compound annual growth rate (CAGR) over this 9-year period would be close to approximately 14% per year on a compounded basis. In total, this corresponds roughly to the market having appreciated around 3.4 times in value from the end of 1981 to the end of 1989, or about 240% total growth.

In 1981, the average mortgage rate was 16.63%; by 1989 mortgage rates dropped to 10.25%. The Fed fund rate was as high as 20% in 1981. By 1989, the Fed funds rate dropped to 9%.

And lastly, unemployment was at between 7.5% and 8.5% in 1981; by 1989 the rate of employment dropped to 5.3%. GDP also got a shot in the arm going 3.21 trillion to 5.64 trillion or 76%.

But real GDP, which measures true economic output and growth grew by 33%. So correct me if I am wrong, but as an investor, based on the data—how did supply side economics hurt the investor, the economy, or the stock market?

If it did anything, it helped the investor by significantly lowering taxes on individuals and corporations, which increased incentives to invest and produce. It’s important to avoid the noise by doing the research.

 Here are some important data points.

Tax Cuts: The Economic Recovery Tax Act of 1981 and subsequent tax reforms sharply reduced marginal tax rates, cutting the top income tax rate from 70% to 50% and later even lower, along with reductions in capital gains taxes. This allowed investors to keep a greater share of their earnings and investment returns, boosting after-tax profits and capital available for reinvestment.

Accelerated Depreciation: Changes like the Accelerated Cost Recovery System enabled businesses to write off capital investments faster, reducing taxable income and encouraging more investment in equipment and infrastructure.

Deregulation: Reducing government regulation lowered costs and increased market efficiency, creating a more favorable environment for businesses and investment.

Economic Growth and Confidence: These policies helped spur one of the largest peacetime economic expansions in U.S. history, with GDP growing around 3.6% annually and unemployment falling. This created higher corporate earnings and asset values, benefiting investors through capital gains.

Trickle-Down Effect: The belief was that tax relief to corporations and high earners would “trickle down” by leading to more investment, job creation, and overall economic expansion, indirectly benefiting all investors and workers.

Now, history doesn’t repeat,  it rhymes—and past performance is not indicative of past performance. But it’s proven, based on history, that supply side economics worked for business and investors.

It did not work for the non-investor or the citizens that had no financial stake in the economy on an investment basis. Supply side economics created wealth inequality, as tax cuts favored the wealthy.

The richest Americans saw major income and wealth gains, while the poor and middle class saw stagnant or shrinking incomes.

We also saw cuts in social program funding—large cuts to federal spending targeted social safety nets and public services such as education and welfare. This meant that many disadvantaged groups received less support, and states and local governments had to raise taxes or reduce services, impacting average citizens negatively.

The middle class suffered as incomes barely improved despite the major GDP growth during the period. Many workers faced wage stagnation, job insecurity, and the erosion of manufacturing jobs due to globalization and deregulation impacts.

This is the point in where we may see a different result in this period of supply side economics. With companies reshoring stateside and the removal of burdensome regulations that prevented business from manufacturing in the U.S, this could lead to a growth in real GDP.

And for those who don’t understand what the big beautiful tax bill means from an investors perspective—this means companies’ net incomes and earnings will increase based on the depreciation changes and tax cuts in the tax bill.

And for those who think it will not work—what we know is that Bidenomics didn’t fair any better as it added 8.4 trillion to the national debt in 4 years as compared to the potential of a Trump 3.4 to 6 trillion projection lead by an FDR new deal type of spend, hoping that it would create jobs and placate the nation.

And while we saw recovery from the pandemic in GDP, here are the actual numbers.

1. 2020: -2.16% (a contraction due to the COVID-19 pandemic impact)

2. 2021: 6.06% (strong rebound from the pandemic recession)

3. 2022: 2.51% (moderate growth slowing from 2021 peak)

4. 2023: 2.89% (continued moderate growth)

5. 2024: Estimated around 2.8% based on projections and recent data trends

One thing is for certain—the pandemic supply shocks and zero rate monetary policy created inflation during the pandemic. Today, we are still 2.543 trillion heavier on the Feds balance sheet as compared to pre-pandemic, which is causing the Feds to stay more restrictive than the market would like.

But if history is an indicator of “you can get past the noise,” the investment future looks extremely bright. First, it’s not a matter of if Feds will lower, it’s when.

Secondly, economic output will increase, therefore, real GDP will increase. And lastly, the tax bill and market deregulation should provide a runway for stocks to appreciate the future, barring any major set backs.

 WHEN INVESTING BECOMES A LIFESTYLE YOU WEAR IT!

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IS JAY POWELL WRECKING THE ECONOMY…

So here is the controversy…Trump wants Jay Powell to lower the Fed fund rate. The Feds have a dual mandate which dictates low stable prices, low unemployment, and low inflation. 

Here is where it gets hairy. Their target is 2% and headline CPI inflation is at 2.7%, while core CPI ex food and energy sits at 2.9%, which is up from the prior month of 2.4% and 2.8%, respectively. 

Inflation seems to be going in the wrong direction, which might indicate that tariffs are having a measured impact on the economy. Jay Powell and the FOMC are of the mind that they should stand pat and remain data dependent due to the unknown nature of tariffs. 

Trump’s Administration wants a lower Fed fund rate and has berated Jay Powell to this effect—to the point where his job has been threatened, repeatedly. 

Jay Powell’s position is that the Feds do not make moves on politics, but strictly based on their dual mandate. Trump’s insistence is fueled by the fact that a 1% decrease could save the government 360 billion in interest payments. 

And secondly, mortgage rates are high because of the Feds unwillingness to be more accommodating. In order to understand this further, let’s look at the reasoning further on both sides. 

Starting with the Feds. 

 If the Feds lower interest rates, this could trigger inflations ugly head because money then becomes cheap in the form of loans, mortgages, and credit. And the thought process is that if the consumer has more money chasing less supply, this is inflationary—as lowering rates put more money in the consumers hands. 

But when you look at the CPI shelter, it’s approximately 40% to 45% the overall reported index, with Americans paying between 30% and 50% of their income for shelter, where as historically since 1900, it’s been 20%. 

This feeds into Trump’s argument that Jay Powell is recking the economy and that he is weaponizing the Feds against the American economy. This is a political move if you ask the president, as the Feds lower interest rates 75 basis points before the 2024 election to help the Democrats. 

Trump and his supporters framed the rate cuts as moves intended to help the Biden-Harris administration and boost the Democrats’ chances in the election.

Meanwhile, we are looking at paying almost 1 trillion dollars in interest payments and the argument is the Feds are not moving because Jay Powell doesn’t like Trump and his inflationary tariff policies. 

an economical note, tariffs may be just starting to show up in the numbers, but the recent GDP numbers of 2.97% say we are picking up steam, as opposed to last months negative .05% number, which was driven by less imports and higher consumer spend. 

A great GDP print bolds well for the president while simultaneously putting more pressure on the Feds. 

The thought process is that Trump’s policies and tax bill will cause inflation due to taking on 3.4 trillion dollars in debt over 10 years, but it doesn’t account for the potential real GDP output, which if Trump’s plan works, we will have economic offsets as businesses start to rebuild America on sharing and hiring workers and creating new industries. 

The issue is that Jay Powell thinks the exact opposite, which makes this a political move against Trump in Trump’s opinion.  The trick is lowering interest rates without causing higher inflation.

The Fed’s has stated that rates are modestly restrictive, which when you look a little deeper—the rolling of bonds off of the Feds balance sheet is actually keeping mortgages rates higher.

The Feds are the biggest buyer of bonds, so if they aren’t creating a market for mortgage bonds, this keeps rates higher in the private markets due to the fact that mortgage bonds holders will request a premium to own them, which inflates the bonds, therefore, disrupting the natural correlation between mortgage rates and the 10-year treasury. 

This, in combination with a 4.25% and a 4.5% Fed fund rate some are saying is too restrictive based on the neutral rate, which is approximately 2.7% to 2.8%. When you subtract this number from the current Fed fund rate, you get 1.7% to 1.8%, which in theory is restrictive on the economy. 

In order to understand, first you must understand a few parts :

The federal funds rate is the current policy rate set by the Fed through its Federal Open Market Committee (FOMC). This is the rate at which banks lend reserves overnight and the main tool through which the Fed conducts monetary policy.

The neutral rate is a theoretical or estimated rate at which the economy would be at full employment and stable inflation, with monetary policy neither stimulating nor restraining economic growth. It is not directly observable but inferred from economic data.

When the federal funds rate is above the neutral rate, policy is considered restrictive (cooling the economy). When it is below the neutral rate, policy is accommodative or stimulative (encouraging growth).

Since the Feds have a track record of moving too late, based on pandemic history where they acted too slow to raise rates sighting the pandemic shock was temporary—the fear is that they will wait too long to lower rates, pressing the U.S. economy into a recession or even worse, stagflation. 

Where we see high unemployment, high inflation, and slow or anemic growth—this is the exact reason the Feds are being pressured to act, but fortunately for Jay Powell and fortunately for President Trump, unless there is wrong doing they can’t replace Jay Powell without cause, because the Fed Chair is protected by law as part of an independent agency.

But the Federal Reserve Chair can be removed by the President “for cause,” according to the Federal Reserve Act. “For cause” generally means valid reasons such as misconduct, neglect of duty, inefficiency, or malfeasance, rather than policy disagreements or political reasons.

This would explain the recently surfaced accusation of misappropriation of the 2.5 billion in funds being spent on the renovation project of its historic buildings. 

The White House, including Budget Director, Russ Vought, has expressed concerns that some elements of the renovation might deviate from approved plans and could breach legal standards.

This is an obvious witch hunt and since the President has publicly expressed his displeasure for the way Jay Powell is handling interests rates, fabricating a botched renovation proves his motives, which ultimately makes Jay Powell bullet proof for the time being…this is definitely a nail biter…stay tuned…

WHEN INVESTING BECOMES A LIFESTYLE YOU WEAR IT!

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Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report