(Please note: The Kotok Report is now also available on Substack at https://dkotok.substack.com.)
We will discuss the Israel-Iran war in coming Kotok Report posts.
I would like to preface this Sunday’s commentary by wishing a happy 52nd Anniversary to Cumberland Advisors and a happy Father’s Day to all the dads in our readership.
Let’s open today’s discussion with two snippets from the online introduction to the CBO’s 42-page “Budget and Economic Outlook: 2025 to 2035”:
Deficits
In CBO’s projections, the federal budget deficit in fiscal year 2025 is $1.9 trillion. Adjusted to exclude the effects of shifts in the timing of certain payments, the deficit grows to $2.7 trillion by 2035. It amounts to 6.2 percent of gross domestic product (GDP) in 2025 and drops to 5.2 percent by 2027 as revenues increase faster than outlays. In later years, outlays increase faster than revenues, on average. In 2035, the adjusted deficit equals 6.1 percent of GDP—significantly more than the 3.8 percent that deficits have averaged over the past 50 years.
[AND]
Debt
From 2025 to 2035, debt swells as increases in mandatory spending and interest costs outpace growth in revenues. Federal debt held by the public rises from 100 percent of GDP this year to 118 percent in 2035, surpassing its previous high of 106 percent of GDP in 1946.
(Projection for 2025–2026, “The Budget and Economic Outlook: 2025 to 2035,” https://www.cbo.gov/publication/60870#:~:text=In%20CBO’s%20projections%2C%20economic%20growth,size%20of%20the%20labor%20force)
The 47th American president has declared “I’m a fiscal hawk. I’m a bigger fiscal hawk. There’s nobody like me as a fiscal,” Trump told reporters on Capitol Hill last month.
When he was readying to ascend to the position of US Treasury Secretary, Scott Bessent outlined his 3-3-3 projection. Here’s the link to the Fox News report:
“Treasury secretary nominee Scott Bessent’s ‘3-3-3’ plan: What to know,”
https://www.foxbusiness.com/politics/treasury-secretary-nominee-scott-bessents-3-3-3-plan-what-know
An excerpt:
Bessent discussed the 3-3-3 plan this summer at an event hosted by the Manhattan Institute. He said it would involve cutting the budget deficit to 3% of gross domestic product (GDP) by 2028, the last year of Trump’s second term; boosting GDP growth to 3% through deregulation and other pro-growth policies; and increasing U.S. energy production to the equivalent of an additional 3 million barrels of oil per day.
Kotok’s view
I don’t believe anything is predictable now as we watch the evolution of Washington under #47. DT 2.0 policy or lack of same is unfolding as a continuing series of surprises and revelations that raise market volatility (in both directions, like VIX shooting to 72 and then plummeting to 16). DT 2.0 adds to uncertainty premia, which seem to be at record highs. Number 47 is following a governmental footprint originated and publicized in Project 2025. (Its lead author is now ensconced in the administration’s budget mechanism.) I read Project 2025 (https://static.heritage.org/project2025/2025_MandateForLeadership_FULL.pdf) and have written about aspects of it. Its implementation is destined to have extraordinary impacts on the national economy and on life in the United States.
In addition, the US economy is slowing as the tariff war continues to unfold and to take its economic toll. This economic outcome reminds me of what happened in 1973, when Nixon’s protectionism was evolving and we experienced the beginning of a bear market, sliding slowly down a deadly slope. The vicious bear market in American stocks emerged in the latter half of 1974. I remember it well. Then came an oil-price supply shock; now it is a tariff-induced supply shock. And there were a group of stocks called the Nifty Fifty. I remember them, too. Wikipedia summarizes their history:
“Nifty Fifty,”
https://en.wikipedia.org/wiki/Nifty_Fifty
And here’s the history of the 1973–74 stock market crash:
“1973–1974 Stock Market Crash,”
https://en.wikipedia.org/wiki/1973%E2%80%931974_stock_market_crash
It was in June 1973 that I co-founded Cumberland Advisors with my late partner Sheldon “Shep” Goldberg — we started our business during that crash. Wikipedia’s summarizes the two key years this way:
In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange’s Dow Jones Industrial Average benchmark suffered the seventh-worst bear market in its history, losing over 45% of its value. The year 1972 had been a good year for the DJIA, with gains of 15% in the twelve months, and 1973 had been expected to be even better, with Time magazine reporting just 3 days before the crash began that it was ‘shaping up as a gilt-edged year’. In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to −2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974. The Dow reached its lowest level, 577.60 points, on December 6, 1974.
I remember when the Dow went under 600. I also remember when Shep and I started a buy program for our few early clients. The oil supply shock scared nearly everyone. And stocks seemed cheap, with some projected P/E ratios in the single digits.
As today’s missive is written in mid-June 2025, 14 tech sector stocks constitute 39% of the weight of the S&P 500 Index. Is this the “Nifty Fourteen”? (Source: DataTrek Morning Briefing, June 8th) They are collectively reflecting ongoing growth in earnings at projected rates that are very high. Will that growth be delivered in the tech sector on a continuing basis to justify the high P/E? We shall see.
Kotok note: The 14 tech stocks are collectively priced at a high P/E but not as high as the peak P/E of the Nifty Fifty. Note that the rest of today’s stock market is priced on much lower earnings growth estimates. My Cumberland colleague Matt McAleer has discussed this, with the comparison of the S&P 500 revealed in the cap-weighted security SPY versus the same stocks in the equal-weighted RSP. Contact Matt directly for details: Matthew.McAleer@cumber.com.
Bond markets also show diverse and inconsistent reactions, IMO. We illustrated this recently with a personal example of a trade from my own account (“Anatomy of an Actual Trade,” https://kotokreport.com/anatomy-of-an-actual-trade/). I compared a tax-free 5.18% federally backed bond with a duration-matched 10-year Treasury note yield that was about 8/10ths of a percent lower. Same US government backing for both credits. Tax-free about 20% higher than taxable yield. Even when we used market-based prices to “insure” the US creditworthiness with a 10-year credit default swap (CDS), the net tax-free yield still exceeded the taxable Treasury yield. Note that the whole investment return of the bond I bought for myself compared with a taxable equivalent of over 8%. Please think about these numbers when the inflation rate is currently somewhere between 2% and 3%. I don’t know about you, but for me a tax-free “real” return 2–3 points higher than the estimated inflation rate seems appealing.
My best guess is the “Big Beautiful” fiscal package will be around the 5% to 6% of GDP deficit level and continue that way for Trump’s term. What happens after the midterm elections is debatable, but the deficit trajectory is likely to be a couple of points above Scott Bessent’s 3% if we don’t have a recession and well above it if we do. So, a huge fiscal stimulus is coming on top of a record debt/GDP ratio that exceeds the peak established during WW2.
“There’s nobody like me as a fiscal,” said the 47th president of the United States.
On May 21, we published “A Memoir: Mike McKee’s Lobster Dinner!” (https://kotokreport.com/a-memoir-mike-mckees-lobster-dinner/). In that piece we listed a partial deficit history.
Here’s the excerpt:
According to Consumer Affairs, the biggest single presidential term deficit, adding $8.18 trillion to our nation’s debt, was delivered by Donald Trump in his first four-year term. Joe Biden comes in second place behind Trump with a cumulative four-year term federal debt increase of $6.6 trillion. It took Barack Obama eight years to rack up $8.34 trillion in national debt additions — an average of $4.17 trillion for each term. The national debt grew $5.85 trillion under George W. Bush. His time in office included wars in Iraq and Afghanistan in addition to a financial crisis. (“U.S. debt by president: dollar and percentage 2025,” https://www.consumeraffairs.com/finance/us-debt-by-president.html)
It looks to me as if our President “Fiscal” is about to break his own record.
Happy Father’s Day!
Further reading
“Why Protecting the Congressional Budget Office Should Matter to the Congress, and to the Country,”
https://debtdispatch.substack.com/p/why-protecting-the-congressional“Tariffs, Trade, And the Coming Recession,”
https://kotokreport.com/tariffs-trade-and-the-coming-recession/“Impact Of Trump Tariffs On S&P 500 Earnings,”
https://kotokreport.com/impact-of-trump-tariffs-on-sp-500-earnings/
