Deficit Attention

How to think about the future without thinking about the future.

“Do not waste time thinking or talking about the shortcomings or wrong actions of plutocrats or trust magnates. Their organization of the world has made your opportunity; all you get really comes to you because of them. Do not rage against corrupt politicians; if it were not for politicians we should fall into anarchy, and your opportunity would be greatly lessened. God has worked a long time and very patiently to bring us up to where we are in industry and government, and He is going right on with His work.”
Wattles, Wallace D.. The Science of Getting Rich (p. 45) - 1910.

There is the moral of all human tales:
'Tis but the same rehearsal of the past,
First Freedom, and then Glory—when that fails,
Wealth, vice, corruption—barbarism at last.
And History, with all her volumes vast,
Hath but ONE page,—'tis better written here,
Where gorgeous Tyranny hath thus amassed
All treasures, all delights, that eye or ear
Heart, soul could seek, tongue ask—Away with words! draw near,
Lord Byron ~ Childe Harold's Pilgrimage Canto IV (CVIII) - 1818

“Those who cannot remember the past are condemned to repeat it”
George Santayana ~ The Life of Reason 1905

“Which of you by taking thought can add one cubit unto his stature?
Gospel of St. Matthew, 6,27 -King James Bible

I recently had the privilege of attending an event hosted by Grant Williams and his fragrant co-host Stephanie Pomboy of Macro Mavens in Tampa, Florida and being invited to add my ha’pennyworth to the day’s discussions. The event - one of the most convivial and stimulating conferences I have attended - was populated by some 200 or more members of the eclectic community of investment professionals and amateurs, business owners past and present, family wealth stewards and principals and other souls from all walks of life, skills and geographies who constitute Grant’s enthusiastic audience. (The Virtual Pass to the event is still available here and dare I say it worth your while purchasing). It was a blast and I was privileged to have been invited to contribute. Here’s how Grant described the event in afterwards

If you didn’t join us in Tampa for the Super Terrific Happy Day, you missed out on a remarkable set of conversations featuring Felix Zulauf discussing the macro outlook post-election, legendary Mutual Fund investor Bob Rodriguez, who offered his own unique insight into the untenable fiscal situation facing the United States and how he is positioning for its impact on policy and markets and Sy Jacobs, who shared the keys to his success in long/short investing as well as where he's finding opportunity now in the financial space.

That’s not all, however!

Also present was legendary value investor Dave Iben of Kopernik Global, who talked about the opportunities he sees in both the resource sector and emerging markets, after a lively debate about the true nature of ‘value’ with Cathie Wood of ARK Invest (I moderated their conversation and, I have to say, it was not what I was expecting. At all).

The great Peter Atwater (author of The Confidence Map) joined Steph Pomboy for a chat with about how investors can try to divine where the markets are on the arc from ebullience to despair and Sir Steven Wilkinson raised just about every eyebrow in the room with a captivating discussion about what he sees as the possible end of the era of the Nation State.

The event took place in the week following the Presidential Election which handed President Trump an across-the-board mandate. The theme or red thread running through the event was the US fiscal deficit, which like some vast planetary body exerted its gravitational pull on every conversation, interview and perspective, looming ominously in the background or forcing its way centre stage to dominate an exchange. The unspoken conclusion that nobody quite seemed to want to articulate clearly was, or so it appeared to me, that the problem of the deficit would - could - only be solved through a deep and destructive crisis and that the consequences of that - ineluctable though logic would make that consequence appear - were simply too horrible and unpalatable to contemplate let alone articulate.

“Prediction is very difficult, especially about the future” ~ Niels Bohr

The quotations chosen to preface this piece encapsulate the dilemma of thinking about the future, a dilemma with which I struggle continuously. To ignore it is to risk repeating the mistakes that a study of history would reveal. To spend too much time pondering future outcomes is to risk extrapolating in linear fashion that which is inherently dynamic. As Howard Marks has often quipped “Making predictions is largely a loser’s game” to which Benjamin Graham might have added: "I have never specialised in economic forecasting or market forecasting either. My own business has largely been based on the principle that if you can make your results independent of any views as to the future you are that much better off." Jesus was quite clear about the value of worrying about tomorrow (don’t) as was Wallace Wattles in his wonderful little book penned and published in 1910 in which he states that nobody who wants to be successful should spend their time worrying about stuff that is inherently none of their and all of God’s business.

What to do, given the weight of opprobium and scorn heaped on the heads of those who “forecast” by those who have proven themselves adept at making money and creating successful firms through long careers and multiple cycles? Does worrying about the potential resolution of an exponentially growing US fiscal deficit “add not one cubit to our stature?” (probably not): is it a waste of time to think about it, contextualise it or ponder its implications now or in the future? Is it pointless hot air production to opine on whether Elon Musk and his band of DOGEteers will succeed in slashing $2 trillion of costs from the Federal Government’s annual expenditure given the fact that 70% of that expenditure is earmarked for (apparently untouchable) entitlements (a wonderful weasel word loaded with such powerful emotional content), or defence spending or other aspects of Federal infrastructure deemed beyond the cost-cutting pale? Or $1 trillion or perhaps nothing? If “forecasting” is a waste of time, then why bother thinking about the future at all?

Murray Rothbard in the opening chapter of his America’s Great Depression points out that

“we live necessarily in a society of continual and unending change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply.”
~ Murray Rothbard - America’s Great Depression (Chapter 1, “Business Cycle Theory”)

and I take comfort in the fact that he states a given that “[p]eople try to forecast and anticipate changes as best they can. Forecasting is what we do.

The US Deficit in context

David Stockman, Ronald Reagan’s Budget Director in the 1980s and a staunch free-market supporter, has written a brace of essays recently on the parlous state of the Nations finances which map out the current situation and its inexorable mathematical progression as follows

A goal of $2 trillion of budget savings is crucial to the very future of Constitutional democracy and capitalist prosperity in America. In fact, the soaring public debt is now so out of control that the Federal budget threatens to become a self-fueling financial doomsday machine. So more power to the DOGE of Musk and Ramaswamy. In spades!

For want of doubt, just recall this sequence. When Ronald Reagan was elected in 1980 on a call to bring the nation’s inflationary budget under control, the public debt was $1 trillion.

By the time Donald Trump was elected the first time it had erupted to $20 trillion, which has now become $36 trillion. And under current built-in spending and tax policies it will hit $60 trillion by the end of the current 10-year budget window.

Thereafter, however, soaring interest expense will ignite a veritable fiscal wildfire. On paper, the public debt would power upward unabated to $150 trillion by mid-century under the CBO’s latest projection. Yet even the latter is based on a Rosy Scenario budget model that assumes Congress never again adopts a single new tax cut or spending program and that the US economy steams along without a recession, inflation recurrence, interest flare-up, or other economic crisis during the entirety of the next quarter-century!

Of course, long before the public debt actually hits $150 trillion or 166% of GDP per the CBO’s current long-term projection, the whole system would implode. Every remnant of America as we now know it would go down the tubes.

In case you have not reviewed the evidence recently here is the annualised progression (in nominal dollars to be sure) of the US Federal Surplus/Deficit

or in percent of GDP

In 1970 under President Nixon the Budget deficit stood at a measly $11 billion and stands today at some $1.8 trillion. Over 50 years that amounts to a compound annual deterioration of 9.9% - some 7% points over what the statistics would have us believe is the average rate of inflation during that period. If the CBOs projection for the Budget deficit evolution over the coming decade - which assumes no changes in laws, no recessions, no increase in the level of interest rates and other fairyland “ceteris paribus” assumptions - holds true, then the COVID era levels of deficit spending will have become the norm well before that (see Peter G. Peterson Foundation analysis referenced below).

Forecasters and other latter day practitioners of market haruspicy will generally be wide of the mark by factors rather than fractions, but I would lay good odds on none of the current projections erring on the side of pessimism. The larger the deficit, the larger the levels of debt the more fragile and prone to shocks a system becomes quite apart from the prosperity and energy sapping effects of the current structure of governance.