“The U.S. federal budget is on an unsustainable path,” U.S. Federal Reserve Chair Jerome Powell said in 2024. Simply put, fix what is broken with U.S. President Donald Trump’s “America First” policies: At a high level, Make America Great Again by growing the U.S. economy at the expense of everyone else. Sadly, it might be the only way to go. Modifying entitlements has always been a third rail issue for elected politicians and few will go there.

Certainly, not enough to pass legislation to fix it. The reality is that social security and health care promises are the primary issue. It’s not discretionary spending, although the Department of Government Efficiency (DOGE) is likely to cut out some significant waste in government, it won’t move the needle too much. I do not love the style we are seeing to get it done, but the conventional way of cutting has never really worked, and the U.S. needs some sort of a more radical process.

To make the above ratio fall and stop rising, the U.S. needs to raise revenues and or lower expenses and add less annual debt than the rate the economy is growing. The natural growth that happened after the Second World War won’t be repeated as the U.S. simply does not have the demographics to achieve it. There is really no rational discussion other than while we are not at the point of no return, we are closer than we have ever been.

The Mar-a-Lago Accord (MALA) is:

1. Raising revenues: Tariffs and more businesses and people paying taxes in America equals jobs in the U.S. Trump has bullied several companies to move in this direction. It’s inflationary, and does rebalanced trade demand a weaker U.S. dollar?
2. Sovereign wealth fund: Invest U.S. assets (social security) better (more like Canada does with the Canada Pension Plan Investment Board). This could also mean monetizing assets like parks, or revaluing gold.
3. Reducing debt: Using DOGE, lowering the cost of debt and getting others to pay more for national security.

Using tariff threats to get a “better deal” for America is inflationary. The U.S. dollar strengthens as a primary offset. This makes stuff America sells to the world more expensive and worsens trade balances. Additional revenue by way of more jobs equals more taxes paid in the U.S., which is a positive in the long run. From my lens, this is not much of a debate.

If Apple Inc. produces equipment in the U.S. over a cheap place, costs go up or margins go down. Productivity is unlikely to be better in the U.S. versus cheaper jurisdictions. The investment negative is that the big U.S. companies (most of the S&P 500 Index) have about 50 per cent of earnings coming from abroad. The stronger U.S. dollar makes future returns on investing capital in the U.S. less compelling, worsening capital account balance.

Better investing U.S. assets could be a big win. The social security trust fund is bankrupt eventually. All it owns is a special issue Treasury security paying interest. Converting that to real assets could be a huge plus for markets. But most assets are very expensive right now. We like this move, and it could boost equity markets, but we do not think Congress will be able to get there. Just revaluing gold won’t do it. This would go a long way to lower cost of entitlements by investing better.

Reducing the debt-to-GDP ratio requires stronger economic growth (either more people in the work force or higher productivity through advancements like AI). But this will not likely move the needle enough in a service-based economy to get growth north of three per cent. The current deficit is over six per cent of GDP. The cost of existing debt is rising rapidly.

Inflationary policies will only make that worse as it will drive up interest rates. Some talk about issuing zero coupon (no interest payments) 100-year bonds, but there are no buyers for this unless you force them. DOGE will clean up some of the waste in government and while I’m not a fan of how they are doing it, any conventional way has never worked. In order to improve productivity, you need productive workers. It’s an offensive topic to be sure, but people should be doing the jobs they are best skilled at and are happiest delivering.

Reducing the cost of debt is one of the mandates of the U.S. Treasury. The other is consistent reliable issuance, which was manipulated under former U.S. Treasury Secretary Janet Yellen to fund. The best way to accomplish that is to contain inflation and lower the total amount of debt. Those are spending issues and Congress controls that, so while Trump’s 2.0 MALA agenda is making some ground, we do not think it will be enough to make enough of a difference. Policies that will keep inflation contained (boosting productivity) are mostly what will help. Investing U.S. assets better (social security) will require and act of Congress too. Based on everything we’ve read; a zero coupon 100-year bond is a pipe dream.

The bottom line for your investments is that equity markets are super expensive. What needs to be done to fix the fiscal mess is a net negative for most assets. At this point I’m adding duration to my bond exposure for a harder economic landing, which is likely what is needed to cool inflation, but that’s not good for the economy, the deficit, or the high valuation in markets. Why do you think Warren Buffett keeps raising cash in Berkshire?

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