Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
The Big Beautiful Bill, Social Security, and Your Investment Strategy
June 2, 2025 | Season 7 | Episode 21
The global investment landscape may be approaching a pivotal shift after 15 years of US market dominance. While American markets have delivered exceptional returns, mounting evidence suggests international opportunities deserve renewed attention from investors seeking to optimize their portfolios.
At the heart of this potential transition is a stark contrast in fiscal trajectories. Since 2000, the US debt-to-GDP ratio has skyrocketed from 33% to over 120% – a staggering 90 percentage point increase. This massive expansion of government debt likely fueled economic growth and market performance, essentially "borrowing from the future" to prime the economic pump. Meanwhile, countries like Germany, Canada, and numerous others have maintained more disciplined approaches, with many actually reducing their debt burdens over the same period.
This divergence creates an intriguing investment thesis. Countries that have demonstrated fiscal restraint now have greater flexibility to increase infrastructure and defense spending, potentially creating more favorable investment conditions. Germany's trillion-dollar commitment to these sectors represents a significant departure from previous austerity, while other regions may benefit from shifting trade relationships amid US-China tensions. Early indicators support this view – while the S&P 500 has gained approximately 1.5% year-to-date, international indexes have surged about 14%.
Beyond global allocation strategies, this episode explores practical considerations for retirement planning. Despite political uncertainty surrounding Social Security, mathematical analysis confirms that delaying benefits until age 70 provides superior returns compared to commercial alternatives. With a 9.6% higher payout rate than comparable annuity products, the financial advantage of waiting remains compelling for those who can afford to delay.
Curious about how these global economic shifts might impact your portfolio? Consider whether your current asset allocation reflects these emerging opportunities and challenges. Have you reviewed your international exposure lately? The next decade of investing may look quite different from the last.
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lanton.
Keith Lanton:Good morning. Today is Monday, june 2nd five months in the books, first Monday of 2025. In the month of June, a lot already happened over the weekend. May was a very powerful month for equity markets here in the United States, defying the usual saying to sell in May and go away. If you would follow that advice, well, you'd missed out on some very healthy returns here in the United States. We'll talk a little bit about what took place in the month of May and then we're going to move on to talk about the United States what it's looking like with respect to our budget deficits as the new big, beautiful bill makes its way now to the Senate, perhaps a period of US exceptionalism for the last 20-plus years, and what the next decade or so may look like. Just to give us some historical context, some historical references, as we talk about international markets, overseas markets Barron's talked about them as well and then we're going to move on to talk about a couple of other topics that were covered over the weekend.
Keith Lanton:We're going to talk about Social Security benefits and how you might want to think about strategizing, depending on your age, for your benefits. Lots of folks are concerned about whether or not their Social Security will be there for them. We'll talk about strategies and what may be the best strategy moving forward. We will touch on what's become a hot topic, which is university endowments, and we're not going to talk about the politics of university endowments, but we'll talk about the ramifications of the politics of what that may mean for university endowment portfolios. We'll briefly touch on that and how that may affect other segments of the market and how you might want to think about your portfolio. Barron's also touched on former retail darling Target and we will examine that in a little bit of extra detail. Talk about pharmaceuticals and perhaps there is a light at the end of the tunnel for the pharmaceutical drug industry with some blockbuster potential products coming in the cardiovascular space.
Keith Lanton:And then, finally, I'll talk a little bit about the bond market, going to talk about perhaps an opportunity in treasury inflation, protected securities or TIPS, as the bond market has reached about a 5% level on the long-year treasury bond. In fact, bloomberg this morning talking about the speculation that perhaps the US will no longer issue 30-year treasuries, that being dismissed. But just floating it out there means that someone's thinking about it, that perhaps with the long end of the yield curve really picking up this year and the short end of the yield curve actually seeing reduction in rates so certainly seeing a steepener in rates, but lots of pressure on long US yields and what the Treasury can do to potentially offset that. One of the things they could do is limit supply issue less. That does have some other ramifications, meaning that if we have shorter maturities here in the US, if interest rates do go up, that would be problematic because we don't have as much debt that is locked in. On the flip side, if these long bonds are yielding a lot more than the rest of the curve, perhaps we can get the interest costs down by issuing shorter maturities and perhaps going back to long maturities later. These are all things that the Fed needs to consider.
Keith Lanton:But, most importantly, what does it mean for your portfolio? How to position yourself here in the United States, in your US investments? How much should you be thinking about international investments? How much should you be thinking about whether or not you should be investing in bonds, income investments, whether it's dividend-paying stocks? These are the key questions for your portfolio. What's the right strategy, what's the right allocation, what's the right risk tolerance? And hopefully we'll give some clarity to that. So I'm going to start out just doing a little bit of a recap. Should you have sold in May and gone away? S&p 500 saw its best monthly gain since 2023 and its best May in 35 years. Index was flat on Friday of last week, last trading day of May, but was up more than 6% for the month. That's the S&P. The Dow was up 3.8% last month, the NASDAQ up nearly 10% and that was the best NASDAQ gain since November of 2023.
Keith Lanton:Biggest reason for the optimism last month is that President Trump backed off some of his largest tariffs and then at the end of the month we got news that a court has challenged the legal basis for most of them. That's the US Court of International Trade, which ruled on Wednesday that many of President Trump's tariffs, including his broad set of reciprocal tariffs, were put through illegally. Keep in mind that two of those three judges on that panel were appointed by Republican presidents, one, in fact, appointed by President Trump, and that was a unanimous decision. But an appeals court did delay that ruling for now, and some are suggesting including Commerce Secretary Lutnick this morning, that President Trump has a lot of levers that he can pull. There's a lot of executive powers, so perhaps the president can utilize other measures in order to legally impose tariffs. Time, of course, will tell. So already President Trump's advisers are considering new tariff plans that may face less legal pushback, but Wall Street seems to have breathed a sigh of relief and expects the levies going forward will be less severe than what was experienced so far in April and going into May.
Keith Lanton:But it wasn't just tariffs that were driving the markets higher. Earnings for companies that have reported earnings so far are up 13% year over year. 78% of companies have beaten earnings expectations and companies, most importantly, have been expanding their margins despite anxiety that tariffs and consumer weakness would weigh on them. Biggest tech stocks have contributed about half of the earnings growth, which is a big reason why we're seeing that NASDAQ outperformance. Fears of tariff-induced inflation have not materialized so far. So, despite all this good news, nevertheless the S&P has been stuck just at about that 6,000 level. What will it take to break through that 6,000 level and then move on and challenge the previous high on the S&P 500, which was 6,144? Well, perhaps lower inflation data, lower 10-year treasury yields and less angst out of Washington. Of course, investors will certainly be watching how tariffs continue to shake out.
Keith Lanton:Barron's talking about tariffs as well as other factors affecting markets right now, ran a column entitled Tariffs, trade Talks and a Giant Tax Bill. No wonder we're confused. Uncertainty has been the leading candidate for the word of the year from nearly every corporate earnings conference call to what the experts that you're seeing in the press and on television are saying about economic and political matters, one Washington watcher, greg Valieri, saying that confusion will be the major theme. He talks about the confusion that is now out there after that ruling that we just discussed from the International Trade Court. We also have confusion regarding our situation and our negotiations with respect to the war in Russia and Ukraine, which, over the weekend, we saw Ukraine saying that they successfully had launched an attack deep inside of Russia, destroyed 40 of their aircraft Russia has confirmed the attack but has not confirmed the extent of the damage and then of Russia, destroyed 40 of their aircraft. Russia has confirmed the attack but has not confirmed the extent of the damage.
Keith Lanton:And then, of course, the uncertainty with respect to China and the trade policies. This morning, more rhetoric this time coming from China saying that the US is the one that is not living up to their end of the trade bargain, after President Trump had said the reverse on Friday. So we're seeing this heated rhetoric go back and forth. Then over the weekend we had the Defense Secretary Hegseth make some comments with respect to Taiwan, suggesting that the Chinese certainly shouldn't underestimate the United States to paraphrase what he said if there was to be some action against Taiwan. And then the Chinese reported, retorted back that the US should not play with fire. So we're seeing increasing rhetoric between the US and China.
Keith Lanton:We're seeing certainly continued uncertainty with respect to the situation with Russia and Ukraine and of course we've got the trade talks seeming to be stalled. We've got uncertainty with respect to tariffs and of course we've got also the BBB, the big beautiful bill, which did pass the House of Representatives but is facing a less certain future in the Senate, where a few Republican senators are making a strong case that the cost is too high and therefore they want to see a lower deficit going forward. They are saying that they had thought that the tariffs would help pay for some of the let's call them the goodies and the big beautiful bill. But some concerns that the tariffs are now being dialed back and now also some concerns, ironically, with this ruling from the International Trade Court, perhaps even greater concern that the amount that this big, beautiful bill will potentially add to the deficit might even be a little bit higher than originally thought. So we will monitor all these events, discuss them further as they progress next week and in the weeks forthcoming.
Keith Lanton:But no wonder that those of you out there may be saying to yourselves I am really not sure where things are going. I really feel a lot of anxiety with respect to the course going forward. You're not alone. That's the reality of the current situation we're in. We have a lot of clouds and hopefully we'll have some sunshine peeking through those clouds in the next several weeks, if not sooner, or perhaps a little bit later. All right, so let's talk, let's change gears and let's talk about the past, because the past gives us lots of insights into the present, which will give us insights into the future.
Keith Lanton:And one of the things that certainly we've talked about before and that is getting lots of attention currently is the US deficit, and the deficit is most important when it's relative to something right. So a United States deficit of $5 trillion is different than a $5 trillion deficit in a country like Uruguay, which has a much smaller economy. So when we look at the deficit, we have to look at it relative to the size of the economy, and this is known as the debt, the amount of debt that a country has relative to its GDP, the size of their economy, so that we can compare apples to apples when we're looking at different situations and countries. And if we take a look here at the United States, let's take a look at what the debt to GDP has looked like over the past 25 years. And if we go back to 2000, right after the US had gotten its fiscal house in order, after the contract with America which was what Newt Gingrich led in the House of Representatives and then, to the surprise of many folks at the time, the Democrats and President Bill Clinton decided that he was going to change gears and he was going to agree to a lot of the terms of the contract with America. And the US took actions, raised taxes among one, but took actions to reduce the debt and deficit.
Keith Lanton:And by the year 2000, our debt here in the United States to gross domestic product was at 33 percent. Then we had some international conflict, we had the 9-11 events here in the United States and then we subsequently had wars with Iraq and Afghanistan and we increased the spending in order to facilitate those wars, and we also had a weak economy in 2001. And we saw the deficit, or the debt-to-GDP ratio, pick up from 33% in 2000. In 2005, we were up to 56%, so we saw a 23% increase. So a 23% increase between 2000 and 2005. And then between 2005 and 2010, we had the financial crisis and we saw the debt-to-GDP ratio pick up by another 29% and we were up to 85% debt-to-GDP by 2010. So we saw the debt-to-GDP ratio pick up by almost 50% between 2000 and 2010.
Keith Lanton:Things stayed relatively reasonable between 2010 and 2015. We went from 85 to 95 percent. But then, between 2015 and 2020, we had COVID and we had the debt to GDP ratio pick up again by 29 percent. Additionally, we're up to 124 percent in 2020 from just 33% in 2000. So we're talking about a 90% increase in the debt to GDP ratio here in the United States. That number is dialed back a little bit as COVID has gone into the rear view mirror, but we're still north of 120% of debt to GDP in the United States. So we're still up just about 90% since 2000. So we have here in the United States. So we're still up just about 90% since 2000.
Keith Lanton:So we have, here in the United States, significantly increased our debt without having done anything about it, and increasing that debt, which is something that is very stimulative to the economy, arguably has been one of the greatest reasons that we have seen economic outperformance, perhaps one of the reasons that we've seen US exceptionalism when it comes to our financial markets, because we have been priming the pump here in the United States and when you're priming the pump and things are going well and you are, in essence, potentially, arguably borrowing from the future to have a good present, that is something that may eventually not go on forever. And while we were doing this here in the United States and arguably perhaps we got a little bit hooked like an addict gets hooked and our economy that we feel real good short term and don't want that feeling to end. But while we've been doing this here in the United States, if we take a look at what the countries outside the United States have been doing, well, many of them have had a different experience. So if we take a look at a country like Germany, which has a reputation for fiscal conservatism, in 2000, germany's debt to GDP was at 42%. By 2010, that had gone up to 82%. So Germany and the US on a somewhat similar trajectory or path, with the numbers increasing significantly between 2000 and 2010. But Germany, here in 2020, is down at 68% of debt to GDP. So they did not follow the US trajectory forward the way that we see here in the United States, and even countries that were struggling or suffering, let's say, over the years, like Spain, which is a country in southern Europe, their debt-to-GDP ratio is currently at about 100%. We're at about 120. But if you look at the forward projections, as opposed to the US, we're expecting the debt-to-GDP ratio to continue to climb. Well, in Spain, it's expected to drop over the coming decades. And if you look at some of the big economies out there, outside of the United States, and you look at their debt-to-GDP ratios, well, in Brazil, in 2000, it was about 51%. Currently it's 76. Again, here in the United States, we're north of 120.
Keith Lanton:If you look at Canada, our neighbor to the north, obviously a smaller economy In 2000, they were at 80% of debt to GDP. In 2000, we were at 33% debt to GDP. We were about 50% less. Today Canada's at about 69% debt to GDP. We're at 120. We've gone up dramatically. They've gone down dramatically.
Keith Lanton:If you were to take a look at other large economies like India. In 2000, india's debt to GDP was about 55%. Today is about 57%. If you look at the European Union in aggregate in 2000, we are at 120 to 125. Europe is just north of 80.
Keith Lanton:So you can see my point. You can see that our debt to GDP ratio, our reliance on increasing our debt over the past 25 years, perhaps has added to our ability to prime our pump, to prime our economy, while the rest of the world, by and large not every single country. You could also look at China, but their metrics are a little hard to read because they're not quite as transparent and use different metrics. But even in China, which has seen a particularly high rise in debt to GDP, the statistics indicate perhaps that China's currently at about 80%, but the figures are a little hard to read. But bottom line is, while we have significantly increased our debt to GDP, a lot of the rest of the world has not increased at the same rate, which is perhaps one of the reasons why, now that countries like Germany are talking about spending more money on their infrastructure and spending more money on their military, that perhaps these folks can potentially outperform the United States in terms of investment.
Keith Lanton:We're not talking about outperforming in terms of being a stronger country or a better country. We're talking about outperform in terms of where your investment dollars may be better served. It doesn't mean that the United States will not continue to excel, but on a relative basis. You might want to think about whether or not you should have more allocation to international markets, and this would be a thesis on why you might want to think about doing that. So the US has been the most rewarding destination in the world for the last 15 years, trouncing overseas markets, making it hard for many of us to even consider international investments. We kept our money at home here in the United States Most investors even amid signs that the US markets valuations were growing exceedingly high relative to the rest of the world and we continued to move higher, and we've also had our national debt, as we've just discussed, continue to move higher, and perhaps we're getting to a point where some of these other countries may be changing their ways in terms of they may be actually spending more and we may have pressure to spend less, and this could have an impact on our financial markets going forward and maybe perhaps have an impact on how financial markets perform.
Keith Lanton:So moving away from a successful strategy like investing in the United States is not easy. Us stocks have performed so well in recent years that a generation of investors have had little reason to look elsewhere. So if you're an investor and let's say you're 40 to 45 years old, you've probably thought very little over your lifetime about investing outside the United States. In fact, the S&P 500 has delivered a total return three and a half times as big as that of the MSCI All Countries World Index over the past 15 years. If you were invested in the US over those past 15 years you invested in the S&P you were up 625%. If you were in that index XUS, you were up 173%. So dramatic outperformance here in the United States. Now, powering some of that performance were the shale and artificial intelligence revolutions that created rewarding opportunities for investors. The US economy bounced back bigger and faster from the pandemic, perhaps because we had a lot of money that we ran up in our deficit in order to facilitate that, and that was the significant stimulus that we had here in the United States, and that contrasted with a more constrained Europe that was cleaning up from their earlier debt crises in the 2010 period, as well as the Chinese, who weren't as robust with their stimulus as they were concerned about their property bust that they had experienced.
Keith Lanton:But fast forward to 2025, at least so far this year. The MSCI All World Country Ex-US Index the one that has dramatically lagged over the past 15 years well, it's up about 14%. S&p 500 is up about 1.5%. So we're not talking about suggesting dumping US assets or the US. We're not making predictions. The US is going to lose its reserve currency status, but perhaps, perhaps and this is not for everybody, but something to think about thinking about rebalancing, not tomorrow, not instantaneously, but rebalancing over the next several months or years and joining some big money players like central banks and sovereign wealth funds. What they're starting to do, and what Bridgewater's co-chief investment officer, karen Carniol-Tambor, says is what they are seeing in their mindset is perhaps a once-in-a-generation economic shift, and this shift in Europe, arguably, is being led by Germany, which is in the midst of a U-turn on the financial austerity that has defined it over the past decade, committing to spending over a trillion dollars on defense and infrastructure, as the US signals it could back away from its security commitment to Europe.
Keith Lanton:And here in the United States, even if President Trump is successful in getting the Big Beautiful Bill passed, the amount of stimulus that it will provide is negligible to the previous jolts that we've gotten in the past. So, even though we'll be adding to the deficit and arguably providing stimulus, when you look at the amount of stimulus being provided relative to previous stimulus measures, even with the big beautiful bill, it is not of the same magnitude, so you may not get the same jolt out of it. So then that begs the question if you are considering investing in international assets, how much of your portfolio should you think about applying outside of the United States? And in this Barron's article entitled how to Prep your Portfolio for a Shift Overseas, they are suggesting considering and every situation is different 15% to 20% in the mix of international stocks and bonds, bonds. Jp Morgan recently, in a survey, said that when they were talking to investors, that 54% were looking to increase allocations to Europe. Others are finding opportunities in places that may be less vulnerable or even benefit from the reordering of trade created by US-China tensions, such as Brazil and India.
Keith Lanton:All right, so with that mindset, talking about that international shift, let's take a look at where we are this morning. What's going on? We'll start out with stock futures right now are looking at a mildly lower open S&P futures trading about 25 points below fair value. Just picking up here just to confirm that level. Right now S&P futures a little bit better than that down about 15. Dow futures down 71. Nasdaq futures down about 85 points. Oil moving significantly higher this morning at up $2.80 a barrel to $63.50 for Brent crude and we are now seeing bond yields ticking higher to 4.44%. This morning Today at 10 o'clock we will get the release of the manufacturing PMI for May. Actually that's at 9.40, that's at 10, that's at 9.45, and then at 10 o'clock we get construction spending here in the United States.
Keith Lanton:Some news this morning Politico reporting that US banking stocks could be active Following a report that the Trump administration is preparing to ease rules for big lenders. Keep an eye on shares of Wells Fargo, jp Morgan, citibank, bank of America, morgan Stanley and Goldman Sachs. Blueprint Medicines is set to open around $128.50 a share, just below the $129 per share cash offer from Sanofi. That would be an all-time high for the company, which went public a decade ago at $18 per share. We are seeing a significant move up in US-based steel stocks Cliffs Steel Dynamics and Nucor, clf, stld and NUE all moving significantly higher on President Trump's announcement that he is going to double the tariff on steel imports from 25 to 50 percent.
Keith Lanton:Moderna stock moving higher. This morning FDA approved a new COVID shot. Last week Moderna had received the news that the government was pulling funding for a bird flu vaccine they were working on. In fact there were some reports that Moderna, which had a very big cash pile, could be plowing through that cash pile. So some concerns with respect to Moderna.
Keith Lanton:Last week seeing a little bit of a reversal. This week Asian markets mixed, actually mostly lower. China's market was closed. Hong Kong was down half a percent, japan down a little over 1%. European markets mixed as well. We did have elections in Poland where the party that was more in line with President Trump and the conservative party there eking out a victory in Poland. That market down a little over 1% in Poland. After those election results.
Keith Lanton:Wall Street Journal reporting that China is turning its back on the US for violating the preliminary trade agreement reached in Geneva. I mentioned the Ukrainian strike deep in Russia taking out the warplanes. China told the US not to play with fire on Taiwan. We talked about that. New York Times reporting that a proposal for a nuclear deal has been sent to Iran by the United States. Fed Governor Daley, who is not a voter, still thinks two rate cuts in 2025 are likely, and OPEC saying that they are keeping the output hike steady for July. Not sure if that's what's leading to a push up in oil prices this morning, but perhaps having an impact with that commentary.
Keith Lanton:What do we have to look forward to outside of the Institute for Supply Management? This week we have earnings from CrowdStrike, dollar General and Hewlett-Packard. Tomorrow Broadcom and Lululemon report. On Thursday the JOLTS report, job Openings and Labor Turnover Survey is also coming out this week. We're looking for that number to come in at 7.1 million job openings. That would be down 100,000 from March. And then the biggest employment report of the week is the Bureau of Labor Statistics releasing the jobs report for May. Economists forecast an increase of 125,000 in nonfarm payrolls after a gain of 177,000 in April. Unemployment rate expected to stay unchanged at 4.2%.
Keith Lanton:All right, moving on to Barron's, let's talk a little bit about Social Security. Social Security lots of folks starting to get worried on whether or not it's going to be there for them. Lots of talk about the big beautiful bill and what, if any, changes are there to Social Security? The answer is, at the moment, none. The only factor that arguably is affecting Social Security is the Doge Department of Government. Efficiency has had an influence on perhaps the number of folks that are servicing Social Security and perhaps some customer service reps and folks concerned about the customer service, but retirement claims are up 13 percent compared with this time last year. While there are some financial concerns, certainly around Social Security, retirees should separate the program's long-term financial health from the turmoil being caused by staffing reductions and confusing messaging out of the Social Security Administration.
Keith Lanton:Barron's suggesting and I am in agreement that waiting to claim makes sense for those who can afford it. Clients who claim before their full retirement age, which is 67 for everyone born in 1960 and later, will see their benefits permanently reduced. Claiming at 67 gives them 100% of their earned benefit. If they claim at 70, they will receive 124% of what they would have received at age 67. And to put this into perspective, that the Social Security bump that you get from waiting is a lot better than the bump you will get if you were to privately try to mimic what Social Security provides. So Social Security is a better deal than you could get, for example in the commercial annuity market. For starters, no annuity. Today none offers inflation protection linked to the Consumer Price Index like Social Security does.
Keith Lanton:And if you look at the numbers and you compare a commercial annuity bought today, at age 62, to delaying Social Security until age 70, which is similar to purchasing a deferred annuity at 62 and starting to take the money at age 70, which means that you purchase an annuity when you turn 62 and you say turn it on when I turn age 70, which is the same choice you have when it comes to taking Social Security. You can turn it on at 62, receive a lower amount, or you can wait until age 70 to turn it on. And if we compare Social Security to that deferred annuity and that deferred annuity, we assume that we have a 3% cost of living adjustment every year, meaning that the benefit amount of money you get for waiting is 3%. Keep in mind, for Social Security we're not fixed at 3%. We're actually getting CPI, which could be more or less than 3%. But more importantly, it's more akin to how much the cost of living your life is attuned to. So the payout rate for delaying Social Security is 9.6% higher. So you will benefit if you wait to defer your Social Security from 62 till 70, you'll be looking at a 9.6% pickup versus if you were to buy that annuity current market rates. If you're a man, you'd be looking at a return of 7.7% and if you're a woman, because you're expected to live longer, you'd be looking at a 7.2% bump. So, unlike the commercial market, the government doesn't pay women less, since they tend to live longer. Women less since they tend to live longer. But either, whether or not you're a male or a female, you will still benefit by waiting to defer your Social Security versus anything that you can commercially purchase out there, which indicates that, at the moment, that Social Security and the benefit you get from waiting is perhaps a very good economic opportunity. Of course, if you can afford to wait, everybody's situation is different, but if you can afford to wait, even with all the uncertainty, it arguably pays to wait.
Keith Lanton:All right, let's change gears. Let's talk about private equity, private debt, something that's gotten tons of attention the last several months. We've been hearing about opportunities in private debt, private equity, concerns about private equity, private debt and Barron's talks about private equity this week because university endowments have been in the news and they are big purchasers of private equity and university endowments are under a lot of pressure because the current administration feels that these universities have built up very large endowments, pay very little tax, in the neighborhood of 1 to 1.5%. If you are a big university with a big endowment and the legislation being proposed going forward could increase that tax to 21%, and this could have some real-life implications for you as an investor. Even though you may not have much interest in how much Harvard is paying or Stanford is paying on their endowment, how they invest their money could affect you.
Keith Lanton:So, if you think about it, universities have historically been big purchasers of private equity, private debt hedge funds. Because these strategies require locking up funds for a long period of time, university endowments typically can go on in perpetuity. These strategies don't have to be particularly tax efficient because before universities were paying very low to almost zero tax rates. But suddenly these universities and endowments suddenly are becoming much more tax aware. At the same time, they actually may need this money because the other thing that the administration is doing is cutting off funding. So they may need more of this money than they needed before.
Keith Lanton:So you've got this storm taking place in the private equity market where traditionally very large buyers of private equity university endowments are suddenly finding that these investments aren't as attractive as they were before and they're also thinking to themselves I've got very big gains in these investments. I've been investing them a long time. If I were to liquidate them now, before this 21% tax goes into effect because I think I might need to liquidate some of them anyway well, perhaps I could avoid paying the big capital gains on these investments and I can move into more tax efficient strategies like S&P 500, the linked ETFs or other equity linked ETFs, which are far more tax efficient. So what you might see is you might see a shift where you see money moving out of private equity, therefore pressuring prices in the private equity market. Also, see the effects of the fact that you suddenly might be hearing from your financial advisor that there are some opportunities in private equity because these private equity firms suddenly are reaching out to Wall Street saying, hey, you know this investment that was closed to you before we're opening it up. Might be because they're very kind and generous, or it might be because they're losing a very big client and they need to replace that client with, potentially, you, the individual investor. So when you're thinking about private equity. You're thinking about money moving into and out of markets. You might see if some effects or ripple waves as a result of these changes coming through Washington that could land at your doorstep in terms of your portfolio performance, creating increased demand for exchange-traded funds. Whether they're passively managed or actively managed, they are very tax-efficient and seeing some funds flow out of the private equity market, which isn't super liquid.
Keith Lanton:I will mention that Barron's talked about Target and Target being at a tipping point. We talked about Target and Target being at a tipping point. Barron's concerned about Target, suggesting that if Target doesn't make some significant changes, that Target could go the way of, let's say, kohl's or Kmart, once a Sears Roebuck, once leading retailers here in the United States. Target, they argue, having a difficult time competing against the Costcos, the Walm and the Amazon's of the world. They do have some unique niches, some attractive products, but they need to really fine-tune their message. Article is not the death knell for Target, but the warning shot across the bow that, in their opinion at Barron's, target needs to make some changes or they could face a threat, an existential threat, not in the near term, but over the next decade or two. So those of you who are invested in Target. Very nice, healthy dividend. But keep an eye out. This could either be an opportunity or this could be a value trap, and the changes that the senior management makes at Target will be very important over the next several months or years to determine which of those is true opportunity or value trap.
Keith Lanton:Also, barron's talking about pharmaceuticals and drugs area sector that has been under tremendous pressure, big underperformer. We talked about this last week. We talked about this last week. Barron's talking about a new class of heart disease drugs that could arrive in the near term. That could be revolutionary and pack of new cardiovascular drugs. These are drugs that are either pills or weekly or biweekly or semiannual shots. Even some of these potential shots or injections could be once-in-a-lifetime infusions. These could significantly potentially reduce the level of your LDLs or other proteins like LPL, little a, and successful trial results in the next few years, if successful, could not only save thousands of lives but could generate billions of new revenue for drug makers. Companies like Eli Lilly, merck, astrazeneca, amgen, regeneron Pharmaceuticals, new Amsterdam Pharma and gene editing specialists like CRISPR and Verve Therapeutics all participating in seeking solutions to improve your cardiovascular health All right.
Keith Lanton:Finally, just to mention one item here in the fixed income world. Barron's talking about taking a look at treasury, inflation, protected securities or TIPS. You may say to yourself well, treasuries have not been a good investment. Over the past 10 years, long-term treasuries have actually returned a negative six-tenths of one percent. That puts long bonds in the same humiliating place where stocks stood at their knee gear in February of 2009.
Keith Lanton:Of course, if you had made the trade in February of 2009 at the point of maximum pain. Well, you would have invested in the S&P 500 at 666, and you'd be up about ninefold. Currently, no one's predicting you'll be up ninefold if you invest in bonds today, with long-term treasuries going out 30 years. But perhaps it is symbolic of a moment where there is an opportunity and Barron suggests if you are going to invest in long-term bonds, well, take a look at TIPS Treasury, inflation, protected Securities. Take a look at TIPS Treasury, inflation, protected Securities.
Keith Lanton:30-year TIP yields recently reached 2.7%. That is the highest level on TIPS on the long term going back to 2010. And if you look at where the real yield on TIPS has been over the past decade and a half, well, it's generally been between half a percent and one and a half percent. So today, if you buy a long-term TIP or Treasury, inflation, inflation, protected security you're going to earn the 2.7% real rate. Plus you will earn the inflation rate that is generated by the CPI. So the break-even rate, if you think about it, 30-year tip is paying 2.7. You also earn the inflation rate If a 30-year treasury is yielding 5%.
Keith Lanton:Well, the break-even rate for a 30-year tip is 2.3%. So if you think that treasury yields will increase by more than 2.3%. If you think inflation will increase by more than 2.3% a year over the next 30 years, perhaps a treasury inflation protected security versus buying a 30-year treasury at 5% would make sense for you. We also mentioned last week that if you are thinking of buying a treasury inflation protected security, also known as a TIP to be mindful that there are negative tax implications of owning these securities in a taxable account. So you may want to think about these investments in tax-deferred accounts. So one final thought there when it comes to your fixed income portfolio to take a look at the tips and take a look at the real yields you're getting in tips, compare that to your personal inflation expectations and getting that protection in a period of great uncertainty. That's everything I've got.
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