President Biden’s budget proposal … our government’s reckless spending … the deterioration of the dollar …  more hot inflation … how your wealth can outpace cost of living

Pop quiz…

What do President Biden’s budget proposal, our government’s debt, and today’s inflation have in common?

Answer: your hard-earned dollars.

If you’re in a rush, here’s the takeaway from today’s Digest…

Let’s do our best to generate outsized returns while this bull market is hot, because there are a lot of hands reaching into our pockets today.

What President Biden’s budget proposal released earlier this week means for you

First, it’s a $7.3 trillion behemoth that would usher back in the days of “Big Government,” but on steroids; second, it’s more of a talking point than something to consider seriously.

Here’s how The Wall Street Journal puts it:

The largely symbolic document, which sets out spending and revenue plans for a decade, typically marks the start of the debate with Congress over plans for the next fiscal year.

That said, it’s worth looking at how Biden’s policies would affect you. After all, based on our government’s deteriorating financial position, today’s proposed “fantasy” budget could easily become tomorrow’s actual, adopted budget.

Let’s begin with the high earners. If you’re in that camp, the impact of Biden’s budget proposal is straightforward…

The government is coming for more of your money.

Beyond increasing the tax rate on earned income, the proposal would double the capital gains tax on high earners from 20% to 39.6%.

There was a time when our government incentivized prudent saving and investing. That was the point of lower capital gains taxes.

After all, you’d already been taxed on your earned income which you turned into savings through living beneath your means, and those savings funded your stock investment. So, it made sense to tax the ensuing gains from that stock investment at a lower rate than earned income.

Not so much according to this budget proposal.

By the way, the next time you hear the refrain of “time for the wealthy to pay their fair share,” keep the following in mind…

Using the latest data we have from 2020, the top 50% of all taxpayers paid 97.7% of all federal individual income taxes, while the bottom 50% paid the remaining 2.3%.

But even if you’re not a high earner, this budget proposal would likely affect your portfolio. That’s because it targets corporate bottom lines and stock repurchase excise taxes, both of which would impact stock prices.

From PWC:

Key business tax provisions in the FY 2025 budget include a renewed proposal to increase the US corporate income tax rate from 21% to 28%.

The budget also includes proposals to increase the corporate alternative minimum tax from 15% to 21% and to increase from 1% to 4% the corporate stock repurchase excise tax…

Now, you might agree with these budget proposals. If so, fine. Just be aware of the potential impact on your portfolio.

Second, our government’s reckless spending guarantees the long-term buying power of your savings is eroding…

So, you’d better make more money today to maintain your lifestyle tomorrow.

The government is adding $1 trillion to its $34.5 trillion debt every 100 days.

This is unsustainable.

Below is the chart we’ve provided before in the Digest. It dates to the 1970s, showing how our national debt was growing at a linear pace until the late 2000s, when it began to go exponential.

This “hockey stick” curve is illustrative of a government creating runaway expenses that are increasingly difficult to control.

Perhaps the most frightening driver of this debt is the interest we’re now paying, which is akin to a monstrous snowball, barreling down the mountain, picking up size.

Here’s The Wall Street Journal:

The U.S. government is expected to pay an additional $1.1 trillion in interest over the coming decade, according to the Congressional Budget Office’s latest estimates.

Interest costs are on pace to surpass defense this year as one of the largest government expenses in the budget.

Only Social Security and Medicare are forecast to be bigger burdens in the coming years.

The increase revives longstanding Wall Street worries that the yearslong acceleration in government borrowing by both political parties will eventually weigh on economic growth and asset prices.

You can be certain that our politicians will kick this can down the road for as long as they can, but this ends in one of two ways (or both together):

• Substantially higher taxes on you (not just the super wealthy)
• The crumbling purchasing power of your savings

In either case, yet again, you better start making (a lot) more money today if you want to maintain your standard of living tomorrow.

Finally, while we cheer what appears to be falling inflation, let’s make the distinction between “inflation” and “prices,” and remember what high prices are doing to your wealth

First, on that “falling inflation” idea, we have another inflation report out this morning that didn’t play nice.

Wholesale inflation, measured through the Producer Price Index (PPI), jumped 0.6% month-to-month.

Was that a lot?

Yep – it was double the Dow Jones forecast. On a year-over-year basis, it rose 1.6%, which is the biggest jump since last September.

But let’s say that this is just an anomaly and look at the broader trend of falling inflation.

Remember what that does – and does not – mean for your wallet.

Inflation is nothing more than a measurement reflecting the change between two prices. So, all that “falling inflation” means is that prices are continuing to get more expensive, yet at a slower rate.

As an analogy, consider a Ferrari accelerating down a racetrack with a beginning speed of 100 miles per hour. And let’s say the “inflation” of its speed is 10%, then 6%, then 4%, then 0%.

Clearly, the Ferrari’s “speed inflation” is falling. But what’s happening to the absolute speed itself?

Well, 100 miles per hour x 10% speed inflation = 110 miles per hour.

110 miles per hour x 6% speed inflation = 116.6 miles per hour.

116.6 miles per hour x 4% speed inflation = 121.3 miles per hour.

121.3 miles per hour x 0% speed inflation = 121.3 miles per hour.

So, while speed inflation has dropped from 10% to 0%, what has happened to absolute speed itself?

It’s jumped from 110 miles per hour to 121.3 miles per hour.

Similarly, CPI inflation has dropped from 9% to about 3% today, but here’s a real-world illustration of the reality of absolute costs hitting your wallet. This is a CNBC headline from Tuesday:

Homebuyers need to earn 80% more than in 2020 to afford a house in this market. It’s not just due to high mortgage rates

And yes, this includes the increase in wages that the average worker has seen in recent years.

From the article:

While the typical household in 2024 makes about $81,000 a year, up from $66,000 in 2020, wages have not kept up with housing costs.

“Since January of 2020, the typical mortgage payment on the typical home in the U.S. has nearly doubled,” said Orphe Divounguy, a senior economist at Zillow.

Nowadays, potential homebuyers need to make about $106,500 a year in order to afford the typical home today, an 80% increase from January 2020, according to Zillow.

Have you received an 80% raise since 2020?

By the way, this creates an easy plug for gold (or frankly, any other high-quality hard asset)

Charles-Henry Monchau is the Chief Investment Officer at Syz Group. He recently posted that the average price of gold in 1920 was $20.68 per ounce. Today, it’s worth roughly $2,100 per ounce. That’s a 100x increase.

Meanwhile, in 1920, the average house price in the U.S. was between $5,000 and $6,000. In 2023, it was $492,000. That’s in increase of roughly 80x – 100x.

Pretty evenly matched, right?

What’s not evenly matched is “dollars then” versus “dollars now.”

Guess how many dollars you’d need today to equal $100 in 1920.

Ready?

$1,551.63.

Remember that the next time someone claims gold is no longer relevant.

Bottom line, everything is getting more expensive, yet for the average person wages aren’t keeping up

That forces us to look to the investment markets.

Fortunately, we’re in a bull market today. Better still, if you need to grow your nest egg, legendary investor Louis Navellier believes the $8.8 trillion of investor cash that’s sitting on the sidelines is about to flood the market. He’s eyeing a handful of stocks that his quantitative system has flagged as high-fliers.

Yesterday, Louis held a live event called the Emergency Cash Bubble Briefing that detailed the situation. He walked through the catalyst for this cash bubble hitting the market and when it will happen, why you don’t want the lion’s share of your savings in cash today (we agree), and why small-cap stocks are where Louis is looking for the fastest way to snowball your wealth.

In the free replay of yesterday’s event (which you can watch here), Louis detailed five small-cap stocks that he’s confident have the potential to perform just like the FAANGs as this cash bubble bursts.

If you’re worried that you’re falling behind in your finances, or not on pace to retire when you want, I’d encourage you to tune into Louis’ presentation simply to learn how this expert is viewing today’s market.

Circling back to the top of this Digest, there are myriad wealth-stealers coming for your wallet. Let’s do our best to make serious money while this market is cooperating. Have a good evening,

Jeff Remsburg