The Risk of the New Trump Rally

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
entitlement programs

In my last column, I talked about the astonishing effects that Donald Trump’s win has had on the financial markets.

Stocks have hit new all-time records. The dollar has climbed to a 13-year high. Bond yields have moved sharply higher (while gold has rallied like a lead balloon).

Investors expect Trump’s pro-growth policies - tax cuts, regulatory reform and infrastructure investment - to boost the economy, inflation, wages, interest rates, consumer spending and corporate earnings.

Trump has also soothed nerves by toning down some of his harsh rhetoric and backing away from some of his more controversial policy proposals.

For instance, he has said he won’t prosecute Hillary Clinton. He will keep some features of Obamacare. He has an “open mind” about climate change. And he no longer believes that torturing terrorism suspects is a good idea.

However, one campaign promise continues to loom over the economy, the financial markets and the future of the country itself: his pledge not to reform our out-of-control entitlement programs.

Consider the problem. The U.S. national debt now exceeds $19.9 trillion. That’s equal to $166,533 per taxpayer.

But that’s only the tip of the iceberg. The current unfunded liabilities for Social Security, Medicare and Medicaid now total more than $104.2 trillion. That’s equal to $872,296 per taxpayer.

Add them together and - if you’re one of us poor schlubs who actually pays federal taxes - your share of this liability is $1.04 million.

Congratulations. You’re now a seven-figure debtor.

Moreover, the Congressional Budget Office estimates the Social Security and Medicare shortfall - the one that totals more than $100 trillion - will continue to grow by more than $8 trillion a year.

To put this figure in perspective, if the U.S. government confiscated all the profits of every publicly traded company in the nation and all the adjusted gross income of every household earning more than $66,000, it wouldn’t even pay for the annual increase in these liabilities.

There is no Social Security trust fund. There is no Medicare lockbox.

One hundred percent of the payroll taxes for these programs are spent in the same year they are collected. If the federal government produced the kind of financial statements that are required of businesses and nonprofit enterprises, this would be more widely known.

But it doesn’t. And it isn’t.

Our entitlement system - which would make Bernie Madoff or Charles Ponzi proud - is careening toward insolvency.

Yet candidate Trump - like candidate Clinton - promised not to reduce Social Security or Medicare benefits.

Unfortunately, entitlement spending is now so stupendous that it is no longer a matter of simply raising taxes here or cutting a program there. The whole system has to be radically reformed. Every serious person knows it.

The problem, of course, is voters don’t want their benefits cut (or even delayed) or their taxes raised.

However, if Trump truly wants to “drain the swamp,” run the government more like a business and be a transformational leader, he will need to tackle this problem head on, not kick the can down the road as his predecessors have.

Let’s hope in his first 100 days he calls for a bipartisan commission to deal with this reality.

Because only when the country’s entitlement programs have been put on a financially sound footing can we invest for the long haul with confidence.

Good investing,

Alex

Have thoughts on this article? Leave a comment below.

This article contains Plus content.

To access it, sign in or click here for more information on Investment U Plus+.

Live Twitter Feed