First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 45 | Brian Wesbury | Trading Quarter-Zips for Farmland | ROI Podcast
Brian Wesbury shares his views on why the Trump Administration is upending global trade, why tariffs may be an insufficient cure for problems created by big government, and where the US economy is headed for the rest of 2025.
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Hi, welcome to the First Trust ROI podcast. I'm Ryan Isakainen, ets Strategist at First Trust. This episode, I'm joined by Brian Westbury, chief Economist at First Trust. We discuss the US economy whether or not we'll head into a recession at some point in 2025. We discuss tariff policies, what the Trump administration is trying to achieve and Brian's thoughts on why tariffs might not be the best way to achieve those objectives. Thanks for joining us on this episode. You came on the podcast in. I think it was late January. Early February, stock market was in a much different place than it is today as we're recording this. There's a ton of volatility, right, but it seems to be kind of toggling around your year-end forecast, right, which was 5,200 on the S&P 5,200,.
Ryan:yeah, I mean, are you doing a Westbury victory lap?
Brian:Do you think that we?
Ryan:where do we go from here? I guess Is the market fairly valued at this point.
Brian:Yeah, no, it's still a little overvalued and it all depends. Interest rates have been moving a lot. So just to remind everybody, our model is pretty simple. We take profits and I use IRS profits like treasury profits, not S&P reported. I figure if you reported to the IRS you really did make the money because you owe taxes, all right. So that's the number we use. It comes out with a little bit of a lag, but we have 70 years worth of profits by quarter. We have 70 years of 10-year treasury by quarter and then all you do is the math and then compare it to the S&P 500.
Brian:So one thing I remind everybody is that this model is 30,000 feet. It's not a trading model. Just because it says we're overvalued, don't go short the market. If it says we're undervalued, you know. I mean I'm not telling people, you know, go triple long or triple short or buy options. That's not what this is not a trading model. It just gives an indication of whether we're over or undervalued.
Brian:So when we talked, the S&P was over 6,000. Fair value at a four and a quarter 10 year, which I think we had back then, was about 4,800. And so our forecast this year I don't just forecast the fair value because it's an estimate and I figure we're going to get tax cuts this year. We're probably going to get more Fed rate cuts, which we didn't get, and so that's why I only went down to 5,200. But at this moment, I'm not going to change it because, even though it still says the market's slightly overvalued, it's within the range of error. I mean, this is a 30,000 foot view and all I do know is that we're no longer undervalued like we were from 2009 all the way through 2021-22. That's when I was bullish forever People called me a permable and now, for the last couple of years, I've been more bearish because the model says we're overvalued and so it's worked out this year. And no, I'm not doing a victory lap. I try not to do that because it's a humbling business being in the forecasting business.
Ryan:You were definitely an outlier and it seems like there's a lot more forecasters that have kind of moved in your direction. Yep, and you know, I guess that's because the market has moved and they've updated their forecasts. Right, how much of your forecast I know it's just purely quantitative as you described, but as you're kind of coming up with that final number how much of that has to do with your view on the economy? And I guess the bigger question is do you think we're headed into a recession at some point this year?
Brian:I do. I've been waiting for a recession basically since COVID ended, and what I think kept us out of a recession is massive federal budget deficits, even with the unemployment rate at 4%. And so, for example, just the other day I saw a stat 12% of all the jobs in New York City are Medicaid, paying people to stay at home to take care of their relatives.
Brian:oh, wow and so that's the deficit adding to job growth, and I I think we would have grown much slower if we hadn't not have had those big deficits. Now, with doge, and congress is about to pass up well, they're going to put a budget forward we'll see if it gets passed that actually cuts spending. I think those deficits are going to come down not a lot, but as long as they're not growing anymore, then that, then that takes it away. So, at the same time, the federal reserve monitor, the m2 money supply today is lower than it was at the peak in 2022. And interest rates today are like inflation plus one and a half. They're maybe even a little bit too high. And so I would argue the era of easy everything is over, because all we were doing is spending and printing and holding interest rates down, and now that's come to an end. So I do think a recession Now it's going to be a normal recession.
Brian:This is not a crash. We're not in dot-com bubble territory. We're not in 08. There aren't any major excesses in the world that I can look at like housing in 08. And as a result, it's kind of a normal recession. I expect about a half a percent decline in GDP. That's about it. Unemployment maybe goes to six percent and so, and then we can adjust the knobs at that point and come out of it, and so that is part of my forecast, because the consensus was 10 percent earnings growth this year. In 2025. I think it's going to be 5% or less, and people are now adjusting their earnings forecast and that's why they're bringing down their stock market forecast. Almost the whole street had the market going up and I think we were a true outlier this year, and so in that way, I feel good that we helped advise investors to be cautious and it turned out that was the right way to be.
Ryan:Yeah, it seems like the volatility has really picked up as the tariff policies that were. You know they've been discussed for a long time, so it shouldn't be that new. But when they've actually kind of hit the date the liberation date as Trump would call it or whatever you want to call it it seems like there's a lot of uncertainty Some would call it chaos surrounding what the goals are and how it's going to be implemented, and that seems like it would slow down decision making and maybe the economy.
Brian:No doubt about it.
Ryan:So I guess my question for you is where do you think we land with all the tariff? I guess my question for you is where do you think we land with all the tariff? In your view, what are the goals that the administration is trying to achieve and where do you think we end up as the year? Because eventually the chaos has to get solved, right yeah?
Brian:Well, that's the thing about rules. Once you set the rules, businesses can handle it. They'll deal with it. Even if you don't like the rules, they'll deal with it. Even even if you don't like the rules, you still deal with it, right and and so? So that's. The problem is that we keep changing, seems, day to day, hour to hour. You know, my joke now when I go up to the podium is I have to literally I'm checking Twitter and Wall Street Journal and Bloomberg like two minutes before I go up, because everything changes so much.
Brian:So, to really get to the heart of your question, what we have done in America for at least 60 years, you could probably go back to the Great Depression. But really, since the Great Society is, we have followed Keynesian economic policies, and Keynesian policies say hey, we're going to tax people with a high marginal propensity to save. I know that's academic speak, but in other words, savings is a drain on the economy. In the Keynesian world, what helps boost growth is consumption, because consumption is 70% of GDP. That's what people will say all the time. And so redistribution taxing people that have a high marginal propensity to save, giving the money to people that have a high marginal propensity to consume. They say that will boost growth. Well, it hasn't. In fact, it goes the opposite way. But what it has done is boost consumption massively. And so since 2007,. Consumption of goods in America and I'm adjusting for inflation, so this is real, like the amount of goods people buy is up 62%, and the most aggressive measure of manufacturing output that we have it's called value-added manufacturing is up 12%. So consumption up 62%, manufacturing output up 12%. How do you consume 50 percentage points more than you produce? Well, you import.
Brian:And so what's happened is the Keynesian economics has led to these massive trade deficits and the Trump tariffs. I always say Trump has spidey senses, so he knows something's wrong. All right, but he doesn't, and his advisors are telling him it's tariffs. I believe what's really wrong is government's too big. We need. We shouldn't be redistributing this much money. Government shouldn't be as big as it is. And basically what we're doing is we're causing the United States to consume more, produce less because we regulate and tax production heavily. And by doing that we're basically, if you think about it, we're buying quarter zips and sneakers and giving them dollars and in turn, they're buying our farmland, like we're literally trading consumption for investment, foreign investment and that's not sustainable over the long period of time.
Brian:So I think the heart and soul of the tariffs is to try and fix that. Here's the problem with that. It's like um maha, make america healthy again. Yeah, so the the people who talk about that. They will say it's our food supply, the way we grow food, that is making people obese and have diabetes and immune disorders. And then what we do is we treat the symptoms right. So now we're treating obesity, we're treating diabetes, rather than going back and fixing the food supply, and I would argue tariffs are the same thing. We're treating the problem, which is big, big, massive, overly big trade deficits, but we're using a tool that doesn't really fix the underlying problem to begin with.
Brian:And so my hope is that the craziness that all of this and so my hope is that the craziness that all of this creates and we don't know why we're doing it, who we're going after for, what the rates are going to be that I hope that what that makes people do is rethink the original policies that caused it. And then, at the same time, there's a whole other side Foreign countries do have tariffs against us that we don't have against them and, as a result, we want them to get rid of their tariffs, and so part of what's happened is Israel, ireland, vietnam I mean the list is pretty long Countries who are willing to lower their tariffs, and that's going to be a really good outcome. And then, I think also, in the end Trump wants to go after China, just like Reagan went after Russia. Reagan broke Russia. And the question is can we break China? And I mean, they're an adversary, they clearly don't like us and and, as a result, kind of going after them isn't a bad idea.
Brian:So there's a whole bunch of things involved in this tariff thing, but the root of it is that for 60 years we've been I mean, the savings rate in the United States has come from 15% all the way down to 4% Like we don't save anymore and we import all this stuff and foreigners are buying more and more of America. That can't, that's not sustainable, and so, if Congress won't fix it, the executive can't cut spending on his own completely, can't cut taxes on his or her own completely, but they can put tariffs on. And so I know it's treating the symptom of the problem, but it's still heading in the right direction.
Ryan:So, brian, to extend your metaphor, the medicine of tariffs is, in your view, maybe the wrong medicine for the underlying condition, right? So the right medicine is what? Cutting the size of government?
Brian:Cut the size of government, stop redistributing and I mean literally. We paid people to sit at home during COVID. I mean massive trillions of dollars, and most of the people that we paid to sit at home aren't big savers. The savings rate went up immediately because we flooded so many trillions into it, but then it came right back down and then went below where it was in 2019. So this Keynesian idea that taking from savers and giving it to spenders boosts growth, it's not.
Brian:I mean the last 20 years in America, our growth rate, real GDP growth rate 2%, in spite of unbelievable technologies you think about the cell phone and the internet and the cloud and AI and all these things 0% interest rates. For nine of those years, tripling in the money supply, the federal budget went from $3 trillion to $6.5 trillion. So we spent all this money, printed all this money, held interest rates at zero and came up with unbelievable new technologies, and we only grew 2% a year. After World War II, before the Great Society, we grew 2% a year. After World War II, before the Great Society, we grew 4% a year. When Reagan and Clinton were in office and they cut the size of government, we grew 3.8% a year and now we're growing two.
Brian:This is European-style growth, and no wonder houses aren't affordable, like we're just not growing fast enough and incomes aren't rising and living standards aren't rising, and it's all because government is too big. So the way you really fix it is you cut the size of government, you cut tax rates and you cut regulation, and I mean regulation is disastrous because you can't produce anything here anymore. Because you can't produce anything here anymore. I mean, try to build a plant, you know a new factory, and they find some weevil that lives like wherever and you can't build it.
Brian:My example lately is have you bought a gas can lately to fill up your lawnmower, your snowblower? Like you can get gas in them, but you can't get gas out of them, like because of all the regulations over the environment. It's the craziest thing and um and and we do that to our manufacturing and so we need to reverse all of that. But this has been 60 years in the building and no one wants to cut. I mean, in fact, doge is trying to cut and they're demonizing them like for you know, for like for any kind of cutting, because evidently if you cut spending you're going to hurt somebody. Yeah, and I believe you're hurting everybody by spending so much.
Ryan:All right, I want to ask you more about Doge, but before we get to that, I want to finish off on tariffs, because the conventional wisdom that here on you know all the talking heads and embedded in a lot of the thinking on tariffs is that it's inflationary in itself. Yeah, do you view tariffs as being an inflationary force, or is that just going to slow economic growth because they're more of a tax?
Brian:Yeah, it's more of a tax and no, it's not inflationary. So the items that would go up in price. If you still bought all the quarter zips with 122% tariff or whatever it is, you would pay more for quarter zips, but that means that if you kept buying the same number of quarter zips, you'd have less to spend on going out to dinner or new appliances for your kitchen or whatever. So the price of some things will go up, but the price of other things will come down. The only thing that causes inflation is money printing, and right now the Fed isn't printing money like they did during COVID. So in fact, the money supply is lower today than it was in 2022. So and I get it, jerome Powell can say whatever he wants, but tariffs by themselves are not inflationary. It will make some prices go up, but other prices come down.
Ryan:Okay, so back to Doge. And, by the way, I have way too many quarter zips, so I think I'm part of the problem. Me too, if you look in my closet it's just filled with quarter zips. Okay, back to Doge. I think there's a lot of hope that that will actually end up making things more efficient. Cut regulation. When will that actually bear fruit, though? How long does that take?
Brian:Yeah, I think it's already bearing fruit. You know, there are all kinds of charts all over the internet that show government spending in 2025 versus 2024, versus 2023. And we haven't, you know. It basically shows that government spending hasn't really come down from 2024. Right, well, there's a couple of reasons for that. Number one Social Security and Medicare automatically increase just because we have an aging population. So that's number one. Number two our debt has continued to grow, so our interest costs have gone up.
Brian:So once you take those things out, doge has actually begun to cut some spending.
Brian:Remember, we put a lot of government employees on furlough and after six or nine months that will run out, so then that expense starts to go down.
Brian:Usaid, I mean, there's still court cases and all kinds of stuff, but that would be significant, especially if you add it up. Over 10 years, we found fraud and abuse in some systems that we're getting rid of, and so right now, if you look at the macro data how much the government is spending it's hard to see the impact, but it is having an impact, and I wish I could quantify it exactly for you, but I can't. An impact, and I wish I could quantify it exactly for you, but I can't. And Doge has a website and you can go and they claim to have this many billions cut, and I know they have cut some but it gets hidden because of, especially, the cost of net interest. Our debt keeps going up and it just costs us more every month to just pay the interest on our debt and so that's government spending and it hides the benefits of Doge. But I know the benefits are there.
Ryan:You mentioned M2 and its relationship to inflation a minute ago. Last time we talked on the podcast, you were talking about the analogy of the embers of inflation and right, you know the need to make sure they were fully stamped out and buried and you know all the other extended analogy that you had are the embers still burning?
Brian:yeah, they are, they're. The inflation is not gone. If we were to print money, lower interest rates too much, I think inflation would come back. However, right now it appears, especially last month, in spite of all these tariffs and all this crazy stuff going on, the CPI the Consumer Price Index and the Producer Price Index both fell in the month of March, and that's pretty good news, and so I would argue that inflation isn't dead. The embers aren't out, but it's calmed down, and Powell seems to be in transient about cutting interest rates and letting the money presses go. So that would mean inflation's gonna continue to come down. The only there's a problem with that, and that is if inflation is going to continue to come down. There's a problem with that, and that is if it's tight enough to bring inflation down. It's also tight enough to cause a recession.
Ryan:Okay. So I'm glad you brought up Jerome Powell and the Fed, because you look at what's priced into the market and it's two cuts, three cuts, four cuts, three cuts. It seems like it goes all over the place by what's expected to be cut this year. So two-part question One should the Fed be cutting rates this year? And two will they cut rates and any idea how much?
Brian:Yeah. So I would argue three, four months ago I argued that inflation itself was 3%, and then you need a real return. If you're an investor, you get paid back for inflation, or if you're a borrower, you need to pay for inflation. But then you also have to pay a real return for somebody to invest in you, to save their money and put it in your bond, and it all depends on the riskiness of the bond, et cetera, et cetera. But let's just talk about treasuries. So 3% plus one and a half, I think if you buy a treasury bond you ought to get inflation plus one and a half. That's about where it should be Historically, that's about where it's been. So three plus one and5 is 4.5.
Brian:So four months ago I said interest rates are about right. The federal funds rate is at 4.5. The 10-year treasury is 4.3, 4.4, 4.5, somewhere right in there. Well now, especially after those March numbers, inflation looks to me like it's down to about 2.5. 2.5 plus 1.5 is 4. I would argue the Fed could cut twice. It makes some sense. They wouldn't be super easy.
Ryan:In other words, they wouldn't be inflationary at 4, but they would be reflecting the current inflation rate, which is about two and a half percent now, and so, yeah, I think the Fed should be cutting and you know, I think a lot of the narrative that's been it seems like it's a relatively recent narrative, but that has really taken root has been that Trump is trying to push Jay Powell and he's going to fire Jay Powell. And you know, can he do this? The Fed needs to be independent. What's your take on that? Is Trump actually going to fire Jerome Powell? He?
Brian:talked about it last time he was president. He never fired him.
Ryan:Yeah, and is that something that the president should or shouldn't try to do?
Brian:Yeah, I do believe that monetary policy itself should be independent of the political world. The last time that it really got violated, if you will, was in the 1970s. Richard Nixon pounded the Fed, pounded the Fed and actually the Federal Reserve followed a monetary policy that was easier than it should have. Because if you're a politician, you want interest rates low, you want them to print a lot of money because it makes everybody feel better. And I mean this last since COVID. I mean everybody should realize this. I mean since 2007,. We've tripled the money supply. No wonder if you own houses and assets, you won. I mean because we just exploded the money supply and so anybody with assets won. And when you have low interest rates, if you're a borrower, an investor, you love that, all right, and remember Trump's in real estate. So so what does he want? He wants like maybe he doesn't think about it like the president should, but but if you're in real estate, you want low rates and lots of money printing, you know, because it makes it a lot easier to build a building and fill it up and make it cheap and pay for it. All right, so I get that. But that's the problem is that politicians always want an easier monetary policy than we should have.
Brian:Here's where I kind of agree with Trump, not maybe that he should have control of monetary policy, but that the Fed has gone off the rails a little bit. They've tripled the M2 money supply. The Fed's balance sheet is literally 10 times bigger than it was into the year 2000. 10 times bigger, and the Fed is bigger than the top 10 sovereign wealth funds of the world all added together. It's insane how big their balance sheet is. And then what they've done because of that is because all that money they're printing could be inflationary. They are now regulating banks like they never have before, raising capital requirements, and they keep using 2008 as the excuse to do this. But what they've done is they've taken all this power that they really weren't given and consolidated at the Fed.
Brian:I would argue the Fed's had a mission creep problem. The way they're moving is toward a national bank. We don't need these banks because we got all the money, and that's a scary thing. On top of it, the Fed's gotten involved in climate change, in community development. The Chicago Federal Reserve is involved in taking lead out of water pipes, like they're worried about lead water pipes, and I'm like, isn't that the EPA's job, like why is the Chicago Fed doing this? And it's because they've run out of things to do, and so what I would argue is the Fed needs to be controlled. They only really have.
Brian:Their independence depends on them doing their job well, and they've expanded their job into areas that have nothing to do with monetary policy, and so I do think the Federal Reserve should be reined in. Now, who should do it? Congress should do it, and then all Trump has to do is wait for 13 months, and then Powell's tenure is over and he's gone and he can appoint a new Fed chairman. But the Fed should be independent, but at the same time, it shouldn't have grown itself as much as it did. I hope that makes sense to people, because what I say is they only have themselves to blame for politicians being mad at them Because they went into areas that they shouldn't have.
Brian:It's just like USAID going in and working with all these NGOs and nobody knows where any of this money is going or how it's getting there or who's making the decisions. Well, the Fed's doing a lot of the same kinds of things, and they do it under the guise that you know we're independent. Well, yeah, keep the value of the dollar stable and you failed because the inflation rate went up, and yet you don't want to take blame for it and you want to keep all this power. They need to be shrunk, they need to be pulled back, but at the same time, monetary policy should be independent, just not independent under this current system.
Ryan:Yeah, Well, I mean all of what you're describing. Predates Jerome Powell right.
Brian:Right.
Ryan:Bernanke started it. I mean yeah, and so I guess my skepticism is whoever the next appointed Fed chair is are they going to? Do anything different.
Brian:Yeah well, arthur Burns did things different from Richard Nixon.
Brian:That's a good point so I hope that doesn't happen. I do hope that doesn't happen. But Bernanke started it, yellen kept it going. She was chair of the Fed for a while and then Powell kept it going and he really juiced it during COVID. So Bernanke was the juicer and then Powell was the juicer. Yellen kind of was the status quo in the middle. I think all of them should be trying to get us back to where we were in 2007, before all this changed.
Brian:I've written extensively on the abundant reserves versus scarce reserves. We've talked about it before. We should be going back to scarce reserves, and that would take. The Fed has grabbed so much power, so many resources, so many new employees and it's got mission creep, and so Powell isn't doing that. He's you know.
Brian:People always say well, how do we get the Fed to go back? I mean, why won't they go back? I speak to a lot of financial advisors. I'm like this room is full of financial advisors. If you had $6.7 trillion under management, do you want to go back to $900 million? Like no, neither does he.
Brian:So these people that work for government are human, just like everyone else. We want to be bigger, we want to be better, we want to be stronger we want to be. You know, they're the same, and that's the problem with government entities is that, even if they're not doing their own job well, they find ways to grow in other areas because because they just have so many resources and and it's human nature to want to grow like that they're they're not angels, you know, and and so I think the Fed has completely lost its way. It should be reined in. I think Trump wants to fire Powell because he won't cut rates, which is not what I'm talking about. But again, he has spidey senses. You know, there's something wrong with these people and he just doesn't know how to contain it all and fix it.
Ryan:So is there a mechanism that the Fed could reduce the size of its balance sheet without just dumping money into the system?
Brian:Yeah, they, well they. So here's the problem if they reduce their balance sheet. So remember. So what they did is they printed all this money, right, and then they bought government bonds. So to reduce that size of the balance sheet, they have got to get the banks to trade their reserves, which is all the money the Fed printed for these bonds. But because of the way they've set all this up, capital rules today and liquidity rules say, if I put all these bonds on banks' balance sheet, they'll all be in violation of these rules. So they can't. So when the Fed flooded the system with money, it was going to be inflationary. So how do you stop it from being inflationary? Well, you force the banks to hold on to it all, and you do that with capital rules, liquidity rules, and you pay them to hold those reserves. Well, you can get the banks to trade Fed funds for bonds, but at that point now they're in violation of the capital rules. So you're going to have to ease the capital rules.
Brian:Jamie Dimon, in I don't know three weeks ago now, something like that said look, the government needs to finance its debt and you, at the same time, want us to hold more bonds, but these capital rules and liquidity rules don't allow us to do it, and today the Fed is debating whether they should lower the liquidity rules to help fix this. But this is a crazy debate. We shouldn't be having it in the first place, and the only reason we're having it is because they handle monetary policy with regulation now, and so the way you have to do it is go back to the way the banking system was before. But boy oh boy, we're 17, 18 years down this road. You know this is one of the big problems. You know welfare, for example, and I know that's a complete change of topic, but give me a chance to come back around. We have seven generations of people on welfare. We knew four generations ago there were problems with this system, but in order to fix it, you've got to take it away from people, which nobody wants done, and then you might lose votes or they might, you know, be in pain because they don't get paid by the government anymore. But this system has failed, but because it's got so much momentum, nobody knows how to fix it, and I think that's the deal with the Fed.
Brian:Right now it's hard to fix because they've grown the Fed so much, they've grown the money supply so much that going back to the way it was is going to have some pain Probably some higher interest rates to get the banks to hold all those treasuries. Right now, the Federal Reserve is paying private banks $200 billion a year to hold on to all this money that the Fed made, created during COVID and during 2008. And all I can ever say is Elizabeth Warren must not know this, because she'd have a cow. She hates private banks. So, but our government is paying banks $200 billion a year and, by the way, if we stop doing that, that's $2 trillion over 10 years of savings for the taxpayer. And so, but that's the system we've created, and it sounds crazy, but that's what they created. And how do you get out of it without creating pain?
Ryan:So if you stop paying the banks to hold that cash, wouldn't they just lend it out? Yeah, that's inflationary.
Brian:That would be the concern. Right, yeah, right, and that's the problem. They printed all this money, then they bottled it up in the banks by making higher regulatory costs, like capital rules, liquidity rules. So what I always say is, what they do is they're storing gasoline next to the water heater, and that may be fine if you go check the gas every five minutes, but you leave gasoline next to a fire, you're stupid. And so what they've done is they've put all the gasoline in the banks that's inflationary, and then they're fighting to contain it, and in order to do that, they're regulating banks like never before.
Ryan:Yeah, another narrative that I've heard a lot recently has to do with the idea of American exceptionalism. I keep hearing this meme that you know the era of American exceptionalism is over. What do you think Is American exceptionalism coming to an end and what actually is the source of that exceptionalism? Yeah, the exceptionalism coming to an end and what actually is the source of that exceptionalism?
Brian:Yeah, the exceptionalism of America really goes back to the Declaration of Independence and the US Constitution. There are no documents like that anywhere in the world, and those documents give individuals the right to be free and pursue happiness. And then they set up the rules of property rights and the rule of law, and that's what makes America exceptional. We haven't always been perfect. When we founded this country, slavery existed, not in every state, but abolitionists quickly um, we're the second country in the world to abolish slavery, and um, and I believe that's a sign of them, I mean a sign of american exceptionalism. And I know people would argue with me and yell and scream at me about saying that, but but at least we ended it all right and and we, we only did that because of the constitution, and so that's what it is Now. I think today, I mean, everybody's talking about democracy is on trial and we're not democratic anymore and all of these things, but what really leads to it is is adherence to the constitution, and right now we see, actually the play out right now between Trump and the courts and the Supreme Court. That's just more proof. We're exceptional Because in a lot of countries that stuff doesn't happen and I you know if it comes down.
Brian:I don't want economic war with anybody, all right, I don't all right. But if we catch recession, other countries are going to catch depression. China basically survives exporting to the United States, and and they can't live without us. The world can't live without us, and so I I do not think the US exceptionalism is under. You know, I guess it's always under attack, but but it I do not expect it to go away, not at all. Yeah.
Ryan:You know the relationship with China. I think over the last couple decades it has evolved and changed so much. It seems like it used to be the thinking in Washington and maybe changes from group to group but that if you had a closer trade relationship, where you're more interdependent, then you're less likely to have military conflict. And it seems like maybe the thinking is evolving and shifting because now it's like well, we want to decouple the economies and so why is that shift? Why is that taking place?
Brian:Yeah, I think in order to understand our relationship with China, you have to go back to Reagan. You know, reagan looked at China. There's a billion people earning a dollar a day. I mean it was true poverty, like, I mean China was in terrible shape. And he's like look, look and I'm paraphrasing history here and nixon broke it. I'm I'm forgetting a lot of things, but I'm just like 50 000 foot view of this. He's like look, would you please join the global trade system? Like, like, please. Like, help your citizens by joining the global trade system, not not being isolationist, and we'll allow you to be part of our global system, even though you're a communist and we don't agree with that. And basically that brought a billion people out of poverty. I mean, you go to Shanghai in the 70s, you get run over by bicycles, like they were tens and hundreds of thousands of bikes. Now, there now there's no bikes, it's all cars, like it's. Cuba went the other way. They went from cars back to bikes, like China went from bikes to cars. And in other words, reagan was successful. And then you couple that with what we talked about before.
Brian:The US has literally subsidized consumption by increasing redistribution to incredible amounts. It's almost 20% of all income now and therefore we've become the consumer of the world's production and China's like hey, look at how much wealth we created by exporting to the rest of the world. The US is perfectly willing to buy everything we produce because we make it so cheap. We don't care about our consumers, like America, all they care about is consumption. We don't care, and so it went from a point of us helping them to a point where they took advantage of it, and I believe that's what's going on.
Brian:They have very high tariffs on a lot of different goods. They know full well that our consumers have an insatiable appetite to buy stuff, and now they're taking advantage of it and slowly but surely this is what I mean we're trading quarter zips. We're buying quarter zips from China, giving them our dollars, and then they're turning around and buying our farmland, our treasury bonds, our shares of stock in the US companies, warehouses, you know, making all kinds of investments, and it worked for them to get out of poverty. So that's the story. They'll just keep going with it and I believe they're now abusing it, especially with very high tariffs. Also, if you think strategically, we can't make all our own antibiotics or even all our own military equipment without imports from the rest of the world, and so we've made ourselves vulnerable to someone who is willing to use that as a tool, and I think we need to be really careful about that as well.
Ryan:Yeah, and that, I think, became more and more apparent during the COVID period, when you couldn't source certain chips that you needed for an automobile, or ingredients or things for different medicines. I'm not sure how. And again back to tariffs for just a second. The concern is, if you put tariffs on that, you're not sure they're going to last. Are you going to incentivize businesses to actually make investments for reshoring?
Brian:Yeah. Well that's what I mean by if you set the rules, then everybody adjusts, but you have to set the rules and hold the rules.
Ryan:Yeah, they've got to be consistent.
Brian:Yeah, and so far we aren't there. They put them on, they take them off. I read a story the other day that Peter Navarro happened to be out of the office one morning and he's the champion of tariffs in the Trump administration, and the Treasury Secretary Besant and the Commerce Secretary Lutnick took advantage of the fact that Navarro wasn't there and that's why we had the 90-day pause. And so I mean I don't like. It's almost like reading People magazine about politics and finance, but I read that and I'm like, oh my gosh, it just depends on who's at a breakfast meeting and can run into the Oval Office, because that seems a little.
Brian:If you're really going to invest a half a billion dollars in a factory, or a billion dollars, how can you do it when things change like that? And I think we have to set the rules and stick with them, otherwise there's going to be too much uncertainty. Right now, the number of ships coming from China is plummeted, shipping containers are down, first quarter is going to be close to zero growth and I'm worried about second quarter too. I think we might be seeing the recession I thought was going to come this year.
Ryan:It's kind of surprising. The first quarter would be low because I think that you would have a lot pulled forward to the first quarter because that's before the April, you know when those Liberation Day tariffs and all that uncertainty I think a lot of companies may have hoarded some of the inputs for their goods and things. Well, that's why it's going to be so slow, because, import so gross so the second quarter will be so slow because they pulled it forward.
Brian:First quarter too, because gross domestic product domestic is the key word. If you import, it's a negative, and so we imported all this stuff to beat the tariffs Right, and then that counts as a negative in GDP, and then the second quarter may be negative. I think people are still, imports from different places are going to probably still be up, but at the same time, I think business investment is going to slow, and so is consumption, because when people get uncertain, they just hold back. So we're there. Plus, as I said, the money supply hasn't grown since 2022. Deficits are not going to be as big or they're not going to be growing, and all of that means that there's the era of easy everything is over.
Ryan:So the other piece of uncertainty that's likely to get resolved as the year progresses has to do with tax policy. The administration's trying to renegotiate along with Congress to figure out what personal tax rates will be, what corporate tax rates will be, whether there'll be tax on tips and all the other promises that Trump made during the campaign. When do you think that gets resolved and any views on where we end up with tax policy?
Brian:Yeah, well, we already have the blueprint. It looks like the Trump tax cuts will be extended no extra tax cuts at this point, but that's already been passed and they can move it through the Senate with 51 votes. So I don't even know how to talk about all this because I'm not the politics expert. That's bob stein, but, but it's record. It's called reconciliation. So as long as you don't need 60 votes, you can get a lot done. Yeah, and, and so they did pass the framework for that.
Brian:But there is a really important ruling coming up um, the all the budget scores like so the trump tax cuts were put in place for 10 years. At the end of that 10 years or eight years, whatever the number was they they're scheduled to go back up, right, so so according to this congressional budget office, that is a, a tax hike that's built into the system like so that's where revenues are going to be in the future. If we don't do that tax hike, then it's going to cost us this amount of revenue. So then they would say extending the Trump tax cuts cost us money, right? What Republicans are trying to do is to get the parliamentarian to rule that keeping current law is not a tax cut or a tax hike Interesting, yeah, and so it's. It's. It's. It's a like, like.
Brian:If you really look at the way they score our budget, what they mean is you know like we're going to? These are taxes are doing this Spending is going to do that. We're going to add to Social Security, so we score the budget we. This is you know like we're gonna. These are taxes are doing this spending's going to do that. We're going to add to social security. So we score the budget we. This is what the budget will be.
Brian:They're always wrong by the way um and and number one, but it's always biased against tax cuts and for spending increases the way they do it. And so what the republicans are trying to do is say, no, this is just current law, this is not going to cost us anything. So we're it's your figment of imagination that we were going to have a tax hike. We're just going to keep current law. Yeah and so, anyway, it'll be a very interesting ruling by the parliamentarian and a debate that's taking place, and a lot of it's so back room smoke-filled room stuff inside baseball that nobody really even knows I think the whole language of saying that I pay less in taxes and that costs somebody, yeah, like that seems like it's the wrong word, yeah that's what I mean by it's biased for tax hikes and against spending does it cost you if I don't give you money?
Brian:it doesn't cost you something yes, it costs me to give you the money yes, but it doesn't cost you to not get it.
Brian:That's exactly right and it's the same with you. Know, the problem is, if you want to cut the size of government, you're taking money from people, and if you want to cut tax rates, you're giving money to people, and it's just the language that we use. It really come and and, by the way, they built that into these mathematical scoring models that they use and and that's why it's just, it's biased against tax cuts and for spending increases, and and that Keynesian economics is why we're consuming so much.
Ryan:So I was talking with Bob Stein. He's the episode before this launches, and my hope is the SALT deduction living in New York State is as big as it can possibly be, but that's fully self-interested.
Brian:I'll put that out there right now, exactly.
Ryan:And I guess everyone's self-interested when it comes to tax policy to some degree. Okay, so that seems like it would be potentially a positive catalyst for investors later this year if you do have some certainty with some of these things, including tax policy, coming into this year, as we talked about. You're pretty bearish on stocks as you kind of look out of the next six to 12, 18 months. Maybe I'm pushing you beyond your 5,200 year-end target what happens next year?
Brian:Yeah, well, let me just put it this way I wouldn't be surprised to see the market go below 5,200. Fair value is closer to 4,800 right now it really is. But one of the reasons I stayed at 5,200 is I thought these tax cuts, the Trump tax rates, were going to end up being extended. So that's a positive, and so that's why I'm at 5,200. I would argue that if we do well, I do expect a recession, a minor one, it's not huge, not an 08 or 2001. That the Fed will cut rates and that that will help investors as well. So I'm going to stick with 5,200 for now. I could change, but it's just a judgment, and so my argument.
Brian:Well, here's the way I think about it. I don't think we're going to have a V-shaped recovery in stocks and it's just been a normal correction so far. I mean, technically, I guess we're in a bear market. If you look at the NASDAQ, I always get confused about what is and what isn't. Market's down, all right, and so is it going to go straight up from here V? I don't think so. I think it's a tilted L Like.
Brian:I think things will continue to get better, like, profit-wise, investor-wise, in the years ahead. We have too many great new technologies that are adding to productivity and profitability. But it's a tilted L, it's not a V, and so I wouldn't be surprised to see us go below 5,200 for a while. If the Fed cuts rates, I think we could come back up, but I don't see us hitting the old highs anytime soon. So the next couple of years, so next year, depending on where we end this year, I might be a little bullish, but I don't see myself as being massively bullish unless somehow we were able to really cut the size of government, and that's up to Congress and they just seem unwilling to do that.
Ryan:Okay. So, brian, previous podcasts, I've always asked you for a book recommendation. I'm going to shift gears a little bit for my last question for you and, by the way, this question comes directly from Grok. I asked Grok if I was going to ask Brian Westbury a specific question on a podcast. Give me some options, and this is one of the options Grok says to ask you if you could talk to a historical economist, who would it be and what would you ask them?
Brian:Yeah, you know, I don't know if you can see this book in the back behind me here, but Milton Fried, you know. I asked Grok what historical figure I? If you read all my tweets and posts, what historical figure do I sound the most like? Okay, and it said Milton Friedman.
Ryan:And I was like whoa that was unbelievable to me.
Brian:But, and so now here's the deal. I have met Milton Friedman. He's passed away now. So has his wife. I met he and his wife a number of times. I'm a member of the Mont Pelerin Society and he helped found that with Friedrich Hayek. And Friedrich Hayek was taught by an Austrian economist named Ludwig von Mises. He wrote the densest most like if you need to sleep, it'll help you for six months. It's so big and long and dense, but I've read it multiple times a book called Human Action. In my view, without him, friedman would have never been as powerful as he was, hayek would have, and both of them won the Nobel Prize. Hayek and Friedman, they were both students of his. I would want to. I would want to hang out with Ludwig von Mises and and and here's the.
Brian:This may sound weird, but the question I want to ask him the most is does he believe in God? Okay, because when I read his books he talks about entrepreneurship and he builds the economy up from the root cause and human action is how humans act, and I feel he always kind of claimed that he was agnostic. I don't believe it, and I actually talked to Hayek's son about this, who has now passed away himself even but I got a chance to ask him and he said, oh no, he wasn't agnostic. I don't believe that, because when you read about the economy and how humans interact and the best way for that interaction to be, it just smells and tastes like God, like it really does. And the way he writes he's so brilliant that I cannot believe he didn't believe in God. And yet there's really. No, he didn't write about it. In fact, he kind of called himself an agnostic, but I wonder if he did that for intellectual, academic reasons or really.
Brian:Yeah interesting, because when you, I mean the free market is such an amazing thing, billions and billions and he actually called entrepreneurs angels. So you know, they just they're angels, they're not normal. And I wonder you know what that meant to him.
Ryan:So let me ask you a follow-up question. Do you think the way that the economy works and the economy is? You know there's different levels of the economy, but is that a reflection, in your opinion, of how some image of God? Yes?
Brian:like God. God, I mean read the Bible. God created man in his image. What was God? He was a creator. So what's man supposed to be? A creator? And and so that's, and in the end that goes back to this Keynesian economics. It's all about consumption, not creation, and I believe growth comes from creation. It's also where we get the term supply side, supply side economics, demand side economics, creation, consumption, and so so, yes, I, I absolutely believe that the, the, that the way people interact in a, in a free market, is is is like I I don't want to go too far because I don't know I never know whether I'm blasphemy or not, getting to blasphemy or not but that God wanted us to interact that way. And when you read the parable of the talents, I mean it's so clear, there's so much in the Bible that sounds like free markets to me. And then when I read Mises, and he describes free markets so beautifully but without ever using God, I just want to know. I want to put those two things together Interesting.
Ryan:Yeah, it does seem like you're talking about innovation, creativity. That is some sort of a reflection of if you believe in God, that God created people and we're creating things all the time.
Brian:Well, one last point on this. Like you come up with a new idea, I mean, you know, where did it come from? Like I, like those football players who mean it when they get into the end zone and they go and they point up, like I mean NFL football or college football, it's hard to get in the end zone, like you know, and and and yes, you've worked your tail off, you've, you've got a great team, you do. There's a lot of reasons for you to be there, but a lot of people go like this.
Brian:Well, so when I'm writing and and I I'm searching for a way to say something, and then or, or I'm looking for something to say, and then, all of a sudden, an idea pops in my head. Did I do that? I call it manna from heaven. I don't know that I've ever sat it in front of my computer and gone like that, but I have thought it. I'm like, oh, thank you, thank you, lord, and that's creation. And a lot of people start to believe. It's all them. And I'm not going to pretend that I, yeah, I studied, yeah, I read, yeah, I but but I didn't make my brain and and then it came up with this idea. So where did that come from? Yeah, and so I think it came from outside of me.
Ryan:All right Well uh, we're finishing up the ROI podcast with theology corner here. So, brian, thank you once again for coming on the podcast Really appreciate it. We'll do it again very soon, hopefully. Absolutely, ryan. All right, and thank you all for joining us on this episode of the First Trust ROI podcast. We will see you next time.
