The Great DivideSTEPHEN COLAVITO, JR .

MANAGING DIRECTOR – PORTFOLIO MANAGER

ASSET PRESERVATION ADVISORS

The Great DivideDisclaimer:

The views and opinions expressed in these slides are those of the speaker and do not necessarily reflect the position of Asset Preservation Advisors or their employees. This material is not financial advice or an offer to sell any product. Cartoons and the contents are also not reflective of APA or of the speaker. The cartoons are just speakers attempt to be funny and make light of a very complicated issue. My opinion is neither copyrighted nor trademarked, and it’s price competitive because its worth zero.

The Great DividePlace:

Informal. The Great Divide is an Earth Science term, meaning the longest divide on earth and synonymous with the Continental Divide of the Americas.

Source: Wikipedia

The Great Divide

Things that (I think) we can agree on1. Something powerful is happening in the real world to crush the status quo of political systems of every Western democracy.

2. Parties around the globe are failing to recognize the change. Instead they keep trying to back their “old guard” candidates like Hillary Clinton, only to lose.

3. Something predictably sad is happening in the political world to replace old guard candidates with self-absorbed plutocrats like Trump and Macron.

4. Something new and powerful is happening in the economic investment world to divorce political risk and volatility from economic and market risk.

Part One: Economic EstimatesCartoon Source: Real Clear Politics

Economic Estimates(Source: Bloomberg 7/5/2017)

Economic Estimates(Source: Bloomberg 7/5/2017)

Economic Estimates(Source: Bloomberg 7/5/2017)

Current 10Y UST(Source: Bloomberg 7/5/2017)

Current 10Y UST(Source: Bloomberg 7/5/2017)

Trump and Potential Tailwinds

Current Economic Tailwinds – Consumer Confidence

Economic Tailwinds – Equity Markets (S&P 500 – Source Bloomberg 7/5/2017)

Economic Tailwinds – Equity Markets (S&P 500 – Source Bloomberg 7/5/2017)

Economic Tailwinds – Equity Markets (Source: CFRA, Morningstar)

More Potential Tailwinds – Deregulation

Potential Economic Tailwinds –Deregulation

Economic Tailwinds – Potential Deregulation

Economic Tailwinds – Potential Deregulation

Potential Economic Tailwinds –Deregulation

Trump/Republican Agenda

Trump/Republican Agenda - Taxes

Trump/Republican Agenda - Taxes

Trump/Republican Agenda - TaxesAccording to the Tax Foundation

* Aggregate cost of Trump cuts would be roughly $4.3-5.9 trillion dollars over 10 years (on a static basis)

* Aggregated cost of Trumps cuts would be roughly $2.6-3.9 trillion dollars over 10 years (on a dynamic scoring basis)

Trump/Republican Agenda - Taxes

Trump/Republican Agenda - TaxesCongress has plenty of wasteful pet projects they can cut:

* Economic Assistance to Egypt - $250 million annually

* Presidential Campaign Fund - $775 million annually

* Require collection of unpaid taxes by federal employees - $1 billion dollars

* National Organic Certification Cost-Share Program - $56.2 million

* Washington Metro Area Transit Authority subsidy - $150 million annually

* Beach Replenishment - $95 million annual savings

* International Fund for Ireland - $17 million annual savings

* Department of Energy Grants to States for Weatherization - $530 million annually

* Plus many more!

Over $2.5 Trillion dollars of savings over 10 years

(Source: 2016 Congressional Pig Book – Citizens Against Government Waste)

Democratic Economic Agenda

Democratic Economic Agenda Source: Democrats.org

* Raise Incomes and Restore Economic Security For the Middle Class

- Raise wages, expand Social Security, expand Housing

* Create Good-Paying Jobs

- Infrastructure, clean energy, science research, education

* Economic Fairness and Fight Against Inequality

- Fixing our financial system (Wall Street), higher taxes for the wealthy, fair trade

* Bringing Americans Together and Remove Barriers to Opportunities

- Closing racial wealth gap, fixing broken immigration system, civil rights, ending systemic racism, fighting for the people of Puerto Rico

* Protecting Voting Rights

* Combat Climate Change, Build a Clean Energy Economy and Secure Environmental Justice

Political Jump Ball - Employment

Political Jump Ball – Employment U3(Source: Bloomberg)

Political Jump Ball - Employment U6(Source: Bloomberg)

Political Jump Ball – Employment Participation rate 62.9

Political Jump Ball – EmploymentBirth Rates Are at Historic Lows

Wage GrowthSource – Federal Reserve Bank of Atlanta

Wage GrowthSource – Federal Reserve Bank of Atlanta

Domo Arigato Mr. Roboto

A.I. and Wage Growth

A.I. and Wage Growth(Source: Trading Economics)

Growth

Growth – GDP (Source: Trading Economics)

Growth – GDP (Source: Trading Economics)

Something both parties agree on…DEBT

US Gross Debt to GDP

US Gross Debt to GDP

Central Banks - Debt(Source: Bank of England)

Personal Debt to GDP

Economic Headwinds - Debt

Debt (Hurts Economic Spending)

The Politics of Washington

The Great Divide - TRUMPT – Tax Reform – Likely going to blow a hole in the debt without slowing the rate of growth on programs. Any cuts Democrats will oppose. 50/50 shot Republicans will use budget reconciliation to get a water down version done in 2018.

R – Relative valuations on both equities and fixed income are high and ignoring all of the global political unrest. At some point earnings are going to have to show large gains to justify price/earnings ratios.

U – Unfunded Pension Liabilities & Social Security will hurt State and Federal governments ability to balance any budget (ex: Illinois & Puerto Rico) . This is not being properly addressed by politicians and will come back to cost tax payers billions of dollars.

M – Medicare/Medicaid and ACA. Democrats passed a horrible law. Now the Republicans are going to make something bad even worse because they will not get any help from across the isle. Passing a bill through budget reconciliation will only give them the steering wheel of a sinking ship. This is an area where both parties need to work together quickly, but I don’t expect it happen.

P – Policy changes through Executive Order. This seems to be the new way of a President getting anything done. Trump can remove Obama’s orders on regulation but I hope he doesn’t try and usurp the traditional way bills become laws. What happened to “School House Rock…I am just a Bill?”

In Conclusion* Frustration of the economy put an “outsider” in the White House

* Growing speculation that perhaps the Trump administration will not be able to effect the type of change that was central to his campaign promises.

* GDP growth could increase slightly if Trump is able to deregulate (some) and make some changes to the tax code. But bipartisanship is looking less likely.

* Neither party wants to address the issue of entitlements and debt. They can keep “kicking the can” but at some point it ends up in a cul-de-sac and the results will not be pretty.

* Watch the consumer numbers carefully (auto sales, housing starts, retail sales, etc.). There is reason to believe that added consumer debt numbers (if they continue) will slow spending and thus slow GDP growth.

* The more things change…the more they stay the same.

Thank you!Thank you GA Chapter of CPAs!

Stephen Colavito

Managing Director/Portfolio Manager

Asset Preservation Advisors

678-504-4862 (Direct)

scolavito@apabonds.com

scolavito6@bloomberg.net

Find me on LinkedIn

DisclosuresThank you GA Chapter of CPAs!

Stephen Colavito

Managing Director/Portfolio Manager

Asset Preservation Advisors

678-504-4862 (Direct)

scolavito@apabonds.com

scolavito6@bloomberg.net

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