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May 27, 2025 – The House has passed Trump’s big beautiful bill and moved it on to the Senate. It’s a budget buster that offers something for all but will expand deficits meaningfully. It’s a bit of a mess that can be fixed if the Senate has the backbone to fix it. Wall Street will be watching, especially bond investors.

//  by Tower Bridge Advisors

More Whack-a-Mole. President Trump, frustrated with the pace of trade talks with the EU, announced 50% tariffs by June 1 if insufficient progress wasn’t made. Within 48 hours that deadline was stretched to July 19th. And if it has to be modified again, it most likely will happen given that 50% tariffs will essentially halt most western-bound movement of goods, and the likelihood of retaliatory tariffs will halt most of our exports as well. Whereas equity markets fell 3% after Liberation Day announcements, last week’s 50% tariff news evoked a much more modest reaction. That appears to be reversed this morning after the weekend extension. It’s the world we have to live in today. More and more, investors are adjusting to Trump’s rhythm. The reality is that the center point for tariff discussions appears to be close to 10%. Tariffs alone are not the entire trade agenda. The EU’s persistent attacks on American tech companies won’t go unnoticed, for instance. There could be specific rules for specific industries varying country to country. Autos are a case in point. American imports come largely from Japan, South Korea, and Germany. The bottom line is that basic frameworks can be negotiated within a few months. Final details will take much longer.

But perhaps the biggest news last week that has serious long-term implications was the passage of the huge reconciliation bill that passed the House by one vote. As always, the devil is in the details and as is typical in Congress, the last-minute edits and additions designed to get the most reluctant on board at the last minute made the final result much messier than it should have been, and will be modified in the Senate. For the most part, Trump and fellow Republicans have talked about all the tax breaks included in the bill. But what is missing from the bill is any effort to lower the Federal deficit and regain fiscal responsibility. One can argue how much deficits will increase in the coming years or how to score the bill’s impact. But any way one does it, this bill will result in higher deficits annually over the next decade.

When Trump passed his big tax cut bill back in 2017, the national debt was about $20 trillion. Eight years later it is over $36 trillion. Do the math. $16 trillion more in 8 years. That’s $2 trillion per year. Debt service has more than doubled over the same period of time. In 2017, the Fed Funds rate was below 1%. Now it is over 4%. Rates all along the curve are over 4% today. Does that bother bond holders? Last week’s anemic 20-year auction and rate spikes in Japan suggest strongly that the answer is yes. We all know Trump wants a bill on his desk to sign by July 2. If Republicans in the Senate simply want to placate Trump and avoid stirring the pot, that will happen with some modifications. The SALT deduction is a case in point. No rational reason for it to be increased to $40,000. The only beneficiaries are the wealthy in high tax states. But these are also big donors. If the Senate cuts the $40,000 back to $20,000, House Republicans can tell constituents they tried and got something while others can claim fiscal responsibility. Trump-style art of the deal!

But back to the real message, adding $2 trillion or more every year to the debt would bring it to over $50 trillion in 8 years. Apply a 4% cost and you get an annual interest expense of over $2 trillion, about five times what it was in 2017. Today the government spends about $6.5 trillion per year. Debt-to-GDP is over 100% and could rise to 125% or more in 8 years, a level not even seen in World War II. Should there be an intervening recession, the numbers would likely be much worse.

No one knows when a crisis occurs requiring immediate austerity measures. There’s no need to find out. We can’t expect miracles out of the Senate. But some efforts to rein in deficits would be welcome news for financial markets.

With that said, any real effort to control deficits requires attacking the major parts of government spending that need to be reined in. So far, the only part of the budget being addressed is Medicaid and SNAP. Even there, early bold goals to reduce costs have been reduced meaningfully. There are three other 800-pound gorillas in the room to attack if one seriously wants to control spending. And make no bones about it, the problem is much more about out-of-control spending rather than a revenue shortfall. The gorillas are defense spending, Medicare and Social Security. Trump has declared the last two off limits but conceivably could address them later in his term. He wants more for defense. As Commander-in-Chief, any President’s first priority is to protect America. Trump’s Golden Dome proposal is certainly on target with that priority. But we don’t have infinite resources. Procurement is a mess. Look at the debacle over Air Force One. Why should it take Boeing 12 years to build two new planes? Boeing bears responsibility but so does the Pentagon which orders changes with each evolving technology. We are still building weapons to fight yesterday’s wars. The whole procurement system needs to be rebuilt from the ground up. DOGE made headlines firing people in what appears to be haphazard fashion but beneath the surface it was also trying to set the table to modernize infrastructure for today’s world. The poster child for this is air traffic control where parts of the infrastructure still even uses floppy disks. When was the last time you used one?

Getting any major infrastructure done takes many years. Much of the 2021 infrastructure bill passed by Congress is still unspent due to permitting delays. To his credit, Trump wants to strip away as much of the red tape as possible. But in Washington, things happen slowly. Bureaucracy gets in the way. So do courts.

The Senate could help by putting spending caps in place and by acts of recission. Recission means taking back, through legislation, monies previously allocated but unspent. In a world where more spending means more benefits to constituents who vote and fund campaigns, that’s a tough thing to do. But modest changes today will avoid significant austerity tomorrow. Does Wall Street care? Equity investors may not. After all, more spending and tax cuts are stimulative. But so is snorting cocaine. The highs might be brief but the aftermath painful. Bond investors do care. As we saw in last week’s auction of 20-year bonds, the lack of buyers means higher rates. One way Treasury has acted to keep 10-year bond yields in check is to issue fewer of them, selling more short-term bonds instead. The problem with front loading the big chunk of debt is that the subsequent turnover rate is higher. That means not only will Treasury have to issue $2 trillion of new debt (or more) annually, but it will also have to refinance an ever increasing amount of maturing debt at the same time. To be absurd but to make a point, if all Federal debt had a maturity of one-day, then Treasury would have to find buyers for over $36 trillion dollars of debt every day. Moreover, if inflation were to rise again setting off another inverted yield curve, debt service costs would skyrocket.

The bottom line is what the Senate will do with the House bill matters. It really matters. Lip service may make Trump happy. He wants to get everything on his agenda done as fast as possible. But fiscal responsibility matters as well. If Congress could get a constructive bill passed and incorporate an increase in the debt ceiling at the same time, Wall Street would react positively. The debt ceiling becomes part of this discussion because if raising it can be incorporated into the reconciliation bill, it would require only 50 votes in the Senate to pass. But if reaching agreement on the reconciliation package stretches out for too long, and the debt ceiling is reached before the reconciliation bill passes, then 60 votes would be needed allowing Democrats to dictate changes.

So, we will get a bill by early July. The issue is form. Simply put, a bill that shows little spending restraint will not be well received by the bond markets around the world. One that begins to address the level of deficit spending might contain fewer goodies, but would be more responsible. Trump can only lose four Republicans in the Senate. Rand Paul and Ron Johnson are taking the charge to cut the proposed deficit. They need just two more to stand ground and make constructive changes. Let’s hope they succeed.

Marjorie Taylor Greene turns 51 today.

James M. Meyer, CFA 610-260-2220

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « May 22, 2025 – Memorial Day Weekend is typically the unofficial start of summer for many. However, this year has been anything but typical. Corporate earnings have been holding up based on recent company reports and outlooks. Tariffs have dented a few earnings reports, but the consumer continues to spend. Credit spreads are not indicating a recession yet, although interest rates have been on the rise as Congress works on a spending resolution bill. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory. Anyone traveling this weekend to a national park should remember to bring their bear spray.
Next Post: May 30, 2025 – Amidst a volatile market, significant economic risks such as high interest rates and trade policy are creating a tense environment where stock market gains may be capped. Key sectors, like housing, are already showing signs of strain from elevated rates, while the bond market remains turbulent. Therefore, a diversified and defensive investment strategy is recommended, emphasizing fundamental analysis and valuation discipline for stocks while holding high-quality bonds to navigate the expected volatility. »

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  • July 7, 2025 – Treasury Secretary Bessent talks of his 3-3-3 goals, 3% growth, 3% inflation and a reduction of the deficit-to-GDP ratio from over 6 to just 3. Those are mighty goals. The passage of the reconciliation bill may make short-term movement in the right direction but the ongoing buildup of debt may make reaching those long-term goals difficult.
  • July 3, 2025 – The second quarter of 2025 delivered a stellar performance for U.S. equities, with impressive gains across major indices driven by strong corporate earnings, AI enthusiasm, and eased trade tensions. Despite this rally, the market successfully navigated challenges including early tariff anxieties, signs of consumer stress, and geopolitical uncertainties. Looking ahead, investors are keenly watching the “One Big Beautiful Bill Act” and its potential impact on interest rates, inflation, and corporate profitability.
  • June 30, 2025 – Trump’s big beautiful bill is headed for the finish line. It isn’t done yet and likely will see further changes before it reaches his desk. As the administration buys the votes necessary for its approval, expect the impact on future deficits to rise. With that said, the bill will help to accelerate near-term growth. Second quarter earnings reports are just a couple of weeks away and they should be good. However, unlike Q1 when skepticism abounded, this time optimism is high. July is usually a good month for stocks but the sharp April-June rally may mute the pace of further gains.
  • June 26, 2025 – Labubu dolls are hard to get these days. These dolls are prized by children in China, along with some celebrity admirers such as David Beckham and Rihanna. The grimacing, elvish-looking creatures come in “blind boxes” that keep buyers in suspense over which one they might get, but can take weeks to acquire. They sell for as little as $20, but a rare variety recently sold at auction for $150,000. In spite of all the hand-wringing about inflation and tariffs, consumers around the globe continue to spend. However, patterns of spending have definitely shifted.
  • June 23, 2025 – Saturday’s bombing of Iran’s nuclear sites was shocking news but financial markets are taking the news in stride at least until they can assess the Iranian response. Economically, little has changed so far. The one elevated risk would be an attempted blockage of the Strait of Hormuz. While possible, that would be a very dangerous escalation that would evoke a powerful response. Markets, at least for now, place low odds of that happening. Thus, the economic impact of the raid so far is marginal and markets remain calm.
  • June 16, 2025 – While many in Congress fret that the reconciliation bill now before the Senate raises deficits and ultimately leads to economic disaster if left unchecked in the future, the focus will be on now. That means lower taxes, faster growth and higher earnings in the short-run as long as the bond market doesn’t rebel. Only a true crisis is likely to elicit fiscal austerity. That won’t happen before the current bill, slightly modified, will pass. Wall Street will embrace it because it always embraces stimulative policy, at least until the side effects kick in. Markets are starting to replace complacency with euphoria. That can last many months. But as we learned from the SPAC debacle in 2021, it won’t last forever.
  • June 12, 2025 – Despite a resilient stock market grinding near all-time highs, a fresh wave of geopolitical risk and fiscal policy uncertainty is creating headwinds. A chorus of Wall Street’s most respected investors is sounding the alarm, warning of dangerously high valuations, an unsustainable U.S. debt burden, and the rising probability of an economic slowdown.
  • June 9, 2025 – This week the focus will be on trade negotiations with China and the progress getting the Big Beautiful Bill on the President’s desk. The former is likely to be complicated and slow moving, but any movement in the right direction should keep investors happy. As for the legislation, it will be inflationary and worrisome long-term if one focuses on future debt service requirements. But this market has heard wolf cried too often to care until either interest rates spike higher or the dollar comes under renewed attack.
  • June 5, 2025 – The Old Faithful Geyser in Yellowstone National Park erupts regularly, but not on an exact schedule. Considering the most recent 100 eruptions, the average time between eruptions ranged from 55 minutes to over 2 hours. Likewise, inflation and employment data can cause ebbs and flows in the bond market, creating volatility for investors. Economic data are currently coming in mixed, mostly related to changing tariff policy. Meanwhile, equity markets are slightly positive so far this year, and only off about 3% from all-time highs.
  • June 2, 2025 – Just as the Soviets laid down the gauntlet in the 1960s starting the space race, China has caught up to us technologically in many ways and is still gaining ground in others. For the U.S. to maintain its leadership requires coordinated efforts from both the private and public sectors. Trying to erect barriers is not a winning formula. Rather, properly focusing resources to support the most strategic initiatives makes sense.

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