The Sunday Drive - 03/09/2025 Edition [#153]

Musings and Meanderings of a Financial Provocateur

A Sunday Drive Around the Internet

👋🏼 Hello friends! Let's enjoy a leisurely Sunday Drive around the internet.

🎶 Vibin'

We sure had quite a wild and crazy ride in the financial markets this past week. It’s hard not to feel a sense of unease from the uncertainty surrounding current policy discussions taking place in our country and abroad. I’m reminded of the fact that, over the course of time, things usually don’t turn out that bad if you’re patient.

Most of you know that I’m a sucker for a good mashup, and it’s been a while since we’ve had one in the Sunday Drive. So this week, I’m vibin’ to Crazy Train by Ozzy Osbourne and…Earth, Wind and Fire. 😎 Enjoy…

💭  Quote of the Week‌

“Learn the rules like a pro, so you can break them like an artist.“
— Pablo Picasso

📈  Chart of the Week

This week’s Chart comes to us courtesy of my friend and former Eaton Vance colleague, Henry Peabody and his firm, Riverhead Research.

Though by no means do I claim to be a competent macroeconomic thinker, I’ve been spending a lot of time lately considering the long term implications of recent policy shifts under the Trump 2.0 Administration.

For one, the Administration has expressed a desire to move more manufacturing capacity back to the U.S., thus onshoring many jobs that are currently offshore. As a result of increased investment in the U.S. in the coming years, the Return (GDP) on Invested Capital (Capital Stock) is bound to change significantly.

According to this week’s Chart, one could argue that after the Great Financial Crisis (GFC), the U.S. economy grew increasingly capital efficient as it outpaced the rest of the world in the ratio of GDP to Capital Stock.

But (and it’s a big one)…

This increase in capital efficiency occurred in the context of a massive increase in leverage (government debt) in the U.S. economy.

At the outset of the Great Financial Crisis (2007-2009), U.S. debt-to-GDP ratio was around 35%.

Prior to the Covid-19 Pandemic (end of 2019), the ratio had risen to nearly 80% of GDP right before the pandemic.

Today, the current debt-to-GDP ratio is approximately 122.30%.

So here we are. We now have an economy that appears poised to:

• De-lever (unsustainable levels of debt service),

• Increase domestic investment (privately not publicly funded),

• Increase relatively high paying domestic manufacturing employment (inflationary in light of an aging workforce? Not with sufficient productivity growth), and

• Decrease government spending (spending which is largely sourced from the private economy here and abroad)

If we zoom out from all the current (scary) headlines, what does this really mean? In my view, it means a reorientation of the drivers of economic growth in the U.S. in the coming years.

In my college Macroeconomics class, I learned that Gross Domestic Product (GDP) is comprised of the following:

1. Consumption +

2. Investment +

3. Government Spending +

4. Exports minus Imports

Leaving aside what may or may not happen over the next few months, my outlook for economic growth over the next decade (or more) is quite positive.

Consumption should be strong in the context of higher wages and increased, AI-driven productivity growth.

Investment in the Capital Stock of the U.S. should increase as a result of the aforementioned onshoring efforts.

Government Spending will likely come down, freeing up capital to be directed to (hopefully) more productive uses.

The mix of exports to imports should improve as a result of a weaker dollar and tariff normalization (moving the tariffs the U.S. imposes to be more in-line with the tariffs already being imposed on the U.S. by our trading partners).

When we put all that together, though we may see some short lived economic weakness as the economy reorients itself, the prospects for accelerated economic growth in the U.S. are quite good. I’m encouraged by what may lie ahead.

Sources:

1. United States Gross Federal Debt to GDP - Trading Economics

2. How worried should you be about the federal deficit and debt?

🚙 Interesting Drive-By's

💡 Revisiting Competitive Moats

📈 America’s New Golden Age

📉 Lessons on Birth Rates: Japan and South Korea

👨🏼‍🦲 Balding Cure: We May Finally Have a Simple Way to Reverse Hair Loss

🧐 China Launches Underwater Intelligent Computing Center

👋🏼 Parting Thought

For those out there who are maniacally focused on dividends, especially in light of the recent outperformance of value stocks over growth stocks, I would point out that Berkshire Hathaway’s dividend yield is….zero. That’s right. Warren Buffett’s Berkshire doesn’t pay a dividend. Let that sink in for a while. 🤔

---

If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.

Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners.

‌I hope you have a relaxing weekend and a great week ahead. See you next Sunday...

Your faithful financial provocateur,

-Mike‌

If you enjoy the Sunday Drive, I'd be honored if you'd share it with others.‌‌

If this was forwarded to you, please subscribe and join the other geniuses who are reading this newsletter.