Drill, Baby, Drill
We find ourselves in the second half of 2025, and it already seems like a full year. We have been through a war in the Middle East. We have enacted new tax legislation which renews the old tax structure that was set to expire at the end of this year. By adding more tax cuts to that plan, we seem on the verge of a supply-sider’s paradise. While we have also waded into some expense laden government programs which seemed set to grow indefinitely, we have also witnessed significant expense and job cuts in the Federal Department of Education and the IRS. We expect these changes to the expense side of the budget to result in relatively “little” to “flat” growth going into 2026. If experience is any guide, we can expect some economic growth to accrue from the recent tax cuts. So far, our economic growth expectations are good.
The trade outlook for the country and the world gives us some concern, however. Trump’s insistence and reliance on tariffs leaves us with no clear vision of how things will actually work and markets don’t like uncertainty. There seems to be no equitable method for setting tariff levels between countries and economies. There also seems to be no “one size fits all” solution to setting tariff levels. Accordingly, there is a constant appeal to different policies and ultimately to political design when making tariff rules. Political design is rarely fair and can be expected to ruin almost any program. We are watching the political decisions as they may likely affect our trade policies as we get deeper into the tariff business.
Our Immigration Policy is changing dramatically. The previous open-door policies that created a law-and-order problem in our country have changed as America now attempts to identify and deport undocumented immigrants. It appears the current immigration plan is aimed at rebuilding the legitimacy of our immigration system by reversing the course that allowed millions of illegal immigrants and criminals into our country. Immigration is an important factor in our country’s economy, so a cleansing of the failed systems of the past is essential to ensuring a thriving immigration system of the future. These highly sensitive changes will, however, take time to return to normalcy, so we expect further market volatility as a result.
“Drill, baby, drill” has been a backbone strategy for Trump since his first term. The thought behind “drill, baby, drill” is to cheapen the price of oil. By doing this, we will create a natural inflation hedge in our economy. There is a lot of inflation fear circulating in the trade policies being assembled by this administration, as most Americans are still naïve about how our tariff system will work. Cheap oil will certainly help calm inflation fears and provide a cushion against oil conflict anywhere in the world. Our involvement in the Middle East makes this policy very timely and important.
Global tensions remain substantial, however, our position as global leaders appears to be at a relatively high point as a result of the developments in the Middle East and the reduction of Iran’s nuclear capabilities. Returning our country to a position of respect in the world is critical and we are hoping that there will be more proof of this with a peaceful resolution in Ukraine. The President has been calling for 100% tariffs on Russian goods, so perhaps there is something brewing in Ukraine.
While the economy continues to chug along, we note that it is beginning to act like it’s in a bit of a stall with interest rates near a high, and housing prices beginning a decline. Sales are now below the levels that defined the past three recessions. Additionally, the price/earnings ratio for the market at large is about 22x, which is extremely high for stocks. Bond interest rates are high as well, so we are bracing for a correction from these levels and will be quick on the trigger if critical market levels break.
As a whole, however, we seem to be setting a stage for a new high, perhaps by May/June of next year. Tax revenues should be higher, and earnings should be at new highs by then.
We hope that the world leaders can muster enough respect to give us some peace with lower interest rates and higher earnings. Time will certainly tell, and we remain positive while things unfold. China and Russia are still in the “Enemy Camp,” but the politics of the Middle East seem to be improving. Iran’s influence over that part of the world has been diminished as the result of America’s leadership and successful reduction of Iranian nuclear capabilities.
Keep the faith!
