Afford Anything Podcast: The Most Expensive Election Trade Ever Made (A Cautionary Tale)
Host: Paula Pant | Cumulus Podcast Network
Release Date: November 1, 2024

Introduction

In the November 2024 episode of the Afford Anything podcast, host Paula Pant delves into the intricate interplay between economic indicators, investment strategies, and the looming U.S. election. Far from a mere discussion on money and investing, the episode explores the psychology of decision-making, highlighting the importance of critical thinking and recognizing behavioral blind spots in navigating financial landscapes.

1. Federal Reserve's Anticipated Interest Rate Cuts

Paula begins by addressing the Federal Reserve's impending decision to cut interest rates by a quarter of a percentage point. Despite an unexpectedly weak jobs report, the Fed appears poised to proceed with the rate reduction:

"[00:01:30] Paula Pant: 'The market at this point has priced in a 25 basis point cut, not just at the November meeting, but also in anticipation of their December meeting.'"

She emphasizes the Fed's cautious approach this year, contrasting it with the more predictable rate hikes of 2022 and 2023. The presence of a rare dissenting vote in September underscores the uncertainty within the Fed regarding future economic moves.

2. The Unprecedented October Jobs Report

The October jobs report revealed a stark deviation from expectations, with only 12,000 new jobs added compared to the anticipated 100,000. Paula attributes this anomaly to two primary factors:

• Hurricanes Helene and Milton: These natural disasters are estimated to have reduced employment by 40,000 to 70,000 jobs across the Southeast.

• Labor Strikes: Strikes at major companies like Boeing, Textron, and Hilton Hotels contributed to a decline of approximately 44,000 manufacturing jobs.

"[00:05:00] Paula Pant: 'There are two major factors at play... hurricanes and strikes combined probably led to around 100,000 fewer jobs created in the month of October.'"

Despite the gloomy numbers, Paula reassures listeners that these factors are likely temporary, aligning with the Fed's measured approach to economic adjustments.

3. Gold's Soaring Popularity Amidst Uncertainty

One of the episode's focal points is the remarkable surge in gold prices, which are on track to reach their highest levels since 1979. Paula explores the reasons behind this trend:

• Central Bank Purchases: Unlike individual or institutional investors, central banks are significantly increasing their physical gold reserves, citing geopolitical risks and the desire to reduce dependence on the U.S. dollar.

• Geopolitical Tensions: Concerns over potential conflicts, particularly between China and Taiwan, drive central banks to seek safe-haven assets.

"[00:07:00] Paula Pant: 'The modern gold rush was started by central banks... They are worried about geopolitical risk.'"

She highlights that while gold has historically been a modest performer, its role as an inflation hedge and its low correlation with equities and bonds make it an attractive asset during times of uncertainty.

4. The Decline of I Bonds as an Inflation Hedge

Paula contrasts the rising popularity of gold with the declining returns of I Bonds. Once yielding an impressive 9.6% in 2022, I Bonds have plummeted to a four-year low of 3.1%:

"[00:12:00] Paula Pant: 'Basically, there's really no point anymore at the current rates of chasing I bonds.'"

She advises listeners to consider alternative investment vehicles, such as high-yield savings accounts, which now offer better returns without the purchase limitations associated with I Bonds.

5. U.S. Stock Market: Dominance of the Magnificent Seven and Potential for Small Caps

The episode sheds light on the robust performance of the U.S. stock market, particularly the "Magnificent Seven"—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—which account for a significant portion of the S&P 500's gains. However, Paula also points out the emerging opportunities for small-cap companies:

"[00:15:00] Paula Pant: 'Generally speaking, whenever there are rate cuts, those tend to benefit small cap companies... the smallest companies that often tend to benefit the most.'"

She notes that the Russell 2000 index's bullish trend suggests growing optimism about small-cap stocks, especially as cheaper access to capital can fuel their expansion.

6. U.S. Economy vs. G7: Strengths and Deficits

While the U.S. economy showcases strong growth and market performance—the highest among G7 nations—the episode also addresses a significant concern: the burgeoning federal deficit, which stands at an alarming 6% of GDP.

"[00:20:00] Paula Pant: 'Among the G7 countries, our deficits are the worst... the US has had the highest level of economic growth since the pandemic.'"

The juxtaposition of economic strength and fiscal irresponsibility poses challenges for maintaining growth and global competitiveness.

7. Risks: Tariffs, Trade Wars, and Escalating Deficits

Paula outlines potential risks that could undermine the U.S. economic standing:

• Tariffs: Proposed tariffs on imports, especially from Mexico, could trigger inflation and spark a global trade war, damaging economic growth.

• Deficit Growth: Both presidential candidates' economic proposals threaten to exacerbate the already high deficit, with estimates projecting a rise to 6.1% of GDP by 2025.

"[00:25:00] Paula Pant: 'The prospect of looming tariffs, a global trade war and increased deficits could have some serious economic ramifications...'"

She warns that these factors could erode the U.S.'s strong economic position and lead to increased living costs for consumers.

8. Cautionary Tale: The Perils of Trading Based on Election Outcomes

The episode culminates with a compelling cautionary tale against making investment decisions based on election predictions. Paula recounts the story of Sam Bankman-Fried (SBF), who accurately predicted the 2016 election outcome but ultimately suffered massive losses due to unforeseen market reactions:

"[00:35:00] Paula Pant: 'He could not accurately predict what the downstream effects would be... he lost $600 million in his sleep overnight.'"

This narrative underscores the unpredictability of market behavior, even when the primary event (election result) is accurately forecasted. Paula advises:

"[00:40:00] Paula Pant: 'Don't trade the news. Think long term. Stay the course, buy and hold.'"

She reinforces the principle that while predictions can be accurate, the subsequent market movements are influenced by myriad factors that are difficult to foresee.

Conclusion

Paula Pant's November 2024 episode of Afford Anything offers a nuanced exploration of current economic trends, investment opportunities, and the inherent risks of reactive trading strategies. By weaving together insights on interest rates, employment data, gold investments, and the volatile nature of the stock market, she equips listeners with a comprehensive understanding of the financial landscape during an election month. The cautionary tale serves as a poignant reminder to prioritize long-term strategies over speculative moves based on uncertain events.

For those seeking deeper financial insights and decision-making frameworks, this episode is an invaluable resource, blending economic analysis with practical advice to navigate complex market dynamics.

Notable Quotes:

• "The market at this point has priced in a 25 basis point cut, not just at the November meeting, but also in anticipation of their December meeting."
  — Paula Pant [00:01:30]

• "There's really no point anymore at the current rates of chasing I bonds."
  — Paula Pant [00:12:00]

• "Don't trade the news. Think long term. Stay the course, buy and hold."
  — Paula Pant [00:40:00]