Reduced Regulations for Businesses, Tariffs, Liquor Sales, Mortgages, Increased Insurance Premiums, Mortgage Lending, Oil Prices, Government Interest Expense, Fake Job Postings & Medicare Prices

Businesses should do well with reduced regulations going forward

Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months.

At this time, we’re not sure which ones will be eligible for elimination, but you will likely see some rules that perhaps made no sense to many people could be reversed in 2025. There could be a fight brewing between California and the federal government over some of these changes in regulations and California could lose their waiver and authority to ban the sale of new gasoline powered cars by 2035. The federal government wants control back over the auto industry, and does not want to allow states to come up with separate rules. That could ease pressure on both the auto companies and consumers as well. One that I’m not sure on is eliminating bank watchdogs like the FDIC.

I like the idea of pulling back on the regulations, but maybe this is one that should be controlled not eliminated? Be prepared in 2025 for many changes in business, I believe most will be helpful. 

History has proven in the recent past that tariffs can cause problems in the economy and the markets as well.

We have talked for the past month or so that we have been lightening up on our investments, which does not mean we went to 100% cash but a more reasonable level of around 20% in cash and 80% invested. A big reason for this is I believe currently the markets are incorrectly ignoring what the potential tariffs will do in the short term. It was only about six years ago when we had tariffs and that caused disruption in supply chains and rising manufacturing costs along with declining profits for some corporations. Our trading partners did not simply give in to the demands.

Looking at China in particular, in September 2019, an additional $113 billion of tariffs were imposed on top of roughly $50 billion of tariffs that were already in effect. Each time the tariffs were raised, there was retaliation from China. This began to cause wild swings in the stock and bond markets. It is important as well for investors to understand when tariffs were imposed in 2018, the economy was doing well. That was because of recent tax cuts that reduced the corporate income tax from 35% down to 21%, which was a 40% decline. Now in 2025 there are no big tax cuts that the economy and businesses are benefitting from, which could hurt corporate profits in the short term.

There is a potential tax relief bill that must go through Congress, but that would not be felt by anyone until the summer or late fall of this year. No one knows for certain how long it takes tariffs to benefit the economy because last time the world and trade fell apart as Covid changed everything. So for now, we will just have to wait and see how long it will take before the United States sees a benefit to tariffs, which I do believe long-term they are a good thing. With some potential short-term headwinds from these trade conversations, I think it’s important to not be overly aggressive with your portfolio and to make sure you’re holding strong businesses with low valuations that do not rely heavily on overseas trade.

Liquor sales are declining and the bourbon boom seems to have passed

It used to be investing in alcohol companies like Brown-Forman, who is famous for Jack Daniels, and other alcohol companies was a relatively safe investment over the long-term. But it appears that peoples liquor cabinets are still full from the Covid years when they over bought many types of booze for drinking at home and they still have a good amount of that alcohol left. No help to the industry is the anti- obesity drugs, the legal use of cannabis and some people switching to non-alcoholic drinks.

The recent warning from the US Surgeon General recommending alcohol bottles should have a warning label on them about cancer could also hurt sales temporarily. We can’t forget about the tariffs that are coming as this will likely be another heavy weight on alcohol and bourbon sales and profits. While writing about the decline in bourbon sales, I thought I would go to my bar to see if I had any bourbon to try. I took a shot of it and it burned all the way down. I personally don’t know why Bourbon is so popular in the first place. With that said I guess maybe others are agreeing with me, US whiskey sales declined 1.2% in 2023, which was the first decline in 21 years.

In the first nine months of 2024 there was additional drop of 4%. Your bigger distillers have the balance sheets to whether the storm, but your smaller craft distillery companies are beginning to close. I do believe this will probably change course maybe not in 2025, but perhaps come 2026 more distillers could quit the business, which will leave room for the big companies to pick up that slack and see their sales and profits increase.

What Really Matters when Getting a Mortgage

When getting a mortgage, everyone’s top priority is to get the best rate. However, it is equally as important to understand what it took to get that rate. When you get a mortgage, there are origination costs called points that you can buy to reduce your mortgage rate. In other words, you can buy down that rate for a cost, and this typically doesn’t get analyzed correctly. Let’s consider an example using current market rates. For a well-qualified buyer, the par rate is about 6.75%, meaning there are no added point costs. If the borrower wanted, they could pay a point, which costs 1% of the mortgage balance, in exchange for a lower rate of 6.375%.

On a $600k loan, this point would cost $6,000. The question is, how long would it take for the interest savings from the lower rate to recoup the additional $6,000 point cost? In this example assuming a 30-year mortgage, it would take almost 3 years. That may not seem like a long time, but in the current interest rate environment, most experts agree that mortgage rates will be coming down at least slightly, especially within 3 years. This means if you forgo paying the point and accept the higher rate and higher accompanying monthly payment, as long as you are able to refinancing into a lower rate within 3 years, you will come out ahead. On the contrary by paying a point, you believe that right now mortgage rates are at their lowest point for the next 3 years, which is a strong stance to take.

I believe there will be opportunities to refinance into lower rates, meaning the overall cheapest way to structure a mortgage now is with a higher interest rate. You can even take this a step further by accepting a rate above the par rate in exchange for credits from the lender that can be used to pay closing costs and some of the mortgage interest. In our $600k mortgage example, taking a rate of 7.125% would come with approximately $7,500 of credits. A rate of 7.125% might look expensive, but as long as you can refinance within 3 years, that rate option gives you the lowest overall cost of borrowing.

Why the $30 billion loss from the LA fires will increase insurance premiums across the country

It is now estimated the LA fire is going to cost $30 billion give or take a few billion. This is concerning considering the cost of insurance has already risen dramatically because of increased construction costs and population growth in areas that are riskier than others. Litigation costs also continue to rise for insurance companies as there seems to be a large amount of attorneys going after large settlements deserving or not. The average US insurance premium for a home was $1902 in 2020 and that jumped 33% to $2530 in 2023. Not only are there rising costs for construction, labor and settlements but the number of major disasters has increased dramatically. In the two years from 2022 to 2024-billion-dollar disasters averaged 24.3 a year.

If you go back 45 years to 1980 the average of billion-dollar disasters was only 3.3, which means there has been a sevenfold increase. It may not sound fair, but insurance companies have to spread the risk over their entire insured portfolio, even if you’re in a different state and a low-risk area. Unfortunately, sometimes insurance companies have to raise rates more in an unregulated state than a highly regulated state. Again, it may sound unfair, but if the insured losses are rising, the money doesn’t fall from the sky for insurance companies and they have to increase their premiums to cover rising expenses.

Don’t look for any relief soon in your insurance premiums, we’ve had these large catastrophe events for almost 10 years now and insurance companies use that for their data to price premiums going forward. Insurance companies rightly presume for the next 10 years we will have 20-to-25-billion-dollar disasters per year, which must be covered by higher insurance premiums. If you’re looking at buying a home and you can just squeeze in with all the expenses, you may want to reconsider because the amount that you’re using to insure the home over the next few years could put you into a financial disaster yourself. The higher insurance premiums could also cool off the once hot housing market going forward as insurance costs continue to rise and that’s if you can get insurance at all.

Will the LA fires change mortgage lending in California?

I think with the rising cost of homeownership in California, the LA fires will just make it more difficult for mortgage lending in California. In 2023 alone, $13 billion in mortgage loans were made on homes in ZIP Codes that were burned or evacuated by the current fires. In Southern California there are nine counties that are at a high fire risk and in 2023 $170 billion in mortgage originations were written in those areas, which was roughly 10% of the entire US market.

The top lender in Southern California in 2023 was JPMorgan Chase, which wrote over $30 billion in loans. That was closely followed by Vista Point Mortgage and United Wholesale Mortgage. The banks and the mortgage companies will not suffer any losses, most of the burden from the loss is suffered by the insurance companies and the homeowners. The banks will be offering forbearance for up to a year to relieve homeowners of the burden of paying the mortgage while they try to put their lives back together. The only loss the banks and mortgage companies may have would be lost interest for the next year; however, remember many banks after they obtain the loan they generally sell it off to other banks, insurance companies or private lenders that then hold the loan.

The major concern is it may be difficult obtaining a mortgage in areas with high fire risk in Southern California going forward because the risk has just become to great and the rising cost of insurance could make it difficult for people to qualify. I have heard that some people may decide it is not even worth rebuilding a home in these areas with high fire risk. 

Prices at the pump have remained low, but oil prices have been rising. What should investors and consumers expect in the near future?

If you’re like me, you feel good pulling up to the pump and seeing lower gas prices. Because of high taxes in the state of California, they’re not as low as many places across the country but for us in California paying around $4.20 a gallon for gas is a pretty good deal. If you’ve been watching the price of oil lately, it has touched $80 a barrel with blame going to new US sanctions on Russian oil that could reduce the global supply.

The good news for US consumers is there is currently an oversupply of gas according to the Energy Information Administration (EIA) as they have said inventories of gasoline are now 6 million barrels above normal existing inventories with refiners producing more gasoline than drivers can use. The big culprit at the pump is about 50% comes from oil price changes and 20% comes from refining costs. Since Russia invaded Ukraine, there have been sanctions that have caused oil prices to spike at various times but Russia has been able to find ways around the sanctions, which would then increase the world supply of oil.

We will see if that happens again, maybe this time it will be more difficult with the change in administration. If oil prices do continue to rise, OPEC+ could make some changes as they did reduce output by 5 million barrels per day, which is over 5% of the global demand. Even if oil prices stay at these higher levels, perhaps we could see more supply come online from OPEC+ and there’s talk that maybe by April they begin producing more oil again. If you’re an investor in big oil companies or oil related investments, I believe you could see some nice gains in 2025.

For consumers, I don’t think we’ll see the large inventory last long and perhaps by early February we could start seeing prices at the pump once again rise. There are a lot of actions the new administration is taking to help with energy policy, but I believe this will take some time to flow through the system. 

The government interest expense continues to rise, why is this important to you?

The annual net interest cost for the United States government has recently risen to $882 billion in Fiscal year 2024, which means it topped National Defense spending and accounted for over 13% of the $6.75 trillion that was spent by the government in fiscal year 2024. This increase in interest expense was nearly a 300% climb since 2014. People and investors are so focused on what the Fed does with short term interest rates, but they are forgetting that long-term rates like the 10-year Treasury dictates what long-term borrowing costs will be.

You may be thinking that the government has a lot of leeway to cut expenses, but with a budget deficit of nearly $1.9 trillion it may be difficult to find large expense cuts. Why do I say that you may ask? It’s because social benefits and defense spending are very large components of the budget and they would be very difficult and very painful to cut. Of the $6.75 trillion that was spent last year, Social Security accounted for $1.46 trillion and Medicare accounted for $874 billion. Together, those two items accounted for nearly 35% of the spending. National defense totaled $874 billion and accounted for about 13% of total spending. Other large components included health at $912 billion, income security at $671 billion, Veterans’ benefits at $325 billion, education at $305 billion, and transportation at $137 billion.

If you believe increasing corporate taxes is a great idea to reduce the deficit, looking at the numbers it accounts for a small amount of the total tax revenue that is generated. For fiscal year 2024, corporate income taxes came in at $530 billion. This compares to individual income taxes at $2.43 trillion and total receipts or total revenue for the government of $4.92 trillion. This means even if we doubled the corporate tax rate, it would only lead to an increase of $530 billion with all else being equal. My big concern is this would be devastating for growth, which would then likely lead to a decrease in social security or payroll taxes and individual income taxes.

I have said many times before the best way out of this debt situation is to produce and increase our GDP at a rate far faster than the growing debt. As the GDP becomes larger, the debt as a percent becomes smaller.

Be careful of fake job postings

Those jobs postings you’re seeing online may not be real, unfortunately today’s society has created a lot of phonies. According to Greenhouse, a hiring platform, they estimate that roughly 20% of online jobs are fake with no intention of ever being filled. The reason some companies run fake jobs may be that they want to show that they are growing and they need more employees to sustain their growth. They also dangle a line out there for anybody because who knows maybe some fantastic candidate will come along at the right price that they just can’t pass up. It is astonishing how many companies posted at least one false job, also known as a ghost job.

According to Greenhouse, in the second quarter of last year nearly 70% of companies had at least one ghost job posted. What was even more amazing to me is 15% of companies were known as regular offenders, advertising jobs that were never filled. The survey also revealed that the most ghost jobs were seen in construction, the arts, food and beverage, and a big surprise was legal. To avoid falling for ghost jobs, which can take up much of your time and can include multiple interviews and homework, it is best to establish real relationships and network with real people. I’ve always been an advocate of this, and this includes not just sending in a résumé and hoping for the best.

Be careful of staffing agencies with those great jobs they post. It was revealed that maybe that job really doesn’t exist and when staffing companies are trying to get business for a company to use their agency, they can show that they have a good pool of talented people that they can draw from. I wonder if College is still teaching ethics in school these days or maybe some business people are too greedy and just don’t care as long as they win! 

Medicare is looking at negotiating prices on drugs with reductions of 25 to 60% off the regular price

I was so glad to see that Medicare, which is run by the federal government is not just going to pay whatever price the drug companies are charging. There are 15 drugs that are subject to a second round of pricing negotiations, which include your diet drugs from companies such as Eli Lilly and Novo Nordisk. They will also be negotiating on other drugs for cancer, type two diabetes and asthma. Obviously, the drug companies are pushing back. These 15 drugs that they’re negotiating account for $41 billion in costs to Medicare. It is the law that the negotiated prices must be cut by at least 25% to 60% off the regular price.

The downside is the prices will be revealed around the end of 2025 and will not take effect until 2027. I think the next thing that Medicare should work on would be a quicker response to the lower negotiated prices. If Medicare were to get an average reduction of 40% off the price being paid now that would be savings of over $16 billion. I believe this is an obvious step in the right direction to help reduce sky rocketing costs to Medicare. Currently, Medicare does not cover drugs for obesity, there has to be another health issue such as cardiovascular disease or diabetes. It would cost Medicare roughly $35 billion more over the next nine years if they would cover anti-obesity drugs. We have said many times before these drugs are still fairly new and we believe people are taking them too freely. We still continue to worry that the side effects have not taken place yet and we believe the healthiest way to keep your weight under control is through diet and exercise.