June 2025 Commonly Asked Questions (FAQ)

By Dennis Stearns, CFP^®, SFG Investment Committee, Founding Partner and Senior Wealth Advisor

Q: Will the new tax bill create positive or negative effects on the economy or my investments?  

A: The new tax bill from the House of Representatives now goes to joint committee for review and to the Senate for further debate.  While a lot can change between now and then, the legislation will likely retain features intended to boost economic growth. The legal battles that have put tariffs in their current form in some doubt will impact the senate negotiations. Many senators were counting on tariff revenues to offset some of the deficit impact of the proposals.  

• Business tax cuts on bonus depreciation, R&D expensing, factory expensing, and interest deductions are likely to be included in the final version. These measures should help achieve the “3% GDP growth by the end of 2028” goal, one of the three criteria outlined by Treasury Secretary Scott Bessent. [See last months FAQ for a full explanation of Bessent’s 3-3-3 plan] To achieve the 3% goal will require the U.S. economy to grow faster than currently expected.  

• As another FAQ below discusses, most would consider it a huge win to simply get deficits down from the 5-6% annual range to 4%. 

While the goal of promoting economic growth is a good one, not everyone thinks the legislation, in its current form, is acceptable.  This is primarily due to the fact that it is projected to increase our nation’s debt. [See FAQ below for more analysis on this]  

The bond market has reacted negatively to the proposed legislation, with bond yields rising, indicating investors are demanding more for their investment in what has historically been the safe haven investment of the world.  The “no confidence” vote is due primarily to the belief that the “big, beautiful bill” will increase the nation’s debt, deficits and inflation, putting pressure on the Federal Reserve to keep interest rates at current levels. Ironically this belief is keeping bond rates higher (adding to the deficit) and preventing the U.S. treasury from refinancing government bonds coming due at longer term maturities.  

Note that some elements of the new proposed tax law are set to expire at the end of President Trump’s administration.   Limiting the time period legislation will be effective is a strategy often used to help get the legislation passed more easily.  

Q: I’ve read a lot about declining CEO and consumer confidence. Couldn’t this, in and of itself, create the economic slowdown that is feared?  

A: The recession odds have fallen below 50% from many reliable forecasters, but the possibility of some type of recession is still elevated. Strategas has recession odds at 35%. However, last Thursday’s Conference Board survey of public company CEOs had 83% expecting a recession in 12-18 months. There is evidence of public companies tapping the brakes on spending mostly due to tariff uncertainty.  

Most private company CEOs are not as worried about the economy. The difference appears to be that public company CEOs are tasked with growing their company’s top and bottom line PLUS growing their stock value in an environment where everyone sees the scorecard. All of these factors are likely to be negatively impacted by a continuing trade war and retooling of the global supply chain. Growing their stock value is more difficult when their stock may be priced for perfect conditions to begin with.  

For consumers, the highest-earning 10 percent of Americans, who drive the bulk of consumer spending, are still in good shape. A still solid job market and wage increases have kept consumers in the game. Some consumers have increased spending short term to get ahead of the tariffs. The rapidly falling consumer confidence due to the trade war has led to more price conscious behavior and cutting back on discretionary spending, like dining out and leisure activities.   

The pandemic stockpile of built-up cash has largely now been exhausted.  At the same time, consumers are increasing their credit card purchases. The percentage of credit card debt that is 90 days or more past due has now risen almost to the 20-year high seen in 2010 (in the wake of the 08/09 Great Recession.)  

Perhaps the biggest concern about the near-term future of consumer spending is that the solid job market is showing some signs of weakening. For the first time in a while, job openings have fallen to the same level as the number of unemployed workers. Only a few years ago job openings were 2X individuals looking for a job. Consumers who feel like their job is secure tend to spend more than ones who are worried.  

Even artificial intelligence trends are affecting consumers, with a rising number worried that AI will diminish or take away their job in the future. Our discussions with both private and public businesses suggest this is something to keep an eye on. Most companies are looking for ways to grow revenues with fewer workers per dollar of revenue growth, PLUS consolidate parts of their business where automation or AI can enhance productivity.  

AI is already eliminating some entry level jobs, making it more difficult for some college grads to find a job in the area of their training or interest.  

Spending, while slower, is now consistently increasing faster than income, adjusted for inflation. This imbalance can’t last. The Federal Reserve isn’t too worried yet. “The U.S. consumer never lets us down,” John Williams, president of the Federal Reserve Bank of New York, said in a recent interview. When the going gets tough, the tough go shopping!  

Q: Why is Congress pushing through a tax bill with such a negative impact on the deficits and U.S. debt? 

Update: The court decision on May 28 halted many of the tariffs temporarily and the court suspended the stop of tariffs pending the appeal, which will likely end up at the Supreme Court.  Parts of the Strategas analysis below will be materially impacted by this outcome, plus the new tax bill may be adjusted materially if tariff revenue is not likely.  For the time being, it will be difficult for the administration to negotiate trade deals when the tariffs being threatened may change in form and length of time if they have to be revised based on other tools available to the Administration.  

A: Musk calls the bill a “disgusting abomination” and several key Republican senators have dug in their heels on not putting “our children and grandchildren at risk with higher debt”.  

Strategas takes everything into account and discusses one of the Sum of All Fears issues in SFG’s Fall, 2024 research, the potential issues as interest cost on the national debt crossed the 14% yellow caution line. Strategas arrives at a “no net deficit impact” analysis on the current most likely tariff scenarios combined with the House version of the new tax bill – that assumes the tariff numbers materialize as projected: 

[From Strategas May 27, 2025] “The big discussion last week among investors was about the deficit and the impact on bond yields of Republicans’ One Big Beautiful Bill (OBBB). A long tail Treasury auction threw gasoline on this debate, which was already combustible. We have long argued that once net interest costs exceed 14 percent of tax revenue, bond markets pay attention to US fiscal policy. Interest costs are currently at 18 percent of tax revenue. Adding to this pressure is that the Treasury will need to flood the market with debt issuance once the debt ceiling is raised with passage of the tax legislation. And because of the deficit, at some point the Treasury will need to increase long-term bond issuance, which has been on hold for some time. The Senate is talking about more tax cuts. These are headwinds for the Treasury market. But we notice investors are overestimating the deficit impact of the legislation by only incorporating the tax portion and failing to incorporate tariffs. The deficit impact is often cited at $3.7 trillion over 10 years. This is the tax component but fails to incorporate the $1.5 trillion of spending cuts. The net cost we see is $2.3 trillion over 10 years. This is just slightly higher than the $2.1 trillion in tariff revenue expected from Trump’s trade fight. In other words, tariffs have largely backstopped the tax cuts and we view this as net austerity relative to the current policy mix with more spinach (tariffs) than candy (new tax cuts.) 

Since Trump is enacting tariffs by executive order and Congress is not passing any tariffs, any revenue from the new tariffs is not included in the current budget baseline or the scoring of OBBB. There is always a chance of Trump removing some tariffs, but it feels like the 10 percent universal, 30 percent China, and sectoral tariffs are what is likely to remain in force (pharma and semis have not been enacted yet.) We have our estimates, but below we simply took the Tax Foundation estimates of tariff revenue and compared them to the net scoring of OBBB. The deficit impact is negligible over 10 years, and the short-run deficit effect is smaller. Neither of these estimates assumes growth effects.”  

SFG’s Take: On the positive side, it is likely the corporate benefits in the new tax bill will create some extra GDP growth, which is needed to bring annual deficits down from the 5-6% range predicted.  

On the negative side, many things can go wrong in these projections. The bond market doesn’t like this equation at all and has given a “no confidence” vote to the tariff/big tax bill strategy (discussed in May’s Compass or simply search “bond vigilantes”) by raising interest rates, which adds to the 18% interest problem cited by Strategas.  

There are too many complex variables to confidently forecast whether the tax bill will pass with modifications or be split into two parts. Another difficult thing to forecast is the push (extra growth) versus pull (bond market reactions) in the future.  

One thing is fairly clear: the combination of all of this is unlikely to bring annual deficits and the total debt down to a more manageable level. SFG’s 2025 portfolio positioning should cushion these effects short term. We are developing strategies to adjust portfolios as we see more evidence whether the push or pull effects will create better, or worse, conditions. 

It is important to understand the all-in effect of tariffs + tax cuts + budget cuts.   

Q:  What country owns most of our nation’s debt? 

A: Americans and the U.S. Federal Reserve own the majority, with Japan second at only 3.2%. China and England are now tied at 2.2% each.  

This pattern reflects how Japan managed its own outsized federal debt.  Again, enter the bond vigilantes, who recently have been roiling the Japanese bond markets by selling bonds as a vote of “no confidence” in policies being enacted by the government.  Selling bonds results in higher supply, which drives bond prices down, and interest rates up.  This, in turn, forces countries to pay higher rates on their own debt. Japan got away with a 200% Debt-to-GDP ratio for years, well higher than the U.S. Now they are being squeezed by the bond vigilantes. Perhaps no coincidence the Japanese are in talks with the U.S. on a joint sovereign wealth fund that could provide extra growth plus take pressure off both countries’ interest rates?    

Q: What are sovereign wealth funds? I’m hearing this term pop up frequently, even linked to the future of AI. 

A: A sovereign wealth fund (SWF), or sovereign investment fund, is an investment fund of a particular country that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity funds or hedge funds. Sovereign wealth funds invest globally.  

Most SWFs are funded by revenues from commodity exports or from foreign exchange reserves held by that country’s central bank.  The link to artificial intelligence has come recently as overseas SWFs have begun to invest in AI to give their country an edge in the race to increase productivity via AI.  

Masayoshi Son, founder of Japan’s SoftBank Group, has recently proposed the creation of a joint sovereign wealth fund between the United States and Japan to invest in large-scale investments in U.S. technology and infrastructure. The idea has not yet materialized into a formal proposal, but preliminary discussions have taken place between the U.S. Treasury Department and Japan’s Ministry of Finance.  

Under the suggested wealth fund structure, the U.S. Treasury Department and the Japanese Ministry of Finance would be joint owners and operators of the fund, each with a significant stake. They would then open the vehicle to other limited partner investors, and could potentially offer ordinary Americans and Japanese the chance to invest.   

This SWF could launch with up to $300 billion in initial capital and be significantly leveraged to maximize its impact. The fund’s appeal lies in its potential to deliver a steady revenue stream to both governments, including taking pressure off future budget deficits. 

Norway is the surprising leader in SWFs and has over $1.7 trillion in its SWF, largely due to their surplus coming from North Sea oil and gas drilling which was ramped up considerably after Russia began cutting off energy sent to Europe as retaliation for Europe’s support of Ukraine. China could lay claim to the #1 spot if both of their SWFs are considered with almost $2.5T. Abu Dhabi and Kuwait both have over $1T in SWFs with Saudi Arabia close behind.  

Norway has a fairly conservative investment strategy and, at least for now, doesn’t seem interested in leveraging the power of its SWF for overseas influence the way many other SWFs are doing. And they don’t have the debt and deficit problems that the U.S. and Japan face. But that doesn’t mean they are not using AI or may invest in areas to make Norway an AI powerhouse in the future. Norway’s SWF is actively adopting AI to improve efficiency and decision-making. They are freezing hiring and focusing on increasing efficiency through technology, particularly AI. SWF CEO Nicolai Tangen expects AI to increase efficiency by 20% in 2025 and another 20% the year after in their SWF management. AI is being used to monitor news about investments, reducing the time it takes from days to just 10 minutes. Tangen is mandating AI adoption among the fund’s 670 employees, emphasizing that those who resist will have limited future prospects. [a universal warning for employees everywhere.]  

The SWFs in the middle east have already been using these funds to invest in a future 20+ years from now where oil and gas may be depleted or less critical to the world. Imagine major data centers in Saudi Arabia running with the latest and greatest AI chips, all designed to give that country a leg up in the race to a reimagined future state.  

The United States, which passed the Foreign Investment and National Security Act of 2007, has concerns that foreign investment in the U.S. by SWFs raises national security concerns because the purpose of the investment might be to secure control of strategically important industries in the U.S. by other countries for political rather than financial gain. 

However, the times are changing. If you can’t beat them, join them. President Trump and Treasury Secretary Bessent are working on a U.S. SWF (possibly separate from the joint US/Japan SWF mentioned above) that could end up larger than most other countries. “We’re going to monetize the asset side of the U.S. balance sheet for the American people,” Bessent said in a February announcement. “There’ll be a combination of liquid assets, assets that we have in this country as we work to bring them out for the American people.” 

Some sovereign wealth funds may be held by that country’s central bank, which accumulates the funds in the course of its management of a nation’s banking system. Given the contentious relationship between the Trump administration and the U.S. central bank (Federal Reserve), it’s likely the U.S. SWF will not be housed at the Fed.  

The increasing power of SWFs has led to SFG already factoring sovereign wealth fund investment trends in several of our investment strategies.  

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Dennis Stearns, CFP^®, ChFC, MS

Dennis is the founder of Stearns Financial Group and is nationally recognized for complex ultra-high net worth financial planning and the effect of Super Trends on clients’ investments, businesses/careers and the economy.

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