Insight Archives - Servant Financial

Strategic Materials in Focus – Rare Earth Elements and Lithium

Written May 29, 2025May 29, 2025 by John Heneghan

In our last edition, Together We Build: Reindustrialization of America, we explored how historical industrial policies can inform a modern investing methodology in the face of shifting global dynamics. As a reminder, we categorized raw materials into three investment-relevant groups:

Strategic Materials – Rare Earth Elements (REEs), Semiconductors, and Lithium
Vital for national defense and advanced technologies, yet heavily reliant on foreign supply chains.
Critical Materials – Cobalt, Graphite, and Aluminum
Essential for energy storage and transportation, with vulnerable domestic sourcing.
Essential Materials – Steel, Copper, and Cement
The foundational components of industrial infrastructure.

Spotlight on Strategic Materials: Rare Earth Elements & Lithium

This article zeroes in on two highly strategic materials: Rare Earth Elements (REEs) and Lithium. Both are integral to a wide array of technologies, ranging from electric vehicles (EVs) and renewable energy systems to defense equipment and medical devices.

Research suggests rare earth elements (REEs) demand is led by magnets (~33% in 2025), used in automotive, renewable energy, and electronics, with a projected growth rate of 10-12% CAGR by 2032. For example, the rare earth neodymium highlighted in the periodic table above is used to produce magnets used in various everyday applications in audio equipment, mobile phones, and disk drives, and is vital in wind turbine assemblies. Similarly, lithium demand is dominated by electric vehicles (EVs) at ~38% in 2025, with key sectors including energy storage and consumer electronics, growing at ~18.9% CAGR by 2032.

The U.S. Department of Energy (DOE), in its April 2020 report Critical Materials Rare Earths Supply Chain, identified 17 elements as “rare earths.” These elements are now center stage in national security discourse, as highlighted in a series of recent Executive Orders aiming to revitalize domestic mining and refining capacity.

A Strategic Vulnerability

Currently, China controls over 90% of global rare earth refining and over 60% of global rare earth mining. This dominance poses a significant strategic risk, leading the U.S. to pursue vertical integration of domestic supply chains for critical minerals.

📄 Executive Order: Ensuring National Security and Economic Resilience

Investing in the Future: ETF vs. Direct Exposure

Initially, we considered the VanEck Rare Earth and Strategic Metals ETF (REMX), which offers broad exposure to companies involved in strategic minerals. Its geographic spread is diverse—about 18% U.S. and 10% China. However, in light of the geopolitical landscape, we opted to dig deeper into the individual holdings to identify U.S. and allied “national champions.”

Here are four companies that stand out:

US Rare Earth Elements

MP Materials (Ticker: MP)

Location: Mountain Pass, California
Focus: Only active U.S. rare earth mining and processing site
Use Case: EVs, wind turbines, defense
Strategic Edge: Central to U.S. policy goals; competes with Chinese dominance
Website

Lynas Rare Earths (Ticker: LYSDY)

Location: Australia (mining), Malaysia (processing)
Focus: Rare earth oxides for permanent magnets
Use Case: EVs, electronics
Strategic Edge: Non-Chinese alternative, government-backed supply chain diversification
Website

⚡ Lithium

Albemarle Corporation (Ticker: ALB)

Location: U.S. HQ with global operations (Chile, Australia, U.S.)
Focus: Lithium, bromine, and specialty chemicals
Use Case: EV batteries, grid storage
Strategic Edge: Integrated operations, policy-aligned U.S. producer
Website

Sociedad Química y Minera (Ticker: SQM)

Location: Chile
Focus: Fertilizers, iodine, and lithium
Use Case: EV batteries
Strategic Edge: Vast lithium reserves, low-cost production
Website

Looking Ahead

As the U.S. government intensifies efforts to secure critical mineral supply chains, investors have an opportunity to align with long-term structural trends. Companies like MP Materials and Albemarle stand to benefit from federal support and shifting global sourcing patterns, while allies like Lynas and SQM offer diversified, non-Chinese exposure.

Servant Financial’s investment research is ongoing on these materials vital for America’s industrial resurgence. Our intention is to develop a thematic internal fund, or basket of securities, comprised of competitively well-positioned companies with the most attractive risk-adjusted return potential. Our next newsletter issue will cover critical materials, followed by essential materials, and wrap up with disclosure of the composition of our Strategic Materials Fund.

📄 Executive Order: Unleashing America’s Offshore Critical Minerals
📄 Executive Order: Measures to Increase Domestic Mineral Production

Together We Build: Reindustrialization of America

Written April 28, 2025 by John Heneghan

Researched and written by John Heneghan and Grok AI

Inspired by Freedom’s Forge: How American Business Produced Victory in World War II by Arthur Herman, which chronicles America’s WWII industrial mobilization, this article explores how industrialists like William Knudsen and Henry Kaiser offer a blueprint for today’s reindustrialization amid economic and kinetic warfare. The tale focuses on the pivotal roles played by these two great American industrialists of that era in securing Allied victory. Kaiser’s “can-do” spirit is captured in our “Together We Build” newsletter title. Meanwhile, the Knudsen coined “arsenal of democracy” moniker was used by President Franklin Delano Roosevelt to enlist popular support for the transformation of the American industrial sector into a mass production juggernaut the likes of which the world had never seen before.

William S. Knudsen: Knudsen, a Danish immigrant, rose to lead GM’s Chevrolet division and later oversaw the mass production of military equipment during WWII.
Henry J. Kaiser, known for building Liberty ships at record speed, also spearheaded major infrastructure projects like the Hoover Dam.

Under Knudsen and Kaiser, American industry produced 286,000 planes and 5,600 merchant ships, including Liberty ships built at unprecedented speeds. Their efforts involved drafting talent from companies like Chrysler, Republic Steel, Boeing, Lockheed, GE, and Frigidaire and turning auto plants into aircraft factories and civilian lines into munitions production.

Just as Knudsen and Kaiser turned industrial might into victory in WWII, today’s political and business leaders must harness similar ingenuity to counter economic and security threats. Freedom’s Forge offers a historical blueprint on how private industry, government collaboration, and innovative leadership can rapidly scale production to meet today’s existential challenges presented by global economic and trade war tensions. One book review even suggested “relearning government-business partnerships would catalyze a New Gilded (golden) Age.” The economic and kinetic warfare of the WWII era provides sober perspectives on the geopolitical and competitive aspects of today’s world around strategic technologies, supply chain security and control, and system resilience against natural or man-made disasters.

The Office of Production Management, under Knudsen’s leadership, classified WWII materials based on their importance to national defense, economic stability, and supply chain vulnerabilities. The OPM classified materials as strategic (critical for defense with high foreign dependency), critical (vital but vulnerable), and essential (important with stable supply) – a framework that applies to the leading technologies of today’s modern society.

If we flash forward and look at recent Administration actions, we can see evidence of a similar strategic thought process being applied today. We need only look toward the recent Executive Order on Restoring America’s Maritime Dominance, signed April 9, 2025, to see this with considerable clarity. This EO aims to revitalize U.S. shipbuilding, countering China’s dominance, with a sharp focus on funding, workforce, and competitiveness.

The two pictures below highlight how strategically ill-prepared we are in this essential aspect of national defense. Today, the U.S. has limited domestic shipbuilding production and very high foreign dependency.

The U.S. builds less than 1% of global commercial ships, while China builds about 50%, posing intolerable risks to national security and the economy. Additional statistics highlight further U.S. vulnerabilities: 0% of global containers and ship-to-shore cranes are domestically built, compared to 96% and 80% by China, respectively. (Fact Sheet: President Donald J. Trump Restores America’s Maritime Dominance)

The Executive Order on Restoring America’s Maritime Dominance tackles China’s 50% dominance in global shipbuilding by revitalizing U.S. production through funding, workforce development, and a Maritime Action Plan, plus financial incentives to spur private investment.

For more details, please refer to:

This comprehensive EO aims to restore U.S. leadership in maritime industries, countering China’s dominance and ensuring economic and national security. Similarly, other strategic dependencies can be considered within the framework of economic warfare, the potential for kinetic warfare, and the technological demands of human evolution.

We came up with the following raw materials categorizations based on the OPM criteria applied to today’s global realities.

Strategic Materials – Rare Earth Elements (REEs), Semiconductors, and Lithium. Strategic materials like rare earths are vital for defense and technology, but are heavily reliant on foreign supply.
Critical Materials – Cobalt, Graphite, and Aluminum. Critical materials like cobalt are essential for batteries, yet their domestic supply chains are vulnerable.
Essential Materials – Steel, Copper, and Cement. These essential elements are the building blocks for manufacturing plants and related infrastructure.

Conclusion

By applying the OPM’s WWII-era categorization to the modern technological age, we have identified several areas that we must build together as a nation. Rare earths, semiconductors, and lithium are strategic priorities requiring urgent action, while cobalt, graphite, and aluminum need supply chain focus, and steel, copper, and cement demand protection. Investors should carefully watch sectors like rare earth and lithium mining and refining, as well as semiconductor manufacturing, as government policies catalyze growth.

We believe that this fourth reindustrialization of America will offer ample opportunities for investors to build wealth and security for our nation, families, and communities. Which sectors will drive this reindustrialization? Investors, take note.

Tariff Madness

Written March 26, 2025 by Ailie Carlene Elmore , John Heneghan

Have you ever wondered where the term “March Madness” comes from? You may think it was a term coined by news broadcasters or advertisers to describe the excitement of the NCAA basketball final showdown. However, the popular phrase is credited to an Illinois high school official, Henry V. Porter, who in 1939 used the term to describe the Illinois High School Basketball Annual Championships. At one time, more than 900 teams would battle it out for the state title at the University of Illinois’ Huff Gymnasium. The term was later made even more illustrious by CBS broadcaster Brent Musburger, who used the term in the 1982 men’s NCAA basketball tournament.

While March Madness usually evokes images of incredible upsets, broken brackets, and history-making moments, it can also describe the current madness unfolding regarding the future direction of the U.S. economy. The first 100 days of a president’s term are typically marked by cabinet confirmations, settling into the White House, collaborating with Congress on legislation, and issuing executive orders. President Donald Trump seems particularly fond of the last item on that list, potentially busting social and economic bracket predictions across the nation. During his first term, Trump signed 24 executive orders in his first 100 days. This time around, he’s signed 96, with more likely before the April 30, 2025, milestone. By comparison, Joe Biden issued 162 executive orders during his term as President of the United States.

The dreaded T in basketball often connotes angry outbursts and a point-scoring opportunity for opponents. In economic circles, the feared T stands for tariffs, which also creates potential winners and losers within global competitive trade. President Trump has already issued several executive orders surrounding tariffs and is keeping his thumb on the buzzer to increase or decrease tariff levels depending on how market participants react to his defensive and offensive maneuvers. The situation looks quite volatile for the viewers in the grandstands with new matchups and strategies occurring daily. With the Administration coveting the team from Greenland one day while taunting the Canadian team as the 51^st draft pick the next. So far, Trump’s toughest matchups have been with its biggest trading partners – China, Canada, Mexico, Colombia, and the European Union, with each country playing its own defense or sometimes giving in to the full-court pressure. Here is a recap of some of the important tariff definitions and matchups, and what sectors are the key players.

Tariffs are taxes levied by governments on imported or exported goods. The main types of tariffs include: Ad Valorem — calculated as a percentage of the good’s value (e.g., 10% of a car’s price), Specific — a fixed amount per unit (e.g., $5 per ton of steel), and Compound — a combination of both. Tariffs serve various purposes, such as protecting domestic industries from foreign competition, generating government revenue, and responding to unfair trade practices by other countries. Before 1913, the U.S. government relied entirely on tariffs for funding. However, the introduction of the income tax in 1913 fundamentally altered the nation’s revenue structure.

At a high level, pro-tariff arguments suggest that tariffs protect U.S. jobs and promote local businesses by shielding them from international competition. On the other hand, anti-tariff perspectives contend that tariffs drive up costs, reduce market efficiency, and negatively impact global trade.

Match up #1: United States vs. China

It’s no surprise that President Trump’s top rival is the world’s second-largest economy — China. Chinese President Xi Jinping and President Donald Trump have had their share of one-on-one matchups in the past. During Trump’s first term, the United States entered a trade war with its largest trading partner at the time, resulting in a significant decline in Chinese imports since 2018 — a trend that’s likely to continue.

Source: Wall Street Journal

President Biden left many of the tariffs in place from Trump’s first term. Trump’s America First plan includes raising tariffs by another 10%. In retaliation, China has declared it will impose an additional 15% tariff on U.S. chicken, wheat, corn, and cotton products, while American sorghum, soybeans, pork, beef, seafood, fruits, vegetables, and dairy products will face an extra 10% tariff. U.S. Agricultural experts are concerned about the additional tariffs as the U.S. farm economy is coming off lower net farm incomes in 2024 and falling commodity prices. China was the largest importer of U.S. agricultural goods in 2023; however, the previous China tariff regime resulted in the emergence of Brazil as a supplier of bulk commodities to China in recent years. U.S. farmers will likely be in the center lane if additional tariffs are levied on China over the next few years.

Source: USDA

On the import side of the equation, several items will likely see price increases in the next few years. You can find the “Made in China” label on everything from your clothing tags to car parts, cell phones, and other tech devices. As one of the dominant producers in the semiconductor industry, China has been running a fast break in the United States on smartphones, computers, and electronic appliances for years. President Trump has vowed to increase domestic chip production during his presidency, a promise that former President Biden also made. While Biden attempted to boost domestic production through subsidies and tax incentives, Trump is taking a more aggressive approach using his entire bench of economic levers. Trump has discussed scrapping the Inflation Reduction Act infrastructure legislation and insisted that higher tariffs would incentivize manufacturers to move production to the United States. It’s still early days, but some global technology stalwarts have read “the art of the deal” playbook and are making commitments to onshore critical technology manufacturing and services to the U.S. The boxscore highlights include $1.3 trillion from a) Apple for $500 billion, b) AI infrastructure led by OpenAI, Oracle, and SoftBank of $500 billion, c) Taiwan Semiconductor (TSMC) of $100 billion, and d) Nvidia of $200 billion.

Source: Wall Street Journal

Match up #2: United States vs. Canada

Much like the battles associated with the recent Four Nations Face-Off hockey tournament, the U.S. and Canada are once again clashing amid the ongoing tariff madness — let’s just hope no one loses their teeth this time. Relations with our northern neighbor have been tense, especially after President Trump’s provocative remarks about Canada becoming the U.S.’s 51st state. While that scenario is a bit far-fetched, one thing that’s more certain is that our pancake breakfasts might get pricier from the rising cost of Canadian maple syrup.

Frustrated by immigration issues and the fentanyl crisis, Trump imposed a 25% tariff on goods coming in from both Canada and Mexico, despite Canada contributing only a small fraction of the fentanyl entering the U.S. In response, Canada slapped a 25% duty on select goods, notably steel and aluminum. This back-and-forth is hitting some American car manufacturers hard, even as they’re already grappling with rising costs due to increased tariffs on Chinese semiconductors. Early estimates suggest that the price of a new car could rise by as much as $4,000 to $10,000 — the economic equivalent of watching your #1 seed get knocked out by a #16.

Spectators: The American Consumer

Waiting anxiously in the stands is the American consumer, unsure of how these tariffs will play out. On one hand, tariffs mean increased revenue for the U.S. government — a much-needed boost as it grapples with a growing deficit. President Trump campaigned on promises to reduce the budget deficit and has already cut thousands of federal jobs to rein in government spending. However, the legality of some of these executive branch actions remains subject to judicial challenges.

Historically, increased tariffs are typically passed on to the consumer through price increases, and it is rare for companies to absorb the increased costs entirely. With the volatility of the situation, it is unclear how much, if any, of the tariff burden will be passed along to U.S. consumers, but some consumers are already starting to hold tighter to their playbook. Consumer sentiment took a hard foul in March, with the University of Michigan’s survey showing a 10.5% drop from February, hitting its lowest point since November 2022. Inflation concerns and market volatility played tough defense. The one-year inflation outlook soared to 4.9%, its highest since November 2022, while long-term expectations posted numbers not seen since 1993 — a throwback no one was cheering for. Sentiment fell across political lines, with overall expectations taking a 22% slide since December. It will be interesting to see how future consumer sentiment reports reflect the evolving landscape surrounding tariffs. Despite the rough court conditions, markets have generally held their ground, eyeing the Federal Reserve for potential rate cuts later in the game.

Spectators: Financial Markets

The current tariff strategy has financial markets waiting for the brackets to bust. Initially, stocks showed confidence and optimism, rising 2.5% after the election outcome was announced. However, equity markets have reversed all those gains in recent weeks, with the S&P 500 declining 3.6% since November 5th. The Trump Administration has not ruled out the possibility of a recession as they try to rebalance the budget and the fiscal picture for long-term sustainability by eliminating waste, fraud, and abuse in government spending and boosting revenues sourced from foreigners through tariffs and other means. Investors are looking to real assets like gold as their 6th man, hoping for a solid defense against global volatility from a rebalancing of trade and monetary regimes.

The Final Countdown

As the final buzzer looms on President Trump’s first 100 days back in office, the tariff madness shows no signs of letting up. Each new policy feels like a buzzer-beater, shifting momentum and keeping markets, consumers, and global trade partners on their toes and in a defensive posture. Much like a championship game, every move sparks reactions — from retaliatory tariffs to shifting supply chains and rising costs. Farmers brace for a tougher growing season ahead, manufacturers scramble to adjust sourcing plans, and consumers anxiously await the final score on prices at checkout.

Financial markets remain in a full-court press, with investors hedging bets with flight to safety plays like gold, hoping to avoid getting benched by volatility. Meanwhile, the Federal Reserve stands on the sidelines, watching for signs that the economy needs a timeout — or perhaps a rate cut — to ease mounting economic worries.

Whether these Trump tariff policies lead to long-term gains or a costly turnover is still up for debate. One thing is certain: the tariff madness isn’t over, and the next few quarters promise more surprises, more drama, and plenty of action before the final whistle blows. For now, all we can do is watch the game unfold — brackets busted and all.

Readers looking to sit in on the Team Trump’s sideline huddle on tariffs and economic strategies can watch the All-In Podcast’s Interview of Commerce Secretary Lutnick at https://www.youtube.com/watch?v=182ckTL2KBA.

Trump Era 2.0, Donald’s Version

Written November 27, 2024 by Ailie Carlene Elmore

The stage is set, the self-tanner is more orange than ever, and the star of the show has arrived. Donald Trump was elected the 47th President of the United States on November 5, 2024, winning both the popular vote and the Electoral College. Largely fueled by Rural America, President Trump’s victory sent shock waves worldwide, impacting both voters and financial markets. The equity and crypto markets seemingly embarked on a love story with the president-elect, as his potentially business-friendly tax policies and the most pro-crypto treasury stance propelled these asset classes to immediate gains. However, not all asset classes were enchanted by Trump’s victory. Concerns over the president-elect’s plans to Make America Healthy Again and potential healthcare reforms have caused Big Pharma and the healthcare sector to tumble, leaving many wondering, “Is it over now?”

It is a fool’s errand to try and predict what the next four years will hold, but we can make some forecasts about financial markets and sector performance based on Trump’s policy statements before, during, and after the election. Before diving into those projections, however, we must first revisit the president-elect’s first term in office as a prequel.. Are you ready for it?

The First Era

Donald Trump served as the 45th President of the United States from 2017 to 2021, defeating Democratic nominee Hillary Clinton in a historic election. Trump was the first president without prior experience in public office or the military, bringing a unique background in corporate America and reality television to the role. Comparing the red and blue maps of the United States from 2016 to today reveals a strikingly similar picture, with the notable exception of the swing state of Nevada. Shifts in the Electoral College reflect changes in population, as many Americans have moved away from traditionally blue states like California, New York, and Illinois to traditionally red states such as Montana, Texas, and Florida.

Source: AP Poll

Diving into the key events of Trump’s first administration, there are a few notable policy shifts that are likely to set the stage for the direction of his next term. Perhaps, his most significant fiscal policy shift, the Tax Cuts & Jobs Act of 2017 lowered individual and corporate tax rates across the board that the Biden administration has largely left untouched. The act increased the standard deduction from $6,350 to $12,000, raised the child tax credit by $1,000, reduced corporate tax rates from a range of 15%–39% to a flat 15%, and introduced the Opportunity Zone program.

Source: CNBC

While these policies reduced the tax burden for many Americans, some of President Trump’s other policy decisions were generally viewed as less favorable for the environment. Known for his critical stance on international climate agreements, Trump withdrew the United States from the Paris Agreement on Climate Change. At the same time, he expanded domestic oil and natural gas production in U.S. waters and near public lands while encouraging private investment in traditional energy resources.

Frustrated by large trade imbalances with China and Chinese infringement of U.S. intellectual property rights, Trump initiated a trade war with one of America’s largest trading partners. He imposed significant tariffs on Chinese goods, costing American households an average of $625 annually and increasing tax collections by $200 to $300 per household. Notably, his successor, Joe Biden, maintained most of these tariffs, with the exception of a few policies related to the EU and Japan.

One of the biggest casualties of these tariffs was American agriculture. A U.S. Department of Agriculture study found that retaliatory tariffs led to a $27 billion decline in U.S. agricultural exports between mid-2018, when the tariffs were introduced, and the end of 2019. The federal government provided $23 billion to U.S. farmers through the Market Facilitation Program to mitigate the impact on flat commodity markets and low export volume.

**Who was The Man?**

It is not uncommon for the incoming president to be compared to the outgoing one. So, as we compare Donald Trump with Joe Biden, we might be asking who was our fearless leader and our alpha type? Looking at the numbers behind each administration, we see a varied picture. While inflation was certainly higher under Biden, Trump added more to the federal debt level than the outgoing President. Both presidencies were impacted by the effects of the COVID-19 pandemic and despite varied economic conditions GDP growth was similar under both administrations. The S&P 500 saw greater gains under the former business executive, Donald Trump, and more recently the S&P 500 has rewarded investors by returning 18% since his re-election. While there historically isn’t a strong correlation between the political party in office and the performance of the stock market, Trump’s tax plans for corporate America have created an early indicator of what might be to come in the next 4 years.

	Trump	Biden
GDP Growth	2.3%	2.2%
Inflation	1.9%	5.4%
Average Unemployment Rate	5.04%	4.11%
S&P 500 Return	16.3%	12.6%
Increase in Federal Debt Level	39%	29%
Average Gas Price	$2.57	$3.60

Era 2.0

But on Wednesday, after the election was called, we saw it Begin Again. President Trump’s second term is likely to be a bigger show with lots of friendship bracelets exchanged this time around. There are several key aspects to Trump’s Policy 2.0 plans that financial markets will likely be paying close attention to. Below is a summary of his many and varied fiscal policy intentions floated during his election campaign:

Lower corporate income tax from 21% to 20%
Lower corporate income tax rate to 15% for those who make their products in the U.S.
Increase child tax credit to $5,000
Exempt Social Security benefits from taxation
Exempt tip income & overtime pay from taxation
Create a deduction for auto loan interest
Create a tax credit for family caregiver
Eliminate green energy subsidies from Inflation Reduction Act
Tax large private university endowments @ 1.4%
Impose universal baseline tariffs on US imports of 10% to 20% and/or reciprocal tariffs
Impose a 60% tariff on all US imports from China

Both Donald Trump’s and Kamala Harris’s plans were likely to add to the federal deficit with Vice President Harris’s plan likely adding $3.95 trillion to the federal deficit and President-elect Trump’s plans adding $7.75 trillion. It will be interesting to watch the possible impact of Trump’s new Department of Government Efficiency (DOGE) led by billionaire technologists Elon Musk and Vivek Ramaswamy. The pair aim to cut at least $500 billion in annual spending, but there are lingering questions about how DOGE recommendations to control federal spending will be implemented and sustained.

Perhaps one of the most widely discussed policy proposals of this past election has been Trump’s position on tariffs. Economists estimate that if the tariffs are raised to his proposed level, it will add 0.9% to the rate of inflation with increased costs being passed on to consumers. The tariffs are also expected to cost U.S. Farmers somewhere between $0.9 – $1.4 billion. However, many believe Trump’s tariff plans are just a negotiating tactic part of a broader geopolitical and economic plan. For example, Trump recently announced that he will immediately slap 25% tariffs on all goods imported from Canada and Mexico until the shared borders are secured to prevent illegal drugs and immigration into the United States.

In last month’s article, we discussed some of the likely stock market winners and losers under a Trump regime. Those “winners” have experienced large equity gains in associated companies over the past few weeks. Elon Musk’s Tesla has experienced a 40% increase since Trump’s victory and Bitcoin has soared to almost $100,000 causing sparks to fly across financial markets. Nuclear energy, banks, and defense and weapons companies have also shown gains in recent weeks.

In the end, we know all too well that “nothing safe is worth the drive.” As we embark on Trump Era 2.0- Donald’s Version, the world waits with bated breath, balancing hopes for economic prosperity with concerns over inflation, global relations, and deep state countermeasures. His proposed fiscal policies, the bold strokes of a self-proclaimed disruptor, could “paint the town blue,” but at what cost? Some industries are singing their “Love Story” with large market gains, while others brace themselves, wondering if perhaps “we are never ever getting back together” with normalcy.

As we analyze the past to forecast the future, let’s remember that every stage of history is unpredictable. We’re all just “dancing with our hands tied,” hoping to weather the storm. Whether you’re cheering or jeering, this Trump Era 2.0 promises to be remembered “all too well.” It will either unite us or drive us further apart. As Abraham Lincoln declared, “A house divided against itself cannot stand… I do not expect the Union to be dissolved. I do not expect the house to fall, but I do expect it will cease to be divided. It will become all one thing or all the other.”

Polymarket Predictions and Policy Perturbations

Written November 4, 2024 by John Heneghan

With less than 30 days remaining before the 2024 Presidential and other elections on November 5th, investors’ eyes are focused on the electoral outcomes and the potential market impacts.

The Presidential race remains very tight between Vice President, Kamela Harris, and former President, Donald Trump. It appears that the path to the White House will hinge on just seven key swing states: Nevada, Arizona, Michigan, North Carolina, Wisconsin, Georgia, and critically important Pennsylvania with its 19 electoral votes. Current trends and polls suggest the path to 270 electoral votes will be difficult for either candidate without securing Pennsylvania. Perhaps we now know why it’s called the Keystone State.

We begin by introducing subscribers to Polymarket for an alternative perspective on the electoral college and what we the people are collectively thinking. Polymarket is the world’s largest prediction market. It provides registered traders the opportunity to profit from their beliefs and insights by betting on the outcome of future events across various topics such as politics, sports, and pop culture. Polymarkets reflect accurate, unbiased, real-time probabilities for significant global events. Note, however, Polymarket is unavailable to U.S. residents of the United States because it has not obtained appropriate license(s) from the Commodity Futures Trading Commission.

According to Polymarket, research shows prediction markets are often more accurate than polls or pundits. Polymarket traders aggregate news, polls, and expert opinions, making informed trades with the expectation of profit. Traders’ economic incentives ensure market prices adjust to reflect “true” odds. Polymarkets always seek the truth (Latin: “semper veritas”). According to Polymarket, this makes prediction markets one of the best sources of real-time event probabilities.

So, without further ado, we present the Polymarket U.S. Presidential election market predictions as of 8:30 am on Thursday, October 10, 2024, below:

Source: Polymarket https://polymarket.com/event/presidential-election-winner-2024?tid=1728566107442

Note that there is $1.6 billion of volume on this particular polymarket. The market rules provide “This market will resolve to “Yes” if Donald J. Trump wins the 2024 US Presidential Election. Otherwise, this market will resolve to “No.” The resolution source for this market is the Associated Press, Fox News, and NBC. This market will resolve once all three sources call the race for the same candidate. If all three sources haven’t called the race for the same candidate by the inauguration date (January 20, 2025) this market will resolve based on who is inaugurated.”

Let’s now look at the potential market perturbation each candidate’s policies may have on equity markets. In the long run, there is little evidence suggesting that the political party elected has a directional influence on broad markets. U.S. Bank investment strategists examined market data over the past 75 years and concluded that financial market performance in the medium to long term is minimally impacted by election outcomes. The big drivers of financial market performance remain inflation indicators and broad economic trends.

In the short run, however, specific sectors can benefit based on who is in office and their policies in place. Once again we find that Goldman Sachs is doing “God’s work” and has developed proprietary equity portfolio baskets for each candidate with a Democratic victory basket and a Republican victory basket. Given their proprietary nature, the equity basket securities are not broadly available publicly, but various market participants have provided a general overview of sector preferences and hypothetical stock picks that might be influenced by the policies favored by each party. Please note that we are simply citing conjecture with the foregoing individual stock and ETFs cited. We have conducted limited research and these securities absolutely do not represent recommendations:

Democratic Victory Basket:

Renewable Energy: Solar, wind, and other green technology companies, like First Solar Inc (ticker: FSLR) or iShares Global Clean Energy ETF (ticker: ICLN), due to anticipated continued emphasis on environmental regulations and the funding of “community-based climate projects.”
Healthcare: Companies that might benefit from healthcare reform or expansion, like those involved in Medicaid programs, such as a large managed care organizations (MCOs) like Elevance Health (ticker: ELV) or iShares U.S. Healthcare Providers ETF (ticker: IHF), or health technology leaders, like Boston Scientific (ticker: BSX) or iShares U.S. Medical Devices ETF (ticker: IHI).
Technology: While tech is often considered bipartisan, Democrats might push for more tech regulation on “misinformation or disinformation” while at the same time supporting innovation in certain tech subsectors, especially those linked with green tech or social platforms with obedient, progressive companies, like Meta Platforms, Inc. (ticker: META).
Consumer Discretionary: Companies that might benefit from policies aimed at increasing minimum wages or enhancing consumer protections. This basket might potentially include companies like Target (ticker: TGT) or other companies with strong ESG (Environmental, Social, and Governance) practices such as those represented in the iShares ESG Aware MSCI USA ETF (ticker: ESGU). ESGU represents a potential Democratic trifecta basket in and of itself with 34% allocation to technology, 16% to consumer businesses, and 12% to healthcare.
Education: Companies related to education technology or services, like Coursera, Inc. (ticker: COUR) might also see benefits due to potential increases in educational spending.
Infrastructure with a focus on Sustainability: Companies that work on modern infrastructure, including smart cities, electric vehicle infrastructure, etc. Such companies may be found in the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index ETF (ticker: GRID)

Republican Victory Basket:

Financials: Banks and financial institutions often benefit from deregulation, which tends to be a Republican policy initiative. Companies like JPMorgan Chase & Co (ticker: JPM) or The Financial Select Sector SPDR Fund (ticker: XLF) could be included.
Energy: Traditional energy and fossil fuel sectors, like oil and gas companies, might be favored due to lower emphasis on environmental regulations with a “drill baby drill” mindset. Think of companies like ExxonMobil Corporation (ticker: XOM) and The Energy Select Sector SPDR Fund (ticker: XLE).
Defense: Although the world was mostly a peaceful place under the 45^thS. President, increased defense spending has historically been associated with Republican administrations. Lockheed Martin (ticker: LMT) or Invesco Aerospace & Defense ETF (ticker: PPA) could be examples. (Personally, I would fade the defense sector as an area of potential focus under Elon’s Government Efficiency Commission since it has the greatest potential for taxpayer savings.)
Industrials and Materials: With policies often focusing on infrastructure or domestic production, companies in these sectors might benefit. Freeport-McMoRan Inc. (ticker: FCX) or SPDR S&P North American Natural Resources ETF (ticker: NANR) may be included.
Pharmaceuticals: Less focus on regulating drug prices could be seen as positive for big pharma. Consider companies like Eli Lilly and Company (ticker: LLY) and The Health Care Select Sector SPDR Fund (ticker: XLV). (Personally, I think of this sector as an area of risk given Robert Kennedy, Jr. grand alliance with Trump and his focus on Making America Healthy Again.)
Bitcoin/Crypto: Trump is expected to lay out “a plan to ensure the United States will be the crypto capital of the planet.” Consider Fidelity Wise Origin Bitcoin Fund (ticker: FBTC) and Fidelity Crypto Industry and Digital Payments ETF (ticker: FDIG) which includes Coinbase Global, Inc. (ticker: COIN) and several bitcoin miners.

Please note that Goldman Sachs also offered proprietary short baskets for each party, but we have only summarized Goldman’s longs.

Whether or not you accept the “veritas” of Polymarket, you may be interested in another good exchange of real-time event probabilities with the handicapping being done by capital market investors. The graphic below presents the relative performance of Goldman’s Victory Baskets through October 9, 2024:

Source: Zero Hedge https://x.com/zerohedge/status/1844168635000160748

As the chart above depicts, markets are constantly re-handicapping probabilistic outcomes. There is still plenty of race left in this two-horse contest as we come around the bend into the home stretch. Voter turnout will be critically important, particularly turnout among young voters. This cohort has typically left political decisions more in the reins of their elders and has historically demonstrated lower participation rates. Since 1988, voter turnout amongst those aged 18 to 29 years has averaged 42%, compared to 56% for those aged 30 to 44, 66% for those aged 45 to 59 years, and a 69% voter turnout for those 60 years and older. As the pundits are wont to say, veritas is stranger than fiction. We’ll all just have to see what happens.

“This is the chief thing: be not perturbed, for all things are

according to the nature of the universal.”

~ Marcus Aurelius

Fed Sends Mixed Messages

Written September 29, 2024 by John Heneghan

On September 18th, the Federal Reserve cut interest rates by 50 basis points, marking the beginning of a new rate-cutting cycle. Historically, such a large initial rate cut has typically been reserved for times of economic crisis. Updated economic projections provided by the Fed, referred to as the “dot plots”, indicate that the Fed now anticipates a higher ending 2024 unemployment rate (4.4% vs. 4.1%), higher GDP growth (2.0% vs. 1.4%), lower inflation as measured by the Personal Consumption Expenditure (PCE) index (2.3% vs. 2.4%), and a reduced 2024 year-end Federal Funds rate (4.4% vs. 4.6%) compared to its December 2023 forecasts. These updated forecasts hardly suggest any economic downturn or crisis is around the corner. Both the bond market and the Fed expect an additional 50 basis points in cuts by year-end, implying a 25 basis-point reduction at each of the two remaining Federal Open Market Committee (FOMC) meetings this year.

The Fed’s 50 basis-point cut lacks clear justification based on currently available economic data. Core and headline inflation continue to exceed the Fed’s 2% target, and base effects and housing dynamics suggest that core inflation could remain sticky. Further, on September 26^th, the U.S. Bureau of Economic Analysis reported that U.S. GDP grew at an annual rate of 3.0% for the second quarter of 2024. This final 2Q24 GDP figure was revised upward from the initial estimates and reflects healthy economic growth, driven by strong consumer spending, an upturn in private inventory investment, and business investments. Additionally, financial conditions are at their lowest since May 2022, and jobless claims continue to fall. Initial jobless claims in the U.S. fell to 218,000 for the week ended September 21, lower than analyst estimates of 223,000 to 225,000. The latest jobless claims represent a four-month low, indicating a stronger labor market than some analysts and perhaps the Fed anticipated. In addition, the latest Bank of America Fund Manager Survey shows that over 50% of respondents do not foresee a U.S. recession within the next 18 months, i.e.. the consensus expectation remains for a soft landing.

The Fed’s decision to cut interest rates by 50 basis points last week has sent mixed messages to the markets. The ensemble of market reactions suggests the Fed has ignited risk-on behavior.:

Stock Market: Initially, there was a muted or even negative reaction in the stock market. This might seem counterintuitive because rate cuts are typically viewed as positive for stocks due to lower borrowing costs which can stimulate growth. However, the immediate dip could be attributed to investor concerns that the larger-than-expected cut might indicate the Fed’s worries about underlying economic weaknesses, particularly concerning the labor market. However, following the initial confusion, there has been a meaningfully positive reaction with stocks rallying sharply as market consensus moves toward the assessment that the Fed does not have any inside information on data portending broad economic weakness.
Bond Market: The bond market showed a significant and immediate reaction with the 10-year Treasury yield spiking to 3.78% on September 26th from 3.64% the day before the Fed’s rate cut. The bond market seems to be repricing for higher expected inflation and/or stronger economic growth in the longer term post the Fed’s cut.
Gold: Gold spiked to an all-time high on September 26th by topping $2,700 per ounce for the first time in history. This signals both the possibility of a Fed dovish policy mistake and safe haven buying in response to the escalation of the wars in Ukraine and the Middle East.
Bitcoin: Likewise, bitcoin, or digital gold, has popped above $65,000 and is up almost 4% on the 26th. For market technicians, the $65,000 price per bitcoin represents a key technical level with many analysts suggesting that a breakthrough of this level may signal the beginning of another epic run. Today’s price appreciation may signal the start of a run to Bitcoin’s all-time high, previously set in November 2021 at approximately $69,000. Pop zing!
Energy Markets:
1. Oil: Oil prices have shown limited volatility as of late. Brent crude has been range-bound around $75 per barrel. There’s some underlying sentiment of a bear market in oil, with some hopes pinned on-demand increases or external stimuli like actions from China to boost prices. Escalation of the Middle East war between Israel and Iran’s Hezbollah proxy in Lebanon could drive increased risk premiums into oil prices.
2. Natural Gas: Natural gas experienced a significant jump, with futures up over 8% recently, possibly due to the aforementioned geopolitical tensions in the Middle East or expectations of increased demand from electricity producers looking for energy resources to satisfy the growing demand for Artificial Intelligence computing capacity.
3. Uranium: Uranium has seen quite dramatic swings in prices in 2024. The spot price of uranium has decreased by (11.6%) since the beginning of 2024, reaching around $80 per pound as of late September, after hitting a 16-year high earlier in the year due to increased demand and tight supply. Despite this year-to-date decrease, uranium has been the best-performing energy commodity year-over-year, despite its decline from a peak of $106 in February 2024. The supply-demand imbalances in uranium are long-term in nature as it takes around a decade to bring new supply online. As we’ve outlined previously, there is strong interest in uranium due to its role in nuclear power production, especially with global pushes towards decarbonization and the “greening” of nuclear energy. Uranium prices and Sprott Uranium Miners ETF (URNM) have been raging as of late. URNM is up about 13% since the last FOMC meeting.

X Grok AI rendering of Three Mile Island nuclear plant

Last week, BlackRock, Global Infrastructure Partners, Microsoft, and MGX announced an AI partnership that could invest up to $100 billion in U.S. energy infrastructure and data centers. Additionally, Constellation Energy signed its largest-ever power purchase agreement with Microsoft, adding 835 megawatts of carbon-free, nuclear energy to the grid. Microsoft’s long-term offtake commitment catalyzed the restart of the decommissioned Three Mile Island nuclear plant in Pennsylvania, with key permits still required. The deal is projected to contribute $16 billion to Pennsylvania’s GDP and generate over $3 billion in taxes.

Prince fans will remember an analogous Fed policy instance that occurred in 1999. At the December 21, 1999, FOMC meeting, the Fed kept interest rates unchanged, citing uncertainties around the century date change across the nation’s information processing systems. Nearly a year later, in January 2001, the Fed began cutting rates, starting with a 50 basis-point reduction due to weakening production, declining consumer confidence, tightening financial conditions, and high energy prices. At that time, jobless claims and headline inflation were higher than today. Core inflation and manufacturing activity were lower. The price-to-earnings (P/E) ratio of the S&P 500 was 30.1x, compared to 27.5x today. However, the technology sector’s price-to-sales ratio is currently over 30% higher than it was during the peak of the 2000 Tech Bubble. The top 10 companies in the S&P 500 now make up 34% of this large-cap index, compared to 25% at the height of the Tech Bubble.

Servant Financial’s market commentary and portfolio recommendations for this 1999-like party atmosphere are as follows. S&P 500 valuations appear rich using metrics like the Shiller P/E ratio. Further, yield-to-earnings comparison (the inverse of the P/E ratio versus bond yields) suggests U.S. stocks are less attractively priced relative to bonds than at any time since the 1990s and are reminiscent of conditions before the dot-com bubble. For now, looser financial conditions introduced by the Fed (characterized by lower interest rates, higher liquidity, and easier credit) may end up keeping the ‘party’ going for some time, but no one knows for sure. We will continue to keep a watchful eye on the adults (10-year Treasury yield and gold) and the underage, yet savvy teenager (bitcoin) for messages and clues that things are getting out of hand and it’s time to leave the party. We’ll also keep an eye on inflation rates, shifts in Fed policy guidance, or significant geopolitical events that could also serve as catalysts for a change in market dynamics.

In light of these economic uncertainties, we believe it’s prudent for investors to continue to maintain globally diversified portfolios. Globally diversified portfolios are comprised of traditional investments in stocks and bonds but importantly also include diversifying assets like gold, silver, shares in gold miners, bitcoin, and real assets such as uranium and farmland. These assets offer a hedge against inflation, and currency fluctuations, and provide portfolio stability during periods of market volatility.