The social media boxing match between the world’s richest man and the world’s most powerful man is overwhelming news alerts with a speed and tenacity rarely seen. Underlying the jabs and hooks is a noteworthy instigating kernel. As Mr. Musk was tasked as the head of the Department of Government Efficiency and has openly stated that the unsustainable spending path of the United States could be catastrophic, he endured what appeared to be a high time and reputational cost in an effort to reduce government expenses. While other motives could have been at work, there is reason to believe that his fiscal concerns are genuine and real (as the problem is very real). As annual U.S. Treasury interest payments have begun to exceed defense department spending, Musk has been quoted as saying, “Interest payments already consume 25% of all government revenue. If the massive deficit spending continues, there will only be money for interest payments and nothing else! No social security, no medical, no defense … nothing.”
As the President’s “Big, Beautiful Bill” increases annual deficit projections by $300 billion annually, and somewhere between $2.4 and $5.0 trillion of total additional debt over the next ten years, Mr. Musk declared the apparent fiscal irresponsibility to be a “disgusting abomination.” Threats and accusations that have ensued raise eyebrows, but there have been a handful of recent weak signals indicating that the end of the fiscal can-kicking era may be in sight. While the U.S. has a significant role to play, budgetary irresponsibility is pervasive worldwide.
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Global Fiscal Challenges Emerge
On May 20th, Japan issued a 20-year government bond that had far less interest than usual. As a result, the rate of interest offered to investors had to increase to the highest level in 25 years. On the following day, the U.S. Treasury experienced a similar relatively undersubscribed 20-year government bond that sent longer-term U.S. rates to the highest levels in around 20 years. Since Japan is a global investor and the top foreign holder of U.S. debt (over $1.1 trillion), these instances are both significant and interconnected.
As governments around the world continue to spend more than they generate in tax revenue, more debt — via government bonds — needs to be sold. Jonathan Amoia notes that signs are beginning to emerge that the amount needing to be sold — due to persistent overspending — is causing concern for investors, and higher interest rates are necessary to properly compensate for the unsustainable and growing risk of eventual default. In response to this growing systemic stress, Moody’s downgraded the U.S. credit rating last month. As rates naturally rise due to deteriorating credit, government budgets must cut spending to afford higher interest payments… or borrow even more.
On May 30th, likely in response to these two government auction incidents, Jamie Dimon, CEO of JP Morgan, was quoted as stating that, “You are going to see a crack in the bond market. It is going to happen.” As the bond market is the foundation of the entire financial system and JP Morgan is the largest global bank, this statement caught much attention. Cracks or a lack of investor support in the bond market will raise rates even further and cause high inflation.
The Unpacking of Fiscal Irresponsibility
Going back to Mr. Musk, he was highly (and likely correctly) upset that the House’s proposed budget not only failed to reduce the current annual overspending but actually increased it. In 2025, the U.S. government is expected to spend approximately 36% more than it generates in tax revenue. Everyone inherently understands fiscal responsibility as they are managing their own personal budgets at the least. Because the numbers are so large, Jonathan Amoia explains that it is difficult to conceptualize the significance of government overspending. But simply put, imagine spending 36% more than you make each year and thus having to take a loan to get by. Year after year, you become a higher-risk credit, and thus interest rates increase. The only true way out of this financial mess is to make more (higher taxes) or spend less. Neither party appears to have the political will to do either in earnest.
Amoia points out that the fiscal problem is not new by any means, but for the first time in quite a while, the market is sending signals that fiscal responsibility must be taken seriously. Further, as trade imbalances look to be reconciled with new deals, foreign governments will no longer be taking in as much U.S. consumerism. While the U.S. may have been buying more than selling from most countries, the excess dollars received were often invested in dollars or dollar-denominated U.S. treasuries. The impending decoupling of globalism — while a boon to U.S. industry — is reducing interest from traditional bond buyers and adds additional stress to the bond market.
A Potential Solution: Stablecoins
American leadership is looking to a near-term solution within a growing digital asset class called Stablecoins. Unlike the volatility of Bitcoin or other cryptocurrencies, Stablecoins are designed to maintain stable value and are generally pegged to the U.S. dollar. What is happening is that people around the world who live in countries with unstable, inflationary currencies –- such as Venezuela, Argentina, and Turkey -– can now easily open a cryptocurrency wallet from their phones and indirectly purchase the stability of the U.S. dollar. Stablecoin issuers are the fastest-growing U.S. treasury buyers, and there is forthcoming legislation to strengthen this space, likely this summer. Jonathan Amoia believes there is good reason to believe that the Stablecoin trend will drive greater interest across all digital assets, which he will explore in a future letter.
Investment Strategy Amidst Market Shifts
The growing risk within the bond market is something Jonathan Amoia and his team are closely monitoring. If inflation returns, being invested in leading growth companies with healthy balance sheets is one way to benefit from the shift, as they will capture inflation with higher prices. By design, Concentrated Equity Alpha (CEA) is positioned to withstand and take advantage of a potential storm of this kind. CEA began the year with 13% in cash reserves. Through the selloff in early April, nearly all of the cash was deployed into best-in-class assets trading at opportunistic prices. As the market has rebounded, some gains were harvested, and the team now stands with an 8% cash reserve and is entering the second half of the year in a position of strength.
New Portfolio Addition: Crane Company
One new company was added to CEA last month: Crane Company [CR] is a worldwide leader in industrial technology and stands with a storied history of 170 years. The company is a cornerstone in the aerospace and defense sectors, serving as a sole-source provider for nearly every major program through its diverse portfolio of critical components. Notably, every Boeing aircraft ever manufactured has relied on Crane’s industry-leading anti-skid braking systems, a testament to its indispensable role. In recent developments, Crane has secured new contracts within defense programs, positioning the company for sustained, long-term growth.
In its Process Flow Technologies segment, Crane has undergone a profound transformation. Under visionary leadership, the company has redirected its focus toward high-growth applications, channeling significant investment into research and development. This strategic pivot has yielded innovative products in a sector long characterized by stagnant innovation, enabling Crane to capture market share and outperform its competitors. As this transformation continues to unfold, Crane is poised to deliver above-market growth for years to come, capitalizing on its reinvigorated product offerings and strategic foresight.
Crane’s management team has demonstrated exceptional acumen in capital allocation, leveraging a robust balance sheet that boasts a net cash position. This financial strength empowers the company to pursue strategic acquisitions of distinctive assets, aligning with its ambitious goal of doubling its business scale over the medium term. With a foundation built on innovation, financial discipline, and market leadership, Crane is exceptionally well-positioned to navigate the evolving industrial landscape and drive enduring value creation. Having looked for an opportunity to acquire Crane shares for the past year, Jonathan Amoia and his team are excited to now add this global leader to their clients’ portfolios.
Jonathan Amoia | Partner, Managing Director
Certified Private Wealth Advisor®
Certified Exit Planning Advisor®
Certified in Blockchain and Digital Assets
*The above commentary was written by Jonathan Amoia and not generated by Artificial Intelligence.
Disclaimer: This commentary is for informational purposes only and does not provide specific investment advice, recommendations, or offers to buy or sell any securities. Sandhill Investment Management (“Sandhill”) is a registered investment adviser with the SEC. Statements reflect Sandhill’s views as of the commentary date and are subject to change. Forward-looking statements are speculative and not guarantees of future performance. References to specific securities, industries, or economic policies are for illustrative purposes only and do not constitute recommendations or assurances of results. Economic and market discussions are based on publicly available information believed to be reliable, but Sandhill does not guarantee its accuracy or completeness. The Concentrated Equity Alpha (CEA) strategy is an all-cap core strategy, which may hold large, mid, and small capitalization U.S. common stocks, American Depositary Receipts (A.D.R.s), domestic ETFs, sector ETFs, and cash. All investments involve risks, including market volatility, geopolitical uncertainty, and company-specific factors that may impact returns. Past performance is not indicative of future results. For additional disclosures or information on Sandhill’s investment strategies, please contact Sandhill Investment Management at 716-852-0279.