Latest / Markets with Megan: A Quick Financial Markets Update / 030: Fitch Credit Downgrade 08-02-23
Transcript
- 0:04Megan Horneman: Hello, welcome to Markets with Megan.
- 0:06Megan Horneman: This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors.
- 0:10Megan Horneman: We're coming to you today to talk about the recent raiding action that Fitch took against the US government debt.
- 0:17Megan Horneman: Fitch downgraded the US government debt from the highest credit quality of AAA to AA+.
- 0:23Megan Horneman: We've seen a sell-off in the equity market today, as well as a sell-off in the bond market, so let's dig in about what this means.
- 0:32Megan Horneman: It's not necessarily a super surprising action, given what's been taking place over the past month.
- 0:39Megan Horneman: We saw that we had significant political brinkmanship around the debt ceiling.
- 0:44Megan Horneman: Once again, the US government took the debt—raising the debt ceiling to the 11th hour.
- 0:49Megan Horneman: This reduces the confidence that raiding agencies have in our political system.
- 0:55Megan Horneman: At the same time, we've seen interest rates rise while revenues are declining because the economy is slowing.
- 1:02Megan Horneman: As interest rates are rising, the cost of funding the additional debt that we have to take on just to finance our existing debt is increasing.
- 1:13Megan Horneman: We call that our net interest costs.
- 1:15Megan Horneman: Right now, the estimate is that the net interest costs will go up about another 50% over the next five years.
- 1:23Megan Horneman: We've already seen a 40% increase in just the past year since the Fed started raising interest rates.
- 1:30Megan Horneman: So to put that in perspective, the amount of money we will have to spend to just finance our debt by 2028 will be almost equivalent to the amount of money we spend on an annual basis for national defense.
- 1:44Megan Horneman: This type of a fiscal policy budget deficits.
- 1:48Megan Horneman: This isn't sustainable.
- 1:50Megan Horneman: We don't think this is going to have big ramifications in the near term, especially if we have an election year coming up.
- 1:57Megan Horneman: It's going to be difficult to see big fiscal spending cuts, but what it does highlight to us is there's two things.
- 2:03Megan Horneman: Remember that fiscal policy is not there to save us anymore, and neither is monetary policy, meaning that the Fed can't come in and cut interest rates because inflation still remains stubborn, and the government can't come in and just continue to spend.
- 2:18Megan Horneman: These two things, we think, are just another kind of dominoes that pile up on the outlook for the economy over the next 12 to 24 months.
- 2:28Megan Horneman: For the time being, we think that equities are selling off because of the fact that interest rates are rising as a result of this.
- 2:33Megan Horneman: In addition, the Treasury has highlighted today that they have to increase the amount of debt that they're going to borrow, so you're seeing interest rates rise.
- 2:42Megan Horneman: It's taking some of that steam out of those very high flying technology, high growth, high PE names, and we're seeing that specifically today with the NASDAQ.
- 2:52Megan Horneman: So digging the headline the debt downgrade.
- 2:57Megan Horneman: It's not the first time our debt has been downgraded.
- 2:59Megan Horneman: It is catching, I think, the markets just giving in.
- 3:02Megan Horneman: Another reason here for why we have some, maybe taking some profits off in the equity market.
- 3:07Megan Horneman: We'll keep watching any other developments from the government standpoint, but that's all that we have today.
- 3:13Megan Horneman: If you have any questions or comments, please feel free to reach out to podcast at verdence.
- 3:16Megan Horneman: com.
- 3:18Megan Horneman: Thank you.