030: Fitch Credit Downgrade 08-02-23

Imagine the enormity of our national defense spending, now imagine spending just as much on simply covering the cost of our debt. That's the stark reality facing the US economy, as Fitch downgrades US government debt from AAA to AA+. This week on 'Markets with Megan' we delve into the ramifications of this downgrade, the rising interest rates, and a slowing economy, all of which are causing significant tremors in the equity and bond markets. Join us as our Chief Investment Officer, Megan Horneman, unravels the financial market dynamics, and paints a vivid picture of the looming economic headwinds.

As we discuss the financial storm gathering on our horizon, Megan shines a light on the net interest costs expected to skyrocket by another 50% over the next five years. Fiscal and monetary policies are handcuffed, unable to offer much-needed relief. The episode takes a closer look at the impact of rising interest rates on equities, with a keen eye on the hard-hit tech and high PE businesses. So, tune in to navigate the economic maze, understand the reasons behind the debt downgrade, and prepare for its market implications. Don't hesitate to reach out with your thoughts or queries at podcast at verdence .com as we continue to decode global economy trends.

Hello, welcome to Markets with Megan. This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today to talk about the recent raiding action that Fitch took against the US government debt. Fitch downgraded the US government debt from the highest credit quality of AAA to AA+. 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.

It's not necessarily a super surprising action, given what's been taking place over the past month. We saw that we had significant political brinkmanship around the debt ceiling. Once again, the US government took the debt—raising the debt ceiling to the 11th hour. This reduces the confidence that raiding agencies have in our political system. At the same time, we've seen interest rates rise while revenues are declining because the economy is slowing. 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. We call that our net interest costs. Right now, the estimate is that the net interest costs will go up about another 50% over the next five years. We've already seen a 40% increase in just the past year since the Fed started raising interest rates. 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.

This type of a fiscal policy budget deficits. This isn't sustainable. We don't think this is going to have big ramifications in the near term, especially if we have an election year coming up. It's going to be difficult to see big fiscal spending cuts, but what it does highlight to us is there's two things. 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. 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.

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. 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. 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. So digging the headline the debt downgrade. It's not the first time our debt has been downgraded. It is catching, I think, the markets just giving in. Another reason here for why we have some, maybe taking some profits off in the equity market. We'll keep watching any other developments from the government standpoint, but that's all that we have today. If you have any questions or comments, please feel free to reach out to podcast at verdence. com. Thank you.