August 2023
Kevin and Chris agree that this downgrade has been a long time coming and could hopefully bring about some reform. Chris says the only way to bring the rating back up is for the government to become more fiscally responsible and pay off their debt. However, so far, the government has been ignoring their quickly growing debt- an unsustainable path that could have powerful repercussions for Americans.
To protect yourself in these uncertain times, Kevin and Chris suggest diversifying your portfolio with investments that generate enough cash flow to make the risk worth it. They also encourage listeners to consider investing in tangible assets like real estate and gold, as they have proven to be more resilient than other assets like stocks and bonds.
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Watch previous episodes of THE FINANCIAL COMMUTE here:
Ep. 45 Investing in China: Attractive Opportunity or Value Trap?
Ep. 44 Are You Paying More in Taxes Than You Have to?
Hello, everybody. And thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor and Partner Kevin Rex.
Kevin, thank you for joining us. Thank you. So the purpose of this podcast is here's what's going on in the world, here's how it affects you and here's what you can do about it. One of the most popular things in the news last week was Fitch downgrading the U.S. government's debt from AAA to AA+. Let's talk about sort of the implications, implications of that downgrade and what that means.
I'd like to talk about it's a lot to unpack here. Yeah. So, you know, in the headlines last week, besides Taylor Swift changing the face of the U.S. economy with her billion dollar tour, Fitch, one of the rating agencies, downgraded U.S. debt from triple-A to Double-A plus. Why did they do that? You know, the biggest factor and I mean, what everybody knows the why is just losing faith in the U.S. government.
Essentially, it's sending a message around policies and procedures not working. And the fact that they've just kind of ignored it for a long time, it's okay, now we need to hold somebody responsible. We need to let you know that we're not okay with this long term. And this was a little, you know, call it a slap on the wrist as far as like, hey, like, what are we going to do?
What are we gonna change? Because we can't continue on like this? It's so fascinating. And I'm always trying to figure out, okay, what's the reason? Why did Fitch do it now and then? What was the reason or rationale? And so when Fitch downgraded the U.S. debt last week, it wasn't any new news. We kind of knew that government deficit has been getting larger and larger.
The revenue that the government takes in is far lower than what they're spending in. In fact, I think U.S. government spending is on track to be like $1.4 trillion. And now that interest rates are higher, the debt service costs adds another $600 billion or something to to the budget. Nothing that Fitch brought out caused it to be a catalyst or things that weren’t already inherently sort of known.
Yeah, it's interesting you bring up a great point on the timing of it. Right. What is new? Well, we've known all that for a long time. And one thing you think about is if you and I ran our personal finances, the way the government runs it, we'd be in really bad shape because we can't just create more money whenever we want.
And it's again, I think they just had enough. I think they got to the point where this can't go on forever. I don't think it was one thing where they woke up and it happened. It was, you know, this is the time to bring it to light and say, all right, we need a change. And this is a first step towards making, you know, the headline is making all of us talk about it.
And it's again, we've known it, but now the more we talk about it, the more pressure we can put on hopefully instilling some change in the future. And I think that's maybe why the market responded a little bit. But it's still definitely positive this year through a number of different headlines that have come in versus 2011. The last time the U.S. debt got downgraded, there was an analyst by the name of Nikola Swann, who downgraded back in 2011.
A lot of these things were already known. And so they might have been factored in, but last time in 2011, I think the market was down call it 15 to 20% in a very short period of time, 6 to 8 weeks. You know, it was another debt ceiling debacle and, you know, the government overspending. It was really interesting how the market responded last time versus that.
Yeah. And I find it interesting that’s very similar right? It was hey, government, you're doing some things we don't like so that the impetus for the downgrade was very similar. The numbers are different. And when you think about the headlines, right, the people I talk to, family, friends, clients, the headlines, they're concerning. I think people really are worried about what's going on.
But there's a disconnect between the emotional side of it and then still, you know, the FOMO or fear of missing out. Investor behavior hasn't changed all that much, and I don't think this announcement is going to change the way people invest. It's definitely changing the way we think again, brings to light. But people are going to invest in U.S. treasuries.
People are going to continue to have faith in the U.S. government as the powerhouse, you know, across the globe. But it's yeah, it definitely needs to continue to find ways to adjust or we're never going to get out of this hole we're digging. Yeah, I think in 2011, debt to GDP was like 65%. And then today, with the downgrade by Fitch last week, we're what, like 98% debt to GDP and on track to be 115%.
So it took 12 years for the debt to GDP to double. And you still are considered, you know, one of the safest assets in the world. And, you know, maybe only another rating agency downgrade of the U.S. debt. How bad does the rest of the world have to be for that to be the situation? The other two aren't following suit.
Yeah, I know. I was looking at the 1.4 trillion deficit expected to be double in the next couple of years. Like we're headed down a path of more concern. And so how do you get out of it? Right. There's really the two ways we talk about it. You either have to make more money, bring in more money than what you spend.
So the government's got to raise to raise taxes and then cut what they're spending, which that's not attractive in any way. Or you keep running high inflation. And so the dollars that you're paying back, it's just a cheaper way to pay back your debt. Neither of those seem like really positive options for a political party or for the government to implement.
And so they've really used option three. Hey, just don't look at it and let's just keep going the way we're going. And as long as we're better than the rest of the world, in a lot of ways, we're just going to be fine. And it's not going to play out well long term. I think that's the frustrating thing for me personally, is, you know, we talk a lot about fiscal responsibility, helping work with clients to, you know, enjoy and protect and generate income.
We talk about fiscal responsibility, you know, with their kids, you know, spending less than what they make and saving. But because the rest of the globe has continued to print trillions and trillions of dollars, we've been able to get away with doing it, too. And, you know, for some respect, it's partially been needed. The fallout from 2008/2009 was so bad that the globe needed, you know, fiscal stimulus for sure.
But it's frustrating. But as long as it went on. Right. It felt like there was a period of time where rates stayed low, money kept being printed and it's great, we're in an expansionary period, let's start making our economy a little bit healthier by adjusting some of these things. And they didn't take those actions. And we felt the real pressure of it, especially COVID.
No one planned on it, but they couldn't drop interest rates because interest rates were extremely low. So you saw all these countries going into negative interest rates, money continuing to be printed. So when you make decisions that are a little bit hard in the moment but are the right thing long term, it puts yourself in a better position.
But we have a long, long history of not making those tough calls and continuing to take the easy path. And now our credit downgrade. Yeah, it'll be really interesting to see what happens. And you know, politically how we, you know, handle our fiscal response ability going forward because the only way to get back upgraded to triple-A is to have a little bit more fiscal responsibility, show a trend toward bringing debt down and having a plan. Before we get into sort of what we're doing about it or why we invest the way that we do,
I'm going to read the top eight headlines for 2023, just as a reminder that this stuff's important. It matters in how we make decisions, but we need to ignore it and focus more on our individual plan because almost any one of these could cause somebody to want to sell out of all of their investments and, you know, go to cash or flight to safety.
Right. And say, okay, you hear that? So mortgage rates past 2008 highs. It's 7.2%. Credit card debt set to hit 1 trillion for the first time ever. Regional bank crisis leads to second and third largest bank collapse in history. The Fed raises interest rates to the highest level since 2001. The debt ceiling crisis nearly leads to U.S. default.
The U.S. sees most bankruptcies since 2020 locked down interest expense on U.S. debt set to cross $1 trillion annually. And then last one. Besides Taylor Swift, Fitch downgrades U.S. credit rating for the first time since 2011. Yeah, Any of those topics in isolation, it's scary. It's not a good situation. But I think when you talk about our clients and us, none of those things in and of themselves are going to just make everything fall apart.
They are headlines for a reason. They're meant to capture your attention, grab some emotion. But we do need to protect and find ways to diversify because all of that is negative news. And that's in one year. We're talking several months, not even a year. So seven months. Yeah, 30 months in. And this is it.
I think that's why we talk so much about when we're looking to invest. We care a lot about diversification. Investments that are truly diversified from one another generate cash flow. So we understand the health of it. And, you know, we get paid well at that risk management aspect. We understand the risk that we're taking on, but we're getting paid well enough to take on that risk.
So it's why we try to look beyond traditional stocks and bonds for real assets, you know, real collateral behind some of the loans or things that we're investing in. But it's also why we like gold and precious metals as well. Real estate. Right now, when you talk real assets, things that can't just be created out of thin air.
And that's what we've seen with currencies, currencies around the globe. So you can touch it, feel it, you know, it's something that we probably are going to be interested in. Kevin, thank you so much. I mean, obviously the Fitch downgrading U.S. credit rating is just one of the number of headlines that's concerning to us. We need to somewhat ignore the noise a little bit and focus on ourselves and what investments and what plan do we need to have our family be successful and then, you know, continue to focus on things outside of traditional stocks and bonds for diversification and growth.
Thanks so much. Thanks for having me.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
