Moneybeat: Beautiful bill, brutal debt

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

DAVID BAHNSEN: Good morning, Nick, Good to be with you.

EICHER: David, Speaker Johnson pulled off a razor-thin vote and the House passed its “big, beautiful” reconciliation bill. Yet markets gave a shrug. You’ve called the usual explanations off base—walk us through why investors didn’t cheer.

BAHNSEN: Well, my view is that a lot of the narratives around the market response are a little lacking—in the sense that I don’t believe that markets didn’t know that a bill was going to get passed.

I think there is no way markets could have known when and exactly what, because there was a lot of unpredictability on those specifics—based on what you said, the razor-thin majority that speaker Johnson had to work with. But that’s different than the markets being expected to breathe a sigh of relief that we extended the Trump tax cuts.

I just have never believed that there was a point at which markets didn’t know one way or the other that this was going to happen. In terms the bill itself, it’s hard for me to believe that markets would be that surprised, because most of what we’re talking about here is not really all that great for markets.

The extending of the Trump tax cuts is status quo. Not extending the Trump tax cuts would have been disastrous. But I’ve referred to this before as asymmetrical risk/reward. There was risk if the tax cuts are not extended, but not a lot of reward if they are. I mean that in the sense that people are going to be paying the same taxes that they were the year before. That isn’t a pro-growth tax cut. It’s just an avoidance of a problematic tax increase, Nick.

The issue is the spending. Okay?

The issue is that there is $36 trillion, almost $37 trillion, of national debt; that the deficit for this fiscal year is over $1.8 trillion that we’re going to be adding to the national debt. Is there a chance that the Senate ends up dealing with some of this? There’s a chance.

But I think it’s pretty clear the politics of this: the Republicans have been asked to get in line. Maybe we’ll see some modest adjustments, some modest tweaks. But for the most part, there just still is not a political will to deal with the spending, and there’s a willingness to add to the deficit further, which is disappointing. It’s not what markets were responding to this week. I don’t believe markets are remotely surprised that we’re still in a big spending mode.

But you know, personally, I’m disappointed. I’d hope more could get done there.

EICHER: So let’s talk about the debt. It’s been a while since we’ve talked much about the problem of federal debt, which if I have it right, has ballooned to $37 trillion dollars. Public debt, $29 trillion dollars. Debt-to-GDP ratio, 120%. What does that mean for us? We’ve talked about this before, but it bears repeating. Talk about what it means to carry this kind of debt.

BAHNSEN: Yeah. Well, there’s one other metric that you you didn’t share: the deficit-to-GDP. That’s the percentage of the annual deficit divided by the total goods and services of the economy. That’s running 6.1%.

Between 2000 and 2020, the deficit-to-GDP was somewhere between zero and 3%. What I’m getting at is we were growing the economy around the same level that we were growing the debt. Now, the deficit is growing more than the economy. That is the metric that has to change now.

We have grown the debt from about $10 trillion when President Bush left office to nearly $40 trillion. Now we have an even larger need to deal with this. Imagine if we said, “Hey, we’re going to live with $37 trillion of debt forever, and in the meantime, we just want to stop the growth.” To do that, you need to have the debt growing slower than the economy.

So you need a more pro-growth policy. And I’m sorry, but “no tax on tips” is not the pro-growth prescription the doctor ordered.

Now there is some pro-growth in this tax bill, okay? I think the 100% business expensing incentivizes further capital expenditures. The R&D—research and development—deduction gets enhanced, but neither of those are permanent. So, you might get a kind of spurt of additional expenditures, but this temporary stuff that makes it fit in a budget window is suboptimal for growth.

Ultimately, the debt has to be dealt with. I’ve said this countless times. I’m never going to stop saying it. No honest person, left wing or right wing, conservative, Democrat, it doesn’t matter. Nobody is talking about dealing with the debt if they’re not talking about entitlements. You have to talk about Medicare, Medicaid, Social Security, these are the issues primarily feeding it. I would have hoped that this bill would have done more for discretionary spending. It didn’t do that much.

Look, I just want to remind everybody, the House Republicans, when President Biden was in office, passed a budget to cut spending over 10 years by $17 trillion. It didn’t go anywhere because they didn’t have the majority in the Senate or the White House. But you know what? The House Republicans just passed $2 trillion in cuts over 10 years. So somehow $15 trillion extra could be cut when they’re not in power that can’t be cut when they are in power.

I mean, come on!

EICHER: David, we’ve got to run in a minute, but one last thing: You wrote in this week’s Dividend Café about bond yields, and I wonder if it’s worth taking a minute or two to kind of talk about the particulars of the bond market reaction to “big beautiful.” You’re saying there’s a false narrative around it and I’d like for you to talk about why that matters.

BAHNSEN: Well, it matters a great deal to always be immunized against false narratives. I think it’s important for investors and for people who listen who are trying to learn more about the economy. It’s become quite systemic, this narrative of, “Oh boy, the debt issue is bad—a premise I agree with—and the bond market is rebelling against it—a conclusion that is just demonstrably false.

My own view is that we have to understand bond yields for 10-year bond are really the best measure we have of what people expect total economic growth to be, what’s called nominal GDP growth. That figure is a combination of inflation expectations plus real growth—expectations growth net of inflation.

So let’s say this, Nick: I would be really happy if we got 1-1/2% inflation for the next 10 years and 3% real GDP growth. For reference, 3.1% is what we’ve averaged from World War II all the way to the financial crisis. If you combine those two together, that would be 4-1/2%. That’s exactly where we’re at now.

People that are sitting here going, “Oh, 4-1/2 is so high! The bond market doesn’t trust American creditworthiness.” Do they want a 3% yield? Because we had a 2% to 3% bond yield from the financial crisis up to COVID. Why? Well, because of both very low inflation and very, very low growth.

So I doubt we’re going to get 3% real growth. I certainly don’t believe we’re going to get higher than that. Yet, I don’t understand the hand-wringing over bond yields—unless they get to 5%, 6%, 7%. Then you start saying, “Okay, it’s either measuring fears of higher inflation, or it’s measuring some sort of concern about the creditworthiness of the United States.”

But neither is even remotely on the table right now, and I think there’s some maybe using it as a political diversion. I have a problem with that, because I want to be critical of the things that need to be criticized for the right reasons. But to try to do fearmongering about something that isn’t true in the present just desensitizes people. It makes them numb and not pay attention to what is a real fear.

That’s the reason it matters, Nick.

BAHNSEN: Thanks so much, Nick.

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