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Moneybeat: Credit crunch or cockamamie?


WORLD Radio - Moneybeat: Credit crunch or cockamamie?

Moody’s posts a negative comment on the U.S. government’s creditworthiness

The U.S Capitol is seen in Washington Associated Press/Photo by Mariam Zuhaib, File

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

NICK EICHER, HOST: Alright, time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnsen Group. He joins us now from New York City. David, good morning.

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

EICHER: Well, I'd like to start by asking about this story on the credit ratings firm Moody's and its attitude on U.S. debt. It didn't exactly issue a downgrade, but the outlook on the U.S. credit rating was changed from stable to negative. The rating stays AAA, but per the New York Times, it says it's another black mark for the economy. It underscores the threat that's posed by rising interest rates, a mounting debt burden, and a polarized Congress that's been unable to agree on ways to reduce America's budget deficit. Now, is the Times reading too much into this? And in any case, how do you look at a data point like this, David?

BAHNSEN: I don't look at it at all. The S&P actually downgraded the American credit rating, and that was 12 years ago. And so they don't even have a AAA. And they did that in 2011. I think we talked about this somewhere around six months ago, when Fitch, which is the least known of the three credit agencies did the same, downgraded it to AA+. Look, the default rate on AA+ is 0%. The default rate on Triple A is 0%. So all they're saying is that they're not going to default, which they're most certainly right about. They're not going to default.

This issue has never had anything to do with our ability to make a payment. Now, some would say, it's not really a great thing if you can make a payment by using deficit spending. And that's a totally separate point from the credit worthiness. Moody's and S&P and Fitch are not supposed to have any opinion at all on how they make the payment. They're supposed to have an opinion on whether or not they're gonna make the payment. That's what credit worthiness is. And to delve into the political about whether there's this dysfunction in Congress, whatnot—which is the only reason the New York Times even ran the story—is not to focus on how high deficits are. Deficits have been this high for 15 years. It's not to focus on how high the national debt is. The New York Times doesn't care about that. It's to try to get a jab in saying because Republicans are being hard to get along with, you know, Moody's made a negative comment. But what is a negative comment? If a teacher gives a student an A+ and says, “But you know, we're kind of worried about how you're going to do next semester,” is any parent going to get upset about that? I mean, it's just a complete non-event from people who shouldn't even have an opinion.

EICHER: Well, David, there's a big regulatory change, and it's coming to the Office of Management and Budget. That's an important White House office that, among other things, scores regulatory costs and benefits. And this change grew out of, if you remember, one of the flurry of day-one executive orders by President Biden. This was a rules change. And those require a few hoops and a lot of time, obviously, but now it's come to fruition. So now the government is changing the way federal agencies consider the value or harm of regulations. And again, quoting the New York Times, “They are going to have to pay attention to economic inequality, climate change, and other data sources that progressive economists have long complained are missing from government analyses.” Now, I think this line puts it best, “They would allow the government to impose more costly regulations for Americans today, in hopes of saving money and lives in the future.” Or maybe, put another way, in hopes of advancing progressive economic goals. How big a deal is this, do you think, David?

BAHNSEN: Well, I think it's hysterical that President Biden was inaugurated almost three years ago, and it just got done now. This sort of overhaul of how they want to look at some regulatory cost. And it's all really kind of very bureaucratic stuff. And it will be effective for about five more minutes. Now, look, if he's reelected, or, or another high regulation president is in office, then perhaps some of this stuff gets extended. But you notice the whole thing that they said they were trying to undo was another regulatory order from Trump administration that had changed things. And prior to that it was the Bush administration. So this is the problem I have with heavy use of executive orders. And I want to be very clear, this is not a criticism of the Biden administration using it. It's a criticism of the Biden administration using it, and the Trump administration, and the Obama administration, and the Bush administration. You are supposed to handle these things legislatively. If we are talking about real setting a policy, real setting of cost, accountability to Congress–that first branch of government that makes a law–then this should be set at the legislative level.

To have a president just use the executive order pen to come in and say something, and then it can get redone years later, a few years later, is not the way this was intended. And we've now had several presidents in a row, including the current one, who has tried to do way too much by executive order. This doesn't make any difference in real life. That there is a federal government filled with left wing people wanting to look at income inequality and environmental regulation has been true for quite some time. It's going to be true for some time. And this has no teeth to it. But the problem is it is allowed to then be used as cover for other studies and other, you know, Google searchable type events that will play out into the future. The only solution, Nick, is to have a smaller state, a smaller use of federal government. This is my pleading with those who are part of the conservative right to realize that the solution to our problems is not asking for more big government.

EICHER: Well, we have talked about the potential for oil prices to spike in connection with instability in the Middle East, David. We're past one month into the conflict. The fighting in Gaza is now into the real dangerous part. Block by block in a densely populated city, trying to surface terrorists who are hiding in tunnels many, many feet underground. We don't know exactly how far underground, but almost always in civilian areas, using human shields as they do. So the troubles are obviously mounting, yet oil prices really aren't moving much at all. Does that surprise you a bit?

BAHNSEN: No, it does not. Because I said in the very first weekend after the initial atrocity in which Hamas attacked Israel, that it was going to require an escalation with Iran until this really had substantive impact on supply. Along the way, it could have impact on sentiment, and it did. Oil prices did go up about $4 a barrel. They had been in the low 80s and got up to the high 80s. But now they've come back not only giving that back up, but another few bucks since then, sitting in the high 70s. You notice bond yields have come down about 40 basis points. They had gotten up to about 5%. The long bond tenure is now down to about 4.6%. Now there's a lot of volatility there, that's going up and down. So one listener listening to this Monday morning, it may still be true, and by Monday afternoon, it may not be true. That's just sort of the way bond yield volatility is going right now.

My point is what are bond yields and oil prices both doing, Nick? They're looking at expectations of economic growth in the short term trying to guess. And right now the bias has gone from more economic growth–which is pushing bond yields higher oil prices higher–to wait a second, maybe it's going to be slowing down a little in the quarters ahead. By no means recessionary. Oil prices would not hold at $78, and bond yields would not hold at 4.6 in a recession. But it's come down a bit. So bond yields are driving the stock market, and bond yields are driving oil prices, until a supply disruption that would require a greater Middle East distress than we have right now, primarily one involving Iran.

EICHER: David, just a couple minutes left. Anything else catch your attention last week that we need to know about?

BAHNSEN: Well, I do think that both stocks and bonds continue to reflect a great deal of volatility, and a lot of that volatility stems from uncertainty about the economy. It's nice to see that, I think, both sides are a little exhausted in trying to formulate their economic predictions around their political hopes. I think some people are tired of predicting doom and gloom economically, because they want the current administration out. And I think some are tired of cheerleading for this economy because they like the administration, and clearly this economy doesn't deserve cheerleading.

We're in a real state of uncertainty, Nick, and that's what I see in financial markets, in bond yields, in volatility, and stock prices. Earnings season is about to end, and earnings are going to be up about five and a half percent year over year, better than expected. Revenues are only up about one to one-and-a-half percent year over year. So companies, again, have done what they do best. They found good margins. They've expanded them, and they've held them. But there's a lot of economic uncertainty that I think you and I will continue talking about week by week for months to come.

EICHER: Absolutely. David Bahnsen founder managing partner and chief investment officer of the Bahnsen Group, you can keep up with David at his personal website and if you want to have a look at his weekly Dividend Cafe, you can find that at David, thanks so much. I hope you have a terrific week.

BAHNSEN: Thanks so much, Nick.

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