By coinnews 
00:00 Speaker A
Now let’s start with that credit downgrade, spooking markets a little bit this morning. But if history is any indication, prior US credit downgrades haven’t led to structurally higher interest rates, recessions, or sustained equity market declines. So, given that, how much weight should investors really place on this latest downgrade? Does it carry any meaningful signal for future market or economic direction?
00:42 Speaker B
I think you put your finger right on it, Allie. I think that the downgrade, uh, was on the third downgrade of those, um, agencies over the last decade plus, right? So we had S&P downgrade originally, then we had Fitch, and now we have Moody’s. So now it’s a, uh, uh, all three of them have downgraded. But if you look at both the equity market and the fixed income market, they’ve hardly responded. Why is that? It’s because the downgrade was based on information that is widely available. Everyone knows deficit is running at 6 and a half to 7% of GDP. Everyone knows that debt to GDP is pretty high and unsustainable. Everybody knows that most of the budget is taken up by Medicare, Medicaid, interest expense, and Social Security, as well as defense. And that if we’re going to do that, if we’re going to fix the deficit, then we need to address those areas. And certainly the bill that was put forward over the weekend doesn’t really give us a lot of confidence. So I think the rating agencies were catching up with what the market already knows. I think the more significant, uh, impact or dynamic going on today is that this is in the context of US stocks underperforming international stocks for the last several months, right? And we have seen earnings estimates outside the US go up, while earnings estimates inside the US are going down. And we have seen that, uh, economic expectations in terms of GDP for this year and next year are going down here. So I do think there’s a little bit more of a nail in the coffin in the sense that investors are looking at other options and particularly international investors are looking at other options. So you may see flows out of the US, uh, because of these structural reasons. And the last downgrade might be the catalyst to get them to actually pull the trigger and move that money, but I don’t think it’s the cause of it per se. I think it’s based on information that the market already knows.
04:07 Speaker A
So interesting. You laid out a few potential risks there, right? With the flow of money from the US to international markets, earnings revisions. Uh, is there an underestimated risk in your view at this point?
04:32 Speaker B
I think the single biggest underestimated risk is negative estimate revisions due to some combination of tariffs and changes in immigration, right? So if you think very simplistically, GDP is equal to, uh, labor force times productivity. And if we start deporting, uh, people in the context of a pretty tight labor market, then that can cause inflation to go up and it can also cause GDP to go down. So if, uh, immigration policy materially changes, I think that’s an underappreciated risk because that will impact corporate earnings. Companies will have to pay more for workers and that’s going to hurt their margins leading to negative earnings estimate revisions. So I think that’s the biggest underestimated risk. I think the tariffs were an underestimated risk and then they were an overestimated risk when, uh, the market was acting as though the April 2nd announcement would be, would be implemented literally, which it’s clear now that it won’t be implemented literally. So that’s less of a risk, but I do think the labor market is the single most important element holding up the US economy and the markets. And if the labor market weakens because of immigration or any other reason, then that’s, that’s the biggest risk.