Deficits, Populism, and Higher Rates
On Friday, November 10th, 2023, Moody’s lowered its outlook on the U.S. Credit rating to “negative” from “stable”. This move comes amidst increased policy paralysis on Capitol Hill and a looming government shutdown.
We have a problem. It is not a problem that can’t be fixed but looks increasingly likely to worsen. Decades of an ever-falling cost of capital have led to a predictable outcome: higher debt and higher structural deficits. If the threat of inflation is nowhere to be found and borrowing costs are des minimis, why not? Why not push through another tax cut? Why not authorize increased spending on defense and entitlements? Unfortunately, every good party comes to an end. We have come to the end of what economists call “The Great Moderation.” After so many years of falling inflation, a decade-long crescendo of zero interest rate policy, and finally the spending bonanza that was our response to the COVID pandemic, we finally pushed to the point where inflation was awakened from its dormancy.
In WealthVest’s upcoming whitepaper, Deficits, Populism, and Higher Rates, we will discuss the outlook for our debt and deficits, focusing on the many unpredictable variables that will determine the path. Not only are there economic unknowns, such as long-term productivity, but also a myriad of unknowable political variables. Ultimately, we rely on our elected officials to continuously find prudent compromise. It is our view that prudence is unlikely.
DEFICITS
As this chart illustrates, interest expenses are inflicting higher. Higher interest rates add to our deficits. While our deficits have grown unevenly over time, what has changed suddenly is interest rates. In 2024, interest expense is estimated to be higher than defense spending. The return of inflation and the tangible servicing cost of higher interest rates bring deficits to the top of mind for markets.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
WealthVest makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made in this material, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of Tim as of the date indicated. They do not necessarily reflect the views and opinions of WealthVest and are subject to change at any time without notice. WealthVest does not have any responsibility to update this material to account for such changes. There can be no assurance that any trends discussed during this material will continue.
Statements made in this material are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed in this material, including consulting their tax, legal, accounting or other advisors about such information. WealthVest does not act for you and is not responsible for providing you with the protections afforded to its clients. This material does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by WealthVest.
Certain statements made in this material may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates and for certain fixed index annuity contracts is licensed for use by the insurance company producer, and the related products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or their affiliates, none of which make any representation regarding the advisability of purchasing such a product. WealthVest is not affiliated with, nor does it have a direct business relationship with Standard & Poors Financial Services, LLC.
