Kenny Polcari from Slatestone Wealth and Eddie Ghabour, CEO of Key Advisors Wealth Management, will explore the economy’s current state, particularly focusing on whether buying market dips is a wise strategy.
Like many, I share concerns about government spending and rising debt. But I can’t help but question the competence of credit rating agencies like Moody’s.
This is the same organization that upheld high credit ratings for subprime mortgage-backed securities right up to the brink of the biggest financial crisis since the Great Depression, costing investors trillions.
The National Bureau of Economic Research recently reminded us of Moody’s role in that meltdown.
“The 2008-9 credit crisis reflected several issues. Structured financial products, including mortgage-backed securities, exceeded $11 trillion in the US debt market… Over half of the securities rated by Moody’s had ratings that were later deemed overly generous, following a significant uptick in downgrades.”
Interestingly, Moody’s paid an $864 million penalty in 2017 due to its flawed ratings, contributing to the crisis. How do we gauge Moody’s credibility now?
It’s somewhat reminiscent of choosing Pee Wee Herman as your investment advisor.
This situation is about more than just Moody’s missed marks. There’s a political bias evident. The largest budget deficit occurred under President Joe Biden, with an estimated $5 trillion spend. With inflation diminishing the value of existing government bonds, it’s puzzling that no credit downgrade followed during Biden’s administration.
Currently, with Donald Trump in office, the situation appears dire. Economists at Moody’s generally criticize tax cuts from the supply-side while applauding government spending as an economic stimulus.
It’s unclear to me why they seem to overlook how tax cuts can foster growth. Historically, measures like Reagan’s 1981 and Trump’s 2017 tax cuts helped stimulate the economy and reduced the debt burden as a percentage of wealth over time. More jobs and fewer welfare recipients intuitively lessen debt costs. If President Trump achieves his goal of a 3% growth rate, the debt burden may start to reduce.
It’s important to remember the full faith of the US government underpins financial debt, much like a solid guarantee of repayment. Washington certainly has a spending problem, but it’s not on the level of a country like Zimbabwe.
The timing of this downgrade raises eyebrows. Is it mere coincidence that it coincides with Congress voting on Trump’s proposed tax cuts?
Recently, President Trump has attracted a new investment commitment of at least $1 trillion to the US. Why are investors rushing toward nations with default risks?
Perhaps they trust what Moody’s cannot. Overall, Trumpnomics seems beneficial for the US economy and those investing here.
