WEBVTT 00:00:00.000 --> 00:00:03.720 Okay, so let's dive right in. We've got some 00:00:03.720 --> 00:00:05.900 pretty big financial news today, something that 00:00:05.900 --> 00:00:08.599 feels like, well, a significant signal. Another 00:00:08.599 --> 00:00:11.300 major credit rating agency, Moody's, has just 00:00:11.300 --> 00:00:14.140 downgraded the US credit rating. And today our 00:00:14.140 --> 00:00:17.239 deep dive is all about unpacking this specific 00:00:17.239 --> 00:00:21.140 move. Moody's deciding to shift the US from that 00:00:21.140 --> 00:00:24.739 top rating down to AA1. We're really focusing 00:00:24.739 --> 00:00:27.780 on one article here that lays out the details. 00:00:27.940 --> 00:00:29.820 So our mission really is to pull out the key 00:00:29.820 --> 00:00:32.659 insights for you from this source. Why now? What 00:00:32.659 --> 00:00:34.799 did it do to the markets immediately? What are 00:00:34.799 --> 00:00:37.000 the sort of longer term ripples and what's the 00:00:37.000 --> 00:00:39.159 bigger picture here? Yeah, and it's crucial I 00:00:39.159 --> 00:00:40.880 think to remember this isn't happening out of 00:00:40.880 --> 00:00:43.070 the blue. The article makes a point of saying, 00:00:43.070 --> 00:00:44.729 you know, this fall is Fitch doing something 00:00:44.729 --> 00:00:47.729 similar just last year, 2023. And S &P did it 00:00:47.729 --> 00:00:50.229 way back in 2011. So Moody's, it's framed as 00:00:50.229 --> 00:00:52.170 kind of the latest step in an ongoing trend. 00:00:52.409 --> 00:00:54.490 OK, right. So let's get into the why. The source 00:00:54.490 --> 00:00:56.409 must have specific reasons Moody's gave. What 00:00:56.409 --> 00:00:58.869 were the main things mentioned? Well. The absolute 00:00:58.869 --> 00:01:02.030 core issue highlighted is the escalating US debt. 00:01:02.530 --> 00:01:04.810 The article cites the current federal debt at 00:01:04.810 --> 00:01:07.890 over $36 trillion, which is already a huge number. 00:01:07.950 --> 00:01:10.269 $36 trillion, yeah. And then it points to CBO 00:01:10.269 --> 00:01:11.909 projections, that's the Congressional Budget 00:01:11.909 --> 00:01:16.189 Office, suggesting another $23 .9 trillion could 00:01:16.189 --> 00:01:18.709 be added over the next 10 years. It even mentions 00:01:18.709 --> 00:01:20.769 specific legislation, like something called the 00:01:20.769 --> 00:01:24.150 Big Beautiful Bill, possibly adding another $5 00:01:24.150 --> 00:01:26.030 trillion on top. Just gives you a sense of scale. 00:01:26.109 --> 00:01:29.409 Wow. That's just a lot of zeros. And the article 00:01:29.409 --> 00:01:31.250 really leans into the political side, too, the 00:01:31.250 --> 00:01:33.609 lack of consensus. Exactly. That's a huge piece 00:01:33.609 --> 00:01:36.609 of it. The source highlights that basically neither 00:01:36.609 --> 00:01:39.290 major political party has presented what the 00:01:39.290 --> 00:01:42.819 analysis considers a viable plan to really tackle 00:01:42.819 --> 00:01:44.840 the deficit in a serious way. So it suggests 00:01:44.840 --> 00:01:47.959 this deep structural fiscal imbalance and maybe 00:01:47.959 --> 00:01:50.719 a lack of political will to fix it. And it adds 00:01:50.719 --> 00:01:52.760 another layer by comparing the U .S. to other 00:01:52.760 --> 00:01:55.480 countries. It points out that our debt to GDP 00:01:55.480 --> 00:01:57.819 ratio and importantly how much it costs us to 00:01:57.819 --> 00:01:59.859 service that debt. Well, those metrics now look 00:01:59.859 --> 00:02:01.480 worse than many other countries with similar 00:02:01.480 --> 00:02:04.459 credit ratings. OK, so it's not just the total 00:02:04.459 --> 00:02:06.260 amount, but it's getting more expensive to actually 00:02:06.260 --> 00:02:09.580 carry that debt. Precisely. The rising interest 00:02:09.580 --> 00:02:12.199 costs are stressed in the article. Interest payments 00:02:12.199 --> 00:02:16.439 are getting close to $1 trillion a year. And 00:02:16.439 --> 00:02:19.780 that's expected to grow, partly because the Fed's 00:02:19.780 --> 00:02:22.280 keeping rates higher to combat inflation, but 00:02:22.280 --> 00:02:24.879 also just the sheer size of the debt keeps growing. 00:02:25.439 --> 00:02:28.159 And here's something interesting. The article 00:02:28.159 --> 00:02:30.240 picked up on the market was already showing signs 00:02:30.240 --> 00:02:33.439 of stress before the official downgrade. It mentioned 00:02:33.439 --> 00:02:36.139 weak demand in some recent treasury auctions. 00:02:36.280 --> 00:02:38.259 I think it specifically called out the 20 -year 00:02:38.259 --> 00:02:41.060 bonds. Oh, really? Yeah. Demand was apparently 00:02:41.060 --> 00:02:42.879 soft enough that yields the return investors' 00:02:42.979 --> 00:02:46.360 demand they spiked up to 5%. The highest since— 00:02:46.680 --> 00:02:48.939 2023, apparently. It's like a signal, right? 00:02:49.379 --> 00:02:51.860 Investors getting nervous about the US's ability 00:02:51.860 --> 00:02:54.419 to handle its debt if REITs stay high or deficits 00:02:54.419 --> 00:02:56.960 keep climbing. OK, so that covers the rationale, 00:02:57.060 --> 00:02:59.819 the why. What about the immediate aftermath? 00:02:59.979 --> 00:03:02.419 What did the analysis say about how markets reacted 00:03:02.419 --> 00:03:04.520 right when the news hit? Well, it definitely 00:03:04.520 --> 00:03:07.139 describes a significant shakeup. Volatility jumped. 00:03:07.580 --> 00:03:11.080 The Dow Jones dropped over 800 points. The S 00:03:11.080 --> 00:03:13.719 &P 500 fell about 3 .2 percent, and the Nasdaq 00:03:13.719 --> 00:03:16.400 was down even more, like 4 .1 percent. And some 00:03:16.400 --> 00:03:18.979 sectors felt it more than others. The article 00:03:18.979 --> 00:03:21.520 mentions banking stocks, for instance, big names 00:03:21.520 --> 00:03:24.979 like JPMorgan Chase, Bank of America. They apparently 00:03:24.979 --> 00:03:27.060 lost something like six to eight percent of their 00:03:27.060 --> 00:03:29.520 value pretty quickly. And that market fear gauge 00:03:29.520 --> 00:03:32.060 you hear about, did that react? It did. The VIX. 00:03:32.120 --> 00:03:36.289 Yeah, the CBO. The article says it surged 11 00:03:36.289 --> 00:03:39.669 % in just one trading session. So clearly, increased 00:03:39.669 --> 00:03:42.009 anxiety in the market. And that stress in the 00:03:42.009 --> 00:03:44.150 treasure market we talked about. The article 00:03:44.150 --> 00:03:46.270 connects the dots. It says that weak demand for 00:03:46.270 --> 00:03:48.469 the longer -term bonds kind of made things worse, 00:03:48.550 --> 00:03:51.030 leading to this thing called yield curve steepening. 00:03:51.069 --> 00:03:53.590 OK, what does that mean exactly? Basically, investors 00:03:53.590 --> 00:03:56.009 demand a much, much higher return for lending 00:03:56.009 --> 00:03:58.930 money for, say, 30 years compared to shorter 00:03:58.930 --> 00:04:02.550 terms. The yield on the 30 -year bond hit 5 .1%. 00:04:02.280 --> 00:04:04.360 percent, according to the piece. It signals they 00:04:04.360 --> 00:04:06.599 see more risk lending to the U .S. government 00:04:06.599 --> 00:04:08.560 long term. But I think you mentioned the article 00:04:08.560 --> 00:04:11.159 also included some perspective that maybe the 00:04:11.159 --> 00:04:13.680 sky wasn't falling entirely. That's right. It 00:04:13.680 --> 00:04:16.040 did include some analyst views, mentioned one 00:04:16.040 --> 00:04:18.680 from Allianz, I believe, suggesting that while 00:04:18.680 --> 00:04:21.220 it's big news, the immediate market chaos might 00:04:21.220 --> 00:04:23.420 be somewhat contained. And the reasoning there. 00:04:23.720 --> 00:04:25.899 It often comes back to the unique position of 00:04:25.899 --> 00:04:28.240 the U .S. dollar as the world's main reserve 00:04:28.240 --> 00:04:31.720 currency. And the fact that Realistically, there 00:04:31.720 --> 00:04:34.399 aren't many other places for a global capital 00:04:34.399 --> 00:04:37.199 to go that offer the same scale and historically, 00:04:37.339 --> 00:04:40.420 at least, safety as U .S. treasuries. There just 00:04:40.420 --> 00:04:42.540 aren't perfect substitutes right now. Got it. 00:04:42.600 --> 00:04:45.579 OK, so moving beyond that first reaction, what 00:04:45.579 --> 00:04:47.459 about the longer -term economic stuff the article 00:04:47.459 --> 00:04:49.980 flags? Well, looking ahead, the big implication 00:04:49.980 --> 00:04:52.519 is that higher borrowing costs for the government 00:04:52.519 --> 00:04:55.500 itself could force some really tough choices, 00:04:55.699 --> 00:04:57.800 you know, things like spending cuts or maybe 00:04:57.800 --> 00:05:00.300 tax increases down the line. But didn't the article 00:05:00.300 --> 00:05:03.459 also say the politics make that unlikely? Exactly. 00:05:03.600 --> 00:05:06.439 It kind of highlights the irony. The same political 00:05:06.439 --> 00:05:09.160 gridlock that contributed to the downgrade makes 00:05:09.160 --> 00:05:11.680 enacting those kinds of major fiscal reforms 00:05:11.680 --> 00:05:14.120 seem, well, pretty difficult in the current climate. 00:05:14.699 --> 00:05:17.540 The article also brings up the 2017 tax cuts 00:05:17.540 --> 00:05:20.519 specifically, points out they added to revenue 00:05:20.519 --> 00:05:23.220 shortfalls and notes they're set to expire in 00:05:23.220 --> 00:05:26.160 2026 anyway, which just adds another layer of 00:05:26.160 --> 00:05:28.240 fiscal uncertainty. OK, this is where the article 00:05:28.240 --> 00:05:30.480 got really interesting for me. It talked about 00:05:30.480 --> 00:05:33.329 investors changing their behavior. making shifts? 00:05:33.670 --> 00:05:35.670 Yes, this was a fascinating part of the analysis. 00:05:36.410 --> 00:05:38.949 It identifies what it sees as a clear trend. 00:05:39.410 --> 00:05:41.790 Investors increasingly looking for ways to hedge 00:05:41.790 --> 00:05:44.509 against all this fiscal uncertainty. And where 00:05:44.509 --> 00:05:47.120 are they going? towards hard assets, specifically 00:05:47.120 --> 00:05:49.540 gold and silver. Right, hedging against uncertainty. 00:05:49.899 --> 00:05:52.040 And it gives specifics. It notes central banks 00:05:52.040 --> 00:05:54.399 around the world have been huge buyers of gold, 00:05:54.879 --> 00:05:57.259 purchasing over 1 ,000 tons annually for the 00:05:57.259 --> 00:05:59.620 last three years straight. The source expects 00:05:59.620 --> 00:06:02.399 that to continue, maybe even accelerate. 1 ,000 00:06:02.399 --> 00:06:05.300 tons annually for three years. Yeah, massive 00:06:05.300 --> 00:06:07.740 amounts. And it doesn't stop there. It shares 00:06:07.740 --> 00:06:11.500 some pretty eye -popping price projections, cites 00:06:11.500 --> 00:06:15.360 institutions like JP Morgan, Wisdom Tree, suggesting 00:06:15.360 --> 00:06:19.019 gold could potentially reach $4 ,000, maybe even 00:06:19.019 --> 00:06:21.980 $5 ,000 an ounce. Wow. OK, so what's driving 00:06:21.980 --> 00:06:24.240 that? Is it just the usual suspect, people worried 00:06:24.240 --> 00:06:26.829 about inflation? Well, this is key. And the article 00:06:26.829 --> 00:06:30.350 is very specific here. It argues this shift isn't 00:06:30.350 --> 00:06:33.629 primarily about inflation fears. It's more fundamental. 00:06:33.850 --> 00:06:36.389 It's about a decline in confidence in traditional 00:06:36.389 --> 00:06:39.490 paper assets, meaning fiat currencies like the 00:06:39.490 --> 00:06:41.509 dollar itself and sovereign debt, government 00:06:41.509 --> 00:06:44.370 bonds. It suggests a growing unease about the 00:06:44.370 --> 00:06:47.189 long term value and stability of those core financial 00:06:47.189 --> 00:06:49.649 instruments. That's a significant claim. And 00:06:49.649 --> 00:06:51.329 the article connects this back to the political 00:06:51.329 --> 00:06:53.410 situation pretty directly, doesn't it? Oh, absolutely. 00:06:53.550 --> 00:06:55.740 It does not mince words. It talks about partisan 00:06:55.740 --> 00:06:59.740 gridlock and this persistent inability of policymakers 00:06:59.740 --> 00:07:02.660 to get deficits under control. The analysis frames 00:07:02.660 --> 00:07:05.279 it as a real erosion of fiscal discipline over 00:07:05.279 --> 00:07:08.500 time. Not blaming one party specifically? No. 00:07:08.540 --> 00:07:10.579 It states pretty clearly that both Democratic 00:07:10.579 --> 00:07:13.319 and Republican administrations have tended to 00:07:13.319 --> 00:07:16.819 prioritize short -term goals or stimulus over 00:07:16.819 --> 00:07:20.139 long -term fiscal health. And the consequence, 00:07:20.319 --> 00:07:23.279 according to this analysis, it potentially undermines 00:07:23.279 --> 00:07:25.660 the credibility of how the U .S. manages its 00:07:25.660 --> 00:07:29.040 economy on the world stage, and could even speed 00:07:29.040 --> 00:07:32.019 up the movement of capital away from dollar -based 00:07:32.019 --> 00:07:35.180 assets towards other things, that capital flight 00:07:35.180 --> 00:07:37.439 idea. Which leads to the global picture, right? 00:07:37.439 --> 00:07:39.959 Wider implications. Exactly. The argument in 00:07:39.959 --> 00:07:42.079 the piece is that this kind of downgraded chips 00:07:42.079 --> 00:07:45.079 away at the U .S.'s perceived economic leadership. 00:07:45.360 --> 00:07:47.279 And this is happening at a time when, you know, 00:07:47.439 --> 00:07:49.399 emerging markets and other countries are already 00:07:49.399 --> 00:07:52.540 actively exploring ways to rely less on the U 00:07:52.540 --> 00:07:54.769 .S. dollar trade and reserves. That whole de 00:07:54.769 --> 00:07:56.930 -dollarization trend you hear about. Right. The 00:07:56.930 --> 00:07:58.910 source suggests that continued fiscal problems 00:07:58.910 --> 00:08:01.269 in the U .S. could give that trend more momentum, 00:08:01.410 --> 00:08:04.410 especially if, say, another agency were to downgrade 00:08:04.410 --> 00:08:06.850 further down the line. Okay. So let's try and 00:08:06.850 --> 00:08:09.970 wrap this up. To recap, Moody's downgrade coming 00:08:09.970 --> 00:08:13.829 after others, it really acts as this significant 00:08:13.829 --> 00:08:16.269 flag about the U .S. fiscal path. We're talking 00:08:16.269 --> 00:08:19.129 escalating debt, rising interest costs, making 00:08:19.129 --> 00:08:21.810 it harder to manage, and this perceived lack 00:08:21.810 --> 00:08:24.209 of political agreement or will to change course. 00:08:24.730 --> 00:08:26.329 Yeah, and it clearly caused some immediate jitters 00:08:26.329 --> 00:08:28.129 in the market, that volatility we discussed. 00:08:28.629 --> 00:08:30.250 But maybe the bigger takeaway from the analysis 00:08:30.250 --> 00:08:32.669 is about those longer -term risks, the potential 00:08:32.669 --> 00:08:35.289 for permanently higher borrowing costs for the 00:08:35.289 --> 00:08:37.990 government. And perhaps more profoundly, this 00:08:37.990 --> 00:08:40.190 shift highlighted an investor behavior that moved 00:08:40.190 --> 00:08:43.210 towards assets like gold, driven less by inflation, 00:08:43.350 --> 00:08:45.850 according to the source, and more by, well, fundamental 00:08:45.850 --> 00:08:48.049 questions about the long -term reliability of 00:08:48.049 --> 00:08:50.269 traditional paper assets in government debt. 00:08:50.350 --> 00:08:53.009 It's fascinating how this deep dive just following 00:08:53.009 --> 00:08:55.429 the threads in this one source really connect 00:08:55.429 --> 00:08:58.389 domestic policy choices or lack thereof with 00:08:58.389 --> 00:09:01.750 immediate market reactions and then ripples out 00:09:01.750 --> 00:09:03.909 to America's whole economic standing globally. 00:09:04.350 --> 00:09:05.889 So let's leave you with a final thought, something 00:09:05.889 --> 00:09:08.129 to mull over based on what this article suggests. 00:09:08.750 --> 00:09:11.129 If confidence in those traditional bedrock assets 00:09:11.129 --> 00:09:13.570 currencies, government bonds is genuinely starting 00:09:13.570 --> 00:09:16.730 to fade as the analysis implies. What does that 00:09:16.730 --> 00:09:18.450 fundamentally change about how we should all 00:09:18.450 --> 00:09:20.649 be thinking about economic stability, maybe even 00:09:20.649 --> 00:09:22.669 our own investment strategies, in the years ahead?