You're listening to Strictly Business Podcast with Lindsay Williams.
Last week, Moody's stripped the US of its AAA credit rating, not because America
can't pay its creditors, so why?
With me is John Stockford, head of multi-asset income at 91 in London.
They're way behind Fitch and S&P, which both of those institutions did it a few
years ago.
John, why now and why?
Well, I think the trend is you have...
pointed out, so other agencies have been ahead of the game, has been pretty
obvious.
So for a while, the US has been running a very large budget deficit, its debt level
has been climbing.
And it's not unique in that, but it's been pretty extreme.
So despite the fact that generally, the US economy is doing well, or has been doing
well,
unemployment is low, they've been running a deficit of around six to 7% of GDP.
And so you could argue, actually, why has it taken Moody's quite so long.
Yes, but anyway, they've caught up now and there's, I suppose,
next to zero chance of the US ever defaulting on debt.
So going from AAA to one notch below that doesn't really matter that much, does it?
Apart from being a sort of psychological blow to the new administration.
Yes, to some extent.
And there were accusations that the timing was political.
Why didn't they do it when Biden was running large deficits?
I mean, I guess the concern for investors is what is the right?
price for US bonds.
And as you say, they're unlikely, I think, to default,
but they're going to potentially on this trajectory end up with an unfinanceable
debt burden.
And if that's the case, they'll either need to basically find a way to keep
interest rates at artificial
levels and force people to buy uneconomical debt, which they can do with
domestic investors, I guess,
to some extent, or they're going to try and inflate their way out of it.
you know neither outcome suggests that treasuries um will ultimately be a great
investment so that that i
think is the challenge it's less about default and basically more about
debasement and maybe you know we
won't get to that point but you're going to need the trajectory of us borrowing to
change pretty dramatically to avoid that kind of outcome down the
line i think how likely is that i wonder we'll come to that in a second but if ever
since i've been in the broadcasting and markets game
every single year someone says oh well the dollar's going to collapse because this
level of debt is
unsustainable in the world's largest economy now the us has already
added about i think the number i saw was 13 trillion of debt since 2019 and that
was to support and is
to support the economy through the pandemic and underwrite policies of biden
and and now trump and it's up to about 36 37 trillion These numbers are
mind-boggling.
When does it get to the point where it's unsustainable?
You've sort of answered it a bit, but maybe go into greater detail.
When does someone wake up and say, no more of this?
Well, I mean, I guess, you know, excuse the pun, that's the multi-trillion dollar
question.
Timing is the thing we don't know, but the path is clearly unsustainable.
So the choices are at some point, either they put it on a sustainable path or some
sort of fiscal event happens.
And so...
You know, in the UK, not so long ago,
we had our Liz Truss episode where the government tried to borrow to boost growth
and the
bond market puked, if I can use that term.
You have.
The danger is that, you know, the same sort of thing at some point happens in the
US market and the US is
dependent on the kindness of strangers.
So the US borrows a lot as an economy, not just through the government bond market,
but generally it's relying on...
foreigners to fund the US current account to put money into the US economy.
And at some point, foreigners may decide that either they want to be paid more, or,
you know, there are better places,
less risky places to put the money.
So the risk is you have some sort of event at some point, again, the timing is the
question.
And the problem is, it's very hard at the moment to see with the sort of
dysfunctional nature of US politics.
um how they avoid ending up in that kind of situation at some point and also how
they extricate themselves in in the case of
liz truss because you had one government with a majority in parliament they
could reverse course overnight and address the situation there you can have central
bank helping them out which
happened in the case of the uk you know intervening in the market the fed probably
would or almost certainly would but you know the the risk is you have some
that we're moving towards some sort of panic or some sort of event, whether it's
soon, next year,
two years, five years, who knows.
But the numbers just don't stack up, I think, on any reasonable time horizon.
So then, you know, at some point in the next five to 10 years, it seems unless
something material changes,
that we are going to have people, bond markets revolting against the amount of
debt they're being asked to fund.
Let's just go back to that Liz Truss moment as one commentator that I'm reading
right now is talking about.
He says, if you recall, Truss, famous for having a political career that was
outlived by a head of lettuce,
went wild with tax cuts in 2022 and failed to offset them with spending reductions.
If the Trump administration, he goes on to say, does the same.
And the person here, incidentally, is Michael R.
Bloomberg.
Bloomberg says.
taxpayers and the nation's economic strength and stability will bear the
consequences.
What's happening right now, actually, John, is making this conversation even
juicier.
We're pre-recording this podcast on the 20th of May, and Trump has gone to the
Hill and said,
I want you to have a look at this big, beautiful bill of his, as he calls it,
which will add another $4 trillion to the debt ceiling.
Yeah, I mean, absolutely.
So, you know, I think there was a brief moment of optimism when Trump has
inaugurated, that, you know,
we would have some more sensible budget numbers that the Republicans are very well
aware that the deficit is too
big, ultimately.
Besant, the Treasury Secretary was talking about, you know, trying to get the number
down to about 3% deficit.
Anyway, all of that appears to have gone out the window.
And we are talking about this big, beautiful bill,
which looks like it would basically cost about six and a half percent.
of GDP in terms of a deficit for the foreseeable future.
And, you know, this is an economy that in nominal terms is possibly growing at sort
of four or so percent.
So your debt burden is going up much faster than your GDP.
And ultimately, you end up in the, you know, the problem that that becomes
exponential if you're not careful.
And it gets worse if your borrowing costs go up at the same time And the US isn't
unique in this.
Most developed governments have basically made promises to constituents that they'll
fund their old age, they'll pay for their health care, etc.,
which is all very laudable, but somebody has to pay for that.
And if you can't raise the revenues or you choose not to raise the revenues to pay
for that, you're going to borrow it.
And if the borrowing costs are going up, that model becomes unsustainable.
So in Japan today, 30-year Japanese government bonds went over 3%.
And they've gone up by almost a percentage point in a month.
And, you know, if those kind of things keep happening, it's not going to take
very long before people say, hang on a minute,
this Ponzi scheme, which is arguably what it is, you know, isn't sustainable, and
something is going to have to happen.
And at that point, bond investors, bond vigilantes may revolt.
And suddenly, we're going to have a crisis and central banks will have to come in.
And, you know, confidence in institutions, confidence in the dollar, etc., will get
undermined.
And it's worse for an economy like the US rather than Japan.
Japan is a net saving economy.
So yes, its government owes a lot of debt, but its private sector has a lot of
savings.
In the US, they've basically gone out and borrowed from the world across the board.
They don't save much money at all.
And so, yeah, I'm probably sounding rather...
I don't want to be OTT about this, but I do think we're getting closer to a crunch
point.
And the direction of travel of the US budget, if it gets passed in anything like
its current form,
is pretty worrying.
Okay, so we must watch this space very, very carefully indeed.
Talking of bond vigilantes, China at one stage during the whole nasty business of
five or six weeks that we've
just endured in 2025.
China were accused of being bond vigilantes.
in some quarters by allegedly selling off a load of US bonds, which they can if they
want to.
And they've come to the fore today by also changing their monetary policy a bit.
They cut rates, I understand, John.
Yeah, I mean, they've got almost the reverse problem in that they're trying to
stimulate demand.
They need to, you know, so cutting interest rates there is just trying to get
the economy to work.
But they are also a net saving economy.
You're trying to persuade consumers to take up more of the, you know,
the burden of growing the Chinese economy.
And that's been a real challenge.
So we've got all of these imbalances globally.
and it's not obvious.
how they get resolved in any sort of smooth,
nice manner.
And the vigilante thing, I think you just need to be slightly careful as well in
that all it is is
people who are investing, trying to make rational decisions.
And so it's not that they're trying to punish the US or necessarily force them to
do things.
It's just that they're worried about the direction of travel and put their money
somewhere else.
um so yeah i mean i i think interestingly i think the chinese what they're
choosing to do with their u.s reserves a lot of it is obviously they're investing
in other things but also rather than holding longer dated treasuries they're
holding
treasury bills where you know if they change their mind tomorrow they can put
their money somewhere else um so yeah i think it's
rational behavior
ultimately that causes a panic and then because it starts to move other people
then think oh i've got to move as
well and you know those things can then snowball and spiral i'm not saying that
that's
definitely going to happen or it's necessarily going to happen but i do think
there are a few noises and there's a direction of travel for u.s policy which
you know is is
pretty unsettling yes um let's have a look at the markets now you led into the market
segment of this
podcast rather neatly and uh well you wake up on the morning after the day before
After the Moody's decision and the S&P was down over 1%, the futures market that is,
and everyone thought, goodness me,
this market needed an excuse to come off and here it is.
But by the end of the day, the market had turned around and actually was positive
across the board, the Dow, the S&P, the Nasdaq,
only by small increments, but it was sending a message out to say, we don't
really care about
Moody's, bring on something serious.
And something serious by the sounds of it could be the crunch that you spoke about.
You didn't want to appear to be anarchic or alarmist or anything, as you said.
But on the other hand,
the big beautiful bill might just become the rather large and attractive bill.
So in other words, it's toned down.
And even that would be quite bad from what you say.
What do you think the market would do should it go through in some slightly
toned down form?
Well, I think anything that smacks of actually some level of fiscal
responsibility,
I think would be reassuring to the market.
And there are definitely members of the Republican...
Congress who are uncomfortable with the fact that essentially they're asking for
unfunded tax cuts.
And so, you know, maybe we'll sense will prevail and maybe those people will
actually get the deal toned down.
And that I think would be helpful in terms of what it means for the equity market.
You know, at the moment, there's an element of normality.
And I think equities can or have been largely ignoring the bond market, albeit a
little bit of a set.
back on the Moody's news.
But if we got more of a move, I think it would be surprising if the equity market
was that relaxed,
particularly as we're almost back to all time highs.
And it's not as though equities are now discounting or pricing in a lot of bad
news.
So yeah, I mean, I think the bond market, most of the time, the equity market
doesn't care about.
But every so often, as we saw with, for example, Liz Truss, it can suddenly become
all that people care about.
Right.
You've got to talk about your role as head of multi-asset income at 91 in London.
And you've got to tell us exactly how you are positioned and how you might change
that position, given the conversation we've just had.
Yeah, I mean, so, I mean, an interesting sort of observation.
We now have more in emerging market local bond markets in aggregate than we have in
the U.S.
treasury market by actually quite some degree.
we have a lot of probably one of the lowest weightings in US assets that we've
had for a number of years.
And, you know, that's not because we think this accident's about to happen.
It's just that we're running a defensive strategy and we'd rather not be there if
it does.
And there are better opportunities elsewhere.
So, you know, there are places, I think, where you can hide, if that's the right
term,
and actually earn a reasonable return.
I think, you know, generally, we are concerned about
about the level of complacency across most asset markets.
But at the same time, you know, we are still looking for where we can find
attractive income generating assets at
reasonable valuations, which maybe aren't as exposed to some of the things that
we've been talking about during our conversation.
Fascinating stuff, John.
Thank you so much for your time.
John Stockford is head of multi-asset income at 91 in London.
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