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THE MOODY’S CREDIT DOWNGRADE:
Since the United States largely operates and functions on ‘borrowed money’ – they’re issued a “credit rating” that demonstrates how likely they are to repay back their loans. However – on May 16th, the credit agency Moody’s downgraded the US in terms of their future outlook, going from what’s called a AAA rating to ‘Aa1.’
They’ve pointed out that Congress has continuously failed to reduce the national debt and excessive borrowing, “over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat, large fiscal deficits will drive the government’s debt and interest burden higher, and future performance is likely to deteriorate relative to past performance.” They also project that by 2035, interest payments will make up 30% of the total budget.
DEVALUING THE US DOLLAR:
In times of uncertainty, investors buy ‘safe haven’ assets – like United States Treasuries – because our government is seen as the most stable place to park extra money. Normally, the more investors buy in – the less treasuries have to pay, because there’s such a high demand for stable, guaranteed returns. But this time, the opposite is happening: As stocks go up, treasury yields are going HIGHER, suggesting, investors and countries aren’t buying as many treasuries, anymore.
The head foreign exchange researcher of Duetche Bank previously said that: “The damage has been done. The market is reassessing the structural attractiveness of the dollar as the world’s global reserve currency and is undergoing a process of rapid de-dollarization”
THE GROWING NATIONAL DEBT:
If a new tax plan is passed, it’s estimated to increase the federal debt ceiling by $4 trillion dollars. The Yale Budget Lab calculated that “it would add $3.4 trillion to cumulative deficits over the next decade if tax cuts expire in 2028 and 2029 as scheduled, or $5 trillion if they are extended.” and another analysis found that – over 10 years, another $9 trillion dollars could be added to the national debt.
In terms of who owns this debt: 42% is held by private US investors, like Warren Buffett, 20% is held by government agencies, 13% is owned by the Federal Reserve, and the other 25% is held by foreign buyers, like Japan, the UK, and China (which, is a number that’s risen 5-fold over the last 50 years).
This just means – realistically, government debt is going to get a lot more difficult to sustain, interest payments are already outpacing the amount being spent on Defense and Medicare, and as debt becomes more expensive to finance, the repercussions are going to be felt practically everywhere.
As Warren Buffett previously said: “If the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Consequently, every time the risk-free rate moves by one basis point— by 0.01%—the value of every investment in the country changes.”
MY INVESTING PLAN FOR 2025:
1. Don’t hold too much cash for too long
2. DIVERSIFY investments throughout as many sectors as possible
3. Ignore the “negative news” – and keep dollar cost averaging.
4. Keep a steady income
5. Stay out of margin / leverage
6. If I NEED money in the next 3-5 years – it’s probably not a good idea to invest it.
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