If you buy a house and find out that the foundation needs massive work, or that the roof needs to be replaced, work that is more than a do-it-yourself job, the cost is on you. There is no point in complaining about the seller. It is your problem, and you had better find a way to get the repairs done.
Or you can go on with your life and be in denial, pushing the repairs to the future.
The US economy is like a house with foundation problems. On May 19th Moody’s downgraded US debt from Aa1 to Aaa, a simple “buyer beware” message. Borrowing is a significant portion of the US economic foundation, and the Moody’s downgrade may cause problems.
Secretary Scott Bessent didn’t see it that way, saying it was the fault of the previous administration. It was a very cavalier attitude.
But the financial markets didn’t agree with him. US bond yields went up, prices went down; the 30 year long-bond, the bond used to set mortgage rates, went above 5%, the highest level since 2023. Some investors bought the dip, as many are conditioned to do, so interest rates declined from their peak on Monday May 19th.
It is a mistake to be complacent about the Moody’s downgrade. It doesn’t matter if it was a problem before the Trump administration moved in. It is their problem now. They own it and have to deal with it.
The surprising thing is that after the Moody’s announcement the administration didn’t put forth any changes to their plans. They are still trying to ram through tax cuts, cut government spending, and are holding the line on tariffs. Post the Moody’s announcement there was no alteration to their plans, strange.
If nothing is done, there could be serous problems regarding US fiscal health, the US dollar, and US economic growth.
Higher interest rates increase the US budget cost of servicing debt. One dynamic that can drive US budgeted debt costs higher is foreign investors selling US government bonds. Around the time Moody’s announced its decision, the US Treasury reported that China, the second largest holder of US debt, reduced its holdings in March. If they reduced their exposure in March pre-Moody’s downgrade, what will they do now post downgrade?
Probably sell more.
The US dollar is a concern, too. Rising yields and interest rates normally boost a currency’s value. But on the day that Moody’s announced the downgrade, rates went up, and the US dollar went down.
What explains the declining dollar in a time of higher interest rates? Well, one explanation is a loss of confidence from certain segments of the market, like foreign investors. In many ways, a currency is an expression of confidence, and right now it is hard to argue there is any confidence in the US or the US dollar.
The final concern is how will higher interest rates impact an already questionable economic growth outlook? No one knows the impact of tariffs, and higher interest rates will mean higher costs for credit cards and mortgages, both dynamics that can slow consumption and economic growth. For economic growth, it doesn’t look good.
Fiscal concerns, waning confidence in the US dollar, and economic growth held back by higher rates speak against too much US dollar investment exposure. In short, the US dollar is a risk!
Selling US dollar stable bonds, or fiat for that matter, could be a good idea. Mexican peso stable bonds and Euro are looking good versus the US dollar.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
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