The Debt Crisis Time Bomb

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America stands at a fiscal precipice, with national debt approaching 100% of GDP and projected to reach 130% by 2035 if current policies continue. This podcast features an illuminating conversation with fixed income expert Steve Gattuso, who brings his professional perspective as a portfolio manager at a $6 billion investment firm and his academic insights as a 12-year finance professor.

The discussion reveals how America's fiscal trajectory has deteriorated dramatically since 2012, when debt-to-GDP stood at a manageable 60%. Today, with annual deficits approaching $1.9 trillion and interest payments consuming 14% of federal spending, we're caught in what Gattuso describes as a "vicious cycle" of ever-increasing debt servicing costs. The conversation explores how COVID spending normalized massive deficits, with what once seemed like "ridiculous" $850 billion fiscal packages now appearing as "chump change."

Perhaps most concerning is the political leadership's apparent inability to address these challenges coherently. From tariff policies that were "rolled out badly" to contradictory messaging about Federal Reserve independence, there's a troubling lack of fiscal strategy. The hosts examine how the market currently focuses on day-to-day headlines while ignoring the looming debt crisis – at least until it becomes impossible to ignore.

For investors, the implications are profound. Traditional safe havens like Treasury bonds may no longer provide the security they once did. The podcast offers practical diversification strategies focusing on real assets like gold and real estate, along with potential currency diversification into Swiss francs and Japanese yen. As one host poignantly notes, "This should be a national security concern" – framing fiscal responsibility not just as an economic issue but as essential to America's long-term stability and global leadership.

We help you to understand how America's debt crisis might affect your investments and what steps you can take to protect your financial future in these increasingly uncertain times.

Straight Talk for All - Nonsense for None

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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.

Episode Transcript

Steve Davenport (00:02):
Hello everyone and welcome.
Today we're very fortunate ClemMiller and I, Steve Davenport
here at Skeptic's Guide towelcome Steve Gattuso, CFA, a
colleague of ours from M&T, andSteve is a co-CIO and portfolio

(00:23):
manager at $6 billion managerCurrier, and he's also been a
professor at Canisius for thelast 12, and he was a professor
before that for eight years.
So Steve's expertise and areaof interest has been US debt and
I can't think of a betterperson to have to talk about
right now what's going on in theUS debt, and I can't think of a

(00:44):
better person to have to talkabout right now what's going on
in the US economy and what'sgoing on in the US markets.
I think we're at a prettycritical juncture here, with
Trump stepping back on thetariffs.
I think everybody is realizingthat we've got a debt ceiling
issue, we've got a big,beautiful bill that is going to

(01:07):
potentially add $4 trillion toour debt, and we have these
buyers of our debt who arestarting, not unexpectedly, to
question whether the US'sdirection and efforts are really
going to be good for the globaleconomy, and we could be seeing

(01:29):
a time when people will becomemore self-reliant and trade will
become less of a solution forhow we find the best person and
the best use of resources inthis global economy.
It's really kind of a scary time, and so I've compared this to.
You know, the last two monthsare a walk in the park compared

(01:55):
to what's going to happen ifthis budget deal goes through or
doesn't go through.
It feels like, on the one hand,there will be a lot of upset
market participants who will notlike the fact the tax cut gets
extended, and there will be alot of people who don't like it

(02:17):
if it does get extended.
So I sit here and I go maybethis whole thing is going to
have some kind of a cleansingevent where we see the markets
really test lows in the 4,500 orbelow on the S&P, or it's
really not going to have theresult that everyone wants,

(02:41):
which is a stronger and aclearer direction for the US
economy.
And I'm a skeptic, I will ownmy stripes.
But I think it's important tolook at markets and if there is
an event that, being aware of it, you might do something

(03:01):
differently in terms ofextending your credit or doing
more debt at this time when inreality, it might be a good time
to kind of put some nuts in theground like the squirrel and
just leave it there, because I'mbeginning to get a little bit
more concerned than I usually am.

(03:21):
Clem, if you looked at this andsaid, hey, I just got dropped
into April 25th or April 23rd,sorry and 2025, and I can't
believe what's happening.
Or is this all part of a slyplan to get rates lower, get

(03:44):
refinanced at a lower rate andhave the economy boom along
because you feel that theinflation dragon has been slayed
?
Where are you with?
Clem, So, first of all, Ithink everything coming out of
this administration has beenvery incompetent, and I think
you can see that not just ineconomic policy but in terms of

(04:08):
what's going on with immigrationand what's going on with things
like the whole Signalgate issueand I just you know, you look,
and the focus on Greenland andPanama Canal and Canada and you
exotic weird stuff like the UStaking over Gaza.

(04:30):
I just think you look at it andit's like there's nobody in
charge, right, there's noserious person in charge.
Now, I know people talk aboutBesant being the adult in the
room.
You know Besant being, you know, the adult in the room.
Um, you know, lutnick certainlydoesn't qualify, in my opinion.
Uh, and Besant may be the theonly person around who, uh, you

(04:53):
know who who does offer that youknow sort of maturity, but you
know how long is he going to bethere?
Is he going to be shunted aside?
Uh, is, there are knives outfor him within the
administration.
So I'm very nervous about thatand I think that same level of

(05:14):
incompetence will probably applynot just to trade, and we all
know that the whole tariff issuewas kind of mismanaged, and we
all know that the whole tariffissue was kind of mismanaged,
but I think and they arestarting to back away from that
a little bit, so there's somerecognition, I think, of how
badly that was rolled out, butstill it was rolled out badly.

(05:54):
And the budget issues I thinkwe can.
It's more likely that we canexpect incompetence there than
to expect some newfoundcompetence.
So I'm I'm pessimistic aboutthat.
The only thing I would cautiousabout, you know, on the other
side of the equation, is thatyou know we might be reaching a
point where a lot of this isalready priced in.
And you know, if you see someof this, you know bouncing along

(06:18):
the bottom, or you know somemodest recovery that we're
seeing now.
The question in my mind is havewe reached a bottom?
Is this a time perhaps toincrease beta a little bit or
maybe reduce a little gold?

(06:39):
I mean, as everybody knowswho's been listening to these
calls, I have a lot of gold, Ihave a lot of cash, I have a lot
of cash and I have no bondsright now because of the debt
issue, and I've reduced beta,short interest and forward peg.
The question is, should I beeasing up a little bit on those

(07:02):
ratios?
And I haven't done it yet butI'm looking to see.
Is there?
A bottom Part of it is, andthen I'll just leave it to Steve
.
Part of it is how serious isthis whole AI issue?

(07:22):
I mean, I think we've beenseeing some issues with that.
I don't know that we can counton AI as a savior for these, you
know, in the equity markets, asa savior for what's going on
with the incompetence inWashington.
So I don't know that AI is aplace to hide out, so to speak.
I think it's more you knowthings like tobacco.
Ai is a place to hide out, soto speak.

(07:43):
I think it's more you knowthings like tobacco, for example
, or utilities, or health care.
I think those are the places tosort of hang out in on the
equity side.

Steve Gattuso (08:00):
But I don't know.
I mean, you know, Steve, youknow, what do you think about
about all of this?
Well, first, thank you both forhaving me again.
I'm glad to be back and discussthe issue, so it's always a

(08:22):
pleasure.
I should say maybe pleasure isnot the right word.
Right are kind of keeping theireye on one ball at a time, so
they really can't focus on morethan one thing at a time.
And for the past year and ahalf before inauguration it was
inflation and interest rates.
Right, that was the squirrel tothe dog, if you will.

(08:44):
So that for a year and a halfwas was what was being watched.
And then since the inauguration, it's now been changed to be
whatever is coming out of theadministration in terms of
wording.
And this week is probably thebest proof of that, where you've
got a lot of contradictorythings going on, which kind of

(09:04):
gets to the point you weremaking, clem too, is you can't
even get a coherent strategy outof it that you can depend on
and react to.
So last Thursday it was we'refinding ways that we can fire
the chairman of the FederalReserve, and then yesterday it
was oh no, we had no intentionof doing that.
So I think that goes all withit, and this is what the

(09:27):
market's hanging on right now is.
Every single word, and onceagain this week proves it.
You know, down, 3 percent, up,3 percent, up again, and it's
very difficult to manage around.
But I think this topic thatwe're talking about does not
have the market's attention yet,at least at the forefront.

(09:48):
It's a backburner item becauseit's not an immediate crisis and
it seems that you know, once itcomes into view and is viewed
as a crisis, that's when themarkets will react to that and
say, oh yeah, we forgot aboutthat problem.
The markets will react to thatand say, oh yeah, we forgot
about that problem.

(10:09):
So the eye of the markets mightbe off this ball until, as
Steve said, we get off thetariff issue and we start
turning to the tax issue, whichis one of the campaign promises,
and I have those concerns aswell that you're talking about.
As far as what does this looklike?
If it's done like tariffs, thenit's going to be really ugly

(10:29):
because there's no coherentstrategy and it's not being
approached in a reasonablefashion that is being explained
to everybody.
This is what we're trying toaccomplish, is how we're going
to get there.
So, having said all that, let meframe the problem a little bit.
The way I see it is.
You know that debt situation,if you take it as a percent to

(10:52):
GDP, which is the most most fairway to look at it, as recently
as 2012, our debt to GDP was at60 percent.
Our debt to GDP was at 60%, sovery, very manageable, nothing
too extreme.
From that point, covid happenedand COVID just kind of

(11:19):
unleashed Pandora's box in termsof we can spend money on
everything.
I remember back in 08, Ithought it was ridiculous amount
of money when the Obamaadministration proposed the $850
billion fiscal package to helpus.
Now that's chump change, that'sa drop in the proverbial bucket
relative to what's been spent.

(11:40):
And currently, as of 2024, ourdebt to GDP is at 98%.
If the Tax Cuts and Jobs Actwould sunset the way it was
supposed to here in 2025, theCBO forecast of debt to GDP in

(12:01):
2035, 10 years from now, wouldbe 118%.
And now they've, based on whatthe administration has said,
they've set a baseline that thetax cuts and job DAC is expected
to be extended permanently andif that's the case, by 2035, our

(12:24):
debt to GDPdp will be 130percent.
So you know, common rule ofthumb of of um, you know, rule
of thumb is that once you getover 100, your debt is starting
to become a little unwieldy andit has an impact in slowing your
growth.
Well, we're kind of there nowand we certainly will be there

(12:47):
in a few years, and the problemis if I channel my inner Ray
Dalio is that your debt.
You get into trouble when yourdebt growth exceeds your GDP
growth, and that's where we'vebeen since 2012,.
For the most part is that we'vegrown debt at a much greater

(13:08):
rate than GDP has grown, and youcan get into all sorts of
reasons for that.
Right, because your GDP growthis dependent on productivity and
labor force increase,especially due to immigration
just to bring it back to thattopic for a quick second has

(13:30):
been slowed and they can't comeup with a coherent policy.
So we're not getting growthfrom that and our birth rates
are.
I think last I saw wassomewhere around 1.8 per couple,
when you need 2.1 to maintainyour population.
So we're not getting any helpthere.
And it goes back to what youwere saying, to this AI thing.
Is that where we're getting allthis productivity from?
Is this what we're supposed tohang our hat on.

(13:50):
It's dubious at best.
Right, I'm sure it'll behelpful, but will it save the
day, is the question.
So there's our problem rightnow, and when you look at it,
you look at okay, right now.
And when you look at it, youlook at okay, how do we stop
this?
As of right now, this almost $36trillion in debt that we have

(14:20):
isn't the end of the world yet.
If we were able to get controlof our annual deficits, then as
our GDP grows, the $36 trillionif we kept it at that number
would be manageable, because itbecomes a smaller portion of GDP
as GDP grows.
So you've got two problems here.
How do you grow GDP fast enough?
We don't have the answer tothat, and that's beyond the

(14:41):
scope of what we're talkingtoday.
So then the other problembecomes okay.
Well then, how do you slow therate of growth of debt?
And that starts with our annualdeficits.
We are running $1.9 trilliondeficits each year, which is

(15:01):
almost almost 8-ish percent ofGDP, 7-8% of GDP.
That's what's unsustainable.
We're growing our debt at 6-7%.
Whatever you want to call it.
We're pretty much a 2% economyover a business cycle.

(15:23):
Therein lies the problem.
There's only two ways to tokind of get that annual deficit
in line, and it's either one orthe other, a combination of both
.
You increase your revenue, youdecrease your spending, or a
combination of the two.
And right now that's what theTrump administration had kind of

(15:46):
campaigned on coming in is thatthey were going to get a handle
on government spending becauseit was out of line.
You know, if you take a look atit and say what's more out of
line, is our taxes too low andthe income's not enough, or are
expenses too high relative tothat income?
You know, I guess the firstthought would be more on the

(16:07):
expense side, right, becausethat's much more in control of
administration.
And on the surface, the idea of,okay, let's get more efficient
with government, let's stopwasteful spending, let's get
that spending under control, wasa sound idea.
Let's get that spending undercontrol was a sound idea.

(16:30):
The way it's being executedright now is what's haphazard
and causing a lot ofconsternation, and I don't even
know what the impact is going tobe on it.
Yet we know that.
You know that that two trilliondollar number that was quoted
was ridiculous to start with.
Uh, total spending of thegovernment federal government in
2025 is expected to be $7trillion.

(16:51):
You're not cutting $2 trillionout of $7 trillion.
That'd be like asking ahousehold to cut a quarter or
more than a quarter, almost athird of their annual spending.
They'd look around and saywhere do I spend it?
I can't cut utilities much.
I can't cut my transportationcosts or my food costs.
A household would have troubletrying to cut spending by a

(17:15):
quarter to a third.
So there's no way the federalgovernment is going to be able
to do that in short order.
But anything is progress.
Even if you cut a half atrillion, that would be getting
into the problem a little bit,but it's not going to be enough
to offset even the tax cuts andjobs acts permanency.

(17:39):
That's expected.
So we're still diggingourselves a hole, and you know
the first rule of gettingyourself out of a hole is to
stop digging.
Well, we keep digging, and thisisn't even talking about yet
any of the other tax cuts thatwere discussed in the

(17:59):
administration.
We also had corporate tax ratesgoing from 21 to 15 for
domestic production.
We also have no tax on SocialSecurity that was proposed.
We also have no tax on tipincome that's proposed.
That's not even throwing thatin yet.
So I'll stop there for a secondand we can take this in a
different direction.

Steve Davenport (18:22):
But I just wanted to frame the problem a
bit.
Thank you, steve.
I don't know, I was already onthe edge and I think I've got
one foot over the edge now I'mstill holding on with my
fingertips, but I guess mydiscussion and we had this

(18:44):
discussion, I think, almost ayear ago, and it was at that
time I thought it was tough andthere were going to be things
that you know get rid of thefive day.
You know the Saturday deliveryat the post office go to three
days a week, do some things withincrease in Social Security age
from 67 to 70.
Maybe Medicaid doesn't tick inuntil 70.

(19:05):
I mean, if you press all thebuttons it felt like there was a
solution somewhere.
And I just have you know,looking at my individual
portfolio, that has been rockedby some of this tariff talk when
I was expecting to wait untilthe extension of the tax cuts.

(19:32):
So things happen very quicklyand very hard for the average
investor to figure out what todo.
And I don't want people to sellall and go to cash.
I don't want people to react ina panicked way because I feel
like there is, you know, manythings that you can do

(19:55):
personally to try to get yourlife a little more streamlined,
like you said, maybe not 21%reduction, but you can put
yourself in a tighter reign onyour budget than the federal
government can, because you canstop going out and getting those
double cheeseburgers.

(20:16):
I think that what I'm strugglingwith is I believe in markets, I
believe in the capital system.
I believe that when we buycompanies who are good companies
, they have the ability tounderstand better where markets
are going and how they're goingto affect them and make the

(20:37):
adjustments that are necessary.
But it feels like to me thatwe're still in a fog.
Like to me that we're still ina fog and this fog I thought was
going to get lifted as theadministration kind of marched
along in an orderly way towardssome of the changes.
But it feels like the fog isgetting thicker and I guess my

(21:01):
core belief of this podcast isthat we're here to try to
improve investors' IQ and helpthem attain better financial
wellness.
If you look at your own clientsand you look at our listeners,
what do you think they should doas a you know, top three items

(21:26):
to try to deal, you know, shouldyou send a letter to the
Secretary of Treasury?
Should we all call the WhiteHouse Like.
What do you think would have animpact in trying to get this
focus back on Like?
Do we need to have like acampaign hashtag, campaign less

(21:48):
debt.

Steve Gattuso (21:51):
That's a fantastic question, I mean again
.
The answer is simple, but noteasy, at least to start.
Like I said, my first approachtowards the solution of this is
you got to get control of yourannual deficit, again, linking
this back to a household.
How many years can you go whereyou spend more money than you

(22:15):
bring in?
And for us personally, not many.
What allows the federalgovernment to do this is that
the dollar is the world'sreserve currency, at least right
now.
Okay, so, as much as the restof the world doesn't like it, as
much as we wouldn't, wewouldn't have the fiscal resume

(22:37):
to enter the EU.
It's tolerated because of thedollar.
Now, there's a lot of peoplewho begrudge this, and I
understand why.
Uh, because they'd like to beable to spend like drunken
sailors too, and get away withit, and they can't.
But, um, this isn't somethingthat's going to change in a day,

(22:59):
but this is something that'sgetting a movement already in
terms of trying to come up witha different reserve, whether
it's a basket, whether it'sanything else.
The problem with currency isthere's no one else to depend on
at this point.
So we've got some time to fixit and get the faith back in the

(23:23):
US dollar that you know therest of the world had previously
, and that's where, again, yougot to start with getting that
fiscal house in order, and ifyou can do that, then you can
prove to the rest of the worldwe're serious about this and
we're going to get it fixed.
Problem is that, politically,when does something like that

(23:44):
get attention?
Things like this only getattention when they become a
crisis.
Even if you look at somethinglike Social Security right now,
how many years that we've beentalking about and Social
Security has been putting thequalifier on saying, if Congress
doesn't change things by 2033,you're only going to get 77% of
your Social Security?
We've known this for a decadeat least, and you know we are

(24:08):
what eight years away from that,and they still haven't even
thought about the issue yet.
I expect a solution to come in2030, three years before it
happens and that might beambitious.
So that's the problem is that,just like the markets aren't
paying attention to this, ifpeople aren't clamoring for it,
then the politicians aren'tgoing to pay attention to it

(24:29):
either.
So I think that's part of ourproblem.

Clem Miller (24:32):
Hey Steve, I got three questions for you.
First of all, to what extentcan the government selling
assets help alleviate thissituation?
Are there enough assets to dothat?
What kinds of assets?
Clearly, selling a fewbuildings doesn't do it, but is

(24:53):
there enough out there that thegovernment owns that they could
sell, privatize in order toraise money?

Steve Gattuso (25:02):
That's a good question.
I would think a lot of thatcomes to real estate, for one
thing, and you got the goldreserves as well, well, but then
you're giving away your assetsand you're you're you're kind of
affecting your future.
Then that's a one-time thing,that's a one-shot thing, and if
we haven't addressed the realproblem, then that type of

(25:23):
strategy just masks it for alittle while, right, right, and
you give up again ownership ofsomething.
So you know well, well, I couldsee you know some things that
are not core to government beingsold.
I wouldn't recommend going on awholesale spree just to fix one
year's deficit, right?

(25:43):
We're talking about $2 trillionworth of assets we would need
to sell just to fix one year.
I don't think that's practical.
And I didn't get to answer therest of Steve's question too.
Before you get your two andthree for yours, clem, what's an
investor to do?
It's funny you ask that because, recognizing this, I have been
asking people in the industryfor a few years now, including

(26:06):
as Jeff Gundlach when he washere in Buffalo a few years ago.
I said all right, how do you?
We talk about diversificationand we diversify asset classes,
we diversify our investmentstyles.
You know growth and value.
There's a lot of things we talkabout in diversifying.
The one thing no one ever talksabout is diversification of

(26:26):
currency.
And I had asked and I'm nottalking about just being
invested in another country, I'mtalking about how do you
diversify out of dollardenominated assets?
And I asked this of Gunlock,I've also asked it of JP
Morgan's asset managementresearch group and I haven't had

(26:48):
a good answer yet.
I haven't had a good answer yetOne.
The one answer I got from JPMorgan, which I understood why
they were answering it that way,you know it was kind of a quick
answer of why should you beworried about it?
Because if your income and yourexpenses are in the same
currency, it doesn't matter.
And I'm like no, it does matter, because there are assets like
oil and gold that aredenominated in dollars.

(27:09):
So you're going to see theeffect there in gold that are
denominated in dollars, soyou're going to see the effect
there.
I think what we're looking at iskind of a little bit of a kind
of a car crash in slow motion.
We're not going to get off thedollar tomorrow or next year or
even five years.
This is going to be like agenerational thing where, you
know, maybe 20 years from now,the dollar isn't the world's

(27:29):
reserve currency anymore becausewe continue down the path,
we're going down Again.
This is all fixable even atthis point right now, but we've
got to get our house in order.
$1.9 trillion is just way toomuch as a percent of GDP to have
as an annual deficit, is 27% ofthe spending and that's too

(27:55):
much for any country to do in asustainable way.
So diversification I'd look toreal assets like gold as a
commodity.
You're talking about realestate.
Real assets will kind of helpyou maintain that purchasing

(28:15):
power, I would think, from oneplace.
And obviously internationaldiversification, even in local
currency, if you can, is anotherway to to look at it.
So those are a couple of thingsthat that I would look at to
say what's an investor to doabout this.

Clem Miller (28:32):
I would look at to say what's an investor to do
about this.
So I got two more questions,steve.
First of all, what faith do wehave that the CBO's forecasts
are accurate?
Have they gone in the past andlooked at that and determined
that they've got a good trackrecord in forecasting?

Steve Gattuso (28:53):
I think that's kind of hard to do because their
forecasts depend on certainassumptions which are changing
all the time.
So they are often quoted as thesource for forecasting in terms
of a government perspective andthey're working with data they
have right now.
So as things change, theforecast change.
I haven't seen anyone do itbetter in terms of forecasting,

(29:17):
so I think it's a reliablesource for what we know today.
You know they score things outand again there's assumptions
built into there.
But as long as they'reconsistent in those assumptions,
you can at least use them as areasonable source.

Clem Miller (29:34):
I'd love to be a forecaster who doesn't get
judged on their forecast.
That's right.
Be the weatherman right.
Maybe you know my, my, you know, sort of as a follow up to that
one, do you know if they havemultiple forecasts like positive
or optimistic, pessimistic,baseline?
Do they have something likethat?

Steve Gattuso (29:56):
I do think that they have something like that.
Like, even right now they havetheir baseline with and without
the Tax Cuts and Jobs Act.
So I do think that they'll takemajor things like that and
forecast out, with certainassumptions, as scenarios.

Clem Miller (30:09):
So my third question has to do with Japan as
a model.
Now, I know it's not thegreatest model in the world,
given the history over the lastyou know I don't know, 30 years
actually but you know one thingthat they've done, more so than

(30:30):
we've done in the U S, is havedomestic holdings of uh of their
uh of their debt.
Now, obviously, most of the U Sdebt, u S government debt, is
held by U S citizens.
The same is true of Japanesecitizens, uh, but it seems like

(30:52):
they've more sort of perfectedthe art of having their citizens
hold it.
They have post office savingsthat we don't have here.
I think that institutions inJapan, like pension funds and
the like, are either required to, or encouraged to, hold more

(31:15):
Japanese government paper.
It just, I'm just wondering ifyou think that there might be,
might be scope, uh for greaterus uh, for the government to
basically force or requireparties in the US to hold more
government debt and by doing so,contain interest rates,

(31:40):
especially on the long term.

Steve Gattuso (31:43):
Yeah, and I think there's some key differences
that I believe, between Japanand the US in that regard.
I mean, one of them is just thesheer dollar, the sheer volume,
you know, in dollar volume, ifyou will, of the debt we're
talking about.
You know we're much, muchbigger for one thing.
The second, I think, is they'rea little bit more closed

(32:04):
economy than we are.
So, given that we're more of aworld economy, you know the yen
and the purchase of those bondsstays kind of inside the country
, as you're saying, whereas wehave a lot more outside.
We're more dependent, probablybecause of that volume, on
external buyers, outside of ourgovernment, outside of citizens.

(32:28):
That's another thing.
And I think the third one iswhat you were talking about,
japan as a country.
Their citizens have a muchhigher savings rate than we have
.
Our citizens don't save.
It's not that they're shunningUS treasuries, necessarily, but
it's more the fact that oursavings rate is averaged what

(32:49):
five-ish percent?
Over the long term they save,and I don't know what the
percentage is, but I know thatthey save much more.
That's more ingrained in theirculture in terms of saving
rather than spending.
So I think there's morepropensity for those citizens to
just save altogether.
So there's a lot more demandinside the country for that debt

(33:12):
than there would be here in theUS.
So I think those three thingsmight have some effect on all of
that and why Japan gets awaywith it since 1980s.

Clem Miller (33:26):
Okay, those were my three questions, steve, those
were my three questions, steve.

Steve Gattuso (33:30):
I mean.
The other thing that's playinginto it since you mentioned
interest rates too is we're inan unusual time.
At this point, most of thegrowth of the debt from that 60%

(33:52):
of GDP to roughly 100% of GDP,let's call it and again you're
talking about a growing GDP thatshows on an absolute basis the
dollar, the dollar notionalvalue of debt has gone even
quicker.
It's the fact that most of thattime, since 2012, that debt has
increased while interest rateswere at or near zero.

(34:12):
So from a federal governmentperspective, there was
essentially no opportunity costto increasing the debt because
you were paying very littleinterest on it, and we you know
the government has still keptfederal debt rather short in
terms of maturity.
So the rollover happens quickly.

(34:33):
Now that we're in a higherinterest rate environment, not
only are you feeling just thenotional value of the debt that
we've incurred, but now you'refinancing it at a much higher
rate as well.
So that's a vicious circlethat's being created, because as

(34:53):
we take on more debt and inthese high interest rate
environments you're talkingabout interest expense,
exacerbating the problem, whichis one seventh of the entire

(35:17):
federal spending for the year,so it's about 14% of the entire
spending.
As you're paying more ininterest, your annual deficit is
going to get larger and larger.
So that's where we get intothis vicious cycle, and one way
again.
One benefit of us getting ourfiscal house in order is not
only putting ourselves on theright path reducing the debt but

(35:38):
there's an interest expensecomponent to this as well, where
at some point, the world isgoing to demand higher rates on
treasuries just because theyperceive more risk.
We're not AAA anymore, right,but if you could get your house
in order, then the other benefitto that is that you should be

(36:01):
able to finance still at thelowest possible rates, given the
environment that you're in, andhopefully interest expense
itself starts to decline.

Steve Davenport (36:13):
So, steve, I like to believe that you know I
mean your calm and gentle naturemakes these ideas very
acceptable to people, but Istill, I mean I almost think
that you should be banging thetable when you talk about this,
because it feels I mean I'vealways felt that we're really

(36:36):
talking about only two-thirds ofthe problem.
Right, we're not counting theliabilities from Social Security
and Medicaid and Medicare,which add another I don't know
$14, $15 trillion to this andreally make it more like we're
already at $160 if you includethose.

(36:58):
So when you look at the reservecurrency status, I mean I know
that we talked about these otherthings like real assets.
I mean, is the trade to goldentirely, mostly or just
partially related to loss andconfidence in treasuries in the

(37:19):
dollar?
I mean I feel like everyone Italk to about gold and besides
Clem, because I know Clemunderstands the impact is
talking about gold like, well,we know that the spending in
these things are going to justget worse.
So therefore I'm creating thishedge.

(37:39):
I mean, is there a benefit tosomebody saying why don't we
take all like the kitchen sinkapproach If this were a company
and you wanted to reinvent thecompany, which I think is what
you're trying to say.
We really want to do reinventing.
The company has to puteverything on the table and we

(38:01):
have to not say Medicare is offthe table, social Security is
off the table.
It feels like we're living in aworld where we don't even have
all the problems outlined.
So therefore, we can neverapproach all the solutions if we
don't look at all the problemsRight and, and so I look at the
two items that we're talkingabout right now, which is

(38:24):
tariffs, taking in Some maybe atrillion in income for the US,
and I look at that as a falseargument.
It's not really going to happen.
When I look at the differenceright now in the economy between
exports and imports, we export11%, we import 14% there's a 3%

(38:51):
difference that we're beingcheated on by the rest of the
world.
At 3%, if we solved 100% of ourtariff problem, we would make
up a trillion dollars.

Steve Gattuso (39:06):
It's not even that much.

Steve Davenport (39:08):
I know it's not , but I'm just trying to mention
.
If we will go through this muchtrouble for 3%, what if we had
to tell everybody in the worldhey, the US is no longer taking
a half full kind of look here.
We're going to put all of ourdebt on the table and we're

(39:31):
going to try to manage our wayout of the big solution, out of
the big solution, which isreally the right place to start,
because the half-hearted, I'llsay, versus a profanity approach
isn't going to solve it.
Don't we need to shake it upand get a little more angry?

Steve Gattuso (39:51):
Or is anger?

Steve Davenport (39:52):
not appropriate .

Steve Gattuso (39:53):
Yep, no, and I talk to everyone I can about
this.
But, once again, until itbecomes a problem in the public
eye, you're not going to seeanyone do anything about it.
And I understand, like all theprotests you can't cut this, you
can't cut that.
But on the other hand, anyonewho, if I'm a politician, anyone

(40:14):
who's telling me, well, you,you, you can't cut that funding,
you can't cut this funding, youcan't get rid of that
department, I would turn aroundand say, ok, well, we've got a
one point nine trillion dollarproblem.
How do you propose we solve it?
And I know a lot of it comes towell, increased tax.
Ok, that might be part of theproblem, part of it too.
But there's some morefundamental issues that go on

(40:37):
here.
I think there are some basiceconomic concepts that not
everyone in currentadministration grasps as much as
you would hope they would.
One of them is the tariffs andthe impact.
If the tariffs are used as anegotiating tool to get trade
level, okay, fine.
But once you start talkingabout tariffs as a revenue

(40:57):
enhancer for the federalgovernment, now I start to get
trade level, ok, fine.
But if, once you start talkingabout tariffs as a revenue
enhancer for the federalgovernment.
Now I start to get skepticalbecause right now, tariffs bring
in 80 billion dollars out ofalmost five trillion of federal
income each year.
You can triple that and it'sstill going to be a drop in the
bucket.
So the tariffs aren't a revenueenhancer, they're 1% of,

(41:18):
basically, federal income.
Where that federal income comesis really just from you and I
as citizens.
Payroll taxes are about 25% offederal income, while income tax
is 37%.
So if you're gonna talk aboutfixing the problem with revenue,

(41:39):
then they're gonna have to be asignificant tax increase, which
of course there's an offsettingeffect to this, because an
increase in taxes slows down GDP, which means tax receipts fall.
So there's a tug of war.
You don't get the full effectof that.
And then the other piece of itis again the expenditure side.

(42:01):
Right, if we're going to lookat both sides equally and you're
right, 47 percent of federalspending is just on Social
Security, medicare and Medicaidyou really don't make any

(42:24):
significant inroads into cuttingyour expenditures unless you
take a look at that as well, andI know that that's not popular
right now, you know, obviously.
But you know you're going tohave to do something.
When I say extreme, you have todo something with a big splash,
like you're saying, steve,because even the net interest
Right If I look at SocialSecurity, Medicare and Medicaid
Social Security is about onepoint six trillion.
Medicaid care is one point onetrillion.

(42:46):
Medicaid is another six hundredand fifty billion.
So you know you're adding allthat up and then you add net
interest, which can't becontrolled, as another trillion
interest which can't becontrolled as another trillion.
You don't have that much left towork with on the expenditure
side.
That's going to make asignificant inroad to that 1.9
trillion.
Now you can get more extreme,but the rest of the world's not

(43:08):
going to like it.
How else do you, um, you knowlower your debt, um, uh, burden?
You can inflate your way out ofit, but you know that's also a
tax on citizens, so you're justtaxing them a different way.
Or you can devalue yourcurrency, and you know that's

(43:30):
not something I think thatofficials would do deliberately.
But you know the market'sstarting to do it for them at
this point because you're seeingthe dollar, after reaching
recent highs, start to fallprecipitously a little bit.

Steve Davenport (43:45):
So if I was to, just I get back to this bill,
the big beautiful bill, b-cubed.
If B-cubed were to happen, itfeels to me like the debt
vigilantes or the bondvigilantes will have a problem

(44:08):
with this happening.
And so I still don't understandhow you're a bond person now
and you're saying this is in theassumptions for CBOE and we're
going to take that into theassumptions, and is the bond

(44:28):
vigilante reaction to tariffs oris it a precursor to this big
beautiful bill?

Steve Gattuso (44:36):
I think if anyone's paying attention to the
situation right now, it is thebond market.
So they're the ones that arekind of the canary in the coal
mine looking at this, saying wedon't really like the direction
this is going.
The other thing you have goingalong with that too, is that
some of your buyers and youalready talked about Japan, but
some of your buyers will haveother options.

(44:57):
So as Europe, especiallyGermany, starts to get into
deficit spending, there's goingto be a pool of German boons
which are pretty much as almostsafe as the US.
That especially Europeangovernment or European citizens
say I'm going to go buy thatinstead and kind of reduce my

(45:20):
risk a little bit.
So I think that's one of thethings that we don't have
control over.
As there's more optionsavailable, then people are going
to start voting with theirwallet and start to move into
these other bonds, which aregoing to create, possibly, that
technical problem where you'regoing to have auctions that are
going to be kind of rough.

Steve Davenport (45:40):
Right.
I mean one idea I had, which,again, I don't think there's the
political will for, but I liketo think of if an idea is good
enough, maybe it will eventuallystart to get into the discourse
, which will eventually lead tosome positive consideration is
maybe this tax extension doesn'thappen, but all of the new

(46:03):
taxes that come in from thehigher rates get applied to our
debt and so the spending doesn'tincrease with that new revenue,
but that new revenue goes.
Is there a way for us to budgetin that way?
No laughing Clem.

Clem Miller (46:21):
This is serious stuff.
I was just thinking about AlGore's lockbox.

Steve Davenport (46:25):
Okay, well, I didn't use the word lockbox, so
I don't like the Al Gorereference.
But I'm just saying is itpossible for us to create a
system where we become moreresilient by taking a bad event,
which I think the market willreact pretty badly if we don't

(46:46):
extend this tax cut?
I think all three of us, I meanI'd like to get an idea what
happens if it doesn't getextended.
Will you think the market willreact 10 down, 20 down or 30
down?

Steve Gattuso (47:00):
Well, I think there's a qualifier that goes
with that.
If the Tax Cuts and Jobs Actdoes not get extended and it's
just to spend more money, themarkets would have a more severe
reaction to that, have a moresevere reaction to that.

(47:21):
However, like you were saying,if it was explained in the way
that the Tax Cuts and Jobs Actis not extended but we are
focusing on reducing our debt,then I think it's a little bit
more palatable, because you'retrading a short-term stress to
fix a long-term stress.
So I think that one would be alittle bit more muted in terms

(47:42):
of a market response.
You know to say that, hey,we're going to reduce the.
You know we're going to try andbalance our budget as much as
possible, or we're going to, youknow, get down to a 3% annual
deficit.
That's manageable.
Then I think the marketperceives it, or takes that, a
little bit better, because thenyou're fixing a problem.

Steve Davenport (48:06):
So you're telling me, there's a chance.

Steve Gattuso (48:09):
There's a chance, but that's from a fiscal
perspective where the chanceevaporates, I think, rather
quickly.
Is it politically possible?
That's the part I don't know,because you know Trump ran on
this.
I'm going to extend the taxcuts, I'm going to increase them
right, and in order to do that,he'd have to have a severe

(48:32):
reversal of his policy stance.

Steve Davenport (48:36):
Okay, and one question I've had since we
started this whole question,this pursuit, is the idea of
alternatives.
I mean, if we were to list sometype of list of alternatives to
treasuries, what's at the top?
What are the top threealternatives to treasuries in

(48:58):
terms of somebody looking for arisk-less asset and I just mean
less risk, I don't mean that anyof them are going to be
riskless, but a less risky asset.
What would your three be?
Klum?

Clem Miller (49:17):
Where would your three be?

Steve Davenport (49:19):
Klum, well, I would say, you know obviously
cash itself gold, and after thatit would be, you know, let's
talk currencies, because that'swhat we're really saying is the
dollar.
The dollar, as a savior, is areserve currency, so what other

(49:40):
reserve currencies would youreplace it with?
I mean, would you go German,would you go Japanese?
Would you go?
You know, is there.

Clem Miller (49:51):
So I mean, clearly, if you consider gold to have
the aspects of a currency, Ithink gold would be number one,
after that it would be Swissfrancs, and then, traditionally,
the Japanese yen has held uppretty well during crises, so

(50:11):
like, for example, when theEurozone had its issues, and so
like, for example, when theeurozone had its issues, there
was and during the US debtceiling issue, you had
appreciation of the Japanese yen.
So I think the Japanese yen isa good place to be in In
addition to the Swiss franc.
The euro, historically, hasunderperformed the dollar and

(50:37):
the Japanese yen, so I would putthe euro in.

Steve Davenport (50:42):
Ahead of the pound or behind the pound?
Behind what?

Clem Miller (50:47):
The pound Sterling.
Oh, the pound, that's a weakcurrency.
That's about as weak as the, ifnot weaker than, the, euro.
So I would, you know, the Swissfranc and the Japanese yen go
before the pound and also thepound.
Keep in mind that the pound isbasically a commodity currency,

(51:10):
so it really depends on what'sgoing on with oil prices and
mineral prices.
So it sort of falls in thatsame category as Australia and
Canada and I think when it comesto those, really it depends on
what's going on with commodityprices.

(51:30):
If you think commodity pricesare going to go up, sure, and
that depends on having a rosierview of the global economy.
And I don't I mean clearly, inmy top list you will not find
Chinese currency or really anyemerging market currencies.

(51:51):
They will do well at times, butthen they have their sudden
large, disruptive devaluations.
And as much as some peoplemight say, well, that age is
over, I don't think it's over.
I think we're going to seecontinued periods where emerging
market currencies will havelarge devaluations and what's

(52:14):
more is they'll have largedevaluations in parallel.
So you might have Brazil andArgentina having devaluations,
you know, at the same time.

Steve Davenport (52:26):
Okay, I guess we're getting near the end
time-wise.
So, Steve, why don't I leavewith you the the closing
argument?
Why don't I leave with you theclosing argument If we could
have the magic wand and do twoor three things as investors?

Steve Gattuso (52:55):
what should we do to try to help manage the
crisis that is coming down thepike here?
As individual investors, youprobably have more options than
what we're just talking about ona global scale, and I agree
with Clem on a lot of thoseoptions.
I mean, we get part of it.
We get back to real assets, asyou were talking about.
Whether it be commodities orreal estate, I'm looking for

(53:15):
scarcity, right.
What's scarce that will havevalue in the future.
So that's where I put the realassets in that bucket.
And I agree with you on theSwiss franc.
Unfortunately, it's too small todo anything at scale.
An individual investor has asan option, but not countries, of
course, and no one has faithyet in the renminbi, of course.

(53:39):
So forget that.
That's the second largesteconomy gone, and then it almost
kind of leaves you at that euroif you're going to talk a
currency perspective and thateuro when you're talking about
the whole European Union, it'salmost got as much economic
clout as the US, but the problemis it's made up of a bunch of

(54:01):
countries, not states, and youknow, we all know they have
differing rates of growth anddiffering policies and there's
still a question as to whetherthe European Union as an
economic entity continues intothe future, so you got some
issues there too.
So probably, looking at thisfrom an investor standpoint,

(54:25):
your options are a little bitlimited.
Diversification is going to helpyou for one thing, even the
gold, as much as I understand it, and it's been a historical
hedge and I wouldn't doubt that,and to me it's part of that
real assets bucket, of course.
But, as you know, charteredfinancial analysts, hard for us

(54:45):
to value gold, because itdoesn't throw off any cash flows
, as we know, and it's worthonly what someone will pay for
it.
I don't think cryptocurrenciesare obviously an answer at all,
because what they share withgold is that they don't have all
the characteristics of currencywhere I can use them to go buy

(55:07):
something, among some otherthings, with it.
But at least gold is tangibleand has some physical use.
It's rather tough for aninvestor.
I would say diversification,and you know, even when we talk
about cash, unless it's cash Ikeep in my pocket, you're still
reliant on the financial systemsomehow.

(55:28):
You know, even if I'm holdingmoney markets right, that that's
we call that cash, buttechnically they're financial
instruments as well.
So for an investor, I thinkright now, diversification.
Voting with your feet a littlebit and you're rolling with your
wallet to see how things shakeout is one of the things you
have to watch for.

Steve Davenport (55:48):
Thanks, I appreciate that, clem.
Do you have any comments inclosing?

Clem Miller (55:55):
No, no comments.
In closing, I think this was afantastic discussion and you
know we're really appreciativeof your joining us, steve, and
look forward to, you know,future discussions with you as
well.

Steve Gattuso (56:11):
Thank you, I enjoyed it as well.
Hopefully we've given somepeople things to think about
here and what to watch forreally.
And what we're watching for isfor the US government to have
the political will to get theHouse in order.

Steve Davenport (56:26):
Yeah, thanks to you, I mean, I think.
I think it's like everyindividual we say to individuals
you're responsible and you havethe most reason to be concerned
and view your investments ascritically as you can because
they impact you and your future.
I think this impacts us and ourfuture of our state of the

(56:47):
United States, and I amconcerned.

Steve Gattuso (56:52):
Just add one quick thing to that.
You said, well, I'm notpounding the table.
Just add one quick thing tothat.
You said, well, I'm notpounding the table.
You know, if you ask me, thisshould be a national security
concern and that's not how it'slooked at.
But that's what I hope theystart to get the view of.

Steve Davenport (57:08):
I agree with you.
I think that I think that we'rewhere we have an opportunity,
where we're still the leader andwe need to behave like a leader
.
I think that you know, greatchampions aren't created
overnight.
They're built over time andperforming well over time and
tough circumstances.
I would love to see us, youknow, I think that the

(57:32):
millionaires that I work with,when I ask them about the idea
of if higher taxes went to payoff the debt, would they be more
comfortable with that, they allresoundingly say yes, because I
think of local municipalitieswhen they put up cell towers

(57:56):
Some of the ones I lived in inGeorgia.
Any cell tower affects theenvironment and affects the look
of the landscape, so they haveto take whatever resources they
get from that contract and leaseand apply it to public parks.
I think the same here.
If we're going to apply highertaxes to people, let's put it
towards something that reallycould make a difference, which
is the debt of each of ourchildren and grandchildren.

(58:16):
Because, at this point.
That's really what we're tryingto do here and as a country.
We've looked at this for a longtime and we've talked about
giving our children a betterworld, and I think it's time to
take some action.
So I would love to put this inbold letters on the podcast

(58:37):
title and say act now or forever.
Hold your peace, because ifyou're not willing to do
something now and you're notwilling to solve the problem,
then by you know.
Simply, omission is as much sinas commission, is as much sin
as commission, and notaddressing the problem you are

(58:58):
the problem.

Steve Gattuso (59:05):
And one more thought that maybe it could be a
pickup of this topic next timeis what will this do should we
get into a recession and thefact that fiscal policy will not
be able to help or it'llexacerbate the problem we have
right now, because we spent allthis money already on, you know,
things that didn't make adifference for the most part,

(59:26):
and when we really need it, whenwe get into a recession, it
might not be there as a tool.

Steve Davenport (59:32):
Yeah, I think the Fed has acted irresponsibly
in terms of being the centralbank for all of America.
I mean, I think that when welook at this central bank and we
say markets are down, I was, Ithink we were very close two
weeks ago to the Fed actingbecause they were afraid, and
they're acting to protect that40 to 5 to 50% of the economy

(59:56):
that owns stocks, but that 50%the silent majority, as some
writers have put it that groupisn't being addressed and
they're the ones who are mosthurt by the inflation that the
low rates create.
So I think the Fed is in a veryhard place.
I think that the market willreact and my worry is that we go

(01:00:19):
towards the same old solution,which is with lower rates, and I
think that leads to a longerterm problem that all of us need
to look at each other and saycan we take inflation for a
little while longer and keeprates higher and then stamp it
out before we try to addressthis?

(01:00:40):
Can we address this new budgetwith a little bit I mean any
amount of our funds that couldbe devoted?
I mean, I think there'd be alot of people who would gladly
pay 5% or so in taxes if theyknew it was going towards a good
cause, and that's the way Ithink we should frame it.

(01:01:02):
Instead of a promise of no newtaxes is no new taxes that fund
spending.
New taxes that fund debt,reduce reductions.
Those are worth talking about,so let's start the movement now.
Hashtag reduce debt.

Steve Gattuso (01:01:20):
Sounds good.
Good to talk to you, gentlemen,as always.

Steve Davenport (01:01:23):
Thank you.