The Debt Crisis Time Bomb

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.

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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.

Chapters

• 0:51 Welcome and Introduction
• 2:31 Current Economic Challenges
• 5:22 Political Incompetence and Market Reactions
• 10:10 Understanding the Debt Problem
• 22:47 Reducing Annual Deficits
• 32:07 Tax Extensions and Budget Concerns
• 39:22 Government Asset Sales and Solutions
• 50:13 Currency Alternatives and Diversification
• 56:58 Closing Thoughts and National Security

Transcript

Steve Davenport: 0:26

Hello everyone and welcome. Today we're very fortunate Clem Miller and I, Steve Davenport here at Skeptic's Guide to welcome Steve Gattuso, CFA, a colleague of ours from M&T, and Steve is a co-CIO and portfolio manager at $6 billion manager Currier, and he's also been a professor at Canisius for the last 12, and he was a professor before that for eight years. So Steve's expertise and area of interest has been US debt and I can't think of a better person to have to talk about right now what's going on in the US debt, and I can't think of a better person to have to talk about right now what's going on in the US economy and what's going on in the US markets. I think we're at a pretty critical juncture here, with Trump stepping back on the tariffs. I think everybody is realizing that we've got a debt ceiling issue, we've got a big, beautiful bill that is going to potentially add $4 trillion to our debt, and we have these buyers of our debt who are starting, not unexpectedly, to question whether the US's direction and efforts are really going to be good for the global economy, and we could be seeing a time when people will become more self-reliant and trade will become less of a solution for how we find the best person and the best use of resources in this global economy.

Steve Davenport: 2:07

It's really kind of a scary time, and so I've compared this to. You know, the last two months are a walk in the park compared to what's going to happen if this 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 not like the fact the tax cut gets extended, and there will be a lot of people who don't like it if it does get extended. So I sit here and I go maybe this whole thing is going to have some kind of a cleansing event where we see the markets really test lows in the 4,500 or below on the S&P, or it's really not going to have the result that everyone wants, which is a stronger and a clearer direction for the US economy. And I'm a skeptic, I will own my stripes.

Steve Davenport: 3:16

But I think it's important to look at markets and if there is an event that, being aware of it, you might do something differently in terms of extending your credit or doing more debt at this time when in reality, it might be a good time to kind of put some nuts in the ground like the squirrel and just leave it there, because I'm beginning to get a little bit more concerned than I usually am. Clem, if you looked at this and said, 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 sly plan to get rates lower, get refinanced at a lower rate and have the economy boom along because you feel that the inflation dragon has been slayed? Where are you with?

Clem Miller: 4:19

Clem, So, first of all, I think everything coming out of this administration has been very incompetent, and I think you can see that not just in economic policy but in terms of what's going on with immigration and what's going on with things like the whole Signalgate issue and I just you know, you look, and the focus on Greenland and Panama Canal and Canada and you exotic weird stuff like the US taking over Gaza. I just think you look at it and it's like there's nobody in charge, right, there's no serious person in charge. Now, I know people talk about Besant being the adult in the room. You know Besant being, you know, the adult in the room. Um, you know, lutnick certainly doesn't qualify, in my opinion. Uh, and Besant may be the the only person around who, uh, you know who who does offer that you know sort of maturity, but you know how long is he going to be there? Is he going to be shunted aside? Uh, is, there are knives out for him within the administration. So I'm very nervous about that and I think that same level of incompetence will probably apply not just to trade, and we all know that the whole tariff issue was kind of mismanaged, and we all know that the whole tariff issue was kind of mismanaged, but I think and they are starting to back away from that a little bit, so there's some recognition, I think, of how badly that was rolled out, but still it was rolled out badly. And the budget issues I think we can. It's more likely that we can expect incompetence there than to expect some newfound competence. So I'm I'm pessimistic about that.

Clem Miller: 6:24

The only thing I would cautious about, you know, on the other side of the equation, is that you know we might be reaching a point where a lot of this is already priced in. And you know, if you see some of this, you know bouncing along the bottom, or you know some modest recovery that we're seeing now. The question in my mind is have we reached a bottom? Is this a time perhaps to increase beta a little bit or maybe reduce a little gold? I mean, as everybody knows who's been listening to these calls, I have a lot of gold, I have a lot of cash, I have a lot of cash and I have no bonds right now because of the debt issue, and I've reduced beta, short interest and forward peg. The question is, should I be easing up a little bit on those ratios? And I haven't done it yet but I'm looking to see. Is there? A bottom Part of it is, and then I'll just leave it to Steve.

Clem Miller: 7:41

Part of it is how serious is this whole AI issue? I mean, I think we've been seeing some issues with that. I don't know that we can count on AI as a savior for these, you know, in the equity markets, as a savior for what's going on with the incompetence in Washington. So I don't know that AI is a place to hide out, so to speak. I think it's more you know things like tobacco. Ai is a place to hide out, so to speak. I think it's more you know things like tobacco, for example, or utilities, or health care. I think those are the places to sort of hang out in on the equity side.

Steve Gattuso: 8:24

But I don't know. I mean, you know, Steve, you know, what do you think about about all of this? Well, first, thank you both for having me again. I'm glad to be back and discuss the issue, so it's always a pleasure. I should say maybe pleasure is not the right word.

Steve Gattuso: 8:48

Right are kind of keeping their eye on one ball at a time, so they really can't focus on more than one thing at a time. And for the past year and a half before inauguration it was inflation and interest rates. Right, that was the squirrel to the dog, if you will. So that for a year and a half was was what was being watched. And then since the inauguration, it's now been changed to be whatever is coming out of the administration in terms of wording. And this week is probably the best proof of that, where you've got a lot of contradictory things going on, which kind of gets to the point you were making, clem too, is you can't even get a coherent strategy out of it that you can depend on and react to. So last Thursday it was we're finding ways that we can fire the chairman of the Federal Reserve, and then yesterday it was oh no, we had no intention of doing that. So I think that goes all with it, and this is what the market's hanging on right now is. Every single word, and once again 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 that we're talking about does not have the market's attention yet, at least at the forefront. It's a backburner item because it's not an immediate crisis and it seems that you know, once it comes into view and is viewed as a crisis, that's when the markets will react to that and say, oh yeah, we forgot about that problem. The markets will react to that and say, oh yeah, we forgot about that problem. So the eye of the markets might be off this ball until, as Steve said, we get off the tariff issue and we start turning to the tax issue, which is one of the campaign promises, and I have those concerns as well that you're talking about. As far as what does this look like? If it's done like tariffs, then it's going to be really ugly because there's no coherent strategy and it's not being approached in a reasonable fashion that is being explained to everybody. This is what we're trying to accomplish, is how we're going to get there.

Steve Gattuso: 11:06

So, having said all that, let me frame the problem a little bit. The way I see it is. You know that debt situation, if you take it as a percent to GDP, which is the most most fair way to look at it, as recently as 2012, our debt to GDP was at 60 percent. Our debt to GDP was at 60%, so very, very manageable, nothing too extreme. From that point, covid happened and COVID just kind of unleashed Pandora's box in terms of we can spend money on everything. I remember back in 08, I thought it was ridiculous amount of money when the Obama administration proposed the $850 billion fiscal package to help us. Now that's chump change, that's a drop in the proverbial bucket relative to what's been spent. And currently, as of 2024, our debt to GDP is at 98%.

Steve Gattuso: 12:14

If the Tax Cuts and Jobs Act would sunset the way it was supposed to here in 2025, the CBO forecast of debt to GDP in 2035, 10 years from now, would be 118%. And now they've, based on what the administration has said, they've set a baseline that the tax cuts and job DAC is expected to be extended permanently and if that's the case, by 2035, our debt to GDPdp will be 130 percent. So you know, common rule of thumb of of um, you know, rule of thumb is that once you get over 100, your debt is starting to become a little unwieldy and it has an impact in slowing your growth. Well, we're kind of there now and we certainly will be there in a few years, and the problem is if I channel my inner Ray Dalio is that your debt. You get into trouble when your debt growth exceeds your GDP growth, and that's where we've been since 2012,. For the most part is that we've grown debt at a much greater rate than GDP has grown, and you can get into all sorts of reasons for that. Right, because your GDP growth is dependent on productivity and labor force increase, especially due to immigration just to bring it back to that topic for a quick second has been slowed and they can't come up with a coherent policy. So we're not getting growth from that and our birth rates are. I think last I saw was somewhere around 1.8 per couple, when you need 2.1 to maintain your population. So we're not getting any help there.

Steve Gattuso: 14:07

And it goes back to what you were saying, to this AI thing. Is that where we're getting all this productivity from? Is this what we're supposed to hang our hat on. It's dubious at best. Right, I'm sure it'll be helpful, but will it save the day, is the question. So there's our problem right now, and when you look at it, you look at okay, right now. And when you look at it, you look at okay, how do we stop this?

Steve Gattuso: 14:32

As of right now, this almost $36 trillion in debt that we have isn't the end of the world yet. If we were able to get control of our annual deficits, then as our GDP grows, the $36 trillion if we kept it at that number would be manageable, because it becomes 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 to that, and that's beyond the scope of what we're talking today. So then the other problem becomes okay. Well then, how do you slow the rate of growth of debt? And that starts with our annual deficits. We are running $1.9 trillion deficits each year, which is almost almost 8-ish percent of GDP, 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% economy over a business cycle.

Steve Gattuso: 15:47

Therein lies the problem. There's only two ways to to kind of get that annual deficit in line, and it's either one or the other, a combination of both. You increase your revenue, you decrease your spending, or a combination of the two. And right now that's what the Trump administration had kind of campaigned on coming in is that they were going to get a handle on government spending because it was out of line. You know, if you take a look at it and say what's more out of line, is our taxes too low and the income's not enough, or are expenses too high relative to that income? You know, I guess the first thought would be more on the expense side, right, because that's much more in control of administration.

Steve Gattuso: 16:37

And on the surface, the idea of, okay, let's get more efficient with government, let's stop wasteful spending, let's get that spending under control, was a sound idea. Let's get that spending under control was a sound idea. The way it's being executed right now is what's haphazard and causing a lot of consternation, and I don't even know what the impact is going to be on it. Yet we know that. You know that that two trillion dollar number that was quoted was ridiculous to start with.

Steve Gattuso: 17:08

Uh, total spending of the government federal government in 2025 is expected to be $7 trillion. You're not cutting $2 trillion out of $7 trillion. That'd be like asking a household to cut a quarter or more than a quarter, almost a third of their annual spending. They'd look around and say where do I spend it? I can't cut utilities much. I can't cut my transportation costs or my food costs. A household would have trouble trying to cut spending by a quarter to a third. So there's no way the federal government is going to be able to do that in short order.

Steve Gattuso: 17:46

But anything is progress. Even if you cut a half a trillion, that would be getting into the problem a little bit, but it's not going to be enough to offset even the tax cuts and jobs acts permanency. That's expected. So we're still digging ourselves a hole, and you know the first rule of getting yourself out of a hole is to stop digging. Well, we keep digging, and this isn't even talking about yet any of the other tax cuts that were discussed in the administration. We also had corporate tax rates going from 21 to 15 for domestic production. We also have no tax on Social Security that was proposed. We also have no tax on tip income that's proposed. That's not even throwing that in yet. So I'll stop there for a second and we can take this in a different direction.

Steve Davenport: 18:47

But I just wanted to frame the problem a bit. Thank you, steve. I don't know, I was already on the edge and I think I've got one foot over the edge now I'm still holding on with my fingertips, but I guess my discussion and we had this discussion, I think, almost a year ago, and it was at that time I thought it was tough and there were going to be things that you know get rid of the five day. You know the Saturday delivery at the post office go to three days a week, do some things with increase in Social Security age from 67 to 70. Maybe Medicaid doesn't tick in until 70. I mean, if you press all the buttons it felt like there was a solution somewhere.

Steve Davenport: 19:37

And I just have you know, looking at my individual portfolio, that has been rocked by some of this tariff talk when I was expecting to wait until the extension of the tax cuts. So things happen very quickly and very hard for the average investor to figure out what to do. And I don't want people to sell all and go to cash. I don't want people to react in a panicked way because I feel like there is, you know, many things that you can do personally to try to get your life a little more streamlined, like you said, maybe not 21% reduction, but you can put yourself in a tighter reign on your budget than the federal government can, because you can stop going out and getting those double cheeseburgers.

Steve Davenport: 20:40

I think that what I'm struggling with is I believe in markets, I believe in the capital system. I believe that when we buy companies who are good companies, they have the ability to understand better where markets are going and how they're going to affect them and make the adjustments that are necessary. But it feels like to me that we're still in a fog. Like to me that we're still in a fog and this fog I thought was going to get lifted as the administration kind of marched along in an orderly way towards some of the changes. But it feels like the fog is getting thicker and I guess my core belief of this podcast is that we're here to try to improve investors' IQ and help them attain better financial wellness.

Steve Davenport: 21:39

If you look at your own clients and you look at our listeners, what do you think they should do as a you know, top three items to try to deal, you know, should you send a letter to the Secretary of Treasury? Should we all call the White House Like. What do you think would have an impact in trying to get this focus back on Like? Do we need to have like a campaign hashtag, campaign less debt.

Steve Gattuso: 22:15

That's a fantastic question, I mean again. The answer is simple, but not easy, at least to start. Like I said, my first approach towards the solution of this is you got to get control of your annual deficit, again, linking this back to a household. How many years can you go where you spend more money than you bring in? And for us personally, not many.

Steve Gattuso: 22:44

What allows the federal government to do this is that the dollar is the world's reserve currency, at least right now. Okay, so, as much as the rest of the world doesn't like it, as much as we wouldn't, we wouldn't have the fiscal resume to enter the EU. It's tolerated because of the dollar. Now, there's a lot of people who begrudge this, and I understand why. Uh, because they'd like to be able to spend like drunken sailors too, and get away with it, and they can't. But, um, this isn't something that's going to change in a day, but this is something that's getting a movement already in terms of trying to come up with a different reserve, whether it's a basket, whether it's anything else. The problem with currency is there's no one else to depend on at this point. So we've got some time to fix it and get the faith back in the US dollar that you know the rest of the world had previously, and that's where, again, you got to start with getting that fiscal house in order, and if you can do that, then you can prove to the rest of the world we're serious about this and we're going to get it fixed.

Steve Gattuso: 24:04

Problem is that, politically, when does something like that get attention? Things like this only get attention when they become a crisis. Even if you look at something like Social Security right now, how many years that we've been talking about and Social Security has been putting the qualifier 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 decade at least, and you know we are what eight years away from that, and they still haven't even thought about the issue yet. I expect a solution to come in 2030, three years before it happens and that might be ambitious. So that's the problem is that, just like the markets aren't paying attention to this, if people aren't clamoring for it, then the politicians aren't going to pay attention to it either. So I think that's part of our problem.

Clem Miller: 24:56

Hey Steve, I got three questions for you. First of all, to what extent can the government selling assets help alleviate this situation? Are there enough assets to do that? What kinds of assets? Clearly, selling a few buildings doesn't do it, but is there enough out there that the government owns that they could sell, privatize in order to raise money?

Steve Gattuso: 25:26

That's a good question. I would think a lot of that comes to real estate, for one thing, and you got the gold reserves as well, well, but then you're giving away your assets and 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 real problem, then that type of strategy just masks it for a little while, right, right, and you give up again ownership of something. So you know well, well, I could see you know some things that are not core to government being sold. I wouldn't recommend going on a wholesale spree just to fix one year's deficit, right? We're talking about $2 trillion worth 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 the rest of Steve's question too. Before you get your two and three 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 industry for a few years now, including as Jeff Gundlach when he was here in Buffalo a few years ago.

Steve Gattuso: 26:35

I said all right, how do you? We talk about diversification and we diversify asset classes, we diversify our investment styles. You know growth and value. There's a lot of things we talk about in diversifying. The one thing no one ever talks about is diversification of currency. And I had asked and I'm not talking about just being invested in another country, I'm talking about how do you diversify out of dollar denominated assets? And I asked this of Gunlock, I've also asked it of JP Morgan's asset management research group and I haven't had a good answer yet. I haven't had a good answer yet One. The one answer I got from JP Morgan, which I understood why they were answering it that way, you know it was kind of a quick answer of why should you be worried about it? Because if your income and your expenses 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 are denominated in dollars. So you're going to see the effect there in gold that are denominated in dollars, so you're going to see the effect there.

Steve Gattuso: 27:38

I think what we're looking at is kind of a little bit of a kind of a car crash in slow motion. We're not going to get off the dollar tomorrow or next year or even five years. This is going to be like a generational thing where, you know, maybe 20 years from now, the dollar isn't the world's reserve currency anymore because we continue down the path, we're going down Again. This is all fixable even at this point right now, but we've got to get our house in order.

Steve Gattuso: 28:04

$1.9 trillion is just way too much as a percent of GDP to have as an annual deficit, is 27% of the spending and that's too much for any country to do in a sustainable way. So diversification I'd look to real assets like gold as a commodity. You're talking about real estate. Real assets will kind of help you maintain that purchasing power, I would think, from one place. And obviously international diversification, even in local currency, if you can, is another way to to look at it. So those are a couple of things that that I would look at to say what's an investor to do about this.

Clem Miller: 29:14

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 we have that the CBO's forecasts are accurate? Have they gone in the past and looked at that and determined that they've got a good track record in forecasting?

Steve Gattuso: 29:35

I think that's kind of hard to do because their forecasts depend on certain assumptions which are changing all the time. So they are often quoted as the source for forecasting in terms of a government perspective and they're working with data they have right now. So as things change, the forecast change. I haven't seen anyone do it better in terms of forecasting, so I think it's a reliable source for what we know today. You know they score things out and again there's assumptions built into there. But as long as they're consistent in those assumptions, you can at least use them as a reasonable source.

Clem Miller: 30:16

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 have multiple forecasts like positive or optimistic, pessimistic, baseline? Do they have something like that?

Steve Gattuso: 30:37

I do think that they have something like that. Like, even right now they have their baseline with and without the Tax Cuts and Jobs Act. So I do think that they'll take major things like that and forecast out, with certain assumptions, as scenarios.

Clem Miller: 30:51

So my third question has to do with Japan as a model. Now, I know it's not the greatest model in the world, given the history over the last you know I don't know, 30 years actually but you know one thing that they've done, more so than we've done in the U S, is have domestic holdings of uh of their uh of their debt. Now, obviously, most of the U S debt, u S government debt, is held by U S citizens. The same is true of Japanese citizens, uh, but it seems like they've more sort of perfected the art of having their citizens hold it. They have post office savings that we don't have here. I think that institutions in Japan, like pension funds and the like, are either required to, or encouraged to, hold more Japanese government paper. It just, I'm just wondering if you think that there might be, might be scope, uh for greater us uh, for the government to basically force or require parties in the US to hold more government debt and by doing so, contain interest rates, especially on the long term.

Steve Gattuso: 32:25

Yeah, and I think there's some key differences that I believe, between Japan and the US in that regard. I mean, one of them is just the sheer dollar, the sheer volume, you know, in dollar volume, if you will, of the debt we're talking about. You know we're much, much bigger for one thing. The second, I think, is they're a little bit more closed economy than we are. So, given that we're more of a world economy, you know the yen and the purchase of those bonds stays kind of inside the country, as you're saying, whereas we have a lot more outside. We're more dependent, probably because of that volume, on external buyers, outside of our government, outside of citizens. That's another thing.

Steve Gattuso: 33:12

And I think the third one is what you were talking about, japan as a country. Their citizens have a much higher savings rate than we have. Our citizens don't save. It's not that they're shunning US treasuries, necessarily, but it's more the fact that our savings rate is averaged what five-ish percent? Over the long term they save, and I don't know what the percentage is, but I know that they save much more. That's more ingrained in their culture in terms of saving rather than spending. So I think there's more propensity for those citizens to just save altogether. So there's a lot more demand inside the country for that debt than there would be here in the US. So I think those three things might have some effect on all of that and why Japan gets away with it since 1980s.

Clem Miller: 34:08

Okay, those were my three questions, steve, those were my three questions, steve.

Steve Gattuso: 34:12

I mean. The other thing that's playing into it since you mentioned interest rates too is we're in an unusual time. At this point, most of the growth of the debt from that 60% of GDP to roughly 100% of GDP, let's call it and again you're talking about a growing GDP that shows on an absolute basis the dollar, the dollar notional value of debt has gone even quicker. It's the fact that most of that time, since 2012, that debt has increased while interest rates were at or near zero. So from a federal government perspective, there was essentially no opportunity cost to increasing the debt because you were paying very little interest on it, and we you know the government has still kept federal debt rather short in terms of maturity. So the rollover happens quickly.

Steve Gattuso: 35:15

Now that we're in a higher interest rate environment, not only are you feeling just the notional value of the debt that we've incurred, but now you're financing it at a much higher rate as well.

Steve Gattuso: 35:29

So that's a vicious circle that's being created, because as we take on more debt and in these high interest rate environments you're talking about interest expense, exacerbating the problem, which is one seventh of the entire federal spending for the year, so it's about 14% of the entire spending. As you're paying more in interest, your annual deficit is going to get larger and larger. So that's where we get into this vicious cycle, and one way again. One benefit of us getting our fiscal house in order is not only putting ourselves on the right path reducing the debt but there's an interest expense component to this as well, where at some point, the world is going to demand higher rates on treasuries just because they perceive more risk. We're not AAA anymore, right, but if you could get your house in order, then the other benefit to that is that you should be able to finance still at the lowest possible rates, given the environment that you're in, and hopefully interest expense itself starts to decline.

Steve Davenport: 36:55

So, steve, I like to believe that you know I mean your calm and gentle nature makes these ideas very acceptable to people, but I still, I mean I almost think that you should be banging the table when you talk about this, because it feels I mean I've always felt that we're really talking about only two-thirds of the problem. Right, we're not counting the liabilities from Social Security and Medicaid and Medicare, which add another I don't know $14, $15 trillion to this and really make it more like we're already at $160 if you include those. So when you look at the reserve currency status, I mean I know that we talked about these other things like real assets. I mean, is the trade to gold entirely, mostly or just partially related to loss and confidence in treasuries in the dollar? I mean I feel like everyone I talk to about gold and besides Clem, because I know Clem understands the impact is talking about gold like, well, we know that the spending in these things are going to just get worse. So therefore I'm creating this hedge.

Steve Davenport: 38:21

I mean, is there a benefit to somebody saying why don't we take all like the kitchen sink approach If this were a company and you wanted to reinvent the company, which I think is what you're trying to say.

Steve Davenport: 38:36

We really want to do reinventing. The company has to put everything on the table and we have to not say Medicare is off the table, social Security is off the table. It feels like we're living in a world where we don't even have all the problems outlined. So therefore, we can never approach all the solutions if we don't look at all the problems Right and, and so I look at the two items that we're talking about right now, which is tariffs, taking in Some maybe a trillion in income for the US, and I look at that as a false argument. It's not really going to happen. When I look at the difference right now in the economy between exports and imports, we export 11%, we import 14% there's a 3% difference that we're being cheated on by the rest of the world. At 3%, if we solved 100% of our tariff problem, we would make up a trillion dollars.

Steve Gattuso: 39:48

It's not even that much.

Steve Davenport: 39:50

I know it's not, but I'm just trying to mention. If we will go through this much trouble for 3%, what if we had to tell everybody in the world hey, the US is no longer taking a half full kind of look here. We're going to put all of our debt on the table and we're going to try to manage our way out of the big solution, out of the big solution, which is really the right place to start, because the half-hearted, I'll say, versus a profanity approach isn't going to solve it. Don't we need to shake it up and get a little more angry?

Steve Gattuso: 40:33

Or is anger?

Steve Davenport: 40:34

not appropriate.

Steve Gattuso: 40:35

Yep, no, and I talk to everyone I can about this. But, once again, until it becomes a problem in the public eye, you're not going to see anyone do anything about it. And I understand, like all the protests you can't cut this, you can't cut that. But on the other hand, anyone who, if I'm a politician, anyone who's telling me, well, you, you, you can't cut that funding, you can't cut this funding, you can't get rid of that department, I would turn around and say, ok, well, we've got a one point nine trillion dollar problem. How do you propose we solve it? And I know a lot of it comes to well, increased tax. Ok, that might be part of the problem, part of it too. But there's some more fundamental issues that go on here.

Steve Gattuso: 41:19

I think there are some basic economic concepts that not everyone in current administration grasps as much as you would hope they would. One of them is the tariffs and the impact. If the tariffs are used as a negotiating tool to get trade level, okay, fine. But once you start talking about tariffs as a revenue enhancer for the federal government, now I start to get trade level, ok, fine. But if, once you start talking about tariffs as a revenue enhancer for the federal government. Now I start to get skeptical because right now, tariffs bring in 80 billion dollars out of almost five trillion of federal income each year. You can triple that and it's still going to be a drop in the bucket. So the tariffs aren't a revenue enhancer, they're 1% of, basically, federal income. Where that federal income comes is really just from you and I as citizens. Payroll taxes are about 25% of federal income, while income tax is 37%. So if you're gonna talk about fixing the problem with revenue, then they're gonna have to be a significant tax increase, which of course there's an offsetting effect 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 effect of that.

Steve Gattuso: 42:38

And then the other piece of it is again the expenditure side. Right, if we're going to look at both sides equally and you're right, 47 percent of federal spending is just on Social Security, medicare and Medicaid you really don't make any significant inroads into cutting your expenditures unless you take a look at that as well, and I know that that's not popular right now, you know, obviously. But you know you're going to have to do something. When I say extreme, you have to do something with a big splash, like you're saying, steve, because even the net interest Right If I look at Social Security, Medicare and Medicaid Social Security is about one point six trillion. Medicaid care is one point one trillion. Medicaid is another six hundred and fifty billion. So you know you're adding all that up and then you add net interest, which can't be controlled, as another trillion interest which can't be controlled as another trillion.

Steve Gattuso: 43:41

You don't have that much left to work with on the expenditure side. That's going to make a significant inroad to that 1.9 trillion. Now you can get more extreme, but the rest of the world's not going to like it. How else do you, um, you know lower your debt, um, uh, burden? You can inflate your way out of it, but you know that's also a tax on citizens, so you're just taxing them a different way. Or you can devalue your currency, and you know that's not something I think that officials would do deliberately. But you know the market's starting to do it for them at this point because you're seeing the dollar, after reaching recent highs, start to fall precipitously a little bit.

Steve Davenport: 44:27

So if I was to, just I get back to this bill, the big beautiful bill, b-cubed. If B-cubed were to happen, it feels to me like the debt vigilantes or the bond vigilantes will have a problem with this happening. And so I still don't understand how you're a bond person now and you're saying this is in the assumptions for CBOE and we're going to take that into the assumptions, and is the bond vigilante reaction to tariffs or is it a precursor to this big beautiful bill?

Steve Gattuso: 45:18

I think if anyone's paying attention to the situation right now, it is the bond market. So they're the ones that are kind of the canary in the coal mine looking at this, saying we don't really like the direction this is going. The other thing you have going along with that too, is that some of your buyers and you already talked about Japan, but some of your buyers will have other options. So as Europe, especially Germany, starts to get into deficit spending, there's going to be a pool of German boons which are pretty much as almost safe as the US. That especially European government or European citizens say I'm going to go buy that instead and kind of reduce my risk a little bit. So I think that's one of the things that we don't have control over. As there's more options available, then people are going to start voting with their wallet and start to move into these other bonds, which are going to create, possibly, that technical problem where you're going to have auctions that are going to be kind of rough.

Steve Davenport: 46:22

Right. I mean one idea I had, which, again, I don't think there's the political will for, but I like to think of if an idea is good enough, maybe it will eventually start to get into the discourse, which will eventually lead to some positive consideration is maybe this tax extension doesn't happen, but all of the new taxes that come in from the higher rates get applied to our debt and so the spending doesn't increase with that new revenue, but that new revenue goes. Is there a way for us to budget in that way? No laughing Clem.

Clem Miller: 47:03

This is serious stuff. I was just thinking about Al Gore's lockbox.

Steve Davenport: 47:07

Okay, well, I didn't use the word lockbox, so I don't like the Al Gore reference. But I'm just saying is it possible for us to create a system where we become more resilient by taking a bad event, which I think the market will react pretty badly if we don't extend this tax cut? I think all three of us, I mean I'd like to get an idea what happens if it doesn't get extended. Will you think the market will react 10 down, 20 down or 30 down?

Steve Gattuso: 47:42

Well, I think there's a qualifier that goes with that. If the Tax Cuts and Jobs Act does not get extended and it's just to spend more money, the markets would have a more severe reaction to that, have a more severe reaction to that. However, like you were saying, if it was explained in the way that the Tax Cuts and Jobs Act is not extended but we are focusing on reducing our debt, then I think it's a little bit more palatable, because you're trading a short-term stress to fix a long-term stress. So I think that one would be a little bit more muted in terms of a market response. You know to say that, hey, we're going to reduce the. You know we're going to try and balance our budget as much as possible, or we're going to, you know, get down to a 3% annual deficit. That's manageable. Then I think the market perceives it, or takes that, a little bit better, because then you're fixing a problem.

Steve Davenport: 48:48

So you're telling me, there's a chance.

Steve Gattuso: 48:51

There's a chance, but that's from a fiscal perspective where the chance evaporates, 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 tax cuts, I'm going to increase them right, and in order to do that, he'd have to have a severe reversal of his policy stance.

Steve Davenport: 49:18

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 some type of list of alternatives to treasuries, what's at the top? What are the top three alternatives to treasuries in terms of somebody looking for a risk-less asset and I just mean less risk, I don't mean that any of them are going to be riskless, but a less risky asset. What would your three be? Klum?

Clem Miller: 49:59

Where would your three be?

Steve Davenport: 50:01

Klum, well, I would say, you know obviously cash itself gold, and after that it would be, you know, let's talk currencies, because that's what we're really saying is the dollar. The dollar, as a savior, is a reserve currency, so what other reserve currencies would you replace it with? I mean, would you go German, would you go Japanese? Would you go? You know, is there.

Clem Miller: 50:33

So I mean, clearly, if you consider gold to have the aspects of a currency, I think gold would be number one, after that it would be Swiss francs, and then, traditionally, the Japanese yen has held up pretty well during crises, so like, for example, when the Eurozone had its issues, and so like, for example, when the eurozone had its issues, there was and during the US debt ceiling issue, you had appreciation of the Japanese yen. So I think the Japanese yen is a good place to be in In addition to the Swiss franc. The euro, historically, has underperformed the dollar and the Japanese yen, so I would put the euro in.

Steve Davenport: 51:24

Ahead of the pound or behind the pound? Behind what?

Clem Miller: 51:29

The pound Sterling. Oh, the pound, that's a weak currency. That's about as weak as the, if not weaker than, the, euro. So I would, you know, the Swiss franc and the Japanese yen go before the pound and also the pound. Keep in mind that the pound is basically a commodity currency, so it really depends on what's going on with oil prices and mineral prices. So it sort of falls in that same category as Australia and Canada and I think when it comes to those, really it depends on what's going on with commodity prices.

Clem Miller: 52:12

If you think commodity prices are going to go up, sure, and that depends on having a rosier view of the global economy. And I don't I mean clearly, in my top list you will not find Chinese currency or really any emerging market currencies. They will do well at times, but then they have their sudden large, disruptive devaluations. And as much as some people might say, well, that age is over, I don't think it's over. I think we're going to see continued periods where emerging market currencies will have large devaluations and what's more is they'll have large devaluations in parallel. So you might have Brazil and Argentina having devaluations, you know, at the same time.

Steve Davenport: 53:08

Okay, I guess we're getting near the end time-wise. So, Steve, why don't I leave with you the the closing argument? Why don't I leave with you the closing argument If we could have the magic wand and do two or three things as investors?

Steve Gattuso: 53:37

what should we do to try to help manage the crisis that is coming down the pike here? As individual investors, you probably have more options than what we're just talking about on a global scale, and I agree with Clem on a lot of those options. I mean, we get part of it. We get back to real assets, as you were talking about. Whether it be commodities or real estate, I'm looking for scarcity, right. What's scarce that will have value in the future. So that's where I put the real assets in that bucket. And I agree with you on the Swiss franc.

Steve Gattuso: 54:09

Unfortunately, it's too small to do anything at scale. An individual investor has as an option, but not countries, of course, and no one has faith yet in the renminbi, of course. So forget that. That's the second largest economy gone, and then it almost kind of leaves you at that euro if you're going to talk a currency perspective and that euro when you're talking about the whole European Union, it's almost got as much economic clout as the US, but the problem is it's made up of a bunch of countries, not states, and you know, we all know they have differing rates of growth and differing policies and there's still a question as to whether the European Union as an economic entity continues into the future, so you got some issues there too. So probably, looking at this from an investor standpoint, your options are a little bit limited.

Steve Gattuso: 55:10

Diversification is going to help you 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.

Steve Gattuso: 55:23

But, as you know, chartered financial analysts, hard for us to value gold, because it doesn't throw off any cash flows, as we know, and it's worth only what someone will pay for it. I don't think cryptocurrencies are obviously an answer at all, because what they share with gold is that they don't have all the characteristics of currency where I can use them to go buy something, among some other things, with it. But at least gold is tangible and has some physical use. It's rather tough for an investor. I would say diversification, and you know, even when we talk about cash, unless it's cash I keep in my pocket, you're still reliant on the financial system somehow. You know, even if I'm holding money markets right, that that's we call that cash, but technically they're financial instruments as well. So for an investor, I think right now, diversification. Voting with your feet a little bit and you're rolling with your wallet to see how things shake out is one of the things you have to watch for.

Steve Davenport: 56:30

Thanks, I appreciate that, clem. Do you have any comments in closing?

Clem Miller: 56:37

No, no comments. In closing, I think this was a fantastic discussion and you know we're really appreciative of your joining us, steve, and look forward to, you know, future discussions with you as well.

Steve Gattuso: 56:53

Thank you, I enjoyed it as well. Hopefully we've given some people things to think about here and what to watch for really. And what we're watching for is for the US government to have the political will to get the House in order.

Steve Davenport: 57:07

Yeah, thanks to you, I mean, I think. I think it's like every individual we say to individuals you're responsible and you have the most reason to be concerned and view your investments as critically as you can because they impact you and your future. I think this impacts us and our future of our state of the United States, and I am concerned.

Steve Gattuso: 57:34

Just add one quick thing to that. You said, well, I'm not pounding the table. Just add one quick thing to that. You said, well, I'm not pounding the table. You know, if you ask me, this should be a national security concern and that's not how it's looked at. But that's what I hope they start to get the view of.

Steve Davenport: 57:50

I agree with you. I think that I think that we're where we have an opportunity, where we're still the leader and we need to behave like a leader. I think that you know, great champions aren't created overnight. They're built over time and performing well over time and tough circumstances. I would love to see us, you know, I think that the millionaires that I work with, when I ask them about the idea of if higher taxes went to pay off the debt, would they be more comfortable with that, they all resoundingly say yes, because I think of local municipalities when they put up cell towers Some of the ones I lived in in Georgia. Any cell tower affects the environment and affects the look of the landscape, so they have to take whatever resources they get from that contract and lease and apply it to public parks. I think the same here. If we're going to apply higher taxes to people, let's put it towards something that really could make a difference, which is the debt of each of our children and grandchildren.

Steve Davenport: 58:58

Because, at this point. That's really what we're trying to do here and as a country. We've looked at this for a long time and we've talked about giving our children a better world, and I think it's time to take some action. So I would love to put this in bold letters on the podcast title and say act now or forever. Hold your peace, because if you're not willing to do something now and you're not willing to solve the problem, then by you know. Simply, omission is as much sin as commission, is as much sin as commission, and not addressing the problem you are the problem.

Steve Gattuso: 59:47

And one more thought that maybe it could be a pickup of this topic next time is what will this do should we get into a recession and the fact that fiscal policy will not be able to help or it'll exacerbate the problem we have right now, because we spent all this money already on, you know, things that didn't make a difference for the most part, and when we really need it, when we get into a recession, it might not be there as a tool.

Steve Davenport: 1:00:14

Yeah, I think the Fed has acted irresponsibly in terms of being the central bank for all of America. I mean, I think that when we look at this central bank and we say markets are down, I was, I think we were very close two weeks ago to the Fed acting because they were afraid, and they're acting to protect that 40 to 5 to 50% of the economy that owns stocks, but that 50% the silent majority, as some writers have put it that group isn't being addressed and they're the ones who are most hurt by the inflation that the low rates create. So I think the Fed is in a very hard place. I think that the market will react and my worry is that we go towards the same old solution, which is with lower rates, and I think that leads to a longer term problem that all of us need to look at each other and say can we take inflation for a little while longer and keep rates higher and then stamp it out before we try to address this?

Steve Davenport: 1:01:22

Can we address this new budget with a little bit I mean any amount of our funds that could be devoted? I mean, I think there'd be a lot of people who would gladly pay 5% or so in taxes if they knew it was going towards a good cause, and that's the way I think we should frame it. Instead of a promise of no new taxes 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: 1:02:02

Sounds good. Good to talk to you, gentlemen, as always.

Steve Davenport: 1:02:05

Thank you.