Three in Five Podcast

Episode 3: Three U.S. debt level questions for Dec

Steve sits down with Dec Mullarkey, Managing Director of Investment Strategic Research and Initiatives at SLC Management, to discuss current debt levels in the U.S. and what it might mean for markets.

Steve Peacher: Hi everyone, thanks for tuning in. I'm Steve Peacher President of SLC Management, and this is “Three and Five,” in which we ask three relevant questions to experts across our platform in five minutes. And today we are tapping into Dec Mullarkey, who's a Managing Director in our investment research group and who leads our quarterly strategy sessions. Thanks for joining me today, Dec.

Dec Mullarkey: Thanks Steve.

Steve Peacher: So, my first question is this: the Feds fund rate is only marginally above zero, the Fed's balance sheet has grown dramatically given bond purchases and U.S. debt has risen to about 100% of GDP. Does this mean that the government, at least for the moment, has lost its ability to deal with an economic crisis through rate reductions, bond purchases or fiscal stimulus?

Dec Mullarkey: Well, see that's a great question. They still have some firepower, they certainly, I don't think the Fed is going to go negative and rates, mainly because that'd be so disruptive to money markets. But they do have capacity to do more bond buying, they can target it along the curve. And fiscal stimulus I think if we were really in a bind they’d find a reason to do it, and I think the markets would actually embrace that as well, so I think they do still have firepower.

Steve Peacher: Thanks, you know that the Congressional Budget Office recently came out and projected that publicly held debt to GDP, by 2050 could reach 200%. And that's before the recent budget proposals. So why doesn't the bond market seem to be concerned about that?

Dec Mullarkey: So, you're absolutely right, they're pretty nonchalant about it right now. And that is built on, that forecast is built on the status quo that nothing changes from where we're at right now. I mean the one thing that has always been thrown out there is that there's a view that when you get to 100%, you know, things are really going to turn south in terms of your growth. But Japan is at over 250% to GDP, and the one critical factor is not so much the size of debt but it's really your ability to pay it down. And that comes to your taxing base, your growth prospects and, overall, the independence of your institution. So that's why Japan can have, it can be considered a safe haven investment, versus a Latin American country couldn't get away with that. So I think, I think the Fed has room to run there before markets, really, really turn against it. But it does come down to, you know, certainly being able to tax a fairly wealthy base and they do have that capacity.

Steve Peacher: The Biden administration, as we know, is already passed one large spending plan and now has proposed two more. Given the current debt profile, the CBO projections that we just talked about, do you think the bond market will react negatively if the administration's plans are passed in a form that's substantially in line with their initial proposals?

Dec Mullarkey: You know these are these ones are tough and we're still early stages, I mean the plan, the infrastructure program I think, some of that will happen, and I think that's going to be embraced by markets because a lot of that actually will increase or improve the productivity of the country, be it roads and bridges all of those repairs, they're talking about microchip production happening in the U.S. that needs to happen. Pharmaceutical, vaccines actually being produced here. So all of that, I think it's going to be a good thing, but all of these programs I think it's going to be scaled back is extensively, mainly because we rely on taxes to support them. And right now there's a thin margin that the Democrats are dealing with in the Republicans are in the Senate. Joe Manchin particular from West Virginia, he's the swing vote and he pretty much represents a conservative state, so I think there's going to be quite a bit of cut back on, that some of them will go through, but not in the size we're talking about. And I think I think markets will be fine with that. Because I think some of it will be actually growth enhancing and productivity enhancing, so a scaled down program certainly could work.

Steve Peacher: Okay that's great. Well I got one bonus question for you a Dec here. You’re known around the office for going out for early morning runs. And by early I mean really, really early. Like four o'clock in the morning is probably late for you. So my question is, why do you love to get up at some ungodly hour and go for a run?

Dec Mullarkey: So, I’ll reveal the secret here, Steve. Certainly first of all, you feel like you're playing hooky on the world. You're alone with the world, there's nothing happening, even nature is pretty quiet, so there's something enormously peaceful about that. And I certainly have done it for decades and there's probably a few days that I really haven't missed a day in a long time. But you get this terrific resilience for your day. You start off with that you don't have to worry later where you're going to fit it in, so it does become pretty addictive when you do it. I’ll also reveal that I love running in rainy weather and maybe that harkens back to growing up in Ireland where it rains a lot. But anyway it's, so I would say the resilience that it gives you. That's my health tip for the day.

Steve Peacher: Well, I look forward to seeing you back in the office, but I will definitely not be seeing you on the streets at 3am in the morning. So thanks for tuning in and we'll talk to you next time.

Dec Mullarkey: Thanks Steve.

This podcast is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. This podcast may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.