Moody's Downgrade Should Have Happened Sooner: Memani

Watch Moody's Downgrade Should Have Happened Sooner: Memani - Bloomberg on Dailymotion

Transcript

00:00The downgrade itself should have happened a while ago, and it really isn't much of a driver of anything in the market.

00:08I think if the downgrade had come when S&P 500 was at, let's say, 5,400, 5,600,

00:14I don't think we'll be talking about it in terms of impacting equities and risk assets very much.

00:20But Krishna, as you know, it's coming after a big conversation through much of April

00:25about the future of the safe haven status of the United States,

00:27following a big policy shock on the trade front.

00:30And that's raising questions about the future of a tax bill advancing down in Washington, D.C.,

00:35and what it means for fixed income going forward from here.

00:38What do you think it does mean?

00:40Well, so I think the real issue for the economy right now is, as Yelena was talking about,

00:45is really the slowdown and the tax bill.

00:48But it isn't tariffs, and it isn't really the impact of the fiscal deficit that much

00:54on the state of the economy or even the dollar for that much.

00:57So I think what we are talking about here is the tariff situation will get resolved.

01:03The tax bill probably gets passed, but with lower level of fiscal expansion in 26, 27,

01:10than what we are expecting right now.

01:12That's really not a bad environment for bonds,

01:15and especially in the light of the fact that inflation is really not going to be that big a deal.

01:19You know, tariffs impact price levels, but it's really not as inflationary as people are thinking in terms of.

01:27It's a consumption tax rather than inflationary.

01:30So if that is the case, inflation is not a big deal, and real rates are high,

01:35and you end up with a tax package that is more reasonable rather than meaningfully expansionary,

01:40I think that's not too bad for the bond market.

01:43So, Krishna, are you buying 30-year bonds?

01:45Well, so, you know, in our allocation, for example, for an endowment, for example,

01:51what we are focused on is really the long-term return of equities and private equities in particular.

01:58So bonds, you know, bonds are interesting, but we can generate bond-type returns out of low-vol hedge funds just as much.

02:07So, no, we are not buying it in my private portfolio, yes.

02:10Okay, so here's my question, Krishna.

02:12Why does it not concern you at all that we have a toxic brew right now,

02:15where you have bonds selling off, stocks selling off, and the dollars selling off in tandem

02:19at a time where people are making a lot of noise about the fiscal deficit?

02:23Well, so I would say that you have to put it in a bit of a context.

02:28That is, all of this is happening after a significant rally on all of those things over the last month, month and a half.

02:33So, you know, we are giving, we are taking profits rather than rethinking the basic strategy here.

02:41Krishna, when you talk about in your notes that you don't foresee a recession but a slowdown,

02:45what would make you reconsider that actually the U.S. could tip into a recession?

02:50Well, if the tax bill doesn't pass and tariffs get implemented, that's a fiscal consolidation for the history book.

02:56So I think that really would get us into a recession.

03:00If we have a reasonable tax package and the fiscal consolidation is, or there isn't as much fiscal expansion,

03:10I don't think we get a recession.