Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
Treasury Yields Rise as Trump's "Big Beautiful Bill" Threatens to Balloon the Deficit
May 19, 2025 | Season 7 | Episode 19
Moody's downgrade of US Treasury debt from AAA to AA1 reverberated through markets, pushing bond yields higher and raising questions about America's fiscal trajectory. This watershed moment, following earlier downgrades by S&P (2011) and Fitch (2023), signals growing concern over the nation's $2 trillion annual deficit and proposed legislation that could add another $3.8 trillion through 2034.
The financial impact is immediate but nuanced. As 10-year Treasury yields approach 4.7% – what analysts identify as the tipping point where "equity returns start to waver" – investors face crucial portfolio decisions. Treasury bonds now more effectively compete with stocks for investment dollars, while gold surges $60 to $3,250 on geopolitical concerns. This evolving landscape demands thoughtful consideration of asset allocation between US investments, international stocks, and fixed income.
Looking deeper, today's immigration debates mirror historical patterns. The 1950s "Operation Wetback" deported approximately one million people during an economic downturn, highlighting how economic anxiety often drives immigration policy regardless of which party holds power. This historical perspective, championed by successful investors like Ray Dalio, helps contextualize current market conditions and policy decisions.
Tech investments continue making headlines, with NVIDIA announcing compatibility tools for competitors' products while Adobe presents a potential value play after falling 10% this year. Trading below 20 times forward earnings (compared to historical 30-40x multiples) with 90% gross margins and insider buying, Adobe maintains advantages in commercial AI applications despite increasing competition.
What does this mean for your portfolio? As Treasury yields rise and deficit concerns grow, it's time to reassess your investment strategy. Are you properly positioned for this new environment where fixed income offers more competitive returns? Should you increase international exposure or focus on dividend-paying stocks? Subscribe now and join us as we navigate these critical market shifts together.
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And now introducing Mr Keith Lanton.
Keith Lanton:Good morning. Today is Monday, may 19th. A lot to discuss here, as we have crossed the threshold of halfway through the second quarter. On Friday, after the market closed, we had Moody's Investor Services rating agency downgraded the US Treasury debt. They were the last remaining company to rating agency to have the US at AAA and have now downgraded the US to AA1, which is the second highest rating. So we're going to talk about that. That's leading futures lower this morning, pushing up bond yields. Also.
Keith Lanton:This morning we are going to talk about a topic that we've touched on in the past, but we're going to take a look at it from a different angle. We're going to talk about a policy of the US government earlier in the 20th century at two different junctures, where there was a significant pushback against immigration into this country, specifically with respect to Mexico, and the actions that were taken by the United States, especially in the 1950s, something that many of us who are alive today may not know about, may not be aware of. It's a great example of the fact that human nature is enduring and that there is so much to be learned from the past, and how many times what we are experiencing that we think is brand new is, in effect, a revision of something that has already occurred and taken place, and then we will talk about the big, beautiful bill that the Republicans and President Trump are working on to potentially extend the tax cuts as well as to make some other changes, and we'll talk about the implications of that, whether or not that looks like it is the ability to move forward, and what that may mean for financial markets, what that may mean for your portfolios going forward, how you should be structuring your investments. What is going on in the world today with respect to US and our credit rating? What is going on in the US today with respect to our policies with the rest of the world and our integration with the rest of the world? What does that mean for your portfolio?
Keith Lanton:How should you be situating your portfolio? Should you be emphasizing US investments? Should you be sticking with AI and technology investments? Should you be moving more towards dividend-paying stocks in the US? Should you be considering more international stocks? Or perhaps you should be considering more fixed income, now that rates are moving significantly higher, which they're doing this morning?
Keith Lanton:That may be a combination of two things. One is the downgrading of the debt, but I would suspect that it's possibly more likely that a big move up in the Treasury yields may have to do with the US adding to its debt. So those two inextricably tie together. But the fact that Moody's has made their decision and the fact that that decision is somewhat predicated upon the fact what's taken place in Washington and what's taken place with respect to the debt and deficit, which is a cumulative effect, this is not something specific to this one administration. This has been administration after administration over the past 30 years that has really significantly increased the deficit of the United States and there hasn't been a real pushback against that. And perhaps the bond market is starting to push back. And what that may mean if you can start getting returns on treasuries of five or more right now, or at about five on long-term treasuries, what does that mean in terms of the risk-free rate of investment? And whether or not treasuries are in fact truly risk-free rates of investment is something else that could be discussed. But what does that mean in terms of the composition of your portfolio? Should you be thinking about more fixed income as rates move higher and you can get a return on your money? Rates move higher and you can get a return on your money?
Keith Lanton:Before we begin, we'll just take a quick look back at last week so we can set the stage for where we are this week. Last week, trade and artificial intelligence AI drove stocks. Last week we had the Dow up 3.4%, just to make clear where we're coming from. The S&P was up 5 plus percent. The NASDAQ was up 7%, so a little bit of a pullback here on Monday, while the numbers look like we're off to a weaker start. You got to remember of how strong last week was before you judge what's going on this morning.
Keith Lanton:And last week was not a perfect week. Despite the strong gains, federal Chair Jerome Powell warned of potentially more erratic inflation in the years to come. April retail sales slowed meaningfully from March, walmart warned of higher prices, consumer sentiment tumbled and Facebook parent Meta fell on reports that it's delaying the rollout of its large language model. Last week, president Trump's budget bills got delayed in the House. This morning that bill made its way out of committee with four Republican members voting present as opposed to opposing it, so we'll talk a little bit about that as well.
Keith Lanton:But despite all the headwinds that the markets had last week, those headwinds did not matter. What the market was focused on. Was that a trade war at least for the time being with China was. You know, all-out war was averted, at least for the time being, and the artificial intelligence trade, as we mentioned earlier, made a big return. So last week started out with a rally on the news that the US and China agreed to reduce their so-called reciprocal tariffs by 115 percentage points for 90 days, and that was something that was somewhat of a surprise to the markets after the two countries seemed to be basically at a loggerheads over the issue. So that was a surprise to the market after the two countries seemed to be basically at a loggerheads over the issue. So that was a surprise to the market and that's why you saw such a strong reaction Now. That agreement alone probably would have been enough to create a rally, but stocks also got a boost from the AI trade, with NVIDIA jumping double digits.
Keith Lanton:Stock had already been bouncing back, but President Trump's visit to Saudi Arabia highlighted the growing appetite for sovereign artificial intelligence investments, with nations racing to use US chips for onshore projects. President also said that the United Arab Emirates would be a buyer of American AI technology. Now, while this was especially welcome news, this kind of confirmed that perhaps Silicon Valley wasn't losing its edge, as some had feared, to the Chinese and upstarts like DeepSeek in China. We're so eager to be able to have access to artificial intelligence chips from American companies, sort of a revalidation that the American technology remains the go-to technology. All right, so that's where we were last week.
Keith Lanton:Let's digress to a little bit of history. A little bit of history, and the importance of history is that we often forget that what we are living through may not be quite as unique as it feels, that a lot of the different sentiments that the country is experiencing what we're experiencing here in 2025, and a lot of the policies of President Trump, especially with respect to immigration, but also with respect to things like protectionism and tariffs and where America stands and the fact that other countries perhaps take advantage of America these are themes that have occurred before in history and there's a natural ebb and flow, and in order to effectuate change, you do oftentimes need to take a hard line, and perhaps that's why the American people have elected President Trump, whether they're aware of it or not, whether they're aware of the history and the fact that history may not repeat itself identically, but it is often similar, and the lesson here is that it is such a valuable knowledge for those who do study the past. Ray Dalio, at Bridgewater, frequently talks about this. One of the largest, most successful, largest right now hedge fund, one of the most successful investors in the hedge fund space of all time, talks about the importance of taking a look at financial history, and not just financial history, but of taking a look at financial history, and not just financial history but history in general, because financial history and the history of nations and nation building are inextricably tied to one another. So we can learn a lot and think about how we should be investing and building our portfolios by looking back at history.
Keith Lanton:So taking a look back and we can look back here to the early 1930s, and there was a wave in the early 1930s and there was another wave in the 1950s, arguably a bigger wave, where there was a significant pushback against immigrants coming across the border from Mexico. So if you look back in the 1930s, there were mass deportations. Scholars estimate that as the Great Depression took hold, many Americans believed Mexicans were taking away scarce jobs and there are reports that the US deported about 2 million Mexicans and Mexican-Americans. Estimates range that up to perhaps as many as 50 percent of those deported may have in fact been citizens of the United States of Latino descent. California in fact formally apologized in 2012 for its role in illegally deporting hundreds of thousands of US citizens back in the 1930s and 1940s.
Keith Lanton:But perhaps a more recent example, and one more tangible to us today because it's kind of a closer touchstone to us, is that at the end of the Second World War, the United States was at a point where lots of servicemen were coming home, but before that lots of servicemen went overseas, obviously to fight on two fronts, and the United States needed labor here in the United States to help do the farming to feed the population and the troops. So we were very welcoming and looking the other way when folks from particularly Mexico crossed the border into the United States some legally, some illegally, some legally, some illegally. About 4.6 million Americans not Americans, mexicans crossed into the border in the times during World War II and by the early 1950s we had the servicemen coming home to a United States that was starting to dip into recession, and now, according to an essay published by the Congressional Office of the Historian, president Truman ordered an inquiry that eventually placed much of the blame of the country's social ills at the time on illegal immigration. One memorable line from the report now keep in mind. This is the early 1950s said. The magnitude has reached entirely new levels in the past seven years. In its newly achieved proportions it is virtually an invasion.
Keith Lanton:So when Eisenhower took office, from Truman, his immigration commissioner is what it was called back then unveiled something that was called Operation Wetback.
Keith Lanton:And Operation Wetback was named because the folks crossing into the United States often had wetbacks because they were crossing through the water and they were actually referred to a lot of these immigrants here in the United States as wetbacks.
Keith Lanton:And it is estimated that this operation in the 1950s rounded up about 1 million folks who had entered into the United States. And this operation was headed by the Commissioner of the Immigration and Naturalization Services, a name that we don't know today, as well as the military, as a quasi-military operation of search and seizure of all unauthorized immigrants was begun in the United States. Fanning out from the lower Rio Grande Valley, operation Wetback moved north. The operation was to discourage the re-entry of the workers back into the United States. In fact, what was proposed, and then what was executed upon, was that workers were frequently taken by ship so that they would not necessarily just dump them back across the Mexican border, but bring them further south into Mexico, so that it would be more challenging to reenter into the United States. So you can see that there here is some differences, certainly, but some similarities to what we're experiencing today, and this is something for us to keep in mind as we set policy here in the.
Keith Lanton:United States, as we set policy here in the United States, not just with respect to immigration, but with respect to all the legislation that we are contemplating, to keep an eye on the fact that what we're experiencing may have happened before. We may have a lot we can learn from. The past Doesn't mean we did it wrong in the past. Doesn't mean we did it right. Doesn't mean we're doing it right or wrong today, but we can study what happened, we can see the effects and then we can hopefully learn from this and hopefully make better decisions, become better Americans and we can potentially become better investors, which is what we're focused on here. All right, so let's move to the here and now and let's talk about the news flow this morning. Now, and let's talk about the news flow this morning. We have futures down this morning, and this is partially, or perhaps more than partially, but we again did have a strong run up last week on the news of Moody's downgrading its rating on US sovereign debt. At the end of the day on Friday, treasury Secretary Besant saying that Moody's is a late mover, a laggard, that, johnny, come lately, let's call it to the downgrade, so suggesting that this is not quite as significant as it looks, but nevertheless, if we go back and take a look at the previous downgrades the first downgrade, which took place on August 5th 2011, which was done by S&P, and S&P at the time said that they were concerned about the budget building up and the rising debt to GDP ratios. And if you went back and read a lot of the commentary from the administration at the time in 2011, and that would have been the Obama administration what they were saying at the time was that they were jumping the gun, the opposite of what Scott Besant is saying today. In fact, they were saying that they're panicking and everything is great and the deficit is very manageable, and not that they were Johnny-come-lately, but they were Johnny-come-too-soon, very manageable. And not that they were Johnny-come-lately, but they were Johnny-come-too-soon and, with the benefit of history, that prognostication didn't turn out to be true.
Keith Lanton:Then, in August of 2023, we had Fitch come out and express concerns about the level of debt, the rising deficit, and they also cited something different the erosion of governance. And this again took place in the Biden administration, as the partisan politics were strong then, as they are now. So, if we think back to what took place, we have a debt downgrade following the financial crisis. Then we have a debt downgrade following the run-up in the deficit due to COVID two events that significantly raised the debt and now we have here, in 2025, a cut to the debt because we have proposals that potentially could significantly increase the deficit at a time when the deficit is already extremely high, especially given that we're in peace and especially given that we have an economy that is not in recession. So we need to take a look and see what this debt downgrade may mean. It's more of a signal. I mean, I personally agree with Secretary Besson that this is something that clearly has already been priced in, at least up to this point. It may be getting priced in a little bit further, but perhaps, as I mentioned earlier, what's getting priced in is the is seeking to extend the 2017 tax cuts due to expire year-end, along with an array of other goodies promised in last year's presidential campaign.
Keith Lanton:The issue at the moment seems to be is that the Big Beautiful Bill may not be compatible and some are calling the Big Beautiful Bill BBB and it may not be compatible with what was known as AAA or AAA, the top credit rating here in the United States. Moody's saying that success of US administrations and Congress again, success of US administrations this is not a recent event have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. Moody's saying we do not believe that the multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. And last week that House committee, as I mentioned, had five Republicans vote against moving that bill forward. But last night yes, house working late last night four of those five folks voted present and the bill will be moving forward, although it does not by any means guarantee it will pass in its current form.
Keith Lanton:So what does this bill do? Well, in its current form, the Joint Committee on Taxation is estimating that the bill will increase the deficit by $3.8 trillion through 2034. And if this bill were to be permanently extended because this bill, like the previous bill, has an end date then the deficit would be expanded by $5.3 trillion, by $5.3 trillion, and that includes some $2 trillion in spending cuts through 2034. So even before these expanded future deficits, so even before the big beautiful bill, the US government is running up red ink at an annual rate of about $2 trillion. That's our deficit currently. So we will just be adding on to this, and this is something that perhaps is a big concern of the bond market this morning.
Keith Lanton:Perhaps the bond vigilantes are acting up Whether or not they will act up to the extent that the bond vigilantes did in the UK. You may remember a couple of years ago when the UK was proposing their budgets and that they were going to run up deficits. Now UK not a reserve currency doesn't quite have the flexibility of the US, but UK markets did revolt. Interest rates spiked significantly in the UK and the UK government listened and made changes. Whether or not that will happen here, we we got to be aware and mindful and keep our eyes out Again. These are all going to things that will potentially impact our portfolios.
Keith Lanton:Now, one of the reasons that it's so difficult to get the budget deficit down as we all well know, but it's a good thing to be reminded of is the fact that we spend lots of money on Medicare, medicaid and Social Security, and there's virtually no way perhaps to cut the deficit significantly while leaving all three of these programs largely intact, while leaving all three of these programs largely intact. Now there are proposals out there to reduce Medicaid, but Barron's suggesting that, even with those proposals to reduce Medicaid by doing things like requiring work, which many would suggest makes a lot of sense, including myself. But even still, it will not necessarily significantly reduce the deficit. These three components are about $3 trillion a year in spending. That's about half of the spending from the federal budget just on those three. So if you don't cut those three, you're going to have a hard time cutting the deficit, and that figure, which is currently $3 trillion, is expected to reach $5.8 trillion in 2035, partly due to inflation and partly due to the fact that this country is getting older. And in 2035, which sounds like a long time away 10 years, not that long these three components will not make up 50%, but they will make up 55% of the country's federal budget and they will in fact, make up 13% of our economic output. So big question is how much can we add to the deficit? How much spending can this Congress cut so that perhaps they will not pile on as much debt as feared?
Keith Lanton:What will be the reaction of the bond market? Where will treasury rates go? What will this mean for you as investors? How should you allocate your portfolios between stocks and bonds? The dynamic is changing as we speak, so what I have to say is stay tuned. We're going to be talking about a lot more over the next several months, if not over the next year or two. Now let's talk about what happens when treasury yields rise to the levels that they are currently at. Well, some would suggest that when the 10-year treasury yield which is now at about a 455, reaches 470, that that is when it becomes problematic for the economy. Raymond James analyst Tavis McCourt and David Vargas-Barrons writes that when the 10-year treasury is at about 4.5%, what they say is that at that point equity returns start to waver. So we're at about that tipping point. So we will get a better handle on what this may mean for the equity markets as treasuries start to more effectively compete for your investing dollars. All right.
Keith Lanton:So let's talk about a few other things going on this, outside of the big beautiful bill and outside of the fact that we had a downgrade to the US sovereign credit rating this morning. We have UnitedHealthcare up about 5% after selling off dramatically last week on reports that they're being investigated for Medicare fraud and the CEO resigning. Stocks up about 5% this morning. Td Cowen this morning downgraded the stock to hold from buy but nevertheless the stock is moving higher. Nvidia this morning down despite the fact that Jensen Wang, the CEO, delivered the keynote address at Computex 2025 in Taiwan and that NVIDIA has rolled out a new set of tools whereby their chips and software will work with competitors' products. So what that means is that chips made from other manufacturers could be integrated into the NVIDIA ecosystem, something that could make the NVIDIA ecosystem more adopted. Coreweave is a company that rents out artificial intelligence computing power. They announced they're looking to raise $1.5 billion in notes in a private offering. That stock's down about three and a half points. Alibaba and Apple both down this morning. The Trump administration is looking into the possibility that Apple's partnership with Alibaba to use artificial intelligence is something that they may be concerned with.
Keith Lanton:Over the weekend, we did get the news about President Biden that we've all heard about and that he has an aggressive form of prostate cancer. President Trump and Melania graciously extending their good wishes to President Biden and his wife and family that he has a speedy recovery, but an aggressive form of prostate cancer. The silver lining is that it appears that his form of cancer is receptive to hormone therapy and that has a better prognosis than other aggressive forms of prostate cancer. So obviously we're all wishing him a speedy recovery as well. President Trump said he'll have a call with Vladimir Putin to discuss an end to the war in Ukraine. The Russian president is said to believe he has a strong hand, so he probably won't offer much in the way of concessions. That's being reported by Reuters. Meanwhile, president Zelensky did talk with JD Vance in Rome, their first meeting since that Oval Office spat back in February.
Keith Lanton:Also this morning we have gold moving significantly higher on geopolitical uncertainty, up about $60 an ounce to about $32.50. Silver and copper also moving up, but in the energy space oil down about $0.55, natural gas down about $0.13, a barrel. On concerns about the global economy, the Atlanta Fed President, rafael Bostic, who is not a voting member of the FOMC Federal Open Market Committee, said in a CNBC interview that he would lean toward one rate cut this year. He said the Treasury markets are functioning well and he is more concerned with what is happening with Fed mandates. Bloomberg is reporting that Moody's will keep AAA credit ratings on the states of Texas, florida and North Carolina, despite the fact that the US itself was downgraded from AAA to AA1. And a good sign for mergers and acquisitions business Blackstone has agreed to acquire TXNM Energy for $11.5 billion is agreed to acquire TXNM Energy for $11.5 billion, including debt. Txnm Energy is a company that helps build out the grid, so an infrastructure story there.
Keith Lanton:Microsoft today is hosting its annual Software Developers Conference in Seattle. President Trump tells Walmart that they should quote Eat the tariffs, unquote, instead of blaming duties imposed by his administration on imported goods for the retailer's increased prices. Berkshire Hathaway reporting that Warren Buffett next year will not be answering questions at the annual meeting. He will be seated alongside the company's board of directors while his successor and current vice chairman and incoming CEO, greg Abel, answers questions and that is something that Warren Buffett said that he requested In Barron's, a stock that was a darling that's kind of fallen slightly from graces and thought I would share it with you.
Keith Lanton:It is Adobe symbol ADBE. The stock's a buy. According to one portfolio manager that Barron's was listening to at the Sohn Conference in New York, that analyst is Heard Capital founder, william Heard. Taking a look back at Adobe stock, it has underperformed so far this year. It's down about 10% and this is after the stock ended 2024 with disappointing earnings and investors concerned about generative artificial intelligence competition.
Keith Lanton:Some investors were suggesting that it didn't make sense to pay up for an Adobe subscription when free tools exist. But William Hurd is suggesting that Adobe is still the number one tool for editing, with its AI tool, firefly, offering control at the pixel level. Not to mention that, while AI can often feel like the Wild West, adobe's products are trained on source data with proper licensing, and what that means is that the images it creates can be used for commercial purposes. He also goes on to say that Adobe's metrics are still the ones to beat Sensitive. Adobe's metrics are still the ones to beat. Gross margins approaching 90% still for Adobe.
Keith Lanton:So thought processes, the stock has gotten too cheap from a valuation standpoint, at least in his opinion.
Keith Lanton:Adobe is trading below 20 times forward earnings compared with historical values of 30 to 40 times historical values of 30 to 40 times.
Keith Lanton:Perhaps equally telling is insiders are buying the stock, so putting their money where their mouth is. With the market for AI growing significantly, there is room for Adobe and its peers to grow. Ai is still a relatively new offering for the company and they should be able to ramp that up over time, even as it's already showing a positive impact on things like user retention and usage. He goes on to say that Adobe can go toe-to-toe with lower-end rivals while still demonstrating pricing power with its premium products. Trading near a trough multiple means that while it's not risk-free, the upside potential is meaningful. You've got a season, but that doesn't mean that Adobe won't still be at the forefront as the company that's offering those commercially available images and kind of leading the vanguard, even if there are cheaper alternatives out there. They come with a trade-off that may be useful in some circumstances, but in lots of circumstances, sort of the let's call it the gold standard is still something that he feels that you would need and require to be able to use these tools to their maximum.
Keith Lanton:That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms. To Mr Keith Lantern, this podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.
Sophie Cohen:Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money.