Buongiorno friends - happy Friday! I’m working from Rome this week as I tag along with my wife as she does an artist residency here. It will be a dough boy summer, as I’ve eaten nothing but pizza, pasta, and gelato.

Markets are closed on Monday for the Memorial Day holiday. Enjoy the long weekend!

Also, thanks to everyone for reporting the issues with TestFlight so quickly! We pushed an update yesterday that resolved it. So, just make sure to download the latest version of the Scoops app.

🌎 The Big Picture

The main story of the week was America’s debt problems. These problems are not new, and there weren’t any major unexpected events impacting the country’s financial health this week, but investors are mostly in a drought of things to worry about.

Investors are mostly waiting for more news from Washington. The market crashed earlier this year at the launch of a global trade war and aggressive import tax policies, recovered when those policies were mostly reversed for 90 days, and now remains in a holding pattern waiting for more clarity on where the final policies will actually end up.

The two main events this week (both expected and well discussed):

1) The House passed its initial plan for taxes (lower) and spending (cuts).

2) Moody's Ratings, a primary credit rating agency, downgraded the US government's long-term credit rating one notch from its top rank.

The rating shift itself was not shocking, as the government has consistently exacerbated its overspending and borrowing problems for several administrations, and the two other major credit rating agencies had started downgrading the US borrowing reputation over a decade ago.

However, the downgrade came as the House advanced an initial budget proposal that would make the situation even worse, reducing taxes and increasing the national debt by trillions in the best-case scenario.

The real growing concern is the cost of borrowing. The government ignored its budget problems for years because borrowing was almost free.

But now, interest rates are much higher, and the interest payments are quickly consuming our tax dollars, leaving little room for what our tax dollars are meant to be used for.

America's outstanding debt has nearly doubled to over $36 trillion in just a decade and is projected to climb further. Interest payments are growing faster than anything else the government spends money on.

A growing national debt only spooks investors when it looks like it could

1) spur more inflation, which eats away at business profits, or

2) increase borrowing costs, which slows spending, investment, and growth.

This week was full of more signs of inflation (when tariff-driven inflation is already widely expected).

Borrowing costs shot higher as investors demonstrated their concerns about America’s budgeting problems.

While being one notch down from the highest rating doesn't raise urgent concerns about America's ability to repay its loans, lower credit ratings can make borrowing more expensive.

If you continually max out your credit cards, your credit score drops, and lenders charge you higher rates to borrow, because you look like a lower quality borrower who has incrementally more risk of failing to pay back the money.

It works differently for America, which is essentially the bank and currency for the world. US Treasury Bonds are the foundation of the global financial system. Truly doubting America’s ability to pay its debts would bring down the whole house of cards.

BUT, when the US Treasury went to sell more debt this week, the interest from investors (lenders) was a little lower than normal.

So investors are saying, hey, obv you’ll pay this back, but I’m not dying to lend to you. You’ll have to pay me a little more.

US Treasury borrowing costs are the baseline benchmark for basically all other borrowing. So if US government borrowing costs rise, everyone has to pay more for a mortgage, auto lease, or business loan.

Non va bene.

Investors aren’t as jazzed about these tax cuts as they thought they’d be back in November.

It’s not looking like the boost to growth that people hoped for, since most of the policy is just extending the current tax cuts from the 2017 Tax Cuts and Jobs Act. So, it’s mostly just avoiding a negative.

Plus, it’s a ton of spending cuts. Spending is business. Less spending, less growth.

And for all that, it’s going to add $4 trillion to our $37 trillion in debt. And that projection is based on an expectation of a growing economy. So if we take a downturn or slowdown, which people are more worried about now than they were in November (see: tariffs and trade war), it could actually add trillions more to the debt.

So then you’re not making as much money, and you have even more debt.

But the silver lining is that the underlying economy would be doing pretty well if we implemented policies that didn’t actively detract from growth and business activity.

Business activity has been solid, layoffs have been low, and companies are still turning big profits.

But, with rising borrowing costs, trade wars, and policy uncertainty, we’re starting to see the housing market slow again, student loan borrowers stuck in limbo, and lower optimism. It’s a mixed bag with inflation red flags popping up everywhere.

Get the full breakdown of all the trends affecting your home, wallet, and career in the new Weekend Scoop on the Scoops app!

🏭 The Companies Everyone’s Talking About

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❔ The Big Question of the Week

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