Cancer Vaccines & Data Center Drama

Motley Fool Hidden Gems Investing - The Motley Fool

This episode of Motley Fool Hidden Gems Investing explores macroeconomic themes including interest rates, government debt, and market dynami

Key takeaways

• Interest rates are a critical lever affecting consumer spending, corporate borrowing, and stock valuations, with long-term trends being more important than short-term fluctuations.
• The U.S. government's strategy of issuing short-term debt to refinance long-term debt may be unsustainable due to increased refinancing risks and rising interest costs.

Main topics

• Interest rates and their impact on investing
• U.S. government debt levels and refinancing strategy

Notable quotes

"The bond market is communicating with you. If you're a company and you're going to look for debt, the market says: 'No, I want a 10% interest rate to take that risk.'"

"Buying back $4 billion in bonds when your deficit is $2 trillion is like switching to low-fat milk and saying, 'I can still eat 8,000 calories a day.'"

Conclusion

While current interest rate levels and government debt dynamics are concerning, they represent long-term

Transcript preview

Speaker 5 (0:01) This week, data centers became the enemy. Motley Fool Hidden Gems investing starts now. Speaker 5 (0:10) Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoy. I'm joined today by Lou Whiteman and all the way from Canada, which ironically is he's south of me. So we can have a geography discussion if you want. But Jim Gillies. Jim, welcome to the show. Thank you. It's been a while, Travis. We've got a lot to talk about. There's a lot going on in the market. We do want to get to the news on data centers. But this is sort of a quiet time for earnings. So it's an opportunity to kind of take some bigger picture looks. And one of the interesting things this week was what's going on with interest rates. And I want to start before we get into kind of some of the drama. Lou, why do interest rates matter, particularly for investors in the economy? Wow. Speaker 7 (0:53) Big question, Travis. Is that the only one? I'll just lob Speaker 5 (0:57) that one over to you. So Speaker 7 (0:58) why do interest rates matter or why do the current, you know, the heights interest rates matter? Because look. interest money is the lubricant of the economy and what you pay for money at the end of the day determines what you can, how much you can do with the money. So that's why we follow this stuff. Look, right now there's a lot being made about interest rates being higher than they were. They are higher than they have been. Yes, for a while, but look, they're still way below where they were in the seventies, the eighties and nineties, and somehow companies and consumers, and it wasn't found away. I think some of the current. panic about current rates is overdone because money should cost something. Money shouldn't be free. And as you Speaker 5 (1:38) mean, the 2010s Speaker 7 (1:40) and early 2020s was not normal. Well, and as an investor, I think we I found out or we collectively found out the problems of what happens when money is free. A lot of bad ideas get going. So in a way, you know, a nice four or five percent rate does provide you some sort of I don't want to say BS filter, but I think I just did. But look. Right now, everything's going on. There's kind of an audience of one here that would like to, that needs to see everybody trying to bring rates down. And so we're kind of going through, there's serious things that we should discuss, like what all this means, but a lot of it is just panicking over a line and not zooming the line out enough, I think. Speaker 5 (2:22) Yeah, Jim, it seems like interest rates are like an easy topic to talk about, but. they do flow down into the economy in a very real way. If you get a mortgage, it is tied to interest rates, typically the 10-year. When companies raise money, they have to pay interest on that debt if they're taking out debt. Stocks are valued, at least in part, based on what those interest rates are, the risk-free rate if you're doing modeling. So there is a reason if you are the president or if you're running the Fed. you would maybe want lower interest rates to help the economy. So how do you think about that as an investor? I mean, does that something that plays into your modeling or is this just sort of noise in the ecosystem? Speaker 6 (3:05) Oh boy, can't open worms everywhere. So a couple of things. First off, people who have seen my prior work, we've probably heard a very version of this, what I'm about to say, but I'll say it again because, you know, just hit the hit, play the hits, right? Most people, ask most people what your largest lifetime cumulative expense is. Okay. When I've done little talks in public or I've occasionally talked at high schools or universities or even on Fool Live, Fool 24, sorry, ask that question. Most people say, well, house or education or kids. And I'm like, no, most people's largest lifetime cumulative expense is actually interest. interest on your house, interest on your student loans, on your car loans, on your credit cards, pay off your credit cards, kids, and so on and so forth. And when you realize that, you can start doing things differently because it's within your ken to not pay high interest. You can buy a smaller house, you pay your mortgage down, you could buy a used car, blah, blah, blah. Okay. So, you know, this is a way you can avoid paying interest in your personal life. That's number one. And I would encourage most people to do that because I don't like throwing money away. The idea of where interest is going, though, is because, you know, as Lou mentioned, it's a lot cheaper. But as I understand what's going on from this move, and I, by the way, may very well not understand fully, okay? I want that out there. The U.S. Treasury, and again, Canadian here, so I'm, you know. Not my country, not our fiscal policy or monetary policy, I should say. But, you know, we are keen observers. They are upping the sales of short-term debt using the extra proceeds to buy down the long-term debt and tamp down rates at the longer end of the curve. And doesn't that suggest a little bit of risky behavior? Like if the whole game... which I've been told by multiple smart fools and people not employed by us, has been to, hey, look, government debt's large. Federal government debt in the US just passed the $40 trillion mark. Sounds like a lot. Interest on that debt is already sucking up about 20 cents of every federal tax dollar coming in. Sounds bad. And now we're... going to issue more short-term debt, which comes with a lower coupon, like, isn't that maybe going to require more refinancing fairly near term? What guarantee is it that that works? And, you know, far be it from me to suggest that the bond market might be able to see through that collectively and go, hmm, tariffs are inflationary, debt's elevated and growing. And the present government is, you know, kind of, and this is not an America quote. I mean, you know, I could point you to a few other governments not living within their means, including my own. You know, but like sometimes eventually things break. And so here in Canada, as I call it, the land of the frozen chosen, or as Travis, as you pointed out, I am a little south of you actually, which is kind of a fun fact. Don't look this up, fools. How many US states have territory above the most southernmost point of Canada? The answer will surprise you. The answer will surprise you. But Canada in the mid-90s got up to almost 80 % debt to GDP. And they kind of went austerity. They cut a bunch of services. They offloaded a bunch of services to the provinces. And today, I think we're running at about 60, 65. And I'm just going to point that the U.S. is kind of running at 120, I think. So, I mean, now you guys have something we don't have, which is, you know. Yeah, reserve Speaker 5 (7:02) currency. Speaker 6 (7:02) The global reserve currency. Yeah, that feels important for now. So what is the Speaker 5 (7:06) market trying to say about that debt, though? Because what I think is so interesting with this is, so the short term, what has happened this week is the Treasury is buying back some long term. because they want to reduce those interest rates on the long end of the curve as we were 30 year bonds. But the Treasury does not, or even the Federal Reserve does not set interest rates. The market does. No, the bond Speaker 6 (7:31) market Speaker 5 (7:31) does. That's why I say the bond market's going to see through this. Right. So the bond market is, the way I was thinking about it is they're communicating with you. If you're a company and you're going to look for debt, of course you would love to have a lower cost debt. But the market is communicating to you, no, I want a 10 % interest rate to take that risk. I want a 12 % interest rate. And then you have to adjust to that and adapt to that. And so what is the communication that's happening from the bond market, which by the way, is 10 times the size of the equity market. So the bond market really runs the world. Speaker 6 (8:02) Yeah, the bond market doesn't like the state of debt, I think, in general. uh, in terms of like the, the rate rates will go up as they start to perceive that there's a bad situation. And I'm not smart enough to know if there's a bad situation in the U S or Canada or anywhere else right now. I just, you know, can say, well, on a relative basis, this is getting worse in terms of the amount of debt, in terms of the ratio of debt to GDP. Um, can it be reversed? Of course it could be reversed. Uh, but right now, the bond market's going, eh, we're not really sure about this. The Speaker 7 (8:38) other thing that's going on, and this is just true of every market is, is that all prices are just a simple measure of supply and demand. And there is just a lot of supply of debt right now. We've talked about the hyperscalers and everything they're doing. This is hardly a U.S. thing too. As Jim said, there's a lot of countries, Germany, all over the world, we are running budget deficits. So there is just a lot of paper out there. You have to make yours pretty and you do that with rates. So, you know, I mean, that's just kind of how rates work. To Jim's point, and I said, I think it's for an audience one, but buying back $4 billion in bonds when your deficit is $2 trillion is like switching to low-fat milk and saying, okay, I can still eat 8,000 calories a day. I saw Speaker 5 (9:22) a video of somebody using a squirt gun to try to put out a house fire. I think that is another. It's Speaker 7 (9:28) just not going to work. But I think someone was told to do something. And so they wanted to show they're doing something. That said, look, this is a lot more sustainable than we like to admit. At some point, the government is going to have to do something about it. But we do print our own money. We are, at least for now, we might be doing our best to try to ruin that. But we are the reserve currency. There is a stable. market. This makes everything harder and