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KBW Senior Vice President of Research Brian Gardner says sequestration could affect your 401(k).
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-- rich -- But our next guest says the stock market -- -- decided all the budget cutting talk in Washington.
Is -- done but he says the bond markets are far more concerned we -- joined by Kate BW senior VP.
Brian Gardner thanks for being with a prime.
You know for all look at testified -- going on in Washington.
Cut wise it's only 85 billion dollars out of this year's three and a half trillion dollar budget why would the bond markets get jittery on this why I.
I think it's an issue of political will it's not the size of the cuts -- say it's it's an indication of how serious Washington is on dealing with the long term budget.
So they get if they can't they only get rid of sequestration and don't replace it with something more meaningful for long term entitlement reforms.
Then I think the bond market and fixed income investors say hey look you know we always knew Washington wasn't that serious on the budget.
Now we really know they're not serious on the budget.
Now -- you know President Obama came on today and as sometimes happens when he comes on air stock suddenly.
Went from green to -- and they're now the Dow down 65.
What's making traders -- jittery right now.
Well I think it's a growth story on economic growth story for the stock market and united you know even that as small as this is it will have a a slight negative impact to GDP and -- I think that's what the equity markets are looking at.
So -- if sequestration went away was replaced with something longer term I think the equity markets would be.
Modestly happy I don't you know -- despite that that the temporary sell off this morning we've seen the market grinding higher over the last couple weeks in the face of sequestration calming.
So I don't think the equity markets are as worried.
As this little blip this morning suggests I think most equity investors are just going to kind of brush this off as being more -- Washington -- and not worry about it all that.
Much okay so explain to -- why the bond markets exactly would be so upset so if they just kick can down the road they don't do enough cuts and and don't take bold action.
The bond markets start to begin to worry that the US government's not good paying back its debts and therefore interest rates -- that will jump and you'll have to pay the higher return before we will of the -- have my money.
Not not so much about willing to repay its debts but locking not -- but racking up more debt that they're not serious.
In constraining the the growth rate in government if you can't even -- to 85 billion dollars.
A 110 billion dollars really in any given year over the next ten years.
Then how would series in Washington about.
Working on the larger problems entitlements the real driver of the budget deficit in and debt.
That's going to go on for the next 1020 years so I think they're taking a short moment in time and extrapolating it out.
And that's where the worry and concern comes from.
Here last year I think it was we had fifteen trillion dollars in government debt and we we spent 360 billion dollars on interest serving that debt.
-- ten years ago we had only 13 as much debt.
And we spent about the same exact amount so debt right now for our government borrowing it's simply wait too cheap.
Isn't the best way for Washington to finally cut simply when interest rates go up that we have to pay on financing the debt and his forces cuts for the elected or not.
It it certainly introduces a a level of market discipline in Washington obviously is -- living.
Pretty well right now in terms of financing the debt because of fed policy.
At some point that's going to change when we don't exactly know we we may get a little bit of a better idea tomorrow when when chairman Bernanke steps up on the hill.
On but at some point that's going to change in the market will impose its will -- bond vigilantes will have their say even though they're not yet we know when the future that they well.
-- always worried about the bond vigilantes the idea that overnight they won't put up money left interest rates double or triple or something.
But they'd never really come back now if one were we have is that we have another credit downgrade on the US government and its ability to repay.
Right now interest rates are lower than they were what what are AAA aren't -- for the government all right.
-- it's a it's a legitimate.
It's a legitimate point -- what what we saw was -- in -- in a -- world it was a flight to safety after the downgrade.
Because Europe was so bad as Europe starts to moderate a little -- not that -- out of the woods but it's a less of a concern -- you see emerging markets being able.
To take over the growth engine of the world then the US doesn't be calm as a -- it's not the safe same safe harbor as it is today.
And that's what may be another factor into one to the bond vigilantes step in and and impose their -- Yet only -- -- and and it's.
We -- not one that you wanted to try and people -- -- has saved every other place is far less safe until late floods back in here anyway it's kind of a strange anomaly there it is until it is not be out until it is not and that's the way all worried about all right thanks for make us worry Brian dark.
