The View from Washington D.C.
Transcript of the podcast:
KATHY JONES: I'm Kathy Jones.
LIZ ANN SONDERS: And I'm Liz Ann Sonders.
KATHY: And this is On Investing, an original podcast from Charles Schwab. Each week, we're going to bring you our analysis of what's happening in the markets and how it might affect your investments.
LIZ ANN SONDERS: Well, I'm really excited because on this week's episode, we are going to talk to Mike Townsend, one of my favorite people at Schwab. When you find out, if you don't already know, what he does, you'll know why he's in high demand these days.
Mike is Schwab's managing director of legislative and regulatory affairs. He covers all things Washington and politics. So we're going to give him a call and get the latest updates. An interesting place these days in Washington.
KATHY JONES: Yeah, to say the least, Liz Ann, you know, we've worked with Mike for a long time, and he always has really insightful things to say about the state of things in Washington.
You know, and I guess it's been about four years now that he's had his own podcast, WashingtonWise, which is really popular. I think one of the best parts about his podcast is that he presents all this great information about legislation and policy in what is a pretty neutral, straightforward way. And our clients really appreciate that.
LIZ ANN: And I think because of that—neutral, straightforward—he very much stands out in a crowd of people covering Washington. So kudos. But before we get to Mike, let's talk a little bit about last week.
KATHY: Well, anyone who follows your articles on Schwab.com probably knows that you use a lot of song titles, Liz Ann. And they've probably heard you mention your taste in music. And well, I saw on Twitter that you went to a pretty big show over the weekend.
LIZ ANN: Yeah, it was one of the coolest experiences. I went to see U2, which I'm a huge fan of U2. As many people know, I've seen every tour since the mid-80s, I guess 1987 when they did Joshua Tree. So I'm certainly not new to seeing U2, but as many know, U2 is now at a new venue called the Sphere in Las Vegas. I'm not a Las Vegas fan, so I would only go for something like this. But it is such a visual and acoustic marvel. I think it's part of the reason why they extended their pseudo-residency, but I'm guessing that a lot of other singers and acts and bands are going to be clamoring to do their shows inside this incredible venue. It's just beyond.
And yeah, I do use song titles for my report titles. And sometimes they immediately come to me because just the title pops into my head, and it so resonates relative to what I'm writing about. But I'll also admit that there are times where when I'm done writing, I think, "OK, now I need to come up with a title." And I do have, you know, cheat sheets, you know, top 100 classic rock songs of all time, or I've got sites that let you put in a keyword or two, and then it'll bring up song titles. But I don't know, maybe it doesn't amuse readers, but it amuses me, so I'll continue to do it. So what about you, Kathy? What have you been up to since last time we talked? What was your week like?
KATHY: Well, I think in comparison to your week, mine was far less glamorous.
Jobs report was pretty exciting for the bond market, however. It did come in showing that the labor market is cooling off a bit, and bonds had a really big rally. So I was excited about that.
Other than that, it was a nice weekend here in New York City. So my husband and I spent some time in Central Park bird-watching. Fall migration is almost over, but the big variety of ducks in the reservoir is great to see. So I know that's pretty nerdy, but we really had a good time.
LIZ ANN: Bird-watching is fascinating. You may remember, I interviewed former Treasury Secretary Hank Paulson a number of years ago at Schwab's IMPACT conference. It was after he had written his book about his experience during the financial crisis, and he and his wife are avid bird-watchers. So I got to learn a bit about it from him in some of the pre-conversations, and it certainly is a beautiful thing to do. So I'm a little jealous.
KATHY: It's a nice peaceful activity.
Joining us now is Mike Townsend. Mike is Schwab's Washington-based political analyst. With more than 30 years of Washington experience, he analyzes legislative, regulatory, and political developments to determine how they would affect individual investors, retirement plan participants, and investment advisors.
Mike is the host of Schwab's WashingtonWise podcast. If you haven't heard it, you really should listen. It explores the intersection between policy, politics, and the markets and the economy.
He's a featured speaker at dozens of employee, client, advisor, and industry events each year where he discusses the impact of the political and policy environment in Washington and what it means for investors and the capital markets.
Prior to joining Schwab in 2000, Mike worked for Powell Tate, Incorporated, a Washington, D.C., public affairs firm, and previously worked for two U.S. senators from Maine.
Welcome to the show, Mike. You're our first official guest.
MIKE TOWNSEND: Well, I am honored. You both have been frequent guests on my WashingtonWise podcast, so I am thrilled to return the favor and be on the other side of the questions for a change.
KATHY: Well, good. So we're going to start and fire away. I'm going to do the first question.
Mike, I know we avoided a government shutdown in October. That's basically what cost Kevin McCarthy his job. But now that we have a new speaker, it looks like we're headed for another showdown in just a couple of weeks. What's the consensus on that? Do you think we'll have a government shutdown?
MIKE: Yeah, I think we'll have a government shutdown at some point. The question is going to be what the timing of that is. So the next deadline is next week. The government is funded through November 17th. And there has been a sense in Washington for the last couple of weeks that they would probably just pass an extension of funding until perhaps mid-January, partly because I think everyone recognizes that the new speaker has been on the job for like three weeks, and it's unrealistic to think that he's going to craft some grand bargain with the Senate and the White House. That said, I'd say it's still far from a slam dunk that this is going to get done on time. There are just a lot of different issues crashing together here.
I think the fundamental issue is, of course, that Congress is supposed to pass the appropriations bills that fund every government agency, every federal program, by the time the government's fiscal year starts on October 1st. And they basically never succeed in doing that. And that's what creates these temporary extensions that just keep funding going from the previous year until they can figure out a budget for the new year. So they're on one of those temporary agreements right now through November 17th. In the meantime, they're trying to pass the appropriations bills, but even if they pass them all, the House and the Senate are using different baseline numbers. The House Republicans want to see more spending cuts. Democrats in the Senate want to just keep funding flat from 2023. So there's a baseline difference of about $120 billion between the two chambers. At some point, they're going to have to reconcile that.
At the same time, big fight going on over emergency spending for Ukraine, for Israel, for border security, for humanitarian aid. So it's kind of created this whole giant mixing bowl of issues that are all sort of interrelated.
I guess my bottom line is—there is not a clear plan right now for how all this gets resolved. My guess is they find a way to keep the government open for a couple more months. I don't think that's a certainty, but I think we'd probably get there. So I guess I'd say medium-low chance of a shutdown on November 17th, but probably a very high chance of a shutdown in early 2024.
And I'd say one other thing, Kathy. Investors ask me all the time, "Do the markets care about government shutdowns?" And the answer to that basically is no. Historically, the markets have kind of shrugged about government shutdowns. And in fact, the S&P 500® has actually gone up in the last five shutdowns, which maybe tells you something about what the market thinks of the importance of Washington to investors. But it's not to say there couldn't be, if it's a long shutdown, some economic impact. But generally, it's not something that the markets get too up in arms about.
LIZ ANN: Yeah, Mike, maybe it's when they shut the government down, the view is that, "OK, well, it's shut down; maybe they can't muck it up, at least for some short period of time." Not to mention that lots of games are played in Washington. You and I have often laughed about the game of kick the can, which they do quite well in that city.
So speaking of things that maybe don't often get a lot of attention, although it's an area that we spend a lot of time talking to our clients about, which is the deficit and government debt. I wonder how you view the near-term battle over reducing the deficit, whether it's something that will continue to be debated with little action.
As you know, in our 2023 Outlook written about a year ago, we posited that the broader conversation around debt and deficits would become a bit louder this year. And in light of the significant increase in the cost of servicing debt, do you think this is a topic that will get more attention as we close out the year and head into 2024?
MIKE: I really do, Liz Ann. And it's a much bigger issue on Capitol Hill right now than it's been probably in a decade or more. And a big reason, as you point out, is that interest rates are increasing the cost of servicing the debt. In the fiscal year that just ended, the U.S. spent more than $650 billion on interest servicing the debt. That's an 87% increase from just two years ago. And Bloomberg just last week estimated that 2024 will probably cost a trillion dollars.
So in Washington, once you're talking a trillion here, a trillion there, you're talking real money. After all these years of low interest rates that made servicing the debt not a very big deal, it's just much more on the minds of lawmakers right now. And I think that's contributing to this debate we're seeing over special funding for Ukraine, for other crises, all of which would just add to the deficit and the debt. But you know, when it comes to Congress actually doing something about it—much harder.
You know, when we're talking about spending in Washington, a lot gets taken off the table right away—defense, veterans, Social Security, Medicare. And when you have a whole bunch of untouchable issues, those things comprise 70-plus percent of the budget. So cutting has to come from a pretty narrow slice of the pie. And at the end of the day, you just don't have a big enough bucket to cut from to really make a difference.
I mentioned earlier the House and Senate have different visions for spending in the year ahead. That gap is about $120 billion. In the context of a budget deficit that's approaching $2 trillion, it's just not that much. It's not going to make a big dent. So I think this is something Congress is going to wrestle with more next year. But remember, next year is an election year. And in an election year, members of Congress don't want to take those kinds of tough votes to cut things that their constituents might like and might be mad at them for cutting. So difficult situation for politicians next year.
KATHY: So Mike, can you tell us what's going on with the rating agencies? You know, we've had a couple of downgrades of U.S. government debt in the past. Should we be surprised if Moody's now issues a downgrade?
MIKE: No, I don't think so. I mean, Moody's issued a warning a couple of months ago that a downgrade is very much on the table. And it pointed directly to dysfunction in Washington and the rising debt as key reasons that it's considering a downgrade.
Standard & Poor's, of course, was the first of the rating agencies to downgrade the U.S. from AAA. They did so right after the debt ceiling battle of 2011, which a lot of people forget they never returned the U.S. to that AAA level. That was 12 years ago now.
Fitch Ratings downgraded the U.S. a notch this past August, and they directly cited, I'm going to quote this, "the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance," as key reasons. So now I think, yeah, Moody's may do the same.
What's interesting is that when Standard & Poor's did their downgrade in 2011, huge negative market reaction. It was a big drop, and I think about three months before the market recovered from that. When Fitch made its downgrade this past August, not a lot of market reaction. And I don't know that Moody's, if they downgrade, would elicit that bigger reaction from the market either. I think the market recognizes that the long-term fiscal picture for the U.S. is not good. I think the market is sort of expecting the downgrade at this point.
KATHY: I'll only add a comment that the bond market actually rallied in 2011 during that whole downgrade episode. It was a bit of a flight to safety, a little bit counterintuitive because, you know, you get downgraded and people flock to the thing that gets downgraded. But you know, that's the way markets operate.
The Bank Term Funding Program, this is the program that the Treasury and the Fed put in place in order to help out the banks during that whole meltdown that we saw over the Silicon Valley Bank, et cetera. That program is due to expire in March of next year. Do you have any reading on whether that might be extended if there's concern still about the banking industry?
MIKE: Yeah, you know, Kathy, that was designed to be a short-term program. It was only authorized for a year. So, you know, it stood up, as you said, in the sort of March crisis of 2023, when Silicon Valley Bank, Signature Bank both collapsed. It's a short-term program where the Fed basically said it would provide loans to banks to ensure that they could meet redemptions from depositors if there was, you know, another flurry of redemptions. And the Fed is, as part of that program, they provide a monthly report to Congress on the status. So at the end of September, which is the most recent report, the program had made more than $119 billion in loans. So it was utilized.
It is, as you said, set to expire in March 2024. There really hasn't been any indication here in Washington one way or the other about whether the Fed might extend it. I think that decision will come in the first couple of months of 2024 after a broader assessment of the state of health of the banking sector, but definitely something to keep an eye on early next year.
LIZ ANN: So elephant in the room. There's, I think, something happening in Washington next year, Mike. And needless to say, we're talking about front-page news every day, every minute next year, and that's the presidential election.
So what is your plan? How do you map out an election year in terms of informing all of us as you follow the debates, the primaries, and the election in general. Give us your playbook.
MIKE: Yeah, the 2024 election has been going on for months, obviously, but it sort of feels like it's really kicked off now that the off-year election is in the rearview mirror. Iowa, the first caucus, is just a couple months away. We had the third Republican presidential debate just a few days ago. Former President Donald Trump, of course, did not participate, and really no reason for him to do so. National polling has him running 30, 40 points ahead of the rest of the field, about 30 points ahead in early states like Iowa, New Hampshire, and South Carolina. So these debates feel a little bit like the junior varsity for the rest of the candidates where they're, I don't know, maybe competing to be the vice-presidential choice if it comes to that.
It really feels like a rematch between President Biden and former President Trump is inevitable. And what I think is really interesting is how so many voters on both sides are so unenthusiastic about this matchup. When I talk to investors, when I talk to advisors, at conferences and events—I'm not kidding, the most common question I get is, "Do you think we can get somebody else?" And that comes from people who are on both sides of the political spectrum. I also think there's just a lot of unknowns in the year ahead in terms of the various legal cases that Trump is going to have to deal with that will play out right as the primaries are going along. On the other side, persistent questions about President Biden's age and stamina.
So this election, as I look ahead, doesn't fit the sort of conventional playbook. It's going to be weird and passionate and there's going to be a lot of strange things, I think, that happen. So I'm just going to try to float along with the tide and see where it takes us.
I actually, Liz Ann, spend probably more of my time paying attention to the battle for control of the House and the Senate. Because in a lot of ways, I think that's where policy that can really affect the markets that really impacts investors actually comes from.
And on that front, I think there's a good chance that Republicans take back control of the Senate. They only need to win two seats. There are 23 Democrat senators up for re-election and just 11 Republican senators who are up for re-election. That 23 in the Democrat side includes the three senators who represent red states—Ohio, West Virginia, and Montana. So those are very tough re-election fights. It's just a good playing field for Republicans.
At the same time, I think there's a really good chance that Democrats flip control of the House. They only need to pick up a handful of seats. I think the internal division among House Republicans probably plays really well into the hands of Democrats.
So we could be looking at a split Congress again, except in the opposite way that we have now. And that would actually be unprecedented. We have never had an election where the House and the Senate change control in opposite directions in the same election. So pretty interesting, but, you know, lots of twists and turns ahead. So like I said, I just try to keep my head above water as it all unfolds.
LIZ ANN: Yeah, Mike, related to that and your thinking around what could happen in Congress with the House and the Senate, you mentioned off-cycle elections. Obviously there was just the more localized elections earlier in the week. Did that change your perspective in terms of the messages that emanated from that on what could happen this next year with the congressional elections?
MIKE: Well, I think there's no question it was a good night for Democrats. The Democratic governor of Kentucky, a very red state, won re-election pretty easily. There was a major reproductive rights ballot issue in Ohio that won overwhelmingly. And in my home state of Virginia, the Republican governor put a lot of money and political capital into flipping the Virginia State Senate, which would have given Republicans control of all three branches in the state. And what actually happened is not only did Republicans fail to flip the Senate, but they actually lost the House of Delegates. So Democrats had a really good night, kind of an embarrassing loss, I think, for the Virginia governor.
You know, it's hard to take these off-year elections, which tend to mostly focus on very local issues, and extrapolate out to a big, national, presidential election. But I think it does emphasize that Republicans need to get their sort of playbook in order. They're sort of the party of chaos right now. It's certainly been that way in Washington for the last month or so. And I think a lot of voters are concerned about, you know, the direction that they may take. And that's playing out in some of these elections.
So I think that's going to be really interesting to see if that plays out on a larger stage of the congressional elections and the presidential election next year.
KATHY: So Mike, we're getting a lot of questions about the regulatory environment. What's on your radar in terms of regulation in Washington?
MIKE: Kathy, you know, the regulatory environment tends to really take center stage when you have a divided Congress like we have now that really struggles to get basic things done. And so there's a lot going on that I think investors should be aware of at the SEC, which has a busy agenda that, you know, we have a very controversial rule proposal around climate risk disclosure for public companies. They have put forward a series of proposals to really overhaul how trading works for retail investors, really coming out of the meme stock frenzy during the pandemic. And they're looking at sort of giving investors sort of more clarity about what happens when you push "trade" on your computer, and it disappears out there into the ether, and it comes back and says, "Here's what you got." You know, where was money changing hands inside that pipeline? Did you really get the best result that you're supposed to get? So that's a proposal.
They have also, at the SEC, proposed changing the trading system to go to an auction system at the exchanges, which would be a huge change from the way trading works now. There are also proposals around mutual funds, around the use of technology in getting investment advice. So a lot of things that, I think, tend to fly under the radar a little bit for investors that could have a really big impact on all of us.
So that's something to watch. The regulatory process is super slow. It takes months and months and months, and often years, to sort of unfold. And a lot of these things that I've been talking about are in progress right now but haven't been finalized. So it's something we're going to be tracking into 2024 and trying to communicate to investors about how these things might impact them.
KATHY: Thanks for being here, Mike.
MIKE: Great to be with you both. Thanks so much.
LIZ ANN: And remember, if you want to keep up with what's going on in Washington, follow Mike's podcast. We love it—WashingtonWise. We've been guests wherever you get your podcasts, but thank you for sitting on the other side of the proverbial mic this time.
So now let's focus on where things seem to be headed for next week.
Kathy, what's on your radar for the coming week?
KATHY: Well, the big reports, as you know, will be retail sales because of the strength of consumer spending recently—still very much in focus for markets. And then CPI, that's the big one, the Consumer Price Index.
Inflation has been moderating, especially now we're seeing energy prices fall very sharply. That's going to show up in the Producer Price Index report. We'll see if that filters through to consumer prices anytime soon. But I think those are going to be, you know, the really big reports next week.
And so that's where we are this Friday. What about you, Liz Ann? What are you going to be watching for next week?
LIZ ANN: Well, obviously, those same sets of reports as well. And specific to retail sales, I think we're at the point in the cycle here where you want to, with just about any economic data point, especially a data point that is reported in nominal terms, is look at the difference between nominal and real. Nominal retail sales have been quite strong, but in real terms, which is inflation-adjusted, they have not been as strong. So I think given what we hope is ongoing disinflation, I think getting a sense of that difference between nominal and real is important.
The NFIB Small Business Optimism Survey comes out as well, and I think especially in an environment where, at least in the market, small-cap stocks have done so poorly, getting a sense of optimism or lack thereof of small businesses is important. Not to mention, there are so many component parts to that release and that report that always have, I think, good nuggets in terms of expectations. You've got PPI too, which always comes following CPI. It doesn't tend to be as much of a needle mover, but these days I think you've got to look at all inflation data.
And then I'd say continue to keep an eye on the weekly unemployment claims data. You can look at just initial claims on a weekly basis. Sometimes it's maybe a little more instructive to look at a four-week average because the weekly number can be fairly volatile. But importantly, also focus on continuing claims. That's people who remain on unemployment insurance. And it's continuing claims that have moved up somewhat noticeably. And you could just infer from that people who have lost their jobs, it's taking a little bit longer to find new jobs. So there are some embedded messages that come with claims on the overall economic environment.
And then we've got building permits and housing starts. Those are key leading indicators, obviously reflect what's going on in the housing market. So those are some of the things that I'm keeping an eye on.
KATHY: Thanks for listening. Be sure to follow us for free in your favorite podcast app. And if you've enjoyed this episode, please tell a friend about the show.
If you want to keep up with the charts and data we post in real time, you can follow us both on Twitter (or X) or LinkedIn.
LIZ ANN: I'm @LizAnnSonders, and that's S-O-N-D-E-R-S on Twitter and LinkedIn. Make sure you're following the real me and not one of the rash of imposters I have had recently on, particularly on X.
KATHY: And I'm @KathyJones, that's Kathy with a K, on X, formerly known as Twitter, and on LinkedIn.
LIZ ANN: And on next week's show, we'll be joined by Nancy Lazar, a friend of mine for a long time and the chief global economist at Piper Sandler.
For important disclosures, see the show notes or visit Schwab.com/OnInvesting, where you can also find the transcript.
 National Federation of Independent Business, Small Business Optimism Index, https://www.nfib.com/surveys/small-business-economic-trends/
In this episode of On Investing, hosts Liz Ann Sonders and Kathy Jones welcome Mike Townsend to the show. Mike is Schwab's managing director of legislative and regulatory affairs in Washington D.C. He is also the host of Schwab's WashingtonWise podcast, which explores the intersection between policy, politics, the markets, and the economy. He shares his thoughts on the 2024 election cycle, the likelihood of a government shutdown, and the state of the federal budget deficit and government debt.
Kathy and Liz Ann also give an update on what they are keeping an eye on next week in the markets.
Liz Ann Sonders is Schwab's chief investment strategist. She's regularly quoted in financial publications including The Wall Street Journal, The New York Times, Barron's, and the Financial Times.
She also appears as a regular guest on CNBC, Bloomberg, CNN, Yahoo! Finance, and Fox Business News. Liz Ann has been named "Best Market Strategist" by Kiplinger's Personal Finance and one of SmartMoney magazine's "Power 30." Barron's has named her to its "100 Most Influential Women in Finance" list, and Investment Advisor has included her on the "IA 25," its list of the 25 most important people in and around the financial advisory profession.
Kathy is Schwab's chief fixed income strategist. She is a regular guest on CNBC, Yahoo Finance, Bloomberg TV, and many other networks and is often quoted by The Wall Street Journal, The New York Times, Financial Times, and Reuters. Kathy has been an analyst of global credit markets throughout her career, working with both institutional and retail clients.
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