The elephant in the room remains unaddressed

The elephant in the room. We all see it, we all smell it, and yet no one looks at it and for goodness sakes, no one talks about it. We do it to ourselves, we do it to our families, we do it to our communities and we even do it to our country.

Sometimes, we do it so long, the elephant becomes so obvious, it becomes a fixture of life. We just work around it, managing to exist and even thrive despite its obtrusive presence. Occasionally we live with the elephant so long that when someone finally has the courage to point to the beast sitting there, the pronouncement is practically ignored as irrelevant.

So, when credit rating agency Moody's pretends to have the courage to shout out what everyone already knows, are we expected to give credence to their complicity as well? This week the financial markets determined otherwise. Can somebody give that elephant some oatmeal? He looks hungry.

The U.S. has three major credit rating agencies -- S&P, Moody's and Fitch. These firms are considered the gold standard in credit analysis used for investment pricing, fixed income portfolio construction and risk analysis. As someone who advises clients on portfolio management, I use these work products nearly every day. Most advice firms simply do not have the depth of resources to perform fundamental credit analysis on fixed income securities; we have to rely on these firms for this type of research. It's important stuff.

This week, Moody's announced it was cutting the quality rating on debt issued by the United States government from its highest rating of Aaa to its second highest Aa1. Moody's was the third of the "big three" agencies to perform this ritual, with S&P downgrading U.S. government debt in 2011 and Fitch in 2023.

I find the timing of the pronouncement a little questionable, as we are about to enter the intense negotiation period regarding the domestic fiscal agenda of the Trump administration as the "Big Beautiful Bill" works its way through Congress. The timing of the downgrade in my opinion has the hint of politics behind it, and without doubt the work these rating agencies do has to remain above the political fray. Maybe it's just a coincidence Moody's decided to weigh in now, but if so, it's a pretty big coincidence. I would prefer they not attempt to put a thumb on this policy scale.

As the process of setting Federal tax and fiscal policy for perhaps the next decade takes form, let's look at the math. In 2018 when the current tax laws went into effect, the government collected $3.3 trillion in revenue. In fiscal year 2025 (which began in October 2024) federal revenue receipts from all sources is expected to reach a record $4.9 trillion, a 48% increase in seven years (source: CBO).

Of course, forming any conclusions about these huge numbers is not possible without a wider look at the overall economy. During this same period U.S. GDP in 2018 was recorded at $20.6 trillion; in 2025 GDP is expected to be $27.6 trillion, a 33% increase from when the current tax rules went into effect. So, the economy grew by 33% and tax revenue grew by 48% in the same seven-year period. Only in Washington DC could this increase in revenues be considered a "tax cut" and be viewed as anything but remarkably positive.

The math also requires us to look at just where these revenues were generated. According to research posted by the Institute for Tax and Economic Policy, the top 20% of income earners earn 62% of all income but provide 65% of all tax revenue to the Federal government. So, as the rhetoric in the press over the next few weeks heats up and the "tax cuts for billionaires" line reaches a fevered pitch, let's do our best to stay intellectually honest. Any tax policy change is bound to positively impact high income earners, simply because these households pay most of the taxes. Wouldn't it be nice to leave the class warfare at home for once and have an honest discussion about funding the government?

So back to our friend the elephant. The paradigm of globalization, enabling corporations to seek the lowest cost labor pool anywhere on the planet, while the United States military sets the tone on global security and provides the world's reserve currency, has created incredible prosperity in the United States. Not, however, without a price. The price has added up over time to a marginally manageable $37 trillion mountain of debt. U.S. abundance aside, the continued sustainability of this expensive and poorly managed paradigm has to be questioned. For some reason Moody's chose now to point out the obvious. Investors yawned.

As the latest little girl along the parade route to shout "the emperor has no clothes," I didn't really expect a response from investors. The elephant in the room won't be solved by tax policy, and everyone already knows it.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.