First Friday: The Dollar Is Weak, Bonds Are Expensive, and We Owe WWII-Level Debt

0:28We created more jobs than expected. pointed to fewer jobs being created in May as compared to April. So in April, we created 147 ,000 new jobs. In May, we were expecting that we'd only create 130 ,000. We actually beat that and we created 139 ,000. What does that mean? Big picture, it means we're adding more jobs, but we're slowing down the rate at which we do so. It also means that we expected the slowdown to be worse. So it's still a slowdown. It's just not as bad of one as we thought. Meanwhile, the unemployment rate held steady at 4.2%. But nobody's talking about the jobs report this morning.

1:09People are talking about a big fight that has dominated headlines. Without naming names, we're going to address that at the end of today's episode. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. Every choice has a trade-off. This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I hold a master's in economic journalism from Columbia. And once a month, on the first Friday of the month, I produce a macroeconomic update, a look at the economic news of the last month.

1:47So welcome to the June 2025 First Friday Economic Update. If you're looking for a job, healthcare is the big winner. Over the last 12 months, it has posted an average monthly gain of 44 ,000 new jobs. But in May, it did very well. It created 62 ,000 new jobs. Similarly, the leisure and hospitality sector is also beating its recent performance. So over the last 12 months, leisure and hospitality, on average, added about 20 ,000 new jobs each month. In May, it added, it more than doubled that, it added 48 ,000 new jobs. We are seeing a decline in federal government jobs. So in May, we saw a decline of 22 ,000 jobs.

2:32In total, we're seeing federal government jobs down by 59 ,000 since January. Now, I'm going to put a big, big, big asterisk here. Employees who are on paid leave or employees who are receiving ongoing severance are not counted within that number. So if a federal government worker is still getting severance, then they officially, on paper, count as employed. So we're not going to have accurate data until that severance runs out, so probably in the fall. So in future First Friday updates, stay tuned because you're probably going to hear those numbers revised. But as of now, we know that government jobs declined 22 ,000 in May and 59 ,000 since the beginning of the year.

3:21And to be clear, those are federal government jobs. We actually have seen some gains in state and local government. And that's the jobs report. Let's open with a recap of where we are on tariffs, trade, taxes at the moment. One of the strange realities of creating an economic report that is monthly in its nature is that we are not focused on the day-to-day drama of daily news, but rather we'll recap what happened this week so we can stay current and then zoom out to take a much bigger picture look. Not just at what's happening, but more importantly, at what it means for you. So the U.S. Court of International Trade, which is an entity that was established under Article 3 of the Constitution to provide jurisdiction over disputes related to customs and international trade, made a ruling that stated that the U.S.

4:11Constitution gave Congress the exclusive power to regulate commerce with other nations and that an emergency law that was invoked by the presidential administration does not give him the authority to impose tariffs. Now, to be clear, this does not impact tariffs on specific elements like steel, aluminum, even cars, because those fall under a different law. This only impacts tariffs that were imposed under the International Emergency Economic Powers Act, which is a 1977 law that President Trump cited in order to justify the tariffs that he announced on Liberation Day. The court also ruled that a separate set of tariffs on products from Canada, Mexico, and China, related to what he says is their role in sending fentanyl to the U.S., were also a violation.

5:03Now, the administration is, of course, appealing the ruling, and that case will be decided in the U.S. Court of Appeals for the Federal Circuit. Zooming out, getting away from the news of the week, and putting this in perspective of what it means for the month. Zooming out what all of this means for businesses is greater uncertainty. For example, we know that the president had threatened to impose 50 % tariffs on the EU. However, in an effort to make a deal, he granted a deadline to the EU of July 9th. And so as just one example of this uncertainty, we, on one hand, know that July 9th is a deadline to see whether or not a deal is made.

5:41And if it is not made, 50 % tariffs could go into effect. If those tariffs are struck down by the court, then those tariffs may not go into effect and may have to be unwound. On the other hand, if the administration wins its appeal and if the U.S. and the EU do not come to a deal before July 9th, then the 50 % tariffs against the EU are back on again. So as you can see, if you were the owner of any business that interfaced with the EU, perhaps you have a liquor distribution company, maybe you're a liquor distributor, and so you need to source whiskey from Ireland and Scotland in addition, of course, to Kentucky bourbon and other domestic homegrown whiskeys.

6:18You can see how challenging it would be to create any type of forward forecasting, because while you would have great certainty around the Kentucky bourbon or Tennessee whiskey portion of your business, you would have far more questions around the import of scotch and how to handle whiskeys that come from Canada, Ireland, Japan. The takeaway with these tariffs, bourbon is certain, scotch is uncertain. And while the hope is that that may cause distributors and vendors to favor bourbon, thus boosting the economy of Kentucky and Tennessee, the on-again, off-again nature of what is currently happening has meant that that hasn't happened yet, and that businesses and consumers both are taking a more defensive posture as we brace for the possibility of price shocks.

7:11I should make a note here that when we talk about trade, there are both tariffs and non-tariff barriers, and both play a role, and we often do not hear about non-tariff barriers, but they come in many forms, including export subsidies, regulatory barriers, government procurement policies, a value-added tax known as a VAT, because VAT taxes spending, but does not tax exports. So all of these play a role in the cost of trade. But there are a few things that are certain, which is number one, that in the short term, all of the uncertainty has slowed growth. And if the question is by how much, the OECD, the Organization for Economic Cooperation and Development, has downgraded its growth forecast for the U.S.

7:59to 1.6 % this year and 1.5 % next year. That is a drop from the previous expectation of 2.2%. Global growth is also expected to slow. The expectation for 2025 downgraded from 3.1 % down to 2.9%. Now, if you're listening to those numbers and you're thinking, wait a second, it sounds as though growth in the rest of the world sounds like it's going to be stronger. That is actually not the case. So I realize on a raw numbers basis that might be what it sounds like because you're comparing 1.6 % in the U.S. to 2.9 % globally. But large developed nations, such as the U.S., have lower, slower, more stable GDP growth numbers overall, as compared to developing economies, which overall tend to have higher growth numbers but much greater volatility.

8:53And the U.S. is globally well-positioned because we have the edge when it comes to AI, robotics, quantum computing. So we, more so than any other nation, hold the potential to make massive productivity gains. As one example, NVIDIA just published its latest quarterly report and its revenue has grown nearly 70 % year over year. And that is strong growth given that NVIDIA was already, as far back as 2022, people were already saying, well, it's grown so much, how could it possibly grow any further? And yet we keep seeing quarter after quarter, year after year, just continued outperformance. And that's in spite of NVIDIA having to eat a$4.5 billion charge due to a change in policy that affects the way that it can transact with China.

9:44So NVIDIA took that$4.5 billion hit, and yet they were still tremendously profitable. They saw their revenues grow to$44.1 billion and their profits grow to$18.8 billion. The jump in net profits was another 26%. And I think this in one company shows the story of, at least at the large company level, at the MAG7 level, shows the story of resilience. that big, well-positioned companies can be adversely affected by trade war uncertainty and yet can still, through the advantages that we already hold through the economic moat that big American companies already hold, can still be bullish outperformers even in spite of any such hits.

10:32So if you're listening to this and you're wondering, all right, How does this impact me? I'm not worried about your stock portfolio, particularly the large cap growth elements of your stock portfolio, which is necessarily VTSAX, VTI. The total stock market index is very heavily weighted towards MAG7 large cap. I'm not worried about that. They've got plenty of margin and they, in spite of any hits they may be taking, they are still doing incredibly well. And thanks to the economic moat that the biggest tech companies in the U.S. have, NVIDIA, Alphabet, Meta, Amazon, we are still the global leaders.

11:13If the question is how does this affect me, you, the average person, I'm not worried about your total stock market index allocation. I'm not worried about your stock portfolio. I am worried about your bond portfolio, which we will talk more about in a moment. And I am worried about your employment if you work for a small to midsize company. What we see in the jobs report is that the private sector is still hiring, but they're doing so at a much slower rate than they have for the last several years. And that is largely because small to midsize companies in particular do not have the cash on hand that these larger companies do.

12:00They do not have the margin of error to be able to buffer the uncertainty that larger companies do. And so they buffer that uncertainty through slower growth, slower hiring, more conservative, forward-looking projections.

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14:23I want to talk about the bond market. And before your eyes glaze over, I want to emphasize a particular point. If you truly want to understand the economy, understand the bond market. People mistakenly think that the stock market is a proxy for the economy. It is not. The stock market is a moody teenager. It's going to have mood swings. Just don't get too caught up in it. and in the long term, things will be okay. The exception to that is when there is some type of a financial crisis, such as 2008, when there's a black swan event triggered by underlying weaknesses in the system. And I do think that there is evidence of a few ways in which that can happen.

15:06We can talk about that separately. I would love to have a different discussion about what are some of the black swans that could cause things to come crashing down. We'll save that discussion for a later time. But right now, the point that I want to make is that in the absence of a 2008 level event, the stock market is a reflection of hopes and fears. It is moody. It is, in the short term, a voting machine rather than a weighing machine. And it does not serve as a good bellwether for the economy. What does, however, serve as an excellent, excellent bellwether for the economy are 10-year interest rates.

15:49That's why if you want to learn about what's happening in our economy, look at 10-year treasuries. So first, anytime we talk about interest rates, people automatically think about the Federal Reserve. They think about Jerome Powell. I want to be clear. However, while the Federal Reserve controls short-term interest rates, they control the overnight bank funding rate, which is, as the name implies, the rate at which banks lend and borrow money to and from one another overnight in order to meet their reserve requirements. The Federal Reserve controls that. They have no control over the 10-year treasuries.

16:31Sure, their actions can influence 10-year treasuries, but ultimately, that 10-year rate is going to be based on the strength of the overall economy, it's going to be based on inflation, and it's going to be based on expectations about the future value of the dollar and about the stability of the U.S., therefore, global demand for long-term treasuries. broadly speaking when we have high inflation we tend to have higher rates when we have slow growth we tend to have lower rates sometimes we have both like in the 1970s we had stagflation which meant we had simultaneously in the 1970s we had simultaneously a recession and inflation so sometimes both can happen simultaneously what we're seeing right now is that the dollar is getting weaker, which has both pros and cons.

17:30A weaker dollar is beneficial for exporters. So in that regard, a weak dollar could help with the trade deficit. Anything that helps exporters helps with the trade deficit. That said, a weak dollar is bad for importers, which means it could lead to higher inflation because imported goods would then need to be priced at a markup. So importers would pass those prices on to you and I, average consumers. And so that higher inflation or the expectation of higher inflation could push treasury yields higher. And so what we're seeing right now, what we've been seeing for the past couple of months is a really unusual combination.

18:10We're seeing a spike in treasury yields coinciding with a weaker dollar, which is really unusual. So over the past few months, the past three months, there's been a big climb in Treasury yields, and particularly in the 10-year Treasury. And that could be reflective of a lot of things. Likely it is reflective of higher inflation expectations. But it could also be reflective of worries about the overall fiscal situation in the U.S., particularly the huge level of debt that we have. not only do we have huge deficits, but our debt, and I want to emphasize just how bad it is, not just in terms of total dollar amount, but as a percentage of GDP, in both regards, as total dollar amount and as a percentage of GDP, we've never seen debt levels like this.

19:04Our national debt is the highest peacetime debt we've ever had. In fact, we actually have an even higher level of debt as a percentage of GDP than what we had at the end of World War II. Our debt levels right now are incredibly, they're five alarm fire, incredibly concerning. We currently sit at a debt level of$36.2 trillion. And when Treasury yields spike, that means the government has to pay higher borrowing costs. It means the government is paying more for those government bonds. Not only do we have record high levels of debt, but we're also paying high levels of interest for it. Meanwhile, Moody's just downgraded the U.S.

19:47credit rating. It was the last of the three major agencies to do so. And so when you put all of these factors together, the weak dollar, the spike in treasury yields, the high levels of debt, the trade war uncertainty, what I see here is a recipe for a potential big shakeup in the bond market. I should add that this is not specific to the U.S. This is actually a pattern that we're seeing across a lot of rich nations worldwide. So the cost of borrowing in Britain, its 30-year, hit 5.6%, which is the highest level since 1998. 30-year bonds in Japan have hit 3.2%. That's nearly a new record for them.

20:26In Germany, it's also 3.2%. That's the highest it's been there since the 2010s. And so the fact that yields are climbing all around the world highlights that inflation expectations, not just in the U.S., but around the world, are starting to climb. The reasoning is very simple. When investors expect there to be higher rates of inflation, they demand higher interest rates. So investors are demanding higher rates for long-term bonds all over the world, or at least all over rich, developed nations. and that puts a debt burden on the taxpaying public because as old bonds mature, those bonds need to be refinanced with new bonds, which are now at higher yields, which then adds to the cost of borrowing.

21:13And so a major part of the reason why U.S. debt levels are so concerning is because as long-term treasury yields go higher and higher and simultaneously our debt continues to climb higher and higher, we're taking on just extreme amounts of debt. And now we're refinancing that debt at higher and higher rates. And so when I say that there could be volatility in the bond market or turbulence in the bond market, I'm not talking just about like the market as an isolated market. I'm talking about a very real possibility of the U.S. facing a debt crisis. And if that does happen and it will start in the bond market, it might have or would have spillover effects, trickleover effects into the stock market, the equities market as well.

22:05But if there is a crisis, it would start in the bond market. It would start as a debt crisis. Now, I don't say this to be alarmist. And again, that's partially why I want to emphasize that this is not a problem that's isolated to the U.S., that Britain and Japan and Germany are also seeing higher yields. They're seeing, they're all paying more for long-term government bonds. But much of U.S. economic policy, U.S. is unique in that we, for a long time, have been the safe haven investment. We are the world reserve currency. And in times of turmoil, investors, both domestically and internationally, flock to the U.S.

22:46Capital flows to the U.S. because in times of turmoil, people seek the safety of treasuries. And what we're seeing right now is a weakening of this. People used to believe that the 30-year treasury yield couldn't really go that much above 5 % because if the yield ever got that high, there would just be so much demand for it that that demand would push prices up and yields down, which means that the demand for U.S. treasuries, the idea was that demand would serve as a natural cap on how high yields could go. That was the thinking. And now that assumption is really being tested, which is concerning because so much of the U.S.

23:29financial system was built around that assumption, the modern system. So in general, in the coming weeks and months, if you're ever wondering, hey, how's the economy doing? Don't look at the stock market for that information, look at the 10-year treasury and look at the inflation rate, look at the strength of the dollar, look at those indicators to give you a much more well-rounded picture. On the topic of inflation and interest rates, the next Federal Reserve meeting is going to be June 17 and 18, and investors are overwhelmingly betting that the Fed will hold rates steady once again. So there are no anticipated changes to report there.

24:11The Fed in their notes from their May meeting stated, quote, although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months and labor market conditions remain solid. Inflation remains somewhat elevated, end quote. So functionally, what they're saying is, we're not worried about unemployment. We're happy to see that the economy is continuing to grow. And we are still a bit worried about inflation. Later in the same statement, they reiterated their commitment to bringing inflation down to a 2 % level.

24:53We are close to that. The annual inflation rate for the U.S. was 2.3 % for the 12 months ending in April. That's according to Labor Department data that was published on May 13. Remember, the Fed has a dual mandate to preserve both maximum employment and stable prices. So their dual mandate relates to both employment as well as inflation. As long as unemployment remains at or near historic lows, they are widely expected to continue to hold interest rates exactly where they are so that we can bring that inflation rate from 2.3%, where we currently are, down to 2%. And given the fact that investors in the bond market seem to be signaling or anticipating future inflation worries, that is all the more reason for the Fed to hold steady, as they're widely expected to do.

25:46Very quickly, I want to go back and answer a question that I used to, I don't hear it so much anymore, but I used to hear it frequently last year, people will often look at the fact that prices are permanently elevated and say, wait a second, how can you say that the rate of inflation is down? How can you say that the rate of inflation is 2.3 % when these prices are so much higher than what I used to pay? Eggs at the grocery store are far more expensive than they used to be. My rent is far more expensive than it used to be. So how is it possible that inflation is down? My answer to that is imagine you're driving a car from Maine to Florida.

26:27The rate at which you are driving that car might be 60 miles per hour from Maine down to Virginia. And then once you reach Virginia, you slow that rate down to 50 miles per hour and you drive at that to North Carolina. And then when you get to North Carolina, you slow the rate even further. and now you're going 40 miles per hour to Georgia. And then you slow down to 30 miles per hour to get you over the Florida border. And then, heck, you go 20 miles per hour from the Florida border all the way down to Miami. The rate at which you are driving changes, but you're not going in reverse. In fact, you're still getting further south.

27:14So things are still, in this analogy, still getting more expensive. It's just getting more expensive at a slower and slower rate. It's taking you longer to get there. That's how the rate of inflation can come down, but prices can still continue to climb. Just like the speed at which you're driving is now 20 miles per hour, but you're still heading south to Miami. There might be huge changes to who can be an accredited investor. Typically, you need a million dollars. Wait, can we cue the Austin Powers? One million dollars. Typically, you need a million in order to be an accredited investor. But as I ranted about on an episode a couple of weeks ago, that's an absolutely idiotic policy.

28:00And fortunately, the decision makers in Washington, at least some of them, seem to agree. So there might be big changes that will directly affect everyone listening to this that relate to the accredited investor policy and therefore the amount of private businesses, private equity that you can access. We're going to talk about that next. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers as the Lakers try to poster the relentless pace of the Minnesota Timberwolves.

28:47The Celtics and Knicks, who has the most hustle in defense? This game will come down to who wants it more. And the Timberwolves and the Lakers, it's two Western Conference heavyweights going toe-to-toe. Buckle up, folks. This one's going to be electric. Celtics, Knicks, T-Wolves and Lakers. Coverage starts Friday, 7 o 'clock Eastern, only on Prime.

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