Doug Cohen, managing director at Fiduciary Trust International (BEN), spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below, which has been lightly edited for length and clarity.
ANDY MILLS (AM): What do you think investors should hope for after the election?
DOUG COHEN (DC): So, first of all, they should hope that we have a quote-unquote “clean” election and a clear winner and no divisiveness because honestly, where we are in the country, if we had something like we had in 2000 where it came down to a handful of hanging chads in Florida, that’s not gonna be good for anyone. Beyond that, I think the market’s taken a pretty clear approach and it’s actually surprising to a lot of people that if you just follow the polls over the last number of months — including when Trump was surging, then when Harris was surging, now it’s kind of equaling out as we sit here today — the market hasn’t really seemed to care. It’s gone up pretty much the whole time with very few exceptions. And I think that part of that is because the market doesn’t really see a dramatic difference for all the contrast you could draw between the candidates. It doesn’t see a dramatic difference in the candidates themselves. I think when it comes to control of Congress, that’s where it really matters. And I think there’s a strong consensus brewing that if you have a clean sweep by either party, the market won’t really like that. If we have a split government, essentially the notion that gridlock is good, and that would limit some of the more aggressive policies on both sides, that’s what the market wants.
AM: Gotcha. So split government is actually maybe good for the market?
DC: I think so. At least in the short term. Now, there are always longer term issues to worry about. So one of the things that I really do worry about is the path of our debt. And look, there are incredibly smart people on both sides of that issue. Some of whom have Nobel Prizes who argue the debt path is not necessarily problematic. I completely disagree. I think there are so many examples throughout history. When you start to get to the percentage of GDP that we are on the path toward, when you start to crowd out other spending, whether it’s military, just the interest payments alone, now that we’re in a higher interest rate environment, these are issues that need to be dealt with. And at some point that’s gonna require hard decisions by whatever party is in charge or the combination of the parties. And we’ve been down this path before, we’ve tried to be proactive about it, including under Obama back around 2010. Nothing has worked, and my fear is it’s gonna take a crisis to get us to the point where we actually do have to foster some compromise. And that may be more difficult in a divided government. So longer term, I’m not so sure that we’re gonna really address that issue. But honestly, neither party is addressing it right now. As I said, I think it may take a crisis for us to really be proactive about it.
AM: Yeah. And when you say a crisis, I think of Barney Frank on TV like 15 years ago being like, “We’re working on it and everything is insured, we’re gonna buy all the banks.”
DC: Yeah, 2008 was a really dark period for the financial system in this country and in the world. And the debt situation has the potential to mimic that. Obviously it wouldn’t be a complete rerun, but there are elements of that where trust in the capital markets can break down. And so the things to watch are treasury auctions. We’re financing our debt, not unexpectedly, with treasuries. If you go back just as recently as the summer of 2023, there was a period there when the 10-year yield went from well under 4% to about 5% in just several weeks. There was basically a buyer strike. People didn’t want to buy our debt. And that to me was just a little bit of a coming attraction to what could occur if we don’t do something to address the issue.
AM: Talking about what the consequences of what too much debt looks like, how do you see it playing out here?
DC: So again, I think there’s a risk that we do start to see treasury auctions become problematic. Rates start to surge significantly. And, unfortunately, we got a taste of what that was like in 2022 when both equities and bonds fell significantly. Higher rates are very difficult for the fundamental economy. They’re very difficult for the market. So the good news on the debt is that there are solutions, right? And they just require a compromise. And this is not rocket science. You probably need to reduce the path of spending that we’re on, and you’re probably gonna need to raise taxes. And you could argue, just raise the taxes on the wealthy as frankly the Democrats have done. It’s not enough. It’s gonna have to be shared beyond that. There are other things that we’re gonna have to do for entitlement programs. There are things you can do such as changing retirement age and things like that. All of those are painful. None of them are particularly conducive to growth, but they will put us on a better path.
AM: I mean, the likelihood of both parties coming together and being like, “Guys, we got a thing, so let’s take care of it together before it’s a big issue,” I think is zero, to be frank. So is a recession inevitable? Is a crisis inevitable?
DC: One thing that is perhaps comforting is that there’s no ticking time bomb. It’s very difficult to say that the debt situation is gonna fester to the point where it becomes a major market event this year or next year. It’s very, very difficult to time. So I think there’s a good chance it could be three years, five years, maybe even 10 years down the road, especially if we do some things to try and get things under control. But there are gonna have to be fundamental changes that are necessary. And so our next recession may very well not be caused by the debt issue. It may be caused by something else. It could be a geopolitical shock to the system, Covid being a classic example. Or it could just be a normal cyclical pattern. There are a lot of things that can cause a recession, but in terms of things that could cause severe secular pressure, the debt situation to me is the number one risk.