Prof G Markets Podcast Episode Summary
Title: Why America’s Credit Rating Dropped — ft. Scott Goodwin
Release Date: May 22, 2025
Host: Vox Media Podcast Network
Guest: Scott Goodwin, Co-Founder and Managing Partner of Diameter Capital Partners

Introduction

In this insightful episode of Prof G Markets, hosted by Scott Galloway and Ed Elson from Vox Media Podcast Network, the focus centers on the recent downgrade of the United States' credit rating by Moody's. Joining the discussion is Scott Goodwin, Co-Founder and Managing Partner of Diameter Capital Partners, an expert in alternative asset management within global credit markets. The episode delves deep into the implications of this downgrade, the broader fiscal landscape of the U.S., and its ripple effects across various sectors, including higher education and major corporations like Walmart.

Moody's Credit Rating Downgrade

[05:00] Scott Goodwin:
Moody's downgraded the U.S. credit rating from AAA to AA, citing concerns over the growing deficit and rising interest costs. This action led to a temporary spike in 30-year treasury yields, which briefly reached their highest levels since 2023. Although stocks initially dipped, they eventually closed higher as traders capitalized on the dip.

[06:11] Scott Galloway:
"I think our U.S. interest expense is now over $1 trillion annually. So we're spending more on the debt to service the debt than military spending. And it's our fastest growing budget item. That's just not a good idea."

Galloway underscores the severity of the fiscal situation, emphasizing that the interest payments now surpass significant budgetary allocations like military spending. He expresses concern over the unsustainable fiscal trajectory, highlighting that the U.S. is now facing a consensus view among rating agencies about its unstable fiscal health.

Context and Implications

[07:42] Scott Goodwin:
Ed elaborates on the symbolic nature of the downgrade, noting, "This is coming in the same week that we saw one of the most fiscally irresponsible tax plans in history... It makes it a big deal." He points out that this downgrade aligns with broader fiscal challenges, including substantial tax cuts that exacerbate deficits and debt burdens.

[10:20] Scott Galloway:
"Maybe there's some... I think we're behaving irresponsibly." Galloway reflects on the decline from AAA ratings across major agencies, interpreting it as a "symbolic nail in the coffin" signaling consensus on America's fiscal instability.

Goodwin adds that with the downgrade, the U.S. no longer holds a single AAA rating across all major agencies, marking a significant shift in global financial perceptions. This consensus heightens concerns about the sustainability of U.S. fiscal policies.

Ivy League Schools Selling Private Equity Stakes

[11:15] Scott Goodwin:
The discussion shifts to higher education institutions like Harvard and Yale, which are selling or contemplating selling discounted private equity stakes on the secondary market. Goodwin explains, "More than a third of their allocation as of 2024 is invested in PE and VC funds. They need liquidity, so they're dumping these private equity stakes at large discounts."

This move by Ivy League schools reflects a strategic response to financial pressures, impacting the private equity and venture capital industries that heavily rely on these substantial endowments. Goodwin anticipates long-term shifts in investment patterns, with a potential decrease in PE and VC allocations as endowments seek greater liquidity.

[12:32] Scott Galloway:
"We think they're getting ahead of the puck here... It might result in further trimming of their PE and VC allocations, possibly bringing their investment down to single digits in the next five to ten years."

Goodwin posits that as endowments become more cautious, alternative funding sources like billionaires and ultra-high-net-worth individuals may become more prominent in funding private equity, signaling a significant transformation in the landscape of alternative investments.

Walmart and Trump's Comments

[18:58] Scott Galloway:
The conversation turns to Walmart's strategic response to tariffs and President Trump's subsequent criticism. Galloway praises Walmart's efficient cost-management strategy, stating, "They have done that better than almost any company in the world."

He elaborates on Walmart's business model, which focuses on minimizing costs to offer lower prices to consumers, thereby expanding market share without compromising margins. Galloway criticizes Trump's suggestion that Walmart should absorb tariff costs without raising prices, arguing that Walmart's established strategy ensures their financial resilience without passing costs onto consumers.

[24:24] Scott Goodwin:
Goodwin explores potential marketing strategies for companies responding to tariff-related pressures, suggesting that while overt attempts to "eat the tariffs" may seem appealing for market share gains, they could be detrimental in the long run. Instead, he recommends a more nuanced approach emphasizing American values without directly addressing tariff absorption.

Galloway concurs, emphasizing that while signaling American support is valuable, companies must ensure that such strategies do not adversely impact their financial metrics or long-term sustainability.

In-Depth Conversation with Scott Goodwin

[30:30] Scott Goodwin:
Scott Goodwin joins the conversation, offering a deeper analysis of the credit rating downgrade. He notes, "The credit risk is on the sovereign balance sheets, not on the corporate balance sheets." Goodwin explains that despite the downgrade, corporate borrowing costs have not spiked significantly because investors differentiate between sovereign and corporate debt risks.

[32:43] Scott Galloway:
He summarizes the situation, stating, "We have been fiscally irresponsible for the last 20, 30 years, both administrations or both sides of the aisle." Galloway expresses concern over the impending increase in deficits and interest payments, potentially leading to a downward fiscal spiral.

Goodwin elaborates on the systemic issues, highlighting how the U.S. Treasury's management strategy of issuing short-duration paper during low-interest periods has now backfired, contributing to the current fiscal strain.

Investment Strategies in Credit Markets

[38:34] Scott Galloway:
Galloway shares his personal investment journey, mentioning his transition from exclusively equities to incorporating bonds, recognizing the evolving landscape of credit markets.

[40:45] Scott Goodwin:
Goodwin discusses opportunities within the credit markets, particularly in distressed debt sectors like telecom and spectrum. He explains, "There's a huge amount of convexity in that I have a positive credit spread yield and I have spread convexity."

He highlights how their firm capitalized on dislocations within the credit markets, purchasing long-dated corporate bonds at significant discounts, thereby securing attractive yields and potential upside as market conditions stabilize.

[43:38] Scott Goodwin:
When asked about the novelty of corporate debt outperforming treasuries in terms of safety and returns, Goodwin responds, "It’s been a creeping thing... now you're in an environment where there's more realized volatility."

He emphasizes the proactive strategies employed by credit investors to navigate and leverage market dislocations, underscoring the importance of understanding both macroeconomic factors and specific sector dynamics.

Capital Flows and Market Trends

[45:40] Scott Goodwin:
Goodwin addresses the shifting dynamics of capital flows into U.S. credit markets, noting that despite global investors seeking opportunities abroad, the deep and well-regulated U.S. credit market continues to attract substantial capital. He highlights the risks of interconnected global markets, such as the potential for dollar weakness coupled with rising rates, which could lead to significant market volatility.

[47:06] Scott Goodwin:
He identifies key sectors ripe for investment opportunities, including commercial fiber and spectrum in telecom, driven by advancements in AI and increasing mobile data demands. Goodwin also points out the growing need for capital among companies affected by tariffs, presenting new avenues for credit investment.

Advice for Retail Investors

[63:31] Scott Goodwin:
For retail investors looking to diversify into credit markets, Goodwin recommends starting with Exchange-Traded Funds (ETFs) such as LQD for investment-grade bonds, HYG for high-yield bonds, and BKLN for bank loans. He advises that while these offer straightforward entry points with low fees, partnering with active managers can help capture nuanced opportunities arising from sector-specific dislocations and market volatility.

Closing Remarks

In the concluding segments, the conversation briefly touches on U.S. soccer, reflecting on governance and performance improvements aimed at enhancing the men's national team's competitiveness. The episode wraps up with acknowledgments to the production team and light-hearted banter about AI-generated content.

Key Takeaways

1. Moody's Downgrade Significance:
   The downgrade from AAA to AA by Moody's signifies a troubling consensus on U.S. fiscal health, with implications for interest expenses and long-term economic sustainability.

2. Fiscal Responsibility:
   Persistent deficits and rising debt servicing costs are outpacing other significant budgetary items, highlighting the urgent need for fiscal reforms.

3. Impact on Higher Education and Private Equity:
   Ivy League institutions liquidating private equity stakes signal broader shifts in the funding landscape, potentially reducing capital available for private equity and venture capital firms.

4. Corporate Strategies Amid Tariffs:
   Companies like Walmart continue to thrive through cost optimization and price management, effectively navigating external economic pressures without compromising consumer value.

5. Opportunities in Credit Markets:
   Credit investors are finding value in distressed sectors and leveraging market dislocations to secure attractive yields and potential upside, emphasizing the importance of proactive and informed investment strategies.

6. Retail Investment Advice:
   Diversifying into credit markets via ETFs offers a viable entry point for retail investors, with active management providing additional avenues to capitalize on market inefficiencies.

7. Broader Economic Implications:
   The interplay between fiscal policies, credit markets, and global economic dynamics underscores the complexity and interconnectedness of modern financial systems.

Notable Quotes

• Scott Galloway [06:11]:
  "We're spending more on the debt to service the debt than military spending. And it's our fastest growing budget item."

• Scott Goodwin [07:42]:
  "This is coming in the same week that we saw one of the most fiscally irresponsible tax plans in history... It makes it a big deal."

• Scott Galloway [10:20]:
  "Maybe there's some... I think we're behaving irresponsibly."

• Scott Goodwin [12:32]:
  "Private credit and the returns there, combined with the lack of volatility of that asset class have drawn a lot of capital as well."

• Scott Galloway [18:58]:
  "They have done that better than almost any company in the world."

• Scott Goodwin [38:34]:
  "There's a huge amount of convexity in that I have a positive credit spread yield and I have spread convexity."

• Scott Goodwin [63:31]:
  "If you want to go into the alternatives, there's us and then many others that have products across hedge funds, private credit, clos."

This episode of Prof G Markets offers a comprehensive analysis of the U.S. credit rating downgrade, exploring its causes, implications, and the broader economic landscape. Expert insights from Scott Goodwin provide listeners with a nuanced understanding of credit markets, investment opportunities, and the critical need for fiscal responsibility.