Kevin Warsh set the table for change after the June 16-17 Federal Open Market Committee meeting. The markets will be watching the July 28-29 meeting to see his next steps. Join us live on July 30 at 12:30 p.m., as Marvin Loh, managing director at State Street, discusses the meeting and Warsh's press conference. Register now.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:11):
Hi, and welcome to another Bondbuyer Leaders event. I'm your host, Bondbuyer Managing Editor, Gary Siegel. Today, we're going to discuss yesterday's Federal Open Market Committee meeting and monetary policy. My guest is Marvin Lowe, managing director at State Street. Marvin, welcome and thank you for joining us.
Marvin Loh (00:35):
Thanks for having me, Gary.
Gary Siegel (00:39):
So was there anything in the post-meeting statement or Fed chair Kevin Warsh's press conference that either surprised you or grabbed your attention?
Marvin Loh (00:50):
Yeah, you know what? It's funny. As we were talking a little bit before, it was a meeting that lasted as long as a normal Fed meeting does, and it really didn't say a lot. So maybe that was the intention of the new chairman in terms of his new communication style to keep us guessing a little bit. But the amount of information that we got over 45 minutes was somewhat limited. I think the biggest surprise takeaway for me was that he led with his observations about the bond market itself, where yields were focusing on real yield, and to a certain degree, leaning into the idea that the bond market was going to do the work for the Fed. And if that is the case, and if the Fed winds up being more of a external observer within this monetary paradigm that we're dealing with, there are various things that we as investors need to think about from a volatility perspective, as well as in terms of how we're going to potentially react around data.
(01:57):
So his willingness to almost give one of the main jobs of the Fed to the bond market, at least flippantly in some of his one-off statements, did take me a little bit by surprise.
Gary Siegel (02:12):
When Warsh said that, he basically was saying that not providing forward guidance was working. It sounds like you
Marvin Loh (02:22):
Disagree
Gary Siegel (02:22):
With that, Marvin.
Marvin Loh (02:24):
Yeah. I mean, I don't have a problem with the Fed being a little bit more opaque. I do appreciate the view that potentially providing forward guidance locks the Fed into a policy path in a very fluid economy that might cause it to react more slowly. So from that perspective, I think it's okay not to worry about every single basis point change within the number of markets that we wind up looking at and the number of markets clearly that the Fed winds up looking at. But to effectively say that I'm not going to provide forward guidance and the bond market's going to do the work for me, to me, pushes back against the mandate that the Fed was given by Congress. And to a certain degree, there's dereliction of duty in doing that. So that would be the concern that I have in the approach that the Fed has so far shown from a forward guidance perspective.
(03:31):
Remember, we're only six or seven weeks into this new administration, and we'll see what's wheat and what's CHAF, but the Fed does need to be in the market with a voice. They could decide what voice it is, but you just can't let the markets do all the work for you.
Gary Siegel (03:49):
Right. So the latest dock plot showed a divided Fed where nearly half expected rate hikes and nearly half didn't. And then yesterday we got three dissents from voters who wanted to raise the rates now. Kevin Warsh downplayed the division saying it was a good family fight and there was much consensus among the panel. Is there real division or is this just a minor issue?
Marvin Loh (04:20):
No, I mean there certainly are different policy views and it's not bad ultimately to share those policy views. It's a mature organization. We can get dissents as we did. I would say that the three dissents were at the regional bank level, which has generally been the more vocal group over the course of the last year, year and a half. It was the same three individuals, Kashkari, Logan and Hammock who dissented in April. They wanted to remove the one-way optionality that the policy statement had into a more balanced where the next move for the Fed could be up or down. And ultimately, I guess they saw enough within the last several months to think that the time was now. So I don't view that as potentially negative.
(05:13):
And it still is a committee. It still is a broad vote where majority is going to determine policy. So I do think having a number of different views as part of the policymaking process as being a positive aspect of the Fed. However, if we don't understand where all those voices are because the Fed really isn't going to provide any guidance or really any conceptual wrapper around how they're looking at things, there is going to be volatility and we're really not sure around the credibility of those voices. So again, to be seen, I don't necessarily find debate as being a bad thing. I think there should be quite a vocal discussion as there likely is, but we have to understand what those voices are saying. And the chairman yesterday was not really willing to give us too much insight into that.
Gary Siegel (06:21):
Yes, Marvin Warsh wasn't very willing to give much explanation. In fact, he was asked three times, I believe, that if the Fed wants to get rates down to 2% and inflation is still way above 2%, why the Fed didn't raise rates? What's your thoughts about that? Why they didn't raise rates yesterday?
Marvin Loh (06:48):
Yeah, I mean, so the data certainly wasn't screaming for rate hikes at this point. We have granted as one data point, but the last CPI report, the last PPI report, and even today's PCE report was not screaming that we were having unanchored prices at this point. Having said that, we know that the war started again. We know that energy prices are once again higher. And there are a variety of dynamics around how companies decide to either increase prices or potentially hold them because they think that there's enough volatility in the process where they might come down again. Personally, I think that if you are faced with prices going up and down, up and down, up and down over a longer period of time, you're going to be more apt to push through those prices into the economy. And I think that's certainly one of the struggles that the economy might have going forward from an inflation perspective.
(07:52):
In terms of why they wouldn't hike rates at this point, I think that that goes in their favor. But at the same time, if he's once again looking at the bond market for clues, those clues were telling him that they should hike. We saw it from how real yields have been performing. He mentioned that in an environment where between the June and July meetings, there wasn't a lot of new information to come out of the Fed. But everything that was coming out from a geopolitical perspective, from how the economy was evolving perspective was saying that they should hike. So I think it was that willful disregard and to a certain degree, a willingness to dismiss it that created a bit of the volatility and ultimately to a certain degree, a vote of no confidence as that press conference went forward yesterday.
Gary Siegel (08:49):
So can Fed deliver price stability without any rate hikes?
Marvin Loh (08:57):
I'm in the camp that thinks they need to hike rates. And I think it's more than just the inflation discussion. I think that there is this growth spurt, which is where we're seeing the treasury curve push these higher yields into. Real yields is ultimately saying that there's a growth component that's out there. I do think that we've got the need for higher returns for this fixed income capital, if you will, with the deficit, with the amount of borrowing that is coming from both the public and private sector. And while the chairman might think that the bond market is going to do the work for it, eventually they need to be on board with that. So I think it is going to be hard to deliver price stability without seeing some sort of policy action, some sort of policy tightening within really the next several months.
Gary Siegel (09:54):
Well, looking back now, can we say for sure that the Fed kept rates too low for too long?
Marvin Loh (10:02):
Yeah, I mean hindsight being 2020 and we're always going to get those trades right. But yeah, they did keep policy too loose, too long. I think there's more to it than just rates. I think again, hindsight being 2020, I think their balance sheet policy was too stimulative for too long also. And really within recent history, the series of rate cuts that they had last year at the end of last year, remember we got three delivered the year before. My goodness, let's think through 2024. We got another three delivered last year. Last year's was predicated on this view that the job market was weakening and they were trying to get in front of it. That didn't happen. And I think that we could certainly see some of the froth that has made its way into risk assets in the first half of this year as a result of the fact that that loosening happened at the end of last year.
Gary Siegel (11:02):
So there seems to be a lot of contradictions. Warsh says he won't give forward guidance and refuse to participate in the dot plot, but he encouraged others to participate. He's committed to 2% inflation with no tolerance to higher levels of inflation, yet he doesn't seem to be in a rush to raise rates. Is this a tactic of his and will it work?
Marvin Loh (11:27):
Yeah, I mean certainly we could argue that he slies a fox in terms of how he is approaching this. And by letting risk assets move the way they're moving to a certain degree, we've had a little bit of tightening in the economy, even in the last couple of weeks with higher yields and more volatility on the equity side of things. The markets generally are going to overreact. That's something that we've seen over decades. And if anything, we've seen it quite aggressively over the course of the last few years. Is the Fed willing to allow that degree of volatility to make its way into the market and ultimately have an effect on the broader economy? It seems like a costly bet if they're willing to go down that route. And it is a tactic on their part by letting investors decide where policy should be. There is something to be said that it would work eventually, but there probably is undue volatility, potentially undue carnage that might come as a result of that.
(12:43):
I don't ultimately think that he would allow that to happen, particularly if we start to see days like yesterday, if you will, become more common. There's more harm than good from that. And it really once again is the Fed not doing the job that Congress told it to do.
Gary Siegel (13:03):
Marvin, what is your base case for monetary policy for the rest of this year?
Marvin Loh (13:09):
Yeah, I still think hikes are appropriate. I think that our star, if you will, the productivity gains that the Fed talks about and the market really focuses on might have some positive disinflationary trends once we get to the point that this technology advances. But in the meantime, the here and now is that the demand for capital is to levels that we have not really seen for quite some time. From a nominal perspective, we could say we've never seen demand like this from a relative perspective. We would once again, probably be going back to the pre - GFC period, which is not the best memories that a lot of us have in terms of a Fed that was potentially late. So I do think that there is a facet of credit demand that requires higher yields. I think that there is growth that's being supported by a lot of that.
(14:06):
And I think spending to a certain degree, we are seeing that trickle down impact making its way to spending because the consumer is remaining engaged in this economy, even though we've got inflation where we have. And I've got a lot of things that I've been looking at, the housing market in particular and the inability, housing affordability, if you will, for a much larger part of the economy not to be able to buy homes. There's various knock-on effects associated with that in terms of not saving as much. We do see savings rate where they are. But if you're also not saving enough, you're potentially spending into the economy, which has kept, I think, the consumer engaged from a broad data collection perspective, but probably is behind some of the troublesome and stickiness of inflation.
Gary Siegel (15:00):
Do you think the bond market and the Fed are on the same page? And do you think the bond markets were surprised by anything yesterday?
Marvin Loh (15:08):
I mean, the bond markets are sending a message pretty clear to me. The Fed should hike. Warsh certainly made inflation his number one enemy. But like you said earlier, they didn't do anything. So the bond market and certain members of the Fed are on the same page. The bond market and maybe other members, because we didn't see any policy action yesterday, are not on the same page. I think the bond market's going to continue to say that the Fed should be hiking rates. And if we get into September and we go through what we just went through yesterday, the bond markets are not going to be happy. They're probably going to be less happy at that point, if I'm correct in my assessment of how things will continue to hold in. And really this capital spend from technology, from AI, but also a broadening of it is what we saw in some of the second quarter GDP numbers today in terms of investment.
(16:08):
That part of the economy is going to continue to push for higher yields.
Gary Siegel (16:15):
So you think bond yields are going to rise through the rest of the year?
Marvin Loh (16:21):
Yeah, I do. From a duration perspective, it's been one of my core calls is that duration is going to underperform. I think the short end as always will be influenced by that policy expectation. We saw how we twisted steeper yesterday with the short end reversing some of the higher yields that we saw going into the meeting, taking away some of the expectations for rate hikes in September, pushing them out a little bit. But it really is the long end that is protesting. And ultimately as one of Bill Clinton's advisors who said he wanted to come back as a 10-year because a 10-year yield really could make anybody do anything. So let's continue to look at the 10-year yield. Let's continue to look at the 30-year yield, see what it's saying. And if the Fed doesn't listen to that, then it's going to have to say it louder.
Gary Siegel (17:20):
There was a lot of talk about the yield curve and how it was predicting recession for the past few years, and that recession never developed. Do you think the yield curve is still worth watching for clues about recession in the future?
Marvin Loh (17:37):
Yeah, I do think it is. We always have to take it within the context of overall liquidity in the market. So the size of the balance sheet, how the Fed was managing the balance sheet was certainly influencing the yield curve in a way that maybe the twos, 10s over time was not as influenced by that balance sheet. Having said that, I would not want to discount the yield curve, particularly at this point where we're sending pretty significant messages in terms of the amount of compensation that we need out in the long end. So turning your question around a little bit, don't want to sound like a Fed chairman in terms of twisting words, but the real yield is something that's ultimately very, very important to this economy and this higher real yield message that we're getting out of it. So thinking about it from a steeper curve perspective rather than an inverted curve perspective is that if I believe that a steepening curve is sending me a message around growth around the demand for capital, I can't discount the opposite side of it either if it were to invert.
(18:50):
So yeah, I'm still getting messages from the yield curve. I do think that as all of us professionals within the bond market always do, we look at various points of the curve to tell us a variety of things. So twos 10s is kind of the standard, but fives 10 is telling me something, fives 30s is telling me something, and I'll continue to take any help that I can from bond investors in terms of what they're thinking about the economic and inflation profile that we're faced with.
Gary Siegel (19:20):
Very nice. And we have a question from the audience. Consumer spending is up, but we're calculating the effects of higher prices into that. If I'm buying the same stuff but it costs more, that seems to be a zero-sum game. Is it not?
Marvin Loh (19:38):
Yeah, it is. So one of the things with the US statistics, which is unusual compared to a lot of the rest of the world, is that retail sales is reported from a nominal basis. So you're absolutely correct that don't take it at face value, particularly when we have a higher than expected inflation. We can very easily make it into real terms. That's the way I use that data. I take it and I strip out that inflation to understand if we're actually buying more goods or if we're just keeping up. Also, a lot of the consumption data that comes out of the GDP number, which is what we got today, is in real terms. So those numbers did show that the consumer remains engaged even though we're faced with above average prices as the Fed has acknowledged for way, way too long at this point. So the consumer is still engaged in this economy despite those higher prices and the real amount of demand for goods and services is still increasing.
Gary Siegel (20:52):
Marvin, at the first meeting that Warsh chaired, he set up task forces. What do you expect will be the results of those and what is your takeaway about the creation itself?
Marvin Loh (21:07):
Yeah, I mean it's absolutely fair game to take a step back and look at your processes. And many of the task force, or at least the ones that I'm most concerned with, those on inflation, those on communication are stacked with some pretty respectable names. So I hope that they are true to form, true to the fact that they have gained the degree of respect in the marketplace, and they provide the Fed and the chairman with good information. I think we will get potentially different approaches to policy coming out of these task force. The GFC changed everything and the approach from modern central banking, if you will, from 2010 onwards has been very, very different than anything that we saw before. But at the same time, we've been going back to that playbook for the last 15, 16 years. So it's decent to look at how things have evolved and whether or not we want to change things.
(22:12):
I do have hope that they are very neutral objective voices that come up with answers that will help the policymaking process. What I heard from the chairman yesterday, and I think it's one of the things that really did spook the bond market, potentially could have irritated analysts, I certainly was somewhat irritated, was the view that they might be choosing the types of data that they want. And inflation in particular has been the focus where there's a lot of different ways of measuring inflation. Us at StateStreet, we've got our own measurements of inflation, but what you're trying to get at is the correct assessment of what consumers are facing in terms of their daily life, if you will. And picking and choosing the number that gets you to where you want to be is something that is just bad policy.
(23:16):
I think investors in the bond market will see through that right away. And I think that yesterday we saw bond investors saying, "Don't try to play games with us because we're going to understand immediately what you're doing." And I think that that would be the risk associated with it. But we'll start to hear from these task force in the fall. Jackson Hole is probably one of the places that Warsh will highlight maybe some of the early results as a result of the task force. And once again, volatility is something that we probably should expect going into each one of these meetings, which seem to be more and more important.
Gary Siegel (24:00):
We have another question from our audience. What's your position on how the Fed will manage its balance sheet? Expanding, stabilizing at current levels, or enter aggressive QT?
Marvin Loh (24:13):
Yeah, so there's been a lot of talk about just the balance sheet being too big and the Fed wanting to get to pre - GFC kind of level. So generally the framing of changes to the balance sheet is always that it's smaller. But when you actually dive into it, there are various parts of the balance sheet that they can influence and there are various parts of the balance sheet that they cannot. It really is all on the liability side of things. So I encourage everybody to do your homework and understand what drives the balance sheet because the balance sheet is incredibly important for the functioning in the markets as well as valuations from a risk perspective. Just broadly, the three pieces that they are looking at are currency and circulation, the TGA, which is the Treasury General account, and then bank reserves. Cash and circulation, they can't do anything about.
(25:11):
TGA, they really can't do anything about either because it's the federal deficit in the federal government that manages that. And then it comes down to bank reserves. So bank reserves are about half of the balance sheet. We didn't have anywhere near as much in bank reserves relative to the size of economy now versus where we were before GFC. And that winds up being the focus. But we've seen instances of market volatility once those reserve levels have come down. And even as recently as last fall, the Fed started to re-expand the balance sheet once we got to reserve levels that are close to or just slightly below where we are now. So there are risks associated with that. What I think is that we'll probably maintain the balance sheet. I think that they'll look for creative ways of potentially trying to shrink it. But the only way you could do it mechanically based on the scenarios that I just painted out is to reduce the demand for reserves from banks.
(26:17):
Some of that might be regulation. Some of that might be technology around tokenization of various parts of the financial system that might encourage banks not to need as many reserves, but that is a long-term type of change. So for the onset, I think we wind up seeing a balance sheet that doesn't change too much. And I don't think that they'll go down QT just because it's not worth the risk.
Gary Siegel (26:51):
Marvin, we have another question from our audience. Is the inverted yield curve totally behind us?
Marvin Loh (26:59):
Let's see. Yeah. Well, I guess we need to define cycles. It'll come up again at some point. But for me, for the next year and a half, I do think it's behind us. I think that right now what we're dealing with is growth that's driving yields higher. And then from that perspective, we would probably be thinking more around a steeper yield curve rather than one that's inverted.
Gary Siegel (27:28):
Any concern about stagflation?
Marvin Loh (27:32):
You know what? It was certainly a big concern last year when we were expecting that inflation surge and then that surge pushing a consumer beyond the break point where external forces were pushing prices higher and those prices were really going to hamper the consumer. Well, never underestimate the US consumer. We certainly are the underdog in the world and we always seem to step up to the plate when it's needed. And I think that at this point, that stagflation concern is nowhere near as much as it has been before. If anything, it's growth that's doing better than expected, which is pulling those prices higher.
Gary Siegel (28:22):
In the near term, how would you rate in terms of dual mandate, how would you rate each part as a concern?
Marvin Loh (28:34):
Yeah, so dual mandate, and I'd add financial stability to that. So maybe three broad mandates, full employment, price stability and market stability, if you will. From a price stability perspective, I think the Fed has still a lot of work to do. I do think that we're at the 63rd, 64th month at this point that we haven't hit the targets. That is something that really a lot of the folks in the Fed acknowledge. It was one of the things that we heard from Warsh in the first meeting in June, how unacceptable it was that inflation was above target for this extended period of time. So they're falling behind on that and they continue to fall behind on that. And what we were concerned with yesterday when we listened to the press conference with Chair Warsh was that he ultimately wasn't as concerned about it from an action perspective rather than just words.
(29:37):
He's saying the right words, but we need to see actions. When it comes to the full employment mandate, I think that we've got an unemployment rate somewhere in this low 4% range. It's fairly stable. By most accounts that is full employment. So that is less of a concern. One of the interesting things is that from a non-farm payroll creation perspective,... It's much lower for many, many years or even many, many decades, if you will, we would think that the breakeven rate, how many jobs the economy needs to add in order to keep the unemployment rate stable was in the 120, 150, maybe even 200,000 person range. All of a sudden we've got non-farm prints that are below 50, sometimes 20,000, and the unemployment rate isn't going up. So there are absolutely structural changes in our workforce. I think we can be comfortable that a print somewhere in that 20,000 range is not necessarily the recessionary signal that it used to be.
(30:42):
So I think that from a dual mandate perspective, they're okay there. And then that financial stability perspective, which is kind of the implicit job of the Fed to make sure the financial markets are functioning. You've got a Fed that if it pulls toward guidance and certainly if it approaches the market the way it did yesterday, you're going to add volatility into the market. So I think that that's something that we should all think about in terms of how to approach it and how comfortable we are with that. Does that lead to financial instability winds up being the question. And if anything, there are higher odds that things move around too aggressively, particularly if the Fed is not giving us any signal that they're being engaged with the financial market. And that would be once again, the Fed not doing the duty that it's supposed to do.
Gary Siegel (31:42):
What are the implications of artificial intelligence for the bond market?
Marvin Loh (31:49):
In the short term, really just understanding how much demand for capital is out there. We're at that stage in the process now. Bond buyer, you guys write about how much paper, how much new issue is being sold to the market every given week. 24 and 25, we're close to record issuance years for the debt market. This year we're running somewhere around 25 to 35% above that for investment grade and high yield. We do also read our bond buyer stories about private credit and private capital and how much demand is out there. So that's the first aspect of AI's impact into the debt markets. And whether or not we need more compensation just because we are at tight spread levels, even though we've seen the amount of issuance that we've had is something that bond investors are needing to think about. More longer term, there are a lot of hopes that productivity increases.
(32:52):
Productivity will, if it drives its way broadly into the economy, have a disinflationary effect. That's certainly one of the things that the Fed had been expecting, particularly late last year, early this year in either cutting rates and/or sending signals that they didn't need to do anything, certainly didn't need to hike rates because of that productivity. It's still a ways off. And I think we've heard from a lot of members of the FOMC that they're not really focused on that part of the AI trade at this point. But there are hopes certainly in an economy where we're seeing the aging population shrinking of the jobs force or at least not growing as we had become accustomed to over the last couple of decades. We're going to need that productivity. And there are disinflationary aspects of it. It's just a function of when.
Gary Siegel (33:53):
Any concern about the US debt level and its impact on the fixed income markets?
Marvin Loh (33:59):
Yeah, for sure. I've been one of the vocal voices out there raising the red flag that we've kind of passed through Rubicon when it comes to debt. A lot of the data that we have at State Street shows that demand for duration has been on its back foot for quite some time, both in terms of domestic demand as well as demand from foreigners. Really that foreign bid, if you will, into the treasury market still is important because the amount of debt is as big as it is. Probably the biggest concern. So all of that has led me to really wonder how much duration you want to have in your portfolio, particularly around correlations that aren't necessarily providing the hedge that they normally do in volatile times. It's hard to argue that you want to own a lot of duration. But even beyond that, when we think about whether or not we're ever going to get a handle on it, the weaponization of the deficit is as big of a concern, if not a bigger concern.
(35:11):
We're actually in a fairly strong expansionary period, and we have been over the last couple of years. During those periods, we typically would be getting a handle on our debt ultimately. We'd let the growth in the economy take care of some of the deficit from a relative perspective. Instead, we're continuing to see debt to GDP increase even though we've got growth rates that are exceeding what would be viewed as normal trend growth. If we can't get a handle on our deficit now when times are good, it's going to be a lot harder to even consider getting a handle on it when things are bad. And if things are bad because of the deficit, then it's even worse, if you will. The other thing I'll leave you with, Gary, is that what we're seeing in terms of debt management is leaning on the short end of the curve.
(36:06):
So we do know Treasury has not increased their coupon issuance on a monthly basis for quite some time, a year and a half, I think. Don't hold me to that, but it's been a while. It kind of makes sense given where demand at the short end has been. There's a lot of money market fund assets out there, so auctions are going well at the short end, but there is a risk associated with it because those short-end securities reset quickly because they're short-end securities. And when that happens and when you get a shock, if you will, like we're trying to deal with now in terms of a surprise hike from the Fed, or not necessarily surprise, but the need for a hike from the Fed, that will translate into higher interest costs much more quickly than if you had a more balanced short-end and coupon kind of term structure.
(36:58):
We're not at the tipping point yet, but we certainly are pushing the percentage of short-term debt relative to total issuance to levels that we really haven't seen in a while. So there is risk associated with that too.
Gary Siegel (37:14):
The biggest risks to the economy are probably unforeseeable. What do you see as the biggest risks that you can tell us about?
Marvin Loh (37:25):
Oh my goodness. Yeah, exactly. If we knew what the tail risk was, it really wouldn't be a tail risk. But I do think the amount of debt that's out there at the corporate level can potentially contain some surprises. Do we wind up finding out that one of these companies is much more at risk than one would expect? One of the themes that has been out there is that the biggest issuers of this AI debt are the strongest companies that are out there. And as far as we could see, from an earnings perspective, that all is true and correct. But there are some names that probably have issued a lot of debt that are not as strong as maybe the most significant MAG7 names. I don't know if we even use that term anymore, but a surprise default or a surprise credit issue that pulls back credit broadly for this very, very important AI trade probably is a potential surprise.
(38:35):
Again, these are generally highly rated companies, so running into cashflow issues would be fairly significant. Geopolitically, I'm not an expert on that, and I think that we've been thrown enough geopolitical risk out there that we've seen the market's ability to ultimately absorb it. I probably would be looking at the balance sheet and whether or not that balance sheet question that you had doesn't necessarily evolve as smoothly as I hope that it does and should, because the balance sheet is very, very complicated. The balance sheet is very, very important for market liquidity. But if they zealously want to shrink the balance sheet aggressively, I do think that that would catch the market off guards.
Gary Siegel (39:26):
Marvin, what questions are you getting from clients? What are they worried about?
Marvin Loh (39:31):
They are worried about the deficit. They are worried about demand for treasuries. They are worried about whether or not the US is still the reserve currency of the world. So there are a lot of dollar questions that come out from actions either from the administration and/or the approach to the Fed, the strength of the institution, if you will. And probably one of the bigger questions that we start most of our meetings with is how long can risk assets hold in there? A lot of times they're talking about equities. I would put credit in there because credit has performed ultimately as well as equities have from a relative perspective, of course. By our estimation, there still is liquidity in the system. There still is a decent amount of risk-taking. Yesterday, we saw how quickly that might change. The further we get into this, the longer we get into this expansion, if you will.
(40:40):
The amount of liquidity ultimately naturally comes down unless you're adding more liquidity into the system. I guess I would put it that way. So I kind of do tie it back to that, but really it's the strength of the risk rally that folks have seen and whether or not the US can maintain the place that it has in the world to keep those US assets as well in demand as we've seen.
Gary Siegel (41:07):
Well, we've run out of time, so this ends all leader's event. I'd like to thank our audience and I'd like to thank my guest, Marvin Lowe, managing director at State Street for joining us. Have a good afternoon, everyone.