Odd Lots - Matt King Sees a $1 Trillion Liquidity Drain Heading for Markets

Episode Date: March 30, 2023

One of the big mysteries in markets right now is why risk assets rallied so strongly into the new year even as policymakers were adamant that they would continue to go hard on inflation by raising rates. Sure, there have been some recent signs of a "soft" or even "no landing" scenario, but a lot of the price action seemed pretty dramatic, with investors dashing back to meme and tech stocks that were beaten down last year. Matt King, Citigroup strategist and Odd Lots favorite, has one explanation for the recent "dash for trash." He argues that even though many central banks around the world have announced that they're winding down several years of extraordinarily loose monetary policies, they've actually been adding liquidity to the financial system in recent months — almost $1 trillion of it. Now he says that extra liquidity is going away and it isn't at all clear if private businesses and investment will fill the gap.See omnystudio.com/listener for privacy information.

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slash audio. That's vanguard.com slash audio. All investing is subject to risk Vanguard Marketing Corporation distributor. Hello, oddlaws listeners. We wanted to take a quick moment to let you know that this episode of Odd Lots is a little bit unique. First of all, we recorded it on March 2nd, so that's before some of this recent turmoil struck. Nonetheless, it remains really relevant because it's a discussion in part about how much extra liquidity is in the system and how much will be have to taken out in order to get inflation back to target. Now, our guest, Matt King, brought a lot of charts to show us, and those charts are referenced throughout the conversation. So if you want to see those charts and follow along with them as you listen,

you can find a companion article for the episode at Bloomberg.com slash oddlots. Or you can watch a full video version of this episode at YouTube.com slash Bloomberg Podcasts. Thank you and enjoy. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Weisandthall. Joe, it feels like it's been a pretty whiplashy start to the year. It felt like there was that moment in February where maybe there were signs that inflation was cooling. People were talking about a soft landing. And then just a few weeks later, we're talking about inflation being entrenched. Maybe the Fed has to go even harder on the terminal rate.

It just feels like it changed so quickly. Absolutely. I mean, and I think even like in January, it was still recession watch. So it went from recession watch to soft landing to no land. to no landing overheating fears again and uh yeah quite a lot of ambiguity uh for this short of time into the year okay well when we have ambiguous macro environments there is one man that we like to turn to uh and all thoughts favorite and uh we need to talk to matt king over at city group well absolutely and it's like okay has anyone gotten the last few years right completely no but the last time we talked to matt was in

late 2021. And he said inflation isn't transitory. It's going to be hard. This isn't coming down anytime soon. And I think in early 2023, March 23, people would say, yeah, that's pretty vindicated. Yeah, I remember in that conversation, he also talked about the possibility that the Fed might need to induce a recession to bring inflation down, which again, in late 2021. It was not conventional. Right. That was not the consensus. So we need to check in with Matt. And I am very happy to say that we have him here with us right now. Matt, thank you. Thank you so much for coming back on all thoughts. Thank you very much for inviting me.

So how would you characterize the current environment? Where are we in this sort of macro cycle? I would say that markets are still in thrall to central bank liquidity to a much greater degree than is widely appreciated and that this is contributing to the uncertainty about the underlying economic outlook. So as I see it, the central puzzle is how is it that with inflation-proving, than many people imagined. And with central banks basically being hawkish on the back of that and with yields and

real yields rising again, how is it that risk assets are doing so well? And most people would say, oh, it's because the economic data have surprised positively and the economy is more resilient, and maybe we can have this soft landing or no landing or whatever. And unfortunately, my work puts this in a rather different light. For me, the big factor which has contributed to the strength of risk assets beneath the surface is the way in which, even as the central banks have told us that they're going to be doing QT, actually when you look at the details, they've ended up doing QE.

They've injected over the last three months a trillion dollars of liquidity. And on my framework, that equates very directly into 10% directly on equities. And the moment that you think of it in those terms, it just puts the whole outlook in a very different light. Can you explain what is the mechanism by which you would say central? banks are still adding to liquidity because of course we know we're in one of the huge hiking a historic hiking cycle not just in the u.s but elsewhere what is actually going on this liquidity expansion so the main thing that i look at is reserves or changes in reserves on central bank balance sheets and the main mechanism i think is at work here is is the portfolio balance effect or how much money have we given to

the private sector in the form of reserves or deposits but it's reserves that correlates best relative to how many securities are available to absorb that. And it's actually at the Fed in particular where over the last couple of years, it's become really apparent that changes in reserves correlate much better with changes in risk than looking at securities, which is maybe the obvious way of doing this. And I think the underlying explanation is that money growth has always been important for markets, but over the last decade, changes in money growth have just come overwhelmingly from often technical changes on central bank balance.

when the Fed or other central banks are adding or withdrawing for $500 billion of liquidity, sometimes even in a single week, there's nothing the private sector is doing on anything like that scale. And so it has this outsized impact on markets. Well, just on that note, talk to us about where the liquidity has been coming from. Because I think, as you mentioned, most people, when they think about central banks at the moment, are going to be thinking about balance sheet reduction. The Fed has said that it started QT, although clearly there's a lot of disagreement about whether or not it probably, practically has. And in other parts of the world, central banks have been raising rates and withdrawing

liquidity. So where is that excess coming from? So this gets quite geeky quite quickly, but I think it's the most important thing. It's odd lots. So roughly, depending a little bit on when you measure it, this trillion dollars has come about $250 billion from the VOJ, about $450 billion, again, depending on when we measure it, from the PBOC. And, uh, and, uh, about $300 billion or so from the ECB. In addition, the Fed was draining liquidity and reducing reserves last year. And this year, even as the QT has continued and securities have been coming down, reserves have not actually been falling. So the Fed's contribution is technically zero. But again, as you say, that's surprising when notionally they're doing QT. And each of these

has its own story and I'm probably more confident in the framework than I am in the outlook. But when you start talking a trillion dollars over three months, it just has this massive impact on markets. How has the Fed been doing QT continued with its quantitative tightening, and yet in in 2023 we haven't seen the decline in reserves in the U.S.? So the way that I tend to analyze all of this is almost just empirically what correlates best with markets. And specifically what's been going on is the change in reserves, the Fed in particular, is influenced by not only the change in securities, what most people think of as QT,

but also the change in the Treasury general account, where the US Treasury deposits money at the Fed, and the change in RRP, where money market funds deposit money at the Fed. And it's actually even reasonably intuitive as to why both of these have an impact. So if, for example, the Treasury is issuing a lot more bills and you take money from your bank account

to go and buy those bills, but then they don't send you a stimulus check or they don't spend the money in the real economy paying employees or whatever, and they just lock the money away on the Fed, balance sheet. Well, that's kind of like QT. The private sector has got less money. There are more securities needing to be absorbed in markets. And empirically, what we observe is that in periods where that's happening like January, February last year and April, May last year, securities may or

not be going down, but as reserves fall, risk trades off. What we've had this year, or in fact, over the last six months or so, is that even as securities have continued to roll off, that is, impact has been offset by declines in the Treasury General account, and then to a lesser extent by declines or moves in RRP, that that means that even as the Fed has notionally been tightening and reducing the balance sheet, actually in terms of what matters for markets, it hasn't. And what we've seen over the last few months is whereas last year you could explain almost everything that was going on in terms of the Fed balance sheet and only the Fed balance sheet, what's become relevant over the last three months is to look at equivalent processes going on elsewhere.

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You know what's not embarrassing? Using FIG for Home Improvement Loan. A quick, simple, and transparent offer in minutes. Borrow Better with FIG. Visit fig.ca. You mentioned the portfolio substitution effect, and I think when we talk about the impact of liquidity on markets, it's sort of like an abstract thing. And could you maybe explain to us in detail what is the process by which a liquidity injection? and I suppose it will defend on the form. But what is the process by which that gets transformed

into a greater bid for risk assets? So I do all of this empirically by looking at what correlates effectively with market moves. And everything I've observed, and I tend to come up with the theory afterwards, but I do think that there's a unifying theory. And as I say, it's basically portfolio balance.

But everything I've observed over the last decade or so where QE has dominated, all of my underlying fundamental relationships that used to work, suggests more or less the opposite mechanism from what you hear from the central banks. So there was a lovely article by Bill Dudley on Bloomberg just the other day saying, oh, it's the level of reserves that matters and all this stuff about money changes is irrelevant. And on everything I see from markets, my chart suggests the opposite is the flow, it's the changes. Similarly, the central banks tend to assume once they've announced it, it's in the price. And instead, I find it's only as the liquidity hits the market or is withdrawn from markets that we seem capable of pricing it in.

The central banks always look for an impact on government bond yields and think in terms of reducing duration from bond markets and then everyone updates their dividend discount model with a new estimate for the S&P. That's not what I think is going on at all. For me, it's all of it. It's kind of simpler and cruder. And it's really about this balance between how much money has the private sector got, relative to how many assets are available to absorb that money. And when, say, the Treasury or another private borrower borrows in markets, yeah, that creates some bonds or some bills that somebody needs to buy. But if they spend that money in the real economy, that kind of nets out.

It's closer to being self-funding than people imagine. And in fact, that process of money creation is the system gains assets and liabilities is associated with risk on. QE, though, is kind of doubly powerful because it's simply, simultaneously gives the private sector more money in the form of reserves or bank deposits and deprives them of the safe assets like T-bills or bonds to go out and invest in and crowds investors into riskier assets as a result. And it's sort of unsatisfying in a way because you can't see all these moving parts.

I think what goes on is the guy that would have bought bills buys bonds, the guy that would have bought bonds buys IG credit, the guy that would have bought IG by yield and so on. And you can't see all of those moving parts, but this helps to explain what is otherwise a significant puzzle, which is how come I have all these lovely charts that point to strong relationships, but it's always between QE and risk assets and equities and credit spreads, even though all of the action is, you know, mostly in treasuries and government bonds around the world. I like this daisy chain. It's like someone buys the bill buyer buys bonds, the bond buyer buyer buying his treasuries,

the treasury buyer buys corporate, the corporate buyer buys junk. the junk buyer buys stock and the stock buyer buys doge coin and that is like the it's like that little domino meme right it's like that slight change that some degen way out at the end of the chain is like buying crypto but here's my question listening and in fact just since you've mentioned that ironically the best correlations i find of all are exactly with the most popular assets like cryptocurrency or like tesla stock for example it's just amazing how it shows up there in the in the hottest stats, even though the correlation applies more broadly too. But let me just ask you why there isn't a simpler answer to all of this, because I'm just

looking, you know, I can look at the S&P or I can look at the relationship between QQQ and the S&P, you know, something that's more high beta. And in Q4 of 2022, we got a string of pretty encouraging inflation prints that said, ah, it's finally happening. Lots of people saying, yes, it is finally coming down. A lot of confidence from the Fed. Disinflation, we can feel confident that the inflationary process has peaked. And then in the last, you know, starting in the middle of January, people started saying, no, maybe it hasn't.

And we're starting to see some upward surprise in used car prices. And we're starting to see some ongoing firmness and rents, et cetera. And why is that real activity not a sort of useful way? because that would seem to, to my mind, also explain the trajectory of risk assets, this fact that inflation is not coming down the way we might have thought in Q4, 2022. I agree that that's probably part of the explanation, but if fundamentals were as stronger driver as people traditionally think, all my stupid charts with central bank balance sheets shouldn't work at all,

and instead they work better than most of the people. Sorry, sorry, keep going. I like this answer. No, but they weren't better than most of the phone. other ways of saying it are when we look at the moment, the economic surprises on the city economic surprise indices, yes, are very, very positive, but the economic data changes are not. You know, we've raised our growth forecast globally by 30 basis points, but it's still to one of the lowest levels, 2.2%, one of the lowest levels over the last 40 years, is that really enough

to make you super excited? To put it back, it might be if I thought that we were going to, if I thought two months ago that we were staring down the barrel of a hard landing. Yes, true, but the sort of explanation people normally come up with is, oh, the central banks are being really dovish. And then you have Powell and the guard saying, no, we're not being devish. We're going to stay the course because the most important thing is inflation. You just get a disconnect if you try and explain it in those terms. And I think what people are trying to do is they're trying to retrofit fundamental explanations to price action that was actually driven by these

technicals. So your contention is that the rally that we've seen recently doesn't really have anything to do with what's been happening in the real economy as evidenced by the collapse in private money. But if you look at what's going on with public money, i.e. Central bank balance sheets and things like that, the correlation is much stronger. That puts it slightly too strongly, but yes. Okay. It's basically, basically. Okay. So one thing, like, I was kind of wondering just on this topic is if you look at China, I mean, China is currently, a place that wants to stimulate, I guess, but seems to be having a hard time convincing private companies to actually go out and borrow.

Can you talk a little bit more about what you're seeing there? I think that's a very good description of it. So we debate this because the Chinese the criticism in December was so large. They've been a little bit late publishing the January number. But as you say, what we see is, and have seen over the last few months, is normally at this time of year, we're falling off our chairs with the sheer magnitude of the total social financing numbers, the broad credit numbers in China. And what we've seen in the last few months is actually total social financing in particular

has been really quite disappointing. Even M2, where growth has been a bit stronger, has not been not surprised to the upside. And I think for me, this is part of a broader story that has maybe two legs. The first of them is that what we've seen over an extended period, I mean, literally decades, one economy after another kind of getting saturated with debt, even as it's been cheap to borrow. So Japan drove the world boring until 1990s since then they haven't wanted to do much. U.S. and Europe drove the world's borrowing until 2008. Since then, the private sector hasn't wanted to do much, and what they're doing is often for share buybacks.

And that's where China has stepped in. But even in China recently, it feels as though you're kind of getting this saturation, where it's the state-run banks lending to the state-owned enterprises rather than, as you say, the private sector voluntarily wanting to borrow. In addition, what we tend to feel is that even as the authorities are intervening and providing support and injecting liquidity to banks at the moment, it's not that they want a new investment and real estate driven boom in the same way as they've targeted in the past. Instead, they're trying to achieve the rebalancing towards the consumer that they always wanted. And as a result, you see that kind of relative disappointment in the broad credit metrics and in the credit impulse.

The implications for things like commodities in the rest of the world are much less positive than they have been in previous investment-led booms. Consumer-related stuff, we still see the positive. And things like China equities, we still see the positive. But if what I care about is those credit numbers, it all feels a bit more half-hearted than we've used to perhaps in the past. And even as there have been some narrow liquidity injections on the central bank balance sheet recently, again, it feels to us as though those have been a bit extraordinary. and it would be a mistake to extrapolate them through the rest of this year. So this era of large bank, central bank balance sheets, I mean, it really started in the wake of the great financial crisis, and all the central banks cut rates to zero could not cut further,

and so had to use balance sheet activities to compensate for their inability to cut rates any further. By and large, they didn't want to go negative. But the reversal of that, so 2020, you know, we saw some reversal of that in the mid-2010s, when the rate hikes and the quantitative tightening then, We're seeing the reversal of that now. You've been talking about what's the trajectories of balance sheet. What is the role of the tightening? Because, okay, yes, it's true, as you point out, that in some cases, bank balance sheet, central bank balance sheets still are growing. But we do know that they're all tightening. And that part has not really changed. What is the rate effect? And how does that affect either markets or what we see in the real economy? So this is unclear. And I have a very different view from the central banks and traditional economists.

And this comes back to what I was saying about flow versus level. And Mervyn King has been doing some nice talks for city clients where he actually echoes the points that I'm making about the flows of money being important. So in the central bank models, not only is inflation potentially self-reinforcing, but also the level of rates almost mechanically without looking at, at flows of money growth is thought to translate through into inflation. And never mind that over the last decade until recently, that didn't seem to be happening. Again, they don't have money growth, or did the financial markets more broadly, and therefore,

again, it's the rate levels, which for them are super important. And the way I think about it is instead know that low level of rates counts only if it dry, if it stimulate somebody to borrow. And even when it comes to things like unemployment, again, it's the changes that are actually more associated with recessions rather than the levels in themselves. And while I'm open to the possibility that actually there is now more momentum in the economy because of green investment or some of the other things that people are speculating about as drivers of an increase in our star, in general, I don't see that. What money growth I did see is often defensive stuff like credit card borrowing and seems now to be reducing being killed off by the rises in rate. The bank lending surveys are all showing tightening. And my general impression is that actually, while the M2 and the M3 numbers may exaggerate

the tendency and the negativity because to some extent those are influenced by QT, in general, I'd say central banks and economists assume that there is a momentum there, which would have been the case in the past when it was the private sector driving the money growth because rates were too low and they had a great investment idea or whatever. And this time around, while we had the biggest surge of money growth since the Second World War, it never came from the private sector. It came from the fiscal stimulus. It came from the QE that had already been turned off even before the rate hike started.

And all this to my mind points to the risk of overtightening. I'm not convinced that there is this super strong momentum, which the central banks tend to assume. And yet, they're in a really difficult place because the lags are so long. And it becomes really, it's almost impossible to tell the difference between a two-year lag on inflation, and then conversely, relative to money growth, and then conversely, oh, a genuine de-anchoring and decoupling, especially when you claim that the inflation

were transitory to begin with and then were disappointed that it took longer to go away than you thought. This was going to be my next question on the long and variable lags. But talk to us like, what evidence are you seeing right now of higher interest rates impacting, not markets, but the real economy? And what are you looking for? in terms of signs or evidence that they are, in fact, having an effect.

In many respects, this is hard because those lags are long, and also because there's been so much terming out of debt in recent years that makes it kind of difficult to tell. So let me answer that a different way. Sure. Some of that I lead to our economists, and you were seeing weakness in the housing market, and then in the U.S., the housing market is restr strengthened. You're still getting weakness in other places.

But let me maybe answer this a different way. So one of the puzzles of the last few cycles, in 2018 in particular, is that in general, it's taken lower and lower levels of real yields to kind of end each cycle until now. And each time what caused the pivot was effectively dysfunctioned in financial markets threatening to feed through into the economy. And each time there's been more debt in the system, and maybe that's part of the explanation as to why it's, it was a lower rate each time. And in 2018 to 19, in particular, it's not the case that anyone was running around saying, oh, I can't roll my corporate debt, or oh, I can't pay my mortgage. Instead, what you had was weakness in equities and the weakness in the housing market

threatening to feed through into something broader. And it was that that, coupled with broader fears about deflation, which allowed the Fed to pivot relatively rapidly. Now, this time around, we haven't had that to anything like the same extent. we've seen this year in particular, last year we had an orderly sell-up in financial markets. This year we're rebounding. But you get this debate as to is the recession postponed or avoided entirely. And while there are some signs of more ongoing momentum in the US consumer in particular,

perhaps than I had imagined previously, and my economists have had a better call on that, I'm still deeply suspicious that a lot of the exuberance in markets has come because of this stealth QE from the global central banks. And then in addition, it's just that the lags are long before you see that equity markets are correcting downwards and house prices are correcting downwards. And then the stock of accumulated savings begins to diminish. And the main thing that would convince me that I'm wrong on all of this is if we saw a significant upturn in the loan growth numbers in the money growth numbers and it looked resilient. And that's not what I'm seeing. And so there's a similar debate with respect to when I speak to corporates themselves.

Yes, everyone's having difficulty recruiting workers in hotels and restaurants in particular, and yes, there's this pent-up demand for things that weren't possible during lockdowns. But the question I keep coming back to is, are the corporates saying we need to build more hotels and restaurants? Again, is there this longer-term demand? And I'm not nearly as convinced as many people are that everything has turned around as much as people like. Maybe some of the backstory here, if I may, is I think, again, this difference between how I, I think about it and how the central banks think about it. So the central banks are really embarrassed because while everyone has had difficulty forecasting inflation, oh, it's a hair chart. It's a Medusa chart.

I love those. Exactly. The hedgehogs or whatever, the pocumines. So not only have they been surprised by the inflation being higher than they expected over the last couple of years, but of course, for the preceding decade, they kept expecting more inflation and then there was less. And so they're really having to scratch their heads and say, what is it that's turned 180 degrees and caused our models to go wrong in one direction to wrong in the opposite direction? This is one of the themes that I like going back to, this idea of like the 2020s being the inverse 2010s. And that hair chart, hedgehog Medusa chart, what have you is a good example. It's like first you have a decade of perennially over, your inflation expectations being

perennially over optimistic or too high. And then maybe what are we going to have? It's possible that we have a decade now of continuing to expect that inflation will come down sooner. You know, I want to go back. It seems like part of this debate is and the sort of the variability of the long and variable lags impact on inflation. And it feels like the Fed has is the belief that these lags are much shorter that they used to be. The instantaneous financial market effects reflect a speech. Paul gives a speech, even if he doesn't raise rates then, it all reprises, and then the actual rate rises are a mere formality after that. And it sounds like from your point of view, it's like that actually you still have these long lags

because of things like, well, how companies turned out their debt, and eventually they are going to have to roll them over even if they haven't yet. And when that roll over happens, there will be a kickup in their interest costs and that will create a burden on investment. So it sort of sounds like that's where the tension is. And your view is simply, no, there really are still long and variable lags. All these rate hikes that we saw in 2022, their impact is still coming. Basically, yes.

Maybe I have a particular view here. I'm not an economist. I'm a strategist. And so for me, asset price inflation and CPI inflation have always been two sides of the same coin. Now, the central banks gave up on money growth in the 80s and 90s when they said, oh, there's lots of money growth, but there's hardly any inflation. Our job is to control CPI inflation. So this money growth thing is useless. us and let's stop using it, or in the Fed's case, even stop measuring some of the metrics they ran

previously. And for me, though, and I think virtually anyone in financial markets, it's kind of obvious what went on. We had asset price inflation instead, and those correlations that break down with money growth, even if you build quite crude models where you put together asset price inflation and CPI inflation, those correlations that break down with CPR inflation, they basically carry on. And so for me, what we're seeing is, as you say, not this drastic, drastic turnaround where something, you know, the globalization shifting to de-globalization and long and persistent

inflation. Instead, for me, no, it's just these long time lags. And there's a very clear pattern. It's that the surge in money growth showed up first in asset price inflation, then in goods price inflation, and now in services inflation, and yes, in things like wage growth, but the lags are long enough that it's really difficult to tell whether this is genuinely persistent. Let me ask a devil's advocate question. Could the correlation go the other direction and where it's the surge in asset prices creating the surge in monetary aggregates? And the reason I ask that is because there are models of the economy,

more managers and bank lenders, et cetera, look at the price. And yeah, I'm going to be more likely to make a mortgage loan if I feel like this is an ear where house prices are going up. I'm going to be more likely to approve a business loan. if this is an era where stock prices are going up and the company is likely to be able to tap the equity market. Could it be that some of these charts, which do seem to show a compelling relationship, go from assets first to money supply next? You are certainly right that the relationship often works both ways.

It's not only that credit growth stimulates the housing market. It's also that a buoyant housing market encourages more credit growth. But if it only worked that way, then this chart shouldn't. work, then I shouldn't be able to find a really nice relationship going back to the early 1900s where the imp where money growth in the US links through to real estate, but with about a one and a half year lag. So yes, you're right. That's part of it. But for me, money growth is still the best driver. And to come back to this question of lags, it's reasonably short when I look at things like the equity market, especially now that central banks are driving it. But the link to real estate is

about one and a half years. The link to commodities prices is about one and a half years. The link to CPI is harder to tell because the relationship is weaker. But as far as I can see, it's something like a two-year lag. Now that puts the Fed in a terribly difficult spot because you're not going to see the impact of even the first rate hikes until late April 2024. Never mind the hikes that you're doing at the moment. Little too relaxed during yoga? That's embarrassing.

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and routine on Bloomberg television, radio, and wherever you get your podcasts. You know, Matt, you emphasized that you are indeed a strategist and not an economist. And on this podcast, you're somewhat famous for the sort of flows before prose idea, this idea that, you know, for many years post-financial crisis, it made sense to just follow the money and never mind whether valuations were reasonable or not. if we assume that liquidity does have a big impact on markets, which you argue it does, and if it does seem like all these one-off sort of stealth liquidity injections are now going away, what should investors do here? Just flee on mass? Or what would be your recommendation?

Actually, the outlook for the various liquidity factors is complicated for all of them. The surge feels as though it's been extraordinary. There is a lot of debate as to just have on negative or at least less positive they all become. On balance, though, yes, what I think we have seen is an extraordinary three months. Yes, that's left equity and especially riskier credit valuations at levels where I don't like chasing them at this point, especially for the more expensive equities, which is still the tech sector and the growth sector and still the US relative to the likes of Europe. of if we want risk-on positions, we would tend to do them through currencies, Euro versus

dollar, or through regional preferences, European versus US equities, or maybe you can say the same thing about China. But yes, you're right. The biggest problem that we see generally is that for every individual asset class that considered in isolation might seem sort of attractive, what really matters is the valuation relative to money market funds, especially in dollars. And so IG credit, for example, has some of the best yields available for the last decade. But actually the pickup relative to money market funds or deposits is actually the lowest. It's been in multiple decades. And so that does argue for significantly

increased allocations to cash and cash equivalents, exactly those things which were basically uninvestable over the last decade. All right. Well, Matt, we're going to have to leave it there, but it was fantastic having you on the show once again. Really appreciate it. Thanks very much. Joe, you know what I just realized? Tell me. The last time we spoke to Matt,

I think we ended the discussion by saying that we wished that we had a video product because during the conversation, Matt was bringing up all these different charts and showing them. So now we're finally able to do it and show off some of these. So if you just listen to this episode

on Apple or Spotify or something like that, go to you find this on YouTube. YouTube, where we have the charts that he was bringing up during our conversation. We're going to have a video. Or we're also going to write a post with some of the charts or as many of the charts as possible. So you can read a story about this with all the charts. Because I love the way talking to Matt, how he like brings up all his charts in real time. It's very fun. Yeah. And the charts are excellent, especially the hair charts, which I can never get enough of. But I do think he hits on something, you know, this overall feeling in the market at the moment, which is it does feel a little uncomfortable.

that we still have this overarching question of, is inflation coming down? Are central banks going to have to go harder? I mean, people are talking about terminal rates at like 6.5% now, which seems extreme. And you would think that would have more of an impact on asset prices. Yeah, I mean, it is really striking. I mean, it's still, you know, the fundamental story still seems like it explains some things, especially like setting aside what markets have done in 2023, as you talked to about in the intro, a lot of people have gotten suddenly anxious about the overheating. And so you

see it if, today we're recording this, 10 year back above 4%, etc. But on the other hand, he's right. And one of the charts he showed during the conversation specifically had the title of like, monetarism is gone out of fashion and it's coming back. And it's 100% true of the out of fashion part, I think especially in the 2010s, no one was talking with like M2 and all that stuff. And so then the question is, does this become, once again, as sort of like the 80s, like the Volcker era, where these monetary aggregates become a sort of like central focus for how investors view the economy? Bringing back M2, let's do it. It is true, though, that you can have both things, right? You can have, you can have technicals that are a tailwind for risk assets and also have fundamentals

that so far, because of the long and variable lags that Matt was also laying out, like, look pretty strong. Hey, these charts look pretty good to me. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway.

You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our producers on Twitter. Carmen Rodriguez at Carmen Armin and Dash Bennett at DashBot. Follow all of our podcasts at Bloomberg under the handle at Podcasts. And for more OddLoddLod content, go to Bloomberg.com slash OddLots, or we post the transcripts. In this case, we're going to post the charts as well. We are going to Tracy and I

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