Macro Matters - price stability

Speaker A: Welcome to the CFA Society Chicago Podcast. In this series, society members will be hosting discussions with leading industry experts on a range of topics related to the investment industry from a variety of events hosted by CFA Society Chicago. Learn more about these events and subscribe for free to the podcast so that you never miss an episode@cfachicago.com

Speaker B: welcome to the CFA members and guests to another edition of Macro Matters, the last edition of the first half of 2026. Hard to believe that we're already halfway through 2026. Pretty crazy um, but we're. As we gear up for the fourth of July holidays and quarter end window dressing etc, um, we are back to talk about the markets. My name is Rich Excel, your co host and I'm glad to be joined once again by my fellow co host Tony Zhang. Tony welcome, welcome back from Miami. Welcome back to Chicago. Ready to talk markets. It seems like it's all AI and the Fed as always.

Speaker C: Yeah Rich, uh, so glad to come back from Miami where it's like a beautiful place and so hot. I mean it's as hot as the semiconductor industry where especially in the mid memory chip and a lot of uh investors regarded uh, uh regardless whether institution or retail investors are pouring all of the capital tracing the momentum of the uh semiconductor membership like including Micron Centis and then we have seen this like uh the performance of Micron uh Sendex post earning announcements. So much to actually talk about. Especially we are at an interception where both the institution and retail investor need to think it over um, what might be coming next um given we have a new fad and then we have a new policy for index reconstitution.

Speaker B: Yeah, a lot to cover but uh, let me start. I'm just going to share my screen for those who are watching on YouTube you'll be able to see but for those on the podcast we'll try to talk you through it. And um, let's start with AI. Let's start with um, what's going on in, in the equity market. I have here the chart of the NASDAQ futures. Um, and this is something that I kind of had highlighted on Monday because we you know we, we ended the last week with a little bit of a sell off and then that led to a big sell off. You talk about Micron and SanDisk. SanDisk But SK Hynix and Samsung in Korea are massive names in that same theme and there was a huge sell off in Korea to start the week and that took NASDAQ down quite sharply and we were at an inflection point. Right. We're right near support levels as you can see. I've drawn a few different lines. Regardless of how you want to draw the lines, um, we're kind of at a support level for all of them. A pretty critical juncture. Um and this was heading into Micron earnings like you said. Micron earnings were. Were quite good and the commentary was quite good. Um so it looks to be for now at least that this trend higher. The rally in memory, the rally in the AI theme um is. Is. Is holding. Um you know not only do we get the SpaceX IPO but SpaceX did a bond issuance and that seemed to be well received. So for now it looks like things are holding right now. Tony, is that how you see it?

Speaker C: Uh yes, uh, definitely. I actually have an info sheet. Um.

Speaker A: Um.

Speaker C: I do not know what it is like for me to share but a lot of information to share. Maybe I just brought uh quickly just uh talk about it and because um. Given what right now the AI heat where the AI heat remained it's apparently we have already seen the capital actually shift from the uh large language model side which basically say m m7 um x plus OpenAI and anthropic side to more of the infrastructure side including the data center, memory, uh chip manufacturing and so on. This is the one thing that we really want to actually um discuss and pay attention to. This is information from the Microns um earning announcement which actually shows like 84.9 of gross margin and 84.9 gross margins. Uh this is. People might not actually have a sense of it that basically. That basically saying that for $1 um they sell. It's like the profit. The gross profit is $0.84. This is significantly higher than Nvidia than many of the industry out there typically the manufacturing industry or just the gross profit margin might be less than uh 7 and 8%. If we actually by looking at this what that's really telling us that the demand for Micron chip is so desperated. That's why as what we can uh infer from this reading is we're not talking about the Micron by itself specifically. We're just trying to infer from what the industry is actually talking and that means like the buyer, the crowd center uh like uh Nvidia OpenAI and so they are all willing to pay such a high extraordinary high price just to actually training for the demand. That being said is so far from what this like an earning report that the demand for the AI uh inference remain robust. And it seemed to me uh that it's accelerating because the gross margin is getting higher, not getting lower. So this is base that during the time period that they must already raise the price uh to sell. And this is the. That's we can see there's a lot of information like uh, we can actually send uh, from here and here. The whole country I think is setting up um, the AI as a national strategy and current administration and all of the financial industry uh, embracing uh, the AI as national strategy. So this is something. A war that uh, we cannot lose uh, to China. So I think that we have all still have a strong momentum behind it.

Speaker B: Ah.

Speaker C: Um, so apparently uh, this is something that we just mentioned about the index reconstitution and the administration sec, uh sorry, not sec, I think uh, NASDAQ and uh, they also changed. Russell, they also changed some kind of a policy to rule for reconstitution, uh, to actually add um, many of this kind of memory chip and also the SpaceX into the index without having reached out to certain um, amount of time. So Richards, I have seen domestic uh, change behind that. But um, my point is that the demand remains super robust and this is. So this is not that much to actually um, to worry about the demands at this moment. What do you think?

Speaker B: Well, I totally agree with you and I think the, the analogy when you talk about we have to win the race with China, that seems very similar to. Because a lot of people characterize what we're in right now as Cold War two. Right. If we go back to Cold War one, the US needed to win the space race against Russia. And it does seem to be, have a lot of parallels to that where it's going to be. In this case it's the private market but doing whatever it takes. But I think I just have the intraday chart up here of the NASDAQ futures. And uh, this to me is somewhat interesting as well because um, the numbers from Micron and even, I mean Qualcomm had good numbers too. The numbers were objectively just very, very good. And there's no slowdown as you mentioned. There's no slowdown in demand it appears. But the question always becomes is this priced in or is it position? Are people positioned for it? And we see in this chart in the NASDAQ futures, after hours after that news came out, futures um, jumped considerably and in the overnight session continued to trade higher. And it kind of hit the peak. Futures um, hit the peak, um, right on the market open and then in the first, you know, 30 minutes on the market Open futures kind of tanked. Now there's trying to make it a little bit of a comeback here. But it kind of when you get, when you get poor price action on really good numbers, it always makes you wonder is there anyone left to buy? Is there anyone left in this market that is, that hasn't gotten in on the AI trade, that wants to get in on the AI trade? And that would be what a bearish um, trader might be looking at right now is just the poor intraday price action. And if going back to that first chart, if we kind of break these levels, that doesn't mean the trade is over, that doesn't mean the theme is over. But it could mean, you know, it could mean a pullback, um, you know it could mean a pullback, you know certainly for of about 5% or so which might shake out some of the, certainly the levered ETFs but it might shake out some of the weekends too. Is that something you're, you know, in talking to other people, some, you know, positioning, crowded positioning, Is that something you're worried about?

Speaker C: Well definitely crowded trading is one issue. Uh and if we actually decompose what's actually driving the alpha or driving the performance of many of like a top hedge fund in the US over the past half year, uh there are actually two major factors. Number one factor is the uh, momentum, momentum. And second is a crowd trading. So that being said is um, if you want to actually have the alpha over the market uh for the first half year then you have to really jump over the crowd trading. That being said, if you actually don't jump over the air, don't jump over this infrastructure trade, then you'll be actually uh, you'll be left behind. And second is uh, what tend out to be is if you actually jump over crowd trading together simultaneously that is actually being formed as a force to push the stock with a concentrated portfolio actually higher. And that creates a self fulfilling uh, uh effect that's like the more people buy in, the more it go higher, the more it goes higher the more people uh, buy in. So this sounds like a really familiar um, when that happened. So it was like creating the crypto bubble. Like um, when we actually heard about microstrategy which actually just pump up the bitcoin price uh at a time. So right now we are actually uh getting similar things over there. The only difference between crypto and memory and semiconductor is that while people can argue the fundamental for the semiconductor or AI memory chip remain uh, to be true. While on the other hand it's like a demand for crypto. So you just actually do not know uh, what might be the true use case or real value in the past for the Bitcoin, except some kind of maybe um, uh, some uh, money laundry or something like that. So um, this is, people can argue for that. But giving what the AI and what things remain uh, so strong. I would say here, even though maybe a temporary pullback and sell off. This could be a, uh, couple reasons behind that, but it does not actually change the fundamental. The fundamental is whether the demands would uh, become sluggish and whether the M7 will actually slow down their capex, uh, spending. Uh, then we haven't seen either of them. So from that point of view I wouldn't actually worry except this is some kind of event, some unprecedented event like Covid happened again. Rich.

Speaker B: Yeah, and I think just one thing I would point out too is the seasonality. Here we're recording June 25, June 30 you talked about index reconstitution and um, rebalancing. But we also have quarter end window dressing from a lot of different funds. And then finally um, if we remember back to the end of March, the lows were marked because there's a big um, uh, there's a big asset management firm that uses a lot of options like overwhelms the market with their options trading that really set the low in the market and at the end of March and we continue to rally from there, it'll be very interesting to see what happens um, with that trade next Tuesday when the trade comes through next Tuesday and see what, what happens around there. Because of course as we then head into the fourth of July holiday, just behaviorally, let's face it, institutional fund managers don't want to take on any risk ahead of the July 4th holiday. They want to keep their book as risk free as possible because they too want to enjoy the barbecues, the lake or the golf course or wherever everyone else wants to go. Um, and so you know, PMs are in people too. And so just understand from the market it will get less liquid and we'll see a lot of position squaring etc as we go into the holiday and into the core of the summer in July. So that's a little bit that's kind of going on which after a run up and after seeing some, some what looks like you know, it's only one day with one data point. But knowing where I kind of at a, at an inflection point in the market, just something for, for People to be, to be aware of. Um, yes, but AI isn't the only thing in the market. Sorry, go ahead.

Speaker C: Let's hope for the new heights they are for the Fourth of July like a 250 anniversary of the United States, you know.

Speaker B: You know that the administration would love to see that too, right? They would certainly post about it. Um, but AI isn't the only theme in the market. Uh, you know last week June 17th we had the first FOMC meeting of the new uh Fed Chair Kevin Warsh. Um, I wrote about that a little bit in my substack this week called Wash, Rinse and Repeat. Um but you know if we look at it you know the, probably the biggest takeaway that I read is that he was much more hawkish than people anticipated. I think if we go back to when his name was first surfaced and talking about him last year everyone thought he was going to be a stooge for the President and just want to lower rates. Um, I think that tone somewhat changed um, during the hearings etc. Um however since he was kind of confirmed um, if you look at it that May 19, um the May 19 period for the 10 year when we talked before about that line in the sand that's kind of the peak. His confirmation was kind of the peak. And since during those confirmation hearings we've seen the peak in the yields and the 10 year yield has come back below the line of the sand here at 438 um versus that 4 and a half um so the 10 year yield is responding favorably even though he's hawkish because I think the 10 year sees that he's got some credibility perhaps on price stability. Um the two year yield um has you know had been rallying thinking that as we were pricing rate cut or rate hikes into the market. Now that's down a little bit here in the last uh, couple days um as we've kind of tone that down a little bit. But we're still in the you know in the last month of have gone from basically we started the year at over two and a half rate cuts priced into the market. By May we were basically zero. And by the you know the June meeting, right after the June meeting we're at one and a half rate hikes priced into December um which is a pretty radical um move in the short term interest rate market as you can tell by the move in the two year here. But at this point I wonder if we are going to see the rate hikes that the market's pricing or really what we're seeing from uh, Fed Chair Warsh is that not so much that he's hawkish and wants to hike rates, just that he's not as dovish as people thought. But I don't know in your circles Tony of uh how people are interpreting the first meeting and press conference from Kevin Warshire.

Speaker C: Um, in the same circle, uh no difference, same US Market just in optimization, not just an option. So definitely a lot of information coming out from the um, first FOC meeting with um um Chairman Kevin Walsh as the Fed Chair and apparently uh, even though um the rate remained the same but the information actually tells a lot of us things that we haven't really thought. Apparently he mentioned this is no rush to cut rates. This is no uh, uh surprise to the market. The real thing that I think what he uh really wanted to see is that he say he want to prioritize restoring the inflation credibility over supporting the asset price um before actually taking any action. And just like the most important thing he actually is saying that he somehow he set up multiple task force to address some kind of the policy issue which including for instance whether there should be more of uh, uh data point plots to be actually released uh externally and whether FAD should actually give like a free uh frequent guidance over to the market. Those things are actually super super critical. Now here apparently I agree with you Richard. You just mentioned that people expect Kevin to be dovish but that is not um really critical. I think whether he being like dovish or not, it's not the key point. The key point is he say FAD should actually focus on more about the uh inflation credibility and simultaneously do not give too much information. What if overall over the past like almost a decade that the financial market rely heavily on the information provided from the FOMC meeting. Every FOMC meeting market respond to the guidance to dot frau no doubt that now here is saying oh uh, suddenly the Fed will not actually release this information. What does that tell the market? The market would have actually no information or no input from that. That's going to have had a huge influence over the um Crown shop the hash fun which actually using the natural language processing or AI model to extract information from this kind of guidance actually will suddenly would lost kind of an edge. What that means is apparently it's going to cause m volatility uh overall. And if we actually ask what this really means, this exactly mimic what Chinese central bank is doing. You know the Chinese central bank they don't actually come out and talk. You never actually heard any like a Chinese central bank actually come out and talk and say, how do you come in, Alphonse? Now Eve Fed stay behind the scene. Who would actually have the most influential power over the financial market in this country? So it will be President Trump. So whatever President Trump or administration actually have some kind of fiscal policy that will become the major input over the financial market. So this is what I think institution investors should actually pay attention to right here, right now. I think this is even better than um, what if uh, he is being dovish or hawkish, uh, because we all know that he's not a hawkish person even though he disagree with the um, previous like a Fed's policy over injecting extraordinary amount of liquidity over copyright Rich. That's how I, yeah, I think, I

Speaker B: think you're absolutely right, Tony. I think that was to me one of the biggest takeaways was that he wants to get rid of forward guidance. Now he's not going to unilaterally do that. He has a task force and he'll have the researchers look at this. But he wants to return to pre financial crisis. And I don't think most people in the market remember pre financial crisis because most people in the market came in after the financial crisis. Um, but you know, you talk about before that we had Alan Greenspan who passed away this week, may he rest in peace. But Alan Greenspan would talk to the market, but no one understood what he was talking about because he would speak in such jumbled language that people would talk for months afterwards trying to figure out what he was saying. And so the idea was that the market itself had to figure out what was going to happen and then the Fed would respond to the markets, not the market responding to the Fed, which is since the financial crisis, the market has been waiting for the Fed either supported or not supported and responded accordingly. And so, uh, we're going to be left in the market as having to figure out where we think rates are going and letting the Fed respond to that. And along those lines, just a few charts I have here is like, you know, now that you know, you know, there's some debate on whether or not there is going to be a treaty with Iran or whether it's, it's a legitimate treaty or whatever. Let's leave all that to the side. The reality is if we look at the commodity prices, the ones that were most affected, in particular, you look at oil price, this is wti, um, the WTI oil price here in white, you know, as we see, um, before the war started was somewhere around 65, $66. It's, it clearly spiked up to you know, 120, almost $120. Um, and now his round trip and is back down to $70. Um, in following suit is corn. Corn prices which moved higher because fertilizer prices um, were perceived to move higher and shipping costs move higher. Well, corn prices are down actually, um, getting down to that $4 bushel barrel where $4 a bushel price where farmers are, you know, aren't even going to sell because it's not economical. Commodity prices in general have come down quite a bit in the last month, two months. Right. Um, they're still, again they're still not down on the year. So but I think that's important to think about because here's the, here's a chart I want to show you because today on um, June 25th we got the PCE data. Most people know the Fed prefers to look at the PCE numbers. I have the PCE core in blue here. That came in 3.4%. The headline PCE came in at 4.1%. Both of which are well above the Fed's 2% target. Right. Which is why, to your point, why the, why the Fed chair needs to be speaking about price stability. Because we've talked before about affordability being a critical issue for voters. And as we get together at the fourth of July barbecues, people will be talking about how expensive prices are and that's not what uh, what the politicians want. But a couple other measures here that are maybe a little bit more forward looking about where the, where how the trend might be changing. The first one is that in orange I have the one year inflation swap. So what the market's pricing in for inflation which had hit a high of about three and a half back in April and have fallen down to 2, uh.16%. So they've fallen down considerably in the last two months or so. Um, with anticipating here that's driven primarily by the, the movement in the commodities. But then the white line I have here is that I think I've shown it before. Just a simple index I have of CPA forecast which looks at commodity prices, money supply input prices measured by PPI and inflation expectations. That hasn't fallen as much, but it's shown that it's rolled over as well after April and is starting to come lower. So maybe there's some downward pressure here. Um, that's going to, we're going to start to see in the second half. I know you've been talking about the disinflation from AI, but maybe we're starting to see some disinflation coming from other parts of the economy. So perhaps the Fed isn't going to need to hike rates. And you mentioned the dot plots. Um, in Kevin Warsh There was one dot missing. This time there were only 18 dots, not 19. Presumably that was Kevin Warsh because he's the only new guy. Um, but the other dots, if we just look at the other dots, they're split pretty much 9 by 9 of, of. Of, you know, either no move or rate cut versus rate hike. So the committee itself seems pretty split and with the data perhaps looking like it might be rolling over Fed on hold might make some sense. Um, and then just one last thing and then I'll pass it back to you is the easing bias of the, of the um, the easing bias of the Fed and the rate cuts combined with um, the bigger balance sheet and on top of it the fiscal stimulus that you mentioned, fiscal monetary stimulus led to this dollar US debasement theme which we'd seen pretty strongly in 2024 and 2025 as measured by gold and Bitcoin, Um, and Bitcoin we know rolled over starting last, last September, October. But gold after hitting a pretty high peak at the start of the war, um, has also rolled over pretty markedly, um, and is now down on the year believe it or not. So that debasement theme, it seems like that debasement theme, um, the US asset US dollar debasement theme might be going away and this might be early signs of some credibility at least on monetary policy. We don't know about fiscal policy. I threw a lot at you there Tony. What those things sounds interesting to discuss.

Speaker C: Well, definitely, uh, there's a lot of information over the past few minutes of what you have already uh, talked about. Maybe we can actually start with just like the gold uh, price and also gold USD. Apparently we have seen that the gold price plum and a lot of people might actually wonder why. And this is because it's uh, contrary to general belief. The general belief will be gold is a risk averse assets like during the crisis, financial crisis or war crisis, people should expect the price of gold actually appreciate it. Now at this time it's actually go, um, uh, on the other hand, on the other hand is that it actually went down uh simultaneously with the oil price. And this is actually contrary to a lot of people uh, believe. But now here, uh, um, we actually saw from a different perspective at the same time what happened. Apparently the US dollar gets stronger and stronger and you Might actually want to uh. Tie everything together. Why this happened. Apparently for this country, for the national interest, it's a country we would like to actually see relatively strong dollar but not that strong because we still want to see the strong dollar maintain the uh global reserve currency status. And this is in short term actually nothing can change. But given what the chaos in Middle east and also the tension between the war between Russia and also Ukraine remain um. Uh heavy over there that the US uh dollar should rather remain uh. Stronger. And if that's the case apparently the gold um which actually denominated as the US Dollar will get uh. Weaker. And more importantly if we actually recall over the past uh two years, one year and a half a lot of external large I think um um central ah bank globally including Chinese central bank, Indian central Bank, Japanese central bank, they all sold the US bond Not just they are not net buyer but actually they continue to sell the US Central bank. Given the national treasury that here has uh. Overpassed $39 trillion. Apparently that will favor the high price of ago. That's what what droves I the gold price. But down here since like the war happened. Yes you can uh. Continues to go down. But you know this is all based on the one hyper um hypothesis that the Fed would actually sell would actually will be able to hide the interest rate when because the goal is zero interest rate nominated asset. If the free rate, free rate goes higher apparently we should expect to see lower price of the gold. But uh. Now here's the case we would not be able to actually raise the hike the interest rate here because the $39 trillion national debt together with with the uh interest uh rate so high this already which actually almost overtake 1/3 or 1/4 1/4 of our UH annual GDP tax revenue. That's way too much. So this is definitely some kind of limitation over here. And apparently uh. Kevin Walsh has been long being skeptical of oversight balance sheet and asset purchase driven policy which actually he used to uh. Accredit to the high inflation over here. Now he tried to leverage that uh with just uh the statement or the policy by setting up multiple tasks to address the issue so that to cool down the inflation expectation from the market but without indeed hiking the interest rate. So everything now what we have seen here is only verbally and you will be actually super super surprised to hear what President Trump would say. Remember in the past if um Chairman Powell mentioned that he was going to hike interest rate. President Chung will actually roll a lot of tweet uh over the true social. But now here, this time that when he say, oh, we might actually hike interest rate, what President Trump, uh, in the early interview say, hey, uh, well, uh, it will be actually um, uh, stupid surprise to see that he actually did not criticize uh, uh, Chairman Kevin in this moment. So we know that this is um, it's actually very, very critical to actually work to fight to find a balance between the fiscal policy and also the right policy. So right here. Now coming back to what we finished talking about previous couple uh, slides and yeah, now apparently this is a super, super critical line and it went down from the red line $95 down to almost like a $70. But uh, as what you mentioned and what we discussed in the last episode here, the decline of the price was in my opinion will be transitory. What that really means is it's actually served the purpose because we just open up the Strait of Hormuz and we have so much of reserve in also um, saving uh, over the Gulf, uh, coast area coming out and that create a shock, a shock in the supply higher. I mean this is higher. That's the price went down. But if we actually um, the US have to refuel the spr, uh, the moment that happened. The moment that happened, we will actually likely see this would come in the energy price, the crude oil price will come back up, uh, very quickly. But now the timing is very, very critical. Um, right here and right now that um, right before the midterm election and this is, um, so have so many things like um, walking out at the same time. It's not that easy. And if we actually call right now, we haven't had an agreement between the US and Iran. We just have the MOU memo of understanding. Um, that being said, the memo of understanding is that we will have reached an agreement in 60 days between two countries. In 60 days over the June 19th there will be August 19th, 60 day. So what we have so far is not an agreement at all. It was just saying we actually have an agreement. We are going to reach an agreement in 60 days. So I still see lots of uh, um, unstability or instability that could trigger the short term. Um, I think reverse, reverse of the uh, energy price and gold price cost right here. So

Speaker B: I would agree because we're looking back again at the crude oil and the corn price, etc. Um, couple things that you, one thing you highlight and one other thing is to think about. You mentioned refilling the spr, but we also have to refill the commercial inventories that have been drawn down considerably as well, so you have to think that there's a bid here somewhere, right? Somewhere in probably the $60 to $70 range, um, where both commercial producers, um, as well as the US Government and other governments around the world, which have also been drawing down their, their strategic reserves. You know, there is a. There, you know, there is a bid here somewhere. Um, and I think that's important to note. And the other thing I would highlight is that when we look at, you know, whether it's crude oil prices or corn prices, um, whether it's oilmen or farmers, these were voters for Trump in the, uh, in the last election. So they don't want prices to fall apart as much as other consumers might. So you have to think that there might be some, some floor, some stability. They don't, you know, I don't think anyone even, even, uh, even oilmen don't want prices at over $100 a barrel because they know that destroys demand. Um, they want prices somewhere in that 70 to $80 range, ideally. So maybe we'll see that. Um, and just wanted to kind of highlight. We talked about that dollar debasement and the move in the dollar. Um, the dollar since, uh, since May has moved up sharply. And what had been a falling trend really from all of 25 and into the early parts of 26, of the dollar weakening and was that was leading to. I have here not only the dollar currency, um, the dollar index, but I have the relative performance of the spiders versus EEM, so emerging markets and the relative performance of spiders versus EFA, which is the rest of the, uh, MSCI world outside of the U.S. um, and as the dollar fell for all of 2025 and into early 2026, we see U.S. stocks on a relative basis because of course they were up on an absolute basis, but on a relative basis, US Stocks were falling as the dollar fell. Right. It was a sign that money was flowing out of the U.S. overseas. Um, as the money, as the dollar has started to stabilize here, and in fact, we've seen it move up fairly sharply to levels we haven't seen since a year ago. Um, what, you know, what will we start to see in the relative performance of your stocks now relative to Europe? US Stocks have started to do better since the war because Europe, Europe and Asia, um, Japan primarily, uh, because this is developed market. Asia, US um, or Europe and Japan were going to struggle, um, relative to the US because, um, they were reliant on imports, energy imports.

Speaker C: Right.

Speaker B: With energy prices falling, that should help them. Will that continue? Um, the other one is versus Emerging markets and emerging markets have continued to do very well versus the US Primarily because of Korea, which MSCI just confirmed will stay within the emerging markets index. In Korean stocks, namely sk, Hynix and Samsung have been up uh, massively. Right. And the Korean index is up 90 uh percent this year or so just in 2026. That's, that's really driving this. But we know that the trend in the dollar um, will impact the relative performance and we've seen a kind of a dichotomy here. So that would suggest U S stocks might see some relative upside. Um, and so I think that's kind of a, kind of an interesting thing to think about here. But I just want to end on one thing because you mentioned the balance sheet and, and, and going back to the financial crisis, um, Kevin Warsh has really been critical of the Fed's quantitative easing, et cetera. Right. And the growth of the balance sheet. Um, the balance sheet which is about $6.7 trillion right now. Um, I think some people think that the balance sheet um, should be zero and was zero before. Um, this is a chart I have of the balance sheet as a percentage of gdp which I think is the right way to look at it because as the economy grows the amount um, on the Fed balance sheet will grow in nominal terms but it should stay relatively constant in percentage terms. And if we look at that period, a ten year period before the financial crisis, it was remarkably constant, somewhere around six and a quarter percent. Right after the financial crisis it doubled to over 13%, 13.5%. Uh, then it continued to go higher uh, to around 25% um, in 2014 and then it spiked again higher after Covid, um, to over 40% at one point. It's now because the economy's grown and it's really stayed well, you know, it's the balance sheets come back a little bit, but the economy has grown. The percentage is 23.5%. But I think it's safe to say that this is going to be going lower at some point. How much lower we don't know. And so the question is instead of rate hikes, could the Fed possibly tighten policy through quantitative tightening and if they feel like they went too far, actually use rate cuts as a way to balance that. And that sounds like the Fed's never done that before. But they've actually did the exact opposite in 2015-2017 where they started by hiking rates because they wanted to get off the zero lower bound. And when they felt that they had gone too far, they would actually ease policy by doing more qe. So it's actually the exact opposite of that. So there is some precedence for it. And we know Kevin Warsh really wants to take this number lower. Um if we simply reduced it from 23 and a half back to 13 in the quarter where it was after the financial crisis, um that 10% that's about $3 trillion. And the estimates that Bernanke put out back in the day were $1 trillion of balance sheet is about 25 to 50 basis points of, of power of policy moves. And so 3 trillion would be about 75 to 150. So right now they could start to tighten via uh the balance sheet before they have to do anything. And if they start to maybe feel they've gone too much they could actually start to cut rates again. Something the market's not thinking of. And let's think about if we do that. If they cut rates as well as do quantitative tightening that would serve to steepen the yield curve. Short rates would come lower, long rates would try to stay. They'd hope to keep them constant. That would increase margins for banks which would increase lending for consumers and small businesses which helps Main street versus Wall Street. This isn't going to happen in the next month. This is probably not going to happen for the rest of this year Tony. But I think with a new Fed chair that's something we need to the investors need to wrap their head around and start thinking about because I think you're going to see an unwind of this extraordinary monetary policy back to something that we used to get with Greenspan before the financial crisis.

Speaker C: Exactly. Mitch. Rich, uh, so you actually talk about a great point right here. Um especially you cover about the bank's reserve ffed where indeed the Federal Reserve paid banks interest on reserve balance often called the iorb. Um here that means the reserve that back uh them those actually bank put on the Fed are not just like idle cash. Uh they earn a policy rate. So this was like unprecedented before the financial crisis. And lots of people actually do not uh know about this now uh during the financial crisis uh and after then apparently Congress required the Federal required the bank to put some reserve without actually taking actual risk continue to lend it out. That was actually uh from a good goodwill uh to some extent but um to re. Attract the bank to even do so. So Fed decided to pay uh IRB for those bank. Now given what had happened the real risk free rate have been so high now 3.5 to 3.75 plus above the interest rate. Now banks don't have any appetite to actually lend this money out at all. Because if I can actually earn like a 4.5 uh percent of interest rate, why should I lend out by taking actual risk to some kind of a consumer? So that was the issue. That's why the federal balance sheet was actually so high and that provided support or foundation for uh Chairman Kevin Walsh to think about downsizing the balance sheet of the Fed in a sense which actually piggyback to what you just say, corroborate what you just say. That should actually encourage the banks to lend this money to the small business owner to actually pump up uh, the economy and also to the industrial which might to something extent um, expand the infrastructure spending and hire more of a manufacturing job. The job report last month was extraordinary good. Um, but it was good just because uh apparently the World cup here that we actually need to have more people working in the restaurant and service industry and so on. But we simultaneously we have seen the big hit to the traditional white collar jobs over the market and business chain will accelerate because the deflationary nature of AI and this is from the micron and from the semiconductors earning we know it hasn't really slowed down. It will not slow down. Maybe uh, not until the end of next year based on what um people the CEO has already mentioned. So here it's we actually very very tough. So my projection is that we will not see see uh any interest rate hike uh you probably might just mention verbally because without actually paying the real money. But you just mentioned that we actually keep the interest uh rate hike as an option to keep the dollar relatively strong. He pointed out the dollar strong is because they say oh suddenly all the narratives have changed from the beginning of the year. From the beginning of the year. Rich, if you still recorded that we are talking about three car. Right car. Now here the narrative has shifted. Uh oh zero rate cut probably maybe one hike. That's I think FAT has successfully overturned the market narrative about this. But given the national interest national debt level it's almost impossible for Fed to hike the interest rate no matter what going to happen.

Speaker B: I just want to jump on and pat myself on the back because I was saying all along the market was too dovish. I was looking at that CPI forecast and looking at commodity prices and saying there's no way they can cut two and a half more times this year. Two more times. Uh even with the. Remember that the discussion because you talked about the deflation from AI um and it's just a question of timing right that will clearly happen. The question is when will that happen? Um, so I think you're absolutely right, um, to that, that um, that's, that's, that's one of the things that, that the task force will be looking at. Right. How do you. Price stability requires um, a lot of uh, a lot of data. Right. It requires knowing what's going on. There's a lot of crosswinds.

Speaker A: Right.

Speaker B: We have exhaustionist shocks in commodity markets. We have a demographic, we talk about the labor market. One of the reasons the labor market looks actually the labor market looks pretty strong in the 16 to 64 demographic and we're having baby boomers retire every single day. Um and so the labor market, the unemployment is probably going to improve simply because of retirees over the course of this year. Um, so that price stability is going to really be incumbent on the Fed to how they want to think about price shocks like tariffs and commodity price shocks from wars, how they want to think about AI and the disinflation from AI, how they want to think about demographics and the impact of demographics um, on the labor force etc. Lot of moving parts and a lot of task force to analyze all those moving parts which probably that's why I think to me they want, they're not going to talk the market out of rate hikes because they want credibility and price stability corrupt. But my gut would be that you're probably not going to see any rate hikes this year because we're not going to have any clarity on what to do certainly not by September. And I doubt the Fed would want to move, move right before the election because of the criticism about being too political. So um, lots to go but I'll give you the last word um, before we wrap it up.

Speaker C: Yes. And we definitely have seen some change of the federal like right. The policy at least the way they communicate with the market. And uh, in the meantime at the same time that we already see lot of the sentiment, uh, continue to tracing like a very concentrated uh, sectors within the market so those actually create uh, uh, like a large risk uh leading to the uncertainty over investment over the next couple of quarters. So I actually like to borrow your terms um, for investors to stay vigilant and really try to making sure that you understand the risk for the investment especially if you are semi heavy investors.

Speaker B: Absolutely. Ah definitely always want to stay vigilant and maybe we will start to see the pendulum shifting back towards active managers away from passive systematic quantitative managers because we have less data to work with coming from the Fed. With that. Um, thanks everyone for joining us. Thanks for sticking with us through this, um, through this half year episode. Um, we will talk to you again after the 4th of July holiday. Definitely enjoy the 250th birthday in the United States and all the festivities that go with it. And we'll talk to you on the other side of that. So, Tony, we'll see you. Happy Fourth of July. I'll see you in a couple weeks.

Speaker C: Yes. Happy Fourth of July. And then let's actually celebrate the new high on the new Independence day to end 250 anniversary.

Speaker B: Absolutely. Looking forward to it.

Speaker C: Yeah. Okay. Thank you. See you next time.

Speaker A: Thank you for listening to this presentation of the CFA Society Chicago Podcast. Tune in to hear society members pick the brains of more leading industry professionals@cfachicago.org podcast and to attend one of our upcoming events, please visit cfachicago.org thank you and we'll see you next time on the CFA Society Chicago Podcast.

Speaker C: Sam.