Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Global Markets. I'm your host, Tim Graf, European head of Macro Strategy.

Each week, we bring you the latest insights and thought leadership from our award-winning suite of research, as well as the current thinking from our strategists, our traders, our business leaders, and a wide array of external experts in the markets. If you listen to us and like what you're hearing, please do subscribe, leave us a good review, get in touch with us. It all helps us improve what we hope to bring to you.

With that, here's what's on our minds this week.

Let me tell you how a podcast usually goes. I book in a guest, I share with them a list of topics and a few questions that I want to talk about. We record it, I edit it, you get to hear it. I like the preparation because it allows the guest and I to know what's coming and to collect our thoughts in a more coherent way.

But this week, we are throwing the format out the window. Markets are moving so fast in response to policies announced by the White House and the world's reaction to them that my guests and I just didn't see any point in preparing. I gave them very short notice to appear and no ideas of the topics. We just decided we'd talk markets in a way that I think the decades of experience brought to the discussion would enhance.

So with me this week are Dan Gerard, a senior strategist focused primarily on equity markets, Marvin Loh, who focuses more on rate markets and who I think might be making the fastest ever return appearance to Street Signals. And you know what? I even chip in a few thoughts this time around. Why not? It's my show, right?

Marvin Loh (MV): Hello.

TG: Hey, hey, hey. What's up? Daniel, how are you? Good afternoon.

Dan Gerard (DG): Afternoon.

TG: Good morning. We all good to go?

ML: We are. We are.

DG: We just don't know if we have any better information, but yeah, we're going to swing in chat markets.

ML: Yeah, we're just going to chat markets.

TG: How are we feeling about markets then today, guys?

ML: I mean, a little bit calm within the storm, right? The unpredictability of the administration remains a concern, but at least they haven't upset any new apple carts at the moment. And it kind of shows that the economy remains on solid enough footing that you can create an investment thesis that keeps you engaged in risk to a certain degree.

TG: So you're feeling a little bit better, Marv, what about you, Dan?

DG: We've got a big question to answer. And I think that this is part of the problem is that we need to figure out what the point of the tariffs are. And I think that that's really what people mean when they say we're in this regime of greater uncertainty.

I mean, I've been in this business a long time. I don't think I've ever said that the future looks certain. There's more, there's an environment of certainty. But I think what it means is, we're not sure what previous regime we should apply going forward, or we just have less information about it. Do we really get a better handle on what the point of the tariffs is, or this whole tariff discussion is?

We're not out of the woods on volatility because there continues to be this disagreement on value in that case. I think that that's really what we're seeing in terms of Trump's putting on of tariffs, taking them away, delaying, pausing, etc. It's not to create a protectionist regime where it severely disrupts the global order. It is to try to get some deals, to target China.

And the more we realize that it's not going to be a massive disruption to global world order, I think the less volatility we have, the more we can do to project this future state, which still looks pretty decent in US markets, I think, at this point compared to other places.

TG: So we're still going to have, though, an effective tariff rate that is a lot higher. And I don't know if that's gone away or will go away. I mean, maybe it will for certain countries as he works out the deals, and the reciprocal tariffs will certainly go away. We talked about that last week and I think covered it pretty well.

But the 10 percent baseline tariff is where I think there is this confusion for me at least, because that is clearly, I think, an attempt to disrupt at least the US's relationships to the world. And I don't think we'll ever really know what the ultimate goal here is. I think it's kind of an “all of the above” thing.

But that, to me, at least as long as he's president, seems pretty unlikely that it's going to go away. Not least because, you know, since last week, and really since the whole “Liberation Day” thing, as you've said, we've gone back and forth. We don't really know where we stand on certain things. But that is one thing that has not been taken off the table so far.

ML: One of the challenges is that, I'm not 100 percent sure that everyone in the administration is on the same page with regard to how to take this tariff discussion. We are reacting to the proxy of the day that comes out of the administration. And you certainly have the more trade hawkish voices coming from Navarro. Bessant is certainly coming out as more of a voice of moderation, even though if we were to put him on a scale of moderation, he would definitely be right-leaning, but not as extreme ultimately.

There has been some very consistent threads that have always been with this administration, certainly what was promised during the campaign and is something that they are pursuing. And I think that if we lose sight of some of those threads and talk ourselves into a world where it's just tariffs and it's a tax and we'll be able to ultimately model around it and it'll be transitory nature the way the Fed is looking at it, it doesn't necessarily give justice to the fact that the administration has gone down a route, which they pretty much laid out over the campaign trail.

And that is to a certain degree trying to bring manufacturing back to the US. It definitely takes away some of the globalization benefits that have really accrued across the developed markets and certainly across US companies and the US consumer.

So I think just saying that, okay, we're going to get past this. And I'm not saying that that's what Dan is saying, but we do have to take into account that whether it's this administration and/or potentially the next administration, whether it be GOP or Democrats, once you get money in the coffers, it's hard to give it away. And if there's capital that's being invested in reshoring, that ultimately does create a difference in the financial payment system in a way that hasn't existed for decades.

DG: Yes. I just want to disagree with a little bit of that Marv. I think that when we look at the administration, we've got one serious person in the administration and that's Bessant, right? The rest, to me, may seem like the useful voices that Trump has chosen to give a message. And Bessant has sort of remained the calmer voice.

When it comes to the target of manufacturing and reshoring, I think it's an impossibility that everyone realizes. One, manufacturing never left the United States. United States is still the number two manufacturer in the world. What left the United States was low margin manufacturing that didn't make sense. So the idea that it could come back just doesn't make any sense to me.

The other problem with that is it would take multiple years, if not a decade, to achieve it. And that is longer than the term of President Trump, which means that any investment would have to make sense between administrations. That's too much of a risk for, even if it made sense economically for it to happen. But what makes sense is manufacturing shifts in some industries away from China and to other countries, which I don't think is a serious impact to US business.

When it comes to the tariff itself, we know that the tariff regime is incredibly regressive. Most of the tariff impact is felt by the lower quartile of US consumers. Most of the consumer spending is the upper quartile of consumers, if not the top decile of American consumers. So it just has much less of an impact overall on the aggregate in earnings.

ML: If I get one last point, I'll ask the moderator if I'm allowed to do that, Tim Graf.

TG: You are.

ML: But again, Dan, I don't disagree with any of that.

It certainly is logical that the administration realize that the goals of trying to bring back, if you will, apparel manufacturing to the US is something that really will not move the needle, certainly potentially not worth the effort in order to do it from the impact that it's going to have at the lower income level. It will highlight some of the limitations within the US market.

I'm not 100 percent comfortable just saying that everything that's going to be pursued follows a logical path. And the volatility, if you will, associated with these messages that are sometimes quite confusing is because those idealogues do have a place at the table.

TG: Dan, you brought something up that was actually a question I kind of had in the back of my mind to ask anyway. You brought up the notion of consumption coming from the top quartiles and deciles of the income distribution. And I wanted to start to think about the economic impact of this.

Because as you say, tariffs and if, let's just say, my view that some tariffs are going to be with us, if not forever, for a very long time, I don't think it's a stated fact, that that is a regressive tax.

I think it's the top 10 percent or the top decile of net worth, now contribute 50% of consumption in the US. They've had a massive hit to wealth over the last couple of months. And I wanted to start to think about how we think about growth now. We've already seen Q1 estimates for growth being revised down substantially because of some of the weakness in consumption, some of that's weather related, some of it's not.

But this is a potential hit to both or to all areas of the income distribution via the asset channel for the wealthy and via just regressive taxes on lower income consumers. What do we make of recession odds for the US for the coming couple of quarters here?

DG: It's tough to put odds on it. I think it's becoming greater, but we’ve got to look at the whole picture. There are a number of changes that have been happening at the margins.

One of the biggest ones is the potential hit to additional consumer spending through debt service, or the rise in interest rates hasn't hit people in the US the way it would have in other places because of that low fixed rate they received on mortgages during the pandemic.

But the explosion of credit card use and the explosion of credit card debt service is certainly weighing on consumers at this point. The issue is as long as people have jobs, consumers have been willing to spend. And that's really what we're seeing. We continue to see pretty decent retail sales. We'll get another read of this by the time this podcast is released. Even if it's a little bit weaker, it's understandable during the uncertainty of the tariff regime, not caused by the tariffs, but caused by worry.

Until we see a real decline in the desire to spend at these levels, especially from the higher income groups, then I think that recession odds are pushed out. I don't see any real signs that we should be worried at this point until we do. And that's going to be lower margins from companies and more layoffs, which then hit spending and the potential to service debt. But there's that path that has to be taken, and I just don't see any signs of it yet.

TG: This is interesting because this is, I don't want to accuse you of being consensus, but literally there's a headline that's come across my Bloomberg. B of A does not see a recession in 2025. And no rate cuts. That for me is the interesting thing.

No rate cuts insofar as it means conditions will remain tight. You mentioned the willingness to take on greater credit card debt and to keep spending and to use debt to fuel spending, but conditions are going to remain tight. And I'm just wondering, and Marvin will ask you, is there a sense of complacency about growth that's creeping in?

Because I'm not sure anybody has a recession as their sort of central forecast I think it's J P Morgan maybe has it as a 60 percent chance. But that is not really saying anything and banging your table. What do you make of that?

ML: The data still supports Dan's views. The fact that financial conditions theoretically are tight will keep them on the sidelines as well as the uncertainty that is whatever policy kind of ultimately is implemented by the administration. Now, effectively, keeping the Fed at bay, they're not able to really loosen policy because of the uncertainty as well as what we can comfortably say is going to be higher price that's going to affect at least part of the economy in a more significant way definitely raises the odds. It's just hard to put that in percentage terms when everything, including the jobs market, still looks like it's supportive of business as usual.

DG: And one point to add on to that, Tim, if we look at the major bank earnings that we've seen so far, we have a diverse set of opinions on that exact same subject as you mentioned. Bank of America did not raise their allocation to the non-performing loan provision. They continue to think that this is an environment where they've sufficiently provisioned for non-performing loans. That is a very consumer-centric business. I think Wells Fargo is very similar in that action.

But J P Morgan had a huge raise in their provision for non-performing loans which just states right there that they've got a very different view with a more diverse lending base. It's interesting. I think the consumer-centric banks aren't seeing it, but perhaps the ones that lend more to non-depository financials or to businesses, to commercial real estate, whatever that might be, are starting to see rising recession risks.

TG: So let's think about the market's reaction to this over the last couple of weeks. We're recording this. Dan has mentioned this. This will go out on a Thursday. We're recording it on Tuesday afternoon, London time, Tuesday morning, Boston time. And so obviously, I'll probably have to put another one of those disclaimers at the front of this because the world might well change in the next 48 hours before this goes out.

But nevertheless, the market reaction has been really a derating. This hasn't been guided by massive downgrades or outlooks changing too much other than multiples have compressed. I just want to get a sense from both of you, really, how far along the process is and whether the worst is over.

This is a volatility event that we're going to write about for the coming years and decades. It is up there now in that pantheon.

But have we seen the greatest of the volatility or the largest of the drawdowns?

DG: What I would say here is that this is probably, if not certainly, the first major drawdown we've had in decades, which wasn't credit related. And I think that that's very important to note, right? This wasn't about a de-leveraging that was happening in the system somewhere, that worked its way into a de-rating of financial prices. It was a worry about a future state without that future state having come due. That's really important because it means that things can bounce back and its allocation driven.

To say that we're out of the woods, we might be out of the woods on that kind of volatility, but that doesn't mean we're out of the woods on a de-leveraging that might come down the line because of the impact of actions. We're past one set of risks, but there's a real serious set of risks down the road due to the coming together of whether it's Fed balance sheet issues, commercial bank credit issues, and private credit issues that have been building up for a long time in the system that we're not through In fact, we're just coming into at this point.

It's a set of different things that will only be weighed down by the extra impact of tariff uncertainty. I would say not out of the woods. It's just different. We're out of the woods on the allocation side, not on the credit side.

ML: The most interesting development over the last couple of weeks has been how Treasuries have reacted to this volatility, how Treasuries, rather than being the harbinger of the storm, ultimately help turn up the storm. And I think that we're going to be debating what really drove that volatility, why we're still looking at yields that are higher than they were when the S&P was significantly higher, when the VIX was significantly lower versus the service that we have.

It really does expose a lot of the challenges that the Treasury market has at the moment. And there are concerns that we've had for a while with regard to liquidity, with regard to market functioning, with regard to just the massive amount of Treasuries that investors need to absorb every single week in an environment where there are questions as to who is the marginal buyer, then that is not going to go away.

So irrespective of how the administration says it wants to take out the fat that exists within programs, they are still looking at one of the largest extensions of tax cuts, which accretively adds to the deficit to the degree of three to US$400 billion a year.

That is the keystone policy that the Trump administration wants to pass from a budget perspective, and it's just going to make everything worse at a time when we're already starting to see how fragile and how challenging it is to absorb all of this debt week after week after week.

TG: I want to take five minutes as a sidebar and talk about this rate move, because actually I wanted to see for all three of us really what we think caused that. Marv, you've mentioned deficits, but they've been pointing to things like basis trades that hedge funds put on, cash versus futures or swap spread trades, which were premised on changes of leverage ratios that allowed greater ownership of cash vehicles.

There's been talk of central bank selling. There's talk of moving just away from the US into Europe and rebalancing of reserves.

There’s the inflation risk or stagflation risk. I want to each of us to talk about what we think. What is the most important driver? What has been the most important driver?

ML: You know, I do think that reordering the whole buyer deck, if you will, is one of the aspects of the Treasury market that is both incredibly supportive, but also one that shows fragility when we're talking about the levels of debt that we're dealing with.

So, you know, it's the deepest market in the world for sure. And we have had periods where some of the larger buyers, whether it's official institutions, whether it's specific geographies, have bought more or bought less, but there's been ultimately somebody else that has stepped up to the plate, that marginal buyer.

What we're seeing certainly is that over the last, let's say four or five years, certainly since the pandemic, it has been that real money investor that has - the institutional investor that has had to buy more and more of the Treasury market. Part of that is because the Fed was going through QT, but also we have seen a number of the larger official institutions decrease their exposure to treasuries. Some of that just might be natural, wanting to diversify their reserve basis.

But if we expect institutions to buy more and more of the Treasury market at a time when its haven status, the correlations that we typically can rely on in volatile markets, don't work, there is a price to that. It has served that asset allocation role so well for decades. But what happened last week should be something that investors take to heart because it was the exact opposite. To have stocks go down the way they did, and to have yields go up as aggressively as they do, really does erode one of the main advantages that Treasuries have always had within the market.

And if you're a marginal buyer, someone that can buy corporates, someone that can buy high yield, someone that can buy Bunds, for you to come into the Treasury market because the Treasury market needs you, because we have so much debt coming, there is a cost to that.

DG: I completely agree. I think that the issue is going into the volatility. It's not like we had a strong demand for Treasuries to begin with. All of these issues were building before. Once we got into the volatility piece, the question remained, do people expect rates to go higher or lower over the medium term?

When you typically have this risk-off event and a demand for safety, the US has been a beacon for that. Given that this wasn't a credit event, that it was really worries about the fiscal side of things as well, that there just wasn't this demand. It didn't change the demand focus. I don't think it has much to do at all with an unwind of the basis trade or foreign government selling. It might, but just given how pervasive the rise was across the curve, it doesn't make as much sense to me.

I think this was really more about the view on the future state of inflation, the future term premium, the future fiscal issuance perspective, and the lack of demand to begin with. It just was highlighted into a greater degree as we got through that process.

ML: A lot of times, many of these underlying drivers of Treasury volatility is something that we don't know until well after. But as far as the basis trade goes, it's certainly a potential very large culprit. Non-commercial shorts within the futures market is as big as it's ever been. So we know there's a massive basis trade out there, and we know an unwind of it could be very, very volatile for the Treasury market.

But none of the other funding markets that generally get pulled along with it had any of the stress. So my view is that it's probably not the basis trade.

In terms of foreign selling, again, who knows? It probably was somewhat of a contributor to it, as well as all the other things, because everything came together at the same time. But it's interesting that some of the more high frequency data that we can get, particularly out of Japan, does show that there was a fairly aggressive reduction in what the MOF shows on a weekly basis as foreign fixed income flows.

So some of this might be coming out of Japan as a result of some of the larger trade discussions, potentially some of the larger accord discussions.

Whether or not China is culling some of its treasury holdings, that's also within the mix. We really won't know until some of that TIC data comes out in a couple of months. My guess is that it's probably not the main reason for it, the way a lot of the commentary has pointed in that direction.

Then lastly, there's going to be some duration issues within MBS portfolios. So you know, and again, all of this generally comes together at the same time. But the fact that it was across the curve, the way, you know, Dan pointed out does show that it was a somewhat systemic reduction of risk where there wasn't any part of the curve that wound up being more attractive than any other.

TG: So as a means of going to the next topic, I'll give my thought, which I think, first of all, there surely had to have been a liquidationist element to this in that you have markets just in panic and you raise cash by selling the most liquid thing and Treasuries naturally are one of those outlets. We see this occasionally.

But actually, the other part of this, and you've both mentioned it, and I think we all agree that this is or could have been a factor, is the reallocation away from the US into other markets. And here, for me, the tell is what happened to JGB yields and what happened to Bund yields and spreads between those markets and the US. And I think, given how US rates rose relative to those markets, and particularly the violence of the way those spreads moved, like it does speak to some of that movement you mentioned from the MOF data, Marv, the movements from Japanese investors out of Treasuries potentially into Germany or potentially just back home now that there is yield on offer in Japan.

That raises an interesting question, though. And Dan, I'll start with you on just the attractiveness of the US as an investment destination. And this, of course, ties to the trade side of things where if the US administration is successful in its aims, in theory, current account balances will move from deficit back towards neutral, or at least the deficits will become a little bit smaller. And the demand just inherently to put capital into the US will go down. That's just mathematics.

I'm wondering from your perspective, and here especially thinking about equity markets, if the US has become a less attractive investment destination irrespective of those current account and trade balance factors.

DG: Yeah, so I think there's two parts to that, Tim. I think that there was an expectational element of that, and it was really strongly media driven. And whether it becomes reality is a different situation. And it goes back to the original point I was making that, what's the point of the whole thing?

I don't think it does. I think that to Marv's point, there is a serious issue about the future state of US deficit spending and attractiveness of Treasuries given the potential for rising inflation and all of those elements that go into pricing duration.

What we have seen is that there has been very, very, very little demand for duration going into all of this. Another way to say that is, no one really believes rates are going lower regardless of what the Fed is doing. And that creates a certain environment in terms of institutional allocations for sure. But it doesn't necessarily make the US less attractive as an investment destination.

I think in terms of equities, when you look through the kind of hysteria of the moment, we still have really good earnings expectations, way better than anywhere else. Even if that comes down a little due to tariffs, I continue to think it hurts the US less than it does other places in the end. Even if everybody is a loser, US is less of a loser in that aspect.

So we had extremely high valuations in the US. We had extremely high valuations in a lot of places within the US market, not just in the tech space. And that's just due to that incredible liquidity that has come into the market over the past few years. So the idea that you would take some profit in the stuff where you had profit, where you could actually reduce valuations in the US, allocate to somewhere else, close some underweights elsewhere. It makes sense in that environment.

But for a long term view, when you look at earnings, margins and profitability, I still think investors will see the US as an attractive destination. To be honest, that's really been confirmed by their continued holdings. The holdings might be a little bit less as an open overweight in the US, but it's not like they've been completely drawn down, and it's not like US equities saw a major hit in holdings because of this risk-off situation. The US actually remains the relative better place to allocate here.

TG: Marv, thinking about the rate side, one of the things I failed to mention in talking about reallocation trades out of US fixed income into other economies or other markets is that other markets, similar to what you and Dan have both brought up about issuance concerns around the US, that's going to be happening in European government bonds. It's very much a dynamic in the gilt market. We know what debt levels are like in Japan.

So I'd ask a similar question, but frame it in that context where debt and deficit levels are a problem pretty much everywhere. So where do you, first of all, see the relative appeal of the US versus those economies? Do you see it? If you don't, what the clearing price is for say, 10-year yields to get you to be a bit more interested?

ML: I was thinking about this from the perspective of what the dollar smile means, because I think that encapsulates a lot of the strength in the US. Effectively, a market that performs well when there is exceptionalism internally and when there is volatility globally. I'm not of the camp that the dollar smile is dead, but maybe it's not smiling as much is kind of the way I've been thinking about it. Where we've seen the US doesn't necessarily perform the way one would normally expect in a strong dollar smile environment, when volatility is being churned, particularly because it's being stirred up here, if you will.

And one of the more interesting things that I noticed last week was that, you know, we had three 3.5 percent average daily moves within the equity markets last week. The dollar itself was down during four of those five days. It was pretty much flat at the beginning of last week. Treasury yields were higher in each one of those days. So nothing from the dollar smile perspective was working last week.

That doesn't necessarily mean that it's done because, you know, we're seeing a little bit more of a normalization. But there were markets where it did work, where the currency was stronger and yields were ultimately flat to lower. So, you know, the euro and Bunds were that asset class above and beyond anybody else.

Even in Japan where the yen was stronger, JGB yields were higher. So even there, you had some of the broader cross currents that you mentioned. It does mean that the amount of capital that's available within the global financial system, if you will, is going to have other alternatives.

And we do know from a deficit perspective, even if governments are running deficits more aggressively than they have over the course of the last, let's say, 10 to 15 years, the relative amount of funding is important, that discussion, where in the US, we're talking about from a marketable security perspective, 100% of GDP potentially going up to 120 percent of GDP, depending on just how aggressive these deficits - that's very, very different than the kind of deficits that we're talking about in Germany.

So I do think that there are appeals in those markets from a haven currency perspective, but the options have shown in the US, as well as, if you will, a little bit of stability in the market, that there is a price for Treasuries. I've always kind of put a 5 percent handle where people will definitely come into the market. I guess I'll stick to that number, although given the volatility, it's probably below that before people start to try to buy that dip. It does show that we still have yields that can be quite volatile as we kind of sort through all of this.

DG: There's sort of three different environments we can think about here. There's either the environment we were in before, this growing credit environment, one where we're seeing leverage or continuing leverage, where the decision from investors is, what do I buy? It's a relative choice.

There's the neutral environment, which we just kind of came through, which is what do I buy and what do I sell? And then there's the deleveraging environment of, what do I sell?

That's kind of the issue is that trying to figure all of this out really depends on that time varying regime element. If we stick with this period of what do I buy or what do I buy and what do I sell and what do I buy, that kind of neutral to positive, you do get these allocation changes or potential for risk.

Once we get into a what do I sell environment, a real credit issue, if that is what's coming, then again, I think that you look for the best quality and the best ability to hold up versus everything else. And that does remain US assets in that environment.

TG: Dan, one of the questions I keep coming back to over the last two months, not the last two weeks, but the last couple of months, and I'm thinking here specifically about US equity market valuations and just looking at long-term charts of price to book or price to estimated earnings.

We've been in a bull market since about 2012, a secular bull market. And questioning whether we are poised for a secular bear market. And we've had, of course, a cyclical bear market now. We've had the 20 percent correction. And secular bear markets don't necessarily need to see equity markets continually go down. From here, we can just tread water and still be in a bear market.

I wanted to get your sense of thinking not in relative terms, but in absolute terms about US stocks and whether the probability that we have entered a secular bear market now after a cyclical bear market is higher.

DG: It certainly is higher. And if we want to take the two basic drivers of equity performance, we either have an earnings-driven market or an earnings-influenced market or a valuation-influenced market. The problem with the valuation side of things is that even if you do continue to have decent earnings, if you have an environment where deleveraging is occurring, then the multiple compression overwhelms the earnings growth.

And that's basically another way to say stocks underperform their earnings. And I think that the risks of that are rising tremendously. I mean, that is what my biggest fear is going forward. That if we don't have a world where credit is being generated by the, let's call the three major groups that can drive credit, which are the Fed using their balance sheet themselves, even if they're not deleveraging still or not investing their proceeds, doesn't seem like they're going back to any QE form unless things got really bad.

The commercial banks, which where credit has been extremely flat. We see some growth at the margins, but it's not as if banks are dying to expand their balance sheet and put more credit into the system that would, especially in financial markets, which would drive up valuations or support them.

And private credit, where because of things like the denominator effects, where commitments from the LP side of things are really slowing down, you have this environment where we are shifting from one of the largest injections of liquidity we have ever seen to something which is neutral, which the natural progression would be to pull some of this liquidity out of the system before it becomes inflationary to a larger degree.

And I think that that's what the Fed especially has to worry about. If they fix the transmission mechanism in the system with that much liquidity still around, then it's a recipe for acid inflation and potentially goods and service inflation.

So the summary of that, I think, Tim, is yes, I'm worried about a secular bear because of the underlying credit conditions, which are changing cyclically, I guess, is maybe a better way to say it.

TG: I completely agree, because I just think, and I know this is, I have a very overly simplistic way of looking at the world and falling back on rules of thumb like Price to Book, which I know is probably not the right way of doing things. But it still speaks to an environment that is going to be very, very, very challenging for equities. And we haven't even seen the downgrades that I think are inevitable, just given the uncertainty that we've been talking about.

A lot of that is in the price, I admit, but we haven't seen that. And, you know, stasis from here, I think is almost inevitable, just allowing earnings, even if they continue to grow, to just catch up to where valuations have put them, or what have put equities. You know, that for me is my central scenario, is that equities just enter this blah period where fine, you know, they'll preserve your value and you'll get relative opportunities for certain, but that they will not be absolute heroes anymore because earnings need to catch up to where they have been priced.

DG: These are unusual multiples, right? Unusual multiples, unusual credit spreads. Even if credit spreads have widened out, they are still widened out to unusual levels of tightness. And that's the issue, is that we should expect them to return to some level of normality given where we see markets going.

TG: Marv, I'm going to give you the last question. Based on that, where would you allocate stocks or bonds? We've painted kind of a... I'm actually, by the way, I'm shocked to have heard Dan just say what he said, which is great. I love it when the unexpected happens.

We've painted a fairly gloomy picture for risky assets, and a lot of it is dependent on credit fundamentals that have held up, but credit spreads that now look maybe a little bit heroic.

Where do you think the value is in asset markets for the coming year?

ML: I do like income in this environment, not only from the ability of creating a less volatile environment for your portfolio, but given my view on treasuries, I increasingly lean towards spread products. So things like corporate, certainly where we're not expecting a recession, one where if we just continue to go along here, some of those, let's say, weaker investment grade names should continue to be able to meet their debt service, which is a much lower metric than the equity multiples that they need to lean into. I do think that approaching the market from that perspective really does make a lot of sense.

TG: Very good. Gentlemen, in the words of another podcast, should we leave it there?

DG: Let's leave it there.

ML: Absolutely. Excellent discussion.

TG: Thanks for listening to this week's edition of Street Signals from the research team at State Street Global Markets. This podcast and all of our research can be found at our web portal Insights. There you'll be able to find all of our latest thinking on macroeconomics and markets where we leverage our deep experience in research on investor behavior, inflation, risk, and media sentiment, all of which goes into building an award-winning strategy product. If you're a client of State Street, hit us up there at globalmarkets.statestreet.com. And again, if you like what you've heard, subscribe and leave a review. We'll see you next time.