Intervening event would make it just really challenging to distinguish the tax act from the trade barriers, the pandemic, and then the high inflation and thats the challenge. Thanks so much, phil. Thanks, alan, for coming today and well take a 10 minute break and then resume at 10 00. I just want to thank you. [applause] the moderator of the session. Thank you so much for doing that. Thank you so much for having me. Welcome everyone. We desert all the result we should be worried about the deficit, climb above two and a 50 and how basically a massive problem. Talk to a lot of people should come speaking with steve eisen his famous from the big short last week and is said the deficit is been a concern for 30 years, it is never matter. If you want to bet you will be wrong. Heres the market perspective why it matters and why people care. I love the panel, i love these guests, torsten, you do put our charts and want to start with you mapping out from the market view why the deficit matters in terms of dollars and sense that had to be paid out in the near term. I think as we just talk about and as we shall come when something continues to grow than we do probably need to Pay Attention to it at some point when the debt could become an issue. I think there are three double ways of tackling this on market perspective that we should really get whats going on with treasury auctions. Whats going on with how much of that is maturing which is what this chart is showing, specifically if you can see in the chart, i i know three lin, topline is market interestbearing public maturing and when your list. Let scale about 9 trillion, that rolling over. If you add to that the deficit which is a bit more than 1 trillion, then you 10 trillion, and other line shows that share of gdp. You can quickly figure out that it has grown quite a bit including more recently. So the first point is whos going to buy the comment that . I know this sounds like a typical question but treasure auctions becomes important to look at what is a ratio, how much, it was for participation in a lunch of and statistics come out. First, reason why its very important reason of these markers reflected spin, this is yes then maybe this is not good be a problem and it will most likely be a problem in the near term but nevertheless, we do need to do our homework all of us. I think about what are the did the matter that come in the pipeline . Another way of looking at is look at auction sizes. Across the you curve have also been going up and again have the chart in mind phil swagel was showing, risk approaches tend to go up. Is your new colleagues on right about almost every week theres a lot of questions okay, it auctions isaac of what does that mean particularly as chair gdp . Another way showing that treasury issuing, visit from Treasury Advisory Committee across the ucurve orange bar shows you what is total sizf issuance or five your notes in 2024, 20 tranthree. You can see this year auction sites will be on average, 41 bigger than what they were in 2023. 2023. Again this may a minute matter. Things should be fine if the son of commence demand thea problem. Bio i only to sleep at another dimension, one very important issue is also have biggish of this is tbills. As youve seen this chart tbills as then as a share of also been rising. More and more of this is short. Bottom line is to say yes, we do all worry about the debt levels rising in the shared gdp but one very important way of looking at this look at whats going on in the structure of debt coming to the market and most important how auctions absorbing this. In other words, what are the metrics come out of the auctions suggesting whether theres any more strengthened by debt or whether theres any weakness and by that. This something could be scary and it fits in with the thing. Yet a lot of money that is been raised by the company has gone directly to the physical transfer to the private sector. Its helped bolster the exceptionalism weve been talking about. Michael from your Vantage Point how much is this an negative and how much is what this money is going to actually been a positive for the u. S. Economy . [inaudible] it definitely i think helps come helps economy. Its what the fed is been trying to accomplish. That may be, world treasury and why has the economy been resilient [inaudible] i think its hard i dont think you can avoid the fact [inaudible] that helped offset some of this. I i mean good if it is working r if you waiting for balance growth [inaudible] great if youre reading for the s p to keep rising which is essential a lot of people. Michelle, you really get incredible research in the run up to the financial crisis with Mortgage Rates and mortgage debt. There was this belief crises happen in private sector debt not publicsector debt of developed market countries. Do you think this time to be different was is basically a great fiscal transit that is allowed consumers to retain the resiliency and every credit card data point should be coming out . Yes so theres a few things that unpack. The first one this idea of private sector in balance versus public sector. There is a distinct difference. With the financial crisis the housing bubble that led to the gfp, it was a severe. Once you have this brief setting of collateral of crisis it was clear crisis. Thats not the same story certainly in the u. S. When it comes to sovereign debt when you think about the collateral. When you think about the u. S. And the dollar being the reserve currency. Its more thinking about how this highlevel debt and high level of Interest Rate they go with it feeds into the economy and shifts what we may be seeing in terms of Economic Growth. So far i think were still in an environment as michael sat around this physical transfer. The economy has seen a good amount of support coming out of the covid period from the time this onetwo punch of fiscal stimulus, with monetary stimulus. Monetary side pulled back but the economy has been able to withstand highlevel Interest Rates remarkably well. You could argue part of that mightve been probably was because you had a lot of fiscal support. You have those tax transfers right to consumers. You had chips act, a greening of infrastructure. When will look at some of our hyper local, we see the areas in the u. S. Where the chips act has been filled in creating significant things are manufactured economy and job creation and Consumer Spending. Its not just the immediate transfer payments. Has been some transmission to the economy that has potentially could have more meaning longerlasting effects . We have to see demand store but youll could also make the case had a think about the supply side and become as result the physical support. Michael, how would you respond to get in a sense some of it is good debt being used to transform the economy in new ways to address new economy . Look, i do want to say the support for in 2020 was, that the entity. Almost fatal and agrees that was necessary. Chips, and ira depends on your politics but some would serve the see that as an investment. I think you could take this out and still be looking pretty large number on the debt. Which raises this question, at what point does he economy become unsustainable . Document id of 250 of our race questions if you could probably be to the moon if you start to special get a downturn which you want to explore in the second. Theres a question of if there a benchmark light in the sand where it becomes overly punio the government . Is a something youve studied, talked and . The challenge is which is of no way that is so started my career at the imf down the road and the person youve learned is higher debt levels in particular when you reached exploited by debt levels will eventually begin to cause some problems. It may be a financial crisis but certainly all kinds of other things. Maybe spend more money on Interest Payments and it may also ultimately of the countries mean something for Exchange Rate. A lot of different dimensions were higher debt levels could have an impact. The most critical thing for the u. S. At the moment is think about also so we dont know when that time is, well then we should probably you watch has a go along whether were going to the point are not. One has been very, very pronounced in the less several of these the last decade is weve seen a shift in the buyer face biggest it was foreign officials buying, china and others find you his treasures. They were buying treasuries thats how much because of the yields but because it were to keep their exports competitive. In other words, they wanted to keep making sure my shirt was cheap and if that was the case well then they could do what they could to make sure they limit how much the r d was appreciated and at first it would make sure the Exchange Rate didnt go too much, they did that by buying dollars and filling their own eccentric. They are no longer doing that because they have a list of other problems. We no longer have the yield and we seen a shift in the data that the buyer and a less obvious when Interest Rates have gone up happen household, insurance and all been buying because of Interest Rates going up. The risk is if this is shifting from to yield sensitive bar, then they over the next decade or two again open at this risk that we no longer have this simple buyer that was buying no matter what because finance has no number, not the same number of dollars to recycle but now relying on households, Pension Funds, Insurance Company better by because they like the yield. What happens when the fed cut rates is they are less inclined to buy. Thats an important dynamic also in the last five, ten years that his change in transit who is it actually bind u. S. Treasury. One of the reasons why people watching the auction data every week. People say those people worry warts but this question of okay, whos coming into by and is this a line in the sand what people are going to buy because of the deficit . Michelle, at what point does it become punitive for consumers . Right now were seeing incredible resilience. How much of it is a timing issue, a lot of money and have locked in debt obligations versus something they really this could be the new normal and thats fine . I think theres a few dynamics that are in play when you think about whats happening. First, yes, as the fed is g interestrate meaningfully that if you look at the Debt Service Ratio for aggregate for household, it hasnt increase that much. Thats just above or more prior to the printed despite Interest Rates being higher. Part of that is because this unique nature of the Mortgage Market with 30 fixedrate mortgages. Thats the measure. Her households if you just purchased a car, just purchase a home or you have been in that you are feeling that debt service increased. As a result shifting in terms of prioritization of purchasing power. The bigger story for the consumer has been the strength of the labor market. That is been the number one factor that is leaving to this exceptionalism in the u. S. Economy. The labor market continues to show, seeing improvement in labor force. Not only is a demand, also more supply for labor and thats keeping wages increasing. For the consumer figure to think about their debt dynamic. They have to be careful about that, but a lot of consumers still love a good amount of purchasing power to go out and engage in the economy. That is very much still in play and we see that very clearly when we look at the Consumer Spending ten. Michael, five years ago people are complaining if rates of the Rose Companies would be blown up because at these little interest costs. Debt structures, to michels point, we havent seen it, theyre expanding. Is this something that sustainable . If we stay around 4. 5, 6 on a ten year yield thats fine. If we are 5 fed rate thats fine, they can survive. Yes. A lot of companies refinanced in 2020, 241. Last spring we may have begun to see something breaking with the regional banking crisis. That was shortcircuited by the fed and the treasury come supposedly getting uninsured deposits and shortcircuiting that. I would say many of us are still a little puzzled by the fact. Maybe that wasnt the only break we would see in the cycle but the longer reduced to hear the more firms will have to we talk about on the show the time the refinance, it is little but it keeps getting pushed out a little bit by you to come right now its hard to see that. [inaudible] another with asking this question is how much have higher rates slowed Economic Growth . This is getting back to the same question we started with. Im going to ask it five giveaways i think theres a couple things. Growth is doing well and rates are high. Its kind of like almost rephrasing the question. Go on. That doesnt tell you anything about the economy. One of the things the fact that strong immigration is temporarily boosting the essential gdp growth and will you think of as strong, when we had strong gdp growth Unemployment Rate has risen half a a percentage but which may tell you it may be a little softer. That has to one part of the story. The fiscal has to do one part of the strike. Just generally the postpandemic tailwinds had longer likes them without a lot of the things are going to be 30 interesting. Over the past year where you seem really outsized employment growth in the second half lecture was government, primary date and healthcare. Those are probably the two least interest in subsection i can think of. Some of it is retiring a getting back up after very sharp reduction from the pandemic. That normalization probably stretched on longer. One way of rephrasing, i say the question is also, i think why rates have not worked the way we thought it would according to whatever model you think is a fatal one. I think it has been impacting those that are weak. In other words, and so was that have a lot of debt have been impacted. For example, firms look at it, look at venture capital, and by soffer, tech and growth, areas where a lot of debt and very little cash flow, very little earnings, very lower revenue. If you have the revenues come Interest Rates going up a going to virtue a lot more. Think of this confirms that are triple c in some cases be having much harder impact because higher debt levels. Likewise for households come households that have a lot of debt and dont own s p 500 committed other home, they have also been experiencing more distressed in that sense it is the most highly double that of impacted by because everyone above that locked in a interestrate in mortgages, locked in an credit rate which is investment route of credit markets. That means broadly speaking racing except for those households and corporate entities that have the most highest levels of leverage. Michelle . This goes to the rally that this is not a uniform story for an economy. And i think thats been the case throughout the cycle. The pandemic impacted parts of the county very regularly. Think about the early phase of the pandemic with the experience travel economy, leisure was in a very deep recession of the last for a while while the goods economy burst into expansion and then that reversed. The same story now really holds. That could be contributed widest been disconnect between what service might suggest an sentiment versus overall spending trends is theirs of the aggregate which is to very much showing continued expansion versus where you are seeing some of these pockets of stress and challenges and Interest Rates cerniglia portents for the reason why this become increasingly political and a question of what happens if you hold cohort tickets left behind and drop off further added come when the respite economy is expanding. Michael i would ask you this raises this question of fed independence and is certainly not necessary from politics but at what point will the fed be called into kind of monetize this debt in a way to keep rates lower to kind of cater to seems like theres been a bit of a shifting line in the sand in terms of whats the more important kind of mandate, whether its inflation, whether its a growth, how patient the will be with inflation coming down. Isnt that something that you see in the card . No. I mean i think, the short answer is undercurrent construct i think the fed can retain independence and not be pushed into some done what to do. Weve seen news reports about that may be [inaudible] if we get to that i will have to revisit my answer but right now my answer is i think this fed, the personnel in place, can afford to be solely focused on the inflation and an opponent. Which again goes back to this issue of if thats the case and there is a real evidence that he had you can really. 2 of the sort of uniform downshifting in growth. At what point do they need to and at what point is a debt overhang pewter to do growth . Torsten i would ask you this. Typically history whether it was japan or other economies there was a feeling more debt ledges slower growth. Lisa and develop markets. Disinflation and was part of the reason we had a low rates. Why is this a different this time . Well, think the Interest Rates is just i think two things. Partly because consumers are 95 in 30 affix mortgages so it means a lease on a mortgage side makes up about 35 of the debt is therefore less sensitive. What encourage during the pandemic to lock in the debt levels at much lower levels and what they did before and so, therefore, investmentgrade credit in particular, everything fixed rate also has still fairly Long Duration my comes to Interest Rates really not mattering at least to the nation. Depending on where you live but broadly speaking the next year or two. Interest rates since that has gone down. At the same time we have is a significant tailwinds on the chipset, a flesh reduction, and for such think more recently without a significant easing of financial conditions. Start talk about rate cuts and still type of rate cuts, that has significant rally the s p is up since november 1. Remember consumption lusher lasher was about 19 truly. We have been given a windfall of roughly 50 in a very short time. That is not surprise on retail sales including on wednesday could be quite strong because the consumer is still powering ahead that only because of the fiscal but because of easing financial conditions.