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

Joe Weisenthal (0:10)

Hello, Odd Lots listeners. We wanted to take a quick moment to let you know that this episode of Odd Lots is a little bit unique. First of all, we recorded it on March 2nd. So that's before some of this recent turmoil struck.

Nonetheless, it remains really relevant because it's a discussion in part about how much extra liquidity is in the system and how much will be have to taken out in order to get inflation back to target. Now, our guest, Matt King, brought a lot of charts to show us and those charts are referenced throughout the conversation.

So if you want to see those charts and follow along with them as you listen, you can find a companion article for the episode at bloomberg.com/oddlots, or you can watch a full video version of this episode at youtube.com/bloombergpodcasts. Thank you and enjoy.

Tracy Alloway (1:01)

Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

Joe Weisenthal (1:05)

And I'm Joe Weisenthal.

Tracy Alloway (1:07)

Joe, it feels like it's been a pretty whiplashy start to the year. It felt like there was that moment in February where maybe there were signs that inflation was cooling. People were talking about a soft landing. And then just a few weeks later, we're talking about inflation being entrenched. Maybe the Fed has to go even harder on the terminal rate.

It just feels like it changed so quickly.

Joe Weisenthal (1:33)

Absolutely. I mean, and I think even like January, it was still Recession Watch. So it went from Recession Watch to soft landing.

Tracy Alloway (1:41)

To no landing.

Joe Weisenthal (1:42)

To no landing, overheating fears again. And yeah, quite a lot of ambiguity for this short of time into the year.

Tracy Alloway (1:50)

Okay, well, when we have ambiguous macro environments, there is one man that we like to turn to and Odd Lots favorite. And we need to talk to Matt King over at Citigroup.

Joe Weisenthal (2:01)

Well, absolutely. And it's like, okay, has anyone gotten the last few years right completely? No. But the last time we talked to Matt was in late 2021 And he said, inflation isn't transitory. It's going to be hard. This isn't coming down anytime soon. And I think in early 2023, March, 2023, people would say, yeah, that's pretty vindicated.

Tracy Alloway (2:20)

Yeah, I remember in that conversation, he also talked about the possibility that the Fed might need to induce a recession to bring inflation down, which again, in late 2021-

Joe Weisenthal (2:29)

Was not conventional, was it?

Tracy Alloway (2:30)

Right, that was not the consensus. So we need to check in with Matt. And I am very happy to say that we have him here with us right now. Matt, thank you so much for coming back on All Thoughts.

Matt King (2:40)

Thank you very much for inviting me.

Tracy Alloway (2:42)

So how would you characterize the current environment? Where are we in this sort of macro cycle?

Matt King (2:50)

I would say that markets are still in thrall to central bank liquidity to a much greater degree than is widely appreciated.

And that this is contributing to the uncertainty about the underlying economic outlook. So as I say, the central puzzle is how is it that with inflation proving stickier than many people imagined, and with central banks basically being hawkish on the back of that, and with yields and real yields rising again, how is it that risk assets are doing so well? And most people would say, oh, it's because the economic data have surprised positively, and the economy is more resilient, and maybe we can have this soft landing or no landing or whatever. And unfortunately, my work puts this in a rather different light. For me, the big factor which has contributed to the strength of risk assets beneath the surface is the way in which even as the central banks have told us that they're gonna be doing QT, actually, when you look at the details, they've ended up doing QE. They've injected over the last three months, a trillion dollars of liquidity.

And on my framework, that equates very directly into 10% directly on equities. And the moment that you think of it in those terms, it just puts the whole outlook in a very different light.

Joe Weisenthal (4:04)

Can you explain what is the mechanism by which you would say central banks are still adding to liquidity? Because of course, we know we're in one of the, a huge hiking, a historic hiking cycle, not just in the US, but elsewhere. What is actually going on this liquidity expansion?

Matt King (4:19)