Matt Wolf, Health Care Senior Analyst and National Health Care Business Valuation Leader at RSM on Macroeconomics 4-11-24

This episode explores the current state and future implications of monetary policy in the context of macroeconomic trends.

1. The influence of monetary policy on economic outcomes has diminished compared to the post-2008 financial crisis era.
2. Current economic indicators suggest a mixed outlook on the probability of rate cuts, with a significant degree of uncertainty.
3. The U.S. economy is moving towards an era where fiscal policy and sector-specific cycles will have greater significance.
4. Interest rates are expected to normalize, reducing the extremity of monetary policy impacts seen in previous decades.
5. Long-term U.S. treasury dynamics are becoming challenging due to high national debt levels, affecting the control over monetary policy.

1: Introduction to the Episode

Scott Becker introduces Matt Wolf, setting the stage for a discussion on macroeconomic trends and monetary policy.
Scott Becker: "Matt, tell us what's going on in the private equity world."

2: The Current State of Monetary Policy

Matt Wolf describes the uncertainty in monetary policy decisions influenced by mixed economic signals.
Matt Wolf: "We have seven different Fed governors talking today... the rate cut probability is down to 58% for June."

3: Historical Context and Future Outlook

Discussion on how past monetary policies impact current economic strategies and expectations for future rate cuts.
Matt Wolf: "We're now into a regime where interest rates will kind of normalize, sort of think late nineties type."

4: Impact of National Debt on Monetary Policy

Exploration of how U.S. debt levels affect monetary policy and treasury management.
Scott Becker: "We're starting to give up some control about how we price our long term treasuries just because we're holding so many of them."

1. Monitor interest rate trends for personal and business financial planning.
2. Diversify investments to mitigate risks associated with sector-specific economic cycles.
3. Stay informed on fiscal policies that could impact industry-specific economic conditions.
4. Consider the impact of national debt levels when evaluating long-term financial strategies.
5. Engage with financial news and analyses to better understand the evolving economic landscape.

Matt Wolf, Health Care Senior Analyst and National Health Care Business Valuation Leader at RSM joins the podcast to share insights into the current macroeconomic data landscape and maybe why it isn’t as important as it once was.

People

Scott Becker, Matt Wolf

Companies

RSM

Guest Name(s):

Matt Wolf

Content Warnings:

None

Scott Becker

This is Scott Becker with the Becker private Equity podcast. Today I'm thrilled to be joined by Matt Wolf. Matt's one of our most listened to guests on the Becker private equity podcast. He's a leader at RSM and a brilliant person. Matt, tell us what's going on in the private equity world.

There's all this discussion about our rate cuts coming. Are they not coming? Literally within hours, you get different messages. I want to say Greenspan, but Powell reaffirming that rate cuts are coming. Two other Fed governors saying, not so fast.

What is going on? And how do the macroeconomics, the jobless claims, the jobs, everything else play into all this? What do you see out there? What are the tea leaves say? Yeah, happy to be on, Scott.

Matt Wolf

Thanks. It's a fascinating conversation and discussion. And I had this with a colleague and some clients earlier this week. Right. And they're saying, oh, well, now if you look at Bloomberg, you see the, the rate cut probability is down to 58% for June.

And people are like, well, what does this mean? What does this mean? And its interesting because that sort of almost coin flip knowledge about are we going to cut rates or are we not? That used to be the norm not a few years ago, but in prior regimes, prior to the global financial crisis, that was sort of typical, where we didnt have this sort of pure visibility into the macroeconomic play. And I know it's very frustrating for market participants, especially as we want access to cheaper debt, as we try to refinance, do deals, things like that.

But I want to make a case that despite the fact we have, as we're recording this today, we have seven different fed governors talking today. Some have already talked. We get the jobs report tomorrow. We've had jobless claims. We've had all this data and data data that will influence the monetary policy decisions that are just less important now than they were in the sort of 13 to 14 years after the global financial crisis.

Right. As we emerge from the global financial crisis, we had this, we had to undertake this massive deleveraging of corporate and household balance sheets, right? And that was supported by monetary policy. And it created this environment in which fed moves this way or that way, whether it was the reference rate or if it was even the rate at which they expanded or contracted their balance sheet, created these sort of binary economic outcomes for investors, for companies, for most everybody. And monetary policy was very important then.

Now we are moving, I should say, into this environment where fiscal policy inflation is becoming more important because we've effectively de levered from it took a while, right, to recover from the global financial crisis and delever, effectively the corporate and household balance sheets, but we're effectively there now. We're entering this regime where monetary policy is less important for economic outcomes than it was. That's why we have this noise around, are they going to raise, are they not going to raise lower, keep, sorry, stay or cut, I should say. And we're now in this environment where different industries will experience recessions or expansions at different times. We're kind of at an end or coming near to an end of this sort of monetary policy driven binary outcome economy, right?

I mean, like just look at manufacturing. It's been in and out of recession for the past two years, right? People keep talking about commercial real estate. All of these industries are now becoming less connected as we move on from this sort of binary outcome economy. So that's a message we're trying to share, and I think it's an important one.

Now, to your initial question that I've kind of ranted a little bit and provided some of that context. I think we're still on the train of the call of three rate cuts this year, but we expect the rate cutting cycle to last perhaps into 2026 or, excuse me, 2026. So it could take a while. But again, we're not going to go back to zero interest rates. That period between the global financial crisis and March of 2022 was an aberration.

We're now into a regime where interest rates will kind of normalize, sort of think late nineties type. Right. And monetary policy will become less important and various industries will experience recessions and expansions at different times.

Scott Becker

Yes. What's fascinating is, and this is also a discount with monetary policy because monetary policy for a long time was everything. And it certainly people talked about Greenspan and how much he goose up monetary policy to lead the high stock valuations and then took the, talked about taking the punch ball away. And now you've got the situation where the US has so much debt, which is a different part of this discussion, that we don't control monetary policy and what it actually does to our treasuries as much as we did, because as we have too much debt, those long term treasury prices, we have to pay higher yields to get people to still buy us treasuries almost regardless, which is itself a frightening thing in terms of one of the challenges we have of lots of debt. And I know that's another discussion, people don't want to hear about it all the time, but we're starting to give up some control about how we price our long term treasuries just because we're holding so many of them that we have to sell.

And that's a scary thought, actually, but plays into this discussion as well about monetary policy. Monetary policy was the be all and end all, but it's somewhat of one of careful, we lose our ability to control some of that through monetary policy. Well, absolutely. I mean, that's, we've seen a lot of, you know, financial press coverage around the treasury auctions. Right?

Matt Wolf

Is there going to be sustained demand for the supply that the treasury needs to put out on the market? And so far we haven't hit a point where we haven't found plenty of willing buyers, which is good, definitely something to watch and monitor. That's one positive note. And then on the other hand, too, luckily, we're sitting in a good spot where none of our, none of our debt is denominated in foreign currencies. We don't have a foreign currency reserve problem like some other developed nations do, or developing nations, which is a benefit.

Doesn't mean we couldn't potentially have a problem, but at least we're a little more insulated than some other economies that are getting a lot of press for their problems with foreign currency reserves and their interest rates, like Turkey, China and some others. I mean, 100%, 100%. I mean, fascinating to see what's going on in some of those other nations and how scary the precipice is that they could fall off and the challenges they're having and what we're trying to avoid putting ourselves in that situation here. We're trying to avoid Reagan, put Russia in financial trouble during the Reagan era. We're trying to avoid that self inflicted wound doing that to ourselves here.

Scott Becker

In any event, Matt, you know, I don't mean to get politics out there and so forth, but debt is an issue, should be an issue, regardless of politics. As always, thank you so much for joining us, Matt. It's always great to visit you, always learn something. Matt Wolf, RSM, brilliant. Thank you for joining us today.

Matt Wolf

Thank you, Scott.