Key Wealth's National Call: Countdown to the Midterms — Politics, Policy, and Your Portfolio
George Mateyo (00:00)
All right, good day, everybody. I think we'll just kind of slowly introduce the call, letting know that people are still joining. It's just the top of the hour, but good afternoon, good day. My name is George Mateyo. I'm the Chief Investment Officer here at Key Wealth, and thank you for making the time to be with us. I'm really excited about this conversation. We have a returning guest and also a partner of mine here at Key Wealth to talk to you about the midterms. We're now roughly 35 days away and so we'll discuss politics. So this will be a nonpartisan call. We'll talk about policy, and we'll talk about the impact, most importantly, on your portfolio.
So today, with me, as I mentioned, I'm joined by my esteemed colleague, Rajeev Sharma. Rajeev is our Managing Director and Head of Fixed Income here at Key Wealth, and we're also fine and really privileged to have Libby Cantrill join us from PIMCO. She is a Managing Director and Head of Policy for that important firm.
I'm going to reintroduce Libby in a little bit and get her thoughts importantly and have her really talk us through the midterms, the implications for not only the economy and for the country, but also for your portfolio as well.
We will be taking your questions. I want to thank you in advance for submitting your questions. We'll make sure we cover as many as we can.
If you have a question and something occurs to you during the conversation this afternoon, please feel free to submit your questions in the chat box shown there below at the Q&A screen. We'll make our best effort to answer every one of your questions and make this a really robust conversation as possible.
To get things started, though, we're going to actually ask you for your feedback, and we'd like to hear kind of directly from you in terms of what you think is going to happen next. So, Aaron, if you don't mind, we're going to take a couple minutes to ask a couple questions of you with respect to where things stand today.
First of all, interest rates are certainly a topic again, and one thing we want to gauge your thoughts are has to do with interest rates.
Thus far, depending on how you look at it, interest rates are up some 100 to 150 basis points, or roughly 1.5%. So if you have a thought, we'd love to know if you think the next rate interest rates will be higher or lower by 25 basis points or more. In other words, where we are today, do you think direction going forward will be higher or lower?
Okay, Aaron, let's see if we can find the results there for that first question.
93%, that's a majority. All right, clear-cut consensus there. 93% of you think interest rates will be higher. Next question is a similar question, although this time we're asking your opinion on the stock market.
Stocks have had a very good year thus far this year. The S&P 500 is up roughly 13% through last night. So going forward, which direction do you expect the next 10% move to be? Will the next 10% move be higher or lower?
And again, we'll pause here for just a few minutes to get your thoughts.
Alright, Aaron, let's take a look at the answers for this one.
It's a tie, just about a tie. I would call that a statistical tie, 50-50.
All right, great. Next question, please, Aaron.
Now, this is going to turn to our topic of the day, which has to do with the midterms, of course, so we'd like to know your thoughts on which party will actually assume the majority of the House of Representatives following the elections on November 3rd. Will it be the Democrats or the Republicans?
Again, we'll wait a few seconds to gather your answers.
Okay, Aaron, let's take a look.
The Democrats have it. It looks like the majority of people on this call think that the majority of the House will be occupied by the Democrats.
All right, next question, very similar here. This time we're going to ask you for your thoughts on the US Senate.
Same question, which party do you expect to hold majority of seats in the U.S. Senate following the November elections on November 3rd?
And we'll wait another few seconds for your answers.
Okay, Aaron, let's take a look.
Survey says… Again, a tie. Very interesting.
Okay, not quite a tie, but pretty close.
All right, we have two more questions for you, and then we'll move on to the heart of the presentation.
Question here on the fiscal outlook. This has been a topic, we get this question all the time, and indeed, I think it's valid to ask, how concerned are you about the current U.S. fiscal outlook, meaning our debt and deficit situation? Are you very concerned?
Are you somewhat concerned, or are you not at all concerned about the U.S. debt and deficit situation?
All right, Aaron, can we have the answers, please?
Okay, either very concerned or somewhat concerned. I'll call that a pretty strong majority, that some people are at least somewhat concerned about the deficit situation, whereas about 55% of you are very concerned. Quite interesting. All right, thank you. All right, last question, and then we can get going.
Last question has to do with artificial intelligence, which is another big topic of the day. So the question here is your overall outlook on the potential impact of artificial intelligence. Would it be a positive outcome? Are you negative on the outlook, or are you unsure about that?
Again, we'll pause for a few seconds to gather your answers.
Okay, Aaron, let's take a look.
Interesting. That's pretty interesting. So I think most people are positive, although it's kind of split pretty evenly amongst the three.
All right, well, thank you very much. We'll be sure to send these results along with the replay of this conversation, and also the presentation itself.
So, again, my name is George Mateyo here at Key Wealth. I'm a Chief Investment Officer, and really a pleasure to have you join us today. I'm going to begin by just walking through some slides on the overall state of the interest rate environment. I know my colleague Rajeev has a few thoughts as well, but I know this is an important topic because this is one of the questions you asked us in advance of the conversation.
What do we think about bonds? What do we think about interest rates? And what does this tell us about the economy going forward?
Here on the first slide, we want to walk you through just the shifting dynamics that have occurred in the interstate complex over the last several years, and indeed, year to date.
Five years ago at this time, roughly, interest rates were pretty much anchored at zero, particularly short-term rates, as you can see there on the left-hand side of your screen.
In the intervening 5 years, however, rates have shifted notably higher, which is evidenced by the red line on the left-hand side of your screen.
So as we say here, rates have moved up considerably over the past several years.
At the same time, this year alone, interest rates have moved some 150 basis points higher, as evidenced by the chart on the right.
These are looking at maturities for the US Treasury market based on certain duration targets and overall tenors with respect to maturities of those bonds.
So if you can note you can see quite clearly, interest rates have moved in materially in the past several months and over the past several years as well.
If I take a longer point of view, you can look at this chart here on slide 6, which shows you the overall maturities and the interest rates for 2-year maturities, which is the red line. The blue line are long-term treasury yields, which is evidenced by the 10-year treasury, as shown on the chart here on slide 6.
I think it's fair to say that interest rates have moved up for a few reasons this year, Rajeev. I'd love to get your take on this, but in my view, it's really primarily three reasons, one of which is stick inflation, which has lifted the front end of the curve.
The massive amount of debt from hyperscalers is also lifting yields, and certainly the fiscal outlook, as we heard earlier from our listeners, is causing concern and also pushing up longer term yields.
Rajeev, how would you characterize this year's change in the bond market and the interest rate escalation that we've seen in the past few months?
Rajeev Sharma (08:25)
I think you're spot on, George. I mean, this chart shows two different forces hitting two different parts of the curve. In the front end, the story is primarily about inflation in the Fed. We've had that stubborn inflation that has kept the two-year elevated.
We're in a higher-for-longer policy path environment, and when you have that, you will see the impact on the 2-year. But when you move from 2-year to the 10-year, now you're dealing with a set of different forces
You have an enormous fiscal deficit that you spoke of, George, which means tremendous amount of Treasury supply has to hit the market, has to be absorbed by the market.
You also have the AI hyperscalers that are using the debt markets to finance their capital spend. So even if the Fed eases at some point, the tenure can still stay stubbornly high.
George Mateyo (09:07)
Indeed it can, and it seems to be going that direction for sure, Rajeev.
One thing we also want to note is, though, that the overall impact in rates is showing up in different ways. So on this chart, we show something slightly different. Here we're showing, essentially, the overall spread of what we call CCC-rated bonds. These are bonds that are essentially the most speculative of the speculative, probably the riskiest of the riskiest bonds in the overall bond market environment overall.
And the spread is measured, essentially, as a premium to treasuries. So, in other words, when you see that blue line spike higher, that's additional compensation that our investors are demanding from essentially taking a loan out against high-risky borrowers. Now, at the same time, what's interesting, if you look at that blue line, and you follow this chart over the period of the last few years.
That blue line has also corresponded with rising volatility in the equity market, which is measured by the VIX index, which is shown in red here on slide eight.
What's interesting, however, is that despite the fact that we've seen some of the, the impact from higher rates starting to show up in the credit markets, we've not seen the same level of impact in the equity markets thus far.
Stocks as measured again by the S and P 500 are roughly three or 4% off their all time highs. So we haven't seen that much volatility just yet. Perhaps this gap closes in the sense that maybe equity volatility has to rise or perhaps maybe conversely equity and I'm sorry, fixed income volatility will start to close at the same time that the equity market volatility stays relatively contained.
This is an ongoing debate, and this will probably be a source of conversation going forward. Rajeev, any thoughts on this?
Rajeev Sharma (10:34)
Yeah, I mean, the key here is that higher rates do not impact everyone at the same time. They hit the most levered borrowers first, and that would be your CCC rated companies.
We're seeing wider spreads there. Refinancing for these companies is getting more and more difficult. They used to be able to issue debt between 4% and 5% a few years ago. Now the interest rate environment's very different for them, which causes their debt
Upon maturity, it'd be hard to refinance, and that's where you're seeing wider spreads.
And we've been strong proponents for our clients to be in higher quality assets. In this environment, balance sheet strength matters most, and that limits some of the near-term refinancing risk.
But if you look at the chart right here, equity volatility versus triple C's, I think the credit markets are saying something here that the equity markets may have some level of complacency in. If you look at the two asset classes, triple C's are saying that the cost of capital is becoming a problem.
And equity volatility is telling us that so far there's no broad-based earnings problem for stocks. So if the spreads start to widen in investment grade, I think that could be a systemic risk that we could start seeing in other risk assets like equities.
George Mateyo (11:37)
Thank you, Rajeev. So we'll be paying close attention to this, to say the very least. Some of the factors behind interest rates deserve some attention, too. I'll just spend a few minutes talking about this, and then pull Libby into the conversation as promised.
First and foremost, though, in terms of some of the drivers behind higher rates, again, notably inflation has ticked up quite meaningfully in the past few months as higher energy prices have certainly cascaded through the economy felt most acutely at the pump, whether you're actually consuming it gasoline or diesel form.
Energy prices are notably higher. At the same time, we've also acknowledged that fiscal concerns have also been pushing up the long end part of the curve. Fiscal concerns now have become more elevated as the overall debt has now eclipsed $40 trillion, and debt as a share of GDP now is well over 100%.
In our view, this is a concern, but probably not an imminent concern, but something, again, that bears close monitoring going forward.
And then lastly, one question we often get, and Libby, this is a chart that I saw from your presentation, frankly, which is just looking at the overall notion of the fact that The US now is still the the world's reserve currency of choice.
I mean, despite the fact that we have high debt and deficit levels, we also continue to be blessed with the fact that we have many, I guess, established a fair degree of credibility that people afford us with their dollars, they afford us with other transactions as well, that puts the dollar still in the reserve currency of choice going forward.
So, again, despite the fact that there are some significant headwinds and also some headlines around our debt situation, US still is reserved is still viewed as the reserve sorry, the reserve currency of choice, and treasuries are the reserve asset of choice across the world as well.
So lastly, Rajeev, I'll just turn it back to you for one quick second. I think it's fair to say that with the backup in yields, we now see bonds as actually offering an attractive risk reward. Would you agree?
Rajeev Sharma (13:19)
Yeah, you know, 5 years ago, the problem for bond investors was there was just not enough yield. And today, there is enough yield that you can actually be selective in the bond market. You can get paid to own quality, you can afford to wait as the macro environment develops.
So the compensation for taking duration and interest rate risk is substantially better than it was. You can get over 5% for very high-quality fixed income today, and that provides some solid income play for our investors.
George Mateyo (13:46)
Excellent. Alright. So let me turn the conversation over to you, Libby. And, again, I'll reintroduce you here. I'm not gonna read every word on this page, but really privileged to have you back here. I think this is maybe your third or fourth time with us. We look forward to having these conversations about every two years with you, but also getting your insights in between those periods of time as well.
For those of you who don't know her, Libby, as I mentioned earlier, is the managing director and head of policy at PIMCO. PIMCO is one of the world's largest bond managers, managing some roughly $2.2 trillion. She's worked there since 2007, and before that, she spent time in Congress and also in investment banking. Libby, thanks again for joining us today. Look forward to hearing your comments.
Libby Cantrill (14:22)
Thanks so much for having me. I do think, I think this is the number 3 or number 4, but it's really a privilege to be here with you all, and then, of course, your clients, and we really appreciate the partnership that we… that PIMCO has with Keywell, so thank you so much.
George Mateyo (14:36)
Indeed. So maybe we can begin a little bit by just looking at the overall composition of the election. Kind of walk us through what you think is at stake on November 3rd and how people might be thinking about that as we are now 35 days away.
Libby Cantrill (14:48)
Great. Well, actually, you know, I was going to share my screen, if that's okay. Sure.
And I actually, if it's okay, I have one slide
that was relevant to that previous discussion, which just shows you where real yields are. And obviously, we're bond people as well, so, you know, this is…
A bit talking our own book, but it's also true. We think this is actually a really attractive time for the bond market. And that's because if you actually just look at real yields, which is the difference between nominal and kind of inflation adjusted yields, and you sort of take out expected inflation, you actually get a really, you know, a more attractive yield after inflation. And if you just look at this, it sort of
It shows you that actually, maybe this time that we've been living through in the last 15 years where you've had super low yields and as a result, low kind of after inflation yields, after inflation returns, was more of the anomaly than actually sort of the new normal. And so we would argue that actually you're kind of going back to the normal, you know, back to kind of the old normal.
Versus it being sort of this… sort of an extraordinary period of time. So we, as, you know, as you all kind of have reinforced, we think there's a lot of, interesting opportunities right now in fixed income.
In terms of the midterms, though, which is, I think, much more what you probably want to hear me talk about, you know, if you just… if you just kind of zoom out, and as a… as kind of a reminder, you know, two chambers of Congress, of course, the House and the Senate, every member of the House is up for re-election, so that's 435
Members right now, Republicans have a three-seat majority, and that means that Democrats would need to win three seats in order to take back
the majority. On average.
the party out of power does quite well. I always joke that we like to date our politicians versus marrying them. We sort of, you know, we like them into office, and then we're like, we actually don't like you, and then we vote them out of office. On average, the party out of power, typically picks up
26 seats. So, you know, I would say Democrats need to have, you know, just a probably a fair to good night in order to take back the House. I would agree with the consensus in terms of the response.
On your poll, the Senate is a bit different. 100 members in the Senate, but only a third of them are up for re-election, so it's only 35 this cycle.
Right now, Republicans have a four-seat majority, meaning that Democrats would need to win four Senate seats. And George, if I can, I might just talk about why that's… that could be more difficult, and I would… I think that the sort of consensus, which is sort of it's a jump ball, is probably right.
that, you know, Republicans.
are in a pretty strong position. However, given the national environment, Democrats could potentially take back the Senate, and the reason why Republicans are in a good position is just the map is much more favorable to them. In order for Democrats to take back the Senate, again, they need to win net 4 seats in the Senate.
That practically means they need to defend three seats that are, you know, not necessarily a slam dunk for them. Michigan in particular, obviously close to Ohio, but also in Georgia and New Hampshire. But even if they could protect those three, they would still need to win
4 of these 7 on the screen. It used to be 4 of 6, but now Kansas, you know, is sort of in play, so it does show you that, in some ways, some of these more safe Republican seats are maybe a little bit more vulnerable, but still, it's challenging, right? They would, you know, Democrats would need to win and
Places like North Carolina and Maine, Ohio, of course.
Iowa, Kansas, Texas, and Alaska. It's not impossible, but it would require what people call a wave election, which is when one party really turns out over the other, and then they're pretty significant gains. So I think in that environment, you could see Democrats taking back the Senate, but it still would require basically Democrats to have
You know, effectively a perfect night in order to do so.
George Mateyo (19:07)
So that's a really great backdrop, Libby. And I guess as you go around the country, you talk to other investors, you talk to other voters, presumably. What do you think some of the topical issues are that really are kind of gravitating or kind of making this map as divided as it is?
What's what's what's most topical amongst voters?
Libby Cantrill (19:25)
Yeah, I mean, it has to be affordability, and I'm just going to… I'm going to scroll very quickly here, past some slides, so sorry about this. You know, this has really been… and this is a breakdown of…
of President Trump's approval ratings. You know, to be fair, though, if you go back to the Biden administration, you know, he was getting very low marks on actually all of these issues.
But the one I think that's really the two issues that are really the most important are affordability, inflation in this chart, and also just the general state of the economy. And this is where this kind of K-shaped economy, the two-speed economy, the difference between folks who might be invested in the equity market in particular and those who are not.
You know, it really is quite… is quite acute. But the cost of goods, you know, gas and groceries, is sort of an axiom in politics.
And those things, you know, particularly gas with this Iran conflict.
have, of course, increased. Diesel, even more so. Diesel's quite an important input, obviously, to farmers, but also to trucks in terms of food costs, you know, ultimately. And then, you know, the cost of healthcare has also gone up. The cost of housing, of course.
has gone up. So this is really the big issue in voters' minds, is just this general sense that things just cost too darn much, and nobody is doing anything about it. And I think that's actually the really, the kind of the most important thing, is that, you know, Democrats were the casualty of these concerns
Back in 2024, of course, when Kamala Harris lost and Democrats
sort of, you know, lost both chambers. Republicans probably will be the casualty in this cycle, but I think in 2028, if these issues continue, I think there's going to be a real general, you know, appetite for outsiders, on kind of both sides, because there's just this general sense that, you know, neither party is doing very well. This is sort of a
You know, this sort of underscores it, that there's this kind of metric of, you know, this category of voters called the double haters.
I think anecdotally, this is quite much, much higher than 26%, but this is Pew Research does this, does this poll. But I think it just sort of underscores the fact that, you know, folks are mad about costs, and they don't think, you know, politicians are doing really anything about it.
I probably you might ask about AI and data centers, because I do think that also sort of dovetails into these broader concerns.
George Mateyo (22:05)
Yeah. I know we'll get in a little bit on data sense for sure. But I you know, along the lines, you made a good point that I think both parties, right, have been dealt a really tough hand when it comes to inflation.
And so that's not to say either party is to blame for that, but I think, you know, it's a dynamic that's really a dynamic that has impacted both both parties now for the past several elections. So to what extent can actually politicians do anything to really address the inflation situation directly?
Libby Cantrill (22:32)
Yeah, I mean, it's a great question, and I think something that is flummoxing both parties. And you're right, I think, you know, we hadn't really seen inflation for decades until, of course, you know, 2021, 2022, post-COVID. And now I think it's very clear for politicians, like, how much of a political loser inflation is, and it's basically a regressive tax, meaning
Everybody bears the brunt of it versus unemployment, which is, you know, bad for those people unemployed, but is much more specific to that, to that cohort. I mean, practically speaking, what can politicians do about inflation? It's obviously the central bank, the Fed, which is, you know, independent from politicians. So they're really the ones who are at the steering
wheel in terms of trying to control at least those front rates, which are supposed to sort of slow down the economy. Although I think what we're seeing is that some of the things that are driving inflation and driving the economy are less interest rate sensitive.
But what politicians can do, and I think arguably maybe fail to do, is they can be more fiscally responsible, right? Particularly during the Biden era, you know.
love President Biden, hate President Biden, whatever your political view is, the Democrats, they spent a lot. Trump had spent a lot, obviously, as well, in response to COVID, but I think what we have seen now, with the benefit of hindsight, is a lot of that fiscal stimulus that had passed those first
few months, that first year and a half of the Biden administration, it was basically pushing on a string. The economy was already growing, it was already recovering from COVID, and then you overlaid more fiscal on it, plus, of course, the Ukraine and Russia war, and so more so sort of supply side constraints. So I would say that the levers are relatively limited, but certainly spending more when the economy is kind of already, you know, doing well is one of the things to be avoided.
Rajeev Sharma (24:35)
Is there a scenario, Libby, where political uncertainty could actually be good for bonds? And to your point about fiscal restraint, perhaps that's a scenario where bonds could benefit from some of this uncertainty or maybe some gridlock also?
Libby Cantrill (24:48)
Yeah, so I would say, you know, kind of our base case as it relates to the midterm election outcome is either a split Congress, so Democratic House and a very narrowly controlled Senate.
Or a Democratic Congress, a Democratic House and a Democratic Senate. Now, you might think, okay, those are… those sound really different.
I actually don't think they're all that different for two reasons. One is that President Trump will still be in the White House, so he can veto whatever a Democratic Congress or a split Congress passes.
And, and this is a little wonky, but it's important, is that for most legislation.
You need 60 votes in the Senate, not just 50. So even if Democrats take back the Senate, they may only take it back by one or two votes. So it might be 51, 49 or 52. However, but it's not going to be even close to that 60. So they would still need Republicans. So that's also going to limit what they can get through. However, though, Rajeev, to your point, to your question about spending, the one thing that President Trump and Democrats kind of agree on.
One is honestly higher spending.
President Trump will need to go back to the Congress to get money for this Iran conflict. The Pentagon has been using money that was allocated during this one big, beautiful bill, the big tax bill that was passed last year, but that, you know, from what we understand, that money is
dwindling pretty rapidly, so he'll need to go back to the Congress. And then, as a result, Democrats will insist that they get more money for their things. And so this is sort of how we got into this mess to begin with.
is that nobody has, sort of, the political will to cut spending, and everybody has the political incentive to spend more. So, I would argue that during… usually during, kind of, split governments or split-party control of the White House and Congress, you do usually get that fiscal constraint.
I'm not sure you're going to get it this time around. I guess the last thing I will say, though, the big difference between a united Republican Congress and Trump in the White House, and a Democratic Congress, and
and Trump in the White House is you won't get a big fiscal program. So yes, you'll get more spending on things that Democrats want, but you're not going to get a big more, you won't get an additional tax cut. So you're not going to get a huge fiscal program. So I guess relative to that reality or that scenario, we will see more fiscal restraint. But again, I do think the deficit will continue to grow kind of under any scenario at this point until.
until it can't, until Washington has to focus its mind and actually cut spending, and as we've seen, I think that will have to be forced upon them. They're not going to have the political incentive to do that sort of unilaterally.
George Mateyo (27:32)
Let's stick with the theme for a second, if you don't mind, Libby. I'm curious to know what you and your colleagues at PIMCO are thinking about when it comes to that, because I agree that neither party seems to have the political will to raise taxes or cut spending in any big way.
And thus far, it hasn't proven to be that big of an issue for the bond market, although maybe one could argue that more recently it started to be front and center. How are you thinking about that? Is that a concern until it is a concern, or how should we think about that as it relates to a risk for investors to navigate?
Libby Cantrill (28:01)
Yeah, so this is the… this is sort of the deficit picture. So as a reminder, the deficit is sort of the difference between how much a government takes in in tax revenue and how much it spends in spending. That gap can either be a surplus, or a deficit. Of course, it's been a deficit for the last
27 years or so. And so this is sort of how you measure the deficit as a percentage of GDP, and what you see is that it is high, and it is elevated versus, you know, the average historical deficit, which has been about, you know, 3.5%, more or less, a percentage of GDP now is between 6% to 7% as an outlook, kind of as, you know, for the foreseeable future.
We would agree that part of the backup, part of the increase in interest rates is some concern about fiscal, but it's much more just the supply and the demand that Rajeev talked about. The Treasury just has to issue more debt, and so that means just these auctions are much bigger. So I don't think there's anything necessarily new. Like, we've known this for a while, right? One of the biggest
kind of calls we had in 2024 before Trump came in is that the deficit is going to be high regardless of whether it was Trump or Kamala Harris. So I don't think this is any new information, but I do think that there's just a reality of having these much bigger treasury auctions and what have you. We do think that this will, there will be a reckoning, but I think before I get to that one, the point, I think this is…
quite important to remember is that a lot of the spending in Washington these days is basically on autopilot. A lot, you know, a lot… the majority, vast majority, 75%,
is either mandatory spending, which is Medicare, Medicaid, Social Security, earned income, tax credits, what have you. I think, regardless of what your politics are.
many people would agree these are important programs. Because our, you know, because our population is aging, it means these programs, particularly Medicare and Social Security, are becoming bigger and more expensive, and that just grows on autopilot, right? This is not like a…
a decision that Congress makes every year to spend more money on this. This just grows as the population grows. And then interest expense is the same thing, right? The Treasury has to issue new debt, they have to pay interest expense, they're not… if not, they would default.
And so, you know, this basically, you know, the three-quarters of the spending is on autopilot. So the stuff that Congress actually controls
It's not that big in comparison. And as a result, I feel like they just, they don't think about this every day. They don't look at these things like we do as, you know, in terms of the kind of markets people or what have you.
I do, however, think there will be a reckoning, and there is one right around the corner, which is when the Social Security Trust Fund goes bankrupt. That sounds very…
like, you know, dystopian or hyperbolic or what have you, that just… that just means that this reserve, this trust that has been built up over the ages, this sort of cushion that Social Security has been dipping into to top off benefits, because as we get older, and it's a pay-as-you-go system, fewer people pay in, more people are receiving benefits.
So they've had to kind of top off the benefit with this trust fund. And as, again, we go get closer to 2032, which is sort of this estimated date, that is when that, you know, that trust fund goes to zero and benefits are gonna have to be cut.
by about 20% or so. Congress will not let that happen, right? The polling around this, which is on the right-hand side, is just too compelling. Members of Congress cannot let older folks in their districts get a benefit cut. So that is going to be an inflection point for reform.
I am optimistic, having been… worked on the Hill, that members of Congress do oftentimes rise to the occasion when they have to, and I do think they will reform Social Security, but I think when they're, you know, when they're looking at this, they'll probably have to look at healthcare costs, and they probably will have to look at taxes, and I do
think taxes are going to be going up. One, you know, one good thing about our fiscal situation, unlike Europe, is that we have a lot more runway to tax.
In terms of, kind of, white space. Now, people aren't going to like that, right? No one likes to have their taxes go up.
But relative to Europe, where they already have higher taxes and high deficits, we have low taxes and high deficits, so I do think, you know, sadly, sorry, that taxes will be going up. At some point, I do think this could be the kind of inflection point.
George Mateyo (32:47)
So a few questions that came through the chat are somewhat related to this Libby, which has to do with tariffs and whether or not tariffs can actually, maybe not necessarily fully offset.
Some of these fiscal challenges that we face, but can they be… can they… can they dent… take a dent in the problem so we have, you know, additional revenue in the form of tariffs that could be used to maybe offset some of that situation that we find ourselves in?
Libby Cantrill (33:08)
Yeah, it's an excellent question, and so we have done that analysis, and so these red diamonds are what the deficit would be without the tariffs, as we have them on today.
So if we didn't have tariffs, we'd go from 6.7% of GDP from a deficit to 7%. It's not huge, right? It's 30 basis points, or 0.3%.
It's not… but it's not for nothing, so it does help, but it's, you know, it's so, massively overwhelmed by the deficit, that it only kind of helps at the… really at the margin. I do think, though.
that for a variety of reasons, tariffs are here to stay. I think that folks.
think, you know, President Trump, obviously, this is a big priority, but I also think that lots of Democrats, I mean, Sherrod Brown, who's running in Ohio, as we know, is a, you know, is more of a protectionist, and I think as, you know, people are gonna be…
Policymakers will need need revenue. And tariffs are kind of an easy political way to get revenue, even though you know, there's obviously debate about who actually pays paying the tariffs and and all of all of that. But but it does, so it does help incrementally, but not not not materially.
George Mateyo (34:29)
So the other issue that comes up a lot during these conversations, of course, and we referenced this earlier, Libby, has to do with data centers and AI. We ask our audience for their thoughts on that.
at the beginning of the conversation, too, and there seems to be some, you know, division around is good or bad, but irrespective of AI itself, maybe we could just talk a bit about data centers, what your research has showed.
And what do you think this is? Why is this such an issue right now? Does it really galvanize support? Is it likely to be a non-event? Maybe we can kind of go through the elections and then we kind of go back to business, as they might say. Or does this kind of stay with us through 2028?
Libby Cantrill (35:01)
Yeah, so, this is some data… this is some polling on data centers. On the left-hand side, what you see is that more than 70% of voters
sort of oppose, to some extent, the building of data centers. There's also, of course, the more existential worry about AI, and taking our jobs, and replacing us, and making us all… their pets, or whatever. I mean, sort of the more dystopian stuff.
You know, on the data center front, though, this has been such an interesting issue as an observer.
Because this has really been an issue on the left-hand side that has gone from basically kind of a net neutral position, where you have, you know, just basically just as many people support it as oppose it just last summer.
To an issue where now you have.
The vast majority, 70% plus
of Americans say they would oppose at least a local data center, right? This is… far exceeds the opposition to building a nuclear power plant in your backyard.
So this has become actually toxic. Like, this issue is, like, a toxic, you know, pardon the pun, but, like, it really is a toxic… become…
toxic for voters. You know, I say, kind of, politics leads policy. What you've seen in terms of just at the state level, the number… the opposition has increased, of course, and then the number of data center projects that have been blocked.
Are more than the first quarter of this year.
relative to how the, you know, the total number last year. And this is only, obviously, through the first quarter, but what you're seeing now is many candidates running on a platform of anti-data centers. It was sort of Democrats at first, but, like, quickly.
George Mateyo (36:52)
Both parties, yeah.
Libby Cantrill (36:53)
Lots of Republicans are too. And now actually, interestingly, Republicans are trying to kind of anti data center, you know, out.
George Mateyo (37:02)
Intact data centers.
Libby Cantrill (37:04)
So, you know, I don't think this is necessarily just an election year talking point. I think that the opposition here is sort of so deep.
it's so emotional. I would… I would argue it kind of touches on these broader things we just talked about, sort of the affordability issue, worries about increasing electricity and water and, you know, heat in your environment or what have you, but also really this view of, you know, kind of distrust of big tech.
And also there's sort of this general feeling of like being kind of left behind, like people, again, this two speed economy, kind of the wealthier getting wealthy and like the, and the kind of labor keeps, you know, sort of standing still or what have you. And so, you know, again, I agree with this or disagree with this. You know, if you listen to focus groups, I mean, I've been listening to lots of focus groups, including focus groups in Ohio, and it's like, you know, people are feel really.
vehement about this. The reason, like, how does this affect markets and what have you, again, politics leads policy, and what I… my… my expectation is, is that when you get new governors who've all run on this mantle of anti-data centers.
come in next year in 2027, it's going to be very difficult for them not to do something about it, right? They're going to have to deliver at least partially on this rhetoric. And so what does that look like? You know, moratoriums are the easiest thing to do, honestly. They might be, you know, maybe not the more sophisticated, but they're the easiest. You just push pause on it. You kind of wait for, I mean, New York, where I live, you know, the governor has pushed, you know, pauses on state
wide moratoriums. Partly is that because the state legislature was going to do something even more kind of extreme. So I think she was trying to get ahead of it a little bit. But it does sort of show you that this is real and I do think that this means this will slow down the infrastructure buildout which could then slow down the AI story which could slow down the economy. And this is something that you know our economy right now is basically
like a one-dimensional growth story. It's maybe a little bit fiscal, but a lot of this is AI. It's AI in terms of the CapEx, and it's also AI in terms of the wealth effect.
So, I'm not trying to be kind of too much of a Debbie Downer here, but I do think this is quite real, and I do think this will…
actually lead to some probably negative policy outcomes for the hyperscalers. And again, that could affect both valuations, but just the speed at which we, you know, we pursue this build out here in the United States.
Rajeev Sharma (39:32)
But do you feel that the I'm sorry, Georgia. Do you Go ahead. Just on that point, do you feel the build out for the markets, would be an inflationary impulse, or do you think the productivity gains would kind of be disinflationary?
Libby Cantrill (39:45)
Well, I think what we've seen is that the build-out, at least in the short term, has been more inflationary than not. I, you know, I think we as a firm would subscribe to this idea that AI will be disinflationary over the long… medium term.
But, you know, that's gonna take a while, and you have to have, obviously, adoption and other things to sort of fall in place to see that. So, in the short term.
it does feel like it is more, inflationary, and obviously has pushed up yields, as you said, because, you know, the capital… most of these hyperscalers are issuing long-term debt. That's competing with Treasury bonds, sort of crowding out, if you will, so Treasuries also had to increase their, you know, the yields, or the market has sort of forced that upon the Treasury market.
So this, in some ways, if this does slow down, you know, maybe this actually does bring yields down a little bit, but it could at the same time affect risk assets. And, you know, this is a…
there are lots of dimensions to this, so I'm not trying to say this is, like, yeah, but I do think this is a fly in the ointment of the AI story that maybe is not as fully appreciated as, you know.
as folks should. I think this is becoming much more obvious now to, you know, to people who are paying attention.
George Mateyo (41:03)
Libby, let's go back and widen the aperture once more and talk about your thoughts on what other type of policy moves or considerations our clients or investors should think about.
Based on potential outcomes of November 3rd. In other words, if Democrats are successful.
They gain both House and Senate. What happens then? Conversely, maybe if the House, but it does seem like it's kind of leaning towards Democrats, but if the Republicans retain control of the Senate, well, there you go. This is the perfect slide to talk about that. So maybe let's talk through about some of the implications about the elections themselves and what that might mean for the economy and also for markets.
Libby Cantrill (41:41)
Yeah, I mean, at this point, I think this is kind of a coin flip, if you will, that we could get this had a split Congress, Democratic House, Republican Senate, or we get a united Democratic Congress, House and Senate. I do think, though, in either scenario, the majorities are going to be quite narrow, and that will also have implications. But again, if you kind of lay out what is the most kind of likely under each scenario.
it doesn't look all that different. So you're gonna get more oversight. Now, if the Democrats take both the House and the Senate, they'll control both committee agendas and floor and what have you, so there'll be a lot of
oversight into probably actually big tech a little bit. I think big tech is going to be more vulnerable under a Democratic Congress. You're already sort of seeing some of the previews actually being, letters being sent to tech companies and what have you.
But you're gonna see, you know, obstruction as well. You know, both Democrats will just basically vote against whatever is, you know, kind of sent over if they control the House, and of course, if they control the House and the Senate, they'll just vote down anything that, you know, Trump wants. I would say, though, that if they
if they control both chambers, there's going to be more onus on them to show that they can govern versus just obstruct. So, if you're just, like, only… if you only control the House and not the Senate, I think Democrats will just say, no, no, no. However, if they control the House and the Senate, there's probably going to have to be some
compromise on something. I think housing actually is one of those issues where there's a lot of
bipartisan, support. They actually passed a housing bill, it was signed, you know, it wasn't signed into law, it became law, Trump decided not to sign it for a variety of reasons or whatever, but, but you could see that kind of a Housing 2.0, if you will. I think you could also maybe see something on immigration, even though that seems a little bit
you know, crazy because it's more polarized, but there's some concerns about visas that I think both Republicans and Democrats share. So I think you could see some, maybe some more compromise under that scenario. But again, more oversight under both, more obstruction to some extent. And then, you know, sadly more spending, as I said. I just think because Democrats are going to use that leverage that Trump's going to want more spending on certain things.
They're going to use that to their benefit, restoring some of the cuts to health care. And then again, on some of this like discretionary spending. I think one of the biggest differences, which is kind of wonky, but is actually, I think, quite important for markets folks, is that, you know, there will be it'll be harder for President Trump to confirm kind of anybody under both scenarios.
That's because Republicans will have a narrow majority if they could keep the Senate. Democrats will also have a narrow majority if they win the Senate. But if they win the Senate, Democrats are going to be very low to basically bring up anybody who Trump nominates. Now you think, well, why would that be a good thing? The only reason that's a good thing is the markets had been concerned about Fed independence, about this idea that you get Fed officials who are kind of
compromise, who have political incentives, what have you. I don't think we've seen that on the Fed. I think Kevin Warsh is not, you know, kind of a lapdog, if you will, sorry, for sort of the pejorative characterization. I don't think he is that. I don't think you're going to necessarily see that, but particularly if Democrats take back the Senate, all of those concerns about Fed independence, I think.
go way back, it would kind of recede. And even if, you know, Republicans just control the Senate by one vote or two votes, they're just not going to have the votes that you would need in order to confirm anybody, sort of, who's controversial. So, bottom line, I think it's, I think, again, all those concerns about Fed independence may have been overblown to begin with.
But I think they will recede in particular, you know, particularly if Democrats control the Senate.
George Mateyo (45:31)
Since you brought up the Federal Reserve, I think Libby, we'd probably be remiss if we didn't ask you for your thoughts on monetary policy. Right? We've talked a lot about fiscal spending and tax and so forth.
What are your thoughts on the composition of the Fed next year? I think there might be one or two seats that might be up for some change, potentially, but how should investors also think about interest rates that are set by the Federal Reserve, and maybe potential changes there in the composition of the committee?
Libby Cantrill (45:56)
Yeah, so this is the composition of the committee right now.
And just as a… just as a reminder, you know, the… the FOMC, includes the seven Fed governors. Those people are nominated by the President, again, confirmed by the Senate.
Plus 5 regional presidents. And those… that's on a rotating basis, except for the president of New York, which has a standing seat on the FOMC.
Each of these heads has one vote.
So even again, even there was concern about Kevin Walsh maybe being, you know, political, what have you. And we just kept telling clients, well, he's only one vote. You know, he's important, but not omnipotent. And he still needed a majority of the FOMC to change monetary policy and to change balance sheet policy, which again is kind of wonky, but also important. So when folks were in the beginning.
of the year pricing in these massive cuts because they thought it was going to be dovish, whatever, we were sort of, you know, repelling against that. We didn't think that was right. Now, we were sort of late to the Fed increase call, I think, the rate call. We sort of thought that, you know, some of this inflation data was actually moderating. Well, that said, we do think, and we would agree with folks that we do think the next…
rate move will be one more
hike, but that's, we think, is kind of it. We do not believe that this is the beginning of a right hiking cycle. Now, we could be wrong.
But we think that lots of the components of inflation are actually moderating, and it's, if not for the Iran conflict, which of course is increased energy prices, and if not for, you know, some of the AI stuff, but more for about the conflict, we think that actually you would have.
Inflation really going closer to this 2% target, not quite there, but closer. So again, we our view is maybe they have one more rate hike
but that this isn't necessarily the beginning of a bigger cycle. And so, that's a little bit different from how the market's priced. The market's priced for at least 4 more, hikes, I believe.
We probably would push against a little bit of that, because we think that again, this is much more of, you know, not necessarily a risk management hike, but a bit, a bit more of the, of that than it is, again, beginning a bigger, bigger cycle of increasing interest rates.
George Mateyo (48:26)
And just for our viewers and listeners, Libby, doves and hawks, those doves are people that that's okay. Doves are people that are likely to probably lower interest rates and hawks are likely to raise rates. Is that fair to say?
Libby Cantrill (48:36)
Yes, exactly. Sorry. Yes.
George Mateyo (48:37)
No worries, I know.
Libby Cantrill (48:39)
market speak, but yes.
George Mateyo (48:41)
No worries. You know, a couple a few other questions that came in also have to do with Social Security, and we talked a bit about that. And just a question, I guess, practically speaking is, how did that really get fixed? You talked a little bit about taxes potentially, but Yeah. Are there other things that, you know, neither party seems to be Yeah.
Out in front of us right now, at least as far as I can tell, but are there things that you're looking at that suggest they have a handle on, and there are actually some specific things they might do to try and fix it?
Libby Cantrill (49:04)
No, and actually, you know, I was on the Hill, as you alluded to, you know, 25 years ago, and I had encouraged my boss at the time to co-sponsor legislation that would have done a few things that would have brought Social Security into balance, you know, in 30 years.
And she, you know, kind of pushed back, like, why would I co-sponsor something about trying to fix something so far in the future, which, by the way, and, you know, and it can easily be demagogued and kind of turned against me. So that has been the mentality of Republicans and Democrats alike, honestly.
But so, you know, the sad reality, though, is, is that the fixes now just have to be more draconian than the fixes 25 years ago.
And that's because this is more immediate. So what are those things? They're probably going to have to be a multitude. They're kind of a multitude of levers to bring Social Security back into balance and to sort of restore its
trajectory, and to ensure that's, you know, in existence over the next 30 years or so. One of those would be increasing the payroll tax. You know, we'll see about that. That's a little bit harder, it's kind of regressive, but it could be that. But you could also increase the cap
right now, you know, the Medicare taxes are only subject to the first $180,000, or what have you, of earnings. I think that cap will likely be lifted, and you might actually see the tax rate increase, but also that cap
increase. I think it will probably… some of the benefits will be means-tested. That's been something that's sort of discussed for a long time. You could also see, potentially, the way that, benefits are indexed for inflation changing. It would be
around the edges, but it could also make a difference. And then also potentially benefits, more index for the life expectancy. That would be, you know, over time, so none of this would affect
I think would ideally not affect beneficiaries now. I think they will be… really try to… to ensure that that doesn't happen. But there are lots of things they can do, but again, they're gonna be… it's much harder to do now than it would have been 25 years ago, so…
My boss at the time said, you should run for Congress and you should run on the mantle of Social Security reform.
George Mateyo (51:20)
You can fix it, right?
Libby Cantrill (51:21)
I did not do that, but yes, I mean, so I understand her point, which is, like, it is a difficult thing to sell to voters before you have to do it, and that is what our politics are today, is it doesn't really incentivize folks to do things in the future. It's much more so, you know, in response to crisis and what have you, unfortunately.
George Mateyo (51:39)
So let's try and end on a bit of good news. I think your slide number 37 is probably a great closing, reminder for people, which I think is a slide that I've
stolen, admittedly, a few times, else… there it is, other places, but I think it's a good reminder, and maybe you could just walk us through, you know, irrespective, in my view, irrespective of who wins.
Congress, who controls Congress. Dividing government is usually pretty good for markets, and furthermore, I think, once the midterm's technically clear.
that veil of uncertainty that's overhanging markets. And I , I know we're going through other, there's other things that are holding markets back potentially this year, but usually once that uncertainty clears, markets tend to revert higher. But maybe you've got another way of summarizing that here.
Libby Cantrill (52:18)
Yeah, no, I think that's exactly right. I think, you know, it's sort of trite, but it's true in that markets don't like uncertainty. And even though, you know, as we've said, it's not a huge change, regardless of what the outcome is in the congressional elections, I do think that having that
behind us and having split government typically. I don't know if I have it in this slide, but in this package I don't. But usually, the market performs the best under split government scenarios. So I think this is this kind of relief rally, if you will. Now, I think the one caveat, and George, you know this very well, is that usually when the market has bounced the year
after the midterms. It's usually because the year in the midterms has been very bad for the equity market. So this has been kind of a dead cat bounce, if you will, or whatever. But it still stands to, I think, reason that usually markets do better when there's more checks and balances, when there's kind of more balance in Washington. United control can be great, but it also can be scary because it's spend more spending.
And there are kind of none of those levers to hold parties accountable on both the left and the right. So yeah, this usually, usually the market does like more balance and hopefully next year won't be the exception.
George Mateyo (53:41)
Well, fingers crossed on all that. Again, we thank you so much for your insights, Libby. It's been great to see you and catch up with you again. We'll do this again two years from now, if not before, I'm sure.
Stay tuned, there's a lot of great things coming our way, and a lot of things to really pay attention to, not just the midterms, of course, but we appreciate everybody's time today. Thank you for spending it with us. Hope this was insightful. We will have a replay available later today or tomorrow at the latest, along with some of the slides we walked through this afternoon.
We're adjourned. Thank you again for your interest, and we'll talk to you all very soon. Have a good rest of the day.
Libby Cantrill (54:14)
Thank you.
The Key Wealth Institute is a team of highly experienced professionals representing various disciplines within wealth management who are dedicated to delivering timely insights and practical advice. From strategies designed to better manage your wealth, to guidance to help you better understand the world impacting your wealth, Key Wealth Institute provides proactive insights needed to navigate your financial journey.
With the 2026 midterm elections fast approaching, the stakes for investors are real. History shows midterm years tend to bring lower returns and more volatility, followed by a recovery once the results are in. At the same, today’s environment seems even more uncertain. So how should you tune out the noise and focus on what actually matters for your portfolio?
Rewatch George Mateyo, Chief Investment Officer of Key Wealth, Rajeev Sharma, Head of Fixed Income of Key Wealth, and special guest Libby Cantrill, Managing Director and Head of Public Policy at PIMCO, have a timely, nonpartisan conversation on how the political landscape could shape markets heading into November and beyond.
Key Takeaways
Midterm elections can create market uncertainty, but history shows markets often recover once election results are clear.
Investors should focus on policy issues that may impact the economy, including taxes, tariffs, inflation, and interest rates.
Staying disciplined and avoiding reactionary decisions can help investors navigate political headlines and market volatility.