Inside the Market
Host: Willy Walker
Guest: Kate Moore, Chief Investment Officer at Citi Wealth
Willy Walker: Next up is Kate Moore. Kate Moore has been a great friend of Walker and Dunlop’s. Kate has come on the Walker Webcast many times. She has presented at our Sun Valley Conference before, back when she was working at BlackRock, where she began as Chief Equities Strategist and went on to run a 50 billion dollar fund at Blackrock. She is now Chief Investment Officer at Citi Wealth, guiding all of Citi Group's investments in their wealth management business around the globe. Kate is incredibly insightful on the markets. What she decides and what she thinks has a massive impact on not only what Citi does with their money, but what investors around the globe do. Kate is a product of the University of Virginia as well as the University of Chicago, where she got her master's degree. Kate is known for her studies of game theory. Also, her incredible knowledge of the macroeconomic environment and all that goes into it are what make Kate such an incredibly insightful and capable speaker. With that, Kate Moore.
Kate Moore: I am an obsessive AI user myself. Someone was asking about what tools to use. I have integrated Perplexity into every part of my research process right now. I love the references to the different primary documents. I love that I can test and build stuff in tables. And the number of coders I need on my investment team has shrunk by about 80 percent because of the leverage we can use in AI tools. But that's not what I'm here to talk to you about today. I have the distinct pleasure of talking about the macroeconomy and the markets at a time when there's an enormous amount of volatility. So, I'm back there having an extra tea while Mark's speaking, listening to the last parts of his comments. In case some of you guys have not been on your phone, let me tell you what happened. A speaker for Trump came out and suggested he would be firing Powell imminently. Immediately, the curve steepened. 30-Year surged five to seven basis points. The 2-Year tanked. We had equity markets sell off, the dollar weakened, and it was another one of 2025's fall events. Just about five minutes ago, as I'm finishing getting the mic on, I'm ready to come out here. Trump says, “No, that's not actually the case. I have no intention of firing Powell. We have another eight to nine months with him, after which we will appoint a new Fed chair.” So, I just want to say my stomach did like six or seven flip-flops in the time between Mark was finishing up and when I got out here. What am I going to tell all of you guys about expectations for the economy and for rates when it's changing right as I speak? So, I'm going to give you a little preview, because we're going to talk through the macroeconomy and then through markets. Then I'm really looking forward to taking questions and having a conversation with all of you. I don't think the economy in the U.S. is in a place where we need to massively ease policy. In fact, I would classify the U.S. economy as solid, even with some percolating areas of inflation, and, at the same time, some areas of disinflation. I would characterize the equity market as somewhat fragile. I'll talk about that in a moment, and the bond market as being priced to perfection. So, I have some anxiety and some uncertainty. Now a few of you guys know me. Some of you may know that I do a fair amount of media. Last week I had the fun, which I've had fun on this a number of times, of fighting with Joe Kernen on Squawk Box live on air. He said to me, “Kate, you've been talking about being uncomfortable with the market levels for a while now. So, you've just missed all of this rally.” Let me just say, as a macro investor and as the Chief Investment Officer for Citi, responsible for really thinking about risk in our client portfolios, I am paid to be uncomfortable about markets. My job is to find areas where there could be risk and trying to mitigate those risks for our clients. But we have participated, and I have continued to have a significant large position in portfolios in large cap equities, which we'll talk about in a bit. Okay, as mentioned, here's the run of show. I'm going to set the stage a little bit in terms of market moves. We're going to get into this tug of war on the macro environment, which I think lands us in this solid economic environment. Then I'm going to talk about the shifting market fundamentals, where there may be opportunities, and where I see some areas of weakness. Then we'll open it up for questions. I can talk to you about how I set up portfolios, if anyone cares. OK, setting the stage, I always like to start my presentations with a chart on the left-hand side here. This shows in 2025 where we are for all of the major asset classes. The blue bars are kind of the range of the performance over the course of the year to date. The green dots are where we actually are. You can see there's been a pretty big spread across all asset classes, and you can tell whatever story you feel like telling with this chart. If you want to talk about a market that is resilient, you can talk about the fact that equity markets have bounced back considerably, and we're in the green across the board. If you want to talk about market that is fragile, you can about the best-performing asset class year-to-date is gold, and by a long mile. For the record, I did not include Bitcoin here because of the volatility. But crypto and digital assets in general have also performed really well at a time where investors have looked to diversify their portfolios. If you want to tell a story of stability, well, that's a really hard one. All of you guys know this. But measures of equity market volatility have been all over the map in less than seven months this year. Following Trump's tariff announcements in early April, the VIX index spiked to over 50. That's the highest level since the financial crisis. Of course, they're now settled back down to the 16, 17 level, much more normal. Of course, there was a spike just a moment ago before I spoke. This kind of movement in volatility makes it really difficult for long-term investors and for people who are trying to forecast their future cash flows. I think this has led to a significant shake-up in terms of confidence on the parts of much of the investment community and paralysis when it comes to putting new money to work. The other thing that's leading to paralysis in terms of putting new money to work is this chart on the right-hand side. It looks a little bouncy. Here's all you need to know. Both equities and credit are close to their hundredth percentile of valuation over a 15-year look-back history. This is another way of saying nothing's cheap. Nothing's cheap. Uncertainty's high. The market internals are confusing. They're confusing even intraday, and it's making it very difficult for people to put new money to work. I'll tell you just this, for Citi clients, Citi Bank's a third of the global billionaires. We have incredible global reach. I'm seeing some awesome data now that I'm part of the organization. Many of our clients, even the most sophisticated in their day jobs, are sitting on enormous cash piles. We're doing our best to try and convince them that we see themes and opportunities. But frankly, I have sympathy, given what I just said a moment ago around the uncertainty of sitting on a little bit of cash. Okay. I wanted to start off with the tax bill here, because we've just gotten through the approval. Most of you guys will know all the major details here. But I want to talk about an important aspect of this tax and spending bill, because it's going to lay the groundwork for some challenges in the U.S. economy over the next couple of years. The most important thing is that the tax, while maybe, neutral term, ‘stimulative’ and adding a little bit of fiscal juice in year one and two, is a regressive tax bill. How many of you guys know what regressive tax bills mean? It simply means it disproportionately benefits high earners and high household income and hurts low earners in low household income. The opposite of that is progressive, which hurts high earner and high house income and benefits low income. Why is this important? Well, we have to really study consumption trends over the next couple of years, because the low-end consumer has already been weakening, even before this. Let me put some numbers around this. The top 1 percent by income of taxpayers will receive 21 percent of the benefits of this bill. It's even worse in some states where there was significant trading of horses or a lot of pork put into the bill as a result to get the votes. In Texas, for example, 45 percent of the benefits of the tax bill accrued at the top 5 percent of earners. You can say to me, “Kate, what's the big deal? You know, hopefully these people will continue to spend and this supports the economy.” That may be the case, but I'm going to suggest in future out years if the lower-income cohorts are super challenged by the impact of this tax bill, it's going to lead to even further political swings to the left and to the right, and even more challenge for companies that are trying to plan on policy. If we hollow out the middle and if we challenge the lower and only benefit the upper, then we end up with a lot more volatility in politics. Let me just make a comment here. This is not a comment on my own politics. I have prided myself on making money in all administrations, in all parts of the cycle. But I have to recognize and identify where there could be challenges to the future growth story, even if it doesn't exist today. So, we're going to have to see what kind of supplemental aid some of these households that were already facing some challenges this late in the cycle might receive from their state and local, and how companies handle it. Okay, but the real problem here is around the debt. I think this is probably near and dear to most of your hearts here. The challenge is, there is no bipartisan support, there's no single party support, for reducing overall debt in this country. You guys all know this, but last time there was significant deficit reduction was when? It was the late 1990s, during Clinton's administration. Every president in the last 25 years has added to debt. There was like a small reversal during Biden's presidency, but that was just a hiccup because of the post-pandemic. There is no appetite to make the hard decisions in the U.S. right now. This makes me a little bit nervous, because while we've had the benefit for many, many decades of the reserve currency of everyone wanting to own dollars, I’ve got to tell you, my international clients and most of the companies I speak with outside of the U.S. are now starting to ask this question, “Is U.S. growth sustainable? Do want to put marginal money into U.S. debt if there is no discipline?” Do I think this is going to happen in 2025? 100 percent, no. But as institutional asset allocators think about their forward allocation, how much to own in stocks, how much own in bonds, what is the composition of each geography? These conversations are coming up more regularly. I think it's going to have a significant impact on the demand for U.S. debt over the medium term. But there's another aspect to this. You can say, “Hey, Kate, it's true that the Congressional Budget Office has scored the tax and spending bill. And it said, basically, it will add between $3 and $4 trillion to the U.S. debt, over the course of the next 10 years. But a lot of that's going to be offset by tariffs.” Well, these are big hopes and dreams to keep the current set of tariffs on. I'm going to go through that now. Oh my gosh, making this slide was a bit of a joke, okay? What could I put on this slide that was going to be relevant two days later? I could list the number of tariffs that have been announced since the July 9th deadline. I could talk about the areas where we have the biggest trade. Here's what we know. Minute by minute, day by day, the mileposts are changing around trade. But there are a few things I want to focus on, and let me continue with this thought on how we pay for the tax and spending bill in the U.S. In an ideal world, we take in a lot of tariff revenue, and that offsets the tax cuts. In fact, we've taken in about $100 billion so far this year. If we were to stay on track, it could be up to $300 billion by the end of the year, offsetting a lot of the tax and spending. That helps to reduce the deficit impact; that's great news. The problem is that the majority of the tariff revenue that's being collected right now has a decent probability of having to get returned. Let me explain. So, we know that under the International Emergency Economic Protective Act, the IEPA, which we call it, most of these tariffs were put in place. The challenge is, the International Trade Court on May 28th already ruled them illegal while there's been an injunction, a stay. This will now be revisited by the Supreme Court. The chances, frankly, that the terms and the requirements necessary to institute these tariffs are held up in court are not high. There's a significant opportunity, I think, for countries that were looking to negotiate with the U.S. before this May 28th ruling to stand back, to not show their cards, to not come to the table because the way that the tariffs are structured today may not stay in place. This is why I think the Trump administration was not successful in having more deals done before the July 9th deadline, why they had to pivot instead, and then offer up new letters and new numbers to some of our key trading partners. It increases the amount of uncertainty in the market. The truth of the matter is we can all argue that running a massive trade deficit is not the ideal situation for the United States. But we may need to approach our relationships with our trade partners much differently. In fact, the sectoral tariffs, which the administration is pursuing in a number of fronts and has already instituted in a couple of key areas, are much more likely to stay and provide more consistent revenue, offsetting the tax and spending bill. That is a sustainable path. But the IEPA tariffs are not. I expect we're going to have a lot of volatility about what comes into the government in terms of fees and what leaves. Refunds, we may have to provide some of our trading partners. And of course, what does this all do? It increases the amount of confusion and stress and uncertainty for corporate decision makers. It also, as I mentioned before, holds back some of our trading partners from coming to the table. They're going to wait it out. That means in the absence of good information, we hold back on capex. We wait a minute on hiring. We think long and hard about investment that may be multi-year investment as opposed to stuff that's necessary in the very near term. This is all playing out in real time in the market. I'm going to talk about corporate confidence a little bit more in a moment, but this is inflation week, and so, I'm excited to be here talking to you about inflation. Just by a show of hands, making sure everyone's awake and had enough caffeine after they've gone through the AI presentation, how many people here feel like inflation is in a good place today in the middle of July of 2025? Okay, decent show of hands. I'd say that's more than half. How many people expect inflation to be higher 12 months from now? It’s almost the same number of hands. People feel like it's in a good place, but may rise. In fact, that is what all of the survey data on inflation is also illustrating. It's a kind of a dense table. Oh, it's not up here. It's just, where is my table? My table on the upper right-hand side of this slide basically shows us in all the survey data that almost everything, whether it's consumer confidence or corporate confidence or any kind of measures implied by market pricing, everyone thinks inflation is going to rise over the next six to 12 months, even as we've seen a disinflationary trend, CPI, PPI, PCE, all of these core measures coming down over the recent past. Okay, we had a big debate at Citi yesterday and I would argue this debate happened across the street around the inflation data. You guys are having fun here in Sun Valley. I was parsing through everything in the CPI report for June. Here's what happened. The overall number came out. It looked pretty good, was somewhat benign. And everyone said, “Okay, this is a good trend. It's setting the Fed up to cut interest rates.” Unfortunately, once you dug beneath the surface, it looked a lot uglier. 50 percent of the components of the consumer price index are now running at a 5 percent annualized rate—5 percent. Meaningfully higher than the print we got on CPI. The weaknesses in CPI were around consumption and services consumption in particular: hotels, leisure, dining outside of the home. All these things weakened because demand weakened, and so the pricing weakened. The places where we saw stronger price data were around those areas that were being directly impacted by tariffs. I don't know when all of the tariff impact is going to hit the inflation data. Maybe it'll be a big bang. Maybe it will be a slow trickle. Maybe we'll see it in one part or another and not consistently across the board. But I found yesterday's inflation report, well, a little confusing and a little troubling at the same time. This morning's PPI report, producer prices, showed less inflationary impact from goods, but it doesn't include a lot of import data. So, I'm not sure that's as important. But the key point here is that the uncertainty around the inflation outlook is super high. Companies, the Fed, not just Powell, but all the voters, all the 12 voters on the FOMC, and many economists are all expecting inflation to rise. At the same time, it's going to be a very mixed bag. So, for some of you guys who may know me, I like to combine the macro and the micro, all the big picture stuff of what companies are doing. Let me just tell you, we've started to hear from some of the large retailers how they're handling these price increases. Companies like Walmart, companies like Costco have said, instead of creating sticker shock on some of the products that are facing the largest tariffs and have had a significant increase in terms of pricing, they're actually spreading the price increase across many products, even those that may not be impacted by tariffs. This is a generalized, slow trickle up in terms of price levels for those retailers that want to bring people in the door and that have a big, diverse set of goods that they sell. Small companies are not getting that benefit. If you're a niche retailer, if you're specialty product, you don't have the opportunity, frankly, to do what the big retailers are doing. I think for consumer companies, we're going to see an increasing spread between the haves and the have-nots when it comes to dealing with the tariffs. And this is going to be a bit of a challenge. I'd also know that consumers anchor onto the products that they spend on most often. How many of you guys remember that at the election last year, the conversation was almost entirely around egg prices? Like, oh my gosh, here we are on eggs again, and again, and again. It was like, we're not importing eggs. We have an avian flu. But those details were lost on a lot of voters. But that was a consistent, both Republicans' and Democrats', campaign discussion. So, if consumers are seeing small bleed-up in many of their commonly purchased items, their inflation expectations rise. It changes their consumption patterns and creates more volatility. So, you heard me, I don't think inflation's in great shape. If I was the Fed, and I'm glad I'm not a Fed voter, I probably wouldn't be cutting rates yet. But here's where I'll kind of anchor. The labor market is actually in solid shape. Now, you may say to me, “Kate, the labor market's in solid shape, but some of that's because we've had a freeze in terms of the overall hiring and firing.” That's true. But we've added close to 800,000 new jobs in the U.S. since the start of 2025. Remember, we've had calls for recession every year for the last three years. Adding 800,000 net new jobs is not consistent with that environment. Importantly, wage growth is still strong. In fact, we are actually seeing more and more employers thinking about expanding their workforce domestically as a result of some of this administration's policies. This is all pretty good news, and it actually leads to some good stability in the market. As you remember, the Fed has this dual mandate. It is price stability and full employment. They don't target GDP. They target the labor market and prices. So far, the labor markets look good. But here's a problem. This is around the amount of foreign-born workers who have contributed to the economy and to the labor force over the course, not just of the last five years, but for longer. I show this chart on the right, where you see a significant increase in terms of immigration impact on the overall labor force. But I'm going to tell a couple stories around this that I think are critically important. Most of you guys are probably not as nerdy as I am. I certainly hope not, because I'm pretty lame sometimes. The Dallas Fed came out with a paper just over a week ago talking about the impact of immigration on the overall economy, and a big portion of this is, what would happen to overall GDP growth since we've stopped letting new people into the country legally and illegally. The answer is, they're projecting about an 80 basis point or slightly less than 1 percent drag on GDP in 2025 and more drag actually into 2026 and beyond. It really hurts growth. Why is that? Most of the new entrants into the labor force, who are immigrants, have a very high propensity to spend. These are lower income, lower wage workers. Almost all of what they earn leaves their pockets in terms of consumption. That's not the case with high income households or high earners. Another important thing to remember here is that a significant number of the people, (we can agree or disagree with the policy, but this is just a fact) over the last five years that have entered the U.S. have come in on quasi-legal status. They've come in with parole or asylum-seeking privileges. They've received social security numbers. They are working legally in the U.S. even if they are not legal immigrants. This is complicated because this means that there are many employers around the country (We're not just talking agricultural workers. We're not just talking construction workers.) who are employing people with Social Security numbers who are paying taxes with a high propensity to spend, who are now targeted for getting kicked out of the country. I was going to use a much more colorful word, but I remembered we were getting recorded. I'm going to tell this story that a labor lawyer shared with me last week. So, this guy works with big companies that are trying to deal with immigration issues. One of his clients is a huge energy drinks company. They decided they wanted to build, because they believe in it, and also because they know it would be consistent with this administration's policies, a manufacturing facility, aluminum can manufacturing and bottling facility, in Scranton, Pennsylvania, apparently right next to Dunder Mifflin. This factory would employ 1,000 people. State-of-the-art. Starting salary, $35 an hour, full benefits, and they could not find a worker. No one in the greater Pennsylvania area wanted to work at this manufacturing facility. And they tried; they tried. They kept on raising wages. These were not 12-hour shifts. Again, this is a high-tech factory. We're not actually slogging through offal or something. And eventually what they ended up having to do was hire this lawyer and this entire legal team to help bring workers in from some of the canning and manufacturing facilities that this energy drink company has overseas. They had to legally import labor because they couldn't source it in the U.S. Most of you have heard this stat, but there are 400,000 manufacturing jobs in the United States that are unfilled right now—unfilled because there's a skill mismatch, because there's a geography mismatch, because Gen Z all wants to be influencers and not work inside. I'm not sure. But there's this interesting tension in the market right now where there are jobs to be had. We have filled many of these jobs with immigrants. We're cutting off that supply. It's going to provide a challenge to service pricing going forward unless companies significantly invest in technology systems, AI, whatever you want to call it, to permanently replace the workforce. Is that an outcome we want? I'm not sure, but the labor market itself is not weak. There are just mismatches. This leads me to kind of this sort of consumer side here. So, I talked about some fractures in the consumer. I'll tell you, this really started in the second quarter of 2024, where we started to hear from companies, particularly retailers that sell to low-end consumers, that they were seeing a significant change in terms of overall behavior—that actually, those consumers looked weak. By the end of the earnings season, people were less worried because some of the big retailers said, “Hey, don't worry, our volumes look good.” But the truth of the matter is we are like five quarters in to lower income consumers slowing down their spending because of inflation, because of uncertainty. It's not clear. But wage growth is still solid on average. We have close to 4 percent wage growth in the U.S., and inflation is coming down a little bit. This should lead to better spending. Of course, U.S. consumers love to spend on whatever they can. But I am worried about the confidence, not just the low end, but also at the middle end, and whether or not it will be able to continue if, again, the basket of goods that they are generally consuming, eggs or whatever it is, school supplies at this time of year, continues to percolate in prices. The thing is, we don't really see consumers, especially at the high end, cut back their overall spending unless their neighbors or their friends or their cousins lose their jobs. There has to be a real degradation in the labor market. That hasn't happened. Maybe there’s some paralysis. Maybe there's some mismatch, as I was just suggesting. But there have been no massive layoffs. So, I'm watching for that really closely to have an impact on overall spending. I do want to make this other point. I'm going to classify most of us in here in the upper half of income earners. We've seen appreciation from asset prices. Our houses are more valuable. Most of us have investment portfolios. Those are significantly more valuable, but this segment, our segment, is what's making up all of the consumption in the U.S. right now. As I said before, these fractures have medium-term implications on policy and politics, leading to some whipsawing and some difficulty for those who are making long-term decisions to really forecast. Speaking of that, here's what I stress out the most about: corporate confidence. Equity markets are at an all-time high. Everyone's feeling great. And there has never been a gap that I've seen like this between what companies say to you in private, what they say in anonymous surveys, and what shows up in their actions. Let me explain. No CEO or CFO wants to stand up right now and say, “The uncertainty factor is making me hold back on capital expenditure. I'm slowing down my hiring. I'm going to control costs at certain places. I'm going to put on the shelf different projects I expected to do in 2025, because I don't get the policy.” No one's saying that publicly. But privately, in all of these surveys, whether they're CEO surveys or CFA surveys, meetings that we have with corporate management teams, they say, “We've hit the pause button.” It's not negative, but it's, “We hit the pause button.” And hitting the pause button ends up being a challenge because it takes quarters, not days, to restart once the pause is hit. And then you get these anonymous surveys, whether it's the Richmond Fed Survey, the Dallas Fed Survey which focuses on energy companies, conference board, CEOs, CFOs, corporate decision makers, and they're all saying the same thing. They expect to hire fewer people in the next six months. They're actually looking for job contraction, stable or lower Capex. In the case of the energy sector, a significant decline in Capex, and they are not looking to make decisions until the beginning part of next year. Here's my optimistic scenario. Once the dust settles on tariffs and companies feel like they can start predicting their costs, they'll recognize that expensing of equipment and plants and things that are provided for in the tax and spending bill really are going to be net positive. And they will engage in more investment into 2026. But because that provision has been made permanent, there's also not a rush to do it in January. If it was a one-year or two-year provision, companies may feel an urge to spend once they had more clarity, but they don't right now. So, I'll tell you, we've just kicked off earnings season. I'm particularly proud that Citi had some awesome numbers yesterday. And we're going to be listening very, very closely for how both CEOs and CFOs talk about their future plans. Because the recent information they've given us is, they're worried about tariffs, they're worry about demand destruction, they're worried about inflation, and they're holding off. They've hit the pause button. Okay, here's a little fun fact. It comes from my previous shop. So, I worked with a lot of the quants at BlackRock, and they did a lot studying of the language coming out of earnings calls. They would look at the word placement, the sentiment around the word, all these sorts of things, and who said them. What they found was that CEOs are consistently super optimistic. They always want to project a positive strategy and a great future outlook. But the CFOs tended to be most accurate. They were most anchored in the numbers and the data, and the day-to-day decisions. So, as we go through this earnings season, to the extent that you guys care and want to listen, pay more attention to what the CFOs say when they communicate with investors than the CEOs, who are going to try and give a rosier picture. I'm going to talk about equities here for a moment. We're going to do some equities, a little fixed income, a couple comments on how I'm kind of hedging portfolios, and then open it up to a few questions. Equities are at new all-time high. I started off this conversation with you guys today telling you I was a bit uncomfortable with that. For some of you guys who know me, I have several decades’ worth of history of taking a lot of equity risk. I ran some pretty high octane products at BlackRock. I like nothing more than finding awesome investment ideas and then using a little leverage. So I am not afraid of risk. But I am a little bit nervous about this equity market for two major reasons. Number one: the breadth. Now, on the one hand, you can say, “Hey, this chart on the left-hand side looks awesome. We have this incredible free cash flow and profits generation coming from tech, communication services, all of these amazing areas of entrepreneurship and innovation in the United States.” That's true, but if you remember at the beginning of 2025, everyone was looking for a broadening out in the equity market, not just in terms of sectors, but also in terms of regions. That call that the U.S. could not continue to outperform was loud. People were putting more money into European equities, into Japanese equities. They were buying lower quality parts of the U.S. market. I'm thinking about consumer staples, lower quality part of the financial services, because they were tired of tech and communication services leading the way. The problem is that in an environment of uncertainty, which I think we're in right now, what do investors do and what should we do? You stay disciplined about free cash flow generation. Companies that can put up profits can continue to grow their earnings in all parts of an economic cycle. That's what we have in this amazing area of the U.S. market, technology, communication services, and related. So, in other words, I don't think it's a time to step away. But here's something to think about. We may not have the breadth. We may have a concentrated market. I may think that's going to continue. But there have been a few things that have really led to the better story for corporate profitability in the U.S. over the last 20 years that we have to keep our eyes on. The three largest contributors to corporate profitability have been (1) globalization, (2) globalization, and (3) low interest rates. Let me explain. Almost all, the vast majority of margin expansion for U.S. companies over the last 20 years has come from sourcing goods, services, human capital around the world. You pick the best workers, you pick the cheapest factory, and you pick that region where you can get business done the most efficiently. That has been a huge contributor. Even before some of these changes around tariffs, we were in a pattern of shifting global alliances and shifting trade relationships. Here's what I'll say. Companies that think about realigning their supply chains are going to do it, but are going to do conservatively, in part because it takes a huge amount of capital and in part because we simply don't have the same type of machinery, equipment, and infrastructure in other countries as we do in the big manufacturing areas of China and the rest of Southeast Asia. The other area that's been a big contributor to corporate profitability has been taxes. But remember, the second reason I said it was globalization. That's because it's been lower effective tax rates outside of the U.S. that’s been a net beneficiary to corporate margins. And then, of course, low interest rates have been a contributor. I just want us to all ask ourselves, given the fact that consensus expects margins to stay flat to improving over the course of this year, are some of these risks? And if that's the case, I'm going to go back to my point from a moment ago. This is where we have to stay very anchored on high-quality companies can grow their earnings to all parts of an economic cycle, who generate lots of free cash. Surprise, surprise, that takes us back to continuing to own a huge portion of our folio. Communication services, AI and related, and the sectors, pardon me, and industries that are making use of technology today become more efficient. Oh man, I know you guys care about fixed income and rates, but boy, this has been a weird year. And I was going to make two points on this one. Number one, just as equities are priced to perfection, so is credit. So, there's not been a lot of juice there for us if we've been trying to allocate. But when it comes to like sovereign debt, and particularly U.S. government debt, this is kind of where I want to dig in for a hot minute. Then I'm going to take some questions after this. It has been very difficult for anyone making a broad asset allocation decision to want to own long-term U.S. debt. It's not just the question around debt sustainability. It's just the question around whether or not the institutions like the Fed are going to be independent. It is also the question about whether or not we have entered into a new paradigm in terms of inflation. Sure, we've come down sub 3 percent, but in a world where companies have to invest a lot to realign their supply chains, where tariffs may lead to significant changes in price levels, where we're having significant climate events that impact a number of inputs, where resource nationalization, where countries try and protect their raw materials, whether that's rare earths or copper or anything else, and therefore, you know, charge much higher prices to the U.S., who net imports all this stuff, this is going to be a complicated environment. And I think inflation stays a little higher. It's very possible that we see long end yields rise closer to 5 percent and stay there for the next year. This means that all of us who are fixed income investors have been doing the same thing. We've had the majority of our fixed income exposure in the short end of the curve, short duration, clipping a little bit of coupon, and then having to take our risk elsewhere. And the bigger problem here is that because there are so many reasons for yields to stay elevated in the long end, go four or five basis points up on the third year, as I mentioned just before I stepped in, we have a situation where the fixed income market or bonds in general have not provided the same ballast for multi-asset investors as they have in the past. So, people’s confidence in that as a portfolio tool has been shaken. Where do we end at the end of this year in terms of the 10-year? I don't know. But I think you're hearing my bias here, that inflation is likely to stay a little bit stickier. The labor market, while facing some challenges medium term, looks pretty healthy. The impetus to really cut rates because we are having a significant deterioration in the economy isn't there. I would expect rates to trickle up from here instead of down. My last point here, we've been looking and trying to get more creative about how we hedge our portfolios if we don't think bonds are the ballast. Like a lot of people, I added gold into the portfolio. By the way, just as a point, we all grow, and our views and our approaches evolve over time. There was a point where I used to say, “Why add gold at all? It doesn't have a yield to it.” There are a million different reasons why people would want to invest in it. It's a complicated asset. I've decided, actually, that in the absence of certainty, gold looks like a better hedge for me than cash, which I'm not getting as much of a coupon as I want, or the long end. We also know that as faith in the dollar has declined, global central banks have continued to reallocate away from dollars. This is a multi-year process, not a 2025 story, in adding more gold, precious metals, and in some cases, digital assets and crypto reserves into their overall portfolio. I think this trend continues. We don't currently have crypto in the portfolio. The crypto team works for me at Citi, and we're looking to integrate that, but it's really hard when you can't model the relationship between crypto assets and everything else, you're trying to build from a risk perspective. So, stay tuned on that front. So with that, I know I have a few more minutes, but I'm happy to take questions or hear your feedback on the state of the world that I outlined. There are mic runners. Please don't be shy, or I'm going to call on Jan. Do we have a question?
Speaker 4: Hi, I have a question. Okay. What are your assumptions about immigration trends as you project GDP going forward?
Kate Moore: Yeah, baseline assumption is that we actually have no net immigration over the course of 2025 and into 2026. I think we see significant dislocations in parts of the market, and I'm talking not just about agriculture, but across services across the board, or massive challenges to small and mid-sized businesses. There may be pressure going into the midterms to slightly shift the immigration policy. But I would expect actually the lack of immigration. As I was saying, I'm going to align myself with the Dallas Fed researchers, that we'll see a drag because of that to GDP over the course of ‘25, but no net inflow. I'm not going to say a significant decline, because there still are means to get visaed immigrants into certain parts of the labor. Do you have another question?
Speaker 5: One, are you staying for cocktails tonight?
Kate Moore: Alas, I have to head back to Jackson Hole. My dirty secret is I split my time between New York City and Jackson Hole, so I drove here yesterday, yeah.
Speaker 5: And two, where do you think the 10-year lands by end of the year?
Kate Moore: I think there's a greater than 50 percent chance that we end north of 5 percent on the 10-year. The question is, how many dial for dollars does the administration and treasury do? How many phone calls do they make in terms of buying and bidding? But because of my view on a more likely slight drift up in inflation and the lack of necessity for the Fed to cut rates and some real concerns about debt sustainability and the fact that foreign buyers are asking this question about whether or not they want to put their marginal dollars into U.S. debt, I think 5 percent is realistic.
Speaker 6: Kate, I'd like to ask you about the deficit. There are a lot of alarmists out there, Ray Dalio being one of them, saying the trajectory we're on is unsustainable. Yeah. You know, if we don't either increase revenue taxes, which action is very politically unfavorable, or reduce spending, also politically unfavorable…
Kate Moore: Yeah, by any party.
Speaker 6: It's going to get worse. It just is. And so, seems to me the Senate and the House, their incentive is not to reduce the deficit. Their incentive is to bring money back to their constituents. And so, if we have a situation like we have now, the two parties hate each other more than I can ever recall in my life. Problem doesn't seem to be fixing itself anytime soon. So, it seems Ray could be right. Are we heading toward a fiscal cliff? What do your models show you about that? When do we get to the point when the cost to service our debt is so high, we don't have the funds to pay for Medicaid, for defense spending, and for social security?
Kate Moore: Yeah, I think you know this because you're asking the question. We are less than 10 years out from not being able to provide some of the social safety net that people thought was guaranteed in their lifetime. But let me just up you on, you said, the House and the Senate, Congress at large, Republicans and Democrats don't talk to each other. But I would say there are two things that Republicans and the Democrats agree on wholeheartedly. China is our common enemy. And we have entered a period of significant strategic competition that is unlikely to reverse. That's one major thing they can agree on. And the other thing they could agree on is there is exactly no appetite for fiscal discipline. So, maybe we should have a dinner party with everyone together just around those two topics and get the dialog going again. Look, I'm not going to call Ray Dalio wrong. This is always a question of timing. And the thing that saved the U.S. for so long as we've continued to run up the deficit has been the dollar. The dollar is the global reserve currency. And people need to buy dollars. They've traded. Of course, there's been this deficit that's also reinforced the cycle. And we've been in a situation where we have basically bought ourselves a huge amount of time. I will tell you in the course of my nearly 30-year career, this is the first time global investors that I talk to are really questioning how many dollars they want to own. This is, again, one of the reasons why I added gold to the portfolio, whether or not they should diversify into other currencies. There's not going to be any replacement, but it's the marginal amount of money, the marginal investment that's starting to shift. Global asset allocators are going, “Okay, cool. I may not want to step away from these amazing U.S. companies that are leaders in all the technology, and kind of advanced thinking sectors and industries. But I may want to reduce my exposure to debt in the U. S. And I may want to, on balance, add more to my home country.” We've heard this from a lot of our European clients, adding more German bonds, adding more U. K. Debt. We've heard this certainly from our Japanese clients, who are talking about, for the first time in a long time, adding JGBs into their portfolio. So, there is this subtle shift, and it may not be a waterfall, but it makes the U.S. debt sustainability even more challenging simply because people feel like there are alternatives. To be candid, I'm a little bit worried about this over the medium term, but not so much over the near term. And it's going to be one of the things we study very closely, frankly, whether or not it has a significant impact on asset prices. But let's watch the dollar. I mean, I'm going to go back here to this chart at the very beginning, see if I can click the button fast enough. We had the worst start to the dollar in terms of currency move. Hello, bird. I know I'm getting older because I'm really into birds these days. I went to Africa in September with my mom and all I wanted to do was take pictures of the birds. She's like, “What happened to you?” I'm like, “I don't know. The birds are amazing.” The first half of the year had the largest signal decline in terms of the U.S. dollar. And there are no signs of this abating. In fact, during that little tweet storm, yes, no, we're firing Powell. Maybe we'll keep him. That happened right before I got on stage. The dollar had a big drop, like 60 to 70 basis points at one point. That's a huge single day move. I just think the willingness of people to continue to hold dollars, you know, continues to deteriorate. This is what I'll say, maybe not near term, but I'm not betting against Ray Dalio on this one. I do suggest that incremental money is being put into other asset classes, more to other sovereign debt, diversification in terms of currency. I think we should expect, especially with introduction of stable coins, more diversification from central bank reserves away from U.S. dollars. The question in the back?
Speaker 7: They've asked me to repeat the first question, and it was that we've had two very important Supreme Court rulings in the last couple of days: the first on executive power, meaning that the president can hire and fire who he likes, and the second was that district judges can no longer pass national injunctions, which leads to the likelihood of venue shopping for businesses between red and blue states. The thinking is that blue states will be tied up in litigation, and the red states will move forward with business. I just wondered if you'd given any thought to this in your investments.
Kate Moore: Yeah, we've been talking a lot about this. The truth of the matter is there's a huge amount of innovation in both red and blue states so far. There's been discussion, but I've not seen any change in terms of companies thinking to reallocate. In fact, some of the big public companies that have talked about reallocating their headquarters or their workforce to red states haven't abandoned their blue states. Let me just give you an analogy here. Remember some years ago, and this coincided with Trump's first term, but also was around sustainability and supply chains kind of writ large over a couple different administrations, a lot of companies started talking about pulling away from China. We're going to realign. Maybe that was they were going to build in Vietnam. Maybe they were going to build in India. And some of that did happen. That didn't mean they closed their factories in China. It was an “and,” not an “or” strategy. I think people want to be closer to the end consumers. They understand that employing people in a variety of different states is very good for their brands. But I would also suggest that people need to move where there has historically been a significant influx in labor. I mentioned this point earlier around that energy beverage company, who in part chose the Pennsylvania location because there was a significant improvement in terms of immigration into the state. They thought they would be able to get workers. I know this has been a rationale for some of the manufacturers I've talked to in terms of looking at Texas. But if that reverses, I think some of the decision becomes more complicated. So, I think you raise a really interesting point about where companies want to be domiciled, where they want to headquartered. But a lot is going to depend on labor availability and not just local tax laws. So, I guess I would say California, a very blue state, has just as much innovation as some parts of Texas. We see stuff on the East Coast, in the middle of the country. I just don't know that it's so much of a black and white or blue and red story. I think this country, in general, just really sets up the stage beautifully for entrepreneurialism. The allocation of capital is second to none in this world. So, I'm just bullish the U.S., regardless. Is there another question? Got one in the middle? Mic coming your way.
Speaker 8: Do you run models where you try to prognosticate what inflation is going to be going forward to, say, ‘27 and ‘28, and therefore where the 10-year will be during that time period? Because being in the real estate business, obviously, inflation and interest rates are the two biggest impacts on our business and our profitability.
Kate Moore: Right, yeah. There are a whole team of Ph.D. economists in a different team and city that try and do that. I will tell you, just like all economic forecasts, they get revised, sometimes daily. Example and point here: yesterday, following the CPI release, there was a calculation for what the feed-through would be to the core PCE, which is the Fed’s preferred inflation measure. And because of the components in CPI, it was looking to add 0.3, 0.4 onto the PCE. This morning after PPI, our same set of economists, all Ph.Ds. from really storied institutions, took it down again by another eight basis points. The volatility in these forecasts is insane. It partly because we don't know what tariffs look like, and we don't know what growth is going to look like. We see some of these challenges, but I think they're best guesses. I wish I had an answer for you, and I know it would make running your business a lot easier, but all I would suggest is, I tend to look at the median economic forecast, the bands plus or minus one standard deviation around them, and try to best project. In this case, because inflation expectations, as I showed on a chart earlier, are all pretty lofty across the board, I think people are expecting higher prices, and sometimes that can be, not always, but sometimes, it can be a self-fulfilling prophecy. I don't think rates are coming down a lot, unfortunately. Mic over here.
Speaker 9: Yeah, two questions related to your last couple of themes. The first one, as it relates to currency and repatriating dollars back overseas. So, once the rest of the globe begins to smarten up and starts putting capital back into U.S. real estate, when they ultimately have to repatriate home, do you expect hedging costs to increase, stay neutral, or come down? I know you're going to say it depends upon the currency. But generally speaking, what do you think that vector is? And then the second question on your theme about, I hear you that you're long U.S., but given what's about to happen with your mayor in New York, I'm kind of curious when Citi's going to relocate to DFW. By the way, we’ve got a lot of nonstop flights from DFW to Jackson Hole. It's true. And is the Texas Stock Exchange going to be a reality? Because we don't really need an in-person stock exchange anymore.
Kate Moore: We don't need any in-person stock exchange. Occasionally, I go down to the New York Stock Exchange. CNBC shoots some shows and stuff down there. I go on there, and it's like 30 guys still wearing the jackets because they want to look cool in the jackets, mostly drinking Starbucks. It's like dead quiet. There are no callouts. Why are they even here? It's a beautiful building. But this is theater at this point. I don't think we're relocating and creating a stock exchange in Texas, in large part because we don't need a physical plant, right? I can't opine on the New York mayoral race because I'm as confused by all of it as you are. What I will tell you, and this goes back to one of my earlier comments around politics, there are huge segments of the country that are just incredibly unhappy with the state of their life because their rent has been too high, because inflation has eroded their earnings, and because they don't feel supported. These are people who traditionally vote Republican and traditionally vote Democrat. I suspect we're going to continue to see the political pendulum swinging back and forth, state by state. My own personal opinion, this is nothing to do with Citi. First of all, we're not changing our headquarters. Our building is gorgeous in Tribeca, so that's going to stay for sure. My own personal opinion is that New York City has faced several mayors in a row that have made less than ideal decisions that led to less than ideal situations, whether it comes to homelessness or support or infrastructure. So, I think New York, like a lot of big global cities, not just in the U.S., needs to make a significant amount of adjustment to their spending going forward. I don't love paying New York taxes, but that's how it goes. I have no idea what's going to happen in November. There could be a dark horse or a black swan. On the cost of hedging currency, yes, I do expect the cost of the hedging currently will increase over time, which is not great for some of the foreign buyers. It's one of the reasons why some of our largest institutional clients right now are looking to get ahead with hedging programs and get creative about it today under this expectation that some of that's going to be more challenged in the future. Okay, I see one more last question here. This will take my last, and then I think Willy's going to take over the stage in the flesh, as opposed to on screen.
Speaker 3: Thank you very much for speaking. You started off your presentation about the indications from the Trump administration about firing Powell, and then you said, “We don't have to worry about that until 2026.” Who do you think replaces Powell, and do you think they will adhere to Trump's indications of lowering rates and what that will do to inflation, given Powell's statements about there's not enough time and data to assess the impact to the tariffs? So, how does that feed into what you do on your investment strategy and advising?
Kate Moore: Okay, let me start and go backward and go pretty fast so we can get Willy on stage. Let me start by saying I share Powell’s and the other voting members of the FOMC's assessment that we don't have enough information to know what tariff impact we'll have on inflation in a sustainable way. I think it's a really difficult place to be making a decision. It's worth noting that even if Trump wanted to fire Powell and he had cause, he wouldn't be putting a new Fed chair in place anyway. It would automatically default to the New York Fed chair, Fed President Williams. That's how the Fed system is set up. Then it would get litigated in court. I think the real challenge we have is when we get later in the year, hopefully, into the beginning of next year, and I start debating who the next Fed chair could be, if that person has to speak in a way that's inconsistent with the stability of decision making we've become used to at the Fed. You can disagree or agree with what they do, but there is a framework and there's a bunch of data that they look at. People start to lose faith in the independence of the institution. That has significant implications as well and could in fact, I would argue, like we saw just this morning, impact bond yields in a meaningful way. Who do I think it's going to be? Well, there's a big gap between who I think it might be and who I would want it to be of the candidates that have been put forth by the administration so far. So, I'm not going to give a name. All I'm going to say is, having spent some time last week with a number of ex-Fed decision makers, they reassured the small group of investors that were together with them over and over again that the institution itself will prevent any massive swing in terms of how decisions are made. Remember, policy decisions are a vote of 12 people, not the Fed chair's decision. We can replace the Fed Chair, but replacing all of the voters, you know, is not only impossible without dismantling the Fed, losing faith in the institution, and frankly, a lot of people, both domestic and international investors, losing faith, in the government. So, I just don't think that's likely. So, we'll have someone who's going to speak, I think that Trump speaks, during confirmation hearings. Then we'll adhere somewhat to the more structured and disciplined approach that the Fed has always had to do. So, I'm hoping we just get smart people who look at the data and try and make the best decisions for the U.S. Thank you guys very much.
