00:00How are you thinking about the threat of inflation at this moment with the Strait of Hormuz shut and much
00:04of the energy infrastructure under attack in Iran in the Middle East?
00:07So the first word that comes up sometimes is the word transient. Remember that word?
00:13I thought we weren't allowed to say that anyway.
00:16I think it might be coming up again. Part of it, inflation is an issue.
00:20It was an issue, as Esther George said, before any of this happened, right?
00:25It's going to be a front and center topic in terms of whether or not it's transient.
00:30I believe if it's a shock and it goes away, it will be.
00:33But on the macro front, you know, the change in the markets in terms of the probability of rate cuts
00:40changing in the last week or so, I think that's real, right?
00:44We think of prices, market prices, as sort of the weighted average probability of a set of outcomes in the
00:51future, a point estimate.
00:52And the market's now weighting the probability of rate hikes higher than it was a week ago.
00:58And I think that's appropriate.
00:59What does that mean for your business? I mean, what does that mean for REITs?
01:03So for us, really, it's the shape of the yield curve that matters.
01:07We borrow in the short-term markets. We lend in the long-term markets.
01:11And mortgage rates, as you know, they're still high. They're above 6%, at or above 6%.
01:17It makes for a great investing environment for us. The level of REITs is actually not as important as the
01:24shape of the yield curve.
01:25So our borrowing costs are still much lower than where we're investing.
01:30So what do you also expect? Just another dynamic of this, of the consumer.
01:34We were talking with Shana Sissel earlier, who said, look, we're not at $4, or consumers had been used to
01:39that before.
01:39So prices at the pump aren't that bad. At what level does this need to get and sustain in terms
01:44of energy prices in order for consumer sentiment to also be dragged down?
01:48Yeah. I mean, the things I think of there are the K-shaped economy, right?
01:54So in a K-shaped economy, what's happening is the aggregate data that we have feels okay, but the human
02:03experience is strained, right?
02:05So at some point, when you do get that cost pressure at the pump, grocery prices are still high.
02:13You know, above $4 gas is going to start to strain some wallets here, and it's going to happen kind
02:19of quickly.
02:19Yeah.
02:20Let's talk about, in your notes, you talk about the Fed being kind of one leg of a three-legged
02:25stool,
02:26and the other two being fiscal spending and economic policy.
02:30Yes.
02:31How do you expect that leg, the Fed leg, to change when we get a new Fed chair?
02:39How do I expect it to change?
02:41You know, the Fed is-
02:42Appointed by a president.
02:43Right.
02:43Who clearly wants rates to be lower.
02:45Right. I get it.
02:47Look, I've always said that if you put aside the idea of whether the Fed is independent or not,
02:53their job is still to manage the economy, right?
02:57And no matter what, at the end of the day, the Fed, including Governor Walsh, ex-Governor Walsh,
03:04future Fed chair, is going to have to think through, along with the rest of the Fed, by the way,
03:09there's a whole bunch of other people on the list as well, exactly the same things they're doing now.
03:14The fiscal gap relative to GDP growth, labor markets, inflation, long-term impacts like productivity,
03:24all of those factors are still in the mix.
03:26So I'm not sure it's a hugely different outcome.
03:30Yes, there will be a bias towards helping the bottom of the K come up the curve.
03:36And I think we are looking out for policies.
03:39Is that what this administration is doing?
03:41They're worried about helping the bottom of the K come up?
03:43Look, I think that's part of the focus.
03:46That's why you have so much discussion about housing.
03:48And you want lower interest rates, not just for government bonds being lower,
03:54but the cost of borrowing being lower, right?
03:56But when you look for that, when you look for situations where the policy shift starts to become
04:02less about managing the aggregate economy, but more about kind of pulling certain things
04:07or manipulating certain things, those things can have unintended consequences.
04:11And, you know, we're prepared for the volatility associated with that.
04:14It's an administration that's been increasingly talking about affordability.
04:18And this surely only increases that.
04:20If it can't necessarily pull the levers of bringing energy prices down,
04:23housing has been a big concentration in this administration,
04:26not letting institutional buyers into housing.
04:28Do you expect any more announcements or are there any more levers that they can even pull
04:33in order to try to bring rates down if the Fed can't fully cut to the extent
04:38that President Trump would like?
04:40Yeah, the biggest one would be yield curve control and that the Fed can control, right?
04:45Because really mortgage rates key off of long-term interest rates.
04:49And if you control long-term interest rates, you control mortgage rates.
04:52So that would be the first lever.
04:54The second lever they've already to some extent pulled,
04:56which is the announcement for the GSEs to buy $200 billion in agency MBS.
05:01That announcement in and of itself did bring mortgage rates down some earlier this year.
05:06But, you know, again, interest rates are higher right now.
05:09Treasury rates are higher.
05:10And so mortgage rates have ticked back up.
05:13What about buying mortgage bonds?
05:15I mean, going out and buying the assets directly, we saw them do that with $200 billion.
05:19Yeah.
05:19How did you judge the impact of that?
05:23And could they do more?
05:25They could definitely do more.
05:26It is simply a matter of an agreement with Treasury.
05:30They could do more.
05:31And the issue there, Matt, is that it doesn't always affect the mortgage rate alone, right?
05:37Like the level of interest rates matter.
05:39So as rates are rising, what it does, it just cushions how high mortgage rates can go.
05:44If rates are falling, it has a bigger impact.
05:46So in reality, what it's done is that it's actually allowed investors like us to take comfort in the fact
05:53that mortgage rates can't go too far off relative to Treasuries.
05:57And that's a huge plus for people like us.
05:59But in terms of actually affecting the mortgage rates simply from buying, there's a limited impact.
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