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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Welcome to the TCW Investment Perspectives Podcast, where
our investment professionals share their insight and
expertise on how to make the most of your portfolio.
Today, I'm playing two roles, your host and also one of the guests.
As a Managing Director in Fixed Income at TCW, I spend my
time looking at markets and data and figuring out how events
will influence our strategies and investors in general.
And there's a lot to consider in the current environment.
Inflation, unemployment, the health of the U.S.
consumer are critical, and then with tariffs and a host
of other Trump-related topics also important these days.
So I'm here today with Bryan Whalen, CIO of the Fixed
Income Team, to drill down into some of these topics.
Bryan, thanks for joining me in the podcast today.
Let's start off with the current state of the world.
Obviously, a lot of cross-currents, a lot of variability in the data.
What do you see as the key data points that
we should be looking at as far as markets go?
And what are you using as guideposts for updating strategy?
Sure.
So if you look for the better part of 2024, we had been really
focusing on the labor market as like the key indicator.
We had felt that due to the rate rise and the kind of the
lagged impact of higher interest rates that eventually
the labor market would weaken and potentially even crack.
And then that was the vulnerability.
And there was a lot of debate, particularly in the last
quarter of 2024, about whether that was happening or not.
We at TCW felt like we were seeing certainly some kind of evidence in the hard
data that the labor market was softening, while on the other hand, there were
some key, you know, monthly employment figures that were coming out
that were indicating actually that it was still robust and strong.
And we really questioned that.
And so that was the debate.
So certainly that still is the case today.
We're watching the labor market.
However, I think there's also some other key factors just to really start to
consider, particularly given the change in the administration in Washington
and the efforts there to shrink the size of the government footprint.
Obviously, you have the Doge group looking to cut costs, and you
have a lot of volatility caused by a lot of rhetoric around tariffs.
And so what that's creating is uncertainty.
And this is where you can get to the data part in a second.
Uncertainty often creates a lack of confidence.
And so there's a lot of good confidence metrics out there to look
both at the consumer level as well as at the business level.
And we're seeing those decline because when there's
uncertainty, people lack the confidence to do things.
So watching confidence metrics, and then also we're watching spending,
because a lack of confidence means effectively like a pullback.
And by spending, I assume you mean consumer spending.
Yeah, primarily, right.
But also consumer spending and in the business world, you don't call it
business spending, you call it like CapEx, what companies are willing to do.
Also in businesses, spending is also on employees.
And so that's kind of the state of the world right now.
It's really at an inflection point.
It's very interesting, just given the volatility, the economy tends
to move in a slow fashion seems to be moving at a fairly rapid
one, given the decline, the quick decline in confidence levels.
It's interesting.
I know that we've seen a weakness in lower end consumers for a long time,
but it does seem like you're finally starting to see cracks in the signs
and the confidence anyway, of those higher end consumers who really
have been driving consumer spending in the US for a while now.
Yeah.
I mean, look, like it starts, interest rates
bite the lowest, the weakest consumers first.
Think of it as consumers who live paycheck to paycheck, they
put a lot of their daily expenses on their credit cards
and cost of those cards and borrowing jumps immediately.
They feel that cost.
And so they have to pull back.
And we saw that two years ago, we could see it right away.
And then the phrase we've been using is the, you know, we've
seen the pain of higher rates move up the economic food chain.
And so that kind of creeps up to the kind of the middle level consumers.
And we think interest rates are biting them too, but also the lack of
confidence and that we already kind of talked about is starting to,
we're starting to see that come through in terms of their behavior.
And finally, you have the high end consumer, I believe the top 10% of
the consumer base spends about, which represents about 50% of spending.
That has been incredibly strong, even with higher interest rates.
However, a lot of that strength comes from the balance
sheet, their personal balance sheets being strong.
And a lot of that comes from the wealth effect.
Housing has been strong, but also obviously the stock
market, the equities have been incredibly strong and
they've grown and they've helped kind of fuel the fire.
But as we've seen, you had pullback from
the highs, about 10%, you know, in the S&P.
And we're at this point again, where the S&P and other equity
markets start to decline further, the balance sheet and the
wealth of that higher income consumer starts to shrink.
And then when they start to pull back, which represents 50% of
consumer spending, the change, so to speak, as we say in the
industry, the Delta, you know, what's the change in their
spending habits and how does it impact the economy?
That's quite large.
Great.
Well, let's shift gears a little bit.
We talked a little bit about the demand side
and maybe talk a little bit about inflation.
And I know that our view for a while has
been that inflation is likely to head lower.
And one of the big reasons for that, of course,
is that we know that rents are falling.
We know that rents are 40% of core CPI and a third of headline CPI.
Obviously tariffs have an impact on that inflation.
Any other things you're thinking about as far as
inflation goes and what the outlook there is?
Yeah, let's start with our kind of base case outlook, which
is we think the economy has at this point close to stalled.
We feel like when we look at particular metrics of the economy that are cyclical
in terms of like price changes, we see a lot of evidence that we are basically
back at that 2% annual level in terms of year over year changes in price.
And so we have a lot of confidence there.
And it's also it's bolstered that confidence by the fact that we do know and the
math just works out this way, that housing and the way we measure housing here,
particularly in the metrics the Fed likes to look at,
will continue to head down on a downward trajectory.
It lacks the way we measure it.
So that's why we feel good about our base case forecast.
And the risk to that obviously is coming from strictly from tariffs.
One thing we would point out to everyone is that tariffs are not a new thing.
They may be being used now more aggressively, but in Trump's first
term in office, he certainly did implement tariffs, but inflation
actually went down in the first three years of his administration.
So they don't always push prices up.
And often the result of tariffs on inflation
metrics has to do with who bears the burden.
Is this such a strong economy, the tariffs can be effectively
passed along to consumers and they'll just pay the bill?
Or is this more of a tax, meaning that are these tariffs result in prices that
consumers just won't pay and therefore somebody's got to pay it and who is it?
It's corporations and their profit margins.
And we think most of these, albeit temporary one-time increases in prices, a lot
of it will be absorbed by companies in their margins, which will lead to lower
profitability, which potentially lead, as we
said earlier, to lower employment levels.
But by and large, because of the overall weakness of the economy, we feel that
these tariffs will be one-off, but particularly like one-time changes in pricing
and not lead to kind of persistent annual high rates of price increases.
And if that happens, slowing economy, less spending,
that's sort of inherently disinflationary.
You've got sort of competing forces there.
Exactly.
But maybe let's talk a little bit about expectations for the Fed.
A couple of months ago, it was maybe a half a cut expected this year.
Now it was kind of getting close to three.
Now it's right around two and a half or three cuts.
What's your expectation for how much the Fed has
to ease, rough timing, what do you think there?
Yeah, I think, first of all, it's kind of, remember when
the Fed says things, everybody, they're just listening,
listening, listening, they're taking it almost as gospel.
And we would just kind of, let's look at recent history.
Let's look at last year.
The Fed in the middle of last year, June of last year of 2024, said
they were going to probably only cut rates once by the end of 2024.
And when we look back on the December 31st, we look back
and said, oh, wow, they cut it basically four times.
So there's a, again, the Delta, the change was three cuts, which is
big in just in the order of six months, they changed their mind.
Previous to that, and go back to 2019, came into 2019 and the Fed and the
markets was expecting that the Fed would raise rates twice, 50 basis points.
What happened by the end of 2019, they cut it three times.
So a change of five, a difference of five.
So what happened this year?
We came into this year, 2025 within the market,
expected basically one cut by the end of 2025.
And a lot of that revolved around the high
level of confidence of American exceptionalism.
In the last few months, we've seen that start to get unwound a bit.
And now the market's pricing in two cuts.
It had been three just a few weeks ago.
So we'll see where things play out.
I think we would feel comfortable saying, you know, our base case expectations,
let's go back to when we started the year, at the end of the week, we felt
that the market was forecasting one cut and we felt
it was going to be significantly more than that.
Might be three, might be four, could be even a little bit more than that.
Then that will all just be dictated upon the performance of the economy, which
includes not just growth, but obviously how sticky is that inflation and is
the Fed going to actually have the fortitude and be comfortable enough to see
through some of these short-term movements
from prices increasing due to tariffs.
Yeah.
So that's a segue to talk about, people talk a lot about the neutral rate.
At what point is the, is Fed funds neutral for the
economy, not neither restrictive nor accommodative?
Currently rates at four and a quarter to four and a half,
I think pretty clearly in that restrictive territory.
Any thoughts on where that neutral rate is
or, you know, how long it takes to get there?
Yeah.
So call me in 2028 and I'll be happy to tell you exactly
where that neutral rate was, which is, you know, my
way of having a little fun and saying, we don't know.
No one does.
We'll only know in hindsight, maybe.
So yeah.
So convention had been prior to the rate rises, the neutral
rate was around 2% lately, at least at the end of last year.
Market consensus for those just listening, I'm using air quotes, you
know, was that the neutral rate was somewhere between four and four
and a half, consistent with my comments just now and where we think
Fed cuts will go, we think the neutral rates comfortably below 4%.
Back twist our arm, we'd say comfortably below 3%, probably the neutral rate.
So if we are right, that would mean kind of
putting this whole conversation together.
If we're right, the economy's weakening and stalling.
If we're right that we're seeing a sharp pullback in spending, if we're right
that the neutral rate is comfortably below three, then what we'll see is we'll
be right, most likely on, you know, how many cuts the Fed ends up making.
And again, three, four, five, time will tell.
But if that is how things play out over the next nine, 10
months, you should expect to see interest rates come down.
You should see them come down more in the front
end of the curve than the long end of the curve.
And as a result of that, you should see the bond market
and the performance of the bond market be quite strong.
So we've talked a lot about macro.
Maybe let's shift a little bit, talk about valuations
and volatility, or maybe lack of volatility.
Obviously, equity markets have been bumpy, but
credit markets really haven't moved that much.
The trends have widened a little bit, but not what I would have expected given
the big move we've seen in equity and all the headlines and everything else.
What's your thought there on potential for credit markets going forward
and maybe potential for more volatility in that part of the market?
Yeah.
You know, interest rates move first.
You see the volatility there first, and then things just take time.
Sometimes in the capital markets, these kind of sea changes in terms of the
economy and how people think about risk, not just rates, but credit spreads,
talking about here, that can take weeks, it can take months to actually kind
of filter through the system and for investors to change what
they feel they're required to take certain types of risk.
But what that means, though, is that we are going to see a lot of volatility
and investors are going to reprice risk at the opportunity of the bond markets
and just outright levels of interest rates that I already talked about.
But it's also going to be in credit spreads, hopefully in the beginning, the
opportunity to be kind of underweight and have not a lot of exposure to credit.
And then when the market reprices things and things get
cheaper, there'll be a great opportunity in credit.
And then I think an important point to make here is that it's not just
high level, top down decisions where there's going to be opportunities.
For instance, do I want to buy investment grade corporate bonds or
high yield bonds or treasuries or, you know, whatever the mix may be?
But when there's volatility, there are always outstanding,
what we call kind of bottoms up opportunities.
And, you know, what that really refers to is kind of an active
investor's ability to pick the right bonds because they're
really just, for whatever reasons, offering a great opportunity,
much more opportunity than just the broader market at large.
And that's, you know, as an active manager with big teams and doing a lot
of research and kind of combing through all the bonds out there, that's
when like an active strategy can really kind of show its advantage
versus something that's more index like, or even like passive.
When we get these points in the market, I think it's advantageous for investors
to kind of look at the landscape out there, look at the opportunities and kind
of look at what vehicles, what funds out there have that flexibility, not just
to shift in terms of sectors, but also really pull the levers in terms
of buying like the cheap bonds that offer much more, let's
say, return potential than the broader just bond market.
All right.
And not to put you on the spot, and obviously we don't know exactly how things
are going to progress from this point forward, but if you had to pick a
couple of parts of the market, like where do you think we're
going to find those best opportunities from the bottom up?
Where do you think there's the cracks are going to show
up or where there's terrible underwriting now that's
going to play out over the next couple of quarters?
Sure.
Yeah.
I think, you know, right now the opportunities are in the more liquid parts,
which is to kind of be, have less exposure to broad, simple, basic investment
grade, corporate bonds and high yield and to be overweight and have, you
know, more than let's say your benchmarks exposure,
the liquid parts of the securitized market.
You know, that's kind of at the high level,
what's rich and what's cheap right now.
And then when essentially the volatility picks up and there's issue selection
opportunities, I suspect there'll be outstanding opportunities in like the
parts of the high yield market, particularly the cyclical parts of the
high yield market, because that's where most of the slowdown will be.
That's where the concern will be.
That's where most investors will be selling from, which
means that's where most of the opportunities will reside.
Now you'll have to have the right team to kind of underwrite it and you'll
have to have a little bit of fortitude in your gut to kind of withstand
the noise, but that's usually where the best potential resides.
And then on the securitized market, you should see the same thing.
I anticipate you'd see a lot of interesting opportunities in the consumer part
of the asset backed market again, because that's where you'll see a pullback.
And then certainly the chapters, the story isn't over in the, in the commercial
real estate market, that there has been certainly some rebound, but there's a
lot of properties that are not, you know, the pristine properties you might find
in big markets like New York or Los Angeles, but a lot of smaller cities where
there's still a lot of workouts to be done and in a market where there's
a lot of volatility, properties that have had recent
trouble, hence, as we say, kind of trade very cheap.
And again, you'll be compensated handsomely for taking the, you know,
the risk in those types of properties in a more volatile market.
All right.
Well, thanks very much.
I think we're out of time, but that was fantastic.
Thank you, Bryan.
Thanks for joining me to talk about the current state of markets
and obviously the most important issues now for our clients.
For more information on TCW strategies, please visit our website at tcw.com.
Thanks for listening.
And we'll pick up next time, exploring the
trends and opportunities shaping global markets.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit tcw.com/insights.
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