Efforts to understand the “why” of the motion in asset prices consume our time and attention in markets. To be sure, traditional sources of risk – namely the economy, the path of corporate profits and changes in the interest rate cycle – do matter. But, as Matt King argues, especially since 2012, we increasingly need to monitor what’s happening in the financial plumbing where Treasury and Central Bank driven fund flows can be responsible for powerful liquidity dynamics. Serving sometimes as a headwind and at others a tailwind, flows like QE as well as changes in the TGA and Reverse Repo facilities influence the manner in which investors interact with risk assets. After a nearly two decade stint at Citi, Matt recently founded Satori Insights, an independent firm helping institutional investors navigate today’s uneven and complicated waters of risk. A main aspect of our conversation is his take on the resilience of the US consumer and broader economy in 2023, set against one of the fastest tightening cycles on record and the Fed’s QT program. Matt’s work suggests that tying favorable asset price results in 2023 to this resilience leaves out a critical point. He states that while the Fed’s balance sheet was nominally reduced by roughly a trillion last year, markets wound up enjoying a trillion in new liquidity. His framework, tying a trillion dollar increase in reserves to roughly a 10% increase in the equity market, helps explain the dislocation between asset price performance like tighter credit spreads and traditional fundamentals like defaults. Through the lens of liquidity that Matt utilizes, the risk asset outlook for 2024 is less favorable. He cautions that the Fed may have done more on the hiking front than they should have, underestimated the impact of their balance sheet policies on asset prices. I hope you enjoy this episode of the Alpha Exchange, my conversation with Matt King.