This last week, fellow Excess Returner Justin Carbonneau and I sat down with Libby Cantrill, head of Public Policy at PIMCO. I was excited to talk to Libby particularly about the move towards (re)privatizing more and more of the U.S. Government, starting with the housing market (Fannie Mae and Freddie Mac), which she wrote brilliantly about in May.

Here’s the video:

And here are key quotes and my takeaways. Full transcript below the paywall

On Tariffs and Trade Policy

"Our view has been and continues to be that you have to take the president both seriously and literally when he talks about trade... This is something he believes in; he's quite ideological about this…. We think that trade policy uncertainty and higher tariffs are something that investors and the markets will just have to navigate over the next three and a half years, if not longer term."

I’ll be honest, I have a very hard time knowing what to take as “real” about any aspect of the U.S. economy right now. I’m old enough to remember when the tariffs were just about Fentanyl. It’s useful — to me at least — to have someone as sharp and even-keeled as Libby telling it like it is: We are NOT in some narrow bubble of uncertainty. This is the new normal.

My takeaway: Repositioning or speculating based on headlines around trade policy is a stupid way to spend your time and money. Most investors went into this chaos under-invested internationally, and have been penalized for it. Recent ETF flows suggest at least the buyers of cheap beta (most advisors) are increasing their exposure, even if just at the edges.

On the 2025 Tax Bill

"I do think that's one thing that's been somewhat under-reported: these business tax provisions... I think that is likely to catalyze CapEx and could be more front-loaded in terms of stimulus than people expect."
"You're having your dessert first and pushing your vegetables around the plate. The vegetables are delayed."

The One Big Beautiful Bill Act (or OBBBA Because we’re apparently now a country of middle school dropouts) has plenty for advisors to bone up on (great summary over at Kitces.com), but less attention is being paid to the significant benefits for businesses in the short term. The OBBBA changes a whole bevy of rules about how Capex & R&D are accounted for, all of which have the same basic effect: pulling forward deductions.

Of all the stuff in the OBBBA, this one seems like the cleanest piece of stimulus. While the net effect will likely juice reported earnings (if you expense your whole physical plant instead of amortizing it, it makes for lower taxes, which means higher net-income), it’s not just a gimmick — it could pull forward real CapEx and R&D, and generally that’s a good thing. That’s the “dessert.” The “vegetables” are both the delayed cuts (minimizing short-term disruption ahead of the mid-terms) … and of course the loss of tax revenue from the accelerated depreciation.

On Housing Finance (Fannie & Freddie)

"Our view is that even if Fannie and Freddie were released with a lot of capital, they would still be perceived as having credit risk... For borrowers, that changes the borrowing rate. There will likely be upward pressure on mortgage rates… At the end of the day, is it good for borrowers? Not really. And is it good for the taxpayers? Probably not."

Despite the headlines around tariffs and trade and all, the ending of Fannie/Freddie conservatorship is the biggest moral hazard proposal to worry about. While there are plenty of details, I can’t get past a single line item: How can the U.S. taxpayer provide an iron-clad guarantee to a private company, when only the shareholders of the private company benefit from the guarantee?

That’s the problem with spinning out these Government-Sponsored Entities. I have no problem with making them private companies, as long as they play by private company rules. I have a big problem with taxpayers being the uncompensated backstop. It’s crystal clear to me that a spun-out Fannie/Freddie increase mortgage rates while simultaneously increasing risk in the real estate market. It’s a bad idea unless we restructure the entire ecosystem to actually get taxpayers out of the mortgage business which, for sure, will lead to higher rates.

On the Federal Reserve

"We entered this year with a '2-2-2' forecast... Now we're at '1-3 and then 0-to-4,' meaning 1% real growth... 3-ish percent inflation, and anywhere between zero and four cuts. This is not an enviable position…The bottom line is we continue to think that the Fed is independent. We do not worry about Chairman Powell being fired."

I put the Fed on the list of things to pay attention to but not worry about, so Libby’s comments make a lot of sense to me. The Fed, for all its power, isn’t so much becoming less relevant than the past, but may be less effective going forward. Today’s Fed has to worry about the threat from inside the house, not just the global marketplace. The constant chaos of tax and trade policy simply makes their job harder.

In the Greenspan Era, we used to talk about the Fed “Driving the Bus.” Today’s Fed seems less driver and more driving instructor: sitting in the passenger seat, white-knuckling the e-break while a stimulant-addled teenager is trying to merge in traffic. I’m not excited about the “1-3” Growth-Inflation prediction, but here we are.

On Investment Philosophy

"I'm biased here, but I would say that Washington matters a lot more to markets than markets think it does or appreciate… [Her advice?] Probably just staying invested... It's very difficult to time the market... maybe thinking like an institutional investor and not reacting to every headline."

I, for one, continue to think it’s really really a bad idea to bet against the house in this environment. There are plenty of distractions vying for your attention — from insane income promises to crypto to private credit, but ultimately “the house” here is the Corporate State. The large, influential firms and individuals who are, if we’re being honest, really driving most of what happens in Washington, and thus (to Libby’s point), markets.

I may not like this Casino. But pretending it doesn’t exist won’t win me any chips.

(3700 words of edited transcript follows).

Nadig.com

PIMCO's Libby Cantrill

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