Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Markets. I'm your host, Tim Graf, head of macro strategy for Europe.

Each week, we talk about the latest insights from our award-winning research, as well as the current thinking from our strategists, traders, business leaders, clients and other experts from financial markets. If you listen to us and like what you're hearing, please subscribe, leave us a good review, get in touch, it all helps us to improve what we offer. With that, here's what's on our minds this week.

Around three weeks ago, financial markets began to behave in strange and unique ways. Equity markets were in sharp decline, volatility was through the roof. But the performance of US Treasuries and the US dollar, as all this was going on, were highly unusual, as they were also in freefall, and exhibiting none of their usual safe haven characteristics in a high-volatility environment.

Given much of this volatility came in the wake of a larger-than-expected slate of tariffs imposed by the US on its trade partners, the questions that followed centered around whether this price action was an aberration brought on by position on wines, or if it was indeed a harbinger of a future, more uncertain reality, with US markets no longer such a go-to destination in times of stress.

My guest this week, Mark Rosenberg, has done a lot of thinking on this topic in his capacity as co-founder and CEO of GeoQuant, one of our research partners. GeoQuant takes a data-driven approach to assessing political risks and mapping them to market outcomes. And this week, Mark brings us up to speed on what the trends for the US look like, how they compare to other political economies, and whether US assets and the currency warrant any further risk premium.

Hey, how's it going, Mark?

Mark Rosenberg (MR): Yeah, hanging in there. Trying to keep sane.

TG: There's a lot to keep up on, isn't there? Thanks for joining this week, a return visit as well. I wanted to talk to you today about some things that you've written about for a little while, and where we have these dynamics that really... I think it was the week after Liberation Day when those tariffs were announced. We saw market movements that were really unusual, a positive correlation of stocks and bonds.

But that's happened in previous regimes, but it was really things like the negative correlation between yields and the dollar. Things that have happened in the UK during the mini-budget crisis, and it also occurs a lot in emerging markets as well.

So, I wanted to now stop talking and give you the floor, and give you a chance to talk about when you first started to notice some of these dynamics.

MR: So, in terms of those market impacts, I mean, it won't surprise anyone to hear that to the extent there was kind of emerging market-like market patterns for the United States, there was pretty idiosyncratic, right, and kind of ephemeral. And you would see periods of this, and you would see certain indications of this, say, VIX spiking to all-time highs before the 2020 election, or brief periods, as you mentioned, of correlation between bonds and stocks. You never really saw much in the dollar, right?

But we, in the underlying political data, and in the kind of stuff that GeoQuant measures at the country risk level, we did start to see patterns that would suggest, hey, this political economy, the United States is beginning to look more like an emerging market than a developed market. Those kinds of things were pretty rapid increases in social risk and social polarization, right? Corresponding increases that generally lagged the increase in social risk, which is also important in institutional risk, in kind of challenges to the existing rules of the game.

Those are the kinds of trends that we typically see in emerging markets that tell us, and that are the key drivers of why there's often a lot more market volatility around elections in emerging markets than in developed markets. Simply because the range of possible outcomes in emerging markets is a lot broader because of the institutional weakness and because of the social polarization that gets fired up every time there's an election. The actual outcomes of the elections are uncertain because the institutions determining those outcomes are heavily politicized. The potential for court challenges in politicized judiciaries is a lot higher.

All those things are why, if there is a conventional wisdom in the kind of political risk literature, it's that emerging markets are more volatile around political events than developed markets because the range of outcomes is so much wider. And what we start to see is that that's starting to happen in the United States. And I think the post-election path for Trump 2.0 has demonstrated that.

TG: Is there any way, can you compare the indicators you're looking at from GeoQuant sort of on a panel basis and put two lines on the same axis? Maybe compare the US political risks war and compare it to... Let's throw out Brazil here. That's just the first one that comes to mind. And have that... Does that make sense?

Does it make sense relatively as well as in the time series?

MR: It does. Yes. So the United States has increased in political risk by 18 percent since 2017 in our data series. That's when it starts to become really daily in our data series. That's the largest increase for any developed market in our system. The spread between the average political risk score for an emerging market and the average political and the US political risk score, that spread has increased by 14 percent. That's bigger than any other developed market. So United States, just in our data, in terms of top line political risk, which is our kind of largest aggregate, and also because it's the biggest aggregate, the least dynamic, right? So the changes are actually the smallest.

So these changes of 18 percent, 14 percent, 15 percent, these are very, very large changes in the scheme of the time series. The United States currently is clocking it at 41.26 on our overall indicator, right? And Brazil is at 47.02. Now, if we were to go back to 2018, the United States was at 35.34 and Brazil was at 44.20. Obviously, it would be easier with the visual. But just significantly, so significant convergence.

When I first started in this industry, it was all about the convergence of emerging markets to develop markets economically, and the closing of that gap, of course, led by China. What we've seen in our data is for the United States in particular, a convergence politically, but in the other direction, meaning developed markets, particularly United States looking more like emerging markets politically.

TG: Actually, as an aside, people will be able to see the chart. I'm going to ask for the data afterwards, because I am publishing show notes now, so that will be good. Yeah, people will be able to see that chart as we discuss it, thankfully.

MR: The more data, the better.

TG: Yeah. Exactly. A couple of questions came to mind.

You mentioned this trend in place since 2017, which of course means that we've gone through a couple of different political cycles in the US and different parties in the presidency and leading houses of Congress.

Has this been kind of a monotonic increase or is there cyclicality to this? And I don't necessarily want to start blaming parties or anything, but I'm just curious as to how that's progressed.

MR: No, no, I think that's a really good question to give that context. And it's not monotonic, but it is pretty consistent. You would call it a secular trend, I would say. And you see this in our structural data. So the daily data is quite good from 2017 on, but we have kind of lower frequency data that runs back much further. And you see a pretty steady increase in social and institutional risk in the United States for most of the 21st century.

So there is a pretty, again, certainly not linear, goes up and down among certain administrations, but it's not as if this is purely a Trump phenomena or even a Trump 2.0 phenomena. You do see that trend over time. It did slow down under Biden in terms of institutional risk. Social risk really continued to fly out in large part because of inflation. And then the kind of post-COVID effects.

You did see some lower institutional risk, right? Biden wasn't impeached twice, and there wasn't a contested election. There wasn't stress on the rules of the game that you saw under Trump. But nonetheless, there was significant efforts. There was mooting of packing the Supreme Court, increasing its size. There was lots of chatter certainly about institutional change.

TG: Yeah.

MR: Lots of pressure from the base for institutional change, from the Democratic base. That's a parallel to what's going on, on the Republican side.

TG: Yeah. In talking about the US and its potentially higher risk premia assigned to it, there's this discussion of looking for alternatives. And you see this especially in currencies. The dollar dominance is being diminished, if not completely eroded. I don't think anybody has that yet as the central scenario.

But is there anywhere where some of these risk factors are improving, if not as a consequence, directly as to what's happening in the US., at least as a byproduct, maybe?

MR: No, is the short answer, in that there's not enough of a time series or enough of a pattern for us to say, here's this developed market or this constellation of developed markets, like say, the EU, right?

TG: Yeah.

MR: That is really moving in the opposite direction. We've seen similar trends in these countries, just slower pace than the United States, right? So this idea of developed markets converging toward emerging markets in terms of their political risk, that is a pretty consistent trend.

And of course, the UK has been there as well. Where you see high social polarization leading to pretty significant institutional change like Brexit, right?

And so no is the short answer. In this very short period of 2025, we have seen assets kind of at least hinting at the European market, relatively speaking could be a relative safe haven. That's very slow in our data. We're not, meaning the data is fast, but we don't see those trends picking up.

And I think that's why you see such a high correlation between US political risk and gold price, because there is no alternative except gold effectively. And that's the highest correlation in our system. I mean, it's 0.94 day on day since 2017. And that's just two trends moving in the same direction, so there's going to be high correlation, but it's so high that it's striking, whereas you don't see that with the euro or anything like that.

TG: Yeah. Thinking a little bit more in granular detail, you mentioned a few aspects that you track, sub-indices to the headline, things like social polarization and institutional conflict. And I asked about the trend-like nature in the headline. Do these go through cyclical patterns as well, or do they sadly reach a point at which there is almost a point of no return?

MR: It's a really good question. I think, and this will all be kind of extrapolating a bit from our data set, right? Which is relatively limited when you think about kind of the, say, the broader political economy literature, which has looked at these kinds of questions, you know, for longer term, probably with slower data. But the short answer is generally no.

Once it starts, it's hard to back up on that once the rules of the game change, it's very hard to go back to the previous rules, right? New rules form, a new equilibrium emerges, but that equilibrium is often less stable and more uncertain, particularly as it forms than the previous one, just by definition. There isn't really a cyclicality to the kind of social polarization and corresponding institutional change that we see in the United States in that they do lead to a new equilibrium, not necessarily a reversion to the old one.

That's what's so striking about an increase in, say, 18 percent, et cetera, in our model, is that that is a structural change. We're now in a new equilibrium, and I don't think the likelihood of returning to the previous state is very high. It's much more likely we go somewhere else.

TG: Yeah, yeah.

As a complete aside to this, but more out of my intellectual curiosity, and I’m suspecting you don’t have 80 years’ worth of data, but I’m wondering how big a believer you are in kind of like the cyclical theories of history, like the Howe and Strauss generational theory, or the Kondratiev wave theory for markets and economics. Do you buy into that stuff at all?

MR: I do, in that I think there are, I like the phrase, the cliché, history doesn't repeat it rhymes. I find that in forecasting and in kind of thinking about the future given a sort of set of priors, right, and then updating those beliefs, right? I'm kind of a Bayesian in that respect.

You do have a lot of information in the past that makes sense. So I do think there's a cyclicality and there's obviously ideological pendulum swings, right, from left to right. And we're seeing that play out very much in real time. And in terms of the change now to the kind of global order and that it's been so premised on US hegemony, right, and kind of US primacy and US global engagement, again, this is not just 2025 that we've seen that undermine. That has been consistent and arguably through the Obama administration as well was the beginning of it, right? This kind of we're going to lead from behind kind of thinking.

But that kind of change, I don't, you know, maybe we have to go back to kind of imperial history in Rome and such. And, you know, the decline of the UK or Great Britain as a imperial power to think about those cycles. And I think that's where we are now, as opposed to, will this particular political economy revert to its, you know, previous form?

You know, but more importantly, the global system is enduring a shock that is not an all of a sudden shock. It is a structural shock borne of these factors we just discussed. And where that's going, I think, is hard to gauge based on history, just given the time and place that we're in now.

TG: Yeah. Okay. I wanted to think a bit more specifically now about the US' approach to the world. And particularly, you know, in the, what will be, I think, probably about 100 days, I think we will reach that milestone of the Trump administration by about the time this podcast goes out. We've had a lot of change when it comes not just to trade, but of course, to defense alliances.

Can you talk a little bit about those changes that we're seeing and the evolution of those more multilateral institutions that the United States participates in? And how permanent would you describe some of the changes that we're starting to see in those relationships?

MR: I think those are where we can say we're seeing really a pretty permanent shift in the nature of these institutions, the way the United States engages with these institutions. This is in some sense a culmination of the US is declining hegemon. It's reduced appetite for providing public goods, right? Like global defense and we've seen that not just under Trump to emphasize. There is a kind of a global institutional shift that we're seeing here in terms of the power of multilateral institutions.

It's hard to see ever getting back to the world of the ’90s, right? Where we had a Washington Consensus or these Bretton Woods institutions, there was the kind of dominant theme in global economic analysis was just how much weight these institutions, or even multinational corporations as an extension relative to the state, right? That whole idea of companies being their own kind of political actors playing off in the periphery of these multilateral institutions and being rivals to the state in terms of power and exerting power abroad. All of that, I think, is passé, not just in an intellectual sense, but in a real sense. Using those institutions to try to structure how global actors will respond to one another, right, that's kind of out the door.

The institutions themselves and the gatherings themselves are still useful for gathering information because that's oftentimes where global leaders will meet or where certain statements will be made and those statements can be compared to previous statements and all of that to get a sense of change. But if we think about that, that's where the decisions are made or that's where kind of the powers that be gather to kind of come to a consensus on certain affairs, let's say NATO or the West, etc. I think that's done.

TG: If we took it to its extreme case and the US withdrew and withdrew support from the likes of NATO or the IMF or the UN, the WTO as examples, I mean, what future do those organizations have?

Does it just become much more the sort of 19th century power politics type of world as opposed to these multilateral institutions that we relied on in the post war era?

MR: Yeah, I think there's just there's an ability to coordinate around the United States, right, very simply. So that was really the dominant approach of the United States established a position or would try to suss out a position in these other countries and or other institutions, you know, multilateral would coordinate around that, right?

Oftentimes, the United States would lead that coordination, whether it was responding to the global financial crisis or whether it was responding to a military threat, that kind of central actor, that central coordination function, I think, is no longer. And so you're just going to see a much more kind of multipolar coordination in different kinds of groups and different kinds of settings. I don't think that's anything kind of new.

I think what is interesting to think about is even if we get, let's say, an attempted reversion by the next administration, let's say it's a serious backlash against Trump and you get, you know, a very kind of multilaterally inclined Democrat or even a, you know, cross-party coalition, right? Government of national unity, let's say, if things get really severe in the United States.

TG: We all turn into Europeans.

MR: Yeah, exactly. Once you let this cat out of the bag, the United States would have a very hard time re-establishing in a credible fashion that kind of, you know, chief coordination function. At this point, we've just kind of sacrificed that card.

Now, from the perspective of a lot of folks in the administration, that's the point, right? They don't think that was a good hand, right? I think as a political economist, I would say that's silly. That was a really good hand. And look at the performance of the US economy relative to the rest of the world as proof of the pudding.

TG: Is it overly simplistic to think that it becomes a sort of second Cold War with China able to attract those into the fold who are either acting in their own interests vis-à-vis China or acting against the US' interests as part of another poll? I mean, we have this to a degree, I suppose, already made manifest in the Ukraine War and Russia and China aligned more.

But does that become more formalized or is it, as you say, strictly multipolar or completely disparate?

MR: It's hard to see that becoming more polar. Like, for instance, under Biden, I think you did see that because the United States was really actively seeking to kind of establish that dynamic, right? They were courting allies and going after adversaries, right? And really drawing that line and seeking to create a kind of US sphere relative to a China sphere.

Now, I think, you know, given that this first 100 days of the Trump administration has focused a lot of attention on kind of alienating allies, right? And those that you would kind of bring to your side in that kind of disposition, I think it's going to be more chaotic and more multipolar.

I think there was, under Biden, a trend toward this more bipolar Cold War. The question was, you know, would Europe, what kind of strategy would they play? And there was, you know, lots of speculation among my peers about geopolitical swing players like India, right? Or Vietnam, right? Which way would they go?

And now, I think, you could even ask those questions about some players in the West, right? And so I think it becomes much more multipolar.

Again, there's always the forcing function of some kind of conflict that very sadly clarifies things for, you know, the major players and does lead to a very distinct constellations. And maybe that would be defending Taiwan or maybe that would... But under this administration, it's very hard to bank on the United States even playing a role there.

TG: Well, let's, to close it out, talk about markets and we'll talk about one more institutional risk. And that's the one that I think is probably most prominent in the market mind and has certainly affected markets. And that's the Fed. And the independence of the Fed is certainly up for discussion right now. There have been calls to see if they could fire Jay Powell. Let's just put it bluntly. The rhetoric has changed now and he's backed away from that.

But you wrote a piece in Barron's that talked about the central bank and its importance to the institutional structure of the US, but also a bit of a confidence game in terms of the central bank not responding to political pressure.

Can you talk a little bit about the importance that the Fed holds within the institutional structure of the US, as well as how that then speaks to markets and how well Paul has addressed some of these challenges?

MR: Sure. Yeah, I'm sure long-time observers of US political economy will point out that this kind of political game between the executive or even the legislature and the Federal Reserve has been going on for a while and there's been plenty of instances of conflict. The confidence game has been played for a while.

I think what is unique now about the Fed institutionally is now we're in that more emerging market context where the other institutions that are playing this game are not predictable and are playing a different game. So, for instance, Treasury, you would expect some sort of coordination with the Federal Reserve or even a player between say a demanding executive and the Federal Reserve. Lots of people are thinking about the Treasury under Bessant playing that role, but underneath that's very individualistic. Underneath that, the institution is being gutted. We've had five IRS commissioners this year. The main technocrat in Treasury was one of the first to go under the administration.

The role of the Fed is officially independent, and that's being debated in the courts right now, right? I think becomes even more important in that institute. It's always been key to US financial stability, broadly speaking, and what is the Fed going to do? And that's ultimately all that matters, and that's what folks focus on.

Now, I think you can't bank on a kind of coordination between, say, Treasury and the Fed, or even the Fed and certain constellation of interests or elites in Congress or in business. There is, I think, now, it's much more personalistic. In terms of the way policy is being made, that is a much more difficult environment for an institution to kind of stand its ground.

Its best strategy is still very much, as I wrote in the piece, if the dog barks at the moon, the moon doesn't bark back, right? And that is, I think, the stance that the Fed and other central banks under pressure have taken successfully and will continue to pursue. But here, as you say, Powell's term is coming to an end. You have a Supreme Court case or two, I believe, right? Where the independence of the Fed is, you know, at least implicitly at issue.

Where the United States is really entering uncharted territory here is that the expectation that the Fed, its reaction function can be in the broader interest of financial stability as opposed to jockeying around the preferences of a personal leader. That's declining. And once Powell is gone and there's a new Fed chairman in place, that those assumptions become even more questionable.

TG: Do you think that also applies in terms of the personalization, maybe the politicization to the Senate? Because in Trump's first term, the Senate really was a pretty effective bulwark. A Republican-controlled Senate at that was a pretty effective bulwark against the more fringe candidates that Trump nominated to the Fed for Fed governor posts and regional Fed presidencies.

When they were orthodox candidates nominated by Trump, whether it was Chris Waller or Rich Clare or Powell himself, it was a no-brainer. The Senate did not stand in the way where they did in the way of Stephen Moore, Judy Shelton.

Do you think the same holds true now? Is the Senate actually a check as effectively as it might have been in its past administration?

MR: I don't. I think the market, though, is just as effective a check. And I think the market as a pass-through through the Senate, the Senate being that the upper house, which in these kinds of political economies, again, it's strange to talk about the United States like this, but it's true, become kind of where elite interests get more represented, right, in the political system, just by nature of it being the upper house.

And the markets response, and you saw that this time around, right, in terms of both the kind of firm level response of high-level CEOs going in and saying, this is going to be destructive, the bond markets response in terms of saying, this is destructive, right, in terms of Treasury yields. I think that is what gets the Senate to respond, which then in turns puts some pressure on the administration institutionally.

So I don't think in, you know, waving our hand and saying, all else being equal, the Senate is a much weaker check than it was in Trump 1. That is clear. Look at the cabinet nominees that they have approved thus far. Even Mitch McConnell's certainly been interested in maximizing Republican power over the years, was still had some kind of independent power base. That's just not the case anymore with any particular senator. It's a much weaker check.

The Senate remains the place where economic elites can most effectively translate their grievances or their preferences to the presidency and to the executive branch. And so in that respect, I think it will become the place where, I say relative to the House, where that kind of elite level politics play out. Trump has backed down in the face of market pressure again and again. I think that's the one thing we can rely on. His personal preferences, I think, will continue to be dictated by fear of the market. And that I think is probably what some stability rests on. That's just precarious ground, institutionally.

TG: Yeah, well, thinking about markets now more broadly, and I guess kind of bringing it full circle, we started talking about some of the market movements that brought on this discussion. And we’re talking a lot in terms of this narrative of a Sell America theme, which actually when you look at our behavioral metrics, and again, I’ll have charts on this in the show notes, it’s not really being borne out.

There are outflows from fixed income markets for certain. I think that’s a real concern that is being expressed by institutional investors is particularly selling of longer dated treasuries. But actually, equity flows are coming back now from foreign investors. Dollar selling has sort of started to moderate. We’ll see.

Do you have a sense of how much of this risk premia that has been assigned to US assets, the dollar, has been discounted now, and how much further it might stand to go from here based upon all these risks that you’ve mentioned?

MR: Yeah, in our data and the kind of relationships between these indicator and those outcomes that you just described, I think we're just in an environment that is very sensitive. It's still extremely high policy uncertainty. There's a constellation of interest that says the United States should still be the most attractive place for capital in the world. I don't think anyone would say no to that.

But we're now in a realm where the possibility that that is not the case, data information that tells you that is not the case, the likelihood of that kind of information coming out and being credible is much higher than it's been in the past. That means for the market, the potential for these kinds of flows, outflows to start again or for there to be a large shock to what has now been repriced.

If you talk about tail risks of, say, a US debt default or a significant sustained sell-off in US treasuries, they're still tail risks, but they're really fat. They're way fatter than they've ever been, at least in my memory. I think that is the risk and that's the premium that we need to think about. So, we're just structurally in a different place. There's a lot of momentum toward resuming flow because the United States is still the powerhouse, the economic powerhouse of the world.

If you start to see data suggesting that is not the case, which we're starting to see some indications now, the potential for folks to go back to that week in mid-April where it seemed like there was a regime change, the likelihood of getting back there is just really much, much higher than you would expect even four, five, six months ago.

TG: I wanted to ask about the dollar because I think it's quite right for you to say that whoever, whatever your politics are, there's no interest, I don't think anyone has from reducing the appeal of US assets, not least because we have deficits to fund.

But I think there is a case to be made for a weaker dollar as part of this and you hear all these things like the Mar-a-Lago Accord and this coordinated or supposedly hopeful coordinated effort to potentially weaken the dollar while also encouraging inflows to buy US debt. But of course, we spent the whole podcast talking about how domestic and multilateral institutions are potentially weaker and that coordination you need strikes me as quite difficult.

Do you have any thoughts as to what this means for the dollar specifically in terms of its primacy as an invoicing currency and as a reserve holding for foreign central banks as part of this whole dynamic and whether they're actually is the possibility of coordinated moves on currencies a la The Plaza Accord in 1985?

MR: I don't think there's any possibility. I shouldn't say any possibility because anything is possible. But yeah, the statistician in me… There's a low probability, I think, of a kind of successful coordinated accord here along lines of Plaza Accords because I think it's hard to answer the question, particularly now that the tariff weapon has been unleashed and there's been pretty significant pushback in the Trump administration vis-à-vis China in particular has basically walked back a lot and folded.

I see why the United States under the Trump administration would want the Mar-a-Lago Accord. I don't see why the rest of the world would want a Mar-a-Lago Accord. And for an accord, you need mutual agreement. And again, there would be the idea that there would be the stick of the tariffs to bring folks in line, but that doesn't seem to be happening. Given that, I don't think the coordinated weakening of the dollar in some kind of new monetary accord is a likely outcome here.

These dynamics, what we spent the past minutes discussing, weaken the dollar as a reserve currency. If you think about the term, the full faith and credit of the US government, so many things in this are backed by the full faith and credit of the US government. What is now the full faith and credit of the US government under this kind of political leadership? There's a lot backing it up, but it's definitely not full.

And obviously, that's about more about treasuries and the dollar, but the point stands in that the idea of the dollar now is just as fait accompli in terms of global invoicing or kind of just with all the other reserve currency attributes declined and is going to decline further the longer this goes on. There is nowhere really else to go and that will determine a lot of the kind of resiliency of the dollar. But I think it's time as the default benchmark reserve currency without question is now done. And the question is, where does it go from here? And a lot of that will be determined by macroeconomic and economic outcomes.

But that political assumption of the United States is reliable and credible, that's, I think, a lot harder to claim now than it was six months ago. And that's very hard to get back.

TG: Well, that's a pretty somber note to finish on. But one that I think just highlights how important some of these questions we've discussed are. And I think, Mark, we're lucky to at least have you back to talk to us this week and can hopefully do it again with you soon. Really appreciate you taking the time.

MR: Thanks for having me.

TG: Thanks for listening to Street Signals. Clients can find this podcast and all of our research at our web portal Insights.

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We'll see you next time.