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Speaker 1: Let's get to our guests. David Kotalk is with us.

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Speaker 1: He is the c i O, also the chairman of

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Speaker 1: Cumberland Advisers who joins from Colorado. David, it's always a pleasure.

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Speaker 1: We're focused a lot on the FED and what we've

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Speaker 1: been hearing from a number of officials. Clearly the inflation

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Speaker 1: genie is not yet back in the bottle. We're looking

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Speaker 1: at anywhere from maybe a hundred basis points to a

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Speaker 1: hundred and fifty basis points of further tightening. What does

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Speaker 1: that mean for the equity market, Well, it's a gut

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Speaker 1: to be a headwind, Doug. If you look at the

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Speaker 1: classic model and develop what an equity risk premium that

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Speaker 1: it is appropriate for a given level of interest rates,

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Speaker 1: meaning take the earnings of companies, come up with an

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Speaker 1: earnings yield and compare it to the riskless interest rate.

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Speaker 1: We have rising riskless interest rates and there's a lot

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Speaker 1: of speculum nation about inflection points and pivots, but the

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Speaker 1: path is higher. Whether it's tired to five terminal rate

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Speaker 1: or five and a half terminal rate or something else

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Speaker 1: is not for me. The relevant issue. It's the direction,

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Speaker 1: and the direction is this Federal Reserve will continue on

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Speaker 1: a course until the inflation rate meets or trends to

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Speaker 1: their target. That's trouble for the stock market, David, but

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Speaker 1: that's what they have to do. Yes, they do, because

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Speaker 1: if they let inflation get embedded at three or four.

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Speaker 1: And there's a lot of talk about now let's get

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Speaker 1: do away with two. What if it's three? What if

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Speaker 1: it's for the higher it is, the harder it is

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Speaker 1: to stop, the more damage it does. Inflation is an

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Speaker 1: in sids tax on everybody. It's a big distortion and

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Speaker 1: the Fed has to stay the course. So how is

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Speaker 1: Cumberland playing the current environment right now? I know you're

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Speaker 1: reliant on some of the models that you build. What

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Speaker 1: are they telling you? What are the signals? Well, we

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Speaker 1: have cash reserves in stock market accounts right now. The

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Speaker 1: US equity exchange traded fund account, which is one that

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Speaker 1: I'm involved in managing, is about one third in cash.

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Speaker 1: Cash doesn't decline in value, and you need a cash reserve. Now.

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Speaker 1: You know, if if we have a wonderful piece breaks

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Speaker 1: out in the world, everything is terrific, that's good. We'll

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Speaker 1: have a buying opportunity. I'd love to see that but

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Speaker 1: I think risk management has to include a tax reserve.

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Speaker 1: And on top of it, we have the makings of

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Speaker 1: a contagion taking place in the crypt to space, David,

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Speaker 1: it does seem as that Wall Street is suddenly becoming

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Speaker 1: more and more favored towards China. We've got a lot

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Speaker 1: of the big, big investment houses that who are now

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Speaker 1: looking at seriously as the investment proposition, what's the game,

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Speaker 1: what's it will take? Well, we we look at China too.

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Speaker 1: We saw the Bank of America release. We've been following

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Speaker 1: the markets, both H and A shares, and we think

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Speaker 1: it will be an opportunity if we get beyond the

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Speaker 1: COVID lockdowns. That seems to be a rolling anticipation but

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Speaker 1: not a reality yet, including the most recent news you've

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Speaker 1: just reported today. So the second largest economy in the world,

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Speaker 1: one point four billion people lockdown for a long time.

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Speaker 1: Potential is there for markets and for economic recovery wish

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Speaker 1: And it seems as though after of the Party Congress,

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Speaker 1: that Beijing now is really trying to address some of

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Speaker 1: the economic weakness. Support for the property market also, maybe

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Speaker 1: some tweaks to COVID policy was interesting. The ft reporting

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Speaker 1: the Chinese authorities are recruiting workers from villages and bussing

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Speaker 1: them to uh an iPhone assembly plant that is owned

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Speaker 1: by Fox Con. David, I know you to be a

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Speaker 1: pretty astute political observer. Talk to me about the ramifications

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Speaker 1: of the Republican control of the U. S. House. Now, well,

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Speaker 1: we know mckenry is likely to be the new chair

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Speaker 1: of the House Financial Services Committee. That seems to be

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Speaker 1: in the cards that he replaces very famous maccine Um.

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Speaker 1: I believe market agents will like that. The problem, of

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Speaker 1: course is mckenry is more of a centriest and he's

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Speaker 1: astute in financial manners, but he's got a deal with

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Speaker 1: some very crazy hard right people, and whether there's enough majority.

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Speaker 1: The narrowness in the House makes us very problematic, Doug.

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Speaker 1: But over all, David, we find that if we get

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Speaker 1: anything such as grid luck, actually equities like it. Well,

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Speaker 1: maybe they will like it. If we don't have a

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Speaker 1: debt ceiling crisis. If we repeat the new Gingrich debt

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Speaker 1: ceiling hardball, that's a different story. And I remember that

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Speaker 1: meltdown and the downgrade of the United States because it

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Speaker 1: happened on a Friday night when we were having our

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Speaker 1: gathering in Maine, and Mike McKee was reporting that Friday

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Speaker 1: night for five hours on Bloomberg because there were a

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Speaker 1: bunch of people in one place and he was there

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Speaker 1: with the camera. I hope we don't go through a

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Speaker 1: debt ceiling farce again. I don't think you're alone in that, David,

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Speaker 1: talk to me. We've started the conversation about the FED

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Speaker 1: and the implications for asset prices. The bond market really

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Speaker 1: has been well, apparently under a little bit of stress.

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Speaker 1: There have been a lot of bondwatchers talking about very

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Speaker 1: very tight liquidity conditions. How do you understand what's been

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Speaker 1: happening in the bond market right now? Where there's no

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Speaker 1: question there's an enigma in the inversion of the yield curve.

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Speaker 1: If you believe the yield curve inversion, then the terminal

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Speaker 1: rate estimates of five or five and a half percent

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Speaker 1: are too high. If you think the treasury bond market

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Speaker 1: is being distorted by flows from international sources, then you

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Speaker 1: can say, well, I can see why there's prices prices

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Speaker 1: and treasuries. They are creating an inverted curve, especially when

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Speaker 1: you look at cross currency interest rate swaps and they

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Speaker 1: reveal some of that pricing. If you then look into

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Speaker 1: the United States and you say, okay, the thirty year

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Speaker 1: US Treasury fully taxable to an American investor is yielding

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Speaker 1: under four percent, but a very high grade tax free

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Speaker 1: bond of the same maturity is yielding four and a

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Speaker 1: half percent. Why would the tax ree yield be higher

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Speaker 1: than the taxable yield. That's upside down and backwards. So

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Speaker 1: there's an enigma in the bond market. I don't think

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Speaker 1: the inversion so ironclad clear. David, thank you so much

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Speaker 1: for for your time. Who knew that there was an

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Speaker 1: enigma in the Bonda vodka? I think there ever hasn't

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Speaker 1: made well. But anyway, David got pretty to have him

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Speaker 1: on the program. Chairman of Cumberland Advisers