1 00:00:11,200 --> 00:00:14,760 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:14,840 --> 00:00:17,840 Speaker 1: I'm Tracy Allaway and I'm Joe. WI isn't all Joe. 3 00:00:17,920 --> 00:00:20,880 Speaker 1: I feel like it's pretty hard to be an investment 4 00:00:20,920 --> 00:00:23,439 Speaker 1: manager at the moment, Like I feel, I feel like 5 00:00:23,480 --> 00:00:25,760 Speaker 1: it's hard at the best of times, but at the 6 00:00:25,840 --> 00:00:30,319 Speaker 1: moment you have this intense volatility. So stuff that is 7 00:00:30,440 --> 00:00:34,440 Speaker 1: normally volatile, like stocks and commodities, is even more volatile. 8 00:00:34,760 --> 00:00:37,159 Speaker 1: And then you have stuff that isn't really supposed to 9 00:00:37,240 --> 00:00:40,559 Speaker 1: be volatile but definitely is in the new environment. And 10 00:00:40,560 --> 00:00:44,159 Speaker 1: I'm thinking mostly about bonds well, and also, you know, 11 00:00:44,200 --> 00:00:49,920 Speaker 1: the underlying macro situation is just extremely complicated and contested. 12 00:00:50,080 --> 00:00:53,040 Speaker 1: I mean, like there's a debate about whether, you know, 13 00:00:53,080 --> 00:00:56,760 Speaker 1: the last two quarters considered are characterized as a recession, 14 00:00:57,120 --> 00:01:00,400 Speaker 1: and there's kind of legit questions about that in you know, 15 00:01:00,480 --> 00:01:03,160 Speaker 1: setting aside NBA vers two quarters, Like how should you 16 00:01:03,240 --> 00:01:07,520 Speaker 1: call this environment in which consumer sentiment is really low, 17 00:01:08,120 --> 00:01:11,839 Speaker 1: growth is down, employment is booming, inflation is still hot, 18 00:01:12,400 --> 00:01:15,559 Speaker 1: consumption is still high. Like these are just like really difficult, 19 00:01:15,840 --> 00:01:20,440 Speaker 1: uh environments understanding part because it is kind of unprecedented. Yeah, 20 00:01:20,520 --> 00:01:23,760 Speaker 1: and it seems like everyone kind of feels bad, and 21 00:01:23,800 --> 00:01:28,720 Speaker 1: all the survey based economic measures suggest that sentiment is deteriorating, 22 00:01:28,720 --> 00:01:32,240 Speaker 1: but at the same time, the hard numbers are really resilient, 23 00:01:32,360 --> 00:01:36,880 Speaker 1: so actual spending and investment just keep going. And yeah, 24 00:01:36,920 --> 00:01:41,200 Speaker 1: you're right, it's a really weird environment, particularly if you're 25 00:01:41,200 --> 00:01:43,720 Speaker 1: trying to put money to work. And then I would say, 26 00:01:43,760 --> 00:01:45,959 Speaker 1: over the last two years, like everyone kind of got 27 00:01:46,000 --> 00:01:48,800 Speaker 1: it wrong at every turn, right, Like everyone said, Okay, 28 00:01:49,200 --> 00:01:53,040 Speaker 1: COVID hit in early. Here comes a big downturn and 29 00:01:53,080 --> 00:01:55,640 Speaker 1: a recession, and it's like, actually, we had the shortest 30 00:01:55,920 --> 00:01:58,680 Speaker 1: recession in history, and then stocks were at all time 31 00:01:58,760 --> 00:02:02,640 Speaker 1: has a few months later, then you know, fast forward 32 00:02:02,680 --> 00:02:06,640 Speaker 1: a little bit to people are super positive. Yeah, inflation 33 00:02:06,760 --> 00:02:10,160 Speaker 1: was ticking up, but he's likely transitory. It's like reopening. 34 00:02:10,400 --> 00:02:13,840 Speaker 1: And everyone got that wrong, particularly a lot of investors, 35 00:02:14,120 --> 00:02:17,040 Speaker 1: judging by the reprist how fast the repricing happened. The 36 00:02:17,120 --> 00:02:20,160 Speaker 1: FED had to pivot pretty quickly when it realized inflation 37 00:02:20,240 --> 00:02:23,359 Speaker 1: would persist for longer than expected. Pivot really started in November. 38 00:02:23,440 --> 00:02:26,760 Speaker 1: So it's like, at no point has it felt like 39 00:02:26,760 --> 00:02:29,880 Speaker 1: the consensus has been like had a good feel on 40 00:02:29,919 --> 00:02:33,160 Speaker 1: this cycle. At no point has it felt like anyone 41 00:02:33,240 --> 00:02:36,680 Speaker 1: really knows what's going on? Correct, is that what you're saying? Yeah? Okay. 42 00:02:36,720 --> 00:02:38,800 Speaker 1: On that note, we are going to be speaking with 43 00:02:38,800 --> 00:02:42,040 Speaker 1: someone about all of these very very big topics. Really 44 00:02:42,080 --> 00:02:44,680 Speaker 1: the perfect guest we're going to be speaking with Dan Ivson. 45 00:02:44,840 --> 00:02:47,880 Speaker 1: He is, of course the group Chief Investment Officer and 46 00:02:48,080 --> 00:02:52,080 Speaker 1: Managing Director over at pimco's Newport Beach. For those that 47 00:02:52,160 --> 00:02:54,320 Speaker 1: don't know Pimco, I mean you must know Pimco. But 48 00:02:54,440 --> 00:02:57,360 Speaker 1: PIMCO has something like two trillion dollars worth of assets 49 00:02:57,400 --> 00:03:00,239 Speaker 1: under management, so making these tough decisions about out the 50 00:03:00,280 --> 00:03:04,560 Speaker 1: macro outlook and where to actually invest every day. So Dan, 51 00:03:04,680 --> 00:03:07,280 Speaker 1: thank you so much for coming on all thoughts. Well, 52 00:03:07,280 --> 00:03:09,800 Speaker 1: thank you Tracy and Joe. It's very excited to be 53 00:03:09,880 --> 00:03:14,480 Speaker 1: here today. So you sit on Pimcoe's investment committee, I'm 54 00:03:14,520 --> 00:03:18,160 Speaker 1: really curious what's top of mind for the people who 55 00:03:18,320 --> 00:03:21,560 Speaker 1: have to do something with two trillion dollars worth of 56 00:03:21,600 --> 00:03:24,040 Speaker 1: assets every day? You know, what are you guys talking 57 00:03:24,040 --> 00:03:27,200 Speaker 1: about and what's what's um on the on the top 58 00:03:27,280 --> 00:03:29,160 Speaker 1: of the agenda for you at the moment. Sure, well, 59 00:03:29,600 --> 00:03:32,800 Speaker 1: you know, inflation is is certainly a topic. As you 60 00:03:32,840 --> 00:03:37,720 Speaker 1: mentioned this has been an incredibly challenging time from economic 61 00:03:37,760 --> 00:03:41,920 Speaker 1: forecasting perspective, First the global pandemic, than an unprecedented amount 62 00:03:41,920 --> 00:03:46,120 Speaker 1: of fiscal stimulus, and now an inflation problem that at 63 00:03:46,160 --> 00:03:49,400 Speaker 1: least is partially related to those two prior points. So 64 00:03:50,240 --> 00:03:52,280 Speaker 1: increasingly we're spending a lot of time talking about this 65 00:03:52,320 --> 00:03:56,280 Speaker 1: inflation dynamic. Of course, um, how policy makers are going 66 00:03:56,320 --> 00:03:59,640 Speaker 1: to you'll look to look to you know, get inflation 67 00:03:59,720 --> 00:04:03,560 Speaker 1: back towards their targets. And now increasingly markets are seeing 68 00:04:04,360 --> 00:04:07,840 Speaker 1: what has you know, historically been um, a fairly obvious 69 00:04:07,840 --> 00:04:11,280 Speaker 1: trade off, and that's you know, growth employment, uh, and 70 00:04:11,360 --> 00:04:14,960 Speaker 1: this inflation problem and how will that be balanced over time? 71 00:04:15,760 --> 00:04:18,080 Speaker 1: In addition to that, of course, we're not you know, 72 00:04:18,320 --> 00:04:22,040 Speaker 1: operating in a normal environment. We have war in Europe, 73 00:04:22,600 --> 00:04:26,880 Speaker 1: lots of uncertainty, and ongoing global tension between the United States, 74 00:04:27,120 --> 00:04:30,760 Speaker 1: you know, other Western countries in China. So there's just 75 00:04:30,800 --> 00:04:33,320 Speaker 1: a lot of uncertainty, UM, a lot of risk, and 76 00:04:33,360 --> 00:04:38,680 Speaker 1: we're trying to gain sufficiently broad perspectives to see where 77 00:04:38,680 --> 00:04:40,600 Speaker 1: we may have an edge. And I think it's important 78 00:04:40,600 --> 00:04:43,960 Speaker 1: in an environment as highly uncertain as this one to 79 00:04:44,000 --> 00:04:45,840 Speaker 1: realize when you know, at a particular point in time, 80 00:04:45,880 --> 00:04:48,320 Speaker 1: you don't have an edge and where um your entering 81 00:04:48,400 --> 00:04:51,800 Speaker 1: markets that represent a lot of risk, a lot of volatility, 82 00:04:51,880 --> 00:04:55,400 Speaker 1: and I think there's a risk management piece here as well. Um, 83 00:04:55,440 --> 00:04:57,600 Speaker 1: there's enough volatility where we should be able to zero 84 00:04:57,640 --> 00:05:00,360 Speaker 1: in on areas where we do have an edge, where 85 00:05:00,400 --> 00:05:03,280 Speaker 1: we can't add value while looking to shelter the portfolio 86 00:05:03,320 --> 00:05:05,359 Speaker 1: from a lot of the unwanted volatility that we're seeing 87 00:05:05,360 --> 00:05:08,839 Speaker 1: elsewhere in markets. Um So, So that's one key theme. 88 00:05:08,880 --> 00:05:12,120 Speaker 1: The second, of course, is a lot of real time 89 00:05:12,160 --> 00:05:16,000 Speaker 1: discussions around this volatility that we witnessed beneath the surface. 90 00:05:16,279 --> 00:05:19,320 Speaker 1: A lot of dispersion across equity markets, in fixed INCA markets, 91 00:05:19,800 --> 00:05:23,279 Speaker 1: a lot of you know, localized overshooting. Given markets aren't 92 00:05:23,320 --> 00:05:26,880 Speaker 1: super liquid, um, they don't feel distressed, but certainly a 93 00:05:26,880 --> 00:05:29,359 Speaker 1: type of environment where there's you know, you using a 94 00:05:29,360 --> 00:05:31,920 Speaker 1: baseball analogy, a lot of singles, um, you know to 95 00:05:32,080 --> 00:05:34,560 Speaker 1: hit while you gotta be careful, you know, swinging for 96 00:05:34,560 --> 00:05:36,840 Speaker 1: a home run given this radical uncertainty and the fact 97 00:05:36,839 --> 00:05:38,880 Speaker 1: that you can get you know, caught off sides pretty 98 00:05:38,920 --> 00:05:42,800 Speaker 1: quickly in this type of market. So what do you 99 00:05:42,960 --> 00:05:45,000 Speaker 1: talk a little bit more about, you know, you said 100 00:05:45,680 --> 00:05:49,040 Speaker 1: identifying your own sources of edge, like what are they? 101 00:05:49,120 --> 00:05:50,520 Speaker 1: You know, And I want to get to the actual 102 00:05:50,680 --> 00:05:53,200 Speaker 1: market environment you're outlook for inflation and bonds and all that. 103 00:05:53,240 --> 00:05:55,799 Speaker 1: But when you think about, like where sources of edge 104 00:05:55,880 --> 00:05:58,159 Speaker 1: come from an environment like this, Like what's the answer 105 00:05:58,200 --> 00:06:01,560 Speaker 1: to that? Well, I think think one lates to UM. 106 00:06:01,600 --> 00:06:04,400 Speaker 1: You know, markets that are are less liquid than they've 107 00:06:04,440 --> 00:06:07,160 Speaker 1: been in the past, UM, and and opportunities to take 108 00:06:07,160 --> 00:06:12,080 Speaker 1: advantage of some overshooting UM. Perhaps a good example is 109 00:06:12,120 --> 00:06:14,360 Speaker 1: more recently over the last few weeks, or or maybe 110 00:06:14,400 --> 00:06:19,480 Speaker 1: going back several weeks, where UM equities work quite weak. 111 00:06:19,960 --> 00:06:24,839 Speaker 1: UM credit spreads were widening and widening fairly significantly, big 112 00:06:24,920 --> 00:06:29,560 Speaker 1: upticks in the various volatility markets UM, you know volatility. 113 00:06:29,839 --> 00:06:32,080 Speaker 1: Volatility market could be an agency mortgage, but it could 114 00:06:32,080 --> 00:06:36,200 Speaker 1: also be more technical you know volatility markets. And you know, 115 00:06:36,240 --> 00:06:39,960 Speaker 1: we've seen even over the course of this summer, various 116 00:06:40,200 --> 00:06:43,280 Speaker 1: UM levered players you know, other other you know, specially 117 00:06:43,320 --> 00:06:46,000 Speaker 1: type styles get a bit over their skis for risk 118 00:06:46,080 --> 00:06:49,080 Speaker 1: perspective and part of the stack back that we witnessed 119 00:06:49,120 --> 00:06:51,400 Speaker 1: over the last several weeks and you know, pretty powerful 120 00:06:51,440 --> 00:06:54,520 Speaker 1: recovery into what appeared to be you know, bad fundamental 121 00:06:54,560 --> 00:06:56,919 Speaker 1: news is tied to you know a little bit of 122 00:06:56,960 --> 00:07:00,880 Speaker 1: this UM this this positioning that was a bit off sides. 123 00:07:01,360 --> 00:07:05,800 Speaker 1: So you mentioned how unusual the economic environment has been, 124 00:07:05,920 --> 00:07:08,840 Speaker 1: and I feel like this is the source of tensions 125 00:07:08,960 --> 00:07:11,400 Speaker 1: or problems for a lot of investors at the moment. 126 00:07:11,480 --> 00:07:16,560 Speaker 1: Like we're used to thinking about a normal economic cycle. 127 00:07:16,720 --> 00:07:19,200 Speaker 1: You know, it starts and then at some point it stops. 128 00:07:19,240 --> 00:07:22,080 Speaker 1: But it feels like what we've seen post pandemic is 129 00:07:22,080 --> 00:07:25,760 Speaker 1: is not a normal economic cycle at all. How would 130 00:07:25,760 --> 00:07:28,320 Speaker 1: you characterize it, Like, how are you thinking about it? 131 00:07:28,360 --> 00:07:32,080 Speaker 1: Is this late cycle? Is it early cycle? It seems 132 00:07:32,160 --> 00:07:35,360 Speaker 1: very confusing at the moment, A cycle outside the cycle? Yeah, 133 00:07:35,520 --> 00:07:37,480 Speaker 1: is it even a cycle? Who knows? Yeah? I think 134 00:07:37,520 --> 00:07:40,960 Speaker 1: the multiple cycles or or at least significant cross currents UM. 135 00:07:41,560 --> 00:07:43,240 Speaker 1: I think when you look at cycles, I think it's 136 00:07:43,280 --> 00:07:45,040 Speaker 1: important to make the distinction between a lot of the 137 00:07:45,080 --> 00:07:47,240 Speaker 1: Western economies and what's going on in China right now, 138 00:07:48,000 --> 00:07:50,560 Speaker 1: UM get to a lot of us UM COVID is 139 00:07:50,640 --> 00:07:52,720 Speaker 1: mostly behind us, and where in the midst of a 140 00:07:52,800 --> 00:07:57,960 Speaker 1: pretty significant COVID related reopening process, very strong demand for 141 00:07:58,120 --> 00:08:03,160 Speaker 1: travel services shift away in in in many economies from 142 00:08:03,560 --> 00:08:08,160 Speaker 1: UM COVID related goods consumption towards you know, a more 143 00:08:08,200 --> 00:08:12,440 Speaker 1: normalized um. You know, focus on areas associated with a 144 00:08:12,480 --> 00:08:15,880 Speaker 1: more more traditional and open economy. Over in China now 145 00:08:15,880 --> 00:08:18,720 Speaker 1: they're dealing with COVID. Other Asian countries are to a 146 00:08:18,800 --> 00:08:22,200 Speaker 1: lesser degree, and they're in the midst of an environment, 147 00:08:22,320 --> 00:08:25,200 Speaker 1: you know, where economic growth is slow and slowing uh, 148 00:08:25,280 --> 00:08:28,880 Speaker 1: and inflation isn't a material problem. And then back to 149 00:08:29,160 --> 00:08:32,640 Speaker 1: you know, even the US economy very very different or 150 00:08:32,679 --> 00:08:35,480 Speaker 1: difficult to understand in the sense that we do have 151 00:08:35,760 --> 00:08:38,920 Speaker 1: significant momentum and a lot of sectors. Yet we're quickly 152 00:08:39,000 --> 00:08:42,360 Speaker 1: beginning to see the impact of prior policy tightening on 153 00:08:42,520 --> 00:08:45,120 Speaker 1: some carry key areas of the economy as well. So 154 00:08:45,480 --> 00:08:49,160 Speaker 1: you know, the level of complexity is is there. But again, 155 00:08:49,400 --> 00:08:51,200 Speaker 1: you know, when you have an inflation problem and you 156 00:08:51,240 --> 00:08:54,719 Speaker 1: have policymakers looking at tighten policy, you're going to get 157 00:08:54,760 --> 00:08:57,520 Speaker 1: into a situation where it's almost certain that you're gonna 158 00:08:57,520 --> 00:08:59,960 Speaker 1: see some economic weakness. And then of course the channel 159 00:09:00,040 --> 00:09:02,880 Speaker 1: so then becomes, you know, how does this economic weakness 160 00:09:03,400 --> 00:09:06,240 Speaker 1: impact inflation? UH? Is there a chance of a soft 161 00:09:06,320 --> 00:09:10,840 Speaker 1: landing or do we have a situation where probabilities are 162 00:09:10,840 --> 00:09:13,080 Speaker 1: growing and growing fairly rapidly, that we end up in 163 00:09:13,080 --> 00:09:16,360 Speaker 1: a recessionary environment. Of course, those different scenarios have very 164 00:09:16,360 --> 00:09:20,600 Speaker 1: different implications on what segments of the opportunities set are 165 00:09:20,640 --> 00:09:24,640 Speaker 1: going to perform well, both an absolute and relative terms. Well, 166 00:09:24,679 --> 00:09:26,920 Speaker 1: let's just get right into that. And of course there's 167 00:09:26,960 --> 00:09:30,360 Speaker 1: an econ debate. You have folks like Larry Summers and 168 00:09:30,400 --> 00:09:34,760 Speaker 1: Olivia Blanchard saying like, look, it is, it is unrealistic. 169 00:09:34,800 --> 00:09:38,320 Speaker 1: It's wishful thinking to say that we can really get 170 00:09:38,360 --> 00:09:42,160 Speaker 1: inflation back down to any reasonable level without having a 171 00:09:42,200 --> 00:09:45,880 Speaker 1: meaningful rise, a significant rise in the unemployment rate. Do 172 00:09:45,920 --> 00:09:48,000 Speaker 1: you buy that or do you think? I mean, because 173 00:09:48,040 --> 00:09:50,360 Speaker 1: I think this is the multi trillion dollar question right now. 174 00:09:50,559 --> 00:09:55,600 Speaker 1: Can the Fed get back to target without a painful recession? Yeah? So, 175 00:09:55,679 --> 00:09:58,800 Speaker 1: I I think histories on their side. Uh, you don't 176 00:09:58,800 --> 00:10:02,559 Speaker 1: see a lot of breads Summers and Blanched for sure, 177 00:10:03,480 --> 00:10:06,320 Speaker 1: But there's certainly a chance that we that we um 178 00:10:06,600 --> 00:10:10,880 Speaker 1: see what will feel like a somewhat soft landing. Now. 179 00:10:10,960 --> 00:10:13,679 Speaker 1: You know, here at PIMCO, we still think core CPI 180 00:10:13,720 --> 00:10:17,240 Speaker 1: at the end of this year is gonna remain elevated 181 00:10:17,280 --> 00:10:19,720 Speaker 1: up near that five and a half percent type range 182 00:10:19,960 --> 00:10:22,000 Speaker 1: even out you know, towards the end of twenty three, 183 00:10:22,000 --> 00:10:24,320 Speaker 1: and I take that forecast with it with a great assault, 184 00:10:24,360 --> 00:10:27,559 Speaker 1: given extreme uncertainty, But we don't see inflation getting back 185 00:10:27,600 --> 00:10:29,439 Speaker 1: below three and a half percent, you know, all the 186 00:10:29,480 --> 00:10:32,840 Speaker 1: way out to three. So we do think that the 187 00:10:32,920 --> 00:10:35,920 Speaker 1: likelihood is the FEDS going to need to tighten, and 188 00:10:36,360 --> 00:10:40,560 Speaker 1: tighten fairly significantly from here. But we do think there's 189 00:10:40,559 --> 00:10:44,320 Speaker 1: at least a shot of a somewhat soft landing. We think, 190 00:10:44,400 --> 00:10:46,520 Speaker 1: you know, officially, you know, we're gonna have a recession. 191 00:10:47,240 --> 00:10:51,320 Speaker 1: It could be a prolonged but fairly mild recession. But 192 00:10:51,320 --> 00:10:53,720 Speaker 1: but again, um, one of the bright spots, if if 193 00:10:53,720 --> 00:10:55,679 Speaker 1: there is a bright spot here, is that you know, 194 00:10:55,800 --> 00:10:58,520 Speaker 1: over the last few cycles, there appears to be a 195 00:10:58,559 --> 00:11:02,960 Speaker 1: strong and increasingly strong relationship between the financial economy and 196 00:11:02,960 --> 00:11:07,160 Speaker 1: the real economy. And you've already seen in response to 197 00:11:08,040 --> 00:11:13,079 Speaker 1: moderate tightening thus far, a pretty significant impact on financial conditions. 198 00:11:13,400 --> 00:11:16,840 Speaker 1: Now they've loosened over the course of the last several weeks, 199 00:11:17,559 --> 00:11:21,000 Speaker 1: but that transmission mechanism appears to be working and working 200 00:11:21,040 --> 00:11:24,360 Speaker 1: fairly quickly. So again, we have an economy with very 201 00:11:24,400 --> 00:11:28,640 Speaker 1: strong momentum, particularly on the wage of the employment side. Uh, 202 00:11:28,679 --> 00:11:32,520 Speaker 1: and a FED in other central banks that have tightened 203 00:11:32,640 --> 00:11:36,240 Speaker 1: and it appears that they're having an impact on recent 204 00:11:36,280 --> 00:11:39,920 Speaker 1: economic activity. Um. So there is a path that I 205 00:11:39,920 --> 00:11:44,080 Speaker 1: would define as a moderate slowdown, in a slowdown that 206 00:11:44,160 --> 00:11:49,719 Speaker 1: doesn't have a material impact on overall credit fundamentals and 207 00:11:49,760 --> 00:11:53,000 Speaker 1: would probably put a twenty or thirty percent type probability 208 00:11:53,360 --> 00:11:56,840 Speaker 1: to that type of scenario. Again, UM, you know, anytime 209 00:11:56,880 --> 00:12:02,440 Speaker 1: you have headline inflation up in the nine percent type range, unprecedented, UM, 210 00:12:02,559 --> 00:12:05,719 Speaker 1: at least for you know, several decades in a lot 211 00:12:05,760 --> 00:12:09,120 Speaker 1: of geopolitical risk, including war in Europe, which could deteriorate 212 00:12:09,200 --> 00:12:13,360 Speaker 1: very very quickly. Uh, you have to position yourself, you know, 213 00:12:13,440 --> 00:12:17,000 Speaker 1: for at least a meaningful probability of war, material economic 214 00:12:17,040 --> 00:12:19,600 Speaker 1: slowdown and what that means. Of course, under that state 215 00:12:19,640 --> 00:12:22,240 Speaker 1: of the world, you have a lot more widening to 216 00:12:22,280 --> 00:12:27,839 Speaker 1: go across most credit sectors. You probably have significant earnings 217 00:12:28,080 --> 00:12:31,920 Speaker 1: UM deterioration from this point forward, which will likely lead 218 00:12:32,000 --> 00:12:36,520 Speaker 1: to weakness and equity markets as well. So you know again, UM, 219 00:12:36,559 --> 00:12:39,319 Speaker 1: you know, our general view is that we have a 220 00:12:39,360 --> 00:12:43,280 Speaker 1: fairly mild but sustained recession. That's why we continue to 221 00:12:43,320 --> 00:12:46,719 Speaker 1: be fairly cautious regarding the more credited sensitive sectors of 222 00:12:46,760 --> 00:12:50,920 Speaker 1: the market. But again that's one of a handful of 223 00:12:50,960 --> 00:12:53,680 Speaker 1: credible scenarios. And and again you have to prepare for 224 00:12:53,720 --> 00:12:56,360 Speaker 1: the worst as an investor, um and that means, you know, 225 00:12:56,520 --> 00:12:59,920 Speaker 1: thinking about preserving capital given the radical uncertainty as much 226 00:13:00,120 --> 00:13:03,720 Speaker 1: it does, you know, aggressively positioning to you know, generate 227 00:13:03,720 --> 00:13:06,400 Speaker 1: total return, particularly in those riskier segments of the market. 228 00:13:23,360 --> 00:13:25,920 Speaker 1: You know, Joe mentioned at the beginning of this conversation 229 00:13:26,280 --> 00:13:29,079 Speaker 1: that a lot of people got it wrong on inflation. 230 00:13:29,200 --> 00:13:31,680 Speaker 1: And I'm not just talking about the FED, of course, um, 231 00:13:31,679 --> 00:13:34,600 Speaker 1: which you know doubled down on the transitory idea a 232 00:13:34,640 --> 00:13:37,040 Speaker 1: number of times. But I'm thinking also just of the 233 00:13:37,080 --> 00:13:40,040 Speaker 1: broader market. You know, you look at break evens and 234 00:13:40,320 --> 00:13:45,240 Speaker 1: those were continuously expecting inflation to peak within a few months, 235 00:13:45,400 --> 00:13:48,760 Speaker 1: um and that hasn't really come to pass. What do 236 00:13:48,840 --> 00:13:52,320 Speaker 1: you think people got wrong about the inflation outlook? What 237 00:13:52,360 --> 00:13:55,839 Speaker 1: was it that the market seemed to miss? Yeah, I 238 00:13:55,880 --> 00:13:58,200 Speaker 1: think a lot of participants, you know, we're looking at 239 00:13:58,440 --> 00:14:03,000 Speaker 1: an inflationary process and traditional sense. I think the pandemic 240 00:14:03,040 --> 00:14:07,200 Speaker 1: itself was quite confusing, and of course had direct supply 241 00:14:07,280 --> 00:14:12,520 Speaker 1: side impacts on the global economy. And UH, even more importantly, UM, 242 00:14:13,080 --> 00:14:16,520 Speaker 1: the policy response on the fiscal side was massive, UM, 243 00:14:16,800 --> 00:14:21,360 Speaker 1: and and and and massive, sufficiently massive that again, we 244 00:14:21,400 --> 00:14:23,480 Speaker 1: haven't had a lot of good case studies in history 245 00:14:23,480 --> 00:14:26,880 Speaker 1: and dealing what's with such a significant demand side boost 246 00:14:26,960 --> 00:14:30,480 Speaker 1: at a time where you already had significant COVID related 247 00:14:30,480 --> 00:14:34,160 Speaker 1: supply constraints. So you know, it's an unprecedented situation. We 248 00:14:34,240 --> 00:14:36,400 Speaker 1: talked earlier about you know, these cross currents, you know, 249 00:14:36,480 --> 00:14:40,440 Speaker 1: impacting economies, making an even harder to forecast. And I 250 00:14:40,480 --> 00:14:42,280 Speaker 1: think you know, in some sense, you know, we all 251 00:14:42,440 --> 00:14:45,880 Speaker 1: or many of us were you know, using you know, 252 00:14:45,960 --> 00:14:49,680 Speaker 1: prior frameworks at least initially to think about it into 253 00:14:49,720 --> 00:14:53,520 Speaker 1: forecast this inflationary process. Now your points are you know, 254 00:14:54,040 --> 00:14:56,800 Speaker 1: a good one. UM. You know, even even you know 255 00:14:56,880 --> 00:15:00,320 Speaker 1: market pricing UM didn't envision you know, this level of 256 00:15:00,320 --> 00:15:04,680 Speaker 1: inflation or how sustained this inflation would be. But at 257 00:15:04,680 --> 00:15:07,720 Speaker 1: the same time, when you look today at longer term 258 00:15:07,760 --> 00:15:12,280 Speaker 1: measures of inflationary risk within markets, UH, they too are 259 00:15:12,320 --> 00:15:15,600 Speaker 1: fairly complacent. And if markets proved to be right, UM, 260 00:15:15,680 --> 00:15:18,840 Speaker 1: then in fact, UM, this inflationary event may prove to 261 00:15:18,880 --> 00:15:22,520 Speaker 1: be fairly temporary. So it is remarkable if you said, 262 00:15:22,680 --> 00:15:25,280 Speaker 1: you know, inflation would be you know up at nine percent, 263 00:15:25,720 --> 00:15:27,680 Speaker 1: people would be talking about a FED you know, well 264 00:15:27,720 --> 00:15:30,320 Speaker 1: behind the curve and you would have a ten year 265 00:15:30,360 --> 00:15:33,720 Speaker 1: break even inflation rate below two and a half percent. 266 00:15:33,920 --> 00:15:35,680 Speaker 1: Or looking at a popular rate, we look at a 267 00:15:35,960 --> 00:15:39,160 Speaker 1: forward rate, like a five year forward five year rate, uh, 268 00:15:39,320 --> 00:15:42,600 Speaker 1: well below two and a half percent, or yield curve 269 00:15:42,640 --> 00:15:45,440 Speaker 1: for that matter, today that is fairly flat um or 270 00:15:45,720 --> 00:15:49,680 Speaker 1: you know, slightly inverted at levels below three percent. So 271 00:15:50,080 --> 00:15:53,560 Speaker 1: you know, in some sense, um, although policymakers and investors 272 00:15:53,560 --> 00:15:56,520 Speaker 1: were late, uh, you wouldn't have made a tremendous amount 273 00:15:56,520 --> 00:15:59,480 Speaker 1: of money through a significant bet on inflation unless you 274 00:15:59,560 --> 00:16:01,880 Speaker 1: happen to be in some of those commodity markets, and 275 00:16:01,880 --> 00:16:05,040 Speaker 1: particularly the commodity markets that have been impacted as much 276 00:16:05,080 --> 00:16:07,800 Speaker 1: by the conflict in Ukraine as they were you know, 277 00:16:07,840 --> 00:16:11,360 Speaker 1: tied to this inflationary trend that we've been discussing. So again, 278 00:16:11,400 --> 00:16:14,360 Speaker 1: markets still may be wrong. There's still plenty of uncertainty 279 00:16:14,400 --> 00:16:18,280 Speaker 1: around this inflation dynamic on a go forward basis, but 280 00:16:18,360 --> 00:16:21,560 Speaker 1: it is um, you know, quite interesting that um, although 281 00:16:21,880 --> 00:16:25,160 Speaker 1: you know, people were late, markets are suggesting that perhaps 282 00:16:25,240 --> 00:16:28,280 Speaker 1: things can be just fine um with with a bit 283 00:16:28,320 --> 00:16:32,760 Speaker 1: more policy Titan. Yeah, some of these medium term break 284 00:16:32,840 --> 00:16:35,880 Speaker 1: even measures or five year five year forward break evens 285 00:16:36,320 --> 00:16:39,040 Speaker 1: never really got two out of hand and are kind 286 00:16:39,040 --> 00:16:42,480 Speaker 1: of a normal range. That Big said. The other phenomenon 287 00:16:42,720 --> 00:16:44,800 Speaker 1: this year is I don't want to say the FED 288 00:16:44,840 --> 00:16:46,960 Speaker 1: has been behind the curve per se, because that's a 289 00:16:46,960 --> 00:16:49,080 Speaker 1: little bit of a cliche and I'm never even totally 290 00:16:49,160 --> 00:16:51,600 Speaker 1: sure what it means. But I would say that it 291 00:16:51,640 --> 00:16:54,720 Speaker 1: does seem as though at each meeting they're sort of 292 00:16:54,760 --> 00:16:58,240 Speaker 1: expressing some hope or optimism that Okay, we think we're 293 00:16:58,240 --> 00:17:02,120 Speaker 1: getting closer to air, we're uh in a neutral range, 294 00:17:02,120 --> 00:17:04,159 Speaker 1: we're not going to go as hard. And then some 295 00:17:04,240 --> 00:17:06,760 Speaker 1: other data point comes out and it's like, whoop's time 296 00:17:06,800 --> 00:17:09,959 Speaker 1: to increase, uh, time to go faster again. And so 297 00:17:09,960 --> 00:17:12,399 Speaker 1: we got that seventy five. Maybe those hope was going 298 00:17:12,440 --> 00:17:16,560 Speaker 1: to go down another seventy five. Uh Still we're sort of, 299 00:17:16,840 --> 00:17:19,960 Speaker 1: you know, uh than police believes that policy is close 300 00:17:20,040 --> 00:17:23,600 Speaker 1: to neutral. Are we at a place where maybe the 301 00:17:23,600 --> 00:17:27,000 Speaker 1: FED UH is in a comfortable spot, or do you think, 302 00:17:27,119 --> 00:17:28,919 Speaker 1: as you said, you think there's going to still be 303 00:17:29,040 --> 00:17:32,240 Speaker 1: significant tightening from here that once again the FED might 304 00:17:32,280 --> 00:17:34,879 Speaker 1: have to go a little harder than it hopes in 305 00:17:35,000 --> 00:17:39,800 Speaker 1: the short term, at least in order to constrain inflation. Yeah, 306 00:17:39,840 --> 00:17:41,960 Speaker 1: you know, first of all, you know, policy bakers tend 307 00:17:42,000 --> 00:17:44,560 Speaker 1: to you know, you know, they'll, they'll, they'll, they'll tend 308 00:17:44,560 --> 00:17:47,600 Speaker 1: to have an optimistic spin on things. But you know, 309 00:17:47,680 --> 00:17:51,359 Speaker 1: certainly the price action of late suggests that what central 310 00:17:51,400 --> 00:17:53,840 Speaker 1: banks have done so far are beginning to have an 311 00:17:53,840 --> 00:17:59,520 Speaker 1: impact on economic growth. And um, it's not um a 312 00:18:00,040 --> 00:18:03,320 Speaker 1: you know, a view that hard landings around the corner. 313 00:18:03,640 --> 00:18:06,199 Speaker 1: Um credit spreads tightened over a hundred basis points, you know, 314 00:18:06,320 --> 00:18:08,920 Speaker 1: using you know, using high yield as as a proxy. 315 00:18:09,040 --> 00:18:13,360 Speaker 1: We've seen a significant you know, bouncing in equity valuations 316 00:18:13,440 --> 00:18:16,919 Speaker 1: in the midst of moderate deterioration and a lot of 317 00:18:16,920 --> 00:18:19,960 Speaker 1: the forward economic indicators. So relative to where we were 318 00:18:20,000 --> 00:18:23,320 Speaker 1: several weeks ago, the FET has to be reasonably pleased 319 00:18:23,720 --> 00:18:27,280 Speaker 1: with the impact of their policy decisions thus far. And 320 00:18:27,359 --> 00:18:30,719 Speaker 1: I think although Powell may have um, you know, slipped 321 00:18:30,760 --> 00:18:32,960 Speaker 1: up a touch in suggesting, you know, with a high 322 00:18:32,960 --> 00:18:36,520 Speaker 1: degree of confidence that we're we're implied degree of confidence 323 00:18:36,520 --> 00:18:38,760 Speaker 1: that we're in your neutral right now, I think the 324 00:18:38,840 --> 00:18:42,119 Speaker 1: key point was that, UM, we can begin to focus 325 00:18:42,119 --> 00:18:45,440 Speaker 1: a bit more on the data. UM, you have seen 326 00:18:46,200 --> 00:18:50,000 Speaker 1: the beginning of some you know, material signs of economic 327 00:18:50,080 --> 00:18:54,280 Speaker 1: slowing in a world with massive uncertainty of geopolitical variety 328 00:18:54,359 --> 00:18:57,720 Speaker 1: or traditional economic variety. So I think they're they're they're 329 00:18:57,720 --> 00:19:00,520 Speaker 1: they're comfortable in the sense that they've have gotten to 330 00:19:00,560 --> 00:19:03,040 Speaker 1: a point where they seem to have calm markets over 331 00:19:03,040 --> 00:19:06,560 Speaker 1: the short term. This could change very very quickly. And 332 00:19:06,640 --> 00:19:09,600 Speaker 1: when we look at you know, nine percent headline inflation rate, 333 00:19:09,640 --> 00:19:13,160 Speaker 1: which is likely at least the near term peak, they 334 00:19:13,160 --> 00:19:15,000 Speaker 1: have a lot of work to do UM, and we 335 00:19:15,040 --> 00:19:17,439 Speaker 1: do think that they likely will need to tighten a 336 00:19:17,480 --> 00:19:20,159 Speaker 1: bit more than what's currently embedded in the front end 337 00:19:20,160 --> 00:19:23,040 Speaker 1: of yield curves. We don't think they were wildly far away. 338 00:19:23,119 --> 00:19:25,600 Speaker 1: We still have thought that you know, three and a 339 00:19:25,640 --> 00:19:29,280 Speaker 1: half or four percent type funds rate combined with material 340 00:19:29,359 --> 00:19:33,879 Speaker 1: balance sheet reduction will likely be enough UM to UM 341 00:19:34,000 --> 00:19:38,440 Speaker 1: slow the economy and get inflation back towards their target. 342 00:19:39,000 --> 00:19:42,119 Speaker 1: Another hundred and fifty basis points of tightening more or 343 00:19:42,200 --> 00:19:44,240 Speaker 1: less is what you see that would be right, Yeah, 344 00:19:45,240 --> 00:19:47,920 Speaker 1: one fifty, But you know, again, even under that base 345 00:19:48,000 --> 00:19:51,240 Speaker 1: case scenario. You know, we're not back to core CPI 346 00:19:51,440 --> 00:19:55,880 Speaker 1: levels UM that you know, UM within most central bank 347 00:19:55,920 --> 00:20:00,320 Speaker 1: target zones until you know, probably out into and there 348 00:20:00,320 --> 00:20:02,520 Speaker 1: can be a lot of shocks of the interim, some 349 00:20:02,640 --> 00:20:05,320 Speaker 1: that may be helpful, UM you take to getting inflation 350 00:20:05,359 --> 00:20:09,679 Speaker 1: back down towards target, several events that may not be helpful. 351 00:20:09,720 --> 00:20:11,600 Speaker 1: And again I think humility has got to be the 352 00:20:12,359 --> 00:20:15,199 Speaker 1: key point here. But we think about inflation, when we 353 00:20:15,200 --> 00:20:18,919 Speaker 1: think about inflations impact on the developed markets, UM, you 354 00:20:18,960 --> 00:20:21,639 Speaker 1: have to be a meteorologist as well. UM. You know 355 00:20:21,680 --> 00:20:24,080 Speaker 1: you're going to go into a period UM in Europe 356 00:20:24,119 --> 00:20:29,439 Speaker 1: in particular, temperatures get cold, with massive uncertainty around energy 357 00:20:29,480 --> 00:20:33,640 Speaker 1: supplies and with Russia UM holding the cards at least 358 00:20:33,640 --> 00:20:36,040 Speaker 1: for the time being. So there there are a lot 359 00:20:36,080 --> 00:20:40,679 Speaker 1: of events that can derail UM the more positive scenarios 360 00:20:41,000 --> 00:20:44,280 Speaker 1: that we've described and have been embedded in market pricing. Again, 361 00:20:44,320 --> 00:20:46,159 Speaker 1: one of the reasons when we add up all of 362 00:20:46,200 --> 00:20:49,399 Speaker 1: these sources of uncertainty, we see, you know, the type 363 00:20:49,400 --> 00:20:52,440 Speaker 1: of rally that we've gotten across financial markets over the 364 00:20:52,480 --> 00:20:55,360 Speaker 1: last several weeks, and we're inclined, you know, to take 365 00:20:55,400 --> 00:20:58,639 Speaker 1: a few chips off the table um get get get away, 366 00:20:58,680 --> 00:21:02,199 Speaker 1: or reduce exposure to the economically sensitive areas of the market. 367 00:21:02,680 --> 00:21:06,600 Speaker 1: Not because our base case view UM is so dire. 368 00:21:07,040 --> 00:21:10,480 Speaker 1: It's just that this extreme uncertainty is such um that 369 00:21:10,480 --> 00:21:13,280 Speaker 1: that investors should just be careful in some of those 370 00:21:13,320 --> 00:21:15,679 Speaker 1: more credit sensitive investments where you know, essentially there are 371 00:21:15,720 --> 00:21:18,520 Speaker 1: forms of of of of a short volatility type trade, 372 00:21:18,560 --> 00:21:21,359 Speaker 1: and given that extreme uncertainty, we just don't think, you know, 373 00:21:21,440 --> 00:21:24,639 Speaker 1: you're getting paid enough just yet at these levels to 374 00:21:24,680 --> 00:21:29,800 Speaker 1: be overly aggressive in the those more economically sensitive areas 375 00:21:29,800 --> 00:21:33,480 Speaker 1: are higher yielding areas of the opportunity set. It's a generalization. 376 00:21:33,520 --> 00:21:36,200 Speaker 1: There's there's a certainly you know, things you can do, 377 00:21:36,440 --> 00:21:38,840 Speaker 1: you know, on the margin, but that's our general thinking. 378 00:21:38,920 --> 00:21:41,520 Speaker 1: You know, given where we are today, can you talk 379 00:21:41,560 --> 00:21:43,919 Speaker 1: a little bit more about how you see the credit 380 00:21:43,960 --> 00:21:47,639 Speaker 1: market at the moment, because I feel like, obviously, whenever 381 00:21:47,680 --> 00:21:51,439 Speaker 1: there's concern about a recession, a lot of those worries 382 00:21:51,440 --> 00:21:54,720 Speaker 1: are going to seep into corporate bonds um, which are 383 00:21:54,800 --> 00:21:58,600 Speaker 1: economically sensitive, as you mentioned. But then secondly, even before 384 00:21:58,720 --> 00:22:00,919 Speaker 1: the pandemic, I think there was quite a lot of 385 00:22:00,960 --> 00:22:04,439 Speaker 1: concern about froth in various portions of the credit market 386 00:22:04,760 --> 00:22:08,960 Speaker 1: things being overvalued and potentially a liquid when the time 387 00:22:09,000 --> 00:22:11,760 Speaker 1: came to sell. So how are you viewing that space 388 00:22:11,800 --> 00:22:16,920 Speaker 1: at the moment? Where are their opportunities and what's most vulnerable? Sure, so, 389 00:22:16,960 --> 00:22:18,919 Speaker 1: you know, just just at a very high level, and 390 00:22:19,040 --> 00:22:20,720 Speaker 1: I think there's a lot, a lot of interesting things 391 00:22:20,720 --> 00:22:24,000 Speaker 1: going on, you know, within the credit markets. Um, you know, 392 00:22:24,080 --> 00:22:26,760 Speaker 1: we were adding some credit um you know, back you 393 00:22:26,800 --> 00:22:29,040 Speaker 1: know several weeks ago, when you know, how yal corporate 394 00:22:29,040 --> 00:22:31,200 Speaker 1: bond spreads you know, had gotten out to the north 395 00:22:31,280 --> 00:22:35,240 Speaker 1: of six hundred basis points. We thought they're you know, 396 00:22:35,280 --> 00:22:38,760 Speaker 1: looking at historical analysis and and thinking about embedded our 397 00:22:38,760 --> 00:22:42,880 Speaker 1: recession probabilities and those spreads the credit markets were, um, 398 00:22:42,920 --> 00:22:47,679 Speaker 1: you know, forecasting a very high probability of at least 399 00:22:48,200 --> 00:22:52,080 Speaker 1: a moderate recession. After the rally. Now, over the course 400 00:22:52,119 --> 00:22:54,960 Speaker 1: of the last several weeks, um spreads look less interesting 401 00:22:55,000 --> 00:22:58,680 Speaker 1: to us. Uh, the embedded probability and in credit spreads 402 00:22:58,680 --> 00:23:01,840 Speaker 1: currently of a more moderate recession is dropped, you know, 403 00:23:02,000 --> 00:23:07,000 Speaker 1: down towards you know somewhere in that you know type areas. 404 00:23:07,119 --> 00:23:10,480 Speaker 1: So a little bit less interesting today. But back in 405 00:23:10,560 --> 00:23:12,640 Speaker 1: terms of thinking about the credit market and the structure 406 00:23:12,640 --> 00:23:15,440 Speaker 1: of the credit market. You know, a few thoughts here, 407 00:23:15,760 --> 00:23:20,000 Speaker 1: UM One, Since the Global Financial Crisis, you've had massive 408 00:23:20,040 --> 00:23:24,560 Speaker 1: regulation impacting the real estate areas of the credit markets, 409 00:23:25,200 --> 00:23:29,119 Speaker 1: asset back markets, UM, the market. The financial sector, as 410 00:23:29,160 --> 00:23:32,960 Speaker 1: we know, is heavily regulated today. UH not coincidentally, these 411 00:23:32,960 --> 00:23:34,880 Speaker 1: are all the areas that caused all the problems during 412 00:23:35,200 --> 00:23:40,360 Speaker 1: the GFC. UH. Non financial corporate credit growth in terms 413 00:23:40,440 --> 00:23:45,280 Speaker 1: of issuance has been significant, both public and private markets, 414 00:23:45,920 --> 00:23:48,480 Speaker 1: and that's where you know, even you know, before COVID, 415 00:23:49,040 --> 00:23:55,160 Speaker 1: we did see a meaningful deterioration in underwriting standards, more 416 00:23:55,200 --> 00:24:01,720 Speaker 1: corporate leverage, more aggressive rating agency framework around UM, you know, 417 00:24:01,720 --> 00:24:06,400 Speaker 1: putting their ratings on certain types of risk, far fewer covenants, 418 00:24:06,400 --> 00:24:09,679 Speaker 1: and when there were covenants, not particularly strong covenants. We 419 00:24:09,760 --> 00:24:13,119 Speaker 1: also saw a significant build out our growth in the 420 00:24:13,200 --> 00:24:18,520 Speaker 1: private markets, which are inherently lower quality lending markets. So 421 00:24:18,560 --> 00:24:21,080 Speaker 1: this is where we think there's the weak link this time. 422 00:24:21,119 --> 00:24:24,520 Speaker 1: If we were to get into a broad economic slowdown. UH. 423 00:24:24,680 --> 00:24:28,560 Speaker 1: Public markets have repriced, and they've repriced quite significantly in 424 00:24:28,640 --> 00:24:33,040 Speaker 1: certain sectors and segments of the market. Private credit markets, 425 00:24:33,080 --> 00:24:35,680 Speaker 1: that always move a lot more slowly, have lagged and 426 00:24:35,800 --> 00:24:39,160 Speaker 1: lagged considerably. That dynamic is true within the real estate 427 00:24:39,160 --> 00:24:42,719 Speaker 1: credit markets as well. If you look at what type 428 00:24:42,720 --> 00:24:45,800 Speaker 1: of spread you can obtain for like risk in a 429 00:24:45,880 --> 00:24:49,920 Speaker 1: public CMBs security versus you know where lending is going 430 00:24:49,960 --> 00:24:52,680 Speaker 1: on currently in the private space. So I think point 431 00:24:52,800 --> 00:24:56,280 Speaker 1: number one, um, it's the corporate credit sectors where there's 432 00:24:56,320 --> 00:24:59,560 Speaker 1: the most excess. It's nowhere near the type of excess 433 00:24:59,600 --> 00:25:01,919 Speaker 1: we saw uh in the mortgage credit markets leading up 434 00:25:01,960 --> 00:25:04,120 Speaker 1: to the global financial crisis. So don't want to set 435 00:25:04,160 --> 00:25:07,280 Speaker 1: over the alarming, but this is probably the weakest link 436 00:25:07,320 --> 00:25:09,000 Speaker 1: in the credit chain and where there will be some 437 00:25:09,080 --> 00:25:12,840 Speaker 1: interesting opportunities for fresh balance sheets, fresh band dates to 438 00:25:12,840 --> 00:25:17,440 Speaker 1: take advantage of what will likely be a moderate default 439 00:25:17,440 --> 00:25:20,520 Speaker 1: cycle over the course of the next few years. And 440 00:25:20,560 --> 00:25:23,080 Speaker 1: then again, if you have you know, a public band 441 00:25:23,119 --> 00:25:27,240 Speaker 1: date that's repriced quite significantly versus other private markets, it 442 00:25:27,359 --> 00:25:30,080 Speaker 1: makes sense to take advantage of those opportunities because over 443 00:25:30,119 --> 00:25:32,320 Speaker 1: time there's going to need to be convergence. It can 444 00:25:32,400 --> 00:25:36,480 Speaker 1: converge with public markets recovering. More likely it will converge 445 00:25:36,520 --> 00:25:40,080 Speaker 1: by gradual deterioration in marks in a widening of spread 446 00:25:40,119 --> 00:25:43,680 Speaker 1: levels in the private sector as well, and then the 447 00:25:43,720 --> 00:25:46,159 Speaker 1: last point, I'll make all those areas I mentioned earlier 448 00:25:46,240 --> 00:25:48,960 Speaker 1: that have been heavily regulated since the global financial crisis, 449 00:25:49,640 --> 00:25:53,080 Speaker 1: we think present tremendous opportunity for investors. People still get 450 00:25:53,080 --> 00:25:56,600 Speaker 1: nervous today about housing related risk. Banks continue to trade 451 00:25:56,680 --> 00:26:01,480 Speaker 1: in a very volatile fashion. Um. They are well capitalized, 452 00:26:01,600 --> 00:26:05,879 Speaker 1: and the mortgage credit market is near pristine um in 453 00:26:05,960 --> 00:26:09,960 Speaker 1: terms of you know, the borrower qualifications necessary to get 454 00:26:09,960 --> 00:26:12,160 Speaker 1: a loan over you know, the last decade or so. 455 00:26:12,160 --> 00:26:14,520 Speaker 1: So and those are some high level thoughts, um. And 456 00:26:14,560 --> 00:26:18,720 Speaker 1: again consistent with the way we're positioned across portfolios. Of course, UM, 457 00:26:18,800 --> 00:26:20,239 Speaker 1: you know there's a difference you know, and where when 458 00:26:20,240 --> 00:26:23,280 Speaker 1: we're operating in mutual fund space versus your longer locked 459 00:26:23,359 --> 00:26:26,399 Speaker 1: up alternative vehicles. But those say general principles are the 460 00:26:26,400 --> 00:26:29,840 Speaker 1: principles we're adhering to at this stage in the economic cycle. 461 00:26:30,760 --> 00:26:33,679 Speaker 1: So my next question is completely out of self interest, 462 00:26:33,720 --> 00:26:38,080 Speaker 1: but I I bought a house in in February of 463 00:26:38,119 --> 00:26:42,680 Speaker 1: this year. Did I top tick the market? And then secondly, secondly, 464 00:26:42,760 --> 00:26:46,399 Speaker 1: you know, you mentioned taking on some housing exposure or 465 00:26:46,480 --> 00:26:50,760 Speaker 1: real estate exposure, and I'm curious what the opportunity is 466 00:26:50,800 --> 00:26:52,879 Speaker 1: there exactly because We have seen a lot of people 467 00:26:52,920 --> 00:26:56,720 Speaker 1: worry about the fact that house prices shot up post pandemic, 468 00:26:57,000 --> 00:26:59,720 Speaker 1: secondly the fact that mortgage rates have shot up. And 469 00:26:59,760 --> 00:27:04,640 Speaker 1: then thirdly there's been some sort of market structure weirdness 470 00:27:04,880 --> 00:27:09,199 Speaker 1: within the arena of mortgage backed securities um where things. 471 00:27:09,560 --> 00:27:11,600 Speaker 1: You know, for a while it looked like the market 472 00:27:11,720 --> 00:27:14,199 Speaker 1: was sort of like creaking a little bit at the 473 00:27:14,320 --> 00:27:17,840 Speaker 1: edges as rates went up very very quickly. So how 474 00:27:17,920 --> 00:27:20,520 Speaker 1: are you balancing that? Can you just dig into housing 475 00:27:20,520 --> 00:27:24,239 Speaker 1: a little bit more for us? Sure? So you may 476 00:27:24,240 --> 00:27:25,919 Speaker 1: have top ticked the market if you set all the 477 00:27:25,960 --> 00:27:28,440 Speaker 1: details to our Our mortgage team you know, will run 478 00:27:28,480 --> 00:27:30,479 Speaker 1: some numbers and let you know just how much you're 479 00:27:30,480 --> 00:27:34,159 Speaker 1: top ticked by. But that's a good actually offering that 480 00:27:34,280 --> 00:27:36,560 Speaker 1: service to that's a really nice service. Trace you gotta 481 00:27:36,560 --> 00:27:39,960 Speaker 1: take them up of that. Ye tell me how wrong 482 00:27:40,000 --> 00:27:42,119 Speaker 1: I was. Yeah, it is a little frightening how much 483 00:27:42,119 --> 00:27:45,400 Speaker 1: mortgage data of a highly granular fashion is out there nowadays. 484 00:27:45,480 --> 00:27:48,960 Speaker 1: But um but now in terms of housing, um so, 485 00:27:48,960 --> 00:27:51,080 Speaker 1: so you know, we do think housing is going to 486 00:27:51,160 --> 00:27:54,920 Speaker 1: slow and slow significantly. We think on a national basis, 487 00:27:54,920 --> 00:27:58,840 Speaker 1: housing is likely to decline in real terms or inflation 488 00:27:58,840 --> 00:28:01,719 Speaker 1: adjusted terms over the worse of the next few years. 489 00:28:02,480 --> 00:28:06,639 Speaker 1: Our base case view is that home prices UM stabilized 490 00:28:06,800 --> 00:28:11,000 Speaker 1: near zero growth or you know, very very low single 491 00:28:11,040 --> 00:28:14,399 Speaker 1: digit type growth rates, but it would not be surprising 492 00:28:14,400 --> 00:28:16,720 Speaker 1: and it wouldn't necessarily have to be overly alarming if 493 00:28:16,760 --> 00:28:19,040 Speaker 1: you saw, if you see home prices decline on a 494 00:28:19,119 --> 00:28:22,719 Speaker 1: national basis now similar to the comments I earlier, you know, 495 00:28:23,200 --> 00:28:27,800 Speaker 1: on on on the complicated you know, economic environment. Housing 496 00:28:27,840 --> 00:28:30,400 Speaker 1: markets are complicated as well. UM. As we know, there's 497 00:28:30,400 --> 00:28:34,560 Speaker 1: been a massive shift in preferences since the COVID pandemic, 498 00:28:35,400 --> 00:28:38,600 Speaker 1: desire to live further from the office. Certain vacation and 499 00:28:38,640 --> 00:28:42,880 Speaker 1: resort communities UM have gone up in price quite significantly. 500 00:28:43,320 --> 00:28:46,840 Speaker 1: In some areas there's more land scarcity than others. So 501 00:28:46,920 --> 00:28:49,560 Speaker 1: they are gonna be pockets UM where you saw a 502 00:28:49,600 --> 00:28:53,280 Speaker 1: big increase in demand, where they're gonna be outright price declines. UM. 503 00:28:53,320 --> 00:28:55,280 Speaker 1: You're gonna hear over the course of the next several 504 00:28:55,320 --> 00:29:01,200 Speaker 1: months more headlines around price reductions, price declineings. UM. A 505 00:29:01,200 --> 00:29:03,720 Speaker 1: lot of stories in that regard, And I think if 506 00:29:03,760 --> 00:29:07,080 Speaker 1: you're underwriting a new pool of mortgages, particularly higher risk 507 00:29:07,120 --> 00:29:09,920 Speaker 1: type investments, you have to be very very granular and 508 00:29:10,040 --> 00:29:12,520 Speaker 1: very very careful in how you under write that risk. 509 00:29:12,720 --> 00:29:16,560 Speaker 1: But from a macro perspective, there's still too few homes 510 00:29:16,800 --> 00:29:20,720 Speaker 1: in this country and other Western nations relative to the 511 00:29:20,800 --> 00:29:23,000 Speaker 1: number of households that have been formed over the last 512 00:29:23,040 --> 00:29:27,280 Speaker 1: several years. UM, So again that supplied demand dynamic is important. 513 00:29:27,800 --> 00:29:31,200 Speaker 1: Rents remain elevated, so when you think about the buy 514 00:29:31,280 --> 00:29:34,400 Speaker 1: to rent decision, although the cost to own a home 515 00:29:34,440 --> 00:29:38,360 Speaker 1: has gone up, UM, rental rates are going up as well, 516 00:29:38,640 --> 00:29:42,240 Speaker 1: so that switch is less obvious. And then when you 517 00:29:42,280 --> 00:29:45,880 Speaker 1: step back and look at price to incomes, priced to rents, 518 00:29:46,480 --> 00:29:49,960 Speaker 1: the amount of borrower equity that exists, and again you 519 00:29:50,000 --> 00:29:54,160 Speaker 1: have a tremendous about borrower equity today after um several 520 00:29:54,280 --> 00:29:57,440 Speaker 1: years of significant home price growth, and I mentioned earlier 521 00:29:57,880 --> 00:30:01,000 Speaker 1: a near pristine mortgage market. From a credit quality perspective, 522 00:30:01,600 --> 00:30:05,680 Speaker 1: we just don't see a major risk of significant declines 523 00:30:05,720 --> 00:30:09,800 Speaker 1: in housing on a national level. UM. We do expect though, 524 00:30:09,800 --> 00:30:12,320 Speaker 1: and you're already seeing this a rise in inventories, a 525 00:30:12,360 --> 00:30:16,400 Speaker 1: reduction and housing related activity, which is the transmission mechanism 526 00:30:16,520 --> 00:30:19,440 Speaker 1: or one of the transmission mechanisms that's going to help 527 00:30:19,480 --> 00:30:24,400 Speaker 1: slow the economy and eventually bring inflation back down towards 528 00:30:24,400 --> 00:30:27,239 Speaker 1: towards more reasonable levels. The last, but not least, from 529 00:30:27,240 --> 00:30:32,080 Speaker 1: an investment perspective, in housing related areas of the market, UM, 530 00:30:32,120 --> 00:30:36,680 Speaker 1: those investments in many cases aren't tied to um what 531 00:30:36,840 --> 00:30:40,120 Speaker 1: goes on in home prices from here because they've delivered 532 00:30:40,200 --> 00:30:42,920 Speaker 1: so much. So the typical housing related investment you can 533 00:30:42,960 --> 00:30:46,200 Speaker 1: buy today is backed by pools of mortgages that were 534 00:30:46,200 --> 00:30:49,840 Speaker 1: issued again ten or fifteen years ago. UH embedded loan 535 00:30:49,880 --> 00:30:53,480 Speaker 1: of value ratios in those types of investments today have 536 00:30:53,640 --> 00:30:57,640 Speaker 1: fallen from a dent back during the global financial crisis 537 00:30:57,760 --> 00:31:02,160 Speaker 1: down to in most cases today, borrow with sixty points 538 00:31:02,200 --> 00:31:05,840 Speaker 1: of equity and their property even you know, facing moderate 539 00:31:05,840 --> 00:31:08,760 Speaker 1: declines in their current home price are not a big 540 00:31:08,760 --> 00:31:11,160 Speaker 1: default risk. And even if they are, that's the type 541 00:31:11,160 --> 00:31:14,040 Speaker 1: of load where you anticipate a full recovery. So a 542 00:31:14,040 --> 00:31:16,040 Speaker 1: lot of what we like in the market today is 543 00:31:16,080 --> 00:31:19,680 Speaker 1: season type risk that benefits from the multi years of 544 00:31:19,680 --> 00:31:22,720 Speaker 1: home price appreciation and therefor is much less sensitive to 545 00:31:22,760 --> 00:31:41,680 Speaker 1: what goes on from this point forward. Let me go 546 00:31:41,800 --> 00:31:43,600 Speaker 1: to the other side of things. I mean, just trying 547 00:31:43,640 --> 00:31:46,160 Speaker 1: to think of your overall view, it seems like not 548 00:31:46,320 --> 00:31:50,960 Speaker 1: particularly pessimistic. Your outlook isn't particularly dire, but clearly risks 549 00:31:50,960 --> 00:31:54,840 Speaker 1: abound and opportunities to derail or return to a soft landing, 550 00:31:55,560 --> 00:31:57,880 Speaker 1: all kinds of risks out there. I'm curious, though, like 551 00:31:58,200 --> 00:32:01,520 Speaker 1: what is your view right now on if and what 552 00:32:01,720 --> 00:32:05,720 Speaker 1: role treasury should have in people's portfolio, because and I've 553 00:32:05,720 --> 00:32:08,200 Speaker 1: asked versions of this question too many people. It's like, 554 00:32:08,440 --> 00:32:10,480 Speaker 1: for years it was just such a great trade to 555 00:32:10,520 --> 00:32:13,800 Speaker 1: own a slug of tenure treasuries, and they went up 556 00:32:13,880 --> 00:32:17,520 Speaker 1: in the principle appreciated in value, they were a great 557 00:32:17,600 --> 00:32:20,280 Speaker 1: diversifier to risk assets. They usually went up when the 558 00:32:20,320 --> 00:32:22,720 Speaker 1: stock market went down in the short term. And now 559 00:32:22,760 --> 00:32:26,360 Speaker 1: those conditions are obviously changing to some extent. Sixty forty 560 00:32:26,520 --> 00:32:29,440 Speaker 1: type portfolios got club that coupon that you're getting each 561 00:32:29,520 --> 00:32:32,720 Speaker 1: year is getting swallowed up big time by inflation. Is 562 00:32:32,760 --> 00:32:37,760 Speaker 1: there a role for what is the role for treasury ownership? Yeah, 563 00:32:37,840 --> 00:32:40,400 Speaker 1: that that's a great question. And uh, of course, you 564 00:32:40,400 --> 00:32:43,440 Speaker 1: know what you're getting out is a correlation argument. Um, 565 00:32:43,480 --> 00:32:45,240 Speaker 1: you know, are we gonna have are we are we 566 00:32:45,280 --> 00:32:49,200 Speaker 1: gonna get back? Can we get back? Then you'll uh 567 00:32:49,200 --> 00:32:50,640 Speaker 1: to to a degree and I think you're you're you're 568 00:32:50,640 --> 00:32:53,120 Speaker 1: witnessing this um now with the recent rally that we've 569 00:32:53,160 --> 00:32:57,840 Speaker 1: seen in government bond markets, elevated geopolitical risk um, you know, 570 00:32:57,880 --> 00:33:01,280 Speaker 1: both both in Europe and in the China cityation signs 571 00:33:01,280 --> 00:33:06,520 Speaker 1: of deteriorating economy and elevated risks of recession, and now 572 00:33:06,560 --> 00:33:09,840 Speaker 1: government bonds are beginning to rally, um, you know on 573 00:33:09,880 --> 00:33:12,160 Speaker 1: that type of news. Now, you know, we think you 574 00:33:12,600 --> 00:33:14,920 Speaker 1: get better protection, you know, up when a ten year 575 00:33:14,960 --> 00:33:17,120 Speaker 1: treasury is at three and a half percent versus you 576 00:33:17,240 --> 00:33:19,640 Speaker 1: closer to two and a half percent. But we do 577 00:33:19,800 --> 00:33:23,880 Speaker 1: still think high quality bonds at these higher yield levels 578 00:33:23,920 --> 00:33:28,640 Speaker 1: will provide some insurance benefit now locally and by locally, 579 00:33:28,680 --> 00:33:31,760 Speaker 1: I mean you know, during you know, small moves and markets. 580 00:33:32,120 --> 00:33:34,960 Speaker 1: We don't think you know, you're gonna you know, we 581 00:33:34,800 --> 00:33:37,240 Speaker 1: we we think correlation is going to be much lower 582 00:33:37,280 --> 00:33:39,360 Speaker 1: than they've been in the past. I think that's gonna 583 00:33:39,360 --> 00:33:42,320 Speaker 1: be the case as long as inflation remains a key 584 00:33:42,400 --> 00:33:47,320 Speaker 1: risk facing financial markets. But if inflation begins to trend 585 00:33:47,360 --> 00:33:52,640 Speaker 1: lower towards central bank ranges, so again, exiting this this 586 00:33:52,720 --> 00:33:56,160 Speaker 1: post COVID period of elevated inflation, we do think you 587 00:33:56,160 --> 00:33:59,640 Speaker 1: can revert back to more traditional correlations and high quality 588 00:33:59,680 --> 00:34:05,400 Speaker 1: bond can you know, provide stronger protections or stronger diversifying 589 00:34:05,440 --> 00:34:09,799 Speaker 1: benefits for UM a multi asset type portfolio. But for 590 00:34:09,840 --> 00:34:11,359 Speaker 1: the time being, and by the time being, I mean 591 00:34:11,400 --> 00:34:13,920 Speaker 1: the next several quarters, those correlation is going to be 592 00:34:14,000 --> 00:34:18,319 Speaker 1: highly unstable. We think an extreme flight to quality situations 593 00:34:18,719 --> 00:34:22,440 Speaker 1: signs of a major hard landing in in the global economy, 594 00:34:22,920 --> 00:34:28,640 Speaker 1: signs of you know, UM deteriorating um UM, a deteriorating 595 00:34:28,680 --> 00:34:32,239 Speaker 1: situation with the war in Europe, or heightened conflict you 596 00:34:32,239 --> 00:34:35,120 Speaker 1: know with China as another example. We think those are 597 00:34:35,120 --> 00:34:38,799 Speaker 1: scenarios that likely lead to lower treasury yields. So the 598 00:34:38,800 --> 00:34:41,399 Speaker 1: bottom line is we wouldn't give up on bonds here. 599 00:34:41,480 --> 00:34:44,480 Speaker 1: I think investors just need to understand that UM, those 600 00:34:44,520 --> 00:34:48,399 Speaker 1: traditional relationships that were fairly strong have weakened and there's 601 00:34:48,400 --> 00:34:50,200 Speaker 1: just more in certainty, at least over the short term. 602 00:34:50,440 --> 00:34:54,799 Speaker 1: In terms of these overall trading relationships. How are you 603 00:34:54,960 --> 00:34:58,520 Speaker 1: hedging volatility nowadays? And who is selling it? Because it 604 00:34:58,560 --> 00:35:02,160 Speaker 1: feels like everyone wants vlatility protection And I can remember, 605 00:35:02,320 --> 00:35:04,600 Speaker 1: you know, once upon a time, not so long ago, 606 00:35:04,840 --> 00:35:08,319 Speaker 1: PIMCO is a big seller of fall protection. But I'm 607 00:35:08,360 --> 00:35:12,720 Speaker 1: assuming you guys aren't doing much of that now. Well, 608 00:35:12,800 --> 00:35:15,000 Speaker 1: we sell a little bit of we sell a little 609 00:35:15,000 --> 00:35:19,240 Speaker 1: bit of volatility explicitly, Um, we didn't talk about agency mortgages. Um. 610 00:35:19,600 --> 00:35:22,440 Speaker 1: You know, these these are are are are interesting investments. 611 00:35:22,480 --> 00:35:24,720 Speaker 1: They benefit from a direct government guarantee or a strong 612 00:35:24,760 --> 00:35:28,040 Speaker 1: agency guarantee, which is always nice. You know, given heightened 613 00:35:28,120 --> 00:35:32,279 Speaker 1: risk of a more material economic slowdown, and they've widen 614 00:35:32,320 --> 00:35:34,480 Speaker 1: and spread a lot. Um they're not quite as cheap 615 00:35:34,520 --> 00:35:37,000 Speaker 1: as they were in the first quarter of but they 616 00:35:37,000 --> 00:35:41,360 Speaker 1: are quite attractive on an option adjusted spread basis relative 617 00:35:42,080 --> 00:35:45,240 Speaker 1: to where they've been historically. So we have been adding 618 00:35:45,239 --> 00:35:49,840 Speaker 1: back some agency mortgage backed securities. In an agency mortgage 619 00:35:49,840 --> 00:35:54,279 Speaker 1: backed security represents a form of a volatility sale. We've 620 00:35:54,320 --> 00:35:57,200 Speaker 1: also on a targeted basis, have have have taken advantage 621 00:35:57,239 --> 00:36:01,560 Speaker 1: of some volatility sales in the option markets. That's one 622 00:36:01,560 --> 00:36:03,440 Speaker 1: of the areas I mentioned earlier where you know, a 623 00:36:03,480 --> 00:36:06,960 Speaker 1: lot of the hedge funds other specialist managers have been 624 00:36:07,000 --> 00:36:11,719 Speaker 1: caught offside given the significant moves and realize volatility, and 625 00:36:11,800 --> 00:36:15,719 Speaker 1: there has been a few opportunities to provide liquidity UM 626 00:36:15,880 --> 00:36:17,759 Speaker 1: and and and and take on some of that risk 627 00:36:18,120 --> 00:36:20,839 Speaker 1: at what we think are attractive levels. But the way 628 00:36:20,880 --> 00:36:23,960 Speaker 1: that we're we're dealing with volatility uncertainty now is is 629 00:36:24,000 --> 00:36:27,799 Speaker 1: really staying up in quality in terms of our investments. 630 00:36:27,840 --> 00:36:29,880 Speaker 1: And you know, I mentioned that we've been reluctant to 631 00:36:30,640 --> 00:36:34,280 Speaker 1: aggressively add to the weaker areas of the credit markets 632 00:36:34,360 --> 00:36:39,319 Speaker 1: where your short volatility from a more implicit perspective um 633 00:36:39,400 --> 00:36:42,480 Speaker 1: so across a lot of our portfolios today, we've been 634 00:36:42,520 --> 00:36:46,160 Speaker 1: taking advantage of the widening in areas of the market 635 00:36:46,320 --> 00:36:51,480 Speaker 1: that represents spread risk, not material risk of permanent capital impairment. 636 00:36:51,640 --> 00:36:54,880 Speaker 1: And I mentioned agency mortgages in that category. I mentioned 637 00:36:54,920 --> 00:36:57,880 Speaker 1: the non agency of the non government guaranteed mortgages. I 638 00:36:57,920 --> 00:37:00,240 Speaker 1: mentioned the banks where we have high degree of conviction 639 00:37:00,320 --> 00:37:03,520 Speaker 1: that although those spreads will remain volatile, most banks, particularly 640 00:37:03,600 --> 00:37:07,759 Speaker 1: US banks a bit more isolated from the European uncertainty, 641 00:37:07,800 --> 00:37:11,879 Speaker 1: are tremendously well capitalized and not taking um significant risks 642 00:37:11,920 --> 00:37:14,040 Speaker 1: at the moment. And then there's a whole slew of 643 00:37:14,080 --> 00:37:17,040 Speaker 1: other triple A and double A type risk high quality 644 00:37:17,120 --> 00:37:20,239 Speaker 1: municipal bonds, other areas of the acid back sectors. We 645 00:37:20,320 --> 00:37:23,799 Speaker 1: have a lot of hard collateral and additional subordination. These 646 00:37:23,800 --> 00:37:26,760 Speaker 1: are all areas that should be resilient in a period 647 00:37:26,760 --> 00:37:30,000 Speaker 1: of heightened volatility and which in some cases of widening 648 00:37:30,120 --> 00:37:33,240 Speaker 1: sympathy with these other markets that are much more sensitive 649 00:37:33,280 --> 00:37:36,359 Speaker 1: the credit fundamentals. Where are the areas that you see 650 00:37:36,400 --> 00:37:39,239 Speaker 1: are particularly sensitive to credit fundamentals that you want to 651 00:37:39,239 --> 00:37:41,640 Speaker 1: avoid because you don't want to deal with actual impairment. 652 00:37:42,040 --> 00:37:45,560 Speaker 1: I mentioned the private markets, um, you know, and I 653 00:37:45,719 --> 00:37:48,160 Speaker 1: again you need to differentiate there what we're referring to 654 00:37:48,280 --> 00:37:52,440 Speaker 1: there would be more traditional direct lending mid market companies 655 00:37:52,480 --> 00:37:54,799 Speaker 1: that tend to struggle in a recessionary environment, you know, 656 00:37:54,840 --> 00:37:58,160 Speaker 1: more so than larger cap names. The other issues within 657 00:37:58,600 --> 00:38:02,120 Speaker 1: the private markets which have which have significantly lagged public 658 00:38:02,160 --> 00:38:05,480 Speaker 1: markets or the senior secured bank loan market as an example, 659 00:38:05,560 --> 00:38:08,839 Speaker 1: is that you have floating great debt, so borrowers within 660 00:38:08,960 --> 00:38:13,640 Speaker 1: that space are seeing a direct impact from FED policy 661 00:38:13,640 --> 00:38:16,840 Speaker 1: in the form of higher debt service costs. Now, some 662 00:38:16,920 --> 00:38:19,200 Speaker 1: of those companies will hedge in the cap markets, but 663 00:38:19,280 --> 00:38:22,960 Speaker 1: typically it's a partial hedge. Several companies won't hedge, and 664 00:38:23,000 --> 00:38:26,040 Speaker 1: it's not easy to tell which companies are hedging and 665 00:38:26,080 --> 00:38:28,600 Speaker 1: which ones aren't. So you know, that's an area of 666 00:38:28,880 --> 00:38:32,160 Speaker 1: the market that's going to be more sensitive to rate 667 00:38:32,239 --> 00:38:35,040 Speaker 1: policy from here. In fact, we anticipate that if the 668 00:38:35,040 --> 00:38:40,400 Speaker 1: FED had to tighten policy materially more than a terminal 669 00:38:40,480 --> 00:38:43,000 Speaker 1: funds rate of three and a half percent, you know, 670 00:38:43,080 --> 00:38:45,680 Speaker 1: you'll begin to see a decent amount of stress on 671 00:38:45,760 --> 00:38:49,560 Speaker 1: that segment of the market. If that higher rate policy 672 00:38:49,600 --> 00:38:54,840 Speaker 1: coincides with EBA dot or earnings deterioration, you can even see, 673 00:38:54,960 --> 00:38:58,680 Speaker 1: you know, more problems from a downgrade perspective in that 674 00:38:58,719 --> 00:39:00,920 Speaker 1: segment of the market. So again, I don't want to sound, 675 00:39:01,000 --> 00:39:04,319 Speaker 1: you know, overly alarmist here, but in terms of looking 676 00:39:04,320 --> 00:39:08,800 Speaker 1: for weaker links in the marketplace, that's where we would focus, 677 00:39:08,840 --> 00:39:11,920 Speaker 1: and that's where we're being most defensive right now in 678 00:39:12,000 --> 00:39:15,560 Speaker 1: terms of overall credit position. So I think you've outlined 679 00:39:15,600 --> 00:39:19,319 Speaker 1: a pretty um sort of cautiously optimistic approach here, or 680 00:39:19,440 --> 00:39:23,960 Speaker 1: maybe cautiously opportunistic where you're sort of selecting quality credits 681 00:39:24,080 --> 00:39:27,560 Speaker 1: and things like that. What would make you feel comfortable 682 00:39:27,800 --> 00:39:32,120 Speaker 1: about taking on either more credit or more interest rate 683 00:39:32,239 --> 00:39:35,759 Speaker 1: risk in general? Like, is there a particular thing if 684 00:39:35,760 --> 00:39:38,520 Speaker 1: you saw that happen in economic data point or something 685 00:39:38,520 --> 00:39:42,759 Speaker 1: in the market where you would just jump right in. Yea. 686 00:39:42,880 --> 00:39:45,759 Speaker 1: So so you know from where we top down perspective 687 00:39:46,360 --> 00:39:49,840 Speaker 1: better valuations as a start, you know, you know, stating 688 00:39:49,880 --> 00:39:53,239 Speaker 1: stating the obvious, Um, you know, if we got up 689 00:39:53,239 --> 00:39:56,480 Speaker 1: to a point where you saw some of these riskier 690 00:39:56,480 --> 00:39:59,680 Speaker 1: segments of the market embed a much higher probability of 691 00:39:59,760 --> 00:40:03,080 Speaker 1: an outright recession, you know we would we would get 692 00:40:03,120 --> 00:40:05,640 Speaker 1: more comfortable. Now you know that that's likely up at 693 00:40:05,719 --> 00:40:08,520 Speaker 1: levels you know, you know, around seven d basis points. 694 00:40:08,560 --> 00:40:10,680 Speaker 1: You know, you know, within the high yield space. Now again, 695 00:40:10,840 --> 00:40:12,880 Speaker 1: you think about high yield in a full blown recession 696 00:40:12,920 --> 00:40:15,560 Speaker 1: and you can get to a thousand basis point type 697 00:40:15,560 --> 00:40:18,200 Speaker 1: spreads quite easily. But as as you approach that level 698 00:40:18,560 --> 00:40:21,640 Speaker 1: um and you embed you know, you know, more risk 699 00:40:21,760 --> 00:40:25,280 Speaker 1: of harder landings. You know, we would begin to add 700 00:40:25,600 --> 00:40:28,040 Speaker 1: to that space a bit more aggressively in terms of 701 00:40:28,080 --> 00:40:30,759 Speaker 1: the fundamental picture, um, you know, really focusing on this 702 00:40:30,800 --> 00:40:34,160 Speaker 1: inflation every process we think headline is is hard to 703 00:40:34,200 --> 00:40:36,879 Speaker 1: forecast and is I'm certainly going to come down based 704 00:40:36,880 --> 00:40:40,520 Speaker 1: on what we're seeing commodity prices today, but other areas 705 00:40:40,680 --> 00:40:43,640 Speaker 1: represented in course cp I are going to bear watching 706 00:40:43,719 --> 00:40:47,680 Speaker 1: as well. One is housing or owner's equivalent rent, it's 707 00:40:47,680 --> 00:40:51,880 Speaker 1: been quite elevated. Another is wages that have been running, 708 00:40:52,040 --> 00:40:55,080 Speaker 1: you know, at levels that are that are making central 709 00:40:55,080 --> 00:40:59,560 Speaker 1: banks uncomfortable. Even related to labor, focus on the labor 710 00:40:59,640 --> 00:41:03,280 Speaker 1: for and seeing you know, what percent of the labor 711 00:41:03,360 --> 00:41:07,960 Speaker 1: force returns to the market, providing some cushion and increasing 712 00:41:08,000 --> 00:41:11,080 Speaker 1: the probabilities that the FED can bring job openings lower 713 00:41:11,160 --> 00:41:14,799 Speaker 1: without a meaningful hit to unemployment. So it's it's really 714 00:41:14,880 --> 00:41:18,080 Speaker 1: the details embedded in a lot of these higher frequency 715 00:41:18,120 --> 00:41:22,879 Speaker 1: economic indicators that we're monitoring more closely. Of course, on 716 00:41:22,880 --> 00:41:27,680 Speaker 1: on the geopolitical side, any type of sign of UM 717 00:41:27,719 --> 00:41:31,960 Speaker 1: a stalemate or an improvement UM in the relationship between 718 00:41:32,000 --> 00:41:35,240 Speaker 1: Russia and Europe, the situation on the ground in Ukraine, 719 00:41:35,760 --> 00:41:38,640 Speaker 1: it would take a considerable risk off the table as well. 720 00:41:38,760 --> 00:41:40,959 Speaker 1: So I just a lot of focus on the higher 721 00:41:40,960 --> 00:41:45,200 Speaker 1: frequency type numbers. But again, even if we don't get 722 00:41:45,239 --> 00:41:49,200 Speaker 1: resolution there, we are going to respond to, you know, 723 00:41:49,320 --> 00:41:51,920 Speaker 1: better valuations, you know, like we did a did a 724 00:41:51,920 --> 00:41:54,439 Speaker 1: bit you know, several weeks ago, you know, at at 725 00:41:54,520 --> 00:41:58,799 Speaker 1: higher yields and materially wider spreads all right down, We're 726 00:41:58,800 --> 00:42:00,600 Speaker 1: going to have to leave it there. Thank you so 727 00:42:00,680 --> 00:42:03,120 Speaker 1: much for coming on Odd Lots. Really great to have 728 00:42:03,200 --> 00:42:06,400 Speaker 1: you on the show. And I'll be sending over my 729 00:42:06,400 --> 00:42:08,879 Speaker 1: my mortgage data to your department so you can tell 730 00:42:08,880 --> 00:42:11,560 Speaker 1: me exactly how bad my timing was on on real 731 00:42:11,640 --> 00:42:14,680 Speaker 1: estate purchases. Well, yeah, well we'll do that. They have 732 00:42:14,719 --> 00:42:17,600 Speaker 1: some pretty pictures too, yeah, they they look real good. 733 00:42:31,080 --> 00:42:34,880 Speaker 1: So Joe, I've really enjoyed that conversation. There were, I 734 00:42:34,880 --> 00:42:38,600 Speaker 1: mean a number of things that stick out, um number 735 00:42:38,640 --> 00:42:41,440 Speaker 1: one to call on real estate, but secondly, when he 736 00:42:41,480 --> 00:42:44,640 Speaker 1: was talking about floating rate loans and the idea of 737 00:42:45,080 --> 00:42:48,960 Speaker 1: some of those companies who had borrowed money in floating 738 00:42:49,040 --> 00:42:52,960 Speaker 1: rate increments like actually becoming a credit risk as interest 739 00:42:53,040 --> 00:42:57,240 Speaker 1: rates go up. That's interesting to me because you'll remember 740 00:42:57,480 --> 00:42:59,919 Speaker 1: that floating rate loans were supposed to be the big 741 00:43:00,080 --> 00:43:03,160 Speaker 1: hedge for higher interest rates, right, Like, those were the 742 00:43:03,160 --> 00:43:06,279 Speaker 1: things you were supposed to buy if inflation was going 743 00:43:06,320 --> 00:43:08,040 Speaker 1: to go up and rates were going to go up. 744 00:43:08,080 --> 00:43:09,919 Speaker 1: And now it's like, well they've gone up too much 745 00:43:10,000 --> 00:43:11,960 Speaker 1: and it might actually be a risk. Right, So if 746 00:43:11,960 --> 00:43:15,840 Speaker 1: you're an owner of those notes, yes you get higher 747 00:43:15,960 --> 00:43:18,800 Speaker 1: monthly coupons, which is nice in a period of higher inflation, 748 00:43:19,320 --> 00:43:22,480 Speaker 1: but the cohort of companies that may have issued that 749 00:43:22,520 --> 00:43:26,359 Speaker 1: the company might go bankrupt are not necessarily the more 750 00:43:26,920 --> 00:43:29,640 Speaker 1: the most credit worthy ones, which raises the risk that 751 00:43:29,719 --> 00:43:32,480 Speaker 1: if we actually get like a real recession, that your 752 00:43:32,520 --> 00:43:35,799 Speaker 1: inflation hedge suddenly you start to worry about loss of 753 00:43:36,000 --> 00:43:40,680 Speaker 1: loss of principle exactly, you know, just in general, I 754 00:43:40,680 --> 00:43:44,080 Speaker 1: thought it was interesting, sort of and basically to the 755 00:43:44,120 --> 00:43:46,040 Speaker 1: point that you just made. You know, we we tend 756 00:43:46,080 --> 00:43:49,279 Speaker 1: to think very broadly about like rate and credit, but 757 00:43:49,320 --> 00:43:51,800 Speaker 1: it was interesting hearing him, you know, sort of speaking 758 00:43:51,800 --> 00:43:54,440 Speaker 1: from the perspective of a of a fixed income investor. 759 00:43:54,600 --> 00:43:56,680 Speaker 1: That's like, you know, credit is just way too broad 760 00:43:56,719 --> 00:44:00,279 Speaker 1: a category, and so you mentioned floating rate it. But 761 00:44:00,320 --> 00:44:03,480 Speaker 1: also some of his point about like highly seasoned reads 762 00:44:03,840 --> 00:44:07,720 Speaker 1: was interesting, this idea that, again, how do you avoid 763 00:44:07,840 --> 00:44:10,319 Speaker 1: credit risk, How do you get some of the how 764 00:44:10,320 --> 00:44:12,360 Speaker 1: do you get some of the upside but avoid the 765 00:44:12,400 --> 00:44:15,719 Speaker 1: credit risk and a downturn. Well, one answer might be 766 00:44:16,400 --> 00:44:19,359 Speaker 1: reads in which the owners are the payers of those 767 00:44:19,360 --> 00:44:22,719 Speaker 1: mortgages have built up significant equities such that you're not 768 00:44:22,880 --> 00:44:25,960 Speaker 1: likely to experience significant defaults. These are all just sort 769 00:44:25,960 --> 00:44:28,480 Speaker 1: of things that are like a little more in depth 770 00:44:28,520 --> 00:44:33,560 Speaker 1: and insightful than sort of a typical like headline credit conversation. Yeah, 771 00:44:33,640 --> 00:44:36,680 Speaker 1: I totally agree, And it sounds like PIMCO. I mean, 772 00:44:36,719 --> 00:44:38,880 Speaker 1: you would assume PIMCO would be very good at doing this, 773 00:44:39,000 --> 00:44:41,480 Speaker 1: but it sounds like PIMCO is sort of they're not 774 00:44:42,080 --> 00:44:44,520 Speaker 1: They're cautious in the market, they're not adding a ton 775 00:44:44,560 --> 00:44:47,600 Speaker 1: of risk, but they are sort of tweaking their portfolio 776 00:44:47,760 --> 00:44:50,920 Speaker 1: for the uncertainties that we just discussed well. And I 777 00:44:50,960 --> 00:44:53,839 Speaker 1: think also, you know, it's is a this is an 778 00:44:53,920 --> 00:44:57,000 Speaker 1: environment with lots of lots of I don't know, land 779 00:44:57,040 --> 00:45:00,160 Speaker 1: mines out there, so to speak, in which you know 780 00:45:00,160 --> 00:45:02,200 Speaker 1: it would be easy to or you know, stepping on 781 00:45:02,320 --> 00:45:05,319 Speaker 1: a rake right and hitting your face, And so this 782 00:45:05,360 --> 00:45:07,920 Speaker 1: idea that like you can be sort of optimistic. You 783 00:45:07,960 --> 00:45:11,400 Speaker 1: think maybe the FED it's possible that it's turned the 784 00:45:11,400 --> 00:45:14,680 Speaker 1: corner or getting ready to make a pivot, that maybe 785 00:45:14,719 --> 00:45:18,040 Speaker 1: we're going to soon see lower CPI readings. We'll have 786 00:45:18,120 --> 00:45:21,359 Speaker 1: some confidence that the line is going down. But there's 787 00:45:21,400 --> 00:45:25,040 Speaker 1: just so many little things that could go wrong. There's politics, 788 00:45:25,080 --> 00:45:29,799 Speaker 1: there's geopolitics, Uh, there's the virus. There's other aspects of 789 00:45:29,840 --> 00:45:32,879 Speaker 1: the supply chain that like it all sort of keeps 790 00:45:32,880 --> 00:45:37,040 Speaker 1: you guessing. Actually recording these interns and outros kind of 791 00:45:37,040 --> 00:45:39,520 Speaker 1: makes me nervous nowadays, because there's so much that could 792 00:45:39,520 --> 00:45:43,000 Speaker 1: happen between the time that we record and when we release. Yeah, 793 00:45:43,080 --> 00:45:45,480 Speaker 1: all right, shall we leave it there? Let's leave it 794 00:45:45,520 --> 00:45:49,200 Speaker 1: there alright. This has been another episode of the All 795 00:45:49,200 --> 00:45:51,839 Speaker 1: Thoughts podcast. I'm Tracy Allowhite. You can follow me on 796 00:45:51,880 --> 00:45:54,880 Speaker 1: Twitter at Tracy Allowhite and I'm Joey Isn't All. You 797 00:45:54,920 --> 00:45:58,160 Speaker 1: can follow me on Twitter at the Stalwart, follow our 798 00:45:58,239 --> 00:46:02,359 Speaker 1: producer Kerman Rodriguez at Carmen Armand, and check out all 799 00:46:02,400 --> 00:46:06,399 Speaker 1: of our podcasts Bloomberg under the handle at podcasts. Thanks 800 00:46:06,440 --> 00:46:06,960 Speaker 1: for listening