Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, it has
Speaker 1: been a week. Right. I am so tired. I got
Speaker 1: about two hours sleep last night, and there's just been
Speaker 1: so much that happened. We were both at Milkin in
Speaker 1: Los Angeles, and for anyone who's ever been at Milkin
Speaker 1: or any large conference for that matter, it is just
Speaker 1: a whirlwind of meetings and discussions, and we also recorded
Speaker 1: a couple episodes. And meanwhile, against that entire background, the
Speaker 1: news is actually happening. The Fed raised rates by fifty
Speaker 1: basis points and the markets crashed. They did not have
Speaker 1: they weren't. They had some rough days, that's for sure.
Speaker 1: Crash okay, crap okay. The market went down and then
Speaker 1: the market had some really rough days, and particularly tech growth,
Speaker 1: that kind of stuff, it's just continues to get absolutely killed.
Speaker 1: We also had a jobs report. We're recording this what
Speaker 1: is speaking of being really tired and out of it six,
Speaker 1: recording recording this base six. We also got a jobs
Speaker 1: report today which seemed decent. There is a lot going
Speaker 1: on right now. And yeah, like we were at this conference,
Speaker 1: I kind of feel like I missed a lot of it.
Speaker 1: I almost wish I was just behind my computer the
Speaker 1: whole time. Yeah, that's a very Joe thing to say. Uh. Well,
Speaker 1: one thing that was interesting to me, so I was
Speaker 1: actually at a like a credit market panel right when
Speaker 1: the Fed raised rates, and I got my phone out
Speaker 1: and I started videoing the audience because I I thought like,
Speaker 1: maybe the headline would come out, right, something would change
Speaker 1: in the room. Absolutely nothing happened. I mean, the fifty
Speaker 1: basis point increase was well telegraphed. But the really interesting
Speaker 1: thing was we didn't even really get much of an
Speaker 1: iediate reaction in the market. It wasn't until the next
Speaker 1: day on Thursday that everything started happening. Market stored on Wednesday,
Speaker 1: I think the NAZAC was up like three percent, and
Speaker 1: I was like, oh, coaches, clear they took seventy five
Speaker 1: bases points off the table, maybe policies, some signs of
Speaker 1: inflation turning a corner, and then the markets tanked. We
Speaker 1: have two great guests this time, excellent commenters both. I
Speaker 1: want to welcome to the show. Luke Cowa. He is
Speaker 1: an allocation strategist at UBS Asset Management, as well as
Speaker 1: Neil Dutta, head of economics at Renaissance Macro Research, and
Speaker 1: I think it's Neil's first time on the show, which
Speaker 1: is amazing because if we've known Neil Neil for years
Speaker 1: and I've been big, big fans of his work. So, um,
Speaker 1: thank you both for coming on the show. Neil, that's right,
Speaker 1: you haven't been on odd Lots before, is that correct?
Speaker 1: I haven't, Joe, what took you so long? I know,
Speaker 1: I know it really it's a shameful but big week
Speaker 1: and you're one of the names we needed to call,
Speaker 1: so hopefully that makes up for it. But let's start
Speaker 1: with you, like, what's going on? What's your read of everything?
Speaker 1: Put it in two. I think the the economy is fine, um,
Speaker 1: you know, I think obviously if you look at just
Speaker 1: the total hours worked so far this year, um, it's
Speaker 1: running around three to three and a half percent, so
Speaker 1: aggregate hours worked, So if you assume underlying productivity growth
Speaker 1: of you know, conservatively around one percent, I think underlying
Speaker 1: economic growth is around four to four and a half.
Speaker 1: So I'm not particularly worried about the economy. But clearly, um,
Speaker 1: there's an adjustment that's happening with respect to the interest
Speaker 1: rate outlook that's been going on really all a year,
Speaker 1: and I think that's having some predictable consequences on equity markets.
Speaker 1: I don't know what happened. One day, I mean, the
Speaker 1: feed signaling something in the market rips, and then the
Speaker 1: next day the market tanks. I mean, it's it's it's
Speaker 1: a very bizarre sort of situation. But were generally speaking,
Speaker 1: what I can tell you, and what I've learned throughout
Speaker 1: the years, is that, um, you know, the economy is
Speaker 1: a much slower moving entity than the financial markets, and
Speaker 1: ultimately good economic news can help can help turn the
Speaker 1: financial markets, and UM, you know, my sense is that
Speaker 1: whatever so off we have seen, um and tightening the
Speaker 1: financial conditions we've seen isn't going to have a significant
Speaker 1: impact on the economy. I mean in the sense that
Speaker 1: relative to what's baked into the consensus. Remember, the consensus
Speaker 1: expects a slowdown this year. That's what's priced in. If
Speaker 1: you look at the blue chip consensus, it's at two
Speaker 1: point three for this year, the Feds at to eight.
Speaker 1: So you're gonna see some slow and when when the
Speaker 1: economy slows, there'll be some days where the news comes
Speaker 1: in good and some days when it's not UM and uh.
Speaker 1: And you know, in my mind the data hasn't really
Speaker 1: deviated from from that UM, you know, trajectory really one
Speaker 1: where or the other UM. And it's good to put
Speaker 1: a gun to my head and say, you know what,
Speaker 1: do you think growth is going to come in stronger
Speaker 1: than one that consensus is for QO. My guests would
Speaker 1: be probably yes. So there's a lot to unpack there.
Speaker 1: And before we do, why don't we bring in Luke?
Speaker 1: And I guess two questions for Luke? But one do
Speaker 1: you share Neil's assessment of the economy that he just described?
Speaker 1: And then two, what do you think happened between Wednesday
Speaker 1: and Thursday? What was the trigger? Because it feels like
Speaker 1: that's what everyone's trying to figure out at the moment. So,
Speaker 1: you know, a couple of tough ones. First off, as
Speaker 1: a default, I I think Neil is a great person
Speaker 1: to defer to on the US, on the US economic
Speaker 1: outlook in particular. And now comes the ship you set
Speaker 1: him up all right now, Now now you're gonna show no.
Speaker 1: I I completely agree. All of the data, basically, all
Speaker 1: the data we've got recently on the US confirms the
Speaker 1: idea that the US is decelerating, but to a level
Speaker 1: that's still consistent with nominal growth that's far superior than
Speaker 1: what we got last cycle. The problem is that just
Speaker 1: like that simply doesn't matter right now, that simply is
Speaker 1: not the the proximate uh mover of resentment of risk
Speaker 1: appetite right now. And what's even more concerning is it's
Speaker 1: very difficult to tell what actually is. So I know
Speaker 1: one phrase that you know, Tracy loves to use, as
Speaker 1: you know, flows before pros, just this idea that you know,
Speaker 1: money moving even from you know, potentially you know, unsophisticated
Speaker 1: investors can run over the more sophisticated crowd. Right now,
Speaker 1: the flows are the pros. So it's it's more of
Speaker 1: the story for me about flows before pros. But pr
Speaker 1: O s E. There's no story we can use that
Speaker 1: is going to adequately explain why risk appetite changed on
Speaker 1: such a dime between Wednesday afternoon and uh and Thursday morning.
Speaker 1: There's there's nothing that does it. So what we have
Speaker 1: to do, as I said, allocators, we have to take
Speaker 1: a step back and say, well, you know, there's there's
Speaker 1: really three big risks we see on the table one
Speaker 1: is kind of fed tightening, which is going to be
Speaker 1: you know, possibly if it's if it's too much, it's
Speaker 1: bad for growth, bad for risk assets. If it's too little,
Speaker 1: it's probably just you know, bad for risk assets, financial
Speaker 1: assets generally. Uh, there's the Russia's invasion, which is just
Speaker 1: creating kind of persistent supply issues and threatening to exacerbate
Speaker 1: kind of some of the negative supply commodity price issues
Speaker 1: we've seen way on forward consumption. And then there's China,
Speaker 1: which is both the you know, a supply and demand issue.
Speaker 1: And I think that's one thing that did spook people
Speaker 1: a little when the when the Chinese you want depreciate
Speaker 1: it a bit there because it's like, okay, well, if
Speaker 1: China's supposedly you know, everyone thinking is about to go
Speaker 1: on this decent credit old school stimulus, but smaller binge
Speaker 1: as as the public health situation improves or if they're
Speaker 1: kind of more durably moving to a consumption driven model.
Speaker 1: Well that doesn't comport with it with a lower currency
Speaker 1: at all. Uh. The lower currency comports with the trying
Speaker 1: to be the the demand sinkhole for the rest the
Speaker 1: world and stop all of that up. So that's you know,
Speaker 1: that's something that's concerning. All three of those risks are
Speaker 1: still there. And what we have to do when markets
Speaker 1: are this volatile are demand a higher merchin of safety.
Speaker 1: But take a step back, increase our time frames a
Speaker 1: little bit and think about what are we pretty confident
Speaker 1: is going to be working in a year from now
Speaker 1: because rates volatility is so high, macroeconomic uncertainty is so
Speaker 1: high that trying to really nail that one in three
Speaker 1: month call seems like, you know, not something we should
Speaker 1: be devoting as much of our energy and our risk
Speaker 1: capital to. Right now, I want to zoom out for
Speaker 1: a second, and I want to start this question with Luke,
Speaker 1: and then I want to get Neil answer. But I
Speaker 1: want to zoom out because yes, we don't know what
Speaker 1: happens day to day. It's hard to tell a story.
Speaker 1: But if we zoom out a little bit, obviously these
Speaker 1: incredible tech boom that we've seen, or the growth stock boom,
Speaker 1: it's clearly I think it's safe to say like come
Speaker 1: to an end. I mean, it's a credible contraction. Hundreds
Speaker 1: of billions of tech wealth lost for a lot of
Speaker 1: people like this is something they've never seen before. We've
Speaker 1: arguably had like a twelve year tech bull market, tech
Speaker 1: bull market and growth, Like what if the big story
Speaker 1: about this rotation and the turn? So I think the
Speaker 1: big story does have a lot to do with the
Speaker 1: with the macro environment, ak that the moving rates and
Speaker 1: the moving rates volatility. I think that's something just on
Speaker 1: a on a correlation basis, if you kind of plug
Speaker 1: in what you think should be moving stylistically based on
Speaker 1: what rates are doing that you know rates are to
Speaker 1: a certain extent driving the bus before before you go,
Speaker 1: just real, just real quickly. For people who don't understand it,
Speaker 1: we talk about this link a lot. It's like rates
Speaker 1: are going up, so you sell Facebook or you sell arc.
Speaker 1: It's not intuitive. Can you just walk through for listeners
Speaker 1: in a sort of brief form, like why there's this
Speaker 1: connection between rates or rates volatility and the sort of
Speaker 1: like violence of the tech market sell off totally? So
Speaker 1: I think there's some some competing explanations. I'll go with
Speaker 1: my my preferred and it has less to do with
Speaker 1: like the has less to do with the along duration
Speaker 1: discounting stuff. This is this is more about I think
Speaker 1: generally speaking, rising rates are a function of an environment
Speaker 1: in which nominal growth outcomes are you know, expected to
Speaker 1: be improving and are you know, fairly firm. You can
Speaker 1: you know, equival about that now, given how much of
Speaker 1: it is is related to kind of negative supply shocks potentially.
Speaker 1: But that that's a kind of brief shorthand for why
Speaker 1: should rates rise. Rates should rise because things are good,
Speaker 1: and things are good enough for central banks to remove stimulus,
Speaker 1: and you know, that's a generally speaking, you know, an
Speaker 1: okay environment for growth. If growth, if economic activity is
Speaker 1: doing well, then you don't need to focus on kind
Speaker 1: of the things that might be revolutionary or innovative or
Speaker 1: be you know, turned from a who knows what it
Speaker 1: was into a verb like gold. Uh, ten to fifteen
Speaker 1: years from now, you can focus on Okay, I know
Speaker 1: that energy companies are able to produce x oil with
Speaker 1: X margin and they won't be producing more than that,
Speaker 1: so prices are going to stay within X range and
Speaker 1: that looks very good for me right now, and we
Speaker 1: prefer that to speculating on something that might or might
Speaker 1: not be good ten years from now. So that's that's
Speaker 1: my preferred explanation of how rates kind of effects the
Speaker 1: the growth versus value argument or spectrum there. So that's
Speaker 1: that's that's the headline story there. But I also think
Speaker 1: there's there's a broader issue both related to growth, but
Speaker 1: also related to the idea that the kind of the
Speaker 1: there's a bit of growth convergence to be expected as
Speaker 1: you as you come out of COVID. And I think
Speaker 1: this is something that you know, you've covered a lot
Speaker 1: Joe in that just the kind of the pandemic premium
Speaker 1: both in multiples is is kind of come back, but
Speaker 1: it's coming back in earnings as well. And when you
Speaker 1: have more and more tech companies talk about kind of
Speaker 1: you know, right sizing staffing levels or things like that,
Speaker 1: that to me translates into environment in which growth companies
Speaker 1: are no longer prioritizing growth. They're turning on some other tap,
Speaker 1: but it isn't growth. So it's a bit of a
Speaker 1: stylistic change that the group itself is is undergoing right now.
Speaker 1: And you know, when when they're style drift within a cohort,
Speaker 1: that might get investors to question whether the you know,
Speaker 1: whether the thesis they've applied to the group is is
Speaker 1: still valued valid, And that's you know, something we see
Speaker 1: as an ongoing process right now. I mean, Neil, I
Speaker 1: mean I'm curious your take on that. I mean, You've
Speaker 1: been talking about the reopening a lot. I've had a
Speaker 1: million ibs with you where you point out that like
Speaker 1: Peloton is going down and Planet Fitness, the actual jim
Speaker 1: or people go and work out in person, has been surging.
Speaker 1: I'm curious sort of your take on the same question
Speaker 1: of this sort of like bigger shift that we've seen
Speaker 1: in markets really since I guess November. Well, I think,
Speaker 1: I mean, I think a lot of this just comes
Speaker 1: down to the policy response, right, I mean, the policy
Speaker 1: response following the financial crisis period was not particularly robust.
Speaker 1: I think you could say, and as a result, Um,
Speaker 1: you had a very very um you know, not weak,
Speaker 1: but just not particularly strong phenominal growth environment. I think
Speaker 1: we were basically hovering around four four and a half
Speaker 1: percent for years. UM. So that kind of kind of
Speaker 1: churned the wheels of a very steady recovery. UM so
Speaker 1: things are always getting better, but we never really had
Speaker 1: that that v shape recovery. And and so as a result,
Speaker 1: I mean, in that kind of environment, growth is not
Speaker 1: widespread and so you have, you know, performance in the
Speaker 1: market's kind of narrow to a you know, specific group
Speaker 1: of companies that can you know, drive growth in that
Speaker 1: kind of an environment. By contrast, I think in this period,
Speaker 1: we had a very robust response. Um. I think, you know,
Speaker 1: through a myriad of sort of fiscal support programs. I mean,
Speaker 1: the government was basically able to deliver you know, a
Speaker 1: hirement mum wage to people without actually doing it legislatively.
Speaker 1: And you know, the Fed basically put both of its
Speaker 1: feet planted firmly on the accelerator. And so you know,
Speaker 1: I think that's been one reason why, um, you've had
Speaker 1: such a strong uh nominal growth backdrop, and so growth
Speaker 1: is more widespread and so as a result, it's not
Speaker 1: going to narrow to a handful of mega cap tech names. Obviously,
Speaker 1: the pandemic is important, as you mentioned. I mean I
Speaker 1: sort of pose that question to our clients as well
Speaker 1: as like, what if what we're seeing is really just
Speaker 1: the last gasp of the of the pandemic unwined? You know,
Speaker 1: I mean, I think it's more to it than that.
Speaker 1: But you know, I mean remember back in I mean
Speaker 1: people were making the argument like the stock markets are
Speaker 1: just whistling past the graveyard, and in reality, I think
Speaker 1: the stock markets were actually following up a script that
Speaker 1: made a lot of sense. I mean, if you look
Speaker 1: at online retail sales, they were very strong. Guess what
Speaker 1: those companies did really well and a twenty and by contrast,
Speaker 1: brick and mortar retailer didn't do particularly well. Restaurants didn't
Speaker 1: do particularly well, and and they were punished. So it
Speaker 1: wasn't like the market was just you know, you know,
Speaker 1: turning a blind out all these things. I mean, the market, frankly,
Speaker 1: I think was evolving the way you'd expect. And you know, now, um,
Speaker 1: a lot of that's working in reverse, right, and that
Speaker 1: it's probably better for the economy, but it's it's not
Speaker 1: necessarily the best thing for some of these, uh, some
Speaker 1: of these trades that had been put on over the
Speaker 1: last number of years. You mentioned financial conditions at the
Speaker 1: start of this conversation, and this is something that a
Speaker 1: lot of people are talking about as well, this idea
Speaker 1: that the Fed has explicitly said that it wants to
Speaker 1: tighten financial conditions. And one part of tightening financial conditions,
Speaker 1: or one component of financial conditions, one of the things
Speaker 1: that hadn't moved that much or tightened that much was
Speaker 1: stock so I guess my question is how how is
Speaker 1: the FED thinking about stocks at the moment, or how
Speaker 1: do you think the FED is thinking about stocks? I
Speaker 1: think they're probably encouraged to some degree that the multiple
Speaker 1: has come in quite a bit. I mean, obviously the
Speaker 1: earnings backdrop is quite strong still UM, and I believe
Speaker 1: projected earnings have continued to go up UM. And so
Speaker 1: you know, I think they're they're probably looking at the
Speaker 1: sell off inequities as as a good thing. Obviously, if
Speaker 1: if demand is running really hot and financial conditions ease more,
Speaker 1: that means that demand is going to get even stronger,
Speaker 1: which means that their inflation outlook will deteriorate in their mind, right, So, UM,
Speaker 1: I think they welcome some tightening and financial conditions. And
Speaker 1: as I mentioned, I mean, the financial conditions tightening that
Speaker 1: we've seen so far is not enough in my view
Speaker 1: to really UM send the unemployment rate meaningfully higher. I mean,
Speaker 1: you know, we can talk about the folks over at
Speaker 1: Cameo laying off some tech workers, UM, but you know,
Speaker 1: I just don't see it as as a as enough
Speaker 1: to really um weigh on the unemployment rate. At at best,
Speaker 1: the unemployment probably flattens out in response to this tightening
Speaker 1: of financial conditions over over the over the back half
Speaker 1: of the year. But you know, I think in my mind,
Speaker 1: I mean, the FED welcomes the tightening UM, and and
Speaker 1: given the kind of inflationary environment that we're in, UM,
Speaker 1: this sort of idea that there's this you know, put
Speaker 1: out there that the FED will have your back. I mean,
Speaker 1: the strike price on that put is a lot lower
Speaker 1: than it used to be. UM. And that's again it
Speaker 1: goes back to this idea that UM, you know, in
Speaker 1: previous episodes when the equity markets were were faltering, the
Speaker 1: growth outlook was faltering quite substantially as well. I don't
Speaker 1: think that that's as compelling this time around, and in
Speaker 1: an environment where inflation is still high. UM, I think
Speaker 1: it's really a no brainer. As Powell mentioned this week,
Speaker 1: their goals aren't intention right. So Luke, I want to
Speaker 1: bring you in on this point because I mean, to me,
Speaker 1: the FED never explicitly said that we want the stock
Speaker 1: market to go down, I mean, for obvious for obvious reasons,
Speaker 1: but they said financial conditions need to come down. The
Speaker 1: only thing in the financial conditions induseaes as I mentioned
Speaker 1: that had been staying up was stocks? Why did it
Speaker 1: take so long for the market to sort of accept
Speaker 1: this message, because it it did feel like Neil just
Speaker 1: put it as a bit of a no brainer. Yeah.
Speaker 1: I find it interesting in that, you know, stocks were
Speaker 1: you can argue they still might be, but since more
Speaker 1: or less early February or late January, stocks have been
Speaker 1: kind of stuck in a boring range. You've just been
Speaker 1: going from the you know, the bottom to the top
Speaker 1: of that range. I think it was more about the
Speaker 1: inertia with that. I also think it had to do with,
Speaker 1: you know, despite all all of this, and despite a
Speaker 1: you know, pretty big rerating early in the year, earnings
Speaker 1: have been coming in, You're quite quite fine at the
Speaker 1: guidance outlook might be getting a little a little more
Speaker 1: dowurd in part because the strengthening of the US dollar.
Speaker 1: There's your financial conditions right there um, as well as
Speaker 1: you know, headwinds related to to China and Ukraine. But
Speaker 1: I think I think it was a lot of you know,
Speaker 1: complacity about the about the range we're in. But our
Speaker 1: view was that as we were getting to you know,
Speaker 1: around those levels around top of range, that you know,
Speaker 1: those those are good places to be selling stocks. What
Speaker 1: became more challenging is like when we get to the
Speaker 1: bottom of this range as we had lately, like does
Speaker 1: it still make sense to be underweight stocks? And the
Speaker 1: view there is that, you know, although we've had multiple compression,
Speaker 1: a lot of it, we've had multiple compression at the
Speaker 1: index level essentially to pre COVID levels, we also have
Speaker 1: rates more than a hundred basis points higher. So your
Speaker 1: your layman's equity risk premia would suggest that you're still
Speaker 1: not being compensated enough for the risk that either the
Speaker 1: FED over tightens, that China is a persistently larger drag
Speaker 1: on the global growth outlook for longer, or that's kind
Speaker 1: of supply constraints So Twain, it's Twine Twain who's adorable. Um, yes,
Speaker 1: you can hear how adorable he is. Uh but yeah so,
Speaker 1: or or you have essentially you know, Russia, your grain
Speaker 1: exacerbating supply constraints there. So you know, our view, though
Speaker 1: has been even at the start of April, say when
Speaker 1: you had you know, stocks doing pretty well, even then
Speaker 1: you still had dollar at you know, highs of the year,
Speaker 1: tenure yields at highs of the year, mortgage rates rising.
Speaker 1: The kind of tightening that's going to show up more
Speaker 1: in the forward outlook is going to come much more
Speaker 1: from what's happened, uh, you know in mortgage rates and
Speaker 1: the kind of knock on effects to housing than it
Speaker 1: will from the SMP five hundred going from fort hundred
Speaker 1: to forty two hundred. So in terms of the FED tightening,
Speaker 1: the type of financial conditions that matter in a way
Speaker 1: that kind of influences the forward growth outlook, A lot
Speaker 1: of that, you know, we'd are he was in place
Speaker 1: even before kind of stocks woke up to the idea
Speaker 1: that you know, can't sustain these kind of mall the
Speaker 1: polls at at these kind of rates. With the growth
Speaker 1: outlooked at you still positive, but slowly you know, on
Speaker 1: the mortgage rate back up. I mean, I think it's
Speaker 1: worth pointing out that this is a highly unusual housing market,
Speaker 1: and I think Luke would obviously agree with that. Certainly
Speaker 1: Twin agrees with it, um. But what what what I
Speaker 1: will say, UM, is that when as economists business economists,
Speaker 1: when we talk about housing, we're really talking about three things, right.
Speaker 1: I mean, it's residential investment that's what is booked into
Speaker 1: GDP and Residential investment is really three things. It's sales,
Speaker 1: which is broker commissions, and then it's construction and housing
Speaker 1: renovation spending. Those are the three things that go into
Speaker 1: residential investment, and the broker commission piece of it, or
Speaker 1: the sales piece of it, that's only a fifth okay.
Speaker 1: The rest of it is renovations and construction. So what
Speaker 1: I think it's important for viewers to know is that
Speaker 1: even though rates are backing up, residential investment, the likelihood
Speaker 1: is is that it's still growing. It's still contributing to GDP.
Speaker 1: If you look at the gap between housing starts and
Speaker 1: building completions, there's still a yawning gap. That means mechanically
Speaker 1: that units under construction will continue going up. Okay, And
Speaker 1: as as units can under construction keep going up, that
Speaker 1: means construction spending will keep going up, which means that
Speaker 1: residential investment will keep going up. And to the extent
Speaker 1: that rates have backed up, and that's creating some spatial
Speaker 1: luck and effects. You know, you can make a pretty
Speaker 1: compelling argument that that, you know, people that wanted to move,
Speaker 1: maybe they spend more money on their existing home. Um.
Speaker 1: I mean, I certainly think that's consists of a lot
Speaker 1: of the anecdotal stuff that I'm seeing here in my
Speaker 1: neck of the woods. But you know, look, I mean,
Speaker 1: I get why Luke is so concerned. He's a potential
Speaker 1: first time buyer. That's not everyone. For for most people,
Speaker 1: your real cost of shelter is collapsing because your mortgage
Speaker 1: rates are fixed and everything, and your mortgage, your your
Speaker 1: mortgage monthlies are fixed. Um. You know, we know that
Speaker 1: adjustable rate mortgages are not nearly as substantial in terms
Speaker 1: of a share of dead outstanding as they were back
Speaker 1: in the uh oh four oh five period. You know,
Speaker 1: so your real cost of shelters declining for most people.
Speaker 1: So it's not you know, as I said, I mean, yeah,
Speaker 1: the rates back up. Yes, that's an unambiguous negative, but
Speaker 1: I would be a little bit careful about extrapolating how
Speaker 1: much that's gonna do to to overall residential investment, which
Speaker 1: will still be in my mind to sending in real terms. Yeah, hey,
Speaker 1: I'll definitely agree with you know, someone was asking me
Speaker 1: because I've been I've been pretty optimistic about the economy,
Speaker 1: but it's hard to get a little more pessimistic, and
Speaker 1: they're asking me why and I said, you know, I'm
Speaker 1: essentially the modal millennial. I thought I was convinced that
Speaker 1: this cycle was going to be the one where I
Speaker 1: got into home ownership, and you know, now I'm no
Speaker 1: longer convinced, and you know, extrapolate that across the economy now,
Speaker 1: I'm now I'm a little less less optimistic. So I I,
Speaker 1: you know, I do agree that this could be certainly
Speaker 1: a case of me over extrapolating my my personal circumstances,
Speaker 1: and definitely agree Neil's been kind of quite rightly being
Speaker 1: in the drum that there's a lot of pent up
Speaker 1: production coming coming to housing in particular. But you know, uh,
Speaker 1: the counter factual of you know, rates having not done
Speaker 1: what they've done due to the kind of the FED
Speaker 1: signaling a quick and expeditious move higher in rates as
Speaker 1: it would have been a definitely a brighter environment both
Speaker 1: for home prices and for for first time potentially activity
Speaker 1: going forward on both ends. So again I think it's
Speaker 1: you know that the counter factual is seems also clear.
Speaker 1: Can I ask about one area where another area where
Speaker 1: I think you guys disagree a little bit and correct
Speaker 1: me if I'm wrong, But I think Luke at this
Speaker 1: point in time is more barish on what's going on
Speaker 1: with China and the Chinese economy. The Neil is Um,
Speaker 1: could you maybe explain your, I guess, your respective thinking
Speaker 1: around what's going on in China. We've seen, you know,
Speaker 1: parts of the country basically shut down because of COVID
Speaker 1: zero policies. We've seen some supply chain issues and things
Speaker 1: like that, and there seem to be varying opinions about
Speaker 1: how much that actually matters for the global economy, how
Speaker 1: much of those troubles are going to be exported to
Speaker 1: the rest of the world. So why don't we start
Speaker 1: with with Neil? Sure? Tracy, Well, I'm not I don't
Speaker 1: consider myself an expert on China. UM. I try to
Speaker 1: stick to my knitting. But what I will tell you is, UM,
Speaker 1: it's hard for me to see conditions in China getting
Speaker 1: substantially worse than they are right now. And so for me,
Speaker 1: it's about what the blowback is to the US economy. UM.
Speaker 1: And so you know, my sense is that the situation
Speaker 1: in China can't possibly get any worse than it is
Speaker 1: right now. UM. And you know my senses that it
Speaker 1: gets somewhat better from here. UM, and that'll be a
Speaker 1: tail end I think for UH for global demand and
Speaker 1: will help loosen supply chains. So that's sort of how
Speaker 1: I'm thinking about it. Luke, Yeah, I think, I think.
Speaker 1: I think my main difference is that just there's a
Speaker 1: somewhat at a degree of caution warranted. And it's kind
Speaker 1: of almost similar to the inflation story. When inflation surprises
Speaker 1: to the upside for so long, so long, so long, UH,
Speaker 1: and forecasts are are slow to adjust, then the burden
Speaker 1: of proof is is higher. On the other side, the
Speaker 1: burden of proofer thinking inflation has come down UH should
Speaker 1: be higher because you've been kind of beating over the
Speaker 1: head with the mistakes of the past. I think that's
Speaker 1: very much the case right now from a global macro perspective.
Speaker 1: In terms of in terms of looking at China, I think, uh,
Speaker 1: you know, pretty much everyone could point to five or
Speaker 1: six forward looking catalysts that would have inspired a lot
Speaker 1: of optimism on China over the past you know, five
Speaker 1: or five or six months, and it's been the kind
Speaker 1: of the story of Lucy pulling the football away from
Speaker 1: Charlie Brown each time, whether it's the underperformance so large
Speaker 1: that you know, forward performance should be good. Hey, you've
Speaker 1: got the China's Party Congress coming up in November, you're
Speaker 1: probably going to get kind of firming of growth and
Speaker 1: the stock market ahead of that. Or hey, coming out
Speaker 1: of the Beijing Olympics, you should really see this kind
Speaker 1: of you know, this end of blue guy policy, this
Speaker 1: pick up in industrial production in a way that kind
Speaker 1: of supports and uh and underpins the real estate market.
Speaker 1: A lot of these things can still happen, but I
Speaker 1: think that the thing is when China has kind of
Speaker 1: consistently disappointed on the macro side, and a lot of
Speaker 1: cases through through no fault of its own, but in
Speaker 1: a lot of cases through policy responses that global investors
Speaker 1: do not have a lot of visibility into. Then I think,
Speaker 1: you know, the threshold then for saying, hey, China's decisively
Speaker 1: turned around should be higher. It is something that you
Speaker 1: should approach with a little more caution, even if you know.
Speaker 1: I would tend to agree with Neil that you know,
Speaker 1: the six months, twelve months or things better or worse?
Speaker 1: Probably better, But how bad can things get in you know,
Speaker 1: two to three weeks in China. I think we've seen
Speaker 1: in the volatility in the and that market, things can
Speaker 1: move quite abruptly to the downside, so you know, it's
Speaker 1: I think it's a case of why not be a
Speaker 1: little a little late to the China upside surprise party, right?
Speaker 1: I mean I would just point out though, that I
Speaker 1: think it is worth pointing out that outside of China,
Speaker 1: emerging Asia looks quite good. I mean, if you look
Speaker 1: at UM you know, for example, the p m I
Speaker 1: data outside of China looks pretty healthy. If you look
Speaker 1: at mobility data outside of China, it's been up into
Speaker 1: the right, so factories and the rest of Asia are open.
Speaker 1: A lot of final assemblies already leaked out of China,
Speaker 1: which could be one of the reasons why the supply
Speaker 1: chain effects of this haven't been as onerous frankly, I mean,
Speaker 1: at least on the US economy. I mean, the the
Speaker 1: impact of the delta variants spreading all over Asia was
Speaker 1: a lot worse on for for US. UM, you know,
Speaker 1: producers delivering goods to consumers here than what we've seen lately.
Speaker 1: So um, you know, I think if the US, I
Speaker 1: mean the way for me. I remember, guys, I'm trying
Speaker 1: to bring it back to the US because that's my right,
Speaker 1: that's I'm trying to stick to my knitting year, and
Speaker 1: my sense is that China will re accelerate. I mean,
Speaker 1: whether that happens in one month, two months, six months,
Speaker 1: it's going to happen. We know that Europe is frankly
Speaker 1: a lot more connected to China than than the US is.
Speaker 1: I mean, the Europe is a very large, open economy
Speaker 1: that does a lot of trade with China. So if
Speaker 1: China is improving, it stands to reason that Europe will
Speaker 1: as well. Um, I think that's a story. But that
Speaker 1: remember that dramatically, dramatically undercuts this idea that the US
Speaker 1: isn't going to go into recession in twelve to eighteen months.
Speaker 1: You want to call for a recession in the US
Speaker 1: at a time when China and Europe may be accelerated,
Speaker 1: That to me is ridiculous, Okay, And so um, we're
Speaker 1: obviously not going into recession this year, and so I
Speaker 1: think that's something to keep in the back of your
Speaker 1: mind and that maybe you know, I mean, this is
Speaker 1: this is why again it goes back to what we've
Speaker 1: talked about earlier to start the program, right, is that
Speaker 1: it's a very bizarre period for financial markets. I mean,
Speaker 1: the moment the bond market basically priced the recession probability
Speaker 1: out is the very moment the stock market started pricing
Speaker 1: one in. Well, actually, so I want to actually talk
Speaker 1: about US assets again and start with Luke, because obviously
Speaker 1: a lot of people are looking at their portfolios. Maybe
Speaker 1: they're looking at their floral one case, maybe they're looking
Speaker 1: particular at their target date retirement funds, and they're obviously
Speaker 1: sitting on a lot of losses so far here today.
Speaker 1: And what's when, you know, we talk about financial markets
Speaker 1: being weird, Woods New is not just that stocks are
Speaker 1: down because stocks sometimes fall, It's that the bond portion
Speaker 1: of people's port folios it's also down. What for what
Speaker 1: used to across the last several years performed as this
Speaker 1: nice hedge stocks go down bonds go up is not working?
Speaker 1: It stocks down and bonds down because of the rate increases.
Speaker 1: What does that do, Luke? How does that change the
Speaker 1: thinking of portfolio management? When the sort of these asset
Speaker 1: allocation models that worked extremely well one part goes down
Speaker 1: while the other part goes up are no longer working.
Speaker 1: First off, if you're in an environment where more things
Speaker 1: aren't working, it's you know, it's gross down it's not
Speaker 1: being it's you know, not taking large tilts in in
Speaker 1: anyone direction. It's kind of it gets back to a
Speaker 1: uh more of a risk control and prioritizing relative value environment.
Speaker 1: That's that's step one. Step two, though, is expanding the
Speaker 1: kind of the range of possibilities. And one reason obviously
Speaker 1: why bonds have been doing so poorly is because commodity
Speaker 1: prices have been doing so well. So are the is
Speaker 1: that both as a kind of a defensive ballast in
Speaker 1: portfolios as well as kind of the you know, the
Speaker 1: the structural growth opportunities, particularly in in the industrial metal
Speaker 1: space that you know, commodities are still a good place
Speaker 1: to be right now with kind of questions about demand.
Speaker 1: It's not necessarily something aggressively adding to at that at
Speaker 1: the moment, but kind of on a on a forward
Speaker 1: looking basis, you know, think of it this way. It's
Speaker 1: almost it's almost incompatible to think inflation is going to
Speaker 1: normalize all the way to two percent and that we're
Speaker 1: going to have the necessary investments in developing commodities and
Speaker 1: in using them to support the green revolution that we're
Speaker 1: able to get you know, some semblance of energy independence.
Speaker 1: Those two things seem barely incompatible. Uh so in in
Speaker 1: that kind of environment that that augurs for more of
Speaker 1: a structural increase in allocation into commodities, which have been
Speaker 1: a very unloved asset class for for such a long
Speaker 1: period of time. So that's something that's helped offset the
Speaker 1: you know, the correlation. The correlation go to one environment
Speaker 1: that we we bound ourselves in. Well, Neil, I mean
Speaker 1: obviously you know we're talking about mortgages earlier, but where
Speaker 1: can rates go? Can they keep going higher? I mean,
Speaker 1: we particularly at the long end, you know, you know,
Speaker 1: I think so, um why, I think we're in a
Speaker 1: strong nominal growth environment and um, you know, look, I
Speaker 1: mean if you think about where rates were the last time,
Speaker 1: I mean, the FED ended at two point three seven
Speaker 1: right too, I think it was a twitter quarter or
Speaker 1: two and a half that's where the funds rate was,
Speaker 1: and we were in a four and a half percent
Speaker 1: nominal growth environment at the end of and of FED
Speaker 1: promises to well not promises, but they're guiding for something
Speaker 1: like that this year and will probably be I mean,
Speaker 1: you know, let's say inflations around three to three and
Speaker 1: a half percent. I think real growth will be around three,
Speaker 1: right that maybe a little bit more. Um, so you're
Speaker 1: talking about something north of a six percent nominal growth environment.
Speaker 1: So if you're gonna ask me, do I think equilibrium
Speaker 1: funds rate is higher? Yes? I do. Remember it wasn't
Speaker 1: that long ago where the feed thought when they first
Speaker 1: started doing this, you know, the SEP, the Summary of
Speaker 1: Economic Projections, they thought that they thought equalibrium funds rate
Speaker 1: was four in a quarter, four in a quarter. With
Speaker 1: debt service ratio is a lot worse than they are now,
Speaker 1: with UM, Labor markets a lot more sluggish than they
Speaker 1: are now, with business investment a lot weaker than it
Speaker 1: was than it is now. Oh and by the way,
Speaker 1: households are sitting on UM you know, an excess savings pile. Uh,
Speaker 1: you know, over two trillion dollars and US hitting the
Speaker 1: most favorable demographic patch that we've seen in our careers.
Speaker 1: So yes, if you're gonna ask me, do I think
Speaker 1: equilibrium rates are higher? The terminal funds rate is highed?
Speaker 1: Yes I do. And that makes me crazy. Um, you know,
Speaker 1: so so be it. But you know, I mean, I
Speaker 1: think in the near term there's probably some opportunity for
Speaker 1: fixed income, right, I mean, you know, it's it's one
Speaker 1: of these funny things that you've seen, right, It's like
Speaker 1: it's not risk parity, it's risk parody. Um. But you know,
Speaker 1: but I I do think, I mean, look, there's I
Speaker 1: don't think there's much more the markets can price in
Speaker 1: for the FED right now. UM. And I think that
Speaker 1: probably you know helps um, you know the soft landing,
Speaker 1: the softish landing case that that the FED wants to
Speaker 1: tell um. But I think whatever pause we see, um,
Speaker 1: you know after they get to neutral is um. You
Speaker 1: know the next move after that is going to be
Speaker 1: additional hikes. So to like to piggyback somewhat on a
Speaker 1: Neil set what Neil saying, and you know, for right now,
Speaker 1: right in our stances that you know better to be
Speaker 1: neutral the long end, just by virtue of you know,
Speaker 1: how much has been priced in already. But one thing
Speaker 1: that's clearly different this cycle versus the last one is
Speaker 1: that the global nature of central bank tightening and what
Speaker 1: that's doing to global term PREMIU. So you know, starting
Speaker 1: in you have the you know B O J really
Speaker 1: cranking up, que, you have the E C B B
Speaker 1: O E joining not too long really cranking it up.
Speaker 1: After that this cycle that's essentially all going in reverse.
Speaker 1: And even in the face of a uh, you know,
Speaker 1: a pretty big shock to you know, potentially real incomes
Speaker 1: and growth, the e c B is is telegraphing a
Speaker 1: move out of negative interest rate policy. This is this
Speaker 1: is something that is you know, clearly a clearly going
Speaker 1: to push global term framing a higher and and has
Speaker 1: the lots If you go back to Leo Brainard's speech
Speaker 1: about quantitative tightening in early April that a lot of
Speaker 1: people were focusing on, is you know, this is something
Speaker 1: that's going to drive you know, global bond markets. Well,
Speaker 1: boons have underperformed since that period of time. We're we're
Speaker 1: in an environment where the fact that the e c
Speaker 1: B is is kind of uh signaling what it's signaling,
Speaker 1: and it seems that every day there's a kind of
Speaker 1: pulling forward of of some kind of e c B
Speaker 1: related tightening messaging. That's what's driving still the busts and
Speaker 1: global bonds. So if you if you look at lately
Speaker 1: and one thing that honestly I found a little bit
Speaker 1: confusing in the aftermath of the FED is that US
Speaker 1: bond volatility, implied volatility hasn't really calmed down too much,
Speaker 1: and it might be that US bond volatility can't calm
Speaker 1: down because of what's happening across the pond. I have
Speaker 1: what is perhaps a dumb question, but can everyone tighten
Speaker 1: at once? I mean, I know everyone can technically tighten
Speaker 1: at once, but does it have the same impact? Because
Speaker 1: back when we were easing many many years ago, we
Speaker 1: used to talk about competitive qui and sort of competitive
Speaker 1: devaluations and things like that. So does it have the
Speaker 1: same impact if everyone is doing this at the same time.
Speaker 1: I would argue that because like last time, you had
Speaker 1: a much more focused impact on the US, because essentially,
Speaker 1: you know, the the US was the only one tightening
Speaker 1: dollar up, and then you have dollar up also kind
Speaker 1: of exports tighter credit conditions to the rest of the world.
Speaker 1: So we we have everyone going this time, but the
Speaker 1: dollar is still with a lot of strength, and largely
Speaker 1: it's still like very good growth differentials and the kind
Speaker 1: of possibility of more left tail economic risks in Europe
Speaker 1: and China that's still you know, exists to varying degrees.
Speaker 1: But you know, I would think conceptually, in theory, an
Speaker 1: environment where everyone's tightening is on net kind of is
Speaker 1: less tight than than the than the counter factuals that
Speaker 1: it's actually easier to go if it's synchronized rather than
Speaker 1: if it's kind of one country and particularly US centric. Yeah,
Speaker 1: I mean, the one thing I would just say, I
Speaker 1: I would tend to agree, I guess. The one thing
Speaker 1: I would add to that is, you know, when you
Speaker 1: look at the dollar performance, um, you know right now
Speaker 1: versus you know, let's say back when when you know,
Speaker 1: the like Stan Fisher was making speeches about what the
Speaker 1: dollar impact is on GDP growth and inflation. Um. You know,
Speaker 1: what's interesting now is just I guess, is the differentiation
Speaker 1: that I'm seeing in some of the in some of
Speaker 1: the dollars performance. I mean, obviously, the dollar back then
Speaker 1: was like rattying against pretty much everything in um, you know,
Speaker 1: and and here it feels like it's more like d
Speaker 1: M related. I mean, so, so it's obviously the dollar
Speaker 1: is very strong against the euro, it's very strong against
Speaker 1: the end. But if you look at some of the
Speaker 1: emerging market commodity currencies, I mean, to Luke's point about
Speaker 1: how all commodities have done, those currencies are actually hanging
Speaker 1: in there, you know, UM, and that's been something that's
Speaker 1: been a bit different, um than what we've seen you know,
Speaker 1: saw before. So I just think that that's interesting. But
Speaker 1: generally speaking, yes, I think it's much easier on the
Speaker 1: FED if everyone's also hiking. I know, we have, uh,
Speaker 1: just a few more minutes here. You know, again, people
Speaker 1: are looking at their portfolios. Obviously we've talked about it
Speaker 1: a ton, tech and growth getting clauvered, etcetera. Luke when
Speaker 1: and you know you're talking about okay in this environment,
Speaker 1: maybe the answer is commodities exposure. It's sort of like
Speaker 1: the one thing that's breaking the all correlations go to one.
Speaker 1: But you know, when I look at some of these
Speaker 1: tech names and SPAC names and all this stuff, I
Speaker 1: just see like a complete like in some cases it's
Speaker 1: a much bigger massacre than probably people are ever imagining.
Speaker 1: And people stocks down in many cases for brands that
Speaker 1: people know, what would be the conditions in which one
Speaker 1: would start looking back to this area that's gotten hit
Speaker 1: so hard. What would be the sort of either macro
Speaker 1: conditions or flows uh that you look for to say like, okay,
Speaker 1: maybe this has been enough and start start looking for opportunities.
Speaker 1: So the and the difficulty and so doing just as
Speaker 1: as a starting point is the fact, you know, if
Speaker 1: you go from a you know, a hundred P to
Speaker 1: a fift P, well not not exactly. So that's that's
Speaker 1: that's a bit of a challenge here. What would what
Speaker 1: would kind of warrant it is a is a larger
Speaker 1: pricing of recession risk, certainly so right now in terms
Speaker 1: of like if you look at what's the you know,
Speaker 1: what's the the hump in the in the euro dollar
Speaker 1: curve or anything, it's it's not it's not material. It
Speaker 1: doesn't suggest you know, traders ascribing a lot of odds
Speaker 1: to a material cutting cycle from the FED after this
Speaker 1: kind of quick series of hikes. If that were to
Speaker 1: grow larger at the same time as you get at
Speaker 1: the same time as you get kind of more visible
Speaker 1: slowing in UH in the US and the global economy
Speaker 1: as well, you know, that would be that would certainly
Speaker 1: be something goods demand clearly coming off the boil, and
Speaker 1: it to be to be fair goods demand, you know,
Speaker 1: in in terms of PC basis like hasn't really done
Speaker 1: too much for for about for about a year now.
Speaker 1: You know, that's something that you know should be should
Speaker 1: that side of the you know, economy slow more. That's
Speaker 1: something that's going to I would suggest, probably prompt investor
Speaker 1: attention to turn back more to two growth names. But
Speaker 1: it's I think the fact that it hasn't happened yet
Speaker 1: is one of the one of the signals along with
Speaker 1: the euro dollar curve, that you know, there's not a
Speaker 1: lot of recession risk being priced right now, and that's
Speaker 1: that's something that's odd to think about, as uh as
Speaker 1: stocks being as volatile as they are, but I think
Speaker 1: that's something to hang your hat right on on right now.
Speaker 1: In terms of looking at the forward outbook New Yeah,
Speaker 1: thanks Tracy Well, I would just I mean, look the
Speaker 1: the equity markets, UM, the setup really does look very
Speaker 1: much like a late cycle type of dynamic. Now, obviously
Speaker 1: there can be multiple sort of market cycles within a
Speaker 1: broader economic one, UM, but if you look, I mean,
Speaker 1: for example, defense defenses are outperforming cyclicals. We've seen utility
Speaker 1: stocks better bid, staples better bid. Um, We've seen you know,
Speaker 1: significant sell offs and discretionary I would just say that
Speaker 1: there's only so long that the markets can price in
Speaker 1: a late cycle dynamic and then not actually have it
Speaker 1: happened in the economy. So if you're thinking about something
Speaker 1: like strategic asset allocation. My view would basically be to
Speaker 1: use rallies and defensive positions as opportunities to add to
Speaker 1: cyclical ones, because I do think that's probably the next
Speaker 1: leg of the market cycle. Um So, that that's sort
Speaker 1: of that's sort of how I'm thinking about it. When
Speaker 1: I when I look at the broader economy, um as
Speaker 1: I say, I mean bringing it back to to the
Speaker 1: U S economy, there's really you know, my concern dial
Speaker 1: is not particularly um high. I mean, it's it's sort
Speaker 1: of interesting to see like sell side analysts tripping over
Speaker 1: themselves to see who can pencil in the highest recession
Speaker 1: probabilities over the next two years. But you know, in
Speaker 1: my mind, it's really no harder than it normally is.
Speaker 1: I mean, what would actually decline if you were to
Speaker 1: have a recession like housing is we're talking about how
Speaker 1: we don't have enough cars and we don't have enough homes.
Speaker 1: Um So, what goes down commercial real estate that's already
Speaker 1: as low as it could possibly be relative to g
Speaker 1: D P um So, I mean it could be I
Speaker 1: guess you could make the argument of durable goods. But
Speaker 1: even there, you know, things like motor vehicle sales have basically,
Speaker 1: you know, as a share of of consumption, they've they've
Speaker 1: already kind of reverted to trends. So you know, I
Speaker 1: just don't really see it. I mean, what are we
Speaker 1: gonna talk about the great, the great household furnishing recession
Speaker 1: of It's just it just doesn't it doesn't make a
Speaker 1: lot of sense to me. Um. And that's why I say,
Speaker 1: if if you're if you're in, if you're asset allocating here, um,
Speaker 1: I think we're at a point now where it's probably
Speaker 1: it's it to me it makes sense to pick up
Speaker 1: some of these, uh, these cyclical names that have been
Speaker 1: quite beaten down. And as I say, I mean, this
Speaker 1: is something that Luke pointed to early here. But if
Speaker 1: you think about the markets, it's been three things, right,
Speaker 1: It's been the FED, It's been Russia, Ukraine, so the
Speaker 1: situation in Eastern Europe, it's been China. Okay, So like
Speaker 1: take each of those in turn the Fed. The FED,
Speaker 1: in my mind, is going to be less a source
Speaker 1: of instability for the financial markets over the remainder of
Speaker 1: the year. I mean, Powell has basically given us forward
Speaker 1: guidance for the first time in a while, right, I
Speaker 1: mean basically fifty basis point moves, followed by there's a
Speaker 1: little bit more certainty in the FED outlook than there
Speaker 1: has been. And uh, you know, we talked about China. Um.
Speaker 1: I think I even got Luke to acknowledge that China
Speaker 1: will look better in the next twelve to twelve months.
Speaker 1: But if China is looking better in the next twelve months, um,
Speaker 1: than Europe will too. Right. So those three areas that
Speaker 1: have been beating down the markets and creating this sort
Speaker 1: of instability and volatility that we've seen, I think that's
Speaker 1: likely to abate. So that's why I say, if I
Speaker 1: had to make a market call, that would be it. Well,
Speaker 1: you guys are great. Just could go on a lot further,
Speaker 1: but we got to leave it there. Neil and Luke
Speaker 1: so much appreciate you coming on odd loads to help
Speaker 1: us understand what's been I mean, we say it's been
Speaker 1: a busy week, but really in extraordinary year so far overall.
Speaker 1: So thank you for coming on and helping us make
Speaker 1: sense of the world. We're we're gonna stay on and
Speaker 1: keep thicker. And yeah, just please record it then send
Speaker 1: us the audio. Thanks so much. Guys, that was really fun.
Speaker 1: Thank you. You know what, that conversation made me think
Speaker 1: this is gonna be a meta point that we could
Speaker 1: get to the substance. The best sort of discussions are
Speaker 1: between guests who agree on a lot and share a
Speaker 1: lot of the same premises, but disagree on a few
Speaker 1: key things, like you have to sort of like share
Speaker 1: a common like assumption about how the world works. Those
Speaker 1: are the best conversations, right, But because otherwise it's often
Speaker 1: two people talking past each other exactly right, and that
Speaker 1: was not they were not talking past each other. Well,
Speaker 1: I gotta say, I can't believe we hadn't had neal
Speaker 1: on before. But he's great obviously, and Luke. Every time
Speaker 1: we have Lucan, I'm so proud because Luke used to
Speaker 1: be our colleague and I just love actually, you know,
Speaker 1: he used to write for our team, and I love
Speaker 1: the fact that he's now a guest on all thoughts
Speaker 1: talking so knowledgeably about Macro Yeah, a little tier, yeah,
Speaker 1: thinking about Luke's trajectory. But yeah, no, I thought that
Speaker 1: was really helpful. I mean, so many like interesting points.
Speaker 1: I mean, you know, it's Luke brought this up that
Speaker 1: I hadn't really thought of. But you know, it's interesting
Speaker 1: for all of the double dip or not double dip,
Speaker 1: but like soft landing, hard landing fears like actually so far,
Speaker 1: like the classical recession signals. And they talked about the
Speaker 1: euro dollar curve, like the market is not really pricing
Speaker 1: one in yet, right, it seems like stocks have overreacted
Speaker 1: compared to fixed income. But the other thing, I mean,
Speaker 1: the other thing I keep thinking is just how I
Speaker 1: don't want to say obvious, but yes, obvious is the word.
Speaker 1: How obvious it was that there would be a correction
Speaker 1: in stocks at one point because I mean, the Fed
Speaker 1: we spoke about this. The FED hasn't explicitly said it
Speaker 1: wants stocks to go down, but it talked about tightening
Speaker 1: financial conditions. And then you know, for years we're talking
Speaker 1: about valuations were frothy, that this was something that was
Speaker 1: going to start reverting once interest rates start hiking, and
Speaker 1: then lo and behold they did, right, Like I think,
Speaker 1: the surprising thing it's never easy in real time to
Speaker 1: make trade, so it's never like, oh it out here
Speaker 1: comes an easy trade. But I would say the sort
Speaker 1: of surprising thing is if you look at this sort
Speaker 1: of narrative of what happened this year. It's kind of straightforward.
Speaker 1: Inflation picked up and the Fed said, Okay, now we're
Speaker 1: going to go in a hiking cycle. Oh and ps.
Speaker 1: The way that we control inflation just through financial conditions
Speaker 1: and we're going to like it's a part of those
Speaker 1: and the stocks are like a key part of financial conditions.
Speaker 1: It was it was the obvious trade. Just teleport me
Speaker 1: back to November or January when Defense started pivoting, and
Speaker 1: I could have been I could have been a genius. Yeah,
Speaker 1: I guess it's like the timing aspect is the most
Speaker 1: mysterious of all of this. And why you know why
Speaker 1: we saw a rally on Wednesday after the hike actually happened,
Speaker 1: and it wasn't until Thursday that stocks started dropping off.
Speaker 1: That's the only thing that remains something of a head scratcher. Yeah,
Speaker 1: the week was super weird, thats for sure. Yeah, it was, um,
Speaker 1: shall we leave it there, Let's leave it there, let's
Speaker 1: go take a break and you know, let's head into
Speaker 1: the weekend. All right. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Wisn't all.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our guests Luke Kawa He's at l j Kala. Neil
Speaker 1: Donna isn't technically on Twitter, but I think he often
Speaker 1: contributes to the handle of his Renaissance Macro and they're
Speaker 1: at ren mack l C. Follow our producer Carmen Rodriguez
Speaker 1: at Carmen armand follow at the Bloomberg Head of podcast
Speaker 1: francesco Leedy at Francisco Today. And check out all of
Speaker 1: our podcast Bloomberg onto the handle at podcasts. Thanks for listening.