Speaker 1: Let's get to Jack McIntyre. Jack is the global portfolio
Speaker 1: manager at Brandywine who joins from Philadelphia. Thanks for being
Speaker 1: with us, Jack. It was all about the FED obviously
Speaker 1: today a lot of volatility and markets. I think participants
Speaker 1: are struggling to make sense of what they're hearing. One moment,
Speaker 1: Pow will suggest, hey, you know, we've got a long
Speaker 1: way to go before we're done, and the next breath
Speaker 1: he seems to suggesting, hey, we might be near the
Speaker 1: end of the tightening cycle. There is so much tightening
Speaker 1: that's already occurred. Let's not forget right. I mean, we've
Speaker 1: taken the FED funds rate, or the FED has from
Speaker 1: near zero to around four and a half percent right now.
Speaker 1: Are you of the belief that you know, the kind
Speaker 1: of the classical thinking here long and variable lag. Are
Speaker 1: we still expecting a lot more um negative impact from
Speaker 1: from higher rates or is that less clear now to you?
Speaker 1: So you know, I'm in the camp that there's been
Speaker 1: a tremendous amount of cumulative tightening of financial conditions. You know,
Speaker 1: we talk a lot about uh FED funds, the policy rate,
Speaker 1: but there's been a tremendous amount of tightening in other
Speaker 1: areas as well. So yeah, I kind of was thinking
Speaker 1: that the statement might kind of infer that as opposed
Speaker 1: to ongoing, they might say additional rate hikes something to
Speaker 1: kind of send a message that they were getting a
Speaker 1: little bit closer to the end. But I still believe
Speaker 1: that's going to be the case, because I think the
Speaker 1: economic data is going to take us in that direction.
Speaker 1: And I get it. You know, the Fed and Powell
Speaker 1: in particular, they don't want equities to be off to
Speaker 1: the races and those sorts of things. They want to
Speaker 1: make sure inflation is definitely not just rolled over but
Speaker 1: declined pretty meaningfully. But I expect to see that earlier
Speaker 1: next year. Where do you place the risk of overtightening. Well,
Speaker 1: so it is elevated because I say it's elevated because
Speaker 1: it's the BED focuses on the employment market then there,
Speaker 1: and that's there, you know, they're their primary focus and
Speaker 1: rationale for tightening. Uh, then I think the odds of
Speaker 1: going into a recession are elevated. You know, Historically, anything
Speaker 1: around the labor market is a lagging indicator for the
Speaker 1: overall economy. I feel as though this cycle it's going
Speaker 1: to be an extra lagging indicator because we know the
Speaker 1: companies struggle to find workers and they're gonna do everything
Speaker 1: they can to not let workers go until they get
Speaker 1: real clarity that things are slowing down. But away from that,
Speaker 1: you know, we've seen signs of decline and inflation. But yeah,
Speaker 1: that's the primary focus to FED. They're going to overcook
Speaker 1: it and we're gonna increase the odds of going to
Speaker 1: a recession. Yeah, Wage inflation, I think is still an
Speaker 1: issue that you mentioned. The labor market is very tight.
Speaker 1: I'm wondering whether we're not in when I say we,
Speaker 1: I'm thinking of markets more broadly, whether we've under estimated
Speaker 1: the way in which the economy has been transformed, even
Speaker 1: before COVID to step in and do as much as
Speaker 1: the FED did, and then to realize that technology that
Speaker 1: was available to American businesses away from services. I get travel,
Speaker 1: I get airlines, hotels, right, but there were so many
Speaker 1: other businesses that were embracing technology that didn't um or
Speaker 1: that allowed them to continue to be productive. And I
Speaker 1: understand that the housing market has suffered badly as a
Speaker 1: result because it's very interest rate sensitive. But maybe the
Speaker 1: economy is shifted and we are a little bit less
Speaker 1: interest rate sensitive right now? Is that at all a possibility? Yeah,
Speaker 1: surely it is a possibility, just as though you know,
Speaker 1: we're less sensitive to the increase in oil prices as well. Um,
Speaker 1: but you know, eventually they will have an impact because
Speaker 1: and Powell and I think the Fed and General has
Speaker 1: been very good about the roadmap knowing that, hey, things
Speaker 1: around goods are going to see deflation. Eventually, we're gonna
Speaker 1: see housing service inflation decline, and then the core service
Speaker 1: is going to be the last thing that will will
Speaker 1: see decline. But if we see weakness in those other sectors,
Speaker 1: then I think that will funnel through into service sectors
Speaker 1: as well. Again, this is very big picture long term,
Speaker 1: but you will see more investment in automation robotics, excepting
Speaker 1: those little things as well as because of this, because
Speaker 1: of the dishortage in labor Nearer to him in the
Speaker 1: next couple of quarters. What sort of pressure do you
Speaker 1: expect the sustained high rights to be having on balance sheets,
Speaker 1: stings and consumer confidence as well? Yeah, I think, uh,
Speaker 1: all of those factors as well. It's you know, we've
Speaker 1: been positioning our portfolio, adding treasury duration in the portfolio
Speaker 1: as an offset of that, because I think that the
Speaker 1: tightening of financial conditions that we've been talking about increase
Speaker 1: the odds of the economy slowing down. And you know, again,
Speaker 1: the FEED is very committed to making sure that they
Speaker 1: break the lack of inflation. It's just seemingly when you
Speaker 1: put everything together, it's hard to come out of this
Speaker 1: with a soft landing uh in here, and I think
Speaker 1: that certainly is going to impact um. You know what
Speaker 1: we see on the corporate sector as well well. The
Speaker 1: FED doesn't seem to be there yet. I mean the
Speaker 1: summary of economic projections they're looking at positivity in three.
Speaker 1: If you have to go offshore right now, though, Jack,
Speaker 1: if you have to look to maybe areas in Asia
Speaker 1: to put money to work, are you less inclined to
Speaker 1: be exposed to the US given everything you described. I mean,
Speaker 1: I understand your being a little conservative here looking at
Speaker 1: the bond market, but if if you need to capture
Speaker 1: a better yield, do you go offshore and chase equities there?
Speaker 1: I would do that, and we are doing that in
Speaker 1: terms of our bond allocation as well, because I actually
Speaker 1: think what we're seeing is as the U S slows
Speaker 1: down and the end what we've talked about the odds
Speaker 1: of recession increased, but look at what China is doing.
Speaker 1: China is actually doing the exact option. And I get it.
Speaker 1: This is going to be a bumpy transition as they
Speaker 1: move away from COVID. It's going to be some version
Speaker 1: of two steps forward, one step back. But if you
Speaker 1: extend your time rising and it's very similar to what
Speaker 1: we did in the spring of because of the uncertainty
Speaker 1: around COVID, then but they're ejecting more stimulus and we
Speaker 1: have a more favorable view of China. So the point
Speaker 1: being is that I think you're going to see a
Speaker 1: shift in relative growth North America led by a slowdown
Speaker 1: in the US, but then Asia actually starts to get
Speaker 1: a little bit more traction, led by China coming out
Speaker 1: of that. I think it's got personally, it's got a
Speaker 1: huge US dollar implications. It's going to drive the dollar lower,
Speaker 1: it's gonna push capital more into Asia. UH, and also
Speaker 1: I think in UH Latin America some of the higher
Speaker 1: yielding markets as well, and then eventually even Europe. Do
Speaker 1: you have a sick to specific approach to China, considering
Speaker 1: how enthusiastic regulators often tamed to be there, so you
Speaker 1: know interesting. You know, I'm talking very constructively on China,
Speaker 1: but we don't have a direct all cation into China
Speaker 1: because again, I don't want to own their bonds. If
Speaker 1: they are opening their economy. The currency is interesting, but
Speaker 1: I think there's other ways to be positioned to benefit
Speaker 1: from China's UH sort of potential uptick as they move
Speaker 1: away from covid UH. And that's just more in Asia
Speaker 1: currencies and Asia equities in general. In our world, Asian
Speaker 1: to hire some of the higher yielding bomb markets in
Speaker 1: Asia as well. Jack, always a pleasure. Thank you for
Speaker 1: spending time with us and sharing your perspective on price
Speaker 1: action and markets not just here in the States, but
Speaker 1: in the pack Rim as well. Jack McIntyre's global portfolio
Speaker 1: manager at Brandywine