WEBVTT - Digesting the Taper 0:00:13.600 --> 0:00:17.240 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.280 --> 0:00:20.720 I'm Mike Reagan, a senior editor at Bloomberg, and I'm 0:00:20.760 --> 0:00:24.200 Waldonna Hirich, across asset reporter at Bloomberg. This week on 0:00:24.239 --> 0:00:27.479 the show, well, everyone is freaking out about interest rates again. 0:00:27.760 --> 0:00:30.560 The tenure treasure yield is up twenty some basis points 0:00:30.560 --> 0:00:34.680 since the Federal Reserve September meeting. That's when the Central 0:00:34.680 --> 0:00:38.280 Bank signaled that tapering of its asset purchases will likely 0:00:38.560 --> 0:00:42.559 commence sometime this year. At the same time, well, remember 0:00:42.600 --> 0:00:45.680 that soap opera surrounding the debt ceiling. It's been renewed 0:00:45.680 --> 0:00:49.000 for another season, so as the drama about a potential 0:00:49.080 --> 0:00:52.440 hard landing in China's economy. So what's it all mean 0:00:52.520 --> 0:00:54.840 for your investments? We'll get into it with the chief 0:00:54.880 --> 0:00:59.280 investment strategist at a major investment firm. But first we 0:00:59.400 --> 0:01:03.120 have a very special announcement from Charlie Pellett himself. Well, 0:01:03.200 --> 0:01:05.920 every good mystery must come to an end, so we'll 0:01:06.000 --> 0:01:09.480 keep you in suspense no longer. What Goes Up is 0:01:09.480 --> 0:01:12.400 pleased to announce that Bill Donna hi Rick will be 0:01:12.480 --> 0:01:15.800 the new co host of the show. Permanently, or at 0:01:15.880 --> 0:01:21.520 least until Reagan drives her nuts. I like how Charlie 0:01:21.520 --> 0:01:23.640 could not resist getting a dig in on me on 0:01:23.680 --> 0:01:27.800 that that introduction. They're built but which I really appreciate. 0:01:28.080 --> 0:01:33.279 By the way, this is news to me. Oh well, surprise, surprise. Thanks. 0:01:34.480 --> 0:01:36.360 We know how much you love the the attention and 0:01:36.400 --> 0:01:38.759 the spotlight to be on you, so I I don't 0:01:38.840 --> 0:01:42.240 at all. Yeah, you'll get used to it, you'll get 0:01:42.319 --> 0:01:44.840 used to but but I love but I love everything 0:01:45.440 --> 0:01:48.440 Charlie does. So I appreciate that that's that's one of 0:01:48.480 --> 0:01:51.000 the members here that that you love, Like, okay, yeah, 0:01:51.000 --> 0:01:53.600 that's fair enough. Yeah, but I'm very proud to have you, 0:01:53.640 --> 0:01:56.040 Bill Donna. I mean we I obviously enjoyed the mystery 0:01:56.320 --> 0:01:59.200 co host gimmick for as long as it lasted. But uh, 0:01:59.720 --> 0:02:02.800 long time listeners will know vil Donna has been a 0:02:02.920 --> 0:02:06.240 major behind the scenes contributor to the show since it's beginning. 0:02:06.880 --> 0:02:12.160 Uh that vildonna energy is unrivaled and she's uh uh importantly, 0:02:12.160 --> 0:02:16.119 she's on the phone every day with smart people who 0:02:16.160 --> 0:02:18.960 may or may not realize that they're they're actually auditioning 0:02:19.040 --> 0:02:22.600 for for a guest spot on the for the podcast, right, 0:02:22.840 --> 0:02:25.520 I don't know if you tell them that. I never do, 0:02:25.800 --> 0:02:28.560 and I think that might have been the case with 0:02:28.680 --> 0:02:30.760 this week's guests. We can we can ask him. I 0:02:30.800 --> 0:02:34.040 want to introduce this week's guest. It's Brian Nick. He's 0:02:34.120 --> 0:02:37.359 the chief investment strategist at Moving and he also used 0:02:37.400 --> 0:02:39.239 to work at the New York Fed. So I think 0:02:39.280 --> 0:02:41.919 he's the perfect guest for for the podcast this week. 0:02:41.960 --> 0:02:44.760 Thank thank you for joining us, Brian, Thank you very 0:02:44.840 --> 0:02:46.520 much for having me. And I would say every time 0:02:46.520 --> 0:02:48.440 I talked to a reporter, I secretly hope that I'm 0:02:48.440 --> 0:02:51.000 auditioning for a podcast. So this is this is fantastic. 0:02:51.560 --> 0:02:57.359 It's every strategist stream right. It is finally paid off. Well, 0:02:57.680 --> 0:02:59.720 you know as well, Dona said you started earlier in 0:02:59.720 --> 0:03:02.040 your we're working at the at the market's desk at 0:03:02.080 --> 0:03:05.679 the FED itself. Um so, I want to hope and 0:03:05.720 --> 0:03:07.920 you can kind of put that FED hat on again 0:03:07.960 --> 0:03:10.200 before we actually get into your views on the market, 0:03:10.600 --> 0:03:13.480 I just talked to us a little bit about what 0:03:13.520 --> 0:03:17.640 you're expecting for the tapering process. Um uh, you know, 0:03:18.040 --> 0:03:20.760 how aggressive will the FED be? How soon are you 0:03:20.800 --> 0:03:23.880 expecting sort of the the normalization of interest rates to 0:03:24.320 --> 0:03:28.040 follow after tapering, and you know, how do you think 0:03:28.040 --> 0:03:31.280 the market. Is the market prepared for what's coming um 0:03:31.400 --> 0:03:33.840 or is it over pricing under pricing at any of 0:03:33.840 --> 0:03:37.040 the risks here? Yeah, So I think from the Fed's perspective, 0:03:37.720 --> 0:03:40.640 they have this sort of institutional memory of the last 0:03:40.680 --> 0:03:43.200 crisis when they did wait a very long time after 0:03:43.240 --> 0:03:45.760 the financial crisis three or four years before that. You 0:03:45.800 --> 0:03:48.920 when we're talking about tapering their bond purchases, and they 0:03:48.960 --> 0:03:50.520 were off and on with QI one, q E two, 0:03:50.560 --> 0:03:54.000 q E three, but it took until for them to 0:03:54.080 --> 0:03:57.000 actually get you know, busy with the with the task 0:03:57.040 --> 0:04:01.000 of rolling down those bond purchases, and in retrospect, they 0:04:01.040 --> 0:04:04.360 probably think they did that too quickly. J Pal himself 0:04:04.400 --> 0:04:06.400 has said the economy is actually in better shape today 0:04:06.600 --> 0:04:09.320 that it was when they first announced that taper in 0:04:09.360 --> 0:04:11.200 the market had a big tantrum about it. An interest 0:04:11.280 --> 0:04:13.880 rates doubled in a pretty short period of time. So 0:04:13.920 --> 0:04:18.080 the Fed is taking lessons of the last recovery and 0:04:18.120 --> 0:04:21.360 their part in, you know, getting to the period of 0:04:21.440 --> 0:04:24.960 higher interest rates and fewer bond purchases, and it probably 0:04:25.560 --> 0:04:29.080 thinks it went too quickly, tightened too much tightened too quickly, 0:04:29.520 --> 0:04:31.560 even by what at the time seemed like very very 0:04:31.560 --> 0:04:34.400 slow standards. And and so this feed has become much 0:04:34.440 --> 0:04:38.480 more dubbish in its reaction function to hotter economic data, 0:04:38.480 --> 0:04:41.480 whether it's growth or higher inflation, much more tolerant of inflation. 0:04:41.520 --> 0:04:44.599 I'd say, almost dismissive. When you hear a FED chair 0:04:44.680 --> 0:04:46.880 get up in front of everybody and say, well, the 0:04:46.880 --> 0:04:49.240 difference between two point four percent and two percent. You know, 0:04:49.279 --> 0:04:51.159 the average households not going to feel that. You know, 0:04:51.200 --> 0:04:53.560 we're not in Paul Volker territory anymore, right when we 0:04:53.560 --> 0:04:56.040 have the FED chair saying that. And obviously inflation has 0:04:56.040 --> 0:04:58.160 been much higher than two point four percent this year, 0:04:58.400 --> 0:05:00.719 and the FED has been extremely tall and continuing to 0:05:00.760 --> 0:05:04.240 do the asset purchases, continuing to really like shoot off 0:05:04.320 --> 0:05:06.240 any notion that they're going to be raising interest rates 0:05:06.440 --> 0:05:09.400 anytime soon. I think they got to a point where 0:05:09.400 --> 0:05:11.799 even the doves on the committee were comfortable that liquidity 0:05:11.839 --> 0:05:16.479 was ample. This emergency stimulus, you know, bond buying program 0:05:16.560 --> 0:05:19.560 was probably um no longer doing a whole lot of good, 0:05:19.600 --> 0:05:21.880 probably wasn't doing harm, but wasn't gonna be helping anymore. 0:05:22.120 --> 0:05:24.120 And so I think they were very explicit, in fact, 0:05:24.120 --> 0:05:25.720 more explicit than I expected them to be at the 0:05:25.760 --> 0:05:28.760 September meeting that they would be heading into November with 0:05:28.839 --> 0:05:31.359 the expectation to be announcing a taper, probably start that 0:05:31.400 --> 0:05:35.080 in December, wind it down maybe fifteen billion a month 0:05:35.520 --> 0:05:37.599 until they're done it at the end of July, and 0:05:37.600 --> 0:05:39.840 I think that's probably the timeline that we're looking for, 0:05:39.920 --> 0:05:42.680 probably a bit more aggressive than maybe a few months 0:05:42.720 --> 0:05:45.000 ago what we would have expected. But I think with 0:05:45.000 --> 0:05:47.240 with the COVID cases sort of peeking and coming down, 0:05:47.320 --> 0:05:49.040 some of the economic data has actually turned a bit 0:05:49.080 --> 0:05:51.840 better and inflation hasn't gone away as an issue for 0:05:51.880 --> 0:05:54.440 the FAT to have to consider. Um, this is probably 0:05:54.480 --> 0:05:57.000 kind of the media outcome from markets in terms of 0:05:57.000 --> 0:05:59.160 interest rate hikes. I do think this is where maybe 0:05:59.160 --> 0:06:01.800 the market is being a little bit too aggressive pricing 0:06:01.800 --> 0:06:04.599 in FED hikes. Yes, the FED dots are telling us 0:06:04.680 --> 0:06:06.480 that about half the members think that they should be 0:06:06.520 --> 0:06:08.760 raising rates next year at least once. I mean is 0:06:08.800 --> 0:06:10.680 also half the members don't think they should be raising 0:06:10.760 --> 0:06:12.680 rates next year or won't have to raise rates next year, 0:06:12.680 --> 0:06:14.400 And I think there will be more doves on the 0:06:14.440 --> 0:06:16.840 committee a year from now than there are now. Because 0:06:16.880 --> 0:06:20.120 Biden's going to pick three two or three new FED governors, 0:06:20.120 --> 0:06:22.760 it'll probably be more inclined not to raise rates, and 0:06:22.760 --> 0:06:24.919 so I wouldn't look for them to lift off until 0:06:25.320 --> 0:06:28.560 the first part of three, with a caveat being that 0:06:28.600 --> 0:06:31.480 if inflation continues to come in a lot hotter than expected, 0:06:31.720 --> 0:06:33.480 that may be pulled forward into the second half of 0:06:33.520 --> 0:06:38.200 next year. So, Brian, obviously we saw a spike in 0:06:38.640 --> 0:06:42.320 treasury yields right after the FED meeting, or maybe not 0:06:42.480 --> 0:06:44.680 right after. I think in a story I wrote, uh, 0:06:45.400 --> 0:06:49.320 we said something like eighteen hours afterwards. So it is 0:06:49.320 --> 0:06:53.200 is that what's behind the sell off in the bond market? 0:06:53.400 --> 0:06:55.560 Is it what we you know it was, it's parked 0:06:55.560 --> 0:06:57.760 by what we heard from the Fed? Or is it 0:06:57.839 --> 0:07:00.800 more so the outlook for growth? It both? Can you 0:07:00.920 --> 0:07:03.479 walk us through your thinking? They're sure. I think it 0:07:03.560 --> 0:07:07.479 follows the pattern of a taper tantrum, except in a 0:07:07.560 --> 0:07:10.720 much more mild case than we saw in real interest 0:07:10.800 --> 0:07:13.800 rates rising. You don't really have inflation expectations doing much, 0:07:13.800 --> 0:07:15.720 so the markets not screaming that the Fed's making a 0:07:15.800 --> 0:07:18.160 huge mistake by tapering. Do you think all the way 0:07:18.200 --> 0:07:21.680 back to June. That meeting, when the dots were interpreted 0:07:21.680 --> 0:07:24.040 as being more hawkish and the FED maybe kind of 0:07:24.080 --> 0:07:27.200 mishandle its communication spook the markets a little bit into 0:07:27.240 --> 0:07:28.840 thinking it was going to be a bit too hawkish. 0:07:28.920 --> 0:07:31.320 You actually saw long term interest rates fall, which is 0:07:31.360 --> 0:07:33.160 a sign at the market, at least the bondo market 0:07:33.160 --> 0:07:35.880 thinks that fed's making a mistake and going too quickly. 0:07:36.000 --> 0:07:37.840 With the September meeting, I think it was handled a 0:07:37.880 --> 0:07:41.320 bit better. The communication, the separation of the bond buying 0:07:41.360 --> 0:07:45.040 from the interest rate lift off um again, the dismissive 0:07:45.840 --> 0:07:49.000 attack towards inflation, I think I'll probably also got got 0:07:49.480 --> 0:07:51.960 markets attention. So when you have interest rates rising at 0:07:51.960 --> 0:07:54.240 the Yolkurf steepening, I think it's a sign that the 0:07:54.280 --> 0:07:57.000 markets are optimistic about growth, and I think you have 0:07:57.040 --> 0:07:59.880 to consider the context. Yes, the FED was probably sort 0:07:59.920 --> 0:08:02.320 of proximate cause for the increase in rates, but we 0:08:02.360 --> 0:08:06.000 also have now a clear decline in US and global 0:08:06.360 --> 0:08:08.880 COVID cases, So it seems like the delta variant is 0:08:08.880 --> 0:08:11.080 is in decline in many more places than it's than 0:08:11.080 --> 0:08:13.280 it's on the rise at this point, and the economic 0:08:13.360 --> 0:08:16.720 data sort of sneakily has gotten a little bit better, 0:08:16.800 --> 0:08:18.960 or at least it's less prone to disappointment than it was. 0:08:19.360 --> 0:08:21.600 Over the summer, we got a really good retail sales number, 0:08:21.640 --> 0:08:25.480 some of the housing numbers, home construction was was better 0:08:25.480 --> 0:08:29.320 than expected, and so I think that the overall tone 0:08:29.360 --> 0:08:31.840 has become a bit more optimistic, maybe reversing some of 0:08:31.840 --> 0:08:34.679 the pessimism we saw in July and August, which is 0:08:34.679 --> 0:08:37.960 when rates were declining for reasons that that to us 0:08:37.960 --> 0:08:39.600 at the time we're pretty mysterious. So a bit of 0:08:39.600 --> 0:08:42.600 a reversal of what we saw then. UM, not quite 0:08:42.679 --> 0:08:44.520 risk one, because we've seen the equity markets and how 0:08:44.559 --> 0:08:47.520 they behave. But I think an overall more optimistic tone 0:08:47.520 --> 0:08:49.720 in the bottom market UM that sees the FED is 0:08:49.760 --> 0:08:52.280 as pretty much getting things right and not too many 0:08:52.280 --> 0:08:55.360 other things interfering with the general story, which is slower 0:08:55.360 --> 0:08:58.559 economic growth from a very very high rate and peak 0:08:58.600 --> 0:09:00.880 in the second quarter and at least a number of 0:09:01.200 --> 0:09:03.760 quarters of of above trend growth ahead. So you know, 0:09:03.920 --> 0:09:06.559 I think, so still still relatively smooth sailing for the 0:09:06.640 --> 0:09:19.920 US economy. Ran so obviously, uh, equity valuations are are 0:09:19.960 --> 0:09:24.040 super high, at least compared with history. Credit spreads are 0:09:24.480 --> 0:09:28.040 razor thin um, and you make you set up some 0:09:28.080 --> 0:09:31.480 thoughts heres too toldon and I, uh, sort of your 0:09:31.480 --> 0:09:33.920 general thoughts about the market. And one point you made 0:09:33.960 --> 0:09:36.600 I think is really interesting. Uh you said that the 0:09:36.600 --> 0:09:40.960 economy is early to mid cycle, but markets are are 0:09:41.040 --> 0:09:44.400 late cycle, you know, presumably looking at evaluation metrics like that. 0:09:45.160 --> 0:09:47.000 And I think that's an interesting way of looking at it. 0:09:47.040 --> 0:09:49.760 I agree, I I completely agree. But I'm wondering how 0:09:49.840 --> 0:09:53.080 you think that resolves itself. I mean, to me, there's 0:09:53.160 --> 0:09:56.760 there's kind of two maybe main possibilities. You know, obviously 0:09:56.800 --> 0:10:01.160 that the markets can can sort of you know, come 0:10:01.200 --> 0:10:05.199 down and drag the economy, uh down with them into 0:10:05.240 --> 0:10:07.640 the late cycle or uh, you know, end of the 0:10:07.640 --> 0:10:10.640 cycle for the economy, or you know, I always think 0:10:10.679 --> 0:10:14.000 maybe you get that correction on the X axis of 0:10:14.160 --> 0:10:16.000 the chart rather than the y access you know, in 0:10:16.080 --> 0:10:19.600 other words, just a market that goes nowhere for a while, uh, 0:10:19.679 --> 0:10:23.240 until learnings catch up that sort of thing, um, rather 0:10:23.320 --> 0:10:27.040 than a sharpe drop in price that brings things back 0:10:27.080 --> 0:10:30.520 to a sort of a mean reversion evaluations. But how 0:10:30.559 --> 0:10:33.520 are you thinking about how that will resolve itself? This 0:10:34.280 --> 0:10:37.440 discrepancy between where the economy is, what part of the cycle, 0:10:37.480 --> 0:10:40.679 and where the market seem to be in the cycle. Yes, 0:10:40.760 --> 0:10:42.800 so just just quickly, I think to put some some 0:10:42.920 --> 0:10:44.360 meat on the bones of the argument that if you 0:10:44.360 --> 0:10:46.480 look at the economy, the unemployment or it's not high, 0:10:46.679 --> 0:10:48.880 but it's higher than it was pre pandemic. We have 0:10:48.920 --> 0:10:50.880 a lot of people who haven't even entered the or 0:10:50.880 --> 0:10:52.680 re entered the labor force yet. So I think there's 0:10:52.679 --> 0:10:55.520 still many millions of more people who will be getting 0:10:55.600 --> 0:10:58.240 jobs in the next call at six to eighteen months, 0:10:58.559 --> 0:11:00.640 and so that it's a sign that you're you're creating 0:11:00.679 --> 0:11:03.120 jobs at that clip. It's still early cycle. Savings rates 0:11:03.120 --> 0:11:06.199 are very high, which is not abnormal after research when 0:11:06.200 --> 0:11:08.120 people have built up savings, although the reason that they're 0:11:08.160 --> 0:11:10.480 high is much different than this massive physical stimulus and 0:11:10.559 --> 0:11:13.320 people you know, essentially confined to their to their homes 0:11:13.360 --> 0:11:16.280 for many many months um and then things like inventories, 0:11:16.320 --> 0:11:18.800 their companies are scrambling to restock inventories, they let them 0:11:18.800 --> 0:11:20.640 wind all the way down. That's something that happens earlier 0:11:20.640 --> 0:11:23.199 in economic cycle as well. Whereas the markets are behaving 0:11:23.200 --> 0:11:25.960 almost as if the pandemic they never happened. Equity valuations, 0:11:25.960 --> 0:11:28.080 to your point, are higher than they were pre pandemic. 0:11:28.120 --> 0:11:30.559 They were a little bit off their peaks from earlier 0:11:30.559 --> 0:11:32.559 in the year. They have been coming down because the 0:11:32.559 --> 0:11:34.880 market has been doing less well than earnings growth has 0:11:34.920 --> 0:11:38.920 been doing. But credit spreads certainly extremely resilient and much 0:11:38.960 --> 0:11:42.040 better UM you know, have exhibited you know, late cycle 0:11:42.080 --> 0:11:44.320 signs in a way that that they weren't even doing 0:11:44.480 --> 0:11:47.040 before the pandemic. So how did this resolves itself? I 0:11:47.080 --> 0:11:49.520 think your your point about maybe the market's not giving 0:11:49.520 --> 0:11:52.440 you a whole lot as a diversified investor for some 0:11:52.480 --> 0:11:54.320 period of time. I think it's probably the way we 0:11:54.360 --> 0:11:58.680 see this resolving. As the economy continues to decelerate gently, 0:11:59.240 --> 0:12:02.800 I think we get you know, slightly less good market returns, 0:12:02.800 --> 0:12:05.560 and we're seeing the third quarter has resolved in a 0:12:05.600 --> 0:12:08.440 way that the net net sp five really hasn't gone 0:12:08.480 --> 0:12:11.920 much of anywhere. UM. Interest rates are incrementally higher than 0:12:11.920 --> 0:12:14.880 they were to start the quarter UM, but really it's 0:12:14.880 --> 0:12:17.000 a three D sixty degree turned throughout the quarters, a 0:12:17.000 --> 0:12:20.080 little bit of treading water already this early in the cycle, 0:12:20.120 --> 0:12:22.440 and I think investors can expect some more of that 0:12:22.440 --> 0:12:26.120 doesn't mean there's not opportunities in places credit outperformed in 0:12:26.120 --> 0:12:29.080 in the in the third quarter, but it's gonna be 0:12:29.080 --> 0:12:31.480 I think more frustrating, certainly for anybody who's gotten used 0:12:31.480 --> 0:12:34.839 to the last eighteen months or go back ten years 0:12:34.840 --> 0:12:39.280 of returns for somebody in a portfolio to generate those 0:12:39.280 --> 0:12:43.960 types of returns when markets have already moved so so fast, 0:12:44.000 --> 0:12:47.000 so forward, um in terms of you know, pricing in 0:12:47.080 --> 0:12:50.520 a very good and mature economic cycle when we haven't 0:12:50.520 --> 0:12:52.960 really arrived at that point yet. I think from a 0:12:53.000 --> 0:12:56.200 from a fundamental standpoint, um. The other way it could 0:12:56.200 --> 0:12:59.200 resolve is that we're just wrong about the economic cycle 0:12:59.240 --> 0:13:01.320 being early, and the market is actually much tighter than 0:13:01.360 --> 0:13:03.360 we think, and those workers aren't coming back, and that 0:13:03.400 --> 0:13:07.240 means we do get your classic kind of overheating. The 0:13:07.280 --> 0:13:09.960 FED has has become too debbish and he's gotten behind 0:13:10.000 --> 0:13:11.719 the eight ball, and that's where you get the kind 0:13:11.720 --> 0:13:14.200 of the rapid end of the cycle. We talked about 0:13:14.240 --> 0:13:16.120 that as an investment committee. We talked about that at 0:13:16.120 --> 0:13:18.280 new being quite frequently as a big risk. But we 0:13:18.320 --> 0:13:21.679 don't think that's that's something we should be acutely worried 0:13:21.679 --> 0:13:24.440 about unless there's more evidence in some of these Jaws 0:13:24.480 --> 0:13:26.880 reports coming out soon that that there really aren't that 0:13:26.880 --> 0:13:28.480 many more people on the sidelines are going to get 0:13:28.520 --> 0:13:31.800 back to work. So just to tie a few of 0:13:31.840 --> 0:13:35.199 these things together, everything that's going on with the bond market, 0:13:35.240 --> 0:13:37.040 and then you know what we've seen from the stock 0:13:37.080 --> 0:13:39.040 market so far this year. I know one of the 0:13:39.120 --> 0:13:41.440 things that we were thinking about is just what the 0:13:41.480 --> 0:13:45.480 background looks like, the economic background looks like right now 0:13:45.640 --> 0:13:49.800 with yield spiking, versus what the setup looks like back 0:13:49.840 --> 0:13:51.960 in the spring when we were seeing, you know, a 0:13:52.040 --> 0:13:55.120 similar things happening in the in the bond market. And 0:13:55.160 --> 0:13:58.920 I think some people would argue that the economic background 0:13:59.679 --> 0:14:02.720 just looking forward, it doesn't look as strong as when 0:14:02.840 --> 0:14:05.800 everybody was looking forward to the reopening. Then at the 0:14:05.800 --> 0:14:08.160 same time you did, as you just said, we have 0:14:08.320 --> 0:14:12.600 seen stocks run up quite a lot since then. So 0:14:13.000 --> 0:14:14.959 does that mean like through the end of the year, 0:14:15.120 --> 0:14:18.200 just the bullish set up for the market is a 0:14:18.200 --> 0:14:21.800 little bit less constructive or how are you thinking about it? Yes, So, 0:14:21.840 --> 0:14:25.840 this this economic period that we've been in start obviously 0:14:25.880 --> 0:14:29.040 starting with with the first quarter UM. Most people who 0:14:29.040 --> 0:14:32.720 are investors today have never experienced something like this before 0:14:32.760 --> 0:14:37.040 where we have six or seven GDP growth for a 0:14:37.040 --> 0:14:39.560 period of six months and they were decelerating from that. 0:14:40.080 --> 0:14:43.000 But the absolute level of growth in the third quarter 0:14:43.040 --> 0:14:44.160 is still going to make it one of the best 0:14:44.200 --> 0:14:46.720 quarters that we've seen in several decades. Right, even if 0:14:46.760 --> 0:14:48.360 it's three and a half or four and a half 0:14:48.360 --> 0:14:51.920 of me that that's well above normal, certainly post financial 0:14:51.960 --> 0:14:55.200 crisis and even before that. So we're still running the 0:14:55.240 --> 0:14:58.160 economy hot here and we should still be seeing you know, 0:14:58.320 --> 0:15:01.080 solid contributions from consumer, albeit not as good as the 0:15:01.080 --> 0:15:02.960 first half of the year when we were getting stimulus 0:15:03.000 --> 0:15:05.960 checks and other kinds of of of transfer payments that 0:15:06.000 --> 0:15:09.280 was enabling consumption to be artificially high. Um. We got 0:15:09.320 --> 0:15:13.240 that second quarter, UH revision for GDP. We're now consumer 0:15:13.280 --> 0:15:16.440 spending annualized at in the second quarter. That's just not 0:15:16.480 --> 0:15:18.600 gonna happen in the third. What didn't happen in the 0:15:18.600 --> 0:15:21.280 third quarter is not gonna happen in the fourth quarter. Um. 0:15:21.320 --> 0:15:23.880 But it's still gonna be solid. People are still drawing 0:15:23.920 --> 0:15:27.280 down on considerable savings. UH. We know that businesses need 0:15:27.320 --> 0:15:29.960 to restock inventories. We know they're making investments to try 0:15:29.960 --> 0:15:32.360 to make those workers more productive. That, by the way, 0:15:32.440 --> 0:15:34.960 is one of the things that can help forestall more inflation. 0:15:35.000 --> 0:15:37.240 Is if we just get more productivity out of the 0:15:37.240 --> 0:15:39.600 existing workforce, we can pay those people more without having 0:15:39.680 --> 0:15:43.239 to charge higher prices to to the end end customers. 0:15:44.120 --> 0:15:46.320 So there's a lot of good things happening economy. Global 0:15:46.320 --> 0:15:48.960 manufacturing output is an all time high. Trade flows are 0:15:49.040 --> 0:15:51.680 called close to their all time highs UM. But we 0:15:51.720 --> 0:15:55.280 don't have this huge demand shock every single quarter the 0:15:55.320 --> 0:15:57.040 way we did in Q one and Q two, because 0:15:57.080 --> 0:15:59.760 the fiscal stimulus is gonna very quickly go from being 0:15:59.800 --> 0:16:02.560 an a plus two once it sort of expires and 0:16:02.800 --> 0:16:06.160 becomes a drag and that minus and that's gonna mean that, yeah, 0:16:06.200 --> 0:16:07.760 the growth rate is gonna come down. It's gonna come 0:16:07.760 --> 0:16:10.000 down to four ish three ish two wish, and probably 0:16:10.000 --> 0:16:11.640 by the end of next year we'll kind of get 0:16:11.680 --> 0:16:14.720 a sense of where the new normal is. Maybe it's 0:16:14.960 --> 0:16:16.680 you know, one and a half percent to two and 0:16:16.680 --> 0:16:18.640 a half percent growth, something like what we're used to 0:16:18.920 --> 0:16:21.960 pre pandemic. But we know from experience that equities can 0:16:22.000 --> 0:16:24.680 do fine and that scenario credit can certainly do. Find 0:16:24.680 --> 0:16:28.120 in that scenario UM and some of the I think 0:16:28.320 --> 0:16:30.800 rotations that we've seen into more those more familiar out 0:16:30.800 --> 0:16:34.240 performers like technology and brawdly defined a lot of you know, 0:16:34.320 --> 0:16:38.000 higher growth companies. You know that I think has been 0:16:38.520 --> 0:16:41.680 of a piece with a recognition that that growth is decelerating. 0:16:41.720 --> 0:16:45.440 What we might get pockets of cyclical outperformance here and there, 0:16:45.440 --> 0:16:47.560 like the ones we've been in for the last few weeks. 0:16:47.720 --> 0:16:49.400 I think for the most part, we're settling back down 0:16:49.400 --> 0:16:52.240 into a more familiar pattern for growth, albeit after several 0:16:52.760 --> 0:16:55.240 quite good quarters for the US economy, which would still 0:16:55.360 --> 0:16:57.840 you know, I mean, we're creating jobs, we're seeing wages 0:16:57.880 --> 0:17:01.560 move up, and yes, inflation still probably running above where 0:17:01.560 --> 0:17:04.600 the FED would ideally like it to be. So, Brian, 0:17:04.680 --> 0:17:08.399 I think regular listeners of this show, UH listen up 0:17:08.400 --> 0:17:10.439 for for two main things when when they listen to 0:17:10.480 --> 0:17:12.680 the show. One is the craziest things we saw in 0:17:12.720 --> 0:17:14.840 the market. That's your real test. We'll get to that later. 0:17:15.320 --> 0:17:18.400 That that's your that's your real doctorate thesis there that 0:17:18.400 --> 0:17:20.800 that we'll get to. But the other question they look 0:17:20.800 --> 0:17:23.040 out for is, well, just tell me what to buy 0:17:23.160 --> 0:17:25.000 right now for a guy like you, you know, I know, 0:17:25.400 --> 0:17:28.720 moving you've got a big um what is it one 0:17:28.720 --> 0:17:31.520 point two trillion or something like that at one point 0:17:31.560 --> 0:17:35.480 to bigger than bitcoin. Well we'll say, uh, that's on 0:17:35.520 --> 0:17:38.200 the day. It depends on it depends on the day. 0:17:38.240 --> 0:17:40.280 But you know, so obviously you got your eye on 0:17:40.560 --> 0:17:44.920 across all asset classes, across all uh, you know, markets 0:17:44.920 --> 0:17:48.040 around the world. What is sticking out you know to 0:17:48.200 --> 0:17:51.360 you now as sort of worth investing in right now? 0:17:51.640 --> 0:17:53.679 To to simplify it, to it to sort of the 0:17:53.720 --> 0:17:56.960 most basic question. Yeah, so we we do have this 0:17:57.000 --> 0:17:59.679 sort of late market cycle thesis, which means that a 0:17:59.720 --> 0:18:01.760 lot of things that would normally at this stage look 0:18:01.760 --> 0:18:04.560 at look inexpensive, look to us fully valued or maybe 0:18:04.560 --> 0:18:07.000 even a bit expensive. The question is looking outside of 0:18:07.000 --> 0:18:09.280 those areas which I think make up the bread and butter, 0:18:09.400 --> 0:18:12.960 traditional uh diverse fire portfolios that people invest in. That's 0:18:12.960 --> 0:18:14.959 going to be the key, and it's it's really up 0:18:14.960 --> 0:18:18.199 to the individual. Are you diversifying fully into things like 0:18:18.240 --> 0:18:22.400 a liquid alternatives, private credit, farmland, timber. Those are all 0:18:22.440 --> 0:18:26.320 things that that we're keen on getting investors into if 0:18:26.359 --> 0:18:28.520 we can. But I think even for investors who who 0:18:28.520 --> 0:18:31.800 don't have that liquidity tolerance, of that ability to allocate alternatives. 0:18:31.800 --> 0:18:34.240 It's things like emerging market credit, which is an asset 0:18:34.320 --> 0:18:37.720 class that still looks early cycle compared to the US markets. 0:18:37.760 --> 0:18:39.640 It's always a bit of a penalty just for being 0:18:39.800 --> 0:18:43.080 emerging markets, but EM credit is one of the nice 0:18:43.080 --> 0:18:44.879 things about it. A little bit less China exposure than 0:18:44.880 --> 0:18:47.520 if you go with the e M equity side UM, so, 0:18:47.640 --> 0:18:51.200 less less sort of idiosyncratic ad hoc China regulatory risk, 0:18:51.200 --> 0:18:53.720 which is a big theme in the third quarter. UH. 0:18:53.800 --> 0:18:56.239 And then just just a an environment that we know 0:18:56.400 --> 0:18:59.440 is going to be a reach for yield, increasing risk 0:18:59.480 --> 0:19:02.560 tolerance of fixed income investors. As the global economy continues 0:19:02.600 --> 0:19:05.639 to to do fine, people are gonna be looking for 0:19:05.720 --> 0:19:07.560 areas where they can earn extra income and that's gonna 0:19:07.560 --> 0:19:10.280 be one of them. And then things like bank loans 0:19:10.280 --> 0:19:12.960 of floating rate loans UM also for the US, also 0:19:13.000 --> 0:19:16.879 a big asset class, sort of tactical preference for US 0:19:16.880 --> 0:19:19.840 as well in an environment of raising rising interest rates, 0:19:19.840 --> 0:19:22.439 and it's underperformed high yield just a little bit, so 0:19:22.440 --> 0:19:24.720 if you're looking at that loan versus credit trade, the 0:19:24.760 --> 0:19:26.679 loans look a little bit more attractive to US too, 0:19:26.840 --> 0:19:30.119 And you know, we're very focused on income. Almost every 0:19:30.240 --> 0:19:32.960 asset class we do has some sort of income uh 0:19:33.200 --> 0:19:35.240 bent to it, and so that that's one area that 0:19:35.240 --> 0:19:37.800 we're we're certainly looking for. And then something else that 0:19:37.840 --> 0:19:39.960 we talked about it every investment committee meeting and sort 0:19:39.960 --> 0:19:41.080 of in our d n A as E s G 0:19:41.240 --> 0:19:44.159 investing uh specifically, one thing we talked about it this 0:19:44.400 --> 0:19:46.480 uh this this last meeting, and we're gonna be writing 0:19:46.480 --> 0:19:48.919 about a fourth courter outlook is paying it more attention 0:19:48.960 --> 0:19:51.520