Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and I'm all Donna hik Across Acid reporter with Bloomberg.
Speaker 1: This week on the show, wello is almost ready for
Speaker 1: its place in the history books, and for investors, it'll
Speaker 1: be a pretty ugly chapter. Stocks, bonds, crypto, you name it.
Speaker 1: Pretty much all investments suffered this year as the Federal
Speaker 1: Reserve raised interest rates to quell historic inflation. So what
Speaker 1: does having store? We'll get into it with the head
Speaker 1: of investment strategy for the America's at a big investment firm,
Speaker 1: who is kind enough to break out her crystal ball fore.
Speaker 1: I hope she has a crystal balls Okay, you know
Speaker 1: how about you, Baldonna. It's very It's that time of
Speaker 1: year to get very reflective. Uh do your year end evaluation?
Speaker 1: Have you yourself evaluation? Of course? I look so highly
Speaker 1: of myself. You did, I would say if they were
Speaker 1: to ask me for some input for that, I would
Speaker 1: be mostly positive, but I would have to say, um
Speaker 1: when it comes to our game show. Uh. In the
Speaker 1: Craziest Thing segment of the podcast, the prices, precise performance
Speaker 1: has been a little lot less. It's been a little
Speaker 1: three or four times. I think I should go back
Speaker 1: and keep tracking how many times I've one. I have
Speaker 1: one more time than you have. Well, not in the
Speaker 1: host I win every time. That's not fair. But the
Speaker 1: good news is, I feel like it's kind of been
Speaker 1: my fault that the the topics have been out of
Speaker 1: your wheelhouse. So just to boost your yearine performance, I've
Speaker 1: got one that's squarely in your wheelhouse this week, just
Speaker 1: for you. Is it about Taylor Swift? Is that yours? Yeah?
Speaker 1: All right, and I hear I guess has something really
Speaker 1: great prepared for craziest things in markets, So I do
Speaker 1: want to bring her in. It's Gargi Chadry. She's head
Speaker 1: of Ice Shares Investment Strategy America's and I'm so happy
Speaker 1: that she's joining us today. Thanks so much for coming
Speaker 1: on the show. Gargi. Hi guys, it's so great to
Speaker 1: be here. Thank you Mike and Lodanna for having me. Yeah,
Speaker 1: thanks so much for joining us. And maybe just to
Speaker 1: start out, you can tell us about your role at
Speaker 1: black Rock and what it entails. Sure, of course, so
Speaker 1: um I run a team of investment strategists. The what
Speaker 1: that means in um plain English language is we tell
Speaker 1: our clients who invest with a share as E t
Speaker 1: F S how to think about the market. So, you know,
Speaker 1: obviously you guys were talking about what a historic here
Speaker 1: this has been, but what does that mean? Where does
Speaker 1: that create opportunities? And what is the macro environment telling us?
Speaker 1: You know, taking everything the data, the policy, the geopolitics
Speaker 1: and turning that into investable themes with shas ETF. So
Speaker 1: that's what my team and I do. And then also
Speaker 1: we try to get a sense of how people are
Speaker 1: position what are the flows telling us, Is there an
Speaker 1: area of the market that flows should have gone to
Speaker 1: and didn't. So a lot of macro research, implementation ideas
Speaker 1: and research. Yeah, yeah, Gargy, We very much look forward
Speaker 1: to getting your outlook for three. But even in the
Speaker 1: more near term point, we have a big week ahead
Speaker 1: of US next week Federal Reserve meeting, uh CPI data.
Speaker 1: You know, I think everyone is sort of has their
Speaker 1: fingers crossed under the assumption that the Federal downshift its
Speaker 1: rate hikes to fifty basis points. What are you expecting
Speaker 1: for next weekend? Is there anything you're worried about surprising
Speaker 1: uh in either the CPI or the or the FED decision.
Speaker 1: I love that question, thank you. So I think next
Speaker 1: week will probably be all about inflation. I know we
Speaker 1: wanted to be about the Fed, but I think it
Speaker 1: will be about inflation. As of right now, the market
Speaker 1: is expecting again one more week ish CPI print, So
Speaker 1: think about perhaps a point three on core I think
Speaker 1: anything that looks higher than that. So if we get
Speaker 1: another point four or even a strong point three with
Speaker 1: a strong core X shelter, so remember now the market
Speaker 1: will be extremely focused on that core X shelter piece
Speaker 1: because Chair Powell has brought that up and now we're
Speaker 1: going to be just uniformly focused on that one line item.
Speaker 1: And I think if we get a stronger than expected
Speaker 1: number on that core X shelter, I think that could
Speaker 1: negatively impact risk sentiment. So I think, uh, you know,
Speaker 1: inflation is something that I've focused on my whole career,
Speaker 1: so I'm kind of excited to to deep dive into
Speaker 1: that data. And then with the Fed, I think a
Speaker 1: fifty basis point is baked in. I think a Chair
Speaker 1: Power told us as much at the Brookings. But more
Speaker 1: important than that, fifty basis points is actually how they
Speaker 1: project their SEP forecast. So what are they telling us
Speaker 1: about the path of policy for the next two years,
Speaker 1: How are they guiding us about inflation, So really breaking
Speaker 1: down the SEP forecast for next day, I think that's
Speaker 1: going to be really important. And also how Chair Powell
Speaker 1: is perceived from a hawkish perspective. Again, remember the market
Speaker 1: at first breathed a huge sigh of relief at least
Speaker 1: after November thirty year that he didn't push back on
Speaker 1: the easing of financial conditions. So is Chair Powell going
Speaker 1: to be a little bit more hawkish this time around
Speaker 1: at the December meeting. I don't think so, But I
Speaker 1: think that's what the market is going to focus on.
Speaker 1: To what extent does he talk about uh, double sided
Speaker 1: risks versus to what extent does he talk just about
Speaker 1: you know, more needs to be done. So that's what
Speaker 1: I'll be looking at. And I know you have these
Speaker 1: different themes that you laid out in your year head look,
Speaker 1: and I want to get to those. But just while
Speaker 1: we're talking about the FED, another thing you had said
Speaker 1: in your outlook is that FED easing is unlikely in
Speaker 1: because inflation will keep persistently. Yeah, yeah, that's actually really
Speaker 1: one of the core themes as we think about the
Speaker 1: market for the next day. This idea that we're already
Speaker 1: pricing in some cuts for the end of three I
Speaker 1: think is a little bit optimistic. I think the FED
Speaker 1: has told us again and again. Now whether the market
Speaker 1: wants to believe it or not, but the Fed has
Speaker 1: told us again and again that they are looking to
Speaker 1: keep rates higher for longer. That's what they want, and
Speaker 1: our viewers at least that both core CPI and PC inflation,
Speaker 1: which as we know the FED looks at, you know,
Speaker 1: their preferred measure to look at PC, both of those
Speaker 1: will stay significantly about the two percent target. And in
Speaker 1: a world where unemployment is still, you know, at this
Speaker 1: juncture much below four percent, it's at three point seven
Speaker 1: percent and looking ahead probably still remains much below their
Speaker 1: assumption of Nehru, I think it's a little too optimistic
Speaker 1: to expect meaningful eases three. I think we get to five,
Speaker 1: maybe five and a quarter, and then just stop. We
Speaker 1: let the monetary policy and its lagged effects work um
Speaker 1: and you know, the market prices that in sometimes and
Speaker 1: then comes all the way back and then the FED
Speaker 1: pushes back and they price that that in and then
Speaker 1: come all the way back. So I think there's a
Speaker 1: little bit of that tug tug of war with the
Speaker 1: markets and the pricing of policy for the remainder of
Speaker 1: the year. But I doubt that they are going to
Speaker 1: cut fifty or so basis points before the you know,
Speaker 1: maybe in four but I doubt that will happen this year.
Speaker 1: Maybe one at the end of the year, but no
Speaker 1: more than that. Well, it's a great point. You know,
Speaker 1: we've all been conditioned to sort of assume that FED
Speaker 1: policy is joined at the hip to that two inflation target.
Speaker 1: But is there sort of you know, some space between
Speaker 1: those now where you know, the FED may no longer
Speaker 1: think of two as mission accomplished. You know, if they
Speaker 1: get that PC or core pc actually below the level
Speaker 1: of the FED funds rate, but higher than is that
Speaker 1: sort of mission accomplished for them, do you think? So?
Speaker 1: You know, there's this view in the markets that a
Speaker 1: few a few of the a few people have spoken about,
Speaker 1: and I believe I heard this um in one of
Speaker 1: your other podcasts as well, that you know, the FED
Speaker 1: may revise up their target to something significantly above two.
Speaker 1: I don't think that will happen. I don't think they're
Speaker 1: going to revise it meaningfully higher. And I think, you know,
Speaker 1: every time the chair gets asked about their flexible average
Speaker 1: and facion targeting their faith policy, remember how much we
Speaker 1: obsessed about that in the pre pandemic era when inflation
Speaker 1: was below two percent UM. So I don't think they'll
Speaker 1: revise it how higher. However, what I think will happen
Speaker 1: is that even before inflation gets back to below two percent,
Speaker 1: the Fed will pause on their rate hiking path. They
Speaker 1: will do that because they will have seen significant improvement
Speaker 1: on the path of policy. So we you know, just
Speaker 1: this next month's CPI print, which will come out next week,
Speaker 1: I think we'll already see headline CPI coming down to
Speaker 1: a seven handle, So that's significantly lower than the nine
Speaker 1: is percent that we saw. Core inflation will probably come
Speaker 1: down to just about six maybe, I mean, if we're lucky,
Speaker 1: maybe a five point nine, but just about six, I think.
Speaker 1: And then as we look towards you know, May of
Speaker 1: next day, I think it's likely that we could see
Speaker 1: sort of a high three, like up three point seven
Speaker 1: or so. So it's a lot of progress from where
Speaker 1: we come from. But it's not the two percent that
Speaker 1: they're looking for, and I think they have to be
Speaker 1: okay with that as long as the direction of travel
Speaker 1: is in the right direction. So if the direction of travel,
Speaker 1: especially on a core x of shelter, is in the
Speaker 1: right direction, I think they will definitely be okay to pause,
Speaker 1: but not easy. And then let's talk a little bit
Speaker 1: more about what you're seeing. Because in your side for
Speaker 1: next year, you say that the investing regime we have
Speaker 1: long known has changed, and then you lay out your themes.
Speaker 1: So maybe you can just walk us through your thinking. Sure,
Speaker 1: thank you for bringing up the investment Investment Guide. So
Speaker 1: we published that last week November three year. It is
Speaker 1: our themes for twenty three and I think it's particularly exciting. Well,
Speaker 1: I would think so because my team and I, you know,
Speaker 1: spend a lot of time and effort on this. But
Speaker 1: I think it's particularly exciting thinking about twenty three now
Speaker 1: because of the rough year two was like no doubt
Speaker 1: unless you were in cash, and if you were privileged
Speaker 1: enough to be in cash, um, if you were in
Speaker 1: any other part of the market. I guess outside of energy,
Speaker 1: you've had a really tough go at it and I
Speaker 1: think while we sort of swallow that, it has also
Speaker 1: created this incredible opportunity for the year ahead. And and
Speaker 1: nowhere is that more prevalent than in the fixed income markets.
Speaker 1: And we spend a lot of the report actually talking
Speaker 1: about that, but broadly, you know, as you lay Abradana,
Speaker 1: one of the things that we we start off talking
Speaker 1: about is how this next six to twelve months and
Speaker 1: you know, we're not looking past that, but at least
Speaker 1: the next one six to twelve months is going to
Speaker 1: be very different than the previous regime of a very
Speaker 1: accommodative central bank that is poised to cut rates at
Speaker 1: any hint of an economic slowdown. And I think we
Speaker 1: are now grappling with a central bank, or for that matter,
Speaker 1: we're grappling with a capital market where interest rates are
Speaker 1: higher for longer, and that is the new normal. It
Speaker 1: is not the lower for normal, lower for longer that
Speaker 1: we have gotten used to, which of course, you know,
Speaker 1: had its own ramifications on where in the equity market
Speaker 1: you want to invest or what that means for returns
Speaker 1: and fixed income. I think understanding that for the near term,
Speaker 1: with inflation remaining above the FED style, get that rates
Speaker 1: are going to stay high and where you should allegate
Speaker 1: too is really profound, and that's what we're focused on
Speaker 1: on the investor guy. So how do are we thinking
Speaker 1: about sort of the growth versus value trade in that scenario? Um?
Speaker 1: You know, is is it time to keep in that
Speaker 1: value and and sort of everything but tecking growth basket
Speaker 1: going in absolutely, Mike, that's actually our you know, second
Speaker 1: theme our first team, which I'm hopeful that we'll talk
Speaker 1: a little bit more about, is the role of bonds
Speaker 1: in a portfolio and how it's significantly shifted UH this
Speaker 1: year and will be much more meaningful in three. But
Speaker 1: second theme is around this idea that you know, whenever
Speaker 1: I'm talking to clients and they're looking to hear our
Speaker 1: views on the equity market, they always want to know
Speaker 1: around you know, when should I get back into the
Speaker 1: growth trade? And historically, obviously, you know, when we've gone
Speaker 1: into slow down periods where we've either been forecasting a
Speaker 1: recession or we've been in a recession, growth has obviously
Speaker 1: led the way. But that's been because that's always the
Speaker 1: time when the FED steps in and cuts rates meaningfully,
Speaker 1: sometimes even bringing real rates to negative territory. And that
Speaker 1: has been very very beneficial for the growth part of
Speaker 1: the equity market. But this time it's a new regime
Speaker 1: where at least again for the next six to twelve months,
Speaker 1: the FED has told us over and over again that
Speaker 1: they are keeping rates at a higher level for longer,
Speaker 1: and that's actually better, we think for the value segments
Speaker 1: of the market, so um at least for the near term,
Speaker 1: until we expect the FED to start to cut rates,
Speaker 1: to begin on their cutting cycle, which we do not
Speaker 1: think is going to be the case this year. We
Speaker 1: think that value, much like this year, will outperform in
Speaker 1: a higher rate regene. Now we can certainly and if
Speaker 1: this does happen, if we feel like the economy is
Speaker 1: slowing down much more meaningfully or inflation has come back
Speaker 1: down much more meaningfully than is our base case or
Speaker 1: our forecast right now. Of course, that could shift if
Speaker 1: the FED were to begin to cut rates back down
Speaker 1: um to zero or even just back down to two
Speaker 1: percent or something like that, But that is not the
Speaker 1: card right now. I think we are going to at
Speaker 1: least for the next few months, actually see higher interest
Speaker 1: rates from the BED, perhaps at the end of first quarter,
Speaker 1: and again in that period. You want to be allocated
Speaker 1: to the value part of the equity market with tickers
Speaker 1: such as sort of you know I W D or
Speaker 1: I V which give you that allocation to broader value
Speaker 1: segments of the market, or something like a V l
Speaker 1: U E, which again is a value factor that gives
Speaker 1: you exposure to those deep value names. And we saw
Speaker 1: that this year. We saw sort of that outperformance of
Speaker 1: minimum volatility and value and to a certain extent, at
Speaker 1: least in the beginning of next day, I think that
Speaker 1: minimum volatility and value can outperform. And then by the
Speaker 1: end of next day, and you know, hopefully we can
Speaker 1: have another conversation then. But by the end of next day,
Speaker 1: if we do see that the FED is stepping in
Speaker 1: and getting ready to ease rates, we can talk about
Speaker 1: if it's time to go into growth and where and growth.
Speaker 1: I think that will be another exciting conversation. Not all
Speaker 1: growth will be behaved the same way. They'll certainly be
Speaker 1: pockets of high quality tech such as semiconductors, such as
Speaker 1: robotics that will do really well, and there will be
Speaker 1: other pockets that will not. So can I ask you
Speaker 1: follow up on this which is so earlier this year
Speaker 1: we obviously had a couple of different rallies in the
Speaker 1: stock market that then sort of petered out, they didn't
Speaker 1: end up holding. And I think during one of the
Speaker 1: earlier ones, maybe sometime over the summer, we actually saw
Speaker 1: when we saw the rally happening, we saw a lot
Speaker 1: of speculative names also rallying meme stocks and tech versus
Speaker 1: is what we're seeing now where we are actually seeing
Speaker 1: some of those value names doing a little bit better.
Speaker 1: I'm just wondering if you think that that's a sign
Speaker 1: that maybe the rally is a bit stronger, more broad
Speaker 1: based versus just seeing you know, tech coming back for
Speaker 1: a couple of days or a couple of weeks. Yeah,
Speaker 1: you're absolutely right. I think there have been seven periods
Speaker 1: the sale when the market and when I say market,
Speaker 1: I mean IVV, just the broad index SMP has rallied
Speaker 1: over seven percent, and we actually saw that, not not
Speaker 1: including the last couple of days, but from October twelve
Speaker 1: to sort of the beginning of this week, Um, we
Speaker 1: saw another massive rally in the market. And a lot
Speaker 1: of that is actually around the pricing in of a pivot, right,
Speaker 1: So every time that has happened, and obviously the most
Speaker 1: recent one was because of the CPI number followed by
Speaker 1: the last day of November when the FEDS spoke at
Speaker 1: UM at the Brookings Institute in November thirty year. Then
Speaker 1: again that was all pricing in a pivot of policy.
Speaker 1: And of course if you're pricing in a pig of policy,
Speaker 1: you do have sort of that growth led rally and
Speaker 1: you also have the you know, what's been interesting to
Speaker 1: me is sort of the most shorted names that rally
Speaker 1: the most, because obviously that's where positioning is the most offsides.
Speaker 1: We also saw this back in the sort of the
Speaker 1: July two or June two August rally, right, and that
Speaker 1: that rally was what se which ended right before the
Speaker 1: Jackson Hole meeting. And again we saw the same thing
Speaker 1: where there was a pivot narrative getting priced in very prematurely.
Speaker 1: There's no pivot in sight for now. And again you
Speaker 1: saw that those areas of the market that we're probably
Speaker 1: the least owned, that we're pricing in that pivot, and
Speaker 1: for now, this is not a pivot. For now. The
Speaker 1: best we can get early next year is perhaps a pause.
Speaker 1: To me, a pivot means that the FED is going
Speaker 1: to turn around and cut rates we're not expecting that,
Speaker 1: and therefore those value names, looking at a v LUV,
Speaker 1: looking at an IVY, looking at a nightputy really makes
Speaker 1: a lot of sense in a portfolio. And I'll be
Speaker 1: very honest, depending on how this data for CPI next
Speaker 1: week comes out, if we get another point too or
Speaker 1: even a point three, and if we get a core
Speaker 1: UH Services ex Shelter component, which is the one that
Speaker 1: I was talking about earlier, having another sort of weakest print.
Speaker 1: It was a little less than point to last month,
Speaker 1: and we have another point to and core UH Services
Speaker 1: ex Shelter, I think that that can be a huge
Speaker 1: catalyst going into your end. Everyone wants the Santa rally UM.
Speaker 1: That can be a catalyst going into between now and
Speaker 1: the end of January. We can see that, but I
Speaker 1: don't think that's going to be a lasting rally because
Speaker 1: I think that earnings growth will probably get revised lower
Speaker 1: as we see many of the UM analysts starting their
Speaker 1: revision for twenty three. We're going to see that in
Speaker 1: the earning season. That is going to be with us
Speaker 1: in the end of January, so we can have a
Speaker 1: period of market rally. For sure. It can be a
Speaker 1: relief rally, but it is not believed to be a
Speaker 1: groat lad start of a new cycle. I think that
Speaker 1: is still far away from us. Well, thank you for
Speaker 1: defining pivot for us. It's funny how much debate there
Speaker 1: is over the meaning of the word. Everybody uses it, yeah,
Speaker 1: without defining it. I think it's the basketball players that
Speaker 1: are messing everything up because you can pivot. You can
Speaker 1: pivot in basketball without doing the full money. Just throw
Speaker 1: that out there. One really interesting point you make in
Speaker 1: this look ahead pieces bonds are back. Would have ever thought?
Speaker 1: Who would have ever thought we'd be talking about bonds
Speaker 1: as a and you have a you have a great
Speaker 1: acronym for it. I think it's bar It's barbed. Yeah,
Speaker 1: so we went from Tina to Barb. Thank you for
Speaker 1: Bonds are back. Bonds are back, Bonds are back. Okay, yeah,
Speaker 1: bonds are back. So we you know, lived in a
Speaker 1: decade and a half of the of the Tina world,
Speaker 1: which of course we know is there is no alternative,
Speaker 1: and now we are about to embark upon actually we
Speaker 1: have embarked upon it since I first started talking about
Speaker 1: this barb or actually the first thing that I was
Speaker 1: talking about a lot was um I called it the
Speaker 1: yield of dreams. So it was our yield of dreams
Speaker 1: that we were getting when you could earn about six
Speaker 1: and a half percent and something like an i G
Speaker 1: s B which gives you exposure to the one to
Speaker 1: five year part of investment grade corporate credit, and to
Speaker 1: earn over six percent was the stuff of dreams because remember,
Speaker 1: not that long ago we were going out into high
Speaker 1: yield and emerging markets to earn that. We've lived through that,
Speaker 1: not that long ago, so we remember what it's like
Speaker 1: to crave yield and live in a world where there
Speaker 1: is an alternative but to go out of the risk spectrum.
Speaker 1: And now it is so exciting, I think, to be
Speaker 1: in a world where there are some incredible opportunities staying
Speaker 1: very high in quality, short in duration in the fixed
Speaker 1: income markets and on yields that we could have only
Speaker 1: dreamed about. Because bonds are back, because it's barbed, and
Speaker 1: I'm talking to your treasuries here, I'm talking one to
Speaker 1: five year i G credit, something like an i G
Speaker 1: s V or something like an sage why or even
Speaker 1: mortgages something like an MBB which you can earn you
Speaker 1: about four point six percent yield without taking again too
Speaker 1: much credit risks, staying very up in quality and earning
Speaker 1: significant yield in your portfolio, and especially having that in
Speaker 1: a world where, um, you know, growth is going to
Speaker 1: slow down. Now, whether we're immediately going to fall into
Speaker 1: a recession or not, you know, we don't know. I
Speaker 1: think the signs are showing a recession. But even without
Speaker 1: all of that, I think owning bonds in your portfolio
Speaker 1: where you have historically been sixty forty two equities, I
Speaker 1: wonder if you're supposed to be sixty forty two bonds right, Well,
Speaker 1: the let's unpack a little bit. You're thinking on the
Speaker 1: the m B B, the uh, the mbs E T
Speaker 1: F T. I feel like when people hear mortgages, uh know,
Speaker 1: there's there's a little bit of a yeah and a
Speaker 1: little bit of a fear. And and then that scenario
Speaker 1: laid out where if we do have, uh you know,
Speaker 1: a sort of a deeper recession than people are worried about,
Speaker 1: if we do see that uptick in unemployment and delinquencies
Speaker 1: and defaults, how risky is our mortgages? Do you think
Speaker 1: in that scenario? Yeah, I mean I completely hear you.
Speaker 1: And look, it's very natural for us to always go
Speaker 1: to It's it's a human bias, right we our brain
Speaker 1: sort of goes to the last period that we can recall.
Speaker 1: Whenever we hear the word housing, we think great financial crisis.
Speaker 1: And I completely hear that, and I would say that
Speaker 1: the dynamics off the housing market now, the dynamics of
Speaker 1: the mortgage market now are so different from what two
Speaker 1: thousand seven was, because two thousands seven taught us some
Speaker 1: very good, hard earned lessons around what it means to have, um,
Speaker 1: you know, a stronger, more regulatory in used mortgage market,
Speaker 1: and all of that had has led us to a
Speaker 1: world now where, of course it's much more difficult to
Speaker 1: get mortgages. The way in which the mortgage market is
Speaker 1: set up is a lot more different. And also just
Speaker 1: from a structural or perspective, I think like our housing
Speaker 1: prices going to come back come back lower from here,
Speaker 1: for sure. I think we are going to say, see
Speaker 1: some of that markets you point out. You know, if
Speaker 1: unemployment rate does go up from here, let's say it
Speaker 1: goes up another percent or so, we get up to
Speaker 1: the mid force, which is probable over the next year. Uh,
Speaker 1: is it possible to see further pressure on the housing market. Absolutely,
Speaker 1: But does that mean that we're going back to the
Speaker 1: foreclosures and exactly the same kind of outcome that we
Speaker 1: saw in two thousand seven. The answer is no, because
Speaker 1: it's a structurally different market. There's a lot less supply
Speaker 1: of homes, a lot more demand. There is a lot
Speaker 1: more people that are entering that d to thirty five
Speaker 1: age bracket in the US that will be needing to
Speaker 1: form households that will need to own homes. Uh. There's
Speaker 1: also uh, you know, thinking back to two thousand seven,
Speaker 1: I mean there was fourth selling in the mortgage space.
Speaker 1: Right when we remember back to what was happening to
Speaker 1: the Ginny Mays and the family maze of the world,
Speaker 1: there was four selling of mortgages, which will not take
Speaker 1: place this time around. These are all government sponsored entities already. Um.
Speaker 1: And when you're sort of allocating to that space, especially
Speaker 1: right now, when you're looking at mortgages, you know, one
Speaker 1: of the risks, if you will, every asset class has
Speaker 1: a risk, right, So one of the risks that you're
Speaker 1: that that you would normally faces your pre payment risk, right,
Speaker 1: So that is you know you've got your credit risk,
Speaker 1: you've got your interest rate risk, and you've got your
Speaker 1: pre payment risk and your pre payment risk. Usually in
Speaker 1: mortgages comes about why homeowners are able to refinance and
Speaker 1: pay down their existing mortgage, refinance into a lower rate,
Speaker 1: and prepare them mortgage. When mortgage rates are where they are,
Speaker 1: the number of people that can refinance is about nine
Speaker 1: below where they work pre pandemic, so that pre payment
Speaker 1: risk isn't really there given what mortgage rates are doing.
Speaker 1: I don't think any of us are refinancing our home
Speaker 1: right now. Well, going forward, you you would have to
Speaker 1: assume that the FED does hold study and doesn't engage
Speaker 1: in a big rate cutting campaign. I guess too, you know,
Speaker 1: to to eliminate that risk. Yeah, and and and again
Speaker 1: I come back to the what are my assumptions here? Uh,
Speaker 1: And the assumptions that I build, that my team and
Speaker 1: I build our forecast on are that number one, inflation
Speaker 1: remains above the fed's target of two percent, in fact,
Speaker 1: meaningfully above the fed's target of two percent on PC
Speaker 1: for the next six six to twelve months. We think
Speaker 1: it's going to be closer to three percent instead of
Speaker 1: two percent by the end of Another assumption that we
Speaker 1: build this on is and it's related to Number one
Speaker 1: is that as a result of inflation remaining high, the
Speaker 1: FED will not start a campaign of cutting rates aggressively
Speaker 1: back to zero. You know, we're going to see five
Speaker 1: five in a quarter and then a pause and just
Speaker 1: a pause and a hold, which is actually very beneficial
Speaker 1: for fixed income owners because you're earning your couper and
Speaker 1: your earning that income of fixed income, which we haven't
Speaker 1: seen in these meaningful amounts since the early nineties. So
Speaker 1: to your point, yeah, I mean, now, if we were
Speaker 1: to believe that the Fed is going to go back
Speaker 1: to bringing rates down by two three basis points, which
Speaker 1: would start that refinancing cycle, absolutely, I think that would
Speaker 1: we would think rethink this view all together. But also
Speaker 1: remembering that more MBB does have a interest rate sensitivity,
Speaker 1: It does have duration if you will, of near seven years,
Speaker 1: so you will benefit from having that interest rate duration.
Speaker 1: But of course there's going to be that pre payment
Speaker 1: that's going to come in as well. And one about
Speaker 1: place is to not be in three because I know
Speaker 1: you said recently cash had done well uh this year obviously,
Speaker 1: but that at this point it's not exactly the best
Speaker 1: place to be going forward, right I mean, yeah, cash
Speaker 1: has done done well this year. I would say that
Speaker 1: I think the time to step out of cash has come.
Speaker 1: I think that, especially given what you're earning in the
Speaker 1: very front end of the very high quality treasury market.
Speaker 1: So right now, if you're in one to three year treasuries,
Speaker 1: you're earning call it, you know, as of today four
Speaker 1: point three um. You know, as of just a few
Speaker 1: weeks ago, it was closer to five. I think it's
Speaker 1: entirely possible after the FED meeting, if they push it
Speaker 1: back on pricing just a little bit, you're going to
Speaker 1: get some incredible opportunity to ease back into the front
Speaker 1: end of the market with an e t f T
Speaker 1: like s h D or s H Y and um,
Speaker 1: you know, enjoy some of the incredible yield that you're
Speaker 1: earning there. And I would say that, um, when we
Speaker 1: have that yield, When we have that incredible yield in
Speaker 1: the front end of the market, you don't really need
Speaker 1: to sit in cash. You can be on you can
Speaker 1: be in duration of one to three years. You're not
Speaker 1: taking on a lot of interest rate risk, you're not
Speaker 1: taking on any credit risk. So why be in cash
Speaker 1: if you can earn so much more just stepping out
Speaker 1: of cash just a little bit. So you know, cash
Speaker 1: certainly had a role to play and probably could still
Speaker 1: as a maybe like a mitigator to risk. But at
Speaker 1: one year and two year treasuries yielding what they do,
Speaker 1: I think the time to step out of cash has
Speaker 1: has arrived. Wow, Guardi Chargery, head of Investment Strategy for
Speaker 1: the Americas that I shares fascinating conversation. Any guests who
Speaker 1: comes on and refuses to make a prediction, I'm going
Speaker 1: to reference back to this episode and say you can
Speaker 1: do it. Just have a little confidence and do it.
Speaker 1: All right, I think it's that time, Bildonna, It's time
Speaker 1: for you to improve your your end evaluation for me, Yes,
Speaker 1: which which I know you care so much about. I
Speaker 1: do care. I want, I want to win. You know,
Speaker 1: the prices, precise competitions, obviously, all right, let's bring it on.
Speaker 1: It's the it's the craziest thing we saw in markets
Speaker 1: this week. Why don't you go first? So there's this
Speaker 1: great story this week out about f t X and
Speaker 1: Taylor Swift having been in talks for a sponsorship deal
Speaker 1: worth more than a hundred million dollars. Oh my goodness.
Speaker 1: And the talks fizzled out. I guess just a couple
Speaker 1: of months before f t X collapsed there was going
Speaker 1: to be n F t S involved somehow, like yeah,
Speaker 1: of course, one would assume there'd be Yeah, of course.
Speaker 1: And and Sam Bank when freed f t X, same
Speaker 1: and countried he favored the deal because he's a fan
Speaker 1: of quote who isn't who party? You know, we didn't
Speaker 1: get into crypto. But I'm wondering, you know, as someone
Speaker 1: from a E t F company, you know where your
Speaker 1: head is at on crypto. You know, were you bullish
Speaker 1: about the potential for some more crypto E t F s?
Speaker 1: Where you sort of agnostic? And how are you thinking
Speaker 1: about it now? I think the underlying blockchain technology is
Speaker 1: something that is going to be with us. I'm gonna
Speaker 1: sound like a very old person when I say this,
Speaker 1: but I personally don't own any crypto and I've been
Speaker 1: happy to see that. But I'll also say, what I
Speaker 1: notice is how many clients asked me about crypto, And honestly,
Speaker 1: the number is zero. If there's so much happening in
Speaker 1: the markets with bonds and inflation and geopolitical risk in
Speaker 1: the war and front end bonds only you five percent.
Speaker 1: I don't think anyone is really too concerned about crypto
Speaker 1: right now. I think that was very different in one
Speaker 1: got a few questions that year, for sure, Yeah, right right,
Speaker 1: that's true. That talk about you know, they were the
Speaker 1: answer to there is no alternative. Well maybe there's this,
Speaker 1: but uh, you know it's your point of treasuries at
Speaker 1: the front end are paying for I don't know, even
Speaker 1: the yield schemes and the yield farming schemes are now
Speaker 1: many of them lower than the yields on treasuries and more,
Speaker 1: many more people are much more scared of than that. Yeah, absolutely, yeah,
Speaker 1: absolutely for good reason. All right, uh, gargy, how about you.
Speaker 1: What's the craziest thing you've seen recently? So there's so many.
Speaker 1: The first one that I've been absolutely obsessed with all
Speaker 1: of two is supply chains and just the clogging of
Speaker 1: supply chains that happened. And you know, we all were
Speaker 1: very familiar with how much it costs to ship a
Speaker 1: container for the cubic foot contain now from Shanghai to
Speaker 1: l A. So it's been really just over the last
Speaker 1: two months, it's been incredible to see that there are
Speaker 1: no ships stuck outside the port of l A that's
Speaker 1: gone from hundred and seven to zero. So just seeing
Speaker 1: the unclogging off supply chains and what that might mean
Speaker 1: for goods inflation, especially when this was such a big
Speaker 1: concern for for the last twelve months before that. I
Speaker 1: think that has been incredible, just understanding the truck driver
Speaker 1: shortage in this country and the huge impact that that
Speaker 1: has on our day to day and thankfully that's especially
Speaker 1: as we go into the holidays. I think that's been
Speaker 1: incredible to have that sorted out and avoiding some of
Speaker 1: the strikes, etcetera. So that's something that people don't think
Speaker 1: about impacting markets, but I think it has a profound
Speaker 1: implication on markets. So that's one crazy thing that happened
Speaker 1: and thankfully got resolved. And then the other one, UM
Speaker 1: is something that I was looking at recently, but just
Speaker 1: the amount of UM options that are trading in the
Speaker 1: market that are within a twenty four hour expery, so
Speaker 1: pe all buying one day options is about forty of
Speaker 1: total options traded, which is insane. That went up from
Speaker 1: I think the number was somewhere around you know, call
Speaker 1: it fifteen percent or so in the pre pandemic regime
Speaker 1: to about forty three percent now, and that's why you
Speaker 1: see such big one day moves, Like when the market
Speaker 1: moves one percent, you're pretty sure it's going to move
Speaker 1: two or three because of this dynamics. That's another crazy
Speaker 1: thing that I've been noticing that has been going on
Speaker 1: in the markets is that the you know, the Yolo
Speaker 1: retail reddit crowd. Do you think to driving that? I
Speaker 1: think it's just this understanding of or it's a manifestation
Speaker 1: of a higher volatility regime that we've entered into. If
Speaker 1: we look at where the VIX has been trading, or
Speaker 1: even the move Index for that matter, people trying to
Speaker 1: capitalize on that. So I don't want to attribute this
Speaker 1: to any one type of investor. I want to attribute
Speaker 1: it to what's happening in the markets. With respect volatility
Speaker 1: being so high and obvious. I hope that we will
Speaker 1: see a decline of that and maybe some of this
Speaker 1: behavior will go away. But I think for all investors,
Speaker 1: um investors that are trading for themselves or institutional investors,
Speaker 1: I think it's important to know that this is a
Speaker 1: phenomenon in the market, and when you're seeing price action
Speaker 1: that you can attribute some of that to what's happening
Speaker 1: in the options market as well. Um, I cannot imagine
Speaker 1: that this stat is going to remain in alle I
Speaker 1: would expect it to come down, but I don't think
Speaker 1: it will go back down to the pre pandemic levels
Speaker 1: of I think Argue wins because she brought few things,
Speaker 1: two things. She doubled up, doubled it. All right, you're
Speaker 1: a lot of double dip though. There are both good ones,
Speaker 1: both good ones the options that is mind blind. All right,
Speaker 1: Well it's your turn to win now, Bildada. I've got
Speaker 1: faith in you on this one. Uh as as you know, gargy.
Speaker 1: Maybe you don't know, but my favorite asset class is
Speaker 1: redictable ridiculous collectible items. I don't know how you allocate
Speaker 1: to that. I'm like some people do sixty forty bonds,
Speaker 1: I do like ridiculous collectible. What I think that comes
Speaker 1: in the first bucket? Yeah, that's that's a collectible. At
Speaker 1: this point, a Harry Potter fan who received an exclusive
Speaker 1: addition of the first J. K. Rowling book after entering
Speaker 1: a published company competition is putting it up for auction.
Speaker 1: I think you're actually gonna bid on this. This is
Speaker 1: if this is Vldona's Wheelhouse. Gargis is Harry Potter Books anyway.
Speaker 1: This is courtesy of the Press Association in Great Britain,
Speaker 1: childcare practitioner. I don't know what a childcare practitioner is,
Speaker 1: A babysitter, I guess or in any Chloe Esselmont was
Speaker 1: sixteen when she entered the competition, having to write a
Speaker 1: letter explaining in no more than fifty words why she
Speaker 1: loved Harry Potter. So I feel like you could have
Speaker 1: entered that competition, um anyway, and she won. She won
Speaker 1: a leather bound special fifteenth Anniversary edition of Harry Potter
Speaker 1: and the Philosopher's Stone, which is published exclusively for the
Speaker 1: competition and signed by none other than author J. K. Rowling.
Speaker 1: So the question is, UH, when this goes up for
Speaker 1: auction at Hanson's Library Auction in Staffordshire on December six,
Speaker 1: what do you suppose the auction house expects the winning
Speaker 1: bid to be You forgot to say, we're playing the
Speaker 1: prices and I regret to form you, Gargy. I'm gonna
Speaker 1: need a bid from you as well, because this is
Speaker 1: our game show. The prices precise, Gargy, I'm gonna make
Speaker 1: you go First, what do you think the expected winning
Speaker 1: bid in British pounds is for a fifteenth anniversary leather
Speaker 1: bound additioned author signed Harry Potter and the Philosopher's Stone.
Speaker 1: And I reminder it's not always a ridiculous outrageous Okay,
Speaker 1: but let me give you one more bit of um
Speaker 1: of little bit of color on here. Hansen's book expert
Speaker 1: Jim Spencer, who has one global recognition for rare Harry
Speaker 1: Potter Finds, you know, global recognition for rare Harry Potter Finds,
Speaker 1: said he had never seen an example of a book
Speaker 1: like this. Technically, he said, this is the rarest Harry
Speaker 1: Potter book I've ever handled, and I have assessed hundreds. Okay, okay,
Speaker 1: So cash isn't as cheap as it used to be,
Speaker 1: So I am going to say there's a little bit
Speaker 1: of tightening of financial conditions that has happened. So my
Speaker 1: aunswer would have been differ nastya. I'm going to say
Speaker 1: fifteen thousand dollars way above, way way above. It pretty
Speaker 1: much the same, pretty much the same these days. So
Speaker 1: I'm going with two hundred and fifty thousand pounds to
Speaker 1: have a hundred and fifty thousand British. I'm putting this bit.
Speaker 1: You are a Harry Potter bull. Yes, forever forever. I'm sorry,
Speaker 1: but you lose again what gargy. That was like pretty
Speaker 1: good analysis. She took in the financial conditions and that
Speaker 1: is what they expect ten thousand pounds. Come on, but
Speaker 1: as usual they will get Vldona will get a call
Speaker 1: from this auction house. I definitely in our action, Yeah,
Speaker 1: I kind of. I would have said, on seen, I
Speaker 1: would have gone over I think I'm not actually bidding
Speaker 1: on this because I would overbid wit so I said
Speaker 1: fifteen thousand US dollars and you said it's ten thousand pounds.
Speaker 1: So I mean I was close and were so bound.
Speaker 1: I love this. I'm jealous. I'm jealous of your ability
Speaker 1: to to to win this. Well. She took in the
Speaker 1: tighter financial conditions, you know, and and and Britain being
Speaker 1: sort of drinkings coming guys. Yeah, yeah, that pound liquidity
Speaker 1: is not what it used to be. Come on, don't
Speaker 1: make me feel to buy some bonds. Just buy some
Speaker 1: bonds you here's a free idea for you, just e
Speaker 1: t F that just buys Harry Potter books. What do
Speaker 1: you think free for free, one for you. You don't
Speaker 1: have to credit me for it. What would be the ticker?
Speaker 1: H JAC was going but one is good one one
Speaker 1: is really good. Yeah. W uh, Gargy Chaudry. So great
Speaker 1: to hear your thoughts and catch up with you. Really
Speaker 1: enjoyed it and I hope we can get you back
Speaker 1: again soon. I would love that. Thank you guys, Thank
Speaker 1: you Gargy. What Goes Up. We'll be back next week
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