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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. Brig Peters of PGM
Speaker 2: Fixed Income is with us in a studio, just a
Speaker 2: perfect guest to talk about what's having in the bond market. Greg,
Speaker 2: good morning. What do you make of these moves at
Speaker 2: the long end of the curve? I don't want to
Speaker 2: make this too much for a big deal if it
Speaker 2: doesn't have to be. We have sustained levels around four
Speaker 2: to five percent for quite a number of years now,
Speaker 2: and the economy's been okay. What does five twelve, five
Speaker 2: point thirteen mean to you on a thirty year I.
Speaker 3: Think it's the direction, right, not the level, And so
Speaker 3: there is just a pushback globally on the back end
Speaker 3: of the curves. So if you look at what's happening
Speaker 3: in Europe, you're looking at Japan. Obviously, the US investors
Speaker 3: are basically having a time out on the back end,
Speaker 3: and so consequently you're just seeing, you know, the thirty
Speaker 3: year twenty year yesterday really trade heavy just because there's
Speaker 3: not that investor demand. I think investors concerns are manifesting
Speaker 3: itself in term premium and kind of wait and see
Speaker 3: mode in the back end of the curve, And that
Speaker 3: makes sense to me.
Speaker 2: Can you help us understand the things we should care
Speaker 2: about and the things we should ignore. Typically, a twenty
Speaker 2: year maturity isn't something that investors like anyway, and it's
Speaker 2: auctions that we don't typically follow. All of a sudden, yesterday,
Speaker 2: twenty year auctions self demand and everybody cared about it.
Speaker 2: And I sat there and I just thought, if you
Speaker 2: care about twenty year auctions, you have no place in
Speaker 2: the bond market. What did you make of how much
Speaker 2: white people put on that?
Speaker 4: Well, so the twenty year.
Speaker 3: Definitely is an orphan type of you know, maturity, But
Speaker 3: what it says is about the duration. So forget about
Speaker 3: a twenty year thirty year. It is adding duration to
Speaker 3: the portfolio, so that's where the pushback is. And twenty
Speaker 3: years are trading poorly everywhere as well, so it is
Speaker 3: an anti duration trade. And what you're seeing in the
Speaker 3: back and curve globally is that they're behaving like risk assets,
Speaker 3: not like the typical kind of defensive risk adverse assets,
Speaker 3: and that just kind of feeds upon itself, which is
Speaker 3: why you have two separate bond markets.
Speaker 4: In the front end, you have.
Speaker 3: Yields and prices driven by central bank policy, and as
Speaker 3: you move further out, it's driven by all these other factors,
Speaker 3: from debt and deficits, to inflation, to the uncertainty to
Speaker 3: all these.
Speaker 2: What you're saying is so so important. If we've diluted
Speaker 2: the risk mitigation characteristics of the long bond, what does
Speaker 2: that mean for how people invest? And what are you
Speaker 2: telling clients of PGM that they should do.
Speaker 3: Yeah, it makes it really tricky, And what you're seeing
Speaker 3: is kind of manifold. First, you're just investors kind of
Speaker 3: diversified globally, so you're seeing less of a sole focus
Speaker 3: on the US bond market. So you're seeing in guilts,
Speaker 3: you're singing and jgbs you're singing across just to get
Speaker 3: that diversification in.
Speaker 4: And then second is front and the curve right.
Speaker 3: You want to be attached to something that you think
Speaker 3: you have a better understanding, and that is the Central
Speaker 3: bank reaction function. So in our minds, you want to
Speaker 3: be as close to that kind of two year front
Speaker 3: end point as you can. To further you drift out
Speaker 3: the more vaguers you introduce into your portfolio. So the
Speaker 3: get defensive, I think, is to kind of stay front end,
Speaker 3: and that includes spread and carry as well. So we're
Speaker 3: very defensive. We think valuations are exceedingly expensive. I mean
Speaker 3: you just kind of think about it in really simple terms.
Speaker 3: You know, credit spreads are well through kind of the average,
Speaker 3: and I think all of us would admit there's probably
Speaker 3: above average uncertainty out there risk, and so just kind
Speaker 3: of think of it in that simple way, and you
Speaker 3: want to be defensive.
Speaker 5: And the uncertainty is emanating from Washington, DC.
Speaker 6: Can we talk about that relationship?
Speaker 5: Is there a line you think that Congress actually starts
Speaker 5: paying attention to it.
Speaker 4: Has to get worse.
Speaker 3: So the only arbiter out here right now is the
Speaker 3: bond market. So it's kind of back to the nineties, right,
Speaker 3: kind of Carbill's.
Speaker 4: Revenge and so.
Speaker 3: Absent that there's no political will. You saw this bill
Speaker 3: last night. It was casting dogs and all these things
Speaker 3: no one wanted to cut, and all these things were added.
Speaker 3: It's not the political will of Congress to kind of.
Speaker 4: Tighten the belt.
Speaker 3: And what you're seeing from a market perspective is really
Speaker 3: worrisome outlook on the debt and deficit, and quite frankly,
Speaker 3: it is worrisome.
Speaker 4: It is a really bad place.
Speaker 7: Right.
Speaker 4: We never took our deficit to a better place when
Speaker 4: the economy was doing well.
Speaker 3: And so what I really worry about is not the
Speaker 3: hero and now, but let's say when and if we
Speaker 3: do enter a recession, then what.
Speaker 4: There's one or two it opens.
Speaker 3: One is Congress doesn't do anything fiscally, which means you
Speaker 3: have a longer, harder recession, or they do as they
Speaker 3: always do, they spend, and then you come out the
Speaker 3: other side and the debt and deficit is exceedingly worse,
Speaker 3: and then you put us in a real precarious position.
Speaker 2: Trillion dollar question, Can I just jump in quickly forgive
Speaker 2: me what you just said is so so important. Typically
Speaker 2: in developed markets, what happens is you go into a downturn,
Speaker 2: yields drop, and it enables fiscal authorities to act counter cyclically.
Speaker 2: This is also important to investors because they understand that's
Speaker 2: the bust in their portfolio. You get into bad times
Speaker 2: and bonds rally. That is the definition for me, at
Speaker 2: least if a developed market, that's what happens. In DM
Speaker 2: them you have problems, other things happen. Are you suggesting
Speaker 2: that if we go down into a downturn and the
Speaker 2: deficit just by definition blows out, that yields don't drop,
Speaker 2: that they actually might time.
Speaker 4: There's that potential.
Speaker 3: I think it's a level of uncertainty that is introduced
Speaker 3: that we typically don't have to worry about, right, And
Speaker 3: just the fact that we're having that conversation and that
Speaker 3: question just changes behavior. So you know what we saw
Speaker 3: in twenty twenty one, twenty twenty two when inflation moves higher,
Speaker 3: as an example, there's nowhere to hide, right, So this
Speaker 3: is a kind of a similar story in a way.
Speaker 4: So that's that's the worry. It's not like base case.
Speaker 3: By the way, I don't want to show it all
Speaker 3: darkned hour here, but at the same time that is
Speaker 3: a real risk that investortion.
Speaker 2: This is just a really important thought exercise I think
Speaker 2: is happening on invest the committees around the world right now.
Speaker 2: I just wanted to finish with the level that were
Speaker 2: at the moment, so five point fourteen now almost on
Speaker 2: a thirty year yield. When I started the conversation, I
Speaker 2: talked about somewhere between four and five. We have lived
Speaker 2: with that through this cycle so far. But when you
Speaker 2: get to the upper ended where the ranges for the
Speaker 2: whole cycle, which is basically through that level right now,
Speaker 2: life up here hasn't been sustainable. It is this self limiting.
Speaker 2: How sustainable are these levels?
Speaker 3: I think to a degree it is so I do
Speaker 3: believe there'll be a.
Speaker 4: Crowding out effect, so to speak.
Speaker 3: So if you continue to move yields higher, that just
Speaker 3: changes the incentive structure. Right, so investors are much more
Speaker 3: apt or willing to invest in treasuries let's say VSV
Speaker 3: investment great corporates and equities, and so there is this
Speaker 3: great kind of modulator regulator function with yields itself. But
Speaker 3: at the end of the day, you have to have
Speaker 3: a higher level of certainty of what you're investing in,
Speaker 3: and so yes, as yields go higher, that compensates you
Speaker 3: more for that uncertainty. But typically you don't see investors
Speaker 3: jump in when they don't know what they're jumping into.
Speaker 2: They're not jumping in right now, that's for sure. I
Speaker 2: can appreciate your time. As always said, thank you, great
Speaker 2: pit A patient. Native Richardson of IDPAS drop boy to
Speaker 2: catch up with us this morning, Native, good morning.
Speaker 1: Good morning.
Speaker 2: Let's stop it. Jobs claims two twenty seven. Just continued resilience,
Speaker 2: which is a thing that you keep going back to repeatedly.
Speaker 2: One depends that resilience of the moment.
Speaker 1: Well, the labor market, if you look at it in
Speaker 1: a snapshot, is really really stable. Companies are keeping their workforce,
Speaker 1: they're not letting them go. That's why we see the
Speaker 1: such low initial jobless claims, and workers are buying large
Speaker 1: staying put. So the snapshot of the US labor market
Speaker 1: is solid. The problem is if you look at the
Speaker 1: labor market in motion, the churn is gone. People are
Speaker 1: not leaving, firms are not hiring in mass, and so
Speaker 1: you don't see the dynamism that has defined not no,
Speaker 1: not only the labor market but productivity growth, And if
Speaker 1: you really want to look for the crack in the
Speaker 1: labor market, go back to the last measure of labor
Speaker 1: market productivity output worker was down one point four percent
Speaker 1: year over year. That's a sign of the drag that's
Speaker 1: going on right now.
Speaker 2: When you see a load chain dynamic like the one
Speaker 2: you describe start to grip the labor market, typically when
Speaker 2: you look back, how long is that sustained before things
Speaker 2: break one way or the other.
Speaker 1: I don't think we can go back to pryors. I mean,
Speaker 1: if I look at the Great Financial Crisis, for example,
Speaker 1: the unemployment rate was above seven percent for several years.
Speaker 1: Now we're not even at the starting point of that
Speaker 1: Great Financial crisis. We're at four point two percent. The
Speaker 1: unemployment rate has been remarkably stable, and I think that's
Speaker 1: because there's so many demographics that are shaping that rate.
Speaker 1: Lots of retirees, slow down in immigration, there's going to
Speaker 1: be labor shortages.
Speaker 6: That are persistent.
Speaker 1: So it's hard to really capture the labor market in
Speaker 1: one number, harder than it has been in the past.
Speaker 6: When you think about.
Speaker 5: Immigration policy, do you see the unemployment rate actually going down?
Speaker 1: I don't see that Actually, I actually see those shortage
Speaker 1: in certain pockets of the labor market. What's interesting about
Speaker 1: this labor market versus twenty twenty two or twenty twenty
Speaker 1: three is that they're no superheroes. We could rely on
Speaker 1: leisure and hospitality to be the stalwart in the labor's market,
Speaker 1: or healthcare more recently.
Speaker 6: We're not seeing that now. So who's going to.
Speaker 1: Save the day and boaster or jobs into the future. Well,
Speaker 1: there's no sector that's doing that. Immigration is actually the
Speaker 1: lack of the labor supply is likely to keep wages
Speaker 1: very tight and robust, which is a problem for the FED,
Speaker 1: who's looking to bring inflation down.
Speaker 5: If there was to be a superhero, though, wouldn't it
Speaker 5: be AI and the supply chains around that these data
Speaker 5: center build.
Speaker 1: Out, You know, that is a long term play. I
Speaker 1: do think that AI increases what contributes to American exceptionalism,
Speaker 1: which is productivity growth. And so if AI can make
Speaker 1: workers more productive, then there is a chance that we
Speaker 1: grow our way out of some of these problems. But
Speaker 1: the problem is it's not just the technology, it's the people,
Speaker 1: and right now there's a gap between the two. Is
Speaker 1: the technology hitting the workforce in a way that increases
Speaker 1: labor productivity.
Speaker 6: We have yet to see that.
Speaker 2: Let's talk about a potential problem this morning. Yields are
Speaker 2: higher by five basis points the very long end of
Speaker 2: the curves, getting all the attention the thirty year. At
Speaker 2: the moment of five fourteen, we've sustained this expansion. We've
Speaker 2: been running GDP around three percent with rates close to
Speaker 2: where they are now. These are cycle highs were through
Speaker 2: those levels, granted, but between four and five percent. We've
Speaker 2: seen fed funds between those levels now for a couple
Speaker 2: of years, and we've sustained the expansion. Is there any
Speaker 2: reason to believe that this break out puts the brakes
Speaker 2: on this economy?
Speaker 1: You know, there's so much, as Anne Marie was saying,
Speaker 1: there's so much to be determined in this particular bill.
Speaker 1: We can't think that the levels are sustained at the
Speaker 1: where they are today.
Speaker 6: There's going to be a lot of movement.
Speaker 1: And I think it's also the speed of the increase
Speaker 1: that matters in terms of yields. So it's not just
Speaker 1: the levels, it's the churn and the volatility in those
Speaker 1: numbers that will ultimately decide the short term, but longer term.
Speaker 1: This country is built right now. The economy is based
Speaker 1: on interest rates that are much lower than where they
Speaker 1: are now. Yes, housing mortgage rates for higher in the
Speaker 1: nineteen eighties, but house prices were a lot lower. And
Speaker 1: now we live in a world where house prices are
Speaker 1: very very high, and you match that with higher interest rates,
Speaker 1: you're really going to get a cold breeze in the
Speaker 1: housing market, which trickles into other parts of the economy.
Speaker 2: This is the problem for Federal Reserve guys, you know
Speaker 2: need they cut rates by one hundred basis points and
Speaker 2: mortgage rates went up. Have they lost control of the
Speaker 2: long end of the curve? If they ever had control
Speaker 2: of the long end of the curve.
Speaker 1: That's not their sweet spot. That's not where they make
Speaker 1: those money moves. They make it at the short end
Speaker 1: of the curve and maybe at best the two year,
Speaker 1: but really the ten year that is reflective of not
Speaker 1: just the US economy, but the global economy.
Speaker 6: And if the.
Speaker 1: Global economy shrinks away from you set, not necessarily because
Speaker 1: of preferences, but a slowdown, then you're likely to see
Speaker 1: those mortgage rates continue to high at the hole at
Speaker 1: the levels they are, or even edge higher.
Speaker 6: Well nearly.
Speaker 5: When it comes to the Fed, they've been talking about
Speaker 5: the fact that they don't have all the you know,
Speaker 5: dotting the eyes criss crossing the t's, but they have some.
Speaker 5: Now they have a little bit of a blueprint of
Speaker 5: what's going to happen fiscally in Washington.
Speaker 6: Do they start talking about that now?
Speaker 1: It depends on how much they want to show their
Speaker 1: hand in terms of whether the rates, whether they increase
Speaker 1: rates or lower rates. And I still think that's an
Speaker 1: open question for the Federal Reserve because, as you know,
Speaker 1: there are a lot of things that are changing in
Speaker 1: the macro economy, and those changes right now look to
Speaker 1: be inflationary, and so I think they want to give
Speaker 1: it a little more time to be certain that the
Speaker 1: next move is a rate cut before they start contemplating
Speaker 1: that publicly.
Speaker 2: NATA, it's going to say, as always a lot to
Speaker 2: think about NATA riches in that of id page, nature
Speaker 2: of sounds. Where to say in New York now joining
Speaker 2: us from parametric nature, good to see it.
Speaker 4: Has been too long?
Speaker 2: Yes it has good to be here the long end
Speaker 2: of its curve. Does it get bored? Can we sustain
Speaker 2: levels at these kind of levels?
Speaker 7: I think we're starting to hit that ceiling. Right, You
Speaker 7: start to hit he yields north of five percent, and
Speaker 7: you take a look at everything that's been priced into
Speaker 7: the equity market, right, we've seen in a very sharp rebound.
Speaker 7: Equity market is saying, look, everything's good, nothing to worry about,
Speaker 7: a lot of optimism. I think in the equity market,
Speaker 7: I would argue in the bond market, we've almost priced
Speaker 7: in a lot of what has been feared, right, especially
Speaker 7: in the deaths and deficit side. So I think this
Speaker 7: is kind of a ceiling where you start seeing buying opportunities. Look,
Speaker 7: I think for fixed income investors, the biggest thing we've
Speaker 7: been lacking for many years has been the income aspect.
Speaker 7: The duration plays another story, right, So going on on
Speaker 7: the long end your tape, a duration play which you
Speaker 7: can make an argument at this point in time, with
Speaker 7: no slowdown or recession risks in the market's being priced in.
Speaker 7: I almost think that that's being undervalued, right. Fixing investors
Speaker 7: may not be positioned for this slowdown. We had a
Speaker 7: claims number this morning came in maybe right in line
Speaker 7: with expective. If we start seeing any cracks on the
Speaker 7: job side in labor markets, in consumer spending. I don't
Speaker 7: think we've seen that being pricing in the bond market,
Speaker 7: and that's something that I think we're not fully taking
Speaker 7: into account.
Speaker 2: In years gone by, that would be a good argument
Speaker 2: to anticipate level yields on the long bond.
Speaker 6: Yeah.
Speaker 2: But now people are coming on the program suggesting that,
Speaker 2: given the concerns that are dominant at the moment, that
Speaker 2: if we go into a downturn, you could see and
Speaker 2: I don't think it's the base case of the consensus
Speaker 2: view right now, but you could see yields climb, not
Speaker 2: full because the dominant concern right now is the deficit. YEA,
Speaker 2: how much comfort can you take from the tenure and
Speaker 2: out in a downturn?
Speaker 7: Yeah, I mean look, I think also you've had kind
Speaker 7: of this trifecta of three things happening in a short
Speaker 7: period of time, which is why you've been seeing kind
Speaker 7: of long end pricing in a lot of concerns around deficits. Right,
Speaker 7: so Moody's downgrade, You have a tax bill which is
Speaker 7: coming in nowhere near the amount of cuts that that
Speaker 7: people were expecting or wanted to see, and know you
Speaker 7: have kind of just further concerns in regards to tariffs
Speaker 7: and that not coming in anywhere close to the revenue
Speaker 7: that was originally being generated. So I do think that
Speaker 7: that ten plus year part of the curve, look, you're
Speaker 7: going to continue to see some volatility.
Speaker 2: Right.
Speaker 7: Finding natural bias in that part of the space is
Speaker 7: going to be very tricky, but I think this is
Speaker 7: an entry point where you do start to see again
Speaker 7: looking at real yields, you're starting to see very attractive
Speaker 7: yields in that part of the curve. I think for
Speaker 7: a fixed income investors with you know, come of an
Speaker 7: income bias, we would even argue stay in the belly
Speaker 7: of the curve. Right, It's all about stepping out of cash,
Speaker 7: moving out a little bit in the ill curve, and
Speaker 7: there's I think a tremendous opportunity from an income perspective.
Speaker 5: Since Trump won the presidency, everyone just kept telling me
Speaker 5: this tax bill is priced in.
Speaker 6: So why all the consternation?
Speaker 7: Now, Yeah, I think it's a few things. Up until
Speaker 7: this morning last night, we really didn't know what was
Speaker 7: going to be kind of fully implemented, and we still
Speaker 7: don't know, right. I mean, this is the House version.
Speaker 7: There's a lot that's going to be changed so even
Speaker 7: early on, Again, what I would say is, while a
Speaker 7: lot of these components were known, I think it's a
Speaker 7: little bit of a confluence with the Moody's downgrade, right,
Speaker 7: and you have kind of now these reignition of debt
Speaker 7: and deficits concerns. Keep in mind, the economic data has
Speaker 7: held up fairly well, right, So it's like the bond
Speaker 7: market's like, look, we're not worried about that for now,
Speaker 7: so we're going to focus really on the dest and
Speaker 7: deficit side. So I think you're seeing that now being
Speaker 7: priced in, and again there is this worry that this
Speaker 7: bill again does not have enough and that's basically what
Speaker 7: the bond market is saying, right, So it's going to
Speaker 7: be very tricky for the Senate. Look, they don't have
Speaker 7: to take any of these components, but to really come
Speaker 7: up with something that is going to satisfy not only
Speaker 7: bond markets but overall markets, to really suggest that the
Speaker 7: administration's doing, you know, kind of a significant enough job here.
Speaker 7: And then again the tax cuts aspect, that's something that
Speaker 7: this illustration definitely wants to do. It's getting very challenging
Speaker 7: to come up with the pay force on the other
Speaker 7: end to make up for it.
Speaker 2: You mentioned the downgrade from Moody's in the last week.
Speaker 2: If I go back to the previous down grade from FETCH,
Speaker 2: I think that was back in twenty three and that
Speaker 2: landed around the same time we had the quarterly refunded announcement,
Speaker 2: which spooked this bomb market and ultimately forced the degree
Speaker 2: of corrective action from the Treasury Secretary then Treasury Secretary
Speaker 2: Janet Yellen, who tightened up the average maturity and started
Speaker 2: issuing a ton of tea bills. Do you think we
Speaker 2: need this time around also corrective action either from Treasury
Speaker 2: or from Congress in some form, maybe reshaping this tax
Speaker 2: bill going through Congress right now, to put a lid
Speaker 2: on some of the volatility some of the moods we're
Speaker 2: seeing at the long end of the curve.
Speaker 7: I think those tools are definitely there, and I think
Speaker 7: that's a great example. It might be too soon to
Speaker 7: really come out and say anything needs to be implemented,
Speaker 7: but I think this is where kind of your Treasury auctions. Again,
Speaker 7: to your point, you're going to have to see a
Speaker 7: different structure of issuance, a debt financing to really help
Speaker 7: support the long end of the curve. This shot up
Speaker 7: in yield tests happened, I would say relatively kind of recently,
Speaker 7: in a short period of time. But I think we
Speaker 7: need to see a little bit more again, more economic data.
Speaker 7: I don't expect anything to happen over the next two
Speaker 7: to three months, whether it's from a monetary policy standpoint
Speaker 7: or even in terms of Treasury Secretary coming to kind
Speaker 7: of step in. I think the economic data here is
Speaker 7: going to be the focus. July fourth time frame is
Speaker 7: going to be very important, and I think that's you know,
Speaker 7: we're all hoping for a quiet summer here, but I think.
Speaker 6: We're that may not be the case.
Speaker 7: So I mean, look for our clients that again have
Speaker 7: a higher quality kind of typically mandate that are looking
Speaker 7: at fixing come as a ballast. Look, we're suggesting if
Speaker 7: we haven't been kind of if you've been underweight, fix income.
Speaker 7: Here's an opportunity to at least step out locking some income.
Speaker 7: And again, this bond market I think has become almost
Speaker 7: too optimistic. We have completely priced out any I would
Speaker 7: say slow down risks. I hesitate on the word recession,
Speaker 7: but any risk of slow down.
Speaker 2: Great PSPGM said that Jamie Damer and JP Morgan said
Speaker 2: that in the last week as well, and Niche Patel
Speaker 2: a parametric Just set it right now.
Speaker 4: Sure he's going to see you.
Speaker 6: Yes, good to see you too.
Speaker 2: You're in good company, that's for sure. It's got cron
Speaker 2: at a city right in the following. Recent signs of
Speaker 2: consumer slowing are concerning we Bus in favor of a
Speaker 2: combination of defensive names and secular growers that have been
Speaker 2: more heavily investing in their businesses. Scott, John just now
Speaker 2: for more, Scott, Welcome to the program, sir. We need
Speaker 2: to take a bit of a bee and talk about
Speaker 2: what's developing in the bond market and what ultimately it
Speaker 2: means to you and the team in equity. Scott, what
Speaker 2: happens when we get to these kind of levels in bonds?
Speaker 2: What does it mean to you?
Speaker 4: Nahan, Well, it means a couple of things.
Speaker 8: I think, first and foremost, you look at the potential
Speaker 8: impact of higher rates in terms of a slowing effect
Speaker 8: in terms of demand.
Speaker 4: For a new credit. That's pretty straightforward.
Speaker 8: Additionally, from an equity perspective, it's mostly about valuations, and essentially,
Speaker 8: when you're looking at how to value securities, it's a
Speaker 8: combination of where you think near term fundamentals are going,
Speaker 8: but it's also how you discount future earnings five ten
Speaker 8: years down the road and assign a valuation to terminal values.
Speaker 6: And so what ends up happening.
Speaker 8: Here is when you backup yields, you begin to change
Speaker 8: the math and those future earnings are worthless now. So
Speaker 8: the bottom line is that from a valuation impact, when
Speaker 8: you look at this current trajectory in ten years in
Speaker 8: particular where we focus, it's a gating factor potentially on
Speaker 8: future economic activity, but essentially real time it's an overhang
Speaker 8: in terms of the evaluation set up for US equities.
Speaker 5: When you look at the policy down in Washington, scott
Speaker 5: we do have the one big beautiful bill passing through
Speaker 5: on the House side, and the bond market seems to
Speaker 5: be pushing back on a number of issues. But what
Speaker 5: if they didn't do anything and we would have a
Speaker 5: tax at the end of the year, what would the
Speaker 5: bond market do?
Speaker 8: Then it's kind of pick your poison, right, So what
Speaker 8: you would get with the tax hike, which was where
Speaker 8: we were a year ago at this time looking at
Speaker 8: potential presidential election outcomes, is that you would have a
Speaker 8: different influence where you would probably begin to slow aggregate
Speaker 8: spending levels. You would crowd out essentially expenditures because more
Speaker 8: of your income is going to taxation.
Speaker 4: So essentially, to be careful, what.
Speaker 8: You wish for the bottom line memory is that we've
Speaker 8: been living in a fairly fiscally stimulative environment going back
Speaker 8: to the pandemic. That's when you really began to see
Speaker 8: your debt to GDP rise. And now with the Fed
Speaker 8: rate policy in the rearview mirror, you're also looking at
Speaker 8: the debt service component kick in it as well. So
Speaker 8: essentially from my perch, from an equity perspective, you get
Speaker 8: the deficit spending that's fiscally stimulative. That's actually pretty good
Speaker 8: for economic activity and probably for corporate fundamentals.
Speaker 4: But the offset is what you're doing.
Speaker 8: In terms of uh, you know, you know, paying forward
Speaker 8: now for future pain, in terms of the risk of
Speaker 8: higher for longer rates, the valuation impact and the ultimate
Speaker 8: slowing effect that could have an economic activity.
Speaker 2: So Scott, as you know, the economists over sets in
Speaker 2: your colleagues are worried about downturn hits the labor market
Speaker 2: and they think we're going to see a real reduction
Speaker 2: in interest rates. I continue in fixed income. The conversations
Speaker 2: we keep hearing is that they don't know what defense
Speaker 2: really looks like anymore, and they don't want to plan
Speaker 2: on the long end of the curve. They want to
Speaker 2: aggressively shortened duration. Scott, how does that apply to equities?
Speaker 2: How are you thinking about defense now compared to maybe
Speaker 2: years gone past?
Speaker 8: You know, Jonathan, we pulled out you know, a month
Speaker 8: or so ago.
Speaker 4: Are in old playbook.
Speaker 8: Tactic of ours where when you go into these periods
Speaker 8: of economic concern we like to pull out growth as
Speaker 8: defensive as our approach here, And so what I'm getting
Speaker 8: at is that you're dealing with lots of issues in
Speaker 8: terms of economic activity that affect the way you think
Speaker 8: about traditional cyclical parts of the market and also traditional
Speaker 8: defensive parts of the market.
Speaker 6: However, when you look at.
Speaker 8: Longer term, longer term, where are the best underlying structural
Speaker 8: growth dynamics at work? There's still the AI play here,
Speaker 8: but you can broaden it across sectors. We've been writing
Speaker 8: more recently within the consumer discretionary sector as an example.
Speaker 8: But my point here is at one antidote to a
Speaker 8: lot of the issues that we're discussing right now in
Speaker 8: terms of rates economic activity deficit is show me the
Speaker 8: growth where I've got more confidence in longer term structural
Speaker 8: growth drivers at a company specific up to a sector
Speaker 8: maybe even market level, that in our view, is the
Speaker 8: more appropriate way for navigating the current period of uncertainty
Speaker 8: that we've got from a fiscal and economic perspective.
Speaker 2: Scott, when you screen for those things, does it scream
Speaker 2: MAC seven?
Speaker 8: It has to start there, because where you go with this, Jonathan,
Speaker 8: is let's look at where companies are spending capital spending
Speaker 8: for the most part is very concentrated within the S
Speaker 8: and P. The megacap growers that are attached to the
Speaker 8: AI trend are certainly driving the bus right now, and
Speaker 8: what we saw with Q one earnings is that there's
Speaker 8: not much of a risk to that materially changing in
Speaker 8: the short term. However, when you look across sectors again
Speaker 8: I mentioned consumer discretionary, you can find companies that are
Speaker 8: are showing capital expenditure profile as well above depreciation, where
Speaker 8: their fundamentals are also less cyclical and the correlation of
Speaker 8: their fundamentals is less high economic activity. Those are the
Speaker 8: types of names that we want to keep a focus on,
Speaker 8: and I think that's an appropriate way for thinking about
Speaker 8: the valuation issue we have with broader equities, as well
Speaker 8: as how to think about navigating this current macro setup,
Speaker 8: which certainly is noisy at the very least.
Speaker 2: Scott, When you put consumer discretionary and you break it up,
Speaker 2: how much performance dispersion are you seeing within that group
Speaker 2: of stocks at the moment?
Speaker 8: There's a lot because at the same time consumer discretionary
Speaker 8: and stables right alongside that's ground zero for where terriff
Speaker 8: effects are kicking in, particularly as it relates to the
Speaker 8: China aspect on this.
Speaker 4: So what we've seen through the.
Speaker 8: Tariff discussion over the past several months is a very
Speaker 8: strong dichotomy and performance within the consumer part of the market,
Speaker 8: where you've got companies that are more directly exposed to
Speaker 8: China feeling the real brunt of that. But again i'd
Speaker 8: come back here, it's less about the inflationary component of terrorists.
Speaker 8: It's more about the gross margin pressure that potentially emanates
Speaker 8: from your higher cost of goods that you're importing. So
Speaker 8: bottom line is it's a lot of performance dispersion, and
Speaker 8: so we're kind of cutting through all that noise with
Speaker 8: let's keep a focus on companies that we think structurally
Speaker 8: are in a pretty good position to perpetuate ongoing growth. Again,
Speaker 8: regardless of the macro circumstance Right now.
Speaker 2: Scott, appreciate your input. As always said, what a monocle
Speaker 2: ready's called cronic that city breaking down the equity market
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