WEBVTT - Markets Eye Tech Turnaround 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg 0:00:13.840 --> 0:00:17.920 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:22.000 on Apple CarPlay or Android Auto with the Bloomberg Business App. 0:00:22.360 --> 0:00:25.680 Listen on demand wherever you get your podcasts, or watch 0:00:25.760 --> 0:00:27.200 us live on YouTube. 0:00:27.720 --> 0:00:31.479 David Kelly is a jewel. He writes incredibly informed work. 0:00:31.520 --> 0:00:34.280 He did this for years at Putnam, now holds court 0:00:34.280 --> 0:00:37.599 at JP Morgan Roshrild. You could get our holiday week here. 0:00:37.720 --> 0:00:41.720 Started strong, strong, strong, David, You start with I love 0:00:41.760 --> 0:00:44.600 this the Red River of the North up in the 0:00:44.680 --> 0:00:49.360 Dakotas and Manitoba up to Lake Winnipeg. And you're talking 0:00:49.400 --> 0:00:54.000 about the crazy river system of our North in Canada 0:00:54.080 --> 0:00:56.600 as well. Why is it like the stock market. 0:00:57.400 --> 0:01:01.560 Well, the key at that particular river is it flows 0:01:01.600 --> 0:01:03.800 from south to north, which is actually very unusual in 0:01:03.840 --> 0:01:06.200 America for a big river. But that's actually a really 0:01:06.240 --> 0:01:09.200 big problem in the spring because what happens is when 0:01:09.360 --> 0:01:11.880 the ice tolls, it all tolls in the south. First, 0:01:11.920 --> 0:01:13.759 it all floods in. But the water can all flood 0:01:13.760 --> 0:01:15.800 into the river. It's just got nowhere to come out, 0:01:16.160 --> 0:01:18.720 and so at inun dates say, you know, Grand Forks 0:01:18.760 --> 0:01:21.640 and Winnipeg and all these poor cities just get flooded 0:01:21.880 --> 0:01:23.920 because there's no way way for the water to get out. 0:01:23.959 --> 0:01:26.600 And the reason that's relevant to the stock market is 0:01:26.640 --> 0:01:29.000 we've been looking at you know, this has been it's 0:01:29.040 --> 0:01:31.880 a tortoise of an economy sort of you know, crawling, 0:01:32.040 --> 0:01:34.000 you know, staggering to the edge of the end of 0:01:34.040 --> 0:01:35.680 the year here. But we've had a hair of a 0:01:35.800 --> 0:01:38.559 market for a third consecutive year. Why is the market 0:01:38.640 --> 0:01:42.200 so strong when the economy is And I think part 0:01:42.240 --> 0:01:44.920 of the reason is because there are institutional things within 0:01:45.000 --> 0:01:51.280 our market, things like stock buybacks, embedded capital gains, money 0:01:51.280 --> 0:01:54.400 flowing into defined contribution plans. 0:01:54.440 --> 0:01:55.080 All this is. 0:01:55.040 --> 0:01:58.120 Funneling money into the equity market and it's hard to 0:01:58.160 --> 0:02:00.680 get it out because of you know, capital gainstown. That's 0:02:01.000 --> 0:02:04.040 pushing money into giving us a really strong stock market 0:02:04.120 --> 0:02:07.280 and what's an okay economy, But it's not nothing to 0:02:07.400 --> 0:02:08.320 write home about it. 0:02:08.360 --> 0:02:10.840 So, you know, David, we had, as you mentioned, a 0:02:10.919 --> 0:02:13.880 really strong twenty twenty five in terms of S and 0:02:13.919 --> 0:02:17.160 P and NASDAC fixed income gave you high single digit 0:02:17.280 --> 0:02:20.280 returns here. Yeah, what's the setup for twenty twenty six? 0:02:21.360 --> 0:02:23.880 Well, I think the economy itself should be okay. 0:02:24.200 --> 0:02:26.440 I think it's going to be strong in the first 0:02:26.480 --> 0:02:29.480 half because of income tax refunds. I think we will 0:02:29.480 --> 0:02:31.520 see a pickup in growth in the first half the year, 0:02:31.520 --> 0:02:33.560 and then it's going to fade because we really are 0:02:33.600 --> 0:02:37.520 short of workers. For the market. We still probably need 0:02:37.560 --> 0:02:39.919 to see a shock to cause a big correction here. 0:02:40.720 --> 0:02:43.919 You know, eventually we will have some shock. Evaluations are 0:02:44.080 --> 0:02:47.359 very high. But you know, I think the base case 0:02:47.400 --> 0:02:49.720 is the market keeps on The equity market keeps on 0:02:49.760 --> 0:02:52.839 moving up, probably broadens out a bit beyond the mag 0:02:53.000 --> 0:02:55.240 seven and you know, it continues sort of broadening out 0:02:55.280 --> 0:02:58.480 to other sectors. But for investors, the real thing is, 0:02:58.520 --> 0:03:00.520 you know, how much risk are you carrying? Because these 0:03:00.560 --> 0:03:03.760 are expensive stocks at this point, and I think really 0:03:03.840 --> 0:03:09.160 the resolution for twenty twenty six is rebalance because you know, 0:03:09.240 --> 0:03:11.799 whatever happens to returns, the risk level is pretty high. 0:03:11.840 --> 0:03:14.280 Here are the earnings that we see out there. I mean, 0:03:14.320 --> 0:03:17.000 the earnings in twenty twenty five have been really really strong. 0:03:17.080 --> 0:03:19.440 Here are they strong enough as you look forward to 0:03:19.520 --> 0:03:20.480 kind of support this market? 0:03:21.240 --> 0:03:22.240 Yeah, I think they should be. 0:03:22.280 --> 0:03:25.920 I mean, it's a as I said, it's a moderately 0:03:25.960 --> 0:03:29.079 growing economy, so long as we avoid recession. One of 0:03:29.120 --> 0:03:31.280 the things that I'm seeing is a fair amount of 0:03:31.320 --> 0:03:33.840 weakness and wages. I mean, there aren't many available workers, 0:03:33.840 --> 0:03:36.840 but workers still can't get a pay increase. And meanwhile 0:03:36.960 --> 0:03:39.880 companies are installing AI. Now I don't know if that's 0:03:39.920 --> 0:03:41.960 making people more productive or not, but they say it's 0:03:42.000 --> 0:03:44.320 making them more productive, and so people are and so 0:03:44.400 --> 0:03:47.040 productivity numbers are going up because you've got fewer workers 0:03:47.040 --> 0:03:50.240 and producing more output, and that helps corporate profits too. 0:03:50.280 --> 0:03:52.480 So overall, I think the profit picture is pretty good. 0:03:52.880 --> 0:03:55.160 I think the rate pricket picture is pretty stable, and 0:03:55.160 --> 0:03:58.280 that should support the stock markets, barring some shop but 0:03:58.320 --> 0:03:59.880 of course there's always the potential for a shop. 0:04:00.040 --> 0:04:02.080 We starts throwing Monday. David Kelly with us for an 0:04:02.080 --> 0:04:06.600 extended conversation. He drives GP Morgan Asset Management with all 0:04:06.640 --> 0:04:09.600 of their strategy. David one of my great insights and 0:04:09.600 --> 0:04:11.360 folks in my last two days of the year here, 0:04:11.400 --> 0:04:13.800 I'm really going to look back here. One of the 0:04:13.800 --> 0:04:17.680 great insights this year was Nancy Wilazar, who David and 0:04:17.760 --> 0:04:20.880 I know for years with Edheimen. Nancy's up in Minnesota 0:04:20.920 --> 0:04:25.040 with Piper, Jeffrey and David. She just said, look, it's 0:04:25.080 --> 0:04:29.320 an economy where there's an odd job creation. You let 0:04:29.400 --> 0:04:31.839 on this two years ago. You're the one that said, 0:04:32.320 --> 0:04:35.400 get used to non farm payrolls under one hundred thousand. 0:04:35.800 --> 0:04:38.400 Do you adjust liked your own Powell and are you 0:04:38.440 --> 0:04:41.479 giving me a real three month moving average? Now that's 0:04:41.480 --> 0:04:43.960 a negative statistic of payroll growth. 0:04:45.040 --> 0:04:45.880 It's very close. 0:04:46.000 --> 0:04:48.760 I mean, I think we're talking about somewhere in the 0:04:48.839 --> 0:04:51.880 range of minus fifty to plus fifty is the trend rate. 0:04:51.960 --> 0:04:54.159 It might pick up a little early next year. But 0:04:54.200 --> 0:04:56.080 we're out of workers. I mean, we don't have good 0:04:56.080 --> 0:04:59.200 immigration data at all. The governments stopped producing a lot 0:04:59.240 --> 0:05:01.280 of data that we need in order to figure out 0:05:01.320 --> 0:05:03.560 exactly what's going on with the growth in the working 0:05:03.560 --> 0:05:05.839 age population. But as far as I can tell, it's shrinking. 0:05:06.240 --> 0:05:08.159 And it's very hard to grow jobs when you're shrinking 0:05:08.400 --> 0:05:10.880 the working age population. But that actually has a feedback 0:05:10.920 --> 0:05:13.040 loop in the overall economy. You know, I don't know 0:05:13.040 --> 0:05:17.279 if you remember says law from your economic theories classes, 0:05:17.360 --> 0:05:20.440 but the idea that supply creates its own demand. If 0:05:20.520 --> 0:05:22.800 you pull back in the number of workers a night, 0:05:23.600 --> 0:05:26.200 and you know, you don't open a restaurant because hey, 0:05:26.200 --> 0:05:28.800 you couldn't stop the restaurants. So those jobs don't get created. 0:05:29.240 --> 0:05:31.719 You know, the meals don't get served, the houses don't 0:05:31.720 --> 0:05:33.480 get built from the people who don't want to are 0:05:33.560 --> 0:05:34.400 around to live in them. 0:05:34.480 --> 0:05:36.839 So the lack of labor supply is slowing the economy 0:05:36.880 --> 0:05:37.800 in itself. 0:05:37.680 --> 0:05:41.640 Right, says Law Paul at Trinity College. Is they open 0:05:41.920 --> 0:05:45.480 the Guinness brewery yep, And if they manufacture the Guinness, 0:05:45.520 --> 0:05:49.200 it somehow it gets consumed. That says Law out of 0:05:49.279 --> 0:05:52.800 David Kelly's Ireland. I look, David at the job economy 0:05:53.200 --> 0:05:55.080 and I look at the worry out there, and to 0:05:55.200 --> 0:06:00.560 me it becomes a political monetary policy. Can economists nor 0:06:00.760 --> 0:06:06.920 a negative non firm payroll trend? Well, I think it probably. 0:06:07.040 --> 0:06:11.279 I think if it continued into the first six months 0:06:11.279 --> 0:06:13.960 of next year, then I think the FED would ease earlier. 0:06:14.000 --> 0:06:15.919 But I think I think we'll see a little pick up, 0:06:15.920 --> 0:06:18.040 as I said, because of income tax refunds. I think 0:06:18.080 --> 0:06:19.520 we'll see a pickup and growth, and I think that 0:06:19.560 --> 0:06:25.320 will stench the bleeding for for a while, but then 0:06:25.720 --> 0:06:28.120 you know, maybe later next year we do get rate cuts, 0:06:28.120 --> 0:06:30.000 but I want to make it clear rate cuts won't 0:06:30.040 --> 0:06:32.839 fix anything here. The problem, the problems that this economy 0:06:32.880 --> 0:06:36.039 faces have got nothing to do with interest rates or 0:06:36.040 --> 0:06:36.880 interest rates being. 0:06:36.720 --> 0:06:37.520 Too high anyway. 0:06:38.320 --> 0:06:41.239 So yes, it may force the Federal Reserve into cutting 0:06:41.440 --> 0:06:44.680 more aggressively later next year if the economy, if we 0:06:44.680 --> 0:06:47.080 don't sort of put some more artificial stimulus into the economy, 0:06:47.120 --> 0:06:47.919 which we may well do. 0:06:49.120 --> 0:06:51.360 David at JPM, we're going to ask the management, how 0:06:51.360 --> 0:06:54.120 do you guys think about alternative investments? 0:06:55.640 --> 0:06:57.760 Well, we think a lot about them. 0:06:58.120 --> 0:07:01.640 Were we were very conscious of the fact you're just 0:07:01.680 --> 0:07:03.320 talking about how good a year has been for the 0:07:03.400 --> 0:07:05.520 stock market and the bond market has given you positive 0:07:05.520 --> 0:07:08.680 returns despite a fair amount of inflation. That means that 0:07:08.960 --> 0:07:11.200 a sort of sixty to forty stock bond portfolio, it's 0:07:11.200 --> 0:07:15.280 pretty expensive and people really need to diversify and reduce risk. 0:07:15.320 --> 0:07:17.000 But one of the key ways they can do that 0:07:17.440 --> 0:07:23.320 is investing in alternatives things like infrastructure, transportation, real estate, 0:07:23.680 --> 0:07:26.360 also private equity and private credit. But you've got to 0:07:26.400 --> 0:07:30.160 know who's managing that money. But we definitely believe that 0:07:30.440 --> 0:07:33.560 all investors need to think about having some alternatives in 0:07:33.600 --> 0:07:36.480 the portfolio beyond the public markets, because the public markets 0:07:36.520 --> 0:07:38.200 do have a certain amount of risk, and by the way, 0:07:38.320 --> 0:07:41.080 there's also a lot of opportunity in private markets. 0:07:41.280 --> 0:07:43.360 The companies don't want to go public, and. 0:07:43.280 --> 0:07:46.360 So a lot of the explosion of ideas around technology 0:07:46.360 --> 0:07:47.800 and AI and biotech. 0:07:47.400 --> 0:07:49.960 And so forth, they're all occurring in the private market space. 0:07:50.000 --> 0:07:51.800 So you really want to be able to access some 0:07:51.880 --> 0:07:52.080 of that. 0:07:52.160 --> 0:07:55.800 So yeah, I think it's beyond time for people to 0:07:56.040 --> 0:07:58.480 when people can just afford to ignore alternatives, I think 0:07:58.480 --> 0:08:00.280 people really need to think about their alternative as it 0:08:00.320 --> 0:08:01.320 go into twenty twenty six. 0:08:02.040 --> 0:08:03.880 So, David, I mean I can sit here in a 0:08:03.880 --> 0:08:06.320 two year treasuring get you know, three point five percent. 0:08:06.360 --> 0:08:09.559 That's a nice coupon relative the last ten or fifteen years. 0:08:10.200 --> 0:08:12.120 Is that good enough in the fixed income space? Or 0:08:12.120 --> 0:08:13.680 should I be taking some credit risk here? 0:08:15.040 --> 0:08:16.640 I wouldn't take too much credit risk. 0:08:16.720 --> 0:08:16.960 I think. 0:08:17.160 --> 0:08:20.400 I think I'd want to have, you know, maybe a 0:08:20.400 --> 0:08:22.720 little bit more duration than that, but not much. I 0:08:22.720 --> 0:08:24.760 don't think there's much money to be made in fixed income, 0:08:24.760 --> 0:08:28.240 but I think that it does help stabilize a portfolio. 0:08:28.280 --> 0:08:29.880 So I wouldn't be underweight fixed income. 0:08:29.960 --> 0:08:32.240 I wouldn't take much credit risk because credit spreads are 0:08:32.240 --> 0:08:35.400 really tight, and if you do have a recession, then 0:08:35.800 --> 0:08:37.439 you know these credit spreads are going to blow out 0:08:37.640 --> 0:08:39.720 and you're going to get hurt. So I just don't 0:08:39.720 --> 0:08:42.040 think you're getting paid for taking risk in the bond market. 0:08:42.320 --> 0:08:46.360 The melting ice, to your analog of the dakotas enough 0:08:46.440 --> 0:08:50.400 to Winnipeg. The melting ice is the yield on money 0:08:50.440 --> 0:08:53.960 market funds. You got some compete, They can do the 0:08:54.000 --> 0:08:57.600 math over there, you know, I mean for Oley, Casman, 0:08:58.160 --> 0:09:01.319 Santo's the rest of them. Maybe Kelly, what's the math 0:09:01.880 --> 0:09:05.040 of when the dam breaks on money market funds, what's 0:09:05.080 --> 0:09:07.120 the yield or the ice melts? 0:09:09.200 --> 0:09:10.360 You know, I don't think that. 0:09:11.120 --> 0:09:14.160 What usually happens is as those rates come down, you 0:09:14.240 --> 0:09:15.640 think a whole pile of money will come out of 0:09:15.640 --> 0:09:18.680 money market funds. But what happens is people get scared 0:09:18.720 --> 0:09:23.440 more and more scared that something is seriously going wrong here. 0:09:24.640 --> 0:09:25.800 It depends, you know, if. 0:09:25.640 --> 0:09:29.120 We have recession, I would expect money to pile out 0:09:29.240 --> 0:09:31.800 of the money market funds to go into the bond market. 0:09:31.840 --> 0:09:34.760 But if it's if it's sort of a recession plus 0:09:34.800 --> 0:09:37.360 inflation threat, because we're going to get more stimulus in 0:09:37.360 --> 0:09:38.840 an economy that's supply constrained. 0:09:38.840 --> 0:09:41.280 If it's that kind of story of twenty twenty two 0:09:41.360 --> 0:09:41.880 all over. 0:09:41.720 --> 0:09:43.880 Again, I think the money will sit in money market 0:09:43.880 --> 0:09:45.959 funds even if the Fed gets strong armed in the 0:09:45.960 --> 0:09:48.760 pushing rates down, because people will be genuinely scared of 0:09:48.840 --> 0:09:49.720 long term assets. 0:09:50.840 --> 0:09:53.559 So David, in the equity markets, the US equity markets, 0:09:53.559 --> 0:09:55.920 the last two or three years, really it's kind of 0:09:55.920 --> 0:09:58.600 been an AI trade, a mag seven, all that kind 0:09:58.679 --> 0:09:59.600 of stuff. 0:09:59.600 --> 0:09:59.800 Here. 0:10:00.760 --> 0:10:03.760 Folks that have been waiting for a broadening out, They've 0:10:03.760 --> 0:10:05.840 been waiting a long time. Here is twenty twenty six 0:10:05.880 --> 0:10:07.600 a year or maybe we can get some broadening out. 0:10:08.280 --> 0:10:08.760 It could be. 0:10:08.800 --> 0:10:12.080 I mean, marketing markets can remain irrational longer than the insolvent, 0:10:12.120 --> 0:10:13.600 as somebody said many many years. 0:10:13.480 --> 0:10:17.920 Ago, so it could broaden out. I think it is. 0:10:18.920 --> 0:10:21.480 If we have a big correction or a bear market, 0:10:21.520 --> 0:10:24.000 it will broaden out because we know that that the 0:10:24.400 --> 0:10:26.680 epicenter of any bear market is going to be the 0:10:26.720 --> 0:10:30.160 area of greatest speculation before it occurred. So I think 0:10:30.200 --> 0:10:32.000 that I think that I think there's a good chance 0:10:32.040 --> 0:10:33.760 that have brought out at some stage here. 0:10:33.880 --> 0:10:34.960 But the other thing to think. 0:10:34.800 --> 0:10:37.200 About is, you know, when you look at these mammoth 0:10:37.280 --> 0:10:41.480 companies who are pouring money into their version of AI, 0:10:41.800 --> 0:10:44.280 they're all making the same bet, and they've all got 0:10:44.280 --> 0:10:48.040 these sort of quasi monopolistic profits which are funneling into 0:10:48.360 --> 0:10:51.880 an enormous amount of spending on data centers and chips 0:10:51.920 --> 0:10:55.080 to be the AI superpower. But they can't all be 0:10:55.160 --> 0:10:57.959 AI superpower. So even within the mag seven there's a 0:10:58.040 --> 0:11:00.400 there's a lot of risk there that they're all chasing 0:11:00.440 --> 0:11:04.719 after a goal, you know, a brass ring that all 0:11:04.760 --> 0:11:07.120 of them cannot achieve, and maybe none of them can 0:11:07.160 --> 0:11:09.240 achieve if you know, China gets there first. 0:11:10.000 --> 0:11:13.480 David trees to the sky. Paul asked about earnings as well. 0:11:14.120 --> 0:11:18.240 Four years double digit return. It's happened like I think 0:11:18.320 --> 0:11:22.200 three times since the Irish kicked the English out of 0:11:22.520 --> 0:11:25.680 David Kelly's Ireland. David, come on, I mean, there's a 0:11:25.720 --> 0:11:29.280 point where this breaks. What should our listeners in viewers 0:11:29.960 --> 0:11:33.400 study and observe to try to get a bit out 0:11:33.440 --> 0:11:35.800 front of when the market breaks. 0:11:37.080 --> 0:11:39.200 Well, I think I think the first thing is look 0:11:39.240 --> 0:11:41.440 at that AI trade and look at the some of 0:11:41.480 --> 0:11:43.880 the big players there. Is it going to come a 0:11:44.040 --> 0:11:46.720 point where people get skittish about some of the players 0:11:46.720 --> 0:11:49.200 in this space whether they will be the winners. Because 0:11:49.200 --> 0:11:50.720 if it looks like you're not going to be the winner, 0:11:50.720 --> 0:11:51.840 then should you be putting all. 0:11:51.760 --> 0:11:54.320 This money into it? And if you shouldn't, then you know, 0:11:54.800 --> 0:11:56.040 what's your business model looking like. 0:11:56.040 --> 0:11:58.400 So I think that's that's one area of vulnerability. And 0:11:58.440 --> 0:12:02.200 then also, FRANKU keep an eye on the politics. 0:12:01.640 --> 0:12:02.080 Of all of this. 0:12:02.200 --> 0:12:03.400 I mean, I'm very worried that. 0:12:03.400 --> 0:12:06.360 We're going to try to do tariff rebate checks, which 0:12:06.400 --> 0:12:10.439 we'll just you know, if we pour more consumer stimulus 0:12:10.480 --> 0:12:13.440 into the economy before the midterm elections when we're supply constrained, 0:12:13.480 --> 0:12:14.760 we're going to reignite inflation. 0:12:15.800 --> 0:12:17.920 And that is certainly a fear. 0:12:18.080 --> 0:12:21.600 If our political system is not capable of dealing with 0:12:21.640 --> 0:12:25.120 the moment with some sort of sobriety, we do have 0:12:25.120 --> 0:12:27.079 a problem. I think that's the other thing people should 0:12:27.120 --> 0:12:29.880 keep an eye on. But more generally, look, we don't 0:12:29.920 --> 0:12:31.640 know where the next shock is going to come from. 0:12:31.800 --> 0:12:33.600 That's why you go into next year with some sort 0:12:33.640 --> 0:12:36.360 of balance. So regardless of how you try and figure 0:12:36.360 --> 0:12:38.640 out the risks, look at your portfolio is that more 0:12:38.720 --> 0:12:41.040 risk than you should be taking. If it is, how 0:12:41.080 --> 0:12:43.200 can you in a tax efficient. 0:12:42.800 --> 0:12:45.000 Way get to more balance? And I think that's a 0:12:45.000 --> 0:12:46.360 real question for twenty twenty six. 0:12:46.520 --> 0:12:48.440 David, Thank you so much. Just a great way to 0:12:48.480 --> 0:12:51.800 start this holiday with David Kelly with This is Forever 0:12:52.160 --> 0:12:56.800 of JP. Stay with us. More from Bloomberg Surveillance coming 0:12:56.880 --> 0:12:57.880 up after this. 0:13:05.120 --> 0:13:08.720 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:13:08.760 --> 0:13:11.920 weekday afternoons from seven to ten am Eastern Listen on 0:13:12.000 --> 0:13:15.400 Apple Karplay and Android Otto with the Bloomberg Business app, 0:13:15.600 --> 0:13:17.439 or watch us live on YouTube. 0:13:17.559 --> 0:13:20.600 We have the perfect guest after the certitude. Whatever you 0:13:20.600 --> 0:13:22.960 think of the politics and all that, the certitude of 0:13:23.040 --> 0:13:25.959 Stephen Myron. Here, George Borri with us right now, who 0:13:25.960 --> 0:13:30.200 writes in a wonderfully measured approach to fixed income for 0:13:30.320 --> 0:13:35.040 Allspring Global Investments. He's chief investment strategist fixed income at 0:13:35.040 --> 0:13:38.760 the firm. George, I look at forget about the theory. 0:13:39.600 --> 0:13:44.120 The certitude of Stephen Myron is breathtaking. What anybody if 0:13:44.679 --> 0:13:47.120 I more In the day we lost Marty Feldstein as 0:13:47.160 --> 0:13:51.160 PhD advisor. If Professor Feldstein was sitting here, I be saying, 0:13:51.200 --> 0:13:54.880 are you kidding me, professor? Did you teach him this certitude? 0:13:55.280 --> 0:14:00.559 When you hear that certitude of opinion from a legits, 0:14:00.679 --> 0:14:01.600 how do you react. 0:14:02.080 --> 0:14:04.720 I think there were two very strong messages in what 0:14:04.800 --> 0:14:07.960 he had to say, and the first is, really, you know, 0:14:08.000 --> 0:14:10.960 the easing bias is very much in place if there's 0:14:10.960 --> 0:14:13.920 a mixed view. But as he said, you know, Chairman 0:14:13.960 --> 0:14:16.640 Powell's done a good job of wrangling the committee that 0:14:16.679 --> 0:14:20.400 the committee itself seems biased to continue down this eating 0:14:20.520 --> 0:14:26.119 easing path until until data says otherwise. And then secondly, 0:14:26.600 --> 0:14:29.320 you know, they seem committed to wanting to extend the 0:14:29.360 --> 0:14:34.000 cycle and trying to engineer not just a soft landing, 0:14:34.040 --> 0:14:37.280 but an ongoing expansion. And I thought what was really 0:14:37.280 --> 0:14:40.480 interesting is talking about that balance between supply and demand, 0:14:40.960 --> 0:14:45.280 very economic driven basic principles. But if both are expanding 0:14:45.320 --> 0:14:50.280 at the same time, that really is the ultimate cycle extension, 0:14:50.440 --> 0:14:53.320 and it sounds as if the FED is committed to 0:14:53.400 --> 0:14:53.800 doing that. 0:14:53.960 --> 0:14:56.160 I was going backing for the David gerb this we're 0:14:56.200 --> 0:14:58.760 commercial free folks at the top of the hour. Let 0:14:58.760 --> 0:15:01.600 me get one more impulse, George Bory, I look at 0:15:01.600 --> 0:15:04.160 this and I go, okay, we're going to get a 0:15:04.240 --> 0:15:08.360 Myron vector to lower interest rates. I'm not sure it 0:15:08.440 --> 0:15:11.800 benefits they have nots. Let's say it benefits they have 0:15:12.280 --> 0:15:16.800 in the financialization of America. You're living this every day. Yeah, 0:15:16.840 --> 0:15:21.200 if you get a Myron vector, it's like boom, right. 0:15:21.680 --> 0:15:24.240 I think there are three big factors that are going 0:15:24.320 --> 0:15:27.640 to drive through markets next year very much bond market focus. 0:15:27.760 --> 0:15:30.080 Number One, cash is on the move. If the FED 0:15:30.160 --> 0:15:33.040 is the FED is biased to ease, then that eight 0:15:33.120 --> 0:15:37.000 trillion dollars in money markets and in short term deposits 0:15:37.280 --> 0:15:39.680 are going to be looking for other places to go. 0:15:39.880 --> 0:15:42.640 And in a world where inflation still remains up around 0:15:42.640 --> 0:15:46.760 that three percent level, the free trade, the easy trade 0:15:46.800 --> 0:15:49.040 is over, You're going to need to move that cash 0:15:49.160 --> 0:15:52.440 into something else, and so moving out into short duration 0:15:52.560 --> 0:15:56.080 bonds seem likely. The second is the curve. The curve 0:15:56.160 --> 0:15:59.000 itself kind of came down a little bit, yields came 0:15:59.040 --> 0:16:01.480 down a little bit this year. Year sounds as if 0:16:01.480 --> 0:16:03.960 we're going to see more of a twist next year 0:16:04.000 --> 0:16:06.920 that front end coming down, the long end could actually 0:16:06.960 --> 0:16:09.320 start going up again. And so I think that that 0:16:09.440 --> 0:16:11.880 actually is a really big theme that bond investors are 0:16:11.880 --> 0:16:14.200 going to contend with. And then the last you talk 0:16:14.200 --> 0:16:16.920 about haves and have nots. If we look at the 0:16:17.720 --> 0:16:22.320 corporate side of the economy, you know, event risk defaults, 0:16:22.680 --> 0:16:25.880 m and A, the AI build out, the drawdown of 0:16:26.040 --> 0:16:29.240 cash in the system to sort of spend money on 0:16:29.360 --> 0:16:33.000 things has kind of a mixed impact on credit markets, 0:16:33.040 --> 0:16:36.600 and credit markets themselves are seeing a pretty big kind 0:16:36.600 --> 0:16:40.160 of increase in dispersion and would suggest that we're in 0:16:40.200 --> 0:16:43.000 the later stages of a credit cycle, not the end, 0:16:43.360 --> 0:16:46.200 but very much the later phase. And so these three 0:16:46.280 --> 0:16:49.560 big themes are going to be what bond investors and 0:16:49.680 --> 0:16:51.040 any investor really is. 0:16:51.000 --> 0:16:52.560 Going to have to contend with now. 0:16:52.880 --> 0:16:56.840 Navigating that's going to require some maneuverability in your portfolio 0:16:57.000 --> 0:16:59.600 if you do it well. You know, for bond investors, 0:17:00.160 --> 0:17:02.600 you know, mid to high single digit returns is sort 0:17:02.600 --> 0:17:04.680 of what you're shooting for. That's kind of the best 0:17:04.720 --> 0:17:07.399 we can hope for. But it's not going to just 0:17:07.520 --> 0:17:10.199 come to you. The beta trade, if you will happened 0:17:10.240 --> 0:17:13.520 in twenty five, next year twenty six, you're going to 0:17:13.600 --> 0:17:16.320 have to move it around a little to actually achieve 0:17:16.680 --> 0:17:17.840 those kind of returns. 0:17:17.880 --> 0:17:21.080 How about if some of that cash mews into municipal debt, 0:17:21.280 --> 0:17:23.879 particularly for those in high tex jurisdictions. 0:17:24.160 --> 0:17:28.160 Yeah, munis still look very attractive relative to other bonds. 0:17:28.920 --> 0:17:31.600 You know, yields have not moved down as much as 0:17:31.600 --> 0:17:35.199 we've seen in the taxable side of the market, and 0:17:35.280 --> 0:17:38.240 so in the world of munis, where you've got the 0:17:38.280 --> 0:17:41.399 benefit of high ratings, you've got balanced budgets at the 0:17:41.440 --> 0:17:45.200 state levels, and you still have very good income streams 0:17:45.240 --> 0:17:48.960 coming through, we think there's really good value in munis 0:17:49.000 --> 0:17:50.960 and it's a nice way to kind of add to 0:17:51.040 --> 0:17:54.720 that portfolio. The tax advantage is huge for the haves, 0:17:55.040 --> 0:17:57.159 and so we'll see good demand over the course of 0:17:57.200 --> 0:18:00.159 the year, and they're going to be very susceptible to 0:18:00.200 --> 0:18:04.440 those three basic themes of moving out of cash, twisting, 0:18:04.480 --> 0:18:06.160 curve growing, event risk. 0:18:06.280 --> 0:18:08.320 So it's not really ire act. But let's ask what's 0:18:08.320 --> 0:18:11.160 a single point ten year yield for you twelve months out. 0:18:11.359 --> 0:18:14.080 I think twelve months we're probably right around four percent 0:18:14.200 --> 0:18:17.399 fan distribution four percent, we're down a little, down a little. 0:18:17.480 --> 0:18:19.240 So what does a thirty year mortgage do if we 0:18:19.280 --> 0:18:22.159 have curve steepening. Yeah, this is a surprise here. It 0:18:22.160 --> 0:18:22.840 doesn't come in. 0:18:22.880 --> 0:18:25.160 It doesn't come down much because the thirty year could 0:18:25.200 --> 0:18:28.280 be back up above five, and so the twist is 0:18:28.359 --> 0:18:30.840 actually very much around that tenure. 0:18:30.920 --> 0:18:31.639 Part of the curve. 0:18:31.960 --> 0:18:35.040 Front end comes down about twenty five basis point, long 0:18:35.160 --> 0:18:39.040 end goes up a little. Mortgages don't come down that much. 0:18:38.960 --> 0:18:43.040 Which are a surveillance real estate course. Paul Sweeneer. That's grim. 0:18:43.080 --> 0:18:44.520 That is grim because I think if you talk to 0:18:44.560 --> 0:18:46.680 some real estate agents, they say they need to see 0:18:46.680 --> 0:18:49.600 something with a five handle to get people to maybe leave. 0:18:49.440 --> 0:18:51.080 Their homes and put stuff up for sale. I mean, 0:18:51.160 --> 0:18:53.199 Myron's got the trend right here. We got to go 0:18:53.240 --> 0:18:58.320 here like one minute. But George, if Myron, if sort 0:18:58.359 --> 0:19:04.159 of Myron happens and the FED cuts rates, what, I'm sorry, 0:19:04.200 --> 0:19:06.960 what does it do to a sixty forty portfolio. It's 0:19:07.000 --> 0:19:10.960 like it's the edge of nerve. It's like what member, 0:19:11.080 --> 0:19:15.480 when your father made the charcoal fire and you took 0:19:15.520 --> 0:19:20.359 the guests, they can squeezed, Yes, welcome. Isn't that what 0:19:20.400 --> 0:19:21.240 we're talking about? 0:19:21.560 --> 0:19:24.920 It certainly should heat things up, and that's that's that's 0:19:24.960 --> 0:19:27.400 for certain. And so you know that's why we think 0:19:27.400 --> 0:19:29.879 this kind of late cycle, you know, sort of phenomena 0:19:30.040 --> 0:19:32.720 is upon us. It's why you know, intermediate short part 0:19:32.720 --> 0:19:35.080