WEBVTT - Brevan Howard's Top Economist Sees Three Huge Macro Turning Points Under Way 0:00:10.760 --> 0:00:14.760 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.880 --> 0:00:17.200 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:17.440 --> 0:00:20.280 Tracy, you know what actually surprises me a little bit 0:00:20.360 --> 0:00:22.919 about twenty twenty four, maybe twenty twenty three. 0:00:23.560 --> 0:00:28.400 We're only we're only two weeks in, so go on, or. 0:00:28.440 --> 0:00:30.920 Maybe it's twenty twenty three. So here's what surprised. Maybe, 0:00:30.960 --> 0:00:32.839 and think about this, like we've had this a huge 0:00:33.000 --> 0:00:36.279 increase in raids. We're coming to the end, you know, 0:00:36.360 --> 0:00:40.600 the pandemic like shook up the world. But by and large, 0:00:40.720 --> 0:00:44.440 like things have normalized in some level. I'm surprised that 0:00:44.600 --> 0:00:47.279 things aren't more different than they are in fact. Yeah, Like, 0:00:47.479 --> 0:00:49.800 you know, we have the Nasdaq surging. I was just 0:00:49.800 --> 0:00:52.040 looking at It's like the Nasdaq was surging back of 0:00:52.080 --> 0:00:55.760 the day, NASA crypto is back. Like I thought the 0:00:55.760 --> 0:00:58.880 world was gonna change or turned upside down. And yet 0:00:59.000 --> 0:01:01.040 like I'm kind of surprised, like we have this seemingly 0:01:01.080 --> 0:01:04.640 different macro environment, and I'm a little surprised by how 0:01:04.680 --> 0:01:07.640 many themes actually did not go awheyre did not change. 0:01:07.680 --> 0:01:11.600 It's kind of crazy. So rates have basically like tripled 0:01:11.640 --> 0:01:14.280 or at least funding costs, yeah, tripled for companies, and 0:01:14.360 --> 0:01:16.360 yet as far as I can tell, we're sort of 0:01:16.560 --> 0:01:19.720 heading back into twenty twenty two territory. I know the 0:01:19.800 --> 0:01:21.920 S and P five hundred has been wobbling a bit. 0:01:21.959 --> 0:01:25.920 We're recording this on January seventeenth, so it's been down 0:01:25.959 --> 0:01:27.800 for the past couple days or so. But we did 0:01:27.800 --> 0:01:30.080 have a really big rally going into the end of 0:01:30.080 --> 0:01:32.840 twenty twenty three. A lot of the tech companies, the 0:01:32.959 --> 0:01:36.200 usual culprits, the ones you would recognize from twenty twenty 0:01:36.280 --> 0:01:38.440 one to twenty twenty two, were sort of leading the way. 0:01:39.240 --> 0:01:42.080 It is strange that we are in a new regime 0:01:42.280 --> 0:01:44.800 of higher interest rates, and yet the new regime looks 0:01:44.800 --> 0:01:45.880 a lot like the old regime. 0:01:46.360 --> 0:01:50.240 And then throw in some of these huge things. So 0:01:50.280 --> 0:01:53.440 I mentioned the pandemic, which had this huge disruptive effect 0:01:53.600 --> 0:01:58.279 on society. But then there's multiple wars happening right now. 0:01:58.560 --> 0:02:02.120 The war in Ukraine means ongoing, the war against Gaza, 0:02:02.240 --> 0:02:05.520 the firing against the ships in the Red Sea, et cetera. 0:02:05.680 --> 0:02:10.360 So geopolitics is back in a big way. We just 0:02:10.400 --> 0:02:13.320 had the Taiwanese election. We did a recent episode on 0:02:14.040 --> 0:02:17.160 sort of thinking about some of the geopolitical risks outside 0:02:17.160 --> 0:02:20.080 of China, Like, there's a lot going on also, speak 0:02:20.120 --> 0:02:22.600 of China today, did you see the population numbers? 0:02:22.880 --> 0:02:25.560 I did, pretty staggering statistics. 0:02:25.960 --> 0:02:28.200 Yeah, so the second year in a row that the 0:02:28.560 --> 0:02:32.239 population in China actually shrank, birth rates continue involve. There's 0:02:32.280 --> 0:02:34.639 just a lot of stuff going on, you know, throwing 0:02:34.639 --> 0:02:36.760 stuff like AI. You know, they're probably talking about I 0:02:36.760 --> 0:02:38.960 think they're talking about that in Davos right now, Like 0:02:39.240 --> 0:02:40.400 there is a lot going on. 0:02:40.800 --> 0:02:43.400 I bet they're talking about demographics to show probably and 0:02:43.480 --> 0:02:46.680 geopolitical risk. I guarantee you there's someone in Davos talking 0:02:46.720 --> 0:02:49.959 about the big risk for twenty twenty four is geopolitical. 0:02:50.040 --> 0:02:53.120 They'll probably talking about elections and elections in the US. 0:02:53.680 --> 0:02:56.720 There is a lot going on, and it's like, yeah, 0:02:56.800 --> 0:02:58.800 maybe like we'red in all the time, high in stocks 0:02:58.840 --> 0:03:01.720 are close enough, but like it still feels like everything 0:03:01.760 --> 0:03:04.880 feels very unsettled or sort of like the abilt or 0:03:04.919 --> 0:03:06.400 easily unsettled at this point. 0:03:06.560 --> 0:03:10.360 Well, I think the issue is there's sort of there's 0:03:10.400 --> 0:03:14.240 an unease about the current economy, which is that we 0:03:14.400 --> 0:03:18.200 have seen this incredibly dramatic run up in rates and 0:03:18.280 --> 0:03:21.840 yet it feels like we haven't really seen I guess, 0:03:21.840 --> 0:03:25.079 the full result of it or the shoe dropping just yet. 0:03:25.120 --> 0:03:28.919 We've had three banks failed in twenty twenty three. It's 0:03:28.960 --> 0:03:32.520 definitely not nothing. But compared to how people were talking 0:03:32.600 --> 0:03:37.080 about ten years of ultralow interest rates after the two 0:03:37.120 --> 0:03:39.760 thousand and eight financial crisis, this idea that central banks 0:03:39.760 --> 0:03:43.440 were distorting markets, there were all these zombie companies, everything 0:03:43.520 --> 0:03:46.480 was artificial because of low rates. It feels like something 0:03:46.520 --> 0:03:49.560 more should have changed in sort of twenty twenty three. 0:03:49.680 --> 0:03:51.800 Should we have a big picture macro conversation. 0:03:52.040 --> 0:03:52.520 Let's do it? 0:03:52.560 --> 0:03:54.680 All right, Well, I am really excited. We have a 0:03:54.720 --> 0:03:57.880 perfect guest. I'm thrilled that we have him here in studio. 0:03:58.120 --> 0:04:00.720 We're gonna be speaking with Jason Cumming. He is the 0:04:00.800 --> 0:04:05.000 head of research and chief economist and Brevin Howard asset Management, 0:04:05.640 --> 0:04:08.320 been there for a long time. He's also previously an 0:04:08.360 --> 0:04:12.880 economist at the Federal Reserve Board. So really the perfect 0:04:12.960 --> 0:04:16.360 guest to be speaking about some of these big macro issues. Jason, 0:04:16.560 --> 0:04:18.200 thank you so much for coming on. Odd lots. 0:04:18.279 --> 0:04:19.400 Thank you, Joe. Thanks Tracy. 0:04:19.440 --> 0:04:21.920 All Right, I'm gonna ask an embarrassing question, but maybe 0:04:22.000 --> 0:04:24.919 hopefully it's something that our listeners will find useful. What 0:04:25.080 --> 0:04:28.000 is a chief economist and a head of research at 0:04:28.040 --> 0:04:31.560 an asset manager like Brevin or specifically Brevin. What do 0:04:31.560 --> 0:04:33.760 you do and what is your role within the company 0:04:33.800 --> 0:04:35.120 and within the investment process? 0:04:35.279 --> 0:04:37.400 Okay, I think it's useful. Instead of going through a 0:04:37.480 --> 0:04:39.760 job description about what a chief economist does? Is you 0:04:40.240 --> 0:04:43.279 frame this up both for economists and for the investment 0:04:43.279 --> 0:04:47.480 management industry more generally, Sure, I make the distinction between 0:04:47.839 --> 0:04:52.720 desk generals and special operators, and whether you're an economist 0:04:52.839 --> 0:04:55.280 or operating in a hedge fund or across the asset 0:04:55.279 --> 0:04:58.040 management industry. This taxonomy is helpful to try and think 0:04:58.040 --> 0:05:01.080 about people who are big picture sure desk generals who 0:05:01.560 --> 0:05:04.640 move pieces around on a map, and people are special 0:05:04.640 --> 0:05:07.320 operators who do house to house combat every day with 0:05:07.400 --> 0:05:10.160 the data and with markets. What we do at our 0:05:10.240 --> 0:05:12.960 fund Brevan Howard is much more like house to house combat, 0:05:13.320 --> 0:05:17.000 whereas other shops, certainly a Warren Buffett or the old 0:05:17.360 --> 0:05:21.159 David Swinson model of endowment management that has more the 0:05:21.200 --> 0:05:24.279 air of a desk general moving things around strategically very 0:05:24.400 --> 0:05:27.799 long lived bets, and what we do at a hedge 0:05:27.800 --> 0:05:32.400 fund is really different from that. We don't afford ourselves 0:05:32.440 --> 0:05:34.479 the ability to just make long term bets and then 0:05:34.800 --> 0:05:37.680 walk away because we have stewardship over capital that has 0:05:37.720 --> 0:05:41.599 to be marked to market every day for our investors 0:05:41.640 --> 0:05:44.640 who face very real budget constraints. We don't manage money 0:05:44.920 --> 0:05:47.080 for the Warren Buffets of the world or the Yale 0:05:47.160 --> 0:05:50.159 endowments of the world. We manage money for shops more 0:05:50.240 --> 0:05:52.960 like the investment committee that I'm on. Two of them, 0:05:53.360 --> 0:05:58.960 Brookings and Swarthmore. Swarthmore has a really impressive endowment, Tracy. 0:05:59.760 --> 0:06:02.800 Fifty percent of the operating budget is funded by that endowment. 0:06:03.240 --> 0:06:05.479 They can't afford to have a year where their private 0:06:05.480 --> 0:06:08.640 equity partners come to them and say sorry, no distributions 0:06:08.640 --> 0:06:11.520 this year, because then the kids don't have their scholarships. 0:06:11.839 --> 0:06:13.840 They need partners more like Brevan Howard, who are doing 0:06:13.880 --> 0:06:17.800 this houseouse combat with markets every day, trying to extract 0:06:17.839 --> 0:06:20.640 risk premium in all different kinds of markets. So we 0:06:20.680 --> 0:06:23.680 are neither long risk assets all the time, nor are 0:06:23.680 --> 0:06:26.400 we sitting around just buying vall all the time, because 0:06:26.480 --> 0:06:28.480 as you well know, people overpay for options. So if 0:06:28.480 --> 0:06:30.840 you were long vall all the time, you would end 0:06:30.920 --> 0:06:34.000 up going out of business sooner rather than later. So 0:06:34.080 --> 0:06:38.080 what a chief economist does, Joe, is try and provide 0:06:38.120 --> 0:06:41.599 the framework for thinking about investment management, whatever the environment is, 0:06:42.000 --> 0:06:44.720 and then figuring out exactly the ways in which we're 0:06:44.760 --> 0:06:47.400 going to go about that on a high frequency basis, 0:06:47.440 --> 0:06:50.320 because we aren't paid for our long term views about 0:06:50.360 --> 0:06:52.880 whether we're in the new normal or the new abnormal 0:06:52.880 --> 0:06:54.880 for interest rates, we have to figure out when the 0:06:54.880 --> 0:06:57.720 FED pivot is, when the next interest rate cuts are. 0:06:58.160 --> 0:07:00.800 And so the essence of a macro hedge fund is 0:07:00.800 --> 0:07:04.120 is not figuring out the terminal destination, but it's figuring 0:07:04.120 --> 0:07:06.640 out how you get there, what the exact path is, 0:07:06.760 --> 0:07:09.880 the volatility along the way, all those different elements, and 0:07:09.920 --> 0:07:12.320 the chief economist tries to weave together all those different 0:07:12.600 --> 0:07:13.600 all those different pieces. 0:07:13.800 --> 0:07:17.280 Wait, can I ask an even a broader step back question? 0:07:17.640 --> 0:07:19.360 A step back from the step back? And you sort 0:07:19.360 --> 0:07:21.760 of touched on it just then, But what does a 0:07:21.800 --> 0:07:23.040 macro hedge fund actually do? 0:07:23.120 --> 0:07:23.800 Because I take the. 0:07:23.760 --> 0:07:26.800 Point about I take the point about, you know, being 0:07:26.920 --> 0:07:30.040 tactical and having to sort of pivot on a day 0:07:30.080 --> 0:07:32.480 to day basis, But my impression was that macro hedge 0:07:32.480 --> 0:07:36.800 funds were all about making the big bets on big 0:07:36.920 --> 0:07:42.080 changes in the global economy, macroeconomic regime shifts, that sort 0:07:42.120 --> 0:07:42.400 of thing. 0:07:42.960 --> 0:07:45.880 So a macro hedge fund is defined by the kinds 0:07:45.880 --> 0:07:49.560 of assets it's trades, so it trades foreign exchange, currency, credit, 0:07:49.960 --> 0:07:54.160 and traditionally, certainly in the kind of older style Soros 0:07:54.560 --> 0:07:57.840 big macro hedge fund bets where we broke the Bank 0:07:57.920 --> 0:08:01.840 of England. It's certainly true that in Brevin Howard's history 0:08:01.880 --> 0:08:05.600 we've had amazing returns through very difficult times in the economy, 0:08:05.600 --> 0:08:08.600 for example two thousand and eight and certainly during the pandemic. 0:08:09.000 --> 0:08:11.880 But we wouldn't be good partners with our stakeholders if 0:08:11.880 --> 0:08:13.520 we told them we were only going to make money 0:08:13.520 --> 0:08:16.080 if there's a pandemic. We can't count on a pandemic happening. 0:08:16.080 --> 0:08:18.840 We can't count on breaking the Bank of England once. 0:08:19.160 --> 0:08:21.960 So we try and make the inner girl the path 0:08:21.960 --> 0:08:24.600 integral of what goes on, and markets make money through 0:08:24.600 --> 0:08:27.640 all those different environments, which sometimes might mean tracy that 0:08:27.760 --> 0:08:30.560 your long just carry. Last year it turned out that 0:08:31.160 --> 0:08:33.160 some of our best performing parts of our fund were 0:08:33.520 --> 0:08:36.440 long credit, and that's not something that is the essence 0:08:36.480 --> 0:08:39.360 of the old style macro of let's pick a big 0:08:39.480 --> 0:08:42.080 up or down. But it is true we punctuated some 0:08:42.120 --> 0:08:44.280 of our best returns in those periods of time where 0:08:44.559 --> 0:08:46.840 being the chief economist, we looked at what was going 0:08:46.840 --> 0:08:49.640 on with the pandemic and people were enormously complacent. You'll 0:08:49.640 --> 0:08:52.960 remember that period of time in February March of twenty 0:08:53.080 --> 0:08:55.400 twenty when we went through the it's just the flu 0:08:55.480 --> 0:08:58.000 phase of things, and we were looking out across the 0:08:58.040 --> 0:09:01.040 investment landscape and saying, people are not tuned to the 0:09:01.080 --> 0:09:06.079 global economy shutting down. We were probably Tracy only a 0:09:06.120 --> 0:09:08.960 week or two ahead of people in that case, but 0:09:09.040 --> 0:09:11.360 that was all that we needed in order to be 0:09:11.400 --> 0:09:13.240 able to in one of our funds make one hundred 0:09:13.240 --> 0:09:14.559 percent during that period of time. 0:09:14.679 --> 0:09:17.120 I remember that time in early twenty twenty, and it 0:09:17.200 --> 0:09:20.520 was amazing, like how slim the edge was, but also 0:09:20.600 --> 0:09:23.920 kind of how obvious because I remember in January February 0:09:23.920 --> 0:09:26.680 twenty twenty, I mean, China shut down like a huge 0:09:26.720 --> 0:09:31.040 portion of its economy and stocks were still rising in 0:09:31.120 --> 0:09:33.560 the US and everyone was talking about the Trump impeachment, 0:09:33.600 --> 0:09:35.320 and it was kind of stunning to me that we'd 0:09:35.360 --> 0:09:39.200 been worried about a trade war with China for so 0:09:39.240 --> 0:09:42.080 many years, and then China shuts down most of its 0:09:42.080 --> 0:09:43.360 economy and everyone was like. 0:09:43.320 --> 0:09:44.480 It doesn't matter, it's fun. 0:09:44.640 --> 0:09:47.920 Can I ask a questions? So obviously making good decisions, 0:09:48.040 --> 0:09:51.480 hopefully pivoting at the right moment, being ahead of others 0:09:51.520 --> 0:09:56.640 in terms of is there a describable, persistent source of 0:09:56.679 --> 0:10:00.360 alpha that you could say across the cycle? Something like 0:10:00.559 --> 0:10:02.400 you know, and I think like some hedge funds, like 0:10:02.440 --> 0:10:05.800 maybe like they're expertise, is like all their different portfolio 0:10:05.840 --> 0:10:08.680 managers and the risk management practices that they apply to 0:10:08.840 --> 0:10:12.440 sort of allocating capital internally, and maybe their ability to 0:10:12.480 --> 0:10:14.480 do that is a source of alpha. Or maybe some 0:10:14.520 --> 0:10:18.040 of them are really good at like applying the cutting 0:10:18.160 --> 0:10:20.800 edge of technology or AI, et cetera, and that is 0:10:20.840 --> 0:10:25.000 their edge, et cetera. Is there like a describable edge 0:10:25.040 --> 0:10:27.680 that Brevin aims to exploit across the cycle. 0:10:27.960 --> 0:10:30.319 So I've thought about how to answer this question a lot. 0:10:30.320 --> 0:10:33.360 Because everyone is hard working and everyone is smart in market, 0:10:33.440 --> 0:10:37.079 So there's no real alpha from working an extra hour 0:10:37.200 --> 0:10:40.200 per week and having an extra IQ point, because that's 0:10:40.240 --> 0:10:42.600 an arms race where everyone is up to the frontier. 0:10:42.960 --> 0:10:45.320 I think about it in three different ways, going from 0:10:45.840 --> 0:10:50.840 narrowly out. So first is muscle memory. I've seen as 0:10:51.160 --> 0:10:53.720 chief economists all kinds of different things. So I was 0:10:53.760 --> 0:10:55.960 just reminded, you know, we were talking about the pandemic 0:10:56.000 --> 0:10:58.560 just a moment ago. You need to have seen a 0:10:58.600 --> 0:11:01.679 lot and be able to pull together my academic training, 0:11:01.720 --> 0:11:04.960 my policy training, or markets training to be able to 0:11:05.040 --> 0:11:08.720 make a view. So in that period right around February, 0:11:08.960 --> 0:11:12.040 when I saw that when the people who were put 0:11:12.080 --> 0:11:14.880 away in Travis Air Force Base actually started community spread 0:11:14.880 --> 0:11:18.199 at Vacaville Community Hospital a mile away, I knew that 0:11:18.280 --> 0:11:20.800 there was going to be spread everywhere. When I saw 0:11:20.880 --> 0:11:24.520 that the La Unified School District was shutting down, I 0:11:24.559 --> 0:11:26.600 knew that the whole economy was shutting down. That kind 0:11:26.600 --> 0:11:31.160 of muscle memory, knowing what happens when those developments are 0:11:31.200 --> 0:11:34.040 going to hit markets is a key source of alpha. 0:11:34.400 --> 0:11:36.440 Going back to earlier periods, you were just talking in 0:11:36.480 --> 0:11:39.760 the intro about how things seem fine. Now you flip 0:11:39.840 --> 0:11:42.559 the calendar and it doesn't really seem like anything really changes. 0:11:42.800 --> 0:11:44.640 I'll tell you another period of time where you flip 0:11:44.679 --> 0:11:47.800 the calendar and something really changed. GDP growth at the 0:11:47.880 --> 0:11:50.880 end of two thousand and seven, just a few days 0:11:50.880 --> 0:11:53.360 before the business cycle peak in December of two thousand 0:11:53.679 --> 0:11:58.200 printed four percent on a quarterly annualized rate, which was 0:11:58.200 --> 0:12:00.240 the fastest run rate of growth going in to the 0:12:00.240 --> 0:12:02.440 business cycle peak a few days later than you had 0:12:02.440 --> 0:12:05.079 seen in four years. A few weeks after that, the 0:12:05.160 --> 0:12:07.960 unemployment rate went up three tenths. The FED did an 0:12:08.000 --> 0:12:11.240 emergency seventy five basis point cut, followed just a few 0:12:11.320 --> 0:12:14.839 days later by regularly scheduled meetings fifty basis point cut. 0:12:15.080 --> 0:12:17.360 Things can change very quickly, and one of the persistent 0:12:17.400 --> 0:12:19.599 source of alpha that we have is that experience of 0:12:19.640 --> 0:12:22.320 the individuals we have in the firm, MEAs chief economists 0:12:22.320 --> 0:12:24.560 and other The two others I would just mention quickly 0:12:24.559 --> 0:12:29.640 are I think it's underappreciated how important trust is in organizations. 0:12:29.640 --> 0:12:31.600 And that may seem like something that's a very soft 0:12:31.640 --> 0:12:33.360 consideration when it comes to something right. 0:12:33.360 --> 0:12:35.520 It sounds like a car, but it's not. 0:12:35.679 --> 0:12:38.960 Which is, you can get sources of information anywhere. But 0:12:39.000 --> 0:12:40.960 if you trust me, Tracy, when I come to you 0:12:41.000 --> 0:12:43.120 and say listen, the US economy is going to shut down, 0:12:43.360 --> 0:12:45.480 that may be the difference between you putting on a 0:12:45.520 --> 0:12:48.600 trade that's one unit or ten units. And then finally 0:12:48.600 --> 0:12:52.079 the last one is there's intangible capital that is developed 0:12:52.080 --> 0:12:54.080 over a period of time. In a firm we've been 0:12:54.120 --> 0:12:56.839 around for more than twenty years, we have intangible capital 0:12:56.880 --> 0:12:59.640 in the way we structure trades, the AI, the individuals, 0:12:59.640 --> 0:13:02.280 and that is something that we have as a permanent 0:13:02.440 --> 0:13:04.360 a source of strategic ballast for us. 0:13:05.240 --> 0:13:08.920 Joe asked you about alpha. How much of global macro 0:13:09.720 --> 0:13:13.400 alpha is systematizable? Because again, I think about the landscape 0:13:13.440 --> 0:13:15.199 of hedge funds. I think about the hedge funds that 0:13:15.240 --> 0:13:17.600 have been popular in recent years. It's sort of all 0:13:17.679 --> 0:13:22.760 you know, like relative value alg driven type momentum hedge funds. 0:13:23.400 --> 0:13:27.040 And you're here, you're talking about like very specific things 0:13:27.080 --> 0:13:30.160 that have happened in the global economy. Like you know, 0:13:30.240 --> 0:13:32.200 I was watching the spread of the pandemic and I 0:13:32.200 --> 0:13:34.760 saw this one base in what was happening there. How 0:13:34.800 --> 0:13:37.400 systematizable is that kind of insight? 0:13:38.280 --> 0:13:40.320 I think almost none of it. I think that you 0:13:40.480 --> 0:13:45.040 have to there's no designer indicator. People will look at 0:13:45.040 --> 0:13:48.240 financial conditions indexes, or they'll look at regularities that they've 0:13:48.240 --> 0:13:51.040 seen in the past and hopefully be able to you know, 0:13:51.120 --> 0:13:53.120 extract some risk creamium out of the markets. But I 0:13:53.160 --> 0:13:55.760 harken back to a podcast you just did the other 0:13:55.840 --> 0:13:58.920 day with Harley Bassman, who's developed some you know, pretty 0:13:58.920 --> 0:14:02.560 sophisticated financials, but in the hands of people who aren't 0:14:02.559 --> 0:14:05.520 sophisticated investors, their weapons of mass destruction. If you just 0:14:05.640 --> 0:14:09.040 kept your p fix throughout the cycle, it's an excellent 0:14:09.080 --> 0:14:11.320 financial instrument. But what if you missed the day of 0:14:11.360 --> 0:14:14.319 the FED pivot? What if you missed the day that 0:14:14.400 --> 0:14:18.040 there's you know, essentially a failed auction, because this is 0:14:18.120 --> 0:14:21.320 the day that people decide that the US's credits is 0:14:21.520 --> 0:14:24.040 really in question. Those are the kinds of things that 0:14:24.120 --> 0:14:27.880 I think require real feel for the analysis, plus mapping 0:14:27.880 --> 0:14:31.480 into the markets. It's very difficult to systemae systematize. You 0:14:31.560 --> 0:14:33.920 might take a step back and look at markets and say, listen, 0:14:34.200 --> 0:14:36.240 most of the returns in stocks and bonds have been 0:14:36.360 --> 0:14:40.360 around FED days, But which FED days pick them? Was 0:14:40.400 --> 0:14:42.680 it just because you were able to know that J. 0:14:42.880 --> 0:14:44.680 Powell was going to do a trillion dollars of que 0:14:44.880 --> 0:14:46.880 in response to the pandemic, it was important to pick 0:14:46.920 --> 0:15:01.800 that week. 0:15:02.880 --> 0:15:07.920 Let's talk about this moment interesting times. Obviously, debates about 0:15:07.920 --> 0:15:10.760 whether the FED is gonna cut in March. We recently 0:15:10.800 --> 0:15:13.600 had the Waller speech. Waller was one of the hawks 0:15:13.680 --> 0:15:15.720 leading the way, and though he didn't say we're going 0:15:15.800 --> 0:15:18.960 to go right away, he clearly indicated that on some 0:15:19.240 --> 0:15:22.160 level he is ready for the rate cut cycle to happen. 0:15:22.520 --> 0:15:28.200 Inflation trajectory generally seems fine, labor market seems solid, lots 0:15:28.200 --> 0:15:31.920 of optimism about the soft landing. January seventeenth, here we are, 0:15:32.240 --> 0:15:34.240 how do you see just sort of the short term 0:15:34.240 --> 0:15:35.520 macro picture of the medium term. 0:15:36.040 --> 0:15:40.400 Let's weave that into the very recent Waller speech and 0:15:40.480 --> 0:15:43.560 especially his Q and A. The FED is pulled a 0:15:43.560 --> 0:15:45.280 little bit of a fast one. They told you that 0:15:45.320 --> 0:15:47.040 they are data dependent and you just needed to look 0:15:47.040 --> 0:15:49.800 at the data. So let's over the last six months 0:15:49.880 --> 0:15:52.680 look at what's happened with the data. The June sep 0:15:52.920 --> 0:15:58.080 is an important milestone. At that meeting, the median forecast 0:15:58.200 --> 0:16:01.760 for that nineteen member committee was three point nine percent 0:16:01.760 --> 0:16:04.760 for corp PC inflation. We project at the end of 0:16:04.760 --> 0:16:07.000 this month, and we, like many others, put a lot 0:16:07.040 --> 0:16:09.720 of effort into this kind of high frequency data analysis. 0:16:09.920 --> 0:16:11.560 We project at the end of the month, the release 0:16:11.600 --> 0:16:13.760 for core PC inflation will be two point nine percent. 0:16:14.080 --> 0:16:17.000 They've missed by one hundred basis points in six months. 0:16:17.400 --> 0:16:20.760 In the era of the SEPs, going back to twenty fourteen, 0:16:21.040 --> 0:16:23.920 they've never missed in that direction by that magnitude. In 0:16:23.920 --> 0:16:26.760 twenty nineteen, when they missed by a mere thirty basis points, 0:16:26.800 --> 0:16:29.360 it was enough to get a seventy five basis point 0:16:30.040 --> 0:16:32.680 mid cycle adjustment, as they called it, in an economy 0:16:32.680 --> 0:16:35.280 that was performing otherwise pretty well. It faced some shocks 0:16:35.280 --> 0:16:37.760 with obviously the Trump trade war and so on, but 0:16:37.880 --> 0:16:40.120 just a thirty basis point miss got them to cut 0:16:40.120 --> 0:16:42.280 three times starting in the summer and into the fall. 0:16:42.520 --> 0:16:44.600 They missed by one hundred basis points. Just on what 0:16:44.720 --> 0:16:48.240 we know, and furthermore, in terms of thinking about where 0:16:48.320 --> 0:16:52.000 we're going farther down the line, Monetary policy now is 0:16:52.040 --> 0:16:54.600 as tight as it's ever been on the precipice of 0:16:54.640 --> 0:16:57.400 recessions if you take the FED seriously. They think that 0:16:57.480 --> 0:17:00.120 long term neutral is two and a half percent, so 0:17:00.240 --> 0:17:03.360 rates are broadly three hundred basis points above neutral. Whenever 0:17:03.400 --> 0:17:06.200 that's been true, you've had a recession, with one small 0:17:06.240 --> 0:17:09.040 exception in nineteen eighty four. But if it's the case 0:17:09.080 --> 0:17:12.720 that monetary policy is tight, what is the natural equilorating 0:17:12.800 --> 0:17:15.040 force of the economy to bring it into equilibrium and 0:17:15.119 --> 0:17:17.560 just keep it there. Well, it's not monetary policy, because 0:17:17.560 --> 0:17:20.679 that's putting continual downward pressure on the economy. So we 0:17:20.720 --> 0:17:24.359 fully expect the economy to continue to slow. And the 0:17:24.440 --> 0:17:26.800 interesting thing about Waller's take on thing is he had 0:17:27.359 --> 0:17:31.080 obviously taken on board what's happened with inflation and what 0:17:31.160 --> 0:17:34.439 he projects to happen inflation. He's discounting the prospects of 0:17:34.480 --> 0:17:37.400 a deterioration in the labor market, which we do foresee. 0:17:37.720 --> 0:17:40.960 But he slipped in something very important Joe, especially in 0:17:41.000 --> 0:17:43.280 the Q and A, which is he went from data 0:17:43.320 --> 0:17:48.520 dependence to his own personal preference dependence, which is he said, 0:17:48.800 --> 0:17:51.160 the biggest mistake we could make is starting and then 0:17:51.160 --> 0:17:53.760 stopping or having to reverse, and in fact he used 0:17:53.760 --> 0:17:57.040 the word worst mistake. And so he talked three times 0:17:57.040 --> 0:17:59.400 in the official speech about how he had more confidence 0:17:59.440 --> 0:18:01.640 in various parts to the outlook coming together which would 0:18:01.720 --> 0:18:03.960 lead to rate cuts. But then in the Q and 0:18:04.000 --> 0:18:06.920 A he was unwittingly revealing of his own personal preferences, 0:18:06.960 --> 0:18:09.240 which is said, the worst thing we could do is 0:18:09.280 --> 0:18:12.639 stop and start, and furthermore that he had to be 0:18:12.720 --> 0:18:16.920 thoroughly convinced that inflation had been slaid. So we think 0:18:16.960 --> 0:18:19.800 that the Fed is well on its way to rate cuts. 0:18:19.840 --> 0:18:21.960 Figuring out the exact timing is going to depend upon 0:18:22.240 --> 0:18:24.320 one piece of data or another. How does the next 0:18:24.320 --> 0:18:26.679 employment report play out? But I think you can have 0:18:26.760 --> 0:18:31.400 more conviction about the ultimate destination than about the exact timing. 0:18:31.800 --> 0:18:34.879 I just remind you the last two normal rate cutting 0:18:34.880 --> 0:18:37.320 cycles started out with a bang, with a fifty basis 0:18:37.320 --> 0:18:40.760 point cut. One of them was intermeeting, followed up by 0:18:41.000 --> 0:18:43.159 in that same month in January two thousand and one, 0:18:43.320 --> 0:18:47.160 another cut. And remember the two thousand and one recession 0:18:47.160 --> 0:18:49.520 we called a recession. It you never even ultimately strung 0:18:49.560 --> 0:18:52.240 together two quarters of negative GDP, and the Fed was 0:18:52.240 --> 0:18:55.199 cutting by one hundred basis points because they kind of 0:18:55.200 --> 0:18:58.080 waited around. And then Greenspan did his thing. He said, 0:18:58.080 --> 0:19:02.040 I looked at initial claims and second week auto sales 0:19:02.080 --> 0:19:05.159 in December of two thousand and the economy's changed. He 0:19:05.240 --> 0:19:07.439 said to his colleagues, the last move is always a mistake. 0:19:07.480 --> 0:19:09.560 We need to take it back and take it back quickly. 0:19:09.640 --> 0:19:11.840 So the March versus mad debate, I think, in some 0:19:11.880 --> 0:19:14.000 ways obscure is what's really going on, because that's a 0:19:14.040 --> 0:19:17.520 guess about a policy maker's utility function and how risk 0:19:17.560 --> 0:19:20.640 averse they're going to be with regard to this really 0:19:20.680 --> 0:19:24.520 severe aversion to policy reversals, and that's tough to judge. 0:19:24.760 --> 0:19:28.800 So I take the point about timing, and in some 0:19:28.840 --> 0:19:31.440 respects it's academic whether it's March or like a few 0:19:31.440 --> 0:19:34.119 months later. But you mentioned something earlier that was really 0:19:34.119 --> 0:19:36.160 interesting to me, which was that I think you said 0:19:36.160 --> 0:19:39.119 you went long credit in twenty twenty three, and that 0:19:39.240 --> 0:19:42.840 was kind of a bold and unusual call, because again, 0:19:43.160 --> 0:19:45.840 going into twenty twenty three, towards the end of twenty 0:19:45.880 --> 0:19:49.159 twenty two, everyone the consensus was that we were going 0:19:49.240 --> 0:19:51.840 to have a recession and that corporate defaults were going 0:19:51.920 --> 0:19:54.680 to spike. And we have seen a pickup in defaults. 0:19:54.680 --> 0:19:57.159 This is true, but certainly not to the extent that 0:19:57.200 --> 0:19:58.719 a lot of people were thinking. 0:19:58.760 --> 0:19:59.560 We have seen. 0:19:59.440 --> 0:20:02.600 Spreads come in since towards the end of twenty twenty three. 0:20:03.000 --> 0:20:08.160 What went into making that specific call, I go back to. 0:20:08.320 --> 0:20:10.760 Two thousand and six, as a good template. So two 0:20:10.760 --> 0:20:12.840 thousand and six saw the end of the rate hiking cycle. 0:20:12.840 --> 0:20:15.040 Then in June of two thousand and six, there was 0:20:15.080 --> 0:20:18.280 widespread worries about the economy, and there were more manifest 0:20:18.280 --> 0:20:21.160 than they are now because housing was obviously slowing down 0:20:21.160 --> 0:20:24.080 and looking very dodgy in certain parts of the country. 0:20:24.119 --> 0:20:27.280