WEBVTT - Luke Kawa on the Macro Situation Right Now 0:00:10.800 --> 0:00:14.640 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.680 --> 0:00:18.799 I'm Joe wasn't All and I'm Tracy Halloway. So, Tracy, 0:00:18.840 --> 0:00:21.400 you know, every once in a while, um, I feel 0:00:21.440 --> 0:00:23.400 like every few months we have to do like a 0:00:23.800 --> 0:00:26.160 like a sort of macro episode. I mean, we talk 0:00:26.239 --> 0:00:29.360 about topics in macro, but it's also good to just 0:00:29.360 --> 0:00:32.120 sort of take stock of like where we are right 0:00:32.159 --> 0:00:37.240 now with the economy, FED and markets. Yeah that's fair enough, 0:00:37.400 --> 0:00:39.680 but I feel like at this moment in time, I 0:00:39.680 --> 0:00:43.440 mean I should mention we're recording on March. There is 0:00:43.440 --> 0:00:45.640 a FED meeting coming up, so maybe things will change, 0:00:46.000 --> 0:00:48.960 But at this moment in time, the macro environment is 0:00:49.040 --> 0:00:52.360 really interesting because of course we've seen this big backup 0:00:52.440 --> 0:00:55.960 in yields which has impacted stocks, and now we're watching 0:00:55.960 --> 0:01:00.120 out to see what the central banks actually do about it. Yeah, 0:01:00.000 --> 0:01:03.160 it's just a very interesting environment for exactly that. In 0:01:03.200 --> 0:01:06.559 addition to the backup and rage, we've seen this fairly 0:01:06.640 --> 0:01:09.640 dramatic rotation the likes of which we haven't seen for 0:01:09.680 --> 0:01:12.200 a while, where we have a lot of like banks 0:01:12.480 --> 0:01:15.039 and Energy Company is leading the way, and a lot 0:01:15.080 --> 0:01:18.399 of the tech darlings for the last year, if not 0:01:18.600 --> 0:01:23.640 the last decade, arguably pretty pretty severely underperforming. We're seeing 0:01:23.640 --> 0:01:27.320 this commodity boom ongoing, something that we recently talked about 0:01:27.360 --> 0:01:32.520 with Jeff Curry. We're seeing expectations continue to get ratcheted 0:01:32.600 --> 0:01:34.080 up for what growth is going to look like in 0:01:35.000 --> 0:01:39.360 one and maybe so we're definitely like at a turning point, 0:01:39.680 --> 0:01:42.600 which makes a of some sorts, which makes a good 0:01:42.600 --> 0:01:47.199 time to like take stock of the macro right now. Yeah, 0:01:47.240 --> 0:01:49.760 And I guess whenever you have these big turning points 0:01:49.760 --> 0:01:52.320 in markets, or when it feels maybe like you're seeing 0:01:52.320 --> 0:01:54.480 a turning point in market, the question always comes up 0:01:54.520 --> 0:01:57.600 about how you should actually position for it, And it 0:01:57.720 --> 0:02:01.560 does seem in this particular environ ronament. I don't know 0:02:01.600 --> 0:02:03.800 how you feel about it, but like I feel that 0:02:04.080 --> 0:02:07.960 it's more difficult than normal, I guess because bonds are 0:02:07.960 --> 0:02:10.760 selling off because people are positioning for growth, and at 0:02:10.800 --> 0:02:14.000 the same time, all the stock market winners that we've 0:02:14.000 --> 0:02:16.360 seen for the past couple of years are also selling off. 0:02:16.400 --> 0:02:18.519 So I don't know, it feels a little bit tricky 0:02:18.560 --> 0:02:23.079 at the moment. If if you're in charge of allocating assets, yeah, 0:02:23.160 --> 0:02:25.600 I mean, you know, I think for the last for 0:02:25.639 --> 0:02:28.200 a long time. You could have had a real like 0:02:28.240 --> 0:02:30.640 sort of set it and forget it port portfolio, like 0:02:30.639 --> 0:02:32.679 a sixty forty type thing, or we have a bunch 0:02:32.680 --> 0:02:35.959 of stocks, you have a bunch of treasuries, and you 0:02:36.040 --> 0:02:38.440 just don't worry about it. But a there's a lot 0:02:38.440 --> 0:02:40.959 of talk that maybe the treasury component isn't gonna work 0:02:40.960 --> 0:02:45.040 that well, especially in an environment that's reflationary, higher rates 0:02:45.600 --> 0:02:49.160 that has impact on the stocks. So there is a 0:02:49.160 --> 0:02:52.120 a broad reckoning, or at least questioning of whether a 0:02:52.160 --> 0:02:53.920 lot of the strategies that have worked well for a 0:02:54.000 --> 0:02:56.960 very long time, longer than a decade, really are just 0:02:57.000 --> 0:03:00.320 going to continue to be so easy. M hm. Anyway, 0:03:00.600 --> 0:03:03.200 the good news for us is that we're just journalists 0:03:03.760 --> 0:03:05.720 and so we don't actually have to answer these questions 0:03:05.760 --> 0:03:07.760 ourselves because it's not our job to get it right. 0:03:07.960 --> 0:03:11.600 That's true. But our guest is very special episode today. 0:03:11.680 --> 0:03:14.360 So our guest Nat only used to be a journalist, 0:03:14.720 --> 0:03:16.840 but it actually used to work for me, and you're 0:03:16.880 --> 0:03:19.760 tracing this episode makes me very happy because we're going 0:03:19.800 --> 0:03:22.680 to have one of our old colleagues on and not 0:03:22.800 --> 0:03:25.840 only was he an excellent journalist, but he's gone on 0:03:26.160 --> 0:03:29.960 I think, to be an excellent strategist at a real bank. 0:03:30.000 --> 0:03:33.840 And it's really nice when you see someone who has 0:03:34.320 --> 0:03:37.720 who has expertise in markets, who sort of translates that 0:03:37.840 --> 0:03:41.400 expertise into UH I guess something other than writing about it, 0:03:41.440 --> 0:03:44.960 and actually takes an active role or position in it, 0:03:45.160 --> 0:03:49.400 putting theory into practice. Right, So we just write about it, 0:03:49.480 --> 0:03:51.720 we just talk about it. But our guest today used 0:03:51.720 --> 0:03:53.600 to do that and now he actually has to make 0:03:53.640 --> 0:03:57.400 these calls. So we're going to be speaking with Luke Kala, 0:03:57.560 --> 0:04:01.960 our longtime colleague. He is UH asset allocation strategist at 0:04:02.120 --> 0:04:05.760 UBS Asset Management. We references work a lot. We talked 0:04:05.760 --> 0:04:08.080 about his business. We cover ones which will probably come 0:04:08.160 --> 0:04:11.600 up today. Luke, thank you very much for joining us. Guys, 0:04:11.600 --> 0:04:14.560 it's a it's my pleasure in the warm, fuzzy feelings 0:04:14.560 --> 0:04:18.560 are very much mutual here. So is this a tough time, 0:04:19.120 --> 0:04:21.880 like as Tracy set out, like, does this seem like 0:04:21.920 --> 0:04:26.560 a particularly sort of tricky moment for thinking through problems 0:04:26.640 --> 0:04:30.760 in the question of asset allocation? I mean, this is 0:04:30.800 --> 0:04:33.479 the thing about uncertainty, right, It's always supposed to be 0:04:33.520 --> 0:04:36.760 above average, but at the at the risk, at the 0:04:36.839 --> 0:04:39.000 risk of you know, contradicting tracy, which I guess I'm 0:04:39.000 --> 0:04:41.840 allowed to do now. It's uh, it almost seems that 0:04:41.960 --> 0:04:44.960 one of the one of the more difficult parts right 0:04:45.000 --> 0:04:48.719 now dealing with this environment is is letting it fully 0:04:48.880 --> 0:04:51.000 play out. We know that we have, you know, some 0:04:51.080 --> 0:04:54.240 incredible fiscal stimulus in the pipeline. We're pretty sure we 0:04:54.279 --> 0:04:58.280 have you know, sustained monetary support over a reasonable enough 0:04:58.600 --> 0:05:02.600 forecast horizon. So now it's a lot about just making 0:05:02.600 --> 0:05:05.680 sure that you know, the fundamentals are still aligned with 0:05:05.680 --> 0:05:08.000 with your thesis coming into this year and you know 0:05:08.080 --> 0:05:10.719 so far, I think I think that's that's been the key. 0:05:10.760 --> 0:05:13.200 And if you look at kind of the current environment 0:05:13.240 --> 0:05:15.520 we're in, something that it reminds me of a lot, 0:05:15.640 --> 0:05:18.599 not in macro implications, but in terms of just letting 0:05:18.640 --> 0:05:22.400 it play out. Would be the kind of the oil 0:05:22.440 --> 0:05:25.600 shock whose ramifications in terms of, you know, how what 0:05:25.640 --> 0:05:27.719 it did to what it did for bond yields, what 0:05:27.760 --> 0:05:31.800 it did for commodities generally commodity currencies, that that essentially 0:05:31.920 --> 0:05:34.760 lasted for like an eighteen month period in which it 0:05:34.839 --> 0:05:38.800 was a chief catalyst for performance across the board. Right now. 0:05:39.080 --> 0:05:42.320 That's that's kind of how I'm envisioning the degree of 0:05:42.360 --> 0:05:45.240 fiscal that's in the system right now, and the kind 0:05:45.279 --> 0:05:49.240 of earnings rotation that's that it's supporting underlying underlying markets. 0:05:49.880 --> 0:05:52.200 So I have a ton of questions just based on that. 0:05:52.279 --> 0:05:54.760 But I think maybe to begin with, we have to 0:05:54.839 --> 0:05:57.600 start with your or at least talk about it a 0:05:57.640 --> 0:06:00.880 little bit, your transition to the real world, you know, 0:06:00.920 --> 0:06:04.880 moving away from journalism actually putting what you write about 0:06:04.880 --> 0:06:09.080 in practice, Like what made you want to do that 0:06:09.279 --> 0:06:13.320 to start with? And obviously obviously you can avoid saying 0:06:13.560 --> 0:06:16.640 bad things about Bloomberg, but you know, why were you 0:06:16.680 --> 0:06:21.680 interested in making that switch? Yeah? And nothing, nothing but 0:06:22.080 --> 0:06:24.719 nothing but love on my end for former and current 0:06:24.920 --> 0:06:28.040 current employers on that front. But yeah, I think it 0:06:28.160 --> 0:06:31.120 just there there was time in my in my career 0:06:31.160 --> 0:06:35.120 where I wanted to definitely take a take a learning 0:06:35.160 --> 0:06:38.960 step and you know, figure out whether kind of my 0:06:39.040 --> 0:06:41.760 ideas and the way I thought about things could uh, 0:06:41.960 --> 0:06:44.680 you know, could translate into the real world. But also 0:06:44.760 --> 0:06:47.120 to uh, you know, to start fresh again and be 0:06:47.360 --> 0:06:50.200 the definitely be the dumbest guy in the room. And 0:06:50.240 --> 0:06:52.640 that's that's a position I I relish and I enjoy 0:06:52.680 --> 0:06:55.080 and I'm in in every meeting i'm in. So just 0:06:55.240 --> 0:06:59.000 the ability to really to learn to rewire my brain 0:06:59.560 --> 0:07:02.480 and to you know, to solve problems on a on 0:07:02.520 --> 0:07:04.680 a more prolonged basis, because I think, you know, one 0:07:04.720 --> 0:07:07.800 of the things with with journalism that's fun and exciting 0:07:07.800 --> 0:07:09.440 and what I what I loved about it when I 0:07:09.480 --> 0:07:11.800 was doing it, is that when you when you go 0:07:11.880 --> 0:07:14.960 in every day, you have really no clue what you're doing. 0:07:14.960 --> 0:07:17.760 The market is going to dictate kind of what you're doing, 0:07:17.880 --> 0:07:20.640 and you know whether whether you're covering commodities that day 0:07:20.760 --> 0:07:24.400 or options or bonds, etcetera, etcetera. I do like the 0:07:24.440 --> 0:07:27.160 idea of of a little more structure and working to 0:07:27.240 --> 0:07:30.120 solve problems where you know, the half life and the 0:07:30.120 --> 0:07:32.720 payoff period is going to be longer than that one 0:07:32.760 --> 0:07:34.640 day where we're going to have some stay in power, 0:07:34.960 --> 0:07:38.200 we're going to be building results for for our clients 0:07:38.240 --> 0:07:41.360 together over a prolonged period of time. So that's something 0:07:41.440 --> 0:07:43.680 that really appealed to me. And you know, I love 0:07:43.760 --> 0:07:45.560 the people I worked with when I was at Bloomberg 0:07:45.600 --> 0:07:49.200 and I love the team I'm on here. So talk 0:07:49.280 --> 0:07:52.000 through a little bit more the process. I mean, it's 0:07:52.040 --> 0:07:54.640 one thing to like have calls, right, It's like, okay, 0:07:54.720 --> 0:07:57.520 rates are going to rise or commodities are going to 0:07:57.560 --> 0:08:01.440 continue to rally or whatever. Butbviously to make a call 0:08:01.560 --> 0:08:03.400 like that, you have to have some sort of like 0:08:03.520 --> 0:08:06.400 deeper you know, something has to proceed that some sort 0:08:06.440 --> 0:08:11.560 of like process for incorporating new information into a call. 0:08:11.960 --> 0:08:15.360 Talk to us about how you and your colleagues begin 0:08:15.520 --> 0:08:19.640 to think through these problems translating inputs and the markets 0:08:19.800 --> 0:08:23.240 in the economy and policy and turning them into the 0:08:23.320 --> 0:08:28.680 question of um, you know, decisions on asset allocation. Basically yes. 0:08:28.760 --> 0:08:31.280 So I think there's a really actually good tie into 0:08:31.680 --> 0:08:35.000 journalism here because I think, Bloomberg, the interview question you're 0:08:35.040 --> 0:08:36.880 always asked, I think there is one of the most 0:08:36.880 --> 0:08:39.920 important things as a journalist, and it's accuracy and accuracy 0:08:39.960 --> 0:08:41.839 are the two most important because I think what you're 0:08:41.840 --> 0:08:44.520 supposed to answer, and then when it when it comes 0:08:44.520 --> 0:08:47.719 to investing, I think the the answer there would be 0:08:48.080 --> 0:08:52.240 accuracy and asymmetry. So essentially what we're trying to doing 0:08:52.400 --> 0:08:57.440 is is trying to identify convex opportunities that are based 0:08:57.480 --> 0:09:01.560 on underlying macro themes we expect to play out. Now, 0:09:02.080 --> 0:09:05.440 what is something that provides, you know, the convexity or 0:09:05.440 --> 0:09:09.319 the outsized return or the the best expression of a thesis, 0:09:09.679 --> 0:09:13.000 so to speak. It's probably going to be a combination 0:09:13.160 --> 0:09:17.760 of both valuation and catalyst. So it's it's really working, 0:09:18.080 --> 0:09:22.760 working through and doing doing the work to identify assets 0:09:22.800 --> 0:09:26.040 that do appear undervalued and that we do believe have 0:09:26.200 --> 0:09:30.080 like a reasonable macro case to expect these valuation gaps 0:09:30.120 --> 0:09:33.640 to remedy based on an improvement in the underlying fundamentals. 0:09:33.760 --> 0:09:36.480 And I think that's key. It's not just hoping that 0:09:36.520 --> 0:09:39.600 this valuation gap will close if you have that, but 0:09:39.679 --> 0:09:42.800 you don't have the here's how part, And that's what 0:09:42.880 --> 0:09:45.240 we spend a lot of our time doing. It's easy too, 0:09:45.280 --> 0:09:47.480 It's easy to kind of identify and just know where 0:09:47.480 --> 0:09:50.680 the valuation gaps are. How you avoid value traps is 0:09:50.720 --> 0:09:53.800 really finding that catalyst and making sure it will be 0:09:53.880 --> 0:09:56.880 there within a reasonable period of time, so you have 0:09:57.000 --> 0:09:59.680 your your mergence safety built on valuation, and you have 0:09:59.679 --> 0:10:04.400 your the list that provides for meaningful upside exposure. The 0:10:04.480 --> 0:10:07.800 catalyst point is interesting because I always thought that this 0:10:07.880 --> 0:10:10.360 is probably one of the things that I I would 0:10:10.360 --> 0:10:13.720 certainly struggle with if I made the switch. You know, 0:10:13.760 --> 0:10:16.960 it's one thing to write you think rates are too 0:10:17.000 --> 0:10:19.880 low or the dollar is miss priced or something, but 0:10:19.960 --> 0:10:22.079 it's a whole other thing to actually come up with 0:10:22.160 --> 0:10:27.040 an actionable trade based on that idea. And the other 0:10:27.080 --> 0:10:29.520 thing I've been thinking about is you could argue that, 0:10:29.800 --> 0:10:33.080 you know, markets get stuff wrong. Um, although I guess 0:10:33.080 --> 0:10:34.760 some people would take issue with that, but you could 0:10:34.840 --> 0:10:38.400 argue that markets, you know, stay irrational longer they then 0:10:38.440 --> 0:10:41.600 you can say, solvent things like that. That's probably why 0:10:41.600 --> 0:10:44.560 the catalysts becomes so important. But how do you sort 0:10:44.600 --> 0:10:48.520 of deal with that aspect of it. Especially in recent 0:10:48.800 --> 0:10:53.199 months or years, we have seen this frothiness in markets 0:10:53.240 --> 0:10:56.320 and you can say that valuations are way too high, 0:10:56.640 --> 0:10:59.720 but they can just keep going up and up and 0:10:59.800 --> 0:11:04.080 up without you know, a catalyst on the horizon. I 0:11:04.080 --> 0:11:06.720 think this is something that plays in very well to 0:11:06.880 --> 0:11:09.440 the kind of the the biggest debate that you alluded 0:11:09.480 --> 0:11:12.040 to and the in the preamble, which is essentially the 0:11:12.280 --> 0:11:15.400 growth versus value trade right now, because I think that 0:11:15.600 --> 0:11:18.199 you know that essentially is a good parallel for for 0:11:18.480 --> 0:11:21.520 you know, what underlies your question there, and for the 0:11:21.600 --> 0:11:24.160 longest time you could say, well, you know, these these 0:11:24.240 --> 0:11:26.640 valuations are getting to the most stretched since the dot 0:11:26.640 --> 0:11:29.679 com bubble, totera, etcetera. At certain point this is going 0:11:29.720 --> 0:11:33.199 to snap back the situation we have here, and people 0:11:33.240 --> 0:11:36.240 can people can point to the rates market as a 0:11:36.320 --> 0:11:38.920 you know, as a catalyst for this rotation or as 0:11:38.960 --> 0:11:42.200 accentuating this rotation. When you really look at this under 0:11:42.200 --> 0:11:45.280 the hood, it's it's just the fact that the earnings 0:11:45.480 --> 0:11:48.280 the bottom line for value stocks are expected to grow 0:11:48.280 --> 0:11:50.520 at a faster pace than growth stocks for the first 0:11:50.559 --> 0:11:53.120 time in quite quite a while. So if you look 0:11:53.160 --> 0:11:56.720 at finally getting the catalyst to realize some of that 0:11:57.200 --> 0:11:59.360 some of that out performance, and that's you know, that's 0:11:59.440 --> 0:12:03.720 unlocked byvaccinations, that's unlocked by fiscal stimulus. So right now, I, 0:12:04.120 --> 0:12:06.599 you know, I I view that as much more fundamental 0:12:06.960 --> 0:12:11.439 to the cause of value versus growth performance. Then then 0:12:11.480 --> 0:12:13.680 the rates market. If you're going to run like correlations 0:12:13.720 --> 0:12:18.040 for three month rolling performance of NASDAC versus SMP five 0:12:18.280 --> 0:12:21.079 D versus the movement and tenure rates or real rates, 0:12:21.280 --> 0:12:25.120 you're not going to get incredibly strong signals. That's it's 0:12:25.120 --> 0:12:28.400 a bit of a a quasi myth. So it's it's 0:12:28.440 --> 0:12:31.320 really looking into what's been driving the out performance. Is 0:12:31.320 --> 0:12:33.760 it the earnings growth? And do we expect that's reversed? 0:12:33.760 --> 0:12:36.480 And that's that's our view that based on just the 0:12:36.480 --> 0:12:38.679 the amount of physcal stimulus in this in the system, 0:12:39.000 --> 0:12:43.400 given vaccinations, laying the groundwork for return to economic normality, 0:12:43.720 --> 0:12:46.559 that that's going to happen. And so that's the that's 0:12:46.559 --> 0:12:49.080 the kind of scenario that I'm talking about. Just letting 0:12:49.080 --> 0:12:51.880 it play out because the earnings in this case are 0:12:51.960 --> 0:12:55.560 the catalyst, and you come late this year midpoint of 0:12:55.600 --> 0:12:59.040 this year, we'll be talking about, Okay, how can this 0:12:59.120 --> 0:13:01.760 be sustained? Do we have the policy action to sustain this? 0:13:02.320 --> 0:13:04.440 Or are we going to migrate back into the into 0:13:04.480 --> 0:13:06.760 the regime we have before? And that's when you you 0:13:06.800 --> 0:13:10.160 return to monitoring your policy milestones and how do you 0:13:10.200 --> 0:13:12.400 know attempt to attempt to you discern the tea leaves here. 0:13:13.320 --> 0:13:16.880 I mean you you basically anticipated my next question, so 0:13:18.600 --> 0:13:22.920 expected to be blistering fast growth. I mean we might 0:13:22.920 --> 0:13:25.680 get I think I've seen estimates for like potential GDP 0:13:25.800 --> 0:13:27.760 growth of like eight percent for the year. It's like 0:13:27.840 --> 0:13:31.160 going to be something nuts because the reopening, the vaccine, 0:13:31.640 --> 0:13:34.480 the stimulus. I think two will probably have some of 0:13:34.520 --> 0:13:37.440 that and also be pretty decent. But then there's a 0:13:37.520 --> 0:13:42.120 question about what's next. So how do you start thinking about, 0:13:42.160 --> 0:13:44.920 as you say, those policy milestones and the degree to 0:13:45.040 --> 0:13:48.280 which they'll sort of like continue to affect the like 0:13:48.800 --> 0:13:51.920 what's next? The weather value continues to outperform what do 0:13:52.000 --> 0:13:53.920 you like getting? What do you what are you gonna 0:13:53.920 --> 0:13:56.000 be thinking about? Thinking ahead? What are you gonna be 0:13:56.000 --> 0:13:58.240 thinking about for the end of In terms of that 0:13:58.320 --> 0:14:01.080 what's next? I think the important part is not to 0:14:01.320 --> 0:14:03.320 not to think ahead too much, not to not to 0:14:03.400 --> 0:14:07.200 think too fast, like the kind of the the biggest 0:14:07.480 --> 0:14:09.839 mistake that could be made in the in the coming 0:14:09.920 --> 0:14:14.240 months is essentially saying, okay, we've had peak policy support, 0:14:15.000 --> 0:14:17.160 what's next to the kind of the kind of show 0:14:17.200 --> 0:14:19.400 me story and using that as a reason to get 0:14:19.480 --> 0:14:22.080 you know, bearish when you know, we know it's a 0:14:22.080 --> 0:14:25.480 it's a popular to quote another of our former colleague, 0:14:25.480 --> 0:14:28.640 samro you know stocks usually go up, that's the that's 0:14:28.640 --> 0:14:33.000 the thing. So I think importantly kind of anchoring, anchoring 0:14:33.080 --> 0:14:35.400 on that and realizing that, you know, as long as 0:14:35.440 --> 0:14:38.200 we're still expected to get earnings growth. It's just you know, 0:14:38.200 --> 0:14:40.480 a matter of making sure you're on the right side 0:14:40.480 --> 0:14:42.760 of the rotation. But in terms of things to watch, 0:14:43.320 --> 0:14:47.320 I think an encouraging development lately has been the degree 0:14:47.320 --> 0:14:51.840 of Chinese policy support that hasn't really contracted as significantly 0:14:52.320 --> 0:14:54.680 as you know some may have feared coming into the year. 0:14:54.720 --> 0:14:58.640 That's that's removed a pretty pretty key downside risk. A 0:14:58.720 --> 0:15:03.000 second would be the the continuation of US fiscal support, 0:15:03.080 --> 0:15:06.760 not only through the anticipated infrastructure bill that we know 0:15:07.280 --> 0:15:09.760 then Congress will begin to work on soon and hash 0:15:09.800 --> 0:15:12.120 out over the course of the year, but also whether 0:15:12.240 --> 0:15:15.440 some of the provisions and the most recently past one 0:15:15.440 --> 0:15:19.360 point nine trillion stimulus are actually extended and made more permanent. 0:15:19.680 --> 0:15:22.040 Those kind of things they do add up, and they 0:15:22.120 --> 0:15:24.480 just do show that the policy boat is you know, 0:15:24.520 --> 0:15:27.680 continuing to move in the right direction, and that that 0:15:27.760 --> 0:15:31.280 allows kind of the more cyclical traits to continue to 0:15:31.320 --> 0:15:51.280 have the wind at their back. Um, you mentioned China there, 0:15:51.320 --> 0:15:53.880 and I do want to get into that, but before 0:15:53.880 --> 0:15:56.240 we do, maybe maybe if I just ask the bonds question, 0:15:56.320 --> 0:15:59.080 that would be a good segue into it. We're talking 0:15:59.120 --> 0:16:02.920 about how stocks in the long run tend to go up. 0:16:02.960 --> 0:16:06.440 But I'm curious how you feel about bonds at the 0:16:06.520 --> 0:16:09.440 moment because I imagine, you know, if you're in the 0:16:09.480 --> 0:16:13.720 business of asset allocation, I just don't think selling you know, 0:16:13.840 --> 0:16:17.400 a big position in US treasuries is that um, I 0:16:17.400 --> 0:16:19.800 don't know, it can't get people that excited at the moment, 0:16:19.920 --> 0:16:22.800 right like it, It doesn't really it doesn't really work 0:16:22.880 --> 0:16:26.160 to um to offset losses in stocks anymore, or at 0:16:26.240 --> 0:16:29.240 least it hasn't this year. The yields are incredibly low. 0:16:29.520 --> 0:16:32.600 It's just very very hard to see the attraction in 0:16:33.000 --> 0:16:36.840 US debt at the moment. So how are you feeling 0:16:37.360 --> 0:16:42.840 about the role of you know, US treasuries in a portfolio. Well, 0:16:42.880 --> 0:16:46.520 I think bonds full stop, do still playing an important 0:16:46.600 --> 0:16:50.560 role in portfolios in US treasuries due to like think 0:16:50.600 --> 0:16:53.720 think about the nature of the quote unquote shock and 0:16:53.760 --> 0:16:56.760 I'm using air quotes on that because we're still pretty 0:16:56.840 --> 0:16:59.840 much even at all time highs after this this rate shock. 0:17:00.520 --> 0:17:02.520 And it's the thing about bonds is that they aren't 0:17:02.560 --> 0:17:05.080 intended to touch the shock. They're intended to hedge the 0:17:05.240 --> 0:17:08.159 downside shock to growth. And that's something that you know, 0:17:08.200 --> 0:17:10.960 we were we were able to to overcome and deal 0:17:11.000 --> 0:17:15.240 with last year in bonds. You performed pretty well throughout 0:17:15.240 --> 0:17:18.160 that I think you can say, especially after the liquidity 0:17:18.520 --> 0:17:21.880 crisis stages of the of the COVID chuck has passed. 0:17:21.920 --> 0:17:24.359 But right now, from from our point of view at 0:17:24.520 --> 0:17:28.760 GUBS were under we're underweight global duration, and that's just 0:17:29.320 --> 0:17:32.720 based on the view that we're getting we're getting a recovery, 0:17:32.720 --> 0:17:36.879 and bond yields haven't fully priced in the magnitude of 0:17:36.920 --> 0:17:39.800 the recovery or the about or the amount of growth 0:17:39.840 --> 0:17:42.520 we're about to get that's in the pipeline. But you know, 0:17:42.920 --> 0:17:46.560 being underweight bonds doesn't mean kind of abandoning them completely. 0:17:46.920 --> 0:17:49.320 So that's that's the kind of the rule we see 0:17:49.359 --> 0:17:51.480 that the give and take. It's certainly not a time 0:17:51.920 --> 0:17:54.439 in our view to be to be overweighting bonds. We 0:17:54.520 --> 0:17:58.480 prefer equities to bonds, we prefer credit to bonds. So 0:17:58.560 --> 0:18:00.600 that's that kind of gives you a sense of of 0:18:00.640 --> 0:18:04.479 where we are positionally. So just on the idea of 0:18:04.600 --> 0:18:07.960 bonds as a diversification play, and the fact that you 0:18:08.000 --> 0:18:12.560 mentioned the Chinese economic performance recently and the fact that 0:18:13.359 --> 0:18:16.960 monetary policy hasn't been as tight as maybe some people 0:18:17.119 --> 0:18:20.080 were worried that it could be. How do you see 0:18:20.160 --> 0:18:22.760 Chinese bonds at the moment, because I got to say, like, 0:18:22.800 --> 0:18:25.600 one of the things that we've been watching out here 0:18:25.840 --> 0:18:30.200 um in Asia is the enormous inflows that we've seen 0:18:30.320 --> 0:18:35.159 into Chinese government debt in and one like, it's just 0:18:35.200 --> 0:18:40.920 such a step change in China's position in investment portfolios 0:18:40.960 --> 0:18:43.879 and also in the global financial system because it's getting 0:18:43.960 --> 0:18:46.560 very close to moving from an exporter of capital to 0:18:46.640 --> 0:18:50.120 an importer of capital, and that's just really interesting to see. 0:18:50.160 --> 0:18:56.080 So I'm curious from an investment strategy perspective, what's going 0:18:56.080 --> 0:18:58.720 on with Chinese debt, Like what is the attraction right now? 0:18:59.560 --> 0:19:02.160 So I think the attraction starts with just the most 0:19:02.200 --> 0:19:05.720 simple component, and that's that's the yield premium relative to 0:19:05.800 --> 0:19:08.280 the rest of the world. So essentially, coming into this 0:19:08.600 --> 0:19:10.560 coming into this year, you had you know, the Chinese 0:19:10.560 --> 0:19:13.960 tenure at a near record premium two G three yields, 0:19:14.000 --> 0:19:17.040 So that that in itself is going to drive attention, 0:19:17.119 --> 0:19:20.639 especially with central banks signaling at the time that you know, 0:19:20.680 --> 0:19:23.720 we nobody was anticipating the kind of the results we 0:19:23.800 --> 0:19:26.280 got in Georgia or for yields to move the way 0:19:26.320 --> 0:19:28.280 they had. So that's something that just off the hop 0:19:28.680 --> 0:19:32.119 is going to naturally lead people to gravitate towards a 0:19:32.160 --> 0:19:35.440 you know, a higher yielding solution. But I think a 0:19:36.160 --> 0:19:38.760 deeper part of this, and this is something that it's 0:19:38.760 --> 0:19:40.760 part of a collection that me and my colleagues have 0:19:40.840 --> 0:19:44.520 written called Upgrade Draft Allocation. And the second paper in 0:19:44.520 --> 0:19:48.560 this series deals with enhancing diversification in the context of 0:19:48.600 --> 0:19:50.960 a low yield world. So how are you going to 0:19:51.080 --> 0:19:54.160 make sure portfolios are are well buffered in an environment 0:19:54.480 --> 0:19:57.359 where bonds might be at an effective lower bound? Which 0:19:57.960 --> 0:20:00.119 still an interesting part of the COVID chuck is that 0:20:00.200 --> 0:20:02.960 no central bank took rates more negative to deal from it. 0:20:03.040 --> 0:20:05.639 So it seems like, you know, the appreciation of that 0:20:05.720 --> 0:20:09.400 policy tool might might be might be fading in its 0:20:09.640 --> 0:20:12.040 in its role going forward. And so when we looked 0:20:12.040 --> 0:20:15.200 across the spectrum of different different fixed and co instruments, 0:20:15.280 --> 0:20:18.879 we just believe that Chinese bonds, because the yield premium 0:20:18.920 --> 0:20:22.320 and because of the the economic maturity, the People's Bank 0:20:22.359 --> 0:20:25.120 of China has now a reasonable history of being able 0:20:25.160 --> 0:20:29.399 to move move countercyclically, so you know, enable to you 0:20:29.440 --> 0:20:32.680 know ease when conditions are bad and tighten when conditions 0:20:32.680 --> 0:20:36.280 are getting better. That kind of supports the stock bond 0:20:36.280 --> 0:20:38.800 correlation you would like to see and helps you have 0:20:38.920 --> 0:20:41.280 faith that it will be there in the future. But 0:20:41.480 --> 0:20:43.760 I think what's more important is what Tracy just mentioned. 0:20:44.040 --> 0:20:47.200 The fact that Chinese bonds are getting all of these 0:20:47.240 --> 0:20:50.160 inflows and receiving all of this uh, you know, all 0:20:50.200 --> 0:20:54.320 this more institutional adoption and appreciation is something that itself 0:20:54.320 --> 0:20:58.639 will perpetuate and kind of reinforce this, this negative correlation 0:20:59.040 --> 0:21:02.560 between between stocks and Chinese bonds in particular because if 0:21:02.560 --> 0:21:04.359 you look at also the you know, if you go 0:21:04.440 --> 0:21:07.480 through the growth shocks or the you know, any reasonable 0:21:07.520 --> 0:21:10.679 pullbacks we've had in the past few years, it's you know, 0:21:10.760 --> 0:21:15.919 China and sixteen China divil. Obviously, Chinese component yields go 0:21:16.000 --> 0:21:19.600 down during this, and global stocks go down earlyen the 0:21:19.760 --> 0:21:23.200 you know, the Valmageddon experience not clearly not a China matter, 0:21:23.280 --> 0:21:28.560 but yields down materially to fen not really a China story. 0:21:28.880 --> 0:21:31.239 You can argue it might be about trade, maybe not, 0:21:31.359 --> 0:21:34.399 but yields down a lot during that, and COVID is 0:21:34.600 --> 0:21:37.679 certainly a story that China was first into from an 0:21:37.680 --> 0:21:41.879 economic and risk market perspective, and yes, yields down. So 0:21:41.920 --> 0:21:45.200 if you're trying to tell any story about the global 0:21:45.240 --> 0:21:48.680 economy and you know macroeconomic cycles and ebbs and flows, 0:21:48.880 --> 0:21:51.119 it's very likely that China is going to be a 0:21:51.119 --> 0:21:53.439 mover and shaker in that story. So it's you know, 0:21:53.520 --> 0:21:56.840 it's very likely that beyond the yield premium of the offer, 0:21:57.119 --> 0:22:00.760 that the negative correlation will still be there. That's super interesting. 0:22:00.920 --> 0:22:03.639 So you mentioned something early on in that answer I 0:22:03.680 --> 0:22:05.560 want to go back to, which is we didn't see 0:22:05.600 --> 0:22:09.400 any major central banks go deep into negative rates during 0:22:09.560 --> 0:22:12.680