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Speaker 2: Terminal and the Bloomberg Business app. Towston Slock of Apollo
Speaker 2: saying ten tail winds are increasing the likelihood that the
Speaker 2: FED will have to reverse course at its November meeting.
Speaker 2: Ensure the no landing continues. Torson' whe us around the table,
Speaker 2: Torston cad Mornic. When you say reverse course, do you
Speaker 2: mean pause or start gown the other way?
Speaker 3: I mean pause?
Speaker 2: You mean pause? Okay, share the ten tail winds with.
Speaker 3: Us well, So the key tail winds, of course.
Speaker 2: Not a memory test.
Speaker 1: Pick five.
Speaker 3: That's a lot of things that are supported for of course,
Speaker 3: first of all, most importantly, when the FED turn stubbage,
Speaker 3: financial conditions begin to ease. This has been a very
Speaker 3: strong tail in just in the last few weeks since
Speaker 3: the September meeting. Second, of all, underline the growth outlook,
Speaker 3: we also have the Chips Act, the Inflation of our Check,
Speaker 3: the Infrastructure Act. Those are also very strong tailwinds that
Speaker 3: continue to provide support to construction of manufacturing facilities. We
Speaker 3: also have, on top of that a lot of spending
Speaker 3: on data centers on AI. I have not met anyone
Speaker 3: who is saying, oh, I'm not going to build a
Speaker 3: data center because the FIT just raised race twenty five
Speaker 3: basis points. On the contrary, this is a structural force.
Speaker 3: It doesn't matter what interest rates are doing. At the
Speaker 3: same time, we also have at the highest level, stock
Speaker 3: markets are rallying, credit markets are very tight, and at
Speaker 3: the same time, consumers are still very strong. So overall,
Speaker 3: the tailwinds in the form of what will the outlook
Speaker 3: look like for the next level quarters just continues to
Speaker 3: not be surprising. Why we're getting still two hundred and
Speaker 3: fifty four thousand jobs. Why GDP growth in the second
Speaker 3: quarter was three percent and Atlanta VEGDPN now for the
Speaker 3: third quarter is three point four. I mean, you really
Speaker 3: do begin to ask the question where is to slow down?
Speaker 3: And as we've been debating before, is monetary policy really restrictive?
Speaker 3: If it is so restrictive, why is the economy still
Speaker 3: doing so well.
Speaker 2: They don't just believe it's restrictive. They believe it's sufficiently
Speaker 2: restrictive to get inflation back down to two percent of
Speaker 2: a certain period of time. Do you have your dance then.
Speaker 3: True, Well, it becomes a bit of a semantics of
Speaker 3: what exactly does it mean, because it was for a
Speaker 3: long time the argument that when the fit funds rate
Speaker 3: is where it is at the moment at five percent,
Speaker 3: and if we're supposed to go to our style, which
Speaker 3: is three percent, that must imply, if you have that
Speaker 3: model in your mind, that we have very restricted policy.
Speaker 3: But the incoming data across the board, if you look
Speaker 3: at the daily data on your Bloomberg screen for how
Speaker 3: many people go to restaurants are still very strong, how
Speaker 3: many people flying airplanes? Daily data also very strong. Debit
Speaker 3: card spending on my Bloomberg terminal, also daily data very strong,
Speaker 3: weekly day for retail sales strong. The number of people
Speaker 3: who are at the moment spending across basically most categories
Speaker 3: of consumption as we saw in the retail sales report
Speaker 3: week also very strong. So in that sense, it's not
Speaker 3: even the case that there was a slowdown last week.
Speaker 3: It's still the case that things are still chugging along
Speaker 3: very nicely.
Speaker 4: That said, you are seeing in surveys and talking to
Speaker 4: different executives that they're not really planning on hiring mass
Speaker 4: groups of people, that they're actually allowing attrition to shrink
Speaker 4: their workforces. You are seeing signs that there is sort
Speaker 4: of evening out in the labor front, and that seems
Speaker 4: to be the big concern for the Federal Reserve that
Speaker 4: sees that as a slower moving ship. Why do you
Speaker 4: think that isn't enough to really create a landing.
Speaker 3: Well, if you look at the Chatlender Grand and Christmas
Speaker 3: survey of the announced job cuts, that's still very low.
Speaker 3: This is a monst the series where they go out
Speaker 3: and ask companies, are you're planning to do mass layoffs?
Speaker 3: And the answer to that at the moment is there's
Speaker 3: no increase in mass layoffs. In the dual survey, the
Speaker 3: layoff rate, meaning the percentage of people who lose their jobs,
Speaker 3: is at one percent. So total employment in the US
Speaker 3: is about one hundred and sixty million people have a job,
Speaker 3: so the layoff rate means that one percent get involuntarily
Speaker 3: fired every month, so that's one point six million people.
Speaker 3: But that's been very flat for the last two years.
Speaker 3: There's no increase in the lay off rate. So in
Speaker 3: that sense, there's a lot of worries, and there's certainly
Speaker 3: a lot of things on the horizon, including election, to
Speaker 3: your political risk, other things you can begin to think about.
Speaker 3: But the bottom line still is that the incoming data,
Speaker 3: it just continues to show that the economy is doing
Speaker 3: just fine. Job as claims, we had some hurricane issues,
Speaker 3: but look at the next non found payrolls report. If
Speaker 3: we do get that at one hundred and fifty or
Speaker 3: two hundred thousand, we could easily get a scenario where
Speaker 3: they fit will basically have the reverse course and begin
Speaker 3: to stay on hold.
Speaker 4: Are you saying that you're completely discounting the next jobs
Speaker 4: or forth that we get.
Speaker 3: So I will say that I think the pain trade
Speaker 3: for the market is that if it's a lot better,
Speaker 3: because everyone is expecting it to be bad now, So
Speaker 3: that's why if everyone is speaks to be bad, then
Speaker 3: then well that could either be the economy slowing down
Speaker 3: or could be the hurricanes. But imagine if that comes
Speaker 3: in at one hundred and fifty or two hundred, then
Speaker 3: I think the market will say, whoa, maybe things.
Speaker 1: Are not that bad.
Speaker 3: So I think taking the totality of the data the
Speaker 3: mostsake of what's going on in the incoming data, it
Speaker 3: still tells me that we are in the no landing scenario.
Speaker 3: It's just really difficult to argue that Marsterrypolsi is restrictive.
Speaker 2: How many moments of this do you need for the
Speaker 2: Federal Reserve to come around? See your view of the world.
Speaker 2: It's November seventh too early.
Speaker 3: So I do think that the next employment report obviously
Speaker 3: is very important, but I think that everyone is expecting
Speaker 3: him now to be bad. So that's why I think
Speaker 3: it will not take much more than a little bit
Speaker 3: better than expected in poor report.
Speaker 2: By the way, because you said one fifty might be
Speaker 2: sort of the pain trade.
Speaker 3: Well, as you know from Tara Watson and Andy Whittlberg
Speaker 3: at the Handlson Institute at Brookings, they have been quantifying
Speaker 3: what is the level of employment growth that way, I've
Speaker 3: had so much immigration, and their estimates have said, well,
Speaker 3: we should be more like two hundred thousand. Now the
Speaker 3: question is, well, if we do get one hundred and fifty, well,
Speaker 3: that would certainly be below that. But if you're correct
Speaker 3: for hurricanes and all the other things that are holding
Speaker 3: things down, well, then I would say a good report
Speaker 3: would certainly be even something at one hundred and fifty.
Speaker 3: Bad would be below one hundred thousand. But at the moment, again,
Speaker 3: the totality of the data that comes in, it completely
Speaker 3: justifies both why FITS pricing is changing and also why
Speaker 3: long rates are going on.
Speaker 4: John asked a question about potential reinflation, which I think
Speaker 4: is a really important one because even as people see
Speaker 4: all of this robustness, they still see prices on a
Speaker 4: year over year basis continuing to come down, And that
Speaker 4: alone is enough to justify some of the FED moves.
Speaker 4: When you take a look at the panapoly of potential
Speaker 4: policy that we could potentially get. When you start talking
Speaker 4: about manufacturing more in the US, when you start talking
Speaker 4: about tax cuts, how much does that actually feed into inflation?
Speaker 4: What are you models looking at?
Speaker 3: Well, what's most important is what is the fiscal impetus?
Speaker 3: In other words, how much does it support GDP and
Speaker 3: Of course, if you look at it from the broadest perspective,
Speaker 3: the Trump tax cuts that are running out by late
Speaker 3: twenty twenty five become very important in that discussion. But
Speaker 3: that's still quite some time and way only in twenty
Speaker 3: twenty six. So the story here and now is still
Speaker 3: in the very near term that we still have tailwinds
Speaker 3: from the fundamental reasons why the economy continues to do
Speaker 3: so well. But to your question LeadSA what really becomes
Speaker 3: important for inflation is that if this easing that now
Speaker 3: is being signaled by the Fed begins to mean that
Speaker 3: we still have more job growth, we still have more
Speaker 3: weights growth, which are very important drivers of housing demand.
Speaker 3: That means that the forty percent of the CPI basket
Speaker 3: that is housing, if that begins to reaccelerate, then we
Speaker 3: could have the risks that that inflation begins to move
Speaker 3: higher again. So that's why we're watching very very carefully
Speaker 3: what's going on in the housing market at the moment,
Speaker 3: because there's already a number of indicators suggesting some most
Speaker 3: signs of life which could potentially begin to be that
Speaker 3: problem that inflation could begin to move higher because of
Speaker 3: housing inflation moving high, is that.
Speaker 5: Just a vicious cycle. Basically, people think the Fed's going
Speaker 5: to cut more, so they start to potentially look at
Speaker 5: maybe getting on the property ladder, maybe going out and
Speaker 5: getting construction done on their homes.
Speaker 3: Well, the FED has since December been signaling that now
Speaker 3: rates are going down. The pivot in December of last
Speaker 3: year was certainly after having said for several years rates
Speaker 3: are going up, up, up, So now say rates are
Speaker 3: going down and at the same time, the key drivers
Speaker 3: of housing demand, of course, are three things. Mortgage rates,
Speaker 3: of course they are a little bit up now again.
Speaker 3: But the two other key factors are wage and income growth,
Speaker 3: and at the same time job growth and waste growth,
Speaker 3: and job growth still doing fine. So it's not prising
Speaker 3: that we're seeing the housing indicators begin to show more
Speaker 3: signs of life.
Speaker 5: Let's talk about fiscal policy. You see in the bond
Speaker 5: market today. Some people come on this program saying this
Speaker 5: is down to a Trump trade.
Speaker 3: Do you believe that. Well, if you look at your
Speaker 3: Bloomberg screen at the term premium both from the San
Speaker 3: Francisco Fed by YenS Christensen and also the New York
Speaker 3: Fed term premium, they have been going up quite a lot.
Speaker 3: And when it is start to go up. It started
Speaker 3: going up exactly after the last employment report. So in
Speaker 3: that sense, I would say that most of the rise
Speaker 3: in the term premium we're seeing here, meaning most of
Speaker 3: the rise of why is it that people are now
Speaker 3: bidding higher rates to go up and why is the
Speaker 3: ould curves deepening is because of this issue that people
Speaker 3: are looking at it from that the business cycle is
Speaker 3: simply a lot stronger than what we thought before. So
Speaker 3: there's probably a lot of people that are squeezed out
Speaker 3: of the short view, meaning that the economy is going
Speaker 3: down and maybe it's now not going down and therefore
Speaker 3: rates have to go up. But there's probably also a
Speaker 3: lot of people that are beginning to come to the
Speaker 3: conclusion that, hey, maybe Martins Harry policy is not as
Speaker 3: restrictive as the Fed has been saying, and as the
Speaker 3: market has been selling itself for quite some time.
Speaker 4: Tour certain in your scenary or your look at the
Speaker 4: world as it is, does that mean that where rates are,
Speaker 4: even if they go to four and a half percent
Speaker 4: on the tenure, you could see a sustainable rally in
Speaker 4: equities that essentially this is a less bond sensitive equity
Speaker 4: market than a lot of people.
Speaker 3: Think, well, I do still think that corporate earnings actually
Speaker 3: are still doing quite well. What really is the key
Speaker 3: issue for investors this here is that if yield level
Speaker 3: is higher, that means that private credit will continue to
Speaker 3: give you high yels, fixed income will continue to give
Speaker 3: you high yels, and for investors an asset allocation, the
Speaker 3: key message is we are not going back to zero.
Speaker 3: So therefore capalis structures that were put in place when
Speaker 3: it's just raised for zero will continue to be vulnerable.
Speaker 3: Or put in different words, companies that have earnings continue
Speaker 3: to be attractive, both on the debt and on the
Speaker 3: equity side. And the reason why that's important is that
Speaker 3: that also means for equities that this discussion about small
Speaker 3: cap relative to large cap will continue to dominate the
Speaker 3: debate in the equity space because small cap will continue
Speaker 3: to be vulnerable if rates are higher for longer. Because again,
Speaker 3: if I have a company with no revenue, no cash flow,
Speaker 3: no earnings, of course, when my debt servicing cars go
Speaker 3: up and stay higher for longer, of course I'm going
Speaker 3: to get in trouble before other companies that actually have earnings.
Speaker 3: So that's why it is all about investing in companies
Speaker 3: out of earnings and looking at it both on the
Speaker 3: equity side, and that's why those parts of the equity
Speaker 3: and private equity world where you invest in companies with
Speaker 3: earnings will generally you tend to do a lot better.
Speaker 2: Towston, this was a clinic. It always is. We appreciate it.
Speaker 2: We've had a healthy debate over the last few months
Speaker 2: on this topic of the data's moving your way, that's
Speaker 2: for sure. Towston's slock there of Apollo, Brent Shuley of
Speaker 2: Northwestern Mutuals saying this, Well, it maybe months before we
Speaker 2: know if the FED is able to cut rates fast
Speaker 2: enough to resuscitate weak areas of the economy. The bifurcated
Speaker 2: nature of the economy brings with it risk, but simply
Speaker 2: there is less room for error when only a fraction
Speaker 2: of the economy is healthy. Brent joins us now for
Speaker 2: more brand welcome back to the program. Last time we
Speaker 2: had this conversation, we were debating whether this FED is
Speaker 2: too late. There are people around this table now saying
Speaker 2: that maybe this FED was too early. What'd you say
Speaker 2: back to them?
Speaker 6: I think that highlights a difficult path going forward for
Speaker 6: the FED. Look investors, are way too optimistic that the
Speaker 6: FED is going to cut rates in a nice, neat
Speaker 6: and tidy way. There is the possibility they cut two
Speaker 6: rates too quickly, the possibility that they cut rates too late.
Speaker 6: They don't know, We don't know, and I think that's
Speaker 6: where the risk are is if there is the chance
Speaker 6: that the FED has cut too early already and that
Speaker 6: inflation pressures are coming back. The narrative was the FED
Speaker 6: would cut rates, everything would be well, and it would
Speaker 6: alleviate the interest pain on certain parts of the economy. Well,
Speaker 6: the FED cut rates in the tenure Treasury sixty basis
Speaker 6: points higher, which has pushed mortgage rates higher, which has
Speaker 6: made housing more unaffordable for most every American in the country.
Speaker 2: So, Brent, beant if you want to buy a house,
Speaker 2: where does it leave the equity market. You've a cautious
Speaker 2: last time around. You've a cautious on launch camps. I
Speaker 2: believe sol any more bullish on smalls. Has that changed?
Speaker 6: No, that's the irony. I mean, you've had a bifurcated
Speaker 6: economy and a bifurcated market. At some point we have
Speaker 6: to get back to equilibrium. How do we do that
Speaker 6: longer term? I think is the question, and do we
Speaker 6: need a recession to do it, which historically has been
Speaker 6: the way.
Speaker 1: That you've got an economy back into equilibrium.
Speaker 6: I think the irony is there's opportunities in small and
Speaker 6: midcaps because yes, they are interest rates sensitive. Who doesn't
Speaker 6: know that. I could say, stay in quality for a
Speaker 6: while and it could continue to work. But think about
Speaker 6: the other side. What happened in July when we thought
Speaker 6: the other side was coming. There was a ferocious rally
Speaker 6: and small and mid which are historically cheap, And that's
Speaker 6: where I think any investor should think about right now.
Speaker 6: Given that uncertainty, look to valuations, which tend to matter
Speaker 6: more over the intermediate time period as you're guiding light
Speaker 6: and guiding posts.
Speaker 1: And that's where we're positioned right now.
Speaker 2: Bret.
Speaker 4: I'm trying to put these two things together, and I'm
Speaker 4: a little bit confused because if there is this risk
Speaker 4: of no landing and inflation being stickier than expected and
Speaker 4: frankly longer term yields rising, if the FED cuts more,
Speaker 4: why go into the more interest rate sensitive stocks that
Speaker 4: actually hinge and do better when you get more FED
Speaker 4: rate cuts, which don't seem like they'd be in the
Speaker 4: offing given some of the better than expected data and
Speaker 4: the performance that we've seen in bonds are.
Speaker 6: Look, at the end of the day, the Fed knows
Speaker 6: how to get inflation down. It knows how to kind
Speaker 6: of stem inflation overall. We saw what had to happen
Speaker 6: back in the eighties. To me, it's always about what
Speaker 6: happens next in marketing and what's not priced. If you
Speaker 6: look at nineteen ninety nine two thousand, which I think
Speaker 6: is a perfect example of where we're at, when the
Speaker 6: market was concentrated and we were in economic cycle, over time,
Speaker 6: you actually saw a small and middew better into that
Speaker 6: recession and thereafter because they had already priced in the
Speaker 6: fact that it was likely we're going to have a recession.
Speaker 1: And that's where I think we're at right now.
Speaker 6: And that's where I think, thinking beyond the next three
Speaker 6: six and nine months and thinking out to the next
Speaker 6: two three five years, that's where I.
Speaker 1: Want to be a positioned because no one's thinking that
Speaker 1: way any longer.
Speaker 4: One thing that you point out is and you keep saying,
Speaker 4: is valuations. That's one of the main drivers for you
Speaker 4: right now. Given how high valuations are, particularly in large caps.
Speaker 4: That's the area you like least. Why is an argument
Speaker 4: not valid? Would say investment grade bonds where spreads are
Speaker 4: pretty tight and valuations are pretty full.
Speaker 1: So it is.
Speaker 6: I mean, look, I agree longer term interest rates are
Speaker 6: likely to be higher, but I think the path is
Speaker 6: lower at some point, just because I do think you're
Speaker 6: going to have to have a recession to kind of
Speaker 6: clear the deck of all the abnormalities that are out
Speaker 6: in the economy, where you have the haves that are
Speaker 6: winning quite a bit and the havenots that are not.
Speaker 6: This is where I think we want to be more
Speaker 6: towards treasury debt, even though I do see longer term
Speaker 6: risks there. I think there will be a flight to quality,
Speaker 6: much like there was back in July, believe it or not,
Speaker 6: and that's where I think we want to be positioned
Speaker 6: more so so, not so much out on high yield.
Speaker 6: I think investment grade high quality is still a place
Speaker 6: to be as you think about the reality that the
Speaker 6: FED will only be able to cut rates aggressfully if
Speaker 6: they do see a recession on the horizon.
Speaker 5: Brent, We're fourteen days out from the US election, so
Speaker 5: I have to ask about how you're potentially your advice
Speaker 5: for positioning ahead of that. You like the small caps.
Speaker 5: Do you think that is a Trump trade that's on
Speaker 5: right now because of policy or because of economics?
Speaker 6: You know, I think it's a bit of each. Look,
Speaker 6: I don't want to overweight the election too much. I
Speaker 6: don't think anyone knows what the outcome is likely to be,
Speaker 6: and therefore, if I don't know what the outcome is
Speaker 6: going to be, I don't try to position too much
Speaker 6: for it.
Speaker 1: It certainly in the background.
Speaker 6: I think the more important thing is the economic cycle,
Speaker 6: which I keep coming back to. Look, we are later
Speaker 6: in an economic cycle. Yes, the unemployment rate has risen,
Speaker 6: but it's still low. Where are we going to find
Speaker 6: the people to fill the supply that is needed if
Speaker 6: demand reaccelerates. And to me, that's where I think that's
Speaker 6: the most important thing. And no matter who wins, I
Speaker 6: think they are likely to preside over a recession in
Speaker 6: the next four years. I think they're likely to preside
Speaker 6: over a market, especially large cap stocks that are historically expensive,
Speaker 6: that does less. That's where I think investors should be optimistic.
Speaker 6: On the other side, where things are cheaper and will
Speaker 6: do better. I think when we get to the other
Speaker 6: side of whatever lies ahead.
Speaker 5: Get to the other side. Yeah, we're all looking forward
Speaker 5: to getting to the other side. When it comes to
Speaker 5: this idea of potentially your recession call could potentially the
Speaker 5: policy of whatever administration we get next further push the
Speaker 5: US in that direction, or do you think that is
Speaker 5: going to happen regardless.
Speaker 6: I think it's likely to happen regardless. Look, you have
Speaker 6: a really unbalanced economy that has been demarketed by interest
Speaker 6: rates and ownership of financial assets.
Speaker 1: It's not balanced.
Speaker 6: The economy is being pushed higher by higher income and
Speaker 6: middle income consumers who have had a wealth effect at
Speaker 6: their tails. If you have debt and you don't own
Speaker 6: a house, you probably don't feel as.
Speaker 1: Confident about what's going to happen going forward.
Speaker 6: And so to me, I do think there are still
Speaker 6: risks that are out there, and that's all we're asking
Speaker 6: is that investors pay attention to those risks and importantly
Speaker 6: stay diversified, which does tend to pay off at the
Speaker 6: end of economic cycles, which I think is still out
Speaker 6: there on the horizon.
Speaker 4: But what it sounds like to me is that in
Speaker 4: some ways you agree with this call that we heard
Speaker 4: from Goldman Sachs and that Cameron Dawson over at New
Speaker 4: Edges seem to agree with that equity returns on labarge
Speaker 4: caps are probably pretty muted over the next decade or so,
Speaker 4: and so you're basically trying to shift things around on
Speaker 4: a valuation basis with that expectation that there isn't going
Speaker 4: to be some sort of massive acceleration.
Speaker 1: Is that correct one hundred percent?
Speaker 6: I mean to me, evaluation does tend to matter. It
Speaker 6: does not matter in the short term. It's an imperfect
Speaker 6: timing tool, but I think about the regime change it's
Speaker 6: likely to occur. Look, every economic cycle back to the
Speaker 6: eighties has had new market leadership, and the prior leaders
Speaker 6: have become the next cycles laggards because the economy changes
Speaker 6: and those asset classes are typically priced for perfection at
Speaker 6: the end.
Speaker 1: And that's where I think we're at.
Speaker 6: And how do you transition from what worked in the
Speaker 6: past cycle to what we think will work in the future.
Speaker 6: That's the difficulty of trying to explain the positioning that
Speaker 6: we have. It's just that at the end of the day,
Speaker 6: valuation does tend to matter. I don't think valuation is dead.
Speaker 6: I hear that argument, I'll be doing this for thirty years.
Speaker 6: It typically gets loudest at the end of an economic
Speaker 6: cycle where people are really tempted to concentrate in yesteryear's winners.
Speaker 6: Eventually that becomes losing strategy. And that's where I want
Speaker 6: investors to stay diversified, stay true to their plan, and
Speaker 6: think about the reality that asset classes don't die, they.
Speaker 1: Just go to sleep for a while.
Speaker 6: And that's where I think there'll be new winners in
Speaker 6: the opposite side of whatever comes in the next few months.
Speaker 2: This wastfo frand we appreciate it. Thank you, sir, friend
Speaker 2: Shitty daf No Western Mutualice kurk Ryman of UBS, assigning
Speaker 2: a forty five percent chance Harris wins with a split Congress,
Speaker 2: writing a Democratic sweep would likely be the most negative
Speaker 2: outcome for equities. Markets would likely cheer a Republican suite
Speaker 2: for its lower taxes and lights of regulation, but this
Speaker 2: could be partially offset by concerns about the costs and
Speaker 2: inflation impact. Some places say that in a studio Kirk
Speaker 2: John just now Kirk and Monitorer, it's good to be
Speaker 2: with you. You are in a fantastic seat because you
Speaker 2: sit on both the fixed income side of things, and
Speaker 2: you have to deal with the politics in this election
Speaker 2: over the next few weeks. Can you tell us how
Speaker 2: much of an election impact you think we're already seeing
Speaker 2: in fixed income.
Speaker 7: I think there may be some of an impact, because
Speaker 7: it's not just happening in the bond market. You're seeing
Speaker 7: in some of the sectors within the stock market that
Speaker 7: would tend to favor a Trump victory in his numbers
Speaker 7: have improved in the paws least. But I think the
Speaker 7: bond market's also telling another story, which is at the
Speaker 7: front end of the yield curve was pricing in more
Speaker 7: aggressive FED rate cuts than we thought was reasonable. But
Speaker 7: also the growth backdrop has improved, so we've seen a
Speaker 7: bit of a of a of a bare flattening of
Speaker 7: the curve over the past call it month or so.
Speaker 7: I think that move higher in yields is more about
Speaker 7: a growth pickup than it is about anything related to
Speaker 7: necessarily concerns about inflation. So if we get inflation leading
Speaker 7: to higher rates.
Speaker 1: Then I'm concerned.
Speaker 7: But at a four call it four fifteen, four to
Speaker 7: twenty yield on the tenure, that's looking more.
Speaker 5: Attractive, So you don't think, actually, what the bond market
Speaker 5: is saying is Trump winning.
Speaker 7: I think this is much more about the growth backdrop.
Speaker 7: I think the election outcome is very much a secondary
Speaker 7: factor because, let's face it, the polls are still very tight.
Speaker 7: This can go either way. The battleground states, the four
Speaker 7: of them are within a percentage point. So this is
Speaker 7: not an election that has been decided. We still have,
Speaker 7: as you know, a couple of weeks to go. Because
Speaker 7: of that, it would seem unlikely that the bond market
Speaker 7: and the equity market would be pricing in today a
Speaker 7: more complete picture of how this election is going to unfold.
Speaker 5: But as Jim Caram was saying, whether or not it's
Speaker 5: Harris or Trump, it could be inflationary. With Trump you
Speaker 5: get tariffs, and with Harris you get higher corporate taxes.
Speaker 5: Both of these could be very inflationary. Also, it's going
Speaker 5: to be tax cut for people like in the middle income.
Speaker 5: Why wouldn't the bond market just be pricing in that environment.
Speaker 7: I think that's missing a big element of what we're
Speaker 7: seeing unfold in DC over the next administration, at least
Speaker 7: the next two years, and that is constraints on government.
Speaker 7: So you think about the Senate and the House. If
Speaker 7: you get a united government, you're going to have very
Speaker 7: narrow majorities. And the prospects for divided government under Harris
Speaker 7: are quite high because the Senate looks very likely to
Speaker 7: shift Republican. So when it comes to all of the
Speaker 7: policy prescriptions that have been put out on the campaign trail,
Speaker 7: not a lot of them are going to get done.
Speaker 7: I think when it comes to personal income tax cuts
Speaker 7: and extending those, we'll probably get.
Speaker 1: Most, if not all of them.
Speaker 7: But on the corporate tax side, when you think about
Speaker 7: the current state of deficits and the debt load, adding
Speaker 7: another tax cut in the case of Trump is going
Speaker 7: to be hard to do with the fiscal hawks. And
Speaker 7: if you have divided government under Harris, well, I mean,
Speaker 7: then that's just a non starter.
Speaker 4: So if you don't think that what we're seeing right
Speaker 4: now in the bond market is a Trump trade, are
Speaker 4: you saying that the market is not going to price
Speaker 4: in some of those fears of higher deficits, higher inflation, etc.
Speaker 4: In the direct aftermath if Trump does what? In other words,
Speaker 4: could you see yields climbing quite significantly in the immediate aftermath.
Speaker 7: Yes, there's going to be the knee jerk reaction as
Speaker 7: there always is. We could get at a bear steepener
Speaker 7: of the yield curve in the event of a Trump victory.
Speaker 7: We could get the dollar appreciating quite a bit, even
Speaker 7: though it's already very expensive. So you think about some
Speaker 7: of those reactions, Yes, but then I think the market's
Speaker 7: going to get back to what is the foundational elements
Speaker 7: of the markets that we're seeing today, which is that
Speaker 7: the economy is strong, that the Fed is cutting interest
Speaker 7: rates into the end of next year, and maybe even
Speaker 7: further than that. We've had strong earnings growth. We think
Speaker 7: earnings growth is going to remain strong next year. Where
Speaker 7: are the concerns on a Trump victory. Yeah, sure, it's
Speaker 7: on tariffs, But then the question is is how strong
Speaker 7: will they be. They get more stagflationary the more that
Speaker 7: tariffs are raised, but then that has sort of cycles
Speaker 7: back on itself. If it becomes inflationary and bad for
Speaker 7: the economy, then maybe that'll be a signal to the
Speaker 7: administration that they want to do a deal or some
Speaker 7: kind of an adjustment.
Speaker 4: Terry Wiseman was talking about how his key tell will
Speaker 4: be if the dollar weakends in tandem with yields going
Speaker 4: higher after this election. Do you see that as a
Speaker 4: possibility if international investors get concerned about the US deficit.
Speaker 7: Yeah, I mean, I still think that deficits and debt
Speaker 7: are more of a secondary factor. They're not showing up
Speaker 7: in influencing where the bond market is headed. The bond
Speaker 7: market's principal direction is coming from the macroeconomy. It's coming
Speaker 7: from the decline and inflation rates, the sort of trend
Speaker 7: rate of growth in the economy or if you will,
Speaker 7: nominal GDP. I mean, we're sort of getting back there.
Speaker 7: I also think though, that it's possible that the dollar
Speaker 7: could weaken, very likely because it is so strong right now.
Speaker 7: So the longer term view, and what we tell our
Speaker 7: clients is keep with the long term, keep the focus
Speaker 7: on your strategic portfolio weights, focus on it makes some
Speaker 7: tax trades if you can that you think makes sense.
Speaker 7: But for the most part, hue towards your strategic acid allocation.
Speaker 2: Kurt, this was great. We've got to do it again soon.
Speaker 2: It's going to say and before the election two weeks ago. Kurt.
Speaker 2: Thank you, Kurt Ramming there of ubs. This is the
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