WEBVTT - Bloomberg Surveillance TV: October 22, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.760 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.440 Terminal and the Bloomberg Business app. Towston Slock of Apollo 0:00:37.720 --> 0:00:40.559 saying ten tail winds are increasing the likelihood that the 0:00:40.560 --> 0:00:43.479 FED will have to reverse course at its November meeting. 0:00:43.720 --> 0:00:47.280 Ensure the no landing continues. Torson' whe us around the table, 0:00:47.320 --> 0:00:50.080 Torston cad Mornic. When you say reverse course, do you 0:00:50.120 --> 0:00:51.880 mean pause or start gown the other way? 0:00:51.960 --> 0:00:52.560 I mean pause? 0:00:52.640 --> 0:00:55.120 You mean pause? Okay, share the ten tail winds with. 0:00:55.160 --> 0:00:57.960 Us well, So the key tail winds, of course. 0:00:57.720 --> 0:00:58.440 Not a memory test. 0:00:58.520 --> 0:00:58.960 Pick five. 0:01:00.120 --> 0:01:02.080 That's a lot of things that are supported for of course, 0:01:02.160 --> 0:01:04.880 first of all, most importantly, when the FED turn stubbage, 0:01:05.440 --> 0:01:07.959 financial conditions begin to ease. This has been a very 0:01:08.000 --> 0:01:10.080 strong tail in just in the last few weeks since 0:01:10.080 --> 0:01:13.600 the September meeting. Second, of all, underline the growth outlook, 0:01:13.600 --> 0:01:15.880 we also have the Chips Act, the Inflation of our Check, 0:01:15.920 --> 0:01:18.840 the Infrastructure Act. Those are also very strong tailwinds that 0:01:18.880 --> 0:01:23.080 continue to provide support to construction of manufacturing facilities. We 0:01:23.160 --> 0:01:25.040 also have, on top of that a lot of spending 0:01:25.120 --> 0:01:28.319 on data centers on AI. I have not met anyone 0:01:28.360 --> 0:01:30.040 who is saying, oh, I'm not going to build a 0:01:30.080 --> 0:01:32.160 data center because the FIT just raised race twenty five 0:01:32.200 --> 0:01:34.800 basis points. On the contrary, this is a structural force. 0:01:35.040 --> 0:01:37.840 It doesn't matter what interest rates are doing. At the 0:01:37.880 --> 0:01:40.959 same time, we also have at the highest level, stock 0:01:41.080 --> 0:01:44.080 markets are rallying, credit markets are very tight, and at 0:01:44.080 --> 0:01:47.680 the same time, consumers are still very strong. So overall, 0:01:47.760 --> 0:01:50.440 the tailwinds in the form of what will the outlook 0:01:50.480 --> 0:01:52.760 look like for the next level quarters just continues to 0:01:52.880 --> 0:01:55.800 not be surprising. Why we're getting still two hundred and 0:01:55.800 --> 0:01:58.760 fifty four thousand jobs. Why GDP growth in the second 0:01:58.840 --> 0:02:01.160 quarter was three percent and Atlanta VEGDPN now for the 0:02:01.160 --> 0:02:03.160 third quarter is three point four. I mean, you really 0:02:03.240 --> 0:02:05.320 do begin to ask the question where is to slow down? 0:02:05.560 --> 0:02:09.400 And as we've been debating before, is monetary policy really restrictive? 0:02:09.720 --> 0:02:12.040 If it is so restrictive, why is the economy still 0:02:12.040 --> 0:02:12.680 doing so well. 0:02:12.919 --> 0:02:15.919 They don't just believe it's restrictive. They believe it's sufficiently 0:02:16.200 --> 0:02:18.840 restrictive to get inflation back down to two percent of 0:02:18.919 --> 0:02:20.840 a certain period of time. Do you have your dance then. 0:02:21.160 --> 0:02:23.960 True, Well, it becomes a bit of a semantics of 0:02:23.960 --> 0:02:25.960 what exactly does it mean, because it was for a 0:02:25.960 --> 0:02:28.160 long time the argument that when the fit funds rate 0:02:28.360 --> 0:02:30.880 is where it is at the moment at five percent, 0:02:31.200 --> 0:02:33.040 and if we're supposed to go to our style, which 0:02:33.080 --> 0:02:35.600 is three percent, that must imply, if you have that 0:02:35.680 --> 0:02:37.919 model in your mind, that we have very restricted policy. 0:02:38.000 --> 0:02:40.040 But the incoming data across the board, if you look 0:02:40.080 --> 0:02:41.880 at the daily data on your Bloomberg screen for how 0:02:41.880 --> 0:02:44.000 many people go to restaurants are still very strong, how 0:02:44.000 --> 0:02:47.160 many people flying airplanes? Daily data also very strong. Debit 0:02:47.200 --> 0:02:50.280 card spending on my Bloomberg terminal, also daily data very strong, 0:02:50.480 --> 0:02:53.359 weekly day for retail sales strong. The number of people 0:02:53.440 --> 0:02:57.720 who are at the moment spending across basically most categories 0:02:57.720 --> 0:02:59.920 of consumption as we saw in the retail sales report 0:03:00.080 --> 0:03:02.760 week also very strong. So in that sense, it's not 0:03:02.800 --> 0:03:05.160 even the case that there was a slowdown last week. 0:03:05.280 --> 0:03:07.760 It's still the case that things are still chugging along 0:03:07.840 --> 0:03:08.359 very nicely. 0:03:08.480 --> 0:03:11.200 That said, you are seeing in surveys and talking to 0:03:11.280 --> 0:03:14.280 different executives that they're not really planning on hiring mass 0:03:14.280 --> 0:03:18.240 groups of people, that they're actually allowing attrition to shrink 0:03:18.320 --> 0:03:22.040 their workforces. You are seeing signs that there is sort 0:03:22.040 --> 0:03:24.680 of evening out in the labor front, and that seems 0:03:24.680 --> 0:03:26.840 to be the big concern for the Federal Reserve that 0:03:26.880 --> 0:03:29.360 sees that as a slower moving ship. Why do you 0:03:29.400 --> 0:03:32.800 think that isn't enough to really create a landing. 0:03:33.040 --> 0:03:35.320 Well, if you look at the Chatlender Grand and Christmas 0:03:35.320 --> 0:03:38.400 survey of the announced job cuts, that's still very low. 0:03:38.480 --> 0:03:40.000 This is a monst the series where they go out 0:03:40.000 --> 0:03:42.600 and ask companies, are you're planning to do mass layoffs? 0:03:42.720 --> 0:03:44.280 And the answer to that at the moment is there's 0:03:44.360 --> 0:03:47.560 no increase in mass layoffs. In the dual survey, the 0:03:47.840 --> 0:03:50.680 layoff rate, meaning the percentage of people who lose their jobs, 0:03:50.760 --> 0:03:53.000 is at one percent. So total employment in the US 0:03:53.040 --> 0:03:55.040 is about one hundred and sixty million people have a job, 0:03:55.280 --> 0:03:58.480 so the layoff rate means that one percent get involuntarily 0:03:58.520 --> 0:04:00.840 fired every month, so that's one point six million people. 0:04:00.920 --> 0:04:03.080 But that's been very flat for the last two years. 0:04:03.240 --> 0:04:05.400 There's no increase in the lay off rate. So in 0:04:05.400 --> 0:04:07.840 that sense, there's a lot of worries, and there's certainly 0:04:07.840 --> 0:04:10.320 a lot of things on the horizon, including election, to 0:04:10.360 --> 0:04:12.600 your political risk, other things you can begin to think about. 0:04:12.760 --> 0:04:14.680 But the bottom line still is that the incoming data, 0:04:15.000 --> 0:04:17.479 it just continues to show that the economy is doing 0:04:17.560 --> 0:04:20.320 just fine. Job as claims, we had some hurricane issues, 0:04:20.360 --> 0:04:22.840 but look at the next non found payrolls report. If 0:04:22.839 --> 0:04:24.280 we do get that at one hundred and fifty or 0:04:24.279 --> 0:04:27.480 two hundred thousand, we could easily get a scenario where 0:04:27.480 --> 0:04:29.920 they fit will basically have the reverse course and begin 0:04:30.000 --> 0:04:30.880 to stay on hold. 0:04:30.960 --> 0:04:33.240 Are you saying that you're completely discounting the next jobs 0:04:33.279 --> 0:04:34.080 or forth that we get. 0:04:34.200 --> 0:04:37.160 So I will say that I think the pain trade 0:04:37.200 --> 0:04:39.080 for the market is that if it's a lot better, 0:04:39.320 --> 0:04:41.920 because everyone is expecting it to be bad now, So 0:04:42.000 --> 0:04:43.760 that's why if everyone is speaks to be bad, then 0:04:43.800 --> 0:04:45.760 then well that could either be the economy slowing down 0:04:45.839 --> 0:04:47.600 or could be the hurricanes. But imagine if that comes 0:04:47.600 --> 0:04:49.640 in at one hundred and fifty or two hundred, then 0:04:49.720 --> 0:04:51.479 I think the market will say, whoa, maybe things. 0:04:51.279 --> 0:04:51.960 Are not that bad. 0:04:52.120 --> 0:04:54.920 So I think taking the totality of the data the 0:04:55.000 --> 0:04:57.760 mostsake of what's going on in the incoming data, it 0:04:57.760 --> 0:05:00.000 still tells me that we are in the no landing scenario. 0:05:00.080 --> 0:05:03.400 It's just really difficult to argue that Marsterrypolsi is restrictive. 0:05:03.600 --> 0:05:05.040 How many moments of this do you need for the 0:05:05.080 --> 0:05:07.559 Federal Reserve to come around? See your view of the world. 0:05:07.600 --> 0:05:08.920 It's November seventh too early. 0:05:09.080 --> 0:05:11.279 So I do think that the next employment report obviously 0:05:11.360 --> 0:05:13.400 is very important, but I think that everyone is expecting 0:05:13.440 --> 0:05:15.320 him now to be bad. So that's why I think 0:05:15.360 --> 0:05:16.840 it will not take much more than a little bit 0:05:16.880 --> 0:05:18.200 better than expected in poor report. 0:05:18.240 --> 0:05:20.080 By the way, because you said one fifty might be 0:05:20.200 --> 0:05:21.159 sort of the pain trade. 0:05:21.200 --> 0:05:23.880 Well, as you know from Tara Watson and Andy Whittlberg 0:05:24.000 --> 0:05:27.760 at the Handlson Institute at Brookings, they have been quantifying 0:05:27.839 --> 0:05:30.080 what is the level of employment growth that way, I've 0:05:30.080 --> 0:05:32.560 had so much immigration, and their estimates have said, well, 0:05:32.560 --> 0:05:34.800 we should be more like two hundred thousand. Now the 0:05:34.920 --> 0:05:36.960 question is, well, if we do get one hundred and fifty, well, 0:05:36.960 --> 0:05:38.719 that would certainly be below that. But if you're correct 0:05:38.760 --> 0:05:40.960 for hurricanes and all the other things that are holding 0:05:41.000 --> 0:05:43.120 things down, well, then I would say a good report 0:05:43.160 --> 0:05:44.960 would certainly be even something at one hundred and fifty. 0:05:44.960 --> 0:05:48.160 Bad would be below one hundred thousand. But at the moment, again, 0:05:48.200 --> 0:05:50.719 the totality of the data that comes in, it completely 0:05:50.839 --> 0:05:53.960 justifies both why FITS pricing is changing and also why 0:05:53.960 --> 0:05:54.760 long rates are going on. 0:05:55.000 --> 0:05:58.440 John asked a question about potential reinflation, which I think 0:05:58.520 --> 0:06:00.680 is a really important one because even as people see 0:06:00.839 --> 0:06:03.719 all of this robustness, they still see prices on a 0:06:03.760 --> 0:06:05.960 year over year basis continuing to come down, And that 0:06:06.040 --> 0:06:08.320 alone is enough to justify some of the FED moves. 0:06:08.640 --> 0:06:11.680 When you take a look at the panapoly of potential 0:06:11.800 --> 0:06:15.119 policy that we could potentially get. When you start talking 0:06:15.120 --> 0:06:18.159 about manufacturing more in the US, when you start talking 0:06:18.200 --> 0:06:22.160 about tax cuts, how much does that actually feed into inflation? 0:06:22.279 --> 0:06:23.600 What are you models looking at? 0:06:23.839 --> 0:06:26.840 Well, what's most important is what is the fiscal impetus? 0:06:26.839 --> 0:06:29.560 In other words, how much does it support GDP and 0:06:29.640 --> 0:06:31.800 Of course, if you look at it from the broadest perspective, 0:06:31.920 --> 0:06:34.560 the Trump tax cuts that are running out by late 0:06:34.560 --> 0:06:37.360 twenty twenty five become very important in that discussion. But 0:06:37.400 --> 0:06:40.000 that's still quite some time and way only in twenty 0:06:40.120 --> 0:06:42.040 twenty six. So the story here and now is still 0:06:42.200 --> 0:06:44.919 in the very near term that we still have tailwinds 0:06:45.000 --> 0:06:47.640 from the fundamental reasons why the economy continues to do 0:06:47.680 --> 0:06:49.960 so well. But to your question LeadSA what really becomes 0:06:49.960 --> 0:06:54.080 important for inflation is that if this easing that now 0:06:54.480 --> 0:06:57.320 is being signaled by the Fed begins to mean that 0:06:57.360 --> 0:06:59.560 we still have more job growth, we still have more 0:06:59.560 --> 0:07:02.359 weights growth, which are very important drivers of housing demand. 0:07:02.720 --> 0:07:04.960 That means that the forty percent of the CPI basket 0:07:05.000 --> 0:07:07.800 that is housing, if that begins to reaccelerate, then we 0:07:07.839 --> 0:07:10.240 could have the risks that that inflation begins to move 0:07:10.320 --> 0:07:12.600 higher again. So that's why we're watching very very carefully 0:07:12.720 --> 0:07:14.440 what's going on in the housing market at the moment, 0:07:14.480 --> 0:07:17.480 because there's already a number of indicators suggesting some most 0:07:17.480 --> 0:07:20.800 signs of life which could potentially begin to be that 0:07:21.120 --> 0:07:23.360 problem that inflation could begin to move higher because of 0:07:23.400 --> 0:07:24.840 housing inflation moving high, is that. 0:07:24.800 --> 0:07:27.920 Just a vicious cycle. Basically, people think the Fed's going 0:07:27.960 --> 0:07:30.360 to cut more, so they start to potentially look at 0:07:30.440 --> 0:07:33.240 maybe getting on the property ladder, maybe going out and 0:07:33.320 --> 0:07:34.880 getting construction done on their homes. 0:07:35.200 --> 0:07:38.040 Well, the FED has since December been signaling that now 0:07:38.120 --> 0:07:40.480 rates are going down. The pivot in December of last 0:07:40.560 --> 0:07:43.320 year was certainly after having said for several years rates 0:07:43.320 --> 0:07:45.160 are going up, up, up, So now say rates are 0:07:45.200 --> 0:07:47.360 going down and at the same time, the key drivers 0:07:47.360 --> 0:07:50.360 of housing demand, of course, are three things. Mortgage rates, 0:07:50.560 --> 0:07:52.119 of course they are a little bit up now again. 0:07:52.360 --> 0:07:55.240 But the two other key factors are wage and income growth, 0:07:55.400 --> 0:07:57.760 and at the same time job growth and waste growth, 0:07:57.760 --> 0:08:00.440 and job growth still doing fine. So it's not prising 0:08:00.520 --> 0:08:03.240 that we're seeing the housing indicators begin to show more 0:08:03.280 --> 0:08:03.920 signs of life. 0:08:04.000 --> 0:08:06.160 Let's talk about fiscal policy. You see in the bond 0:08:06.200 --> 0:08:08.160 market today. Some people come on this program saying this 0:08:08.280 --> 0:08:09.760 is down to a Trump trade. 0:08:10.000 --> 0:08:12.960 Do you believe that. Well, if you look at your 0:08:13.000 --> 0:08:15.280 Bloomberg screen at the term premium both from the San 0:08:15.320 --> 0:08:18.040 Francisco Fed by YenS Christensen and also the New York 0:08:18.040 --> 0:08:20.200 Fed term premium, they have been going up quite a lot. 0:08:20.240 --> 0:08:22.080 And when it is start to go up. It started 0:08:22.120 --> 0:08:25.000 going up exactly after the last employment report. So in 0:08:25.000 --> 0:08:27.440 that sense, I would say that most of the rise 0:08:27.480 --> 0:08:29.280 in the term premium we're seeing here, meaning most of 0:08:29.320 --> 0:08:31.760 the rise of why is it that people are now 0:08:31.800 --> 0:08:33.440 bidding higher rates to go up and why is the 0:08:33.440 --> 0:08:36.400 ould curves deepening is because of this issue that people 0:08:36.440 --> 0:08:38.559 are looking at it from that the business cycle is 0:08:38.600 --> 0:08:41.000 simply a lot stronger than what we thought before. So 0:08:41.040 --> 0:08:42.800 there's probably a lot of people that are squeezed out 0:08:42.800 --> 0:08:45.040 of the short view, meaning that the economy is going 0:08:45.080 --> 0:08:46.839 down and maybe it's now not going down and therefore 0:08:46.880 --> 0:08:48.559 rates have to go up. But there's probably also a 0:08:48.600 --> 0:08:50.080 lot of people that are beginning to come to the 0:08:50.080 --> 0:08:53.400 conclusion that, hey, maybe Martins Harry policy is not as 0:08:53.400 --> 0:08:56.280 restrictive as the Fed has been saying, and as the 0:08:56.320 --> 0:08:58.520 market has been selling itself for quite some time. 0:08:58.640 --> 0:09:01.520 Tour certain in your scenary or your look at the 0:09:01.559 --> 0:09:04.559 world as it is, does that mean that where rates are, 0:09:04.640 --> 0:09:06.000 even if they go to four and a half percent 0:09:06.000 --> 0:09:08.640 on the tenure, you could see a sustainable rally in 0:09:08.720 --> 0:09:11.959 equities that essentially this is a less bond sensitive equity 0:09:12.040 --> 0:09:13.319 market than a lot of people. 0:09:13.040 --> 0:09:15.439 Think, well, I do still think that corporate earnings actually 0:09:15.480 --> 0:09:17.520 are still doing quite well. What really is the key 0:09:17.600 --> 0:09:19.680 issue for investors this here is that if yield level 0:09:19.720 --> 0:09:22.480 is higher, that means that private credit will continue to 0:09:22.520 --> 0:09:24.559 give you high yels, fixed income will continue to give 0:09:24.600 --> 0:09:27.439 you high yels, and for investors an asset allocation, the 0:09:27.559 --> 0:09:30.560 key message is we are not going back to zero. 0:09:30.760 --> 0:09:32.960 So therefore capalis structures that were put in place when 0:09:33.000 --> 0:09:35.520 it's just raised for zero will continue to be vulnerable. 0:09:35.960 --> 0:09:39.400 Or put in different words, companies that have earnings continue 0:09:39.440 --> 0:09:41.280 to be attractive, both on the debt and on the 0:09:41.280 --> 0:09:43.720 equity side. And the reason why that's important is that 0:09:43.720 --> 0:09:46.480 that also means for equities that this discussion about small 0:09:46.520 --> 0:09:49.280 cap relative to large cap will continue to dominate the 0:09:49.320 --> 0:09:51.880 debate in the equity space because small cap will continue 0:09:51.920 --> 0:09:54.600 to be vulnerable if rates are higher for longer. Because again, 0:09:54.640 --> 0:09:57.079 if I have a company with no revenue, no cash flow, 0:09:57.160 --> 0:09:59.640 no earnings, of course, when my debt servicing cars go 0:09:59.760 --> 0:10:01.719 up and stay higher for longer, of course I'm going 0:10:01.760 --> 0:10:05.040 to get in trouble before other companies that actually have earnings. 0:10:05.120 --> 0:10:07.199 So that's why it is all about investing in companies 0:10:07.200 --> 0:10:09.560 out of earnings and looking at it both on the 0:10:09.559 --> 0:10:12.480 equity side, and that's why those parts of the equity 0:10:12.520 --> 0:10:14.880 and private equity world where you invest in companies with 0:10:14.960 --> 0:10:16.880 earnings will generally you tend to do a lot better. 0:10:17.000 --> 0:10:19.640 Towston, this was a clinic. It always is. We appreciate it. 0:10:19.679 --> 0:10:21.280 We've had a healthy debate over the last few months 0:10:21.320 --> 0:10:23.400 on this topic of the data's moving your way, that's 0:10:23.400 --> 0:10:35.599 for sure. Towston's slock there of Apollo, Brent Shuley of 0:10:35.640 --> 0:10:39.000 Northwestern Mutuals saying this, Well, it maybe months before we 0:10:39.080 --> 0:10:40.760 know if the FED is able to cut rates fast 0:10:40.880 --> 0:10:44.199 enough to resuscitate weak areas of the economy. The bifurcated 0:10:44.280 --> 0:10:46.800 nature of the economy brings with it risk, but simply 0:10:47.080 --> 0:10:49.440 there is less room for error when only a fraction 0:10:49.520 --> 0:10:52.200 of the economy is healthy. Brent joins us now for 0:10:52.280 --> 0:10:54.520 more brand welcome back to the program. Last time we 0:10:54.559 --> 0:10:57.120 had this conversation, we were debating whether this FED is 0:10:57.160 --> 0:10:59.800 too late. There are people around this table now saying 0:10:59.800 --> 0:11:02.480 that maybe this FED was too early. What'd you say 0:11:02.520 --> 0:11:03.640 back to them? 0:11:04.120 --> 0:11:05.959 I think that highlights a difficult path going forward for 0:11:06.000 --> 0:11:09.240 the FED. Look investors, are way too optimistic that the 0:11:09.240 --> 0:11:11.160 FED is going to cut rates in a nice, neat 0:11:11.160 --> 0:11:13.960 and tidy way. There is the possibility they cut two 0:11:14.040 --> 0:11:17.160 rates too quickly, the possibility that they cut rates too late. 0:11:17.640 --> 0:11:19.600 They don't know, We don't know, and I think that's 0:11:19.640 --> 0:11:22.000 where the risk are is if there is the chance 0:11:22.040 --> 0:11:24.240 that the FED has cut too early already and that 0:11:24.320 --> 0:11:27.440 inflation pressures are coming back. The narrative was the FED 0:11:27.440 --> 0:11:29.720 would cut rates, everything would be well, and it would 0:11:29.720 --> 0:11:33.040 alleviate the interest pain on certain parts of the economy. Well, 0:11:33.080 --> 0:11:35.520 the FED cut rates in the tenure Treasury sixty basis 0:11:35.520 --> 0:11:38.120 points higher, which has pushed mortgage rates higher, which has 0:11:38.160 --> 0:11:41.360 made housing more unaffordable for most every American in the country. 0:11:41.480 --> 0:11:43.079 So, Brent, beant if you want to buy a house, 0:11:43.240 --> 0:11:45.400 where does it leave the equity market. You've a cautious 0:11:45.440 --> 0:11:47.760 last time around. You've a cautious on launch camps. I 0:11:47.800 --> 0:11:50.600 believe sol any more bullish on smalls. Has that changed? 0:11:51.520 --> 0:11:53.319 No, that's the irony. I mean, you've had a bifurcated 0:11:53.320 --> 0:11:55.720 economy and a bifurcated market. At some point we have 0:11:55.760 --> 0:11:58.080 to get back to equilibrium. How do we do that 0:11:58.160 --> 0:11:59.760 longer term? I think is the question, and do we 0:11:59.760 --> 0:12:02.319 need a recession to do it, which historically has been 0:12:02.400 --> 0:12:02.880 the way. 0:12:02.679 --> 0:12:04.720 That you've got an economy back into equilibrium. 0:12:05.040 --> 0:12:07.280 I think the irony is there's opportunities in small and 0:12:07.320 --> 0:12:10.800 midcaps because yes, they are interest rates sensitive. Who doesn't 0:12:10.840 --> 0:12:12.959 know that. I could say, stay in quality for a 0:12:13.000 --> 0:12:15.520 while and it could continue to work. But think about 0:12:15.520 --> 0:12:17.839 the other side. What happened in July when we thought 0:12:17.880 --> 0:12:20.280 the other side was coming. There was a ferocious rally 0:12:20.320 --> 0:12:23.360 and small and mid which are historically cheap, And that's 0:12:23.400 --> 0:12:25.719 where I think any investor should think about right now. 0:12:25.760 --> 0:12:28.800 Given that uncertainty, look to valuations, which tend to matter 0:12:28.880 --> 0:12:31.360 more over the intermediate time period as you're guiding light 0:12:31.400 --> 0:12:32.040 and guiding posts. 0:12:32.040 --> 0:12:33.360 And that's where we're positioned right now. 0:12:33.440 --> 0:12:33.640 Bret. 0:12:33.640 --> 0:12:35.400 I'm trying to put these two things together, and I'm 0:12:35.400 --> 0:12:37.839 a little bit confused because if there is this risk 0:12:37.880 --> 0:12:41.520 of no landing and inflation being stickier than expected and 0:12:41.559 --> 0:12:44.800 frankly longer term yields rising, if the FED cuts more, 0:12:45.400 --> 0:12:49.200 why go into the more interest rate sensitive stocks that 0:12:49.320 --> 0:12:52.360 actually hinge and do better when you get more FED 0:12:52.440 --> 0:12:54.880 rate cuts, which don't seem like they'd be in the 0:12:54.880 --> 0:12:58.120 offing given some of the better than expected data and 0:12:58.160 --> 0:13:00.560 the performance that we've seen in bonds are. 0:13:01.400 --> 0:13:02.839 Look, at the end of the day, the Fed knows 0:13:02.840 --> 0:13:05.120 how to get inflation down. It knows how to kind 0:13:05.120 --> 0:13:08.280 of stem inflation overall. We saw what had to happen 0:13:08.320 --> 0:13:10.679 back in the eighties. To me, it's always about what 0:13:10.720 --> 0:13:13.400 happens next in marketing and what's not priced. If you 0:13:13.400 --> 0:13:15.200 look at nineteen ninety nine two thousand, which I think 0:13:15.280 --> 0:13:16.960 is a perfect example of where we're at, when the 0:13:16.960 --> 0:13:20.040 market was concentrated and we were in economic cycle, over time, 0:13:20.360 --> 0:13:22.320 you actually saw a small and middew better into that 0:13:22.360 --> 0:13:25.000 recession and thereafter because they had already priced in the 0:13:25.080 --> 0:13:27.800 fact that it was likely we're going to have a recession. 0:13:28.280 --> 0:13:29.559 And that's where I think we're at right now. 0:13:29.559 --> 0:13:32.040 And that's where I think, thinking beyond the next three 0:13:32.080 --> 0:13:33.719 six and nine months and thinking out to the next 0:13:33.760 --> 0:13:35.480 two three five years, that's where I. 0:13:35.480 --> 0:13:37.320 Want to be a positioned because no one's thinking that 0:13:37.360 --> 0:13:38.160 way any longer. 0:13:38.400 --> 0:13:41.000 One thing that you point out is and you keep saying, 0:13:41.080 --> 0:13:43.600 is valuations. That's one of the main drivers for you 0:13:43.679 --> 0:13:46.600 right now. Given how high valuations are, particularly in large caps. 0:13:46.600 --> 0:13:49.400 That's the area you like least. Why is an argument 0:13:49.440 --> 0:13:52.080 not valid? Would say investment grade bonds where spreads are 0:13:52.080 --> 0:13:54.600 pretty tight and valuations are pretty full. 0:13:54.440 --> 0:13:56.440 So it is. 0:13:56.480 --> 0:13:59.000 I mean, look, I agree longer term interest rates are 0:13:59.040 --> 0:14:00.599 likely to be higher, but I think the path is 0:14:01.040 --> 0:14:03.280 lower at some point, just because I do think you're 0:14:03.280 --> 0:14:04.679 going to have to have a recession to kind of 0:14:04.679 --> 0:14:06.880 clear the deck of all the abnormalities that are out 0:14:06.880 --> 0:14:08.960 in the economy, where you have the haves that are 0:14:08.960 --> 0:14:10.640 winning quite a bit and the havenots that are not. 0:14:11.520 --> 0:14:13.240 This is where I think we want to be more 0:14:13.280 --> 0:14:16.199 towards treasury debt, even though I do see longer term 0:14:16.240 --> 0:14:18.160 risks there. I think there will be a flight to quality, 0:14:18.240 --> 0:14:20.560 much like there was back in July, believe it or not, 0:14:21.080 --> 0:14:22.520 and that's where I think we want to be positioned 0:14:22.560 --> 0:14:25.600 more so so, not so much out on high yield. 0:14:26.000 --> 0:14:28.240 I think investment grade high quality is still a place 0:14:28.280 --> 0:14:30.680 to be as you think about the reality that the 0:14:30.720 --> 0:14:33.320 FED will only be able to cut rates aggressfully if 0:14:33.320 --> 0:14:35.040 they do see a recession on the horizon. 0:14:35.320 --> 0:14:37.760 Brent, We're fourteen days out from the US election, so 0:14:37.800 --> 0:14:41.520 I have to ask about how you're potentially your advice 0:14:41.560 --> 0:14:44.160 for positioning ahead of that. You like the small caps. 0:14:44.160 --> 0:14:46.040 Do you think that is a Trump trade that's on 0:14:46.160 --> 0:14:49.160 right now because of policy or because of economics? 0:14:49.840 --> 0:14:51.360 You know, I think it's a bit of each. Look, 0:14:51.360 --> 0:14:53.520 I don't want to overweight the election too much. I 0:14:53.560 --> 0:14:55.560 don't think anyone knows what the outcome is likely to be, 0:14:55.680 --> 0:14:57.080 and therefore, if I don't know what the outcome is 0:14:57.120 --> 0:14:58.920 going to be, I don't try to position too much 0:14:58.920 --> 0:14:59.440 for it. 0:14:59.440 --> 0:15:00.800 It certainly in the background. 0:15:01.000 --> 0:15:03.280 I think the more important thing is the economic cycle, 0:15:03.280 --> 0:15:06.120 which I keep coming back to. Look, we are later 0:15:06.200 --> 0:15:08.960 in an economic cycle. Yes, the unemployment rate has risen, 0:15:09.200 --> 0:15:11.560 but it's still low. Where are we going to find 0:15:11.560 --> 0:15:13.280 the people to fill the supply that is needed if 0:15:13.320 --> 0:15:16.880 demand reaccelerates. And to me, that's where I think that's 0:15:16.920 --> 0:15:19.160 the most important thing. And no matter who wins, I 0:15:19.200 --> 0:15:21.640 think they are likely to preside over a recession in 0:15:21.680 --> 0:15:23.840 the next four years. I think they're likely to preside 0:15:23.840 --> 0:15:27.119 over a market, especially large cap stocks that are historically expensive, 0:15:27.400 --> 0:15:30.800 that does less. That's where I think investors should be optimistic. 0:15:30.840 --> 0:15:33.480 On the other side, where things are cheaper and will 0:15:33.480 --> 0:15:35.600 do better. I think when we get to the other 0:15:35.640 --> 0:15:36.920 side of whatever lies ahead. 0:15:37.320 --> 0:15:39.040 Get to the other side. Yeah, we're all looking forward 0:15:39.040 --> 0:15:41.480 to getting to the other side. When it comes to 0:15:41.960 --> 0:15:47.400 this idea of potentially your recession call could potentially the 0:15:47.440 --> 0:15:50.920 policy of whatever administration we get next further push the 0:15:51.000 --> 0:15:53.280 US in that direction, or do you think that is 0:15:53.320 --> 0:15:54.800 going to happen regardless. 0:15:55.840 --> 0:15:57.840 I think it's likely to happen regardless. Look, you have 0:15:57.880 --> 0:16:00.880 a really unbalanced economy that has been demarketed by interest 0:16:00.920 --> 0:16:02.880 rates and ownership of financial assets. 0:16:03.240 --> 0:16:04.240 It's not balanced. 0:16:04.480 --> 0:16:07.760 The economy is being pushed higher by higher income and 0:16:07.800 --> 0:16:11.520 middle income consumers who have had a wealth effect at 0:16:11.520 --> 0:16:14.080 their tails. If you have debt and you don't own 0:16:14.080 --> 0:16:15.840 a house, you probably don't feel as. 0:16:15.800 --> 0:16:17.760 Confident about what's going to happen going forward. 0:16:18.240 --> 0:16:20.960 And so to me, I do think there are still 0:16:21.040 --> 0:16:22.680 risks that are out there, and that's all we're asking 0:16:22.720 --> 0:16:25.360 is that investors pay attention to those risks and importantly 0:16:25.360 --> 0:16:27.880 stay diversified, which does tend to pay off at the 0:16:28.000 --> 0:16:29.920 end of economic cycles, which I think is still out 0:16:29.920 --> 0:16:30.640 there on the horizon. 0:16:30.760 --> 0:16:32.440 But what it sounds like to me is that in 0:16:32.480 --> 0:16:34.600 some ways you agree with this call that we heard 0:16:34.600 --> 0:16:38.040 from Goldman Sachs and that Cameron Dawson over at New 0:16:38.120 --> 0:16:41.840 Edges seem to agree with that equity returns on labarge 0:16:41.880 --> 0:16:45.640 caps are probably pretty muted over the next decade or so, 0:16:45.880 --> 0:16:49.200 and so you're basically trying to shift things around on 0:16:49.240 --> 0:16:52.920 a valuation basis with that expectation that there isn't going 0:16:52.960 --> 0:16:55.040