00:00You know, taking a much closer look at the alternative data sources, the private data sources, the alternative data that I'm mentioning there, we've had a lot of success scraping the wage inflation data or the wage posting data and extracting from it wage inflation measures.
00:16And one of the most important stories that I think everyone is aware of, when you came out of COVID, it was the bottom end that led the wage gains. And that shifted. And we've been in a period where, you know, you guys have talked about it, the K-shaped recovery, talked about a lot in this program, but that shifted where the bottom end was really weak and it was the high end that was holding up.
00:40And the latest innovation in the data, we saw a little bit of a strength in the high end over the last two months. That's come out of the data and that's come back down.
00:54It's kind of brought the aggregate wage data back in line with where we were in the pre-COVID period. So it's not that bad, but you had had this period of really aggregate wages that were above.
01:04Now you're coming back in line and the change is a softening and that softening is interestingly coming more from the high end than the bottom end.
01:14Jeff, you're a PM. Is that sufficient reason to dial down risk?
01:16So one of the things, you know, as a PM in our process is, you know, having a lot of inputs to the process. And so we're talking about one of what might be a hundred different inputs.
01:30So we're going to weight that appropriately and not react to just one, but it is an important data point. And what does it, what does it point to?
01:38You know, it points to what a lot of what we're seeing in the market pricing that, that most of what we're getting out of the alternative and the private data sources are kind of validating what we had as the last reading, which is the slowdown in the, in the labor market.
01:52So it confirms a lot of what the other data source sources say. And when it all lines up, yeah, it kind of points you into, into the one direction, which is, you know, 70% odds of the Fed continuing its cutting cycle here.
02:05You know, when we talk in December.
02:07Jeff, how much is a risk asset market really depending on that rate cut? I mean, it sort of seems like we're talking about two different worlds, whether it's the AI trade and risk assets that aren't necessarily hedged to the underlying economy or jobs market.
02:19And then we're talking about labor market data that is affecting what the Fed does. Is there a sense that this risk market needs at least another rate cut this year from the Federal Reserve to keep on going?
02:30You know, I think it depends on how risky you're talking about in terms of the risk market, you know, fixed income, you know, the investment grade side, it's going to be much more dependent on that rate picture because there's just less credit spread.
02:43And so total returns are going to be much more about the rate side.
02:47I think when you start getting into the riskier parts of the market, like high yield, there's more credit spread, it's more credit sensitive.
02:54So that rate cut, you know, whether they cut or they don't cut in December and all the things we gnash our teeth about, you know, that's going to be less of an impact for that part of the part of the portfolio.
03:05And the equity market and the equity market outlook is going to be, you know, much, much more important for the riskier parts of fixed income like high yield.
03:14Jeff, since nothing really happened to cause this momentum unwind and we actually got earnings from big tech that showed positive returns, are you buying right now?
03:22I mean, is this something that you're seeing as something that's just a momentary blip that gives you an opportunity to trade around?
03:28You know, if you look at what we were coming into, you know, kind of end of September, first week of October, you know, there's there's aggregate measures and there's a lot of focus on the aggregate.
03:43You know, some headlines about Schiller cyclically adjusted cap.
03:49But you look under the surface and you saw some very extreme moves in terms of valuation.
03:55We talked about this as the market moving from optimism, from the post Liberation Day concerns.
04:02That was kind of June, July to when the Fed got involved, when they started to signal a bigger preference for labor markets to drive their decision making.
04:12That really shifted the market from optimism to euphoria.
04:15So valuations got very extended.
04:18They got particularly extended in the cross section and differential characteristics.
04:24A lot of high risk pricing in the equity market.
04:28A lot of anti beta, which means people were really not looking for defense.
04:34They were really on the offense and they got a little overextended.
04:37And I think that's what you're seeing here in the pullback.
04:40You know, absent a big change to the macro outlook, that can be a buying opportunity.
04:45You know, we're not buying today.
04:47You know, we're going to see how long this revaluation plays out.
04:51But, you know, without a big change in the macro outlook, this is really kind of a pullback from what was some very extended euphoric type valuations in the equity market.
05:01Jeff, just a final question for me.
05:03Is there a sweet spot in the market right now for you?
05:05Somewhere you see an asymmetry of risk, somewhere you want to be, somewhere you're comfortable.
05:07Yeah, I mean, if we talk about kind of the risk side and the risky side, you know, on the on the risk free side, the sweet spot, I think, is still kind of in that middle part of the curve.
05:19You know, fives to sevens.
05:21You know, the Fed here is asymmetric to talk about, you know, your question.
05:26You know, they're going to be very responsive.
05:28Right now they're talking about normalization.
05:31And so that's giving a little bit of support to that part of the curve.
05:35But if normalization gets shocked, you were talking in the earlier part of the segment, you know, the dependency on consumption to the wealth effect, right?
05:43This is the inverted market.
05:45The stock market cares more about the – sorry, I just got that wrong.
05:49The economy cares more about the stock market than the stock market cares about the economy because what's driving the economy is consumption and wealth effect.
05:56So if you've got to pull back there, you know, the Fed's going to be very responsive.
06:00And that part is not normalization.
06:02That's more of a Fed-cutting cycle.
06:04And that part of the curve initially, I think, will benefit.
06:07On the risky side, you know, it's a carry story.
06:11It's asymmetric to the downside.
06:13But as you're talking about, earnings are strong.
06:15Corporate balance sheets are strong.
06:17The economy and measurements, we've kind of eased off of this concerns that we had earlier in this year.
06:23And so that's a carry trade.
06:24You know, you understand that that's income against downside.
06:27But the downside seems pretty limited.
06:29So you can take that carry.
06:30Hey, Jeff, good to see you.
06:31As always, maybe next time we do this, we've got some data.
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