Inflation Won't be as Stark a Headwind in 2026: Caron

Bloomberg

Watch Inflation Won't be as Stark a Headwind in 2026: Caron - Bloomberg on Dailymotion

Transcript

00:00Let's talk about the Fed because this December meeting, it feels live, the pricing going back

00:05and forth here. And I wonder, you know, when you think about this Federal Reserve, all the

00:09different cross currents coming, the question of December, the question of 2026, how are you

00:13feeling right now? Well, look, like you said, it's been going back and forth. And let's take a step

00:18back. Last week, there was about a 30 percent probability that the Fed was going to cut 25

00:23basis points in December. Now there's 70. What does that tell you? It tells you that the market

00:27has no clue. It is 50 50. I don't care what the numbers say. It is 50 50. Look, it's going

00:33to be a close call. I think 2026, though, is going to be a better year to the extent that

00:372025 is the soft patch. This is when economic data was supposed to slow down. It did slow

00:43down, but it was masked by the fact that equities kept making new all time highs. But the data

00:48it wasn't really that strong. But I do think that there is going to be a recovery in the

00:53data next year. And that's going to form the right side of the U and actually bring things a little

00:58bit better. Well, talk us through what gives you the conviction to say that that 2026 will be better

01:03than 2025. When you spill out the tea leaves, what exactly do they say? Loss of headwinds. So number

01:09one, you don't have tariffs. Tariffs are pretty much already set in motion. Second is that you

01:15ultimately understand the tax policy at this point. So taxes are there also. Inflation. Inflation is not

01:22going to be as much of a headwind. We expect inflation to start to come down. So just just the

01:27relationship between U.S.-China policy, tariffs, taxes and even inflation suggests that, you know, plus

01:36you're going to get an onslaught of fiscal stimulus, whether it's accelerated depreciation, tax policy in

01:41that sense, even for the consumer in terms of tax rebates. So a lot of these headwinds that did exist in

01:472025 are going to go away. The question is, is 2025 pulling forward all of that good news right now?

01:54And is there room to surprise the upside? And we think there is. What about the labor market? How does

01:59it shape up in 2026? Yeah. So so I do think that the labor market is going to get stronger, but it's

02:04going to get weaker first. So if you ask me, I understand that the unemployment rate is 4.4 percent based

02:10on the latest data. If you ask me, I think the real number is somewhere around 4.8 or 4.9. I fully

02:16expect us to get there. I have a much, much more sanguine view on labor, but I think it's temporary

02:21and I think it's already here and it's being priced in. This is the soft patch. So when we start to move

02:27into 2026, I would expect that the mid cap, even the small cap companies, which account for about 70 percent

02:34of job hiring with deregulation and everything else and tax policy is going to be better. So I think we're

02:40going to have some weak momentum in jobs coming into 2026, particularly in the first quarter.

02:45But then after that, you're going to start to see a recovery. And I think things start to stabilize.

02:49So how does that lead to how you want to allocate your money? Where do you want to be in equities

02:53versus fixed income versus something like alternative investments? So I so right now we are still more

03:00overweight equities than we are fixed income. We think that fixed income just spreads are very tight.

03:05Rates have come down. I think we're already pricing about a three and a half percent, you know,

03:09Fed fund being moved down and Fed policy may be a little bit lower than that. So I think we're

03:13almost priced to perfection in that sense. On the equity side, though, I don't think that we're

03:17priced really for what I would expect in 2026 to be more of a broadening of the market, the other

03:22493, not just the mag seven. So so I think equities probably shows the most potential for upside.

03:29Private markets are still interesting right now. They're going through some fits and starts. We all know

03:33what's going on in private credit. There's a big repricing, a re-underwriting of the risk.

03:37Private equity, though, in many cases has, I think, the pendulum has already gotten down towards the

03:44bottom. But you've got to be patient. You're not going to get your money back plus return really

03:48quickly. But that's when you want to invest in private markets because you can't buy when the

03:53pendulum is swinging up because then you're going to overpay. Right now you can get things at a good

03:57discount to NAV, but you've got to be patient. Well, Jim, let me make sure that I understand what

04:01you're saying. So you're saying that right now private equity maybe looks a little bit better than

04:05private credit. Yeah, I think so, in my opinion. Now, you're going to get different views on this

04:09because it always depends on the idiosyncratic factors, which manager, which opportunities are

04:14you looking at. So let's set that aside for a second. But I do think that on the private equity

04:19side, that a lot of the a lot of the bad news, a lot of the valuation arguments, those were in the

04:25past years. Right now, I think we're coming out of that. In private credit, we're still hearing more

04:30and more talks about this. And there's still a lot of worry in the markets. Does that spill over into

04:36the public credit markets? I don't think so. We're not seeing evidence of that. I mean, credit spreads

04:41still remain relatively tight. So default risks, in our view, no recession in 2026. Default risks,

04:46we still think, stay relatively low. People are yield buyers of credit right now. Spreads are tight.

04:53There's no question. Now, we'll make the case that we don't think there's a lot of room for spreads to

04:58tighten further. So you're not going to get that excess return. But you should be able to clip the

05:03coupon, I think, with some reasonable confidence at this level. So I think it's worth an allocation

05:09in that sense. And Jim, I'm also curious to get your thoughts on cash here, because one of the

05:13puzzles of markets this year is that you have equities at all time highs, risk assets. It feels

05:18like in general, I've had a very good year. And then you take a look at money market funds. I think

05:22we're up to, what, $7.5 trillion? Yeah, sure. Something close to that, maybe a gazillion soon

05:27coming. It just feels like there's this insatiable demand for cash. And I wonder what breaks the

05:32fever, basically. So people have been worried about the markets. Look, whenever you see the

05:36markets go up with narrow leadership, what that means is that the markets have become increasingly

05:41fragile, which means that if there's a slight vibration, the Jenga can start to kind of come

05:47down, right? And you can see that in some of the big name tech stocks, for example, over the past

05:51couple of weeks. So what people are doing is they're allocating away from this fragility in

05:57the markets. When the market starts to broaden out, and it's a good question, like what's the

06:01catalyst to make people get off the sidelines with cash? They need to see the markets broaden

06:06out. It can't just be about seven stocks. It's got to be about the other 493, because then what

06:11they can do is they can start to diversify. They can go into health care. Health care is interesting

06:15right now. Industrials, industrial policy is very positive. Materials, that's connected with, you know,

06:21so once you can start to broaden this out, people see that they can get the diversification

06:25and that's going to move them off the sidelines from cash.

Category

Transcript

Be the first to comment

Recommended