00:00It's been an interesting 2026 already. And it just feels like the invasion, the attacks on Iran, kind of at
00:10another layer of risk to what's already been a pretty fragile market.
00:14So I am curious, before we get into portfolio management and what you should be doing, it feels like the
00:18first question that needs to be asked is what's really changed as a result of what happened over the weekend?
00:23Yeah, I mean, I think it's too soon to tell exactly. I think you hit the word of the day,
00:30the nail on the head, which is uncertainty. Uncertainty has really been a staple, I think, for the last 18
00:36months or so is going to continue to be a staple.
00:39I think gold is reflecting that and has reflected that over the last year, year and a half. But I
00:45do think, listen, wars in general never really are disinflationary or deflationary.
00:51I think the bond market is picking up on that at the moment, whether that be because of, you know,
00:55the obvious oil and natural gas disruptions or whether it be more due to supply chain issues.
01:02It's hard to make a case how what we saw over the weekend is going to lead to deflation or
01:07disinflationary forces.
01:08Especially going into it, there were inflationary concerns.
01:11Well, that's the thing is that, you know, I think even without what was going on with Iran, you've been
01:16seeing inflation start to tick up pretty meaningfully.
01:18Remember, core PCE is what the Fed cares about. And core PCE bottomed in April of last year.
01:24You look at, you know, ISM input prices today. You look at the PPI data. It's all suggestive of higher
01:29inflation, not lower inflation.
01:31And so this just adds another wrinkle to that, which I think the bond market is getting right.
01:35Right. You started off with the flight to quality and lower yields and that quickly reversed course.
01:40And now you're seeing higher yields. And I think that's the right reaction.
01:43Can we extrapolate this to midterms and in an environment where voters care about the economy, voters care about prices,
01:52they care about inflation and what this war could mean for a change of control in Washington?
01:59Not at the presidential level, of course, but maybe maybe in the House, maybe even some are saying in the
02:05Senate.
02:05Yeah. Yeah. I think ultimately what matters for markets is less politics and more what the trajectory is for liquidity
02:14and earnings.
02:15And so to the extent that, you know, how does it matter to markets, I'm not sure the midterm elections
02:23even matter all that much.
02:25You know, I think earnings growth is reasonably strong in the U.S. It's certainly expanding globally pretty dramatically.
02:31What happens with the midterm elections is not going to affect what happens with European earnings and emerging markets, ex
02:37-China earnings.
02:38I actually don't think politics are going to have a huge influence on rates either, which I know is probably,
02:43you know, maybe a controversial statement in and of itself.
02:47But I think the markets are smarter than what's going on with politics and investors will be investors.
02:53And the midterms are going to be proved to be much less exciting for markets than maybe what most expect.
02:58What could be exciting in a negative way is some kind of crisis.
03:01And I just do feel like the drumbeat is expanding.
03:05Former Goldman CEO Lloyd Blankfein speaking in an interview with Citadel's co-chief investment officer about how he can smell
03:13a fresh crisis brewing and see similarities, parallels to the mortgage crisis.
03:17And then it was just Jamie Dimon that we heard from about a week ago.
03:21And we're going to hear from him in just a moment, too, live on our air, warning of parallels to
03:25the financial crisis.
03:26What are the major risks, which seems like a stupid question coming off a weekend where we have seen the
03:32U.S. and Israel attack Iran and we see, again, unease, unrest, if you will, in the Middle East.
03:39What are the major risks?
03:40And is it we've seen credit spreads widening a little bit?
03:42Like we see things percolating and yet that doesn't necessarily mean crisis.
03:47Yeah, I do think that the stage could be set for credit weakness.
03:53We've been saying that, admittedly, for probably a little longer than what it's taken.
03:57You know, about 18 months ago, we started talking about the illiquidity risk with private credit.
04:02And we're starting to see that actually, you know, happen over the last few weeks and over the last few
04:07months.
04:07I think absent from, you know, Middle East tensions and sort of war, and I'll talk about that in just
04:13a moment, I think the credit space does pose a bit of a risk here.
04:17Not so much from mass defaults and that causing a recession and any sort of contagion similar to the global
04:23financial crisis, but more from the perspective of having these very illiquid products.
04:30And what do you sell when you can't sell what you want to sell?
04:33You sell what you can sell.
04:34And that can sometimes beget a, you know, a crisis in and of itself.
04:38Who gets hurt in that process?
04:39Well, I think certainly private credit holders, but also just credit markets in general.
04:45I think if that comes at a time where you have higher inflation because of geopolitical risk and higher rates,
04:50that can cause meaningfully wider spreads and credit risk as well.
04:53Something that's not lost on us, and we talk about this all the time, is that this is happening at
04:56a time where people want, certain people want retirement accounts open to private credit.
05:03And the idea that, well, you know, everybody should have an opportunity to invest in what many argue is an
05:10opaque asset class.
05:11How do you view that?
05:12So, it's interesting.
05:14Rich Bernstein, who you all know, and is, of course, the founder of RBA, wrote an interesting report several years
05:20ago about what sort of are the makeups of a bubble.
05:25And one of the key makeups of a bubble is democratization of markets.
05:30And I think that's what we're seeing here.
05:32That's essentially what you asked him is sort of the idea of private asset classes within, you know, retirement accounts
05:38and these sort of things, alts and all this, you know, illiquid asset classes.
05:42Classes within retirement accounts is democratization, just like, you know, the gamification of trading has been.
05:48Well, I mean, at the end of the day, the people who, I mean, and correct me if I'm wrong,
05:52Carol, but it seems like the people who want this in retirement accounts are the ones who sell it.
05:56Yeah.
05:57And the ones who, you know, would benefit from a larger market of people or entities buying these assets.
06:03It feels like there's a lot of money to put to work, and they're searching for more markets to put
06:06it to work.
06:06And that makes me a little nervous.
06:09Yeah, I think you mentioned Lloyd Blankfein earlier.
06:11He had a good quote about this and how many of his peers out there have made, you know, substantial
06:15sums of money doing what they're doing, and now they're trying to even grow that more.
06:18And what's the real need for that?
06:20Those were Lloyd's names, you know, where it's not my own.
06:22But I do think that is an interesting point.
06:25But listen, I mean, this is an industry, the asset management industry is one where, you know, you get paid
06:30to grow assets and perform, right?
06:32We focus on the performance side and let the asset growth take care of itself.
06:36But, you know, it's hard.
06:37It's easy to see how those can get, you know, those objectives can get muddled.
06:40Michael, just got about 30 seconds here.
06:42This moment in time, how do you suggest investors should be investing?
06:45Should they be making adjustments, thinking shorter term?
06:49What's your thoughts here?
06:50Certainly not shorter term.
06:51I think investors need to think like investors and think over the long term.
06:55Currently, we want to be underweight, really expensive excess in the markets, investments that are driven by liquidity.
07:00We think liquidity will tighten more.
07:01That means basically underweight long duration assets, speculative U.S. technology.
07:07China, we would put in that boat.
07:09And overweight, you know, shorter duration assets.
07:13Companies that pay dividends currently value short duration, high quality fixed income.
07:17You know, you know, you're not going to be underweight, high quality fixed income.
07:17So, okay.
07:17Let's see.
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