00:00You think about where we stand right now. I mean, you take a look at the fundamentals underpinning corporate America
00:05right now.
00:06There's a lot of foolishness about where profits, where earnings could go.
00:10But again, then you take a look at what's going on on the geopolitical front.
00:14All of these headlines being volleyed back and forth.
00:17And that seems very much to be what's top of mind for markets heading into the weekend.
00:23Yeah. So, you know, Katie, I think it's important that we frame this in the right way right now,
00:27because I think the way what markets are thinking is they're really thinking about it as a tipping point.
00:32So right now what we have is a price shock going through oil prices.
00:36Equities are following oil prices. There's no question about that.
00:40That's a price shock, right? That is something that's going to degrade value.
00:44That's going to degrade prices, I should say, because effectively what you're going to do is you're going to discount
00:48your future cash flows at a higher interest rates.
00:51As oil prices go up, interest rates go up and you're going to get a lower present value.
00:55That's a very normal reaction.
00:57But that's a price shock. That's temporary. That's something that can go away over time.
01:02But the debate, though, is does this turn into a growth scare or does this potentially increase recession risk?
01:09Then it becomes a valuation shock.
01:12So what we should really be debating is the difference between a price shock and a valuation shock.
01:16And I will say that right now my view is that we are in a price shock, meaning that we
01:22have to adjust to higher oil prices, look at interest rates.
01:25Interest rates are rising, and that's an issue.
01:27But today has showed me something very significant, and that today's the first time really that the curve is steepened
01:33in the way that two-year yields have come down and 10-year rates have actually gone up.
01:39That is now the market starting to think that we could be tiptoeing into more of a valuation shock, which
01:46is something that would be a longer-lasting downturn in prices.
01:50We're not there yet. That's not my case. That's not my view.
01:53But overall, that's, I think, what the debate is, and that's what the market's worried about.
01:58Well, Jim, I was going to ask you, what is the nuance there between price and valuation in terms of
02:04how you're thinking about a portfolio?
02:06You mentioned that you do see the curve steepening today.
02:09That might suggest that we're heading into a valuation shock, at least from the market's point of view.
02:15It sounds like what you're saying, though, is that perhaps that's something you would fade at this moment.
02:20At this moment, I would.
02:21And the reason is that we don't have enough information right now.
02:25We have to recognize that the initial conditions, the conditions that preceded this war, were actually relatively good.
02:32Strong, robust data. Everything was going relatively well.
02:36And it's going to be hard to blow the U.S. economy off course or even the global economy off
02:40course.
02:40But it can be interrupted, which means that we could be into a period of assessing what the damage that's
02:47been done from oil shortages and higher prices
02:49that could set aside some of the good growth news.
02:53And ultimately, it's just going to take longer for it to it's going to take longer for it to really
02:58reignite.
02:59So I think we're in that waiting game at this point.
03:03We don't have clear information as to how long this is going to last or even if it or even
03:08if it intensifies.
03:09So this is what the market's worried about.
03:11Look, it's a Friday. We're heading into the weekend.
03:13Saturday and Sunday, we're not trading.
03:15So people are nervous and they're taking down risk.
03:18Glad you bring that up because we've been here before.
03:20We've seen big policy pronouncements followed by the weekend.
03:22The markets aren't open.
03:23And I'm curious how that past has given you sort of an indication of sort of how you might process
03:28anything that happens here,
03:29process the bad news that we've seemingly gotten today.
03:32Yeah, I think we have to think somewhat technically on a Friday going into a weekend with these types of
03:39events.
03:39Because ultimately, you know, this is a question of do we start to take risk off the table?
03:45Do you want to go into the weekend with any long positions on?
03:48And the answer is probably not, right?
03:51And I think then Mondays what we typically see is a rebound, right?
03:54If nothing bad happens over the weekend, it's status quo, then people take back prices.
03:59So I think we have to look at today's downdraft and equity prices with a little bit of a grain
04:04of salt and just say that this is going to bounce around for a bit.
04:07But we're still waiting to hear if there's any improvements.
04:12Because essentially what the market has to process is this whole concept of negotiated escalation.
04:19And this is what's happening, you know, between the U.S. and Iran.
04:22It's a very common military tactic in these periods of time based on history where you have a negotiation,
04:28but at the same time you escalate the military force.
04:33So that way you think, both sides think, they have a stronger seat at the negotiating table.
04:39That's a concept that's really hard for markets to process because it just looks like things are intensifying and we're
04:45not making any improvements.
04:47But really this escalation is being really thought of as the endgame settlement,
04:52that you have to have this escalation before you get the actual negotiated, you know, ceasefire.
04:59And I think that's part of it.
05:01All right, Jim, have to leave it there.
05:03Have a great weekend when you get there.
05:05That is Jim Caron.
05:06He is CIO of the Portfolio Solutions Group over at Morgan Stanley Investment Management.
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