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00:00We're just about five hours away from that 8 p.m. deadline that President Trump set when it comes to
00:05Iran.
00:06Of course, you think about what he posted on social media this morning.
00:10Obviously, the stakes are very high.
00:12You wouldn't know it by looking at the markets right now.
00:14You certainly wouldn't know it by looking at the 10-year Treasury yield pretty much flat on the day.
00:20I wonder what you make of this sort of non-action when it comes to the bond market and markets
00:25overall.
00:27So I take a couple things.
00:29First of all, thanks for having me on, by the way.
00:31I did say a couple things.
00:32First of all, markets, the level of uncertainty is extraordinary.
00:35You know, being active in the markets and trading in the markets today, particularly more so in the equity market
00:41today, the depth of the markets is incredibly shallow.
00:46When you go to execute something, you see how the market moves.
00:49There is not a lot of certainty.
00:51There's not.
00:51And so markets tend to, particularly in the rates market today, it is, you know, we've backed up rates and
00:56backed up a decent amount.
00:57I agree with the commentator before who said front end of the yield curve in the U.S. I think
01:02is interesting.
01:03And, you know, now that you're not certainly not pricing in anything in the way it cuts.
01:07So, you know, it's a period of stasis.
01:09I will say one thing.
01:10People watch that rally you saw in the equity market last week.
01:14The technicals in the equity market are phenomenal.
01:17The earnings growth dynamics are still very good.
01:20And so if you had good news, market would rally significantly.
01:25The problem is you just don't know how or when.
01:28And so today, you know, there's a lot of sitting on people's hands.
01:32And you see that in the depth of the markets as being incredibly shallow.
01:36Well, I'm curious.
01:37I mean, you mentioned what we saw in the equity markets, a big rally, relief rally going through last week.
01:43It feels like you haven't seen that same dip-pying impulse, or at least not to the same degree, when
01:48it comes to the bond market, particularly the Treasury market.
01:52And I wonder whether, you know, you're watching this sell-off and you think about where rates are right now
01:57and whether that presents as a buying opportunity to you.
02:01So, you know, today, I think the front end is well-priced.
02:06And I think, quite frankly, I'm in a mode today of, A, staying conservative until you get more data.
02:11You know, I'd say we're pretty good investors at markets that are predictable or, you know, when you anticipate and
02:18can use your data to analyze what the oncoming situation looks like.
02:23This is pretty unpredictable.
02:24And you talk about when you move prices of major commodities around with the speed of what you're doing, pretty
02:31hard to do that.
02:32And it's pretty hard, quite frankly, when you have such a range of outcomes in oil prices and the commensurate
02:38impact on inflation to say, gosh, I'm really going to drive into the rates market today.
02:44That's a pretty bad answer in terms of, but it is what it is today.
02:47The front end of the yield curve and the carry you get gets you, you know, you feel very comfortable
02:52with, A, there's a Fed that's not going to raise or the new Fed or however you interpret it, not
02:57going to raise rates.
02:58I think ultimately, and I think the commentator before said, you know, you've got a labor situation that's quite different.
03:04The starting point of where rates are, you have room to be accommodative.
03:09So, listen, the amount of carry we create in our funds, particularly keeping our duration in the front to belly
03:14of the curve, you know, this is one of those periods, you know, you just want to see, like, can
03:18we keep our portfolio stable, carry well through it,
03:23and then we're going to get more visibility on what the environmental condition is, and then you can lean into
03:27some risk a bit more.
03:28I am curious, though, about as we start to get data on that condition, Rick, and just a few moments
03:34ago, Bloomberg just had an interview with Kristalina Gorgieva over at the IMF,
03:38who said that next week when they do release their outlook, they will be downgrading the global growth forecast.
03:44Now, that shouldn't be a surprise to anyone, but I am curious about your view as to what the U
03:49.S. growth forecast could potentially look like.
03:52Given the general perception about our energy independence and some degree of insulation, some degree from what's happening overseas.
04:00Yeah, I mean, you know, it's a pretty incredible thing.
04:03Like, people that we live in a world, people want one word or one line answers to things and say,
04:08gosh, the economy is going to slow.
04:09When you actually break down the data and you get really deep into what the economy really looks like,
04:13if you go back a month or so ago, the acceleration of the economy, we're talking about mid to high
04:195% nominal GDP,
04:21and you've got a fiscal tailwind that's quite significant this year.
04:25So now you say, OK, we're probably going to create some slowdown on the other side of this,
04:30obviously given the impact on fuel prices, the impact that it has tangentially on consumer goods, etc.
04:36So now you say, OK, I would say if I was operating at mid to high 5s, gosh, we've gone
04:43through the numbers.
04:44Can you can you move that down a half a percent or so?
04:47I think so.
04:48But that's very far, very far from, gosh, we're in a crisis.
04:52When you still got an economy growing at those sort of levels.
04:55I was looking at something today.
04:57My partner, Russ Kostrich, was looking at that actually, if you go since February, there are more earnings revisions up
05:03than down.
05:05So you think about like you've got a pretty good environment.
05:07And so, you know, what's really hard is you've got to step back and say, OK, environmental condition is good.
05:12The economic condition is good.
05:13The corporate condition is quite good.
05:15You've got it.
05:16You've got it.
05:16Obviously, a shock to the system that you've got to you've got to build in your model.
05:20That's tricky.
05:21Well, and to Russ's point, I mean, we've seen a lot of that data attract here at Bloomberg as well
05:25as over at FactSec and others.
05:26There's showing that increase that actually increase that we've seen over the last few weeks in expectations for earnings growth.
05:33Is there an issue, though?
05:35And I know it's hard to sort of trade around as an investor.
05:37But is there an issue about waning confidence where some of the enthusiasm we had for deal making in the
05:44investment banking space or corporations looking to expand and invest?
05:48Does that now potentially become at risk?
05:52Yeah, I think I think your point's well taken at the margin.
05:55You think about M&A, you think about CapEx in scale.
05:59And by the way, how you finance that.
06:01Listen, when you have this sort of disruption and this sort of uncertainty on a global basis, trade flows that
06:07are more difficult to interpret, there's no doubt you create this cloud over the system that does bring some of
06:13that back in terms of it does dull some of that enthusiasm.
06:17You know, I will say today, I mean, we see it in the markets.
06:20People are literally I mean, I looked last week at flows, a lot of money coming into cash.
06:24By the way, we're still seeing good flows into our income funds, et cetera.
06:28But people are sitting back and waiting and being conservative.
06:32But there's no doubt, as you say, a little bit of confidence is pulled back.
06:36I will say one thing I've learned about human psychology.
06:40Things can change pretty quickly.
06:42If there is obviously an avenue which the data improves or the environmental condition improves, if that happens, boy, it
06:48will be pretty fast in terms of terms of how people will jump in.
06:52And, you know, given given, like I say, the backdrop is pretty good generally.
06:56Well, to your point on cash and take a look at money market fund assets right now, we're sitting at
07:01about seven point eight trillion dollars, which is truly remarkable.
07:04We'll see how that changes as we get closer to tax day.
07:08But, you know, in thinking about the economy, I want to talk a little bit about the bond that the
07:11Federal Reserve is in, because, you know, obviously they're trying to thread the needle between what we're seeing on inflation
07:18and what we're seeing when it comes to the labor market.
07:21We did get a labor market report on Friday.
07:24Markets were closed.
07:25It was a little bit unusual.
07:26But we saw a lot of strength come through.
07:30Certainly you saw big revisions, but still that headline number really surpassing expectations.
07:35And from where you're sitting right now, Rick, I wonder what you see as the bigger issue in the Fed's
07:41mind at this moment.
07:42Is it the inflation side of things, the risk that, you know, we could see some stubbornness there, or is
07:48it still the labor market?
07:51Listen, I think every central bank, you know, is going to have at the forefront of their thinking, how do
07:56you deal with inflation, particularly when inflation is elevated today?
07:59And we've come from a place where it's been hard to reduce that sticky level inflation.
08:04If you said to me, what is the bigger structural problem?
08:07I think it's employment.
08:08And like you say, it was a pretty good employment report.
08:10But I've actually looked at the revisions you said, the income data, the work week data.
08:15And then if you take it in the context of the last three months, six months, there was, and by
08:21the way, there's weather effects, there were strike effects.
08:23So I think you need to look at the broad landscape.
08:25The broad landscape is, you know, you see this from companies.
08:29I'm going to look at it every day.
08:30If you cut your labor force by 20 percent, your operating leverage into your earnings is profound.
08:35I was looking at two companies yesterday.
08:37You realize how powerful that is.
08:39Companies are going to operate more efficiently.
08:41To me, the bigger issue for the Fed is how do we create maximum employment?
08:46You know, there's no question of the supply factor, but immigration is something that can change.
08:51There's a structural dynamic at play.
08:53So how do you balance these?
08:55My sense is what the Fed will do.
08:57We'll wait.
08:58And we'll say, let's get more data.
08:59Let's get more data.
09:00We've got obviously counteracting forces.
09:03And let's wait.
09:04The thing that's important for a rates market, we live in a global world.
09:09And if you look, Bank of Australia, Bank of Canada, the ECB, the Bank of England, Bank of Japan, you
09:16know, globally rates are going, you know, they're moving rates higher to combat the inflation.
09:20So it is something obviously that's got to be at the forefront of the Fed's thinking, where I personally, I
09:26think the employment one is a bigger one.
09:27But I'm not sure that the Fed would would interpret it the same way today.
09:31Well, Rick, to your point, I mean, you know, the Fed operates in a global environment.
09:36Their peers around the world are raising interest rates.
09:38I hear what you're saying that, you know, you don't think necessarily that's something that the Fed would do.
09:43What different ingredients would you need to see where you would say, OK, this is a conversation worth seriously having
09:50at this point?
09:52For raising?
09:53Yes.
09:54Listen, I think I think you'd have to see a persistent structural level of inflation that worked its way in
10:01the system.
10:02And quite frankly, I don't think, you know, 3 percent is not at the Fed's 2 percent target.
10:06But I don't think 3 percent is an infectious.
10:08And you look at five year, five year forwards.
10:11Boy, they're not really moving.
10:13So the system, you're not seeing a spike in inflationary expectations longer, certainly longer term.
10:18If you started to see that and if you start to see, gosh, you know, there's a persistence to this
10:23interpretation of inflation.
10:25You start to see the two year, two year forwards, the five year, five year forwards really start to move.
10:30Then I'd say, you know, if you're at the Fed, do you start to react to that?
10:33I think so.
10:33You know, one man's opinion is a very different reaction function to a supply shock versus a demand shock.
10:40When you're driving, when you talk about inflation, at the same time, people are getting pressured by higher food prices,
10:47fuel prices to raise mortgage rates, to compound the problem.
10:52Just doesn't strike me as the right policy initiative.
10:55But listen, if you start to see an infectious increase in forward inflationary expectations, listen, that has to be part
11:01of the calculus for sure.
11:02Rick, I do want to get your thoughts on credit markets right now, both as a signal with regards to
11:09the geopolitical risk out there, but also within the context of some of the issues that have been raised with
11:14regards, I guess, from a liquidity standpoint, at least with regards to private credit.
11:22So I'll tell you, the one thing that's been super impressive is the credit markets are extremely resilient.
11:27And I will say, you know, we've done some managing of the risk in our portfolios.
11:32And we are, you know, us and I'm sure others have built a lot of cash in our portfolio to
11:36get through what is a what is a risky period.
11:38And the credit markets, the high yield market, which I think is is natural to some extent, but it's been
11:44pretty resilient relative to what's happening in private credit.
11:49And, you know, as yields have backed up, you've brought in buyers, insurance companies, pension funds.
11:55So not only have spreads held in now, you've had real buyers and you've had real transmission in terms of
12:01supply that's coming on the market in size, particularly in the investment grade market.
12:05It's been really impressive. And if you take the whole cacophony of risk that's come into the system, it has
12:15been amazingly impressive.
12:16I will say there are days that I would like it to push out a bit more than it's than
12:20it's moved out.
12:21But credit markets are very relaxed. And they're saying, let's get back to the point.
12:25There's so much cash waiting to go, particularly for rates and for people that have liabilities you're trying to match.
12:32Yeah, there's so much money out there to go in. It's it is impressive.
12:36Well, on that point, then, because obviously we have a lot of big issuance coming down the pike, particularly with
12:40regards to data center build outs and things and potentially 14 billion, maybe potentially over the next couple of weeks.
12:46Is there you don't have any real concerns right now about the market being able to absorb all of that
12:52new issuance?
12:54I just came out of a meeting.
12:57Listen, I mean, you know, so the answer is no. I think the market will be able to absorb it.
13:01I think that is going to be the ecosystem of growth in the in the economy.
13:06I think people a lot of particularly hyperscalers are in finance.
13:09I just went through some of the data around it. They're in great shape from a leverage point of view.
13:15So and and by the way, some of these are new names that will come to the market.
13:19So, no, I think it will get, you know, assuming we're making an assumption on the on the next 24
13:23hours of the next two weeks in terms of what the geopolitical looks like.
13:28But it's I'm pretty blown away by how much how much money is out there.
13:32And I will say, you know, from my perspective, some of the issuance that's coming in some of the bigger
13:37names that actually comes at very tight levels.
13:41You know, I don't find from a return perspective, they're not that interesting.
13:44I actually find some that are coming in equity or ones that are maybe a little bit earlier stage that
13:51are pricing to, you know, the upside potential.
13:54Those those I think are a bit more interesting today.
13:56That's really interesting. So basically what you're saying is when it comes to some of the issuance that we're seeing,
14:02it sounds like particularly when it comes to the A.I., the data center build out, that maybe the better
14:08place to kind of play that, so to speak,
14:10is in the equity market rather than, you know, buying into some of these new issues.
14:15Katie, I, you know, I will say this for my my whole career, I actually think investing in technology is
14:20better in equities.
14:21Now, some of and, you know, the upside is greater.
14:24Oftentimes you end up. And by the way, this is part of the we talk about with regard to private
14:29credit.
14:29You know, you think about what your recovery is on debt and equity in technology.
14:33They become pretty equivalent numbers. But the upside potential is significantly greater.
14:38So I would say generally I prefer equity.
14:42Now, there's also converts. There's loans with warrants to the upside.
14:46There's some ways to play that. And, you know, nothing is digital.
14:49There are there's some financing in tech that is that we've done that is that is pretty interesting.
14:56But I would say generally I tend to prefer in technology to be in the equity side because the upside
15:02is much greater.
15:03And Rick, we only have about a minute left with you.
15:05But I do want to quickly talk through some of your holdings when it comes to bank,
15:09because I see that U.S. high yield makes up nearly 15 percent of the portfolio.
15:14You were talking about, of course, corporate credit.
15:16You said that it's been remarkably, you know, resilient here.
15:21And certainly when it comes to high yield spreads, they've actually come in over the past couple of weeks.
15:26I wonder, you know, how you think that sort of stands up when it comes to evaluation perspective.
15:32I mean, would you go as far as saying it looks a little bit expensive right now?
15:36Yes. So, by the way, we've we have reduced a decent amount of our European high yield as well as
15:45some U.S. high yield.
15:46There's also some tools we use where you can overwrite some of your positions to create more income against your
15:52existing positions.
15:53So we've reduced a decent amount of it, particularly in Europe.
15:58And by the way, some decent amount of European investment grade credit.
16:01It's just not that interesting in terms of in terms of where the levels are today versus, you know, securitization
16:09market,
16:09particularly things you could do that are more customized, et cetera.
16:13Some of the you know, we've we've moved some money into mortgages not so much recently.
16:18E.M., you know, it's all in the world of being a bit conservative today.
16:22But E.M., the yields are attractive, particularly, you know, if you can overwrite some of them with with the
16:26volatility in the E.M.
16:28So, yeah, we're running more conservative.
16:30I will say from a fundamental default perspective, I still feel very good about the high yield market.
16:36It's just the levels, you know, are just OK.
16:39By the way, in our global allocation fund, I'm pretty blown away.
16:42If you take the beta, the equity market relative to high yield, high yield held up really well.
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