00:00So let's start right there on that conversation Romaine and I were having.
00:03I mean, you think about these equity markets.
00:05March was a hairy month, but then you saw what happened in April.
00:10And you think about where we are when it comes to the bond market.
00:14It hasn't really retraced that sell-off.
00:16You think about where we are when it comes to oil.
00:18We're at very, very high levels relative to where we were a few months ago.
00:23Are you surprised by where we stand when it comes to U.S. public equities?
00:27Yes. So I think that equities price in new is good or bad rather rapidly.
00:33And what we're seeing, and if we go all the way back to the financial crisis, we go back to
00:36COVID,
00:37we're seeing this Liberation Day last year.
00:40We're seeing the snapbacks happen faster.
00:42The volatility is happening rapidly and the recovery is happening with amazing speed.
00:48And that's really become a pattern for the equity market because of this pricing in.
00:52And right now, the equity markets have priced looking through the Iran conflict to its conclusion.
00:59And I think that's what's driving the equity markets along with, dare I say, fundamentals.
01:05The storyline is pretty strong and U.S. economy remains resilient and positive.
01:10Absolutely.
01:11And it's worth noting.
01:12I mean, you think about the latest round of earnings that we got through.
01:15We got a lot of the Magnificent Seven out of the way.
01:18Certainly, this opportunity to focus on the fundamentals of corporate America might help explain what we're seeing in the S
01:26&P 500.
01:27But even still, if we were to stay around these levels when it comes to Brent, when it comes to
01:32WTI,
01:33I mean, how much longer can this sort of dynamic last where you have pretty high oil
01:39and you have an equity market that is paying attention to a totally different story?
01:43So there's a few things here.
01:44So first of all, the downside risk, the extended Iran conflict really isn't priced in at this point in time.
01:52So there is some room for volatility in the future.
01:55Our base case is that we stay elevated on oil prices, let's say around $100 a barrel for, we'll call
02:03it three months.
02:04And during that period of time, we sort of slowly then, towards the end, tail back down.
02:08Not to pre-Iran conflict prices, we don't really see a round trip to $60.
02:12It's going to take a little bit of time to unsnarl the supply chain disruption that came from having the
02:18straits closed.
02:19And so as a result, we're going to see maybe $80, which is about where the future suggests by the
02:26end of the year oil prices will go.
02:28So in that environment, you know, that the markets can operate, fixed income can operate too.
02:36And we'll talk a little bit maybe about where the fixed income markets are.
02:40But that's where equities have priced in.
02:43Again, looking past the conflict to fundamentals and the ability of the economy to recover, remain resilient, even in spite
02:50of elevated oil prices.
02:52Well, let's talk about fixed income.
02:54I mean, spreads are still tight, despite, I think, everything that's happened.
02:57So, I mean, you still have some resiliency there, same way you see in equity markets.
03:01So I am curious, do you expect at all any sort of widening of those spreads as this conflict continues
03:07for a longer period of time?
03:08Or do we kind of stay where we are?
03:11So I think fixed income is now more of a rate story than it is a spread story outside of
03:16technology.
03:17And what we're seeing is concern about inflation and Fed policy and, by the way, central policy, central bank policy
03:26around the globe and what's happening there and the concern about whether they need to actually begin to act, dare
03:31I say, raise rates.
03:32And our view is that we still expect one rate cut later this year, but obviously the markets have priced
03:41that out.
03:42And we have, you know, assuming all goes well, a new Fed chair in Warsh.
03:49And so I think we're going to see a change the way the Fed manages interest rates going forward and
03:54thinks about inflation fighting using different tools or using the same tools differently, if you will.
04:00And so as a result, I think it's more of a rate story.
04:03What else is also happening is because of the Iran conflict and other fiscal spending that's happening, we're going to
04:10see more treasuries get issued.
04:11And so as a result, we're seeing sort of a lift to rates because of the supply-demand, dare I
04:17say, imbalance.
04:18Way more supply coming relative to the demand.
04:21And that's lifting rates.
04:24That, however, isn't affecting spreads.
04:26So the spread story is one where the fundamentals, the same market conditions that are driving, dare I say, somewhat
04:32optimistically, driving rates, excuse me, driving stocks are also driving the spread story relative to rates.
04:39You mentioned how the Fed is going to maybe think a little bit different about inflation fighting.
04:43But there's also been a lot of talk, based on what Kevin Warsh has said publicly, just about thinking about
04:48what inflation is altogether, at least in the context of monetary policy.
04:53When you think about whether it's productivity, enhancements and other things coming into the economy, is there a case to
04:59be made that maybe the way we look at inflation at its current levels is, I don't want to say
05:03wrong, but maybe it's not the right way to think about it?
05:05I think the issue is, do the tools that currently are, are the tools that are available to the Fed
05:13and to central banks, are they the right tools to fight this type of inflation?
05:17So if the inflation is one that's caused by supply chain snarls, I mean, there's, to be real, there's a
05:23whole lot of oil available, you know, many, many, you know, billions of barrels, but getting it out of the
05:29ground and getting it to where it needs to be deployed are two different matters.
05:34And so as a result, is the, is the Fed the right, using the right tools, or do they even
05:39have them available to fight that kind of inflation?
05:41I think the market is pricing in what I would call the pig through the Python problem.
05:44So if all goes according to plan or expectations right now, what we're going to see is we're going to
05:49see inflation bulge and then return down to at least some level that is closer to the Fed target.
05:56Do I see 2%, which is the Fed's target number anytime soon?
05:59No.
06:00And in fact, we have to look at the bigger picture, which is, are we in a bit of a
06:03reflationary world anyway?
06:05All this building for AI, all this need for capital.
06:08These are different types of drivers than necessarily the Fed's situated to take, you know, to take care of.
06:17And so I think that's one of the reasons that Wors is really interested in and has written a lot
06:23about how do we really address these tactically and what tools does the Fed have available to it to address
06:31them?
06:31So, I mean, how does that change your thinking about how you're viewing U.S. government bonds as an investor?
06:38Because, you know, you mentioned a whole lot of elements here, which sounds like it leads to maybe a structurally
06:43higher long end of the Treasury curve.
06:45Does that change any assumptions that you have about, you know, what role that plays when you're putting together a
06:51portfolio?
06:52So, interestingly enough, what we've seen is we've seen a flattening of the yield curve.
06:55And I think what we're going to see is a lot more issuance in the short end.
06:58So, perhaps what we're going to see is this flatter yield curve becomes a bit more of a phenomenon relative
07:03to the, frankly, even our prediction that we were going to see a steeper yield curve.
07:07At the beginning of the year, that certainly made a lot of sense.
07:09Given where we are now, the flatter curve probably is the story.
07:12Oddly enough, also, what we've seen is the 10-year remains anchored.
07:15And it's been anchored, running between high threes and high fours for a long time now, since 2022, really.
07:22And so, as long as we're within that space, investors can actually tactically move duration, which is what we've done.
07:29As interest rates move up to, say, 4.5 level on the 10-year or maybe a little bit more,
07:35that's the time to extend duration.
07:37Frankly, the economy and tech and other markets, stock market, for example, really don't perform well when the 10-year
07:45goes north of 4.5%.
07:47So, keeping it in that range, I think, makes a lot of sense.
07:50And I suspect that Fed policy and, more likely, Treasury policy will have a goal to keep the 10-year
07:58within that trading range.
07:59With regards to Treasury policy, I mean, how do you rate it so far?
08:02I mean, I know there's a lot we don't know, but at least from what we can see, it does
08:05appear that Besson has done a relatively good job so far of trying to thread this needle.
08:09Actually, I mean, I think he actually has done a very good job, considering there's been so much headline news.
08:15There's been a lot of deficit spending.
08:17You know, it's – and you have to signal.
08:20The Treasury has to signal when they're issuing and how much.
08:23And I think it's been very transparent.
08:26And I think, in fact, the Treasury Secretary has done a great job.
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