00:00Before we start hiking, we've got to drop an easing bias.
00:02And according to a headline just dropping across the Bloomberg Terminal,
00:05one other Fed president actually supported the three who dissented against the language of the statement at last week's meeting.
00:11How close do you think we are to dropping that easing bias?
00:16We're probably a solid two meetings away.
00:18At least I think the next meeting will maintain the bias, but we're close to see where the tides are
00:23going.
00:24And what's interesting, like in regards to the inflation discussion and using your whack-a-mole analogy,
00:30we've been having an outstanding year across our funds, especially a strategic bond fund.
00:34And the reason why we're having that is that we're whacking at the hole before the mole's there.
00:39We're not whacking at the mole. We end up hitting the mole in the head.
00:42So the hole that we're looking at now where the mole's not yet there is inflation.
00:46We believe the inflation genie has been let out of the bottle, not just because, as you've discussed, the supply
00:53shock.
00:53We also have the second order of that hitting, which will come through in food.
00:58You'll see it in chips and technology because of helium and the like.
01:02But we also have, so that's what you call cost push inflation.
01:07But now, based off the last clip that we've seen, we believe we're going to have demand pull inflation as
01:13well, too.
01:14And the reason why we're going to have demand pull is growth has been especially strong, surprisingly strong this year,
01:20and will get stronger because of the wealth effect.
01:23It's not just a U.S. wealth effect. It's a global wealth effect.
01:26So when you have demand pull and supply shock, you know what that is?
01:31That's COVID, redux, supply shock, demand pull because of all the money in the economy.
01:37So we don't believe hikes are on the table for 2026.
01:41Definitely on the table for 2027.
01:43And not only that, I don't believe the discussion will be 25 basis point hikes just because they'll be so
01:50far behind the 2026 curve.
01:52You're going to be talking 50 plus hikes depending on where inflation is at that time.
01:56And because of that, right now we're positioned underweight duration and we're selling more as we get close to 425.
02:03We're overweight credit because the growth outlook is good, which means your default probabilities don't get tighter.
02:08But we are looking to lighten up on our overweight of credit right now.
02:12Let's just sit on the underweight duration story.
02:15I just want to get an idea from you as the way you think yields might go through next year.
02:19It's an interesting theory. I just want to explore it further.
02:22If you've got them hiking and maybe by more than 25 basis points in 27, what kind of levels, numbers
02:26are you thinking about?
02:28So what's interesting, and we could discuss in terms of this year, which applies to next year.
02:32Our theory this year was that yields will remain in the range of 20, 25, 10-year treasuries, which was
02:37390 to 480.
02:39So 435 is the midpoint.
02:42Anything below 435 or underweight, and the more it goes through 435, the more underweight we go, and vice versa.
02:49We're not buyers above 435 until 450 to cover the short, and then we will start going long.
02:55We will have a discipline post to start going long.
02:57We think 480 holds, but there's a definite possibility we hit 5%, not next year, this year.
03:03But we like being very overweight at those levels.
03:06The math of fixed income and owning 10-year, call it the Bloomberg Ag, U.S. Ag, the math gives
03:15you a lot of protection for another 100 basis points of hike.
03:18So if you buy at 5%, you probably have an active manager who has 6% yield on their portfolio.
03:24You have 100 basis points of protection for additional hikes beyond that.
03:29And that's where we like owning bonds.
03:31We like owning them towards 480, and we like owning them towards 5%.
03:35We believe QE will come into play if we hit 5%, which gives you protection on the first time of
03:40being overweight duration.
03:42Can you lean into that, Earl, just a little bit?
03:44How do you see the Kevin Warsh Fed handling a situation where the market's pushing back on rate cuts but
03:51expecting intervention on the long end?
03:55Yeah, I pushed upon that a little bit in regards the longer they wait for hikes, the more they're going
04:02to have to hike.
04:02So it's going to make their job very difficult.
04:05Also, you have the Treasury versus the Fed, although they should be hand in glove with Warsh coming in.
04:12But don't think it has an effect, because the reason why the Fed will have to hike and hike probably
04:16a lot more than the market thinks is inflation expectations.
04:20One of the things of note recently, on the recent sell-off, we saw 10-year U.S. break-evens
04:25go above 250.
04:27They touched like 252, 253.
04:29They're now at 244.
04:30The last year high was 245.
04:34This is why we believe the inflation genie is out of the bottle.
04:37It's not yet the thing they're focused on, but it is the thing that the market will focus on.
04:42We believe in Q4 this year.
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