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00:00So good first half. Absolutely. Amazing second quarter for a lot of names. Tailwinds are in the
00:05rear view. How come? Well, I think if you look at where we are today, it's hard to argue that
00:11things aren't phenomenal, right? I mean, we have the best earnings growth since 2021. You're seeing
00:16all these different indicators like retail sales are double digit, you know, employment starting
00:22to come back, PMIs are doing really well. So growth is obviously really good. And that's kind of what's
00:27been powering the market higher. As we look to the second half, I think the bigger question is,
00:33you know, are the growth drivers that drove the first half, are they going to be sustainable into
00:36the second half? I think a lot of those are going to be going away. And so it doesn't mean
00:40the market
00:41can't go up, but there's more risk to that story. I think it's going to be a little bit choppier.
00:44What are some of those risks to the story? Right. So, you know, one of the big things is record
00:49tax
00:49refunds, right? Those are all paid out. And so you get a little bit of a continued boost as those
00:53get
00:53spent, but that's going away. Part of the big, you know, first half boost was just the fact that
00:59we are reopening from the government shut, longest, you know, government shutdown in history last year.
01:04You had, you know, the Fed out there doing RMPs and buying treasury bills. You had Fannie and Freddie
01:10buying mortgages. And you have AI spending those, you know, obviously surging, and that's continuing,
01:15you know, but a lot of these things are going to get a little bit more choppy. And so we
01:18look at the
01:19second half and there's probably three big risks that, you know, they don't have to happen, but
01:24they're the things that you should be monitoring to work if you're going to be worried about the
01:27second half. The first is the fading consumer tailwinds I already kind of alluded to. The second
01:32is AI capex vigilantes. You're starting to already see that story play out. And then the third would be
01:38just sort of a higher for longer interest rate story as it sort of cycles through the economy. So we
01:43think
01:43that interest rates more likely to be lower than they were in from where we were. And inflation should start
01:48to come down as it's peaking. But the fact that they're going to still be elevated, I think, you
01:53know, listen, credit card delinquencies are basically, you know, 15 year highs. We have record
01:58amount of credit card debt. There's things that we have to consider as you look to the back half
02:02because things have been so good. The credit card debt and the delinquencies. Well, let's start
02:07just with the debt. Is that inflation adjusted? So like, is that a fair way to compare it? Well, even
02:13if
02:14you inflation adjusted, it's high. I mean, if you think about, you know, why the consumer has been so good,
02:19I mean, it doesn't make any sense. We've had, you know, dispose of real incomes just went negative, you
02:25know, for the first time in a while. And because of inflation, because of inflation. So you have these, you
02:30have these headwinds to consumer, yet spending is really strong. Well, how is that? Well, they're drawing down
02:35their spending. We saw basically, if you go back in like the 40, 50 year history of savings rates,
02:42you don't sustainably come down to these levels where we are today. You did for a few years
02:47pre-GFC, but you don't come down here. So they're drawing down to their savings. They're tapping their
02:52credit cards. And so that's, that's, that's what's kind of happening. Dan is what really is happening
02:57is something we've talked about so much. And that's the K-shaped economy that the consumers that
03:01are feeling the pinch or, or, you know, you know, facing credit card delinquencies,
03:06is it the lower rung of that K? And, you know, this is the disconnect we get of people not
03:12feeling
03:13so great, not doing so well in this economy. And then you have a stock market at record highs,
03:16because there are those folks at the higher income strata, if you will, who are in the market,
03:23who are doing well. A hundred percent. And so when does the problem of those that aren't doing so well
03:29kind of play out in the economy, especially when we talk about the wealthier consumer is really
03:35what pushes consumer spending? Yeah. I mean, Carol, you hit the nail on the head. That's
03:38absolutely right. And the problem is that the K-shape is getting wider. And we talk about this in the
03:44report and our mid-year outlook, but also, you know, probably the bottom part of that K is,
03:48is growing. Right. And so like the concern is, is that the, you know, that lower income consumer
03:54that's feeling the pain, it's sort of moves up into the middle income consumer, which becomes a
03:59bigger part of the pie. Right. And one of the things that's fascinating is that when you look
04:03at inflation, we talked about inflation, actually, if you're in the highest income, uh, part of the,
04:09the consumer, you actually have had deflation over the last few years. So not only has your stock
04:15market been going up, but actually the prices of stuff you spend your money on have been coming
04:18down. Whereas it's this lower, lower income consumer that's felt the most inflation. The
04:24interesting thing is the middle income consumer that we talked about, they are just now moving
04:28into that inflationary territory. So that's where they start to feel the pain. And, and that's one
04:33of the concerns, not that it has to play out as a disaster, but we don't, when does it matter?
04:38Like, I will be honest with you. I think we've had wealth managers on and we're like, well,
04:43they're not our customers, you know, we've got, they're not the ones driving spending in this
04:46country. Exactly. I'm not trying to be critical, but they're kind of like, well, you know, everybody
04:51we're dealing with, they've got lots of money. So I'm like, when does it become a problem in terms
04:55of an economy? Certainly it plays out politically. Well, it's really on the margin, right? I think
05:01if you see, like when you look at disposable income I talked about that just went, the real
05:07disposable income just went negative, you know, that's including the wealthy, by the way. So it's
05:11like as a whole, the, the consumer is seeing, and, and that's not just inflation growth for
05:17total income is actually, is actually slowing, right? So that becomes a bigger headwind for the
05:22consumer, especially now that the refunds are paid out. I think that matters today. It doesn't
05:27have to be a disaster because the higher income consumers can still spend. But, you know, if you
05:33think about the starting point, I mentioned credit cards, but pretty much every category outside of
05:38mortgages is basically GFC level, you know, delinquencies today. That's a problem. Yeah,
05:43it is a problem. But to your point, it is concentrated in the lower end. It's the concern
05:47is that starts to grow and not that it's going to collapse things, but on the margin,
05:51higher delinquencies and slower growth, you know, that's something that's really not baked into
05:56people's expectations. Can I just ask, but it happens in a inflationary environment, right? Or is it,
06:02or do you anticipate inflation coming down? Well, so that's the thing is like if inflation, well,
06:07I do think inflation is peaked or is peaking. And a lot of that has to do with sort of
06:11the
06:12roll through impacts of Iran and oil prices. So as that comes out, you know, inflation is going to
06:17come down. The other part of inflation, the other thing that's been driving inflation higher is not
06:22just Iran, but, you know, the economy. We just talked about how great the economy is. People always
06:29forget how cyclical inflation is. And so if on the margin, things start to slow, not collapse, but start
06:35to slow, you know, and oil prices are coming down, you could actually see inflation come down more
06:41than people think by the end of the year. I think it's going to be sticky, but it might come
06:44down
06:44because people are saying inflation is going to stay high. We're pricing in one or two hikes by the
06:49end of the year. We don't think that's going to happen. In fact, if I had to choose, we think
06:52base
06:52case, no move by the Fed. If I had to choose, I'd say cuts are more likely given what we
06:57just talked
06:57about. Yeah. So then what's the right way to construct a portfolio for what you think this environment
07:02will look like? Well, I think, listen, I'm going to be the 1000th person that's come on your show
07:06this week to say diversification, but diversification matters given what's happening.
07:11I mean, you're seeing what type of diversification is asset class diversification. Is it regional
07:16diversification? Is it a stock size diversification? Yeah, yeah, exactly. At the heart of it, you want
07:23sort of factor diversification in the sense that like, I don't care if you have a thousand different
07:29assets in your portfolio. If they all move just based on AI, that's a problem. That's not
07:33diversification. Same thing if they all just move based on oil or interest rates. So that's the type
07:37of diversification. But I do think that in order to get that, you need size diversification, you need
07:43regional diversification. And I do think that the private markets give you a lot more wider of a menu.
07:49I mean, most companies in the world and in this country are private companies, right? So you can either
07:54go to the public markets, which are more concentrated than they've ever been, or you actually look to
08:00the sort of the private markets and alternatives to look for other alternative sources of diversification.
08:06What should realistically be your exposure in private markets at this point, considering some
08:09of the private credit concerns that we've had and still questions about disclosure?
08:13Well, that's what people forget. That's what people forget. It's like asking how much should
08:20your alternatives exposure be is like asking like, you know, what should your bond stocks and bonds
08:26total allocation be, right? It should be because basically, well, there is a prescription for 60
08:32based on age. And also, yeah, in 6040 is classic. Yeah, it should be based on it should be based
08:37on your
08:38risk tolerance. But like, I think what people forget is like, it's not a separate asset class, equity at the
08:43end of the day is equity, and debt at the end of the day is debt. So it doesn't matter
08:46if it's public or private
08:48equity, you know, like, you're owning shares in companies, and if their profits do well, there's
08:53transparency, the vehicle matters, but like the underlying asset you're buying is still a company,
08:59right? Like SpaceX went from being a private company to a public company, at the end of the day,
09:02you're owner, and if SpaceX grows its profits, you're going to benefit from that. If it doesn't,
09:07you're not going to do well. So I think, you know, there's there's benefits, the benefits I see to
09:12alternatives are that it's a wider menu that offers more opportunity for diversification, because
09:17you talked about private credit, you talked about private equity, but you didn't talk about,
09:21you know, infrastructure, as an example, you know, infrastructures is very interesting,
09:25because it's uncorrelated with all the everything else we talked about. And I think that we're in
09:31sort of a structurally higher inflationary environment for the next 10 years, right?
09:35But infrastructure has an AI component, it has economic component, if it's funded by either
09:41federal money or municipalities, like there is a lot. But this is the opportunity is that the fiscal
09:47budgets can't support the infrastructure you need. That's why the private money is coming in
09:53to support the necessary infrastructure. So it is private capital, and there's really good
09:58opportunities for income, diversification, and inflation protection that you're not getting from
10:03many of these other asset classes. So you're not going to say 10%, 30%, 40%? You're not going to
10:08say 50%.
10:09I think, again, there's a prescription for every person.
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