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00:00The unemployment rate goes down, but a surprise contraction in jobs.
00:04Last time we spoke for last month, you said the employment picture is stable, broadly unimpressive.
00:09Has your assessment of this labor market changed since then with these numbers in hand?
00:14No, broadly not impressive, I think is the right terminology.
00:19In fact, I was thinking about it. I think it's actually remarkable how unremarkable the data is.
00:24Listen, I think, you know, when you look at, you know, people say, well, gosh, we're not hiring many people
00:29because we have a supply issue.
00:30And you saw some of that play through today. But that being said, you're not seeing any wage growth.
00:34So meaning there's not that demand for labor that you would expect when you've got an economy that's doing as
00:40well as it's doing.
00:41I mean, we're going to grow. I think you're going to see 6 percent nominal GDP.
00:44You've got corporate top line revenue that's strong. Earnings are strong.
00:49But you're seeing operating leverage for companies kick in like you read about.
00:52I mean, you look at all these earnings reports, particularly in the tech space.
00:56Companies are growing. They're spending immense amounts of CapEx.
00:59But you're actually cutting people in many cases.
01:01So anyway, I think we're seeing a productivity revolution.
01:03And I think we're watching it play out month in and month out.
01:06I mean, to have only 20,000 jobs on a three-month moving average, you strip out health care, you're
01:11having negative job growth in aggregate.
01:13So anyway, I think it's, listen, I just think we're going through.
01:16I think when they summarize this years from now, they're going to witness something that is productivity.
01:22People say it's AI kicking in.
01:23I actually think it's just been an ethos around companies growing their business and seeing how you can operate without
01:30that much employment.
01:31Well, also, you've got the fall in immigration that is probably contributing to these big declines we're seeing in the
01:39labor force.
01:40But the people who want jobs are apparently getting jobs with unemployment at 4.1%.
01:44So I assume this tells you, as well as the Fed, that we don't have a problem with the labor
01:50force side of the mandate.
01:53Yeah, I mean, I think that's right, Mike.
01:54I mean, you know, I've been pretty adamant about I don't think the Fed needs to hike.
01:58And, A, I don't think you really will solve the inflation dynamic.
02:02Part of why I think these task forces will be so powerful is you'll get into what are some complex
02:06subjects.
02:07When you break down inflation, you look at the difference between services and goods.
02:11You think about what's still sticky in inflation, education, health care, insurance.
02:15Does you're moving the overnight funds rate up really do much?
02:18And you get to the point being, if you're restrictive on rate and you're driving mortgage rates higher, I just
02:23don't see that as really effective trying to bring inflation down.
02:28You've got what I would argue is, yeah, maybe it's an okay labor market.
02:31But, you know, you still need, in particularly when you have this much debt on the country, you need to
02:36grow faster.
02:37You need to put more people to work.
02:39And I think that, to me, is the philosophy that the Fed has to employ today.
02:43Well, on the inflation side of things, Rick, I know you've been a big proponent.
02:47And, again, the type of inflation we have isn't something that's fixed by hikes, but perhaps by policy, not monetary
02:53policy, but fiscal policy.
02:55What is the policy you think that could start to eat away at inflation?
02:58Is it just, like, ending a war, basically?
03:02I mean, listen, the war is a big deal.
03:04I mean, obviously, not only do you get higher prices in terms of fuel, but, you know, there's a transmission
03:09effect through that when you talk about, obviously, trade getting slowed somewhat.
03:13So, anyway, the war is a big deal, obviously.
03:14So, that will change.
03:16Then the dynamic, and people will focus on tariffs.
03:19You know, the goods inflation, you know, in the U.S. economy, it's not that large of an importer of
03:23goods.
03:23So, yes, and I think people got really worked up about that last year.
03:26So, what do you do?
03:27And how do you create fiscal velocity?
03:31You know, there's a bunch of things you could do.
03:33And I think, quite frankly, deregulation is powerful.
03:35I think the idea around how do you help with housing, things like zoning, permitting, et cetera.
03:39How do you get, like, some of the stuck student loan asset or liabilities that young people have?
03:48How do you transition some of that?
03:49How do you help with some of that?
03:50I think there's a whole series of fiscal dynamics that can help with inflation.
03:55But I don't think moving the overnight funds rate will really do it.
03:59And we've seen that before.
04:00It doesn't really have that much of an impact.
04:02I guess I would ask you, then, in that case, because I agree that there's probably not going to be
04:07anything happening on the fiscal side,
04:09because they can't even vote on an attorney general at this point.
04:12And the Fed is maybe leaning now towards a hold in September.
04:18We'll see after the Wednesday CPI report.
04:20But that leaves us with an inertial economy.
04:24And what do you think happens to the economy if there's no movement on the fiscal or the monetary side?
04:31Mike, I mean, I think you're unbelievably good at analyzing this.
04:35And I always appreciate the questions you ask at the FMC meeting, et cetera.
04:39Another thing I will say is I'm not sure I agree with the inertial concept.
04:42I actually think the economy is operating at an amazingly strong level.
04:46And if you look at the CapEx, it's obviously a big driver of that, that from AI that's getting into,
04:51you know,
04:52straight growth of the economy in so many different forms.
04:55And then you look at consumption today.
04:57Consumption, you see this, you know, particularly in areas like leisure and hospitality.
05:01You see this in some of the transportation dynamics in terms of travel.
05:06Listen, the economy is operating.
05:08And actually the thing that was pretty amazing to me in the last two months is somebody had a fiscal
05:11tailwind.
05:12But you actually had lower and middle income that was actually starting to accelerate.
05:16And we see that in all of, we use a lot of this high-frequency data.
05:20You actually saw consumption in a pretty good place.
05:22So, listen, I think the economy is operating at an extremely solid level.
05:26You know, you would think in the second half of the year you'd start to moderate a bit post the
05:31fiscal tailwind.
05:32But, boy, you know, you see this.
05:34I mean, this was a pretty amazing quarter of earnings reports that not pervasively across every single company or industry.
05:44But, boy, I thought it was pretty darn good.
05:46And, you know, part of what, when you look at the equity market and having a pretty good run, particularly
05:49recently,
05:50you're actually looking at multiples that are coming down because these companies are earning so fast.
05:54So, anyway, I'm pretty enthusiastic about where the economy is today.
05:57And I'm assuming that that enthusiasm over equities translates into your world of credit, Rick.
06:03You have Bink, of course, a fund that has been outperforming the broader benchmark by a healthy clip for the
06:08past few couple of years.
06:09I know last time you joined, you expressed skepticism on USIG credit.
06:13You like carrying higher income.
06:15I think all of this is so interesting time at a time, Rick, where, as you point out, so much
06:20is happening because of AI,
06:22especially in debt with the huge issuance we're seeing from the hyperscalers.
06:26We've got another $25 billion that this market easily took up from Google just this week.
06:30And at the same time, we're going to get more issuance from the Treasury next week.
06:34What are you thinking about where you want to place Bink just given the sheer amount of issuance that continues
06:39to hit this market?
06:40You know, Danny, I'll say one thing about, you know, because you've had a backup in rates, you're able to
06:46hit your yield targets.
06:47I mean, talk about we're hitting almost seven.
06:49I mean, six, you know, high sixes in terms of yield.
06:51And so a couple of things we've been doing is you actually don't need to go down in credit quality.
06:55You actually don't need to go that far down in terms of the liquidity in the portfolio.
06:59So, you know, we've been keeping it, you know, we've been adding a bit in terms of European fixed income.
07:05You know, I think emerging markets are interesting, particularly if you assume the dollar is not going to be moving
07:10aggressively.
07:11You made the point right.
07:13I think investment credit, given the amount of supply we're going to see, data center, hyperscaler,
07:17investment credit is not that interesting at all.
07:19But in the securitization market, you know, they've securitized assets, both in commercial real estate, ABS, RESI, you know,
07:28those markets are in pretty good shape.
07:30So, you know, we're in an environment where we don't feel like we've got to stretch a lot.
07:33You know, these real rates that today give us an amazing ability to keep our yield up without really stretching.
07:40We're running Bink now at an average rating of A minus.
07:43You know, you're hitting high sixes.
07:45Like, that's pretty good today.
07:46So I think we're trying to be in bonds, we're trying to be as boring as you could be and,
07:51you know,
07:52take the risk in equities, which, you know, have a little bit of volatility to them, particularly single-label.
07:57A little bit less risk, maybe, in the bond market.
08:01But there's such an appetite, I guess I would say, for debt, for the hyperscalers, et cetera.
08:10How's that affecting how you can sell all of these bonds?
08:14I was really surprised yesterday with the Google Alphabet offering that it was so oversubscribed.
08:22You know, Mike, we're living through something.
08:24And so one of the real benefits to all the financing that has to come, data center, hyperscaler,
08:29U.S. Treasury, U.K., Japan, is we're actually going through a pretty historic demographic that is supporting this demand
08:38for yield,
08:39insurance companies, life insurance, pension.
08:41So it's amazing.
08:43If you price assets right on the debt side, you can place an awful lot of debt.
08:48Now, that being said, I mean, the hyperscalers have clearly widened quite a bit.
08:52And so you're getting the levels.
08:53Like I say, these real rates, if you're a pension today and think, gosh, I can defease a good portion
09:00of my liability stream at these real rates,
09:02it brings a lot of people in, particularly if you get some spread on it and you're watching that play
09:07out.
09:07Like, I would say one thing, I mean, the supply is not going to stop coming.
09:10And, you know, next week we get a lot of Treasury supply.
09:13So, you know, in terms of interest rate exposure, we feel like we don't have to be in a rush
09:17to add much interest rate exposure.
09:19This basically takes, in your view, a hike off the table.
09:22I wonder about cuts, though, because when we had spoken about a month ago, you said perhaps we still could
09:27get cuts in the back half of this year.
09:29Do you think that's still a possibility?
09:32So, listen, I mean, I, you know, you still have a Fed committee that is, that is generally hawkish.
09:39You still have a committee that is more focused on inflation than the labor readings.
09:44So, listen, I mean, I think, I think you could, it could still happen.
09:48You'd have to see some deceleration in economic conditions.
09:52You'd have to see, you know, we think core PCE is going to come into the, into the high twos,
09:57down to the high twos.
09:59Next year, we think you're going to get into the mid twos.
10:02Can you still get it done this year?
10:04I think so.
10:05But, listen, I mean, I think you have to, one thing I've learned about investing, it's not what you, it's
10:10not what you think they should do.
10:11It's what they're going to do.
10:12And today, the structure of that committee clearly is in the, we're going to fight inflation and, and, and use
10:18the rate tool to, to be that, that tool to get there.
10:21So, listen, I think they still could.
10:23I just think hiking doesn't make a lot of sense today.
10:26Pre-interpret Wednesday for me, though, the, the CPI.
10:29We saw a big drop in market expectations, sort of a knee-jerk move after the labor report.
10:35What's it going to take to move one way or another in the fixed income markets on Wednesday with CPI?
10:41Yeah, that's a great question, Mike.
10:42So, you know, you've gotten a couple of softer prints on inflation recently.
10:46You know, we think we're in this mode of getting 0.2s type of, uh, type of numbers when you
10:52look at core.
10:53And then, you know, even, you know, I was looking at the numbers for core PCE, maybe a little under
10:58the 0.2 monthly reading.
11:00So, yeah, listen, if you got something significantly aberrational to that, you know, that would certainly move markets.
11:06Listen, if the number came in significantly higher, which would be incongruous to what you've seen over the last couple
11:12of months.
11:13Listen, you know, is the Fed going to be on alert for that?
11:15Yes, I think so.
11:16You know, you know it's better than anybody.
11:18I mean, I think this, I think this, you know, what the chairman has stated, what Chairman Walsh has stated,
11:22it's not just one number that he's laser focused on.
11:25He's looking at the panoply of, um, of, of readings.
11:30And our sense is inflation is slowly moderating.
11:33But, you know, it'll be interesting to see that report, like you said, that comes out Wednesday.
11:37Rick, I do wonder, obviously yields are coming in now.
11:40But we have had a 30-year yield that has been stubborn and stubbornly moving higher above 5.2 at
11:45one point.
11:45Now it's obviously below 5.20.
11:47Do you think that this market is at all reflecting its concerns about credibility over the Fed and Chair Walsh?
11:56You know, I'm, I'm a little surprised at the, at the concern around, you know, whether it was the last
12:02FOMC meeting or, you know, you know, some of what I thought was a little bit harsh on credibility.
12:08I think, you know, I think reduced forward guidance is not terribly intimidating to, from, to market participants.
12:15So, you know, I don't, you know, I don't really think, you know, can we get more from the Fed
12:19in terms of the metrics they're looking at, in terms of the structure of what is going to be important
12:23to them going forward?
12:24I think so.
12:25And I think we'll get more details around that.
12:27Listen, Annie, I think it is, we're getting a lot of supply of product.
12:31You know, you're pushing real rates up because you're getting a financial transmission that is historic in terms of whether
12:37it's fiscal supply that's coming from not just U.S., but obviously, you know, pressures and whether it's U.K.,
12:43Japan, plus the amazing amount of supply we're getting in the credit market.
12:47So I think it's more that than it is anything else.
12:50And like y'all have said, I mean, we still have some stickier inflation that is keeping these rates up.
12:55So anyway, those are where I would put the, what's the influences.
13:00Hey, Rick, just super quickly, because we're about to talk to our tech reporter, Ed Lolo, about all the AI
13:04debt coming, and we talked about it just a moment ago.
13:07You talked about what it does to the IG market.
13:09Do you think it changes the attractiveness or the pressure on the Treasury market at all, getting all that supply
13:14from the AI hyperscalers?
13:16I mean, whenever you push that much supply on the market, you think about there's a crowding out effect.
13:21I mean, listen, the U.S. Treasury is still the behemoth in terms of issuance.
13:24But, you know, you take what's coming in IG, asset backs on the backside of it through data center.
13:29So, yeah, I just think we're getting a lot of supply, and all markets, including government bonds, are reflective of
13:35that.
13:35So, yeah.
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