[00:00] Okay, welcome to the break of the game. I'm with Josh, good to be with you. What's up with the Fed? We came into the year, the market expected a couple of great cuts. It looks like we're going to do this year with a couple of great hikes.
[00:12] And so with appreciation for how difficult it's been to predict the future, Josh, where do you think this hiking cycle ends up? Well, I don't think it's just the solo hike the Fed did yesterday.
[00:24] I think it's going to be more than one, just given the tone of the press conference throughout. The market price is in four.
[00:37] I think oil is going to be a very important determiner of this. When you kind of look at the year, I think that's probably the biggest surprise, is the big rally in energy prices.
[00:51] you know, they then came off with a little bit of a lull in the hostilities, but then, you know, resumed climbing back above 100. I think that's really impacted the inflation outlook after a series of inflation shocks,
[01:04] and maybe you could begin to see a case back to 2%. The big shock in headline inflation, I think, has had a big impact, you know, on that. Now, the market heavily discounts a kind of proper hiking cycle with 4.
[01:19] you know actually myself don't think we'll actually end up getting that that that many but the market's clearly you know nervous okay so it sounds like in your mind it's two or three
[01:33] total I think it's two two or three total for me if I had to pick a number today it would be two okay so we'll be done we'll be done with this cycle this year okay what do you think yeah How few is that? So another one in October and then a long pause.
[01:50] You know, distributions-wide, as Josh said, lots of things that could still happen that could change the picture, I think, in both directions. I think two is a pretty good anchor point. I think there's probably a bit of skew to the upside from that.
[02:04] What I do think is that at four price, if you ask me, more likely two, more likely six, I'm going to tell you much more likely two. So I do think we've put in real premium against a proper cycle,
[02:16] and I think probably then the risk is that we under-deliver, which is the half-fee. Okay. Josh, I want to come back to you. Let's talk about the bond market. The yield curve has flattened this year,
[02:28] but I feel like most of the recent talk or hand-wringing or worry has been about the back end. Do you have a strong view on the shape of the yield curve going forward? I don't have a strong view on the yield curve shape.
[02:43] I would note a couple of things. Like you, even with all the talk about deficits and whatnot, it's really been, I think, overall a front-end driven move as the market kind of repriced monetary policy expectations.
[02:57] The bond market's done a lot of work. There's obviously a lot of bearishness and all the kind of stories floating around, whether it's strength of the economy, fiscal deficits, anxiety about inflation.
[03:12] But right now, you have a 10-year note at 5%. You have a 30-year real yield above 3%. Well, the near term may be hard to call. I would just point out that the bond market structure is in a very different place than it was the last decade
[03:30] in terms of the coupon on offer, and in particular, in the long end, like the real yields that are on offer. So I just think the bond market's kind of discounted a lot of that story at this point.
[03:42] I feel like you both think, again, with appreciation for how complicated things are, I feel like you both think there's a decent amount in the price, there's a decent amount of risk premium to fixed income, is that fair? I do. I think it needs a catalyst of some sort
[03:56] to kind of more properly reverse things. I think that catalyst probably needs to be, or would most likely need to be, a fall in oil prices. It would give the market some comfort in that vein.
[04:11] If you do get that catalyst, kind of a more bullish factor, I think buyers will return, because I think longer term valuations are more attractive than they been in a fair bit of time I want to stick with the fixed income question for a second There a number of reasons One can look back kind of back to post and say here why yields have done what they done right
[04:34] Debt and deficits, of course. Inflation, 66 months north of target. Competition of capital. And then in a more benign sense, growth, nominal growth has been very, very strong.
[04:46] How much do you kind of worry, though, about the persistence of those factors? Yeah, and I was going to what you were asking Josh about before. I think it's helpful to break them down, you know, kind of the way you did.
[04:58] If I think of the ordering of it for me, collision of sort of AI and corporate finance needs rising while the fiscal deficits are there. I think that's a big part of the story of rising real yields. You know, that competition for capital story.
[05:10] The cyclical counterpart to that is economies doing, you know, reasonably well. growth being fairly resilient while inflation is, you know, only still slowly, if at all, kind of converging back to target.
[05:23] So pressure to keep policy rates high or push them back up again sort of reemerges as a story. And then you have these, you know, issues more on the inflation side, obviously, the energy price shock and kind of general worries around inflation coming through the oil price.
[05:37] And then some of these worries about, you know, various policy interventions to, you know, both here and elsewhere to kind of restrain yields perhaps sort of flowing into the picture. When I look at the deeper side of this, I think a lot of it structurally is that real rate competition for capital
[05:54] and the kind of resilience of growth. And so where there is scope for change, I think there's scope for change, as Josh said. You can have some inflation relief that takes maybe the edge off this kind of spread-tagging cycle.
[06:08] Oil relief is definitely going to give you some scope for some long-end relief as well through that channel. But I do think that the structure of higher real rates that we're seeing owes a lot to these sort of financing dynamics and this sort of growth story.
[06:24] And so until that really changes, the notion that you'll get a big shift in yields lower outside some of this sort of inflation risk coming out, I think it's harder for me to see. If we get the AI investment boom start to turn,
[06:36] if you get a proper gross downside surprise of the kind that's not in our forecast, then you could get a meaningful replacing lower. But I think we're going to be in a higher yield world,
[06:48] and the risks on the real side are still that that kind of financing pressure just keeps yields up and perhaps even pushes them higher over the course of the next six to 12 months. Okay. I want to ask you both about risky assets.
[07:01] Dominic, I'll stick with you. So we had this very volatile July. It felt like coming out of that, and there's still traces of that in August, the setup was cleaner or a bit better. But the AI headlines and the volatility associated with that, it just keeps coming, of course.
[07:18] So I'd just be kind of curious, what's your take on risky assets from here? Yeah, look, I think, as you said, it's been a trickier patch. I feel like we've been circling around the same set of risks now for a while between AI kind of rates yields and the oil and energy risks through the Iran conflict.
[07:37] And there's real hard uncertainty around at least two of those three. And we've had patches where it's been all three of them. And so that uncertainty is real. We got a brief setup, like you said, at the end of July where it felt things cleared.
[07:50] And the market did reset higher and then has held on to at least some of that reset. but the kind of ebb and flow of these things made things complicated. I think the setup is those risks have not gone away.
[08:03] The uncertainty band is still wide around some of those, particularly the war and the energy price risks, and I think AI for me falls into that category. But going back to what we were saying about rates,
[08:16] I think we've just moved pricing and worry into a different place than we had before. The AI concerns are much better than this. We've had some derating of key areas of the market with still kind of ongoing confidence that earnings at the moment are still holding up well.
[08:33] We've priced a Fed that's going to hike four times. We've taken real yields up. We've priced oil above 100. And so what has definitely changed is the distribution of pricing. And so it's much easier to see now how they could be passed for release from here.
[08:47] So I think having cleared the Fed having had them come out hawkish anchoring the back end of the yield market maybe again you got a slightly cleaner setup I think the difficulty level is still you know is still higher
[09:00] And I like the idea of using this kind of low index bolt and protect yourself either downside or using upside exposures. But I think this is the clearest setup we've had on the bullish side for a little while.
[09:12] maybe not quite as good as it was in late July, but it has some of that feeling if you come out of the FOMC and things look a little bit clearer, even with a hawkish innovation there. Okay. Sounds like you want to buy some call options.
[09:26] Yeah, I think the short-term setup is good, and I think the pricing of those looks pretty attractive. Okay. What do you think, Josh? I think the stock market's handled a lot of stocks selling pretty well.
[09:38] You know, big rallies in oil prices, big backup in bond yields, tremendous amount of headlines around the AI theme, around safety,
[09:50] and kind of through the churn, it's kind of been a very range-bound market. So I actually think it's kind of impressive, you know, how well kind of stocks have held in.
[10:03] Now, I think, you know, earnings are clearly part of that story, but it could be a little bit like you, Britton, where you're in a choppy period through all these headwinds and then some of them dissipate and you can kind of resume rallying at some point.
[10:22] I think maybe it speaks to just like the underlying economic strength. We're just in this like big CapEx cycle, real growth in the economy, very strong. and it means the stock market can kind of withstand a few of these bumps
[10:38] because we're just in like a broader upswing. I want to come back to you on the macro. In the end, similar to the judgment, of course, is going back to this durability of the U.S. economy.
[10:51] Where do you feel like we are in that? What's going to trend from here? Yeah, the forecast is more of the same, 2%-ish type growth. I have great pictures being kind of solid overall. I think it's impressive in the face of the shocks, the resilience there, and we've seen that.
[11:06] It's not spectacular, but I think growth's been holding in. The labor market's been holding in. And I would say at the margin, when you take a step back, which, again, is surprising given the oil hits that we saw earlier in the year,
[11:18] if anything, growth status looked a little better. The labor market sort of looks like it's, you know, on the front lines, falling over times very different from what people came into the year expecting. You look at the composite ISM. You know, there are problems with all of these surveys, but it's kind of slowly picking up over the recent months.
[11:34] So, if anything, things have gone a little better. We're now, you know, we've hit the economy recently with higher energy prices, not just oil, but, you know, flying through to gas and diesel. We've got rates going up. Financial conditions have tightened.
[11:46] They haven't tightened the amount you would really worry about. So, pretending you've got that, look, but we've got some new pressures that if they continue to build could make things trickier over the next quarter or two. But, you know, if that's the limit of the price we see, we'll get some relief.
[12:02] I think the growth outlook looks pretty decent. I think the challenge a little bit is just we're not that worried about growth as a market in terms of where the concerns have been priced. Most of our measures, we've had some underperforms in cyclical areas,
[12:15] but not a huge amount. Most of our sort of cyclical growth pricing measures still look pretty solid. So, you know, it's not like you have a big gap there. I noticed yesterday in the SEP, FOMC SEP, that when you looked at balance of risks around growth,
[12:31] no one said to the downside, which is relatively unusual. I have a bit of the Lloyd Blank find, you know, I haven't felt this good since 2011. I like that you went that deep into the SEP.
[12:46] It's pretty unusual to see that. So there's a little bit of that lingering sense that we're all pretty comfortable with the growth outlook, really. I mean, there's periodic worries, but the market's not really shaking its view. So it's much more around the pricing of it, but I think the underlying picture looks fine.
[13:01] All right, last market question for each of you. There's about four months left in the year. Not even. What's one theme or position where you have the most convection from here to the turn?
[13:13] Huh you know it been so choppy it hard to kind of say there one clear theme I say a couple of things that I watching One is the U dollar which has been choppy
[13:27] You know, I think the Fed hiking, but also kind of Warsh's press conference, what I thought was a clearly hawkish bent in this kind of U.S. story leading in AI,
[13:40] could set up nicely for the dollar with a strong U.S. economy, relatively a Fed, you know, that seems like it's on the case. I'll call that out. I think to the extent we could, you know, pass the midterms and get some relief in oil prices to the downside,
[13:58] could open up a nice kind of all assets up trade into the end of the year. But I think you kind of need that fall in oil prices to catalyze that. And then lastly, you know, as I mentioned earlier,
[14:11] I continue to look kind of from a medium to long-term perspective at the high, what I view as kind of high, reasonably attractive levels of real yields in the very long end above 3%.
[14:23] And I would just highlight that. Okay. Dollar? Yeah, I think, you know, as we mentioned, with these kind of big risks, I still think of the market as a sort of month-by-month process a bit more. But now I look at the pricing of Fakes that we talked about at the beginning.
[14:39] We've got nearly four cumulatively for the Fed. We've got more than four cumulatively for the ECB in this new round. We've got nearly four in Japan, more than four in Canada. And so I think as the center of the distribution, that stuff follows.
[14:53] There are a lot of ways now. That's obviously in the distribution. It's not crazy pricing, but I think it's easy to see how we end the year in a place where we're less worried about this sort of necessity for ongoing tightening.
[15:06] That could come through oil. It could come through inflation relief. There's just a lot of different paths to that. And it's been pretty, obviously, the market has had a view that maybe we're going to get fewer of these hikes for a while and then we keep moving further in the direction of
[15:20] tightening. But I do look at those and think we're now getting to levels where, like I said before, two hikes or six hikes, where do I think the balance of risks lies? And it's pretty clear to me that it's on one side of that distribution.
[15:33] So I'm starting to get more interested in that. Okay. But our off-the-field question, I thought this was a clever one, is if you could go back and, like, reclaim an old tech product, an old technology that you used to use that's not around anymore,
[15:48] what would it be? I'll go. You go. Yeah, good one. I would like my BlackBerry back. I loved the BlackBerry. It coexisted alongside my smartphone.
[16:00] I always preferred pecking an email out on BlackBerry. and then they were taken from our hands and I've kind of gone the way of the dodo bird.
[16:12] But maybe you'd have it for a week and realize, actually, this is not so impressive, but I'd like my touch to hurry back, please. I would answer, I had not thought of that. That's the way I've gone, but when you say it, I have this wave of nostalgia that comes right over me.
[16:26] It's very sad, but it's something like that. For me, it's mostly music-related stuff that comes to mind. I mean, my youngest daughter is big on vinyl now, so that's like come back. But I actually think of like boom boxes, mixed tapes, like tape decks,
[16:43] being able to record from one side to the other on your double tape player, those kinds of things. And I have a bit of lingering nostalgia. Again, I think in the end I would hate it for rotary phones. I don't even hate it.
[16:55] So I just love, you know, like it's just so old school. I'm so deeply ingrained in just sitting there by the phone, but also the painful prospect of dying. It just kind of raised the bar for contacting people in a healthy way.
[17:10] I often wonder if my family had an old-fashioned telephone in the house. That was once a new technology. That's how I kind of grew up, everybody waiting for the next person to have the phone.
[17:25] You're trying to find a quiet place to speak. and, you know, just a different age now with cell phones, and sometimes I, you know, long for that time in a way.
[17:37] Okay. We're going to leave it there, Josh. Thanks for doing this. Thank you. Thank you.