Let me start with you. And what the Fed has in front of it. What is it trying to do. Well the Fed is trying to get Goldilocks.
And that means it wants to get inflation back down as fast as it can towards its 2 percent target without engineering a
recession. And the market is giving it the benefit of the doubt. If you look at what's discounted into markets today it is
basically two and a half percent inflation and in just over a year and only a moderate slowdown in growth. And I think it's
going to be almost impossible for the Fed to get everything it wants here. The porridge is gonna be too hot or too cold either.
Inflation will end up running much higher than the Fed's target and they risk losing their credibility. Or if they're serious
about getting inflation down especially from the current high levels it's going to require more TARP more tightening which we
think is going to engineer a deeper recession. And that's what we're focused on. We think that within six to nine months we're
going to be looking at U.S. GDP that's negative to negative 3 percent. So sir where are you on this. Because it felt like a
tension this week between the markets the futures markets on the one hand saying exactly. Rebecca just said and economists on the
other hand saying you know what. We've got a really jack up the rates a lot to get inflation under control. Which side are you
on. More skeptical side. I think that's how we are as value managers
always want to have it proven to us. But note that we've had so much liquidity created four trillion dollars out of enlargement
to the Fed's balance sheet since the beginning of the pandemic in early 2020. That's a lot of liquidity and it's still there.
The Fed only just started to reduce go into it from the quantitative easing to quantity tightening starting June 1 of
this year. And it's just beginning and it'll go from 30 billion a month and then bump that up to to 60 billion a month and
letting those bonds roll off. That again starts to compress bank reserves. This will take its cut and be quite lagged in its
effect. So financial conditions will just tighten due to that reason alone. And we don't think markets anticipate that at all.
And I think just building Sarah on your point it's it's important to remember that the markets are really looking at
the rates. They're not thinking as much about quantitative tightening or do the roll off of the Fed's balance sheet which
is on autopilot. That's going to keep going. And so we don't have the Fed buying bonds. We don't have banks buying bonds
anymore. And so we've seen bond yields come down in the last couple of weeks. But how much further can they come down without
retail investors institutional investors moving out of equities into bonds. I think what we've seen historically is when stocks
go down bonds rally and you get that diversification. We've had that for the last few weeks. We didn't have it for the first
half of the year. I don't think we can count on that as we get Kuti continuing. Quantitative tightening continuing. Bond yields
may come down but it's going to be a lot harder for them to do that. In this environment where the Fed's created a liquidity
hole it's taking liquidity out and it's not as clear today who's going to fill that who's going to supply the demand to keep bond
yields going further down. So let me pursue that liquidity issue a little bit Sarah because you mentioned that the lack of
liquidity that really makes the markets essentially much more volatile. So what does that do to an investor. How do you know.
Do you have a G.P.S. at this point given where we are. The key is to have a low entry price because you've got to have that
margin of safety. And what this will mean if if massive increases in liquidity. Again this wasn't just the Fed. Central
banks globally are all RTX the European Central Bank the Bank of Japan. And as they take all in unison take liquidity off the
system. What pushed up market multiples. What made valuations expand. What made investors indifferent to valuation. It'll be
just the opposite. And we've already seen that start because some of the hardest hit stocks globally including in the U.S.
market have had the most bloated valuations so that we can expect more of that in the future where those stocks which had
valuations unjustifiable based on the kind of cash they can generate are likely to see a rerating downward. And the thing
that we're watching really as we go forward is what happens to growth and therefore earnings. We expect that there's still a
shoe to drop here with a reduction in earnings expectations. We're seeing early days consumer confidence at outlook
expectations component this week lowest level since 2013. Confidence leads activity. Activity is going to flow into
earnings of someone. Spending goes down that affects someone else's income. And so we think that even those stocks in the
United States have fallen quite a lot. Year to date that's almost exclusively reflecting higher discount rates and higher
risk premium. We haven't seen lower earnings baked into equities yet and we think that's still ahead of us. It's a really good
point because margins in general across all industries are near peak levels in the US. That's not usually a sign of a continued
bull market. And furthermore look at just some of those basic. Indicators like market cap to GDP. Take the US market. It is
another high level similar to where it was in prior to past and or at past peaks. Say the top of the global financial crisis and
also the TMT bubble in the late 90s early 2000s. So none of those bode well for a market that supposedly is going to keep
marching forward at the same time. Rebecca we've got data going into different directions because GDP is down. Consumer
confidence as you say is down. Then personal spending is up and there's still a lot of money on the balance sheets household
balance sheets as well as a lot of corporate balance sheets. Yeah. So what we've seen is initially as we were coming out of
the pandemic if we can say that even I'm not sure people are spending down the excess savings the stimulus they received as a
result of the pandemic that is back down savings rate is back close to 5 percent and the spending has been prolonged through
credit. So people are now tapping into their credit cards to keep that spending going. But as interest rates continue to rise
the cost of servicing that credit continues to rise. We think that's going to be another inflection point lower and an
important marker to watch to see when does consumption start taking a bigger step lower.
So Rebecca I'm sorry Sara when does the other shoe drop on credit. Because if interest rates are going up as Rebecca says
sooner or later you got to pay the piper. Well what will really spur blow up further and spreads and
therefore that's going to have ramifications across the U.S. economy in fact globally will be as inflation gets beyond again
to our point what the Fed is anticipating and we may see some of that centered in housing. Well the momentum we're seeing in
rents looks unstoppable and that a very big impact on CPI. I think that's a great point. You know a lot of people are
looking at the housing activity which has really slowed quickly as mortgage rates have gone up and said oh well housing
inflation will be gone in a blink. But really as people can't afford homes then they rent and rents are still resetting
higher. So we have rent inflation that is still marching higher and housing inflation given the very very constrained supplies
and now rising household formation helping demand at the margin. We think we're in a position where housing inflation partly due
to rents is going to be sticky. Wages might start to to moderate but there are going to be relatively sticky. Both of these
things are a big reason why we think inflation is not likely to get back down towards the Fed's target as quickly as the
market's price especially CAC because people still have jobs. And if anything wages are going up.
They are they're going up here and the labor scarcity just anecdotally everywhere you go you see signs help wanted. And it
just seems that the portion of the labor force just vanished and it's not again specific to the US. We see this in Europe as
well. The crying need for more labor and whether immigration can fill that gap is very debatable.