SNAP and Twitter swords disappointed. Overall how are we doing with equities and earnings right now.
That the bar was low going into earnings season. But that said I think there are three main takeaways that we're hearing from the
second quarter. The first is that we saw real market excel acceleration downward in terms of demand trends and a softening
really across the board in the second quarter. We saw not just the early consumer cyclicals disappointed to the downside which
we heard in the first quarter but we're now really starting to see that right now to the broader economy. You mentioned the
disappointment in earnings that we saw from Snapchat on on Thursday but you also saw negative earnings revisions lower from
some of the consumer cyclicals some of the industrials some of the metals and mining company. And really what you're hearing a
lot from corporates right now is that the consumer is is weakening. But you're also starting to see business confidence
also weaken. And you've started to see some of those advertiser dollars starting to get shrunk on the back of the fact that the
demand environment just doesn't support it. The other I think key takeaway that you'd start to see in the second quarter
earnings season is inflation remains persistent. But what's new is that you're starting to see higher financing costs also start
to really bite in terms of corporate profitability and the interest rate increases that we've seen on the back of the Fed.
Raising rates has really started to hurt corporates in terms of their earnings profitability because it costs more now finance.
And the third I think key takeaway and this is a real change in trend is that the dollar strength is also starting to really
impact the corporate profitability. We've seen the dollar rally about six and a half percent in the second quarter. That shaves
about one and a half to 2 percent off of earnings. And you heard from corporates like Procter and Gamble Johnson and Johnson as
well as IBM all to talk about you know lower profitability ahead because of the higher dollar. And this isn't something that
we've heard about really talked about since 2016. So that's a new wrinkle in terms of the outlook for the second half. So Bob
that is equal time for the equity side. What about on the bond side. Let me add one other softening number. We had PMI numbers
that came in on Friday that were softer as well. I hear and I understand everything she's saying we have a completely
different take on corporate America and it starts with it's priced in. If you look at the start of the year investment grade
corporate bonds yield at somewhere around two point four percent. They're now yielding four point six percent. You look
at high yield it yielded under 5 percent at the start of the yield. It's now yielding over 8 percent. So there's an awful lot
of the bad news that Aaron talked about priced into the market. We look at those yields and we say this is the time to buy
particularly in high yield where you're being compensated for default rates that can go up to 6 percent. We look at where we
think default rates are going to go. It's a much higher quality high yield bond market. Six percent of it washed away in 2020.
If you look at the amount in double these it's the highest ever 53 percent. We think default rates only get up to two point
seven percent. The other thing we're noticing is that clients are returning to the bond market especially corporate bonds. And
it's because they have renewed confidence in the central banks. It started with the Fed 75 basis point increase and it continued
with the ECB as 50 basis point increase. So what I did see another bank will go unnamed has a fund managers report that
came out this week and said this is the time to go into bonds. Exactly what you just said. But OK so put that together with the
Federal Reserve. We're going to hear for the FOMC this week. Is that saying we're thinking that they've gone as far as you're
going to go or they're not going to as far as we're thinking at least. Well what it's telling us is the market is now fairly
pricing in where they think the Fed should go and the Fed is in sync with that. So we're talking about a Fed funds rate
somewhere around three and a half percent at year end. That's 200 basis points above where we are to go back to the start of
the year. People are saying maybe the Fed will do one or two 25 basis point hikes. That was fantasy world. This is the real
world. I think that. Sorry. Go ahead. No go ahead Aaron. Aaron go ahead. No I'd just like to go back to Bob's earlier point
saying that it was priced in because when you look at concept census earnings estimates for the second half of the year
they're still up about 10 percent year on year. And even if you look at twenty twenty three estimates they're up about 8 to 9
percent in terms of what market expectations are pricing in for next year. Now the market right now in terms of the equity land
is trading at about 16 times forward earnings which is the average mark market multiple over the life cycle of the S&P 500.
So we're trading at average market multiples yet still pricing in pretty lofty earnings expectations for the second half of
the. And 2023 which tells me that the market actually isn't fully priced for a recession at all.
Certain segments of the market have certainly repriced lower and are pricing in I think more comfortable levels to start to dip
your toe back in. But broadly speaking I think the market is very mispriced for an oncoming recession remember. Typically in
recessions we see the Dow or earnings earnings fall about 20 percent and IBEX fell slightly less than that. But but you know
that would imply that we would have negative earnings over the next year not positive earnings which is currently consensus
expectation. So we're there we're looking at the corporate bond market and we think that where credit spreads have gotten to
where yields and corporate credit had gotten to it placed in about 75 percent probability of recession. The other thing that
we're very mindful of is our job is not to predict the economy. Our job is to predict the markets. And we were looking at yields
that had doubled in corporate credit and we were looking at a lot of cash on the sidelines. And you were looking at pension
funds who were discounting their liabilities either side of 7 percent that could go into the top of the capital structure by
buying high yield debt and getting over a percent. Those are the flows that we're seeing returning to the market. It's just
begun. So Aaron BOVESPA a number of the table 75 percent chance of a recession within what pretty time Bob over the next 18 18
months. What's your number. Yeah I think that for a very mild recession I think about 60 percent probability has been priced
in for a garden variety recession. I think only about 40 percent probability is priced in. I think that's more like what we're
looking at over the next 12 months. And so the market's pricing in basically stagnating growth. I think it's going to be
negative growth which I think implies A that the market has you further to reprice on top of that.
I think that yes you know you have seen you see yields emerge in corporate credit right now. A lot of that has been just based on
the fact that we've seen the cash free rate increase pretty significantly since the start of the year. Based on federal
fence hikes. So we haven't really seen spread widening. When you look at that
same measure of spread widening versus historical recessionary periods even imply that you really haven't seen the market price
in a full recession in terms of how far this far far spreads typically widen. Corporates I think is much more attractively
valued. I think that there is a place you could start giving your telling but not with respect to high yield. Bob last word
on this subject. High yield credit spreads started the year at 300 basis points. They got to 600 basis points. That's a
doubling. They're now five hundred basis points over. That's 200 basis points. You look at the quality of the high
yield market. It's difficult to even get to a 3 percent default rate in a moderate recession. Forget about a mild recession. A
moderate recession. It's priced in.