Give us a sense from investors point of view.
Bond investor in particular, given what you and Lisette have been talking about
in the markets. What is a bond investor to do right now?
I think they sit and wait. We've had a pretty big move in risk
assets. I still believe there's some repricing
in the bond market. If you look at the shape of the curve,
you know, it has to be reconciled within the bond market, too.
So if we do hit a soft landing, then the inverted yield curve can't be at its
extreme level that we see today. And then vice versa, reenter a
recession. Then it's it's more reaffirmed.
But I think the pressure for yields or the near term is higher, not lower.
At the same time, though, once yields get above 4 percent or equal, we get a
lot more excited around investing in the sovereign bond market here in the US.
So listen to what of a stock picker? What should they do?
Well, one of the things we were saying during the heart, or maybe I should say
heat of the January rally was to to fade the low quality, high beta, non
profitable, heavily shorted trades that had kicked back in and lean more into
quality factors. I think when you take a factor based
approach, essentially investing based on characteristics, one of the things
investors should do is focus on factors that represent things that are dear from
a macro perspective. So we're in a declining earnings
revision, declining forward earnings estimate environment.
So look for companies with positive earnings revisions, positive earnings
surprises. We're obviously in a rising interest
rate environment. Look for strength, the balance sheet
with high cash levels, low debt companies with pricing power in a more
constrained demand environment. So kind of lean into up quality and fade
that down quality that I think was disconnected from the fundamentals at a
more macro level. And we have already started to see a
reversal there. And I'm mindful of fact that this week
marks the end of the first year of Russia's war in Ukraine.
And I wonder, looking back on this year and looking forward as well.
What effect, if any, those and do you think that this conflict, this war in
Ukraine has had on investors? So it's not having the day to day
intraday volatility impact as it did in the first month or two of the war.
But clearly, the effect is still there both up and down through the commodity
channels. I think also more recently, it's maybe
either highlighting or speeding up what I think is a secular theme that was
happening anyway, which is not really deep globalization, but regionalization
is economic, geopolitical factions and segments of the world kind of banding
together. And as we see with some deterioration,
our relationship with China and what China's trying to do with regard to
Russia, I think it's maybe putting a spotlight on on some of those alliances
that are forming there happening for reasons other than just a more grand
quarter from your 40 year fixed income. Are we seeing a different regime going
forward for investors? I think we are.
I think we already entered the new regime where central banks are no longer
at investors beck and call. They're fighting a different problem.
That's inflation. I also think geopolitical risk is a new
secular thing. You know, this is just one avenue, just
one part of the puzzle around geo politics.
And I think that has to be embedded in risk premium.
So I look at the market today versus a year ago, a year and a half ago.
And I think it's a very different place and the geopolitical landscape is very
different. And investors have been paid to ignore
it for years and years and years. And I don't think that's the case going
forward. Let's add one last one to you from your
point of view. Are we looking at a new world of higher
prices and not just because of energy? And is Russia the energy because of
Ukraine, but also some of the disruption or change, at least in globalization, in
labor markets? I think where we're in now secular
environment of more volatility, in inflation, in commodity prices, in
geopolitics. And I think that, you know, the era of
the Great Moderation, I think is definitively over.
That was the era of abundant access to cheap goods, cheap energy, cheap labor.
And in that, those ships have have sailed.
And in particular, demographics, I think is reshaping this next secular phase
here. And it's just not going to look like the
20 years pre pandemic. Do you agree with that, Gregg?
I do. I do indeed.
That's just one of the many secular shift, so I definitely agree with that.
Dramatic.