I think Jay Powell was trying to calm things down, but I'm not sure he
accomplished that. He did not accomplish that.
But that's the market's fault, not his fault.
Think he was very clear in telling us what we already knew, which is that the
Fed is likely to downshift to 50 basis points in December, but the terminal
rate is very unclear and we have a ways to go in terms of taming inflation.
Clearly, the only positive was around housing and talking about the rolling
over there. But other than that, I think he was a
straight shooter about setting the table for what uncertainty there is in terms
of where the terminal rate is and where the Fed pauses.
But, Greg, he also set the table for being really concerned about wage
inflation because he talked about the really dislocation, taking the JOLTS
numbers. And then those numbers came out on
Friday and were exactly what he was hoping would not happen, I think.
Yes. So the strong non-farm payroll report
and the recent economic data actually is a blunt reminder, actually, that the
data are in charge. So it doesn't matter if you're a pundit
or foil manager or even Fed chair Powell.
It's all driven by the data. So for him or anyone to proclaim that,
you know, rate rises or pausing or pivoting is just really kind of a fool's
errand because you're driven by the data.
And the data is what's driving the Fed and should drive the markets.
Absolutely. If you don't mind my adding back in
June, the Fed communicated that it was going to only hike by 50 basis points.
Then two data points came out within days of the Fed meeting.
We got CPI, we got Michigan inflation expectations and they pivoted to 75
basis point. So Gregg is absolutely right.
The data is going to drive this and that really renders Powell speech pretty
irrelevant. So, Greg, if the data are driving the
Federal Reserve, what's driving investors?
If you're an investor, what do you make of these data and where do you go?
You know, it is this circular reference problem that we have.
It's it's it's clear to me, at least that the markets are focusing less on
the data and more on what the Fed has to say.
The challenge, I think, is that the rhetoric coming out of the Fed is quite
disparate, not all over the place. So the message being what is quite
mixed. But to me, it's really hard for me to
swallow that, you know, rates have rallied risk assets have also rallied.
And we haven't even seen a recession yet and we haven't seen the peak in rates.
And we've had one day to print day that of lower input and lower inflation.
So you're a fixed income guy. Greg, what do you do in fixed income
given that circumstance? Yeah.
So I think it's been this. This is obviously very difficult market
for fixed income. And if you think about where the 10 year
started this endeavor post Covid, it was 50 basis points, right.
So they know we're at three and a half now.
I do think yields move higher here as we reprice more rate hikes.
But I have to tell you, you know, we we've repriced is such a dramatic degree
that I see it from many this amount of value, fixed income yields higher all
else equal is a good thing. Spreads wider, all else equal, a good
thing. So while we can't time it, I feel really
bullish on the outlook for fixed income who say, hey, you, what do you see for
investors right now? Where should they be going?
Well, I think investors should remain relatively defensive, but recognize that
we are likely to see improvement and a more risk on environment when we get
more clarity. Certainly when we when markets can tell
that there is an imminent Fed pause before then, there'll be volatility,
though. So being defensive investment grade
credit looks attractive, more defensive equities, but then also waiting for
that, that pivot investment grade credit should actually hold investors through
as but as they take on more risk and other asset classes.
So so this isn't a time to be well diversified, but more defensive there.
Does that mean in order to be able to pivot, you want to be pretty liquid so
you can jump back in when you're on a moment's notice?
Well, you certainly want to have some level of liquidity, but at the same
time, humans are notoriously bad at market timing.
So I'm thinking about building positions for the longer term, starting to dollar
cost average and sooner rather than later.
Greg, in the fixed income area, what are the things we hear a lot about these
days is private credit. We're going to have Mike getting out a
little bit later in this program. And some people are saying, well, given
the fact that the interest rates are going up, that means equities are
somewhat less attractive. Does the discount rate that private
credit is really attractive because you can get some very high yields in the
fixed income space? Well, you can, but you can get higher
yields and public fixed income. I think if you look at what's been
happening over the past decade or so, there's just been this tsunami of
investment and private credit. So if you look at when the excesses of
the zero negative interest rate policy, I think private credit is front and
center. So we have a lot more concerns around
the private credit market. There's a lot more leverage in that
market. It's a non mark to market market as
well. And so it's that don't ask, don't tell
type of policy there. So to me, the relative value that we see
is clearly in public fixed income. And it's also important to reiterate
that there is a lot more leverage in the private credit market than there is the
public. At the same time, it's shorter term,
isn't it? Is it a shorter duration so you can get
any. Yeah.
And also so as the floating rate I think.
Right. Greg.
Yeah. A lot of his floating rate, but it's
also a highly dependent upon the investor and sponsor putting money in.
Right. Because these are such levered capital
structure. If in fact we do have this recession
that everyone's forecasting for 2023, you know, that requires a lot more
flexibility, a lot more collateral. Cash falls into the company.
So it's really incumbent upon the sponsors who hold all the cards, whether
that company survives or not. And that's not necessarily a great place
set. So, Christine, most of us retail
investors are not going to participate in the huge private credit.
If I'm a retail investor, what makes sense for me and I had the flexibility
that you want, but at the same time be somewhat defensive.
So I think being very well diversified have some also exposure.
And there are actually even ways to have access to things like private credit.
I think what's what we learned from 2022 is that it is very important to have a
broad array of of investments in an equities, fixed income and also
particularly attractive right now, as I said, as investment grade credit.
Also, I favor dividend paying stocks in this kind of environment, but we're
going to have to recognize that in the near term there should be significant
volatility. So some lower correlating asset classes
within the old space could make a difference.
Do you have to have a possible recession in the back in your mind, Christine?
So I think we'll be able to avoid a recession if we do have a recession.
It should be relatively modest and brief so we could see an environment in which
an economic recovery begins to unfold by the end of 2023.
Do you agree with that? Greg, briefly, I was slightly more
negative view. But nonetheless, even if it's a soft
landing, a shallow recession or a deep recession, the contours are very
different. So just the kind of blindly, widely in
blindly kind of add on risk. I don't think it's the right way to play
it. I think which you'll see, David, is a
tremendous amount of differentiation and dispersion.
Some segments of the economy, some sectors are hit harder than others.
I think that's the for.