Rick we hear this. I was going out with a Halloween you've talked about that the goblin of demand destruction. Are we
facing demand destruction. So in some places there is I mean pricing you know companies have what is extraordinary pricing
power today you know because the demand function economy is so strong. I mean we're looking at some numbers as you were saying
you know you think about during this two year period there had been almost two year period of Covid where consumers have
actually underspent relative to what they have historically been David Ingles outside have underspent. I took that note. We took
those numbers and looked at it relative to what the 2 trillion stimulus that came in. The demand is extraordinary. That's out
there. But companies now have pricing power and you're seeing prices move significantly higher. You're seeing places like
energy where there's a supply demand imbalance a significant portion driving energy prices higher. So we will denigrate some
of this demand you're seeing in housing very clearly that that market tends to slow down people. People stop buying houses just
slow down for a period for a period of time. That is some demand destruction taking place some parts of
consumer durables when you get significant prices increase because supply chain shocks or energy or input cost shock.
So there is some demand to get denigration. That being said you know I think what happens over time is that some of this
inflation starts to come down and some of the supply chains reopen. You'll get backs. You're seeing rig counts go up. You're
seeing productivity increases as an energy. You bring down some of that inflationary impulse. Similar what the Fed has
described. And I think the demand is incredible and will continue. But there is definitely some what people describe as
stagflation I think is is miss oriented. The demand is tremendous. But no doubt people will hold back in some areas
because they anticipate prices coming down. And it's not just of course for goods and services also for workers. I mean because a
lot of job openings are out there it's come down a little bit. It's still up near record levels. What about that. What's going
to correct that situation. David I mean I think I've studied this back through World War 1.
I've never seen. I don't think we've ever have had a hotter jobs market. And I think you know you look at just the sheer some
magnitude of the hiring the Amazons the Walmart's hundred thousand hundred and fifty thousand jobs or people they're
looking for to fulfill these roles. And then you look at biotech and you look at technology. I think we go through extraordinary
thinking to see historic levels of low unemployment because there's just not enough people that are out there. And it's
interesting I watch what's happening in hospitality restaurants which is oftentimes the frictional job that's out there tends to
be not the highest paying job. And I think it's hard to bring a lot of those workers back because there's so many jobs available
in other areas. So I quite frankly I'm not watching the payroll data as closely as I am some of the job openings data the JOLTS
data et cetera. And it's gonna be high for a period time. By the way you see more people retiring recently and that's taking a
lot of people out of the workforce. So I think I think there's a supply of human capital that shortage that's going to be there
for a for an extended period of time that'll keep wages buoyant. And by the way not just direct wages but benefits and other
other forms of of accommodation to workers that are going to be I think historic. So as a worker you say you pay more attention
to this point to the open jobs than say unemployment. You're in good company because the San Francisco Fed is you know did a
study on this and basically said instead of looking at unemployment you figure out if there's labor slack when you're
at addressing the question of potential inflation you should be looking at the ratio of unemployment tell job open jobs. If you
look at that that might indicate we may have some wage inflation coming.
Totally agree. And by the way I also look it quits to layoffs. So you look at the number of people why are they why are quits
the layoffs at historic highs. It's because mobility job mobility is on an extreme level because there are so many jobs
available that pay higher wage or better benefits etc.. So I think those metrics are much more important today. And so you
know looking at the whole suite you know people say oh my God you know like last month. That was a slower jobs number. The
economy must be slow. It's just actually absolutely misplaced. It's the demand. It's high. It's trying to get that supply
moving into the right place. I think you'll see more and more people come a come out of retirement be joining the workforce.
And by the way it's missing that the benefits that people received you know that expire largely expired. I mean the
immense number that expired in August September. And so that'll cause them and re-entered in the labor force. But there's still
not enough people available for them for the job. So I'm watching those openings and equates to layoffs in a series of
those metrics to see where we're going. But there's no doubt in my mind wages will be we'll be we'll be strong for a period of
time. And this all necessarily leads back into questions about rates as a practical matter. And you've said you expect nominal
rates to go up at the same time. With inflation we're talking about real yield is really staying surprisingly low. How
concerned should we be about. Because I've read some macro economics that say if you have real deal really low it's hard to
have the productivity gains. So listen I think looking at real yields Exley exclusively as is
is an archaic concept in a number of ways and less real yields are moving real rates are moving to extremes like you go back to
the 70s and yet inflation you had to have real rates that came down significantly. Listen I think there's something that's
really important. I look at the companies return on invested capital versus their weighted average cost of capital. That
drives financial transmission that drives investment. And today companies return on invested capital is extremely high. You're
seeing companies are 15 20 25 percent. Our return on equity and our weighted average cost of capital is really low. The cost of
equity because I don't how the stock market is across equities cheap and the way they finance themselves the real rates that
the Treasury market trades that it's not really relevant it's where they finance themselves. And today on the debt and the
debt market and the equity market there's a historic bid for yield in a market that's not going away anytime soon. Somewhat
because that demographic. So because of what the Fed did. So as long as that weighted average cost of capital stays reasonable
and we think it will. Rachel move up a bit from here. I still think front end short end interest rates are going to move up a
bit. But boy as long as companies continue and the demand continues to be what it is in the economy I'm not that concerned
about small moves in real rates. You know listen if inflation moves dramatically higher and the nominal interest rate moves
significantly higher forcing up companies cost to borrow. That's significant. But I think we're far far from that. So Rick you
invest an awful lot of money on behalf of a whole hell of a lot of people. Give us some investment advice here. I'm looking at
your specific stocks or bonds but tell us about what we should do with all you've said in terms of investment. I'm thinking
because you're on both sides you swing both ways. He heard you were here right. You handle both the fixed income and the equity
side. What does all that tell us about for example the balance between fixed equity and
fixed income sorry in equities. So first off I think you got to look at companies operating
leverage and think about what this means. Do I want to be a lender. I do want to buy their bonds sort of buy their stock. So
what happens when when you get inflation higher and if companies have pricing power in their business and they could price it
through many of their expenses are fixed leading by design long term leases. That's a fixed expenses not subject to inflation. A
number of their expenses are fixed. So what happens is that you get pricing power and some portion of your expense is fixed. And
so all you're doing is your variable costs go up. You're actually benefiting. So meaning what do you do with all that.
Equities are a whole lot more attractive there. And you know given what we described around around real rates are
historically low. They can move up a bit and inflation may push interest rates a bit and the Fed pulling back a bit. And I think
going to raise rates in 2022. And so you know your return on a lot of the fixed income is not
that interesting. Some of the credit markets some of the real estate markets commercial mortgages residential mortgage
financing asset backed financing that's interesting. If you get enough spread and there are some places to do that today. But
otherwise I think equities make a whole lot more sense. I think the equity market is going higher and then you hold some cash.
And then in fixed income where are you getting enough yield to me that makes sense relative to where where interest rates where
the risk free rate is where the Treasury rate is. And there are still a number of places to do that. But I will tell you your
returns will be driven from equity. Private equity venture capital. And that's where I think the real upside is over the
next certainly over the next year or so. So I just want to come back and hit one point here. As you said overall doesn't want
fixed incomes that are attractive but there are sources. You said credit and it was a high yield. Where were the
opportunities. You think the. Actually a fixed income. Yeah I'm not getting too nuanced around where around specific areas but
know places like the European high yield rates are backed up significantly recently and credit spreads are backed up. So
there's some opportunities there. I think the high yield market generally because rates have moved up and and in high yield
assets have cheapened up somewhat less. I think there's some opportunities in high yield. The more interesting place for us
today is actually to finance you know it's some of the less liquid assets in residential real estate commercial real estate
where you can actually if you're willing to take some risk and a bit of illiquidity that's been more attractive.