Before we start about how we come out of this stronger let's talk about where we are now. Where are we.
Listen I mean for markets and for the economy we're in one of most uncertain periods we've been in a long time and quite
frankly in a generation we have never had an experience where our economy is tangibly slowing across almost every piece of
data. Economy is slowing. You're starting to see it work through and the claims data and
the unemployment rate. And we think over the next couple of employment for you're going to see an economy or hiring dynamic
that's different. And you've got a central bank that's got as its singular focus today despite VIX mandate is full employment
and price stability that is got to bring down inflation. So it is a construct that the markets have a hard time dealing with.
How much will they let the economy go. How much with inflation which we think will come down you're seeing you're certainly
seeing indications that you're seeing in the markets pricing of it.
So it's a very challenging period to think through when you're trying to evaluate risk versus reward. What are interest rates
do in a portfolio. What are stocks high yield bonds doing a portfolio. And I think the markets haven't reconciled the
solution to that yet. And how much of that is the markets and the underlying economy and how much it is policy. I know the
BlackRock has a terrific chart basically indicating surprise me in recent years the volatility in monetary policy has driven the
investments more than the investments have today. But it's an it's a pretty incredible thing. And part of what we're trying to
illustrate on this report is you've human investing. 20 years ago 10 years ago it was all about the central banks
reaction function to the economy and how the central bank would react when inflation or employment moved too far away from
normalcy. The last 10 years and certainly anybody we've hired or worked
for us it's been there 10 years has been an environment where the central banks are overbought punctually. All you have to
focus on because they are driving the dynamic around how prices are moving. Why is that the case. I mean listen you need
aggressive monetary policy when you go through a financial crisis or you go through a pandemic. You need aggressive policy.
But there's been this process of tweaking to get back on the line that I would argue is creating more volatility in the
markets. You know what I would argue including this central bank including the Fed. We need to get to neutral quickly. Get to
neutral. The system has an ability to recalibrate itself be flexible. I would say high prices is the cure for high prices.
The U.S. economy is incredibly adaptive and you're seeing it. It was good article today about you know you do look at gas prices
higher consumption comes down the system recalibrate. But we've become used to the central bank is kind of trying to put us back
on a line of code 2 percent inflation and full employment. And I would argue it's actually creating more volatility at times than
is warranted by how much the economy actually actually generates. We say get back to note neutral. We heard from a
chair Jay Powell and his testimony for Congress this week saying he still thinks neutrals around 2.5 percent.
But even he is saying now we may need to go above that. You have other people saying we need to go way above it in order to
really put a stake through the heart of inflation. Is that wrong.
I said I don't think you have to go way above it. I think the chair is right. And I think what they're doing now is exactly
the right policy. I know that I and others have been critical about we waited too long to move and I think the Fed has been
clear on that being the case. But there's a question of what is the trade off from if you get to neutrally going a bit beyond.
We shouldn't be at easy policy like we are today. Get to neutral do another 75 get closer to neutral. Let me do a 50 on the
backside of that you know you think about what you could do fiscal policy sole or bad or you've seen some developments
recently what you could do and precision AG to help the food market. Multi-family housing incentives to build more
multi-family housing affordability is really hard is really expensive today. Multi-family is going to be people who stay in
rental. We need more development of multifamily. These are fiscal initiatives that need to come in and can be and
by the way have a real velocity to create multiplicative economic impact.
Just raise just keep raising rates and taking people out of work.
It's a blunt tool and maybe it doesn't work and maybe doesn't bring the inflation down. I just don't agree. I think the Fed
should get to neutral maybe a bit through it as the chair has said and then see where you are how fast the economy slowing
before you say gosh we got to go so far past. I just don't agree with that. So Rick Ness some advice for the policymakers. What
about for investors. Give us some investment advice here. Where are we right now. For example you allocate both for
equities and for debt. You fixed income you do both. Where are we right now in the 60 40. So I mean they entered within the
most interesting things is the interest rate. Marcus the interest rate market has decided that the Fed will never get to
do what people are saying and go much very. I mean this week was extraordinary about what the market said OK. The Fed's never
going to get to do with the economy slowing. And it's almost as if the Fed announced they're easing how fast rates are coming
down. So I think the market has said you're not going to get there around because of the economy slowing too fast. Listen I
still think you have the risks and interest rates. I think the central bank is going to try and get rates higher. So I you know
do you take a lot of interest rate risk today. I still think you have to be moderate in terms your interest rate exposure. So
keeping that down the equity market you know is still the liquidity the uncertainty. It's just okay. And we're looking at
certain areas that we think are durable that have really gotten hit. Some parts of the tech market tech technology area like
software where companies need to be more efficient to bring their costs down. So I think there are parts of the equity
market. You know the credit markets have become really interesting. And you know we start to add some in credit. I mean
even by high yield now back to 9 percent something about real rates. We lived in a zero world zero interest rate world. High
yield was trading at three three and a half nine. You know you're starting to get. I still think you've got to be careful
in portfolios. You still got to run a high level of cash. You still got to let things work through around these uncertainties.
But we're letting you know we're letting our cash run down a little bit by a little bit more credit. And but I still think I
still think you've got to be patient and let things play. We're gonna get a lot of data on the economy a lot of data on monetary
policy not just the US. Europe is going through some more significant slowdown. The U.S.
China's evolving. So there's a lot to come in the next couple of months. We think taking a little bit more risk but not racing in
I think makes sense. You're right. Also in Shery Ahn chart comparing private credit with high yield.
Yeah. So it is an extraordinary thing that I am quite frank I haven't seen in my career nearly to this extent maybe at all
that you know some of the private markets are slower to adjust and people say they're less volatile.
I don't know why less liquidity means they're less volatile organically. You don't mark them to market as much. But it's
interesting and I keep saying private investments brought to us and I asked the question have you seen the public market is like
why is that pricing where it is. So you know I think that you know I think two things have to happen. One my sense is the
public markets will stabilize and start to improve when we get a sense for the Fed and the ECB are going to slow down the policy
adjustment so that that improves. And then I think the private markets need their return rate of return hurdles have to
increase about the cost of illiquidity has to go up a bit. So I my sense is both will happen. But right now this is weird. It's
sort of like when people sell houses you just step back and don't sell them for a while. Because you don't like the price.
And I think some of the private markets they need to adjust bad. And I think both will happen. But I think it takes that
adjustment period. Take some time.