We had some predictions out of the Fed that said inflation is going to go down under their projections without inflation and
without unemployment going too high. Were those realistic. They're not really predictions. I think what it is it's a survey
of all the Fed presidents. So it's kind of a numbers that command it's.
But David I think what struck me is is in order to get inflation down you know 50 percent which is what they're looking at. To
think that we're gonna have virtually no change in unemployment or no pain in some other area just seems seems realistic. And
whether or not we can get core inflation down at those levels very much depends on further further action by the Fed. So is it
possible. Sure. I think it's possible. I think it's unlikely that it will happen without a bigger impact on the broader
economy and an unemployment. No. Let me jump in here. The the the Fed is trying to operate
this solution through two mechanisms and a lot of people focus just on one of those. The idea being raise interest rates reduce
overall economic activity which means companies then don't hire as many people. In fact they fire people. And that slows things
down. And that's sort of you know that's one way to do it. You reduce the income of households and they can spend less. And
then inflation falls. But the other mechanism is higher interest rates themselves. Right. Have an impact on financial conditions
affecting both households and firms and households. Basically say higher interest rates means that's going to cost me more to
finance a car. It's going to cost you more to buy furniture. It's going to cost you more to buy a house. Firms are saying
it's going to cost them more to do any projects they want to do. But it's the consumer side if those higher interest rates
actually induce consumers to do less of those big purchases. That is the other mechanism that substitution effect. Getting
them to wait for a year or two years to buy those things when supply might come back because it ultimately will hurt the Fed's
objective if they reduce overall economic activity too much because we do need more stuff to be produced. Also to keep
inflation moving in that downwards direction. So Joanne that really begs the question of the consumer and the consumer's
balance sheet because there's something like two point seven. I've seen trillion dollar still sitting on the balance sheet a
lot of households. And maybe they'll just sit on that savings or maybe they'll keep spending it which will make it more difficult
for the Fed to get inflation headed down sooner rather than later. Yeah that's exactly the other challenge that the Fed
faces as consumers are flush. They've paid off a lot of their debt. They're sitting on a savings. But generally households you
know that's a form of a measure of household wealth. And generally when households spend they don't ramp up spending
because their overall wealth went up. They tend to spread that over time. And in times of uncertainty they tend to spend less
of that. They're going to try to make it last longer. So in this period of time when people now might start getting worried about
what the future holds whether they're going to keep those jobs that they got whether new job opportunities might disappear. We
may very well get a situation where consumers decide you know what. We better keep those savings in the bank and spend less
and hoping that prices will come down. Forecast as they begun to do and for other things.
Bob what about the prices going down for stocks and for bonds. At what point do you become a buyer of bonds. You've been
obviously mostly you've been a seller recently. At what point do they become enough of a bargain and make sense and stocks for
them under the same thing. I think in the in the government bond market we talked last year
that we needed to get interest rates higher. We talked about that. The range of the 10 year has been one and a half to 3
percent virtually for over a decade. It got slightly below that during Covid. But basically when we talked in December and
January it was like a one and a half percent. It's now above 3 percent. So you know in some ways you could make an argument
that there is real value in the 10 year. My own view David is that in order to impact inflation or core inflation at 5 percent
we're going to have to continue to drive the overnight funds rate closer to 4 to 5 percent. And what the markets are
discounting right now is 3 percent at the end of this year maybe three and a half to 4 percent at the middle of 2023. I think
it's going to get closer to 4 to 5 percent over time. So I do think that 10 year will go higher. But certainly there's a lot
of value in a 10 year as you show right there at three point one seven percent versus what it was just not so long ago at one and
a half percent. So then what about that. On the equity side if Bob is right and by the way he's not alone in saying we're going
to hit 4 or 5 percent if that's right. Does that say it's not time to buy stocks or are there some shopping opportunities
right now. Yeah I think I think it's a good time to be very selective about
holding onto various stocks. You know the Fed clearly has a short term problem ahead of a short term being you know a few
years not 10 years. And if you look at the long term forecast that the market holds for inflation. Out to that horizon it's
still only about two point four percent. So inflation expectations are pretty well anchored and that should help keep
the 10 year from going up too much further. But I wouldn't rule out certainly something in the order of 4 percent that's going
to make it more challenging for growth stocks is no question. But companies that have more resilient growth sources like those
providing parts for cloud computing expansion for data center expansion these are the types of areas that tend to power
through recessions. Companies like a broad commerce Cisco are really well positioned for this kind of an environment. And I
think investors could find in those which have come down substantially as real opportunities for solid returns over the
longer term. Bob you mentioned credit earlier as maybe presenting some opportunities as the spreads really increase.
But at one point if you're really going to four or five do you have to worry about defaults. I mean is credit too risky at this
point. You know it's a it's spot on. I mean I think is you know David
we started a opportunistic credit fund two years ago and we're already seeing that crack. And I think having dry powder and
having an opportunity to invest across the capital structure in good companies who have had maybe a bad financing structure or
just don't have access to financing or are being hurt by higher interest rates. There are going to be some fantastic
opportunities for investors who can opportunistically look at opportunities for good companies with a point with a poor
financing structure. And I think we're already beginning to see the
those opportunities emerge. So Joe I want to give you last word here. Given what Bob just
said is that argued that you need to be more in cash or cash equivalence right now because he said there's going to be
opportunities. You need the cash to invest. Are you more in cash than you have in the past.
No. No we're not. We think it's pretty challenging to try to time a market like this. And so being in cast is implicitly a
bet against a recovery. You know at some point in time it's just very hard to get that right. So our view is investors should be
positioned based on their time horizon if they need cash in the short term. They'd better not be too exposed to equities. If
you're in equities you really should be looking to the two year three or four year five year horizon. And so we don't think it's
a good time. In fact as Bob was saying we think there are actually opportunities now. Those opportunities may very well
get better. We don't know but there are certainly opportunities now. And a lot of times what investors our clients will look for
is income from those investments that helps them write out these tough times. And you can find a lot of good dividend yielding
stocks some in the growth world where they have those long term drivers already in place and some of the safer spaces like in
the financials which will provide some protection against those rising interest rates.