John you actually wrote a column earlier this week noting that the bond market reaction apparently in part to Nancy Pelosi's
visit. But do you think it has longer term ramifications. I fear it has very much greater the longer term ramifications.
And I'm a little concerned both how quickly the bond market got worried. We had a brief period of not much more than 24 hours
when there was really quite intense demand for treasuries all on the classic desire for a safe haven
and more or less as soon as Nancy Pelosi's plane landed in Taiwan without the Chinese trying to shoot it down. I'm only
slightly exaggerating. The market rebounded as though everything was everything was okay. And certainly the degree of saber
rattling we're seeing presence from China is quite concerning. It's conceivable that the speaker's trip is in some way holds
China's bluff. I'm not a military strategist but people are pointing out that
Taiwan is an island 100 miles away from China. It will make if Russia couldn't make a good job of invading Ukraine. China
actively invading Taiwan is going to be orders of magnitude harder.
So with arguably the risk of a total breakdown it returns. Conflict is is still quite slim
but that there's no question if this leads to is a serious worsening
in U.S. Chinese relations from where they are now or which is all not outright conflict. That's very serious. That's any any
way that's going to be bad. Martin what about your perspective and not just limited to China. We have an awful lot of
geopolitics going on as John just referred to briefly in various respects. Do you think geopolitics is affecting the markets
right now or do they have enough to worry about whether it's inflation or whether it's supply chains or whether it's the Fed.
Yeah you know David this year we we actually got an outsized amount of geopolitics impacting markets directly of course
starting with that Russia Ukraine conflict which not only kind of exacerbated the inflationary problems but really put upward
pressure on oil energy. Grain prices across the globe. And then of course we did shift some focus to China. But because of the
lockdowns and the on and off lockdowns created tensions and supply chain created some demand reopening and then shutting
down once again. And then of course with Nancy Pelosi's trip this week we started to think about maybe another tail risk
emerging in geopolitics which is the China Taiwan situation which could potentially at least in an investor's mind could be
a Russia Ukraine 2.0. And keep in mind the implications would be quite a bit more severe. Supply chains and inflationary
pressures again could be exacerbated to to more even more extreme level. So for now in our view we think it's a tail risk.
But certainly one that's worth monitoring and certainly one that we're watching could intensify in headlines if we see another
similar type of trip negotiation discussion. But hopefully for now a tail risk that has a lower probability than certainly what
we saw in Russia and Ukraine. So Mona translate it into investment advice if you would. Does that mean if I'm an
investor from my portfolio I should look at more defensive investments whether that's equities or debt stay with growth
right now. Yeah you know I think in the near term. So look we've had a great run rebound off the lows of mid-June across equity
markets and even in fixed income. So in equities we've seen the S&P rally nearly 13 percent underneath the surface. The growth
parts of the market technology et cetera are up nearly 20 percent. Similarly fixed income rebounded off lows as well. Now
going forward if we start to see yields move higher. You know we've had a really nice move downward in yields. But keep in
mind we still have the Fed in play. We still have quantitative tightening in play which could put upward pressure on yields if
that occurs. We could probably once again see growth start to underperform or lag again. So in our view as we get through the
next few months as those earnings and economic data perhaps start to soften catch up with what we've seen in equity markets
earlier this year we would advise a more defensive tilt value oriented defensive sectors and equities and fixed income. But if
and when we do get inflation kind of in earnest moving lower the Fed in earnest able to pause that's really when we see a pickup
in risk assets but perhaps a shift towards growth once again. And then that's when you start layering in and barbell and
growth. But for now we'd say stay invested and stay perhaps somewhat defensive in the months ahead. But don't be surprised
if earnings and economics bottom. Start to bottom but equities look forward and start to move higher. So that's what we do
expect to happen u shaped recovery ahead. So so John just overly simplistic here briefly does that mean I should have more bonds
than I thought I should. That's. That is a very difficult one. I tend to be somewhat
bearish on bonds. I think that there is a risk that the peak for the 10 year rates isn't seen yet
and that is it. That means that you probably don't want to pile too much too heavily
into the into bonds. My best guess because.
All of us have to contend with the fact that we don't really know then that the lack of good precedents for what happens to
the world in 2020 means that there is also a lack of good precedence for what we should be expecting now. My best guess is
that rates probably have to rise higher to choke off inflation. The rule of thumb is that inflation doesn't go down. It doesn't
peak until the interest rate exceeds the inflation rate. That implies that
we're going to be going. I would say above 4 percent at least. And that would mean that you would want to be getting into
more defensive kinds of stocks that actually benefit from higher rates. Just being a citizen basically value if you want seats in
terms of real risk. There's this Machiavellian possibility of getting into chip makers that are from Taiwan. If something bad
happens there then you is something a lot more scarcity of chips.