Rick give us your sense of this market from your point of view.
I mean you're putting money to work all the time both on fixed income and also
in equities. What do you make in this market right
now. So I mean David I mean you think about
we came in the beginning of this week and so you've got energy caps you've got
the turning off of Nord Stream you've got China growth China Covid China
Taiwan. You've got a series of issues that are
that are hard to get your arms around. By the way the goods sector the U.S.
economy is softening. So there's a lot of challenges out there
in the world. That being said you know if you take a
step back and you think about as an investor you know with the Fed moving
rates higher all of a sudden you could buy short end interest rates at it at
levels we haven't seen a really long time.
I was thinking about a year or two ago you know you had to pay less than 1
percent to fund companies 50 basis points or Amazon or 25 basis points in
three years. All of a sudden you could buy you could
buy short end assets at four four and a half five percent put some money to work
get some carry. And then tactically look at areas that
are that are where there's opportunity. Listen.
I mean you can get really really concerned about where the world is when
you step back and think about U.S. economy.
We think is going to have nominal GDP this year 5 percent nominal GDP of 5.
You know you've got a service sector that's doing well in the health care
sector that's doing well. You've got parts of the economy.
So there's things to do. I mean you know while it is one of the
most challenging uncertain times that we've seen in markets in a long time
with central banks tightening there's some things to do in the markets and
there's some there's some reason to look at some of some opportunities out there.
So just as my math works from a quarter of a percent to 5 percent pretty big
difference. That sounds pretty good to get.
They got a return. The same thing.
It depends on what's going inflation right.
We got CPI numbers coming up next week. If we've got a headline inflation around
a theme we've got core around 5 or 6. That 5 percent doesn't look quite so
good does it. It actually doesn't look good at all.
If you assume that we're going to be running at those sort of levels for a
period of time but you look at where the inflation markets are where the real
capital including ourselves are transacting.
And today we were we were walking in inflation in two years at under two
point two percent for two years five years five years around two and a half
percent ten years around two point four. So if you say gosh I can buy one and two
year high quality assets at four and a half to five.
I'm projecting my inflation risk in the low 2s or I'm locking in real
rates. I'm financing company wide not just
companies commercial mortgages I'm financing companies with a real rate
that's pretty attractive. And you can actually be we can talk
about the stickiness of inflation which is real shelter inflation high wages are
high before you can do some things in the market that can that can certainly
hedge your your inflation risk. And then Ben Bernanke carry quite well
in the market today. So yes inflation risk is not what some
people fear it is is actually coming down.
Why is that. Is that because the Fed is tightening
and tightening the money or is it actually is there something those in the
supply chain is loosening up. Some.
So I think it's two parts. One.
I think the Fed deserves an awful lot of credit.
And so I was there was enough criticism to go around myself included that last
year they waited too long QE. I think that's been well chronicled this
year. They cannot be any more clear.
They cannot be more more strident in inflation as it is
what they're doing. And they're not going to back off that.
And you know I think they're going to get the funds rate to four or three and
three quarters of a four probably four. And then I think they in a light long
and variable lags monetary policy do their thing.
So they're pretty clear. So I think there's a credibility
from the Fed that I think you've got to you've got to applaud in terms of what
they're doing today. Second is as you said supply chain.
You see real real improvement in supply chains.
You see it in some of the PPA numbers. You see freight costs coming down.
You see commodity costs coming down. So there are some reasons to see you to
see that the cash some of this inflation you know by the way you also seen
inventory levels look at retailers or inventory levels are up quite a bit.
In fact there's not there's not places to put some things that I see.
You'll see some price discounts there. And by the way in semiconductors it's
not it's a perfectly solid around supply chains.
But look at some of semiconductor shut stocks these days.
People are concerned about oversupply. That's not something we've talked about
for a long time. So it's better and there's some reason
for optimism. But I think you have to start with a
central bank that is there is no ambiguity.
And they're quite clear in how they're communicating that tie with the
divergence of the economies around the world because we're sure our series how
the ECB rate 75 basis points this week and they say it's going to get worse
before it gets better. They've got an energy crisis in Europe.
I think it's fair to call it that. China is slowing down.
Its challenges to Japan has its own challenges.
Are there opportunities or challenges in that divergence among the economies.
So I mean where there's such a multifaceted question David you think
about you know why is the dollar doing what it's doing.
Financial assets are being purchased in the U.S.
because it is a safer haven. It is hard to say gosh Europe the CBI
towards we never know what the weather's going to look like over the next couple
of months let alone whether Nord Stream comes back on or not.
So that is tricky. China as you talked about earlier in
your show. Round around Covid dynamics around the
US the trade dynamics China Taiwan etc. those are hard.
So U.S. it has to be your your your source of
best opportunity. And the play had where the place where
you sleep better at night. But the parts of the European eye you
know we've been investing in some of the European credit markets particularly
some of the shorter duration. You get comfortable that you know you're
not going to have rapid or significant defaults particularly of big companies
that have revenues ISE sales outside of the region.
So we've been doing some things in credit.
In Europe again you know in moderate form because we're more comfortable in
the US. And then tactically in other parts of
Asia we've made we've taken about some opportunities.
But you know it's no mystery as to why the dollar is well supported.
Financial flows corporate flows are certainly heading into a region.
That certainly seems to be well-supported by the service sector and
other parts of the economy. And Rick how much of that U.S.
position right now is strictly energy because we're an energy exporter at a
time that a lot of the rest of the world needs energy desperately.
And that's a macro factor that's not likely to go away right away.
You know it's a really really big deal. David I mean it's not just something
anything about crude or not gas. You know the fact that I mean where the
U.S. shifted a number of years ago to being a
net exporter of fuel. Boy you change the paradigm around your
self-sufficiency your independence and you think about Europe.
And I was in that. I was in London this week.
I was in Europe the week before. And by the way as inflation is seen to
be that bad if you're using dollars when you're traveling to those those locales
ahead boy you know you look at Germany and you think about how vibrant how
strong deep leveraged economy is. But then all of a sudden you have a nat
gas reliance that really questions whether do you have to shut industry for
a period of time. That becomes tricky.
Italy becomes extremely tricky. And the U.K.
is in a boy. I witnessed it firsthand.
We talked about fuel costs that we talk about your electric bills going up three
four five times let alone you've gathered censuring us to raise rates.
You've got floating rate mortgages that are moving higher.
Tough really tough dynamics. And I think the world is going to
realize and by the way not just fuel supply chains how you think about your
supply chain. So you think about vertical integration
of your company. I think a lot of this is part of why
inflation probably states a bit stickier over a period of time as companies can
be more thoughtful about what are their points of vulnerability and how do you
how do you mitigate those going forward. Rick help us make some money here about
where we really should be investing if we think about for the medium long term.
It sounds to me like short term credit. You've mentioned that more than once in
Europe and here the United States. What's going on.
What beyond short term credit. Short.
Yeah like the credit markets generally. I think I think you can take some risk
and high yield for you can you can pick up assets at 8 to 9 percent that are
reasonable credit quality I think. I think the high yield mark I think
generally the credit market by the way I think it's cheaper than equities to
think about what's what's your return paradigm in equities when you've got
margin pressures uncertainty of top line revenue where you're going to create 10
to 15 percent return y gosh if I get it in debt and I can get that 8 to 9
percent DAX I think that's intriguing. The short end of the curve to me and
that means the ability to just take not a lot of interest rate risk and not not
a lot of credit risk that. But I also think it's interesting.
And listen I I I still think you need to be in the equity market.
Yeah. And I think there's some opportunities
in in equities. I just think you got think about the
quality companies that have durable cash flow across industries health care parts
of tech. You know we called NASDAQ companies that
are that are good cash flowing that have some pricing power.
And I still think you've got to be in the equity market again.
I'd rather you know for the first time in a long time but I'd rather be in more
fixed income than equities because of where rates are today.
And you could be up the stock in a more uncertain time.
But I still think equities are OK. I wrote for the long term certainly.
OK. But it sounds like Terry you're right on
equities. You spent a lot of time looking at
balance sheets and things like cash flow and even die and all those old fashioned
things. Leverage.
Yeah well I. There's no better time to do that in the
end. Yeah we've lived in a kind of kind of a
crazy world the last couple of years where all that stuff when you're in QE
it's almost get as much bait in the portfolio ride the wave as much as you
can. And now I think you're going through an
era where gosh is that coming. You see the volatility of a second.
By the way the liquidity of these markets is not great.
So if you if you have a bad piece of news and stocks depreciate pretty darn
quickly so you know we're spending much more time on the intensity of gearing
and cash flow.