Total Return Webcast - 1968 and Economic Parallels

[Music] thanks everybody for joining us for the total return webcast here June 11th 2024 I say this every year but it&#39;s hard to believe that we&#39;re barreling towards the middle of the Year already and uh the summer always goes very very quickly the title of this webcast as you can see on the screen is 1968 and I&#39;m thinking about the political environment today and a lot of the growing tensions around the world and the multiplication of tensions the the picture on the screen is of Columbia University on uh April 23rd of 1968 where five buildings were taken over by students and they actually kidnapped a Dean for a brief period of time and about a week went on and then they had to order in a thousand police to clean up the mess and there were over 700 students arrested but that&#39;s that was just one example of all the protests which were not find to the United States or to the universities they were all around the world there were massive strikes in Europe uh anti-vietnam War protests in the UK and then all across America with the 1968 election interestingly the year 1968 began with the first day of the year the New York Times had their headline World bids Ado to Violent year to a violent year so people were happy that 1967 was gone but it so often happens you don&#39;t really know when it&#39;s over and oftentimes what you thought was bad is followed by something of the same ilk but much more severely so I go through a timeline of 1968 I lived through it I was in in third grade uh in 1968 and I remember being aware for the first time of anxiety about the situation and the world didn&#39;t seem so safe but the year the year started out uh in a pretty good spot January 22nd of 1968 was the debut Rowan and Martin&#39;s Laughin which was about the number one show in America it was on once a week and celebrities would go on and it was kind of a skit type of the thing kind of a precursor to sah and I live and uh it was called Laughin as a play on all that was going on with Sittin and beins and lovein all these ins and so they said let&#39;s make let&#39;s have a laugh in so let&#39;s leave the cares of the world outside for an hour and Rowan Martin&#39;s laughing but things started Det pretty quickly January 23rd just a day later North Korea seized the USS poblo claiming that the surveillance ship strayed into Korean North Korean Waters a crewman was killed 82 were imprisoned and an 11-month standoff between the US and North Korea ensued and then January 30th North Vietnam launched its Ted offensive directly contradicting lbj&#39;s claims the president United States that the Communist forces in Vietnam were were weak and that the US was winning that was a complete lie and it was later shown so in the Pentagon papers which were published finally in 1971 uh February 1st two Memphis sanitation workers got crushed to death by a malfunctioning garbage truck leading to strikes that turned into a the Civil War movement largely was born in its last phases of violence on that dat and then uh February 7th after a battle in uh in bentre village in Vietnam an American officer told the Associated Press quote it became necessary to destroy the town in order to save it and that became a huge anti-war rally and cry kind of reminds me of Nancy Pelosi saying that we have to pass the healthc care bill so we can figure out what&#39;s in it and then February 27th the most um trusted and revered newspaper news uh anchor TV news anchor Walter kronite did a tour in Vietnam and he came back and he said the situation is Meed in stalemate which directly again contradicted the administration&#39;s claims that the United States was on a path to Victory and it greatly swayed public opinion against the war so things started to accelerate on March 12th the New Hampshire GOP Primary and Democratic primary were held Nixon won the Democratic primary with 78% of the vote but Eugene mcar karthy opposing LBJ as an anti-war candidate won a shocking 42% % of the democratic vote so that on the ba basis of Johnson&#39;s poor primary showing just four days later New York Senator Robert F Kennedy uh entered the Democratic race and then 15 days later LBJ who had won the 1964 election 61% of the popular vote announced that he was not going to run for re-election in 1968 then all hell broke loose April 4th Martin Luther King who was in Memphis Jr Martin Luther King Jr in Memphis for the sanitation worker strike that was started earlier that year was fatally shot and riots erupted in over 100 US cities leaving 39 dead over 2600 injured and over 21,000 arrested there&#39;s a good website about 1968 with pictures from Atlantic magazine that goes through and the the images are are really worth looking at because uh things were pretty out of hand and then in May 26 7 the Supreme Court ruled 7 to1 that burning a draft card would not be excused as a protest of free based upon free speech so he couldn&#39;t burn your draft card then June 3 little off topic Andy Warhol was shot by by somebody who was in his Circle and she was mad that he had lost a copy of a a police she wrote or something like that but then a day later June 4th more killings RFK wins the California primary by a lot and that night was assassinated at The Ambassador Hotel in Los Angeles so June 19th 50,000 people joined a rally on the National Mall to protest the State of Affairs the United States the racism and the poverty of the underclasses so this all culminated in the Democratic National Convention August 28th uh DNC in Chicago where the police and the National Guard went on a rampage clubbing and tear gassing hundreds of anti-war protesters and isn&#39;t it interesting that the Democratic National Convention uh this August I believe it is is going to be in Chicago also so some parallelism there so September 16th trying to get rid of his Sourpuss image Richard Nixon running for president went on laughing and said four words celebrities would go on laughing and I I don&#39;t know why they thought it was funny they would say sock it to me and then November 5th Nixon won barely in the popular vote but surely Chisum also set a landmark being the first black woman elected to the House of Representatives and then finally December 23rd North Korea released that P blow ship that they had said They confiscated and they released the crew but they kept the ship and it&#39;s still there in North Korea the ship the USS playo is on display in What&#39;s called the Victorious Fatherland Liberation War Museum in panyang so with that as a backdrop let&#39;s get started this is uh new homes under construction I&#39;m breaking it into single family to single family which is the the gray area and the orange area is multif family and I&#39;m pointing out that there&#39;s a parallelism here between the late 60s or at least around 1968 maybe 1970 where we had a very high percentage of multif family units under construction relative to single family homes and was a ratio that hasn&#39;t been seen until today and I find this interesting because that was the Baby Boomers uh back there in 7074 that caused that thing and now the baby are the ones that are being pro protested against the Baby Boomers protested against their parents and their parents&#39; policies uh but now it&#39;s the younger generation is protesting against their grandparents those very Baby Boomers and so we now also have a lopsided total uh multif family home versus single family home construction that probably has something to do with how unaffordable the mortgage payment is uh on there a percentage of household income you can see that back in 2018 2019 it was around 20% or even lower of with a 20% down payment a 30-year term and the median uh existing home sale price that has gone from The High Teens percentage of disposable in of household income to 30% so no wonder people aren&#39;t feeling happy they&#39;ve lost 10% of their uh disposable income has now being funneled into just a median standard mortgage payment and of course home sales are very very low in fact this goes all the way back to 01 and we can see that the most recent print is the absolute lowest that we&#39;ve seen over this 23e span of time so we&#39;ve had low unemployment uh we use the establishment survey for unemployment comes out the first Friday of every month and this exhibit shows the number of consecutive months that the US unemployment rate was beneath 4% from the from the first month that it went below 4% and we&#39;ve actually backed to the 1968 period where we&#39;ve had 27 consecutive months um the last one was 3.96 so it&#39;s still below four uh but but that makes it actually one month longer because we we would attack that one onto the series so we&#39;re in the same type of extended low unemployment situation going back all the way to the late 1960s we look at unemployment as a very important uh indicator of whether we might the threshold of a recession and one thing we we use as a yellow flashing light is the 12 is the unemployment rate versus its 12-month moving average which is on the screen now and indeed we are slightly above the 12-month moving average um and once you get above the 12 month moving average you really have a yellow light for recession it really looks to me like the trend has changed here um we&#39;ve actually been in a gently increasing uh unemployment rate on the u3 for basically a year and a half and a a lot of things things have been in place now for about a year and a half we&#39;ll explore that presently but first let&#39;s go to the red light indicator which is the uh you3 unemployment rate versus its uh 36-month moving average and it hasn&#39;t gone above yet but that that Gap has closed a lot and we&#39;ll see what happens in the next unemployment report if it goes above that would be a real warning sign for a continued economic slowdown which has started to occur and we&#39;ll get to that in a moment here&#39;s what a thought experiment we&#39;ve shown many times in the past we just take the middle two quartiles of past recessions and uh that&#39;s the Shaded blue area and then we take the median uh of all the recessions over this period and you we&#39;ll see that we live within the blue shaded area we&#39;ve got the red area is the current movement in the u3 unemployment rate I&#39;m just pointing out that uh we it does look that it&#39;s following that median trajectory so not really willing to declare that this is cross the line yet but things are starting to fall into place also payroll revisions are acting awfully strange in fact payroll numbers have joined the inflation numbers is being a little bit uh difficult to understand because last the most recent jobs report had uh on the establishment survey had 272 jobs added which was a good number however that same day there&#39;s the household survey which at turning points in the economy has historically been a better indicator and uh that showed a very different situation it did show job growth but while the establishment survey showed uh full-time jobs going going up nicely and we&#39;ll see that in the next exhibit the household survey last uh report showed that full-time jobs lost 625,000 jobs so one report says there&#39;s hundreds of thousands of jobs gained and the other one shows hundreds of thousands of jobs Lost In addition what we&#39;ve seen and I don&#39;t have this exhibited in this this deck but we&#39;ve seen government has been growing again and government payrolls are not really very productive and in fact they might even be intentionally uh accelerated in order to make economic releases look perhaps a little bit Rosier but one thing that happens in the in the establishment survey is there&#39;s a number that&#39;s initially released it gets tremendous attention every first Friday of the month and then after a while they finally stop revising it and this is uh the history of the difference between the first release on the first Friday and the final value after revisions and you&#39;ll notice that the revisions now for about 18 months again a lot of things seem to have been stabilizing over the last 18 months we see that we&#39;ve had basically every month nearly has had a revision that came in lower than the First Data number and the reason for that is the households that the establishment survey uses the birth death model to estimate things and it seems to to be anachronistic and it seems to be leading to overstating the initial number and then having to revise it lower also things wor worth looking at the employment picture this is unemployed part-time for economic reasons which means they want to work full-time but they can&#39;t find a full-time job this also looks like it turned up not alarmingly yet anyway uh but over the last 18 months that one this is some uh leading indicators for potential uh unemployment or employment changes in Trend and we see that the red line is the you through unemployment rate we&#39;ve inverted it here so it&#39;s the same as we had in the prior exhibits but now it going down means that that uh unemployment rate is going up and then we see a leading indicator which is small business hiring plans index which tends to go sharply to the weak side before the unemployment rate starts to rise and it&#39;s one of the more extreme declines in the uh small business Hing plans index without having really that definitive of a rise in unemployment so we&#39;re going to be watching for this in the next reports also average hourly earnings in manufacturing manufacturing&#39;s been quite weak it&#39;s been the one of the weaker parts of the economy so we have to take this with a grain of salt but nonetheless the average hour we average weekly hours worked are definitely shrinking and they&#39;re shrinking at that pace which has been consistent with recession so all these things are kind of on the brink but it&#39;s too early to declare that we cross the line I always talk about the budget deficit I&#39;m going to spend very little time on that in this webcast uh we have 5.7% of GDP unemployment rate without a high unemployment rate or anything like that and The Bu Administration has forecast that next fiscal year will be 6.1 percentage of GDP and of course this is getting a lot of attention because people are aware of the things we&#39;ve been warning of and monitoring closely like the interest on the debt which is now basically the same as the defense plus War budget um it&#39;s actually bigger than the official defense budget but if you throwing in the money for the wars in Israel and Gaza and Ukraine and Russia we&#39;re now up at 861 thou trillion on hard to keep track 861 billion on on the on the debt and we&#39;ve got 895 on the on the war machine Social Security and Medicaid are still bigger but we can say that the federal expense interest expense is percentage of federal revenue under the current tax system is alarmingly increasing and it&#39;s basically uh it&#39;s well above where it was in 1968 even though we were in the middle of the Vietnam War which is a much more uh Hot War than the ones that were proxying right now but it was at 7% we&#39;re now more than double that so the interest expenses percent of federal ratio is twice as bad as it was in the tulous year of 1968 and of course the interest rate on the treasury debt is going up because we have the stuff that was uh floated at 25 to 100 to 150 basis point coupons uh during uh pre pandemic now those are being replaced with well the 10e treasury was at 447 uh yesterday and so it&#39;s down a little bit today but it&#39;s quite a bit above the 333 which is the moving average of the uh yield on the outstanding treasury debt is obviously going to go higher if rates stay at these levels there&#39;ll be bonds that would be floated that were say they were issued for five years in 2019 they had a 25 basis point or 50 basis point coupon that&#39;s going to go up by 400 basis points so this problem&#39;s going to get worse and that&#39;s all I&#39;m going to say about this now people talking about consecutive weeks of inversion and they point out that uh going back to the late 70s we see that we now have the longest period of 21&#39;s reversion um of any any length of time but I want to caveat this because as long although this is a lengthy one look back at the left side of the exhibit from 78 into 82 I lived through that time period And I can tell you it never felt like you were out of recession from 1978 into late 1981 people don&#39;t remember that when rid came in the economy actually got bad again you&#39;ll notice that that uh blue area that was prior to the recession of inversion that there was small Hiatus when it was de inverted but if you Ed more of a moving average thing if you take my point of view that this whole time period was really one four year long or three year long recession um actually you could you would say that the curve was inverted back in the late 70s early 80s for more like not just a 100 weeks but more like 180 weeks so we haven&#39;t really broken that record going back to the 1980s but certainly it&#39;s been inverted much longer than most periods of time and people asked this question I saw it in the queue already why is that why why are these recession indicators not working and the answer I think is pretty clearly that we&#39;ve had high volatility of economic response both fiscal and monetary highly volatile we took rates down to zero some countries went negative we had tremendous amount of money Printing and then the FED embarked on a 500 basis point uh 525 basis point fed funds increase and we&#39;re still debating whether that&#39;s going to stay uh at that level for much longer we know we have the FED tomorrow we also have the CPI tomorrow which is an inter in combination so it&#39;s going to be very important to see what happens to the the summary of economic projections that comes out every quarter and here it is June so it comes out the third month of every quarter and we look very carefully at how the market reacts my prediction is that the FED will no longer show three Cuts this year uh in their work tomorrow I think they&#39;re going to say two cuts I think if they stayed with three Cuts I think you would get a rally in the short end of the bond market and you get a selloff in the long end we have some de inversion going on but I really think two is the number and I I think if they do say it&#39;s only one cut I think you&#39;re going to see repricings to markets um that are more more hawkish in nature so let&#39;s look at the yield curve steepening before the recession recession indicator and yeah it&#39;s been deeply inverted it&#39;s been a long time but again it looks kind of like the late 70s early 1980s and we&#39;re going to be waiting for this thing to go above zero before we really say this indicator is a real red light caution for the market a lot of people are focusing on the fact that it&#39;s been a ver a long time and there&#39;s no recession but if you look at this chart carefully uh you you want to see it go above zero to really ring the bell in in a loud way here&#39;s a consumer confidence less present situation same sort of a thing it hangs out where their their view of the future is Bleak compared to their view of the present that&#39;s when the gray shaded areas get very big but it&#39;s really when it goes sharply the other way that you are worried about recession we&#39;re not there yet so again we&#39;ve got the setup the conditions are in place but the Catalyst has not yet appeared but things have slowed down I talked about the last 18 months but look at just now this is this is a very short-term time period so one has to be careful you can&#39;t make decisions based upon just short-term data but this short-term data is kind of remarkable the the blue bars are the nbe monthly recession indicators and they&#39;re labeled down on the x-axis and it&#39;s the three-month uh number annualized and three of you know most of them were decent or very very good it was the manufacturing which we we&#39;ve been talking about for a couple of years has really been a bad part of the economy because it was overheated thanks to all the government money printing but just look at the last month again let&#39;s not make too much out of a month but they really have reverted from the three-month annualize virtually they&#39;re all zero in fact the only one that&#39;s even positive is non-farm payrolls for May and we&#39;ll see uh what happens to the revisions there because we have very inconsistent data from the household survey and the establishment survey in the most recent prints here&#39;s small business optimism which is probably the weakest part of the economy you can&#39;t really be surprised a lot of small businesses have gone out of business because they couldn&#39;t make it through the lockdown period and it does it doesn&#39;t seem like their mood has improved at all uh from that horrible experience in 2020 2021 where so many businesses shut down here&#39;s the Bloomberg economic US economic surprise index uh the categories are up on top and I&#39;ll just point out that it was surprising pretty decently until the last couple of months so again another uh Harbinger perhaps that maybe something has changed we need more data and I&#39;m sure the FED will comment to the fact that they&#39;re data dependent and I&#39;m sure they will acknowledge some of the Slowdown that uh is in some of these numbers but it&#39;s not enough to be convincing because of the time frame so here&#39;s what&#39;s happened to the Market&#39;s view of the FED funds what it&#39;s pricing in it&#39;s pretty interesting as of uh as of April of 2024 you could you could see what was being priced in and they see June you know June and then then we see uh the other month and we can say that it&#39;s really it&#39;s really changed when we were earlier in the year January uh 2024 that&#39;s the green line the market was almost crazily looking for about seven rate cuts and that disappeared pretty quickly when the first quarter data particularly the inflation data spiked up which happens seasonally we&#39;re gonna we&#39;re going to get to this so we&#39;re not as alarmed I think as the market was uh at the end of of in March and April but we see the the big pricing uh because when you just got to um to to April the red line you&#39;re down to just a cut or two and that seems to be pretty much where we are right now as of June 3 it&#39;s a little bit more but it&#39;s really only about one or one and a half cuts for the year I I I still believe the FED will talk about uh two cuts in their SCP dots here&#39;s the two-year treasury which does lead the FED funds rate uh I get push back on this a lot but I actually did calculated of the last 11 times that uh we had the curve change direction the two&#39;s T the fed the FED changed Direction in their fed funds rate policy of the last 11 times nine of them the Fed was led by the change in direction of the two-year one of them the Fed was in front and one of them was simultaneous I would say the one at the most left uh leftmost yellow circle is simultaneous but clearly uh they&#39;re largely in front of the FED changing policy right now this indicator would say the FED is going to be cutting rates sooner R than later and I suspect the FED will say something at least in line with that not contradictory to that this is an interesting thing that when I showed about the unemployment rate leading into recession this is the change in the two-year treasury yield around the last Fed rate hike and this one is not anything like the median of the last several observations of the two t uh two 10 and and the FED hike we see here is if anything this suggests the FED might stay on hold uh a little bit longer which would come as a surprise and would not be a welcome uh a welcome development for markets sentiment and also here&#39;s the tenure treasury around the last fed hike and that that too is not really uh following the the pattern of past activities I just point that out because this has had a very different look over the past few months than it did say in the fourth quarter of last year here&#39;s something that&#39;s just amazing to me this is the us when you compare tips to nominal treasuries you get an implied inflation break even and it really is interesting that while there was some volatility on the two-year and the five-year the tens and the 30s the purple line and the blue line have been remarkably stable so I think one of the things that is a challenge for the market or could be a surprise for the market and a disruptor what if this changes what if the attitude of the pricing in the bond market breaks out of this incredibly stable range i&#39; call this almost uh of the ilk of the Byron wean you know surprises you know 10 surprises or however many it was at the end of every year because if this actually changed uh I think it would be a real game Cher for markets not happening yet what else is what else is interesting in terms of how it&#39;s changed well how about the 12-month rate of change of Central Bank policy rates you&#39;ll notice that back in around 1968 1970s you see that there was tremendous volatility month-over-month changes in policy rates 12 month changes in policy rates were flopping around and then of course we went into Financial suppression or repression uh back in the aftermath of the global financial crisis and the problems in Europe and you had almost no changes for a very long period of time longer than anybody&#39;s uh career experience ever saw before and now we&#39;re going back into a little bit more volatility so it would seem that the the the the template of 2011 to 2019 is probably not going to be very helpful in thinking about risks and markets going forward another question you know that question why is there no recession M2 went negative year-over-year why no recession well this is this is I think what monetarist economists failed to fully appreciate is that the yellow dotted is the trend pre pandemic of M2 money supply growth uh and we say that it totally blew out away from that Trend because of all the money that was printed by the the covid response and while M2 did go negative on a year-over-year basis you see that blue line started to move down you&#39;ll notice that it&#39;s still pretty close as of April 30th pretty it&#39;s still pretty far above rather the trend of pre pandemic so I I get a lot of uh I I Noti a lot of commentators talk about excess savings has dried up um maybe that&#39;s true but this suggests to me that the economy has been powered Along by tremendous you know pig in the python of money supply growth back in the pandemic but money supply growth was negative not by a lot you see that huge growth this is just year-over-year M2 money supply growth and it did go zero and this is why I think a lot of economists that are particularly monetarily oriented Ed and I certainly respect the M2 going negative and so I probably gave this too much emphasis as well but we see that it&#39;s now actually positive point6 on the M2 all right let&#39;s look at some other areas we&#39;re going to spend quite a bit of time on inflation which I think is important and here this is wage growth and the quits rate the Atlanta fedge wage growth tracker is now not it&#39;s been suspended so it&#39;s at 4.7 so I&#39;m just really looking at the quits rate but the the fit between uh wage growth and the quits rate is pretty tight as your eye can see and this does suggest that the wage growth tracker if it becomes republished should probably start moving down although it&#39;s still uncomfortably High U for the FED at 4 point probably 4.5% now if they if they come out and and reprint it commodity prices have potentially bottomed out gold remains very elevated having a great year I was bullish on gold entering the year but I didn&#39;t expect go up 20% that quickly and but it&#39;s holding that gain awfully well but Commodities are really all over the place a year to date here in 2024 with gold up a lot uh you know Copper&#39;s been all over the place and what we see is some Commodities are down a lot and some are up a lot so there&#39;s no there&#39;s no General commodity Trend but we&#39;re putting it all together here with the bcom index and the red dots that&#39;s the 200 day moving average and I&#39;ve been sort of bearish on Commodities since 2022 in the summer and uh really they couldn&#39;t get out of their own way but it seems to me that the commodity complex may be bottoming uh it did break down below the 200 moving average briefly but as of yesterday it was slightly above uh the 200 day moving average and so be watching for this because I think Commodities may start to get into an interesting moment uh if the dollar starts to drop as as a consequence of a recession developing whenever that happens okay let&#39;s look at inflation here&#39;s the the mo kind of the most standard one it&#39;s the CPI year-over-year comes out tomor comes out tomorrow as is PPI producer price indices my my apologies the that the blue line is X food and energy so so so-called core the FED can&#39;t be too happy that this has stalled out at around 3% although it&#39;s way better than was and then you see the final demand which is even less uh encouraging for the FED while it&#39;s at a better level at 2.2 it was down nearly at zero so with commodity prices going up I put the these these indices in this order intentionally Commodities are the you know the fastest highest frequency and we see that that seems to may have bottomed out and then ppi is the next highest frequency it leads CPI and it&#39;s a little bit discouraging that that seems to maybe have Bott bottomed out and then we see uh the CPI and we see that that has stalled out at about 3.4 and 3.6 for X food and energy the prediction for tomorrow is that uh the headline CPI will be at around three and a half percent year-over-year so not much movement and that maybe the head the uh X food energy the core will be at about the same level so the FED really wants to see this go down certainly into a two handle and that&#39;s not going to happen uh with the print tomorrow so it&#39; be interesting to see how the FED wants to comment on that one thing that&#39;s driving this inflation it&#39;s kind of wacky it&#39;s auto insurance inflation I mean if you if you drive a car uh you probably know now that auto insurance is up a lot but this is the actual data and it&#39;s up 22.6% year-over-year and this is contributing substantially to CPI but will it go down I don&#39;t know it&#39;s been going up more than 5% for the past three years in a row so if you think about the cumulative uh impact of this on the cost of auto insurance it&#39;s pretty staggering and remember auto insurance is not something that you you buy once you buy it every day because by law you have to own it in most places anyway and so you&#39;re forced to participate in this program and you you you&#39;re running into this double whammy for the insurance companies where the frequency of problems has gone up with you know less fewer insured motorists on the road there&#39;s more uninsured motorists so that increases the cost to those that buy insurance carjacking is up auto theft is up the cost of repairs is up and so you&#39;ve got the frequencies going up and you&#39;ve got the cost going up and that&#39;s creating this incredible monster of an inflation contribution uh but I doubt these prices will go down unless we go into a radically different state of society which maybe will happen as happened in the several years after 1968 here&#39;s uh us headline in core pce that I put this one in it&#39;s not the highest frequency but it&#39;s the one the FED leans on the most heavily this one is the most encouraging for the FED Remains the most encouraging we see that the headline number is uh 2.7 and we see that the core number is 2.8 at least they&#39;re below three and at least while it did tick up on the headline number but while it&#39;s decelerating on the downside the core number it&#39;s somewhat somewhat in the comfort zone I would think for the FED at this juncture now what you don&#39;t hear about anymore is super core inflation remember that one back in 2022 they wanted to look at Super core inflation which is core Services X shelter which X housing which is turns into a very small piece of most people saving a spending I mean Foods everybody energy everybody housing everybody so there&#39;s a maybe auto insurance isn&#39;t in this but we see that supercore pce has stalled out at 3.4 and so they don&#39;t want to talk about that let&#39;s just look at the regular pce because that&#39;s looking in the two- handle but look at the CPI the supercore CPI is really disconcerting uh it&#39;s 4.9 now that does include uh uh auto insurance in there so I think I think it does anyway and so that&#39;s part of the reason for this Divergence but uh don&#39;t hear about that anymore here&#39;s the contributors to headline inflation and you&#39;ll notice that core services for uh is is all of it here you got 3.4 year-over-year on pce on the CPI and we see that the gold area core Services is just about everything contribution to core inflation again it&#39;s basically shelter and core Services ex shelter that&#39;s your entire inflation rate there is no inflation in core Goods core CPI X shelter inflation I put put this in almost as a joke because you can get an inflation rate at any number that you want just like it seems you can get unemployment data that&#39;s greatly inconsistent one series versus another if you want to say that inflation is under control then you can say I I&#39;ll do a magic trick I do core CPI X shelter and there you have it you&#39;ve got 2.0 is uh core CPI ex shelter and you&#39;re not being terribly creative in how you&#39;re slicing and dicing the components so shelter obviously is a big component of inflation and it should come down this has been a little bit disappointing for the fed I&#39;m sure because if you look at new tenant rent index it&#39;s at 8% year-over-year and yet the CPI shelter component is at 5.55 year-over-year so there&#39;s a 475 basis point difference between the two and shelter inflation is about a third of CPI so you can dream that these things will converge I I do notice that there usually is a higher number on the shelter than the rent index but if they converge by even 300 basis points then you would knock something like a hundred off of the CPI rate and that that that&#39;s really the piece that&#39;s missing uh for the FED we need we need this to come down offset auto insurance believe it or not and then here&#39;s something that&#39;s interesting November 1 we had that pivot the rhetorical pivot by the FED where they they got away from 12- month numbers they started talking about three-month numbers annualized and six- month numbers annualized well they&#39;re not talking about that anymore because on CPI this three-month annualized and six-month annualized are both worse than the 12-month annualize so that one&#39;s brushed under the carpet we can do the same thing um for pce inflation and we get nearly the same result we get that the 12-month number is higher than the three-month annual sorry it&#39;s lower than three-month annualize and six-month annualized so these the trend here has not been good uh particularly for core pce where you know the three Monon is worse than the six month is worse than the nemon annualized so here&#39;s something that&#39;s interesting that you hear about this 2% inflation Target that was developed some quite a while ago and we&#39;ve got that 20 that 2% number uh on the lower exhibits so that if you&#39;re running at exactly 2% that would be the inflation trend line and it&#39;s curious how we had headline CPI and core CPI the blue lines really tracking along particularly the core CPI was like glued to that uh that that trend line and yet yet then the pandemic came and of course the monetary response spiked inflation and so now we&#39;re well above the 2% inflation Target not only for the last year or five years but also the last 10 years it&#39;s 3% for core CPI and two and a half for core pce so it&#39;s just interesting how inflation cumulates we&#39;ve been doing a lot of work at double line not just looking uh at headline numbers and not just looking at short-term fixed time periods but trying to get do a deep dive and these are some of the things that we&#39;ve uncovered this is my favorite as everybody knows export and import prices which are averaging zero you&#39;ve got import prices at 1.1 and export prices at negative 1.0 so they have been uh very tame for the past couple of years and they were terrible back uh with all the supply chain shocks and everything and then they relaxed understandably and now we&#39;re basically right back to where we were prepandemic running at around zero on the growth in import export prices that&#39;s a probably a good thing if you&#39;re on food stamps you&#39;re on a fixed income um then you&#39;re you&#39;ve had a bad run here for the last 5 years because the purchasing power of a fixed income uh deflating by pce inflation which isn&#39;t the highest inflation out there you&#39;ve lost 14% of your purchasing power this is obviously these are reasons why people are unhappy they&#39;re they&#39;re not getting big increases if particularly if they&#39;re on entitlements or on food stamps which is another entitlement uh or they&#39;re on a fixed income as a reti you&#39;re you&#39;re not getting any growth there and you had a steep fall off in your purchasing power but one thing that&#39;s interesting is the University of Michigan expected price change it&#39;s a survey and I&#39;m skeptical of surveys but this survey shows that forever the median the red line has been at about 3% plus or minus two and a half plus or minus and right now is at 3% but we also looked at the the mean the average you see the mean has gone way up so what this means is the median median hasn&#39;t moved so the the dispersion around that median uh has not really moved very has been relatively constant but all of a sudden one of the tales the tales for higher inflation those that think inflation is going to be higher in the next five to 10 years well that&#39;s gone off the charts it was at two and a half and now it&#39;s at five so what this means mathematically is that the people who are thinking are revising to the high side have a very wide tail whereas the the people that are at at the below calculating to the mean they are probably more tightly uh tightly clustered sort of interesting we&#39;ll see what happens if this mean number moves that&#39;s going to be just as important as you know policy rate volatility changing and other things that I talked about that have been slow to move here are some good news for inflation let&#39;s do some good news they seasonally adjust the pce but they don&#39;t do a very good job of it if you take a look at the median Gap versus core p for the last uh 14 years what you find is that they still seem to overstate first quarter inflation first inflation definitely comes out seasonly higher than other quarters and the particularly good news is that in the second half of the year it&#39;s actually uh weakest and you&#39;ll not remember last year we got to seven uh rate Cuts expected for 2024 that was kind of on the back of weak inflation in the second half of last year and of course we&#39;ve had higher inflation for most of the first half of this year the good news is that might be relaxing the other piece of good news gasoline prices have been falling uh WTI has been falling a little bit so we see WTI the blue line was up at 85 it&#39;s now in the high 70s and usually it leads and gasoline may be falling I I I suspect that there will be some attempts to weaken gasoline prices in front of the election as well all right so let&#39;s take a look at the bloodless verdict of the market through last Friday uh the winner this year in in the bond market and this is just the US bond market that we do have em on here but it&#39;s mostly us we have triple triple B cnbs the thing that everybody wanted to hate the most is up by the most and doubleb Clos are up 11.2 and Triple C loans have done really well defaults haven&#39;t really materialized at least not yet and people like the high coupon on this stuff and so they they&#39;re up nearly 10% and then Triple B Clos uh also doing well up 6% so it&#39;s loans and Clos and cmbs that are doing well then you get get into high yield isn&#39;t doing particularly well it&#39;s only up 2% at least it&#39;s up when you get into em it&#39;s up 1.3 um one thing you want to consider is Venezuela has made its way back into theery Market Bond index and that has raised the yield of the index in a technical way so em spreads aren&#39;t really widening is that they&#39;ve reintroduced Venezuela which has increased the spread by at least 30 and maybe as much as 60 basis points just by including it but then you get into investment grade stuff and there&#39;s there&#39;s just no positive numbers here investment grade is down uh Double A&#39;s down almost 2% and so forth the best thing here again is the lower credit Triple B investment grade is very slightly down so not a lot of return in the traditional higher rated Bond markets copper gold ratio checking in totally not working uh it didn&#39;t work during the lockdown and then miraculously it worked during 2022 the two lines converged but ever since early 2023 not working copper gold ratio says rates should be substantially lower than where they are um and the Divergence remains I just have been using this for years it doesn&#39;t always work but it&#39;s been a good long-term indicator what&#39;s been working better frankly than copper gold is just plain old simple WTI price of WTI and the generic 10year bond yield are very highly correlated for for pretty good reasons and they&#39;ve been particularly highly correlated uh for the past I don&#39;t know I&#39;d say eight years so this is really worth watching and we notice that uh crude oil has been sideways broadly for the past couple of years here&#39;s the 30-year treasury bond uh always bring this up it was in a long-term declining trend broke out of that Trend and we&#39;re we&#39;re way out of that CH channel in fact we&#39;re out of it almost by a factor of 100% and because of that you see these horrific Bond returns you see the 30-year treasury is still down 50% in price on this draw down cycle going back to 2020 so this leads me to something I want to spend a little bit of time on and that&#39;s the banking system and I&#39;m talking about the small Banks the ones like svb and ones that had problems in 202 three you&#39;ll see small dank deposits are now higher than their 2022 High you see the 2023 problems caused by that blue line coming down but this is a sort of a this is sort of a double-edged sword because the reason their Bank deposits are going up is they&#39;ve had to increase what they&#39;re paying on them so they have all these deposits that are coming back in but they&#39;re not paying zero on them anymore and they still own a lot of Securities that caused their problems back in 2023 so if we look at small Banks exposure to commercial real estate okay so I&#39;m just saying that small Banks exposure to commercial real estate is increasing as a percentage of their assets part of that&#39;s the denominator effect that their the uh assets like the treasuries that I showed the draw down on are way smaller really uh particularly the ones that they&#39;re marking to market the ones that are so-called available for sale but if you&#39;re worried about uh commercial real estate this is this is a okay so this is sort of a warning sign you see that the their their commercial real estate holdings have have been increasing although they&#39;re not that high but here&#39;s the last thing I have on this and this is FDI Insurance institutions and unrealized losses and this is all FDIC insured institutions and what you see here is there&#39;s a massive embedded loss in these investment Securities we see the held to maturity Securities which aren&#39;t even put through their financial statements they have massive losses uh of hundreds of billions of dollars and then the available for Sal Securities still have tremendous amount of embedded losses you add it all up and you&#39;re at negative 7 you&#39;re at $700 billion of losses on investment Securities in spite of the fact that the bond market has somewhat improved here&#39;s credit car delinquencies which I&#39;m checking in on because they&#39;re now noticeably higher this is from Deutsche Bank and Philly fed and St Louis fed they&#39;re noticeably higher than they were pre pandemic and trending High very very quickly this is when the reasons why I think we&#39;re starting to see some of the anxiety building in the economic system this is CLO prices we saw that Clos have been doing well um we actually have have uh increased the very high- rated the safest of all AAA which are generating yields that are up near Six up near um 7% which is pretty attractive considering that we think they have no risk from default standpoint and they float if you&#39;re worried about uh interest rate risk so we can see that the price is just completely cratered in 2020 and then they made it back pretty quickly into 2021 then fell again uh and in 2022 with the bond market being weak but we&#39;re all the way back up if you take a look at the top uh rating categories Triple A down to Triple B they&#39;re all clustered together they&#39;re all basically at issue price or par for this reason the clo Market is being refinanced at an epic rate to the to the extent that amazingly there&#39;s little or no net issuance in the SEO Market There&#39;s issues coming all the time this is these are repackaging of bank loans they&#39;re they&#39;re coming Fast and Furious but it&#39;s all just being re it&#39;s all refinancing so you see the gross issuance using this exhibit from Morgan Stanley the gross issuance is pretty pretty robust up about 600 billion but you&#39;ll notice that the net issuance because you&#39;re it&#39;s being used to call existing deals is actually the first negative year in at least 11 years so this is an incredibly strong technical factor for this market and I think that&#39;s been supportive of the prices and something we&#39;ve been expecting real quickly um what you don&#39;t want to do based upon valuation relative to history you don&#39;t want to go from tripleb to Double B you you get very little in terms of incremental U the the the gray shaded area you want as much gray shading as possible to incentivize you from downgrading from Triple B to Double B but there&#39;s very little there right now the lowest ever was 45 basis points and that was a horrible time to have been downgrading and right now it&#39;s 69 basis points which is not very far away uh it&#39;s not it&#39;s not as bad but there&#39;s very few instances that this has been as tight and this far into yield curve inversion in economic cycle and Rising gradually Rising unemployment rate uh that you don&#39;t want to be downgrading for no reward however if you go from trip B the highest category of high yield into Double B the highest category of high yield you do get a very high pickup but there&#39;s a reason for that and the reason is that people know that defaults are going to start coming in the lower reaches of the high yield bond market they don&#39;t look terrible now but they&#39;re definitely protecting themselves because you among the higher for if you did this on a moving average basis which is on there you can see it&#39;s at one of the higher ones over the past decade I talked about Europe how I liked starting to invest in Europe way back in uh late 2021 uh it hasn&#39;t really worked versus the S&amp;P 500 but it hasn&#39;t really been that bad either it&#39;s been almost a push over that front of me now okay so here&#39;s one that is just nonstop and that&#39;s the S&amp;P outperforming Emerging Markets it&#39;s it&#39;s back at it again we haven&#39;t gone to a new high on the S&amp;P divided by the emerging market futures but it&#39;s awfully close but this is a trend you absolutely don&#39;t want to fight until the trend breaks so we&#39;ve not have not been really active interested or active in emerging in Emerging Market versus the S&amp;P so with that I&#39;ll wrap it up I&#39;ve gone a little long but I don&#39;t through that whole 20 1968 thing do look do look into that Atlantic website so Andrew I&#39;m going to turn it over to you to cover some of the facts of torture and Bon fund

[Music] thanks everybody for joining us for the total return webcast here June 11th 2024 I say this every year but it&amp;#39;s hard to believe that we&amp;#39;re barreling towards the middle of the Year already and uh the summer always goes very very quickly the title of this webcast as you can see on the screen is 1968 and I&amp;#39;m thinking about the political environment today and a lot of the growing tensions around the world and the multiplication of tensions the the picture on the screen is of Columbia University on uh April 23rd of 1968 where five buildings were taken over by students and they actually kidnapped a Dean for a brief period of time and about a week went on and then they had to order in a thousand police to clean up the mess and there were over 700 students arrested but that&amp;#39;s that was just one example of all the protests which were not find to the United States or to the universities they were all around the world there were massive strikes in Europe uh anti-vietnam War protests in the UK and then all across America with the 1968 election interestingly the year 1968 began with the first day of the year the New York Times had their headline World bids Ado to Violent year to a violent year so people were happy that 1967 was gone but it so often happens you don&amp;#39;t really know when it&amp;#39;s over and oftentimes what you thought was bad is followed by something of the same ilk but much more severely so I go through a timeline of 1968 I lived through it I was in in third grade uh in 1968 and I remember being aware for the first time of anxiety about the situation and the world didn&amp;#39;t seem so safe but the year the year started out uh in a pretty good spot January 22nd of 1968 was the debut Rowan and Martin&amp;#39;s Laughin which was about the number one show in America it was on once a week and celebrities would go on and it was kind of a skit type of the thing kind of a precursor to sah and I live and uh it was called Laughin as a play on all that was going on with Sittin and beins and lovein all these ins and so they said let&amp;#39;s make let&amp;#39;s have a laugh in so let&amp;#39;s leave the cares of the world outside for an hour and Rowan Martin&amp;#39;s laughing but things started Det pretty quickly January 23rd just a day later North Korea seized the USS poblo claiming that the surveillance ship strayed into Korean North Korean Waters a crewman was killed 82 were imprisoned and an 11-month standoff between the US and North Korea ensued and then January 30th North Vietnam launched its Ted offensive directly contradicting lbj&amp;#39;s claims the president United States that the Communist forces in Vietnam were were weak and that the US was winning that was a complete lie and it was later shown so in the Pentagon papers which were published finally in 1971 uh February 1st two Memphis sanitation workers got crushed to death by a malfunctioning garbage truck leading to strikes that turned into a the Civil War movement largely was born in its last phases of violence on that dat and then uh February 7th after a battle in uh in bentre village in Vietnam an American officer told the Associated Press quote it became necessary to destroy the town in order to save it and that became a huge anti-war rally and cry kind of reminds me of Nancy Pelosi saying that we have to pass the healthc care bill so we can figure out what&amp;#39;s in it and then February 27th the most um trusted and revered newspaper news uh anchor TV news anchor Walter kronite did a tour in Vietnam and he came back and he said the situation is Meed in stalemate which directly again contradicted the administration&amp;#39;s claims that the United States was on a path to Victory and it greatly swayed public opinion against the war so things started to accelerate on March 12th the New Hampshire GOP Primary and Democratic primary were held Nixon won the Democratic primary with 78% of the vote but Eugene mcar karthy opposing LBJ as an anti-war candidate won a shocking 42% % of the democratic vote so that on the ba basis of Johnson&amp;#39;s poor primary showing just four days later New York Senator Robert F Kennedy uh entered the Democratic race and then 15 days later LBJ who had won the 1964 election 61% of the popular vote announced that he was not going to run for re-election in 1968 then all hell broke loose April 4th Martin Luther King who was in Memphis Jr Martin Luther King Jr in Memphis for the sanitation worker strike that was started earlier that year was fatally shot and riots erupted in over 100 US cities leaving 39 dead over 2600 injured and over 21,000 arrested there&amp;#39;s a good website about 1968 with pictures from Atlantic magazine that goes through and the the images are are really worth looking at because uh things were pretty out of hand and then in May 26 7 the Supreme Court ruled 7 to1 that burning a draft card would not be excused as a protest of free based upon free speech so he couldn&amp;#39;t burn your draft card then June 3 little off topic Andy Warhol was shot by by somebody who was in his Circle and she was mad that he had lost a copy of a a police she wrote or something like that but then a day later June 4th more killings RFK wins the California primary by a lot and that night was assassinated at The Ambassador Hotel in Los Angeles so June 19th 50,000 people joined a rally on the National Mall to protest the State of Affairs the United States the racism and the poverty of the underclasses so this all culminated in the Democratic National Convention August 28th uh DNC in Chicago where the police and the National Guard went on a rampage clubbing and tear gassing hundreds of anti-war protesters and isn&amp;#39;t it interesting that the Democratic National Convention uh this August I believe it is is going to be in Chicago also so some parallelism there so September 16th trying to get rid of his Sourpuss image Richard Nixon running for president went on laughing and said four words celebrities would go on laughing and I I don&amp;#39;t know why they thought it was funny they would say sock it to me and then November 5th Nixon won barely in the popular vote but surely Chisum also set a landmark being the first black woman elected to the House of Representatives and then finally December 23rd North Korea released that P blow ship that they had said They confiscated and they released the crew but they kept the ship and it&amp;#39;s still there in North Korea the ship the USS playo is on display in What&amp;#39;s called the Victorious Fatherland Liberation War Museum in panyang so with that as a backdrop let&amp;#39;s get started this is uh new homes under construction I&amp;#39;m breaking it into single family to single family which is the the gray area and the orange area is multif family and I&amp;#39;m pointing out that there&amp;#39;s a parallelism here between the late 60s or at least around 1968 maybe 1970 where we had a very high percentage of multif family units under construction relative to single family homes and was a ratio that hasn&amp;#39;t been seen until today and I find this interesting because that was the Baby Boomers uh back there in 7074 that caused that thing and now the baby are the ones that are being pro protested against the Baby Boomers protested against their parents and their parents&amp;#39; policies uh but now it&amp;#39;s the younger generation is protesting against their grandparents those very Baby Boomers and so we now also have a lopsided total uh multif family home versus single family home construction that probably has something to do with how unaffordable the mortgage payment is uh on there a percentage of household income you can see that back in 2018 2019 it was around 20% or even lower of with a 20% down payment a 30-year term and the median uh existing home sale price that has gone from The High Teens percentage of disposable in of household income to 30% so no wonder people aren&amp;#39;t feeling happy they&amp;#39;ve lost 10% of their uh disposable income has now being funneled into just a median standard mortgage payment and of course home sales are very very low in fact this goes all the way back to 01 and we can see that the most recent print is the absolute lowest that we&amp;#39;ve seen over this 23e span of time so we&amp;#39;ve had low unemployment uh we use the establishment survey for unemployment comes out the first Friday of every month and this exhibit shows the number of consecutive months that the US unemployment rate was beneath 4% from the from the first month that it went below 4% and we&amp;#39;ve actually backed to the 1968 period where we&amp;#39;ve had 27 consecutive months um the last one was 3.96 so it&amp;#39;s still below four uh but but that makes it actually one month longer because we we would attack that one onto the series so we&amp;#39;re in the same type of extended low unemployment situation going back all the way to the late 1960s we look at unemployment as a very important uh indicator of whether we might the threshold of a recession and one thing we we use as a yellow flashing light is the 12 is the unemployment rate versus its 12-month moving average which is on the screen now and indeed we are slightly above the 12-month moving average um and once you get above the 12 month moving average you really have a yellow light for recession it really looks to me like the trend has changed here um we&amp;#39;ve actually been in a gently increasing uh unemployment rate on the u3 for basically a year and a half and a a lot of things things have been in place now for about a year and a half we&amp;#39;ll explore that presently but first let&amp;#39;s go to the red light indicator which is the uh you3 unemployment rate versus its uh 36-month moving average and it hasn&amp;#39;t gone above yet but that that Gap has closed a lot and we&amp;#39;ll see what happens in the next unemployment report if it goes above that would be a real warning sign for a continued economic slowdown which has started to occur and we&amp;#39;ll get to that in a moment here&amp;#39;s what a thought experiment we&amp;#39;ve shown many times in the past we just take the middle two quartiles of past recessions and uh that&amp;#39;s the Shaded blue area and then we take the median uh of all the recessions over this period and you we&amp;#39;ll see that we live within the blue shaded area we&amp;#39;ve got the red area is the current movement in the u3 unemployment rate I&amp;#39;m just pointing out that uh we it does look that it&amp;#39;s following that median trajectory so not really willing to declare that this is cross the line yet but things are starting to fall into place also payroll revisions are acting awfully strange in fact payroll numbers have joined the inflation numbers is being a little bit uh difficult to understand because last the most recent jobs report had uh on the establishment survey had 272 jobs added which was a good number however that same day there&amp;#39;s the household survey which at turning points in the economy has historically been a better indicator and uh that showed a very different situation it did show job growth but while the establishment survey showed uh full-time jobs going going up nicely and we&amp;#39;ll see that in the next exhibit the household survey last uh report showed that full-time jobs lost 625,000 jobs so one report says there&amp;#39;s hundreds of thousands of jobs gained and the other one shows hundreds of thousands of jobs Lost In addition what we&amp;#39;ve seen and I don&amp;#39;t have this exhibited in this this deck but we&amp;#39;ve seen government has been growing again and government payrolls are not really very productive and in fact they might even be intentionally uh accelerated in order to make economic releases look perhaps a little bit Rosier but one thing that happens in the in the establishment survey is there&amp;#39;s a number that&amp;#39;s initially released it gets tremendous attention every first Friday of the month and then after a while they finally stop revising it and this is uh the history of the difference between the first release on the first Friday and the final value after revisions and you&amp;#39;ll notice that the revisions now for about 18 months again a lot of things seem to have been stabilizing over the last 18 months we see that we&amp;#39;ve had basically every month nearly has had a revision that came in lower than the First Data number and the reason for that is the households that the establishment survey uses the birth death model to estimate things and it seems to to be anachronistic and it seems to be leading to overstating the initial number and then having to revise it lower also things wor worth looking at the employment picture this is unemployed part-time for economic reasons which means they want to work full-time but they can&amp;#39;t find a full-time job this also looks like it turned up not alarmingly yet anyway uh but over the last 18 months that one this is some uh leading indicators for potential uh unemployment or employment changes in Trend and we see that the red line is the you through unemployment rate we&amp;#39;ve inverted it here so it&amp;#39;s the same as we had in the prior exhibits but now it going down means that that uh unemployment rate is going up and then we see a leading indicator which is small business hiring plans index which tends to go sharply to the weak side before the unemployment rate starts to rise and it&amp;#39;s one of the more extreme declines in the uh small business Hing plans index without having really that definitive of a rise in unemployment so we&amp;#39;re going to be watching for this in the next reports also average hourly earnings in manufacturing manufacturing&amp;#39;s been quite weak it&amp;#39;s been the one of the weaker parts of the economy so we have to take this with a grain of salt but nonetheless the average hour we average weekly hours worked are definitely shrinking and they&amp;#39;re shrinking at that pace which has been consistent with recession so all these things are kind of on the brink but it&amp;#39;s too early to declare that we cross the line I always talk about the budget deficit I&amp;#39;m going to spend very little time on that in this webcast uh we have 5.7% of GDP unemployment rate without a high unemployment rate or anything like that and The Bu Administration has forecast that next fiscal year will be 6.1 percentage of GDP and of course this is getting a lot of attention because people are aware of the things we&amp;#39;ve been warning of and monitoring closely like the interest on the debt which is now basically the same as the defense plus War budget um it&amp;#39;s actually bigger than the official defense budget but if you throwing in the money for the wars in Israel and Gaza and Ukraine and Russia we&amp;#39;re now up at 861 thou trillion on hard to keep track 861 billion on on the on the debt and we&amp;#39;ve got 895 on the on the war machine Social Security and Medicaid are still bigger but we can say that the federal expense interest expense is percentage of federal revenue under the current tax system is alarmingly increasing and it&amp;#39;s basically uh it&amp;#39;s well above where it was in 1968 even though we were in the middle of the Vietnam War which is a much more uh Hot War than the ones that were proxying right now but it was at 7% we&amp;#39;re now more than double that so the interest expenses percent of federal ratio is twice as bad as it was in the tulous year of 1968 and of course the interest rate on the treasury debt is going up because we have the stuff that was uh floated at 25 to 100 to 150 basis point coupons uh during uh pre pandemic now those are being replaced with well the 10e treasury was at 447 uh yesterday and so it&amp;#39;s down a little bit today but it&amp;#39;s quite a bit above the 333 which is the moving average of the uh yield on the outstanding treasury debt is obviously going to go higher if rates stay at these levels there&amp;#39;ll be bonds that would be floated that were say they were issued for five years in 2019 they had a 25 basis point or 50 basis point coupon that&amp;#39;s going to go up by 400 basis points so this problem&amp;#39;s going to get worse and that&amp;#39;s all I&amp;#39;m going to say about this now people talking about consecutive weeks of inversion and they point out that uh going back to the late 70s we see that we now have the longest period of 21&amp;#39;s reversion um of any any length of time but I want to caveat this because as long although this is a lengthy one look back at the left side of the exhibit from 78 into 82 I lived through that time period And I can tell you it never felt like you were out of recession from 1978 into late 1981 people don&amp;#39;t remember that when rid came in the economy actually got bad again you&amp;#39;ll notice that that uh blue area that was prior to the recession of inversion that there was small Hiatus when it was de inverted but if you Ed more of a moving average thing if you take my point of view that this whole time period was really one four year long or three year long recession um actually you could you would say that the curve was inverted back in the late 70s early 80s for more like not just a 100 weeks but more like 180 weeks so we haven&amp;#39;t really broken that record going back to the 1980s but certainly it&amp;#39;s been inverted much longer than most periods of time and people asked this question I saw it in the queue already why is that why why are these recession indicators not working and the answer I think is pretty clearly that we&amp;#39;ve had high volatility of economic response both fiscal and monetary highly volatile we took rates down to zero some countries went negative we had tremendous amount of money Printing and then the FED embarked on a 500 basis point uh 525 basis point fed funds increase and we&amp;#39;re still debating whether that&amp;#39;s going to stay uh at that level for much longer we know we have the FED tomorrow we also have the CPI tomorrow which is an inter in combination so it&amp;#39;s going to be very important to see what happens to the the summary of economic projections that comes out every quarter and here it is June so it comes out the third month of every quarter and we look very carefully at how the market reacts my prediction is that the FED will no longer show three Cuts this year uh in their work tomorrow I think they&amp;#39;re going to say two cuts I think if they stayed with three Cuts I think you would get a rally in the short end of the bond market and you get a selloff in the long end we have some de inversion going on but I really think two is the number and I I think if they do say it&amp;#39;s only one cut I think you&amp;#39;re going to see repricings to markets um that are more more hawkish in nature so let&amp;#39;s look at the yield curve steepening before the recession recession indicator and yeah it&amp;#39;s been deeply inverted it&amp;#39;s been a long time but again it looks kind of like the late 70s early 1980s and we&amp;#39;re going to be waiting for this thing to go above zero before we really say this indicator is a real red light caution for the market a lot of people are focusing on the fact that it&amp;#39;s been a ver a long time and there&amp;#39;s no recession but if you look at this chart carefully uh you you want to see it go above zero to really ring the bell in in a loud way here&amp;#39;s a consumer confidence less present situation same sort of a thing it hangs out where their their view of the future is Bleak compared to their view of the present that&amp;#39;s when the gray shaded areas get very big but it&amp;#39;s really when it goes sharply the other way that you are worried about recession we&amp;#39;re not there yet so again we&amp;#39;ve got the setup the conditions are in place but the Catalyst has not yet appeared but things have slowed down I talked about the last 18 months but look at just now this is this is a very short-term time period so one has to be careful you can&amp;#39;t make decisions based upon just short-term data but this short-term data is kind of remarkable the the blue bars are the nbe monthly recession indicators and they&amp;#39;re labeled down on the x-axis and it&amp;#39;s the three-month uh number annualized and three of you know most of them were decent or very very good it was the manufacturing which we we&amp;#39;ve been talking about for a couple of years has really been a bad part of the economy because it was overheated thanks to all the government money printing but just look at the last month again let&amp;#39;s not make too much out of a month but they really have reverted from the three-month annualize virtually they&amp;#39;re all zero in fact the only one that&amp;#39;s even positive is non-farm payrolls for May and we&amp;#39;ll see uh what happens to the revisions there because we have very inconsistent data from the household survey and the establishment survey in the most recent prints here&amp;#39;s small business optimism which is probably the weakest part of the economy you can&amp;#39;t really be surprised a lot of small businesses have gone out of business because they couldn&amp;#39;t make it through the lockdown period and it does it doesn&amp;#39;t seem like their mood has improved at all uh from that horrible experience in 2020 2021 where so many businesses shut down here&amp;#39;s the Bloomberg economic US economic surprise index uh the categories are up on top and I&amp;#39;ll just point out that it was surprising pretty decently until the last couple of months so again another uh Harbinger perhaps that maybe something has changed we need more data and I&amp;#39;m sure the FED will comment to the fact that they&amp;#39;re data dependent and I&amp;#39;m sure they will acknowledge some of the Slowdown that uh is in some of these numbers but it&amp;#39;s not enough to be convincing because of the time frame so here&amp;#39;s what&amp;#39;s happened to the Market&amp;#39;s view of the FED funds what it&amp;#39;s pricing in it&amp;#39;s pretty interesting as of uh as of April of 2024 you could you could see what was being priced in and they see June you know June and then then we see uh the other month and we can say that it&amp;#39;s really it&amp;#39;s really changed when we were earlier in the year January uh 2024 that&amp;#39;s the green line the market was almost crazily looking for about seven rate cuts and that disappeared pretty quickly when the first quarter data particularly the inflation data spiked up which happens seasonally we&amp;#39;re gonna we&amp;#39;re going to get to this so we&amp;#39;re not as alarmed I think as the market was uh at the end of of in March and April but we see the the big pricing uh because when you just got to um to to April the red line you&amp;#39;re down to just a cut or two and that seems to be pretty much where we are right now as of June 3 it&amp;#39;s a little bit more but it&amp;#39;s really only about one or one and a half cuts for the year I I I still believe the FED will talk about uh two cuts in their SCP dots here&amp;#39;s the two-year treasury which does lead the FED funds rate uh I get push back on this a lot but I actually did calculated of the last 11 times that uh we had the curve change direction the two&amp;#39;s T the fed the FED changed Direction in their fed funds rate policy of the last 11 times nine of them the Fed was led by the change in direction of the two-year one of them the Fed was in front and one of them was simultaneous I would say the one at the most left uh leftmost yellow circle is simultaneous but clearly uh they&amp;#39;re largely in front of the FED changing policy right now this indicator would say the FED is going to be cutting rates sooner R than later and I suspect the FED will say something at least in line with that not contradictory to that this is an interesting thing that when I showed about the unemployment rate leading into recession this is the change in the two-year treasury yield around the last Fed rate hike and this one is not anything like the median of the last several observations of the two t uh two 10 and and the FED hike we see here is if anything this suggests the FED might stay on hold uh a little bit longer which would come as a surprise and would not be a welcome uh a welcome development for markets sentiment and also here&amp;#39;s the tenure treasury around the last fed hike and that that too is not really uh following the the pattern of past activities I just point that out because this has had a very different look over the past few months than it did say in the fourth quarter of last year here&amp;#39;s something that&amp;#39;s just amazing to me this is the us when you compare tips to nominal treasuries you get an implied inflation break even and it really is interesting that while there was some volatility on the two-year and the five-year the tens and the 30s the purple line and the blue line have been remarkably stable so I think one of the things that is a challenge for the market or could be a surprise for the market and a disruptor what if this changes what if the attitude of the pricing in the bond market breaks out of this incredibly stable range i&amp;#39; call this almost uh of the ilk of the Byron wean you know surprises you know 10 surprises or however many it was at the end of every year because if this actually changed uh I think it would be a real game Cher for markets not happening yet what else is what else is interesting in terms of how it&amp;#39;s changed well how about the 12-month rate of change of Central Bank policy rates you&amp;#39;ll notice that back in around 1968 1970s you see that there was tremendous volatility month-over-month changes in policy rates 12 month changes in policy rates were flopping around and then of course we went into Financial suppression or repression uh back in the aftermath of the global financial crisis and the problems in Europe and you had almost no changes for a very long period of time longer than anybody&amp;#39;s uh career experience ever saw before and now we&amp;#39;re going back into a little bit more volatility so it would seem that the the the the template of 2011 to 2019 is probably not going to be very helpful in thinking about risks and markets going forward another question you know that question why is there no recession M2 went negative year-over-year why no recession well this is this is I think what monetarist economists failed to fully appreciate is that the yellow dotted is the trend pre pandemic of M2 money supply growth uh and we say that it totally blew out away from that Trend because of all the money that was printed by the the covid response and while M2 did go negative on a year-over-year basis you see that blue line started to move down you&amp;#39;ll notice that it&amp;#39;s still pretty close as of April 30th pretty it&amp;#39;s still pretty far above rather the trend of pre pandemic so I I get a lot of uh I I Noti a lot of commentators talk about excess savings has dried up um maybe that&amp;#39;s true but this suggests to me that the economy has been powered Along by tremendous you know pig in the python of money supply growth back in the pandemic but money supply growth was negative not by a lot you see that huge growth this is just year-over-year M2 money supply growth and it did go zero and this is why I think a lot of economists that are particularly monetarily oriented Ed and I certainly respect the M2 going negative and so I probably gave this too much emphasis as well but we see that it&amp;#39;s now actually positive point6 on the M2 all right let&amp;#39;s look at some other areas we&amp;#39;re going to spend quite a bit of time on inflation which I think is important and here this is wage growth and the quits rate the Atlanta fedge wage growth tracker is now not it&amp;#39;s been suspended so it&amp;#39;s at 4.7 so I&amp;#39;m just really looking at the quits rate but the the fit between uh wage growth and the quits rate is pretty tight as your eye can see and this does suggest that the wage growth tracker if it becomes republished should probably start moving down although it&amp;#39;s still uncomfortably High U for the FED at 4 point probably 4.5% now if they if they come out and and reprint it commodity prices have potentially bottomed out gold remains very elevated having a great year I was bullish on gold entering the year but I didn&amp;#39;t expect go up 20% that quickly and but it&amp;#39;s holding that gain awfully well but Commodities are really all over the place a year to date here in 2024 with gold up a lot uh you know Copper&amp;#39;s been all over the place and what we see is some Commodities are down a lot and some are up a lot so there&amp;#39;s no there&amp;#39;s no General commodity Trend but we&amp;#39;re putting it all together here with the bcom index and the red dots that&amp;#39;s the 200 day moving average and I&amp;#39;ve been sort of bearish on Commodities since 2022 in the summer and uh really they couldn&amp;#39;t get out of their own way but it seems to me that the commodity complex may be bottoming uh it did break down below the 200 moving average briefly but as of yesterday it was slightly above uh the 200 day moving average and so be watching for this because I think Commodities may start to get into an interesting moment uh if the dollar starts to drop as as a consequence of a recession developing whenever that happens okay let&amp;#39;s look at inflation here&amp;#39;s the the mo kind of the most standard one it&amp;#39;s the CPI year-over-year comes out tomor comes out tomorrow as is PPI producer price indices my my apologies the that the blue line is X food and energy so so so-called core the FED can&amp;#39;t be too happy that this has stalled out at around 3% although it&amp;#39;s way better than was and then you see the final demand which is even less uh encouraging for the FED while it&amp;#39;s at a better level at 2.2 it was down nearly at zero so with commodity prices going up I put the these these indices in this order intentionally Commodities are the you know the fastest highest frequency and we see that that seems to may have bottomed out and then ppi is the next highest frequency it leads CPI and it&amp;#39;s a little bit discouraging that that seems to maybe have Bott bottomed out and then we see uh the CPI and we see that that has stalled out at about 3.4 and 3.6 for X food and energy the prediction for tomorrow is that uh the headline CPI will be at around three and a half percent year-over-year so not much movement and that maybe the head the uh X food energy the core will be at about the same level so the FED really wants to see this go down certainly into a two handle and that&amp;#39;s not going to happen uh with the print tomorrow so it&amp;#39; be interesting to see how the FED wants to comment on that one thing that&amp;#39;s driving this inflation it&amp;#39;s kind of wacky it&amp;#39;s auto insurance inflation I mean if you if you drive a car uh you probably know now that auto insurance is up a lot but this is the actual data and it&amp;#39;s up 22.6% year-over-year and this is contributing substantially to CPI but will it go down I don&amp;#39;t know it&amp;#39;s been going up more than 5% for the past three years in a row so if you think about the cumulative uh impact of this on the cost of auto insurance it&amp;#39;s pretty staggering and remember auto insurance is not something that you you buy once you buy it every day because by law you have to own it in most places anyway and so you&amp;#39;re forced to participate in this program and you you you&amp;#39;re running into this double whammy for the insurance companies where the frequency of problems has gone up with you know less fewer insured motorists on the road there&amp;#39;s more uninsured motorists so that increases the cost to those that buy insurance carjacking is up auto theft is up the cost of repairs is up and so you&amp;#39;ve got the frequencies going up and you&amp;#39;ve got the cost going up and that&amp;#39;s creating this incredible monster of an inflation contribution uh but I doubt these prices will go down unless we go into a radically different state of society which maybe will happen as happened in the several years after 1968 here&amp;#39;s uh us headline in core pce that I put this one in it&amp;#39;s not the highest frequency but it&amp;#39;s the one the FED leans on the most heavily this one is the most encouraging for the FED Remains the most encouraging we see that the headline number is uh 2.7 and we see that the core number is 2.8 at least they&amp;#39;re below three and at least while it did tick up on the headline number but while it&amp;#39;s decelerating on the downside the core number it&amp;#39;s somewhat somewhat in the comfort zone I would think for the FED at this juncture now what you don&amp;#39;t hear about anymore is super core inflation remember that one back in 2022 they wanted to look at Super core inflation which is core Services X shelter which X housing which is turns into a very small piece of most people saving a spending I mean Foods everybody energy everybody housing everybody so there&amp;#39;s a maybe auto insurance isn&amp;#39;t in this but we see that supercore pce has stalled out at 3.4 and so they don&amp;#39;t want to talk about that let&amp;#39;s just look at the regular pce because that&amp;#39;s looking in the two- handle but look at the CPI the supercore CPI is really disconcerting uh it&amp;#39;s 4.9 now that does include uh uh auto insurance in there so I think I think it does anyway and so that&amp;#39;s part of the reason for this Divergence but uh don&amp;#39;t hear about that anymore here&amp;#39;s the contributors to headline inflation and you&amp;#39;ll notice that core services for uh is is all of it here you got 3.4 year-over-year on pce on the CPI and we see that the gold area core Services is just about everything contribution to core inflation again it&amp;#39;s basically shelter and core Services ex shelter that&amp;#39;s your entire inflation rate there is no inflation in core Goods core CPI X shelter inflation I put put this in almost as a joke because you can get an inflation rate at any number that you want just like it seems you can get unemployment data that&amp;#39;s greatly inconsistent one series versus another if you want to say that inflation is under control then you can say I I&amp;#39;ll do a magic trick I do core CPI X shelter and there you have it you&amp;#39;ve got 2.0 is uh core CPI ex shelter and you&amp;#39;re not being terribly creative in how you&amp;#39;re slicing and dicing the components so shelter obviously is a big component of inflation and it should come down this has been a little bit disappointing for the fed I&amp;#39;m sure because if you look at new tenant rent index it&amp;#39;s at 8% year-over-year and yet the CPI shelter component is at 5.55 year-over-year so there&amp;#39;s a 475 basis point difference between the two and shelter inflation is about a third of CPI so you can dream that these things will converge I I do notice that there usually is a higher number on the shelter than the rent index but if they converge by even 300 basis points then you would knock something like a hundred off of the CPI rate and that that that&amp;#39;s really the piece that&amp;#39;s missing uh for the FED we need we need this to come down offset auto insurance believe it or not and then here&amp;#39;s something that&amp;#39;s interesting November 1 we had that pivot the rhetorical pivot by the FED where they they got away from 12- month numbers they started talking about three-month numbers annualized and six- month numbers annualized well they&amp;#39;re not talking about that anymore because on CPI this three-month annualized and six-month annualized are both worse than the 12-month annualize so that one&amp;#39;s brushed under the carpet we can do the same thing um for pce inflation and we get nearly the same result we get that the 12-month number is higher than the three-month annual sorry it&amp;#39;s lower than three-month annualize and six-month annualized so these the trend here has not been good uh particularly for core pce where you know the three Monon is worse than the six month is worse than the nemon annualized so here&amp;#39;s something that&amp;#39;s interesting that you hear about this 2% inflation Target that was developed some quite a while ago and we&amp;#39;ve got that 20 that 2% number uh on the lower exhibits so that if you&amp;#39;re running at exactly 2% that would be the inflation trend line and it&amp;#39;s curious how we had headline CPI and core CPI the blue lines really tracking along particularly the core CPI was like glued to that uh that that trend line and yet yet then the pandemic came and of course the monetary response spiked inflation and so now we&amp;#39;re well above the 2% inflation Target not only for the last year or five years but also the last 10 years it&amp;#39;s 3% for core CPI and two and a half for core pce so it&amp;#39;s just interesting how inflation cumulates we&amp;#39;ve been doing a lot of work at double line not just looking uh at headline numbers and not just looking at short-term fixed time periods but trying to get do a deep dive and these are some of the things that we&amp;#39;ve uncovered this is my favorite as everybody knows export and import prices which are averaging zero you&amp;#39;ve got import prices at 1.1 and export prices at negative 1.0 so they have been uh very tame for the past couple of years and they were terrible back uh with all the supply chain shocks and everything and then they relaxed understandably and now we&amp;#39;re basically right back to where we were prepandemic running at around zero on the growth in import export prices that&amp;#39;s a probably a good thing if you&amp;#39;re on food stamps you&amp;#39;re on a fixed income um then you&amp;#39;re you&amp;#39;ve had a bad run here for the last 5 years because the purchasing power of a fixed income uh deflating by pce inflation which isn&amp;#39;t the highest inflation out there you&amp;#39;ve lost 14% of your purchasing power this is obviously these are reasons why people are unhappy they&amp;#39;re they&amp;#39;re not getting big increases if particularly if they&amp;#39;re on entitlements or on food stamps which is another entitlement uh or they&amp;#39;re on a fixed income as a reti you&amp;#39;re you&amp;#39;re not getting any growth there and you had a steep fall off in your purchasing power but one thing that&amp;#39;s interesting is the University of Michigan expected price change it&amp;#39;s a survey and I&amp;#39;m skeptical of surveys but this survey shows that forever the median the red line has been at about 3% plus or minus two and a half plus or minus and right now is at 3% but we also looked at the the mean the average you see the mean has gone way up so what this means is the median median hasn&amp;#39;t moved so the the dispersion around that median uh has not really moved very has been relatively constant but all of a sudden one of the tales the tales for higher inflation those that think inflation is going to be higher in the next five to 10 years well that&amp;#39;s gone off the charts it was at two and a half and now it&amp;#39;s at five so what this means mathematically is that the people who are thinking are revising to the high side have a very wide tail whereas the the people that are at at the below calculating to the mean they are probably more tightly uh tightly clustered sort of interesting we&amp;#39;ll see what happens if this mean number moves that&amp;#39;s going to be just as important as you know policy rate volatility changing and other things that I talked about that have been slow to move here are some good news for inflation let&amp;#39;s do some good news they seasonally adjust the pce but they don&amp;#39;t do a very good job of it if you take a look at the median Gap versus core p for the last uh 14 years what you find is that they still seem to overstate first quarter inflation first inflation definitely comes out seasonly higher than other quarters and the particularly good news is that in the second half of the year it&amp;#39;s actually uh weakest and you&amp;#39;ll not remember last year we got to seven uh rate Cuts expected for 2024 that was kind of on the back of weak inflation in the second half of last year and of course we&amp;#39;ve had higher inflation for most of the first half of this year the good news is that might be relaxing the other piece of good news gasoline prices have been falling uh WTI has been falling a little bit so we see WTI the blue line was up at 85 it&amp;#39;s now in the high 70s and usually it leads and gasoline may be falling I I I suspect that there will be some attempts to weaken gasoline prices in front of the election as well all right so let&amp;#39;s take a look at the bloodless verdict of the market through last Friday uh the winner this year in in the bond market and this is just the US bond market that we do have em on here but it&amp;#39;s mostly us we have triple triple B cnbs the thing that everybody wanted to hate the most is up by the most and doubleb Clos are up 11.2 and Triple C loans have done really well defaults haven&amp;#39;t really materialized at least not yet and people like the high coupon on this stuff and so they they&amp;#39;re up nearly 10% and then Triple B Clos uh also doing well up 6% so it&amp;#39;s loans and Clos and cmbs that are doing well then you get get into high yield isn&amp;#39;t doing particularly well it&amp;#39;s only up 2% at least it&amp;#39;s up when you get into em it&amp;#39;s up 1.3 um one thing you want to consider is Venezuela has made its way back into theery Market Bond index and that has raised the yield of the index in a technical way so em spreads aren&amp;#39;t really widening is that they&amp;#39;ve reintroduced Venezuela which has increased the spread by at least 30 and maybe as much as 60 basis points just by including it but then you get into investment grade stuff and there&amp;#39;s there&amp;#39;s just no positive numbers here investment grade is down uh Double A&amp;#39;s down almost 2% and so forth the best thing here again is the lower credit Triple B investment grade is very slightly down so not a lot of return in the traditional higher rated Bond markets copper gold ratio checking in totally not working uh it didn&amp;#39;t work during the lockdown and then miraculously it worked during 2022 the two lines converged but ever since early 2023 not working copper gold ratio says rates should be substantially lower than where they are um and the Divergence remains I just have been using this for years it doesn&amp;#39;t always work but it&amp;#39;s been a good long-term indicator what&amp;#39;s been working better frankly than copper gold is just plain old simple WTI price of WTI and the generic 10year bond yield are very highly correlated for for pretty good reasons and they&amp;#39;ve been particularly highly correlated uh for the past I don&amp;#39;t know I&amp;#39;d say eight years so this is really worth watching and we notice that uh crude oil has been sideways broadly for the past couple of years here&amp;#39;s the 30-year treasury bond uh always bring this up it was in a long-term declining trend broke out of that Trend and we&amp;#39;re we&amp;#39;re way out of that CH channel in fact we&amp;#39;re out of it almost by a factor of 100% and because of that you see these horrific Bond returns you see the 30-year treasury is still down 50% in price on this draw down cycle going back to 2020 so this leads me to something I want to spend a little bit of time on and that&amp;#39;s the banking system and I&amp;#39;m talking about the small Banks the ones like svb and ones that had problems in 202 three you&amp;#39;ll see small dank deposits are now higher than their 2022 High you see the 2023 problems caused by that blue line coming down but this is a sort of a this is sort of a double-edged sword because the reason their Bank deposits are going up is they&amp;#39;ve had to increase what they&amp;#39;re paying on them so they have all these deposits that are coming back in but they&amp;#39;re not paying zero on them anymore and they still own a lot of Securities that caused their problems back in 2023 so if we look at small Banks exposure to commercial real estate okay so I&amp;#39;m just saying that small Banks exposure to commercial real estate is increasing as a percentage of their assets part of that&amp;#39;s the denominator effect that their the uh assets like the treasuries that I showed the draw down on are way smaller really uh particularly the ones that they&amp;#39;re marking to market the ones that are so-called available for sale but if you&amp;#39;re worried about uh commercial real estate this is this is a okay so this is sort of a warning sign you see that the their their commercial real estate holdings have have been increasing although they&amp;#39;re not that high but here&amp;#39;s the last thing I have on this and this is FDI Insurance institutions and unrealized losses and this is all FDIC insured institutions and what you see here is there&amp;#39;s a massive embedded loss in these investment Securities we see the held to maturity Securities which aren&amp;#39;t even put through their financial statements they have massive losses uh of hundreds of billions of dollars and then the available for Sal Securities still have tremendous amount of embedded losses you add it all up and you&amp;#39;re at negative 7 you&amp;#39;re at $700 billion of losses on investment Securities in spite of the fact that the bond market has somewhat improved here&amp;#39;s credit car delinquencies which I&amp;#39;m checking in on because they&amp;#39;re now noticeably higher this is from Deutsche Bank and Philly fed and St Louis fed they&amp;#39;re noticeably higher than they were pre pandemic and trending High very very quickly this is when the reasons why I think we&amp;#39;re starting to see some of the anxiety building in the economic system this is CLO prices we saw that Clos have been doing well um we actually have have uh increased the very high- rated the safest of all AAA which are generating yields that are up near Six up near um 7% which is pretty attractive considering that we think they have no risk from default standpoint and they float if you&amp;#39;re worried about uh interest rate risk so we can see that the price is just completely cratered in 2020 and then they made it back pretty quickly into 2021 then fell again uh and in 2022 with the bond market being weak but we&amp;#39;re all the way back up if you take a look at the top uh rating categories Triple A down to Triple B they&amp;#39;re all clustered together they&amp;#39;re all basically at issue price or par for this reason the clo Market is being refinanced at an epic rate to the to the extent that amazingly there&amp;#39;s little or no net issuance in the SEO Market There&amp;#39;s issues coming all the time this is these are repackaging of bank loans they&amp;#39;re they&amp;#39;re coming Fast and Furious but it&amp;#39;s all just being re it&amp;#39;s all refinancing so you see the gross issuance using this exhibit from Morgan Stanley the gross issuance is pretty pretty robust up about 600 billion but you&amp;#39;ll notice that the net issuance because you&amp;#39;re it&amp;#39;s being used to call existing deals is actually the first negative year in at least 11 years so this is an incredibly strong technical factor for this market and I think that&amp;#39;s been supportive of the prices and something we&amp;#39;ve been expecting real quickly um what you don&amp;#39;t want to do based upon valuation relative to history you don&amp;#39;t want to go from tripleb to Double B you you get very little in terms of incremental U the the the gray shaded area you want as much gray shading as possible to incentivize you from downgrading from Triple B to Double B but there&amp;#39;s very little there right now the lowest ever was 45 basis points and that was a horrible time to have been downgrading and right now it&amp;#39;s 69 basis points which is not very far away uh it&amp;#39;s not it&amp;#39;s not as bad but there&amp;#39;s very few instances that this has been as tight and this far into yield curve inversion in economic cycle and Rising gradually Rising unemployment rate uh that you don&amp;#39;t want to be downgrading for no reward however if you go from trip B the highest category of high yield into Double B the highest category of high yield you do get a very high pickup but there&amp;#39;s a reason for that and the reason is that people know that defaults are going to start coming in the lower reaches of the high yield bond market they don&amp;#39;t look terrible now but they&amp;#39;re definitely protecting themselves because you among the higher for if you did this on a moving average basis which is on there you can see it&amp;#39;s at one of the higher ones over the past decade I talked about Europe how I liked starting to invest in Europe way back in uh late 2021 uh it hasn&amp;#39;t really worked versus the S&amp;amp;P 500 but it hasn&amp;#39;t really been that bad either it&amp;#39;s been almost a push over that front of me now okay so here&amp;#39;s one that is just nonstop and that&amp;#39;s the S&amp;amp;P outperforming Emerging Markets it&amp;#39;s it&amp;#39;s back at it again we haven&amp;#39;t gone to a new high on the S&amp;amp;P divided by the emerging market futures but it&amp;#39;s awfully close but this is a trend you absolutely don&amp;#39;t want to fight until the trend breaks so we&amp;#39;ve not have not been really active interested or active in emerging in Emerging Market versus the S&amp;amp;P so with that I&amp;#39;ll wrap it up I&amp;#39;ve gone a little long but I don&amp;#39;t through that whole 20 1968 thing do look do look into that Atlantic website so Andrew I&amp;#39;m going to turn it over to you to cover some of the facts of torture and Bon fund

Transcript for:Total Return Webcast - 1968 and Economic Parallels

Transcript for:
Total Return Webcast - 1968 and Economic Parallels