Q: Was the presidential result a surprise for you?
A: We were thinking Trump might win, but it was too close to call. We did not reduce risk in our models discretionarily, and as a general statement, they’ve been long the dollar and long equities, so that they’re doing fairly well today. I read the same media you do, and I think we all expected this to be a lot closer than it ended up being.
Q: Information is so important in your business. Are there other sources of data you need to bring in that would be more useful?
A: Geopolitics is something that we obviously have been spending more time thinking about, and need to continue to get the best possible advice on that, and we're ramping up the amount of consulting information we get in that regard, because we don't internally have much of an edge in terms of what Netanyahu might do next, or what China might do next. But there are groups that do consult on that information, and some of them are quite helpful, some not.
Another interesting thing is these betting polls were a lot more accurate than anybody else in predicting this outcome, right? I mean, they had it at 60% going into this, more or less. The media and most of us thought it was 50/50. So, it's an interesting thing – that's a new development.
Our real job is trading rates, FX (foreign exchange), equities, credit, and trying to understand what those markets are going to do. And we keep an eye on geopolitics, and a much larger eye on geopolitics than perhaps 10 years ago or three years ago, but we still really have to focus on having our economic analysis be as good as it can be.
Q: What does the next 12 months look like?
A: From my seat, it’s going to make for a very interesting 12 months to follow. We have the potential for a decent size move in FX, and we certainly had one overnight. We know that Trump has certain plans that he's articulated, and his ability to execute on them or not, of course, isn't perfectly clear, but at least we know what his basic policy objectives are. Deport some people, that of course, would increase the tightness in the labor market. Tariffs on China and so on, would presumably have a little bit of an inflationary effect. And we know he's going to want to pressure the Fed and I'm not so sure Powell is going to be so easily pressured, because we know he doesn't like Trump and he's going to want to maintain the independence of the Fed. But it's probably a good opportunity for the steepener trade (bets on Treasuries) to continue to work.
One of the things that really strikes me at this moment in time is that duration risk is not properly priced. When I grew up in the hedge fund business a very long time ago, duration risk was something that people cared about, and you got a term premium for tying up an interest rate level for, say, 10 or 30 years.
And in the last two decades, term premium has gone away, and I think that's one of the most interesting new opportunities, particularly in light of the size of the deficit and then potentially inflationary pressures through the new administration. We already had inflationary pressures without this, and then you've got the divergence that's going to go on, because obviously it's bad for Europe, if we have tariffs on Europe. That's one of the reasons the European equities are down about a percent today, and American equities are up about 2% and small stocks are up even more the Russell's up three or four.
Divergence and volatility and a lot of potential trading opportunities. And, as always, in my business, you don't always get these things right. But it's not boring.
Q: Graham has been around since 1994. Bill Clinton was president then. You've seen many different administrations, macro and economic environments. How do you think about this moment in time? Does it stack up to past moments in trading?
A: It's going to stack up as constructive broadly for macro. It doesn't mean just because you have a view, your view ends up prevailing. But I don't expect markets to be sleepy.
And if you think about the environment for macro, look at 2010 to 2021, monetary policy globally was on hold, right? You had the ECB, the Fed and the BOE in 11 years make collectively, that's all three combined, 13 rate changes in 25 basis points. In the two years following that, ’22 to ’24 you had 60 moves of 25 basis points or more. Some of the moves are not 25 basis some of them were 50 but, if you just do it in 25 basis points increments, there were 60 moves in the two-year period versus 13 in an 11-year period. Or put differently, 20 times the action if you're a rates trader, then it was in the previous decade.
And naturally, that's why ’22 was such a good year for macro, and that's why I'm bullish on the opportunity set. Now we’ve got a bunch of rate cuts priced in, in addition to all these hikes. So you know, roughly six cuts per central bank over the next, say, 15 months. Whether they're able to do all of those things or not, time will tell. But the main point I'm making is the markets are not boring. They're not in a small trading range, there's a lot going on.
Q: What’s your outlook with Fed meeting this week?
A: We think it is status quo. We don't think what happened last night changes a 25-basis point cut, which is widely priced in and the expectation.
Really the more interesting aspect of what happens from here is, do we see people get spooked about the long end of the fixed income market because of inflationary pressures, but also because of the deficit? The deficit is now 7% of GDP, the debt load on that is enormous, and will there be a buyer strike of government bonds at some point that really creates a pretty good sell-off in fixed income in the long end?
When I recently spoke with Paul Tudor Jones at the Robin Hood conference we were talking about this exact subject, and I likened it to three scenarios. We could see a prick in the bubble in bonds, where maybe it's kind of what we're seeing right now; all of a sudden, the 10-year has gone up 40 basis points in the last three weeks. We could see a pop in the balloon where you get a really big move, because all of a sudden, the psychology of people to own long term bonds is a bad idea, and we don't have any term premium to support the rationale to risk money for 10 years and 30 years of duration, versus three to five or one to two. Or we could get a really big shock, which, would look something like a real buyer strike in the fixed income market and create some real chaos. My gut tells me it's somewhere between one and two.
Q: Whenever we get interesting historical periods, do you feel that institutional investor interest in macro funds increases?
A: I think so. We've had a lot of interest in macro now for a couple of years, and that probably continues. If I'm an institutional investor, I have a fixed income portfolio, I have an equity portfolio, and I have an alternatives portfolio. And if you look at the world of alternatives, macro is the least correlated to equities and/or fixed income, but particularly to equities. And we have equities as we sit here having this conversation today at record highs. So, if you're a CIO out of a pension fund or a wealth management organization, or even the high net worth investor, people are kind of anxious to find a way to be more diverse than they've been before. Think about the period between 2010 and 2021, (there's) not much going on in macro, not that we didn't have some good years in that decade. But now, the opportunity set is dramatically upgraded, and the need for diversification is also dramatically more intense, in my opinion.
Q: Anything else you’re keeping an eye on?
A: The thing that really strikes me today, is we've seen a bull market in equities since 2009. I worry that people are a little too complacent about equity valuations.
Obviously, we know Trump is a risk-on trade in the short run, for sure, because that's what the markets are telling us today, that he's going to cut regulation, he's going to try and cut taxes. The market psychology is, ‘this is good for risk assets.’
We also want to look around the corner and keep an eye on what happens if this deficit keeps getting bigger and it really spooks people? We’ve been risk-off a bit. You know, these things happen in such an unpredictable way, whether it was COVID or 2008. It's hard to point to too many people who said, ‘Oh, I saw that coming. I predicted that.’ But that's what I got my eye on. I think the deficit is the elephant in the room, and we want to pay attention to that elephant.
