Finding Opportunity in Uncertainty

Finding Opportunity in Uncertainty

Rob Costello:  Hello and good morning to some.  Good afternoon to others.  My name is Rob Costello, and I’m the client portfolio manager for Global Fixed Income here at Thornburg Investment Management in Santa Fe, New Mexico.  I want to welcome all those attending across the United States and around the globe.  In this webcast we’ll be discussing topics such as Federal Reserve action, potential recession and how to position fixed income portfolios going forward.  I’m delighted to be joined here by my colleague, Jason Brady, who is President and CEO of Thornburg.  Jason, thanks for coming.

Jason Brady:   It’s a pleasure.

Rob Costello:  A couple of housekeeping items before we get started.  First, there’s going to be two different ways to ask questions on this webcast.  First, you can send an email to questions@thonrburg.com.  That’s questions@thornburg.com.  The second which is probably easier is to type in the questions directly into the webcast.  We’ll be taking audience Q&A later on in the session.  But in the meantime, Jason, let’s get right into it.

Jason Brady:   Great.

Rob Costello:  So the Federal, the Federal Reserve, as expected, hiked by 25 basis points yesterday.

Jason Brady:   Mm hmm.

Rob Costello:  With a Fed Funds Rate, uh, not at a range between 5 and 5.25.

Jason Brady:   Mm hmm.

Rob Costello:  It’s amazing that in just 14 months which seems like an eternity, the Fed embarked on a rate hiking cycle unlike anything the market has seen over the past 40 years.  But to focus on this meeting in particular, I want to get your reaction holistically about the  Fed decision.

Jason Brady:   Mm hmm.

Rob Costello:  Then communication and if there was any opportunities you think they may have missed.

Jason Brady:   I think actually, uh, unlike a number of the other, uh, press conferences that we’ve seen over the course of the last 14 months, uh, Chair Powell really stayed on message fairly well.  Um, there was a moment, uh, where the markets got a little bit, uh, concerned in the context of what, you know, what does the future look like.  But the reality is, uh, where the Fed stands today is partly a product of what they see coming forward but actually partly a product as is true with everyone in life –

Rob Costello:  Mm hmm.

Jason Brady:   – of where they’ve been.  And the reality for the Fed is that they’ve spent the last 14 months catching up.  They got very much behind, and they had to get to a point where they were no longer, you know, skiing from the back seat.  Um, they’re now a little bit more under control, uh, in the context of where they think they need to be.  And most of their communication was essentially underlining that fact.  Um, we probably saw the last or the, perhaps the second to last hiking moment over the course of this year absent any real, real acceleration of inflation which I don’t particularly expect.  So all in, it was a pretty good communication job certainly, uh, relative to the standards of the genre.  And, uh, the markets indeed, uh, understood that while this isn’t necessarily a pivot, the Fed is much closer, much, much closer to the end of the hiking cycle than, of course, to the beginning.

Rob Costello:  And, and I want to hone in on the macro picture itself.  Obviously, the Feds following that very closely.

Jason Brady:   Sure.

Rob Costello:  And, and there’s been a lot of conflicting data –

Jason Brady:   Mm hmm.

Rob Costello:  – that’s come out lately.

Jason Brady:   Mm hmm.

Rob Costello:  And, and markets are trying to grapple with what it means.

Jason Brady:   That’s right.

Rob Costello:  Right.  As, as you can see on the chart we’re about to post, the inverted yield curve and the Leading Economic Indicators Index all point to recession.

Jason Brady:   Mm hmm.

Rob Costello:  But there’s other data flow out there that’s more positive.  So just walk us through your thoughts on what the data flow, uh, what you think it means in terms of if or when we could be approaching recession.

Jason Brady:   Sure.  The biggest piece of this is looking at what is a forward looking set of indicators and what are maybe coincident or, or backward looking.  Traditional forward looking indicators, unsurprisingly as, as we’re showing the Leading Economic Indicators, uh, of course, uh, a similar data series would be PMIs both on a, on a, um, uh, domestic basis on a global basis that’s showing similarly a significant deterioration.  The challenge that the Fed has, and as we all have in the context of things that we really feel, employment and inflation, those are the Fed’s mandates, they’re also the most lagging indicators.  So if you wait for unemployment to begin to rise, what you’re seeing at that point, coincidentally, is that you’re very likely already in recession.  Similarly, inflation’s coming down.  But it’s coming down today partly for a number of **** we’ll get into a second.  Uh, but inflation’s coming down.  It’s really, uh, the lagged effect of the actions the Fed has taken to slow the economy.  Let’s remember, the Fed raising rates is specifically designed to slow the economy.  That’s not a bug.  That’s a feature.  And that’s what we’re seeing just in the context of long and variable lags.  One last element of the Fed’s mandate, I might note, is really a mandate around financial regulation and stability.  We’ve seen a number of headlines of, of course the last couple months about the banking system.  It is a, a fact of history that when the Fed raises rates, especially as you note, in the fastest fashion we’ve seen in 40 years, at least, um, in general, things start to get a little wobbly.  And again, while that’s not what the Fed is looking for specifically, it is, in fact, an element of a slowing economy and that’s what we’re seeing.

Rob Costello:  Yeah, and, and in terms of inflation.  Let’s get into inflation a, a little bit because –

Jason Brady:   Mm hmm.

Rob Costello:  – this has, the inflation prints have been also a bit of a mixed bag.

Jason Brady:   Mm hmm.

Rob Costello:  It’s true that inflation has been coming down gradually.

Jason Brady:   Mm hmm.

Rob Costello:  Um, but what we’ve also seen is that the contribution to inflation is coming a lot more from, from services.

Jason Brady:   Exactly.

Rob Costello:  And, uh, in fact, we’ll put up a chart showing how services as a percentage of GDP has been rising and kind of normalizing to a pre-COVID level.  So, um, share with us with your thoughts about the inflation picture and how you think it evolves over the next few months.

Jason Brady:   One of the things that’s been most surprising to me over the last several years is how long reverberations from COVID disruptions have taken to work through the economy.  And this is a prime example of that.  So obviously during COVID there were, wasn’t a whole lot of services one could consume sitting in your house at least, uh, physical.  Certainly digital, um, uh, took a big step up.  But people started to, you know, really get into goods consumption, uh, in the year following, uh, sort of the COVID shutdown in March.  And you can see that in the chart and how that, how that’s changed.  That coupled with supply chain disruptions, uh, again as a result of COVID, really caused a significant amount of goods inflation.  I think everyone can remember eye popping numbers around used cars, for example.  Taking that further, what you’ve seen over the course of the last year, again, remember inflation’s a rate of change measure.  So prices don’t need to fall.  They can stay at an elevated level and inflation goes to zero.  In fact what we’ve seen with used cars is prices have fallen back down, again to sort of a trend level rate.  So goods’ prices have normalized significantly.  And in fact, as a, as a component of inflation, goods prices are about 0 today.  So then shift over to services.  Services prices and services inflation has taken the baton from goods prices.  And so services prices are now rising at a rate, um, you know, in and around the sort of mid to high single digits.  Um, that’s a real concern.  We saw today, uh, data around, uh, unit labor costs and they surprised the upside.  So what the Fed is looking at now is the potential for what really worries them which is sustained expectations of services or wage prices rising which tends to be, turn into a significantly negative loop.  My view frankly is that that will slow.  Um, and what you’re seeing is some forward-looking, uh, indicators of strength in the labor market being it’s low, job openings being one, um, that combined with base effects, ie, your annualizing higher inflation from a year ago with much lower, you know, month over month inflation today should get us to about the mid threes in the next several months.  And then it will be a question of whether or not labor, uh, markets cool enough for that services cost, uh, number to start to come down significantly.

Rob Costello:  Yeah, and I, I appreciate those comment, Jason.  And of course, the inflation trajectory has a tremendous impact on interest rates.  And of course –

Jason Brady:   Mm hmm.

Rob Costello:  – treasure yields.

Jason Brady:   Right.

Rob Costello:  Uh, we flashed on the screen earlier the inverted yield curve.  And but instead of talking about the curve in terms of its recession, uh, predictor status.  Let’s discuss rates a little bit more in terms of portfolio positioning.

Jason Brady:   Mm hmm.

Rob Costello:  Uh, where in the curve do you think presents the best relative value.  And does it make sense to move out duration given where rates are currently?

Jason Brady:   At Thornburg generally we don’t move our duration positioning our portfolios around.  Uh, we generaly want people to sort of have a sense that we’re gonna be in a particular part of the curve.  But certainly an inverted yield curve that at one point was more inverted again than any time in the last 40 years, presents, uh, a particular set of incentives for investors.  And what investors have generally done and gravitated towards is the very front end.  Now, that’s okay from an asset liability perspective if your use, if you’re investing in short-term securities for short-term needs.  But what’s interesting about fixed income markets today versus most times in the last 15 years, is that you actually see some value a bit further out the curve.  If I had to know one, uh, statistic around financial markets in total, I would want to know where real yields are, ie. after inflation yields are throughout the curve.  And what we’re seeing is they move from notably negative a couple years ago to actually nicely positive today.  Now, it was better 3, 4, 5 months ago.  Uh, but still we’re seeing nicely positive real yield.  So investors can take advantage of real yields that are higher than we’ve seen in a number of years.  More importantly, because those yields are at those levels a little further out the curve, fixed income, high quality fixed income can start to play a role in portfolios which really is a more traditional role, income but also **** to your portfolio.  So a risk reduction measure as in a typical 60/40 portfolio.  So to get around answering your questions, uh, what we see is some value out in the intermediate part of the curve for a lot of investors, particularly those that have spent the last, you know, several months or even year rolling front end treasuries.  We hear that a lot from clients and it, to me it looks like an asset liability mismatch that, that investors will regret.  To give you a sense of that, the last time investors were asking me the question of, hey, why would I invest a little further out the curve, I can get more yield in the front end was 2007.  As we all know, that was the time period where it actually paid to extend a little bit.

Rob Costello:  Yeah, and, and to that point, Jason, as I wanna, uh, follow up on, on the comments about treasury bills, right, because –

Jason Brady:   Mm hmm.

Rob Costello:  – yields on treasury bills are obviously the highest that they’ve been in 15 years.  And even to a point where the yields are eclipsing distribution yields on many fund products today.  So is there some semblance of a free lunch going on here with T bills?

Jason Brady:   Well, that’s there, so there’s a lot in that question.  Uh, I think maybe the most important thing for investors to understand is that distribution yields from a lot of fund products are not necessarily the portfolio yields of the underlying securities.  So to give you an example.  If a buy a bond at par it goes to 90, and again, what we saw in 2022 was, uh, down trade in a lot of high quality fixed income ’cause rates rose.  Um, I’m holding it at par.  It goes down.  The, the yield that I would receive if I bought it say at 95 today where it would be priced would be, uh, a distribution yield.  So I sold the thing I bought at par and bought the exact same thing at 95.  It would all be in the distribution yield.  I simply held it.  Then part of that, uh, portfolio yield is gonna come back in NAV rises which is actually more, uh, tax advantaged, uh, for a number of investors.  So I wouldn’t focus on the distribution yield.  I would focus on portfolio yields.  And in general, what we see when we’re purchasing securities is we’re seeing some pretty interesting things to do in say, you know, 2, 3, 4, 5 years, uh, that are relatively high quality, um, we and I are less interested in 30-year securities.  That tends to be the purview of insurance companies.  If you’re an insurance company, yes, you have asset liabilities in that regard.  But I think that ultimately investors are well served to match their assets and liabilities are bit better.  What, what I’ve seen over my 17 career, year career with Thornburg is investors tend to hold fixed income products for about, individual investors about 3 years, institutional investors obviously according to their mandate.  Um, and that’s why for a flagship, ,uh, uh, **** portfolio we end up at about 3, 3 1/2 years.

Rob Costello:  Let’s shift to a discussion about what’s happening oversees.  Uh, certainly there’s been a lot of growth and inflation risks that, you know we’ve certainly experienced here in the United States that other countries are sharing.  Although, uh, it depends on the degree, depends on the country.

Jason Brady:   Mm hmm.

Rob Costello:  Um, I’ll keep this fairly open ended, but walk us through what you’re seeing globally.  And if there’s reasons from an investing perspective to be either optimistic or pessimistic.

Jason Brady:   I think that, uh, we live in a more and more globalized world.  Um, there’s a lot of discussion about deglobalization, um, but the reality is the largest company in the world is, is, uh, just as much as a Chinese company as it is an American one which is Apple.  Um, they’re trying to change that.  But that’s quite a long road.  So, um, despite a lot of political rhetoric, it’s still a, quite a globalized economy.  So we have moved passed, uh, a world where if one large economy has a problem everybody else can say it’s not a big deal.  Um, I don’t think, uh, the downturn we’re likely to experience going forward is 2008, but I think everyone can remember that in 2008 US residential, uh, mortgages were the problem of the whole world.  And it goes both ways.  So it’s less about extremely differential, um, global economic situations.  Although there’s certainly an element of that.  I think it’s more about valuation.  And, you know, let’s talk about equities for a second.  It’s pretty clear to us at Thornburg that, um, international or global equities relative to US equities, yes, there’s always a valuation gap particularly relative to sector concentrations.  Uh, but even the same, uh, industry or the same sector, uh, with very similar operating and, uh, history and outcomes is, you’re seeing a discount outside the United States.  So for us, the opportunity is not so much that, you know, companies that are domiciled, for example, in Europe, um, are gonna do much better because they’re in Europe or much worse but rather because and, uh, in the equity side in particular, global companies that are domiciled in Europe are just cheaper.  Um, and, and frankly, uh, that valuation dynamic is a really big part of a margin of safety.  You know, for, for, for our global, uh, multi-asset income product, the investment income builder, uh, the equity portfolio is priced around a 10 times PE which is, is essentially half of where the S&P is.  So I think there’s really a valuation dynamic which is different outside the United States.  Um, I also think that given what we’re about to see, uh, going forward, uh, investors would do well to focus on cash flow, cash flowing companies as opposed to sort of the promise of a, of a distant future, um, outcome.

Rob Costello:  So Jason, let’s, let’s mix things up a bit.  We’ll, uh, we’ll do what’s called a lightening round.  And –

Jason Brady:   All right.

Rob Costello:  – what I’m gonna do is I’m gonna throw out a bunch of quick questions.

Jason Brady:   Mm hmm.

Rob Costello:  And on various market topics and just come back with rapid fire answers.

Jason Brady:   Okay.

Rob Costello:  All right.  So here we go.  Have we seen the last of Fed rate hikes this cycle?

Jason Brady:   Um, I’m gonna say yes, but there might be one more.  But if you press me I’ll say, uh, this is the last one.

Rob Costello:  Will we see a Fed rate cut this year?

Jason Brady:   Yes.

Rob Costello:  Where will the 10-year Treasure yield be at the end of the year?

Jason Brady:   Uh, lower certainly, in my view, um, but let’s say 2 7/8, something like that.

Rob Costello:  Headline CPI at the end of the year?

Jason Brady:   I think base effects alone will get you down a good ways and recession will get you down a little further so I’ll say mid to low 3s, let’s call it 3.4 percent.

Rob Costello:  Level of the S&P 500 at the end of the year?

Jason Brady:   Uh, 3,700.

Rob Costello:  All right.  Uh, price of oil at the end of year?

Jason Brady:   Oh, um, right here maybe 70.

Rob Costello:  High yield index, do we see a 350 spread first or a 600 spread first?

Jason Brady:   600.

Rob Costello:  Okay.  And I’m using the Bloomberg Index which is right now at 473.

Jason Brady:   Mm hmm.

Rob Costello:  It’s May 4th so favorite Star Wars movie?

Jason Brady:   Oh, I’m gonna a little deep.  I’m gonna say Empire Strikes Back.

Rob Costello:  Okay.  And finally, who wins the World Series?

Jason Brady:   As long as it’s not the Mets.

Rob Costello:  Appreciate it, Jason.  Jason knows I’m a big Mets fan so thank you for that.  Um, let’s move on to a topic in the news especially more of late which is, which is the debt ceiling, right.  The point at which the US may default on its obligations could be as early as June 1st, maybe as late as late July.  It’s definitely a floating target.  It, it appears that the market is not giving too much worry to it yet.  They seem to be giving worries to a lot of other things right now.  But, uh, what are your thoughts about the debt ceiling.  Should we worry right now?

Jason Brady:   I think the debt ceiling is kind of a known unknown.  Um, it’s something that we should worry about, of course, but I think there are ramifications if we don’t, in fact, extend the debt ceiling and they’re some sort of government shutdown.  Um, it’s worth exploring what that looks like.  Um, I think the No. 1 most important element of that is that Congress people would have to go back to their constituents and say yeah, we’re the reason, I’m the reason why you didn’t get your, you know, your Medicare payment or you didn’t get paid if you’re in the military, what have you.  And, in fact, uh, what you saw overnight was a release from the White House saying hey, um, this would put, I think, 8 million people out of work.  And that’s exactly the kind of mindset.  Now, um, it could be that this is intractable in a way that it hasn’t been intractable for dozen or so times, uh, prior to this.  Um, but it does seem to me to be counter both congressional incentives and human nature to take responsibility for something which pretty, has pretty clear negative externalities.

Rob Costello:  So let’s, let’s switch gears to, to another topic here which is commercial real estate.  So the Silicon Valley Bank collapse was not about commercial real estate per se.

Jason Brady:   Yeah.

Rob Costello:  But it, it put a lot of attention on the health of the regional bank balance sheet.  And we’re certainly seeing that in the volatility in the equity markets this week on –

Jason Brady:   Mm hmm.

Rob Costello:  – um, and how punishing the markets have been towards regional banks.  Um, we, we know that regional banks are a lender in the commercial space.  So how do you view the commercial real estate market right now and going forward?

Jason Brady:   Um, I think one of the most under appreciated tools that investors can use in the context of examining where the Fed is and where sort of, um, uh, some interesting economic analysis might come from is former Fed governors or presidents.  Um, and so I paid a lot of attention, uh, when former, uh, Fed President Kaplan was on the tape saying, hey, look what we’re seeing now is an asset liability mis, mismatch.  So Silicon Valley Bank certainly that.  Actually a lot of the, uh, bank challenges that we’re seeing today are really about deposit flight.  So short term liabilities with any kind of long-term asset is a mismatch that, that gets people into trouble.  But his first statement is that’s, you know, we haven’t even seen the end of it.  We haven’t really even said the beginning because the next step is credit.  So what you’re referring to in essence is part, not part of what we’ve seen in the cycle so far but we may see in the future as he, as, as former Fed president Kaplan’s indicating.  Um, commercial real estate can be a challenge, for sure.  Um, it’s smaller than residential real estate was and is.  But it’s still sizable.  However, sticking with the asset and liability theme, most of, um, the liability structures that hold commercial real estate are okay.  Um, banks are, can be an exception.  But most of them are okay.  So what this has tended to be, and what I think it will likely be going forward is very much in the context of many kinds of private assets to include private credit and private equity which is a longer term, slower moving, um, let’s say headwind to the economy persistent but not dramatic.  So I think that there’s a lot, uh, to think about in commercial real estate.  Certainly office is a challenge, uh, multi-family maybe being overbilled, blah, blah, blah, blah, blah.  But it’ s more of a longer term, uh, headwind to the economy versus a dramatic sort of step change.

Rob Costello:  I, I appreciate those thoughts, Jason.  And we have covered a lot of ground clearly so far in this, in this webcast.  What may happen, what may not happen.  Uh, but before we, we turn it over to Q&A.  Uh, let’s bring this back to something we can directly control and that’s, uh –

Jason Brady:   So not the Mets?

Rob Costello:  So either, not there, that can never be controlled.  Uh, we know that.  Um, and, and, and that’s their, our positioning in, in the fixed income portfolios here at Thornburg, right.  So tell us how we’re positioned in terms of risk and, you know, what we’re favoring and what we’re avoiding.

Jason Brady:   Well, I think one thing that’s important to understand about Thornburg is that, uh, in, uh, and particularly in the fixed income side, is that we tend to thrive in terms of, in times of volatility.  And the reason that’s true is, is very specifically the way the team is constructed or the way the portfolios are constructed but also the dynamics of the fixed income market.  So fixed income tends to have what’s called negative skew.  If I buy a bond at par, my best case scenario is whatever yield I’m promised.  And my worst case scenario is 0.  Very different than the equity market when certainly there’s upside volatility as well as downside volatility.  So we care a lot more, um, about being in, uh, uh, a relatively good position when there’s volatility as opposed to picking up nickels in front of a steam roller.  So today we look at the balance of risks and we say, on the rate side it looks much better than it did.  Um, not wonderful but okay.  So we’re kind of home base there.  On the credit side, it’s okay.  It’s, it’s maybe average or a bit below, uh, but two things, one that skew, for example, in high-yield spreads which you mentioned earlier, is one where there’s a bunch of high yield that’s below average but then there’s some real outliers.  So it’s, it’s more of a barbell.  Um, when we look at what could happen or what we’re getting paid to do, we’re not really getting paid to take as much credit risk.  And as we did in 2020, as we did in 2018, 2015, ’16, ’13, ’12, uh, obviously ’11, ’08, etc. we want to position ourselves to be able to, um, really take advantage of, of dislocations.  Um, it’s something that is happening more and more frequently in markets.  I mean, I think anyone listening to this webcast can remember a lot more flash crashes in the last 15 years than certainly prior.  And so it served us well over the course of that, you know, decade and half plus, plus, to put ourselves in that position.  So all of that is, uh, input to the idea that we’re a bit more cautious, um, not sure that, uh, recession or challenge is being priced into credit markets today.  Um, within credit markets you can look at various balance sheets, um, consumer balance sheets, corporate balance sheets and sovereign balance sheets.  And in order consumer balance sheets look a lot better, uh, corporate balance sheets look okay.  And sovereign balance sheets look not good.  And all of them are deteriorating.  So we’re, we’re, we’re managing that, we’re looking at that.  And, and we’re looking at that through a number of lenses.  Consumer balance sheets not only do we have, um, uh, views in through **** through various asset backed security deals, we also have great, uh, insight due to, you know, looking at equity earnings of banks which obviously we’re earlier in the earning cycle.  So we’re, we’re paying attention to this dynamic.  But by and large, we continue to position ourselves to be able to execute well in times of volatility when investors really need us.

Rob Costello:  I appreciate those thoughts, Jason.  And what we’re gonna do is we’re gonna transition to the Q&A, uh, section of the, of the webcast.  Just as a reminder, two ways to, uh, to put in a question.  One is email, uh, **** questions@thornburg.com, again questions@thornburg.com, uh, or type in the, uh, the question directly into the webcast.  As we take Q&A and Jason, um, let me ask, uh, the one topic with the fixed income we haven’t discussed is the municipal bond market.  So curious to hear your outlook on the **** bond market and current opportunities in that space.

Jason Brady:   So the **** bond markets had a, uh, a pretty good run of it actually.  Um, and I think part of that is in anticipation of continued higher tax rates.  So tax adjusting, uh, municipal bonds is not only relevant to your own personal tax situation, uh, but obviously your outlook for taxes going forward.  Uh, and so a traditional set of measures of the, of, of **** of value one is the **** to treasury ratio.  So what’s the percentage of yield that you’re getting from, uh, munis relative to treasury is typically notably below 1 for a bunch of reasons that have to do with taxes.  Um, I don’t think we’re, uh, in an environment where municipal bonds have significant credit issues.  Although that said, there will continue to be individual credit issues and just picking, you know, muni bonds out of a hat is, is likely to lead to tears in certain cases.  So there’s a lot of credit to, to manage.  Uh, but overall the, the muni credit environment looks pretty strong.  The muni value environment is one that, um, is less interesting just today, uh, relative to treasuries.  But honestly that changes quite a bit, um, even from kind of month to month as, as mostly treasuries have high volatility.  So it’s something to keep an eye on.

Rob Costello:  Uh, we, we have a question in about, um, really about recession.  And essentially, you know, are there sufficient economic factors in, here in the United States where we could potentially face, um, almost like a rolling recession environment.  Right, we had one in 2020.  We’re maybe facing one this year.  You know, could it be something where it’s either a, a V or a U-shaped type of, uh, a recession recovery or maybe we’re entering into a bit of a malaise.  I know, what, what are your thoughts there?

Jason Brady:   Yeah, that alphabet soup of sort of shape of recession is always interesting, um, each one is different, um, every unhappy family is unhappy in its own way.  Um, I think that March 2020 was an interesting starting point because I actually, it obviously was a recession.  Obviously there was a lot of challenge in, in the global economy.  Uh, but it was a very exogenous factor.  Uh, which is to say a health crisis and a very ex, uh, exogenous, uh, solution which is to say, uh, vaccine roll out.  And so again we’re seeing a real, um, uh, set of reverberations from policy actions that were from then and, in, in that sense certainly that’s rolling.  Um, but I thin what we’re getting back to over time is a more traditional credit cycle.  Uh, I would argue that 2016 was a more, more regular way credit cycle than certainly 2020.  Um, so I think that it’s less, I, I think we’ll see a recession later this year.  Um, I think it won’t be driven as much by consumer although that’s something I’m, I’m worried about because that feels consensus.  And any time you’re in consensus you should be concerned.  But ultimately, um, what we’re seeing, what we see in 2022 was not a recession environment.  It was a normalization of rates.  That normalization of rates could accelerate a credit cycle as we get through that it’s really a question of how do we clean up balance sheets and how do we normalize labor markets.  So less of a rolling recession and more of really a set of interconnected events, uh, that continue to reverberate through the US and indeed global economy.

Rob Costello:  We’ve got a question about the, the money supply.  We’ve actually seen a bit of a, of a net reduction in the money, money supply.  So, you know, are there risks that you see in terms of liquidity leaving the, the capital markets?

Jason Brady:   Money supply is an interesting one.  Um, obviously from an economic perspective it was very much en vogue in the context of monetarists like Milton Friedman kind of fell out of favor.  People are more interested now, uh, given that, uh, inflation that folks called for that monetarists sort of called for in the context of **** didn’t happen and, and **** did a victory lap.  And now it did happen, so I think what the, the question refers to that maybe that’s more interesting than **** anything like that is, is just truly liquidity.  And absolutely it’s the case that look, the Fed raising rates is designed to remove liquidity from the system.  Um, we’re raising the cost of money.  So therefore the idea that folks are gonna deploy that in a high velocity way is, is less likely and indeed the money supply is tightening.  Um, one caveat to that actually is a lot of the, the, um, actions taken just recently to support, uh, the US banking system actually ,uh, changed the dynamic of that in, in the near term.  So remains to be seen how, uh, long, uh, that will, that will continue.  Uh, it was telling to me that Chair Powell didn’t really talk about any changes to quantitative tightening, um, I think they’d like everybody to forget about it.  But for sure, liquidity is being drained from the system.  And that’s, that’s the whole idea.

Rob Costello:  Mm hmm.  Um, you know, it, we had a question about in, in the mortgage space, and interestingly this is something we’ve been involved in.  But how we view relative value in agency mortgage backed securities.

Jason Brady:   Yeah.

Rob Costello:  Yeah.

Jason Brady:   Well, um, interesting enough I was, I was having a conversation with a few folks on the desk, uh, Chris Battistini, uh, Patrick Dempsey, uh, Jeff Klingelhofer, my co-portfolio manager, um, and we’re talking about, a little bit about what opportunities exist, uh, basically from some of the selling from, from, uh, bank balance sheets, uh, that’s currently happening.  Uh, but really, uh, because mortgages are a bit of a function, pricing is a bit of a function about rates volatility in the context of pricing, uh, the option that, um, a borrower has to repay, um, what has that done to value and how do we think about that.  And, you know, we have found value in non-qualifying mortgages for a little while here.  But just lately, um, more interest in some agency product, uh, for a bunch of sort of detailed dynamics which get down to hey, what is the price of, uh, uh, of the option, the embedded option for a very low coupon mortgage in a notably higher rate environment.  And how is the market pricing that?  So suffice to say there is a lot more to do in, in that marketplace then there has been, you know, over the last couple years there’s become a lot more to do than there was over the prior 15 simply because of where mortgage, mortgage coupons are.  Um, frankly what, uh, volatility of or, or sort of, uh, changes in domicile.  If you have a 3 percent mortgage today does that feel like a liability or an asset?  It feels more like an asset.  And so how do pricing dynamics in the marketplace contemplate that or not.  So kind of a complex **** environment, uh, to include supply from, uh, from regional banks, uh, but a very interesting one and one that we’re paying a lot of attention to.

Rob Costello:  Thank you, Jason.  And I want to be cognizant of time.  And so we’ll bring this webcast to a conclusion and I thank you for your time today, Jason.

Jason Brady:   It’s a pleasure.

Rob Costello:  Um, and thank you and thank you, everyone, uh, for attending this webcast.  Uh, I hope you enjoyed it as much as I did.  Uh, please rate this webcast if you see the pop up window appear.  Uh, we love to hear, uh, what you think.  We will make a replay available, um, as soon as we can.  And we’ll be letting you know of future webcasts.  So thank you again for joining this Thornburg Investment Management webcast with Jason Brady.  And we will see you soon.