The $600 Billion Loop | Jeff Klingelhofer on AI, the Return of Bonds and the Fed's Third Mandate

Summary

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Excess Returns Podcast Summary

Episode: The $600 Billion Loop — Jeff Klingelhofer on AI, the Return of Bonds, and the Fed's Third Mandate
Date: July 6, 2026
Guest: Jeff Klingelhofer (Aristotle Pacific)
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler

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Overview

In this rich and timely episode, Excess Returns sits down with Jeff Klingelhofer, Managing Director at Aristotle Pacific and a veteran portfolio manager in global fixed income markets. The discussion covers the outsized effects of AI-driven capital expenditures (“AI CapEx”), today’s transformed fixed income landscape, the evolution of the Federal Reserve’s mandates (including a possible “third mandate”), the business cycle, and risks and opportunities for investors in an environment shaped by macroeconomic shifts, war-driven inflation, and persistent questions about the national debt and private credit.

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Key Discussion Points

1. The $600 Billion AI CapEx Loop

[00:56, 02:41, 11:40]

• AI CapEx Is Driving Markets: Klingelhofer emphasizes that an "incredible AI capex expansion"—roughly $600 billion from just a handful of giant companies—is currently the “massive tailwind to the US economy” and stock market.
  • “It’s AI CapEx that’s driving the stock market, and it’s the stock market that's driving that ability of that high-end consumer to continue to consume, which is all very circular in nature...” (Jeff, [00:56])
• Narrow Economy & Fragile Feedback Loops: The current economic engine is “relatively narrow,” reliant on high-end consumers buoyed by asset appreciation, while lower- and middle-income consumers face increasing delinquencies and pressures from inflation and war.
  • “...the only part of the consumer that’s holding up ... is that increasingly high-end consumer. And they’re only holding up because they ... benefited primarily from asset price appreciation.” (Jeff, [02:41])
• Fixed Income’s Role in the AI CapEx Boom:
  • Due to the outsized capital needs, companies are turning to both equity and debt. Recent examples include SpaceX tapping the bond market after its IPO, with major tech companies following suit.
  • Klingelhofer notes that as a credit investor, the focus is on repayment, not upside, and that “these major companies are incredibly high quality ... most of them started with close to no debt ... and they're just beginning the phase of tapping the bond markets.” (Jeff, [11:40])
  • Yields are attractive (6-7%), but new supply is “endless,” which may keep yields wider than risk justifies.

2. Fixed Income Markets: A New Regime

[04:59, 06:07, 17:35]

• Structural Shift: The fixed income regime of very low rates—a “period of market manipulation by central banks”—is over. Klingelhofer explains that for years central banks deliberately suppressed rates to combat disinflation, pulling demand forward, but now they’re trying to restrain persistently above-trend inflation.
  • “Fixed income is always meant to be balanced in investors’ portfolios ... but we must think about the role and purpose of fixed income very differently [than during ZIRP].” (Jeff, [06:07])
• Return of Bonds as a Portfolio Hedge:
  • Starting points matter: After taking the pain of rising rates, we’re now in a world where fixed income again functions as portfolio ballast when equities struggle.
  • “...as equity markets are potentially experiencing stress ... central banks will be cutting rates, and fixed income will serve as a tremendously valuable hedge.” (Jeff, [17:35])
  • The correlation between stocks and bonds is normalizing post-2020, with rates and inflation both higher and more normalized compared to the “regime of zero and zero.”

3. The Business Cycle: Not Dead, Just Muted

[21:02, 21:20, 23:30]

• Cycles Are Alive: Despite years of intervention extending expansions, Klingelhofer is skeptical about the “death” of business cycles. He expects a return to “a regular, boring old business cycle ... where the Fed has raised rates, we've seen inflation move up, that acts as a demand dampener...”
• Sentiment Rules: “What really drives prices is sentiment. And once sentiment rolls over, it's tough, right?” (Jeff, [21:20])
• Crisis Thinking May Be Overblown: Recent cycles were unusual/crisis-driven (e.g., GFC, COVID), but the next one may echo the tech bubble: more market volatility, less real economy fallout.

4. The Fed’s Mandates — Is There a "Third"?

[24:43, 24:53, 34:22]

• Fed Has Three Mandates:
  • Klingelhofer insists that the US Federal Reserve, according to the 1913 Act, has three mandates: maximum employment, price stability, and moderate long-term interest rates.
    • “It may not be very smart, but I'm pretty sure I can count to three...” (Jeff, [24:53])
  • The “third mandate” is about ensuring moderate long-term interest rates—interpreted dynamically, as the product of balancing the first two.
• Mandate Evolution:
  • Over time, the emphasis has subtly shifted: from financial stability (quantitative easing) to social stability (wage compression, employment) to today’s core focus on inflation expectations.
  • Warsh’s (the new Fed chair) stance marks a new era of less forward guidance, stronger commitment to the 2% inflation target, and willingness to accept employment pain to restore price stability.
• Forward Guidance vs. Discretion:
  • Klingelhofer suggests the Fed’s communication toolkit (forward guidance) was crucial at the zero-lower bound, but is less relevant with ample “blunt tool” room now.
  • “In today's environment, all that forward guidance I think is much less useful than it was in the past ... because ... rates were already very, very low.” (Jeff, [30:27])

5. Inflation, Policy, and the Impact of War

[34:02, 38:04]

• The war (implied: Iran/Middle East) and oil price volatility have temporarily increased inflation, but services inflation is a persistent challenge, unrelated to the war.
• Klingelhofer suggests the end of war may be slightly inflationary by reigniting demand.
  • “I worry that the end of the war might actually be slightly inflationary rather than disinflationary...” (Jeff, [38:04])

6. The Fed’s Balance Sheet

[39:57, 40:16]

• Warsh is expected to favor shrinking the Fed’s balance sheet over time—reducing its role in supporting asset prices, which may become a “potential challenge” for markets.
  • “The balance sheet over time is going to shrink ... it’s going to play a smaller role in the US economy, a smaller role in the Fed’s arsenal.” (Jeff, [40:16])
• The indirect effect: “If you believe, and certainly I do, that [the balance sheet] has been a positive force on asset prices ... what impact will it have on the way down?”

7. National Debt and Rates

[44:05, 44:37]

• Long-Term Unsustainable: Klingelhofer calls current US debt levels unsustainable, though not an immediate crisis.
• The main market impact: higher long-term rates, yield curve steepening, and greater uncertainty, especially for companies with high floating-rate debt loads.

8. Private Credit and Flexibility in Fixed Income

[47:30, 51:22]

• Private Credit: Not All Alpha: The asset class is here to stay, but quality is lower and risk higher than public credit. Successful navigation depends on experienced, well-resourced managers.
  • “Private credit is the same as public credit. ... What you have to underwrite is the ability and likelihood that you are going to receive your capital back.” (Jeff, [47:51])
• Active Approaches Matter: Indexing is possible but not always optimal in private credit, especially in volatile or stressed credit cycles.
• Flexible Management:
  • Investors (and asset managers) must move beyond siloed thinking (public vs. private credit, asset-backed vs. corporate) and seek relative value across structures.
  • “Most of the world isn’t equipped to do that ... if you put that process in place, to me, it gives you an edge...” (Jeff, [51:22])

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Notable Quotes & Memorable Moments

• On What Drives Asset Prices:

  • “What really drives prices is sentiment. And once sentiment rolls over, it’s tough, right?” (Jeff, [21:20])

• On the Fed’s True Mandate:

  • “I'm pretty sure I can count to three. And I just counted three.” (Jeff, [24:53])

• On Risk and Flexibility:

  • “Just because it’s sunny today doesn’t mean that it won’t be stormy tomorrow.” (Jeff, [16:45])

• On Investment Edge:

  • “The edge that many people ... want to hang their hat on is a belief that I can underwrite a company ... But really what's going to drive that asset price is sentiment.” (Jeff, [55:00])

• On Being Wrong:

  • “You will be challenged. You always want to give yourself to be room to be more wrong.” (Jeff, [56:19])

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Important Timestamps

• [00:56] – AI CapEx circularity and economic concentration
• [02:41] – High-end consumer’s role and wealth effects
• [04:59] – How the new macro regime alters fixed income
• [11:40] – AI CapEx through the debt markets
• [17:35] – Bonds as hedges in a normalized market
• [21:20] – Sentiment, business cycles, and the risk of complacency
• [24:53] – The “third mandate” of the Federal Reserve
• [34:22] – Assessing the new Fed chair's approach after regime change
• [38:04] – War's lingering impact on inflation
• [40:16] – The shrinking Fed balance sheet and asset price implications
• [44:37] – The national debt’s long-term drag on rates
• [47:51] – Private credit risks and the importance of management
• [51:22] – The value of flexible, “cross-silo” fixed income management
• [55:00] – Differentiating belief vs. sentiment in investing
• [56:19] – The importance of position sizing and humility

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Final Lessons from Jeff Klingelhofer

• Sentiment beats pure analysis: Understanding, anticipating, and respecting sentiment is critical, even more than perfecting the cash-flow model.
• Know yourself: “Your sentiment will also shift as the world shifts. ... You always want to give yourself room to be more wrong.”
• Active risk management: Flexibility, humility, and the ability to adapt across vehicles and regimes define success—especially in a financial world that keeps changing its rules.

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Transcript

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[Jeff]

It's AI CapEx that's driving the stock market and it's the stock market that's driving that ability of that high end consumer continue to consume, which is all very circular in nature, right? If any one of those links in that chain breaks, it's a very tenuous setup. Part of the reason why we haven't had a classic business cycle is because of all of that Federal Reserve intervention and its direct focus on financial markets. And so I think what it's done is it's lengthen that business cycle. As good business analysts, we try and focus on fundamentals, what's ultimately driving individual companies, how those companies are driving the stock market. But what really drives prices is sentiment. And once sentiment rolls over, it's tough. Right?

[Justin]

Jeff, welcome to Excess Returns.

[Jeff]

Hi, it's great to see you and great to be here. So I appreciate it.

[Justin]

You are managing director at Aristotle Pacific and a portfolio manager across several of the firm's fixed income strategies. Through this role that you currently sit in and prior roles at Pimco and Thunberg, you had a front row seat to global fixed income markets through many different regimes, many different credit environments. And today what we'd like to discuss with you is the current macro environment, Fed policy, credit markets, inflation and where investors should be looking for opportunities in today's market. People always say that the fixed income guys are the smartest guys. It's the room and much smarter than the equity guys. So we're Jack and I are hoping today that some of this intelligence rubs off on on both of us.

[Jack]

They would have to do a lot of work to rub off on us. Justin, we've got, we've got a lot of work to do.

[Justin]

Right. Well, hopefully Jeff is patient with us as, as we work through this, you said that the markets are focused on an increasingly set of narrow things that are working and really aren't appropriately weighting some of the headwinds out there. So can you explain where you're coming from with that?

[Jeff]

Yeah, look, the way I would describe it is we've all talked about this K shaped economy for quite some time and what we are seeing is the economy is humming along, but it is relatively narrow in the sense that there's only a few things that are really working and even those couple of things that are working are very interrelated. And so what I really mean by that is if we just unpack where GDP is today, if we unpack the reality of higher rates, higher inflation, having pressure on that lower end consumer, that's old news. That started in 2022 with the rising rates. Now it's continued to spread and it's been made notably worse by war in Iran, increasing oil prices, et cetera. And at least for the moment we've got a temporary reprieve that's helping to alleviate that. But really what's been driving the economy is this incredible AI capex expansion. Right? We've got 600 some odd billion from only a handful of companies. And for the moment there's lots of questions around ultimately where AI goes, its impact on the consumer, its impact on the broader. But in the build out phase, it's for real. We need real people, we need real things, we need to be digging in the ground, we need energy, we need copper, we need chips, we need all of these things. And so that is a massive, massive tailwind to the US economy. It's also been a massive tailwind to equity market returns. And so the more narrow focus that we've been seeing from the consumer is that really the only part of the consumer that's holding up amongst this massive tailwind is that increasingly high end consumer. And they're only holding up because they are the ones that are benefited primarily from asset price appreciation. Right. House values have gone up, equity markets have done well. And so that higher end consumer that has a lot of assets, continues to spend, they're the ones that are really propelling the economy. That middle and lower end consumer are acting as drags, we're seeing delinquencies increase. And so when I think about what's working in the economy, it's AI CapEx that ultimately would potentially prove catastrophic. But I think if nothing else, would act dramatically to slow where the economy is currently heading.

[Justin]

And how does that sort of view play into or weigh into how you're looking at sort of the fixed income markets today?

[Jeff]

Yeah, the way that I would think about it, look, fixed income markets are very different today than what many folks think about the fixed income markets. If we just kind of take out that last 15, 18 years of unfortunate fixed income markets and what we know, that's the vast majority of many of our investing experiences. Right. That was a period of very low interest rates and it was a period of what I will directly call market manipulation by central banks. Now for many good reasons, and I'm sure we'll get into that here later on or if you want to, but the reality today is that we have emerged from a period of what was below trend inflation. And we have emerged from a period where central banks were trying to push towards price stability by actually trying to create inflation. Right. We were significantly below that 2% inflation level that most central banks around the world buying as price stability. And we were struggling to get there. And one of the things they did in that environment was keep rates very, very low to help prop up the economy, to pull demand functions forward and act as a catalyst to propelling the level of prices up towards price stability. That's not the environment that we're in today.

[Jack]

Right.

[Jeff]

The environment that we're in today is we have above trend inflation. Central banks are trying to pull it back down. And so the reason why I want to start with that as backdrop is because we have to think about what fixed income is and the purpose it serves with an investor's portfolio very differently. So first I would say the level of the level of income generation is no higher than it has been in the past. Right. It's relatively easy for fixed income investors to get 5 and a half to mid 6% very high quality fixed income assets today. But then secondly, and most importantly, fixed income is always meant to be balanced investors portfolio. We're not supposed to be the most interesting folks in the room. I wouldn't necessarily even say we're the smartest by any stretch, but we're definitely not supposed to be the most volatile and the most interesting. And so traditionally what happens is if the economy was to slow central banks around the world, the US Federal Reserve would be cutting rates. That pushes the level of prices of fixed income up and it acts as ballast within the context of a portfolio. And really that's tremendously important. And I think that's how folks should be thinking about it. One is income generation as a yield source, as part of their total return equation. But even more importantly, within the context of overall equity and other risk asset allocations, what kind of protection and balance can fixed income really provide in today's environment?

[Justin]

I think that's a very interesting point that a lot of times in investing you see an environment take place and then you assume that that's sort of the environment that you're going to be in going forward. And that can be such a challenge for investors, you know, whether it's a fixed income regime or an equity regime, and how that can be very different than what the historical precedent actually is and has been or will be. So I think that's a very fair and good point that you bring up.

[Jeff]

Yeah, look, I think so many things that all of us have grown up in just simply isn't the reality, in my opinion of the world today. And as we look forward. And one more thing, right? Central banks were created for the very purpose of acting in an independent way to keep us as a global economy, as a US economy from experiencing runaway inflation. Right? They were act. They were created with the sole purpose essentially to act as a break on, quote, the reckless fiscal, fiscal spending. And in general, the way you should think about that is central banks were created to pull inflation down or prevent it from rising rapidly. And it was an entirely new playbook for all of us. When Japan was the first country to really slip into this inflationary period and there were a lot of PhDs, he included, that said, you know, all you have to do is just throw more money at the system. Anyone can overcome below trend inflation, you're just not doing enough. Then he became chairman of the Federal Reserve and he wasn't successful at breaking us out of this low inflationary environment. And so really, to me, central banks are most effective at doing what they were designed to do, preventing this runaway inflation. And that's the environment we have today. And we were all along for the ride with all of these various monetary experiments in trying to arrest deflation and disinflationary environments.

[Jack]

It's interesting thinking about them as sort of their goal is to prevent runaway inflation because for that huge period they didn't even have to care about runaway inflation. They could basically do whatever they wanted and it didn't impact inflation. So it's almost like they maybe forgot a little bit about the playbook because it was so long they didn't have to use it.

[Jeff]

Well, I think that's exactly right. But to be fair, it's not just them, it's all of us. Right? It's all of us. And I think one of the big things and one of the big questions in markets today, especially as we emerge out of this period where Chairman Powell is now in the history books and we have chairman coming in, is how does Warsh think about this? How does Warsh think about the balance sheet? How does Warsh think about quantitative easing? How does Warsh think about both? Greenspan put right, will there be a Warsh put? And I think all of us have come to this belief that central banks have our back as investors. That's what they're there to do, is provide financial stability. But that's just not the case in my opinion. Right. I think what central banks are designed to do, the US Fed already is a very unique central bank in this world in the sense that it doesn't only have one mandate, it has two. Or I will actually argue, or I assert very directly it has three. But if we just focus on those two and just even really, that price stability mandate, financial returns, financial assets affect all of our ability to consume and our ability to consume affects price stability, inflation or lack thereof. And so that's what central banks care about. That's what the Fed cares about. They don't care about financial markets, they only care about financial markets into that financial, into that price stability equation.

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[Jack]

And we're going to talk a lot more about central banks in a minute. But first I want to get back to AI CapEx because I was interested to talk to you because we've talked a lot about, we've talked to a lot of equity investors about AI Capex and they kind of look at it, you know, they're looking at it from a growth perspective. But I would think a fixed income person is thinking this more from the perspective like I got to get my money back. Like it's a different way that fixed income people would probably look at this. So I'm just wondering if you have any insights on what you're seeing in terms of this massive AI Capex from like the fixed income side.

[Jeff]

Well, the first thing that I'll say is, right, we started off by talking about there are very few things in the US economy that are really true working when you think about we're roughly a $30 trillion US economy and you think about 600 some odd billion dollars of capex coming all online all this year and from only four or so companies, that gives you a sense of just when we talk about 3% GDP growth, that's essentially it. So it's very concentrated, but it's very important. And $600 billion is a whole heck of a lot of money, right? We all know this. And so the thing that I would say is when you have that much capex, you will take money in any way, shape or form that you can possibly get it. And so we're seeing it come from the equity market and equity raise, right? We just came off the SpaceX IPO, but right thereafter, a week and a half later, SpaceX tapped the fixed income markets. And we've seen the same thing from Microsoft, from Meta, from Amazon, from all of these companies as they engage in a capex build out. And you're right, the old joke is that fixed income investors, we're always grumpy, we always wake up on the wrong side of the bed. And maybe that's true or maybe it's not, but what I would really say is it's because we care about getting our money back. If AI works incredibly well and profits are even beyond our wildest imaginations, I don't benefit as a fixed income investor. I get my money back, that's the upside. I get interest along the way. And the downside is the exact same, I could potentially lose it. So we have to think about it very differently. Thankfully, almost all of these major companies are incredibly high quality tech companies with very, very strong balance sheets. Really most of them started with close to no debt on their balance sheets and they're just beginning the phase of tapping the bond markets, tapping the debt markets to really raise capital for these AI expansions. All of them have very strong business lines away from AI. And so the way I would think about it is it's very attractively priced today in the sense that you get a 6 to 7% type yield depending on where you play on the yield curve and what the quality spectrum is, but from companies that are notably higher quality than where else you might have to look to get that similar yield profile. The big headwind is we know that markets are tapping the market today and we know that they're going to tap the market tomorrow. And so there's this endless supply that continues to come and that's keeping yields maybe artificially wide. Relative to my opinion of the risks of being repaid versus almost the entirety of the rest of the fixed income market. It's the exact opposite of the equation, right? Investors are pricing in almost no risk of recession, of defaults, of any challenges in the macro economy. And I would say that the challenge potentially in AI is much more. But the profile is quite interesting from a fixed income perspective.

[Jack]

So do you see any of the dangerous stuff? You have some people out there in the news talking about they're starting to get into dangerous forms of financing and things like that around the edges? Are we seeing any of that yet or is this still pretty solid? Because to your point, it was from cash flow for a long period of time, which is different than something like fiber back in the day like this. This seemed like it was safer coming out of the gate.

[Jeff]

Look, I think that's the million dollar question. My honest take is at this point we're not seeing, quote, dangerous forms of financing. What we are seeing is the reality that what we have ascribed as a market as just kind of a one way train up and to the right increasing forever overall revenues coming from AI increasing adoption is a challenge, right? We haven't ever experienced any prior technology that has gone in a perfectly straight line. You know, I will date myself here a little bit in terms of the Internet age, right? I started on bullet board systems and then I went to something that called CompuServe and then I went to AOL and then it moved to MySpace and a million iterations right along the way. And MySpace is still, or sorry, Facebook is still around, but all the rest of them have, have moved on, been acquired, failed, whatever in many of its various forms. And so I just think that we have to keep that in mind as investors. I don't think we're seeing dangerous forms of financing, but we will see increased competition. There will be winners and losers and there will be competition for our dollars, both from an innovation perspective, but also increasingly from a price perspective. And that's really the thing that has me scared the most is there's a lot of companies that aren't the best, but there's a lot of companies in AR that are pretty gosh darn good and charging a whole heck of a lot less. And so I think we just have to think about what that revenue equation is and the multiples that we're assigning to it. And the same thing on fixed income. We have to make sure that we are focused on those companies that start with just absolutely bulletproof balance sheets have a very large moat around their AI offerings. And really have the ability to pay us back at the end of the day.

[Justin]

Jeff, was that you on the raging, raging Bull message board?

[Jeff]

I don't know if you remember Raging ball constraint. Constraint is really my view. There's opportunities, but there's always risk. And we just have to remember that just because it's sunny today doesn't mean that it won't be stormy tomorrow.

[Jack]

Well, it was funny. We had Cliff Asness on. He admitted he was anonymous on the Yahoo message boards back in the day, making some comments on different things. So it's a very different world now than it was then. I wanted to ask you, going back to the idea of inflation being here, one of the questions that we talk about a lot in the podcast is for many, many years, bonds acted as a great hedge for stocks. And now we have some debate around that, which we haven't had in a very, very long time. And I'm just wondering, as a fixed income person, can you kind of put that in context, how you're thinking about the correlation between bonds and stocks and maybe bonds as a hedge for stocks in a more inflationary period?

[Jeff]

Well, I think you nailed it right there on its head in that inflationary type period. And so generally speaking, when the economy is doing well, we have inflation and stocks are working incredibly well because the economy is doing well. And bonds generally are lackluster because rates are rising to potentially bring down how well that economy is doing. And that actually may be that environment that we have today. But really the most important point is that is absolutely, absolutely the environment that we had coming out of the global financial crisis, coming out of US Federal Reserve rates that were pinned at zero, coming out of that period of well below 2% inflation. And coming out of that Covid period where the Fed had to ultimately raise rates to arrest what was a runaway inflation because of the supply shock from supply constraints around the closing due to a global pandemic. And so that was a tough journey, but it was also a very predictable journey. Right. We all knew that after a decade of financial repression, after a decade of zero rates, there was only one direction that rates could go, and that was up. And that's painful for fixed income. But we've taken that pain, we've taken that medicine. And so maybe we get a hike or two out of the US Fed, maybe we get a cut or two. But really, I think it's pretty hard to argue that we're in a pretty comfortable spot. Rates are much closer to, quote, neutral. They're that they're not necessarily stimulated they're not necessarily holding back the economy today. And but that puts us in a very different backdrop because when equity markets might not work in a recessionary type period, almost assuredly we will all be consuming less. Almost assuredly inflation will be coming down and the Fed will be doing what the Fed is supposed to do, which is cutting rates. And so that's really. That all of the pain, all of that lack of negative correlation, what most investors have experienced over the last decade, we have to remind ourselves that's not normal because it's not normal that we started with zero rates, it's not normal that we started with 1% inflation. This is actually the normal time period. And so what I expect going forward is again, as equity markets are potentially experiencing stress, given that narrowness of the economy and just given traditionally within the economy, central banks will be cutting rates and fixed income will serve as a tremendous medley, valuable hedge to equity assets, but not only equity assets, but also credit assets. Right. We have to think about how we use Treasuries versus maybe other creditors within our fixed income portfolios and providing balance because it's the outcome that our clients are after.

[Jack]

Yeah, that's such an important point because starting point matters, right? I mean, now we're starting. Our starting point is higher rates and our starting point is higher inflation. Before it was basically 0 and 0. So that's a very different dynamic going forward. As you think about bonds as a hedge for stocks. Right?

[Jeff]

That's exactly it. That starting place matters and today is very different. It's very different than what most of us know within the role of fixed income. Because look, this hasn't just been one or two or three years, it's been a decade and a half. And that's just the reality. We haven't seen a recession essentially since the global financial crisis in 2008. But business cycles are healthy and we will get a business cycle. I feel very confident saying that now. Ask me on timing and of course the old adage that predicting the future is easy unless you ask me. Sorry, predicting what might happen is easy unless you ask me about the future. However, that old quote goes, but today is a very different starting place than where we have been.

[Jack]

Do you think we're just. You brought up the business cycle. Do you think we're in a different scenario with respect to the business cycle? Because you could argue if you look through history, we're having less recessions than we used to. Some people argue we have maybe more rolling recessions now where they happen in certain areas, but they don't happen overall. Like, do you think something's changed significantly with the business cycle versus what we saw in history?

[Jeff]

I don't. Look, people ask me all the time, what. What ends this incredible expansion that we've had? And my honest answer is I don't know. And nobody else does either, right? So if anyone tells you they have the crystal ball, they've got the playbook, I would question exactly what they know that potentially all the rest of us don't. But what I will say is my general answer is I think what we get this time is just a regular boring old business cycle where the Fed has raised rates, we've seen inflation move up. That acts as a demand dampener on all of us. That's exactly what we're seeing. We've already talked about that. And eventually that over exuberance just rolls over. Just a very classic business cycle. I think what we've all been conditioned as we look for the canary in the coal mine, because what we've had is a global financial crisis where the financial system was just in broad meltdown had, was a global pandemic. I think what the biggest thing that I would point to is part of the reason why we haven't had a classic business cycle is because of all of that Federal Reserve intervention and its direct focus on financial markets. And so I think what it's done is it's lengthened that business cycle. It's allowed us to continue into potentially those periods of over exuberance for longer than maybe is even healthy, but it hasn't killed the business cycle. And so again, we're seeing the pressures build. Anyone's best guess in terms of the timing of eventually when it happens. One of the things I like to say is all of us focus on fundamentals, right? As good business analysts, we try and focus on fundamentals. What's ultimately driving individual companies, how those companies are driving the stock market. But what really drives prices is sentiment. And once sentiment rolls over, it's tough, right? We're all just been conditioned to. To dip the belief that tomorrow will be better perhaps than a weekday today. But after a few weeks, or even potentially a few months of things just going down and to the right versus up and to the right, our reaction functions become very different. And that's the business cycle. So we have to focus on sentiment is still very, very strong within credit markets, within equity markets. And no, I don't think the business cycle's dead. I think it's as alive as it ever has been. And we need to focus on the business cycle.

[Jack]

I think what was great about that answer is you were talking more about a garden variety like business cycle recession type thing. So many people are looking at what happened for a long period of time and thinking it has to end catastrophically or it has to be 2008 or something like that, because we saw that it seems like this is a more reasonable way to look at it than it has to end with crisis and catastrophe.

[Jeff]

Well, we can all hope that that's actually the way that it does come to fruition. It does end. But I think another important point is we also have to remind ourselves that global financial crisis in 2008, which was really that last business cycle, was just tough on everybody. But if we go to one prior to that, right, the Internet boom and the tech bubble, ultimately it was a little bit different. It was much more dramatic within markets than it was on the main street economy. And so if anything, to me, that next business cycle, again, full humbleness, recognizing nobody knows what happens tomorrow, it feels a little bit more like that where the markets may have a little bit more of a wild ride than just broadly the underlying economy. And it's again, back to your point is it's because starting place matters. And so I think it'll be really interesting to watch and fascinating for all of us within the markets.

[Jack]

I want to shift to the Fed and I was watching some of your appearances and you've talked about this idea of a third mandate for the Fed in addition to employment and stable prices. Can you talk about what that is and what that means?

[Jeff]

It's something I'm pretty passionate about. Look, I'm going to go a level further. To me it's not even debatable. The Fed does have a third mandate. And so I will point to a lot of people don't believe me when I talk about this and I will say just pull up the actual document that governs what the Federal Reserve is supposed to do. And so it's the Federal Reserve act of 1913 and it basically is the mandate from Congress and it says that essentially the central bank within the US Is to pursue effectively the goals of maximum employment, price stability and moderate long term interest rates. And so I may not be very smart, but I'm pretty sure I can count to three. And I just counted three. And so that third mandate, technically as it's given by Congress, is moderate long term interest rates. The question becomes what the heck are moderate long term interest rates and how does the Fed think about them? And so I've actually asked A couple former Fed officials, but importantly Chairman Powell actually got this question in a press conference maybe four or so press conferences ago. It almost never comes up. And you should have seen the smile on my face as it came up because it's something I've talked about for quite some time. But his answer essentially was as good as any. He said a couple things. What he said ultimately is, look, we, the Federal Reserve don't know what moderate long term interest rates are and they change throughout time. And moderate long term interest rates are what you get when you successfully balance maximum employment and price stability. And so that's very similar to a couple other Fed folks that I've talked to. And on the surface that may sound not interesting and almost like you could dismiss it outright, but I actually would argue the exact opposite. I think it's tremendously important. And I think it's tremendously important because we've already talked about a few of these things. The US Fed is one of the most unique central banks in the world. It has again, let's just say two mandates. Almost every other central bank has one mandate and only one mandate. That's price stability, 2% inflation, you get that and nothing else matters. The US Fed, at minimum has those two mandates, price stability and maximum employment, which are oftentimes two different sides of that teeter totter. Right. And I think we can look at today's environment as exactly that. It's not even controversial that we have inflation that's above the Fed's target. And it's maybe a little controversial of how strong the labor market is. It wasn't that long ago we were talking about some potential weakness on the labor side. And so on one side of that coin you could say the Fed should be raising rates, on the other you could say the Fed should be lowering rates. And what should the Fed be doing? And what I will say is that third mandate recognizes inherently that the economy changes throughout time. It's much like a lot of what makes that American system great. It's the flexibility that the founding folks, in this instance, right, the people that put the central bank there gave them a lot of flexibility to look at today, look at the drivers today and adapt. And so I will argue that there's kind of been three primary iterations of that third mandate. The first one was financial stability. And we've talked about this. It's not because the Fed cared about the level of prices or the level of stocks. It was because in a time period where they were trying to push inflation up, if they engaged in QE1 and QE2, they pulled forward our demand function. They propped up the level of assets within the economy. It made all of us more confident to go out and spend. And that helped keep the level of prices up towards price stability. Now, that evolved. And so in a 2020 time period, this was before the runaway inflation, I actually think Chairman Powell told us that second iteration became social stability. So we went from financial stability to social stability. And what the Fed told us was, is they used to be very reactive. Right, sorry. They used to be very proactive. Sorry, let me very be very careful. They used to be very proactive. Once overall employment got too strong, they worried that it would bleed into higher asset prices, higher consumption, and so they would proactively raise the level of rates to ensure that that didn't happen. But because we came out of that period of below trend inflation, the Fed said we have been wrong in how we've run monetary policy. And what we learned is by keeping that expansionary unemployment rate very, very low for a long period of time, it actually compressed the wage gap. And we like that. We want more of that. And so I think coming out of 2020, the Fed actually focused on social stability. And we saw that, right? We saw low wage income earners really close that wage gap versus high income earners. But as we look forward, I think again, the Fed has redefined that third mandate and it's now one of inflation expectations, stability. And the reason why I think all of that's important is because that puts us squarely to where we are today. And exactly what we heard from Marsh coming in, which is the Fed is unambiguously committed to 2% inflation. We've been too far away from it for way too long, and we're going to get back. And so I think that we have to, as investors, remind ourselves that the economy is different today. The way the Fed thinks about the economy is today. And I really think that third mandate, and if I'm right, inflation, expectations, stability, that's where we should be watching to make sure that after five years of missing on the high side, if we keep on going, that's going to be a challenge. And the Fed isn't willing to tolerate that anymore. So I think that's actually the driver of what they're looking at today, even more so than those first two mandates.

[Jack]

I could be way off on this because I'm definitely not a fixed income guy, but I'm wondering if like the aggressive use of forward guidance also plays into that. Because if I want stability, I Probably want to be telling people what I'm doing way in advance and like, not surprising anybody. I mean, does that make sense?

[Jeff]

It absolutely makes sense. And I think to me, the answer to that question is it depends on which regime you are in. And so, look, there haven't been many Federal Reserve chair folks that have started in one period and exited in another, right? And Powell was one of those. He took for a Fed with well below trend inflation, and he exited a Fed with well above trend inflation. And I think one of the things he could have done a little better was make that transition in recognizing that and shift the Fed policies. Because it's no different than running a business, right? You run the business in a very different way when things are going incredibly well than when you have to hunker down, cut costs, think about preservation more so than expansion. And so in today's environment, all of that forward guidance, I think is much less useful than it was in the past because the primary tool that the Fed has, interest rates, were already very, very low. And so you had to rely on all sorts of other things in order to hopefully propel the economy. But I think really the transition today is we can go back to basics. We can understand that, yes, the Fed has one big blunt tool, but it's incredibly, incredibly effective. The challenge with it is it's like a lot of modern medicine, right? You take one pill, it might cure this ailment over here, but you might not feel so well along the way to recovery. And I think again, this Fed just might be, will take that pain in recognizing that we have to get inflation back under control. That will likely come at some expense of the employment side. And it's because we as an economy are just so incredibly strong today that we need to rein in that business cycle.

[Jack]

What you said about other central banks not having the employment mandate got me thinking. I wonder what the consequences are of that for the US versus other central banks. I would guess you would have, if you're not solely focused on inflation, maybe the US would have more variable inflation. Because there's times where I have to deal with higher inflation because of my other mandate. Is that the consequence probably of having the dual mandate is maybe inflation is more variable and might have to live with higher inflation at times?

[Jeff]

I don't think so. The way that I would describe it is, look, I think it's quite amazing that they have this dual mandate or even that TRI mandate. I think it's almost asinine to think about a Fed that always has to do something very Mechanically and we can look at other economies around the world today. One of the things the Fed does is they define price stability as core. They want to think about it not in just the sense of there's been the supply shock of high oil prices and we need to immediately react. We need to think, step back and say maybe this won't last forever. And we can focus on kind of the through cycle view as where the ECB just focuses on that headline inflation number and they were raising rates. And so I really think what it allows the Fed to do is be a bit more forward looking, a bit more thoughtful in the responses. But a challenge, a big challenge with that is in some ways it's in markets easier to have a Fed that has a pure reaction function. We know the equation. If inflation is high, they're automatically going to raise rates. We know that we do the work for them and we just move on because they have hundreds of PhDs on their staff and they still don't know what's going to happen to tomorrow. And that's not a fault of the Fed. It's just the reality of the world that we live in. Nobody knows what's going to happen tomorrow. And so I think we need to give them a little bit of grace. But actually I think it makes the US economy way stronger as a result.

[Jack]

So taking this from the theory into practice, how do you think about the situation the Fed finds itself in right now? Before this whole war, they seem to be a little bit more focused on the easing side, a little bit more focused on the employment. Now we have seen inflation, the latest meeting, they seem to be focusing maybe a little bit in the other direction, although they haven't made any changes. How do you think about what they should be doing and what they will do in this situation?

[Jeff]

Look, the first thing that I will say is we've talked a lot about change, right? The world is always changing and that's what makes investing so fascinating. It's what keeps us all excited. To wake up. At least myself every morning is the world is different. And so the world is different in a lot of ways. It's very different for this Fed versus the prior Fed. But for us as investors, if nothing else, Warsh is likely to be very different than Powell. And so we've had this regime change and one of the most important things that I want to remind kind of everybody and even myself, right, I say it predominantly for myself is we know coming in and Worsh told us many times that he is less of a fan of Forward guidance. And so everything that he has told us thus far as chairman of the Federal Reserve, he is deliberately trying not to give us a lot of insight into what may happen in the future. Now it's our jobs to read into that. It's our jobs to form views and make opinions on where he ultimately heads. But we have to be very humble that we're also on that learning journey. So I think where the Fed is today and what maybe the Fed should be doing is exactly, at least what I heard from Marsh in that first press conference. The second thing I would say is everything we know about Warshaw, he's got a rich history. Just given the fact that he's not new to the Fed, I kind of like to equate it. If you go from having friends with kids to having your own kids, becoming a father, all of a sudden you're not a dad and then you are a dad or you're not a mom and then you are a mom, or for other listeners, potentially you've got a lot of friends that may be married. But then all of a sudden on that day you become married, the world just changes. And so everything we know about what worse thought the Fed should do we have to re question because now it's not what he thinks it should do, it's he gets actually decide what they do. And so that might be different as well. But everything we've heard I think is exactly what should be happening. We have to take the environment that we're in today. We're now five plus years in a period of above trend inflation. We have to be asking ourselves a very serious question of no one is worried about runaway inflation today, but at what point after how many years might they be right? We know it's not an infinite timeline, but it's apparently more than five years. And so I think the Fed is saying to evolve we have to probably raise rates if we don't see a direct and obvious path of inflation coming down. And we have to ask ourselves as investors what might lead to that. So the Fed is going to have a reprieve. We're going to see oil prices come down, just as we've already seen, that will bleed into inflation. So we've got a couple of months where inflation will be coming down. But just like the Fed looked through the supply side shock on the way up, they also have to look through that supply side shock on the way down. And I think that's exactly what the Fed is going to do. I think with technology that's potentially the Savings. Grace, we've all talked about and heard about that amazing productivity that might come from AI, but I would ask ourselves, are we actually seeing it in our own lives? Because yes, it will come through, but I think it probably comes through over decades. Right. The rise of the computer did not move to an immediately high productivity environment. It happened over the course of a decade and a half. And so I think that's exactly what we're going to see with AI. I think inflation is probably much stronger at the core level and the Fed is going to raise rates and be willing to sacrifice or accept the consequences of that on the employment market.

[Jack]

Do you think there's any lasting impact from the war on inflation? We've heard guests who had both sides of this, some who said once it comes back down, we're going to be okay, other who say oil's inputs to other things, so that's going to still bleed through for a while. And also if oil prices come down, you might spur demand again. So you might actually get a little bit more inflation that way. Do you think there's a lasting impact to this or do you think it's mostly behind us?

[Jeff]

The way that I think about it is there's a lasting impact to everything. Everything that we do today, every choice that we make today will ultimately impact how we think about the world tomorrow. And, and obviously some things will be far more consequential than others. But I think this war, it will have lasting impacts. I'm surprised to see where oil prices have immediately kind of retraced back to almost pre war levels. The reality is we don't know what the Middle east looks like a year from now. We don't know that this 60 days is going to last beyond 60 days every single day. There are still headlines that are very contradictory from both sides, the US or Iran. I think what is the most obvious thing that I could say is we're not going back to the exact markets and the exact state of the Middle east that we had pre war. Things will be different. And so in that environment I absolutely think there are lasting impacts. But even beyond that, what I would say is let's forget about the war, let's just say it never happened. That was a period where we already had above trend inflation. We in this last CPI print, we actually had negative goods inflation. We continue to have a challenge with services inflation and that wasn't impacted by the war. And so if anything, I think oil's bleed through to goods prices maybe had an immediate high impact and will come down. But Services are completely unchanged. We have a services inflation problem. And the Fed knows that I can make a very credible case. And if I was to put myself on one side of kind of the three places that you just suggested, I think, look, the economy's on incredibly strong footing. It was, if all else equal, the uncertainty of the war, the uncertainty around what might happen in geopolitics, the impact of high oil prices that made us all maybe pull back our demand function a little bit. And so as we pull that off, I worry that the end of the war might actually be slightly inflationary rather than disinflationary, at least over the medium term.

[Jack]

Just one more on the Fed. I want to ask you about Warsh and the balance sheet. And I'm not a close Fed watcher, so I could be wrong about this, but he believes, I think he believes in a smaller Fed balance sheet. And so I was wondering, like, do you think that has any impact? Like, do you think that's something that's going to be studied for a long time and maybe nothing's going to happen in the short term, or do you think there's any impact to that?

[Jeff]

Well, I'll kind of go back to what I said before. We know what war thought about the balance sheet coming into the Fed. It's yet to be determined what he thinks about the balance sheet as the actual FOMC chair. Right. Because the decisions he makes today are very different. Everyone has an opinion on what, what their boss should be doing, but maybe those opinions are a little different when they actually become the boss. And so look, you're 100% right coming in. I think Warsh believe that all else equal, we need to think about inflation in kind of two different regimes. You've got goods inflation and you have asset inflation. And what balance sheet has mostly created is asset price. So if you prop up, if you bring the level of rates down, you buy Treasuries, you support the mortgage market, et cetera, all else equal pushes the level of housing prices up, it impacts the level of stock prices. And so that benefits asset holders, which are broadly that high income part of the population. But what really the Fed is tasked with doing is preventing price instability or creating price stability for the entirety of the population. And so all else equal, he's created a task force for that. A lot of people ask me what's going to come out of the task force. And the most insightful thing that I honestly can say is that I've never been part of a task force or heard of a task force that comes back and says, you know, everything's great, we're not going to do anything, so we're going to get something. And, and really what I think is likely is the balance sheet over time is going to shrink. Now, I've already said it's not that the Fed cares about financial asset prices directly, but they do care indirectly in the sense of they don't want a financial catastrophe because that would lead to demand destruction and it would lead to a price instability challenge when inflation comes down. So WARSH is going to be very mindful of that. I think we will step gradually into that reduction. But I think the direction of the balance sheet is it's going to play a smaller role in the US economy, a smaller role in the Fed's arsenal. And if you believe, and certainly I do, that it has been a positive force on asset prices, I think we have to ask ourselves the opposite question. What impact will it have on the way down? And I think all else equal, it's just another potential challenge that we have to navigate within markets.

[Jack]

Yeah, that point about talking what you're going to do about what you're going to do when you're in the seat and actually doing it is such a good point. And it applies to so many areas of investing. All of us say In March of 2009, I'll be a hugely aggressive buyer. And then the reality is, put us in the situation in March 2009. Most people are not a hugely aggressive buyer when they see the world collapsing around them. So it's just interesting that it's such an important point.

[Jeff]

Well, and I'll go back. What drives prices? Sentiment drives prices. And sentiment can shift very quickly. And it's actually one of the things that I think makes professional investing very different than personal investing. And I'm obviously an investor and a fixed income investor, but the way I run professional portfolios is different than the way I run my portfolios because sentiment affects me directly. Right. My own situation, my happiness or lack thereof. But I think that kind of gets back to the question of what worlds fixed income serve. And I really will go back to. We've just been on an incredible journey in the world of equity prices. And so there's all sorts of antidotes. I'm certainly not your first guest to talk about high multiples. We are today running essentially at peak margins. And we have to ask ourselves the question of how sustainable is that? Capital is taken from labor for a very long time, ever since the 1950s. And so ultimately the direction that that has to go is it can't continue on infinitely. It has to continue at some point potentially to reequilibrate. And at what point does labor take from capital and what is the implication as that potentially happens to financial asset prices?

[Jack]

I always like when we have.

[Jeff]

I'll leave it up to you if you want to re answer that without the background.

[Jack]

No, that's totally fine. That's all very, very normal for the podcast. Yeah, we have all kinds of stuff going in the background.

[Jeff]

Perfect.

[Jack]

If someone wheeled a baby in, we'd probably go viral. So like that. Remember that video back in the day? I want to ask you about the national debt because we've gotten all kinds of different opinions on that. I mean there's been many people panicked about the debt for a very long time and, and so far we haven't seen many consequences of it. But we get different opinions. We get some people who say, you know, the impact of the debt ultimately is just maybe higher rates and higher inflation over time. And we get other people who talk about debt crises, you know, potentially in the future. So I'm just wondering from you're an expert in fixed income markets and I'm just wondering like what you think about the national debt and what its impact actually is. It's a long question.

[Jeff]

I know it's incredibly difficult. It's an incredibly difficult question because we have to think about the impact short term versus long term. I think what it creates is long term. It's unsustainable. I don't think anyone would really push back against that. It's unsustainable. And so eventually it will fix. And the question we have to ask ourselves is does it fix instantaneously in a giant couple moment? Probably not. But there's a lot of ways out of our debt crisis. I think we have become very accustomed to running overly expansionary fiscal policies. That's going to have to end. I think we have become accustomed to cutting tax rates on the wealthy, to cutting tax rates on businesses. That's going to have to end. Right. It's just like when you, you speak to somebody who maybe you're friends with and they got an argument with their spouse. You always have to remind yourself that there's two sides to that equation and both sides are probably have some validity to them. And so I think as we look forward, all of these things that have acted as a tailwind to consumption, to markets, to just the broad economy that we have are going to become less of a tailwind and eventually they're going to become A headwind. And that is a tough thing to navigate. And so I don't think it's tremendously challenging to fix income markets in the immediate term. Part of that solution is probably inflation. We've already had a while of that, but you can't have that in perpetuity. And so I do think it has been acting as a steepener on the yield curve. That is to say it's introducing higher uncertainty for longer periods of time. And that longer periods of time just means that rates have to be notably higher on that long end. Obviously we've seen a little bit the opposite here just recently as we ascribe more confidence to that inflation question today with warsh. But it's having real impacts. And if I was to put it back directly to financial markets, I think really the impact that it's likely to have is that our rates are likely to stay higher for longer than they would have otherwise. And that's exactly what we've seen. And so in a period of rising interest rates, a lot of people are looking at floating rate debt as a potential safe haven. And that's exactly right. But the flip side is that floating rate debt also rolls over, which means those companies have a higher interest burden in their, in their balance sheet equation. And it means that that is a potential source of instability for those companies with a high floating rate component. So I'll look at private credit as potentially one area where that introduces even higher uncertainty. But at the end of the day, I think it's a much more medium to long term challenge. But it doesn't mean that that medium to long term challenge doesn't have implications for today. It just means that we're not investing for this kind of regime change or big kaboom type environment.

[Jack]

You mentioned private credit and that's another one we get talk about a lot on the podcast. And again I'm asking all these two sided questions, but you really do have. It's another one where you've got people on both sides. I mean you've got people who some say private credit is great and there's been a couple of one off type things that have occurred in there and other people think it's a more systemic problem. What's going on in private credit right now? What do you think about that?

[Jeff]

Look, private credit is here to stay and private credit is not new to be fair. It's just been this tremendous flow of capital that has gone into private credit that creates some questions. I think private credit is tremendously valuable in the sense of if you're a small company and you value having a small cohort or even one potential borrower to work with in periods as your business changes. That's exactly what the world of private credit is meant to do. If you're an investor and want to give up liquidity for a slightly enhanced return profile, that's another reason why private credit might be great. But at the end of the day, private credit is the same as public credit. It's credit. What you have to underwrite is the ability and likelihood that you are going to receive your capital back. And so what we see in private credit is with all of this influx of capital into the private credit area, public market is roughly 65% of the below investment grade is rated double B, which is that highest quality part of the below investment grade. What you have is almost the exact opposite in private credit. And that is to say that your average company borrowing there is just much lower quality. They have much higher leverage. What you have in public credit is you've got about four and a half times free cash flow coverage. What you have in private credit is about two and a half times. And so just there as, as asset classes, the returns on private credit are higher, but it's because the risk is higher. These are less quality companies. And so as I look forward, you know, I, I think what I would say is we will get a business cycle that's true for private credit, it's true for public credit, it's true for equities, it's true for everything. And the way that I would think about public private credit today is make sure that whoever you might be investing with, you believe in their ability to navigate that business cycle effectively. Because really I think that's what's going to determine individual outcomes and that's really what we should care about. But private credit is, it's valuable, it's here to stay, it serves an important purpose, but it's not always and everywhere better than public credit and vice versa. It's just a compliment and it serves two different purposes.

[Jack]

And correct me if I'm wrong, but it would seem like not a great place to index in private credit. It would seem like you'd want someone who knows what's going on a little bit more than like running like an index type strategy. Does that make sense?

[Jeff]

I think it does. I really, what I would say is I think indexing again is also something just different. Whether that be in public private public credit or private credit or equities or not. If you just want broad beta exposure at this point, the private credit market is probably large enough that there are some effective products that can just give you beta exposure. But if you're looking for alpha, I think you want active management. You really want a private credit firm again with that ability to navigate whatever challenges may come their way. Because I think the way that I would think about private and public credit is the intensity of investing becomes much higher when markets are less strong, when you're having to deal with individual situations that as the world change, aren't working out the way that you underwrote them. It just takes more resource, more expertise, more dedicated focus. And so any recently formed private credit shop needs to be thinking about their staffing into the future because eventually they too will have to navigate that credit cycle. And so again, my biggest piece of advice is just make sure that you believe in your manager's ability to navigate that credit cycle with the resources, expertise and knowledge. Because eventually they will have to.

[Jack]

Just one more for me before I hand it back to Justin. I want to ask you about how you think about managing fixed income portfolios. Because in my research I, I found this thing that you said, fixed income should be managed flexibly rather than silos. And I'm wondering, can you talk about what that means?

[Jeff]

Look, I think, I think every investor has to be honest with themselves, right? We as human beings, we'd like to think that we're good at everything and we can do everything, but none of us are. And so I think as investors we really have to be honest with ourselves. And saying, what do I bring to the table? What process have I put in place that I can replicate throughout market cycles to act as grounding to how I perform research and how I build portfolios. And so the way that I've liked to talk about fixed income markets is a lot of the market is set up for the old world of investing, right? Where there's just these clear delineations between equity and fixed income, public credit and private credit, investment grade and below investment grade, corporate securities and asset backed securities. And today the world is far more complex and we are focusing on outcomes. We're just doing things differently. Right. If you look at, we started this conversation with a potential question around AI and CapEx. And so yes, it's coming in equity markets. Yes, it's coming in fixed income markets. Yeah, it's coming in corporate form and asset backed form and CMBS form. It's coming in private markets, it's coming everywhere. Companies these days are tapping markets in all sorts of ways. But we on the asset management side are still very siloed in our thinking, right? You have again, you have equity investors, fixed income investors, asset backed investors, corporate investors. And so what I really mean by that and that flexibility is to look across various capital structures and search for relative value. Because one of the biggest things from my philosophy on fixed income, the most mispriced asset in any given point in the cycle actually isn't what might go wrong. It's the market becomes overly exuberant in pricing volatility or the lack thereof, right? It's how do I capture a much lower volatility investment today where it doesn't have to cost me in terms of yield and total return today? And so one of the examples that I like to give is if we said we want to invest in hotels, you could go buy Marriott or Hilton Equity, you could go buy corporate bonds, you could buy the timeshare version and asset backed, you could buy an individual property in a CMBS bond, you could buy a pool of properties from a manager who manages a hotel reit. And each one of those would be focused on by a different analyst at many firms, right? An equity analyst, a cmbs, an abs, a corporate analyst, a REIT analyst. But it's all the same thing. If that hotel operator does well, they all do well. And if that hotel operator doesn't, or we face a recession, they all do relatively poorly. But the market at any given time will be pricing in the potential upside and downside. But in these periods like we have today, and thankfully for the bulk of the market, things are going okay. The economy is doing well. And what really that relative value is, when you look across those individual silos of fixed income, is it allows you to say one of those is going to perform notably better on the downside. But the market's not pricing that today. And that's really what I mean by that flexibility is looking across the various asset classes of fixed income. Because most, most of the world isn't equipped to do that. And as a result of that, if you put that process in place, to me it gives you an edge in thinking about how to protect, which we've talked about, really is a core tenet of being a successful fixed income investor.

[Justin]

Jeff, we appreciate your time today. We always like to ask our guests two standard closing questions. The first one is what's the one thing you believe about investing that most investors, your peers would disagree with you with?

[Jeff]

Oh, gosh, there's, there's a lot, you know, to me, I, I will go back to something I said earlier. I think the edge that many people in investing really want to hang their hat on is a belief that I can underwrite a company or cash flows. I can know the equity story so much better than, than anyone else. And there's elements of truth to that. Right. There's no shortcut to the hard work of just being a great analyst and, and, and understanding what, what the potential drivers are. But really what's going to drive that asset price is sentiment. And so I think maybe if I was to answer that question directly, it would be say you have to focus on what do you think, you know, what's priced, what maybe isn't priced, and how might sentiment intersect with that. It'd be the biggest piece if I was to insert maybe one other piece, and I think we've kind of already talked about that is know yourself, your sentiment will also shift as the world shifts. And so it might be a great investment, but also know your holding period, your ability to hang on in tough times, your, your ability to continue to add in and always give yourself room to be more wrong. Because as an investor, you will be wrong at times and you always want to be, have the capacity to step into that.

[Justin]

That's great. And then the last one for, for us is based on your experience in the markets, what's the one lesson you would teach your average investor? And maybe that is the lesson, but if there's something else you'd like to sort of share, that's great too.

[Jeff]

Well, I guess I, yeah, I kind of preempted that. Next question. I mean, really, I think that the biggest thing that I would say is again, you will be challenged. You always want to give yourself to be room to be more wrong. You know, one of my great mentors always used to talk about, he's bought the bottom in many markets, and I think we all have, right? We've all bottom ticked something various. But the challenge is you haven't only bought the bottom, you bought. You liked it here and then you really liked it here and then it went here and you kind of had to be adding along the way. And so I'd say it's the exact same thing with the move up in rates. You always want to be able to buy a little bit more as rates move higher because all else equal, things are more interesting. So always give yourself a room to be more wrong because you never want to be stopped out on the wrong side of that equation.

[Justin]

You've been a great sport today, Jeff. Thank you very much. We appreciate it.

[Jeff]

Yeah, thank you. Always interested to talk about the world. There's a lot to talk about and so I really appreciate it.

[Justin]

Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns [e-mail] if you have any feedback or questions, you can contact us@excess returnspodmail.com no information on this

[Jeff]

podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.