A (3:26)

Got it. Okay. So as you're coming up with these strategies and these recommendations, in lots of ways it just relies on forecasting and I have to say I'm sympathetic to how hard forecasting is, especially when it comes to the future. In our economic forecast we also included a bunch of different alternate scenarios because I just see that much uncertainty in the global economy. So with that as a backdrop, nothing is for sure. But where would you say your highest conviction calls are when it comes to investing in 2026?

B (3:55)

Well, as I mentioned, we like US equities and that remains a very high conviction call for us. Sort of dug through the details of that already. And so I want to turn to our other high conviction view which is curve steepen. We see pretty material U.S. treasury curve steepening over the next year. I think even as a macro strategist actually expect yields at least in the back end to be mostly range bound. And this steepening will be very much driven by what happens in the two year point. I think as markets continue to we think underprice future Fed easing and growth slow down tail risks.

A (4:34)

So that's super helpful in terms of the places where you're convicted. Let me be perhaps a little bit unfair because nothing is in fact certain. And so if there are things that we feel pretty sure about, there've got to be things where we're either not sure or parts of the market that really pose the most risk. So if I asked you then where do you see the biggest risks for investors and markets next year, what would you say?

B (4:56)

So one of them really is AI investment cycle abruptly ending. And then this has been a topic of huge debate in all of the investor meetings that we've had over the last several weeks end because I think the idea is you have a sharp pullback in investment in the next 12 months which could trigger pretty cascading effects. And of course that would likely pressure US equities I think given the hyperscalers index weight, but could weirdly enough benefit IG credit by reducing issuance, which has been the main driver of wider spreads in our forecast. But I think the other Risk here actually is if animal spirits run a bit down too hot. Underlying equities over credit, over rates, allocation is some revival in animal spirits, but it's not the kind of irrational exuberance that marks the end of cycle in our view. Given I think there's still rational belief in that policy triumvirate that we touched on earlier that can still be supportive of risk. But you know, I think if sentiment does overheat, then our allocation tilt towards cyclicals and beta would be wrong. And historically late cycle expansions see investment grade outperforming high yield in equities with bonds eventually leading returns. The last risk I think to our asset allocation is really the Fed either the FOMC not easing further over next 12 months or if it changes its reaction function. And I think both of those will have very different implication of what happens to the front end of the yield curve. So my question to you Seth, is what do you see as the probability around both of those scenarios?

A (6:43)

Look, with the data that we have before the government shutdown, it was clear there was a tension. Spending by households, spending by businesses was strong. Employment data were getting weaker and weaker. And the Fed has decided to start cutting to err on the side of insulating against further deterioration in the labor market. So one thing that could upend our forecast is that the real signal is from the spending. Spending stays strong, the labor market eventually catches to the stronger spending and we start to see job gains come back. If that happens, especially with inflation now running notably above the Fed's target, I just don't really think we're going to get anywhere near the number of rate cuts that we forecast or that are already priced into market. So you'd have to see a reversal. How likely is that? You can't rule it out. I'd say 20% or something like that, maybe a little bit more. On the other hand, to the downside, I wonder if what you're getting at a little bit is there's going to be some turnover in the personnel at the Fed and do we have to worry about a fundamentally different reaction function from the Fed going forward and cutting rates aggressively even if the macro considerations don't warrant. Is that really what you were getting at?

B (7:51)

Yes, I think that has been the question on the forefront of investors minds.

A (7:56)

Yeah, I think that's a real question. The way I look at it is Chair Powell is in charge of the Fed now. His term goes through May of next year. And so until we get to the middle of next year, I don't really think there's any fundamental change in how the Fed does business, but it really does seem like we're going to have a new Fed chair in June of next year. But even there, we got to remember that the committee is a committee and that's how policy is decided. And so if there was a new chair who really, really, really wanted to take policy in a truly unorthodox way, I also don't think that's really feasible over the second half of next year because there just won't have been that much turnover in terms of the personnel of the Fed. That's how we're looking at it for now. I really don't think that latter version of the world is a big risk. That said, I'm going to throw it back to you because I always have to get the last word. You talked about asset classes, bullish on US equities, we talked about high yield bonds, we talked about some of the risks that markets have to face. But one thing I didn't hear, and we do have a global investor base, is about currencies and specifically the dollar. So this time last year the team made a pretty bold call that the dollar would depreciate a great deal. And here we are. And the dollar has come off a lot on net over this year. That stabilized a little bit. Maybe not for the whole year because that kind of forecasting is hard for currencies. But what do you see over the next few months? Call it the next half year for the dollar. Is it going to continue the trend or do you think we should see a reversal?

B (9:22)

So we do think the dollar will continue its trend downwards from here to the middle of next year. And I know, I know there's been a lot of discussion, there's been a lot of debate around whether the dollar has basically stopped where we are. But the thing is, going back to what you mentioned around the path for growth in the U.S. and unemployment in the U.S. if we do see softer economic data in the first half of next year, that can drive the dollar downwards. In fact, we're once again more bearish than consensus on the dollar by the middle of next year.

A (9:59)

Got it. All right, that's super helpful, Serena. Thank you so much for taking the time to talk with me today and let me ask the questions of you. Always a pleasure, Seth, and thank you for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

B (10:18)

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