Hello and thanks very much for joining the latest of our monthly podcasts where I'm going to share some of our thoughts around what's going on in financial markets from more of a macro perspective.

Obviously, the US election just a week away, and I want to cover that in a bit of detail. But before I go into the politics. I think it's worth just looking at what's going on in terms of the US economy and the bond market, because in many respects since we saw the Fed cut of 50 basis points in September. We've seen economic data continue to be really pretty robust, which was very much in line with the view that we'd been articulating for some time.

And I've got to say, on a recent research visit to Washington and around the States, I'm still struck by the fact that the US economy has a reasonable amount of momentum behind it. Certainly any sense that we could see a recession in the near term to me seems very unlikely, and I guess in that light the fact that the Fed did 50 back in September, in many respects sort of diminishes recession risk even further, doesn't it? And in a way, the Fed, wanting to prioritise the growth part of their mandate, perhaps a bit more than the inflation part of the mandate for the time being, again, has been taken in a relatively constructive light.

And that being the case, we've actually seen interest rate expectations and yields actually normalise over the course of the past month with rates moving higher. And it's interesting to actually observe where we're currently sitting.

If you look at what is currently priced as of today for the Fed. Across the next two policy meetings, you will see a cumulative 42 basis points of rate cuts. In other words, there is less than 100% certainty that we get two moves of 25 basis points at the November and December meetings.

I've got to say myself, I think that a move in November is very likely, I think, in a way, if they don't do 25 in November. It's almost like they've confessed to making a mistake in September, so there are a number of reasons why I think that they will do the cut in November.

Thereafter I think that you may still see a further cut of another 25 basis points in December. But there is a sense in which further monetary easing is becoming much more data dependent. And if the economy is just not slowing down, it's just not clear why this economy needs rate cuts stimulus at the current point in time. At the end of the day it looks like growth in the 3rd quarter could be above 3%. It still remains pretty robust for the time being.

We've got the equity market near an all time. High credit spreads are very tight, and so from that perspective, it doesn't really feel like the economy needs a lot of easing just for the time being.

But if that's the trajectory around the Fed, I guess the other part of the dynamic is where that leaves pricing in terms of terminal rates in the US. If you look at where rates are expected to decline to in this particular economic cycle. Now, we actually see the futures market discounting a reduction in interest rates down to 3.5%, which is quite a lot different to where we were about a month or so ago, where we were actually pricing and move in rates down to about sort of 2.7-2.8%.

So there's been quite a backup in terms of thinking around where the bottom of the rate cycle will be. And on the back of that. I think I've got to say that with rates expected to bottom around 3.5%, we think that is more or less reasonably priced at this particular point in time.

So, having expressed on many previous podcasts this desire more to be leaning towards a short duration stance, I think we'd say at this particular juncture. The pricing of US rates, at least at the front end, looks to be relatively sensible from our point of view.

Where we're probably more cautious, is still towards the back end of the curve, and I would say here that, regardless of who wins the election next week in the United States, whether it's Harris or Trump, we're going to continue to see profligate fiscal policy. We're expecting to see the fiscal deficit next year remain at 7% of GDP a massive fiscal deficit. If you think about it in the context of an economy that's operating at full employment from that perspective, we continue to see that sort of fiscal trajectory, not really adding or subtracting very much to growth next year, but it certainly is adding to the amount of debt which is being issued.

We're expecting this trajectory on the fiscal side to continue to put pressure on the curve to steepen, as investors demand more of a term premium for owning longer dated debt. So, I think that remains quite a structural view that we continue to have and I've inferred that I think that the fiscal paradigm is only going to change in the United States when cutting taxes becomes less popular. You might ask when a tax cuts ever going to become less popular. Well, I'd infer here, when you actually reach a point in time where cutting taxes pushes up interest rates, and people end up worse off. This will be a moment where actually, the idea of fiscal responsibility comes back into fashion.

But in order to see that you actually need to see quite a degree of steepness in the yield curve. First I think you probably need to see cash to thirties around 150 basis points steep, and it's only at that particular point that instead of people wanting tax cuts, you'll see more of a narrative where people are starting to clamour for lower mortgage rates, for example.

But until we reach that juncture, I think for the time being, that trajectory is one towards curve steepening. And if anything, as I've shared before, the fact that the US yield curve has been inverted over the course of the last couple of years has actually been a bit of a green light to policymakers to carry on going with tax cuts. Keep on going with profligate fiscal policy. So there you go. I think that's something that's going to be an ongoing theme as we move through 2025.

Now, coming to the election, we are a week away. Betting markets are pricing around about 60% probability on trump winning only 40% on Harris. I think that this is broadly realistic.

I'd note that in meetings in Washington, just over a week ago I met a lot of Senior Democrats and Senior Republicans, and I was really quite struck by the fact that a lot of those on the Democrat side were almost in a way conceding defeat, talking about what would be going on under a Trump Presidency. There was a bit of a sense in terms of recrimination. How on earth have the Democrats not ended up with a candidate who can beat this obnoxious person as they see him in their particular eyes, and the mood from the Democrat camp was very different to what we got on the Republican side, which was much more brilliant, much more upbeat. Quite a lot of confidence that their man is going to win.

So I do think that looking at the vote itself, expecting a trump victory at this point in time probably makes sense. Bear in mind if you've got polls, neck and neck somewhere in Pennsylvania. Actually, there tends to be a bias to underreport Trump support by about two percentage points. So, the fact that the polls look tied actually means that Trump is probably a couple of percentage points ahead. And if you look at the analysis, you tend to see that whoever winds up winning Pennsylvania has probably got a 90% likelihood of actually carrying the election at the end of the day. So that looks to be the direction that we're moving in.

As I've said, I don't think that this is going to be an outcome that matters that much to the US economy. I think fiscal policy is going to be largely the same, whoever wins. So I don't think there's a big delta there. But there is going to be a big delta on other things, a big difference in terms of what this means in terms of foreign policy. Obviously, a Trump win is not great news if you're Ukraine, or for that matter the European Union, perhaps.

Furthermore, I'd say that when it comes to trade policy again, Trump versus Harris is very significant. Now I think that, regardless of who wins, we're going to see more hawkishness on China. And so there's more tariffs going China's way, regardless of the outcome. Frankly, there's almost a desire to disengage China as much as possible from US supply chains and the US market, it would seem. But where?

Well, obviously, markets will be focusing on trump is the narrative around more of a global tariff that he's been speaking about wanting to apply a tariff of maybe 10% or even 20%. Now, I do think that having spoken to Senior Republicans, this is more of a negotiating tactic.

I think that sanctions will occur, but they'll probably be more targeted at specific sectors. But a lot of this is going to be aimed at trying to get concessions his way. There is this sort of deep belief that actually, if you're the economic superpower, you can get away with pushing a narrative of tariffs, because you are going to be forcing companies to relocate their investment and production into the United States, and this will end up benefiting the US economy and US jobs. And that's obviously the agenda that Trump wants. But at the same time, that's before we start talking about reciprocal measures that other trading partners may actually end up enacting.

But in this way I think that one of the observations I'd have on the US election is that the outcome here of next week's vote could actually end up mattering more to countries outside the US than it does actually inside the United States. Ironic, isn't it? But I think that in many respects we're all sort of subject to what's happening in the world's largest economy from that point of view.

And so sort of looking at things more from a European perspective for a moment. I think the other thing that I'm really struck by in terms of my recent meetings with European policymakers is just how depressed, how downbeat the situation in the context of the eurozone is currently looking.

Just today, actually, we've had an announcement from Volkswagen that they're actually looking at closing three plants in Germany because their cost base is way too high. They can't be competitive. Maybe that's not such a shock. But there's also an accompanying narrative that they want to enact a 10% pay reduction across the board for all VW workers.

It really shows you the dire straits that the German industrial sector is currently facing, not just in the auto sector, but in chemicals really, across the German economy. It was last week the Siemens CEO came out and said he didn't know who would want to be bothering investing in Germany at the moment.

And so this relatively depressed narrative, I think, is something that continues to be quite troubling to or very troubling, I should say, to a lot of senior policymakers we interact with.

And in some ways there's almost more of a sense of a depressed state at the moment than we actually discerned in our conversations. Going back as far as 2008, or 2012 at least. At those times there was a bit of a sense of there were tools available to the ECB that could actually address the eurozone sovereign crisis, for example.

In a way, it was just a question of actually corralling the political support. And then, when Draghi said, I'll do whatever it takes. the problems largely then started fixing themselves. But in the context of the current economic climate, I think there is more of a deep stated structural concern around the narrative in Europe.

And in a way there's almost this metaphor in Brussels around Europe, almost being like the boiling fog that is kind of withering away and really struggling. And from that point of view, oddly enough actually, if we end up with a Trump win, it could actually deliver the shock that Europe needs to actually get stuff done. In a way, the problem with the boiling frog is it needs a crisis moment to actually jump out the pot, doesn't it? And so, there is just a chance that although Europe may throw its hands up at the idea of Trump winning.

Actually, if that actually corrals Europe together in a way that actually drives more assertive policy action, it may actually be the sort of shock therapy that Europe perhaps needs. But we'll have to watch this space.

Otherwise, I would note that when it comes to monetary policy in the context of the eurozone it looks to us as if the ECB is in the process of accelerating rate, cuts at the same time as the US perhaps, is slowing down.

And indeed, in that light. If you look at what is being priced into the ECB in terms of the next two policy meetings, I think you see a cumulative 64 basis, points of monetary easing being priced. In other words, one move of 25 plus possibly one move of 50 basis points across the next two meetings.

And I would infer that if we see a Trump win, I think that likelihood of a 50 basis point cut from an ECB in December, perhaps, becomes more likely. Lagarde is quite an astute political operator. In a way, I think, that, given the narrative, that Trump has been sharing this idea that you end up with tariffs being applied to European exporters.

Given, the European economy is reliant on exports, is obviously going to be bad news, and in that way, if Lagarde goes bigger on monetary easing earlier, gets her revenge in first, in a way, might not be a super thing for her to be doing, particularly if that ends up weakening the euro. Actually, that could actually limit the US President's room for manoeuvre once he takes office in 2025. But we'll have to have to see how that plays out.

I do think that in the context of Europe we also likely to see this theme of yield curve steepening. But whereas in the US I see curve steepening really being led more by the long end of the bond market, the 30-year asset more selling off and heading up towards 5% at some particular point in the future. In Europe we've seen curve steepening as a theme, really being led by the front end of the curve, moving lower in yield. As the economic news has tended to be relatively disappointing.

Otherwise, in the UK we've got a big week ahead of us. Rachel Reeves, or, as some people have been calling her, Rachel thieves, maybe a bit unkindly, perhaps, but we have this upcoming budget in which we're expecting to see a slew of tax rises, but also a desire to actually increase investment spending.

Now, labour have done a lot of fiddling with the fiscal rule and obviously have wanted to create fiscal space in which they have got an ability to actually implement some of the agenda that they would like to get done.

The one problem or the two problems that labour faces is. Firstly, there's a bit of a building sense that they don't really know what they're doing. They've had ages to prepare for winning the election that they won earlier in the year. It hasn't really felt like they've had a very coherent plan. They're still floating 12 balloons, and their plans haven't really coalesced, and the fact that Starmer and colleagues have been having a bit of a tough time of it. His approval rating has plummeted in a way, is actually undermining the market's confidence and trust in the ability of the UK Government to actually deliver. And that sort of trust element is kind of important, because if the market doesn't trust, it won't give the Government the fiscal space that it wants.

Secondly, of course, a lot of Rachel Reeves plans around these budget numbers have assumed that interest rates and bond yields would be falling this year and also next year. But the fact that they haven't done so is actually, when you look at the numbers even more cramping the ability for the labour to actually spend very much, even if they are sort of raising taxes.

And so there's a bit of a sense in which Reeves is walking a bit of a tightrope. I'm hoping that she doesn't sort of fall into some of the mistakes that we saw in the Liz Truss era. I'm thinking that should be unlikely, but still, I think that the fact that the market is scrutinising her every move as carefully as it is really going to mean that we probably end up with a budget which is very modest in terms of its application, and the danger here, then, is that labour so far have been quite united behind Starmer and Reeves. But if it becomes apparent that they're not getting the agenda done that they wanted to see, deliver, then that could actually create more infighting, more difficult times ahead.

All of this said I continue to be a bit downbeat on the UK economy. I think that sort of being short, the pound here is probably an interesting play. But otherwise in terms of UK rates, not a lot to say. I think that the Bank of England we know that Bailey wants to cut interest rates. We know that he's dovish. The last inflation number was a good one, and so I think he will in November, but still, I do see that UK inflation is going to remain sticky, remain problematic.

We've got service inflation still near 5%, and also lots of pay rises, including pay, rises in the public sector in an economy that doesn't really have a lot of productivity growth that feeds back into inflation. And so again, I see a limit to how much UK rates are really going to be able to come down over the course of the year ahead.

Moving over to Japan. Another general election to talk about. We've just had one this weekend. LDP has lost its majority. There's going to be, I think, a minority LDP government that actually leads. Now, people have been asking the question, what does that mean? I don't think it actually means very much. I think the economy is continuing to move ahead relatively well, monetary policy fiscal policy remains stimulative and with wages moving higher, we continue to see the BoJ on a path towards normalising rates.

We've thought that because of this election that they can't really do much at the BoJ meeting that's taking place later this week. We think the next rate hike has probably likely tied in with their next quarterly meeting, which will be in January. But if the yen is coming under a bit of pressure in the interim. That means that a December move becomes much more likely.

But there is certainly this narrative that if you think about it in Europe, you're actually seeing an acceleration of rate cuts. At the same time rates are going in the other direction in Japan, and as that interest rate differential narrows, we do think the euro yen as an FX pair is looking quite interesting from a structural point of view. So, we've been starting to put our toe in starting to build a position in the yen. From that perspective we continue to contend that the yen is very cheap from a valuation point of view.

Also a few words on China, because China has also been in the news in terms of its recent policy stimulus.

There was a couple of days when everything in China went up very nicely. It's come back down a bit since, because, in a way, I think that China has tended to be underwhelming in terms of what it's doing in terms of policy delivery. Making it easier to buy a house isn't going to fix the property market but that the Chinese are facing themselves in easing monetary policy by 20 basis points, again, isn't really going to amount to very much.

Chinese interest rates should be at 0% already. The one thing that could move the dial would be fiscal policy, but the extent of their ambitions remain quite limited. Also, there's always this desire to actually prioritise production and manufacturing and investment. But there's almost like this belief that the Chinese think that they can export their way out of their problems when they can't, because the rest of the world doesn't want more cheap Chinese imports. You really need to see Beijing do more to actually empower the consumer, we think, in order to become more structurally upbeat and constructive around the Chinese story. And so, from that point of view, we continue to see China still struggling over the medium to longer-term.

With that I'm mindful of time. A couple of quick words on credit. We've retained a pretty constructive view all year. If you don't think there's going to be a US recession, credit's going to okay. And that's continued to be our view. And I think many other investors have tended to be more cautious on credit, and they've moaned that credit spreads are too tight.

But the thing you need to know about credit spreads. It's not just the valuation of the corporate bonds. There's the valuation of the government asset, and the government asset has become cheaper and cheaper because there's too much supply. You can see this in looking at moves that we've seen in swap spreads.

And so, from that point of view, although spreads may look optically tight, we think they can go tighter steel, particularly because we continue to see investors putting more money to work in fixed income. That corporate supply just isn't growing in the same way that government bond supply is growing. And from that point of view the technical continues to be quite constructive. So we're happy to retain an upbeat credit Beta view.

And we've also seen a nice outperformance of cash bonds relative to CDS on a basis trade. I think the one thing that we'd be saying is, as we go into next week's vote, we've been sort of flattening out risk to a degree.

Obviously, the US election is something that can be a catalyst for market volatility. And albeit we have tended to think that Trump is likely to win, we have to acknowledge that if you go back to the time of the 2016 election. on the eve of that election the betting markets only gave an 8% probability of Trump actually carrying the day, and yet he did so. We want to be prepared for every eventuality and different outcomes, and having seen a good run-in markets, booking some profits and flattening some risk out to us has made a degree of sense.

Otherwise, I think the other thing to say which I sort of covered already is, we think that in terms of our conviction, views here being in curve steepeners being short duration in Japan being a bit overweight, the dollar flattening out some of our risk in emerging markets, because EM or some assets in EM may not do so well on a Trump victory.

We've already seen things like Mexico under pressure. So, I think that being prepared for any eventuality is kind of where we want to be positioned, so that if there is a spike in volatility, we're well positioned to take advantage of it.

With that in mind I've spoken for, there you go bang on 25 min. I've tried to move as quickly as I can across the narrative there. So, I'm now going to be jumping into some questions, and we've got a number of questions coming through, and I'm going to try and fire my way through these as quickly as possible.

The first question I had come in so someone is asking a question around a paper that Rubini did regarding activist Treasury issuance.

Now, the gist of this is actually what we've seen the US treasury doing over the course of the past year or so is issue more and more treasury bills and less longer data bonds. And the thesis is that in a way that the US is cheating, because by doing this actually longer dated bond yields are a lot lower than they otherwise would be. And I think the answer to this is in a way, yes, you're right. If there was a lot more long-dated issuance right now, you would see longer dated, yields higher.

Almost certainly I think all of that said. If you're a point in the economic cycle where monetary policy is restrictive and above neutral, the idea that you actually shorten the maturity of your debt. Stock makes a degree of sense, albeit there are limits to how far you can actually take this if you end up issuing more and more bills and shortening the maturity profile all the time. You start becoming more vulnerable to refinancing risk, because you're having to roll that debt over ever more frequently.

And so, from that point of view, as the volume of debt gets bigger and bigger, you are going to need to issue more longer dated bonds. I don't think you can just go down the path of actually seeing this come through on the back of the idea of all of this is going to be bill issuance. And bear in mind as well that in a world where yield curves are inverted, you're having to pay more for those bills as the US treasury than you would be if you are issuing longer dated bonds for the time being. So it's a bit of a double edged sword. So it's a factor that's helped this year, but not so sure that's going to be something that dominates in the year ahead.

So a question on the US election and our playbook. Are there specific levels on the 5, 10, and 30 year where we would expect to add positions?

So, look from my perspective I think that the front end of the curve is looking pretty much fair value. If we saw the US two year above 425, going towards 450. Actually, we might want to be longer. The front end at that particular juncture.

Given all of the economic uncertainty that is still ahead as we look longer term into where we might be in 12 or 18 months from now that said, when it comes to the back end of the market. I probably thought that the right level for the 10 year is a level around sort of 4 and a half, and so I'd only be wanting to buy US 10 s. If we got closer to 475, and I probably wouldn't want to be long of the 30 year point of the curve below 5%, albeit we might be looking to close some of our shorts in advance of that. But certainly, from my perspective, more enthusiastic, buying the front end than the back end.

A question on EM local currency versus hard currency. So I think that sometimes in EM it's difficult because there'll be winners and losers in something as broad as emerging markets. I would say, structurally, I like the valuation of EM local. A lot of real interest rates look very attractive superficially. You've got something like Brazil with yields at 12 and inflation at 4. What's not to like about that?

Well, I guess the problem here lies in the politics, and the problem lies in the fact that the rail has been trading a bit weaker. And if we do see Trump in the White House. I think it could be sort of a more difficult environment for EM, more generally, certainly through the lens of a stronger dollar. So for the time being I think that structurally we want to be a bit biased towards EM local currency versus hard currency. But the general theme for the time being has been flattening of risk taking less risk in EM just for the time being, until we know the outcome of the vote next week.

Next question was GS has written that they expect a 3% annual return on the S&P for the next decade. We saw an average of 13% over the last decade. Thoughts on that. Well, I'm a fixed income, guy, not an equity guy. I think the idea that equities are only doing 3% a year over the next decade would suggest that equity performance is going to be underperforming on more of a structural basis.

The one thing that I'd say, though, about equities is that ultimately equities are a play on corporate earnings, aren't they? And if you end up with the economy growing at 2 or 3% a year. And inflation's 2 or 3% a year. You end up with nominal growth at 4, 5, 6%. And given how balance sheets are levered. you'd expect, therefore, to see corporate earnings may be growing at 8 to 10% a year. I could well see that being the case.

And so from that point of view the idea of 3% a year on US stocks seems a bit too bearish, though of course, there's the argument that the starting point in terms of the valuation in terms of the PE today is the wrong one. But that's a difficult argument to get into. The one thing I would say, is that equity markets as well as credit markets bluntly have done a very good job of climbing the wall of worry. There will always be reasons to hate the valuation and hate the asset class.

But at the end of the day, sometimes you end up in a situation where the price keeps on going up. And the one thing you'd say about the US is the US economy continues to grow, doesn't it? At a time when the rest of the world is struggling. And so yeah, sometimes people refer to TINA. There is no alternative as an investment strategy, but the idea of US exceptionalism driving growth is a reason why you can't be as bearish of US stocks as you might want to be at this moment in time. I think that to get properly bearish on US stocks, you'd really want to have a much more bearish view on the economy.

In terms of China valuations, how to time the Chinese market, the Lord only knows right? I think that in a way, there are short term momentum plays which, if you can catch good on you, there's been one of those recently. I think for the time being, I think that we might be in a phase where you end up with a bit of disappointment, a bit of underperformance coming back in, and then you're almost like trying to catch the next wave of the next set of policy announcements which I'm sure will end up coming, won't they at some point in the future. Because I think that ultimately China is going to need to do more.

Am I worried about the Fed's independence being eroded. Well, not really right. So, Trump can't get rid of Powell. He could actually nominate someone else who's at the Fed to be the Fed chair. But the Fed wouldn't wear this. They feel very strongly about their independence, and actually, the more that trump tries to interfere, the more the Fed's likely to push back.

There are constitutional limits here, and the thing is that if Trump starts meddling, financial markets are going to freak out, aren't they? And the Equity market is going to go down. Bond yields are going to go up. Trump's no idiot from that point of view. He's not going to want to do things which end up damaging the economy. Of course he would like to see lower interest rates, but if he wants to see lower interest rates. Ultimately, we need to see lower inflation in the US which, again, is the reason why tariffs may be a good threat to have rather than something that he ends up wanting to implement.

Lastly, I've got a question on how I see recession risk in the US. I think here the last thing to say is, there's just a lot of uncertainty in geopolitics, in domestic politics, in the economy. And so, I think, from my point of view, I can say that recession risk in the United States is very low over the course of the next 2, 3, 4, 5 months. That's kind of the investable window that I can see into with a degree of some certainty, and I'm trying to invest in.

Trying to ask me where the economy might be in 12-18 months from now. Who knows? And there is a nightmare, of course, that if you do end up in a recession at some later point, you're going to end up with a fiscal deficit that's even worse.

There won't be room to ease fiscal policy at the same time. You might then need to cut interest rates more. But we've seen in the same way that interest rate hikes as the Fed has been tightening have not really had much of a bearing on the economy. It could well be that if you end up in a really bad economic scenario and the Fed needs to cut, it may be difficult for the monetary policy to get traction again then as well.

So, this is something to bear in mind, perhaps, as a dark scenario, as I'm looking at the dark sky behind me. But this isn't what we're playing for in the here and now in the here and now we're investing for what we can see over the course of the next few months, and from that perspective we're still inclined to think that we can end up with a constructive end to 2024.

With that. Thank you very much for joining today. Appreciate the questions. I hope some of this has been informative. Good luck in the markets and speak to you again in a month from now. Thank you. Goodbye.