How should I be positioned? with Eric Van Nostrand (Lazard) and Jason Draho (UBS CIO)
The desk's primary thesis is that interest rates have not yet peaked and may continue to rise, as articulated by Eric Van Nostrand of Lazard in a recent podcast discussion with Jason Draho from UBS. This perspective is supported by the evolving macroeconomic environment and expectations around Federal Reserve monetary policy, which indicates potential upward pressure on rates as economic conditions warrant. Per the full note , Van Nostrand emphasizes that current rates have further room to run, contrary to perceptions of stabilization. The implications for fixed-income positioning suggest a cautious approach as traders weigh the impact on the FX landscape amid these dynamics.
What the desk is arguing
The desk asserts that the trajectory of interest rates will remain upward through 2024, as echoed in insights from Eric Van Nostrand, who mentions that rates still have the potential to increase. The current macroeconomic indicators suggest that inflationary pressures and labor market strength may compel the Fed to maintain a hawkish stance, influencing currency markets accordingly.
A significant element of this hypothesis is the recent theme of client inquiries regarding fixed-income investments, where Van Nostrand states that interest rates have not peaked. This acknowledgement aligns with broader discussions around monetary policy adjustments and their potential market impact.
Where it sits in our coverage
Our consensus view targets the EUR/USD at 1.075, with a range from 1.04 to 1.12, reflecting the variance in outlooks from respected firms: - jpmorgan: 1.10 by Mar 26 - bofa: 1.04 by Mar 26
This view suggests alignment with jpmorgan, placing the desk at the upper end of the projected range, signaling a cautiously bullish stance amid underlying rate dynamics.
How other firms see it
Firms such as jpmorgan express a similar outlook, foreseeing a bullish trend for USD due to anticipated Federal Reserve movement on rates. Conversely, bofa maintains a contrarian stance, suggesting a more subdued FX environment with less upward pressure on the dollar.
As the euro-dollar rate is closely tied to the Fed’s interest rate policy, traders should also keep an eye on the dynamics of USD/JPY as an additional barometer of cross-currency trends influenced by rate changes.
What the calendar says
No imminent high-impact events are scheduled that might directly influence the interest rate outlook or FX market positioning within the next 30 days.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Interest rates have not peaked and may continue to rise, influencing FX markets.
- 02Fixed-income asset allocation remains a critical discussion point among market participants.
- 03The desk's stance aligns with a cautious bullish outlook for the USD against the EUR.
- 04Expectations of continued upward movements in interest rates shape fixed-income strategy.
Market implications
Traders should monitor EUR/USD for movement as interest rates adjust, with particular attention to the 1.075 resistance level. Also, any signs of Fed pivoting or economic data that suggests an unexpected rate stabilization could be pivotal.
Risks to this view
A significant catalyst that could reverse this positioning is a notably dovish shift from the Fed or unexpected weakness in economic indicators, leading to a reassessment of rate hike expectations.
Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. On this podcast, we do like to catch up with our industry colleagues and partners to discuss the market and macro environment along with thinking when it comes to asset allocation.
Joining me here from the UBS Chief Investment Office, glad to welcome back Jason Draho. Jason is the head of Asset Allocation Americas within UBS FSI. We're also excited to be joined today from our partners at Lazard Asset Management by Eric Van Nostrand.
Eric serves as Chief Investment Officer responsible for shaping and leading Lazard's investment strategy across the firm. Previously, Eric served as Assistant Secretary of the Treasury for Economic Policy during the Biden Administration, where he led Treasury's economic analysis of domestic and international policies. So with that, Jason, Eric, it's great to be with you both at the table today.
Thank you for dropping by and for spending some time with our listeners and clients. A lot to talk about, so looking forward to hearing your insights. Great to be with you, gentlemen.
Yeah, thank you for joining for the first time. Thank you. It's good to be here.
So a lot to cover. I know Eric may be beginning with the rate environment, which has been top of mind for many of our listeners and that's among other topics that we'll cover on today's episode. Questions that have come up a lot in client conversations include, have interest rates peaked?
Is it a good time to buy fixed income and have a position within the asset class? How are you at Lazard Asset Management thinking about those considerations when it comes to rates and fixed income positioning? Thanks, Dan.
Well, look, I'll give you a short answer and a long answer. Short answer is no, we don't think they peaked. We think they have some room to run.
Let me unpack what I think is really driving that. We're at really the first moment in my career and in the career of most professional investors working today where all the major conceptual drivers of interest rates, meaning what the Fed is expected to do, what inflation is expected to do, what the term premium, which is what investors need to invest in long-term debt, what that's going to do, all three of those main drivers are cutting the same way and cutting toward higher interest rates. I think it's actually the first time in the macro environment of most investors working today where that's been the case.
We see global central banks being kind of cajoled into tighter policy on the back of rising inflation expectations, but we've also seen supply constraints increase that structural inflationary impulse beyond what the Fed can control at the near term. At the same time, these worries about government fiscal sustainability are making long-term debt cheaper. It's making it more expensive to borrow at long horizons that has been the case historically.
I think those are the three drivers that explain why rates have been rising this year and here's the key point. I don't think any of them are about to stop. I think the push toward higher structural inflation and central banks that are going to be a little behind the curve catching up to that at the same time that concerns about global fiscal sustainability are getting worse, it's going to persist and that points toward higher for longer long-end rates.
Jason, with that, I know you have your views talking about this very topic. In your client conversations, what's the view of the Chief Investments Office? Well, I want to caveat my comments by saying that we're recording this on Monday morning of November 9th.
That's a good November. That's an important edge. So at the moment, the 10-year treasury yield is slightly below 4.9%, like 4.88%, something like that, down significantly from the 5.3%.
So I think the answer like three weeks ago, I might say it's close to the peak and now it's clearly pulled back. I would agree with Eric in that when I think about what's driven rates higher this year, it has been primarily because of the better macro conditions, better growth, but also just consistently high nominal GDP growth. That's something that I've talked about on the podcast that we are in somewhere between a 5% to 6% nominal GDP growth environment and that has been surprisingly, to some people, kind of resilient for this decade and I think that will continue.
In terms of really kind of very near term, and this is getting more nuanced, I would have said the 10-year probably can't go much higher than 5.3%, 5.4%, maybe 5.5%, in part because it was rising significantly because growth expectations and inflation expectations were being revised high just because the economy was doing better than expected. To keep going higher towards, say, drifting towards 6%, you'd need to be like, actually we are going to be growing at 3% indefinitely and the neutral Fed funds rate is something closer to like 4.5% or 5%, which I think not many people would be in that particular camp. Not to say it's completely off the table, but I think that's the scenario.
So to go beyond that, if you really are kind of thinking the Fed needs to hike more, it's because they need to get inflation down. So you almost get a situation where like, well, now the Fed basically needs a recession or something close to it to get inflation lower, so the yield curve would emerge. So I say that in the context of, I think where we are now is probably the low end of a range that will persist for the time being, again, using the 10-year from 4.9, that's our official forecast for the end of 2026, and could easily go back to 5.2%, 5.3%.
I don't think it's going to go much lower than that, but that is kind of the general kind of view of where we are. So low end of the range, and probably this is a range that will exist for a while. So I just want to maybe unpack some of these key factors.
So to me, it's like mostly a good economic growth story. You mentioned long end rates, and so there's a difference between the 10-year and the 30-year, and the 10-year, there's investors who buy it, 30-year feels like it's a bit of a widget. Intellectual price.
Yes. So when you think about that is, sure, the 30-year could go to 6% or higher, but do you think that's actually reflective of the economy, or is it reflective of something else, and is that sort of doing its own thing, and it's not really indicative of where rates would ultimately kind of settle out? Yes.
So I think it's a great question. I think it subsets the question about fixed income markets right now, and your phrasing of it was elegant. Thank you.
I intended that. But is it reflecting the economy? Because I think what we mean by the economy in that context is changing pretty quickly in terms of what the drivers of fixed income markets are.
And stepping back for a moment beyond fixed income, the big macroeconomic theme of our year at Lazard is what we're calling the new supply-side era. Our CEO and I just put out a paper that unpacks that for an academic audience and intellectual audience a couple of weeks ago, and we're thinking through now what all the investment implications of it are. But the bottom line of it is the following, that most of the variance in asset prices over the past 20 years and log-in rates at the front of this have been driven by questions of demand management.
How much are consumers going to buy? How much are businesses going to invest? How much are governments going to stimulate it to get us out of whatever recessionary hole we're in?
And what we argue in this paper, and this is central to our view on log-in rates, is that the drivers of asset prices are shifting since the pandemic, but most acutely since the salience of AI really surged three, four years ago towards supply constraints on both the upside and the downside driving asset prices. We've got supply-driven optimism from AI, so everyone gets more excited about the economy's ability to produce more stuff with a positive technology shock, but we're also having a lot of downside supply shocks. Karate oil is an important one, but another less maybe salient one, but one that's really important to fixed-income markets is the fiscal story globally, but especially in the United States.
Not a new story by any stretch. The U.S. has been in fiscal trouble for a long time. It forecasts to get in a much more difficult position, but I think part of the move upward we've seen in rates this year, and I agree with you, Jason, that the kind of growth and inflation story is the primary driver, but I think it's been exacerbated by an increased focus in the asset owners who play at the long end, not just the 30 years, but the whole 10- to 30-year sector of the yield curve.
By a recognition that maybe the optimism that DC is going to fix its fiscal issues is maybe a little bit overplayed, and I think that's contributing to some of the upside we've seen in interest rates, the downside we've seen in bond prices over the course of the year. That's what gives me pause and I think makes me a little more worried than you about the near-term rate path at the end of the day, because I'm worried that's the sort of thing that compounds and gets worse before you see a policy-driven impulse to rate it in, and that's why I'm a little more nervous about, tactically, how far along that in particular could go. As you're saying this, thinking about at least two ways to think about drivers for the long term, beyond the macro environment perhaps being better and the rates overall should be higher, because you're just higher growth rates.
There's one element that is just almost a pure supply-demand for capital, like in economics 101 through the year, like ISLM curves, like supply of savings versus investment needs. One of the narratives this year, particularly in recent months, is the competition for capital, the amount of money that's being requested by hyperscalers and other companies to do AI build-out, large deficits, so there's the demand for capital versus the supply. It's actually shifting.
It's going up. For many years, it was like savings. How much is that demand for capital driving up rates, and the question, and there'll be a question, don't worry, of all the demand for AI-related investment, how much is that actually contributing to the rate rise?
If you actually try and quantify it, what would that be? The second part of this, which I think your question was sort of alluding to, is almost more of the risk premium that our investors demand, the term premium for buying long-end bonds, because ultimately, you don't have confidence in governments in the U.S. or around the world to deal with these fiscal challenges, and so I guess between those two factors, we'll start there, and I have some follow-up questions of how much do you think of it as just there's demand for capital, a lot of demand for capital from both the public and private sector, and so that just has to drive rates higher to sort it out, and how much do you think is a risk premium argument about the long-term sort of fiscal situation and borrowers of long-term government bonds say, we just need to be paid more because, frankly, we don't trust your ability to navigate this difficult fiscal path? Yeah.
Well, first, let me say it's a blast to be in a podcast where you're allowed to say ISLM curve out loud. I find most communications professionals tell you not to say things like that on podcasts like this, but that means it's an intellectually serious price, and I appreciate it. Our listeners are very, very smart.
I like it. I like it. I think both of those factors, Jason, I mean, I think obviously both of those factors are important.
I tend to think the former factor, the supply and demand for capital, is the larger explainer of what we've seen to date, but the second factor, the lack of trust that global investors, particularly sovereign reserve investors in the global south, those that are really going to drive in the marginal allocation of capital in the long end, I think that lack of trust is going to rise in importance going forward. So even though I think the AI capital demand story has been a big part of what we've seen year to date, that's commensurate with the growth drivers of what we've seen year to date, I am nervous that this lack of trust narrative is going to intensify in a meaningful way. The way I think about it, and this is one of my favorite charts in global economics, and it's hard to describe a chart in an audio podcast, but it's an important point, which is that if you look historically at what the 10-year interest rate did from the end of the big oil-driven inflation in the late 70s, early 80s, through to the pandemic, you see something that looks rather impressively smoothly like a straight line down, as you acknowledged.
The point that I love is if you look at over that 40-year period and look at what economists and investors were saying was going to happen to interest rates, basically at every point along that period, the consensus was for that long downtrend in rates to reverse and expectations to pick back up. And economists and investors alike were pretty much persistently wrong about that for 40 years. The reason why is the global savings fund that Jason asserts, that the big structural supply and demand capital picture wasn't getting picked up in those forecasts.
Now it's easy to look at that history and then say this time is different, but I do think we've clearly seen a structural break since the pandemic, where given the dynamic around AI investment, that savings-led picture has reversed. So there's a part of me, and this is obviously a little speculative but a little bit data-driven and we should be, as forward-leading investors, the nexus of those two things, a little concerned we're not going to see the opposite pattern, where it's going to be easy for investors to be kind of calm, that we'll get a normal retrenchment in yields, but that this persisted capital supply and demand problem combined with a worsening fiscal picture, not just in the United States but globally, is going to keep structurally pushing rates up. So I don't challenge the economics, I challenge, or I can ask the question on the policy response.
So you get there, this is unsustainable for governance, the U.S. government, you could look at the fiscal projections just from the CBO. So the logical, or the conclusion that many investors withdraw is that the only way around this to solve the problem is financial repression, meaning there's some sort of policy measures to try and suppress interest rates, we've seen this before. In the summer, at the FOMC meeting in July, after sounding very hawkish in June, Kevin Warsh and the FOMC did not raise rates and the explanation was unsatisfactory for the markets, I think that's a kind way of putting it.
And then in August, you had the Treasury with Scott Pessant, Treasury Secretary, announce this buyback problem of buying back long-due-to-bonds. Small amounts, not a game-changer, but to me, I think the market took it as a sign, this is a baby-step towards a sort of financial repression argument, because ultimately you cannot have 10-year yields of 500% or 30-year and so on, you have to get whatever, by whatever means, you create regulations, changes where the banks just have to hold more capital and they're going to hold treasuries. So how do you kind of weigh that consideration and think, okay, is it the surge and ultimately this will be, at some point beyond that, some suppression, if so, what does that look like?
And so how do you think that whole cycle of rates rising and staying or coming down because of the policy response? Yeah, I think that's the right kind of vector of tensions with which to discuss this, right? The way I think about it, and I worked on this closely when I was at Treasury and this is how we thought about it, just on a matter of pure arithmetic on the fiscal picture, the problem has gotten big enough, the extent of what the, not even necessarily the deficit today, but what the aggregate deficit is going to do to interest expense on the debt over the next 10 years.
There are only three options to structurally get to a place that's clearly more sustainable, that's not just messing around on the margins. The first is raising taxes on the middle class. There's not enough income in the richest parts of the income distribution to close the fiscal gap.
If you're trying to solve this with tax policy, you have to hit the middle class. You can reduce the entitlement spending, Social Security and Medicare, that we've already in our social contract kind of told people they're going to get and brought them up for decades contributing to. Both of those things are politically impossible to imagine any sitting elected official saying they endorse.
And that's why you see such focus on the third option, which is hoping we get a bailout from long-term interest rates, which can allow us to afford a larger deficit in the long run. And I think what we've seen through the Trump Treasury's experiments over the past almost two years now is that the U.S. government, certainly not the U.S. administration outside the Federal Reserve, you know, has the firepower to actually create the magnitude of financial repression that would be necessary to change the fiscal picture. You know, at the beginning of 2025, the Treasury Secretary said, we view the 10-year Treasury yield as a policy instrument, and we are going to be reducing our policy instrument, trying to draw an analogy with the way the Fed operates at the front end of the curve.
And that obviously has not been successful, just looking at the market prices, and you can see closer explanations of – closer illustrations of that over the past couple months with some of the small buyback programs and the market's reaction to them. So I'm a pessimist that even the Fed, which it could try to do by a balance sheet policy, is going to have – is going to have sufficient control over the 10-year yield to really make a dent in the fiscal picture. That admittedly leads you to a pretty pessimistic place about the state of global fixed income markets because if you look back at what I just said, I just said there are only three options and they're all off the table for various reasons.
The fourth option is a much clearer bond market rejection of the status quo that looks much more like a spike, like a crisis, than the upward pressure yields we've seen this year. And I just – from a pure perspective of political economy, of what drives policymakers to do the things they do, I'm worried that it's going to take a crisis-level spike in bond yields before policymakers do anything about the issue. And that's what's got me nervous about fixed income right now.
I think history would tell us that when it comes to fiscal matters, countries, politicians don't take action until it's – the markets essentially force their hand because it's a difficult fiscal situation. But we could talk more about the fiscal dynamics rates. The one thing I would say is Japan, the Bank of Japan was the first to do some sort of form of quantitative easing, which ultimately the Fed followed during post-global financial crisis.
Bank of Japan did yield curve control. We may follow that path later on. It's like they'll just say, we're buying every bond that keeps the 10-year treasury not going above 3%.
I don't – I'd say it's a high probability. I think it's on the table of the realm of possibility. But I want to pivot because I know we've already used up a chunk of time, but sort of a related topic and it's AI because frankly, if you think about to me, like the two big questions I get when I talk to our advisors or our clients is on fixed income, like kind of what to do.
Are rates going to go higher? How to sort of navigate that? The second part is AI because it's such a dominant story and they're not unrelated because part of why I think rates have gone higher this year is because the investment story has been so strong that it's led to higher growth that's led to higher rates.
So there's kind of an endogeneity there. That's the near term meaning next one, two years of a lot of AI investment. But ultimately, the aim would be this transition to higher productivity growth.
And if you have higher productivity growth, well, then you can also grow faster without generating inflation. It may mean rates are higher, but it's like kind of the good reason why rates are higher. It does seem also like the Trump administration and also perhaps Kevin Walsh who's talked about this in terms of the AI story, like kind of looking at the 1990s, maybe fingers crossed that this is going to repeat of the productivity boom.
That was the dot-com era, the internet, this will be the AI era. So there's a lot to kind of potentially kind of unpack. So one in just in terms as you think about maybe the economics of AI for the macro perspective, like investment versus productivity, how do you think, how do you see this playing out and how do these sort of work hand in hand or, you know, positive or negative feedback loops?
Yeah. Yeah. So the investment versus productivity framing, I think is a really important one that I appreciate you bringing up because I think it often gets lost and those two things get conflated in the market narrative where we talk about AI as if it's one thing.
It's way too important right now to be thought of as one homogenous market force and different parts of it operate at different time horizons. So let's split it up like you did into investment and productivity. It's kind of an analogous divide into what we would call as are the demand impacts of AI in the near term, how many more groundbreakings we're going to see on data centers, what is the actual profitability picture of the frontier labs?
All those questions are important, but to my mind, the bigger source of variance in asset prices over the next decade as opposed to the next couple of months is going to come from the supply side components of AI, which is the productivity shock. How much more output are we able to produce as an economy because we have this technology? And for this technology in particular, because it takes the form of, you know, it takes the form of something that's actually easily transferable at the end of the day.
The markets are just, these models are just long, very long, but very long vectors of quantitative parameters that as we're seeing with some of the Chinese models, the open weights models are able to move around and be tweaked and fine tuned quite easily. I think that even in some of the more pessimistic scenarios for the frontier labs, some of the more pessimistic scenarios for how much data center investment we're going to get over the next year or two, we're still on the inflection point coming just before a globally historic upside productivity shock, right? And that's why we, it's a big part of the reason I talked about some of the downsides of this new supply side era in our fiscal discussion.
Yeah, productivity boom is to me the principal upside of the new supply side era in that it's going to make everybody more efficient. It's going to solve the big problems that we haven't been able to figure out on the technology frontier in a very meaningful way. I hold that optimistic view, even frankly, as I'm growing at this particular moment as we're sitting here in mid-November, more worried, more pessimistic about what the impact of AI on our near-term GDP figures, on the near-term growth impulse is going to be.
We have, you know, a growth in investment that is still, we don't talk about as much as we did, you know, say in 2025, but it's still crowding out a lot of the traditional kinds of investment in CapEx and structures that has historically been an important boon to American economic growth. And as enthusiasm for building more and more data centers slows, it's not going to stop, but I do think it's going to slow, both because businesses are starting to get a little more risk aware of the returns to incremental investment from here. And as many have discussed, one of the big surprises in the midterm elections was the extent to which governors with an explicitly anti-data center view have increased their power pretty meaningfully.
And I think both of those two things will lead to a bit of a disappointment relative to the currently sky-high forecast for how many more of these things we're going to build over the next couple of months. And that does create some risk, I think, in some of the equities that are heavily linked to that impulse. But I want to be clear, that's a very different view than being pessimistic about what this is going to do to supply-side growth in the long run, where I think we only continue to see upside surprises.
I mean, we see it in our personal lives and the way we use technology, the technology in ourselves. I've just been personally consistently surprised by how good it's gotten so quickly. I remember two years ago, there was a lot of headlines about the frontier chat GPT model couldn't count the number of hours in the word strawberry.
You remember that? It wasn't that long ago, right? And now it's doing, you know, it's solving open results in math that the frontier flesh and blood mathematicians haven't been able to do.
And that we're not good as investors at reckoning with that pace of change. It's exciting. So on the AI data center, given your background work in the Biden administration, you know, one of the market responses that sort of, you know, really hit the fan on Thursday was the potential constraints on AI data center build-out.
And you know, I think what surprised the markets was not that the Democrats got to both the House and the Senate in DC, but the change, particularly in Texas, that was the surprise. So there's an element where, you know, the worst case scenario is like you have regulation that's going to grind this to halt rather than sort of kind of, you know, kind of reform it to some extent. And my sense is that at least in Texas, the approach would be, you know, we're supportive of AI data centers, but there has to be benefits for the community.
So making sure that it doesn't impact electricity demand, water consumption, you know, constraints on the grid. But I'm sort of looking at this from the outside and have no insider aspect of that kind of what policy discussions have been taking place. But my reaction is that the markets may be too pessimistic on how much this could curtail investments.
Given your sort of, you know, history in the policymaking world, is like on a 1 to 10 scale, like no concern whatsoever versus like it shutting down, like how, you know, how concerned would you be in terms of like this change in policy environment? Yeah. I agree.
I actually, I agree that the political focus on, I agree that the market's focus on politics slowing down data center construction is overdone. I do think it's going to slow. I think it's going to slow organically.
I'll probably blame politicians as an excuse for it, if you will. But I think the actual impact of the political change that's gotten everyone focused over the past week is overdone for the following reasons. And there's, you know, there's a kind of simplistic narrative from casual observers of politics that, oh, Democrats don't like, you know, Democrats don't like big corporate investment.
Right. I've worked for two Democratic presidents. There's always an important debate over the tension between those community impacts and the fact that there is a real economic benefit to the kind of growth that they deliver.
Right. And that's always a focus. And the point I'd make about these governors, yeah, they recognize the impact it has on the community.
And, you know, we're markets people that always want to see more growth. But I always think it's important to acknowledge the pain and stress and anxiety that those communities feel is a very real one. This is a radically different way of operating in communities that haven't had a lot of tech exposure before.
The governors are sensitive to that. They're paying close attention to it. It's why they're talking about it too much.
They also and here's the maybe cynical point. They also really like tax revenue that benefits governors politically, too. They like jobs.
And one can say, well, data centers have, you know, fewer human jobs associated with them than an auto factory of the same size. But there actually is, particularly in the construction phase, a lot of relatively, you know, relatively high paying electrical engineering jobs and such that are going to bring with you. So I think what you're going to see is you're going to see these governors go on TV and talk about how important it is to rein things in and use big words like moratoria, but you're going to see him looking for ways to politically let the investment happen, but communicate it to their communities in a positive way.
That's why you're seeing the headlines from some of the hyperscalers about, you know, giving a thousand dollars to every teacher in a community with the new data center. I think you're going to see a lot of that. But I think the the real opposition is is going to be less than what is feared right now.
That's my my optimistic point on this. So I kind of made a point on the podcast earlier today that there are other potential bottlenecks that are maybe more likely to cause a slowdown in investment, whether it's access to capital gets constrained, access to energy supplies, semiconductors, or just the demand for computers not nearly as significant as what is being developed. So it's not a game changer at the margin, it maybe has an impact.
So but then kind of I know we're already coming up close to time, so I want to kind of try and big picture kind of bring it back to ultimately kind of an investment view. Because you did mention like we're a little near term about, near term could be, let's say, next year. You can clarify that of how this investment story plays out, things will slow down.
Longer term, AR productivity gains. So there's a point where like I call it the cyclical has to pass the baton to the structural or secular. Exactly.
And ideally, you know, it's a smooth, you know, pass. You win the four by one head in the Olympics, and if you don't, you're, well, we don't have to say. There's also an interesting thing that, you know, going back to the data center constraints, anything that sort of is postponed, delayed, or more term, probably impacts investment in 2028 or beyond.
I think everything for 2027 is almost like that's permitted. I agree with that. It's faked in.
And so as a result, like the investment story for growth, the economic growth and also earnings growth is probably already done. And so the ironic thing is, as 2027 year ahead outlooks start to be published, it's almost like the market's like, yeah, we don't care about 2027, it's going to be fine. All we care about is 2028 and beyond.
Yeah. And so that is that sort of transition period. So there's an element given that, you know, the uncertainty about 2028, how then, and the market is forward looking, but this is really far forward looking, maybe more so than normally would be.
How then is you as an investor navigate, is this an environment like, you know, it's going to be rocky until we see the productivity gains or I'm willing to look through the rockiness because I think they will be strong enough, going back to the interest rate component, if you believe even some chance of like a financial repression, we've got to keep rates lower, like all is equal. And I don't necessarily want to own fixed income, I want to own assets that would benefit from higher nominal GDP, like equities. So given all these things combined and AI is central to all this, how do you think about, you know, kind of the next six, 12 month outlook, kind of beyond and like, where do you think the risks are appraised appropriately or not appraised appropriately across equities or other parts of the asset class universe?
Yeah. I appreciate the question because I think it's very important from your listening perspective. We can pontificate all day about the high and mighty long-term economics here, but the question, the most important question is, you know, what do you do out in markets today when you have these forces happening at different time rises?
And look, bottom line is I think different assets are affected differently by that near-term demand component and that long-term supply component, right? A central element of Lazard's identity as an equity investor, our whole – not since I've been here, but for decades, has been that we focus on quality companies. We identify companies with the kind of strong balance sheets that aren't getting their equity market returns from trying to time exuberant sentiment on any particular technology or sector, but that have strong competitive modes to deliver persistent earnings per share growth over time.
And a lot of the companies that fit that definition have actually been beaten down pretty bad over the course of the years as AI ebullience has risen up. And I think we're on the cuffs now. This pullback in the near-term demand investment in the technology is, I think, very well placed to benefit those groups of companies.
So companies that are, you know, they're frankly the opposite of sexy right now. Software names, the thing that's kind of easy for everyone to say six months ago, you know, was just going to get beaten down by AI. And by the way, structurally, if your software company's whole route to success was we've got the smartest coders in the world, we've hired the best computer science majors, and we just code artfully more than anybody else, that's a tough case to make now because the models have kind of eclipsed that scale.
But a lot of the software companies that have been hit so hard this year, you know, companies whose business models don't just rely on having the best code, but had real moats related to real barriers to competition related to the network effects of the data sources they use or the way they're kind of perceived by entire industries as being the singular providers of, you know, industry standard technology. Those moats were never in the code. Those moats were in the data and the network effects and the barriers to competition.
I think a lot of those names are poised to see an important rebound. So that quality factor, as it were, someplace I think we're going to see real meaningful outperformance. Geographically, I think one way to really benefit from that long-term supply side story, but benefit from it in the shorter term, is to expand your aperture beyond the big rich economies that most investors spend most of their time operating.
The emerging world, super important to Lazard's history and my work with the firm today, is a place where, you know, with some obvious exceptions, but in general hasn't gotten the gusto of the AI enthusiasm in the way that companies adjacent to American frontier labs have. So I think pushing out the emerging market frontier is going to be an important thing to do too. And what to stay away from?
You know, I think there's a lot of opportunity in being tactical and active management in fixed income, but I think controlling your exposure to duration in this very uncertain period for interest rates is, as you can probably infer from my comments earlier, I think very important to do right now. A lot to think about. I think, again, the idea of probably going and finding companies that could be somewhat immune, higher quality, when there's so much uncertainty.
Even this, you know, like we can make conjectures, but you never are certain, but I think it is the situation where I feel pretty good transparency about the next 12 months beyond that. It's the range of outcomes seems very, very wide from just AI, but, you know, other factors as well. I certainly agree with that.
Well, the time always goes quick. A lot here to follow up on, Eric, would be great to have you back at some point as we look ahead to 2027. But Jason, Eric, thank you both for joining our listeners, our clients here today on How Should I Be Positioned.
I appreciate your time and insights. Thank you both. Good to be with you.
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