How should I be positioned? with Jeffrey Sherman (DoubleLine) and Jason Draho (UBS CIO)
The desk is tracking shifts in the geopolitical landscape and their implications for monetary policy and fixed income, as discussed by Jeffrey Sherman and Jason Draho. They highlight that the current macroeconomic environment, influenced by factors like artificial intelligence, presents unique investment opportunities. Per the full note source, the evolving dialogue around interest rates and market dynamics indicates that positioning should be adaptive to these changes. The desk notes that understanding these elements is crucial in shaping FX strategies, especially as they relate to broader market sentiment.
What the desk is arguing
The current geopolitical landscape is significantly impacting investor sentiment and market behavior, suggesting that traders need to be nimble in positioning. Per the full note source, Jeffrey Sherman emphasizes the necessity for active management amidst a complex backdrop driven by both local and global factors.
The implications for fixed income markets are pronounced, with shifts in monetary policy likely on the horizon as central banks navigate inflationary pressures and economic uncertainty. This could influence currency valuations as well, necessitating close attention to central bank communications and macroeconomic indicators.
Where it sits in our coverage
Our consensus target sits at 1.075 in the EUR/USD pair, with a range of 1.04 to 1.12. Key firms provide insights aligning with this set target, including: - jpmorgan: 1.10, Mar-26 - bofa: 1.04, Mar-26
The desk's view aligns closely with jpmorgan, yet remains cautious of the lower boundary set by bofa due to the potential for continued volatility from geopolitical tensions.
How other firms see it
Several firms, including jpmorgan and bofa, present contrasting views on EUR/USD, with jpmorgan advocating for stability while bofa cautions against potential declines should economic conditions worsen. This divergence illustrates the challenging landscape for traders as they seek to navigate forthcoming volatility.
Given the relation of this insight to the upcoming ECB announcements, market participants should be vigilant about how these will affect EUR/USD valuations moving forward.
01Geopolitical factors are altering market dynamics.
02Active management is essential amid uncertainty.
03Fixed income trends are interlinked with currency strategies.
04Positioning must remain flexible to respond to economic shifts.
Market implications
Traders should monitor the EUR/USD pair closely, particularly as it interacts with the 1.075 level. Any significant breach or support at this level could dictate short-term trading strategies, especially in light of ongoing geopolitical developments.
Risks to this view
A significant reversal could occur if central banks signal a more aggressive approach to combating inflation or if geopolitical tensions escalate, prompting a flight to safety that undermines current positioning in risk assets.
ubs
Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. As you know, on this podcast, we like to catch up with our industry colleagues and thought leaders to discuss the current market and macro environment along with thinking when it comes to asset allocation.
Joining us here today at our new 1285 podcast studio, glad to welcome back from our partners at Double Line Capital, Jeffrey Sherman. Jeffrey Sherman serves as Deputy Chief Investment Officer and Portfolio Manager at Double Line Capital. Also joining us today from the UBS Chief Investment Office, glad to welcome back Head of Asset Allocation for the Americas, Jason Draho.
Jason, great to have you back as well. And Jeff, I'm glad you can join us here in person at the new studio. I know there's a lot going on in the markets, the macro environment, so a lot to cover with our listeners and our clients today.
Well, thank you for joining us in person. We've done this multiple times on the phone, but it's nice to do it in person. Yeah, and this is a beautiful studio, so I'm taking some notes for our back at the Double Line offices.
Happy to trade some ideas anytime, Jeff. So yeah, let's get right into it, perhaps beginning with the geopolitical environment as we're recording here on Thursday, April 9th, to give a bit of context around timing. Remains very fluid as we're monitoring ongoing developments with respect to the U.S.-Iran War.
How have these geopolitical developments, Jeff, influenced and formed your investment outlook at Double Line? Yeah, I mean, well, you just have to go back to the market itself, right? So at the end of the day, it's what we call the bloodless vertical of the market.
So what did the market tell you? It told you that we were at low end of yields coming into the Iran conflict, and now we're kind of at the higher end of yields in most range-bound areas, or in this range-bound trade we've been in for really a couple of years. And so I think the first reaction is that war is inherently inflationary, right?
It's destructive, of course, but the replacement is going to cost a lot of money as well. I think the biggest question, and I know Jason and I were talking this before we got on here, is that no one really knows what this means for oil, right? And oil is a significant input in everything in the global economy.
And I think the challenge here is that if you're looking for investment implications, short-term trading, I'm not the guy to look for here. But I know Jason's better at this than I am. That's why we brought him in, too.
But the thing is, is that when I look at what's going on in the bond market, I think it's neurotic as well right now, because it doesn't know how to think about this inflationary impulse that comes from oil. Obviously, the Fed shouldn't do anything. There's a reason they strip out the commodity price stuff.
But if we have ultimately a higher oil price for a longer period of time, and let's say we have $80 probably for the rest of the year, that has to be an impediment to growth at this point. And so impediment to growth doesn't mean, just because I'm a bond guy, doesn't mean recession, right? But it just means we have to pencil in a slower economy.
So I think if there's a trade in there, it's something on the duration side that's brewing. Still, because we have a truce as of last night. Looks like we violated it within a couple of minutes of signing it.
If it wasn't even signed, who knows? But I think you're just going to have this headline ping pong for a while. And so I think there will be some points where you want to take a couple of those risks out there.
And you can see, even with the corrections that we saw yesterday when the truce was announced after the close the previous day, you can see that reaction. There's a lot of buyers out there. And so people are looking for a reason to buy.
And there hasn't been meaningful sellers. And so I think the selling's been in the rates market. And I think it's getting to where that belly of the curve, that five-year part of the curve looks pretty attractive.
I want yields a little bit higher to add some duration to portfolios. But I think the reason for the five is pricing in a slower economy. Not meaningfully slower, but slower, with still some inflation.
But potentially, this brings the Fed back into play later in the back half of the year, which brings that front of the curve down a bit. So long-winded thought there. But how do you get from war to buy bonds?
I don't know. But I somehow got there. Well, a lot to cover.
I know we want to drill into some other topics, Jason. But since we're on the topic of geopolitics, quite timely, I know the Chief Investment Office released an alert on this very topic, addressing CIO's perspective on the ceasefire that came out yesterday, right? It came out yesterday.
We've done sort of multiple communications to try and keep our clients in real time what's going on. Because it's a very fluid, fast-moving situation. But as Jeff mentioned, I think none of us have any expertise to assess how this is going to play out.
I think almost no one does, because we're really in unprecedented territory, which certainly makes it difficult to figure out what exactly to invest in. This is an inflationary shock when we know inflation, all is equal, goes higher, growth goes lower, the magnitudes remain to be seen. Since we don't have any real advantage to trying to forecast the geopolitics, I kind of go back to, well, what did we think back on February 27th, the Friday before?
What was our outlook? Our outlook then was growth this year of, let's say, 2.5 percent. Inflation would come down, the Fed's going to cut both times, a pretty constructive environment for risk assets.
So then you get into the question, well, how much has this outlook changed? Well, growth is probably closer to 2 percent, assuming, again, things are, we're in a ceasefire mode. Inflation's higher, but still likely to come down.
Ultimately, we think Fed, we're still on the side that Fed's going to cut a couple times this year, but it's certainly debatable, it could get pushed into next year. So it certainly moves things to the margin. It doesn't, sort of, fundamentally take us from a situation where, like, it was all fantastic to now, like, recession is a base case scenario.
I think that's the best thing you can do, and the markets are trying to struggle with that. And you mentioned, Jeff, also my kind of follow-up question to you is, you know, this applies across all asset classes, but the bond market, like, how do you kind of price this in? And when I looked at across different asset classes, you know, it's two and a half weeks ago.
At that point in time, you know, the two-year was out 40, almost like over 50 basis points from, again, Feb 27th, the 10-year was up 45, equities, the S&P was down, like, four and a half percent. Not much yet. Which you factor in, like, you know, finance 101, while your discount rate goes higher, you know, equity valuations go lower.
So what was the growth component? Pretty minimal. Commodities were higher.
So all this suggests that the market's treating this as an inflation shock, not a growth shock. A week later, then you start to see some cracks, where, like, the two years come down quite a bit. The market pricing went from pricing in, you know, 50% chance of a hike to, like, now, as of yesterday, you know, 30% chance of a cut by December.
But how do you – when you look at the bond markets in totality, how do you think – you know, as best you can sort of tease, like, where do you think the bond market's thinking this will go? Is it, like, growth will be okay, not great, but it's still – we're much more worried about inflation. And if it – what would maybe tip it from one to the other?
I kind of feel like, you know, the way I would say it is the bond market still thinks nominal GDP is the same, right? So – and that's, you know, to kind of paraphrase you, it's a real growth rate that's a little bit lower with a little bit higher inflation. And if you look at kind of just – let's go to break-even spreads, right, because that's the price of inflation in the market, you've seen the elevation on the front of the curve, as you'd expect, because oil prices tend to dominate short-term inflation moves, because remember, the bond market trades headline, so it trades the actual CPI.
That's what's into the tips market. And so – but you haven't really seen that respond further out the curve. And so what I mean further out the curve is the break-even spreads haven't come up meaningfully when you look at, like, tens or thirties.
So I think you're right. The market's thinking of it as a supply shock. And the nice thing about supply shocks is that the cure for high prices is high prices, right?
And it does the behavior of slowing things down because it changed your consumption basket. So coming back to it, you know, price and hikes I think I just thought was ridiculous, you know, out there. I do like having a positive slope curve, by the way, because I like buying twos at times.
You know, I like the front of the curve when it comes to investment strategies today just because the analyzability is just so much greater with that shorter tenor to payback. But coming back to what is the bond market saying, I think that you have to take it not from February 27th, but let's rewind the clock six, nine months. And we've been mired in these trading ranges.
And right before the war started – I'm always trying to choose my words. Is it war? Is it a – I don't know what it is.
But when you have like 10, 15 countries, it feels like a war. But before that happened, we were at the low end of the range in tens. We were kind of in the middle-ish on 30s.
We were at the new lows roughly in twos and fives, right? So what you had was this kind of repricing back to middle of ranges or upper ends of ranges. And so that's why I'm trying not to extrapolate five weeks of performance because if you take that chart back a little bit different, it kind of just says we're back to where we are.
Here we are again. The bond market wants cuts and it's not getting them, right? And that's what was happening.
And if you go back and pull on your screens, you go back to September 22, the rates market has been pricing in Fed cuts since Jay Powell said we're done hiking. The bond market heard we're cutting, right? And it's been that way for three and a half years.
And once again, there's something that derails that. And so I think what we have to get used to is these are the level of rates we got to deal with. This is probably the neutral-ish rate today.
Maybe the Fed cuts, maybe they are a little tight, but the fact that we've been having a real growth rate north of three for the last few years tells me that the Fed wasn't that tight, right? They weren't choking off. So getting it back to the bond, that's what the rates market is telling me right now is that, you know what?
We got a little excited about the rate cuts. Obviously, war is inflationary. You got to price in a little bit more of that inflation premium.
But I think that even if we have this true ceasefire and it continues for a period of time and oil moderates a little bit, I could see the front end coming down more than the back end, right? So I still think we have the stigma that's on the back end of the curve that the entire developed world has of just having too much fiscal debt out there and policies that are just egregiously poor when it comes to the fiscal wherewithal. I mean the CBO came out and said in the first five months, it's a $1.05 trillion deficit.
That's before the war, right? I mean we're running at a $2.2 trillion rate and I just ask everybody, where's Doge? We were promised that a year ago.
So anyway, I just think that the bond market is reacting I think somewhat normally right here and what we did is just got rid of the rate cuts for now. As you said, there is a probability of cuts once again and I think what the bond market is saying is if we're going to have elevated oil for the next three, six, nine months, that does have some hindrance on the growth prospects and maybe that causes the Fed to have to start that reaction function of cutting rates. So continuing with that thought, the market was like 2.4 cuts this year, February 27th, got up to like pricing I think 60% chance of a hike.
Now it's some probability of a cut. Look, we got all of our views like what the Fed should do. That's not my job.
I'm not setting monetary policy. My job is just trying to think about what will the Fed do. So we are in the camp of two cuts this year, September, December, obviously the risk is it gets pushed further out.
Based on what you've heard from Fed officials since this began from the press conference after the FOMC meeting in mid-March, the Fed Chair Jay Powell was at Harvard last week kind of giving some comments, seemed a little more balanced. Other people were speaking. I think it's next week Kevin Warsh is testifying before the Senate Banking Committee to be the next Fed Chair.
Given all these factors that are going on, how do you think – I guess what do you think the Fed is likely to do? I mean obviously it assumes what's going to happen in the Middle East but it's a starting point. Yeah.
I think my base case is that they probably – if they cut, it's really back in loaded and it's back in loaded and it will all be predicated on labor. And so I think the inflation environment, although coming down and we're coming off elevated levels, you still have some of these inflationary impulses that are feeding through into the goods sector via tariffs. And so we've been talking about tariffs now for a year and there's been fits and starts going off and on.
But what you're seeing now is showing up in goods prices. So you're starting to see that. You see what duties received at the border.
You saw it in the last PPI data. You saw specifically aluminum and copper was driving on the manufacturing side. So I think you still have some of these inflationary pressures there that the Fed can't look through in the short term.
And so if you do that holistically, then you say, OK, well they have the dual mandate. So then it becomes the labor market. And look, I think the labor market is the most challenging to forecast right now because again, just having very low nominal numbers of job growth on the nonfarm payrolls, right?
We don't know what that number is to maintain employment. And I'll give Powell kudos for saying last summer where he pivoted and said, well, we need to focus on the unemployment rate. It's not these jobs numbers that matter.
It's the supply and demand equilibrium and that has to do with immigration. And so bringing that back in the context of the Fed, well, we had a decent jobs report. It was a holiday, so most of us missed it.
The bond nerds had to work for a couple hours and look at the data. But at the end of it, I think this just says that the Fed's more on hold and it makes that case for being more back end loaded. So if you told me there's two, I would go in your camp of September, December.
But this is kind of the way we were last year. We said, oh, we'll probably get a couple of cuts in the back end of the year. It looked like there was no cuts throughout the summer.
But then all of a sudden things happened and it somewhat necessitated it and Jay called it risk management. So you mentioned Warsh. So he's going to testify.
I want to see him in action. So I don't know who Kevin Warsh is. I know because the reason I say that, well, first of all, I don't know the man and he probably doesn't want to know me anyway.
So it doesn't really matter. But the thing is, I mean, if he wants to call me Kevin, we can have a coffee or something. But the thing is, is that the Kevin Warsh that I would know from being in the Fed is a hawk.
But we know that the president wanted someone who's going or willing to cut rates. And so what did he say in his interviews to make that happen? I don't know.
And I don't care. I want to see him in action because I can't extrapolate his history because in a Trump orbit, people are influenced by him and I want to see how he behaves. Unfortunately, I feel bad for him for his press conference.
Everybody flounders in it. It's going to be rough. He's going to have to learn how to really parse words.
I think he's a smart man. I think he's a good choice. So let me just put that out there.
I'm not questioning his integrity or anything. But once again, I want to watch the market reaction to Kevin and I want to see how he behaves up there at that podium and what is his ability to garner the consensus. And I think that's where I think there's still a lot of divisive views on the Fed.
So even though – if you ask me in my career, I'd say never pay attention to Fed governors. Only listen to the chairperson. During 22, I said you need to actually listen to governors right now because everyone is telling you they're going to hike rates.
So forget what Powell is saying about transitory. It's coming. We didn't know the magnitude of course.
I think we got to go back to, OK, let's figure out what a Kevin Walsh Fed looks like and I just don't know what that is today. And so I could reserve judgment. Let's let the market price it.
I think having no cuts, slight cuts feels right to me. But also I think the risk is to more cuts simply because we could have a slowdown due to those oil price uncertainty. Trevor Burrus So thinking about – let's say there's a scenario where it's just status quo.
So Powell stays – and not because of Walsh not getting approved by the senate but just thinking about a shift in policy. And so it seems – and Powell said this thing at the press conference in March that they're now going to view the break-even rate of job growth, monthly job growth, to keep the unemployment rate basically stable is somewhere maybe as low as like zero to like 10,000, very low. And so like economists are trying to estimate what this break-even number is, like how many jobs does the U.S. economy need to produce every month given demographics, given immigration to keep the unemployment rate steady.
Before it was like 150,000, late last year like maybe 70,000 to 80,000. Now it's like, well, maybe it's 20,000 or 30,000, which in case given the last few months of private payroll growth is like averaging 75,000, there's no reason for the Fed to cut and especially if inflation is high. So given those levels – so that would imply the Fed is not going to cut at all if we can kind of maintain the status quo.
But then we have this Kevin Walsh component who perceived to be a hawk, maybe had to be dovish to get the job. Just in terms of then kind of bringing it back to trying to assess monetary policy, you want to see them in action, how much do you think it's – that would drive your view of what the Fed might do based on Walsh at its first press conference and what governors are saying versus like what the actual economic data because a Powell-led Fed with 20,000 jobs a month might not cut. Walsh might be pushing for cuts.
Just curious like how you – Yeah. I think it's garnering that consensus at the end of it and I mean there is some politicization within the Fed that some people really are hawkish, dovish based on kind of their political leanings. But in general, I think they do a pretty good job of trying to look at data.
I think that Powell has done a good job of being a data-dependent Fed. Yes, he missed the inflation. I think he intentionally missed the inflation.
I think that when we go back, there's a phrase you're never going to hear again. It's called average inflation targeting. Remember, the reason that the Fed was probably harping on that transitory comment is that they had this new average inflation targeting framework where they're saying we're going to make up for the ills of our sub-2% inflation.
We're not going to tell you what that number is or what the lookback period is. We want it on average to be two. I think that led him to go that direction.
But I think a Powell Fed has been pretty dang data-dependent and you will get political pundits that will come in and say, oh, cut before an election, whatever. But that being said, I want to see how Kevin just operates in this environment and you know what? Fed policy shouldn't move every six weeks.
There should be a trend. There should be some stabilization. And so I think where Warsh is kind of inheriting, yes, it's in a conflict right now and yes, there's this uncertainty about oil and global growth.
Remember, the Fed, they do give you growth estimates but that's not in their mandate. Their mandate is in the inflation and the employment. And if they stick to that and they keep data dependency, I don't think it really matters that much what Warsh says.
I think it's that we all will continue to have that confidence that it is an independent Fed and that's one thing we can't lose control of because that's what helps bring a lot of stability to our markets. The case in point, if you look at treasury yields or you look at just sovereign yields, we saw like the Liz Trust moment in 23, right, or in 22. You saw the Takeichi moment earlier this year in Japan.
You haven't seen a US moment even with these insane numbers that we show in deficits but you did have one moment last summer that should scare people and that was the day that Trump tried to fire J-PAL. And they leaked it out and they came out and bond yields spiked in the treasury market. And to me, that's when they ran out best and it's like, no, no, no, no, no, no, there's none of this and calmed the market down.
That to me is very important and I think that's what Warsh has to preserve and this isn't about being political. It's about preserving the legacy of the Fed and I think that's the most important thing. So that's a long-winded way, Jase is saying.
I think they are data dependent and I think he will be and that's where if I have to side with him, it's not calling him a hawk or a dove. Let's just read the data. Right.
So ultimately, whether it's Powell, Warsh, Randman, third candidate, the institution is data dependent. The institution itself will kind of preserve like that's, which I think is the reasonable assumption that's how the markets are sort of taken at this point in time. Yeah, and there's a weird thing that the media comes out and says, oh my gosh, there's a dissent.
Oh, there's one dissent. You don't get as much from Williams anymore. You don't see that now that he's not in the running.
But that being said, look, I think it's healthy to have debate. That's the whole point. They're supposed to try to figure out what's for the good of our overall economy when it comes to price stability and full employment.
So do that. Don't worry about the externalities and if you're doing your job, yeah, you're going to have critics on both sides. But if you're doing your job, that's what preserves it and like I got a lot of respect for Powell.
The way he's been handling himself, especially ever since what I call his hostage video he recorded on that Sunday night, the way he's handled himself, I think it's been just a man of integrity and I think that's important and that's what we should all learn from this is that that's who we need as our leaders is to have that and look, I have no preconceived notion about Mr. Warsh coming in and I'll judge him by his behavior and the way he runs the Fed. Within fixed income, we talked a lot about rates, what the Fed is going to do with the curve.
Again, thinking about what's happened over the past six weeks or so, I don't know exactly at this moment where the IG spreads are but again, from Feb 27th to as of a day or so ago, IG spreads were either one basis point lower or one basis point higher. In fact, they were lower than they were in parts of February when they spiked on these kind of private credit concerns. High yield spreads are a little bit wider but still really contained.
How do you kind of interpret that? Do you ultimately think ultimately the bond market is saying like, slow down but grow as long as it's like above 1%, that's fine or something else or do you think at this point in general, you're just actually not getting paid for the risk of owning that part? I think the bond market is pricing risk pretty fairly.
We can argue that spreads are tight, yeah, high yields inside of 300 today, that oh, it's tight, it's tight but when you look at what's the hairy credits, the things that have kind of stories behind them, the ones that trade low and trade with double-digit yields, the market is pricing that with risk. So when I look at like double Bs, they're inside of 200, it doesn't get me excited on corporate bonds but also it's a pretty good quality asset and so I understand why people are gravitating to that. Let's use software as an example because you mentioned kind of some of those huge private credit and it's mainly software related.
Look at how much the loans traded down. I mean, yeah, probably at their worst day, they were down two points, right? But the stocks are still down, right?
The stories at the time were AI is going to take over every software name, right? So there's going to be no more software, AI, you're going to do it just in your garage and you're going to have the next Microsoft, right? That was the story.
But when you look at it, it was really a margin compression story. This has been the darling part of the market for the last six years. Software is a low capex kind of product, right?
It has – you can scale it very much and it has a very high margin. Hence, that's why it's in VC, all these areas is that it was a sexy place to be. What I see from what that signal is is that it was a repricing of risk.
It's a repricing of margins, not that there's this obsolescence of all software companies. And I think that's what the bond market showed in software. It's like, yeah, maybe the interest coverage isn't as good as we thought but it's not the end of the world as we know it for this entire sector of the market.
I would use that metaphor, that analogy right here simply because I think that's still what's going on in what you see in spreads right now is that it is a slower growth environment but it's not enough to derail things. The things that have risk still have risk. Those risks may have been exacerbated.
Some may have gotten bailed out with like petrochemicals that have been a really bad part of the credit markets for a while. Obviously, they're being helped out with these new prices out there. So there are some things that kind of benefit a little bit at the margin from it.
So we expect, oh, war, risk off, we're going to have this big spread widening. But I think it's just a repricing of expectations and you can pencil in higher oil prices and you can still say that they have good coverage on these assets. So I think that's part of what's going on here.
I don't want to sound like we're super Pollyannish about credit and we've all been dancing in the higher quality stuff. That's why I like shorter duration credit too. It has less spread sensitivity.
It's more analyzable and I don't have to worry about the next five to ten years. I got to worry about the next 12 to 24 months. And those are the types of credits we think make a lot of sense in today's market and we're not the only ones, of course.
Steve McLaughlin Picking up on that, can you point about AI because that was AI disruption was the driver of Fabric. That was the big story until, of course, March rolled around. If I can infer from your characterization like AI squeezes margins, but it doesn't get rid of these software companies overall.
So the question about was AI a bubble or not, it sounds like without putting words in your mouth, perhaps like you think it's that is overhyped. It's not a bubble necessarily. There is an issue of like just the amount of IG debt that's been issued to finance the data centers.
I was talking with a colleague yesterday who said estimates say it's like 60% was already done in Q1. Either that's a good technical for IG or people have massively underestimated how much supply is ultimately going to come. How do you think maybe different angles like for what AI would do for corporate credit?
Tim Cynova Yeah. What I think about AI in corporate credit and just everything is I rewind the clock to a couple years back when we started really the big CapEx expansion. Most of it was done through equity issuance of names or the megas having just massive free cash flow, right?
So they've got money to burn, let's call it. And so what happened last year is that dynamic started to change. They started to come to the debt market, right?
There's the IG market. There's the blow. And look, Microsoft is an AI name or not.
We could argue that all day long. But you know what? Microsoft can blow $200 billion a year and it doesn't matter, right?
They're going to have revenues. I mean on the multiple. Yeah, yeah, yeah.
But my point is is that they have the means. The smaller players don't, right? So the question becomes is where does the ROI and all that stuff come from?
So what I'm looking at in the debt markets is how willing is the bond market to finance this stuff? You're coming to the debt markets now and it's not just the corporates. It's in, you said data centers.
Data centers live in commercial real estate. You need a building, right? Those buildings are being financed in the CMBS market.
People need to secure revenue streams. So they're using the ABS market to do that for the data centers. So the debt level of AI is really growing exponentially right now.
And I think it's going to be a function of the bond market will dictate how far that CapEx expansion goes now. And what I mean by that is that if you have to come to debt markets, you have to borrow. At some point, we're a different type of investor when it comes to a credit investor.
We think about getting our money back. We're not worried about your margin. We're worried about you paying us.
And so I think that's what we're going to see this year as we go into next because the estimates are just through the roof on what CapEx needs to be. And unfortunately with energy price right now, it's not the greatest time for that. But again, if you look through the cycle, I want to see what the bond market allows.
And so far, it's been smooth sailing. So on that point, given some of the expectations like the announcements of companies' projections of $3 or $4 trillion in CapEx spending between now and 2030, so far, so good in terms of the bond market absorbing that. What do you think would be kind of like the break point or kind of sense of the growth?
I don't know because at this rate, the U.S. government is going to be doing that a year. $2 to $3 trillion, it feels like, is what our debt is. So you have to compete with other parts of the debt markets. And so until there's a question about viability or the success of these companies, I think it's smooth sailing.
Once you get a hiccup, that's when we're going to see how discerning the bond market is. And the hiccup would be, again, a deal falling through, something like that. A lot of these deals that we see out there, like in the CMBS market, the ABS market, they trade because Oracle's going to lease it, Microsoft's going to lease it.
It trades like there's this explicit covenant in this deal flow that they are going to back the deal. They're just saying, if you build the building, if you set it all up, sure, we'll lease it from you. Yeah, you got our word on it.
You don't build it, so it's a different risk is the point. And I think what we've said is like in CMBS, for instance, we don't want to own this risk. We just went through this office debacle, and we're not even to the bottom in office yet.
And repurposing buildings, what do you do with a data center that's in the middle of some place that people have never heard of? Does it turn into an apartment building? What do you do with it?
And so what's the residual value is what you would say as a CMBS investor. And that has a big question mark. So when it has a big question mark, I need a more risk premium.
But this stuff trades like it's a Microsoft name, or it obviously has more spread than a Microsoft bond, but it's getting those implicit backings. And so to us, it's like, why do we want to own that risk? You know what?
We also buy stocks, by the way, for our own portfolios. We own AI risk. Let's own it where we can get paid for it.
And to us, that's a big thing that we've been working on for the last nine months or so is trying to really understand, do we want to own any of this risk? And that's why when I come back down to buying credit products today, we're buying things like residential mortgages. They're not really exposed to that.
Yeah, we could get some prepayment changes, potentially, because of some automation. But I joke about that with our resi guys, because I'm like, remember when we had the robo mortgage? Everybody was up in arms about that in 2006, but now it's AI, but now it's cool, right?
So anyway, I have a lot of thoughts about that AI side. But I think at the end of it, I would tell investors where you want to invest in AI is to the equity, and you probably want to be avoiding a lot of the debt market. So it's become a standard kind of final question for guests of the podcast on AI.
Not so much where do you see the opportunities, but how actually are you using it in your investment process? Is it to run models, scrape data, write reports that you don't want to have to write reports? I'm just curious, because I think this is all evolving very quickly.
How do we leverage it to ultimately make better investments? Yeah, I mean, it's mainly doing a lot of the scraping of data, especially when it comes to quarterly reports. When we get earnings and everything, the scraping is massive.
That's been the huge efficiency there. We always had stuff that ran scripts behind the scene, but it seems to be much more faster now. Definitely, report writing is the worst part of the job, Jason, as a mathematician I am.
I can't stand it. I write in bullet points. I might make it sound good, and I'll edit it.
I feel like I'm a better editor. From that standpoint, you're seeing a lot of that. We're seeing it in coding.
The problem is that it does still have some of the hallucinations, so that's the challenge. You still need sensibility about it. I will say that we've started to use more of these more advanced models, and they're starting to show some promise of pulling in data, being able to just kind of build the infrastructure of a quick spreadsheet.
I can see why people get super excited about it, but I want to see that next level still. The hallucination stuff, the jury's out on whether we'll ever get rid of that. That's beyond my scope of understanding, but I would say that we definitely see it from a process stuff.
We're data people. At the end of the day, any way you can get us more data faster, that's what we all want. My aspiration is to be like Tony Stark from Iron Man, who can talk to Jarvis and say, hey, Jarvis, can you run this model?
It's like, that way I don't have to do any of the data work myself. I can just get the machine. I always said that's why I had analysts.
I hate downloading data. I hate doing it. Just send me the data in the spreadsheet.
I'll do it. I don't care. It's just I don't want to go get it sometimes, and so I think that's it.
Maybe I'm a little cynical because it's always been neural networks, these linear program models. This has been the holy grail in mathematics for my entire lifetime, and so maybe we're getting there, but maybe we've hit some of the limits. Time will tell.
If I had a final thought on AI, it would be this, is that whatever you think AI is, in five years' time, you will have no clue what that actually is. In five years' time, when you look back, you'll say, I missed this so bad, right? I just think it's going to be completely different, but it's going to be amazing probably, right?
So I get the fervor. Yeah. I think we can say for sure that this is the worst AI we'll ever be is right here today, and whatever it is will be better in five years, but I think that's a good ending point.
I used to joke a couple years back, if AI is the auto-predictive text, I don't want it, but at least it's finally getting a little bit better, too. Well, the time always goes quick. We'll have to have you back again soon, Jeff, and perhaps get these cameras working and do a video podcast as well.
Always something to strive for, but Jeff, Jason, thank you again. Great conversation. Thanks for joining us today.
Yeah. Thanks for having me. We'll see you in a couple of days.
Okay. Okay. Cool.
Cool. Cool. Cool.
We'll have you back in a couple of days. Thanks, Jeff. Bye.