How should I be positioned? with Richard Bernstein (RBA) and Jason Draho (UBS CIO)
The desk posits that evolving U.S. trade policies are crucial for shaping the economic landscape and investment positioning in the near term. Per the full note source, Richard Bernstein and Jason Draho emphasize the fluidity of these developments and their direct implications on market sentiment. With the ongoing negotiations around tariffs likely to influence economic outcomes, market participants should closely monitor this landscape. Key indicators will be necessary as tariffs can dramatically shift cost structures for businesses across sectors, underscoring the potential volatility in related financial markets.
What the desk is arguing
The desk believes that U.S. trade policy, particularly around tariffs, is at a critical juncture and will have significant implications on both the economy and investment strategies. Recent developments have shown an increased fluidity in trade negotiations and tariff considerations, which could lead to substantial market reactions.
Steps taken by policymakers could either prompt quick responses from sectors reliant on international trade or dampen future expectations based on increased costs of imports. The market's reaction to these policies will gauge the health of the U.S. economy, which remains a focal point for asset allocation decisions.
Where it sits in our coverage
Currently, our consensus target for USD/EUR stands at 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This aligns with jpmorgan's positioning at the upper bound of the range, indicating an expectation of a strengthening dollar amid favorable U.S. economic data and positive trade engagement. bofa poses a more cautious outlook reflecting potential adverse effects of heightened tariffs on economic growth.
How other firms see it
Several firms, including jpmorgan and goldman, align with the bullish perspective on USD assets, suggesting confidence in the underlying strength of the U.S. economy amid these tariff discussions. In contrast, firms such as bofa and citi express concern over potential backlash from trade policies that could lead to inflation or reduced economic output.
The trajectory of USD/EUR remains closely tied to these trade negotiations and ongoing commentary from the Federal Reserve, particularly as the market looks to gauge implications on monetary policy and rate adjustments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Evolving U.S. trade policies, especially regarding tariffs, are expected to significantly influence market conditions.
- 02Investment strategies should adapt to trade policy changes to optimize portfolio performance.
- 03Market sentiment will likely be volatile as trade negotiations continue to unfold.
- 04Monitoring economic indicators will be essential to anticipate shifts in market sentiment.
Market implications
Traders should keep a close eye on upcoming tariff announcements and their immediate impact on sectors sensitive to trade dynamics. A break above or below the 1.10 level in USD/EUR could trigger significant adjustments in positioning ahead of any major economic reports.
Risks to this view
The main catalysts that could invalidate this outlook include unexpected escalations in trade tensions that lead to substantial tariff hikes, which could slow down the economic recovery and alter investor sentiment. A lack of clarity from policymakers could similarly obscure the outlook for USD strength.
Hi everyone. Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel.
On this podcast, we 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 today from the UBS Chief Investment Office, glad to welcome back Jason Draho, the Head of Asset Allocation for the Americas. We're excited to welcome back long-time guest Richard Bernstein, the Chief Executive Officer and Chief Investment Officer of Richard Bernstein Advisors or RBA.
So with that, Jason, Rich, thank you both for spending some time today with our listeners, our clients. Rich, it's great to have you back. I know you've been on with us here on the podcast many times over the years and we always look forward to hearing your thinking.
So thank you both again for joining us. Looking forward to today's conversation. Yeah, thanks.
Thanks for the invitation to be with you again. Thanks. Thanks, Rich, for joining us.
I think last time I said that you were now a member of the Five Timers Club, so you're fully vested in that club at this point in time, so we appreciate that. Yeah, I'm waiting for my smoking jacket. It's in the mail, trust me.
Might be a tariff applied to it, unfortunately, just to be aware. Yeah, so there's a lot to cover, though perhaps that's a good starting point, that being U.S. trade policy development surrounding tariffs. We have learned a lot in the past 24 hours.
We have seen some significant developments as we're recording here on Thursday, May 29th. The U.S. trade policy at the moment seems to be driving so much of the economic and investment outlook. I'm curious, Rich, how do you anticipate that these developments will evolve from here over the near term?
I know it's very fluid and perhaps as well your expectations in terms of what we may see throughout the balance of the year. Yeah, so Dan, thanks again for the invitation. And, you know, I always kind of start this kind of discussion about tariffs and everything, especially these days.
I start by saying, look, it's not my job to actually opine on whether policies are good or bad, right? I think that's something we could all have over a beer or a drink sometime. But I think as an investor, it's important to understand that we view at RBA, we view our role as having to be very dispassionate, not opine on good or bad policy, but rather whatever the policy is, we have to try and find the best portfolio for our investors.
That's really what our day job is. And, you know, and I think we've always done that. I think regardless whether one liked policy or didn't like policy over the last 15 years in RBA's existence, you know, we've always kind of said we kind of ignore politics.
And we are trying to do that in the current environment as well, as amazing as that may sound. I think the unfortunate side to this is that the policy backdrop, especially for tariffs, is changing very rapidly. You know, we could call it fluid as you did.
Others might call it capricious. It's very hard to figure out. And I think that's an important part, not just from the point of view of being an investor, but obviously from the point of running a business.
And even in, you know, the business that I run here at RBA, we're not subject to tariffs, of course, but the vagaries of the market and how the market reacts to this clearly impacts us as a small business. And so, you know, I think you're seeing a fair amount of uncertainty, which is the word of the day, not only in the markets, but in the business community as well. And I would argue that that's not very healthy for the economy.
I mean, the business world is uncertain enough, and I don't think we need another level of uncertainty. So we could argue all day long, are tariffs good or bad? Again, I don't think that's my day job.
But I think what really is a thorn in our side as investors is, to use your word again, the fluidity of policy. And I don't think we've seen that in many, many, I would probably say decades. And Jason, you and I have discussed trade on a weekly basis, seemingly for months now.
What are your thoughts on these latest developments and any thoughts on what we just heard there from Rich? Well, I agree with Rich in that, you know, as investors, we have to take the world as it is, not as we want it to be, because we don't have the control. So I think that's, you know, what are we facing?
Obviously, we're facing an environment where the tariff news changes day to day, hour by hour. And as we're recording this, that's the day after the Court of International Trade actually ruled against some of the tariffs that the Trump administration imposed, because they used a measure of this International Emergency Act to do it. And the court said that's actually not allowable, given what the legislation says.
And then just a few minutes ago, the administration said they want to appeal it and go all the way to the Supreme Court by, you know, very, very quickly. So fluid, so how it shifts, it could change like day to day, hour to hour. The way I, you know, to try and sort of manage it is like, you know, we have to take the world as it is, but we also have to take the world as like, what we think it will be, you know, not should be, but will be.
And a simple way to distill all this down and say, well, when the dust settles, like what is maybe the effective tariff rate that ultimately will be imposed across different countries, sectors, things of that sort. It's a simplification of a lot of complexity, which is difficult to manage. But I think, you know, in times like this, sometimes it's easier for us as investors and then collectively as the market to kind of fall on maybe there's more simplifications just because trying to be overly precise becomes pointless when the news flow changes very quickly.
And the effective tariff rate is basically just the amount of import tax or customs duty that importers would pay for all the goods brought into the US as a percentage of the total imports into the US. Coming in this year, that was effective tariff rate was around like a sub 3%. After the Liberation Day tariff announcement, it was in the high 20s.
Where it is right now, you know, where we think it will settle is in the mid-teens, like let's say 15% range. If it's 10% or less, that's a really good outcome. That's probably the bull case. 20% or higher is probably the bear case.
I think being a little more prescriptive than that is probably like, you know, not to be helpful. So we, when we invest in like going to like what Rick said in terms of how do you construct a portfolio, we're kind of investing on the assumption that it's probably going to be in that 15% range. Give or take a little bit, you know, and with the many other factors that could drive the markets, that's a reasonable assumption.
I'm not saying this is the right way to think about it, but then kind of going back to you, Rich, if you do have to make these investment decisions, you do have to make some assumptions about how you think this could play out, where levels could materialize, whether you think markets are pricing. So are you thinking of it that way in terms of effective tariff rates? Are you thinking about it something else?
And if that's the case, like what are you kind of assuming? Right. So, Jason, that's, you've hit on like a really critical point.
And so, you know, I think that our view has been that we're kind of flying blind. And what we've tried to do is we've tried to focus on things that we have greater visibility, certainty, you know, things that are, we feel pretty confident about. And for that, we've kind of gone back to traditional fundamentals.
We've kind of said two things. Number one, if there is tremendous uncertainty in the financial markets, what's the scarcity in the financial markets? We want to buy that scarcity.
And that scarcity is certainty. And so we said, well, what's certainty? Certainty is things like dividends.
Certainty is things like strong balance sheets. Certainty is quality, you know, these type of, it's value. You know, those are the type of things.
And so we've been, you know, all year reorienting our portfolios towards those more certain investment outcomes, right? Kind of a bird in the hand is worth two in the bush type strategy is a way to think about the way we're thinking of the markets. Second way we're thinking of the markets is that we think tariffs are no tariffs.
The profit cycle in the United States and many profit cycles around the world are in the process of peaking out. That doesn't mean the dollar value of earnings is peaking, but it does mean the growth rate in earnings is starting to peak out. So let me try to attach a number to that to give people kind of some perspective.
It looks like this quarter, year over year growth in corporate profits is going to be about, reported corporate profits, is going to be about 14, 15 percent. We think by the end of the year, that will be somewhere between zero and two percent. And so you're going to see a deceleration of corporate profits.
We feel pretty confident about that, not necessarily the numbers per se, 15 to zero. I mean, you know, as I think you pointed out before, putting decimal points on this is kind of silly, but we do think the deceleration is pretty much going to happen. And we think that's going to happen.
Tariffs are no tariffs. Now, we think tariffs just exacerbates that, but we think that we want to structure our portfolios in such a way that the prime theme is going to be this deceleration of corporate profits. You know, if tariffs are 20 percent or more, as you pointed out, which would be the bear case, well, then I think our portfolios may hit a home run.
You know, if it's less than 20 percent or less than 10 percent, maybe it doesn't work quite as well, but we still think profits are going to decelerate, and you're still going to see a rotation towards more certain outcomes. And so that's kind of how we've been playing it. I don't think, you know, at RBA, I think we like to kind of figure out what do we know and what do we don't know, and we try to structure our portfolios what we feel more confident about.
And I think we're doing that once again. On this kind of deceleration idea of earnings, and if it's somewhat agnostic to the tariff level, like, you know, the higher the tariffs, you know, the bigger the deceleration, but the direction of travel has not changed. How much, then, from a U.S. earnings perspective, does that reflect, say, like a deceleration of the incredible earnings growth we've seen from the MAG-7, the tech sector, versus maybe more, you know, cyclical parts of the market or parts that are a little bit less tied to either?
And there's probably some deceleration maybe across the board, but is it more pronounced in some areas versus others? Because this could be nasty to happen, like, from earnings growth of the MAG-7. Like, it can't be at 50% forever.
Like, it could be 20% and get stepped out, but it's still good. So how do you see it, like, compositionally, you know, from a market perspective? Yep, absolutely.
So, again, I always seem to answer things with two answers. So the first answer is that, you know, when profits decelerate, quality and defensiveness tends to outperform. Doesn't always, but it tends to.
And part of that is, you know, the sound economic principle that no matter what goes on, we all still eat, right? I mean, that happens in every cycle. And so quality, you know, one of the things that we follow very, very carefully, and we've done this for 30-odd years, is, you know, quality definitely outperforms when profits decelerate.
And that's because the cycle, by definition, is determined by more cyclical companies, which tend to be lower quality companies of various ilts. And so we tend to focus on quality. So in terms of the spectrum of high quality, low quality, we're very high quality oriented.
Now, your second point about the MAG7, I think that's really critical right now, because we just wrote a big report, which everybody can get off our website, rbadvisors.com, that talks about how the MAGnificent 7 has become, to use the Gen Z phrase, has become the Mid 7. That there is nothing magnificent about them anymore. Their growth rate in earnings is decelerating to the point where it looks like the rest of the market.
The median next 12-month earnings growth for the MAGnificent 7 is about 10%, a little bit under, but 10%. And the median projected earnings growth rate for the remaining 493 is now 9%. So we're talking about 10% versus 9%.
I'm not sure I would pay a monster multiple for 10% growth versus 9% growth, but that's what people are looking at. So I think, yes, a lot of the deceleration is in some of these companies, but a lot of it will also be in the more cyclical side of the economy. So if you look at our portfolios right now, you would see a pretty traditional defensive quality type portfolio.
You'd see us overweight things like staples and healthcare and utilities. You'd see us overweight quality, especially, and one thing we haven't even talked about, international quality, very, very cheap, superior growth rates to the MAG 7 right now, things like that, as well as you'd see us, you know, as I said, overweighting dividends and those types of things. So, you know, I think your point about is the MAG 7, you know, the way to think about it, even if you think they're magnificent, they're certainly not unique anymore.
That's probably the better way to say it. You mentioned the international, and I think a big way to a debate that's happened, it's been going on for like now the past couple of months, even before it's been accepted, really in the past couple of months, about US exceptionalism. And it's one of these kind of terms that I think back to the, like two years ago, the debates about soft and hard landing.
It's, you know, everyone uses the terms like, well, what do you mean by soft landing? Can you define it? Can you actually put some quantitative numbers on it?
And same thing with US exceptionalism. Do you mean like the fact that US economy was going almost 3% last year and the Eurozone was at 0.4% and this year they might converge? Is it something else?
Like there's a lot of different ways you can define it. But I think one thing that is pretty clear, it's not just the US equity performed last year and really for the last decade, but a simple way to look at is the return on equity, you know, how much US companies return on equity versus, you know, the rest of the developed markets. And you can look at the price to book and how much investors are willing to pay for it.
If I did a scatterplot of countries around the world, you'd see a kind of a mash, you know, in the middle and in the US is in the upper right, like far off on its own. That to me, from an equity investor, and that's probably the most critical thing is like, that is the best categorization of US exceptionalism. These companies just collectively have just really high returns and the markets want to pay for that.
And I'm not sure anything that could happen as a result of tariffs or trade war, anything near term is going to alter that. But then, you know, so that would argue like, well, no, like this is still a place you certainly have to be invested in the US. There's no doubt about that.
But on a relative basis, your comment about you could see better earnings growth elsewhere other than the now, let's call it the mid seven. Are you seeing that? Do you see cracks in that aspect of US exceptionalism in terms of like, the performance of these companies and therefore, relative to the valuation, like there's actually better opportunities elsewhere?
Or is it still within the quality bucket? So how do you think of the US versus the rest of the world from an equity perspective, in light of this kind of exceptionalism? Right, right.
So, Jason, you know, I think we might have discussed this on other calls, now that I'm in the five-time club, I guess it was the other four calls or whatever. But one of the things that I always point out to people is when we started RBA in 2009, 2010, we were very bullish on the United States. And nobody wanted the United States.
In fact, at the time, IFA developed markets, EFA was a bigger portion of the global equity market than the United States was. And everybody was on board with that. Nobody wanted to talk to us about the United States.
People wouldn't invest with us because they thought we were taking too much risk by investing in the United States. Morningstar refused to classify our global equity fund as a global equity fund because we had too big a weight in the United States for their liking. They said that no global investor would ever do that.
And so that was the setting of where we were in 2009, 2010. And here we are now, 15 years later, and everybody's talking about American exceptionalism. Right?
The pendulum has swung pretty far in the other direction. And I'm not debating the statistics that you cited. Those are absolutely true, 100%.
But I think there's a sentiment and valuation argument that maybe people have bitten off on that perhaps a bit too much. So, if you look at quality companies in developed markets, and I'm not even talking emerging markets here, I'm just talking quality companies in developed markets, their growth rates are roughly similar to the mag 7, now the mid 7, as we were joking before, roughly similar. The median growth rate is a touch higher for international quality.
Their dividend yield is much, much higher, and their valuation is much, much lower. So, from our perspective, we have this kind of weird situation right now where, look, Europe and developed markets have been cheap forever and a day. I don't think that's been the story.
But now you have a situation where not only do you have cheapness and dividend yield, but you now have growth. And it's not so much that these companies have grown and changed their growth profile so much. But getting back to what you were saying before, it's that the mag isn't mag anymore.
The mag 7 isn't so magnificent. And it's especially true, by the way, I'm not saying anything positive or negative about this stock, and we own it in some of our portfolios, just all the important disclosures there. But if you remove NVIDIA from the magnificent 7 and you have the magnificent 6, it's even more startling.
Just picking up on that last point, what if you removed Tesla, which is, I don't know if it's in exact numbers, but we know they had not a great Q1. The stock price hasn't really performed because it still seems like the numbers that we got from Microsoft, Meta, Alphabet, still really strong. The tails are, at this point, it seems like it's NVIDIA and Tesla.
So, the other companies, they're high-quality companies. How would you think about those? Full disclosure, we have two of our preferred sectors are technology and then communication services, which is primarily dominated by Google and Facebook.
And they're both predicated on a view of this AI investment thesis continue to play out. There were questions earlier in the year after the deep-seek news that validated the concerns that investors had. These companies are spending a massive amount of money.
Where's the return on capital? Yeah, they may have deep moats, but it turns out perhaps these moats around the business models aren't so deep. Yet, after the Q1 earnings season, and now NVIDIA, it feels like that thesis, after a bit of a pause, investors are feeling much more comfortable with it.
So, maybe think about less the MagSaver, but more maybe this AI technology story. Some of these are very high-quality companies. How do you think about that broadly as an opportunity?
Which, again, favors the US because these are companies that give the US, that's partly why it's been so exceptional. Definitely true. I mean, the way we kind of look at it, and I think maybe we discussed this on one earlier call, is that we try to separate out an economic story from an investment story.
And I think the economic story of AI changing the economy should be a given. I mean, of course, it's going to change the economy, and it's going to change the economy in ways that we cannot envision. But, and that's with a capital B, I say, but technology always changes the economy, right?
I mean, the internet changed the economy. The automobile changed the economy. My personal favorite, the light bulb changed the economy.
It was a massive productivity-enhancing technology at the time because it turned the economy into a 24-hour economy, right? You can't have a graveyard shift in the dark. So technology always changes the economy.
And I also think we should be a bit more skeptical than people are about the productivity enhancements that are going to accrue to AI because that was also the story with the internet. And since the technology bubble, US productivity has gotten marginally, I'm not overstating the case, I don't overstate the case, has gotten marginally worse since the internet. So I don't know what everybody out there is doing on the internet, but they are not enhancing productivity.
And so I think we want to be a touch skeptical, but there is no doubt in my mind, zero doubt that AI will change the economy. I don't think as an investor, that's the right way to think about it. I think you have to worry about, you know, valuation, how much money is going into this.
And historically, you know, the over-capitalization of new technologies has been a major stimulant to them spreading through the economy. I'm sure you guys both, Dan and Jason, I'm sure you remember the charts that came out about the internet 25 years ago, about how the adoption of the internet was much more rapid than anything we had seen with respect to automobiles or television or telephones or anything else. And I would argue part of that was this massive over-capitalization of the sector, which basically gave them free money, which allowed them to expand like crazy, which allowed the adoption to be so rapid.
However, you know, the internet theme at the time turned out to be a miserable investment theme, that if you bought NASDAQ at the peak of the bubble in 2000, you know, NASDAQ didn't break even for 14 years. It was crazy. And so I think, you know, I think we have to be careful about that again.
And I'll also point out that some of the best internet investments were not the ones that were around during the bubble and that took place during the bubble. And even some of the ones that were, you know, so think about like an Amazon or something like that, which people very often point to, still lost about 90% of its value before it finally dropped and then became the Amazon that we all know and love today. So I just think we have to separate out the economic story a little bit from the investment story.
And I'm not pooh-poohing anything that you said at all. I just think that's kind of the way we think about it here at RBA. Well, I like to think that all the time I spend watching YouTube videos and TikToks is actually productive, but you know, that's a conversation at the time, coupled with the conversation about the right tariff level.
I know we're, you know, don't have too much time left to discuss, but you know, a big topic aside from the whole tariff debate recently has been the, like with interest rates, you've seen the back end kind of rise, the concerns about the fiscal deficit situation, things of that sort. Just, you know, I want to focus more on kind of the equity implications and maybe how this, your view on rates informs those equity views and, but therefore it's like implicit in what are you assuming for how rates would kind of play out? Because that does require, you know, some views either of like the economy, policy, but also how, you know, like all that would impact rates and therefore then channel into equities.
And what level of rates, given what you're assuming, like what would actually get you concerned if rates were to stay kind of higher for longer? Yeah. So I'll tell you, you know, the other day I wrote something that pointed out that since NASDAQ's inception in 1971, I think, that utility stocks have basically been neck and neck with NASDAQ.
And it just shows you the power of compounding dividends. And somebody made a very nasty comment to me. Well, of course, utilities have done well because they've been, you know, secular bond bull market and utilities are bond proxies.
And I think that may be right, but it also ignores that a lot of growth stocks in the technology sector are long duration equities and their multiple expansion has been fueled by falling interest rates. And so it's not just been utilities that have benefited from secular falling interest rates. It's been multiples on growth.
And we all know that growth has outperformed value for quite some time now. And I would argue that's the reason why. So if you think that interest rates are going to reverse and you think that we are entering some period of secularly rising interest rates, not only would it argue that you want to have shorter duration secularly, not for any one day or anything, but I'm saying secularly, you'd want to have shorter duration bonds than maybe you would have had, you know, over the last 10, 15, 20 years.
But you probably want to have shorter duration equities too. And again, I think that comes back to our notion, you know, what are shorter duration equities? Well, they're more conservatively valued.
A lower P.E. means you're looking at a shorter distance into the future. And, you know, your dividend yield says you're getting, you know, as I said, a bird in the hand is worth two in the bush. And so you're getting more of your total return upfront in the form of a dividend.
I kind of think that if we are entering some period, for whatever reason, right, it could be fiscal irresponsibility, it could be the dollar, it could be loss of faith in the United States rule of law, it could be all kinds of different things, whatever. But if you think we're entering a period of secularly higher rates than people think, I would argue, you're also arguing for secularly shorter duration, both in your fixed income and your equity portfolio than people are probably used to. Are you, you're making some assumptions on where rates are going to go.
What's, if I may ask, what are you sort of assuming it's time? Yeah, well, we don't make an actual forecast. You know, we kind of work in a world of higher or lower.
And we don't worry quite as much about, you know, is it 5%, is it four and a half, is it six, whatever. But right now, we're operating under higher still rather than lower. Now, if there's a recession, of course, rates are going down, right?
There's a school of thought right now that even in a recession, long term interest rates in the United States will not come down. I don't think that's right. I think we have a recession.
I think rates are coming down pretty hard. But that's, you know, we haven't changed the basic rules of economics. When you say higher rather than lower, like, meaning, more likely a 10-year is that closer to 5% than it is to 4%?
Something like that? Yeah, I think that's right. Yeah.
Barring recession, right? If there's a recession, you know, obviously, we'll probably go down, we may, we'll probably break 4% in a recession. But assuming for a second there is no recession, our portfolios are still geared more towards 5% than 4%.
So in that scenario, and I would agree that, like, with a recession scenario, I think that the 10-year is below 4%. It probably gets close to 3%. It wouldn't, you know, at all.
Yeah, I think. And just to add one element of real bearishness on this, which I don't mean to because we're really not that bearish. But I think everybody should consider for a second, whether the next recession could be a real doozy.
And the reason I say that is that you could now be, I think, 38 and never have experienced a real recession, other than the pandemic, which doesn't count. No real economic recession. And we've already seen some cracks in consumer confidence with an economy that's reasonably healthy and employment that's quite healthy.
Imagine what would happen to consumer confidence if we really went into a recession. That could feed on itself. That lack of confidence could feed on itself, and the economy could contract more than people think.
But that's not our forecast. I don't think we're going there right now. But I think it's something that people should keep in the back of their heads.
It's been a long, long time since we saw a real recession. By age 38, that's what you mentioned. What you mean is people who, like, in their professional working careers, other than the pandemic, if they started post-GFC, like in 2009.
Correct. Okay. And assuming they also graduated from Harvard at 22.
Just one final question. It ties into the rates view, because there's different reasons why rates could be elevated. There is, I think, a legitimate school of thought that the Treasury Secretary, Scott Besson, was kind of basically said as much in the last week on, I think, some of the Sunday morning news shows, of how do you deal with the national debt?
Well, clearly, fiscal consolidation, lower deficits, that's not on the near-term horizon. So it's like, we'll grow our way out of this problem, which a view I've kind of had for the past couple years is that given the debt levels, you need nominal GDP growth of, like, over 5%, maybe 6%. Ideally, more of that is from real growth, not inflation.
But if you can't get the real growth, that means you're going to tolerate higher inflation. And even, I think that's a possibility of some sort of financial repression in place where if the Fed cuts, the curves deepen. So the Fed cuts rates, they issue more at the front of the curve, like more T-bills, less 10-year.
But the 10-year, because of the inflation, stays at 5%. So there's different types of 5% for the 10-year. Some are worse than others.
So inflation staying elevated is definitely a real risk. How does that, does that make into your kind of, you know? Absolutely.
Absolutely. The key word that you use, which most people don't use, and which we use in all of our stuff here, which is why I think it's so, so insightful of you to use it, because we use it all the time too, is the word nominal growth. Right?
People haven't had to worry about nominal growth, meaning real growth plus inflation. People haven't had to, haven't really worried about that in a very long time. They haven't talked about it even.
It's always been real growth, real growth, real growth, because there was no inflation and people got very spoiled. Like when I started, you know, in this industry back in the dark ages, nominal GDP was constantly talked about because inflation was so high. And I would guess that at least half the people listening to this are completely unfamiliar with what nominal GDP actually is.
And I think that what you said is absolutely true. We are going to have to grow our way out of this. It's a question of whether it's real growth or via inflation.
Right? My guess is it's going to be a combination of the two, but we will have more inflation than the markets currently are anticipating. So if the markets are saying two to two and a half, I would say it's more like three or three and a half.
Well, the time always flies though. Rich, Jason, thank you both again for spending some time with our listeners, our clients here on How Should I Be Positioned. Rich, hopefully we'll have you back on for your seventh appearance sometime soon, though.
Thank you again for your time, your insights, and for joining us here on the UBS Market Moves podcast channel. Yeah, thanks, guys. I appreciate it very much.
Thanks, Rich, for joining. And yeah, next time in person, we will have the purple, you know, crushed velvet jacket for you. I'm looking forward to it. 42 regular, please.
Okay, well, Dan, make it out of that, 42 regular. Visit UBS.com slash CIO to view the latest research. specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.
Sources & References
How we cover this story