How should I be positioned? with Torsten Slok (Apollo) and Jason Draho (UBS CIO)
The desk's interpretation revolves around the shifting landscape of global monetary policy as discussed by Torsten Slok and Jason Draho, emphasizing the need for positions that account for an evolving macro environment. Per the full note source, the conversation illuminated expectations for US monetary policy and its impact on asset allocations in 2024 and 2025. This is particularly relevant as economic indicators suggest potential easing from the Federal Reserve amid signs of cooling inflation, which could benefit risk assets and certain currency pairs. The reference to macro trends should stimulate careful consideration by traders seeking to align with anticipated market moves in the upcoming year.
What the desk is arguing
The desk aligns its view with the insights from the UBS podcast emphasizing a pro-risk stance as monetary policy transitions. As Slok and Draho discuss potential investment themes for 2024, the implication is that markets may respond favorably to stimuli that support growth amidst a softer monetary tightening cycle.
Supporting evidence includes ongoing trends indicating a gradual easing stance from the US Fed, with inflation management remaining a critical objective. This could imply a brighter outlook for the USD against a basket of currencies, particularly if the anticipated policy pivots materialize as expected.
Where it sits in our coverage
Our consensus target for the USD's performance against the basket stands at 1.075, with a 1.04 to 1.12 range as displayed by the following firms:
The current desk view leans towards a higher target in line with jpmorgan, suggesting confidence in a potential USD appreciation as compared to bofa’s more conservative position.
How other firms see it
Several aligned firms share a positive outlook on US equities and risk assets, reflecting an overall optimistic sentiment. Firms like jpmorgan and morganstanley are reinforcing similar views.
In contrast, some firms such as bofa maintain a cautious stance, recommending a more defensive approach. Key related currency pairs to watch will include USD/EUR and AUD/USD, reflecting how changes in US interest rates may influence cross-border capital flows and risk sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Positioning towards risk assets is favored as US monetary policy appears to trend towards softness.
- 02Expectations are set for potential shifts in economic indicators influencing Fed decisions in 2024.
- 03The dollar's strength could experience upward pressure depending on macroeconomic outcomes.
- 04Investors should pay close attention to central bank communications and inflation data.
Market implications
Watch the USD/EUR technical levels closely for breaches of key support or resistance, particularly around the 1.075 mark as indicators of broader market sentiment. Any dovish signals from the Fed in Q1 could trigger significant shifts.
Risks to this view
A reversal in the Fed's dovish outlook would undermine the current positioning and could see the USD strength diminish rapidly, particularly if inflation data surprises to the upside or employment indicators exhibit unexpected resilience.
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 spend time catching up with our industry colleagues and partners to discuss the market and macro environment along with thinking when it comes to asset allocation.
So with that, joining me here today in our 1285 podcast studio in New York, I'm glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office. Very excited to welcome back, I believe, his fourth appearance with us, Torsten Slott, Partner and Chief Economist with Apollo Global Management. So with that, Torsten, Jason, thank you both for spending some time with our listeners, our clients, as we're quickly approaching year end.
It's great to be with you both. Thanks for having us. Torsten, thanks for joining for our holiday edition.
Hopefully you're bringing us presents and not lumps of coals in our stockings. Absolutely. We'll make sure it's festive.
So let's dive right into it. A lot to catch up on with just a few weeks remaining in 2024. Torsten, as year end is on the mind of many, can you speak a bit to your expectations for the economy in the year ahead?
But also, what are your thoughts on the conditions of the economy as it currently stands today? Yeah, so exactly. Let's first talk about what has the incoming data been showing and then what should we expect next year, including what might be coming from a Trump administration.
The incoming data up to this point has shown a remarkable degree of resilience in the U.S. economy. The Fed started raising interest rates in March of 2022. And you would normally have expected that when interest rates go up, that car sales start to go down.
That's not what we've seen. That home prices start to go down. That's not what we've seen.
And that business investment cap spending also starts to go down. And that is also not what we've seen. So what really is quite unique about the U.S. economic outlook is how incredibly strong the U.S. economy continues to be.
There's some very unique reasons for this. Namely, first of all, we have had consumers and firms locked in low interest rates during the pandemic. So consumers and firms were less interest rate sensitive.
We also have significant tailwinds from AI and a data center spending boom. And we also have tailwinds even before we talk about what Trump will do from the CHIPS Act, the Inflation Reduction Act, the Infrastructure Act. And these things have kept the economy powering ahead in a very significant way, very differently, as we'll surely talk about, relative to Europe, U.K., Australia, Canada, that have seen more weakness.
So the starting point, Dan, to your question is here that the economy is in incredibly good shape and we are entering 2025 on a very strong footing. So with that, Jason, a lot there we can dive into based on what Torsten laid out for us. But what's your pulse on what the economy looks like today and light expectations as we're heading into a new year?
So I think Torsten summarized it well in terms of like where we've been. If I were to distill down, it's like, you know, where you are have maybe not Goldilocks economy, but it's certainly a very, very good economy, good momentum going into 2025. And the expectations for almost two years now, the economy slowing down, it really hasn't materialized.
The way I kind of characterize it, our outlook, at least as a base case for next year, is like kind of benign growth, meaning growth moderates a little bit, but going from like 2.8%, say for this year, down to like, you know, 2.3, 2.4, still a good number. Inflation goes lower, the Fed's cutting rate, a good macro environment. There'll be debates and choppiness, certainly, but an overall kind of, you know, good outlook.
Now, there's a lot of directions we can take this towards. And, you know, one thing I want to touch on is your Fed expectations. We're recording this on a Wednesday.
December 4th. December 4th. Earlier today, Jay Powell was at an event giving sort of his comments and, you know, being, as you'd expect from a Fed chair, to be somewhat opaque in terms of what to expect later this month.
What is your expectation at this point in time, given what we know that the Fed would do in December, but also next year, and more generally, what do you think is the sort of philosophy or approach of how they want to, you know, proceed with interest rate cuts, you know, over the next basically 12 months? Yeah. So given that Fed hikes ended up having actually a relatively small effect on the economy, that also means that if we still have strong momentum in the economic data, we've had strong growth still in nonfarm payrolls, the unemployment rate has gone up a little bit, but more recently, the last few months, it started to come down again.
So given the strength of the economy, and given that the Fed is now cutting rates, and given that stock prices are still relatively high, we still have credit spreads in investment grade and high-yielding loans, still relatively tight credit spreads, that all should be very supportive for GDP growth into next year. Adding to that, Trump policies, which could come in the areas of potentially lower taxes, potentially something on tariffs, potentially something on restrictions on immigration, it could raise a small risk that we might get some moderate upward pressure on inflation. All that means for the Fed, that the most likely scenario is that we will probably only see a few cuts over the next several quarters.
And the conclusion, therefore, from a market perspective is, we should all be planning that interest rates will stay higher for longer, because the Fed is not going to cut as much as they definitely were expected to cut six months ago. But also from a broader market perspective, we think that they will cut much less relative to what the market is saying. So interest rates and base rates, the Fed funds rates staying higher for longer with two or three more cuts over the next 12 months, I think should be the baseline scenario.
So I want to pick up on a point about the mark or the economic sensitivity to rate cuts. You know, you pointed out that the Fed raised rates from basically zero to five and a half percent, roughly, with pretty modest impact on the overall state of the economy for a variety of reasons. So the natural assumption would be, well, if they start cutting, it's also going to have not much of an impact.
I think that's as a starting point, that seems reasonable. I think that's the kind of the consensus view. I agree.
But I've kind of asked myself, and I'm curious on your thoughts, like, one, it feels like, well, if that's the case, then the risk is more skewed that the market is actually the economies are more responsive, you know, to rate cuts than people are assuming. So like, it's more of the upside growth and inflation scenario. But there's also maybe a reasonable argument that things could be more responsive.
And the reason I'd say that is, people who were not impacted by, well, there's two segments of the economy. There's people who weren't impacted, existing homeowners, people who had mortgages, they're locked in, they're fine. Businesses who termed out debt, they're fine.
But other segments of the economy, small businesses who borrow at floating rates, a good chunk of consumers who didn't own assets and who feel affordability issues, they will actually benefit from lower rates, whereas the, you know, upper, you know, healthy businesses, healthy consumers, fine, they don't get as much on their money market funds, but their stock portfolio has gone up more than enough to compensate. So there can actually be an asymmetry that the losers before can actually be big winners, the winners before will continue to be winners. And so now everyone is a winner.
And so there could be a risk of like, I think of things sort of overheating. Do you kind of buy into that? Where's the flaw in that logic, you know?
I totally agree with that logic. And everything you just analyzed is exactly also how I look at the upside risk to the outlook that we could have more upside risk to growth, because think about it for the higher income households that have done generally well throughout the last two and a half years, despite the Fed hiking rates, they have seen stock prices have gone up. We can discuss why stock prices have gone up, but if stock prices have of course gone up because of strong earnings, especially in the magnificent seven, but broadly speaking, if you own the S&P 500, you have generally done quite well in the last few years.
Likewise, you've also seen home prices go up. And when interest rates are high, not only are asset prices going up, but your cash flows, for example, in private credit, other fixed income products, you have seen steady cash flows over the last several years that have just been incredibly elevated relative to where they were from 2008 to 2022. So that means that for anyone with a portfolio, and in particular for the upper half of the income distribution, who both have seen assets, meaning stock prices, home prices go up, but they have also seen their cash flows go up because interest rates are higher for longer.
I expect exactly as you're saying, Jason, that for the next at least two, three quarters, we should continue to see steady, strong cash flows from private credit, from fixed income generally, that will be supporting the economic outlook. And if you're at the same time at the low end of the income distribution, get more relief with the Fed cutting rates, you could get that worry that maybe that could result in the risk of overheating and therefore a second run up in inflation. And therefore the Fed may be not cutting rates, and in the worst case, maybe even raising rates to try to battle inflation again.
So you're thinking like two, three cuts for the Fed, just thinking like the sequence in my sense is that the Fed wants to cut maybe or maybe Jay Powell wants to cut in December, that way they can say we did 100 basis points, we'll pause, we'll assess how the data is playing out, we'll see what the administration is and then wait until March and then you become data dependent. And like, if it ends up being a really strong economy, they probably cut, you know, maybe two times. Our current view is 125 basis points between now and the end of next year, partly because we're assuming inflation growth will come down.
There's wild cards in terms of what the administration does and whether that could be inflationary or not. Do you think, so if it's two or three cuts, like what would be the sequencing? Do you think they'd still go in December unless the jobs report for November is really strong?
And then it just gets, they're kind of done unless the data slows down. Like how is the sequencing play out in that situation? And what's really interesting exactly about that discussion is this debate that the Fed has been having in speeches by FOMC members about what is our star?
What is the neutral level of the Fed funds rate where we are going? Because they have been arguing very strongly that monetary policy is restrictive. When you say monetary policy is restrictive, you are saying that you think that, not you, but the Fed has been saying that they think therefore, that interest rates need to come down because monetary policy is in the process of cooling the economy down.
But you start asking the question, what is the evidence that the monetary policy stance at the moment is restrictive? Because maybe in their view, if our star or the level of the Fed funds rate we're going to, which they think is 3%, if they think we're going down to 3%, well, surely at the moment at roughly 475, we surely need to cut interest rates more. But if you have interest rates, even at 475, and you still have strong economic data coming in, that raises a lot of questions about, but is monetary policy really restrictive?
Is it necessary to do more cuts? So that's why in FOMC members' speeches in the last month or so, they've really been backpedaling quite significantly and saying, well, maybe monetary policy is not so restrictive. And as you said, Jay Powell today is now beginning to say, well, hey, maybe we don't need to cut as quickly.
Maybe we're not in a hurry to cut rates as much, because the economic data that comes in is still good. And if that's still good, well, why should we then be cutting rates dramatically? Because we normally cut rates because the economic data is bad.
We normally don't cut rates if the economic data is good. So that's sort of the bigger, in my view, headache for the Fed at the moment, namely, well, maybe they don't really need to cut that much, because the economy continues to do just fine. And if Trump policies ends up coming with corporates getting tax cuts for domestic manufacturers going down to 15%, some increase in tariffs, some restrictions on immigration, and maybe some parts of that, of course, also deportations and the other things that have been talked about, all that runs the risk of putting upward pressure on inflation, which also then would be arguing if we already have an economy with strong momentum, then maybe the added policy response that could come here with adding slightly more pressure on inflation could raise the risk that the Fed might not be cutting as much even as markets are pricing today, which would be certainly also be our view.
I mean, one of the things that I have in mind is, it's kind of an inverse scenario of what happened in 2018. When the Fed was hiking rates, they hiked in December. And if December 2018, if those recall, was painful for equity markets, the S&P was down 14% from December 1 to Christmas Eve.
It kind of ruined my Christmas Eve lunch that day. It kind of bounced back. The Fed pivoted.
But Powell very clearly said at that meeting, we want to get to neutral. Their thought of neutral is two and a half. So there's an element of my thinking that they think the policy rate is still restricted.
We don't know where it is, but it's probably certainly quite a bit below the current level. They kind of want to get closer to neutral, whether that is right or not. Now, they may have learned their lesson before and therefore more conscious, but I kind of feel like they want it.
That's why they want to do a little bit more. That's why it's still Sarah and they're inside of them doing at least 25. So I agree that they are certainly worried about it.
They worry about the downside risk. But what we as investors also should worry about is a repeat of 2022. And what happened in 2022 was that your 60-40 portfolio did really, really poorly.
And you went through a roller coaster ride where suddenly it went down dramatically because interest rates were going up and stock prices were going down. And if we have now another move higher in inflation and we have seen that in the last two prints from CorePCE that is beginning to look more like at least CorePCE at the moment at just below 3 percent, that momentum is beginning to build in inflation again. And if we add again the risk of Trump policies doing something on taxes, meaning lower taxes, something on tariffs, something on immigration restrictions, all that runs the risk that if we as investors next year begin to see anything that looks like a repeat of 2022, of course, that will run the risk of rates potentially going up and the stock market going down, which, of course, in our Apollo world means that roller coaster ride was pretty tough in 2022, whereas in private markets, of course, in particular in private credit, you can get a much more steady cash flow without having to go through that stomach churning experience of having the 60-40 portfolio underperforming as dramatically as it did exactly in a scenario when you have a risk of inflation now beginning to move higher again.
The lack of mark-to-market is kind of beneficial in those time periods, right? Well, certainly, but there's also, of course, a lot of things that are mark-to-market also, of course, in private credit. So just pivoting from monetary policy to fiscal, you've touched on potential for tariffs, tax cuts, deregulation, all different things are at least in scope right now.
Trying to forecast what they'll do, that's kind of where it gets a bit of a fool's errand at this stage. But what we can do, and this is my question for you, is let's just start with tariffs. Aside from your expectations, think of it more along the lines of like, what would have to be done on tariffs that would be sufficiently negative in view to kind of start to alter the outlook?
You know, increasing tariffs on Chinese imports, okay, you know, the economy should be okay. Maybe it's a slight to the margin to grow with inflation. What point, what level of tariffs do you think actually starts to have a material and negative impact?
Yeah, so there are three different institutions. Many have tried to do different quantifications of what Trump policies mean. But the Penn Wharton budget model is one quantification of Trump policies.
Another is the Tax Foundation. And the final one is Committee for a Federal Responsible Budget. And these three different models have tried with different angles to quantify, including what might be happening on the budget front, but also what might be happening on the tariff front.
And if you assume that we are going to see 60% higher tariffs on goods imported from China, and 20% higher tariffs on everyone else, then most simulations show you that within 12 months, inflation will be one percentage point higher. So if inflation already today in the latest data is now currently in core PCE around three, or that begins to paint a fairly worrying picture about that if we do go all in on 60% on universal tariffs on China, 20% of everyone else, that that could potentially lift inflation quite significantly over the next six to 12 months. So now the question becomes, will we see that?
Or will we not see that? That remains to be seen. But at least if we do see a significant move on tariffs, it could be something that could be quite a scare for financial markets.
And also note here, for rates markets, in particular for long rates, of course, it's about the business cycle. If the economy is good, normally long term interest rates go up. If the economy is bad, long term interest rates go down.
So in this case, if the economy is good, and inflation is coming, long term interest rates are going up. But we now have the added second issue, namely, that if we do this in an unfunded way, where we have fiscal expansion, where both these are these three different institutions that have quantified this suggest that we could have as much as over the next 10 years of three, four, five trillion dollars in additional deficits, that also begins to run the risk that long rates could go up not only because the economy is good, but also because of the fiscal risk and the debt sustainability issue becoming a point for long term fixed income investors. So I want to pick up on that debt sustainability point.
One of the most common questions that we get from our clients from our advisors is this debt situation. And it's often something that's a little bit more on the really fearful end, like, you know, where the country's spending itself into oblivion, it's going to cause inflation to spike, the currency is going to crash. I always try and like walk people kind of back from the edge.
But it's clearly a challenge, like the long term projections are not great. It is a fundamental worry. The way I'd kind of describe it, if you think of it as a medical condition, though, it is a chronic illness that is we can maintain, you can kind of live your life, you can function the economy and society.
But at some point in time, it becomes like maybe an acute problem, like later on, like you were, this is a serious issue that you have to deal with almost like, like, you know, a heart attack or something along those lines. It's hard to know when you kind of flip from one to the other. I don't think it's anytime soon.
I mean, like, you know, next few years, if not longer. But from your perspective, and I saw a report you published a few weeks ago, looking at this issue, how do you think about, you know, the debt currency situation? Is it a drag on growth?
Is it boosting growth? When will it become a problem that could be start to impair on growth or become an issue like where interest rates start to rise? Like, how are you thinking about this whole debt sustainability?
So one important first starting point, at least in my view is to look at what the Congressional Budget Office is saying about this issue. And even before we have any clarity about what Trump policies will look like, we already know from the Congressional Budget Office own estimates that today, debt to GDP is 100%. And over the next two decades, that will go up to 200% of GDP.
So in other words, debt to GDP is going to grow dramatically, mainly because of mandatory spending, meaning spending on Social Security, Medicare, Medicaid, Obamacare, combining healthcare and Social Security makes up more than 50% of federal spending at the moment. Also, as you know, today, we spend more money on interest payments on debt than we do on defense. We spend more money on interest payments on debt than we do on Medicare.
So we already have a fairly serious situation where for every $100 that the government spends, $13 goes towards servicing debt. So the situation is already fairly problematic for a lot of different reasons. So to your good question, what does this then mean?
And why is this important for markets? Well, this is really important, of course, because ultimately, if we have a debt sustainability situation that continues to show that debt levels will rise, we just need to issue more and more treasuries that someone needs to buy. And at the moment, treasury issuance over the next 12 months, you have about $10 trillion in treasuries that will mature that needs to be rolled over.
And that is just on the existing stock of debt. And you add to that QT is still happening. If you add to that, that we still have 6% deficit to GDP every year, and Trump might be also now spending more money and increasing the deficit.
That just makes you more worried that we should all be spending more time on the following four things, namely spending time, first of all, on treasury auctions. What was demand? There was a 20-year auction about a week ago that turned out to be tailing, meaning there was less demand than what you would have liked to see.
That's showing some signs of weakness in that little part of the treasury market. Things have generally looked good, but treasury auctions is a very important first place to look for whether there is enough demand for government debt. A second place to look, of course, is to look at the rating agencies.
If we get downgraded by the rating agencies, the U.S. sovereign, of course, will also begin to raise a lot of challenges. We also need to look at, of course, at what's happening with the term premium, meaning what are the likelihoods that people don't want to buy long-dated government bonds but only want to buy short-dated government bonds. If the yield curve gets steeper, that's also a problem.
And finally, as you all just mentioned, we need to look very hard at the dollar. So far, the dollar has been going up a lot. And the conclusion from, at least in my view, this question about, well, how long can this continue?
Well, as long as the rest of the world is, unfortunately for them, in a really bad state. Things are, as we speak, really bad in France. They are really bad in Germany.
And they are actually also pretty bad at the moment in Australia and in Canada because of the weakness in China. Then the U.S. is lucky for the U.S. at the moment benefiting from the rest of the world not being a great state. So rates are higher for longer in the U.S.
And we have the rest of the world not doing very well. We have a decoupling of the global business cycle where money is still flowing into the U.S. simply because the other alternatives are not very attractive. So the short answer to your question is because the rest of the world is decoupling from the strength in the U.S., I still think the rest of the world will continue to pour money in to U.S. markets, including U.S. treasuries.
Well, it's often the case whether you're talking about debt crises, bank runs, currency crises, things are good until they're not good. And it's a very kind of binary. That's exactly right.
It's hard to know when it is. And the textbook would exactly tell you all the endless amount of weekend reading papers that look at this will say, hey, if you have a debt situation that's unsustainable, it may be okay, okay, okay, okay, until it's suddenly not okay. That's why these four things I just listed are the areas that we are spending so much time on.
Again, what's happening to the sovereign rating of the U.S., what's happening to the term premium, what's happening to the dollar, and what's happening to treasury auctions. Because this could be, as you and I often talk about, treasury auctions are throughout the week at 1 p.m. in the afternoon, and suddenly it could be one afternoon that people, there was not enough demand for 30-year government bonds, and then people could immediately change their view of, whoa, there's not enough people buying 30-year government bonds. Well, maybe I should change my view on what the outlook is for treasuries.
So that's why the incoming administration, the best thing for financial markets that could happen if they in some way can find a credible plan and roll over that outlook for what's happening to debt-to-GDP so that it's not only going up, but so that there is a more declining property and characteristic of where debt-to-GDP will be going. So a week ago, I wrote a note and I titled it, The Other Trump Put. So during his first administration, the thought was, and I guess we know he follows the stock market, like the S&P 500, and, you know, especially during the trade war with China, the increase in tariffs, as the markets would get jittery, once it got to about a 10% drawdown for the S&P, then suddenly the tweets got quieter or they'd be pushing towards a deal.
That was the case where I think the economy, you know, interest rates, you know, were strong, the interest rates were low. This time with interest rates higher, to me, like the second Trump put is actually more for treasuries, and that the idea is they can only do so much because if yields go higher, that becomes a real burden. And we'll see, and I think, you know, the market's reaction to him nominating Scott Besson to be treasury secretary, it's not, well, maybe there could be some, you know, to me it's an upside surprise if they're more fiscal prudent saying the market is assuming they're going to spend like crazy.
I think that I would almost take the other side, I think they're going to be more focused on trying to keep the deficit, you know, constrained. So, you know, a little more optimistic on that point. But I do want to pivot from kind of the economics to thinking about investments in markets.
It's not Christmas yet, but it feels like we've all been as investors given a pretty nice Christmas present with the S&P up 27% year to date. There is questions like how much this could be sustained? Is it getting kind of frothy or not?
I mean, you find that we get some volatility, but our host view is, you know, this benign growth continues. And we touched on that earlier, we see the S&P up almost 10% by the end of next year. And it's more of a US focused story for all the reasons we've kind of touched on.
But what is sort of the, you know, your view, the Apollo view in terms of financial markets, equities, fixed income, like what are the key sort of investment themes that you see for 2025? So the main problem with S&P, of course, where we are today is the concentration. If you think about this from a global equity perspective, there is a concentration issue that really all global stock markets is really all about the US.
And the other concentration issue is that it's not only about the US, it's really about the Magnificent Seven. And at the end of the day, it's really not only about the Magnificent Seven, it's really just all about NVIDIA. But am I willing to hang my hat on one stock alone?
It used to be the case, of course, that, oh, well, NVIDIA goes up and down. And sometimes, hey, I like that Renalyn Rush from investing in NVIDIA. And you say, hey, it's down 20%.
Okay, so what? But if the bond market moves one point, oh, my God, the bond market is moving. This is crazy.
So people have just gotten so used to that, well, the Magnificent Seven can only go up because they've done so well. So the big question mark is, and that is also the expectation generally in markets is, if earnings growth is going to slow down, and here we're talking about the growth rate of earnings over the next several quarters, which is the expectation from the consensus, what does that mean for earnings in the Magnificent Seven? And if the risk is that if earnings growth is going to slow down, then I cannot only rely on the Magnificent Seven delivering returns to me.
And that's why I would go back to page one in my finance textbook and say, well, my page one in the finance textbook says I have to be diversified. And if the stock market is more and more and more and more and more concentrated on a very few handful of stocks or a little bit more, then you end up saying, okay, I like those stocks. I like the adrenaline rush and the excitement that comes with betting on some Wednesday afternoon, whether Nvidia earnings go up or down.
But you know what? If the starting point is that rates are higher for longer, why don't I just look over here in fixed income? On fixed income, one of the concerns that we have a little bit is extended duration too far out because if rates rise because of inflationary pressures, term premium, that if you go out 10 years and beyond that you can run significant price losses, like offsetting your yield, which is why we're going to recommend you run like a five-year duration right now instead of the sweet spot.
Given your outlook on rates, where do you think it's going and how do you think about the exposure within fixed income? Where is the kind of opportunities, but where is the real sweet spot? I agree completely.
And you have written very well also about that issue, namely that exactly the belly of the yield curve, three, five-year rates should look relatively interesting because long duration is exactly where some of these more significant moves will be in the bond market if rates really start to move, in particular if they start to move higher. I think also about the other issue, which you also have written very well about, of course, is that money market funds today are paying in round numbers around 5%. So of course, people say, I like 5%.
So why don't I just put some money in money market funds? If we just agreed that the Fed is now cutting, we can discuss how much they're cutting. Where is the six and a half trillion dollars in money market funds going to go if the Fed starts cutting rates?
Because people might begin to say, and including many of your listeners here say, hey, if I get in money market funds, the rates are coming down in the front end to, well, now it's no longer five, maybe it's four, maybe it's even three, if you listen to what the Fed thinks, where we're going. If it's only three, well, maybe I should be taking my money somewhere else to get a higher return. And that's, of course, where both private credit is an option.
You can get more spread, you can get more juice relative to what you get in money market. But also, generally speaking, in fixed income, you can then see spread product, investment grade credit, maybe even high-yield loans still probably trade better as a result of simply being more competitive relative to money market funds finally beginning to come down from the very high levels that we've had more recently. So I only have one final question.
We can end on a lighter note. The holiday season is here. I remember last year, Apollo had put out a video, kind of video wishing everyone holidays.
You were a central character in that video. Can we look forward to a sequel? I didn't ask to be a central character last year, and I didn't ask this year.
But I will be playing a very prominent role, serving soft ice. So I'm not going to say too much more. But it is something that we found very funny to make, and we hopefully find that you and everyone else will find it also very entertaining.
But we certainly wish everyone a very happy holidays on behalf of everyone, of course, from Apollo here. Well, we look forward to that video, and hopefully there'll be a trilogy. Well, I hope to see one video with you and Dan also one day.
We'll see what next year has in store. We'll have to work on that. This has been great, though.
Torsten, Jason, thank you both. Great way to cap off 2024, part five in order for 2025. So until then, have a great holiday season.
Thank you. Speak soon. Thank you so much.
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