#1029 - Fresh Signs of a Soft Landing? with Cullen Roche | Jobs Data, the Fed, & Rate Expectations

0:00Today's Real Vision Daily Briefing is brought to you by Chintai, your partner in asset tokenization. Licensed and regulated by Singapore's monetary authority and powered by the innovative Chex token, Chintai offers a compliant, one-stop solution for bringing real-world assets on chain. Chintai enables the tokenization of virtually any asset, from carbon credits to corporate debt, private funds and real estate, enhancing liquidity and optimizing efficiency for all. The technology becomes largely invisible and seamless to the end user. I can take a selective store of value within a wider portfolio in a fairly liquid form, very efficiently, to anything, whether it's some high-value whiskey, whether it's a particular supercar that's a one of three limited edition, therefore, in this fungible trading of them in a liquid form, is the true endgame here for tokenization.

0:54With billions of dollars in client deals facilitated, explore how you can take advantage of tokenization by visiting realvision.com slash chintai.

1:13Did we just get fresh signs of a soft landing? Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Colin Roche, founder and CIO of Discipline Funds. Hi there, Colin. Great to have you on the show. Hey, Maggie. It's great to talk with you. Yeah, and happy Friday. We made it. And it's been one heck of a week. We're going to dive into a little bit of what's been happening and some of the news today, the jobs report. But you've been a guest on Real Vision before, but I think this is your first time on the daily briefing. So why don't we kick off with an overview?

1:44Just give us a sense of your approach. And I'm guessing that you called it Discipline Fund for a reason. Yeah. So I'm a financial advisor by background. And so I work with a lot of retirees, a lot of people who are very time conscientious. And so a lot of my investment focus is based on helping people navigate time. And so I focus a lot on the behavioral hurdles of the troubles of navigating time because that's ultimately the thing that all of us are fighting. And investing is really hard because we don't necessarily understand the time horizons over which we're going to have certain amounts of assets in our portfolios.

2:22And so a lot of our investment approach is very time-focused, helping people build financial plans and then applying an investment strategy that instills a certain amount of discipline over very specific time horizons to help them plan for the future, plan for retirement, and all of life's trials and tribulations. That's amazing. And we talk about time frame a lot here because you're right, it's the one piece that sometimes people either forget about or they struggle with, especially when they're thinking about risk management. But also, we had a conversation yesterday. You can have a narrative view of a long-term trend, but how do you make sure that you can survive to see it through or navigate some of the volatility that comes in between, layered against that narrative.

3:05So fantastic for us to have you here today. So when you're talking about the makeup of funds or you're advising people, just want to get your thoughts on bonds, because there's been a lot happening on the bond front. A lot of people kind of wondering if they are a diversifier or a good hedge on inflation. Are you changing the way you think about asset makeup or fund makeup, given some of what we've been seeing on the macroeconomic front? Yeah, for sure. I mean, I think that one of the one of the big lessons from especially the last few years is that bonds are not a good inflation hedge. And I think that that's a mistake a lot of people sometimes think of when they buy bonds is that, for instance, a lot of people, I think, have tried to replace things like tips in their portfolio or utilizing bonds in a way that tries to sort of jerry-rig them into being an inflation hedge.

4:04And that just doesn't work because my view, basically, is that bonds are principal stabilizers. When you buy the right types of bonds over the right time horizons, when you buy a one-year treasury bill, you're buying something that has basically absolute principle certainty over a one year time horizon. It has no credit risk. You know that it's a AAA rated instrument. You know exactly what the income is from that instrument. So that's a very specific temporal-based instrument. Whereas when you buy something like a 30-year treasury bond, you're buying something that has a huge amount of uncertainty over a 30-year period.

4:44But the really important thing is that I think that most importantly with bonds is they're implicitly principal stabilizers in a portfolio, whereas other assets are best utilized as inflation hedges. The stock market's a great inflation hedge. Something like Bitcoin can be an inflation hedge. Your home, I mean, God, A house with a mortgage has been the absolute best inflation hedge over the course of the last few years. So real assets, things outside of the bond market are, I think, more appropriately thought of as growth instruments or inflation hedges. And the bond market, when properly utilized, is very specifically a principal stabilizer.

5:26Great, great differentiation. And you're right, we have to think of it holistically, right? Because sometimes people just look at their 401 or their IRA. They got to think about their house or real estate or other real assets as well. And sometimes it sounds absurd, but sometimes we forget about that when we're trying to think about how we live in it. When I go through a financial plan with somebody, for instance, whether they're a homeowner or a renter is a really crucial distinction because if you own a home, you can make a really strong argument that you don't need a lot of other real assets in your portfolio because what is a home at the end of the day?

6:00It's a big block of commodities that sits on a big piece of land. So it's all real assets. And it's very explicitly an inflation hedge because it's comprised of inflation hedged materials or materials that will be highly correlated to the price increases over time. So versus a renter, this is again, you see this with a lot of the stickiness and inflation and the big rent increases in the last few years. A renter has a completely different risk profile when it comes to being inflation hedged because they're much more exposed in terms of not having that real asset hedge that a homeowner has. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

6:44We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Today's Real Vision Daily Briefing is brought to you by Chintai, your partner in asset tokenization. Licensed and regulated by Singapore's Monetary Authority and powered by the innovative Chex token, Chintai offers a compliant, one-stop solution for bringing real-world assets on-chain. Chintai enables the tokenization of virtually any asset, from carbon credits to corporate debt, private funds and real estate, enhancing liquidity and optimizing efficiency for all. The technology becomes largely invisible and seamless to the end user.

7:24I can take a selective store of value within a wider portfolio in a fairly liquid form, very efficiently to anything, whether it's some high value whiskey, whether it's a particular supercar that's a one of three limited edition, therefore in this fungible trading of them in a liquid form is the true end game here for tokenization. With billions of dollars in client deals facilitated, explore how you can take advantage of tokenization by visiting realvision.com slash chintai.

8:13little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments, S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway way to the markets. Visit us.plus500.com to learn more. Trading and futures involves the risk of loss and is not suitable for everyone.

8:46Not all applicants will qualify. Plus 500, it's trading with a plus.

8:56Boy, I tell you, we get a lot of questions about rent or own. We're going to have to have you roll up for the next workshop we do because it is a big issue and it's one that's really a generational issue, right? We get that a lot with some of the younger people or people who are sort of just getting into family creation, formation, timeline, as opposed to those who are thinking about retiring and maybe have a different view of what to do with that property. All right, so let's dive in. So we saw a lot of swings in the job report today, rather in the markets this week. We had a job report out today.

9:27Seemed like it was positively received by the market. What did you make of that? Yeah, it was, this is, yeah, I generally hate the term Goldilocks, but in large part because I think in the original text, Goldilocks gets eaten by the bears at the end. So not always properly used, but I mean, in terms of like the way that this report came out, yeah, it looked, it looked not too hot, not too cold. I mean, it was, it was a small miss. So it was 175 versus, you know, what was the market expected, 240 or something like that. So a small miss, but not a miss that is indicative of like a recession or, you know, the, I think the point where people would start to argue the Fed made a policy mistake would be the point where like the unemployment rate starts to go up.

10:15So if we started to see either huge revisions or big job losses and a sharp increase in the unemployment rate, that's the point where people would say, you know, the hard landing is here now. The Fed made a policy mistake by moving rates too far too fast and then keeping them too high for too long. And so it'll be interesting. That narrative is not necessarily dead or that risk is not necessarily dead going forward into the end of the year. And the election makes all of this, you know, even more interesting with the timing of what the Fed is going to do. So you think a recession risk is still a possibility?

10:57Because I feel like what the Treasury bond market was telling us earlier this week, last week, was that, hang on a second, this economy is red hot. The Fed has been kind of teasing the idea of easing. They're wrong. Rates are higher for longer. Inflation's a problem. them yeah well are they wrong really i think the really interesting thing about the next six to sort of nine months is that the fed is in a weird spot with the election in particular because the election i think my theory at least i mean some people are still saying like i saw that jan hatzius from goldman was still saying that july is you know a rate cut possibility i i don't see it just because I don't think core inflation is going to come down enough before July for the Fed to say, okay, we feel totally comfortable cutting rates now and sending that signal.

11:50And that's really interesting because if we get past July, the next meeting is September. And then you're getting into a situation where you're really close to the election. the meeting after that is the day after the election i believe and then there's a december meeting and so if we don't get a cut in july i i highly doubt we're going to get a cut in september just because i don't think the fed unless something really screwy is going on with the labor market let's say then we're getting like negative prints or something maybe the fed cuts in september but But I think if you get anything that even is marginally positive, indicative of still kind of remotely sticky inflation, I don't think they're going to implement a rate cut a few weeks before the election.

12:38I mean, imagine the news headlines if that happens. It would make the Fed look very politically motivated. And I think that's something they're going to want to avoid and try to avoid, which means that the next potential cut comes November, December. So you're going to have, you have a lot of labor market reports, a lot of inflation reports between now and November. And I think November, November is my baseline estimate for the potential for a first cut in large part because of the election. And that just, it's a really tricky situation for the Fed because there's a lot that could happen in the next six months.

13:16Yeah, great, great points. And Melvin, I think this is getting at exactly what you asked about how likely will rate cuts be if it does happen, how long will it take? Like, and Cullen, the other thing, and I know everybody likes to say that the Fed is really political, but if you go back and look, they traditionally, the Fed, doesn't matter who the chairman is, doesn't matter what parties in Congress, doesn't matter who the president is. Traditionally, they like to stay away from making moves either way ahead of the election. It's just traditionally something that they really, as you said, doesn't mean they've never done it, but they really try to avoid it.

13:49It's almost like a blackout period. For all the things that I think you can critique about either the Fed or Jerome Powell, I think the one thing that you can definitively say about Jerome Powell is that he has been really steadfast in his sort of anti-political approach to managing the Fed. I mean, we saw this, I don't know if people remember, you know, when Trump was president and the constant berating that Trump was slamming on the Fed back then. And Powell did not succumb to it. So, you know, for all the faults of the Fed and the way that they, you know, they sort of are so data dependent and sometimes rearview mirror looking, I think that Powell has done a really good job of being apolitical as he's managed this Fed.

14:37Yeah, there's also, every once in a while somebody does it. I mean, if you are boring enough to watch C-SPAN and watch every fan chairman go in front of Congress, they're constantly berated and always under political pressure to toe the line of whatever group they wanted. Another wild card here. It's the worst job in the entire world. Worst job in the world. Can't make anybody happy. I mean, and it's so hard because they've been boxed into a corner by Congress. Keep spending money. I mean, this is not people say, oh, Treasury spent. No, Congress spends the money. both parties. One thing that we haven't talked about yet, and we're going to run through all these risks as we get closer, is you point out that meeting is the day after the election.

15:20It is entirely possible, if it is a tight election, that we don't know who won the day after. So then November gets taken out because there's no way they're going to make a policy move. We don't even know who's won the presidency. People don't remember Goran Bush, but that market does not like that if that happens. And if we're in a tight election where they're counting votes, I mean, that's another nightmare scenario that we may have to. Yeah, I hadn't even thought about that one. I mean, that would probably, that would almost certainly push the baseline to December. Yeah. So you're right. It becomes really tricky, which may be why the Fed is sort of, you know, a lot of people were surprised that they weren't more hawkish and that they were keeping the idea of a rate cut alive.

16:04But this is a tricky period that they're going into. So there is the possibility you think that maybe we still hit a patch where there's a recession. What do you think about the data that's been coming in? So the employment data, Goldilocks today, we've seen some very weak PMI readings in data. We've seen some hot inflation data. Does it seem like stagflationary? Because that's the word everyone's throwing around again. Or do you think some of these are just leading and lagging and we're kind of in that bumpy transition? Yeah. I mean, a lot of people said at the end of last year that the last mile of the inflation fight was going to be the hardest.

16:44And that's obviously turned out to be dead right. I mean, the last few years have been, I think, maybe the hardest period to forecast in economic history just because COVID did so many screwy things to the economy, supply chains, everything, government spending out of control, all this stuff. It made a lot of this so hard to forecast. I think that the, I mean, my baseline view has basically been that the economy is in the process of sort of mean reverting back to all of its pre-COVID scenarios. And so, and I think that those trends are still very much in place. You know, the most interesting data point that I saw this week was actually from the JOLTS report on Wednesday, which is the, you know, the report from the BLS that comes out before the big labor report every week.

17:34And the data point there that was interesting was the quits rate. And the quits rate is indicative of really how tight the labor market is. It shows when people are quitting, what that's indicative of is an environment where people are willing to say, you know what, screw this job. I'm going to get another job. And I don't have any concerns about my ability to get another job or what the wage is going to be. And that's indicative of an environment where basically labor has a lot of negotiating power over capital. And we've seen a really significant decline in the quit rate in the last, really the last, it's been a pretty steady trend over the course of the last sort of 18 months.

18:13And that was very persistent in the latest JOLTS report. And then we saw, not to my surprise, the big decline in the hourly earnings from today's labor report. And so all of this, I think, shows that the labor market is continuing to soften and it's not softening too much yet. But at the same time, there are lots of really strange readings in the underlying data. When you look at things like, temporary help and things like average hourly earnings. I mean, these are slowing at a rate that is generally indicative of a very slow economy. So some of the high GDP readings and even the employment reports from the last six to 12 months have been really surprising in large part because a lot of the data, like you were saying with PMIs and stuff like that, is still indicative of a very low growth environment.

19:10So, you know, and that's pretty consistent with what we had in the pre-COVID environment, where you had really like mostly like one and a half to two and a half percent GDP. And I think that's kind of the baseline that we're going back towards, the big risk being that if the Fed continues to keep things really tight on the monetary policy side, you could potentially find ourselves in a scenario where in November or later this year, things are slowing down a lot more than expected. And the Fed actually is behind the curve in that scenario where they then probably wish they had cut in July and maybe even looked political going into the election.

19:55And instead, they're going to find themselves in a situation that's not uncommon for them where they're behind the eight ball again, kind of like they were in 2021 when they didn't raise, when things were starting to look like inflation was starting to get kind of out of control. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

20:21And we talked about this being the hardest job in the world because, of course, It's hard anyway. This is a really tough macro environment coming out of COVID. The signals are mixed. We're going into a very uncertain election, which is sure to be volatile. And to add on to that, there's a global element to this inflation picture. That's been coming up a lot in conversations we had this week. We're going to run a clip of some of those highlights of what is on the mind of some analysts, especially when it comes to that global view on inflation. Sticky inflation can get much worse because of all the balls that we still have being tossed around.

20:57Geopolitics, of course, being maybe number one of the balls. But if you haven't noticed, this country has gotten a little bit insane lately, too. And we have an election and we have a lot of spending. We're at the beginning edge of what will be the last great wave of Chinese product dumping. It's captured everyone's imagination in the electric vehicle space. And that's very, very real. But that's only one small sliver of what's coming. And unlike previous times when some version of this has happened with one country or another, this time the Americans, the Japanese and the Europeans are all not only ready, they're prepared to put into place trade practices that will smash as much of that incoming product as possible.

21:42So we're standing today at the beginning of the greatest trade conflict we have seen since the 1920s. Try to imagine a state of the world one year, two years, three years out on where are we with the U.S. and China? Would China have done a big devaluation? have they flooded the market? As we're seeing, they've gone from wanting to be the sweatshop of the world to the machine tool shop of the world. If they're moving up the value chain for these products, what's the business model for Korea at that point if there's a big overlap with a giant manufacturer that's exporting deflation? What's the business model for Germany?

22:33I think the U.S.-China, it just gets very, very difficult for people to imagine how ugly this could get in the decoupling. When we look back on this period, let's call it three to five years from now, in our opinion, we think one dynamic will be very clear, which is the Federal Reserve, rather than go the last mile of disinflation to get inflation sustainably back 2%, opted to save the economy rather than achieve its inflation mandate. And ultimately, that is structurally bullish for the sustainability of the business cycle, which itself is structurally bullish for risk assets.

23:13And keen observers will know that Scott was not on the daily briefing, but that great interview he did with Ash is on the platform. I encourage all of you, if you haven't had a chance to check it out, to go over there. And if you are not a member and can't access it, Brian will drop a link in for you to join so you can do that. So, Cullen, against that sort of very uncertain backdrop, what do you like here? Where do you see opportunity? Well, it's – I mean, again, going back to sort of the time horizon-based perspectives that I have, you know, the current environment is sort of interesting because a lot of people are shunning bonds.

23:53I actually like bonds probably more today than I have at maybe any point in, God, the last 20 years, especially if you're a short-term saver. I mean, the ability to now get 5.5 % on treasury bills, this is the positive side of the higher for longer narrative, is that savers now are getting a real return for the first time in forever. So in terms of especially shorter time horizons and the potential for the Fed to be cutting, I think that short-term bonds and intermediate bonds look really, really attractive these days. I mean, anything out to like five years or so looks super attractive. And I actually would, if I were invested in really short-term treasury bills, I'd probably be thinking these days about extending maturities a little bit, start to front-run the Fed a little bit.

24:45If they're going to be cutting in, say, a year or six months, it's going to look pretty smart to have front run them a little bit, locked in higher rates, and get a bit ahead of them. So the other asset classes are so much trickier in this environment because the stock market now is back to being frothy. The real estate market has been frothy, obviously, for a while here. you know everything else kind of looks a little more frothy the the commodity markets as a whole look relatively attractive because they've come down in value a lot in the last year or so so commodities probably look you know on the moderately more attractive side but yeah I mean it depends on time horizons I mean for for super super long time horizons I mean for the investor that has a 20 30 year time horizon you know I always tell people like that you know you build a diversified, aggressive portfolio and, you know, lose your password to your brokerage account for 20 years, you'll wake up and probably be pretty happy.

25:48So, you know, a lot of this depends on your time horizon. Right. We always say that. I know it's a sort of loaded question when you started by saying it's all about time horizon. So let's break it down a little bit. We have a question from Timothy. He was super excited to hear you lay it out the way you did because you're speaking his language as somebody who is, I think, thinking about his portfolio at this stage of life. He asks, I would appreciate Colin to go over AI as related to mutual funds in a 401k IRA as the types of funds he looks at. But that's an interesting long-term trade. And it's kind of what I alluded to.

26:26We talked about it yesterday. You can believe AI is this transformative exponential trend, but it comes with some risks and some volatility and we don't know who the winners are going to be. How do you think about that? And let's say, I think Timothy has a shorter horizon, right? He's going to need his money sooner. I'm guessing you can correct me if you're wrong, Timothy, because based on your smart knowledge in the chat, you probably have enough. But if you're looking at that long trend, but you're closer up on needing that money, how do you think about something like that? Because that's a tricky one.

27:02These are the sorts of trends that I think you have to put into the really long-term bucket of your portfolio. I mean, this is, I think a good way to think about this is, think of the NASDAQ bubble back in 1999. The NASDAQ bubble was not wrong. Tech investors back then were not wrong. They were just early. And that's oftentimes all that euphoria is. It's It's people pricing in things that are not necessarily wrong in the long run, but people just get a little overly excited about in the short term. And so the investor who bought even the NASDAQ peak, diversified portfolio of tech stocks, that investor still did wonderfully in the long run, but it took a long time.