Was the Rate Cut Enough? ft. George Goncalves

25:28and then the Powell pivot in December created a massive risk on, which has been kind of carrying through all of 2024. I mean, we've had minor pullbacks in risk markets, but in general, we've seen an upward swing in the stock market, right? And rates have kept going lower and lower and lower. So I think the two are related. The bond market was easing financial conditions already. So now even if the Fed delivers on the bond market, there's no additional financial conditions easing going forward. And I think that's what's lost upon a lot of the folks in the risk market is that it's already happened.

26:00The easing took place. And in fact, actually, you might have a risk that rates go up as the Fed is cutting rates over inflation concerns or whatever the case may be. But the five-year, 10-year part of the curve might not rally as much going forward. And that's not going to help out credit, not help out mortgages. It's not going to help out the housing market. It's not going to help out the stock market either. So basically, it's all priced in. Okay, that is really, really interesting. And I want to walk through it in some detail, particularly for people who don't follow this as closely as you do, George, because these are some really, really important points about what's going to happen in your view to U.S.

26:33Risk asset prices to your treasury right now, trading at 3.55 on my screen, 10-year, 3-point, call it about 3.75 or thereabouts. One of the things that's interesting here is we have this disinversion of the curve, 2-10 spread right now at around 20 basis points, 19 bps on my screen. This is the first time in some time during this cycle that we've seen this positive 2s10 spread. Going back to 2022, it's really interesting to hear you say, hey, listen, what bond markets might be doing right now is pricing in those future rate cuts. As you said, lots of wood to chop from the Fed to get down to that terminal rate.

27:11This is really, really interesting because if the implication here is that these bond markets have already priced in those cuts, it really does, as you say, have implications for this idea that credit conditions simply may not loosen any further. This is really interesting stuff. Yeah, no, and I think that's going to slowly come into the discourse over the coming weeks. But maybe go to page 14 if you guys don't mind sliding down and going into the market section and we'll work our way backwards. Let's do it. One more, yeah, page 14. Yeah, so this is what people kind of in our industry call the hairline charts.

27:49It's just basically all those little dotted lines are being superimposed on the black line, which is the Fed funds rate. So this is just what yield curves were telling us on a given day over history going back into the 90s. And how does the yield curve project like where rates were going to be? If you kind of look work from left to right, the bond market in the past was actually a very optimistic bunch of folks. We thought rates would always go higher. So in the 1990s, when the Fed had finished hiking rates in 95, they were almost projecting 8 % on rates. That's what that little kind of curve was telling you.

28:30Even after the dot-com peak in 2000, the bond market was suggesting that rates were going to get close to 7.5%. We've never seen rates like that ever again. It probably won't unless we get into a massive inflationary spiral, but that's not the story for today. But in general, those little hairlines are basically yield curves that are suggesting where rates would have been had the Fed followed along with market projections. Look at what's happened ever since. Every single time we've had either a crisis or an economic slowdown, the bond market starts to realize, oh, after you finish hiking, the next move is easing.

29:05Like there's only so much time that that can stay on hold. and the clock starts ticking once the final cut is put in place. This was a long hold period, analogous to what we got in 2006-2007 hold period. But you can see the stronger burgundy kind of dots, charts around 2001, 2007, 2008. The bond market starts to learn, once you finish actual hiking and you're on hold, the next obvious move is further cuts because we can't maintain these levels of rates. Well, then he kind of moved on to 2019. The same thing happened. And the bond market kept pricing in lower and lower cuts. And eventually the Fed delivered on those cuts.

29:47And then even in this most recent largest and quickest rise in rates from the Fed, all the while the Fed was raising rates, the bond market was pricing in cuts. Right? Just think about that. So they're trying to tighten monetary conditions, and the bond market was easing while they were actually tightening. So the curves were inverted, to your point before, that the curve is disinverted for the spot curve on the treasury curve. But for short-term interest rates, which is the domain of the Fed, that area of the money market space has had an inverted curve and still has an inverted curve. So that's the blue line towards the right side of the chart.

30:28You can see that as of the Fed meeting on September 18th, that solid blue line was almost the same level as when the Fed delivered its last 50 basis point hike. So the curve shape looks very similar to when they were still hiking and we were expecting cuts. So we've been expecting cuts for a long time. And now that the Fed has finally kind of moved in that direction, the question is, is what the bond market has priced in enough? And if it is, then the Fed will then get towards neutral because that blue line, the trough there is somewhere around 3%. But if it's 3%, I don't think it's going to be enough to engender further financial conditions easing because it's already been priced in for about 18 months.

31:15So at least for the last nine months for sure. But even while the Fed was hiking, the market was easing. I know it's hard to kind of reconcile that concept, but that's what was being priced in. And that was the level of credit pricing that was afforded to large corporations because they kind of tee off of that money market sulfur curve. Let's talk about this because it really is a big shift. I really enjoy these charts that go back some 30 years. It's really interesting. When we look back to the left-hand side of this chart, you can see exactly what you said when we are at the high point in retrospect of those cycles on federal funds rates.

31:54You saw those forward curves pricing in further rate hikes. You know, this is going back to the days when I could run a mile without wheezing. Really interesting to see what happens here around the 2019 period where you see the expectation. Perhaps, you know, I guess in hindsight everything makes sense. It seems pretty logical. Hey, once we get to a certain level, the Fed's going to have to cut. But this is a major shift for the way that bond markets have worked for 30 years. What's the implication for this, George? What's the risk? Does this sort of imply that the Fed is losing its ability to guide markets and that markets are being guided by the, this is sort of the tail wagging the dog, that essentially you have markets say, hey, we know you guys aren't going to be able to keep them up this high for very long.

32:40we're going to start pricing in on the forward curve of these cuts. Yeah, and this is kind of, it's like a tango, two steps forward, one step back. It's going to be this give and take between markets and the Fed. In my humble opinion, I think it's also one of the reasons why, although their neutral rate, which is the long-term dot for those that follow these sort of wonky stuff, the long-term interest rate estimates projected in the most recent summary of economic projections from the Fed's forecasts, they moved up their long-term expectations to 2.875, so whatever, let's just call it 3 % roughly.

33:16So somewhere between 2.75 and 3 % is what the Fed thinks is neutral. The market also agrees that it's neutral. And that might be the Fed drawing a line in the sand saying, look, we're not really looking to cut rates much more than that. We're kind of meeting the market at the point where we understand that the market's been calling for 3%. We've been keeping it at 5.5. that's been the wrong zip code. We're going to make a run towards three. The question is how fast you get there and at what pace. Is it like in this kind of moderate 25-bip increments or are they going to have to keep doing these large 50 cuts to get there quickly to ensure that they don't do further damage to the labor market?

33:58That to me is the only question that remains now. Once we get towards 3%, that's neutral. That's not even like accommodative, right? That should be like where the economy is not expanding or contracting or creating inflationary pressures. Once we get to that stage, then the question then becomes, does the economy need further easing or do they overshoot? And maybe the neutral is even higher now because of the kind of we're embedding more and more inflationary pressures in the system. That's like part three where we can't even trade that at this point yet. It's more about understanding, like, can we get to 3 %?

34:32How fast? And I think that the market has drawn that line in the sand, and the Fed's going to meet it. Yeah, this gets into this idea of the much debated R-star, the neutral policy rate, how we know when we get there. Listen, let me ask you this, because talking and hearing what you just said on the last segment, it's really interesting to me, this idea of lower for longer. It sounds like potentially lower forever. What happens if the risk is misjudged by the Fed in terms of this asymmetric risk to the labor markets? What happens if we see inflation beginning to crawl higher again? Have they lost the ability to manage that?

35:14So, I mean, what you described is stagflation, which is still a distinct possibility. It's high in my odds. I actually increased our odds of recession back to above 50 percent, so 55. So I'm probably one of the highest forecasters on the street still thinking that in the next 12 months or maybe in hindsight, we're already in the recession. We'll see. But I think that we'd probably see a slowdown first, which is inherently disinflationary. People lose pricing power in terms of wages. You know, people lose their jobs. So like, I mean, that's the unfortunate consequence of overstaying, keeping rates too high for too long.

35:46But this idea of like higher for longer, I think we love narratives, obviously in the markets. And it's very convenient to package these ideas like these like catchy sayings, but higher for longer is relative. It's relative to like where we were before and it's relative to what is the estimation of R star or the neutral rate. So if the neutral rate is three, they have been very restrictive. Forget about higher for longer. They've been very restrictive. So, I mean, higher for longer for me is anything above three. So if you're above three, this idea of higher for longer is still consistent and you don't have to keep tightening the price of money through higher rates.

36:28Once you get closer to three, then you're getting more towards the neutral. And then you can see if the economy either starts to heat up again or not. And if it continues to decelerate, that means that the long and variable lags have created enough damage to the underlying economy that they're going to have to go under three. So that's why you can't set up for that trade yet. I think now we're in the period of markets are going to give the Fed a chance to see if they deliver on those cuts. And if we can actually get a soft landing, I'm in the bumpy landing category. They're going to try to soft land, but as we're doing it, it's going to be bumpy.

37:01We're going to get even further evidence of economic weakness. We have a real risk of some negative NFPs coming up in the coming releases. And that will really scare markets to realize, hey, maybe it's not as rosy out there. And even if the Fed cuts, it won't really change anything because the die has been cast. And so it's going to keep kind of decelerating until the Fed either cuts under neutral. But you can't set up for that yet. I think we need more data for that to get behind that view. So yeah, I think it's just rates matter. They always do. When people start telling you that rates don't matter, which was another narrative that was out there that was driving me crazy.

37:40It's like rates are like the price of money. How could they not matter? They matter to different industries and different cohorts at different times and different regimes, but they still matter. Otherwise, why do we have rate policy to begin with, right? Why do we have these tools? So rates matter. Higher for longer is relative. And perhaps the Fed overstayed their welcome at high rates. And now there's going to be that long and variable lags working its way through the economy. They're going to have to cut faster to offset it. George, I know we jumped ahead a little bit here in the deck. Maybe we should head back as we talk about rate cuts.

38:11I think the rate cut charts begin. Well, let's maybe we head back to we head back to slide nine. We can take a look at this and walk through the labor market picture that the Fed was looking at and then head into some of the MUFG analysis on rate cuts. Yeah, so what we're looking at is just job openings and the unemployment rate. And I think by now everyone's become familiarized with the whole SOM rule and the fact that we're seeing the short-term averages of the unemployment rate rising faster than the 12-month trailing low. And that is usually happening at inflection points in the economy. So unemployment rate rising is never a good thing.

39:03And there are folks that'll come out and say, well, it's because the labor force is expanding. Well, if we're not producing enough jobs for new entrants, isn't that a problem? I mean, those folks would like to get a job as well. And so then they're competing for whatever available jobs are out there. And so you have a rising labor force, but not enough jobs being created. And then if you look at the job openings, which is the red line, that's been declining and has been declining ever since we saw the big increase post reopening, post-COVID. When these two continue to operate like this, if we continue to see less job openings and higher unemployment and just overall hiring slowing down, you're very close to, if not in a recession.

39:46And so no one likes to say the R word. I know it's, but we have to be just kind of like, be clinical about it and just be objective and look at the data is telling you that something's not right with the labor market. So I think this is what the Fed's also looking at as well. And then if you go to the next slide, slide 10, to kind of keep on pace with the labor data, this next slide shows you on page 10, there's been different ideas around what's the steady state, what's the natural growth rate for the labor force. Let's just call it 175 ,000. I've seen estimates between 125 and 225. Let's just call it somewhere in the middle that you need to at least produce this amount of jobs just to keep up with population growth and new entrance into the workforce.

40:35So let's call it 175. So the way to read this chart, the bottom panel, the black line is, are you producing more than the 175 or less than the 175? And since April, job growth has been under delivering. So we've been producing less than 175 ,000 average per month. We've been producing about 135. And that one July reading got revised lower to 89 ,000 jobs. So one of the really weakest prints for the year. But really, since April, there's been a downshift in the U.S. economy. So I think like we were, yeah, you can, and this is based on NFP data, by the way, which already gets revised lower because of the QCW thing, right?

41:20So jobs at 175 ,000 is nothing to snuff at. It is a good, decent job growth. At least you're maintaining. It's not like super strong and pulling in or overproducing jobs, but at least you're maintaining the growth rate that's needed for the economy. Under 175, you're in deceleration mode. So something happened over the course of the last couple of months where companies have been pulling back on hiring. And a lot of this hiring, by the way, this includes both private and public sector. If it wasn't for the government jobs, healthcare jobs, and state and local government, we would actually see very little private sector growth altogether, which tells you the private sector has been offline for the last couple of months.

42:05George, we're gonna walk through some of the slides, the next three slides, about Fed rate cuts in just a second here. But I wanna ask you something that may be a little bit outside your wheelhouse, but I just want to bring this into focus here. We're talking about potential impairment to the labor market, particularly private sector labor markets when you do this net of federal, state, and local job creation. I'm looking here just at the S &P 500 trading above 5 ,700 on my screen right now. Year to date, plus 20%, trailing 12 months, plus almost 32%. It's hard to reconcile some of these points that we're talking about here.

42:39We talk about impairment of the labor market. We talk about shrinking credit availability to small and medium-sized enterprises. And yet you have a massive, it just increases in prices of U.S. equities far above anything that looks like a long-term average return. How do you square that mentally when you look at this and we walk through these data points? What do you think might be happening there? look uh i mean you um i'm sure are familiar with good work from michael green uh the whole passive flow you know the the stock market is not the economy i think we have to i mean if this doesn't tell you that it's not the economy i'm not sure what it is um you can have these divergences for for periods of time i mean at some point they have to reconcile either corporate earnings have to increase or valuations have to come back down right so i think that we're in this sort of ambiguous state where we don't know, are we going to see a pullback on earnings expectations?

43:36And then that finally gets translated into lower equity prices. I'm more in that camp, especially if they're not really expanding their businesses and growing further. And they're just benefiting from capital, capital that's kind of very captive capital that continues to get reinvested into the equity space. And, you know, in the US markets do receive a lot of support from foreign investors. And so I think there's this kind of magnetic pull that's been driving flows into equities that have been self-sustaining for now. And the active managers really can't fight that flow, I think. And so it's just kind of like this kind of cruise control kind of grinds higher until there's like a day of reckoning around the macro.

44:20We realize, oh, our assumptions were really all flawed. The bond market has been telling us for a long time, screaming from the mountaintops that, hey, something's not right here. Fed delivers on it, and then the equity market has a correction. I'm much more in that camp. Yeah, and it's interesting because sort of implicit in that thesis, whether it's hot money flows, international capital, our old friend Mike Green here at Real Vision, the passive indexation about what's happening in markets. The implication is, hey, this could continue to go on for some indefinite period of time before reality catches up.

44:53That's right. And or the demographics start to shift around it too, right? Because I mean, we do also have a lot of baby boomers that are at some point, you know, having to tap into retirements. So again, this is going to be a flow driven kind of market until otherwise. And that's going to need the macro to turn in a very clear way. But when it's so obvious, it's going to be too late. That's the problem, right? It's going to be like, once everyone realizes that there wasn't real economic activity that is sustainable behind it, that it needs really, really low rates, then I think that the story will get rewritten.

45:26And if it does happen, it will be perfectly obvious in retrospect. Always is. I mean, that's the problem. I mean, people want to have the evidence before the actual outcome, but we're in the predictions business and it's the hardest one to do, right? You can't forecast the future with 100 % precision. If you do, then everyone already has a trade-on and it's already priced in. Okay, with that said, let's jump back in. I believe slide 11, looking at the Fed. Yeah, so this is really just highlighting, and this is us trying to, as we were mapping out the last 50 basis point first cut, which happened in 2007.

46:04So that's the black line that you're seeing there. And we kind of superimposed what could have been events. And look, I was in the markets back then. I've been in the market since 97, 98. And I've seen different iterations of what drives markets. And I distinctly remember that 07, 08 period. It's ingrained. It's the PTSD that all us bottom veterans have from that time period. But I superimposed some of the key events that took place that drove the black line's probability of a 50-bit cut in 2007. You go through a big period of time where in the summer of 2007, people really were banking on the soft landing.

46:43It's going to be fine. Housing is just a very isolated issue. You get into August of 2007, you get the first sort of indications that it's not just a housing story. It's a broader kind of call on the whole euro dollar liquidity global dollar markets. And that's when you saw the black line started to move higher when we saw the BNP funds slowing down or suspending the redemptions. You had the Fed cut an emergency cut in 2007 in August. And then the probabilities of the 55th cut dropped back down to zero and then spiked around the first negative NFP that we saw in September of 2007. But going into the meeting, the market was not pricing in a 50-bip cut, and the Fed actually delivered a surprise cut.

47:30Whereas this time, the market, again, because we're getting smarter each time we do this, I think, and the market kind of saw the big yen carry trade unwind of August of 2024 now, and saw that maybe there is some risks out there that could potentially indicate that there's liquidity issues out there. We saw a big spike in the probability, as you see with the red line, nearly almost 100 % of a 50-bib cut. And then it started kind of coming back down as the data started coming out, as we saw a lot of the sort of weaker hands close down on the end carry trade. And then we moved back towards U.S. macro narrative, you know, how much will the Fed cut, 25 or 50?

48:10We went back and forth on that all the way up until basically the few days before the meeting and the probability spiked again. but only to about 60, 65. So like usually the Fed likes to do a policy change, especially the first one with a probability closer to 100%. So this was still a surprise in my book because they cut when nearly 90 % of the forecasters were calling for 25 and it was only a few of us that were calling for 50. It's still a surprise in my book, even though it was priced in partially by the bond market. I remember those days in 2007 quite well. Ah, you know, they're just these two obscure hedge funds over at Bayer.

48:51Nobody cares. Jimmy Kane knows what he's doing. Everything's going to be fine. Yeah, and it kept kind of unraveling, snowballing from there. We know the rest is history. And I think sometimes what confuses and confounds us is we think that what we knew in 2009, 2008 was already known in 2007. You had to go through the passage of time to actually really realize the gravity of the situation. So even though we look at these historical charts, we're like, of course, that's what happened. Like, yeah, but when you were living through it, it was not that obvious. Yeah. Next slide. Slide 12 is interesting because you have a breakout, this election sidebar scenarios where you have a separate take on what may happen here with the different scenarios for a Harris presidency versus a Trump presidency.

49:36Really interesting stuff. Yeah, so our view was for this idea of front loading. As you can tell, we think that the Fed should do more sooner. Maybe that could avoid them doing less later or whatever. The more you cut, you can try to address the problem now, and you get a bumpy landing, but not a full-blown recession, hopefully. But you got to start moving. You can't just sit there waiting on the fence. So our scenario is one of scenarios. There's two kind of split between the soft landing dreams, front loading versus a missed window, bumpy landing. We're kind of torn between those two as our macro views.

50:15And then a small probability that they actually skip in November if we have a lot of election volatility. I don't think that's likely. We probably won't know who's going to be the winner of the election. It might take a few days. It might be contested. It might drag on for months on end. And so we might not really know definitively who's the next president. And so I don't think the Fed should skip in November. They should just cut at a minimum 25. But if the next couple of NFPs are very low in the 100 or sub-100 level, it may be dangerously close to negative because of that birth-death model bias in September could actually swing NFP negative, which comes out in October in a couple of weeks.

51:01So we'll see if we get a negative NFP, that's going to almost lock in a 50 basis point cut for November. So that's like our base case view. And then on the right side, this is just hypothetical, and they're separate and aside from the general themes. But people always ask, like, you know, if you get a blue wave or a red wave, like what would the Fed's reaction function be? This is my first attempt at like looking at that. I think, you know, it depends on if it's a surprise scenario. scenario like was the market expecting a trump win and then we got a harris surprise or vice versa we got you know harris uh was it was was doing well because it has been doing well in the polls and that continues to improve up until the day of the election but then we get a surprise and it's actually trump that wins like that's the way to read this um hypothetical scenario it's like if you have a shock of a blue or red wave what does the fed do i think in a in a shock blue full blue So House, Senate, and the presidency, that gives a mandate for Harris to actually implement those sort of tax reforms that I don't think the markets are going to find friendly.

52:10And you can see a pretty decent risk off. And given that a lot of the wealth effect has been tied back to the S &P continuously rising over the last couple of years, if you get a risk off and that wealth effect goes in reverse, that's going to slow down the economy because the upper income are, you know, doing a lot of spending. So if you give a shock to the wealth effect from a blue wave, then the cup move, in my opinion. If you get a red wave, it's, you know, the Fed in general, and most market practitioners view a Trump wave as more inflationary, even if it's not the case, we can debate that.

52:47But if that's the way the market trades initially on that sort of news and outcome, then the Fed cuts less. That's the simplest, easiest way to kind of distill those two scenarios. Hey, let me ask you this. Listen, I generally avoid talking about politics like a plague on this show. But I have to ask you, when we look at the polling data, it's something that I've been doing kind of every day, just flipping through the polling data. I just don't have any confidence in these numbers. It does not seem like pollsters have gotten this dialed in. They haven't figured out the transition from landlines to cell phones.

53:17It seems like depending upon which poll you're looking at, they're just reaching different people. They just seem like they're all over the place. Do you have any faith in the predictive power of this polling data that we're seeing? No, not when it's close to 50-50. I really don't assign too much confidence in one outcome versus the other. And I think the market doesn't either. That's why the market hasn't been reacting that much. I mean, during the debate, there was some concerns as Kamala Harris did, at least from the odd sites and from the polling afterwards looked like she did much better in that first debate.

53:53And the S &P actually went down during that overnight session. So that was probably the only real read of a connection back to near-term updates connecting the political developments with market. I think the markets have been focused on the Fed because it was a big historic move, them being so preemptive with a big cut. And in the market, as much as we can try to suggest, we can juggle a lot of balls at one time. You know, a lot of times the market becomes very myopic on one macro theme and then moves on to the next. And I think we're now at that point where we're going to transition towards really laser focused on what the election, you know, what's in store for the election.

54:33Is it going to be a clear victor? Is it going to be a drawn out process? But yeah, the market I don't think has been really reacting to political developments yet. Yeah, I think that's well said. Okay, lucky number 13, slide 13. This is an interesting one because it shows the absolute trajectory of rate cuts during cutting cycles, sort of agnostic of where the levels were when they began. You just see the cutting here on the x-axis. You've got the months charted. Yeah, the big takeaway from this chart, every cycle is different, first and foremost. And so in the 70s and 80s and 70s, there were really sharp rate cuts because they had hiked a lot before.

55:13So when you're hiking 1 ,000, you can cut 1 ,000. So that's why you get these big sort of swings. But once we got into the more steady state, great moderation, post-1990s, lower rate environment, all else equal, rate paths have been shallower, rates have been lower, all else equal too. But most easing cycles tend to get wrapped up in one year's time. So if the clock now has started in September, by next year, September, the Fed has basically finished its easing cycle. So that's why if you look at the dashed red line, that's the market forward rates, which have roughly about 200 basis points. The black line is the average, which is being skewed a little bit lower.

55:57because in the last few easing cycles, the Fed has cut 2019 aside because they didn't have enough room to cut. They only had 250 bips to be able to go down to zero. But in the last couple of easing cycles, they cut 500. And they have room to do 500. I don't think they should or will, but if things were to get worse from here, they have the ammunition to go down 500 basis points. So every cycle is different. The majority of cutting tends to happen in the first 12 months. and base effects matter, i.e. where you start from, gives you a clear indicator about how much room you have to move to the downside.

56:36Okay, I think we're going to skip 14. That's the hairline chart that we hit. Going to 15 historic two-year trend change signal rate cuts ahead. This is an interesting one. Yeah, so I've been taking most of my guidance from the two-year. The two-year, I think, has a better handle than long-term rates on where the Fed is going to go. And I also think that long-term rates have rallied a lot already. They can go lower if the Fed delivers more than the 200 basis points of easing. But if you look at this chart from the perspective of momentum, that red line is like a momentum indicator. Very simplistic, but it's just looking at the cumulative change for a two-year treasury in a two-year window, which is basically the life of the two-year.

57:20So as it's kind of rolling along, once the trend in the rate direction changes course, it keeps going until it stops. And it hasn't stopped. And the Fed has only started cutting. So the way to read it is roughly somewhere between six months to a year, the bond market realizes that there's only so much further if it can raise rates. And then it starts to trade sideways, which is what the two-year did for the better part of 2023 into 2024. And then now it's broken through its prior load that we saw during the SVB move. And now if you take this to its final completion, that red line will continue to decline until it starts to form a base, which is probably after the Fed is delivered on the cuts.

58:11So that's the way to read it. It's worked for most of the recent easing cycles. Once the two-year changes directions, it signals cuts are ahead. And most people were ignoring it. I don't know why. I mean, this is like one of the other obvious charts where it's been staring you in the face that the two years telling you that lower rates are coming, but people didn't want to believe it either because of their kind of worldview on where we are in the economy, whatever the case may be. But the bond market's been telling you that we can't afford high rates. Rates are going to start cutting. It's only a matter of time.

58:42And now that they actually started to do the process, it's only when they finally stop cutting that the two-year, I think, will hit bottom. And I think that's – we've had kind of a curve steepening bias. We've had the two-year is the best point on the curve, and that's been the right view in our book. Gosh, you know, that's such an important point. I've seen so many cycles where you see investors get caught in there. I don't want to call it politics, but just this worldview where, like, I remember this during the 2008 crisis. so vividly. It's like the reckoning is coming. It has to come. It just has to come.

59:16Equity prices can't stay where they are. And they did. And they continue to. And so it's so interesting to look at this from a data-driven perspective. Let me just ask you, what's your base case for where that two-year yield is going to stop? Obviously, when it went above that historic 5 % mark, where do you think this continues to go? Where do you think the two-year yield finds a bottom? Yeah, so our official forecasts are very close to what the Fed's going to deliver. So basically 3 % and slightly under like 275, 3 % is probably where the two-year is moving towards. So it still has about 75 basis points or so to go, 50 to 75 declines.

59:54So the two-year could rally more than the 10-year, where I think the 10-year can be somewhere between 325 and 425. If the 10-year were to break under 325, and that would then create another bull flattening type move, then something must have broken in the economy or financial markets. Which, again, is a possibility, but I think that the fact that the Fed is now getting ahead of it or trying to get on track by delivering these cuts, it's going to be mostly the front end that rallies from here. and we'll have episodes where long-term rates can actually sell off if we get, you know, there's going to be times where data's not going to be always looking that bad, maybe might improve in Q1 next year, give us kind of this false dawn that everything's fine.

1:00:38And then, you know, we realize that we're still in the slowdown. All right, slide 16. I think we got through, I don't want to say all of them, but most of them. This is the last slide in the deck. Talk us through what we're looking at right here. Yeah, so this actually is a great way to kind of end because we started off with how much the divergence has happened between small businesses and large corporations and how, in many regards, large corporations have been borrowing at basically Fed funds interest rate levels with a small spread. So what I'm showing you here is the Fed funds rate again, the red line.

1:01:16The black line is the spread, though, not the yield of corporates, but the spread that corporates, the overall index, not just one individual company or industry, but the overall broader index of IG, you know, spreads are very tight. They're tight. This is the investment grade options adjusted spread that you're looking at. This is a metric that measures the spread that large above the federal funds rate. Exactly. And that spread is near historic lows. It's kind of been bouncing around the lows. and our view is that if rates continue to rally from here, then spread risk or widening risk can start to actually take hold.

1:02:00And that is, when the Fed's cutting, they're usually cutting because the economy's slowing down, not because the economy's getting stronger, right? And so if that's true, then it probably will flow through to corporations as well. And so then you'll see some credit risk premium come back in and or credit bonds will not be able to rally as fast as government bonds. And so by default, the spread starts to widen. And so I think that defense cutting rates because of the macro considerations that we've laid out here on the labor side, and that it's going to be bumpy from here on out, then credits are too rich on a hedge basis versus gubbies.

1:02:39George, it's always a pleasure when you join us. I especially enjoyed this show here today. A slightly different view from a different angle, talking about some of the issues that everyone is concerned, everyone is focused on, but a different perspective, a different narrative, different data points. Really a pleasure to have this conversation with you. Final thoughts, key takeaways that you'd like to leave our listeners and our viewers with from this conversation. Yeah, I think the key takeaways are rates do matter, that we are at a point where it's unclear if the Fed's going to be able to soft land.

1:03:15And so they're going to try their darndest to try to soft land, which means that they have to deliver on the cuts that are already priced in. And don't underestimate all the financial conditions easing that has already taken place and it's already been embedded into risk markets. It makes it much more challenging going forward to trade these markets. George Ngoloff is head of U.S. macro strategy at MUFG. Always a pleasure when you join us. Thanks for watching. Thanks for listening. Have a great afternoon, everybody. What if you could invest in a hard asset like silver and then earn a return in that same asset, bypassing the fiat dollar system entirely?

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