00:00Can I start with the 10-year, Katrina, because we have Edyardani talking about the 5% mark for the
00:0510-year today.
00:06And, you know, a lot of people have mentioned that as a sort of a line in the sand.
00:09We're at $472.99, so basically $473.
00:12But that's only 27 basis points away, and we moved up 40, 45 basis points in just a matter of
00:18weeks.
00:19How soon could we get to 5%?
00:21Well, I think that a lot of people are forecasting a rate hike.
00:24I think it's 35% probability in actually the September meeting.
00:28I think some people are looking at the midterm elections and kind of punting that rate increase to the December
00:33meeting because of just the influence on the election.
00:36So I think that, you know, there's a third of the market that is telling you that the rate hikes
00:41are coming.
00:41And, you know, we've got this inflation narrative as well.
00:44And so you look at the PPI number that came in, you look at the CPI, and it suggested moderation,
00:49and you saw the markets react to that.
00:52However, we now have this additional layer, which is Iran's come back on the table.
00:56We kind of thought it was in the background.
00:58You know, we now have an indication that, you know, oil's starting to raise its head again as an inflation
01:04concern.
01:04And that inflation concern is what I think people are starting to worry about.
01:09Is this a structural shift that will stay with us even after the Fed does its thing and, you know,
01:14gets inflation under control?
01:15Given the structural shifts in the global economy, you know, things like fears over supply shocks, continually persistent inflation coming
01:23to haunt us.
01:23I do think that we are in a market where inflation is going to be well above 2%.
01:29Now, when I say well, I'm not talking fives and sixes, but I'm talking well in that 2% to
01:333% range versus, you know, some of the very low numbers that we've had.
01:37And that, I think, is a result of, as you've indicated, the supply chain shift, and that shift into the
01:44United States.
01:44So, we're actually on-shoring a lot of our manufacturing, and that's slightly more expensive.
01:49You secondly have, you know, some of this commodity price increases.
01:54We're seeing oil price increases, and those two are inflationary.
01:57So, I think that from our perspective, you just have a lot of these inflation concerns.
02:02They are going to be persistent, which keeps those yields high.
02:05So, you're just back from Australia, where they're having a similar problem, right?
02:09But also, they had the first, or at least the first, U.S. AI debt offering, right?
02:15So, there's competition between the AI offerings and sovereign debt worldwide as well.
02:21Does that continue to crowd out sovereign bond buyers?
02:25I think that there is enough capacity in this market to be able to accommodate the amount of AI debt
02:31that is coming.
02:32And I know that there's been a lot of narrative about, you know, being very pessimistic about what's coming to
02:38the market.
02:38But everything that's coming to the market is being priced, and it's actually being placed.
02:43However, we had the narrative.
02:45In the beginning of the year, we were talking a lot about this ROI on AI.
02:50And I think that a lot of people were negative that companies were just spending all this money.
02:55What we've got are two data points that I think are really significant.
02:59First of all, the top 1% of AI spenders are spending about $7,400 per employee on AI.
03:06The second thing, as we go through second quarter, we're starting to get commentary about the returns on AI.
03:12Now, you have certain companies, Chime Financial, Dow is another example, where they're cost-cutting.
03:18So, they're reducing labor forces.
03:19But you've also got other companies, such as Box, which is saying we're redeploying, and that's going to generate revenue
03:25growth.
03:26So, we're starting to see these use cases and this AOI return on investment.
03:31We're seeing it in our own business at Franklin.
03:33And so, I think you're going to continue to have this narrative.
03:36And as long as AI starts generating returns for the companies that are spending, I think you have that justification
03:44for the continued CapEx.
03:46Are you saying that you're continuing to be optimistic about stocks or just the stocks that report an ROI on
03:53AI?
03:53So, we believe that earnings is what drives stock markets.
03:57And if you have a look, I mean, second quarter earnings growth was 47%.
04:01We're a developed market and to print that type of earnings growth.
04:05And the earnings growth was across a number of sectors.
04:08If I look on a full-year basis, actually all 11 of the S&P GIC sectors are generating positive
04:14earnings growth.
04:15So, that's actually a really nice setup for a broad market as well as a positive market in terms of
04:21underlying growth.
04:22And so, I think that where we think that we are continuing to have positive earnings growth, then we look
04:29at the valuation.
04:30And I would say that valuation alone is never a reason to sell a market.
04:34We're trading on forward earnings estimates with about 13% growth priced in for 2027.
04:41At 19, just over a 19 multiple, the average is 17.
04:44So, we're not in cheap territory, but we're definitely not in expensive territory.
04:50And then finally, I think we were just talking before the break.
04:52You know, some of the numbers in terms of the bullish sentiment, that's where we're a little bearish.
04:57I mean, so many people are bullish.
05:00And with bond yields being so attractive, there could be some shift of incremental capital back into the bond market,
05:06given the yields.
05:07Okay.
05:08So, that figure that we were talking about was 56% of fund managers polled in a Bank of America
05:13poll are overweight equities,
05:15which is the highest level since November 2021, right after COVID, right?
05:18And cash allocations are down to 3.5%.
05:21Exactly.
05:21So, that's in and of itself what the risk is.
05:26People are overexposed to equity markets.
05:28Some of them have done it on a levered basis.
05:30And so, that, you know, if you look, people are thinking about the equity markets are not particularly cheap.
05:36I've got a lot of bullish sentiment.
05:38So, you may have a pullback in the short term.
05:41But we would actually say, given the earnings setup and given the earnings growth that we're seeing for 2027, it
05:47is a buying opportunity.
05:48I think one of, you know, if we look, you know, the AI negative narrative about the jobs situation, we
05:54don't believe is the case.
05:56If some equity investors flee to the bond universe, as you say, is a threat, so they're maybe not doing
06:00it immediately, where would they go?
06:02Where would be the best value?
06:04I always say that the United States, because of, you know, the currency certainty, you're not actually dealing with this.
06:09And I would say probably out onto the 30-year curve, because the yields are attractive.
06:14So, I think that you have that.
06:16But I think taking too much of a duration bet is, you know, is a little difficult.
06:21I think, really, you're playing the bond market here for the yield and the carry.
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