News & Insights 2023 Bond Market Recap with Charlie Jamieson: Key Trends and Takeaways

Investment Leaders JCB Podcast

Damian Cilmi: [00:00:00] Welcome listeners to the Praemium investment leader series podcast. I'm your host, Damian Cilmi, head of investment managers and governance at Praemium, one of Australia's leading investment platforms. And today we're pleased to be joined by Charlie Jamieson from Jamieson Coote Bonds. Welcome Charlie. And we had you on the show back in early 2020.

So it's great to have you back again. The world was very different at that point in time. And we'll get there and we'll talk about that. And for, for the listeners today, we're obviously, we're going to be talking about about bonds. You know, you are a bond manager, but all of the pieces that come together with that there.

So we're going to talk about inflation. We'll talk a bit about the economic backdrop of GDP. We'll talk about interest rates and obviously how bond managers are seeing all of this and putting it together. So let's kind of recap from early [00:01:00] 2020. I think it was just before COVID started but rates were already very low at that point and actually even went lower from, from there on, just walk us through the last couple of years. I suppose we could probably say even the last year was the the big turning point.

Charlie Jamieson: So look, just an extraordinary period in, in history incredible response from the powers that be to navigate us through COVID in terms of the epic response with both fiscal monetary and liquidity policy to stem the tide of what was to be a pretty hellish moment potentially for economies.

Charlie Jamieson: And we stayed in that state for too long as it, as it turns out. In June 21, we were being told by Chairman Powell of the Federal Reserve. We're not even thinking about thinking about raising interest rates. Well, here we are today, and you know, we've raised more than 500 basis points in the U. S., in the U. K., in New Zealand, about 400 in Europe, 425 in [00:02:00] Australia. So huge recalibration to try and kill consumption and bring demand down to bring the economy back into equilibrium to quell that inflationary impulse that was there from the revenge spend coming out of lockdown combined, you know, turbocharged by geopolitics and energy policy and, and these types of things.

Charlie Jamieson: Now broadly, that has occurred in terms of we're not at 9 percent inflation anymore in the U. S. Thankfully, the global inflation pulse has slowed significantly, but it's still a bit too high. So. I think, markets have had this huge recalibration. Certainly the bond markets had a terrible 2022 as rates were moved higher. It's simply unprecedented rates. We've not seen this.

Damian Cilmi: And I think it was also the pace of change as well. Like in an absolute level, the numbers are not that big historically, but the rate of change really big. Have you seen any other periods that they've gone up that quickly?

Charlie Jamieson: Not like that. I mean, the last obvious [00:03:00] one is, is the 2004 to 2006 period, the Federal Reserve. They raised interest rates from 1 percent to five and a quarter percent. We'll no doubt talk about that period because what happened after was pretty significant as well. Yes. And we've just done from zero essentially up to five and three eights or about five and 0. 4%. If you round it up it's happened much faster and we're a bit in the eye of the storm moment.

Charlie Jamieson: So, in 2023 people have certainly been very cautious. We've had, the Silicon Valley bank episode. It's been a few little things that have been a cause for concern. Clearly we've got more geopolitics at the moment, but broadly nothing's happened. Economies have kept on keeping on, we're enjoying a bit of an equity rally and a bit of a bond rally at the moment.

Charlie Jamieson: So maybe that's a bit like 2007, the year after the last big rate hiking cycle. People were very cautious again, Bear Stearns went down, a few funds locked up. There were a few of those little, maybe pre warning signs and then of course [00:04:00] 2008, everything happened. Now, I'm not suggesting that. Everything needs to happen in 2024 but certainly it's not amazing to suggest that economies are slowing, the fiscal monetary liquidity policies, which propped everything up back then in 2020 have all been removed and thrown in reverse.

Charlie Jamieson: How long they stay there is the source of great debate. Can we cut rates at some stage? And no doubt we'll talk about that over, over this little chat. Certainly, of course, at some stage that will occur. And how much of the inflation monster do we still need to, to kill? The majority of that project is complete.

Charlie Jamieson: But as we know with inflation, there can be a second round. And so you don't want to let those embers continue to glow too much. And certainly the great fear from central bankers is to cut too early and re stimulate that inflationary impulse. And then they've got a bigger problem down the line. So

Damian Cilmi: we've seen that movie before as well.

Charlie Jamieson: We've certainly seen that movie before. , as we're kind of sitting here today, [00:05:00] data is starting to get a bit softer. That doesn't mean it's bad, but it's about the loss of momentum. So markets are starting to see that. We have periods where bad news is good news, and certainly if that means some rate cuts and a bit more support, markets like that.

Charlie Jamieson: And we've seen, over the last 12, 18 months in particular and we saw it really pronounced around the middle of 2022 when the bond market sells off very violently. It does take a lot of other things with it. Yeah. Sadly it'll take equities. I mean, it is our global cost of capital. So it's not unsurprising to say that, like you know, a train on a locomotive, I kind of explain it.

Charlie Jamieson: If that's getting pulled in one particular direction, it will drag other things with it. You know, like there's. Buildings behind us, their valuations are very predicated on the funding rates that are available. Clearly if they rise by 500 basis points, unfortunately that thing's not worth what it used to be. And that takes a long time to get recalibrated. That normally happens through refinancing and we haven't really hit that part of [00:06:00] this story yet. That's down the line. So for now, the market's absolute focus is on inflation, making sure that inflation continues to come down around the world. Broadly is in Australia, it is slowly, but not fast enough, which is why the RBA just hiked again in November.

Damian Cilmi: So let's unpack that, that inflation point, because we have seen it trending down and we, you got some good data points. Obviously there's been some recent releases around that one there. Like, I suppose one of the questions we need to ask ourselves is, yes, it's been trending down, but does it stay a little bit elevated because there's a bit of that discourse out there as well. How do you see that one playing out?

Charlie Jamieson: Yeah, I think that's rational. So you're getting back into two to 3 percent band is going to be difficult. Inflation is going to remain volatile. That doesn't mean it necessarily needs to be high. But it just means that there's a wider band of uncertainty as to where is it really trending.

Charlie Jamieson: And so at the moment, we're in a downdraft in that [00:07:00] volatility. So it's likely, in our opinion, that inflation will rise a little bit in the US coming into the end of the year. Now that's very different to Australian inflation, so, and 4 percent is really that magical level that gives central bankers the yips when it comes to inflation.

Charlie Jamieson: We have periods where we've gone higher, but beyond 4 and really become sustained. The US breached that 4 percent level in April 21. Australia didn't breach that 4 percent level until January 22. Yep. So big, big lag. As we often see with cycles, you know, we're in a completely different part of the world.

Charlie Jamieson: We have a completely upside down seasonality to other Northern Hemisphere economies. So they often lead and then we'll follow. So we really think that inflation will continue to, to come down in Australia, particularly around things that, the central bank can't control, like cost of insurance that's been climate change driven, global cost of energy because of geopolitics.

Charlie Jamieson: There's nothing the central bank can do about that. And a few other things like [00:08:00] that wholesale energy prices, which have risen very steeply and are now coming down, regulated to come down. But it's not happening fast enough and certainly here in Australia where there is monopolistic pricing power, just a few supermarkets, just a few airlines, we've all experienced that.

Charlie Jamieson: You go down and just think, my God, the prices are certainly higher. I don't feel like they're accelerating anymore. In fact, you go, I'm lucky enough to do the supermarket shopping for our family on the weekends. And a lot of things actually discounted all of a sudden. And you're saying that, you know. Last year to fly up to Sydney from Melbourne, you know, we were paying nearly a thousand dollars a seat.

Charlie Jamieson: I did it a day before yesterday for 180. Yeah. So a lot of things have normalized. I'm sure the airlines will find a way to charge you somehow magically. But those vast changes are not, no longer occurring. And inflation is a rate of change concept. So don't expect prices will come down necessarily.

Charlie Jamieson: They hopefully do in some parts of our lives. But if they just stay [00:09:00] the same, then inflation goes to zero. So, you probably don't enjoy filling up your car on a Saturday morning, don't expect that it's going to come down massively. If it just stands still, inflation, zero. So we need to get closer to that point and I think we are getting there.

Charlie Jamieson: If we look around the world, headline inflation in the US is at 3. 2%, having peaked at nine. Inflation in the UK has just dropped from six to four. Inflation in Europe's broadly pretty mute. In Canada, 3. 2. In China, slightly negative. So they're well off those really scary numbers, but to your point, just a bit too high.

Charlie Jamieson: Yeah. And that means that interest rates will stay a bit higher for a bit longer. And the longer they stay high, the more problematic that becomes through time. So. If rates go high and then come back down, it's a bit like a tumble turn in a swimming pool, it's painful for a short period and then, you know, back to status quo.

Charlie Jamieson: Unfortunately, we don't think that will occur. We're not going to go back to zero rates. We don't believe because [00:10:00] these changes that have occurred after COVID in terms of the immunization is the buzzword for supply line management. Don't have a single supplier, AKA don't get everything out of China. Diversify to South America, Africa, other Asian nations, even take some domestic. And clearly in that process, while that's being engineered, that is inflationary. Once it's built out and becomes into a steady state, prices might be higher. But it's no longer inflationary in the same way and then it gets competitive.

Charlie Jamieson: And so a lot of those things that were big secular drivers of lower inflation outcomes, we think still present in the world. So, very high debt loads, negative demographics, robotics, automation, AI, these types of things, they are not likely to generate material inflation in and of themselves.

Charlie Jamieson: So yes, there are certainly things that have occurred that have generated inflation. And through a whole series of events, with the picking up of the economic jigsaw puzzle, we've thrown it in the air, [00:11:00] pieces have landed everywhere. People have used that moment when demand was high, you know, any, I'd just pay any price to go out and have a meal rather than sit on my couch and watch Netflix after lockdown.

Charlie Jamieson: Well, the suppliers took advantage of that, lift their prices, labor was hard to get. All of those things have kind of reversed. Australia has now got 500, 000 people arriving every year. there's plenty of labor available. So yeah, it's I do think it stays higher, but yeah, that we talk about that last mile of inflation being difficult to deliver.

Charlie Jamieson: And again, it is a bit cyclical, so, it'll fall for a period, then it'll rise a little bit and it might fall again. But certainly as we expect the economy to continue to moderate. And at the moment it's just stalling. It's not bad. As I said, it's not,

Damian Cilmi: because when I seen it in unemployment numbers, I'm really not budging.

Charlie Jamieson: No. And these are fractional changes. I guess, economics is a science, a fractional change, it's unemployment from three to seven is catastrophic. It's only seven. It's not 70. So they're marginal [00:12:00] changes. And at the moment in those very, micro kind of things that we monitor, they are slowing quite considerably.

Charlie Jamieson: As I said, they're not bad yet. So, if I flatten out, then we're just bumble along. If I continued to decay, then it gets a bit faster.

Damian Cilmi: And I think one of the features out of this, you might see the private sector slowing up, but the governments have not. And that's probably one of the things that we're, we're being seen over the last 12 to 18 months. Yes, there's been a whole lot of infrastructure projects that were kind of committed or decided upon during zero rates of COVID. But they're still persisting on that one there. So how do you see, like, especially at the state government level, their, their ability to continue to finance these projects?

Charlie Jamieson: Well, I was going to say at the state government level, still spending, out of control, let's be honest, federally, not so much. And certainly, the U S is in a similar position where it's just going gangbusters. We're coming into pressure. But you love the inflation reduction act. Yeah. Trillion [00:13:00] dollars. Yeah, yeah. Let's just throw some more fuel on the fire. Yeah. So, look, state governments, yeah, I mean, they've got to fund these deficit programs at substantially higher yields. They have a revenue problem. It means that they're going to have to find that revenue from taxing folks or fining us more, or, you know, all of their favored means.

Charlie Jamieson: So that's not a good news story for, you know, certainly for us here in Victoria but it's not dissimilar in, in other states. Look, federally, we're in a pretty lucky situation. I think the estimations from the federal government in the budget assumptions are for iron ore in the sixties. At the moment it's like 120 bucks or something like that.

Charlie Jamieson: So there's probably room for some pretty positive surprises. I think those estimations give you a reasonable idea of where they think commodity markets are headed. But certainly for now we're in a lucky situation where, we've had a return to surplus, very different from say the U. S. Yeah. You know, to be spending six, 7 percent of GDP at the end [00:14:00] of an economic cycle is a bit terrifying to be honest, because what comes next is a slower economy, lower tax receipts. And clearly the Biden administration have got some very generous spending programs running, clearly keeping us growth up.

Charlie Jamieson: But if we get to that dreaded recessionary moment, then, you know, you're thinking about deficits potentially being double digit, which is catastrophic. Already on very large amounts of debt and, you know, with this huge interest. So yeah, as I said, in a presidential year there, we're seeing similar kind of things happening in the UK.

Charlie Jamieson: There's a, an election cycle there in 24. The government's talking about cutting taxes for lower and middle income earners, some more generous spending programs. And I think they're just trying to balance out, clearly what's been a pretty brutal recalibration. So going into COVID was very difficult.

Charlie Jamieson: They probably overstimulated in the end. And now, trying to, to, kind of regain control of the situation. Well, I think they probably prefer to hit the brakes too [00:15:00] hard because they know what to do next if they do rather than not hitting hard enough. And so, as I said earlier, we're really in the eye of the storm with regards to these rate hiking cycles.

Charlie Jamieson: Yeah. Because the full effect hasn't really washed through the economy yet, that talk about the long and variable lag of monetary policy.

Damian Cilmi: And you've got that refinancing wall as well too.

Charlie Jamieson: Yeah. And so this is the thing, like hiking interest rates here in Australia in November of 23, that won't really impact the economy until, you know, deeper into 24, by which time things are probably already pretty soft.

Charlie Jamieson: Yeah. So that's just heaping a bit more pain on those that are already under sufferance. Now what it does need to do is to try and recalibrate behavior and stop us from going out and spending too much into the Christmas period and bringing that demand back down to equilibrium so that inflation can moderate.

Charlie Jamieson: That's certainly the idea. You know, it's a bit bifurcated in Australia because young folks like us with families, mortgages, we feel the brunt, older folks that are lucky enough to not be in that [00:16:00] space are just loving higher interest rates. Thanks so much. All the free income. I'm going to take that down to the shopping center and have a bit of fun, so.

Charlie Jamieson: You know, it's not impacting everybody equally but you know, that is a blunt tool of, of monetary policy and you know, it works in the end, but it can be a bit like swatting a fly with a sledgehammer.

Damian Cilmi: So let's talk about yields and I think you, you, you did mention like they, they've gone all over the place this year, they really came back a bit during Silicon Valley Bank, and then also recently as well now on it, but we also did see a U. S. tens print over 5 percent intraday, I think. 4. 99. Yeah. What was that? Good enough. Like middle, late October, I think. Yeah, just recently. Yeah. But so where, where do you see like scenario wise, it played out, where do you see yields like 10 years ago, you know, next year?

Charlie Jamieson: Okay. In, in most hiking cycles, it's ten year yields often get very close to the funding rates. Obviously the [00:17:00] funding rate in the US is just so much higher than it has been in other cycles. We've got there faster. I think the bond market was feeling that maybe it didn't need to get all the way there this time. But as you said, with the, you know, we've had a really quick run towards 5 percent recently and that's mainly been around two things.

Charlie Jamieson: Firstly, the problem with the bond market is there hasn't been a problem, so the economy hasn't slowed down enough yet. And people are thinking, well, you know, is this justified? The U. S. is spending so much money. There's so many bonds to issue. Who's going to buy them all? Clearly with a very strong U. S. currency, people aren't motivated to buy on an unhedged currency basis. So a lot of big, powerful global investors would normally do that. Japanese being the obvious one. But there's other international players that are just missing from that market that used to be a big sponsor. The obvious ones are the people that generate a lot of oil revenue or petro dollars as we call them.

Charlie Jamieson: The Saudi Arabia, Russia, both missing China, [00:18:00] not so much. So there is a bit of a sponsorship vacuum and clearly that means that you know, that needs to get financed domestically. People need to think that through because the government bonds will get financed and the capital will come from somewhere else.

Charlie Jamieson: So if they need to move to high yields to find the capital. It's actually a bad news story for other markets, i. e. risk assets. So be careful what you wish for or if you think that it, you know, bond yields have to go massively higher, but you'll be unaffected in other asset classes, you just simply won't be.

Charlie Jamieson: And we've seen those episodes where it does drag. Now, having said that, bond yields are a bit like a rubber band. There's only so far you can pull back until things really start to snap. And when we do get these kind of washout moments, they do tend to crescendo pretty fast. So the move to five and now we're back at four, 4.

Charlie Jamieson: 4 percent today has happened pretty rapidly. There is still a lot of speculation in, in bond markets and certainly those momentum funds and the like that have [00:19:00] been short or underweight made a fortune in 2022. And you know, they generate a lot of stops and the like from, from investors that naturally own the product.

Charlie Jamieson: And so it's been a fight between the speculators and in the investors. So when you kind of ask about bond markets, I, my first response is always to say, over what time period in the next five minutes, they can go anywhere they want. But through the medium and longer term, we've not seen yields that what, you know, at these levels since prior to the GFC, these are very attractive yield levels and on a medium term basis.

Charlie Jamieson: What happens after these moments is the economies tend to slow down. Can they get higher? Yeah, of course they can. Can they stay higher? Probably not. You know? So you know, does that generate opportunity? Of course it does. So with regard to scenarios you know, clearly if we do push to, to higher bond yields.

Charlie Jamieson: Yeah. That's problematic for everything. It's not great for bond returns, but there is a lot of income in bonds now. So even if you do go to high, unlike '22 where there wasn't [00:20:00] as much income, you know, we had negative total returns. Here's the capital. Yeah. It's actually pretty likely that you still have positive returns, albeit not as much as you'd hope for.

Charlie Jamieson: Having said that relative to other asset classes, you're probably doing really well because other asset classes can go down factors of, you know, those declines. And we say that You know, when things like equities or whatever it might be do finally cascade down, they can move very, very quickly, as we know, same with recalibration of property and these types of things.

Charlie Jamieson: So I think, bonds in many respects have led asset classes and now, from a relative point of view, given they've had an enormous adjustment and other things maybe haven't had as big an adjustment yet, well, we think they are all pretty much interrelated. So, those relationships do hold over time.

Charlie Jamieson: It's likely that bonds do fairly well whilst other things might continue to recalibrate a little bit. Now that doesn't have to occur. Those in risk markets hope for a bridge to the other side, i. e. rate cuts next year. [00:21:00] And that's pretty possible. As I said before, we've got 3. 2 percent inflation in the U. S. Fed funds is basically at 5. 4%. That's incredibly restrictive. So could that come down by 100 basis points as the bond market's suggesting? Absolutely. It can come down by a lot more than that particularly if inflation, you know, settles in in the, you know, low to mid threes. Sure. So that would be a good news story.

Damian Cilmi: What's the, the forecast index return if, if rates do go up or go down by a hundred points?

Charlie Jamieson: So if rates stand still from, you know, kind of October's closes, which were at high yields in terms of a government bond index investment, the expected return would be 5. 1 percent on a 12 month basis.

Charlie Jamieson: Now, I could promise you with a hundred percent certainty that will not happen. Markets don't ever stand still. So that I, I don't ever promise that very often, but I can guarantee that line of care. Clearly we'll, we'll move in some direction, whether that's a bit higher. I think that's unlikely after such [00:22:00] a big washout already.

Charlie Jamieson: You know, I'm not saying that they can't go there, but they probably don't stay there that easily. If we do get to the state of the cycle where central banks are starting to give something back. You know, growth is decaying quickly in Europe. It's no good in China. It's pretty weak in the UK. It's slowing in the U S and here we're a bit further behind that cycle, but the irony of that is we actually have a much faster transmission mechanism. We call it because we have a much more variable mortgage market. And whereas in the U S you borrow money for 30 years, you borrowed it at 3%. Thank you very much. You know, try and slow me down. I dare you. You just can't. Yeah. Here, you borrow money, and it's variable, rates were nothing, now they're, you know, quite substantial.

Charlie Jamieson: But it's about the cash flow shock, right? Because, you know, let's say rates were 12 and went to 15, 16, whatever it was. Let's just say the cash flow was 120 a month. It goes to 60 and it's 160 a month. Okay, well [00:23:00] that's what it is. For us, let's say the cash flow at 2 percent was 200 a month and now it's 650.

Charlie Jamieson: So it's that quantum, which is so shocking really. You're being asked to provide multiples of what you were. Not a bit more. Multiples. Agreed. And so for those that are in that situation, clearly, unless they're getting corresponding wage gains, which they're just not, then they have a loss of discretionary income.

Charlie Jamieson: Inflation in, in lots of other things is eroding their purchasing power anyway, be that in, you know, utilities or in fuel or food or all these things that we've been subjected to. So we really do need to find a steady state with that and, work through it. I think it's rational to expect that at some time, you know, globally, we'll see some rate cuts next year.

Charlie Jamieson: Definitely. Whether Australia will be at the forefront of that or not, you know, remains to be seen. How quickly we slow. Yeah. We won't slow that quickly on a notional basis because [00:24:00] we've got 2 percent of, you know, net migration every year. That means when you look at things like retail sales, they've got to go up because there's more players in the system.

Charlie Jamieson: Yeah. So there's a lot more stuff that gets sold. Now, what does that mean on a per capita basis? Well, already things are pretty soft, but we mask it by bringing in new people. And so certainly. That stimulates, you know, demand, and that's a good thing, but so in terms of a severe recession here, we don't see that, but you know, could things slow to a mild recession?

Charlie Jamieson: Yeah, sure,

Damian Cilmi: Yeah, fair enough. We, we touched on bond auctions previously, but it's probably just worth going through that a little bit more because there had been some very weak bond auctions throughout the year. I think the last couple have been a little bit better than some of the others earlier on.

Damian Cilmi: You talked about some of the, the foreign buyers, but generally, well, what's, what's the market action been? What are participants looking at?

Charlie Jamieson: Yeah. So clearly whilst everyone's been concerned about the U S fiscal deficit, you know, how sustainable is [00:25:00] that? Who's going to buy all those bonds. We've had some weak us bond auctions.

Charlie Jamieson: And so when we say weak obviously there's a yield that the bond is supposedly trading at. As we go into a live auction and the way that these securities get issued, if the demand is not at that yield, when then we say that the auction has tailed by a certain amount and that's that does happen and has always happened, but it's normally by not a very large amount.

Charlie Jamieson: The last few have been quite pronounced. And so that would showcase that. There isn't demand, you know, at those yields and yields might need to rise. There have been a few technicalities around that. And one of them was a very large custodian had a cyber attack CIBC, I think it was which probably meant that a lot of people couldn't participate in the auction.

Charlie Jamieson: So there can be those oddities that, you know, that that do impact them. That was a particularly large tail. And that was a few weeks ago, all of the supply that we've had this week has actually gone very well. Actually went through the market. So rather than having a tail, if the yield [00:26:00] before going in was 4.

Charlie Jamieson: 5, it actually closed it now and went through at 4. 49. So one basis point richer, remembering when yields go down, prices go up. So there was a lot of demand. Now, if the economy is going great, the demand story is going to be an issue, isn't it? If the economy is starting to lose momentum and cracking a little bit, and the market's got this thinking that the federal reserve is coming my way.

Charlie Jamieson: Then funding the supply will be pretty straightforward. Yep. Yields are high. They're attractive on a long run, medium run basis with, average yields since the start of the two thousands are around three and a quarter in us 10 years. As I said today, we're at four 40, so very elevated.

Charlie Jamieson: This is really exciting for, you know, asset liability matches, pension funds, insurers. Mums and dads, you know, that, that can buy continuously compounding government guaranteed cash flows that remain liquid through the whole cycle. That's really important. You know, like people say, well, why don't I just going to get a term deposit?

Charlie Jamieson: [00:27:00] Well, that's fine. But term deposits obviously lock your money up. You're getting similar yield. If you get a big downdraft in your favorite growth assets, you can't get to them. It's like having a mobile phone with no batteries, kind of useless, right? He'll throw it at someone. Maybe. But the point being is that you can buy those cash flows for 10 years and you do take the risk that yes, cash rates might continue to go up.

Charlie Jamieson: I think the world doesn't work very well if that occurs. So I do think that there is a limitation to how far that can go because the debt burdens become unsustainable. It's more likely in my opinion that they come down a little bit, barring an exogenous energy shock. We could still get that. We could have war between superpowers any day.

Charlie Jamieson: Who knows where we are in that. You know, grand game of, of of geopolitics. But clearly the ability to, you know, have a 10 year return in that way. If the market does rally, you get an instantaneous you know, return. And it gives you a lot more [00:28:00] optionality with your portfolio through the cycle.

Charlie Jamieson: So if you take the COVID episode, it was very, very extreme. Hopefully we don't see anything like that again. Bonds are trading at a Praemium or certainly sovereign bonds, credit bonds, not so much. They tend to follow equities a bit more. They become very liquid, they get. Difficult to transact, but equities had a big cascade down 30 ish percent, I think something like that.

Charlie Jamieson: So it's nice to be able to say goodbye to the bonds at a premium and hello to your favorite growth assets, deeply, deeply discounted. That is dynamic asset allocation 101. And that's why you, you build up these different exposures in your portfolio, certainly different time and different price. Yeah.

Charlie Jamieson: You pull all levers a little bit. I mean, there's no such thing as a bad asset. Obviously there's just bad asset prices. So, onc e the price reflects, you know, the risk that you're taking, people will say, well, that's enough for me. I'll move into that. I'll give it a go. And clearly, you know, bonds have cheapened an awful lot whilst other things haven't.

Charlie Jamieson: So there's probably something to do there, you know, depending [00:29:00] on what your portfolio looks like. Yep. Certainly in the institutional space, we're seeing a lot of people move into fixed income at the moment. I think that's very rational. But retail folks sometimes like to see. You know, the central bank behind them, they're actually cutting rates.

Charlie Jamieson: That's a very virtuous circle. But the problem with that is of course, the best returns have already passed you by. But I fully appreciate the momentum has been terrible. Catching the falling knife has been no fun. Few false dawns. Few false dawns. I mean, we're kind of advising folks as much as we can.

Charlie Jamieson: We're not supposed to advise people directly, but we think a laddered approach is very sensible because it's always a wonderful regret minimisation tool. If you take a little bit now and it gets cheaper, great, you can get a better average by getting some more later. If you take a little bit now and it starts to rally, well, you're happy that you got some and you didn't wait.

Charlie Jamieson: You know, for a singular price point and miss the whole thing. So given that the short run volatility is still, you know, difficult to, to read and these you [00:30:00] know, momentum funds are still making a bit of a mess of things and, and we're also, you know, violently oscillating around these regime changes.

Charlie Jamieson: Do central banks have to hike again? Yeah. Is inflation still a problem or is the data actually weak enough that actually the next move is a cut? And there's a foot in both camp at the moment, so that's why we're kind of gyrating around these levels a little bit. I think once we, you know, finally get that turn or the pivot as the markets talk about then, you know, you get a much clearer trend and you can get on and probably do pretty well.

Damian Cilmi: So what's your general positioning and then we'll kind of get onto, I suppose, some of your favorite trades.

Charlie Jamieson: In our time? Yeah. Yeah. Look, we've, we've had to be cautious because this near term, you know, as much as we love the product and we'd like to own more of it we've got to optimize the ownership through the cycle.

Charlie Jamieson: And so certainly if we'd got long too early. It would have been problematic whilst we've been pushing to higher yields. We've certainly had periods where we've been overweight, but the market doesn't move in perfectly straight lines. [00:31:00] So we can, we can manage through that. I think, once we start to see the data continuing to roll and, and policy makers coming in behind that, that'll give us confidence to, to add more duration to our funds.

Charlie Jamieson: But you know, that's, that's up to us to manage on the shorter run basis. It's not. To suggest to folks listening today that avoid the product because we're cautious in the next five minutes. Yeah, yeah. That's that's to say, you know, wood for the, for the trees kind of thing. Now I think, you know, what's occurred over the last 18 months is profound and throws up wonderful opportunities to not only do pretty well through the next part of the cycle, but be in a wonderful position to monetize that if other things do cheapen up.

Charlie Jamieson: Yeah, I agree. You know, it's you know, as we know. Equity is a wonderful place to make money, and it's not a bad place to keep them, except for 2022. Yeah. They ended up doing, I mean, it's funny when we look at all asset classes, as much as bonds got lambasted for having a very, very [00:32:00] ordinary year, the worst in, in a couple of hundred years, if you look back and look at data, which is extraordinary in and of itself.

Charlie Jamieson: I think that was still the fifth of 10 big asset classes that we look at. So, you know, clearly when you think, look at things like commodities and these types of things, they're very volatile. And they rip around and no one seems to complain. I guess they're just used to the volatility. We haven't had those kind of moves in bonds you know, previously, but I guess that the period that came before it was so extraordinary that that meant that there was a recalibration that needed to occur.

Damian Cilmi: Mm. Mm. Mm. We might leave it there. Charlie, I was just going to say, you, you quipped to me before a long time ago that no one wants to sit next to you at dinner parties, but I'd sit next to you.

Charlie Jamieson: That's, we're in an arm in arm, aren't we? Well, it's getting a bit more interesting, isn't it? I used to make the joke, no one wants to sit next to a bond manager.

Charlie Jamieson: They'd prefer to sit next to their real estate agent because they're making so much money by going to sleep every night. Well now we've got proper income and bonds, maybe you can make money going to sleep in the bond [00:33:00] market. It's a, there is genuine yield again, which is exciting. Yeah. So yeah, maybe phone's ringing a little bit more.

Charlie Jamieson: I won't, I won't hold my breath too much today.

Charlie Jamieson: Thank you very much for joining us once again.