00:00What is it like as a kid and you go out there for your first Ivy League game like Yale
00:07-Cornell this weekend?
00:09It's best time of year, best part of the country, bone-chilling. It's exciting. It's very exciting.
00:15I mean, I look at the Harrods. Do you think you were cheated because you didn't go to the playoffs
00:20last year to get shellacked by Montana?
00:23Cheated, yeah, but no. I mean, I'd rather, yeah, no. No, we had a good time.
00:27It's very cool, though. I mean, you know, the whole college sport, I mean, it's different than like Alabama.
00:32It's the last passion, really, of what you and I remember.
00:35Yeah, yep, it is.
00:37And all that.
00:37What's the, for like all the crazy alums, the game, the Harvard-Yale game is just insane.
00:43What's it for like a player when you guys go on the field? Is it just another game?
00:46Do you guys as young kids have any idea what's going on?
00:48No, it's not another game. I mean, you have presidents in the crowd.
00:51Yes.
00:52Current and former presidents in the crowd is definitely not a normal game.
00:54But I will say the contrast between being a player and being an alumni is very different.
00:59When you're a player, it's very focused. It's very serious.
01:02When you're an alumni, it's the biggest party in the Northeast every year.
01:05Plus, you have an organic chemistry museum on Monday morning.
01:08You're there at Sunday night.
01:10Oh, microeconomic soul boy.
01:12Exactly. Let's see. Slutsky, Hicksie, and we'll get it right.
01:16Gary is still in the equity markets here.
01:18These are the oddest markets I've ever seen.
01:20I just quoted a zero-hitch quote.
01:22I've never seen it like this.
01:24How do you stay invested confidently, given the upset and turmoil right now?
01:30Yeah, thank you for asking that question.
01:31It's an excellent question because I think you really do need to have a systematic process
01:35to make sense of all the noise, the cacophony of noise.
01:38We're in a period right now where the distribution of probable economic policy and market outcomes
01:43is as wide as probably anybody trading risk has ever seen.
01:45And as a function of that, you must have a systematic process that allows you to interpret your data,
01:51challenge your Bayesian prior, and ultimately come up with a better asset allocation mix for your clients.
01:55So what are we doing in a world where yields appear to be higher for longer?
02:01That's kind of what the experts are telling us.
02:03But we've got excellent economic growth here, so maybe the rates are where yields are where they kind of should
02:08be.
02:09Are you still active in this equity market?
02:11Let's start with the equity market first.
02:13Yeah, we're very bullish.
02:14You know, we have two views.
02:17Our Bayesian prior, from a research perspective, is that the market has substantial upside,
02:21and as a coiled spring, we can talk about that.
02:23Our view is that after that coiled spring, you know, arrives, it may persist throughout 2027
02:28and perhaps even in 2028.
02:29But after that, we're likely to experience a secular bear market.
02:32A secular bear market later.
02:34Yeah, well, secular bulls tend in and secular bears and AI and CapEx bubbles tend to catalyze frenzied overbuilding,
02:42debt financing structures that are complex.
02:44You tend to see disruption of legacy industries.
02:47So those are all things that are likely to be, you know, features of this market cycle.
02:51The equity markets have been driven, rightfully so, by really, really strong earnings,
02:56like exceptionally strong earnings here so far in 2026.
02:59If nothing else, the comps for 2027 are going to be more difficult.
03:02Is that a headwind, the fact that the growth rates and earnings are going to slow,
03:06or is that something you think the market can digest here?
03:09I think the market's been digesting that really since early June in terms of the increasing,
03:12the expansion and volatility that we've seen across the indices.
03:15In our view, we think that's a coiled spring, however,
03:17because if you think about the drivers of this market cycle,
03:20on one hand, you have what we've been calling a productivity boom and a jobless recovery.
03:25Those should equal margin expansion.
03:27The margin expansion should equal multiple expansion.
03:30And we also have a view that liquidity's on the way, which should equal multiple re-rating.
03:34And so that's why we're so bullish when we look out into 2027.
03:37And you made a comment on bonds, and I respectfully disagree.
03:41Bonds are not at their equilibrium price level.
03:43We run five sophisticated models that try to ascertain what the fair value of the 10-year nominal treasury yield
03:47is,
03:47and the mean of those models is 6.04%.
03:50Really?
03:51And so as a function of that, we can and likely will go higher until one of two things happens.
03:56The Federal Reserve hikes two to three more times to truncate its accommodated policy bias.
04:01Or we see an expansion of buybacks via the Treasury, TGA-funded, and or bank deregulation,
04:07reserve management purchases, or yield curve control out of the Fed that sort of caps yields at a certain level.
04:12So what am I doing in the bond market here?
04:14I mean, Tom's in triple leverage, all cash.
04:16He's not doing anything.
04:17He's not playing.
04:18I'm at the two-year Treasury at 4.9%.
04:20I feel like that's a good living there.
04:22Do I take credit risk above and beyond that?
04:24In our view, whenever the sovereign is buying its own bonds,
04:27it's a signal to investors to go buy other asset classes, to go further out on the risk spectrum.
04:32In our view, a lot of investors, based on our positioning model, investors aren't appropriately allocated to risk.
04:37Darius is killing us, folks, with some fancy statistics talk.
04:41On a lazy Friday in September, we're going to crush it here.
04:46I will be going to services for Ellen Greenspan on Monday.
04:50I'm honored to be invited by the family.
04:52We'll go down to Washington for this very emotional service of a guy who believed in nighty and uncertainty out
04:59of Chicago in 1921.
05:01You're spouting Bayesian priors, which is a certitude about where I am right now in using that prior guesstimate into
05:11the future.
05:12Are you saying Wall Street now is so damn certain they know where they're going?
05:17I think they're not necessarily certain.
05:20I think the focus has become hyper short term.
05:23I'll agree with that.
05:24The theta's come in.
05:25The theta's right in the formulas, folks, here.
05:28The theta comes in.
05:30Does that make our narrative a heavier weight?
05:33Absolutely.
05:34I think so.
05:34It increases the value of gamma as a risk attribution.
05:39However, if you want to get away from that, in my opinion, where I think the bulk of the returns
05:43come from for most investors is going out, extending that theta and understanding that there are certain macro forces that
05:50dictate the performance and dispersion in asset markets.
05:52Do you have some humility like a nighty and uncertainty out of the University of Chicago that, oops, we're going
05:59to get a correction.
06:00We're going to get an AI drawdown and we're going to be uncertain about the future.
06:06Translate to get some humility.
06:07Yeah, I think the best way to transition from uncertainty to risk and actually do something about that is to
06:13have a Bayesian inference process where you're challenging your assumptions on a daily basis with unconditional data.
06:19But does that lead to an overconfidence like we see now in a market that's completely stacked to tech and
06:25AI?
06:25I think what leads to overconfidence is confirmation bias that's anchored around a legacy narrative.
06:31What we do at 42 Macro is we understand our legacy narrative, but again, every single day we refresh the
06:36same models to challenge that legacy narrative with new data.
06:39Does interest rates change your equity narrative here?
06:43Yeah, so we've been bearish on bonds since December of 2021.
06:46We call it for the death of the 60-40 portfolio.
06:48And as a function of that, since January of 2023, we've been very bullish on stocks, very bullish on cryptocurrencies.
06:54And since September of 2023, we've been very bullish on gold.
06:57Our bearishness on bonds and the policy intervention as a result of that is why we're so bullish.
07:02Paul, save the interview.
07:03I want to say, folks, the Bible on this is my number one book for interns, Against the Gods, Peter
07:10Bernstein.
07:11There's no other book.
07:12There's very little math in it.
07:14No theta, no gamma.
07:16Against the Gods, Peter Bernstein's, the Bible.
07:19Paul Sweeney, just save the interview.
07:20Very little math in that is right up my alley there.
07:23You mentioned crypto.
07:25I mean, you know, Bitcoin, $85,000 per token.
07:29We haven't talked about it in a long time because it hasn't been doing much.
07:33How do you think about crypto these days?
07:35Yeah, when we think about portfolio construction, we view stocks as a productivity feature, something that allows you to capture
07:41productivity.
07:42Gold is something that allows you to protect your portfolio against financial repression.
07:45Bitcoin, cryptocurrencies, broadly protect your portfolio from monetary debasement.
07:48We've been in a modest period of monetary debasement up and through June.
07:52It's unlikely that we see any material monetary debasement until we see either...
