00:00On Thursday, yields on the longest-dated U.S. bonds rose to the highest level in more than two decades.
00:05Bond volatility has left traders unwilling, in some cases, to make riskier bets,
00:09with concerns about high inflation and government spending running rife.
00:13Financial markets are now pricing at least three Fed rate hikes over the next year.
00:16For more on this, we're joined by Barry Ritholtz, founder of Ritholtz Wealth Management,
00:20of course, the host of Masters in Business.
00:22Barry, great to see you once again.
00:24Let's start with the bond market.
00:25We'll get to stocks here in just a minute.
00:26But when you look at the moves that we've seen, what are they telling you?
00:30Just a few weeks back, there was kind of wider concern about how they're reflecting the state of the fiscal
00:35house that the U.S. has.
00:37How do you read what's happening here?
00:44I'm not sure. Barry, can you hear us okay?
00:47I'm not hearing the audio.
00:49All right, we'll fix that and get back to Barry in just a second.
00:51You know I do love talking about bonds, David Gurra.
00:53I know, very much so.
00:54And I can tease that there's more of it coming up here later in the show.
00:56Maybe as we wait for Barry, we can go back to what we were talking about there, or Alexis was
00:58talking about a moment ago,
00:59which is this conversation about AI and Bill Gates' sobering comments about humanity.
01:04You've been at a lot of events on the sidelines of the U.N. this week.
01:07I have as well.
01:08I was really struck by how much this did rise to the fore.
01:10This was something that a lot of folks were talking about, even as it was taking place in D.C.
01:14as well.
01:14It really did.
01:15Even casual coffees and off-the-record conversations, you talk about the news of the day, and then everyone was
01:20talking about Iran.
01:21I think because all these officials, most of them are parents, and they're really concerned about what this means for
01:27next generations to a point where they're talking about it in a policy standpoint.
01:30I feel like that has happened very quickly in the last couple of months.
01:33This has come to the forefront.
01:35I believe we have Barry Ritholtz back with us.
01:36Barry, I was asking you before just sort of how you read the moves in the bond market.
01:39If it's about growth, as Beth Hammack said, if it's about the prospect of growth, if it's about what the
01:44Fed's going to do here,
01:45if it's about concern about the American fiscal house, how do you read what we're seeing here in the 30
01:50or the long end in particular?
01:52Sure.
01:52What makes this so confusing to people is that there are several things that are somewhat contradictory happening at once.
01:59So when we had rates from the Fed at zero, when we had, gee, almost two and a half decades
02:07of QE and ZERP, that's an abnormality.
02:12And what we're seeing since 2022, since rates began to normalize, is just simply going back to pre-financial crisis
02:21levels.
02:22So you go to the 80s and 90s, 7% mortgages and 4.5%, 5% 10-year was not
02:30aberrational.
02:31At the same time, there have been a series of, the most polite way I could describe it, is self
02:38-inflicted policy decisions.
02:41So tariffs are inflationary.
02:43War in the Middle East driving oil and diesel prices higher is inflationary.
02:48And all of that is combining with this normalization to not only make yields much, much higher, but just to
02:57do it so rapidly.
02:58And so you have those two things happening at once, normalization and a series of policy factors that are driving
03:05inflation and yields higher.
03:07That's why people are having a hard time wrapping their heads around it, unless you're a yield investor,
03:13in which case, hey, you're falling, getting paid to sit in fixed income.
03:18Okay, I am not a yield investor.
03:19It's been a long time, I should say, since they've had that moment to embrace.
03:23Well, that's what I was going to ask.
03:24I mean, if people are used to this abnormal, almost artificially cheap credit,
03:28and you have structured your investing or your business investments around that,
03:33how do you cope with this sudden spike in borrowing costs?
03:35How is it impacting businesses on the front and the back end?
03:38Sure. So there's a couple of approaches, starting from the least aggressive to most aggressive.
03:47To begin with, after 2022 and looking at bond prices today,
03:56you should be a little more comfortable with a little more duration.
04:00That's the easiest thing you could do, go from five-year average duration of bond portfolio to six and a
04:08half, seven, seven and a half.
04:10Secondly, because we've enjoyed not only four consecutive years of double-digit equity growth,
04:17but really 15 years of plus 15% a year,
04:21every time I look at a new portfolio,
04:26many Americans are wildly overweighted in equity,
04:31which has been fantastic, especially during the past four years.
04:35But if you're a traditional 60-40 or 70-30 portfolio allocator,
04:41and you look at your holdings and that has ballooned up to 77-33 or pick your favorite 80-20,
04:50pick whatever that allocation has moved out of whack,
04:53well, the simple thing to do is to just rebalance, reweight back to where you were.
04:58And then if this is truly higher for longer and you're starting to get concerned about the amount of risk
05:05in your portfolio,
05:06well, modest shifts, 75-25 down to 70-30 along those lines on an allocation level,
05:15makes sense for people, especially if you're older, if you're close to retirement,
05:20if you're really not making a panic decision about risk,
05:25but working with just the facts of your particular situation.
05:29Barry, help us navigate the market psychology surrounding AI today and over the last week.
05:35So we had Met, of course, doing very well with the announcement of this new device.
05:39At the same time, we've seen a lot of companies building data centers,
05:43pausing their IPOs, scaling back,
05:45kind of reflecting some of the nervousness that we've seen about AI more broadly.
05:50What is your sense of sort of where things stand?
05:51As we were just talking about a moment ago,
05:53there is this kind of broader conversation happening, yes, among executives and world leaders,
05:58the rest of us about sort of what this is going to notionally do here for the world going forward.
06:04Yeah, so first, it's a tremendous technology when deployed correctly.
06:10And, you know, unfortunately, I see a lot of people using it kind of transactionally,
06:16substituting for search as opposed to collaboratively.
06:19Hey, I don't want to read this whole five-volume set of books.
06:23Can you show me the best data points within it?
06:27And now I'm going to use that as the basis for further research, one of the ways I use it.
06:34So this constantly seems to get compared to the dot-coms.
06:39It's nothing like the dot-coms, not only because of the revenue and profit picture.
06:44I think this is much more akin to the industrial revolution.
06:47It's going to be that significant.
06:49Now, all that said, every time we have a new technology, it doesn't matter.
06:54You could go back to railroads or fiber optics in the 90s or really everything in between.
07:01There's always a massive overallocation of capital as people try and choose the winners.
07:07And we know what happens.
07:09There will be winners.
07:10There will be losers.
07:11Whoever is a big winner today may not be a big winner tomorrow.
07:15Meta was a giant laggard for a while.
07:20Remember their whole foray, the reason they even changed the name into Meta?
07:26Right.
07:26And that didn't work out.
07:27I actually forgot about the Metaverse, to be honest.
07:30I mean, it's literally in their name and their stock symbol.
07:33But you never know who the next great product company idea is going to pop up.
07:41So what is Meta?
07:42Up 30% for the month, 11% for the week.
07:45It's the top of the Apple App Store downloads.
07:49Yeah.
07:50So the fascinating thing there is good for Meta.
07:54The question is, who's the next company that's going to pop up with this?
07:58Yeah.
07:58How much staying power do they have here?
