The 'cash is trash' mantra just makes me laugh, JPMorgan's Bill Eigen
Not so. Popular economic theory out there poses the idea that interest rate hikes may actually be boosting the economy instead of a recession, which many had been calling for and which has failed to materialize. Our next gets somewhat agrees with that theory. We’ll talk to him about that. Bill Egan is the head of the absolute return and opportunistic fixed income team at JP Morgan Asset Management. And and Bill, it’s kind of a weird theory, the idea that higher rates are actually boosting things. A lot of people will say it’s the Fed job owning, talking about rate cuts that have been boosting things, but you think the actual rate hikes themselves have helped in some arenas. Well, I remember that article that came out and I disagree with a large portion of it. But the part I do agree with is there’s a lot more disposable income running through this economy than people want to actually realize. Like for instance, I own a couple of small businesses and one of the things that one of the themes I see over and over again is particularly the over 55 crowd and people who have been saving, of which according to the average economist, there are none, right? Everyone’s over levered and Max other and that’s just not true. And these people have been collecting 0 on their savings accounts for a decade or more, right. And now they have all this disposable income coming in the form of 5% plus money market yields. We’re taking virtually no risk and collecting all this new found income and and you’re seeing it make its way into the economy. So that part of the equation I I definitely agree with. Let’s talk about how much you have in cash right now because that kind of shocks me. I I guess for this fund you’ve had somewhere between 15 and 80% in cash over any given point in time. Right now you are more than 50%. Yes. Why? OK, this whole mantra of cash is trash. Just makes me laugh. Do you know the five year return on the Barclays aggregate index, which is the S&P 500 of bonds, is negative? You’ve lost money in the bond market for five years. That means you lost your entire coupon and some of your principal. And yet people keep piling into this stuff. You know what the single best performing asset class is among traditional fixed income asset classes over the last five years? What you just said cash. OK. So if you haven’t had any cash equity in someplace else, I mean that’s well because as a fixed income manager, you know you’re, you’re limited in scope in terms of what you can do. You can’t just go out and buy dividend paying equities, some of which I think are very attractive here, right to be honest with. You can create a 4% dividend yield with a portfolio of income producing equities including some money center banks, industrials, et cetera and still have plenty of upside. But when you look at the investment grade corporate bond market, spreads are at all time tights, which means you’re completely beholden to movements and interest rates when you own investment grade, when you own traditional mortgages, even when you own high yield to an extent, because high yield bonds right now are trading at 295 basis points over Treasury is the tightest. They will not ever risk, right. So you’re taking, you’re just taking rate risk over and over and over again when you buy these areas, you think interest rates should be headed higher. Next, you think the Fed should raise rates, Forget about lowering rates. Yeah. Well, let’s think about this just from a common sense standpoint, right. When you look at the checklist for Fed tightening right now, pretty much all the boxes are checked, right? You got inflation running way above target. You got the economy running, you know, well above where they thought it would be or anyone else thought it would be. Even Even this quarter, the Atlanta GDP now index is at like tracking at 4.1% and we’re already halfway through the quarter. You’ve got stock market at the highs, you got volatility at the lows, you got spreads at the tights. That’s a checklist for Fed tightening, not Fed easing. And I’ll bet if the Fed could go back to the fourth quarter and take back this whole easing bias because the data’s gone right in their face. But they are. They are. Yeah, I know. Exactly. They are raising. They’re not. Not with rate cuts but with the balance sheet and everything. They’re already doing it and jawboning it, even though we’re. Even though the market doesn’t really want to listen. It’s the bond market, doesn’t like, for instance, seems like we’re still pouring it on. Yeah. Well, it’s interesting, right? Because you have a $7 trillion Fed balance sheet, which is, you know, never went down. Right. Really hardly ever went down. You’ve got an economy that’s doing just fine. You’ve got a deficit that’s at wartime levels. How much would we need? How many, Jim and grants had 200 basis points of hikes before. Yeah, I know Jim’s pretty well. Do we need, do we need 2 hikes, 3 hikes? I just think what the Fed’s going to do here. When I look at it, sometimes the best trades are the ones you don’t make right? the Fed should probably just stand back and just do nothing, right? Because that’s their safe bet. In reality, given the data, you know, should they tighten, they probably should do. I think they will in an election year. Probably not, right? But the big problem I’m looking at here is it is an election year, right? Everyone’s pulling out all the stops. And what’s that mean? That means the printing press is in full effect. That means tons of bonds are getting issued. You’ve got 7 trillion, you’ve got a refund over, you know, for the balance of the year plus the bills to be paid, there’s going to be so much issuance coming up. And I just wondered who’s going to buy it all?