Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted by Melanie Schaffer each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
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Lead-Lag Live
Rates vs Reality: David Busch on Fed Signals, Inflation, and Positioning for Year-End
In this episode of Lead-Lag Live, I sit down with David Busch, CFA and Co-Chief Investment Officer at Trajan Wealth, to cut through the noise after Powell’s Jackson Hole speech and the latest inflation data.
With CPI softening, PPI still hot, and Fed policy hanging in the balance, David explains how investors should think about rates, risk, and portfolio allocation as volatility looms into the fall.
In this episode:
– How Powell’s “data dependent” tone shapes the Fed’s path
– Why CPI vs PPI is creating mixed signals for inflation
– The growth vs value dilemma in equity positioning
– Credit and consumer data showing cracks beneath the surface
– Why bonds offer a rare generational opportunity today
Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.
#LeadLagLive #Fed #Inflation #Rates #Markets #Bonds
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When the Fed lowers or raises rates, they're targeting the overnight Fed funds rate, and then the rest of the curve is driven by supply and demand dynamics. We're seeing a rising delinquencies in credit cards, auto loans, personal loans and now we have the restarting of student loan payment programs.
Speaker 2:I'm your host, melanie Schaefer. Welcome to Lead Leg Live Now. After Powell's speech at Jackson Hole and the release of the July FOMC Minutes, investors are still trying to make sense of the Fed's next move. Will we get rate cuts or has the market jumped the gun? Inflation is sending mixed signals, headline CPI softened, but poor producer prices are still running hot. Meanwhile, upcoming housing data and consumer metrics could give us a clear read on just how resilient the US economy really is on just how resilient the US economy really is. Joining me today is David Bush, cfa and Co-Chief Investment Officer at Trajan Wealth. Today, we're breaking down what this all means for rates, risk and portfolio positioning as we head into the fall. David, thanks so much for joining me today.
Speaker 1:Thank you, melanie, I'm happy to join you.
Speaker 2:So let's just get right into it. Powell's tone from Jackson Hole. Some investors heard a dovish lean, others thought it was more of the same. What stood out to you the most, and how should we be reading the tea leaves?
Speaker 1:That's a great question. You know what was interesting to me in just having been in the markets for the last 25 years? One thing that always stands out to me with Jerome Powell is he is very data dependent and so his tone at Jackson Hole appeared to be a little bit more dovish, meaning that we still have persistent inflation, but the labor markets while the unemployment rate is still low, we've seen some cracks forming in the labor markets while the unemployment rate is still low, we've seen some cracks forming in the labor markets. And so his the way that I interpreted his tone was leaning dovish, but still data dependent, and from that perspective, you know, it'll be interesting to see what happens on September 17th.
Speaker 2:Yeah and David. So last week CPI Creek gave markets hope. The hotter PPI number tempered that optimism. How do you see this sort of tug of war playing out and what's the real message for rate sensitive sectors?
Speaker 1:Yeah, so with PPI, what's interesting is is that in some of those sectors you know, like food and energy, the price is reflected relatively quickly in CPI. But there are other sectors, you know that it usually takes like a one to three month lag. So when we see a spike in PPI, I would expect, you know, probably the next two to three months we'll see it translate into CPI as well. And this has really been driven off of a lot of. You know a lot of it's driven off of the tariff. You know all the tariff negotiations that are happening worldwide and that's going to cause like an initial price increase but then over time, as consumer demand wanes, you know, while tariffs are inflationary to begin with, over time it becomes deflationary.
Speaker 2:And that's sort of. The next thing that I wanted to talk about is equity positioning. So if Powell stays cautious but data weakens, what sectors do you see outperforming and which ones are the most at risk?
Speaker 1:So what's interesting, just at a high level, if we zoom out, historically speaking, rates down favors growth growth companies, rates up favors value companies, and the mechanism behind that is a term we call duration of equity. And when you think about a growth company, their cash flows are further out into the future, whereas value companies, because they pay dividends and they're typically cyclically proven businesses, they will provide cash flows, shorter cash flows. So, depending on which way rates go, you know depends on really which tilt we need to lean into, whether it's growth or value. And so, at a high level, because it's sort of unknown at this point, you know, I'm leaning more towards a balanced approach Because, on one hand, if, if inflation is continues to be persistent and the fed, you know, gets one, maybe two rate cuts, you know dividend payers are going to do well, but also, uh, growth could potentially, you know, have some upside Um, but I would be cautious because you know we really don't at this point, we don't know how much the Fed can cut rates and and you know, I think that's it, it's the unknown. And so stay balanced.
Speaker 1:So if we look at individual sectors, you know I'm long technology, meaning that you know technology is the future, and so you know there should always be an allocation towards tech and specifically with AI. On the defensive side, you know things like consumer staples should should perform well. I would also look at some defensive, some defensive holdings like utilities. I would lean away from or steer clear of consumer discretionary. Lean away from or steer clear of consumer discretionary. Consumer discretionary is a sector that, as consumer, start to pull back from their spending. The higher end consumer, the wealthy of the world, they'll continue to spend money, but it's that call it upper middle class in in lower, that will have to lean into more consumer staples versus discretionary. So I'd be cautious on discretionary.
Speaker 2:Yeah, that's what I was going to lead into. Next is consumer discretionary and and also there's still pressure in financials. Do you think some of this is margin compression from student loans and slowing credit, or is it something much deeper?
Speaker 1:So when we look at, you know, if we look at the bank loan data, what we're seeing is we're seeing a rising delinquencies in credit cards, auto loans, personal loans, and now we have, you know, the restarting of student loan payment programs.
Speaker 1:And the interesting thing is, in the US, student loans are given by the government, so banks don't necessarily lend for student loans. I think there's a handful of student loans that you can get from a bank, but generally speaking, they're originated by the US government originated by the US government. So what'll be interesting to see is so if we see rising delinquencies and defaults, that's going to pressure financials. In the commercial real estate side, we're also seeing some rising delinquencies, specifically in office properties, but multifamily seems to be holding up pretty well. Certain retail sectors are we're starting to see a rise in delinquencies as well, but I think that's that's the main catalyst for the pressure on financials rates. Higher actually should benefit banks, and the reason is is because you know their deposit base. They can pay a lower amount on their deposits and lend at higher rates or invest at higher rates, so that should be a tailwind for financials banks specifically.
Speaker 2:Yeah, so just for a minute to the bond side, but the front end of the curve has been whipsawed by rate expectations. How are you thinking about duration here, and what's your view on quality versus yield chasing?
Speaker 1:Yeah, so, to your point, when the Fed lowers or raises rates, they're targeting the overnight Fed funds rate, and then the rest of the curve is driven by supply and demand dynamics. And so anytime the Fed is either in an easing or a tightening phase, we're going to see that front end whipsaw a lot more. And so what what I've been focused on is investing at the intermediate part of the curve. So call it right around the five year. But if we continue to experience persistent inflation, an allocation towards treasury inflation protected securities or TIPS on the front end will help manage or mitigate some of the inflationary pressures. So I think the five year is kind of the sweet spot, or right around the five-year.
Speaker 2:You've mentioned before, David, that industrials and selective staples could hold up well, especially with infrastructure, CapEx and tariff pressures. How do you think investors should approach that rotation?
Speaker 1:Yeah, you know we're a firm believer in diversification and so, going back to fixed income for a moment, you know this is really a generational opportunity for investors to buy bonds and lock in some yields. And you know, at least in the United States, you know we've had we haven't had this level of interest rates for quite a long time. You know it's been since after the global financial crisis in 2008. And so bonds can provide current income as well as a great diversifier. Also, within fixed income, I would go up in quality. You know high yield to a certain extent, but I'd be very cautious there. You know high yield to a certain extent, but I'd be very cautious there in terms of how that matches off with with an equity allocation. Is I would lean into more defensive sectors, but maintain an allocation to tech and and specifically AI driven type companies, and the reason is is because tech will always be the future. Right, that's what they're solving for is the the problems of the future? So I would maintain that allocation.
Speaker 2:And I think you've already answered this, but just sort of finally end to be marked there for people trying to stay nimble through this macro uncertainty what's your biggest advice on positioning through to the end of just this year?
Speaker 1:Yeah for the end of this year. I would just caution that we're gonna experience some volatility, specifically right around any of the Fed meetings and any of the Fed speakers. So we watch that closely because I'll call it inflation volatility or inflation driven volatility or inflation-driven volatility. If we see a continued increase in inflation, then we're going to get some volatility, both the equity and the bond markets. If inflation starts to subside and we trend towards the Fed's 2% inflation target, then I think things will calm down and we won't have as much volatility. So I would caution investors be mindful of the volatility, don't react too terribly, don't let the emotions of investing kind of get the best of you, because what happens is investors have a tendency that when the markets start to sell off, they immediately sell and move into something like a cash type position.
Speaker 1:But the recovery is usually pretty quick and if you look at both the size and the duration of bull markets equity bull markets versus bear markets the bear markets the size and the length is substantially less than the bull markets. So we typically have a recovery because of intervention like monetary or fiscal policy, and we can look back to April of this year as a great example. The equity markets had sold off. And then there was one day where the Dow Jones jumped like 3,000 points. Now, if investors had moved to the sidelines during that time period, they would have generally missed that upswing in the equity market. So from a positioning perspective I would stay balanced growth and value and on the fixed income side, intermediate with a allocation to tips on the front end.
Speaker 2:And David, just to wrap up where can our viewers go to find out more about you and about Trajan Wealth?
Speaker 1:Yes, trajanwealthcom, and you can also follow us on all of our social media platforms.
Speaker 2:Fantastic. Well, thank you so much for joining me. It's been a pleasure and thanks to everyone for watching. Be sure to like share. Subscribe for more macro market coverage and expert conversations on Big Leg Live.
