Talk Your Book: Will AI Debt Cause a Recession?

Ben Carlson (0:00)

Today's Animal Spirits Talk, your book, is brought to you by JP. Morgan. Go to jpmorganassetmanagement.com to learn more about the JP. Morgan Strategic Income Opportunities Fund, JSOSX. That's jpmorganassetmanagement.com to learn more.

SPEAKER_2 (0:14)

Welcome to Animal Spirits, a show about markets, life, and investing.

All opinions expressed by Michael and Ben are solely their own opinion, and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Ben Carlson (0:44)

Welcome to Animal Spirits with Michael and Ben. Michael, the AI trade has now hopped from the risk was initially the stock market to the economy, to the bond market, because these companies are finally issuing debt.

Should we be worried that tech companies, these tech companies and these tech leaders have actually never really dealt with debt before? This is a totally new thing for them. Has Mark Zuckerberg ever dealt with issuing corporate debt before?

Michael Batnick (1:13)

Well, I don't think he's personally doing it. I think he's got some people there. Should we be worried that they're issuing debt?

Ben Carlson (1:18)

The historical playbook would tell us, yes, we should be worried. So we talked to Billy again, who is the head of absolute return and opportunistic fixed income team at JP Morgan. He's the portfolio manager on the Strategic Income Opportunities Fund, which is an absolute return fund, meaning we don't want to lose money.

It's really interesting. Before we talked to him, you sent me a chart of their returns. It's a line that doesn't move at all.

Michael Batnick (1:40)

They've been heavily invested in cash.

Ben Carlson (1:42)

Because a lot of it is in cash. It's funny because it felt like for years, cash is going to be trash again once the Fed lowers rates, but the Fed hasn't done that. In fact, they lowered a little bit, but now they've raised them again, and cash is actually still yielding something. It's not bad.

Michael Batnick (1:54)

You know what? Our investors are always complaining.

Ben Carlson (1:56)

Of course.

Michael Batnick (1:57)

Yes. The answer is yes, they are. Interest rates at 1% were no good, and now interest rates at 5% are no good because x, y, and z, and I'm not sweeping those concerns under the rug. I choose to see this as a glass half full story.

And I understand that part of the reason that rates are rising is fiscal irresponsibility. I understand that inflation is stickier.

Ben Carlson (2:19)

Come on, that's not it.

Michael Batnick (2:20)

What do you mean?

Ben Carlson (2:21)

It's inflation and growth.

Michael Batnick (2:23)

How do you know?

Ben Carlson (2:24)

Because we had a fiscal surplus in the 1990s and that interest rates were 6%.

Michael Batnick (2:28)

That doesn't disprove that yields are moving higher because people are worried about deficits.

Ben Carlson (2:32)

Yeah, you also can't prove it though. I'm just saying, I think it's more to do with economic growth.

Michael Batnick (2:36)

The onus is on you, sir. You seem to be pretty emphatic.

Ben Carlson (2:39)

Yeah, I think it's more about economic growth and inflation than anything. And that's what investors are dealing with.

It really is an interesting market because as yields rise, people are so worried about inflation. But if yields keep rising, eventually that's going to cause yields to fall. It's kind of like higher prices are the solution to higher prices.

Same thing, higher yields are the solution to higher yields.

Michael Batnick (2:59)

The 10-year can't possibly go above 5.3%. Right.

Ben Carlson (3:03)

And then it does. And I don't know. It's interesting to think about what that means. Like, eventually, if the Fed kept hiking, they'd hike, then they'd slow the economy down and then rates would fall. And that's good for bonds. And it's a weird. Anyway, we talked about all this with Billy again. I like the way he thought about the world and fixed income. Many fixed income managers are naturally pessimistic. I think, from a marketing perspective, kind of like hedge fund managers, like you almost have to be a little bit pessimistic. Every time a fixed income manager goes on CNBC, they're pretty bearish about the general state of the world. Because guess what? Being bearish means, hey, come to the loving arms of bonds.

But Bill said, no, I have to make money for my investors. It's I'm not tied to some benchmark. It's a go anywhere, provide us income, don't lose money.

And I think that's an interesting way to think about, like not having a benchmark and a way to manage this kind of mandate. So anyway, fun conversation. Here's our talk with Bill Eigen from JPMorgan.