The conversation revolves around the implications of a higher resting heart rate for inflation on asset allocation in a traditional portfolio. The CIO of KKR's 28 billion dollar balance sheet, Henry McVeigh, discusses the firm's shift towards real estate, credit, infrastructure, and climate assets that benefit from contracted revenues in the event of inflation.
McVeigh emphasizes that the relationship between stocks and bonds is linked by inflation, and he believes that bonds will not offer the same diversification benefits to stocks. He also mentions that banks in the US and the Fed have about 700 billion and 1 trillion dollars of unrealized losses in their bond portfolios, respectively.
McVeigh suggests that the Fed and the ECB will likely pause their current policies, leading to a higher inflation rate for a longer period. He predicts that the long end of the market is mispriced, and there will be more upward bias to rates globally. He also points out that real rates are expected to bite into the economy more than this year, even though they've been raising rates.
Finally, McVeigh suggests that the transition period will have some friction, but it's important to work through it. He advises not to fear three to four percent inflation, as it's part of the transition period.
1. The speaker is discussing the implications of a higher resting heart rate for inflation, which has implications for asset allocation in a traditional portfolio.
2. The speaker is the CIO of KKR's 28 billion dollar balance sheet and is also a partner at KKR.
3. The speaker is focused on the relationship between the bond market and equities.
4. The speaker believes that services inflation will stay stickier for longer, and that the direct correlation between wages and inflation is the key focus.
5. The speaker has shifted their own capital from about 18 real assets to 20-25 percent, indicating a focus on real estate, credit, infrastructure, and climate-related assets.
6. The speaker believes that bonds will not offer the same kind of diversification benefit to stocks because stock and bond prices are linked by inflation.
7. The speaker believes that if stocks go down, bonds rally, and this has been a consistent pattern.
8. The speaker believes that the relationship between stocks and bonds will remain the same even as inflation peaks and comes down.
9. The speaker believes that banks in the US have about 700 billion dollars of unrealized losses and the Fed has about a trillion dollars of unrealized losses in their bond portfolio.
10. The speaker believes that every time there is a rally in bonds, banks will sell, creating an overhang.
11. The speaker believes that Japan, the biggest owner of US bonds, is exiting deflation.
12. The speaker believes that the Fed and the ECB will probably pause, but there will be a higher for longer type thing.
13. The speaker believes that the idea that rates will go down to bail out the market doesn't work anymore.
14. The speaker believes that there's more money in the system, which keeps popping up.
15. The speaker believes that neither political party will want to see the US go into a recession.
16. The speaker believes that the long end of the market is mispriced, not just a US comment, but also in developed markets around the world.
17. The speaker believes that there will be more upward bias to rates in the long term.
18. The speaker believes that the real threshold for whether inflation was a big problem for stocks was more like four percent, not two percent.
19. The speaker believes that banks have been suffocating under QE and can now make a positive spread.
20. The speaker believes that if the Fed and the ECB ease a little bit on the short end, financials will perform a lot better.
21. The speaker believes that real rates are going to bite into the economy more than this year, even though they've been raising rates.
22. The speaker believes that there will be less boom and more busting in 2024, and that real rates will take hold.
23. The speaker believes that there is no need to fear three to four percent real rates or long bonds or inflation, just the transition period.