[00:00:36] Joseph Gradante: Welcome to another episode of Orwellian Optics, a podcast by Allio Capital. I'm your co host, CEO, Joseph Gradante. I'm here with my chief investment officer, AJ Giannone. AJ, what's going on?

[00:00:47] AJ Giannone: Hey, Joseph, glad to be back. I'm, really excited to talk about markets again this week. A lot of gyrations in the last few weeks here and a lot of action. So really looking forward to this conversation and, good to see you guys. Chris, Tyler, how are you [00:01:00] guys doing today?

[00:01:00] Chris Morgan: Hey, AJ. Hey, Joseph. Good to see you guys. Glad to be here. Excited, for another week of Orwellian Optics. Dive into the markets a little bit today.

[00:01:09] Joseph Gradante: Yeah, yeah, let's do it. Well, let's first start with,really what's happening, right? Like in our society right now. obviously, there's a situation with the fires, but we're not going to really get too much into that. I think,there's some big indicators here that there's a cultural shift happening in the United States.

[00:01:26] Joseph Gradante: Mark Zuckerberg, added Dana White to his board. And,that's a huge change of sentiment, right? There's a lot of media that goes out, they think I've gotten rid of the fact checkers there. And so how are you guys feeling about that? Tyler,what's your thoughts there?

[00:01:40] Tyler Goering: I think it's a positive change. I think we're moving away from this kind of heavy censorship that, Americans should only see, hear, read the things that are approved by some arbitrary third party source. I gotta give credit to Elon Musk. He spearheaded this whole movement with this purchase of X and, Community Notes has also [00:02:00] been very, very successful on that platform.

[00:02:02] Tyler Goering: And I think with the changing administration. Zuckerberg probably saw that it was probably a good time to follow in those footsteps. But ultimately, I think it's a good change. I really, my personal political beliefs think that censorship in all of its forms is wrong, so it's good to see that the, the tech titans, are kind of following suit with more of a libertarian ideal on how to moderate content on these platforms.

[00:02:26] Tyler Goering: So ultimately, I love it. I love to see it. curious to hear what you guys think about it as well.

[00:02:31] Joseph Gradante: I just want to say, I couldn't agree more. It was getting scary there for a while. AJ, how are you feeling about it?

[00:02:37] AJ Giannone: Yeah, I'm in the same mind and in the same boat, I think. Dana White's a unique personality in that he is unapologetically, himself. And, that's the piece that I think makes this really a compelling value add for Meta and the board. And it just, to your point, signals, I think a shift in the common discourse for what is,[00:03:00] acceptable and what is a priority for America and whether that's on the corporate side, the political spectrum, the academic spectrum, I think there's a craving and a yearning for, that, authentic discourse that was really missing for a long time.

[00:03:14] AJ Giannone: It was just, some, you go online, you look at comments, you'll get message boards, Facebook, whatever, and you just see just a whole bunch of virtue signaling and fake discourse. it was meant to kind of,in my view, at least signal. your political affiliations or your viewpoints, and it wasn't really focused on identifying solutions or looking at problems authentically.

[00:03:37] AJ Giannone: And that puts you in a really tough spot, when you encounter as a society, the types of challenging problems on the geopolitical side and on the political side. and. you have to come up with solutions and mobilize, the resources at your disposal to solve these, these really tough problems.

[00:03:53] AJ Giannone: And you're not having an honest conversation about it. it's a little bit of a tangent, but I think it's really timely and relevant. given all the [00:04:00] volatility and the risk that, we see when we look out there,both in terms of looking at, countries like China, looking at some of the challenges that they've posed to the U.

[00:04:08] AJ Giannone: S. on the world stage, looking at some of the, agreements that we're going to have to strike, with countries in terms of trade and tariffs to be competitive, as a,both technology based and production based economy in the 21st century. these are really, I think.

[00:04:23] AJ Giannone: all interrelated and it's a big step in the right direction.

[00:04:27] Chris Morgan: definitely. I think you hit the nail on the head there, AJ, when you say we have these huge problems that require honest conversations, but we can't have those honest conversations if we're worried about virtue signaling and, having to say the right thing in the right way. If you can't just.

[00:04:45] Chris Morgan: Break it down and have a real honest conversation, then you're never going to solve a problem. So I think, yeah, Facebook coming to this realization that they're, we'll call it virtue signaling again, but they're blocking information or controlling information. I think that's going to be a huge shift.

[00:04:59] Chris Morgan: And [00:05:00] it's just a huge cultural shift. What it also says is that the company didn't trust Americans before. didn't trust Americans to be able to read and dissect their own news and their own information. They were saying, we don't think you're smart enough, so we need to tell you. This seems to be a shift to trust us and the new incoming administration saying, Hey, we trust you to make right decisions for yourself and your family.

[00:05:22] Chris Morgan: We are not here to tell you exactly how to live.

[00:05:24] Joseph Gradante: So here's my question for you guys, right? The people, obviously there's this cultural shift and we all agree there, it's a positive change, right? Because we need data driven policy formulation that's really non partisan, right? And I would say that, Trump might be a Republican on paper, but, he's really a populist, right?

[00:05:44] Joseph Gradante: And he challenged the establishment of both parties. He's challenged the Washington political establishment, the machine, if you will. And,I want to play an interview here. with John Doon, in a second. it was Laura Ingram and John Doon and there's a lot of stuff I, I disagree with on Fox News, [00:06:00] but, I do think if you read his body language and what he says that there's, it's telling because in order for these changes to happen, you have to get the entrenched establishment.

[00:06:10] Joseph Gradante: Is the establishment that has worked for big business, that has worked for the plutocracy, Is it going to respond to the people? Is it going to be responsive to the people? Or is it going to sabotage, as Charles Payne calls Donald Trump, the people's champion, right? Is it going to sabotage him so it can be back to business as usual, the guys in the red ties blaming the guys in the blue ties, and the guys in the blue ties blaming the guys with the red ties, so let me pull up this interview, and 

[00:06:39] Joseph Gradante: And then after that, guys, after we talk about this a little bit, we're going to talk about the implications for, your portfolio and capital markets, 

[00:06:46] Fox News Presenter 1: John Thune, it's been a long time. it's great to have you on the show. Thank you so much for joining us. Alright, Leader Thune, it's now the new year, new Congress, and it's the same resistance from the Democrats. What's your plan [00:07:00] over in the Senate to combat what he's planning for these nominees, including Pete Hegseth, who they want him in place on day one.

[00:07:07] Fox News Presenter 2: and we're going to grind them down. those national security knobs especially are critical to the country. Really important that we get them done quickly. Schumer is, and the Democrats are probably not going to cooperate. You would think that after the election, they might have learned their lesson.

[00:07:20] Fox News Presenter 2: They did a little bit today. They got religion on the Lake and Raleigh bill. They, we had 84 votes for it in the Senate today. To get on the bill, we'll obviously have to try and process it next week, but I'm hoping that, they will come to their senses and realize that the election drubbing that they took was a message from the American people.

[00:07:38] Fox News Presenter 1: it didn't sound like it though, right? it's the fireworks here. Elizabeth Warren going out there saying she's going to essentially make trouble for Pete Hegseth bringing in, she's going to ask lots of questions. She's demanding, I think, answers to 72 questions. Look, that's advise and consent.

[00:07:52] Fox News Presenter 1: I get that. Are you confident that Hegseth, start with him, is going to get through the Senate? 

[00:07:58] Fox News Presenter 2: Well, I think, you know, again, I [00:08:00] don't try and prejudge these things until they go through the confirmation hearing, but I think he's got a path, and I think he's done really well in the meetings he's had, my meeting with him was really good, he talked about his vision for the department, I think focusing on the war fighter, and he's got great experience, not only as a veteran, but he's a very, obviously a very smart guy, and um, so I'm hopeful.

[00:08:19] Fox News Presenter 2: Alright, 

[00:08:19] Fox News Presenter 1: and Senator, I know you said, a couple days ago, that your relationship with Trump is evolving. When I hear that word, I, you know, it's a little red flag there and you want to get this to the same destination you said. But what does that really mean? It's really diplomatic. Um, but without, I just think of it this way, without him on the ticket in November, I don't see that the Republicans would have had either the House or the Senate majority.

[00:08:43] Fox News Presenter 1: I mean, maybe they would have, but I don't think so. So shouldn't the president's priorities get some serious deference here considering what he did to boost the entire Republican Party? 

[00:08:53] Fox News Presenter 2: Yeah, no doubt about it. I mean, he got 77 million votes. He gave us a 53 Senate majority in the, uh, 53 seat majority in the United [00:09:00] States Senate.

[00:09:00] Fox News Presenter 2: So, uh, He is the driving force, behind everything, and the people in this country gave him a mandate, and we intend to deliver on that mandate. Um, you know, I describe my relationship with him, it's really good. I mean, I try not to overstate it, because I know somebody might go to him, and they 

[00:09:14] Fox News Presenter 1: might say something else.

[00:09:15] Fox News Presenter 1: Well, you backed Tim Scott, which, look, a lot of folks back other people. It's not, people say that, like, big deal. I mean, you backed Tim Scott initially. Uh, you know, and, and, lots of people have come along to understand the party is a different party than it was five years ago. It's a 

[00:09:29] Fox News Presenter 2: totally different party than when I, the time I got into politics and, President Trump has brought to the table.

[00:09:35] Fox News Presenter 2: Constituencies, uh, coalitions, uh, groups of people that never were voting Republican, and they now are, and, uh, we have a, I think a great opportunity that doesn't come along very often and sometimes doesn't last very long to get some, really good things done for the American people thanks to, uh, President Trump and his leadership.

[00:09:51] Fox News Presenter 2: So we're working closely with him to, to answer your question. 

[00:09:54] Fox News Presenter 1: An evolving relationship. Alright, well, okay, alright. Well, I'm just trying to be Okay, diplomatic. I'm a very [00:10:00] conservative. I know you are. I described her twice. Alright. Alright. Two bills versus one bill. People watch this go, what does that even mean?

[00:10:06] Fox News Presenter 1: Here's the concern. I think this is the concern that President Trump has stated and probably still has that once Republicans get their tax cut, a lot of Trump's other priorities, whether it's tariffs or maybe cutting Ukraine funding are going to go by the wayside. He's concerned about that. Do you think you can get 51 votes if there are two bills for some of these other priorities?

[00:10:32] Fox News Presenter 1: Well, more unusual priorities that the president has. Unusual compared to the old Republican Guard. 

[00:10:38] Fox News Presenter 2: Well, I think that the, uh, yes, and actually that what you described is an argument for doing two bills, because you're going to do, if you're going to do the tax piece of it, some of the other things, That's probably going to be happening later in the year.

[00:10:51] Fox News Presenter 2: I mean, I think we can do some things right out of the gate. Like what? Border, border security, which is a huge priority for the President, for all of us. On energy, and on, uh, [00:11:00] military readiness. Increasing our defense budget, all offset. But do that, get a quick win, and then focus on the, the broader debate about taxes and some of the other issues that you mentioned, including spending cuts.

[00:11:12] Fox News Presenter 2: Which I think we have an opportunity, a historic opportunity to do something about. 

[00:11:16] Fox News Presenter 1: Are you worried that without significant spending cuts that year from now, year and a half from now, Jay Powell sees that these These numbers are going up. This budget deficit's going up. He raises interest rates. This country's thrown into recession.

[00:11:30] Fox News Presenter 1: And Republicans get wiped out in the midterms. That's what I'm worried about, uh, without real cuts. And I know, uh, Washington never wants to cut. I know you're a fiscal conservative, but We've seen spending go up across the board. 

[00:11:43] Fox News Presenter 2: Yeah, and I think what you have to do, and I think that reconciliation is a great opportunity to do it, you've got to slow the rate of growth.

[00:11:49] Fox News Presenter 2: You need growth in the economy, you need pro growth policies on the tax side, tax, regulatory, energy policies, all things that we care about that we want to do through reconciliation as well, but then you've got to slow the rate of [00:12:00] growth, and particularly in some of the mandatory programs, the entitlement programs, and that's something that Congress hasn't been able to do for a long time.

[00:12:06] Fox News Presenter 2: I think the President has I think, uh, members in the House and the Senate, Republicans, both want to get this done. And I think it's important, because if we don't, you're right, we're headed on a, it's a, it's a train wreck. It's a fiscal train wreck. We can't control monetary policy, but we do control fiscal policy.

[00:12:24] Fox News Presenter 1: Uh.

[00:12:24] Joseph Gradante: I'm going to stop there, guys. And, that's what I want to get into. because, Allio Capital, we're a top down macro investing company. I want to, make that clear. We look at monetary policy, and we look at fiscal policy. And you just heard the Senate leader there talking about fiscal policy and what they're going to do.

[00:12:41] Joseph Gradante: first off, some of these issues that are on the table. I'm Tax cuts, right? Even just extending the tax cuts. these are risks to the markets, because if they don't do tax cuts, now I think they will, right? I think Republicans will definitely get a tax cut done. They'll just probably extend what they have.

[00:12:58] Joseph Gradante: That would be a negative for markets. [00:13:00] I don't know that continuing it would be a huge benefit. It would certainly be on the positive side of catalyst, but it's not, it's been there, right? And it's been one of the things that has kept us growing despite the terrible policies by the administration is those tax cuts.

[00:13:16] Joseph Gradante: And they've actually, the congressional budget office, the numbers they predicted, they got it wrong. the government has increased their revenue intake every year since the tax cuts. So not extending those would be disastrous. They are going to probably come later. I've heard a lot of the Republicans say that.

[00:13:32] Joseph Gradante: but I always get weary when I hear about, increasing the defense budget. I'm all for strategic spending on defense, but, the military industrial complex, I'm You know, you didn't hear anything about, I just, when she talked to some of these other initiatives,they say border security, I think Trump might have to go all again through executive order, but, they didn't say anything about, Ukraine, and some of the tariffs, particularly.

[00:13:55] Joseph Gradante: Like some of these other more controversial things,and I don't know if the, [00:14:00] as Dune said, when he got, it was a different Republican Party and a lot of those people are still left. So what do you guys feel about that? Do you think that ultimately, they're going to get those things done? and then, first, let's start there and then we'll talk about how that's going to impact market.

[00:14:15] Joseph Gradante: So, Tyler, do you think that they're, you just heard, doing there. Do you think that they are going to get it done, when it comes to some of those more,food regulation, things like that, listening to DOGE, making spending cuts, these other areas, particularly the military industrial complex, stuff like that.

[00:14:30] Joseph Gradante: Are they going to respond to this new coalition or are they going to, basically ally with their big business, interest there? That they have on the lobbying side.

[00:14:39] Tyler Goering: Me personally, I think Trump's going to get a lot of what he wants done. And, he mentioned this in the clip. I also mentioned this on the last podcast, but Trump is, he's the power broker right now that he has been given a mandate by the American people. The elections were a landslide. he's got a lot of momentum.

[00:14:57] Tyler Goering: Going in his favor, and I think [00:15:00] anyone trying to buck the trend or trying to cut him out at the knees, is going to probably face some pretty swift, punishment. So I would say that anyone trying to stall or stop his agenda, especially the second time around, it's probably not going to work as well as the last time around.

[00:15:19] Tyler Goering: So my personal opinion is I think a lot of what Trump wants to get done, he probably will get done in his second term here.

[00:15:26] Chris Morgan: Yeah, especially in that first hundred day kind of honeymoon period. I think he's going to have a lot of both Democrats and Republicans behind him and some of the things that they want to do. So like you said, Tyler, if you're in Washington and you're going against what he wants to do, you're probably going to lose.

[00:15:40] Chris Morgan: He's got a mandate. the American people want the plans that he has. So I think there's a real path there.

[00:15:47] Joseph Gradante: I will say this before you go, A. J. Don't underestimate the media and Hollywood and the pressure that they will put on the Democrats to try to hold on to power.

[00:15:57] AJ Giannone: Yeah, that was kind of going to be my point is [00:16:00] that, I think at this stage, it's clear that, Trump is coming in with a mandate and there are some key issues like border security that I think, the Democrats really got pounded on. Both in, the polling and in some of the commentary and even in, the media that are going to be like easy wins, to start off with.

[00:16:18] AJ Giannone: But,like anything else, this is the honeymoon period and when the rubber hits the road and you start to get into the details and some of the dirty, underbelly of Washington politics and, really just have, a little bit more friction when it comes to getting some of these more systematically important.

[00:16:36] AJ Giannone: Cuts made and some tax. policies changed. I think that's where, the challenges are going to pop up because, as much as I personally agree with the concept of DOGE and really trimming down some of the excesses and wastefulness in the federal government, I think there are going to be a lot of very easy political talking points that are made, you cut the federal budget in any one area and then you can start to see, Oh, [00:17:00] for example,all the, the food assistance to elderly grandmothers was cut.

[00:17:04] AJ Giannone: then it's just starts to become, child's play for these companies and these media conglomerates to push the narrative. So on the one hand, I think that's going to be a huge challenge to navigate. But on the other hand, I think, Okay. What was unique about this particular cycle was that the media was pushing that crap the whole time and it didn't work.

[00:17:23] AJ Giannone: So I think there's a unique window here if the administration stays consistent with how it projects its messaging with respect to podcasts and new media platforms and direct communications with the American people, then I think they have an opportunity to succeed in these areas where historically they might not have.

[00:17:44] Joseph Gradante: So you were saying, I just want to clarify, take their message to the American people directly and get that pressure on Washington, right?

[00:17:51] AJ Giannone: Exactly. Yeah. Cause

[00:17:53] Joseph Gradante: thousand percent. Reagan

[00:17:54] Chris Morgan: Yeah.

[00:17:55] AJ Giannone: yeah. and you see it here, like when you look at, these media clips that you see and they put the [00:18:00] cameras in the faces of all these senators when they're walking out of meetings and all the Congress people and they get the clips that, hit make the evening news.

[00:18:06] AJ Giannone: that's just. It's tired and it's stale and nobody cares anymore. if they have an ability, to project their messaging more directly and explain why they're doing what they're doing and cut those traditional media companies out at the knees and actually execute on that, then, assuming that they can put pressure, on those marginal senators that would otherwise be prone to getting exposed or pressured by the media.

[00:18:32] AJ Giannone: maybe that tilts the scales enough to get some of these things done.

[00:18:36] Tyler Goering: I think you saw that a lot in the last election with the popularity of Rogan, Theo Von, podcasts are the new medium for politicians to, get right in front of the American people with no filtration and, the Trump campaign to their credit, they did more of that than the Harris campaign.

[00:18:53] Tyler Goering: And I think it paid dividends for them. And I think this is kind of a pattern that we're going to see going forward, is you bypass [00:19:00] legacy media, you go straight to the people with your message, of dozens of podcasts through which you could accomplish that. So I think we have probably seen a fundamental shift, in my opinion, in the media landscape in this country, excuse me.

[00:19:15] Joseph Gradante: Yeah, they just have to be consistent with it. they got to remember that for them, campaigning is an over to get this legislation, through Washington. Okay. So, so we all agree on that. so if they make some of these cuts,they extend the tax cuts.

[00:19:28] Joseph Gradante: We're in this environment. how is this going to play out in capital markets, particularly? right now it doesn't look like there's any rate cut in the near future. There is a CPI report, that I believe is coming out, tomorrow.

[00:19:40] Chris Morgan: Yep,

[00:19:41] Joseph Gradante: Yeah. that is going to be a big indicator, right?

[00:19:43] Joseph Gradante: We'll see where inflation's at. but before we get into the markets, I just want to say real quick. as far as what we just speculated here, Pete Hegseth is actually going through the confirmations right now. So we're going to see, I mean, I think will be a huge indicator, um, because he was a little bit controversial at first.

[00:19:58] Joseph Gradante: He came from media, I think, him [00:20:00] and RFK, if they get confirmed, That's going to be, the two people that we got to look out for to see, how these Republicans are going to, play this whole thing. but what, what the audience wants to hear, right? Is that how is this going to, play out in markets, right?

[00:20:12] Joseph Gradante: what are we going to see? And, I'm going to go first, right? just real quick. I'm not the chief investment officer here. but. Right, I've been around markets my whole life, and I will say that I think there's going to be a lot of volatility. I think gold prices are going to continue to do well, because I think, again, playing the macro environment, I think Bitcoin and gold, they're going to be the hedges to everything.

[00:20:33] Joseph Gradante: And so, In case right until this stuff clears up until the clouds clear and we see what the weather is really going to be right. I think there's just going to be a lot of volatility in markets. I think, there's opportunity, do some option plays in there volatility this way. but,AJ might as well start you, your chief investment officer, like really, what are the assets and, and sectors that you think are going to be.

[00:20:57] Joseph Gradante: that they're going to benefit, do you think volatility [00:21:00] is going to be here for the next couple months until the stuff clears up? And if you do, or you don't, When that happens, Or until that happens, which asset classes you think are gonna are going to benefit the most? Yeah, absolutely.

[00:21:12] AJ Giannone: Yeah, no, it's a great question. Thanks for teeing it up for me, Joseph. to me right now,you have to understand where we are today. You have to walk the clock back about a couple months to, when Trump won the vote. And, from there, I think there was a little bit of, you know, euphoric feeling that came over markets.

[00:21:28] AJ Giannone: Asset prices got bidded up in anticipation of some of these, pro business, pro growth, policies, for example, cutting of some regulations, some tax cuts, some pro business shifts in the administration. We're going to be big for markets, big for corporate America, big for profits, big for wage growth and all these kind of things that, I think people were really excited about.

[00:21:47] AJ Giannone: But, if you look at where we are today, the market's kind of given back, all of that, rally that it, sustained in the wake of the election. And I think it, To understand why, I think you have to look [00:22:00] at inflation and the rates market. So, you know, inflation has been, stubbornly persistent with respect to the Fed's ability to get inflation back down to that 2 percent target.

[00:22:10] AJ Giannone: And it's been because the economy's been so robust. we've had rates at, you know, What is a recent historical high for quite some time now. And due to some structural shifts in the economy during the last, call it 10 to 15 years,particularly with the ultra low rates that many consumers and businesses were able to lock in during the, COVID period.

[00:22:31] AJ Giannone: it. Results in an economy that is much less rate sensitive. So,we're in an environment where inflation is elevated relative to where the Fed would prefer it to be. That is in effect, a tax on the American consumer, but, the consumers weathered it remarkably well. And now, what you're looking at,in the last couple months here is we've shifted from an expectation of continued rate cuts after the Fed started their rate cutting program in, September of last year to a situation [00:23:00] where when you look out the markets pricing in really only 25 basis points, which is effectively one cut throughout the entirety of 2025.

[00:23:07] AJ Giannone: And even that, is a bit of a coin flip at this point. there's a almost an equal likelihood that we get no rate cuts in 2025 as we get one rate cut. And obviously, a lot can change during the next 12 months. what's I think really a key component of this is when you look at the rates market, specifically the 10 year yield on the U.

[00:23:25] AJ Giannone: S. Treasury, You've seen a steady climb for the yield, upwards, today. Right now I'm looking at it 4. 794%. That's off, a local low of about 3. 6%, which was, in mid September. So we're up over a hundred. basis points, almost 120 basis points off of, where we were basically when the fed started cutting rates.

[00:23:51] AJ Giannone: And, I talked about this a little bit, you know, with some folks in my network and, the Liz trust effect, excuse me, is in full effect here. And what I mean by that is [00:24:00] that the market's now pricing in, A massive increase in the federal deficit and the required issuance from the treasury that's going to be necessary to support that deficit and the growth of that, including all of the marginal increases in interest expense that the federal government is going to have to pay over the next 10 years, effectively.

[00:24:22] AJ Giannone: what that means for folks who are purchasing a 10 year treasury bond, is that, they're looking at this and going, Hey, I need to be compensated for the risk that, the government has to print money, over the next 10 years to, to sustain this deficit. And,the term premiums back, the terms, fiscal irresponsibility are back.

[00:24:42] AJ Giannone: And Joseph, we saw it on an interview you just showed, there's a acknowledgement even from. the quote unquote, the mainstream media that, we're on a fiscally, irresponsible path and it's unsustainable. So, when this discourse begins to kind of snowball, you get a situation where, the markets are going to hold [00:25:00] government accountable one way or the other.

[00:25:01] AJ Giannone: They're not going to just take whatever they're given laying down. They're not going to be spoon fed crap. if the markets look out and, as we've seen over the last couple of weeks and they see some uncertainty with respect to, what are the fiscal policies, of the administration going to do with respect to, the government's ability to sustain itself and they start to question that.

[00:25:23] AJ Giannone: this is what you get. You get, really steep, really aggressive increases in long rates, which puts downward pressure on equities because now you have a choice between, a 5 percent in effect risk free rate on a 10 year and owning equities at a 20 plus, forward P. E., which, implies a forward looking return in the low single digits.

[00:25:40] AJ Giannone: what that means, for markets and for, your portfolio is really that risks are elevated here. I think the economy is still on solid footing, um rates market does tell us economy is humming along. well capitalized as are firms, everyone took the opportunity from 2020 to 2021 refinance every [00:26:00] piece of debt they had and lock in a super low interest rate There's not really, this fiscal overhang from the perspective of the consumer or from corporate America, but, things are priced to perfection, so to speak.

[00:26:13] AJ Giannone: So we need to, deliver on everything that the administration has promised with respect to tax cuts and pro business agenda and get, growth to where it needs to be in order to deliver on the earnings expectations that are priced into the equity market. it's important to stay diversified and, I'll hammer on this every single episode, every chance I get, but, there's.

[00:26:36] AJ Giannone: Diversification is the only free lunch. when you can get 4. 797 percent on a 10 year treasury relative to an equity, it makes sense to include some of that, as part of your overall allocation. especially with inflation in the low twos, your real yield there is, a hair over two and a half percent,relative to an equity where, you know, you, if your expected return is a four or a five, but with, 20 percent annualized volatility, [00:27:00] That's a tough trade off.

[00:27:00] Joseph Gradante: On that note, I want to, because there is a lot to unpack there. So that I think, we're going to say a lot of volatility, right? And there's going to be lots of uncertainty until this fiscal thing clears out. And there's a little bit more guidance on how we got to see how the inflation report comes out.

[00:27:14] Joseph Gradante: So we'll continue to talk about these things in the podcast. But I think hammering on diversification and trying to get into the details there and how to diversify, And for me personally, I think you got to have a nice combination of a risk, risk off. you talked about it last week.

[00:27:29] Joseph Gradante: You talked about some of the. financials, right? Some of those community banks, some of the deregulate. I do think that's going to come particularly. I think, financials are going to be a lot of deregulation areas. There's going to be a lot of M& A activity. That's going to come, that's going to, spike up M& A activity is supposed to be up about 25%, year over year going into and I think bar stepping down as the top cop, I think, they're all indicators are positive there. I think. semiconductors. I think that's a nice little area, industry to pay attention. I do think there's areas of equities that you want to be right.

[00:27:59] Joseph Gradante: [00:28:00] Like obviously the AI stocks,these are the areas that are really going to have to drive growth for the U. S. economy, if we're going to get back to pro growth and, and there's, some other areas too,of manufacturing,I think looking at some, production and natural gas, things like that, there's, but yet I also think like gold, right?

[00:28:18] Joseph Gradante: Like you gotta have heavy exposure to gold and some Bitcoin, a little bit of Bitcoin in your portfolio, just because sentiments, Bitcoin to me, you don't want to have, it's that market is entirely driven by sentiment, but I expect at least for the next four or five months, like this stuff needs to clear up.

[00:28:35] Joseph Gradante: if you're gonna, if you're gonna hedge this whole inflation play, having a little bit of exposure there is probably wise. and I think that's unique because you're not talking about, diversification with equities and bonds, right? Just equities and bonds. You gotta have some of these other unique asset classes in your portfolio.

[00:28:52] Chris Morgan: I was going to ask you guys too. I had,I read this morning that most of the returns in the bond market have actually come from price action rather [00:29:00] than yield. So does that mean bonds have a different place in your portfolio now that they should be replaced by something like gold or hold bonds as is just hold on for the ride? 

[00:29:11] AJ Giannone: it's a great question, Chris. And then I'll throw it over to you, Tyler, to get your opinion. But, essentially, that's just due to the magnitude of the move. the yield on equities, or should I say the yield on fixed income here, whether it's treasuries, high yield, corporates, bank loans, whatever, it's single digits.

[00:29:27] AJ Giannone: But when you have ultra low yields, you get really high duration measurements because, Fixed income becomes incredibly sensitive to changes in yield because the yield return component is so small. So, you know, when we see, we're in the longest fixed income bear market in history, relative to the United States and, going all the way back to the 1700s.

[00:29:46] AJ Giannone: So,what that means is where we are today, in over the last two years, maybe that's the case that the price action has resulted in most of the depreciation, of fixed income instruments. But for where we are today, [00:30:00] looking forward into the future, The expectation is that the yield component will become a larger part of your expected return of fixed income going forward.

[00:30:08] AJ Giannone: You know, assuming no move in rates from here, if we're in a higher for longer environment, then all you really need to do to approximate expected return on a, instrument like a 10 year treasury is to just look at the yield and that's a reasonable approximation. what it means for diversification though is thatthis is a piece that I think people often overlook is that the correlation between treasuries as a safe haven asset and equities is not always inverse, which is what a lot of people came to rely on over the nineties and the two thousands.

[00:30:36] AJ Giannone: and if you look over the last hundred, 150 years, that correlation flip flops fairly regularly, and it's done so, a decent amount over that span of time. So you can't always rely on fixed income.if the, driver of the correlation moving to positive between equities and fixed income is inflation, which has been the case since, [00:31:00] 2021, then, really the hedge there, the natural hedge or inflation sensitive assets.

[00:31:04] AJ Giannone: So assets like gold assets, like commodities and natural resources that are, in effect. Going to be directly tied to the costs and the inputs that are in the inflation measurement. Those are things that are going to be key assets to hold in your portfolio. So with that said, I'll, I'll flip it over to you, Tyler.

[00:31:21] AJ Giannone: What do you, what do you think of this?

[00:31:23] Tyler Goering: I would echo a little bit of what you said that diversification is your free lunch. when things are choppy, when things are frothy or uncertain looking forward, diversification is always a great play. this is going back to classical asset management, but if you can find assets that are uncorrelated or, have a low correlation with the other things that you hold.

[00:31:41] Tyler Goering: That's all the better. So don't be afraid to look at things like alternatives. there's even ways you can invest in Arts, Bitcoin. there are lots of different ways that you can get that little extra bit of diversification in your portfolio. I would also say it's never a bad idea to keep a little bit of cash on the sidelines to take advantage of some [00:32:00] more tactical plays.

[00:32:01] Tyler Goering: Joseph had mentioned this earlier that,let's say Trump ends up getting a lot of the things that he wants done specifically tariffs and increasing us manufacturing. you might want to have a little on the sideline to where you could take advantage of a move like that, but, no, or ultimately if things are choppy looking forward, diversification is your friend and you should, strongly push towards that in your portfolios.

[00:32:23] Joseph Gradante: Yeah, guys, with uncertainty here and before we close out, I just want to say that,there's when you have uncertainty, you gotta always look out for the black swan. So, you know, there can be massive upside opportunity, but you never know in that black swan, right?

[00:32:34] Joseph Gradante: And you've got to be positioned for that to Tyler's point. so I think, yeah, those are all great points, Tyler. Um,with that, folks, it's been another episode of Welling Optics here by Alloy Capital. don't forget to click like below, follow us. again, go to the website, alloycapital. com, sign up for the beta, and thank you for joining with us.

[00:32:55] Joseph Gradante: Peace, love, see you next time.

[00:32:56] Tyler Goering: Thanks a lot, 

[00:32:57] Chris Morgan: Thanks everybody. 

[00:32:58] AJ Giannone: Thanks everyone. [00:33:00]