Is there an end in sight? And Michael, would you like to kick us off with that?

Sure, I'll kick it off and we can kick it around.

But look, I think there's a few interesting things about this bond bear market that we're living through right now.

One of which is that compared to other bond bear markets we've seen the last few years, really since 2022, it's been a much quieter, almost stealthy move higher in interest rates.

If you actually measure the volatility of the 10-year Treasury note, it's about half of what it was doing in the prior bond sell-offs, all of which were a little bit more dramatic, but also which resulted in ultimately finding a bid here.

And I think the fact that it's sort of a more quiet sell-off, to my mind, is a suggestion that maybe we don't see a frantic bid and a reversal of interest rates lower.

Maybe they're going to – I think the chances of them sticking at higher levels is much higher than it was earlier.

share that

What I'm intrigued by... is why correlations among stocks are so low it looks like uh one month implied correlations are at their lowest record level um going back to 2011 uh around 0.08 Michael you want to kick us off and touch on that

Yeah, they're moving up just a little bit higher just today, maybe like 0.1.

But these are crazy low levels, Eric, and I'm glad you brought this up.

Just for context, if you look at this time series going back to 2011 when it starts, the average for that... has been around 0.36 or so.

Correlations move higher when volatility explodes and they go down during bull markets.

And so the fact that we're in year four now of a pretty robust, pretty historic bull trend, I mean, low correlations are to be expected.

What happens here is that greed overtakes fear.

You know, what are your your takeaways there?

People catching up.

Yeah.

Well, it's been a pretty remarkable year.

Obviously, earnings growth has been exceptional, and what's even more distinctive about that exception, exceptional earnings growth is that it came on the back, not of an earnings trough, but of a very strong 2025 earnings, uh, there.

And, you know, I, uh, a lot of strategists are upgrading their price targets, but just to throw out a couple of quick numbers here, forward earnings estimates for Bloomberg consensus on the S&P 500 are up nearly 20% year to date.

Now, some of that might be some ex- you know, sort of unusual things-

Yeah.

Uh, you've seen the, uh, the volatility risk premium shrink to levels that are n- don't make you p- particularly comfortable, uh, uh, there.

Mm-hmm.

Right? And it was pretty much that.

It wasn't back in inflation.

So to get rates back down lower, you need one of two things.

You either need horrible economic data, uh, coming in the, in the next few months, or you need the Fed to really change its messaging on what it's gonna be doing with cuts.

The way I see it is that with Warsh presumably coming in at some point in the near future as our, as our new chair, he's gotta walk a, a real, a, a, a difficult tightrope balancing a lot of things between, um, uh, the guy who nominated him, uh, President Trump on the one hand, and then his colleagues at the Fed there.

And so, um, if you look at the last, you know, FOMC meeting, it was, but for Moret, it was a, the...

That's gotta infect, um, impact inflation expectations.

What are the conversations you're having with your clients these days?

Well, one thing I think I've certainly been doing is standing back and looking at sort of some of the cross-asset correlations and how those are moving, because I think those give clues as to what type of risk environment we're edging into.

And so one of the interesting things here, Thomas is referencing the VIX at 21, which is really not that high a level there.

That's right in line with this long-term average there.

But at the same time, you're seeing very high cross-asset correlations For example, crude's correlation with the VIX right now over the last several days, really since these attacks began, it's in the top 2% of all readings going back a decade.

If you look at crude's correlations with high yield spreads, those are also in the top 2%.

What's interesting about that is that high yield is now correlating with the VIX, which it had kind of de-correlated.

We need more on methyl ethyl ketone if this

When you think about your latest report, how do we make sense of this?

Well, I guess, you know, first of all, it's been a series of interesting weekends, right? It's always news seems to break early Saturday morning and there's not much trading at that time besides Bitcoin there.

But look, I guess when you think about this and what to do with your portfolio, my view is that.

You have to go back and look at what's happened historically, right? And I profiled in this note I just put out last night four different sort of geopolitical shocks, all of which had to do with oil, right? So you go back to Iraq's invasion of Kuwait in 1990.

You go back to September 11th.

You go back to Russia's invasion of Ukraine, and then you go back to Venezuela, right? All four of those very different, very distinct scenarios, but there's sort of oil sort of embedded somehow in all of them in different ways.

What you see in all of those scenarios is that being long oil usually works.

WHEN DO YOU START BECOMING CONCERNED ABOUT THIS BEING PROLONGED? HOW LONG DOES IT LAST? HOW LONG DOES THE CONFLICT LAST WHERE YOU BECOME CONCERNED ABOUT INFLATION RISK AND, AS YOU MENTIONED THE R-WORD, RECESSION

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Here, Michael Purves on a unique Tuesday.

No, I think what's really idiosyncratic with Japan right now is the fact that their thirty-year bond is just, you know, that yield is just surging, right? And it's an interesting contrast, because in the United States, for all the time we talk about the Fed, the chair-

Mm-hmm

... uh, a while now, and our term premium has been at a high, much higher, elevated level.

So we do have to con- you know, sort of, you know, contextualize our Treasury yields in a global, in a, and, and i- in a global construct.

W- we import and export, uh, uh, uh, interest rates just like other, other countries do.

It is a, we have one big global bond market.

But to get back to Tom's question, like, the question is, is how much does it really matter here, right? And I think right now, Japan is clearly very important.

You know, uh, is it gonna yank our 10-year up to 4.75%? I doubt it, but it's sort of a subtle underlying pressure, uh, uh, there, that will sort of ultimately, you know, reinforce valuations for Treasuries, uh, you know, on our side.

Mm

Can you take a look back and give us a sense of how dominant that theme was and how that might be poised to shift in 2026?

Well, Lisa, you know, if you look at the, um, sort of large tech relative to, uh, cyclical and value pair over the last, not year, but the last, uh, six or seven years, that line goes up to the right just like the overall market does.

It's sort of one and the same, but what I've argued for years now is that the big tech rally is kind of the broader SPX rally.

Uh, there, there's just consistent out-performance in almost every year, except when you have bear markets, uh, like 2022.

Uh, and even that it wasn't really that ferociously sold off there.

There's very good reasons for that, which is that they generate not only superior, uh, quantity of earnings, but the quality, meaning the volatility of those earnings is remarkably low.

And so, uh, compared to cyclical and value earnings streams, they're just a lot more superior.

How much do you see, uh, equal weight as being true diversification in this type of backdrop?

Um, how do you think about the earnings growth for 2026? Is that enough to support this market?

Uh, Paul, it's, it's a, it's a tricky one, I think.

If you l- you know, I look at the S&P as sort of like a, a holding company with two divisions that at...

One of which being the big tech monsters, and then the everything else, at a very simplistic level.

So you can look at the SPX Equal Weight Index, uh, as sort of a proxy for everything but the Mag Seven.

And if you look at that, earnings growth year over year is sort of 4%.

Uh, can it beat that? Well, it will need to, A, have some decent nominal GDP to go along with that.

Uh, what do you think about next year?

What's on your mind this morning?

Well, you know, Thanksgiving.

Turkey.

Turkey.

But I think as we get past this week, all right, I think that's really... what we have to be thinking of is December going to be strong or is this little bit of reprieve just reprieve before we have more selling off.

I'm of the view that I think we're going to have a strong rally into year end and that there's been a lot of unusual cleanup.

You know if you think about it in September and October usually the most volatile months of the year.

What's the bull case here into year end? I mean, it's got to do with rates, the AI story, valuations, perhaps a little bit too premature as far as some of the concerns here or?

(laughs)

... (laughs) um, uh, offline, but one thing we had in the, in the, in the, in the mid and late '90s is, you know, you had this sort of persistent, you know, inflation not getting to the Fed's target and you had, you know, good economic condition there.

One thing that's different now is that, you know, we have arguably v- y- you know, a refreshed cutting cycle here, um, here.

And, and you didn't...

You know, you had what the Fed was sort of tweaking back in the, in much of the, of the last few years of the 1990s.

Um, if we get a, um...

It doesn't seem to right now based on some of the Fed messaging, but if we do get, um, you know, sort of a, a, a refreshed F- Fed and a refreshed sort of cutting narrative, um, with this type of economic data, uh, that is gonna be a really interesting period, uh, uh, unfolding.

What's it look like?

Yeah.

...

when we're...

W- what's, what's the problem? You know, if w- we go back to the last two big events, uh, COVID and the great financial crisis, um, those were giant left tail shocks.

The federal government was there, uh, whether it's monetary policy or fiscal policy, there to, to, to, to, to be the ointment, the salve, for, uh, uh, getting, getting the wounds repaired and the economy back on track.

In this case, the federal government is actually the, uh, catalyst for the, for the volatility.

So it's a very different, I think, mindset here, um, uh, there.

(laughs)