The following soundbites and insights are attributable to the indicated authors:
The Political Climate in China is Worsening
George Friedman, Founder and Chairman at Geopolitical Futures
China is increasing its monitoring of citizens in a countrywide effort managed by the Chinese Communist Party. Neighborhoods and regions have been divided into grids, and in many cases, residents of the grids have been recruited to go door to door, inspecting the living spaces in houses and reporting their findings to authorities.
This degree of inspection is worth noting, as it indicates intensifying unease within the CCP.
Potential Value in Intermediate Term Treasuries
Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management
UBS Commentary – 566KB ∙ PDF file
The 10-year Treasury #yield reached a new handle earlier this morning, hitting 5% intraday before falling back. The magnitude, and even more shockingly, the velocity of the move higher this year is one that hardly any investor – admittedly including our CIO team – saw coming.
So how did we get here and what did we get wrong?
First, #growth and consumer resiliency have been much stronger than what we anticipated, recently evidenced by third-quarter GDP, retail sales well above expectations, and the decline in jobless claims. And secondly, the market’s removal of Fed easing to a mere 115bps through 2025 far exceeded our expectations—giving “higher for longer” an entirely new meaning. Headwinds from Treasury supply, quantitative tightening, and government dysfunction have added to the mix as well.
Now, where do we go from here?
While reaching 5.15-5.2% is not out of the question given market illiquidity, we still believe we’re close to the peak in the cycle, and yields will trend lower into 2024. Policy rates are still restrictive, and eventually should put pressure on inflation and growth, sending yields lower.
Bottom line: What should investors do?
To date, the most severe drawdowns in high-quality bonds have been in the ultra-long end of the curve, which exhibits more sensitivity to technical supply/demand factors than pure macroeconomic factors. Volatility could remain elevated here, and we continue to exercise caution.
Instead, we still see value in the 1-10yr segment, particularly the 5yr point, as running yield and capital upside should quickly reverse recent drawdowns. It’s worth noting that despite nearly 100bps of moves higher, the total return on a 5yr high-quality bond investment is essentially flat, demonstrating how higher outright yields levels can protect against mark-to-market volatility with potential upside.
High Yield Bonds Are More Attractive than Equities
Myles Zyblock, Scotia Global Asset Management – 1832 Asset Management LP
Over the past 150 years, the equity market has generated a 10% annualized total return. That’s impressive and it is what most people who own equites are chasing. On any reasonable long-term investment horizon, we find that there is a huge dispersion around those long terms returns. Let’s set a 20 year horizon as an example (a 10-year or 30-year window changes nothing). And, here the return dispersion is between 3% annualized and 17.5% annualized with a 10% annualized average. Keep that in mind for a second.
Now look at the universe of high yield bonds, yielding nearly 9.5%. Sure there might be some defaults and I know we need some recovery rate estimates, but areas of credit are becoming VERY competitive with those long term equity returns. Bonds are an obligation, meaning that the variance in the expected 9.5% longer-term return is probably much lower than that for equities. Today’s prospective credit market returns are probably more competitive with equity market returns than at anytime in at least the past 10-15 years.
Real Wealth Concepts Note: We were saying this a couple months ago
AI ‘godfathers’ warn of huge risks
Geoffrey Hinton and Yoshua Bengio
Managing Ai Risks – 354KB ∙ PDF file
AI systems could rapidly come to outperform humans in an increasing number of tasks. If such systems are not carefully designed and deployed, they pose a range of societal-scale risks. They threaten to amplify social injustice, erode social stability, and weaken our shared understanding of reality that is foundational to society. They could also enable large-scale criminal or terrorist activities. Especially in the hands of a few powerful actors, AI could cement or exacerbate global inequities, or facilitate automated warfare, customized mass manipulation, and pervasive surveillance.
Many of these risks could soon be amplified, and new risks created, as companies are developing autonomous AI: systems that can plan, act in the world, and pursue goals. While current AI systems have limited autonomy, work is underway to change this.
If we build highly advanced autonomous AI, we risk creating systems that pursue undesirable goals. Malicious actors could deliberately embed harmful objectives. Moreover, no one currently knows how to reliably align AI behavior with complex values. Even well-meaning developers may inadvertently build AI systems that pursue unintended goals—especially if, in a bid to win the AI race, they neglect expensive safety testing and human oversight.
Once autonomous AI systems pursue undesirable goals, embedded by malicious actors or by accident, we may be unable to keep them in check. Control of software is an old and unsolved problem: computer worms have long been able to proliferate and avoid detection . However, AI is making progress in critical domains such as hacking, social manipulation, deception, and strategic planning. Advanced autonomous AI systems will pose unprecedented control challenges.