TONY PASQUARIELLO: At this point in the cycle, it will pay up for very selective secular growth companies who have something special in their business. And I'm probably going to go after those who don't. The family office world, we estimate at somewhere between $3 trillion and $4 trillion. And again, very much growing most every day, all else equal. I think the dynamics in the game have changed a bit this year. It's going to be more a year that favors tactical investing. And you're going to need to fight some of that commitment bias.

RAOUL PAL: I'm really looking forward to sitting down with Tony Pasquariello and chatting about macro markets. See, Tony and I started our careers together at the same place. We we're both at Goldman Sachs. He was early into his career. I was kind in the middle of my career at that time. But we grew up with the same people, the macro legends.

See, what makes Tony really unique is 20 years of talking to hedge fund legends. It gives him that knowledge base and understanding and nuance of markets that very few people do. Certainly, very few people on the sell side have the kind of depth of experience and the relationships that Tony has. And I think that information from that is really, really valuable. It's going to be interesting. What I love about macro is we're all going to have different views. So let's see how Tony's views differ from my views. And let's see where he thinks the world is going. Tony, finally we get to catch up with each other. It's been a long time.

TONY PASQUARIELLO: It's been 17, 18 years.

RAOUL PAL: I know because we were at Goldman at about the same time.

TONY PASQUARIELLO: Correct.

RAOUL PAL: I think you joined-- what? '90?

TONY PASQUARIELLO: 1999.

RAOUL PAL: 1999, and left 2000, 2001. And we were both doing the same thing.

TONY PASQUARIELLO: Correct.

RAOUL PAL: We were in equity derivatives. And I think at that point, you'd been brushed by the macro stroke, and that was it.

TONY PASQUARIELLO: That's right.

RAOUL PAL: You were into macro as I was into macro. And then I moved to GLG, and then you were my salesman.

TONY PASQUARIELLO: That's right.

RAOUL PAL: And I was at the GLG, and then your career took off from there. What are you doing now?

TONY PASQUARIELLO: So it's been 20 years at Goldman Sachs. I started as a summer intern, started then in fixed income, spent most of my time in the seat you mentioned, which is covering the macro hedge funds, think Stan Druckenmiller, Paul Jones, Louis Bacon, for equity derivatives, our old space.

RAOUL PAL: Yeah.

TONY PASQUARIELLO: Ran equity sales, ran equity derivatives, and now I'm responsible for coverage of the firm's macro clients across equities and fixed income. That's the day job. The night job is, we're building out our family office business across asset management, investment banking, and the securities division.

RAOUL PAL: Wow. So I think you chose a really good time to get back to macro, because macro is really not a good game for the last three or four years.

TONY PASQUARIELLO: That's correct.

RAOUL PAL: Now, suddenly, macro is back.

TONY PASQUARIELLO: That's right.

RAOUL PAL: And the top down, what's your macro view right now?

TONY PASQUARIELLO: So I'd say the number one question, particularly through the lens of a macro equity investor is, should I be worried about the signaling from the bond market?

RAOUL PAL: You said I wasn't allowed to talk about the yield curve.

TONY PASQUARIELLO: We'll get to the yield curve, for a moment.

And so I think as we sit here today, take a quick step back, a bit of a rocky road and a wild six or seven months. The market made-- the stock market that is, US equities made an all-time high in September. Against all seasonal patterns, the fourth quarter was an utter disaster. So you had the worst December since the Great Depression.

We sit here today, best start to the year since 1991. And so, you know, really what characterized last year, what characterized 2018 in the end, was the absence of return in any asset class. So whether it was stocks, treasuries, commodities, the credit market, not that any of the downs were particularly bad, but there were no ups last year. This year has actually seen a fantastic start in virtually every asset class.

The other interesting thing about last year was it was a year where I think the real economy effectively outperformed the financial economy, which is very different from, say, kind of the QE years where the market is doing great and the economy is kind of struggling. That flipped last year. And now it feels like it flipped back again a bit again. The financial market is doing great, and a bit of a wobble in, call it US growth, US activity data.

And so I think we sit here today and say, OK, there's been a ferocious move in the bond market during the month of March. What is the story and is the equity market failing to look around the corner? I would say--

RAOUL PAL: Now, whose story is right?

TONY PASQUARIELLO: I'd say, I think they both can be right, frankly. I'd say the big dynamics in the game for US equities are still quite favorable. We're talking about a growth pace which, if we're right, as a house, if Jan Hatzius on our US economics team is right, we'll grow in the low 2% area this year and next year, which is kind of where we've lived most of the post-crisis period.

RAOUL PAL: So that would mean you've got maybe a slow Q1, which looks like it's going to be a disaster quarter, and then back to reasonable growth there.

TONY PASQUARIELLO: Bingo. Yeah, so the sequencing would actually be sub 1% growth in the first quarter.

RAOUL PAL: Yeah.

TONY PASQUARIELLO: I don't think that's probably breaking news for most market participants, 3% growth in Q2. So you have a very big swing for two reasons. One is the financial conditions, impulse gets much more favorable, i.e. markets have gone to much more accommodative levels for growth since the end of last year, the start of this year. But also the fiscal swing, right? So the government shutdown probably takes about 50 basis points of GDP out of Q1. You drop that into Q2.

So to your point, kind of a quick hook, and then a resumption to kind of the trend we were living with, which, again, durable, above trend, not too hot, not too cold, fairly equity friendly throughout the cycle. And then the other dimension of this would be positioning. And so I would argue that there is a very significant amount of deleveraging and derisking in the fourth quarter. You started the year with exposure levels-- be it net exposure, gross exposure, so either the length you carry or the total risk you carry-- at effectively rock bottom levels.

We've seen a very sober response by our investors since the start of the year. So as we sit here today, we're still talking about a backdrop of stable growth, very favorable financial conditions, largely as a function of the Fed's pivot and an investor base who probably are under-positioned, if anything, for further upside. So I think we can live in a world where stocks will accept the repricing of fixed income as a tailwind. And you remember this, the lower-for-longer dynamic has been very favorable for the multiple of secular growth companies, in particular. So I think if you have stable growth, if you have defendable margins, you don't borrow, what effectively has happened, again, is wildly stimulative, perhaps, for your P/E multiple.

RAOUL PAL: I think that's probably the core assumption. And it's the rates stay relatively low, as you say. And that's probably good for equity markets unless something else is going on. And there is a fear you've got to be cognizant of that, well, if we go back to 2000, we had a very similar environment where the market became increasingly volatile, basically thrashed around at the highs, really difficult, made new high, then fell back, almost made a new high, rallied and fell and rallied and fell.

TONY PASQUARIELLO: That's right.

RAOUL PAL: The fixed income rallied like a banshee. Because it was kind of looking forward and saying, OK, there is something going on here that maybe the economy's not as good. Could it not be that situation?

TONY PASQUARIELLO: So certainly things to worry about. Now, it's been a long expansion. This is now--

RAOUL PAL: Yes, the longest ever coming up, I think.

TONY PASQUARIELLO: This summer will be the best in 150 years. It's already the longest stock market rally, effectively, on record. Always depends how you want to slice these things. But a very long cycle, however you want to think about it. You're also talking about globally, very clear signs of a significant slowdown in the manufacturing sector. And you're talking about, globally, a policy apparatus which may not have a lot of room to react, should things get a lot worse. Obviously, in the US, we do have scope to cut, but if you're looking at Europe or Japan, a lot of the bullets have been expended already.

RAOUL PAL: Yeah.

TONY PASQUARIELLO: So I'm not dismissive of it. And just to spend a minute on the yield curve, that you do have to respect the history book, which is whatever it's been. The past seven or eight or nine recessions have all been preceded by an inverted curve. There's very few false positives. You want to resist the temptation to say it is different this time, and so very respectful of that.

What I would say, though, at the same time, is the history book would tell you, there's typically a year or two lag from inversion to recession. The prior two cycles, it's been a full two years. The trading handbook would also tell you from the point of first inversion to a year out, actually, equity returns tend to be quite favorable. So I don't want to get too cute with this, but I actually feel like even if recession ultimately is in the off, we still have a reasonable short-term runway for risk.

I also think bigger picture, Raoul, I'm not so sure the expansion needs to die of old age. And again, if you think about this low 2% GDP gradient we've lived with post crisis, you've never really had the boom. So I'm not so sure we need to have the bust.

RAOUL PAL: Well, people say the boom is maybe in asset prices. When I observe that, I'm kind of sanguine on equities right now, so I don't really know. But they've gone up a lot.

TONY PASQUARIELLO: Yes.

RAOUL PAL: So I mean, it's at it's longest run. So maybe that's the boom.

TONY PASQUARIELLO: Perhaps. Although, at current pricing on our estimates of S&P does $173 of EPS this year. You're talking about divided by 2810 or whatever is the piece. So you're talking about a 15, 16 multiple, which is effectively bang in line with the long run average. So again, it's been a long expansion. It's been a long cycle. But to my eye, particularly in the context of bond yields, if we think about equity risk premium, that old Fed model, I don't think stocks are wildly overvalued.

RAOUL PAL: Even though, you know, if you look at the longer run, you know, P/E ratio of the S&P, I mean, it's obviously the second highest in all history. So it's relatively high, right-- or extremely high by any other yardstick?

TONY PASQUARIELLO: Sure. I think the other dimension, though, to consider is inflation. . So weak growth or stagnant growth, low bond yields in the context of inflation, I think that's wildly concerning. In the absence of inflation, I think it's a very different story. And so as we sit here today, perhaps the fairy tale is the United States is at full employment.

We've actually seen quite healthy wage growth. For the first time in a long time, measures of wealth equality have actually, thankfully, improved. And yet core inflation is still running below trend. So I would argue there's elements of that that are dreamlike through the perspective of the equity market investor.

RAOUL PAL: Yeah. So what about fixed income, then? Because can fixed income remain at lower yields if you've got some sort of wage growth? Because that's the other argument. The bond bearers have been arguing that, well, wage growth is too hot. The economy is relatively too hot. And therefore, fixed incomes are at the wrong price. And everyone's just been stopped out, as we've seen this month.

TONY PASQUARIELLO: That's right. That's correct.

RAOUL PAL: All the bearers got stopped out. That was the move.

TONY PASQUARIELLO: That's right. I think that's certainly a risk scenario for both stocks and bonds, yes, that, ultimately, there is transmission and you start printing above target inflation. The interesting part about the current narrative, though, is it seems that this Federal Reserve, which is a very different Federal Reserve than the one we encountered at the end of last year, have opened their minds to the idea that one could perhaps let that inflation run above target, this notion of average inflation targeting.

And so you have a central bank, who, I think, have pivoted and who is rightfully dovish or is possibly dovish as they could be, again, at full employment given the wage trends we're talking about. So I still don't feel like you're encountering, as you've had in prior cycle, which oftentimes drove that yield curve inversion and subsequent economic bust, you're not encountering this very aggressive Fed who feels like they have a lot of work to do in the short term.

RAOUL PAL: So why are they doing it then? So, you know, if we say the economy is reasonably strong and, you know, if the house forecast is 3% or whatever the number is, 2 point whatever, why are they not continuing to raise rates? Why the dovishness? And that's caught the market a little bit off guard trying to understand, is this them signaling, just go for it in the equity market?

TONY PASQUARIELLO: Sure.

RAOUL PAL: Or is it them saying, oh, there's something bad around the corner, you just can't see it yet?

TONY PASQUARIELLO: Right. Yeah, it's been a very interesting tenure under Jay Powell.

RAOUL PAL: Yeah.

TONY PASQUARIELLO: If you look at the year that was 2018, the stock market on the day of every single FOMC announcement sold off. He had a perfect score in 2018. Now, that record has flipped thankfully in 2019, at least judging from the January meeting and the March meeting. But I think Jay Powell was a bit of a P/E killer through the course of last year.

I think the Fed today-- I think they're effectively saying, we need three things to have confidence we're going to hike-- confidence in the durability of the recovery, which means if they're just reading the tea leaves of the data, it's hard to get to. We need stable asset markets, kind of a return to healthy financial conditions. I think we're probably getting there.

And the third thing they've been very clear about is inflation, that they're going to need to see the whites of the eyes of inflation. And to all of our prior points, this relates to core inflation and how they view things. It still feels like there's a bit of time before we have to worry about that. So again, this is a very different Fed than what we were looking at last year.

RAOUL PAL: And how do people, how do you personally factor in Europe? Because Europe and Asia right now, they're both messy.

TONY PASQUARIELLO: Through the prism of growth.

RAOUL PAL: Yeah, and the global macro framework.

TONY PASQUARIELLO: Yes.

RAOUL PAL: And does that kind of rot away at the US growth story or can it be entirely remote and that those things can operate on their own? Because we've seen it before. We've seen some sort of decoupling. It's happened in the past.

TONY PASQUARIELLO: Sure.

RAOUL PAL: Does that happen?

TONY PASQUARIELLO: I think you're right to posit this as something to be worried about. So, you know, Europe, who perpetually disappoint as it relates to GDP growth, earnings growth, innovation, at best, kind of muddle through. As you look at Europe today, one could say, be it Brexit or Italy, you have tail event, an event risk in the perhaps short term, which is concerning.

You look at a country like Germany, who sailed through, really, the European crisis circa 2010, '11, and '12 who now appear at least in the manufacturing side, to be slipping into a precarious place. I think there is a lot of worry about Europe. Now, I don't think, as a US equity investor, that's a reason to sell all of your exposure. And I say that because it's not--

RAOUL PAL: Sell all of your US exposure?

TONY PASQUARIELLO: Correct.

RAOUL PAL: Yeah.

TONY PASQUARIELLO: I just don't think it's new. And so I'll give you one statistic, which is rough and needs fact checking, but it's one that I carry in my head. If you were to draw up a list of the world's 500 largest companies, take a snapshot of that list in the year I was born in 1976 and then take a snapshot of that list today, Europe, in those 42 years, has added one company to that list. California alone has added nearly 30.

And so what I wouldn't want to do is sit there and say, OK, Germany just printed a terrible manufacturing print, therefore I need to go sell my Microsoft holdings. That's unequivocally been the wrong judgment through the last part of the cycle. So something to be mindful of, but I don't think something to over extrapolate back into the US equity framework.

RAOUL PAL: Yeah, I think when I listen to that argument, it tells me one thing, which is the US dollar goes higher. Because if you're talking about a situation where Asia's not looking great. I mean, Asian export growth, everything else is imploding. Europe looks terrible. And the US looks relatively good.

TONY PASQUARIELLO: Sure.

RAOUL PAL: Then you have to have a higher dollar, right?

TONY PASQUARIELLO: I think that's probably right. The only--

RAOUL PAL: Which makes it worse for Asia and, you know, kind of--

TONY PASQUARIELLO: Yes, which makes it trickier. I agree. My only counterpoint to that would be, in a world that is now increasingly going to be starved for fixed-income returns, for carry, for roll down, all of a sudden the US tenure note yields at 2.40% looks pretty meaty. Because the next best option on that list is Italy. And then it really falls off from there, the German tenure booms have now gone negative again.

RAOUL PAL: Negative, yeah.

TONY PASQUARIELLO: And so even accounting for cross currency basis and things which make it more difficult than it would appear, my guess is there's going to be plenty of demand for treasuries as we go along. So yeah, I think that would argue for ultimately a stronger dollar.

RAOUL PAL: Which would then, the knock-on effect for a stronger dollar tends to be slightly weaker commodities than you would see in an ordinary strong cycle. Because the US can't carry the world's growth, I guess.

TONY PASQUARIELLO: