Episode summary
Inflation Falls When Stocks Do | Andy Constan on the Fed Hike, AI Capex and Why He Likes Bonds Again
Excess Returns
· · 59 min · Guests: Andy Constan
Summary
Andy Constan argues the Fed’s latest hike was a necessary reaction to inflation that is still running hot, with demand supported by consumer borrowing, elevated asset prices, and heavy AI-related capital spending. He says the economy remains resilient, but that resilience is also part of the inflation problem because households are funding spending through dissaving rather than real wage growth.
He does not think the hike meaningfully improved the Fed’s credibility. In his view, credibility comes from deeds that actually bring inflation down, not from stronger language, and that likely requires weaker asset prices and tighter conditions before inflation returns to target. He also explains why a Fed hike does not mechanically mean higher long-term Treasury yields: the front end can rise while slower growth and lower inflation expectations can pull the long end down.
Constan is more constructive on bonds than he has been in years because yields now offer a better mix of risk premium, real yield, inflation compensation, and diversification potential. He also says Japan has become investable again now that bond yields are no longer near zero, making Japanese stocks and bonds more attractive in his global beta portfolio. The main risks he watches are persistent inflation, activist Treasury issuance, and whether AI capex keeps requiring stock issuance.
Key takeaways
- Constan says the Fed’s hike was a no-brainer because inflation has stayed above target for 66 months and equities were still strong enough to absorb it.
- He argues higher long-term rates will not come just from a Fed hike; growth and inflation expectations matter more than the mechanical pull on the front end.
- He thinks bonds are attractive again because they now offer a real yield, some inflation compensation, and downside protection if growth disappoints.
- He says Treasury buybacks and coupon management can suppress long rates by about 5 to 10 basis points, but not enough to override the bigger growth and inflation drivers.
- Constan says Japan became investable once bond yields moved up enough to make the currency, stocks, and bonds usable as beta.
- He believes AI capex still creates an issuance headwind for stocks, unless spending slows enough to reduce the funding burden.
Notable quotes
“It was a no-brainer and they did”
“credibility is built from deeds not words”
“I think what has to happen is asset prices have to fall”
“I do think balance sheet policy, fiscal policy um can affect long-term long-term asset prices”
“Today, you know, interest rates fall from 5 to 4%. Which they easily could, they could fall to 3%. you're going to have substantial capital appreciation in a b in a bond portfolio”
How the episode opens
We are back with another discussion with our good friend Andy Constant from Damp Spring Advisors. Hi Andy, how are you? — Just I'm great. How are you? Hey Jack. — Good.
Yeah, great to great to have you back. We like to pop on these once a month and just talk to you about the macro landscape, the first principles behind how you look at the markets and the economy and the things that you're sort of paying attention to under the surface and some of the nuts and bolts of of how markets are operating and what they're reacting to. And this is a pretty this was a pretty kind of busy week.
I mean, you had the Fed with its first interest rate increase in in three years. And I think that's kind of where we wanted to to start with you. And there's sort of a lot of I guess crossurrens.
You have the the uh first rate hike from the Fed since 2003. The 10-year cross 5% for a time being. Uh and oil is you know I don't know where it is today, but it was you know trending over $100 a barrel and and so just how do you how are you kind of making sense of all these different sort of things that are happening in the market?
I think you have to start with what's going on in the economy overall and that what's been happening is still happening which is um a combination of consumer which is the dominant force in the economy um and extreme capex spending on um equipment meaning the compute build um are keeping the economy quite strong. um consumers are not experiencing significant um wage growth. They're not seeing real wage growth.
So most of their consumption is being funded by uh desaving and borrowing.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed hike
- inflation
- treasury yields
- ai capex
- bond diversification
Companies and tickers mentioned
- Damped Spring Advisors
- Substack
- X
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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