A Word to Our Limited Partners

"A Word to Our Limited Partners"
Good morning. I'm going to skip the P&L walkthrough because you can read a PDF, and I want to spend our twenty minutes on something the PDF won't tell you: two markets are currently pricing two different Americas, and one of them is wrong.

Start with the bond market, because bonds don't lie the way equities do — they just get ignored, which is worse. The 30-year Treasury yield hit 5.28% last week, the highest print since July 2007. Not "highest since the regional bank scare." Not "highest since the 2023 debt-ceiling tantrum." Highest since the summer before Lehman. That's the long end of the curve telling you it does not believe Kevin Warsh's committee has inflation licked, doesn't much care that headline PCE cooled on July 31st, and is demanding compensation accordingly. The 10-year sits at 4.67%. The 2-year, sub-4.25%. That's not a curve pricing a soft landing. That's a curve pricing a Fed that either hikes into September or loses the argument to its own dissenters.

And on that: three FOMC members — Logan, Hammack, Kashkari — voted to hike on July 29th while the Chair held at 3.50–3.75%. Nine to three isn't consensus, it's a coalition, and coalitions fracture. Warsh called it a "good family fight." I'd call it a Chair who won a vote and lost the room. He told the press the July decision was "the beginning of the story, not the end of it." Fine. Bond traders heard that sentence and did the only rational thing: they sold the long end and made mortgages more expensive for anyone who isn't already sitting on a 2021 refi.

Now walk twenty feet down the hall to the equity desk, where none of this appears to be happening. The Nasdaq put up its best Friday in weeks on the back of Amazon and Microsoft earnings, the S&P closed out its fourth straight winning month, and — this is the number that should bother you — 85% of the roughly 300 S&P 500 companies that have reported this season beat estimates, with aggregate profit growth tracking above 47%. Forty-seven percent. RBC is out there defending an 8,150 S&P target like it's a hill worth dying on.

Here is my question for the room, and I want you to actually sit with it instead of nodding: how do you reconcile a discount rate screaming distress with an equity multiple that's still pricing perfection?

The honest answer is that you don't reconcile it. You choose a side and hope the other market blinks first. Right now the equity tape is betting the AI capex story — the hyperscaler spend, the earnings beats, the Amazon cloud number — is durable enough to outrun a rising cost of capital indefinitely. The bond market is betting the opposite: that 5%-plus long yields eventually reprice every terminal-value assumption baked into every DCF a sell-side analyst has built for a Magnificent Seven name since 2023. Both bets can't be right at the same time, and historically, when equities and long bonds disagree this violently, it's the bond market that's been early rather than wrong.

I'd also remind the room what oil did in the middle of all this, because it's the variable everyone's forgetting to price. WTI spiked to $84 and change the week Iran hit American positions and Trump promised retaliation "hard" — and then it dropped again once Washington held off on further strikes, which is why Sensex opened up ten percent-plus on relief and why Indian markets are having a moment nobody in this room is watching. Crude is now a geopolitical coin flip sitting directly upstream of the inflation print the Fed keeps citing as its excuse to stay restrictive. One more escalation in the Strait and Warsh's "rigorous review of the economic situation" writes itself a new chapter, and it won't be a dovish one.

So where does that leave the book. It leaves it exactly where I told the risk committee it would three weeks ago: short duration, underweight the long end of anyone's balance sheet that needs cheap financing to hit its capex guide, and light on the mega-cap AI names that are pricing a 2030 free-cash-flow number off a 2026 discount rate that's already 100 basis points too generous. I am not telling you to short the earnings. The earnings are real — 47% growth is not a mirage. I am telling you the multiple attached to that earnings stream assumes a cost of capital that the 30-year is actively refusing to deliver.

Friday brings non-farm payrolls. If that print comes in hot, the hawks on the Committee get their receipts, September becomes a live hike meeting instead of a coin flip, and the equity market's ability to keep ignoring the long end gets a lot harder. If it comes in soft, Warsh gets cover to hold again, the "family fight" quiets down for one more cycle, and the multiple survives another month on borrowed time.

Either way, I want this fund positioned for the bond market to be the one that's right. It usually is. It's just rarely early enough for anyone to admit it before the invoice comes due.

That's the call. Questions can go to IR — I've got a Fed speaker on the tape in eleven minutes and I intend to listen to every word of it.