October 18, 2024 • 35 mins
“This has been an incredibly unique cycle, both in terms of the economy and the market,” says Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab, on this week’s episode of Merryn Talks Money. “Maybe that’s the ultimate understatement.”
Sonders joins Merryn Somerset Webb to discuss what is and isn’t driving such turbulent markets—from Mother Nature “wreaking havoc” with inflation data to artificial intelligence’s promised productivity spur—and how investors can navigate the turmoil.
Join us at Bloomberg on Oct. 31, the morning after the Budget, for a taping of the podcast in front of an audience. Register here:
https://go.bloomberg.com/attend/invite/merryn-talks-budget/
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News. Hi, it's Meren here.
We have got something special coming up on October thirty,
first atam at Bloomberg Headquarters. It is going to be
Merin on the Budget, Well not just Marin on the Budget,
Meren plus John plus Stephanie and plus special guest Andy King,
who knows an awful a lot about fiscal policy and
(00:25):
fiscal matters. So it's going to be educational, maybe interesting,
and we'll have a run through what the budget, about
which we now know almost nothing, will mean for you.
So if you're interested in joining us or signing up
for the event, do look in the show notes whether
there will be a link or look out for it
in Money Distilled, John's brilliant newsletter, which I know you
all get already. Right onwards, Welcome to Maren Talks Money,
(00:55):
the podcast in which people who know the markets explain
the markets. I'm marrin Sumset Web. This week I'm joined
by Lizanne Sonders, managing director and chief investment strategist at
Charles Swab. We talk about the federal reserves, monetary policy
investors can navigate these particularly difficult markets and with the
US elections just around the corner. We talk about the
impact of elections on markets. Welcome Lizan to Marin Talks Money. Lazan,
(01:22):
thank you so much for joining us again. It's really
nice to have you back on.
Speaker 2 (01:25):
Oh nice to be on again. Maren, thank you so much.
Speaker 1 (01:27):
Well, look, there is so much going on at the moment.
So an ordinary investor looking around them, they can see
the American election coming up, inflation falling below, with most
people's targets suggesting, you know, more interest rate that's to come.
There's geopolitical tensional over the play, It's lots going on
in the energy markets, all sorts of things. How do
(01:49):
we even begin to make sense of this?
Speaker 2 (01:51):
You know, this has been an incredibly unique cycle, both
in terms of the economy and the market. Maybe that's
the ultimate understatement, but I think it's worth thinking about
what has made this cycle unique, and a lot of
it ties back to COVID and the aftermath of COVID
in the sense that you've had these bifurcations, particularly within
(02:13):
the economy when we had the early part of the
pandemic and the stimulus kicked in that was largely to
the sole benefit of the goods side of the economy,
not just in the United States but globally because of
course services were completely shut down, so that was where
the burst of activity initially happened. That's where the burst
of inflation started. But then fast forward we had the
(02:34):
later opening backup of services, the pent up demand associated
with that. In turn, the services or non goods categories
within inflation surged later and are stickier by nature, even
though we've actually had one could argue recessions in parts
(02:54):
of the economy that were earlier beneficiaries housing, housing related
manifest actioning a lot of stay at home beneficiaries on
the consumer products side of things. We've actually gone into
deflation in the goods categories of inflation indicators, we've just
had the offsetting strength and the economy on the services side,
(03:16):
service is a larger employer, helping to explain the resilience
of the labor market and stickier inflation data, and those
bifurcations have actually morphed into what's happened in the market too,
where you've had this large cat bias, but much more
churn and weakness and turmoil even under the surface at
the average stock level. So that's the connection point I
(03:39):
think between what's been going on in the economy and
is unique cycle and the market.
Speaker 1 (03:43):
Okay, so how does the economy let now to you?
And there's a lot more discussion coming up about no landing.
They're not going to be a self landing hard landing.
Now we're in a world of no landing. It sounds great,
Is that what you see happening?
Speaker 2 (03:56):
Yeah, it sounds great, But again we have had We've
had hard landings in those intrasensitive segments of the economy,
and in the case of manufacturing, hasn't yet pulled out
of its sectoral recession. It wasn't enough weakness to take
the whole economy down with it. But we're still trying
(04:17):
to claw out of hard landings in manufacturing, in housing,
in housing related whether the rest of the economy, the
more services oriented, can hang in there. So far, so good.
The economy looks in decent shape. Services is a much
larger share of the economy, so the economy can continue
to chug along without an officially declared recession. I think
(04:39):
the real key, because consumption is such a big part
of the US economy, is for the labor market to
remain healthy. I think that has been the feeder into
resilient consumption more so than traditional metrics like the savings
rate or even in this cycle, the excess savings level.
(05:00):
But I think the labor market does have to hang
in there. If the labor market were really crack from here,
and that's not our base case, but I think that
would feed into weaker consumption patterns, probably fairly quickly.
Speaker 1 (05:11):
So what's your base case on the labor market.
Speaker 2 (05:14):
So far, so good. The most recent jobs report obviously
was very strong, and not only just on the surface
with the headlines of payrolls and the unemployment rate, but
the innards of the report were quite strong. Not to mention,
you had positive revisions upward revisions to the prior couple
of months, and that booked the recent trend. But that
was one month, and we have another jobs report between
(05:37):
now and the November FED meeting, and so we'll get
more color. Of course, the big rub here in the
United States is that hurricanes and tornadoes and mother nature
is likely to recavoc with a lot of this labor
market data, certainly things like initial unemployment claim. So it's
going to be hard, frankly, to get a true picture
of the health of the labor market, given how severe
(05:59):
some of these storm have been and the implications that
that has for a lot of the real time leading
indicator type labor market data points.
Speaker 1 (06:08):
And those storms could then have an impact on the
inflation data as well.
Speaker 2 (06:11):
Right, absolutely, I think it's a question of whether there's
enough color commentary around any potential pickup and inflation suggestive
of it being more storm related and not some turnback
higher for traditional supplier demand reasons. I think if you
had a scenario where and we did get CPI last week,
(06:33):
which wouldn't have been a sort of shaded by some
of the storm impacts, it was slightly hotter than expected,
if we were to get another couple of readings that
were stronger than expected, with an extrapolation being that, hey,
this is more than just storm related. You add that
to recent better labor market data, and it's part of
(06:57):
the reason why you've not only taken in a fifty
basis point cut by the FED off the table. At
this point, there is a you know, reasonable likelihood of
the FED not doing anything, just you know, moving quickly
into pause mode, which certainly was not expected even a
(07:17):
few weeks ago.
Speaker 1 (07:18):
Yeah, so you if you want inflation as a whole.
Do you think it is pretty much dealt with? Give
or take you know, an odd little tick up here
or here or that, but the big crisis is over.
Speaker 2 (07:29):
Well, it depends on how you define dealt with. I think,
you know, a hanging of the of a banner saying,
you know, victory, our job is done. Nothing to see here,
let's move forward. I think that that's a little naive.
I happen to think that from an inflation secular inflation
backdrop perspective, not you know what the next monthly reading
(07:52):
on CPI or PCE is going to be. I think
we're we're likely transitioning or already in secular inflation backdrop.
That doesn't look like the twenty five years or so
leading into the pandemic, often referred to as the Great
Moderation Era from the mid to late nineties up until
(08:12):
the early part of the pandemic, really up until the
COVID related spike in inflation, and that was a period
of very benign inflation, very little inflation volatility, very benign
interest rate backdrop. It was driven by a lot of
powerful secular forces, including globalization and Gina joining the wto
(08:34):
and basically flooding the world with cheap and abundant access
to goods and to labor. We had actually less geopolitical
instability than we have right now. There's demographics that have
come into play. So I think the era we're in now,
if you were to liken it to an era of
the past, may look a little more like what I've
(08:57):
been calling the temperamental era, which was the thirty year
prior to the Great Moderation, so the span from the
mid sixties to about the mid nineteen nineties, and that
was an era of more inflation volatility. That's not the
same thing as saying high inflation the whole time, and
that's not my perspective in this environment, but more inflation volatility,
(09:17):
bigger swings on the upside and downside, and that was
in conjunction with greater economic volatility, so shorter cycles, more
frequent recessions, but stronger growth phases on the upside. And
I think we may be back in that environment. I
think the FED to some degree maybe in that camp too,
and they want to be mindful of not repeating them
(09:39):
mistakes made in the sixties and seventies, in particular of
premature declaration of victory easing policy, only to see inflation
reignite again, and then you know Arthur Burns having to
scramble and titan policy again. And we went through that
process twice until Paul Volker had to come in the
(10:00):
same thing, until finally interest rates had to be jacked
up to the moon in order to finally combat these
fits and starts of inflation. So I think we're in
a more inflation volatility, even if inflation in the near
term is not set to move up markedly.
Speaker 1 (10:18):
Okay, And it sounds like a lot of that inflation
with volatility will be driven by global forces as opposed
to domestic crisis, So driven by constantly shifting supply chains,
driven by people feeling like they need to reshure them
manufacturing or French shure it and that kind of thing.
Speaker 2 (10:32):
Yeah, so, yeah, we're not in the deglobalization camp, but
there's definitely a change in the nature of globalization to
your point, regionalization, supply chain diversification. But there's also the
demographics associated with labor supply that's a global phenomenon, and
I think one of the implications of this is that
(10:53):
labor relative to its own history is picking up as
a sort of a share of the economy and therefore
wields maybe a bit more power that all else equal
is supportive of more inflation volatility.
Speaker 1 (11:08):
Does that still end lots of ways though, rather like
a good thing, and that over the last period, during
the Great Motivation, particularly during the Great Great Kiwy period,
it's rather felt like labor has been on the back foot,
and in many places rail wages actually been falling. And
so this seems to me and lots of people like
like a really good thing that labor regai is in power,
that rail wages rise and then the consumption rises as
(11:32):
a result, and we have maybe a more balanced economy.
Speaker 2 (11:35):
Right. These things go in long secular waves and their
global in nature, not just in the US. If you
look at you know, profits as a share of GDP
over the long term, and you look at labor via
compensation as a share of GDP, you go in waves.
And clearly in the recent past profits has been at
(11:56):
the high end of its historical range in terms of
as a share of GDP and labor the opposite. But
they're they're starting to converge, not toward each other in
terms of weight within the economy. But relative to their
own history history, you're seeing labor garner a little bit
higher a share of GDP and profits a little bit
lower a share. And globally, I think that that probably
(12:19):
has has legs in part just because of labor supply
problems that are largely global in nature. Yeah.
Speaker 1 (12:28):
Now, a great hope, of course, is it the shortage
of labour supply encourages companies to behave in such a
way that enhances productivity across the board that it encourages
a new wave of CATHEGX and alongside that all the
benefits from AI, which of course we don't really understand yet.
It's impossible for us to forecast what AI will actually do, right,
we don't really know. But a hope is it, well,
(12:49):
these things will combine to give us a huge boost
in productivity which will support continued railwaye growth.
Speaker 2 (12:54):
And productivity has been has been healthy. It's it's it's
premature at this point to try to pinpoint AI's contribution
to that stronger productivity, but that's been certainly one of
the brighter spots within the US economy's decent productivity. Now
in the very near term, meaning you know, the next
few weeks. We've had sort of a stall in CAPEX,
(13:16):
in plans for CAPEX for somewhat obvious reasons around in
certainty with regard to the election. So I think to
really see a renewed cycle of capital spending or get
a sense of whether there will be a renewed cycle
of capital spending, we've got to get through this period
of uncertainty between now and the election.
Speaker 1 (13:33):
Yeah, I don't tell any of our UK readers to
mistakenly believe that productivity has had big pick up in
the UK as well, because I'm a fraid to ask, oh, sorry,
well that's okay, that's okay, But you know, we wait
and we wait and we wait, but it just doesn't happen.
And we took about digitalization and the great productivity boom
coming from technology and AI etc. We just we just
(13:54):
and we wait. Let's talk a little bit about the
reason for the slowdown in capecks in the US, which is,
of course the election coming up. And I'm certainly not
going to ask you to pick a side or anything
appulling like that. Who would want to have to do that.
But what tends to happen in an election. Everyone knows
that the run up to an election is usually very
(14:14):
good for storm markets, but what happens after that, and
these are a big difference between parties should we be
looking out for.
Speaker 2 (14:21):
You have to be careful about generalizing and looking at
long term averages and suggesting that that's some sort of
typical performance because there are such a wide range around outcomes.
Whether you look at the four year election cycle and
which year tends to be best, which year tends to
be worst. Actually, the best year on average has been
the pre election year, and last year was a strong
(14:42):
year for the market here in the United States, so
obviously that was in keeping, but you tend to see
a little bit more weakness and volatility in the election year,
and we've kind of bucked that trend with a strong
market this year. You often get a lot of sector
related volatility and trading moves in the lead into election,
but that tends to be more pronounced if you have
(15:05):
less of a tight relationship between the parties within Congress,
and I think regardless of what happens during the election
with Congress, we're not going to have wide majorities, which
means that there's a limit to how much of these
policy proposals and are natural on the campaign trail can
actually become policies because of what is likely to be
(15:27):
a pretty narrow margin regardless of what happens with the
makeup of Congress. It's also, frankly a bit of a
fool's errand to try to trade around election outcomes, especially
if those trading moves are based on an assumption that
the policies actually become policy. Proposals become policies. I think
(15:48):
that there's a lot of naivete when it comes to that.
I see headlines all the time of you know, if
Harris wins, then taxes are going through the roof. For
if Trump wins, are all the tax cuts are going
to remain in place, and that's it's not the way
the government works. And the other thing that happens is
(16:08):
I think there's assumptions that are made that translates into, well,
if so and so wins, it's good for fill in
the blank. And here's an anecdote that I think a
lot of people don't realize, and it highlights the care
you need to take with applying politics too much to
your perspective on market move. So Trump clearly is considered
(16:29):
pro traditional energy and Biden Harris are considered more pro
renewables and green energy. Well, the S and P energy sector,
which is one of eleven sectors, is all traditional energy.
In fact, almost half that index, that energy index is
(16:50):
two companies. It's Exonmobile and Chevron. But the rest of
the companies in the energy sector are traditional expiration production companies,
traditional drilling companies. There's not a green energy company, a
solar company, a win company in there. So you would
think that under the Trump administration energy would have fared
well well. From inauguration day to inauguration day, energy was
(17:12):
not only the worst performing sector, it was the only
one down, and it was down by forty percent. The
next worst sector was up by twenty percent. Fast forward
to the Biden Harris administration. From inauguration day to Friday's close,
energy has been by far the best performing sector, even
more so than technology. Now that is not because Trump
was secretly anti traditional energy and Harris Biden were secretly
(17:36):
pro traditional energy. The point is that there are so
many forces in impact what the market does, what sectors do,
what individual stocks do, and tying it to political party
is just a fool's.
Speaker 1 (17:48):
Errand right now, US households are very exposed to equity
as much as they've been since the early two thousands.
Is that a good allocation of the capital? Do you
think in the run up to the election and with
the evaluations of the US market as they are, etc.
It seems ambitious.
Speaker 2 (18:06):
There's no way to generalize an answer to that. And
I actually, Marion, I find that when I get off
in questions that are even more specific than that, you know, what,
what should investors be doing? How much exposure should they
have to you know, equities or fixed income? As if
there's one cookie cutter answer that's right. I could actually
(18:28):
have a bird land on my shoulder from the future
and say, all right, wink wink, here, Lasanne, I've got
I'm going to give you ninety eight percent odds that
the stock market's going to do X, that the ball
market's going to do X. And I were then sitting
across from two investors. One investor is twenty two years old.
(18:50):
They just inherited ten million dollars from the grandparents. They
don't need the money. They're not going to obsess over
the portfolio balance. They're not going to freak out out
in panic if there's a fifteen or twenty percent drop
in their portfolio. And then the other investor sitting across
from me is seventy eight years old, has built a
nest egg. That's their retirement nest egg. They can't afford
(19:13):
to lose any of the principle and they're living on
the income generated. So I have basically round it to
one hundred percent conviction of what the markets are going
to do. What I would tell those two investors is
entirely different. So shame on anyone that answers with specifiicy
even just in the confines of my world. At Charshchwab,
(19:33):
we have ten trillion dollars of client assets. That's a
wide array of risk tolerances and time horizons and need
for income and tax bracket. So yes, you know, if
you just on the surface add near record equity exposure
on the part of individuals to other sentiment indicators, maybe
(19:55):
it falls on the as a contrarian indicator on the
concern side of the ledger. But that kind of environment
of lofty sentiment, either attitudinal measures of sentiment too much optimism,
or behavioral measures like exposure to equities that can stay
that way for years. You know, people forget.
Speaker 1 (20:15):
That and has stayed that way for the Yeah, Alan.
Speaker 2 (20:18):
Greenspan's famous irrational exuberance comment was made in nineteen ninety
six and the stock market didn't peak for another three
and a half years. So one thing I always say
about investor sentiment, whether it's the attitudinal measures or the
behavioral measures like exposure, like fun flows, is it's a
(20:38):
terrible market timing tool. I mean, there's no good market
timing tool. But the sentiment is gives you a backdrop,
but it doesn't give you a signal.
Speaker 1 (20:47):
Well, that's an interesting point. There is no good market
timing tool, is there. And we can evaluations absolutely nonstopic
and libt all sorts of things, but in the end,
it's all about momentum. I'll just go up until this
stop going up, and then they go down until this
stop going down, and you gone timeline.
Speaker 2 (21:01):
That's right.
Speaker 1 (21:01):
Well, you can do, of course, is buy cheap things
and hold them for a very long time. But no
one can tell you when even those cheap things are
going to turn, as we keep finding in the UK market.
Speaker 2 (21:09):
Well, but I would add into it the discipline's around.
It's this and this is the funny part, because this
is the stuff that actually matters. But I suppose it's
the stuff that's more boring to talk about more interesting
if you certainly, if you're listening to a podcast or
watching financial television, it's more interesting to have somebody come
on and make some bombastic forecasts and try to time
(21:32):
the market when the reality is it's not what I know,
or you know, or the investor knows about what's going
to happen in the future because we don't know. It's
not what we know that matters, it's what we do
along the way. And that's where disciplines like diversification across
them with an assa classes and probably the most beautiful
discipline of all, which is rebalancing, periodic rebalancing, because it
(21:52):
forces us to do a version of what we know
we're supposed to do. Not so much by low sell high,
because that almost infers all in, all out. It's ad
low and trim high, and when left to our own devices,
we often do the opposite.
Speaker 1 (22:06):
Yeah, no, it's interesting. We used to run, John, and
I not run, but to have it in our head.
A group of investment trusts that we five investment trusts
are listed in the UK, a diverse group and of
these investment trusts. One of them did unbelievably well. Scottish
mortgage shored to this guy and then of course collapsed
later not completely class but didn't do so well. And
(22:28):
we told our readers for years, every six months to rebalance, rebalance, rebalance, rebalanced.
One of those who had would have made a full
chips and those who did not, of course, were incredibly disappointed.
Speaker 2 (22:38):
I have a fun anecdote about just the odd psychology
that comes into the idea of rebalancing. I was at
a client event a few months ago and a client
came up to me after the event and said, I'm
really annoyed. I'm really frustrated. It was suggested that I
(23:02):
trim a little bit of my Nvidia position, So I did.
I trimmed about five percent of the position, and the
stock kept going up, and I'm really annoyed. So I paused,
and I said, would you be happier with the ninety
five percent that you still own if the stock cratered,
(23:22):
because then you could pat yourself on the back for
having trimmed a little bit at some perfect peak. And
to his credit, he paused. He said, I can't believe
I didn't think of it. That way. But that's the
right way to think about it.
Speaker 1 (23:38):
But it is, I mean, it is a it's a
difficult discipline. It's a difficult discipline. It is, you know,
and you have out there a lot of people saying,
run your winners, run your winners, go with the momentum. Now,
it's hard for an ordinary investor who's making money to
think to themselves, I'm going to have to sell some
of that, even though I think it's going to give
going up. I mean, I absolutely agree with you. It's
(23:58):
just hard.
Speaker 2 (23:59):
It is hard. But the downside is if you continue
to let the winners just run, run, knowing that there
will be an inevitable pullback phase whatever the stock or
the group, or the index or the sector, and with
the absent rebalancing, it just becomes a much larger share
(24:19):
of your portfolio, and in turn, the parts of the
portfolio that might have been underperforming in relative terms will
at some point have their day in the sun. And
it just rebalancing just keeps investors in gear. It smooths
the ride such that at the end of whatever the
period is, there's just been less volatility, less emotional turmoil.
(24:42):
Even if you don't have the bragging rights of I
just nailed the top and the bottom in this stock
or this sector or this index, which nobody can do
consistently anyway. So I just think that there are sort
of the unsung heroes of what matters for investors.
Speaker 1 (25:00):
Asset allocation, investification, rebalancing is the best you can do.
Speaker 2 (25:05):
That's those are the things that matter.
Speaker 1 (25:07):
Frankly, Okay, well, let's look at the first two. Asset allocation, divestification.
Let's I know you, it's hard as hard as you say,
because there's so many different situations. But a young person today,
a young person today, they haven't inherited ten million, not
quite so good, But maybe they've got a little lump
sum and that's looking at this cash and they're thinking, God,
(25:28):
what on earth do I do with it? How would
you allocate assets across the board of the moment, and
how would you divest?
Speaker 2 (25:33):
Like, I would probably ask a couple of questions first
before I might advise. And keep in mind, I don't
advise clients directly individually. I'm not a financial advisor. I'm
not sitting down with them and telling them how much
exposure to have to different asset classes.
Speaker 1 (25:50):
We're not looking for financial advice. We're looking for a
sort of rough sense of what makes sense to you
right now.
Speaker 2 (25:55):
I would probably ask a question back, which is, do
you have a sense of whether your emotional risk tolerance
is tied directly to your financial risk tolerance, because I
think a lot of investors learn the hard way that
during a tumultuous period a bear market or a crash
or really heightened volatility, that what they thought was a
(26:17):
high risk tolerance based on things like time horizon turned
out not to be if it resulted in a panic.
And I don't want to lose any more money, not
because they need the money, So that would be the
first question back. But assuming some connectivity between the emotional
and financial side of things, then I think it's proper
(26:39):
to have a little more bias on the equity side
of things to make sure there's also some international diversification
and not just domestic equities. Then there's more of the
near term issues around whether an equal weighted approach makes
more sense than a cap weighted approach. Until very recently,
(27:00):
the cap weighted approach was the right way to go,
but it also established a lot of concentration risk for investors,
and that's something that that's unique to this part of
this cycle. So that's less of the broad answer and
more of the specific answer. There's also for individuals, especially
that have a long time arise, and there's been so
(27:21):
much democratization of this business and asset classes and the
ability to take diversification beyond just the standard stocks, bonds, cash,
and the ability even at low allocation amounts, to potentially
have exposure within the private markets or commodities or precious metals.
(27:45):
So I think that there has been an opening with
this democratization to exposure to other asset classes to maybe
make that diversification a bit more robust. You have to
be mindful of tying up the money, which can often
be the case in the private markets, but for a
younger person that has a very long time horizon, that's
(28:06):
something that could be considered as well. Somebody that has
a much shorter time horizon can't afford maybe to sort
of lock some portion of their portfolio in asset classes
that don't have that immediate liquidity, so that would be
another consideration.
Speaker 1 (28:20):
It's something we talk about a lot. There's massive growth
in the private market zone and whether there will soon
be a pendulum swing back tools of public markets again,
or if maybe gradually, gradually everything will end on private
light exaggeration, but you know what I mean, there's definitely
a shift. Can you think I'd.
Speaker 2 (28:35):
Say, yeah, But I think it's more of an end
not an r. I don't particularly individual investors shouldn't be
put in a position to think that they have to
try to time public markets versus private markets. I think
that they're frankly to some degree, will always be opportunities
in both.
Speaker 1 (28:51):
And precious measured Does it make sense that everyone has
some allocation to, for example, gold, Well, it.
Speaker 2 (28:55):
Depends on what your goal would be. And I'm not
an analyst on precious metals, but I think you know,
a lot of the money that it's found its way
into gold in the recent period of time has actually
not been around as an inflation hedge, and that has
historically been a consideration for people they think of gold
(29:17):
as an inflation hedge. It actually has not been a
pretty a consistent inflation hedge really since Breton Woods.
Speaker 1 (29:25):
But is it now maybe catching up and the rises
that were saying in the goldpres recently maybe beginning to
compensate holders for the inflation of the last couple of years.
Speaker 2 (29:34):
But I think the reason why gold's been going up
is more around geopolitical uncertainty less around inflation. So I
think the why behind gold's move up, I think is
important as a consideration. Yes, it's therefore been to the
benefit of inflation having eroded other asset class performance, but
I think the reasoning behind moves into gold has been
(29:55):
less about inflation and more about geopolitics.
Speaker 1 (30:00):
What about the sect is that one traditionally the areas
that one traditionally looks at during an easing cycle, so
small caps, infrastructure, this kind of thing. The sect isn't
people normally look at when they think interest, right, so.
Speaker 2 (30:12):
You know you're right that small caps tend to do
quite well when you're in an easing cycle. The rub
this time is that the easing is happening not because
the FED is combating a recession, but because they want
to kind of get a jump on bringing policy back
in line alongside inflation that has eased. But we clearly
(30:35):
haven't had full blown recession type conditions. It's the combination
of easier monetary policy and the inflection point coming out
of a recession that has historically accrued to the benefit
of small caps where profits really got crushed, and you've
got that leverage to a turn back up in the economy.
That happens obviously when you're coming out of recession. So
(30:57):
we've got the easier monetary policy part of it, but
we don't have that turn up anticipated in the economy
that provides that huge profitability boost, especially in the down
the quality spectrum for small caps. And still the case
that forty percent of the Rustled two thousand index of
small caps are some combination of not profitable or zombie companies,
(31:20):
the companies that don't have sufficient cash flow even to
pay the interest on their debts. So those interest payments
on debt have come down, but you're unlikely to get
that profitability boost, which is why in this cycle we're
saying there are opportunities down the cap spectrum. You probably
want to be mindful of looking for opportunities outside just
the Magnificent seven and the megacap names, but in doing so,
(31:43):
you want to stay up in quality because of the
absence of those recession type conditions that allow for that
launch point that accrues to the benefit of the lower
quality companies within small caps. I just don't think that
that represents this cycle or where we are in this cycle.
Speaker 1 (32:00):
Okay, fair enough, Now lasting this diversification across the board,
Would that, for you involve crypto?
Speaker 2 (32:07):
No?
Speaker 1 (32:08):
No, would it not even involve bitcoin?
Speaker 2 (32:11):
No?
Speaker 1 (32:11):
Okayypt.
Speaker 2 (32:13):
I'm an avowed skeptic, those skepticism based on I have
yet to get a compelling answer to a question. I
ask everybody that's either an expert or a believer, which
is what problem is this solving for? I got lots
of different answers, but none that are terribly compelling. It's
not a currency. It's not it's not a store of value.
It's not a medium exchange. Uh, it's a it's a
(32:35):
speculative investment that's made a lot of people a lot
of money. So have at it, but just be mindful
of of of what it represents. It's not the next
Bitcoin is not taking over the from the dollar as
the world's reserve currency. It's not a currency. So I think, frankly,
a lot of the same type of money, meaning the
rationale behind it that has that might have otherwise gone
(32:58):
into crypto is some of the same conceptual money that's
gone into gold. Yeah.
Speaker 1 (33:05):
Okay, So if I gave you a choice of gold
little bitcoin. I'm kind of guessing you choose gold. Yes,
good thought there any is there anything that would make
you change your mind?
Speaker 2 (33:17):
Not not that I can think of in the near
term that I'm not. I'm not a you know, a
gold believer forever. I'm not a gold bug by any means.
I just when I when I look at at the
type of flows that we've seen, I think there's a
little bit of a mirror, and I think probably it's
a little bit more of the air quotes, you know,
smart money that that veers into precious metals for maybe
(33:41):
some of the same perceived reasons as as the money
that's gone into crypto. But I think crypto is more
of a kind of a money chasing I I want
to make a lot of money, I want to speculate,
and and you know, everybody has the right to do that.
But I think there's less there there in terms of
it representing something compelling. And you know, in the case
(34:03):
at bitcoin, bitcoin's been around since two thousand and nine,
when people say, well, it's still in sympancy and therefore,
you know, give it time to become a true medium
of exchange. And in the world of innovation and technology.
I don't know. Fifteen years is a long time.
Speaker 1 (34:16):
It is quite a long time, isn't it. You would
have thought someone could have come up with a good
answer towards it for by now, Lizzen, thank you so
much for.
Speaker 2 (34:24):
Joining us today, My pleasure.
Speaker 1 (34:32):
Thanks for listening to this week's Marin Talks Money. If
you like us, share, rate, review, and subscribe wherever you
listen to podcasts, and keep sending questions or comments to
Marror Money at Bloomberg dot net. You can also follow
me and John on Twitter or x. I'm at Marinus
W and John is John Underscorestepic. This episode was hosted
by Me Marry Zumsetweb. It was produced by Sumasidi and
Isabella Ward. Production support and sound designed by Moses and
(34:55):
and special thanks of course Toud Liz and SAUNDERSK.
Bloomberg Audio Studios, Podcasts, Radio News. Hi, it's Meren here.
We have got something special coming up on October thirty,
first atam at Bloomberg Headquarters. It is going to be
Merin on the Budget, Well not just Marin on the Budget,
Meren plus John plus Stephanie and plus special guest Andy King,
who knows an awful a lot about fiscal policy and
(00:25):
fiscal matters. So it's going to be educational, maybe interesting,
and we'll have a run through what the budget, about
which we now know almost nothing, will mean for you.
So if you're interested in joining us or signing up
for the event, do look in the show notes whether
there will be a link or look out for it
in Money Distilled, John's brilliant newsletter, which I know you
all get already. Right onwards, Welcome to Maren Talks Money,
(00:55):
the podcast in which people who know the markets explain
the markets. I'm marrin Sumset Web. This week I'm joined
by Lizanne Sonders, managing director and chief investment strategist at
Charles Swab. We talk about the federal reserves, monetary policy
investors can navigate these particularly difficult markets and with the
US elections just around the corner. We talk about the
impact of elections on markets. Welcome Lizan to Marin Talks Money. Lazan,
(01:22):
thank you so much for joining us again. It's really
nice to have you back on.
Speaker 2 (01:25):
Oh nice to be on again. Maren, thank you so much.
Speaker 1 (01:27):
Well, look, there is so much going on at the moment.
So an ordinary investor looking around them, they can see
the American election coming up, inflation falling below, with most
people's targets suggesting, you know, more interest rate that's to come.
There's geopolitical tensional over the play, It's lots going on
in the energy markets, all sorts of things. How do
(01:49):
we even begin to make sense of this?
Speaker 2 (01:51):
You know, this has been an incredibly unique cycle, both
in terms of the economy and the market. Maybe that's
the ultimate understatement, but I think it's worth thinking about
what has made this cycle unique, and a lot of
it ties back to COVID and the aftermath of COVID
in the sense that you've had these bifurcations, particularly within
(02:13):
the economy when we had the early part of the
pandemic and the stimulus kicked in that was largely to
the sole benefit of the goods side of the economy,
not just in the United States but globally because of
course services were completely shut down, so that was where
the burst of activity initially happened. That's where the burst
of inflation started. But then fast forward we had the
(02:34):
later opening backup of services, the pent up demand associated
with that. In turn, the services or non goods categories
within inflation surged later and are stickier by nature, even
though we've actually had one could argue recessions in parts
(02:54):
of the economy that were earlier beneficiaries housing, housing related
manifest actioning a lot of stay at home beneficiaries on
the consumer products side of things. We've actually gone into
deflation in the goods categories of inflation indicators, we've just
had the offsetting strength and the economy on the services side,
(03:16):
service is a larger employer, helping to explain the resilience
of the labor market and stickier inflation data, and those
bifurcations have actually morphed into what's happened in the market too,
where you've had this large cat bias, but much more
churn and weakness and turmoil even under the surface at
the average stock level. So that's the connection point I
(03:39):
think between what's been going on in the economy and
is unique cycle and the market.
Speaker 1 (03:43):
Okay, so how does the economy let now to you?
And there's a lot more discussion coming up about no landing.
They're not going to be a self landing hard landing.
Now we're in a world of no landing. It sounds great,
Is that what you see happening?
Speaker 2 (03:56):
Yeah, it sounds great, But again we have had We've
had hard landings in those intrasensitive segments of the economy,
and in the case of manufacturing, hasn't yet pulled out
of its sectoral recession. It wasn't enough weakness to take
the whole economy down with it. But we're still trying
(04:17):
to claw out of hard landings in manufacturing, in housing,
in housing related whether the rest of the economy, the
more services oriented, can hang in there. So far, so good.
The economy looks in decent shape. Services is a much
larger share of the economy, so the economy can continue
to chug along without an officially declared recession. I think
(04:39):
the real key, because consumption is such a big part
of the US economy, is for the labor market to
remain healthy. I think that has been the feeder into
resilient consumption more so than traditional metrics like the savings
rate or even in this cycle, the excess savings level.
(05:00):
But I think the labor market does have to hang
in there. If the labor market were really crack from here,
and that's not our base case, but I think that
would feed into weaker consumption patterns, probably fairly quickly.
Speaker 1 (05:11):
So what's your base case on the labor market.
Speaker 2 (05:14):
So far, so good. The most recent jobs report obviously
was very strong, and not only just on the surface
with the headlines of payrolls and the unemployment rate, but
the innards of the report were quite strong. Not to mention,
you had positive revisions upward revisions to the prior couple
of months, and that booked the recent trend. But that
was one month, and we have another jobs report between
(05:37):
now and the November FED meeting, and so we'll get
more color. Of course, the big rub here in the
United States is that hurricanes and tornadoes and mother nature
is likely to recavoc with a lot of this labor
market data, certainly things like initial unemployment claim. So it's
going to be hard, frankly, to get a true picture
of the health of the labor market, given how severe
(05:59):
some of these storm have been and the implications that
that has for a lot of the real time leading
indicator type labor market data points.
Speaker 1 (06:08):
And those storms could then have an impact on the
inflation data as well.
Speaker 2 (06:11):
Right, absolutely, I think it's a question of whether there's
enough color commentary around any potential pickup and inflation suggestive
of it being more storm related and not some turnback
higher for traditional supplier demand reasons. I think if you
had a scenario where and we did get CPI last week,
(06:33):
which wouldn't have been a sort of shaded by some
of the storm impacts, it was slightly hotter than expected,
if we were to get another couple of readings that
were stronger than expected, with an extrapolation being that, hey,
this is more than just storm related. You add that
to recent better labor market data, and it's part of
(06:57):
the reason why you've not only taken in a fifty
basis point cut by the FED off the table. At
this point, there is a you know, reasonable likelihood of
the FED not doing anything, just you know, moving quickly
into pause mode, which certainly was not expected even a
(07:17):
few weeks ago.
Speaker 1 (07:18):
Yeah, so you if you want inflation as a whole.
Do you think it is pretty much dealt with? Give
or take you know, an odd little tick up here
or here or that, but the big crisis is over.
Speaker 2 (07:29):
Well, it depends on how you define dealt with. I think,
you know, a hanging of the of a banner saying,
you know, victory, our job is done. Nothing to see here,
let's move forward. I think that that's a little naive.
I happen to think that from an inflation secular inflation
backdrop perspective, not you know what the next monthly reading
(07:52):
on CPI or PCE is going to be. I think
we're we're likely transitioning or already in secular inflation backdrop.
That doesn't look like the twenty five years or so
leading into the pandemic, often referred to as the Great
Moderation Era from the mid to late nineties up until
(08:12):
the early part of the pandemic, really up until the
COVID related spike in inflation, and that was a period
of very benign inflation, very little inflation volatility, very benign
interest rate backdrop. It was driven by a lot of
powerful secular forces, including globalization and Gina joining the wto
(08:34):
and basically flooding the world with cheap and abundant access
to goods and to labor. We had actually less geopolitical
instability than we have right now. There's demographics that have
come into play. So I think the era we're in now,
if you were to liken it to an era of
the past, may look a little more like what I've
(08:57):
been calling the temperamental era, which was the thirty year
prior to the Great Moderation, so the span from the
mid sixties to about the mid nineteen nineties, and that
was an era of more inflation volatility. That's not the
same thing as saying high inflation the whole time, and
that's not my perspective in this environment, but more inflation volatility,
(09:17):
bigger swings on the upside and downside, and that was
in conjunction with greater economic volatility, so shorter cycles, more
frequent recessions, but stronger growth phases on the upside. And
I think we may be back in that environment. I
think the FED to some degree maybe in that camp too,
and they want to be mindful of not repeating them
(09:39):
mistakes made in the sixties and seventies, in particular of
premature declaration of victory easing policy, only to see inflation
reignite again, and then you know Arthur Burns having to
scramble and titan policy again. And we went through that
process twice until Paul Volker had to come in the
(10:00):
same thing, until finally interest rates had to be jacked
up to the moon in order to finally combat these
fits and starts of inflation. So I think we're in
a more inflation volatility, even if inflation in the near
term is not set to move up markedly.
Speaker 1 (10:18):
Okay, And it sounds like a lot of that inflation
with volatility will be driven by global forces as opposed
to domestic crisis, So driven by constantly shifting supply chains,
driven by people feeling like they need to reshure them
manufacturing or French shure it and that kind of thing.
Speaker 2 (10:32):
Yeah, so, yeah, we're not in the deglobalization camp, but
there's definitely a change in the nature of globalization to
your point, regionalization, supply chain diversification. But there's also the
demographics associated with labor supply that's a global phenomenon, and
I think one of the implications of this is that
(10:53):
labor relative to its own history is picking up as
a sort of a share of the economy and therefore
wields maybe a bit more power that all else equal
is supportive of more inflation volatility.
Speaker 1 (11:08):
Does that still end lots of ways though, rather like
a good thing, and that over the last period, during
the Great Motivation, particularly during the Great Great Kiwy period,
it's rather felt like labor has been on the back foot,
and in many places rail wages actually been falling. And
so this seems to me and lots of people like
like a really good thing that labor regai is in power,
that rail wages rise and then the consumption rises as
(11:32):
a result, and we have maybe a more balanced economy.
Speaker 2 (11:35):
Right. These things go in long secular waves and their
global in nature, not just in the US. If you
look at you know, profits as a share of GDP
over the long term, and you look at labor via
compensation as a share of GDP, you go in waves.
And clearly in the recent past profits has been at
(11:56):
the high end of its historical range in terms of
as a share of GDP and labor the opposite. But
they're they're starting to converge, not toward each other in
terms of weight within the economy. But relative to their
own history history, you're seeing labor garner a little bit
higher a share of GDP and profits a little bit
lower a share. And globally, I think that that probably
(12:19):
has has legs in part just because of labor supply
problems that are largely global in nature. Yeah.
Speaker 1 (12:28):
Now, a great hope, of course, is it the shortage
of labour supply encourages companies to behave in such a
way that enhances productivity across the board that it encourages
a new wave of CATHEGX and alongside that all the
benefits from AI, which of course we don't really understand yet.
It's impossible for us to forecast what AI will actually do, right,
we don't really know. But a hope is it, well,
(12:49):
these things will combine to give us a huge boost
in productivity which will support continued railwaye growth.
Speaker 2 (12:54):
And productivity has been has been healthy. It's it's it's
premature at this point to try to pinpoint AI's contribution
to that stronger productivity, but that's been certainly one of
the brighter spots within the US economy's decent productivity. Now
in the very near term, meaning you know, the next
few weeks. We've had sort of a stall in CAPEX,
(13:16):
in plans for CAPEX for somewhat obvious reasons around in
certainty with regard to the election. So I think to
really see a renewed cycle of capital spending or get
a sense of whether there will be a renewed cycle
of capital spending, we've got to get through this period
of uncertainty between now and the election.
Speaker 1 (13:33):
Yeah, I don't tell any of our UK readers to
mistakenly believe that productivity has had big pick up in
the UK as well, because I'm a fraid to ask, oh, sorry,
well that's okay, that's okay, But you know, we wait
and we wait and we wait, but it just doesn't happen.
And we took about digitalization and the great productivity boom
coming from technology and AI etc. We just we just
(13:54):
and we wait. Let's talk a little bit about the
reason for the slowdown in capecks in the US, which is,
of course the election coming up. And I'm certainly not
going to ask you to pick a side or anything
appulling like that. Who would want to have to do that.
But what tends to happen in an election. Everyone knows
that the run up to an election is usually very
(14:14):
good for storm markets, but what happens after that, and
these are a big difference between parties should we be
looking out for.
Speaker 2 (14:21):
You have to be careful about generalizing and looking at
long term averages and suggesting that that's some sort of
typical performance because there are such a wide range around outcomes.
Whether you look at the four year election cycle and
which year tends to be best, which year tends to
be worst. Actually, the best year on average has been
the pre election year, and last year was a strong
(14:42):
year for the market here in the United States, so
obviously that was in keeping, but you tend to see
a little bit more weakness and volatility in the election year,
and we've kind of bucked that trend with a strong
market this year. You often get a lot of sector
related volatility and trading moves in the lead into election,
but that tends to be more pronounced if you have
(15:05):
less of a tight relationship between the parties within Congress,
and I think regardless of what happens during the election
with Congress, we're not going to have wide majorities, which
means that there's a limit to how much of these
policy proposals and are natural on the campaign trail can
actually become policies because of what is likely to be
(15:27):
a pretty narrow margin regardless of what happens with the
makeup of Congress. It's also, frankly a bit of a
fool's errand to try to trade around election outcomes, especially
if those trading moves are based on an assumption that
the policies actually become policy. Proposals become policies. I think
(15:48):
that there's a lot of naivete when it comes to that.
I see headlines all the time of you know, if
Harris wins, then taxes are going through the roof. For
if Trump wins, are all the tax cuts are going
to remain in place, and that's it's not the way
the government works. And the other thing that happens is
(16:08):
I think there's assumptions that are made that translates into, well,
if so and so wins, it's good for fill in
the blank. And here's an anecdote that I think a
lot of people don't realize, and it highlights the care
you need to take with applying politics too much to
your perspective on market move. So Trump clearly is considered
(16:29):
pro traditional energy and Biden Harris are considered more pro
renewables and green energy. Well, the S and P energy sector,
which is one of eleven sectors, is all traditional energy.
In fact, almost half that index, that energy index is
(16:50):
two companies. It's Exonmobile and Chevron. But the rest of
the companies in the energy sector are traditional expiration production companies,
traditional drilling companies. There's not a green energy company, a
solar company, a win company in there. So you would
think that under the Trump administration energy would have fared
well well. From inauguration day to inauguration day, energy was
(17:12):
not only the worst performing sector, it was the only
one down, and it was down by forty percent. The
next worst sector was up by twenty percent. Fast forward
to the Biden Harris administration. From inauguration day to Friday's close,
energy has been by far the best performing sector, even
more so than technology. Now that is not because Trump
was secretly anti traditional energy and Harris Biden were secretly
(17:36):
pro traditional energy. The point is that there are so
many forces in impact what the market does, what sectors do,
what individual stocks do, and tying it to political party
is just a fool's.
Speaker 1 (17:48):
Errand right now, US households are very exposed to equity
as much as they've been since the early two thousands.
Is that a good allocation of the capital? Do you
think in the run up to the election and with
the evaluations of the US market as they are, etc.
It seems ambitious.
Speaker 2 (18:06):
There's no way to generalize an answer to that. And
I actually, Marion, I find that when I get off
in questions that are even more specific than that, you know, what,
what should investors be doing? How much exposure should they
have to you know, equities or fixed income? As if
there's one cookie cutter answer that's right. I could actually
(18:28):
have a bird land on my shoulder from the future
and say, all right, wink wink, here, Lasanne, I've got
I'm going to give you ninety eight percent odds that
the stock market's going to do X, that the ball
market's going to do X. And I were then sitting
across from two investors. One investor is twenty two years old.
(18:50):
They just inherited ten million dollars from the grandparents. They
don't need the money. They're not going to obsess over
the portfolio balance. They're not going to freak out out
in panic if there's a fifteen or twenty percent drop
in their portfolio. And then the other investor sitting across
from me is seventy eight years old, has built a
nest egg. That's their retirement nest egg. They can't afford
(19:13):
to lose any of the principle and they're living on
the income generated. So I have basically round it to
one hundred percent conviction of what the markets are going
to do. What I would tell those two investors is
entirely different. So shame on anyone that answers with specifiicy
even just in the confines of my world. At Charshchwab,
(19:33):
we have ten trillion dollars of client assets. That's a
wide array of risk tolerances and time horizons and need
for income and tax bracket. So yes, you know, if
you just on the surface add near record equity exposure
on the part of individuals to other sentiment indicators, maybe
(19:55):
it falls on the as a contrarian indicator on the
concern side of the ledger. But that kind of environment
of lofty sentiment, either attitudinal measures of sentiment too much optimism,
or behavioral measures like exposure to equities that can stay
that way for years. You know, people forget.
Speaker 1 (20:15):
That and has stayed that way for the Yeah, Alan.
Speaker 2 (20:18):
Greenspan's famous irrational exuberance comment was made in nineteen ninety
six and the stock market didn't peak for another three
and a half years. So one thing I always say
about investor sentiment, whether it's the attitudinal measures or the
behavioral measures like exposure, like fun flows, is it's a
(20:38):
terrible market timing tool. I mean, there's no good market
timing tool. But the sentiment is gives you a backdrop,
but it doesn't give you a signal.
Speaker 1 (20:47):
Well, that's an interesting point. There is no good market
timing tool, is there. And we can evaluations absolutely nonstopic
and libt all sorts of things, but in the end,
it's all about momentum. I'll just go up until this
stop going up, and then they go down until this
stop going down, and you gone timeline.
Speaker 2 (21:01):
That's right.
Speaker 1 (21:01):
Well, you can do, of course, is buy cheap things
and hold them for a very long time. But no
one can tell you when even those cheap things are
going to turn, as we keep finding in the UK market.
Speaker 2 (21:09):
Well, but I would add into it the discipline's around.
It's this and this is the funny part, because this
is the stuff that actually matters. But I suppose it's
the stuff that's more boring to talk about more interesting
if you certainly, if you're listening to a podcast or
watching financial television, it's more interesting to have somebody come
on and make some bombastic forecasts and try to time
(21:32):
the market when the reality is it's not what I know,
or you know, or the investor knows about what's going
to happen in the future because we don't know. It's
not what we know that matters, it's what we do
along the way. And that's where disciplines like diversification across
them with an assa classes and probably the most beautiful
discipline of all, which is rebalancing, periodic rebalancing, because it
(21:52):
forces us to do a version of what we know
we're supposed to do. Not so much by low sell high,
because that almost infers all in, all out. It's ad
low and trim high, and when left to our own devices,
we often do the opposite.
Speaker 1 (22:06):
Yeah, no, it's interesting. We used to run, John, and
I not run, but to have it in our head.
A group of investment trusts that we five investment trusts
are listed in the UK, a diverse group and of
these investment trusts. One of them did unbelievably well. Scottish
mortgage shored to this guy and then of course collapsed
later not completely class but didn't do so well. And
(22:28):
we told our readers for years, every six months to rebalance, rebalance, rebalance, rebalanced.
One of those who had would have made a full
chips and those who did not, of course, were incredibly disappointed.
Speaker 2 (22:38):
I have a fun anecdote about just the odd psychology
that comes into the idea of rebalancing. I was at
a client event a few months ago and a client
came up to me after the event and said, I'm
really annoyed. I'm really frustrated. It was suggested that I
(23:02):
trim a little bit of my Nvidia position, So I did.
I trimmed about five percent of the position, and the
stock kept going up, and I'm really annoyed. So I paused,
and I said, would you be happier with the ninety
five percent that you still own if the stock cratered,
(23:22):
because then you could pat yourself on the back for
having trimmed a little bit at some perfect peak. And
to his credit, he paused. He said, I can't believe
I didn't think of it. That way. But that's the
right way to think about it.
Speaker 1 (23:38):
But it is, I mean, it is a it's a
difficult discipline. It's a difficult discipline. It is, you know,
and you have out there a lot of people saying,
run your winners, run your winners, go with the momentum. Now,
it's hard for an ordinary investor who's making money to
think to themselves, I'm going to have to sell some
of that, even though I think it's going to give
going up. I mean, I absolutely agree with you. It's
(23:58):
just hard.
Speaker 2 (23:59):
It is hard. But the downside is if you continue
to let the winners just run, run, knowing that there
will be an inevitable pullback phase whatever the stock or
the group, or the index or the sector, and with
the absent rebalancing, it just becomes a much larger share
(24:19):
of your portfolio, and in turn, the parts of the
portfolio that might have been underperforming in relative terms will
at some point have their day in the sun. And
it just rebalancing just keeps investors in gear. It smooths
the ride such that at the end of whatever the
period is, there's just been less volatility, less emotional turmoil.
(24:42):
Even if you don't have the bragging rights of I
just nailed the top and the bottom in this stock
or this sector or this index, which nobody can do
consistently anyway. So I just think that there are sort
of the unsung heroes of what matters for investors.
Speaker 1 (25:00):
Asset allocation, investification, rebalancing is the best you can do.
Speaker 2 (25:05):
That's those are the things that matter.
Speaker 1 (25:07):
Frankly, Okay, well, let's look at the first two. Asset allocation, divestification.
Let's I know you, it's hard as hard as you say,
because there's so many different situations. But a young person today,
a young person today, they haven't inherited ten million, not
quite so good, But maybe they've got a little lump
sum and that's looking at this cash and they're thinking, God,
(25:28):
what on earth do I do with it? How would
you allocate assets across the board of the moment, and
how would you divest?
Speaker 2 (25:33):
Like, I would probably ask a couple of questions first
before I might advise. And keep in mind, I don't
advise clients directly individually. I'm not a financial advisor. I'm
not sitting down with them and telling them how much
exposure to have to different asset classes.
Speaker 1 (25:50):
We're not looking for financial advice. We're looking for a
sort of rough sense of what makes sense to you
right now.
Speaker 2 (25:55):
I would probably ask a question back, which is, do
you have a sense of whether your emotional risk tolerance
is tied directly to your financial risk tolerance, because I
think a lot of investors learn the hard way that
during a tumultuous period a bear market or a crash
or really heightened volatility, that what they thought was a
(26:17):
high risk tolerance based on things like time horizon turned
out not to be if it resulted in a panic.
And I don't want to lose any more money, not
because they need the money, So that would be the
first question back. But assuming some connectivity between the emotional
and financial side of things, then I think it's proper
(26:39):
to have a little more bias on the equity side
of things to make sure there's also some international diversification
and not just domestic equities. Then there's more of the
near term issues around whether an equal weighted approach makes
more sense than a cap weighted approach. Until very recently,
(27:00):
the cap weighted approach was the right way to go,
but it also established a lot of concentration risk for investors,
and that's something that that's unique to this part of
this cycle. So that's less of the broad answer and
more of the specific answer. There's also for individuals, especially
that have a long time arise, and there's been so
(27:21):
much democratization of this business and asset classes and the
ability to take diversification beyond just the standard stocks, bonds, cash,
and the ability even at low allocation amounts, to potentially
have exposure within the private markets or commodities or precious metals.
(27:45):
So I think that there has been an opening with
this democratization to exposure to other asset classes to maybe
make that diversification a bit more robust. You have to
be mindful of tying up the money, which can often
be the case in the private markets, but for a
younger person that has a very long time horizon, that's
(28:06):
something that could be considered as well. Somebody that has
a much shorter time horizon can't afford maybe to sort
of lock some portion of their portfolio in asset classes
that don't have that immediate liquidity, so that would be
another consideration.
Speaker 1 (28:20):
It's something we talk about a lot. There's massive growth
in the private market zone and whether there will soon
be a pendulum swing back tools of public markets again,
or if maybe gradually, gradually everything will end on private
light exaggeration, but you know what I mean, there's definitely
a shift. Can you think I'd.
Speaker 2 (28:35):
Say, yeah, But I think it's more of an end
not an r. I don't particularly individual investors shouldn't be
put in a position to think that they have to
try to time public markets versus private markets. I think
that they're frankly to some degree, will always be opportunities
in both.
Speaker 1 (28:51):
And precious measured Does it make sense that everyone has
some allocation to, for example, gold, Well, it.
Speaker 2 (28:55):
Depends on what your goal would be. And I'm not
an analyst on precious metals, but I think you know,
a lot of the money that it's found its way
into gold in the recent period of time has actually
not been around as an inflation hedge, and that has
historically been a consideration for people they think of gold
(29:17):
as an inflation hedge. It actually has not been a
pretty a consistent inflation hedge really since Breton Woods.
Speaker 1 (29:25):
But is it now maybe catching up and the rises
that were saying in the goldpres recently maybe beginning to
compensate holders for the inflation of the last couple of years.
Speaker 2 (29:34):
But I think the reason why gold's been going up
is more around geopolitical uncertainty less around inflation. So I
think the why behind gold's move up, I think is
important as a consideration. Yes, it's therefore been to the
benefit of inflation having eroded other asset class performance, but
I think the reasoning behind moves into gold has been
(29:55):
less about inflation and more about geopolitics.
Speaker 1 (30:00):
What about the sect is that one traditionally the areas
that one traditionally looks at during an easing cycle, so
small caps, infrastructure, this kind of thing. The sect isn't
people normally look at when they think interest, right, so.
Speaker 2 (30:12):
You know you're right that small caps tend to do
quite well when you're in an easing cycle. The rub
this time is that the easing is happening not because
the FED is combating a recession, but because they want
to kind of get a jump on bringing policy back
in line alongside inflation that has eased. But we clearly
(30:35):
haven't had full blown recession type conditions. It's the combination
of easier monetary policy and the inflection point coming out
of a recession that has historically accrued to the benefit
of small caps where profits really got crushed, and you've
got that leverage to a turn back up in the economy.
That happens obviously when you're coming out of recession. So
(30:57):
we've got the easier monetary policy part of it, but
we don't have that turn up anticipated in the economy
that provides that huge profitability boost, especially in the down
the quality spectrum for small caps. And still the case
that forty percent of the Rustled two thousand index of
small caps are some combination of not profitable or zombie companies,
(31:20):
the companies that don't have sufficient cash flow even to
pay the interest on their debts. So those interest payments
on debt have come down, but you're unlikely to get
that profitability boost, which is why in this cycle we're
saying there are opportunities down the cap spectrum. You probably
want to be mindful of looking for opportunities outside just
the Magnificent seven and the megacap names, but in doing so,
(31:43):
you want to stay up in quality because of the
absence of those recession type conditions that allow for that
launch point that accrues to the benefit of the lower
quality companies within small caps. I just don't think that
that represents this cycle or where we are in this cycle.
Speaker 1 (32:00):
Okay, fair enough, Now lasting this diversification across the board,
Would that, for you involve crypto?
Speaker 2 (32:07):
No?
Speaker 1 (32:08):
No, would it not even involve bitcoin?
Speaker 2 (32:11):
No?
Speaker 1 (32:11):
Okayypt.
Speaker 2 (32:13):
I'm an avowed skeptic, those skepticism based on I have
yet to get a compelling answer to a question. I
ask everybody that's either an expert or a believer, which
is what problem is this solving for? I got lots
of different answers, but none that are terribly compelling. It's
not a currency. It's not it's not a store of value.
It's not a medium exchange. Uh, it's a it's a
(32:35):
speculative investment that's made a lot of people a lot
of money. So have at it, but just be mindful
of of of what it represents. It's not the next
Bitcoin is not taking over the from the dollar as
the world's reserve currency. It's not a currency. So I think, frankly,
a lot of the same type of money, meaning the
rationale behind it that has that might have otherwise gone
(32:58):
into crypto is some of the same conceptual money that's
gone into gold. Yeah.
Speaker 1 (33:05):
Okay, So if I gave you a choice of gold
little bitcoin. I'm kind of guessing you choose gold. Yes,
good thought there any is there anything that would make
you change your mind?
Speaker 2 (33:17):
Not not that I can think of in the near
term that I'm not. I'm not a you know, a
gold believer forever. I'm not a gold bug by any means.
I just when I when I look at at the
type of flows that we've seen, I think there's a
little bit of a mirror, and I think probably it's
a little bit more of the air quotes, you know,
smart money that that veers into precious metals for maybe
(33:41):
some of the same perceived reasons as as the money
that's gone into crypto. But I think crypto is more
of a kind of a money chasing I I want
to make a lot of money, I want to speculate,
and and you know, everybody has the right to do that.
But I think there's less there there in terms of
it representing something compelling. And you know, in the case
(34:03):
at bitcoin, bitcoin's been around since two thousand and nine,
when people say, well, it's still in sympancy and therefore,
you know, give it time to become a true medium
of exchange. And in the world of innovation and technology.
I don't know. Fifteen years is a long time.
Speaker 1 (34:16):
It is quite a long time, isn't it. You would
have thought someone could have come up with a good
answer towards it for by now, Lizzen, thank you so
much for.
Speaker 2 (34:24):
Joining us today, My pleasure.
Speaker 1 (34:32):
Thanks for listening to this week's Marin Talks Money. If
you like us, share, rate, review, and subscribe wherever you
listen to podcasts, and keep sending questions or comments to
Marror Money at Bloomberg dot net. You can also follow
me and John on Twitter or x. I'm at Marinus
W and John is John Underscorestepic. This episode was hosted
by Me Marry Zumsetweb. It was produced by Sumasidi and
Isabella Ward. Production support and sound designed by Moses and
(34:55):
and special thanks of course Toud Liz and SAUNDERSK.
Host
Merryn Somerset Webb
Popular Podcasts
40s and Free Agents: NFL Draft Season
Daniel Jeremiah of Move the Sticks and Gregg Rosenthal of NFL Daily join forces to break down every team's needs this offseason.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Bobby Bones Show
Listen to 'The Bobby Bones Show' by downloading the daily full replay.