Q1 2023 | Putting the Quarter-in-Perspective | Part Two: Interest Rate Hikes & Bank Failures

Unfiltered Finance

Stories of historically atypical interest rate hikes, and multiple bank failures, concerned many advisors in the early days of 2023. Join us for the second (and final) part of our discussion with Casey Dylan, CIMA®, Consultant, and the host of Unfiltered Finance, Tom Romano, Head of Strategic Relationships, as we discuss some of the more prominent news events, and their effects, during Q1 of this year.

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Transcript:

0 00:00:01.900 --> 00:00:07.800 Let's let's

1 00:00:07.600 --> 00:00:10.600 shift a little bit to some of the headlines that we saw because there was

2 00:00:10.600 --> 00:00:15.100 there's quite a bit. It felt like it was a very long quarter. Yeah, and you

3 00:00:14.200 --> 00:00:17.700 know as we did see some positive results, but can we

4 00:00:17.600 --> 00:00:21.300 talk a little bit about just in general some of the headlines that we saw and

5 00:00:20.600 --> 00:00:25.000 then specifically I want to take a dive into inflation

6 00:00:23.600 --> 00:00:26.700 and then the banks because that was

7 00:00:26.700 --> 00:00:30.200 a really big headline. We got a lot of a lot of calls regarding that look

8 00:00:29.800 --> 00:00:31.200 there there were

9 00:00:33.300 --> 00:00:35.900 Striking headlines around things like

10 00:00:36.800 --> 00:00:40.800 shocks to sort of economic surprises on

11 00:00:42.000 --> 00:00:45.300 job numbers to what was going on with the FED

12 00:00:45.100 --> 00:00:48.400 to Banks not just near the United States but

13 00:00:48.100 --> 00:00:51.600 internationally and yet what you see is kind

14 00:00:51.400 --> 00:00:55.000 of, you know markets do what they do in in any given day. They respond

15 00:00:54.600 --> 00:00:57.900 to that but they are quick to incorporate the news

16 00:00:57.600 --> 00:01:01.300 and get back to pricing on other kinds of things. And

17 00:01:00.600 --> 00:01:05.200 so I would say as a micro dosage of

18 00:01:04.600 --> 00:01:08.400 what the ride is for investors. It's

19 00:01:07.800 --> 00:01:11.000 this it's if you can sort of

20 00:01:11.000 --> 00:01:14.400 take in stride that there are going to be lots of headlines and

21 00:01:14.100 --> 00:01:17.500 that there may be short-term Market reactions headlines over the

22 00:01:17.400 --> 00:01:21.000 longer term that kind of gets filtered out on

23 00:01:20.400 --> 00:01:23.700 the upside and downside right and what you get back

24 00:01:23.400 --> 00:01:26.600 to is. Hey one of my paying for right I'm paying for some kind

25 00:01:26.500 --> 00:01:30.100 of future earnings or I'm lending with some expectation that

26 00:01:29.800 --> 00:01:33.800 I'm going to get paid and income stream based on that and that tends

27 00:01:33.000 --> 00:01:36.700 to drown out the short term noise and now

28 00:01:36.400 --> 00:01:40.200 you're back to factors of how much did I pay did I

29 00:01:40.100 --> 00:01:41.700 get my earnings did I not is

30 00:01:42.000 --> 00:01:45.600 We're upside to that right and markets are kind of a weighing machine

31 00:01:45.500 --> 00:01:48.900 in that sense. Right? They're weighing those earnings. They're weighing those

32 00:01:48.900 --> 00:01:52.200 cash flows in the future. Right? So I would say

33 00:01:52.000 --> 00:01:55.900 lots of lots of news lots of scurrying

34 00:01:55.000 --> 00:01:56.300 around the news.

35 00:01:57.100 --> 00:02:01.000 You know at the end of the day we're sort of where we started one

36 00:02:00.100 --> 00:02:03.200 of the headlines and one of the things that we've been getting a lot

37 00:02:03.200 --> 00:02:06.300 of questions about I'm talking about is is inflation. I know we've spent some time

38 00:02:06.200 --> 00:02:09.600 already today talking about that. We did

39 00:02:09.400 --> 00:02:13.500 see US inflation ease a little bit but there

40 00:02:13.100 --> 00:02:16.300 might be some pressures coming up. So if you don't mind commenting on that, that

41 00:02:16.100 --> 00:02:19.200 would be great. Yeah, you bet. I think it's helpful to kind of

42 00:02:19.200 --> 00:02:21.200 take a step back and look at

43 00:02:22.200 --> 00:02:25.700 With the onset of the pandemic right everything kind

44 00:02:25.400 --> 00:02:28.800 of shut down and then when we went to reopen things back up

45 00:02:28.600 --> 00:02:32.000 factories didn't necessarily open up, especially in

46 00:02:31.900 --> 00:02:36.600 places like China right for some time. Right and the the

47 00:02:35.300 --> 00:02:39.700 supply chain was suddenly

48 00:02:38.300 --> 00:02:41.500 constrained and so we

49 00:02:41.300 --> 00:02:44.300 had a hard time getting Goods, right but there was a lot

50 00:02:44.300 --> 00:02:48.400 of demand because we were at home, you know person stuff and so

51 00:02:48.200 --> 00:02:51.700 as you have demand shoot up but supplies constrained

52 00:02:51.200 --> 00:02:54.500 price shoots up, right? That's just sort of Economics 101

53 00:02:54.200 --> 00:02:57.400 and we saw that and at the time, you know, the Fed was quick

54 00:02:57.200 --> 00:03:00.500 to say, hey, look we think this is transitory think eventually things

55 00:03:00.200 --> 00:03:03.700 settle down we get manufacturing back online. We work

56 00:03:03.400 --> 00:03:06.700 out the bugaboos associated with the supply chain

57 00:03:06.500 --> 00:03:09.600 and those the price pressure doesn't inflationary pressure should come back

58 00:03:09.500 --> 00:03:13.100 down over time and in large respect

59 00:03:12.800 --> 00:03:16.500 this seems to have proven that out right?

60 00:03:15.800 --> 00:03:19.100 I think what really got the fed's

61 00:03:18.800 --> 00:03:21.800 attention and started them down the path.

62 00:03:22.200 --> 00:03:26.100 Of really dramatically raising rates was

63 00:03:25.400 --> 00:03:28.700 the fact that well while goods were

64 00:03:28.500 --> 00:03:31.800 sort of starting to come back down. It was

65 00:03:31.600 --> 00:03:34.900 inflation associated with services that was going up. And

66 00:03:34.600 --> 00:03:37.800 in fact, what we've seen is good coming down

67 00:03:37.600 --> 00:03:40.700 the the overall inflation of

68 00:03:40.600 --> 00:03:44.500 the CPI number or that PC number coming down from its

69 00:03:44.100 --> 00:03:48.100 highs last summer, but while that's been happening underneath

70 00:03:48.900 --> 00:03:52.300 Inflation associated with Services has continued to

71 00:03:52.100 --> 00:03:52.600 go up.

72 00:03:53.200 --> 00:03:56.500 And so even if we're at a point now where the latest inflationary readings

73 00:03:56.200 --> 00:03:58.100 are half of what they were.

74 00:03:58.900 --> 00:04:00.400 Just a year ago this time.

75 00:04:01.600 --> 00:04:05.500 Services inflation is up and continuing to go the wrong direction. Right? And

76 00:04:05.200 --> 00:04:08.400 so the the FED has said hey, look

77 00:04:08.200 --> 00:04:11.400 first of all, we don't look at kind of the overall CPI number. We don't

78 00:04:11.300 --> 00:04:15.500 that's not how we measure it. We're looking at these underlying statuents and

79 00:04:14.900 --> 00:04:18.600 they prefer the the pce as

80 00:04:18.200 --> 00:04:21.300 opposed to CPI, but they're all just kind of ways of measuring, you know

81 00:04:21.300 --> 00:04:24.900 inflation in the economy. And so

82 00:04:24.400 --> 00:04:27.400 one of the ways that we've looked at

83 00:04:27.400 --> 00:04:30.600 this for a very long time is core CPI, right? We're stripping out the

84 00:04:30.400 --> 00:04:34.100 volatility of energy and food because those tend to move around so much and then

85 00:04:33.900 --> 00:04:37.300 you know, we've been introduced to this concept that not

86 00:04:37.000 --> 00:04:40.500 only is it core CPI, but it's core Goods CPI and

87 00:04:40.200 --> 00:04:44.100 course Services CPI. And so the FED now is very focused

88 00:04:43.600 --> 00:04:48.000 on core Services looking at Services minus

89 00:04:47.000 --> 00:04:50.400 services for energy and food and what

90 00:04:50.100 --> 00:04:54.000 we see are again our sort of troubling Trends

91 00:04:53.100 --> 00:04:56.500 around services and housing

92 00:04:56.100 --> 00:04:59.400 in terms of the impact that that

93 00:04:59.200 --> 00:05:01.400 has now pushing.

94 00:05:01.600 --> 00:05:04.700 Up or holding up those inflation numbers and if they

95 00:05:04.600 --> 00:05:08.100 continue on the wrong direction, that's what the fed's concern about and the

96 00:05:07.600 --> 00:05:11.500 the whammy that potentially comes

97 00:05:10.600 --> 00:05:13.900 from if Services costs go

98 00:05:13.700 --> 00:05:16.800 up at some point that starts to impact Goods costs as

99 00:05:16.700 --> 00:05:20.600 well. Right? And so if you look at this where the the white

100 00:05:19.800 --> 00:05:23.200 bars are coming down, right the the concern

101 00:05:22.800 --> 00:05:26.400 is that Services cost the cost of producing goods

102 00:05:25.800 --> 00:05:29.200 and delivering them right is going to impact the the cost

103 00:05:29.000 --> 00:05:32.500 that gets passed through and goods start to come back up and there's sort

104 00:05:32.100 --> 00:05:35.500 of a double double impact of inflation if

105 00:05:35.400 --> 00:05:38.700 you will and that's what I think the FED is incredibly concerned about

106 00:05:38.500 --> 00:05:41.600 and and why they say look we're gonna ratchet rates up

107 00:05:41.600 --> 00:05:45.700 and we're gonna keep them up there long enough until we're convinced that we've we've

108 00:05:44.800 --> 00:05:48.000 stamped this out and brought it back down to a level that's

109 00:05:47.800 --> 00:05:51.000 livable because the last thing you want to do is take your foot off the pedal.

110 00:05:51.800 --> 00:05:55.300 And then suddenly have a Resurgence of these

111 00:05:55.000 --> 00:05:58.300 inflation Air Forces which that we've saw

112 00:05:58.000 --> 00:06:01.400 in the 70s, right if you think about what we've we've

113 00:06:01.200 --> 00:06:04.800 seen this show before the early 70s the FED raising

114 00:06:04.500 --> 00:06:08.400 rates taking their their foot off the brake, I guess and then

115 00:06:08.000 --> 00:06:11.900 Resurgence of inflation in the late 70s stagflationary

116 00:06:11.200 --> 00:06:14.500 environment and it took the volcker FED in the 80s

117 00:06:14.200 --> 00:06:17.800 taken rates to places. We'd never seen until recently right to

118 00:06:17.400 --> 00:06:20.700 to stamp that out. And so I think the FED

119 00:06:20.500 --> 00:06:24.000 is taking a lesson from history and said we don't want to repeat those mistakes.

120 00:06:23.600 --> 00:06:27.000 We're gonna stay on this until we're sure right absolutely and

121 00:06:26.600 --> 00:06:30.200 speaking of the fed and it says been a very fast pace

122 00:06:29.600 --> 00:06:32.800 in terms of Ray hikes. Yeah

123 00:06:32.600 --> 00:06:36.200 historically exactly exactly so

124 00:06:35.800 --> 00:06:40.400 they they have meant business and I

125 00:06:39.500 --> 00:06:44.100 think Market participants repeatedly made

126 00:06:43.200 --> 00:06:47.000 the mistake of not taking

127 00:06:46.700 --> 00:06:48.200 the FED at its word.

128 00:06:48.700 --> 00:06:51.900 Right and and equities markets have

129 00:06:51.700 --> 00:06:54.900 definitely gotten well ahead of the FED particularly at

130 00:06:54.700 --> 00:06:58.600 the end of last year and maybe potentially the beginning of this year bond markets

131 00:06:58.200 --> 00:07:01.500 now are pricing that the FED

132 00:07:01.200 --> 00:07:05.000 will pull back and yet the FED is saying no. No, we're we're

133 00:07:04.600 --> 00:07:08.600 gonna raise rates and we're gonna keep them there longer and that's

134 00:07:07.600 --> 00:07:10.900 you know, we have no expectation that we would

135 00:07:10.800 --> 00:07:14.300 pull back from that anytime this year. Right? So the market

136 00:07:13.800 --> 00:07:17.000 participants are our forward looking forward pricing, but

137 00:07:16.900 --> 00:07:20.500 they seem to not be taking the FED at its word. I think that's pulled

138 00:07:20.100 --> 00:07:23.800 back a little bit in February and March we started to

139 00:07:23.500 --> 00:07:25.400 see Market participants kind of get their arms around.

140 00:07:26.300 --> 00:07:29.400 Actually be coming and we see you know

141 00:07:29.400 --> 00:07:33.400 investors like hedge funds really sort of looking at volatility

142 00:07:32.400 --> 00:07:36.000 Bets with the expectation that hey this

143 00:07:35.600 --> 00:07:39.300 may get a little more turbulent before it gets better. Right? So

144 00:07:39.000 --> 00:07:44.200 there's a lot of sort of now Market positioning

145 00:07:43.200 --> 00:07:46.500 for the fed me

146 00:07:46.300 --> 00:07:49.800 actually do this and we may see an economic pullback,

147 00:07:49.300 --> 00:07:52.800 but that may not necessarily mean the FED response to

148 00:07:52.800 --> 00:07:56.500 it. Right? I think again as we look forward the

149 00:07:55.900 --> 00:08:00.100 the way that I would think about this as an investor as a the

150 00:07:59.200 --> 00:08:03.000 stock market is not the economy, right? The

151 00:08:02.400 --> 00:08:06.200 markets are definitely driven by

152 00:08:05.700 --> 00:08:09.400 interest rates and fed movement

153 00:08:09.000 --> 00:08:10.200 and yet

154 00:08:12.500 --> 00:08:16.400 Much like headlines the markets take that

155 00:08:16.200 --> 00:08:20.200 news and stride it gets built into prices and there

156 00:08:19.800 --> 00:08:23.000 may be short-term volatility associated with this but if you look out over

157 00:08:22.800 --> 00:08:26.300 time, you know, what what do we see going back to

158 00:08:26.000 --> 00:08:29.200 you know, as long as we have records 1926 and Beyond

159 00:08:29.000 --> 00:08:32.600 right Imperial heads when interest rates

160 00:08:32.300 --> 00:08:36.300 go up interest rates go down inflationary environments disinflationary environments

161 00:08:35.900 --> 00:08:40.100 recessionary environments across all of those things markets

162 00:08:38.900 --> 00:08:42.400 tend to produce a return

163 00:08:42.100 --> 00:08:45.700 of you know, seven to ten percent average annual

164 00:08:45.400 --> 00:08:49.000 you don't get that every year but you get on average over time and it's

165 00:08:48.700 --> 00:08:52.200 paying you for those cash flows so much like,

166 00:08:51.900 --> 00:08:55.100 you know, the all the comments that we've had prior to

167 00:08:54.900 --> 00:08:55.200 this.

168 00:08:56.500 --> 00:08:59.900 As investors, it's important to sort of take in its Stride

169 00:08:59.800 --> 00:09:02.900 Right put some blinders on there may be volatility associated with

170 00:09:02.800 --> 00:09:06.400 this ride. You will get wet on this ride. Right but we

171 00:09:05.800 --> 00:09:08.900 promise you'll come out in the other side, right and when you do,

172 00:09:08.800 --> 00:09:11.900 you know, the markets will get back to doing what they

173 00:09:11.800 --> 00:09:15.000 do, which is you know, paying you for putting Capital to work

174 00:09:15.000 --> 00:09:18.400 in there. So so that I would say again we watch these

175 00:09:18.100 --> 00:09:21.300 things. We we sort of especially working

176 00:09:21.100 --> 00:09:24.200 in the industry. It's a incumbent upon

177 00:09:24.100 --> 00:09:27.200 us to have some product prognostication about where this could

178 00:09:27.100 --> 00:09:30.800 be headed at the end of the day what we think matters very little it's

179 00:09:30.100 --> 00:09:33.300 what actually happens and we build portfolios to

180 00:09:33.100 --> 00:09:36.600 be as robust as we can because Anything Could Happen. Yeah, that's that's fantastic.

181 00:09:36.100 --> 00:09:39.300 And that's a really good way of putting it. We don't know what's

182 00:09:39.100 --> 00:09:40.000 happening, but we're

183 00:09:41.000 --> 00:09:45.000 We're invested in a way to endure what's to come? Right? Exactly. So

184 00:09:44.100 --> 00:09:47.500 one of the headlines that we we spent

185 00:09:47.300 --> 00:09:50.700 a lot of time talking to advisors and investors alike is the

186 00:09:50.600 --> 00:09:54.200 the notion of the banks and we saw from Silicon Valley

187 00:09:54.000 --> 00:09:56.100 and First Republic and a few others.

188 00:09:57.000 --> 00:10:00.200 I think it's a it's a risk reward story. But I also think

189 00:10:00.000 --> 00:10:04.400 this is the diversification story there. I'd love to hear your thoughts. Yeah. Well, yes,

190 00:10:03.700 --> 00:10:05.500 I think

191 00:10:06.600 --> 00:10:08.300 the the situation with the banks

192 00:10:09.300 --> 00:10:13.300 has a lot to do with other stuff, right? Yes, the

193 00:10:12.600 --> 00:10:15.800 the banks were quick to come out and say well this

194 00:10:15.600 --> 00:10:18.800 is a consequence of how rapidly the FED is

195 00:10:18.600 --> 00:10:22.300 raised interest rates. And this is potentially impaired the

196 00:10:22.200 --> 00:10:25.300 asset base of these Banks and there's no question right over the

197 00:10:25.200 --> 00:10:28.600 course of 2022. You saw the asset base

198 00:10:28.200 --> 00:10:31.500 drop significantly across banks in

199 00:10:31.400 --> 00:10:34.800 general because right so, you know first principles,

200 00:10:34.400 --> 00:10:37.500 what is a bank do they take money in when they

201 00:10:37.500 --> 00:10:41.100 take that money in as a deposit? It's a liability to them. Right?

202 00:10:40.500 --> 00:10:43.600 So they take that liability and they got to go match it up

203 00:10:43.500 --> 00:10:47.000 with an asset and they do that either by making loans and if

204 00:10:46.900 --> 00:10:50.800 they can't make enough loans, then they got to go buy bonds treasuries.

205 00:10:50.300 --> 00:10:53.800 For instance, right? Yes. That's the old against the

206 00:10:53.300 --> 00:10:56.600 liabilities. So if you if you've got a bank that

207 00:10:56.300 --> 00:10:59.600 has a bunch of bonds that they're holding as an asset

208 00:10:59.300 --> 00:11:03.000 and the value of those bonds dramatically drop. They've lost

209 00:11:02.600 --> 00:11:06.000 a lot of money against the liabilities that

210 00:11:05.900 --> 00:11:08.800 are still where they are, right and

211 00:11:09.200 --> 00:11:13.400 So that's that's the the challenge for

212 00:11:12.900 --> 00:11:13.900 the financial.

213 00:11:15.800 --> 00:11:19.200 sector and it no surprise the financial sector

214 00:11:18.900 --> 00:11:22.600 was sort of the worst performing sector for the first quarter in large

215 00:11:22.400 --> 00:11:23.700 part because of these Dynamics

216 00:11:24.800 --> 00:11:28.300 It was a part of what happened at svb. It was a catalyst

217 00:11:27.800 --> 00:11:31.300 for the bank run that followed but the bank

218 00:11:31.000 --> 00:11:34.500 run followed because of the unique dynamics of

219 00:11:34.400 --> 00:11:38.100 svb, correct? Right and the the failure

220 00:11:37.500 --> 00:11:40.900 of silvergate was

221 00:11:40.500 --> 00:11:44.200 function of crypto and had as

222 00:11:43.800 --> 00:11:47.500 much to do with FTX the failure of FTX, which

223 00:11:47.200 --> 00:11:50.300 was a Ponzi scheme, right? So you have

224 00:11:50.200 --> 00:11:54.300 a lot of kind of very unique situations Signature Bank,

225 00:11:54.100 --> 00:11:58.000 very crypto focused right First Republic the

226 00:11:57.100 --> 00:12:00.900 very very heavily on

227 00:12:00.200 --> 00:12:04.200 the asset side writing interest only mortgages

228 00:12:03.400 --> 00:12:06.700 right in to a degree that other

229 00:12:06.500 --> 00:12:10.500 Banks didn't have some unique characteristics of these Banks which cause

230 00:12:09.900 --> 00:12:13.600 them to be sort of the canary in the coal mine if you will right

231 00:12:12.900 --> 00:12:16.100 and Credit Suisse just

232 00:12:18.000 --> 00:12:21.100 Has struggled for years, right? And this was

233 00:12:21.000 --> 00:12:24.500 just the nail in the coffin form. The concern is are they

234 00:12:24.200 --> 00:12:27.600 the canary in the coal mine or are they just being punished because

235 00:12:27.400 --> 00:12:29.900 the malfeasance and poor management?

236 00:12:31.000 --> 00:12:34.700 And I think the answer is a bit of both, right? So the the

237 00:12:34.400 --> 00:12:38.400 fed and other institutions got

238 00:12:38.000 --> 00:12:41.900 together and said, hey, we got a backstop this thing to keep any contagion

239 00:12:41.300 --> 00:12:45.300 from spreading and assure depositors that

240 00:12:45.200 --> 00:12:48.600 they're deposits are safe, even if the value of the bond the assets

241 00:12:48.200 --> 00:12:51.600 that these banks are holding have dropped down. We the the government

242 00:12:51.200 --> 00:12:54.300 are going to step in and and backstop not just

243 00:12:54.200 --> 00:12:57.300 your 250,000 but everything right that was

244 00:12:57.300 --> 00:13:00.500 the strong message that they sent and that sort of seem to

245 00:13:00.300 --> 00:13:03.600 work, right it calm markets. Thanks for still being sort of reviewed and

246 00:13:03.500 --> 00:13:06.500 I would say look there's there could be more to this story. There could be

247 00:13:06.500 --> 00:13:09.800 other shoes to drop in time. Right? So you'll continue

248 00:13:09.500 --> 00:13:12.600 to watch it. I think as in as a person

249 00:13:12.500 --> 00:13:15.600 who has money at a bank, right am I rushing to pull my money

250 00:13:15.500 --> 00:13:18.800 out? No, I'm fairly confident that you know,

251 00:13:18.800 --> 00:13:21.500 we're we're gonna survive this right now.

252 00:13:22.400 --> 00:13:26.100 Did I say the same thing in 2008 when when I

253 00:13:25.700 --> 00:13:28.900 really thought hey, man, the whole financial system could go down.

254 00:13:28.800 --> 00:13:32.300 These Banks had collapse in Mass. I don't think we're anywhere

255 00:13:31.900 --> 00:13:35.300 near that I think banks are much healthier than than they

256 00:13:35.100 --> 00:13:39.900 were then and I think the issues that they have have to do with treasuries and

257 00:13:39.800 --> 00:13:43.200 the FED has said look, we're gonna step in and provide as much liquidity

258 00:13:42.800 --> 00:13:46.400 as necessary for the banks. So this becomes

259 00:13:45.900 --> 00:13:49.700 a potential issue down the down the pike, right? If

260 00:13:49.200 --> 00:13:52.700 in fact the FED has to step in and provide the

261 00:13:52.300 --> 00:13:55.700 Surplus liquidity to the treasury market,

262 00:13:55.500 --> 00:13:56.800 why might they have to do that?

263 00:13:57.800 --> 00:14:01.000 Well, if for some reason we default on the debt ceiling for instance,

264 00:14:00.800 --> 00:14:04.200 right that could be very problematic and the FED

265 00:14:04.000 --> 00:14:07.200 might have to take aggressive steps in a way that we've

266 00:14:07.100 --> 00:14:11.300 never seen before to step in and try and provide Surplus liquidity

267 00:14:10.700 --> 00:14:14.000 specifically to the treasury market. That would

268 00:14:13.800 --> 00:14:17.300 be a complete roll reversal of where we've been right? That's that's

269 00:14:17.000 --> 00:14:20.900 taking the quantitative tightening off the table and now we're back to quantities, right

270 00:14:20.400 --> 00:14:23.600 so so could things come down the bike that

271 00:14:23.500 --> 00:14:26.900 would cause a, you know, real dislocation to

272 00:14:26.500 --> 00:14:29.900 banking to markets sure it could happen

273 00:14:29.700 --> 00:14:32.900 again. Who knows right? Everybody's got a crystal

274 00:14:32.800 --> 00:14:33.100 ball.

275 00:14:34.100 --> 00:14:37.700 Nobody's usually right spot on about what's gonna happen, but

276 00:14:37.200 --> 00:14:40.400 it's a potential risk that you want. Hey, look this might happen, but

277 00:14:40.300 --> 00:14:41.000 we'll survive.

278 00:14:41.600 --> 00:14:45.200 Yeah, no, absolutely. And as you said before, I mean, it seems like the markets

279 00:14:44.600 --> 00:14:45.300 have.

280 00:14:46.100 --> 00:14:49.600 sort of shrugged off those headlines because we've seen some pretty decent returns

281 00:14:49.100 --> 00:14:52.000 and in q1, but I think you know in

282 00:14:53.200 --> 00:14:56.500 Let's let's go back to the text docs, right? I mean that's what's really

283 00:14:56.300 --> 00:14:57.800 leading the charge here, isn't it?

284 00:14:58.800 --> 00:14:59.000 well

285 00:15:00.000 --> 00:15:01.800 I think there are a lot of Dynamics at play.

286 00:15:02.400 --> 00:15:06.000 But underpinning all of that is risk and reward right?

287 00:15:05.500 --> 00:15:08.800 I mean that at the end of the day, it's that simple

288 00:15:08.600 --> 00:15:11.700 what are the risks and what are the rewards and how much am I

289 00:15:11.600 --> 00:15:15.400 willing to pay for those rewards? And am I underestimating those

290 00:15:15.200 --> 00:15:18.800 risks? Right? So everything is sort of a function of those things

291 00:15:18.600 --> 00:15:22.000 and so I would say look in equities. The the

292 00:15:21.600 --> 00:15:25.200 tech stocks is a risk, right? There's there's certainly reward

293 00:15:25.000 --> 00:15:28.400 there's upside there. We're seeing it in terms of markets, but I think there's risk

294 00:15:28.100 --> 00:15:31.800 right in fixed income. There's potential

295 00:15:31.200 --> 00:15:34.600 risk associated with the yield curve

296 00:15:34.400 --> 00:15:39.000 and what happens with the fed and raising rates in areas,

297 00:15:38.100 --> 00:15:41.600 like financials. There's risks

298 00:15:41.200 --> 00:15:44.800 right associated with that. I think the key

299 00:15:44.500 --> 00:15:47.800 takeaway for that for anybody looking at

300 00:15:47.600 --> 00:15:48.300 it is

301 00:15:49.200 --> 00:15:52.500 Broad diversification not just in

302 00:15:52.200 --> 00:15:55.600 one geography not just inequities not just in fixed income

303 00:15:55.300 --> 00:15:58.300 across factors as much as you

304 00:15:58.300 --> 00:16:01.800 can broadly diversify the more robust your portfolio is to

305 00:16:01.300 --> 00:16:04.200 stand up to any of those unique risks.

306 00:16:04.900 --> 00:16:06.800 And so I would I would say.

307 00:16:08.200 --> 00:16:12.100 That that would be where I would encourage investors to

308 00:16:11.700 --> 00:16:13.100 sort of keep their heads.

309 00:16:14.100 --> 00:16:17.400 I it's always challenging when you have tech stocks doing

310 00:16:17.300 --> 00:16:20.800 as well as they are because they drive

311 00:16:20.400 --> 00:16:23.700 markets you want to be there. You want to participate in it.

312 00:16:23.500 --> 00:16:27.400 There's a a benefit socially to

313 00:16:26.700 --> 00:16:30.100 holding names that people are familiar

314 00:16:29.700 --> 00:16:33.000 with and talk about right if you think about the

315 00:16:32.700 --> 00:16:36.000 fomo experience that people have

316 00:16:35.700 --> 00:16:38.900 missing if you're missing out, right? Yeah, my next

317 00:16:38.900 --> 00:16:41.900 door neighbor. He's he's got Google and apple and they're tear on

318 00:16:41.900 --> 00:16:45.800 the cover off the ball. Never mind. What happened last year right now, I gotta you

319 00:16:45.100 --> 00:16:48.500 know, keep up with the Joneses on that water cooler. Alpha

320 00:16:48.100 --> 00:16:51.600 is what I call that. Yeah water cooler Alpha and I would just

321 00:16:51.300 --> 00:16:54.900 say hey look at the end of the day. We're people right if we

322 00:16:54.600 --> 00:16:57.800 were autonomous, you know Vulcans. This would just be

323 00:16:57.700 --> 00:17:01.000 economics and math and we can figure it all out reality is

324 00:17:00.900 --> 00:17:04.700 we're people and you got to build a portfolio you can live with right as

325 00:17:04.200 --> 00:17:07.300 our as our good friend Phil Henry says, you

326 00:17:07.200 --> 00:17:10.700 got to build a portfolio you can live with and then live with it, right? I think

327 00:17:10.700 --> 00:17:13.400 that's absolutely true. And so you have to take into account.

328 00:17:14.000 --> 00:17:17.700 The the investor psychology associated with this that's

329 00:17:17.000 --> 00:17:20.200 why I think momentum is such a

330 00:17:20.000 --> 00:17:23.500 powerful factor to build into your portfolios

331 00:17:23.000 --> 00:17:26.200 because momentum picks up

332 00:17:26.000 --> 00:17:29.400 these like when tech stocks going to run you end up

333 00:17:29.400 --> 00:17:33.400 owning things like Apple and Google and because they

334 00:17:32.900 --> 00:17:37.100 are demonstrating positive momentum, right? So you you're picking

335 00:17:36.400 --> 00:17:39.800 up some of that you're participating in that upside and I

336 00:17:39.800 --> 00:17:42.900 think as a as an investor, that's that would probably be enough for

337 00:17:42.800 --> 00:17:46.400 me, right? It's a modicum of the things that I everybody else

338 00:17:46.200 --> 00:17:49.400 is holding that that's working but it's also stuff that's not working

339 00:17:49.300 --> 00:17:52.400 because eventually that circles around and that becomes the thing

340 00:17:52.300 --> 00:17:55.600 that's worth. I don't have to try and time it. I'm just holding it and I'm

341 00:17:55.400 --> 00:17:58.600 waiting keeping my powder dry in that area so that when it

342 00:17:58.400 --> 00:18:02.100 does I benefit that that's how I would think about it look again

343 00:18:01.700 --> 00:18:03.100 tech stocks are

344 00:18:04.300 --> 00:18:08.300 The amazing thing about markets is they run longer than you think they should right. They're

345 00:18:07.900 --> 00:18:12.100 fueled by stuff. Sometimes you don't understand and and

346 00:18:11.600 --> 00:18:15.100 in many cases, I think the

347 00:18:14.700 --> 00:18:18.500 tech stock Dynamic is is part

348 00:18:17.800 --> 00:18:21.300 fairy dust, right and you know,

349 00:18:21.200 --> 00:18:24.500 we watched it run for a decade and drive markets, you know

350 00:18:24.500 --> 00:18:28.800 for you know, double digit returns for years because

351 00:18:27.800 --> 00:18:31.900 that happen again, of course, it could right. I'm not

352 00:18:31.900 --> 00:18:35.700 gonna tell you again. I am cautious about the

353 00:18:35.200 --> 00:18:38.600 dynamic being set up looking very similar to

354 00:18:38.500 --> 00:18:42.200 the dynamic that we saw at you know, 2019 2020.

355 00:18:41.700 --> 00:18:45.000 Yeah. No, absolutely and you know that seems like that tech

356 00:18:44.700 --> 00:18:47.900 store keeps popping up. I started my career in the late 90s and that was the

357 00:18:47.800 --> 00:18:50.600 whole story and then I saw a lot of portfolios.

358 00:18:51.300 --> 00:18:55.100 A lot of people see their portfolios blow up but because of overexposure to

359 00:18:55.000 --> 00:18:58.500 to technology and they having a

360 00:18:58.400 --> 00:19:02.400 balanced portfolio Diversified across multiple asset classes regions geographies.

361 00:19:01.900 --> 00:19:05.000 That's that's the best course of action at the

362 00:19:04.900 --> 00:19:10.100 end of the day. So yeah, I think I go back to the the E-Trade

363 00:19:09.300 --> 00:19:12.600 baby, right if you remember the E-Trade baby so easy

364 00:19:12.500 --> 00:19:15.800 baby. Yeah that was born right on the text actually and then

365 00:19:15.600 --> 00:19:18.700 they they put the baby away for a while baby's back right now. I was

366 00:19:18.600 --> 00:19:21.800 a little bit older now, he's out of the wedding, you know hanging out

367 00:19:21.700 --> 00:19:25.200 with this guys and gals but to

368 00:19:24.800 --> 00:19:28.200 me that a Hallmark of a caution, right because

369 00:19:27.900 --> 00:19:32.000 the reality is it's it's easy but

370 00:19:31.600 --> 00:19:34.900 hard right it's not you know, it's not

371 00:19:34.700 --> 00:19:38.500 difficult to say. Hey look broadly based diversification sit still it's

372 00:19:37.700 --> 00:19:41.000 incredibly difficult to do. Yeah, right and that's where

373 00:19:40.900 --> 00:19:45.100 the real benefit of working with financial professionals comes in because everybody

374 00:19:44.300 --> 00:19:47.900 thinks they can do it everybody. They're gonna be Spock

375 00:19:47.300 --> 00:19:50.600 and devoid of emotion, but then the moment of truth comes

376 00:19:51.200 --> 00:19:54.200 The market drops 40% and you're looking at like am I gonna

377 00:19:54.200 --> 00:19:57.400 be able to retire? Right and the fear grips hold and it's

378 00:19:57.200 --> 00:20:00.900 2 am and you're thinking what do I do? Right. That's

379 00:20:00.300 --> 00:20:03.400 when you need to have that dispassionate third party

380 00:20:03.300 --> 00:20:07.700 to pick up the phone and say I want to sell everything. They whoa. Let's

381 00:20:07.100 --> 00:20:11.000 revisit right like is anything changed? Oh the

382 00:20:10.400 --> 00:20:13.700 market drop 40% right has anything in your life changed right?

383 00:20:13.400 --> 00:20:16.800 Maybe that's not the best course of action. Let's take a beat having that

384 00:20:16.600 --> 00:20:20.000 dispassionate a third party to keep you from blowing yourself up

385 00:20:19.700 --> 00:20:23.000 at that exact moment is invaluable. Yeah

386 00:20:22.700 --> 00:20:26.400 and making sure you have the right mix between stocks bonds

387 00:20:26.000 --> 00:20:29.900 and maybe even Alternatives depending on the investor and if someone

388 00:20:29.500 --> 00:20:33.000 can't sleep at night, it's not necessarily that they should take action,

389 00:20:32.600 --> 00:20:35.800 but they might be in the wrong asset allocation for

390 00:20:35.600 --> 00:20:36.200 their

391 00:20:37.300 --> 00:20:41.000 The risk, you know their ability to accept right? Yeah,

392 00:20:40.600 --> 00:20:45.800 it could be that often. What I've

393 00:20:45.500 --> 00:20:48.800 experienced is when it's that it's because the client wanted

394 00:20:48.500 --> 00:20:52.000 more Tech right in their portfolios or more of what's

395 00:20:51.700 --> 00:20:55.100 working, right? And then when that's no longer working, they

396 00:20:54.700 --> 00:20:57.700 can't sleep at night, but cautionary Tale the other

397 00:20:57.700 --> 00:21:01.900 piece of that is we're surrounded by the news 24/7

398 00:21:01.000 --> 00:21:04.600 right? It's just and it's always the whatever

399 00:21:04.100 --> 00:21:07.700 bleeds leads right? And so it's this constant

400 00:21:07.100 --> 00:21:12.200 drum beat of kind of negative stuff. And I think that investors

401 00:21:10.400 --> 00:21:13.700 need a voice.

402 00:21:14.600 --> 00:21:18.000 That that they trust to say. Hey, yeah. No I

403 00:21:17.800 --> 00:21:21.600 saw that too. Yes, that bank went out of business. Here's

404 00:21:20.800 --> 00:21:24.600 why we shouldn't Panic here, right? Yep. We

405 00:21:24.500 --> 00:21:28.300 see all that. Here's why we're gonna stay the course. Here's why we're not gonna Panic. Here's

406 00:21:27.800 --> 00:21:31.200 what let's you know, our long-term goals are and we're in good

407 00:21:31.100 --> 00:21:35.000 shape to hit those. I think that sort of calming reassurance

408 00:21:34.500 --> 00:21:37.700 helps people get back to sleeping at night. Yeah. No,

409 00:21:37.500 --> 00:21:40.800 I agree Casey as always. It's a pleasure talking to you.

410 00:21:40.700 --> 00:21:43.800 Thanks for joining us great having you here and I want to thank all of

411 00:21:43.700 --> 00:21:47.400 our listeners and these feel free to access other podcasts

412 00:21:46.800 --> 00:21:49.800 that we have done and they can be

413 00:21:49.800 --> 00:21:53.300 accessed anywhere you get your podcast. So thanks everyone and we

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