Latest / Merryn Talks Money / How Investors Should Approach The US Election with Liz Ann Sonders

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How Investors Should Approach The US Election with Liz Ann Sonders · Merryn Talks Money

• 0:03
  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Hi, it's Meren here.
• 0:10
  Speaker 1: We have got something special coming up on October thirty,
• 0:12
  Speaker 1: first atam at Bloomberg Headquarters. It is going to be
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  Speaker 1: Merin on the Budget, Well not just Marin on the Budget,
• 0:18
  Speaker 1: Meren plus John plus Stephanie and plus special guest Andy King,
• 0:22
  Speaker 1: who knows an awful a lot about fiscal policy and
• 0:25
  Speaker 1: fiscal matters. So it's going to be educational, maybe interesting,
• 0:30
  Speaker 1: and we'll have a run through what the budget, about
• 0:32
  Speaker 1: which we now know almost nothing, will mean for you.
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  Speaker 1: So if you're interested in joining us or signing up
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  Speaker 1: for the event, do look in the show notes whether
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  Speaker 1: there will be a link or look out for it
• 0:42
  Speaker 1: in Money Distilled, John's brilliant newsletter, which I know you
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  Speaker 1: all get already. Right onwards, Welcome to Maren Talks Money,
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  Speaker 1: the podcast in which people who know the markets explain
• 0:58
  Speaker 1: the markets. I'm marrin Sumset Web. This week I'm joined
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  Speaker 1: by Lizanne Sonders, managing director and chief investment strategist at
• 1:04
  Speaker 1: Charles Swab. We talk about the federal reserves, monetary policy
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  Speaker 1: investors can navigate these particularly difficult markets and with the
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  Speaker 1: US elections just around the corner. We talk about the
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  Speaker 1: impact of elections on markets. Welcome Lizan to Marin Talks Money. Lazan,
• 1:22
  Speaker 1: thank you so much for joining us again. It's really
• 1:23
  Speaker 1: nice to have you back on.
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  Speaker 2: Oh nice to be on again. Maren, thank you so much.
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  Speaker 1: Well, look, there is so much going on at the moment.
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  Speaker 1: So an ordinary investor looking around them, they can see
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  Speaker 1: the American election coming up, inflation falling below, with most
• 1:39
  Speaker 1: people's targets suggesting, you know, more interest rate that's to come.
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  Speaker 1: There's geopolitical tensional over the play, It's lots going on
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  Speaker 1: in the energy markets, all sorts of things. How do
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  Speaker 1: we even begin to make sense of this?
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  Speaker 2: You know, this has been an incredibly unique cycle, both
• 1:54
  Speaker 2: in terms of the economy and the market. Maybe that's
• 1:56
  Speaker 2: the ultimate understatement, but I think it's worth thinking about
• 2:02
  Speaker 2: what has made this cycle unique, and a lot of
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  Speaker 2: it ties back to COVID and the aftermath of COVID
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  Speaker 2: in the sense that you've had these bifurcations, particularly within
• 2:13
  Speaker 2: the economy when we had the early part of the
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  Speaker 2: pandemic and the stimulus kicked in that was largely to
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  Speaker 2: the sole benefit of the goods side of the economy,
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  Speaker 2: not just in the United States but globally because of
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  Speaker 2: course services were completely shut down, so that was where
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  Speaker 2: the burst of activity initially happened. That's where the burst
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  Speaker 2: of inflation started. But then fast forward we had the
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  Speaker 2: later opening backup of services, the pent up demand associated
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  Speaker 2: with that. In turn, the services or non goods categories
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  Speaker 2: within inflation surged later and are stickier by nature, even
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  Speaker 2: though we've actually had one could argue recessions in parts
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  Speaker 2: of the economy that were earlier beneficiaries housing, housing related
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  Speaker 2: manifest actioning a lot of stay at home beneficiaries on
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  Speaker 2: the consumer products side of things. We've actually gone into
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  Speaker 2: deflation in the goods categories of inflation indicators, we've just
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  Speaker 2: had the offsetting strength and the economy on the services side,
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  Speaker 2: service is a larger employer, helping to explain the resilience
• 3:20
  Speaker 2: of the labor market and stickier inflation data, and those
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  Speaker 2: bifurcations have actually morphed into what's happened in the market too,
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  Speaker 2: where you've had this large cat bias, but much more
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  Speaker 2: churn and weakness and turmoil even under the surface at
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  Speaker 2: the average stock level. So that's the connection point I
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  Speaker 2: think between what's been going on in the economy and
• 3:41
  Speaker 2: is unique cycle and the market.
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  Speaker 1: Okay, so how does the economy let now to you?
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  Speaker 1: And there's a lot more discussion coming up about no landing.
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  Speaker 1: They're not going to be a self landing hard landing.
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  Speaker 1: Now we're in a world of no landing. It sounds great,
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  Speaker 1: Is that what you see happening?
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  Speaker 2: Yeah, it sounds great, But again we have had We've
• 4:00
  Speaker 2: had hard landings in those intrasensitive segments of the economy,
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  Speaker 2: and in the case of manufacturing, hasn't yet pulled out
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  Speaker 2: of its sectoral recession. It wasn't enough weakness to take
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  Speaker 2: the whole economy down with it. But we're still trying
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  Speaker 2: to claw out of hard landings in manufacturing, in housing,
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  Speaker 2: in housing related whether the rest of the economy, the
• 4:25
  Speaker 2: more services oriented, can hang in there. So far, so good.
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  Speaker 2: The economy looks in decent shape. Services is a much
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  Speaker 2: larger share of the economy, so the economy can continue
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  Speaker 2: to chug along without an officially declared recession. I think
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  Speaker 2: the real key, because consumption is such a big part
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  Speaker 2: of the US economy, is for the labor market to
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  Speaker 2: remain healthy. I think that has been the feeder into
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  Speaker 2: resilient consumption more so than traditional metrics like the savings
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  Speaker 2: rate or even in this cycle, the excess savings level.
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  Speaker 2: But I think the labor market does have to hang
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  Speaker 2: in there. If the labor market were really crack from here,
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  Speaker 2: and that's not our base case, but I think that
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  Speaker 2: would feed into weaker consumption patterns, probably fairly quickly.
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  Speaker 1: So what's your base case on the labor market.
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  Speaker 2: So far, so good. The most recent jobs report obviously
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  Speaker 2: was very strong, and not only just on the surface
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  Speaker 2: with the headlines of payrolls and the unemployment rate, but
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  Speaker 2: the innards of the report were quite strong. Not to mention,
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  Speaker 2: you had positive revisions upward revisions to the prior couple
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  Speaker 2: of months, and that booked the recent trend. But that
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  Speaker 2: was one month, and we have another jobs report between
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  Speaker 2: now and the November FED meeting, and so we'll get
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  Speaker 2: more color. Of course, the big rub here in the
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  Speaker 2: United States is that hurricanes and tornadoes and mother nature
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  Speaker 2: is likely to recavoc with a lot of this labor
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  Speaker 2: market data, certainly things like initial unemployment claim. So it's
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  Speaker 2: going to be hard, frankly, to get a true picture
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  Speaker 2: of the health of the labor market, given how severe
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  Speaker 2: some of these storm have been and the implications that
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  Speaker 2: that has for a lot of the real time leading
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  Speaker 2: indicator type labor market data points.
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  Speaker 1: And those storms could then have an impact on the
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  Speaker 1: inflation data as well.
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  Speaker 2: Right, absolutely, I think it's a question of whether there's
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  Speaker 2: enough color commentary around any potential pickup and inflation suggestive
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  Speaker 2: of it being more storm related and not some turnback
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  Speaker 2: higher for traditional supplier demand reasons. I think if you
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  Speaker 2: had a scenario where and we did get CPI last week,
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  Speaker 2: which wouldn't have been a sort of shaded by some
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  Speaker 2: of the storm impacts, it was slightly hotter than expected,
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  Speaker 2: if we were to get another couple of readings that
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  Speaker 2: were stronger than expected, with an extrapolation being that, hey,
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  Speaker 2: this is more than just storm related. You add that
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  Speaker 2: to recent better labor market data, and it's part of
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  Speaker 2: the reason why you've not only taken in a fifty
• 7:01
  Speaker 2: basis point cut by the FED off the table. At
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  Speaker 2: this point, there is a you know, reasonable likelihood of
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  Speaker 2: the FED not doing anything, just you know, moving quickly
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  Speaker 2: into pause mode, which certainly was not expected even a
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  Speaker 2: few weeks ago.
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  Speaker 1: Yeah, so you if you want inflation as a whole.
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  Speaker 1: Do you think it is pretty much dealt with? Give
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  Speaker 1: or take you know, an odd little tick up here
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  Speaker 1: or here or that, but the big crisis is over.
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  Speaker 2: Well, it depends on how you define dealt with. I think,
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  Speaker 2: you know, a hanging of the of a banner saying,
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  Speaker 2: you know, victory, our job is done. Nothing to see here,
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  Speaker 2: let's move forward. I think that that's a little naive.
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  Speaker 2: I happen to think that from an inflation secular inflation
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  Speaker 2: backdrop perspective, not you know what the next monthly reading
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  Speaker 2: on CPI or PCE is going to be. I think
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  Speaker 2: we're we're likely transitioning or already in secular inflation backdrop.
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  Speaker 2: That doesn't look like the twenty five years or so
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  Speaker 2: leading into the pandemic, often referred to as the Great
• 8:09
  Speaker 2: Moderation Era from the mid to late nineties up until
• 8:12
  Speaker 2: the early part of the pandemic, really up until the
• 8:15
  Speaker 2: COVID related spike in inflation, and that was a period
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  Speaker 2: of very benign inflation, very little inflation volatility, very benign
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  Speaker 2: interest rate backdrop. It was driven by a lot of
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  Speaker 2: powerful secular forces, including globalization and Gina joining the wto
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  Speaker 2: and basically flooding the world with cheap and abundant access
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  Speaker 2: to goods and to labor. We had actually less geopolitical
• 8:42
  Speaker 2: instability than we have right now. There's demographics that have
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  Speaker 2: come into play. So I think the era we're in now,
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  Speaker 2: if you were to liken it to an era of
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  Speaker 2: the past, may look a little more like what I've
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  Speaker 2: been calling the temperamental era, which was the thirty year
• 9:00
  Speaker 2: prior to the Great Moderation, so the span from the
• 9:03
  Speaker 2: mid sixties to about the mid nineteen nineties, and that
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  Speaker 2: was an era of more inflation volatility. That's not the
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  Speaker 2: same thing as saying high inflation the whole time, and
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  Speaker 2: that's not my perspective in this environment, but more inflation volatility,
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  Speaker 2: bigger swings on the upside and downside, and that was
• 9:19
  Speaker 2: in conjunction with greater economic volatility, so shorter cycles, more
• 9:24
  Speaker 2: frequent recessions, but stronger growth phases on the upside. And
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  Speaker 2: I think we may be back in that environment. I
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  Speaker 2: think the FED to some degree maybe in that camp too,
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  Speaker 2: and they want to be mindful of not repeating them
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  Speaker 2: mistakes made in the sixties and seventies, in particular of
• 9:43
  Speaker 2: premature declaration of victory easing policy, only to see inflation
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  Speaker 2: reignite again, and then you know Arthur Burns having to
• 9:52
  Speaker 2: scramble and titan policy again. And we went through that
• 9:55
  Speaker 2: process twice until Paul Volker had to come in the
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  Speaker 2: same thing, until finally interest rates had to be jacked
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  Speaker 2: up to the moon in order to finally combat these
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  Speaker 2: fits and starts of inflation. So I think we're in
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  Speaker 2: a more inflation volatility, even if inflation in the near
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  Speaker 2: term is not set to move up markedly.
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  Speaker 1: Okay, And it sounds like a lot of that inflation
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  Speaker 1: with volatility will be driven by global forces as opposed
• 10:22
  Speaker 1: to domestic crisis, So driven by constantly shifting supply chains,
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  Speaker 1: driven by people feeling like they need to reshure them
• 10:29
  Speaker 1: manufacturing or French shure it and that kind of thing.
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  Speaker 2: Yeah, so, yeah, we're not in the deglobalization camp, but
• 10:35
  Speaker 2: there's definitely a change in the nature of globalization to
• 10:39
  Speaker 2: your point, regionalization, supply chain diversification. But there's also the
• 10:43
  Speaker 2: demographics associated with labor supply that's a global phenomenon, and
• 10:49
  Speaker 2: I think one of the implications of this is that
• 10:53
  Speaker 2: labor relative to its own history is picking up as
• 10:57
  Speaker 2: a sort of a share of the economy and therefore
• 11:01
  Speaker 2: wields maybe a bit more power that all else equal
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  Speaker 2: is supportive of more inflation volatility.
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  Speaker 1: Does that still end lots of ways though, rather like
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  Speaker 1: a good thing, and that over the last period, during
• 11:14
  Speaker 1: the Great Motivation, particularly during the Great Great Kiwy period,
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  Speaker 1: it's rather felt like labor has been on the back foot,
• 11:21
  Speaker 1: and in many places rail wages actually been falling. And
• 11:23
  Speaker 1: so this seems to me and lots of people like
• 11:25
  Speaker 1: like a really good thing that labor regai is in power,
• 11:28
  Speaker 1: that rail wages rise and then the consumption rises as
• 11:32
  Speaker 1: a result, and we have maybe a more balanced economy.
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  Speaker 2: Right. These things go in long secular waves and their
• 11:38
  Speaker 2: global in nature, not just in the US. If you
• 11:40
  Speaker 2: look at you know, profits as a share of GDP
• 11:44
  Speaker 2: over the long term, and you look at labor via
• 11:47
  Speaker 2: compensation as a share of GDP, you go in waves.
• 11:51
  Speaker 2: And clearly in the recent past profits has been at
• 11:56
  Speaker 2: the high end of its historical range in terms of
• 11:59
  Speaker 2: as a share of GDP and labor the opposite. But
• 12:01
  Speaker 2: they're they're starting to converge, not toward each other in
• 12:04
  Speaker 2: terms of weight within the economy. But relative to their
• 12:07
  Speaker 2: own history history, you're seeing labor garner a little bit
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  Speaker 2: higher a share of GDP and profits a little bit
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  Speaker 2: lower a share. And globally, I think that that probably
• 12:19
  Speaker 2: has has legs in part just because of labor supply
• 12:24
  Speaker 2: problems that are largely global in nature. Yeah.
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  Speaker 1: Now, a great hope, of course, is it the shortage
• 12:31
  Speaker 1: of labour supply encourages companies to behave in such a
• 12:34
  Speaker 1: way that enhances productivity across the board that it encourages
• 12:38
  Speaker 1: a new wave of CATHEGX and alongside that all the
• 12:40
  Speaker 1: benefits from AI, which of course we don't really understand yet.
• 12:43
  Speaker 1: It's impossible for us to forecast what AI will actually do, right,
• 12:46
  Speaker 1: we don't really know. But a hope is it, well,
• 12:49
  Speaker 1: these things will combine to give us a huge boost
• 12:51
  Speaker 1: in productivity which will support continued railwaye growth.
• 12:54
  Speaker 2: And productivity has been has been healthy. It's it's it's
• 12:58
  Speaker 2: premature at this point to try to pinpoint AI's contribution
• 13:03
  Speaker 2: to that stronger productivity, but that's been certainly one of
• 13:06
  Speaker 2: the brighter spots within the US economy's decent productivity. Now
• 13:10
  Speaker 2: in the very near term, meaning you know, the next
• 13:12
  Speaker 2: few weeks. We've had sort of a stall in CAPEX,
• 13:16
  Speaker 2: in plans for CAPEX for somewhat obvious reasons around in
• 13:19
  Speaker 2: certainty with regard to the election. So I think to
• 13:22
  Speaker 2: really see a renewed cycle of capital spending or get
• 13:26
  Speaker 2: a sense of whether there will be a renewed cycle
• 13:28
  Speaker 2: of capital spending, we've got to get through this period
• 13:30
  Speaker 2: of uncertainty between now and the election.
• 13:33
  Speaker 1: Yeah, I don't tell any of our UK readers to
• 13:35
  Speaker 1: mistakenly believe that productivity has had big pick up in
• 13:38
  Speaker 1: the UK as well, because I'm a fraid to ask, oh, sorry,
• 13:42
  Speaker 1: well that's okay, that's okay, But you know, we wait
• 13:44
  Speaker 1: and we wait and we wait, but it just doesn't happen.
• 13:46
  Speaker 1: And we took about digitalization and the great productivity boom
• 13:50
  Speaker 1: coming from technology and AI etc. We just we just
• 13:54
  Speaker 1: and we wait. Let's talk a little bit about the
• 13:58
  Speaker 1: reason for the slowdown in capecks in the US, which is,
• 14:00
  Speaker 1: of course the election coming up. And I'm certainly not
• 14:03
  Speaker 1: going to ask you to pick a side or anything
• 14:05
  Speaker 1: appulling like that. Who would want to have to do that.
• 14:08
  Speaker 1: But what tends to happen in an election. Everyone knows
• 14:12
  Speaker 1: that the run up to an election is usually very
• 14:14
  Speaker 1: good for storm markets, but what happens after that, and
• 14:17
  Speaker 1: these are a big difference between parties should we be
• 14:20
  Speaker 1: looking out for.
• 14:21
  Speaker 2: You have to be careful about generalizing and looking at
• 14:24
  Speaker 2: long term averages and suggesting that that's some sort of
• 14:27
  Speaker 2: typical performance because there are such a wide range around outcomes.
• 14:31
  Speaker 2: Whether you look at the four year election cycle and
• 14:34
  Speaker 2: which year tends to be best, which year tends to
• 14:36
  Speaker 2: be worst. Actually, the best year on average has been
• 14:39
  Speaker 2: the pre election year, and last year was a strong
• 14:42
  Speaker 2: year for the market here in the United States, so
• 14:44
  Speaker 2: obviously that was in keeping, but you tend to see
• 14:48
  Speaker 2: a little bit more weakness and volatility in the election year,
• 14:51
  Speaker 2: and we've kind of bucked that trend with a strong
• 14:54
  Speaker 2: market this year. You often get a lot of sector
• 14:57
  Speaker 2: related volatility and trading moves in the lead into election,
• 15:01
  Speaker 2: but that tends to be more pronounced if you have
• 15:05
  Speaker 2: less of a tight relationship between the parties within Congress,
• 15:10
  Speaker 2: and I think regardless of what happens during the election
• 15:13
  Speaker 2: with Congress, we're not going to have wide majorities, which
• 15:17
  Speaker 2: means that there's a limit to how much of these
• 15:20
  Speaker 2: policy proposals and are natural on the campaign trail can
• 15:23
  Speaker 2: actually become policies because of what is likely to be
• 15:27
  Speaker 2: a pretty narrow margin regardless of what happens with the
• 15:31
  Speaker 2: makeup of Congress. It's also, frankly a bit of a
• 15:35
  Speaker 2: fool's errand to try to trade around election outcomes, especially
• 15:40
  Speaker 2: if those trading moves are based on an assumption that
• 15:44
  Speaker 2: the policies actually become policy. Proposals become policies. I think
• 15:48
  Speaker 2: that there's a lot of naivete when it comes to that.
• 15:51
  Speaker 2: I see headlines all the time of you know, if
• 15:54
  Speaker 2: Harris wins, then taxes are going through the roof. For
• 15:57
  Speaker 2: if Trump wins, are all the tax cuts are going
• 16:00
  Speaker 2: to remain in place, and that's it's not the way
• 16:04
  Speaker 2: the government works. And the other thing that happens is
• 16:08
  Speaker 2: I think there's assumptions that are made that translates into, well,
• 16:13
  Speaker 2: if so and so wins, it's good for fill in
• 16:15
  Speaker 2: the blank. And here's an anecdote that I think a
• 16:18
  Speaker 2: lot of people don't realize, and it highlights the care
• 16:21
  Speaker 2: you need to take with applying politics too much to
• 16:25
  Speaker 2: your perspective on market move. So Trump clearly is considered
• 16:29
  Speaker 2: pro traditional energy and Biden Harris are considered more pro
• 16:34
  Speaker 2: renewables and green energy. Well, the S and P energy sector,
• 16:41
  Speaker 2: which is one of eleven sectors, is all traditional energy.
• 16:44
  Speaker 2: In fact, almost half that index, that energy index is
• 16:50
  Speaker 2: two companies. It's Exonmobile and Chevron. But the rest of
• 16:53
  Speaker 2: the companies in the energy sector are traditional expiration production companies,
• 16:58
  Speaker 2: traditional drilling companies. There's not a green energy company, a
• 17:02
  Speaker 2: solar company, a win company in there. So you would
• 17:04
  Speaker 2: think that under the Trump administration energy would have fared
• 17:07
  Speaker 2: well well. From inauguration day to inauguration day, energy was
• 17:12
  Speaker 2: not only the worst performing sector, it was the only
• 17:14
  Speaker 2: one down, and it was down by forty percent. The
• 17:16
  Speaker 2: next worst sector was up by twenty percent. Fast forward
• 17:20
  Speaker 2: to the Biden Harris administration. From inauguration day to Friday's close,
• 17:25
  Speaker 2: energy has been by far the best performing sector, even
• 17:28
  Speaker 2: more so than technology. Now that is not because Trump
• 17:31
  Speaker 2: was secretly anti traditional energy and Harris Biden were secretly
• 17:36
  Speaker 2: pro traditional energy. The point is that there are so
• 17:39
  Speaker 2: many forces in impact what the market does, what sectors do,
• 17:42
  Speaker 2: what individual stocks do, and tying it to political party
• 17:46
  Speaker 2: is just a fool's.
• 17:48
  Speaker 1: Errand right now, US households are very exposed to equity
• 17:53
  Speaker 1: as much as they've been since the early two thousands.
• 17:57
  Speaker 1: Is that a good allocation of the capital? Do you
• 17:59
  Speaker 1: think in the run up to the election and with
• 18:02
  Speaker 1: the evaluations of the US market as they are, etc.
• 18:05
  Speaker 1: It seems ambitious.
• 18:06
  Speaker 2: There's no way to generalize an answer to that. And
• 18:10
  Speaker 2: I actually, Marion, I find that when I get off
• 18:14
  Speaker 2: in questions that are even more specific than that, you know, what,
• 18:18
  Speaker 2: what should investors be doing? How much exposure should they
• 18:21
  Speaker 2: have to you know, equities or fixed income? As if
• 18:24
  Speaker 2: there's one cookie cutter answer that's right. I could actually
• 18:28
  Speaker 2: have a bird land on my shoulder from the future
• 18:31
  Speaker 2: and say, all right, wink wink, here, Lasanne, I've got
• 18:35
  Speaker 2: I'm going to give you ninety eight percent odds that
• 18:38
  Speaker 2: the stock market's going to do X, that the ball
• 18:42
  Speaker 2: market's going to do X. And I were then sitting
• 18:45
  Speaker 2: across from two investors. One investor is twenty two years old.
• 18:50
  Speaker 2: They just inherited ten million dollars from the grandparents. They
• 18:54
  Speaker 2: don't need the money. They're not going to obsess over
• 18:57
  Speaker 2: the portfolio balance. They're not going to freak out out
• 19:00
  Speaker 2: in panic if there's a fifteen or twenty percent drop
• 19:03
  Speaker 2: in their portfolio. And then the other investor sitting across
• 19:06
  Speaker 2: from me is seventy eight years old, has built a
• 19:09
  Speaker 2: nest egg. That's their retirement nest egg. They can't afford
• 19:13
  Speaker 2: to lose any of the principle and they're living on
• 19:16
  Speaker 2: the income generated. So I have basically round it to
• 19:19
  Speaker 2: one hundred percent conviction of what the markets are going
• 19:22
  Speaker 2: to do. What I would tell those two investors is
• 19:25
  Speaker 2: entirely different. So shame on anyone that answers with specifiicy
• 19:30
  Speaker 2: even just in the confines of my world. At Charshchwab,
• 19:33
  Speaker 2: we have ten trillion dollars of client assets. That's a
• 19:37
  Speaker 2: wide array of risk tolerances and time horizons and need
• 19:41
  Speaker 2: for income and tax bracket. So yes, you know, if
• 19:45
  Speaker 2: you just on the surface add near record equity exposure
• 19:51
  Speaker 2: on the part of individuals to other sentiment indicators, maybe
• 19:55
  Speaker 2: it falls on the as a contrarian indicator on the
• 19:59
  Speaker 2: concern side of the ledger. But that kind of environment
• 20:04
  Speaker 2: of lofty sentiment, either attitudinal measures of sentiment too much optimism,
• 20:09
  Speaker 2: or behavioral measures like exposure to equities that can stay
• 20:13
  Speaker 2: that way for years. You know, people forget.
• 20:15
  Speaker 1: That and has stayed that way for the Yeah, Alan.
• 20:18
  Speaker 2: Greenspan's famous irrational exuberance comment was made in nineteen ninety
• 20:24
  Speaker 2: six and the stock market didn't peak for another three
• 20:27
  Speaker 2: and a half years. So one thing I always say
• 20:30
  Speaker 2: about investor sentiment, whether it's the attitudinal measures or the
• 20:34
  Speaker 2: behavioral measures like exposure, like fun flows, is it's a
• 20:38
  Speaker 2: terrible market timing tool. I mean, there's no good market
• 20:41
  Speaker 2: timing tool. But the sentiment is gives you a backdrop,
• 20:45
  Speaker 2: but it doesn't give you a signal.
• 20:47
  Speaker 1: Well, that's an interesting point. There is no good market
• 20:50
  Speaker 1: timing tool, is there. And we can evaluations absolutely nonstopic
• 20:53
  Speaker 1: and libt all sorts of things, but in the end,
• 20:56
  Speaker 1: it's all about momentum. I'll just go up until this
• 20:58
  Speaker 1: stop going up, and then they go down until this
• 20:59
  Speaker 1: stop going down, and you gone timeline.
• 21:01
  Speaker 2: That's right.
• 21:01
  Speaker 1: Well, you can do, of course, is buy cheap things
• 21:04
  Speaker 1: and hold them for a very long time. But no
• 21:05
  Speaker 1: one can tell you when even those cheap things are
• 21:07
  Speaker 1: going to turn, as we keep finding in the UK market.
• 21:09
  Speaker 2: Well, but I would add into it the discipline's around.
• 21:13
  Speaker 2: It's this and this is the funny part, because this
• 21:16
  Speaker 2: is the stuff that actually matters. But I suppose it's
• 21:19
  Speaker 2: the stuff that's more boring to talk about more interesting
• 21:22
  Speaker 2: if you certainly, if you're listening to a podcast or
• 21:25
  Speaker 2: watching financial television, it's more interesting to have somebody come
• 21:29
  Speaker 2: on and make some bombastic forecasts and try to time
• 21:32
  Speaker 2: the market when the reality is it's not what I know,
• 21:35
  Speaker 2: or you know, or the investor knows about what's going
• 21:37
  Speaker 2: to happen in the future because we don't know. It's
• 21:40
  Speaker 2: not what we know that matters, it's what we do
• 21:41
  Speaker 2: along the way. And that's where disciplines like diversification across
• 21:45
  Speaker 2: them with an assa classes and probably the most beautiful
• 21:48
  Speaker 2: discipline of all, which is rebalancing, periodic rebalancing, because it
• 21:52
  Speaker 2: forces us to do a version of what we know
• 21:54
  Speaker 2: we're supposed to do. Not so much by low sell high,
• 21:57
  Speaker 2: because that almost infers all in, all out. It's ad
• 22:00
  Speaker 2: low and trim high, and when left to our own devices,
• 22:03
  Speaker 2: we often do the opposite.
• 22:06
  Speaker 1: Yeah, no, it's interesting. We used to run, John, and
• 22:08
  Speaker 1: I not run, but to have it in our head.
• 22:11
  Speaker 1: A group of investment trusts that we five investment trusts
• 22:14
  Speaker 1: are listed in the UK, a diverse group and of
• 22:18
  Speaker 1: these investment trusts. One of them did unbelievably well. Scottish
• 22:22
  Speaker 1: mortgage shored to this guy and then of course collapsed
• 22:25
  Speaker 1: later not completely class but didn't do so well. And
• 22:28
  Speaker 1: we told our readers for years, every six months to rebalance, rebalance, rebalance, rebalanced.
• 22:33
  Speaker 1: One of those who had would have made a full
• 22:35
  Speaker 1: chips and those who did not, of course, were incredibly disappointed.
• 22:38
  Speaker 2: I have a fun anecdote about just the odd psychology
• 22:44
  Speaker 2: that comes into the idea of rebalancing. I was at
• 22:48
  Speaker 2: a client event a few months ago and a client
• 22:52
  Speaker 2: came up to me after the event and said, I'm
• 22:57
  Speaker 2: really annoyed. I'm really frustrated. It was suggested that I
• 23:02
  Speaker 2: trim a little bit of my Nvidia position, So I did.
• 23:07
  Speaker 2: I trimmed about five percent of the position, and the
• 23:10
  Speaker 2: stock kept going up, and I'm really annoyed. So I paused,
• 23:15
  Speaker 2: and I said, would you be happier with the ninety
• 23:18
  Speaker 2: five percent that you still own if the stock cratered,
• 23:22
  Speaker 2: because then you could pat yourself on the back for
• 23:25
  Speaker 2: having trimmed a little bit at some perfect peak. And
• 23:30
  Speaker 2: to his credit, he paused. He said, I can't believe
• 23:33
  Speaker 2: I didn't think of it. That way. But that's the
• 23:35
  Speaker 2: right way to think about it.
• 23:38
  Speaker 1: But it is, I mean, it is a it's a
• 23:40
  Speaker 1: difficult discipline. It's a difficult discipline. It is, you know,
• 23:44
  Speaker 1: and you have out there a lot of people saying,
• 23:46
  Speaker 1: run your winners, run your winners, go with the momentum. Now,
• 23:49
  Speaker 1: it's hard for an ordinary investor who's making money to
• 23:52
  Speaker 1: think to themselves, I'm going to have to sell some
• 23:54
  Speaker 1: of that, even though I think it's going to give
• 23:56
  Speaker 1: going up. I mean, I absolutely agree with you. It's
• 23:58
  Speaker 1: just hard.
• 23:59
  Speaker 2: It is hard. But the downside is if you continue
• 24:04
  Speaker 2: to let the winners just run, run, knowing that there
• 24:07
  Speaker 2: will be an inevitable pullback phase whatever the stock or
• 24:11
  Speaker 2: the group, or the index or the sector, and with
• 24:15
  Speaker 2: the absent rebalancing, it just becomes a much larger share
• 24:19
  Speaker 2: of your portfolio, and in turn, the parts of the
• 24:23
  Speaker 2: portfolio that might have been underperforming in relative terms will
• 24:27
  Speaker 2: at some point have their day in the sun. And
• 24:29
  Speaker 2: it just rebalancing just keeps investors in gear. It smooths
• 24:34
  Speaker 2: the ride such that at the end of whatever the
• 24:36
  Speaker 2: period is, there's just been less volatility, less emotional turmoil.
• 24:42
  Speaker 2: Even if you don't have the bragging rights of I
• 24:45
  Speaker 2: just nailed the top and the bottom in this stock
• 24:48
  Speaker 2: or this sector or this index, which nobody can do
• 24:51
  Speaker 2: consistently anyway. So I just think that there are sort
• 24:54
  Speaker 2: of the unsung heroes of what matters for investors.
• 25:00
  Speaker 1: Asset allocation, investification, rebalancing is the best you can do.
• 25:05
  Speaker 2: That's those are the things that matter.
• 25:07
  Speaker 1: Frankly, Okay, well, let's look at the first two. Asset allocation, divestification.
• 25:14
  Speaker 1: Let's I know you, it's hard as hard as you say,
• 25:17
  Speaker 1: because there's so many different situations. But a young person today,
• 25:20
  Speaker 1: a young person today, they haven't inherited ten million, not
• 25:23
  Speaker 1: quite so good, But maybe they've got a little lump
• 25:25
  Speaker 1: sum and that's looking at this cash and they're thinking, God,
• 25:28
  Speaker 1: what on earth do I do with it? How would
• 25:29
  Speaker 1: you allocate assets across the board of the moment, and
• 25:32
  Speaker 1: how would you divest?
• 25:33
  Speaker 2: Like, I would probably ask a couple of questions first
• 25:37
  Speaker 2: before I might advise. And keep in mind, I don't
• 25:40
  Speaker 2: advise clients directly individually. I'm not a financial advisor. I'm
• 25:45
  Speaker 2: not sitting down with them and telling them how much
• 25:48
  Speaker 2: exposure to have to different asset classes.
• 25:50
  Speaker 1: We're not looking for financial advice. We're looking for a
• 25:52
  Speaker 1: sort of rough sense of what makes sense to you
• 25:55
  Speaker 1: right now.
• 25:55
  Speaker 2: I would probably ask a question back, which is, do
• 25:59
  Speaker 2: you have a sense of whether your emotional risk tolerance
• 26:02
  Speaker 2: is tied directly to your financial risk tolerance, because I
• 26:06
  Speaker 2: think a lot of investors learn the hard way that
• 26:09
  Speaker 2: during a tumultuous period a bear market or a crash
• 26:12
  Speaker 2: or really heightened volatility, that what they thought was a
• 26:17
  Speaker 2: high risk tolerance based on things like time horizon turned
• 26:20
  Speaker 2: out not to be if it resulted in a panic.
• 26:23
  Speaker 2: And I don't want to lose any more money, not
• 26:26
  Speaker 2: because they need the money, So that would be the
• 26:28
  Speaker 2: first question back. But assuming some connectivity between the emotional
• 26:34
  Speaker 2: and financial side of things, then I think it's proper
• 26:39
  Speaker 2: to have a little more bias on the equity side
• 26:42
  Speaker 2: of things to make sure there's also some international diversification
• 26:45
  Speaker 2: and not just domestic equities. Then there's more of the
• 26:49
  Speaker 2: near term issues around whether an equal weighted approach makes
• 26:55
  Speaker 2: more sense than a cap weighted approach. Until very recently,
• 27:00
  Speaker 2: the cap weighted approach was the right way to go,
• 27:03
  Speaker 2: but it also established a lot of concentration risk for investors,
• 27:08
  Speaker 2: and that's something that that's unique to this part of
• 27:11
  Speaker 2: this cycle. So that's less of the broad answer and
• 27:13
  Speaker 2: more of the specific answer. There's also for individuals, especially
• 27:19
  Speaker 2: that have a long time arise, and there's been so
• 27:21
  Speaker 2: much democratization of this business and asset classes and the
• 27:27
  Speaker 2: ability to take diversification beyond just the standard stocks, bonds, cash,
• 27:32
  Speaker 2: and the ability even at low allocation amounts, to potentially
• 27:39
  Speaker 2: have exposure within the private markets or commodities or precious metals.
• 27:45
  Speaker 2: So I think that there has been an opening with
• 27:47
  Speaker 2: this democratization to exposure to other asset classes to maybe
• 27:53
  Speaker 2: make that diversification a bit more robust. You have to
• 27:56
  Speaker 2: be mindful of tying up the money, which can often
• 28:00
  Speaker 2: be the case in the private markets, but for a
• 28:02
  Speaker 2: younger person that has a very long time horizon, that's
• 28:06
  Speaker 2: something that could be considered as well. Somebody that has
• 28:09
  Speaker 2: a much shorter time horizon can't afford maybe to sort
• 28:13
  Speaker 2: of lock some portion of their portfolio in asset classes
• 28:16
  Speaker 2: that don't have that immediate liquidity, so that would be
• 28:19
  Speaker 2: another consideration.
• 28:20
  Speaker 1: It's something we talk about a lot. There's massive growth
• 28:22
  Speaker 1: in the private market zone and whether there will soon
• 28:24
  Speaker 1: be a pendulum swing back tools of public markets again,
• 28:28
  Speaker 1: or if maybe gradually, gradually everything will end on private
• 28:32
  Speaker 1: light exaggeration, but you know what I mean, there's definitely
• 28:34
  Speaker 1: a shift. Can you think I'd.
• 28:35
  Speaker 2: Say, yeah, But I think it's more of an end
• 28:37
  Speaker 2: not an r. I don't particularly individual investors shouldn't be
• 28:41
  Speaker 2: put in a position to think that they have to
• 28:42
  Speaker 2: try to time public markets versus private markets. I think
• 28:46
  Speaker 2: that they're frankly to some degree, will always be opportunities
• 28:49
  Speaker 2: in both.
• 28:51
  Speaker 1: And precious measured Does it make sense that everyone has
• 28:53
  Speaker 1: some allocation to, for example, gold, Well, it.
• 28:55
  Speaker 2: Depends on what your goal would be. And I'm not
• 28:58
  Speaker 2: an analyst on precious metals, but I think you know,
• 29:03
  Speaker 2: a lot of the money that it's found its way
• 29:05
  Speaker 2: into gold in the recent period of time has actually
• 29:09
  Speaker 2: not been around as an inflation hedge, and that has
• 29:13
  Speaker 2: historically been a consideration for people they think of gold
• 29:17
  Speaker 2: as an inflation hedge. It actually has not been a
• 29:21
  Speaker 2: pretty a consistent inflation hedge really since Breton Woods.
• 29:25
  Speaker 1: But is it now maybe catching up and the rises
• 29:28
  Speaker 1: that were saying in the goldpres recently maybe beginning to
• 29:31
  Speaker 1: compensate holders for the inflation of the last couple of years.
• 29:34
  Speaker 2: But I think the reason why gold's been going up
• 29:36
  Speaker 2: is more around geopolitical uncertainty less around inflation. So I
• 29:40
  Speaker 2: think the why behind gold's move up, I think is
• 29:43
  Speaker 2: important as a consideration. Yes, it's therefore been to the
• 29:46
  Speaker 2: benefit of inflation having eroded other asset class performance, but
• 29:51
  Speaker 2: I think the reasoning behind moves into gold has been
• 29:55
  Speaker 2: less about inflation and more about geopolitics.
• 30:00
  Speaker 1: What about the sect is that one traditionally the areas
• 30:02
  Speaker 1: that one traditionally looks at during an easing cycle, so
• 30:06
  Speaker 1: small caps, infrastructure, this kind of thing. The sect isn't
• 30:09
  Speaker 1: people normally look at when they think interest, right, so.
• 30:12
  Speaker 2: You know you're right that small caps tend to do
• 30:15
  Speaker 2: quite well when you're in an easing cycle. The rub
• 30:17
  Speaker 2: this time is that the easing is happening not because
• 30:22
  Speaker 2: the FED is combating a recession, but because they want
• 30:26
  Speaker 2: to kind of get a jump on bringing policy back
• 30:29
  Speaker 2: in line alongside inflation that has eased. But we clearly
• 30:35
  Speaker 2: haven't had full blown recession type conditions. It's the combination
• 30:39
  Speaker 2: of easier monetary policy and the inflection point coming out
• 30:45
  Speaker 2: of a recession that has historically accrued to the benefit
• 30:48
  Speaker 2: of small caps where profits really got crushed, and you've
• 30:52
  Speaker 2: got that leverage to a turn back up in the economy.
• 30:54
  Speaker 2: That happens obviously when you're coming out of recession. So
• 30:57
  Speaker 2: we've got the easier monetary policy part of it, but
• 31:01
  Speaker 2: we don't have that turn up anticipated in the economy
• 31:05
  Speaker 2: that provides that huge profitability boost, especially in the down
• 31:10
  Speaker 2: the quality spectrum for small caps. And still the case
• 31:13
  Speaker 2: that forty percent of the Rustled two thousand index of
• 31:15
  Speaker 2: small caps are some combination of not profitable or zombie companies,
• 31:20
  Speaker 2: the companies that don't have sufficient cash flow even to
• 31:23
  Speaker 2: pay the interest on their debts. So those interest payments
• 31:26
  Speaker 2: on debt have come down, but you're unlikely to get
• 31:29
  Speaker 2: that profitability boost, which is why in this cycle we're
• 31:32
  Speaker 2: saying there are opportunities down the cap spectrum. You probably
• 31:36
  Speaker 2: want to be mindful of looking for opportunities outside just
• 31:39
  Speaker 2: the Magnificent seven and the megacap names, but in doing so,
• 31:43
  Speaker 2: you want to stay up in quality because of the
• 31:46
  Speaker 2: absence of those recession type conditions that allow for that
• 31:50
  Speaker 2: launch point that accrues to the benefit of the lower
• 31:53
  Speaker 2: quality companies within small caps. I just don't think that
• 31:56
  Speaker 2: that represents this cycle or where we are in this cycle.
• 32:00
  Speaker 1: Okay, fair enough, Now lasting this diversification across the board,
• 32:05
  Speaker 1: Would that, for you involve crypto?
• 32:07
  Speaker 2: No?
• 32:08
  Speaker 1: No, would it not even involve bitcoin?
• 32:11
  Speaker 2: No?
• 32:11
  Speaker 1: Okayypt.
• 32:13
  Speaker 2: I'm an avowed skeptic, those skepticism based on I have
• 32:18
  Speaker 2: yet to get a compelling answer to a question. I
• 32:20
  Speaker 2: ask everybody that's either an expert or a believer, which
• 32:23
  Speaker 2: is what problem is this solving for? I got lots
• 32:26
  Speaker 2: of different answers, but none that are terribly compelling. It's
• 32:28
  Speaker 2: not a currency. It's not it's not a store of value.
• 32:32
  Speaker 2: It's not a medium exchange. Uh, it's a it's a
• 32:35
  Speaker 2: speculative investment that's made a lot of people a lot
• 32:37
  Speaker 2: of money. So have at it, but just be mindful
• 32:40
  Speaker 2: of of of what it represents. It's not the next
• 32:43
  Speaker 2: Bitcoin is not taking over the from the dollar as
• 32:46
  Speaker 2: the world's reserve currency. It's not a currency. So I think, frankly,
• 32:51
  Speaker 2: a lot of the same type of money, meaning the
• 32:54
  Speaker 2: rationale behind it that has that might have otherwise gone
• 32:58
  Speaker 2: into crypto is some of the same conceptual money that's
• 33:03
  Speaker 2: gone into gold. Yeah.
• 33:05
  Speaker 1: Okay, So if I gave you a choice of gold
• 33:07
  Speaker 1: little bitcoin. I'm kind of guessing you choose gold. Yes,
• 33:12
  Speaker 1: good thought there any is there anything that would make
• 33:14
  Speaker 1: you change your mind?
• 33:17
  Speaker 2: Not not that I can think of in the near
• 33:19
  Speaker 2: term that I'm not. I'm not a you know, a
• 33:22
  Speaker 2: gold believer forever. I'm not a gold bug by any means.
• 33:25
  Speaker 2: I just when I when I look at at the
• 33:28
  Speaker 2: type of flows that we've seen, I think there's a
• 33:31
  Speaker 2: little bit of a mirror, and I think probably it's
• 33:34
  Speaker 2: a little bit more of the air quotes, you know,
• 33:37
  Speaker 2: smart money that that veers into precious metals for maybe
• 33:41
  Speaker 2: some of the same perceived reasons as as the money
• 33:44
  Speaker 2: that's gone into crypto. But I think crypto is more
• 33:46
  Speaker 2: of a kind of a money chasing I I want
• 33:50
  Speaker 2: to make a lot of money, I want to speculate,
• 33:52
  Speaker 2: and and you know, everybody has the right to do that.
• 33:55
  Speaker 2: But I think there's less there there in terms of
• 33:58
  Speaker 2: it representing something compelling. And you know, in the case
• 34:03
  Speaker 2: at bitcoin, bitcoin's been around since two thousand and nine,
• 34:05
  Speaker 2: when people say, well, it's still in sympancy and therefore,
• 34:08
  Speaker 2: you know, give it time to become a true medium
• 34:10
  Speaker 2: of exchange. And in the world of innovation and technology.
• 34:14
  Speaker 2: I don't know. Fifteen years is a long time.
• 34:16
  Speaker 1: It is quite a long time, isn't it. You would
• 34:18
  Speaker 1: have thought someone could have come up with a good
• 34:19
  Speaker 1: answer towards it for by now, Lizzen, thank you so
• 34:23
  Speaker 1: much for.
• 34:24
  Speaker 2: Joining us today, My pleasure.
• 34:32
  Speaker 1: Thanks for listening to this week's Marin Talks Money. If
• 34:35
  Speaker 1: you like us, share, rate, review, and subscribe wherever you
• 34:37
  Speaker 1: listen to podcasts, and keep sending questions or comments to
• 34:39
  Speaker 1: Marror Money at Bloomberg dot net. You can also follow
• 34:42
  Speaker 1: me and John on Twitter or x. I'm at Marinus
• 34:44
  Speaker 1: W and John is John Underscorestepic. This episode was hosted
• 34:48
  Speaker 1: by Me Marry Zumsetweb. It was produced by Sumasidi and
• 34:51
  Speaker 1: Isabella Ward. Production support and sound designed by Moses and
• 34:55
  Speaker 1: and special thanks of course Toud Liz and SAUNDERSK.