WisdomTree: Navigating These Unusual Market and Economic Signals

In this conversation Jeff Weniger, Head of Equity Strategy and Samuel Rines, Macro Strategists, Model Portfolios at WisdomTree Asset Management, join us to discuss various topics including the performance of the equity and bond markets, inflation, the labor market, and the real estate market. We explore the potential impact of rising yields on equities, the relationship between bonds and stocks, and the role of the US dollar as a hedge. We get into  the challenges of navigating the current economic landscape and the reluctance of individuals and businesses to make changes in their financial strategies. Jeff and Sam unpack the impact of job mobility and housing on asset allocation. Jeff Weniger discusses the challenges of job relocation and the limitations it imposes on housing choices. He also highlights the rigidity of mortgage rates and the potential financial burden it creates for homeowners. Sam Rines adds that the lack of labor market dynamism and the preference for home remodeling contribute to the stagnation of the housing market. Then we shift to the changing dynamics of the US economy, with a focus on the transition from goods to services. Sam Rines emphasizes the normalization of the services sector and the potential lasting effect on the labor market. Our focus turns to a discussion about asset allocation and the push for domestic equity ownership in various countries. We explore the seismic shift in investment trends, with a focus on the changing dynamics of global markets. We dive into the history of investing in the early 2000s in emerging markets like Brazil, Russia, India, and China (BRIC), and how the focus has now shifted to investing in Japan, Korea and other markets where policy driving home bias is flourishing. We look at the role of China in the commodities market, particularly its insatiable appetite for base metals and gold. If anything, our entire conversation highlights the importance of diversifying portfolios and considering alternative asset classes like managed futures and commodities. They also touch on the impact of US-China relations and the potential risks and opportunities in the market.

Takeaways

• The equity market has performed well despite the backup in yields, indicating resilience in the face of potential headwinds.

• Bonds may provide a diversifying effect in a 60-40 portfolio, and there is an indication that bonds and equities may move in opposite directions this year.

• There is a misconception about inflation, with people often misunderstanding the difference between the rate of inflation growth and inflation levels.

• The labor market has been confounding, with indicators sometimes differing from what is happening on the ground.

• There is friction and inertia when it comes to individuals and businesses making changes to their financial strategies, such as moving cash to higher-yielding investments.

• The real estate market is slow-moving, and the effects of macro factors, such as the actions of the Fed, take time to materialize.
• The current economic landscape presents challenges, but there is a sense of managed control and a slower pace of change compared to previous cycles. Job mobility and housing choices can significantly impact asset allocation decisions.
• Rigid mortgage rates can create financial burdens for homeowners, limiting their job mobility.
• The lack of labor market dynamism and the preference for home remodeling contribute to the stagnation of the housing market.
• The transition from goods to services in the US economy is normalizing, potentially impacting the labor market.
• There is concern about a push for domestic equity ownership in various countries, which may affect asset allocation strategies, and US equity performance.
• Japan and Korea, and other countries (Canada) are at the centre of this push that is further bullish for them, and less so for the US where country allocations are concerned.
• China's insatiable appetite for commodities, particularly base metals and gold, has significant implications for the market.
• Diversification and considering alternative asset classes like managed futures and commodities are crucial for portfolio management.
• US-China relations continue to be a significant factor impacting the market, with potential risks and opportunities.

Chapters

00:00 Discussion about CTAs, market thresholds, portfolio diversification, and bond-equity relationship.

09:10 Labor market indicators are confounding due to COVID's impact on surveys - may not align with actual conditions. Sub-questions reveal differing responses.

15:38 Recent market issues addressed with intervention, BTFD easing bank assets.

17:10 Surprise at bank walk concept, advises money markets over savings accounts.

23:37 Macro moves slowly, taking 18 months to 2 years for major shifts. Real estate in the US takes longer to impact than expected.

29:48 Post-financial crisis house underwater issue slowed recovery, COVID impact on job mobility and quits.

34:29 Higher mortgage rates, bond market volatility, and housing market concerns persist.

42:38 Encouraging stock purchases through pension plans globally, with a focus on Japan and UK.

46:32 Concerns raised about potential totalitarian push for domestic equities by institutions with significant capital. Nationalistic push may impact relative performance of US equities.

53:44 Text suggests possibility of rising prices, impact on retail, potential for gold strength, and higher inflation and bear market probabilities. Cautions against putting all money in equities and bonds.

56:26 Gold's relationship to interest rates and the influence of a strong dollar on its value.

01:01:11 Under-the-radar aggregate companies outperformed in 2021.

01:08:23 Optimistic about US economy, pessimistic about US-China relations.

01:11:48 Many people don't plan for social security, but they should.

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Starlight's Dennis Mitchell: Outlook 2024 – Diverse Bets for Uncertainty

Dennis Mitchell, CEO, CIO at Starlight Capital joins us this episode to discuss various topics including the impact of interest rates, the potential for rate cuts, portfolio construction for the period ahead - which will be marked by the persistent threat of inflation and higher rates for longer, the importance of proper pension-like diversification, and the rising risks of geopolitical instability, and authoritarianism, and ensuing political risk ahead. He expresses optimism about the long-term trends in private real estate, infrastructure, and equity markets. He also highlights the need for education and due diligence in investing in these asset classes. However, he expresses concern about the rise of authoritarianism and the erosion of democracy, which could have negative consequences for global markets and standards of living. We explore the current investment climate and the need for a shift in portfolio construction. Dennis Mitchell emphasizes the importance of considering and adding private assets and alternative asset classes with the objective of building resilient portfolios. Mitchell highlights the need for a diversified approach that goes beyond traditional 60-40 portfolios. We discuss the benefits of adding private equity, private real estate, infrastructure, commodities, and private credit. He emphasizes the critical need for enhanced financial education and the role of financial institutions in providing innovative investment solutions. We also get into the misconceptions about private assets and the importance of understanding the risks and returns associated with different asset classes.

Takeaways

• Investors should consider diversifying their portfolios with private real estate, infrastructure, and equity assets to replicate the strategies of large pension plans.

• The Canadian market has recently opened up to alternative and real asset investments, providing more options for investors.

• Investors need to understand the benefits of diversification and the importance of long-term returns.

• Geopolitical risks, such as conflicts in the Middle East and Russia-Ukraine tensions, can undermine political stability and impact global markets.

• The rise of authoritarianism poses a threat to democracy, free markets, and innovation.

• The world has become smaller and more dangerous, with the potential for catastrophic consequences if leaders abdicate their roles or fail to address emerging challenges.

• The investment climate is influenced by geopolitical events and economic cycles, which create opportunities to allocate capital to different sectors and geographies.

• Traditional 60-40 portfolios are outdated, and investors should consider allocating more to alternative asset classes.

• Private assets, such as private equity, private real estate, infrastructure, commodities, and private credit, offer opportunities for long-term returns and diversification.

• Financial education is crucial for investors to understand different asset classes and make informed investment decisions.

• Financial institutions have a responsibility to provide innovative investment solutions and be accurate stewards of the economy.

Chapters

• Introduction and Setting

• The Impact of Interest Rates and Rate Cuts

• The Canadian Market and Inflation

• The Importance of Diversification and Investing in Private Assets

• The Risks of Authoritarianism and Erosion of Democracy

• The Impact of Politics and Populism on Global Markets

• The Danger of Geopolitical Conflicts and Authoritarianism

• The World's Smaller and More Dangerous Nature

• The Current Investment Climate

• The Decline of Traditional 60-40 Portfolios

• The Role of Financial Education and Institutions

Where to find Dennis Mitchell & Starlight Capital

Dennis Mitchell on Linkedin

Starlight Capital

Starlight Capital's Thought Leadership

SIACharts' Paul Kornfeld - Buy the dip, or sell the rip? Are we at a turning point?

In this episode with SIACharts' President, Paul Kornfeld, we kick off our conversation with the recent changes in the Federal Reserve's rate cut projections and the performance of various stocks. We question whether it's a good time to 'buy the dip or sell the rip.' We get into the use of SIA charts in analyzing market trends and making investment decisions. What are the benefits of using a systematic approach and relative strength analysis? We touch on the challenges and opportunities of 24/7 trading, and the pressure that's mounting for moneycenter banks. We dive into the importance of having a rules-based approach and risk management in investing. We discuss the opportunities and risks in the market, and in particular the generational opportunity in the energy and materials sectors. Wending our way through the conversation, Paul peels back the layers on the importance of diversification and the need to consider the opportunity cost of investing in certain sectors. There's also the potential impact of various serious geopolitical events on international markets to weigh and the importance of incorporating risk management strategies, now. What has been the historical performance of different sectors and how great is the potential for a shift in market dynamics. What is the market indicating are trends to follow in specific sectors? What is the potential impact of inflation on portfolios and how great is the need to consider alternative asset classes?

<h3>Takeaways</h3>

<ul>

<li>The Federal Reserve's rate cut projections have been revised, leading to uncertainty in the market.</li>

<li>Using SIA charts and a systematic approach can help investors analyze market trends and make informed investment decisions.</li>

<li>24/7 trading presents both opportunities and challenges for investors, and risk management is crucial in navigating the market.</li>

<li>Money center banks are facing pressure due to rising interest rates, and it's important to monitor their performance.</li>

<li>Having a rules-based approach and discipline in investing can help mitigate emotional biases and improve investment outcomes.</li>

<li>There are opportunities for profitability in sectors like energy and materials</li>

<li>Diversification is important to mitigate risk and take advantage of different market opportunities.</li>

<li>Consider the opportunity cost of investing in certain sectors and evaluate the potential for higher profitability in other areas.</li>

<li>Geopolitical events can have a significant impact on international markets, and it's important to monitor and adjust investment strategies accordingly.</li>

<li>Incorporating risk management strategies is crucial to protect portfolios during market fluctuations.</li>

<li>The historical performance of different sectors can provide insights into potential future trends and opportunities in the market. Diversification and following trends in specific sectors can provide opportunities in the current market environment.</li>

<li>Inflation is expected to remain sticky, and portfolios need to consider alternative asset classes to fill the void left by bonds.</li>

<li>SIACharts is a tool that simplifies research and provides actionable insights for advisors.</li>

</ul>

Toby Carlisle - Value Investing is Simple, Not Easy

In this conversation, Mike and Pierre talk to Tobias Carlisle, Managing Principal and Chief Investment Officer at Acquirers Funds, LLC, and portfolio manager of ZIG and DEEP ETFs. Toby shares his approach to value investing and the historical perspective he brings to the art of investing. He also talks about the performance of value investing and the importance of staying consistent with your strategy. Our conversation highlights the benefits of a systematic and quantitative approach to investing. We explore the challenges and strategies of value investing. Toby emphasizes the importance of having a systematic design and sticking to a set of rules to avoid emotional and behavioral mistakes. We discuss the ideological debate between value and growth investing and the need for a balanced approach. Our conversation turns to the role of activism in value investing and the importance of avoiding ruin and focusing on survival. The conversation continues with Toby sharing his insights into portfolio construction and the baked-in returns of value investing. We further explore the concept of investing in value stocks and the challenges that come with it – the importance of considering the long-term perspective and the potential for high returns despite short-term fluctuations. Mike and Toby deconstruct the role of market feedback loops and the impact of market crashes on investment strategies. Toby highlights the significance of character and reputation in investing. We ask Toby about his upcoming book 'Invincible' and its exploration of the parallels between value investing, Sun Tzu's 'Art of War,' and Lao Tzu's 'Tao Te Ching.'

Aubrey Basdeo: More Coupon, Less Duration

In this episode, our conversation with Aubrey Basdeo, Head of Fixed Income at Guardian Capital LP, we focus on the fixed income landscape and the outlook for interest rates in the US and Canada, the Federal Reserve's approach to inflation and interest rate cuts, as well as the differences between the US and Canadian economies, the impact of mortgage rates on consumer spending and the potential for rate cuts by the Bank of Canada. Overall, the conversation highlights the importance of maximizing optionality and the challenges of monetary policy in a changing economic environment, various topics related to central banks, portfolio construction, and fixed income investing. Our main themes include the shift in central bank narratives, the impact of inflation on monetary policy, the changing dynamics of portfolio construction, the shifting climate in holding duration for the sake of hedging portfolios, and the critical importance of using active management in fixed income. Our conversation also touches lightheartedly on the challenges faced by different generations in the current economic environment.

Timestamped Highlights:

00:00 Maximizing Optionality: The Federal Reserve's Approach to Interest Rate Cuts

12:10 US Exceptionalism: Strong Growth and Pro-Growth Policies

15:55 Challenges in the Canadian Economy: Higher Mortgage Rates and Slower Job Growth

17:54 American homeowners have tax deduction advantage.

21:16 Bank of Canada needs to pivot on inflation.

24:32 Bond market optimism can spell consumer pessimism.

26:43 Bank of Canada rate likely to rise.

32:32 Portfolio construction shifting due to global changes.

35:26 Hedging portfolio with fixed income shifted focus.

40:24 Fed should be less restrictive, economy speed-dependent.

43:20 Bank of Canada will ease rates moderately.

48:29 Central banks shift risk approach, requiring active management.

50:45 Focus on coupon, not duration, for returns.

54:12 Economic growth needs younger population to sustain.

"The mistake is that if they're going to make a mistake, it's that they're going to be focused on that two number (~2% neutral rate) and insist that they need to get to that, rather than you're on that trajectory towards two and you can start to ease at that point."

"The world that we're entering into in terms of how things are going to, the factors that we're gonna be reacting to are going to be different from those factors that guided portfolio construction for the past 30 years."

"If you're looking for duration as the hedge to the portfolio, that's not going to provide it in the same way that it did 10 years ago."

Takeaways

• The Federal Reserve is aiming to maximize optionality in its approach to interest rate cuts, with the possibility of three cuts, two cuts, or no cuts depending on the evolution of inflation and the economy.

• The US economy is showing signs of exceptionalism, with strong growth and pro-growth policies driving the outlook for interest rates. In contrast, Europe and China are facing slower growth and export-driven challenges.

• The Bank of Canada is expected to ease interest rates ahead of the Federal Reserve, as the Canadian economy faces challenges from higher mortgage rates and slower job growth.

• The impact of mortgage rates on consumer spending differs between the US and Canada, with American homeowners benefiting from tax deductions and longer-term mortgages.

• Bond investors are optimistic about the potential for rate cuts, while consumers may be more pessimistic due to the potential impact on disposable income.

• The Bank of Canada will need to carefully navigate the path of easing, considering the impact on inflation, the interest rate differential with the US, and the potential depreciation of the Canadian dollar. Central banks may shift their narrative from targeting a specific inflation number to being less restrictive in their policies.

• Portfolio construction needs to adapt to a changing economic environment and regime shift.

• Duration may no longer provide the same level of protection in portfolios as it did in the past.

• Investors should focus on the belly of the yield curve for fixed income exposure.

• Active management is crucial in navigating the risks and opportunities in the fixed income market.

• The current economic environment has different implications for different generations.

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